Moody's retains negative outlook on Singapore's banks

KUALA LUMPUR: Moody's Investors Service is maintaining its negative outlook on Singapore's banking system over the next 12-18 months, as it has been since July 2013, and expects a moderate uptick in problem loans.

The international ratings agency said on Tuesday since the moderate rise in the problem loans would be because the banks had rapidly grown both their domestic and cross-border loans in recent years.

A Moody's vice president and senior credit officer Eugene Tarzimanov said the rise in problem loans would also be due to the US Fed's expected raising of policy rates, and as asset prices are likely to fall.

"Even a gradual increase in interest rates will put pressure on the banks' operating environment, because the rapid credit growth in recent years has led to a situation where many loans will not be fully seasoned when the repayment burden on more highly leveraged borrowers increases, as interest rates rise," he said.

Tarzimanov was speaking on the release of Moody's "Banking system outlook Singapore," which he had authored.

The report was based on Moody's expectation of how bank creditworthiness will evolve in this system over the next 12-18 months.

It focused on Singapore's banking system in terms of five factors. They were operating environment (which is classified as "deteriorating"); asset quality and capital (deteriorating/stable); funding and liquidity (stable); profitability and efficiency (deteriorating); and systemic support (stable).

Tarzimanov said the banks' problem loans in 2014-2015 would increase only moderately, given the very low 1% reported at end-2013.

"The mild deterioration will likely originate from the banks' foreign loan books, which made up 47% of their gross loans at end-2013, while domestic exposures will largely remain stable over the outlook horizon," he said.

Moody's report points that the quality of the banks' corporate loans in several emerging Asian economies will deteriorate, if interest rates rise.

The report also says that the banks' consumer loans in Malaysia and Thailand are exposed to risks, due to the high and increasing levels of household debt in the two economies.

By contrast, the quality of their mortgage and consumer loans in Singapore will be supported by the significant wealth levels of Singapore borrowers, as well as their low average loan-to-value ratios, and the recent moderation in property prices, largely as a result of the cooling-off measures introduced by the Monetary Authority of Singapore.

In addition, the banks will enter this period of slightly weaker asset quality with good capital buffers, which Moody's expects will remain unaffected by higher credit costs over the next 12-18 months, because recurring earnings will be more than sufficient to cover the gradually increasing loan-loss provisions.

Moody's views Singapore as a high support country for banks, given their importance to the overall economy. Additionally, Singapore's very high fiscal strength and low level of debt give it ample capacity to support the banks in a timely fashion.

As for a formal bail-in regime, Moody's report says that while Singapore has not adopted such a regime, the introduction of bail-in powers globally, and more recently, regionally, may indicate the emergence of a trend that could prompt a shift in the Singapore regulator's policy on the issue.

Moody's rates Singapore's three major banking groups - DBS Bank Ltd., Oversea-Chinese Banking Corporation Ltd. (OCBC) and United Overseas Bank Ltd. (UOB). Moody's also rates Bank of Singapore, the private-banking subsidiary of OCBC.

Moody's report focuses on the three major banking groups, which together accounted for around 60% of domestic system assets at end-2013.