Pepper Money shifted the focus of its lending to non-conforming mortgages and asset finance during the second half of 2022, as it targeted higher yields to offset rising funding costs. The company was still hit with a sharp contraction in margin but income and profit grew in the 12 months to December 2022. Pepper’s mortgage originations rose 7 per cent last year to $6.8 billion and the mortgage book grew 10 per cent to $13.5 billion. Prime originations, with a weighted average interest rate of 6.6 per cent, were down 4 per cent. Near prime originations, with an average rate of 7.3 per cent, were up 26 per cent. Asset finance originations rose 35 per cent to $2.8 billion and the asset finance book grew 35 per cent to $4.7 billion. Asset finance accounted for 37 per cent of the company’s operating income. Asset finance rates were as high as 12.9 per cent. Pepper was able to switch its sales effort to higher yielding loans with only a modest deterioration in credit quality. Mortgage arrears (90 days or more past due) rose from 88 basis points to 99 bps. The company’s long-term average for mortgage arrears is 1.2 per cent. Asset finance arrears rose from 18 bps to 26 bps. Loan losses increased from $24.6 million in 2021 to $33.3 million last year. Excluding the management overlay, loan losses as a proportion of total loans fell from 23 bps to 22 bps. Operating income rose 9 per cent to $408.2 million. The net interest margin fell 36 basis points to 2.2 per cent. Net profit rose 8 per cent to $140.5 million. On a cash basis, profit of $142 million was unchanged from the previous year. Pepper chief executive Mario Rehayem said “interest rate rises with pace” meant the company’s cost of funds increased while there was a lag before its loan re-pricing could catch up. By the end of the year NIM was starting to look better. NIM on the mortgage book fell from 2.28 per cent to 1.9 per cent over the year but the “exit” NIM at the end of the year was 2.03 per cent. NIM on the asset finance book fell from 3.43 per cent to 2.75 per cent over the year but the exit NIM at the end of the year was 2.91 per cent. Rehayem said Pepper has some new products in the works that will further diversify its business. He said the capital market was very supportive and Pepper raised $5 billion through public securitisations last year. It has warehouse capacity of $11.3 billion, giving it plenty of room for growth.