Moody's: Stable outlook for Singapore banks on improving growth, receding risks to asset quality and profitability

Moody's Investors Service says its change in outlook to stable from negative for Singapore's banking system reflects improving growth conditions and stabilizing commodity prices that will limit a further weakening in asset quality and profitability.

"Loan growth will increase mildly but be sustained by the system's strong capital, funding and liquidity buffers," says Eugene Tarzimanov, a Moody's Vice President and Senior Credit Officer.

"Improving growth momentum in Singapore's key trade partners will support export-oriented manufacturers and offset some lingering weaknesses in the local economy," adds Tarzimanov.

Moody's conclusions are contained in its just-released report titled, "Banking System Outlook — Singapore: Improving Growth, Asset Quality and Profitability Underpin Stable Outlook".

The stable outlook is based on Moody's assessment of five drivers: Operating Environment (stable); Asset Quality and Capital (stable); Funding and Liquidity (stable); Profitability and Efficiency (stable); and Systemic Support (stable).

Moody's expects real GDP growth in Singapore (Aaa stable) to edge up to 2.2% in 2017 and 2.5% in 2018, from 2.0% in 2016. Credit growth will also rebound to mid-single digits in this outlook, after almost flat growth in 2016.

Asset quality weaknesses have largely peaked, says Moody's, in particular among oil and gas exposures. Although problem loan ratios will still increase moderately, reflecting lingering distress in some local business segments, capitalization will be supported by mild loan growth, stable profitability and falling credit costs.

Funding and liquidity will remain key strengths for Singapore banks, with stable loan-to-deposit ratios well below 100% for the three large banking groups, a low reliance on wholesale funding and high proportion of liquid assets.

Moody's expects mildly higher interest rates in Singapore, as a result of US monetary policy tightening, to sustain banks' interest margins. This, together with subsiding credit costs, a mild rebound in loan growth, and higher fee income will support the system's profitability.

Government support for the three large Singapore banking groups will remain very high, reflecting not only their economic importance but also the government's strong support capacity.

While Singapore will soon introduce an enhanced resolution regime for banks, the proposed amendments will not subject banks' existing and prospective senior creditors and depositors to bail-in, which is in line with Moody's expectation of strong support in this system.

Moody's rates five banks in Singapore that together accounted for 55% of systemic domestic loans and 68% of deposits as of end-2016.