Big banks worry as mortgage interest rate gaps opens with smaller lenders
Large lenders may have to introduce incentives to keep customers as smaller banks fail to raise interest rates in line with big operators
Kanis Li and Sandy Li
Hong Kong's big banks are anxious to see smaller peers follow the rises in mortgage interest rates the largest operators announced earlier this month, after a gap opened up that could let smaller lenders poach business.
"We plan to observe for some time, say a month, to see how the situation develops," an executive at a leading bank in the city said. "If the gap persists, I believe large banks will increase the attractiveness of their mortgage products by increasing cash rebate levels, for instance."
Five big banks in the city have raised their mortgage lending rates over the past two weeks, but some small to medium-sized banks, hoping to attract more customers, kept their existing rates as low as 2.15 per cent, the minimum guideline set by the industry regulator, the Hong Kong Monetary Authority.
"It is a zero sum game," a head of mortgage business at another major bank said. Bigger banks were concerned about losing potential customers to smaller banks with lower rates. "If a lot of customers turn to other banks, we have to evaluate what the impact will be to our bottom line."
The concerns come on top of a shrinking market for mortgage loans since the government rolled out a sixth round of measures to cool down the market last month.
Centaline Property managing director Louis Chan Wing-kit said transactions in the secondary market fell to near-zero after the measures. "The market is worse than it was during the Sars health scare in 2003," he said.
The gap between lending rates charged by big and small lenders means the smaller operators are in a position to take a bigger bite out of a shrinking mortgage pie, a situation causing growing concern among large lenders, who currently hold a 65 to 75 per cent share of existing and new home loans.
If that ratio dropped to 60 per cent or below, large banks would "take action" to regain their share of the pie, the executive said.
But rather than adjusting their lending rates again after such a short period, they may offer higher cash rebates or cash coupons to attract customers.
Cash rebates are currently restricted by the monetary authority to a maximum of 1 per cent of loan size. On their prime-based mortgages, HSBC and Standard Chartered are currently offering cash rebates of 0.2 to 0.5 per cent, while Bank of China says its cash rebate is set case-by-case.
"Now we have nothing to do but monitor the situation closely," the banker said.
Smaller banks have had little or nothing to say on the subject of rate increases since their bigger rivals raised their rates. Only the Hong Kong branch of Bank of Communications said it will follow the rise but it has yet to decide the effective date.
Robbie Choi Yee-chuen, head of mortgage and secured loans at Wing Lung Bank, said: "Major banks increased their mortgage lending rates because of higher costs of doing business. For us such costs are stable and we have no urgency to follow."
The monetary authority has ordered eight banks in the city to set aside 15 per cent of their mortgage lending as capital reserves, increasing the costs of making mortgage loans.
As a result, HSBC, Standard Chartered, Hang Seng, Bank of East Asia, and Bank of China (Hong Kong) raised their mortgage lending rates to a range of 2.4 to 3.5 per cent. Banks such as Dah Sing , Wing Lung, and China Construction Bank, held their rate at 2.15 per cent.
The rise in mortgage rates and extra property tax to penalise speculators have scared home seekers away from the market with sales in primary and secondary market at a record low.
In the primary market, only 13 units sold over the weekend, while two transactions were done in 10 housing estates monitored by Ricacorp Properties.
At Park Ivy, a joint venture project between Sino Land and Unban Renewal, in Tai Kok Tsui, only one unit was sold, according to sources.
In the secondary market, The Kornhill, Quarry Bay and Kingswood Villa in Tin Shui Wai each recorded one transaction respectively.