The mortgage loans war we won’t have in 2013: Morningstar

Forget about a fifth banking pillar emerging and a mortgage discount war in 2013.

The big four banks’ dominance of the mortgage market is set to strengthen this year with regional banks, non-bank lenders and mutual lenders continuing to clutch at their coat-tails.

According to Morningstar analyst David Ellis, the major banks are only going to get stronger in 2013 and the last thing they want is a mortgage war to impact on their “highly profitable oligopoly”,

The possibility of a mortgage war was raised by Business Spectator columnist Robert Gottliebsen in a recent article in The Australian titled "The rate discount that will change banking".

Gottliebsen claimed that because lenders like Yellow Brick Road now have access to cheaper funding from Macquarie Bank, banks will be forced to match discounted offers in the market place and that a mortgage war will erupt.

Ellis says quite the opposite that, while net interest margins are under pressure, a combination of loan repricing, better conditions in wholesale funding markets, the major banks’ strong competitive position and improving funding mix will provide upside to margins.

“We expect major bank pricing decisions to remain rational, as there is no desire for a home loan price war to upset the highly profitable oligopoly," he says.

In a slow-growth housing market, likely to persist until 2015, Ellis says the major banks managed outstanding housing credit growing of 5.9% to the end of October compared to the 4.7% for the total market, continuing to take market share from non-banks.

According to Ellis the major risk to earnings growth for the major banks is a sharp deterioration in credit quality growth, particularly if the economy slides into recession, “but we rank this a low possibility”.

“We do not see any material loan loss risks in the residential portfolios of the major banks and at this early stage of the 2013 financial year, overall credit quality remains sound,” he says.

And while the outlook for the major banks in the current environment of low loan growth, benign bad debts and strong profitability is strong with Ellis expecting them to generate approximately 50–75 basis points bps in internal capital each year, “providing a growing surplus for capital management initiatives” the outlook is murkier for other lenders.

“Regional banks, building societies and non-bank lenders relying on securitisation as a major funding source will struggle to raise cost effective funds, crimping profitability,” he says.