The local banks in Singapore mentioned in the Moody's report are DBS, United Overseas Bank and OCBC. Additionally, the report mentions Bank of Singapore, the private banking arm of OCBC. The report "focuses on the three majors that collectively account for around 60 per cent of system assets", Moody's said. Each major bank has a bank financial strength rating/baseline credit assessment of B/aa3 and long-term bank deposit rating of Aa1. 

The Moody’s report may prove a jolt to some commentators who have claimed that the city-state’s banks have been well-placed to take business from rival jurisdictions, including Switzerland. However, while Moody’s argument might be contested, it is a reminder that Asia’s banks are not seen as being beyond adverse pressures that have hit other regions around the world.

The MAS set out six reasons why Moody’s comments should be seen in context:

Singapore banks have the highest average credit ratings amongst banking systems globally;  

“Moody’s has been revising downwards its ratings outlook over the past two years for a number of well-rated banking systems. This is understandable, in light of the impact that low global interest rates have had on credit growth and asset prices, and the potential risks when interest rates rise. The local banks are not immune to such concerns”;

The local banks continue to have strong financial positions by any serious assessment. As Moody’s itself concluded, the local banks have enough capital to withstand even the severe stress test scenarios that it considered.  They maintain capital levels well above the “Basel requirements”;

MAS has been concerned that some borrowers are at risk of being overstretched, especially when interest rates rise. However, the local banks are not at risk. They undertake regular stress tests on their own as well as coordinated by the MAS, and have adequate buffers in place to cope with the inevitable upturn in the interest rate cycle;

The Singapore regulator has been closely monitoring risks, it said. With regard to property market risks, MAS and other government agencies have taken "pre-emptive measures, such as tightening loan-to-value ratios for housing loans and stamp duties on property transactions, and shortening loan tenures".

Moody's reasons

In its comment on 15 July, Moody’s said: “The two main drivers underpinning our opinion are the recent period of rapid loan growth and rising real estate prices in Singapore and in regional markets where Singapore banks are active. These have increased the probability of deterioration in the banks’ credit profiles under potential adverse conditions in the future.”

"We recognise that Singapore banks have strong financial metrics that explain why we continue to assign them the highest average ratings, both on standalone and supported bases, compared to all banking systems globally. Our outlook is a directional, forward-looking view of the trend in the banks’ relative credit quality, which we consider as having potentially reached - or to be close to reaching - a cyclical peak," the rating agency said.

"Together, these factors result in a banking system profile that is more exposed to changes in global credit cycles. The negative outlook differs from the stable outlook on two of the three domestic banks’ individual deposit and debt ratings as well as with the sovereign rating. Our sovereign outlook places more emphasis on the government’s strong fiscal position, which we expect to continue, despite our negative outlook for the banking system," it continued.

"Historically, Singapore has been a high support system. However, we note that government policy to deal with ailing banks has evolved globally. While significant variations exist across countries, governments have generally revised policy to make support for bank subordinated debt less probable than before. These developments led to a methodology update on 31 May 20133, changing our approach to assessing systemic support for such debt. In this context, for Singapore specifically, Moody’s has put on review for downgrade the bank subordinated debt ratings that have benefited from an uplift linked to Moody’s prior assessment of systemic support," it added.