Moody’s: Trade war could increase Singapore banks’ asset risk next year

OCBC, DBS, UOB and Citibank ATMs at Tang Plaza in Singapore; taken September 2018.OCBC, DBS, UOB and Citibank ATMs at Tang Plaza in Singapore; taken September 2018.

The three Singapore banks could see their asset risk rise next year due to the trade war between the U.S. and China, Moody’s Investors Service said in a note on Wednesday.

“During January to September 2018, DBS, OCBC, and UOB reported significant improvements in profitability, stable asset quality and continuously strong capital buffers,” says Eugene Tarzimanov, a senior credit officer at Moody’s. “However, the banks could face greater asset risk, because of the trade dispute between China and the U.S.”

So far, the banks’ asset quality has remained stable, with nonperforming loan (NPL) ratios little changed at 1.4 percent to 1.6 percent and credit allowances around 80-90 percent of non-performing assets (NPA), it noted.

But it added that the trade war could cause asset quality to deteriorate modestly.

“The quality of loans to small and medium-sized enterprises (SMEs) is more vulnerable because this borrower group has lower financial flexibility against the backdrop of weaker operating conditions, compared to large corporates,” Moody’s said.

It said core capital ratios at DBS and UOB declined on-quarter in the most recent results amid increased dividend payouts, but they remained strong, while OCBC’s capitalization increased modestly.

“We expect loan growth at the three banks to moderate to about 5 percent in 2019, as domestic macroprudential measures and challenging macro conditions for trade dampen loan demand at home and overseas,” Moody’s said, noting loan growth was around 9 percent on-year at the end of September.

“New measures to cool the property market in Singapore, introduced in July 2018, will dampen demand for loans for residential property purchases, while the U.S.-China trade war will result in weaker growth in trade loans,” it said.

But it added, at 5 percent loan growth, “retained earnings will be more than sufficient for the banks to maintain ample capital buffers.”

It said it expected net interest income and non-interest income will continue to improve in 2019, while credit provisions may rise moderately.

That was after all three banks reported nine-month earnings showing profitability improved “substantially,” with wider net interest margins, steady fee income growth from wealth management and low credit costs, Moody’s said.