Tag: Mortgage Pricing

ACCC Tasked (Again) To Look At Mortgage Pricing

Yet another inquiry has been announced into mortgage pricing as the ACCC is tasked to examine the banks failure to pass on in full official interest rate cuts engineered by the central bank. The ACCC’s preliminary report is due by 30 March next year, six months before the final report.

Beyond the crocodile tears, there are important questions here, because as we have highlighted, loyalty is not rewarded as the banks cut rates to attract new customers. In addition, deposit margin compression has reach a floor, and funding costs are under pressure. But nothing has fundamentally changed from recent ACCC and Productivity Commission reports. Yet, having another investigation takes pressure off The Treasurer, conveniently.

Via The Guardian. The treasurer, Josh Frydenberg, has asked the competition watchdog to examine why many mortgage holders are being charged rates well above the cash rate record low of 0.75%.

The higher rates have prompted allegations of price gouging by the banks – Commonwealth Bank, Westpac, ANZ and National Australia Bank – which have previously cited funding costs as a reason why not all reductions could be passed on.

“We need information about the cost of the funds of the banks and … why they’re not passing on these rate cuts in full,” Frydenberg told ABC television on Monday.

The inquiry, which will also include smaller institutions, comes after an earlier royal commission into misconduct in the banking sector uncovered predatory practices and dented market confidence.

But Frydenberg shrugged off suggestions that the new inquiry by the Australian Competition and Consumer Commission would further affect confidence in Australia’s banks.

“I actually did call the CEOs of the big four banks yesterday and told them that this could actually help clear the air,” he said. “But at the same time, you know, they’re defending their patch and will continue to do.”

The treasurer said the banks need to explain how they balance the competing needs of shareholders and customers.

The official cash rate is at a record low of 0.75% after the Reserve Bank of Australia cut interest rates three times this year. But the big four banks on average passed on only 75% of the total reductions to their customers.

“There are a number of smaller lenders that have actually wasted no time in passing on these rate cuts on in full,” Frydenberg said.

“If the big four banks had passed on these 75 basis point rate cuts, then somebody with a $400,000 mortgage would be more than $500 a year better off in lower interest payments.”

The ACCC’s preliminary report is due by 30 March next year, six months before the final report.

What The Banks’ Memos Say

An excellent summary of the ACCC’s report, which we discussed yesterday, from MPA’s Otiena Ellwand.  It confirms the banks were well aware of the opportunity to capture substantial economic benefit of hundreds of millions of dollars in additional revenue, and a quest to meet financial targets.

The ACCC’s interim report into residential mortgage pricing reveals the “lack of transparency” around how the ‘inquiry banks’ – ANZ, CBA, Macquarie, NAB and Westpac— make these decisions.

The regulator found a “lack of vigorous price competition” between the big four banks in particular, with negative public reaction being a major concern.

The ACCC examined thousands of internal documents for this report. This is what they reveal:

1. Banks raised rates to reach internal performance targets:

The ACCC found that achieving profit and/or revenue-related performance targets affected the banks’ decisions on interest rates.

For example, concern about a shortfall relative to target was a key factor in two inquiry banks increasing headline variable interest rates in March 2017.

Tweaking the headline variable interest rates may be in the banks’ favour because it affects both new and existing borrowers, so even small increases can have a significant impact on revenue, the report found. And the majority of existing borrowers would likely not be aware of small changes in rates and would therefore be unlikely to switch.

2. A shared interest in avoiding disruption:

The banks’ pricing behaviour “appears consistent with ‘accommodating’ a shared interest in avoiding disruption of mutually beneficial pricing outcomes”, the ACCC found.

Instead of trying to increase market share by offering the lowest interest rates, the big four banks were mainly preoccupied and concerned with each other when making pricing decisions.

In fact, in late 2016 and early 2017, two of the big four banks each adopted pricing strategies aimed at reducing discounting in the market even though this was potentially costly for them if the other majors didn’t follow suit.

3. Reputation is everything:

The banks are particularly attentive to when and how they explain interest rate decisions to the public, and strong public reaction can even put pricing decisions on hold.

One inquiry bank decided to defer a rate rise due to the reputational impact.

Another bank’s internal document noted that changing the headline variable interest rate without an easily understood reason or trigger event could have the “potential to attract a lot more attention and focus” from the public.

In an email discussion among a group of bank executives, one leader noted that it had not made the case for repricing its back book.

“I am also very conscious that we suspect that many first home buyers, unable to afford owner occupier homes, have instead have [sic] bought [an] investment property to take advantage of the low interest rates, tax break and keep a foot on the housing market. I don’t think that this would play well from a customer or community stand point,” the executive wrote.

4. Not just about APRA:

In July 2015, all of the big four banks attributed interest rate increases to APRA’s limits on investor lending.

However, one inquiry bank said in an internal memo that the “substantial economic benefit” of hundreds of millions of dollars in additional revenue was a consideration in its decision.

Where does this ACCC report come from?

Back in June 2017, the banks indicated that rate increases were primarily due to APRA’s regulatory requirements, but once under further scrutiny they admitted that other factors contributed to the decision, including profitability.

In December, the ACCC was called on by the House of Representatives Standing Committee on Economics to examine the banks’ decisions to increase rates for existing customers despite APRA’s speed limit only targeting new borrowers.

The investigation falls under the ACCC’s present enquiry into residential mortgage products, which was established to monitor price decisions following the introduction of the bank levy.

Mortgage pricing not strongly competitive

The opaque pricing of discounts offered on residential mortgage rates makes it difficult for customers to make informed choices and disadvantages borrowers who do not regularly review their choice of lender, a report by the ACCC has found.

The ACCC’s Residential Mortgage Price Inquiry is monitoring the prices charged by the five banks affected by the Government’s Major Bank Levy: Australia and New Zealand Banking Group Limited (ANZ), Commonwealth Bank of Australia (CBA), Macquarie Bank Limited, National Australia Bank Limited (NAB), and Westpac Banking Corporation.

The Inquiry’s interim report, out today, reveals signs of less-than-vigorous price competition, especially between the big four banks.

“We do not often see the big four banks vying to offer borrowers the lowest interest rates. Their pricing behaviour seems more accommodating and consistent with maintaining current positions,” ACCC Chairman Rod Sims said.

“We have seen various references to not wanting to ‘lead the market down’, to have rates that are ‘mid-ranked’ and to ‘maintain orderly market conduct’.”

The ACCC has found that discounts are a major factor in the interest rates customers are paying. Banks offer varying levels of discounts, both advertised and discretionary, but the latter are not always transparent to consumers.

The criteria used by different banks for determining the total discount offered to borrowers includes many factors, such as the individual borrower’s characteristics, their value or potential value to the bank, and their ability to negotiate.

During the two years to June 2017, the average discount across the five banks under review on variable interest rate loans was 78-139 basis points off the relevant headline interest rate.

“The discounting by the big banks lacks transparency and it’s almost impossible for customers to obtain accurate interest rate comparisons without investing a great deal of time and effort. But the potential savings from these discounts are immense,” Mr Sims said.

The report also found the average interest rates paid for basic or ‘no frills’ loans are often higher than for standard loans at the same bank.

“We think many customers who opted for ‘basic’ or ‘no frills’ loans thinking they are saving money would be surprised to learn they might actually be paying more.”

The report’s other key findings include:

  • existing residential mortgage borrowers paid significantly higher interest rates than new borrowers at the same bank. Between 30 June 2015 and 30 June 2017, existing borrowers on standard variable interest rate residential mortgages at the big four banks were paying up to 32 basis points more (on average) than new borrowers,
  • the large majority of borrowers are paying lower interest rates than the relevant headline interest rate, and
  • the bank with the lowest headline rate is not always the bank with the lowest average rate paid by borrowers.

“These findings suggest that many bank customers would likely benefit from either switching mortgage providers, or approaching their bank for a better rate and indicating they are prepared to switch to get one,” Mr Sims said.

“It seems existing customers are not being rewarded for their loyalty; in fact they are worse off. For example on a $375,000 residential mortgage, a new borrower paying an interest rate that was 32 basis points lower would save approximately $1200 in interest over the first year of a loan.”

“This is a significant saving,” Mr Sims said.

In addition to examining the way banks make their mortgage pricing decisions, the ACCC’s Residential Mortgage Pricing Inquiry final report will detail if the banks have adjusted their pricing in response to the Government’s Major Bank Levy.

As at November 2017, the five banks stated no specific decisions had been made to adjust residential mortgage prices in response to the Major Bank Levy.

Indeed, one bank considered whether the costs could be passed on to customers and suppliers at a range of different time periods, including after the end of the ACCC inquiry.

The ACCC’s final report will examine these issues further.

Background

On 9 May 2017 the Treasurer, the Hon. Scott Morrison MP, issued a direction to the ACCC to inquire into prices charged or proposed to be charged by Authorised Deposit-taking Institutions (ADIs) affected by the Major Bank Levy in relation to the provision of residential mortgage products in the banking industry in Australia. The Major Bank Levy came into effect from 1 July 2017, and the Inquiry will consider residential mortgage prices for the period 9 May 2017 until 30 June 2018.

The ACCC’s interim report examines the motivations, influences, and processes behind the residential mortgage pricing decisions of the five banks during the period 1 July 2015 to 30 June 2017.

The ACCC is reporting on this period in order to have a baseline against which to compare pricing decisions for the review period set by the Treasurer.

The ACCC will continue to examine the banks’ mortgage pricing decisions and how they have dealt with the Major Bank Levy through to 30 June 2018.

The ACCC has used its compulsory information gathering powers to obtain documents and data from the five banks on their pricing of residential mortgage products. The ACCC has supplemented its analysis of the documents and data supplied by the five banks with data from the Reserve Bank of Australia (RBA), Australian Prudential Regulation Authority (APRA) and the Australian Bureau of Statistics (ABS).

This inquiry is the first task of the ACCC’s Financial Services Unit (FSU), which was formed as a permanent unit during 2017 following a commitment of continuing funding by the Australian Government in the 2017-18 Budget. Alongside the ACCC’s role in promoting competition in financial services through its enforcement, infrastructure regulation, open banking, and mergers and adjudication work, the FSU will monitor and promote competition in Australia’s financial services sector by assessing competition issues, undertaking market studies, and reporting regularly on emerging issues and trends in the sector.

Basel Committee’s low risk weight for covered bonds is credit positive for issuing banks

From Moody’s.

Last Thursday, the Basel Committee on Banking Supervision accredited covered bonds with low risk weights, closely following a precedent set by European regulation. A low risk weight is credit positive for issuing banks’ sales of covered bonds outside the European Union (EU) given the global application of the Basel rules.

In Australia, covered bonds funded about 10% of all outstanding mortgages in 2016, up from 6% five years earlier.  More will be funded this way once the new rules are in place.

Existing EU covered bond issuers will benefit from the Basel IV regulation because their covered bonds become a more attractive investment for non-EU bank investors. Amid rising minimum requirements for regulatory capital, risk weights applied in the calculation of banks’ stock of risk-weighted assets have gained importance in their investment decisions. European covered bond issuers can diversify their investor base and potentially reduce their funding costs as demand for their bonds increases. However, some issuers may be incentivised to increase their share of covered bond issuance in foreign currencies, thereby increasing their exposure to foreign-currency fluctuations given that cover pool assets typically are denominated in euros or other local European currencies.

Outside the EU, lower risk weights for covered bonds will foster the development of covered bond markets and encourage the bonds’ use as a funding tool. The additional funding source will make non-EU banks less reliant on deposits and the sometimes volatile unsecured wholesale funding market. Additionally, the covered bonds will provide an opportunity to improve their asset-liability matching, particularly for mortgages, which typically have 20- to 30-year maturities, versus five to 10 years for covered bonds. In the EU, banks investing to fulfil liquidity coverage requirements, for example, typically absorb about one third of primary covered bond market issuance.

Covered bond markets outside the EU include Australia, Canada, New Zealand, and Singapore, where the bonds have had a less relevant, but growing, role in financing local mortgage markets. In Australia, covered bonds funded about 10% of all outstanding mortgages in 2016, up from 6% five years earlier, but significantly less than in Sweden, where covered bonds finance about 55% of all outstanding residential loans, according to the European Covered Bond Council’s HypoStat 2017. Once Basel IV rules are implemented, we expect that non-EU banks will become more active investors in their domestic covered bond markets, thereby facilitating domestic mortgage funding.

Lower risk weights reflect covered bonds’ status as the only bank debt that cannot be bailed-in and that has a proven track record of sound credit and liquidity. Basel IV regulation stipulates certain requirements that issuers must fulfil to achieve low risk weights for their covered bonds beginning January 2022. The Basel IV requirements include that the covered bond issuer be subject by law to special public supervision designed to protect bondholders, that the value of the cover pool backing the covered bonds is restricted to a maximum loan-to-property value ratio of 80%, and that the covered bonds are protected by at least 10% over-collateralisation.

Lenders Cut Attractor Mortgage Rates

As predicted, lenders are now falling over themselves to offer new low-rate loans to attract business, in the run up to Christmas, utilising the war chests they created earlier in the year when many rates, especially investment loan books were repriced up. Even some loans to investors are being cut (but not for existing customers of course!)

This from Australian Broker, summarises some of the recent moves:

Several banks have introduced lower principal and interest rates for new mortgage customers either by dropping rates or introducing discounts for new lending.

Effective from 23 October, Westpac has brought in better discounts on its Flexi First Option Home and Investment Property Loan products.

This is a two-year introductory offer which increases the discounts as follows:

Old discount New discount 2-yr intro rate Base rate Comparison rate
Flexi First Option Home Loan 0.71% p.a. 0.84% p.a. 3.75% p.a. 4.59% p.a. 4.44% p.a.
Flexi First Option Investment Property Loan 0.96% p.a. 1.15% p.a. 3.99% p.a. 5.14% p.a. 4.93% p.a.

Both loans come with no establishment fee, saving new borrowers $600. These changes will not affect Westpac’s interest only mortgage products.

Westpac subsidiaries, St George, BankSA and Bank of Melbourne, have also introduced promotional discount rates, effective from 23 October.

Rates on the 2 Year Residential Investment Principal & Interest loan have decreased by 20 basis points while the Basic Owner Occupier Principal & Interest Promotional Rate has dropped by two basis points:

Old rate Change New rate Comparison Rate
2 Year Residential Investment P&I loan 4.34% p.a. -0.20% 4.14% p.a. 5.63% p.a.
Basic Owner Occupier P&I Promotional Rate 3.80% p.a. -0.02% 3.78% p.a. 3.79% p.a.

Finally, Bankwest has also introduced lower P&I rates for new owner occupied and investment lending on its Complete Variable and Premium Select Home Loans products. These changes came into effect on 20 October.

Borrowings Old rate New rate Comparison rate
Complete Variable Home Loan
Owner occupied $200k+ 3.92% p.a. 3.79% p.a. 4.22% p.a.
Investor $200k – $749k 4.49% p.a. 4.39% p.a. 4.81% p.a.
$750k+ 4.39% p.a. 4.29% p.a. 4.71% p.a.
Premium Select Home Loan
Owner occupied $20k+ 4.09% p.a. 3.99% p.a. 4.01% p.a.
Investor $20k – $749k 4.59% p.a. 4.49% p.a. 4.51% p.a.
$750k+ 4.49% p.a. 4.39% p.a. 4.41% p.a.

 

‘No formula’ for mortgage repricing, says NAB CEO

From The Adviser.

NAB chief executive Andrew Thorburn told a parliamentary committee on Friday (20 October) that if the bank wanted to maximise profits, it would not have reduced principal and interest rates by 8 basis points for 500,000 customers.

“We are trying to do a whole lot of very delicate things in a very dynamic market,” Mr Thorburn said.

“APRA required 30 per cent. We then have to make a judgement of what the number should be to get to that. That’s an estimate we make in very fast-moving competitive, dynamic environment.

“There is no base number to work off. You have to estimate what you think it takes with the price to reduce your demand in a market where there are dozens of players doing the same thing.”

Committee chair David Coleman MP was eager to find a correlation between NAB’s 35 basis point hike on all interest-only loans and APRA’s direction for banks to cap new interest-only lending at 30 per cent.

Mr Coleman questioned whether the Australian Competition and Consumer Commission (ACCC), which is currently investigating banks’ mortgage pricing decisions, will find the cost of the change as materially less than what NAB charged its customers.

“I don’t think we will ever know,” Mr Thorburn said. “The ACCC [has] all the documents. There is no formula that tells you what the number should be.”

Also appearing in Canberra on Friday was NAB’s chief operating officer, Antony Cahill, who confirmed that the major bank has reduced its interest-only portfolio from 41 per cent to 37.7 per cent of the total book.

He explained that price was just one of the many levers the bank pulled to meet regulatory requirements and lend responsibly. Others include LVR caps, ceasing lending to non-resident borrowers and introducing an LTI ratio.

Mr Cahill also highlighted that the lender introduced “highly competitive fixed rates” that have driven a surge in volumes.

“Our fixed rate lending has more than doubled in the last three months,” the NAB COO said. “We have gone from $500 million to $1.3 billion of customers with fixed rates.”

‘Yes, we repriced the back book’: ANZ defends rate hikes

From The Adviser

ANZ chief executive Shayne Elliott CEO has explained how it was a first mover on mortgage repricing and why it made a decision to hike rates knowing full well that its customers could move to another lender.

He appeared in Canberra on Wednesday (11 October) where he answered questions before the House of Representatives Standing Committee on Economics, commonly known as the major bank review.

Committee chair David Coleman MP asked the ANZ boss why the group increased rates for existing loans earlier in the year when APRA’s 30 per cent interest-only cap was for new lending only.

“We run a business,” Mr Elliott said. “We need to make sure that it is prudent and that we identify risk and price for it appropriately while still providing a good, decent service to our customers.

“We started changing our approach in terms of lending standards, policy and pricing well before APRA put in place its speed limit. In fact, our first changes around interest-only started in April 2016. We made policy changes, we have reduced the amount of time people can have interest-only, and we have reduced the maximum LVR. That was well before [APRA’s speed limit] because we assessed that the risk in that book was changing and that we needed to be mindful of that.”

Mr Elliott said the first pricing changes the bank made were on 24 March, a week before APRA’s interest-only speed limit came into place.

“Subsequent to the speed limit we came out and reduced rates, we were the first. We reduced rates for people paying principal and interest and we increased others. We did that not knowing what our competitors would do and not knowing what the customer behaviour would be. But we wanted to reward customers who repaid principal, because it is the right thing to do, and we wanted to give them the right signals to move.

“Yes, we repriced the back book but, we also gave price cuts to the back book as well.”

ANZ CFO Graham Hodges added that the bank also introduced its lowest ever fixed-rate at 3.88 per cent for P&I borrowers.

Mr Coleman argued that it is “disingenuous” for a bank to tell its customers, who are not impacted by APRA’s regulatory action, that the bank has determined that it is good for them to move to P&I.

“First of all, we gave people a four-month notice period,” Mr Elliott said. “Whether that’s to move with us or a competitor. Also, when people come to us and asked for an interest-only loan, we assess them on the basis that they can afford to pay P&I from day one. We do assess people’s ability to be able to pay the principal.”

Mr Elliott said the bank modelled the impact of its pricing changes. Asked about the profitability of interest-only loans and the impact of repricing, the chief executive explained that the answer depends on customer behaviour.

“It depends what customers do,” he said, adding that there was an assumption in Mr Coleman’s question that all customers stay with ANZ and don’t move.

“About 10 per cent of our customers with a home loan choose to leave us and go somewhere else each year. There are a lot of factors.

“We absolutely ran an analysis and looked at the fact that by reducing P&I loans by 5 basis points it would come at a cost. That’s about two thirds of our customers who received the benefit of a rate cut.

“We were first. We did that not knowing what the competition would do and at a risk that a lot of those customers would vote with their feet and go somewhere else, or vote choose the fixed-rate, which is a much lower margin product.”

Interest-only loans currently account for approximately 34 per cent of ANZ’s total mortgage portfolio.

Westpac also faced tough questions from David Coleman in Canberra yesterday. Chief executive Brian Hartzer told the committee that interest-only loans accounted for 50 per cent of the Westpac mortgage book.

Westpac Cuts Fixed Mortgage Rates Too

From The Advisor.

As of Wednesday (20 September), Westpac’s two-year fixed rate for owner-occupiers paying principal and interest (P&I) dropped by 11 basis points to 4.08 per cent (standalone rate) or 5.16 per cent comparison.

For those with a Premier Advantage Package, the new rate is 3.88 per cent (4.88 per cent comparison) for two-year fixed terms.

 

At Bank of Melbourne, Bank SA and St. George Bank, the new standard two-year fixed rate for owner-occupiers on P&I is 14 basis points below its former level, at 4.00 per cent (5.14 per cent comparison).

The group clarified to brokers that customers will receive the new lower rate on applicable loans if they have already rate-locked their fixed rate, and if the rate locked in is higher than the new rate, on the date the loan settles (provided that there is no further fixed rate change).

If the rate locked in is lower than the new rate, then they will not be impacted by this change (i.e., they will get the rate they locked it at).

Westpac’s move to drop its two-year fixed rates follow on from similar moves from Suncorp, ANZ, CUA, and MyState Bank. Suncorp Bank recently said that the rate drop follows on from “recent reductions to fixed rate funding costs”.

AMP Bank Lifts Mortgage Rates

From The Adviser.

AMP Bank has, as of this week, increased variable interest rates for owner-occupied interest-only loans by 28 basis points. The increase applies to Basic, Professional Pack, Classic, Affinity and Select variable rate loans and lines of credit. The increase does not apply to construction and land loans.

For example, the Basic package variable rate for new owner-occupier mortgages (interest only) now starts from 4.56 per cent (4.28 per cent comparison).

As well as variable rates, the bank has also hiked fixed rates for owner-occupied and investment interest-only loans by 20 basis points. The increase applies to fixed rate loans between 1 to 5 years as well as for 1-year fixed interest in advance loans.

Fixed rates for owner-occupied principal and interest loans have decreased by 10 basis points.

Existing customers will not be impacted by the changes.

The maximum loan-to-value ratio for interest-only loans will drop from 90 per cent to 80 per cent, effective for loan applications received from Wednesday, 31 May.

This change applies to all owner-occupied loans and loans that include owner-occupied and investment property securities. Master limit applications will also be limited to 80 per cent LVR.

The maximum LVR for purchases of investment property loans remains unchanged at 70 per cent.

AMP aims to be “provider of choice” for brokers

The rate changes were announced on the same day as AMP held its investor strategy day in Sydney, in which the bank revealed that it aims to become the “provider of choice to advisers and brokers” and believes it has “significant potential for future growth” via the broker market.

The group executive for AMP Bank, Sally Bruce, told The Adviser that mortgage brokers had been identified as one of the “key priorities and distribution channels” for the bank, and that it was therefore “looking to increase both the breadth and depth of [its] adviser and broker distribution network”.

Ms Bruce said: “Mortgage brokers currently generate more than 50 per cent of all home loan applications in Australia and, with the credit market growing, and AMP’s market share at just 1 per cent, we believe this market has significant growth opportunity.”

She added that the bank had “boosted the team that supports intermediaries by 20 per cent, helping [the bank] with ongoing improvements to efficiency and speed for turning around applications”.

According to Ms Bruce, this “service-focus, plus a compelling and competitive range of mortgage products, will play key roles in driving growth”.

Speaking at the investor strategy day last week, Ms Bruce noted that the first quarter of the financial year 2017 had seen a 5 per cent boost in both mortgages and deposits.

She commented that the bank was “confident” that the growth would continue for several reasons. Ms Bruce explained: “The first thing is because we have a very strong, established distribution capability… [W]e have the largest advice network in the country and we also have established broker relationships. When you look at that as a channel, it targets more than 50 per cent of all mortgage activity in the market.”

Ms Bruce concluded: “In the broker fraternity and the market generally, we have 1 per cent market share, so we continue to reach further into the network and originate through those people. We’re having great success with that in both of those channels; we’re continuing to get broader reach into more advisers, more brokers, and originating more through them.

“So, we’re just at the beginning of the journey which is what gives us comfort.”

ACCC To Inquire Into Residential Mortgage Pricing

In the budget, the liabilities levy as we reported will create a 5% problem for the banks in terms of earnings, and as a result they will likely seek to recover these costs by repricing.

However the budget statement also said:

To facilitate the introduction of the levy, the Australian Competition and Consumer Commission (ACCC) will undertake a residential mortgage pricing inquiry until 30 June 2018.

As part of this inquiry, the ACCC will be able to require relevant ADIs to explain changes or proposed changes to residential mortgage pricing, including changes to fees, charges, or interest rates by those ADIs.

So something of a cat and mouse game, as lenders continue to adjust mortgage pricing thanks to changing capital weights, risks and funding.

Or you could look at it as a signal of market failure, insufficient competition requiring additional regulatory intervention. It is an acknowledgement of the market power of the big players!