Pepper Money buys HSBC's $1.3 billion NZ mortgage portfolio

One of Australia's leading non-bank lenders Pepper Money (ASX: PPM) has reached a deal with HSBC to acquire its New Zealand prime residential mortgage portfolio, which has an outstanding balance of approximately NZ$1.4 billion ($1.29 billion).

The transaction is anticipated for completion in late November if approved by the New Zealand Overseas Investment Office, with the new portfolio adding to a presence developed across the Tasman since Pepper Money acquired GE Capital's Australian and New Zealand home lending business in 2011.

Since then the group has established an end-to-end mortgage platform in New Zealand and rolled out a full suite of prime, near prime and specialist loans in 2019.

The Sydney-based group has a market capitalisation of around $580 million and its total assets under management (AUM) stood at $18.9 billion at the end of FY23. 

"Today’s announcement of Pepper Money’s agreement to acquire HSBC’s NZ$1.4 billion mortgage portfolio is a further step in our growth strategy. It is a testament to the ongoing diversification of Pepper Money’s revenue streams," says Pepper Money CEO Mario Rehayem.

"Pepper Money has continually demonstrated our strong capabilities in loan portfolio acquisition and management, over 23-plus years, and this acquisition will see the business continue to build scale in New Zealand, a market which we understand well having serviced mortgages and delivered compelling customer service since 2011.

The company will fund the transaction in a similar way to its loan origination activity, through a combination of senior and mezzanine funding with Pepper Money contributing the first loss equity.

Last week Rehayem lamented the "pronounced impact" on credit demand as a result of 12 official cash rate increases since May 2022, noting the mortgage market has been challenging with "intense competitive behaviour as the major banks sought to gain share through cash back offers and other incentives driving higher levels of customer attrition".

Pepper Money saw its mortgage originations decline 58 per cent year-on-year in the June half at $1.7 billion, but asset finance originations reached a record half-yearly level of $1.8 billion as part of a strategy to capitalise on strong opportunities identified in the auto and equipment market.

"This has seen the business accelerate growth in our asset finance business to offset volume constraints in Mortgages, given the macro-economic conditions and cost of fund volatility," the CEO explained.

"In turn, we have been able to manage AUM which is a key driver of future profitability. The stability of our Assets under Management (AUM) and the quality of our book is a testament to this.

He highlighted how Pepper Money's use of our proprietary data and analytics has helped its 90-plus arrears continue to trend below long-term averages. 

In the half-yearly announcement, the group noted an encouraging 4 per cent uplift mortgage enquiry levels over the last six months according to Equifax data, which suggests and upward trend in lending activity even whilst there may be further interest rate increases ahead.

"As we head towards 2024, we are well positioned to capitalise on growth in lending activity. Our warehouse capacity means we have ample headroom to originate, and our balanced business mix enables us to focus on pursuing sustainable growth," Rehayem said.

"Our ongoing investment in processes and technology, provides us with operating leverage and the ability to capitalise on lower cost to serve whilst continuing to offer the very best service to our customers and distribution partner."

Founded in Sydney by its current chairman Michael Culhane in 2000, Pepper Money has a long history of corporate restructuring. After riding out the global financial crisis, in 2011 Pepper bought back its equity from Merrill Lynch which had been operating the group for five years, paving the way for the aforementioned GE acquisition and many more around the world over the following decade.

The company listed on the ASX in 2015 only to delist two years later after it was acquired for $676 million by KKR, a US investment management company which has retained ownership Pepper Global but spun off the Australia-New Zealand business through another ASX listing in 2021. 

According to Pepper Money's most recent annual report, 60.57 per cent of its shares are held by KKR-owned Pepper Global, now based in Singapore and led by group founder Culhane as CEO.