While strong economic growth and liquidity have boosted Singapores stable and benign banking sector since 2009, pressure from developed markets, including the scaling back of quantitative easing in the US, could trigger a reverse in the credit cycle, leading to a worsening of NPL ratios and higher credit costs, says Moodys. With the potential risk of a turn in the interest rate cycle, we view strong asset inflation and credit growth trends as vulnerabilities, as this combination would likely cause credit costs to rise from their current low base, says the report published on Monday. If interest rates rise, we therefore expect rising credit costs to outweigh any potential increases in lending margins.
Gene Fang, a Moody's vice-president and senior analyst, says: Take for instance DBS, which has a large presence in Hong Kong. [The] banking sector [there] also has a negative outlook and is also under pressure."
What's more, Singaporean banks have a presence in Malaysia.
Although the banking sector has a stable outlook, household debt is high, so there are potential problems there too, says Fang.
In any case, the rare bearish note from Moody's with respect to Singapore could also highlight how rating agencies are seeking to establish more forward-looking assessments of issuers' creditworthiness.