Banking experiment a drain on Challenger capital

George Lekakis

Mark Ellis, chief executive, bank, at Challenger

Challenger Limited’s foray into banking has proven a costly exercise after the group poured an additional A$112 million to boost the capital base of the rebranded MyLifeMyFinance business it acquired in July 2021.

Details of the capital drain are revealed in financial accounts of the bank subsidiary that Challenger lodged last week with ASIC.

The MyLifeMyFinance business, which has been rebranded to Challenger Bank, posted a pre-tax operating loss of $15.6 million for the 12 months to the end of June 2022.
 
As reported in Banking Day on 17 August, Challenger group is currently reviewing its ownership of the subsidiary and has appointed Gresham Partners to advise on a potential sale of the business.
 
Disclosures in the subsidiary’s accounts indicate that Challenger is moving urgently to offload the bank as it soaks up capital resources of the group.
 
Directors of the bank indicated that they would discontinue plans to integrate the bank with other parts of the Challenger business until the subsidiary’s strategic future was clarified.
 
“Pending Challenger Limited's determination on the appropriate course of action from this strategic review, the Company will continue to focus on providing financial services to its retail and non-retail customers in the form of taking deposits and providing financial loans,” the bank’s directors stated in the subsidiary accounts.
 
“The Company will also consider the rationalisation, slow down or cessation of any integration activities into the Challenger Group until such determination by Challenger Limited is obtained from this strategic review.”
 
Challenger chief executive Nick Hamilton announced a strategic review of the business on 16 August after revealing that the subsidiary was expected to generate another loss of more than $10 million in 2023.
 
Challenger Bank, which is one of the smallest deposit-taking institutions in Australia, has cost the Challenger Group considerably more to acquire than the $35 million disclosed in December 2020 when the purchased was negotiated.
 
According to disclosures on page 36 of the bank’s 2022 accounts, Challenger Group paid Togethr Trustees Pty Ltd - the former owner of the bank - $37.5 million when the transaction was settled in July last year. 
 
However, to complete the deal Challenger Group also had to return to the former owner an additional $5.25 million of surplus capital that had been sitting on the bank’s balance sheet.
 
Upon taking ownership of the bank, the Challenger pumped $62 million cash into the bank.
 
This was followed by a further capital injection of $50 million in February this year.
 
These capital distributions, which emanated from Challenger’s life insurance company, were considerably higher than previously signalled by Challenger’s senior management in December 2020.
 
It appears that the collapse of numerous digital banks such as Volt and Xinja have spooked the Challenger board and forced it to reassess whether its banking aspirations were over-baked.
 
Challenger faces several obstacles offloading the business, not least of which is its shrinking base of retail deposits and loans.
 
According to APRA data, Challenger Bank’s household deposit base declined 12.5 per cent or $30 million to $209 million in the 12 months to the end of July.
 
Total deposits increased owing only to a sharp rise in deposits from financial institutions, which is believed to be mostly cash derived from entities within the Challenger Group.
 
The mortgage book withered to only $87 million from $211 million a year earlier.
 
Selling the bank might also be complicated by the fact that Challenger Bank operates its business on a Temenos technology platform.
 
The terms of the arrangement with Temenos are not known publicly, but Volt Bank directors earlier this year cited onerous contracts with technology providers as having contributed to financial pressure on the company.
 
If Challenger Bank has a subscription to Temenos’ banking as a service offering, it could mean the bank might be exposed to residual costs if a prospective buyer of the business was not in a position to honour a long-term contract.