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Are Singapore’s Three Banks Headed for Trouble?

Last week, credit ratings agency Moody’s Investors Service had downgraded the credit outlook for Singapore’s trio of banks from stable to negative. The banks in question should be familiar to many Singaporeans and they are namely, DBS Group Holdings Ltd (SGX: D05), Oversea-Chinese Banking Corp Limited (SGX: O39), and United Overseas Bank Ltd (SGX: U11).

Then earlier this week, Moody’s had followed up with the release of a report titled “Banks – Singapore: Behind the negative outlook on DBS, OCBC and UOB.”  

Should investors be worried about their investments in the three banks given Moody’s actions?

Moody’s downgrade of the banking trio’s credit outlook was driven by a weaker macroeconomic outlook for Singapore and other key geographical markets for the banks such as China, Hong Kong, and Malaysia. In fact, Moody’s had also recently downgraded the credit ratings outlook for the three territories.

Due to slower economic growth and the increase in the risk of defaults, Moody’s sees some concerns over the banks’ asset quality and future profitability. DBS Group was also singled out because of its larger exposure to oil and gas services companies when compared to the other two banks.

But, Moody’s also noted that all three banks are well-capitalised – meaning to say their balance sheets are strong – and that they can still be profitable even if there’s a “250 basis point increase in their NPL [non-performing loans] ratios and a 25 per cent decline in pre-provision income over two years.”

Price-to-book (PB) ratios for DBS, OCBC, and UOB from 6 April 2011 to 5 April 2016
Source: S&P Global Market Intelligence

But even without Moody’s downgrade and report, investors appear to have grown less optimistic about the three banks. You can see this in the chart above which plots the price-to-book (PB) ratios of DBS, OCBC, and UOB over the past five years; all three banks have PB ratios over the past few months that are at the lower ranges for the period under study.

A Fool’s take

For now, it appears that the banks are not in serious trouble despite there being an apparent slowdown. But, long-term investors have to consider if it is a permanent structural decline or just a temporary cyclical decline.

If it is the former, does it also mean that Singapore would be losing its status as a financial hub for this region of the world? And if it is the latter, then another important question would pop up: Are the banks’ current valuations low enough to make them a bargain?

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn't own shares in any companies mentioned.