The property market correction in Singapore may place modest pressure on banking system loan quality, Fitch Ratings says in its latest Asia-Pacific Chart of the Month report. Nonetheless, local banks DBS Bank Ltd, Oversea-Chinese Banking Corp and United Overseas Bank Limited should be able to weather a significant rise in credit costs given their healthy loss-absorption buffers.
Residential property prices in Singapore are down 5%-8% from their peak in mid-2013, in contrast to Hong Kong where steady demand and a supply shortage continue to drive up prices. Nonetheless, Fitch expects Singaporean banks' potential losses from mortgages to be minimal due to relatively healthy household balance sheets and adequate collateralisation.
The government's macro-prudential policies over the past few years included measures to strengthen mortgage underwriting practices at local banks. Mortgage delinquencies remain extremely low in both Singapore and Hong Kong (Singapore: 0.36%, Hong Kong 0.02% at end-September 2014).
While we anticipate Singapore banks' loan losses to rise as the property market continues to cool, Fitch expects the Monetary Authority of Singapore to remain vigilant for signs of stress. The agency remains watchful of potential second-order effects of the housing slowdown, such as weaker private consumption and rising construction company defaults.