Banking on boring but safe home mortgages

Last month, a DBS Bank staffer got rather worked up at a tweet which said "UOB has the highest new home loan market share in Singapore, at 31 per cent: CEO". This reporter was contacted and grilled on the matter, such as how UOB made such a claim, and exactly the period for which it was asserting the number one rank.

The market share ranking came from data provided by the Credit Bureau and who is leading depends on the period one looks at. A senior DBS executive later confirmed that DBS did lead in new home loans sales in 2016 but only for more than half of the year.

The flurry of excitement generated by that tweet reflects the aggressive strategy at DBS in going after the home loans market, and so it was naturally dismayed to find that rival United Overseas Bank had taken the lead in Q4.

DBS boss Piyush Gupta had during the bank's Q4 results' media briefing last month said that it was the biggest home loans provider with almost 29 per cent market share, up from 25 per cent in 2014. It wasn't just that its market share was 25 per cent in 2014, DBS, South-east Asia's largest bank, only ranked third then with a home loans book of S$52.9 billion. UOB, the third largest Singapore bank, was the leader with S$54.7 billion of home loans, trailed closely by OCBC Bank's S$54.2 billion.

Read also: Banks drop some fixed-rate home loans amid interest rate uncertainty

Today, DBS has leapfrogged its rivals to clinch the leader title; its home loans book grew 10.1 per cent in 2016 over 2015 to S$64.5 billion. UOB is now in second place, expanding 9 per cent to S$61.5 billion. OCBC Bank grew its home loan book by 7.3 per cent to S$60.1 billion, placing it third.

DBS' strategy in April 2014 was to switch to basing home loans on its fixed deposit rate - a transparent and stable reference rate. No other bank had tried this: using a fixed deposit home rate (FHR) benchmark. Home buyers were won over and began switching their loans to DBS as they understood that being the largest bank with a massive deposit base meant DBS would quote the lowest fixed deposits rates in the market; this in turn translates to a cheaper reference rate for its home loans.

Read also: You may need to act fast to buy home

OCBC and UOB finally capitulated in late 2015 and 2016. Having the FHR field to itself for almost 18 months allowed DBS to romp home in the home loan stakes.

Slugging it out

The price war continues. On Monday, DBS and UOB were caught slugging it out in offering a zero-per-cent spread under their FHR packages aimed at projects under construction, with no lock-in period and a one-time free conversion for a limited time only. DBS has said the zero per cent special deal would end on March 6 and UOB was expected to follow suit.

Price wars are expensive and the winners end up often bruised. It's expensive to sell home loans, said sources. Costs include offering commissions to property agents, said to be 0.1 per cent, to introduce the home buyer. Banks can mitigate the loss leader if they are able to cross sell products like mortgage insurance. And having the customer in the door, they can try selling other so-called wealth management products, typically unit trusts.

Banks are targeting the consumer banking segment to make up for the slow and volatile corporates' loan and income growth. Singapore's growth in 2017 is expected to range 1-3 per cent.

As UOB said in its Q4 results briefing, retail banking gives it growing income with stable asset quality. Income for its group retail business has gained between 9 and 11 per cent in the past three years.

Wholesale banking income was volatile, ranging a sluggish 3 per cent in 2016 from 13 per cent in 2015 and 10 per cent in 2014.

DBS's retail banking growth was even stronger; income has been gaining at a 14 per cent compound annual growth rate since 2012. But its institutional banking income roller-coastered, falling one per cent in 2016 while it was up 7 per cent for 2015.

Critically, while wholesale or institutional banking can provide fat margins when times are good, they can also be horrible such as the torrent of soured loans in the oil and gas sector which continues to haunt the Singapore banks. DBS's non-performing assets rose 74 per cent in 2016 from a year ago to S$4.86 billion, due largely to stresses in the oil and gas services sector.

Mortgages, on the other hand, are usually boring but safe, unless there's a recession and borrowers lose their jobs. That's because people are usually conservative when it comes to paying off the loan for their home unlike risk-taking entrepreneurs. UOB chief Wee Ee Cheong also noted that generally the borrowers are for owner-occupied homes as "today, nobody wants to buy investment property".

Bank bosses said they see little stress in their mortgage books. DBS's 2016 non-performing loans ratio for home loans was unchanged at 0.2 per cent.

Banks will skip some margins in their home loan war in initial years to gain market share. If the economy continues chugging along and funding cost remains stable, it may mean that their bet on home loans will not turn into a pyrrhic victory.

This article was first published on Mar 02, 2017.
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