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Analysts believe strong rivalry between banks in the $2.1 trillion mortgage market is cooling off as ANZ Bank and Westpac stop providing near-market-low home loan rates. Bank investors worried about the fierce war between banks to capture mortgage clients in 2023, as lenders offered large interest rate cuts and cash-backs.

Cost of Loan Writing

Last year, Commonwealth Bank said loans were written below its cost of capital, the shareholder-required rate of return, lowering profit margins. Home loans will remain a major battlefield, but experts believe some of the most fierce competition has cooled as banks maintain profit margins. Morningstar analyst Nathan Zaia said while house loan competition was fierce, large banks were increasingly focused on profits. Zaia said ANZ continues to expand ahead of the market, although Westpac and ANZ have marginally raised their advertised mortgage rates more than competitors in recent months.

“Westpac and ANZ are no longer among the banks offering the cheapest rates,” he added, expecting competition for loans and deposits to ease as banks concentrated on profits. Zaia said Commonwealth Bank, which lost mortgage market share during severe competition, recently lowered its rates, reducing the gap between the lowest and most costly big bank rates.

Competition in Loan Market

In a recent note, Goldman Sachs analyst Andrew Lyons claimed house loan competition had “some alleviation” and estimated Australian mortgage yields were close to the cost of capital. Lyons said any additional competition increase would likely be “muted”. He predicted that banks’ net interest margins, which compare financing costs to loan income, would decline, lowering their earnings.

According to Australian Prudential Regulation Authority statistics, ANZ grew house loans faster than competitors in the three months to November by competing on pricing and cash-back incentives. Zaia says variable mortgage rates rose for all four large banks from September 2023 to January 2024.  In the middle of last year, UBS head of Australian bank research John Storey believed mortgage discounting peaked.

He stated, “Last year was incredibly unusual in the Australian banking landscape because we had many borrowers coming off their fixed-rate mortgages.” “But that fixed-rate mortgage cliff is slowing.” Many consumers refinanced in 2023 after leaving ultra-cheap fixed-rate loans, with banks competing for new and current customers. As interest rates climbed, Storey said the serviceability buffer, a stress test that adds a 3 percentage point “buffer” to a loan rate, was restricting new loan growth.

Big 4 Bank Competition

Zaia expected Macquarie, a competitor to the big four banks that has grown its mortgage market share significantly in the past three years, to take market share more slowly due to a higher cash rate and “internal return hurdles”. Storey said Macquarie’s broker networks set it apart from the big four, which might help it develop. He said Macquarie has been the largest disruptor in the mortgage sector in recent years. Not looking like it will calm down soon.”

Summary

Smaller lenders who are more flexible on service and policy, may find their competitive advantage increases with more competitive rates to fulfill their offerings. Big 4 Banks can rely on market and brand knowledge and current large loan books, however with mortgages easier and cheaper to move these days, customers don’t just have more options, but more incentives with less constraints to move and seek the best rate, service, and products that meets their needs.

Sources:

SMH – Heat Fading From Mortgage Markets https://www.smh.com.au/business/banking-and-finance/heat-fading-from-mortgage-war-as-banks-protect-margins-20240122-p5ez4u.html

AFR – Home Loan Competition Won’t Last – https://www.afr.com/companies/financial-services/accc-warns-that-home-loan-competition-is-just-a-short-term-phenomenon-20231211-p5eqo3