Smart growth key to Pepper Money's success

History is littered with clowns who tried to juggle too many things at once with disastrous consequences.

Yet in the world of mortgage finance, brokers and lenders alike are finding it increasingly necessary to keep multiple disciplines in constant, frantic motion.

A lot has been said of the trend of mortgage brokers diversifying their offerings to incorporate commercial, asset and even development finance.

But lenders, too, are under considerable pressure to service as wide a net of customers as possible in order to remain competitive.

Take non-bank lending heavyweight Pepper Money, which posted a confident set of financial results at the tail end of last week.

While the 2024 financial year was hard slog through macroeconomic worries and rate uncertainty, Pepper Money managed to grow its net interest margins (NIMs) by 12 basis points to 1.97%, despite seeing a 3% drop in full-year loan originations.

Finding the balance

Speaking with MPA, Pepper Money chief executive Mario Rehayem (pictured) said the lender’s robust margins were a result of a diverse product offering, which spans residential, commercial and SMSF mortgages, asset finance, auto lending and personal loans.

“When you run a diversified product offering, you do have an opportunity to lean on certain segments of the market that are going to give you accretive growth in NIM (net interest margins),” said Rehayem.

Rehayem said that growth needs to be intelligently handled in order to keep margins on course. “It is a very competitive market and I do expect NIM in one way or another to contract only if we are chasing growth,” he said.

On results day, Rehayem spoke of the need “to balance volume growth and mix – whether that be mix between products, between business segments or countries”.

In terms of product mix, Rehayem is seeing “significant growth” in the SMSF mortgage space, although prime lending, commercial real estate and novated leasing for auto remain buoyant.

Pepper Money’s growth curve steepened in the back half of 2024, when mortgage and auto applications started to ramp up. Indeed, group-wide originations were up 16% in the second half compared to the first.

“So we're in a very good position right now in the context of growing our settlements for the first quarter of this year, and that's due to the very strong pipeline – and very good momentum in Q4 last year,” said Rehayem.

Asset finance undoubtedly hit a rough patch in 2024, with originations falling by 13% year on year to $2.9 billion.

While asset finance (of which Pepper Money recently celebrated 10 years of growth) NIMs improved by five basis points, this trailed the eight basis points of NIM growth in the mortgage segment.

“There has been a deterioration in credit performance – as customers in this segment are being impacted by the ongoing pressures of cost of living and high interest rates, which is seeing late-stage arrears increase,” Rehayem said on results day, adding: “Further, there continues to be heightened levels of insolvencies which impact performance, as the government protections under COVID-19 have been fully removed.”

However, Rehayem told MPA that “a very steady improvement” is mounting in the asset finance space.

In a perfect example of the power of diversification, he said: “It was a conscious decision to drive volume down because there was extreme competition at the time, and we didn't feel comfortable at the margins… so we didn't want to compete.

“But in saying that, the first couple of months of this year we are seeing much better – or more improved – application and settlement flow” in the asset finance space.

Brokers diversify

The lion’s share of Pepper Money’s mortgage deal flow comes from the third-party channel, with 95% of home loans brought to the lender by brokers.

While mortgage brokers’ share of the asset finance market remains low, their influence is growing.

“We have seen a consistent growth from mortgage brokers selling and offering their customers auto and equipment finance, which is really good because it shows the diversification strategies of many brokers starting to come into play,” Rehayem said.

This, according to Reyahem, is something the aggregators and mortgage brokers have been wanting to do for quite some time. The result is “a significant increase” in mortgage brokers introducing asset finance to their offerings.

For Pepper Money specifically, mortgage broker-originated asset finance flow grew from 11% of the book in the first half of 2024 to 12% in the second half.

Mortgage brokers aside, nearly half of all originations were novated lease arrangements, while commercial brokers, auto brokers and dealerships also put in a showing.

Diversification across product lines is not coming at the expense of quality, said Rehayem. This is down to mortgages naturally being the most complex loans to write, making the transition to auto and equipment finance fairly seamless.

“It really is a very similar process and much faster, because auto loans settle within the same day, where mortgages, they're submitting loans and they're settling them in a couple of months,” he said.

According to Rehayem, diversification is being driven by customers “becoming more needy with regards to their own time. Rather than going to multiple brokers for multiple purchases, they want to go to one source.”

Role of technology

Rehayem also discussed the role technology plays in maintaining Pepper Money’s reputation in the non-bank lending sector.

The Pepper Product Selector (PPS) “has been continually bolstered by its innovation and automation and we are now live with a particular aggregator where we are giving out real-time approvals,” he said.

PPS allows brokers to get an indicative offer for their clients in a matter of minutes.

“This is something we believe will be the future of lending for both lenders and the mortgage brokers. We are looking now to start rolling that out to other aggregator groups,” said Rehayem.

Reyahem’s hinted that there are more innovations on the horizon.

“We're 25 years now working alongside mortgage brokers and auto finance introducers, and we’re very privileged to be able to have access to that kind of distribution,” he said.

“We look forward to 2025 and rolling out a number of new, exciting products that brokers have asked for. We're really looking forward to adhering to their needs.”

Can he be more specific? “Let’s just say one of them may be a first-time owner's product,” said Rehayem. Stay tuned.