Non-bank lender Liberty does not expect relief from elevated funding costs that have contributed to interest rate increases and put pressure on key measures of profitability.
Liberty chief executive James Boyle said the lending sector had been under more scrutiny than ever before with multiple reviews from regulators and the Hayne royal commission but viewed it as a positive saying the sector was lifting its game.
“Those changes have led to changes within our market… our industry has changed more over the last 18 months than at any time in our past,” Mr Boyle said.
On Wednesday morning, the privately owned lender reported a strong uptick in lending across residential property and vehicle finance, delivering a 10 per cent rise in before tax profit to $83.9 million from $76.3 million.
Liberty says it is investing heavily in systems and staff with headcount rising to 415 from 275 just two years ago. The additional investment has come at a cost, however, with the lender’s cost to income ratio rising to 46 from 45 the previous year.
Liberty, which secures about two-thirds of its funding from term debt and one-sixth from wholesale markets, said investors were seeking higher returns which had weighed on net interest margins.
“The underlying benchmark of our cost of funds increased materially,” chief financial officer Peter Riedel said.
“Prior to 2018 our cost of funds was about 10 basis points above the cash rate, as from January that increased by 50 bps so during this year we saw a 40 bps increase in the cost of funding.”
Mr Riedel said there were a number of factors influencing the cost of funds. He noted that although Liberty was the only investment grade-rated non-bank lender it was a price taker when it came to issuing debt and expected funding costs to remain elevated.
“It will probably continue into next calendar year, I don’t think the trade issues with the US and China are particularly helping anything but it’s inconclusive.”
Impairments rose to $19.2 million from $12.6 million in line with the 35 per cent growth in total assets representing a small 2-basis-point increase to 24bps of assets from 22 bps of assets as the lending book swelled to $10.2 billion from $7.5 billion.
Reflecting on the strength of the property market, Mr Boyle said delinquencies were at a 21-year low but noted that while house prices were “cooling”, they were now beginning to “correct”.
Mr Boyle said the lender was tightening its lending standards much like any other lender, however he said that the firm was always careful to meet its obligations under the credit act and ensure customers were able to service their loan.
“Asking for bank statements has always been one of our go-to tools,” he said. Mr Boyle said the company was well positioned for any downturn, citing the broader mix of revenues than in its past.
Established 21 years ago, Liberty has diversified its book beyond the non-conforming loans it specialised in when it first began, however Mr Boyle said the firm was proud to continue servicing that segment as the supply of credit continued to tighten.
“We are not a bank and therefore our choice to maintain capital on our balance sheet is exactly that, the big changes we have seen in bank lending, the so-called tightening of credit, has been due to the increase in regulatory capital … their risk appetite has been inhibited,” Mr Boyle said.
Residential mortgages still make up the vast majority of the firm’s revenues, however motor vehicle finance and commercial loans now account for around 25 per cent of total revenue.
Liberty has also acquired an interest in loan and mortgage protection specialist ALI and will distribute its products through its network of brokers, which operate under the National Mortgage Brokers brand.
CFO Mr Riedel said the aim was to reduce the reliance on residential mortgages to less than 50 per cent of revenue and was confident the company had put in place the right strategy to achieve its goal.
Article appeared in The Australian Financial Review on 17 October 2018.
Article written by James Frost