Last week the 3 major players, or the 3 local banks, that between them probably account for 70-80% of the mortgage market in Singapore announced their financial results for 2nd quarter in 2015 with DBS firing the loudest salvo – highest loan growth.
We will take some time to look at their results in terms of their mortgage business and attempt to predict how the 3 big boys will play their cards and strategy in the 2ndhalf of 2015.
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First DBS reported a quarterly record bookings of $3b new home loans of which $1b came from refinancing. This brings the bank’s total new mortgage sales in 1st half of 2015 to $5.2b. If we assume each new loan average size is $300,000, this would mean 13,000 new mortgage customers acquired by the bank in the first 6 months of the year. However it is interesting to note in DBS financial results presented, we see a net increase of only $1.738b in DBS home loan book over the same 6-month period, which means there is also a net attrition of $3.46b of housing loans which is puzzling as we do not think there is such high nos. of refinancing loans coming out from DBS in Singapore. Which can only mean there is high attrition of housing loans denominated in other currencies? We do not have all the answers.
DBS Chief Executive Mr Piyush Gupta go so far as to explain why the bank has been so successful in its mortgage business amidst of sluggish property market – it is playing on its strength in deposits. The bank has total deposits of $306b (slight down 6% from previous quarter due to deliberate strategy of getting rid of the more expensive USD and HKD deposits). Mr Gupta also explained the bank has most advantage in the refinancing business as it can offer 3-year fixed rate loan and at competitive rates. About 2 out of 10 customers of the bank opted for fixed rates over floating. The other advantage is how it has been able to target the HDB market by leveraging on its POSB network. Its market share in the mortgage business for Q2 has risen to 25.3% from 24.56% in Q1. Our own estimation based on MAS’s survey of selected banks housing loan books points to a slightly higher figure of 26% market share for DBS as at end Jun but this is largely in-line and due to mortgage loan of all currencies in our figures (there is no breakdown provided as to how much of DBS’s $54.60b comprises of S$ loans but over 90% is expected)
UOB home loans and OCBC home loans registered slower growth this quarter as DBS plays catching up in terms of market share. Of the 3 local banks, UOB score the lowest growth in net mortgage loans growth for 2015 as its CEO details how it deliberate wants to move away from the increasingly competitive mortgage market ceding leadership to other players and refocus on growing revenue and profit through its “gem” of intra-ASEAN trade where it has been growing its franchise in last 5 years.
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Our opinion is that as much as UOB refocuses its strategy out of the traditional bread-and-butter mortgage business where its margin gets eroded over time, it cannot afford to register negative growth in its loan books without facing the ire of shareholders. And true enough we do see some aggressive retention actions now on both UOB home loans and OCBC home loans where repricing rates of 1.88% p.a. 2-year fixed rate are offered for bigger loans, matching that of DBS home loans. With interest margin being assaulted by DBS with its cost leadership position (with its huge deposits base of POSB savings accounts), I think there is only one way for the bank to grow its interest income for mortgage business – go for volume rather than margin. I am still expecting the other 2 local banks in particular UOB to launch its own version of “Fixed Deposit-pegged” mortgage loans as they feel the pressure from DBS with its FHR peg chipping away at its loan books. The pressure can only accentuate with sibor rising in the next 12 months and DBS attempting to hold its FHR for as long as it can.
As for DBS, we do not see any reason why it will let up in its effort to grow market share until it overtakes as market leader (we think by end of this year). The CEO has already said openly they are having a surplus as far as Sing dollar deposits are concerned. For this reason I am betting that they will hold FHR constant at 0.40 for the next 12 months at least even as sibor rises further with Fed rate hike likely in September. Reason being that the bank will want to capitalize on this period fully (while it still can before liquidity dries up forcing it to raise deposit rates) to try garner the most share of new mortgage business. Having said that the bank has a history though of going less aggressive 2ndhalf of the year we notice.
Above are strictly our opinions and we do not warrant to know exactly how each bank will adjust its strategy to compete for the mortgage business. Do read with a pinch of salt and position yourself well in terms of choosing the right peg for your home loan in midst of a rising interest rate environment.
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