MORTGAGE ADVICE BUREAU (HOLDINGS) PLC

("MAB", or "the Company", or "the Group")

23 March 2021

Final Results for the year ended 31 December 2020

Mortgage Advice Bureau (Holdings) PLC (AIM: MAB1.L) is pleased to announce its final results for the year ended 31 December 2020.

Financial highlights

Operational highlights

Post year end

Peter Brodnicki, Chief Executive, commented on the 2020 results: 

"These results once again demonstrate the resilience of our operating model and the quality and dedication of our management team and staff during a year of exceptional challenges. We took quick and decisive action in response to the pandemic that resulted in us not only coming through an incredibly difficult period in great shape and ensuring that our 2020 strategic objectives were met, but also putting ourselves in a strong position to start accelerating growth over the next few years.

"In a market where gross new mortgage lending was down 9% on prior year, our revenue grew by 3% to £148.3m and our mortgage completions grew by 5% to £17.6bn. Our market share of new mortgage lending increased 11% to 6.3%, thereby delivering our strategy to achieve year-on-year growth, irrespective of prevailing market conditions. Adviser numbers were up 8% to 1,580⁽⁴⁾ by 31 December 2020.

"Despite the impact of the pandemic, our profitability and cash generation profile remained strong, which enabled us to reimburse all the Government furlough grant income received. Accordingly, we are pleased to propose a final dividend of 19.2 pence per share, in line with our policy of paying out a minimum of 75% of adjusted earnings, making total proposed dividends for the year of 25.6 pence per share. This includes the 6.4 pence per share 'catch up' interim dividend paid in December 2020."

Current trading and outlook

Despite the UK being in lockdown since the start of the current year, activity levels have remained strong in terms of both written business and Adviser recruitment. The Intermediary Mortgage Lenders Association's ("IMLA") current estimate of gross new mortgage lending for 2021, published in January 2021, is £283bn, representing a 16% increase on 2020 (£243bn) and a 6% increase compared to 2019 (£268bn).

The underlying fundamentals driving levels of consumer demand for housing are strong. This level of demand, coupled with the Chancellor's announcement earlier this month of the launch of a "Mortgage Guarantee Scheme", an extension of the Stamp Duty holiday until the end of June and the nil rate band being doubled until the end of September, give us understandable optimism about the year ahead, and what can be expected when restrictions are lifted.

Our strategy of consistent investment in people, technology and extension of our business model, has put MAB in a strong position to start accelerating growth over the next few years. Current trading is in line with the Board's expectations.

¹ MAB uses adjusted results as key performance indicators as the Directors believe that these provide a more consistent measure of operating performance by adjusting for acquisition related charges and significant one-off or non-cash items. Adjusted overheads ratio in 2020 is stated before £0.4m amortisation of acquired intangibles (2019: £0.2m) and £0.9m (2019: £0.4m) of additional non-cash operating expenses relating to the put and call option agreement to acquire the remaining 20% of First Mortgage. In 2019 £0.4m of one-off acquisition costs associated with First Mortgage were also adjusted.

² Adjusted profit before tax is stated before the items in (1) above and the loan write off and loan provision totalling £1.7m. Adjusted earnings per share is also stated before these items, net of any associated tax effects.

³ Adjusted cash conversion is cash generated from operating activities adjusted for movements in non-trading items, including loans to AR firms and associates totalling £(1.5)m in 2020 (2019: £0.9m) and increases in restricted cash balances of £0.5m in 2020 (2019: £2.2m), as a percentage of adjusted operating profit.

⁴ Includes the Advisers of a firm previously authorised under an Appointed Representative agreement with MAB until 7 December 2020. MAB continues to provide services to this firm, now directly authorised by the FCA.

⁵ An active Adviser is an Adviser who had not been furloughed and was therefore able to write business.

⁶ Based on average number of active Advisers.

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 ("MAR").

For further information please contact:

Numis Securities Limited                                                       Tel:  +44 (0)20 7260 1000

Stephen Westgate / Hugo Rubinstein / Laura White

Analyst presentation

There will be an analyst presentation via conference call to discuss the results at 9:30am today.

Those analysts wishing to attend are asked to contact investorrelations@mab.org.uk

Copies of this announcement are available at www.mortgageadvicebureau.com/investor-relations. 

Chief Executive's Review

Overview of 2020

I am very pleased with MAB's performance in 2020 given the challenges presented by the pandemic. We continued to grow revenue, mortgage completions, and market share, building on our consistent track record of delivering growth. Once again, we comprehensively outperformed both the UK housing and the new mortgage lending markets. 

Despite ongoing restrictions on lending and everyday life, new business levels built up quickly from the start of summer, resulting in a strong H2 2020 for written business. Although the start of this new financial year saw the introduction of a very tough third lockdown, housing and mortgage activity has held up well. The underlying fundamentals driving levels of consumer demand for housing are strong. This level of demand, coupled with the Chancellor's announcements earlier this month of the launch of a "Mortgage Guarantee Scheme", an extension of the Stamp Duty holiday until the end of June and the nil rate band being doubled until the end of September, and the signposted easing and removal of lockdown restrictions, are likely to improve housing activity further.

Our growth in mortgage completions is set out below:

MAB's total gross mortgage completions (including Product Transfers) increased by 5% to £17.6bn (2019: £16.7bn). Gross mortgage completions excluding Product Transfers increased by 1% to £15.3bn (2019: £15.2bn). This increase, together with the contraction in overall new mortgage lending volumes in the UK, led to an 11% increase in our share of UK new mortgage lending to 6.3% (2019: 5.7%). Product Transfers increased by 50% to £2.3bn due to the lending restrictions on re-mortgages during the year. Group revenue increased by 3% to £148.3m, including £14.7m of revenue generated by First Mortgage, and saw a 1% decrease excluding First Mortgage. This growth was achieved in a year when the first national lockdown closed the housing market in England for almost two months and the markets in Scotland, Wales and Northern Ireland for three months.

In terms of market environment, we saw a buoyant first quarter resulting from the lift in consumer confidence post the December 2019 UK General Election, but then transaction volumes reduced significantly as a result of the housing market shutdown in Q2 2020, with year-on-year drops in gross new mortgage lending and housing transactions for the quarter of 32% and 47% respectively. Q3 2020 mortgage completions continued to be impacted despite the reopening of the housing market due to pipeline conversion timeframes. However in Q4 2020, the continuing recovery translated into a 5% increase year-on-year in gross new mortgage completions, driven by the house purchase segment.

Overall for 2020, UK gross new mortgage lending activity fell by 9% to £243.1bn (2019: £267.9bn⁽¹⁾), excluding product transfers. UK housing transactions fell by 11% over the same period. MAB significantly outperformed the market in all four quarters of the year.

We also achieved excellent progress on our strategic initiatives. The campaigns we rolled out in support of our Appointed Representative ("ARs") and their Advisers to ensure opportunities were maximised during and after the housing market shutdown were incredibly well received, and further cemented our close relationships with our ARs.

Progression of our technology initiatives was a priority throughout the period, thereby ensuring that investment in key projects relating to increased operational efficiency, lead generation and productivity continued to be delivered to plan. The pandemic also triggered additional technology requirements, enhancements and new growth initiatives. We strongly believe that this is the time to continue investing in new technology and extending our business model to fully leverage our leading proposition and deliver operational efficiency.

Our recruitment of ARs and Advisers resumed at pace after the housing market reopened and throughout the second half of the year. By 31 December 2020, our total Adviser count stood at 1,580⁽²⁾, an 8% increase on last year, despite the very limited recruitment achieved during the national lockdown in Q2 2020. Our recruitment pipeline remains very healthy, and as at 19 March 2021 our Adviser numbers had grown to 1,637⁽²⁾.

In terms of broadening our addressable market, 2020 was also a year of significant progress, with the launch of MAB Later Life, a new best-in-class proposition for brokers in the high growth later life segment, in partnership with Key Group. We are also delighted to have announced our new joint venture partner in Australia, Australian Finance Group Ltd, helping us to accelerate the rollout of our leading distribution and advice model in Australia.

During the year, we continued to strengthen our management team with the addition of a Chief Commercial Officer, a new Chief Information Officer, a Head of Partnerships, and a Head of Digital Transformation. These are all key new roles that will help us to achieve our growth ambitions, providing specific focus on lead generation, the performance of our investments, and the delivery of our technology developments.

I am proud of the way in which we have supported our staff, our ARs and their Advisers, and our customers during exceptionally difficult times. The health, safety and wellbeing of our employees has been and continues to be our top priority, and I am exceptionally grateful for their hard work and dedication. The campaigns we launched to help support new and existing clients in addressing the financial challenges brought about by the pandemic were also extremely well received, including our National Mortgage Information Support Service campaign.

As a result of strong written business in H2 2020, it was with great satisfaction that the Board was able to approve the repayment in full of all the precautionary pay cuts applied in Q2 2020, as well as the Government furlough grants. In December 2020, the Group also repaid the £12m Revolving Credit Facility in full, and paid the 6.4 pence per share "catch-up" dividend to shareholders.

Delivering our strategy 

We believe that the significant and ongoing investment being made in the team, technology and infrastructure, combined with maturing and new growth drivers, put MAB in a strong position to capitalise on additional opportunities for continued and increased levels of growth, as well as deliver operational leverage.

Clearly, increasing Adviser numbers remains a key growth driver, and we do not expect that to change in the medium term. In fact, our strategic initiatives are enhancing our proposition still further and as a result are impacting positively on Adviser and AR recruitment.

Recruitment of Advisers

The pandemic presented many challenges to MAB in 2020. During the first national lockdown in Q2 2020, our ARs immediately put their recruitment plans on hold which affected our organic growth in Adviser numbers.

Since the housing market re-opened in England in mid May 2020 and then in Scotland, Wales and Northern Ireland at the end of June 2020, there has been a sharp recovery in written business. This in turn meant that our recruitment activity also picked up strongly, as our ARs grew increasingly confident and started strengthening their teams again. This trend has continued for the remainder of 2020 and into 2021 despite continued social mobility restrictions.

Despite the many challenges, the Group is pleased to report an 8% growth in new Advisers to 1,580⁽²⁾ (2019: 1,457). The average number of active Advisers⁽³⁾ for 2020 rose from 1,341 to 1,455, an increase of 9% (6% excluding First Mortgage).

We have seen the pipeline of new ARs build strongly. However, since MAB's AR recruitment is mainly focused on larger ARs, given the restrictions that have been in place for large parts of 2020 and since the beginning of the year, some of these discussions have been delayed, and are unable to conclude at present. When restrictions are lifted, we expect these discussions can be quickly concluded.

Technology

We are very pleased with the progress we made in the last year. The rollout of our new technology platform started in 2020 and continues into 2021.

During the first national lockdown in 2020 we needed to prioritise IT resource to focus on providing new solutions for the various challenges that remote working presented at the time, and as a result, new technology initiatives were and continue to be implemented.

We also chose to bring forward the transformation of our risk and compliance technology. This decision was made to support and enable secure communication and the transfer of confidential personal documents between customers and MAB, at a time when all customer interaction had instantly become remote, as opposed to face to face. We also further developed and successfully deployed our proprietary risk management platform, to enable managers and business owners to better identify and manage any potential compliance risks, whilst working entirely remotely. In addition, we integrated our MIDAS Pro platform with new and more secure payment collection technology, again supporting remote working and ensuring adherence to new and heightened regulatory requirements.

Our focus is now firmly on completing the platform rollout and continuing to add many new features and improved functionality such as our new lead management platform.

We are also excited to have established our new relationship with the technology firm MQube, to explore the practical applications of machine learning and artificial intelligence for mortgages. The actual process of applying for a mortgage today could be greatly simplified and made more efficient, benefitting both the Adviser and customer. Through this new relationship, we will be leveraging MQube's expertise and investment in data, to help us to deliver efficiencies that benefit all stakeholders in the mortgage process, including lenders.

Our plans to increase Adviser efficiency and productivity also include the integration with lenders, however progression on that front has been slower than we had hoped. This was solely due to the impact of the pandemic and the entirely unforeseen operational strain it placed on lenders. Towards the end of the year, we completed our first full integration with a top ten lender.  We have now also seen integration become an urgent priority for lenders, particularly as some of their operational strain has become more manageable and they recognise the need to deliver new processes that can be more operationally resilient and efficient in the future. We expect more top ten lenders to follow in 2021.

Our digital plans will deliver enhanced customer engagement, optimise existing income streams, generate new lead flow and revenue, as well as service customers through the digital channels they are choosing to use. For MAB and its ARs, it will also result in greater efficiencies and better decisions informed by data. New data and technology-enabled products and business models can change the dynamics of our sector, which is why we remain of the view that market leading technology combined with our unique business model will further enhance MAB's competitive advantage.

Lead Generation

We expect our lead generation strategy to become a major new contributor to MAB's growth plans. Although MAB AR firms have typically sourced, acquired and serviced customers largely or wholly through their own contacts and relationships (for example through local estate agents or builders), MAB will now be playing an increasingly important role in adding to that lead flow.

Reliability, quality and scalability of lead flow drives every aspect of Adviser and firm performance, and MAB's unique business model is key to our ability to drive meaningful lead flow through our partner firms.

This strategy will in turn increase Adviser productivity, drive organic Adviser growth and AR firm recruitment, and further enhance consumer brand awareness.

Investment continues to be made in technology, extending our business model and increased specialisation in our marketing team in order to support this strategy, with further equity investment also expected in distribution and strategically important lead sources.

During the pandemic more customers have been forced to research and transact digitally. The progress we have made over the last two years, and in particular over the last 12 months, has positioned the business well in this regard. This means making faster progress using data and technology to significantly increase the number of lead sources.  This will increase the number of customers we engage with, how and when we engage, and widen the range of products and services that are offered to those customers. The development of our new lead management platform will allow us to fully leverage our unique business model and deliver this strategy.

Early customer capture is core to our strategy, and since the year end MAB has secured contracts with two high profile brands in line with that strategy, namely Moneybox, and the soon to launch property portal, Boomin.

Moneybox, which is a saving and investing app, has launched its app-integrated mortgage service, offering customers a simple way to find the best mortgage for them supported by a telephone advice team. Already helping hundreds of thousands of customers save for their first home through its popular Lifetime ISAs and other products, Moneybox now wants to help people on the next step of their journey to home ownership and has partnered with MAB to do so.

Boomin, the next generation property site, is partnering with MAB to provide mortgage services across various parts of its platform. Boomin will offer something different and will not only appeal to the millions of home-movers in the UK with its unique features but also to the much bigger passive audience of customers who are early in their journey, looking for inspiration and who have a deeper interest in everything property. MAB will be able to connect with this audience earlier and in a more meaningful and varied way and offer them a more integrated and seamless experience as they move from passive to active.

Another new development is the launch of MAB's Home Buying Buddy app as part of our strategic partnership with Life Moments, a fintech business whose digital coaching technology engages and nurtures consumers to achieve their life goals. The app is designed to help existing and future customers develop a clear and informed plan for the purchase of their home, as well as address the growing complexity of the home buying landscape.

This strategic partnership seeks to empower consumers to better understand financial products and equip MAB with customer insights to inform future proposition development. This is major step forward in terms of how we can further engage with our customers and offer a more personalised experience. It allows us to deliver tangible value to the customer from the early stages of their research process and home buying journey. It is a great example of how through collaborating with mission-aligned firms, we can help more of our customers play life better.

As customers adapt and change how they research and buy mortgage products and services, MAB plans to be firmly at the forefront of this change, making lead generation a clear priority, thereby ensuring the Group's future growth and success.

Larger Addressable Market

The Group's core market, comprising of people actively moving home or re-financing, remains buoyant, with significant and long-term upside growth potential for MAB. There are however other addressable markets for MAB to extend into, and these opportunities further support our lead generation strategy.

Firstly, there are tenants or younger people living at home with their family, many of whom aspire to become homeowners for the first time. Identifying and supporting future first time buyers to become mortgage and purchase ready is an important strategic priority for MAB, with much of that strategy achievable by leveraging the extensive lettings, estate agency, and new build distribution we have in the Group.

Broadening our addressable market to include products for the over 55s is also an important part of our strategy, and towards the end of 2020 we were delighted to launch MAB Later Life, an exclusive strategic alliance with Key Group that provides brokers with a best-in-class proposition in the specialist later life market. Although the UK has remained almost entirely in lockdown since then, we are pleased with the progress we have made.

The later life market is underpinned by strong factors such as pension under-provision and the need for long term care and estate planning. It also extends to cover products that are suitable for people coming off interest only mortgages, as well as older borrowers wanting to provide inter-generational support for their families.

This is an important growth segment for MAB and is highly intermediated, with customers needing comprehensive advice from specialist brokers, and we aim to continue our learning and growth in this market through 2021 and beyond.

Future first-time buyers and later life are just two elements of our strategy to broaden our addressable market, and our continued investment in the future of our digital strategy will allow MAB to further leverage its unique business model. This will not only drive new lead sources to our AR firms, but also generate new income opportunities from future and existing mortgage customers.

To support our plans to widen our customer offering, we will be launching Be Money Sure as an additional consumer brand for all non-mortgage related sales. The brand will be introduced to existing customers as we extend the products and services that we are able to offer them, but it will also be utilised with customers we capture earlier in the mortgage research process, that may consider our extended offering to be of more immediate interest.

Investment Strategy

The Group continues to make strategic investments:

-     to help existing or new distribution partners to accelerate their growth plans;

-     to accelerate MAB's lead generation strategy; and

-     to establish or enhance MAB's specialisms in key market segments (for example, new homes).

In October 2020, we completed a 40% investment in Meridian Holdings Group Ltd ("Meridian"), our leading new build AR. Meridian has a key role to play in our plans to achieve even stronger market share growth in this specialist sector. In March 2021, Meridian agreed to acquire Metro Finance Brokers Ltd, a leading shared ownership firm based in Sheffield. This is an excellent strategic fit for Meridian, with a complementary client base and route to markets.

In Australia, Australian Finance Group Ltd ("AFG") has become our new joint venture partner for MAB Broker Services Pty Ltd, helping us to accelerate the rollout of our leading distribution and advice model in Australia. Listed on the Australian Stock Exchange, AFG is a leading mortgage network in Australia with extensive distribution channels and a strong broker proposition. This is an exciting development and a real step-change for our Australian operations, that will allow us to attract the best brokers into our differentiated model.

In January 2021, First Mortgage acquired a minority stake in M & R FM Ltd ("First Mortgage North East"), a successful and fast-growing broker based in Gateshead. Previously directly authorised by the FCA, First Mortgage North East operated under the First Mortgage franchise. This is the first investment by First Mortgage as it seeks to leverage its strengths under MAB ownership and further enhance its track record of profitable growth.

New Board appointment

On 1 March 2021, Mike Jones joined MAB as a Non-Executive Director, having recently retired from Lloyds Banking Group. Mike's leadership, vision and strategic thinking at the UK's leading lender has shaped the intermediary and lending markets that exist today. His appointment strengthens our Board and is a testament to our huge ambition.

Summary

In a year of unprecedented challenges, MAB again delivered growth in revenue, Adviser numbers, mortgage completions and market share. One year after the onset of Covid-19, MAB has emerged a stronger group, having continued to invest in its growth strategy, including adapting and evolving its technology and lead generation initiatives.

We are very pleased with our new investments, especially considering the restrictions imposed over this period, as well as with the performance and resilience of the majority of our existing investments, which we expect to perform more strongly in 2021. As previously highlighted, future investments and potential acquisitions will include distribution and lead sources that we believe are strategically important and scalable. 

We have entered 2021 with a number of ongoing investment discussions, which form part of our plans to fully leverage our unique business model, and by doing so to start accelerating future profit and market share growth over the next few years. This will strengthen our market leading position still further.

Our new platform developments are a key enabler of our growth plans and will deliver significant benefits in terms of our lead generation strategy and operational efficiencies for MAB, its ARs, Advisers and their customers.

We are delighted to have launched MAB Later Life, and in AFG we have secured an exceptionally strong partner for MAB in Australia, and we look forward to reporting success from there in due course.

Broadening our addressable market extends our reach to a greater number and wider profile of future customers and lead sources, and supports our strategy of Adviser and productivity growth.

The pandemic and the successive lockdowns have brought about a change in consumer sentiment, resulting in a greater focus and prioritisation towards spending on current and new homes, and most relevantly stimulating a greater number of home moves. This is bolstered by the pent-up demand that built pre the General Election in 2019 and only partially contributed to growth in 2020 due to lockdown restrictions.

Looking ahead, we are confident that these key fundamentals supporting the housing market combined with the return of greater numbers of new mortgage products and less stringent lending criteria, will lead to demand for housing remaining strong. Over and above this, the recent Budget announcement and the Government's housing policy will also prove positive for MAB.

Our maturing and new growth drivers, combined with the significant investment continuing to be made in exceptionally high calibre management, resource, and technology, put MAB in a very strong position to start accelerating growth over the next few years.

We look forward to what we hope are better times ahead for everyone.

¹ UK Finance regularly updates its estimates. MAB previously reported £267.6bn for 2019 but this figure has slightly increased since.

² Includes the Advisers of a firm previously authorised under an Appointed Representative agreement with MAB until 7 December 2020. MAB continues to provide services to this firm, now directly authorised by the FCA.

³ An active Adviser is an Adviser who had not been furloughed and was therefore able to write business.

Market Review

After a buoyant Q1 2020 which saw a 4% year-on-year increase in gross new mortgage lending after a lift in consumer confidence following the December 2019 UK General Election, transaction volumes plummeted when the housing market shut down in Q2 2020, with gross new mortgage lending and housing transactions down 32% and 47% respectively.

Q3 2020 remained heavily impacted despite the reopening of the housing market due to pipeline conversion timeframes, with gross new mortgage lending and housing transactions down 14% and 16% respectively. However, the last quarter of the year rebounded well with a 5% year-on-year increase in gross new mortgage completions.

Overall for 2020, gross new mortgage lending activity fell by 9% to £243.1bn (2019: £267.9bn⁽¹⁾), excluding product transfers. UK housing transactions fell by 11% over the same period, with monthly transactions shown in the graph below. Provisional figures from HM Revenue & Customs show a 17% year-on-year increase in property transactions in Q4 2020.

http://www.rns-pdf.londonstockexchange.com/rns/1039T_2-2021-3-22.pdf

Source: HM Revenue and Customs

In terms of segmental breakdown of gross new mortgage lending, the purchase market was hit the hardest during the housing market shutdown. During this time, there was a 46% drop in purchase lending activity in Q2 2020, followed by a sharp return to growth in Q4 2020 with a 28% year-on-year increase. UK quarterly house price inflation⁽²⁾ of 4% and 3% in the third and fourth quarters respectively contributed to this growth. Overall, for the year, house price inflation was c.9%, with the increase in average house price in 2020 being c.3% higher than in 2019.

Re-financing activity held up better during the property shutdown, partially driven by the strength in Product Transfers. However, in both Q3 and Q4 2020, Home-owner and Buy-to-Let re-mortgage lending values continued to experience year-on-year decreases as the purchase segment dominated the market, which is illustrated on the graph below. Product Transfers represented £168bn of mortgage lending in 2020, a 1% increase compared to 2019.

http://www.rns-pdf.londonstockexchange.com/rns/1039T_1-2021-3-22.pdf

Source: UK Finance Regulated Mortgage Survey (excludes product transfers with the same lender), Bank of England, UK Finance BTL data (used for further analysis)

The pandemic has made it much more complex for people to obtain a new mortgage. Lenders have struggled with significant operational challenges, including the high number of payment holidays taken up by borrowers and the need to consistently apply tight and restrictive lending policies. Consumer reliance on mortgage intermediaries therefore has increased, with intermediary market share strengthening as a result. Approximately 79% of UK mortgage transactions (excluding buy to let, where intermediaries have a higher market share, and Product Transfers where intermediaries have a lower market share) were via an intermediary in 2020 (2019: 77%). In addition, execution-only sales by lenders have not meaningfully progressed during this period.  

In response to the crisis, the Government and the Bank of England announced a strong package of temporary measures in support of both mortgage lenders and borrowers, including reduced capital buffer requirements for banks. The Bank of England's base rate, cut to a record low of 0.1% in March 2020, has stayed at the same level since that date.

The increase in the stamp duty threshold, which took effect in July 2020, has further supported the housing market recovery, as have the Government's broader measures supporting housing investment and the continued availability of the Help to Buy Equity Loan and Shared Ownership schemes.

We remain confident that the fundamentals of house purchase demand remain strong and are further supported by the launch of a Mortgage Guarantee Scheme and extension of Stamp Duty relief announced in the Budget earlier this month. The Intermediary Mortgage Lenders Association's ("IMLA") current estimate of gross new mortgage lending for 2021 (published in January 2021 before the Budget announcement in March 2021) is £283bn, representing a 16% increase compared to 2020 and a 6% increase compared to 2019. In addition, we anticipate that the increased average pipeline conversion timeframes that we have seen over the last year and has pushed completions into 2021, will revert to usual timescales by the end of the year.

¹ UK Finance regularly updates its estimates. MAB previously reported £267.6bn for 2019 but this figure has slightly increased since

² Land Registry House Price Index

Financial review

We measure the development, performance and position of our business against a number of key indicators.

http://www.rns-pdf.londonstockexchange.com/rns/1039T_3-2021-3-22.pdf

Revenue

Group revenue increased by 3% to £148.3m (2019: £143.7m), including £14.7m of revenue generated by First Mortgage. Excluding First Mortgage, Group revenue decreased by 1%. Strong growth in Q1 2020 was offset by the adverse impact of the first national lockdown on Q2 and Q3 2020 revenue, followed by a significant recovery in Q4 2020 where the housing market remained open during the second national lockdown. Normally, a key driver of revenue is the average number of Advisers during the year. However, in Q2 and Q3 2020 certain ARs furloughed a number of their Advisers (albeit a smaller number in Q3), and therefore the average numbers of active Advisers⁽¹⁾ is a more appropriate figure during this pandemic affected year. The housing market closure during the first national lockdown adversely impacted active Adviser⁽¹⁾ productivity, resulting in a £2.0m (1%) reduction in organic revenue for the year.

In Q1 2020, revenue was up 25% on the prior year (14% excluding First Mortgage), with average Adviser numbers up 19% (13% excluding First Mortgage) and average revenue per Adviser up 5% (1% excluding First Mortgage), reflecting the start of the impact of improving market conditions and change in customer sentiment post the UK General Election, as well as the success of our growth strategy.

This trend was reversed in Q2 2020 as the adverse impact of the first national lockdown on mortgage completions started to bite, with revenue down 14% (22% excluding First Mortgage) compared to the prior year. Average active Adviser⁽¹⁾ numbers were up 7% (1% excluding First Mortgage) and average revenue per active Adviser⁽¹⁾ decreased by 19% (23% excluding First Mortgage).

In Q3 2020, as a result of lower written house purchase business in Q2 2020, and despite the considerable increase in written house purchase activity in Q3 2020, revenue was down 7% on the prior year (which included First Mortgage from Q3 2019 onwards) despite average active Advisers being up 2% with average revenue per active Adviser⁽¹⁾ decreasing by 9%.

Q4 2020 saw a marked increase in completions resulting from the increase in written business activity in Q3 2020 and revenue was up 12% on the prior year with average Advisers up 7%; with average revenue per Adviser up by 4%.

The Group continued to generate revenue from three core areas, summarised as follows:

Despite the adverse impact of the pandemic on Q2 and Q3 2020 revenue, all key income sources for the Group, other than client fees, continued to grow due to the positive contribution from First Mortgage, which is summarised as follows:

Following H1 2020, when we saw a higher proportion of refinancing business as lockdown severely restricted the completion of purchase transactions in Q2, the mortgage mix mostly rebalanced for the year overall due to the considerable increase in house purchase activity in H2 2020, though we did have a higher proportion of Product Transfers than in the prior year. Mortgage procuration fees for the Group increased by 4% with mortgage completions up 5% overall for the year, with Product Transfers typically generating a lower procuration fee than purchase mortgages and re-mortgages.  

Excluding First Mortgage, gross mortgage completions increased by 3% with mortgage procuration fees increasing by 1% primarily due to the increased proportion of Product Transfers.

The increase of 5% in protection and general insurance commission for the Group reflects the impact of the First Mortgage acquisition and associated revenue synergies with procuration fees up 4% and mortgage completions up 5% for the year. For the Group excluding First Mortgage, protection and general insurance commission decreased by 3% with a 1% increase in procuration fees as Advisers focused on mortgages for purchase business in H2 2020 and protection sales also have a natural lag in terms of timing of commission payment.

Client fees reduced by 6% in the year resulting from more business being conducted remotely and the increase in Product Transfers as a proportion of the mortgage mix, leading to a reduction in the overall attachment rate of client fees for MAB excluding First Mortgage, which does not charge client fees.

First Mortgage, which only started to contribute to Group revenue in H2 2019, was impacted by a longer lockdown in Scotland in Q2 2020.  As a result, First Mortgage's contribution to Group revenue increased by 81% to £14.7m with procuration fees up 61% and protection and general insurance commission up 105% reflecting in particular the product related synergies that the Group started to benefit from in the latter part of H2 2019.

MAB's revenue, in terms of proportion, is split as follows:

Despite the fluctuation in mortgage mix during the year resulting from the pandemic, the only notable change to the overall mix for the year was an increase in Product Transfers. The slight increase in the proportion of protection and general insurance commission reflects the additional revenue synergies achieved in First Mortgage. As anticipated, the proportion of client fees has reduced following the acquisition of First Mortgage who do not charge client fees, but the reduction in attachment rate of client fees resulting from more business being conducted remotely has also added to this. We expect client fees to become increasingly dependent upon the type and complexity of the mortgage transaction, as well as the delivery channel. This will lead to a broader spread of client fees on mortgage transactions, which, by their nature, are our lowest margin revenue stream.

Government grant income

Government grant income of £0.5m was received during the year due to some employees being placed on furlough during the months of April, May and June 2020.  These amounts were repaid in full in December 2020.

Gross profit margin

As anticipated, gross profit margin increased to 26.9% (2019: 25.3%) due to a full year of contribution from First Mortgage, which has a higher gross margin of c.65% due to its Advisers being directly employed. Excluding First Mortgage, gross profit margin remained broadly stable at 22.7% (2019: 23.1%). The Group typically receives a slightly reduced margin (revenue share) as its existing ARs grow their revenue organically through increasing their Adviser numbers. In addition, larger new ARs typically join the Group on lower than average margins due to their existing scale and hence we expect to see a degree of erosion of our underlying gross profit margin due to the continued growth of our existing ARs and the addition of new larger ARs.

MAB continues to provide services to a firm previously authorised under an Appointed Representative agreement until 7 December 2020 but now directly authorised by the FCA.  As a result, going forward, the fees received by MAB will represent the total income received by MAB in respect of this arrangement. No commission will be paid out by MAB to this firm as it receives its income direct. The effect of this will be to marginally increase the gross profit margin going forward.

Overheads

Overheads increased by £3.8m to £22.7m, reflecting the full year impact of the acquisition of First Mortgage which increased overheads for the year by £2.7m.  In addition there was an increase of £0.5m in MAB (excluding First Mortgage) overheads and a further £0.6m increase relating to a full year of the amortisation of acquired intangibles and non-cash operating expenses relating to the put and call option agreement to acquire the remaining 20% of First Mortgage.

Adjusted⁽²⁾ overheads as a percentage of revenue were 14.5% (2019: 12.4%).   The anticipated increase in overheads as a percentage of revenue, due to the full year impact of First Mortgage's operating model having a higher overheads ratio than MAB, was exacerbated by curtailed growth in revenue as a result of the pandemic with Group overhead savings not fully offsetting this. Excluding First Mortgage, adjusted⁽²⁾ overheads as a percentage of revenue were 11.9% (2019: 10.8%).  

MAB has been investing in its technology platform and extending its business model and continues to do so. All development work on MIDAS Pro platform is expensed. In addition, MAB continues to invest in its marketing team to drive lead generation opportunities. 

Our FCA and FSCS regulatory fees and charges are usually closely correlated to growth in revenue. Previously, in 2019 MAB had benefitted from a reduction in its FSCS levies due to its protection and general insurance commission moving from the Life and Pensions Intermediation funding class of the FSCS (which had borne increasing levies in recent years, primarily due to pension transfer and self-invested personal pension (SIPP) related advice claims in the wider market) to the General Insurance Distribution funding class. In January 2021, the FSCS published its Plan and Budget for 2021/22, which indicated that the 'retail pool' contribution from both Home Finance Intermediation and General Insurance Distribution will be substantially higher than in the prior year, due to increased business failures as a result of the pandemic, an increase in complex pension advice claims and further failures of SIPP operators.  As a result, MAB expects its FSCS levy cost for the year ended 31 December 2021 to be c. £1.5m higher than in the prior year.  The reaction of other mortgage intermediaries to this unfair allocation of levies has been widely reported and MAB  is supporting the challenge by the Association of Mortgage Intermediaries (AMI), the trade association that represents the views and interests of UK mortgage brokers, so that future levies can become better signposted and fairer.  

Despite this headwind, MAB continues to benefit from the scalable nature of the remainder of its cost base, where those costs typically rise at a slower rate than revenue, which will, in part, counter the expected erosion of MAB's underlying gross margin as the business continues to grow.  

Associates

MAB's share of profits from associates was £0.04m (2019: £0.3m).  In addition, during the period MAB wrote off the £1.1m loan balance due from Freedom 365 Mortgage Solutions Limited due to the adverse impact of the pandemic on its financial results. MAB has also made a provision of £0.6m against the full balance of the loan due from Eagle & Lion Limited and reduced the value of the investment in The Mortgage Broker Group Limited by £0.5m to reflect the fair value carrying amount of the investment.

The remainder of the Group's associates have performed well during the pandemic and whilst their profits in 2020 were adversely impacted, they are in a strong position to contribute positively to the Group's results in 2021. MAB considers that the value of a number of these investments exceeds their balance sheet value as accounted for using the equity accounting method under IAS 28.

Profit before tax and margin thereon

In a year heavily affected by the pandemic, adjusted⁽³⁾ profit before tax decreased by 5% to £17.8m (2019: £18.7m), with the margin thereon decreasing to 12.0% (2019: 13.0%).  Statutory profit before tax reduced to £14.9m (2019: £17.7m) with the margin thereon being 10.0% (2019: 12.3%). 

Finance revenue 

Finance income of £0.1m (2019: £0.1m) reflects continued low interest rates and interest income accrued on loans to associates.  Finance expense of £0.2m (2019: £0.1m) reflects the interest payable on MAB's Revolving Credit Facility of £12m, (drawn down in full at the end of March) and interest expenses on lease liabilities. MAB repaid its £12m Revolving Credit Facility in full on 23 December 2020.

Taxation

The effective rate of tax reduced to 14.2% (2019: 16.8%), principally due to the deduction arising from the exercise of employee share options being higher than in the prior year.  We expect our effective tax rate to continue to be marginally below the prevailing UK corporation tax rate, subject to tax credits for MAB's research and development expenditure on the continued development of MIDAS Pro platform, MAB's proprietary software, still being available and further tax deductions arising from the exercise of employee share options.

Earnings per share and dividend

Adjusted⁽³⁾ earnings per share decreased by 5% to 28.6 pence (2019: 30.1 pence). Basic earnings per share decreased by 16% to 23.7 pence (2019: 28.2 pence).

The Board is pleased to propose a final dividend of 19.2 per share (2019: 6.4 pence), which represents a cash outlay of £10.2m.  Following payment of the dividend, the Group will retain significant surplus regulatory reserves. The proposed final dividend represents circa 75% of the Group's adjusted⁽⁴⁾ post-tax and minority interest profits for 2020 and reflects our ongoing intention to distribute excess capital in line with our previously announced dividend policy. 

The record date for the final dividend will be 30 April 2021 and the payment date 28 May 2021. The ex-dividend date will be 29 April 2021.

Cash flow and cash conversion

The Group's operations produce positive cash flow.  This is reflected in the net cash generated from operating activities of £17.8m (2019: £20.4m). 

Headline cash conversion⁽⁵⁾ was:

The Group's operations are capital-light, with the most significant ongoing capital investment being in computer equipment.  Only £0.3m of capital expenditure on office and computer equipment was required during the year (2019: £0.2m).  Group policy is not to provide company cars, and no other significant capital expenditure is foreseen in the coming year. All development work on MIDAS Pro platform is treated as expenditure.

The Group had no bank borrowings on 31 December 2020 (2019: £nil).  The Group had unrestricted bank balances of £18.6m on 31 December 2020 (31 December 2019: £7.0m).  

The Group has a regulatory capital requirement amounting to 2.5% of regulated revenue. On 31 December 2020 this regulatory capital requirement was £3.4m (31 December 2019: £3.1m), with the Group having a surplus of £17.7m (31 December 2019: £11.7m).

The following table demonstrates how cash generated from operations was applied:

¹ An active Adviser is an Adviser who had not been furloughed and was therefore able to write business.

² Adjusted for £0.4m (2019: £0.2m) of amortisation of acquired intangibles and £0.9m (2019: £0.4m) of additional non-cash operating expenses relating to the put and call option agreement to acquire the remaining 20% of First Mortgage. 2019 also excludes one-off costs associated with the acquisition of First Mortgage of £0.4m

³ Adjusted for the items in (2) above and the loan write off and loan provision totalling £1.7m. Adjusted earnings per share is also stated before these items, net of any associated tax effects.

⁴Adjusted for non-cash First Mortgage acquisition related items of £1.2m (2019: £0.6m).

⁵ Headline cash conversion is cash generated from operating activities adjusted for movements in non-trading items, including loans to AR firms and associates totalling £(1.5)m in 2020 (2019: £0.9m), as a percentage of adjusted operating profit.

⁶ Adjusted cash conversion is headline cash conversion adjusted for increases in restricted cash balances of £0.5m in 2020 (2019: £2.2m) as a percentage of adjusted operating profit.

Independent auditor's report to the members of Mortgage Advice Bureau (Holdings) PLC

Opinion on the financial statements

In our opinion:

•     the financial statements give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 31 December 2020 and of the Group's profit for the year then ended;

•     the Group financial statements have been properly prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006;

•     the Parent Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and

•     the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

We have audited the financial statements of Mortgage Advice Bureau (Holdings) PLC (the 'Parent Company') and its subsidiaries (the 'Group') for the year ended 31 December 2020 which comprise the consolidated statement of comprehensive income, consolidated and company statement of financial position, consolidated and company statement of changes in equity, consolidated statement of cash flows, and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in the preparation of the Group's financial statements is applicable law and international accounting standards in conformity with the requirements of the Companies Act 2006.  The financial reporting framework that has been applied in the preparation of the Parent Company's financial statements is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 102 The Financial Reporting Standard in the United Kingdom and Republic of Ireland (United Kingdom Generally Accepted Accounting Practice).

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

Following the recommendation of the Audit Committee we were appointed by the Board to audit the financial statements for the year ended 31 December 2020 and subsequent financial periods., In respect of the year ended we were appointed at the Annual General Meeting on 26 May 2020 to audit the financial statements for the year ended 31 December 2020. The period of total uninterrupted engagement is 7 years, covering the years ended 31 December 2014 to 31 December 2020.

We remain independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC's Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.

The non-audit services prohibited by that standard were not provided to the Group or the Parent Company.

Conclusions relating to going concern

In auditing the financial statements, we have concluded that the Directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Our evaluation of the Directors' assessment of the Group's ability to continue to adopt the going concern basis of accounting included:

·      In evaluating whether the Group is a going-concern, we have assessed the reasonableness of the assumptions within management's forecast for liquidity and profitability for a period of 12 months from the signing of these accounts, agreeing back to supporting evidence. This involved considering the base and stress scenarios testing undertaken by management to support the Going concern assessment which included assumptions about the potential impact this could have on  revenue (mainly from purchase  mortgages) and possible cost saving measures. We focused on the cash and capital position during this period.

·      We have also searched publicly available information on house market and house price index to assess any impact on the Group's business.

·      We enquired with management and assessing the implications of COVID-19 on the business

Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Group's ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.

Our responsibilities and the responsibilities of the Directors with respect to going concern are described in the relevant sections of this report.

Overview

An overview of the scope of our audit

Our Group audit was scoped by obtaining an understanding of the Group and its environment, including the Group's system of internal control, and assessing the risks of material misstatement in the financial statements.  We also addressed the risk of management override of internal controls, including assessing whether there was evidence of bias by the Directors that may have represented a risk of material misstatement.

The audit of the Group was conducted by BDO LLP directly at Group level as all transactions are recorded in a common accounting system, except for those of First Mortgage Direct Limited, which has been consolidated within the Group. A full scope audit was carried out in respect of First Mortgage Direct Limited. The audit of the Group and all entities were conducted by the Group audit team.

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit, and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Our application of materiality

We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements.

We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements.  We consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements.

In order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a lower materiality level, performance materiality, to determine the extent of testing needed. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole.

Based on our professional judgement, we determined materiality for the financial statements as a whole and performance materiality as follows:

Component materiality

The materiality used for the audit of First Mortgage Direct Limited as a component of the Group has been set at £109,000 (2019 - £117,000), calculated on the same bases as at the group above.

Reporting threshold 

We agreed with the Audit Committee that we would report to them all individual audit differences in excess of £16,000 (2019: £17,000) for the Group and £4,000 (2019: £5,000) for the parent company.  We also agreed to report differences below this threshold that, in our view, warranted reporting on qualitative grounds.

Other information

The directors are responsible for the other information. The other information comprises the information included in the report and financial statements, other than the financial statements and our auditor's report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

We have nothing to report in this regard.

Other Companies Act 2006 reporting

Based on the responsibilities described below and our work performed during the course of the audit, we are required by the Companies Act 2006 and ISAs (UK) to report on certain opinions and matters as described below. 

Responsibilities of Directors

As explained more fully in the Directors' responsibilities statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Directors are responsible for assessing the Group's and the Parent Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

Extent to which the audit was capable of detecting irregularities, including fraud

Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below:

We gained an understanding of the legal and regulatory framework applicable to the Group and the industry in which it operates and considered the risk of acts by the Group which would be contrary to applicable laws and regulations, including fraud. These included but were not limited to compliance with the Financial Conduct Authority ("FCA") regulations, FCA Mortgage Advice and Selling Standards and tax legislation.

We focused on laws and regulations that could give rise to a material misstatement in the company financial statements. Our tests included, but were not limited to:

·      reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with relevant laws and regulations discussed above;

·      enquiring of management and the audit committee;

·      performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due to fraud;

·      reading minutes of meetings of those charged with governance, reviewing internal audit reports and correspondence with the Financial Conduct Authority; 

·      in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other adjustments;

·      assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business; and

We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including internal specialists and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit. As part of this discussion, we identified potential for fraud through accounting estimates such as impairment and clawback provision. See Key Audit Matters above.

Our audit procedures were designed to respond to risks of material misstatement in the financial statements, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery, misrepresentations or through collusion. There are inherent limitations in the audit procedures performed and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we are to become aware of it.

A further description of our responsibilities is available on the Financial Reporting Council's website at: www.frc.org.uk/auditorsresponsibilities.  This description forms part of our auditor's report.

Use of our report

This report is made solely to the Parent Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.  Our audit work has been undertaken so that we might state to the Parent Company's members those matters we are required to state to them in an auditor's report and for no other purpose.  To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Parent Company and the Parent Company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Ariel Grosberg (Senior Statutory Auditor)

For and on behalf of BDO LLP, Statutory Auditor

London, UK

22 March 2021

BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).

Consolidated statement of comprehensive income
for the year ended 31 December 2020

All amounts shown relate to continuing activities.

The notes that follow form part of these financial statements.