Singapore banks' regional expansion raises risks: Fitch
Singapore banks' regional expansion raises risks: Fitch
Bloomberg, Singapore
Singapore banks' expansion into countries including Indonesia, Thailand and India has increased their credit and operational risks, Fitch Ratings said.
DBS Group Holdings Ltd., United Overseas Bank Ltd. and Oversea-Chinese Banking Corp., the island's three largest banks by assets, have made acquisitions overseas in the past year in a bid to counter declining business at home, moves which have raised their risk profiles, said Ambreesh Srivastava, managing director for financial institutions in Asia at Fitch.
"Most of these expansions are in countries that are less developed and certainly less regulated than Singapore," Srivastava said at a media briefing in the island-nation.
"There are incremental risks that come about because of the expansion into such markets."
The three lenders have been expanding in the region as competition intensifies in Singapore's limited market of about 4 million people.
DBS Group said last week it plans to buy a 37.5 percent stake in India's Cholamandalam Investment & Finance Co. Oversea-Chinese said earlier this month it completed the purchase of its stake in Indonesia's PT Bank NISP.
United Overseas Bank Ltd. had its ratings cut one level by Moody's Investors Service in April because of concerns about increased risks as it expands in Asia.
Still, Fitch said it's keeping a stable outlook rating for the banks because of their strong financial positions as well as risk-management capabilities.
It will review ratings if the banks undertook expansion strategies that would significantly reduce capital, Srivastava said.
"On the positive side, we believe that banks have learnt lessons from some of their experiences in the past and have considerable beefed up their risk-management systems and also their management abilities," he said.
"They are in a much better position now to negotiate with such risks."
Even so, banks will eventually hold less capital with the implementation of the Basel II accord capital-adequacy rules, David Marshall, head of banks and financial institutions for Fitch in Asia, said in an interview.
"Basel II will reduce the amount of capital banks need to hold against relatively save assets, in particular mortgage lending in fairly stable economies," Marshall said.
"That means banks can charge relatively lower interest rates and still keep an adequate return on equity. The banks will find that they need a lot less capital going forward."
Singapore banks are currently required to maintain a capital adequacy ratio of at least 10 percent, more than the 8 percent international standard.
The city's lenders already have capital in excess of the minimum required, with DBS Group's ratio standing at 15.8 percent at the end of last year.
The Basel II rules will replace 1988 rules that require banks to set aside about 8 U.S. cents for every $1 they lend.
The proposed regulations will obligate banks to earmark money depending on the loan risk.