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Pressure On Banks To Raise Interest Margin In 2016

We ended 2015 by giving our prediction that there will be more casualties in the oil and gas sector in 2016 before it gets better.  Little did we know that we would be proven right almost immediately when the year starts.

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The current stock market carnage, which is to me really a confidence crisis that spirals out of control, was triggered largely by continued woes on the slowing down of Chinese economy and a further crash of oil to below US$30 per barrel.  It has now brought the stock valuations of the 3 local banks to attractive levels somewhere near or even below their book value I have read.  It is perhaps good time to heed our call late last year and start loading up on DBS counters for example by doing dollar cost averaging if your mortgage loan is pegged to their FHR18 which has just been raised from 0.5% to 0.6% last month.  After all it has crashed more than 33% from its recent peak of $21 merely six months ago (July 2015) to the current $13.87 (week ending 22 Jan) and is not too far away from what I think is the next bottom at $10-12 (it went to $8.40 at lowest point in 2009).  You can never catch the lowest point, anywhere near is good enough in the bigger scheme of things.  This is one sure way to “hedge” against rising mortgage interest a scenario that is becoming more real this year.

Do not get me wrong.  This is not an investment blog so please do your own analysis and Caveat Emptor!  However I make the call as I think this is one window of opportunity that you do not want to miss.  Even if it means taking out an equity term loan now on your existing mortgage and put that money back to the very bank you helped make rich through servicing of its rising mortgage interests.  I need to re-iterate, whether you accumulate positions in say DBS at $14, $12, $10 or even $8 should it crash all the way back to Great Recession levels, it does not matter in a time frame of 10 years as you must be quite prepared to service the higher monthly repayments during this period if you do leverage for this investment.  From historical perspective take comfort that even in a full-bloom bear market it usually lasts only 2 to 3 years but that is a whole different topic I will cover in another article.

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The reason why I wrote at length about this “hedging” is that I do seriously think that what we predicted in an earlier article “3 Dangers Of FHR Home Loan You Must Know” may just about come true if the current slump persists till the end of the year.  Wait.  That does not necessarily mean that here at MortgageWise, we stop advocating deposit-based home loans.  It is more a case of choosing the lesser evil between 3 types of mortgage loan pegs in Singapore – Sibor-based, Board-based or Deposit-based, and we still favor the last in an interest upswing cycle.

Of the three dangers covered, we think the biggest risk is now the pressure on banks to show results this year via interest margin against a backdrop of heightened risk and the next corporate earnings reporting season by the 3 local banks immediately after Chinese New Year break will help shed more light on their loan books growth, interest margin and rising NPL (non-performing loans).  Coming off from years of growing their interest income through the volume game (by issuing more loans and raising the overall Loan-to-Deposit ratio) rather than margin, the trend might start to reverse now as banks turn more risk adverse which means they start to look at increasing their interest revenue through rising rates and cutting back on aggressive loan books expansion per se.  At our end we have certainly noticed credit departments turning more cautious when approving loans especially those that breach the regulatory TDSR limits of 60%.  Previously banks would still allow MAS exemption for owner-occupied properties bought before 29 Jun 2013 subject to it not exceeding a much higher “internal TDSR limit” but now even this limit has been cut to 80% and the bank might still ask for such clients to pay down 3% of their outstanding loans before they will take over the loan.

We still believe that the local banks will need to justify their every manoeuvre of their FHR18 (DBS) or 36FDMR (OCBC) and they should only do it after the benchmark 3-month Sibor first jumped ahead by an even bigger margin.  However we cannot dismiss the pressure that will come from rising NPLs should the current bearish sentiments persists for longer than it should and translates into more defaults or foreclosures in the property market.  The bank will then need to hike FHR18 or 36FDMR ahead of Sibor movements in a bid to raise interest margins so as to take a hit on NPLs.  Then there is also the impact from the fallout from oil and gas companies that we discussed at the start of this article.  Whilst I do not have information on the level of exposure of the 3 local banks to this sector, if big provisions are made that will surely add to the pressure of increasing the topline in 2016.

Of the remaining two dangers, one of them might materialize as well.  As the dollar continue to strengthen with capital outflow from emerging markets and from falling oil prices, it will put upward pressure on Sor and indirectly on Sibor which has already crossed the 1.25% (as at 15 Jan).  If this trend persists interbank rates here in Singapore might move ahead of its precursor in United States – the federal funds rate, which is what we are seeing in the past few months.  As rate rises more people might choose to deleverage during refinancing where they partial prepay a portion of their outstanding loan via CPF or even cash.  Liquidity in the system will dry up somewhat though the extent is hard to speculate as we know there are many clients who simply hoard cash for investment in the past few years with ultra-low cost of funds but all that is going to change.  With falling deposits it certainly put more pressure on rates as banks need to comply with certain Loan-to-Deposit ratio and the spiral continues.

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Not all is doom and gloom though.  Over at MortgageWise we do think that the current stock market rout is largely a confidence crisis which is hard to explain.  Most head honchos in the business world see Chinese market going through a restructuring from a manufacturing-based economy to one that is services-or-consumer-driven hence the pain and panic that comes from falling PMI numbers should really be expected but is now blown out of proportion.  We tend to agree with this view and the belief that at some point the Chinese government will have the resolve (as well as resources you bet) to put out a set of comprehensive, broad-based and market-stabilizing stimulus measures to reverse the trend.  It should not take more than 6 months for that to happen.  We hope.

In an interest upswing cycle, all mortgage pegs will go higher eventually be it Sibor, Board or Deposit-based.  Even fixed rates will end at some point and reverts to much higher floating rates.  We choose the peg with the least propensity to increase, plus some “hedging” along the way which is the only insurance against rising rates if you like.  At the very least take comfort from the idea that as you pay higher mortgage interests over the years, you are also benefiting as a shareholder of the bank.

 

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.

 

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About Darren Goh

Darren Goh is the Executive Director of MortgageWise.sg, a thought leader in the Singapore mortgage industry, with frequent interviews and quotes by the press - Business Times, Straits Times, Zaobao and EdgeProperty for his views on the latest mortgage trends. He is an avid property investor with careers in banking & real estate before becoming an entrepreneur.
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