SINGAPORE: The outlook for Singapore banks remains stable despite the slowing global economy, according to ratings agency Fitch.

But they warn that a prolonged recession in the United States could pose a serious threat to banks' risk profiles here.

Fitch said that Singapore banks are remaining resilient, even as all three local banks reported lower income growth in the first half of this year.

Alfred Chan, an analyst at Fitch Ratings, said: "While we still see that financial performance may weaken because of the more challenging market conditions, they have a very strong loss absorption capacity.

"If you were to look at their capital position, they are very healthy. And among the region, they are one of the highest rated credit profiles."

The low number of loan defaults and high liquidity in Singapore's banking system is helping to cushion the impact of a global credit crunch. But Fitch added that this outlook could change if the US goes into a prolonged recession.

This would hit the property sector in Singapore and in turn affect Singapore banks which had increased their exposure to the property market since the boom in 2006.

Mr Chan added: "Most of the expansion we saw in the loan growth came from the construction sector. And if the construction industry were to experience some slowdown, then the banks would experience some difficulty in cash flows, getting money from the property players. And this will of course give rise to deterioration in their loan books."

But some economists warned of other indicators, such as financial stress and a slowdown in consumer spending. They said this would impact on Singapore banks' performance going forward.

Manu Bhaskaran, a Centennial Group partner, said: "Even if the United States escapes the technical definition of a recession, which may well be the case, it will certainly go into a period of prolonged economic slowdown, very mediocre growth and certainly experience a great deal of financial stresses.

"This may cause investors and businesses to withdraw and create extremely difficult conditions for businesses, including banks."

As such, Singapore banks may have to brace themselves for slower economic activity, as well as higher risk of defaults in the months ahead. - CNA/vm