Challenger Limited · ASX:CGF
Challenger — Investor Presentation (September 2004)
23 slides from Challenger's investor presentation, Sep 6, 2004
Slide 1: Challenger Wholesale Finance: An overview
Challenger Wholesale Finance An overview Brian Benari, Chief Executive, Challenger Wholesale Finance Drew Hall, Chief Financial Officer, Challenger Wholesale Finance 6 September 2004
Slide 2: Key messages
Key messages Î Challenger Wholesale Finance is analogous to a funds management business: — Investors, via residential mortgage backed securities, invest — In portfolios of mortgages (securitised pools) — Which are originated and managed by Challenger for a fee — With the benefit of excess spread ear
Slide 3: Agenda
Agenda 2004 highlights 4 Business model 5 Predictable earnings stream 6 Significant growth opportunities 8 Mortgage book growth 11 Low capital intensity business 12 Financials 13 Summary 22 3
Slide 4: 2004 highlights
2004 highlights • Net profit before goodwill, interest and tax - $33m1 • Acquired Australia’s No. 1 prime residential white-label wholesale lender, Interstar, in September 2003 • Established Australia’s fastest growing non-conforming residential wholesale lender, ‘The Mortgage Alternative’ (TMA) in
Slide 5: Business model
Business model Sourcing investors Portfolio management Mortgage origination / funding Scaleable technology Warehousing & - Banks operations Residential - Life Company - Wealth management 540+ Interstar white-label Global & domestic Prime originators securitisation programs - External investors - Lif
Slide 6: Predictable earnings stream
Predictable earnings stream • Revenue ― Management fees ― Excess spread ― Difference between portfolio return and investor required return — Weighted average mortgage life 4.2 years • Operating expenses ― Trailing commissions paid to originators • Overhead expenses ― Cost of running the portfolio ma
Slide 7: Predictable earnings stream
Predictable earnings stream • Credit losses — There is no recourse to Challenger for any credit losses — Credit losses on mortgage portfolios are absorbed by the insurers of the mortgages or the investors in the residential mortgage backed securitisations • Interest rates ― Official interest rate ch
Slide 8: Significant growth opportunities: Macroeconomic environment
Significant growth opportunities Macroeconomic environment (%) "Baby Boom" 40 Long and stable growth in mortgage credit 30 20 Great depression 10 WWII 0 -10 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Australia USA Source : UBS “According to a recently published R
Slide 9: Significant growth opportunities: Macroeconomic environment
Significant growth opportunities Macroeconomic environment • The RBA does not believe this rate of growth is sustainable and is targeting a compound annual growth rate of 10-15% • Signs are that settlements have been contracting to more sustainable growth levels • This sets the scene for long term s
Slide 10: Significant growth opportunities: Industry trends
Significant growth opportunities Industry trends • Brokers now originate more than 30% of mortgages, a level substantially lower than the US and UK (>50%) and are here to stay • Traditional lenders efforts to shift away from brokers will propel non-bank lenders like Challenger • Financial planners m
Slide 11: Mortgage book growth
Mortgage book growth Total book – Interstar, Commercial & TMA 2,000 18,000 New Settlements (LHS) 1,800 Total Mortgage Portfolio (RHS) 16,000 1,600 1,400 14,000 1,200 $m $m 1,000 12,000 800 10,000 600 400 8,000 200 0 6,000 M 02 M 03 M 04 2 3 4 A 02 A 03 Fe 2 ay 2 Ju 2 N 02 Fe 3 ay 3 Ju 3 N 03 Fe 4 M
Slide 12: Low capital intensity business
Low capital intensity business • Challenger’s product and servicing infrastructure will support: ― Material increases in volumes ― Increased product breadth ― New asset classes • Australia wide asset origination support teams can facilitate new products and asset classes with minimal cost increases
Slide 13: Financials
Challenger Wholesale Finance Financials Drew Hall, Chief Financial Officer, Challenger Wholesale Finance
Slide 14: Financials
Financials Interstar TMA Commercial Total 9 mths to 9 mths to 12 mths to 12 mths to 30 Jun 04 30 Jun 04 30 Jun 04 30 Jun 04 $m $m $m $m Revenue 125.7 1.0 21.8 148.5 Operating expenses before 41.8 1.1 - 42.9 amortisation & interest Overhead 24.3 2.2 7.8 34.3 EBITA 59.6 (2.3) 14.0 71.3 Amortisation 38
Slide 15: Interstar earnings analysis
Interstar earnings analysis Securitisation trusts Interstar earnings Profit 0.24% Management fees and Portfolio mgt costs 0.24% excess spread 1.30% Amortisation 0.39% 1.30% Trail 0.43% Average Trustees fees borrower rate 7.23% RMBS investor return 5.89% 15
Slide 16: Interstar annuity revenue
Interstar annuity revenue 6 months 6 months 12 months to 31 Dec 03 to 30 Jun 04 to 30 Jun 04 $m $m $m Revenue 39.8 85.9 125.7 % of average mortgage portfolio 1.34% 1.30% 1.31% • Revenue is annuity style from management fees and excess spread — Excess spread is the margin earned between mortgages and
Slide 17: Interstar expenses
Interstar expenses 6 months 6 months 12 months to 31 Dec 03 to 30 Jun 04 to 30 Jun 04 $m $m $m Operating expenses before amortisation 13.2 28.6 41.8 % of average mortgage portfolio 0.44% 0.43% 0.44% Overhead expenses 8.4 15.9 24.3 % of average mortgage portfolio 0.28% 0.24% 0.25% • Operating expense
Slide 18: Interstar amortisation
Interstar amortisation 6 months 6 months 12 months to 31 Dec 03 to 30 Jun 04 to 30 Jun 04 $m $m $m Amortisation expense 12.2 26.0 38.2 % of average mortgage portfolio 0.41% 0.39% 0.40% • Interstar capitalises: — Upfront third party origination costs (deferred origination costs) — Upfront capitalised
Slide 19: Commercial Lending
Commercial Lending Revenue & overhead expenses 6 months 6 months 12 months to 31 Dec 03 to 30 Jun 04 to 30 Jun 04 $m $m $m Revenue 10.9 10.9 21.8 % of average mortgage portfolio 1.03% 0.96% 0.99% Overhead expenses 4.1 3.7 7.8 % of average mortgage portfolio 0.39% 0.33% 0.35% • Revenue reflects appro
Slide 20: Operating cashflow
Operating cashflow 6 months 6 months 12 months to 31 Dec 03(1) to 30 Jun 04 to 30 Jun 04* $m $m $m EBIT 12.5 20.6 33.1 Add back: Depreciation & amortisation 12.4 26.3 38.7 Deferred origination & portfolio costs (28.9) (38.3) (67.2) Timing differences accrued income (7.6) 3.5 (4.1) and payables Opera
Slide 21: Balance sheet
Balance sheet Before allocation of corporate debt $m Interstar(1) 211 TMA acquisition and seed capital over 3 years 6 Share of CMV of HMT management rights 107 Net assets before allocation of corporate debt 324 (1) Note: A contingent liability exists for deferred acquisition consideration payable of
Slide 22: Summary
Summary Î Challenger Wholesale Finance is a high growth, low capital intensity business generating annuity style revenues from funding, servicing and managing prime residential, non conforming residential and commercial mortgages Î The business will: — Achieve 18% RONA on historic cost net assets in
Slide 23: Discussion / Questions
€2 challenger Financial Services Group Discussion / Questions