Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

The Chinese juggernaut of slowing economic growth, wobbly currency movements, slumping stock prices, pervasive disinflation and elevated credit stress has reached Singapore, where there's now palpable gloom in investors' dim view of the city-state's banking industry. 

Sample just one statistic: Even during the 2008-09 financial crisis, there wasn't a time when all three of the island's homegrown lenders traded below book value, which is what they did this week: 

Going Down
The price-to-book ratio of Singapore's three largest banks hasn't been this low since the credit crisis
Source: Bloomberg
** Final figure is as of Jan 21, 2016

The waning investor confidence is puzzling for three reasons.

One, keeping aside concerns about China, there doesn't seem to be a strong trigger for the way valuations are getting crushed. The housing market in Singapore is dead, but it's been that way for some time and falling home sales aren't new.

Uniformly Bad
Shares of all three Singapore banks have declined over the past two years
Source: Bloomberg

The market is perhaps reacting to analysts' downgrades of the banks' profit estimates, which in the case of DBS, Oversea-Chinese Banking Corp. and United Overseas Bank have tended to be more bearish than what the lenders have actually reported. The last time optimism swooned like now was after all three announced poor results in August 2011. This time investors seem to be worried ahead of the fact -- full-year earnings are due next month.

Two, pessimism is setting in just when the city's benchmark interbank borrowing rate is climbing. To the extent Singapore banks' net interest margins in recent years have been hostage to the abundance of cheap money, investors had a reason to be optimistic. Clearly, China-related jitters are trumping any hopes of them being able to turn their low-cost deposits into higher-priced loans, especially without a revival in the property market:

Cheap Money Has Hurt Margins
Singapore banks have struggled in a zero interest-rate environment
Source: Bloomberg
*Average trailing 12-month net interest margin of DBS, OCBC and UOB

Three, the pecking order has changed since China's shock Aug. 11 devaluation. Before that, UOB, the smallest of the trio by market value, had the lowest price-to-book ratio. Now it has the highest. Interestingly, this shift has occurred even as analysts have marked down their estimates of UOB's 2015 per-share earnings by almost 3 percent over the past four weeks. It seems investors are giving UOB the benefit of the doubt because of its lower exposure to Asia's biggest economy:

UOB Looks Safest...
But none of the three Singaporean lenders has pared back its exposure to Greater China
Source: Bloomberg

Ultimately, though, it's impossible to accurately assess Singapore banks' actual vulnerability to a China meltdown. All three are regional lenders with significant corporate loan books at a time when companies in Asia are facing deep distress because of the way China's flagging demand for commodities has caught them off guard. Ripples in the high-yield bond market are giving a strong signal that 2016 may well turn out to be a year of accelerated loan-loss provisions for them. Investors may be right to seek cover.

Year of Reckoning
Singapore banks may have to set aside significantly more money this year for loan losses
Source: Bloomberg

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at

To contact the editor responsible for this story:
Katrina Nicholas at