Another giant building society emerges

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Australian banking is in a mad scramble to squeeze the last drop of juice from the massive mortgage lemon:

Macquarie Group’s domestic mortgage book will almost double to $30 billion in two years, transforming the investment bank into one of most significant players in the market, and allowing it to nip at the heels of the four major banks.

…In a research note, JPMorgan analysts characterise Macquarie’s aggressive incursion into domestic mortgages as “more meaningful than investors or even Macquarie management themselves may suggest”.

The investment bank notes growth has been exceptional over the past two years with the portfolio expanding by around 50 per cent to $17 billion.

Further growth will be fuelled by the redeployment of some $10 billion of surplus cash management account (CMA) deposits.

Even our only home grown investment bank, which is supposed to function in the system as the broker of high risk, high return business investment, is instead turning to mortgages as the only game in town.

That, seemingly, is all there is.

David Llewellyn-Smith
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Comments

  1. and Mac bank was a pioneer (if my memory serves me correct) of the collateralised mortgage back securities market that helped fuel via the US market, the GFC.

    Welcome to the new Oz economy?????????

  2. Is Macquarie investing in YBR securitisations or is this traditional on-balance-sheet lending (distributed through non-YBR channels, presumably)?

    Does anybody know?

    • YBR sell Macbank product – along with others.

      Ultimately one would expect some or all of those loans to be securitised.

      Macbank ownes just under 15% of YBR.

  3. Why wouldn’t you?
    You can gear yourself 20times, make a 2% pa clip, and history shows the gov will support you,
    Id call this good management

    • You can gear much more than 20 times. My info says Macquaries capital model attaches a ~20% risk weighting to mortgages, which implies ~50 times gearing. Wheeee!

      • It’s worse than that – Macquarie is less leveraged than the Big 4 according to Joye. What could possibly go wrong with our major banks leveraged over 60:1?

        http://www.afr.com/p/personal_finance/smart_money/secret_to_big_bank_profits_r9E5I0BaywuvDTmqGFy2tN

        Among the majors, home loan risk-weightings range from 15 per cent for CBA to 20 per cent for NAB, says UBS. Macquarie’s is about 22 per cent.

        Risk-weightings at all other deposit-takers average 40 per cent.

        Given an 8 per cent target capital ratio, this means a regional bank has $3.20 of capital for every $100 of home loans. The majors hold only half this buffer, or $1.60 of capital.

        So whereas the majors’ capital is leveraged a staggering 63 times, their rivals are leveraged only 31 times.

        Assuming an economic margin of circa 0.5 percentage points per new home loan, leverage of 62.5 times produces a return on equity of 31.3 per cent. Lower the leverage to 31 times and your return slumps to 15.6 per cent. Now you know why Macquarie is gobbling up mortgages: it’s scalable money for jam.

  4. sbinderMEMBER

    Macquarie needs a stable revenue stream to offset the volatility from their IB operations. That is what the infrastructure management business did for a while, until the model of withdrawing upward valuation increments as cash (funded by loans), and extracting a management fee that increased as the structure got closer to insolvency, failed.

    Housing may be more resilient.

    But it probably highlights that when it comes to low capital intensity, high return, utility functions it doesn’t get much better than Australian mortgages.

  5. Read an article last week that the governor at Threadneedle St expects legislation of bank bail-ins to be in place for the G-20 by the 12th November for the Brisbane
    Meeting.