Smaller lenders have plenty to gain by pushing loans through the third-party channel. But are the benefits mutual? The Adviser’s James Mitchell explores how brokers and their clients can profit from customer-owned banks.
In a market where turnaround times are blowing out and banks are cracking down on certain borrower segments, an alternative lending solution is always a good idea. Consumers are becoming increasingly receptive to other options as the big banks face ongoing scrutiny over numerous scandals and calls for a royal commission grow louder.
The mutuals have always championed a community-focused, customer-comes-first approach to banking. It’s a strong and purposeful message, though one with limited impact in a market dominated by the majors. But times are changing and so are consumer attitudes, not to mention a stronger mortgage proposition and full suite of banking products from the mutual sector. Brokers are also becoming more willing to engage with those mutual banks they may have overlooked just a few years ago.
Mutual banks: an overview
KPMG’s 2015 Mutuals Industry Review, a performance survey that reported on credit unions, building societies and mutual banks, noted that the introduction of capital reforms for investment lending (as recommended by the Financial System Inquiry) levelled the competitive balance across the home loan industry — to the benefit of mutuals.
Put simply, the report notes that as larger banks have raised interest rates on investment and residential loans, mutual offerings have become more competitive.
The winds of change certainly seem to be favouring mutual lenders for now, but it’s worth noting that these smaller players also face their share of challenges. Particularly those that became banks just in time for APRA to unleash its 10 per cent investor lending speed limit and capital requirements. Some players like Teachers Mutual Bank were forced to exit the market altogether for a brief period.
Since 2010, mutuals with Tier 1 capital of at least $50 million have been able to apply to present themselves as a bank. MyState and Auswide took advantage of this and converted to bank status. IMB Building Society converted to a mutual bank (IMB Bank) on 1 August 2015. Australian Defence Credit Union became Australian Military Bank last year. Great Building Union is now Greater Bank. Queensland Police Credit Union has become QBANK, and so on.
Australian Military Bank explained its decision to convert by observing that “the term ‘credit union’ is not readily understood by younger generations. Thus becoming a mutual bank helps to promote the long-term future of the organisation”. Hume Bank (previously Hume Building Society) says it provides “the same products and services as a bank; and we meet the same financial standards as a bank. This does not mean we will be like the big four banks. Hume will remain customer-owned and focused while delivering exceptional value to its customers.”
Put simply, the word ‘bank’ carries more clout that ‘credit union’ or ‘building society’. ‘Bank’ suggests safe, established, and credible; a monosyllabic term that’s undoubtedly more robust and arguably more reassuring to customers than its two-worded predecessors. The number of mutual banks therefore continues to grow and now includes:
There are important synergies between mutual banks, brokers and their customers. A sense of community binds them in a strange yet powerful humility that the big commercial banks — and even some of the larger non-majors — are yet to achieve.
Mutual banks, like mortgage brokers, are fundamentally community-based businesses.
QBANK, for example, which traded as Queensland Police Credit Union up until this year, has been financially assisting individuals and families who serve the Queensland police, emergency services, ambulance, fire, nursing and public sector since 1964. Today the bank sees approximately 40 per cent of its home loans originated through third-party.
“Mortgage brokers offer far more points of distribution for us than we could ever achieve on our own,” QBANK chief executive Grant Devine says. “This is particularly relevant in regional areas, where QBANK has a limited presence.”
Asked whether the group considers itself a mutual or a non-major, Mr Devine says neither term appropriately fits QBANK’s true value proposition.
“Most current or potential customers don’t even know what mutual means these days,” he says. “We consider ourselves a niche private bank intimately serving the unique financial needs of those who serve Queensland, principally government employees.”
Mr Devine admits that categorising lenders can be difficult in today’s ever-changing market.
“The non-bank category can sometimes be a bit confusing and mutuals are included. If non-banks refer to mortgage managers, the difference lies in a broader range of banking products, not only to cement the relationship but provide other sources of funding.
“Mutual banks have various sources of funding arrangements including various wholesale facilities with more attractive pricing, if rated. QBANK is a rated entity with S&P. This can provide greater stability in customer pricing and long-term sustainability.”
Working with brokers
QBANK has been working with mortgage brokers for about a year, since entering the channel in November 2015. Since then, its loan portfolio has grown by about 20 per cent — nearly triple system.
Mr Devine says the bank’s results to date have been well beyond his expectations, with “excellent support from major aggregator AFG”.
Pink Finance director Nicole Cannon, an award-winning AFG mortgage broker, says the aggregator has been very proactive with accreditation sessions. As a result she has just started using mutual banks.
“Over the last 12 months I’ve been accredited with four or five mutuals that I never had before,” she says. “I’m looking at them as an alternative solution. When time is of the essence, we need to have these lenders available to us so we can deliver for our customers.”
QBANK’s launch into the broker channel was well-planned and considered over a two-year period, says Mr Devine, who ensured all systems, process and people were aligned.
“Management ensured we had the relevant expertise and knowledge to service the unique needs of the broker channel. Service levels have been industry leading and we have worked well with brokers to ensure the customer experience is beyond expectations.”
Having established itself as a viable alternative for brokers and their customers, QBANK recently launched a referral program. This provides referrals to brokers for business the bank cannot service or attend to in regional areas. Mr Devine says this is completed with full customer consent. So far, it has received positive feedback from both customers and brokers.
The Rising Star
Heritage Bank took the title of Rising Star in the 2016 Momentum Intelligence Third-Party Lending Report: Non-Major Banks, rising from tenth position last year to sixth position in 2016. Heritage Bank had the highest year-on-year increase in its overall aggregate score across the 23 metrics.
The Toowoomba-based bank, which has a rich history dating back to 1875, recently launched its Family Guarantee loan that allows people to help their family members into the property market.
The mutual receives approximately 45 per cent of its mortgage volumes through brokers. Michael Trencher, Heritage Bank’s head of broker distribution, is eager to see the third party become the group’s primary distribution channel for mortgages.
“We recognise the importance of [the broker channel] based on the growth it has experienced over the last few years, and predominantly driven by consumer demand; more and more Australians are asking to use a mortgage broker,” Mr Trencher says. “That fits in very well with our strategy — we're on a growth trajectory.”
Said growth plans are not just talk. The bank recently appointed a new CEO, Peter Lock, and the decision to hire Mr Trencher back in March was strategic, given his extensive career with brokers at ANZ and, more recently, NAB Broker.
While Heritage Bank made a decent run in this year’s Third-Party Lending Report, Mr Trencher says the customer-owned mortgage provider does not consider itself a typical non-major lender.
“We consider ourselves a mutual bank,” he says. “In fact, we're Australia's largest mutual bank. We've got the philosophy of a mutual bank, which is member and community-focused, a mutual way of doing things, but we also have the strength and backing of being an ADI.”
Investing in brokers
Since he started in the role earlier this year, Mr Trencher says he has made it a priority to gather and implement the resources required to run a top-notch broker distribution business for Heritage Bank.
Part of that process involved a complete review of all lending processes and policies.
“We're looking at exactly how we do business and changing and challenging a lot of those things we have done in the past as well. It's had an immediate effect and we’ve had some early wins,” he says. “One key aspect of our change agenda is the level of investment we are making to the channel in a number of areas. Since I've arrived we've had some more credit assessors put on.”
Mr Trencher concedes that Heritage Bank is not looking to take on the majors. Indeed, few mutuals would make such an ambitious claim. Nevertheless, Heritage does see itself as a viable alternative and aims to be viewed — at least in the eyes of its broker partners — alongside second-tier banks with much bigger loan books.
“We want sustainable growth so that we will have further investment in the channel,” he says. “The second thing is really making sure that brokers understand our proposition. To make sure they understand what Heritage is about, what we stand for and, importantly, why we do what we do.
“We're a mutual bank and outside of south-east Queensland there is no branding. I want Heritage to be known as a really viable alternative to a broker looking to move outside the majors. Assuming they think outside the big four, Heritage should be on their list.”
Consistency is key
In a crowded market it can be difficult to get a broker’s attention. Not everyone is sold on mutual banks. Sydney-based broker Will Foster of Foster Finance, who was ranked number 26 in this year’s Elite Brokers ranking (see page 22), writes most of his business with the majors. For him, consistency is incredibly important.
“Don’t be the cheapest in the market for two months of the year and then let brokers forget about you for 10 months of the year because you’ve met your targets,” Mr Foster says.
“ME does consistency very well. They are never really out of the market price-wise. Having a broader offering is important as well. You can’t just have a really competitive owner-occupied P&I rate because you will only appeal to a very small portion of broker clients,” he says.
“You want to be appealing to a larger portion so they get used to working with you, they develop processes to make things easier and develop little intricacies around credit and policy. Having a broad offering and being open to accepting more clients is really important.”
ME dropped ‘bank’ from its name earlier this year but is certainly still a mutual bank, and a well-capitalised one at that, with industry superfunds as its primary shareholders.
In April the lender appointed Lino Pelaccia to the newly-created role of general manager of brokers, following the departure of national broker manager Stewart Saunders.
According to Mr Pelaccia, ME is now seeing close to 55 per cent of mortgage flows coming through the third-party channel.
“Over the last 16 months we have introduced a whole suite of home loan products to the market, which has allowed us to be a lot more attractive to brokers,” he says.
Like many mutuals, ME took the opportunity presented by challenging market conditions to reinvest in its systems and processes. This almost became a necessity for banks big and small as daily pricing and policy changes required a better arrangement.
“Over the last 16 months, we have invested more in our systems,” Mr Pelaccia says. “We have also had a targeted approach in relation to brokers that fit the ME profile, which has really allowed us to adjust our stance in the market and become competitive.
“Over the year, the market has been a challenging environment. The new products we have launched have enabled us to challenge the market in those areas that we do well in.”
Mr Pelaccia maintains that ME has tried to be consistent with its messaging to ensure brokers understand its offering.
Innovative product offerings
Dipping in and out of certain markets such as low-doc, investor and SMSF is a big no-no for brokers.
Teachers Mutual Bank made the decision to stop lending to property investors in May, halting all new applications in an effort to meet APRA’s 10 per cent speed limit. After a couple of months waiting in the wings, the bank returned in August and is once again accepting new applications for investment property loans.
Elite Broker Will Foster says it creates “enormous brand damage” when a lender exits the market.
“They are not just branding their business to borrowers, they are branding their business to brokers as well, and that is important for the mutual banks who don’t actually have a significant brand presence,” Mr Foster says. “They don’t need to be marketing to the general public, they need to be marketing to us because we’re their sales network.”
Teachers Mutual Bank deputy CEO Brad Hedgman says that during its sabbatical the group closely managed its investment lending portfolio, which has seen growth slow in line with the bank’s expectations and to meet APRA’s annual 10 per cent guideline.
“We are pleased to be in a position to return to the market,” says Mr Hedgman. “Our focus now will be working closely with our members and third-party distribution channel to address their needs while still adhering to our regulatory responsibilities.
“To ensure a steady flow of business in this sector, we will continue to proactively monitor our growth and adjust our lending measures as needed,” he adds.
Australian investors will again have access to variable and fixed rate home loans along with a 100 per cent mortgage offset option through products such as the Teachers Fixed Option Investor Home Loans and Solutions Plus Investor Home Loan.
Teachers Mutual recently announced that UniBank has entered the third-party channel, a decision based on the strong mortgage growth and settlements volumes Teachers Mutual has seen since it began partnering with brokers in 2013. The two banks merged earlier this year.
Teachers’ national manager of third-party distribution, Mark Middleton, says he has already received calls from brokers interested in the UniBank offering.
The lender’s new first home buyer product includes a 98 per cent LVR (including LMI) and a 40-year term.
“It’s hard to get into the market right now. The 98 per cent lend and 40-year term is a great product,” Mr Middleton says. “The main aim here is to help people get into the market.”
In the past financial year, Teachers Mutual has seen a 33 per cent increase in home loan settlements. Mr Middleton anticipates a similar trend with UniBank.
He says brokers will have the opportunity to significantly expand their potential customer-base and be able to provide them with tailored products unique in the financial sector, including 100 per cent mortgage offsets on fixed and variable products.
Teachers Mutual partners with 12 aggregators and over 2,000 accredited brokers across Australia, with National Mortgage Brokers (nMB) and Australian Finance Group (AFG) the most recent additions.
Mr Middleton says the bank has plans to continue to increase its broker reach via its existing aggregator panel over the next few years.
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