Moody's downgrades outlook on Singapore's banking system to negative

MOODY'S Investors Service has revised the outlook on Singapore's banking system to negative from stable due to worsening operating conditions and rising risks to asset quality and profitability.

The credit rating agency said on Thursday its negative outlook on Singapore's banking system over the next 12-18 months reflects the weaker operating conditions for the banks, against the backdrop of softer domestic and regional economic and trade growth.

"We also expect rising risks to the banks' asset quality and profitability, from their high exposure to energy-related industries and the generally high leverage of domestic firms," said Eugene Tarzimanov, a Moody's vice-president and senior credit officer.

Moody's said conditions for the banks are worsening because of the slower economic and trade growth in Singapore (Aaa stable) as well as more broadly in Asia. It expects real GDP (gross domestic product) growth in Singapore to slow to 1.6 per cent in 2016 and to 1.5 per cent in 2017, compared to the 2 per cent achieved in 2015 and the average of 4.5 per cent between 2011 and 2014.

On asset quality and capital, Moody's said the slowing economic and trade growth in Asia, continued vulnerabilities in the energy sector and the generally high leverage of domestic firms will "worsen slightly" banks' asset quality. Problem loans could rise from a very low 1.1 per cent of gross loans at end-March 2016.

It also voiced concerns that large banks are highly exposed to energy-related industries and shipping.

"Despite some rebound in energy prices so far in 2016, the quality of such exposures will deteriorate, because many of these firms are still restructuring their finances," Moody's said.

On profitability, Moody's said higher credit costs and flat loan growth rates would lead to a fall in profitability. Banks' net interest margins are seen staying stable at 1.5 per cent, with risks to the downside, because Moody's sees scope for Singapore's monetary policy to turn more accommodative over the coming months, due to deflationary pressures and the slowdown in growth.

Moody's rates the three local banks - DBS, OCBC and UOB - all Aa1 negative, aa3.

Standard Chartered Bank in Singapore is rated Aa3, negative, a2, and Bank of Singapore Aa1 negative, a3.