Don't bank on a future with the second-tier players
Sydney Morning Herald
Monday June 1, 2009
There's a huge amount of hand-wringing going on about the future of the country's second-tier banks. From a somewhat healthy group of five, this band of brotherly bankers has shrunk to three with growing concerns being expressed that over time the remainder could disappear altogether.In terms of independence, the industry has farewelled the biggest, St George, after its merger with Westpac, and waved goodbye to the most aggressive, BankWest, now in the hands of the Commonwealth.It is worth noting, though, that neither has disappeared from the public's radar given their new owners' deliberate policy of keeping these well-known brand names going.That said, it is turning out to be an increasingly lonely and diminishing sector as far as the likes of Suncorp, the Bank of Queensland and the Bank of Bendigo and Adelaide are concerned.Their big problem is their ability to financially compete or more to the point not compete with Westpac, Commonwealth, ANZ and National Australia Bank.Not since the days before the arrival of non-bank lenders such as Aussie Home Loans, Wizard and RAMS, which snared healthy chunks of the mortgage sector, have the Big Four so dominated the lending and deposit markets.Like those small operators, the second-tier banks were able to use sources of cheap money (the international debt markets) to fund their aggressive attempts to grab market share and give the major banks a run for their money.But the global financial crisis and its effect on credit markets where a repricing of risk on that borrowed money has pushed the cost of long-term debt way above what the regionals can really afford has stifled their ability to compete.That much is clear when customers turn to what they think are robust competitors and find out that the cost of borrowing when taking out a loan is no different (and actually may be higher) from the big banks.The same applies to the interest rates they are being offered on their deposits, which is a double whammy for the regionals given they are now so much more dependent on this form of financing than ever before (that being before the days of securitisation and cheap debt).BoQ's managing director, David Liddy, has been banging on about this subject for sometime now and, in particular, has targeted the much higher cost the regionals have to pay to use the Federal Government's wholesale funding guarantee to raise any kind of new debt.Give or take a couple of recent examples, the guarantee remains the only way for the banking sector to raise additional money to meet lending needs when deposits can't plug the gap.The Big Four pay less because of their better credit ratings, while the lower-rated second-tier banks pay more. That in itself is a disincentive for the regionals to use the guarantee even if they can afford to make a buck or two on the higher costs of the new debt.Hence the reason Liddy has been complaining of an uneven playing field.He has now been joined by Suncorp's acting chief executive, Chris Skilton, who says the likely consequence of the new and probably permanent world of bank financing will be that banks like his own will become large sophisticated building societies, more or less dependent on deposits.Now, self-funding is no bad thing and you can offer reasonable deals on home loans and other borrowings if you can attract customers with great interest rate offers.But there's a limit to how aggressive you can be and therefore how far you can take the competition to the really big players in the market.That's why Skilton said last week that trying to compete with the Big Four banks in this market and therefore match or even undercut their price advantage is like a corner grocery shop trying to keep Woolworths honest.And now there's another factor: the growing multi-brand strategy of the majors. Take, for instance, the decisions of Westpac and Commonwealth to keep the St George and BankWest franchises.These have given customers the appearance there is just as much competition as before but the biggest two of the four have been able to use their credit ratings and balance sheet strengths to bolster their subsidiaries and take the fight to the smaller banks even more (as well as themselves).Just one sign of that is the latest customer satisfaction survey conducted by Roy Morgan Research which showed that in April the gap between the smaller banks and the Big Four in terms of people being happy with the service provided had shrunk from a healthy 10 per cent 12 months ago to 5 per cent now.Part of that was the result of a long-running effort by the Commonwealth Bank to improve its once-lowly position while St George and BankWest appeared to have suffered some post-merger blues.But there were worrying declines too for all the regionals as well in an area they have traditionally sought to make a difference: service.Throw that into the mix of their increasing difficulties in competing on price and you can see why the second-tier players can't bank on having a long-term future except perhaps by teaming up with a stronger partner along the lines being considered by BoQ or through a change of ownership in the case of Suncorp.
© 2009 Sydney Morning Herald
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