Australia’s mortgage industry settles to a new normalDOWNLOAD
24 November 2011: The heads of mortgages and home lending CEOs and CFOs in this year’s Deloitte Australian Mortgage Report, anticipate a lending environment of moderate growth in 2012, with continued costly funding and scrutiny around raised lending and regulatory standards.
“Price wars will likely continue in the short term,” said Deloitte National Banking Leader Rick Porter. “However under the current economic environment, institutions will need to strike the right balance between growth and profitability.”
Report co-author and Deloitte partner James Hickey noted: “The Australian mortgage marketplace now totals more than $1.2 trillion of lending to Australian households. However at less than 6% p.a., we are seeing the lowest level of lending growth in more than 20 years. This will be the ‘new normal’ for the foreseeable future.
“Together with the backdrop of an aging population moving from having a mortgage to downsizing, and households showing a preference to deleverage, it will be a challenging environment for banks to achieve greater growth than this without gaining market share from other providers,” he added.
“The industry needs to be careful to avoid perpetuating a costly round of refinancing which may end up being a ‘zero sum game’ and further erode margins for all industry participants,” said Hickey.
“While such price competition may be a good outcome for borrowers in the short term, it does make it more difficult for competitors to emerge and potentially stifles innovation and other benefits that come with a broad base of competition.”
Deloitte senior banking partner and fellow report co-author Graham Mott said: “While major banks generally reported improvements in net interest margins (NIM) in 2011, reflecting the repricing benefits across the existing mortgage loan portfolio of passing on more than the cash rate increases in late 2010, the outlook is for margins to narrow in 2012.”
“The response to these tighter margins is for lenders and distributors to actively seek diversified funding solutions,” he said.
“Given that markets have reflected the political situations over the past 12 months and ‘see-sawed’ between optimism that funding is opening up, or freezing as it shuts down, it remains a challenging environment to attempt to lengthen the maturity profile of debt issuance, address the annual funding requirement, and comply with the new liquidity guidelines,” Mott said.
“In the absence of any repricing of borrower rates, reduction in borrower discounts or easing wholesale funding costs, major bank NIM will trend downwards from the current c220bps to closer to 200bps over the next 12-24 months,” said Mott. “This highlights the balancing major banks need to undertake to offer competitive rates to borrowers and ensure adequate returns to shareholders."
The recent uptick in mortgage settlements shows there is growth remaining in the sector. “Settlement volumes are the oxygen of the mortgage lending system,” says Hickey. “And with new settlement volumes across the nation averaging $20 billion per month in 2011 and returning to positive growth in recent months, this underpins the 2012 outlook for new lending,” he said. “However, this will be predicated on consumer confidence in the Australian economy, property prices holding up, and interest rates remaining at current relatively low levels,” Hickey said.
In anticipation the report expects consumers to maintain the competitive balance of power over the short term. “Banks will build their cross sell options with bundled offerings, especially for non traditional products such as wealth, general and life insurance. Banks need to continue to develop innovative solutions for customer cross sell in existing channels, as well as in everyday mobile and online delivery channels,” Hickey said.
Time for a rethink
Deloitte Access Economics’ Partners Ric Simes and Professor Ian Harper put forward the view that increased competition and innovation was largely driven by the entry of smaller lenders and foreign banks in the 1980s which delivered benefits to consumers in terms of pricing and choice. In the report they consider the current banking environment 30 years on, and propose that it might be time to revisit ways to achieve the right balance between effective competition and stability in 2012 and beyond.
With differences in relative funding costs limiting competition, they propose part of the solution to improving competition in the sector is to improve access to funding at competitive rates. “Support of the securitisation market could help reduce funding costs for smaller lenders,” Ric Simes said.
Simes and Harper conclude that, “It has been more than a decade since the Wallis Inquiry and there have been significant developments since then, leading to growing calls for another comprehensive review of the financial system. Centre stage for any such review should be achieving the right balance between effective competition and stability.”
Please download the full media release below.