The Commonwealth Bank CEO is considering the impact of the banking royal commission’s recommendations concerning broker remuneration on the group’s planned demerger of its third-party businesses.
In the banking royal commission’s final report, Commissioner Kenneth Hayne called for the phasing out of the commission-based broker remuneration and the introduction of a borrower-pays model for home loan services offered through the broker and proprietary channels.
The broking industry has strongly opposed such changes, with industry leaders flagging the risks of a borrower-pays model to competition in the mortgage market.
Speaking to the media following the release of the Commonwealth Bank of Australia’s (CBA) financial results for the first half of the 2019 financial year (1H19), CEO Matt Comyn, who reiterated his support for the remuneration changes, said that the group would assess the impact of the commission’s recommendations on the planned demerger of its mortgage broking and wealth management businesses.
“As you’d expect, we’re carefully considering all of the recommendations of the royal commission and how they might impact the demerger and making sure we’re setting that business up for success,” he said.
Following the release of the commission’s final report, the share prices of ASX-listed brokerages Mortgage Choice (of which CBA is a minority shareholder) and the Australian Finance Group (AFG) fell sharply, dropping by 25 per cent and 29 per cent, respectively.
In contrast, CBA’s share price increased by 4.6 per cent in the day following the release of the final report.
When pressed further on the matter and asked if he would consider selling CBA’s demerged entities, which include Aussie Home Loans, “piece by piece”, Mr Comyn replied: “I don’t have a lot more to add from what I’ve already said.”
He added: “We have a CEO in place, we’re actively considering all of the commission’s recommendations and will ensure that we set that business up for success.
“Ordinarily, I wouldn’t speculate on something like that anyway.”
Brokers drive CBA’s HY19 ending growth
The major bank has posted a cash net profit after tax (NPAT) of $4.7 billion for the first half of the 2019 financial year (1H19), an increase of 1.7 per cent from 1H18.
The profit jump coincided with home lending growth of 4 per cent, driven by owner-occupied loan growth of 6.5 per cent in the 12 months to 31 December 2018.
However, much of the bank’s home loan growth was generated through the broker channel, which originated 45 per cent of CBA’s home loan flows, up 5 per cent from the previous corresponding period.
Speaking to investors following the release of the bank’s results, CBA CEO Matt Comyn acknowledged the contribution of the broker network to the bank’s home lending growth, noting that borrowers have sought assistance from the third-party channel amid tighter lending conditions.
“If you go back to the second half of last year, all of the major banks had struggled to grow at system,” Mr Comyn said. “The increased proportion of new loans to the broker channel has increased during that period.”
He continued: “At a macro level, 59 per cent of applications at a system level are going through the broker channel.
“I think over the past six months, that context has been conducive to brokers because there has been a lot of discussion and information out there about availability of credit.”
Mr Comyn conceded that home loan volumes were “flat” via CBA’s proprietary network, claiming that “higher performance” in the broker channel was also partly attributable to the bank’s increased participation in the broker channel.
Mr Comyn was also asked if he believes the banking royal commission’s proposed reforms to broker remuneration would reduce CBA’s exposure to the broker network and increase mortgage origination via CBA’s branch network.
The CBA CEO replied: “We’ve certainly invested in our proprietary network and our branch network and the number of lenders.
“We try to service our customers directly and that’s been a focus for us for some time.”
Mr Comyn claimed that the banking royal commission’s recommendations would not hinder competition in the mortgage market and referred to the outcome of similar reforms in the Netherlands.
“In the Netherlands, there wasn’t a reduction in the capacity or the number of mortgage brokers, even with the shift,” he said.
“They were the same sorts of recommendations that the commissioner has put forward.
The CBA CEO added: “I note that a number of people have speculated that that’s the outcome. I think that’s far from [certain] but I think the recommendations align with good customer outcomes.”
In its HY19 results, CBA reported that despite recording growth in home lending volumes, its share of the home loan market dropped, falling from 24.6 per cent in 1H18 to 24.3 per cent in 1H19.
CBA’s overall mortgage portfolio increased by $14 billion, from $444 billion as of 31 December 2017 to $458 billion at the conclusion of 1H19.
Find out more about what the final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry means for the broking industry, and what the next steps are, by attending the Better Business Summit 2019.
Running across five different states every Thursday from 14 February, the Better Business Summit provides brokers with straight-talking, practical advice to help them grow and improve their businesses in this time of change.
Tickets are selling out – so make sure you secure your ticket today to stay ahead of the curve and prepare your business.
[Related: Banks comment on broker remuneration changes]