Singapore banks will weather further weakening in asset quality: Moody's

SINGAPORE'S three largest banks face continued downward pressure on their asset quality and profitability in 2017, but the impact will be manageable, according to Moody's Investors Service on Tuesday.

The credit rating agency says strong government support will continue to underpin the Aa1 ratings of DBS Bank (Aa1/Aa1 stable, a1), Oversea-Chinese Banking Corp (Aa1/Aa1 stable, a1) and United Overseas Bank (Aa1/Aa1 stable, a1).

Simon Chen, Moody's Vice President and senior analyst, expects further headwinds to be manageable and does not envisage further downgrades over the next 12-18 months.

"Problem loans will increase in 2017, but new problem loan formation -- primarily from the embattled oil services sector -- will slow from the peak levels observed in 2016," adds Mr Chen. "The gradual recovery of oil prices from the troughs seen in early 2016, if sustainable, will lead to a re-start of production activities and higher utilization of oilfield services."

Deterioration in the banks' regional loan quality will stay mild as the banks remain cautious on business growth amid continued macroeconomic headwinds.

Downside risks on profitability will continue over the next few quarters due to elevated credit costs and slower loan growth, somewhat offset by higher interest rates.

All three babks - DBS, OCBC and UOB - have strong common equity Tier 1 (CET1) ratios of 12 to 14 per cent, supported by retained earnings and slow balance-sheet growth. Moody's expects their capital ratios to remain stable over the next 12-18 months because lower capital utilization from slower business growth will help offset weaker profits.

As for the banks' liquidity, this will remain robust due to their strong deposit franchises, with loan-to-deposit ratios of around 90 per cent.

"Relative to highly rated global peers, the Singapore banks exhibit a low reliance on market funding and are thus less exposed to market volatility and refinancing risks,'' Moody's notes.