We are looking at a defining moment in the Australian banking industry.
Last night as I reflected on the momentous decisions being made by the CBA and Westpac on the one hand and NAB and ANZ, on the other, I could not help recall a conversation I had with David Morgan around three years ago when he was CEO of Westpac.
Morgan was really worried about the housing market and the level of credit being extended in Australia. He had taken a courageous decision and would allow Westpac to lose market share in exchange for maintaining credit soundness. Morgan had his timing wrong but it was one of the finest examples of long-term banking we have seen in Australia.
Now let’s move to 2009. We can now see that the ANZ and the National Australia Bank are making a Morgan-style call in the Australian housing market, which is currently being driven by first home buyers, and are restricting their lending. The Commonwealth and Westpac reckon the ANZ and the NAB are calling it wrong and see the grant-driven housing boom as a once in a life-time opportunity to make the ANZ and NAB less relevant in this key market.
The enormity of these calls was underlined yesterday by Nick Tabakoff writing in The Australian when he revealed that while all four of the big banks expanded their mortgage books in the March quarter, the Commonwealth/BankWest and Westpac/St George took a combined 85 per cent of the big four mortgage growth during the period.
The CBA and Westpac have been lifting their market share of the housing market for about three years, but the two takeovers added impetus to the trend because the aggressive cultures of BankWest and St George were suddenly combined with the strong balance sheets of the CBA and Westpac.
Real estate agents tell me that BankWest has been particularly active and sometimes agents can get BankWest to finance first home buyers that the CBA bank has rejected.
ANZ and NAB clearly believe that the margins being offered in housing are not worth the risks. NAB and ANZ would argue that with bank capital in short supply it is better to place more emphasis on the capital hungry but higher margin business loans.
In recent weeks I have been on the ANZ/NAB side and have been concerned at the risks being taken by the big banks in lending to first home buyers on low deposits which inevitably become ‘no deposit’.
Sometimes the loans come to 105 per cent if you ignore the grant because the builders lift the price of the home beyond valuation. The Tabakoff research underlines that it is CBA and Westpac that have taken most the big risks.
It’s easy for commentators like me to issue a warning. For the CEOs involved, the decisions are much tougher. All four banks are making long term calls and it may be two years before we discover who was right and who was wrong.
If, in two years’ time, these low-deposit loans do not deliver substantial defaults, then the two aggressive chief executives – CBA’s Ralph Norris and Westpac’s Gail Kelly – will have been proved right. Accordingly they will be shareholders’ heroes and ANZ and the NAB will have made disastrous calls and will have to claw their way back in the mortgage market.
However, the reverse will also apply. If ANZ and NAB have made the right call then their CEOs will be the heroes.
There are big stakes involved for all the banks and their chief executives.
This article first appeared on Business Spectator.
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