Will bad loans continue to haunt Singapore banks this year?

It will slow down, but the impact will be manageable, says Moody's.

Singapore's three largest banks, DBS Bank Ltd., Oversea-Chinese Banking Corp Ltd, and United Overseas Bank Limited, face continued downward pressure on their solvency metrics of asset quality and profitability in 2017, but the impact will be manageable, according to Moody's Investors Service.

Moody's vice president and senior analyst Simon Chen said declining asset quality and profitability for the three large Singapore
banks contributed to the recent downgrades of their standalone credit assessments.

"Problem loans will increase in 2017, but new problem loan formation, primarily from the embattled oil services sector, will slow from the peak levels observed in 2016. The gradual recovery of oil prices from the troughs seen in early 2016, if sustainable, will lead to a re-start of production activities and higher utilization of oilfield services," Chen said.

Furthermore, Chen noted the deterioration in the banks' regional loan quality will stay mild as the banks remain cautious on business growth amid continued macroeconomic headwinds.

Meanwhile, downside risks on profitability will continue over the next few quarters due to elevated credit costs and slower loan growth, somewhat offset by higher interest rates. Profitability metrics are just in line with highly rated global peers, despite the banks' relatively larger exposure to higher yielding emerging markets.