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Published December 16, 2010

Property sector accounts for 51% of S'pore banks' loans

But risks of default from such loans low, says report

By VEN SREENIVASAN


SINGAPORE banks' exposure to the property sector has doubled from 24 per cent of total loans in 1991 to 51 per cent as at September 2010, but banks here face low risks of default.

In a report released this week, IIFL Securities Research noted that Singapore banks' property exposure was comparable to the 52 per cent in Hong Kong.

But the two cities have significantly higher exposure than the 20-30 per cent norm for the rest of Asian banks.

The key difference, according to IIFL, is that while Hong Kong's loans are largely to property developers (27 per cent), the bulk of Singapore loans (35 per cent) are to home buyers.

'This can be partly explained by the very high (90 per cent) home ownership rate in Singapore,' IIFL noted. 'As such, housing loans have been key loan driver for Singapore banks and their share has tripled from 10 per cent in 1991 to 35 per cent of loans currently.'

IIFL expects continued robust growth in property-related loans in Singapore, given the buoyant residential sales volumes and developers' need to replenish their land banks. In fact, it expects the share of property loans as a percentage of all loans to go even higher over the next two to three years from the current 51 per cent.

So does such high exposure to property pose any systemic risk? After all, property-related loans are a cause for concern for banks elsewhere - for example, in India, China, the US and many countries in Europe.

'Remarkably, bad loans in the property sector were not a cause for concern in both Singapore and Hong Kong during the recent financial crisis,' IIFL said.

'In Singapore, we do not consider this as a risk due to several reasons. Firstly, the bulk of housing loans (over 70 per cent) are to owner-occupied properties, which have a lower risk profile.'

It added that 'secondly, housing loans in negative equity are less than one per cent of outstanding housing loans currently and were only 3 per cent during the crisis period, when property prices island-wide dropped by an average 25 per cent between 2Q08 and 2Q09.'

'Thirdly, only 7.1 per cent of housing loans have a loan-to-value ratio of above 80 per cent. And finally, the non-performing loan (NPL) ratio of developer loans is below one per cent, as there are strict criteria on who can become a property developer in Singapore and most have low leverage and strong balance sheets.'

IIFL finds Singapore banks 'attractively poised', from a fundamental and valuations perspective.

'We expect earnings growth of 16-18 per cent over the next two years driven by 8-9 per cent loan growth, stable net interest margins, robust fee income growth and declining NPL provision charges.'

It noted that valuations are attractive at 1.2x-1.5x price-book and dividend yield of 4-5 per cent.

'The gradually appreciating Singapore dollar makes these high dividend yielding counters even more attractive. Our preferred picks are OCBC and DBS.'

IIFL Securities is a unit of financial services company India Infoline Group, and is the first Indian broker on SGX.