Firstmac sale underscores ‘dilemma’ for non-banks

Queensland-based non-bank lender Firstmac confirmed yesterday it was up for sale, with reports indicating the group could be worth some $500 million.

Firstmac has issued more than $14 billion in mortgage bonds since 2013. In May, S&P assigned a AAA credit rating for three classes of Firstmac’s prime residential mortgage-backed securities (RMBS).

However, Digital Finance Analytics principal Martin North told Mortgage Business that securitisation has become “a bit of a marginal activity, even among the big banks” compared to the pre-GFC heyday.

“The non-bank sector, driven by securitisation... that business model is not working,” Mr North said.

“The prospective sale of Firstmac underscores the dilemma for non-banks operating in the current environment. Pre-GFC, most were able to work a very effective RMBS model where bundles of loans were packaged up and sold to investors, many of whom were offshore. Then the GFC hit. As a result, the securitisation markets froze and funding all but stopped. It has hardly recovered.”

According to Mr North, non-bank lenders like Firstmac now require private investors or funding from the big banks to continue operating.

Firstmac is 100 per cent privately owned by managing director Kim Cannon, one of the pioneers of Australian non-bank lending. It remains unclear whether the whole business will be acquired or the group will take a cash injection for an equity stake.

“I suspect there will be quite a lot of interest because the fact is there is quite a lot of potential for non-bank operators in the market place here. But they have to decide if they are going to focus on niche offerings,” Mr North said.

Meanwhile, Deloitte financial services partner James Hickey said the more successful non-bank lenders have introduced an element of specialisation into their lending programs, targeting low-doc, self-employed and SMEs borrowers.

“It also depends on how you go to market. Firstmac has been very successful in pioneering its online distribution platform Loans.com.au,” Mr Hickey told Mortgage Business.

"If you can either differentiate by offering specialist lending or an online, direct-to-consumer channel, then you can certainly carve out a niche in the marketplace.

“But if you are just trying to compete with prime lenders through the broker channel, it is going to be very hard for a non-bank lender to etch out a margin when you have deeper discounts of up to 140 basis points and volatility in funding markets.”

Pressure on margins has driven consolidation of the non-ADI space in recent years. Mr Hickey believes today’s non-bank lenders need to be active, regular participants in the funding market just to stay afloat.

“You need to have a relatively large origination program to continue operating as a non-bank lender going forward. You need to do about $500 million of RMBS issuances per annum to stay relevant,” he said.

While Mr North believes the international appetite for local RMBS has waned, Mr Hickey says Australian non-bank lenders are well-regarded by offshore investors.

“There is always keen appetite for Australian paper when it goes over there. Particularly if you have been a non-bank lender with a track record of strong performance in your deals, such as Resimac and Pepper,” he said.

“They have a long track record of issuing both domestically and offshore. The performance of all of their deals have been very good.”

[Related: Firstmac to be sold]