Postfinance-hypo-entry gives bloodbath at cantonal banks

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A consulting company has prepared an analysis for Postfinance, what happens when the state bank is allowed to speak new mortgages and other loans. This is what the Federal Council wants; the banks, above all the cantonal, regional and Raiffeisen banks, are against it. They threaten to swim off the skins: the fat margins in the hypo business are likely to erode.

According to the consignor, the source text of the consultancy company was weakened beyond recognition – apparently for fear of disadvantages for the customer Postfinance. Here the article appears in the original version:

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Over the last few years, the volume of the mortgage market in Switzerland has risen steadily, reaching a market volume of around CHF 1,000 billion. This growth was driven, in particular, by historically low mortgage rates, which are due, among other things, to real interest rates on sight deposits with the SNB.

Thus, it was and is much more attractive for banks to lend mortgages than to park money with the SNB. Above all, the Raiffeisen- (Compound Annual Growth Rate CAGR, average annual growth rate in market share from 2011 to 2017: +2.67 percent, market share June 2018: 18.23 percent) and Cantonal banks (CAGR market share from 2011 to 2017: +0.78 percent, market share June 2018: 40.68 Percent) have significantly expanded and intensified their involvement in the mortgage market over the last few years.

This growth was at the expense of the big banks (CAGR market share 2011-2017: -2.26 percent, market share June 2018: 31.22 percent), which nevertheless, on an absolute basis, increased their own mortgage volume (2018 versus 2011: +16.11 billion Swiss francs or + 5.38 percent.

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However, a decisive change for interbank competition in the mortgage sector is likely to be the Federal Council’s decision of 5 September 2018 to allow Postfinance to grant mortgages. According to the 2017 Annual Report, Postfinance manages client funds averaging € 109.8 billion for 2.9 million clients.

Postfinance faces the dilemma of having to invest it profitably, without having previously had the opportunity to work in the credit and mortgage sector – an increasingly difficult task, especially with regard to the continuously eroding interest business. This also testifies to the fact that, according to CFO Kurt Fuchs, 35 billion can not be invested profitably today.

Immediately after the Federal Council decision was announced, Postfinance CEO Hansruedi Köng tried to dispel concerns by stating that Postfinance was only “aiming for a low percentage, single-digit market share (…) without triggering a ruinous price war”. Whether it will calm the other market participants?

It pays to take a closer look: The average duration of a mortgage in Switzerland is 7.71 years (source: own calculations based on NZZ articles), which means that with a market size of 1,000 billion, 130 billion are replaced each year and therefore by competitors can be competed.

Taking account of Postfinance’s market entry over two years, this would result in a market share of 9 per cent annual renewal volume in the first and 18 per cent in the second year – effectively representing “only” 3.5 per cent of the total Swiss mortgage market and thus Köng’s statement do not contradict.

If one considers that important criteria in the selection of the mortgage bank are a) the personal attachment to the bank and b) the interest rate of the mortgage, it is to be expected that Postfinance could gain a strong market position within a very short time.

Postfinance already has 2.9 million customers, and will probably offer extremely competitive mortgage rates, as even low, positive interest rates are likely to be preferable to the SNB’s negative interest rate. This strong position is likely to be at the expense of the Raiffeisen and Cantonal banks, since these are regionally anchored but are already among the more expensive providers. Therefore, it is likely that the pressure on margins in the mortgage market will continue to increase with the entry of Postfinance.