• 23/06/2024

European financial crisis to blame for lending clamp-down

Jeff Whalley | Herald Sun | October 6, 2011


The discounting war engulfing the mortgage market is likely to end as Europe’s debt crisis raises the banks’ funding costs, industry experts say.

Lenders may soon have to abandon the price-cutting programs that have characterised the home-loan market this year if funding costs continue to rise, they say.

In a report on the mortgage industry, analysts at investment bank JP Morgan say the aggressive home-loan discounting this year has been “quite remarkable”.

Competition has soared to levels unseen since the onset of the financial crisis, they say, and discount rates are now bigger than when non-bank lenders proliferated the market in 2007.

“We believe the current pricing is about as competitive as it can get prior to diluting profitability,” the report says.

“In this type of environment, retaining existing higher-margin customers is imperative.

“Although discounting off headline rates is nothing new, the speed with which it has developed, and the depth at which it now is, is quite remarkable.”

It says that banks are now paying 0.7 percentage points more for funds sourced from foreign lenders than two months ago.

The European crisis has opened a new chapter of uncertainty in the global banking market, with institutions charging higher rates – a “risk premium” – to lend to each other, as they did before the depth of the crisis in 2008.

One banking analyst told BusinessDaily: “I think it’s probably a fair observation that if market conditions stay as they are much longer they will put pressure on banks.”

The JP Morgan report, compiled with technology group Fujitsu, said the discounts were partly funded by increased deposits.

“The current level of discounting on the new (mortgages) is not sustainable at current levels,” it said, adding that recent falls in deposit rates would help the banks hold mortgage prices down.

The report says that the Commonwealth Bank still leads the industry with a 25.7 per cent share of the mortgage market, followed by Westpac with 24.3 per cent.

National Australia Bank, which has attractively far more customers than its rivals this year, holds 14.3 per cent of the market while ANZ has 13.1 per cent.

Among the major banks, the average standard variable rate has been steady at 7.8 per cent since rates climbed last November.

The average three-year fixed rate – which was higher than the standard variable rate midway through last year – peaked at 7.5 per cent in February and has now fallen to 6.6 per cent.


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