CBA Chief Warns Increased Competition In Mortgage Lending May Distort Market
Ralph Norris, chief executive of Australian banking major CBA has warned that the mortgage lending market may face distortions if higher interest rates revive non bank financial lenders.
Non bank lenders largely withdrew from the mortgage lending market during the banking crisis.
Mr. Norris said that competition between the Big Four Australian lenders and their smaller rivals, which fell during the crisis, would soon return.
A small number of non bank financial lenders have begun to write mortgages again, after most of them exited the market during the crisis.
Competition for retail deposits has returned as companies such as Virgin Money restart their operations in Australia.
“The level of market competition prior to the crisis that drove banks and financial institutions to see new and riskier ways to increase their profits is still around today. The wake-up calls provided by the crisis and the fact we’re now operating in a much higher funding cost environment will influence the nature of that competition. Competition is also likely to come from new entrants into the Australian banking sector from offshore. The strength of the Australian economy and our proximity and links with Asia present a very appealing option for offshore banks, particularly for those banks faced with a subdued home economy.” Mr. Norris told a FINSIA conference in Sydney yesterday.
Mr. Norris says he believes that as interest rates continue to rise and the securitisation markets returns to life, non bank financial lenders would once again become interested in the Australian mortgage lending market.
CBA is Australia’s largest mortgage lender, with a $290 billion mortgage book.
Mr. Norris said that because non bank lenders were not as tightly regulated or prudentially supervised as the banking sector, the increase in non bank lending is a cause for concern.
“We may see competition coming from sources we’re not currently thinking of, as the cost of credit to consumers continues to rise, it does send an invitation to non-banking institutions to explore ways to offer low cost loans. On the upside, this has the potential to promote innovation within the financial sector. On the downside, the risk of non-regulated players entering the market and taking increased risks with the lending and borrowing practices is something for the banks to watch carefully.” he said.
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Wayne Swan Slams Coalition Demand To Re-Regulate Interest Rates
Federal Treasurer Wayne Swan has dismissed demands by the Coalition opposition for re-regulation of interest rates as being “absurd”.
Not all Coalition MP’s are united in their support of such measures, with one Liberal suggesting the idea came from the “lunatic fringe” before being made aware that it came from within his own party.
The opposition is pushing for the Federal government to take Australia’s major lenders to task over interest rates, accusing the government of being all talk and no action.
Australia’s major lenders have signalled their intention to raise their standard variable home loan rates, despite the fact that the Australian central bank held interest rates steady at the start of the month.
Tony Abbot, leader of the opposition said that the government was ineffectual. Joe Hockey shadow Treasury spokesman said that the major lenders were not listening to warnings by the Treasurer on interest rates, despite the fact that the government enacted policy which helped prop up the banks during the financial crisis.
Mr. Swan, in his response to calls for re-regulation said: “an absurd intervention from Mr. Hockey, who was asked time and again (in an interview) what he would do differently, and had no answers, just incomprehensible bluster”.
“Just last week we had the shadow finance minister advocating the government intervene with the floating dollar, and now we have the shadow treasurer saying we should jump in the time machine and remove the RBA’s independence by re-regulating interest rates,” he said.
“No wonder Joe Hockey has no economic credibility, not even Malcolm Turnbull or Don Randall from his own party are prepared to support his latest piece of ill-considered rubbish.”
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Australians Paying Off Credit Card Debt
According to the results of a recent survey, Australians are making a greater effort in paying off their credit card debt in full.
The survey conducted by Datamonitor showed that 48.43 per cent of borrowers polled said they had not paid any interest over the last 12 months. This was up from 40.23 per cent in 2009 and 39.07 per cent in 2008.
“This is a staggering 8% nominal increase compared to last year, with nearly half of Australians did not pay any interest at all in the last 12 months” says Harry Senlitonga, senior analyst at Datamonitor and author of this research.
Mr. Senlitonga said that the global financial crisis has resulted in a paradigm shift in how borrowers pay off their credit card debt.
“This year is a year of recovery, not just for the global economies, but for many Australians who were impacted by the crisis. We have seen that consumers are not just becoming more price conscious, but also more savvy than before in searching and using their credit cards.”
The change in borrower attitudes towards credit card debt repayments may results in a potential loss of revenue by lenders in the form of lower interest income.
According to Datamonitor six consecutive rate hikes undertaken by the Australian central bank between October 2009 and May 2010 has also been a major reason behind the shift in borrower attitudes. Datamonitor says that should the trend continue the industry will be forced to undertake a major review of credit card prices which could result in lenders considering opting for a more stable fee-income model as opposed to one based on interest rates.
“Arguably, the increasing cost of funding and combined with the uncertainty caused by a shift in consumer behaviour has shaken the fundamental business model for some credit card issuers. Credit card issuers should see these changes as an opportunity to innovate, especially to design some products to target specific consumer segments” concludes Senlitonga.
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ANZ Chief Urges Government To Undertake Bold Reform
Mike Smith, chief executive of Australian banking major ANZ has said it will be difficult for Australia to maintain economic growth, without the federal government committing to “bold economic reform”.
Mr. Smith issued his warning after the chairmen and chief executive of some of Australia’s largest companies expressed their fears that a hung parliament would result in a period of stagnant reform.
Mr. Smith said that the country needed to resist the temptation to become too domestically focused.
“To be blunt, without a renewed commitment to bold economic reform and productivity improvements, Australia’s current growth rates will simply not be sustained,” Mr. Smith said speaking at a business lunch in Melbourne on Tuesday.
“Right now in Australia, as we begin a new era of politics with a minority government and, from next year, a Green Senate, it is timely for business — especially those of us with businesses that are outward looking — to provide a reminder of the bigger picture that is before us.” he said.
ANZ has embarked on ambitious expansion strategy in Asia and is currently conducting due diligence for a proposed acquisition of Korea Exchange Bank (KEB).
Mr. Smith will be travelling to Korea this weekend with Federal Treasurer Wayne Swan, although no meetings with KEB executives have been scheduled.
Mr. Smith said he agreed with the notion that corporations have a responsibility to express their opinions on policy issues.
Mr Smith said: “I think we all have to play our part. We all have a responsibility. I think if business doesn’t actually call the questions then it is difficult for the government to know if they are doing it right or wrong. What I will say is that it is good to have those discussions before you implement something than try and deal with the consequences afterwards.”
Mr. Smith identified removing restrictive governance, excess regulation and tax reform as three key priorities. Mr. Smith said that Australian companies would have to get used to a higher Australian dollar, and that he expected it would be at least a year to 18 months before the US Federal Reserve began raising interest rates again.
“I don’t think you should be in a rush to see the Australian dollar come back to US85c,” he said.
Mr. Smith also said he believed that a carbon tax was inevitable, and that Australia needed to be sensible about how it implements such a tax.
As far as ANZ’s interest rate policy goes, Mr. Smith said he was “in no particular hurry” to raise interest rates, though it is widely expected that the Australian central bank will tighten when it meets next month.
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Australian Central Bank Expects To Tighten Interest Rates Sooner Rather Than Later
The Australian central bank released the minutes of its last board meeting which reveal that it does not intend to wait indefinitely before it raises the cost of borrowing again.
The Reserve Bank of Australia chose to hold interest rates steady when it met at the start of the month as it sought more data, however, according to the minutes of the meeting, the argument was made for tightening interest rates.
According to the minutes of the October 5th policy meeting, the central bank made the decision to hold official interest rates steady at 4.5 per cent since the economy was expected to maintain trend growth rates, softening credit growth and an appreciating Australian dollar would have the effect of keeping monetary conditions tight.
The central bank said its decision to hold interest rates steady, which surprised the financial markets was “finely balanced” and added that the timing of future interest rate increases “remained a matter of judgement”.
“While the board recognised that it could not wait indefinitely to see whether risks materialised, members judged that they had the flexibility to do so on this occasion,” it said.
The central bank board will meet again in early November, by which point it will have has the opportunity to assimilate third quarter inflation figures. The central bank expects inflation will rise to the top of its 2-3 per cent target inflation range over the next year and a half.
The pace at which the Australian dollar appreciates will have a large impact on the RBA’s decision after last week’s rise to parity against the US dollar.
The central bank said that economic conditions were evolving, with demand growth remaining moderate as public spending falls and fresh business investment had yet to fill the gap.
“The outlook remained for public spending to slow, but for private demand to pick up noticeably. For the moment, however, indicators of current growth in demand remained moderate,” it said.
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Australian Residential Property Prices Increasingly Unaffordable
Though it may be far easier to find a job in Australia, it is expected that being a home owner is expected to become more difficult.
As Australia moves into an environment of declining unemployment, house prices and interest rates are rising, and some analysts say this points to signs that house prices are going to become increasingly unaffordable during the next few years.
Last week the results of housing surveys that were released suggested that residential property prices may rise by as much as 20 per cent during the next three years in cities such as Adelaide, Perth and Sydney, with other state capitals expected to post more moderate growth.
Whilst property prices continue to rise, many economists are predicting that the unemployment rate will decline to as low as four per cent, and interest rates may even exceed even nine per cent.
Rob Mellor, managing director of BIS Shrapnel says that the strong economy, low unemployment and robust growth in incomes is expected to produce steady growth in residential property prices.
“The big risk is affordability, that’s the part of the equation that certainly suggests over the next three years affordability will become a major issue.” Mr. Mellor said.
Strong migration trends and tight housing supply were a drivers for growth in residential property prices in Sydney, whilst the impact of the resources boom were expected to drive property prices in Perth Mr. Mellor said.
“Affordability will deteriorate as we go to a higher interest rate environment by 2013, It will deteriorate back to the sort of poor affordability that we had during 2008, when interest rates got to 9.5 per cent. So it’s certainly a negative.” he said.
Mr. Mellor says that affordability will continue to remain a serious issue as mortgage payments as a percentage of income rises.
“It will be a critical issue over a three year period, we do expect interest rates to rise in 2011/12. They’ll probably be back at around 8.3 per cent or so by June 2012 and more like 9.1 per cent by June 2013.” He said.
According to data released by the Australian Bureau of Statistics (ABS), nearly 50,000 full time jobs were created in September, keeping the unemployment rate at 5.1 per cent.
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Competition Regulator Warns Australian Banks On Signalling Interest Rate Policy
Graeme Samuel, chairman of the Australian Competition & Consumer Commission has issued a stark warning to Australia’s major lender not to signal their interest rate policies to one another, with such behaviour constituting misconduct.
Mr. Samuel said during a radio interview that he was concerned that lenders were signalling their intentions to raise interest rates to each other and the world at large.
“And it’s that sort of price signalling that worries me a bit because what it’s really doing is saying to their competitors, hey guys, if you lift your rates, we’re going to lift them too, so you don’t have to worry about it, and that sort of price signalling really borders on areas that in the US and Europe are potentially, you know, misconduct.” Mr. Samuel said.
On Thursday Ralph Norris, chief executive of CBA said during a speech in Sydney, that rate rises were inevitable as a result of the higher cost of bank funding.
Mr. Norris said that the pressure on bank funding costs were the result of the additional cost of capital, and declined to reveal when CBA intended to pass this additional cost on to its customers.
Mr. Norris’s comments replicate comments made last week by Westpac chief Gail Kelly who said during a business forum that mortgage lending rates would have to rise in order to offset materially higher funding costs.
Mrs. Kelly admitted that the views of the government and the banks on interest rates policy differ substantially.
“We have a particular view of what has occurred with funding costs and I think it is very clear to all of us that funding costs have gone up materially as a direct result of the global financial crisis, and the government has a different view of the extent of it and just how the banks will deal with that situation.” she said.
Last year Westpac was the subject of intense criticism by politicians when it increased its standard variable mortgage rates by 20 basis points in excess of the 25 basis point rate hike undertaken by the central bank.
Mr. Samuel said his main concern was maintaining and encouraging competition within the banking industry, and that price signalling was a worry.
“Well, the banks know our views (on the subject), I’ve said so both publicly and privately.” he said.
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CBA Chief Norris Signals It Will Be The First Lender To Lift Rates
Ralph Norris, chief executive of Australian banking major CBA signalled during a speech on Thursday that the lender would be the first to raise its interest rates. In his speech, Mr. Norris cited higher funding costs and said that interest rate increases had become inevitable.
“There is no doubt, when we look at the current funding costs, rates are going to increase. The additional cost of liquidity and the additional cost of capital is going to put upward pressure on interest rates going forward.” Mr. Norris said during a speech given at lunch hosted by the Committee for Economic Development of Australia.
Mr. Norris refused to provide any time table for rate hikes.
“When we have any announcements to make in that regard, we will make them,” he said.
Mr. Norris detailed reasons why Australian lenders faced increased pressure from rising funding costs in the aftermath of the global financial crisis, saying that funding pressures faced by all the major banks were “independent” of the central bank’s interest rate policy.
“The cost of debt is now significantly impacted by what is known as the risk premium,” Mr Norris said.
“It’s a situation which will prevail until we see some sort of normality get back into the markets — but I don’t see that happening quickly.”
Last year, when rival Westpac chose to increase its mortgage lending rate in excess of official interest rate tightening, the lender was heavily criticized.
Earlier in the week Westpac chief executive Gail Kelly warned that Australian interest rates faced upward pressure for at least the next eighteen month as a result of changes caused by the financial crisis.
Mr. Norris avoided commenting about the potential for political criticism that banks may face should they decide to raise their interest rates beyond any official tightening in interest rates.
“There is always a situation where there is robust debate between government and business, particularly around the issue of pricing. None of us should be surprised about that, and certainly we will make our decisions as and when we find it necessary.” Mr. Norris said.
Analysts believe that the major Australian lenders will use the next hike in official interest rates to implement their next big rise in interest rates.
CBA, which is Australia’s largest bank, and raises 40 per cent of its funding on wholesale international markets, is widely considered to be the lender under most pressure to lift its lending rates.
The Reserve Bank surprised the market by holding its official rate steady this month, but expectations are that it could consider a rate increase at its next board meeting on November 2.
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Australian Mortgage Borrowers Struggle To Pay Home Loans
The results of a new survey suggest that mortgage borrowers are scrapping their holiday plans in order to concentrate on paying off their home loan.
According to the results of the latest Bankwest/Mortgage and Finance Association of Australia (MFAA) home finance index, more than half of those polled were sacrificing a number of everyday necessities in order to absorb the cost of higher interest rates.
“With interest rates higher than last year, many mortgage holders seem to be holding back on their spending,” Bankwest retail chief executive Vittoria Shortt said.
The survey polled over 1,000 property owners across the country, and found that over half said they ate out less, whilst just under half said they were cutting costs at home and taking packed lunches to work.
42 per cent of respondents said they were either scrapping their holiday plans altogether or considering cheaper holiday options. 40 per cent of those polled said they were now purchasing food in bulk.
“There is a clear move to more thrifty spending for many Australian households,” Ms Shortt said.
Australians seeking to cut their costs have implement measures ranging from selling unused items to seeking additional work and reducing insurance payments and superannuation contributions.
“Although some of the cost cutting strategies may seem extreme … it’s actually down to principals of good financial management,” MFAA chief executive officer Phil Naylor said.
“Borrowers can’t avoid rising interest rates, but they can minimise the impact by considering making an extra mortgage repayment with extra funds that would have otherwise been used for things like holidays.”
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Australians Inflation Expectations Rise
The results of a survey suggest that consumer inflation expectations increased sharply during October as worries persist over the state of the global financial system.
The Melbourne Institute Survey of Consumer Inflationary Expectations showed the median expected inflation rate rose to 3.8 per cent in October, from 3.1 per cent the month before.
The percentage of consumers who expect that inflation will remain within the Australian central bank’s target range of between 2 to 3 per cent declined to 15.1 per cent from the 19.0 per cent recorded during September.
“While we expect inflationary pressures to build up over the next 12 months, this month’s jump in inflationary expectations … came as a surprise,” Melbourne Institute research fellow Michael Chua said in a statement on Tuesday.
The view however is not universal amongst all Australians, with the inflation expectations amongst professionals and managers declining marginally to 3.3 per cent from 3.4 per cent in September.
“We are living in more uncertain times and this is showing up in the dispersion of views among the respondents,” Dr Chua said.
The consumer price index (CPI) which is the official measure of inflation increased by 0.6 per cent during the June quarter, well below what the 1.0 per cent economists had been forecasting.
Economists had been forecasting an annual inflation rate of 3.4 per cent, with the actual rate of 3.4 per cent.