S&P exposes futile mortgage price war

While the non-majors appear to be leading the market with record-low rates, S&P reports that the considerable muscle of the major banks means they can offer discounts of up to 100 basis points, further bolstering their dominance of the mortgage market.

“Although one might struggle to find the names of any of the four major Australian banks listed in the lowest 20 variable interest rate home loans on rate comparison websites such as Canstar, InfoChoice and RateCity, you would see several rated banking mutuals,” the report said.

“Newcastle Permanent Building Society, bankmecu, and Credit Union Australia all appear on the lists, with market-leading variable-rate offers of 4.62 per cent, 4.60 per cent, and 4.65 per cent, respectively at 17 November,” it said.

“Nevertheless, anecdotal evidence suggests that despite the higher advertised rates of the major banks – with 5.12 per cent the lowest on 17 November – the major banks typically offer higher discounts on their advertised rates than Australian mutuals and regional banks do generally.

“Discounts of 100 basis points on low (less than 80 per cent) loan-to-value exposures are not out of the ordinary for the majors.

“Furthermore, the major banks also each have successful online residential loan offerings that are near best priced in the market – including through their other brands – and are now actively using "bonus" offers to entice new lending.

“As a result, the actual cost of a home loan with an Australian major bank could be lower than that offered by some of the mutuals and regional banks, given that both tend to discount at a lower level than the major banks – if at all, in the case of some mutuals.”

Released this week, the report concludes that the regional and mutual banks are losing the competition battle against the big four, who are building market share on the back of strong price competition, a strong distribution capability and a sharper sales focus.

S&P noted the majors' favourable pricing position are their funding cost advantage – including federal government support – and the more favourable regulatory capital treatment of their residential home loans.

“This dynamic has made it difficult for other, smaller residential mortgage lenders to compete against the major banks in an increasingly cut-throat Australian residential lending market and could bring downward rating pressure on regional banks and banking mutuals if this competitive struggle were to escalate,” the report said.

In the six months to June this year, residential lending credit growth was seven per cent on an annualised basis.

The major banks have dominated credit growth over the period, with annualised growth for each major bank between 7.7 per cent and 6.6 per cent, according to the report.

By comparison, Bendigo and Adelaide Bank’s loan growth was 6.0 per cent, Suncorp’s 3.7 per cent, and Bank of Queensland's 2.2 per cent over the same period.

However, the report singled out the success of Macquarie Bank, which achieved growth of 71 per cent in its residential lending book in the year ended 30 June 2014, supported by investment in listed mortgage broking companies, its broker commission structure, and the 2013 acquisition of a $1 billion loan book from ING Direct.