Wealth management firm JP Morgan Securities has delivered some stark warnings about current banking trends in mortgage discounting and refinance.
The latest volume of the Australian Mortgage Industry Report
released yesterday (19 October) urged major players in the industry to exhibit greater pricing discipline.
“At the heart of the issue is the fact that incremental ROEs since the financial crisis (that is change in profit over change in capital) are around 12% – not much better than the cost of equity, and bordering on being insufficient to grow dividends.”
The report found that over the last 12 months banks have looked to preserve margin rather than ROE. “It is as though the industry saw the November 2015 re-pricing as a war-chest to go and buy market share through bigger front-book discounts, rather than remaining disciplined on price in order to preserve ROEs.”
This means mortgage ROEs have fallen from 35-40% to around 25% which will have drastic implications for mortgage pricing.
“With profitability across the non-mortgage portfolio not improving, mortgage ROEs can’t really ‘afford’ to go lower than they are today without having an impact on dividend sustainability. Effectively, we may have reached a ‘line in the sand’ on mortgage profitability,” the report said.
Refinancing: Fighting the churn
JP Morgan also looked at refinancing and how customers move around between major and non-major banks. As well as having around 80% market share, the big four banks retained around 90% of customers seeking to refinance their mortgage. Of these:
- One third stay with the same lender
- Over one half refinance with another major bank
“This indicates that by cutting price to drive market share (like CBA
did earlier this year), major banks are simply poaching share off each other, which will most likely lead to a price-matching strategy by other major banks to retain share,” the report said.
“This is important. If all major banks price rationally, then pricing stability should ensue across the incumbents – basically, major banks are their own worst enemy when they pull the price lever.”
Amongst regional banks, these rates were higher with around two thirds of borrowers refinancing with the major banks. Amongst non-banks, retention was high with two-thirds of borrowers remaining loyal. However, attraction was poor with only 1% of borrowers with major or regional banks refinancing with non-banks.
“All of the above dynamics reinforce the theme that banks are not necessarily ‘under attack’ from other mortgage providers at present and the threat of significant losses in market share are more against each other.”