THE trio of local banks&rsquo profitability will come under pressure next year amid an anticipated deterioration in asset quality, according to Moody' s Investors Service.

DBS : D05 +0.23%,  OCBC : O39 +0.82%  and  UOB : U11 +1.01%  had all posted record profits for the third quarter of 2022 on rising interest rates. Moody&rsquo s analysts expect that profitability will continue improving along this trend in the next two to three quarters due to further increases in rates.

However, the credit rating agency noted in its Nov 7 report that the banks&rsquo asset quality will deteriorate as worsening economic conditions lead to increasing defaults.

Loans to small and medium-sized enterprises, unsecured retail loans, as well as loans with exposure to property developers in China were highlighted as being at greater risk.

The banks will add loan loss provisions in anticipation of this, said Moody&rsquo s, noting that current levels are low at below 20 per cent of gross loans in all three banks as at Q3 2022.

Moody&rsquo s also noted that while the banks&rsquo capital ratios decreased marginally on loan growth and interim dividend payouts, their common equity tier 1 (CET-1) ratios remained at &ldquo good&rdquo levels.

CET-1 refers to paid-up ordinary shares, share premium, accumulated other comprehensive income and other disclosed reserves, as well as certain other assets.

Moody&rsquo s expects that the CET-1 ratios of DBS and UOB will decline modestly in the coming quarters following acquisitions of Citi assets.

Nonetheless, the agency believes that all three banks' funding and liquidity will remain " robust" in 2023. It added that the ratios of current and savings deposits in the banks&rsquo total deposits remained high, although depositors trended towards higher-rate term deposits.