RHG milks the back book

RHG Limited is extracting a hefty profit from its back book, reporting a profit of $69 million for the half year to December 2008.

The only income stream for RHG - the former Rams Home Loans group - is the income from managing a declining but still substantial portfolio of home loans originated in the boom years.

The collapse of its funding model in August 2007, and only weeks after listing on the ASX, forced the company to sell the Rams brand and franchise network to Westpac.

The shifts in the funding environment over the next year or so, with funding costs and lending rates rising sharply, have worked in RHG's favour. So while funding costs fell over the later months of 2008, RHG reduced interest rates to customers more slowly than have lenders with new business to seek and a reputation to manage.

To some extent RHG's dogged pricing has accelerated the rate of refinancing, with the loan portfolio declining by 26 per cent over only six months to $9.2 billion.

The average interest rate paid on the RHG loan book was in excess of nine per cent over the December 2008 half. Funding costs fell more quickly than the costs charged to borrowers, maximising the profit.

It's interesting to note that the profits of RHG, a business broken by the credit crunch and forced to sell its retail arm, and that is now shrinking, has in the last half of calendar 2008 made more profit than was forecast for the 2008 financial year in the Rams prospectus.
 
RHG continues to warn of the risk of events of default as it renegotiates warehouse facilities with banks.