Macquarie defends the abnormal growth of its mortgage business

The rapid growth of Macquarie Group's Australian mortgage business prompted a series of questions from analysts at an investor briefing on Friday, when Macquarie presented its results for the September half.

Over the six months to September Macquarie's mortgage book grew by more than 16 per cent to A$19.8 billion.

Analysts' interest was prompted by the Reserve Bank's commentary on the housing finance market in its most recent Financial Stability Review, published in September, which focused on the risks associated with strong growth in lending for residential property investment.

The RBA said there was a risk that "additional speculative demand can amplify the property price cycle and increase the potential for prices to fall later, with associated effects on household wealth and spending."

It said: "The direct risks to financial institutions would increase if these high rates of lending growth persist, or increase further.

"The bank is discussing with APRA and other member of the Council of Financial Regulators additional steps that might be taken to reinforce sound lending practices, particularly for lending to investors."

Macquarie's head of banking and financial services, Greg Ward, said the bank was "cognisant" of the growth in house prices and investor activity and was "careful" with its loan-to-valuation and serviceability policies.

Macquarie chief executive Nicholas Moore said the group was "very happy" with the progress of the banking and financial services division.

The division, which includes the group's mortgage business, increased its operating income by 12 per cent in the six months to September, compared with the previous corresponding period, and increased its net profit contribution by 27 per cent.

The division's activities also include business banking and wealth management.

Macquarie reported a net profit of $678 million for the six months to September - up 35 per cent on the previous corresponding period. Banking and financial services contributed $141 million to the result.

Moore reminded analysts that Macquarie has been in the mortgage market for a long time and that its mortgage book was bigger before the financial crisis.

Before the GFC Macquarie funded its mortgage book through securitisation. It was forced to stop lending in 2008, after the mortgage securitisation market collapsed.

Today it funds its mortgage business through deposits held on balance sheet, as well as a relatively small amount of securitisation. It is a more stable funding mix.

Macquarie has total retail deposits of $35.3 billion, which grew by six per cent over the six months to September.

Given the size of its deposits, there is more room for the mortgage business to grow.

"We are very careful in terms of how we approach growth in the book," Moore said.

Analysts also questioned the division's high costs. The banking and financial services division reported net operating income of $665 million and total operating expenses of $524 million. Macquarie also pays high commissions to mortgage brokers.

Moore said: "It is in growth mode, where we are putting capital ahead of revenue. As it grows we will get scale benefits, and we have the scope to keep growing. We have been investing in the business."

Ward said: "Cost efficiency is very important in areas such as onboarding customers. Costs peaked in the 2014 financial year and we have seen them come off in the September half. We believe we will see that trend continue."