Singapore Banks' Outlook Lowered by Moody's as Pressures Mount

  • DBS, OCBC, UOB outlooks reduced to negative, ratings affirmed
  • Lenders face `more challenging' environment, Moody's says

DBS Group Holdings Ltd., Oversea-Chinese Banking Corp. and United Overseas Bank Ltd. had their credit rating outlooks lowered to negative by Moody’s Investors Service, which said it expected a further weakening of conditions for the three largest Singaporean lenders as economic growth slows.

“A more challenging operating environment for banks in Singapore in 2016, and possibly beyond, will pressure the banks’ asset quality and profitability,” Moody’s said in a statement, citing a slowdown in economic and trade growth both domestically and in the wider region.

Singapore’s economy, among the most vulnerable in Asia to swings in global demand, is facing pressure amid a slowdown in China and a weaker environment for energy and commodities. Ructions in the world economy are coming at a time when cracks are showing in the island’s traditional pillars of growth such as manufacturing and electronics, and as it faces an aging population. The nation’s expansion is forecast to slow to 1.9 percent in 2016, according to a Bloomberg survey of economists.

Loan Losses

The ratings firm said it expects the lenders will have to bolster their provisions for loan losses and this will dent profits. It noted that leverage in the Singaporean economy remains elevated and that there will be a “challenging deleveraging cycle” for the country’s companies. In addition to the impact of slowing Asian growth on domestic borrowers, the banks will also face headwinds from their foreign loan books, Moody’s said.

Oil and gas borrowers are a “looming risk” to the lenders, according to Moody’s, which estimated that their exposures to oil and gas services firms ranged from 13 percent to 24 percent of common equity Tier 1 capital.

OCBC and UOB each carry Aa1 ratings at Moody’s, one step below the assessor’s top score. DBS Group is currently rated Aa2, the third-highest Moody’s grade, while its subsidiary DBS Bank Ltd., ranked one level higher at Aa1, also had its outlook revised to negative.

While the situation for the lenders has weakened, Moody’s did underscore that they maintain “very strong” capital buffers, loan loss provisions and pre-provision income. They also have robust funding and liquidity profiles, and support from the Aaa rated government is “very strong,” the firm said.

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