Housing credit may slow as major banks optimise profitability

Sydney, April 08, 2010

Demand for home lending may outstrip supply as the major banks ration credit after rapid market share and balance sheet increases following the onset of the GFC, according to a new mortgage industry report.

The joint J.P. Morgan/Fujitsu Australia Mortgage Industry Report (Volume 11, April, 2010) also highlights the vulnerability of first home owners borrowing at higher loan-to-value ratios (LVRs) and a higher multiple of their income.

According to Scott Manning, Banking Analyst at J.P. Morgan, “The banks may find themselves in a position to be happy with the size of their current housing portfolio and look to optimise profitability, rather than chase further market share gains.

“While demand for housing credit is unlikely to abate, the Australian major banks will look to achieve the best possible returns on the increasingly scarce wholesale funding they are able to secure,” he said.

System housing credit growth has recovered from a 3 month annualized growth rate of 6.1% in September 2008 to 9.0% in February 2010 as a result of significant government support for first home owners followed by a recovery in household wealth from a rebounding equity market.

Major banks continue to dominate market share, increasing their mortgage market share from 65% to 76% since the onset of the GFC.

Martin North, Executive Director Industry Group, Fujitsu Australia & New Zealand said the resumption of house price growth, along with a rising interest rate environment sees affordability again deteriorating.

“Housing affordability is a real issue, especially for first time buyers who are having to reach very high to enter the market. As interest rates rise many will fail to achieve their dream of owning their own property,” North said.

Fujitsu data indicates that first home owners are typically borrowing about the same amount as other borrowers (approximately $280,000), however, they are borrowing at higher LVRs, and a higher multiple of their income.

J.P. Morgan’s Scott Manning commented, “While borrowers will typically have household income of approximately $100,000, first home owners have household income below $70,000. This means that at current interest rates of approximately 6.2%, first home owners are committing 34% of their post-tax income toward servicing interest payments (not even accounting for principal reduction), compared to 24% for typical borrowers.”

Separately the J.P. Morgan/Fujitsu Australia Mortgage Industry Report found mortgage broker volumes have rebounded and stabilised through 2009 at approximately 40%.

“Despite this, we believe that the market power has slipped for brokers,” said Martin North. “In addition, regulation in the form of new borrower protection under the National Consumer Credit Protection Act 2009, depressed broker profitability pools, the focus of major banks on processing efficiency through higher volumes via preferred vendors and heightened verification and documentation standards for brokers should see further consolidation in the broker industry.”

Also included in the report is that latest findings from the Fujitsu Mortgage Industry Profit Model, which reveals:

• The profit signatures of loan portfolios are exhibiting signs of continued improvement. Despite rising delinquencies, overall profitability has improved over the past 12 months, mainly through unprofitable customer becoming ‘less unprofitable’
• Fees and margins played only a minor role in lifting profit
• While cost efficiencies were a contributor, the most significant driver of improved profitability was longer loan durations. This has a meaningful impact on profitability of the portfolio, as customer revenues are not offset by customer capture costs, origination processing cost, and exit costs

Separately, Fujitsu Australia surveyed 26,000 banking customers split into 11 different segments and found:

• Increasingly, borrowers are motivated to refinance purely by pricing in what is being considered a commoditised product
• The majority of re-financing activity continues to be driven by the need to reduce monthly repayments (33%) or pay down or consolidate other debt (31%)
• There has also been a significant rise in those looking to use equity in their property to fund stock market investments (up from 4% to 8%) or to fund property investments (up from 9% to 13%)

An interview with Stephen Porges, Chief Executive Office of Aussie is also included in the report.

The Australian Mortgage Industry Report (Vol. 11, April 2010) is a joint effort between J.P. Morgan and Fujitsu Australia, focusing on recent developments in the Australian mortgage industry, based on Fujitsu Mortgage Market and Yield Improvement Modeling.