Investors considering taking up the NAB 2-for-25 rights issue need to consider just one thing – whether they want to increase the absolute level of their investment if in their portfolio they are already heavily exposed to Australian banks.
It is worth noting that all four Australian banks make it into the top 25 of the world’s largest banks by market capitalisation – CBA (number 10), Westpac (13), ANZ (19) and NAB (21). All of them are individually bigger than (say) the Bank of Communications (China) or BNP Paribas (France). Does this really make sense, given Australia’s population base relative to China or the EU? The capitalisation of the Australian banks has almost doubled in the three years. Can they really keep growing like they have, with regulatory pressure on capital requirements on the horizon?
But that is really a secondary question. More importantly, the pace of disruption, which began with non-bank lenders like Aussie Homes Loans and Wizard, has in the past year quickened significantly. There are literally dozens of disruptive players eyeing off the juicy bank valuations. In Australia, James Packer is a shareholder in Society One. Students of finance will remember that Packer was also a core shareholder in Seek and Carsales, both of which successfully disrupted the classified advertising businesses of Fairfax and News Corp. (Just as interesting, another shareholder of Society One is Westpac.)
Thus far, Lending Club in the US is the biggest disruptive bank player (it calls itself the “world’s largest online credit marketplace”) with a capitalisation US$6.6b, having floated in October last year. Its board is of some interest – John Mack, formerly CEO of Morgan Stanley is a director, as well as former US treasury secretary Larry Summers and Kleiner Perkins’ Mary Meeker. The loan book is just under US$10b.
Lending Club CEO Renaud Laplanche has been quoted as saying “We only have a few billion dollars in loans. The banks’ business in consumer loans is over a trillion. But I think now we’re beginning to see banks pay attention to what’s going on at Lending Club. There is a whole marketplace being developed on lending, using the Internet, with no expenses coming from branches.”
Unsurprisingly, having created the mould, others are following. Marlotte LLC raised US$450m to get started in the US late last year. Another is Prosper Marketplace Inc. In the UK, Zopa is in the lead, having originated some US$1.2b in loans (it just signed a significant joint agreement last night with another bank disruptor). And of course, Society One is playing in Australia, as well as DirectMoney. Others are in the wings.
All of this before we consider what the big boys are doing – consider Yu-e Bao, an Alibaba business, which created the world’s fourth-largest money market mutual fund – around US$90b – in eight months. Tencent has just been granted a US$1.6b line of credit by Bank of Beijing to kickstart the social media platform’s new bank.
Development Bank of Singapore chief executive Piyush Gupt, in a speech last year, noted “The amount of money both Tencent and Yu’e Bao have been able to raise in extraordinarily short periods of time is mind- boggling.”
Why, apart from the size of the prize in the event of success, are the banks such a fertile target for disruption? Simply because they are slow to move, inflexible with respect to the requirements of borrowers and can be reluctant to provide credit outside very stringent guidelines. All of this has created a complex, high-cost product which is then passed on in the form of higher interest rates. (There are figures which show that in 2013, the average cost across four of the world’s leading P2P platforms was 4.2% on the loan balance – 40 per cent lower than that of the banks.)
Reduced to its core, providing loans is arguably much simpler than the business the banks have built. Aussie Home Loans, Rams and Wizard Finance showed that sourcing money from outside a traditional deposit base may be more expensive than it is for banks, but these higher costs were more than offset by the lower operating expenditures around writing the loan. The banks couldn’t believe their luck when the wholesale market dried up during the GFC and they were able to buy these businesses at knock down prices. This time, it may not be so simple.
When wholesale market finance is blended with the web, hurdles around documentation, credit checks and securitisation simply melt away, and an industry is born.
Many of the most successful disrupters have chosen a very simple business model and pursued it single-mindedly – find a segment of the market that is being poorly serviced both through the customer experience and the cost, collapse the cost structure through technology, and harvest some of the savings yourself, passing on the rest to the customer. Then grow your business from there, expanding into higher value areas.
As for the banks themselves, they are across the problem of start-up lenders – the issue is their ability to do anything about it. They can, and do, sometimes seed the new players, as Westpac is doing, but this merely serves to cannibalise their own business because it is cheaper. Further, it is to some extent an admission to their shareholders that their own model is under threat – something which creates further drag on the stock price.
A strategy of attempting to match the price offered by the new player would create a two-tier customer base – those that are on the new “matched” rate and those on the old rate – but this would only create new problems as borrowers increasingly demand access to the new low rates. Providing the loans across the board would collapse profitability. Thus, the best thing to do is continue with the old model for as long as possible. Just like Telstra and Fairfax did. Expect a lot more of these fading blue-chips as the disruption story takes further hold.
