"We have other options for where to put excess balance sheet," exec says
The CEO of National Australia Bank said he was cooling on the idea of growing home lending as rival financial institutions engage in cutthroat competition for new mortgage customers in a tumbling property market.
Ross McEwan said the intensifying battle to attract new customers as rates rise and prices fall would force NAB to direct more of its excess capital to business lending over the next two years, according to a report by The Australian Financial Review.
McEwan’s note of caution, which was welcomed by investors, came as the bank reported full-year cash earnings of $7.1 billion – an 8.3% increase – but also warned of growing headwinds next year as the Reserve Bank’s rapid rate hikes stifle credit growth.
Other companies exposed to property are also becoming more cautious. Online listing firm REA Group reported an 11% drop in first-quarter income, citing waning enthusiasm for housing, AFR reported.
NAB has a home lending portfolio of $329 million, which grew by 7.1% over the past year. Much of the volume comes from customers refinancing at cheaper rates.
In the first three quarters of 2022, NAB grew its home lending above the system average. In the fourth quarter, however, it lost market share to rival lenders. NAB cited growing risks in the mortgage market for the loss, according to AFR.
Trying to compete on price with rivals like Westpac and ANZ, who have been pricing loans competitively and offering cashback incentives to reclaim market share lost during the COVID-19 pandemic, has put a dent in NAB’s profitability, AFR reported. Mortgage competition has shrunk its net interest margin b7 0.7%. NAB warned that “housing lending competitive pressures are likely to intensify” in 2023 as billions of dollars in fixed-rate loans reset.
The bank expects the cash rate, now 2.85%, to peak at 3.6%, leading to house prices tumbling 20% from their peak.
Read next: Rising interest rates boost big four banks’ coffers
While higher official interest rates will support banks’ earnings next year, competition is expected to remain intense and bad debts are expected to rise as the RBA continues to hike rates in an effort to curb inflation, AFR reported.
“After over a decade of ultra-low rates weighing on bank profitability, the recent rapid rises in interest rates are starting to provide some initial margin relief for the majors,” Steve Jackson, KPMG Australia head of banking, told AFR. “However, the monetary policy tightening cycle is also introducing some inflationary pressure, which is working against efforts to reduce cost bases and, depending on the pace and strength of rate rises, contributes to the potential for economic slowdown and a rise in bad debts.”
McEwan said that cutthroat competition to write more mortgages didn’t make sense when NAB could steer its lending towards small businesses and agricultural and mining companies benefitting from an export price boom.
Home lending is “becoming a very, very competitive marketplace,” McEwan said.
“Across the board, margins are getting squeezed pretty heavily, and you do have to watch that you are not taking on business that you may regret over the next 12 to 24 months,” he said.
NAB predicts that home lending growth will fall from 7% this year to between 2.5% and 3% in 2023 – but the bank may decide to grow at a slower rate as it steps away from pricing it feels is becoming irrational, AFR reported.
“We are having to look very strongly about how much growth we want in this [mortgage] business in the next 12 to 24 months,” McEwan said. “We have other options for where to put excess balance sheet over the next couple of years. We have a business bank that is doing very well, and is gaining market share and is a profitable business.
“Our view is to look after existing customers and, maybe if there is a little less [mortgage] growth, and that is below system, then I am comfortable with that,” he said.
