The Royal Automobile Club of WA’s foray into the mortgage broking business has proved costly, with the group writing down the value of its broking arm by $4.3 million.
The Royal Automobile Club of WA’s foray into the mortgage broking business has proved costly, with the group writing down the value of its broking arm by $4.3 million.
The write-down contributed to a fall in RAC’s annual profit, despite increased revenue in its core operating activities.
The RAC spent $6.5 million acquiring two interstate mortgage broking firms in 2003 and 2004 and also pursued incremental growth in the business, which generated $11.9 million in commission income last year.
Chief executive Terry Agnew said the mortgage broking business was adversely affected by slower lending growth in all states except WA and pressure on profit margins, as banks reduced commission payments and individual brokers sought a higher share of revenue.
He said the expected revenue from the broking business had been revised down, and consequently goodwill had been written down by $4.3 million.
This was reflected in the value of RAC’s intangible assets (including goodwill) being cut to $4 million from $8.8 million.
In contrast, in 2004, the group capitalised (i.e. added to) goodwill as a result of expansion of the mortgage broking business.
Mr Agnew said RAC remained committed to the mortgage broking business, which was one of four growth areas, along with its auto service centres, its finance subsidiary and its home security business.
He said the group’s mergers and acquisitions team was continuing to seek further opportunities “that are aligned to our brand” in these growth areas.
The M&A team was also assessing “purely commercial” opportunities, with the most obvious being equity investments in major property projects.
RAC’s finance arm has already done a few small deals of this kind, but future deals were likely to be “a few million” dollars.
Mr Agnew said the net improvement in RAC’s financial position was $57.7 million in the year to June 2005 compared with $61.3 million in the previous year. This comprised two components, although comparisons were complicated by accounting changes. The first component, net profit from ordinary activities, was $28.3 million, down from $41.3 million.
The positives in this result included an increased profit from its 50:50 insurance joint venture with Promina to $18 million. The second component, the net increase in the asset revaluation reserve, was $29.4 million, up from $19.9 million.
