Published April 13, 2007

Banks' property exposure could go up to 20-30%

One link is through loans to property development investment firms


(SINGAPORE) Banks are exposed to the red hot real estate sector through increased lending to investment companies set up for property development, which could push their total exposure to the industry to as much as 20-30 per cent.

And the banks' increasing real estate links have attracted the attention of the Monetary Authority of Singapore (MAS). Banking and property stocks fell sharply yesterday after MAS said the widespread use of deferred payment schemes by developers could pose additional risks to banks.

Banks report customer loans by analysing via industry. The full picture of their exposure to the real estate sector is told in two lines - building and construction and non-bank financial institutions.

'Risk for banks re developers is manifest in two industry classifications - 'construction et al' and 'finance and holding companies',' says Morgan Stanley analyst Matthew Wilson.

United Overseas Bank (UOB) senior executive vice-president Chong Kie Cheong said at the bank's 2006 results briefing in February: 'A lot of financing to the real estate sector is through lending to the non-bank financial institutions. These are investment holding companies involved in property development.'

Mr Chong, who was responding to a question on UOB's slower growth in loans to the building and construction industry compared with rivals DBS Bank and OCBC, also said: 'Don't be misled by looking at just one line. There are two lines you should be looking at.'

Non-bank financial institutions lending includes credit to other industries, such as finance companies or broking houses.

UOB's non-bank financial institutions lending grew a whooping 24 per cent to $12.9 billion in 2006. Credit extended to building and construction rose a slower 4 per cent to $7.9 billion. If loans to both industries are added up, they make up 26.2 per cent of UOB's $79.4 billion loan book.

At OCBC, loans to financial institutions, and investment and holding companies grew 10.6 per cent to $8.4 billion, while building and construction lending was up 27 per cent to $9.3 billion. If the two are added, they make up $17.7 billion or 29 per cent of the bank's total loan book of $61.1 billion.

DBS Bank's loans to financial institutions, and investment and holding companies rose 6.25 per cent to $8.5 billion, while building and construction credit was up 21 per cent to $10.9 billion. Credit extended to both industries makes up 22.4 per cent of DBS's $86.7 billion loan book.

But increasing exposure to developers does not necessarily mean banks have taken on much higher risks - provided the economy continues to grow and there is plenty of liquidity.

'Unless you believe we are in a big bubble and a severe crash is imminent, then the risk is quite measured,' says Morgan Stanley's Mr Wilson. 'Moreover, much of the property price growth has taken place at the high end and many buyers acquire with cash - there is so much liquidity in Singapore.'

UOB spokesman Quak Hiang Whai said the bank assesses projects on a case-by-case basis, taking into account key factors such as customer profile, cash flow, collateral and project viability. 'We have always taken a prudent and disciplined approach in our credit evaluation process.'

DBS shares lost 50 cents or 2.2 per cent to $22.20 yesterday. UOB slid 50 cents or 2.2 per cent to $22.10. OCBC fell 30 cents or 3.1 per cent to $9.35.