Published October 6, 2009

For local banks, the worry is loans growth - not capital

Global drive to raise capital requirements for banks may leave S'pore untouched

By SIOW LI SEN

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(SINGAPORE) Local banks are already very well capitalised. So the global trend of making banks safer is more likely to result in tweaking of the rules here, rather than the imposition of additional requirements, analysts say.

The Tier 1 ratio of the three local banks (DBS Group Holdings, United Overseas Bank and OCBC Bank) - ranging from 12.6 to 15.4 - is more than double the minimum 6 per cent requirement. 'There may be an enhancement or refinement, but no additional requirement which will have an impact on their operations. MAS has to be seen to be globally compliant,' said Tay Chin Seng, Macquarie bank analyst.

The Monetary Authority of Singapore (MAS) is already a very strict regulator. So whatever new capital or operating guidelines that may emerge eventually (after probably months of global regulator negotiations), they are unlikely to materially affect the Singapore banks, said Anand Pathmakanthan, Nomura Asia, Asean banks analyst.

Last Friday, MAS managing director Heng Swee Keat said global regulators are looking to strengthen the banking system and considering a minimum global liquidity standard to address liquidity concerns.

'MAS is involved in the discussions on both the capital and liquidity proposals, and supports the broad thrust of these initiatives,' Mr Heng said.

The issue facing the three local banks is not capital, but sluggish loans growth.

'As underscored by August 2009 system data, loans growth is weak and non-performing loans (NPL) pressure contained,' said Mr Pathmakanthan. August loans growth was 2.5 per cent while the three banks' first-half 2009 gross NPL averaged below 2.5 per cent.

'Coupled with already ample capital backing and one of the lowest leverage ratios in the region, Singapore banks need to reverse their current return on equity-sapping deleveraging trend, not compound it,' Mr Pathmakanthan said.

Given the local banks' strong balance sheet, they won't need to raise capital, said BNP Paribas analyst Ng Wee Siang.

'OCBC Group remains strongly capitalised, with Tier 1 ratio of 15.4 per cent and total adequacy ratio of 15.9 per cent as at June 30, well above the regulatory minimums of 6 per cent and 10 per cent,' said Koh Ching Ching, the bank's head of group corporate communications. Core Tier 1 ratio (excluding perpetual and innovative preference shares) was 11.3 per cent, she added.

A United Overseas Bank (UOB) spokeswoman said: 'We are currently well capitalised and are comfortable with our capital position. We will continue to monitor developments on the international front.'

DBS chairman Koh Boon Hwee said last week that banking business in the future would not be as lucrative as it was before the onset of the current global recession, sparked by reckless lendings. He said capital requirements for banks would go up, and returns would come down.

Macquarie's Mr Tay noted that DBS is having problems deploying its capital. Last December, the bank raised $4 billion through a rights issue.

Reporting its H1 2009 results in August, DBS said net customer loans after deducting allowances for bad loans fell 2 per cent in the quarter, reversing a 3.2 per cent increase in the first three months of the year.

DBS and OCBC fell yesterday, down 1.4 per cent and 1.18 per cent to $12.60 and $7.51 respectively. UOB rose 0.86 per cent to $16.44.