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Published February 8, 2011

Banks should depend less on property loans


BANK lending in Singapore has surged, but there is much to suggest caution beneath the eye-catching numbers. Lending by banks rose by 14.7 per cent last year, the Monetary Authority of Singapore (MAS) said last week, and the growth beat analysts' earlier estimates on the back of faster-than-expected economic expansion in the fourth quarter.

These headline figures, however, should not lead to an overly bullish assessment of the sector, nor indeed be seen as directly reflective of broader economic activity. The general consensus is that the sizzling growth in loans cannot be sustained, although credit demand will stay healthy.

For one thing, economic growth is likely to moderate after the sharp rebound from the recession. The Singapore economy grew by a record 14.7 per cent last year, according to preliminary official estimates. But growth is expected to slow to 4-6 per cent in 2011.

Indeed, with Singapore's manufacturing growth plunging unexpectedly to just 9 per cent in December - less than half the consensus growth forecast - some economists have called for a downward revision of the sparkling fourth-quarter and full-year 2010 GDP growth projections.

And with inflation being the policy focus, further Singapore dollar appreciation by the MAS could push short-term rates lower, putting more pressure on the margins of Singapore banks which are net lenders in the interbank market.

Also, credit growth has been lopsided. It was driven by the growth in home loans, which accounted for 57 per cent of the increase in overall bank lending last year. Other major sectors saw uneven growth.

For instance, while there was strong growth in business loans in December, this was mostly driven by a sharp rise in loans to non-bank financial institutions - including fund management companies and real estate investment trusts. While loans to building and construction firms and general commerce loans rose in December, lending to other major sectors, such as manufacturing, transport, storage and communication, fell.

This year, growth in home loans is likely to slow as recent government measures to cool the property market start to bite.

While the drawdown for previously given loans would continue over the next few quarters for new projects, home-loan growth could start slowing later in the year if new and secondary sales are crimped by the anti-speculation measures.

The banking sector's high dependence on the housing market isn't anything new - and no one can blame bankers for riding each property wave. But this is also not necessarily healthy. Achieving more balanced credit growth will not only even out short-term fluctuations in loan demand but also put the banking sector on a fundamentally sounder footing.