Mortgage originations up 6% to $1.8 billion
Non-bank lender Pepper Money has released its first half 2024 financial results, delivering what CEO Mario Rehayem described as a strong performance and balanced growth despite difficult market conditions.
The first half data to June 2024, released to the market on Thursday, August 29, revealed total loan originations of $3.3 billion, including mortgages of $1.8bn, up 6% on the prior corresponding period (PCP) of 1H23.
Asset finance originations came to $1.4bn, down 19% vs the PCP – which had been an all-time high of $1.8bn, partly due to a flurry of activity due to the fact that tax incentives for self-employed were coming to an end.
Pepper Money attracted 37,357 new customers during the 1H24, with close to half a million customers (492.605) assisted since the non-bank formed in the year 2000.
Total assets under management reached $19.3bn, up 2% on PCP. Mortgages AUM totalled $11.3bn, down 9% compared to 1H23, while asset finance AUM was up 1% to $5.7bn. Servicing AUM was up 149% to $2.3bn.
Net interest margin improved 11 basis points to 1.92% compared to 2H23. Breaking the figures down, mortgages NIM rose 9bps to 1.60% and asset finance NIM improved 13bps to 2.52%, compared to the second half of 2023.
Pepper Money revised its accounting classification of going trail commission payable in respect of mortgages originated by brokers in Australia and New Zealand – relabelling trail commission expense from lending expense to net interest income.
Statutory and pro-form net profit after (NPAT) came to $46.1 million, down 4%. Rehayem said this result reflected a 4% reduction in total operating income versus PCP partially offset by total expenses, which were 2% lower than PCP.
“Importantly our profit pre-provision in 1H 2024 was $108 million, up from $95.8 million in the first half of 2023, a growth of 13% on PCP, and an increase of 12% on 2H 2023,” Rehayem (pictured above) said.
Rehayem said Pepper Money’s performance over the first half of 2024 had been strong, with mortgage volume increasing and total NIM expanding.
“This was achieved despite uncertain market conditions and the weakness in consumer and business confidence.”
Key Pepper Money 1H24 results
- Statutory NPAT and Pro-form NPAT of $46.1m
- Profit pre-provision of $108m up 13% on PCP
- Total originations of $3.3bn
- Total AUM of $19,3bn, up 2% on PCP
- Net interest income of $170.9m
- Total NIM of 1.92%, up 11bps on 2H23
- Loan losses as a percentage of lending Aum rose from 0.28% to 0.45%
- Total operating income - $186m
- Total expenses, down 2% on PCP to $119.6m
- Warehouse capacity of $9.2bn, closed June 30, 2024
- Two public term securitisations completed in 1H24, raising over $1.4bn
- Four whole loan sales - $1.1bn in assets
- Interim fully franked dividend of 5c per share, up 1.5c per share from 2023 interim dividend
Focus on balanced growth – Mario Rehayem
Speaking to MPA after the results were announced to the ASX, Rehayem said among the positive things that stood out to him was the more than 37,000 new customers introduced to Pepper Money in the first half of 2024.
“That’s a massive thanks to the brokers that entrusted us in their recommendation and that’s really good growth for us,” Rehayem said.
“Volume wise – we’ve seen a 6% increase in year-on-year growth in the first half of this year versus the first half of last year for mortgages.”
Rehayem said Pepper Money was capitalising on opportunities in the current market.
“That is your typical non-conforming mortgages, self-managed super fund mortgages and small-ticket commercial real estate mortgages that we are growing. We grew 120% year on year in small-ticket commercial.”
“We are seeing strong growth and the beauty about the growth is that it’s balanced – it’s not just one product, it’s across diversified product segments.”
While the market for asset finance loans (automotive loans) had dropped, Rehayem said the tax incentives for self-employed customers weren’t available this year and Pepper Money is also now focusing on different segments of the market.
“We focused more on novated leasing than we did the previous year and that has worked for us, because we’re trying to balance our composition of risk across the whole book.
“However, $1.4 billion in asset finance originations is still extremely strong, but yes slightly off our record year, which was last year. If you look at what we originated versus the market, we’re still probably up in the top two non-banks for total originations in asset finance.”
SMSF lending
Rehayem said SMSF lending, which Pepper Money introduced in October 2023, had also gained significant traction with the non-bank also in the top two in this sector in terms of volume and market share.
He said SMSF lending had taken off “purely on the basis of service and the features that we have embedded in our products”.
This included removing the complexity and giving brokers confidence and fast turnaround times, a well as competitively priced products across both residential and commercial SMSF loans.
“We do have an extensive distribution network, so when we do roll out a new product, we’ve already run it by our brokers before launch to ensure it hits all the sweet spots that they want – that’s why we have an immediate uplift. We just keep on growing in that segment.”
Whole loan sales
Pepper Money has been involved in whole loan sales since 2026 and executed four whole loan sales during 1H24, totalling $1.1 billion in assets, in what is now a growing program for the non-bank.
Whole loan sales involves Pepper Money selling loans to a third party but retaining the servicing of the loan. Rehayem said while the loan, interest and risk belongs to the acquirer, Pepper Money gets paid a premium for the loan upfront plus an annual servicing fee.
While previously the whole loan sales involved mainly prime mortgages, Pepper Money has expanded this to include non-conforming loans and asset finance.
“What this does for us is it gives us diversification in our funding and the way we fund our loans,” Rehayem said. “It gives us an opportunity to build a servicing business on the side, which is capital light and delivering annuity income, irrespective of what the market is doing.”
Whole loan also meant the lender could replenish it capital and disperse that capital efficiently elsewhere, including new originations, dividend payments, buybacks or its corporate debt facility.
Broker relationships
Asked why Pepper Money had achieved strong growth, Rehayem said after 24 years there was a very strong correlation between the brand and what it stood for inside the broker market.
“Brokers now know what they get with Pepper. They have the confidence that we will get the job done. Our conversion to yes is higher than the majority of non-banks in the market so they have a level of confidence that when they submit a deal the probability yes is much higher because of our credit cascading model.”
Rehayem said the non-bank’s same day turnaround made the brokers look good in front of their customers and brokers loved that level of service.
Pepper Money also asked brokers what their pain points when it came to other products in the market, and looked to fill gaps in the market where banks were not active.
Bright future ahead
Rehayem said there were some promising signs for the market ahead, including moderating inflation.
While there had been 18 months of headwinds driven by rate rises putting pressure on customers, these “ headwinds are now starting to fall off”.
“We've had a good ten months of cash rate stability,” Rehayem said.
He said when the narrative of the Reserve Bank of Australia becomes more positive and the RBA start to indicate cash rate cuts will occur, business and consumer confidence will start to increase.
“Once that starts to happen, that automatically starts to build a level of productivity when it comes to housing,” said Rehayem.
SMEs and sole traders would also gain more confidence to buy new vehicles, equipment or investment properties.
“We will be a beneficiary of that and the great thing is that we are prepared for that swing … we’ve got a scalable platform – our funding is ready for that, our distribution network is ready for that.
“I'm very confident that we're going to see some green shoots coming out in horizon over the next six to eight months .. and that Pepper is ready to capitalise on those growth opportunities.”
What do you think of Pepper Money's first-half 2024 performance? Comment below.
