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The group executive for retail banking at ANZ has revealed the key drivers that make broking a less profitable channel than proprietary channel.
On Friday (8 November), the Australia and New Zealand Banking Group Limited (ANZ) released its full financial results for the financial year ending September 2024 (FY24), revealing that brokers were writing a record proportion of the bank’s new mortgage volumes in Australia.
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According to the results, the third-party channel originated 65 per cent of the major bank’s new home lending flow in Australia (excluding Suncorp Bank).
During an investor call, the bank’s senior leaders were asked whether they would prioritise proprietary lending – as NAB recently revealed it would be doing – in order to improve shareholder returns. Indeed, both NAB and CBA CEOs have recently said that broker loans had lower margins than the proprietary channel.
Responding to the question, the group executive for retail banking, Maile Carnegie, clarified the economics behind why proprietary and broker channel profit margins are different.
She said she didn’t believe the industry spent enough time talking about the nuances of why brokers are more or less profitable than proprietary channels.
Noting that broker margins are usually talked about in “a very blunt way”, she said: “I think the thing that people don’t spend enough time on is really getting under the hood and saying: ‘Why are brokers slightly less profitable than proprietary?’
“It’s actually not necessarily the commission that is being paid [to brokers].
“When you really look at it, the key drivers of that profitability difference are a combination of: how long a broker customer is on your book; and how engaged that customer is in your product beyond just a home loan.”
Carnegie said that in order to improve margins in home lending, banks needed to reduce their overall cost to acquire and service customers (adding that ANZ Plus would deliver this) and, specifically for brokers, look at the “how do you fix those underlying drivers of the profitability difference”.
She said that ANZ is starting to look at building propositions to partner with brokers about building engagement with their ANZ clients.
ANZ CEO Shayne Elliott said that while it was well known home loans are being written below the cost of capital, he added that the marginal returns on both proprietary and broker “are at, or above, the cost of capital”.
“We run our business on that marginal basis,” the CEO said.
“We don’t ignore the fully allocated but we run it on that margin. [So], what’s the marginal cost of funds, what’s the marginal operating cost, what’s the marginal brokerage cashbacks, all of that sort of stuff, etc – that’s how we run our pricing.”
He also stated: “We go where our customers go. The market is choosing to go to brokers; 75 per cent of the [mortgage] market goes through brokers. Now we can sit here and say: ‘We don’t want to compete; we only want to compete in 25 per cent of the market’, but we’d have a really, really small bank, right?
“So we had to find a way to have a proposition that is profitable, irrespective of channel. Hence, [ANZ] Plus, I mean, that is what we are doing now. We don’t think that the answer is to go and build more branches. We don’t think that because our customers don’t want to use them.”
ANZ Plus may eventually have sharper home loan rates: Elliott
The CEO said the bank’s new digital platform, ANZ Plus (onto which customers are being migrated over the coming years) has been built to not only improve efficiencies, but also reduce both the costs of manufacturing and operations for home lending.
He said that the bank may, in future, look at offering preferential pricing through ANZ Plus. (CBA currently does this through its digital-only refinance offering, Digi Home Loan.)
Elliott told investors: “We’re not there yet because we’re not sufficiently scaled to be able to make that meaningful. But you know, philosophically, of course we should have channel differences. If there’s literally a different cost to operate, I think that’s only reasonable.
“If you look globally you look in the US with Rocket Mortgages and things like that [then], absolutely, digital – you would imagine – [would] be more assertively priced. But, I think, you can do that and still [have] higher profit margins for the provider, i.e. the bank. I don’t think that all gets competed away.”
However, Elliott said having cheaper ANZ Plus mortgages than broker rates was not something “in the pipeline from right now”, but added: “But absolutely, I would imagine that’s the case.”
[Related: ANZ broker flows hit new record high]
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