Are ASX fintechs poised for a comeback as rising interest rate cycle nears peaks?

Morgans says Aussie fintechs focused on better quality loans in higher rate environment
MoneyMe worked to improve overall asset quality of its book as rates rise
Plenti Group says it delivered improvements across key performance metrics in FY23

While the fintech space was hot in a low interest rate environment it has suffered as central banks hiked rates to curb rising inflation, affecting investor sentiment around growth stocks and also lending, broker Morgans is optimistic the end may be near.

First a little background. Morgans analyst Steven Sassine – who covers diversified financials – told Stockhead major banks have been focusing more on their “bread and butter” mortgage lending.

“That left the personal lending space wide open for players like MONEYME (ASX:MME) to step in and offer a niche product, particularly around approval speed and getting loans through the process much quicker,” Sassine says.

“We saw quite a number of players step into the space with MoneyMe being one example.”

Sassine says stocks in the personal lending space tend to do well in a low rate environment where the cost of borrowing is low, but since the cost of capital has increased they have been sold off.

“The lenders on the pointier end of the credit curve get hit first so the personal lenders get sold off first and foremost because people are concerned about two things generally – asset quality and funding risk,” he says.

Sassine says as the cost of funding increases fintechs generally start to see compression in their margins.

“It’s a case of sell first and ask questions later and we saw that across the space,” he says.

“We’re at a position now where finally we can see the light at the end of the tunnel with the rate hike cycle and the forward curve was indicating at least one more rate rise but that has ebbed away in the past week or so.”

“The market expectation is we’re at the peak or near the peak and that generally is a sign of optimism particularly for lenders.”

He says there has not been much consolidation in the fintech space which is a sign they’ve been able to “weather the storm”.

“The majority of the fintech lenders had their funding sorted out,” he says.

Sassine says funding risk seems to have abated to a degree with warehouse funding and ABS issuances “going off without a hitch which is a net positive”.

“Funding risk, while it is still there, is probably less of a concern at this point,” he says.

Sassine says asset quality is also worth noting, particularly with unsecured personal lending.

“As mentioned, when rates start to rise people become concerned about asset quality, people start defaulting on loans and the unsecured personal lenders are generally first hit,” he says.

“But we haven’t seen asset quality fall of a cliff and whilst they have picked up marginally they haven’t blown out to worrying proportions.

“In times like this where the cost of capital increases, these type of lenders will generally focus more on the better quality cohort and bringing better quality loans onto the book to reduce the risk of defaulting and improving their overall asset quality.

“They will temper their loan growth and focus on better credit quality so you’ll see overall originations trend lower and we’ve definitely seen that. On the flip side you’ll see profitability which we’ve also seen so that’s probably how the sector sits at the moment.”

So what’s been happening with some key players in the ASX fintech space?

MoneyMe

Morgans covers MME with a speculative buy rating and 12-month target price of 26 cents. Sassine says MME has worked particularly hard during the rate rise cycle to protect its asset quality.

“Management had a focus on improving the overall asset quality of the book and we saw that with increasing Equifax scores along with moving towards more secured lending,” he says.

“Their Autopay product, which is vehicle finance, has grown into a much larger part of their loan book so I think it is now sitting 40 to 44%.

“Anytime you bring a secured loan onto the book, that is obviously going to improve your asset quality profile, and along with that raising Equifax profile of your average customer base, your asset quality looks to be relatively okay and we’ve seen that specifically with MoneyMe.”

MME reported record gross revenue of $239 million for FY23 up 67% from FY22 with statutory NPAT of $12 million and $24 million cash NPAT for FY23.

The company also increased average customer Equifax profile to 727 from 704 in FY22, protected and maintained its net interest margin (NIM) of 12% and paid down its corporate debt facility principal to $50m from $75m, significantly reducing ongoing interest costs.

Plenti Group (ASX:PLT)

PLT offers automotive, renewable energy and personal loans. At its AGM, CEO Daniel Foggo noted that PLT delivered improvements across each of its key performance metrics in FY23, including loan origination growth, loan portfolio growth, revenue growth, profit growth, and credit performance.

The company’s loan portfolio grew 36% in FY23 to $1.8 billion, revenue was up 62% to $143 million and cash NPAT was $4.5 million, an improvement of $4 million on Fy23.

Foggo says PLT has deliberately developed diverse funding sources, providing enhanced funding flexibility, depth and resilience in a higher interest rate market.

“We have in place three funding warehouses, have attracted over 31 domestic and international investors to our ABS funding program and operate two investment platforms,” he says.

Furthermore, he says PLT is focused on lending only to creditworthy borrowers, helping to bring stability to its credit outcomes and reduce overall business risk.

“We leverage our credit decisioning and pricing technology to help ensure we maximise the profitability of our lending,” he says.

“In the last year the weighted average Equifax credit score attached to the over 44,000 loans we funded, a helpful proxy for future credit performance, was approximately 820.

“We also maintained the proportion of lower risk secured automotive loans and renewable energy loans at ~68% of our loan portfolio.”

Harmoney Corp (ASX:HMY)

HMY is a consumer-direct personal lender in Australia and New Zealand. The company surged 19% upon release of its solid FY23 performance, including record cash NPAT of $4.7 million, and cash ROE (return on equity) of 9%.

Group loan book grew 28% on pcp to $744 million in FY23, revenue grew 47% to $107 million driven by loan book growth.

HMY says its strong cash profit for the year can be attributed to continued growth in existing customer originations, as well as shift in focus from loan book growth to profitability.

The company says revenue is also underpinned by its 100% consumer-direct model, combined with the growing efficiency of its highly targeted marketing spend and believes a ROE of 20% in the medium term is achievable as it continues to benefit from economies of scale and further technology enhancements.

HMY has added a third Australian warehouse facility to its funding panel. The new $140m facility is provided by one of the Big Four Australian banks and introduces a new global mezzanine funder.

“We are also actively working with Google on opportunities to apply the latest developments in artificial intelligence to further augment and enhance automation within our Stellare platform,” CEO David Stevens says.

Liberty Financial Group (ASX:LFG)

LFG operates throughout both Australia and New Zealand offering a range of financial loans for home, car, business and personal needs.

LFG reported statutory NPAT for FY23 of $181 million, 17% lower than FY22, which it put down to challenging capital market conditions.

After adjusting for non-cash amortisation, LFG reported a 19% fall in underlying NPATA to $186.6 million for FY23.

“We are operating in different economic conditions than seen in decades which affects the returns of the entire industry,” CEO James Boyle said at the time.

New loan originations were $5.4 billion and industry leading customer and broker net promotor scores above 50.

In its annual report to shareholders recently chair Richard Longes says the likely continuation of lower demand for home finance and capital market pressures will continue to impact profitability for the next financial year.

“However, the company is in a strong financial position and has the capabilities needed to diversify its products and services to customers and to add value through the cycle,” he says.

LFG has been pushing further into asset finance and commercial lending in recent years, with residential mortgages making up a smaller proportion of its overall mix.

As at 30 June 2023, ~60% of its portfolio was for home loans, down from 68% a year earlier.