Firstmac strikes its own path

Firstmac is an outlier in Australia’s nonbank sector thanks to its focus on prime mortgage lending and its expressed ambition to gain authorised deposit-taking institution (ADI) status. James Austin, chief financial officer at Firstmac in Brisbane, gives an update on the company’s strategic plan.

What are Firstmac’s growth plans?

Our organic growth is largely gained through direct retail lending by digital channels. This is targeted to be 60-70 per cent of our business and is balanced with 30-40 per cent from broker groups, which offers good diversification.

Firstmac has been forthcoming in its aspirations to become an ADI. What is the reasoning and can you give an update on the process?

We have been pursuing an ADI license for quite some time. The reason for this is that it would provide diversification of funding through access to retail deposits. It is important to have access to different funding markets for long-term stability. During the financial crisis we saw global securitisation markets close, so it is important to diversify in case a similar situation eventuates again.

Gaining ADI status can be achieved either through acquisition of an existing ADI or by application for a license in our own right. In either case the Australian federal treasurer’s office will have to approve, under the Financial Sector (Shareholdings) Act, an ADI which is more than 15 per cent individually owned. We are in the process of applying for this approval.

Firstmac’s business focuses on prime mortgages. How challenging has the elevated bank-bill swap rate (BBSW) been in this context, given your natural competitors are the ADIs?

BBSW affects nonbanks more than banks in the short term. This is because all our balance sheet is priced off BBSW, which means it has 100 per cent transmission through our balance sheet. For an ADI, this transmission ranges from 30 per cent to 50 per cent of the balance sheet depending on what the structure is.

We see this as a short-term factor, though. Ultimately, a rising tide lifts all boats so higher funding cost will eventually flow into deposit rates.

Has some of the pressure been relieved by the major banks raising their lending rates?

It has. We increased interest rates in May when the pressure was first felt and it has been sustained since then. With a lot of pressure on the major banks around the royal commission, they did not move due to political motivations. This left us in a fairly uncompetitive position. With the majors now having moved it is restoring our competitive position, because a dislocated market is effectively being corrected.

Firstmac recently launched a fixed-rate mortgage product. What is the strategy, and how was it received?

The fixed-rate product is in response to consumer expectations that interest rates will rise. It is offered at below many lenders’ variable rates.

Approximately 5 per cent of our balance sheet is fixed-rate loans and our intention is to increase the proportion of fixed-rate loans to 15 per cent. This will shift some of the funding reset away from BBSW. We see this as one part of a natural hedge against BBSW. If borrowers are on a fixed-rate loan they are hedged with longer-term swap rates rather than short-term rates.

The product is still very new but it has been taken up very well. There is a good and growing pipeline as a result of the positive response.

Firstmac’s securitisation transactions this year have been targeted at specific geographic investor bases. Is this an ongoing issuance strategy?

The strategy is to target different geographies to achieve diversification across our investor base. The Reg S deal we priced early in the year was targeted at investors in south-east Asia while our more recent deal was targeted at investors in Japan. The deal we are looking at in the fourth quarter will be focused on domestic investors.

This isn’t to say investors from outside the targeted geography cannot participate, and in all these deals other investors have been involved. We place an emphasis on particular geographies only to ensure diversity in the placement of our bonds.

Firstmac’s balance sheet passed A$10 billion (US$7.3 billion) earlier this year. What material impact does scale have?

It gives economies of scale. We have been able to grow our balance sheet to A$10 billion from A$6-7 billion with a minimal increase in the cost base. We are getting efficiency from the balance sheet and our profitability has increased.