Fin­bond buys into four US pay-day lenders

Fin­bond has soared 391% in the past three years, thanks to its strat­egy of mi­crolend­ing and mu­tual bank­ing. But its big­gest gam­ble so far has been buy­ing into four US pay-day lenders. Can it work? asks Gi­uli­etta Talevi

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You’ve prob­a­bly seen the ad­verts, on the In­ter­net at least, of pay-day lenders who’re will­ing to tide you over un­til the next pay cheque comes along: “Need cash now? We’re ready to lend a hand.”

In Amer­ica, more than 19-mil­lion house­holds count a pay-day loan “among their choice of short-term credit prod­ucts”, says one as­so­ci­a­tion ded­i­cated to the busi­ness of short-term loans.

Clearly it’s a busi­ness model SA’s only mu­tual bank, Fin­bond, found too tempt­ing to re­sist. This month, it an­nounced it had bought four pay-day lenders in the US and Canada in a deal worth more than R500m. It might not seem like much, but Fin­bond is worth only R2.1bn, so it’s a risky gam­ble equal to 25% of its mar­ket value.

One small-cap fund man­ager, who asked not to be named, says: “if the Amer­i­can as­sets they are buy­ing are so great, why have no Amer­i­cans bought them?”

It’s clearly a big gam­ble for a com­pany that some retail in­vestors be­lieve may be the next Capitec. In re­cent years, those in­vestors have been hand­somely re­warded. Fin­bond’s share price has rock­eted from around 12c/share in 2012 to R4.05 by the end of last year, out­per­form­ing the JSE all share many times over. It’s a thump­ing vin­di­ca­tion of CEO Wil­lie Van Aardt’s strat­egy of mi­crolend­ing to the 40% of South Africans ig­nored or frozen out of the for­mal bank­ing sys­tem, as well as hav­ing a mu­tual bank that, at last count, held R921m worth of de­posits from peo­ple at­tracted to the high rates it pays.

And yet, in re­cent weeks, the ar­dour has cooled, with the stock hav­ing shed more than 10% this year to trade at around R3.60.

This sug­gests that the mar­ket is not en­tirely sold on the pay-day lend­ing plan.

What Fin­bond is buy­ing in the US is a flashy tech­ni­colour col­lec­tion of lenders, with names like Cash in a Flash and Amer­i­can Cash Ad­vance.

They aren’t small busi­nesses ei­ther: Amer­i­can Cash Ad­vance owns 41 branches in Louisiana and Mis­sis­sippi, Cash in a Flash has eight branches in In­di­ana, while the len­der Cash­back LLC owns 37 branches in South­ern Cal­i­for­nia, with plans to open an­other five. The Cana­dian len­der is On­tario-based Cash Shop, which owns six branches.

Sur­pris­ingly for a com­pany that has done so well in re­cent years, the com­pany ap­pears par­tic­u­larly de­fen­sive over this deal. Fin­bond CEO Wil­lie Van Aardt says all the deals were done at earn­ings-en­hanc­ing prices, “as is glar­ingly ob­vi­ous” from its Sens doc­u­ment. But it’s not as sim­ple as Van Aardt sug­gests.

For ex­am­ple, he says Fin­bond’s C$6.5m pur­chase of Cash Shop puts the busi­ness on a mul­ti­ple of 6.5 times earn­ings.

How­ever, if you use the net af­ter-tax profit of C$194,209 for the year to De­cem­ber, this puts the pur­chase price at 33 times its earn­ings. Fin­bond sup­plies no other earn­ings fig­ures in its ac­qui­si­tion an­nounce­ment.

Asked to clar­ify this, Van Aardt told In­vestors Monthly that the mul­ti­ple paid will be closer to 6.5, be­cause the pay-day len­der has pro­vided a war­ranty that the prof­its will be at least C$1m.

“That unau­dited C$194,209 [of the pre­vi­ous year] in­cludes “ab­nor­mally high fees” paid to pre­vi­ous share­hold­ers the year be­fore that will not be re­peated in the cur­rent year, and I’m look­ing at the war­ranted profit of C$1m,” Van Aardt says.

Thanks to the steep rise in Fin­bond’s shares in re­cent times, its own shares trade on a p:e ra­tio

It’s clearly a big gam­ble for a com­pany that some retail in­vestors be­lieve may be the next Capitec

of 35 times earn­ings. So it would make sense for Van Aardt’s com­pany to use its equity, through a R525m rights of­fer, to stake its claim on Amer­i­can soil.

It’s a trans­for­ma­tive deal. If share­hold­ers give it the green light, Fin­bond ex­pects up to 50% of earn­ings to be in dol­lars within the first year. Within five years, it ex­pects its dol­lar prof­its to grow to be­tween 70% and 80% of its over­all earn­ings.

Of course, it’s easy to see why South African firms are fall­ing over them­selves to ex­pand into so-called hard cur­rency re­gions, given the in­creas­ingly frail rand, which shows lit­tle ob­vi­ous sign of re­cov­er­ing its poise.

But the US is a hard teacher: Old Mu­tual and Dis­cov­ery both floun­dered be­fore reignit­ing their US ca­reers with vastly scaled-back ap­proaches, while fi­nan­cial ser­vices group Sage ran aground in spec­tac­u­lar fash­ion.

Van Aardt sug­gests Fin­bond doesn’t in­tend to make sim­i­lar mis­takes. “It’s worth re­mem­ber­ing that the US part­ners and se­nior man­age­ment that we get as part of the ac­qui­si­tions have ex­ten­sive prac­ti­cal knowl­edge of the mar­ket with a proven track record of suc­cess,” he says.

Fin­bond has ap­par­ently been scout­ing around for ways to di­ver­sify its risk and in­crease its rev­enue. The pay-day lend­ing model in the US pro­vides “earn­ings-en­hanc­ing growth op­por­tu­ni­ties”.

Van Aardt says the US foray will be ring-fenced from its South African op­er­a­tions. It’s a risky busi­ness, how­ever. Pay-day lenders have been squeezed by reg­u­la­tors in the UK, with com­ing un­der fierce at­tack for what many be­lieved to be preda­tory lend­ing tac­tics.

Van Aardt says that the prof­itabil­ity of branches in North Amer­ica is “sig­nif­i­cantly su­pe­rior to that in SA”.

He ex­pects the 91 branches that Fin­bond is buy­ing to gen­er­ate earn­ings sim­i­lar to those it makes through its 342 SA branches in the short term.

Once the ac­qui­si­tions are in the bag, Fin­bond will be lend­ing US$130m/year through its mi­cro­cre­dit divi­sion. But not ev­ery­one is as bullish. One an­a­lyst, who pre­vi­ously cov­ered Fin­bond, says: “The idea of pay-day loan busi­nesses in Amer­ica mak­ing bot­tom-line prof­its of $1m scares the liv­ing day­lights out of me — th­ese are clearly not busi­nesses of scale.

“I hope they un­der­stand the risks and have done all the re­search into the reg­u­la­tory in­tri­ca­cies in the US.”

But the regulation, says Van Aardt, is “sig­nif­i­cantly more favourable” to that in SA, with pay-day lend­ing reg­u­lated on a state-by-state ba­sis.

Ac­cord­ing to the Pew Char­i­ta­ble Trust, 12-mil­lion Amer­i­cans re­sort to pay-day loans ev­ery year. In 2013, the typ­i­cal cost of tak­ing out a pay-day loan was $55, and a typ­i­cal pay-day loan cus­tomer would end up tak­ing out loans over five months of the year, pay­ing $525 in fees.

Van Aardt ap­pears un­fazed by reg­u­la­tory rum­blings. “We had dis­cus­sions with state leg­is­la­tures as well as fed­eral leg­is­la­tures and are com­fort­able with the cur­rent and po­ten­tial fu­ture reg­u­la­tions.”

In SA, Fin­bond has had its share of clashes with the reg­u­la­tors — no­tably the Na­tional Credit Reg­u­la­tor.

Hav­ing se­cured its mu­tual bank li­cence in 2012, Fin­bond has gone from mak­ing a head­line loss of 1.3c/share at its 2012 year-end to head­line earn­ings of 8.6c/share for the year ended Fe­bru­ary 2015. Its to­tal as­sets, at last count, were R1.2bn.

Clev­erly, the busi­ness mar­ries long-term fixed de­pos­i­tors seek­ing a higher yield, with short-term bor­row­ers. Typ­i­cally, Fin­bond’s en­tire loan port­fo­lio turns 3.5 times a year, with an av­er­age loan size of R1,472 and an av­er­age ten­ure of 3.5 months.

In a 2014 note on the com­pany, An­chor Cap­i­tal wrote: “The key to Fin­bond’s ex­plo­sive growth po­ten­tial [off an ad­mit­tedly small base] is the mas­sive spread earned be­tween their fund­ing source and their loans writ­ten.”

Given that the com­pany has also se­cured a bank­ing li­cence, this gives it ex­tra room to grow.

In­sti­tu­tions have largely stayed away un­til now. While it moved to the JSE’s main board in March 2014, only the Eskom Prov­i­dent Fund had a stake in it, and that a pal­try 0.01%.

But in Fe­bru­ary last year, Protea As­set Man­age­ment, on be­half of Mid­brook Lane and the Riskowitz Value Fund, snapped up 10.26% of its shares. They join Van Aardt’s Kings Reign In­vest­ments, which owns 33.7% of the com­pany and Serge Be­la­mant’s JSE-listed pay­ment ser­vices group Net1, which holds 25.9% of the firm.

Protea and Mid­brook are the brain­chil­dren of Sean Riskowitz, who swooped on listed in­sur­ance out­fit Con­duit Cap­i­tal last year, prompt­ing a man­age­ment shake-up and the de­par­ture of for­mer CEO Ja­son Druian.

Mid­brook Lane is now un­der­writ­ing Fin­bond’s R525m rights of­fer, which will be used to fund the North Amer­i­can blitz.

Riskowitz has no wor­ries about the US pay-day lend­ing foray. “I be­lieve you can de­duce that we are very pos­i­tive about the trans­ac­tion and the prospects of Fin­bond’s North Amer­i­can ex­pan­sion,” he says.

For its part, Net1 will stump up R136m to fol­low its rights, while Van Aardt has com­mit­ted R75m.

Net1, bet­ter known to read­ers for the fall­out over a so­cial se­cu­rity pay­ments ten­der, has been a pas­sive in­vestor in Fin­bond since 2009, when it sold some of its branches to Fin­bond in ex­change for shares.

Her­man Kotze, Net1’s fi­nance di­rec­tor, says: “There are lim­ited busi­ness links be­tween the two firms. We have pro­vided Fin­bond with arms-length share­holder loans over the years and we pro­vide our EasyPay bill pay­ment ser­vice, along with pre-paid air­time and elec­tric­ity prod­ucts, at Fin­bond branches.”

But Kotze says that Net1 “has cer­tain tech­no­log­i­cal of­fer­ings that may be ap­pli­ca­ble to Fin­bond’s US op­er­a­tions and [that it looks] for­ward to ex­plor­ing th­ese op­por­tu­ni­ties with Fin­bond’s man­age­ment”.

Those al­ready in­vested are pre­dictably talk­ing in gung-ho terms. But for peo­ple on the out­side, it’s a gam­ble worth more con­tem­pla­tion.

An­chor Cap­i­tal’s re­search note per­haps sums up the equa­tion best: “If Fin­bond can repli­cate [Capitec’s] suc­cess, share­hold­ers could be hand­somely re­warded — but given the ex­e­cu­tion risks, we be­lieve this is a stock for risk-seek­ing in­vestors only.”


Fin­bond CEO Wil­lie Van Aardt.

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