030415.002.001.jpg Bus Age Pic requested by C Webb,taken by John WoudstraJustice Kenneth Hayne from the High Court, at the 13th Commonwealth Law Conference being held in Melb. this week. DIGICAM 12345As the big banks brace for a royal commission in 2018, it is only natural that other concerns surrounding these financial giants move to the backburner somewhat.
However, the powerful judicial inquiry, to be led by Kenneth Hayne, is not the only challenge likely to confront the big four in the year ahead. They may also face a tougher grind in one of the most lucrative segments of banking: the $1.6 trillion home loan market.
While it has been overshadowed by the dramatic deterioration in relations with government, over the past few years there has been a gradual decline in their dominance across the all-important mortgage market, the engine room of the big four’s profits.
Their position is still a powerful one – they command a share of about 82 per cent of outstanding household loans, excluding the non-bank sector, according to KPMG data.
But that figure has gradually fallen from almost 85 per cent in 2014, and appears to be on a slow downward trend.
The big four’s share of new loans being written has fallen more sharply, according to mortgage aggregator AFG. Its competition index for December showed the big four’s share of new flows was at 62.6 per cent, the lowest in the post-global financial crisis period.
Reserve Bank governor Philip Lowe noted the decline at a dinner in November, observing the majors were gradually losing market share to smaller rivals.
“There’s been, over recent times, an increase in the share of housing lending by the banks who aren’t the large four,” Dr Lowe said.
“Many of the smaller institutions have some type of competitive advantage either through their close relationship with their customers or other strategic advantages.”
As if to underline the prospect of rising competition, in the week before Christmas a deal was announced revealing that for the second time this year, a US private equity giant would pile into the Australian mortgage market.
Investment group Blackstone snapped up 80 per cent of La Trobe Financial, which followed KKR’s buyout of Pepper Group earlier in 2017.
What’s behind this apparent burst of competitive tension in the big four’s most valuable turf?
Could it be that the major banks are finally facing a tougher fight in the mortgage market, something politicians and regulators have sought for years? Perhaps.
But it may be premature for customers expecting a price war to crack out the champagne.
As much as being a reflection of competition, the trend is probably also occurring because banks are being forced to put the brakes on interest-only and investor home loans.
Those restrictions were imposed in response to a boom in credit growth and house prices that itself helped propel banking profits for years.
Dr Lowe also highlighted the impact of this regulation, implemented to dampen risks in the housing market, which until recently, appeared to be over-heating. These restrictions were affecting the big four most, he said.
“They [the big four] were the ones who had more interest-only loans and often with more investor loans so the restrictions have affected the large institutions a bit more than the smaller ones,” Dr Lowe said.
However, it is not only the big four that are at risk of losing share. The entire regulated banking sector – known as Authorised Deposit-taking Institutions (ADIs) – have shed some share to the less regulated non-bank lenders, such as Pepper, Liberty Financial and La Trobe.
Unlike ADIs, non-banks escape the caps on housing investor and interest-only loan growth.
Macquarie analysts, led by Victor German, earlier in 2017 noted the decline in ADIs’ market share did “not bode well for the majors’ volume growth outlook”.
The Blackstone and KKR deals also indicate foreign financial giants will be keen to grab a bigger slice of the home loan market.
Bell Potter analyst TS Lim says the attraction for foreigners is that returns here are still high.
“For them it’s a relative game. It’s going to be a better rate of return than what they can get in the US,” Mr Lim said.
But will these non-bank lenders or “shadow banks” seriously challenge the might of the big four? Many bank watchers are not overly concerned.
While interesting, the entry of Pepper and KKR into the mortgage market has not raised significant concerns among bank investors, as the shadow banks’ share of the pie is still tiny. An RBA study in 2017 estimated non-bank lenders held less than 4 per cent of outstanding residential mortgages.
Mr Lim said banks might even be happy to give up some market share in home loans, because of a risk that bad debt charges would increase from their current historic lows.
“It’s a good time to redistribute the risk around,” he said.
Regal Funds Management’s Omkar Joshi also said a slight decline in the big four’s market share was a marginal issue for their overall profitability.
The entry of private equity giants into the non-bank lending industry highlighted the potentially high profits that could be made by taking customers that the big four were turning away because of tighter credit policies. Many of these customers being rejected by the major banks had foreign incomes, he said, but could still be safe customers.
“The banks are being forced to slow down their growth, so as a result non-bank lenders are growing a little bit faster,” Mr Joshi said.
Whatever happens to banks’ market share in 2018, it seems safe to assume that banks will face just as much pressure over their home lending from regulators keen to avoid further overheating.
When more than half of the banks’ loan books are in residential mortgages, that is likely to mean a further slowdown in their balance sheet growth.
This story Administrator ready to work first appeared on Nanjing Night Net.