Australian Non Bank Lenders To Consolidate Further

Post by Sharat on December 29, 2008 · Under Featured Articles, Mergers & Acquistions, banking, home loans, insurance, loans, mortgages · Comment

The capitulation of GE Money, and the subsequent divestment of its Wizard Home Loans unit for just A$ 26 million, after having paid A$ 500 million for the business only 4 years ago suggests the outlook for non bank lenders and mortgage brokers is positively horrendous. The acquisition of Wizard by Aussie Home Loans and CBA bears the beginnings of a wave of consolidation for the industry in general.

GE Money paid Wizard founder Mark Bouris and James Packer up to $500 million for Australian Financial Investments Group, which includes Wizard and a third-party business, in 2004. The third-party business is in run-off after failing to find a buyer, and its Wizard subsidiary in New Zealand is similarly in run-off. The $26 million sale figure says as much about how desperate General Electric was to exit the Australian market as it does about just how far financial markets have deteriorated.

GE Money expanded aggressively in Australia and New Zealand in the past decade, spending about A$2 billion buying enterprises including Wizard, the credit card business of Coles and the hire-purchase interests of AGC. It is now withdrawing just as fast. In the latest filings with ASIC, GE Money Australia’s mortgage operations posted a net loss of A$5.7 million for 2007, compared with A$70 million in the previous year.

Remaining non-bank lenders, Resi Mortgage Corp, First Mac, Pepper Home Loans, Better Choice Home Loans, Beat Home Loans and a few others are either expected to shut down or merge as credit conditions worsen. Speculation is rife that listed mortgage broker Mortgage Choice will be the first target in a series of takeovers. Its share price has fallen by 75 per cent to 70 c over the last year, and its market cap is now less than $100 million.

Other mortgage brokers including Australian Finance Group, the largest mortgage broker in the country, are under pressure to diversify their earnings and combine with smaller players after lenders cut the commissions they pay to companies originating mortgages by up to 40 per cent recently. More credit unions and building societies are also believed to be considering merging to compete with the bigger players.

Smaller regional banks with a need to recapitalise may also use the merger or sale route in order to replenish their balance sheets. Suncorp, Bendigo Bank and Bank of Queensland have all been tipped to either merge or be acquired by a larger rival in recent weeks.

This year two of the Big Four Australian banking majors have acquired smaller rivals with Westpac purchasing St George and CBA having just been given permission to buy BankWest. CBA is also rumoured to be interested in buying Suncorp’s banking unit, though it may have problems getting that deal past competition regulators.

The Future Is Not Bright

The result of all of this is that the big banks are get bigger and smaller players are disappearing, leaving a distinct lack of competition in Australian banking, and the results are showing on interest rates. Australian Banks are charging their customer higher interest rates today than they were seven years ago, despite official lending rates being exactly the same level back then as they are today. The differential costs a family with a A$300,000 home loan as much $158 a month and lack of competition in the Australian banking landscape is the main reason behind the interest rate differential.

The Big Four banks have already doubled their market share in the home loan market from 45 per cent in 2007 to about 90 per cent at the end of November 2008. This figure is expected to keep increasing as securitisation markets remain shut for the foreseeable future.

For customers, the diminished competition will mean that banks have regained pricing power over savings accounts, credit cards and most significantly home loans.

To date, regulators have done nothing to stop this, having already waved through Westpac’s $17.5 billion merger with St George and Commonwealth Bank’s $2 billion merger with BankWest.

Competition regulators have taken a laissez faire view of proposed deals in recent months after financial market meltdowns resulting from the credit crisis made the idea of merging weaker lenders with stronger ones to prevent them from collapsing fashionable. There is little doubt however that customers benefit from having more banks, not fewer.

Lenders that have reduced their presence or exited include Majestic Mortgages, Macquarie, Bluestone Mortgages and Virgin Money. Virgin went as far as saying to customers that it could not offer loans and was steering potential customers towards eChoice on its website.

Aussie Home Loan’s Symond said 2009 would see more consolidation as credit markets remained closed and non-banks continue to take a beating. “They can’t lend money, they can’t secure liquidity and in mortgage broking the banks cut commissions by 30 to 40 per cent over the past four to five months,” he said. He said the decision to buy Wizard was based on scale. “This is a big volume, low margin business and we are on the lookout for further acquisitions,” he said. The merger will boost Aussie’s market share from about 3.5 per cent to 6 per cent, making it the biggest non-bank lender.

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