Pepper Money Ltd

ASX:PPM

Earnings Call Analysis

Strong Start and Optimistic Outlook for 2024

Pepper Money began 2024 with solid momentum. Mortgage volumes rose by 6%, and net interest margin (NIM) improved to 1.92%. Total assets under management (AUM) reached $19.3 billion, with $3.3 billion in new originations. Despite market challenges, Pepper Money welcomed over 37,000 new customers, with a milestone of 500,000 helped since 2004. The company achieved an EBITDA of $89.8 million and a net profit after tax of $46.1 million. The board increased the interim dividend payout to 47.5%, up from 30% in 2023. They remain confident in their capital and funding strategies and are prepared to capture more growth opportunities as they arise.

Navigating the Market with Resilience

Pepper Money has shown financial resilience in the first half of 2024, managing to grow its mortgage originations by 6% year-on-year to $1.8 billion. This growth is notable given the overall challenging market conditions, which have softened since last year. The company's total assets under management (AUM) reached $19.3 billion, showcasing a solid foundation for future profitability.

Improved Profitability and Cost Management

Profit before tax increased significantly by 13% compared to the prior comparable period, reaching $108 million. Net profit after tax stood at $46.1 million for the same period. Notably, total expenses decreased by 2%, indicating effective cost management strategies which included a 10% reduction in full-time equivalents (FTE).

Cash Position and Capital Management

As of June 30, 2024, Pepper Money reported unrestricted cash of $99.8 million, an increase from $78.8 million a year earlier. This robust cash position has enabled the company to execute a successful whole loan sales strategy, generating $1.1 billion in whole loan sales which contributed to premium gains and optimized liquidity.

Focus on Non-Conforming Segments

In a competitive lending environment, Pepper Money has strategically focused on non-conforming mortgage segments. This niche has grown, with 60% of originations in the near-prime and specialized categories, allowing the company to leverage its historical strengths dating back over 24 years.

Net Interest Margin Stability

The net interest margin (NIM) improved to 1.92%, reflecting a careful balancing of pricing initiatives and operational adjustments despite the competition in the sector. Specifically, mortgage NIM was noted at 1.6%, showing a gradual recovery amid structural changes within the mortgage market.

Dividend Payout Adjustment

Reflecting confidence in its financial health, the board increased the interim dividend payout ratio from 30% in 2023 to 47.5% in 2024, translating to a dividend of $0.05 per share. This decision illustrates management's commitment to return value to shareholders amid revenue uncertainties.

Credit Performance Under Pressure

Credit performance has shown some deterioration attributed to heightened insolvency rates during the first half of 2024. The loan loss ratio now stands at 0.45%, accompanied by robust provisions totaling $120.8 million and a coverage ratio of 0.71%. This cautious stance underscores the ongoing economic challenges facing consumers.

Outlook for Growth in 2024

Looking forward, management is optimistic about capturing growth opportunities as the macroeconomic environment shows signs of easing. The focus will remain on scaling technology-driven initiatives, including the rollout of the Pepper Product Selector, which has already resulted in substantial volume growth through enhanced operational efficiencies.

Earnings Call Transcript 2024-Q2

[Operator]

Thank you for standing by, and welcome to the Pepper Money Limited 2024 Half Year Results Briefing. [Operator Instructions]

I would now like to hand the conference over to Mr. Gordon Livingstone, Investor Relations. Please go ahead.

[Gordon Livingstone, executive]

Good morning, everyone, and welcome to Pepper Money Limited's 2024 Half Year Results Presentation. My name is Gordon Livingstone, Investor Relations at Pepper Money. I would like to begin by acknowledging the traditional custodians of the land on which we meet today, the Gadigal people of the Eora Nation. We pay our respects to each of their Elders, past, present and emerging.

Today, Pepper Money's CEO, Mario Rehayem will provide a business update, after which Pepper Money's CFO, Therese McGrath, will take us through the financial performance. After some closing remarks by Mario, there will be an opportunity to ask questions, which can be either via phone or submitted via the portal.

I'll now pass over to Pepper Money's CEO, Mario Rehayem.

[Mario Rehayem, executive]

Thank you, Gordon, and thank you to everyone that has dialed in today. I will start off with our first half 2024 highlights located on Page 3 of the investor presentation. We have started 2024 strongly. Mortgage volumes are up. NIM has increased versus the second half of 2023 and expenses are down. It is a consistent application of our strategy that has seen the business continue to successfully navigate the cycle. Our results for the first half of 2024 reflect our ability to respond to market conditions, deliver on customer needs and leverage our diversified business portfolio.

We delivered originations of $3.3 billion over the first half of 2024. Mortgage originations of $1.8 billion increased 6% on the prior comparable period. Market conditions started to show signs of stability over the latter part of 2023 and have held into 2024. I'm encouraged by this trend.

Asset Finance performed well over the first half, delivering originations of $1.4 billion, while originations were down 19% on PCP. This was due in part to soft market conditions and ongoing cost of living pressures suppressing demand, as well as the first half of 2023 benefiting from strong commercial growth ahead of the removal of government tax incentives on the 1st of July 2023.

Customers are at the forefront of how we do business, given our mission to help people succeed and customer wellbeing forms part of this mission. We welcomed 37,357 new customers to Pepper Money over the first half of 2024. We also made sure we found ways to help our existing customers navigate increasingly difficult economic conditions. We continue to focus on providing all the right touch points to support our customers if and when needed. And in August 2024, we also hit one of our core strategic milestones, passing the mark of having helped over 500,000 customers since 2004.

Total AUM, which is a key foundation of future profitability, closed June 2024 at $19.3 billion. In line with our funding and capital management strategy, we undertook 4 whole loan sales over the first half of 2024, totaling $1.1 billion, 2 in prime mortgages, 1 non-conforming and a further in asset finance. Funding margins continued to improve with PRS40, which settled on 16th of August, pricing 36 basis points inside of PRS39, 63 basis points better than PRS38 and 93 basis points better than PRS37.

Lending AUM was $17 billion, mortgages at $11.3 billion and asset finance at $5.7 billion. Servicing AUM increased by $1.4 billion over the prior comparable period to close June 2024 at $2.3 billion, reflecting the transfer of AUM from the whole loan sales.

Net interest margin is stabilizing following the wind back of intense competition amongst the banks that we saw over 2023, coupled with more stable swap rates and improved funding margins. NIM also benefited from our ability to balance our mix given our portfolio diversification. In response to changes in market practice, we have changed how we account for mortgages trail commission. Therese will cover the change in the financials. On a like-for-like basis, total NIM at 1.92% increased from 1.81% in the second half of 2023. Mortgage NIM at 1.6% was up 9 basis points over the second half of 2023 and asset finance NIM of 2.52% improved 13 basis points over the same period.

Credit performance over the first half of 2024 saw our loss ratio being loan losses as a percent of AUM moved to 0.45%. We remain well provisioned. We are holding $120.8 million in total provisions giving a coverage ratio at 0.71%. I've spoken in the past about how we have built a scaled technology platform supporting automation. This, coupled with our disciplined approach to cost management, saw expenses decrease by 2% versus the first half of 2023, with core FTEs reducing 10% over the same period.

A real standout is our profit pre-provisions being profit before tax and loan losses at $108 million was up 13% on prior comparable period. Pro-forma and statutory NPAT for the first half of 2024 was $46.1 million.

In line with the change in our dividend policy announced in February, the Board has increased the payout ratio to 47.5% and declared a fully franked interim dividend of $0.05 per share on the net profit after tax for the 6 months to 30 June 2024, up from 30% payout, an increase of $0.015 per share versus the 2023 interim dividend.

Turning now to Slide 4, our mortgage business performance. Market conditions for mortgages were generally soft, but there are clear signs of stabilization. The intense competition across the entire sector seen over 2023 has reduced. As I discussed at the time of our full year results, our focus for mortgages has been to leverage our position in the non-conforming segment, an area banks do not play in and to develop new products for those customer niches not best served by traditional banks.

Mortgage originations over the first half of 2024, grew by 6% on PCP, with the product mix skewed to near prime and specialists, which accounted for 60% of our mortgage originations. Pepper Money started over 24 years ago, as a non-conforming lender, and today, we continue to have strong market position in this space.

Mortgage volumes benefited from new products launched in Australia. Our self-managed super fund mortgage launched in October 2023 is performing well ahead of expectations, as we focus on delivering a seamless process for brokers and customers alike. Over the first half of 2024, we executed 3 mortgage whole loan sales, 2 prime and 1 non-conforming. Whole loan sales have been part of our funding and capital management strategy since 2016. Whole loan sales see the equitable notes sold to a third party with Pepper Money retaining the servicing of the loans. AUM, therefore, transferred from lending to servicing. And as Pepper Money retains the servicing of the loans, we benefit from the generation of a capital-light annuity-style income.

Mortgage lending AUM dropped by 9% on PCP to $11.3 billion. At our full year results, I said that we expected to see mortgage NIM stabilize, as both market conditions and customer attrition stabilized. This was certainly the case and NIM on a like-for-like basis for mortgages increased 9 basis points on the second half of 2023 to 1.6%. The NIM walk and credit performance will be covered in the financials.

Turning to asset finance. Our asset finance business delivered solid results over the first 6 months of 2024, given tough market conditions, including consumer and business confidence being at historic lows, as cost of living and rate rise concerns weighed heavily and slowed application and originations growth. Business insolvencies accelerated with asset reporting a 36% increase over the fiscal year ending 30 June 2024. The first half of 2023 also had the benefit of higher commercial originations, as businesses sought to capitalize on tax incentives before they ceased on the 1st of July 2023.

In asset finance, we delivered originations of $1.4 billion, down 19% on prior comparable period, but only 8% down in the second half of 2023. Our novated lease business continued to grow well ahead of system with originations at $700 million, up 56% on PCP. As part of our funding and capital management strategy, we executed another whole loan sale in asset finance in June 2024 of $0.5 billion. Whole loan sale sees the AUM from lending to servicing. After the whole loan sale in June, AUM for asset finance closed the first half of 2024 at $5.7 billion, up 1% on PCP and in line with December 2023 close.

Given both increasing insolvencies and cost of living pressures on consumers, we focused over the first half of 2024 on growing our Tier A customers, while being more conservative on Tier B and Tier C. Novated lease customers are typically Tier A. In total, Tier A customers accounted for 67% of asset finance originations over the first half of 2024.

Asset finance net interest margin at 2.52% compared to the second half of 2023 improved 13 basis points. While Therese will cover off credit in detail in the financials, overall asset finance loss provisions remained constant versus PCP, as the whole loan sale in June released collective provisions. Total loan loss provisions for first half 2024 closed at $89.3 million, which is in line with 2023 year-end given a constant coverage ratio of 1.57%.

Now to loan and other servicing. Our loan and other servicing business is the provision of independent loan servicing to the market and includes our whole loan sales servicing program, servicing for non-operational owners of loan portfolios. For example, our appointment as administrator of the Treasury Corporation of Victoria's new commercial and industrial property tax and loan portfolio acquisition.

Loan and other servicing grew over the first half of 2024, given the extension of our whole loan sale strategy into non-conforming mortgages, as well as a further whole loan sale in asset finance. Building our loan and other servicing business via whole loan sales is part of our overall capital management strategy as it is capital-light, whole loan sales allows us to recycle capital against growth opportunities. It provides an annuity style income and no incremental cost to the business, given the loans are already being serviced, and it provides us with a defensive earning stream across the credit cycle.

Servicing AUM in the first half of 2024 increased to $2.3 billion, up from $900 million in the prior comparable period. The increase in servicing AUM supported total operating income increasing to $5.3 million over the first half of 2024.

Now turning to funding on Slide 7. Funding is the core strength of Pepper Money. We are a frequent and programmatic issuer with an unblemished 24-year history. As at 30th of June 2024, our warehouse capacity stood at $9.2 billion. Over the first half of 2024, we completed 2 public term securitizations, 1 RMBS and 1 ABS raising in excess of $1.4 billion. We also raised a further $1.1 billion from whole loan sales. And since close of the half year, we also completed our 40th non-conforming mortgage public securitization, PRS 40, which is our largest all Australian dollar securitization in our history.

What I'm most pleased about was how strong the demand was, we were able to upsize to $1.25 billion. Likewise, the margin for PRS 40 at [ 1.3% ] was 36 basis points better than PRS 39, which completed in February 2024 and improved 63 basis points on PRS 38, which completed in August 2023. I'm very encouraged by how the debt capital markets and our funding activities continued to improve.

I will now hand over to Therese to run through the financials, after which I will make some closing comments before opening to questions.

[Therese McGrath, executive]

Thank you, Mario, and good morning, everyone. As Mario has covered key volume trends, I'll focus today on net interest margin, credit performance, expense management and capital. But before turning to NIM, in the first half of 2024, we changed our accounting treatment for mortgage trail commission to align with market practice following a shift across the banking industry. Historically, we recognized trail commission liability and trail commission expense on a monthly accrual basis. This amount has been immaterial.

The change in accounting treatment results in a financial asset and financial liability being booked that reflect an estimate of the net present value of ongoing trail commission expense over the expected life of the underlying mortgage. We adopted the change effective 1, January 2024 for reporting at half year. As the impact was deemed immaterial, prior periods have not been restated in the financial statements. One aspect of the adoption of the treatment has been a reduction in net interest income of $11.1 million, with a corresponding offset in lending expense.

Total operating income remains constant. For comparative purposes, in this presentation, net interest margin has been revised across all periods to provide a like-on-like presentation. I've included in the appendix a chart that breaks down the key drivers of operating income and which illustrates the change in accounting presentation.

So if you turn to net interest margin on Slide 9. As Mario has noted, net interest margin is stabilizing and has improved versus the second half of 2023. Total NIM for the first half of 2024 at 1.92% was in line with PCP and grew 11 basis points over the second half of 2023. The improvement versus the second half was delivered by the flow through of pricing initiatives, which drove over 34 basis points improvement in customer rates and funding margins, which started to see an improvement in the second half of 2023 and supported a further 3 basis points improvement in total NIM. However, these gains were partially offset by the flow through of prior period, as the swap rate spreads, which drove NIM down by 26 basis points.

Mortgages net interest margin at 1.6% improved 9 basis points on the second half of 2023. Back and front book price increases implemented across our mortgage portfolio in response to when the RBA increased interest rates flowed through as OCR stabilized. This resulted in underlying customer rates improving by 31 basis points versus the second half of 2023. Mortgage NIM also saw the benefit from improved funding margins, which Mario has already covered. These gains were partially offset, as prior period adverse movements in BBSW flowed through reducing NIM by 24 basis points.

Our asset finance business, which is the graph on the lower right-hand side also saw NIM increase versus the second half of 2023 in much the same way as mortgages. The volatility in soft spot rates experienced through 2023 eroded NIM by 32 basis points. However, like mortgages, customers and partners come to our asset finance business given our service levels, speed to [ yes ] and ease of doing business. Pricing initiatives saw our average customer rates increase 39 basis points net of mix versus the second half of 2023.

Now turning to Slide 10, credit performance. The economic environment and cost of living pressures have proved challenging for a number of our customers. While most customers, particularly in mortgages are managing, not unexpectedly, we have experienced some deterioration in credit quality over the first half of 2024. Most notably, we have seen the heightened number of insolvencies in Australia, as well as an increase in late-stage arrears, both of which impacted asset finance. [ This for us lifted ] specific provisions for asset finance from $37.5 million December 2023 to $42.1 million during 2024, an increase of 12%.

In the case of the company entering administration, we recognize the outstanding loan balance, as a provision. Historically, we have found around 50% of companies in administration will queue up. However, until that point, we hold the provision against the loan.

In terms of asset finance collective provisions, following the completion of a whole loan sale in June, we released the collective provision held against the pool of loans sold. As such, asset finance collective provisions reduced by $5.9 million June 2024 versus December 2023. The collective provision for asset finance also saw the benefit from favorable customer mix, as originations continue to be weighted more heavily to customer with the lower probability of default, namely novated lease and Tier A customers.

We now make up 62% of asset finance AUM. Given this mix shift, we -- as we move through 2024 into 2025, the overall profile for asset finance should start to rebalance. This release of collective provisions offset the increase in specifics in asset finance, resulting in the coverage ratio remaining constant at 1.57% December 2023 to June 2024. Over the same period, asset finance AUM remained constant.

Our mortgage customers have proved resilient with collective provisions reducing in line with AUM. Mortgage specific provisions remain low and relates to a small number of loans. Typically, specific provisions in mortgages are around 2 basis points to 4 basis points of mortgage AUM.

In total, our provision coverage remains strong. Versus the second half of 2023, we increased the provision coverage from 0.65% to 0.71%. We're holding $120.8 million in provisions. This includes $10 million in post model overlay, as we've retained $8 million for mortgages, and given the recent elevation in insolvency, we increased the post model overlay for asset finance to $2 million.

To close out on credit performance, turning now to Slide 11. In terms of 90-plus days arrears, which is a good indicator of future losses, mortgages closed June 2024 at 1.48%. And as you can see from the graph on the top right-hand side, this remains in line with the long-term average when the experience under COVID is removed. Likewise, asset finance 90-plus days arrears at 0.34% of AUM at June 2024 is only marginally up versus the long-term pre-COVID run rate.

As I mentioned, as the origination profile for asset finance over the first half of 2024 was weighted to Tier A and novated lease customers, the overall arrears profile, as we move through 2024 and into 2025 will start to rebalance. And again, we remain well provisioned, including holding $10 million in post model overlays.

Turning now to expenses on Slide 12. Our constant investment in technology and process improvements, coupled with our disciplined approach to managing expenses continues to deliver benefits. In the half to June 2024, total expenses reduced 2% on PCP.

Scaled economies through technology, automation and process improvements allowed us to continue to reduce FTE with core FTE being those that support the lending business reducing by 10% on PCP. As a result, employee expenses increased by less than 0.5% over the same period, seeing us absorb the impact of salary and wage inflation.

Others and corporate interest, all other expenses reduced on PCP. Corporate interest reflects the impact of higher BBSY versus prior comparable period. When compared to the second half of 2023, total expenses only increased by 2%, as we chose to write down the value of an equity investment held and corporate interest was higher, given higher BBSY. All other expense [ sizes ] reduced first half 2024 over the second half of 2023, including employee expenses, as we lowered our FTE.

Turning to our pro-forma income statement on [ Slide 19] (sic) [ Slide 13 ]. In the first half of 2024, total operating income reduced 4% on PCP, given the lower originations growth and increased loan loss expense. These movements were partially offset by the gain from whole loan sales executed. Cost management and scaled economy supported the business to deliver EBITDA of $89.8 million and net profit after tax on both a statutory and pro-forma basis of $46.1 million. Profit pretax and provisions for the half at $108 million increased 13% on PCP and 12% over the second half of 2023.

Slide 14 details our core operating metrics, which have largely been covered, so I will turn directly to cash on Slide 15, and then on to the balance sheet. As at June 30, 2024, we had $99.8 million in unrestricted cash compared to $78.8 million June 2023 and $121.1 million, as at 31 December 2023. We completed the acquisition of the residual 35% interest in Stratton effective 28th of March, with the $41.9 million paid funded through operating cash flows. Our capital management was also supported by our whole loan sales strategy, which delivered $33 million in premium over the period. Otherwise, cash flows were all in the normal course of business following our origination and funding profile.

Turning now to our balance sheet on Slide 16. The main movement, as you would expect, has been in loan and advances, which at $17.1 billion for 30 June 2024 has followed the movement in AUM, including whole loan sale net of loan loss provisions. We originated $3.3 billion in new financial assets over the first half of 2024, with asset growth financed by the issuance of 2 public term securitization of $1.4 billion and a further $1.1 billion of whole loan sales. As the mortgage market remains soft, we reduced warehouse capacity to $9.2 billion over the period.

Net assets at 30 June 2024 at $860 million was flat on December 2023. Net tangible assets to loans and advances at 4.1% was up from 3.8% December 2023. Following the maturity and repayment of Pepper Money's corporate debt facility, a new syndicated 3-year revolving credit facility was established on the 23rd of May 2024. Given demand, we were able to increase the size of the facility from $200 million to $270 million. The facility at period end remained drawn at $155 million.

I've already covered sources and uses of cash, we closed June 2024 with an unrestricted cash balance of $99.8 million. Retained earnings reflect the profit delivered by the business net of the 2023 final dividend paid. And given the strength of our capital position, the Board has lifted the interim dividend payout ratio from 30% in 2023 to 47.5% in 2024. This will see an interim dividend of $0.05 per share paid on the 10th of October.

Thank you. And I'll now hand back to Mario to close.

[Mario Rehayem, executive]

Thanks, Therese. Before running through the outlook and opening to questions, I thought it would be worthwhile looking at how our purpose-built technology is driving scale and how when growth returns, we can capture it efficiently.

Turning to Slide 17. Pepper Product Selector, or PPS, is our digital scenario assessment and approval tool designed to streamline the mortgage process for our customers and distribution partners. PPS has evolved. PPS now provides real-time credit assessment and approval. PPS is API integrated into aggregator CRMs.

As a broker captures customer information in their CRM, PPS is seamlessly integrated, providing real-time credit assessment, product selection and approval. PPS not only saves a broker time, but gives the broker confidence of both speed and probability to yes for the customer. PPS provides customers with more choice and transparency. I believe that technology and customer-centric automated processes, which sit behind PPS will be the future of lending.

Since launching in 2017, 25% of origination volumes have been generated via Pepper Product Selector. Nearly 28,000 customers have been offered a Pepper Money solution through PPS. We have generated more than $55 billion in application volume. Since July 2024, we have been piloting real-time PPS with the major aggregator. Over this period, volumes increased 113% for them at a time when all our other channels increased 12%. Plans are already in place to continue the rollout of real-time PPS to the rest of our distribution network. This will deliver not just scale in terms of leads and approvals, but continue to drive origination efficiencies.

So how do we see the outlook for the balance of 2024, turning to Slide 18. The start of 2024 has been [ encouraging ]. Inflation is moderating and the expectation of further interest rate rises has slowed, and our performance over the first half of 2024 has been strong with mortgage volume increasing and total NIM expanding. But we cannot shy away from the fact that the macro environment and the cost of living pressures are proving challenging, and consumer and business confidence remains low. I am, however, encouraged by how resilient most of our customers remain.

While unemployment remains low, which is a positive, we do need to balance this with lower productivity and growth. But all in all, I do feel that the headwinds are easing. And as a business, we feel confident, as we move through 2024. We are prepared to capture more opportunities, as they become available.

Over the 24 years, we have been in business, we have successfully managed through all cycles. We have managed our customers through rate rises, we have sought new opportunities, and we have launched new products such as self-managed super fund mortgages and Sharia lending. Our constant investment has delivered scale, technology and processes. We have sufficient funding headroom available, and we are positioned to capitalize on growth, as it returns.

We have built a business with strong core competencies in credit and underwriting, distribution, funding, data and technology. We are diversified both in terms of the scale of our 2 core lending businesses of mortgages and asset finance, as well as the growth from our loan and other servicing business unit, which delivers a capital-light annuity-style income stream from our whole loan sales strategy. We are also disciplined whether it be how we manage credit, expenses or capital. We remain, as always, well provisioned with $19 billion in assets under management today, we are strong and have the ability to capitalize on opportunities, as they emerge.

Thank you. And I will now hand back to the operator for questions.

[Operator]

[Operator Instructions] Your first question is from Jeff Cai from Jarden.

[Jeff Cai, analyst]

A question on the outlook of bad debts from the asset finance book going forward. Look, I guess, this half, we saw the SPA charge to be about $20 million higher half-on-half. Like should we see this as mainly a catch-up effect given the insolvencies that's coming through? So future losses should be a bit lower? Or does it actually continue to go up, as your coverage levels remain broadly similar?

[Therese McGrath, executive]

Thanks very much, Jeff, good question. What we are seeing, and I think the whole of Australia is seeing this is a real [ heartening ] in the number of insolvencies that have been booked. And I think [ as ] secretary reported they are up 36% at the end of the financial year, 30th of June. If you look at the specifics, what we've got is a little bit of a movement -- mix movement going on. When we do whole loan sales, obviously, you're selling that slightly lower-performing Tier A, novated lease type lines, where the credit performance is very strong. It allows you to do the collective provision release. But when you then rewrite your portfolio, you're actually holding a little bit higher risk loans.

If I look at the specifics versus the second half of 2023 for asset finance, they only went up $4.6 million, a 12% increase. And if I add back the influence of the whole loan sale on the asset finance AUM, that also went back up by 9%. So it's trending more or less in line with AUM and in line with expectations. The slight elevation in the percent really is to do with insolvencies. We are hoping to see insolvency start to stabilize and tail off.

The only other point I'll make on an insolvency, the moment a company goes into administration, you have to recognize the loan loss provision at that point. Typically, we do find around 50% of companies that enter into administration actually queue up. So at a future point, you could see some write-backs as well if companies queue up.

[Mario Rehayem, executive]

Yes. And just to add to that, Jeff, is that historically, you would have seen Pepper always adjust its new originations coming in, as we start to understand that the macro environment impacts. So what we have done is focused very heavily on our Tier A originations in auto, which has really started to shift the risk profile for a period, which is the first half of 2024, and that now sits at around 62% of our AUM. So you will start to see better performing loans coming through the door, as we start to mitigate some of the accelerated issues with the insolvencies.

[Jeff Cai, analyst]

Got it. And then a quick question on margins. Given the improving dynamics around cost of funds and I noted that your outlook statement talks about stabilizing NIM going forward. Can you provide a bit more color on what you're thinking there? Are you thinking the NIM is stabilizing around exit NIM or more towards just a half year NIM?

[Mario Rehayem, executive]

Yes, I think the way you've got to look at it is, and you can see it in our -- over the years how we have performed, we always tend to look at the mix in our originations profile, whether it's mortgages, going from leaning more into prime versus non-conforming or vice versa, and in auto, whether it's Tier A, B or C. We are focused on maximizing our capital. And the way that we do that is looking at a balance between whether it's return on invested capital or NIM in its entirety.

Where we are today, we are seeing and you would have noticed, a dip in our volumes. And whenever you see a dip in our volumes, that is a conscious effort and decision made by the business to go more towards a NIM stabilization as opposed to volume growth. We may see in the back half of the year, a focus on volume growth, which will see us holding NIM to where it is today or maybe even a slight improvement or a slight decrease. It really depends on the mix that we see an opportunity. So you will see -- again, I'll just reiterate, going over time, you look at our performance, you will always see us take advantage, where we see the right balance between volume and margin.

[Operator]

Thank you. The next question is from John Lee from Goldman Sachs.

[John Lee, analyst]

Hi, everyone, can you hear me?

[Mario Rehayem, executive]

Yes.

[Therese McGrath, executive]

Yes. John?

[John Lee, analyst]

I just wanted to ask about the higher whole loan sales, and just wondering if you could elaborate on the strategic rationale for this uptick and what's the best way to be thinking about it going forward?

[Mario Rehayem, executive]

Sure. So the whole loan sale program has been in place since 2016. For us, we use it on 2 major fronts, and one is part of our funding diversification and also our capital management. What we have noticed, there has been a significant increase in the demand of Pepper assets coming inbound from offshore and onshore investors, whether it be insurance companies, PE firms and the likes. And what we are doing here is executing on our strategy, which is maximizing shareholder return, looking to increase our dividends. And by doing that, we're looking for the most efficient capital use of our capital. And at the moment, that is looking at a balanced approach between originating and keeping them on our balance sheet versus actually selling some of those assets.

Now the upside in selling those assets, which you will notice on our page, where it says loan and other servicing. What we are doing here is shifting some of our assets on to our servicing. What that does is build an annuity-style income for us that is capital-light and gives us an opportunity to maximize our efficient servicing capabilities. We will continue as long as there's appetite. And as long as there is a premium in what we are selling, we will continue to go down this path of finding the right balance between keeping assets on our balance sheet and growing our servicing AUM.

[John Lee, analyst]

Got it. That was very clear. And I guess, just another one on provisioning levels. What would be some of your macro assumptions that underpin like your current levels of provisioning?

[Therese McGrath, executive]

Yes. We actually held the macroeconomic variables in line with what we had at the end of the 31st of December 2023. So the key ones that we always look at are OCR, GDP, but importantly, unemployment as well. So they are the key ones, and we've hold the assumptions. We've also held the weighting in terms of downside case of 5% base case and the upside case at a very minimal amount.

[Operator]

Thank you. The next question is from Jason Shao from Macquarie.

[Jason Shao, analyst]

First question on whole loan sales, if I may. So you've done about $1 billion this half and depending what margins sell them at, you have a gap of -- in your revenues by about call it, $20 million to $30 million every year. I know there's some offsets with the servicing income, and I appreciate your comments about being capital-light, but overall, your future revenues will be smaller. How do you view the trade-off between earning and capital-light income, but seeing smaller revenues in the future?

[Mario Rehayem, executive]

Sorry, what was the question?

[Therese McGrath, executive]

Whole loan sales because you're selling the loan sales, you actually see a little bit of [indiscernible] come down in actually...

[Mario Rehayem, executive]

Yes. When you do a whole loan sale, no doubt that you are foregoing NIM over time. We have factored that into our modeling. And what we do is we look at the premium that we are achieving at the sale and offsetting that with obviously the lifetime earnings over the servicing and also part of our funding strategy of not needing to tap the market continually with securitization. We are very confident that the percentage of what we are selling versus what we are originating is going to play well to our strategy, which is maximizing the use of our capital.

[Jason Shao, analyst]

And sort of related to that, there hasn't been much progress on the buybacks you've announced recently. Given the book hasn't really grown too much, so assuming you don't need too much more capital, and you are doing more whole loan sales. What's holding you back from doing more buybacks than -- would you look to increase the size of it

[Therese McGrath, executive]

Yes. Look, it was simply a timing issue. We were waiting to the AGM to actually start the buyback. The AGM was pushed out a little bit. And at that point, our Chair resigned. As he retired from the Board, we appointed a new Chair. We will literally then straight up against going into a blackout period for the results. So we -- our full intention is to actually implement or start the share buyback. It was literally a position of timing just because the AGM has been quite late this year.

[Jason Shao, analyst]

And you're still happy with the size of your current buybacks, even though you're doing increasing amounts of loan sales?

[Therese McGrath, executive]

Yes, definitely. Yes.

[Mario Rehayem, executive]

Yes. It's fair to say that you would expect to see a buyback imminently depending on where the share price is.

[Therese McGrath, executive]

Correct. So the pre-close, you can buy up to 10% of the share -- per share close over a 12-month period on an on-market buyback. We announced our intention to [ do ] the on-market buyback, and we issued the Form 3 ASX in April. We will commence a buyback as and when following these results.

[Operator]

[Operator Instructions] Your next question is from Tom Strong at Citi.

[Thomas Strong, analyst]

Just another question around capital allocation. I mean, clearly, you've taken a view to go more of a capital-efficient model between lending and servicing in this result. I was just wondering, based on what you can see in the market today, if we think about capital allocation over the next 6 months, how do you sort of think about the balance between capital management, growing your lending AUM or paying down the corporate debt, which is quite expensive.

[Mario Rehayem, executive]

Yes. So it is a comb -- it's actually a combination of all everything you just mentioned. So the capital will be deployed through growth in certain asset classes, it will be deployed through dividend payments, paying back some of the CDS and also a share buyback, as we just mentioned earlier. So there is a number of opportunities for us to utilize the capital that we are generating. And this business does generate a significant amount of cash because of the profitability through the circa $20 billion of assets under management. So we have options, and that's a good position to be in. And what we are doing is looking at a way to flex those options as and when we see fit that is going to be best for shareholder returns.

[Thomas Strong, analyst]

And in terms of your appetite to, I guess, deploy more capital into lending AUM, I mean, you should get some good funding tailwinds over the next 12 months, which will all else equal improve, I guess, your risk-adjusted returns and make it more attractive to put capital in there. Is -- I guess, your appetite going to be constrained by competition and how much you'd have to give up on the NIM? And I guess, could you make some comments around what you're seeing around competition in asset finance and in prime mortgages?

[Mario Rehayem, executive]

This industry, it's very clear that you will always forfeit NIM for volume, and you can't shy away from that. But in saying that, we always look to grow, and we feel that it's the right balance between the returns that we're going to generate. If you think about our mortgages, so let's just think about commercial lending, for instance, half-on-half, we've grown 120%. So we know where to deploy the capital in areas of where we're going to grow, and that's going to give us the best returns.

Our second half to date our applications are up 14.5% on first half. So again, we do have the capital, we do have the ability to grow. I just want to stress the point that the volume -- the reduction in volume in the first half of this year versus last year -- back half of last year is purely, purely done because of us taking that decision, not because of our inability to grow. You will see a growth in the second half of this year. But again, that depends on what the market conditions are and what the returns will be. But you will always have to forfeit NIM in core products like prime mortgages and others purely because of where the market is today.

[Operator]

Thank you. There are no further questions at this time. I'll now hand back to Mario for closing remarks.

[Mario Rehayem, executive]

Thanks again, for everyone that joined the call, and thank you to our shareholders. To be frank, we are very confident of where we are sitting today. We are well provisioned. We are well funded. We have an extensive distribution network that allows us to deliver new products above and beyond our core products that we offer. We have very strong results in the first half, and we are very confident in our ability to grow when the market permits a growth or sustainable growth in that perspective.

On top of all of that, the other area is obviously whole loan sale program. We have been inundated by offshore and onshore buyers of our assets. They love the performance of our assets. And if there is always an opportunity for us to find the right balance, we will execute on that. Thank you, and we'll see you again soon.

[Operator]

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.