Singapore banks' profitability under pressure: Moody's

Bad loans jumped to new highs in September.

Moody's Investors Service says that the profitability of the three largest banks in Singapore by assets is under pressure, as seen by their Q3 2016 financial results.

The three banks are: DBS Bank, Oversea-Chinese Banking Corporation Limited, and United Overseas Bank Limited.

"The Q3 results for DBS, OCBC and UOB show a further weakening in the banks' asset quality and profitability, because of the persistent challenges that they face in relation to their oil and gas exposures," says Eugene Tarzimanov, a Moody's Vice President and Senior Credit Officer.

The deterioration was in line with Moody's expectations, as reflected in the negative outlook assigned to the banks' ratings at end-March 2016.

"The NPL ratios of all three banks climbed to new highs at end-September 2016," says Simon Chen, a Moody's Vice President and Senior Analyst. "The NPL increases were driven mainly by the banks' loans to oil and gas service companies; a segment within the oil and gas industry that has been the most severely impacted by low oil prices."

Moody's expects that asset quality challenges posed by the troubled oil and gas service companies will persist over the next few quarters, contributing to a further weakening in the banks' asset quality.

Returns on assets continued to decline for OCBC and UOB for the first nine months of 2016, owing to higher credit costs and weaker revenue growth, with the latter pressured by margin compression.

On the other hand, DBS' profitability has shown more resilience relative to the other two banks. For the first nine months between January and September 2016, DBS recorded stronger operating income growth and lower operating expense growth than OCBC and UOB; thereby positioning it better to withstand the increase in credit costs.

Moody's report notes that despite the headwinds that the banks face, all three show robust loss absorption buffers. In particular, during Q3 2016, the banks recorded higher fully-loaded common equity Tier 1 ratios, driven mainly by retained earnings and slow balance sheet growth.