Making bank for the underbanked turns out to be a really good business lately. In a generous year for investors in the publicly-traded markets, firms serving the underbanked have far outpaced their brethren in the S&P 500.
In my unscientific non-weighted analysis of returns for the fourteen months (approximately)
since the beginning of last year, the "UnderBanked 25" have returned 51 percent on an annualized basis. By comparison, Spider (SP 500) shares are up 16.9 percent. The annualized (14 months price change divided by 1.167, ignoring dividends) returns are below:
- Consumer Portfolio Services, distressed auto loans, up 727 percent
- Conn's, rent-to-own, up 159.2 percent
- The Bancorp, prepaid debit card issuer, up 68.6 percent
- Portfolio Recovery Associate, debt collection, up 60 percent
- First Cash Financial, pawn, up 53 percent
- Global Cash Access, payments for casino consumers in momentary financial desperation, up 50 percent
- NetSpend, prepaid program manager, up 46 percent
- H&R Block, tax preparation and prepaid cards, up 44 percent
- Credit Acceptance, financier to buy-here pay-here, up 35 percent
- Asset Acceptance, debt collection, up 32 percent
- MetaBank, prepaid card issuer and payments processor, up 31 percent
- Asta Funding, debt collection, up 17 percent
- America's Car Mart, buy-here pay-here, up 17 percent
- World Acceptance, consumer finance and credit insurance, up 14 percent
- Liberty Tax, tax preparation and consumer finance, up 13 percent
- Aaron's, rent-to-own, up 9 percent
- Cash America, consumer finance, up 8 percent
- Dollar Financial, consumer finance, up 6 percent
- Nicholas Financial, financier to buy here pay-here, up 4 percent
- Rent-A-Center, rent-to-own, up 2 percent
- MoneyGram, money transmission, down 5 percent
- EZ Corp, pawn and consumer finance, down 13 percent
- Western Union, money transmission, down 19 percent
- The Cash Store, consumer finance, down 41 percent
- Green Dot, prepaid cards, down 45 percent
In how many sectors do 20 of 25 names go up in the same fourteen-month period.
The big winner for the year is Consumer Portfolio Services ("CPSS"). At the beginning of 2012, shares in CPSS sold for less than one dollar. Today they are north of nine dollars. Last fall, CPSS published a great Powerpoint about their business model here. CPSS purchases portfolios of car loans. Most of the cars that collateralize those loans are high-mileage domestic autos. Their customers had an average credit score of 561. As of last fall, their $845 million portfolio yielded 23.2 percent.
Some of the results would appear to sector-driven. Thus, Western Union and Moneygram make a good example. WU lost 18 percent during that period, whereas Moneygram's shares dropped a bit more than 5 percent. Distressed debt was led by CPSS, Portfolio Recovery Associates (4th), Asset Acceptance (10th), and Asta Funding (12th). Aaron's and Rent-a-Center, the leading rent-to-own firms, had positive returns of less than 10 percent. Prepaid was an outlier: while Green Dot's shares were the worst-performing name in the entire portfolio (-45 percent), The Bancorp (69 percent), NetSpend (46 percent), and MetaBank (31 percent) all did very well.
One conclusion: poor people are paying their bills. More specifically, poor people are making their car payments. In spite of its high-yield low credit customer base, CPSS only set aside four percent for loan losses. This isn't always true, though. The Buy Here Pay Here folks are all predicting that more than 20 percent of their loans will go bad. Nonetheless, the BHPH firms can recoup their losses through repossession. Thus, CACC only sets aside about 6 percent for expected losses.
Another conclusion: the CFPB is not destroying the value of these companies. The CFPB has managed to write rules for a number of these products and they have announced intentions to review rules for most of the rest. Did regulation destroy value? No.
Perhaps the payday lenders might feel differently: shares in the five payday firms in this sector fell by an average of 1.8 percent.
Two companies that were operating in this space at the beginning of 2012 have since then dropped out. White River Capital, a financier of sub-prime auto financing to an audience of consumers made up mainly of service members, was acquired by Parthenon Capital. AccountNow purchased nFinanSe, most likely because of the attractive opportunity presented by their contracts in several dollar stores.
Some important unbanked and underbanked companies are excluded from this analysis because those activities only constitute a very small portion of their revenues. This group includes American Express (BlueBird), JP Morgan Chase (Liquid), and TSYS (payments rails).