Hindsight is a wonderful thing. But was there a bigger accident waiting to happen on the UK stock market than International Personal Finance?
For readers not familiar with the FTSE 250 company it is a doorstep lender with a twist: it operates in Eastern Europe and Mexico.
Our largest and most established markets are the four Central European markets – Poland, the Czech Republic, Hungary and Slovakia. They joined the European Union in May 2004 and boast rapidly growing, yet relatively undeveloped, consumer credit markets with further potential for growth. We now have over 1.5 million customers in this region. Home credit didn’t exist here before Provident moved in. For the first time, customers had a quick, convenient alternative to local banks or borrowing money from friends or family.
Indeed.
Somewhat predictably the company has issued a profits warning this morning that has sliced almost 30 per cent off its share price. Its problems are in Hungary, where demand for its services have fallen sharply and impairments are rising. The net result is that full year profits are going to come in around £20-£30m below expectations.
But that is not the end of the bad news. Some analysts think the company, whose business model has not been tested in an economic downturn before, could breach banking covenants.
Here’s Noble Research.
Covenant risk: IPF has an interest covenant of 2x. Following today’s update we estimate impairments as a % of revenues to be running at 31%. Given that the sensitivity to bad debts is every 1 percentage point increase in provisions = c. £5m off profit. (Loan book is £500m), we estimate that if that ratio goes to 34%, they will breach the interest covenants.
How realistic is 34%? In 2005, the ratio of impairments to revenues was 37%! (table 1). Moreover, management has a target range of 25-30%. As we have highlighted in the past that this business model has not been tested in an economic downturn and hence there is a risk of exponential rise in bad debts.
The recent data from one of the main Polish Banks (BRE) suggests that bad debt charges in retail banking in Q109 increased by 61% over Q408. So given the deteriorating macro environment and the uncertainty in all the economies in which IPF operates, we would not be surprised to see the 34% being hit.
Scary stuff. Nowhere near as bad as Cattles, of course, but worrying nonetheless.
Update:
Here’s the view of one analyst who just been on this afternoon’s confernce call with IPF.
The conference call will IPF has just ended and beggared belief. It transpires that they didn’t know the extent of the problems in Hungary until yesterday morning. Nor did they realize that so many of their customers had CHF mortgages. They don’t accept that this has any read across for Poland with their survey data suggesting that it only affects 3% of the customer base but how reliable is that data. Also they conceded that in Hungary that a major part of the problem was the outflow of capital caused by such mortgages, this is bound to impact on Poland similarly. Given that this business operates in Emerging Markets, which by there very nature volatile, the inadequacies of their management information is astounding.
Related link:
UK’s Cattles warns of more provisions – FT Alphaville