Australia's four biggest lenders — ANZ, CBA, NAB, and Westpac — could lose their competitive edge against smaller mortgage providers as low interest rates and evolving technologies affect their profitability, according to the latest analysis by Moody's Investors Service.
The Reserve Bank of Australia has already slashed the official cash rate three times this year, triggering a race to the bottom amongst home-loan providers. The low interest-rate environment is putting substantial pressure on the big four bank's profitability, said Moody's vice president and senior credit officer Frank Mirenzi.
"We expect it will become increasingly difficult for the banks to retain their competitive advantage, with reduced room for differentiated pricing and ongoing competition, in particular in the digital arena, although economies of scale remain a significant strength for the major banks," he said.
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Borrowers switching banks
A recent report by Deloitte Access Economics and commissioned by the Australian Banking Association (ABA) found that 2.8 million customers have switched to new banks or financial providers for their home loans, credit cards, and transaction accounts over the past year.
ABA CEO Anna Bligh said this could indicate that the competition between banks remains strong.
"Whether you're looking for a new home loan, a credit card or a transaction account, competition for a customer's business is fiercer than it has ever been," she said.
Bligh urged borrowers to consider looking for more competitive products if their current ones are not working for them.
Recent industry figures show that the market share of the big four is constantly declining. KPMG's full-year analysis of the big four banks revealed that their mortgage market share declined to 81.2%. A separate analysis by Moody's showed that the big banks’ share of new housing loan approvals fell to 70% in June 2019 from 86% a decade ago.
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Levelling the playing field
Mirenzi said the impact of low interest rates is starting to become more pronounced for these banks, which became more reliant on domestic lending for revenues after a number of divestments of overseas businesses and wealth management operations.
"Moreover, intense competition will make it more difficult for the major banks to preserve margins and grow revenue through differentiated pricing strategies for lending and deposit rates," he said.
Furthermore, evolving technologies could further diminish these banks' competitive advantages against some of the smallest mortgage providers, particularly online lenders, which bear minimal operational costs.
Open banking will also affect how the lending industry operates. In a Your Investment report early this year, Liberty head of consumer advocacy Heidi Armstrong said investors will be increasingly looking outside the big four for finance.
"We're seeing an increasing number of borrowers being frustrated by cumbersome, slow and unclear approval processes and policies by major banks," she said.
As borrowers look for custom lending solutions, Armstrong said non-bank lenders could have "increased relevance" because they offer "helpful solutions right across the lending spectrum".