Net interest margins have tumbled since 1990
One of the most eye-catching takeaways in the Mortgage and Finance Association of Australia’s (MFAA) Value of Mortgage and Finance Broking 2025 report on Tuesday was that the rise of mortgage brokers has had an inverse impact on major banks’ net interest margins (NIMs).
Not that the Big Four can cry poor, but the numbers say it all – since 1990, NIMs among the major banks have decreased by nearly three percentage points (see chart below from the MFAA’a report).
Over 24 years, NIMs, which measure the profitability of interest earned on deposits minus interest paid, have decreased from somewhere around 5% to somewhere around 2%.
KPMG data compiled since 2003 shows a similar trend. There are many reasons for this, not least the impact of higher capital requirements following the Global Financial Crisis.
But MFAA stressed that the rise of the broker channel has played no small part in this trend either.
“One way that the increased competition mortgage brokers have brought to the lending market has benefited borrowers is through lower net interest margins (NIMs),” the MFAA said in the report. In other words, brokers are getting a statistically proven better interest rate for their customers.
NIMs are not the only profitability metric to have fallen at the big banks. Profitability as measured by return on equity (RoE) across all income lines at the big banks has fallen from 15% in the early 2000s to 11% today.
This, said MFAA, is still comparatively high by international standards, suggesting that “although increased competition has contributed to somewhat lower profitability for banks, Australian banks remain in a strong position, with robust profitability and substantial capital funding, by international standards”.
This brings us to Commonwealth Bank.
A major upset
The major’s interim results released on Wednesday revealed a 2.08% NIM in the six months to 31 December, 2024. This is up nine basis points year on year, but down 145 basis points since 1997 (which is as far back as CommBank’s earnings archive goes).
Interestingly, CommBank has been warning of increased competition in the home loan market for decades.
In 1998, when NIMs saw a fairly brutal dip from 3.35% to 3.08%, the bank said: “The interest margin reduction results from increased competition in lending, primarily home loans in the first half of the year.”
Looking at CommBank’s RoE – which, in other words, is the amount of profit being generated by equity invested by shareholders – shows similar trends. In the most recent first half, it was 13.7%. In 1997, it was 18.48%.
This is undoubtedly a sharp decline in profitability, although CommBank is faring better than its Big Four competitors. Westpac, for instance, had a NIM of 1.95% and a RoE of 11% at last count. NAB? A 1.71% NIM and 11.6% RoE at last count. ANZ? 1.68% and 9%.
CommBank also writes substantially fewer loans, as a proportion of its loan book, via the broker channel compared to its competitors. And even though profits have declined over time, CommBank is still much more profitable than its competitors.
What does this mean?
If one considers the fact that CommBank writes only a third of its loans via the third-party channel, while Westpac, ANZ and NAB all write nearly two thirds of their loans via the third-party channel, a case can certainly be made that brokers do, indeed, squeeze bank profits to the benefit of borrowers.
Numerous industry sources say CommBank is focusing more on writing loans via the direct channel rather than brokers, which is distinctly at odds with the broader industry trend of brokers’ market share approaching 80%.
A case could even be made that CommBank, being the dominant force in home loans it is, is unevenly skewing the data to the downside.
CommBank’s executive general manager of home buying Michael Baumann (pictured) said in comments sent to MPA: “We are pleased to have maintained our strength in the home loan market over the six months to 31 December 2024, and know that much of what we have achieved in this space can be attributed to our clear multi-brand home lending strategy.
“We have multiple distinct home loan brands – each of which have their own great products and capabilities – that help us to meet the needs of our customers via their channel of choice.
“When it comes to the third-party distribution channel, we understand how complex buying a home can be and know many customers appreciate the face-to-face guidance and support they get from a mortgage broker.
“It is for this reason the broking industry continues to play an integral role in our business and why we have been supporting brokers for more than 30 years.”
Baumann also said that CommBank has upgraded its CommBroker portal “based on feedback we’ve received from our brokers and their support staff – to deliver a better, more comprehensive platform”.
Yet CommBank’s interim earnings report doesn’t mince words: “Broker-originated home loans (are) 20-30% less profitable than proprietary.”
Go with the flow
There have been grumblings from shareholders of the other majors about their emphasis on the broker channel over proprietary lending.
During ANZ’s 2024 full-year earnings call, Brian Johnson, an analyst at MST Marquee, enquired that, since broker-originated loans benefit the broker and customer over ANZ, “should you be changing your mix?”
ANZ chief executive Shayne Elliot’s response was pretty straightforward: “We go where our customers go… We can change our mix by just saying no to a whole bunch of business, right?... The market is choosing to go to brokers.”
