Ratings agency positive about Avanti's market position

Changes to Avanti's funding base well received by ratings house.

Friday, October 4th 2024, 6:00AM

Ratings agency S&P has kept Avanti Finance's rating at the BB and noted the non-bank lender is becoming less reliant on bank funding.

"Avanti Finance continues to diversify its funding base away from its primary bank provider. As a result, we revised upward our assessment of the company's funding," S&P says.

The company has reduced its reliance on a single bank funding provider, to about 30% as of June 30, from about 80% in 2015.

"We expect Avanti to further diversify its funding. The company's reliance on funding from a single bank could drop to about 20% over the next six months. As such, we now see the company's funding profile as consistent with more highly rated peers."

S&P expects Avanti will continue to diversify its funding sources by issuing residential mortgage-backed securities, medium-term notes, and asset-backed securities as it grows. "An expanded cross section of banking relationships providing a larger number of warehouse facilities will provide further funding support."

"We believe Avanti will maintain its niche position in New Zealand's financial industry. The company offers lending products to borrowers which the banking sector does not service. It will likely maintain its competitive position in the non-bank sector of New Zealand, despite pressures from the larger New Zealand banks. Furthermore, we expect it to return to profitability in fiscal 2025 (year-end June 30)."

Avanti made a $521,000 loss in its recently completed financial. years (which included a $247,000 in profit attributable to non-controlling interests) driven by higher operating expenses and fair value losses for derivative financial instruments offsets this.

Despite S&P being positive about the changes in funding it decided not to to lift the rating due to an offsetting view that the company will "manage its risk-adjusted capital (RAC) ratio at a strong but lower level than we previously thought."

"Reflecting this, we revised downward our assessment of Avanti's capital and earnings. We project our RAC ratio for Avanti could fall to 11.5%-12.5% over the next 12 months. This is as the company expands its loan book by at about 20% per year, with a focus on higher-risk-weighted auto lending in both New Zealand and Australia and personal lending largely in New Zealand."

Australian auto loans made up 30% of Avanti's gross receivables.

"Despite higher-risk lending than traditional banks, Avanti will likely maintain sound asset quality," S&P predicts. "This is because the company is moving to a customer segment with higher credit quality. We also expect credit losses across the financial system in New Zealand to remain low, with support from low unemployment. The company's credit losses could amount to about 50 basis points of customer loans over the next two years, in our estimation."

Tags: Avanti S&P