Macquarie warns of risks of banks chasing mortgage loans

Banks aggressively chasing loans are putting future profitability at risk, a Macquarie analyst has warned.

System credit growth

Banks aggressively chasing loans are putting future profitability at risk as margins are crunched by falling official interest rates that are failing to inspire widespread demand from borrowers or inflation, experts say.

Ahead of the Reserve Bank’s finely balanced meeting today, analysts singled out Commonwealth Bank, Suncorp and AMP as lenders growing “well ahead” of rivals in the $1.5 trillion mortgage market.

In contrast, ANZ, National Australia Bank, Bendigo and Adelaide Bank and Bank of Queensland were growing below “system”, or the overall market, according to Macquarie’s analysis of the regulator’s monthly lending data for June.

“While we would normally be critical of banks that are losing share in mortgages, given the current state of the market, we question whether additional volume growth is coming at a cost of sacrificing margins and profitability,” Macquarie analyst Victor German said.

“Banks offer significant discount to attract volumes, and returns on new mortgages are materially below the back-book returns (about 14 per cent versus 30 per cent).”

Martin Crabb, head of research at Shaw and Partners, said a “channel check” of mortgage brokers last week suggested borrowers could get a mortgage at just 3.75 per cent.

“That must represent pretty thin margins for a wholesale- funded bank. I reckon the cost of five-year money for a bank is 3.56 per cent. Must be a lot of cheap retail funding around,” he said.

Markets have priced in a 68 per cent chance the RBA will today cut the official cash rate a further 25 basis points to 1.5 per cent, extending an easing cycle that began in late 2011.

After mixed second-quarter domestic inflation data and the US Federal Reserve holding rates last week, economists labelled it a “line ball” decision.

Several banks, including HSBC, Westpac and ANZ, have backed the RBA to follow up the May cut with another reduction given alarmingly low annual inflation of just 1 per cent and the risk of the dollar rising to US80c.

Falling official rates hurt banks by eating into profits from their deposit books and equity holdings. Low rates often also inspire more competition for assets.

Despite the RBA’s May rate cut, borrowing petered off in June with total credit growth nudging up just 0.2 per cent to take the annual growth rate down to 6.2 per cent.

The trends were mirrored in the Australian Prudential Regulation Authority’s separate lending data for banks, with CBA leading in mortgages in its second consecutive month of above-system growth.

At 10.7 per cent, CBA’s three-month annualised mortgage growth is the strongest it has been since February 10, according to Ord Minnett, which said the bank was offering higher discounting of up to 150 basis points off advertised standard variable rates. In contrast, system growth was 8.5 per cent — a level Westpac, ANZ and NAB did not exceed, reducing their market share.

CBA’s growth comes ahead of its annual profit results next week, where investors will scrutinise whether the bank has repaired the market share the bank lost during the first half.

Mr German said gaining market share did not “come cheaply” and banks growing “well ahead of system in the current market were at risk of having greater margin pressure in the future”.

“Although we believe that banks will reprice mortgages to offset margin pressures, in our view, a far more rational approach to pricing is required to maintain longer-term profitability,” he said.