Australians owe $2.3 trillion in mortgage debt, three-quarters of which is owed to the Big Four banks, a cosy oligopoly stifling competition and keeping mortgage costs high. Harry Chemay concludes our mortgage nation series.
Credit is the lifeblood of modern market-based economies, and the banking system is the beating heart that keeps it flowing. Banks take risks when lending, and their shareholders expect to be appropriately compensated for doing so.
Borrowers are best served when there is robust competition for their loan from a variety of potential providers who deliver services efficiently, honestly, and with fairness.
Meanwhile, regulators of various stripes try to balance a range of financial system objectives, from economic stability (RBA) to prudential supervision (APRA) to competition (ACCC) and consumer detriment (AFCA). On occasion, these regulators see risks evolving differently, as they currently do with household indebtedness.
The risk of borrowing
While the latest RBA Financial Stability Review appears sanguine to household financial stress, mortgage debt levels and loan arrears, APRA has instead chosen to retain the mortgage serviceability buffer at 3% despite pressure from some quarters for it to be eased, noting that:
“The level of household debt in Australia is high relative to incomes both compared with its long-term history and relative to international peers, making this a key vulnerability if adverse economic scenarios came to pass.”
The below chart from the RBA, would suggest that APRA’s concerns are valid.
Meanwhile, AFCA, the financial services consumer complaints authority, has seen an 18% rise in complaints involving financial difficulty during 2023-24, noting that about one-third of the more than 5,700 financial difficulty complaints received in that period were in relation to home loans.
Similarly, ASIC, in its role as the consumer finance watchdog, recently released a report finding that the number of hardship notices received by mortgage lenders from struggling borrowers had increased by 54% between late 2022 and 2023.
There appears to be something of a disconnect between Martin Place and the suburbs of Australia, with comparator site Finder recording the highest level of mortgage stress since first tracking it in 2019. Their latest report suggests that
some 42% of the near 60,000 people surveyed in August struggled to pay their home loan.
When it comes to mortgage lending, some three in every four new home loans are written with the Big Four banks. How did Australia come to have such a concentrated banking system?
Mortgage nation. Australian retirees owe record amounts to the Big Four banks.
The Four Pillars policy
Australia’s four biggest banks (ANZ, CBA, NAB and Westpac) are the beneficiaries of a ‘four pillars’ policy that stretches back to the 1990s, reflecting a view that these four banks should compete while not being allowed to merge amongst themselves.
With mergers precluded, each has looked elsewhere, resulting in a string of takeovers, mergers and acquisitions of smaller rivals since 1991.
Commonwealth Bank acquired the State Bank of Victoria (1991), the State Bank of New South Wales (as part of a merger with Colonial in 2000), and Bankwest (2008).
Westpac, meanwhile, was no less active, acquiring Challenge Bank (1995), Bank of Melbourne (1997), and NSW-biased St. George Bank (2008).
NAB tried its luck overseas instead, acquiring UK’s Clydesdale Bank and Northern Bank (1987), the Bank of New Zealand (1992) and US-based HomeSide Lending (1997). It has since exited most international operations, returning to focus on the more lucrative Australian market.
ANZ Bank followed NAB’s lead overseas but has focussed more on the Asian region. It has interests in countries including Singapore, Vietnam, Cambodia, Taiwan and Indonesia.
Of mortgage giants and minnows
In apparent acknowledgement of the profitability of domestic banking, ANZ Bank now aims to acquire Queensland-based Suncorp Bank for some $5 billion, removing yet another competitor second-tier bank. Despite the ACCC first denying the proposed merger in late 2022, the Australian Competition Tribunal overturned the ACCC’s decision earlier this year, paving the way for it to proceed.
The proposed ANZ – Suncorp merger provides a glimpse into the concentration of Australia’s $2.3 trillion mortgage market, one heavily shaped by the four pillars policy.
One, however, need not read the ACCC’s final determination on its (now overturned) decision to deny the merger, nor the numerous expert reports, submissions, consultations and other material supporting it to understand the nature of mortgage market concentration in Australia.
Between domestic banks, credit unions, building societies and local branches of foreign banks, Australia has a little over 100 institutions from whom borrowers can seek a residential property loan.
But it’s the Big Four who dominate, together accounting for some 75% of all mortgage debt outstanding, with the CBA at around 26% market share, Westpac at some 22%, NAB at 14% and ANZ at 13%, according to data provided by the banking regulator APRA during the ACCC determination. ANZ’s acquisition of Suncorp Bank would add about 2% to its market share, leapfrogging NAB into third spot.
The next two largest mortgage lenders, Macquarie Bank and ING Bank, hold about 5% and 3% of the market, respectively.
Mortgage nation. The ‘wealth effect’ that drives big bank’s super profits.
Big Four market share
The market share of the Big Four in total assets almost perfectly mirrors their share of the mortgage market, benefitting from home loan growth as shown in the chart below.
Contrast that to the US, where the four biggest banks by total assets are currently JP Morgan Chase, Bank of America, Citibank and Wells Fargo.
When it comes to US mortgage lending, however, only Bank of America makes the top four, with JP Morgan Chase and Wells Fargo not even in the top ten. Instead, the US mortgage market is far less concentrated, with the current largest lender, United Wholesale Mortgage, barely holding a 6% market share.
That the Big Four hold such power within Australia’s financial system, mostly through their dominance of residential property lending, speaks volumes about just how much the economy is shaped by our $11 trillion housing market.
Lack of real competition
In allowing the proposed merger between ANZ Bank and Suncorp Bank to proceed, the Australian Competition Tribunal has made an assessment that there will be no detriment to competition from the union, instead finding a “net public benefit”.
Looking, however, at the material provided by the ACCC in its earlier determination to block the merger, a very different picture emerges, with its final determination noting that it was:
not satisfied in all the circumstances that the proposed acquisition is not likely to substantially lessen competition.
The ACCC had good reason to be wary, with its previous inquiries into the mortgage market in 2018 and 2020 finding a range of advantages for, and behaviours by, the Big Four which allowed them to dominate the mortgage market, including a funding cost advantage, opaque discretionary pricing, structural barriers for new entrants and the potential for what the ACCC terms ‘coordinated conduct’.
The previous inquiries had observed the Big Four exhibiting “signs of oligopolistic behaviour” by engaging in “an accommodative and synchronised approach to pricing”, the ACCC further noting their pricing strategies were often being used “to accommodate, rather than challenge, rivals”.
Suncorp, why?
Overall, the ACCC would have preferred Suncorp Bank to either continue to operate independently or alternatively seek a merger with a fellow second-tier bank.
It looks instead like Suncorp Bank will follow Challenge Bank, Bank of Melbourne, State Bank of New South Wales, St George Bank and Bankwest among other mortgage lenders who have fallen into the fold of the Big Four.
And Australia will continue to be a Mortgage Nation, beholden unto the Big Four banks as they gradually hoover up and negate what little genuine competition remains.
As further evidenced by our supermarkets, airlines and telecommunication providers, market concentration over competition is the Australian way.
Harry Chemay has more than two decades of experience across both wealth management and institutional asset consulting. An active participant within the wealth and superannuation space, Harry is a regular contributor to investment websites in Australia and overseas, writing on investing and financial planning.