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Tutorial 5

Tutorial 5

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Published by NothingToKnow

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Published by: NothingToKnow on Dec 10, 2008
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11/07/2012

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BAF3009 Financial Institutions & Markets(Answer Guide)
TUTORIAL 5:FINANCE COMPANIES & SGX-SECURITIES TRADINGQuestion 1
Traditional businesses: HDB home loans, car loans, SME loans- HLF: cleaned up its loan portfolio, moved away from used car loan business
Non-traditional Businesses: Distribute unit trusts, corporate finance advisory services, sellinsurance policies, act as underwriter, provide foreign exchange services to customers(hedging their foreign currency receivables, HLF plans to be a one-stop shop for SMEs),locate prospects for M&A.)Possible reasons for moving into non-traditional businesses
The market was getting competitive; the traditional businesses of finance companies were notenough for HLF to move on - Fierce competition from commercial banks (both local andforeign) in their traditional markets
 Additional Note: SME financing, property loan (led by the 3 local banks) and car loans (led by DBS with more than 20% of market share)
Needed to diversify to fee-based businesses to stay in the competition -goal is to increasenon-interest contribution to revenue to about 10% from the current 5% (DBS has non-interestincome of about 40%)
Tightening regulations by MAS - Cannot provide overdrafts, have an unsecured lending limithigher than the current $5,000 (and participate in foreign exchange trading)
Question 2
Share Loans
loans granted against a security/ pledge of acceptable shares
if the share prices drop, the value of the pledged securities will decrease
the loan to security ratio may rise above the approved margin of financing of say 70%;
and the finance company will make a margin call on the customer The customer can service the margin call
topping up with additional collateral by pledging more shares or acceptable securities
topping up with cash
selling the pledged securities to raise cash to reduce the overdrawn position
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