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Housing loan growth re-accelerates after national housing prices stabilize

Households increasingly vulnerable to global interest rate rise

Fujitsu Australia Limited

Sydney, April 19, 2006

A surge in housing credit growth in 1QCY06 and rising Loan to Valuation Ratios (LVRs) on variable rate loans has resulted in more consumers being vulnerable to global interest rate rises than ever before, a new report from JPMorgan and Fujitsu has found.

The Australian Mortgage Industry Report (Vol. 3: April 2006) is a joint venture between JPMorgan and Fujitsu Australia, focusing on recent developments in the Australian mortgage industry, based on Fujitsu Mortgage Market and Yield Improvement Modeling.

“A surge in housing credit growth in the first quarter of 2006, set against the backdrop of further declines in residential construction activity, reflects a stabilization in national house prices and an increased willingness by consumers to borrow on higher LVRs,” said Brian Johnson, Banking Analyst, JPMorgan Australia.

“Increasingly, Australian households are heavily leveraged into residential property and with approximately 85% of home loan outstandings at variable rates, the risk of rising global interest rates on this increased level of consumer indebtedness is being borne directly by households, not the banking sector,” he said.

The report identified a number of important consumer trends that highlight the impact of competition and the growing sophistication of the household lending sector. A key finding was that customers, having previously used mortgage brokers to arbitrage mortgage prices between banks, are increasingly using multiple mortgage brokers to verify offerings.

“More than 85% of customers now use more than one broker when searching for a mortgage, with over 20% using three or more brokers. These statistics suggest that use of the broker channel is maturing as customers become more comfortable dealing directly with brokers,” said Martin North, Managing Consulting Director, Fujitsu Consulting.

“The internet is increasingly being used by mortgage borrowers as a price discovery mechanism, while our research also found that 29% of customers found broker web sites easier to use, compared to 21% for bank web sites. These results suggest that the internet is being used increasingly in the research stage of buying a home loan,” he said.

Other consumer trends identified in the report were:

  • Owner-occupied refinancing is making up a larger share of total loans (significantly, mortgage brokers are capturing a larger share of refinancing than other sectors)
  • Mortgage market participants have responded to slowing volume growth by offering lower rates and ‘attractor’ packages
  • The proportion of broker-originated home loans continued to rise to around 35%
  • The non-bank mortgage intermediary industry is starting to consolidate.

Australian Prudential Regulation Authority (APRA) statistics to the end of February 2006 indicate that housing loan market shares for the major banks have declined slightly, regional banks have stabilized, and non-banks/foreign banks have picked up modest incremental housing share.

“Each of the major banks has lost market share in their branch networks, with the notable exception of ANZ. This market share loss continues despite significant reinvestment in branch networks, particularly by CBA and ANZ, after long periods of branch closures and disinvestment,” said Mr Johnson.

“Generally, sales through the branch network are underperforming relative to sales through other channels, in particular third-party mortgage brokers, which now account for an estimated 45% of new housing lending volumes,” he said.

The reliance of the major banks on third party broker originated mortgages continues to increase and the banks must act to reclaim the pricing power associated with the distribution function.

“The tacit support of mortgage brokers by banks is weakening the distribution strength, and ultimately the pricing power, of the banks,” said Mr Johnson.

The report also presents a detailed review of the operating efficiency of the Australian mortgage industry based on the Fujitsu Consulting Mortgage Industry Cost Index (MICI).

Operating efficiency will become an increasingly important issue for the Australian banking sector going forward given the confluence of emerging competitive cost pressures from new entrants on lending and deposit margins; burgeoning capital expenditure bills on IT systems and compliance issues; and the need to reinvest in the proprietary branch networks to recapture pricing power.

“Costs and fees charged to consumers in Australia are up to 35% higher compared with the US and UK mortgage markets,” said Mr North.

“Industry players in Australia still have the capacity to drive greater operating efficiency out of the mortgage business while reducing fees and maintaining profitability.

“Major re-engineering of mortgage lending processing, servicing and credit processes is evident at CBA under its CommWay and CommSee programs and WBC under its Pinnacle and Reach programs.

“At least 25% of the mortgage sales cost can be removed from the mortgage supply chain through automating the interface between customers, lenders, lawyers and surveyors.

“The wide gap in average mortgage origination costs between the best Australian mortgage lenders at A$540 and the worst at A$1,349 highlights the potential savings available to the industry by improving the mortgage origination process,” he said.

The report identifies nine levers available to the Australian mortgage industry to improve operating efficiency:

  1. Introduce fast track processes for low risk conforming loans
  2. Implement a streamlined ‘shopping’ process built around needs-based selling to tailor suitable product options
  3. Enable automated underwriting and decision making via real time integration
  4. Deploy customer-centric, consistent processes across all contact points to enable faster processing of service and sales requests and an enhanced standardised customer experience
  5. The pro-active management of applications in progress by utilising automated escalation management
  6. Fully integrated imaging, document management and workflow
  7. Automated provisioning integration with seamless automated funds requests and provisioning through enterprise application integration to existing legacy financial systems
  8. Streamlined broker management with work only commenced on an application after an automated process has ensured 100% of data requirements have been supplied
  9. The establishment of a single customer view to enable cross-selling on an automated basis.

An interview with Mr Phil Naylor, CEO of the Mortgage Industry Association of Australia, is also included in the report.

Download a free copy of the Australian Mortgage Industry Report – Volume 3 Whitepaper here

About Fujitsu Australia Limited

Fujitsu is a full service provider of information technology and communications solutions. Throughout Australia and New Zealand we partner with our customers to consult, design, build, operate and support business solutions. From strategic consulting to application and infrastructure solutions and services, Fujitsu has earned a reputation as the single supplier of choice for leading corporate and government organisations. Fujitsu Australia Limited is a wholly owned subsidiary of Fujitsu Limited of Japan. For more information, please see:

About Fujitsu Limited

Fujitsu is a leading provider of customer-focused IT and communications solutions for the global marketplace. Pace-setting device technologies, highly reliable computing and communications products, and a worldwide corps of systems and services experts uniquely position Fujitsu to deliver comprehensive solutions that open up infinite possibilities for its customers' success. Headquartered in Tokyo, Fujitsu Limited (TSE:6702) reported consolidated revenues of 4.7 trillion yen (US$44.5 billion) for the fiscal year ended March 31, 2005. For more information, please

About JPMorgan

JPMorgan Chase & Co. (NYSE: JPM) is a leading global financial services firm with assets of $1.2 trillion and operations in more than 50 countries. The firm is a leader in investment banking, financial services for consumers and businesses, financial transaction processing, asset and wealth management, and private equity. A component of the Dow Jones Industrial Average, JPMorgan Chase has its corporate headquarters in New York and its U.S. consumer and commercial banking headquarters in Chicago. Under the JPMorgan, Chase and Bank One brands, the firm serves millions of consumers in the United States and many of the world's most prominent corporate, institutional and government clients.
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Company:Fujitsu Australia and New Zealand Limited

Date: 19 April, 2006
City: Sydney
Company: Fujitsu Australia Limited