June edition2010 - MPA (10.07)
For mortgage brokers, it is more than straws in the wind. Competition among lenders is coming back into the Australian market - not with a roar but certainly with more than a whimper.
The Big Four, of course, still hold sway. In March this year, Commonwealth Bank and Westpac had 50% of the market between them, and National Australia Bank and ANZ took another 13.2% and 12.5% share, respectively. Since the GFC, the Big Four have therefore increased their market share from 65% to 76%.
It has been a significant shift, and that this shift has occurred in the wake of the GFC is hardly surprising. In this difficult environment, the banks were competitive on pricing, consumers returned to the brands they trusted (if not liked), and other forms of lending such as securitisation, which had emerged in the early 1990s, simply dried up. But there is now growing evidence that the Big Four are treading water in terms of their share of this market, and that other lenders are making a comeback. Securitisation is re-emerging and smaller banks, credit unions and building societies are beginning to flex their muscles.
The evidence is not just anecdotal, although in talking to brokers there is plenty of circumstantial evidence about. According to independent research and consulting firm Market Intelligence Strategy Centre (MISC), the December 2009 quarter was a milestone, with the Big Four banks actually ceding market share to the regional banks and the latter growing their place in the sun to 24%, up from 20.6% in the previous quarter. This gain by the regional banks is the third consecutive increase in successive quarters seen in 2009.
MISC added that there were also further signs of smaller non-bank lenders re-emerging as some of the larger lenders provided seed funding for new lenders, and niche players developed specific 'broker only' offerings. Significantly, this market shift in the December quarter occurred while loan volumes fell 13% to just $16.3bn. In a recent speech to the Mortgage Innovation Conference, Assistant Governor (Financial Markets) of the Reserve Bank, Guy Debelle, provided more evidence of this welcome trend. "The outlook for the smaller lenders has improved since mid-2009. The securitisation market is starting to recover, with the volume of issuance to non-Australian Office of Financial Management (AOFM) investors picking up and secondary market spreads decreasing," he said.
"With the securitisation market showing greater vitality in recent months, the housing loan market remains contestable. Any widening in margins is likely to attract new competitors into the market. Already, the improvement in securitisation has encouraged some of the smaller lenders back into the market and encouraged some brokers to again look to increase their own mortgage lending. With these developments, the provision of mortgage credit in Australia is likely to continue to be adequate in a competitive marketplace."
JP Morgan banking analyst Scott Manning, who helps author the six-monthly Australian Mortgage Industry Review, is of a like mind. "Mortgage originators, credit unions and building societies were showing signs of a comeback after having lost their share to the banks over the past year," he said. "Credit union and building society capacity to originate profitable mortgage flow was severely crimped, due to deposit compression of the funding base in a rapidly falling interest rate environment. More recently, they have modestly increased volumes as legacy term deposit rates have reset, allowing them to participate in the first homeowner uptick."
That's the macro picture; the news coming from lenders is also encouraging. ING Direct, which is the fifth biggest mortgage lender after the Big Four, announced its mortgage portfolio rose by nearly 4% to $36bn in 2009. Unlike its major competitors, ING doesn't boast a branch network, with its business going direct through brokers (75%), white label arrangements (20%) and direct (5%).
That banks such as Citibank are able to push back into the market is not all that surprising. The GFC might have seen "a flight to government guarantee", but these lenders continued to maintain their relationships - even as business was slowing. They remained active in talking to their broker partners. They realised it was critical to remain engaged and provided support at a time when the ability to use wholesale funds didn't make commercial sense.
Now that the markets are thawing it is allowing them to become more competitive and provide viable lending options to brokers.
For Bankwest, the emphasis today is on the quality of the loan the broker brings to the table - not the quantity. At the same time the bank is working closely with its broking community to ensure all parties get the paperwork right the first time around. It's all part of a focus on excellence. But as more confidence returns to the mortgage market, Bankwest, which traditionally has had an extensive broker network, can be expected to pick up the volume of loans - further evidence that the second-tier banks are reasserting themselves.
But perhaps the most interesting development has been the re-emergence of the securitisation market. In November last year, ME Bank issued $782m of residential mortgage-backed securities (RMBS); in March this year it returned with an issue of $673m. Other lenders to enter the market are BoQ and Aussie Home Loans.
Yet this market will not return to its pre-GFC form, at least for a while. At that time, about one-third of RMBS were structured offshore. The liquidation of this part of the market generated an overhang of stock in the secondary market that took time to work its way through the system. But with that overhang being largely yesterday's story, and with spreads narrowing significantly, domestic issuers are returning that haven't required the support of the AOFM.
Jeff Zulman is chief executive of Vow Financial