Negative ratings for Singapore banks – Spike in bad loans feared – SDP raises questions

Fearing a spike in bad loans, Moody, a credit rating agency has revised the ratings of local banks DBS, OCBC and UOB from stable to negative.
Referring to deteriorating credit conditions against a backdrop of slower economic and trade growth, the credit rating agency’s report said that our big banks will see an increasing amount of problem loans and will have to hike loan loss provisions on back of the escalating regional headwinds.
Moody warned that because of weaker economic growth and banks’ tighter credit underwriting, Singapore’s corporate sector is headed for a challenging deleveraging cycle.
“Domestic firms are affected by slowing economic and trade growth in Asia and the drop in oil and other commodity prices. This has led to deteriorating corporate profitability, and in turn to lower credit metrics for corporates across several industries, including manufacturing, oil and gas, shipping, ship and rig building, and metals and mining,” Moody said.
Because foreign loans constitute around one-half of our local banks gross loans, they also face escalating headwinds from slowing growth in regional economies.
The collapse in oil prices is another factor which affects the banks’ asset quality. Their large exposure to oil and gas borrowers, including services companies, which were the most affected by the collapse, poses a looming risk for the local banks.
The three large Singapore banking groups however maintain very strong buffers in terms of capital, loan loss provisions and pre-provision income, Moody said. Although bad loans are expected to increase, asset quality remains good, the credit-rating agency suggested.
Responding to the negative rating by Moody the opposition political party, Singapore Democratic Party (SDP), has released a statement saying that it “is troubled by news.”
Noting that such a worrying trend is occurring in the midst of an economic downturn exacerbated by high land costs which is causing a slew of companies exiting the Singapore market resulting in “more and more workers are being retrenched”, SDP asked why the “Finance Minister Heng Swee Keat has not produced a Budget to address these big concerns for the immediate future as well as for the longer-term.”