* Home mortgage market key profit centre for Australia's Big Four banks
* Macquarie's push into home mortgages seen as smart use of capital
* Debate rages over whether housing market in boom or bubble
By Jackie Range and Cecile Lefort
SYDNEY, Oct 28 (Reuters) - Australia's largest investment bank Macquarie Group Ltd is pushing rapidly into home mortgages, threatening to disrupt a highly profitable segment of the banking industry long dominated by the country's top four lenders.
Australia and New Zealand Banking Group Ltd (ANZ), Commonwealth Bank of Australia, National Australia Bank Ltd (NAB) and Westpac Banking Corp are on track to report a combined record profit for the fifth consecutive year. Part of the profit stems from their leading positions in the country's $1.25 trillion mortgage market.
Together, the four write as much as 90 percent of the nation's home loans. They typically make a profit of almost A$75,000 ($71,900) over the lifetime of an average sized 25-year home loan, excluding fees charged, according to estimates by The Australia Institute, a Canberra-based think tank.
The prospect of such lucrative gains appears to have enticed Macquarie to expand rapidly into residential mortgages in its own backyard this year. Such a move, analysts say, has the potential to shake up the industry, offering borrowers a competitive alternative to the Big Four.
"Macquarie is probably the standout and the more aggressive mortgage lender at the moment," said Paul Dowling, principal analyst at East & Partners. The research firm says the investment bank is deploying "considerable cash balances".
A Macquarie spokeswoman declined to comment on the bank's moves in the mortgage sector.
Macquarie's share in mortgages for investment purposes jumped 25 percent in the three months to July alone, although that still only accounts for 1.1 percent of the overall investor mortgage market, UBS analysts have calculated.
Its push comes as Macquarie diversifies away from investment banking into less riskier areas, and is seen as smart use of capital when return on equity from the mortgage market is high. The investment bank also has more liquidity, giving it a strong base to fund home loans.
Other firms too are delving deeper into Australia's home loans market, including mortgage group Yellow Brick Road Holdings Ltd, 14.9 percent-owned by Macquarie, and the Australian arms of ING Groep NV and Citigroup Inc .
To raise more funds to lend to home buyers, those smaller lenders are now securitising mortgages in a market which came to a halt just a few years ago after the global financial crisis spooked investors and lifted the cost of funding to exorbitant levels.
While funding costs are still significantly more expensive than in 2006 before the crisis, they have sufficiently fallen from the peak to allow small lenders to take a crack at the Big Four's stranglehold of the home loans market.
The Big Four haven't always had such dominance. Before the crisis, smaller lenders had 30 percent of the market. They included Australian regional banks such as St George Bank, Suncorp Metway and Adelaide Bendigo Bank, and non-bank lenders like Resimac and FirstMac.
Australian arms of international lending institutions were also part of the group, with Citi and ING able to gain a solid presence even without the brand recognition in the country that Macquarie enjoys.
Talk that Australia's housing market is in a bubble has intensified with a spike in an index for home prices in the country's major cities to an unprecedented high as well as close to record auction clearances in parts of Sydney.
Financial authorities have sought to quash such talk, with the central bank calling it "unrealistically alarmist". But the fears themselves are real and the banks' earnings over the next two weeks will be scrutinised for any hints as to the health of the mortgage market.
ANZ, Commonwealth Bank, NAB and Westpac are on track to report an 8.5 percent rise in combined full-year cash earnings to A$27.1 billion.
Any shifts in home loan market share for individual banks are also set to go under the microscope, with analysts citing commentary on mortgage demand and pricing from the banks as drivers for share prices.
Australian mortgages represent 61 percent of gross loans and advances for Westpac, 60 percent for Commonwealth Bank, 45 percent for NAB and 42 percent for ANZ, according to figures from UBS.
Westpac may be of particular interest after it experienced slower growth in its domestic mortgage book of 3.8 percent in the 12 months to the end of August, compared to the banking industry average of 5.1 percent.
It reports on Nov. 4 and is expected to post annual cash earnings, which exclude one-off and non-cash items, of A$7.1 billion, up 7.6 percent on the year before, according to an average of estimates from three analysts polled by Reuters.
ANZ reports on Oct. 29 and is projected to book a 9.8 percent rise in full-year cash earnings of A$6.4 billion. NAB is expected to post a 6.8 percent rise in annual cash earnings to A$5.8 billion on Oct. 31.
Commonwealth Bank, the nation's biggest lender by market value, is expected to report first-quarter cash profit on Nov. 6 of around A$2.15 billion, up from A$1.85 billion from a year earlier, Morningstar analyst David Ellis has projected.
It reported full-year cash profit of A$7.82 billion in August.
Two analysts surveyed by Reuters expect Macquarie, which reports on Nov. 1, to log first-half net profit of A$475 million, up 32 percent from a year earlier.