Be Vigilant About Asset Bubbles: Jackson Tai

Source : The Business Times, December 6, 2007

Falling lending standards among key risks in Asia

FALLING standards of lending due to intense competition among banks and 'too much money' driving asset prices up are some of the main risks to Asia's financial industry, said outgoing DBS Group chief executive Jackson Tai last week.

'Underwriting standards for loans and financings have deteriorated in the region, and this development comes on top of the US sub-prime mortgage problems,' he said in an interview with The Asian Banker. 'Intense competition, including that from foreign banks and institutions who have rediscovered Asia, have brought credit spreads to unsustainably low levels. The risk-adjusted return on loans is not where it should be.'

He was responding to a question on what worried him most in Asia's financial industry.

Lax lending practices at US mortgage lenders have been blamed for the sharp rise in bad loans there - especially in the sub-prime or high-risk mortgage segment - that triggered the recent turmoil in global financial markets. In Singapore, banks have seen rapid loans growth in recent months, although the proportion of bad loans remains low.

Last week, the latest monthly figures from the Monetary Authority of Singapore (MAS) showed that total loans made by banks and other financial institutions here grew by 15.5 per cent to $224.1 billion at end-October from a year ago - the fastest yearly rate of growth since December 1996.

Some $16.2 billion or more than half of the $30.1 billion in loans added over the year were made to the property sector, comprising consumer home loans and business loans to the building and construction industry.

While Asian economies have recovered well from the financial crisis of 1997 and the region is now 'bounding with growth and optimism', 'we can't get too carried away about Asia's prospects', said Mr Tai.

Besides falling underwriting standards, 'we have the risk of asset values in the region going through the roof', he added.

'Yes, property and asset values have only just returned to pre-Asia financial crisis levels in many markets, but there is too much money and too much optimism chasing after assets.'

'We must be vigilant about asset bubbles in the region,' Mr Tai said.

Asia's rapid economic expansion in the past few years has attracted large amounts of foreign investment into financial assets such as shares, and fixed assets including property and infrastructure from global fund managers seeking higher returns and cash-rich countries in the Middle East.

Some economists fear that a sudden steep fall in share prices in China - which have nearly tripled over the past 12 months - could dampen economic growth there at a time when Asia is bracing itself for a sharp slowdown in US demand for exports.

On Monday, MAS warned in its latest twice-yearly Financial Stability Review that Singapore banks' profits could be hit in the short term by higher volatility in financial markets.