Who’s who in the burgeoning listed non-bank sector

More non-bank lenders are clamouring to list on the ASX, but is it a harbinger of a permanent new banking paradigm or a sign the bull market is nearing a peak?

We’re not talking about the buy now pay later (BNPL) sector which has become a crowded ASX-listed cohort in its own right.

Rather, the attention has focused on the slew of lenders (generally unsecured) to the consumer and small business sectors, offered digitally via funky misspelt names such as Prospa, Plenti and Harmoney.

The business models vary, but in the main it’s the type of lending the increasingly risk-averse banks won’t touch. But that’s not to say it’s a bad business if you get the credit decision-making right.

Not surprisingly, many of them have cobbled together BNPL offerings to elevate their sex appeal to investors.

Latitude Financial (ASX: LFS) last month showed the virtue of persistence by listing on its third attempt, after raising $200 million in the year’s biggest float to date.

Run by former Australia Post chief and former National Australia Bank senior exec Ahmed Fahour, Latitude claims to be the country’s third-biggest unsecured lender – ahead of the ANZ Bank and his former bank employer.

Formerly known as GE Finance, Latitude is best known for its business-to-business-to-consumer model, a.k.a Harvey Norman style ‘no interest’ point-of-sale deals.

But while the company has signed up 2.77 million customers across 3,400 participating retailers, the bulk of its revenue is still derived from net interest income rather than features such as merchant commissions and late fees.

As Livewire Markets’ Angus Kennedy writes, Latitude’s strong merchant relationships also pose a weakness, because the company is competing with both the banks for loans and BNPL companies for the instalment business.

“Continuing financial success will rely on whether it can develop and commercialise new products or enhance existing products in order to compete with the conveyor belt of technology backed financing solutions constantly emerging,” he says.

Latitude’s IPO followed that of its nearest non-bank rival – Liberty Financial (ASX: LFG) in December last year.

Liberty’s business is slanted to home lending, which accounts for 70 per cent of its $12 billion loan book.

In February, the company reported a better than expected December (first) half underlying profit of $117 million, 58 per cent higher. On the back of that, management upped the full year prospectus forecast from $165 million to “in excess of” $200m.

Latitude and Liberty are valued at $2.45 billion and $2.25bn respectively.

Among the smaller cap players, the New Zealand-based Harmoney (ASX: HMY) listed in November 2020 after raising $92.5 million. Not to be confused with the online dating site e-Harmony, Harmoney used to play Cupid between compatible borrowers with lenders under a "peer-to-peer" model but has since pivoted to funding loans off its own bat.

Harmoney’s “new generation” behavioural credit decision-making tools means it's confident enough about its tools to lend up to $70,000 unsecured over three to five years, with the loans averaging $25,000.

In a trading update, the company reported a 60 per cent post-pandemic surge in lending to new customers in the March quarter, to $NZ44 million.

The self-proclaimed number one online lender to small business, Prospa Group (PGL) in late April said loan originations had returned to pre-pandemic levels. Fleshing this out, the March quarter was flat on a year-on-year basis, but 20 per cent up on December quarter levels.

Formerly known as RateSetter Plenti Group (ASX: PLT) listed in September 2020 after raising $55 million. Plenti intermediates peer to peer loans and also runs a direct platform with an emphasis on the automotive and renewable energy (solar power) sectors.

Self-described as a digital credit business, MoneyMe (ASX: MME) listed in December 2019 on the back of its rapid decisioning abilities. In the case of its Autopay vehicle finance, the company promises approval - not just settlement - within 60 minutes for prospective buyers while they’re kicking tyres on the car lot.

MoneyMe’s box of tricks also includes ListReady, a tool to finance up to $35,000 of a house vendor’s pre-selling expenses. The agents are the intermediaries and so far MoneyMe has signed up 500 realtors covering more than 3200 vendors.

Given the largely upbeat pronouncements, investors might assume they will pocket some decent returns from this non-bank sector. But to date, it’s yielded nothing like the hyper-driven gains of the BNPL cohort.

At the time of writing, Latitude shares were slightly adrift of their $2.60 a share listing price, having peaked at $2.99 post listing.

Liberty shares have delivered a creditable 26% gain on their $6 listing price.

Prospa Group listed in June 2019, after raising $110 million at $3.78 a share. The shares are now close to 78% underwater.

Plenti Group shares are some 32% shy of their $1.66 a share listing price.

MoneyMe shares are trading in line with their $1.35 a share debut price.

Not to be confused with MoneyMe, Money3 (ASX: MNY) is a long-established listed stock that morphed from payday lending to specialist auto financing. The shares have bounced 145 per cent over the last year, despite (or because of) a hefty $52 million raising to fund a loan book acquisition.

An earlier exponent of peer-to-peer lending, DirectMoney back door listed as Wisr (ASX: WZR) in March 2017 and has delivered modest returns to investors since then.

Given the largely unsecured nature of the lending, there’s always the spectre of a bad debt blowout on the back of rising unemployment. But you don’t need to be a member of Scott Morrison’s congregation to believe in miracles – in this case, Australia’s economic one.

Currently, the lenders report 90 days arrears in the range of 0.5 to 1.5% – higher than the banks’ bad debts but more than covered by rates that start at 7-8% but can be much, much higher for borrowers deemed to be risky.

Another wildcard is an uptick in interest rates and the implications for a sector that’s almost fully reliant on wholesale funding.

Despite the indifferent returns, more of the non-banks are eyeing IPOs to avail of the still-receptive conditions.

The biggest is Society One, which recently signed on Jamie McPhee who previously headed ME Bank and Adelaide Bank. 

With private equity firm Blackstone owning an 80% stake, LaTrobe Financial is reportedly eyeing a $2 billion IPO. Deriving around half its revenue from asset management, LaTrobe is not so much a lending play but a conduit for investors to access mortgage trusts and high yield credit accounts.

Pepper Money (asset financing and servicing third party loans), Grow Finance (small business lending) and Columbus Capital (diversified financial services) are also mentioned in dispatches as IPO candidates.

Led by former National Australia Bank exec Gavin Slater, the payday lender is mulling a listing next year as it transforms to more palatable traditional lending.

Not all of these vaunted listings will materialise, but what’s clear is that investors can be – and need to be – highly discriminating in such a crowded sector.

On the positive side, the mediocre near-term performance means there’s arguably more value on the table than in the BNPL space.

Tim Boreham edits The New Criterion

Never miss an insight

Enjoy this wire? Hit the ‘like’ button to let us know. Stay up to date with my content by hitting the ‘follow’ button below and you’ll be notified every time I post a wire. Not already a Livewire member? Sign up today to get free access to investment ideas and strategies from Australia’s leading investors.