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AMP steps up challenge to the big 4 banks

Prized for its profitability, the Australian mortgage market is about to see a boost in competition thanks to a strategic deal between financial services firm AMP (ASX: AMP) and Bank of Tokyo-Mitsubishi.

According to a report in the Australian Financial Review, Bank of Tokyo-Mitsubishi has agreed to provide a $500 million one-year mortgage-backed facility that was described by the newspaper as a “landmark deal that marks the entry of Japan’s banks into the Australian home loan market.” The deal will allow AMP to write more mortgages before bundling them up and issuing residential mortgage backed securities (RMBS) to pay back the loan.

While the report suggests this is a single one-year loan, no doubt it is the conservative nature of Japanese banking looking to ‘test the waters’ before a potential increase in their exposure. Given this deal was more than one-year in the making, it is unlikely it was undertaken with the view to being a one-off transaction.

The Global Financial Crisis saw a significant lessening in competition within the Australian lending market as foreign banks were forced to withdraw from the local market. This has left the big four banks with a significant 85% share of a very profitable market. In contrast AMP has just 1% of the mortgage market.

The mortgage market’s profitability has also attracted Macquarie Bank (ASX: MQG) to boost its presence in the sector. The investment bank has increased its use of mortgage brokers such as Yellow Brick Road (ASX: YBR) and Mortgage Choice (ASX: MOC) to achieve this.

Foolish takeaway

AMP’s vast financial planning network is a huge advantage to the company as it tries to build its market share of mortgage loans. Having presumably sourced an appealing interest rate with the Bank of Tokyo-Mitsubishi, AMP can now undertake a serious push into expanding its product offering and marketing of AMP-branded mortgage products.

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Motley Fool contributor Tim McArthur owns shares in Macquarie Bank.

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