A Bigger Slice Of Pie

At that time, the non-banks had wooed away a significant share of the market from the banks. Much of this was down to a sharp price advantage, but there were also other compelling reasons for borrowers to turn their backs on the bigger lenders.

Complacency spanning several decades had cost the banking sector dearly. Pioneers such as Mark Bouris and John Symond capitalised on this market opportunity in the ‘nineties and captured the imaginations – and loan volumes – of thousands of Australians.

Times have changed, however, and as the non-banks’ price advantage withered away, so too did their reputation.

Panic-stricken consumers fled to the safety of the banks during the global financial crisis (GFC), with the majors capitalising on a blanket of misinformation and confusion around the non-banks.

The sector has by now recovered some of its lost ground, but the non-banks still have a long way to go before they can claim to have recaptured their former glory.

Non-banks now account for just 12.5 per cent of all loans written – down from 20.4 per cent in 2007 – according to the latest Australian Finance Group data.

But while their market share might be lagging, interestingly, the non-banks still occupy an important and unique position within the broking industry.

The Adviser’s broker sentiment survey for the last quarter of 2010 revealed over 80 per cent of brokers surveyed would recommend non-bank products in the coming quarter – almost 7 per cent more than this time last year.

Since the survey’s launch in 2008, the non-banks have never fallen below 70 per cent – even in the darkest days of the GFC.

So, why this discrepancy between broker sentiment and volumes?

Many brokers appear to be still worried about embracing ‘alternative’ lenders, highlighting the scars that remain at consumer level.

Several brokers told The Adviser the consensus is that borrowers don’t know who the non-bank lenders are. They are therefore less inclined to trust them than they would a major bank brand.

Non-bank lenders are simply not as able as the big banks to market to the consumer, which creates a challenge for brokers who are in principle open to working with the non-banks.

So, while brokers are not unwilling to work with the non-bank sector, the non-banks need to do a lot more if they are to realise their full potential.

INCREASING THEIR PRESENCE

Some, it is true, have already begun making a bid to step up their public visibility, aiming to carve out for themselves a more dominant position in the retail space and to boost market share.

Meanwhile, on the pricing front, Homeloans revised its rates in a bid to play the majors at their own game. While pricing is not the be-all and end-all, it certainly does help put the non-bank sector on a par with the majors, says Homeloans’ general manager, third party distribution, Tony Carn.

Of course, non-bank lenders cannot compete with the majors on price all the time. Moreover, it would be difficult for every non-bank lender to succeed in the retail prime mortgage space as this is not their traditional area of expertise, says FirstMac’s managing director, Kim Cannon.

Historically, non-bank lenders have offered products that fall just outside the conforming loans offered by the majors. These products were perceived as a genuine alternative, assisting borrowers who had been turned away by the major banks to obtain finance.

The non-bank sector’s credibility and market share – and competition in the Australian mortgage market – took a beating during the GFC when several lenders were forced to drop out of the market due to higher funding costs.

Ultimately, this sullied the reputation of the entire sector, Mr Cannon says: “The non-bank sector was suddenly no longer perceived as a reliable and safe alternative to the majors.”

Policy decisions that were sensible at the time have unintentionally bolstered the competitive advantage already enjoyed by the Big Four banks, leaving fewer options for brokers and their clients.

Less competition favours neither the borrower nor the broker as it could, among other things, lead to reduced broker commissions and greater lender selectiveness.

However, if the deck seems stacked against the non-banks at present, it would be wrong to assume there is no competition out there.

Liberty Financial took significant steps to increase competition in the prime space in September 2010 by cutting up-front fees on its prime products.

Provident Capital, Mortgage EZY and Australian First Mortgage have in recent times also come out with competitive products for prime borrowers.

Lenders including Liberty, Pepper and Better Mortgage Management are also providing competitive products for the self-employed and borrowers with more specialised needs.

According to Bendigo and Adelaide Bank’s general manager, third party lending Damian Percy, competitive options are available to those who are looking.

THE HALF-OPEN DOOR

The major banks’ decision to move out of cycle with the Reserve Bank in November may give birth to fresh business opportunities, according to Mr Percy.

The November rate movements infuriated borrowers and encouraged them to act on their dissatisfaction – brokerages including Aussie, Loan Market and Mortgage Choice received an unprecedented increase in refinancing enquiries.

Borrowers were not the only ones to express irritation with the majors. The federal government spoke out, while mainstream media jumped on the bandwagon with a fervent round of bank bashing.

Non-banks and brokers would be “silly” not to capitalise on the backlash, says FirstMac’s Kim Cannon. “This bank bashing is karma,” he says. “We were hung out to dry after the GFC; now the big banks are getting a dose of the same medicine.

“Some, though not all borrowers will be looking for a viable alternative to the majors – which is where the non-banks come in. Any lender that does not capitalise on this opportunity is silly.”

However, while the door might be open for non-bank lenders to discuss alternatives with borrowers, their dissatisfaction is not currently enough for non-banks to claw back the market share lost in recent years, says MAS Funder’s director Troy Phillips.

FUTURE OPPORTUNITIES

According to Mr Phillips, it is now up to the government to step up to the plate and introduce measures that will improve non-bank funding access.

“We need a government-sponsored Residential Mortgage Backed Securities (RMBS) market that can price and trade our RMBS and put liquidity and certainty into mortgage pricing,” he says.

His comments are echoed by Bendigo and Adelaide Bank’s Damian Percy. While the government has already made an extremely positive contribution through the Australian Office of Financial Management’s direct investment in the RMBS market, according to Mr Percy, he would welcome that commitment continuing until the securitisation market is functioning effectively of its own accord.

“I think there is merit in elements of the Canadian model and similar structures whereby governments support very specific and defined assets rather than guaranteeing – implicitly or otherwise – an institution as a whole,” he says.