Banks in one of the world’s financial capitals are seeing a bright spot emerge – a booming property market, after battling stresses from a floundering oil and gas sector over the past year.
Recent data indicated that demand for loans have been boosted by the increase in home buying activity in Singapore. And analysts say that whether housing loans can actually lift earnings for the rest of 2017 will be shown in the banks’ upcoming second-quarter financial reports.
According to estimates from Phillip Securities Research analyst Jeremy Teong, at the country’s three major banks — DBS Group Holdings, Oversea-Chinese Banking Corp (OCBC) and United Overseas Bank (UOB), mortgages make up 15 to 20 percent of total loans.
“Given the significant weight of [the housing loans] segment, the Singapore banks will benefit from a stronger Singapore mortgage system loans growth,” Teong said, adding that he expected local banks to gain market share against international and non-bank competitors.
data from Credit Bureau Singapore showed that compared the previous three months, mortgage loan applications were already up by 20 percent in the first quarter of the year.
Even though authorities kept cooling measures intact, official data showed. the increase came as private housing transactions in the city state grew to a near four-year high in 2017’s first quarter.
Analysts said that especially considering the lack of other appealing short-term opportunities, the banks are likely to grow their loan portfolios should the housing market continue to be so hot.
Maybank Kim Eng analyst Ng Li Hiang wrote in a note last week that banks’ margins from the stronger domestic property sector could be limited by the tight competition in the Singaporean lending space.
“There is usually a 2-3 month lag between mortgage applications and mortgage disbursements … We envisage an improvement in housing loan growth in the next few quarters,” Ng said. “(But) banks are prepared to tighten pricing to attract new borrowers, potentially limiting the upside to earnings.”
In addition, even as fewer oil and gas support services firms face financial distress, provisions — money set aside for soured debt — and non-performing loans may still climb.
“The lumpy write-offs have been made last year, but there is still stress in the sector due to weak charter rates and lower drilling activities … banks may need to pad up provisions as they face lower collateral values in these offshore marine vessels,” said Teong.
That means that it would be hard for the banks to match up with the “remarkably strong” first quarter performance, which was supported by gains in wealth management and trading income.
Still, analysts said that all three banks will be helped to register net profit growth in the second quarter by a low comparison base a year ago — when troubles among oil and gas support services firms emerged.
The higher interest rates should be beneficial for the banks further down the road.
“The market concern has been that the rate hikes in the U.S. have little or no impact on the Singapore interest rates environment. Nonetheless, we are gradually seeing some pass-through,” said Nomura analyst Marcus Chua
(Adapted from CNm)