Asset finance originations up 35% in full-year results
A drive in originations over the first half of 2022, along with a renewed focus on asset finance, commercial and non-conforming lending has led to strong financial results for Pepper Money.
Announcing its annual results on Thursday, which cover the 12 months to December 31, 2022, the non-bank lender declared a statutory net profit after tax of $140.5 million, up 8% year-on-year.
Total originations reached $9.6 billion, up 14% compared to the year ending December 2021.
Mortgage originations reached $6.8bn, up 7%, contributing to 60% of total operating income of $408.2m. Asset finance originations totalled $2.8bn, up 35%, with assets under management increasing 35% to a record $4.7bn.
Total lending applications reached $13.7bn, down from $14.2bn in 2021. Total applications were $8.4bn in the first half-year and $5.3bn in the second half-year: down 31% year-on-year ($7.7bn in 2H21).
In an ASX announcement on the full year results, Pepper Money CEO Mario Rehayem (pictured above) said that Pepper Money “rose to the challenges” that uncertain and weakening market conditions presented over 2022.
“We entered CY2022 with a strong focus on driving volume to support assets under management (AUM) growth, expecting that emerging economic trends and interest rate increases would see the market slow over the latter part of the year,” Rehayem said.
Over the first half of 2022, Pepper Money achieved its strategy of above systems growth, he said.
“The second half of the year saw significant softening in the markets in which we operate, as the impact of consecutive rate rises coupled with volatility in capital markets impacted both customer value and funding costs,” Rehayem said.
For the full year, Rehayem said Pepper Money’s mortgage business delivered two times’ system growth, while asset finance achieved 35 times systems growth, noting that a drive in originations ahead of market softening enabled these annualised growth rates to be achieved.
Talking to MPA after full-year results were released, Rehayem said he wanted to thank brokers, who represent 95% of Pepper Money mortgage originations, for their continued support.
Mortgage originations down in second half
Mortgage originations reached $4.1bn in the first half of 2022, falling to $2.7bn in the second half.
In response to market softening, Rehayem said Pepper Money used the breadth of its product offering to shift its focus away from low yielding prime residential mortgages to “higher yielding asset finance, commercial real estate and non-conforming mortgage portfolios”.
Pepper Money anticipated the slowdown in new lending the second half, he said. At the start of 2022, there was geopolitical unrest and indications that interest rates would rise.
“We decided to originate fairly aggressively in the first half of 2022, to give us the breathing space that we needed in the second half,” Rehayem said.
Non-conforming residential mortgages formed part of Pepper Money’s core offering when it was established around 23 years’ ago, he said.
“It was about going back to what we know best, pricing for risk, being able to flex into that segment of the market [and] assisting those customers that are traditionally turned down by the banks,” Rehayem said.
Volume of asset finance originations at record high
Rehayem confirmed that the 35% annual increase in asset finance originations was a record result in terms of volumes.
Asset finance has formed part of Pepper Money’s diversification strategy for many years, he said.
“Fortunately, we have a very diversified portfolio and the ability to be able to flex in these particular segments of the market,” Rehayem said. “Our ability to focus more on asset finance because of the softening in the mortgage market has reaped rewards.”
Pepper Money’s mortgage origination platform Solana played a key role in asset finance volume growth, as it streamlines the process for brokers, Rehayem said. There is no need to re-key information, APIs are embedded in the CRM and customer information is extracted onto Pepper Money’s platform, forming part of a “fast answer to yes”, he said.
Pepper Money has also released what Rehayem refers to as “quick access to cash”. It’s automated process, which includes real-time payments, provides a speedy response, useful for situations such as where customers want to purchase a car from a dealership.
Headline results full-year 2022
- Statutory net profit after tax (NPAT): $140.5m (up 8% year-on-year)
- Pro-forma net profit after tax: $142.0m (marginal year-on-year increase)
- Total loan originations: $9.6bn (up 14%)
- Mortgage originations: $6.8bn (up 7%)
- Asset finance originations: $2.8bn (up 35%)
- Total operating income: $408.2m (up 9%)
- Net interest margin: 2.20% (mortgages: 1.98%, asset finance: 2.91%)
- Dividend: 5.1c per share (total 10.5c in CY2022)
Pepper Money strategy for 2023
Acknowledging that the RBA bumped up the official cash rate by a further 25 basis points in February, indicating further increases would be needed over the months ahead, Rehayem said that he expected capital market volatility to continue in the short-term.
Volatility and the cost of funds were the key reasons for a slowing of mortgage originations in the second half of 2022, he said.
Heading into the first half of 2023, Pepper Money will take a more conservative view and focus continually on asset finance, commercial lending and non-conforming lending, he said.
“We have witnessed very early signs of stability coming through: the cost of funds has started to stabilise – the movement in bank bill swap rates (BBSW) has started to stabilise – so it has given us early indications that we may be able to lift up our mortgage originations a little earlier than what we expected,” Rehayem said.
Brokers can look forward to continual system improvements this year, along with several new products developed in response to feedback.
“Brokers can expect what they’ve always expected from us: great service, great technology and products that will continually fill the voids in the market,” Rehayem said.
Towards the end of 2022 amid turmoil in the UK pension fund industry, Pepper Money treasurer Anthony Moir confirmed Pepper Money priced a $750m residential mortgage-backed transaction (PRS 34), marking its third non-conforming PRS deal of 2022.
Pepper Money completed seven public securitisations in 2022, raising over $5bn. On February 16, Pepper Money announced its first public securitisation for 2023, a $1bn residential mortgage-backed security transaction (PRS 35), consisting of non-conforming and prime mortgages, to settle on February 24.
The deal was upsized from $500m to $1bn, which Pepper Money Treasurer Anthony Moir said was “very encouraging” and highlighted a “significant improvement” in credit market conditions, and the strength of its funding program.
“Pepper Money is off to a very strong start for CY2023, with our first public securitisation raising A$1.0bn to support our non-conforming mortgage growth,” Rehayem said of the transaction.
Clawbacks on commercial lending removed
On February 8, the non-bank lender announced that clawbacks on all commercial lending products were removed, effective February 1.
Pepper Money said it was also simplifying commercial product fee structures, to make it easier for brokers to do business.
