Singapore central bank says banks must guard against rising bad loans

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SINGAPORE: Singapore's central bank on Tuesday urged the city-state's banks to guard against a potentially protracted economic slowdown amid a rise in bad loans, but said the financial system remains capable of withstanding a severe stress event.

In its annual financial stability report, the Monetary Authority of Singapore said its stress test found the banking system to be resilient even though banks' provisioning cover was down at 98% at the end of the third quarter.

"The banking system's overall NPL ratio has increased over the past year alongside the weakening economic environment and emerging asset quality risks," the MAS said. "Banks should continue to maintain sound credit underwriting standards, and set aside adequate provisions to withstand more NPLs should the economic slowdown be protracted." 

The central bank's report comes at a time when bad debt charges among Singapore banks have jumped as credit woes deepen for the offshore energy services sector, which has been hit hard by an almost two-year rout in oil prices and a slowing economy.

The banking system's overall non-performing loan (NPL) ratio rose to 2.1% in the third quarter of 2016 from 1.5% a year ago, the MAS said. The aggregate NPL ratio of local banking groups' edged up to 1.4%, it added.

The banking system's aggregate exposure to the oil and gas and related supporting services sector was less than 10% of total exposures, the MAS said.

Results of an industry-wide stress test showed banks would be able to absorb losses under severe economic stresses, such as a protracted slowdown in China's economy and steep falls in commodities and Asian currencies, the central bank said.

"All banks would remain solvent, with their capital adequacy ratios (CARs) remaining well above Basel regulatory requirements under the stress scenarios," the MAS said.

Corporate sector leverage remained broadly stable, with the corporate debt-to-gross domestic product (GDP) ratio having stabilised at around 150% of GDP since 2015, the central bank said.

Still, risks from heightened corporate leverage remain amid declining earnings and firms should take steps to deleverage where possible and to refinance existing debt at favourable interest rates, the MAS added.

The central bank said households continued to deleverage after a series of macroprudential measures were introduced since 2009. Household debt growth moderated to 2.8% year-on-year in the third quarter, down from an average 6.9% year-on-year over the last five years.

"On an aggregate basis, Singapore's household balance sheets are resilient, with aggregate net wealth at a healthy four times of GDP," it said. - Reuters