Time in the market favours CBA, Westpac

In the latest edition of the JP Morgan Australian Mortgage Industry Report, released yesterday, the investment bank's analysts tackled a perennial hot topic: first home buyers.

According to Scott Manning, banking analyst for JP Morgan, how the loans from FHBs are refinanced and otherwise dealt with is set to become an important differentiator for the majors, although for unexpected reasons.
 
The underlying cause is the contrast between the risk weighting needed to cover the loan to the previous home owner, presumably the original borrower.
 
That is, the original lender needs to assess the LVR using asset values in place when the loan was originated, rather than its current value, under the so-called dynamic LVR approach (that is, inclusive of house price appreciation).
 
In the years leading into the financial crisis up to about 2009, CBA and Westpac made concerted efforts to expand their mortgage books.
 
However, by late 2010, housing credit growth for CBA and Westpac reduced from a high of about 20 per cent in the 12 months prior to tracking in the low to mid-single digits range, with the previous boost in volumes constraining the funding profile of both banks and limiting future growth opportunities.
 
"Importantly, we expect that a significant cohort of the first home buyers acquired by CBA and WBC through the post-GFC period may be actively assessing refinancing opportunities given a typical behavioural maturity path of approx five years," the JP Morgan report said.
 
In contrast,  ANZ and NAB moved later than CBA and Westpac to expand their mortgage books and with more conservative LVRs of around 70 per cent, and their problem is that property prices have risen, while not much of the original loan has been repaid yet.
 
"The challenge for ANZ and NAB may be far more pronounced in coming years, considering not only will they have to build stronger levels of capital to support higher mortgage risk weights, but also fight to retain customers from the 2011-2012 cohort who may be offered relatively more attractive pricing by rival banks," the JP Morgan report explained.
 
"In our view, a key to meeting this challenge will be for ANZ and NAB to quickly identify which customers may be at the greatest risk of movement."
 
In practical terms, this is likely to mean borrowers in Sydney, where prices have moved faster and further than anywhere else in the nation in some pockets or Melbourne.