Competition heats up

In the past few weeks, many of Australia’s majors, second-tier and non-bank lenders have slashed their rates or made significant policy changes in a bid to claim greater market share from their competitors.

Since the beginning of the year, we have seen the Commonwealth Bank of Australia scrap its mortgage establishment fees and launch an Australian first no fee home loan; Westpac slash its rates; ANZ start a $100 million internet banking revamp; and NAB launch a very aggressive cash incentive campaign.

Australia’s second-tier lenders have also become increasingly competitive. In recent weeks, ING DIRECT has slashed rates, increased its maximum LVRs, extended its Reduced Equity Fee offering and contemplated re-launching its $1,000 switching incentive scheme.

Meanwhile, Citibank and Bankwest have both gone to market with heavily discounted products.

Citibank slashed the rate on its Mortgage Plus Home Loan by almost one per cent, while Bankwest launched a new discounted product, the Super Start Home Loan.

At the same time, some of Australia’s non-bank lenders, including National Finance Club and LJ Hooker, increased their maximum LVRs and introduced a series of new products.

Bankwest’s head of retail specialist banking, Ian Rakhit, says the recent spate of enhancements not only suggests that competition between lenders is heating up, but that the funding markets could be opening once again.

“If you look at announcements from the CEOs of all the lenders over the past weeks, everybody is talking about market share and their desire to have more of it,” he says.

“The market is definitely hotting up. The banks are really well funded at the moment, which will benefit consumers in the long run.”

In February, Westpac launched a $435 million Residential Mortgage Backed Securities (RMBS) issue.

According to Mortgage Choice’s chief executive officer Michael Russell, however, Australia’s smaller lenders are still not in a position to go toe to toe with the majors.

“The markets may be opening up, but it is doing little to help Australia’s non-bank lenders,” he says. “Unfortunately, these lenders face higher capital and higher funding requirements, which renders them uncompetitive in terms of pricing.

“And, as we are in the middle of a price war, these smaller lenders will find it near impossible to properly compete and challenge the majors for market share.”

That said, it would be an error to discount the non-banks and second-tier sector altogether, he says.

“In time, I think we will see these lenders start to spread their wings once more.

“They are very resilient, they have a loyal customer base and I believe they are simply waiting on the sidelines until they have access to cheaper funding. Once this happens, we can expect the segment to hit back – really hard.”

Mr Russell’s sentiments were largely echoed by Aussie’s chief executive Stephen Porges.

Mr Porges says at the moment there is little evidence to suggest Australia’s smaller lenders have what it takes to be a true competitive alternative.

He says the current state of the RMBS market is stopping the nation’s smaller lenders from competing on a national scale.

“There’s a lot of talk that the second tier will come back in to competition, I don’t believe that. They pretend, but they don’t have any volume. We haven’t seen any of the second tiers change their business model, so any business that is reliant on the RMBS market won’t be able to truly compete,” he says.

“They might get one deal away, but they won’t be able to fund any more.”

“And even if the market does open up again, the majors might be so far in front that no-one can catch up.”