All three local banks DBS, OCBC and UOB have just reported their financial results for first half of 2019. We present our usual snapshot of the key indicators for their mortgage books.
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Some may be wondering why do we monitor the three local lenders’ mortgage portfolios? We are probably the only mortgage consultancy firm that does that on a regular basis.
Because it does tell us a thing or two about the motivations of the respective banks to compete for business in the year. Housing loans is such a big portfolio on the banks’ asset books, often the biggest segment by industry breakdown and constituting 20-25% of the total loans they dished out; the banks will not allow their market share to slip if they want to do well. And if you also include their lending to developers or the building and construction industry which forms another 20-25%, the banks’ total exposure to the property market in Singapore is close to 50% of their total income-generating assets (or loans).
So how did the three local lenders, which easily make up 85% of the mortgage market in Singapore, fare in the first half of 2019? We know there had been many rounds of mortgage peg increments earlier in the year which is tracked and reported in our blog here at MortgageWise.sg. As a result, the banks have continued to build on the momentum of interest rate uptrend since 2018 and raised lending rates faster than deposit rates or cost of funds leading to widening of interest spreads or NIM (net interest margin). Take for example the case of DBS, after doing a 10-basis point jump in full year 2018 NIM from 1.75 to 1.85 by end of Dec 2018, 2019 quarter two’s NIM has went up further to 1.91 – the highest amongst the three local banks. This is not surprising as we have said many times in this blog DBS has the most control on interest margins where all housing loans are pegged to their proprietary FHR (fixed deposit home rate) mortgage pegs set and adjusted by the bank. They also have the lowest cost base from the huge CASA (current account, savings account) deposits from their POSB franchise – accounting for 89% of their Sing dollar funding (see above, $141.77b out of $159.55b). On the contrary, fixed deposits form close to half of the funding source for both OCBC and UOB home loans which is very likely the reason why both banks have withdrawn the FDR pegs some time ago.
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We do note however that UOB’s NIM has gone down by two basis points in the latest quarter, when compared to their full year 2018’s NIM. But it is also the only bank to have held on and grew its mortgage books marginally whereas both DBS and OCBC have lost ground in terms of market share most likely to foreign lenders who have muscled in on mortgage business this year, especially the likes of HSBC, SCB and CIMB.
By and large, the financial performance of all three lenders in 2019 thus far have been helped in a big way by widening spreads on interest margins earlier in the year. However, that is set to change in the second half with more headwinds for the global economy and continued slide in interest rates. US Fed is now expected to take more aggressive stance in rate cuts depending on outcome of the roller-coasting trade talks between US and China.
As we look at the books, it then comes as no surprise that we see DBS rolled out a fixed rate of 1.89% in the first year that is even lower than prevailing floating rates – an anomaly. As we all know in business, to grow profits you either work on the margins or the volume, if not both. With spreads compression expected in the coming months and going into 2020, both DBS and OCBC would need to go more aggressive in getting their loan books volume up. In fact, OCBC home loans registered an even bigger net loss of $2.3b compared to DBS’s $1.1b in the first half. I am somewhat surprised the bank is not going all out yet to acquire more new loans than what is shedded when many refinanced out. Perhaps because the bank has locked in a strong pipeline of BUC loans and it is expecting more progressive draw-downs over the next few years?
It was reported at end of 2018 that DBS home loans commanded 31% market share with its $75b housing loan portfolio (note this is across all countries, we do not have the breakdown for Singapore’s share which we estimate at 86% of total). Going by the latest numbers, it is reasonable to expect that the three local banks have ceded some market share to foreign lenders thus far in 2019. We should see the local banks go more aggressive in their home loan marketing and promotions going forward.
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Speak to us today to find out how you should choose between the local banks’ and foreign banks’ offerings. The foreign banks have slashed margins to razor-thin on SIBOR loans since start of the year to win business and prima facie it has worked so far. The local banks have upped the ante now by offering even lower fixed rates aided by their cost base advantage. Which one should you go for in view of the macro events taking place right now?
At MortgageWise, not only do we show you all the home loan Singapore packages in our exclusive Rates Report that truly allows you to compare them all at one glance, we pack in great exciting values for both purchase (special $1,800 legal fee for completed property) and refinance home loans ($150 valuation fee offset), both subject to min loan of $500,000. Other terms apply.
For the same packages that you get by going direct to the bank, you save even more and derive greater value when you apply through us today. So, speak to our consultants now!
Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest developments in the industry, providing useful mortgage tips, and making sense of rate movements. We seek to build trust with clients over the longer term instead of doing product-peddling for quick one-time deals. That’s why we always present “whole-of-market” perspective including home loan packages that some banks do not pay us.