Banks grow close over mortgage profits

13 Feb 2012, 7:24 am   -   Source: AAP
Share This

One year on from NAB's Valentine's Day-inspired "break-up" campaign, the big banks have grown closer over mortgage profitability.

One year on from National Australia Bank's (NAB) Valentine's Day-inspired "break-up" campaign, the big four have become closer in a bid to protect profit margins on home loans.

All eyes will be on banks' group-wide net interest margins when three of the majors report earnings this week, especially the impact of higher funding costs and competition for deposits which ANZ Banking Group and Westpac used on Friday to justify interest rate rises for borrowers.

Banks usually do not disclose their profits made on home loans.

However, last May NAB's executive director of finance, Mark Joiner, confirmed market-profit estimates of around 20 per cent when he told analysts the bank was pricing mortgages to achieve a profit of between 19 and 25 per cent.

Asked about NAB's incremental return on equity (ROE) - a measure of profit - on new home loans following over-sized interest rate rises in November 2010, he said the bank was writing mortgages at an ROE of between 19 and 25 per cent.

But the banking industry would have to take a stand on whether to cut interest rates for existing borrowers if the Reserve Bank of Australia started to cut the overnight cash rate, he said at the time.

Last week some analysts claimed banks are now losing money on home loans because of higher funding costs driven by the impact of Europe's debt crisis on global credit markets.

Given the marginal cost of pricing a mortgage and the marginal cost of issue, then the margin on home loans made by the big four is currently around 40 to 50 basis points, George Gabriel, analyst at Evans & Partners, said.

After stripping out operating costs, that margin is reduced to between 10 and 20 basis points, and falls into loss-making territory if the bank is issuing covered bonds, he added.

Deposits account for between 54 and 65 per cent of the funding mix for the big four banks, with term debt sourced from offshore credit markets accounting for around 20 per cent.

The big four write over 90 per cent of all mortgages in Australia.

When compared with global banks, the local banks enjoy strong profitability for home loans because Australia has relatively few non-banks offering mortgages, global ratings agency Fitch Ratings said in January.

"Australian banks have a higher interest margin than Canadian banks as well as most other peers, reflecting a variety of factors, including higher levels of interest rates in Australia and potentially the more concentrated nature of the industry in that country."

The local banks posted average bank-wide ROEs of between 14.5 and 19.4 per cent over the last decade, Fitch said.

By September 2011, the cash ROE for Westpac was 16 per cent, while NAB's was 15.2 per cent, and ANZ's was 16.2 per cent.

Commonwealth Bank's cash ROE was 19.5 per cent by June 30, 2011.

It will report first half earnings on Wednesday.

  • Follow us: 
  • Follow us on Facebook
  • Follow us on Twitter
  • Follow us on Youtube