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The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:79050 BoomBustBlog Reggie Middleton

The Veritas 2017 Token Offering Summary Available For Download and Sharing

The Veritas Offering Summary is now available for download, which packs all the information about Veritas in a single page. A step by step guide to purchasing Veritas can be downloaded here.

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10-04-2017 Hits:78902 BoomBustBlog Reggie Middleton

What Happens When the Fund Fee Fight Hits the Blockchain

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07-04-2017 Hits:83382 BoomBustBlog Reggie Middleton

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03-04-2017 Hits:79949 BoomBustBlog Reggie Middleton

This Is Ground Zero for the 2017 Veritas Offering. Are You Ready to Get Your Key to the P2P Capital Markets?

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01-04-2017 Hits:82259 BoomBustBlog Reggie Middleton

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28-03-2017 Hits:53236 BoomBustBlog Reggie Middleton

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28-03-2017 Hits:81258 BoomBustBlog Reggie Middleton

Bloomberg Chimes In With My Warnings As Landlords Offer First Time Ever Concessions to Retail Renters

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27-03-2017 Hits:81269 BoomBustBlog Reggie Middleton

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I have decided to share a portion of my interest in the consumer finance sector with the blog. I put a team together to focus on this sector before moving on to develop the next leg of my investment thesis. We have shortlisted 8 companies in the US consumer lending sector for further fundamental analysis.  We will be looking more closely at these companies and reviewing their financial statements and foot notes. I'll share the procedure and two of the finalists (sounds like a beauty pageant, doesn't it?) as well as one that was booted from the list.  

 

We selected these companies based on the following procedure:

From our initial list of 825 companies globally, we selected 525 companies by excluding 290 companies for which price information was not available and were having market cap of less than 2.5 mn.  Of the remaining 525 companies, we selected 146 companies based on relevance of business in the following line of business - Credit cards consumer installment, credits loan guarantees, secured/unsecured consumer lending, real estate lending, consumer lending and financing, capital funding service, outsourced receivables management, pawn brokering services, financial guarantee insurance.

Of the remaining 146 companies we excluded 26 companies which had witnessed price decline of more than 65% over the past one year.  We obtained 34 US companies (in the remaining list of 120 companies), of which 6 were excluded with market cap of less than $10 mn.

 

The following are 3 out of the 8 companies that were shortlisted from the list of 28 US companies for further scrutiny:

 

American express (AXP) :

·         AXP with adjusted P/B of 6.47x trades higher than most of its peers.

·         The company’s net charge-off’s to loans in 2007 was 4.0% while its total allowances to loans was 3.4% suggesting that the company might have inadequate provisioning

·         AXP’s total debt to common stood at 662.3% at the end of 2007 while its leverage at 13.6x is considerably high when compared to its peer group.

 

Capital One (COF) :

·         COF’s five year EPS growth (geometric) is at a negative of 0.3% reflecting the company’s dismal performance.

·         COF’s return on equity and return on assets at 6.3% and 1.0% , respectively for 2007 is significantly lower than its peer group.

·         30 day+ delinquency rates for credit card segment increased to 4% in 1Q2008 from 3% in 1Q2007 while charge-offs for US credit card segment had increased to 5.85% from 3.72% in the comparable period.

 

SLM Corporation (SLM) :

·         SLM’s 5 year geometric EPS and NIM growth of -6.1% and 2.2% is quite low when compared to its peer group.

·         SLM has very thin NIM margin of 1.3%.

·         The company is highly leveraged with leverage ratio of 29.7x and total debt to capital at 4,019% (sourced from Bloomberg)

·         SLM’s total reserves at 0.8% of total loans could be inadequate to cover for future charge-offs.

·         Although the stock has declined nearly 63% over the past one year its still trading at $19.4 . A further probe revealed that there was not enough meat left on the bone for significant downside potential from the current levels.

 

The next step was to whittle down the 8 companies chosen to a manageable chunk... 

 

Among the 8 companies shortlisted for further scrutiny, we have looked at the first 7 and have shortlisted 3 companies based on the following observations (I'm only publsihing two for now).

 

Capital One:

·    Note: Capital One was on my radar last year and earlier this year as having the highest default rate among its peers, but I decided to move on to other targets on both occasions. Despite the price drop and a more stringent screening process, it shows up in the scan once again. Capital One’s loan portfolio comprising credit card business, auto finance business and international business is facing problems as reflected by higher delinquency rates (30+ days) in its US credit card business, auto finance business and international business at 4.04%, 6.42% and 5.12%, respectively in 1Q2008, up from 3.06%, 4.64% and 4.78%, respectively in 1Q2007.

·         Its net charge offs increased 78% to $767 mn in 1Q2008. Also, its allowances for loan losses increased 44% to $3.3 bn.

·         Despite increase in delinquency and charge-offs, the company’s provisioning for loan losses seems inadequate. In 1Q2008 COF’s provision to loans were 1.10% while chare-offs to loans stood at 3.07%. Its provision to losses was consistently below its charge-off rate in the previous four quarters

·         Its net interest income growth (q-on-q) slowed down drastically to 2.8% in 1Q2008 from 5.6% and 8.5% in 3Q2007 and 4Q2007, respectively.

·         Non interest income growth (q-on-q) was negative 4.7% in 1Q2008 compared to 11.1%, 9.0% and 0.4% in 2Q2007, 3Q007 and 4Q2007, respectively.

·         Its adjusted leverage also increased from 11.7x in 1Q2007 to 13.4x in 1Q2008

 

American Express (AXP)

·         AXP’s ‘reserves as % of consumer receivables’ at 3.6% in 1Q2008 as against ‘loans 90 days past as % of loans’ at 4.4% reflect that the company has inadequate allowances for bad loans.

·         AXP’s write-offs for consumer receivable loans have increased to 0.78% of loans from 0.62% in 1Q2007 while write-offs for Card member loans have increased to 0.74% in 1Q2008 from 0.55% in 1Q2007.

·         Despite increase in charge offs and inadequate provisioning, AXP’s adjusted P/B of 6.47x seems significantly higher than its peers

·         Leverage has increased from 11.7x in 1Q2007 to 14.6x in 1Q2008.

 

SLM corporation has also witnessed similar trend in its provision for loan losses and write offs but the stock has already witnessed around 65% decline in its price over the last 12 months. Therefore, the same has been excluded from our list of 3 shortlisted banks.


Of the above companies, AXP and Capital One appear more venerable based on initial analysis.

 

Market metrics

 COF US EQUITY

 AXP US EQUITY

 

 Consumer Fin

 Consumer Fin

Line of business

 Credit card & consumer lending

 Travel related

 

 Consumer Fin

 Consumer Fin

 Business descrption

Capital One Financial Corporation provides a variety of products and services to consumers through its subsidiaries. The Company through Capital One Bank offers credit card products. Capital One F.S.B. provides certain consumer lending and deposit services. Capital One Services Inc. provides operating administration and other services to the Corporation. Obvious credit risk abounds.

American Express Company through its subsidiaries provides travel-related financial advisory and international banking services around the world. The Company's products include the American Express Card the Optima Card and American Express Travelers Cheque. Exposed to credit risk and the coming consumer entrenchment and global slowdown – effected by higher fuel prices that hamper travel and lower real wages that hamper spending the proclivity to pay back loans.

 
 
 
 
 
 

 

 

 Share price

                                                        38.0

                                                                 37.7

 Shares outstanding

                                                      372.9

                                                            1,158.0

 

 

 

 Market Capitalization

                                                 14,261.1

                                                          43,637.4

 Enterprise Value 

                                                 40,939.2

                                                          98,676.4

 

 

 

 52 Week High

                                                        79.4

                                                                 65.9

 52 Week low

                                                        37.3

                                                                 37.6

 

 

 

 - Price as % of 52 week high

 

 

 

 

 

Price Performance (% change)

 

 

  3 months

-20%

-10%

 12 months

-48%

-33%

 

 

 

     

Valuation metrics

 COF US EQUITY

 AXP US EQUITY

Book value per share

                                                      65.16

                                                                 9.52

Tangible book value per share

                                                      30.74

                                                                 8.05

Earnings per share

                                                        4.02

                                                                 3.42

Revenue per share

                                                      49.02

                                                               26.90

 

   

Price / Sales

                                                        0.95

                                                                 1.92

Price / Earnings

                                                        6.87

                                                               15.10

Price / Book Value

                                                        0.71

                                                                 5.42

Price / Adjusted Book value

                                                        1.54

                                                                 6.47

Price / FCF

                                                        1.57

                                                                 8.03

     

Ratios (2007)

 COF US EQUITY

 AXP US EQUITY

 

   

5 yr EPS growth

                                                        (0.3)

                                                                 11.1

5 yr NIM growth

                                                        19.2

                                                                   1.1

 

   

NIM Margin

                                                          5.3

                                                                   5.4

Efficency ratio

                                                        54.4

                                                                 65.6

Net Revenue Margin

                                                        76.2

                                                                 87.9

Operating Margin

                                                        20.9

                                                                 17.8

Pre tax margin

                                                        20.2

                                                                 17.6

 

   

Provision for loan loss to Total Loans

                                                          2.7

                                                                   7.8

Reserve for loan loss to Total Loans

                                                          2.9

                                                                   3.4

Net Charge off to Average Loans

                                                          2.0

                                                                   4.0

 

   

Net Interest Income to Earnings Assets

                                                          3.2

                                                                  (0.5)

Interest Income to Average Loans

                                                        10.2

                                                                 14.9

Interest expense to Total Deposits

                                                          5.4

                                                                 27.9

Earnings assets to Interest bearing liabilities

                                                      101.3

                                                                 80.5

 

   

Return on assets

                                                          1.0

                                                                   2.9

Return on common equity

                                                          6.3

                                                                 37.3

Total debt to common equity

                                                      153.5

                                                               662.3

Total debt to Assets

                                                        24.8

                                                                 48.8

Total loans to total assets

                                                        67.6

                                                                 36.9

Total loans to total capital

                                                      165.3

                                                                 65.8

Leverage (x)

                                                          6.2

                                                                 13.6

 

   

 

   

Interest income

                                                    10,127

                                                               7,416

Net Interest income

                                                      6,530

                                                               3,590

Provision for loan loss

                                                      2,637

                                                               3,901

Interest expenses

                                                      4,548

                                                               3,826

Non interest expenses

                                                      7,940

                                                             18,198

Earnings assets

                                                  121,903

                                                             71,176

Total Shareholder's equity

                                                    24,294

                                                             11,029

Total Assets

                                                  150,590

                                                           149,830

Reserve for loan losses

                                                      2,963

                                                               1,876

Net Income

                                                      1,570

                                                               4,012

Non performing assets

                                                         936