Moody's Investors Service has upgraded its outlook for Singapore's banking system to stable (Aaa stable), reflecting the domestic property market's soft landing and moderating domestic as well as cross-border credit growth.

The outlook had been negative since July 2013. Moody's rated all three of Singapore's major banks - DBS, OCBC and United Overseas Bank - as "Aa1 stable, aa3".

It also rated Bank of Singapore, the private-banking subsidiary of OCBC, as "Aa1 stable, a3".

The credit rating agency said yesterday that it expects Singapore banks to continue benefiting from healthy - although lower - economic growth, both domestically and in their regional operations.

While real gross domestic product (GDP) growth here will slow to around 3 per cent this year and next year as a result of slower growth in China, this will be offset somewhat by the recovering United States economy, it said.

"We expect moderate credit growth for Singapore banks in the next 12 to 18 months, which will help to regulate household and corporate leverage," said Mr Eugene Tarzimanov, Moody's vice-president and senior credit officer. "But problem loans will increase somewhat during 2015-16, mainly from foreign loans, while the quality of domestic loans will remain stable."

Moody's said Singapore's domestic property market is undergoing a soft landing, with regulatory steps and new housing supply having moderated prices for public and private housing by about 5 per cent to 7 per cent since 2013.

It expects this trend to continue as additional housing supply comes online, interest rates gradually increase and current regulatory measures remain in place. The rating agency tips Singapore banks to maintain stable loan-to-deposit ratios of around 90 per cent in 2015-16, but profitability will drop as higher credit costs and slower loan growth weigh on margins.

While higher interest rates will provide support to net interest margins, Moody's expects improvements to be very gradual and offset by these higher credit costs.

Capital buffers will stay strong, unaffected by credit costs as recurring earnings will cover gradually increasing loan-loss provisions, and risk-weighted asset growth will be in line with internal capital generation, said Moody's.

Mr Kevin Kwek, vice-president at Sanford C. Bernstein, said the ratings upgrade "bodes well for the banks' liquidity and ability to raise cheap long term debt", which will give their margins a lift.