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Australian banking fees higher than overseas

Joint JPMorgan and Fujitsu Consulting Australian Mortgage Industry Report, Vol 5, March 2007

Fujitsu Australia Limited

Sydney, March 27, 2007

Australian households pay A$150-A$170 more each year in banking fees than UK or Canadian customers, the latest mortgage industry report from JPMorgan and Fujitsu Consulting has found.

The Australian Mortgage Industry Report (Vol. 5: March 2007) is a joint effort between JPMorgan and Fujitsu, focusing on recent developments in the Australian mortgage industry, based on Fujitsu Mortgage Market and Yield Improvement Modeling.

“We have undertaken a detailed review of retail banking fees in Australia and have found that, based on a similar basket of products and services and taking account of the average market conditions in each geography (UK, Canada, Australia, New Zealand), on average, banking fees in Australia are higher than overseas. In short, the average Australian pays A$150-A$170 more each year in banking fees compared with what UK or Canadian customers pay for similar services,” said Martin North, managing consulting director, Fujitsu Australia and New Zealand.

The key findings are:

  • Australian mortgage fees are clearly higher at all stages across the mortgage transaction lifecycle – In contrast to the UK, where intense competition ensures low mortgage loan application fees, Australian consumers are not always presented with a clear picture when assessing mortgage products
  • Australian transactional account banking fees are clearly higher than overseas – High over-the-counter withdrawal fees in Australia in particular have acted as a mechanism for Australian banks to encourage consumers to use other channels. However, more recently, banks are actively reinvesting in branch networks in an effort to regain strategic flexibility and the pricing power associated with the distribution function
  • Australian credit card fees are higher than international peers – UK regulators have intervened initially in credit cards, pushing towards cost-plus benchmarks. Intuitively, we could see similar outcomes in Australia to those already observed in the UK. With Australia entering a Federal election cycle, the increased “politicisation” of bank fees is a virtual certainty.

Separately, in a detailed review of the broader mortgage industry, JPMorgan banking analyst Brian Johnson said, “The second half of CY2006 saw a slowing growth profile for Australian housing lending as the weight of contractionary monetary policy took hold of the market, only stabilising in January 2007, at which point, the aggregate system home loan outstandings reached A$834.0bn. The rebound in housing credit growth, against the backdrop of further declines in new housing construction activity, reflects a modest upswing in national house prices, driven by Perth, and an increased willingness by borrowers to borrow on higher Loans to Valuation Ratios (LVRs).”

Since 1992, household debt has increased from A$111bn to A$834bn, with the dynamic LVR nearly doubling from around 12 per cent to over 23 per cent. Excluding the estimated 35 per cent of residential properties with no debt, the dynamic LVR on geared properties is 36 per cent. Continuation of status quo growth rates will see security coverage decline further. Extending circa 12 per cent system housing credit growth out to 2010 increases the total household debt outstanding from A$834bn today to A$1,327bn, generating a dynamic LVR on geared residential properties of 45 per cent.

“The predominance of variable rate loans which account for an estimated 80 per cent of Australian home loan balances sees this increased “gearing tolerance” likely vulnerable to rising interest rates. The continued rapid growth in variable rate housing debt in households, as opposed to fixed rate US mortgages, must ultimately restrict the capacity of the Reserve Bank of Australia to increase interest rates in Australia,” Mr Johnson said.

There are also some significant and growing signs of stress in the Australian housing market, according to the latest surveys contained in the report. These signs include: affordability at an all time low; potential rate rises on the horizon; rising LVRs; rising delinquencies in the wholesale market; and deep discounting by players in an attempt to maintain market share.

“The Fujitsu profit model reveals that for the major lenders, about half of all loans written, do not generate profit for them, whilst around twenty percent of loans generate eighty percent of their profit. These findings are explained by the significant waves of refinancing which are hitting the industry, and the powerful forces which are being exerted by brokers who are responsible for more than half of all refinances,” said Martin North.

A survey of 2,500 borrowers, conducted in February 2007, found that around 23 per cent of respondents had to cut back on their overall spending to pay their mortgages. The survey also found that the number of borrowers who had fallen more than 30 days behind in their mortgage repayments nearly doubled in the past 12 months.

“This highlights one of the points of stress in the mortgage market,” said Martin North.

In addition, a survey of 1,500 potential first-time buyers highlighted that around 30 per cent cannot afford to enter the market, an increase of 50 per cent in the past 12 months. While affordability has dropped in Sydney and Melbourne, Perth has become the least affordable state in which to buy property.

“Whilst industry ‘stress testing’ results suggest Australian home loan loss rates will remain low, even if interest rates and unemployment numbers rise and house prices fall, there are other factors which may not be fully incorporated,” said Martin North. The report also found that the broking sector is under stress.

In a survey of 1,000 brokers, or 10 per cent of the Australian mortgage broker community, Fujitsu found that:

  • Mortgage brokers are frustrated by the lack of service they are receiving from lenders
  • Brokers level of confidence varied by state, with New South Wales and Victoria less optimistic than Western Australia and Queensland. In New South Wales and Victoria 20 per cent of brokers are contemplating leaving the industry
  • Most brokers concentrate on residential and investment lending
  • Brokers are continuing to align to the large aggregators, thereby increasing the industry consolidation, with an estimated 75 per cent of new broker originated loans coming from the top ten aggregators.

The survey also found that broker revenue growth had fallen to an all time low of five per cent, which is expected to fall even further this year. In the wholesale market, delinquencies are expected to double thanks to the higher concentration of non-conforming lending, at the same time that mainstream lenders have taken back market share from the wholesale sector.

“There are stresses across the mortgage value chain,” said Martin North, “which are creating opportunities for consolidation by traditional lenders. The game is about to change significantly.”

An interview with Mr Neil Sinden, General Managing Director GMAC-RFC Australia is also included in the report.

About JPMorgan

JPMorgan Chase & Co. (NYSE: JPM) is a leading global financial services firm with assets of $1.3 trillion and operations in more than 50 countries. The firm is a leader in investment banking, financial services for consumers, small business and commercial banking, financial transaction processing, asset and wealth management, and private equity. A component of the Dow Jones Industrial Average, JPMorgan Chase serves millions of consumers in the United States and many of the world’s most prominent corporate, institutional and government clients under its JPMorgan and Chase brands. Information about the firm is available at:
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About Fujitsu Australia Limited

Fujitsu is a full service provider of information technology and communications solutions. Throughout Australia and New Zealand we partner with our customers to consult, design, build, operate and support business solutions. From strategic consulting to application and infrastructure solutions and services, Fujitsu has earned a reputation as the single supplier of choice for leading corporate and government organisations. Fujitsu Australia Limited is a wholly owned subsidiary of Fujitsu Limited of Japan.
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About Fujitsu Limited

Fujitsu is a leading provider of customer-focused IT and communications solutions for the global marketplace. Pace-setting device technologies, highly reliable computing and communications products, and a worldwide corps of systems and services experts uniquely position Fujitsu to deliver comprehensive solutions that open up infinite possibilities for its customers' success. Headquartered in Tokyo, Fujitsu Limited (TSE:6702) reported consolidated revenues of 5.1 trillion yen (US$43.2 billion) for the fiscal year ended March 31, 2007.
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Elizabeth Greene

Phone: Phone: +61 2 9113 9252
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Company:Fujitsu Australia and New Zealand Limited

Date: 27 March, 2007
City: Sydney
Company: Fujitsu Australia Limited