Criterion: ‘Rebellious' banks are going for broker in their war against mortgage intermediaries
With home loan margins shrinking, the banks want to originate more loans in house
Mortgage brokers account for about 75% of all home loans written
The banks hope that better service via the use of technology will win back customers
The banks are redoubling their efforts to win back direct home loan customers from the mortgage brokers, having ceded these relationships by closing thousands of branches.
"Signs of rebellion are emerging,' says S&P Global Ratings in a new report.
While winning the occasional battle, they're still losing the war.
According to the listed broker intermediary Australian Financial Group (ASX:AFG), brokers account for 75% of all home loans – up from 59% three years ago.
When John Symonds' pioneering Aussie Home Loans opened its doors in 1992, the lenders saw the brokers as a convenient way to glean market share while reducing their physical footprint.
Now they are seen as a nuisance, pocketing a nice cut of shrinking mortgage margins.
Typically, the banks pay an upfront fee of 0.65% of the loan, with an ongoing 0.15% trial (aka money for nothing).
According to KPMG, the Big Four operated on an average net interest margin of 1.81% in the first half. So no wonder they're grumpy about the brokers stealing their lunch.
The biggest home lender, the Commonwealth Bank (ASX:CBA) claims broker-originated loans are 20-30% less profitable than own-sourced ones.
Tapping a younger audience
Clearly borrowers appreciate brokers for their ability to corral the best loans and present a panel of options.
Many of them perceive the service as free, but the cost is built into the interest rate.
According to S&P credit analyst Simon Geldenhuys, the banks believe that younger borrowers are more willing to engage directly via digital channels.
'While many Australians still favour person-to-person interaction for the biggest purchase of their lives, a new generation of tech-savvy borrowers continues to embrace digital solutions,' says S&P credit analyst Simon Geldenhuys.
'By digitising the mortgage process and offering greater price transparency, banks might dilute the mortgage broker value proposition."
The idea is that banishing the brokers means better returns for the banks and 'potentially better pricing for borrowers'.
Honing the attack …
S&P Global notes all the Big Four are investing in long-term tech infrastructure upgrades to support their own digital products.
This includes automating credit assessments and document verification, thus reducing application wait times to hours, or even minutes.
No prizes for guessing that AI will play a key role.
The CBA's key weapon is its digital direct arm Unloan, which offers a smaller range of simpler – and thus cheaper – loans.
At the National Australia Bank's (ASX:NAB) half-year results, CEO Andrew Irvine cited improving proprietary lending as one of the bank's three 'clear priorities'.
Over the years the banks have made stuttering attempts to overcome their addiction to brokers.
The Bank of Queensland (ASX:BOQ) renounced brokers in 2004, only to return to the market in 2012. Last year, it 'paused' broker applications as of August.
The Australia and New Zealand Banking Group (ASX:ANZ) has had a relationship with brokers that's been more off-again on again than Jennifer Lopez and Ben Affleck.
The branchless Macquarie Group (ASX:MQG) relies heavily on brokers – and has been winning market share.
Heading to a stalemate?
The battle could end up as a Ukraine-style stalemate, because the lenders that continue to deal with the enemy are likely to win market share.
If the banks prevail, the ones with the greatest upside are those with the greatest broker exposure: the NAB, Westpac (ASX:WBC) and the ANZ Bank.
The NAB and Westpac source about half of their loans via brokers, but with the ANZ the figure is more like two-thirds.
If the intermediaries win the battle of the brokers, AFG is the go-to stock.
A 'mortgage aggregator' AFG provides the back-office engine – such as tech, compliance and automated marketing – to a network of 4100 brokers.
AFG's December half numbers showed no sign of distress: settlements through its network hit a record level for a first half – $31.8 billion, up 13 per cent.
Also a lender, AFG accounts for one in six broker loans.
Mortgage Choice, another ASX-listed early mover, was acquired by REA Group in 2021.
With its catchphrase of 'we'll save you', the unlisted Aussie Home Loans thrived with its brazen anti-bank schtick .
Ironically, the Aussie was acquired by the CBA, which goes to show the battle lines in this skirmish are not a rigid as one might think.
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