Problematic housing loans to deteriorate mildly in 2014

Isolated cases drove up problem loans in Q2.

The asset quality of housing loans are expected to deteriorate mildly in 2014, Moody’s Investment service revealed today.

A few isolated cases drove up problem home loans in Q2, but the overall asset quality of banks will remain robust all the way to 2015 owing to stable economic growth, low unemployment and a small increase in interest rates.

“Macroprudential measures should improve the quality of new housing loans in Singapore, because such loans are originated under tighter underwriting standards, and are not granted to overleveraged borrowers, (i.e., those with TDSRs of more than 60%). The quality of housing loans originated before June 2013 should also remain good, despite the decrease in property valuations, because the average portfolio loan-to-value ratio (LTV) was about 48% in June 2014, according to MAS. Such LTVs provide the banks with large buffers, even if property prices fall significantly,” stated Moody’s.

Here’s more from Moody’s:
The gradual decline in property prices is credit positive for Singapore banks because it relieves pressure on bank asset quality. Further price increases would have increased the risk of a real estate price bubble bursting.

Despite a few isolated cases driving a small increase in problem home loans in second-quarter 2014, we expect the asset quality of housing loans to only deteriorate mildly but still remain robust this year and next owing to stable economic growth, low unemployment and a small increase in interest rates.

Singapore’s property prices are decreasing because of regulatory steps aimed at cooling off the market. Between 2009 and mid-2013, the Monetary Authority of Singapore (MAS) implemented eight rounds of property cooling measures to address its concerns that the low interest rate environment would lead to a property price bubble.

Macroprudential measures, particularly the introduction of the total debt-service ratio (TDSR) cap of 60% in June 2013, contributed to a significantly smaller increase in housing loans, rising in June 2014 by 8% from a year earlier. Year-over-year growth in 2014 has been the lowest in almost five years.

Despite the property market cooling off and new originations, the quality of housing loans at DBS Group Holdings Ltd. (Aa2 stable) and Oversea-Chinese Banking Corp. Ltd. (OCBC, Aa1 stable, B/aa3 stable1) is stable, while that of United Overseas Bank Limited (UOB, Aa1 stable, B/aa3 stable) has weakened mildly because of a few isolated problem loans.

Still, one risk area for banks lies in mortgages with LTVs exceeding 80%. However, these loans only accounted for around 5% of outstanding housing loans at the end of 2013, down sharply from around 20% at the end of 2009.