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Now that all the major banks have reported their 2023 profits, the conventional notion that Australia’s big four lenders act as a herd is being challenged.
Far from acting as an oligopoly, there is a clear gulf in strategy between the big four banks on how they handle an intensely competitive mortgage market.
The big split: Four banks, two agendas.Credit: Dominic Lorrimer
Commonwealth Bank and NAB are on one side, ANZ and Westpac on the other. Their behaviour is now so divergent that it’s difficult to tell which have gone rogue or which are being conservative.
While ANZ in particular has shown its willingness to weaponise discounted interest rates to hoover up customers, on the other end of the spectrum CBA is firmly unwilling to sacrifice its margins to build out its market share.
That said, there are a couple of common themes that the banks agree on. Most notably, their mortgage customers as a whole are coping well enough with the 13 interest rate rises they have endured over the past 18 months.
ANZ chief executive Shayne Elliott says homeowners are by and large rich. Credit: Pat Scala
The percentage of borrowers that have fallen behind on interest payments has barely moved since rates started their ascent last year, and the amount of money held in offset accounts has actually risen.
As ANZ’s chief executive Shayne Elliott describes it, the banking sector’s immunity from credit deterioration in mortgages stems in part from the make-up of these customers. Put simply, they are the rich.
“Homeowners skew to be more affluent in the first place, the 36 per cent of people with a home loan tend to be better off highly monthly income, more secure employment and their incomes are rising faster than the renter who is really in a tough spot – unfortunately (they are) younger.”
While other bank chief executives haven’t stated that fact quite so bluntly, they make similar observations.
The other clear theme from the results is that interest rate price competition has taken its toll on the profit margins of the banks.
After a strong first half when banks feasted on rising rates, the second half of fiscal 2023 has seen profits take an about-turn, as competition intensified. All four of the bank bosses have pointed out that competition for customers is now fiercer than ever before.
It is their response to the mortgage wars that has divided the banks – with the CBA and NAB showing their reluctance to sharpen their pencils on rate pricing to grow market share. Their reasoning is that indulging in a mortgage war involves writing barely profitable mortgages.
CBA has been prepared to cede market share, and even after that, its margins were still crunched in the quarter to September. The bank, which reported its quarterly numbers on Tuesday, noted its “disciplined approach to pricing which ensures shareholder returns remain above the cost of capital in a highly competitive market”.
While its mortgage market share grew by less than others, its share of business lending grew faster.
The divergent blueprints of the banks come with risks, and the recent profit announcements provided a platform for bank bosses to strongly prosecute their strategies. It’s been a slug fest of sorts, with the CEOs keen to explain why their approach works for their shareholders.
Elliott states his case forcefully: “In my view it comes down to what choices you have. Without naming names, some of those banks that have said they have stepped away from home loans have nowhere else to go.
“What are they going to do? … Now they are saying they are not going to grow at all. So they will be under pressure from shareholders (who will be) saying hang on a minute what’s this all about – you’re not growing your core business, so you had better take out a whole bunch of costs.
“So they will be under pressure, and they will work out one day that it’s better to be in than out,” he said.
CBA boss Matt Comyn, meanwhile, is happy to point out the damage heavy discounting can wreak on industry’s margins – in particular the way it’s squeezing the numbers of its competitors.
CBA chief executive Matt Comyn says the bank isn’t interested in chasing customers through discounts.Credit: Alex Ellinghausen
“Net interest margins of peers are under pressure [and] margins are a big factor weighing on investors’ minds … I think we have seen [sequential] margin deterioration in some of the peer results which would be the biggest negative margin erosion in [Australian] banking history.”
He says that as borrowers move from fixed interest to variable interest, the competition will remain elevated, “but the bigger factor [has been] some banks chasing volume and trying to win back volume or market share they have lost”.
It’s too early to tell which of the two strategies will win.
Elliott believes there is a structural ratcheting down in interest rates and therefore the market will remain competitive, so any banks staying out of the game do so at their own risk.
“There is always going to be competition, we are not going back to the old lazy days, there is always going to be someone out with sharp prices and a better offer.”
And in a last swipe at those unnamed banks sitting on the mortgage war sidelines, Elliott concludes: “It’s only banks that can sustain [discounting interest rates] because they are fundamentally better at what they will do, that will be able to stick it out.”
Meanwhile, Comyn concedes there is a structural element to lower rates but argues that there is also a strong cyclical element.
But one thing is for sure – not since NAB’s famous “break up” campaign in 2011 have we seen such a gulf in strategy open up between our big four banks.
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