Non-bank lender Pepper Money on how it intends to grow post IPO

Non-bank lender Pepper is in the final stages of its long – anticipated IPO, and as the KKR owned business gets ready for what could be a huge $1.27 billion ASX debut, it’s telling potential investors where it sees its growth in the coming years.

Pepper is no newcomer to the market – it has a substantial presence in Australia, and claims 12% of the sub-prime market here, so to target growth, it’s aiming at sectors that conventional lenders aren’t serving.

“Our purpose is to help people succeed – we focus on under-served customer segments, via our multi-channel distribution platform and cascading credit model,” chairman Michael Culhane told the AFR.

And that focus seems to have whetted investors’ appetites – last week MPA broke the news that Pepper was increasing its IPO size.

But just who are Pepper’s target growth markets?

“There are a number of segments within the Australian residential home loan market that are currently under-served, particularly segments within the non-conforming borrower set who are unable to satisfy the criteria of the major Australian banks,” a prospectus provided to ASIC says.

“Self-employed and casually employed customers are typically best served by specialist lenders with tailored products and credit assessment staff trained in underwriting these types of applications.”

And those target customers are, according to the non-bank, “Airtasker contractors, Uber drivers, and Airbnb rental income.”

Those audiences may be Pepper’s preferred niche, and it seems successful – average loan losses are under 1.5%. But not so fast if your clients are in Western Australia – 57% of Pepper’s losses are from that state so it is trying to reduce its exposure to borrowers there.

Pepper claims 0.5% of the $2 trillion Australia and New Zealand mortgage market which accounts for 75% of its revenue. The remainder is principally its larger 5% of the $52 billion motor finance market.

So just how big is Pepper Money?

AUM (as at Dec 2020)

$10.5 billion – Australian residential home loans

$109 million – NZ residential home loans

$100 million – Commercial real estate loans

$2.6 billion – Motor vehicle and equipment finance

$1.7 billion – loan servicing for third-party clients

Originations (as at Dec 2020)

$3.2 billion – Australian residential home loans

$88 million – NZ residential home loans

$57 million – Commercial real estate loans

$1.2 billion – Motor vehicle and equipment finance

Who are Pepper’s current clients?

57% - prime –average interest rate of 4.1%. Customers with a clear credit history. Meet traditional ADI lending criteria.

32% - near prime –average interest rate of 5.1%. Customers who do not satisfy all aspects of the traditional ADI lending criteria and “require a more flexible approach.”

6% - specialist – average interest rate of 5.8%. Customers whose circumstances have made getting a loan more challenging.