Singapore banks' asset quality and profitability face downward pressure in 2017

But Moody's says impact will be manageable.

Moody's Investors Service says that Singapore's three largest banks - DBS Bank Ltd., Oversea-Chinese Banking Corp Ltd and United Overseas Bank Limited - face continued downward pressure on their solvency metrics of asset quality and profitability in 2017, but the impact will be manageable, while strong government support will continue to underpin their Aa1 ratings.

"Declining asset quality and profitability for the three large Singapore banks contributed to the recent downgrades of their standalone credit assessments to a1 from aa3, but as we expect further headwinds to be manageable, we do not envisage further downgrades over the next 12-18 months," says Simon Chen, a Moody's Vice President and Senior Analyst.

"Problem loans will increase in 2017, but new problem loan formation -- primarily from the embattled oil services sector -- will slow from the peak levels observed in 2016," adds Chen. "The gradual recovery of oil prices from the troughs seen in early 2016, if sustainable, will lead to a re-start of production activities and higher utilization of oilfield services."

Moody's conclusions were contained in its just-released report on banks in Singapore, "Banks — Singapore: Further Asset Quality Weakening Is Manageable; Strong Government Support Underpins Aa1 Ratings".

Furthermore, the deterioration in the banks' regional loan quality will stay mild as the banks remain cautious on business growth amid continued macroeconomic headwinds.