The JP Morgan Australian Mortgage Industry Report (Vol.23) noted that return on equity (ROE) for bank mortgage books has fallen from 40 per cent to 25 per cent since 2008.
JP Morgan banking analyst Scott Manning said non-mortgage ROEs are at GFC lows, hovering around the cost of capital (just above 10 per cent).
Overall bank ROEs are around 14 per cent, which is the level required to fund an 80 per cent dividend payout ratio and growth of 4 per cent, Mr Manning said.
In order to avoid a cut to dividends, the major banks may be forced to "draw a line in the sand" on mortgage profitability and reassess their product pricing, he said.
"Given the current return profile and demonstration of re-financing preferences, we would expect the major banks to pursue more rational risk-based pricing of mortgages ahead of market share ambitions after quite a period of dislocation over the last 12 months," said the report.
The change in the banking landscape since 2007 "is not to be underestimated", said Mr Manning.
"Regulatory capital requirements since 2007 have tripled, while profit has ‘only’ doubled," he said.
The "more worrying trend" is that non-mortgage ROEs are currently around the cost of capital, making mortgages the primary capital generator of the major banks.
"[Mortgages are] effectively funding the growth across the entire business and thereby a key contributor to dividend affordability," Mr Manning said.
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