Debt threat: Moody’s issues negative outlook on Singapore banks

Their profitability and efficiency are deteriorating.

Singapore’s biggest banks are grappling with more problem loans and steadily higher interest rates, prompting Moody’s Investors Service to again issue a negative outlook on the country’s banking system.

Moody’s noted that the negative outlook will last for the next 12-18 months, as asset prices continue to fall and banks struggle with increasing credit costs.

According Eugene Tarzimanov, a Moody's Vice President and Senior Credit Officer, "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 seasonedwhen the repayment burden on more highly leveraged borrowers increases, as interest rates rise."

Here’s more from Moody’s:

The report -- whose outlook expresses Moody's expectation of how bank creditworthiness will evolve in this system over the next 12-18 months --looks at Singapore's banking system in terms of five factors: 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").

"Nevertheless, the banks' problem loans during 2014-15 will 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," says Tarzimanov.

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 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.