Banks cutting out brokers

Norman Wilson, CEO HSBC which this week announced it would no longer deal through mortgage brokers. Picture / Michael Craig

HSBC says cutting all ties with mortgage brokers is a purely economic decision. Chief executive officer Norman Wilson says the New Zealand banking market has become so competitive that it now has the tightest profit margins in the western world. Basically, HSBC just wasn't making a buck after paying brokers' commissions.

A hugely competitive banking market is clearly good news for the consumer. But could these tight margins mean that banks will become increasingly unwilling to pay commission to brokers, and this relatively new avenue for seeking out a home loan will shrink? HSBC joins the Bank of New Zealand, Kiwibank and TSB in not dealing with mortgage brokers.

Mortgage brokers and the banks that do use them say not. They say it's a move specific to HSBC, and other lenders will find their own way.

"The reality is, while it's always disappointing to lose an avenue, it's not actually going to impact on the growth of the broker channel as such," says Geoff Bawden, chairman of the Mortgage Brokers Association. He says the HSBC move was not unexpected, as it wasn't doing a lot of business through brokers. Bawden says it operates in a niche market servicing high value clients with whom it also often has an overseas relationship.

HSBC's Wilson agrees his organisation targets people with a variety of investments, both in New Zealand and offshore, and made a decision to stick with its knitting. However, he describes the bank's decision to start using mortgage brokers in 2003 as "ill-timed".

"If margins had remained as they were when we went in to that business we could have afforded the commission rebate to the brokers."

Wilson believes the New Zealand banking scene couldn't be more cut-throat, and it's due to simple economics - we have the greatest number of established banks chasing the smallest number of borrowers.

New Zealand is also unusual internationally in that the majority of mortgages are on fixed rates. The profit banks can make on fixed rates is much slimmer than they can make on floating or variable rates. And in our highly competitive market, homeowners are not always loyal.

Wilson says banks write down over a number of years the commission they pay to brokers on a loan. "Which is fine if you've got loans that stay on your books for 10, 20, 30 years. But in the New Zealand market a lot of the borrowers who come through brokers are very price conscious and very mobile. So you actually find you only get to keep these loans on your books for a relatively short period of time."

"I think banks have realised that while we all want to chase market share, there comes a point where margins are important to preserve."

Blair Vernon, general manager of personal finance services for the BNZ, agrees. He says BNZ made the decision three years ago not to use mortgage brokers because it saw banking margins shrinking. He says the bank's been proved right. "The economics of delivering a home loan out into the market when you're paying quite a substantial amount for someone else to do your sales work was just not going to stack up."

Conversely, ASB bank has used brokers for up to 15 years

and is wedded to the concept. As far as head of retail banking Ross McEwan is aware, ASB is the only bank that features mortgage brokers in its advertising. He says the bank hasn't seen a lot of difference in the cost of selling mortgages through bank branches or mobile managers versus brokers.

He says margins are getting thinner and the bank does watch the cost of delivery. But he says if it gets to the point where it's too thin, that's the bank's problem. "It very much comes to us to address that, as opposed to cutting out a channel and saying, well, we're no longer wanting to acquire customers through that that channel."

McEwan says it's about customer preference, and if customers want to deal through a broker then the bank should be there for them.

The Mortgage Brokers Association remains convinced the growth potential for brokers in New Zealand is significant. Geoff Bawden says they currently handle around 30 per cent of the home loan market, compared with 70 per cent or more in markets such as the United States. "There is still in New Zealand a relatively low awareness of what mortgage brokers do."

But Massey University banking expert David Tripe says while brokers have enjoyed rapid growth in their business over the past few years, that's slowed. He says KPMG's most recent report on the area shows brokers now handle 23 per cent of mortgages, which is lower than in previous years. He says the 30 per cent figure the association quotes will refer to the dollar value of mortgages, which has obviously risen. "New Zealand would be unusual, in that the mortgage broker market appears to be shrinking." Dr Tripe agrees tiny banking margins will play a role. "The banks are certainly not going to be using mortgage brokers if they don't have to, because they'd rather not have that cash drain."

He says the New Zealand market can't be directly compared with the US, where the market is much more diverse. He says a lot of firms we would regard as brokers are owned by banks, and they will write loans for a variety of lenders including their competitors.

ASB's McEwan adds that in markets such as the US and Australia customers do not have as good a relationship with their bank as people do here.

However, Tripe says New Zealand brokers do provide a satisfactory experience for homeowners seeking the best deal on their mortgage, and they're not seen as cowboys. "The reason mortgage brokers got established is because bank branches were not necessarily pleasant places to do business." David Tripe says while the tightness of the banking market may be reducing the window of opportunity for brokers to do business, the banks won't want to walk away from too many lending opportunities either.

Mike Pero Mortgages broker Shayne Gough says he hasn't been losing a lot of sleep about HSBC's decision to axe his kind. He says with its call centre based in Malaysia, the bank hasn't had a good reputation for service. "Let's just say for some time now HSBC hasn't been the sharpest pencil in the case."

Norman Wilson concedes service levels when he arrived 15 months ago were not what he would consider to be up to HSBC's usual standard. He says the bank's addressing that, and has brought part of its call centre back to New Zealand "because we appreciate a lot of people want to speak to someone in New Zealand".

Meanwhile, mortgage brokers also say they're lifting their game, in preparation for proposed new regulations next year governing all classes of financial advisers. Geoff Bawden says it will involve an approved professional body which will work alongside the Securities Commission to regulate the industry.

Brokers will be obliged to be a member and the association is hoping to become that official body.