Commonwealth Bank mortgage slide expected to ignite new wave of competition

Commonwealth Bank’s shrinking mortgage book is expected to ignite a new wave of competition between the big four banks.

Commonwealth Bank managing director Matt Comyn. Picture: Commonwealth Bank

Commonwealth Bank’s shrinking mortgage book could trigger a new period of competition between the big four banks, analysts say, as the nation’s biggest lender looks to protect its dominant share of the home loan market.

According to monthly data released by the Australian Prudential Regulation Authority last week, CBA’s housing loans fell for a second consecutive month in August, slipping 0.3 per cent to $543.0m after a similar decline in July.

Each of the other big four banks increased their mortgage books in August, led by ANZ’s 0.7 per cent increase to $283.1m and Westpac’s 0.6 per cent rise to $454.3m.

Mortgage loans across the entire industry - including owner-occupier and investment products - rose from $2.11 trillion to $2.12 trillion.

CBA’s retreat in July was the first time its mortgage book had gone backwards since November 2017, and analysts say a second consecutive decline could spark the bank into action.

In a note to clients, analysts at Macquarie say that while competition between lenders has eased over the course of the year, that could change as CBA looks to claw back market share lost to its competitors in recent months.

“Anecdotal channel checks highlight CBA remains ~25bps above the best rates offered in the market,” the note says.

“APRA volume growth data supports this, with CBA’s mortgage book reduction accelerating.

“However, anecdotal feedback suggests that CBA has improved retention pricing over the month. While CBA’s mortgage pricing exceeds the cost of capital, we see limited appetite for

CBA to cede market share in the medium term, potentially re-igniting some level of mortgage competition in the industry.”

The latest APRA figures show that CBA still has the biggest share of the mortgage market, at 25.6 per cent, followed by Westpac (21.4 per cent), National Australia Bank (14.7 per cent) and ANZ (13.3 per cent).

The competition for mortgages has settled in recent months, as higher funding costs, including higher deposit rates, force banks to focus on margins and less on volume.

CBA led the charge in tempering the competitive drive of the sector and became the first big four bank to announce plans in May to withdraw its cashback offer.

When the company reported a record $10.1bn cash profit in August, managing director Matt Comyn warned mortgage volumes were likely to take a hit, and stressed the bank was “not prepared just to seek share for the sake of it, but we are very focused on sustainability over the medium term”.

However, in a note to clients, UBS analyst John Storey says the recent APRA data shows pressure is mounting as competitors eat into CBA’s market share.

Meanwhile, Macquarie analysts say deposit competition remains the biggest challenge to banks’ margins.

“We see ongoing revenue challenges from margin compression on both mortgages and deposits, in addition to meaningful expense headwinds, which we believe the market has not fully accounted for,” their note says.

“Housing lending growth still remains at ~4 per cent, and has remained here over the last few months, as rates have stopped rising. However, with potential for further rate hikes, housing credit growth remains at risk.”