A home loan price war on the horizon?

Sibor, commonly used by Singapore banks to peg their variable home loan rates, hits its lowest in 23 years

Julie Quek

juliequek@ mediacorp.com.sg

SINGAPORE

The benchmark Singapore interbank offered rate for three-month Singapore denominated loans (Sibor) was at 0.44 per cent on Friday — its lowest in 23 years, according to

The Sibor is commonly used by Singapore banks to peg their variable home loan rates.

So far, Mr Dennis Ng, founder of mortgage consultancy portal HousingLoanSG.com said that the price war for home loans has gained intensity over the past six months.

“The loan rates offered by banks here have already been cut to the bone, and it will be difficult for the banks to earn sufficient margins should they undercut each other further,” Mr Ng said.

Rates for home loan packages pegged to the interbank rate are likely to continue to fall from the low interest rate environment, observers said.

Currently, OCBC’s first-year rate for the bank’s variable package for HDB flats stands at 1.18 per cent annually. Both UOB and DBS declined to reveal their rates for the period when contacted by MediaCorp.

Analysts estimate the average variable public housing home loan rate for the first year is now between 0.9 per cent and 1.4 per cent.

But they said the current low Sibor rates will not be sustainable in the long-term.

Ms Christine Kuo, senior analyst (financial institutions group) at Moody’s Singapore, said that she does not see a large-scale price war for the banks here.

“However, I would not be surprised if some local or foreign banks or finance companies (start to) offer lower rates to selective customers for a short period of time,” added Ms Kuo.

A DBS spokesperson said “certain rates that are pegged to shorter tenor Sibor or swap offer rates can be particularly volatile”. Thus, “homebuyers need to ensure that they are able to handle the expected range of fluctuations, particularly if there is a lock-in period”, the DBS spokeperson added.

DBS advised customers who are worried about the volatility of the Sibor rates to go for a five-year fixed rate home loan package, which will offer greater stability in repayment.

This will allow them to enjoy the current low interest rate for the entire duration of the minimum occupancy period for HDB flats, the bank said.

UOB advised new homeowners to remember that buying a home is a long-term financial commitment.

“Regardless of the prevailing interest rate environment, and the first-year rates, home buyers should always calculate their own affordability level to ensure that they are able to service a housing loan over a longer period of time,” a UOB spokesperson said.— Record-low interest rates could re-ignite the price war for a piece of the home loan pie, industry observers said.Bloomberg data.

Singapore — Analysts expect Singapore’s three big banks to report weaker earnings for the third quarter of this year, due to an all-time low Singapore Interbank Offered Rate or Sibor.

As of last Friday, Sibor stands at 0.44 per cent or 44 basis points — it’s lowest in 23 years. As interest from interbank loans is pegged to Sibor, analysts said banks may see lower net interest incomes in their latest financial results.

Analysts said more hot money is expected to flow into this region as a result of quantitative easing in developed markets.

“It seems increasingly likely that the Sibor could stay at this very low level for a very protracted period of time,” said RBS banking analyst Trevor Kalcic.

He foresees Sibor to increase marginally to 60 basis points or 0.6 per cent for this year and to 80 points or 0.8 per cent for next year.

RBS maintained its “sell” call on DBS Bank, which will release its results on Nov 4, citing low rate headwinds as a strain to earnings into next year.

To limit the impact of low interest rates, Mr Kalcic expects DBS to post strong loan growth for its third quarter results.

According to RBS forecasts for third quarter results, UOB and DBS may report lower interest incomes, with DBS posting the biggest decrease at 10.5 per cent on-year.

But Mr Alfred Chan, banking analyst at Fitch Ratings, said long-term prospects for banks remain bright.

“Banks are generally reporting stronger profitability in 2010 than 2009. They have been making provisions in 2009 for stress environments,” he said.

“They also have very liquid balance sheet. They are able to manage the low interest situation as they already have a strong deposits base,” said Mr Chan.

With Singapore’s growth forecast of 5 per cent next year, he expects robust economic activity to provide support for the banks’ diversified revenue streams. One of these streams is loan growth. Mr Kalcic said loan growth is picking up and should reach 10 per cent for this year and the next.

“After lagging for some time, business lending is starting to accelerate,” he said, adding that it will impact earnings more positively compared to consumer lending.

“The reason is that consumer lending is primarily driven by mortgage lending, which is a relatively low-margin business.” said Mr Kalcic.

The reason is that consumer lending is primarily driven by mortgage lending, which is a relatively low-margin business.

RB S banking analyst Trevor Kalcic

Large capital inflows a risk

Rachel Kelly

rachel@mediacorp.com.sg

SINGAPORE — Too much of foreign capital is too much of a good thing. The World Bank says a risk to economies in East Asia is the return of large capital inflows, which are driving up prices and causing inflationary pressure. 

Inflation in China — Asia’s largest economy and the world’s second biggest — accelerated to the fastest pace in almost two years in September, according to data out yesterday. September’s inflation rate was 3.6 per cent over a year earlier, compared to August’s 3.5 per cent and well above the 3 per cent official target.

Helping drive overall prices higher was a 6.1 per cent jump in food costs due to shortages of vegetables and other items.

China — the world’s fastest growing major economy – is sucking foreign capital in billions of dollars at a go. And too much money — together with the domestic stimulus — is fuelling a property bubble which has prompted the Chinese authorities to take steps to prevent overheating.

World Bank’s chief economist for East Asia & the Pacific, Mr Vikram Nehru, said:

“In China the authorities have used a variety of measures to try and curb credit growth. The bulk of those measures have been through administrative means, specific targets and so forth for banks.”

“So this is part of a more concertive action by the Chinese to take some of the froth off the real estate sector and try to stabilise asset prices.”

Other countries in East Asia are also grappling with large and rapid inflows of foreign capital and are adopting different strategies to deal with the challenge.

Mr Nehru said that some of these countries were “simply allowing their currencies to appreciate and that is one way to try and absorb the inflationary pressures that might be coming through these capital inflows”.

He added that some countries had been intervening in foreign exchange markets to try and reduce the volatility of these inflows or were keeping a close eye to see what was happening in the banking systems.

G20 finance chiefs aim to avoid currency wars

SEOUL

Finance ministers and central bankers will say after talks conclude in Gyeongju, South Korea, tomorrow that they want a “more market-determined exchange rate system that minimises adverse effects of excess volatility and disorderly movements in exchange rates”, a G20 official said yesterday, citing a draft statement and speaking on condition of anonymity.

G20 policymakers are convening amid concern countries are pursuing weaker exchange rates as a route to stronger economic growth, either by limiting currency gains with interventions like Japan or by discussing possible monetary easing, as the United States and the United Kingdom have done.

The risk is of a protectionist backlash that curbs economic growth, with emerging markets including Brazil and South Korea already introducing capital controls to stay competitive.

Treasury Secretary Timothy Geithner said in a

Mr Geithner delayed a report on foreign exchange markets last week, saying the yuan remained undervalued and that China needed to show continued commitment to allowing the currency to rise against the US dollar over time. The yuan has risen about 2 per cent since a two-year peg against the greenback was scrapped on June 19.

People’s Bank of China Governor Zhou Xiaochuan said his nation needed to avoid the “shock therapy” of excessive yuan appreciation and “very fast” gains probably would not end global economic imbalances.

Chinese Premier Wen Jiabao also warned of the dangers of a rapid rise, saying yuan gains of 20 to 40 per cent would exacerbate unemployment and cause social upheaval.

Mr Marc Chandler, global head of currency strategy at Brown Brothers Harriman and Co in New York, said the US is trying to forge a united front among the G7 nations in urging China and other emerging market nations to let their currencies rise.

“How the dollar does against the euro and sterling might be different than how the dollar does against Asia,” he said. Mr Chandler predicted there would be increasing pressure on China at the G20, without an international agreement on intervention such as the Plaza Accord in 1985.

[Xtremely OUTdated  1985 AccOrd    ? ? ? ?]

[COmplacency  IncOmpetence  NeglIgence  ExUberance    ? ? ? ?]

Canada wants to “address, with our G20 colleagues, mechanisms to enhance and timelines to enhance the flexibility of currencies”, Bank of Canada Governor Mark Carney said yesterday.

Bank of England Governor Mervyn King said finance chiefs need to reach a “bargain” to coordinate economic policies, though real agreement would require a “revolution”.

The US backs current-account targets to gauge whether individual trade surpluses or deficits are sustainable, and Mr Geithner wants the International Monetary Fund to take on a larger role of economic surveillance. — Group of 20 finance chiefs plan to say members will refrain from the “competitive undervaluation” of their currencies in a bid to soothe trade tensions before they derail the world economy.Wall Street Journal interview published yesterday that China needs to let the yuan rise so other emerging market nations will feel comfortable letting market forces affect their currencies, repeating a theme from speeches he gave earlier this month. He also said that “major currencies” were “roughly in alignment”.Bloomberg

Japan govt says economy at standstill

TOKYO

In a monthly report, the government downgraded its assessment of the economy for the first time since Feb 2009. A senior Japanese official said further pressure on the economy, which is mired in stubborn deflation, could tip it into recession.

“If the economy turns out as expected in our main scenario, we may end up describing the current situation as a soft patch,” said the official at the Cabinet Office, which compiled the report. “But if it comes under further downward pressure, it could end up slipping into recession,” he said.

The government also cut its view on exports and industrial output, saying they were weakening,

which prompted the downgrade of its overall economic assessment.

A rise in the yen to a 15-year high against the dollar added to these woes.

Faltering recoveries from the global financial crisis in developed economies have pushed global investors into emerging markets in search of higher returns, driving up their currencies.

The move has been exacerbated by widespread expectations that the United States Federal Reserve will print billions of dollars to try to lift the US economy, sparking concerns that the extra liquidity will find its way into emerging markets.

Japan’s policymakers had earlier prompted the government to draw up a supplementary budget and the central bank to offer cheap loans and to promise to buy assets.

The government said it wanted the Bank of Japan to support the economy through “appropriate and flexible” monetary policy while the two branches work closely together — phrasing it used when it announced ¥5.05 trillion ($$80 billion) in stimulus spending on Oct 8.

The currency tensions will dominate a Group of 20 finance ministers’ meeting in South Korea starting on Friday and a G20 summit in November, as officials look to tackle the economic imbalances and the threat of competitive currency devaluation.

“Currencies will be the topic that many people will be talking about ... at the G20. I hope that good ideas will be put forward there and we will explain the present situation in Japan,” Finance Minister Yoshihiko Noda said.

Japanese Prime Minister Naoto Kan said yesterday he wants to implement stimulus measures as quickly as possible to support the expansion of the economy. — Japan’s government said yesterday the economy was now at a standstill, highlighting the growing gulf between developed and emerging countries at the heart of global currency tensions.AGENCIES

China raises key rate for the first time since 2007

Bloomberg

BEIJING

The one-year lending rate will increase to 5.56 [+0.25] per cent from 5.31 per cent effective today, the People’s Bank of China said on its website. The deposit rate will increase to 2.5 [+0.25] per cent from 2.25 per cent.

“This is a bucket of cold water for the market,” said Capital Securities analyst Zhang Yuheng in Shanghai.

The tightening would hit both equities and commodities, he said.

The impact was also felt by global markets across the board after the announcement last night. Oil prices fell, stock markets turned negative in Europe and the US dollar rose as investors were caught off guard by the tightening step.

Inflation hit 3.5 per cent in August over a year earlier, above the official annual target of 3 per cent.

Data to be released in Beijing tomorrow may show that September inflation climbed to 3.6 per cent or more even as economic growth moderated, analysts said. — China has unexpectedly raised its benchmark lending and deposit rates for the first time since 2007, ahead of data that may show inflation accelerated to the fastest pace in almost two years.Agencies

energy ‘trilemma’

Regulations and tiered pricing won’t be enough to help

Singapore control its energy usage, says Trade Minister Lim

$388 billion in Chinese loans at risk

BEIJING

The results of the investigation were published yesterday on the front page of the official

The probe is a first step in what the government has promised will be a thorough effort to clean up the mess left by a surge of stimulus spending to counter the global financial crisis last year.

Local governments, which are officially barred from borrowing, launched thousands of hybrid government company bodies as financing vehicles to get around the restrictions and fund their expenditures, much of which went to infrastructure.

According to the investigation, 24 per cent of the debt incurred by the local financing vehicles is fully backed by revenues from the projects that they have funded.

A second batch of loans, about 50 per cent of the total, will not be recoverable directly from the projects that they have funded. However, these will be covered by secondary sources, such as government revenues.

The third batch is the 26 per cent in serious trouble.

“With the third kind of loans, projects did not conform to regulations; fiscal guarantees did not conform to regulations and there will be serious risks in paying them back. For example, the loans have been embezzled or used as investment capital,” the

Large state-owned banks provided about 40 per cent of the loans to the financing vehicles, while smaller banks accounted for 26 per cent and government-controlled policy banks the remaining 30 per cent. — About a quarter of all loans to Chinese local government financing vehicles are at a serious risk of default, according to regulators, who estimate that 2 trillion yuan ($388.6 billion) of debt could turn sour.China Securities Journal.China Securities Journal reported.REUTERS

Retail real estate sluggish: DTZ

SINGAPORE

Average prime rental rates along Orchard Road and Scotts Road remained unchanged in the third quarter, the firm said.

For the third straight quarter, gross rents of prime first-storey space in the area stayed at $39.70 per square foot per month.

Rents in other areas in the city continued to decline. Prime first storey rents in these areas fell by 0.8 per cent to $24.10 per square foot per month.

Monthly gross rents of prime first-storey retail space in the suburban malls, meanwhile, were unchanged at $33.60 per square foot per month.

DTZ said the new supply of retail space last year led to a competitive environment, which did not support any increase in rentals.

Some 1.3 million sq ft of new retail space became available last year.

Other than the newly-completed and pipeline supply that have put a lid on rentals, the two new integrated resorts also had an impact, DTZ said.

The integrated resorts siphoned off some demand for shopping as more people spend time and money at the casinos instead of at the malls, it noted.

But with a robust economic recovery taking place, DTZ said retail rents should increase gradually next year as the new supply is eventually absorbed.— Singapore’s retail real estate continues to be dogged by supply pressure, according to property consultancy DTZ.