Macquarie Group Ltd. (MQG) and the local host of the “The Apprentice” are teaming up to crack into Australia’s A$1.1 trillion ($1.15 trillion) mortgage lending oligopoly.
Starting next year, the country’s biggest investment bank will fund loans via Yellow Brick Road Holdings Ltd. (YBR), whose chairman Mark Bouris hosts the television show made famous in the U.S. by Donald Trump. YBR will offer a 1.15 percentage point discount off its base rate for the first 12 months, undercutting the average 0.75 reduction offered by banks. The four biggest banks control more than three of every four home loans.
“Money is not a designer commodity, money’s money, and you want it for the cheapest possible price,” said Bouris, who in 2004 sold his Wizard Mortgage Corp. to General Electric Co. in a deal worth about $300 million. “The moment someone’s come in with a new price it’s upset the oligopoly, and people are coming to us in hordes to refinance.”
Macquarie is aiming to revive its return on equity, which has slumped to 6.6 percent from 23.7 percent in its 2008 financial year, and is seeking more stable sources of cash flow from leasing aircraft, managing funds and providing loans. YBR will bid to lure new borrowers even as annual home-loan growth slows to the weakest pace since records began in 1977, and snatch some of the A$960 billion in loans already extended by the nation’s four main banks.
YBR’s loan rate is about 30 basis points below the average discounted rates available at Australia & New Zealand Banking Group Ltd. (ANZ), Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac Banking Corp. (WBC), a big enough discount to entice borrowers to switch, Bouris said.
Bouris is seeking another success in the industry that made his fortune. He built Wizard into the nation’s biggest non-bank home lender, with 200 branches and A$18.5 billion of mortgages, when GE bought its parent company Australian Financial Investments Group in 2004. Australian Financial was equally owned by Bouris, Kerry Packer’s Publishing & Broadcasting Ltd., ABN Amro Holding NV and Deutsche Asset Management Australia.
GE sold Wizard’s mortgage book to Commonwealth Bank of Australia (CBA) and its branch network to Aussie Home Loans in 2008 as the global credit freeze roiled markets.
Bouris in 2007 started YBR, which offers financial services including pension planning and tax advice. He holds a 27 percent stake in YBR, while Nine Entertainment Co., whose Nine Network broadcasts “The Celebrity Apprentice” in Australia, owns 20 percent, according to data compiled by Bloomberg.
YBR made an A$6.8 million loss on revenue of A$14.8 million in the 12 months ended June 30, according to a regulatory filing. It signed its 100th branch agreement in January.
While Bouris is aiming to get a 5 percent market share of new loans and refinancings, he accepts it’s going to be tough, as the four banks have shored up their dominance by buying smaller rivals, and benefit from government guarantees on deposits, Bouris said.
“It’s harder now, much harder,” Bouris said. “But when you crack it, you crack it big time.”
The so-called four pillar banks posted combined net income of A$22.8 billion for their most recent financial years, according to a report this month from PricewaterhouseCoopers LLP. The lenders share 77.3 percent of the home loan market and 76.6 percent of business lending, the report states. They have a combined market value of A$294 billion, according to data compiled by Bloomberg, versus A$57.8 million for YBR.
“I wouldn’t call it a fifth pillar,” said TS Lim, a Sydney-based banks analyst at Bell Potter Securities Ltd., who said YBR’s move into mortgage lending is unlikely to hurt the major lenders. “If anything, it may put a dent into the other smaller players.”
Macquarie has been looking for ways to deploy some of its A$3.4 billion in surplus capital and will consider acquisitions across all geographies, Chief Executive Officer Nicholas Moore said in a telephone interview last month. It announced a A$500 million share buyback program in October 2011.
The company’s banking unit had already been beefing up its mortgage business before the YBR deal, according to data from the Australian Prudential Regulation Authority, which oversees the nation’s banking industry. Macquarie Bank had A$4.5 billion of housing loans to owner-occupiers and investors outstanding as of Sept. 30, the most in APRA figures going back to 2002.
Macquarie spokeswoman Jessica Richards declined to comment.
The bank’s agreement with YBR comes as a rally in credit markets drives interest rates on global financial debt to historic lows. Such bonds yielded an average 2.69 percent on Nov. 8, the least in records going back to 1997, according to a Bank of America Merrill Lynch index.
“The fact that Yellow Brick Road and Macquarie are willing to push the product indicates that funding markets have begun to thaw quite significantly, and wholesale funding costs have dropped enough to make the product economic,” said Jarrod Martin, an analyst at Credit Suisse Group AG. “It’s a good distribution channel for Macquarie.”
The yield premium on Macquarie Bank’s $750 million of 3.45 percent notes due in July 2015 has tumbled to 165 basis points more than Treasuries, from 320 when the bonds were sold in July, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.
Macquarie increased deposits to A$36.2 billion at Sept. 30, and has a “diverse and stable funding base,” it said in a statement Oct 26. Macquarie Bank’s cash management accounts pay interest that tracks the Reserve Bank benchmark rate, currently at a three-year low of 3.25 percent, according to its website.
It’s also looking to increase lending as Australia’s housing market stabilizes after a two-year slide. Home prices rose for a second straight quarter in the three months to Sept. 30, the first back-to-back increase since 2010, led by gains in the capitals of states at the center of the nation’s mining boom.
“Lower-than-average interest rates are providing some support to demand in the economy,” Reserve Bank Deputy Governor Philip Lowe said in an Oct. 30 speech in Sydney. “There is also some sign that they have led to a slight improvement in the property market, although there has been little change in the appetite for debt.”
The annual pace of housing credit growth slowed to 4.7 percent in September, the least in records dating back to 1977, central bank data shows. That’s down from about 12 percent when Bouris founded Wizard in 1996.
Arrears of more than 30 days on loans underpinning Australian prime mortgage-backed bonds were 1.5 percent in July, according to Standard & Poor’s. The equivalent U.S. loan delinquency rate was 7.6 percent at June 30, Bloomberg data show.
“The Aussie mortgage market stacks up well compared to offshore peers,” said Chris Viol, a Sydney-based credit analyst at UBS AG. “Arrears are low, unemployment is low and the housing market was relatively stable through the global financial crisis, all driven by an outperforming economy.”
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