Moody's revises S'pore banking system rating to negative

International rating agency, Moody's, has revised its outlook on Singapore's banking system from "stable" to "negative", expressing concern with the debt level rising in the city state, according to a media report.

A rise in rates could erode the Singapore lenders' credit profile in the next 12 to 18 months, 'The Straits Times' reported today citing a Moody's rating report.

Moody's pointed out that some households in Singapore might struggle to pay off loans such as mortgages if interest rates rise, as was expected.

Other agencies such as Fitch still have a rating of "stable" on the outlook for the banking system in Singapore, according to the report.

Moody's also maintained its outlook for the three local banks - "negative" for DBS since August last year, and "stable" for OCBC Bank and United Overseas Bank.

Moody's said consistently low interest rates and strong economic growth in Singapore have encouraged borrowing and boosted asset prices.

The ration of Singapore dollar loans to deposits has risen steadily to 79%  last year, the highest in six years.

Since 2009, household debt has risen 40.4%  as monthly income rose 26.3% .

These numbers could spell trouble when interest rates rise, cautioned Moody's.

High debt "may leave some households with less flexibility to adjust to higher interest rates or cope with the increasing risk of rising unemployment brought about by more challenging economic conditions", the report said.

The banking system would likely face challenges from Singapore banks' overseas expansion forays too.

"Problem loans from outside Singapore, Southeast Asia and Greater China increased to 45% of the total non-performing loans last year, up from 11% in 2008," the local daily quoted Moody's as saying.

Global interest rates rises might also cause investors to shift funds out of emerging markets, which could "place downward pressure on asset prices and collateral in several of the emerging markets where Singapore banks operate," it said.