Singapore Banks Will Weather Through Further Weakening in Asset Quality, Says Moody’s

Singapore's three largest banks—DBS Bank Ltd., Oversea-Chinese Banking Corp Ltd., and United Overseas Bank Limited—face continued downward pressure on their solvency metrics of asset quality and profitability in 2017, but the impact will be manageable, while strong government support will continue to underpin their Aa1 ratings, according to Moody's Investors Service.

"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," adds 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."

Furthermore, the deterioration in the banks' regional loan quality will stay mild as the banks remain cautious on business growth amid continued macroeconomic headwinds.

Profitability

Meanwhile, 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.

Profitability metrics are just in line with highly rated global peers, despite the banks' relatively larger exposure to higher yielding emerging markets.

Moody's also notes that strong loss-absorption and liquidity buffers underpin the three banks' resilience to challenging credit conditions, and are critical to maintaining their BCAs at a1.

All three—DBS, OCBC and UOB—have strong common equity Tier 1 (CET1) ratios of 12%-14%, 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.

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

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.

Moody's further notes that the Singapore government's (Aaa stable) support for senior creditors will remain strong despite moves towards regulatory bail-in.

The scope of bail-in is likely to be limited in Singapore, in contrast to the regulations in the US and EU.

The Monetary Authority of Singapore's current proposal to introduce a bank resolution and bail-in regime excludes all existing and prospective senior debt, customer deposits and interbank liabilities.

Singapore's fiscal buffers have not been affected by the downturn in growth and remain more robust than those of other Aaa-rated peers.

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