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Banks challenged on mortgage repricing

Australia’s banks need to avoid a “lazy” approach to mortgage portfolio repricing in light of debate around higher capital requirements, JP Morgan has warned.


A new report, co-authored by the investment bank and consultancy Digital Finance Analytics, cautions the major banks against knee-jerk reactions to trends in macroprudential policy.

“Much of the debate around offsets to higher capital requirements for the major banks has centred around repricing of the mortgage portfolio, with the ‘back of envelope’ sensitivities suggesting a 30bp repricing of the mortgage book to attain a ROE neutral scenario,” the report states.

“We do not think this would be the right approach for major banks to take from a competitive stand point. Repricing the mortgage portfolio is a lazy response, and may be detrimental to longer-run return prospects for the portfolio.”

The report warns that a plausible outcome of “blanket repricing” would be a competitive advantage for non-bank lenders, whereby they could “establish a foothold” and attract volume required for greater profitability.

Such a pricing strategy may also benefit regional and smaller banks and other lenders, the report states, through creating a “pricing gap” and/or giving them a “free leg up” for their own profitability.

Instead, major banks should look to increasing profitability through alternate means, such as the tailwind provided by improving “average cost of wholesale funds”.

In addition, the report urges increased focus on efficiency measures such as branch optimisation and LMI “price capture”. 

The report comes as Australian lenders consider the impact of moving to capital requirements in line with Basel 4 accreditation.

Australia’s banks need to avoid a “lazy” approach to mortgage portfolio repricing in light of debate around higher capital requirements, JP Morgan has warned.

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A new report, co-authored by the investment bank and consultancy Digital Finance Analytics, cautions the major banks against knee-jerk reactions to trends in macroprudential policy.

“Much of the debate around offsets to higher capital requirements for the major banks has centred around repricing of the mortgage portfolio, with the ‘back of envelope’ sensitivities suggesting a 30bp repricing of the mortgage book to attain a ROE neutral scenario,” the report states.

“We do not think this would be the right approach for major banks to take from a competitive stand point. Repricing the mortgage portfolio is a lazy response, and may be detrimental to longer-run return prospects for the portfolio.”

The report warns that a plausible outcome of “blanket repricing” would be a competitive advantage for non-bank lenders, whereby they could “establish a foothold” and attract volume required for greater profitability.

Such a pricing strategy may also benefit regional and smaller banks and other lenders, the report states, through creating a “pricing gap” and/or giving them a “free leg up” for their own profitability.

Instead, major banks should look to increasing profitability through alternate means, such as the tailwind provided by improving “average cost of wholesale funds”.

In addition, the report urges increased focus on efficiency measures such as branch optimisation and LMI “price capture”. 

The report comes as Australian lenders consider the impact of moving to capital requirements in line with Basel 4 accreditation.

Banks challenged on mortgage repricing
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