BANK lending in May has contracted year on year for the eighth straight month, preliminary data from the Monetary Authority of Singapore (MAS) showed.
At the same time, ratings agency Moody's downgraded its outlook for Singapore's banking system to "negative" from "stable", citing weaker operating conditions and rising risks to asset quality and profitability.
Preliminary MAS data showed that loans through the domestic banking unit - which captures lending in all currencies but mainly reflects Singapore-dollar lending - were around S$593 billion in May, down 0.7 per cent year-on-year but up 0.5 per cent from S$590 billion in April.
The year-on-year decrease was due to a dramatic slowdown in loans to general commerce and to a lesser extent, to financial institutions.
However, loans made to the building and construction industry continued to increase compared to a year ago.
Loans made to consumers continued to increase as well. This was due to housing and bridging, and share financing loans registering upticks.
Selena Ling, OCBC head of treasury research and strategy, said she expects bank loans to shrink by up to 1.1 per cent year-on-year in the second quarter of the year.
For the entire 2016, she estimates the contraction to be 0.2 per cent compared to 2015, amid macro headwinds, notably uncertainties after the United Kingdom voted to leave the European Union.
But she highlighted how business loans to transport, storage and communications in May actually recovered 3.2 per cent year-on-year, and was up 2.2 per cent month-on-month, after two consecutive months of declines. This possibly signals some initial stabilisation for this sector, she said.
On the consumer side, she said car loans should continue to improve modestly with the recent easing in car loan measures.
Meanwhile, Moody's in its downgrade note said that operating conditions for banks are worsening because of slower economic and trade expansion at home and also more broadly in Asia.
Banks here are highly exposed to the vulnerable energy-related industries and shipping sectors. The recent recovery in oil prices has yet to translate into material cash flow improvements for listed firms in the upstream offshore and marine sectors, the agency said.
Its banking system outlook is its forward-looking assessment of fundamental credit conditions that will affect the creditworthiness of banks over the next 12 to 18 months. A negative outlook suggests that negative rating actions are more likely on average.
High corporate debt remains a key risk. The debt of domestic non-financial firms has increased to 82 per cent of gross domestic product (GDP) in 2015 from 58 per cent in 2010, as companies borrowed for domestic and regional expansion, Moody's said.
Household debt levels also remain high at 75 per cent of GDP at end-March, with 80 per cent of all debt provided by the banks.
Yet Moody's said large Singapore banks do not face significant funding and liquidity pressures, and government support remains very strong.
Most household debts are housing mortgages, where asset quality risks are low because of cooling measures imposed by the MAS in 2013. High wealth levels also imply a strong capacity to service debt, Moody's said.
That Singapore's property market has been cooling since 2013 "lowers the risk of a material price correction".
"We expect housing prices and transaction volumes to continue to moderate over the next 12 to 18 months as the MAS is unlikely to ease its property cooling measures," Moody's said.