Same, same… but a little bit different: Victor German on the big banks and their investor loan book
GUEST OBSERVATION
NAB has announced it will reprice its interest‑only loans and line of credit facilities by 29bps. While this change follows the lead from ANZ and CBA, NAB’s decision appears to impact a greater share of its owner‑occupied customers (~47% of NAB’s Australian housing portfolio is affected vs ~29% of lending to investors). While positive for NAB’s near‑term earnings, we see higher attrition risk as peers may target NAB’s owner‑occupied customers.
In the short term, we expect NAB to offer retention discounts to its owner‑occupied customers affected by this change and, in the longer term, address this issue by introducing new products. Also, while reducing interest‑only loans should be positive from a quality perspective and potentially favourable to capital, we believe it will encourage a higher level of repayments and may have an impact on NAB’s home lending volume growth.
Earnings benefit of 3-4%
Assuming NAB reprices 47% of its housing portfolio by 29bps, it implies a 3-4% benefit to FY16f earnings. We estimate ~30% of customers that have been affected by this change will be offered price offsets and, therefore, we expect ~33% of NAB’s housing book will be repriced. This should provide ~3% FY16f earnings uplift.
Banks are using their market power
While in a normal competitive environment repricing changes of this nature may potentially lead to customer attrition in the investor segment, in this instance we believe the regulator has largely removed that risk. This repricing thematic is consistent with our thesis outlined in ‘Risk weights on returns – Part II’, and following recent changes we believe the sector is now ~30% through our estimated mortgages repricing.
Regionals set to benefit
We believe recent pricing changes are favourable for the regionals. As the table above highlights, we see 4-5% earnings benefit from potential repricing. However, given their recent subdued volume growth in the investor lending segment, we see scope for the regionals to grow their book before introducing repricing measures.
Victor German is Senior Equities Analyst at Commonwealth Bank. He can be contacted here.