Unmasking the non-bank lenders

By InvestSMART · 20 Dec 2012

By InvestSMART ·
20 Dec 2012

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AS SHARES in the Commonwealth Bank hover close to record levels, lifting the country's biggest provider of home loans towards a market valuation of $100 billion, it is worth considering how the banking industry in this country has changed since the dark days of financial calamity in 2008 and 2009. Those were rollercoaster years of investor anxiety as the unsound lending practices of some of the world's biggest financial institutions were laid bare, toppling some and forcing others into mergers with stronger partners.

Some Australian banks spied investment opportunities amid all the uncertainty and, as they mopped up smaller lenders, the local industry began a period of significant consolidation. Bank investors may be winners but what about the consumers?

In 2008, Westpac bought RAMS Home Loans and St George Bank (including Bank of Melbourne). CBA paid $2.1 billion for Bankwest in October 2008, just two months after it bought 33 per cent of mortgage provider Aussie Home Loans. And in December 2008 Aussie Home Loans bought its rival, Wizard Home Loans. It is worth noting that CBA's share price has more than doubled since mid-2009. Now CBA has agreed to lift its stake in Aussie Home Loans to 80 per cent, and it has an option to move to 100 per cent later. The deal, which requires clearance from the competition regulator, already has raised some concerns about the real level of competition in the local market.

Bankmecu is one rival calling for greater transparency for consumers. It wants bank-owned mortgage providers that operate under non-bank brand names to disclose their ultimate ownership in all advertising - a move Bankmecu must hope will help it win customers disaffected by CBA, Westpac, National Australia Bank and ANZ.

A vigorously competitive financial industry, prudently managed and firmly regulated, is vital to Australia's interests. A lender that can rely on the financial backing of a strong bank is to be welcomed, but genuine industry competition only flourishes if these lenders operate at arm's length from parent banks.

The major banks' repeated reluctance to pass on Reserve Bank interest rate changes in full, coupled with the inevitable delays in implementing such changes, only enhances scepticism about banks' integrity and industry competition. If smaller lenders become mere puppets of parent banks, offering the same rates and fees on loans, then consumers will be worse off and so will this economy.

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Frequently Asked Questions about this Article…

What does the article mean by 'non-bank' mortgage lenders and why should investors care?

In the article 'non-bank' mortgage lenders often refer to mortgage providers that trade under non-bank brand names but may be owned by major banks. Investors should care because ownership links can affect competition, pricing and consumer trust in the mortgage market—issues that can influence banking sector performance and valuations.

How has bank consolidation since 2008 changed Australia’s mortgage and banking landscape?

Since the 2008–09 financial turmoil many Australian banks bought smaller lenders, driving significant consolidation. Examples in the article include Westpac buying RAMS and St George (including Bank of Melbourne), CBA paying $2.1 billion for Bankwest and taking a stake in Aussie Home Loans, and Aussie buying Wizard Home Loans. This consolidation has reshaped competition and market structure for home loans.

Why is Commonwealth Bank’s move to increase its stake in Aussie Home Loans controversial for competition?

CBA has agreed to lift its stake in Aussie Home Loans to 80% (with an option to reach 100%), and that deal must get competition regulator clearance. The article notes this has raised concerns about the real level of competition in the mortgage market when large banks increase ownership of non-bank brands.

What transparency changes is Bankmecu urging for bank-owned mortgage providers?

Bankmecu wants bank-owned mortgage providers that operate under non-bank brand names to disclose their ultimate ownership in all advertising. The article says Bankmecu hopes this greater transparency will help consumers spot when a lender is actually backed by a major bank and may appeal to customers disaffected with the big four banks.

Does bank backing make a non-bank lender better for consumers or investors?

The article suggests bank backing can be welcome because it means strong financial support, but it cautions that genuine competition only flourishes if those lenders operate at arm’s length from parent banks. If they simply mirror parent-bank rates and fees, consumers may be worse off and the economy could suffer.

How do major banks’ handling of Reserve Bank interest rate changes affect consumer trust and competition?

The article highlights that the major banks’ repeated reluctance and delays in passing on Reserve Bank interest rate changes fuel skepticism about banks’ integrity and the level of industry competition. Slower or partial rate pass-through can undermine consumer trust and raise competitive concerns.

What role does the competition regulator play in bank acquisitions of non-bank lenders?

According to the article, deals like CBA’s move to increase its stake in Aussie Home Loans require clearance from the competition regulator. That review is important because it assesses whether the acquisition would harm competition in the mortgage market and affect consumer outcomes.

As an everyday investor, what signs should I watch for when assessing non-bank lenders and banking competition?

Watch for ownership disclosures (who ultimately owns the lender), major bank acquisitions and regulatory clearance outcomes, how lenders pass on Reserve Bank rate changes, and whether acquired non-bank brands operate independently or simply mirror parent-bank pricing. These signals can indicate how competitive and consumer-friendly the mortgage market is—factors that affect bank and non-bank investments.