SINGAPORE (Aug 14): Fitch Ratings has affirmed the ratings of the three Singapore banks, DBS, OCBC and UOB.

The banks' Long-Term Issuer Default Ratings (IDRs) have been affirmed at 'AA-' with Stable Outlook, and the Viability Ratings (VRs) at 'aa-'.

Fitch says the ratings are based on the trio’s resilient funding profiles, which stem from stable domestic franchises, healthy capitalisation buffers and strong regulatory oversight”. These rating strengths, it adds, “mitigate risks to the banks' balance sheets from rising exposures to emerging markets in the Asia-Pacific region and high loan growth - including in property-related lending - in recent years”.

Fitch believes the banks’ asset quality has benefited from favourable credit conditions over the past five years or so, and impaired loan ratios of 0.7%-1.2% of gross loans at end-June 2015 are close to cyclical lows.

That said, it reckons that slowing macroeconomic growth in Singapore and other key markets, lower commodity prices and potentially higher interest rates and market volatility present “cyclical risks to asset quality and headwinds to profitability” over the next 12-18 months, particularly in light of the strong loan growth in recent years and rising leverage in some markets. However, Fitch expects any deterioration in asset quality to be manageable.

Fitch warns that the banks' ratings are sensitive to their increasing exposures to the more challenging developing markets. This will burden their asset quality, funding profiles, particularly in foreign currency, if offshore expansion is not conducted in a disciplined manner. “Expansion in its various forms also adds to operational complexities, which could add to downward rating pressure,” it says.

Lastly, Fitch points out that OCBC could also face negative rating action if it fails to improve its capitalisation to a level closer to that of its peers over the next one to two years.