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Non-Banks Capitalise on the Big Banks’ Flight to Quality

When it comes to home lending, most of the attention is put on the big four banks. But what about the non-bank lenders like Liberty Financial, Resimac,…



This article was originally published by Roger Montgomery

When it comes to home lending, most of the attention is put on the big four banks. But what about the non-bank lenders like Liberty Financial, Resimac, Pepper Money and AFG? It seems they are faring pretty well, and picking up new customers as the majors re-set their focus on the highest quality borrowers.

In my last blog I discussed the recent bank results and the drivers of the lower than expected net interest margins generated in the last 3 to 6 months. With most of the weakness coming from reducing spreads in the mortgage books, the share prices of the non-bank lenders have also taken a hit recently.

As I noted last week, the primary driver of the reduction in mortgage margins in the bank results was the cessation of the term funding facility (TFF) at the end of June, combined with the increase in 3 to 5 year swap rates in September. This materially impacted the margins generated in new fixed rate originations for the major banks, and when combined with a surge in demand for these products, overall bank net interest margins came under intense pressure toward the end of the period.

The non-bank financial institutions write little or no fixed rate mortgages. While there was competitive pressure in variable rate products as well, it was a lot less intense. This is because the reference rate for wholesale funding is the 1 or 3 months bank bill swap rate. Because this is very short duration, it more closely mirrors the official RBA rate. While the market is betting that the RBA is likely to bring forward its current 2024 interest rate increase expectation given current inflationary signals, the official overnight rate remains at 0.1 per cent. Therefore, variable rate mortgage margins have not experienced the same degree of margin squeeze from rising funding costs as the banks saw in 3 to 5 year fixed rate mortgages.

Looking at the comments from the trading updates provided by the four major listed non-bank mortgage providers, Liberty Financial, Pepper Money, Resimac and AFG, all of the companies pointed to intensive competition in mortgages, but margins had remained relatively stable for all but one of the companies.

Liberty Financial

  • Funding costs remain supportive of the net interest margin.
  • Liberty is seeing ongoing growth in loan originations and the asset portfolio with A$1.4 billion in the September quarter.
  • Mortgage discharges and principal repayments are elevated at present, offsetting the strong growth in originations, and reducing the rate of growth in the loan book.
  • The loan book is expected to continue growing and diversifying in FY22.


  • There is likely to be some net interest margin (NIM) compression coming given the acceleration in refinancing activity across the industry. The effect on net interest revenue is being offset by strong growth in the loan book.
  • Asset finance offers a good mix offset as does an increase in the proportion of new mortgages that are near prime rather than prime.
  • The major banks are increasingly focused on the highest quality mortgages. This is where the greatest competition is at present. Resimac is competing more with other non-banks rather than the majors.
  • Resimac reported record mortgage settlements in the 4 months to October 2021 of A$2.5 billion. This was up 72 per cent on the same period in FY21.
  • In the 6 months to December 2021, Resimac expects to settle A$3.3 billion of new mortgages.
  • The overall mortgage book has grown 5.1 per cent to A$14.5 billion over the 4 months to October. This implies an annualised rate of growth of around 15 per cent.

Pepper Money

  • Pepper has generated A$5.1 billion of mortgage originations in the ten months to October 2021.This implies A$1.7 billion of originations in the four months to October 2021.
  • Applications are currently up 43 per cent over last year.
  • Pepper expects to deliver on its mortgage NIM forecast from the prospectus. The forecast was 2.30 per cent for CY21. Given the mortgage NIM in the first half of CY21 was 2.40 per cent, this implies a NIM in the 6 months to December of at least 2.20 per cent.
  • The fall in mortgage NIM that was factored into the prospectus forecasts was due to an assumption that BBSW would increase relative to the official RBA overnight rate. This has not occurred, allowing Pepper to be more aggressive on pricing to accelerate the growth in the loan book.
  • Pepper has not been immune to the intense competition and elevated level of prepayments in mortgages.
  • Most of the intense competition coming from the banks is in the super prime space where margins are ultra thin. Pepper is not playing in this market.
  • As the banks have moved increasingly toward lower and lower risk loans, there are areas of the prime market that have opened up for Pepper. Pepper has grown its prime business by 55 per cent in the first half of CY21 relative to 38 per cent growth in near prime. Mix is therefore having a negative impact on NIM for Pepper but the quality of the loan book is improving.


  • A shift in mix toward higher margin products in near prime, SMSF and low doc will assist in supporting long term NIM in the securitised mortgage book.
  • These higher margin products generate approximately 40 basis points higher NIM than the core prime mortgage book.
  • Growth in the AFG loan book is well above market growth despite the higher amortisation and refinancing rate across the market.
  • Applications in the first 4 months of FY22 totalled A$1,373 million. Higher margin products made up 22.5 per cent of these applications, well above the average of the back book in these products at around 6 per cent as at 30 June.
  • Recent increases in fixed rates by major banks is leveling the playing field for competition from non-major lenders. The addressable market for AFG is now expected to increase as fixed rate products ultimately become less attractive to borrowers.
  • AFG has rolled out one of its two warehouse facilities by 12 months to Dec 2022 as well as adding a new warehouse facility with another major bank. Both facilities will have a lower funding margin that the existing warehouse facilities. Additionally, while residential mortgage backed securities (RMBS) spreads have increased by around 10-15 basis points from their lows in the middle of the year, they remain well below AFG’s average funding cost. This will see the average funding margin over 1 month BBSW fall over the coming year, supporting NIM.

Overall, it appears there is some margin pressure in the mortgage books of the non-bank lenders but not to the extent shown in the recent Westpac, the Commonwealth Bank of Australia and National Australia Bank results. This is because the primary source of margin pressure in the September quarter came from funding cost pressure in 3 to 5 year fixed rate products, combined with increasing focus by the banks on the highest quality borrowers.

The non-banks focus exclusively on variable rate products and the underserviced borrowers that are too difficult for the major banks.

However, Pepper and Resimac are likely to report weaker NIM trends on a sequential basis and Liberty and AFG due to the decision to boost loan book growth through more aggressive pricing and in the case of Pepper, a mix shift toward lower risk and margin prime loans.

With fixed rates having been forced to rise materially in recent weeks, combined with an increased focus from the majors on the highest quality borrowers, the opportunity set for the non-banks has grown rapidly, leading to record application and settlement volumes, partially offset by the acceleration in refinancing activity driven by historically low interest rates.

The increase in refinancing activity has seen greater rotation of the back book to front book pricing causing some dilution of mortgage margins for the non-banks. However, funding costs continue to fall as warehouse facilities are rolled and new RMBS issuance filters into the funding mix.

You can read my previous blog here: WILL AUSSIE BANKS REBOUND FROM HERE?

The Montgomery Funds owns shares in Westpac, Commonwealth Bank and National Australia Bank. This article was prepared 02 December 2021 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies you should seek financial advice.

interest rates inflationary

Author: Stuart Jackson


If You Want a 30% Return This Year, Look to Amazon

If you found a stock with a strong growth history that is expected to gain 30% this year, you’d be interested, right? Then maybe you should check out…

If you found a stock with a strong growth history that is expected to gain 30% this year, you’d be interested, right? Then maybe you should check out Amazon (NASDAQ:AMZN) stock.

An image of an Amazon logo on a buildingSource: Jonathan Weiss /

Amazon has been through the ringer as of late. It’s down 23% since July and 14% over the last month. After reaching $3,700 per share just six months ago, you can buy AMZN stock for just south of $2,900 now.

The biggest problems facing Amazon last year was that it was going up against huge comparable quarters from 2020. Amazon had a huge 2020 as the Covid-19 pandemic shut down brick-and-mortar retailers. Shoppers turned to e-commerce in record numbers to spend those government stimulus payment checks.

Amazon was a huge disappointment. AMZN stock only returned 2% for all of 2021 while the S&P 500 gained 29.6%. The Dow Jones Industrial Average rose 18.7%, and the Nasdaq composite jumped 21.4% in 2021.

Now that founder Jeff Bezos is gone, having turned over the reins at Amazon to new CEO Andy Jassy, it’s a new day at Amazon, and perhaps investors have a right to be a little skeptical.

But there are plenty of analysts who have a strong belief that Amazon will have a strong year. They still have faith in AMZN stock. Maybe you should, too.

AMZN Stock at a Glance

In late October, Amazon reported third-quarter earnings that were a disappointment.

Revenue was $110.81 billion, versus analysts’ expectations of $111.6 billion. Earnings of $6.12 per share were much lower than analysts’ expectations of $8.92 per share.

On top of that, CFO Brian Olsavsky cautioned investors that the company will take a $4 billion charge in the fourth quarter from increased labor costs, productivity losses and inflation. The company planned to hire 150,000 seasonal workers just to get through the holiday season.

Amazon is expecting operating profit between zero to $3 billion in the fourth quarter. A year ago, Amazon posted a profit of $6.9 billion in Q4.

But there are some reasons for optimism. By several accounts, Amazon had a decent holiday season with its biggest-ever sales over the Thanksgiving weekend.

And it’s important to remember that Amazon just isn’t a retail company. The third quarter was the first time in Amazon’s history that its Amazon services division posted more revenue that its retail division.

The retail side made $54.9 billion in the third quarter. But revenue from Amazon Prime subscriptions, advertising and its cloud component Amazon Web Services made $55.9 billion.

In fact, if it wasn’t for Amazon Web Services’ $4.88 billion in revenue for the quarter, the company would have lost money in the period. AWS revenue rose 39% in the quarter.

The Analyst Sentiment

At this writing, Amazon stock is hovering around $2,900. That means it needs to gain about 38% to hit the $4,000 mark.

Is that a pipe dream? Not at all, according to analyst sentiment.

For instance, Morgan Stanley’s Brian Nowak just raised his firm’s price target from $4,000 to $4,200. He has an interesting take: He notes that Amazon is badly lagging behind the other top tech stocks like Alphabet (NASDAQ:GOOG, GOOGL), Meta (NASDAQ:FB), Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT).

Nowak said there’s a correlation between companies that improve their disclosure practices and the price that investors are willing to pay for stock. Amazon needs to give investors more insight about how it spends its money, he wrote in a note to clients.

“Better visibility into Amazon’s estimated ~$19 billion spent on engineers per year (excluding AWS) and emerging ‘other bets’ projects could help investors better understand the health of its core retail business.”

At JPMorgan, analyst Doug Anmuth said investors expect U.S. internet stocks to outperform the market this year. And Amazon is by far the “strong favorite as best performing FANG” stock for 2022, he says. Anmuth has a price target of $4,350 for AMZN stock.

The Bottom Line on AMZN Stock

Fifty analysts currently cover AMZN stock, and 49 of them rank it as a “buy” or a “strong buy.”

Despite coming off a rough 2021 – and a rough start to this year – Amazon can’t be ignored. It’s the unquestioned leader in e-commerce stocks. And with its Amazon Web Services, Amazon is a growing power in cloud services. It’s that division that will give Amazon its greatest profits in 2022.

If you want a 30% return in 2020, Amazon seems to be a great place to find it.

On the date of publication, Patrick Sanders did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Patrick Sanders is a freelance writer and editor in Maryland, and from 2015 to 2019 was head of the investment advice section at U.S. News & World Report. Follow him on Twitter at @1patricksanders.

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Author: Patrick Sanders

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Visualizing the Evolution of the Global Meat Market

The global meat market will be worth $1.8 trillion by 2040, but how much of that will plant-based alternatives and cultured meat command?
The post Visualizing…

The Evolution of the Global Meat Market

In the last decade, there has been an undeniable shift in consumers’ preferences when it comes to eating meat.

This is partly due to the wide availability of meat replacement options combined with growing awareness of their health benefits and lower impact on the environment compared to conventional meat.

In this infographic from CULT Food Science (CSE: CULT), we examine how meat consumption is expected to evolve over the next two decades. Let’s dive in.

Taking a Bite out of Meat’s Market Share

The COVID-19 pandemic triggered a massive turning point for the meat industry, and it will continue to evolve dramatically over the next 20 years. Taking inflation into account, the global meat market is expected to grow overall by roughly 3% by 2040 as a result of population growth.

However, as consumption shifts, conventional meat supply is expected to decline by more than 33% according to Kearney. These products will be replaced by innovative meat alternatives, some of which have yet to hit the mass market.

  • Novel vegan meat replacement: These are meat alternatives products made from plants that resemble the taste and texture of meat.
  • Cultured meat: Also referred to as clean, cultivated, or lab grown meats, cultured meat is a genuine meat product that is produced by cultivating animal cells in a controlled environment without the need to harm animals.

Aside from new meat replacements, biotech will also transform adjacent industries like dairy, eggs, and fish.

The Future of Food?

Meat replacements and cultured meat could overtake the conventional meat market, with cultured meats reigning supreme overall with a 41% annual growth rate (CAGR) between 2025 and 2040.

New technologies for cultivating non-animal based protein will provide one-third of the global meat supply due to an increase in commercial competitiveness and consumers becoming more accepting of these kinds of products.

Meanwhile, conventional meat will make up just 40% of all global meat supply by 2040, compared to 90% in 2025. For this very reason, conventional meat producers are investing a significant amount of capital in meat alternative companies so they can avoid disruption.

Invest in the Revolution

The changing tides in the industry have sparked a variety of undeniable opportunities:

  • Regulatory approvals: Singapore is the first country to legalize cultured meat for consumers, and many more will no doubt follow behind in the coming years.
  • Lower production costs: Cultured meat and dairy have made quantum leaps in reducing production costs.
  • Changing consumer ethics: Consumers are demanding a more ethical approach to factory farming and cultured and plant-based alternative products are becoming a more accepted solution.

CULT Food Science (CSE: CULT) is a cutting edge investment platform advancing the future of food. The first-of-its-kind in North America, CULT aims to provide unprecedented exposure to the most innovative start-up, private or early stage lab grown food companies around the world.

Will you be part of the revolution?

The post Visualizing the Evolution of the Global Meat Market appeared first on Visual Capitalist.

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JPMorgan Models War Between Russia And Ukraine: Sees Oil Soaring To $150, Global Growth Crashing

JPMorgan Models War Between Russia And Ukraine: Sees Oil Soaring To $150, Global Growth Crashing

With Morgan Stanley joining Goldman and calling…

JPMorgan Models War Between Russia And Ukraine: Sees Oil Soaring To $150, Global Growth Crashing

With Morgan Stanley joining Goldman and calling for $100 oil, and Bank of America’s commodity strategist Francisco Blanch one-upping both, and today laying out the case for $120 oil…

… on Friday afternoon JPMorgan trumped all of its banking peers with a report that is especially troubling if not so much for the implications from its “theoretical” modeling, but for the fact that Wall Street is now actively assessing what may be the start of World War 3.

In a note from the bank’s economists Joseph Lupton and Bruce Kasman (available to pro subs) which picks up where our article “Shades Of 2008 As Oil Decouples From Everything” left off, JPM writes that oil shocks have a long history of driving cyclical downturns, with US recessions often associated with oil price spikes…

… most recently of course the surge in oil to all time highs in 2008, which some say sealed the fate of the global financial crisis.

So looking at the latest geopolitical tensions between Russia and Ukraine, JPM warns that “these raise the risk of a material spike this quarter.” That this comes on the back of already elevated inflation and a global economy that is being buffeted by yet another wave of the COVID-19 pandemic, JPMorgan sees the risk of a kinetic war breaking out as adding “to the near-term fragility of what is otherwise a fundamentally strong recovery.”

Drilling down, JPM considers a scenario in which an adverse geopolitical event between Russia and Ukraine materially disrupts the oil supply. This scenario envisions a sharp 2.3 million b/d contraction in oil output that boosts the oil price quickly to $150/bbl—a 100% rise from the average price in 4Q21.

Given that this would be solely a negative supply shock, the impact on output is to reduce global GDP by 1.6% the bank calculates based on its general equilibrium model. And with global GDP projected to expand at a robust 4.1%ar in 1H22, the economist due project that “this shock would damp annualized growth to 0.9% assuming the adjustment takes place over two quarters. Inflation would also spike
to 7.2%ar, an upward revision of 4%-pts annualized.”

It gets worse: in addition to the drag from a sharp contraction in oil supply our models estimate, there are two other channels through which this shock could damage global growth.

  • The first relates to the repercussions of a Russian intervention in Ukraine. The US, coordinating with allies, would likely impose sanctions on Russia. While the possibilities vary widely in scope, they will likely impact negatively on sentiment and global financial conditions.
  • Second, JPM estimates incorporate the realized behavior of major central banks over the past two decades whereby oil price shocks associated with geopolitical turmoil have been perceived to pose a greater threat to growth than inflation.

Against the backdrop of a year of already elevated inflation and extremely accommodative policies, JPM warns that central banks may display less patience than normal—particularly in the EM, where rising global risk aversion may also place downward pressure on currency values.

To be sure, as with any Wall Street analysis that models war, JPM is quick to caveat its findings, noting that “it is important to recognize that the scenario of a jump in the oil price to $150/bbl is premised on a sharp and substantial shock to the oil supply. History has proven that such large and adverse shocks do material damage to the macroeconomy. In this regard, the results reported here should not be a surprise but seen as useful for quantifying the damage based on a carefully specified general equilibrium model using generally accepted elasticities.”

Boilerplate language aside, what is notable is that for months we have been wondering what “latest and greatest” crisis will replace covid as the Greenlight that central banks and governments need to perpetuate not only QE and NIRP, but also the all important helicopter money. Now we know.


Tyler Durden
Fri, 01/21/2022 – 15:27

Author: Tyler Durden

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