MENU

Is it time to invest in smaller banks?

Australia’s biggest mortgage lenders by market share are Commonwealth Bank (ASX: CBA), Westpac (ASX: WBC), NAB (ASX: NAB) and ANZ (ASX: ANZ). Their robust balance sheets and strict lending criteria throughout the GFC meant they were able to continue to increase their share of mortgage market while others faded away.

In the past six years, the big four have gone in different directions. The two biggest banks have snapped up subsidiaries to do their bidding. ANZ and NAB have focused on developing business strategies and international expansion whilst still remaining competitive in the mortgage market.

However Westpac, which controls St George, and CBA, which has BankWest, are using their different brand names to offer loans throughout Australia to would-be homeowners, many of whom are likely unaware they are negotiating with a ‘big bank’. So far this strategy has paid off.

RateCity’s Alex Parsons said although the big four control the “lion’s share” of the mortgage market it “is slowly shifting as more people realise that smaller lenders, in the main, are offering better rates.” By comparison some small banks are offering 4.55% for variable loans whilst the average variable rate among the big four is 5.24%, according to The Australian Financial Review.

The big banks have countered the swing by upping the commissions they pay to mortgage brokers and by raising the loan-to-value ratio. This is something many property investors will be welcoming, particularly with interest rates so low and property prices rising. According to the Australian Finance Group, investors make up around 40% of the market.

Although lending for new houses has stalled in the past six months, the demand for mortgages could grow in the short term, especially if the RBA cuts rates again. HIA senior economist Shane Garrett said, “The patchiness we are continuing to see in areas of the home loans market means that another interest rate cut from the Reserve Bank before the end of 2013 is important in order to ensure that the market recovery fires on all cylinders.”

Foolish takeaway

Australian banking stocks remain priced to perfection for shareholders but not investors. With interest rates so low, margins are likely to be put under pressure for both big and small lenders. Regional banks such as the Bank of Queensland (ASX: BOQ) and Bendigo and Adelaide Bank (ASX: BEN) have performed exceedingly well in the past 12 months and continue to pay great dividends which could reward investors who are investing for the long term but, at current prices, they are not ‘bargains’.

Want to know the name of the best dividend stock on the ASX? We think we’ve found it! Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

More reading


Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…

Including:

The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!