Banking is changing back to just savings and loans: mortgage expert

However, this is not any guarantee that major banks prefer one type of loan over the other.

James said: “You'll have to ask the banks.”

“They're all out to make a buck all right … ? Their shareholders obviously want profitability and they deliver significant profits to their shareholders,” Smart Property Investment’s Phil Tarrant added.

In the current state of the landscape, James believes that the Australian Banking Model is being challenged, and it’s expected to look very different in the near future compared to how it was in the past couple of decades.

“It's just not going to be sustainable … Banks are sort of changing the way they operate [because] there's a lot more scrutiny on them,” he said.

The mortgage expert, together with Phil and Momentum Media’s Aleks Vickovich, discusses how the banks are coping following the recent APRA changes and how the property markets will be affected over time:

How are the CEOs of major banks being scrutinized amid APRA changes?

James Mitchell: I've sat through and watched the Parliamentary Committee where all four major bank CEOs were basically grilled ... for two hours at a time. How much of your book is interest only? You sent out this press release on the 27th of June saying you hiked rates by 34 points—[is that for] all your customers? Not just the new ones to meet this requirement? And they're asking straight up: Did you measure that? What was the calculation? What was the modelling? Why did you get to 34 basis points?

What did the banks’ CEOs say?

James Mitchell: They said there's no calculation. It's a judgement. And then, CBA said they did it because everyone else did it … [It was] really interesting.

Which CEO did the best from your point of view?

James Mitchell: To be honest, Shayne Elliott from ANZ, I think … He's probably the most on the ball at the moment in terms of just getting his point across ... balancing out consumer outcomes with trying to run a bank in a different environment.

I think he's [also] quite open to change—he's even said that. I mean, they're sort of selling off their wealth businesses. They're streamlining the ANZ business completely. It's very different now and will be going forward, [from] what it looked like before when Mike Smith was CEO and they were sort of investing in Asia, [wanting] to be the super regional bank.

“Banking is changing back to almost just savings and loan”—what does this mean for banks and investors?

Aleks Vickovich: I think ANZ had less exposure to a lot of those problematic areas. I mean, the banks haven't done well in the wealth management space. They haven't done well in life insurance. They're just not well-suited to that type of business, so they are moving back to being savings and loans operations. That's easier to do for some than for others.

If you have a look at the case of Commonwealth Bank, for example ... some of the wealth management businesses that they bought in the late 90s and early 2000s … came with price tags of $100 million [or more], and they're effectively worthless businesses except if they're able to push financial products through those.

Has vertical integration—banks buying these businesses to provide better outcomes and establish better relationships with customers—worked?

Aleks Vickovich: Well, it hasn't worked at all. It's completely failed, but there's nothing nefarious about it, in general. I mean, vertical integration … just means that you own both manufacturing and distribution … So, if you're manufacturing Nike shoes and you own the Nike store, then you're vertically integrated.

What happened, I guess, in wealth management was that they have these financial products—we're talking about superannuation funds, life insurance policies, these types of products that Mums and Dads have for their long-term retirement savings—and they bought these distribution companies, financial planners, insurance brokers, and so on as a vehicle to push those financial products through. So, that in itself wasn't the problem.

The problem was that those industries that they bought were also professionalising at the same time … They were going through a process where they were needing to have higher education levels. They were becoming more akin to ... accountants or lawyers. Both by law, but also naturally in terms of where those industries were going, which means that they didn't want to be salespeople for products. They wanted to give unbiased advice like you would expect to get from your lawyer—those two things don't really go together, right? So a lot of those people said, "Well, we're not a distribution force. We're trusted professionals. So you can't turn us into salespeople." And when that happened, and the laws subsequently came in to back that up, [it] made those businesses less valuable from the perspective of the banks.

Should property investors be concerned about these issues?

Aleks Vickovich: There was nothing too nefarious about it. Arguably, they weren't honest enough about the fact that they owned the Nike store as well as the Nike shoe. So, there [were] disclosure problems … All the banks are trying to do is get a return for their shareholders, and despite all of the scandals after scandals they've had in the last few years, [there is] greater profitability for most of the banks than they've ever had before. So, they're doing pretty well.

But, I think, James is right. They're moving back to savings and loans. And I think it's a very important issue for everyone in the country, particularly for investors, because there's [a] direct relationship between the amount of competition in the banking sector and the sorts of prices that people get.

Is there a “big property bubble” in the Australian markets now?

Phil Tarrant: Aussie real estate is big business, right? And when you look at what gets channelled into the banks—the bank's profitability—I think 40 per cent of it is because of their mortgage business, so it makes sense for them to be in the business of mortgages and ensuring that Aussies can borrow to live or invest or whatever they want to do.

When you look at the market over the last sort of two years, everyone's been talking it down. It's this big property bubble. It's going to burst and things are dire, particularly in Sydney and Melbourne. You look at other markets like Perth that's 10 plus under where it should be. So they're hurting it, right? So every market's got different markets, right? But when you look at the Sydney property market, and Melbourne, they've been waiting for it to cool and come off for some time.

But even auction results the weekend just past were still pretty strong, right? Stuff's still going way over reserve. So, I don't know how much it's cooling.

What should property investors prepare for in the coming months?

James Mitchell: I think what'll be the big ... test for Sydney and Melbourne, in particular, is when the RBA starts tightening monetary policy and starts increasing rates … I mean, they don't really have much ... I reckon they're going to be on hold for some sort of world record time that a central bank can be on hold for rates … There's a few different opinions around. A number of the major banks can see two rate hikes next year and another two in 2019.

Tune in to Aleks Vickovich and James Mitchell’s episode on The Smart Property Investment Show to know more about the issues property investors are facing from major banks and government and their recommendations on how to overcome them.