SINGAPORE (BLOOMBERG) - Slumping property and oil prices have dragged a gauge of Singaporean banks' loan quality to the worst in six years, inflating their borrowing costs.
Lenders have placed 2.3 per cent of their loan books in a "special mention" category that signals potential weakness, the highest since 2009. The extra yield investors demand to hold DBS Group Holdings 2019 dollar notes over US Treasuries surged to a record 87 basis points last month. Similar measures for United Overseas Bank and Oversea-Chinese Banking Corp. are the highest in at least six months.
While Singapore's banks are among the best capitalized in the world, loan recovery is suffering after government curbs drove home sales to a six-year low in 2014, oil prices slumped and Southeast Asian economies faltered. Singapore's gross domestic product shrank an annualized 4 per cent quarter-on-quarter in the three months through June, as bank lending fell for three straight months starting February in the longest tumble since 2009.
"You could see higher nonperforming loans and higher credit costs for the banks" because of the oil and property sectors, said Matthew Phan, a Singapore-based analyst at CreditSights Inc.
Soured debt at DBS backed by property increased 39.7 per cent from last year to $524 million at the end of June. Non-performing real-estate loans rose to 1 per cent of all lending at UOB as of June 30 from 0.8 per cent. Oil and gas loans are under some stress, which will continue, Samuel Nag Tsien, chief executive officer of OCBC, said July 31.
The trends may hurt lenders' profitability, according to Eugene Tarzimanov, senior credit officer at Moody's Investors Service in Singapore.
"Banks make good returns if they are growing or margins are widening," he said. "In Singapore, both conditions are not there."
call and an e-mail to the corporate communications officers of DBS and UOB were not answered. An OCBC spokesperson referred to the comments made by the bank's chief executive officer during the analyst call for company views on exposure to oil and property.
Since 2009, Singapore moved to stem a surge in the property market that was fueling discontent in the city-state. The measures included taxes as high as 15 per cent of the purchase price for foreigners.
Moody's also cited the government's guiding housing prices lower without sparking sharper slides in changing its outlook on Singapore's bank system to stable from negative last month. While the credit assessor expects a "mild deterioration in books," the relatively low exposure to commodities including oil should prevent major problems, Mr Tarzimanov said.
Banks and builders face an economy that shrank the most since 2012 last quarter. The city had the weakest-performing luxury residential market in the world for the sixth consecutive quarter at the end of June, according to consulting firm Knight Frank.
Office rents posted the first decrease in more than two years and residential prices have fallen for seven quarters in the longest run of declines since 2002.
While Singapore's lenders mitigate risks by securing loans, their exposure to the property industry represents about 40 per cent of all lending, according to Fitch Ratings.
"We believe the overall health of the Singapore economy is highly correlated with the property market," said Elaine Koh, a director in the financial institutions unit of Fitch in Singapore. "A severe and extended market correction would likely hit the banks' asset quality through a number of channels."