November 8, 2019 / 4:03 AM / 2 months ago

Westpac CEO defends existing mortgage customer "loyalty tax"

SYDNEY, Nov 8 (Reuters) - Australia’s Westpac Banking Corp on Friday defended an industry practice of discounting loans for new mortgage customers, which leaves existing customers paying what critics have termed a “loyalty tax” saying it aided competition.

Chief Executive Brian Hartzer said it was not reasonable to expect Westpac, the country’s second largest lender, to lower rates for more than a million existing customers to match the discounts used to entice new customers.

“We’re essentially trying to balance up the disconnect between the demand for loans and the supply of funding of difference sources, and we seek to try to keep our net interest margin (NIM) ... relatively stable,” Hartzer told a parliamentary hearing.

Some analysts estimate the practice adds more than 10% to the earnings of the country’s so-called “Big Four” banks - Westpac, Commonwealth Bank, National Australia Bank and Australia and New Zealand Banking Group - which account for around 80% of the home loan mortgage market.

Lawmakers pressed Hartzer on the issue ahead of a scheduled inquiry by the competition regulator into mortgage pricing. The probe by the Australian Competition and Consumer Commission (ACCC) will look specifically at the pricing differential between new and existing customers and why the major banks have failed to pass on three official interest rate cuts this year.

“Repricing the entire book ... would have a major impact given that a lot of our funding is fixed for different periods of time,” Hartzer said.

If the ACCC review results in measures to fully close the pricing gap, or one of the four major banks were to self-disrupt the oligopoly, Morgan Stanley estimates their NIMs would likely fall by up to 15 basis points and their earnings by up to 12%.

Westpac has 11.2 million Australian customers, according to its annual report released on Monday when the bank reported a 15% slide in full-year cash earnings. A spokesman said the lender currently has about 1.6 million mortgages.

The new inquiry follows hot on the heels of last year’s government-backed inquiry into the financial sector that has so far cost banks more than A$8 billion in compensation charges for customers over mis-selling and related costs.

Reporting by Paulina Duran in Sydney; Editing by Jane Wardell

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