It has been a busy half-year in the leasing market for relative newcomer PCF Bank, but against market conditions that means greater competition. Brian Cantwell talks to Scott Maybury, chief executive at PCF, about the bank’s experience in the leasing market.

PCF Bank’s profit before tax was up 20% to £2.1m (€2.4m) for the six months ending 31 March this year (2017: £1.7m), which included costs for new banking infrastructure and resources.

The bank said it reached £108m in retail deposits, and that its lending portfolio grew by 40% from £128m in 2017 to £179m. Earnings per share maintained at £0.008, while after-tax return on equity reduced to 8.7% (2017: 10.5%), reflecting the increased capital base and investment in the banking model, said PCF.

The bank noted than in eight months, customer deposits had reached £108m (2017: nil), and that it was pleased with its “excellent progress” on strategic objectives and £350m portfolio target to be reached by 2020.

Due to lower costs of funding, the bank saw a 97% increase in new business originations to £69m (2017: £35m). Unearned finance charges hit £39m (2017: £28m). Chief executive officer Scott Maybury said he was confident that the bank could grow in
its chosen niches in the face of a competitive lending market.

Leasing Life: What are your thoughts on the target market you are covering, and the experience of lending in this market?

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Scott Maybury: We are very much about expanding in our existing markets at the moment. I think the story here is about delivery of the objectives we quite clearly set out before becoming a bank. We did not promise immediate diversification; we saw the opportunity to lend into our existing space. We knew we had a very small market share: our broker intermediaries have told us that 80% of the business that they look at we price ourselves out of, so we are very much about cashing in through those existing channels. I think the results tell you all of that. We have been in consumer motor and SME lending for over 20 years, so we understand the products well. The board wanted to put the banking licence to work quickly, but we are not going to do anything rash or out of our comfort zone when it comes to risk, so it made a lot of sense to go into our markets in a bigger way. We chose to go more prime. We have effectively passed all the cost savings of our retail deposits onto the marketing effort by lowering our headline rates and going for the more-prime customers that we were previously excluded from.

LL: Is competition a risk in the SME lending space?

SM: We think there is certainly a bit of price competition in the SME marketplace, and we are also a little concerned that not everyone prices correctly for risk. There is a bit of an attitude for volume first and profitability later, which is obviously foolish. We apply a very regimented price-to-risk model whereby, depending on your credit grading that we allocate you, we will both determine the price that we are prepared to lend to you, but just as importantly, the loan to value (LTV) you get from us. Our best credits, which are the new credits that we lend to, will get a higher LTV and a lower rate, and our lowest credit, which is no lower than we ever used to do in the past, will get a lower LTV and a higher rate. To us, that is a sensible place to be in the market place. It does not make us attractive to everybody and we do lose some business to competition, but we are not in any sort of race to the bottom when it comes to yield. Even without competing in that race to the bottom, we have managed to grow SME lending 111% in the six-month period. I think we are happy with our place in the market.

LL: What about the risks that have been expressed by other lenders in the SME lending space?

SM: What risks are the chairmen and CEOs talking about? I think they are talking about the competition. I think they are concerned people are not pricing correctly for risk, and I know the PRA is very concerned about pricing for risk as well. The PRA is asking the banks to look at their books, and it is asking the banks to actually say if their portfolios are exactly the credit quality they expect of them. It is very much the old story of a bit of a dash for growth. Is PCF a bank in that position because it is looking to grow? Yes, we have got to compete with them, but we offer a low base with a small operator and the targets we are setting ourselves are not so large that we have got to go right down. We set ourselves a target of £350m by 2020, and we have got two and a half years to go to get there. I think we are showing the market that there is a clear trajectory to that target, and we can do it with the same sort of responsible lending that we have been doing over the last couple of years.

LL: What is the business looking at regarding its market strategy?

SM: It will entail an acquisition, most likely, and I think that will be in one of the sectors that we are in at the moment, in a complimentary product. So something SME-related, or something consumer-related. We are very focused on our returns, and you are not going to see us dashing into residential mortgages, for example. We cannot just make that sort of net interest margin. I can probably tell you more of what it is not going to be than what it is going to be. We need to research; we get to our first target on organic growth, so we can take our time. We have got to look at the regulatory landscape from each of these products. We also want to look at the economic environment and the competitive environment for each of these products. We want to put a business line into PCF bank that is going to be as large as our SME or consumer finance book within two to three years. We do not want to be talking to you in three years’ time with three sub-scale business lines that have not got the potential to get above £50m, for example. We want a third and a fourth business line, which will race past £100m and sit alongside SME and consumer finance as a important part of our business.

LL: From past conversations, there have been smaller specialist lenders that have seen business loans as a good way to access the SME market, as opposed to traditional asset financing – if only because those SMEs that are not experienced in credit lending understand the idea of loans perhaps better than asset finance. Is that something you see progressing across the market?

SM: It might be. There’s certainly a demand for it, I do not deny that. High-street banks are not providing overdrafts for small business, which is quite tragic. That is the sort of cash-flow lending that has supported the private sector for many years, so they do have a requirement for it. I would just say that there are other products that can be secured, which might be more attractive to us – something like stocking finance, trade or supply line finance, invoice discounting or factoring, all of which are cash-flow products for small businesses but all of which have an element of security. What would worry us about SME loans is the unsecured nature of that loan, and unless it had a personal guarantee attached to it, you would have to look at the quality of the company, the length of time that it has been in business and the size of its balance sheet and retained profits and share capitals, to make sure you are at least adequately secured. It is a shift away from the collateral-backed lending that we do at the moment.