Non-bank lender's latest results went down a treat with market, but is prime lending leading to margin squeeze?
If there was one word to sum up ASX-listed non-bank lender Pepper Money’s latest interim results, it would have to be "prime".
Specifically, the 25-year-old group saw a startlingly sharp pivot in its mortgage-origination mix in the six months to 30 June, with prime lending comprising 70% of volume mix. Near-prime and a smidgen of specialist lending naturally made up the difference
In the previous six-month period, prime mortgages made closer to 55% of originations, while in the first half of 2024 it was just 40%.
It was a bit of a mixed blessing for Pepper Money though. With the smaller margins that come with prime mortgages, the lender saw an eight-basis-point contraction in mortgage net interest income (NII), causing mortgage net interest margins to dip nine basis points to 1.51%.
For Pepper Money’s chief executive Mario Rehayem, the sudden surge in prime lending was neither a surprise nor without precedent.
Not necessarily a titanic effort
“It's not new to us to be writing that kind of volume in prime,” Rehayem told MPA following the release of Pepper Money’s results.
He explained that Pepper Money decided to scale back prime in the last year or two. “And that's because when the market was extremely competitive in prime, what happened was that the margins weren't there. So we decided to focus more on things like non-conforming and asset finance."
But as market dynamics shifted and prime lending shot up, Pepper Money was quick to adapt.
“When we decide that this is an area that we want to play in and we feel that we've got good cost of funds and an ability to originate for value, then we will,” said Rehayem.
He explained that an uptick in commercial deals, not just residential, has played into the surge in prime lending.
Read more: Pepper Money ramps up broker support with senior hires in Victoria
is Reyahem not concerned about the margin contraction that has evidently come with the surge in prime. If he is, he’s not letting on.
"That’s not a problem because we're able to then get that margin coming through commercial. We're able to get that margin increase in auto finance. So we've got levers to pull.
“When we look at it from a business perspective, we're roughly being very consistent over the last couple of years, sitting at around 200 basis points of NIM as a business.”
Is it not difficult, though, to pivot the business on such sudden shifts in market appetite?
"Our brand is synonymous with that,” said Rehayem. “We're not known just for one product – we're known for quite a number of products.”
He continued: "When you are dealing with mortgage brokers and intermediaries, they vote very quickly with their feet if you've got something to offer…Our platforms and our processes are product agnostic, so at any point in time we can swing to one area of the business and have a significant uplift in volume, but the business is designed for that. It's not like we're trying to turn around the Titanic.”
Competition mounts in challenger lending space
Pepper Money’s interim results were largely applauded by the market, with shares bouncing 5.5% higher on Thursday, while the stock is up nearly 50% year to date.
It’s not the only non-bank lender on the scene to be in bull mode.
MA Financial, which also delivered a strong set of results on Thursday, shot nearly 14% on the day, bringing its year-to-date rally above 60%.
They are both different businesses with different focuses, but it serves as a reminder that there is no shortage of competition in Australia’s challenger lending space.
However, Rehayem does not try to get too distracted by what the competition is doing.
“Pepper now has been around for 25 years and we've seen competitors come and go, we've seen them grow, we've seen them fail, that's just the nature of the business that we're in. You're always going to get competition. And that's why we try to differentiate ourselves,” he said.
For Reyahem, it’s about maintaining a good service proposition and strong relationships with brokers. “We can't determine what competition we have. It's how we just run our own race. We keep an eye on them. But we run our own race.”
Reyahem also teased by new technologies and policy changes in the works “to open up the addressable market that we play in, both in asset finance and in mortgages”.
Unfortunately, he didn’t divulge much more than that.
