Major-bank mortgage price war helps us: Pepper CEO

Pepper Money, which will list on Tuesday, says the current low-rate environment benefits the company because it leads to tighter credit from the major banks.

Pepper is looking to expand its housing book. Picture: Andy Brownbill

Pepper Money has said it benefits from the current environment of strong price competition between the major banks in the mortgage market, because cheaper rates lead to tighter credit.

Ahead of the company’s listing on Tuesday, chief executive Mario Rehayem said current, low-rate conditions were “always good for us, but not so good for the customer because their applications can be declined by traditional lenders”.

“There’s been a definite tightening in price over the last few years and there’s many reasons for that - the major banks have become more streamlined and more efficient,” Mr Rehayem said.

“But because of their sheer scale, they’ve got more selective about their customers instead of seeking a wide spectrum of different customers.”

The Pepper chief said this was one of a number of reasons that market share for the non-bank sector, which concentrates on under-served customer segments, would continue to expand.

Since March 2015, the sector’s share of home-loan originations by mortgage brokers has lifted from 2 per cent to its 5 per cent level in September 2020.

Pepper will relist on the Australian Securities Exchange on Tuesday, after it was delisted in 2017 when a majority of funds owned by KKR took it private.

The company increased its initial public offering earlier this month from $450m to $500m, with the KKR-led Pepper ANZ Hold Co to hold 60.6 per cent of the group on listing instead of the earlier advised 64.5 per cent.

The IPO will value Pepper at $1.3bn, or $2.89 a share, based on a forecast net profit of $120.7m for the 2021 calendar year, up from $106.3m and equivalent to an earnings multiple of 10.5.

Pepper Home Loans’ Mario Rehayem.

The float is the biggest this year, with the proceeds to be used in the business and paying down a $275m bridging facility.

Mr Rehayem described domestic and New Zealand business conditions as “very strong”, in both the company’s key segments of housing and asset finance, including cars, caravans, bikes and small equipment.

This was despite early signs of an increase in funding costs, which has led to an increase in fixed-rate mortgages.

Late last week, Commonwealth Bank effectively called the bottom on ultra-low rates, hiking its three and four-year fixed rates, as analysts predicted there was likely to be more to come.

Shorter-duration fixed rates are now starting to rise in tandem with wholesale funding costs, despite central banks around the world trying to stimulate the global economy by keeping a lid on interest rates.

Mr Rehayem said Pepper didn’t play in the fixed-rate market.

Also, if funding costs started to rise, Pepper had a “disciplined” approach and would protect its net interest margin by repricing its loans.

“We like to run our business with a NIM north of 200 basis points, with the asset finance NIM higher than that,” he said.

The business was also stronger for its longstanding emphasis on the broker network for distribution.

The banking industry’s branch network had declined at a compound rate of 3.6 per cent to 5200 since 2016, compared to a 3.6 per cent compound increase in the number of brokers to 16,500 over the same period.

Broker-originated home loans now accounted for almost 60 per cent of the market compared to 52 per cent about five years ago.

“We have a strong affiliation with the broker market, where brokers are building their own brands,” Mr Rehayem said.

“So the trend feeds into our distribution model,” Mr Rahayem said.

Pepper’s majority shareholder is subject to voluntary escrow provisions which expire when the company releases its 2021 annual result in February next year.