Release Date: August 29, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Mortgage volumes increased by 6% compared to the prior comparable period, indicating strong performance in the mortgage sector.
- Net interest margin (NIM) improved to 1.92%, up from 1.81% in the second half of 2023, reflecting better profitability.
- Expenses decreased by 2% compared to the first half of 2023, showcasing effective cost management.
- The company welcomed 37,357 new customers in the first half of 2024, demonstrating successful customer acquisition strategies.
- Pepper Money Ltd (ASX:PPM, Financial) declared a fully franked interim dividend of $0.05 per share, up from $0.035 per share in the 2023 interim dividend, reflecting a higher payout ratio of 47.5%.
Negative Points
- Asset finance originations were down 19% compared to the prior comparable period, impacted by soft market conditions and cost of living pressures.
- Business insolvencies increased by 36% over the fiscal year ending June 30, 2024, affecting asset finance performance.
- Mortgage lending AUM dropped by 9% on PCP to $11.3 billion, indicating a decline in mortgage assets under management.
- Specific provisions for asset finance increased by 12% due to heightened insolvencies, impacting credit performance.
- Total operating income reduced by 4% on PCP, driven by lower originations growth and increased loan loss expense.
Q & A Highlights
Pepper Money Ltd (ASX:PPM) 2024 Half-Year Earnings Call Highlights
Q: A question on the outlook of bad debts from the asset finance book going forward. Should we see this as mainly a catch-up effect given the insolvencies that's coming through? So future losses should be a bit lower? Or does it actually continue to go up, as your coverage levels remain broadly similar?
A: Therese McGrath, CFO: We are seeing a real increase in the number of insolvencies. Specific provisions for asset finance increased by 12%, but this is trending in line with AUM and expectations. We hope to see insolvencies stabilize and potentially tail off. Historically, around 50% of companies in administration recover, which could lead to future write-backs. Mario Rehayem, CEO: We have focused heavily on Tier A originations in auto, which now sits at around 62% of our AUM, mitigating some of the insolvency issues.
Q: Given the improving dynamics around cost of funds, can you provide more color on NIM stabilization? Are you thinking the NIM is stabilizing around exit NIM or more towards just a half-year NIM?
A: Mario Rehayem, CEO: We always balance between return on invested capital and NIM. Currently, we are focusing on NIM stabilization rather than volume growth. Depending on market conditions, we may focus on volume growth in the back half of the year, which could slightly affect NIM.
Q: Could you elaborate on the strategic rationale for the higher whole loan sales and the best way to think about it going forward?
A: Mario Rehayem, CEO: Whole loan sales have been part of our strategy since 2016 for funding diversification and capital management. There has been significant demand for Pepper assets, and we are balancing between keeping assets on our balance sheet and growing our servicing AUM, which provides a capital-light annuity-style income.
Q: What are some of your macro assumptions that underpin your current levels of provisioning?
A: Therese McGrath, CFO: We have held macroeconomic variables in line with what we had at the end of December 2023, focusing on OCR, GDP, and unemployment. We have also maintained the weighting in terms of downside, base, and upside cases.
Q: How do you view the trade-off between earning capital-light income and seeing smaller revenues in the future due to whole loan sales?
A: Mario Rehayem, CEO: We have factored the foregone NIM into our modeling. The premium achieved at sale, combined with lifetime earnings from servicing and reduced need for securitization, supports our strategy of maximizing capital efficiency.
Q: Given the book hasn't grown much and you are doing more whole loan sales, what's holding you back from doing more buybacks?
A: Therese McGrath, CFO: The delay was due to timing issues around the AGM and a blackout period for results. We intend to start the buyback following these results.
Q: How do you think about capital allocation over the next 6 months between capital management, growing lending AUM, and paying down corporate debt?
A: Mario Rehayem, CEO: We will deploy capital through growth in certain asset classes, dividend payments, paying back corporate debt, and share buybacks. We have options and will flex them as needed to maximize shareholder returns.
Q: What is your appetite for deploying more capital into lending AUM given potential funding tailwinds and competition?
A: Mario Rehayem, CEO: We will grow where we see the best returns. Our applications are up 14.5% in the second half to date. The reduction in volume in the first half was a conscious decision, not due to an inability to grow. We will grow in the second half depending on market conditions and returns.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
