The financial industry on the ASX has a variety of companies, but a lot of them seem to generate most of their earnings from loans.
The big four banks, Bendigo and Adelaide Bank Ltd (ASX: BEN), Bank of Queensland Limited (ASX: BOQ), Mortgage Choice Limited (ASX: MOC) and MyState Limited (ASX: MYS) are all examples of businesses that rely on the loan market.
I'm not sure loans are going to be the best place to be focused on over the next few years. The growth of Australia's debt has boosted earnings in recent years but it could turn sour if bad debts start to rise.
Here are three of my favourite financial stocks on the ASX that don't focus on loans:
Challenger Ltd (ASX: CGF)
Challenger is Australia's leading annuity provider with a dominant market share.
The number of people hitting retirement age is expected to dramatically increase over the next two decades, so the amount of money transitioning into the retirement phase should also increase substantially.
Challenger is increasing its distribution channels every year, in the first quarter of FY18 Challenger will be on AMP Limited's (ASX: AMP) and BT Investment Management Ltd's (ASX: BTT) platforms.
Challenger is trading at 17x FY18's estimated earnings with a grossed-up dividend yield of 3.76%.
Magellan Financial Group Ltd (ASX: MFG)
Magellan is one of Australia's leading fund managers, with a focus on international shares.
It runs a variety of unlisted and listed funds including its listed investment company called MFF Capital Investments Ltd (ASX: MFF).
Its funds under management (FUM) has been impressively growing for a number of years. In its latest monthly FUM update for May 2017 it revealed that FUM had grown by 3.58% compared to April 2017's FUM total.
I think Magellan could be the best fund manager to own because its strong performance attracts more funds.
Magellan is currently trading at 24x FY16's earnings with a grossed-up dividend yield of 3.96%.
Macquarie Group Ltd (ASX: MQG)
Macquarie is Australia's fifth biggest financial group but is quite different to the big four banks. It is an investment bank with a focus on international capital markets and asset management.
In its latest report for the full-year to 31 March 2017 it reported that around 63% of its revenue actually came from overseas.
The share price has risen to $86.50, so I wouldn't describe it as a great value buy at the moment, but it could be a good long-term buy at these levels.
Macquarie is currently trading at 13x FY18's estimated earnings with a partially franked dividend yield of 5.42%.
Foolish takeaway
Out of the three above companies, Challenger is by far my favourite at the current prices. The ageing demographic tailwinds should be a huge boost for the annuity king, with a decent dividend thrown in.
If you'd prefer a simpler stock compared to Challenger, with a HUGE dividend yield, you should check out our number one income stock for 2017.
