It may have escaped your notice, but there is a quiet war going on in Australia’s banking system.
Long known for its lack of real competition and lazy deposits that effortlessly filled bank vaults with cash, there have been growing signs that the old order is slowly passing away and competition is hotting up.
The most obvious sign was the $17 billion crunching of Commonwealth Bank’s share price in the past week after it reported concerns about its net interest margin contracting and of rising costs and competition.
The share prices of the other three big banks are mixed but still lofty as they begin to confront their own woes.
Big Banks All Battling Issues
ANZ is undergoing a painful major restructure under the new leadership of Nuno Matos, and both Westpac and NAB are struggling to maintain their home loan and business bases.
The sudden boom in first home buyer activity thanks to the Federal Government’s new 5% deposit scheme has also exposed some awkward bottlenecks in the big bank’s ability to cope with a sudden rise in demand.
Underneath all of these woes lies a deeper truth – the “good old days” of deposits just rolling in the door despite a rising tide of hoops to jump through to get more than a derisory rate of interest seems to have passed or at least is more subdued than it used to be.
Also, the bold experiment of “contracting out” the loan approval process to mortgage brokers and diminishing the direct loan application channel seems to have backfired badly.
While some of the big banks are now belatedly trying to beef up their internal loan channel – a trend led by Commonwealth - customers seem to quite like using a mortgage broker with the ability to shop around between various offers from lenders large and small.
Even worse for the banks, the mortgage broker might also remain in contact with their customers and suggest money saving refinancing options, increasing the competitive pressure and reducing the incidence of long term, profitable loans.
Some recent figures from the banking regulator, the Australian Prudential Regulation Authority, show how intense the competition is getting.
Macquarie Growing Market Share
Upstart Macquarie grew its mortgage book and deposits at three times the pace of Commonwealth Bank in September, helping itself to more market share from the big four.
While Commonwealth’s mortgage book broke through $600b for first time in September, that still only meant that it grew its market share by 0.68% over the month, or 1.2 times the rate of the mortgage market.
For Macquarie, home loans grew by 2.13% over September - 3.7 times the rate of the market – while ANZ, NAB, and Westpac all lost market share.
Macquarie’s mortgage book may be tiny relative to Commonwealth’s at $153.7b but it has grown it by a solid 22.4% in a year.
One of the keys to Macquarie’s home loan growth has been the speed at which it has also been growing deposits, with relatively generous deposit rates at call with few conditions on balances up to $2 million.
Macquarie now has a 5.5% share of deposits, which totalled $91.7b by the end of September and have grown by 36.5% over the past year.
While Macquarie grows deposits through relatively high interest rates with few conditions, the other banks are getting trickier and meaner with their special conditions such as the number of transactions made and consistent balance increases.
Faced with a choice between tricky and mean deposit conditions and straightforward conditions, customers have been voting with their feet.
New Competition Abounds
It is not just Macquarie grabbing market share, with a massive range of smaller players ranging from tiny neo banks and other online players to smaller traditional lenders and banks all competing hard for market share.
None of which is a signal that the happy days are entirely over for the big banks but the markets they operate in are getting more dynamic, and there is no shortage of new players who can pick off one aspect of banking and do it better than the incumbents.
Whether it is Wise offering better foreign exchange rates for travel or online business lenders such as Lumi and Prospa, it is hard to see too many areas in which the big banks are not facing a challenge.
Competition is great for consumers but terrible for large, slow moving incumbents facing smaller, more nimble players.
While the big banks still make soaring profits, the days of buying banks shares and relaxing as you wait for the next juicy dividend could be coming to an end.
