Oversupply of commercial space to impact banking sector

PETALING JAYA: The oversupply of office space and shopping complexes would impact the banking sector negatively but not significantly, a CIMB Research report on banking says.

Quoting Bank Negara, which had held an analyst briefing in late September, the report drew attention to Public Bank Bhd , the largest financier of commercial space at RM78.7bil as at end-December 2017, 93% higher than Malayan Banking Bhd ’s (Maybank) RM40.8bil.

Non-residential mortgages (NRMs) made up 25.8% of Public Bank’s total loans at the end of 2017 and 8.3% in Maybank, the report said.

RHB Bank expanded the fastest, with NRMs almost tripling in the past five years. When contacted to clarify whether NRMs include bridging loans and long-term commercial loans, analyst Winson Ng said NRM was a broad term covering commercial property.

“We are pessimistic about the demand prospects for commercial property, given the oversupply of both,” he said in his report.

Given the rise in online retail, the private sector on the current cost-cutting mode and given the more robust assessment of project viability and a developer’s financial strength, loan approval rates for the construction and purchase of both segments of property are expected to trend down, going forward, Ng’s report said.

Nonetheless, Bank Negara at an analyst briefing said the oversupply of commercial property is expected to have minimal impact on banks’ asset quality because most banks have tightened lending for office space and complexes.

Bank’s asset quality would be impacted by non-performing loans, which, according to the report, has “outpaced” NRM growth. Gross impaired loans (GILs), which is another term for non-performing loans, more than doubled in commercial mortgages over the four-year period from end-2013 to end-2017 for almost all local banks. This was partly due to a low base in 2013, the report said.

So “we do not see this as alarming ...,” the report said, adding that Affin Bank’s impaired loans for non-residential mortgages saw the steepest increase, rising more than 10 times in the past four years from RM23.7mil to RM272.5mil.

Maybank’s GILs for non-residential mortgages surged by 7.3 times over the same period between 2013 and 2017.

Starting this year, banks have strengthened their assessment process for financial proposals of new property/ construction projects by having a more robust assessment of the project viability, the financial strength of the developer and location-specific factors, CIMB said, quoting Bank Negara.

CIMB said banks’ exposure to both these segments of the property sector in the form of loans, which include end-financing to buy offices and complexes, financing for construction/development of such properties and corporate bond holdings and sukuk, was stable at RM89bil, quoting Bank Negara.

The research house is retaining a neutral rating on the banking sector, given that the oversupply is expected to persist going forward and this would affect banks’ loan growth, asset quality and credit costs. Market conditions in both segments were subdued in the first half of 2018.

“This neutral rating is premised on the earnings risk facing the sector, such as weak business loan growth and margin erosion,” CIMB said.

Banks may also have to put aside higher provisions for impaired borrowings for this property segment, assuming lower foreclosure values.

The report said developers and (local) authorities may put the lid on commercial projects and only proceed with those that have been planned or continue with work-in-progress.

So, it is a combination of push-and-pull factors within the office and mall space which is impacting lending and banks’ profitability.

The CIMB report said there is an incoming supply of 38 million square feet (mil sf) of office space (in the Klang Valley), quoting Bank Negara.

New shopping mall space in the Klang Valley, Penang and Johor is exerting downward pressure on occupancy and rental rates, although developers are deferring or downsizing their projects, CIMB added.

CIMB explained that companies were on cost-cutting mode, with expectations of them limiting or reducing floor space to minimise rental costs, which make up a big chunk of outgoings.

Even banks are shrinking their branch networks to go digital, with Maybank reducing its total number of branches from 400 to about 360 over the last few years.

At the end of August, NRMs accounted for 13.2% of the Malaysian banking industry’s total loans, based on Bank Negara’s monthly highlights and statistics. In comparison, residential loans accounted for about a third.

Over the 12 months from 2016 to 2017, NRMs accounted for 13.7% and 13.5% of total loans, a marginal decline. NRMs saw rapid expansion in 2011 and 2012.

CIMB said the shrinking contribution of NRMs to industry loan growth was one of the reasons for the slowdown in loan growth in the past two to three years. Applications for NRMs peaked at RM19.8bil in 2013 at the end of the property boom, which started in 2009/2010.