Small banks still ‘hamstrung’ by mortgage risk weights, says CEO

Addressing shareholders at the MyState Bank AGM in Hobart this week, CEO Melos Sulicich said Australia needed more competition in financial services but “small banks remained hamstrung by competitive inequity”.

He said that while regulation had required large banks to increase the average mortgage risk weight from 18 per cent to 25 per cent, this was the lower limit of the Murray report’s recommendations and not enough to level the playing field.

“The average mortgage risk weight for smaller banks is 39 per cent and we believe the government needs to raise the minimum average mortgage risk weight for large banks to at least the upper Murray report recommendation of 30 per cent, if not above, to address competitive inequality. At present small banks hold 56 per cent more capital which is a huge disparity,” Mr Sulicich said.

“This regulatory capital requirement advantage is compounded by a funding cost advantage from an implicit government guarantee of ‘too big to fail’ which helps large banks obtain wholesale funding at significantly lower cost.”

Mr Sulicich said mortgage risk weight changes would significantly benefit consumers. He believes that small banks can provide much needed competition to the mortgage market, but are obliged to issue fewer home loans using the same capital.

“The really unfair aspect is that the risk of the mortgages issued is the same,” he said.

“Banks like MyState want to compete vigorously and give large banks a run for their money. We are up for the competition, but our returns are lower due to the risk weight disadvantage. These constraints are stifling consumer choice.

“A focused product and pricing strategy and technology-driven innovation have helped us to increase our loan book at nearly double the national average over the past two years. We are gaining market share, but on an uneven playing field it is an uphill battle.”

This month MyState's loan book surpassed $4 billion for the first time, marking an important milestone for the company. The lender’s book was just over $3 billion two years ago.

“MyState's strategy has enabled the company to grow without compromising the quality of its loan book. We place great emphasis on strong risk management, and our 30-day arrears are substantially less than regional peers and the benchmark for the big banks,” Mr Sulicich said.

“We believe it is imperative that the competition recommendations contained in the Murray Inquiry continue to be implemented.”

[Related: Regional bank considers M&A deals in 'challenging' market]