The Big Four Stand to Profit from Trail Commission Removal

Ending the trail commission payments to brokers would boost the profits for the big four banks by 1.8 per cent, according to the Roadmap to Branchtopia report by Morgan Stanley Research.

This data was established via an analysis of information that was garnered from the major banks’ FY17 (full-year 2017) financials and from Mortgage Choice. The data stated that on average, 18 basis points are paid to mortgage brokers by the trail commission.

Westpac would benefit the most, if trail is removed at 2.2 per cent, closely followed by ANZ and Commonwealth Bank at 1.9 per cent, and finally, NAB at 1.3 per cent.

Branch Costs Vs Commission Costs

Another discovery of this research pointed out the impact that the trail commission payments and upfront basis points (on average 66 basis points) have on the total costs acquired by the four major banks.

The Morgan Stanley report shows that the broker commission payments include around 4.6 per cent of Commonwealth Bank’s overall costs. Westpac’s make up about 4 per cent, ANZ’s 3.1 per cent, and NAB’s at 2.5 per cent.

On the other hand, this research unveiled that the costs accumulated from mortgage broker commission payments are less than one-third of the costs related to operating branch networks.

Only about 12.5 per cent of the acquired cost by the big four banks is related to their operating branches across Australia.

The report notated that $1.36 billion (15 per cent) of Westpac’s total costs is related to their branch operations. CBA follows closely behind at $1.43 billion (14 per cent), NAB is at $868 million (11 per cent), and finally ANZ at $855 million (11 per cent).

The report follows calls from the PC (Productivity Commission) for proof about comparable costs of doling out home loans via the broker channel against the costs acquired via the propriety channel.

The Productivity Commission’s draft report noted that is wasn’t able to garner enough proof from lenders and third-party channels while researching and preparing the report.

Nonetheless, Peter White, the executive director of the FBAA (Finance Brokers Association of Australia), has suggested that the expense of using brokers was about half the expense of using the propriety channel.

During one of the FBAA’s public hearings, Mr. White said, “The use of brokers evolved from a clear recognition that the value proposition of using a broker was more attractive than branches and staff.”

He continued, “The proliferation of brokers has occurred because of the benefit derived by product issuers from an expanding broker network, and, implicitly, product issuers know that a broker distribution model is cheaper and, more effective than staff and branches, which is why it continues to thrive.”

Additionally, July’s report by Deloitte Access Economics (DAE), The Value of Mortgage Broking, it was notated that although “transaction costs are higher in the broker channel due to commission payments”, and “processing costs are similar for both brokering and banks’ direct channels”, lenders can offer “significant savings” through third-party channels.

This same report declared that the allocation of mortgages via branch networks produces higher base and overhead costs, which it asserted make up 40 to 60 per cent of these lenders’ operating costs.

According to DAE, third-party sectors consume a substantial financial burden related to compliance costs, which features information provided by Connective, the mortgage aggregator.

The report read, “The costs associated with staff compliance and training costs can be significant on a per-loan basis. Aggregators train and mentor their mortgage brokers and enforce compliance”.

For instance, Connective spent nearly $3 million on educational affairs for mortgage brokers in 2017. That is above their business structuring planning and mentoring services.

Broker Share of Major Bank Flows Rising

It’s also worth noting that Morgan Stanley’s research uncovered that the share of broker-centric home loans processed by the big four banks has increased, currently exhibiting 47 per cent of the home loan flows.

The rise is attributed to growing complications within the mortgage market, according to the research from the AFG (Australian Finance Group).

As the report published, “We think this growth has been in response to rising mortgage product complexity and consumer preferences. For example, AFG reported that the number of its mortgage products rose (by approximately) 135 per cent from 1,450 in 2015 to over 3,400 in 2017” Differentiating pricing and tighter lending standards are additional drivers.”

Based on its analysis, Morgan Stanley reported that ANZ turned out to be the most dependent upon the broker channel, since 51 per cent of its figures started by brokers in 2H17, and CBA followed with 46 per cent, Westpac 43 per cent, and NAB 34 per cent.

Morgan Stanley stated that the CBA is the only one of the four major banks that has reduced its broker flows, adding that broker-initiated home loans fell from 45 per cent in FY17 to 40 per cent in FY18.

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