The performance of S&P/ASX 200 Index (ASX: XJO) banks could be impacted by one particular factor during 2022.
In 2021, the loan market was subject to intense competition in terms of pricing. There were some loans that had an interest rate that started with a 1.
However, all of the major banks – Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group Ltd (ASX: ANZ) – have increased their interest rates for borrowers a few times in the last few months.
The RateCity.com.au research director, Sally Tindall, noted that these hikes are really adding up. For example, NAB's 3-year fixed rate loan is now around a full percentage point higher than it was a few months ago.
Ms Tindall said:
We expect fixed rates to keep on rising in 2022, creating a very different landscape to what we've become accustomed to. Next year there's going to be a lot of mortgage holders coming off a fixed rate starting with a '1' who are going to get the shock of their lives when they discover just how far prices have climbed.
However, there could be another factor that's even more important in 2022 for borrowers when it comes to picking an ASX 200 bank.
Loan processing times a focus
One of the online-only leaders, Lendi, thinks that home loan processing times will be an important factor for borrowers in 2022, according to reporting by The Australian.
Lendi boss David Hyman said:
Processing times have fluctuated significantly over the last two years due to increased demand, particularly for refinances, in the ultra low-rate environment and COVID-related disruption.
However, many lenders have been working hard to improve their service level agreements because the customer experience is just as important as price to many borrowers.
Indeed, ANZ recently attributed its failure to process applications at a good pace as a key reason why its market share recently fell. ANZ said that it took urgent action to fix those processing issues by materially increasing its assessment capacity as well as simplifying and automating processes.
ANZ chair Paul O'Sullivan said about its processing of mortgage applications:
Let me be frank, we got it wrong. Although we expanded capacity, we didn't expand capacity enough. And as a result, we lost market share to those who could process it.
We have spent a lot of time at board and management understanding this issue. There has been significant work done to bring in new processes, new ways of handling things and to look externally at best practice, so we can learn from that and improve.
The big four ASX 200 bank has been working hard on improving its performance with loan applications.
Differences in loan processing times could lead to different growth rates of the loan book for the ASX's banks. It's not just the big four banks wanting to win market share, there are others including Macquarie Group Ltd (ASX: MQG), Bank of Queensland Limited (ASX: BOQ), Suncorp Group Ltd (ASX: SUN) and Bendigo and Adelaide Bank Ltd (ASX: BEN).
While loan book growth helps the banks' net interest income, many of them have been warning of a deterioration of the net interest margin (NIM).
For example, CBA said that its NIM was "considerably lower" in the first quarter of FY22 because of impacts like home loan price competition, customers switching to lower margin fixed rate loans and the impact of a low interest rate environment.
RateCity.com.au's research director Ms Tindall thinks that the variable interest rates could see some volatility from banks too:
Banks are still trimming variable rates, but the cuts have largely been to their basic loans and almost always reserved for new customers.
While we expect more cuts to variable rates in the next few months, we could see some lenders hike later this year ahead of the RBA, if the cost of funding continues to escalate.
