SINGAPORE - Ratings agency Moody's Investors Service has revised its outlook on Singapore's banking system from "stable" to "negative".
The agency is concerned that with debt levels here rising, some households may struggle to pay off loans such as mortgages if interest rates rise, as is expected.
A rise in rates could erode the local lenders' credit profile in the next 12 to 18 months, it said.
Other agencies such as Fitch still have a rating of "stable" on the outlook for the banking system.
Moody's also maintained its outlook for the three local banks: "negative" for DBS since August last year, and "stable" for OCBC Bank and United Overseas Bank.
In its report, published on Monday, it said consistently low interest rates and strong economic growth here have encouraged borrowing and boosted asset prices. The ratio of Singapore dollar loans to deposits has risen steadily and is now at its highest level in six years, at 79 per cent last year.
Since 2009, household debt has risen 40.4 per cent as monthly incomes rose 26.3 per cent. These numbers could spell trouble when interest rates rise, Moody's said.
Higher debt "may leave some households with less flexibility to adjust to higher interest rates or cope with the increasing risk of rising unemployment brought about by more challenging economic conditions".
The banking system will likely face challenges from local banks' overseas expansion forays too.
"Problem loans from outside Singapore, South-east Asia and Greater China increased to 45 per cent of total non-performing loans last year, up from 11 per cent in 2008," Moody's said.