Research analysts have suggested that reducing broker commissions, and instead paying a fee, would be “an obvious area of savings” for banks if the market turned “bullish”.
In a recent Australian Banking Sector Update: Bulls bounce back. Do the Bears still have bite?, analysts Jonathan Mott and Rachel Bentvelzen set out scenarios over the future course the banks could take.
The note explains that the banks have had “a few big wins in recent week”, after a “very tough” second quarter when “everything seemed to go against them”.
Noting that APRA’s “light-touch definition of 'unquestionably strong' capital even took the bankers by surprise” and highlighting that “recent mortgage repricing are positive signs”, the analysts asked whether the banking industry was past the worst.
The update reads: “This has led to a clear turn in sentiment towards the banks and leads to questions as to whether it is time to again turn bullish on the banks?”
Outlining a Bull case – where the case rate remains unchanged at 1.5 per cent, capital headwinds have abated, the housing market remains resilient, state-based bank levies look “less likely”, mortgage repricing offsets slowing credit growth, and positive jaws (among other factors) — the analysts suggested that “substantial cuts to mortgage broker commissions look inevitable”.
The analysts write: “The major banks each have a focus on costs and efficiencies, particularly in an environment with a challenging revenue outlook. In this environment, the banks could tighten their focus on efficiency to help drive growth in pre-provision profits.
“We see an obvious area of savings for the banks from reducing payments to third-party providers, in particular mortgage brokers.”
Noting that the major banks have said they intend to adopt the recommendations of both the ASIC and Sedgwick Reviews into mortgage broker remuneration, the analysts once again reiterated their widely criticised estimation that brokers earn up to $4,600 per mortgage.
They write: “We estimate commissions were [around] $2.4 billion in 2015, which is equivalent to [around] 23 per cent of the cost of running the entire Personal and Consumer Banking Businesses for the major banks.
“This equates to an average commission of $4,600 per mortgage, which we believe is disproportionate for advice provided on a simple commoditised product. In our view, fees paid for simple Financial Advice ($200 to $700) is more reasonable.”
This marks the latest occasion where the analysts have slammed broker commissions, following a similar report which was lambasted by broker associations and industry members as being not only “ridiculous” but also “incorrect”.
Both associations have previously emphasised that the ASIC report had also not recommended “sweeping changes”, but instead “improve” the standard commission model, and highlighted that the ASIC report actually recognised the value in mortgage brokers, with chairman Greg Medcraft telling the media after the release of the report that brokers deliver “great consumer outcomes”.
Further, several industry commentators have also condemned the fee model, which they suggest could hurt consumers.
The UBS note goes on to outline a "bull case" where “consumers are the most over-leveraged in the world”, where APRA is “turning up the dial” on macro prudential measures, with borrowers migrating from Interest-Only to Principal & Interest “putting pressure on cash flows”, investor rates rising to 6.3 per cent, and a “challenging” political environment.
It reads that in this scenario, “mortgage repayments as a share of household income is near the highest level in a decade” despite the lowest RBA rate on record . . . [while] a 100 basis point increase in mortgage rates would result in mortgage repayments as a share of income “rising to GFC levels”.
However, the analysts concluded that the true outcome could be somewhere in between the two scenarios.
They conclude: “The near-term outlook for the major banks has clearly improved in recent times. . . . If global equities markets continue to rally and investors continue to cover underweight positions in the Australian banks . . . [it] would imply upside of around 10 per cent to current share prices, if everything goes right.
“However, we continue to believe the medium-term outlook for the banks is very challenging given the issues highlighted in the Bear Case. We believe this is likely to cap the upside to bank share prices and provide material downside if a more negative outcome is seen in the housing market or the political environment deteriorates.”