Mortgage Choice announces healthy FY10 performance

Mortgage Choice posted a net profit after tax on a cash basis of $14.8 million, up from $13.0 million in FY09. The net profit after tax on an IFRS* basis was $23.5 million.

Company CEO Michael Russell said, "It gives me great pleasure to announce a rise in our cash profit of 14%, which demonstrates Mortgage Choice's quick recovery from the GFC setback last year. I am also pleased to announce an increase of 17% in our dividend payout, to 12 cents per share."

Highlights for the 12 months to 30 June 2010

• Total loan book was $40.0 billion. This included LoanKit, the company's new aggregation arm, and the Mortgage Choice non-core offering.
• The Mortgage Choice-only residential loan book reached $39.1 billion, up 8.6% on the previous financial year's balance of $36.0 billion and again performing ahead of system growth (7.9%).
• Net cash profit after tax for the group was $14.8 million, an increase of 14% year on year. On an IFRS basis it was $23.5 million, down 12.5% due to an adjustment in FY09 of future loan book cash flow estimates.
• Total residential commission revenue on a cash basis for Mortgage Choice was $135.1 million, down 2% on $138.0 million for FY09. On an IFRS basis it was $167.3 million, down 12%. Again, due to the adjustment last year of future loan book cash flow estimates.
• The consolidated earnings per share on an IFRS basis stood at 19.7 cents per share compared to 22.6 cents per share for FY09.
• $10.1 billion in housing loan approvals were generated by the group while continuing to achieve industry-high productivity levels per broker. This was on par with FY09.
• A final fully franked dividend of 6.5 cents per share was declared by the Board, taking the total dividends out of FY10 profits to 12 cents per share. This was a 17% increase on 10.25 cents per share in FY09.
• 65.6% of residential commission revenue was paid to franchise owners, compared to 65.9% in the prior corresponding period.
• Net assets were $77.3 million for the group, compared to $66.4 million at 30 June 2009.
• Group cash flow from operating activities was $18.8 million, compared to $13.7 million for FY09.

Financial performance

Showing resilience in the face of continued credit constraints and subdued housing credit growth, Mortgage Choice's FY10 financial performance reached the upper end of market expectations.

The group produced a strong result with an annual increase in net profit after tax on a cash basis to $14.8 million, up 14%.

Trailing commission revenue on a cash basis derived from the existing Mortgage Choice residential loan book (of $39.1 billion) stood at $82.9 million for FY10. It was $115.1 million on an IFRS basis.

Total operating revenue on an IFRS basis for the 12 months to 30 June 2010 was $171.3 million, including $52.2 million derived from new mortgage originations.

The total group loan book reached $40.0 billion. This included LoanKit, the company's new aggregation arm, and the Mortgage Choice non-core offering.

Mr Russell said, "The rise in our cash profit reinforces the determination of our mortgage brokers and our staff to execute our FY10 DREAM strategy and make it a success. Mortgage Choice's ability to take advantage of alternative revenue streams while nurturing the core proposition is worthy of great applause."

"We are also delighted to again find our customer 'loan life' has lengthened even further, strengthening the value of our assets, and loan book growth is 8.9% better than system growth.

"In further good news, home loan settlements and greenfield franchise recruitment are both up on the previous corresponding period. I am especially pleased that this combined with our prudent reduction in costs has resulted in an increase in the dividends we can deliver to our shareholders."

Business update

Its FY10 strategy, DREAM, signalled a material shift in Mortgage Choice's path to healthy growth. DREAM is an acronym that stands for:

• Diversification
• Recruitment
• Existing franchisee support
• Acquisitions
• Managing costs

"In laying the platform for long-lasting results, Mortgage Choice recognises DREAM is not a 'quick win' solution. It is a calculated execution of a series of initiatives and improvements to deliver a robust increase in market share, customer share of wallet and broker productivity," Mr Russell said.

The diversification strategy implementation (expanding its range of products, including personal and commercial loans, risk and general insurances and asset finance) continued to gain speed over FY10.

Mortgage Choice generated $2.1 million in non-core gross revenue over the 12 months, with most of the income coming from risk insurance and our commercial loan services. This is almost double the $1.1 million in gross revenue in FY09.

Mr Russell said, "I am pleased with the speed at which the company and our brokers have expanded their offering to better suit a changed landscape and cater for a wider range of customer needs."

"Our brokers have quickly moved outside their comfort zone to cross-sell complementary products and enjoy additional income streams. As a result, the company now has 'stickier' customers and greater revenue potential."

Broadening its geographic spread, Mortgage Choice welcomed 18 greenfield franchisees in FY10. This compared to two in FY09.

"Our greenfield recruitment efforts increased nine times over year on year. Special attention will continue to be paid to signing up new business owners into greenfield franchises, so Mortgage Choice touches more communities across Australia," Mr Russell said.

"In terms of franchisee support, we introduced a range of initiatives over the year, from technology and other system improvements through to a rework of our learning and development programs, a relaxing of loan book acquisition policies and the introduction of new panel lenders and other suppliers."

The rise in franchisee confidence is reflected in the jump in retail shopfronts over FY10 from 165 to 172.

As for the company's new aggregation arm, LoanKit was re-launched in late April with a proposition that provides an alternative to the 'one size fits all' aggregation industry. The number of LoanKit brokers had more than doubled by the end of FY10. Now the business is quickly gaining industry awareness and recognition for its efforts, the speed of recruitment has intensified.

Mr Russell said, "LoanKit has made excellent progress so far and we are focused on recruiting a large number of suitable brokers to its member base. We hope to build the business organically and through acquisitions, hence Mortgage Choice remains committed to actively seeking and identifying acquisition opportunities that meet our benchmarks."

Lastly, the group reduced its operational costs by 7.4% over the year to $28.1 million.

Mr Russell said, "A significant amount of work has been done to streamline business systems and processes so the company can maximise efficiencies without incurring extra costs."

Market outlook

"As the credit industry adjusts to a better regulated environment, the mortgage broking market looks ahead to a bright future with the GFC firmly in the rear vision mirror," Mr Russell said.

"The subdued growth in housing finance demand has not deterred major players like Mortgage Choice from taking advantage of the recovery in consumer sentiment and heightened awareness of property as a stable investment class. Further, it has encouraged us to seek alternative revenue streams, which places the industry in a stronger position for sustainable health."

The next financial year shows great promise for the mortgage broking industry for reasons including:

• More homebuyers now recognise a mortgage broker's core value is convenience and choice of lender, a proposition that is still unable to be matched by one single lender;
• As smaller lenders re-enter the market and strengthen their product suite, the increase in competition will increase the attractiveness of using a broker;
• Licensing will enhance brokers' professionalism and the way they are perceived by consumers, government, media and other key stakeholders;
• Industry consolidation caused by slower housing finance demand and stricter industry regulations means less brokers will write more loans; and
• Lenders are continuing to invest in their third party channels, some quite heavily, and are respecting their customers' choice of introductory channel.

However, housing undersupply continues to remain a problem that places strain on housing affordability for a large number of property buyers as well as renters.

Mr Russell said, "Australia has serious blockages in its land and dwellings supply pipeline. This must be cleared if we are to tackle the undersupply problem that continues to stress housing affordability. While undersupply is good news for many investors, with tight rental vacancy rates seeing rental price rises, it is bad news for others. Our three tiers of government need to work together on effective and immediate action."

"Regardless, Mortgage Choice intends to remain Australia's largest independently-owned mortgage broker in an industry that now sources 41% of all new home loans across the country."

Call 13 MORTGAGE. 

Under IFRS (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.

For further information or to arrange an interview, please contact:

Belinda Williamson 
Mortgage Choice     
(02) 8907 0472 / 0407 416 124
belinda.williamson@mortgagechoice.com.au