The global financial crisis had removed effective competition in mortgage lending, enabling Westpac and Commonwealth Bank to keep windfall gains from the transition to a new global accord on bank capital, said Mark Joiner, chief financial officer of National Australia Bank (NAB).
He said that adoption of the Basel II accord two years ago had doubled the average return on equity (ROE) of the industry for home loans to 45 percent from the current 22 percent. The sudden windfall arose because Basel II enabled banks to hold less capital against secure home lending.
"I find the national sport of bank bashing a bit ironic because it tends to focus on fees and the passing on of higher funding costs, when the real windfall relates to neither of those issues," said Mr. Joiner. "There are super profits in mortgage lending because the banks, with the transition to Basel II, took more than half the capital off the table and the margins never adjusted down to reflect that."
However, he predicted that home lending ROEs would revert to previous levels, aided by the federal government’s reforms to reduce expensive mortgage exit fees, making it easier for borrowers to switch banks.
The NAB is relatively rich in business lending unlike the huge lending records of Westpac and CBA after they acquired St. George Bank and Bankwest, respectively.
The bank is trying to change the dynamics of home lending and retail banking by reducing fees and discounting the standard variable rate.