Dwindling competition, pressure on bank margins and the issuing of loans at a loss, may cause banks to take a harder line when offering you discounts on interest rates. So says Simon Stockley, the chief executive of SA Home Loans.
SA Home Loans is the only provider of home loans in this country which is not a bank. It accesses its funds directly from the capital markets and not by taking deposits from the public.
The current consolidation within the banking sector following the collapse of Saambou, the sale of NBS home loans to First National Bank and the takeover of BoE by Nedcor means that you have only the four major commercial banks and SA Home Loans from which to obtain a home loan.
A few years ago, it was unheard of for consumers to be offered two percentage points off the prime lending rate. Now, favoured customers can get discounts of up to 2.5 percentage points off the prime lending rate, which has just been increased to 16 percent a year.
Niche players, such as Saambou and NBS, aggressively chased market share and SA Home Loans started offering low interest rate loans in 1999. The response of the big banks was to slash their profits and offer better interest rates.
"My concern is that a lack of aggressive competition may result in banks hardening their attitudes to consumers and tightening their prices," Stockley says.
Simon Tippett, a banking analyst at Old Mutual Asset Managers, agrees that fewer competitors is probably bad news for consumers. But depositors are more likely to lose out than borrowers.
He says banks are fiercely trying to attract home loan business, and mortgage originators, who shop around for the best rates on behalf of consumers, and SA Home Loans remain as checks on their rates.
Bank margins getting smaller
Bank margins have been under pressure due to competition from niche players and the recent increase in the costs of funds that banks need to operate their business.
Banks borrow money in the money market on a daily basis. The increase in short-term rates has meant that the banks have been paying more for their funding, while not being able to pass on those increases to consumers.
Banks are also under pressure to recoup loss-making business. Traditionally, banks have not been good at managing their costs or pricing their products and services according to the risk profile of borrowers. As a consequence, banks have been issuing some home loans at levels that have caused them to lose money in an effort to remain competitive. The pressure is now on for banks to reverse this trend, Stockley says.
Tippett expects banks to improve at pricing their loans according to risk, resulting in a bigger range in the interest rates on offer. High-risk consumers will pay more for their loans than low-risk consumers, he says.
With bank profits under pressure, the only way a bank can grow its businesses is to win market share, because it can no longer push bank costs on to consumers via fee increases, Tippett says.
Richard Gahagan, the general manger of home loans at Absa, does not believe the market will be any less competitive. Banks are launching better products and services all the time in an effort to get business. The arrival of mortgage originators in the market a few years ago has also forced banks to be more competitive.
Gahagan says banks that are consolidating will be able to reduce their unit costs because of the greater volume of business. "I believe these efficiencies will be relayed to consumers. It may not necessarily be by way of better interest rates, but through better products and services. For instance, getting loan approvals more quickly."
Banks are so competitive that initiatives which could have benefitted the industry have failed because banks don't want their competitors to know their strategies.
Charles Chemel, the director of strategic and product development at Standard Bank, says the bank will continue to remain "seriously competitive" in the market.
In addition, Standard holds a stake in SA Home Loans, which proves that it is committed to promoting competition in the industry, Chemel says.
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