A new report from financial comparison site InfoChoice.com.au and The Sheet lends weight to recent claims from the Commonwealth Treasury that Australian banks are profiteering from customers.
The mortgage market report *The State of Play shows that profit margins for banks have increased more than 30% in the last six months, from 135 basis points in January 2008 to more than 180 basis points in July. These figures come despite claims by the banking industry that profits are continuing to suffer as a result of the troubled credit market.
“While the recent credit crunch has obviously had a significant impact upon the local money market, there is limited evidence to suggest the costs of funding are still increasing,” said InfoChoice’s Head of Research Steven Anderson.
“Based on the 90 Day Bank Bill Swap Rate, funding costs have in fact fallen since reaching their peak in February, yet borrowing costs and interest rates do not show any signs of reducing. The major banks have not only survived but strengthened thanks to the credit crisis, becoming the market price setter for the first time since they relinquished the position to specialist home loan lenders more than a decade ago,” he said.
Steven Anderson suggests the reason why banks have been able to resume this role is because competition levels in the industry have declined so sharply. “There are fewer competitors to hold the big banks accountable,” he said.
Figures from *The State of Play show that the Big Four’s market share has grown from 59% to 60% since January 2008, and now accounts for more than $578 billion of Australia’s $964 billion mortgage market.
“Many customers believe their money is safer in the hands of the large banks, hence we are seeing a significant shift back to the Big Four for both deposits and lending,” said Mr Anderson.
“This growth is especially evident in new lending, where the major five banks (soon to be four if the Westpac-St George merger proceeds) account for more than 80% of the market. If other lenders are forced to sell, as is expected, the majors may control as much as 90% of the new lending market,” he said.
According to The State of Play, Australia’s five biggest banks have grown their market share each quarter since the credit crunch hit in August 2007, as compared to 20 straight quarter losses in the five years preceeding.
“It has taken the big banks just months to turn around what was essentially a five year losing streak,” said Mr Anderson.
“Unfortunately for consumers, this shift has come at the expense of competition, with smaller regional participants, building societies, credit unions and non-bank lenders losing market share, or being pushed out entirely.”
InfoChoice estimates there is a 13% shortfall in lending from operators that are now out of business or seriously restricted.
“A large percentage of this shortfall is likely to be taken up by the big banks, with rumours circulating that the big banks could consolidate even further,” said Mr Anderson.
“That being said, some non-majors have taken advantage of growing borrower discontent and attracted new customers with very competitive product offerings. BankWest and ING Direct have seen their lending growth expand by 25% and 19% respectively over the last 12 months and I expect this will continue to accelerate in the long term. The non-bank sector may be struggling now, but some will survive if not strengthen,” he said.
“The chance to share in the profits of Australia’s mortgage market is too attractive a proposition for the current status quo to remain – new players will enter the market, it’s simply a matter of when.”
But the news is not all bad for borrowers. “Despite these concerning changes in the market choice does still exist and there are good products in the market. Now is the time for Australians to do their research and
*State of Play: The Australian mortgage industry is a quarterly series of reports on the mortgage market in Australia researched and published by financial comparison site InfoChoice.com.au and financial services commentators The Sheet.