SINGAPORE - Ratings agency Moody's Investors Service has retained its negative outlook on Singapore's banking system over the next 12 to 18 months, it said on Tuesday.

The agency expects that a surge in lending by Singapore banks in recent years will raise the risk of problem loans when interest rates rise.

"Because the banks have rapidly grown both their domestic and cross-border loans in recent years, we expect a moderate increase in problem loans, as interest rates rise... and as asset prices are likely to fall," said Mr Eugene Tarzimanov, vice president and senior credit officer at Moody's.

"As a result, the banks will face a modest increase in their credit costs over the next 12-18 months," he added.

But Mr Tarzimanov expects the problem loans of Singapore banks this year and next year to "increase only moderately", noting that such loans made up just 1 per cent of all loans here at the end of last year.

Banks' foreign loans are more likely to be at risk than domestic loans, which "will largely remain stable over the outlook horizon", he added.

The loans that banks here have made to consumers and home buyers will also be supported by the "significant wealth levels" of Singapore borrowers and their low average loan-to-value ratios, Mr Tarzimanov said.

"In addition, the banks will enter this period of slightly weaker asset quality with good capital buffers, which Moody's expects will remain unaffected by higher credit costs over the next 12-18 months," he said.

"Recurring earnings will be more than sufficient to cover the gradually increasing loan-loss provisions."

Moody's has had a negative outlook on Singapore's banking system since July last year.