Turning point in Singapore's credit cycle may lead to worsening NPL ratios

Asset quality has potentially peaked.

According to Moody's, in the past few years, Singapore banks have achieved significant reductions in NPL ratios, and now rank more favorably relative to their global peers, when compared to 2009. 

Here's more from Moody's:

However, asset quality has potentially peaked both at home and in many of the regional markets in which Singapore banks operate, and a turning point in the credit cycle is likely to lead to a worsening of NPL ratios.

Domestically, household debt has increased by 40.4% since 2009, while monthly incomes climbed by 26.3%11. Increasing leverage 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.

Although mortgage NPLs have been historically low, a decline in real household incomes or in household debt servicing capacity could have negative  repercussions on consumer lending and purchasing power in other sectors.

Additionally, as a proportion of NPLs, problem loans from outside of Singapore, South East Asia,  and Greater China increased to 45% of total NPLs in 2012, from 11% in 2008, further highlighting the heightened risks of off-shore expansion for Singapore banks. 

While we recognize that the specific problem assets in Exhibit 10 reflect legacy exposures from before the global financial crisis, we nevertheless view such historic exposures as emblematic of the type of risks Singapore banksface as they continue expanding their geographic and product platforms.

We have previously published our analysis pointing to rising asset quality risks in other regional markets, for example Malaysia and Hong Kong, where Singapore banks have notable presences.

Household debt in Malaysia has increased to 80.5% of GDP as of year-end 2012. In Hong Kong, residential property prices increased 122% between 2009 and 2012, while the system faces increasing exposure to Mainland China.