As major banks battle with shrinking margins in home loan lending, the shift towards the SME and business banking sector is on.
This presents a unique opportunity for mortgage brokers to diversify their skill sets and capitalise on the growing demand for commercial lending expertise.
But for many brokers, acknowledging the need to diversify and actually doing it are two different things and some may feel ill equipped to overcome the unique challenges of commercial lending.
“There’s a massive opportunity for brokers to diversify as the market transitions,” said Fawaz Sankari (pictured above), chief business banking officer at Bank of Sydney. “This diversification will not only boost their earning potential but also cater to the increasing demand for commercial lending expertise.”
Many banks, however, lack the resources to deal with brokers who lack a commercial banking background, according to Sankari.
This creates a challenge for brokers seeking to submit business and commercial loan applications.
Sankari said smaller banks had a significant role to play in extending crucial business funding support to SMEs and were uniquely positioned to accommodate inexperienced brokers with expert commercial advice.
“I believe smaller banks like the Bank of Sydney are uniquely positioned to offer tailored financing solutions and streamline application processes for business support,” said Sankari. “We have a number of advantages over larger banks when it comes to assisting brokers and their business clientele.”
Why is business lending in and mortgage lending out for banks?
The recent market shift, particularly in the last six to 12 months, has seen banks pivot from their previous strategy of residential mortgage growth and a move towards the SME and business banking sector, where they’re finding healthier profit margins.
Evidence of this can be seen when Commonwealth Bank of Australia’s (CBA) profits rose despite its mortgage books decreasing for three months in a row – although it must be said Australia’s largest bank is far from the only example.
CBA’s $2.5 billion unaudited quarterly cash profit was driven by a 11% increase in business lending.
A recent CBRE lenders survey of 40 banks and non-banks echoed this sentiment and others in the industry have looked to capitalise on the changing landscape.
But why is this transition happening? Sankari pointed to two reasons.
“Mortgage funding costs are getting more and more expensive. When you look seven to eight years ago, funding costs were a lot cheaper than they are today,” Sankari said. “On the other hand, business loan interest rates are generally higher than mortgage rates, which can be more profitable for banks.”
The second reason, according to Sankari, is that many banks took advantage of the RBA’s Term Funding Facility (TFF) program during COVID, which offered cheap funding at 0.1%.
“However, these loans are now maturing, and banks are having to repay billions back to the banks over the next couple of years.”
What are small businesses thinking?
Impacted by the cost-of-living crisis in both expenses and its impact on consumer sentiment, small businesses may look to reduce lending in the near future.
However, Sankari further emphasised the significant growth potential in the small business sector, necessitating increased lending activity.
“There is also a lot of forecasted growth in the small business sector which will require further lending,” Sankari said.
This shift, he believes, will ultimately benefit both brokers and SMEs, who have long been frustrated by the lack of support from traditional banks.
“I believe SMEs have been frustrated in recent years with banks neglecting their needs,” said Sankari. “However, with the increased focus on this sector, SMEs will finally benefit from the support services and resources they deserve, especially in banking and finance.”
“This shift will be noticeable, and Bank of Sydney stands out in the market by offering a dedicated senior relationship management team. These individuals have either run their own businesses, served as brokers, or worked closely with them.”
Why smaller banks hold the advantage in business lending
While large banks benefit from size and scale often having the ability to offer sharp rates, Sankari said small banks had a couple of advantages.
“What we hear is brokers complaining that they’re always talking to a new CRM and BDM because of high turnover,” Sankari said. “For a broker that’s new to the commercial space, they need a consistent and trusted source to take them through that journey step by step.”
“Aside from being former brokers and business owners, our relationship managers supporting the broker area are extremely experienced, being with us for seven to eight years on average.”
In contrast, Sankari said brokers in larger institutions often struggled as they found themselves immersed in systems lacking genuine connections.
“Major banks, focused on high volumes, can overwhelm brokers, making it challenging to establish meaningful relationships,” Sankari said. “Our team truly understands the unique needs of SMEs. This expertise allows us to provide the additional support that SMEs have been requesting, particularly access to someone who speaks their business language.”
What do you think about the banks’ shift to business lending and the opportunity to diversify? Comment below.