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Morningstar | Senate Inquiry Increases Credit Corp’s Regulatory Risks But Not Enough to Change the FVE

The recently instituted Senate Inquiry into financial services targeting Australians at risk of financial hardship adds some uncertainty over no-moat Credit Corp’s business, but our initial view is we do not expect the inquiry to materially impact the company. Our fair value estimate is unchanged at AUD 19.80 per share. The inquiry is focusing on areas not covered by the Financial Services Royal Commission, and is investigating payday lenders, short-term credit providers, consumer lease providers, buy-now-pay-later providers, and debt management and personal budgeting firms.

The timing of the inquiry suggests it has the potential to become a political football. This adds to the uncertainty on what if any regulatory changes will result from it. The inquiry was instituted on Oct. 17, 2018, submissions closed on Nov. 9, 2018, and only one day is scheduled for a hearing (on Dec. 12, 2018 with an agenda yet to be published). The political risks are high given the final report is due on Feb. 22, 2019, a few weeks after the Royal Commission final report, and in the lead-up to the next Federal election expected in May 2019.

Nevertheless, at this early stage, we do not expect the Senate inquiry to materially impact Credit Corp’s underlying business. We believe the key area of risk for the company is its growing Australian loan business “Wallet Wizard” which provides cash loans with credit limits from AUD 500 to 5,000. Wallet Wizard is a core part of its Australian consumer lending business that generated circa 22.3% of group operating profits in fiscal 2018. Its consumer lending and United States purchased debt ledger, or PDL, business (2.6% of operating profits) are its growth businesses forming part of its diversification strategy away from relying on the firm’s lower growth Australian PDL business (75.1% of operating profits).

A key risk from the inquiry is reputational damage to the company from the uncovering of actions that fall short of community expectations. However, we think the likelihood of this occurring is low given the inquiry has only set aside one day for a hearing despite the plethora of financial services it is covering, and Credit Corp’s relatively strong compliance record. Notably, the company has not been the subject of any regulatory orders or undertakings and has had no reportable external dispute resolution systemic issues despite being the largest PDL operator in Australia.

Although we are not in a position yet to know the substance of the potential legislative/regulatory changes arising from the inquiry, we expect Credit Corp to be in a better position than most of its competitors in the impaired consumer finance industry to implement most changes. For example, it already has a credit licence, its core Wallet Wizard product already has features such as an annual percentage rate below the 4% monthly cap suggested by the Small Amount Credit Contract and Consumer Lease Reform Bill, or SACC Bill, and we understand it does not lend to people whose major source of income is from welfare payments.

Nevertheless, we expect politics may be a primary driver of this inquiry, which makes it difficult to forecast the types of regulatory changes that may arise out of it. We think the Labor party and Greens may use the inquiry against the Coalition government for the lack of movement on the SACC Bill which has not yet been legislated despite being drafted following a consultation period ended on Nov. 3, 2017 and following an ASIC Report in 2015 and inquiry in 2016. Politics may result in regulatory changes currently not contemplated including the requirement of stronger responsible lending practices from nonbank credit providers that may result in Credit Corp being required to implement changes in processes and incurring higher operating costs.