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Bank of Thailand’s new rules to tighten mortgage lending are credit positive

Under the new rules, the maximum loan-to-value (LTV) ratio will be restricted at 80% on new mortgages for homes worth more than 10 million baht.

Daniel Lorenzzo

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Real Estate promotion billboards in downtown Bangkok

On 4 October, the Bank of Thailand (BOT, Baa1) announced measures to tighten credit underwriting standards in mortgage loans.

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Under the new rules, the maximum loan-to-value (LTV) ratio will be restricted at 80% on new mortgages for homes worth more than 10 million baht.

The same LTV restrictions will apply for the purchase of a second home irrespective of the property value. Banks will also be prohibited from providing advances that exceed the value of a property.

New measures to target speculative buying

The new mortgage-lending rules are credit positive because they will help to reduce speculative buying and require banks to focus on borrowers with better credit quality.

We expect the measures to improve the asset qualilty of banks’ newly originated mortgage loans. Amid Thailand’s prolonged low interest rate environment, property prices have been rising steadily.

A 78% increase in condominium prices

According to the Bank for International Settlements, residential property prices in the Bangkok area have increased 49% in the past 10 years; nevertheless, the increase in condominium prices has been sharper at about 78% during the same period.

In addition, banks’ credit underwriting standards for mortgage loans have deteriorated because a greater proportion of newly originated mortgage loans have higher LTV and lower debt servicing capacity.

The housing NPL ratio rose to 3.4%

The share of high-LTV mortgages, or mortgages with LTV ratios of more than 90%, increased to about 49% of newly originated loans at the end of first-half 2018, from about 34% at the end of 2013, while the median loan-to-income (LTI) ratio rose to around 3.8x at the end of the first-quarter 2018, up from 2.7x during the same period (Exhibit 1).

For Thai banks, housing loans are the only type of consumer loans where the nonperforming loan (NPL) ratio has been increasing: for other retail segments, NPLs have remained stable or improved. The housing NPL ratio rose steadily to 3.4% as of June 2018 from 2.4% three years ago (Exhibit 2).

In addition, household leverage remained high in Thailand at 77% of GDP at the end of June 2018, although the growth rate has slowed.

Mortgages are a big business for Thai banks, accounting for 17% of systemwide loans and about 50% of total retail loans at the end of first-quarter 2018.

As such, the deterioration in the mortgage underwriting quality can have significant effect for banks if the property prices decline substantially.

The macro-prudential guidelines from the BOT follow similar guidelines issued by other countries in the region in the past few years (Exhibit 3).

Source : Moody’s Investors Service comment: Banking – Thailand: Bank of Thailand’s new rules to tighten mortgage lending are credit positive.

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