Analysis: Lower loan-to-value policy: Impact on banks, property and auto
In an effort to prevent a potential bubble burst in consumer loans, the central bank (BI), effective in June 2012, has finally increased the minimum down payments (DPs) for mortgage and automotive loans, translating to lower loan-to-value (LTV) policy.
BI increased down payments (DPs) for commercial vehicles to 20 percent, 2 wheelers to 25 percent and 4 wheelers to 30 percent. For multi-finance companies, which fall under the jurisdiction of the Indonesian Capital Market Supervisory Agency (Bapepam), there are plans to also increase DPs: commercial vehicles the same to 20 percent, but to a lesser degree for 2 wheelers and 4 wheelers to 20 percent and 25 percent respectively.
Likewise, DPs for mortgages are raised to a minimum of 30 percent from 10-20 percent previously. This policy, however, is not applicable on the government’s subsidized mortgage under the FLPP (Housing Liquidity Facility Loans) program or housing with total area of less than 70 square meters. Our take on this BI policy on the banking, property and auto sectors are highlighted below.
With mortgage and auto loans accounting for Rp 289 trillion, only 13 percent of the banking industry’s loan portfolio, BI’s new policy would have limited impact on overall loan growth in our view. Additionally, this lower LTV policy should generally offer larger protection to their principles from defaults. Although gross nonperforming loans (NPL) of mortgages and auto are currently low at around 2 percent and 1.3 percent respectively, there are concerns that future loan performances could somewhat be adversely impacted by the following factors: (1) Fuel price increases, accounting for approximately 30 percent of low-end household spending and (2) Overheating in white-goods financing deteriorating consumers’ ability to service debts.
It is undeniable that skyrocketing property prices in some locations have raised concerns for some banks, although over 70 percent of home buyers reportedly utilize cash installments rather than loans. Nevertheless, higher DPs should help discourage speculation, keeping property prices at bay and prevent bubble burst as 2011 mortgage growth had reached a new high of 29.9 percent vis-à-vis 2006-10 compounded annual growth rate of 23.6 percent while industry loans grew 24.1 percent in 2011 and at 19.7 percent in 2006-10 compounded annual growth rate.
In 2010-11, total marketing sales of seven property companies under our coverage increased 55-67 percent year-on-year, mostly stemming from higher selling prices, which are partially driven by speculations in our view. Thus, BI’s new regulation to implement a maximum of 70 percent LTV for housing mortgage starting June 2012 will regulate price increases in the property market, resulting in more prudent property transactions.
While this will undoubtedly lower future property purchases, 2012-13 earnings within our property counters will be protected by high pre-marketing sales in the past two years. Additionally, with inflation on the rise (property = anti-inflation hedge), coupled with BI’s plan to hold its benchmark rate in place will mean sustainable low mortgage rates to help support our property sales growth estimate of 20-25 percent this year. Nevertheless, we do expect some temporary sales deceleration when the government implements its fuel price hike.
On 4 wheelers, with current market DPs of 15-20 percent, car sales to middle-up income earners will be more resilient. Note that over the last 7 years, 4 wheelers prices and volumes had risen over 50 percent and 67 percent respectively, testimony to strong middle-up Indonesians’ purchasing power. Additionally, we believe that higher DPs, will eventually raise the quality of auto buyers. Over the medium term, we believe auto sector’s growth will remain strong, particularly with the introduction of low-cost green car products to enter the market as-soon-as the end of 2012.
On 2 wheelers, to mitigate the impact of this policy, we expect dealers to provide subsidies (i.e. cash backs) for auto customers to help offset higher DPs. Nevertheless, with headwinds ahead and given that 2011 sales growth having slowed to 8.5 percent year-on-year vs 26.2 percent year-on-year in 2010 (i.e. even on current market down payments of around 10-15 percent), we see downside to our 2 Wheeler figures in the short term. Thus, we lower our 2 wheelers unit sales y-y growth estimate from 10 percent to 2 percent.