Pepper profits from red hot markets

Australian non-bank lender Pepper Group posted a net annual profit of $61 million for 2016 on record growth in Australian mortgage loans and is forecasting a profit growth of at least 10 per cent this year.

Earnings for 2016 are up a whopping 26 per cent on the previous year, mostly because the Aussie mortgage business delivered new originations of $2.53 billion. This is a jump of 36 per cent on the year before - and way above system growth of 6.5 per cent. 

Interestingly, the lender is targeting net earnings of at least $67.5 million for 2017, according to Pepper’s co-group chief executive, Patrick Tuttle. Further, after raising $1.5 billion through residential mortgage backed securities (RMBS) in 2016, Tuttle is planning to bring more RMBS deals to market in March.

“This will most likely be an $800 million size transaction. We would then look to bring a second deal in the second half of the 2017," he said. Clearly, Tuttle is optimistic about the outlook for Australia’s residential mortgage market in the year ahead.  

“I expect that market conditions will be broadly supportive, given unemployment rates are expected to remain stable, GDP growth will be slightly positive on the upside, and I anticipate the official cash rate will remain flat for longer given where the inflation rate currently stands,” he told AB+F.

“We are already seeing record application volumes in our mortgage business early in the new year, with February delivering the highest level of daily application volumes in the 16-year history of Pepper’s business.

“While the mortgage market remains highly competitive, Pepper is not really directly competing with the major banks. Although we offer standard variable rate Prime mortgage, like the banks, we charge a slightly higher interest rate than the banks because we don’t rely on lenders’ mortgage insurance to underwrite the borrower.

"For our specialist lending, which represents around 70 per cent of our new lending volumes, we are primarily target near-prime customers who for various reasons fall outside traditional bank automated credit scoring models."

Speed bumps

Tuttle likes to point out that Pepper’s housing arrears remain at record lows, with the proportion of loans more than 90 days delinquent running at 1.36 per cent.

Mortgage volumes have largely been delivered through Pepper’s three core distribution channels, namely mortgage brokers, white-label partners and direct to consumer.

Speaking of the banks - and without having any direct insight into how close many of them might be to the 10 per cent speed bump - Tuttle suspects they’ll take turns for the remainder of 2017 in originating investor loans within their capacity limits.

“They would definitely not want to knowingly incur the wrath of the prudential regulator by breaching this regulated portfolio limit," he said.

Total income for 2016 was $413.2 million, up 36 per cent on the previous year’s $304.3 million. Assets under management rose by 15 per cent to $52.4 billion.

Pepper said loan originations in South Korea were up 52 per cent to $1.28 billion. And, the company’s Prime Credit investment in Hong Kong and China upped its earnings contribution from $5.8 million to $9.5 million.

Meanwhile, the lender’s pan-European loan servicing platform stands at $45 billion of assets under management.

“The emergence of challenger banks in the UK - many of whom choose to outsource the administration of their lending books to companies like Pepper - has bolstered assets under management growth,” added Tuttle.

Discussions between Pepper and Banco Popular to create a consumer lending joint venture in Spain continue.

Pepper, results
Elizabeth Fry,
Article Posted:
February 27, 2017

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