No need to feel moody over Moody's

INVESTORS need not feel moody over the outlook of Singapore bank stocks, following the sector's downgrade by credit rating agency Moody's earlier this week.

Analysts say that there is little cause for investors to be alarmed as the concerns pointed out by the agency are not new, and that the local banks have robust capital positions.

On Monday, Moody's lowered its outlook for Singapore's banking system from "stable" to "negative" owing to rapid loan growth and soaring property prices. It said the local lenders - DBS, OCBC and United Overseas Bank (UOB) - could face more loan defaults as interest rates rise, particularly as household debt has risen more than 40 per cent since 2009.

CIMB analyst Kenneth Ng said: "We are not perturbed by Moody's downgrade...as Singapore's banking system has proven to be relatively resilient."

Malaysia-based DBS Group Research analyst Lim Sue Lin noted that the concerns highlighted by Moody's were not new.

She added: "We had previously highlighted that a rate hike, a severe macro slowdown and, more importantly, if unemployment issues start to surface, would be possible concerns on asset quality."

A day after the downgrade, the Monetary Authority of Singapore said the local banks are in strong financial health, citing their capital levels which are well above globally prescribed standards.

Ms Lim said: "From our recent conversations with the banks, there is still no stress observed in the banks' portfolios."

Mr Ng said while he agreed with the downgrade on the basis of a weaker credit environment, he believed the banking system is relatively resilient.

He also noted that Singapore's domestic non-performing loans (NPLs) did not surge during the two major recessions in the past 16 years, and believed that the levels will be similar even as higher interest rates loom. He added: "Domestic mortgages have not contributed significantly to NPLs in the last two decades and we believe that they will not be a big contributor this time either."

The Moody's downgrade also had a muted impact on stock prices of the three local banks. On Tuesday - a day after the downgrade - DBS shares dipped just five cents to $16.44, UOB shed a mere 11 cents to $20.97 while OCBC dropped 12 cents to $10.22. The counters soon rallied, reacting far more to United States central bank chief Ben Bernanke's remarks to Congress on Wednesday night that the ultra-easy monetary policy will still be in effect for some time.

For instance, DBS jumped 19 cents to $16.59 on Thursday, more than erasing the combined dip of nine cents seen on Tuesday and Wednesday.

CIMB is neutral on the local banking sector, with DBS as its top pick for "its trade finance success and earnings delivery from multiple fee income streams". The broker has an "outperform" call on DBS with a $19.02 price target.

The three local banks are set to unveil second-quarter earnings early next month.

Barclays analyst Sharnie Wong noted: "We expect slower earnings momentum quarter-on-quarter, due to lower trading gains and market-related fee income." However, she added that strong loan growth should help cushion mild margin pressure.

Barclays named UOB as its top pick, given its "strong fee income generation and exposure to faster-growing Asean markets".

alfoo@sph.com.sg

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