BT : Credit loss risks on residential property loans limited: S&P

Business Times - 20 Jul 2010

Credit loss risks on residential property loans limited: S&P

THE credit loss risks of Singapore banks would be limited even if an asset bubble were to form, Standard & Poor's Ratings Services said yesterday.

Singapore banks' heavy exposure to home loans and the strong climb in property prices in the past year have raised many questions, including the credit loss risks that banks face, it noted in a report. However, 'a high savings rate and low household debt support borrower repayment ability when collateral values fall', said Standard & Poor's credit analyst Ivan Tan.

Negative equity (when the loan amount exceeds valuation of the home) by itself, is not a sufficient condition for default, he added.

Standard & Poor's said that its view was based on the reasonable level of housing affordability, sound borrower repayment ability, low loan-to-value ratios, the government's measures to cool the market, and mortgage rates turning upward. Mortgages represent the single largest industry exposure for Singapore banks, at about 25 per cent of loan portfolios.

The risk of financial losses to banks would increase if affordability declines, which could occur if property prices continue climbing or if household incomes slip, the rating agency said.

'We believe an unabated increase in property prices is unlikely, given the government's past willingness to implement cooling measures,' Mr Tan said.

On the other hand, household incomes can fall sharply for a few reasons: job loss in a recession is the most common factor. Nevertheless, the rapid economic recovery has led to an improvement in the unemployment rate to 2.2 per cent as of March 2010, almost back to pre-crisis levels.

In February 2010, the government lowered the ceiling for home loans to 80 per cent of valuation - one of the steps that it took in trying to rein in the market.

'We believe Singapore banks seldom extended loans of more than 80 per cent of valuation even before the loan ceiling was lowered,' said the report.

'Banks are beginning to price in higher risk premiums by raising home loan rates . . . The higher home loan rates will counterbalance the returns from property investments. This, in turn, helps reduce the likelihood of a speculative bubble and limit the risk of credit loss for banks.'

Last week, Standard & Poor's affirmed its rating on the three Singapore banks, citing the lenders' strong financial profiles and prudent management strategies.

S&P kept its long-term rating for DBS at AA-/Stable, United Overseas Bank (UOB) at A+/Stable, and OCBC Bank as A+/Stable.

The banks' short-term ratings stand at DBS with A-1+, UOB with A-1, and OCBC with A-1.

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