SINGAPORE, Nov 27 ― Singapore's central bank warned today that subdued regional economic growth is posing increased credit risks for the city state's banks, but it said the financial system remains resilient in the face of external headwinds.

Highlighting growing challenges facing global policymakers, the Monetary Authority of Singapore also cautioned that divergent monetary policies across the United States, Japan and Europe could stoke financial excesses as traders search for higher returns.

“Uncertainty over US monetary policy could trigger higher market volatility, while accommodative policies in the euro zone and Japan could fuel search for yield and financial excesses,” the MAS said in its annual Financial Stability Review.

It said sub-par growth in Asia could pressure profits and debt servicing capacity of businesses, with the turning credit cycle leaving banks exposed to risks of bad loans.

“Asset quality remains healthy, but there are signs of increased credit risks.”

All the same, the domestic banking system remains resilient against a backdrop of an uncertain external environment, MAS said.

“Banks have strong capital and liquidity buffers to withstand severe shocks but continued vigilance is warranted.”

The overall non-performing loan (NPL) ratio increased to 1.5 per cent in the third quarter of 2015 from 1.1 per cent a year ago, the central bank said.

“Banks' corporate loan portfolios face increased vulnerabilities as subdued regional growth could hit the profitability and debt servicing capacity of corporates in Asia,” the MAS said.

The MAS said household balance sheets have remained firm on aggregate, with household net wealth ― the difference between household assets and debt ― totalling S$1.5 trillion (RM4.5 trillion) in the third quarter. Defaults on consumer loans have been low, it said.

However, “the impending interest rate normalisation, coupled with headwinds in the external outlook and slower domestic growth, pose downside risks to the household sector,” especially for the highly-leveraged, the central bank said.

Michael Wan, an economist for Credit Suisse, said the risks from leverage were “slightly more acute” for households in Singapore than for the corporate sector.

“The good thing is that over the past say one-and-a-half years or so, the growth rate of household debt has come down quite a bit,” Wan said. “I don't personally think that it's going to be a widespread default kind of issue.”

Highly-leveraged firms in certain sectors could be vulnerable if interest rates rise or earnings weaken further, while those with foreign currency exposures should guard against currency market volatility, the MAS said. ― Reuters