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NAB bolt-on right for OCBC but test lies ahead

LAST week OCBC Bank said it had entered into an agreement to buy a mortgage loan book worth about US$1.7 billion and a US$3.05 billion deposit portfolio from National Australia Bank (NAB).

Although OCBC's press release headlined the transaction as buying NAB's private wealth business in Singapore and Hong Kong, the statement detailed the acquisition as comprising mortgages and deposits. It comes with about 11,000 customers - more than 7,000 in Singapore and about 4,000 in Hong Kong - mainly from the affluent segment.

The addition of US$1.7 billion of mortgages will increase the size of OCBC Bank's housing loan portfolio by about 4 per cent, based on its existing book of S$60 billion as at end March 2017.

More than half of the properties are located in Australia, the majority of which are in the major cities of Sydney, Melbourne and Brisbane. Properties in the UK, Hong Kong, New Zealand and Singapore make up the rest of the mortgage portfolio.

Giving the rationale for the deal, OCBC's chief operating officer Ching Wei Hong said the mortgage loans book of more than S$2 billion is not small.

"It would have taken us time and money to grow our mortgage loans organically by that amount. We are now getting an immediate boost to our mortgage loans book," said Mr Ching.

"The mortgage portfolio to be transferred to us is a high-quality and well-supported one. And the customers are in the affluent segment that we have been building. We are therefore pleased to acquire this base of customers that we can extend additional banking services to."

Maybe.

Affluent customers who buy properties overseas are usually middle-aged and well-banked, that is they would already have longish relationships with their existing banks; at this time in their lives, affluent customers are well stocked with credit cards and familiar with investment advice and insights. They may be tempted to buy additional banking products if they come packaged with goodies - which will be expensive.

These affluent customers could have ventured into offshore properties because they have been sold on the prospect of higher investment returns while some have decided to buy a house or flat in Sydney or Melbourne because their children are studying there. And sell when their offsprings leave as maintaining an overseas property is usually too expensive for individuals.

OCBC may find it tough to cross-sell to this new group of customers, especially when the bank is trying to rein in costs. Its cost-to-income ratio in the past five quarters busted twice the upper 45 per cent cap set by the bank, with a high of 45.5 per cent in Q2 2016. Cost-to-income ratio declined to 43.3 per cent in Q1 2017, from 44.8 per cent a year ago.

More immediately achievable with the NAB buy is playing catch-up with its local rivals in the home loans stake. Housing loans is the single largest loan by industry for all three Singapore banks.

OCBC may be Singapore's second largest bank but its total loan book is actually in third place, behind United Overseas Bank; the latter is the smallest bank - based on market capitalisation and assets - among the three.

DBS is the biggie - with a total loan book of S$302.9 billion, followed by UOB's S$229.1 billion and OCBC at S$224.8 billion at March 31, 2017. Their respective housing loans are S$64.6 billion, S$62 billion and S$60 billion.

OCBC has struggled in the past five years to expand its loan book, and managed to do so in 2014 following its largest acquisition to date, when it bought Hong Kong's Wing Hang Bank. That catapulted its loan book into second place which it held for two years - 2014 and 2015.

Now with the latest NAB bolt-on, OCBC has a chance of pipping UOB.

Home loans are difficult to sell because of its commoditised nature - the cheapest typically clinches the deal.

DBS did not grow its market share in home loans in the first quarter and chief executive Piyush Gupta said that was due to rivals which launched tactical low-cost home loan packages in that quarter which won't be sustained. No one else in the home loan market is able to match DBS's three-year fixed rate package at 1.68 per cent, he said.

A banker once described the business as peddling like mad just to stay in place. She was referring to the strenuous effort of selling new home loans to eke out a net gain in the mortgage book which constantly is in danger of shrinking from the pool of borrowers who have finished paying up their loans.

Buying NAB's mortgage book as a way to gain market share is not a bad strategy; it's just not exciting and it's not clear how effective it would be beyond the initial boost. At least it didn't cost anything since OCBC is not paying a premium for the mortgages - that's some kind of consolation prize.