Monday 7th of April 2008

The past week was always going to be a useful one to get a fix on the state of the finance company sector. As Monday was the end of the March quarter companies were due to send out payments to debenture holders and if there was any bad news it was likely to come out during the week. For a while I thought it was OK, but then down came Lombard. Was this a surprise? On balance probably not. Lombard was an average finance company that tried to look extraordinary. It didn’t appear to offer any clear competitive advantage and if you measured it against a set of criteria I produced last year you would have stayed clear of the company. The company, through its name, its TV advertising and use of former MPs, puffed itself up and made it look bigger, stronger and more important than it in fact was. Perhaps of more concern is that the company had some black marks to its names including problems with contributory mortgages and the not-too-pretty sight of its chief executive ending up in court over various matters. Thirdly, and this is the bit which is harder for investors to see, is that some of its lending was not too flash and there was a huge concentration of loans. This is yet another warning bell. At a finance company sector level, the Lombard situation is being portrayed a number of ways. One being that it was the first property lending company to run into trouble. The conclusion then being that maybe this is the first of a number of collapses. I don’t buy that line as Bridgecorp was clearly property-related. Secondly, Lombard blamed the property market. On balance it seems that has had an impact, but one can’t dismiss the observations about how the company itself. Perhaps the most salient point is that companies who aren’t well-prepared and don’t have contingency lines of funding in place, are the ones which are going to struggle. It’s a no-brainer to realise that reinvestment rates are down and will stay down, and that new retail money is scarce. Added to that wholesale money in this credit crunch constrained environment is almost non-existent too. A key to success is having lines of funding. Asset quality and loan repayments are vital, but in some ways the latter is nearly out of the control of the lender, sure if someone doesn’t make a payment they can get whacked with penalty interest, but that isn’t much use if they have no money. Thirdly finance companies need to focus on what they are good at and manage the size of their business.