The major brokerage is entering a decisive period as it “resets” its business model in a “rapidly changing operating environment”, according to independent investment research agency Morningstar.
In its analysis of Mortgage Choice’s full-year 2018 (FY18) financial results, Morningstar has maintained its “subdued medium-term” outlook for the brokerage, citing “major risks to returns”.
In its FY18 financial results, Mortgage Choice reported a 7 per cent fall in broker settlements. This equated to settlements being down by $800 million, from $12.3 billion in FY17 to $11.5 billion in FY18.
Further, Mortgage Choice’s statutory net profit after tax (NPAT) dropped by 80.9 per cent, from $22.2 million in FY17 to $4.2 million in FY18.
The brokerage partly attributed the fall to a $7.1 million “positive adjustment” for “changes in run-off and other adjustments”, and non-cash adjustment of $28.5 million due to the introduction of the group’s new broker remuneration model.
Reflecting on the results, Morningstar noted: “Mortgage Choice is at the crossroads and has reset the business model to cope with a rapidly changing operating environment.”
The investment research agency claimed that there are “major risks to returns in the longer term”.
“Future profitability relies heavily on the ongoing strength of the Australian housing market, and the preparedness of the four major banks to continue using mortgage brokers to distribute mortgages and continue paying current levels of upfront commissions.”
However, Morningstar reiterated that “despite the challenges”, which include a change in CEO and a sharp drop in the group’s share price, Mortgage Choice is “not in turmoil”.
Morningstar noted that the brokerage “continues to deliver strong profitability, high returns on equity and an attractive dividend yield”, and that it has forecast a FY19 NPAT of $16.6 million.
The research agency added: “We expect further increases in the firm’s franchise footprint to drive earnings growth.”
Broking industry structure is “generous”
Moreover, in its analysis, Morningstar made reference to scrutiny of the broking industry from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
The research firm noted that the commission had raised concerns over the “structure of broker remuneration, the efficacy of trail commissions and just who brokers are working for”.
Despite refraining from making an “informed judgement”, Morningstar has said that it doubts that the existing structure of the broking industry would remain unchanged.
“Potential changes to the industry structure have been raised, but it is too early to make an informed judgement on the outlook for earnings, other than the projection that mortgage brokers will likely not continue to benefit from the current generous industry structure,” Morningstar claimed.
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