Australia’s mortgage industry shifts up a competitive gearDOWNLOAD
26 November 2012: The heads of mortgages and home lending CEOs and CFOs in this year’s Deloitte Australian Mortgage Report 2013, expect competition in the $1.3 trillion Australian mortgage market to remain tight. In a wide ranging roundtable discussion participants anticipated a tough 12 months ahead.
With borrowers continuing to seek the lowest price, and settlement growth expected to reach 5% at most, representatives from Australia’s residential lending sector are gearing up to meet the increasingly competitive environment in 2013 head on.
“To this end we consider that lenders in 2013 will focus on leveraging the opportunities in existing portfolios or back books,” said Deloitte Financial Services Partner James Hickey. “This involves retaining valuable customers by ensuring a better customer experience at the front end. It also means using data better to identify and leverage customer cross sell and upgrade opportunities, as well as protecting interest margins on existing portfolios.
“Leveraging existing portfolios – the back book - is the least expensive and most successful approach to maintaining residential mortgage market share and earnings. More so than competing aggressively for new customers,” Hickey explained.
“Differentiation in this market will be defined by how the lenders balance their market share and earnings growth. For most lenders the mortgage portfolio is the largest engine in their business and creates the most enduring customer relationship for the bank,” he said.
“So driving efficiencies across end-to-end mortgage operations, and ramping up channel innovation through digital delivery to meet growing customer needs, will be increasingly important in 2013 if lenders are to maximise the potential of their mortgage portfolios and deliver the value to the broader organisation.”
Deloitte National Banking Leader Rick Porter pointed out that: “Figuring out how to best leverage the opportunities and value mortgage customers bring to the lender across the full spectrum of their organisations will be increasingly important in 2013.” He said: “Using data to create better and more accurate decisions to meet customer needs, and matching that customer centricity with end-to-end operational excellence, is in our experience the most likely way to succeed.”
Deloitte Financial Services Partner Graham Mott said: “Leveraging these opportunities in the mortgage industry will be critical in 2013 as the challenge for lenders is that growth in mortgages is slowing. With growth of lending in 2013 trending to 5%, the pressure is still on lenders to achieve earnings growth at levels that many shareholders have come to expect. Yet the days of 10–15% p.a. system growth in mortgage lending have passed, and will not return soon.”
The sentiment of the roundtable was that despite the combination of interest rate reductions and stronger personal balance sheets, the current flat property prices combined with what was perceived as real systemic issues around consumer confidence, would be likely to keep borrowers sitting on the fence in 2013. However given that Australia suffers an endemic shortage of housing stock, even in a slower market it is expected that property prices will remain ‘there or thereabouts’ if not achieve a modest level of growth.
“Another key trend identified by the roundtable was householders continuing to de-leverage their debt. Currently this is mostly ancillary debt – credit cards and personal loans etc. – but it also includes the high end investment property sector. As interest rates fall, lenders are seeing borrowers taking the opportunity to reduce their mortgages rather than increase their spending,” Hickey said.
Price management and funding
“As price management remains a constant balancing act for the banks, any reductions in standard variable rates relative to a lowering of the cash rate, will be contingent on balancing deposit costs. These costs remain high and tied to increased regulatory liquidity and funding ratio targets, that are pressuring bank margins,” said Graham Mott.
“Deloitte analysis indicates that these sustained higher funding costs combined with deeper discounts on the standard variable rate being offered to customers, will result in a continued pressure on retail bank margins throughout 2013.
“The fundamental driver for this total portfolio retail margin reduction, is the difference between ‘average’ net interest margin of all mortgages based on the historic funding mix, and the ‘marginal’ NIM of new lending, based on the current cost of raising new funding.
“Majors are being challenged as more new mortgages are written at marginal NIM which will reduce average NIM. This is one reason why majors are seeking to leverage their back books to protect higher average margins,” Mott explained.
Hickey said that while it is unlikely that major lenders will increase their risk profile in 2013, there is opportunity for the smaller banks and non-bank lenders to leverage their risk appetite for ‘near prime’ borrowers. He added: “To meet borrowers’ demand for lowest price, it is also likely that the majors will use their subsidiary brands at a more aggressive price point and so shift up a competitive gear.”
As the roundtable discussed views on competition and the scope for any Parliamentary Inquiry to reset the balance between stability and competition, Deloitte Access Economics Partner Professor Ian Harper said: “Mutuals, including credit unions and building societies, have struggled to remain competitive as markets raise their wholesale funding costs relative to larger institutions perceived as more stable.
“Because we are a capital importing country we have been obliged to sign up to a number of regulatory changes beyond those our own regulators had put in place. These new regulatory interventions will reduce the capacity of lenders to lend to small business, and to housing and rural customers,” he said.
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