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Friday, November 6, 2009

A return to rationality in mortages

KUALA LUMPUR: Rationality has returned to the pricing of domestic residential mortgages after being gradually driven to “uneconomic levels” in recent times, a top banker said yesterday.

However, CIMB Group Holdings Bhd group chief executive Datuk Seri Nazir Razak denied the banks had met and agreed to end the mortgage war but that the upward revision of mortgage rates was the result of each bank’s decision to act “rationally”.

“Of course we have conversations with each other, banks look at each other; but the point is that mortgage rates have been driven to uneconomic levels,” Nazir told reporters after a signing ceremony to mark Genting’s pricing of RM1.45 billion 10-year medium-term notes.

CIMB Investment Bank Bhd and HSBC Bank Malaysia Bhd are the joint lead arrangers and joint book runners for the MTN programme.

In denying that there had been any particular trigger or catalyst for the banking industry as a whole to revise mortgage rates upwards, Nazir said when irrationality prevailed and subsequently one player decided to act “rationally”, the others would follow suit.

He added that the low rates offered by most banks in recent years had potentially dangerous implications for the banking industry.

He warned that if mortgage rates were priced wrongly, it would come back to haunt the banks in five or six years’ time, especially with regard to potential credit losses which would have to be borne by the banks if they failed to build a buffer to manage non-performing loans.

“If they don’t build up the reserves to bear the credit cost in the long term, it will be dangerous for the banking sector,” he said, adding that the world had seen the effects of irrational pricing in the US mortgage market.

“I support rationality in pricing,” Nazir said.

OSK Research on Wednesday said banks had in general agreed to raise the average mortgage rates from BLR-2% up to -2.3% to BLR-1.5% to -1.9%. BLR is base lending rate.

The research house pointed out that mortgage products were priced as high as BLR+1% in the early 2000s and had declined to as low as BLR-2.4% of late.

It viewed the move in a positive light in terms of net interest margins (NIMS) as margin enhancement would offset the potential impact of marginally slower loans growth.

However, OSK Research cautioned that “there is no guarantee that irrational competition will not recur”.

In another report, HwangDBS Vickers Research also said banks had agreed to put an end to “the mortgage price war” but were still offering attractive rates for new launches. It had said some banks had started raising rates for new applications.

“At BLR-2.4%, it effectively takes banks at least two to three years to break even. BLR currently stands at 5.55%, while average cost of funds for banks is 2%,” it said.

HwangDBS also said every bank would be able to price products depending on their respective cost structure and also incidence of default.

It has been reported that banks are moving towards risk-based pricing in determining mortgage rates and as such, may charge borrowers different interest rates based on factors such as credit score, wages and employment, and even the type of property.

“For a customer with a healthy credit profile, it is possible for the bank to offer him/her an attractive rate,” HwangDBS said.

Meanwhile, Nazir also said demand for loans would be affected by several factors, including the soon-to-be reinstated 5% real property gains tax (RPGT).

He added that there was also “some softening of mortgage demand”, which he said “may be a good thing, because [we] don’t want the [real estate] market to bubble”.

On his outlook for mortgage loans next year, he said it was “difficult to tell” especially with the significant changes, such as the reimposition of RPGT.

On prospects for the banking sector in 2010, Nazir said it depended heavily on the macroeconomic environment. “We are not certain about not seeing a double dip in the year ahead, so we must tread carefully.”

By The EDGE Malaysia (by Melody Song)

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