Tuesday, 4 October 2011

Banks' rate cuts won't last, analysts say aap * * tweet0 * Email * Print

Banks' rate cuts won't last, analysts say

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On Wednesday 5 October 2011, 15:32 EST
The big four banks have tough decisions to make if they want to grow or even just maintain their share of the mortgage market in a subdued property environment, analysts say.
An annual study of Australia's mortgage industry by financial services firm JP Morgan and business and IT firm Fujitsu shows home lending growth has slowed in the last 12 months.
Last year's Melbourne Cup day interest rate rise, natural disasters and global debt and economic concerns have contributed to a slowing of credit growth to an average rate of 6.5 per cent, the report said.
The major banks still represent a major proportion of the mortgage market, but their growth rates are also slowing, with Commonwealth Bank and Westpac currently growing at a slower rate than the industry as a whole.
Lenders have therefore been competing hard on price.
Rates on fixed-rate mortgages have been coming down, while Westpac on Wednesday said it would, for a short time, offer $1,000 cash back on new mortgages of over $250,000.
Fujitsu's industry group executive director Martin North said the cost of banks' funding will be the main influence on lending competition, as there is no prospect of improvement in housing sector growth.
First home buyers are sitting on the sidelines because they can't afford to enter the housing market and investors are staying away because house prices aren't rising as much as they did previously, he said.
That leaves the refinancing of existing mortgages as the main driver of lending growth for the banks, and what prompts people to refinance is a cheaper alternative, Mr North says.
"That's the double jeopardy," he said.
Banks can increase market share by enticing people to refinance, but refinancing can lead to lower profitability, he says.
JP Morgan banking analyst Scott Manning describes the current discounting on loans as "remarkable", but believes it will not be sustainable if banks want to maintain their profits.
"Am I willing to accept a lower return, but still a good return, on these mortgages? - that is the key issue (for the banks)," he told journalists.
The banks' costs of funding are likely to be determined in the next three to six months, and those outcomes will provide an insight into the banks' lending portfolios and whether the discounting comes to an end, he said.
The JP Morgan and Fujitsu report also found consumer preferences are changing rapidly, with less people using bank branches and more banking online.
This shift could result in some branches becoming "stuck costs" for banks, the report warned.

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