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 29 Nov 2008

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Bad loans at Singapore banks set to rise

Singapore's banks will face a deterioration of their loan books and rising bad debt, reflecting the slowdown of Southeast Asia's economies, Reuters quoted the country's central bank as saying Friday.

But the central bank said Singapore banks' capital strength would help them through the difficulties.

"The local banks would face these risks from a position of strength...Our assessment is that the banking and insurance sectors are resilient and should be able to weather the economic downturn and heightened market volatility," the Monetary Authority of Singapore said in its annual financial stability review.

The cushion of capital that banks are required to hold by regulators as measured by the so-called tier-1 capital ratio averaged 11.3 percent, or nearly three times the Bank of International Settlements' recommendation of 4 percent and well above the central bank's 6 percent minimum.

The financial turmoil has already hurt Singapore's three banks, with DBS Group, Southeast Asia's largest bank, cutting 900 jobs earlier this month after it suffered a 38 percent drop in quarterly profit as losses from bad debts quadrupled.

United Overseas Bank reported a 5.1 percent fall in net profit while Oversea-Chinese Banking Corp  saw its third-quarter profit slide 13 percent.

The MAS said households and companies had very little debt relative to assets, with companies' median debt-to-equity ratio at around 40 percent compared with more than 60 percent prior to the 1997-98 Asian financial crisis and households holding more cash than debt.

For instance, cash held by households in bank and retirement accounts exceeded liabilities, while the household debt-to-remuneration ratio has fallen from a 10-year-high of 208 percent in 2003 to 166 percent in 2007, the central bank said.

But it added that companies are facing higher borrowing costs and that risk premiums on corporate debt issued in Singapore have more than doubled since the start of the year.

"While there may be some specific instances of distress in the corporate and household sectors, we expect the sectors as a whole to weather the economic slowdown relatively well given the strength of their balance sheets."

Singapore, which is in recession after its economy shrank for two quarters, is expected to grow by 2.5 percent for the whole of 2008 and could shrink by 1 percent in 2009, the government said last week.

Credit Suisse warned in a report that Singapore's loan growth could collapse to zero next year while Merrill Lynch expects the non-performing loan ratio for banks to double to 3 percent by 2010.

The MAS also said that the impact of the credit crisis on its banks was contained, as banks had limited exposure to securities linked to U.S. home mortgages.

But it added that a worse-than-expected weakening of the global economy could lead to a severe dampening of economic activity and an accordingly sharper rise in loan defaults.

MAS also said that company profits are likely to decline and that firms may find it more difficult to finance themselves this quarter and next year given the tight credit markets.

The central bank warned that such a situation would led to large capital outflows from emerging market economies.

"The probability of these downside risks materialising is assessed to be low at the moment," MAS said.




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