Investor Wag Informal Investment Insights

Ground is shifting beneath payday lenders

Changes to government legislation can make big ripples through affected industries. Cash Converters (ASX:CCV) and the proposed pay-day loan legislation changes is no different. Recently I took a look at the proposed changes and the potential impacts.

The main points regarding regarding the legislation changes is as follows:

  1. A draft of new pay-day laws was written late last year. It proposed fee caps comprising a 10% establishment fee and a 2% monthly fee.
  2. Senate committee concluded on 2 December 2011 that the proposed fee caps are unworkable
  3. There have been talk from Bill Shorten and the media of a revised cap of 20% establishment fees and 4% monthly charge. These are the caps Cash Converters proposed to a parliamentary committee. This is the mostly likely outcome from what I can see

But what does Cash Converters charge at the moment? Below are the figures for the average loan made by CCV in Australia from their presentation in March:

  • Loan Size: $1028
  • Establishment fee: $250 (24%)
  • Interest: $490
  • Total Fee: $740
  • Length: 7 months
  • Therefore, Interest per Month: $70 (6.8%)

So currently, the average establishment fee is 24% and the average interest per month is 6.8%. If the favourable outcome is reached (20% and 4%), CCV is still looking at a reduction of fees from personal loans in Australia of around 33%.

Australian cash/personal loans are a very big part of CCV. These are the stats from the same presentation:

  • Cash and personal loans: 40% of revenue, 75% of EBIT
  • Australia makes up about 85% of CCV's loan book.

Combining the reduction in fees for Australian loans with it's profit share within the company and we're potentially seeing a 21% reduction of EBIT on the bottom line. These figures are rough and don't take into account loans over $2000, intricate industry details I'm unaware of, flow on affects of the changes with demand, and makes the assumption that the new proposed caps will equal the average fee collected. Though rough, I still believe it to be a good guesstimate.

That's all I wanted to share. Others might find this information useful. I don't have a particular opinion on the company as an investment.

CCV last traded at $0.61

Reminder: I'm not a licensed financial adviser and nothing on this site constitutes financial advice. I can't guarantee any of the numbers or information provided here are accurate.