There’s something a little strange about Westpac’s move to slash commissions paid to mortgage brokers. The brokers have been told, Crikey readers were told on Friday, the analysts have been told – but the bank is being quoted in the Fin Review today as saying only that the “business was being reviewed”. Curious.
In a note to clients this morning, GSJBWere states:
During the week, WBC cut its commission on broker-originated mortgages. Upfront commissions have been reduced from 75bp to 50bp and trailing commissions have been cut from 25bp to 15bp. On our estimates this will actually boost FY08 NPAT and have a minimal negative impact on FY09 and FY10.
We’re told the upfront reduction is actually from 70 points to 50 for major aggregators – the same figure used by JP Morgan’s Brian Johnson in his latest research note.
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Johnson reckons bank branch-originated mortgages are back near their pre-credit crunch profitability. But much more interesting is his forecast of how the banks will power out of the present crisis:
The move by WBC (cutting commissions) would see the profitability of a broker originated, balance sheet funded mortgage double from ~6% to ~12%. While this still generates poor performance in the current environment, the impact when the cash/90 flattens will be quite positive, boosting the overall return from ~12% to ~30%, far superior to the 17% returns achieved pre credit-crunch.
Given the oligopolistic structure of the Australian banking industry, and citing the upward repricing of mortgages outside the cash rate cycle as recent evidence, we anticipate that other banks will follow WBC’s lead in the near future.
Yep, the ill wind is blowing plenty of good the banks’ way. Meanwhile Crikey hears NAB is the bank most keen to follow the Westpac lead with brokers expecting them to move in the next few weeks. NAB has been discussing its plans with brokers, “trying to soften us up”, and proposing an interesting twist.
Like Westpac, NAB wants to cut the up-front commission but it’s workshopping the idea of increasing the trailing commission when a mortgage lasts beyond three years.
The NAB’s idea is particularly curious. Obviously the bank benefits if mortgages last longer, saving the up-front commission and costs for a start. But what’s the implication behind offering brokers an incentive to get their clients to stick?
Either there’s an imputation that brokers churn clients, or that a trailing commission incentive will stop brokers doing the right thing by clients in helping them re-finance to take advantage of better offers and products. Your pick.
Meanwhile, back at Westpac, what’s particularly annoyed some brokers is that they’ve been given a starting date for the new commission structure of any loan that settles after May 21. That means there’s plenty of business in brokers’ pipelines that will pay less than what was on offer when the business was written.