# Non-Standard Finance Analyst Q&A (LON:NSF)

- Link: https://www.directorstalkinterviews.com/non-standard-finance-analyst-qa-lonnsf/412800399
- Published: 2019-12-10T09:07:43+00:00
- Author: Amilia Stone

**Non-Standard Finance **(LON:NSF) is the topic of conversation when **Hardman and
Co**’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.

**Q1: Non-Standard Finance had a severe share price reaction to its recent trading
statement. What can you say about it?**

**A1**: NSF’s trading update had three elements.

First, there was a 4-5% reduction in current year consensus estimates due to softer
trading in Q3 (primarily lower loan volumes in guarantor loans, a market which has
been affected by adverse press coverage and company specific operational issues).

Second, there was a 6-8% reduction associated with a step change in provisioning
policy assumptions. There is a known cyclicality inherent in IFRS9 as its calculation
of credit impairments requires companies to give a weighting to a range of possible
economic outturns. As you go into a recession, the weighting for the downside scenario
increases so provisions will increase even if customers continue pay exactly as 
they were before. IFRS9 anticipates future losses and what NSF did was increase 
the weight to the downside.

Finally, NSF is indicating tighter lending criteria and so slower lending growth.
Even after all these we are still forecasting 2021 adjusted profits to be double
the 2018 level.

**Q2: So, tell us more about the softer trading?**

**A2**: The key driver to the 4-5% trading downgrade is thus lower volumes in the
guarantor loan business, especially in September and the expectation that with the
move to Trowbridge there will be a period of disruption that will take a few months
to get back to previous run-rates. Management noted a number of company specific
issues including a change in management and keeping two separate sales functions.

We note there were record volumes in July, near record in August and the fall off
was primarily in September. This timing may also suggest that adverse market publicity
has had an effect (although the company said there was no evidence to confirm this).

To address the slower than expected loan book growth, NSF is accelerating the consolidation
of all functions into one site by nine months, which should see cost savings ahead
of expectations and also realise a number of operational efficiencies.

**Q3: And the assumption change?**

**A3**: It has always been known that IFRS9 has cyclicality. The methodology includes
a weighted probability assigned to different economic outturns and as a recession
approaches a greater weighting is likely to be assigned to downside scenarios than
when the outlook is more positive. NSF moved from 85% base case, 10% downside 5%
upside weighting to 50% base and 50% downside, which we believe is in line / above
where peers have got to.

The change in weighting applies to the existing loan books for both branch-based
lending and guarantor loans and so in 2019 there is a step change effect. In future
years the effect is less as the higher weighting will only apply to new business.
It is also worth noting that the change in assumptions has had a material impact
on provisioning in branch-based lending and guarantor loans but is not visible in
home collect. This reflects the historical relative stability of credit in the business
in a downturn and so there is less sensitivity to downside scenarios.

**Q4: Finally, you said Non-Standard Finance had slowed growth assumptions. what
can you say about that?**

**A4:** Management has revised some of its medium-term targets (i.e. over the next
three years or so) to reflect the current uncertain outlook as management tightens
scorecards. The biggest volume reduction is in guarantor loans where having enjoyed
a period of significant loan book growth (H1 2019 saw growth of 53% versus the prior
year) growth is now expected to moderate to between 15-20% per annum. Branch lending
growth has reduced from 20% to 10-15%. As we move into a downturn and the 3-year
outlook is for recovery, the old target may get re-instated.

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