RE: Recovery potential25 Aug 2020 15:55
Hi yellowlorry, I'll have a go at commenting on each item:
1. A lower collection rate will reduce cash flow and the net asset value as impairments rise from lower collectability. It won't put them out of business by any stretch but they are being more selective about new loans which will reduce profitability. As we are looking at ~90% collections performance, I would guess that we will see an increase in impairments up to 40% of revenue for the half year which will push the business into a loss.
2. Conditions were worse in the GFC but it's still early days. It took Hungary unemployment 2 years to ht its peak and then 3 years to fully recover. But the economic contraction from Covid has been deeper and the various furlough schemes are masking the true number so it may take a while for unemployment to bottom out. And yes the temporary restrictions in eastern Europe are no doubt impacting new business. With the caps much of the new business they were previously writing won’t be profitable but they are due to be lifted at the end of the year I believe
A second winter wave is a worry of course. Volatility is still elevated in the market in anticipation of a flare up so you need to be on your toes.
3. The digital business delivered a maiden profit last year but is likely to swing back into a loss for the half year. Established markets are performing well with impairments of 20% but with pretty low growth. New markets are taking some time to optimise the business model weighing up what rates to use, what the ideal balance is, who are the most creditworthy customers, and other loan terms. They seem very confident that they can bring that 65% impairment level down but that part of the business is delivering double digit growth so there will be a price to pay for that growth. And the improved performance of the business seems to indicate they are getting credit under control before they start to ramp up new lending.
Hope that helps!
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