Why these non-bank lenders could be poised to benefit when interest rates decline
Earlier this month, the Reserve Bank put a pause on interest rate hikes, the first time it has done so in 11 meetings.
Although it doesn’t signify an end to rates increases (the RBA said so itself), it does provide short term relief for borrowers, lenders, as well as investors.
Surging rates over the past year have put a lot of pressure on lenders, especially non-banks which aren’t able to access the low-cost customer deposits like the traditional banks.
Non-bank lenders have to rely on more expensive sources of funding, such as borrowing from other financial institutions, issuing bonds, or making warehouse funding arrangements.
But what that means is when interest rates do decline, non-bank lenders will have the most to gain.
“It will also ease the upward pressure on funding costs, and help fintech and non-bank lenders stay competitive against the big banks,” Howes told Stockhead.
Howes has no doubt that rates will eventually have to come down as part of the economic cycle.
“The RBA has said there could be more rate rises coming, but the sentiment now is more dovish, and this latest rate pause is a positive indication that we might see rates turn around sooner than previously expected,” he said.
But Howes does acknowledge that while a rate hike pause is on the cards, there is still a lot of uncertainty ahead.
“Capital markets are incredibly tight, and it will likely be hard to access market growth capital for some time,” Howes said.
This means positive cash flow is even more critical, and profitable businesses will have a significant advantage over those that have not been able to protect their margins in the higher interest rate environment.
“When the economy is rapidly changing, credit risk management becomes more complex and a company’s ability to make accurate predictions may be the difference between thriving or failing,” Howes said.
In general, the higher credit quality of the loan book, the lower the risk and the better the company will withstand challenging times.
“This is why we have focussed on improving the credit quality of our book, even though it’s already significantly above market average.”
With a recent successful cap raise to be out of the way, MoneyMe says its key focus for FY23 will remain on profit delivery and strengthening its balance sheet in preparation for the next growth phase.
“We see particularly high demand for our car loan product, Autopay, and there is a significant opportunity in this market that we are planning to capitalise on,” says Howes.
“We have new innovative product features in this space ready to roll out, which we are extremely excited about. We are just waiting for the right moment to launch.”
MME delivered annual profits in FY17, FY18, FY19 and FY20, and for the first half of FY23, it reported a record statutory NPAT of $9m, a 147% bump from the same period a year ago. Its loan book is predominantly variable rate, which means the company has been able to pass on the rate increases to end customers and protect its margins.
“Our AI-powered proprietary technology platform has also allowed us to do this efficiently, which has been a contributing factor to our strong results,” Howes said.
“This has all led to $7 million in statutory profit in January and February alone which, coupled with the $9 million in profit delivered in the first half and significant interest cost savings expected from paying down the PEP facility, sets us up for a very strong full year result.”
Non-bank lender Propell is targeting Australia’s 2.4 million SMEs who the company says are frustrated with traditional banks’ slow and difficult lending processes and paperwork.
The platform is serving a potentially large addressable market as Australia’s small businesses account for 97% of the country’s enterprises.
Momentum in the Butn BNPL platform continues to accelerate, with platform origination growth an increasing component of its overall loan book. In the last half, Butn delivered $214m in loan originations, up 68% on pcp, including two consecutive record quarters of growth. Net revenue for the half was $3m, up 119% on pcp.
Harmoney (ASX:HMY) is a profitable digital lender on the ASX. The company delivered cash NPAT of $2.3 million for the last half, its second consecutive half with a positive cash NPAT. This was on the back of revenues of over $50 million for the last six months, and a 23% increase in loan orginations to $240 million.
Plenti Group (ASX:PLT) is another digital lender that had a profitable quarter. Its loan portfolio increased by $1.67 billion, 51% higher than the pcp driven by its auto loans business, which has grown every quarter.
Plenti also delivered more positive bottom line cash NPAT in the quarter, and said that it remains on-track to meet its H2 objectives.
At Stockhead we tell it like it is. While MoneyMe is a Stockhead advertiser, it did not sponsor this article.