After ramping up its mortgage discounts earlier this year to arrest market share losses, CBA sliced its mortgage discounts on advertised interest rates in August and swiftly experienced a pullback in growth, according to official lending data released this week.
Scott Manning, analyst and executive director at J.P. Morgan, said October was the first time since March that CBA’s housing credit growth had slipped below the broader “system,” signalling that banks were becoming more rational after sacrificing too much margin to win new customers.
“We expect growth rates among the majors will converge on system rates as profitability becomes more of a focus, after elevated levels of front-book competition has seen return on equity eroded over the past 12 months,” he said.
Last week, NAB subsidiary UBank lifted variable home loan rates by 10 basis points. Meanwhile, Westpac increased a range of fixed rates as banks attempted to offset slowing demand and position themselves for the end of RBA’s rate-cutting cycle.
Jonathan Mott, analyst at UBS, also noted CBA’s slowing growth since winding back its “aggressive” mortgage discounting. He warned that “price appears to be CBA’s only tool to stem mortgage market-share losses.”
Mott further noted that while discounting had increased volumes, home loan net interest margins had also slipped a significant 7 basis points to 1.26% in the six months to June 30, 2016.
“Given concerns around the NIM outlook, CBA removed its most aggressive price offerings...[which] led to an immediate slowdown in volumes,” he said. “This is consistent with our concerns over CBA’s ability to sell mortgages via its proprietary [branch] network.”
As Australia’s biggest lender, CBA’s discounting has affected the entire $1.5 trillion mortgage market. Such was the concern about the blow to all the banks’ profitability that CBA recently held a briefing with fund managers to clarify its mortgage strategy and analyse the pricing tactics being deployed by rivals, reveals insider sources.
Shayne Elliott, ANZ’s chief executive officer, told attendants at a Reuters event earlier this week that discounting had increased in recent years to unprecedented levels due to intense competition. Discounts of up to 130 basis points were common, with CBA earlier increasing discounts to a whopping 150 basis points before winding them back.
Collections: Mortgage News