Singapore big three banks' impaired loans ratio to rise to 2.5% in 2021

The pandemic’s full brunt won’t set in until later in 2020.

The impaired loan ratios of Singapore’s big three banks is forecasted to rise to 2.5% in 2021 from 1.5% currently, when asset quality deterioration due to the ill effects of the pandemic is expected to bare its full force, said Fitch Ratings.

DBS, OCBC, and UOB are expected to face margin pressures not until later in 2020, given their wider credit spreads as well as a resilient showing of the three-month London interbank offered rate (LIBOR). However, net interest margins (NIMs) are expected to narrow by double-digit basis points in 2020.

Likewise, credit demand will fall to the low-single digit range, whilst credit costs are expected to average 50bps in 2020 and 40bps in 2021, according to Fitch.

The outlook for banks’ capitalisation and leverage factor score is also negative, with capital not being particularly strong given the current operating environment, tolerance levels being lower, and the prospect of risk-asset quality inflation.

Despite this, banks are still currently forecasted to be able to pay out dividends in 2020 given their solid capital levels.

The three banks will also likely book substantial general provisions in 2020 in anticipation of the deterioration in asset quality, so as to reduce earnings volatility in subsequent quarters.

Funding and liquidity, and support from the local regulator, will also help the big three banks stay afloat amidst the pandemic.

“Funding and liquidity has been [a] strength for the Singapore banks, and we do not expect this to change. The banks remain substantially more deposit funded than other large and highly rated peers. There has also been support from MAS in terms of the $60b swap facility, and we would expect the Singapore banks to benefit from depositors' flight to quality, not only domestically but also from around the region,” Fitch stated.

“This, along with low credit demand, should help the banks maintain loan-to-deposit ratios in the 80% region. Furthermore, the banks remain substantially more deposit-funded than other large and highly rated peers,” the note concluded.