PETALING JAYA (Nov 20, 2013): A new Bank Negara Malaysia (BNM) ruling that requires banks to give out property loans based on net selling price, which excludes rebates and discounts, rather than gross selling price may affect loans growth for banks this year, Alliance Research Sdn Bhd said.
Its analyst Cheah King Yoong said a BNM circular sent out to banks last Friday announced not only the expected ban on the developers interest bearing scheme (DIBS) and the interest capitalisation scheme (ICS), but also an unexpected rule for all banks to determine their loan-to-value (LTV) ratio based on net selling price rather than gross selling price.
Banks can no longer provide financing for projects approved by authorities with DIBS on or after Nov 15, 2013 effective immediately. While those projects approved before Nov 15 have until Jan 1, 2014 before the prohibition is effected.
“We currently project 2014 loan growth target of 9%, supported by stronger growth of business loans stemming from the ongoing implementation of Entry Point Projects under the government’s Economic Transformation Plan, which is expected to fill up the vacuum left by the moderation in household loans. However, in light of the more onerous property lending curb, we will be reviewing this target,” Cheah said in a note to clients yesterday.
The research firm will review its “overweight” recommendation on the banking sector post third quarter 2013 reporting season, after it gets further clarity from management of banking groups under its coverage with regards to the impact of such policies on the banks’ growth prospects.
“We believe that the latest policies implemented by BNM illustrate the sheer determination of the authorities to contain the growth of household debt. These measures, together with potential rate hikes by the central bank, fiscal tightening by the federal government and subsidy rationalisation programme next year, could further drag loan growth momentum in the retail segments, temporarily lead to rising credit cost, and dampen investor sentiments on the banking sector,” Cheah said.
The circular represents the third attempt by the authorities to contain the growth in household debt since the second half of this year. Household debt to gross domestic product currently stands at 83%, one of the highest in the region.
A housing loan agent who declined to be named told SunBiz yesterday that determining LTV based on net selling price has already been practised by some banks, but what the latest ruling by the central bank does is now make it a standard procedure for all banks.
“BNM effectively wants to deter the practice of giving 100% housing loans,” he said.
In the past, banks rely on the sale and purchase value (SPA) in calculating the LTV. Post Budget 2014 however, developers are compelled to disclose the all-in price of properties. As such, banks will determine the LTV using this all-in price.
The new circular also places the onus on banks to have in place sound policies and procedures to ensure valuation of property is reasonable.
“Although the guidelines on prohibition of DIBS is not a surprise following its announcement during Budget 2014, the new rule on “net selling price ” basis for determining LTV ratio is a negative surprise to us.
“While it is difficult to gauge the impact on banks going forward, the fact that this new rule applies to all property financing, including first time home buyers, means that property buyers’ affordability will be affected and this will lead to lower property loans growth,” Cheah said in the note.
He added that the measure by BNM effectively negates developers’ effort to provide other forms of incentives to replace DIBS. Cheah opines that it also neutralises the widespread practice by developers of providing rebates to lower upfront cash outlay by property buyers.