Thank you @keygeo. I have been trying to get my head around the...

Thank you @keygeo. I have been trying to get my head around the home loan lending. The loan pool hovered around $221M for a few years until FY2015, when there has a sudden jump to $233M. That growth has continued with $246M.1 as at 31 December 2015. Aiming for $400M come 30 June 2020.

To attract growth, the company has previously announced that they have had to reduce establishment fees. This is evident in the FY2015 annual report were home loan fee income went from $2,560,763 in FY2014 to $1,446,842 in FY2015, a drop of $1.1M. Reducing the fees has enabled them to win more new business. Another negative is that the mortgage brokering fees dropped from $1,383,381 to $1,195,328 in FY2015. I guess that since they were winning new home loan lending business, there were less clients being referred onto other lenders and therefore less brokerage fees being received. That’s where the bad news stops.

The accounts for FY2015 (page 40) shows interest income as $18,031,307 and interest expense of $10,818,862. The lenders margin is therefore $7,212,445 before expenses. It got me thinking, what it might look like at a $400M loan book. Applying some basic maths logic, the interest income would rise to approximately $30,955,033, the interest expense to $18,573,154 and the lenders margin would be around $12,381,880, thereabouts. An extra $5M.

Some short term pain in reduced establishment fees will result in some long term joy in increased interest income in future years. The gift that keeps giving!

From what I have been told, for every $100M the loan pool increases by, FSA needs to contribute $3M in a non-recourse loan arrangement. The balance sheet risk at $400M would only be $12M. Westpac takes on most of the risk.

Don’t be too disappointed if there is no profit growth for FY2016. Keep an eye on the size of the loan pools and arrears amounts. Provided they are growing, good times should be not too far ahead.