Consumer lender Plenti Group has taken the unusual step of including the movement in its expected credit loss provision in the adjustments it has made to get from a statutory loss in the year to March to a claimed cash profit for the year.
Arguing that the A$7.4 million increase in its ECL balance is a non-cash item, along with $2.8 million of shares-based payments, $1 million of depreciation and amortisation and a $4.4 million income tax expense on a hedge gain, Plenti has reported a statutory loss of $6.3 million and a cash profit of $500,000 for FY2022.
A maiden profit would be a milestone for the company, which was established in Australia in 2014 and listed on the ASX in September 2020.
The ECL balance at the start of the 2021/22 financial year was $12.8 million. As the company’s loan book grew, additional provisions of $12.8 million were recognised during the year.
The balance was reduced as receivables of $7.4 million were written off as uncollectable (up from $4.9 million the previous year). This, in turn, was offset by recoveries of $1.8 million.
The closing balance was $20.1 million. Plenti counted the difference between the opening and closing balances as a non-cash item in its cash NPAT adjustment.
In the profit and loss statement, the customer loan impairment expense (which is made up of realised impairment losses plus ECL movement) rose by $5.2 million to $12.3 million.
Whatever the merits of its approach, Plenti was not cash flow positive. Net cash used in operating activities rose from $2.9 million in 2020/21 to $3.9 million in the year to March.
Aside from the question of whether or not it made a profit, Plenti had a good year. Originations were up 134 per cent to $1.1 billion and the loan portfolio grew 111 per cent to $1.3 billion.
Total expenses rose 42 per cent to $88.4 million, while revenue rose 67 per cent to $88.5 million.
The strong growth did not compromise credit quality. The proportion of loans in arrears by 90 days or more fell 5 basis points to 26 bps.
The company expanded its auto loan business during the year, entering the commercial auto loan market.
Plenti chief executive Daniel Foggo said one of the big trends in consumer finance is the growth of “integrated finance” – manufacturers, retailers and other vendors offering finance with a sale.
He said digital businesses like Plenti are better suited to working in this environment, especially where the sale is made online.
He said another advantage for lenders like Plenti is that the growth in consumer credit data from sources such as comprehensive credit reporting, open banking and the growth of third-party information providers can be fully utilised by lenders with proprietary credit engines.
Plenti charged an average interest rate of 9.4 per cent in the year to March, down from 11.2 per cent in 2020/21. The fall reflects the change in its business mix from predominantly personal loans to more auto and renewables loans.
Plenti entered the public securitisation market during the year, with two issues of asset-backed securities. Its funding rate fell from 5.7 per cent to 3.6 per cent, largely reflecting the benefit provided by securitisation funding.
Foggo said the company’s funding costs are rising in line with interest rate movements. In April, the average funding rate on originations was around 5.2 per cent.
He said Plenti has been increasing borrower rates but these have not yet increased sufficiently to offset higher funding costs.
“Further borrowing rate increases are being prioritised over coming months, rather than loan origination growth, to support the net interest margin,” he said.
An anomaly in Plenti’s funding is a marketplace lending platform with $258 million of assets under management. It is a fund that allows investors to take a stake in a portfolio of the company’s loans.
The fund is a remnant of the company’s earl days, when it was called RateSetter and promoted itself as a peer-to-peer lender. Foggo said it remains a valuable source of funds because it is relatively low cost and has the flexibility to accommodate new types of lending.
“We are looking to grow it,” he said.