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Correction in realty prices may hit banks (The Economic Times 1st Feb 2008)A sharp correction in property prices on account of the turmoil in global markets could impact the performance of Indian banks, according to the latest report by ratings firm Standard and Poor’s (S&P). S&P said that Asian equity markets are influenced by the performance of global markets. This has been amply demonstrated both during a boom or a slump, as it is transmitted instantaneously, the report said. The equity market volatility, in the past week, is perhaps a harbinger of the future.
Since local property markets’ fortunes are linked to the performance of capital markets and economies, these linkages are important for banks. This is because the equity markets are a source of trading and fee-income streams. Hence, a reversal of the strong rally of the past few years has the potential to suppress Asian banks’ earnings. A significant decline in property prices would hurt the quality of Asian banks’ commercial real estate and residential mortgage portfolio. Eventual losses would vary across the markets, depending on the proportion of portfolio linked to property. The losses would also depend on the effectiveness of banks’ risk management systems and the length and extent of the slump in the respective property markets. And banks in China, Singapore, and India are relatively more susceptible than others in the region, said the S&P report. More
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