Challenger sells mortgage business to NAB

National Australia Bank, historically, considered the broking channel largely incompatible with its own business model - too hard to work with, too unprofitable and too much trouble to rate an area for change in an organisation with plenty of other projects on its plate.

Now NAB like the mortgage broking channel sufficiently to want to buy several of them.

NAB, metropolitan newspapers widely report this morning, has agreed to buy the mortgage distribution and mortgage management business of Challenger Financial Services. NAB and Challenger are likely to confirm details today.

The strategic rationale, for NAB, appears to centre on the mortgage "aggregators" rolled up by Challenger two years ago: Choice Aggregation Services, PLAN Australia, FAST and presumably also the 40 per cent stake in Homeloans Limited (the latter being a mortgage manager rather than an aggregator).

NAB may see less merit in the mortgage funding business of Challenger, acquired from Interstar in 2003.

This business was a creature of, and dependent on, the securitisation boom.

While better placed than Rams and Wizard in the prime home loans space (whose owners sold the brand and network, but not the back book, to Westpac and Aussie respectively) Challenger's mortgage funding business faltered in the first phase of the credit crunch from mid 2007 and became increasingly stressed as the second wave hit in late 2008.

Challenger's management persisted with plans to invest in aggregators (which manage relationships with lenders and supply IT and training to a myriad of small brokers).

This strategy may have generated some value for Challenger even as new business dried up on the funding side.

The Australian reported NAB may pay at least $330 million and the Sydney Morning Herald reported NAB may pay as much as $400 million.

Challenger said back in February that its return on net assets in mortgage management was steady at 22 per cent in the December 2008 half, up from 20 per cent in the June 2008 half, but steady with the December 2007 half.

The lending book declined by 13 per cent to $18.9 billion over the year to March 2009.

Mortgages under administration at March 2009 were $73 billion.