Low doc home loan competition hits Adelaide Bank bottomline

Adelaide Bank has issued an earnings downgrade after intensifying competition in the mortgage lending sector forced it to remove premium pricing on its low-documentation home loans.
The regional bank revised its earnings per share (EPS) growth forecast for fiscal 2007 to between 6c and 9c a share, down from 10c. The downgrade surprised the market and its shares ended down 53c, or 3.9 per cent, at $13.05.

“Competition in the banking sector, in particular the mortgage markets, has continued to intensify this financial year,” the bank said.

“As a consequence, the mortgage portfolio is being repriced at a faster rate than had been expected when the 2007 financial year budgets were formulated in May.”

CEO-in-waiting Jamie McPhee said the loans affected were all low-documentation loans, which comprised about 35 per cent of the bank’s mortgage loan book. “They have been priced historically at a premium to a standard product,” Mr McPhee said. “Today’s new business is no longer written at a premium and that’s the big change.”

Mr McPhee said Adelaide Bank was one of the first banks to offer low-documentation loans, which were popular among the self-employed who often did not have the documentation to support a loan application, unlike company workers.

“We were early into the low-doc space, but more of the market has offered them and that premium has been competed away,” he said.

Mr McPhee said the bank was also exploring development options, which could impose a short-term burden on EPS growth but increase it in the medium term. “We think there’s other opportunities for the bank to take hold of, and those things come at additional cost,” he said.

Investments the bank is considering include acquisitions and new product developments.

Last year, AdBank bought Goldman Sachs JB Were’s margin lending business and a portfolio funding business.

“These businesses have made a significant contribution to the bank’s profit growth and their contribution for the 2007 financial year is in line with or exceeding expectations,” the bank said.

AdBank reported a 13 per cent lift in net profit to a record $94.42 million for 2005-06 and achieved EPS growth of 13 per cent to 88.68c. Mr McPhee will replace outgoing AdBank chief executive officer Barry Fitzpatrick when he retires next month.

AAP

About: Rick Adlam: Rick Adlam has been helping clients with home loan finance since 1985 when he was home consultant with AV Jennings. Rick started Equity Home Loans in 1996 to help homeowners become property investors. Rick currently consults in the development of Mr Mortgage for mortgage brokers and HomeMate for new home buyers. Website: http://www.mrmortgage.com.au