Hi Madtrader,
What did you make of the extra disclosures?
I dont hold any PNC but I have been a long time holder of CCP so I monitor PNC loosely as well.
One of the disclosures that I think is interesting is the 4x multiple (slide 17). Looking at the revenue note for the past 5 years shows that they have been amortising less and less of their PDP's. The amortisation rate has gone from 30.24% (which equates to a 3.3x) down to 23.02% (which equates to a multiple of 4.34) in just 2 years.
View attachment 726900
So while the 4x isn't news to me I must say that it does still surprise me that they would publish it directly as the cynic in me did think they were trying to obscure it in their numbers. Now that they have published it, the reason it worries me is from a couple of angles:
1. Given that they are only collecting 1.4x the PDP purchase price in the first 2 years. (at CCP 54% - of what they collect is done within the first 2 years). PNC are effectively saying that they only collect 35% in the first 2 years - but that their tail will last a lot longer. With 97% instalment completion rate at the moment they obviously have enough evidence to justify the view that payments will continue for up to 10 years but with an extended timeframe comes extended risk. The variables (recession etc) has to increase over time as the economic environment can change;
2. Given that they are purchasing for close to 18c in the dollar and forecasting a 4x return on that what they really forecasting is a return of 72c in the dollar (18c x 4x). Obviously they are charging interest (at 12% so in some instances collection can be over 100%) but to me that feels high. CCP for comparison buy at 5c and earn 2.15x so they are only chasing 10c in the dollar back;
3. If they can get 72c in the dollar back and a 4x investment I would question the sustainability of a multiple like that from the banks point of view. It is one thing for the banks to sell off severely delinquent loans at 5c in the dollar when the buyer can only make a multiple of 2.15x (CCP multiple). Firstly its hard, specialised work chasing these loans and the rewards (2.15x) aren't that great. And secondly the bank probably never wants to transact with those customers again. But to sell clients at 18c and have them pay back 72c in the dollar. To me the banks will start asking whether they have left too much meat of the bone and shouldn't they be doing this themselves (the reward is very high - 4x) AND the bank should still want to deal with these clients (if they can pay back 72c in the dollar in aggregate).
Have you thought much about this issue and if so how have you reconciled it?
(20min delay)