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Moody's downgrades ratings outlook for Singapore banks to negative

It expects challenging environment to pressure asset quality and profitability, but adds that the banks have strong capital and provisioning buffers

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A touch of gloom has descended on Singapore's banking sector, with Moody's Investors Service downgrading its ratings outlook for the Singapore banks from "stable" to "negative".

Singapore

A TOUCH of gloom has descended on Singapore's banking sector, with Moody's Investors Service downgrading its ratings outlook for the Singapore banks from "stable" to "negative".

This was alongside fresh data from the month of February that showed bank lending had fallen for five straight months from a year ago - a malaise not seen since 1999.

The lowered rating on Thursday reflects the likely rating direction over the next 12 to 18 months, and are assigned only to the banks' long-term deposit, to the issuer and senior unsecured debt ratings.

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Moody's said that despite these headwinds, Singapore banks maintain very strong buffers in terms of capital, loan-loss provisions and pre-provision income; funding and liquidity profiles are also robust.

Moody's has affirmed, among other things, the institutions' credit ratings; the banks hold the second-highest level in credit rating, at Aa1.

The rating agency said: "The rating action reflects Moody's expectation that a more challenging operating environment for banks in Singapore in 2016, and possibly beyond, will pressure their asset quality and profitability. Moody's expects credit conditions for banks in Singapore will continue to weaken against the backdrop of slower economic and trade growth, both domestically and in the region."

Market watchers have noted that the current downturn is different from the financial crises of 1998 and 2008, in that there are no systemic issues of high corporate leverage, outsized unhedged currency exposure or a global liquidity crunch. Asian corporate balance sheets are stronger than before, and should withstand potential shocks.

A DBS spokesman said Moody's rating methodology captures the macro profiles of countries in which the banks operate. It has downgraded Singapore's macro profile, as well as the operating environments of China, Hong Kong and Malaysia. "With global growth likely to be slower this year, we will grow our business sensibly, while being watchful of risks. DBS's asset quality is resilient and our liquidity and capital positions are strong."

Similarly, OCBC's chief financial officer Darren Tan said the bank has been prudently managing its franchise. "In particular, we have been paying close attention to the management of our asset portfolio and ensuring that our liquidity and capital positions remain robust."

Jimmy Koh, head of investor relations in UOB, said the bank's priorities of maintaining robust capital and risk management, as well as preserving a strong balance sheet and funding base, will help ensure resilience through economic cycles and to support customers in the long term.

Standard & Poor's (S&P) Ratings Service kept its "stable" outlook on the sector, noting the Singapore lenders' sound underlying fundamentals.

It said: "We believe the three Singapore banks that we rate have sufficiently solid financial profiles to endure the difficulties, supporting our 'AA-' long-term-issuer credit ratings.

"We also continue to factor in a high likelihood of extraordinary government support for Singapore banks."

S&P noted this week that the Singapore banks have a solid loan-loss reserve at more than 100 per cent of problem loans, providing some cushion against asset-quality pressure.

"The moderation in credit growth also puts less pressure on capital."

Noting that macro-prudential measures to cool the property market have proven effective, S&P forecasts loan growth of 3 to 5 per cent for Singapore banks in 2016.

However, S&P flagged the hit on revenue from weakening loan growth, with interest income from loans accounting for some 60 per cent of revenue for banks. "If loan growth slows down, non-interest income from loan-related services would also weaken."

This comes as bank lending in Singapore saw more drag in February, preliminary data from the Monetary Authority of Singapore showed.

Loans through the domestic banking unit, which essentially captures lending in all currencies but mainly reflects Singapore-dollar lending, stood at S$596 billion last month, down 0.7 per cent from January, the MAS figures showed. In January, bank lending was flat at S$600 billion.

From a year ago, bank lending in February fell 1.2 per cent, at the same pace as the contraction in January.

Selena Ling, head of treasury research and strategy at OCBC, said that the five straight sets of contraction is the longest stretch since 1999; back then, business loans went on a decline for six months running, between November 1999 and April 2000.

Business loans in February fell 3.4 per cent from a year ago to S$354 billion - and has been down for six straight months. Loans to financial institutions, trading companies and manufacturers, have been contracting for at least 12 months now. The hit on business lending would have been more severe if not for construction loans, which are holding up on a year-on-year basis. Loans to construction firms, which stood at S$119 billion, are the single-largest contributor to business lending.

Consumer lending is still growing, but this has been decelerating on the back of property-cooling measures. Mortgages, which drive consumer loans, grew 3.9 per cent from a year ago to S$185 billion.

Ms Ling expects bank loans to contract around 1.2 per cent year-on-year in the first quarter of 2016, given very weak domestic business sentiments. Her full-year estimate ranges between no growth and a 2 per cent lift.

Shares of DBS shed 11 cents to S$15.38; those of OCBC also fell 11 cents to S$8.84, while shares of UOB fell 18 cents to S$18.87.

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