Southeast Asia's biggest bank by assets has seen its shares tumble 18 percent this year, underperforming rival lenders, on worries that earnings could suffer due to its significant exposure to China through its Hong Kong unit and tough times for the oil and gas sector.
KUALA LUMPUR: Moody's Investors Service has revised the outlook on Singapore's banking system to negative from stable.
A Moody's vice president and senior credit officer Eugene Tarzimanov said on Thursday the 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," he added.
Moody's conclusions were contained in its just-released report on Singapore banks, titled, "Negative outlook due to worsening operating conditions, asset quality, profitability".
The negative outlook is based on Moody's assessment of five drivers: operating environment (deteriorating); asset quality and capital (deteriorating/stable); funding and liquidity (stable); profitability and efficiency (deteriorating); and government support (stable).
With the operating environment, Moody's says that 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.
Specifically, Moody's expects real GDP growth in Singapore to slow to 1.6% in 2016 and to 1.5% in 2017, results which would be lower than the 2% achieved in 2015 and the average of 4.5% between 2011 and 2014.
Moody's said Singapore's growth performance will be adversely affected by the slowing domestic manufacturing sector, and weaker economic activity in its key trade partners, including Greater China and Malaysia (A3 stable).
On the asset quality and capital, Moody's said that because of the slowing economic and trade growth in Asia, continued vulnerabilities in the energy sector, and the generally high leverage of domestic firms, the “banks will see their asset quality worsen slightly, with problem loans rising from a very low 1.1% of gross loans at end-March 2016”.
Moreover, the 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.
Nevertheless, Singapore banks will maintain strong capital buffers. These buffers will remain unaffected by higher credit costs, because pre-provision income will be sufficient to cover rising loan-loss provisions.
The ratings agency expected growth in risk-weighted assets will be muted and in line with the banks' retained earnings, leading to little pressure on their capital ratios.
As for profitability, Moody's said higher credit costs and flat loan growth rates will lead to a fall in profitability.
“The banks' net interest margins will stay generally stable at 1.5%, 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,” it said.
Funding and liquidity will remain strengths for large Singapore banks. The large banks will likely maintain stable loan-to-deposit ratios of around 90% in 2016-2017.
“Their low reliance on wholesale funding — of around 12% of assets at end-2015 — and Moody's expectation of slow credit growth, suggest that the banks will not face significant funding pressures. Around 30% of the major banks' assets are liquid assets, and refinancing risk is limited, given their low levels of market borrowings,” it pointed out.
Moody's said government support for large Singapore banks is very high. Because of the banks' importance to the economy, and Singapore's very high fiscal strength and low level of debt,
Moody's believes the Singapore government will be willing and able to provide timely support to the banks in situations of need.
Singapore is currently amending its resolution regime for financial institutions. The proposed amendments will not subject the banks' existing and prospective senior creditors and all depositors to bail in; a situation which is in line with Moody's expectation of strong support in this system.
Moody's rates the three major banking groups in Singapore: DBS Bank Ltd. (DBS, Aa1 negative, aa3), Oversea-Chinese Banking Corp Ltd (OCBC, Aa1 negative, aa3) and United Overseas Bank Limited (UOB, Aa1 negative, aa3).
It also rates Standard Chartered Bank (Singapore) Limited (Aa3 negative, a2), and Bank of Singapore Limited (Aa1 negative, a3).
Moody's negative outlook for Singapore's banking system is in line with the negative outlooks on the five Moody's-rated banks in Singapore.
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