Australian Finance Group Realigns For Growth Path

This story features AUSTRALIAN FINANCE GROUP LIMITED. For more info SHARE ANALYSIS: AFG

As Australian Finance Group negotiates the impact of lockdowns on mortgage activity, transactions are likely to be becalmed before bouncing back further into FY22

-Settlements should still grow moderately amid robust housing demand
-Margin outlook supported by low funding costs
-AFG Securities re-positioning to near-prime and SMSF loans
 

By Eva Brocklehurst

Mortgage settlements are likely to stall as Australian Finance Group ((AFG)) negotiates its way through another lockdown maze, this time primarily in NSW. Still, brokers expect modest growth will resume in FY22.

Settlements recorded in the second half of FY21 should drive revenue growth in FY22 as pricing competition is offset by lower funding costs, Citi asserts. The broker expects FY22 settlements to grow to $50bn and reflect the continuing strength of the property market.

The combination of low interest rates and changes to the dynamics of housing demand have meant resurgent housing markets over the last 12 months. Yet Victoria's experience with extended lockdowns late in 2020 points to a sideways shift in settlements rather than an actual decline and, amid the current restrictions in both NSW and to a lesser extent Victoria, seller hesitancy is expected.

Sellers and buyers are expected to take to the sidelines until more listings come onto the market. Macquarie notes the company's lodgement-to-settlement ratio of 52.6% was below the long-term average in FY21 and reflects an acceleration in lodgement activity in the fourth quarter. So a proportion of these lodgements are likely to settle in FY22.

Morgans remains positive, too, noting the company's comment that lodgement volumes in the second half were up 80% and supportive of strong settlement prospects in FY22. The broker agrees funding costs are also supporting the margin outlook.

AFG expects the current cost of funds will continue for at least six months. Morgans points out banks are continuing to experience strong growth in low-cost deposits and therefore are likely to remain relatively inactive in the term wholesale funding market.

Hence investor demand should remain strong for non-bank RMBS (residential mortgage-backed securities) over coming months. The broker believes the marginal RMBS pricing is still below the cost of the company's warehouse funding facility and therefore a further reduction in these costs is possible.

Risks

Citi believes it will be a protracted lockdown that presents a risk to volumes and the main risk is if wary lenders do not come to market. This is a trend visible currently in property clearance rates and the low number of properties being sold.

Once the lockdown ended in Victoria in the second half of 2020, commitments took two months to recover back to NSW levels. Hence, should restrictions in NSW persist past October this may pose a risk to FY22 volumes.

And, unlike 2020, there will not be a refinancing boom and future growth will remain a function of new sales. Citi assesses a resurgence of refinancing activity is unlikely, as with high levels of fixed loans the particular cohort is largely locked into pre-existing deals during the current lockdown.

Yet, the broker notes AFG was able to bounce back from the first half of FY21 when a slowdown in volumes was attributed to major banks obtaining further market share through aggressive fixed-rate offers.

That said, competition is still strong, particularly in the prime segment. New mortgages seemingly are being priced at around -50 basis points below the back-book although falling securitisation funding costs are expected to offset this pressure in FY22.

Macquarie was not impressed by the pricing competition in FY21, which appears to be creating pressure on net interest margins at around -1.5 basis points per month. Still, asset quality has been maintained, with loans in hardship on the back of the rise of the Delta variant still very low. As of June 30 2021 there were just 27 loans in arrears greater than 30 days out of 8829 loans on the book.

Change In Mix

Citi believes the group will be supported through investment in technology and a repositioning of AFG Securities to near-prime loans and SMSF (small-medium superannuation funds).

The company has indicated the move to emphasise near-prime and SMSF was designed to reduce an over reliance on the prime segment. As a result of reinvigorated higher-margin near-prime offerings as well as SMSF, Morgans expects interest margins will be supported by this shift in asset mix.

The broker notes the Connective acquisition does not look like going ahead at this point and expects AFG will explore other opportunities for acquiring distribution in its AFG Securities book.

Morgans is excited by the prospect, given AFG Securities is the company's highest margin business segment. FNArena's database has three Buy ratings for Australian Finance Group with a consensus target of $3.39 that signals 13.9% upside to the last share price.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms