Westpac’s NIM (excluding highlights) fell nine basis points in the six months through September 30, while NAB’s was down five basis points and the CBA said in an update that its NIM was “significantly lower” during the September quarter. ANZ was able to increase its NIM by one basis point, but only because well-publicized problems with mortgage processing (which saw processing times delayed as far as 25 days in some circumstances) have caused its mortgage growth to lag behind that of the broader market.
Triggs expects the NIMs to decline again in the first half of the new fiscal year. He noted that ANZ’s NIM will fall by four basis points to 1.61 percent (as Bank of Melbourne is likely to increase discount rates to restore mortgage momentum), while NAB’s NIM is expected to fall by three. basis points to 1.66%.
But the biggest declines will be in Westpac, where opponents are expected to see NIM drop eight basis points to 1.9 percent, and CBA, where Triggs NIM tips will drop 16 basis points to 1.88 percent.
There are many moving parts in a bank’s NIM. Funding costs are vital, of course, and it’s no coincidence that the 30 years of downward pressure on rates that Sulicich is referring to have coincided with the persistent low interest rates that have characterized the past three decades in financial markets.
But with the mortgage market arguably as hot as ever in Australia, intense competition is forcing the banking sector to make a tough choice between growth and profitability. Grow in line with or above the broader market and you’ll retain customers but sacrifice profit margins. Growth without the broader banking system, and you’ll protect margins, but find yourself losing out on clients who may have a long-term relationship with the bank.
MyState is one of an army of smaller rival banks that are ramping up mortgage competition against the majors and putting pressure on the NIMs; The $6 billion mortgage book grew at a record 19 percent year-over-year in the September quarter, or about 2.5 times the system’s growth. For Solich, the industry dynamic of declining profitability means one thing for a smaller bank like his.
“With net interest margins shrinking, you have to do two things. You have to get bigger, and you have to be more efficient. And what we have done is build a very robust platform to be bigger and more efficient at the same time.”
While MyState also reported competitive pressures in the mortgage market, the NIM actually increased by 10 basis points in the 12 months to June 30, from 1.86 percent to 1.96 percent.
But Sulicich’s growth has been driven by perhaps the most valuable characteristic of today’s competitive market: speed.
A survey of mortgage brokers conducted by Macquarie earlier this year found that while price was the most important factor for clients (filtered by 89 percent of brokers), approval time was a close second (nominated by 85 percent). from intermediaries).
As approval times increase in 2021 amid the flood of applications, (from an average of 13 sayings in 2020 to 15 days) speed is becoming more important; The importance of time to approve brokers jumped 13 percentage points from 2020 to 2021.
Over the past few years, MyState has been able to provide conditional approval of a mortgage application within 48 hours; By way of comparison, brokers in the Macquarie survey, which covered the largest institutions in the country, said Macquarie Bank has the fastest approval time on the market, with a weighted average of six days.
Earning mortgages through speed was also vital in helping the Tasmanian-based bank expand into the east coast of the mainland.
Solich explains that his bankers are ruthless about response times, and they actually manage their growth by application volumes. If there are very few incoming apps, you will be more active in labeling and pricing. If there are too many, MyState will pull its horns, so its two-day response times won’t be compromised.
“Because once your mortgage processing system has a problem, it’s really hard to get back in line,” Solich says. “What’s the point of having a market-leading price or a special offer in the market if a customer comes up to you and says ‘I want to buy a house, you have a great price’ and then you say ‘Okay, give me your order in three weeks and I’ll get back to you. You have to make life easy for your customer and your distribution channels. “
It’s an undoubted feeling that ANZ CEO Shane Elliott and Australian boss Mark Hand agree with; They are pumping both human and technological resources to raise the bank’s mortgage processing times. Although there have been some improvements recently, the sheer volume of applications in this hot market has been making ANZ play catch-up for a while now.
JP Morgan’s Triggs says ANZ has already “corrected” its prices, but will have to do more to regain market share. “While its guidance for ‘direct’ system growth at some point in the second half of 2022 points to a recovery, our main concern is that it will need to compete more on price to make that happen.”
Technology has played a major role in driving up turnaround times for MyState, and Sulicich’s broader transformation of the bank. The stock is up 44 percent since the market bottomed in March 2020, and while still much short of its post-COVID rally, it has added 16 percent over the past five years; CBA is the only one of the Big Four to post gains in the stock price during that period.
His decision to completely rebuild the bank’s legacy systems means MyState can provide a lot more automation in its mortgage processing than other banks, reducing time but also errors. Sulicich believes the bank can eventually halve conditional approval times again, and make the broader mortgage process more seamless for clients.
Early next year we will be in a position where from unconditional consent to compromise [the mortgage] Don’t touch human hands because a series of robotic processes will go in, pick up objects and move on to the next stage of the process,”
In terms of deposits and the business side, MyState uses artificial intelligence to attract clients. The bank’s algorithms learn about a customer’s cash flow needs and can then suggest or even take different actions. Warn a customer if their balance is too low to pay a regular bill, for example, or even transfer excess money from a transaction account to a savings account.
It’s easier to spread technology like this across a small bank than it is with a big one, of course. But Sulicich believes the changing banking landscape has opened the door for smaller banks focused on digital technology. The rise of fintech companies means that customers are more open to having multiple accounts across different banks, giving the likes of MyState a chance to win over customers looking for something different, like AI-powered deposit accounts, or bot-led mortgages.
This is vital to achieve these two goals of increasing the size of the bank and improving its efficiency to resist low NIMs. And there is still a way to go; Solich says the bank needs to double the size of its balance sheet and bring the cost-to-income ratio down from above 61 percent to around 50 percent.
But that will be the task of his successor, former BNK and ING banker Brett Morgan.