Bendigo and Adelaide Bank has agreed to acquire a portfolio of approximately $1.35 billion of standard residential loans based in Western Australia, from the wholly owned Western Australian Government entity Keystart Housing Scheme Trust by equitable assignment. The portfolio is selected from the total loan book of approximately $4 billion.
Bendigo has had net interest margin pressure for some time, and this might be seen as a way to help address the hole. The question however is asset quality and net returns on the transaction over time.
The bank says they have selected customers in the portfolio have on average five years of repayment track record and no arrears. The portfolio is approximately $1.35 billion residential loans and 6,000 customers. The purchase price at a premium of 0.2% or approximately $2.7 million. The average loan size is approximately $225,000, all variable rate owner occupied loans, no interest only loans. The weighted average seasoning is 64 months and the weighted average LVR is 84%. None are covered by Lender’s Mortgage Insurance. Geographically, 67% are in greater Perth, 33% regional Western Australia. They have limited exposure to mining by geography and occupation, with 0.4% of loans domiciled in Pilbara/Kimberley. Keystart will continue to service the customers on behalf of the Bank. To fund the purchase they also announced an equity raising to be launched in October.
The banks said “The acquisition complements our existing business in Western Australia and improves our geographic diversification by increasing the proportion of our loan book in Western Australia from approximately 11 to 13 percent. We will also have potential to provide 6,000 Keystart customers with a range of complementary products and services”.
Keystart customers are typically first home buyers who do not have sufficient initial savings for a deposit. The Keystart loan is designed to be a transitionary product, with approximately 80 to 90% of Keystart customers refinancing to a mainstream lender over time. They are full documentation owner occupied loans. They have approved loans for approximately 60,000 households for more than 27 years. Their total loan book is approximately $4 billion with approximately 18,000 customers. They have approximately 18% of the first home buyer market in Western Australia, with a “strong and consistent record” of low arrears and loan losses.
Whilst this makes sense in terms of geographic expansion and book growth, the higher LVR nature of the book will require higher risk weights to be applied. A quick estimate suggests it will provide a small lift to earnings, but only if the defaults remain low. Given the rising level of arrears in WA and slowing house prices, this may hit the loan performance later.
