Credit crunch causes banks to scrutinise mortgage profitability
Inefficient processes hitting banks, consumers hard
Fujitsu Australia Limited
Australian banks looking to improve mortgage business profitability in the wake of the global credit crunch need to radically review their use of brokers and lift processing efficiency, according to a new mortgage industry report.
The joint JPMorgan/Fujitsu Consulting Australian Mortgage Industry Report (Volume 7 March 2008) also questions the validity of the banks’ mortgage stress testing. “Brokers have retained a disproportionate share of the ‘mortgage profitability pie’ which the banks will not allow to continue in perpetuity,” said JPMorgan banking analyst, Brian Johnson.
“Banks are using the current environment to break the status quo of using brokers to boost market share and to reclaim the pricing power associated with the distribution function, such as their branch networks,” he said.
Among the report’s key findings was a six percent fall, from 45 percent to 39 per cent, in new loans written by brokers in the six months to December 2007 as volumes through non-bank lenders virtually stalled due to their inability to economically fund in wholesale markets.
Fujitsu Consulting’s Managing Consulting Director, Martin North said inefficient mortgage processes were hitting both banks and consumers hard.
“Australian mortgagees are paying up to 35 percent more than they should in fees because of longstanding inefficiencies in the industry,” Mr North said.
“It takes weeks generally to get a mortgage funded, compared with a few days overseas. There is a shocking amount of manual handling of mortgage applications, and associated error rates and rework.
“This failure to keep up with best practice bites into the banks’ ‘mortgage profitability pie’ and the hip pockets of their customers,” he said.
“That means more radical use of new technologies and business process like point-of-sale confirmed offers. In the medium-term we see the industry evolving like the funds management industry in Australia has done. This will create the opportunity for mortgage platforms which drive efficiency and enhanced customer experience,” he said.
The report also concluded Australian banks are showing no discernable deterioration in their housing portfolio stress test results, despite storm clouds gathering on the horizon.
“Australian households are still highly geared. A 25 basis points increase in interest rates increases the interest burden on home loan borrowers by an estimated $1.7 billion,” said Mr Johnson.
Fujitsu Consulting’s updated Mortgage Stress-O-Meter continues to confirm that more than 700,000 consumers will experience some form of stress by June 2008, with a significant and growing proportion – more than 300,000 slipping into the severe stress category.
“Even more affluent customers are feeling the heat,” Martin North said. “This ‘Affluent Stress’ is hitting customers who are normally insulated from rate rises, but a combination of factors - rising rates, hikes in school fees, and margin calls on shareholdings are creating a ‘perfect storm’ Australian banks cannot afford to ignore.”
Other key findings of the detailed review of the mortgage industry include:
- The certainty of fixed rate borrowing appeals to households. The proportion of households engaged in fixed rate borrowing has surged to 24 per cent, up from 15 percent, in the last six months;
- System housing growth has contracted from a peak three month annualised growth rate of 23.4 per cent in November 2003 to 10.4 per cent in January 2008; and
- Pricing premiums are being restored with initial LVRs contracting as lenders assess the risk profile of their residential lending books.
An interview with Peter Golovsky, Head of Partnerships Distribution – Insurance, BT Financial Group is also included in the report.
The Australian Mortgage Industry Report (Vol. 7: March 2008) is a joint effort between JPMorgan and Fujitsu, focusing on recent developments in the Australian mortgage industry, based on Fujitsu Mortgage Market and Yield Improvement Modelling.
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Date: 13 March, 2008
Company: Fujitsu Australia Limited