A 3 percent increase in mortgage rates would boost the share of overly indebted households to as much as 15 percent from 10 percent now, the Monetary Authority of Singapore said in its annual financial stability review today. Banks also need to guard against credit quality deterioration as rates increase after Singaporean companies’ median debt-to-equity ratio rose to 39 percent at the end of June, the authority said.
While the city’s banks led by DBS Group Holdings Ltd. (DBS) already conform to international guidelines for risk buffers, MAS said Asian economies could face capital outflows and banking risk when the U.S. begins curbing its $85 billion in monthly bond purchases. Singapore manages monetary policy through its exchange rate, rather than by setting its own interest rates.
“Looking ahead, should advanced countries start normalizing policy, interest rates in Singapore could rise from the low levels which they have been at,” the authority said. “An unexpectedly sharp increase, especially if it comes earlier than expected, could strain the debt-servicing ability of over-extended borrowers.”
U.S. Federal Reserve officials signaled in minutes of their Oct. 29-30 meeting they may taper the bond program known as quantitative easing “in coming months,” if the economy improves as anticipated. Fed policy makers have said they will hold rates near zero depending on the outlook for the nation’s unemployment and inflation.
The three-month Singapore interbank offered rate, used to price debt ranging from commercial term-loans to homeowners’ mortgages, has averaged 0.38 percent this year, compared with a record low of 0.34 percent set in September 2011, and a peak of 3.56 percent in July 2006, data compiled by Bloomberg show.
Singapore’s banks already meet Basel III requirements, MAS said today. Basel III is a set of global banking regulations that include minimum capital and liquidity requirements for banks to comply with in stages by 2019.
DBS, Oversea-Chinese Banking Corp. and United Overseas Bank Ltd., Singapore’s three local lenders, were in the Top 10 of a Bloomberg list of the world’s strongest banks compiled as of Sept. 13. The rankings order lenders according to criteria from Tier-1 capital ratios to nonperforming loans and loan-loss reserves.
Some banks in Singapore have also lent to entities whose ability to service foreign currency-denominated debt has been weakened by slumping currencies in Asia, the monetary authority said. Indonesia’s rupiah and the Indian rupee are among the 10 worst performers this year among 24 emerging-nation currencies tracked by Bloomberg.
Banks that have increased their lending to China and India need to be aware of the slowing economic growth in those countries, MAS said. The two nations represent 9.2 percent and 4.2 percent respectively of loans made by foreign and local banks in Singapore, according to today’s statement.
China’s gross domestic product is expected to expand 7.6 percent this year, compared with 7.7 percent last year, according to International Monetary Fund forecasts. India’s economy is forecast to expand at 3.8 percent in 2013, compared with 5.1 percent last year, the IMF estimates.
The non-Singapore dollar loan-to-deposit ratio, which was 128.2 percent at the end of September, also warrants close monitoring, the MAS said today.
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