Home loan repricing ‘unsustainable’, says J.P. Morgan

Speaking on a panel at the Australian Securitisation Forum in Sydney this week, J.P. Morgan executive director of Australian equities research Scott Manning said that as the sources and uses of capital converge, it becomes “extremely important” for banks to get their risk-based pricing right.

“Banks have been using a very blunt instrument to date in terms of simply repricing the whole portfolio,” Mr Manning said.

“I think you can get away with that once. I’m not necessarily sure that is a sustainable view going forward, particularly as it opens up the door for more efficient models to actually look at proper ways of doing risk-based pricing going forward,” he said.

Moderating the panel on Monday was Sarah Hofman, managing director and head of primary markets at RBS, who noted that there has been a heavy focus in the mortgage market on risk-based pricing and home loan distribution. Ms Hofman then asked Mr Manning whether he thought the traditional distribution models of the banks will change.

“I think things fundamentally need to change,” he said.

“What we have seen to date, if you go back in history, is that banks have really grown their way out of trouble.

“The cost-to-income ratios today are where they are not because they are efficient, but because the average amount borrowed has gone up as interest rates have gone down. As that starts to cap out, I think you’ve got to refocus on the risk that’s in your book and the appropriate charge for that. But more importantly your cost base as well.”

Mr Manning said that J.P. Morgan has conducted research on the viability of new online players, which shows that the notion of a branch being a barrier to entry doesn’t necessarily hold the credibility that it once did.

“There is a lot of trust in the intellectual property components of online players, and that can ultimately bypass that traditional notion of trust,” he said.

“On the cost side, I don’t think the banks have done anywhere near enough on their branch network.

“Simply trying to reduce the floor space by 30 per cent is going nowhere near where they need to be. They need to think a lot harder about that to continue to grow revenues faster than costs.”

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