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Non-performing mortgage loan risks to persist in banks
NON-performing mortgage loan risks will persist for Singapore banks this year, albeit with a shift from defaults by foreigners on luxury homes to those by locals on suburban homes. Banks remain safe, nevertheless.
Maybank Kim Eng analyst Ng Wee Siang, in a report this week, said that high-end apartment prices may have fallen sharply, but tighter credit criteria put in place by regulators have reduced the risk of foreigners defaulting and exiting the market in droves. This should help to protect banks.
Based on DTZ data, prices of luxury homes have fallen close to 10 per cent year-on-year in Q4 2014 to S$2,320 psf on average.
From 2013, a 50 per cent loan-to-value (LTV) ratio limit was imposed on second housing loans for individuals, both foreign and local. This ratio shrinks with the subsequent home loan.
Mr Ng's belief that the fallout for banks will be mild is also premised on the fact that the valuations of most high-end properties have stayed quite resilient. Luxury homes reselling at large losses are sporadic and isolated to selected projects, primarily at Sentosa, he said.
For instance, the sale of two units in Turquoise, a luxury Sentosa Cove condo, at almost half their original value recently, affected United Overseas Bank (UOB), whose housing non-performing loans (NPLs) have soared 61.4 per cent since end-2013, he noted.
"While defaults emerging at such an early stage of the market's downturn may be alarming, it is reasonable to assume that some of these purchases were speculative. They should not be taken as representative of the health of the entire housing market," Mr Ng said.
Banks' LTV ratio for outstanding housing loans have since dropped to an average of 48.6 per cent at end-Sept 2014.
But if a housing meltdown does occur, Mr Ng believes that OCBC would be most at risk, because its loan growth grew the fastest from Q2 2009 to Q2 2012, a period when home prices breached pre-crisis highs, backed by quantitative easing in the West. Speculation was rife, with foreign purchases peaking at one in five of all transactions in Q4 2011.
"At the early stages of a property cycle, the upswing in prices is usually driven by fundamental demand. The moment that upswing has taken root, people's greed will come to the fore and take precedence. That is when another round of very sharp upswing will come in, and that is when it becomes dangerous," he told BT.
He said that UOB's housing loans grew the fastest during the early housing boom, and OCBC's later on. As for DBS, its modest growth in housing loans, at a compound annual growth rate of 8 per cent in the past nine years (UOB: 14 per cent, OCBC: 13 per cent) makes it the least at risk.
But Kenneth Ng, who heads equity research at CIMB, prefers to look at which banks' mortgage lending grew the most from 2012 to early 2013, a period when prices peaked, as those loans would have been made out to properties with the priciest values. The two banks with the highest mortgage growth during this time were OCBC and UOB.
He agreed with Maybank, however, that concerns on non-performing loans were overblown, given the Monetary Authority of Singapore's controls. The problem comes, however, when a buyer reports to a bank a higher purchase price than he is actually paying after substantial discounts and rebates, which means the buyer is effectively getting a higher loan-to-value ratio than is permitted, sometimes up to 90 per cent, Mr Ng said.
This is what UOB is currently alleging of the developer of Marina Collection in Sentosa and seven individuals - that they conspired to get inflated loans - after 37 of 38 housing loans for the purchase of 38 condo units defaulted.
"The worry is greater on foreigners, who make up a bigger portion of high-end investment homes. It's harder to chase after a foreigner who doesn't live in the country when they default."
The three local banks may still see some high-end defaults this year, but more will likely come from small-format, non-central units bought by locals, he said.
"All three local banks would have participated in this segment. If some of the owners hinging on tenants to fund their mortgage cannot find a tenant, they'll default. What douses the concern a little is that the ticket prices for these units are lower, so losses are lower as well. Buyers, being locals, are also easier to chase."
Lee Nai Jia, associate director of research at DTZ, added that banks are also protected by the MAS' tougher rules on minimum levels of liquid capital that they must hold to inoculate against sudden financial stress.
"Singapore's exposure is not like the US subprime mortgage crisis, which happened partly because of the availability of mortgage backed bonds. We don't securitise mortgages, so that reduces the problem," he said.