By Samantha Harper, Student Number 97093532
“I saw the competition mortgage originators had provided the banks in the USA and I thought to myself. Australians have been taken for a ride long enough by the banks in this country, and it’s time to do something about it. Aussie home loans opened it’s doors in 1992. It’s purpose: to challenge traditional lenders and make home ownership more affordable. Today, Aussie is Australia's largest non-bank lender, offering a range of home loan solutions.” ( Symond 2003).
In this article we examine how John Symond was able to implement this vision in the years between 1992 and 1997. We consider the strategies used, the actions of his competitors and suggest strategies for the future.
BACKGROUND - A DIFFICULT MARKET TO ENTER?
Prior to 1982 the banks had been highly regulated. They were effectively protected from competition but interest rates for housing were capped and this made home loans unprofitable at times of high interest rates. In these situations the banks essentially rationed loans by placing all kinds of preconditions on any new loan. ( Robins 2003 ). It was a common complaint that the banks would never lend you money unless you were so rich that you didn’t need a loan anyway. In fact for many people the building societies were the only recourse although they were more expensive. At their peak they accounted for about 35% of the home loan market.
By about 1985 the finance sector was substantially deregulated and this allowed mortgage originators to appear. They raised wholesale funds by selling AAA rated mortgage backed securities to various financial institutions. This left them at a disadvantage. The banks had traditionally offered derisory interest rates on cheque and personal savings accounts. This allowed them to provide more than half their mortgage lending funds at very low cost. On the other hand the mortgage originators were not saddled with expensive retail branch and agent networks. By 1996 more than 100 mortgage originators were in business representing 16% of the home loan market ( Fenech 2003 ).
A final change occurred in the early 1990’s when the Reserve Bank reduced the Capital Adequacy Risk Weighting for home loans substantially . This reduced the funds the banks were required to hold as security for such loans .
In 1992 the major banks were: Commonwealth Bank of Australia with 22% of the home loan market, the National Australia Bank with 17% , Westpac Banking Corporation with 15% and the Australian and New Zealand Banking Group with 11%. Nearly all the remaining market was divided between building societies and regional banks. Only about 1% was in the hands of mortgage originators.
The “big four” formed a comfortable oligopoly as the financial and marketing barriers to entry into banking were seen to be very high. In early 1992 they all offered rates of 12.0% which gave them a very profitable 4% lending margin.
AUSSIE HOME LOANS - DAVID vs GOLIATH.
This unlisted public company was formed in February 1992 with John Symond as managing director. Its stated aim was “ to be a residential banker by consistently exceeding the expectations of our customers and providing exciting opportunities for our employees in order to foster continuing growth and profitability”.
The funds for this activity came from Macquarie Bank subsidiary PUMA Management Limited which issued the mortgage backed bonds into the capital market on behalf of Aussie.
The strategic plan seemed to have three elements.
The primary competitive approach was that of price. The oft repeated slogan “We’ll save you” essentially referred to saving money. In 1992 this was not difficult as bank lending margins were very high.
The second competitive approach was that of service. In 1992 the customer went to the bank between 9:30 and 4:30 Monday to Friday. Aussie Home Loans would speak...