Pepper Money sets new record in half-year results

Asset finance originations eclipse mortgages for first time

Pepper Money sets new record in half-year results

Pepper Money has set a new record in asset finance originations over the first half of 2023, which have overtaken its total mortgage originations for the first time.

The non-bank lender has reported total originations of $3.5bn over the first half year. Asset finance originations reached $1.8bn, while total mortgage originations were $1.7bn.

Pepper Money CEO Mario Rehayem (pictured above) told MPA that the record level of asset finance originations not only demonstrated diversification within its business, but also the level of support from mortgage brokers and introducers in increasing diversification.

In its half-year results announced on Wednesday morning, which cover the 6 months to June 30, 2023, the non-bank lender declared a statutory net profit after tax of $52m, down 24% on the second half of 2022, down 28% on the same period last year.

The business reported total originations of $3.5bn, down from $5.6bn (-38%) on the first half of 2022 (January to June 2022), below $4bn achieved in the second half, which it said reflected “strong asset finance growth” and “challenging market conditions in mortgages”.

Asset finance originations were up 19% on the first half of 2022 (up 37% on the second half), while mortgage originations were down 58% on the first half, and 36% below the second half. Mortgage AUM was down 12% on the first half, at $12.4 billion.

Total operating income was $193.5 million, down 3% on the first half, comprised of 56% mortgages, 41% asset finance and 2% loan and other servicing.

The business reported it had attracted 43,165 new customers, up 11% on the first half of 2022. Net interest margin (NIM) was 2.06% (mortgages 1.83%, asset finance 2.62%), down 23 basis points.

Loan losses as a percentage of assets under management were 0.28%, increasing 2 basis points compared to the second half.

Record set for asset finance originations   

Discussing business performance results on a webcast on Wednesday morning, Rehayem said that given the breadth of its mortgage product suite, as the RBA increased interest rates, the business was able to enhance its focus on the non-conforming mortgage segment.

Of the $1.7bn in mortgages originated in the first half of the year, 65% were non-conforming, he said.

Noting that asset finance originations exceeded mortgages “for the first time”, Rehayem said that lending AUM of $18.9bn was 1% lower than the prior comparative period, but with a “clear mixed shift”.

“While mortgages AUM dropped 12% on the prior comparative period to $12.4bn, asset finance has now reached AUM of $5.6bn, up 32% on the prior comparative period,” Rehayem said.

Pepper Money’s asset finance growth equates to 3 times system over the prior comparable period, he said.

“We do believe we are now the largest non-bank asset financier in Australia,” Rehayem said.

Market “tough” for mortgages

Over the reporting period, Rehayem described the mortgage market as “tough”, an Equifax report showing mortgage enquiry volumes were down 10% over the 12 months to June 2023 (ABS lending indicators for June showing the value of new loan commitments for housing were down 18.2% year-on-year).

While demand was down, banks were competing to gain market share, offering compelling rates and high levels of cashbacks to attract new customers, he said.

“In balancing capital allocation, we decided to accelerate our growth in asset finance, while focusing on margin in mortgages given our strength in the non-conforming segment,” Rehayem said.

“This was a slowdown in mortgage originations and mix skewed to near prime and specialists.”

Other than lower origination rates over the last 12 months, Rehayem said that the business had experienced high customer losses across its mortgage portfolio.

“Customers sought lower rates and capitalised on cashback offers offered by the banks - 97% of customers who refinanced away from Pepper Money moved to a major bank,” he said.

Rehayem said that Pepper Money would continue to maintain its strong track record of credit risk management, which had seen indexed loan-to-value ratios protected, with 66% of loans sitting in LVR bands below 70%.

Talking to MPA after full-year results were released, Rehayem acknowledged the increased level of diversification across the mortgage broking market.  He noted that Pepper Money was averaging over 12,000 applications, predominantly in auto financing.

“That’s a strong testament to the broker market, our product offering and the service delivery that we have,” Rehayem said.

Discussing mortgage performance, he said that a decline in mortgage volumes was unsurprising.  Pepper Money had anticipated that if cashbacks had continued as they were, and banks were fighting for market share, there would be a clear impact on the business.

Flow of non-conforming mortgages steady

Pepper Money had shifted its mix of business to non-conforming (near prime and specialist mortgages), which Rehayem said highlighted the strength of the broker market in being able to assist customers that banks had turned down.

Pepper Money is seeing a steady flow of non-conforming mortgages – the biggest hit in volumes was in prime lending, he said.

Rehayem said that Pepper Money continued to dominate in the non-conforming space and that it had recently seen an increase in its daily run rate, off the back of its ‘Red Hot’ mortgage promotion.

“Brokers have voted with their feet and they are coming towards Pepper as their first choice for non-conforming  mortgages,” he said.

Aside from a steep rise in asset finance originations, Rehayem said that Pepper Money had launched self-managed super funds (SMSF) and that its commercial real estate loans were gaining traction.

"We have a very positive outlook on mortgages...we've held back over the past 6 months and that's purely a decision we made because we flexed into auto finance," he said.

Removal of clawbacks on commercial finance well received

Effective February 1, Pepper Money removed clawbacks on all commercial lending products, while simplifying fee structures. Rehayem said that the change was well received by the broker market, and that momentum was building.  Thanking brokers for responding, he said that Pepper Money was continually evolving its commercial real estate loans, including product features.

Changes planned for second half

Looking ahead, Rehayem said that Pepper Money would continue its focus on technology. Brokers can expect continual improvement, increased automation and further enhancements to make Pepper Money easier to do business with. Clients would enjoy a better experience when they settle their loan and post-settlement, including through enhancements made to self-help options for customers.

Through to the end of the year and continually through the first half of 2024, Pepper Money plans to roll out a number of new products across mortgages, commercial and auto, he said.

Headline results half-year 2023

  • Statutory net profit after tax (NPAT): $52m, down 24% on 2H22, down 28% on 1H22
  • Pro-forma net profit after tax: $52 million, down 25% on 2H22, down 29% on 1H22
  • Total loan originations: $3.5bn, down 38% on the prior comparative period
  • Mortgage originations: $1.7bn, down 36% on 2H22, down 58% on 1H22
  • Asset finance originations: $1.8bn, up 37% on 2H22, up 19% on 1H22
  • Total operating income: $193.5m, down 3% on 1H22
  • Net interest margin: 2.06% (mortgages: 1.83%, asset finance: 2.62%)
  • Dividend: 3.5c per share (annualised yield of 5.1%)

Pepper Money confirmed in the results that since 2000, it had written $54bn in loans and had $19bn in assets under management.  In the first half of 2023, EV lending was $184m, up 272% on the prior comparable period.

For the full year to December 31, 2022, Pepper Money announced a statutory net profit after tax of $140.5 million, up 8% year-on-year.  The second half saw a significant softening in markets, mortgage originations falling to $2.7bn in the second half year.