At the end of October, the Ministry of Manpower revealed that Singapore’s citizen unemployment rate had hit 4.9% in September – higher than the peak during the Global Financial Crisis. There are now 97,700 unemployed Singaporeans. And although Singapore’s pandemic management has been one of the best in the world, economic anxiety remains palpable.
But what implications does this have for the Singaporean home loan market, if any? According to the recently released OCBC Financial Wellness Index, 30% of respondents are having trouble paying off their home loans, compared to 21% last year. But we want to look beyond subjective and qualitative responses, and see what the hard loans data reveals.
To find out, we decided to dig into the financial statements and reports of the “Big Three” Singaporean banks – DBS, UOB, and OCBC. Our goal? To see how their non-performing loans (NPLs) and other metrics had trended over the year and make some educated guesses about what they think is coming down the pipeline for Singaporean home loans.
With the banks having recently released their third-quarter reports, we pored over the data and found four interesting common themes.
Theme #1: There Was Minimal New NPLs Throughout the Year (So Far)
The first piece of data we observed was the banks’ non-performing loan (NPL) ratios, which tells us the percentage of loans that are more than 90 days overdue. Put simply, a higher number of NPLs suggest that more people are struggling to repay their loans. Given the pandemic, we naturally expected to see a jump in in the ratio.
However, the data showed otherwise. The banks’ NPL ratios had either stayed relatively flat and, in some cases, even improved. UOB, for instance, had an NPL ratio of 1.6% as of 31 March, which improved to 1.5% as of 30 September. OCBC saw a slight increase, from 1.5% as of 31 March to 1.6% as of 30 September. Finally, DBS’ NPL ratio remained constant at 1.6% for both 31 March and 30 September.
Now, keep in mind that this NPL data isn’t just exclusive to housing loans, but rather their entire loan book. Still, the top-line data shows that there hasn’t been any jump in defaults. For instance, even when we look at new NPLs, there was only a slight increase. For the first nine months of the year, UOB recorded S$778m in new NPLs, compared to S$767m for the first 9 months of 2019. And OCBC saw new NPLs decrease by S$66m over the same period.
The only exception was DBS, which saw new NPLs double from S$724m to S$1,551m. However, this was most likely from the corporate sector. As DBS also noted in its report, it was not seeing much NPL formation other than for unsecured consumer credit (i.e. not housing loans).
Theme #2: Banks Have Been Prudent in Extending Home Loans
The fact that NPL formation has remained muted even amidst the pandemic reflects in part the prudent lending practices by the banks – they are strict in only giving loans to financially stable borrowers. Of course, the LTV and TDSR regulations put in place by MAS also played their role. But we should also give the banks credit where it is due.
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For example, DBS had this to say regarding its share of consumer loans that are under moratorium or relief programmes: “Loan moratoriums increased marginally for corporates, unchanged for consumers. Consumers unchanged at S$5.7bn, mostly owner-occupied Singapore housing loans with LTV well below regulatory thresholds”.
The keywords here are “LTV well below regulatory thresholds”. In other words, the amount of loans outstanding was low compared to the properties’ values. This indicates that the risk of these borrowers going into full default is also relatively low. It also means that the bank could easily help prevent a full default using targeted assistance, especially since these are homeowners (not property investors).
Still, the banks aren’t taking any chances.
Theme #3: The Banks are Progressively Buffering Up
Although NPL formation may have been low, the banks are not taking any chances. All of them have been progressively increasing their buffers to strengthen their resilience against any sudden shock. The metric we are looking at here is the NPL coverage ratio, which tells us how much money the banks have earmarked to cover potential NPLs. A ratio of 100% means that for every $1,000 in NPLs, the banks have set aside $1,000 in the event the NPLs deteriorate into a full default.
Prior to 2020, all three banks had NPL coverage ratios of under 100%. Throughout the year, however, they have gradually added to these buffers. As of 30 September 2020, all three had a coverage ratio exceeding 100%. UOB’s ratio stands at 111%, OCBC’s at 109%, and DBS’ at 107%.
So far, it’s all been good (or at least, not so bad) news. But there is a major reason the banks are beefing up their capital reserves – they are planning for the day all the loan moratorium and relief programmes end.
Theme #4: A Sudden Stop to Loan Moratoriums and Reliefs Could Have a Hard Landing
There is no doubt that these relief programmes have helped prevent a spike in home loan defaults. The banks have recognised this openly. UOB noted that “NPL formation remains low as loan moratorium reliefs in the region are still in force”. And OCBC said that “Repayment upon moratorium relief exit may be better than expected, but sustainability not certain yet. Further relief to be targeted and disciplined”.
Reading between the lines, this means that the banks believe that a sudden stop to these loan relief programmes could result in a spike in home loan NPLs.
Fortunately, MAS’ actions so far have shown that this is highly unlikely. The original home loan moratoriums and reliefs announced in April were originally set to expire at the end of the year. But back in October, MAS decided to extend the relief programme (albeit with modified terms) well into 2021.
As such, we are unlikely to see a “hard landing” for the Singaporean housing loan market. MAS has done its job as a financial regulator admirably – not just during the crisis, but in the years before as well. Exits to the relief programmes will likely be gradual, and while defaults may indeed increase, there is unlikely to be a sudden surge.
While Uncertainty Remains, Singapore Can Weather the Storm
We live in a world governed by probabilities. There is no such thing as absolute certainty, especially when it comes to economics. But our banks are strong, and we have a competent and far-seeing financial regulator. Combine this with our world-leading pandemic management, and the probabilities of us getting through the storm and maintaining a healthy property market are looking good.
That said, if you have any concerns or doubts about anything home loan-related, why not get in touch with one of our friendly Home Finance Advisors? Just fill out this short form and one of them will contact you to provide detailed advice tailored to your personal situation. And for all the useful information you need on home financing, our guides can help.
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This article was written by Ian Lee, an ex-banker turned financial writer who hopes to use his financial background and writing skills to help raise people’s financial literacy levels – a necessity in our modern world.