Pepper Money suffered record mortgage book attrition in 2023, at 43.8 per cent, as the intense competitive in the market exposed its relatively high funding costs. But Pepper chief executive Mario Rehayem said yesterday that the competitive dynamics in the mortgage market have turned more in favour of non-banks lenders in recent months.  Attrition was up from a long-term average in the mid-30 per cent range (attrition is measured as the difference between opening and closing assets balances, excluding whole loan sales and less originations in the period). Pepper’s average securitisation funding margin rose from 189 basis points in 2022 to 219 bps last year. Over the same period, the funding benchmark, the bank bill swap rate, rose from an average of 132 bps to 387 bps. In response, Pepper’s average interest rate on prime mortgages rose from 6.4 per cent in 2022 to 7.6 per cent last year. Its rate on near-prime loans rose from 7 per cent to 8 per cent and its rate on specialist loans rose from 8.4 per cent to 9.3 per cent. Pepper originated A$3.9 billion of mortgages last year, 43 per cent down on the previous year. Mortgage assets under management fell 7 per cent to $12.6 billion. Some of this fall was offset by strong growth in asset finance – a combination of consumer and commercial loans, and novated leases. Originations grew 20 per cent to $3.4 billion and assets under management grew 21 per cent to $5.7 billion. Rehayem said growth in asset finance originations would moderate this year as demand for finance to buy cars and other goods slowed. Pepper’s total originations for the year were $7.3 billion – down 24 per cent on the previous year. Net interest income fell 7.2 per cent to $360.9 million. Net profit was $108.7 million was down 22.6 per cent on profit of $140.5 million in 2022. The net interest margin fell 20 bps to 2 per cent. The loan loss expense rose from $33.3 million to $39.9 million. Loan losses as a percentage of assets under management rose 6 bps to 28 bps – 3 bps for mortgages and 81 bps for asset finance. Arrears (90 days or more) were 50 bps for the prime mortgage book, 1.9 per cent for the non-conforming book and 31 bps for the asset finance book. Rehayem said Pepper’s most recent issue of residential mortgage-backed securities, PRS39, raised $750 million at an average margin of 166 bps. When Pepper issued PRS38 last August, the average margin was 193 bps. The pricing of PRS39 was the best for Pepper since March 2022. Investor demand for RMBS and ABS has increased in recent months, despite rising arrears.  As non-bank funding costs ease, banks continue to compete for deposits to replace their cheap Term Funding Facility loans, which must be repaid by the end of June. Rehayem said Pepper was in a stronger competitive position as demand for home loans continues to recover. Pepper’s mortgage originations in the second half of the year were 28 per cent higher than the first half. “In the fourth