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Singapore's banks face asset quality headwinds in regional expansion

Geographic diversification has not helped Singapore's banks escape the burden of deteriorating asset quality across Southeast Asia, but it has proven an effective way of minimizing the pain of their exposure to the troubled oil and gas-related sectors, analysts told S&P Global Market Intelligence.

"The best thing [Singaporean banks] can do is to diversify their portfolio as much as possible, including geographically," said Hiroshi Inagaki, a senior economist at Mizuho Research Institute overseeing Southeast Asian economies. He noted that such diversification also helps local banks soften the blow of any global headwinds hitting the city-state's economy, which is reliant on exports and trade,

Given those factors and their small market at home, Singapore's major banks — DBS Group Holdings Ltd., Oversea-Chinese Banking Corp. Ltd. and United Overseas Bank Ltd. — are no strangers to overseas expansion, particular in the neighboring ASEAN region and Greater China.

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In the past few years, growth in foreign loans at the three Singaporean banks has outpaced that of domestic loans. Foreign loans grew 65.40% between end-2012 and March 31, while domestic loans grew 31.99%, according to S&P Global Market Intelligence data. Foreign loans made up 51.56% of total loans by geography at the three lenders as of the end of March.

Moody's expects loan growth at all Singaporean banks to be moderately higher over 2017-2018, between about 6% and 7%, driven primarily by foreign loans. "Aside from reflecting a recovery in trade activities, this is also the result of a multiyear effort by Singapore banks to diversify further into regional operations, particularly in Greater China, the ASEAN region and other Asian economies," the rating agency said in a May report.

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Meanwhile, net foreign assets at all Singaporean banks have been increasing, reaching S$157.94 billion as of May, according to the Monetary Authority of Singapore. However, external assets made up 53.70% of total banking assets in the banking sector, slightly down from 54.72% as of May 2016.

The perils of ASEAN exposure

Yet there's no escaping asset quality concerns.

Take Malaysia. The economy of Singapore's closest ASEAN neighbor generally moves in tandem with Singapore's, making it an ineffective counter-balance, Inagaki said, noting that Indonesia and the Philippines from that perspective offer better prospects.

Meanwhile, Fitch Ratings analyst Elaine Koh said dynamics in the region could shift if ASEAN economies see significant fund outflows following the U.S. Federal Reserve's move in June to raise rates and Fed Chair Janet Yellen's remarks on July 12 noting that it is still committed to pursuing "accommodative" monetary policy as it gradually implements rate hikes, potentially prompting investors to shift funds away from emerging Asia.

Nonperforming loan levels also remain a concern, despite some respite. The three big Singaporean banks saw their NPL levels rise through 2015 and 2016 on the back of exposure to the oil and gas sector, though the banking sector appears to be on a gradual road to improvement, with sectorwide NPL levels declining to 1.40% at March-end, compared with 1.48% in at the end of 2016.

Additionally, the three banks' overseas operations have seen higher NPL levels than at home. "The region is economically less stable than Singapore," Koh said.

As the three lenders aim to tap earnings opportunities in faster-growing emerging markets, "this would expose them to the more challenging operating environments, but will help them diversify away from Singapore's mature, saturated and competitive environment," Fitch noted in a May report.

According to a Moody's analysis of problem loans at Singapore banks since 2011, the country's three largest banks' NPL ratios have "historically registered higher levels outside of Singapore, and mainly in emerging markets that tend to show higher asset-quality risks when compared to Singapore." Loans to ASEAN countries have made up the largest segment within the three banks' problem loans since 2014.

However, Singapore's banks have managed the NPL risk "reasonably well" even as ASEAN economies have been in a relative down cycle as they have limited their NPL ratios to about 2%, said Matthew Phan, an analyst at CreditSights.

"For the long term, the strategy [for Singaporean banks] to do more overseas business makes good sense," given relatively slower economic growth at home, he added.

As of July 13, US$1 was equivalent to S$1.38.

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