Private & Commercial in demand

The business of lending, to people or companies, has become drastically circumscribed by the credit crunch. But for those strong enough to hang in there, the improved lending margins created by the exodus of competitors could be good news.

Private & Commercial Finance Group (PCF), which has 20,000 outstanding loan agreements worth an average £6,500 each and provides equipment funding for smaller companies and car finance for individuals, is in this fortunate position. The company, which increased pre-tax profits from £390,000 to £930,000 in the year to March, on turnover up nearly ten per cent, says it is experiencing an improvement in loan quality and margins and has achieved half its £15 million two-year funding target in six months.

Before Tony Nelson retired as chief executive last month to become deputy chairman, he suggested AIM-quoted PCF was likely to show a 15 per cent pre-tax profit increase for the six months to September. According to Nelson, the London-based company decided last year to ‘rein back our new business volumes because of the outlook for the wider economy’.

He has argued this decision has greatly benefited PCF, since, in recessionary conditions, demand for the company’s services ‘significantly exceeds supply’. This has enabled PCF ‘progressively to tighten our lending criteria and further increase margins’.

Scott Maybury, newly installed as Nelson’s successor at the AIM-quoted company, says it has raised £7.5 million since April from the likes of Hitachi Capital and Siemens Finance. He points out that London-based PCF’s principal funding arrangements are with major UK retail banks, but explains that the trade finance groups, which have provided the latest funding, ‘run portfolios similar to our own, understand our business and talk our language’.

According to Maybury, the company, which recently forecast a 15 per cent first-half profits increase, does not expect to repeat last year’s 40 per cent portfolio growth. He sees seven to eight per cent as more realistic in today’s markets, though enhanced by
higher margins.

PCF had a £20 million three-year facility with Kaupthing Singer & Friedlander, part of the collapsed Icelandic group Kaupthing. But, given the relatively modest scale of its present financing plans and its recent success in raising funds on terms, which Maybury describes as ‘absolutely liveable’ from groups with which the company already had relationships, the company looks well placed to achieve its measured growth it plans.

Maybury agrees that PCF operates in a market where demand exceeds supply. Companies and private individuals alike are trying to reduce their borrowing, but rival lenders are also pulling out, leaving PCF with ‘a larger share of a smaller market’.

Maybury says second half growth will be slower and bad debt provisions will rise. But he suggests dwindling competition, as weaker brethren withdraw from the market, will enable the company to increase the quality of its lending and widen its margins to compensate for increased provisioning.

In the six months to September, PCF increased its portfolio of finance receivables by five per cent to more than £170 million, including £30 million of finance charges to be recognised in future periods. Analysts contend that, given the company’s ability to tighten lending criteria, its portfolio has the potential to generate £30 million of finance charges over the next three to four years.

In common with most other financial sector shares, PCF’s have been dire stock market performers of late. Floated ten years ago at 65p, they have halved since last year to 12.5p.

Supportive analysts argue that is less than a third of the company’s net asset value. At these levels, they could offer defensive qualities and might justify a medium to long-term purchase.