First 2nd Tier Bank Comes Up For Air
/As I have been forecasting, recent interest rate increases by the major banks have given the second tier banks and non-bank lenders an opportunity to recover margins. Until now these have been compressed by the majors' great advantage over their smaller peers: the capacity to hold significantly less capital against their loan portfolios. The smaller lenders' only option for remaining price competitive has been to accept less margin for risk on the new loans they have been writing; writing underwater as some have termed it.
Well today, one of the institutions that we could most liken to a community bank has seen fit to follow suit. Whilst they also have shareholders to please, the good news is that these shareholders are many of us: members of Australian industry superannuation funds and trade unions.
In making their announcement, ME Bank has explained its decision:
“The catalyst for this increase was APRA’s recent decision to increase the capital the major banks must hold against their mortgage portfolios, from 18% to 25%, thereby reducing the competitive advantage the major banks have had over smaller banks like ME, which are required to hold 39%.
Up until APRA’s decision, smaller banks like ME have been achieving below-market shareholder returns in order to provide competitive home loan products. Last Financial Year for example, ME reported a return on equity of 7.4% compared to the majors’ average shareholder return of 15.8% over the same period.
This afternoon we will announce an interest rate increase of 0.20% across our variable home loan portfolio, effective 20 November 2015. Along with productivity gains enabled by our recent technology investment, this rate change best balances the Bank’s need to offer a competitive home loan rate to customers on the one hand, while delivering acceptable rates of return for our industry super fund shareholders and their members on the other.
Importantly, this increase will put ME’s Flexible Home Loan interest rate at 5.08% p.a., positioning us 0.48%-0.60% lower than the major banks, as has consistently been the case over the last 10 years, a gap that widened in May when ME passed on the RBA’s full rate cut and three of the major banks didn’t.
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Yes, it is not good news for their home loan customers with variable rate loans. But perhaps this move increases the likelihood of other lenders making similar announcements and the RBA restoring home loan holders' disposable incomes by lowering the cash rate next week or in early December.
The volatility continues.
