Big Four tighten stranglehold on lending

While Australia's major banks may be bold, they are not exactly beautiful when it comes to choice, write Eric Johnston and Danny John. THEY stand as the great survivors of the global financial crisis and, as a result, have emerged as some of the biggest banks in the world. But the growing dominance of Westpac, Commonwealth, ANZ and National Australia Bank on the world stage has also brought with it some worrying signs for customers back home. For instance, take a walk through the suburbs of Melbourne, Sydney or even Brisbane, and you'll be presented with an abundance of brands that give the appearance of widespread and fierce competition. But as is increasingly the case, there are now only a handful of players behind the names. Of the lenders - RAMS, St George, Aussie Home Loans, BankWest and Wizard - that have been mopped up by one of the majors over the past 18 months, it has probably been Commonwealth Bank's $2.1 billion swoop on BankWest in October that stands to change the future of the nation's banking market the most. But not because of BankWest's size or regional dominance - after all, it has "only" added 100 branches to CBA's already 1000-strong network. The real impact of the deal has been to take out a mid-tier player that threatened, through its east coast expansion plans that have since been abandoned, to present a longer-term threat to the dominance of the Big Four. That acquisition, which came about as BankWest's British parent, HBOS, ran into terminal problems at home, delivered CBA more than 40per cent of Western Australia's lending market and nearly one in two of the state's deposit accounts. While this gave an unprecedented level of control to CBA - already the nation's biggest bank by market share - Australian Competition and Consumer Commission chairman Graeme Samuel conceded he had "no choice" but to approve the deal. "In normal circumstances, CBA-BankWest would have probably been met with opposition from us," Samuel told The Age. Even before the global financial crisis, the Australian banking system was one of the most concentrated in the world. The recession of the early 1990s helped remove virtually an entire layer of second-tier banks as government-owned state-based lenders were swallowed up by bigger rivals after running into trouble. This time it is the exit of troubled international lenders and the disappearance of the non-bank lenders that will help big banks stand to gain again. Samuel said the ACCC concluded that the CBA-BankWest deal would substantially reduce competition in the West Australian market and across eastern states. This contrasts with the approval of Westpac's move on the smaller StGeorge. "St George was not a significant competitive tension, competitive force in the retail banking market," said Samuel. But with BankWest, the competition watchdog faced a dilemma. The transaction took several weeks before the Government put in place a deposit guarantee as customers were starting to pull deposits from BankWest, given growing concerns over the teetering HBOS. In approving the deal, Samuel said the ACCC took advice from bank regulators, the Reserve Bank and the Australian Prudential Regulation Authority, as well as the federal Treasury. But Samuel strongly rejects suggestions any political pressure was placed on the ACCC to approve the BankWest transaction. "There was a widely held view at a senior regulatory level that (if) the merger didn't proceed, that could lead to some ongoing instability in the Australian financial system," he said. "For those reasons we allowed it to proceed, although we did so with some reasonable degree of discomfort over the future competitive prognosis". As speculation spread that vulnerable Suncorp-Metway was in talks to offload its banking arm, Samuel said the ACCC also began some pre-emptive analysis on a potential sale to one of the majors. But as the Government's banking guarantee diminished Suncorp's appetite for a sale, no proposal was ever formally put to the ACCC. Former Westpac senior executive David Liddy, who has run the Bank of Queensland for the past seven years, is optimistic that his own bank will survive, but he is under no illusions about the tough times ahead, given the increasing and dominant share of the market held by the Big Four. And neither is he convinced that the Federal Government will do all that much to stop the majors from having it all their own way. The disappearance of StGeorge and BankWest as stand-alone rivals had reduced the number of genuine regional banks to just three - BoQ, Suncorp and Bendigo and Adelaide Bank - with all of them constantly mentioned as either takeover targets or likely to be bought out, Liddy said. And part of the instability has been caused by the very same weapon that the Government has deployed to underpin the financial strength of the banking sector: the wholesale funding guarantee. A direct consequence of the industry being able to use the Government's AAA rating to raise money to keep lending is that the regional banks are charged more than the majors because of their own lower credit ratings. And that is hurting the smaller players such as BoQ, argues its chief executive. "I can't see how it can be anything other than anti-competitive to sting the regional banks more for the funding guarantee when they are already paying more for their funding," Liddy said. Liddy agrees with the view expressed by his one-time boss at Westpac, David Morgan, that any stand-alone financial institution with a credit rating below AA will struggle to obtain the funding on a cost-competitive basis. That means every bank outside the majors, which now make up four of the 12 remaining AA-rated banks in the world. "What (Dr Morgan) also mentions is that the second tier of financial institutions is fast disappearing. What he doesn't mention is that this doesn't seem to bother the Federal Government," Liddy said. He does concede that the introduction of both the wholesale funding guarantee and its supporting deposit counterpart was a necessity to prevent the prospect of a major financial crisis in Australia back in October. It is also widely accepted now that the guarantee also saved Suncorp from having to sell its banking division to ANZ. Nevertheless, Liddy believes it is time to reassess the effectiveness and need of the support measures to remove what he argues is a distorting effect and a lever by which the majors are tightening their grip on a market that has already had independent non-bank lenders such as Wizard and RAMS taken over while many foreign banks are packing up and going home. Certainly, the latest market-share figures for different forms of lending tend to support the case. The mortgage market, in particular, has been one of the hardest hit as a freeze in securitisation markets closed off a key funding tap for small lenders. In just one year, the Big Four have increased their share of the mortgage market to more than 82per cent, Reserve Bank figures show. The smaller Australian-owned banks, foreign banks, as well as credit unions and building societies, have also lost some market share over the past year or so. Even the big players admit they are starting to overwhelm the market. "You can't just have four banks running the economy," says NAB chief executive Cameron Clyne. "It is essential that we see the re-emergence of vibrant second-tier banking." This extends to foreign banks, non-bank institutions, regional banks and second-tier banks. The Big Four have a similar grip on the business lending sector, while in deposits - covering household and companies - their market share now stands at 82per cent, again when St George and BankWest are taken into account. As it is, Australia's big banks "will emerge stronger from the recession", according to Citigroup analyst Craig Williams. Indeed, recent Government actions aimed at stabilising the sector, such as the deposit guarantee and a short-selling ban, underpin the natural advantages the major banks already have over their international rivals, Williams said. The reduced appetite of foreign banks and some regionals has improved the major banks' pricing power across several lending segments. A key area has been in credit cards, where competition in recent years was at its most intense, but evaporated during 2008. In home loans, banks have been able to increase spreads by about 70 basis points even as the benchmark bill rate has been falling. In business lending, where rates vary significantly with the risk profile of customers, banks have found it easier to increase spreads. But figures recently released by APRA are yet to bear out the belief that foreign-owned banks are pulling out in droves. Having reasserted their traditional dominance, which was apparent before the successful challenges mounted in the 1990s by the non-bank lenders such as Aussie Home Loans and Wizard and growing regionals like StGeorge, the circumstances of the past year have played straight into the hands of the Big Four. Former StGeorge chief executive Paul Fegan, who quit his post as a result of the bank's merger with Westpac, has little doubt that new entrants will eventually emerge but he says the costs of entry will make it difficult. Nonetheless, what lies in a potential competitor's favour is that the market is open, the industry is well regulated, the legal and financial frameworks are fully tailored to commerce and the chances of making money is good if you get it right. And Fegan believes that the re-established strength of the Big Four could turn out to be a weakness in the longer run. Ultimately, Fegan believes it will be the quality of the service offered by the big banks, just as much as reasonable pricing and fees, that will determine whether they maintain their hold on the market. And recent history suggests that, again, they won't have it all their own way. One such challenge could come from the industry that has changed the way Australia saves for the future. The superannuation industry-owned Members Equity Bank offers a model that could, in time, grow into a decent mid-tier player and offer a real alternative to the majors, argues its chief executive Anthony Wamsteker. At this point of the cycle, when true competition is hard to come by, it is the efforts of the small players that offer the best prospect of breaking a stranglehold that is going to get tighter in the months to come.