Home loans: who’ll be king of the castle?
Latest bank results show that Absa is fighting hard to reassert its dominance in the lucrative home loans market
Will Absa reclaim the home loan crown?
Almost three years since announcing its plan to claw back its dominance in this coveted sector of the market, the bank still lags rival Standard by a considerable margin.
Absa’s share is now 23%, while Standard is comfortably top of the pile at 34%.
That’s a far cry from 2009, when Absa was responsible for one in three home loans written in SA.
Head of home loans Geoff Lee says that soon after Absa introduced its new operating model in 2016, originators and estate agents realised it was open for business again.
Unfortunately, by then it had surrendered its mantle to Standard Bank.
Still, in the first six months of 2019 Absa has ramped up mortgage registrations by 16%, and the number of mortgages sourced through mortgage originators by almost 25%.
Home loans are a powerful hook for banks as they lock clients into a relationship of up to 20 years.
But up to the 2008 financial crisis, mortgages were often treated as loss leaders: it was common to grant 100% mortgages, with no collateral, and loans priced at prime minus 2%.
Raj Makanjee, head of FNB Retail, says it is only since home loans were repriced after the crisis that these loans have started generating healthy returns on equity.
Standard Bank’s head of home loans, Andrew van der Hoven, says 80%-85% loans are now more typical, and most clients get charged just above prime. "Very few clients would now get prime minus 2% — perhaps just long-standing wealth customers who are getting a bond from us for the second time."
Lee says a home loan is very appealing because of the long-term relationship it leads to and the greater opportunities it gives banks to cross-sell products and services to a new customer.
Despite their ability to lock in customers over decades, scrapping on price is uncommon and mortgage rates vary little between the banks. Yet homeowners are clearly keen to get rid of their debt as quickly as possible: the average mortgage is paid off over seven or eight years.
In contrast, in the UK mortgages are churned between providers every two years.
Banks are anxious to portray home loans as a way they carry out a social good. Van der Hoven says Standard Bank’s mission statement is "Africa is our home and we aim to grow its wealth".
That was one of the reasons it decided in 2011 to spearhead an aggressive growth strategy in home loans. It proved to be very good timing as the historical market leader, Absa, was forced to cut its risk appetite significantly under pressure from its then parent, Barclays.
Lee says London-based Barclays had its own views about the amount of risk it was prepared to take in Africa, and risk control, rather than growth, was the key driver.
Absa’s withdrawal allowed Standard Bank to swoop in, and it built strong relationships with mortgage originators such as SA Home Loans and Ooba.
That paid off handsomely: over a decade Standard Bank’s market share increased by 10%.
While Absa is clearly keen to reclaim top spot it’s not exactly indulging in a lending free-for-all: Lee says the deposit requirements have been tightened, from 13% to 17% of the loan value.
Meanwhile, Van der Hoven says Standard Bank’s market share is topping out and it has begun withdrawing from some higher-risk buckets. Research from consultants Genesis shows that Standard Bank’s market share has fallen by 0.75% over the past year, with almost all of this going to either FirstRand (up 0.38%) or Absa (up 0.28%), with much smaller increases at Nedbank and Investec.
Nedbank’s home loans increased by 3.4% in the first half, which was ahead of the very poor overall market in the year to date. Of its 295,000 home loans customers, 40% also do their transactional banking at Nedbank.
Increasingly, would-be buyers are being put off by the cost of home ownership.
"Affordability is becoming more of a concern with the sharp increase in rates, electricity and water prices," says Van der Hoven
And the Basel 3 banking rules, now coming into effect, mean that home loans will need a higher capital allocation, he says. "We have already scaled down on revolving credit facilities offered on the back of home loans because of the punitive capital requirement."
FNB, arguably the bank that did the most to grow overall market share in the past decade, besides Capitec, is a clear laggard when it comes to home loans.
But, says Makanjee, "we are more concerned with the market share of profits than that of mortgages issued".
FNB has been growing faster in the affordable housing market — usually defined as houses priced R300,000-R700,000 — than in the pricier brackets.
In Standard Bank’s case, Van der Hoven says banks’ home loan divisions are not much exposed to the very large properties, as the banks give few loans above R8m. "Much of that [sector] is a cash market. Or people might borrow from their private banks and [not] use traditional bonds."
There has been a reduction in the number of bonded transactions every year for the past five years, particularly in freehold properties.
Today as much as 48% of property sales are nonbonded.
Van der Hoven says he is much more concerned about customer risk than about the risk of falling house prices.
"The sheer mismatch between the high bond payments in Cape Town and salaries, [which are] lower than those in Gauteng, brought prices there under pressure. And we are more choosy about the type of collateral we accept: we don’t consider vacant land to be desirable; it takes too long to dispose of it."