Moody’s points to potential credit quality concerns for Singapore’s banks

OCBC, Citibank, DBS and UOB ATMs at Tang Plaza at Orchard Road in Singapore.OCBC, Citibank, DBS and UOB ATMs at Tang Plaza at Orchard Road in Singapore.

Singapore’s banks has strong fundamentals, but they will face credit vulnerabilities ahead, but Moody’s Investors Service said in a note last week.

For one, it noted the concentration of debt on highly leveraged borrowers was “persistently high.”

Companies with net debt exceeding their earnings before interest, tax, depreciation and amortization (EBITDA) by more than four times, or which had negative EBITDA, accounted for 76 percent of total debt held by listed non-financial firms at the end of 2018, Moody’s said.

In addition, the top 20 companies accounted for around 75 percent of that 76 percent, Moody’s said.

To be sure, Moody’s said it didn’t expect a meaningful deterioration in Singapore corporates’ credit quality.

“As a partial risk mitigant, we consider that many of these large borrowers are of adequate or good credit quality because they have strong contractual cash-flows (real estate), self-liquidating inventories (trading companies) and/or would benefit from government support (for firms with direct and indirect government ownership),” the note said.

For the offshore and marine sector, which was the main contributor of new non-performing loans during 2016 and 2017, Moody’s said it expected the quality of banks’ exposure would “remain stable but weak,” as long as oil prices remain at or above US$60 a barrel.

It noted that the three large banks’ outstanding exposures to the sector made up 1-2 percent of gross loans at end-2018, with a “very high” impairment rate of around 50 percent.

But Moody’s wasn’t worried about property exposure, saying ti expected nonperforming loans for household loans, mainly mortgages, would remain low due to a strong labor market and macroprudential measures limited the segment’s credit growth.

In addition, the risk of a price bubble in the city-state’s residential property market has remained low, amid regulators’ efforts to maintain stability with continued cooling measures, Moody’s said.

Singapore’s banks have few mortgages with loan-to-value ratios exceeding 80 percent due to a ban on those loans since 2013, with the average loan-to-value ratio low at 51 percent, the note said.

Moody’s forecast problem loan ratios at the three largest banks would rise modestly to 1.7 percent at end-2020, from 1.5 percent in 2018, amid increased delinquencies among small-to-medium enterprises and non-financial companies.

“SMEs are particularly vulnerable to Singapore’s economic slowdown, and these loans made up about 10 percent of loans at the three largest banks,” Moody’s said, noting new problem loan formation has starting rising after hitting multiyear lows in 2018, led by SMEs and commodity-related corporates.

Moody’s rates DBS, UOB and OCBC at Aa1, with a stable outlook. Aa ratings indicate high quality and very low credit risk, while the modifier of one indicates it is in the higher end of its ratings category.

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