One bank especially likely to feel pinch from margin pressures
The mortgage war between the big banks isn’t likely to ease this year, analysts say.
The pressure on bank margins is expected to continue even if interest rates go up and customers move from fixed to variable-rate mortgages, according to a report by The Australian Financial Review.
Despite continuing margin pressures, however, banks are increasing their capital returns to shareholders. National Australia Bank is the latest financial institution to do so, announcing it would extend its latest share buyback to a total of $5 billion.
Analysts say that ANZ is the bank most likely to feel the pressure from increased mortgage competition, AFR reported. The bank is already under the gun, trying to rebuild home loan market share lost as a result of its failure to keep up with demand in the recent housing boom.
Carlos Cacho, analyst at Jarden, told AFR that higher interest rates and the dwindling effect of customers who locked in cheaper rates would be tailwinds for banks.
However, Cacho remained cautious due to the risk of increased competition. The peak period for fixed rates to expire will be in 2023, and there is no precedent to help measure the impact of competition, AFR said.
Fixed-rate mortgages reached as high as 50% of the market during the sustained period of low interest rates since 2011, compared to a long-term average of 10% to 15% of the market.
“In particular, we see a risk that ANZ may sacrifice margin in an effort to return to system growth and expect a step-up in competition over 2023, as $400 billion to $500 billion in fixed-rate loans expire, prompting a refinancing spike,” Cacho told AFR.
UBS analyst John Storey told the publication that ANZ’s retail business had so far weathered its steady drop in mortgage market share. However, Storey downgraded earnings estimates by 4% for financial year 2023 and by 5% for 2024 and 2025, since “it is only so long that these issues can continue to hide.”
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“Over the past five years, ANZ has progressively lost market share in home loans, driven by manual processing issues and – according to the company – capacity constraints, as volumes, especially over the past two years, have increased above its expectations,” Storey told AFR.
Storey said that although ANZ claims that its new technology project, ANZx, will cut costs by up to 30%, it won’t solve the bank’s market-share issues.
“We came away from this briefing thinking that ANZx, in the short term, is unlikely to be the panacea that ANZ is hoping for, especially to address current mortgage market share issues,” he said. “ANZ is unlikely to address this issue for now, and even with ANZx up and running, it’s not clear how an online mortgage offering could help to close the gap to peers as online currently accounts for a small percentage of new business for the industry.”
