The financial ratings of Singapore’s banks are stable, thanks to a buffer built up during the economic boom last year and conservative management of their balance sheets. According to ratings agency Moody’s, the overall impact of the tightening global credit markets has been moderate.
However, Moody’s has also revealed that there are risks ahead that could undermine the stability for banks in Southeast Asia.
With the tight capital market, companies have had to look towards other sources of funding.
This has driven them to the banks, resulting in lenders increasing their single borrower exposure where loans are locked in with the same few big entities.
Deborah Schuler, Senior VP, Financial Institutions Asia, Moody’s, said: “The problem with single borrower concentrations is that every once in a while, even a good company can go spectacularly bad. And if that number is big, relative to your earnings in capital, you end up with an embarrassing negative number in your income statement.”
While the risk is distinct, the upside is that single borrowers tend to be reputable and unlikely to default.
Conservative management may have shielded banks here but there is pressure for local lenders to produce more returns on equity.
Moody’s said the next challenge is how banks will be able to do this while remaining financially strong.
Another challenge is how central banks tackle rising inflation which could hurt corporate earnings.
Thomas Byrne, Senior VP, Sovereign Risk Unit, Moody’s, said: “The response to inflation may not just be interest rate policy. It could be other policies such as exchange rate policy. A country may have a managed exchange rate, or an exchange rate basket which we see in the case of Singapore. It’s a challenging environment for policymakers to operate and we’ll just have to see how they respond.
Inflation has been rising in Asia triggered by record high oil prices and increasing food costs. – CNA/vm
Source : Channel NewsAsia – 19 Jun 2008