Banks stocks have emerged worse for wear from last month's profit season, but their outlook just got a little dimmer on news of a potential mortgage rate war.
The Commonwealth Bank of Australia (ASX: CBA) has reportedly cut its interest-only mortgage rate to win back market share and the other three big banks are expected to follow suit, according to a report in the Australian Financial Review.
The big banks made a miscalculation when they raised rates on this mortgage product as they tried to lower their lending risks at a time when property prices were falling.
The AFR wrote that the banks have been "massively over-estimating the impact of lending caps on their loan books" as banking regulators have moved to restrain the growth of these interest-only loans to 30%.
The Commonwealth Bank has stepped too hard on the brakes and its growth has ended up around a low 20%. Its new chief executive Matt Comyn is now trying desperately to rebuild the business and has cut interest rates on its one-to-four-year fixed interest-only loan rate by around 50 basis points.
Smaller lenders have not wasted time to snatch market share off the big boys and the assault by the nimbler rivals has coincided with a period of no-to-low growth for the banking sector that is struggling with weak credit growth and record high household debt.
The other three big banks, which include Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ), will have little choice but to respond as they face the same pressure from shareholders to prove that the sector has not gone ex-growth.
I was already wary about the banking sector before today's news as I think the banks are facing increasing headwinds through 2018, not least of which is the Banking Royal Commission that could pave the way for class action lawsuits.
A land grab by sacrificing margin for volume is not ideal and brings back memories of the bruising supermarket wars between Woolworths Group Ltd (ASX: WOW), Wesfarmers Ltd's (ASX: WES) Coles supermarket & Aldi. A battle that contributed to a few years of lacklustre returns.
Perhaps more significantly, the move by Commonwealth Bank shows that the systemic risks in the industry are far from being under control by our banking regulators.
Any resurgence in the popularity of interest-only loans will contribute significantly to a devastating fallout from a potential housing market correction.
Worse still, the fallout won't be only confined to the banking sector. There probably won't be any safe place on the share market to hide.
But this isn't the time to panic although investors should be cognisant of the risks. The Australian economy is still expected to pick up steam and that is good news for stocks in general.
There is one sector in particular that the experts at the Motley Fool are bullish on. Click on the link below to get your free report on this sector and to find out what stocks are best placed to benefit from this investment thematic.
