Boston, MA -- (SBWIRE) -- 01/01/2013 -- BMI View: Despite the risks inherent in a small yet highly trade-exposed economy such as Singapore's, the city-state's banking sector is on solid footing to deal with a global economic slowdown. While a slowing real estate sector, threats to exporters, and foreign currency loans all present risks to Singapore's three largest banks, these risks are manageable even in the event of an acute global financial crisis. That being said, profits growth will likely be challenged as loan growth retreats from its peak, slowing to 10.0% (a slight upwards revision from our previous forecast of 6.0%) in 2012 versus 30.3% in 2011. Singapore's banks remain well positioned to stave off even a marked deterioration in the global economic environment, and continue to post healthy profits growth despite low net interest margins. All three major Singaporean banks (DBS, UOB, and OCBC) are well capitalized with tier 1 capital ratios of 12.7%, 14.7%, and 13.9%, respectively, and posted strong year-on-year (y-o-y) profit increases of 16.0%, 12.4%, and 32.5%, respectively in Q112. Credit Growth To Retreat Following Peak Loan growth in March hit 26.0% y-o-y, but has been falling gradually since peaking at 31.1% in September 2011. We believe that Q411 represented the top of Singapore's credit cycle, and that while loan growth is still underpinning banks' revenue, it will continue to contract over the coming quarters, bringing full-year 2012 loan growth to 10.0%. This forecast is supported by the broader economic fundamentals that we are seeing in the city-state, especially activity in the bubbly real estate sector. As we have mentioned before, we believe that Singapore private property prices, which have skyrocketed by 54.7% since bottoming in mid-2009, are set for a correction, although they are likely to fall more gradually than 2009's collapse. In particular, we believe that prices have come too far too fast relative to affordability. Against the rapid run-up in private housing prices, nominal wages have grown only 11.9% since 2009. Furthermore, an average "mass market" home, costing around SGD1,000,000 (based on a SGD900 per square foot valuation), implies a poor affordability ratio of 11.8x based on median annual household income of SGD84,480.

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