Mortgage price war could threaten bank dividends, says JPMorgan

October 25, 2016

Mortgage price war could threaten bank dividends, says JPMorgan

Any business can be expected to offer competitive prices to its customers. This is especially true when there needs to be an ongoing grab for new customers and the competition is tight. In Australia, it has gone beyond a mere competition in prices between major banks. Now, the prices are so low that it is hurting the banks themselves.

Australian Banks are Offering Cheap Loans

The banks have continued to lower their prices on home loans so much so that it is threatening their dividends. For some time now, the customers have seen rates so low that many have been refinancing their home loans, and saving a lot of money. While this is good for the consumer, it is not so good for the lenders.

The majority of interest that banks make has traditionally come from the large amount of interest generated from home loans. That amount of incoming profit, however, has been cut by the banks offering loans so cheap in an effort to grab another bank’s customers, or to obtain more.

The Average Variable Interest Loan Has Reduced Substantially

Interest rates have been reduced by as much as 1.5 percent on the average variable interest loan. With this kind of a drop, which is sure to attract new customers, it will be interesting to see how well the banks can fare after this. Most likely, they all will soon need to raise their prices just to survive.

Some have already done just that. It seems that two banks, Westpac and the Commonwealth Bank, have already started raising their prices and offering their customers smaller discounts.

This battle between banks has enabled customers to embrace changing their banks when it means saving money. They have seen what a difference it makes to get a lower interest rate, which has led to a rush to get a better deal through refinancing.

One analyst from JPMorgan, Scott Manning, indicated that the banks may have reached a “line in the sand” when it comes to profiting from mortgages. It appears that the profit that banks make on home loans, called return on equity (ROE), has dropped from an average of 35 percent down to 25 percent.


Australian Money


Although the competition has not yet abated, banks will certainly need to decide whether or not they want to lose their sustainability on dividends. If they want to make a worthwhile profit, then they will have to increase the amount of profit they obtain from home loans.

Lower Priced Home Loans Are Now Threatening Banks Dividends

While loan rates have decreased, the prices of homes have increased. This has led to even more of a rush to get refinancing because the higher values meant people had more equity in their homes, which many wanted to tap into.

The rush to get refinancing was more than just people wanting to get better interest rates and save money. People who had been living in their homes for some time wanted to get access to their equity. While this is not unusual, the twist was that many wanted to do it so that they could assist their children in buying property. They became the bank for their children.

The fact that two banks have already rescinded their discount rates reveals that it has already hurt banks more than they can afford. When you consider that the income from mortgages makes up as much as 60 percent of all of their loans, it can be seen quickly to be a drastic measure to cut rates so low.

The only major bank to cut rates recently has been ANZ, which did so this past May. The Commonwealth Bank appears to be able to continue its dividend payout ratio of as much as 80 percent.

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