Banks in Singapore will face a severe test as home prices drop while interest rates edge higher, according to media reports.
UOB, for instance, sued the developer of Marina Collection in Sentosa Cove and some home buyers after 37 out of 38 units at the development defaulted.
The gloomy situation is further exacerbated by rising interest rates. Notably, the three-month SIBOR, a benchmark rate which most mortgages are tied to, has increased almost half to 0.65 percent since the start of the year.
Even prior to that, the Monetary Authority of Singapore (MAS) revealed that the non-performing housing loan ratio rose for the first time in three years, climbing by up to 0.4 percent in Q3 2014.
Analysts caution that while more defaults are expected, there is no need to panic.
“Anybody who has been punting, anybody who has been speculating and overextended, this marginal creep up of half a percentage point for example, that is going to get to them,” said Cyrus Daruwala, Managing Director of IDC Financial Insights.
“But the real non-performing loans, I think we are going to budge from 0.8 percent to maybe 0.9 percent – it is still under one percent of the total portfolio.”
This is partly because the government has set a limit on how much financing buyers can borrow during the bull market, and the measures have provided banks sufficient headroom as the market turns.
Some analysts even believe the hike in interest rates may be good for banks since it makes their portfolios more profitable.
“When you look at the funding side, a lot of it is current or savings deposits, retail deposits, so there is a repricing gap,” said Ivan Tan, Director at Standard & Poor’s.
“Generally, banks are slower to revise up interest rates for their deposits, whereas the loan repricing is quite fast. So between the loan repricing and deposit reprising, there is some interest margins to be had.”
Romesh Navaratnarajah, Singapore Editor at PropertyGuru, edited this story. To contact him about this or other stories email romesh@propertyguru.com.sg
