With profits walking out the door, the big operators have had to think again, business editor David Potts reports.
If you're not too fond of the banks, this is going to make your day. Unless you're a shareholder, that is.
The days of slash and burn are over, and instead of closing branches, the banks are opening them.
Which just goes to show that finance is no less fickle, and probably more so, than any other industry. The 1990s mantra that branches were too expensive is being seen as the mother of boo-boos another debt we don't owe management consultants, change facilitators and Harvard graduates.
The penny has finally dropped, so to speak, and the banks are going to pay dearly.
Broking analysts have watched in disbelief as banks have been handing over their customers to mortgage brokers. Almost one-quarter of bank mortgages are done through mortgage brokers rather than through the banks.
Not only are most brokers indifferent to which bank they sign their customers up to, they have no qualms about re-signing them with another bank, or for that matter a non-bank lender, if a better offer comes along. Especially for the broker.
Although borrowers usually sign up for a 25- or 30-year mortgage, they rarely last the distance. Er, the mortgage that is. More like seven years, because they invariably upgrade to another home, and a new mortgage.
Now the banks are lucky if they last three years a glorified personal loan, except there's a lot more of it.
The reason for shorter mortgages, but more of them, is the popularity of honeymoon or 12-month (sometimes six-month) introductory rates.
Brokers agree, and the banks are finally coming around to the same view, that a mortgage signed up at a branch is more profitable than one done through a broker.
That's because the banks have to pay an upfront commission of at least 0.5 per cent and in some cases up to 0.8 per cent, plus another 0.25 per cent a year to the broker.
It might sound like only a fleabite, but boy, does it sting. In the case of the ANZ Bank, for example, almost one-third of the profit on a home loan that lasts three years sold through a broker is eaten up in commissions, Merrill Lynch has estimated.
Ouch.
Mind you, the fact that banks also get hit by fees does have a certain poetic justice to it.
Fellow stockbroker UBS estimates that the profit margin on mortgages sold through branches is 35 per cent higher than through mortgage brokers.
The squeeze
You wouldn't suspect from the recent run in their share price that one of the most profitable parts of the banks' business, home lending, is about to, er, hit a brick wall.
It's bad enough that their new sales force mortgage brokers have no loyalty to them. For a broker, the bank that pays the highest commission that day is the best lender. Sure there are exceptions the biggest ones such as Mortgage Choice and Aussie Mortgage Market insist the commissions their brokers get are the same irrespective of the lender but as the Australian Securities and Investments Commission found, there are plenty of others that don't.
Brokers especially love honeymoon rates because of the potential to earn another commission by switching you to a different lender when the loan falls due.
"They exploit them," said Andrew King, director of investments of ABN AMRO Morgans.
"They will even diarise when the one-year honeymoon is up."
And why wouldn't they?
While there's a housing boom on, with the number of new loans which includes a lot of old loans recycled to a new lender and so counted again increasing at 20 per cent a year, the banks can pretty well hide the fact that their profit margins are falling. Bulk makes up for quality.
But once the boom cools off, the banks won't be such a pretty sight.
And it will be made worse by their allies, the mortgage brokers, who will also be feeling the pinch. Only their suffering won't be mutual.
They'll be on the phone to borrowers suggesting they might like to refinance for a lower rate or bigger amount down the road, something that's already happening, but has been brushed under the carpet by the sheer size of the housing boom.
Incredibly, the banks have given the competition a free kick because they're not the only ones to use brokers.
Having seen the success of small, non-bank lenders which used brokers to give them a national market, the banks decided to climb aboard.
"By using brokers the banks have levelled the playing field," King said.
So when the housing boom eventually ends, the banks won't just be paying commission to brokers to play pass the parcel with mortgages, but will lose some business altogether to non-bank upstarts such as Wizard, RAMS and Resi.
Back to the future
And guess what those non-bank lenders are doing? Opening new branches, of course.
Wizard has been the most aggressive, boasting that it's opening a new branch a week. It aims to have 200 branches by the end of the year. That's already one-quarter the number Westpac has with a head start of almost 150 years, thanks to mass closures in the 1980s and 1990s.
It has forced the banks to sit up and take notice. The Bank of Queensland is even using the same formula branch franchising as Wizard.
Homeloans , the only non-bank lender listed on the stock exchange, aims to build 30 branches, or what chief executive John McGee calls "satellite offices", this year.
RAMS will open 50 branches in the next 18 months. In Queensland, the Heritage Building Society opened six "community branches" last year.
But the most symbolic turnaround must be in Saturday morning trading. For about 40 years we went without banks opening on Saturdays, and the march of ATMs would have made any suggestion of a comeback seem fanciful.
St George was the first bank to trade on Saturdays, a leftover from its building society origins.
But Westpac has joined in, while the ANZ is conducting trials in Victoria.
The experience has come as a pleasant surprise even to Westpac. It found no shortage of volunteers to staff the desks, while customers "especially working couples, are particularly interested in discussing home loans and financial planning on Saturdays" , chief executive David Morgan said.
He even penned an article called "The branch is back" in Westpac's annual report.
Westpac and the Commonwealth have drawn a line in the sand at closures, and ANZ is planning to open 50 new branches. St George will be opening branches as it expands into Queensland and Victoria. The Commonwealth not only has stopped closing branches, it has opened two this year.
The National Australia Bank is also opening new branches, though on a slightly different tack. They're specialist financial advice or business centres, with 38 to be opened in the next year or so.
Seen as the original perpetrator of branch downsizing, ANZ has come closest to an apology.
"Every time we make a marginal gain [by closing] a few branches in the bush, it's like a million dollars a year saving and $500 million off your market capitalisation," chief executive John McFarlane reportedly said recently.
Maybe not quite an apology, but it'll do.
Community banks
The smaller banks have also been on a branch building spree, especially Bendigo Bank. Talk about rubbing the big banks' noses in it. Bendigo Bank is behind the 100 community banks that have sprung up around the country, their sole raison d'etre to restore a bank branch to an area.
These joint enterprises between local communities and Bendigo Bank basically the deal is that they split revenues (note, not profits) 50-50 have been so successful they've defied the normal rule about two out of three new businesses folding within a year.
The average break-even point is only 12 to 18 months after opening, while by the third year the banks can be expected to be paying dividends. This is despite, by their very nature, serving only small communities the very communities the big banks abandoned because their branches weren't profitable.
Another 30 community bank branches are planned this financial year.
Since first opening five years ago, none of the community banks has folded. No wonder Bendigo Bank shares are near an all-time high.
OYO branch
You too can ride the branch boom.
Although community banks are more like a syndicate shareholders typically put up about $5000 each and nobody has a controlling interest Bendigo Bank also has three "private franchise" branches, community banking manager David Macauley said.
That means the branch is franchised as a small business.
Wizard has made this into an art, or rather an entrepreneurial, form.
It has owner-managers, and its system seems to be more generous than your normal franchise.
The upfront payment is about $60,000, including $40,000 working capital, and Wizard pays for a few things such as signage, while the owner-operator does the rest, such as hiring staff and running the branch as a business.
Homeloans, RAMS and Bank of Queensland have similar schemes.
The trickiest part for owner-managers is finding a suitable site Wizard, for example, stipulates it should be on the ground floor, on a main road and near an intersection. Gee, it sounds like my place.
They are paid a commission on each loan they sign up.
The idea is for them to be like bank managers of yore, except human.
Some savvy investors are landlords to the bank, which must be an exquisite feeling.
Every now and then branches come up for sale, usually as a leaseback, so the bank rents them back for seven to 10 years.
The beauty of this is you have a good, secure tenant, so the money rolls in.
The bad news is that sales are becoming rarer the banks are getting altogether too smart and the prices are being pushed up.
"There might some [branches] later in the year for St George," said Scott Gray-Spencer, national director investment sales, CB Richard Ellis.
BankWest has also been selling branches.
"Watch the papers to see when they're advertised," Gray-Spencer said. Rental yields have ranged recently from just over 4 per cent to over 9 per cent (in Wagga Wagga).
But you're unlikely to pick up a branch for much less than $1 million.
The normal rules apply if you find one: location, the architectural style, and if the bank's not leasing it back, it's got to be useful floor space for another business.
Remember, if you can't find a branch for sale, you can always set one up yourself.
When to use a branch
- Don't use one for withdrawals because, depending on your account, you could be charged a fee. Eftpos is usually cheaper.
- Be careful if paying bills these count as a withdrawal as well, so you could cop a fee.
- Branches are popular for deposits because, while everybody trusts ATMs to spit out money, nobody trusts them to take money.
* When you're ready to sign on the dotted line. Most things you want to know are on the banks' websites.
- For financial advice, but keep your wits about you because the banks have their own products to flog.
How to open your own branch
- Wizard plans to open a new branch a week. Go to www.wizard.com.au for an application pack.
- Other lenders such as Homeloans , RAMS and Bank of Queensland advertise branch opportunities.
- Bendigo Bank says it is also open to "extraordinary" opportunities for new franchise branches.
- All will require start-up capital of about $50,000, depending on the location.
How to start a community bank
- Get an information kit from Bendigo Bank (www.communitybank.com.au) .
- Form a local steering committee.
- Get pledges of financial support (you need about $600,000 the bank will supply you with forms).
- Hire a consultant to do a feasibility study.
- Use Bendigo Bank model to produce a three-year business plan.
- Draw up a prospectus.
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