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Small banks gouge customers too

The RBA noted smaller banks lifted mortgage rates in 2015.APRA effectively gave ‘s smaller housing lenders a choice this year: grab an opportunity to compete more strongly with the Big Four cartel, or increase  your profit.
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No prize for guessing which option they’ve chosen. Yes, those warmer, friendlier, we’re-not-a-big-bank lenders will take the money and run if they get the chance, too.

ICYMI, that observation was tucked away in the Reserve Bank board minutes on Tuesday. In a paragraph discussing what was happening with investor and owner-occupier housing loans, the bank noted:

“Most mid-sized housing lenders in had increased their standard variable lending rates by 15-20 basis points in November, despite not being subject to the same capital increases on housing loans as the major banks.”

The Big Four had an excuse for lifting rates – “APRA made us do it” – but the rest took the opportunity to improve their bottom lines rather than maintain their existing net interest margins and compete more strongly on price. Less profitable

In fairness, the smaller lenders aren’t as profitable as the Big Four. The Reserve Bank’s excellent chart pack shows regional banks’ return on shareholder equity running around a rather miserable 5 per cent, compared with the Big Four’s rich 15. The regionals had been keeping pace and sometimes doing better than the big boys before the GFC caught up with them – and particularly with their riskier commercial property loans.

(On the other hand, our building societies and credit unions are much better capitalised than the banks, boasting capital ratios about 500 points higher.) No difference

And the smaller lenders have a more intriguing excuse for not capitalising on the latest round of Big Four rate rises by becoming more competitive – offering cheaper loans doesn’t seem to make much difference.

Check the rate comparison sites and you’ll have to scroll down a long way before you find a product from one of the Big Four as cheap as what various little and medium lenders are offering. It is one of life’s mysteries why ns generally prefer to pay more to boost the multimillion-dollar salaries of the Big Four CEOs, rather than make the effort to borrow more cheaply. Maybe we’re just naturally generous in our dealings with big banks.

That’s all a matter of individual choice – or ignorance. What the RBA keeps its eye on is the impact on the availability of credit where it’s needed.

In his annual Fairfax Media interview, governor Glenn Stevens sounded happy enough with the way that’s going and the edge coming off the Sydney and Melbourne housing bubbles.

The board minutes go a bit further, in the process voicing doubt about just how well banks know who is an investor and who is an owner-occupier:

“Although questions remained over the quality of housing credit data disaggregated by the categories of investors and owner-occupiers, there were signs that lending for housing to investors had eased and lending to owner-occupiers had picked up a little. Significant reclassifications of loans to investors to loans to owner-occupiers in recent months, reversing some of the reclassifications earlier in the year, made determining the current rate of growth of the two categories difficult.”

Whether a borrower is an investor or owner-occupier matters more to APRA and the RBA than to the banks. The lenders’ prime concern, quite rightly, is the valuation of the property and the borrower’s ability to service the debt. The authorities’ interest picked up when they became concerned about speculative exuberance and wanted a macroprudential method for selectively hosing down investors. On target

The concern about classifications aside, the RBA is content that housing rates have finished up pretty much where the central bank wants them:

“Overall, by the end of November, housing loan rates for owner-occupiers had risen to their levels around the middle of the year, while those for investors had risen by more, to be back to their levels at the beginning of the year.”

More importantly for our economic outlook and the economy achieving a sustainable transition from resources dependence, business lending proved immune to the capital changes:

“Members noted that strong competition in the banking sector meant that business lending rates had remained at historic lows for both small and large businesses.”

The pick-up in business lending is a key reason for the RBA’s cautious optimism about 2016 – the hope that the executive suite’s animal spirits are finally stirring in the direction of investing for growth, instead of just cost-cutting their way to annual bonuses.

Stevens signalled that with a variation on Scott Morrison’s “are we there yet” line:

“I am starting to see the odd story now about how investors are asking themselves, ‘Where are the growth opportunities?’ and I think that’s the phase that has to come, because that’s the precursor to thinking on their part, ‘you know, maybe we do need to try a new product, or go for a new market – take on new additions to the workforce,’ and at least in some instances that will be accompanied by a bit of physical investment as well.”

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