Singapore banks can withstand Chinese crisis: analysts

Singapore’s financial analysts predict that the city-state can weather a Chinese financial storm. Source: Wikimedia

A high-profile Swiss billionaire’s prediction of a crisis in the Singaporean banking industry is being played down by analysts, who say the sector is set up to handle economic adversity. 

In January Felix Zulauf, owner of the Swiss-based hedge fund Zulauf Asset Management, said that a future Chinese economic shock could bring about a banking crisis to the city-state, with a risk of massive capital outflows.

“China in today’s cycle is what US housing was during the financial crisis in 2008,” he said. He added that continuing capital outflows would prompt regulators to devalue the yuan by 15 to 20 per cent.

He said the resulting banking crisis would hit Singapore and Hong Kong particularly hard.

Zulauf said Singapore would be exposed because it had attracted considerable foreign capital over the years.

“Singapore’s banking-sector loans have grown dramatically in the past five or six years. Singapore is now losing capital, which means the banking industry is losing deposits,” he said.

The big three banks in Singapore – DBS, OCBC and UOB – have considerable lending exposure to the greater China region, but market watchers listed two mitigating factors.

Exposure was largely to Hong Kong, while mainland China lending was predominately trade-finance related, analysts said.

These are “short-term, self-liquidating trade loans, which are traditionally safer and are mostly backed by letters of credit from systemically important Chinese banks”, said analyst Ng Wee Siang of Fitch Ratings.

Second, the tight regulation of Singapore’s banking sector meant major banks were subject to more strict capital requirements. The banks were making good profits, which “provide another layer of cushion,” said Ng.

DBS, among the major three banks, has the largest lending exposure to greater China, not including Hong Kong. From 2008 to the end of June 2015, this increased 9 percentage points to 17 per cent of gross loans. But DBS has says that it lends to sound Chinese and international corporations.

Jack Wang, a partner at Raffles Investment, said Zulauf’s prediction of an impending banking crisis in Singapore was “unlikely and baseless”, given “the relatively small direct exposure of Singapore banks to China” and the fiscal and monetary controls at both the banking industry and central-bank level.

Last November’s Financial Stability Review by the Monetary Authority of Singapore flagged rising risks to financial stability but said that the financial system remains sound. In the report, the financial regulator said Singapore’s banks had strong capital and liquidity measures to withstand intense shocks.

“External headwinds from a China slowdown and commodities rout will weigh on the performance of Singapore banks, but their credit fundamentals will continue to be supported by their sound capitalisation and liquidity levels,” said credit analyst at Standard and Poor’s Ivan Tan.