This is an interview I conducted last week with Scott Maybury, CEO of PCF Bank (PCF).
At the time of publishing this, I own PCF shares in my personal portfolio. I think it’s a compelling story: an experienced lender which secured a banking licence for the first time in 2017. I started buying shares in it about six months ago, at various prices c. 26p-28p
PCF’s banking licence means that it can rapidly grow its lending portfolio and replace its wholesale debt funding with much cheaper retail deposits. In other words, it has the opportunity to create a much bigger and more profitable business.
Many thanks to Scott for taking the time to answer my questions.
PCF Bank (LON:PCF)
- Share price: 37p
- Forecast 2018 EPS: 1.86p
- Market cap: £78.5 million
- Website: pcf.bank
Q: Can you explain your shareholder structure and the free float? Does this give rise to any corporate governance concerns?
A: Although we survived the global financial crisis, life became very difficult. At the time PCF operated under a wholesale funding model and during the crisis our banks withdrew facilities and would not renew funding for longer than a 12 month basis, which given we were offering 3, 4 and 5 year products made us uncomfortable.
Somers Limited, a financial holding company listed in Bermuda, had bought a 10% stake in PCF. Somers also owns Bermuda Commercial Bank, Utilico here in the UK (the old JO Hambro), Stockdale Securities and MJ Hudson. It also owns Homeloans Limited in Australia, a mortgage packager. Somers increased its stake to 20% and started discussions with us with a view to co-operating. Somers put in an unsecured convertible loan note which enabled us to secure 4 year facilities on new terms from our lenders in early 2013. At our request, Somers converted the loan note 12 months ahead of maturity so that we could re-build our balance sheet and begin the process of getting a banking licence. The conversion gave them 68% of the equity. This stake was subsequently diluted to 65% following the April 2017 fundraise. This gives us, net of directors’ holdings of about 5%, a free float of around 30%.
Somers have two (down from three) representatives on the Board. One of the Somers directors also sits on the Board of Bermuda Commercial Bank and the Board of Somers. The other is CEO of Stockdale Securities. They always put the interests of PCF Bank Group first and make positive contributions – David was a former head of Standard Chartered in the far east and Mark is the head of Stockdale so helps us with AIM regulation and the London investment market generally. Somers is a hands-off investor and we only catch up with them once a year for an update on strategic direction. Somers was supportive of the banking licence project and participated in the April 2017 fundraise.
Going forward, Somers recognises that a larger free float would be helpful in attracting additional institutional investor interest but believe that our plans should see the share price more accurately reflect our prospects. Somers originally bought in at a market cap. of £10-15m. I don’t know what value it believes is appropriate but I think that they would accept further dilution when that valuation is met. I’d compare the situation to Arbuthnot and Secure Trust.
Q: Can you tell us about the credit profile of your business customers and what this means in terms of moving from ‘near prime’ to ‘prime’?
A: The first thing to say is that our customers are not non-conforming or sub-prime – as you can see from our impairment charge and the list of competitors in our most recent presentation (on the web site). While we were operating on a wholesale funded model, we could not compete in the prime markets. Now that we have a cheaper source of funding from customer deposits, we can.
We have clear KPIs for the business we write based on credit ranking and some 70% of new business is in the top 4 credit grades (out of 8 leading down to near prime). Our Business Finance team lends to SMEs, partnerships and sole traders and we only offer collateral backed lending. This includes vehicles and plant and machinery – all good quality, not immediately supercedable and with liquid markets.
Turning to the credit risk of the debtor, most borrowers have modest balance sheets (think £250k), are consistently profitable and if a sole trader have good personal credit ratings and are homeowners. They will have been trading for several years. We use all the credit tools you’d expect including Experian, financial statements, bank statements and affordability criteria. We lend against business critical assets and can match assets to contracts. So, if a bus operator wants a new vehicle to service the award of a new route, we can see from the contract the affordability of our loan. This is good quality prime business to borrowers of good credit, character, collateral and cashflow with years of trading history.
Q: How was the move from a wholesale to a deposit funded model? Was it a difficult process and is the growth we’ve seen to date sustainable?
A: Our growth to date has resulted from starting from a very low base. We reckon that our market shares in the sectors we service range from 1.4% to 3.5%, making it easy to take on competitors because we are still too small for them to notice. Yet. Our new business has grown by 97% from this very low base and of course this growth rate will moderate in time and we will need to access new markets. We believe we can sustain in the medium term however the growth model seen over the last 12 months.
We have grown customer deposits from zero to over £108m at the end of March and more now. The proceeds were initially used to repay some £60m of expensive wholesale debt – an easy win – with remainder used to grow the balance sheet. We still have some wholesale debt where prepayment penalties exist so as these amortise over the next couple of years, we’ll run them down and then pay a much smaller penalty to get rid of them. We’ll continue to use the £25m of wholesale funding from the Bank of England’s Term Funding Scheme which closed on 28 February this year. This is 4 year money at base rate.
We aim to use 100% retail deposit funding for loans over the next two years until we are large enough for securitisations – our assets are very securitisable.
On the deposit side, we have been very successful using aggregators and playing with rates to move up and down the tables. We’re still learning obviously but have been surprised at the success. We offer Notice accounts and Term accounts, marketed weekly – no current accounts. This gives a good match to our lending with average deposit tenor of 2.7 years at a blended rate of under 2% (compared to 6% 2 years ago on the wholesale model). This allows us to lend the money to prime borrowers.
However, there is a cost to us for being a bank and accessing retail deposits of about £2-2.5m per annum although this cost will be diluted each year as we grow our deposit portfolio.
Q: Can you achieve an ROE of 12.5%?
A: Yes. As you know, we have targets for the medium and the longer term and our recent results statement was about showing delivery against our stated strategy. So, will PCF deliver on its targets? I believe that growing from £175m to £350m in two years to September 2020 is within reach and although our ROE this year will reflect the extra cost of being a bank, getting back to 12.5% is a target we’re confident we can achieve. Thereafter, reaching a £750m portfolio and a 17.5% ROE by September 2022 will require some asset diversification. Diversification will come from acquisitions, strategic partnerships or by taking on teams of experienced people.
No payment was made in relation to this interview. The transcript is based on notes taken during the interview. At the time of publication, Graham Neary owns PCF shares. This interview is for journalistic purposes only and does not constitute investment advice.