Singapore banks' profits to increase moderately over the next 12-18 months

Four factors will contribute to the modest growth.

Singapore banks’ profits will increase moderately over the next 12-18 months, according to Moody's Investors Service, against the backdrop of higher interest rates, rebounding loan growth, growth in fee-based income, and normalising credit costs.

"We expect that the three large banks' return on assets (ROA) will rise mildly, from 0.9% posted for 2016," it added.

Here's more from Moody's:

Singapore banks' net interset margins (NIMs) will likely improve, as local rates will rise to reflect the pass-through from higher USD rates. According to the Singapore banks, rates in Singapore could reflect 40%-60% of the rate increase in the US.

We expect the US Federal Reserve to continue its monetary policy tightening in 2017, with another two or three rate hikes this year in increments of 25 bps; this will increase the upper bound of the Fed funds target range to 1.5%-1.75% by year-end 2017.

We expect moderation in loan loss provisions, in line with our view on stabilising asset quality. As Exhibit 27 shows, the modest asset quality hit in 2016 resulted in a rise in the banks' loan loss provisions to 14% of their pre-provision income (PPI), from 10% in 2015. We expect provisions to normalise in 2017-2018.

The three large Singapore banks traditionally derive around 35%-40% of their net revenues from non interest income (NII) sources, lead by fees and commissions. In line with the banks' increased focus on wealth management, transaction banking, insurance and card business, we expect NII to be an increasing contributor to the bottom-line.

The banks will likely maintain stable operational efficiency metrics, with faster income growth helping to keep their cost-to-income ratios at or below current levels. These stood at around 46% in 2016, unchanged from the previous year.