Big 4 laugh all the way to the bank as lending landscape remains unchanged
Australia’s banking sector is an interesting beast. Monopolized by the so-called Big 4, who ate up most of what constituted “the competition” – smaller, second tier lenders – post-GFC, our lending landscape has changed very little over the decades.
Since the business of borrowing began in earnest with the early settlers of our wide brown land, four major players emerged and evolved into today’s CBA, NAB, ANZ and Westpac.
A little bit of history
Prior to the GFC, the biggest threat to these four mega money merchants was the potential for increased competition, with talk of an international entrant making moves on their territory.
Major UK bank, HBOS (Bank of Scotland), who owned BankWest at the time, used this local leverage to test the waters, with further talk of Japanese banks considering entering into the market as well.
But if it was difficult to successfully challenge the stranglehold the ‘Big 4’ had on the financial services sector at the beginning of the century, it’s become nigh on impossible since the GFC rocked the foundations of numerous international finance powerhouses.
Now it’s fair to say that any prospects for effective competition – that could exert meaningful pressure on interest rates and compromise the Big 4’s position – have deteriorated even further.
While it’s unlikely that we’ll see any major player stepping onto the scene for quite some time, the Australian market is still an enticing prospect for international lenders.
In comparison to their overseas counterparts, the returns Australian banks make on their mortgage books is high, and vastly more attractive than in the UK and the US.
But is this enough of a carrot to attract an international entrant? While Australian borrowers stand to benefit from such a shake up, with more robust competition potentially seeing lenders squeeze margins and slash rates, the chances of it actually happening in the next hundred odd years are fairly slim.
For a start, international banks have weakened off the back of the GFC and in turn, become a lot more introspective; with a focus on getting domestic business back on its feet and generating strong, more liquid profits with less gearing and borrowing to improve their credit rating.
Further impeding any chance of change to our current lending landscape is the growing market share boasted by the Big 4, who effectively swallowed up most smaller, second tier players post GFC, after squeezing them out of the running.
Essentially, it would be even more costly for an international institution to try to establish a successful brand and client base here in today’s market. Any right minded, overseas banking CEO would know they don’t stand to make any profit for maybe ten years or more while they build their business from the ground up. Not that the shareholders would keep them employed for a decade on the back of such inevitably poor performance.
Last lenders standing
While there’s little chance of a banking breakthrough from an overseas contender, in the last two or three months we have interestingly witnessed a bit more aggression from Australia’s remaining second tier players.
The likes of Suncorp and ING, who remain independent of the Big 4 (unlike BankWest, Bank of Melbourne and St George for instance), have become a lot more assertive with their pricing in recent times, after finally finding their fiscal feet post-GFC.
Up until now, cost of funds and access to the market meant Australia’s bigger lenders have had better pricing power. But the tide is turning and the little leaguers are playing catch up, as the Big 4’s run of hardline discounting in a bid to attract new business over the last three years reaches its crescendo.
Borrowers take note
Even though this very slight power shift is somewhat underwhelming in the overall scheme of things, it nevertheless presents a good opportunity for borrowers to take advantage of this more level playing field.
You certainly have a capacity now to leverage the fervour of these newly revived second tier players, who are eager to win some additional market share. Seeking borrowing solutions outside of the Big 4 could potentially score you a better deal.
At the beginning of December for instance, ING announced it would waive mortgage insurance for owner-occupiers wanting to purchase a home at up to 90% loan to value ratio.
On the surface this might seem like a token gesture. But if you consider that borrowing 90% of an $800,000 property would cost you around $15,000 in mortgage insurance, you can see how much better off you’d be in that first year if you went with ING as opposed to say, the CBA.
These are the types of deals currently in the marketplace; reflecting the renewed competitive vigour independent second tier players are now bringing to the party.
Unfortunately I don’t think these ‘David’s’ will defeat Australia’s banking Goliaths any time soon, nor will their bid to win a greater market share make too much difference to the Australian lending landscape, with the Big 4 still boasting more than 90% of all new mortgages.
But I do think the succession of enticing rate discounts we’ve seen across 2014 by the majors has probably hit its peak, and is unlikely to continue as we head into 2015. But hey, stranger things have happened!
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Stuart Wemyss is a chartered accountant and founder of Property Tycoon Finance. Email: firstname.lastname@example.org
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