October 2013

The Mortgage Lending Investment Bank?
The market is sitting up and taking notice of Macquarie’s bold plans to become a ‘fifth pillar’ in the Australian banking industry, adding a growing residential mortgage lending offering to its established investment banking suite. Is this just ‘testing the water’ for other lending products, or is Australia’s largest investment bank actually capable of achieving this?

East & Partners Deposit Funding and Debt Index (DFDI) closely tracks intricate changes in Australia’s Authorised Deposit Taking Institutions (ADI’s) lending and deposit taking ratios, in addition to market share and volume characteristics. A surge in mortgage lending over the last 18 months has been reflected in falling DFDI ratios for the banks with greatest exposure to this sector as they put their cash reserves to work.

Residential lending heavy weights include the Big Four, Suncorp, BOQ, Bendigo Adelaide and AMP. Their DFDI ratios have all tracked relatively smoothly in line with the trend since 2012, yet a noticeable pace setter and interesting case study in adaptability to changing market conditions is shown to be Macquarie.

A significant change in Macquarie’s DFDI ratio is emerging as the bank deploys its considerable cash balances in the form of an intermediated assault on residential mortgage markets. Immediately following the GFC in 2008 Macquarie effectively withdrew from property lending, resulting in its retail DFDI ratio rising to 1.20. A higher ratio indicates more deposits relative to lending balances.

Since the beginning of 2013 however Macquarie has made an astounding comeback, achieving property lending growth that will see the bank soon bracketed with larger regional lenders such as BOQ and Bendigo Adelaide instead of foreign owned banks with smaller residential property loan books such as HSBC and Citigroup.

Macquarie’s retail DFDI ratio decreased 60 percent since 2011 to 0.48 as the bank aggressively drives into the $1.3 trillion mortgage market.

Macquarie has achieved strong mortgage lending growth by expanding its stake in Mark Bouris’ Yellow Brick Road and Homeloans, along with a unique Qantas Frequent Flyer linked home loan package that has very effectively differentiated the bank from its well established Big Four competition.
Unlike the Big Four who increasingly rely on deposit funding as their principal revenue stream, the core business underpinning competitive mortgage lending propositions from AMP and Macquarie is wealth management.

AMP has successfully cross sold mortgages through its extensive financial planning network, and it appears Macquarie is now harnessing the full potential of its mortgage lending acquisitions and ‘Big Four Alternative’ status to diversify from its investment banking foundation.

The reason why more home loans are issued by the Big Four is their strong capital base and ability to provide more attractive rates. The larger scale of the Big Four, who account for over three quarters of all fixed rate loans, give them a significant advantage in sourcing funding and out pricing smaller lenders.

Borrowers in Australia have not had an exceptional array of competitive options to choose from until recently, with the regionals and Macquarie in particular shaking the mortgage lending market up. This will pose a unique challenge to CBA, NAB, ANZ and Westpac as they fiercely defend their dominant mortgage lending positions.

Low interest rates coupled with improved consumer sentiment have resulted in a rapid upshift in residential lending demand not only in Australia but also from abroad. Nearly half of all NSW mortgages in August were taken out by investors, with a similar increase in commercial property lending expected to be seen in early 2014.

Senior Markets Analyst Martin Smith comments “Credit growth in areas other than property is still taking time to develop, resulting in a strategic capital allocation swing to residential property lending”

“Macquarie has recorded impressive growth in this category however it is from a low market share base and remains to be seen if it can be maintained."

Smith said the sharp decline in Macquarie’s retail DFDI ratio indicates a fundamental shift in the way the bank allocates it capital.

"The effect this has on other banks in terms of their reaction to Macquarie’s unique competitive positioning of residential property loans will play out interestingly within the next DFDI report released next month,' he said.

MQG Deposit Balances / Lending Balances
MQG Bank Ratios


2011 2012 2013

Business Deposits/Lending Balances

4.13 2.43 1.76

Retail Deposits/Lending Balances

1.20 1.11 0.48

Total Deposits/Lending Balances

2.68 1.67 0.90

TOTAL Retail Deposits/Lending Balances

0.44 0.46 0.48

Source: East & Partners Deposit Funding & Debt Index Report - September 2013

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