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  • Springleaf Holdings, Inc. (LEAF): A Market Leader In Personal Loans 0 comments
    Jan 8, 2014 6:02 PM | about stocks: OMF

    Springleaf Holdings is a consumer finance company specializing in providing personal loans and insurance products to subprime borrowers. Based in Evansville, Indiana, the company was formerly known as American General Finance Corporation, a direct subsidiary of AIG Capital Corporation. Before its restructuring, LEAF used to operate in four business lines which included credit insurance, the consumer lending, retail lending, and real estate. However, following the restructuring, the company terminated its real estate and retail lending operations, which are now in run off mode. Springleaf is now focusing on its core businesses, which are consumer lending and credit insurance. Moreover, the company also has a new segment; acquisition and servicing.

    Springleaf is the second largest U.S. lender specializing in personal loans to subprime borrowers. It has a long history in subprime lending and, following the restructuring and renewed focus on its core businesses, has become a market leader in personal loans. Much of the company's competition has retrenched/withdrawn following the credit crisis. The regulatory constraints have forced most banks to back away from credit card lending to the lower-end of the credit spectrum. While the banks are now focusing on the mass affluent, this has left a wide-open field for non-bank finance companies such as LEAF. Most of these loans are secured by automobiles or other collateral and are typically in the range of $3,000 to $5,000 and at rates of 25%+. With a limited threat of competition and a fragmented market, LEAF should be able to maintain its strong loan growth over the next few years through a network of over 800+ branches and an internet lending division called iLoan.

    Being the market leader in personal loans, LEAF is well-positioned to benefit from a favorable environment and large market opportunity. There is currently about $3.3 trillion of consumer debt outstanding in the United States, comprised of personal loans, credit card debt, auto loans, and student debts. There is a large addressable market of non-prime to sub-prime borrowers, which are under-served by traditional large bank lenders that have scaled back or exited that segment because of a desire to de-risk, new capital requirements and regulatory scrutiny. As Basel III rules related to capital adequacy begin to phase in, credit unions, thrifts, and traditional bank lenders will continue to be constrained. Moreover, credit card companies, which have also traditionally lent to subprime borrowers, have reigned in their lending and have focused on competing for prosperous borrowers. As a result, lower income and higher risk consumers lack sufficient access to borrowing. While this whole situation has resulted in reduced competition, the demand for financing among household borrowers remains high and exceeds the available lending capacity in the market. According to Springleaf, 50% of American households do not believe they could raise $2,000 within 30 days. Springleaf, as one of the largest operators remaining in the non-prime space, is well-positioned to benefit from this supply/demand imbalance and grow its portfolio.

    LEAF should act as a consolidator in a very fragmented personal lending market. The company operates an extensive branch network of over 800 locations, which it can leverage to gain market share in the fragmented personal loan market. LEAF has the potential to become one of the Go-To lenders for personal loans. In addition, as smaller lenders close business and larger banks either scale back or exit business, it could also result in acquisition opportunities for the Indiana based company. LEAF's biggest competitor is OneMain Financial, which is part of Citi's non-core Citi Holdings. Many of the company's former competitors such as NextCard, Providian, and Household are no longer operating today. Given the company's strong competitive position, it should be able to maintain its strong y/y loan growth over the next few years (19% y/y loan growth in 3Q13).

    The company's growth strategy is based on three main initiatives. First, the company expects to grow its revenue organically by capitalizing on its existing branch network. Springleaf's management is targeting an increase in branch originations by increasing productivity within the branches. LEAF used to service its real estate loans from within the physical branches, however, the real estate lending operations have ceased operations and the company is currently in the process of transitioning its servicing operations to a centralized servicing platform. This should free up capacity within the branches and allow employees to focus on underwriting and originating personal loans.

    Secondly, new channels and more portfolio acquisitions similar to the SpringCastle one should also help LEAF grow its loan originations. In 2013, the company also started sourcing personal loans through its internet lending platform, iLoan, which has allowed the company to reach customers outside of its geographic footprint and to cater to customers that spend more time on the internet.

    The last initiative of the company's growth strategy is to pursue additional fee income opportunities related to the servicing of loans. LEAF's centralized servicing operation, known as Springleaf Servicing Solutions, will offer third-party-fee-based servicing for consumer loans. Springleaf believes that by 2015, it can boost the productivity at the branch level from $3.4 million per branch currently to $5.0 million. On this front, the company has developed interesting partnerships with other institutions to receive low-cost referrals for new customer acquisition. In addition, loan growth has and will continue to benefit from the company's on-line strategy driven by the iLoan platform.


    Due to reduced competition, limited market supply, and growing demand, Springleaf is well-positioned to benefit from a compelling market opportunity in consumer lending. The company is in a good position in the market, targeting customers that are under-served but providing services that warrant limited regulatory scrutiny. LEAF uses proprietary underwriting processes, which have led to a net charge-off rate below that of industry averages. Additionally, the company has pinpointed a number of key growth initiatives, including portfolio acquisitions and Internet lending, which could increase earnings past the already strong branch model. LEAF's extensive network, market leading share, and credit quality in the sub-prime segment should produce robust core earnings growth and warrant a premium over peers.

    MissionIR provides investor relations services to publicly traded companies in exchange for compensation. This article may be part of our efforts to widen a client's exposure. To read our full disclaimer, visit http://disclaimer.missionir.com

    Stocks: OMF
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