Like other non-banking financial institutions (NBFIs) peers which reported over February 2023, Liberty’s 1H23 result highlighted its disciplined focus on net interest margin (NIM) over volumes. This is critical as BBSW increases flow through to the bottom line through higher funding costs. In our view, Liberty’s superior capital ratios and controlled approach to NIMs provides some offsets to potentially adverse economic outcomes. There has only been a small increase in arrears and delinquency rates which has demonstrated the ability of their borrowers to absorb rate increases. Therefore, while it may be a difficult time for NBFIs, Liberty is well placed to manage the headwinds.
The new Liberty 5yr is coming at 3mBBSW+380bps. Based on the Liberty curve, this offers around a 20bp pickup for one-year tenor extension. Compared to major bank sub trading at +200bps, there is also a considerable pickup (c.180bps) for a credit which is on BBB-/positive outlook. Liberty has an unblemished capital market track record – and raised over AUD12bn in domestic and international capital markets. It now has 4 domestic bonds which is comparable to a Bank of Queensland or Bendigo Bank. I expect this new issue to outperform and credit spreads to tighten by around 30bps.
Source: Bloomberg
Source: Bloomberg
Looking at the Liberty curve, I would be looking to switch my exposure out of one of the shorter-date lines into the new Liberty 5yr (especially for those investors not wanting to take anymore additional NBFI risk). I can understand investors not liking the NBFI sector – but the old adage of picking the winner within the sector is still very apparent here with Liberty.
Liberty is a highly regarded specialty financial services company with operations across Australian and New Zealand – and the only investment grade non-bank (BBB-/positive). Liberty operates through three segments – Residential Finance (64% of assets), Secured Finance (32% of assets) and Financial Services (4% of assets). What distinguishes Liberty from other non-bank lenders, is their advanced risk-management capabilities and proprietary technology.
Liberty continues to skew towards higher margin Secured Finance and Financial Services, now 32% and 4% of the book respectively. With housing credit growth slowly and refinancing activity likely to intensify competition, we can’t fault this strategy. The company’s reported 1H23 net interest margin (NIM) was down 18bps to 2.87%, benefiting 8bp from a mix shift to higher margin Secured Finance and Financial Services book which grew 13% sequential while Residential Finance fell 4% sequentially.
Source: Liberty Investor Presentation
Management provided helpful disclosure around the collective provision coverage it assumes across each product line: 10bp in Residential, 20bp in SME/SMSF, 250bp in Auto loans and 320bps in Financial Services. Liberty reported that 75% of its Secured Finance book was SME/SMSF and the remaining 25% Auto. While bad debt debts will inevitably rise, we believe it is well placed to manage headwinds.
The financial and capital position remains stable – but more importantly, the capital adequacy is well above regional peers. Adding to this, the company is generating a 17% underlying Return On Equity (ROE) which many peers would be envious of.
Source: Liberty Investor Presentation
