Yield falling at RHG

The earnings from the superficially profitable back book for the former Rams Home Loans Group declined quickly in the latest half year.

RHG, as the remnant of Rams is now known, said in a statement to the ASX yesterday that it earned a net profit of $120 million for the year to June 2009. RHG published unaudited financials with the full financials to follow later.

Following a profit of $69 million in the December 2008 half, the profit fell to $51 million in the June 2009 half, a period during which big banks and some small banks improved margins on home loans portfolios.

RHG said that is expects to report an operating profit in the 2010 financial year of between $55 million to $65 million, though this forecast was heavily qualified.

The firm said its mortgage book stood at $12.7 billion at June 2009. Arrears increased to 2.7 per cent at June 2009 from 2.1 per cent at June 2008, contrary to the trend at many lenders where a gentle improvement in arrears is evident.

RHG, when still trading as Rams, generated much of its lending and revenue growth in the late phase of the credit boom by providing loans to borrowers with very little equity. RHG has also not cut interest rates much in line with falling money market rates, depriving customers of the benefit of reduced home loan repayments.

The RHG statement noted that funders obliged the firm to invest in additional subordinated debt of mortgage-backed trusts that fund the majority of its loans and also bank warehouses, while also having to buy back impaired loans. The firm also noted that it had to pay a higher cost of funds to its bank funders.

These are recorded in the unaudited balance sheet as investments at cost and in line with Australian accounting standards, but the commentary notes that "these assets are at risk and are unlikely to be fully recovered". It isn't clear whether the losses expected by management from these assets are already factored into the forecast operating profit for 2010.

The stated net asset of 38.7 cents a share may thus be exaggerated.

RHG has attracted a small band of new investors in its share over the last year, some of them steered into the stock by the retail investment newsletter, The Intelligent Investor, when the share price was much lower than now.

Shares in RHG traded yesterday at 58.5 cents, near the 12-month high for the stock and more than six times the low for the stock over the last year. RHG sold shares in an initial public offer in July 2007 for $2.50 a share.

The firm sold the Rams Home Loans brand to Westpac several months later.