By Gareth Vaughan
It's still a good time to be a borrower with competition between the big banks in the home loan market probably as cut throat as it has ever been, if you have the required deposit, KPMG says. The firm says the active poaching of customers between banks is "growing in vigour."
KPMG's just released 2013 Financial Institutions Performance Survey (FIPS) notes the introduction by the Reserve Bank of restrictions on high loan-to-value ratio (LVR) mortgage lending has seen the big, "flush with cash" Australian owned banks relentlessly pursue lending targets by homing in on borrowers with a deposit of at least 20%. This means pain for smaller banks, forced to reduce their margins and match the big banks to stay relevant.
John Kensington, KPMG partner and head of financial services, told interest.co.nz the competition for mortgages where borrowers have a deposit of at least 20% is as vigorous as anything seen in the 27 years of KPMG's FIPS.
"I think it's the prolonged nature of it and I think that's brought about by a couple of things. When you've got large growth aspirations and can play in the whole mortgage pool and have a battle that's fine," Kensington said.
"But when you're told you've got to stay out of a part of a market where you were writing 20% plus of your business, and now because you're only allowed to do 10% and you're writing 3% or 4% of it, it means that something like 15% (more) of your business has to come from that other part of the market - the less than 80% LVR. It makes that part of the market incredibly competitive," he said.
This competition sees banks undercutting their carded, or advertised, mortgage rates, dangling carrots like iPads and TVs, contributing to legal costs and providing additional cash incentives, and paying other banks' break fees to temp fixed-term borrowers across from rivals.
This behaviour has been around for some time. Interest.co.nz first reported of banks paying break fees to help win business from customers on fixed-term loans with rival banks in June 2012. The story was closely following by a warning from the Banking Ombudsman that bank customers have no specific rights to break fee discounts. Some banks have offered "special" interest rates to customers coming across from other banks, and banks ranging from ASB to TSB have thrown in TVs, iPhones and tablets with loan deals.
Kensington suggested this competition was likely to continue until one bank does lending that turns out to be "too hurtful."
"And (then) a bank says 'well I'm not playing in this, I'm stepping out of this.' And the other three (banks) then step out gradually as well. I think you will see margins hurt a little bit," Kensington suggested.
"But I don't think you'll see everybody playing it so hard that they're silly."
'Banks will pass on OCR rises in full to borrowers'
The FIPS report also points out the cost of funds across the banking sector fell 22 basis points in the year to September 30, 2013 to an average of 3.64%. However, questions this year centre around whether deposit growth continues to cover lending growth, and what impact increases in the Official Cash Rate (OCR) - assuming they happen as expected - have.
Kensington said because of the cut throat lending competition, if he had to guess he'd say banks will pass on OCR rises in full to borrowers, and not more than OCR rises to depositors.
"Because there is such a battle going on in the lending end whether it's give aways, competitive rates or the like, I just don't think if their funding costs do go up that they can afford not to pass it all on (to borrowers)," Kensington said.
"Now of course if it's the OCR that goes up it will affect local deposit rates (but) it will not affect wholesale deposit rates. You might get the OCR going up by an amount and because of the (funding) blend, the effect of where the funding comes from and the impact on the rate, you might not see the whole of the OCR rise creep into the funding cost. But I think the blended rate that you do see creep in will be very close to the amount that they pass on."
There's always the old chestnut of New Zealand's big banks potentially having to make greater use of international wholesale funding markets if domestic deposit funding growth slows or gets significantly more pricey and lending growth exceeds expectations, and what might happen if there's some sort of disruption in these international markets. But as recently as December the Reserve Bank said funding conditions remained comfortable for New Zealand’s major banks, with access easy and pricing as low as it has been since the global financial crisis.
And despite stiff competition in the home loan market the two big banks that have been most aggressive there over the past couple of years, ANZ and ASB, have posted strong numbers in their most recent financial results. Reaping the benefits of its successful ANZ-National Bank merger, ANZ last Friday posted a 33% rise in unaudited first quarter net profit to $393 million as expenses fell 7%. And ASB's recent half-year net profit rose 14% to a record high $416 million with net interest margins up 10 basis points to 2.35%.
The FIPS report also suggests the LVR restrictions could put home buying beyond the reach of some people with this group potentially deciding to be "renters for the rest of their lives."
"They may therefore be prepared to use deposit money for other things. If so, it may help to explain some of the economic upturn via expenditure at the end of the year, particularly where the finance companies sector saw a large increase in request for personal, boat, car and jetski-type of loans. It may be that these people have given up getting to a 20% deposit and - for now or for the future - are prepared to rent but will reward themselves with other spending," KPMG says.
The annualised consumer credit growth rate in the Reserve Bank's latest sector credit figures of 3.7% is the highest growth rate in about five-and-a-half years.
Taken from the FIPS report, the chart below shows the major banks cost of funds versus the OCR