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BFCSA investigates fraud involving lenders, spruikers and financial planners worldwide.  Full Doc, Low Doc, No Doc loans, Lines of Credit and Buffer loans appear to be normal profit making financial products, however, these loans are set to implode within seven years.  For the past two decades, Ms Brailey, President of BFCSA (Inc), has been a tireless campaigner, championing the cause of older and low income people around the Globe who have fallen victim to banking and finance scams.  She has found that people of all ages are being targeted by Bankers offering faulty lending products. BFCSA warn that anyone who has signed up for one of these financial products, is in grave danger of losing their home.

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BFCSA: Australia’s big banks are losing their power

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Australia’s big banks are losing their power

The Australian 6:59am April 17, 2019

Robert Gottliebsen

 

Big banks represent well over half the market capitalisation of ASX top 10 companies so what happens to them will have a profound influence on the fortunes of Australian savers.

And it has suddenly become apparent that the banks have lost considerable power over the distribution of what is the industry’s most profitable and biggest product - home loans.

Although last week the banks received a nasty alert to the dangers of not controlling home loan distribution, analysts are not worried, so are boosting bank shares on the back of looming cost reductions and possible interest rate cuts.

They argue that not only does outsourcing product distribution boost profits, but the banks have big staff and cost reductions in the pipeline.

But while that might be true in the short term, in the longer term banks look set to be relegated to commodity-producing price takers, which will lower their profitability.

If that happens then not all of them will remain in the top 10 ASX companies.

The Hayne Royal Commission understandably focused on the dangers to consumers of the banks using brokers to distribute product, but there is an equal if not greater danger to the banks.

Let me illustrate the banking hazards from the experiences of other industries.

Brewing is the classic.

Between 1949 and 1985 the tough Reg Fogarty and later the milder Lou Mangan understood that the power of Carlton and United Breweries started with control of a big slice of its distribution—then the hotels.

By 2003 the Fogarty and Mangan memory had faded and the board of the company believed the power of the brewery (by then called Foster’s) was not in its distribution but in its brands so it floated off the hotels in a $1.4 billion deal. The share market rejoiced.

Later, Woolworths bought control of the hotels and the brewer was to learn the hard way that former CEOs were right and that in beer, retail power was greater than brand power.

While there are exceptions (like Kellogg’s and Arnott’s) most branded food makers are under constant pressure from supermarkets not to increase their prices and their margins are squeezed.

During the recent housing boom, instead of investing in their own distribution systems, the banks found it more profitable to use brokers. The Commonwealth Bank and Westpac went full bore. NAB and ANZ were more restrained.

In the case of NAB, last week I revealed that NAB’s broker market share had slumped partly because it was having difficulty with its decision-making processes and partly because it had delayed raising interest rates so as not to lose existing customers during the NAB battering at the royal commission.

When it raised rates to catch up those higher rates coincided with a decision-making quagmire and broker market share was lost.

It was a scary warning to all banks of just how fickle their market share can be in an environment where they don’t control their distribution.

NAB’s use of brokers generates between 40 and 50 per cent of their home loans. Last December, Commonwealth Bank generated 45 per cent of its loans via brokers and 55 per cent via branches, although Bankwest boosts the numbers. In 2009, to gain market share, the Commonwealth stepped up its broker approval rate and NAB and ANZ were the main sufferers. Westpac is a bigger user of brokers.

As it happens NAB’s most profitable and dominant operation is small business lending, but the savagery with which it and the ANZ bank lost broker market share underlined to all the consequences of losing control over your distribution.

In addition brokers are moving from their home loan stronghold into the small business lending space.

Interestingly I passed a Bendigo Bank branch yesterday which set out a full range of advisory services offered at the branch. Bendigo will need to get scale to stay in the advisory game but the big banks have the reverse strategy and are retreating from non-banking in their branches. They will become even more dependent on brokers.

If banks talk with the food processing companies they will discover that when you don’t control your distribution you need to be more and more efficient.

And that’s what the bank boards are now coming to grips with.

Ironically it was the NAB that first announced it was moving to be more efficient.

Thanks to the policies of former chairman Ken Henry and CEO Andrew Thorburn the NAB was upfront about the retrenchments ahead.

Other bank boards are now secretly plotting massive staff reductions. They have no choice but to increase efficiency because in a game where you don’t control your distribution, you must be both a low-cost producer and quick in your decisions.

If the ALP wins the election then bank franking credits will be less valuable. The combination of APRA lending restrictions and broker-induced margin clamps will be a long term downward force on shares.

To offset this the banks must become more efficient and deliver cost structures that are so low that new entrants can’t get past the door.

But that will require an entirely different banking culture.

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