An outbreak of fierce competition between banks in the $2.1 trillion mortgage market appears to be cooling off, analysts say, amid signs the key aggressors, ANZ Bank and Westpac, are no longer offering home loan rates that are near the cheapest in the market.
A key concern for bank investors throughout 2023 was the competitive battle between banks to win mortgage customers from rivals, as lenders sought to attract and retain mortgage holders by offering deep discounts on interest rates and paying cash-backs.
The trend has crunched profit margins in the industry, with Commonwealth Bank last year saying loans were being written at below its cost of capital – the rate of return demanded by shareholders.
While analysts say home loans will remain an important battleground, they are highlighting signs some of the most aggressive competition has cooled off recently, as banks look to protect profit margins.
Morningstar analyst Nathan Zaia said while competition for home loans remained intense, the major banks seemed to be increasingly focused on managing their margins. Zaia said although ANZ continued to grow ahead of the market, both Westpac and ANZ had modestly lifted their advertised mortgage rates in recent months by more than rivals.
“Westpac and ANZ are no longer among the banks offering the cheapest rates,” he said, adding that he expected competition for loans and deposits to continue easing as banks focused on their margins.
Commonwealth Bank, which lost mortgage market share through the intense period of competition, has recently trimmed its rates, closing the gap between the cheapest and most expensive major bank rates, Zaia said.
Goldman Sachs analyst Andrew Lyons said in a recent note there had been “some alleviation” in home loan competition and he estimated returns from Australian mortgages were close to the cost of capital.
Given this, Lyons said any further pick up in competition would probably remain “muted”. However, he said the banks’ returns would not improve dramatically, either, with their net interest margins – a measure of profitability comparing banks’ funding costs with what they make on their loans – expected to fall.
While several major banks started retreating from the heavy competition last year, some such as ANZ continued competing on price and offering cash-back offers, growing home loans ahead of competitors in the three months to November according to Australian Prudential Regulation Authority data. But variable mortgage rates have moved higher for all four big banks from September 2023 to January this year, according to Zaia.
UBS head of Australian bank research John Storey said the level of discounting in the mortgage market seemed to have peaked in the middle of last year.
“Last year was incredibly unusual in the Australian banking landscape because we had many borrowers coming off their fixed-rate mortgages,” he said. “But that fixed-rate mortgage cliff is slowing down.”
As borrowers came off ultra-cheap fixed-rate loans in 2023, many looked to refinance, with banks competing to attract new customers and retain existing ones. However, Storey said the serviceability buffer – a stress test that adds a 3 percentage point “buffer” onto the rate of a loan – was slowing down new loan growth as interest rates rose.
Zaia said he expected Macquarie – a competitor to the big four banks that has been growing its mortgage market share significantly in the past three years – to take market share more slowly than it has in the past, with a higher cash rate increasing its funding costs and as the business faced “internal return hurdles”.
However, Storey said Macquarie had a differentiated model from the big four, with its own broker networks, which could help it continue to grow.
“Macquarie has been the biggest disruptor, setting the cat among the pigeons in the mortgage market in recent years,” he said. “It’s not looking like it will slow down anytime soon.”
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Source: Thanks smh.com