Moody's revised the outlooks of the banks' financial strength ratings or BFSRs of three Singapore banks from stable to negative.The DBS Bank Ltd, Oversea-Chinese Banking Corporation Ltd, and United Overseas Bank Ltd reported an increase in non-performing loans in the fourth quarter of last year, following many years of steady improvement. While the increases were moderate, the rising trend will likely continue in line with the weakening economic conditions evident in their core markets.Moody's Investors Service notes that Singapore's banks do not have significant exposures to toxic assets; hence the major impact of the current economic turmoil on them will be in the form of rising NPL ratios, which are likely to peak in one to two years."The negative outlooks of DBS, OCBC and UOB reflect the fact that the deepening global economic downturn could have a protracted impact on their asset quality and earnings," says Christine Kuo, a Moody's Vice President and Senior Analyst."However, on an absolute basis, all three banks have strong franchises, healthy credit profiles, liquid and well-capitalised balance sheets, and benefit from a very high level of support from the Singapore government. Consequently, even in a severe downside scenario, we would expect the banks' BFSRs to remain above average and their debt and deposit ratings to be solidly positioned within the Aa-rating band," says Kuo.In addition to rising loan loss provisioning, Moody's expects the three banks' revenues to be negatively affected by weak demand for loans and other banking-service products. As a result, both interest and non-interest income could be lower in the next couple of years.The three banks also also received revised ratings of their Aa1 long-term deposit and debt from stable to negative. But the three banks' short-term ratings of Prime-1 are not affected and their outlooks remain stable.The three banks' Aa1 debt and deposit ratings incorporate two notches of uplift in recognition of the potential for systemic support. The Singapore government has adequate financial flexibility to support the financial system, if required, and has demonstrated strong support for the financial system with its deposit guarantee scheme.While Moody's believes that the probability of systemic support for Singapore's banks remains very high, the deposit and debt ratings of the three banks could still be lowered if their BFSRs are downgraded, and hence their negative outlook.
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