http://www.businesstimes.com.sg/arch...perty-20130514

Published May 14, 2013

28% of banks' non-bank loans linked to property

Tharman: Property measures provide a buffer for banks

By Siow Li Sen


BANKS' property exposure makes up more than a quarter of their non-bank loans, it was revealed yesterday.

As of March 2013, property-related exposures accounted for 28 per cent of banks' total outstanding non-bank loans, Monetary Authority of Singapore Chairman Tharman Shanmugaratnam said in a written reply.

These exposures comprised housing loans at 17 per cent, and loans to property developers and construction companies, at 11 per cent. Of the housing loans granted, more than 70 per cent were for owner-occupation.

The series of measures taken over the last three years to cool the property market, especially the more stringent caps on loan-to- value (LTV) ratios, has provided a buffer for banks should property prices decline, he said.

The average LTV ratio for outstanding housing loans stood at a reasonable 48 per cent as of Q1 2013, he said.

In comparison, average LTV ratios for housing loans for Canada, Australia and South Korea stood at 55 per cent, 50 per cent and 48 per cent respectively in 2012.

Mr Tharman, who is also Deputy Prime Minister and Finance Minister, also said the impact of a rise in interest costs on financial institutions (FIs) could affect them in two ways.

First, the net interest margins may rise or fall, depending on whether interest income from an FI's assets increases by more or less than the interest expense on its liabilities.

A rough estimate, based on the local banks' 2012 annual reports, showed that the impact of a one percentage point increase in interest rates on the net interest income of the three banks is about $400 million.

It is about 10 per cent of the local banks' net interest income in 2012.

While the impact on the FIs' net interest income may therefore be either positive or negative, there is a second, important way in which banks may be adversely impacted.

"The overall loan quality of an FI could be impacted if borrowers facing higher interest costs encounter difficulty servicing their loans, or default on their loans," he said. The default rate currently remains very low, at well below one per cent for housing loans.

"However, a low default rate is to be expected during years when property prices are on the upswing," he noted.

MAS conducts regular stress tests on banks and insurance companies to assess their ability to withstand adverse financial and economic shocks, including a sharp correction to property prices.

The most recent stress test conducted last year showed that all major financial institutions would continue to maintain adequate capital buffers above MAS' regulatory requirements under the prescribed stress scenarios, he said.

"We will continue to watch the property market closely, and take steps when necessary to avoid a bubble that could hurt borrowers and destabilise our financial system," said Mr Tharman.