Singapore Banks - Maybank Kim Eng 2017-07-17: Singapore Property And Housing Loans

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Singapore Banks - Singapore Property And Housing Loans

Singapore property market seeing some revival 

• Housing loans represent 31% of the system’s domestic banking unit (DBU) loans. 
• Following the implementation of cooling measures since 2009- 2013, mortgage growth has slowed from 16% YoY at end-2012 to 4% YoY now. Recent buoyancy in the Singapore property market augurs well for housing loans. 
• In assessing the impact of housing loans, we conclude that loans could increase by SGD7-12b in our base case scenario of 24.5k units of private housing sales, raising housing loan growth by 4-6% YoY in 2017. This translates to an increase of 1-2% of system DBU loan growth in the same year.

Methodology in assessing impact on housing loans 

• We observe that the net increase in mortgages bears a strong correlation to private residential transactions. 
• Using the ratio of net changes in DBU housing loans divided by the number of private residential transactions, we discover that the net loan/transaction was stable at ~SGD500,000 but has been declining since 2014. We believe that this is a reflection of lower property prices, smaller number of speculators and property investors who tend to prefer larger units, and real buyers opting for small housing units.

Housing loan growth should stay within 4-10% p.a. in our base case scenario 

• We conduct a linear scenario analysis using net loans/transaction and expected transacted volume of private housing units and executive condominiums (ECs) in FY17E. If we assume SGD300k-500k of net loans/transaction and 20.5-28.5k of housing units, we estimate that the system can stand to gain SGD6-14b of mortgage lending opportunities, with housing loan growth estimated to increase by 3-7% from current levels of SGD194b. This translates to ~1-2% increase in system DBU loan growth. 
• Given that margins for new housing loans are usually tight, at 1% above 3M SIBOR, we estimate that system’s pre-tax earnings could range from ~SGD60-140m.

Maintain sector NEUTRAL 

• Maintain NEUTRAL on Singapore banks. Singapore banks are currently trading at ~1.1 to 1.2x forward P/BV which is slightly below the historical average. 
• On a relative basis to our coverage listed below, DBS remains our preferred pick based on its better capability to manage liability costs to drive pre-provision profits. 
• Risks to our call are: 
  1. NIM improvement from higher rates; 
  2. higher non-interest income; and 
  3. benign credit costs.

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1. Assessing impact of uptick in residential transactions on housing loans 

• The Singapore residential property market has enjoyed renewed interest, following the easing of property cooling measures in March. Take-up rates at property launches have improved, the secondary market has been more active, and land tender bids have beat expectations. These are positive for bank lending to the housing and building and construction (B&C) sectors.
• In this report, we assess the impact of improved demand for housing on banking system housing loans.
• At the end of May 17, the banking system’s domestic banking unit (DBU) housing loans constituted 31% of advances or SGD194b. For the three Singapore banks, housing and B&C loans together form 40-50% of total loans, with housing loans comprising 21-27% as at 1Q17.
• In our assessment, housing loans remain an important lending segment for the three banks. Banks are prepared to tighten pricing to attract new borrowers, potentially limiting the upside to earnings. Should property transactions be sustained, there could be upside to our current FY17E system loan growth assumption of 6-7%.

2. Impact on housing loans 

• The introduction of property cooling measures from 2009-2013 has tempered take-ups and prices. Consequently, DBU housing loan growth declined from 16% at end-2012 to 4% YoY now.
• According to Credit Bureau Singapore, new mortgage applications are up 20% QoQ as of 1Q17. The number of new mortgage applications was 46,425 as at 1Q17. Since there is usually a 2-3 month lag between mortgage applications and mortgage disbursements, we believe the increase in applications has not yet translated into higher housing loan growth. 
• We envisage an improvement in housing loan growth in the next few quarters.

2.1 Understanding relationship between transaction volume and housing loan growth 

• To estimate the impact of increased private residential activity on housing loan disbursements, we first calculate the net loan per private residential unit transacted from 2010-16. We use the annual change in outstanding housing loans divided by private residential transactions for the year. 
• The net change in housing loan per unit has hovered around ~SGD500,000 per unit from 2010-2013. It shot up in 2014 and has been declining since.
• Intuitively, the declining trend for loans per private residential unit over the past two years is consistent with lower property prices and a smaller residential unit size. The private property price index is down c.12% in 2Q17 from its peak in 3Q13.
• Why was 2014 so exceptional when net loan per transaction increased to SGD762k? This is peculiar, especially against the introduction of total debt servicing ratio framework in June 2013. We think the higher loan amount in FY14 could be a possible reflection of the following: 
  1. FY13-14 saw a 47-75% YoY increase in private housing supply and thus experienced more loan drawdowns from completion of properties; 
  2. Prior to 2014, buyers comprised a large number of speculators and investors who tend to buy more expensive units. 
• Following the last and most devastating cooling measures, they were forced to take up financing as they were unable to offload their inventory, thereby inflating the loan quantum.

2.2 Estimating the impact on system loans 

• In 1Q17, total private sector housing volume (excluding ECs) was 6,274 units. Our property analyst currently estimates FY17E private home sales (excluding ECs) to increase by 34% YoY to 22k units. Including ECs, the transaction volume would be 24.5k units. Private residential units sold in sub-sales, an indicator of speculative activity, were also at a new low after several rounds of cooling measures.
• Based on the net loan per private residential unit and sales of private residential housing and ECs for FY17E, we conduct a linear scenario analysis to assess the impact on system DBU housing loans and pre-tax earnings. Our base case scenario is 24.5k units of total residential sales. 
• Based on SGD300k-500k of net loan/transaction and 20.5-28.5k of sales, we estimate that the system stands to gain SGD6-14b of mortgage lending opportunities. Our analysis shows that system DBU housing loan could grow by 3-7% from current levels of DBU housing loans at SGD194b. Our base case scenario of 24.5k of sales could increase mortgage lending by SGD7-12b, and housing loan growth to increase by 4-6% YoY.
• Given that margins for new housing loans are usually tight, at 1% above 3M SIBOR, we estimate that system’s pre-tax earnings to be ~SGD60-140m. Our base scenario shows system’s pre-tax earnings to be ~SGD70-120m.

Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-07-18

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