S’pore banks will weather further weakening in asset quality: Moody’s

SINGAPORE - The Republic’s three largest banks - DBS Bank, Oversea-Chinese Banking Corp (OCBC) and United Overseas Bank (UOB) - face continued downward pressure on their asset quality and profitability in 2017, but the impact will be manageable, Moody’s Investors Service said in a report on Tuesday (Jan 17).

Singapore’s banks have suffered an increase in their non-performing loan (NPL) ratios mainly due to the troubles in the embattled oil services sector, which accounts for 1 to 3 per cent of the banks’ total loans, as well as from regional operations. And while the oil services sector remains affected by overcapacity and uncertainties in production that have hurt cash flows and debt serviceability, the situation could improve slightly this year as oil prices edge up.

“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 utilisation of oilfield services,” said Mr Simon Chen, Vice President, Moody’s Investors Service.

Moody’s also said in its report that deterioration in the banks’ regional loan portfolio quality will stay mild as the banks remain cautious on business growth amid continued downside risks to macroeconomic conditions. Accordingly, further asset weakening will be manageable. Meanwhile, downside risks to profitability will continue over the next few quarters due to elevated credit costs and slower loan growth, somewhat offset by higher interest rates.

“We expect DBS to benefit more than OCBC and UOB from higher interest rates, given its superior low-cost deposit franchise, which provides more support for net interest margins, as the banks begin to price up their loans and deposits,” the report said.

Despite the challenges facing the banks, strong Government support will continue to underpin their Aa1 ratings, Moody’s said.

“Capacity-wise, Moody’s considers that the Singapore Government has ample resources to recapitalise the country’s large banks, if needed, particularly after taking into account the strong fiscal position of the government,” it said.