Joint J.P. Morgan and Fujitsu Consulting Australian Mortgage Industry Report, Vol 10

Sydney, October 06, 2009

The major banks have stamped their dominance on the mortgage market, and are now investing significantly to secure their advantage with a focus on reducing cost and driving innovation, according to a new mortgage industry report. Competitive tension between the big four banks is expected to increase as the Global Financial Crisis moves into its next phase.

The joint J.P. Morgan/Fujitsu Consulting Australian Mortgage Industry Report (Volume 10, October, 2009) also explores the fact that the expected household de-gearing has not materialised and as a result, loan growth will slow, and affordability will deteriorate as interest rates rise.

Locally, the major banks are still in the box seat and are the major beneficiaries of market consolidation and the funding pressures experienced by wholesale lenders. Globally however there are still significant risks.

“While there has been some early signs of a turnaround for the non banks with volumes experiencing a modest recovery, the market share of the major banks has risen to 82 per cent, up from approximately 67 per cent prior to the onset of the GFC,” said Scott Manning, Banking Analyst at J.P. Morgan.

“Globally the GFC has a way to go, with four trillion dollars of bad loans still to be dealt with, and many banks being supported by direct government intervention and guarantees. This support needs to be unwound carefully, and in a coordinated manner, or else a further wave of difficulty is possible, with local ramifications,” said Martin North, Executive Director, Industry Group, Fujitsu Australia.

“The outlook for Australian housing volume growth remains extremely challenged,” Mr Manning said. “At the same time, despite the positive impact from the first homeowner grant, volume growth remains below the long run trend and we see limited acceleration potential going forward.

“Government support in the form of the first homeowners grant saw growth rates modestly recover to a three month annualised growth rate of eight per cent since October 2008, however we see median loan growth stabilising between six per cent and seven per cent over the course of 2010 and 2011,” Mr Manning said.

The report also noted that expectations of household de-gearing have proven unfounded to date.

“Housing outstandings as a percentage of disposable income rebounded to an all time high at approximately 150 per cent. Household interest payments as a percentage of disposable income, while falling dramatically following initial rate cuts, hold the potential to return to approximately 11 per cent of total disposable income if interest rates increase by two per cent.

“This increased ‘gearing tolerance’ reflects the strength of the first home-owner market grant – and is particularly notable given that the cut in interest rates undoubtedly has had a materially positive impact on disposable income,” Mr Manning said.

Fujitsu’s Martin North added: “This higher state of gearing means that Australian property is some of the least affordable globally and as rates rise into next year, affordability for many will become a real issue.”

The report highlights the significant investments being made by the major market participants in terms of innovation and cost. Mr North said: “All major players are increasing their focus on reducing or pushing cost out of their business model and looking to reduce the reliance on manual processing, and drive automation and innovation.

“Beyond a tactical focus on costs, many players are looking more strategically at their mortgage business. One of the key themes is Customer Centricity. Building a business from a customer’s perspective, this customer centric approach is critical as market participants focus on fast return on investment delivery and a preference for flexible models to optimise capital expenditure,” Mr North said.

Fujitsu Consulting’s Mortgage innovation Cycle identifies the six key themes:

• Optimising valuation process could yield savings in excess of 40 per cent. Efforts include the adoption of Automatic Valuation Models, appropriately matching valuation types to policies, and active procurement of valuation services.
• Reducing Rework with rates of less than five per cent being achievable. Over 50 per cent of all Australian loans require rework through the application assessment processes. This needs to include an assessment of what data is essential to facilitate approval (policies do vary), one time issue management, and better exception handling.
• Simplifying Redraws with savings in excess of 30 per cent achievable. Some players require as much effort for a minor modification of a loan as for a new loan, even if the customer history is complete.
• Simplify Product Portfolio with cost savings of 50 per cent achievable. There is a significant cost in maintaining a complex mix of product types and features (from systems to paperwork).
• Optimise IT/Virtualisation with 20-30 per cent savings potential in some instances. Many players are spending more than necessary of their IT systems. Developments such as unified communications, software as a service, and cloud computing can yield significant IT savings.
• Early Leads Screening could result in a 40-60 per cent cost savings. The sales process and “time to yes” is often inefficient. Applications which are unlikely to be authorised should be rejected at point of origin. For others, Point of Sale Approval is a valid option, and also improves customer experience.

Separately, Fujitsu Consulting surveyed of 26,000 banking customers split into 11 different segments and found:

• Increasingly, borrowers are motivated to refinance purely by pricing. This bodes best for the major banks which are equipped to provide the cheapest lending. However, it bodes poorly for growth prospects for housing affordability in general.
• Consumers continue to see little differentiation between products from various lenders. In fact, nearly 90 per cent of respondents cannot see any differences between bank mortgage products.
• While nearly 40 per cent of respondents are willing to use a broker, they are less inclined to use their services than 12 months ago. Whether the strengthened position of the banks as a consequence of the GFC is sustained as funding markets recover and interest rates rise remains untested.

An interview Steve Weston, General Manager, Distribution – Broker Platforms & Lending at Challenger Financial Services Group is also included in the report.

The Australian Mortgage Industry Report (Vol. 10, October 2009) is a joint effort between J.P. Morgan and Fujitsu Consulting, focusing on recent developments in the Australian mortgage industry, based on Fujitsu Mortgage Market and Yield Improvement Modeling.