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A Morningstar report has outlined a number of challenges facing one of Australia’s largest brokerages and warned that its future depends upon the maintenance of current commissions arrangements.
A research note by Morningstar analyst David Ellis on Mortgage Choice has found that below-trend economic conditions, increasing pressure on housing affordability, tougher lending criteria, weak wages growth, a shortening in average loan life and higher interest rates are expected to slow demand for new home loans.
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However, Mr Ellis noted that, despite the expected market slowdown, Mortgage Choice is well placed to maintain solid earnings growth as it "expands its broker footprint, streamlines procedures, enhances systems, broadens its product range, ups its marketing effort, diversifies and invests in online capabilities".
He described the steady increase in the use of brokers in Australia as a “tailwind” for Mortgage Choice, but noted that the ASX-listed brokerage has “struggled to grow its share of mortgages in recent years”.
The Morningstar report noted that Mortgage Choice’s return on equity (ROE) is forecast to average 21 per cent per year for the next five years.
“Despite the upside, Mortgage Choice faces tough industry competition given the low entry barriers enable abundant numbers of small players,” Mr Ellis said.
“Future performance depends on lenders continuing to rely on brokers to distribute mortgages and, importantly, maintaining current commission arrangements,” he said.
“A robust property market is also essential as this leads to ongoing demand for new mortgages.”
RBA data shows a decline in housing credit growth to 6.3 per cent from 7.4 per cent for the year to 30 November 2016. Morningstar expects housing credit growth to stabilise at 5.0 per cent per year for the next five years.
Mortgage Choice grew its settlements by 6.3 per cent to $12.2 billion over the 12 months to 30 June 2016. The group’s loan book surpassed $50 billion over the 2016 financial year.
[Related: Flavell warns of further rate hikes in 2017]
