Investors Concerned Over Increasingly Bitter Battle Being Waged By Australian Banks
The intense battle for market share that is being waged by Australia’s big four lenders is being criticized by investors, who fear that the increasingly bitter battle for customer hearts and minds will inevitably lead to pressure on profit margins and result in downgraded earnings.
Banking industry analysts and fund managers are increasingly of the belief that the fierce competition between the big four lenders will only intensify going forward, reducing their earnings as each lender seeks to defend its market share with tit for tat cuts to either interest rates or fees.
NAB fired the first salvo in the brutal war that has erupted as it contentiously announced that it would pay the mortgage exit fees of customers who switched over from rivals CBA and Westpac. Both banks are the two largest in Australia in terms of market capitalisation and have the largest mortgage portfolios and both responded immediately, by increasing the discounts on home and business loans.
CBA which has also been suffering from slow growth in its mortgage lending business over the last 18 months has also relaxed some of its lending criteria.
Consumers and the government have welcomed the changes and many see it as a sign that competition within the banking industry has increased.
Whilst consumers may welcome a bitter price war, investors in the banks are not so thrilled themselves, fearing that profit margins will also come under attack. Australian banking is one of the most profitable sectors in the economy, with the four biggest lenders expected to earn a combined $22 billion this financial year.
Analysts say that margins were already facing pressure even prior to the pricing war, largely as a result of higher funding costs and slower loan growth that is expected over the next few years. The increased competition is likely to make the issue of declining margins even more acute.
According to UBS margins of the big four lenders will fall from an average of 2.26 per cent last year to 2.25 per cent in the current year, with the investment bank forecasting margins to drop to as low as 2.13 per cent over the following two years.
Some investors are fretting that the current battle could begin to engulf businesses outside of retail and business banking and have expressed concern that this is likely if lenders embark on a strategy of sheer growth in market share, which will almost certainly come at the expense of margins.
White Funds Management managing director Angus Gluskie said. “We would be concerned if the competition was to result in significant margin compression. There is potential for that to occur. The competition that we have seen so far has been largely vocal jockeying for the market’s attention. At this stage we don’t think it’s at the level that there’s a financial detriment. But we do have our eye on it.”
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