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Pepper takeover reflects 'latent' strength of non-banks

KCA’s bid to take over Pepper Group reflects Australia’s changing financial landscape, analysts have said, pointing to clampdowns on risky bank lending and the “latent” value of the non-bank sector.

Pepper Group Limited confirmed on 5 July that it had received a non-binding proposal to enter into an exclusivity agreement from KKR Credit Advisors (US) LLC (KCA) to the tune of $3.60 per share. Pepper said KCA had been granted exclusivity to allow it to undertake due diligence with the potential to negotiate definite transaction documents.

While the potential takeover is still in talks, industry analysts have said the move highlights the value of the non-bank lending sector in the wake of regulatory clampdowns.

Digital Finance Analytics (DFA) principal Martin North said that if he were a bank, he’d be watching the movements of Pepper and KCA “with interest, but also reflecting on the fact that the good times in the mortgage sector are definitely over.”


He explained that as banks “throttle” back on the more risky interest-only and higher LVR lending due to regulatory crackdowns, “it’s going to be tougher [for them] to maintain the momentum and growth than it has been”.

As a result, non-bank lenders will be stepping in to fill the void. “Effectively the regulatory pressure on the banks means they're having to hold more capital and they're being limited as to the amount of lending they can make and therefore, for players who are not constrained by the same limits… there is potential growth.”

Kym Dalton, executive chairman at GlobalED agreed, adding that a private equity firm of KCA’s stature would not make a bid “without intensive investigation and detailed knowledge of the target and the business environment in which it operates.”

According to the most recent property exposure data from the Australian Prudential Regulatory Association, brokers wrote 52.1 per cent of loans for non-major lenders in the March 2017 quarter, compared to 46.6 per cent of loans for the majors. The percentage of loans written for non-majors grew by 19.7 per cent between the March 2016 and March 2017 quarters. In May, Mario Rehayem, director of sales and distribution at Pepper called on brokers to think beyond the big four banks.

Mr Dalton said that KCA’s decision to bid “is a definitive signal to the relevance of both the broker channel and the non-bank lending environment”.

However, he cautioned brokers against anticipating commission increases as the non-bank lending sector grows: “A keynote of the operation of private equity firms however, is that they seek growth once an acquisition is made and they keep a tight control on income and expenses.”

A ‘real alignment’

DFA’s Mr North said this “real alignment” of lenders in the marketplace was being driven by “one or two of the major lenders… CBA and Westpac in particular” deliberately pulling back the volume of loans sourced through their third-party channels in order to “get more value” out of the branch networks.

“What it means for brokers is that, one: this could be a different business mix going forward, two: some lenders will perhaps be less willing to write business via the third-party channel, so brokers may need to think differently about which of their lenders they go to… and I think the third question is, what is the overall momentum going to be? Are we going to see loan growth shrinking or growing?”

He predicts a possible slide in lending growth to below five per cent, and adds that there’s a reasonable possibility for more bids similar to KCA’s.

“It would not surprise me if there were other deals in the wind based on the fact that this is a very interesting and growing segment.”

[Related: Banks know ‘no one likes them’: economist

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