Currency rise hits real estate loans
The rapid appreciation of the Taiwanese dollar against the greenback in the past seven weeks is having an unexpected ripple effect on a part of the domestic loan market in Taiwan that was already reeling from regulatory tightening last year.
Banks are shying away from lending to the construction and real estate industries in Taiwan as the domestic currency’s rise is distorting a key ratio governing their exposure to the sectors. Some banks are shunning these property loans outright to avoid breaching the ratio, while others that still have some room to lend are struggling to close syndications without paying up.
“Banks have already been hit by the overall clampdown on property lending in recent years. With the appreciation of the NT dollar, it is like rubbing more salt in the wounds for lenders that had already been affected,” said a senior banker at a state-owned bank in Taipei.
The ratio in question aims at capping the concentration of exposure of banks to the property sector. Under the Banking Act, the total amount of real estate exposure in a bank’s loan book is capped at 30% of the aggregate of its total local and foreign deposits and issued bonds.
Banks with a higher proportion of US dollar deposits are finding this ratio edging closer to the 30% limit if their local deposits fail to grow to offset the impact. That is because US dollar deposits are now worth less in local currency terms, thereby shrinking the denominator of this ratio.
The lenders getting particularly squeezed are those with a higher US dollar deposit base through their business operations overseas, such as CTBC Bank and Mega International Commercial Bank.
As of the end of April, residential and corporate construction-related loans averaged 26.4% of the total local and foreign deposits and issued bonds for banks, according to data from the Financial Supervisory Commission. The ratio had jumped to above 27% for eight banks.
The Taiwan dollar’s rise – the currency has strengthened by nearly 7% since the beginning of May and is currently hovering below 30 to the US dollar – is compounding the challenges for borrowers from the sectors, as well as lenders.
Last September, the Central Bank of the Republic of China introduced various measures to cool down lending to the property sector and rein in soaring home prices, such as raising the reserve ratio requirements for banks or the downpayments for home buyers.
The moves came after the central bank met with 34 local banks in late August and asked them to come up with self-disciplinary measures applied every month to cool their real-estate lending and contain credit risks for the property sector.
Slow down
In the five months ended May this year, construction and property loan deals have slowed to just 10 deals totalling US$2.64bn, down 24.2% from 15 deals totalling US$3.48bn in the same period a year earlier, according to LSEG LPC data.
One of the borrowers affected is Taipei-based developer E-Sane International, which launched a NT$5.5bn loan in February. CTBC Bank, which is leading the deal, has recently broadened syndication to invite more banks to the financing, according to several bankers.
“We are not accepting any commercial construction loan applications anymore, and we are seeing heightened syndication risks as it could take longer than usual for these loans to close, as the remaining quotas for banks are getting thinner,” said another senior banker.
“Given the challenges, we would either use some incentives or include terms that require the borrower to maintain an average deposit balance with our bank as part of the criteria before approving a loan,” the first banker said.
Two other bankers said that given the low appetite for these loans, new loans for property and construction sector credits would have to pay at least 4% total interest to attract lenders that still have capacity to lend.
Another option would be to lend to urban renewal projects, which are excluded from the 30% limit. The catch, however, is that the returns on these loans are less attractive.
With financing drying up, small and medium-sized developers could be deprived of an important lifeline, while their larger peers may limit themselves to more urban renewal projects, said the second banker.
Still, others see new opportunities, as banks may be more incentivised to introduce their existing bilateral loan borrowers to the syndicated loan market to manage their exposures and avoid exceeding the 30% limit.
“But that is no panacea. Unless the borrower is a top-tier name with strong financial backing or track record, it would still be hard to bring a completely new borrower to the syndicated loan market, as every bank is facing the same pressure,” said a third banker.