Singapore is an open economy that embraces free trade and open competition which helps to drive up productivity and bring down prices. For that I always like to quote the airlines and telcos to see what has happened to prices in the last 10 years. Monopoly or oligopoly is never a good thing for consumers, except when it comes to certain goods and services of a social or national nature, or where there are high fixed infrastructural costs in the industry
In an earlier article I have estimated the three local banks combined command a market share of 83% of the mortgage pie in Singapore. Is this a good thing?
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There are various views. Ceteris paribus, the preference in the Singapore market is to go with a local bank for mortgages where most would have some sort of banking relationship like salary-crediting account, GIRO or transaction account, etc. For this reason, it is natural to expect the lion’s share of the market to go to the three local banks. Still I cannot help but feel a more “balanced” allocation would be to move towards a 70:30 market share split between local and foreign lenders, for the longer term interests of you and me as a homeowner or borrower, instead of the current 83:17 split. This is because competition amongst the 3 local lenders is fierce and often lead to homogeneity of their offerings. This is especially true for BUC home loans for new launches. In the end, consumers do not really get much of a choice.
In recent years we have also seen a new breed of home loans pegged to deposit rates, or what we termed as DMR (deposit mortgage rate) home loans for simplicity sake, that has gained popularity. It is a laudable innovation, first introduced by DBS back in 2014, which essentially acts like a “middle-ground” option for those who find traditional SIBOR-pegged mortgages too volatile and too elastic to interest rate hikes, but who find fixed rate home loans too high a premium to pay especially for bigger loans. DMR has indeed been the main driver for market share for local banks in recent years that has resulted in tremendous growth of their loan books at the expense of foreign lenders.
However, of late we notice some pushbacks by foreign banks with the introduction their own DMR home loans first by StanChart last year, followed by Maybank last month. More may soon follow. In another positive sign for the market, we also notice more foreign banks now willing to do business at slimmer margins by introducing 2-year fixed rate packages at interest rate that can give local banks a run for their money. This is a smart move as I have elaborated in an earlier article – the only way for foreign banks to compete is not to go for margin but volume by deploying the right distribution channel. To run fixed rate promotions, banks need to lock-in a tranche of funds back-to-back from their Treasuries and that requires them being able to first secure funds at a certain COF (cost of funds), hence it is sporadic in nature for foreign banks who are net borrowers from interbank market.
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This is unlike local banks who command the biggest share of Sing dollar deposits by way of their branch operations, salary-crediting accounts, etc. They are likely net lenders in the interbank market. The foreign banks will never be able to match the low cost base of their local adversaries who can plan ahead their Treasures operations and provide perennial fixed rate packages throughout the year. However local banks do also run up huge operating fixed costs in an enlarged mortgage and credit departments so it is very hard to say who has a more profitable business model. The smart lenders are the ones who recognize the shifting patterns of consumers preferring to go through independent third-party mortgage distributors or brokers, over mortgage specialists from the banks, as a better way of planning for mortgage; and hence converting their fixed costs to variable by keeping internal teams small and lean and leverage on external distribution networks. More and more so, bankers are becoming loan processors rather than advisors no matter what name you give them. It is an inevitable trend that is set to take roots as homeowners prefer and trust a relationship-based advisory over that of a transaction-based one that has no accountability after the deal is done.
Are we then advocating for foreign banks? Absolutely not. We are advocating let there be free market competition from more lenders be it local or foreign which will lead to the best available rates for homeowners instead of “standardized interest rates”. Do not forget there are still finance companies in Singapore considered local but who are not as active in this space. We hope over the long term there will be more industry participants who recognize the attractiveness of the mortgage lending business in Singapore with stability of returns, low default rate, well-regulated regime with TDSR, and the continued appeal of property as an investment class from the rising Affluent segment.
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For this free and vibrant marketplace for mortgages to come true, consumers will also need to stay open to all lenders be it local or foreign and be willing to “try out” new lenders. After all you are now putting money but borrowing from the banks. Back in May 2015, we already have our Central Bank conferring the status of “D-Sibs” (Domestic Systematically Important Banks) on seven banks (3 local and 4 foreign) and imposing stricter requirements and supervision on them, for example they need to meet the requirement of 10% Capital Adequacy Ratio (CAR) which is higher than the 8% stipulated under the latest Basel III international standards. The four foreign banks are Maybank, StanChart, Citibank and HSBC. As these banks have significant retail operations in Singapore, they are required to locally-incorporate their Singapore operations which then comes fully under the Company Act. In short, you are dealing with a Singapore-incorporated bank even though it remains fully-owned subsidiary of its international parent bank. Outside of these seven D-sibs, you also have some other major banks with growing retail presence here in recent years the likes of Bank of China (BOC), CIMB etc. Notably BOC has been particularly consistent and aggressive in their fixed rate mortgage strategy which has brought much delight to those in the market looking for good fixed rate loans. If these banks expand their footprints further in Singapore over the next few years, they might also be become D-Sibs at some point.
The real winner is you the consumer. It will be a matter of time before all 7 D-Sibs (and we hope more to come) offer DMR home loans as well as the traditional SIBOR-based loans and fixed rate packages. Whoever secures the lowest funding costs from time to time and is most hungry for your business will entice you with the lowest remortgaging rate be it for fixed or floating. Do your comparison and make sure you always get the lowest funding cost for yourself and the best way to do that is to work with a professional mortgage intermediary like us as many of our clients can testify to. In fact sometimes we give lenders so much business that we gain an unfair advantage if you like – with exclusive deals offered below-the-line sometimes. So speak to us today to find out more!
At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into developments and news on mortgages & helping clients track interest rate movements. We do not just go for one-time business with clients but rather choose to build long trusting relationships by giving truly independent advice to the extent of losing the deal. We strive to become the first-choice mortgage partner for homeowners and the creditable distributor of mortgage products for banks and financial institutions in Singapore.