The Australian Finance Group Ltd (ASX: AFG) share price has leapt 16% this morning following the announcement the ACCC will grant clearance for its merger with rival Connective. Both businesses will become better positioned to invest in digital technologies and innovation in the face of digital disruption faced by the sector.
Image source: Getty Images
What does AFG do?
AFG is one of Australia's largest mortgage broking groups and was established in 1994. It began as a mortgage aggregator which provides mortgage brokers access to products and support. It now offers business finance, insurance products, and AFG-branded and securitised products throughout Australia.
What is the Connective merger?
AFG proposed to merge with competitor, Connective. The combination would create Australia's largest mortgage aggregator by a significant margin, accounting for almost 40% of Australia-operating mortgage brokers. More than half of all home loans written each year are initiated through the broker channel.
After the merger, the AFG and Connective brands intend to operate separately. The transaction is also subject to court approval with a final decision likely in the second half of FY20.
How is the AFG share price performing?
The AFG share price has more than doubled from its March low of 92 cents with shares currently trading at $1.96. AFG entered the S&P/ASX 300 (ASX: XKO) in the most recent quarterly rebalance due to this increase.
AFG announced in its most recent update that April operating results had been strong. However, COVID-19 is expected to create some economic uncertainty. Lodgements and settlements could experience adverse effects on 1H FY21. Lodgements in the March quarter were up 33% on the previous corresponding period, driven by record-low interest rates.
Nonetheless, residential settlements are expected to fall in coming months driven by a slowdown in broader economic activity. This will result in upfront commissions payments softening. Operating cash flow from existing trail commission arrangements on AFG's $151.7 billion trail book will, however, continue.
Foolish takeaway
AFG's merger will provide a strong base to benefit from an eventual recovery, despite the Australian mortgage market being expected to feel a downturn as a result of COVID-19.
