The three local banks reported their 2017 full year financials just before the CNY break which might have seen some of us too busy with the festivities to take notice or digest the info, other than news of the commitment of $1.20 dividend payout from DBS going forward which is a respectable 4.1% yield at today’s closing price of DBS $28.70 (as at 28 Feb). Those who have followed our advice almost two years ago (Jan 2016) and bought DBS shares at $14 on equity term loan then, would be laughing all the way to the bank now. At entry price of $14, that’s 8.5% dividend yield promised by a blue chip stock on top of the almost 100% capital gain. No body will raise an eyebrow paying more mortgage interest to the same bank who is paying him back even more!
Now back to the financials. Most of the banks power ahead in 2017 with both solid broad-based loans growth as well as interest margin pickup in the 2nd half of 2017, after dipping earlier in the year when SIBOR (3-month) made an about turn down after hitting a high of 1.25 back in April 2017.
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As usual, at MortgageWise, we concern ourselves mainly with the performance of the mortgage business amongst the three big boys and see how they stack up against the market. A quick glance of the key ratios (Y-on-Y) are presented below.
DBS registered the strongest and double-digit loans growth which got its CEO to comment in his presentation slides (see below) that their mortgage market share in Singapore grew from 28.7% as at end-2016 to 30.8% at end of 2017. From MAS statistics we know that the total mortgage market in Singapore (including bridging loan which is insignificant amount) comes up to $192.1b and $200.3b as at end of 2016 and 2017 respectively. Working backwards it means that DBS housing loan portfolio in Singapore has risen from $55.1b to $61.7b which is a whopping 12% increase which is synonymous with the increase in their overall mortgage book across all countries.
Source: SGX, DBS-4Q17-CEO-Presentation-Slides
As OCBC and UOB did not provide any breakdowns or hint on their Singapore mortgage loan book as a percentage of total, we can only surmise a guess based on this same ratio exhibited at DBS of 84% ($61.7b out of total $73.293b). This puts OCBC’s and UOB’s mortgage book in Singapore at approximately $54.2b and $55.1b so the three local banks continue to command the lion’s share of $171b or 85% of the total mortgage market.
Another observation is that although DBS registered the highest loan growth in terms of volume, its NIM or net interest margin actually fell by 5 basis point to 1.75 in the year when compared to 2016. UOB bucked this trend as the only one in the trio that actually show an increase of NIM by 6 basis points. One possible reasoning could be UOB has a bigger pool of existing home loans still peg to their old BOARD or SIBOR rates which has gone up in 2nd half of the year. This is because it is the last of the trio to introduce FDR (Fixed Deposit Rate) home loans. On the other hand, unless DBS and OCBC hiked their FDR tranches they will not be able to benefit immediately from the rise in interest rates from their mortgage base; they could only benefit from their lending in the interbank market or corporate loans which are usually pegged to SOR or SIBOR.
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Indeed, DBS was the first to raise their FHR18 peg by a reasonable 0.20% at the start of February while we are still awaiting similar actions from the other two local banks. It will not be too long. Some foreign banks like Maybank and SCB have already made their respective moves on their FDR tranches.
On the funding side, although all banks manage to grow their CASA (current account savings accounts) deposits annually (see OCBC slides below), fixed deposits as a whole still form a large part of the funding source for OCBC (42% of total deposits in all currencies) and UOB (51%). This could explain why for OCBC there seems to be shift away from FDR home loans towards end of 2017 (in Q4) by replacing it with the new OHR mortgage peg which the bank claimed is referenced on the long-term trending of SIBOR and will not fluctuate with short-term rates. The bank is re-thinking its mortgage strategy and choosing to delink its mortgage peg (what drives interest income) from its cost of funds (fixed deposit tranches). All eyes will now be on how the bank manages OHR which could turn out to be the next best thing to fixed rate.
Source: SGX, OCBC-FY2017-Results-Presentation
One thing for sure, when interest rate rises over the next few years, all banks will have to move their lending rate up including OHR I believe. As long as this is paced neatly following a sufficient lag from SIBOR’s climb, it will be construed as fair by the market, just like this recent round of increases. The only way to lock down mortgage costs and not let it rise is to go for fixed rates – that is why we have been calling for a switch to fixed rates since end of last year in the run-up to the tax reform bill in US. It is still not too late, with fixed rates still hovering below 2% – in the 1.65% to 1.85% range. At this level it is wise to go for as long as a fixed term as one possibly can; anything below 2% is still historically-low by any measure. So contact our consultants today.
Finally I need to qualify here we are not research analysts who spent their time poring over financial statements. We are simply using a common sense approach to look at key banking ratios and to link them with developments in the mortgage market which we track very closely for our clients. We do this in a bid to decipher what would make for a good recommendation to our client. Speak to us if you like to work with us long term.
Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest trends in the industry, providing useful mortgage tips, and making sense of rate movements. We aim to build trust with clients for longer term partnership and not just do product-pushing for a one-time deal unlike bankers. That’s why we always present “whole-of-market” perspective including packages that banks do not pay us. That’s why many have chosen to work with us in the end notwithstanding the sheer number of brokers and agents out there. See their testimonials.
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