Cattles cowed as change in reporting rules knocks hole in profits

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The Independent Online
The doorstep lender Cattles warned yesterday that its annual profits would have been 30 per cent lower under new accounting standards that take effect this year, causing a steep drop in its shares.

The doorstep lender Cattles warned yesterday that its annual profits would have been 30 per cent lower under new accounting standards that take effect this year, causing a steep drop in its shares.

Cattles, which lends to people unable to borrow from banks, reported a 15 per cent rise in pre-tax profits to £141.2m last year, slightly ahead of analysts' forecasts. But under the International Financial Reporting Standards (IFRS), which come into force in the second half of this year, profits would have been £40m lower at £100m. Cattles' shares fell 29.5p to 347.5p.

The impact comes mainly from a rule stipulating that companies must recognise income from insurance products sold alongside a loan over the lifetime of the loan, rather than booking it all at once in the first year. Another change is that loans are regarded as bad debt as soon as they are in arrears, regardless of whether the loan is still being repaid.

Sean Mahon, the chief executive of Cattles, sought to dispel investors' fears that profitability would be affected by the new standards. He spoke of a presentational change, and said: "There is no loss of profit ­ it's deferred. There is no impact on cash flow or credit quality."

Analysts at Citigroup and Bridgewell Securities agreed. Michael Long at Citigroup said, "This is purely a timing issue and does not affect the overall profitability of the loans." But analysts at Merrill Lynch called Cattles' IFRS estimate a "shocker" and said they would review their "neutral" rating on the stock.

Cattles sounded a positive note on credit quality, reporting a fall in the bad debt ratio to 7.5 per cent from 7.7 per cent in 2003, against a background of rising interest rates. Mr Mahon was unconcerned about the slowdown in consumer lending, saying Cattles' policy of issuing small personal loans would shield it from the slowdown and from any worsening in people's ability to repay debts. The firm charges annual rates of interest of up to 42 per cent.

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