Singapore central bank warns of credit risks for banking as growth slows

The Monetary Authority of Singapore also cautioned that divergent monetary policies across the US, Japan and Europe could stoke financial excesses

Singapore's central bank warned on Friday that subdued regional economic growth is posing increased credit risks for the city state's banks, but it said the financial system remains resilient in the face of external headwinds.

Highlighting growing challenges facing global policymakers, the Monetary Authority of Singapore also cautioned that divergent monetary policies across the United States, Japan and Europe could stoke financial excesses as traders search for higher returns.

"Uncertainty over US monetary policy could trigger higher market volatility, while accommodative policies in the euro zone and Japan could fuel search for yield and financial excesses," the MAS said in its annual Financial Stability Review. 

It said sub-par growth in Asia could pressure profits and debt servicing capacity of businesses, with the turning credit cycle leaving banks exposed to risks of bad loans.

"Asset quality remains healthy, but there are signs of increased credit risks."

All the same, the domestic banking system remains resilient against a backdrop of an uncertain external environment, MAS said.

"Banks have strong capital and liquidity buffers to withstand severe shocks but continued vigilance is warranted."

The overall non-performing loan (NPL) ratio increased to 1.5 percent in the third quarter of 2015 from 1.1% a year ago, the central bank said.

The ratio of special mention loans - credit facilities not yet classified as NPLs but with potential weakness - has increased gradually over the past two years and continues to trend upward, it added.

"Banks' corporate loan portfolios face increased vulnerabilities as subdued regional growth could hit the profitability and debt servicing capacity of corporates in Asia," the MAS said.

The MAS said household balance sheets have remained firm on aggregate, and defaults on consumer loans have been low.

However, "the impending interest rate normalisation, coupled with headwinds in the external outlook and slower domestic growth, pose downside risks to the household sector."

Some highly-leveraged households could encounter difficulties, the central bank said.

Corporate balance sheets in Singapore remain healthy in aggregate but highly-leveraged firms in certain sectors could be vulnerable if interest rates rise or earnings weaken further, the MAS said.

Companies with foreign currency exposures could face increased foreign currency mismatch risks if currency market volatility were to persist, the central bank added.