How the ‘millionaires factory’ shook up Australia’s big four banks

The “big four” have long dominated retail banking in Australia, but after a landmark ruling this week, perhaps we should be talking about the “big five”.

As the market reacted to ANZ’s win over the competition watchdog in its long-running plan to buy Suncorp’s banking arm, one of the more intriguing parts of the story was the rise of Macquarie Group as a serious force in retail banking.

Macquarie Group, known as the millionaires factory, is better known for its investment banking mystique and the huge riches it showers on executives, rather than the less racy business of making home loans and accepting household deposits.

Macquarie Group is better known for its investment banking mystique.Credit: Jim Rice

But when Justice John Halley this week rejected the Australian Competition and Consumer Commission’s (ACCC) ruling on Tuesday, he highlighted “maverick” Macquarie’s rise to show how banking was changing.

Macquarie has amassed a 5.3 per cent share of the mortgage market, doubling its presence in the past four years, proof that it is possible to break into a market dominated by the big four, at the same time as mortgage brokers and digital technology have made it easier for consumers to shop around.

The decision went against the ACCC’s argument that banking is a cozy oligopoly prone to “co-ordination” between the big players – and it wasn’t what some in the market expected.

“The surprise for us in this judgement is that five key players, namely the four major banks with Macquarie, are considered enough by the tribunal to ensure consumers are protected from anticompetitive behaviour,” Citi analyst Brendan Sproules said.

It is the latest development in a long-running debate about banking competition in Australia – a topic that always gets attention because it affects the cost of banking services, and the profits of these financial giants.

While some argue the merger will reduce competition in an already-concentrated sector, others posit it will help ANZ compete with more weight against its bigger peers, including heavyweight CBA, and indeed, Macquarie.

So, what does the tribunal’s decision, and the recent flurry of bank results, tell us about the state of competition in Australia’s banking sector?

The story so far

When Justice Halley this week overturned the competition watchdog’s decision to block the biggest deal in Australian banking since 2008, he surprised some onlookers.

At a time when market power and competition in some of the country’s biggest sectors is under scrutiny – including through parliamentary inquiries into insurance and supermarkets – banks have insisted the mortgage market is more competitive than ever.

NAB chief executive Ross McEwan said in November that he was seeing “some of the thinnest mortgage margins” across his time in Australian banking.

Trading updates from Commonwealth Bank, Westpac and NAB in the past two weeks have revealed some continued pressure on profits. Their net interest margins – a measure of profitability comparing banks’ funding costs with what they charge for loans – has dropped in recent months.

‘The surprise for us in this judgement is that five key players, namely the four major banks with Macquarie, are considered enough by the tribunal to ensure consumers are protected from anticompetitive behaviour.’

Brendan Sproules, Citi analyst

This comes after a period of extreme competition in home loans. This included ultra-cheap fixed rate terms and cashbacks in which some banks were writing loans below their cost of capital (the rate of return demanded by shareholders) in a bid to maintain and expand market share.

However, the ACCC in August vetoed ANZ’s $4.9 billion takeover bid for Suncorp’s banking arm, saying more consolidation in an industry dominated by “the big four” banks would further entrench the country’s banking oligopoly.

The ANZ-Suncorp merger would nudge ANZ’s market share in mortgages above that of its nearest competitor, NAB, making it the country’s third-biggest home lender. According to Australian Prudential Regulatory Authority data from December, CBA, Westpac and NAB had market shares of roughly 25 per cent, 21 per cent and 15 per cent respectively. If ANZ and Suncorp’s merger goes through, the combined entity would have a market share of nearly 16 per cent.

On Tuesday, following an appeal of the ACCC decision by ANZ, the Australian Competition Tribunal said the merger between ANZ and Suncorp was unlikely to substantially lessen competition in the banking sector. In doing so, they rejected the reasoning and concerns of the ACCC, and endorsed a view of bank competition which was broadly supportive of the status quo.

The deal still needs approval from Treasurer Jim Chalmers and changes in legislation made by the Queensland government to go ahead.

The rise of the big five banks

In allowing the country’s fourth-largest bank to buy a smaller competitor, the tribunal bought ANZ’s argument that the idea of a lazy banking oligopoly was outdated. Instead, ANZ maintained that the rise of smaller players – including investment behemoth Macquarie’s banking division – showed there was fierce competition.

Macquarie, which has rapidly grown its presence in the Australian home loan market in the past few years, was labelled a “maverick” competitor by Halley this week. Through partnering with mortgage brokers and focusing on its digital offerings, Macquarie has grown from having 2.5 per cent of home loan market share in 2020 to about 5.3 per cent in 2023.

The bank also flagged at its earnings update last week that it saw an opportunity to “dramatically increase” its market share in the home loan market at a time when several other banks are pulling back amid intense competition.

Some in the market are convinced Macquarie is now a serious force in retail banking, where it has invested in technology that allows it to approve loans quickly.

Jeffries analyst Matt Wilson said recent comments such as these suggested Macquarie was not going to back down in the mortgage market, and that competition against the big four would remain fierce.

“Given the amount they’ve spent on digitising the bank, Macquarie could grow to double its [market share] in the mortgage market [over the long term],” Wilson said.

Former ACCC chair Allan Fels said the merger’s fate before the competition watchdog, and then the tribunal, was “always going to be a close thing”.

Allan Fels says Australians are facing unfair pricing in many sectors, including banks, thanks to poor competition across the country.Credit: Alex Ellinghausen

“The ACCC itself said it was lineball when it came out against [the takeover],” said Fels, who has recently completed a report on price-gouging for the Australian Council of Trade Unions, which said there was a “significant lack of competition” in banking.

“The tribunal also said it was lineball. On balance, they believed it would not substantially lessen competition, underline the word substantial.”

Fels said the tribunal still seemed to be sceptical of the degree of competition between the four banks.

Where to from here?

ANZ and Suncorp’s win at the tribunal inevitably stoked speculation about the possibility of further bank mergers.Citi’s Sproules noted the tribunal’s ruling “clearly opens the door for further mergers of the smaller banks, possibly with other large players”. However, observers doubt the biggest home loans players, Commonwealth Bank and Westpac, would face the toughest competition hurdles – so much of the speculation focused on National Australia Bank.

While Fels said he was agnostic about the ANZ-Suncorp merger, he said some past decisions to allow bank takeovers lessened competition.

“My biggest regret is that in the past, some bigger regional banks like St George were allowed to be taken over by Westpac,” he said. “I think that would have lessened competition. Because Suncorp is so small, it may not have made much difference, but the regional banks are a source of competition, and the more they disappear, the less the competition.”

Fels said he was also sceptical about CBA’s takeover of Bankwest in 2008.

“To be fair, Bankwest was in prudential trouble due to the GFC,” he said. “So, it probably had to be taken over, but I would have preferred another bank do so.”

While some are wary about banks getting bigger, others have argued that the regulatory costs and degree of investment needed for banks to keep up and innovate their digital capabilities – including customer-facing services and cybersecurity measures – is difficult without significant scale.

Speaking at a business lunch in Sydney on Thursday, the NAB’s McEwan said it was important to ensure regulatory requirements, and the costs associated with them, were not too high, especially for smaller banks.

“We’ve got to be very careful if we want these [smaller] banks there, to make sure they’re not overburdened with the regulation and requirements of running a bank,” he said.

Bank mergers are notoriously challenging to pull off, requiring integration of complex systems.

However, if successfully executed, the deal could allow Suncorp to sharpen its focus by becoming a pure play insurance company, and ANZ could focus on capitalising on synergies, finding cost efficiencies and further developing its digital offerings in what it – and the tribunal – have said is a tough competitive environment against bigger players.

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