Human technology

The secret weapon in the mortgage war crushing bank margins

Westpac’s NIM (excluding notable items) fell nine basis points in the six months to September 30, while NAB’s fell five basis points and CBA said in an update that its NIM was “considerably lower” in the September quarter. ANZ was able to increase its NIM by a basis point, but only because of well-known mortgage processing issues (which saw processing times drop to 25 days under certain circumstances) which placed its mortgage growth well. behind that of the market at large.

Triggs expects NIMs to fall again in the first half of the new fiscal year. He predicts that ANZ’s NIM will drop four basis points to 1.61% (as the Melbourne bank is likely to accelerate rate discounting to regain mortgage momentum), while NAB’s NIM is expected to drop three points. basic at 1.66%.

But the biggest drops will come at Westpac, where the discount is expected to see its NIM drop eight basis points to 1.9%, and CBA, where Triggs estimates NIM will drop 16 basis points to 1.88% .

A bank’s NIM has many moving parts. Funding costs are of course vital, and it is no coincidence that the 30 years of downward pressure on rates to which Sulicich refers have coincided with the steady decline in interest rates that has marked the past three. decades in the financial markets.

But with the mortgage market arguably as hot as it has ever been in Australia, intense competition is forcing the banking industry to make a difficult choice between growth and profitability. Grow online with or above the wider market and you’ll keep your customers while sacrificing your margins. Growth less than the banking system at large and you will protect your margins, but you will find yourself losing customers who might have a decades-long relationship with the bank.

MyState is part of an army of competing smaller banks that are stepping up mortgage competition against majors and putting pressure on NIMs; its $ 6 billion mortgage portfolio grew to a record 19% year-on-year in the September quarter, about 2.5 times the growth of the system. For Sulicich, the industry dynamic of declining profitability means one thing for a small bank like his.

“As the net interest margins get smaller and smaller, you have to do two things. You have to get bigger and you have to be more efficient. And what we’ve done is create a very solid platform to be able to become bigger and more efficient at the same time. “

Melos Sulicich, CEO of MyState Peter Whyte

While MyState also reported competitive pressure in the mortgage market, its NIM actually rose 10 basis points in the 12 months leading up to June 30, from 1.86% to 1.96%.

But Sulicich’s growth has been driven by perhaps the most prized feature in today’s competitive market: speed.

A survey of mortgage brokers conducted earlier this year by Macquarie found that while price was the most important factor for clients (named by 89 percent of brokers), the approval time was close (named by 85 percent of brokers).

And as approval times accelerated in 2021 under the avalanche of applications, (from an average of 13 said in 2020 to 15 days), speed has become even more vital; the importance of approval time for brokers jumped 13 percentage points from 2020 to 2021.

Over the past few years, MyState has been able to provide conditional approval for a mortgage application within 48 hours; For comparison, brokers in the Macquarie survey, which covered the nation’s largest institutions, said Macquarie Bank has the fastest approval time in the market, with a weighted average of six days.

Getting mortgages fast has also been key in helping the Tasmanian-based bank grow on the continent’s east coast.

Sulicich explains that its bankers are ruthless about turnaround times and actually manage their growth through application volumes. If there are too few applicants, they will be more proactive about tagging and pricing. If there are too many, MyState will pull its horns, so its two-day turnaround times are not compromised.

“Because once your mortgage processing system has problems, then it’s really hard to line up,” says Sulicich. “What’s the point of having a leading market rate or a special market offer if a client comes to you and says’ I want to buy a house, and you have a good rate ‘and then you say’ Hey well, give me your application in three weeks, i will get back to you. You have to make life easier for the customer and your distribution channels. ”

It’s a sentiment that ANZ CEO Shayne Elliott and Australian boss Mark Hand would no doubt agree; they devote human and technological resources to reducing the processing times for bank mortgages. While there have been some recent improvements, the sheer volume of apps in this hot market is such that ANZ will catch up for some time to come.

JP Morgan’s Triggs says ANZ has already “corrected” its prices, but will need to do more to regain market share. “While its forecast for the growth of the ‘online’ system at some point in the second half of 2022 indicates a recovery, our main concern is that it will need to be more price competitive to achieve this.”

The technology was key to lifting MyState’s turnaround times and Sulicich’s broader bank turnaround. The stock has risen 44% since the market bottomed in March 2020 and although it remains well below its post-COVID high, it has risen 16% in the past five years; CBA is the only one of the big four to post a price gain over this period.

Its decision to completely rebuild the bank’s obsolete systems means that MyState can bring much more automation to its mortgage processing than other banks, thus reducing both time and errors. Sulicich believes the bank can potentially cut conditional approval times in half and make the larger mortgage process smoother for clients.

“At the start of next year, we will be in a position where from unconditional approval to settlement [the mortgage] does not touch human hands because a series of robotic processes will come in, pick up things and move on to the next step in the process, ”Sulicich

On the deposit side and on the business side, MyState uses artificial intelligence to attract customers. The bank’s algorithms learn about a customer’s cash flow needs and can then suggest or even take different actions. Notify a customer if their balance is too low to pay a regular bill, for example, or even wipe excess money from a transaction account to a savings account.

Technology like this is easier to deploy in a small bank than in a large one, of course. But Sulicich believes the changing banking landscape has opened the door for smaller, digitally-focused banks. The rise of fintech means that customers are much more open to having multiple accounts at different banks, giving MyState a chance to gain customers looking for something different, like its bank-driven deposit accounts. AI or its robot-driven mortgages.

This is essential to achieve this dual objective of increasing the size of the bank and improving its efficiency in resisting weaker NIMs. And there is still some way to go; Sulicich says the bank needs to double the size of its balance sheet and reduce its cost-to-income ratio from over 61% to around 50%.

But it will be a task for his successor, former BNK and ING banker Brett Morgan.