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2012: Trends to Watch in Australian Retail Banking

Synopsis

This report provides an overview of the most significant banking developments of 2011 and identifies 10 of the most important trends that will shape the retail banking market in 2012, to which providers will need to respond and adapt.

Description

INTRODUCTION

The Australian retail banking market is undergoing difficult times with a number of adverse conditions developing both locally and abroad. Higher funding costs, lower credit growth, new regulations and evolving consumer preferences will challenge even the most stable bank. This report examines the key trends affecting the market over the next year and the steps banks can take in response.

FEATURES AND BENEFITS

  • Identifies the most important trends that will affect retail banking in 2012.
  • Assesses the impact of macroeconomic, consumer, strategic, and technological developments on the retail banking industry.
  • Details what actions competitors will undertake in 2012 to protect and improve their market position.

HIGHLIGHTS

  • One key feature of the Australian retail banking market in recent years has been the erosion of net interest margins on their lending business. While the net interest margins of the banks had been on a long-term decline before the financial crisis, the environment since the crisis and its immediate aftermath has been decidedly negative.
  • The outlook for 2012 and indeed funding conditions in the Australian market are greatly influenced by what is happening in Europe, and an outright global recession remains a very real possibility. Australian banks are exposed to the continuing crisis facing Europe and its banks.
  • In Australia the overall lending environment - both commercial and personal - was up from 2010. While 2011 was an improvement on 2010, which represented a recent low in credit flowing into the Australian market, average monthly lending remained below the peak the market recorded in June 2007.

YOUR KEY QUESTIONS ANSWERED

  • What shape will the Australian retail banking market take over the next 12 months?
  • What impact will macroeconomic, regulatory, and technological developments have on the retail banking sector?
  • How will providers respond to the changing banking environment in 2012?

TOC

OVERVIEW

  • Catalyst
  • Summary

EXECUTIVE SUMMARY

  • Trend one: a flat to negative Australian property market will see many players struggle
  • Falling property prices will have a slew of direct and indirect effects on the banking marketplace
  • Trend two: the Australian deleveraging process will lead to lower credit growth in the near term
  • The global crisis jarred confidence and lowered the appetite for credit in Australia
  • Banks will have to develop strategies for attracting switching customers rather than relying upon new borrowers
  • Trend three: regulatory changes will impose costs and drive consolidation
  • Over the next year the regulatory burden will be a key driver behind consolidation in the advisor space
  • In five years' time the financial advice marketplace will be dominated by big and integrated groups
  • Trend four: the spread of the online channel will come at the margins of the market
  • Online channel usage and attitudes have become polarized and stabilized
  • Consumers will begin to see mortgage refinancing as an activity simple enough for the online channel
  • Trend five: ATMs will evolve to offer more than just cash distribution
  • The use of ATMs has reached a stagnation point, which signifies a step toward the future of cashless payments
  • New generation ATMs will begin adding bank branch activities to the self-service kiosks
  • Trend six: the new paradigm of banking will have clear basic products with low fees
  • New regulations in the wake of the global crisis have limited the risk banks are allowed to take and heightened the importance of fees
  • Adopting low fee platforms and cost-cutting will become more prevalent
  • Trend seven: banks will cope with the low fee transactional banking by better targeted value-add products and services
  • There are now no fee mortgages, credit cards, and accounts, which have reduced important earners
  • Banks will compete with products designed for specific social groups and consumer segments

MARKET OVERVIEW

  • The eurozone crisis has made overseas borrowing costlier for banks, squeezing lending margins
  • In 2011, Australian banks have had to contend with higher funding costs, making balance sheet management key
  • Eurozone instability is the main threat to banks, and froze wholesale lending markets in 2011
  • Global uncertainty has negatively impacted Australia's lending markets
  • Average monthly lending commitments to the Australian economy were only 3.1% higher in 2011
  • Global political indecision and reactive markets have depressed Aussie investors and borrowers
  • Volatility at the global level has had a direct impact on local consumer confidence
  • The two speed economy has pressured consumers and businesses, creating a poor trading environment
  • The split between the industrial East and the resource-based West and North has resulted in two Australias
  • Worse global prospects means lower resource demand, dampening even the bright spots in the economy
  • The record high dollar lowers demand for Australian manufacturing exports
  • Australia has a relatively strong position globally due to its lower public debt
  • Australia has low public debt compared to most Western countries
  • The lower public debt ratio of Australia makes for a more resilient economy
  • The Australian market has entered a period of weak credit demand from consumers
  • Australian consumers have amassed a considerable amount of private debt in the form of mortgages
  • Australian households have become twice as indebted over the last 20 years
  • The Australian property market has recently come off the boil
  • Australian property prices have supported rising consumer demand for debt
  • The Australian property market will struggle in 2012 and prices may decline by up to 10%
  • Property prices will remain flat or fall in the medium term

TRENDS IN AUSTRALIAN RETAIL BANKING

  • Trend one: a flat to negative Australian property market will see many players struggle
  • Falling property prices will have a slew of direct and indirect effects on the banking marketplace
  • Falling property prices will create challenges for providers, but there will always be opportunities for savvy businesses to prosper
  • Trend two: the Australian deleveraging process will lead to lower credit growth in the near term
  • The global crisis jarred confidence and lowered the appetite for credit in Australia
  • The decline in the first time home buyer income to mortgage ratio highlights the shift in consumer attitudes to debt
  • Credit growth for all types of consumer finance will remain sluggish in 2012 creating a difficult trading environment
  • Trend three: regulatory changes will impose costs and drive consolidation
  • Over the next year the regulatory burden will be a key driver behind consolidation in the advisor space
  • The FoFA reforms are coming into effect over the next year
  • The US government has imposed reporting obligations and costs on Australian financial institutions
  • In five years' time the financial advice marketplace will be dominated by big and integrated groups
  • Trend four: the spread of the online channel will come at the margins of the market
  • Online channel usage and attitudes have become polarized and stabilized
  • Consumers will begin to see refinancing as an activity simple enough for the online channel
  • Trend five: ATMs will evolve to offer more than just cash distribution
  • The use of ATMs has reached a stagnation point, which signifies a step toward the future of cashless payments
  • New generation ATMs will begin adding bank branch activities to the self-service kiosks
  • The move toward a cashless society lowers the usefulness of the traditional ATM role of cash distribution
  • Trend six: the new paradigm of banking will have clear basic products with low fees
  • New regulations in the wake of the global crisis have limited the risk banks are allowed to take and heightened the importance of fees
  • A lower risk/return environment makes it harder to charge high performance fees and commissions
  • The move toward transparency will benefit providers and products that can demonstrate added value
  • Adopting low fee platforms and cost-cutting will become more prevalent
  • Trend seven: banks will cope with low fee transactional banking by offering better targeted value-add products and services
  • There are now no fee mortgages, credit cards, and accounts, which have reduced important earners
  • Migrating consumers to premium accounts and product bundles will become more of a priority as fee income from individuals continues to slide
  • Banks will compete with products designed for specific social groups and consumer segments

APPENDIX

  • Data tables
  • Note on exchange rates used in the report
  • Data sources
  • Methodology
  • Further reading
  • Ask the analyst
  • Disclaimer

TABLES

  • Table: Top 20 mortgage lenders in 2011 by book size and percentage of overall lending
  • Table: Westpac Premium Financial Services' mass affluent offering
  • Table: Australian trade balance, seasonally adjusted and trend (A$m), 2007-11
  • Table: Outstanding residential mortgages on the books of authorized deposit-taking institutions (A$bn), March 2002 to October 2006
  • Table: Outstanding residential mortgages on the books of authorized deposit-taking institutions (A$bn), November 2006 to June 2011
  • Table: Average first home buyer mortgage and weekly wage
  • Table: Australian gross state product: chain volume measures (percentage changes), 2005-11
  • Table: Average annual wages per average first home mortgage
  • Table: Household debt to asset ratio, March 1990 to September 2011
  • Table: Housing debt as a proportion of total household debt, March 1990 to September 2011
  • Table: Total debt to disposable income ratio, March 1990 to September 2011
  • Table: Monthly mortgage lending commitments to owner-occupiers excluding refinancing (A$bn), January 2004 to December 2011
  • Table: Bank household fees by product over time (A$m), 1997-2010

FIGURES

  • Figure: Banks are no longer able to rely upon substantial margins from their lending business
  • Figure: Australian banks have shifted their liabilities to deposits, but retain substantial exposure to the debt markets to fund their lending
  • Figure: Monthly lending commitments were up in 2011, albeit still well below their 2007 peak
  • Figure: Major macroeconomic events in the eurozone in 2011
  • Figure: The S&P 500 VIX was elevated for much of the second half of 2012
  • Figure: The mining state of Western Australia has consistently outgrown the rest of the economy
  • Figure: Australia has a trade surplus supporting the currency since 2010
  • Figure: Resources play an important role in Australian exports
  • Figure: Australia's top three trading partners are China, Japan, and the US
  • Figure: The Australian dollar has strengthened against the US dollar since 2009
  • Figure: Australia has a relatively low level of public debt
  • Figure: Mortgage debt has grown substantially in Australia
  • Figure: Australian households have become gradually more leveraged over the last two decades
  • Figure: Housing debt has increased as a proportion of total household debt
  • Figure: Total household debt to total disposable income has recently started falling
  • Figure: Average first mortgages have increased faster than average wages
  • Figure: The Australian property market has been sheltered in the past from global negative economic forces
  • Figure: Home loans make up the bulk of a retail bank's lending, but some are more exposed than others
  • Figure: The mortgage to wage ratio has trended down in recent years, and this is expected to continue in the future
  • Figure: Bank lending to households has slowed considerably
  • Figure: Owner-occupier mortgage lending commitments excluding refinancing have been flat since 2008
  • Figure: GE Money has targeted the Australian refinance market
  • Figure: Banks have struggled to convince the public to use the online channel for all products
  • Figure: New payment tools will move consumers away from using ATMs
  • Figure: Interactive ATMs allow customers to speak with a live teller via video link
  • Figure: The Commonwealth Bank Kaching mobile application allows easy payments via smartphone
  • Figure: PIMCO has been able to offer investors a low cost way to access its managers' talent
  • Figure: UBank invites its customers to compare its proposition to its competition
  • Figure: Bankwest offers a no annual fee platinum credit card
  • Figure: Bank household fees have recently dropped, eating into profits
  • Figure: The ANZ Pacific Money Transfer Card provides a low fee option for small remittances to the Pacific Islands
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