Roundup: Moody's downgrades outlook on Singapore's banking system to negative

Moody's has revised the outlook on Singapore's banking system to negative from stable, the credit rating agency said in a statement on Thursday.

"Our negative outlook on Singapore's banking system over the next 12-18 months reflects the weaker operating conditions for the banks, against the backdrop of softer domestic and regional economic and trade growth," said Eugene Tarzimanov, a Moody's vice president and senior credit officer.

"We also expect rising risks to the banks' asset quality and profitability, from their high exposure to energy-related industries and the generally high leverage of domestic firms," adds Tarzimanov.

The negative outlook is based on Moody's assessment of five drivers: Operating Environment (deteriorating); Asset Quality and Capital (deteriorating/stable); Funding and Liquidity (stable); Profitability and Efficiency (deteriorating); and Government Support (stable).

With the Operating Environment, Moody's said that conditions for the banks are worsening because of the slower economic and trade growth in Singapore as well as more broadly in Asia. Specifically, Moody's expects real GDP growth in Singapore to slow to 1.6 percent in 2016 and to 1.5 percent in 2017, results which would be lower than the 2 percent achieved in 2015 and the average of 4.5 percent between 2011 and 2014.

Moody's said that Singapore's growth performance will be adversely affected by the slowing domestic manufacturing sector, and weaker economic activity in its key trade partners.

On Asset Quality and Capital, Moody's said that because of the slowing economic and trade growth in Asia, continued vulnerabilities in the energy sector, and the generally high leverage of domestic firms, the banks will see their asset quality worsen slightly, with problem loans rising from a very low 1.1 percent of gross loans at end-March 2016.

Moreover, the large banks are highly exposed to energy-related industries and shipping. Despite some rebound in energy prices so far in 2016, the quality of such exposures will deteriorate, because many of these firms are still restructuring their finances.

As for Profitability, Moody's said that higher credit costs and flat loan growth rates will lead to a fall in profitability. The banks' net interest margins will stay generally stable at 1.5 percent, with risks to the downside, because Moody's sees scope for Singapore's monetary policy turn more accommodative over the coming months, due to deflationary pressures and the slowdown in growth.

Funding and liquidity will remain strengths for large Singapore banks. The large banks will likely maintain stable loan-to-deposit ratios of around 90 percent in 2016 to 2017. Their low reliance on wholesale funding - of around 12 percent of assets at the end of 2015 - and Moody's expectation of slow credit growth, suggest that the banks will not face significant funding pressures. Around 30 percent of the major banks' assets are liquid assets, and refinancing risk is limited, given their low levels of market borrowings, the agency said.

Government support for large Singapore banks is very high. Because of the banks' importance to the economy, and Singapore's very high fiscal strength and low level of debt, Moody's believed the Singapore government will be willing and able to provide timely support to the banks in situations of need. Endit