ANZ margins hit as mortgage competition bites lender

ANZ Bank’s profit margins have taken a hit from the fierce competition in mortgage lending, as the bank tries to stem losses in home loan market share following last year’s blowout in processing times.

ANZ on Monday said it had started to deal with some of its mortgage processing woes, but it also underlined the pressure on net interest margins, which are being crunched by low-interest rates and aggressive competition.

ANZ says it now can approve simple home loans at the same speed as its rivals. Credit: Will Willitts

A market update from ANZ said its net interest margin - which compares funding costs with what it charges for loans - had slumped 8 basis points in the latest quarter, citing “structural headwinds” in the sector. The bank also said it was considering increasing the size of a $1.5 billion share buyback it announced last July, as its balance sheet gives it the flexibility to return more capital to shareholders.

Although ANZ did not publish a profit figure, the update was weaker than expected by brokers, and some analysts said the market was likely to downgrade its estimates for ANZ’s half-year profits.

The bank added it could now approve simple home loans at the same speed as its major bank rivals, after outdated systems caused the bank to suffer a blow-out in processing times and lose market share during the COVID-19 property boom.

Soft revenue growth is putting pressure on banks to cut their costs, but ANZ said it expected its running costs to be flat for the year, which UBS analyst John Storey said was slightly higher than expected.

“The revenue picture is softer than what the market has pencilled in, unlike WBC [Westpac], ANZ doesn’t have the cost release to offset this,” Mr Storey said.

Citi analyst Brendan Sproules estimated the bank’s cash earnings were about $1.55 billion in the quarter, and that earnings were being supported by lower bad debt charges.

ANZ shares slipped 1.9 per cent to close at $26.57.

Chief executive Shayne Elliott was last year forced to admit the bank was caught off-guard by the “extremely elevated demand” for home loans, as cheap credit, government stimulus and lockdowns combined to create the perfect property storm.

The major banks have been fighting to reduce the ‘time to yes’ to grow home lending portfolios as property prices around the country soar and profit margins are squeezed by historic low-interest rates.

On Monday, ANZ said it had made “solid progress” in Australia to “improve systems and processes for simple home loans with application times now in line with other major lenders”.

ANZ pointed to a slight uptick in the bank’s overall home lending balance during the first quarter of FY22, from $277.8 billion in September to $287 billion in December. However, it said more work was needed to improve processing times for complex home loans.

“Given the high levels of refinancing activity in the sector, managing both attrition and margins remain key areas of focus,” ANZ said.

Morningstar banking analyst Nathan Zaia said speeding up simple loan approvals was not good enough and this should be considered the bare minimum in the hyper-competitive market, adding all lenders will eventually be able to approve these types of loans within 24 hours.

“They need to be competitive across the board.”

Mr Zaia said ANZ had “probably annoyed a lot of brokers and a lot of customers for being too slow” last year, and would now need to introduce incentives to win back trust. “If you just get back into a competitive time for approval, you might have to use price to win back some people.”

However, Mr Zaia said all banks would need to balance the need to grow market share with maintaining a healthy approach to risk, with higher interest rates set to put additional stress on borrowers’ capacity to repay loans. “Only time will tell if we do have a real economic downturn how the loan books perform.”

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