S'pore banks' property exposure below 35%

Published July 10, 2007

S'pore banks' property exposure below 35%

Citigroup expects exposure to reach closer to 30% by year-end

By CHOW PENN NEE


SINGAPORE banks are not overly exposed to the red-hot property sector, said Citigroup economist Chua Hak Bin.

In a report yesterday, he estimated that the overall property-related exposure 'is probably still comfortably below 35 per cent', the rule that 'limits property-related loan exposure to 35 per cent as a proportion of total non-bank loans and debt instruments'.

In an earlier report last month, Dr Chua had highlighted that the financial industry's exposure to the property sector might require the government to apply brakes. But the Monetary Authority of Singapore had reiterated then that its existing measures were adequate.

'As of May 2007, we assume that only about 25 per cent of mortgages and 33 per cent of loans to financial institutions are property-related. This produces an exposure limit of 26.9 per cent,' said the latest Citigroup report.

'Adjusting both these percentages to about 28 per cent and 40 per cent respectively would still put the property-related exposure at only about 28.7 per cent, still comfortably below the 35 per cent limit.'

Dr Chua expects the exposure to accelerate and reach closer to 30 per cent by the end of this year.

'Mortgage growth is accelerating, particularly as completion numbers rise,' he noted. 'The deferred payment scheme has delayed the financing cycle for consumers as compared to the past.'

Indications are that most of the local banks are still below the limits, while some of the Qualified Full Banks may have higher property-related exposure limits and possibly closer to the 35 per cent limit, the report said.

'Local banks generally have a wider reach to the owner-occupied mortgage mass market, which does not fall into the 35 per cent limit and at the same time raises the overall loan base.'

Dr Chua noted that the already high home ownership levels - at about 93 per cent - suggest a higher proportion of new loans are for investment rather than owner-occupation.

Banks, as they approach the 35 per cent limit, will likely change their behaviour, he said.

The interest rate spread between owner-occupied and investment-related mortgage rates will likely widen.

Banks may also choose to carve out and sell off their property-related exposure to the capital markets.

Likewise, larger property companies may turn to the capital markets for raising funds if the banking system becomes more constrained or pricing becomes more expensive. 'Such responses will keep the overall property exposure within the banking system in check,' he said.

He also noted that property speculation is still below the highs seen during the early 90s boom and is confined to selected locations, namely Marina and Sentosa.

July 10, 2007

Banks' exposure to property loans 'still below 35% limit'

Experts unfazed as it is comfortably below regulatory maximum, says Citigroup report

By Grace Ng, FINANCE REPORTER


THE overall exposure of Singapore banks to property-related loans taken out by investment buyers and financial institutions amid the property boom is rising.

But experts are not worried. A new Citigroup report says the percentage is set to climb from 27 per cent of total loans currently to 'closer to 30 per cent' by year-end.

But this is 'still comfortably below' a regulatory limit of 35 per cent, it said. Foreign banks may be nearer to the limit than local ones, said Citigroup economist Chua Hak Bin yesterday.

All these figures exclude property loans taken out by owner-occupiers - about 80 per cent of all bank loans.

If banks approach the limit, customers could be charged higher interest rates for investment- related mortgages compared to owner-occupied ones, suggested Dr Chua.

Mr Paul Kwee, Citigroup Singapore's corporate bank director and head of real estate, noted: 'In view of the recent increase in lending activity, it may well be that certain banks have less appetite, and may become more selective in granting loans, as well as in reviewing the terms that go with the loans.'

Dr Chua also pointed out that while speculative buying of property has risen and may climb further over the next few years, it is still well below the level seen in the property boom of the mid-1990s.

So bank-loan exposure to the property sector 'is likely to remain within tolerable limits'.

In May, about 25 per cent of mortgages taken out by investment buyers and 33 per cent of loans to financial institutions were property-related, estimated Citigroup. This works out to an overall property-related loan exposure for the banking sector of 28.7 per cent, well below the 35 per cent limit.

The limit was introduced by the Monetary Authority of Singapore in May 2001, as a safeguard to limit the risks of the banking system's exposure to property loans, especially speculative activity.

But Dr Chua expects 'mortgage growth to accelerate' to near 30 per cent in the next six months, as more new property projects are completed and some homebuyers on the deferred payment scheme apply for loans.

A higher proportion of new mortgages are likely to be investment-related, given the 'already high home ownership in Singapore of about 93 per cent'.

OCBC Bank has seen the ratio of new applications for investment properties to owner-occupied ones rise, but the latter is still the 'key driver of overall sales', noted head of consumer secured lending Gregory Chan.

DBS Bank and Maybank said about a fifth of their Singapore mortgages are for investment properties, while Standard Chartered Bank said the percentage is between 15 and 20 per cent. The rest are owner-occupied ones.

A Maybank spokesman argued that 'there is no direct relationship between loan rates and the 35 per cent limit'. The pricing of mortgage rates and corporate loan rates depends on a combination of factors, such as the risk profile of the borrower, the purpose of the loan and the type of property mortgaged, she said.

In his report, Dr Chua also noted that property speculation may have increased, as reflected in the rise in sub-sale deals to about 10.5 per cent of total transactions for the April to May period, compared with about 3 per cent three years ago. But this is still much lower than the 1990s peak.

[email protected]