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This story features Latitude Group Holdings Ltd and other companies. For more information SHARING ANALYSIS: LFS
Who’s doing what in the booming listed non-bank sector
By Tim Boreham, Editor-in-Chief, The New Criterion
More and more non-bank lenders are clamoring to be listed on ASX, but is this a harbinger of a permanent new banking paradigm or a sign that the bull market is approaching its peak?
We’re not talking about the Buy It Now Pay Later (BNPL) industry, which has become a fully-fledged ASX-listed cohort.
Instead, attention has been focused on the large number of (usually unsecured) consumer and small business lenders, offered digitally via awesome misspelled names like Prospa, Plenti and Harmoney.
Business models vary, but overall this is the type of loan increasingly risk averse banks will not touch. But that doesn’t mean it’s a bad deal if you make the right credit decision.
Unsurprisingly, many of them have concocted BNPL deals to elevate their sex appeal with investors.
Latitude Financial ((LFS)) last month showed the virtue of perseverance by listing on its third attempt, having raised $ 200 million in the biggest float of the year to date.
Led by former Australia Post chief and former National Australia Bank senior executive Ahmed Fahour, Latitude claims to be the third largest unsecured lender in the country – ahead of ANZ Bank and its former banking employer.
Formerly known as GE Finance, Latitude is best known for its business-to-business-to-consumer model, aka Harvey Norman-style ‘no interest’ point-of-sale offerings.
But while the company has signed up 2.77 million customers at 3,400 participating retailers, the bulk of its revenue still comes from net interest income rather than merchant commissions, late fees, and more.
As Angus Kennedy of Livewire Markets notes, Latitude’s strong business relationships also pose a weakness, as the company competes with banks for loans and BNPL companies for installment transactions.
âOngoing financial success will depend on its ability to develop and commercialize new products or improve existing products to compete with the treadmill of ever-emerging technological financing solutions,â he says.
Latitude’s IPO followed that of its closest non-bank rival – Liberty Financial ((LFG)) in December of last year.
Liberty’s business is focused on mortgage lending, which represents 70% of its $ 12 billion loan portfolio.
In February, the company reported better than expected underlying profit of $ 117 million (first half) in December, 58% higher. On the back of that, management increased the prospectus forecast for the full year from $ 165 million to “over” $ 200 million. “
Latitude and Liberty are valued at $ 2.45 billion and $ 2.25 billion, respectively.
Among the smaller capitalization players, the Harmoney ((HMY)) listed in November 2020 after raising $ 92.5 million. Not to be confused with e-Harmony, Harmoney played Cupid between compatible borrowers and lenders under a “ peer to peer ” model, but has since pivoted to fund loans on its own.
Harmoney’s ânext-generationâ behavioral credit decision tools allow it to lend unsecured up to $ 70,000 over three to five years, with loans averaging $ 25,000.
In a business update, the company reported a 60% increase in loans to new customers after the pandemic during the March quarter, to NZ $ 44 million.
Self-proclaimed # 1 Small Business Online Lender, Prospa Group ((PGL)) in late April said original loans had returned to pre-pandemic levels. To complement this, the third quarter (March) was stable year over year, but up 20% from levels in the December quarter.
Formerly called RateSetter, Plenti Group ((PLT)) listed in September 2020 after raising $ 55 million. Plenti operates in the area of ââpeer-to-peer loans and also operates a direct platform focusing on the automotive and renewable energy sectors (solar energy).
Describing itself as a digital credit company, MoneyMe ((MME)) listed in December 2019 due to its quick decision capabilities. In the case of its Autopay vehicle finance, the company is promising approval – not just settlement – within 60 minutes for potential buyers as they kick the parking lot.
MoneyMe’s tip box also includes ListReady, a tool that can fund up to $ 35,000 of a home seller’s presale expenses. Agents are the middleman and so far MoneyMe has signed 500 realtors covering over 3,200 sellers.
Given the largely bullish statements, investors might assume that they will pocket decent returns from this non-bank sector. But to date, it hasn’t yielded anything like the hyper-motivated gains of the BNPL cohort.
At the time of writing, Latitude shares were drifting slightly from their price of $ 2.60 per share, having peaked at $ 2.99 after listing.
Liberty shares generated a credible gain of 26% on their listing price of $ 6.00.
Prospa Group was listed in June 2019, after raising $ 110 million at $ 3.78 per share. The shares are now close to -78% underwater.
Plenti Group shares are about 32% timid compared to their quote price of $ 1.66 / sh.
MoneyMe shares trade online with their entry price of $ 1.35 per share.
Not to be confused with MoneyMe, Silver3 ((MNY)) is a long established listed stock that has moved from payday lending to specialty auto financing. Shares have rebounded 145% in the past year, despite (or because of) a $ 52 million raise to fund the acquisition of a book of loans.
A former representative of peer-to-peer loans, DirectMoney back-door listed as Wisr ((WZR)) in March 2018. Since then, Wisr has delivered a 450% return, which is about as good as it gets.
Given the largely unsecured nature of loans, there is always the specter of a bad debt eruption on the back of rising unemployment. But you don’t have to be a member of Scott Morrison’s congregation to believe in miracles – in this case, the economic one of Australia.
Currently, lenders report 90-day arrears in the range of 0.5-1.5% – higher than bad loans from banks but more than covered by rates that start at 7-8%, but can be much, much higher for borrowers deemed to be risky.
Another wild card is rising interest rates and its implications for an industry that relies almost entirely on wholesale funding.
Despite the indifferent returns, more and more non-banks are considering IPOs to take advantage of the still receptive conditions.
The largest is Society One, which recently signed with Jamie McPhee who previously ran ME Bank and Adelaide Bank.
80% owned by private equity Blackstone, LaTrobe Financial is reportedly considering a $ 2 billion IPO. With half of its income coming from asset management, LaTrobe is not so much a lending game, but a channel for investors to access mortgage trusts and high yield credit accounts.
Pepper Money (asset finance and third party loan services), Grow Finance (small business loans) and Columbus Capital (diversified financial services) are also mentioned in the dispatches as IPO candidates.
Led by former National Australia Bank chief Gavin Slater, the payday lender is considering a list next year as it turns into more palatable traditional loans.
Not all of those much-vaunted lists will materialize, but what is clear is that investors can – and should be – highly discriminating in such a crowded industry.
On the bright side, poor short-term performance means there is arguably more value on the table than in the BNPL space.
Disclaimer: In no case has the company mentioned to the IIR or to the author been the subject of incentives or otherwise. The views here are independent and unrelated to the IIR’s core research offering. The opinions here are not recommendations and should not be taken as general advice in terms of stock recommendations in the ordinary sense.
The content included in this article is not by association the point of view of FNArena (see our disclaimer).
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