Singapore’s financial system is resilient even though risks to global financial stability have risen, the Monetary Authority of Singapore said. But the impact on bank profitability could be further exacerbated.

The city-state's overall banking system is currently healthy with strong capital and liquidity positions, the Monetary Authority of Singapore (MAS) said in its annual Financial Stability Review released last week. However, global risks have grown against a challenging macroeconomic environment.

This includes a global economy that continues to see a synchronized slowdown and an uncertain outlook given ongoing trade and geopolitical tensions.

Can Withstand Severe Shocks

The central bank’s stress test showed lenders in Singapore having the capacity to withstand severe shocks as banks continue to maintain ample capital buffers to cushion credit losses despite a slight deterioration in asset quality in the third quarter. Total credit growth has moderated to a more sustainable pace too.

However, the extended uncertain global operating environment could present banks with challenges. «Banks could face some pressures on net interest margins given the persistently low-interest rate environment,» MAS wrote in its 65-page report.

Bank Profits At Risk

«The impact on bank profitability could be further exacerbated by ongoing weakness in the global operating environment,» it added.

Hence, MAS urged banks to continue maintaining sound credit risk management standards and practices, while ensuring adequate provisioning buffers to guard against external vulnerabilities.

Corporate Debt Levels Rose

Corporate debt levels and loans to riskier borrowers have risen due to the accommodative policy stances by major central banks, alongside higher portfolio capital flows into emerging market economies.

With increased uncertainties and expectations for prolonged sluggishness in global growth, MAS urged local companies, banks and households to remain vigilant.

Close Monitoring Needed

Highly leveraged firms should still exercise financial prudence as the risks of a persistent growth slowdown and trade tensions could continue to weigh on profitability and debt servicing ability, the central bank highlighted.

«While the projected improvement in the manufacturing sector in 2020 should cap a further deterioration in NPLs, the trade-related sectors as a whole still bears closer monitoring.»