FSI unlikely to lift mortgage market competition

In a research note on Bendigo and Adelaide Bank last week, Morningstar changed its uncertainty rating from ‘moderate’ to ‘high’ following predictions that the FSI will have mixed outcomes for the regional lender.

Morningstar analyst Nathan Zaia noted that the regional banks had hoped for more favourable recommendations from the FSI, with proposed changes “unlikely to significantly alter the competitive landscape”.

“Acknowledging [that] the gap between mortgage risk-weight requirements of IRB banks and standardised banks need to be narrowed is a short-term positive, with the majors likely to respond by adjusting deposit and lending rates,” Mr Zaia said.

“However, with the regional banks on the path to IRB accreditation, it will be a short-lived boost,” he said.

The FSI final report unexpectedly suggested that all banks hold additional capital, rather than just the ‘too big to fail’ lenders, or majors, which is what the regionals had petitioned for.

This creates additional uncertainty for the regionals, Mr Zaia said.

“The FSI is of the view a failure of a bank outside the majors would still have adverse consequences for customers and the economy, and having different standards for different parts of the banking system would introduce distortion to competitive neutrality of regularity settings,” he said.

While the regional banks are less reliant on wholesale funding than the majors, if global economic conditions deteriorate, Morningstar expects the majors to increase competition for retail deposits, a prime source of funding for the regional lenders.

“Pressure on deposits, and the risk securitisation markets again tighten, could easily see net interest margins fall back to the 1.5 per cent to 1.6 per cent range Bendigo and Bank of Queensland reported in fiscal 2008 and 2009,” Mr Zaia said.

However, the FSI recommendation that APRA assist the regionals to move to IRB accreditation is a positive outcome, he added.

“It remains in the best interest of the regionals to move to IRB accreditation, with the proposed IRB mortgage risk weightings still below the average of the regionals at around 39 per cent currently.”

Suncorp, Bank of Queensland and Bendigo and Adelaide Bank are all currently investing in systems and processes around risk management to move to advanced accreditation, with Bendigo and Adelaide Bank the most advanced, Mr Zaia said.