A Bouris-Macquarie mortgage magnet?

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.

YBR announced the 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.