Singapore banks will weather through further weakening in asset quality: Moody's

ATMs of OCBC, DBS, Citibank and UOB located at the passenger departure hall of Changi Airport Terminal 3.
ATMs of OCBC, DBS, Citibank and UOB located at the passenger departure hall of Changi Airport Terminal 3. PHOTO: ST FILE

SINGAPORE - Singapore's three largest banks - DBS Bank, Oversea-Chinese Banking Corp and United Overseas Bank - face continued downward pressure on their asset quality and profitability in 2017, but the impact will be manageable, while strong government support will continue to underpin their Aa1 ratings, Moody's Investors Service said on Tuesday (Jan 17).

"Declining asset quality and profitability for the three large Singapore banks contributed to the recent downgrades of their standalone credit assessments to a1 from aa3, but as we expect further headwinds to be manageable, we do not envisage further downgrades over the next 12-18 months," says Simon Chen, a Moody's vice president and senior analyst.

"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," Mr Chen added Chen.

"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."

The credit ratings agency said the deterioration in the banks' regional loan quality will stay mild as the banks remain cautious on business growth amid continued macroeconomic headwinds.

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, said Moody's.

But it added that the Singapore banks' profitability metrics are just in line with highly rated global peers, despite the the relatively larger exposure to higher yielding emerging markets.

Moody's also noted that strong loss-absorption and liquidity buffers underpin the three banks' resilience to challenging credit conditions.

"All three banks have strong common equity Tier 1 (CET1) ratios of 12-14 per cent, supported by retained earnings and slow balance-sheet growth, and we expect their capital ratios to remain stable over the next 12-18 months because lower capital utilization from slower business growth will help offset weaker profits," it said.

At the same time, the banks' liquidity will remain robust due to their strong deposit franchises, with loan-to-deposit ratios of around 90 per cent, said Moody's.

"Relative to highly rated global peers, the Singapore banks exhibit a low reliance on market funding and are thus less exposed to market volatility and refinancing risks," it added.