LONDON - UK sub-prime investors are shrugging off Wonga’s cloud. Customer complaints and a regulatory clampdown forced the payday lender to stop making loans. The likes of Amigo Holdings and Non-Standard Finance have different models, and regulators’ blessing. Yet, with Wonga out of the picture, they too risk becoming the focus of public ire.

Recently-listed Amigo, valued at 1.2 billion pounds, has a smart formula for high-risk lending: get creditworthy friends and family members to guarantee loans in case borrowers can’t pay.

The added security means Amigo and Non-Standard Finance, a smaller group pushing into guarantor lending, charge annual interest of around 50 percent. Compare that with the 1,000 percent or more that the likes of Wonga used to charge before regulators imposed a cap in 2015.

Investors love it. Amigo’s return on equity will be around 40 percent this year, using Thomson Reuters I/B/E/S, while it and Non-Standard Finance should grow revenue on average by more than 20 percent each year up to 2021, analysts reckon. NSF, which has a more diversified business including unguaranteed loans, is valued at over 17 times forward earnings. Amigo’s shares were priced at 12 times forward earnings even after a selloff promoted by disappointing results on Thursday. The consumer finance sector on average trades at less than 11 times forward earnings, according to Eikon.

Regulators seem happy for now. Britain’s Financial Conduct Authority has endorsed such “mid-cost” loans as an alternative to pricier options such as doorstep lending or “rent-to-own”, where a sub-prime borrower leases a product in return for steep weekly payments.

Politicians are a bigger headache. Stella Creasy, a member of parliament for the UK opposition Labour party who led a campaign against payday lending, called Amigo “loan sharks” in a tweet this year. She said the lender was forcing a guarantor to sell their house rather than putting the borrower on a repayment plan, and called on the FCA to intervene.

Legislators may find simpler solutions. Both France and Italy have usury laws limiting interest rates, which could capture even guaranteed “mid-cost” loans. The UK has historically shied away from a heavy-handed approach, for fear of forcing poorer citizens to rely on loan sharks. But lenders’ fat returns, and the growing likelihood of a left-wing administration, could trigger a further clampdown. Investors may regret ignoring the looming political risks.

CONTEXT NEWS

- British consumer-credit group Amigo Holdings on Aug. 30 reported revenue of 62.9 million pounds for the three months ending on June 30. That was 47 percent higher than in the same period a year earlier.

- Impairments rose to 25 percent of revenue, compared with 14 percent the year before, which the company put down to the new IFRS 9 accounting rules. Under the regulations, lenders must recognise an impairment provision when loans are made, based on the anticipated credit loss. Previously they would make a provision only when there was evidence of impairment, such as a borrower falling into arrears.

- Earnings per share rose by 31 percent to 5.5 pence. That excludes the costs of an initial public offering in late June and interest on shareholder loan notes, which were converted to equity shortly before the listing.

- Amigo shares were down 3.6 percent to 2.70 pounds at 0755 GMT.

(Editing by Neil Unmack and Bob Cervi)

© Reuters News 2018