Portion of refinancers has increased
AMP Bank has seen an increase in refinancers among its customers and expects competition among lenders to remain elevated amid interest rate rises and fixed rate rollovers.
The bank recently reported underlying net profit after tax of $46 million in its half-year results ending on June 30, marking a 45.2% fall on the same time last year.
It’s residential mortgage book grew by $705 million to $22.4 billion (1.15 times system), driven by continued service improvements, competitive pricing and management of net interest margin (NIM) compression.
The bank reported a drop in net interest margin (NIM) from 1.62% to 1.32%, which it said was driven by mortgage margin compression, growth of fixed rate loans and holding higher liquid assets.
Heading into the second half of the year, MPA spoke to AMP Bank group executive Sean O’Malley (pictured above) to discuss market conditions and how they’re impacting the bank’s mortgage book.
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In line with the wider market experience, fixed rate loans were popular in the second half of 2021 and into the first quarter of 2022, O’Malley said.
As fixed rates increased off the back of higher funding costs and swaps, the popularity of fixed rate mortgages fell, and AMP Bank’s experience was no different, O’Malley said.
The bank’s home loan customers were currently still showing a preference towards variable rates, he said.
“In the last month or so, we’ve seen a bit of a change back towards fixed rates, but it’s still fairly low (10%, 12% of flows are fixed rates), whereas last year, we saw that number as 40%, 50% of flows were fixed rates,” O’Malley said.
As interest rates have come off record lows, the official cash rate having increased 175 basis points since May, O’Malley said the portion of refinancers compared to purchasers had increased.
He pointed to market figures such as those from CoreLogic, which showed over the three months to May 2022, sales activity was down 15.7% compared to the same time last year (sales volumes were 14.2% above the previous 5-year average). In the demand side, CoreLogic’s estimate of sales activity over the three months to July was -16% lower compared to the same period in 2021, the property data provider expecting the number of properties sold to trend lower as higher interest rate rises and a more cautious lending environment weigh on demand.
Noting current market conditions and activity within AMP’s mortgage book, O’Malley said he expected the number of refinancers to continue to grow.
“We’ve certainly seen more refinancers as a portion of total, and I think that’s going to be the shape of the market for the next six, nine, twelve months,” O’Malley said.
In its full-year results for 2022, big four bank CBA said that high refinance activity, upcoming fixed rate maturities and “intense priced-based competition”, were among the factors at play within the home lending market.
O’Malley said competition was increasingly evident in the market from the second half of 2021, when AMP Bank made decisions around price volume trade-offs. While the bank wanted to ensure it remained rate competitive, there were some aspects of the market that went a little far, and didn’t make sense, he said.
“Being balanced about the approach to growth is really the approach we’ve taken,” O’Malley said.
“We deliberately slowed a little during this half to ensure that we got that balance between volume and value trade-off right … we do expect it’s going to continue to be a really competitive market.”
In response to how increased competition was reflected in the bank’s first half-year results, O’Malley said banks typically encountered periods where high fixed rates had an impact on net interest margin. Looking forward, he expected to see some normalisation of the net interest margin compared to the first half of 2022.
In a speech to the Economic Society of Australia on July 19, RBA deputy governor Michele Bullock said the share of housing credit on fixed rate mortgages peaked at nearly 40% in early 2022. Most of these fixed rate loans were due to roll off within the next two years, with the biggest concentration of loans due to expire in the second half of 2023, she said.
In line with Bullock’s comments, O’Malley said AMP Bank customer fixed rate rollovers would increase from around mid-2023.
“From the first quarter of next year to the second quarter of next year, there will be a lot of customers for whom their fixed rates do roll off,” O’Malley said.
As AMP wanted to retain these customers, he said the bank planned to engage with customers “well ahead” of their fixed rate rolls.
“Obviously the variable rate will be significantly higher than their fixed rate and so we’re working on what our best offer is,” O’Malley said.
He said the bank would be marketing to those customers in a concerted effort to retain them, offering them “very strong rates.”
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“I think for consumers, the best bit there is there will be good variable rates and good offers to help customers make that adjustment,” he said.
The bank aimed to equip brokers with information to help them assist customers rolling off lower fixed rate loans.
“We want to give brokers all of the information so that they can present the best possible outcome for their client,” O’Malley said.
“That includes us letting the broker know the offers that we will be making to their clients, about what their roll-to rates will be, but also helping the broker with as much information as we can.”
As a customer rolls from a fixed rate to a variable rate, this provides a great opportunity for the broker to have a conversation with the customer and demonstrate their value, he said.
O’Malley said AMP Bank views the broker as an important channel and that it understood the “time to yes” was critical for brokers and their customers.
“We highlighted in our half year that we’re going to continue to make investments in the experience to make it easier for brokers, try to automate as much as we can, and try to really make that time to yes as fast as we can, but also as consistent as we can,” O’Malley said.
