Australia's Affordability Crisis And Fintech Pressure Will Drag Margins Down

Key Takeaways

• Ongoing pressures from affordability, digital disruption, and fierce competition threaten to erode profitability and inhibit sustainable long-term growth.
  
• Reliance on concentrated funding sources and temporary earnings drivers increases earnings volatility and magnifies risk amid tighter regulatory conditions.
  
• Growth is supported by strong housing demand, tech-driven efficiency, diversified offerings, stable funding, and strengthened broker relationships, ensuring resilient earnings and sustained momentum.

Catalysts

Provides residential mortgage and asset finance lending products in Australia and New Zealand.

• The ongoing affordability crisis and persistent wage stagnation in Australia are likely to further erode home ownership rates in coming years, directly reducing the pool of potential mortgage customers and limiting long-term revenue growth for Resimac.
  
• The imminent runoff of the recently acquired Westpac auto portfolio, combined with a lack of new origination in novated leases, means Resimac's current boost in earnings and AUM is temporary and could reverse, putting medium-term profit and asset growth at risk.
  
• Funding model concentration on warehouse facilities and securitisation exposes Resimac to sudden spikes or disruptions in funding costs. With the long-term trend toward tighter regulatory and capital requirements for non-bank lenders, margins could be persistently compressed and earnings become more volatile.
  
• Intensifying digital disruption in financial services enables larger fintech competitors to outpace smaller peers in technology investment and customer acquisition, which may make it impossible for Resimac to maintain operating efficiencies and could lead to structurally higher cost-to-income ratios.
  
• Continued competition from major banks and new fintech lenders is projected to drive down mortgage yields and push net interest margins to new lows. This race to the bottom will likely erode Resimac's profitability and make organic loan book growth increasingly costly and inefficient over the next several years.

Resimac Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Resimac Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Resimac Group's revenue will grow by 93.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 21.1% today to 6.9% in 3 years time.
• The bearish analysts expect earnings to reach A$82.3 million (and earnings per share of A$0.21) by about September 2028, up from A$34.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 5.7x on those 2028 earnings, down from 11.9x today. This future PE is lower than the current PE for the AU Diversified Financial industry at 20.2x.
• Analysts expect the number of shares outstanding to decline by 1.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.37%, as per the Simply Wall St company report.

Resimac Group Future Earnings Per Share Growth

Risks

• Continued growth in residential housing demand, driven by high population growth, urbanisation, and housing supply imbalance across major Australian cities, is expected to underpin strong mortgage demand and drive up Resimac's assets under management and revenue.
  
• Increasing digital adoption and investments in technology, automation, and AI are improving operational efficiency and customer service, which are likely to reduce Resimac's cost-to-income ratios and boost net margins over time.
  
• Diversification into asset finance and successful integration of the Westpac Autos portfolio has widened Resimac's product offering, which supports earnings resilience and potential revenue growth even if one segment underperforms.
  
• Robust access to warehouse funding and oversubscribed securitisation deals with reduced funding costs provide a stable, flexible funding base, supporting profitable volume growth and enhancing margins and earnings sustainability.
  
• Strengthened broker relationships, an expanded active broker network, and targeted campaigns have driven double-digit growth in loan applications and settlements, suggesting that top-line revenue and overall earnings momentum can continue in the coming years.

Valuation

• The assumed bearish price target for Resimac Group is A$1.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Resimac Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$1.5, and the most bearish reporting a price target of just A$1.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$1.2 billion, earnings will come to A$82.3 million, and it would be trading on a PE ratio of 5.7x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of A$1.04, the bearish analyst price target of A$1.0 is 4.0% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.