Adelaide Bank has implemented a new business plan in its wholesale mortgages division after suffering a 38 per cent fall in earnings in the business. Pre-tax profit from wholesale mortgages fell from $60.5 million in 2005/06 to $37.6 million in the year to June.Adelaide Bank managing director Jamie McPhee said the division fell victim to increased competition in the third party mortgage origination market and severe interest margin compression. Some of this was due to an increase in demand for low margin fixed rate loans. Another factor was the rapid re-pricing of low doc loans in the market.The bank's net interest margin fell 15 basis points from 1.16 per cent in 2006 to 1.01 per cent at the end of June.McPhee said management was implementing the recommendations of a strategic review of the wholesale mortgage business. Steps being taken include cost reduction, yield improvement and better credit quality.McPhee said: "Low doc and large loans have been re-priced. We expect interest margins to continue to contract in the coming financial year but at a slower, more manageable rate."The group reduced costs by $3.6 million to $46.2 million - mainly due to a reduction in expenses relating to third party processing. The bank's overall cost to income ratio fell from 50.6 to 48.3 per cent.McPhee said the strategic review indicated that the third party mortgage origination market was still growing strongly. The bank is committed to the market but will price loans for economic return rather than market share.The bank has introduced a new product range and improved its fraud detection tools.Overall, the picture was brighter. Cash earnings of $104.3 million were 11 per cent higher than the previous corresponding period (the statutory net profit figure of $101 million was up seven per cent).Revenue of $335.5 million was up 8 per cent on 2006. Earnings per share were up nine per cent to 96.8 cents. The final dividend of 36 cents a share was up from 29 cents a share at the interim. The return on equity (on a cash basis) was up from 17.3 to 18 per cent.The highlights for the banks were business lending, where assets grew by 53 per cent, and margin lending, where the loan book grew 41 per cent to $5 billion.Bad and doubtful debts rose by 51 per cent from $11.8 million to $17.9 million. Provisions rose 46 per cent in the June half. Impaired loans rose by $7.4 million over the year to $31 million.The proportion of gross impaired loans to gross non-securitised loans rose from 0.20 to 0.22 per cent over the year.McPhee said there had been an incidence of fraud and some valuation issues in a "handful" of residential loans. He said the bank had tightened up its procedures in this area.