Australian banks likely to takeover mortgage brokers: Deloitte

Corporate finance partner Peter Riedel says that since 1998, Australian mortgage settlements have more than doubled from $A86 billion ($NZ93.3 billion) to about $A200 billion in 2004 and that mortgage brokers’ share of that has gone from 10% to as much as 35% of some lenders mortgage books.

"Based on the increased size of the mortgage market and current average commission rates (60 basis points upfront and 25 basis points trail), we estimate mortgage broker groups generated around $A600 million dollars in revenue in 2003," Riedel says.

That reflects "an extraodinary compound average growth rate of the order of 37% per annum" over the past five years.

But the Australian industry is highly fragmented with the top five players accounting for 48% of revenue and the top 100 accounting for 90%.

"The halcyon days of a booming property market are, however, beginning to turn. The broker industry itself is emerging from its infancy and heading for its next stage of development and maturity," Riedel says.

Independent brokers are facing increasing competition from banks, including ANZ Bank and Commonwealth Bank of Australia, establishing their own franchised broker networks. This competition and the downturn in the housing market is likely to lead to lower commission levels.

At the same time, costs of things such as regulation and technology will rise, making industry consolidation to provide economies of scale inevitable, he says.

To date, only a small number of transactions of mortgage broking firms have occurred, the most recent and most significant being GE Money’s $A435 million purchase of the AFIG Group, which includes Wizard Home Loans and a broking arm, Borrowers Choice. GE’s entry into the market may be a precursor to further consolidation activity.

But while there will probably be mergers and acquisitions among mortgage broking firms, it is also likely that the banks will want a piece of the action. "A substantial portion of the mortgage profit margin, the distribution margin, that used to be earned by the banks is currently flowing to the brokers," Riedel says.

The most recent profit reporting season implied that one of the reasons for declining interest margins among the big banks was loss of distribution margin to brokers, he says.

However, there are a number of problems with banks purchasing mortgage brokers directly, including the risk of compromising a broker’s brand image of being independent. "The implied promise that the consumer will get the best deal with an independent broker has clearly been a major contributor to growth."

But this problem could be solved if the bank’s wealth management operations did the acquiring. Riedel argues that mortgage broking is to some degree complementary to financial planning and that such an acquisition should lead to cross-selling opportunities.

"In my opinion, the combination of financial planners and mortgage brokers makes sense both from a business perspective (for planners and their banking parents) and from a cultural perspective, which is critical to the success of mergers in the financial services sector," Riedel says.

While the banks traditionally have adopted an "order taker" model as their prevailing sales culture, both brokers and planners "employ a hunter/gatherer culture to generate sales leads," he says.

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