NAB Increases Home Loan Market Share Whilst Losing Deposits
Australian banking major National Australia Bank, which raised its interest rates by less than its big four rivals has managed to capitalize on that differential by increasing its mortgage lending market share, though as the expense of losing some of its deposits.
The Australian Prudential Regulation Authority (APRA) published December statistics earlier this week which showed that NAB has managed to capture some market share at the expense of its rivals with its “Fair Value” banking campaign.
Australia’s fourth largest lender by market capitalisation increased its mortgage portfolio by 1.3 per cent in December, compared with 0.2 per cent for CBA, 0.55 per cent for Westpac and 0.8 per cent for ANZ.
NAB’s mortgage book now consists of $105.5 billion in owner occupied home loans and $50.24 billion in investment loans.
CBA and Westpac Australia’s two largest mortgage lenders have deliberately slowed down their mortgage lending, after having rapidly expanded their portfolio during the economic slowdown.
A consumer backlash against CBA, which raised its mortgage lending rates by nearly double the move by the central bank was also a reason for the slowdown in mortgage lending by Australia’s largest bank.
NAB has the equal cheapest standard variable rate among the majors at 7.67 per cent, with ANZ, compared with Westpac’s 7.86 per cent and CBA’s 7.81 per cent.
The data from APRA also suggests that contrastingly NAB experienced a marked drop in the level of its deposits which fell by 1.8 per cent in December or by $5 billion.
However deposits across all Australian banks grew by 18 per cent on an annualized basis for the month, whilst corporate deposits rose by 13 per cent.
Global credit ratings agency Fitch released a report this week which said that banks in the Asia Pacific Region continued to remain amongst the most stable in the world and highlighted Australian lenders as being in strong shape despite the potential that their earnings growth would fall this year.
“The improvements in profitability in 2010 have been heavily influenced by lower impairment charges and asset quality stabilizing. There is less scope for reductions in these charges in 2011, which together with modest top line growth suggests that return on equity and assets will not improve significantly.” Fitch analyst John Miles said.
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Australians Increasingly Turning To Fixed Rate Mortgages
In a climate of rising interest rates and volatile financial markets, Australians are increasingly turning to fixed rate mortgages.
According to data released by mortgage broker AFG, the total number of mortgages in 2010 fell by 10 per cent, whilst nearly 10 per cent of all borrowers opted for a fixed rate mortgage.
AFG estimates that nearly $27 billion in mortgages were processed in 2010, down from $30 billion in 2009.
Mark Hewitt of AFG said that the rate rises of 2010 and political criticism of the banking industry resulted in a challenging environment. Despite the issues, Mr. Hewitt believes that there will be more activity in the market during 2011 largely driven by competition from smaller lenders.
Data from AFG suggests that during December 2009, fixed rate mortgages comprised only 2 per cent of all mortgages. During December 2010, that figure rose to 12.6 per cent.
According to Mr. Hewitt, this increase was driven by banks aggressively marketing fixed rate mortgages, and concerns by borrowers over potential rate rises.
On Thursday, the Housing Industry of Australia revealed that during November 2010, the number of building approvals declined 4.2 per cent.
Andrew Harvey and economist with the HIA said that residential approvals fared worse falling 9.9 per cent over the year.
“It’s unfortunate to begin the new year with disappointing building approvals data which point to subdued housing starts in the first quarter of 2011. The real concern is that the November figures would not have felt the full impact of the November interest rate hikes by the Reserve Bank and the banks, so it’s hard to see Australia’s residential building activity improving any time soon.” Mr. Harvey said.
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ANZ Boss Mike Smith Latest Banking Chieftain To Rail Against Bank Bashing
Mike Smith, chief executive of Australian banking major ANZ is the latest banking chieftain to rail against bank bashing, once again justifying ANZ’s interest rate policy as one being driven by the “permanently higher” costs of doing business.
Mr. Smith made his comments during the lenders annual general meeting last week and followed similar comments made by ANZ chairman John Morschel who defended ANZ’s decision to lift its interest rates by 120 basis points over and above official interest rate rises since the start of the global financial crisis.
“We believe our mortgages are fairly priced in line with costs and risks,” Mr Morschel said.
Mr. Smith, who made an appearance before the Senate inquiry into competition within the banking industry last week warned of the negative consequences of populist backlash against Australia’s most successful industries including mining, telecoms and banking.
“We support practical measures which will increase competition and consumer choice, without increasing the cost of banking. We also believe it’s important to have a discussion where facts and sound analysis are put on the table, not opinions and empty rhetoric. A critical issue that we have to face up to is the fact that banks now have permanently higher funding costs.” he said.
Mr. Smith also warned that it was apparent that the global economy still faced substantial risk for the recent instability in the Euro Zone region, and re-iterated Mr. Morshcel’s view that whilst the pace of Australian economic expansion was likely to be faster than other developed countries, it was still subject to similar volatility as the US and Europe.
“This includes potential volatility in our funding costs,” Mr Smith said.
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Smaller Australian Banks Offer Loyalty Interest Rate Discounts To Mortgage Borrowers
Smaller Australian lenders have begun offering rewards to mortgage borrowers who stay loyal to their bank by offering discounts to home loan interest rates which can be as high as 0.75 per cent.
Smaller banks are seeking to retain their existing customers and are pushing harder to earn their loyalty by rewarding loyal customers with significant discounts on their borrowing rates.
The move by the smaller banks comes against a backdrop of negative public sentiment towards the big four lenders, who angered many with the size of their most recent rate increases, which were higher than the official hike in interest rates implemented by the Reserve Bank of Australia.
Discounts are being offered by Bankwest (a unit of CBA), HSBC, Credit Union of Australia, State Custodians Mortgage Company and ECU Australia.
Currently HSBC offers the highest level discounts amongst the six lenders offering them, with borrowers receiving a 0.25 per cent discount of the standard variable rate after the first year, followed by another half a per cent off after the second year, under the HSBC’s Home Rewards Loan program.
Market watchers believe that as the government cracks down on early exit charges, and interest rates continue to rise, borrowers will have a greater incentive to shop around for the best deal. In order to pre-empt any exodus of customers, the lenders have embarked a strategy of offering discounts to borrowers who stay loyal to their lender as they seek to hold on to customers for longer.
Discounts on interest rates over time is an effective alternative to exit fees and provide smaller lenders with a great mechanism in retaining their customers.
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Federal Treasurer Swan Urges Mortgage Borrowers To Switch To Credit Unions
Federal Treasurer Wayne Swan is advising mortgage holders to switch their lenders from the big four banks to credit unions. Mr. Swan is gearing up to reveal his proposals for a second set of banking reforms which include measures to curtail mortgage exit fees.
The Treasurer is his weekly address, said that smaller lenders, including regional banks, building societies, credit unions and wholesale lenders were a competitive force to be reckoned with.
“That’s why I’ve been working for years to support their ability to fund cheaper loans through our $16 billion investment in residential mortgage-backed securities so they can really give the big banks a run for their money. That’s why we’ve cracked down on unfair mortgage exit fees, which has already led two of the major banks to remove theirs in direct response, and it’s why we brought in an account switching package to help consumers more easily move their deposit account.” Mr Swan said.
Joe Hockey, shadow Treasury spokesperson for the coalition opposition writing in an op-ed featured in The Australian says they time is right for the banking industry to undergo further reforms. Reforms which reflect the political reality of the post global financial crisis world, that banks have effectively become “to big to fail”
“The Coalition is not calling for more regulation to address these challenges. It is not calling for greater interference in the commercial decisions of banks. It is calling for measures to facilitate greater competition in the provision of financial services so the market operates more effectively. It is also calling for specific recognition of the additional support provided to banks by taxpayers, a review of whether that support should continue, and if so, what the community should expect in return. The governor of the RBA has said banks are not like other businesses. We agree. It is time that unique position was formally recognised.” Mr. Hockey Said.
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Rate Hikes Forcing Australians To Scale Back On Christmas
According to the results of a new survey conducted by mortgage broker Loan Market, one in ten mortgage borrowers have scaled back their plans for the Christmas holidays as a result of higher interest rates.
The survey also suggests that nearly two thirds of people who responded to its poll said they were-evaluating their spending plans as a result of the impact of higher mortgage repayments.
An online survey by mortgage broker Loan Market also found that almost two-thirds of respondents were re-assessing their spending due to higher mortgage repayments.
Dean Rushton, chief operating officer of Loan Market said that the four 25 basis point rate rises by the Australian central bank during 2010 has had a major impact on the economy, particularly on the retail sector, which is in desperate need of a robust Christmas season.
“Many Australians are struggling with the cost of everyday goods as well as services such as power and water, and they needed some interest stability,” he said.
Of the 452 people who responded to the poll, 35 per cent said that banks and the RBA had “turned Santa into Scrooge”, whilst 17 per cent said they were opting for cheaper substitutes instead of more expensive food items over the holiday season.
38 per cent of poll respondents said that despite the increase in their mortgage repayments, it would be “Christmas as usual”
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Experts Say Banning Exit Fees Will Result In Less Competition In The Banking Industry
According to The Australian Centre for Financial Studies, whilst the cessation of exit fees may result in a short term gain for customers who wish to shift lenders, the long term impact of the measure is likely to be less competition within the banking industry.
The Centre says the decision to place strict limits on bank’s abilities to charge exit fees will make it increasingly difficult for smaller regional lenders to compete.
Smaller financial institutions rely on keeping customers for years just to break even, having had to invest far more than the big four lenders to win those customers in the first place.
Deborah Ralston ACFS director says the exit fee measures are the latest in a series of regulations that have had a negative impact on smaller lenders, including the banning of ATM interchange fees, bank funding guarantees and the collapse of the securitization market.
“The major banks grew from strength to strength through the global financial crisis just as the position of their competitors, the second-tier banks, building societies, credit unions and mortgage companies weakened,” she said.
Professor Ralston pointed to the fact that whilst smaller lenders were required to pay the government 150 basis points for use of the Federal government funding guarantee, the major lenders were only charged 70 basis points.
Payment reforms implemented by the Reserve Bank of Australia, which require lenders to show their customers the cost of using their ATM cards at cash points of rival banks had encouraged customers to shift their accounts to bank’s with a larger ATM network.
Dr. Henry Ergas of Deloitte says that new entrants to the Australian market had introduced the concept of the exit fee, largely as a means of offering a better deal to potential customers by eliminating up front payments. Dr. Ergas went as far as suggesting that exit fees in fact increased competition within the banking industry by raising the value of acquiring a customer.
Exit fees also cuts the risk that a lender will lose its best customers and be left with the bad ones.
“At the outset, when a bank takes on a customer, there is some uncertainty about the customer’s future income trajectory and what the future value of the asset against which they are lending,” Dr Ergas said. “The lower the switching cost to good customers, the greater the risk that the bank will be stuck with the lemons.”
The result would be that everyone has to offer higher up-front fees to guard against this risk, he said. “Eliminating exit fees is a two-edged sword,” he said.
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Australian Banks Deny Gouging Customers With Mortgage Lending Rates
The Australian Bankers Association says that claims that lenders are gouging their customers with their mortgage lending rates are “manipulated”. The ABA issued the rejection of the claim, after think tank the Australia Institute told a newspaper that the banks had lifted their rates higher than the increase in their funding costs.
The Australia Institute says that whilst the official rise in interest rates during the June quarter of last year was an average of 136 basis points, funding costs had risen by only 88 basis points.
Steven Munchenberg chief executive of the ABA says the think tank’s calculations were flawed, because the Australia Institute used interest rates that were averaged over a year.
According to calculations carried out by ABA statisticians, the official cash rate rose by only 68 basis points.
“My quotes were misrepresented — we don’t agree with the Australia Institute calculations or their conclusions. Clearly, if the Australia Institute was correct, bank margins would have grown enormously. The RBA and APRA have both said bank margins have fallen.” Mr. Munchenberg said.
According to the latest data from the Australian Prudential and Regulatory Authority (APRA), margins for the Big Four lenders fell from 2 per cent to 1.9 per cent for the year ending June.
CBA chief executive Ralph Norris echoed Mr. Munchenberg’s comments, saying that Australian lenders were not profiting from lifting their interest rates in excess of official rate rises.
“I think the RBA’s analysis is somewhat at odds with the Australia Institute, and I would tend to take the view of the RBA over the Australia Institute. If you work on averages, you have a situation where you have a starting point and the end point. When you take the average, you draw the line in the middle.” Mr. Norris said.
The Australia Institute rejected the notion that its calculations were inaccurate and said both CBA and ABA were “defending the indefensible”
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ANZ Angers Politicians By Raising Interest Rates By 39 Basis Points
Australian banking major ANZ has added to the intense political fire-storm surrounding the banking industry by increasing its standard variable mortgage lending rate by 39 basis points, 14 basis points higher than the official rise in interest rates.
ANZ in an attempt to soften the blow of its rate hike included a number of sweeteners such as abolishing exit fees and discounting switching costs.
Finance minister Penny Wong in condemning the rate hike said that the move would be met by intense public hostility.
Prime Minister Julia Gillard added her voice to the growing criticism by saying that Australian lenders had no excuse for lifting their interest rates above that of the official rate.
Joe Hockey, Treasury spokesperson for the opposition said ANZ “made a mockery of the Gillard government and had kicked sand in the face of Wayne Swan.”
ANZ’s 39 basis point rate hike takes its standard variable rate mortgage to 7.8 per cent and adds another $77 a month in repayments to a $300,000 loan which has a 25 year tenure.
ANZ’s decision follows that of CBA’s move last week to lift its lending rates by 45 basis points. The decision by CBA sparked a political fire-storm which has resulted in ASIC saying the banking industry will come under intense scrutiny and an all out assault on the sector by Mr. Hockey.
ANZ chief executive of Australian operations Philip Chronican said “intense competition for deposits and high wholesale funding costs” had increased the bank’s cost of lending.
“Politicians have their own issues that they are trying to deal with it; we didn’t want to engage in a political debate,” he said.
“I think the issue got out of control in the last week or so and I think we need to bring it back down to a substantive level. We hope it passes and we can have a genuine dialogue with Canberra.”
ANZ sought to soften the blow by introducing a raft of measures designed to placate politicians and consumers. ANZ says it will abolish mortgage exit fees, it will also offer a 44 basis point discount on three year mortgage rates until the end of the year, and will also offer as much as $1,600 in fee discounts, which will have the effect of lowering switching costs for loans.
Prime Minister Gillard speaking whilst attending the G20 summit in Seoul Korea described ANZ’s decision as arrogant and added that it would anger the Australian people. The Prime Minister issued a stark warning to Australian lenders not to doubt the government’s resolve to raise the level of competition within the banking industry.
Penny Wong said that ANZ’s decision showed that the lender had failed to learn from the lessons of the last week and that it would face the same kind of hostility from the Australian people as CBA.
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Big Four Banks Move To Raise Interest Rates By More Than Central Bank Inevitable
As three of Australia’s Big Four lenders have yet to announce their interest rate policy in response to last week’s 25 basis point rate hike by the Reserve Bank of Australia, speculation is mounting that they will all move to raise their interest rates above the official tightening in interest rates.
So far neither Westpac, NAB or ANZ have made announced their intention to follow the lead by CBA, which hiked its interest rates by 45 basis points less than 2 hours after the central bank announced its decision to tighten interest rates last Tuesday.
CBA’s 45 basis increase in its lending rate is nearly double the official hike in interest rates, and its decision to do so, has been the subject of intense political and consumer criticism of the banking industry, which many analysts believe has resulted in CBA’s big four rivals holding off on announcing their interest rate decisions.
The current paralysis is the longest time lenders have held off on lifting their mortgage lending rates following an official interest rate hike since the mid 90’s, when they faced flak for closing branches and cutting jobs. Back then the banks were attempting to win back both consumer and political favour by not raising rates instantly, or passing on official hikes in interest rates to their customers in full.
Despite their holding off on lifting interest rates for now, it is inevitable that Westpac, NAB and ANZ lift their interest rates over and above the central bank increase.
The majority of smaller regional lenders and non bank financials have all raised their key lending rates over the last week and an analysis of those moves suggest that smaller lenders have capped their increases at the same level as the central bank.
Non bank financials such as building societies appear to have lower mortgage lending rates than those of the Big Four, which control more than 75 per cent of the Australian mortgage lending market.
The analysis showed the average standard variable rate in Australia is now 7.09 per cent, based on statistics from 100 lenders.