Tag: AFG

Concerns about AFG Connective mortgage aggregator deal

The ACCC has raised preliminary competition concerns about the proposed acquisition of Connective Group Pty Ltd (Connective) by Australian Finance Group Ltd (ASX:AFG).

AFG and Connective are mortgage aggregators that act as intermediaries between lenders and their affiliated brokers.

“Combining AFG and Connective would create the largest mortgage aggregator in Australia by a significant margin, accounting for almost 40 per cent of all mortgage brokers operating in Australia,” ACCC Chair Rod Sims said.

More than half of all home loans written each year are initiated through the broker channel, and brokers play an important role for consumers when seeking a home loan and for lenders in reaching those consumers.

“AFG and Connective operate in an already concentrated market, and not many other mortgage aggregators offer a similar level or type of service. Additionally, potential entrants or small players may be deterred from expanding by various barriers, including compliance costs,” Mr Sims said.

“The ACCC is concerned there will be limited similar alternatives for brokers to switch to. This may negatively impact the services offered to brokers.”

The ACCC has published a statement of issues and is seeking further information about the supply of mortgage aggregation and distribution services, and the supply of home loans in Australia. The ACCC invites further submissions from interested parties in by 5 March 2020. The final decision will be announced on 7 May 2020.

Further information is available at Australian Finance Group Ltd – Connective Group Pty Ltd.

Background

AFG and Connective provide brokers with access to a panel of lenders, and provide panel lenders access to affiliated brokers to distribute loans. Generally, a broker will be affiliated with one mortgage aggregator at a time, while lenders tend to sit on a number of mortgage aggregator panels.

AFG and Connective also offer brokers various support services to assist them to run their businesses. This includes customer relationship management software that provides brokers with the ability to compare products from the lender panel and assist in the lodgement of loan applications. 

AFG and Connective also offer white-label or own-branded loan products under their respective brands. These products are mostly funded by third party lenders, however, AFG also offer loan products funded by its securitisation program.

AFG FY19 Profit Up 1.8%

Australian Finance Group (AFG) announced an annual underlying profit of $28.56 million up 1.8% for the 12 months to 30 June 2019. Significantly, for the first time, more than half of AFG’s gross margin was generated from outside of its mortgage broking aggregation business. The continued growth in these diversified earnings streams despite a softer Australian credit market. Residential settlements were down 11.5%.

Their own RMBS program passed the $2 billion under management on the back of growth of 50% over the prior year.

FY19 financial year highlights include:

  • NPAT of $33.03 million
  • AFG Home Loans (AFGHL) settlements of $3.15 billion, down 2.2%
  • Combined residential and commercial loan book of $155.45 billion, up 6.9%
  • Securities loan book of $2.06 billion
  • A 30.4% investment in Thinktank contributing $1.5 million towards NPBT
  • Settlements of $1.06 billion through AFG Securities business (up 108% on last year)
  • Settlements of $129.7 million through their AFG Business platform which is up 30.9% on the previous six months
  • Return on Equity of 33 per cent, in line with prior period.

AFG declared a final dividend of 5.9 cents per share fully franked, bringing total dividends for the year to 10.6 cents per share. This represents a dividend yield of 6.8 per cent, based on AFG’s share price at 30 June 2019.

AFG Chief Executive Officer David Bailey said “AFG’s entry into the SME market through both its AFG Business platform and its investment in Thinktank is gaining momentum. We fully expect growth from both AFG Securities and AFG Commercial to provide additional contributions to earnings over the coming 12 months.

“We will continue to explore ways to improve customer experiences and improve the day to day efficiency of our brokers. We will continue our ongoing investment in technology and compliance as we believe innovative technology remains a critical area of focus as we transform the way AFG and our brokers improve the delivery of service and positive lending outcomes to Australian borrowers.

Connective merger

On 12 August 2019, AFG announced it had entered into a binding conditional implementation deed to merge with Connective Group Pty Ltd. The combined group will create a significant national mortgage distribution network, with more than 6,575 brokers and combined mortgage settlements of $76 billion in FY19. The $120 million transaction is expected to be EPS accretive (pre-synergies) in the first full financial year post integration.

“The merger demonstrates our ambitions in growing the business,” said Mr Bailey. “Whilst we remain confident about the value AFG stands to generate from our existing ongoing growth plans, we felt successfully participating in the competitive sale process absolutely aligned to our strategy. The prospect of complementing our existing business with the cultural fit and shared customer-focused philosophy of Connective represents a compelling opportunity for AFG shareholders, particularly where we can do so on an earnings accretive basis.

“The proposed transaction offers exposure to an alternative mortgage broker aggregation model with strong ongoing brand recognition whilst also providing access to a broader distribution channel. Upon completion, we anticipate Connective brokers will have access to AFG’s securitisation program and the opportunity to grow both asset finance and commercial lending through the combined network. Expanded distribution channels and broader diversification of products provide greater choice and value for both brokers and consumers.”

The transaction remains conditional upon a court validating the transaction as not being unlawful or able to be set aside, Connective shareholder approval, Australian Competition and Consumer Commission approval and, if required, AFG shareholder approval. If the conditions are satisfied, AFG anticipates completion of the merger in the second half of FY20.

Industry outlook 

Looking ahead, AFG remains optimistic about the residential lending market and the important role brokers play in the home lending market. “The federal election outcome has removed much of the policy ambiguity clouding the industry and mapped out a pathway to deliver regulatory certainty for the business. With the full impact of the stimulus from the RBA and APRA’s amendments to serviceability assessments still to play out, from an AFG perspective the challenging lending landscape reinforces the company’s value proposition and ensures mortgage brokers remain the dominant channel for home loans.

“We will remain proactive in increasing awareness of the value brokers provide in delivering choice and competition to the nation’s home loan market,” said Mr Bailey. “Nevertheless, we fully expect regulatory and compliance requirements will increasingly be a factor for the Australian financial services industry over the short to medium term and the mortgage broking industry will need to adapt to the new environment.

“AFG’s customer-first approach and agile operating model presents enormous opportunities for our business and we enter financial year 2020 confident of another successful year as we deliver on our long-term strategy,” he concluded.

AFG and Connective announce merger

Australian Finance Group Ltd (ASX:AFG) has entered into a binding conditional implementation deed to merge with the mortgage aggregation business of Connective Group Pty Ltd. Connective has a network of over 3,600 brokers across five states with a panel of more than 50 lenders. The combined group will create a significant national mortgage distribution network, with more than 6,575 brokers and combined mortgage settlements of $76 billion in FY19.

Under the transaction, Connective Group Pty Ltd will receive $60 million in cash and 30,886,441 AFG shares valuing the acquisition at $120 million, with AFG to primarily fund the cash component through a new corporate debt facility.  The transaction is expected to be EPS accretive (pre-synergies) in the first full financial year post integration and AFG is currently expected to maintain a dividend payout ratio of between 60 and 80 per cent.

AFG Chairman Mr Tony Gill said: “The merged business will have a significant national footprint in Australia’s $1.8 trillion home loan market.  The delivery of competition and choice to the Australian lending market is at the core of our strategy. The expanded distribution channel and broader diversification of products the combined group can supply will provide greater choice for both brokers and consumers”.

AFG Chief Executive Officer David Bailey said: “AFG’s ongoing successful execution of our earnings diversification strategy in recent years has the business set up for strong cash flow generation and well positioned for growth. The prospect of complementing AFG’s existing business with the cultural fit and similar customer-focused philosophy of the Connective business is compelling.

“Competition is at the heart of both businesses with the non-major lenders representing 48 per cent of residential mortgage lodgements through AFG’s network in July 2019. Greater geographical portfolio diversification positions the merged group to further enhance choice and competition for consumers in all markets across Australia. Together with AFG’s existing growth plans, the opportunity presented by the sale process undertaken by Connective was absolutely aligned to our strategy.

“With extensive experience in the mortgage broking industry and proven management expertise, respected senior executives Glenn Lees and Mark Haron will continue to run Connective’s business and will retain a significant shareholding in the merged group.  I look forward to working with Glenn, Mark, the Connective team and their network of brokers to create a driving force in competition in the Australian lending market.”

Connective CEO Glenn Lees said: “The coming together of the Connective and AFG teams is a natural fit.  We share a strong set of values with the priority to always work on behalf of our brokers.  I am incredibly proud of the business and, alongside the team, I look forward to continuing to drive the success of our brokers who positively impact the lives of thousands of Australian home buyers every year.

The transaction remains conditional upon a court validating the transaction as not being unlawful or able to be set aside (a non-customary condition), Connective Group Pty Ltd shareholder approval, approval from the Australian Competition and Consumer Commission and AFG Shareholder approval (if required), as well as other conditions typical of a transaction of this nature.

Mr Bailey said the transaction represents an opportunity for all AFG shareholders to benefit from the diversification and flexibility of the combined group.

“Connective brokers will have access to AFG’s securitisation program and the combined network also offers the opportunity to grow scale in both asset finance and commercial lending. Connective brings a contrasting revenue model based on fixed membership fees and offers services across residential, commercial and asset finance, as well as its own range of white label home loan products under the Connective Home Loans brand.”

“This should result in more lender and product opportunities for brokers, which in turn means more choice for their customers.  This is particularly important for the self-employed and SME sectors of the market that are presently under banked.”

“When we also consider the possibilities for both cost and revenue synergies together with the leverage of the distribution potential, the transaction becomes one we are delighted with. We will continue to update the market as we reach key milestones in the process.”

On completion of the transaction, Mr Lees, a founding shareholder of Connective, will be offered the opportunity to join the board of AFG.

Further details of the key terms of the transaction are set out in the schedule.

AFG will keep the market informed of progress of satisfaction of the conditions precedent to the transaction in accordance with its ASX continuous disclosure obligations.

Home loan activity falls to lowest in five years – AFG

AFG provides fresh evidence of the fragile state of Australia’s home loan market emerged today, with new figures revealing national lending activity has slumped to the lowest levels in five years.

Whilst its myopic in one sense as it tracks business via AFG, it does provide further evidence of the slowing pace.

The AFG Mortgage Index and Competition Index released today showed lending volumes across Australia in the first three months of 2019 dropped 10 per cent on the previous quarter. Volumes in the March quarter were 15 per cent lower than the same period last year.

The 23,049 loans lodged during the quarter represented the lowest number in six years, while the $11.6 billion volume was the lowest quarterly figure since 2014.

AFG Chief Executive Officer David Bailey said “Today’s numbers provide stark evidence that the lending environment has significantly deteriorated. It’s a wake-up call for policymakers. The softening of the residential market across the country is a real concern, with Sydney and Melbourne driving the downturn and some states enduring a prolonged period of falling activity.

“Despite moves by regulators to encourage activity, investment lending remains at an all-time low of 26 per cent amid the well- documented concerns around property values, particularly on the eastern seaboard.

“Today’s data confirms we have reached a critical time in the housing market cycle and we would urge policy makers to tread carefully in any regulatory responses flowing from the Royal Commission. This is a time for considered policy formulation that considers the full potential impact on the lending market. It is clear, the broader implications for the Australian economy are huge if we get it wrong.

“The volume of loans written in WA for the quarter of just over $1.3 billion represents the lowest volume seen in WA since the inception of the AFG Mortgage Index. Whilst there has been some talk of WA moving into a brighter resources-led period of sunshine, it is clear the local economy needs broader stimulus.”

The tight lending market and falling house prices have contributed to a decline in NSW volumes of almost 20 per cent on the same quarter in 2018. Victoria is down 16 per cent over the same period.

All other states are also much lower than the same time last year. The only lift in volume over the quarter was seen in the Northern Territory, with an increase in the average loan size and a decrease in Loan to Value Ratios.

Following the relaxation of APRA-imposed caps on Interest Only (IO) lending, AFG noted a small lift in IO lending driven by the major lenders.

Four years ago, fuelled largely by strong investor demand, Interest Only loans accounted for around 60 per cent of all loans written. Now, with investor loans accounting for a quarter of new business, Interest Only loans account for just 19 per cent of lodgements.

The breakdown of mortgages between major lenders – the ‘big four’ banks and their affiliated brands – and non-majors highlights the crucial role mortgage brokers play in delivering competition to the home loan sector.

The AFG Index showed the market share of non-majors has now been locked in above 40 per cent for more than a year despite a marginal increase for the majors to 58.6 per cent of total lodgements.

Mr Bailey said “The value mortgage brokers deliver by facilitating a competitive lending environment is most starkly shown by the ongoing decline in the market share of the major banks, which peaked in Q3 of 2013 at 78.2 per cent. Outside of the mortgage broking channel, the majors have control and dominate the market. The distribution capability provided by mortgage brokers enables the country’s non-major lenders to compete.

“With the sole exception of First Home Buyers, who remain the last bastion of major bank lending, the growth in non-major lending has been broadly uniform across all other customer types.”

Major lenders are ahead on fixed-rate loans, with a steady increase across the quarter, leaving four out of five homebuyers that chose the certainty of fixing their interest rates doing so with a major lender.

Examination of the overall volumes going to the major bank reveals the big losers over the past six months have been ANZ and NAB. NAB’s share has halved over the past six months to now be as low as five per cent.

The Westpac stable of brands emerged as big winners, as has Bankwest – whose renewed focus on broker and customer service has paid strong dividends in Western Australia. Bankwest accounts for more than one in every five WA originations. Together with CBA, Bankwest has a stranglehold on more than 35 per cent of all loans written in the State.

AFG Mortgage Index Slows

AFG reported an 8% fall in loan applications compared with the prior quarter, according to their quarterly index, released today. Whilst it only represents the activity though AFG, it is a useful bellwether.

The trajectory of the market is clear, as the volume of investor loans and interest only loans remain significantly lower than before the regulatory intervention. More households are choosing to fix their loan interest rate. NAB lifted their rates today!

AFG used the release as an opportunity to reinforce the role of mortgage brokers (remembering the Royal Commission, out soon, will likely opine on broker commissions).

They said:

Australia’s home loan market is enjoying record levels of competition driven by mortgage brokers, with new lending data released today revealing the market share of non-bank lenders is higher than ever.

And latest industry figures reveal consumers are increasingly relying on mortgage brokers for help, with three out of every five mortgages in Australia now generated through mortgage brokers.

As the financial services sector prepares for next month’s release of the Financial Services Royal Commission’s final report, the AFG quarterly Mortgage Index confirmed the crucial role played by mortgage brokers in creating a competitive home loan market.

It also provides a timely warning to policymakers of the importance of ensuring the availability of credit and consumer choice do not become sacrificial lambs in the regulatory response to the Royal Commission
recommendations.

AFG lodged $13 billion in home lending applications for the final quarter of 2018, down 8% on the prior quarter.

Credit tightening is having an impact on volumes in every state – however, the Sydney and Melbourne property markets have been the most significantly impacted.

“Customers must be kept first and foremost in any discussion of changes to the financial sector,” said AFG Chief

Executive Officer David Bailey. “Although overall volumes are down our brokers still lodged over 25,000 applications for borrowers during the quarter. This is a fraction of the number of consumers they help with post-settlement and ongoing reviews and support.

“AFG now has more than 50 lenders on our panel and in clear evidence of the vital role mortgage brokers play in delivering a competitive home loan market, non-major lenders’ market share is at a record high of 42.1%.

“The non-majors are becoming an increasingly important part of the assistance brokers provide to customers. Penetration has increased across all categories of borrowers, with non-major market share gains recorded for Refinancers (now 46.8%), Upgraders (42%), First home buyers (32.1%) and Investors (43.4%).”

New Mortgage & Finance Association of Australia (MFAA) data shows mortgage broker market share has grown to 59.1%, reinforcing that consumers are increasingly turning to brokers for their expertise as the market becomes increasingly complex.

The record market share for mortgage brokers was the strongest evidence that consumers were more than satisfied with the customer service provided by brokers, Mr Bailey said.

“A spike in those choosing to fix their interest rates indicates borrowers are bracing for more bank-led rate rises, with quarterly volumes increasing from 19% to 23.1%.

“Notably, the major lenders’ market share of Interest Only and Investment lending has stabilised after APRA’s easing of caps.”
January 24th 2019

AFG Says Home Lending Is In A Holding Pattern

AFG Mortgage Index figures released today show the country’s lending in a holding pattern with first home buyers the only category of buyer to record an increase for the first quarter of the 2019 financial year. Of course the AFG data only shows their own channels, but its a good indicator nevertheless.

The volume of mortgages processed by AFG declined 2% on the prior quarter. AFG brokers lodged 27,900 mortgages during Q1 19, totalling $14.2 billion, compared with 28,883 mortgages and $14.5 billion in the final quarter of the 2018 financial year.

AFG CEO David Bailey explained the results: “As the Financial Services Royal Commission continues to rattle the market Australian homebuyers are feeling the pinch as lenders tighten their borrowing criteria. Compared to the same quarter last year, lending volumes are down by just under 5% – a sure sign of a tightening market. The availability of credit has impacted investors most of all, with that category dropping by 1% to 27% of loans processed.

Refinancers were steady at 23% and Upgraders were also static at 43%.

New South Wales and Victoria are both down on the prior quarter, 2.5% and 6% respectively. Queensland also recorded a drop across the quarter, down 2%. Gains were recorded in SA – 2% up on last quarter, NT – up 22% and WA with an increase of 6% for the quarter.

Loan to Value Ratios (LVR) have increased in SA, NSW and WA.

The national average loan size has increased to a record $509,736, led by increases in average loan sizes in NSW, SA and Victoria.

“NSW has recorded an increase in average loan size of 3%, which we suspect is the result of a drop in apartment sales and lenders tightening criteria to investors – which are usually a lower average loan size. Both factors are driving up the average overall loan size in that state.

During the quarter many lenders moved to increase interest rates independent of the RBA, causing many borrowers to rethink their arrangements. “With the recent round of rate rises flowing through, many consumers have been speaking with their brokers to discuss the value of fixing all or part of their loans,” he said.

“Fixed rates have risen to 18.9% of loans by product category, whilst standard variable loans dropped to 64.3%. Basic variable products are also back in favour, increasing to 11.2% of all loans.

The major lenders clawed back some market share during the first quarter of the new financial year to now be sitting at 59.8%. This figure is still well below the high 70’s they had back in 2013, and much lower than they record outside of the third-party channel.

“The major lenders took some share from the non-majors after treading cautiously for the prior two quarters. The non-majors are still sitting at near historical highs with 40.2% market share after peaking at 40.8% last quarter.

“This is further evidence of the value brokers deliver to competition in the Australian lending market. Refinancers (55.5%) and Upgraders (60.5%) are favouring the competitive offers available from the non-major lenders.

AFG FY2018 Profit Up 10.4%

AFG has announced its annual results for the 2018 financial year (FY2018). Strong organic growth has seen AFG deliver profit growth of 10.4% in FY2018, the company says.

The share price has recovered in recent times, but remains below the highs of last year. It has dropped a little now.

The company reports an annual cash net profit of $33.3 million for the financial year ended 30 June 2018 and announces a final dividend of 5.7 cents per share fully franked, bringing total dividends for the year to 22.4 cents per share inclusive of the special dividend that was paid in March 2018. This represents a dividend yield of 15.9%.

AFG retains a strong balance sheet which remains debt free. In a relatively benign credit market, the growth in AFG’s profit is reflective of the strength of its distribution capability with residential settlements of $35.3 billion representing growth of 3%.

AFG CEO David Bailey said the company continues to successfully deliver earnings diversification through the core residential and commercial aggregation business and the higher margin AFG Home Loans business line.

“The earnings diversification strategy of AFGHL continues to deliver results for shareholders with settlements of $3.2 billion, up 20% on FY2017.

AFG’s strategic focus on the under-served SME market also saw the company acquire a significant stake in leading commercial SME lender Think Tank Group Pty Ltd (“Thinktank”) and continue to roll out its AFG Business platform.

“AFG continues to generate consistent growth in sustainable quality earnings despite challenging regulatory and economic conditions,” he said. “This would not be possible without AFG’s earnings diversification strategy, systemic importance to the Australian financial services industry, the certainty provided by a $145.4 billion loan book and distribution network of over 2,950 brokers across Australia.

Highlights include:

  • NPAT of $33.3 million, an increase of 10.4% on normalised FY17
  • AFG Home Loans settlements of $3.2 billion
  • Cash flows from operations of $32.5m
  • Combined residential and commercial loan book of $145.4 billion
  • Final dividend yield of 7.4% based on closing share price of $1.41 at 30 June 2018
  • Return on equity of 33%, up from 31% in FY2017.
  • 30.4% (fully diluted) investment in Think Tank Group Pty Ltd for $10.9 million

Company update

Since listing on the ASX the sector in which the Group operates has been confronted by a number of challenges, including: property price contractions, changes to foreign investor requirements, regulatory intervention, changing lender appetites, significant scrutiny by the regulators and market noise about potential impacts of all of this activity on the sector. “In this environment we have established a track record of financial performance underpinned by earnings growth and ongoing improvement in earnings quality. We are proud of the company’s performance and the results we are announcing today.”

Looking ahead

The past 18 months has seen a significant examination of the lending sector in Australia. “The findings of these inquiries should assist the government to promote a competitive and stable financial industry that contributes to Australia’s productivity,” said Mr Bailey. “We believe, and the Government recognises, that the mortgage broking sector provides vital competition to all Australians and it also an important contributor to the Australian economy in its own right.

“The regulatory reviews of the industry have already led to a level of tightening in credit which we expect will continue in the short term. An effectively functioning financial system requires an appropriate balance of regulation and self-regulation. We will continue to work closely with government, regulators and our industry partners to ensure momentum-based decisions do not drive unintended negative consequences for Australian borrowers.

“With competition and consumers at the core of our business AFG will continue to be a first-choice partner for lenders and broking groups. AFG has 50 lenders on its panel with more than 40% of residential borrowings going to lenders other than the four major banks, and AFG remains committed to ensuring choice and competition remains for all Australian consumers,” said Mr Bailey.

“The broker value proposition is strong, and broker introduced business now represents over 55% of the home lending market. Consumers are clearly comfortable with the channel.

“The industry will continue to evolve and as an agile business in the sector with access to broad distribution and funding and building blocks in place, the future will provide opportunities for AFG and I look forward to another successful year for the company,” he concluded.

Removal of trail would reduce competition, warns AFG

From The Adviser.

Abolishing trailing commissions for mortgage brokers would reduce competition, drive up home loan rates and make banks the “unintended beneficiaries”, the Australian Finance Group has warned.

Speaking after the release of the Productivity Commission’s final report on competition in the Australian financial system, which recommended that the government remove trail commissions, the aggregator warned that such a move could be counterproductive and potentially lead to reduced competition in the financial system.

AFG CEO David Bailey cautioned that any move to ban trailing commissions for mortgage brokers would have the impact of consolidating the lending base of the banks, stating: “This is ironic given the tone of the majority of the final report. Consumers have been voting with their feet in greater numbers for over 20 years and increasingly use brokers for better service and less costly, better-suited home loans.

“Mortgage brokers are encouraged through trailing commission to stay with customers for the life of their loan, to review products and add value. It is in the business interest of brokers to work for their clients through the years to help them continue to gain better finance outcomes as circumstances change.

“Banning the incentive to work with customers for longer durations would have a detrimental impact on the very services that brokers help provide — greater competition.”

Mr Bailey echoed the thoughts of several other heads of industry by highlighting that ASIC’s review of broker remuneration ultimately found no reason to remove trail commissions, adding: “The current structure is not broken. The removal of trail will simply hand more power to the major banks and non-major lenders and consumers will pay the price.

“Since the ASIC broker remuneration review, our industry has come together to address the recommendations from the data-driven ASIC report.

“Excellent progress has been made and a good consumer outcome has been defined. All members of the Combined Industry Forum are actively engaged in addressing the proposals raised by the regulator.

“In light of this progress, momentum-based decisions which ignore the full ramifications of such a move need to be carefully considered.”

The head of AFG went on to say that brokers are filling vital roles in areas that the banks had vacated, and particularly help vulnerable customers, first home buyers and those with complex borrowing needs.

“Providing assistance in these areas takes a lot of time — time that the bigger lenders are often not prepared to give.”

Mr Bailey highlighted that AFG had provided the Productivity Commission with evidence of the savings brokers make for their customers through ongoing contact over the life of a loan, stating that it was “disappointing” the commission “did not give sufficient weight to this evidence”.

“We invite them again to spend time with some AFG brokers to understand the value a demonstrated level of contact with a customer can deliver,” Mr Bailey said.

He concluded: “The last thing Australian consumers deserve is higher prices for lending products and less competition where banks can drive up costs for existing customers.

“We can’t afford to jettison 20 years of competitive experience without giving regard to the findings of other reviews and ensuring a stable, dynamic, customer-focused lending environment remains.”

Mortgage Index – June 2018 – The New Normal – AFG

While AFG reports only on loan flows through their platforms, their statistics provides an interesting perspective on the mortgage industry, and does underscore the changes in train. But it also highlights again loans are still being written, and lending growth continues (despite the record 190 debt to income ratio as reported by the RBA).

This is what AFG said today:

Today’s quarterly AFG Mortgage Index figures (ASX:AFG) show it is ‘business as usual’ as a vibrant mortgage broking industry delivering choice and competition to the market continues to be embraced by Australian consumers.

Total mortgage lodgement numbers for the last quarter were up on the prior quarter to finish the 2018 financial year at 28,896. Lodgement volume for the quarter increased on the previous quarter to $14,589,632,848.

AFG Chief Executive Officer David Bailey said regulatory intervention in 2017 and tightened lending criteria appear to have established a structural change that may be the ‘new normal’ for the market.

“Investors are sitting steady at 28% of lodgements, first home buyers have been at 13% for the past four consecutive quarters,” said Mr Bailey. “Refinancers are at 22% and upgrader categories at 43% are also forming an established pattern.”

Mortgage holders are also taking advantage of low interest rates to pay down the principal with P&I loans sitting at 81%.

The popularity of fixed rates has fallen with a drop to 15.5% for the quarter recorded, down from 26.4% in the first quarter of FY18.

“A sign that regulators will welcome is the drop in Loan to Value Ratios across the states, with the national LVR now at 67.9%,” he said. “Another pleasing aspect of these figures is the fact that the gap between major and non-major lenders continues to shrink.

“Non-major growth across multiple categories – investors, refinancers and upgraders suggest consumer comfort with looking outside of the Big 4 for a lending proposition that meets their needs.

Interest rate, loan features, fees and lender criteria are all key features for a consumer evaluating their options. A mortgage broker is uniquely placed to be able to efficiently and fairly compare the alternatives available across major and non-major lenders. “As outlined in the ACCC Residential Mortgage Price Inquiry Interim Report 1, discounting by the major banks is lacking in transparency and the time and effort required for a consumer to obtain interest rate comparisons and negotiate for a discount is very difficult,” said Mr Bailey.

“The presence of the mortgage broking channel is one of the few drivers of competitive tension in the Australian lending market. A consumer dealing directly with a lender has limited negotiating power or knowledge of the interest rates and lending criteria offered by competitors. A mortgage broker with access to a panel of lenders drives competition between lenders to the benefit of all consumers, not just their own clients” he concluded.

Download full report here

Mortgage Industry In Rotation, Some Would Say In A Spin

AFG has released their latest market report to May 2018.  This may be a somewhat myopic picture, given it looks at business written via AFG. It also only gives a relative share so tells us nothing about total volumes written (which will be down across the board in our view).  AFG white label products continue to grow to 11.7% of their flows in May, ahead of Westpac (9.4%) and NAB (9.5%).

The AFG Competition Index released today shows further evidence of a structural shift in the Australian lending market as non-major lenders again seize market share from the majors. Non-major lenders have seen their overall market share of new loans hit a record 40.97% in May 2018.

AFG General Manager – Broker & Residential, Mark Hewitt explained the results: “The major lenders’ share of new business is declining, with their overall market share continuing a five-month slide to be sitting at 59% at the end of last month.

Among the majors Westpac and its subsidiaries Bank of Melbourne, Bank SA and St George have been hardest hit, with each of their brands recording a drop in market share.

The borrowers turning to non-major lenders in greatest numbers are those seeking to fix their interest rates, with market share for the non-majors in this category steadily increasing to finish the quarter at 32.57%.

“ING and Suncorp are the non-major lenders of choice for fixed products, with their share of the fixed rate market sitting at 6.08% and 5.39% respectively.

“The major lenders have been pulling back from the investor market to meet regulatory caps and as a result the non-majors are filling the gap in the market,” said Mr Hewitt. “Non-major market share among investors rose from 33.52% in February to 42.35% at the end of the quarter – an increase of 26%.

“Macquarie is proving popular with those looking to refinance, recording a market share overall of 5.63% but 8.33% in the refinancing category. Virgin Money has made rapid inroads in the short time they have been on AFG’s panel, with their share of the market in the same category rising from 0.1% to 0.86% in three months.

 

DFA analysis of the AFG data also shows the non banks like Pepper Money are growing relative to other players, which confirms our thesis that the non-banks are making hay as the markets rotate.

“First home buyers looking for a simple, low cost mortgage product have found it in AFG Home Loans with market share for AFG’s white label products rising across the quarter for this category from 4.76% in February to finish at 6.3% by the end of May. Teachers’ Mutual Bank also recorded an increase in market share among first home buyers, lifting from 2.8% to 3.14% for the quarter.

These figures show that competition is alive and well in the Australian lending market. The continued preference by consumers for mortgage brokers and the choice they deliver over major bank branches, demonstrates that brokers are delivering the right consumer outcomes,” he concluded.