Adele Ferguson I Sydney Morning Herald I August 13, 2013
National Australia Bank’s $1000 cash-back offer to induce home owners to switch their mortgages to the bank has a touch of the Demtels about it, with the short-term offer including everything but the steak knives.
It seems competition is intensifying in home lending just in time for the federal election. The banks are hardly novices when it comes to understanding the whims of politicians and what better time for some obvious competitive price tension than during an election campaign.
NAB’s collection of inducements – including $1000, a discount on its mortgage protection insurance, a $600 waiver on its application fee and no monthly fees on its transaction account – follows Westpac’s decision last week to reduce its standard variable mortgage rates by more than the official rate cut by the Reserve Bank, a move that would have been unheard of a year ago, when the big four banks were either ignoring the RBA or offering smaller cuts.
Westpac’s variable rates are still higher than its peers but it is closing the gap. It isn’t surprising, given the latest Australian Prudential Regulation Authority figures show Westpac’s share of the mortgage market shrunk 0.7 per cent in the past year.
Westpac has taken the reverse approach to NAB in recent times. It has been happy to lose market share and retain a higher margin on its home loan product. One of the benefits of this approach is that it could increase the amount of its funding from deposits without paying quite as much as NAB.
While NAB and Westpac might have had different approaches in relation to mortgages, group revenue growth has been much the same. And from Westpac’s perspective, its approach has significantly improved its funding position with a smaller capital impost.
The fact that Westpac’s approach seems to have produced a better outcome leaves observers wondering how long it can keep its mortgage rate higher than its peers. The bank would argue that the higher rate will remain because it has superior service.
This may be true but while credit growth is low, there isn’t much to lose by growing less than market. The crunch will come when credit growth picks up, but that could be some time away if Monday’s figures are anything to go by. The June finance figures show while total new lending jumped for the fifth consecutive month in June – up 6.9 per cent to $59.8 billion – housing finance was up 2.1 per cent, which is flat considering the number of times the RBA has taken the axe to official interest rates.
NAB’s strategy of leading on price has been one of its boss Cameron Clyne’s prouder strategic accomplishments as he has sought to stem the tide of customer dissatisfaction that was a feature of his predecessor’s tenure.
But has leading on price actually been successful? Clyne would argue that it has and that there were precious few alternatives for him to consider: the brand was suffering and he had to do something.
The numbers cast doubt on the success of this strategy. NAB’s total revenue growth is not greater than its peers and its funding position has been increasingly challenged as the cut-price home lending strategy has led to higher loan growth and a greater need for deposits. All this has come at a time when its peers are also seeking to grow their deposits.
One of the outcomes is that NAB now has the lowest net interest margin in its peer group. This was not the case a few years ago. To put it into perspective, NAB’s margin is barely 2 per cent compared with ANZ at 2.24 per cent, CBA at 2.1 per cent and Westpac at 2.19 per cent.
Yes the bank’s struggling UK business has contributed to this position but wind back the clock a few years and NAB’s margin was higher than CBA and Westpac’s.
NAB’s ”More Give Mortgages” campaign was launched on Monday and the quick reaction of all the banks to cut interest rates last week epitomises the flat credit growth and income growth the banks are facing as the economy slows and unemployment rises.
The rule of thumb is the higher unemployment, the bigger the problem for bad and doubtful debts. To date, bad and doubtful debts and impairments have not been a problem for the banks but if the economy turns sour, this will change.
The new impaired assets remain at more than $1 billion a month for the big four banks combined. This compares with less than $400 million a month in 2007, before the effects of the GFC.
There are so many reasons for investors to be keen to drill down into Commonwealth Bank’s results on Wednesday and pay close attention to the outlook statements from its chief executive, Ian Narev. Credit growth and bad debts will determine his ability to keep his EPS growth going in the right direction as well as keep his dividends increasing.
CBA is trading at a hefty 14 times price-to-earnings multiple but still has an enticing 5 per cent dividend yield. When cash rates are 2.5 per cent and bank deposits are paying little more, the appeal of CBA continues as long as its profits and dividends are safe. And that’s the question facing all banks.