Mortgage war hurts banks

The home mortgage price war started by the Bank of New Zealand to boost its market share was not worth the damage it had done to the country's banking sector, a top banking analyst said yesterday.

David Tripe, senior banking lecturer at Massey University, said: "BNZ has dragged down margins across the banking sector as a whole and we can see that in the results that have started to dribble through for the June quarter. It has caused a moderate amount of anguish."

Tripe said the price war was not worth the risk because BNZ was already increasing its market share before launching the campaign last October.

The bank typically holds 16 per cent of the mortgage market. In the March quarter, BNZ's market share increased only "marginally" to 16.6 per cent from 16.4 per cent in the previous quarter, Tripe wrote in his latest report.

Andrew Whitechurch, the bank's general manager of marketing, distribution and strategy, said its "unbeatable" campaign landed its highest slice of the market last December when its share reached 26 per cent at one point and held at 21 per cent for the full quarter.

The bank's two-year fixed-rate mortgage is 7.55 per cent, with 7.5 per cent for the three-year fixed rate.

By comparison, ASB's two-year rate is 7.65 per cent, with 7.6 per cent for three years.

In the March quarter, the net interest income of the five largest banks was down to levels not seen since 2000 and 2001.

"Further reductions in banks' net interest income may see levels lower than have been observed previously," said Tripe.

Whitechurch said the BNZ's campaign, which ended officially in June, did not have as negative an impact on BNZ's margins as it did on rivals.

The 5 per cent decline in the bank's margins over that period was "low".

"We use the wholesale markets to our advantage and we don't carry the costs of broker margins," he said, adding that the bank also recorded a 40 per cent increase in mortgage volume during December.

ASB Bank, owned by the Commonwealth Bank, is seen as particularly vulnerable since it has the highest proportion of assets tied up in residential mortgage lending.

Tripe said: "If there is going to be a squeeze, they are the ones that are most at risk."