Banks giving back spread on discounts

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Another interesting tidbit from Credit Suisse this morning. We all know that banks have been keeping more and more of the spread between the cash rate and mortgage rates over time. And that the likelihood of out-of-cycle interest rate cuts is virtually nil so that the power to maintain net interest margins is not eroded. But bank shave been giving back some of the spread through specific product discounting, especially this year as funding costs have fallen once more:

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Since 2008 mortgage discounts have increased for all loan sizes, but since 2011 discounting has disproportionately increased for larger-sized loans (i.e., loans of $500,000+ in size). In 2013 to date, discounts on $1mn-sized mortgages (0.91%) have increased even more again than for small-sized loan amounts. In turn, dispersion on mortgage pricing, by loan size, has gone from being negligible in 2008 (0.01%) to reasonably significant in 2013 (0.09%). Amongst the majors, CBA has most clearly been differentially pricing more aggressively for larger-sized loans. In turn, this suggests that the risk for WBC is that stemming its own market share losses might require not only capitulation on “back-book” re pricing, but also grading effective rates to progressively enhance the price appeal for larger loan sizes (like CBA has done).

Of the four major banks, CS reckons:

  • Whereas CBA appears to have successfully stemmed three years of mortgage market share erosion, this has come at the expense of both discounting the front book (deeper package discounts) as well as the back book (more attractive headline rates). In turn, we expect this has / will place some pressure on CBA’s near-term net interest margin;

  • Whilst still maintaining a relatively high carded rate (13bp premium to the cheapest major bank mortgages), WBC has significantly increased its package discounting in 2013 in an overall mortgage pricing strategy that appears to be heavily reliant on “front book” pricing initiatives to stem mortgage market share losses (but at the same time seeking to preserve the premium yield being earned on the mortgage “back book”). In turn, we see a risk that WBC is forced to capitulate on its premium carded rate pricing stance (re-pricing the “back book”) in order to successfully stem market share losses, noting that both front and back book re-pricing initiatives were necessary to stem CBA’s market share losses. Accordingly, such a scenario would likely place pressure on WBC’s net interest margin (particularly from FY14E); and

  • ANZ appears to have managed the margin / market share trade-off overall better than it peers, ostensibly through adopting a similar pricing approach to NAB: namely, implementing attractive carded rates (the visibility of carded rates are high to prospective customers) by preserving margins through being disciplined on package discounts.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.