“This,” Tony Nelson said, “will be the golden age of lending.” What?! With borrowers defaulting all over the place and the business climate getting steadily worse – can these really be golden days for money-lenders?
Well, yes actually. And Tony Nelson told me why.
Nelson is chief executive of Private & Commercial Finance (PCF), a £7m AIM-listed provider of finance. Since last August when the credit crisis began to seep through the banking world PCFG has been raising its lending rates. It has widened the margin between the cost of its funds and the price at which it lends them out by 150 basis points.
True, it has had to pay an extra 50 basis points for new loan facilities that it has arranged this year, but still it has seen a dramatic widening of its profit margin in a matter of a few months.
“We are pushing at an open door,” Nelson went on. In recent months major providers of finance such as One World Leasing and the Cattle’s subsidiary Welcome Finance have withdrawn from the business of financing loans to those who want to buy a car or to owners of small businesses who are looking to buy new equipment. So such individuals are finding it increasingly hard to borrow money and are turning to PCFG in growing numbers
This time last year PCFG was receiving 10,000 applications per month. Now it is receiving 35,000. PCFG does not have its own sales team, so all of these come though brokers. Fortunately PCFG has the ability to process this vast volume of applications, thanks to an IT system which it began to develop back in 1998.
Then it simply replicated the various stages of the lending process that were being carried out manually. Over the last ten years the company has steadily refined the criteria that it applies to loan applications, and this automated system is key to PCFG’s operating efficiency, its ability to sort out the good borrowers from the bad, and therefore its commercial advantage.
Solid numbers
Loan applications cascade through various stages, but while a very few get an automatic offer the final decision is made by man and not by computer. Today PCFG has loans averaging £7,500 outstanding with 17,000 customers.
No customer accounts for more than 0.3% of PCFG’s total portfolio of loans and the number of bad debtors is low. Ten days ago PCFG reported annual results that caught the market by surprise. Its portfolio of receivables grew by 46% and the profit in the twelve months to March 2008 was 138% ahead of the fifteen month period to March 2007.
This was an impressive performance and the share price duly jumped. Despite this, the rating of the shares, which trade on just seven times reported earnings, is low.
To an extent this is a hangover from past indiscretions. Nelson admits that PCFG made two strategic errors in the past. Five years ago it pulled out of the sub-prime area after an unhappy experience and in 2005 it closed down another unsuccessful venture, this time into car retailing.
The rating of the shares might also be higher if PCFG paid a dividend. But with a deficit on its profit and loss account it is unable to do so without an expensive capital reorganisation. And, as Nelson points out, in the current climate it makes more sense to keep the capital in the business.
So PCFG looks set for a good year or two. The current portfolio has the potential to generate £29m of gross profit over the next three to four years, on top of which PCFG will no doubt be adding more profitable business this year.
However, while lending margins are high, the other side of the coin is that there fewer credit-worthy applications for loans are being made. So PCFG does not expect to grow its loan book as fast this year. But still it will be adding some very profitable new business to its books – and giving an example of how some lenders at least are able to rebuild their strength throughout these troubled times.
• This article is taken from Tom Bulford’s free daily email, Penny Sleuth