Fifth Pillar: Macquarie and Yellow Brick Road create new retail bank, 1.15% discount on new loans; Mark Bouris game changer to create mortgage competition like the 90s, undercutting big banks
Tweet Topic Started: 7 Nov 2012, 07:43 AM (5,358 Views)
AUSTRALIA could soon have a powerful new player in the world of retail banking, with Macquarie Group believed to be in talks with Mark Bouris' listed Yellow Brick Road Group over a distribution deal that could be unveiled as early as this week.
The deal would give Yellow Brick Road access to the billions of dollars sitting on Macquarie's balance sheet to provide home loans via Mr Bouris' network of more than 140 branches across the country.
News of the proposed tie-up circulated the Birdcage at Flemington on Tuesday, where racing tips and interest rate chatter usually dominate. The key rumour was that Australia's big four banks could soon have a fifth rival knocking on their door.
Well-placed sources revealed that Macquarie would return to the residential home loan business, and in a big way.
As an opening salvo, BusinessDay believes Yellow Brick Road and Macquarie plan to undercut the big four banks by more than a full percentage point on all new home loans.
''This could provide the fifth pillar that our banking sector has always needed,'' said a source close to the deal.
The deal marks a major strategic shift for Macquarie, which has seen many parts of its traditional investment banking model suffer in recent years. Last month Macquarie announced a $361 million profit for the six months to December. Of that Macquarie Capital, which houses the bank's once mighty mergers and acquisitions team, contributed just $10 million.
Doesn't Mac Bank have a lower credit rating than the Big 4? Meaning that its cost of funds would be higher than them.
Fifth pillar? Niche player more like it.
On a semi-related note, a few months back we heard that the Japanese banks were going to enter the "super profitable" home loan market here and change the whole banking landscape. Doesn't seem to have happened.
My name is based on a Seinfeld character, not on a belief of a housing bubble.
by Stephen Bartholomeusz Published 1:57 PM, 7 Nov 2012
The tie-up between Macquarie Group and Mark Bouris’ Yellow Brick Road that was flushed out by some loose lips at the Melbourne Cup may not create a fifth pillar in banking, but it does have the potential to have a major impact on the sector.
Macquarie and YBR are set to announce a partnership arrangement, perhaps supported by Macquarie taking up equity in YBR, that will see YBR distributing white-labelled mortgages and other retail financial products manufactured and managed by Macquarie.
In effect Macquarie will be re-entering the retail financial services space it largely vacated during the global financial crisis when concerns about its access to funding soared and the securitisation market its PUMA business had helped develop shut down.
PUMA had been a major source of funding for non-bank residential mortgage lending and, in particular, had propelled John Symond into a major force.
While Macquarie retains a relationship with Symond’s Aussie Home Loans, the shrinking of the securitisation market and Symond’s tie-up with Commonwealth Bank, which owns a third of his business and appears destined to eventually own the rest, meant Aussie wasn’t a compelling vehicle for Macquarie’s renewed ambitions in retail banking.
Macquarie wants to enter the retail banking space because of a combination of necessity and opportunity.
With its traditional investment banking activities reliant on the levels of activity in markets, and therefore struggling, the group has been putting its face in less volatile, annuity-style businesses like funds management and corporate and asset finance.
The corporate and asset finance business has been growing strongly, with Macquarie aggressively growing that division in the aftermath of the GFC, deploying funding it raised using the federal government’s guarantee in lending to higher-risk, higher-margin corporates and acquiring loan portfolios at discounts that produce very attractive returns.
With the group holding substantial excess capital (more than $2 billion) and liquidity expanding its lending business appears an attractive option, particularly as loans made within the entity that holds its banking licence are classified as "held to maturity" and therefore don’t have to be marked to market.
Getting back into residential mortgage lending in a big way looks even more attractive given that home loans have a very low risk-weighting and therefore generate leveraged returns – above 30 per cent – on equity. For a group struggling to lift its own returns on equity home lending is a compelling opportunity.
Macquarie has an exceptionally competitive source of funding for a large-scale entry into retail banking. Having moved its cash management business into the entity holding its banking licence during the crisis, it effectively turned the cash in those accounts into bank deposits.
The CMA product has helped grow the group’s retail deposit base to more than $30 billion. It hasn’t however, competed with the major banks in terms of deposit rates to attract those funds. The CMA is the platform of choice for financial advisers in managing their clients’ funds because of its functionality and reporting capabilities rather than the rates it offers. Macquarie can raise funds essentially at the cash rate of around 3.25 per cent.
Macquarie has been re-building its retail lending business but it doesn’t have a strong retail brand or the distribution network to leverage that funding cost advantage in retail financial services markets, which is where YBR comes in.
Bouris, who founded the Wizard Home Loans group before he sold it pre-crisis, is a masterful and, thanks to his hosting of the Celebrity Apprentice program on Nine Network, high-profile marketer who has been positioning YBR as a challenger to the majors. It also has a relationship with Nine, which has a 20 per cent stake in YBR that was paid for in cash and a hoard of advertising credits Bouris is yet to exploit.
YBR has about 140 branches – about half of the eventual network it is planning – and writes about $130 million of loans a month. It also has financial advice capabilities in its branches. With the YBR brand, Bouris’ marketing skills, the relationship with Nine and the distribution network YBR appears a vehicle that fits nearly with Macquarie’s ambitions.
It appears YBR will be a simple distributor of Macquarie-manufactured home loans and other retail financial services products, getting a fee and perhaps a small income share for its efforts. If the relationship works, however, it is inevitable that Macquarie will want to bring the business more deeply into its own structure.
The combination of Macquarie’s access to cheap funding, its systems and its acknowledged ability to manage risk – it will have full control of the asset quality of the loans YBR originates – and a strong challenger brand will be disturbing to the major banks.
Cheap funding, low distribution costs and Bouris’ ability to market the brand represent a potentially potent competitive combination in a home loan market that is low-growth and where the margins have been compressed by the funding cost pressures.
YBR might be only a small player but it could have a leveraged impact on the majors, with speculation that it will under-cut their home loan pricing by as much as a full percentage point.
The constraint on the banks’ home loan pricing has been the political sensitivity of mortgage rates and the persistent threat of increased regulatory intrusion into their affairs if they defy the politicians and fully pass on their increased funding costs.
A better structural check on bank profitability and the yet-to-be demonstrated downside of the increased concentration within the sector forced by the GFC is the entry of a new well-funded and resources competitor. The combination of Macquarie and YBR could have that potential.
Ian Narev told banking analysts yesterday that reports of the death of lending in Australia were exaggerated.
Under the deal, Yellow Brick Road will try to undercut the big banks' mortgage rates.
Financial services company Yellow Brick Road has formalised a deal with Macquarie Group that will see it competing with the big four banks in the residential home loan business.
The venture, first reported in BusinessDay this morning, will give the financial services company access to funding from Macquarie, and will use Yellow Brick Road’s 130-store retail footprint to offer ‘‘aggressively priced’’ mortgage products to consumers, the company said.
Yellow Brick Road chairman Mark Bouris - who set up Wizard Home Loans in 1996, which he later sold to GE Money for $500 million - said the deal would ‘‘bring back choice, access and competition like there was in the ’90s.’’
“Plenty of commentators, including politicians, talk about the need for competition,” he said. “This is a game changer that will take the big four head on.”
Under the deal, Yellow Brick Road will try to undercut the big banks by offering a 1.15 percentage point discount on all new home loans for the first 12 months of the loan. It will also offer a 0.86 percentage point discount for the life of the loan.
THE Mark Bouris-backed Yellow Brick Road has signed off on a deal with Macquarie Group that will see it competing with the big four banks in the nation's mortgage market.
The venture will see Macquarie fund mortgages through Yellow Brick Road's 130-store retail network, to offer ''aggressively priced'' mortgage products.
Mr Bouris, the Yellow Brick Road chairman, said the deal would ''bring back choice, access and competition like there was in the 1990s''.
''Plenty of commentators, including politicians, talk about the need for competition,'' he said.
''This is a game-changer that will take the big four head on.''
Under the deal, Yellow Brick Road will try to undercut the big banks by offering a 1.15 percentage-point discount on all new home loans for the first 12 months of the loan. It will also offer discounts for the life of the loan. Credit Suisse analyst James Ellis said the deal was ''bread and butter'' business for Macquarie, which orchestrated a similar contract with Aussie home loans 20 years ago.
Doesn't Mac Bank have a lower credit rating than the Big 4? Meaning that its cost of funds would be higher than them.
Fifth pillar? Niche player more like it.
On a semi-related note, a few months back we heard that the Japanese banks were going to enter the "super profitable" home loan market here and change the whole banking landscape. Doesn't seem to have happened.
True. Macquarie does not have the large branch network and the huge cost associated with this. This is why the big banks can never match the smaller players with much lower costs. A cheaper network far out weighs access to cheaper credit. Go ask a bank manager if you know any, they can never match the cheaper rates as they would be sellign credit for below cost.
The advantage Macquarie will have is much like Virgin airline vs Qantas, you have a much lower cost structure to sell the same type of products.
I have a loan with Macquarie, and its great service and great products. I have loans with Westpac, CBA, ANZ and Macqurie is the cheapest out of the all, none will match them on interest rates. They can get close, the best I got was ANZ who went to 5.9% vs Macquarie who gave me 5.79%.
I will certainly look to swap a few more loans to them for the 5.5% rate then in 12 months lock in what I think will be fixed rates below 5% or close to it for 5 years.
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