The recent decision by the Reserve Bank of Australia (RBA) to hold the line on interest rates comes as no surprise amid growing concerns over the alarming rise in household debt in Australia.
RBA Governor Philip Lowe has warned of lower rates encouraging already indebted Australians to take on more debt, especially amid troubling labor market statistics.
Although January’s employment figures showed a modest increase in the total employment rate year over year, full-time employment saw a loss of 56,100 jobs, marking the highest point. low in 16 months. The latest publication from the Australian Bureau of Statistics (ABS) showed a much better picture, but there is still debate among economists on how to interpret the “real” picture of employment.
On the one hand, you have those who advocate raising interest rates to slow the increase in household debt. On the other hand, you said that rate hikes would inevitably reduce consumer spending, which contributes about 60% to our economy.
While employment prospects and the impact of interest rates on consumer spending may be questionable, debt levels are not.
In 2016, household debt to GDP in Australia stood at around 120%. The following graph compares how we managed to continue to accumulate debt as consumers in other countries cut back on spending.
Today, Australian household debt to GDP is approaching 190%. The RBA says not to worry, saying much of this debt is in the hands of high-income households able to manage their debt, according to a recent article in the Australian Financial Review.
Consulting firm Digital Finance Analytics disagrees. The most recent results of their Mortgage Stress Modeling Survey show that around 670,000 of Australia’s 3.1 million households cannot manage costs of living and interest rates. Here are some of the most relevant observations made by the firm:
• “The increase (in stress) can be attributed to continued income stagnation, rising cost of living and more underemployment; while mortgage interest rates have increased thanks to off-cycle adjustments by banks and larger mortgages thanks to rising house prices. ‘
• “It is the wealthier groups of households, with large mortgages and lifestyles, who now see mortgage rates rising when wages are not that are more at risk. They are used to being lavish and they might not have as much in the bank as you think.
• “Not all wealthy households are in difficulty, but that’s enough to make it interesting.
A September 2016 article in the Sydney Morning Herald reported findings from the Bank for International Settlements showing that Australian household debt to GDP of 123% ranked first out of 44 countries in the bank’s survey.
Today there are apologists who claim to ‘not worry’, but whatever angle you look at the data, we have a worrying debt here in Australia.
Long-time equity market investors know that bad news for some can be good news for others. It is a sad truth that the outlook for ASX Debt Collection stocks could be about to improve.
There are three main debt collection actions on ASX. The following table includes performance history as well as earnings and dividend forecasts.
With the exception of the current dividend yield, Credit Corp Group Limited (CCP) is clearly the leader of the bunch. Pioneer Credit Limited (PNC) is a newcomer to ASX, listed in May 2014 with a first trading day closing price of $ 1.60, up 23% to the current price of $ 2.05 .
ASX is up about 17% year over year. All three companies outperformed. All three pay fully franked dividends and Credit Corp and Collection House Limited (CLH) are expected to increase their dividends. We do not have analyst estimates for Pioneer Credit.
Credit Corp Group operates in three business segments:
• Debt buyback
• Debt recovery
• Ready for consumption
The company purchases portfolios of bad debts from credit providers at prices significantly below the face value of the debt. Settling in with borrowers in default for more than what the company paid for the debt but for less than what the borrower owes can be a “win-win” for both parties. Repayments over time provide recurring income for the business and ease the burden on borrowers.
Credit Corp also acts as a debt collector for companies that do not wish to sell their debts or bear the cost of collection themselves.
Finally, Credit Corp offers consumer loans to consumers with credit problems.
The company has been around for over 25 years, branding itself as a “provider of sustainable financial services to the consumer segment at risk of credit”, not simply as a debt collector.
While some take a dim view of companies like Credit Corp, it is true that many consumers are excluded from traditional financial sources. For these consumers, Credit Corp offers multiple financing opportunities –
• Portfolio Assistant for online loans from $ 500 to $ 5,000;
• CarStart Financing – for auto loans up to $ 20,000;
• ClearCash – offers consumer credit lines up to $ 3,000
• Credit 2U; offer the services of a financing broker to find the best deal based on your borrowing power; and
• Trove Capital – online business loans.
The company released strong 2017 half-year financial results on Jan.31, reporting double-digit increases in revenue and earnings as well as double-digit guidance for the full year, but the share price has fallen. fall. Here is the table.
Investors expected big things when Credit Corp entered the US market. Fierce competition and an increasingly hostile regulatory environment hampered the company’s operations there, with half-year results once again showing losses in the US segment, albeit small compared to previous reporting periods. The company has a consensus rating from OUTPERFORM analysts.
Collection House has struggled over the past two years, with the share price falling nearly 40%. Here is the table.
With one notable exception, Collection House serves the business sector in a variety of ways. The exception is consumer-focused ThinkMe Finance – a brokerage service for consumer loans – the company’s first entry into the consumer market.
For business clients, Collection House offers everything from debt collection and debt purchasing services to credit management training for corporate credit staff and insolvency legal services.
Despite the myriad of services that Collection House offers, debt purchases – known as PDL or Purchase Debt Ledgers – are usually the core business of any debt collection company. Businesses pool their bad debts and sell them to debt collectors as PDLs. Around the third quarter of 2015, Collection House announced that it would reduce its acquisitions of PDL due to rising costs. In contrast, Credit Corp Group announced around the same time that it would increase its buying.
In February 2016, the CEO left the company for personal reasons, with an experienced and respected replacement in May. Due to the recurring nature of PDL’s revenue, it may take some time for revenue to pick up at Collection House. However, for income investors, the company’s dividend performance may be a reason to buy, along with a price / earnings (P / E) ratio of 10.05.
Collection House’s ten-year dividend growth rate is 16.3%, almost double that of Credit Corp Group’s 9%. The analyst consensus rating, however, is UNDER PERFORMING.
Pioneer Credit Limited (PNC) has a business model with a narrower focus – debt purchasing and collection services for large banks and financial institutions. In late 2016, the company entered the consumer market with a variety of offerings under the Pioneer Credit Connect banner. This business line provides a financial assessment associated with consumer loan products from multiple sources serving multiple needs, including loan refinancing. The company offers free access to credit scores as well as training in interpreting and managing a credit score as well as assistance in debt management and financial management.
From fiscal 2014 to fiscal 2016, Pioneer revenue increased 137% while net profit increased 804%. Management forecasts call for a further increase in profits – an increase of 11.7% for fiscal 2017.
Pioneer is small and relatively new to the ASX, but its track record is worth looking at. However, market participants are apparently not rushing to buy the shares. The three-month average daily trading volume for PNC is 81,000 shares, compared to 312,000 for Collection House and 224,000 for Credit Corp Group.