Short-term fixers keep market competitive: Report

Banks have a challenge ahead to keep momentum up through 2014 as interest rate hikes and loan-to-value restrictions bite, the latest PricewaterhouseCoopers’ Banking Perspectives report says.

Thursday, February 27th 2014, 6:00AM

It shows growth in household lending of 2.8% in the second half of 2013 compared with the first half. Banks’ net interest income was up 2% over the same period.

Partner Sam Shuttleworth said mortgage holders had continued to move from floating to fixed interest rates.

Only 44% of mortgage-holders were on floating interest rates in September last year, down from 63% in March 2012. That made it easier for banks to predict interest flows and plan accordingly, he said.

But he said most of the fixing had been for short periods. About 75% of mortgages are floating or fixed for less than a year. “This position should ensure a competitive mortgage market continues throughout 2014.”

This could affect banks’ margins, the report said. “Any prolonged or aggressive competitive pricing in either lending or deposits can impact margins significantly.”

The report noted that many banks had switched to offering split pricing and much cheaper rates for borrowers with more equity. Some banks are charging up to 50 basis points more to borrowers with a deposit of less than 20%.

Shuttleworth said that it was common in the corporate world for banks to charge different margins for different risks. “There’s now some pricing for risk occurring in the household sector.”

He said it was very competitive and if any of the banks changed their strategies on the split rates it would be interesting to see how the others responded.

“If you’ve got more equity in your house, that does give you another card in your hand.”

He said the fight for higher-equity borrowers could also put a squeeze on banks’ margins.

The report said the fight for higher-equity borrowers could also put a squeeze on banks’ margins.

“With banks expected to aggressively step up their efforts in chasing those borrowers with low LVRs, it remains to be seen how this will affect the banks’ net interest margins.”

The report said it would be interesting to observe the impact of loan-to-value restrictions on mortgage lending. It said it was not clear whether the growth in retail lending in the period was due to a rush of borrowers getting in before the rules made it harder to do so.

Banks’ bad debt expenses dropped from $205 million to $178 million between the two halves of 2013. Shuttleworth said that was a sign of the improving economy and that borrowers were servicing their debts at current low interest rates.

The report said the banks had good levels of security should that change, and LVR restrictions would help – but defaults would not be good for the economy overall.

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