Banks face fees squeeze in price warAuthor: Joyce Moullakis and...

Banks face fees squeeze in price war
Author: Joyce Moullakis and Stewart Oldfield
Date: 24/08/2004 / AFR

A price war has erupted between Australia's leading banks as they fend off increased competition from global players amid a slowdown in mortgage lending.

The fiercest competition has been in the $300 billion retail deposit market, the traditional battleground for winning new customers, which the banks are now targeting as the first step to cross-selling loans and wealth-management products.
Last month, National Australia Bank joined ANZ Banking Group in introducing an everyday account with unlimited free transactions, and St George has also sought to simplify its transaction fee structure.

NAB waived its home loan establishment fees earlier this year and is now aggressively pricing interest rates on cash management accounts in a bid to regain market share following its currency trading scandal.

The rush of new deals recently prompted Westpac and HBOS Australia to warn of "unsustainable" pricing in the industry.

While Commonwealth Bank chief executive David Murray welcomed fiercer competition on fees, he suggested the bank might not join NAB and ANZ in offering unlimited transaction accounts.

"We believe they are trying hard and we are trying harder," he said.

"We price for sustainable delivery to customers."

A survey by The Australian Financial Review of the latest earnings results of the major banks provides early signs that growth in bank fees may be levelling off, after a decade characterised by hefty annual increases in bank charges, capitalising on a the big build-up of household debt.

"Right now we are at an inflection point where you have NAB and ANZ particularly easing back on fees to get more customers on board," JP Morgan banking analyst Brian Johnson said. "It tells you that we are heading into a period of an earnings slowdown.

"What has created the strong earnings growth of the banks has been very much an oligopoly pricing regime, and you are starting to see that breaking down."

The exception for consumers is credit-card fees, which have risen sharply as banks have moved to pass on the impact of the Reserve Bank of Australia's reforms, which halved the hidden fees banks charge among themselves to process credit.

Five years of soaring bank fees recently prompted Labor leader Mark Latham to push for the Australian Competition and Consumer Commission to be given formal oversight of bank fees and charges, a ban on unsolicited promotion of higher credit-card limits and forcing banks to offer basic fee-free accounts to health-care-card holders.

Westpac is believed to be close to launching a new fee-free transaction account for social security cardholders, which will comply with the Labor Party's demands for basic bank accounts that have up to 15 free withdrawals per month.

The big banks also face increased competition from internet-based players such as ING Direct, which has accumulated more than 720,000 personal savings accounts and deposit balances worth more than $12billion. It offers a 5.25per cent interest rate and fee-free online banking linked to a traditional account.

Citibank is aggressive in the online high-interest-bearing bank account market, offering 5.4 per cent and two free monthly transactions, after which ATM fees are $2.

While CBA's profit results for the year to June 30 showed a 12 per cent increase in lending fees, they also revealed a 5 per cent decline in fees and commissions in the six months to June 30, compared with the previous half-year.

Analysts attributed the decline to the Reserve Bank of Australia's credit-card reforms and price competition in several areas of retail banking.

The latest half-yearly profit results from other big banks showed they are benefiting from a continuation of strong home-loan growth and related fees. But while they tend to report fee income differently, particularly the payment of upfront commissions to mortgage brokers, their results for the six months to the end of March showed early signs of moderation in total fee growth.

After removing the impact of its acquisition of the National Bank of New Zealand, ANZ Banking Group noted that non-interest income "was flat" in the six months, with lending fees up 2 per cent and non-lending fees increasing 3 per cent.

Westpac Bank said the fees and commissions it received in the same period were up 2 per cent to $1.2billion, largely boosted by lending fees as transaction charges remained steady.

NAB recorded a 7.3 per cent reduction in fees and commissions in the half, while loan fees were up 3.2 per cent.

But NAB chief executive John Stewart last week dismissed claims that the bank had initiated a price war to win back customers.

"We haven't started any price war," he said.

"We're reacting to the people who have been attacking our customer base. All we are doing is defending our customer base."

St George Bank reported a 1.7 per cent decrease in fees and commissions as lending charges stayed steady, and transaction account fees declined compared with a year earlier.

"There were a couple of areas where we deliberately traded off some fee income for some better growth in interest income," St George's chief financial officer, Steve McKerihan, told The Australian Financial Review. The bank announced a review of its fee and collection methods at its interim results. Mr McKerihan said he expected it to be completed by the end of September so that implementation could begin in October.

But he also conceded that the review could lead to fee increases. "We do see the opportunity for some increased revenues in our non-interest income in future periods," he said.

"There may be increases in some areas, but it is way too early to be speculating on which areas."

St George's Freedom account carries a $6 monthly fee if the balance is below $1000, in exchange for 10 free withdrawals and unlimited internet and telephone banking transactions. The bank waives the monthly fee for balances above $1000.

Australian Bankers Association director Nick Hossack said a shift to electronic banking channels was helping banks control costs.

"That cost control issue is keeping a lid on fees and charges," he said.

But the banks are now moving to user-paid structures on new technology platforms, with the average price of an internet banking transaction rising to 25y last year from 20y five years ago and the average price of a telephone banking transaction rising to 45y from 30y five years earlier.

The increases come just as Australian consumers embrace the alternative payment technologies, with the use of ATMs increasing by more than 50 per cent over the past four years while the use of cheques has fallen by more than 30per cent.

The move has outraged consumer groups, who say the banks are now exploiting customers it has pushed on to its preferred technology platforms, while also raising fees in other non-traditional areas. "It is good to see the fees coming down on transaction accounts, but overall I don't think fee revenue is declining," the finance policy officer at the Australian Consumers Association, Catherine Wolthuizen, said.

"Fees may be coming down in some areas, but they are being matched in other areas."

She highlighted fee growth in penalty and dishonour charges, ATM withdrawal fees for foreign transactions, and ATM cash advance charges.

While no one is claiming the banks are not still ratcheting up fees, most expect the the rate of growth to slow.

"You were coming off a fairly high base last year when banks did a lot of repricing of various transaction and other accounts," ABN Amro's banking analyst, Jonathan Reoch, said.

"Banks generally now assume that fee income growth is not going to be a major driver as it has in the past, so they will have to be a lot smarter about how they extract fees from customers in the future."

The latest Reserve Bank of Australia data for 2003 showed total fees charged by banks amounted to $8.7 billion, reflecting growth of 12per cent on a year earlier.

But the RBA numbers were buoyed by a 38 per cent surge in credit-card fees, as banks last year imposed significant increases in annual and other fees to help offset the impact of an industry overhaul by the RBA.

Macquarie Equities banking analyst William Ammentorp said it would be increasingly difficult for banks to sustain growth in fees.

"We think as a percentage of total income, fee revenue will have to decline, and our argument has been that that fee growth is unsustainable because banks are just running out of new fees to apply and how much they can increase fees," he said.

Analysts expect banks will compete more on fees, as home lending slows and competition from global players heats up.

"They realise now that the longer they retain a customer, the more the loyalty builds up; and the more you know that customer, the more products you can sell to them," ABN Amro's Mr Reoch said.