Published January 22, 2009


More provisions seen for developers, banks

But non-performing loan ratios unlikely to hit Asian financial crisis levels: Citi


MORE provisions are expected for developers and banks, according to Citi Investment Research.

'If you look at the latest (property) transaction, it's still $2,600 per square foot (psf) but the reality is that there are people out there who are willing to sell at $2,000 psf,' head of Citi Investment Research Chua Hak Bin told a briefing yesterday.

These may not be reflected now because of the lack of commercial space transactions in the fourth quarter of last year, he said.

Adding that the scope of provisions for City Developments' South Beach and CapitaLand's Farrer Court projects - bought at the peak - is 'very large', he expected that most of the provisions will be recognised at the end of the year.

As for banks, the default loan risks have been higher, when seen against mortgages in earlier recessions, for those funding the construction companies and for developers, said Dr Chua. 'As long as you have a job, you'd try to service it,' he said.

DBS could book more provisions in the fourth quarter of up to $150 million - including a $45 million impairment for Thailand's TMB Bank and another possible impairment on its 37.5 per cent stake in India's Choldamandalam Finance, Citi noted in an earlier report.

Competitor UOB is also set to see some pressure on its loans to small and medium-sized enterprises (SMEs) - which make up about 30 per cent of its loan book - while the outlook for the Thai operations could present more risks ahead, Citi added.

But non-performing loan (NPL) ratios are unlikely to hit Asian financial crisis levels - when in 1999, NPL ratios for all three banks hit close to or above 10 per cent - said Dr Chua, as three-month Singapore Interbank Offered Rate (Sibor) reached about 7 per cent during the Asian financial crisis while it is now about 0.7 per cent.

'That's one critical difference,' he said. 'That means we won't get the price-to-book valuations of 0.7 times that we saw in the Asian financial crisis.'

Citi is expecting NPL ratios for DBS to hit 2.5 per cent in 2010, while UOB and OCBC could hit 2.8 per cent and 2.4 per cent respectively in a year's time.

It has a 'sell' rating on property and bank stocks and has called for 'buys' on telcos StarHub and MobileOne for their good dividend yields.

But Dr Chua said that companies such as the shipping trusts may not be able to sustain their dividends amid the poor economic outlook. 'Take shipping trusts - their dividend yields are at about 30 per cent. But it's questionable when the freight rates have already plunged,' he said, adding that long-term contracts signed by the shipping firms risk being defaulted. 'That's why we have to look at whether the cashflow is actually sustainable and we have to look at financing leverage positions of the companies.'