AFG is the second largest broking platform/aggregator in Australia (3,700 brokers), essentially the software brokers use to compare and submit loan applications for clients. This segment generates high return on capital (20%+), is relatively sticky, in a growing industry (brokers taking business from banks) with a growing market share (albeit slowly). Brokers are also growing further into commercial loans away from traditional residential. This is the attractive, defensive part of the business called 'distribution'. AFG had planned to merge with Connective, the largest in the industry (I believe around 4,500 brokers), and privately owned, but due to legal issues with Connective it was called off. (The legal dispute seems to have wrapped up now so this merger could be back on the table for a number of year - pure speculation on my part). This would create the clear number one in the industry - and despite the concentration (some 50% market share) the ACCC had not previously opposed the merger.

It's second segment is much lower quality but at a cyclical low, 'manufacturing division' in that it offers loans (securitised) similar to Pepper Money, Athena Home Loans etc. As wholesale funding costs have gone up this has hurt this divisions net interest margins. With the prospects of rate cuts on the horizon and lower wholesale funding costs - indeed no bank lenders are already once again outgrowing banks - this segment should return to growth. If net interest margins expand and loan growth increases this segment could start firing again.

In all AFG looks set to benefit from the coming cycle, with a quality segment providing some security if these do get tough.