Singapore Banks may have to make less risky loans to meet new capital requirements

But analysts breathe a sigh of relief that new capital levels not too tight.

Singapore Business Review spoke with leading bank analysts to see what the new changes mean to banks in Singapore.

According to Ivan Tan, Standard & Poor's Director of Financial Institutions Ratings, “In our opinion, Singapore banks are well-positioned to meet these enhanced requirements; they already have a high proportion of common equity in their capital structure, sensible dividend payout ratios and scrip dividend schemes with healthy take up rates that facilitate capital preservation. While we are not expecting the capital requirements to significantly affect the strategy and operations of the Singapore banks, we might expect some gradual portfolio changes with a preference towards less risky asset classes to improve their capital efficiency.”

Fith Ratings director Alfred Chan noted that MAS's announcement follows the developments surrounding Basel III, which was finalised late-2010.

“One area of focus was capital, where banks' minimum capital levels have been raised, with a greater composition of high-quality capital. Compared to most banks globally, Singapore banks have always been subjected to a higher regulatory minimum on capital under Basel I and II, and this remains unchanged even under Basel III. For eg, the minimum core Tier 1 capital adequacy ratio (CAR) is 4.5% under Basel III vs 6.5% required by MAS. This results from MAS's assessment of the local banks' high systemic importance to the economy and hence the need to preserve financial-sector stability, especially in times of stress. Confidence among various stakeholders, depositors in particular is usually high for a well-capitalised banking sector, amongst other factors,” said Chan.

“We do not expect Basel III compliance to be overly onerous for the three Singapore banks - DBS, OCBC and UOB. This is because they are highly capitalised to begin with, and have limited to modest exposures to non-banking businesses and complex and high-risk products. Their core Tier 1 CAR at end-2010 was at least 12%, which exceeds the new regulatory minimum. The effective minimum core Tier 1 CAR for Singapore banks is 9%, after including the 2.5% capital conservation buffer,” he added.

Macquarie Securities research analyst Matthew Smith said the new minimum capital standards appear to be eminently achievable for the Singapore banks, as all three already exceed the minimums based on our estimates.

“We think the capital requirements are reasonable and do not pose major challenges for the Singapore banks based on their current balance sheets. Investors should welcome the clarity that the MAS has provided on this issue, as there had been some concern that the requirements might be unreasonably stringent. While none of the banks can be considered a global structurally-important financial institution (SIFI), all three of the banks are structurally important from the standpoint of Singapore and thus an additional cushion on top of the Basel 3 minimum is appropriate and was expected,” he added.

Meanwhile Moody’s VP and senior credit officer said DBS, UOB and OCBC already have strong capital positions, so they will not have problems complying with MAS’ new capital requirements.
“We think the more stringent capital requirements will instill investor and credit confidence as they ensure Singapore banks will remain well capitalized. It also confirms that MAS is a prudent regulator and supervisor. Since these banks will not need to significantly adjust their businesses or change their capital policies to meet the requirements, their earnings should not be materially affected either,” she added.