# Non-Standard Finance PLC Q&A with Hardman & Co (LON:NSF)

- Link: https://www.directorstalkinterviews.com/non-standard-finance-plc-qa-hardman-co-lonnsf/412751239
- Published: 2018-05-17T08:50:52+01:00
- Author: Amilia Stone

**Non-Standard Finance PLC** (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 released a trading statement yesterday, what did you 
think of it?**

**A1**: Before the announcement, we and the market had very strong growth forecasts
both for profits and lending at Non-Standard Finance. I have to say it’s really 
encouraging that the company appears to be on track to deliver those in these challenging
markets. It is strongly growing in all three of its business lines and it’s keeping
credit very well under control.

 

**Q2: You called your note ‘strongly beating heart’ and focus on the competitive
advantages of the largest division, Everyday Loans (EL). Could you comment on why
you think it is so strong in sales?**

**A2**: Everyday loans, NSF’s branch-based business lending is about 80% of the 
group so when it fires on all cylinders the whole group will do. What we have done
is look at Everyday loans market position and we see two key competitive advantages
in generating sales.

Firstly, it offers loans with a very broad range of APRs, that’s really important
because a customer who’s been relatively recently credit impaired will pay a higher
interest rate. As they start making payments and their rating improves over time
the rate they pay then reduces. By having a broad range of APRs, Everyday Lending
can keep lending to that same customer as they journey from non-standard to towards
prime. The cheapest customer is always an existing one and no competitor has that
range of products and they simply can’t stay with the customer the same way as Everyday
Loans can.

Secondly, as part of NSF group, Everyday Loans can refer customers to the guarantor
loans business where the support of guarantor can make a loan much more affordable
than it would do on a stand-alone basis for that customer.

So, it can generate more business from its own existing customers and it also can
generate more cross referrals.

 

**Q3: What about its competitive advantage in costs?**

**A3**: It’s nearly three times the size of the nearest branch-based business and
that brings all the usual economies of scale in things like purchasing and bulk 
buying.

Perhaps more importantly though, in a regulated world, it spreads the fixed costs
for compliance, it allows the identification and the broad adoption of best operating
practice and some very simple operational changes can have a big impact on the bottom
line. Scale also gives it investment in new branches, new products and training 
staff to the best possible degree.

Finally, it also leads to increasing conversion from broker leads with a much more
local presence.

So, more economies of scale, spreading fixed costs, much better best practice, new
branches, products and training as well as better conversion of broker leads.

 

**Q4: You also refer to competitive advantages in assessing credit, what did you
mean by that?**

**A4**: Everyday Loans is a branch-based lender when most alternative lenders in
that space are remote lenders, so they use things like the internet and are online.
By seeing customers face to face, EL can make a much better judgement on their willingness
to repay a loan, now in that market it’s not just about ability to pay, and automated
systems are still very weak at identifying willingness to repay.

About half the Everyday Loans’ customers that get through all the automated credit
scoring actually then get declined at the branch. The hard fact is that EL impairments
are around 20% of its revenue while say 118118 Moneys losses account for 50% of 
revenue and at Likely Loans it’s over 100%. Everyday Loans makes money when the 
peers are losing money and its credit is a key driver to that.

 

**Q5: If it is this good, why did the bigger branch-based lenders leave the market
in 2008/2009?**

**A5**: It’s important to understand the culture of the organisation, most of the
big branch-based lenders at that time were actually non-core businesses in much 
larger, prime-based lenders like HSBC or Lloyds. They became over-reliant on automated
credit scoring because that’s the system that works in the prime space, and the 
ultimate owners did not have the culture focus on this non-standard business.

Reputationally, they were seen as high risk within these prime businesses and being
non-core closure was an easy option. For some of the smaller competitors at the 
time, funding actually became an issue.

Now, Everyday Loans is focused on the business, it’s focussed in this sub non-standard
market, it has the right credit control culture for that market and it has arranged
committed funding through to 2023.

Our note details why we believe that Everyday Loans like Provident Financial and
S&U in 2008-2010, will deliver highly stable earnings in a downturn because loans
will re-price and increased volumes offset the higher impairments. It is worth noting
that the people that delivered that performance this for Provident Financial now
run Non-Standard Finance and Everyday Loans.

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