That new HSBC loan: too clever by half?

Source : Business Times – 6 Nov 2009

Why not give customers the money outright?

LAST Friday, when given the HSBC press release on its new Sibor plus equity-linked mortgage, I spent at least 15 minutes trying to figure out how it worked. The result was that I was so consumed with the promise of thousands of dollars that I paid no attention to the home loan itself.

Eventually, I had to swallow my pride and talk to an HSBC executive to understand how taking a mortgage from HSBC would put money in my pocket. The idea was quite simple: a borrower could get potential cash rebates based on an equity index over a 24-month period.

The rebate is 0.25 per cent of the outstanding loan amount. This index has to hit or exceed 130 per cent of a specified barrier level on each valuation date, which occurs on the first trading day of every quarter for a borrower to hit pay dirt. At the inception date of the equity-linked home loan on Nov 2, 2009, the barrier point index is 315.50.

Hence, on the first trading day of each quarter, commencing April 2010, if the index is more than 410.15 (being 130 per cent of 315.50) in the official closing for that day, the customer will receive a cash rebate of 0.25 per cent of the loan outstanding; if the index is less than 410.15, no cash rebate will be given. HSBC said that while the customer may get nothing, no one loses any money; it’s essentially giving borrowers a lottery ticket.

Beware the ‘Shell effect’, though: potential gains could be wiped out if interest rates jump next year and the stock market tanks, as central banks rein in liquidity and the bank ends up with moody customers.

Or stock markets move in a volatile manner and crash on the valuation day, putting home loan borrowers on edge – one day thinking they were getting $1,500, and the next day seeing it evaporate. The $1,500 possible rebate per quarter is an example given by the bank based on a $600,000 loan.

Or if the gimmick works too well and the bank ends up paying out huge amounts of cash rebates, will shareholders then suffer? And is it really a ‘free’ gamble for those who have a bullish view of the stock market?

Obviously, some bright spark worked on creating the promotion, after which the bank’s relationship managers had to be trained to explain it to customers, all of which involved some costs – money which could have been better used by just giving it to customers, one would think.

To protect the risk to the bank – in case the index does exceed the 130 per cent level every quarter – presumably HSBC has bought some kind of insurance.

It’s pretty serious money; it’s like paying a maximum 2 per cent – which is much, much more than what the bank pays fixed depositors.

It’s understandable why HSBC thought up the promotion. Mortgages are very boring products, and it is difficult to compete or lure customers without giving them something. Banks have often found themselves slashing prices in order to compete – and that’s not desirable as it can become a vicious spiral downwards in terms of profits.

So what’s the real idea behind the promotion? If it’s to give money to customers to entice them to sign up for the mortgage, why not give it to them outright? Just pay it every quarter over the same 24-month period to keep the customer from jumping ship.

After all, everyone understands money.