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Moody's: Outlook for Singapore's banking system remains negative

Cross-border exposure exposes local banks to risk, the rating agency says.

SINGAPORE: Moody's Investors Service says its the outlook on Singapore's banks remains "negative" over the next 12 to 18 months.

The risk of rising interest rates and potentially more bad loans are among the factors that prompted Moody's to issue the negative outlook on Singapore banks, the ratings agency said in a statement on Tuesday (July 8) accompanying its "Banking System Outlook Singapore" report. It has maintained the same outlook since July 2013.

Said Moody's Vice-President and Senior Credit Officer Eugene Tarzimanov: "Because the banks have rapidly grown both their domestic and cross-border loans in recent years, we expect a moderate increase in problem loans, as interest rates rise, due to the United States Federal Reserve's expected raising of policy rates, and as asset prices are likely to fall." 

The report looks at Singapore's banking system in terms of five factors: Operating environment; asset quality and capital; funding and liquidity; profitability and efficiency; and systemic support.

In the report, Moody's also pointed out that if interest rates rise, the quality of the banks' corporate loans in several emerging Asian economies will deteriorate. Local banks' consumer loans in Malaysia and Thailand are exposed to risks, due to the high and increasing levels of household debt in the two economies, the ratings agency added.

In contrast, Singapore's mortgage and consumer loans are supported by the significant wealth levels of Singapore borrowers, Moody's said. The low average loan-to-value ratios, and the recent moderation in property prices will also lend support to the local banks exposure to mortgage and consumer loans in Singapore. 

Moody's report focuses on the three major banking groups - DBS, OCBC Bank and United Overseas Bank - which together accounted for around 60 per cent of the local banking system assets at end-2013. 

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