Taurus Stock Pick : What Stocks to Buy in SIngapore ?

THE long-term credit ratings of the three Singapore-listed banks are still at risk despite the recovery of the economy, mainly due to the banks' large overseas exposure, rating agency Moody's said yesterday.

The outlook for the Singapore banking sector over the next 12-18 months is stable, but the outlook for the long-term credit ratings of all three Singapore banks is negative, Moody's Investors Service said in a new report.

Fourth-quarter earnings at DBS Group, OCBC Bank and United Overseas Bank exceeded analysts' expectations last month, boosted by a mix of trading gains and a steep drop in charges for bad loans as economic conditions improved. All three banks signalled improved earnings prospects for 2010 and a renewed push for loans growth.

The banks - each rated 'B' by Moody's - have been more resilient than some of their larger international rivals throughout the financial crisis and have maintained 'very liquid and well-capitalised balance sheets', Moody's said.

But 'all three banks also have significant exposure outside of Singapore - mostly in East Asia, but also in the other parts of the world', said Christine Kuo, a vice-president and senior analyst at Moody's in Singapore.

'Given their high ratings, Moody's would need to make sure their overseas operations also stabilise and their overall performance is consistent with that of their similarly rated peers before the rating outlook can be revised back to stable.'

The report also highlights the Singapore banks' large exposure to the property sector as a risk.

'We are wary of the negative impact a return of inflationary pressures could bring to banks' asset quality, as the pace of recovery picks up in the regional economies over the next 12-18 months,' Moody's said.

'Developers and construction firms will become financially weaker if they cannot pass on the increase in construction and financing costs resulting from asset price and monetary policy adjustments. Consumer demand may also soften because of rising mortgage rates. These risks, should they materialise, could lead to a down-cycle for the property market.'

If that happens, it could hurt demand for new housing loans - which make up about a quarter of the Singapore banks' loan books - and require the banks to set aside more allowances for bad loans, reducing their earnings.

Overall, however, the ongoing economic recovery in Singapore and elsewhere means better prospects for the banks, Moody's said, with demand for loans and trade financing expected to rise in the coming months, even as bad-loan charges fall.