Aussie banks face do we, don’t we dance conundrum

Bank of Queensland

04/05/2023 05:00

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Antony Currie
       MELBOURNE, May 4 (Reuters Breakingviews) - What’s a boss
to do when industry competitiveness gets out of hand? Perhaps
the most infamous piece of advice came from Chuck Prince back in
2007. “As long as the music is playing,” said Citigroup’s  C.N 
then-CEO, “you’ve got to get up and dance.” Within months he was
gone, Citi was losing billions of dollars and heading for a
double government bailout. Australia’s banking bosses are
unlikely to face such a calamitous outcome, but their biggest
business, home lending, is putting on some worrying moves.
    On the face of it, lenders Down Under are simply raking it
in after 11 central bank rate hikes in 12 months have pushed up
interest payments on the A$2 trillion ($1.3 trillion) mortgage
market’s mostly variable-rate loans. Top-four lender National
Australia Bank  NAB.AX , for example, on Thursday posted a 17%
jump in earnings for the six months to the end of March of A$4
billion from the same period last year.
    Its net interest margin, though, peaked in December and has
since dropped. Smaller rival Bank of Queensland  BOQ.AX  last
month said its metric hit its zenith two months earlier. Three
main issues are causing it. First, banks’ borrowing costs are
going up. Second, banks are consequently competing harder for
deposits, which are cheaper sources of funding – but are having
to pay more to lure or keep accounts.
    Home lending is where the biggest rivalry is. That’s
understandable: mortgages account for almost 60% of NAB’s loans,
and it’s similar for rivals. Trouble is, rising rates have
driven down home sales. So banks are offering everything from
free internet service to one-off cash payments as high as
A$10,000, in one lender’s case, to win new customers. 
    Right now, the main concern of bank bosses is that such
largesse means the institutions they lead are making home loans
below their cost of capital. That’s why NAB’s Ross McEwan
decided to pull back: a year ago, the bank’s mortgage business
was growing 20% faster than the overall market; now it’s running
at barely half the speed. Others are likely to have taken a
similar decision.
    It’s a smart move, especially given broader issues: with
interest payments higher, house prices down 8% in 12 months, per
CoreLogic, a property data service provider, inflation at 7% and
the economy slowing, the number of borrowers struggling is
likely to rise from the current very low levels. Moreover, some
A$350 billion of mortgages are switching this year from very low
short-term fixed rates in 2021 to much higher floating rates;
staying rampantly competitive increases the chance of picking up
some of the riskiest paper. 
    Trouble is, it didn’t meet with shareholder approval, with
the NAB’s stock falling almost 6% on Thursday morning. That kind
of pressure to stay in the centre of the dance floor is
unhelpful.
    Follow @AntonyMCurrie on Twitter
         
    CONTEXT NEWS 
      National Australia Bank on May 4 reported earnings for the
six months to the end of March of just over A$4 billion ($2.7
billion), a 17% increase from the same period last year. It
equates to $1.29 a share. Revenue was A$10.5 billion. All three
figures were slightly below the consensus estimate of sell-side
analysts, per Refinitiv data. 

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 (Editing by Una Galani and Thomas Shum)
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