Singapore's banking system can withstand a shock from a sharp downturn in the housing market, according to ratings agency Fitch.
Its view comes despite banks' large exposure to the sector - mortgages make up a third of domestic lending - and more weakness forecast for the property market.
Fitch said its stress tests show that the risks for banks would be modest even if housing loan quality were to deteriorate drastically.
It expects Singapore's private residential home prices - having declined 9.4 per cent since peaking in September 2013 - to weaken further as a large supply of new homes floods the market while population growth slows. Still, the possibility of a collapse in home prices "looks remote" without a massive external economic or financial shock, it said. "We believe the regulators have the latitude to stem a drastic and unexpected decline in home prices by unwinding some of the property-cooling measures introduced earlier."
Fitch's worst-case scenario models a 45 per cent collapse in home prices with a housing non-performing loan ratio of 5 per cent. This is higher than the average peak ratio of 4.3 per cent for the three local banks during the Asian financial crisis. The result would be a 17 to 24 per cent slide in the banks' earnings, not taking into account the negative impact of the stress on the other parts of their business.
Still, Singapore banks' rating profiles will continue to be supported by their healthy profitability, steady funding and liquidity pools, and strong capitalisation, said Fitch. In addition, government measures aimed at mitigating systemic risks to the financial system - rolled out in the wake of the global financial crisis - could contain the effect on banks from a sharp deterioration in housing loan quality.
Fitch also noted that the average housing non-performing loan ratio of the three local banks had stayed below 5 per cent through some major events in the last decade, such as the dot-com bubble burst, the 2001 global economic slowdown and the outbreak of the severe acute respiratory syndrome in Asia - all of which followed the Asian financial crisis.
Households are now also holding more cash than in the run-up to the Asian financial crisis, Fitch said.
Foreigners participating in the housing market also pose minimal risks - Singapore's role as a global wealth-management hub "suggests some of these purchases are long-term investments, thus reducing the risk of capital exodus".
Foreign investors accounted for 14 per cent of purchases from 2005 to 2011. Mainland Chinese and Malaysians accounted for more than half the purchases from 2013 to 2015.