Local banks may be hit if there is a property market downturn

Local banks face the risk of taking a hit if there is a downturn in the property market given their heavy exposure to the real estate sector, according to global debt watcher Fitch Ratings.

Home mortgages and construction-related loans account for 50 per cent, or half of local banks’ total loan portfolio, Fitch Ratings financial institutions director Alfred Chan said .

He pointed out, however, that the Government’s move to cool the property market should mitigate that risk as the cooling measures will ensure that only borrowers with good credit quality will prevail.

“Fifty per cent of Singapore bank loans are to the property sector in the form of home loans and construction loans so in the event that prices were to moderate, given that prices are fairly high at where they are now, that could have an impact on the quality of those loans,” Mr Chan said in an interview last week. “But the Government has recognised those developments and has taken measures to mitigate prices from going up further,” added Mr Chan.

Those measures, however, which included the reduction of the loan to value (LTV) ratio – or the maximum financing borrowers can get from a property purchase expressed as a percentage of the appraised value of the property – could depress banks’ earnings.

Still, Mr Chan said the expected lower loan volume arising from the lower LTV limit will be offset by having “quality borrowers with good margins”. “From the top line point of view, it’s going to be tighter. But from the risk point of view, the potential for delinquencies also tends to look lower. So from a net-net basis, it’s generally positive for the banks,” he said.

In its industry review for the third quarter, research firm Business Monitor International (BMI) said demand from buyers from China, Malaysia and Indonesia has been driving up prices of Singapore real estate properties.

In the first quarter, foreign buyers made up almost a third of purchases in Singapore, said BMI in a report this month. It estimated the average house price to be about S$1,935 per sq m. BMI forecasts monthly rentals for retail space here to range between US$36.76 (S$45.54) per sq m and US$237.35 per sq m this year, higher than last year’s rental price range of US$35.61 to US$158.28 per sq m.

Source : Today – 27 Jun 2011