Mortgage lenders fear rules will erode profits: Now for some more fake stats
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Deloitte's annual Australian mortgage survey revealed lenders’ biggest fear was that higher regulatory capital demands and tighter lending standards will erode profitability.
With regulators poised to cut the lending growth cap, participants in the survey released Thursday said lenders were nervous of prudential policy implications on capital, pressuring prices.
“It is worth pointing out that the prudential changes being put in place are to help sustainability and security,” Deloitte financial services partner James Hickey said.
“It was interesting that not many people saw unemployment rising as a concern, nor house prices falling. So maybe we all looked at the market from a positive perspective. Clearly, however the regulator is seeing something in the macro economic conditions.”
CoreLogic’s Australian head, Lisa Claes, said there are valid concerns about financial stability in pockets of the
market, including certain developments and developers within Australia.
“Certainly from the forecast settlement value data we harvest, there are buildings and apartments in selected pockets, where the contract price exceeds its value at settlement. I think that potential risk has a strong impact on the discriminatory regulatory response to investor loans,” she said.
Profitability over book growth
Yet, Australian Finance Group executive director, Malcolm Watkins, pointed out that undermining the lenders’ profit base exposes another danger. Most respondents said lenders will need to increase focus on profitability over book growth.
As respondents see it, this is an important challenge given the pressure for lenders to grab market share ahead of results reporting season.
“As brokers know, the discounts offered by some lenders become very attractive at that time. It drives volume and helps with the book growth,” said Watkins.
Also touted by respondents is the need for lenders to balance the net interest margins and the pass through of out-of-cycle rate hikes.
“At the moment we are seeing out-of-cycle rate adjustments, especially in segments of the portfolio to better balance the pressure points and capital costs,” noted Hickey.
Consultant Steve Weston weighed in with conduct risk: “If conduct risk plays out as expected, lenders will struggle to offer new borrowers a cheaper rate than existing borrowers for similar loans sizes, loan-to value ratios and the like.”
“If they want to change variable home loan rates out of step with official cash rate changes, they will probably need
the blessing of the Australian Securities and Investment Commission first. At least, that is what has happened in the
UK," he noted.
“If the ability to reprice back books is constrained, that provides a material risk to mortgage profitability if funding costs increase going forward.”
Market share
The level of front-book discounting in 2017 came in for discussion as the race for market share intensifies.
“The level of bank discounting of variable rates would be closely scrutinised by the Australian Prudential Regulation Authority given regulators' heightened focus on responsible lending," warned Deloitte’s global head of regulation, Kevin Nixon.
“If you are offering big discounts, you can expect APRA to ask why, particularly if it looks like the main goal is to increase volumes ahead of quarterly announcements. Further, under the broader culture remit, there will be a focus on transparency and fairness in pricing.”
That may be the case but the report found banks will continue to offer owner occupiers steep discounts on variable rates to protect their market share as investor lending is tightened and property prices around the country continue to rise.
The report said in 2016 major banks had been offering owner occupiers discounts on the variable rate of up to 130
basis points.
Discounts are currently tracking at 100 basis points, where loans are for 80 per cent or less of the value of the property. But survey participants are expecting discounting for owner occupiers to continue at between 80 and 120 basis points this year. However, for investors, loan discounts have tightened as variable rates have increased.
The ongoing discounts on banks' front book are putting pressure on net interest margins, which is increasing the pressure to increase standard variable rates on the back book.
Deloitte said house prices in capital cities are set to rise, though at a slower pace than in 2016 and 2015. New mortgage lending is forecast to rise this year by between 1 per cent and 5 per cent.