Pressure mounts on Commonwealth Bank to reignite mortgage wars

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After three months of losing market share in home lending, all eyes are on the Commonwealth Bank to see when its chief executive will draw a line in the sand.

It’s 20 years since the bank, which is Australia’s largest lender, has experienced this kind of market share retreat and the pressure is on CEO Matt Comyn to respond and avoid a fourth month of decline.

CBA chief Matt Comyn will be under pressure to re-enter the mortgage war.

How fiercely he does this will set the tone for all lenders, and could send the industry back to the discounting wars of the early part of the year.

The CBA was the first of the banks to take its foot off the discounting pedal, and led the banking industry in dispensing with cash backs as a means of enticing customers. While there are still some limited cash backs around, mainly from ANZ and some of the Westpac brands, they are significantly smaller than they were at the height of the mortgage wars.

The rule of thumb for the CBA was to have one in four home loans in the market. And while in September, its share of this market was 25.4 per cent, experts believe the CBA won’t want to flirt with the 25 per cent level and will respond soon.

The trigger for the home loans wars was the enormous refinancing event that has been in full swing this year as a large chunk of fixed interest rate loans began rolling off. The big four banks were desperate to retain customers and were offering rates so competitive that many loans were unprofitable. Macquarie’s successful push to increase its share of the market was also a significant factor pushing other banks to sharpen their pricing pencils.

While troubled loans have increased slightly since the Reserve Bank began lifting rates last year, it has not been the catastrophic event many were predicting.

While the peak period of this refinancing has passed, it will continue until the middle of next year – and so will the pressure. The major banks as a group have to date retained between 90 per cent and 95 per cent of their customers. And the mortgage cliff that borrowers were facing has thus far taken on the shape of stairs, which most borrowers have been able to manage.

While troubled loans have increased slightly since the Reserve Bank began lifting rates last year, it has not been the catastrophic event many were predicting.

As the largest and most profitable bank, CBA was arguably under less pressure to discount as heavily as others such as Westpac and ANZ, which had suffered market share losses in the preceding couple of years and were playing catch-up.

For ANZ, which has been sharpest on pricing, its strategy will also be to demonstrate to competition regulators that there is fierce competition in the industry as it progresses its battle to acquire Suncorp’s bank business.

However, all the banks have needed to balance the trade-off between market share and margin.

How margins have held up will become clearer this month when Westpac, ANZ and National Australia Bank release their results to September 2023.

CBA has already made some small moves to entice customers. For example, it has reduced the deposit required for investment loans from 10 per cent to 5 per cent.

But the main game is loans to owner occupiers and a reduction in this rate is what the market is waiting for. Banking analysts will be eagerly looking for commentary on this when the CBA releases its quarterly update in mid-November.

CBA chairman Paul O’Malley says the loss of market share was done for the right reasons. Credit: AFR

At the CBA annual meeting last month, chairman Paul O’Malley noted the board was keen to defend market share and had been asking management about how it would respond.

But he added that, “perhaps getting that balance right is not always easy, but the loss of share I think was done for the right reasons … to make sure that we were appropriately using shareholders’ money”.

Meanwhile, rising house prices have provided the banks with a bit more flexibility on lending because as home values rise so does the homeowner’s equity component, which in turn improves the loan-to-value ratio.

CBA’s head of Australian economics, Gareth Aird, said on Wednesday that, “we expect a 25-basis-point rate increase at the November RBA board meeting, which would take the cash rate to 4.35 per cent”.

“A Cup Day rate increase may weigh on near-term sentiment in the housing market. But overall, we expect the underlying demand for housing to remain firm against a backdrop of constrained supply and strong rental growth.”

House prices have risen back to their previous peak, and few economists have the nerve to predict when this current upswing will level out.

It is against this backdrop that Commonwealth Bank needs to address the balance between margin and market share. Ticktock.

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