Published November 29, 2008

Local banks, insurers can weather slowdown

By CONRAD TAN
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BANKS and insurers here are well-capitalised and will remain sound even if bad loans reach levels last seen during the Asian financial crisis a decade ago, the Monetary Authority of Singapore said yesterday.

FIRM FOOTING
Foreign direct investments have held up well and equity outflows have been limited so far, says MAS

'Our assessment is that the banking and insurance sectors are resilient and should be able to weather the economic downturn and heightened market volatility,' MAS said in its Financial Stability Review published yesterday.

Still, the Singapore economy 'has slowed down sharply and is likely to weaken further in the period ahead with adverse implications for the financial system', it said.

Bank earnings are likely to fall while bad loans will rise as the economic recession deepens, while the volatility in financial markets will also affect the valuation of assets on the books of insurers and banks, it said.

'However, we do not expect these to be destabilising.'

Bank lending growth here will slow in the months ahead as business sentiment weakens, demand for loans falls, and banks themselves turn more cautious, MAS said.

But local banks face the risks ahead 'from a position of strength', MAS said.

'They have strong capital, with the Tier 1 capital ratio averaging 11.3 per cent, well above the MAS's minimum requirement of 6 per cent.'

The proportion of non-performing loans or NPLs on their books is at an all-time low of 1.4 per cent compared to more than 11 per cent during the Asian financial crisis, MAS added.

'From our estimates, even if NPLs were to reach the elevated levels seen during the Asian financial crisis, the local banks would remain well-capitalised and sound.'

The insurance sector, too, 'is well-capitalised and has remained resilient to the ongoing financial turmoil', MAS said.

Both life insurers and general insurers maintained capital adequacy ratios of well over 200 per cent for the first nine months of the year, compared to the minimum regulatory requirement of 100 per cent.

Insurers are likely to face slower demand for insurance policies as the economy slows, and their investment portfolios are likely to be affected if volatility persists in financial markets, MAS said.

Still, 'the strong solvency position of insurers will enable them to weather these headwinds'.

Overall, despite the difficult conditions ahead for banks and insurers, 'we do not expect these challenges to be severe or to significantly undermine the soundness of Singapore's financial system', MAS said.

MAS also said that a broad range of measures it looked at, including the proportion of borrowing by governments, businesses and households, suggest that most financial systems across Asia are in better shape to weather the current downturn than they were at the start of the Asian financial crisis.

The likelihood of large scale capital outflows from the region - seen a decade ago, as foreign investors withdrew funds from Asia on a massive scale - is low for now, MAS said.

One reason is that the growth outlook for Asia 'remains positive relative to other regions', it added. 'Foreign direct investments have held up well and equity outflows have been limited so far, indicating that investor confidence, even if less strong, is still intact.'

But it warned that Asia remains vulnerable to a sharper than expected slowdown in consumption and investment activity worldwide, and a weakening of domestic demand within the region.