Moody’s cuts outlook on local banking system
Impact of likely rise in interest rates on growing debt levels raises concern
By Yasmine Yahya
RATINGS agency Moody’s Investors Service has revised its outlook on Singapore’s banking system from “stable” to “negative”. The agency is concerned that with debt levels here rising, some households may struggle to pay off loans such as mortgages if interest rates rise, as is expected.
A rise in rates could erode the local lenders’ credit profile in the next 12 to 18 months, it said. Other agencies such as Fitch still have a rating of “stable” on the outlook for the banking system.
Moody’s also maintained its outlook for the three local banks: “negative” for DBS since August last year, and “stable” for OCBC Bank and United Overseas Bank. In its report, published yesterday, it said consistently low interest rates and strong economic growth here have encouraged borrowing and boosted asset prices.
The ratio of Singapore dollar loans to deposits has risen steadily and is now at its highest level in six years, at 79 per cent last year. Since 2009, household debt has risen 40.4 per cent as monthly incomes rose 26.3 per cent. These numbers could spell trouble when interest rates rise, Moody’s said.
Higher debt “may leave some households with less flexibility to adjust to higher interest rates or cope with the increasing risk of rising unemployment brought about by more challenging economic conditions”. The banking system will likely face challenges from local banks’ overseas expansion forays too. “Problem loans from outside Singapore, South-east Asia and Greater China increased to 45 per cent of total non-performing loans last year, up from 11 per cent in 2008,” Moody’s said.
Global interest rate rises may also cause investors to shift funds out of emerging markets, which could “place downward pressure on asset prices and collateral in several of the emerging markets where Singapore banks operate”.
The danger of rising interest rates and household debts was also flagged by Standard Chartered in a report earlier this month. It had noted that Singapore households are among the most indebted in Asia relative to what they earn. Indeed, the Monetary Authority of Singapore has also recognised the risk of rising rates on home mortgages. Late last month, it introduced caps on total debt service ratios – this means property buyers may take on new mortgages only if their total monthly repayments, including other outstanding debt obligations, do not exceed 60 per cent of their monthly income.
Banks are also required to compute mortgages based on a notional medium-term interest rate of 3.5 per cent. Moody’s noted that Singapore banks have sufficient capital buffers to withstand losses under stress test scenarios, and have the ability to remain “comfortably solvent” under adverse conditions. Even under severe scenarios, the banks’ extra capital needs would be manageable, it added. “Singapore banks have strong financial metrics that explain why we continue to assign them the highest average ratings…”
DBS chief financial officer Chng Sok Hui said Singapore firms and households can withstand financial shocks better than those in other countries. “For DBS in particular, a rise in short-term interest rates will lift our net interest income, which will help mitigate the higher credit costs from a rise in interest rates.”