The payday lending industry has long been associated with unscrupulous practices that take advantage of the poor and uninformed. Several of these companies are publicly traded and you may be familiar with some of them. However, one name may be somewhat of a surprise. That name is Wells Fargo (WFC).
Wells Fargo, like other payday lenders, may find itself to be scrutinized more as consumer advocacy groups have called for stiffer regulations for the industry, and the government has obliged. The most recent effort came last week when the Consumer Financial Protection Bureau proposed a rule that would set up procedures to supervise these lenders. This may be good for consumers, but what about investors.
Wells Fargo has come under fire for being a part of this industry, and has been accused of loaning out money at interest rates that can reportedly top 200%. Compared to others, like Cash America (CSH), that's cheap. Its APR can be as high as 533% if the borrower chooses to roll the loan over.
Called the Direct Deposit Advance, Wells Fargo touts the program as a way to help people who are experiencing a financial emergency and need money on a short-term basis. It grants advances of up to $500. When funds are put into the account through direct deposit, Wells Fargo recoups the loan. The bank charges $1.50 for every $20 borrowed, which it notes equates to $7.50 for every $100 borrowed.
Wells Fargo warns that this is an expensive service, and has not backed down from those calling for it to cease offering it.
Other payday lenders include, World Acceptance Corp. (WRLD) and EZ Corp. (EZPW). They are called non-banks because they do not have a bank, thrift or credit union charter. It is this group that has captured the attention of the federal government because they have been largely unregulated and beyond reproach because of their status as non-depository businesses.
These non-banks have market capitalizations of about $1 billion. Their gross margins are more than 50%. World Acceptance Corp.'s is a whopping 80%. Their operating margins range from about 15.5% to about 32%. Again, World Acceptance Corp. had the highest operating margin at the 32%.
As an example of their strength, let's first look at World Acceptance Corp., whose fiscal 2012 results reached record levels. It last reported earnings in April. For fiscal 2012 its diluted EPS rose 17.1% to $6.59. Revenues increased 9.9% to $540.2 million and its gross loan balances grew 11.2% to $972.7 million compared with fiscal 2011.
For the fourth quarter of 2011, its EPS rose a 20.4% to $2.54 and revenues were up 8.8% to $148.9 million, compared with the fourth quarter of fiscal 2011.
Company officials credited the record setting levels to an ongoing demand for its loans in both domestic markets and Mexico. The company has also benefited from lower bad debt costs. It has had 12 consecutive quarters of flat or decreased charge-offs as a percentage of net loans when compared to the corresponding quarters of the prior years, according to its 2011 fourth quarter and fiscal 2012 earnings report.
The report also noted that its net income for the fourth quarter of fiscal 2012 rose 9.9% to $37.6 million compared with $34.2 million for the same quarter of the prior year.
EZ Corp. reported similar positive earnings in its last reports. Its report was for the second quarter of 2012. It reported that its net income rose 17% to $37.3 million compared to the same period in fiscal 2011. Its EPS rose 16% to $.73. To further bolster its position, it bought 60% of a payday in Mexico. It also bought a 72% stake in the provider of online loans in the U.K.
Now let's review Cash America. It beat analysts' estimates when it reported its first quarter earnings for 2012. Wall Street expected the company to post earnings of $1.19 per share. It posted an earnings per share of $1.30. That was 15% higher than the $1.13 EPS it posted for the same period in 2011. It took in roughly $42 million. The increase was due to higher revenues from its domestic pawn lending business. Growth in its international operations related to its e-commerce segment further fueled the growth.
Of its peers mentioned in this article, Cash America is the only one that pays a dividend. It is $.14, yielding 30%.
It is important to point out that these companies offer other services besides payday loans, which has further boosted their bottom lines. These services include tax return preparation, bill payment and check cashing.
While the payday lenders have a dubious reputation stemming from the exorbitant fees they charge, and practices some call predatory, for the most part they have been successful. They are filling a void for an increasing number of people who cannot qualify for traditional loans or banking services. As a result, these companies are raking in the cash. Their success is evident in their gross and profit margins, as well as their consistent earnings growth.
If the CFPB has its way, it will be to supervise payday lenders and put them on notice when it has reasonable cause to believe the company poses risks to consumers. The company's can respond in writing or orally. In addition, the proposal creates a mechanism for non-banks to file a petition to terminate supervision authority after two years.
It is difficult to say how much these companies will have to spend to comply with the CFPB's proposed rule. I see their movement to markets outside of the U.S., like Mexico, as a sign that they are preparing for the worst.