Local banks' profits under threat as energy loans waver: Moody's

Operating conditions are steadily deteriorating.

Singapore banks will face rising asset quality risks on back of their large exposure to energy-related industries and the high leverage of domestic firms, a report by Moody's said.

Moody's said that continued vulnerabilities in the energy sector will cause non-performing loans to rise in coming quarters. Problem loans stood at just 1.1% of gross loans in Q1.

"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," Moody's said.

As a result of deteriorating operating conditions, Moody's has revised its outlook on Singapore's banking system to negative from stable.

As for profitability, the report noted that higher credit costs and flat loan growth rates will lead to a fall in profitability.

Nevertheless, Singapore banks will maintain strong capital buffers. Moody's said These buffers will remain unaffected by higher credit costs, because pre-provision income will be sufficient to cover rising loan-loss provisions.