Lending money to people who may not be able to afford to pay it back has long been a controversial issue. Sub-prime loans, aside from bringing about the financial crisis, hold the moral component of forcing people into a position where they may lose everything thanks to repayments they simply cannot cover.
Payday loans were the biggest ‘offenders’ on this front in the public’s mind, with extortionate interest rates getting many of the poorest people into trouble. It is understandable then, that a different type of sub-prime lender, Amigo Holdings (LSE: AMGO), has seen regulatory scrutiny keeping its share price under pressure.
Making progress
Amigo specialises in guarantor loans – providing money to those with poor credit ratings when they can secure a friend of family member to also take liability and step in if they can’t pay. For the privilege, it charges an interest rate of just less than 50%, and has seen its business growing rapidly since it was listed in 2018, thanks in the main to a crackdown on the payday loan business.
Despite this however, its share price is down by two-thirds from its first day of trading, seeing a 50% drop in August alone after it said it will be restructuring its business model to take account of measures put in place by the Financial Conduct Authority (FCA).
Specifically, the company needed to reduce business from repeat lenders, and shore-up its credit checking and complaints handling facilities. Yesterday, CEO Hamish Paton confirmed that it has been doing this successfully.
The FCA, is, apparently, showing encouraging responses to the changes it is making – Amigo saying that improved communication with its guarantors has identified a number of areas it can improve on. Paton said: “Whilst there are things we need to do, I think we’re in a better place in terms of clarity going forward — certainty breeds a degree of confidence”.
Good results
In its half-year results on Thursday, despite showing a decline in pre-tax profits (down to £42.3m for the six months compared to £48.4m in the same period the year before), and despite a higher rate of impairments (its impairment-to-revenue ratio was up to 31% from 23% previously), its increase in customers and revenue was enough to bolster the stock by about 17%.
Customer numbers increased by 18% to 223,000, though the additional revenue this brought in was offset by the increase in impairments and a one-off £10m provision to deal with a backlog of historic complaints.
Would I buy?
This is the big question, and as with my fellow Fool Alan Oscroft, there may be a personal morality aspect to this choice. This business model certainly doesn’t seem as extreme, or as exploitative as the payday loan industry, though a 50% interest rate is very steep. The growing use of these facilities does show there is a need, or at least demand for such services.
As its restructuring continues to fix regulatory issues, and its customer base grows, there is certainly a good argument that the stock is cheap enough to invest in. As with any sub-prime loan business however, customer default rates will always be a concern – there is, after all, a reason why some people cannot get money from more traditional lenders.
