Singapore Finance Companies - MAS relaxes rules on Finance Companies
- MAS relaxes rules on finance companies on some business restrictions and liberalises shareholding policy.
- Aimed at providing alternative financing options to SMEs to support the economy; prospects to finance companies are positive.
- Hong Leong Finance (HLF), Sing Investments & Finance (SIF), and Singapura Finance (SBD) are three listed finance companies; currently trading at c. 0.7x P/BV; potential to re-rate on new prospects of M&A and growth.
- These rules are expected to be neutral to banks as a different customer profile is served.
- MAS relaxes rules on finance companies – some business restrictions relaxed; shareholding policy liberalised. The Monetary Authority of Singapore (MAS) yesterday announced regulatory changes to strengthen the resilience of finance companies (fincos) and enhance their ability to provide financing to small and medium sized enterprises (SMEs). These are:
- Relaxation of business restrictions with enhanced prudential standards, and
- Liberalisation of shareholding policy.
- It is opined that fincos fill a useful niche in SME financing, complementing the role of banks. They often provide more personalised and customised solutions for smaller-sized businesses in particular.
(1) Relaxation of business restrictions with enhanced prudential standards; filler for SME financing.
- Lifting limit to uncollateralised loans as a percentage of capital funds. The limit on a finco’s aggregate uncollateralised business loans will be raised to 25% of its capital funds, from the current 10%. The limit on uncollateralised business loans to a single borrower will also be raised to 0.5% of capital funds, from the current S$5,000.
- Allowance to offer current account and chequing services. Fincos will be allowed to offer current account and chequing services to their business customers. They will also be allowed to join electronic payment networks, including Inter-bank GIRO, Fast and Secure Transfers (FAST) and Electronic Funds Transfer at Point of Sale (EFTPOS). These changes will enable fincos to provide more comprehensive credit and deposit services to SMEs.
- There are still some restrictions. Restrictions on foreign currency exposures and derivatives trading are retained. These restrictions will help to limit the business risks borne by fincos and encourage them to remain focused on serving the domestic SME market.
- MAS will also require fincos to enhance their corporate governance and risk management. This includes stricter rules on related party transactions and limits on exposures to the property sector MAS will phase in the above regulatory changes starting this year.
(2) Liberalisation of shareholding policy.
- Allowing a foreign takeover. MAS will liberalise its existing policy of not allowing a foreign takeover of a finco. This will accord fincos greater flexibility to explore strategic partnerships and innovative business models that can strengthen their SME financing business.
- Open to M&A/new strategic partners with a commitment to maintain SME financing as the finco’s core business. Specifically, MAS is prepared to consider an application for a merger or acquisition if the prospective merger partner or acquirer commits to maintaining SME financing as a core business of the finco. In addition, the merger partner or acquirer must be able to demonstrate expertise in SME financing and present proposals to enhance the finco’s SME lending activities with new technologies, methodologies or business models.
Better prospects for fincos post new rules.
- The ability for fincos to ramp up asset growth appears positive on the onset with these revised rules. In addition, fincos will now be able to gather current account deposits, which should also lower funding costs. These should see net interest margins (NIM)s improve.
- The larger loan size with the increase in the single borrower limit should open doors to SMEs which were too large to borrow from a finco previously but too small in the eyes of the banks.
Three listed fincos are direct proxies.
- There are three licensed fincos today Hong Leong Finance (HLF), Sing Investments & Finance (SIF) and Singapore Finance (SBD)) with around S$16bn in combined assets.
- Fincos are allowed to accept retail deposits and are significant providers of loans to SMEs. Based on the statement by the MAS, as at end-2Q16, fincos accounted for just under S$7bn of outstanding SME loans.
Will these fincos be a threat to the banks? we think not.
In comparison to banks, the fincos are small.
- The three fincos have S$16bn in combined assets which is equivalent to 1.4% of banking sector assets of S$1,146bn. Assuming SME loans account for approximately 25% of total loans in the banking system, the S$7bn outstanding SME loans of fincos is just a mere 5% of banking sector loans of S$147bn. Even if these fincos are able to scale up and double its loan base and asset size, it would still only form a small proportion of the banking system’s assets and loans.
- Bear in mind the customer profiles of fincos are different compared to the ones targeted by the banks.
Profile of the three fincos:
- Hong Leong Finance, the financial services arm of Hong Leong Group Singapore, is Singapore’s largest finance company with a distribution network of 28 branches and over 600 employees. HLF has more than 50 years of experience in SME lending, offering the widest suite of products and services, including corporate finance and advisory services, compared to its peers.
- HLF is managed and controlled by the Kwek family.
- Key management: Kwek Leng Beng, Chairman/ Managing Director
- Major shareholders: Hong Leong Investment Holdings Pte Ltd: 22.45% Hong Realty (Private) Limited: 5.24% Kwek Leng Beng: 1.49%
- FY2015 loans breakdown: More than 40% of HLF’s loans are traditionally in the Building and Construction (B&C) sector, followed by housing loans which are secured by property (13%), and hire purchase/ block discounting (13%).
- Sing Investments & Finance has more than 40 years of lending experience as a finco. Products include residential and commercial property loans, land and construction loans, machinery loans under the Local Enterprise Finance Scheme, motor vehicle loans and block discounting facilities among others. SIF has four branches locally.
- Key management: Lee Sze Leong, Managing Director/ Chief Executive Officer Lee Sze Leong is the son of SIF’s previous Chairman, Lee Fee Huang, who retired in Apr 2015 having been appointed to the post since 1993.
- Major shareholders: FH Lee Holdings Pte Ltd: 25.84%
- FY2015 loans breakdown: Similar to HLF, the bulk of SIF’s loans are B&C loans (23%). However, loans to financial institutions (FIs), investment and holding companies are also substantial at 23%. Hire purchase finance loans are 13% of total loans, followed by loans to professionals and individuals (12%).
- Singapura Finance Ltd was founded in 1950. It was first founded as Federal and Colonial Building Society Ltd, subsequently renamed as Malaya Borneo Building Society Ltd and subsequently Singapura Building Society Ltd (SBS), where it introduced deposits and housing loans. At that time, SBS was a major player in property financing, while working with developers to finance developments such as Teacher’s Estate, while providing other agency and advisory services to government bodies for staff housing loan schemes.
- Today, SBD has seven branches in Singapore and provides a range of products and services including personal deposits, personal loans and business banking products.
- SBD is managed and controlled by the Teo family.
- Key management: Teo Chiang Long, Executive Chairman Jamie Teo Miang Yeow, Chief Executive Officer (son of Teo Chiang Long)
- Major shareholders: See Hoy Chan (1988) Pte Ltd: 46.91% - founded by Dato Teo Hang Sam, grandfather of Teo Chiang Long Teo Hang Sam Realty Sdn Bhd: 5.28%
- FY2015 loans breakdown: Hire purchase/block discounting forms 27% of total loans, followed by professionals & individuals at 21%. Loans to building & construction and housing loans totalled 20% collectively.
Fincos vs banks.
- Unlike banks, fincos typically provide simpler products such as car loans, property loans, hire purchase, block discounting, as well as various government-assisted schemes for SMEs. We summarise the business offerings of the three fincos in the following table.
- Typically, fincos have to pay higher interest rates as compared to banks to attract deposits. While fincos are largely viewed as taking on riskier assets compared to banks which typically translates into higher yields as reward for risk, cost of funding is higher as well, hence NIMs may be lower than banks, as in the case of HLF and SIF.
- As fincos typically have riskier assets compared to the likes of banks, with the exception of HLF which operates pretty closely to a bank, non-performing loans (NPLs) are typically higher for these companies.
- Fincos are also known to possess strong relationships with their partners, such as car dealers, in providing car and hire purchase loans. These relationships are deemed to be valuable in securing loan growth. Potential acquirers may also favour the fincos’ relationships and network in the property sector, as such relationships are not easy to acquire.
Fincos are trading at c. 0.7x P/BV; potential re-rating on current newsflow.
- The share prices of the three fincos have surged by 10% to over 20% yesterday following the MAS announcement, and are currently trading c. 0.7x P/BV, with PEs ranging between 16x to 21x. From a P/BV perspective, these fincos are trading at a 30% discount to the banks. However, on a PE basis, the 16-21x multiple is lofty compared to banks given their sub-par ROEs.
- We currently do not have coverage on the fincos.