SENSITIVITY OF BANK STOCK RETURNS TO REAL ESTATE

Abstract

The purpose of this study is to examine the effectiveness of the Monetary Authority of Singapore (MAS) separation measures to reduce the contagion of non-financial to financial businesses of the banking sector in Singapore. This study tests for possible shifts in bank stock returns sensitivity to real estate in Singapore in response to the separation measures. Review on the divestment activities of the three banks in Singapore namely DBS, OCBC and UOB showed that there was little property or property related assets divestment carried out in response to the separation measures. The results of the inclusion of the real estate factor in the analysis of bank stock returns sensitivity in Singapore shows that the banking sector has already been isolated from the contagion effects of the real estate sector. The analysis on the shifts in sensitivity of the bank stock returns to real estate show that the sensitivity has in fact been reduced after the announcement of the measures. However, since there has been little divestment of property and property related assets, the reduction in sensitivity is not due to the divestments in response to the measures. A further analysis of the individual banks yields similar results. The sensitivity of each bank stock returns to real estate has already been low prior to the announcement. However, a comparison of the three banks shows that DBS experienced the highest reduction in sensitivity. UOB has experienced a lower shift as compared to that of DBS.Interestingly, OCBC yields contrasting results. The sensitivity of OCBC stock returns to real estate has in fact increased in response to the announcement. Overall, the announcement of the separation measures does have an effect on the bank stock returns sensitivity to real estate in Singapore.