Published July 11, 2007

Banks can't rely on property alone

AFTER two years of anaemic loans growth, banks are having it good again. The property market boom has boosted their loan books, especially in housing loans and loans to the building and construction sector. What they face though, is a tough balancing act; between prudential concerns and market demands to make the most out of the buoyant property market, it's a fine line for the banks to tread.

Local lenders cannot be blamed if they are tempted to cash in on the property phenomenon, since loans growth has been weak for much of 2005 and 2006. Since hitting a high of 20 per cent growth in early 2004 - nearly a year after the HDB home loans market was liberalised - growth in housing loans has been declining. In 2006, when the property market recovery got under way, housing loans still grew at a sluggish 2-3 per cent, due to rising interest rates.

Property exposure

Indeed, banks are expected to come under pressure from the stock market to lend aggressively to boost their earnings. The three local banks will be judged by stock analysts and investors on how well they are able to make the most of the good times by lending more voraciously to building and construction companies, investors and home owners.

But prudential requirements also demand that banks keep their property exposure in check. The Monetary Authority of Singapore (MAS) has applied brakes to cap the banks' exposure to the sector. The central bank has stipulated that the banks' property-related loan exposure will be limited to 35 per cent of the banks' total non-bank loans and debt instruments.

This excludes owner-occupied housing loans, the largest chunk of bank mortgages, and is designed to limit the banks' exposure to property speculation.So what's a bank to do? The answer may lie in pushing even harder in diversifying away from interest-based income. The local banks have made some strides in this, but they can do more. Currently, as at March this year, net interest income (or profit from loans) still contributes the bulk of the banks' earnings.

OCBC Bank sees its income coming equally from net interest and non-interest sources, but DBS still has 37 per cent of its earnings coming from non-interest income, while United Overseas Bank (UOB) has 36 per cent of its profit from non-interest or fee income.

For one, local banks should look at garnering more private banking business, as well as the myriad merger and acquisition (M&A) deals out in the region. With Singapore churning out millionaires faster than any country on earth, the local banks should focus on capturing these customers.

The local banks should also try to win a bigger share of M&A deals; a recent report by Thomson Financial showed that the three local banks were left out in big transactions involving Singaporean companies. Indeed investment banking revenue, although having increased, still makes up a very small portion of the banks' total income. First-quarter results showed this segment contributed just 2 per cent of DBS's total income, around 3 per cent for UOB, and less than one per cent for OCBC.

Highly cyclical market

The surfeit of liquidity worldwide and locally means that more deals will be done in this region, and more millionaires will be made. Local banks with their entrenched local customer relationships and networks should strive to benefit more from the burgeoning fund management and M&A activity.

The current exuberance of the property market should not distract the banks from the need to extract more income from non-interest activities like investment banking, wealth management and fund management. Property is highly cyclical, after all, and the banks have themselves learnt first-hand the boom-and-bust nature of the real estate market.

Mortgage lending is something the Singapore banks are well versed in, but it is in diversifying away from such lending that the banks would find more sustainable growth in the longer term.