March 27, 2017

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by Ryan Ong

TOTAL Debt Servicing Ratio (TDSR) rules have been changed, with regard to refinancing. And as with most things involving mortgages, the average Singaporean understands it as well as they would a Swahili lecture on economics. Well you should make an effort, because if you have a mortgage right now this is in the “good news you can use” category.

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by Ryan Ong

TEMASEK Holdings is set to fully acquire SMRT, if only the shareholders can agree to a price of $1.68 per share. This would make the total buyout price of SMRT $1.18 billion. It would also take SMRT off the stock market, and beholden to Temasek instead of its crowd of current shareholders. But what does it mean for the staff and customers, and why do these acquisitions occur anyway?

What is an acquisition?

An acquisition occurs when a company buys a controlling stake in another (or the entirety of another company). In this sense, SMRT can be said to have been acquired by Temasek Holdings already (at present Temasek owns 54 per cent of it). An acquisition can happen in one of two ways:

Friendly acquisition

With friendly acquisitions – as is the case with SMRT – the company being acquired works with the buyer to ensure a smooth transition. This doesn’t just mean helping to facilitate the sale of their shares; it also extends to planning the handover with regard to staff and customers.

For example, SMRT has told the National Transport Workers’ Union that no SMRT staff will lose their job, as a result of the buyover. We also know that SMRT will not scrap the train service; part of the reason Temasek is buying it (see below) is to allow it to improve on that.

The company that’s doing the buying, however, still has to convince the existing shareholders to part with their shares for an agreeable sum. This is usually at a slight premium to the market price.

Hostile takeover

This happens when a company does not want to be acquired. In these situations, the buying company has to find a way to convince existing shareholders to sell it a controlling stake. This is invariably an expensive prospect, since the shareholders are being bribed into handing over the reins.

One of the biggest recent examples of a hostile takeover was in 2014, when Icahn Enterprises attempted to acquire Clorox (yes, that Clorox you use to mop your floors). Shareholders were offered a premium of more than 20 per cent on their stocks, and the total bid for Clorox came to more than $14.4 billion (Icahn still failed to acquire the company).

A hostile takeover may also involve a Leveraged Buy Out (LBO). This is when the buying company intends to sell off the assets of the acquired company in order to pay for the buyout.

For example, a company might want to buy over its competitor, but lack the resources. It then discovers that its competitor has assets valued at $2.5 billion, with few or no loans. The company could borrow an extra $1.5 billion from the bank for its takeover bid, and then sell off its competitor’s assets to pay the loan after the acquisition is made.

Cue Hollywood drama, because that usually means everyone in the acquired company is going to lose their jobs (it is being bought simply to shut it down).

Why do companies want to acquire other companies?

The main reasons are:

  • Business synergies
  • Diversification
  • Eliminating costs
  • Eliminating competition
  • Buying emerging talent

1. Business synergies

This is when two companies have complementary goals, or ways to compensate for each other’s weaknesses. For example, a property developer may be really good at building condos, but suck at selling them. The developer might then purchase a property-related magazine, and use the acquired media (along with it staff, who are more skilled at marketing) to sell their condos.

2. Diversification 

As a business grows bigger, it becomes dangerous to rely on a single product or service. It would, for example, be dangerous for Temasek Holdings to put all its money solely into banks, or solely into shipping. If it did that, a decline in the chosen industry could lead to collapse, and billions in shareholder losses (and a lot of lost jobs).

For the same reason, you often find big companies that own businesses unrelated to theirs. Most people don’t realise that Kraft, for example, has been owned by Phillip Morris (a cigarette company) for a long time.

This is why there are specialised ethical investing funds, for people want to ensure their money doesn’t go into industries like tobacco, firearms, sex, etc. It can be confusing which companies have acquired which in the corporate world.

3. Eliminating costs

A business may acquire a supplier or distributor, in order to lower costs. For example, an electronics company may be paying a lot of money to a manufacturer, to produce its designs. It might decide to save money in the long term, by just buying over the manufacturer.

This can also work “downward”. For example, a clothing manufacturer may buy over the distributor that sells its label.

4. Eliminating competition

This is where hostile takeovers tend to happen. A business may be buying over another company simply to eliminate a rival. Most governments are wary of this, because it is a practice that can result in monopolisation (when a company has enough money to buy and remove all competitors).

The Competition Commission of Singapore (CCS) looks for the following traits when deciding whether an acquisition is anti-competitive:

– The merged entity has/will have a market share of 40 per cent  or more; or
– The merged entity has/will have a market share of between 20 and 40 per cent and the post-merger combined market share of the three largest firms is 70% or more

Section 54 of the Competition Act prevents acquisitions that would be anti-competitive.

Hostile takeovers may also draw the attention of the National Trades Union Congress (NTUC), if it would result in mass unemployment (this can happen if a company buys over a competitor, only to sell all the acquired competitor’s assets to pay for the buyout).

5. Buying emerging talent

This is a variation of point 4. When Facebook bought Whatsapp for around $29.6 billion, it wasn’t because they wanted to buy Whatsapp’s customers and business. In fact, Whatsapp only generated over $13.4 million in sales just after Facebook bought them. Does that mean it was a bad idea?

Facebook probably isn’t crying. Consider that, if Whatsapp had expanded further, it could have one day become a social media site that would rival Facebook. The cost to Facebook then would have been even higher.

Also, a large corporate player sometimes spots an obscure company with great talent and a marketable product, that is not fulfilling its potential. This may prompt them to buy the company quickly, and absorb its potential.

How will the acquisition affect customers?

Acquisitions happen all the time, and usually customers don’t notice. With regard to SMRT, there may even be a positive effect – because Temasek takes them off the stock exchange, SMRT will no longer have to worry about shareholders’ demands and their dividends.

It doesn’t need to worry about making short term profits to please shareholders, and can focus on running its services better.

Acquisition by Temasek is something of a compromise: it’s not quite nationalisation, but it brings SMRT closer to being a nationalised entity. The end result on customers though, is likely to be unnoticeable.

 

Featured image by Natassya Diana.

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Binary Options Trading, buy sell, put call

by Ryan Ong

BILLIONAIRE Peter Lim just raised a ruckus over an ad, which promotes a “get-rich-quick” scheme. Now you might think these ads are nothing unusual – they will name drop famous rich people from Warren Buffet to “my sister who makes $10,000 an hour working from home”. But the ad Mr Lim is upset about was particularly elaborate, and even spoofed The Straits Times. But as much as you might roll your eyes and laugh, you should know the “scheme” being promoted – a binary options site – has a real following:

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by Ryan Ong

FINTECH is a natural response to inefficiencies in the financial system. And before we go further, l’d like you to consider the most famous banking innovation is the ATM. When the world decides your greatest innovation is us no longer having to see your face, you know how much banking processes suck. Enter the internet, with websites that provide banking solutions better than banks can provide them. And now, even the Monetary Authority of Singapore (MAS) wants an environment that’s more supportive of Fintech:

 

What is Fintech?

A portmanteau of “finance” and “technology”. Properly speaking, it refers to the way various websites aim to replace specific functions of a bank, with a more effective version.

For example, P2P lending sites aim to replace the lending function of a bank, with one that’s less tied up in red tape. Blockchain technology aims to replace the transaction systems of the bank, with one that’s safer and harder to hack. Trading sites replace the brokerage services offered by many banks, at a price that saves money for investors, and so on.

Individually, none of these specific Fintech industries represents a threat to a bank (e.g. P2P sites may replace the loans function, but you can’t really deposit money with them). This is why, during the birth of several Fintech companies, banks didn’t take much notice: Fintech firms could steal some business from the bank, but they could never replace the whole bank.

Today, banks have changed their tune. Collectively, Fintech companies have become like a school of piranhas: each one can potentially perform a specific function better than the bank. As a result, traditional banks are seeing little chunks of their business being torn away, and the collective losses are mounting.

 

The two views on Fintech

There are two differing views on what Fintech will do to traditional banking.

One school of thought is that Fintech threatens banks as much as a spitball threatens a battle tank. Fintech sites, according to this perspective, do things that banks no longer have much interest in anyway.

For example, P2P lending sites can give out loans to small businesses, and this should theoretically compete with banks. But many banks don’t want to give out small business loans anyway. The risk is high, and the upside is low (in the unlikely event your Jar Jar Binks-themed cafe becomes a roaring success, are you going to offer to repay your business loan at a higher interest rate? Of course not, so there isn’t much in it for the bank).

Another example:

Mortgage comparison websites, which might seem to affect bank business negatively by directing users to the cheapest loan, mostly work with the banks. See, the mortgage rate changes with the bank’s loan quota (the bank has a certain amount it wants to lend out, and the rates go up as this amount is reached). So the mortgage comparison sites are actually doing the banks a favour: they are advertising the banks that want to give out more loans. The banks that show up as expensive don’t care, because they’ve probably met their quota already.

On top of this, the old school concept of banking – that of banks using deposits to lend to businesses and earn off the interest – is outmoded. Today, the “deposit and loan” aspect of banking may only account for a sliver of the bank’s revenue. Many banks derive the bulk of their earnings from trading derivatives, repackaging loans into bonds, speculating with Credit Default Swaps (CDS), and other things that are invisible to us until they blow up the economy.

From this school of thought, banks aren’t being made obsolete by Fintech at all. Fintech is only taking over the functions that banks don’t care much to provide anymore.

The alternative view is more cautious.

 

Fintech will do to banks what Uber did to taxis

Fintech is catching on fast with Millennials, many of whom (1) are tech savvy and find traditional bank processes too inconvenient, and (2) have grown up in a world where there is increasing distrust of the banking industry.

The view that banks are better established and that Fintech only takes “small” amounts of business, is pretty similar to what many big hotel chains thought, right before Airbnb started to beat them like stepchildren in a faerie tale. Consider that, before Uber moved into Singapore, ComfortDelGro was a giant cab company with literally thousands more vehicles, and near total dominance of the industry. Uber was not even challenged by Comfort (and perhaps still hasn’t been), probably because it seemed insignificant.

While Fintech firms may start with taking small portions of business, they could conceivably grow into other aspects. For example, consider a payment portal: many online shoppers leave some money in their Paypal account. What happens if a site like Paypal decides to take these “residual” deposits, and start investing them using the same fractional reserve banking system that commercial banks use?

What happens if one day, P2P lending sites start rating companies the same way Moody’s or Fitch does, and moves into the finance industry in a way that dramatically affects bond markets? That could disrupt bank businesses at a higher level than retail banking.

This perspective holds that banks shouldn’t sit on their ass and be self-assured. They need to start competing with Fintech yesterday.

 

Examples of Fintech in Singapore

1. Comparison sites

These are sites that aggregate information on different products, and give you a rate comparison. The G has already done this for insurance: CompareFirst.sg gives you a list of insurance policies and quotes, so you can pick based on price, coverage, etc.

We also have sites like MoneySmart and MortgageWise that compare home loans, SingSaver and Get.com which compare credit cards, SG Car Mart for comparing car insurance, and others. The point of these sites is to save you the effort of having to manually compare.

Most comparison sites are free to you, as they operate on the referral fees or commissions they get from selling the bank or insurer’s product.

2. P2P Lending

You can find this on sites like MoolahSense and CapitalMatch. The site hooks you up with a business that needs money, and you can lend them some (usually there’s a minimum sum of $1,000). The interest on this loan is high, up to 21 per cent per annum, so you can grow your money fairly fast.

Of course, this means you take the risk of the business defaulting, and being unable to pay you back. P2P Lending is often used in small doses (like five per cent of your investment portfolio), so the potentially high returns can offset the low returns from safer products.

3. Trading sites

These are companies like Call Levels or 8 Securities, which make it easy or cheap to trade stocks and Forex. Those of you who already do this will be aware of issues such as platform fees, or interface features like the update systems. Pick the one that works for you.

 

Banks aside, Fintech adds a lot of value to you, as the end-user.

Fintech ultimately saves time and money, two resources everyone is always short of. Nurturing Fintech is going to be the smart way forward for us, both because we’re a finance hub, and because Fintech is aggressive when it comes to marketing. If you don’t understand loans or trading, you can bet there’s a Fintech site out there that wants to ram the knowledge down your throat.

In a way, Fintech isn’t just making things convenient. Fintech companies, in an effort to create demand for their services, often produce content explaining mortgages, insurance policies, risk management, and other things we would make mandatory in the school syllabus if we were smarter people. Whatever happens to the banks, Fintech is healthy in more ways than one.

 

Featured image Fintech, money, finance by Flickr user Tech in Asia(CC BY 2.0)

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Photo By Shawn Danker
The Singapore stock exchange building.

by Ryan Ong

EXACTLY how much does a company need to tell you about its business? Should SMRT have told its shareholders about its defective trains? Or was that not really relevant? After all, you probably don’t ask questions about the various companies in your mutual fund portfolio; for all you know, one of them produces dim sum out of old pants and the medical waste of an STD clinic (which would explain the frozen Xiao Lung Baos in several supermarkets). This week, we’re looking at disclosure from a financial aspect:

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by Ryan Ong

BANKS have started to drop home loan rates faster than an O Level student dropping humanities. The rate for private bank loans, which usually hovers at around 1.8 per cent for the first three years, went as low as 1.28 per cent. Here’s how the math works out:

Say you buy a condo for $1.6 million, because privilege is best flaunted. The total loan amount would be $1.28 million (you can only borrow up to 80 per cent of the value, the rest has to be paid in cash. That’s why people still smuggle drugs despite the death penalty).

Say this $1.28 million has a 25 year loan tenure, with an interest rate of 1.8 per cent. Monthly repayments would be around $5,302 per month. Wow, that’s more than my fund manager makes for me per month (by around $5,302). Over a period of three years (the interest rate jumps on the fourth year, it won’t stay the same), that’s $190,872.

Now adjust it downward by just a little, to 1.3 per cent. The monthly repayments come to about a flat $5,000, or $180,000 over three years. That’s a savings of $10,972. That ain’t chump change – it’s enough for a European holiday, or maybe one bun at a Marina Bay Sands cafe.

Needless to say, plenty of private home owners have suddenly felt the urge to refinance. It’s even a strong temptation for those using HDB Concessionary Loans. HDB loans can be refinanced to bank loans, although they cannot be switched back afterward. HDB loans have an interest rate of 2.6 per cent. (Yes, it’s more expensive than the banks. Ask your MP to justify it! They love to serve their public!)

 

Why would the banks charge so little?

The first reason is that banks care and want to give back to society, such as through generous undeclared funding for struggling writers. The second reason is that home loans are pegged to certain indexes.

The most commonly used index to determine home loan interest is the Singapore Interbank Offered Rate (SIBOR): the interest rates of 20 banks are ranked from highest to lowest, and the SIBOR rate is the averaged number between the six middle banks.

Although it’s local, SIBOR rates are indirectly affected by interest rates in the United States.

For example, one of the reasons rates have been so low is due to the 2008/09 Global Financial Crisis. In order to stimulate economic recovery, the Federal Reserve (Fed) reduced the interest rate to zero. This caused SIBOR to go lower than an argument in a YouTube comments box, and partly contributed to a property frenzy that peaked in 2013.

This is where Brexit comes in.

 

How did Brexit make a difference?

I’m getting there. Bear with me.

By 2015 the United States economy was recovering, because unemployment had fallen and Donald Trump was still a funny joke. The Fed decided to raise interest rates again, because prolonged periods of low interest tend to result in high inflation further down the line.

After sufficient people had threatened to throw themselves off the roof, the Fed announced they’d raise the rate slowly. They would start with a teeny bump, of 0.25 per cent. Then there would be three more rate hikes, until the end of 2016. This caused SIBOR rates to rise steadily, with many banks expecting it would hit two per cent by end 2016. There was a big hunt for good fixed rate loans.

The two things happened.

First, the US economy didn’t grow as fast as expected. Second, Brexit.

While it won’t have a significant impact for a while more (the UK has yet to initiate the proceedings to leave the European Union), it’s uncertain what will happen when they do. It’s plausible that the European Union (EU) will deny the UK access to its single market, or come to harsher terms than expected. It’s also possible that the UK’s departure signifies the coming break-up of the EU, if states like France, Portugal, Italy and so forth decide to also pull out.

In light of slowing growth (the US is no longer sure its economic recovery is as complete as they suspected), and the uncertainty of Brexit…they decided to freeze the other three rate hikes.

This means the rate stays at 0.25 per cent, and SIBOR won’t be reaching new highs this year.

Even better, the worse the outcome of Brexit, the more pause the Fed might give to raising rates. That puts many Singaporean home owners in the odd position of wanting some tension and fear in international markets, in order to keep the house cheap. You can bend steel bars around the irony.

 

It’s funny because we’re an island

The metaphorical meaning of “island” usually denotes self-sufficiency (no man is an island). Whoever said that clearly didn’t conceive of Singapore, which is buffeted by outside forces – and dependent on the fates of other nations – precisely because we’re an island.

None of that is likely to change: not by SG 52, SG 100, or SG 10,000. When something as domestic as our home loan rates can be impacted by foreign affairs, it explains our near constant paranoia.

 

Featured image Home Loan by Flickr user CafeCredit (CC BY 2.0)

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How buying a house for retirement can screw your retirement

by Ryan Ong

SINGAPOREANS today have to save nine years longer to retire, compared to their predecessors. That’s terrible news, because when I walk past a sale I can’t manage to save for nine minutes, let alone nine years. What’s interesting about this HSBC study though, is the mention of housing – a lot of Singaporeans count on downsizing their property as a way to pay for retirement. There are all sorts of issues with that:

by Ryan Ong

SINGAPORE is one of the few countries where the downpayment on a family car matches the downpayment on some houses. Unless you’re going to live inside your car, you better lay off the thought of getting a new one. As such, an increasing number of Singaporeans are looking toward old vehicles – and they’re not buying (not immediately anyway) them either:

Photo By Shawn Danker
The CPF Building at Robinson Road.

by Bertha Henson

IT’S only when you start hitting middle age that CPF takes on a bigger role in your life, especially when it seems to be the only form of savings you have, besides your key asset, your home. That’s when the dreaded phrase “minimum sum” starts to worry you.

 

First report

It’s no longer called the “minimum sum” by the way. It’s now known as the retirement sum. And it can be Basic, Full (x2) or Enhanced (x3). Your monthly payout at 65 depends on which of the three retirement sums you opted for and which CPF Life plan you have.

Does it sound complicated? Actually, that’s the simplified version proposed by the CPF Advisory Panel when it released its first report on tweaking the CPF scheme in February last year. You can find all the reports and press releases here.

The best thing about that first report, which included changing most of the names we’re used to, was that it made it clear that the minimum, oops, retirement, sum shouldn’t be sprung on cohorts like a bad virus. So, for those turning 55 this year, the basic retirement sum that applies to you is $80,500​. If you are turning 55 next year, it will be $83,000, and in 2018, it will be $85,500​.

The other thing which is that it offers you some choices about the sort of payouts you want to get, whether at age 65 or later, whether it’s the same amount until the day you die or increasing amounts as you get older. It’s the “escalating” plan.

 

Second report

So what’s this second report all about?

It has to do with expanding your CPF pot beyond the interest earned. But in a way that won’t get you burnt.

Sure, you still can leave everything alone and get up to 3.5 per cent interest in the Ordinary Account (OA) and up to 5 per cent interest in the Special Account (SA) – these include the extra 1 per cent paid on the first $60,000 of a member’s combined balances.

Or you if have $20,000 in the OA and $40,000 in the SA, you can still decide to turn investor and take advantage of the current CPF Investment Scheme (CPFIS) – of which there are two kinds, the CPFIS-OA and CPFIS-SA. But you know how that’s worked out for most people. Only 16 per cent of CPF investors made more returns than what they would have got if they left the money alone – that is, they failed to earn at least 2.5 per cent in returns.

That might be because there’s more than 200 approved funds to choose from and you might not be savvy enough to pick the right one, or don’t have the time to keep watch over your portfolio to reap profits. Even if you do “buy and sell”, there’s all those administrative and management fees to pay, which can erode potential earnings.

The CPF panel thinks that something in between both options needs to be fashioned to make sure all that money in the OA and SA can be put to work. So it’s come up with a proposed Lifetime Retirement Investment Scheme which is low-fee, low-risk, and requires a lower amount of time and effort to manage.

There will be a few diversified funds with a range of returns you can sink your CPF money in. It’s not guaranteed of course, but at least someone has worked out the probabilities for you. So if you and 100 others decide on a certain fund, the money will be pooled and put into it by someone behind the scenes who will manage it for you.

And because this will involve so much money, there will be an expert investment panel set up to advise on the mechanics and the implementation. So hold your horses. No details yet.

 

Click on the following links to find out more about the proposed changes made by the CPF Advisory Panel:

  1. Part 1
  2. Part 2

 

Featured image from TMG file. 

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