http://www.businesstimes.com.sg/arch...s-are-20130123
Published January 23, 2013
For banks, homes are where the margins are
They've cut subsidies and enjoy better margins on home loans, but this may not last
By Siow Li Sen
[SINGAPORE] In a rare moment of amity, banks are enjoying better margins on home loans after scrapping subsidies in the last quarter and raising prices.
The intensely competitive mortgage market eased off somewhat as banks adjusted their prices upwards in the past few months. But amid historic low interest rates, it is possible that the 10 basis points hike went unnoticed by many borrowers.
Private home sales last year rose to a record 22,290 units in 2012, easily eclipsing the previous 16,292 peak in 2010.
Banks price their home loans off a wholesale rate like the 3-month Sibor or the Singapore Interbank Offered Rate, presently at 0.3767, or discount off their own board rate. A typical first year rate would be 90 basis points plus 3-month Sibor.
Should home buyers fret that banks are cosying up to each other?
"We regularly review our existing mortgage rates offered to new mortgage customers and adjust our pricing, whether up or down, according to market conditions," said Dwaipayan Sadhu, Standard Chartered, head of consumer transaction banking and mortgages, Singapore and South-east Asia.
Still, faced with possible shrinking volumes following the recent property cooling measures, banks could revert to what is more typical practice - someone blinks and start a round of price wars.
Fen Peh, DBS spokeswoman said: "It (pricing) changes on a very regular basis, depending on the competition. In the mortgage world, a few months is a very long time."
DBS revised its pricing upwards in November while OCBC followed suit with two increases, in December and early this month. United Overseas Bank, which has the largest home loan book of all, raised it gradually over the last few months.
"Positively, competition has eased in recent months - mortgage rates have ticked up by about 10 basis points while banks have started to pull back subsidies," said Desmond Ch'ng, Maybank Kim Eng analyst.
Since the last quarter, most banks except for one - ANZ - have scrapped the subsidies for home loan borrowers, which had been a mainstay for mortgage packages for the longest time. The subsidies - for legal fee, fire insurance and valuation could amount to a hefty $5,000.
The three local banks moved first in scrapping the subsidies in October, followed by the foreign banks in an attempt to rein in costs. Said Harmander Mahal, HSBC Singapore head of customer value management: "Our home loan packages are among the most competitively priced in the industry and there are currently no plans to raise interest rates. We have stopped offering all subsidies since October last year after a review to align with market practice."
Alan Yet, Maybank Singapore's head of lending business, said there was no upward revision of its home loan interest rates. "We have removed subsidies for home loan late last year in line with market practice."
But ANZ, a latecomer to the retail banking market here continues to offer the subsidies. Currently, ANZ offers legal and valuation subsidies for refinancing packages. Free one year fire insurance subsidy is offered on packages for both new purchases and refinancing.
Philip Lim, ANZ head of retail banking Singapore, said that while there is no immediate plan to remove these subsidies "we are constantly reviewing our packages to provide our customers best value, taking into consideration customer's total banking relationship with us."
Analysts are mixed on whether banks will be hard pressed this year to continue easing off competition, given the expected fall in mortgage volumes.
A banker also said global interest rates will remain depressed for some time, and unless that changes, it will be difficult for a sustained upward movement in local interest rates.
For the three local banks, mortgages represent their biggest business.
Mortgages make up 21 per cent of DBS' total loan book, 26 per cent for OCBC and 29 per cent for UOB, as of Q3 2012 .
DBS Bank chief executive Piyush Gupta has said he expects mortgages to fall 10-20 per cent as the cooling measures turn buyers away.
"I worry about intensification of competition; volumes will fall and on a risk adjusted basis, non-performing loans will become even lower - and potentially spur another round of competition," said Kenneth Ng, CIMB head of research.
But Mr Ch'ng said banks' margins remain slim and deposits costs are rising, so it is unlikely they will revert to an aggressive price war.
Industry loan/deposit ratios have been rising and funding costs have to be managed more carefully, he said. "It is unlikely that banks would risk engaging in aggressive price wars on the mortgage front as spreads are already thin.
"Mortgage rates currently average about 1.2 per cent in Singapore, and this already yields a thin spread of about 1.1 per cent above the 3-month fixed deposit rate of 0.1 per cent. This compares against aggregate bank spreads of about 1.6 per cent to 1.8 per cent," said Mr Ch'ng.
Higher interest rates might come from another source if the latest round of cooling measures do not work. One suggestion is for the regulator to target banks by telling them to raise the risk weights for mortgages, which translates to setting aside more capital for home loans.
That would have the effect of making mortgages more expensive and banks would then have to pass this on in the form of charging higher interest rates.
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