Moody’s revises outlook for Singapore banks to stable

SINGAPORE — Moody’s Investors Service has upgraded its outlook to stable from negative for Singapore’s banking system, in a research report released yesterday.

The change in outlook reflects improving growth conditions and stabilising commodity prices that will limit a further weakening in asset quality and profitability, according to the credit ratings agency.

“Loan growth will increase mildly but be sustained by the system’s strong capital, funding and liquidity buffers,” said Mr Eugene Tarzimanov, a Moody’s vice-president and senior credit officer.

“Improving growth momentum in Singapore’s key trade partners will support export-oriented manufacturers and offset some lingering weaknesses in the local economy.”

The stable outlook is based on Moody’s assessment of five drivers: Operating environment, asset quality and capital, funding and liquidity, profitability and efficiency, and systemic support. All five drivers were rated stable.

Moody’s expects real gross domestic product growth in Singapore (Aaa Stable) to edge up to 2.2 per cent next year and 2.5 per cent in 2018, from 2 per cent last year.

Credit growth will also rebound to mid-single digits in this outlook, after almost flat growth last year.

Asset quality weaknesses have largely peaked, said Moody’s, in particular among oil and gas exposures.

Although problem loan ratios will still increase moderately, reflecting lingering distress in some local business segments, capitalisation will be supported by mild loan growth, stable profitability and falling credit costs.

Funding and liquidity will remain key strengths for Singapore banks, with stable loan-to-deposit ratios well below 100 per cent for the three large banking groups — DBS, OCBC and UOB, a low reliance on wholesale funding, and high proportion of liquid assets.

Moody’s expects mildly higher interest rates in Singapore, as a result of United States monetary policy tightening, to sustain banks’ interest margins.

This, together with subsiding credit costs, a mild rebound in loan growth, and higher fee income, will support the system’s profitability.

Government support for the three large Singapore banking groups will remain very high, reflecting not only their economic importance, but also the Government’s strong support capacity.

While Singapore will soon introduce an enhanced resolution regime for banks, the proposed amendments will not subject banks’ existing and prospective senior creditors and depositors to bail-in, which is in line with Moody’s expectation of strong support in this system.

Moody’s rates five banks in Singapore, which together accounted for 55 per cent of systemic domestic loans and 68 per cent of deposits as of the end of last year.

At the close of trade yesterday, DBS shares were down 0.63 per cent to S$20.47, while OCBC Bank gained 0.77 per cent to S$10.49 against the benchmark Straits Times Index, which ended 6.03 points or 0.19 per cent higher to 3210.82.