SINGAPORE: A warning of a looming crisis in Singapore’s banking industry by a high-profile Swiss billionaire investor is being downplayed by analysts, who say the system is well-placed to handle any economic shocks.
Felix Zulauf said last month that a China-related economic shock could bring about a banking crisis in Singapore, with a risk of massive capital outflows, should the world’s second-biggest economy experience a hard landing.
But while the big three banks in Singapore – DBS, OCBC, and UOB – have significant lending exposure to the greater China region, analysts say the credit risk from this is mitigated in at least two ways.
First, the majority of the exposure is to Hong Kong, while the mainland China exposure is predominately trade finance related.
These are “short-term, self-liquidating trade loans, which are traditionally safer and are mostly backed by letters of credit from systemically important Chinese banks,” according to Mr Ng Wee Siang, a credit analyst at Fitch Ratings.
Second, the Singapore banking industry is tightly regulated, with major banks like the big three subject to more stringent capital requirements. In addition, these banks are making healthy profits, which "provide another layer of cushion,” said Mr Ng.
DBS IS MOST EXPOSED TO CHINA
Among the three Singapore banks, DBS has the largest lending exposure to greater China excluding Hong Kong. From 2008 to end-June last year, this rose 9 percentage points to 17 per cent of gross loans. But DBS has said that it lends to better-quality Chinese and international corporates.
Mr Jack Wang, a partner at boutique investment firm Raffles Investment, said Mr Zulauf’s prediction of an impending banking crisis in Singapore is “unlikely and baseless”, given “the relatively small direct exposure of Singapore banks to China” and the fiscal and monetary discipline at both the banking industry and central bank level.
In its latest Financial Stability Review released in November 2015, the Monetary Authority of Singapore flagged rising risks to financial stability, but said that the financial system remains sound. In the report, the financial regulator also said that banks in Singapore have strong capital and liquidity buffers to withstand severe shocks.
HARD LANDING PREMISE QUESTIONED
Analysts also said Mr Zulauf’s prediction is premised on something that appears unlikely to happen.
Fitch, for example, thinks China has the financial and administrative resources to avoid a so-called hard landing to near-zero growth. Meanwhile, Standard and Poor’s said its base case scenario is one of a manageable slowdown.
“External headwinds from a China slowdown and commodities rout will weigh on the performance of Singapore banks, but their credit fundamentals will continue to be supported by their sound capitalization and liquidity levels,” said Mr Ivan Tan, a credit analyst at Standard and Poor’s.