S’pore banks can withstand housing slump: Fitch

SINGAPORE — The Republic’s banks are strong enough to withstand a sharp downturn in the city-state’s real estate market despite their large exposure to the sector, with property-related loans accounting for more than half of domestic loans, ratings agency Fitch said yesterday.

“Singapore banks’ rating profiles will continue to be supported by their healthy profitability, steady funding and liquidity pools, and strong capitalisation,” it said in a report after it stress-tested the lenders for extreme market conditions.

Property-related loans accounted for 52.1 per cent of domestic loans at the end of June, with 31.7 per cent in housing loans and another 20.4 per cent in building and construction loans, Fitch said. Housing loans, accounting for about four-fifths of consumer loans, increased by a compound annual growth rate of 16.2 per cent from 2009 to 2013, boosted by the low-interest-rate environment.

There is concern that a collapse in home prices would pose risks to Singapore’s banking sector as a large supply of new homes are flooding the market amid slowing immigration and a more challenging operating environment, the ratings agency said.

However, its stress test showed that the risks for banks would be modest even if housing loan quality were to deteriorate drastically.

“Our worst-case scenario shows a 45 per cent home-price collapse with a housing non-performing loan ratio (NPL) of 5 per cent, higher than the average peak ratio of 4.3 per cent for the three Singapore banks DBS Group Holdings, Oversea-Chinese Banking Corp and United Overseas Bank during the 1997-1998 Asian financial crisis, would shave 17 to 24 per cent off their earnings,” Fitch said.

The NPL ratio was 0.4 per cent at end-June for the banks, which are all rated AA- with a stable outlook.

The ratings firm said it expected Singapore’s private residential prices, which have declined 9.4 per cent from their peak in September 2013, to fall further as a large supply of new homes floods the market while population growth slows. However, it said the possibility of a collapse in home prices is remote in the absence of a massive external economic or financial shock. Singapore’s regulators also have the latitude to stem a drastic decline in home prices by unwinding some of the property-cooling measures introduced earlier, it noted.