Mortgage Choice Limited reports 1H11 cash profit up 13 percent

February 23, 2011

Australia's largest independently-owned mortgage broker, Mortgage Choice (MOC) today announced a solid increase in cash profit of 13% to $8.8 million during the six months to 31 December 2010. It is yet another consistent result for the high profile consumer champion.

The national franchisor grew its group loan book to $41.2 billion, up 7% on the $38.5 billion balance at 31 December 2009, while its share of the total home loan market rose to 4.1%.

The Mortgage Choice dividend also showed continued sustainability, with its Board declaring an interim fully franked dividend of 6.0 cents per share, compared to 5.5 cents for the prior corresponding period.

Highlights for the six months to 31 December 2010

• Net profit after tax (NPAT) on a cash basis was $8.8 million, an increase of 13% on the previous corresponding period (pcp).
• Total group loan book (ie. residential and commercial loans written by Mortgage Choice and its aggregation arm, LoanKit) stood at $41.2 billion. This was up 7% on the $38.5 billion balance at 31 December 2009.
• $5.1 billion in housing loan approvals were generated for the group as Mortgage Choice continued to achieve industry-high productivity levels per broker. This result was down on $5.4 billion in the pcp as a consequence of a general market slowdown.
• Board declared an interim franked dividend of 6.0 cents per share, compared to 5.5 cents in the pcp.
• Total commission revenue on a cash basis was $67.8 million, down 2% on the prior corresponding period ($69.5 million).
• Net assets were $78.6 million, compared to $77.3 million at 30 June 2010.
• On an IFRS basis:

- Earnings per share stood at 7.3 cents compared to 8.2 cents in the pcp.

- NPAT was $8.8 million, down 10% due to an adjustment in the prior period.

- Total commission revenue was $66.1 million, down 8% due to this adjustment.

- Management expects 2H11 statutory IFRS results to be consistent with those in 1H11.

Mortgage Choice CEO Michael Russell said, "Mortgage Choice has again displayed its strength with an on-target performance during a landscape full of cautious borrowers and lenders. Our 13% cash profit and market share increase are both excellent outcomes during a period that followed three consecutive rate rises and contained another."

"We are also pleased to provide shareholders with a dividend result higher than the first half of FY10 - an interim fully franked dividend of 6.0 cents per share. This company is a solid earner with a yield that is outperforming that of other small cap financial services companies."

Financial performance

In a demonstration of consistently healthy growth within a subdued market, Mortgage Choice produced a sound half-year result cash NPAT of $8.8 million, a 13% increase on the prior corresponding period. On an IFRS basis it was down 10% to $8.8 million due to an adjustment made at the end of the prior corresponding period to future trail commission estimates.

The group's 1H11 performance was an improvement on 2H10 in that approvals and settlements rose 9.5% and 6.7% respectively, however it was lower than 1H10, a period defined by frenzied first homebuyers taking up the First Home Owners Grant boost before its expiration. In that respect, volumes fell 5.6% for approvals and 6.3% for settlements.

Mr Russell said, "This result was to be expected. Home lending volumes in the comparative period, fuelled by the first homebuyer rush during the First Home Owners Grant boost's final months, reached the highest levels to date for residential home lending for a half-year period according to original ABS data excluding'construction of dwellings for rent or resale'".

"However, our underlying revenue for the first half of FY11 is higher than the first half of FY10 due to a rise in interest income and revenue from new initiatives. The underlying result before tax improved over the last two prior periods due to increased revenue and expense reduction."

Trailing commission revenue on a cash basis derived from the existing Mortgage Choice residential loan book stood at $42.3 million for 1H11 and $40.6 million on an IFRS basis. Total operating revenue on an IFRS basis was $68.6 million, including $25.5 million derived from new mortgage originations.

The total loan book, which consists of residential and commercial loans written by Mortgage Choice and LoanKit, grew 7% to reach $41.2 billion.

The group announced a growth in market share to 4.1%, its best six-monthly result since the second half of 2008. Mortgage Choice's loan writer productivity also rose over 1H11, to 31 settlements per broker, as did its number of franchises, to 354.

The home loan market

According to ABS data, 1H11 new housing finance commitments were down 10% on 1H10 ($125 billion compared to $139 billion). However, December 2010 was the fourth successive month in which the overall value of dwelling commitments rose. This was despite November's high profile rate rise that led the Federal Government to set up an inquiry into banking reform.

First homebuyer home loans also increased in December, to a nine-month high that was only 900 commitments below the long term monthly average. These borrowers accounted for 15.8% of new owner occupied commitments for the month.

Mr Russell said, "Two major influences that slowed the market last year were consumers restraining themselves from borrowing due to a wariness of interest rate rises, utility bill hikes talk of a non-existent 'housing bubble' and lenders' stricter loan approval criteria."

"However, buyer conservatism is now easing with continued improvement to economic factors like wage growth, greater stability of interest rates and home prices, and healthy employment.

"Lending criteria is also loosening as competition heats up, bringing rate discounts, higher maximum LVRs and other special offers. This is a welcome industry development that we expect to move us into a more favourable housing finance environment in the coming months.

"Housing demand will continue to outstrip supply as our population steadily grows, pushing up housing prices and rents, attracting more investors and increasing average loan amounts. And, as first homebuyers return to the market, upgraders are able to sell and purchase again. Property remains a stable asset that the majority of Australians aspire to own."

Recent MOC initiatives

Mortgage Choice is a re-engineered proposition as a result of its three-year DREAM strategy: Diversification, Recruitment, Existing franchise support, Acquisitions andManaging costs.

In 1H11 the company executed a series of improvements and new initiatives such as:

• Acquired its second business, HelpMeChoose.com.au (18 October), a well-established comparison website for home loans and health and life insurance. This broadens the company's reach, brings in more leads and expands diversification opportunities.
• Launched bluegumTM home loans (29 November), its white label product, to better meet the needs of customers and further empower the company's broker network. $9.6 million in unconditional bluegum loan approvals were achieved in December.
• Delivered significant productivity benefits to its broker network through the deployment of an integrated CRM, its Product Analysis & Qualification technology, and an electronic submission software platform.
• Reviewed and significantly improved its new franchise owner and loan writer induction course, and 'rookie' development and mentoring programs.
• Continued to increase the penetration of its diversified product range into risk and general insurance, commercial loans, personal loans and asset finance to bring in alternative revenue streams.

In addition, Mortgage Choice has retained its number one ranking for key organic search terms on Google such as "home loan", "home loans", "mortgage", "mortgage broker" and "mortgage brokers", due to its strong in-house SEO capabilities.

The company also introduced three new key roles to Mortgage Choice - a Head of Sales, a second National Franchise Recruitment Manager and a Special Projects Manager - and two new staff members to its aggregation arm, LoanKit.

Mr Russell said, "In FY11 Mortgage Choice staff and brokers are concentrating on driving forward our metamorphosis, ensuring we capitalise and build on the healthy FY10 momentum. We are confident that the transformation is rewarding all business stakeholders."

"As for LoanKit, it was always a long term play so we were prudent to not invest resources until we had finetuned our offering. It is now gathering momentum as four full time staff recruit brokers, improve its mortgage tools and services and raise its industry profile. Many brokers are coming onboard for the software and the 'compliance in a box' offering, where they hold their own credit licence but we manage their compliance needs. This was a primary goal."

National regulation and the mortgage broking industry

The NCCP Act will have a powerful influence on mortgage broker usage, which stands at around 40% of all new housing loans in Australia. Not only will 61% of the 1,000+ Mortgage Choice 2010 Consumer Sentiment Survey respondents consider using a mortgage broker in future, 59% said national regulation would make them more likely to use one.

Mr Russell said, "The mortgage broking proposition is increasingly appealing to consumers. Companies that operate under their own steam, and by that I mean are not owned by a bank, and market their key selling points well will attract a higher number of customers. Australians are increasingly aware that they have a wide range of options they need help with navigating."

"National licensing will help to raise the professional profile of our industry as it serves to cull a number of brokers who are unprepared to meet the compliance standards. This is not a problem for Mortgage Choice, as we have been prepared for some time and our brokers already operate to the most stringent of ethical standards.

"The market share of brokers should move to 50% and beyond soon, as the industry better promotes itself and consumers' perception of the value of a mortgage broker improves. Our proposition remains highly valued by property buyers and lenders."

The future

"We will continue to invest in the Mortgage Choice brand and see it grow in both stature and reputation," Mr Russell said.

"Our focus remains on refining our role as mortgage specialists who take their responsibility to the Australian public very seriously, while also distributing products and services that best complement our core offering. Our brokers write just over one in every 25 new home loans, and we aim to build that market share further.

"Today's financial results announcement shows the company can consistently achieve a solid financial result in the upper end of market forecasts, despite a cautious market, and that our DREAM strategy accelerates as we drive it further and dominate our goals.

"I am proud to say our dividend yield remains at the top of our industry segment and in the first half of this financial year, as with previous financial periods, our shareholders are rewarded with an impressive dividend.

"Mortgage Choice has an ongoing commitment to build stronger value for all our stakeholders and continues to seek further growth opportunities.

"We proudly remain Australia's largest independently-owned mortgage broker with a robust model, strong brand, healthy geographic spread, and industry leading productivity."

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

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