High Loan Exposure Becomes Dampener

Source : The Business Times, October 4, 2008

Analysts say Singapore banks may have over-lent to property sector.

THE tables have turned. In the heady days when the Singapore economy was roaring ahead, banks which grew their loans the fastest were lauded. Now that the economic outlook has worsened considerably, a high exposure to loans is a cause for concern.

CHANGING LANDSCAPE
In the heady days when the Singapore economy was roaring ahead, banks which grew their loans the fastest were lauded. Now, a high exposure to loans is a cause for concern

Analysts have been sounding the alarm on deteriorating asset quality, or the possibility of loans defaulting, when times are bad.

In a recent report, ratings agency Standard & Poor's noted that property-related exposure is relatively high for Hong Kong and Singapore banks. 'While housing loans form the bulk of it, the share of commercial real estate and construction is high for a single sector exposure,' the report said. 'With economic growth expected to slow down in 2008 and 2009, the quality of this portfolio's unseasoned portion is at risk.'

Morgan Stanley analyst Matthew Wilson wrote in a report that from 2004 to 2007, banks lent aggressively at very low credit spreads 'on the assumption that asset values would continue to inflate and macro growth trends in Asia would sustain'.

He added: 'Singapore banks, in particular, appear to have over-lent into an over-built property bubble. The credit cycle has now clearly turned and higher rates will exacerbate inevitable asset quality issues.'

A report from DMG & Partners pointed out that the banks which have been most aggressive in recent lending could potentially face more severe asset quality reduction.

'Banks that have expanded their loan book more aggressively in the years preceding the economic weakness face a higher risk,' analyst Leng Seng Choon wrote. He said that DBS is most aggressive in lending over the past three-and-a-half years.

'Our analysis showed that DBS has been the most aggressive in loan expansion from December 2004 to June 2008,' the report said.

'Over this period, DBS recorded a loan compound annual growth rate of 16.3 per cent, which is significantly higher than OCBC's 11.2 per cent and UOB's 11.5 per cent.'

It added: 'Given DBS recent aggressiveness in loan expansion, the risk of asset quality deterioration is higher than its peers.'

The biggest risk to earnings would come from an increase in non-performing loans and a subsequent rise in the level of provisioning, UBS analyst Jaj Singh said in his report. 'We are projecting an increase in provisioning from the 17 basis points (as a percentage of loans) of the last few years to 30 basis points.' He noted, however, that a return to the levels of the Asian financial crisis is unlikely as corporate balance sheets and the finances of individuals are healthy.

The banks' core business of loans will also be impacted along with the downturn in the economy, some analysts believe.

Citi said in a report that 'worsening job conditions could weaken mortgage affordability and add pressure to the fragile property market'.

But UBS's Mr Singh said although the slowing economy will lower earnings growth for the banking sector, there are still some bright spots in the economy. 'The reason for this support is primarily due to the construction/real estate sector,' he said in the report.

'Singapore is in the middle of a construction boom, with large infrastructure projects under development, such as the expansion of the Mass Rapid Transit and the construction of two integrated resorts.'

He added: 'We believe these projects are relatively insulated from the slowdown in the economy as they are well-funded and have deadlines to meet.'