Leading Australian mortgage broker Mortgage Choice Limited (ASX code: MOC) today announced a net profit after tax for the year to 30 June 2008 of $19.3 million AIFRS, representing a marginal decrease on the FY2007 result of $19.6 million.
Highlights (Unless otherwise stated, all figures quoted are based on AIFRS*)
- Net profit after tax of $19.3 million, representing a marginal decrease on the FY2007 result of $19.6 million.
- Loan book stood at $33.27 billion at 30 June 2008, up 12.2% on the $29.64 billion balance in FY2007, and ahead of system growth of 10.1%.
- Total revenue of $161.4 million, up 2.7% on prior corresponding period ($157.1 million).
- Earnings per share stood at 16.4 cents per share compared to 16.6 cents per share in FY2007.
- Generated $11 billion in housing loan approvals during the period to 30 June 2008. This result was marginally down on the prior corresponding period of $11.1 billion.
- The Board has declared a final fully frankeddividend of 8 cents per share taking the total dividends out of FY2008 profits to 14 cents per share, the same as in FY2008.
Key messages
- Solid financial and operational performance in a challenging year.
- Borrowing environment likely to remain subdued for at least the first half of 2008/9.
- Mortgage Choice’s business model is robust and well positioned to take advantage of opportunities in a testing twelve months ahead particularly in relation to our competition– due to our strong brand, geographic spread, and industry leading productivity.
Financial performance
Managing Director of Mortgage Choice, Paul Lahiff said, “This result is a solid outcome when considered against a back drop of the US sub-prime situation, a federal election in November and four cash rate rises in the financial year totaling 100 basis points. Also, non-banks saw their competitive advantage weaken; some lenders withdrew from the broker channel while others discontinued their mortgage divisions; most lenders’ mortgage interest rates were increased independently of the Reserve Bank of Australia (RBA) by approximately 60 basis points and mortgage lending policies were tightened, all of which had a profound effect on the Australian mortgage market”.
Mortgage Choice, as a specialist mortgage introducer employing a ‘pure play’ distribution model, with no products of its own and therefore no balance sheet or funding risk, was not directly impacted by funding issues, created by the US situation.
The latest ABS Housing Finance data (June 2008) reported a continued weakening of demand for both owner-occupier and investment housing finance. With house price performance in most capital cities mixed and rental vacancy rates nationally at record lows, it is a challenging time.
“For us, Queensland and Victoria outperformed (in relative terms) the larger New South Wales market in this reporting period. The fact that we now have less reliance on New South Wales is also a major plus in terms of earnings resilience given the continued subdued nature of the New South Wales economy. Western Australian house price growth has plateaued (after a number of very strong years), while the South Australian market showed strong growth after lagging behind other states for some time,” Mr. Lahiff said.
“Mortgage Choice’s specialist focus, strong brand presence, experienced and professional broker network, high productivity levels per broker and well honed training, product and technology systems mean we are ideally placed to continue to benefit from any growth prospects.”
Total operating revenue for the year to 30 June 2008 was $161.4 million. This included $64.4 million derived from new mortgage origination, up 1% over the prior corresponding period. Revenue derived from the existing loan book stood at $93.6 million (including $19.4 million discount unwind) at 30 June 2008, an increase of 4% on the prior corresponding period.
Other important drivers of the result were consistent loan life performance and prudent management of expenses.
The company’s loan book grew by 12.2% during the period, and stood at $33.27 billion at 30 June 2008. The fact that it outpaced system growth of 10.1% in such a difficult market was a pleasing outcome.
Business update
The uncertainty surrounding the US sub-prime situation led to a reshaping of the financial services landscape in Australia, which saw the cost of funds increase for financial institutions with varying degrees of exposure to wholesale funding and the securitisation market.
This resulted in a realignment of broker commission structures (limited impact on the 30 June 2008 year), which are still being finalised. Some lenders have decided to retain their current commission schedules, while others have made adjustments. Throughout all of the discussions with our key lending partners, Mortgage Choice has emphasised the quality it brings to the table. This has been reflected in the commission structures ultimately offered to Mortgage Choice, which are at the highest level available. Criteria such as electronic lodgement, conversion, and submission quality are all important parts of our operating model that franchisees have embraced and place us at the forefront of the industry. Hence, recent commission changes, whilst having an impact on income, reinforce Mortgage Choice's premier position in the market and alignment with the type of behaviours lenders are wishing to reward.
“Major lenders continue to regard mortgage brokers as an essential distribution channel in housing finance. During the period to 30 June 2008, Mortgage Choice continued to work with its panel of 25 lenders to upgrade the quality, service and efficiency of its offering to customers. Also, leading financial services organisations La Trobe Financial and FirstMac were added to the Mortgage Choice panel,” Mr. Lahiff said.
Outlook
The economic fundamentals are in place – a sound economy, strong net migration, low unemployment, stable wages growth - all of which should underpin the housing market.
With the RBA indicating scope to move towards a less restrictive stance on monetary policy, and when considered against the backdrop of a volatile equities market, it does point to a more positive outlook for housing, both owner occupied and investment, going forward.
Strategy inevitably evolves, as it must to adapt to differing circumstances. So then the Mortgage Choice strategy must. The underlying principles, however, remain constant: a focus on executing a limited number of initiatives particularly well; clarity around our strategy; simplicity; and consistency with past strategy where it has proven to be effective.
Looking forward, the company will continue to focus on increased lead generation, enhanced lead conversion, and selectively growing the franchisee base. These are the fundamental planks of the company’s strategy.
At the same time, there will be a strong emphasis on helping franchisees to improve their productivity.
Other key parts of the strategy include, achievement of the objectives of our new enterprise wide software system, Discovery, and enhancement of our commercial lending offering, and the introduction of a personal loan offering to facilitate franchisees wishing to offer these products to their clients.
Mortgage Choice has been calling for national uniform regulation since 2002. The Federal Government has announced there will be a national approach to regulation with ASIC to have the primary role in the licensing of mortgage brokers. It is hoped for introduction in mid to late 2009. We believe this new era will rid the industry of fringe players and at the same time provide Mortgage Choice with growth opportunities.
“Mortgage Choice is confident that it is well placed to achieve another successful year in FY2009. Our approach to business opportunities and a singular focus on the strategies outlined above will clearly assist in this,” Mr Lahiff added.
* AIFRS
Under AIFRS (Australian International Financial Reporting Standards) Mortgage Choice is obliged to include in its financial statements for any period an estimate of all the trailing commission that will be received and paid over the life of the loans settled during the period. This estimate is stated at "present value", reflecting the fact that cash receivable and payable in the future does not earn income in the meantime and so its value today is less than the total of all future cashflows.
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