SINGAPORE (Feb 26): Singapore's three largest banks by assets, DBS Bank, Oversea-Chinese Banking Corp (OCBC) and United Overseas Bank (UOB) will face greater asset risks this year due to worsening macroeconomic conditions despite ending 2018 with record net profits, stable asset quality and strong capital, says Moody’s Investors Service.

This, combined, with the stagnation of net interest margins (NIMs), will also make it difficult for the banks to improve profitability further, says Moody’s.

Although the three banks maintained their non-performing loan (NPL) coverage ratios at 80%-100%, Moody’s says asset quality will deteriorate modestly across the board this year as a consequence of slowing global growth and uncertainty around the ongoing US-China trade tensions. Already, non-performing loan (NPL) ratios at DBS and UOB declined to 1.5% at the end of 2018 at the end of 2018, while OCBC's ratio rose modestly to the same level.

Moody’s also expects further improvement in the banks’ profitability to be difficult. While all three banks posted record net profits for 2018, income growth could slow this year because NIMs will stagnate with interest rates not rising as steeply as they did in 2018 while credit costs will increase incrementally due to worsening macroeconomic conditions.

Meanwhile, loan growth will be modest as macroprudential measures for the domestic housing market and tougher macroeconomic conditions dampen loan demand at home and overseas. Income contributions from trading and wealth management will also decline due to weaker market sentiment.

Capitalisation will also decline but remain a key strength, says Moody’s. At the end of 2018, the three banks' Common Equity Tier 1 (CET1) ratios remained strong, at around 14%. Capital ratios will decline this year due to dividend payouts but will remain within the banks' target ranges of around 13.0%-13.5%. With modest loan growth, retained earnings will also be sufficient for the banks to maintain ample capital buffers and pay out dividends.

Finally, Moody’s expects liquidity to remain robust and sufficient to support loan growth. The three banks' loan-to-deposit ratios (LDRs) remained comfortably below 100% in both their Singapore dollar and US dollar portfolios. Banks also reported liquidity coverage ratios (LCRs) and net stable funding ratios (NSFR) that were above regulatory minimums. Yet, the banks will face tighter US dollar liquidity and higher funding costs if rates in the US continue to rise.

As at 12.44am, shares in DBS, OCBC and UOB are trading at $25.23, $11.24 and $25.39 respectively.