SINGAPORE (Apr 2): Credit rating agency Moody’s Investors Service has downgraded its outlook on Singapore’s banking system to “negative” as the city state grapples with an economic slowdown and declining interest rates amid the Covid-19 pandemic

Against this backdrop, Moody’s analysts Eugene Tarzimanov, Alka Anbarasu, Graeme Knowd and Stephen Long point out in an April 2 report that loan growth in Singapore is expected to be very limited this year.

The analysts also foresee a resultant deterioration in asset quality.

“Problem assets will increase as delinquencies grow among small and medium-sized enterprises and larger corporates,” the analysts say. As such, they expect higher impairments of personal unsecured loans, especially as the labour market softens.

To this end, credit costs are slated to rise in tandem with worsening interest rates, causing a drag on the profitability of banks. This will further impede the banks’ ability to generate capital, the analysts add.

Even so, they note that funding and liquidity will remain strong given Singapore banks’ historical strength in liquidity coverage and high net stable funding ratios that exceed 100%.

“Given the banks’ systemic importance and government’s fiscal strength and ample reserves, the government is highly likely to support the largest domestic banks when needed,” Moody’s analysts say.

Singapore is not alone in Moody’s downgrade. The ratings agency has also downgraded its outlook on 11 other Asia Pacific countries – Australia, China, India, Indonesia, Korea, Malaysia, New Zealand, Philippines, Taiwan, Thailand and Vietnam.

Together with Hong Kong and Japan, who had been placed on the “negative” list earlier, Moody’s latest review puts 14 banking systems on its negative outlook radar.

“The negative outlook reflects Moody’s expectation that the broad and growing scope of economic and market disruption from Covid-19 will increasingly strain banks’ operating environment and loan performance,” Moody’s notes.

“Although governments have put in place far-reaching support measures designed to shore up the financial position of businesses and soften the negative impact on employment and households, Moody’s does not expect these will be sufficient to fully offset the adverse impact of the coronavirus-induced downturn on banks,” it adds.