SINGAPORE, July 8 — Moody’s Investors Service says that its outlook on Singapore’s banking system over the next 12-18 months is negative, as it has been since July 2013.

Said Eugene Tarzimanov, a Moody’s vice president and senior credit officer: “As the banks have rapidly grown both their domestic and cross-border loans in recent years, we expect a moderate increase in problem loans, as interest rates rise, due to the US Fed’s expected raising of policy rates, and as asset prices are likely to fall.

“As a result, the banks will face a modest increase in their credit costs over the next 12-18 months. “Even a gradual increase in interest rates will put pressure on the banks’ operating environment, because the rapid credit growth in recent years, has led to a situation where many loans will not be fully seasoned when the repayment burden on more highly leveraged borrowers increases, as interest rates rise.”

Tarzimanov was speaking on the release of Moody’s “Banking System Outlook Singapore”, which he wrote.

The report expresses Moody’s expectation of how bank credit worthiness will evolve in this system over the next 12-18 months.

It looks at Singapore’s banking system in terms of five factors, namely, operating environment (classified as deteriorating), asset quality and capital (deteriorating/stable), funding and liquidity (stable), profitability and efficiency (deteriorating), and systemic support (stable).

According to Tarzimanov, the banks’ problem loans during 2014-15 will increase only moderately, given the very low 1 per cent reported at end-2013.

He said the mild deterioration would likely originate from the banks’ foreign loan books, which made up 47 per cent of their gross loans at end-2013, while domestic exposures would largely remain stable over the outlook horizon.

The Moody’s report pointed out that the quality of the banks’ corporate loans in several emerging Asian economies would deteriorate, if interest rates rose.

The report also said that the banks’ consumer loans in Malaysia and Thailand were exposed to risks, owing to the high and increasing levels of household debt in the two economies.

Moody’s views Singapore as a high support country for banks, given their importance to the overall economy. Additionally, Singapore’s very high fiscal strength and low level of debt gives it ample capacity to support the banks in a timely fashion.

Moody’s rates Singapore’s three major banking groups — DBS Bank Ltd, Oversea-Chinese Banking Corporation Ltd (OCBC) and United Overseas Bank Ltd (UOB). It also rates the Bank of Singapore, the private-banking subsidiary of OCBC.

The Moody’s report focuses on the three major banking groups, which together accounted for around 60 per cent of domestic system assets at end-2013. — Bernama