Change of tack for Adelaide in the mortgage market
By Ed Charles
Adelaide bank has emphasised its commitment to achieving a five per cent share of the home loan market through the introduction of innovative products while increasing its margins through better use of technology.
This is despite a slip in market share of home loans from 3.6 per cent to 3.1 per cent. During the first half of the 2005/06 financial year the bank wrote $3.9 billion of new loans, down from $4.4 billion in the first half of the previous financial year and $4.4 billion in the second half of 2004/2005. On an annualised basis, this represents a slow down in the rate of growth rate from 25 per cent for the calendar year to December 2005.
Group managing director Barry Fitzpatrick said of this trend: “Housing is still our main game.” He is still aiming for housing lending to account for 46 per cent of the bank’s business by 2008.
Fitzpatrick said the company was now refining its offering to the brokers and “concentrating on our main mortgage managers”.
He said Adelaide Bank pioneered the low doc home market, but said it had become commoditised so the bank saw its share of this business falling. He said: “There is no doubt that the discounted rates of 70 basis points to 100 basis points are here to stay and you are not going to be able to pick that up by magically raising money at cheaper rates. You just have to improve the efficiency of operations and that’s what the bank’s all about.”
Within the next six to eight weeks the bank will launch an innovative mortgage product targeting a specific demographic. Fitzpatrick refused to reveal the nature of the product, which he expects quickly to be copied by mainstream banks.
He said the bank would move into the lucrative reverse mortgage market, though in this case the bank will be a follower rather than a leader. When asked whether he would follow the Bendigo Bank shared equity model or the compound interest model of the other banks he said, “I think we will paddle our own canoe.”
Most of Adelaide Bank’s mortgage business comes from mortgage managers. Jamie McPhee, chief general manager operations, said that the bank had upset some mortgage managers by selling home loans through brokers.
The bank over the last half year dropped aggressive pricing on loans sold through brokers, which had caused a spike in the number of loans written (in the prior half year). The change in approach meant the number of loans written through the broker channel fell in the current half.
McPhee said loans written through mortgage managers were static during the period. He said many mortgage managers had diversified their businesses by bringing other banks on board as part of their own risk management. McPhee also noted the competitive affects of other banks, such as ING and Macquarie, improving their loan offers during the last half.
Retail credit boosts portfolio funding
By Ed Charles
Adelaide Bank says its future remains in lucrative niche products and being innovative in the areas of business banking such as portfolio funding and margin lending.
Managing director Barry Fitzpatrick said he expected portfolio funding would account for more than 10 per cent of the bank’s profit in the foreseeable future. He has revised his target in the portfolio funding business for the full year up from $750 million of loans to close to $1 billion.
The bank increased the portfolio funding business from $307 million in June 2005 to $627 million at December, and from eight partners to more than 12. These include its largest partner, Great Southern Plantations, the credit card receivables of retailer Harris Scarf and unspecified managed investment schemes. The bank is coy about revealing partners and details of the business as it represents a lucrative source of new income with margins of more than two per cent.
Thanks to the $61 million acquisition of Goldman Sachs JB Were’s margin lending business last year, the bank’s portfolio of loans to equity investors jumped from $1.53 billion at December 2004 to $2.9 billion at December 2005. The bank is now the second largest margin lender in the country with 15.5 per cent of the market. Most of its growth, annualised at 90 per cent for the calendar year, was in the first six months when the Goldman Sachs business went on balance sheet. Growth was annualised at 20 per cent for the six months to December 2005.
Fitzpatrick said that the bank has completed property integration of the new margin lending business and is soon to complete merging the IT systems. He said that the bank was ensuring the operational risk management systems were in place so the bank can make money in both rising and falling stock markets.
He said: “We’ve had no losses and we have had three major stock market downturns since our first foray into this business.” He said that he is still on record as wanting to buy smaller players in the margin if opportunities emerge but at present he wasn’t in talks.
Staff costs rise quickly at ADB
By Ed Charles
Adelaide Bank group managing director Barry Fitzpatrick will be picking up his Australia Day honours in April from Government House. He jokes that with the cost structure at the bank he won’t be getting new business cards before the old ones run out.
He may joke, but operating costs increased 17 per cent during the 2005 calendar year. The bank’s staff expenses rose by 23 per cent from $43.5 million to $53.5 million for the year to December 2005. Mostly this was because the bank increased numbers from 1097 in 2004 to 1183 in December 2005 – 26 of them joining from the Goldman Sachs JB Were margin lending business. If Goldman Sachs JB Were’s operating costs of $2.9 million were excluded, operating costs would have increased by 13 per cent.
Fitzpatrick argues that the trends are favourable, since costs grew at less than the rate of loans under management and operating income.