Bankwest Strategy A Cunning Attack On Big Four's East Coast Market

The Age

Wednesday March 23, 2005

STEPHEN BARTHOLOMEUSZ

THE team at the HBOS-owned BankWest know a sensitive area when they see one. Fresh from the early and unexpectedly large success of their first serious crack at the major banks in their core eastern seaboard markets, they are about to open up a new front.

The first significant move from the "new" BankWest - after HBOS took full control of the West Australian-based bank in 2003 - was last year's launch of two direct-channel savings products. In less than six months it has attracted more than $1.5 billion and added more than 15,000 customers.

BankWest says most of those customers are coming from the four majors and St George. The competitive impact and threat created by Britain's biggest, and fastest-growing, mortgage and savings bank has been taken very seriously by the local majors, who have responded with their own online and telephone-banking deposit products.

That response does, however, come at some cost to the established banks, for whom retail deposits are a highly profitable business.

In its Financial Stability Review, issued yesterday, the Reserve Bank noted that competition from high-yield internet deposit accounts was putting upward pressure on deposit rates. It also found the combination of increased competition for savings and the trend for households to invest a larger share of their savings in non-deposit products meant the majors were increasingly reliant on wholesale funding to finance their lending.

The bank that pioneered the online deposit account phenomenon in this market, ING Direct, has attracted $15 billion in deposits.

However, HBOS' size, the success of its offerings in Britain and the obvious strategy of using the savings products to gain a beachhead in the major states on which it can layer other products probably makes it a broader long-term threat to the majors than ING. Certainly BankWest's opening shots generated an immediate response.

Now the bank is about to launch its next major offering, or more correctly relaunch it. It is about to promote its "Lite" home loan product, with a 6.65 per cent interest rate, a $500 application fee that will be refunded on the third anniversary of the loan and, it says, no other fees or charges.

The refund is designed not just to reduce customer churn but to provide an incentive for customers to stick with the bank, thus providing an opportunity for BankWest to build relationships and cross-sell other products.

Undercutting its competitors just as interest rates are rising and customers are becoming unsettled is a clever and opportunistic strategy. The timing is even more strategic considering the channel. The Lite Home Loan will be originated primarily through the broker channel, with BankWest guaranteeing brokers that its commission rates won't be reviewed this year.

That is significant because all the majors have been reviewing and altering the deals they offer brokers. They have been shaving commissions and altering the structure of the deals and, not surprisingly, the brokers are unhappy.

The majors are also under pressure because their home loan margins have steadily eroded as competitive pressures in the segment have intensified. The RBA review noted that the margin between the banks' standard variable rate and the cash rate has fallen nearly 2.5 percentage points since 1993, to about 1.8 per cent.

The brokers are part of the explanation for that margin compression, given that they have been receiving upfront commissions of about 60 basis points and trailing commissions of about 25 per cent on about 30 per cent of the home loans being originated.

The big banks have, however, been able to offset much of the impact of the margin squeeze by sheer volume growth during the explosion in household borrowing. That growth has slowed markedly and may slow further given the recent rate rise, although mortgage-related lending is still at historically strong levels. Without the supercharged volumes, however, the lower volume growth may not offset the loss of margin and the banks will see their profitability squeezed.

BankWest has only a modest bricks and mortar presence on the east coast but has recently built a new processing platform, a replica of its parent's platform in Britain. HBOS is the biggest player in the broker channel in Britain.

By giving the brokers a very competitive product and leaving them with the commission rates they have become accustomed to, it can exploit their dissatisfaction and concern with the direction the majors are taking.

The economics of the model for BankWest would be quite different to the majors with their ubiquitous branch networks and competing channels, but the real opportunity is to build an east coast customer base by seizing the moment provided by the intersection of the impact of rising rates on customers and declining commissions on brokers.

Mortgages are the core retail banking relationship. If the strategy works, BankWest would have three years to sell the customers other products and eventually establish a full suite of banking products in the east. Credit cards, personal loans and wealth management/insurance products would be on BankWest's agenda.

With GE Capital having acquired the Wizard Home Loans business - which gives it the largest non-bank distribution network in the country - the established banks, both major and regional, are being circled by some of the biggest, most aggressive and most successful players on the globe.

bartho@theage.com.au

© 2005 The Age

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