Singapore's top three banks face increasing challenges at home and abroad: Moody's

[SINGAPORE] Moody's Investors Service says that Singapore's top three banks - namely DBS Bank (DBS), Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB) - face increasingly challenging operating conditions both at home and in their key regional markets, and as a result rising pressure on asset quality and profitability.

Reflecting these challenges, Moody's on 31 March changed the outlook on the three banks to negative from stable. On the same date, Moody's affirmed the deposit ratings and senior debt of all three banks at Aa1, and their baseline credit assessments at aa3.

"In Singapore, the banks are exposed to weakening growth momentum and corporate financial conditions," says Eugene Tarzimanov, a Moody's vice president and senior credit officer. "And abroad - with foreign loans now accounting for around half of Singapore banks' gross loans - the banks are also exposed to slower economic and trade growth, as well as higher loan delinquency rates."

"Nevertheless, we expect the banks can weather the current headwinds, as reflected in our affirmation of their ratings," adds Mr Tarzimanov.

Mr Tarzimanov was speaking on the release of a new report titled "Banks - Singapore: Behind the Negative Outlook on DBS, OCBC and UOB". According to Moody's report, credit growth in Singapore will continue to decelerate against the background of weak economic growth and banks' tighter underwriting. Moody's expects nominal economic growth of 2.4 per cent and flat credit growth in 2016, which will lower the country's credit-to-GDP ratio to 127 per cent from 130 per cent in 2015.

Macroeconomic conditions have also weakened in the key overseas markets in which Singapore banks operate -particularly in China (Aa3 negative), Hong Kong (Aa1 negative) and Malaysia (A3 stable) - resulting in increased pressure on their overseas loan books.

But while the negative outlooks on the three banks are driven by broad macroeconomic weaknesses, these banks' individual exposures to specific challenges and risk factors vary. While all three banks saw their asset quality metrics deteriorate in 2015 - testifying to the common headwinds they face - OCBC's asset performance was the strongest.

Meanwhile, UOB underperformed in terms of asset quality as a result of its greater focus on the small- and medium-sized enterprise segment in Singapore. And DBS stands out due to is larger exposures to the currently vulnerable oil and gas services companies, compared to the other two banks.

Despite these rising risks, all three banks continue to report very strong loss-absorption buffers in terms of capital, loan loss reserves and pre-provision income, as well as robust funding and liquidity profiles.

Specifically, Moody's scenario analysts suggests that the banks can withstand a 250 basis point increase in their NPL ratios and a 25 per cent decline in pre-provision income over two years and still remain profitable, with OCBC slightly ahead of DBS and UOB.

The banks' reported capital ratios are also in line with global highly-rated peers in Hong Kong, Australia and Canada, while their leverage ratios are broadly superior.