The Reserve Bank has endorsed the idea that our big banks will be the winners from the recent instability in credit markets.
In its latest Financial Stability Review, released this morning, the RBA said the recent volatility and rise in short term interest rates “is likely to have some impact on the nature of competition in the financial system”:
Traditional lenders that rely relatively heavily on retail deposits to fund their loans are likely to see their competitive position improve, and this in turn is likely to see more loans funded on the balance sheets of financial institutions, rather than in the capital markets.
This means that the rapid growth of non-bank lenders such as Rams, Aussie Home Loans, Wizard and the host of smaller competitors is likely to be curtailed as the big banks, especially the big five, hoover up new business and attract old business back into their accounts.
It is likely to see a wave of consolidation among these non-bank groups. Wizard was last year bought by GE Money, which could be a buyer, but its US parent is quitting subprime mortgages and might not want to take on another Australian non-bank group.
Rams was floated on July 27 and then fell into a big hole as the shares tanked because it could not get a refunding of $6.17 billion away. It is considered to be a prime candidate to be taken over.
Short term interest rates in the bank bill, or interbank markets last week fell from their 11 years of 7.10% for 90 day paper, to a low of 6.84%, before rising back to 6.88% on Friday. They are trading around that this morning.
The rise came as the Reserve Bank cut the amount of liquidity it was injecting into the market each day, and leaving in the Exchange Settlement Account each night. Just over $2.6 billion was left in the ESA at the bank on Friday for the weekend, the lowest since mid August.
In its latest report today the RBA said that the Australian banking system remains “highly profitable and is well capitalised”:
The Australian financial system has also been affected by the strains in global credit markets, with inter-bank interest rates for term funding rising, credit spreads increasing, and both the currency and equity markets exhibiting greater volatility. The effects, however, have not been as pronounced as in some other countries”.
The share of households experiencing financial difficulties remains low, although it has increased over recent years, largely reflecting the much wider availability of credit over the past decade.
Households are benefiting from strong income growth and low unemployment, with household wealth rising solidly recently. While there are some pockets of stress, particularly in western Sydney, most households are reasonably positive about their personal finances. Business balance sheets also remain in good shape overall, with debt-servicing ratios and arrears rates remaining low.
The bottom line from that comment is that your next mortgage is more likely to come from one of the big five than from a non-bank lender. That will be a reversal of the change of the past 15 years which has seen these non-banks grab around 32% of the mortgage market. Now the RBA says that will be reversed for the time being as the big banks grab more business because of the their greater stability.
But it might cost more and those low doc or no doc loans might be much harder to get.