Housing war stings ANZ

"Severe" price competition in the mortgage market hit earnings in the final quarter of last year, the ANZ National Bank warned yesterday.

This disclosure by the bank's Australian parent, ANZ group, highlighted the fallout of the pre-Christmas mortgage price war.

During the December quarter, the Bank of New Zealand led a price war in the two-year fixed home loan market, pledging to beat any mortgage rate offered by a major rival as it fought for market share.

BNZ offered loans at 6.9 per cent interest, charging customers at rates of less than 0.3 per cent above banks' own cost of funds. ASB and ANZ offered loans at 6.95 per cent, the National Bank 7.05 per cent and Westpac 7.4 per cent.

ANZ group chief executive John McFarlane said, as a result, the bank had a flat New Zealand performance in the first quarter of the group's financial year.

The warning follows ASB's disclosure last week that its interest margin had fallen to an all-time low in the six months to December 31. Banks make 70 to 80 per cent of their money from interest.

David Tripe, Massey University's senior lecturer in banking studies, said there was potential for the longer-term impact of the price war to be significantly worse as the low-margin loans spend more time on the banks' books.

"It's likely to cause a more significant drain in future accounting periods," Tripe said.

More detail will be given when ANZ National Bank, New Zealand's largest bank, releases its latest general disclosure statement on Thursday.

The major banks now offer two-year fixed home loans at between 7.60 per cent and 7.80 per cent.

ANZ bought the National Bank from Britain's Lloyds TSB for A$5 billion ($5.5 billion) in December 2003, creating New Zealand's largest bank. At that time it had 37.1 per cent of residential mortgage business.

This fell to 35.5 per cent at June 30, 2004 when BNZ had 15.9 per cent of the market, ASB 22.5 and Westpac 20.4.

Tripe said ANZ National Bank's share of the residential mortgage market fell further to 35.2 per cent at September 30, 2004, but that loss had slowed, or even stopped, in the December quarter.

ASB claims 30 per cent of December home-lending growth and BNZ claims 26 per cent.

McFarlane also said volume growth was higher than expected suggesting "improving momentum" in the second-half of 2005.

Management would move from a focus on integration to using the ANZ and National Bank brands to grow market share and improve financial performance.

No "material" integration issues had arisen and the merger was well on track to be completed this year. McFarlane said customer attrition levels remained below expectations and the group's retail banking market share was stable.

The ANZ group is now investing in new branches.