Kasikorn Research Center has revised its growth forecast for housing loans in the commercial banking sector for 2017 down to 5.0-6.0% with a median of 5.5% from the previous estimate of 6.0-8.0% (original median of 7.0%), reflecting the subdued housing loan disbursement in the first half of the year, which aligns with the slowdown in property transfers and the continued cautious credit policy.

          It must be acknowledged that the overall housing loan disbursement by commercial banks in the first half of 2017 is not very optimistic. The slowdown in housing loans is evident in both commercial banks and specialized financial institutions that are key players. The Kasikorn Research Center predicts that housing loans in the financial system during the first half of this year will increase by less than 50 billion baht or grow less than 6% YoY, which is the lowest growth rate in several years. The slowdown in housing loans can be attributed to three main factors: 1) The loan rejection rate for housing loans remains relatively high compared to the previous year, 2) Demand in the housing market is constrained by rising property prices, while purchasing power and consumer confidence will take some time to recover, and 3) Specific factors related to last year's high base due to government property stimulus measures that ended in April 2016, combined with seasonal factors where the first quarter typically sees more loan repayments than other quarters.

Estimated Growth of Housing Loans in the Commercial Banking Sector

 

2015

2016

2017f

1. Outstanding housing loans of commercial banks (trillion baht)

1.846

1.974

2.07-2.09

2. Growth rate of housing loans of commercial banks (%YoY)

9.3%

6.9%

5.0-6.0%

Source: Bank of Thailand, Forecast by Kasikorn Research Center

          However, looking ahead for the remainder of the year, the Kasikorn Research Center believes that although the reduction in loan interest rates for prime retail customers of commercial banks in mid-May 2017 will help alleviate debt repayment burdens and increase purchasing power for customers, demand for housing among potential customers is slowing down, as reflected in the contraction of property transfer volumes and the continued cautious credit policies of commercial banks to address the pressures from rising non-performing loans (NPLs) in housing loans, leading the Kasikorn Research Center to revise its growth forecast for housing loans in the commercial banking sector this year down to 5.0-6.0% (from the previous estimate of 6.0-8.0%) or a net increase of only 98.5-118.5 billion baht from the end of 2016. Meanwhile, the increase in housing prices per unit, combined with the trend of minimal loan repayments from current borrowers, means that housing loans still see a net increase and do not contract as sharply as the decline in property transfer volumes in Bangkok and its vicinity, which the Kasikorn Research Center expects to contract significantly by around 14.4%-11.0% compared to 2016. The Kasikorn Research Center has summarized key points affecting the housing loan market trend in the near future as follows:

          The ratio of NPLs to housing loans is rising rapidly... which means that financial institutions still need to maintain a tight credit policy and control the issuance of housing loan campaigns by commercial banks.

          The Kasikorn Research Center believes that commercial banks may still need to continue using a cautious credit policy (after the latest NPL ratio of housing loans in the commercial banking system rose to 3.23% of total housing loans in Q1/2017 from 2.93% at the end of 2016) to maintain the quality of new housing loans. This includes setting a relatively cautious debt-to-income ratio, determining an LTV ratio that aligns with customer risk, and tightening controls for applicants seeking a second home loan to prevent speculation. When combined with policies for close debt monitoring, such as pre-due payment notifications and restructuring assistance or extending repayment periods for customers facing difficulties, this should help keep the NPL ratio of housing loans at the end of 2017 from deviating significantly from the Q1/2017 level.

On another note, commercial banks will likely collaborate more closely with real estate developers as this will help them reach target customers with stable incomes and lower chances of default (such as salaried employees, special profession groups, and those who will be relieved of their first car loan this year, totaling over 300,000 people) and can launch more specific housing loan campaigns for potential customers. Additionally, this will indirectly benefit the management of the real estate loan portfolio of commercial banks. Furthermore, commercial banks will likely offer various special interest rate campaigns, both fixed and floating rates, to capture market share in new loans. At the same time, offering loan amounts for purchasing and renovating homes at a relatively high Loan-to-Value Ratio (LTV) and campaigns waiving various fees, such as appraisal and legal fees, may also be seen continuously for the remainder of the year.

          The interest rate cuts... will likely benefit consumers in terms of reduced debt burdens and increased access to loan amounts. However, commercial banks will still need to adapt to the situation of declining returns.

          The reduction in loan interest rates for prime retail customers (MRR) of large and medium-sized commercial banks by 0.25-0.50% per year in mid-May is believed by the Kasikorn Research Center to not significantly support the growth of housing loans, as it has limited effects on stimulating consumer decisions to purchase new homes due to the large debt and long repayment period. However, it will have some positive effects on customers already utilizing housing loans and/or those planning to buy homes this year in two main areas: reducing expenses and increasing access to larger loan amounts. The reduction in MRR leads to an immediate decrease in the debt repayment burden for housing loan customers referencing floating interest rates, averaging about 200 baht per month for every 1 million baht of loan. At the same time, the decrease in MRR also increases the chances for some customers to receive higher loan amounts.

          However, the reduction in interest rates poses a challenge for commercial banks to maintain the actual interest rates of each campaign in line with the risk-adjusted returns on capital (RAROC) and the cost of interest payments that may arise.

[1] Based on the assumption that the loan interest rate equals MRR and the average repayment period is 5 years.

[1] From a loan amount of 300 billion baht under the Royal Decree on Financial Assistance for those affected.

Adjusted according to market interest rates. Additionally, commercial banks also face challenges in retaining customers looking to refinance loans with the bank, especially when some loans from the soft loan amounts borrowed for housing loans will reach the end of the special low-interest period in the second half of this year, which may lead to a higher level of refinancing compared to the first half of the year. The Kasikorn Research Center believes that each bank will likely offer special interest rate campaigns for customers applying for refinancing and/or offer special interest promotions to good credit customers immediately when they enter the floating interest rate period to maintain market share in loans. At the same time, commercial banks will likely market multi-purpose housing loan products for debt-free homes (Home-Equity Loan) more, as this loan product offers higher returns and lower risks compared to other products due to the relatively low LTV ratios, to generate additional returns from customers needing capital.

          In summary, for the remainder of 2017, commercial banks will likely continue to face challenges in sustaining the growth of housing loans and the returns from loan disbursement, while maintaining a strict credit policy to guard against asset quality issues, amidst consumer purchasing power not fully recovering, as reflected in the slowdown in property transfers. Although the reduction in MRR loan interest rates may help reduce the burden for those utilizing housing loans, for these reasons, the Kasikorn Research Center has revised its growth forecast for housing loans in the commercial banking sector for 2017 down to 5.0-6.0% with a median of 5.5%, slowing down from the previous year's 6.9%.

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