AFG volumes down 11% amid ‘unprecedented’ headwinds

Uptake of AFG-branded products via AFG Home Loans (AFGHL) also declined, down 2 per cent from $3.2 billion to $3.1 billion, with white label settlements falling 23 per cent to $2 billion, offset by a doubling in settlements of its mortgage securities to $1 billion.

However, despite the fall in settlements, AFG’s off balance sheet mortgage book increased by 7 per cent to $147.4 billion, while its on balance sheet mortgage book increased by 25 per cent to $9.1 billion.

AFG’s commercial lending streams also helped bolster its underlying performance.

Despite an 11 per cent decline in commercial settlements via its broker network to $2.1 billion, the group’s on balance sheet commercial settlements doubled via AFG Business to $129.6 million, while settlements via Thinktank increased 93 per cent to $89.3 million.

AFG’s total commercial portfolio increased 6 per cent to $8 billion.

Despite mixed settlements, growth in AFG’s residential and commercial loan book has helped the group report a 2 per cent increase in its underlying net profit after tax, from $28.1 million to $28.6 million.

AFG CEO David Bailey said he was pleased with the result, given recent uncertainty in the broking industry and “unprecedented” market conditions.

Mr Bailey said the group’s diversification strategy has helped reduce its exposure to such headwinds.

“AFG has demonstrated real resilience this year,” he said.

“The mortgage broking sector has endured a tumultuous 12 months, with unprecedented external forces creating a tough lending environment leading to residential settlements being down 11.5 per cent compared to last year.”

Mr Bailey continued: “However, AFG has emerged with a stronger and more sustainable business by executing our strategy to continue to develop a more diversified earnings base while still recognising the importance of our traditional aggregation business.

“A stand-out for me has been the excellent growth in our own RMBS program, which passed the $2 billion under management milestone on the back of growth of 50 per cent over the prior year.”

Connective merger

Mr Bailey reflected on the growth opportunities available to AFG off the back of its recently announced merger with fellow aggregator Connective Group.

The CEO said the merger, which is reportedly worth $120 million, will provide AFGHL with access to a broader distribution channel via Connective brokers.

“The combined group will create a significant national mortgage distribution network, with more than 6,575 brokers and combined mortgage settlements of $76 billion in FY19,” he said.

He continued: “The merger demonstrates our ambitions in growing the business.

“Whilst we remain confident about the value AFG stands to generate from our existing ongoing growth plans, we felt successfully participating in the competitive sale process absolutely aligned to our strategy.

“The prospect of complementing our existing business with the cultural fit and shared customer-focused philosophy of Connective represents a compelling opportunity for AFG shareholders, particularly where we can do so on an earnings accretive basis.”

Mr Bailey noted that Connective brokers would have access to AFGHL-branded products upon completion of the merger, expected in the second half of FY20.

“Expanded distribution channels and broader diversification of products provide greater choice and value for both brokers and consumers,” he said.

The transaction is subject to shareholder, regulatory and court approval.

Outlook

The AFG CEO concluded by noting his optimism regarding the year ahead, given recent developments in the market, such as a renewed sense of certainty over broker commissions, the Reserve Bank of Australia’s (RBA) back-to-back cuts to the cash rate and the Australian Prudential Regulation Authority’s (APRA) new lending guidance.  

“The federal election outcome has removed much of the policy ambiguity clouding the industry and mapped out a pathway to deliver regulatory certainty for the business,” he said.

“With the full impact of the stimulus from the RBA and APRA’s amendments to serviceability assessments still to play out, from an AFG perspective the challenging lending landscape reinforces the company’s value proposition and ensures mortgage brokers remain the dominant channel for home loans.”

“We will remain proactive in increasing awareness of the value brokers provide in delivering choice and competition to the nation’s home loan market.”

However, Mr Bailey said he expects continued uncertainty surrounding revisions to lending practices to pose further challenges in the year ahead.

“Nevertheless, we fully expect regulatory and compliance requirements will increasingly be a factor for the Australian financial services industry over the short to medium term and the mortgage broking industry will need to adapt to the new environment,” he said.

“AFG’s customer-first approach and agile operating model presents enormous opportunities for our business, and we enter financial year 2020 confident of another successful year as we deliver on our term strategy.”

[Related: Mortgage Choice reports 29% fall in commissions revenue]