Deloitte's second annual Australian mortgage report – Broadening the Horizons - notes growth in Australia's residential mortgage market reached 13% p.a. in 2005.  Deloitte actuarial and advisory partner James Hickey, who co-ordinated the authors' contributions to the report said, "While 13% growth appears reasonably solid, it actually represents the lowest level of system lending growth since 2001.

"Mortgage growth peaked in early 2004 when it reached almost 22%. 

"Housing approvals fared little better in 2005 calendar year, with overall growth in mortgage lending approvals increasing only 8% over 2004," said Hickey. 

"These growth figures of 13% p.a. for residential mortgage loans outstanding, worth $725 billion by end 2005, and 8% in lending approvals, worth $210 billion in the same period, highlight a household mortgage sector under increasing pressure.

"That pressure is coming from new competitors as well as slower consumer lending. 

"If you add the May 2006 interest rate rise to this equation, a key question for the industry is where will mortgage book and earnings growth come from?"

The report identifies that incumbent lenders have begun ‘product reach’ strategies, with large lenders in particular getting into sub-prime lending, such as lo doc loans. 

Hickey said, while product reach strategies can potentially work in the short term to support margins and market share, we see it as a relatively replicable approach. Once one major lender moves in that direction others can quickly follow. 

"This is already being seen in the sub-prime market, as headline rates are converging closer to standard variable rates, effectively squeezing margins closer to prime margins but with an arguably higher risk profile."

In addition Hickey and the Deloitte specialist lending and broker experts expect continued regulatory and market analyst interest in the risk profile of mortgage earnings streams over the year, in particular those from sub-prime lending.

In the opinion of the report’s authors, existing lenders will need to further shift their focus to profitable growth rather than market share. 

"Product and pricing led strategies will not be enough in this coming year," said Hickey.

As an expert in the use of advanced analytical techniques applied to lender portfolios, Hickey said understanding customers' needs and profiles to predictively drive business decisions is increasingly important in such a deeply competitive marketplace.

"Big lenders and large broker groups are building up sophisticated customer analytical capability. But how well are they using this capability to drive competitive advantage?"

Using analytics to drive competitive advantage

Deloitte considers using analytics as the critical element for big banks to gain competitive advantage and recommends the banking sector take a leaf out of the general insurers' book, where sophisticated analytics are used to sharpen pricing points and customer segmentation.

Author of Retail mortgages: using analytics to better compete for customers, consulting partner Chris Wilson said, "To hold off further margin erosion, sophisticated customer analytics will help lenders achieve:

• greater relevance to the customer base with targeted solutions
• better retention rates
• smarter and more agile pricing
• a loan life that is better than the current average of around 3.5 to 4 years.

"Anecdotal evidence from UK banks suggests predictive behaviour modelling leads to sophisticated pricing which helps to lengthen the time a customer is disposed to stay with the lender.

"The value of building customer relationships through system and service strategies far outweighs that of product reach strategies. Our research indicates that product reach strategies only gain three months advantage over the competition, whereas service and system innovations gain 12 months advantage," he said.

Survey – interesting insights

The Deloitte report, Broadening the Horizons, conducted an exclusive survey of more than 1000 professional services employees. The report indicates that advanced analytical techniques bring to life key competitive advantage insights that initial simple analysis of the data around retention, loyalty and customer segmentation does not.

Hickey said, "For instance when it comes to loyalty, at a simple level, interest rate savings appeared to be the driving force to move lenders. But when we undertook multi-dimensional analysis, we discovered that:

• mature borrowers with higher incomes were largely insensitive to interest rate changes and were more concerned with quality of service and showed a higher level of loyalty to their lenders
• younger, middle income borrowers, who sourced their loans from brokers, were heavily driven by interest rate savings and show a lower level of loyalty to their lenders. 
  

"So a blanket interest rate reduction campaign may not in fact work for the mature, more affluent customer and would instead lead to unnecessarily reducing margins with no retention benefit likely.

"Yet interestingly, although those younger, middle income borrowers who sourced their business via a broker have a relatively low level of loyalty to their lender, they do appear to have loyalty to their broker."

If you would like to find out more about this report please contact either James Hickey or Louise Denver whose contact details are above.

Download the full news release below.