Published September 16, 2009

IAS: banks calm, but analyst says they'll take a hit


(SINGAPORE) Banks here seem to have shrugged off the government's announcement on Monday that the interest absorption scheme (IAS) will be banned with immediate effect, but analysts are less sanguine.

Lower home sales and the resulting slowdown in housing loans growth could hit the three local banks' profits, analysts said. There could also be a ripple effect in the form of a drop-off in loans made to developers and builders.

Banks told BT that the government's decision to disallow the IAS and the similar interest-only housing loans (IOL) with immediate effect will not hurt them too badly.

'While the take-up rate for IAS is good, our normal progressive home loan packages are actually more attractive and popular with homebuyers,' said United Overseas Bank's (UOB) head of loans division Chia Siew Cheng. 'These measures (the ban of IAS and IOL) are not likely to have a significant impact on the bank's loan business as most customers have opted for the normal progressive loan scheme, which is more attractive.'

But Royal Bank of Scotland (RBS) analyst Trevor Kalcic expects the earnings of the three local banks to be reduced by around 0.5 per cent though a negative impact on both volumes and margins.

'On the volume front: the scrapping of the IAS could squeeze out marginal buyers,' he said in a report. 'Banks do not disclose sales under IAS, but several developers have said that IAS sales amount to about 30 per cent of total sales. Assuming that about 30 per cent of these are marginal buyers who would opt only for IAS or nothing, then neutralising these sales reduces our FY10F and FY11F Singapore system loan growth numbers of 2.5 per cent and 3.5 per cent respectively by less than 0.5 per cent.'

A check by BT found that interest in the scheme has been on the wane in recent months. In some projects, as many as 40-50 per cent of units were bought using the IAS scheme, in others it was less than 5 per cent.

Mr Kalcic also added that if the government measures led to a fall in property prices, then it would have a further negative impact on volume.

'We expect that there will be a knee-jerk res- ponse from potential homebuyers to this announcement, resulting in a slowdown of number of new transactions in the short term,' said Gregory Chan, OCBC Bank's head of consumer secured lending.

'Whether property transactions will be curtailed on a sustained basis will depend on other macro factors such as property supply and demand, economic recovery and developers' pricing,' he added.

On the margin front, banks charge developers an interest rate for offering the IAS scheme, which is higher than the retail mortgage rate. 'Hence, scrapping the IAS will have a negative impact on incremental net interest margin and revenue,' Mr Kalcic added.

Credit expansion here has been struggling since the beginning of the year, propped up only by home loans. Year-to-date, total bank lending at end-July dipped 0.1 per cent, weighed down by a 2.4 per cent contraction in building and construction loans but offset by a 6 per cent growth in home loans.

Bankers also told BT that their loans to developers are not at risk.

A UOB spokeswoman said most residential project launches have seen strong sales. 'The sale proceeds collectible are sufficient to complete the construction of the developments as well as fully repay the loans,' she said.

And for the unlaunched projects, the bank's main exposure is in the mass market and mid-range segment, where prices have moved in tandem with underlying demand from genuine homebuyers.

'In addition, we have done numerous stress tests on the portfolio which indicated that the security coverage and debt-servicing coverage ratio are sufficiently robust to withstand the impact of a major price correction,' she said.