Published November 29, 2008

Property exposure of banks well below limit

MAS does not expect sliding real estate market to affect lenders as their loan portfolios are generally well diversified


EVER since the market gathered steam in 2005, property-related loans have grown steadily. In fact, they were the key drivers of non-bank loan growth over the past two years, according to the Monetary Authority of Singapore (MAS), which released its Financial Stability Review yesterday.

Now, as a chill settles over the market again, concerns are being voiced over banks' exposure to the property sector. Brushing aside these worries, the MAS said that the overall property exposure of banks stands at just 18 per cent, well below the regulatory limit of 35 per cent. Of course, some banks may be closer to the threshold. 'Most banks' property exposures were well below the limit, with a few banks' property exposures closer to the limit,' MAS said.

Home loans are not included in the regulatory limit as they are typically very low risk. They accounted for 28.4 per cent of non-bank loans.

Banks' exposures to building and construction (B&C) firms are generally well-diversified with no bank having exposures concentrated in any particular property firm, it said. Lending to the B&C sector accounted for 18 per cent of total domestic banking unit (DBU) non-bank loans in September 2008. The asset quality of B&C loans has remained high, with the non-performing loan (NPL) ratio remaining low at less than one per cent.

'Going forward, the NPL ratio of B&C loans is expected to rise, given the economic downturn and ongoing corrections in the property market,' MAS said.

However, it does not expect this to affect the financial soundness of the banks as their loan portfolios are generally well diversified.

MAS said that the leverage ratio of the property sector has remained at almost the same level as before the Asian financial crisis, at around 60-80 per cent.

'Generally, the small property developers are more highly geared than the large property developers, with the small developers' debt to equity ratio at 76 per cent, compared to the large developers' 62 per cent in Q2 2008,' it said.

While there has been a substantial moderation in the interest coverage ratio since Q2 2007 for both small and large property developers, their earnings are still more than adequate to cover their interest liabilities in Q2 2008 with earnings at about 8.6 times of interest expense, it said.

On housing loans, the MAS said that they 'typically turn in low single-digit NPL ratios and have a low risk profile with 75 per cent of housing loans accounted by owner-occupied residential properties'.

In addition, Singapore banks' mortgage exposures are currently in the form of direct loans. Unlike in the US, there has been no securitisation of mortgages and repackaging into complex products, which had contributed to lax lending standards and the mispricing of risk, it said.

It added that the growth of property-related loans has tapered off recently, reflecting falling home demand and property transactions.