Lending growth and securitisation normalisation give metro a positive outlook

Metro Finance has continued to grow its lending book over the past 12 months and its gross origination volume is now approximately A$1.8 billion per annum. More than 90 per cent of the book is commercial loans to SMEs, but Metro expanded into the novated leasing market about 18 months ago and added consumer lending more recently still.

It has been a strong year for commercial lending, says Metro’s Sydney-based treasurer, George Pappas. The nonbank lender is focused on trades, construction and transport and chooses to be underexposed to mining, retail, tourism, hospitality and sectors that rely on discretionary spending. “Tradies typically have mobility between jobs – their assets are their tools of trade,” Pappas says.

This gives Metro a solid baseline of confidence about the performance outlook of its lending book. Borrowers with trades tied to residential construction will be supported by chronic undersupply of housing to meet renewed steady immigration to Australia. “All these people are looking for places to live and we expect high demand for residential construction, so there should be good demand from tradies for vehicles and equipment,” Pappas confirms.

Meanwhile, the transition to electric vehicles (EVs) is slowly gathering pace. Fringe benefits tax incentives offered by the Commonwealth are influencing Metro customers who sign up for novated leases for consumer vehicles.

Around 80-90 per cent of vehicles funded via novated leases with Metro are EVs, which are generally more expensive than regular cars. “Government incentives are certainly bringing in a higher volume of EVs, especially in the novated space,” Pappas says.

MARGIN COMPETITION

With a much narrower range of funding options than is available to the big banks, Pappas admits it is hard to compete on price. “But where we do compete effectively is on service,” he says. “Our turnaround times are generally less than a day. The banks can be anything from a couple of days to a week or more.”

As economic and monetary policy conditions have become more certain, the securitisation market has returned to more normal conditions after a challenging 2022, says Pappas. He notes solid outcomes for recent issuance and predicts a busy few months leading-up to Christmas. In particular, he highlights the fact that deals varying in size from very small to jumbo, and with a range of collateral types, have been successfully executed in the market – saying this demonstrates that investors are willing to hold a diverse range of credits.

Metro has been a regular issuer and plans to continue to be. “We expect to come to market with a larger deal this year,” says Pappas. “Our book is a prime one, so we expect to see good investor interest domestically and offshore.” 

The issuer expects domestic demand to grow from recent experiences. As evidence, Pappas points to margins on triple-A tranches of nonconforming residential mortgage-backed securities (RMBS) coming in to 150 basis points over BBSW from 175 while prime RMBS margins have contracted to the 125-130 basis points over BBSW level.

“Historically, prime asset-backed securities (ABS) sit somewhere between prime and nonconforming RMBS, and I don’t expect this to change in the current market,” Pappas suggests.

Investors are increasingly supportive of the prime ABS product, especially as supply grows. “It provides diversification and higher yield relative to bank prime RMBS issuance,” Pappas says. “Investors perceive that they are still getting good value from prime ABS, and this is one reason why the asset class is expanding.”

He adds: “Over the past year or so, there has been a lot of pre-placement of mezzanine and senior tranches to reduce execution risk. However, the level of risk seems to have dissipated and issuers can now have more confidence to come to the market without having to pre-place.”