Investment Insider: Golden era for sub-prime lenders may be ending
Sunday 23 September 2012
Total UK personal debt, which stands at about £1.4 trillion, could rise significantly over the next few years. According to the Office for Budget Responsibility, total household debt could top £2 trillion by the first quarter of 2017.
At the same time companies that service the sub-prime borrowing market have been reporting exceptional growth.
However, the aggressive monetary-easing strategies by central banks are likely to have some unintended consequences for consumers, driving down borrowing costs.
This in turn could have an impact on lenders that primarily service the sub-prime market.
Albemarle & Bond, for instance, has warned that profits for the current year may come in at the low end of market expectations. The company offers traditional pawnbroking, third-party cheque cashing, payday advances and loans, and has had five years of unbroken growth in turnover and profits.
H&T, which derives about 40 per cent of earnings from pawnbroking and about 25 per cent from buying gold, is expected to post a drop in profits this year to about £16m from £23m last year.
Meanwhile, S&U, which owns Loansathome4U, expects growth to slow to about 10 per cent this year, a marked decline from last year's 24 per centjump in profits.
Nevertheless, S&U is expected to lift its dividend to 43p a share when it reports full-year results at the end of September. The dividend, which is covered twice by profits, offers an attractive yield of 5.5 per cent that could prove tempting for income investors.
Companies that operate in the sub-prime market have been able to make good profits while the big banks have been sitting on their hands – and their piles of cash. While it is unlikely that companies that serve credit-challenged borrowers will disappear when banks start lending again, the days of abnormal profit growth may be at an end.
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