Home financing forms a big chunk

The numbers speak for themselves. Most banks, especially those with a strong retail banking orientation, see property loans as an important part of their loan portfolio.

As at end-June 2010, property loans accounted for 37% of the total banking sector loan portfolio. This is from an estimated 17.5% level in the beginning of 1997.

However, some banks such as Public Bank Bhd (PBB), Hong Leong Bank Bhd (HLB) and Alliance Financial Group Bhd (AFG) have a much higher exposure to the property sector, with property loans accounting for about half of their total loan portfolio.

Within the property loans segment, residential property loans remain the main focus for the banks as a result of the perceived low risk of the residential property segment.

As at end-June 2010, residential property loans accounted for a significant 73% of property loans and 27% of gross loans in the banking sector (versus 12% as at the beginning of 1997).

When it comes to the individual listed local banking groups, this composition can vary from 12% to close to 40%.

AFG has the highest exposure to residential property loans with 39.4% of its total loans book, HLB with 38.7%, PBB 27.9% and CIMB Group Holdings Bhd 24.5%.

Banks with a strong retail banking orientation are observed to have home loans making up 30% to 40% of their loan portfolios on average.

MIDF Research banking analyst Kelvin Ong believes the larger capitalised banks such as PBB, CIMB and Malayan Banking Bhd (Maybank) are market leaders in terms of housing loans as they have the advantage of better distribution channels such as stronger sales force, marketing network as well as more branches for greater penetration and customer service.

“These banks also have a wider network of solicitors and real estate agents. Another reason is their stronger retail deposits such as current account savings account which provide a low cost of deposits to support a lower credit cost,” he says.

According to Ong, PBB leads with a 17% share of the mortgage loans market, followed by CIMB with 13.8% and Maybank 13.4% as at June 30, 2010.

Ong says the key focus of banks will be to finance properties developed by reputable developers with good track record and properties in good locations.

“They will also have to closely monitor properties located in areas which are already highly priced (showing signs of a property bubble) to avoid over financing,” he says.

Malaysian Rating Corp Bhd (MARC) vice-president and head of financial institution ratings Anandakumar Jegarasasingam says residential property loans are generally considered low risk for banks.

This is because most borrowers will strive to service their loan commitments, especially for their primary residence, due to the economic utility of the residential dwelling and the “social stigma” associated with a loan default and the subsequent auction exercise, he says.

“Even in the event a residential property is put to auction, the recoverable collateral value is likely to be sufficient to ensure a full loan recovery as long as there isn’t a major property price correction.

“While most banks have been prudent in ensuring that the market and forced sale value of a property is appropriately appraised at the time of loan sanction, recent anecdotal evidence suggests that intense competition has resulted in some relaxation of credit underwriting standards,” he adds.

Anandakumar says in general, non-performing loan (NPL) ratio for residential property loans of local banks has been more or less on par with NPL ratio for their broader loan portfolio while the NPL ratio for non-residential property loans has been lower than the gross NPL ratio. According to MARC, PBB has the best residential property loans NPL ratio of 1.1% while Affin has the highest at 11.7% (based on data at bank level).

RAM Ratings head of financial institution ratings Promod Dass says the home loan market is very competitive and successful banks are the ones that have been able to act nimbly to meet customer demands both in terms of pricing and range of product offerings.

“In general, banks’ lending criteria and standards have remained prudent. “Banks also look at various aspects of the property being funded such as market valuation, location, developer, price and property type in their underwriting process as part of the loan-to-value (LTV) determination,” he says.

However, he notes that more residential mortgages had LTVs of 90% or more for the past few years.

“Putting things in perspective, LTVs are only one part of the loan approval process. A borrower’s capacity to service his or her home loan is a key determinant that banks analyse,” he says.

Promod says among other steps, banks also examine the Central Credit Reference Information System (CCRIS) records to determine the number and quantum of other loans that the borrower has as well as the payment track record. CCRIS is a key decision-making tool when it comes to retail loans. Anandakumar does not foresee the demand for residential property loans to be significantly impacted by the proposal to reduce the LTV ratio to as low as 70% for third and subsequent house purchases.

“Any individual who is purchasing a third residential property is either likely to be sufficiently affluent or a reasonably savvy property speculator.

“In either case, a 10% to 30% reduction in the LTV ratio is not sufficient to deter a potential purchase,” he says.

A more effective way to control an unhealthy appreciation in property prices would be to reduce the expectation of potential gains that triggers speculation, he adds.

“This could be done via the implementation of a robust property gains tax that can, if appropriately structured, reduce the incentive to speculate,” he says.

TA Securities says while the proposal should not have any impact on first-time home buyers, it could curb speculation and dampen loans growth.

“Assuming residential loans fall by 10% in 2011, this could lower our 2011 loans growth assumption to 10.6% from 13.6%.

“We also estimate that a 10% decline in mortgages should shave some 8% off our average financial year 2011 net profit forecast for banks under our coverage,” it notes.

TA Securities believes AFG will be the hardest hit due to a large proportion of loans in residential mortgages. Its exposure to the residential mortgage segment represents some 39.4% of its loan book.

By The Star