The banking system - including domestic and foreign banks - will weather the challenging economic environment despite the stresses on their asset quality and earnings, the Monetary Authority of Singapore (MAS) said yesterday.

It also noted that the banks' exposure to the struggling oil and gas sector is not as damaging as expected.

Its confidence is based partly on an industrywide stress test that pictured several drastic scenarios, including a 50 per cent drop in local property values over three years, a 50 per cent fall in oil prices over the same period and a 40 to 60 per cent slump in stock prices.

"All banks would remain solvent, with their capital adequacy ratios remaining well above Basel regulatory requirements under the stress scenario," the MAS said yesterday in its annual Financial Stability Review.

The MAS review comes at a time when weak global growth has hurt companies' ability to service bank loans. This was reflected in the non-performing loan (NPL) ratio seen across the whole banking sector, which rose from 1.5 per cent in the third quarter last year to 2.1 per cent in the third quarter this year.

The ratio for corporate NPL also ticked up from 1.8 per cent in last year's third quarter to 2.7 per cent in the third quarter this year, with the issues particularly pronounced in sectors like manufacturing and transport and storage, MAS data showed.

Rising NPLs typically mean that banks have to set aside more provisions to cover potentially sour loans, which in turn erode profits. Overall lending - a main source of income for banks - has also been contracting since the start of the year.

These issues are less acute for the three local banks - DBS, OCBC and UOB - which had an NPL ratio of 1.4 per cent in the third quarter and still-positive loans growth of 1.9 per cent year on year.

The trio have been grappling all year with bad loans and the winding up of some oil and gas clients, part of the reason why Moody's has downgraded the Singapore banking system's outlook to negative.

However, MAS stressed that the risks are "manageable", as the whole banking system had less than 10 per cent of total exposure to the oil and gas and related supporting services.

Only 4.2 per cent of the total exposure of major lending banks to the oil and gas and related services are considered non-performing assets.