Australia’s Pending Refinancing Revolution & New Loan Competition
Banking Institutions & Mortgage Broker websites, newspaper and TV advertising are awash with very competitive offers on variable rate mortgage products from a wide array of smaller banking institutions. Defence Bank’s market leading rate of 3.83%, ING’s competitive 3.99% promoted by Isla Fisher and Gateway Credit Union’s Promotional Variable Rate special of 4.09% are all raising the volume of conversation about Loan Refinancing and New Loan Competition.
The RBA Governor in July, when asked about how the increased cost of capital would be passed on stated:
“…I imagine it will be passed on in some mortgage rates from the major banks. It is supposed to, that is the point….”
“…It is for the banks to decide what they do, but if they made that adjustment nobody should find that surprising or controversial. The whole point of [the FSI recommendation] was to change the competitive landscape between the majors and the others ….you can’t do that unless some process adjusts….”
The 80:20 ratio on domestic mortgages of the big 4 banks versus the rest of the other banking institutions is well documented.
If APRA’s macro prudential regulations and capital ratio improvements are designed to promote healthy competition then it has commenced in earnest.
As a result of the out of cycle rate rises by the 4 major banks in mid October, sourcing the cheapest deal in Australia will be an emerging psyche in borrower’s minds. A clear price differential is now in place for this to now be a mainstream pursuit. 6pm News Bulletins over the weekend drew attention to the great deals on offer through smaller lenders. I expect this to gather momentum until each individual lender achieves their growth targets.
In just the last week, more than half a dozen institutions ranging from large regionals, to mutual banks and smaller credit unions have told us the momentum under mortgage lending for them is intensifying.
Surplus High Quality Liquid Assets (HQLA) will be run off in the initial phase as banking institutions see this as the lowest cost-funding source followed by an increase in demand and rates for term deposit funds in the second phase.
In just the last few days one notable banking institution has redeemed all excess HQLA holdings to meet their expected drawdowns. They have had a very successful solar panel related lending campaign which has brought them a new borrower demographic. They have now engaged the clients on “ReFi” opportunities and are having burgeoning successes. Conversely some of the major bank’s treasury departments are clearly winding back rates due to a clear void in demand in the early stages of their new financial year.
Put simply the regulatory intentions are having an effect. Possibly the variables are in place and the time is right for demand to exceed all expectations.
In the last 4 years I have not witnessed a period where smaller banking institutions have been overly challenged to fund asset growth. I think the next 3 months will be very interesting in funding circles. I foresee “ReFi” taking off as a crusade by customers who refuse to pay for a stronger big 4 bank system. I will be surprised if customers are truly willing to pay the differential of 50-80 bpts on their loan to a big 4 bank.
The key question is, will borrowers have both the desire and the time over the Christmas holiday period to “make the switch”? There is a clear opportunity for a valet service business to emerge and assist all existing mortgagees who will not “make the switch” because it appears all too hard!
The real challenge for smaller banking institutions will be successfully funding the demand. Liquidity holdings will crimp to minimal buffers by those who market their price differential most aggressively, or incentivise the mortgage brokers to place them front and centre in the “ReFi” battle or new lending campaigns. I understand mortgage brokers currently arrange 50% of household mortgages. Their influence in marketing the price advantage of the smaller more aggressive banking institutions will be a key factor in this competitive opportunity.
But this opportunity may be limited to the strict growth targets approved by each banking institution’s Board. If a campaign achieves the percentage growth target expeditiously then the “special” may be withdrawn. Marketing of the next best offer will be critical to the longevity of this “ReFi” phenomenon. Any material impact on the 80:20 system domination of the big 4 banks will be modest at the very best. But even small percentage improvements in market share will increase real profitability and viability of these banking institutions who have endured years of arguably ruinous economic competition in the fight for survival.
If organic funding by the non-big 4 proves challenging, then Middle Market and Institutional Fund opportunities will arise. Middle Market Councils, Federal & State Agencies and Religious organisations will be the first source of non-client deposits. I have already found banking institution’s NCD levels have pushed out from +0.30% to +0.40% this week for 90 days and more than likely will push out further toward Term Deposit pricing.
This funding demand will potentially resume the dynamics of a positively sloped yield curve on all tenors out to 1 year and beyond rather than the inversion currently evident between 6 months and 2 years.
The medium term funding pressures affecting the 3 – 5 Yr MTN issues of the big 4 banks have been the talk around Wholesale Markets over recent weeks and the Deposits market is creating a scene of its own. The pursuit of dependable “sticky” funds and the assurance of loyalty at rollover may be the new game in town if smaller banking institutions tap real ongoing demand through basic competitive price dynamics.