- Net loans and advance down slightly to £426m
- New business originations a fifth lower at £122.9m
- Less than 4 per cent of portfolio in forbearance at 31 March 2021
- Interim pre-tax profit halves to £1.2m due to sharp rise in cost-to-income ratio
Shares in Aim-traded specialist bank PCF (PCF:15p) finally returned to trading this week, having been suspended since last summer (‘PCF’s financial control failings exposed’, 28 June 2021).
Previous management’s failure to properly report PCF’s exposure from funding provided by PCF Bank to its wholly owned subsidiary Azule led to an Independent Review that also identified several deficiencies and failures in PCF Bank's financial control and reporting function. It has been a tortuous process for the new management team to put in place the requisite reporting and compliance procedures as part of the overall remediation process. It has come at a cost, too.
Although the net interest margin dipped only slightly to 6.7 per cent in the six months to 31 March 2021, and net operating income rose 4 per cent to £14.7m, PCF’s cost-to-income ratio ballooned from 49.2 to 66.3 per cent as operating expenses rose 40 per cent to £9.8m. The upshot being that although the credit impairment charge declined from £4.7m to £3.8m, the additional £2.8m of operating expenses meant that pre-tax profit fell from £2.5m to £1.2m. However, there are several positives.
Firstly, the impairment charge included an additional £3.2m provision for defaulted receivables that were either seriously in arrears or where the assets acting as security have been sold. It looks like a kitchen sink exercise to clean up the loan book.
Secondly, PCF’s stable capital ratio of 16.7 per cent remains comfortable as does its liquidity coverage ratio of 488 per cent. The £425m loan book is being funded by £338m of low-cost customer deposits, £59.6m of drawings against the Bank of England’s ultra-low interest rate Term Funding Schemes, and the balance is from £54.9m (21.5p a share) of shareholders' equity.
Thirdly, impairment charge on the £186m consumer loan book (mainly used car loans) was minuscule (£0.4m) and is likely to remain low given that used car prices have soared in the past 12 months, so even if a customer defaults there is hefty security. PCF’s £64m bridging finance loan book is high quality (nil impairments) and is well diversified, too. Moreover, with 93 per cent of new business originations in prime credit grades, then default risk has diminished.
Fourthly, the £175m business loan book incurred slightly lower impairments of £3.1m, but the majority of the charge represented the kitchen sink exercise.
Investors need to wait the release of the annual results (to 30 September 2021) for when the board will reinstate financial targets and guidance. However, PCF remains profitable even at this low point, has successfully navigated through the Covid-19 pandemic and a major overhaul of its management and financial controls, and retains a solid loan book which generates a stable net interest margin.
Priced on a 31 per cent discount to book value, the shares offer recovery potential. Hold.