Investors and credit ratings agencies also face a difficult task in calculating how much debt property developers hold.
KUALA LUMPUR: Banks in Asia-Pacific (Asia-Pac) will face heightened property risks over the medium term and residential property risks are highest for Australian and New Zealand banks, says Fitch Ratings.
In its report issued on Friday, it cited these banks had relatively high exposure to the sector and heavily indebted household sectors were suspectible to a rise in interest rates or unemployment.
However, Fitch said household leverage has started to decline in the emerging markets where it was highest – Malaysia and Thailand.
“We expect some fallout from over-supply in Malaysia, but risks to banks should be manageable as their exposure to the more vulnerable segments has remained small,” it said.
Fitch said Asia-Pac banks had relatively high exposure to the property sector and hence will face rising risks over the medium term, “given their relatively high exposure to the sector and the susceptibility of heavily indebted household sectors to a rise in interest rates or unemployment”.
The ratings agency said for Australian and NZ banks, the residential property risks were highest and might remain elevated in the short term. It cited low interest rates and high house prices as continuing to drive mortgage growth, albeit it a slower rate.
Residential property loans accounted for 43% of Australian bank assets in December 2017, up from 39% five years earlier, while in NZ the share rose to 46% from 43%.
As for Thailand, it said strong commercial real-estate lending growth by Thai banks in 2017 reflected an improving operating environment and followed sluggish growth in previous years, although there are still risks associated with consumer lending. Real-estate lending growth has also remained high in the Philippines.
Hong Kong banks' property risks were on the rise, with the territory being one of the few markets where property lending has accelerated over the past year, while intense competition continued to pressure margins.
“Mortgages account for a relatively low proportion of system assets, but a sharp housing market downturn could hurt sentiment and expose vulnerabilities, as rising prices have boosted private-sector wealth, banks' reserves and collateral valuations.
“Banks' rising exposure to mainland Chinese property is driving real-estate lending growth. Korea's high household debt would make its economy less resilient to shocks, including a housing market downturn. Household debt ratios are unlikely to decline over the medium term,” it said.
However, Fitch also pointed out household assets are also relatively high and banks' property exposure was healthy overall, with low delinquencies and moderate LTV ratios.
“The same is also broadly true for Singapore, where we expect a more buoyant property market to support bank lending in 2018,” it said.
Fitch also pointed out Asia-Pac regulators have actively tightened macro-prudential measures in an effort to strengthen banking-sector resilience to potential property risks.
These measures have helped cool property markets in Singapore and Taiwan, while the tight stance has generally bolstered loss-absorption buffers and supported lending standards.
Nevertheless, continued rapid lending and a further rise in risk appetite could increase the prospects of negative ratings action in the medium term, particularly in the absence of commensurate reinforcement to buffers, it said.
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