Woolworths, once the darling of the Australian share market, has been struggling lately as troubles with its own businesses and a resurgent Wesfarmers have seen the share price collapse from near $39 just 18 months ago to close at $24.30 yesterday.
There’s a lesson in in that for Australia’s banks, according to Brian Johnson, CLSA’s well-regarded banking analyst.
Johnson wonders whether the recent move by the big banks, and the regionals, to increase the rates they charge customers on their home loans could actually be an own goal in the same way he says that Woolworths’ change of strategy from customer satisfaction and low prices to high RoE (return on equity) targeting was the source of its current troubles.
Johnson says there a big strategic issues at play and highlights that “super high” housing RoEs, which he says deliver returns on owner occupied housing in the 35% – 49% region, and 47-64% RoEs on investment housing lending could “open the way for ‘disruptors’ to grow market share”.
He went further with the Woolworths analogy, saying that it was the “short-term ROE enhancement” which directly allowed Wesfarmers to compete.
And in a warning to bank shareholders, he added that “notwithstanding the prima facie investor appeal of WOW boosting ROE the reality is that the re-entry of WES saw WOW lose market share and WOW has sharply underperformed”.
But he added:
“This strategic perspective goes way beyond retailing and we think should be considered in relation to the apparent Australian banking sector oligopoly which delivers a high ROE relative to banks globally.”
The point being that while upward housing loan repricing initially feels good the preservation of super-high housing product ROEs is not without risk!
Those risks include:
1. Above industry housing pricing helps initially but then it hurts – Moving the SVR increases the rate on the backbook likely at the cost of origination market share.
- 2.The banks now face the risk of a regulatory backlash…There is a fine line between a tolerable “oligopoly” and a “cartel” and a uniform uplift in housing pricing will heighten sectoral oversight!
- 3. Super high housing ROEs could lure fintech disruptors and ultimately housing margin contraction like we saw in the late 1990s.
- 4. Higher housing borrowing rates raise the risk of a major house price correction.
None of that is good news for the banks or their shareholders.
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