Non-bank lender Pepper Group saw mortgage applications hit the highest level in the company's 15-year history in January and February, but it says capital markets are imposing lending discipline through conditions placed on its warehousing facilities and the risk tolerance of investors in securitisation markets.
Pepper will look to raise at least $1.5 billion in residential mortgage backed securities (RMBS) in 2017 to fund its growth, as demand booms.
The company's $61 million net profit for calendar year 2016 was up 26 per cent, driven by new originations of Australian residential mortgages of $2.53 billion, 36 per higher at a time the market as a whole rose by 6.5 per cent.
But although the banks are prevented by the Australian Prudential Regulation Authority from growing their lending to property investors by more than 10 per cent, Pepper's co-chief executive Patrick Tuttle said growth had not been driven by investors turned away by banks. Rather, "the vast bulk of our growth has come from owner-occupiers and first home buyers," he said.
Investor borrowers comprised 27 per cent of Pepper's residential mortgage book over the year, roughly same amount as the previous year. Investor customer numbers had stayed flat because Pepper funds its lending from large warehouse facilities provided by banks, which have limited the amount of lending that can be made to investor borrowers, Mr Tuttle said.
"Although we are not regulated by APRA, we effectively fund ourselves through the debt capital markets. Even if we wanted to, we can't write a disproportionate share of our business in investment loans, because it would skew the book and [compromise our] ability to fund ourselves in the securitisation markets," he said.
After raising $1.5 billion through RMBS in 2016, Pepper is planning a new RMBS deal in March of $800 million, and this could be up-sized if there is strong enough investor demand. Suncorp said on Friday said its $500 million RMBS had been increased to $1.25 billion.
"Over the course of 2017, I would expect to do at least another $1.5 billion of RMBS, and we might even do a bit more because of our growth trajectory," Mr Tuttle said. Pricing for the upcoming March deal was expected to be more favourable than last year's deals due to solid demand for the credit from local institutional investors, he added.
With Reserve Bank of Australia governor Philip Lowe using a speech this week to point to vulnerabilities from elevated levels of household indebtedness, Mr Tuttle said Pepper "feels pretty comfortable with where house prices are sitting, given we are lending at an average LVR [loan-to-value] ratio of 70 per cent. There is nothing that would concern me about the overall macro-economic environment."
Pepper's small size allowed it to "be quite choosey about the credit risk we underwrite, and we are because we want strong book performance and good margins," he said.
Two-thirds of Pepper's home loan lending goes to "near prime" borrowers, who aren't able to quality for a bank loan. Yet its housing arrears remain at record lows, with the proportion of loans more than 90 days delinquent running at 1.36 per cent.
Macquarie analyst Jennifer Kruk said Pepper's result had come in ahead of expectations, while guidance for net profit of $67.5 million this calendar year, which would be up 10.5 per cent, could be conservative. Nevertheless, the stock fell on Friday by almost 5 per cent to $2.55.
Pepper has various lending and loan servicing operations around the world. It reported record loan originations in South Korea, breaking out the country in its financial reporting for the first time to show residential mortgages and consumer lending originations up 52 per cent year on year to $1.28 billion.
Discussions with Spain's Banco Popular to create of a consumer lending joint venture are continuing, it said, while a 12 per cent stake in the Prime Credit business in Hong Kong and China was growing contribution to profits. Meanwhile, volatility in Europe is assisting the pan-European loan servicing platform that now has $45 billion of assets under management.
