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An outbreak of fierce competition between banks in the $2.1 trillion mortgage market appears to be cooling off, analysts say, amid signs the key aggressors, ANZ Bank and Westpac, are no longer offering home loan rates that are near the cheapest in the market.
A key concern for bank investors throughout 2023 was the competitive battle between banks to win mortgage customers from rivals, as lenders sought to attract and retain mortgage holders by offering deep discounts on interest rates and paying cash-backs.
Goldman Sachs analyst Andrew Lyons said competition in home loans would probably remain “muted” but that banks’ returns would not improve dramatically.Credit: Getty/Stephen Clark
The trend has crunched profit margins in the industry, with Commonwealth Bank last year saying loans were being written at below its cost of capital – the rate of return demanded by shareholders.
While analysts say home loans will remain an important battleground, they are highlighting signs some of the most aggressive competition has cooled off recently, as banks look to protect profit margins.
Morningstar analyst Nathan Zaia said while competition for home loans remained intense, the major banks seemed to be increasingly focused on managing their margins. Zaia said although ANZ continued to grow ahead of the market, both Westpac and ANZ had modestly lifted their advertised mortgage rates in recent months by more than rivals.
“Westpac and ANZ are no longer among the banks offering the cheapest rates,” he said, adding that he expected competition for loans and deposits to continue easing as banks focused on their margins.
Commonwealth Bank, which lost mortgage market share through the intense period of competition, has recently trimmed its rates, closing the gap between the cheapest and most expensive major bank rates, Zaia said.
Goldman Sachs analyst Andrew Lyons said in a recent note there had been “some alleviation” in home loan competition and he estimated returns from Australian mortgages were close to the cost of capital.
Given this, Lyons said any further pick up in competition would probably remain “muted”. However, he said the banks’ returns would not improve dramatically, either, with their net interest margins – a measure of profitability comparing banks’ funding costs with what they make on their loans – expected to fall.