Moody's: Local banks expected to manage credit quality issues

Singapore's three local banks will continue to face issues of asset quality and profitability this year but ratings agency Moody's expects they will manage the challenges and not trigger rating downgrades.

DBS, OCBC and United Overseas Bank are grappling with higher levels of non-performing loans (NPLs) through their exposure to the struggling oil and gas sector.

Moody's said in a report on Monday that while these problems are not going away, they will only cause a mild deterioration in the banks' loan books.

"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."

It added: "The gradual recovery of oil prices from troughs...if sustainable, will lead to a re-start of production activities and higher utilisation of oilfield services."

It also said it does not "envisage further baseline credit assessment downgrades for the three banks over the next 12 to 18 months".

Bank earnings last year were eroded by higher NPLs, forcing the lenders to make extra provisions to buffer against some of this lending going sour.

DBS suffered a 6 per cent year- on-year drop in net profit in the second quarter last year as the implosion of Swiber Holdings caused its NPL provisions to more than double in the period.

Other factors, such as stagnant demand for new loans amid the economic downturn and slower growth of fee income, have also posed problems.

Moody's found the local banks' overall profitability metrics to be "not particularly strong relative to their global peers after considering their substantial operations in higher-risk and higher-yielding markets in South-east Asia and Greater China".

It added that "downside pressure will remain over the next few quarters, with risks partially offset by higher interest rates".

It forecasts two to three rate hikes by the US Federal Reserve this year.

Still, the capital levels of local banks are strong by global standards. The banks will report fourth-quarter results next month, starting with OCBC on Feb 14.

whwong@sph.com.sg

This article was first published on Jan 18, 2017.
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