Experts question viability of loan war

By GARETH VAUGHAN


The two-year home loan price war being fought among the major banks may have reached the point where the lenders are not making profits on their loans.

The two-year swap rate, which represents banks' marginal cost of funds, was yesterday at 6.62 per cent. That is just 0.28 per cent below the rate BNZ charges customers.

David Tripe, senior banking lecturer at Massey University, says from that 0.28 per cent the bank must cover its costs such as credit loses, cost of loan acquisitions, administration and cost of capital. Anything left over is its profit on the loan.

BNZ's general manager of business development and strategy, Andrew Whitechurch, says his bank is still making "fine margins" on its 6.9 per cent loans.

However, Mr Whitechurch says that BNZ's major rivals, who unlike BNZ use mortgage brokers and pay their commissions, may not be.

BNZ could quite possibly continue its "unbeatable" campaign after December 17, Mr Whitechurch says. Up to 85 per cent of BNZ's fixed home loan customers are now choosing two-year loans, up from 70 per cent in early October.

ANZ spokesman Craig Howie would not comment on whether ANZ's 6.95 per cent rate is profitable. He did say, however, it was obvious margins had narrowed significantly in recent weeks.

"It's a matter of looking to build longer-term relationships with customers and being competitive in the market place."

Mortgage Brokers Association chairman Geoff Bawden said banks that worked with brokers were keen to negotiate with customers for business and brokers were not finding it difficult to match BNZ's offer. Mr Bawden did not believe any of the banks offering home loans at 7 per cent or less were making profits.

"They're trying to buy market share," he said.

Consumers' Institute chief executive David Russell advised bank customers to take the good deals while they could. But he warned people to do their homework when the two-year loan expired.

Mr Russell said banks were prepared to make little or no money on winning customers with the hope of refinancing loans after two years at a better rate.

"It's good for consumers in the short-term and shows banks have an eye to the future."

Ulf Schoefisch, chief economist at Deutsche Bank, said the question was who would be the first bank to say "we've had enough of this" as the current situation did not seem sustainable.

Mr Tripe said it was not unreasonable to say the situation was getting out of control from the banks' perspective. He said two-year home loan business represented about $10 billion of the big banks' total mortgage lending of about $90 billion.

BNZ was trying to restore its reputation by having cheap loans, Mr Tripe said.

It had 15.9 per cent of the market versus the ANZ National Bank's 35.5, ASB's 22.5 and Westpac's 20.4.

Bank battles

Yesterday ANZ cut its two-year fixed home loan interest rate to 6.95 per cent a year from 7.2 per cent. This came hot on the heels of National Bank, ASB Bank and BNZ cuts.

On Monday National cut its rate to 7.05 per cent from 7.3 per cent and BNZ, which has pledged to beat any two-year fixed home loan rate offered by its major rivals until December 17, dropped its rate to 6.9 per cent. ASB cut its two-year rate to 6.95 per cent last Friday from 7.2 per cent.

Those four banks plus Westpac, which offers a 7.4 per cent two-year loan and a 6.99 per cent 18 month loan, control 87.5 per cent of New Zealand's banking market.