Australian Lending Risks Will Strain Margins Yet Allow Recovery

Key Takeaways

• Increased regulatory scrutiny, dependence on wholesale funding, and cost-of-living pressures could restrict loan growth, compress margins, and heighten default risks.
  
• Rising competition from tech players and demographic shifts may erode Wisr's market share, limit pricing power, and cap long-term revenue expansion.
  
• Rising credit stress, funding vulnerabilities, limited scale, competitive pressures, and shifts toward alternative credit solutions all threaten Wisr's long-term growth and profitability.

Catalysts

Engages in the lending business in Australia.

• While Wisr's rapid growth in loan originations and increasing automation illustrate its strong execution and tap into the broader shift toward digital financial services, the company faces the risk that rising regulatory scrutiny and potential tightening of responsible lending laws could increase compliance costs and restrict future loan growth, directly compressing net margins and limiting revenue scalability.
  
• Although the company is benefiting from the trend of major banks pulling back from personal and auto lending, opening up market share for non-bank lenders, Wisr's continued dependence on wholesale funding markets may expose it to fluctuating funding costs over the long term, which could compress net interest margins and reduce profitability even as the loan book expands.
  
• Whilst Wisr's investment in proprietary technology and automation is driving operational leverage and lower arrears, the increasing household debt burden and potential cost-of-living pressures in Australia may trigger higher defaults and loan losses during economic downturns, thus limiting sustained improvements in credit quality and placing pressure on future earnings.
  
• Despite ongoing enhancements to the automation of lending decisions and the integration of advanced AI for better risk segmentation, entrenched competition from big tech, neobanks, and emerging alternative credit solutions could erode Wisr's competitive advantage and put pressure on loan pricing, negatively impacting revenue growth rates in a crowded marketplace.
  
• While the secular trend toward consumer financial wellbeing and responsible lending aligns well with Wisr's wellness platform and customer focus, gradual demographic shifts such as an ageing population could shrink the overall demand for personal loans in the coming years, capping the company's addressable market and constraining long-term top-line growth.

Wisr Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Wisr compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Wisr's revenue will grow by 112.3% annually over the next 3 years.
• The bearish analysts are not forecasting that Wisr will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Wisr's profit margin will increase from -42.1% to the average AU Consumer Finance industry of 12.4% in 3 years.
• If Wisr's profit margin were to converge on the industry average, you could expect earnings to reach A$25.9 million (and earnings per share of A$0.02) by about August 2028, up from A$-9.2 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 5.0x on those 2028 earnings, up from -4.6x today. This future PE is lower than the current PE for the AU Consumer Finance industry at 12.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.53%, as per the Simply Wall St company report.

Wisr Future Earnings Per Share Growth

Risks

• There is a risk that rising household debt and cost-of-living pressures in Australia over the coming years may lead to greater credit stress for borrowers, which could increase default rates and loan impairments, directly impacting Wisr's net margins and overall earnings.
  
• Wisr's heavy reliance on warehouse and ABS funding could expose the company to higher funding costs if credit market conditions tighten or investor appetite for securitised assets wanes, which would compress net interest margins and reduce profitability.
  
• Despite recent growth, Wisr's relatively small loan book size and limited market share compared to major incumbents suggest that a persistent lack of scale could prevent realising the full benefits of operational leverage, limiting improvements in net margins and earnings growth.
  
• Heightened competition from both existing fintech lenders and potential new entrants such as neobanks or big tech firms could lead to downward pressure on lending rates and increased customer acquisition costs, eroding revenue and compressing margins across the industry.
  
• An ongoing shift in consumer preference towards alternative credit solutions, such as buy-now-pay-later platforms, may reduce long-term demand for traditional personal loans, constraining Wisr's new loan origination volumes and dampening long-term revenue growth.

Valuation

• The assumed bearish price target for Wisr is A$0.07, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Wisr'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$0.11, and the most bearish reporting a price target of just A$0.07.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$208.7 million, earnings will come to A$25.9 million, and it would be trading on a PE ratio of 5.0x, assuming you use a discount rate of 11.5%.
  
• Given the current share price of A$0.03, the bearish analyst price target of A$0.07 is 55.2% higher.
  
• 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.