‘The mould has been broken,’ says CEO Mario Rehayem as $36 billion servicing takeover turns heads
Pepper Money has its fingers in numerous pies – beyond a core offering of prime and near-prime home loans, the ASX-listed non-bank lender is a prominent white-label funder and an underappreciated asset finance powerhouse.
But it’s Pepper Money’s burgeoning loan-servicing arm that is starting to turn heads, anchored by two landmark portfolios.
Having completed its role in a consortium acquisition of Westpac's RAMS home loan book on 1 August, adding $15.4 billion in servicing AUM, Pepper Money has taken on the roughly $36 billion HSBC Australia loan book on behalf of US private credit giant Blackstone.
Between the two, Pepper now oversees close to $40 billion in servicing AUM, on top of the $24 billion it manages in its own book – a figure chief executive Mario Rehayem (pictured) sees as "a new AUM watermark for non-banks in Australia." For him, the appeal goes well beyond bragging rights.
Unlike lending, where every loan written ties up capital, servicing is a fee-based, capital-light business that tends to get more valuable precisely when conditions get tougher. A countercyclical play, in other words.
This countercyclical angle is what excites Rehayem most. "If there is a downturn in the market and there's more pressure in the market, our actual servicing fee increases, because we're looking after the customers more, we're engaging more, so there's more work to be done," he says. "So for us, if you think about our servicing ambition, it's a defensive mechanism for our ability to have sustainable earnings through a down period.”
The HSBC book will fully transition to the Pepper Money brand once the cutover happens, which is slated for the first half of next year. There are not expected to be changes to customers' interest rates, redraw or offset features in the process.
Rehayem adds that HSBC's reputation for customer service should carry through the migration rather than fade: "We believe that there'll be continuity in that area as well. There shouldn't be any form of degrading of any kind of service to the customer."
While he hopes that a run off doesn’t happen as customers jump ship and refinance elsewhere, “it's their prerogative of where they want their home loans to be with”, Rehayem concedes.
More to come?
Asked whether HSBC and RAMS might prove to be the start of a broader pattern rather than one-off wins, Rehayem doesn’t hesitate. "I do, and I've been saying this for many years before they actually started to do it.”
His reasoning centres on the economics facing the major banks themselves. "A lot of banks today, their ROEs (returns on equity) are very low, single digits, and they're writing loans at below the cost of capital. This is an opportunity for them to be able to sell certain portions of their book – whether it be non-core elements of their business, or to look to replenish the capital and get that ROE back up. There is a lot of appetite and liquidity that can appeal to that kind of market from PE firms and insurance firms and the likes."
He argues that Pepper Money's ability to absorb a deal the size of the HSBC book has removed the main obstacle that had kept such transactions off the table. "Now that there's a big tick next to that, all of a sudden it becomes more appealing and a viable option for banks and buyers, whether it be PE firms or otherwise, to say, well, let's knock on the doors of these banks and say, ‘do you want to sell’," he says. "Because the mould has been broken. Before, there was always this nervousness that there's no one that can handle this kind of migration. But we've put that to bed."
Record first half
The servicing expansion sits alongside a record first half for Pepper Money, which posted $6.3 billion in total originations and $24 billion in assets under management (AUM).
Rehayem attributes the growth to sustained investment in product distribution rather than market conditions. "Our distribution network, i.e. our brokers, have been an amazing support and very loyal support to Pepper. The more we keep producing products, the more they keep using us."
On why non-banks are currently outperforming the majors, Rehayem describes a "halo effect" from bank pricing behaviour. "Banks are very consistent in their conversion ratios, so they will convert 50 to 60% of all applications coming through the door. The more aggressive they become, the larger number of customers are being turned down, and that gives them an opportunity to then go and seek an application through the likes of Pepper."
On arrears, Rehayem reckons levels should remain at long-term averages if the cash rate holds steady at 4.35%, though he flagged early-year increases that have since plateaued rather than falling back seasonally.
"The biggest concerns we have are if rates keep going up," he says. "We're also very well provisioned … to ensure that if something does turn for the worse, that we're well provisioned to handle that."
Addressing asset finance slump… and is white label under pressure?
Set against the record mortgage numbers, Pepper Money's asset finance result looked comparatively soft – applications rose just 2% to $1.7 billion for the half, while AUM in the segment declined 4% year-on-year, with arrears ticking up slightly.
Rehayem frames the gap as a choice rather than a weakness. "I appreciate looking at those numbers that we displayed can give you that kind of view, but that was purpose-led," he says. "We wanted to keep our asset finance at a certain level, and we wanted to really focus on the growth in mortgages at the time. We will decide where we want to allocate our capital in new originations."
The white-label funding model Pepper has long supported is also under visible strain elsewhere in the market.
AFG's full-year results, for instance, show the aggregator increasingly steering volume toward its own securitised lending book rather than passing loans to outside wholesale funders – of which Pepper Money is a major player.
AFG Securities, which funds loans directly off AFG's own balance sheet, grew 30% over the year to a record $7.1 billion, with settlements up 47%. White label moved in the opposite direction, with settlements down 25% to $1.3 billion and the loan book contracting 12% to $7.3 billion, as major bank funders including Advantedge progressively exit the channel.
But Rehayem doesn't see that read-through applying to Pepper Money. "Our white-label program is usually very heavily entrenched with these aggregator groups," he says. "AFG is one of them – we've been a white-label partner of AFG now for over 10 years. The big ones that have really pulled out are the banks, the likes of Macquarie Bank, NAB, Adelaide Bank."
Rather than aggregators abandoning white label wholesale, he expects the model to evolve. "There may be more JVs in the future rather than white label, where maybe an aggregator may do a joint venture with a lender," he says, implying a “pseudo-style white-label” offering “but with a bit of sharing economics”.
For all the strategic shifts – the servicing build-out, the disciplined pullback in asset finance, the evolving shape of white label – Rehayem is clear that Pepper Money's growth still runs through the same channel it always has: brokers. Asked what's next for the business, he didn't point to another acquisition or a new funding line, but to the distribution network itself.
"We want to thank all the brokers for continually supporting Pepper Money across the last 25, 26 years," he says. "We have been working hand in hand with numerous brokers and aggregator groups, and brokers should expect a long tail of new products entering the market with the Pepper Money brand."
