Competition heats up for mortgage business

Scott Murdoch | The Australian | October 21, 2010
http://www.theaustralian.com.au/business/competition-heats-up-for-mortgage-business/story-e6frg8zx-1225941418879

The mortgage market could be distorted if rising interest rates revive non-bank lenders, Commonwealth Bank chief executive Ralph Norris warns.

The non-bank lenders largely withdrew after struggling during the global financial crisis.

Mr Norris said competition among major Australian banks and the smaller rivals, which dissipated during the downturn, would soon begin to return.

The non-bank lenders mostly exited the market but a small number have begun to write mortgages again.

Rivalry in the deposits market has started to be reignited, especially as groups such as Britain’s Virgin Money restart their Australian operations.

“The level of market competition prior to the crisis that drove banks and financial institutions to see new and riskier ways to increase their profits is still around today,” Mr Norris told a FINSIA conference in Sydney yesterday.

“The wake-up calls provided by the crisis and the fact we’re now operating in a much higher funding cost environment will influence the nature of that competition.

“Competition is also likely to come from new entrants into the Australian banking sector from offshore.

“The strength of the Australian economy and our proximity and links with Asia present a very appealing option for offshore banks, particularly for those banks faced with a subdued home economy.”

Mr Norris said he expected that non-bank lenders would again become interested in the Australian mortgage market as interest rates began rising and the securitisation market slowly became more active.

CBA’s mortgage book is the largest in Australia, worth $290 billion, compared with Westpac’s $250bn.

Mr Norris said the increase in non-bank lenders could be a concern because the entities were not as strictly regulated or prudentially supervised as the banking sector.

“We may see competition coming from sources we’re not currently thinking of,” he said.

“As the cost of credit to consumers continues to rise, it does send an invitation to non-banking institutions to explore ways to offer low cost loans. On the upside, this has the potential to promote innovation within the financial sector.

“On the downside, the risk of non-regulated players entering the market and taking increased risks with the lending and borrowing practices is something for the banks to watch carefully.”

Australian Prudential Regulation Authority chairman John Laker told the conference the constant argument that the Australian banks did not take a “one size fits all” regulatory approach was no longer relevant.

Dr Laker said the sector still needed to comply with the global toughening of liquidity and capital rules even though Australian banks were now considered the best-performing and most stable in the world.

“We are still being counselled that Australia should somehow distance itself from these global reforms and avoid the so-called ‘one size fits all’ solutions,” Dr Laker said.

“Perhaps these reactions are just a fading echo of earlier concerns that the global reform process would produce draconian solutions to problems that had not been experienced in Australia.

“The solutions are substantial, but they are not draconian and it perhaps is best to let these echoes fade completely.”