UBS has advised CBA and Bendigo Bank against turning on the “broker taps” to try to win market share, saying that broker loans are higher risk than proprietary loans.
In its latest Australian banking update released on 19 February, UBS called recent moves by CBA and Bendigo Bank "prudent", as they refocus on proprietary channels at the expense of mortgage brokers.
CBA and Bendigo Bank have prioritised their own channels since APRA bolstered its macroprudential rules, including capping new IO lending at 30% of total new residential mortgage loans. CBA’s integrated approach to branch, online and mobile lending has also contributed to a lower percentage of broker-originated home loans.
As a result, the two banks’ lending volumes were weaker in the first half of FY18, with CBA reporting credit growth of only +0.6% and BEN +0.3%, said UBS.
As Australian Broker reported earlier this month, CBA’s retail proprietary channels accounted for 64% of home loan flows in the first half of FY18, up from 57% the previous year and significantly higher than the market rate of 44%. On the other hand, brokers accounted for 36% of the bank’s home loan portfolio, down from 43% at the end of June 2017.
UBS analysts Jonathan Mott and Rachel Bentvelzen said focusing on “higher quality” proprietary, owner-occupied, principal & interest loans is wise at this stage of the cycle.
“We believe the easy option is for banks to turn on the broker taps in an attempt to win share,” they said. “However, we believe mortgage broker loans are higher risk than proprietary loans, especially given their weighting to investor and principal & interest.”
Aaron Christie-David, Atelier Wealth’s managing director, calls this statement improper and unsubstantiated, and the lack of reference to the factors that make broker loans “higher risk” frustrating.
With APRA and lenders having reigned in investor IO lending, it is to be expected that investor principal & interest loans would increase, he said.
“If the goalposts are going to keep moving, driven by UBS, then perhaps they should be telling us what the goalposts are, rather than inciting channel conflict and customer confusion,” said Christie-David.
He pointed out a number of lenders rely heavily on brokers for their home loan businesses, including ING, Macquarie Bank, and AMP. “If broker loans were posing such a ‘high’ risk to these institutions, surely, they would have red flagged the channel as high risk.”
He also finds it discouraging that the UBS analysts labelled proprietary loans as “higher quality” without giving any benchmark of what they meant by “quality”.
He said it is only natural for lenders to prefer proprietary sourced loans as they invest significant capital and resources in their own channels. At the same time, these channels can become expensive account management as they focus more on existing clients and less on new-to-bank customers.
“The broker channel provides such a great opportunity to bring a new-to-bank client, which is clearly not a concept UBS seems familiar with,” said Christie-David.
Mott and Bentvelzen said they would be watching the trends – including a focus on proprietary owner-occupied, principal & interest loans – closely to make sure that “both CBA and BEN do not revert to the brokers and 'risk up' at the top”.
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