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Private & Commercial set to grow loan book with banking licence

Published: 14:32 20 Oct 2016 BST

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The niche lender is applying for a deposit taking licence

Gaining a bank licence will allow niche lender Private & Commercial Finance Group plc (LON:PCF)  access to cheaper funding and therefore grow the business, says broker Panmure Gordon.

It comes after the firm issued a trading update, in which it said it expects full year results to end September to beat market expectations and that the process of getting a  deposit-taking licence was going well.

The aim is to start taking deposits by mid-2017.

Repeating a 'buy' rating on the stock,  Panmure analyst Donald Tait said the licence would "move" the group "down the risk curve and offer credit to borrowers that were previously uneconomical.

"This increases the total addressable market the company can serve so we believe that there is a very good chance the company can grow the loan book at an even faster rate and without lowering credit standards," he pointed out.

A prime and near-prime lender

The company describes itself as a prime and near-prime lender generating 60% of its business providing consumer finance for used and classic cars and horse boxes.

The rest (40%) comes from funding vehicles, plant and equipment to small and medium-sized enterprises.

Its interest rates, which average around 14%, are higher than those charged by the high street banks, but are far lower than the majority of offers out there.

Earlier, the company said the EU referendum result in June had not affected trading and organic growth has been strong over the 18-month period, after a change in year end.

The firm generated new business of £100.4mln, and of this, £37.2mln, or 37%, was written in the six months to end September -  an increase of 20% on the six months to end March, which was £31.1mln.

Its portfolio of finance receivables grew in the six months to end September by 9% to £122mln (31 March 2016: £112mln), while the loan loss provisioning charge has continued to reduce, despite already being below target levels.

A diverse portfolio

Chief executive Scott Maybury told investors: "The diversity of our portfolio, our proven performance over an entire economic cycle and ability to increase our relatively small share of core markets should provide reassurance insofar as the current political and economic climate is concerned."

In April on the bank licence, the company boss said: "There is an economic climate and political will to have more competition in the bank deposit market.

"We stand alone because we are an existing business that has been around for 20 years with a tried and tested model that has lasted out the toughest of financial times and stayed in the black during that time."

Valuation does not capture growth potential

Panmure repeated a 'buy' and targets 38p on the shares, based, it said, on the significant potential growth combined with the low risk nature of this type of lending.

Shares trade at 15 times' calendar 2016 earnings and 1.6 times' book value and yields 0.5% for an estimated RoE (return on equity) of 12%.

Panmure reckons this valuation does not capture the growth potential, and thinks that there is a good probability the firm can exceed the broker's current forecasts.

Panmure estimates adjusted pre-tax profit of £4.5mln for 2017 on revenue of £64.1mln, rising to adjusted pre-tax profits of £7.3mln on revenue of £78.4mln the year after.

Private & Commercial shares shot up over 10% on the day to stand at 29.75p.

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