SINGAPORE (REUTERS) - Moody's downgraded the outlook for Singapore's banking sector to "negative" from "stable", citing risks of rising bad loans and deteriorating profitability due to an economic slowdown and a decline in interest rates amid the coronavirus outbreak.

"Credit costs will rise as asset quality worsens, while interest rates will decline due to monetary easing, weighing on net interest margins," the ratings agency said in a report on Thursday (April 2).

Singapore's three main lenders, DBS Group Holdings, Oversea-Chinese Banking Corp and United Overseas Bank had forecast muted earnings growth for 2020 even before the virus outbreak.

Earlier this year, analysts had cautioned that a softening of interest rates and moderation in lending would break a three-year record performance by banks.

Moody's expects asset quality to weaken at the banks. "Problem assets will increase as delinquencies grow among small and medium-sized enterprises and large corporates," it said.

Singapore is bracing for its worst recession ever after the coronavirus knocked its bellwether economy into a sharp contraction in the first quarter.

Analysts say Singapore banks' strong capital ratios and robust liquidity are likely to support their dividend payments.

Moody's pointed out that the rated Singapore banks had strong liquidity coverage and high net stable funding ratios that exceeded 100 per cent.