S’pore banks ‘as close to being safe as possible’
By Francis Chan
BANKS across the United States and Europe are being rescued, merged or shut down but Singapore’s banks are still seen as rock solid in the wider community.
Market watchers told The Straits Times that the three banks here are well regulated, with one expert saying they were ‘as close to being safe as possible’.
They pointed out that the Monetary Authority of Singapore’s (MAS) rules demanding that banks here retain plenty of capital - expressed as the capital adequacy ratio (CAR) - are among the toughest in the world.
‘The thing that differentiates Singapore banks from US and European banks is that none of them is in trouble. There have been no bailouts and no mergers - that’s the major difference,’ said Daiwa Institute of Research analyst David Lum.
Kim Eng Securities analyst Pauline Lee said that the market selldown will affect bank shares, which can fall further. But there is no real loss of confidence in them, she added.
‘The general confidence level is still strong. That’s because the banks are backed by very strong asset quality, and their CAR is maintained at levels that are way above the regulatory requirement.’
A bank’s CAR typically reflects its level of stability, how efficient it is and how well its depositors are insulated if it suffers losses. International regulatory requirements of CAR typically measure two types of capital, called Tier 1 and Tier 2 capital.
In Singapore, the CAR requirements are 6 per cent for Tier 1 and 10 per cent for total CAR. International minimums are 4 per cent and 8 per cent respectively.
This simply means that as a precautionary measure, a bank must set aside six cents of Tier 1 capital for every $1 in loans or other assets it has.
DBS said its Tier 1 CAR is 10 per cent, UOB is at 11.3 per cent and OCBC, the highest, is at 15 per cent. In contrast, US financial giant Citigroup has a Tier 1 CAR of 8.7 per cent and a total CAR of 12.2 per cent.
But its locally incorporated subsidiary Citibank Singapore - which has to meet MAS’ rules - has a Tier 1 CAR of 15 per cent and a total CAR of 15.15 per cent.
Mr Lum noted that all three local banks have also recently shored up their capital base through recent preference share offerings.
DBS, Singapore’s biggest lender, started the capital raising with a $1.5 billion preference share offer in May. OCBC followed, collecting $1 billion in July and a further $1.5 billion in August. Last month, UOB raised $1.32 billion from its issue.
A recent report by credit agency Fitch Ratings said that the ratings of Singapore banks - or their likelihood of default - remained stable, despite the credit crunch.
Mr Ambreesh Srivastava, senior director of financial institutions at Fitch, put it down to a few factors.
First, that banks here have ready access to funds - unlike some Western banks. Fitch said that Singapore banks get their funding from a variety of sources, including retail deposits that pay relatively low rates.
Banks here also have low exposure to structured products - including toxic mortgage-related debts that have fallen dramatically in value - and strong solvency indicators.
So while analysts like CIMB’s Kenneth Ng have downgraded earnings estimates for banks here due to the global economic strife, he stills see banks going strong.
On Wednesday, share prices of the three banks fell to two-year lows on fears that collective rate cuts by central banks would not be enough to support an ailing global financial system.
But they recovered yesterday - DBS was up 2.3 per cent at $15.34, UOB rose 3.6 per cent to $15.94, with OCBC finishing strongest at $6.56, up 5 per cent.
‘With bank valuations at trough levels and banks offering liquidity to portfolios in these times, we believe they will continue to outperform till the end of the year,’ said Mr Ng.
Source : Straits Times - 10 Oct 2008
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