Australian Government Intensifies Crackdown On Bank Fees
The Australian government is intensifying its crackdown on the banking sector and intends to ban the practice of banks charging over the limit fees on credit cards and offering upgraded credit limits to borrowers.
The Treasury has published draft legislation which proposes to toughen regulations on the banking industry as part of reforms that were promised by the government during the elections and as part of the package of reforms proposed by Treasurer Wayne Swan designed to stimulate competition within the industry.
If the reform proposals are implemented it will result in millions of dollars in lost fee income every year for Australian banks, forcing them to restructure credit card repayments, allocating them to the highest interest bearing debt first and making it mandatory for credit card applications to provide an overview of a the features of the account.
Mortgage borrowers will be required to be provided with a key fact sheet enabling them to compare the home loan they are considering against products of rival lenders.
The new legislation is expected to be introduced into parliament for debate within a couple of weeks.
Unsurprisingly the banking industry has heavily criticized the proposals and the timing of the legislation, since the government has only provided for three days of consultation.
The new proposals are on top of the plan by the government to abolish mortgage exit fees and more rigorous regulation designed to curtail price signaling between banks.
The abolition of exit fees is believed will cost the major lenders over $300 million a year in lost revenue.
Steven Munchenberg chief executive of the Australian Bankers Association says the proposed legislation was much tougher than what was expected by the banks.
“The problem that we see is that when a new customer comes into a bank now for a credit card the bank will be conservative about what they will give them until they show they can service that debt and meet their repayments. Then, after a year, a bank will write to them offering an increase. Now they will be banned from doing that, so there’s a situation where either the customers will have to ask the banks, or else the banks could provide a larger credit amount upfront.” Mr. Munchenberg said.
According to Mr. Munchenberg, Australian lenders were increasingly becoming worried that the government would seek to ban other fees
“We have had the exit fees, and now over-the-limit fees are going to be banned. There’s a tendency for the government to price-control bank fees. That concerns us. If they are prepared to do that, what other fees are they going to start to ban?” he said.
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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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Westpac Chief Adds Voice To Growing Criticism Of Mortgage Exit Fee Ban Proposal
Gail Kelly, chief executive of Australian banking major Westpac has strongly criticized the government proposal to ban mortgage exit fees.
Speaking in an interview with the Australian, Mrs. Kelly said the measure was “poor public policy,” Mrs. Kelly said that the proposal to ban exit fees would make it harder for smaller lenders, and actually result in less competition in the market for home loans.
The government says it intends to ban mortgage exit fees starting as soon as the middle of the year.
“We think competition should be allowed to play its role,” Mrs. Kelly said. “If certain players want to have this fee or not have that fee, that is competition. It is not a big matter for us at Westpac but it will have the result of making it harder for the small players.”
Unsurprisingly Mrs. Kelly also said there was no need for the government to legislate against price signaling within the banking industry which is a key proposal in Wayne Swan’s package of banking reforms
“I don’t think there is any need or requirement for further legislation with regard to price matters, price signalling or collusion. All of the laws that are already in place are pretty strong and there isn’t any evidence of that kind of activity happening.” She said.
Mrs. Kelly argues that as the world has emerged from the global financial crisis, competition within the Australian banking industry has not only returned but increased since funding was now easier to obtain.
“There is a significant intensity of competition. We saw during the GFC, when funding was harder to access and a whole lot more expensive, some of the players (in the home lending area) actually stepped back altogether. We are through all of that and the competition is now very, very strong in retail deposits and the competition in mortgages has definitely picked up. We are dealing in a slow growth environment and there is strong competition for mortgages.” She said.
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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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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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NAB Chief Encouraged By Turnaround Performance
Cameron Clyne, chief executive of Australian banking major National Australia Bank intends to deliver on his turnaround of the lender less than five years from his start as CEO, which began in January 2009.
“In many respects, timing (of the turnaround) is not under my control, so we have to just keep making each quarter better than the last. But we’d hope to see a response, certainly before five years.” Mr. Clyne said in an interview with The Australian.
NAB has long lagged its big four rivals even under the leadership of Mr. Clyne who began running the bank at the height of the global financial crisis.
Since Mr. Clyne assumed the top spot at NAB, the lender has returned 40.3 per cent when its stock performance and dividends are included, compared to Westpac which returned 56.3 per cent, ANZ which returned 76 per cent, and CBA which returned a whopping 112 per cent over the same period.
Mr. Clyne however remains unperturbed by this fact and says he feels encouraged that each quarterly result has been better than the previous one, and that the lender was a much better organsiation than when he took over by nearly every measure.
“So eventually that has to translate into (shareholder) returns,” he said.
NAB has sent shock waves through the industry recently with its “break-up” retail bank marketing campaign, which encourages the customers of its big four rivals to switch lenders. However NAB’s stock price performance continues to be held back by its British banking operations and legacy assets.
According to Mr. Clyne NAB’s $20 billion risk weighted specialized group assets portfolio has not produced instability in NAB’s earnings for quite some time.
Mr. Clyne says that NAB had done a lot to mitigate the risk of its exposure of being linked to the British and US economies, though he did acknowledge that its British units were”an obvious (share price) drag”, but there was no option other than to take a long-term view of strategic choices.
“We’ve owned the asset for a long time and we made the decision that we were not going to engage in a firesale. To just dump it at a low historic value and take an enormous write-off would not be in the interests of shareholders.” he said.