PPM - Pepper Money

[System]

Pepper Money is one of Australia and New Zealand’s largest non-bank lenders, focused on underserved customer segments, and currently offers three broad categories of products including Mortgages, Asset Finance and Loan and Other Servicing.

Pepper Money is a technology-enabled lender, with purpose-built data analytics and technology to inform credit decisioning, provide flexibility and drive performance across its business.

Since 2014, Pepper Money has assisted more than 220,000 customers.

It is anticipated that PPM will list on the ASX during June 2021.

Flexible Loan Options To Suit You

As one of Australia's largest, and award-winning non-banks, we offer home, car, personal, and commercial loan options. Rated excellent on TrustPilot.

www.pepper.com.au

 

[Dona Ferentes]

Listing date	25 May 2021 12:30 PM ##
Company contact details	https://www.pepper.com.au/lending
Principal Activities	Non-bank lender focused on underserved customer segments, and currently offers three broad categories or products including Mortgages, Asset Finance and Loan and Other Servicing.
GICS industry group	TBA
Issue Price	$2.89
Issue Type	Ordinary Fully Paid Shares
Security code	PPM
Capital to be Raised	$500,000
Expected offer close date	21 May 2021
Underwriter	Fully underwritten. Credit Suisse (Australia) Limited, Goldman Sachs Australia Pty Ltd, KKR Capital Markets LLC, and Royal Bank of Canada (Joint Lead Managers)

pretty sure that should be $500million to be raised

Non-bank lender Pepper Money has increased its initial public offering to $500 million from $450 million .Pepper’s brokers told fund managers on Thursday that the increased offer would see the company’s owner, KKR-led Pepper ANZ Hold Co, own 60.6 per cent of the company on listing rather than the earlier advertised 64.5 per cent.

The added $50 million would be used to repay debt. Outside shareholder ownership would increase to about 40 per cent of the group on listing.

 

[Dona Ferentes]

and .... under water.. Opened $2.60 at lunchtime and still 20c below IPO price

 

[Dona Ferentes]

New to market non bank lenders ... Pepper, Liberty Financial, Resimac

personal lenders .... Harmoney, Plenti, Wisr and MoneyMe, Money3,

and the BNPL brigade.

where's the moat?

 

[Telamelo]

A whopping 270 million shares come out of escrow today/tomorrow so am staying away/out of this altogether.

US market's tumbled again overnight so reckon PPM headed lower to $1.50 or so short term with extra 270 million shares available to be sold on market.

Chart has been beaten up despite positive results & declaring a 9c fully franked dividend (goes ex-dividend on 13/03/2022).

dyor as always.. cheers tela

 

[finicky]

PPM @ $1.81
Got me interested for a post crash scenario. Not getting exposed to debt before that.
This fund manager says he started accumulating at $1.90; makes a case for PPM being a rare 'structural growth' business and claims it ticks 'growth', 'value', and 'quality' boxes.

PPM offers the most upside

Weekly since launching

 

[Dona Ferentes]

The listed entity still going down?

Meanwhile, there's a floating rate note, a bond, out there, Pepper Money 2yrs to call @ BBSW+600; yield ~9.63%

Now, that is not cheap money. The old Risk v Reward equation; lending to the outliers?

 

[Dona Ferentes]

Pepper Money (PPM) published weak FY23 results, with statutory NPAT down 23% to AUD109m compared to the pcp. Growth in asset finance volumes was offset by the decline in mortgages, with overall NIM compression and increased funding costs.

In Mortgages, originations were down 43% over the pcp to AUD3.9bn, reflecting the competitive environment. A few other key statistics from this division: AUM were down 7% to AUD12.6bn, NIM was down 21% to 1.77%, operating income was down 13% to AUD215m, loan losses as a percentage of AUM increased 4bps to 0.01%, and 90+day arrears for prime and non-prime increased marginally to 0.50% and 1.90% respectively.

In Asset Finance: originations were up 20%, AUM was up 21% to AUD5.7bn, NIM was down 41bps to 2.50% due to business mix and higher funding margins, operating income up 11% to AUD166m, loan losses as percentage of AUM improved 12bps to 0.92%, and 90+day arrears jumped to 0.31%. In Loan and Other Servicing, AUM increased 43% to AUD1.4bn and operating income was down 34% to AUD9.2m.

 

[Dona Ferentes]

as Pepper is about to issue a new subordinated debt instrument, there is accompanying factsheets/ research from around the traps...

Issuer Outline
Pepper Money Limited is a non-bank financial institution (NBFI) in the Australian and New Zealand markets. The group provides a range of lending services
including mortgages (55% of assets), asset finance (43%), and loan servicing (2%). As of 31 December 2023, Pepper had AUD19.7bn total assets under management across its various products. As a NBFI, Pepper is unregulated and therefore does not accept customer deposits, relying instead on funding through debt capital markets (similar to other NBFIs).

Pepper was established in 2000 as Pepper Group Pty Limited, with the company undergoing a restructure in 2021, whereby it was renamed Pepper Money Limited and listed on the ASX. It has a market capitalisation of AUD636m as of 3 June 2024.

Strengths
• Well established position as a primary servicer of nonconforming residential mortgage loans: Pepper is a dominant player within key segments of the mortgage market that fall outside of the traditional banks’ credit risk appetite, such as self-employed, small business borrowers, and borrowers without a genuine savings history. Pepper’s focus on the nonconforming customer segments has underpinned significant growth over a number of years, although the growing number of lenders in the nonconforming space has led to an increased focus on prime borrowers, which we view as a positive. This focus on better quality borrowers (rather than chasing volume) has resulted in the mortgage loan book shrinking over the past 12 months, with some of the deficits being picked up by the asset finance segment, a sector that Pepper has covered since 2014. In FY23, there was evidence of more nonconforming mortgages being issues as opposed to prime.
• Solid track record through the cycle: Pepper has been operating in the non-bank lending space for over 20 years and has gone through many cycles (including the GFC and COVID) without major or catastrophic deterioration in its performance. This reflects the company’s track record to adjust lending practices to the then-current operating environment. To illustrate, from nonconforming mortgage loans originations of AUD943m in 2007, this dropped to AUD124m in 2008, recovering to AUD420m in 2012. Overall, Pepper has originated AUD23.7bn of nonconforming mortgages since 2001, with total aggregate losses of 0.27% of total loans originated.
• Implementation of macro prudential limits on banks will benefit Pepper’s loan growth: As prudential regulators in both Australia and New Zealand introduce tighter lending restrictions for regulated banks, borrowers that no longer fall within the banks’ risk framework will look for alternative lenders, including Pepper. As evidenced over a number of years, and indeed if continued in future, an increasing proportion of prime borrowers will ultimately benefit lenders such as Pepper through lower credit costs and arrears performance (all else being equal) through the cycle.
• Solid loan processing and servicing infrastructure: Pepper has made substantial investments in its technology and systems over the last few years, digitalising its loan processing capabilities through a portal which takes the loan application from receipt through to a rules-based engine for decision making. Pepper also uses loan servicing technology for its collections process. Pepper’s Strong servicer evaluation rating (the highest possible ranking) from S&P Global Ratings is a testament to the strength of the company’s servicing capabilities. Automated loan servicing systems identify accounts in arrears, allowing the arrears management team to mitigate losses through early detection and quick response. Pepper has exhibited strong transaction performance with minimal level of losses, with annualised cumulative losses of about 0.28% in asset finance, 0.05% for prime mortgages and 0.27% for non-conforming mortgages. Securitised loan performance, which makes up the majority of loans funded by Pepper, has generally performed well compared with the industry average.
• Experienced senior management team: Pepper’s senior management team has extensive experience in residential origination and servicing in Australia and various offshore markets. Pepper has a dedicated risk management team, operating within a sound risk management and compliance framework (including two subcommittees of the board with delegated oversight and responsibility for audit and risk). In addition, there are five management committees for asset and liability, credit, risk, product and pricing, and ESG, ensuring a robust audit and quality assurance program. The audit programs complement the risk management framework and provide independent reviews of the effectiveness of Pepper’s financial and operational systems and compliance with laws and regulations.
• Very sound and structured funding mix: Although Pepper does not accept customer deposits (and is therefore primarily reliant on term debt capital markets, or securitisation, for its funding needs), the company has enjoyed long-term
relationships with a broad array of funders. It maintains significant warehouse capacity (AUD9.3bn) provided by 27 funders and has issued AUD38.6bn in the securitisation market since 2003. Consistent with peers, Pepper maintains relationships with domestic banks.

Risks
• Small market share: Although Pepper enjoys a strong market position within its chosen markets, its market share within the broader residential mortgage market is insignificant at approximately 0.5% (and 2.6% in the asset finance market, noting Australian domestic banks have materially reduced their exposure to this segment in recent years). This leaves Pepper and its business volumes susceptible to competitive and margin (profitability) pressures, as evidenced by margin compression that has been prevalent in recent times. Competition also has a much larger impact on smaller NBFIs like Pepper, who in such times often have to decide between protecting its margin (at the expense of loan growth) or growing its book (at the expense of profitability).
• Rising affordability pressure: The material rise in the cash rate since mid-2022 has put significant pressure on many borrowers, not only in terms of ongoing servicing of their loans, but also the ability to refinance at cheaper (relative) rates. There is therefore a heightened risk that arrears will rise, leading to losses. One key mitigant, the reflection of Pepper’s long operating history, is that about 72% of its mortgage portfolio has a loan-to-value ratio below 70%, which would support strong recovery in the event of a foreclosure. The other is that Pepper currently has provisions for losses of 0.65% of its loan book (2.3x its aggregate losses), equal to AUD119.6m. This includes specific provisions, collective provisions as well as a post model overlay to account for worst-than-anticipated losses.
• Strong growth may mask asset-quality underperformance: Pepper, like other non-bank lenders, has benefited from various restrictions placed on bank lending in recent years, resulting in compound annual growth in total assets of 17% between 2017 and 2022. As mortgages generally season over the medium-term (three to five years), strong growth can mask potential asset quality issues (as growth in the denominator outpaces growth in the numerator, which typically lags the former).
• Expansion into a lower risk customer base could erode profitability: As Pepper continues to grow, it will continue to attract more “bank like” customers, which is deemed to be a natural progression for the lender. However, these borrowers typically offer a leaner margin compared to nonconforming ones. As funding costs rise, margin pressures are likely to affect Pepper’s profitability (but the quality of the portfolio should improve).
• Funding risk: As a non-bank lender, Pepper is highly reliant on wholesale funding as it is unable to accept household deposits. Pepper’s reliance on wholesale funding makes it susceptible to increased costs of funding, placing pressure on margin benefits. During times of financial market stress, access to wholesale funding can prove challenging and expensive.
• Limited regulatory oversight as NBFI: Pepper is not regulated by APRA. The absence of strong regulatory oversight may see that risk management frameworks are unlikely to be as rigorous as what would normally be required by regulated lenders. It is worth noting Pepper’s recent period of strong growth has been accompanied by consistently strong risk-adjusted capital ratios.
• Potential for regulatory change: Pepper is not regulated by APRA as it is not an authorised deposit taking institution, and as such, there is risk that additional regulatory obligations will be imposed on both Pepper and the sector more broadly.