A rapid rise in loans and soaring property prices in Singapore have led ratings agency Moody's to lower its outlook for Singapore's banking system to "negative" from the previous "stable" outlook.
Years of low interest rates and healthy economic growth have led to an increase in borrowings and asset inflation in Singapore, Moody's said on Monday.
Given an impending rise in interest rates, these trends could spell trouble for the country's banks, it added.
Moody's noted that household debt has risen to 77.2 per cent of gross domestic product as of March this year, from 64.4 per cent at end-2007.
Over the same period, private home prices grew 1.2 times and Housing Board flat prices rose 1.7 times, Moody's added.
"With the potential risk of a turn in the interest rate cycle, we view strong asset inflation and credit growth trends as vulnerabilities, as this combination would likely cause credit costs to rise from their current low base," the agency said.
"If interest rates rise, we therefore expect rising credit costs to outweigh any potential increases in lending margins."
Moody's also noted that banks in Singapore are exposed to risks in other regional markets. Last year, 77 per cent of Singapore banks' non-performing loans were related to loans made by borrowers outside Singapore, compared to 65 per cent in 2008.