Macquarie our ‘fifth pillar’?

Investment bank’s mortgage book grows by 55% in six months

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Macquarie Bank – the traditional banking arm of investment bank Macquarie Group (ASX: MQG) has posted a 55% rise in mortgages over the past six months, as the group looks to break into the Australian mortgage market.

According to a report in today’s Australian Financial Review (AFR), Macquarie has seen its mortgage lending rise to $6.2 billion, with the majority of loans sold through Mark Bouris’ mortgage broker Yellow Brick Road (ASX: YBR).

The AFR believes that Macquarie is determined to become a more serious player in retail banking, as returns in its traditional investment banking businesses falter, due to low market activity, a lack of mergers & acquisitions, and low trading volumes. The newspaper reports that while Macquarie has continually downplayed its aspirations in retail banking, sources claim it has aspirations to become Australia’s ‘fifth pillar’ in home lending against the big four banks of ANZ Bank (ASX: ANZ), Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC).

The big four currently control over 90% of the home mortgage market, after taking over smaller players such as RAMS, St George and BankWest, and the exit from the market of others. Macquarie has recently started advertising its own home loans on television, but marketing is deliberately being kept low key, to avoid a price war with competitors.

The AFR report suggests the big four could be vulnerable to new competition because much of their funding was sourced several years ago at high rates. In contrast, a new competitor can take advantage of cheap funding available in international credit markets currently.

Macquarie can also take advantage of around $30 billion in cheap deposits through its popular cash management account, which pays an interest rate equal to the Reserve Bank’s cash rate – currently 3%.

In November 2012, Macquarie announced a deal with Yellow Brick Road, to provide the broker with cheap loans. Yellow Brick Road then offered discounted home loans to borrowers at interest rates up to 1.15% lower than the big four banks.

Foolish takeaway

Increased competition should mean more borrowers look outside the big four banks to source their mortgages, and if successful, should see the market dominance of the big four ease.

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