Liberty Financial cautions on uncertainty ahead as profit jumps

The non-bank lender books an 18 per cent jump in annual profit as it increases loans and keeps net interest margin stable.

Liberty Financial has cautioned on the economic uncertainty posed by higher inflation and rising rates but says it has not seen an uptick in arrears or hardship requests, as the non-bank lender posted an 18 per cent lift in net profit for the 2022 financial year.

For the 12 months through June 30, ASX-listed Liberty posted a statutory net profit of $219.3m, as new loans jumped 36 per cent to $5.6bn.

Adjusting for one-off items, its underlying profit after tax lifted 2 per cent to $231.1m.

Its portfolio of financial assets rose 6 per cent to $12.9bn over the year.

Even with the lift in home loans, the lender kept its net interest margin – the difference between its funding costs and what it earns on loans – stable at 3.08 per cent through the year, which it said was “in contrast to industry margin decline”.

But it saw a decline in NIM in the second half, from 3.14 per cent to 3.05 per cent, due to an increase in its funding costs as the cash rate began to push higher.

Chief financial officer Peter Riedel on Monday cautioned that the NIM would continue to be pressured by the return to a more normal interest rate environment.

“During and since the IPO process, we consistently explained that recent NIM results benefited from unsustainably low funding rates of 1 basis point.

“We explained this low funding rate was temporary and would reverse as interest rates increase, which would consequently result in a reduction in NIM,” he told analysts.

When the RBA lifted the cash rate in May, Liberty’s funding rate moved from 9 basis points below cash to an average of 8 basis points above cash, he said.

“That 17 basis point increase in BBSW has been fully absorbed into earnings. As a result, NIM reduced in the second half and will continue to fall until the interest rate environment stabilises.”

Without providing a formal forecast on the NIM outlook, Mr Riedel told The Australian that 2.8 per cent was “a more normalised level of NIM in a stable environment”.

Commenting on volumes in the first few weeks of the current financial chief executive officer James Boyle said there had been a softening in both applications and originations.

“With interest rates going up and cost of living pressures continuing, customers are concerned about borrowing to buy homes in an environment where they’re not sure where the interest rates going to land.

“They’re not sure how much inflation is going to eat into their disposable income and they’re not really sure exactly where house prices are going to land either. So I think there’s a there’s a bit of a softening, reflecting those uncertainties in home lending.”

While Liberty said it would seek to drive further profitability growth, the lender cautioned on the uncertain outlook, warning that “given the high degree of estimation uncertainty, management cannot reasonably assess or quantify the potential short or longer term financial impact on the Liberty Group”.

It did, however, note that to date, it has not seen any increase in arrears levels on its loan portfolio, or hardship requests by borrowers, as a result of recent cash rates hikes.

Mr Riedel said Liberty’s capital and liquidity position remained strong, with the group establishing seven new funding vehicles through the year and raising $5bn in new liquidity.

S&P Global Ratings said Liberty’s strong growth appetite as a non-bank lender would support its position in the competitive lending environment for mainstream borrowers.

“We expect rising inflation and interest rates will result in tighter lending standards for banks. This will allow Liberty Financial to continue to grow in its niche businesses of catering to borrowers that banks typically do not service,” the ratings agency said.

Liberty declared a final unfranked distribution of 28.2c a security, up 17 per cent from the prior year.

Its shares closed down 3.1 per cent at $4.34, in a lower market.