Shares in International Personal Finance (LSE: IPF) fell 13% by morning trading, as the company warned about recent revisions to the draft total cost of credit amendment law in Poland. The lower house of the Polish Parliament voted in favour of “revisions to the draft law that would cap all non-interest costs, whether mandatory or not”.
“If the legislation is enacted as currently drafted, IPF believes that all non-interest costs in connection with a consumer loan agreement may be subject to the cap” the company said in today’s announcement.
IPF had previously developed a product which complied with the previous draft bill, but the company will need to look again at developing an “alternative product structure to mitigate any adverse financial impact to the greatest extent possible.” Because of the reduced room to manoeuvre with non-interest charges, IPF will find it much more difficult to ‘go-around’ the proposed cap.
As previously suggested, interest will continue to be capped at four times the Lombard rate. The Lombard rate, which is the lending rate set by the Polish central bank, is currently 3%; so the interest cap will be 12%. Penalty interest will also be capped at six times the Lombard rate.
Because the draft bill has yet be accepted by the upper house of the Polish Parliament, the eventual outcome is still uncertain. But, public opinion seems firmly in favour of the proposed cap on charges; which should mean legislators are likely to back the bill in principle.
Poland accounts for around half of IPF’s underlying profit, so the potential impact of the cap on non-interest costs is enormous for the company. Other countries, particularly those within the European Union, are also looking to tighten legislation on the consumer credit industry. Slovakia had, earlier, introduced a ban on the delivery of loans in cash and arrears visit to customer’s homes, which led to a reduction of lending there.
IPF was spun out of Provident Financial (LSE: PFG) back in 2007, as it was thought that IPF’s better growth prospects meant it could achieve a sizeable valuation premium and that it would be better served by an independent management team. But, it has since been beset by tightening legislation and intensifying regulatory scrutiny.
Despite stricter regulations, the consumer credit market should continue to grow rapidly. IPF’s business in Mexico is particularly promising, given limited consumer credit availability there. The company is also doing well with product innovations and expanding its digital channel offering. With increasing scale, the company is becoming more efficient, as its cost to income ratio fell 0.7 percentage points to 38.8% in 2014.
It’s shares currently trade at a P/E of 12.4, which is below its historical average and significantly less than its peers. The dividend has also been growing rapidly, having risen by 29% in 2014 to total 12.0 pence per share in 2014. This gives its shares a dividend yield of 2.9%.
As longer term fundamentals are broadly intact, IPF could be a worthwhile long term investment. But, investors should be prepared for a bumpy ride, particularly if there are any more surprises to the regulatory framework.
