Moody’s Downgrades Three Main Local Banks

Earlier this week, Moody’s, a credit rating agency, downgraded the outlook of DBS Group Holdings Limited (SGX: D05), Oversea-Chinese Banking Corp (SGX: O39) and United Overseas Bank Limited (SGX: U11) from “stable” to “negative”.

The two main drivers that triggered the downgrade are the rapid loan growth and rising real estate prices in our island. Moody’s went on to add that these drivers have increased the probability of deterioration in the banks’ credit profiles under probable adverse conditions in the future.

Rock-bottom interest rates for a few years now have been driving potential asset bubbles. More Singaporeans and foreigners are buying properties as a form of investment. Property investors may be hit hard when the interest rates start to rise. US Federal Reserve Chairman Ben Bernanke said end of May that US may start raising interest rates in the future. This saw the stock market go on a knee-jerk reaction, with property counters hit hard.

Furthermore, the domestic household debt has increased to 77.2% of gross domestic product as of March 2013, compared to 64.4% at the end of 2007. This is similar to levels seen before the Asian financial crisis in 1997.

The Moody’s downgrade comes amid some belt tightening by our Government last month. It announced that it has restricted the total monthly debt repayments of home loan applicants – which takes into account a borrower’s total repayments such as mortgages, car and student loans – to 60% of their gross monthly income. This prevents potential buyers from financially overextending themselves further. Without such restrictions, many households may see potential difficulties in repaying loans when interest rates rise.

Moody’s took into account our government’s support when coming up with the ratings of our banks. A failure in any single institution is likely to have knock-on effects for the banking system and economy as a whole.

The Singapore Government’s still has an AAA rating, with a stable outlook.

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