Abstract
M.B.A.
Estimated to contribute between 15-20% of earnings for each of South Africa's
biggest four banks, ABSA, Nedcor, Standard Bank and FNB mortgages are the
biggest contributor to the banks' profits. The economic stability that followed the
emerging market crisis buoyed the mortgage industry. This, and the growth of the
'previously disadvantaged' segment, with its historically low house ownership levels,
has meant that the mortgage industry is the biggest and fastest growing industry in
South Africa.
The positive outlook of the South African mortgage industry created by the above
factors has attracted new players into the industry at various levels of the value
chain. The beginning of 1999 saw the launch of South African Home Loans (SAHL),
a lender that focuses on low risk buyers. Latter in the same year various estate
agents teamed up to form MortgageSA, now the biggest originator group in South
Africa. SAHL by focusing on low risk clients was able to offer buyers very
competitive rates thereby forcing the more established banks to give away significant
discounts on new mortgages as a way of protecting their market share. The 'birth' of
originators have had the same detrimental effect. The originators by obtaining
exclusive rights to mortgage applications generated by the estate agents and latter
'selling' them to the banks have increased the banks' acquisition costs. In 2000
alone it was estimated that originators cost the banks an extra R24million. The
overall effect of the increased acquisition costs and the rate discounting has been
the decline of margins.
The response of the banks to the declining margins has been to adopt a high
volume, low margin strategy. This has forced the banks to focus on the control of
distribution channels as a means of obtaining the required volumes. In South Africa
mortgage origination is mostly controlled by the intermediary channels Le. estate
agents and originators with relatively little business going through the direct channels
Le. internet, branches, home loan consultants and call centres. Collectively
intermediaries account for 75% of total originations and direct channels 25%.
Whether or not this balance between intermediary and direct originations will be...