For the major banks, the banking price war for home mortgages, which broke out in 2012, is a deadly and dangerous game.
It’s like an out of control bushfire in a dried out native forest. Right now it's small but it’s not going to stay that way.
When word spreads that most home mortgage borrowers can reduce their variable home mortgage interest rate by around 0.3 per cent there will be a rush which will change banking in Australia.
At the moment few analysts understand just how the war works and what happens next. It starts with the vast army of financial planners who use the Macquarie cash trust for their client’s spare cash. The clients gain a bank security that is at call and yields around 3 per cent. In years gone by Macquarie would use this pool of money in part to fund its investment banking games. But the going is now tough in investment banking and over the Christmas break UBS even suggested that Macquarie exit the field (Breakfast Deals: Coaxing Macquarie, January 10).
Step by step that’s what Macquarie is doing by replacing investment-banking games with a major thrust into home mortgage lending.
Macquarie’s partner in this adventure is Mark Bouris and Yellow Brick Road. The Nine network owns some 20 per cent of Yellow Brick Road and Bouris will front Celebrity Apprentice on Nine for a third year in 2013. Part of the Bouris deal is a major free or low cost television promotion to inform home loan borrowers that they can reduce their mortgage rate by 0.3 per cent.
You simply gain a loan approval from Yellow Brick Road/Macquarie and then go back to your bank and ask for an interest rate reduction of 0.3 per cent to match Yellow Brick Road. If you are a good customer and bank with St George /Bank of Melbourne, Bank West, Bendigo other smaller banks they will normally match Bouris so you gain your reduction without moving financiers.
Commonwealth Bank and Westpac in their own name will normally not match so in this case you must shift. National Australia Bank and ANZ responses are harder to pick.
Some time in 2013 Yellow Brick Road /Macquarie loans will reach $5 billion to $6 billion, which is a flea bite compared to the Commonwealth’s $400 billion in mortgages. But because the Macquarie cost of funds is so much lower than the big banks the rush to gain a 0.3 per cent reduction, which was seen in 2012, will multiply many times as the word spreads. When the rush multiplies the big banks will have to match and the war then starts in earnest.
The banks will try to lower their deposit rates to maintain margins but already self-managed funds are becoming less and less interested in term deposits as a long-term investment and are switching to the share and property markets. If deposit rates keep falling the banks will have to start returning to the overseas borrowing markets to fund their book. Watch this space.
For further background, see The veiled threats facing Australian banks (November 10) and Mark Bouris' extreme CEO makeover (November 13).
Banks face Macquarie's tinder box
As Macquarie replaces investment banking games with a heavy thrust into home mortgage lending, the majors may be forced to take another look at overseas funds.
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