Big banks getting ‘free kick’ from regulator crackdown, says MyState

Duncan Hughes

Major banks are getting a combined billion-dollar boost to their market power and profits from regulators’ tightening of lending to property investors, according to MyState chief executive Melos Sulicich.

The unexpected windfall is giving the big four and Macquarie Bank a huge competitive advantage that is inhibiting competition for borrowers and imposing financial obstacles for smaller lenders attempting to build market share, Mr Sulicich claims.

“Regulation to slow lending has contributed to make large players even more profitable,” he said. “As prices for investor and interest-only loans increase, the larger banks have gained revenue and therefore a profit advantage over smaller banks.”

Smaller lenders are being penalised for having focused on lower risk, owner-occupier borrowers rather than target investor and interest-only borrowers, he claims. “This unfair playing field reduces the ability of smaller banks to compete,” he said.

The table shows the average premium on investment loans for Australia's banks.
The table shows the average premium on investment loans for Australia’s banks.

APRA, MyState

MyState is a Hobart-based listed financial services group that uses third party channels, particularly mortgage brokers, to augment distribution on the mainland. It is a regular target of speculation about either being a takeover target, or an acquirer, with boutique credit specialist LaTrobe Financial discussed as a target.  

Major banks, which have failed to pass on the increased revenue to savers in the form of higher deposit rates, claim they are facing higher wholesale funding and regulatory costs.

“The advantages that the larger banks receive through capital requirement advantages allows them to lend more than smaller banks with the same capital, and the higher credit ratings they receive from ‘too big to fail’ reduces their cost of funding are more significant,” said Mr Sulicich.

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The table above, which is based on recent Australian Prudential Regulation Authority and internal MyState analysis, shows the average premium on investment loans for Commonwealth Bank of Australia, National Australia Bank, Australia and New Zealand Banking Group, Westpac, key second tier lenders and select smaller players, such as MyState.

The average margin increase over the past 12 months on investment loans was 41 basis points with most of the majors, including Macquarie Bank, between 47 and 60 basis points.

Assuming an investor book of about $120 billion, which is reasonable for major lenders, an average premium of 41 basis points on each bank’s loans represents an increase in gross interest revenue of more than $490 million a year each.

“We believe big banks have benefited in an unexpected way, which has made the playing field even more unbalanced for smaller banks,” said Mr Sulicich.

Loan books for property investors among the big four and Macquarie are typically between 35 and 40 per cent of total loan books, which includes principal and interest. For the smaller lenders they are around 20 and 25 per cent of the total. 

“Repricing of investor loan books has benefited larger banks,” said Mr Sulicich. “They have a greater proportion of investor loans.”

Interest-only loans represent about one in four of owner-occupied and 64 per cent of all investor lending, according to the Reserve Bank of Australia, which has repeatedly warned about borrowers’ financial vulnerability to a rise in rates or change in personal circumstances.

The Australian Prudential Regulation Authority (APRA) is limiting interest-only lending to 30 per cent of total new residential mortgage lending, placed strict limits on the volume of interest-only lending at loan-to-value rations above 80 per cent; and restrict lending to volumes that remain comfortably below 10 per cent growth.

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Major lenders have responded by hiking minimum deposits for interest-only borrowers to between 20 and 30 per cent, toughening income criteria, raising rates and reducing the amount of the total loan that can be interest-only.

In addition, they are taking on other lenders by reducing principal and interest rates, improving terms and offering switching incentives from their own and competitors’ interest-only loans to principal and interest.

“As smaller banks have a smaller investor loan portfolio it does not take much additional lending to breach the 10 per cent loan growth limit, which constrains our ability to grow. Some players have closed their doors for investors,” he said.

“By contrast, investor loan books of large banks have added margin, it has increased their ability to compete for owner-occupied residential mortgages.  Smaller players that have focused on low-risk, owner-occupied lending have been penalised, whereas the large players have been rewarded for their market pricing and behaviour.”