What headwinds should Singapore banks watch out for in 2013?

The banks' credit profiles could be threatened.

According to DBS, NIM is likely to continue declining in the next two quarters. But with Basel III rules on liquidity requirements likely to be relaxed, pressure on funding costs should start to ease.

"What remains under pressure is loan re-pricing of newer lower yielding loans vs older ones which have run down and persistent excess liquidity with limited opportunities to be deployed given the low interest rate environment."

We asked analysts what other headwinds loom for Singapore banks apart from declining NIMs and here's what they have to say:

Fitch Ratings: Alfred Chan, Director, Financial Institutions
The Singapore government's measures to cool the property market, including higher stamp duty and tighter conditions for mortgages, could dampen demand for mortgages for residential investment and commercial properties.

However, Singapore banks are already quite selective in their lending and underwriting, and the new property measures may curb the build-up of potential threats to the credit profile of Singapore banks.

These changes are part of a continuing policy response to the threat of a potential property bubble. The authorities have supplemented a higher tax on residential property purchases for foreigners and companies with the introduction of a sellers' tax on industrial property.

This is important for the Singapore banks, as they hold close to half their credit portfolios in property-related loans. Residential mortgages are a particularly large component, accounting for around 30% of their loan books.

Lingering global uncertainties may also hurt Singapore banks’ performance. A majority of their operations are in fairly open economies (Singapore, Malaysia and Hong Kong), which are sensitive to  developments in trade and financial markets.

However, we believe that the banks’ generally sound risk management and diversified loan books and earnings would help them cope with difficult operating conditions. The government is also likely to take extreme measures to protect the country against external shocks. These factors, alongside the banks’ high levels of core capital and reserves, underpin their likely resilience through economic cycles.

Standard & Poor's: Ivan Tan, Director, Financial Services Ratings
Standard & Poor's believes the slowdown in advanced economies this year, including the U.S. and Europe, will continue to hurt Singapore's export-oriented sectors, such as manufacturing and wholesale trade. This is likely to result in subdued loan growth, reflecting weaker demand as companies reduce their expansion plans.

Regional economies such as China, India, Indonesia, and Vietnam offer notably higher growth potential and better margins. We expect Singapore banks to continue expanding in these economies to counter domestic saturation and margin pressure.

The banks' financial profiles are likely to come under pressure as their exposure to emerging economies increase, reflecting heightened credit risks emanating from lower per capita incomes and weaker payment cultures. Nevertheless, we believe the weakening in credit profiles will be gradual.

CIMB: Kenneth Ng, Analyst
Looking ahead, we forecast sector earnings growth to be only 1-2% for 2013. The banks guide for 6-10% loan growth. NII could be flat as falling margins douse  some of the volume impact.

Margins should still contract in 1H13, though NII upside exist later the year if the yield curve steepens convincingly. Meanwhile, the inflated non-interest income base in 2012 leaves a higher hurdle to beat. The saving grace to counter single-digit topline growth is muted cost pressure and relatively benign asset quality.