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PCF Group Plc: THE INVESTMENT CASE

PCF Group banking on a cheaper source of funds

The regulatory restrictions of the bank mobilisation period have been lifted and PCF can now commence deposit taking activities as a fully-operational bank
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INVESTMENT OVERVIEW: PCF The Big Picture
The group intends to grow the portfolio to £350mln with three years and £750mln within five.

PCF Group Plc (LON:PCF) has completed a three-year transition from a finance house to a bank able to take retail deposits.

What’s remarkable is that all the while it has been jumping through the hoops set out by the Prudential Regulation Authority and the Financial Conduct Authority, it has continued growing at a fair old trot.

The niche lender saw strong organic growth in the first half of its financial year.

Net interest income in the six months to the end of March rose to £5.15mln from £4.89mln in the corresponding period a year earlier.

New business volumes rose 13% to £35mln from £31mln the previous year, while the value of the portfolio of receivables increased 14% to £128mln from £112mln a year earlier.

The group intends to grow the portfolio to £350mln with three years and £750mln within five.

Administration expenses rose as the group girded its loins for the launch of its banking activities, climbing to £3.05mln from £2.47mln, and this increase was responsible for profit before tax ebbing to £1.72mln from £1.77mln the year before.

Underlying profit before tax, which adds back £553,000 of banking costs, rose to £2.27mln from £1.96mln the previous year.

Now that the company is able to start taking retail deposits, it hopes to kick on and hit those targets for the growth of portfolio of receivables.

Retail deposits will provide a cheaper source of funds than the money markets, which means the company can cast its net a bit wider in terms of who it lends to, and how much.

As Panmure Gordon investment analyst Donald Tait put it, its status as a bank moves the group "down the risk curve” and means it can “offer credit to borrowers that were previously uneconomical".

Speaking to Proactive, the group's chief executive Scott Maybury has said it would ensure the group was far less reliant on the mainstream banks for finance. It would also level the playing field with most of its competitors, which have the ability to take in deposits.

“All we want to do is more of the same and to a greater scale. We just want to diversify our funding away from wholesale debt and towards retail deposits.

“There is an economic climate and political will to have more competition in the bank deposit market,” he added, noting that PCF was a lender to small and medium enterprises (SMEs) -  a key objective for the government.

If the group can get its return on assets up to 3%, then profits should rise significantly, and with it, the valuation of the business.

The company describes itself as a prime and near-prime lender generating 60% of its business providing consumer finance for used and classic cars and horse boxes.

The rest (40%) comes from funding vehicles, plant and equipment to small and medium-sized enterprises.

Its interest rates, which average around 14%, are higher than those charged by the high street banks, but are far lower than the majority of offers out there.

PCF Bank will offer customers a range of deposit products that will be be available online and in best-buy publications in the very near future.

A typical one year savings product will offer interest rates of 1.7%, with the account opening process taking as little as ten minutes.

“The potential upside is considerable, as we currently have a relatively small market share and will now be able to access cheaper funding and lend into more prime segments of the market. Our organic growth proves that the model works, and the launch of PCF Bank will allow us to accelerate that growth over the next 3-5 years," declared Maybury.

"The consumer market for used vehicles and the SME market for vehicles, plant and equipment remain robust and our credit criteria remain appropriately judged for the uncertainties of the current political and economic environment.

"PCF Bank's access to retail deposits will allow us to provide our broker network with an even wider and more competitive range of rates, and along with our new business initiatives, will ensure that when those deposits come in we are able to deploy that capital quickly and efficiently," he added.

 

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