New Zealand banks are amongst the most profitable in the world. Yet, the banking environment is extremely competitive especially when it comes to home loans. We’re in a low growth environment with household debt growing at around 5.00% and that’s decreasing. Low growth is driving extremely competitive pricing and in particular cash backs and heavily discounted rates. When it comes to market share there are winners and losers. Noticeably BNZ has been losing market share. It doesn’t deal with brokers (with a few exceptions that were previously BNZ staff) and is therefore absent from at least 30% of the market. As a result of losing share and having to compete harder, it periodically resorts to price to get growth into its business. At the time of writing that has been an advertised 3-year rate of 5.85% and $3,000 cash back.
In contrast ANZ has been growing market share, which is no small feat when you consider it is the largest bank in New Zealand. The advantage ANZ has had is the distraction of a merger (ability to write-off restructure costs) and significant cost savings. As the year-on-year benefit of those cost savings disappear I imagine it will become more difficult to sustain aggressive pricing. For now it’s winning the race.
The side effect of this heightened competition is that property investors have become far more prepared to refinance for a better offer especially with cash incentives on offer. Cash backs will ultimately give banks a headache. The cost is capitalized on bank balance sheets as an “acquisition cost” and then amortized over three or four years. These costs are growing into a large fixed cost, which is ok when revenue is increasing. As revenue growth dries up these costs become difficult to absorb.
Customer churn has increased and is particularly prevalent in the wider Asian market where borrowers are much more likely to switch for better pricing. Churn destroys the economics of home loans, yet banks willingly offer cash to churn each other’s customers. It’s a negative-sum game. The evidence suggests they do not have a proper grasp of the impact on profitability or the ability to accurately measure what’s going on. Cash Backs are not building high quality business and they create preserve incentives. There is a lot of effort that goes into clients that are later moving from one lender to the next. Based on my own experience I think many of these customers are not profitable, yet they chew up significant resources and focus. Eventually this will catch up with the market. Investors that refinance are throwing away their history with their existing lender. Investors that continually refinance risk looking less attractive to future lenders. Personally, I wouldn’t refinance for a better deal, as access to money when I need it (and a Relationship Manager who really knows my business) is far more important to me.
Competition is great and I think we’re heading into a period of tougher profitability for banks. Ultimately it’s a race to the bottom with a focus on expense to income ratios, cost savings and innovation. Hopefully the aspects of my bank relationship that I really value don’t get lost along the way.