Founded in 1994, PCF first operated as a non-bank lender using wholesale debt as its main source of lending capital. In Dec’16 it obtained a banking license as part of an ambitious growth strategy, which allowed it to access retail deposits as its primary, and far cheaper, source of capital. PCF hasn’t looked back. It used this advantage to not only grow rapidly, but also to improve credit quality. ‘Prime’ loan originations grew from 55% in FY16 to 85% in FY20.
Over the four financial years spent operating as a bank, customer deposits have grown from scratch to £342m on 30 Sep ‘20 and make up around 83% of non-equity capital. New business originations (asset-backed SME finance, used car and leisure vehicle consumer finance, and bridging property finance) have grown from £60m in FY16 to £270m in FY20; and the lending book has increased from £108m on 30 Sep ‘16 to £434m on 30 Sep ‘20, a compound annual growth rate (CAGR) of 42% - which includes a Covid-related slowdown in 2020. Impairments unsurprisingly jumped in FY20 from £2.2m, or 0.8% of average loan book in FY19, to £7.8m or 2.0%. Yet, this includes accounting (IFRS 9) provisions based on economic scenarios to cover ‘potential’ losses. The impairment outlook is improving, with forbearance levels falling from the May peak (38% of portfolio) to 6% in Nov.
Financial results have also been impressive during PCF’s time as a bank. PBT increased from £3.6m in FY16 to £8.0m in FY19 (30% CAGR), before falling back to £2.1m in FY20, primarily due to the increased loan impairment charge and a £1.75m acquisition-related goodwill impairment. We see PBT recovering to £6.8m in FY21 and £9.4m in FY22. RoE had grown to 12.6% in FY19 before falling to 2.5% in FY20, but we also see this recovering quickly. 2020 has been a nasty pothole for the banking sector as a whole, but we do not think PCF has been knocked off its strategic path. The pre-Covid goal of building a loan book of £750m by FY22 might be pushed back into FY23, but its medium-term goal of a £1bn loan book looks achievable by FY24 or FY25. Currently there are economic headwinds to growth, but post-Covid we expect PCF to gain market share.
Given its growth prospects, we see PCF undervalued at 24p per share. Indeed, our fundamental valuation is 45p per share. If PCF delivers on its aspirations, we expect its FY21 PE ratio to move from 11x to well beyond the pre-pandemic banking sector median of 14-15x.