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Singapore economy 2014-2015: Third of Triple Whammy - Part 1  

2014-11-02 15:08:58|  分类: Economics (Unto |  标签: |举报 |字号 订阅

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In the first of serial article, Singapore economy 2014-2015: First of Triple Whammy, the first whammy has already happened -- the Singapore property market had collapsed, beginning from 4th quarter 2013.

In the second of serial article, Singapore economy 2014-2015: Second of Triple Whammy, the second whammy is imminently near our door-step. Run! Divest all your stock holding now!

In the third of serial article, Singapore economy 2014-2015: Third of Triple Whammy - Prelude, it tells of the seriously flaw in the PAP-led Singapore government, that is, rob its own citizens in every way possible.

In this fourth of serial article, it explains how precarious the two [1] local banks UOB and OCBC are collapsing into the folds of either GIC or Temasek Holdings Sovereign funds. Few Singaporeans realized Temasek Holdings is the biggest shareholder of Standard Chartered Bank, the fourth local bank after DBS, UOB and OCBC.

Let me begin by pointing out to you six key points.

1) Through a carefully crafted spiraling rise in rate of inflation in housing since the implementation of the Great HDB Upgrading program in 1990 (ignore the rest of the economic factors which had also contributed to the spiraling fate of inflation), housing alone contributed to 80% or more of the growth in GDP and it is purely by way of spiraling inflation. Always remember! Inflation robs the poor and gives it to the rich.

2) This is a cold hard fact. All banks are ONLY interested in loaning money to the rich, thereby making the rich richer. You may argue, “No, the banks lend me money to buy a flat or house. Therefore, you are wrong. The banks lend money to people who want to buy a flat over their heads and most of these flats buyers are mere employees or ordinary folks who are not rich at all.”

3) Let me share with you this common sense statement: Every dollar the banks lend to you, a flat or house buyer, goes directly to the pocket of the property developers. The banks lend you money in order to give the same amount to the rich. In the mind of the bankers, they are only interested in moving money from the borrowers in the form of housing mortgage loans to the pocket of the rich developers. In the process, they make compound interests over 25 to 30 years.

4) Please do not forget this other cold hard fact: first, the banks had already made a huge advancement to the property developer in the form of working capital and loan to pay for the purchase of the piece of land and development charges [2]; second, mortgage loan is the only feasible way to move a lot of  money from the buyers to the developer’s pocket.     

5) Housing is the most expensive item in everyone’s life time purchase. How much money shall be printed electronically to facilitate the purchase of HDB flats or private houses? It all depends on the price of the flat or house. In 1990, a furnished 3-room flat sells at roughly an average price of S$60,000. In 2014, a similar size HDB flats (unfurnished) sells at around S$240,000. That is four times increase in the selling price. Assume the banks capped the financing limits to 90% of the selling price of the flat. In 1990, the bank can only dish out a maximum loan quantum at S$54,000. In 2014, the bank can lend up to S$216,000. The difference of S$162,000 (at 90% loan quantum) shall be printed electronically.

How is the S$162,000 created in the banking system?

Assume the banking system is a black box, meaning, there is no need for us to understand the nitty-gritty of how the banking system works. The answer to the above question is: The government just prints money by way of an electronic transfer. (At this juncture, ignore the other much more complicated tools or banking instruments.)  

·         First, MAS play with one of the few monetary tools to allow an increase amount of money say, S$162,000 to flow into the account of the banks, electronically.

·         Second, the bank now has an excess of S$162,000 (for reason of a simple illustration) which it can now lend to the buyer of a 3-room HDB flat.

·         Third, the S$162,000 is electronically transferred from the bank account to the corporate account of the property developer [3]. 

·         Fourth, the property developer keeps his money as deposit with its corporate bank account (which could be in another bank).

·         Fifth, the banking system (the combination of all banks operating in Singapore) retains the full amount of S$162,000. 

The above is easy to understand. When money is printing electronically, the computerized banking system moves it around efficiently. It sufficiently explains the explosive growth in the supply of money in the banking system [4]. While spiraling inflation is one of the most important tools in making goods sell a higher price, ultimately, it is higher selling price that enables more money to be printed electronically. Conversely, collapsing property prices does the reverse.

6) The large amount of money printed electronically via the above five steps, if way too excessive, must shrink in order to find its equilibrium -- a condition in which all banks must meet the statutory Tier 1 Capital equity ratio, resulting in a stable banking system that the people continue to trust the continuity of banks, thereby, preventing a recurrence of bank runs.

When the borrower cannot pay the monthly installment on time for three months in a row, the entire lot of S$150,000 (perhaps, S$12,000 has been repaid in several earlier installments) is considered non-performing loan and must be parked under a special account called, “Provision for bad debt”. If the borrower could not pay installment for six-months in a row, the said S$150,000 shall be classified as bad debts. For proper accounting purpose, the bad debt must be deducted from the total equity attributable to the bank’s shareholders which consists of the shareholders’ fund and retained earnings (or disclosed reserves [5]). Instead of calling it ‘bad debts’, the bank generally uses a more neutral phrase, Non-performing Asset or NPA. Note: Ignore the word Asset as in Non-performing Asset because technically, it is a forgone asset that has zero value until a portion of it is recovered, say, after the foreclosure procedure [6] is completed.

Next, there is a regulated rule that all banks must adhere to, that is, the Tier 1 capital ratio.

First, let’s understand Tier 1 capital is the core measure of a bank's financial strength from a regulator's point of view. It is composed of core equity capital or total equity attributable to the bank’s shareholders. Due to the inability of the borrower to pay for installment for six-month or longer, the S$150,000 which is now classified as Non-performing Asset (strictly, bad debts) shall be immediately taken off the total equity attributable to the bank’s shareholders.

Second, the Tier 1 capital ratio is the ratio of a bank's core equity capital (numerator) to its total risk-weighted assets or RWA (denominator). For simple illustration, when a borrower could not pay up his monthly installments, the bank total RWA (denominator value) remains the same. However, the total equity attributable to the bank’s shareholders (numerator value) shall be reduced by S$150,000. This means, the Tier 1 capital ratio shall drop slightly.

In year 2008, a large number of home-buyers in the USA who bought houses using Sub-prime mortgage loan failed to pay their monthly installments. The banks’ core equity capital kept shrinking, so did the Tier 1 ratio, pushing the banks to declare bankruptcy. If not for the artificially printing of huge amount of money, some say, US$128 trillion to boost up the core equity capital of the banks around the world, most of these banks would have disappeared.

Therefore, whether the banking system will collapse once again in 2015, it depends on two factors.

1)      How fast the Tier 1 capital ratio falls below the regulated minimum ratio.

2)      The ability of the US Federal Reserve in printing electronic money, in the same light as the US$128 trillions.    

Let’s get back to look at the health of the Singapore Banking System.

1) We already know the Singapore property sector is collapsing. Please re-read “Singapore economy 2014-2015: First of Triple Whammy” at url

http://ericwoonct.blog.163.com/blog/static/181911362201410103322447/

Since the beginning of year 2014, more and more properties are going under-waters, meaning, the current value of the flats (or houses) is lowered than the current amount of outstanding loan. Technically, this is not allowed, meaning, the bank can ask the borrower to top up the difference. Most banks choose not do to do if the borrower is paying his installment regularly and on-time. Though the situation is alarming, and it has been hugely alarming for the past ten months, no one wants to ring the alarm bell.  

2) The article, “Singapore economy 2014-2015: Second of Triple Whammy” at url

http://ericwoonct.blog.163.com/blog/static/181911362201410134940902/ points to an imminent financial meltdown in the Singapore stock market.

Should this happens, the ability of the borrowers in making prompt repayment in their monthly installment can be hit. The moment these borrowers who lost a lot of money in the looming stock market collapse predicted to occur by mid-2015, the banks are forced to move these underwater properties to the Non-performing Assets account. This move shall severely damage the banks’ Tier 1 capital ratio.  

Let’s take a close look at OCBC bank.

“As at 31 December 2013, total nonperforming assets (“NPAs”) stood at S$1.30 billion[[7]] or 0.77%[[8]]. Customer deposits were S$196 billion as at 31 December 2013. The loans-to-deposits ratio as at 31 December 2013 was 85.7%. As at 31 December 2013, the Common Equity Tier 1 capital adequacy ratio (“CAR”) was 14.5%.”

The S$1.3 billion NPA for OCBC looks healthy at 0.77% of total mortgage loans (178 billion, i.e. 85.7% of 196 billion). However, we do not know what the NPA amount shall be by Dec 2014. Common sense tells us, the NPA can deteriorate very fast. A year down the road, come Dec 2014, the private property price had gone down by more than 20% and it is worse for the HDB market. By Dec 2015, the property price is projected to go down by another 20%.

This is a simple postulation. By 31 Dec 2014, OCBC’s NPA should be several percentage points and not 0.7% anymore. At an NPA ratio of 4.5%, OCBC’s Tier 1 capital equity ratio should have fallen below 10%, the minimum ratio set by MAS. Come 31 Dec, 2015, the situation could be worse off by a factor of several times, resulting in a Tier 1 capital equity ratio in the low teens. It then needs the transfusion of a huge amount of money in order to boost up its Tier 1 capital equity ratio.

As of today, Nov 1, 2014, the author bet the PAP-led government shall poach on UOB and OCBC fast deteriorating Tier 1 capital equity ratio and forced into the fold of either GIC or Temasek Holdings. Why?

By mid-2015, both GIC and Temasek Holdings should have been severely hit by the collapse in the world stock markets. It is too eager to swallow up any good entity to make up for its huge recent losses. UOB and OCBC are nice acquisition targets.

Can UOB and OCBC escape the above ill-fated moment?

No!

This is because the Singapore property bubble had gone too gigantic and is bursting now. What these banks are actively doing now is shoring up its cash reserves and hardly gives out new loan. This leads to a positive cash inflow for these two banks, causing a shrinking supply or ‘negative printing’ of money for the Singapore Banking System.

Let take a quick look at Standard Chartered bank, the fourth Singapore local bank after DBS, UOB and OCBC.

1) Ten years of record profits for Standard Chartered bank came to an abrupt hall in 2012.  This is pure financial manipulations for ten straight years. How can this happen during the financial tsunami of 2008-2009 when the world banking system almost collapsed.
2) It has since been hit by surging bad debts in key market in China and India. Bad debts before 2012 has to be gradually written off after that.
3) Aims to cut 80-100 branches due to high cost. This is merely to please the investors. Btw, office rental is bloody high in Singapore. Why not? 
4) Investor were concerned over its rising bad debts and non-performing loans and asking whether management is doing enough to tackle problems. How to tackle this problem when the property market is collapsing?
5) What is the meaning of revival plan? Revival means an instance of returning to life or consciousness. Haha! The clue to the health of Standard Chartered is in this word, revival.
The above four points were raised in article, "Standard Chartered to axe 80-100 branches under revival plan" published on Nov 11, 2014. See url  
https://sg.finance.yahoo.com/news/standard-chartered-axe-80-100-110345494.html   
      

In summary, economics is a complicated subject. Henceforth, the author chose to break it down into five separate articles, each focusing on a single topic. Please read these articles in the following sequence.

Singapore economy 2014-2015: First of Triple Whammy

Singapore economy 2014-2015: Second of Triple Whammy

Singapore economy 2014-2015: Third of Triple Whammy (Prelude)

Singapore economy 2014-2015: Third of Triple Whammy - Part 1

Singapore economy 2014-2015: Third of Triple Whammy - Part 2


       [1] The author counts DBS out because it is owned by the L family.

[2] Under Singapore law, development charges are a tax on the enhanced value of land, resulting from the Government approving a development of higher value.

[3] HDB is the primary developer of most (>95%) HDB flats.

[4] This is exactly how large amount of money has been printed electronically by the US Federal Reserve. So long there is a borrower who wants US dollars to pay to somebody else the banking system which is under the control of the US Federal Reserve Board can instantaneously print more electronic money and shove it around the world.

[5] The choice of word, such as disclosed reserves implies there are some other reserves which are not disclosed. Usually these undisclosed reserves are negative in nature, meaning, severely impairing the core equity capital if they are fully disclosed. Note: Please do not think you can read the bank reports. It is all being heavily manipulated.

[6] The bank sells the property that is held as the collateral for the mortgage loan. Such fire sales, often is at depressed price, usually sold at a big margin of discount.

[7] http://www.theasianbanker.com/resultwatch/ocbc-group-posts-q4-2013-net-profit-of-$565m

[8] As reported, UOB’s NPA is at 1.2% while DBS is at 0.9%.

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