Whilst growth in lending is slowing in 2013, a Deloitte think-tank session concluded brokers would be capturing an increasing share of new settlements going forward.
Many novice chess players falsely assume that the value of a piece remains constant throughout the game. In fact, the value of the piece depends on the surrounding pieces and their position.
In the mortgage industry, the importance of the broking channel has always played a strategic role in banks’ ability to capture market share. Given that the mortgage market is expected to remain tight in 2013, it will be interesting to see how banks interact with the third party channel in their bid to win a bigger slice of the $1.3trn Australian mortgage pie.
In a Deloitte think-tank session, which was attended by aggregators, banks, non-banks and mortgage insurers, one of the key messages for brokers was that rate of new growth is expected to improve 5% in 2013.
“The feeling was that brokers would be capturing an increasing share of the market going forward of those flows,” says James Hickey, partner, Financial Services, Deloitte.
Whilst competition between banks for new customers is expected to gear up in the coming months, roundtable experts didn’t expect a rise in commissions to entice broker business. According to Hickey, banks and non-bank lenders are facing intense margin and cost pressure. He also notes that mortgage discounting and competition for deposit funding are squeezing lenders.
“On the positive side, not many on our roundtable viewed commission reductions as being a dominant feature in 2013. It might just be greater controls around quality and submission volumes and so forth.”
According to the roundtable, a boost to broker incomes in the coming years won’t be built on the back of commission increases: instead, successful brokers will be those who have improved their ability to cross-sell, focus on customer needs and leverage off that in their business.
The other key theme that will emerge, Hickey says, is successful brokers learning how to leverage their back book of customers far more effectively – through regular ongoing relationship campaigns with customers, focused retention efforts on higher risk customers, identifying which customer segments they’ve got and recognising the needs of those customers.
“If you like, actively farming the back book they’ve got, rather than treating it as a passive trail commission stream,” Hickey says.
One thing for brokers to understand is there is no longer just a choice between branch and broker, indicates the Deloitte report. More innovative online technology is starting to come through, but whether that is going to be a channel in its own right, such as digital, or whether it’s going to be more of an enabler to support broker groups, is still unclear. According to Hickey, forward-looking broker groups and brokers are looking at how to integrate the digital into their offerings.
“Brokers need to recognise when the landscape is changing and how to adapt your business model to address that. In particular the use of online, digital, automation and so forth. Certainly the larger broker groups will need to address that, much like lenders are, over the coming year or two.”
The emphasis on customer retention, leveraging opportunities in the back book and the integration of technology, mirrors the strategy experts described banks would be focusing on in 2013.
“Leveraging existing portfolios – the back book – is the least expensive and most successful approach to maintaining residential mortgage market share and earnings… more so than competing aggressively for new customers,” explains Hickey.
“Differentiation in this market will be defined by how the lenders balance their market share and earnings growth. For most lenders the mortgage portfolio is the largest engine in their business and creates the most enduring customer relationship for the bank,” he said.
“So driving efficiencies across end-to-end mortgage operations, and ramping up channel innovation through digital delivery to meet growing customer needs, will be increasingly important in 2013 if lenders are to maximise the potential of their mortgage portfolios and deliver the value to the broader organisation.”
Deloitte national banking leader Rick Porter points out that: “Using data to create better and more accurate decisions to meet customer needs, and matching that customer centricity with end-to-end operational excellence, is in our experience, the most likely way to succeed.”
Despite a combination of interest rate reductions and stronger personal balance sheets, the roundtable predicted flat property prices and poor consumer confidence would likely sideline many borrowers in 2013. Refinancing activity, however, is expected to still play a big part in brokers’ businesses going forward.
“It certainly was a big thing for brokers 12 months ago when discounts were very heavy and I still think the refinancing market will remain at the current elevated levels,” Hickey says. “A few reasons for that is consumers will continue to deleverage, and that’s a key trend that’s happening across the marketplace.
“But with that comes an increasing awareness of the cost of that debt which households have and obviously the households seeking price and certainly the perception of a good price from lenders which will keep refinancing activity bubbling along. And secondly, many borrowers aren’t quite yet ready to take the next step and buy that property that is the next step up the property ladder for them. They’re still seeking to keep their current property but optimise their financing on that. So again that speaks to refinancing. So with whatever limited growth there is in the market, certainly refinancing will continue to make up a reasonable share in that and current levels will continue in 2013.”
A return of the investor market was also identified by the roundtable as being an important trend in 2013. “Once property yields start to, or continue to, improve then investors will return to the market as they realise they can actually tap into banks and do the investment loans and if they get confidence in the property market itself for capital stability then they will actually return to the market which is an important trend which will start to emerge,” Hickey says.
Meanwhile, in the absence of there being any further stimulus or changes to the first home owner grant, the first home buyers market will probably remain status quo. The Deloitte roundtable did discuss that if a parliamentary enquiry should be held into the banking sector, one of the key issues to be examined should be first homebuyer affordability.
“It’s still an ongoing challenge in the marketplace, especially when there is a fundamental mismatch between demand and supply of housing stock,” Hickey says.
What to expect in 2013
Tighter competition between majors
Slower loan growth
Greater emphasis on cross-selling
Focus on creating greater efficiencies
Ramping up channel innovation through digital delivery
Use of data to create more accurate decisions around customer needs
Stable property prices
Lower consumer confidence
Borrowers looking to de-leverage debt
Major lenders’ risk profile to remain unchanged
Majors to offer more competitive pricing through subsidiary brands
Opportunity for smaller banks and non-banks to leverage risk appetite for ‘near prime’ borrowers
Mutuals will struggle to remain competitive
Rise of competition
Major banks are expected to continue to dominate the mortgage market in the coming months, but the door is open for increased competition from non-bank lenders and smaller players.
A slight level of improvement in the securitisation markets over the last six months has buoyed non-majors, but according to James Hickey, partner, Financial Services Deloitte, it’s still a reasonably delicate balancing act between funding markets being open and at a price that’s actually giving economic return for non-bank lenders.
“Certain non-bank lenders that have an expertise and a credit risk appetite further down the spectrum may have some opportunities to focus more on near prime borrowers, or customer segments where the major banks probably wouldn’t more readily play in. This would move them into areas where the major banks aren’t competing as aggressively but it does bring with it increased risk, and that’s a dynamic they have to be happy with.”
Given upcoming Basel III requirements and the need to protect and reinforce their AA credit rating, major banks aren’t expected to make too many changes to their lending criteria going forward. Mutuals will face diffi culties being competitive in the mortgage space and there is the possibility of a Parliamentary Inquiry to reset the balance between stability and competition. According to Deloitte Access Economics Partner Professor Ian Harper: “Mutuals, including credit unions and building societies, have struggled to remain competitive as markets raise their wholesale funding costs relative to larger institutions perceived as more stable.
“Because we are a capital importing country we have been obliged to sign up to a number of regulatory changes beyond those our own regulators had put in place. These new regulatory interventions will reduce the capacity of lenders to lend to small business, and to housing and rural customers.”
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