Cash Converters unpacks the earnings profile of its lending business

Cash Converters ASX CCV earnings profile lending business 2021 2022 EBITDA loans
Cash Converters has strengthened its earnings profile by transitioning away from small to medium amount loans.

Australia’s largest sub-prime lender and second-hand goods retailer Cash Converters (ASX: CCV) has explained the inherent delay in income the business recognises from the loans it writes, to help investors appreciate the difference between its half-yearly results.

The company generates over 50% of its earnings before interest, tax, depreciation and amortisation (EBITDA) through its personal finance business segment, which produces income from unsecured small (up to $2,000) and medium (up to $5,000) amount loans.

The combined average term for these products is less than 10 months, so a large proportion of customers settle their loan well within a calendar year.

It’s a vastly different cycle to what a bank would experience with its home loan book, which has loan terms of up to 30 years.

Although the timeline for a Cash Converters loan is relatively short, there is still a lag between the principal advanced and earnings recognition, with the company appropriately allowing for expected credit losses on potential loan losses up front.

The demand cycle

Peaks and troughs in demand within Cash Converters’ personal finance business are predominantly seasonal.

Tracking business activity (such as loan volumes and velocity) across a calendar year would reflect an inverted bell curve, with activity reaching a crest in the final weeks of the calendar year and then tapering off into June/July, before growing again.

The inverse is true for the earnings generated from this lending activity, with the business recognising the full benefit of this income over the following quarter and half year from the period in which the loan was written.

This relationship between ‘activity’ and ‘earnings’ contributes to the pattern of Cash Converters’ H2 financial year earnings from the provision of personal financial services being larger than the first half (when lending activity is at its highest).

The first half of the financial year covers the months of July to December, the period where the company typically sees a month-on-month climb in lending demand into Christmas.

The busiest period for lending is December, where Cash Converters said the number of submitted applications can exceed 50,000 during the month.

This is a trend that has remained consistent even during the COVID-19 pandemic and sets up the company to benefit during the following half.

Cash Converters managing director Sam Budiselik said dealing in the short-term, high-volume end of personal finance presents its own challenges due to the complexity of meeting responsible lending laws and the significant volume of applications received.

“Our finance business is a high-volume operation and the feedback loop between principal advanced and loan performance is relatively short, so our ability to adapt to changes in the market needs to be rapid.

“Coupled with the survey mechanisms we have across the business, we have a real-time understanding about how customers are performing,” he added.

“We can only responsibly service the demand by leveraging our technology and we have invested heavily in data analytics and machine learning to provide a comprehensive profile on every applicant from a credit risk perspective.”

“It is this ability that provides us with a competitive advantage in our markets as our speed, customer experience and compliance record is industry leading,” Mr Budiselik said.

Transitioning from small to medium amount loans

The company’s decision to gradually transition away from small amount loans towards medium amount loans has lengthened the earnings profile of the company as these loans mature over up to 24 months.

“As pandemic restrictions unwound in the lead up to Christmas 2021, we saw a rise in demand which allowed us to have one of our largest months for outgoings in December,” Mr Budiselik said.

“The changes we’ve made to our customer-facing assets and back-end analytics meant that we are well placed to capitalise on this pent-up consumer demand, now and in the future.”

He added that the company’s ability to capture pockets of demand as they emerge is important, especially considering the indefinite revision to Western Australia’s 5 February border reopening as the eastern states move beyond their relative peak infection rates.

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