Australian banks set to fight it out as housing cools

Competition among Australia's banks is expected to heat up this year as the housing market cools, putting pressure on them to cut costs as they jostle for market share and deposits, a cheap source of funding.

With housing credit growth forecast to slow - house prices in Sydney fell about 5 per cent in 2005 - the A$500 billion ($547 billion) business lending market will be an important battleground for banks, including foreign banks.

The pace of business credit growth outstripped both housing and personal lending near the end of 2005. Housing credit growth slowed to 12.7 per cent in the year to November, down from 17.9 per cent the previous year, said the Reserve Bank of Australia.

Business lending grew at 15 per cent, up from 8.1 per cent.

Savvy consumers are shopping around for the best deal on high-yield online deposit accounts offered by foreign lenders such as Britain's HBOS Plc and ING AS of The Netherlands, as well as by the country's big and small banks.

"Competition is the big issue," said Paul Dowling, the principal analyst at banking research firm East & Partners. "It's developing into a hyper-competitive market and everyone is chasing market share. Margins will continue to be squeezed."

Some online accounts are offering interest rates around the official cash rate of 5.5 per cent, compared with rates near 1 per cent for some traditional deposit accounts.

The country's top five commercial banks - National Australia Bank, Commonwealth Bank of Australia, ANZ Banking Group, Westpac Banking and St George Bank - have lost market share in deposits, while the rate of growth in fee income has slowed.

"As a group they've lost about 2.5 market share points in deposits in the last 18 months, and the growth rate of their fee income has also declined substantially," said Scott Tanner, the head of Bain & Co's Asia Pacific financial services practice.

Foreign banks in Australia have aggressively priced deposits because they have less risk of cannibalising cheaper deposits already on their books, and do not have to maintain large branch networks.

In November household deposits totalled A$268 billion, said the Australian Prudential Regulatory Authority.

Australia's top five listed banks held 78 per cent of those household deposits, while ING held nearly 6 per cent and HBOS 3.3 per cent.

Tanner said that somewhere between 10 to 30 per cent of the major local banks' deposit base could shift over to high online interest-rate offers, putting pressure on earnings.

"Competition for deposits is also driving the major banks to fund more of their balance sheet on the wholesale market, and that exposes them to higher funding costs at the wholesale level and liquidity risks as they run down those lines," Tanner said.

For the major Australian banks to deliver against share price expectations in a slowing market, they would have to cut an estimated A$3.5 billion of costs over three years.

"My sense is that I don't expect that's going to happen," he said, adding that the price-earnings ratios of the major banks would be under pressure even though there would be a significant focus by the banks to get costs down further.

Australia's four largest banks - National, Commonwealth, ANZ and Westpac - are trading on average at about 13.6 times 2006 earnings forecasts.

"It appears the PEs the major banks are trading on now are consistent with a more normal growth level in lending," said Peter Vann of fund manager Constellation Capital Management, referring to slower housing lending.

- REUTERS