Written by The Edge Financial Daily
Thursday, 05 November 2009 00:02
KUALA LUMPUR: OSK Research has maintained an overweight on the banking sector following most domestic banks' and selected foreign banks' move to revise upwards their mortgage rates on Tuesday.
The reseach house said banks had in general agreed to raise their average mortgage rates from a base lending rate (BLR) -2% to -2.3% to BLR -1.5% to -1.9%, while most banks would no longer absorb the legal fees on the loan documentation (1% to 2% of loan value) offered earlier, which would now have to be borne by the consumer. It said the move was positive in terms of net interest margins (NIMS) as margin enhancement would more than offset the potential impact of marginally slower loans growth.
"We are maintaining our overweight call on the sector on the grounds that NPLs are likely to be benign while the downtrend in provisions and strong capitalisation positions will provide future earnings and capital management upside surprises, which may not have been fully reflected in banks' valuations," it said in a report yesterday.
OSK said the sector was currently trading at a mid-cycle price-to-book (PB) valuation of 1.68 times. Its sector top pick is CIMB Group Holdings Bhd (buy, target price: RM14.10) and it also likes EON CAPITAL BHD [] (buy, TP RM6.60) for its attractive valuation (1.05 times PB) and potential earnings upside emanating from its group-wide restructuring and transformation plan.
OSK estimates that the upward revision in mortgage yields would contribute to an eight to 10 basis points (bps) enhancement in NIM and PUBLIC BANK BHD [], which has the strongest mortgage loans growth, would be a key winner with an estimated 3% to 4% enhancement on its FY10 earnings. The research house said the mortgage upward revision was not surprising given the highly irrational pricing that the industry had been seeing.
It said mortgage products were priced as high as BLR +1% in 2000/01 and had declined to as low as BLR -2.4% of late.
As a result, OSK said mortgages, which contribute to a relatively significant 27% of total industry loans, had seen average effective lending yield deteriorate from an estimated 7.4% in early 2002 to a recent historic low of 3.15%, representing a 425bps decline in effective yield.
OSK said this had inevitably put significant pressure on margins as the average cost of funds declined by a much lower 117bps over the same period.
"If one were to factor in an average credit cost of 30bps-40bps and average cost of funds of 2.3%, effective spreads would have narrowed to less than 80bps vs the 155bps spread that banks are able to derive from investing in relatively risk free 5-year Malaysian Government Securities (MGS)," it said.
OSK said the market share of the mortgage segment was more evenly spread than that of hire purchase as a result of intense competition from foreign banks and hence more market-driven.
"We believe that there is no guarantee that irrational competition will not recur. Sustainable and stronger than expected improvement in economic outlook coupled with the system's ample liquidity could re-spark industry-wide irrational pricing.
"That said, we note that mortgage rates are being readjusted upwards from a historical low where the average effective yield has been on consistently on a downtrend for the past 10 years, providing some comfort that pricing is unlikely to turn irrational, at least over the immediate to medium term," it said.
OSK said its channel checks indicated that a few foreign banks continued to offer rates of as low as BLR -2.2%, despite the broad- based readjustment of rates among the local banks to the current cap of up to BLR -1.9%.
It said although the upward readjustment in mortgage rates and the recent re-imposition of real property gains tax (RPGT) may have a slightly negative knee-jerk impact on the near-term mortgage application trend, medium-term recovery growth should remain largely intact.
OSK said in terms of market share in the residential loan segment, the top three domestic banks by market share (Public Bank, CIMB and MALAYAN BANKING BHD []) controlled close to 38% of the total domestic mortgage market, while the top five foreign banks collectively held a 25.6% market share.
Meanwhile, HwangDBS Vickers Research said the current pricing changes affected the secondary market, while the primary market was left unscathed at this juncture.
"At BLR -2.4%, it effectively takes banks at least two-three years to break even. BLR currently stands at 5.55%, while average cost of funds for banks are 2%.
"Taking into account implied costs set aside for credit default (can range from 20-30bps) coupled with overhead costs (agent's commission and fees) estimated at another 30bps, net yield gain on a mortgage loan is merely 1%," it said.
HwangDBS Vickers said every bank would be able to price products depending on their respective cost structure and also incidences of default. "For a customer with a healthy credit profile, it is possible for the bank to offer him/her an attractive rate," it added.
HwangDBS Vickers expects the overnight policy rate (OPR) to rise in 3Q10 in line with the stronger than expected growth (its forecast of 5% versus official forecast of just 2%-3%) as well as inflation trending toward 2.3%-2.5% by July 2010. "We are looking for 25bps in 3Q10 and another 25bps in 4Q10," it said.
HwangDBS Vickers said banks with positive impact on rate hikes were HONG LEONG BANK BHD [] (buy, TP RM8) and RHB CAPITAL BHD [] (buy, TP RM6.60) by virtue of their higher proportion of variable rate loans. For Public Bank (buy, TP RM12.20), while mortgage loan volumes may dwindle, it expected higher rates to more than neutralise the impact.
In a separate report, HwangDBS Vickers said banks had agreed to end the mortgage price war, but were still offering attractive rates for new launches.
It said some banks had started to raise mortgage rates for new applications since this week and mortgage rates had been standardised to BLR -1.8% from BLR -2.3%, while banks were no longer funding upfront costs (such as legal fees, moving costs).
"Despite the minimal 6% increase in monthly installment payments (cash flow impact 11% of property value if include upfront legal fees), this could dent sentiment that had been affected by the recent reintroduction of real property gains tax.
"Transaction velocity could decelerate in the short term (secondary market constituted ~78% of 2008 sales). It remains to be seen whether this agreement will be upheld and for how long, as the banking system is still flush with liquidity (loan-deposit ratio: 75%).
"In any case, interest rates are not expected to remain at record- low levels forever. The banks had a similar agreement to raise hire purchase rates last year — the first attempt failed, but banks later agreed on the pricing rationale and rates are now 150-200bps higher y-o-y and are stable," it said.
HwangDBS Vickers believed developers would continue to offer, if not step up, their incentive packages to stimulate demand.
"In the long-run, demand should be supported by improving economic outlook, rising income levels, inflationary fears (property is a good hedge against inflation), and a young population (50% below 21 years of age).
"Property stocks have consolidated by 15%-20% from recent peaks — current valuations are undemanding at near mid-cycle levels. Our top picks remain S P Setia, DNP and E&O," it said.
Thursday, 05 November 2009 00:02
KUALA LUMPUR: OSK Research has maintained an overweight on the banking sector following most domestic banks' and selected foreign banks' move to revise upwards their mortgage rates on Tuesday.
The reseach house said banks had in general agreed to raise their average mortgage rates from a base lending rate (BLR) -2% to -2.3% to BLR -1.5% to -1.9%, while most banks would no longer absorb the legal fees on the loan documentation (1% to 2% of loan value) offered earlier, which would now have to be borne by the consumer. It said the move was positive in terms of net interest margins (NIMS) as margin enhancement would more than offset the potential impact of marginally slower loans growth.
"We are maintaining our overweight call on the sector on the grounds that NPLs are likely to be benign while the downtrend in provisions and strong capitalisation positions will provide future earnings and capital management upside surprises, which may not have been fully reflected in banks' valuations," it said in a report yesterday.
OSK said the sector was currently trading at a mid-cycle price-to-book (PB) valuation of 1.68 times. Its sector top pick is CIMB Group Holdings Bhd (buy, target price: RM14.10) and it also likes EON CAPITAL BHD [] (buy, TP RM6.60) for its attractive valuation (1.05 times PB) and potential earnings upside emanating from its group-wide restructuring and transformation plan.
OSK estimates that the upward revision in mortgage yields would contribute to an eight to 10 basis points (bps) enhancement in NIM and PUBLIC BANK BHD [], which has the strongest mortgage loans growth, would be a key winner with an estimated 3% to 4% enhancement on its FY10 earnings. The research house said the mortgage upward revision was not surprising given the highly irrational pricing that the industry had been seeing.
It said mortgage products were priced as high as BLR +1% in 2000/01 and had declined to as low as BLR -2.4% of late.
As a result, OSK said mortgages, which contribute to a relatively significant 27% of total industry loans, had seen average effective lending yield deteriorate from an estimated 7.4% in early 2002 to a recent historic low of 3.15%, representing a 425bps decline in effective yield.
OSK said this had inevitably put significant pressure on margins as the average cost of funds declined by a much lower 117bps over the same period.
"If one were to factor in an average credit cost of 30bps-40bps and average cost of funds of 2.3%, effective spreads would have narrowed to less than 80bps vs the 155bps spread that banks are able to derive from investing in relatively risk free 5-year Malaysian Government Securities (MGS)," it said.
OSK said the market share of the mortgage segment was more evenly spread than that of hire purchase as a result of intense competition from foreign banks and hence more market-driven.
"We believe that there is no guarantee that irrational competition will not recur. Sustainable and stronger than expected improvement in economic outlook coupled with the system's ample liquidity could re-spark industry-wide irrational pricing.
"That said, we note that mortgage rates are being readjusted upwards from a historical low where the average effective yield has been on consistently on a downtrend for the past 10 years, providing some comfort that pricing is unlikely to turn irrational, at least over the immediate to medium term," it said.
OSK said its channel checks indicated that a few foreign banks continued to offer rates of as low as BLR -2.2%, despite the broad- based readjustment of rates among the local banks to the current cap of up to BLR -1.9%.
It said although the upward readjustment in mortgage rates and the recent re-imposition of real property gains tax (RPGT) may have a slightly negative knee-jerk impact on the near-term mortgage application trend, medium-term recovery growth should remain largely intact.
OSK said in terms of market share in the residential loan segment, the top three domestic banks by market share (Public Bank, CIMB and MALAYAN BANKING BHD []) controlled close to 38% of the total domestic mortgage market, while the top five foreign banks collectively held a 25.6% market share.
Meanwhile, HwangDBS Vickers Research said the current pricing changes affected the secondary market, while the primary market was left unscathed at this juncture.
"At BLR -2.4%, it effectively takes banks at least two-three years to break even. BLR currently stands at 5.55%, while average cost of funds for banks are 2%.
"Taking into account implied costs set aside for credit default (can range from 20-30bps) coupled with overhead costs (agent's commission and fees) estimated at another 30bps, net yield gain on a mortgage loan is merely 1%," it said.
HwangDBS Vickers said every bank would be able to price products depending on their respective cost structure and also incidences of default. "For a customer with a healthy credit profile, it is possible for the bank to offer him/her an attractive rate," it added.
HwangDBS Vickers expects the overnight policy rate (OPR) to rise in 3Q10 in line with the stronger than expected growth (its forecast of 5% versus official forecast of just 2%-3%) as well as inflation trending toward 2.3%-2.5% by July 2010. "We are looking for 25bps in 3Q10 and another 25bps in 4Q10," it said.
HwangDBS Vickers said banks with positive impact on rate hikes were HONG LEONG BANK BHD [] (buy, TP RM8) and RHB CAPITAL BHD [] (buy, TP RM6.60) by virtue of their higher proportion of variable rate loans. For Public Bank (buy, TP RM12.20), while mortgage loan volumes may dwindle, it expected higher rates to more than neutralise the impact.
In a separate report, HwangDBS Vickers said banks had agreed to end the mortgage price war, but were still offering attractive rates for new launches.
It said some banks had started to raise mortgage rates for new applications since this week and mortgage rates had been standardised to BLR -1.8% from BLR -2.3%, while banks were no longer funding upfront costs (such as legal fees, moving costs).
"Despite the minimal 6% increase in monthly installment payments (cash flow impact 11% of property value if include upfront legal fees), this could dent sentiment that had been affected by the recent reintroduction of real property gains tax.
"Transaction velocity could decelerate in the short term (secondary market constituted ~78% of 2008 sales). It remains to be seen whether this agreement will be upheld and for how long, as the banking system is still flush with liquidity (loan-deposit ratio: 75%).
"In any case, interest rates are not expected to remain at record- low levels forever. The banks had a similar agreement to raise hire purchase rates last year — the first attempt failed, but banks later agreed on the pricing rationale and rates are now 150-200bps higher y-o-y and are stable," it said.
HwangDBS Vickers believed developers would continue to offer, if not step up, their incentive packages to stimulate demand.
"In the long-run, demand should be supported by improving economic outlook, rising income levels, inflationary fears (property is a good hedge against inflation), and a young population (50% below 21 years of age).
"Property stocks have consolidated by 15%-20% from recent peaks — current valuations are undemanding at near mid-cycle levels. Our top picks remain S P Setia, DNP and E&O," it said.
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