The JP Morgan Australian Mortgage Industry Report – Volume 23, released yesterday, explored the sustainability of the major lenders’ current mortgage strategies and their position relative to smaller players in the home loan market.
“This year so far has seen the major banks competing on a price-led strategy, discounting to retain market share,” JP Morgan banking analyst Scott Manning said.
“Led by CBA, the largest lender in the market, this price-led strategy saw a heightened degree of price-matching by major bank peers to retain market share, a strategy the regional banks and smaller players have been unable to compete with,” he said.
Mr Manning believes that “we may have reached a line in the sand” on mortgage profitability, warning that mortgage ROEs can’t afford to go lower than they are today without having an impact on dividend sustainability.
“To restore profitability, price must be revaluated,” he said. “CBA and Westpac are leading the change in behaviour of the banks as they examine both the asset and liability side of the balance sheet, mortgage repricing and risk-based pricing capabilities.”
The JP Morgan analyst said the change in the Australian mortgage landscape since 2007 “is not to be underestimated”, pointing to the tripling of regulatory capital requirements from that time while profit has only doubled over the same period. He noted that return on equity (ROE) for Australian banks has declined from 20 per cent pre-GFC to 14 per cent today.
One “worrying trend” Mr Manning pointed out, which he says has gone largely unnoticed by the market, is that non-mortgage ROEs are currently around the cost of capital (just above 10 per cent).
“This is significant as it highlights that mortgages are the primary capital generator of the major banks, effectively funding the growth across the entire business and therefore a key contributor of dividend affordability,” he said.