Australian Banks Deny Underestimating Cost Of Living Expenses For Mortgage Borrowers
Australian banks which have been charged in a report by investment bank Merrill Lynch with underestimating the cost of living for their customers, and as a result lending to much as they seek to maintain their market share, have dismissed the accusation.
The report published by Merrill Lynch earlier in the week suggests that Australian lenders have not factored in costs of living at a high enough level, resulting banks lending to customers who may later struggle as expenses begin to rise.
According to the report, Australian lenders are using cost of living estimates which are as much as 7 per cent below mainstream forecasts.
Excluding housing expenses Australian banks have estimated that on average, the expenses of an individual are $1,208 whilst a couple faced expenses totalling $1,708.
The estimates fall well short of those by the globally recognized Poverty Index, which puts living expenses for a couple at $1,814.
According to the Merrill Lynch report, ANZ is the most aggressive lender, whilst rivals CBA and Westpac are the most conservative.
On Tuesday the banks responded by saying lower rates of credit impairment and arrears suggest that mortgage lending was far from being too aggressive, and that they had implemented stringent customer assessment plans.
“The poverty index certainly isn’t perfect and this is why we spend time with customers to help assess their real cost of living,” an ANZ spokesman said.
A spokesman for Westpac said the lender updated its living cost assessment once every three months.
“We also confirm a customer’s repayment history and savings record, as a proxy for proposed mortgage repayments,” he said.
“We review and update our servicing models quarterly, to take into account changes in living costs, market interest rates and other market factors.”
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RBA Warns Australian Banks Lowering Mortgage Lending Standards
The central bank is warning that Australian lenders have begun to lower their mortgage lending standards as they seek to achieve the turbo charged pre financial crisis growth rates, an objective the RBA says is unrealistic.
The Reserve Bank of Australia says that as lenders compete for new mortgage borrowers, they were increasing their maximum loan to valuation ratios.
“Increasing competition in housing loans is starting to put pressure on lending standards,” the bank said.
Smaller regional lenders, building societies and credit unions have all been trying to re capture some of the market share they ceded to the big four lenders by offering cut price mortgage deals. This has resulted in a number of mortgage borrowers refinancing their home loans to take advantage of lower interest rates offered by second tier lenders.
“If industry participants were to attempt to sustain earlier rates of domestic credit growth, they could be induced to take risks that may subsequently be difficult to manage,” the RBA said.
Despite the decline in lending standards, the central bank says that the proportion of home loans that had become delinquent remains unchanged at a benign at 0.7 per cent.
The central bank has also been following the performance of home loans to property buyers who took advantage of the first time home buyers grant that was introduced as part of the Federal government’s stimulus package in response to the global financial crisis.
The RBA says buyers who took advantage of the grant typically had lower average incomes and borrowed a larger proportion of the purchase price, and relied on record low interest rates compared to the typical mortgage borrower.
However since then interest rates have been hiked several times, and according to the central bank, borrowers who took advantage of the grant, do not seem to be suffering from a greater degree of delinquency compared to any other type of first home buyers and are beginning to pay off their debts.
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Australian Banks Relax Mortgage Lending Credit Standards
As competition intensifies in the market for mortgage lending, and funding costs ease, Australian lenders look set to relax credit standards for mortgage borrowers.
According to a report authored by UBS which polled both the major and regional lenders, banks have relaxed their underwriting standards over the last year as they seek to cling to their individual share of the mortgage lending market against a backdrop of intense competition.
Recently CBA, the nation’s largest mortgage lender said it intends to reduce the loan to valuation ratio on its mortgage product in response to NAB’s aggressive marketing campaign which encourages customers of rivals to switch their lenders, and have their exit fees paid by NAB.
In 2009 in response to rising funding costs and a glut of buyers looking to take advantage of a government subsidy and buy their first homes, lenders tightened their lending standards aggressively.
Many lenders felt pressure on their balance sheets from the increased demand for housing and consciously decided to ensure that new mortgages were written for the highest quality borrowers.
Consumers make up about 65 per cent of the banks’ loan books and account for 40 per cent of the industry’s profitability.
The banks are likely to make further changes to their current discounts applied to new home loans offering as much as 80 basis points off their standard variable rates to new customers.
The report also shows that the banks’ net interest margins are likely to face renewed pressure this year as a result of increased rivalry.
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Smaller Lenders Express Concern At Exit Fee Ban
John Symond, founder and executive chairman of non bank financial lender Aussie reckons that the government proposal to ban exit fees could result in some smaller lenders being forced to exit the mortgage lending market, resulting in a new wave of consolidation in the business.
Mr. Symonds has made his concerns to clear in a letter to the Federal Treasury in which he warned that smaller lenders, unable to absorb the cost of writing new mortgages may end up ultimately be driven out of business as a result of the proposals.
“This will drive further industry consolidation as smaller lenders will be forced out since they are unable to match the aggressive discounting of set-up costs by the large banks, who will await a cleared playing field until increasing their fees. A concentrated market with fewer lenders could also present risks to the financial system.” Mr. Symond said in his submission to Treasury.
The government believes that exit fees act as a barrier preventing mortgage holders wishing to switch lenders from doing so, and has therefore proposed a ban on exit fees, believing it will stimulate competition within the banking industry.
Australian Finance Group (AFG), a broker which has originated as much as $64 billion in home loans is also worried about the proposal.
“The proposed exit fee amendments, if anything, push more power back to the big four banks and their subsidiaries,” it told Treasury.
AFG argues that without exit fees non bank lenders who face higher funding costs that traditional banks and the big four, would need to charge higher rates of interest.
“This is self-defeating and may remove the opportunity for non-bank lenders to re-enter or enter the market as the impact of the GFC lessens,” it said.
According to the Mortgage and Finance Association of Australia the proposal to ban exit fees could have the effect of unwinding decades of reform
“A ban on exit fees will unwittingly reduce competition by making it much harder for non-balance-sheet lenders to compete; It is these lenders who brought real competition to the mortgage market. To sideline them by making their business models difficult, if not impossible, is a very retrograde step. The deregulation of the Australian banking system over the last three decades will be in danger of being reversed, with pre-1983 major banks dominating.” the association said.
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CBA Customer Satisfaction Ratings Continue To Slip
Australian banking major CBA is facing a backlash from its mortgage borrowers, after the lenders satisfaction ratings took another dip during January.
CBA’s poor result is the latest in a series of losses by the big four lenders, who have seen their efforts at winning over their customers through the cutting of fees undermined.
NAB managed to buck the trend holding ground in terms of its customer satisfaction rating during January, however the lender continues to lag its rivals based on that measure despite making gains over the last 12 months driven by a strategy of using discounted mortgages to win market share.
The customer satisfaction data was compiled by market research firm Roy Morgan Research and suggests that ANZ led the major banks in terms of customer satisfaction ratings declines, having fallen by 1.2 per cent, exceeding CBA’s 0.8 per cent decline in customer satisfaction.
ANZ’s poor result came primarily from non mortgage customers, with CBA’s fall largely driven by its mortgage customers.
CBA faced a political and consumer backlash in November last year, when it chose to raise its standard variable mortgage rate by nearly double the official rise in interest rates enacted by the central bank.
CBA’s decline in customer satisfaction ratings is means far more than simply a loss of pride for the lender. Half of the lenders senior executives have their long terms bonuses, worth millions of dollars tied to an improvement in customer satisfaction ratings.
The drop in satisfaction means more than a loss of pride for CBA. About half its executives have long-term bonuses worth millions of dollars linked to improved ratings.
Westpac, which last year overtook CBA for the second spot in satisfaction, dropped 0.2 percentage points in January to 74.1 per cent.
CBA is third at 72.7 per cent, while NAB which rose 0.1 percentage points during January is 71.8 per cent.
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CBA Hits Back In Australian Bank War For Mortgage Borrowers
Australian banking major CBA has fired its first shot in an increasingly bitter battle between the big four banking groups, as the lender responded to NAB’s advertising campaign which aims to lure customers of its rivals by offering to pay their exit fees.
CBA is offering NAB customers as much as $1,400 in cash if they switch from the lender to refinance their mortgage, open an account and apply for a credit card according to Bloomberg News which cited an internal memo that the agency had obtained.
“If they want to play games with price, I’m happy to compete,” Ross McEwan, head of retail banking at Commonwealth Bank, said in a separate note to employees. “We’ll use the opportunity to target their customers.”
CBA’s current move is in response to NAB’s offer to pay the $700 exit fees for mortgage borrowers who switch lenders, leaving CBA or Westpac for NAB. In December, Federal Treasurer Wayne Swan unveiled a number of banking reform proposals designed to stimulate competition within the industry and making it easier for customers to switch banks.
The big four lenders in Australia control 88 per cent of the mortgage lending market according to figures from the Australian Prudential Regulation Authority.
NAB has embarked on a strategy of distancing itself from its big four rivals, and as part of its latest marketing campaign published a mock relationship break up letter to its three main rivals which appeared in full page newspaper advertisements nationally and started by saying “It’s over between us,”
The campaign has also featured helicopters flying over the headquarters of CBA and Westpac carrying signs that say “You’re dumped.”
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Westpac Chief Orders St George Overhaul
Gail Kelly, chief executive of Australian banking major Westpac has ordered a shake up of its subsidiary St George after it emerged that the lender experienced a substantial slump in mortgage lending.
During Westpac’s first quarter trading update, Mrs. Kelly revealed that she was unhappy with St George’s current lending levels, particularly in its key New South Wales and South Australia markets.
Westpac declined to specify by exactly how much lending had slow down, however Mrs. Kelly did indicate that new mortgage growth at St George was below the banking industry average of 7 per cent a year.
Major lenders use the 7 per cent hurdle as a target growth rate to achieve or exceed.
In response to sluggish mortgage lending growth, Mrs. Kelly has ordered Rob Chapman the new chief executive of St George to overhaul the business and increase mortgage lending.
“I really was disappointed — its (lending) has fallen away sharply, it did not grow at the levels that it should have been able to. But Rob had his hand at the tiller, he’s out growing the business and I’m confident we have the momentum up there now.” Mrs. Kelly said.
St George began overhauling its business in 2010 which has included concentrating on the creation of regional hubs, the abolition of broker networks and reducing the lenders commercial property loan exposure.
Mrs. Kelly said 2010 “was the year that we went through and restructured the St George business and took it back to its regional roots. We have shifted the bank back to its heartland of NSW and SA. We know there’s a set of customers that prefer to bank with a regional, or a local, non-major bank. We also really wanted to really reduce the relation on third-party broker networks in NSW and SA, where there is already really good distribution with St George.”
St George has reduced the proportion of mortgage written through broking channels from 50 per cent of new loans to 40 per cent, the lender has also reduced its commercial property loan portfolio by $10 billion.
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Westpac To Get Aggressive In Emerging War For Home Loans
Australian banking major Westpac has fired its first salvo in an emerging and increasingly bitter war in the market for home loans, after the lender launched an aggressive discount campaign on Tuesday as it seeks to win new customers and expand its market share in the face of more intense competition from rivals.
Australia’s second largest lender in the latest twist to an increasingly bitter battle for market share was responding to NAB’s revelation at the weekend, that it would pay the ext fees for CBA and Westpac borrowers who switch their mortgages to NAB.
According to The Australian , which obtained an internal email, Westpac strongly criticized the move by NAB and has outlined a the contours of a strategy to deal with the threat including dramatic discounts on its Premier Advantage mortgage package.
Westpac will waive a number of fees associated with mortgage, such as the annual and establishment fees. The lender also intends to offer as much as 75 basis points in discounts on mortgages valued between $250,000 and $500,000, and as much as 80 basis points on home loans valued above $500,000.
Westpac will also no longer require borrowers who have an 80 to 85 per cent loan valuation ratio to take out mortgage insurance.
NAB has run a “fair value” strategy over the past 18 months to maintain the lowest standard variable rate of the four largest banks.
Its 7.67 per cent rate compares with Westpac’s 7.86 per cent, CBA’s. 7.81 per cent and ANZ’s 7.8 per cent.
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CBA May Trigger Price War In Market For Home Loans
Australia’s largest mortgage lender Commonwealth Bank of Australia, which has recently lost some of its market share has ambitious plans to rebuild its mortgage lending business, which is likely to trigger a price war in the market for home loans, as rivals who gained market share at CBA’s expense, seek to defend their gains.
CBA chief executive Ralph Norris whilst announcing the lenders first half results said the following a slowdown in mortgage lending, the bank had been writing more home loans in recent months. CBA, during the financial crisis was one of the most active lenders in the market as it sought to expand its market share at a time when others were pulling back, since then the lender has deliberately slowed the growth of its mortgage loan book.
In the last few months of 2010, CBA grew its mortgage portfolio by 16 per cent, and the lender will maintain the pace of growth into this year according to Mr. Norris.
Jonathon Mott, banking analyst with UBS in an interview with The Australian said that CBA’s plans could well be the trigger for a brutal price war in the mortgage lending market, putting pressure on profit margins of all the major lenders.
“CBA is now targeting a return to system levels of mortgage growth after losses in market share through most of 2010. With low levels of credit growth likely to become a more permanent feature of the banking market in Australia, the other banks may follow CBA’s lead.” Mr. Mott said.
Rival NAB has been the main beneficiary of CBA’s reduction in mortgage lending, having increased its market share by 31 basis points and writing $8 billion of new home loans during the first quarter of the current fiscal.
According to Mr. Mott, the increased competition in mortgage lending may result in bank relaxing their credit standards, or increasing the level of discounts offered to new borrowers.
CBA which scaled back loans to first time home buyers has become the most active in that segment.
“The reaction could potentially lead to two outcomes — an increase in lending to borrowers of lesser quality, which could lead to higher impairments in the future, or there could be an increase in price discounting as a tool to win and retain market share,” Mr. Mott said.
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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.