Whilst it has been established that margin is more important than market share in a low-growth environment – and that it would not make sense economically for Westpac (ASX: WBC) to lower its standard variable rate to the level of its peers – the extent to the bank's market share loss in home loans has been revealed.
According to The Australian Financial Review, a detailed analysis by UBS has shown that Westpac increased its lending to new customers by $24 billion for the six months to March. In comparison, Commonwealth Bank (ASX: CBA) increased its lending by $34 billion whilst ANZ (ASX: ANZ) and NAB (ASX: NAB) increased theirs by $21 billion and $23 billion, respectively.
When each of the banks' relative sizes are considered, NAB and CBA are writing 21% of their mortgage books in new loans compared to ANZ's 25%. Meanwhile, that number is just 16% for Westpac.
However, the dilemma facing Westpac is that, should it keep its standard variable rate at 5.98% – above the 5.88% and 5.9% offered by its key competitors – it could continue to lose market share. On the other hand, it has been predicted that the bank could lose over $200 million in profits for the year from making those cuts.
Jonathon Mott said in the UBS report that "In a low-growth environment margin is a larger driver of bank profitability than market share… Economically it does not make sense for Westpac to cut its standard variable rate down to peer levels. However, ongoing share losses are something senior management and boards struggle to accept for an extended period."
In an attempt to stem some of the market share loss experienced over the last year, Westpac is offering discounts of up to 0.9% off its advertised rate for loans exceeding $250,000 in value. This offer is expected to last for three months as part of a spring home loans campaign.
Foolish takeaway
As is the case with each of the other 'big four' banks, Westpac is a quality company that has given investors healthy returns for a long period of time. However, at today's price it would be difficult to justify hitting the 'buy' button on shares. At a time where investors are looking for high yielding stocks, the bank could certainly realise gains in the short term, but over the long-term it is difficult to see how they could deliver market-beating returns.
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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.
