Banking outlook shows challenge for Big Four

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The big four banks certainly brought home the bacon this year, announcing record profits for the financial year ending 2011 to the tune of $23.28 billion.

No doubt consumers will be wondering how bank shareholders will cope with record dividend payouts, while shareholders will be perplexed about all the fuss. After all, as Paul Keating once said: "If there's one thing worse than a profitable bank, it's an unprofitable one."

Without argument our banks have provided a safety net for the economy in the midst of global economic woes post the GFC.

And as Australian Bankers' Association chief executive Steven Munchenberg said when defending the big four: "Unlike overseas, banks here did not fail, nor did they require government bailouts. Australia's healthy banks continue to keep our savings safe and to make loans which keep the Australian economy moving."

After 30 consecutive months without a rate cut, the Reserve Bank's decision to reduce the cash rate to 4.50 percent will no doubt boost confidence.

Depending on market conditions borrowers could see further reductions in interest rates.

Fixed rates have already seen a large drop, but until the property market comes alive borrowers can bank on lenders fighting for their business.

This means the promotions we saw on home loans in 2011 — remember the NAB break-up letters — should continue well into 2012.

"As competition heated up for home loan business, special discounts of up to 1.03 percent were being offered," says Canstar's mortgage and credit card specialist, Mitchell Watson. "I expect promotions to continue into the new year."

Of course the removal of exit fees on all new loans from July 2011 was a major domestic coup for home loan customers.

"It opened up the way for easier switching between lenders," says Canstar chief executive officer Andrew Spicer.

While this is true for loans taken out from July 1, it doesn't help with the hundreds of thousands of loans issued before the new law came into force.

The average early termination fee for banks sits around $1000, while non-banks can charge up to five times that.

Given exit fees typically apply if you repay or refinance your loan within the first five years, new homeowners are still stuck.

The same goes for people who don't have a 20% deposit.

If the government was serious about creating greater competition between lenders, it would remove the need for the double payment of lenders' mortgage insurance.

If you borrow more than 80 percent of the purchase price you pay a premium of up to 2 percent of the loan amount as insurance to your lender.

Until your loan to valuation ratio is below 80 percent, mortgage insurance applies each time you refinance to a new lender. So technically, exit fee or no exit fee, you are still stuck.

For those who can't be bothered swapping bank accounts because it involves the painstaking task of transferring all your direct debits and credit to the new institution, the tick and flick system due in July 2012 should be a treat.

"It promises that all current banking details will be transferred to the new bank by the old bank," says Spicer.

2012 will also see some long awaited credit card reforms.

As Watson says: "Cardholders will finally get some relief."

While some card issuers such as NAB are already doing the right thing, it is common practice to accept credit card repayments for the debt with the lowest interest rate first, leaving the higher interest balance to attract interest charges. This will change.

Other reforms include:

  • Stopping lenders bombarding consumers with pre-approved, tick-and-flick offers to increase their credit limits.
  • Preventing lenders charging fees to customers who go over their credit limit, unless they have expressly asked for this service.
  • Requiring all lenders to clearly warn consumers on their monthly credit statement of the consequences of making only minimum repayments.

Spicer also believes 2012 will be a year when the big banks keep a close eye on the mutuals.

In reply to the government's "fifth pillar" reforms to develop a more competitive and sustainable banking system for Australia, credit unions and building societies are moving towards trading as mutual banks.

Mecu Ltd, which now trades as bankmecu, is leading the charge. The mutuals hope to capitalise on banking opportunity by giving consumers more choice.

And that's really the idea behind these banking awards.

"Knowledge is power, and the Best of the Best Awards highlight products of merit that are worth adding to your shopping list," says Spicer.

Bankwest, for example, topped the scores in a number of categories, winning a massive six gold awards in total. Its flagship "zero fees" banking products go from strength to strength.

"By focusing single-mindedly on keeping its cost structure attractive, Bankwest remains at the forefront of low or no-cost banking," says Canstar's Spicer.

He notes that these awards send a clear message that sometimes consumers do really need to think outside the banking square.

"If you're looking for the best term deposit to park your money in, you won't find it with the usual big name banks," he says.

"This is the domain of institutions like ING Direct, Investec and Beirut Hellenic Bank. The rates speak for themselves but the names may not be that well known. If that's a concern, it is worth noting that the government guarantee still applies on all approved ADI institutions, albeit at a lower rate of $250,000 rather than $1 million after February 1, 2012."

The same applies on the home loan front with mutuals and non-banks such as Pacific Mortgage Group giving the majors a jolt.

Spicer adds: "In these times where most of us struggle to find enough hours in the day, these awards provide an invaluable service to help consumers with better choices of financial products. At the very least they're a great starting point for your own research."

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Effie Zahos is editor-at-large at Canstar and a financial commentator. She is the author of A Real Girl's Guide to Money: From Converse to Louboutins, and a regular money commentator on TV and radio across Australia. In 1999, a background in banking Effie helped kickstart Money, which she edited until 2019. Effie holds a Bachelor's degree in economics.