TMM Better Business
TMM Better Business is New Zealand's home for mortgage advisers. We regularly catch up with a leader in the mortgage industry to bring you insights into what is happening in the New Zealand market.
They're designed to give you new ideas to help you with your business and to help with your professional development.
TMM Better Business
TMM Podcast: How Xceda is evolving to be a major non-bank lender
Daniel McGrath, the chief executive of non-bank lender Xceda, talks to Philip Macalister about the company's goal to be a major player in the specialist lending market.
The most recent step down this path is the launch of a new property investment loan. Daniel explains the loan and how advisers can use it.
Our guest:
Daniel McGrath is the Chief Executive Officer of Xceda Finance Limited and Xceda Capital. With extensive experience in financial services and strategic leadership, he oversees operations, growth initiatives, and investment strategy.
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Welcome to TMM's Better Business podcast series. Each month we catch up with a leader in the mortgage industry to bring you insights into what is happening in the New Zealand market. I'm Philip McAllister, the publisher of TMM. They're designed to give you new ideas to help you with your business and to help with your professional development. They add to our current suite of products, which include TMM Magazine, TMMonline.nz and the TMM Better Business Conference. Welco me to the latest TMM Better Business. I'm in Auckland, CBD, in Xceda's new office down at Queen Street. A bit swanky here, pretty nice to be here. And joining me is Xceda Chief Executive Daniel McGrath. Welcome, Daniel. How's things? Thanks, Philip. Yeah, thanks very much for having me. It's great to talk to you. Yeah, no, looking forward to our discussion. Hey, let's start off and just sort of talk a little bit about Xceda and who you are and where the company's come from.
Daniel McGrath:Yeah, great. So Xceda was originally founded in Whakatane in 1989, so we're well over 35 years old now. The business has changed a lot over the last five years. So originally being founded in Whakatane, it was very based around the Bay of Plenty and regionally focused. predominantly in lending. It was in personal lines of motor vehicle financing. And then over time, we've moved the business, particularly the last five years now, where we're predominantly a mortgage-backed lender, so in residential mortgages, and predominantly focused on the specialist area of the market. So for the last few years, we've had a product in the market that's the short-term bridging lone, which is three to 24 months. And we're now starting to develop longer-term lones, which we can talk about, which is interesting for us. But on the other side of our balance sheet, we are a licensed deposit taker, so a reserve bank licensed deposit taker. We're one of 14 non-bank deposit takers, or NBDTs, as we're known. Which is effectively the group three of the New Zealand banking sector. So you've got the big four occupying group one, and then you've got the mid-tier banks, TSBs, Kiwi banks, et cetera. And so our sector, the NBDTs, we sit alongside the credit unions and building societies. So our business is solely funded by retail depositors. We don't have another bank institution funding us. We're not a securitised vehicle. So in that sense, we have over 2,000 depositors that fund our business. And that gives us a lot of flexibility in terms of the customer base we have and also on the other side of the balance sheet, the type of lending we can do.
Phlip Macalister:Yeah, it's also interesting when I think about it because the company has been around for quite a while and survived the GFC when a lot of the companies in that space disappeared and here you are and it seems to me like you're sort of going into a new era for this business.
Daniel McGrath:Yeah, we've worked a lot over the last five years because we had a change of ownership in the business. We've worked a lot over the last five years of working out how as a prudentially regulated institution we could grow. And so what we're focused on is, as I mentioned, we're focusing on the lending side. The residential mortgage space, we feel for us at the moment, that's a really good fit. And we think there's a lot of opportunities in that market, which we can discuss. Also on the deposit side, we've moved out of just term deposits. We now offer a savings account. We have on-call and notice saver accounts. However, the distinction between us as a deposit taker and say the banks is that we do not have any transaction or day-to-day banking. We don't offer that service to our customers. So we're very much focused around the wealth and savings goals on our deposit side, and hence we only have savings accounts and term deposits. And our customer base seems happy with that because they use their day-to-day or their retail banks for their current account banking needs. And then they look to us if they're looking for a premium deposit rate for savings and term deposits. So the business has changed a lot in some respects, mostly on the lending, but on the deposit side, for over 35 years, Xceda has been taking deposits from the public and is pretty proud of our record in that regard.
Phlip Macalister:Oh, and so you should be. It's pretty impressive to have 35 years. And tell me, what's your take on the market at the moment and what are you seeing out there?
Daniel McGrath:Yeah, so it's been interesting over the last 12 months. I mean, if you go back to July 2024, we had an official cash rate at 5.5%. And as we sit here today, the OCR is now 3.25%. So you've got just a 2% change in the official cash rate. And that has a lot of dynamics for the market, the lending market. So if you look at, let's take the non-bank lending market because we are interesting , Xceda, I guess, in the sense that, as I mentioned, we're a reserve bank deposit taker and we compete with the banks on the deposits. But on the lending side, we are playing in the non-bank lending market. So we are focused on mortgages that you could describe as, say, specialist or near prime mortgages. And there's some very good competitors in that market. So what we've seen, I guess, in the non-bank lending market is we've seen over the last 12 months as the deposit rate has come down, I think it's provided an opportunity for non-bank lenders to actually come back a little bit more into the near prime to prime space. Historically, if the OCR goes up, it puts a lot of pressure on non-bank lenders to compete with the banks on the prime and near prime. You saw that 12 months ago to 18 months ago. The banks started to play a little bit more into the near prime to prime, and it pushed a lot of the non-bank lenders into what you would call the specialist market or the area of the market that is often underserved, so clients that are underserved by the banks. And sometimes that also means the shorter term bridging. So what we've seen in the last six months is as the OCR has declined, we've seen the ability for us as being in the non-bank lending market, but also our competitors be able to move more back into that longer term near prime. And some of our peers in the non-bank lending market are in the prime space as well as the OCR.
Phlip Macalister:But they've always struggled with that, haven't they? It's always been quite a hard game?
Daniel McGrath:Yeah, it is quite a hard game. I mean, obviously the banks have a pretty dominant position, you might say, in that market. And they can play around with their pricing and they compete with each other quite fiercely in the pricing. So often, if a non-bank lender is seeking to play in that very good near prime to prime market, there has to be some type of differentiator. And so you can't win on price alone. And so what I think is the opportunity for non-bank lenders who are trying to compete to some degree with that space with the banks is to have to differentiate the market. And that differentiation can come from the level of customer service. It could come with playing around with, for example, the LVRs or the DTI ratios, depending on how their own credit policy works. It could also mean that they're simply taking a more pragmatic view to a customer and thinking a little bit outside of the box. Those sort of elements are, they sound a bit, I guess... grey in terms of how the credit policy might work, but really most of the non-bank lenders will try and ensure that they can try and get to a solution for a customer where maybe the bank just simply says no.
Phlip Macalister:And banks tend to be very rigid in their processes and their, I guess, their rules, aren't they? And so that's one of the opportunities you have to be a bit more flexible?
Daniel McGrath:Yeah, I think so. I mean, for example, in July last year, the RBNZ imposed macro-prudential tools on the banks, so you've got restrictions on the debt-to-income ratios that have been introduced, where it's a six-times ratio for consumers and a seven-times DTI ratio for investors. Those rules do not apply to the non-bank lending market. Incidentally, and fortuitously for the Group 3 investors, Licensed Deposit Takers like Xceda, the NBDTs, the proportionality framework the RBNZ has implemented means that we are also not subject to those macro-prudential tools. So for us in the group three of deposit takers, that's an advantage. So GTI is one. There's also LVR restrictions on banks where they're lending over a certain LVR threshold. So for example, 80%, they only have a certain amount of investors that can go beyond that. So those types of restrictions that are on the banks, I think that's where non-bank lenders are really good at looking and saying, okay, well, that's somewhere where I can go and talk to advisors and show them examples of how we could provide a loan solution to their client that the banks just would not look to. So they're the areas that I think are real opportunities for them on bank loans.
Phlip Macalister:Yeah, and it seems with more money coming in to organisations like Xceda from the deposit side, it means you have more funds to play with, to lend out, and means that the non-bank space will grow more quickly than it has recently. Would that be correct?
Daniel McGrath:Yeah, I think so. I mean, I could answer that in two parts, really. Splitting up what we are, Xceda, as a licensed deposit taker versus the non-bank lenders that are often funded by banks or private capital or institutions. In our case, as we are funded by the deposit takers, we are actually also subject to the deposit compensation scheme that's just been introduced on the 1st of July this year. So all licensed deposit takers in New Zealand have a protection scheme in place which allow that depositors can get protection up to $100,000 per depositor per institution. So in the unlikely or unfortunate event that a bank or a deposit taker fails, then this scheme will step in to protect the depositor. So that gives a great deal of confidence to the New Zealand depositor market. And it's something that probably has been long overdue. Given that that's the case for something like Xceda, it does put us in a position where we should be able to attract a lower cost of funds into our depositor base which means on the flip side on our ballot sheet when we're lending we are able to offer a different suite of products and also at lower cost. So typically we are able to go into the market. We are seeing this already where we're able to compete a lot more in that near prime space because our deposit cost is low. And the second category is, as I mentioned, the non-bank lenders that are funded by other means such as institutions or banks. I mean, generally speaking, There is a lot of money in the market at the moment, and there's a lot of opportunity for that sector. If you look at the non-bank lending sector of the residential mortgage market, it's currently around 2% in New Zealand of the total resi market, whereas in Australia, it's 8% to 10%. So we think there's a huge amount of growth in the non-bank lending market.
Phlip Macalister:So do you think we can get to 8% to 10% in New Zealand?
Daniel McGrath:Well... Interestingly enough, I think there is an opportunity to do so. And I think it comes through the education that non-bank lenders are doing at the moment with advisors and advisors getting more understanding of the type of lenders that are available. So there's always an ongoing education piece. But I think the reality is that if you look at pre-GFC numbers, it was at around 8% of the market pre-GFC. So it got up to almost $10 billion of total lending, in the non-bank lending space. Whereas as we sit here today, it's just under 2%. It's about $5.2 billion. These are the Reserve Bank figures on non-bank lending. So there's a huge amount of growth just to get back to where we were pre-GFC, let alone what could be possible if you look at the Australian market and other jurisdictions like the UK where the proportion of non-bank lending is a lot higher. So we think there's a lot of opportunity in the market. in the market.
Phlip Macalister:Yeah. Excellent. Exciting. And can you tell me a little bit about the regulations? You know, we have COFI and we have all these sorts of things going on in the advisor space. How is that impacting you and what does it mean for advisors?
Daniel McGrath:Yeah, it think COFI is an interesting one. So that's the Conduct of Financial Institutions that was the regulator is the Financial Market Authority, the FMA. That scheme or the licensing came into force on the 1st of April this year. It only covers banks or licensed deposit takers and insurers. So it does not cover non-bank lenders. So when you look at the imposition of that, which is essentially around customer care and conduct in relation to customers. Because it only applies to banks, then arguably for the non-bank lenders out there, it does present an opportunity in that they're not regulated as such. Now, one would always hope that they're, and I'm sure they are, looking after their customers. But insofar as that relates to the advisors, advisors are going to have to be aware when they're dealing with banks and licensed deposit takers like Xceda, that we have a very stringent customer conduct and fairness program that we have to adhere to. And that'll flow through to the conduct of advisors. But I would say on the whole, the advisors that Xceda deals with are very good at understanding what their customer needs are and what the regulations are in relation to fairness. And so I think it's just effectively one could argue that it's wrapping up what's already going on and putting a ribbon around it in terms of a regulation. But it's certainly the imposition of more regulation in the sector, which is always something that is to some degree burdensome, but we understand why it's there.
Phlip Macalister:Do you think that advisors will be a bit more attracted to using non-bank deposit takers because you're outside of that COFI regime?
Daniel McGrath:Look, I think it could be if, you know, it might be seen by advisors as to be just another reason why they might not use a bank if the bank is imposing extra protocols on them around customer care. As I mentioned, in Xceda's case, we are covered by that. So I hope that the advisors will understand that it is a necessary part of our regulation and they would help us adhere to it. But I think generally, I don't think it will create such a difference in the market. I think everyone realises compliance is a fast-growing industry. It's one of the biggest growing newbies, and so everyone is really understanding that you're going to have to comply with various forms of compliance.
Phlip Macalister:Yeah, yeah. And are there any other regulatory changes which are coming along which are of interest to you and advisors?
Daniel McGrath:I think that the one that's been very interesting over the last 12 months is a wind-back of some of the CCCFA provisions. So when those provisions came in, there was a fair degree of concern amongst the market that the imposition or requirements such as the affordability calculators, how do people get assessed in terms of can they afford a loan? That felt like it was catching some unintended consequences. And so they've now wound that back, which is good. So lenders are able to use judgment assessments on what a customer can afford. So that's helped wind back. There's also some other areas of the CCCFA that have been wound back. So there was the distinction between a trivial breach by a lender and a serious breach. They've created some more clarity around that to make it easier for lenders to operate. And so I think as the new government came in and they looked at those consequences of the CCCFA. Those windbacks, I think, have helped, and I think generally the sector or the industry has been welcoming those changes.
Phlip Macalister:Do you think the CCCFA has been wound back enough, or is there more winding back which needs to happen?
Daniel McGrath:Look, a lot of people have pretty staunch views on whether or not the CCCFA actually prevents customers getting lending. And so, you know, financial inclusion is a big part of the whole discussion. You know, there are some areas that we think could be, you know, wound back even further. But on the whole, I think that the steps that have been taken so far have been well received.
Phlip Macalister:It seemed to me, you know, they were very much going after the predatory lenders, but then they captured everyone else and that sort of just got a bit out of scope.
Daniel McGrath:Yeah, and it's always very difficult, and regulators will have to weigh up putting in place good regulation against having unintended consequences, and that's where we always think, and the industry talks, and really feels that regulators should be talking to the industry to make sure that we don't have unintended consequences like this.
Phlip Macalister:Absolutely, absolutely. And I'm also interested, you know, Xceda has, as you mentioned right at the top of this, evolved your product set a little bit more. You know, you were doing a lot of the short-term bridging loan and now you've got long-term property investor loans and niche home loan products. Can you tell me a little bit about those and how advisors might use them?
Daniel McGrath:Yeah, so as I mentioned earlier, we over the last few years have really transitioned from a personal loans and sort of motor vehicles lender into the mortgage market. And we focused over the last few years around the short-term bridging loans, and that's mostly to investors. We don't lend to developers for development purposes, but we have focused on the bridging market. That's been a very good sector for us over the last three years as we've built our mortgage book and also created a position for ourselves with the advisor market. What we're now looking to do is we're now broadening out our product suite. So as you mentioned, we've got a property investor loan that's just been launched last month, which is a 30-year property investor loan. It's targeted specifically for the buy-to-let market. So it's looking for those customers that are looking to have an alternative to the banks for their property investment needs, and that's being received really well. That gives us the ability to get a bit more longer tenor in our loan book because we have the short-term bridging book, which loans tend to repay you within, say, 9 to 12 months. So it creates a lot of churn in your book. So having that complementary property investor perhaps its long return is really beneficial for us. And because we've got a pretty sticky depositor base now, then we're very confident you can offer that product.
Phlip Macalister:So you expect those loans to stay on the book for 30 years?
Daniel McGrath:No, typically loans, particularly property investor loan in New Zealand, they typically will refinance or churn, as they call it, within three to four years. That's generally what we see in the market as the turnover of those longer term loans.
Phlip Macalister:And so that's probably quite good for you when you, I guess, most of your depositors are going for sort of 12 months and around there. So you've got quite a good match.
Daniel McGrath:Yeah, and it's very important that we maintain our liquidity in the right ratio. So we are able now to be able to offer that longer-term plan, which complements some of our longer-term depositors. So it's something that we're obviously very, very aware of and manage very carefully.
Phlip Macalister:And your other products you've got?
Daniel McGrath:So they're the main two products that we've got at the moment, as I mentioned, the bridge and the property investor. So we are developing a third set of products around the niche home loans. So that's the loans for the consumers that are subject to the CCCFA legislation, asset rich and probably cash poor in terms of their income. They might be retired, semi-retired. And so often the banks don't look to those customers as their core customer base. So they come to us and look for solutions. Those products are really around the niches of the market. So it could be an equity release and it's for someone over that age that often that market, particularly as we look at the wealth transfer in New Zealand, you're looking at a lot of the bank of mum and dad supporting their children into homes. We're seeing a little bit of that come into the market and our customers. There's also other types of homeowners that don't necessarily fit the main criteria of the bank. So you could have small business owners that have some inconsistency in cash flow, or they simply want more equity out of their home to invest in their own business. Those sort of niche products where we see a really, really good opportunity in the New Zealand home loan market.
Phlip Macalister:So are they reverse mortgages?
Daniel McGrath:Not necessarily. The reverse mortgage is a specific product. And I think the reverse mortgage is an interesting product because it's really aligned to someone's retirement goals. So I think that is very interesting. But it doesn't necessarily mean that it could, as I say, just be an equity relief for someone to free up the equity that they've already earned, which is theirs, and to do with it what they will. And it's about ensuring that you're giving that customer a solution but it meets the affordability requirements of the CCCFA.
Phlip Macalister:And so with your niche home loans, so that's a product in the market now, or is that coming?
Daniel McGrath:We're developing that. We do, as I say, we've done, because of our customer base, we're very adept at doing equity releases for customers, but we are looking at a few other niche products around that. We will probably not release those until early next year because we're very focused on those initial two core products that we've got at the moment, the bridging and then the property investor loan. Yeah, but we're excited about some of those opportunities in the market. As I say, particularly around the over 50s, all those customers that are what we would consider to be affluent customers in New Zealand that have a lot of assets, but sometimes don't necessarily meet the mold of what is an income earner in New Zealand.
Phlip Macalister:Exciting. And so those are products which advisors can all use?
Daniel McGrath:Absolutely. So our distribution, like many of the non-bank lenders, is mostly via the advisor networks. So we're constantly talking to the advisor networks and the aggregation platforms, advisor platforms, about our products and constantly trying to make them aware of the solutions. And often with advisors, it's very important to show them examples of the type of loans you do and give them scenarios so they can actually see that there are real options outside of the facts.
Phlip Macalister:Exciting. And sort of future opportunities, you've touched on them a little bit more. but what else do you have out there?
Daniel McGrath:So I think, as I mentioned, in addition to those products that we've talked about, one thing that's quite exciting for us as a deposit taker is we're very interested in seeing the type of product suite that we can offer that combines our lending products and our deposit products. So when you look at customers that are traditionally served in the non-bank lending market, they're really only looking for a loan. But the benefit of a bank, obviously, if you have a mortgage with a bank, is you can then receive the benefit or look at the other products they have around deposits. And so we think there's a really niche part of the market that we can play as a deposit taker with deposits up to $100,000 guaranteed under the scheme that we can offer. And so things like offset accounts and those type of products that have been in the market for a long time that banks can offer, we feel as though that's an area of the market that we will be looking to give ourselves some competitive advantage in the non-bank lending market.
Phlip Macalister:And for Xceda, it's like, to me, it's a company which has been sitting there for a long time and people haven't quite known where it's sort of sat within the non-bank lending sector. But now it seems to me like you've become one of the mainstream players in that space now. Is that a correct sort of interpretation?
Daniel McGrath:Well, look, I'd like to think so. We'd have to ask the advisors. But we really think that over the last couple of years, we've tried to ensure that we have the right product base. We have the right customer service for our underlying customers, but also the advisors. And so when you look at the leaders in the non-bank lending market, we really want to position ourselves as one of those top non-bank lending options for advisors. And so when they think about a customer that comes to them that doesn't quite fit the bank or simply doesn't want to use the bank, we'd love Xceda to be in the mix of the non-bank lenders that they would use. But as I said earlier, we are in an interesting position where we're a bit of a hybrid, where we sit in the non-bank lending market for lending, but we also compete with the banks and deposits. And so we really see our customer base growing rapidly. around depositors quite aggressively, which we're really keen on.
Phlip Macalister:Oh, it's exciting times and it's fascinating to just watch how you've evolved the company into this new space. So, yeah. Look, thank you for your time, Daniel. It's been really interesting. It's really cool.
Daniel McGrath:Thanks for having me.
Phlip Macalister:Awesome. No, it's been my pleasure and I like your offices too
Daniel McGrath:Thanks a lot.