MoneyTalks is Stockhead’s regular recap of the ASX stocks, sectors and trends that fund managers and analysts are looking at right now. In this edition we’re looking at non-bank lending stocks.

Today we hear from Alex Shevelev from Forager Funds.

Non-bank lending stocks represent a sector that has grown substantially through IPOs in the last year.

There have been three larger companies list in Latitude (ASX:LFS), Liberty (ASX:LFG) and Pepper (ASX:PPM), two smaller companies in Plenti (ASX:PLT) and Harmoney (ASX:HMY) as well as MoneyMe (ASX:MME) and Wisr (ASX:WZR) which listed prior to COVID-19.

“The underpinnings of the space and why a lot of them are coming to market now is because you’ve got this good combination [of conditions] for a non-bank lender,” Shevelev said.

“You’ve got lower interest rates which means for some of these companies a lower cost of funding that is truly getting quite miraculously low.

“You’ve got the major banks stepping away from certain areas of lending like personal lending and auto and then you’ve got borrowers that are actually repaying very quickly, so the arrears rates on the repayments in the industry as a whole are fantastically good.

“So it’s a sweet spot for a lot of these companies to come to market.”


Smaller non-bank lending stocks ‘interesting’

It is the group of smaller non-bank lending stocks that Forager has taken more of an interest in.

“That space is interesting because what they’re doing is picking up quite high credit quality customers from the banks,” Shevelev says.

“For banks the personal loans represent a very small portion of their loan books; those numbers are so low that the banks are much better off focusing on mortgage lending, having their best people work on mortgage lending rather than personal loans.

“That’s something these businesses have exploited by making these loans easier to apply for and running software and systems off the back of that that actually help to identify the sort of borrowers they want and how much they can charge a range of different borrowers.”

Shevelev says the businesses are quickly scaling up and as they scale they get better customer data and scale.

However this growth has only been reflected in MoneyMe, thus far. When will the tide turn for the other non-bank lending stocks?

“MoneyMe operates for a higher risk group of customers, they have also seen quite quick growth and that’s been reflected especially most recently in the share price,” he said.

“I think the others suffered through this IPO angle; you had both Plenti and Harmoney come to market.

“They both had low levels of liquidity and low levels of free float so investors who wanted to get an amount of stock struggled and the IPOs themselves were priced well… subsequent to that, the stock came down quite dramatically.

“So that presented an opportunity for us and we got the chance to buy Plenti at something like a quarter below its IPO price.

“And I think if you look at businesses listed there for a while Wisr is one, obviously hit around quite badly by COVID as a lot of other businesses have been but you’ve seen it list in past months from 20 cents to 27 cents and that was despite raising a bit of capital at 25 cents.

“So I think investors are starting to look at the sector a little bit more thoroughly.”


Forager’s pick of non-bank lending stocks?

Plenti (ASX:PLT)

When asked for which company he thought stood out, Shevelev picked Plenti, a company which specialises in personal loans, car loans and renewables.

“I think Plenti is the one that is most interesting,” he said.

“It has suffered through the IPO and lack of liquidity and a couple of other issues around investor perceptions of the business.

“But since listing it’s actually gone from strength to strength and the most recent growth and most result in the year to March [31] has shown the business is a serious contender to take a lot of loan book off the banks and we believe will be quite profitable in doing that.”

Plenti’s quarterly for the March quarter also impressed.

“Plenti released a quarterly originations number that was in the order of 200%+ higher than the prior year and up 26% on the prior quarter so it was a very impressive result,” Shevelev said.

Plenti (ASX:PLT) share price chart


Could interest rates rising halt the growth of non-bank lending stocks?

Shevelev admits rates have helped non-bank lending stocks but it won’t necessarily be doom for them when interest rates go up.

He says bad debts are always the biggest risk to lenders generally but that shouldn’t be a problem for them given their lending policies.

“They’ve proven they are lending to some credit quality customers, loans are being paid and the cost is down,” he said.

“Impact of rates overall has occurred for the lending side so on the personal loans side if you have a whole heap of fintech lenders as well as other lenders happy with lower funding cost, they’ll pass it on to customers.

“Some of that has occurred but outside of big hits to loan losses, it’s their own race to run for these businesses so they can ramp up originations, they have a good cost base to do it from, and get benefits of improved scale.”

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