Moody's Investors Service has changed the outlook for Singapore's banking system to negative from stable, owing to the recent period of rapid loan growth and rising real estate prices in Singapore and in regional markets where Singapore banks are active. These have increased the probability of deterioration in credit quality under potential adverse conditions for the banks in the future.
"The operating environment for Singapore's banking system has been favorable for an extended period, with low interest rates and strong economic growth domestically and in the surrounding region. 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," says Gene Fang, a Moody's Vice President and Senior Analyst.
Fang was speaking on a just-released Moody's report titled, "Singapore Banking System Outlook." The report details Moody's expectation of how bank creditworthiness will evolve in this system over the next 12-18 months. While Singapore banks have improved their non-performing loans (NPLs) over the past few years, asset quality has potentially peaked both at home and in many of the regional markets in which these banks operate. A turning point in the credit cycle is likely to lead to a worsening of NPL ratios and higher credit costs.
Although it is difficult to exactly predict turning points in banking credit cycles, Moody's believes the increased likelihood of a tightening of monetary policy by the US -- with a higher probability of a tapering of quantitative-easing during the outlook period -- is a potential trigger.
Moody's report highlights that Singapore banks continue to have strong financial metrics, underpinning their high average ratings compared to all banking systems globally, both on standalone and supported bases.
"Our outlook is a directional, forward-looking view of the trend in the banks' relative credit quality, which we consider as having potentially reached - or to be close to reaching - a cyclical peak," Fang says.
Moody's rates three major Singapore banks: DBS Bank Ltd. (Aa1/B/aa3 negative(m)), Oversea-Chinese Banking Corporation Ltd. (Aa1/B/aa3 stable(m)) and United Overseas Bank Ltd. (Aa1/B/aa3 stable(m)). Moody's also rates OCBC's fully owned subsidiary, Bank of Singapore (Aa1/C-/baa1 stable).
Moody's incorporates government support in the ratings of all three Singapore banks, since a failure in any single institution is likely to have knock-on effects for the banking system and broader economy.