Singapore's effort to stabilize property market will benefit banks

DBS, OCBC and UOB have exposures to the property market, comprising of 52%-54% of total loans.

On 30 August, the Singaporean government announced its third batch of measures to encourage greater financial prudence among property buyers and to stabilize property prices. Singaporean banks will benefit over the medium term as their exposures to highly leveraged customers and future property price shocks will be reduced, enabling their earnings to stabilize from a decline in potential loan losses.

In the short term, however, these benefits will be less obvious because credit costs on housing loans usually remain low until property prices start falling. Furthermore, a decrease in loan demand could negatively impact banks’ interest income, as extracted from "Moody's Weekly Credit Outlook", dated September 6, 2010 written by Christine Kuo, Vice President - Senior Credit Officer, Moody’s Investors Service.

The measures, which took effect immediately, include imposing a stamp duty on residential property buyers who sell their property within the first three years of ownership, up from one year. In addition, property buyers who already have outstanding housing loan(s) are now required to increase their minimum cash down payments to 10% of the valuation limit from 5% when purchasing additional properties. Loan-to-value (LTV) limits for these buyers will be cut to 70% from 80%.

A healthy property market is critical for the three major Singaporean commercial banks, DBS Bank (Aa1 stable; B/Aa3 stable), Oversea-Chinese Banking Corp. (Aa1 stable; B/Aa3 stable), and United Overseas Bank (Aa1 stable; B/Aa3 stable). All have significant exposures to the property market (52%-54%4 of total loans as of 30 June, the majority of which are to Singaporean borrowers) through their housing loans and lending to the construction and real estate sectors. Bank of Singapore (Aa1 stable; C-/Baa1 stable), on the other hand, focuses on private banking and has little direct exposure to property. But it, too, will still benefit from a stable market as its business flow could fall if the net worth of its clients declines because of significant drops in property prices.

The government took these latest measures in response to ongoing increases in property prices, which have exceeded the peaks set in mid-1996. The previous two sets of measures introduced in September 2009 and February 2010 have helped moderate the rate of price increases for private residential properties in the last three quarters, but the government believes more needs to be done, particularly when the global economic outlook is still uncertain and, in the government’s view, Singapore’s low interest-rate environment is unsustainable in the long term.

The government said more measures to promote a stable and sustainable market will be introduced later, if necessary. Moody’s believes that this statement, together with the announced measures, will dampen speculative demand and help stabilize property prices.