Moody's revises outlook of Singapore banks to negative

SINGAPORE: Credit ratings agency Moody’s Investors Service has lowered the outlook on Singapore’s largest banks to negative from stable.

The affected banks are DBS Bank, its parent company DBS Group, Oversea-Chinese Banking Corp (OCBC) and United Overseas Bank (UOB).

Moody’s said the rating reflects its expectation that a more challenging operating environment for banks in Singapore this year, and possibly beyond, will put pressure on the banks’ asset quality and profitability.

Credit conditions for banks in Singapore will likely continue to weaken against the backdrop of slower economic and trade growth, both domestically and in the region, Moody’s added. However, the agency noted that Singapore banks maintain “very strong buffers” in terms of capital, loan loss provisions and pre-provision income. Their funding and liquidity profiles are also robust and there was a "very high" probability of government support, if needed.

As such, Moody’s said it has affirmed credit ratings for the four banks. DBS Bank, OCBC, and UOB are currently rated Aa1, while DBS Group is rated Aa2.

The issues of vulnerable asset quality and faltering loan demand have been front and centre for local banks amid slowing global growth and a commodity crunch. However, analysts that Channel NewsAsia spoke to say risks facing the banking sector remain "manageable".

"The broader trend for banks is that downside risks remain given the shocks recently, especially in the oil and gas sector and slowing growth in China," said Michael Wan, an economist at Credit Suisse. However, given that oil prices have recently showed signs of stabilising, related risks are unlikely to go out of hand. Meanwhile, Credit Suisse has a base case scenario for China's economy to stay "relatively stable" in 2016, Mr Wan added.

Matthew Phan, a credit analyst from CreditSights agreed: "The dramatic drop in oil prices last year could have sparked concerns about the banks' oil and gas exposure and the potential of more non-performing loans (NPLs). But given the rebound in oil prices, these concerns may be easing."

Local lenders are also among the most well-capitalised in the world, given the conservative non-performing reserve policy in place, said Raffles Investment's Jack Wang. In addition, the banking sector stands to benefit from the rise in interest rates, Mr Wang added.

Meanwhile, the other two of the Big Three credit ratings agencies, Standard & Poor's and Fitch Ratings, have a stable outlook on the Singapore banks. Both have an AA- rating on the sector.

"We stand by our stable outlook on the Singapore banking sector," wrote S&P analysts Ivan Tan and Rujun Duan in a report dated Feb 17. The assessment factors in "a high likelihood of extraordinary government support for Singapore banks" in a crisis scenario.

Fitch, in a note dated Mar 1, kept its outlook and rating on the sector, noting that "Singapore banks' credit profiles are likely to remain resilient despite macroeconomic headwinds in 2016".

Following Moody's announcement, local shares closed down 1.11 per cent to 2,840.90 points on Thursday, with banking counters among those that saw the biggest declines. OCBC fell 1.23 per cent to S$8.84, while DBS dropped 0.71 per cent to S$15.38. UOB ended Thursday's trading session 0.94 per cent lower at S$18.87.