Pepper Money’s Profit Growth Masks Risks from Loan Mix and Market Shifts

Financial Performance and Profit Growth

Pepper Money Limited has reported a modest but notable 2% increase in its statutory and pro-forma net profit after tax (NPAT), reaching $47 million for the half-year ended 30 June 2025. This growth comes despite an 8% decline in net interest income, which fell to $157.3 million. The dip in interest income was largely attributed to a strategic shift in the loan portfolio mix towards prime mortgages and the impact of whole loan sales, which reclassify income from net interest to other operating income.

Loan Originations and Asset Growth

The company achieved robust loan origination growth, with total originations rising 38% year-on-year to $4.5 billion. Mortgage originations surged 53% to $2.8 billion, driven predominantly by prime residential and commercial loans, which now represent 70% of originations compared to 40% in the prior period. Asset finance originations also grew by 19% to $1.7 billion, reflecting strong demand in consumer and novated lease segments. Total assets under management (AUM) increased 4% to $20.1 billion, supported by growth in asset finance and servicing portfolios, despite a reduction in mortgage AUM due to whole loan sales.

Cost Discipline and Capital Management

Operational efficiency remains a key focus, with total expenses reduced by 2% to $116.7 million. The company credits technology investments, automation, and process improvements for delivering scale economies that offset inflationary pressures. Pepper Money also continued to strengthen its balance sheet by repaying $27.5 million of corporate debt, reducing drawn amounts to $97.5 million, and increasing warehouse facility capacity to $11.5 billion. Unrestricted cash rose to $142.9 million, providing ample liquidity.

Dividend Policy and Shareholder Returns

Reflecting its confidence in ongoing profitability and capital position, Pepper Money’s Board declared a fully franked interim dividend of 6.4 cents per share, up from 5.0 cents in the prior year. This represents a payout ratio of 60% of pro-forma NPAT and will be paid on 10 October 2025. Combined with a special dividend of 12.5 cents per share paid in July 2025, total dividends for the year amount to 18.9 cents per share, delivering an annualised yield of 20.9% based on the closing share price.

Sustainability and Regulatory Preparedness

Pepper Money continues to advance its environmental, social, and governance (ESG) initiatives, meeting or exceeding targets across governance, diversity, community engagement, and employee development. The company is also preparing for mandatory climate-related disclosures under the new Australian Sustainability Reporting Standard (AASB S2), embedding climate risk management into its strategic framework. This proactive stance aligns with Pepper Money’s mission to support financial inclusion and responsible lending.

Outlook and Market Position

While macroeconomic uncertainties persist, Pepper Money’s diversified lending portfolio, disciplined cost management, and strong capital position provide resilience. The shift towards prime lending and whole loan sales reflects a strategic recalibration to optimize returns and capital efficiency. Investors will be watching how the company balances growth ambitions with evolving credit risk and regulatory demands in the second half of 2025.