SINGAPORE (Dec 2): The Financial Stability Review (FSR) released by the Monetary Authority of Singapore on Nov 28 highlights the risk of an economic slowdown, but this has not caused systemic problems and unemployment remains in check. Still, given slowing GDP growth this year, MAS says labour demand could moderate in the near term.
Slowing economic growth and a softer labour market could negatively affect household incomes and their ability to service mortgages. So far, MAS’s simulations indicate that, in general, households’ mortgage servicing ratios would remain manageable under stress situations. The MSR for the median household remains below 60% under a severe stress scenario of a 10% fall in income, on top of a 250-basis-point increase in mortgage rates (Singapore Interbank Offered Rates [Sibor] and Swap Offer Rates have fallen this year). Lower-income households that have purchased private properties could face increased stress, however, as their mortgage servicing burdens rise above 70%.
Regression analysis by the International Monetary Fund using data from 1Q2004 to 3Q2018 showed that speculative activity and transactions by foreigners and corporates were significantly related, and were the principal drivers of private residential property price increases in Singapore.
The share of transactions by corporates and foreigners remained stable, accounting for 1% to 2% and 5% to 6% of total transactions respectively over the past three quarters. This is lower than the high singledigit figures before the cooling measures were introduced in 2011.
Oversupply concerns persist
While residential vacancy rates have fallen from the peak of 8.9% in 2Q2016 to 6.1% in 3Q2019, MAS cautions that a large supply of unsold units in the medium term could also weigh on the property market. The number of unsold units from launched projects (excluding executive condominiums) has doubled from 2,172 in 3Q2018 to 4,377 in 3Q2019. “This increase will [probably] be exacerbated in the medium term as developers continue to redevelop and launch projects on sites arising from the large volume of en-bloc sales from 2017 to 2018. The increase in the unsold inventory could place downward pressure on prices in the medium term, if unaccompanied by a corresponding rise in demand,” MAS warns in its FSR.
Given these downside risks, prospective buyers should be mindful of risks and remain prudent before entering into longterm decisions, including buying a property as well as taking on and servicing a mortgage, MAS adds.
NPLs for housing loans stable
The asset quality of housing loans remains strong, with the non-performing loans (NPL) ratio at 1% in 3Q2019, unchanged from a year ago. The share of loans that are more than 30 days in arrears is trending down and stands at 0.4% in 3Q2019.
Part of the reason is the benign credit cycle during a low interest rate environment. Three-month Sibor rose to a high of 2.01% in May and has fallen to 1.88% in October as a result of recent federal funds rate cuts by the US Federal Reserve.
The banking system’s overall NPL ratio showed a slight uptick to 2% in 3Q2019 from 1.9% in the same period last year. This figure is for all the banks, with the local banks’ NPL ratio remaining lower than the average. The NPL ratios for trade-related and manufacturing sectors increased in 3Q2019 to 9.6% and 4.6% respectively. The special mention ratio, which frequently rises in advance of NPLs, has also risen slightly in recent quarters to 3.0% in 3Q2019 indicating some further weakening in asset quality in 4Q2019.
MAS’ annual industrywide stress test results show that, in Singapore, banks in general have the capacity to withstand severe shocks. More importantly, the results of the annual IWST showed that domestic systemically important banks (D-SIBs) can withstand severe shocks.
D-SIBs were required to assume a protracted recession centred on a major slowdown in China and disruptions in global financial markets amid ongoing US-China trade tensions and weak global trade. These external shocks are assumed to hit Singapore severely in the form of a significant contraction in economic growth, rising unemployment and substantial declines in domestic asset prices (see table). Under such a severe stress scenario, the stress test results showed that all banks would remain solvent, with their aggregate capital adequacy ratio (CAR) remaining above MAS regulatory requirements (see Chart 1).
Local banks well capitalised, liquid
The local banks have ample capital and liquidity. DBS Group Holdings’ common equity tier 1 ratio is 13.8%, its net stable funding ratio is at 110% and liquidity coverage ratio is at 131%. Oversea-Chinese Banking Corp’s CET1 is at 14.4%, NSFR at 110% and LCR at 154%; United Overseas Bank’s CET1 is at 13.7%, NSFR at 110% and LCR at 144%. The total CARs of the three local banks are well above MAS’s minimum regulatory requirement.
The concern is on interest rates. If they stay lower for longer, there could be pressures on banks’ net interest margins. Nonetheless, the three local banks have strong underwriting standards and ensure adequate provisioning coverage. “Banks should be vigilant to continuing pressures on their foreign currency liquidity positions. An unexpected tightening of global liquidity or stresses in the forex swap market could accentuate short-term foreign currency liquidity conditions in the banking system,” MAS cautions.
