Will growing reliance on mortgage brokers hit the banks’ brand power?

Will growing reliance on mortgage brokers hit the banks’ brand power?

In recent years, we’ve seen CBA, ANZ and Westpac increasingly turn to brokers to originate mortgages. But could this trend erode their brand value and, consequently, reduce their ability to generate a higher than normal return on capital?

The quality of a company is something we discuss constantly. One of the indicators of the quality of a company is the power of its brand. Brand power enables a company to generate a higher than normal return on capital employed and equity by allowing it to charge a price that is not purely determined by costs.

While most would say the average person’s brand perception of major banks is poor, they remain entities that rely on the trust of their customers. As such, the perception of the brand, even if it is only the consumer’s perception of that brand relative to the other banks, is important. A stronger brand means that the bank’s customers are stickier and that they are more likely to have multiple products. This leads to better pricing, lower customer acquisition costs and higher margin outcomes for the bank.

UBS released a report on CBA in which its banking team, led by Jonathan Mott, highlighted concerns around CBA’s growing reliance on brokers to originate mortgages.

We also see this as a concern, but not just for CBA. Driving mortgage share through the broker channel is more likely to be a function of price. While service levels can be a differentiator, mortgage brokers are more indifferent to bank brands and more focused on interest rates, commissions and discounts in determining which bank’s product to recommend to a customer. This reduces the product to a commodity. It is harder to extract a sustainable return premium from a commodity product.

Historically, CBA and WBC have originated a greater proportion of their mortgage from within their own branch network. If you think about this from a customer’s point of view, the decision to visit the branch of a particular bank means that they know the brand at the very least. Additionally, it gives the bank the ability to sell products to that customer without direct comparisons being made to competing bank products. While the consumer is likely to have visited more than one bank, they are unlikely to have been exposed to the breadth of competing product alternatives a broker could potentially offer.

What is of concern is the increase in the proportion of new mortgages being sourced from the broking channel for 3 of the 4 major banks over the last 4 years, as shown in the chart below.

Interestingly, NAB is the only one of the majors that has actually reduced its reliance on the broker channel for mortgage originations.

If we look at each of the major bank’s share of mortgage drawdowns that are originated directly from major bank branches, we get a very different perception of which bank is generating the strongest growth from their own distribution assets and brand equity.

Despite losing share in the mortgage market recently, NAB actually has the highest share when looking at mortgages originated within the branch network. WBC has been improving its share, while CBA’s share has been falling. ANZ’s share is well below that of the other majors.

The major banks will still benefit from the oligopolistic structure of the market in Australasia, and their scale benefits are expected to allow them to continue to generate higher ROE’s than the smaller regionals. However, the changing consumer perception of relative brand value might be an early indicator that the quality hierarchy within the major might be changing. As an indicator of changes in brand value, this is something we will continue to monitor.

Stuart Jackson is a Senior Analyst with Montgomery Investment Management. To invest with Montgomery domestically and globally, find out more.