- Property market weakness has stoked fears of fallout in housing loan quality; the health of housing market is critical to banks as mortgages account for 29% of total DBU loans.
- We see slim chances of fallout, given the cooling measures in place since 2009, strong household balance sheets and resilience of housing loans in past economic cycles.
- Maintain Overweight on banks. DBS remains our top sector pick, followed by UOB. Stay cautious on OCBC.
Whither housing loan quality?
Singapore’s residential property market is showing signs of weakness and investors are worried about the spillover effects on the banks sector, which has enjoyed a robust housing loan CAGR of 15% in the past five years. Tighter lending rules, a deliberate move to slow down the pace of immigration and an expected influx of new home completions point to further price weakness ahead. Concerns over weaker housing loan quality thus loom large.
Downside risks modest and manageable
With the property market in a state of flux, loan quality concern does look significant at first glance. But we argue that the downside risks are still modest and manageable. First off, the authorities have taken proactive steps since Sep 2009 to curb residential property speculation, tightening the measures in response to changing circumstances. Second, housing loans have historically shown great resilience even under prolonged economic stress. Third, household balance sheets are strong with people more cashed up now than during the period prior to the 1997-1998 Asian financial crisis. Fourth, our analysis indicates that household leverage remains reasonable even under tremendous stress. Based on our estimates, a fourfold rise in housing NPL ratio (from 0.5% currently to 2%) would conservatively reduce EPS by up to 3%. Maintain Overweight on banks. For exposure, DBS is our top pick as it is best positioned to take advantage of a rising interest rate environment. We would remain cautious towards OCBC.
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