More and more non-bank lenders are calling for ASX listing, but is this a harbinger of a permanent new banking paradigm or a sign that the bull market is approaching a peak?
We’re not talking about the Buy Now Pay Later (BNPL) sector, which has become an ASX-listed crowded cohort in its own right.
Rather, attention has focused on the multitude of (usually unsecured) consumer and small business lenders, offered digitally via funky misspelled names such as Prospa, Plenti and Harmoney.
Business models vary, but this is primarily the type of loan that increasingly risk-averse banks will not hit. But that doesn’t mean it’s a bad deal if you make the right credit decisions.
Unsurprisingly, many of them have concocted BNPL deals to elevate their sex appeal with investors.
Loan and hybrid BNPL
Financial Latitude (ASX: LFS) last month showed the virtue of persistence by listing for its third attempt, having raised $ 200 million in the biggest float of the year to date.
Led by the former head of the Australia Post and former National Bank of Australia (ASX: NAB) Senior executive Ahmed Fahour, Latitude claims to be the third largest unsecured lender in the country – ahead of the ANZ Bank (ASX: ANZ) and his former banking employer.
Formerly known as GE Finance, Latitude is best known for its business-to-business-to-consumer model, aka Harvey Norman-style “no interest” point-of-sale agreements.
But while the company has signed 2.77 million customers among 3,400 participating retailers, the bulk of its revenue still comes from net interest income rather than merchant commissions, late fees and the like.
As Angus Kennedy of Livewire Markets notes, Latitude’s strong business relationships are also a weakness, as the company competes with both banks for loans and BNPL companies for installment transactions.
“Ongoing financial success will depend on its ability to develop and commercialize new products or enhance existing products to compete with the treadmill of technology-backed financing solutions that are constantly emerging,” he said.
Latitude’s initial public offering (IPO) followed that of its closest non-bank rival – Liberty Financial (ASX: LFG) in December of last year.
Liberty’s business is focused on home loans, which represent 70% of its $ 12 billion loan portfolio.
In February, the company reported better-than-expected December (first) half underlying profit of $ 117 million, up 58%. As a result, management increased the prospectus forecast for the full year from $ 165 million to “over” $ 200 million.
Latitude and Liberty are valued at $ 2.45 billion and $ 2.25 billion, respectively.
Among the smaller capitalization players, the New Zealand Harmoney (ASX: HMY) listed in November 2020 after raising $ 92.5 million. Not to be confused with e-Harmony, Harmoney played cupid between compatible borrowers with lenders under a “peer to peer” model, but has since turned to loan financing on his own.
Harmoney’s ‘next-generation’ behavioral credit decision tools mean it has enough confidence in its tools to lend up to $ 70,000 unsecured over three to five years, with loans averaging around $ 70,000 over three to five years. $ 25,000.
In a business update, the company reported a 60% increase in post-pandemic loans to new customers in the March quarter, to NZ $ 44 million (A $ 40.8 million).
Self-proclaimed # 1 online lender for small business, Prospa Group (ASX: PGL) By the end of April, loan arrangements had returned to pre-pandemic levels. To illustrate, the third quarter (March) was stable year-on-year, but up 20% from levels in the December quarter.
Formerly known as RateSetter, Plenti Group (ASX: PLT) listed in September 2020 after raising $ 55 million. Plenti offers peer-to-peer loans and also operates a direct platform focusing on the automotive and renewable energy (solar) sectors.
Describes itself as a digital credit business, MoneyMe (ASX: MME) listed in December 2019 on the basis of its rapid decision-making capabilities. In the case of its Autopay vehicle finance, the company is promising approval – not just settlement – within 60 minutes for potential buyers while they throw tires in the parking lot.
MoneyMe’s tip box also includes ListReady, a tool that can fund up to $ 35,000 of a home seller’s presale expenses. Agents are the middleman and so far MoneyMe has recruited 500 real estate agents covering over 3,200 salespeople.
Given the largely bullish statements, investors might assume that they will pocket decent returns from this non-bank sector. But to date, it hasn’t come off like the hyper-stimulated gains of the BNPL cohort.
Performance of non-bank stocks
At the time of writing, Latitude shares were drifting slightly from their listing price of $ 2.60 per share, having peaked at $ 2.99 after listing.
Liberty shares made an honorable 26% gain on their listing price of $ 6.
Prospa Group was listed in June 2019, after raising $ 110 million at $ 3.78 per share. The actions are now close to 78% underwater.
Plenti Group shares are at around 32% of their listing price of $ 1.66 per share.
MoneyMe shares trade online with their initial price of $ 1.35 per share.
Not to be confused with MoneyMe, Money3 (ASX: MNY) is a long established listed stock that has moved from payday lending to specialized auto financing. Stocks rebounded 145% last year, despite (or because of) a large raise of $ 52 million to fund the acquisition of a loan portfolio.
A former exponent of peer-to-peer lending, the DirectMoney backdoor listed as Wisr (ASX: WZR) in March 2017 and has generated a modest return for investors since then.
Given the largely unsecured nature of loans, there is always the specter of a bad debt eruption amid rising unemployment. But you don’t have to be a member of Scott Morrison’s congregation to believe in miracles – in this case, the economic one of Australia.
Right now, lenders are reporting 90-day arrears in the range of 0.5-1.5% – higher than banks’ bad loans but more than covered by rates that start at 7-8% but can be much, much higher for borrowers deemed to be risky. .
Another generic feature is the rise in interest rates and the implications for an industry that relies almost entirely on wholesale funding.
Non-bank IPO applicants
Despite the indifferent returns, more and more non-banks are considering IPOs to take advantage of the still receptive conditions.
The largest is Society One, which recently signed Jamie McPhee, who previously ran ME Bank and Adelaide Bank.
80% owned by private equity Blackstone, LaTrobe Financial is considering a $ 2 billion IPO. With half of its income coming from asset management, LaTrobe is not so much a lending game as it is a channel for investors to access mortgage trusts and high yield credit accounts.
Pepper Money (asset finance and third-party loan management), Grow Finance (small business loans), and Columbus Capital (diversified financial services) are also mentioned in the dispatches as IPO candidates.
Led by former National Australia Bank executive Gavin Slater, payday lender Nimble is considering listing next year as it transforms into more acceptable mainstream loans.
Not all of those much-vaunted lists will materialize, but what is clear is that investors can – and should be – very discriminating in such a crowded industry.
On the bright side, poor performance in the short term means there is arguably more value on the table than in the BNPL space.