Singapore banks' problem loans feared to increase in 2015-2016

These are likely to be mostly from foreign loans.

Moody's Investors Service has revised its outlook for Singapore's banking system to stable, reflecting the domestic property market's soft landing, and moderating domestic and cross-border credit growth. The outlook was previously negative since July 2013.

According to a release from Moody's Investors Service, Moody's analysis is contained in its just-published report "Banking System Outlook: Singapore", by Eugene Tarzimanov, a Moody's Vice President -- Senior Credit Officer.

Moody's rates Singapore's three major banking groups—that account for around 60% of domestic system assets
at end-2014—DBS Bank Ltd., Oversea-Chinese Banking Corporation Limited and United Overseas Bank Limited. Moody's also rates Bank of Singapore Limited, the private-banking subsidiary of OCBC.

Moody's expects that Singapore banks will continue to benefit from healthy—although lower—economic growth
both domestically and in their regional operations. While real GDP growth in Singapore will slow to around 3% in
2015 and 2016 as a result of slower growth in China, this will be offset somewhat by the recovering US economy.

Here's more from Moody's Investors Service:

"We expect moderate credit growth for Singapore banks in the next 12-18 months, which will help to regulate household and corporate leverage," says Tarzimanov. "But problem loans will increase somewhat during 2015-16, mainly from foreign loans, while the quality of domestic loans will remain stable."

Singapore's domestic property market is undergoing a soft-landing; regulatory steps and new housing supply have moderated prices for public and private housing by about 5%-7% since 2013. Moody's expects this trend to continue as additional housing supply comes online, interest rates gradually increase and current regulatory measures remain in place.

Capital buffers will stay strong, unaffected by credit costs as recurring earnings will cover gradually increasing loan-loss provisions, and risk-weighted asset growth will be in line with internal capital generation, says Moody's.

The rating agency expects Singapore banks to maintain stable loan-to-deposit ratios of around 90% in 2015-16, but profitability will decline as higher credit costs and slower loan growth weigh on margins. While higher interest rates will provide support to net interest margins, Moody's expects improvements to be very gradual and offset by these higher credit costs.

Systemic support for Singapore's large banks is very high, given their importance to the banking system and overall economy. In addition, the Singapore government's recently proposed bank resolution regime is among the most investor-friendly in the world, notes Moody's.