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Non-bank lending surges beyond more than housing lines
Non-bank lenders account for about five per cent of all financial system assets or $65 billion as at December, 2022. But as a recent Reserve Bank paper, titled Non-bank Lending in Australia and the Implications for Financial Stability noted, the sector has grown rapidly since 2015, driven mostly by mortgage lending where growth has averaged approximately 15 per cent on a six-month annualised basis – more than twice the rate recorded by banks.
And yet, it is not only housing. In recent years, non-banks have increasingly moved into lending to self-managed super funds (SMSFs) and residential and commercial construction, as well as vehicle and equipment finance, as banks strategically withdraw from these sectors or where access to finance through banks can be more challenging.
This analysis by the central bank provides a useful insight into the non-bank sector. From Thinktank’s perspective, as an active player at scale in this space with more than $5 billion in loans under management, there are other factors at play, including customer service and market knowledge for certain credit products, amid a growing customer awareness and dependence when it comes to non-banks.
A decade ago, there was a false perception in the minds of some that those accessing finance from a non-bank loan implicitly meant bank financing was overly difficult if not unavailable. From the earliest iterations of non-banks, the business model has been predicated on competing directly with the banks and innovating in adjacent areas.
Today, it is clearly the case that customers know the non-banks offer superior options in many cases compared with the mainstream banks. They appreciate there’s a wide spectrum of non-banks that ranges from those offering unsecured credit to those such as Thinktank where all credit is backed by either residential or commercial first mortgage property security. So, saying non-bank doesn’t necessarily mean there’s anything wrong with the credit at all. It just means it’s not with a bank.
It’s not just an issue of creditworthiness either. Market knowledge and regulation also play a role. Customers have come to value non-banks’ deeper understanding of certain market areas. For example, Thinktank has focussed on delivering its extensive commercial property expertise to borrowers, while also producing quality market analysis on a monthly and quarterly basis that adds value for customers, finance brokers and other professionals in the market.
Compliance, too, can give non-banks an edge. Take limited recourse borrowing arrangements (LRBAs), for example, where most major institutions have vacated the market leaving it to the non-banks to specialise and excel in. LRBAs are a regulated financial product, with the associated compliance to ensure everything is correct is just as much of a consideration for all parties involved as the attendant credit risk.
Most non-banks also tend to centralise credit operations. By contrast, the larger banks are typically more fragmented in their approach with selective guidelines that work for the customers they wish to target. However, at Thinktank we have a single, specialised credit team for SMSF LRBAs, ensuring loans are not only appropriately supporting each customer’s individual circumstances and objectives but are compliant with the legislation.
The competitive landscape though, is not necessarily a level one. The cost of capital for non-banks can be a disadvantage, with banks having access to customer deposits, their primary funding source, and a lower cost of funds in global capital markets. That being said, non-banks do not have to bear the banks’ heavy capital and bureaucratic cost structures.
And while the banks can be slow to innovate, the non-banks have shown themselves to be more agile and customer focussed. For example, about six years ago, no banks were offering 25-year terms on commercial facilities; they were commonly limited to terms of between 5-15 years. By contrast, Thinktank came to market in 2006 with 25-year terms and then increased that to 30 years, directly leading to a significantly lower monthly cash flow impact for borrowers.
SMSFs are another example. Several banks that used to operate in the SMSF space only offered facilities over terms of 15 years or less. Although many bank SMSF borrowers have since happily refinanced to a non-bank, with interest rates rising, the resulting restriction on how much money is available for further investments or even maintaining adequate liquidity within the fund because of the stress induced by the shorter loan term, can lead to avoidable detrimental outcomes for fund members. But for non-banks, 25 to 30 years are a standard option, helping relieve cash flow pressure at the very time rates are rising.
Superior and more consistent customer service also helps explain the appeal of non-banks. In the past, a personal relationship with the local branch manager was the norm. This particularly applied to the self-employed running small businesses. Today, that relationship has altered so the service for someone seeking a $500,000 facility, for example, can be very different to a customer after a $5 million loan.
But with non-banks you still get the same service level irrespective of loan size. For Thinktank, our relationship managers and the mortgage brokers we support effectively act as the bank manager of yesteryear.
For non-banks, this personalisation of the relationship is critical. It’s why we don’t support the mortgage cashback ploy or honeymoon rates that reset higher at a later point in the first-time home buyer market. By contrast, our borrowers tend to be more established and are commonly self-employed. They are people who understand the importance of their credit history, industry and have defined wealth accumulation objectives involving property. Crucially, we don’t write every deal that comes in the door as we seek to actively manage our credit risk appetite through the cycle, with the benefit being the very low number of loans in arrears and a loan loss history that is superior to many banks.
Although a recent Reserve Bank report recommended “ongoing vigilance” of the non-bank sector by the council of financial regulators and policymakers, it concluded that the risks posed to financial stability are “low”. Thinktank can only concur, as we continue to support and service a generational expansion in credit demand, especially by the self-employed, as the traditionally dominant lenders continually trim with their service offering and behave inconsistently when it comes to the customers they support and the business they choose to write.
