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Economy

Moody's cuts Singapore bank outlooks as 'headwinds' pick up

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United Overseas Bank, DBS and OCBC ATMs in Singapore   © Reuters

SINGAPORE -- Moody's Investors Service on Thursday lowered its rating outlooks for Singapore's three big banking groups to "negative" from "stable." The U.S. ratings agency said asset quality and profitability are likely to be pressured by a "more challenging operating environment" this year and "possibly beyond."

     The outlooks represent expected rating trajectories over the next 12 to 18 months. The "negative" label applies to four entities in three groups: DBS Bank and parent DBS Group Holdings, Oversea-Chinese Banking Corp. and United Overseas Bank.

     "Singapore banks will report higher problem loan levels and will need to increase loan loss provisions, leading to lower bottom-line profitability," the agency said in a statement. Singaporean companies are "affected by slowing economic and trade growth in Asia and the drop in oil and other commodity prices," Moody's said. It also stated that "a challenging deleveraging cycle" in the corporate sector in Singapore is expected, as banks tighten up on credit underwriting.

     The agency pointed out that Singaporean banks "are facing increased headwinds from slowing growth in regional economies." Around half of their gross loans go to foreign markets, such as China, Hong Kong and other Southeast Asian countries, Moody's said.

     China's slowdown is being felt across Asia. In a report released Wednesday, the Asian Development Bank projected regionwide gross domestic product growth of 5.7% this year, down from 5.9% in 2015. The bank forecast China's growth at 6.5% this year, compared with last year's 6.9%, and said the pace would decline further to 6.3% in 2017.

     Singapore's economy grew 2% in 2015, down from 3.3% in 2014. The government projects growth of 1-3% this year, with sluggish external demand dimming the outlook.

Steady for now

Moody's refrained from changing the actual ratings for the banks. It said they "maintain very strong buffers in terms of capital, loan loss provisions and pre-provision income," as well as robust funding and liquidity profiles. DBS Bank, OCBC and UOB are rated Aa1, while DBS Group Holdings is rated Aa2. The agency noted a "very high" probability that the government would extend support to these banks if necessary.

     Still, the agency warned that the "ratings could be lowered if [the banks'] financial fundamentals deteriorate significantly."

     Their earnings for last year show some signs of pressure. UOB's net profit fell by 1.2% on the year, with higher allowances. Its nonperforming loans at the end of December were up 22% from a year earlier.

     OCBC, which has significantly increased its greater China network with the acquisition of a Hong Kong bank, recorded a 54% jump in bad loans, while net profit inched up by 2%. DBS recorded a 10% increase in net profit, but its nonperforming loans in greater China jumped 35% on the year.

     Responding to the Moody's announcement, OCBC Chief Financial Officer Darren Tan said the bank has been prudent. "In particular," he said, "we have been paying close attention to the management of our asset portfolio and ensuring that our liquidity and capital positions remain robust."

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