ACCC could scupper AFG buyout of Connective

George Lekakis Mortgages

Australian Finance Group’s share price rallied to a record high on Monday after the nation’s largest mortgage aggregator revealed it would pay $120 million to acquire the operations of one it big rivals, the Connective Group.

If the planned buyout proceeds AFG would boost to its leading position in the aggregator market ahead of the broker networks owned by the National Australia Bank.

A union of AFG and Connective would mediate lender interactions with more than 6500 brokers writing $70 billion of mortgages a year.

In terms of market share these numbers are significant because they show that the merged entity would account for 32 per cent of all mortgage brokers operating in Australia and at least 38 per cent of origination activity.

The numbers are so impressive that the proposed hook-up could actually tip AFG from a position of leadership to market dominance.

AFG chairman Tony Gill yesterday pitched the merger deal as a victory for competition and consumer choice.

“The merged business will have a significant footprint in Australia’s $1.8 trillion home loan market,” he said.

“The delivery of competition and choice the Australian lending market is at the core of our strategy.”

The tightening of regulatory compliance across the mortgage value chain is a major driver of the deal.

By joining forces, AFG and Connective believe they can exploit scale to crunch recent blowouts in compliance costs.

AFG chief executive David Bailey is forecasting the merger to deliver annual synergies of about $4 million a year and become value-accretive for his company’s shareholders in its first year.

While the merger could appease regulators such as ASIC and APRA who might welcome moves by aggregators to streamline compliance benchmarking across the broking sector, the proposed union also has the potential to jumble price signals in the home loan market.

Lender access to the aggregator platforms looms as an important issue for the Australian Competition and Consumer Commission in its scrutiny of the deal.

While AFG and Connective are big players in the mortgage industry, the composition of their respective lender panels is remarkably similar.

There are only around 40 mortgage brands represented on the panels of each aggregator, which means that the merger could potentially stymie competition as the broker channel continues to expand its influence.

Only a small number of customer-owned banks and credit unions are represented on each of the panels.

Connective markets loans for only eight mutual brands –  including four that are owned by Teachers Mutual Bank.

Brokers affiliated with AFG sell mortgages for ten customer-owned brands – including Bank Australia, IMB, P&N, Heritage, QBank, Beyond Bank and the four Teachers Mutual brands.

However, many of the most competitive home loan offers in the market are not represented on either panel.

These include top quartile mortgage offers – as ranked by market research firm Canstar - from Greater Bank, People’s Choice CU, CUA, Nexus Mutual, SCU, Move Bank and BankVic.

While it’s true that not all mutual lenders see their business models aligned with the idea of brokers distributing their products, some have indicated to Banking Day that they are keen to do it.

“There is the work we have to do to get our banking platforms to talk to the aggregators’ platforms,” said a mutual bank CEO who requested anonymity.

“But the remuneration practices in the broking business are a risk to your investment for as long as the brokers are not subject to a best interests duty.”

The main challenge facing customer owned lenders wanting to use brokers is mostly about finding the capital needed to link their mortgage servicing systems to aggregator platforms.

Broker dependence on the technology and compliance expertise of companies such as AFG means that the transmission of price signals could become less efficient as the mortgage market-space is redesigned by aggregators.

In a market where most mortgages are originated by brokers the key influences on loan advice and selection seem tied not always to pricing and features but whether the aggregator has put the best products on the broker’s shelf.

The problem is magnified when merger activity reduces the number of aggregators in the industry.

If AFG’s buyout of Connective is approved, the merged entity and the NAB-owned aggregation businesses would control more than 60 per cent of all broker distribution in Australia.

Connective director Mark Haron said his company expected more customer-owned lenders to join the platform over the next 12 months.

“We have seen more join recently and we’re talking to other customer-owned lenders about using the channel,” he said.

“I do see more coming on board in the near future.”

The merger announcement propelled AFG’s share price to a record close of $2.27, up 24 cents or 12 per cent for the day.

AFG also indicated that its profit for the 12 months to the end of June was likely to fall by 1 per cent to $33 million.

The company will release its audited full year accounts on 23 August.