The outlook of Singapore’s banking sector has been downgraded by Moody’s from “stable” to “negative” due to the worsening of profitability and increasing risks of bad loans caused by an economic contraction as well as a fall in interest rates amidst the pandemic.
According to the report by Moody’s on Thursday (2 April), “credit costs will rise as asset quality worsens, while interest rates will decline due to monetary easing, weighing on net interest margins”.
Even prior to the COVID-19 outbreak, the three major banks of the country, United Overseas Bank Ltd (UOBH.SI), DBS Group Holdings Ltd (DBSM.SI), and Oversea-Chinese Banking Corp Ltd (OCBC) had forecasted muted revenue growth for this year.
The banks’ three-year record performance would be marred by a moderation in lending and softening of interest rates, as cautioned by analysts earlier this year.
“Problem assets will increase as delinquencies grow among small and medium-sized enterprises and large corporates,” Moody’s stated as it predicts banks asset quality will worsen.
The COVID-19 pandemic has taken its toll on the Singapore economy in Q1 of 2020, and the country is now bracing for its worst recession to come.
The robust liquidity and strong capital ratios of Singapore banks will help support their dividend payments, analysts said.
According to the credit ratings agency, Singapore banks that were rated had high net stable funding ratios and strong liquidity coverage which were more than 100 per cent.