Banks to see improved profitability by end 2022: Moody’s

Experts forecast the average return of assets of local banks to increase to about 1%.

The profitability of Singapore banks will improve by the end of 2022 on the back of better domestic macroeconomic conditions, Moody’s said in its latest report.

Based on their estimate, Moody’s said local banks’ average return on assets will rise to about 1% from 0.9% by yearend.

The expected improved profitability will also be supported by the widening of net interest margins (NIMs) and modest levels of credit provisions, according to the analyst.

“NIMs will widen as rates in the US rise as a result of multiple rate hikes by the Federal Reserve. Interest rates in Singapore are correlated to those in the US,” Moody’s explained.

Low levels of loan-loss provisions, on the other hand, will help banks boost earnings, the analyst added.

Moody's expects loan-loss provisions to remain modest at 0.2% to 0.3% of gross loans, with reserves covering nearly 100% of problem loans which they described as a “good level.”

Meanwhile, Singapore’s three largest banks—DBS, OCBC, and UOB—will also enjoy robust funding and liquidity in 2022 as economic conditions improve.

Moody’s said the three banks’ loan-to-deposit ratios will remain below 90%, while liquid assets will stand at about 30% of total assets in 2022.

These three banks will also likely receive support from the government when needed given their systemic importance and the latter’s “fiscal strength and ample reserves.”

Apart from funding and liquidity, in the banking system like operating environment, asset, and capital risk will also remain stable during the year, Moody’s said.

The only risk to the operating environment, however, will be a potential surge in inflationary pressure, fueled by rises in commodity prices.