Ann: Credit Corp Group H1 of 2023 Media Release, page-62

The subprime demographic from whom CCP derives revenue and profit tends to have a low percentage of mortgage holders, so it is not much exposed to mortgage-related risks, IMO. Further, unlike its competitors in both the PDL business and the unsecured-lending business, CCP is not highly debt leveraged, so the rising interest rates that occasion mortgage stress to negatively impact highly debt-leveraged business, do not materially impact CCP.

In the PDL business there tends to be two cycles at play, the availability of PDLs when the economy deteriorates, and the increase in collections when the economy improves. Debt buyers benefit from improved PDL availability, and improved collections, so these firms must take a long-term view. Encore Capital's 2021 Annual Report articulate this thus, "While a down economic cycle may lead to some slowing in debt repayments, it also leads to increases in charge-offs and portfolio sales. Alternatively, when the economy improves, many consumers look to resolve their debts thus leading to a catchup in collections over the portfolio’s life cycle."

CCP's business is different insofar as CCP has an unsecured loan business, and Encore does not. Consequently, when PDLs are in short supply, CCP can deploy cash into making loans, so it can keep its funds deployment matched to its funding situation. Encore is likely to buy its own shares when it has excess cash, and thus it passes the benefit to shareholders by having less shares on issue.

Wherever CCP invest funds (in PDLs of loans made) is one thing, but how it reflects this in its accounting is another. The PDL business is biased to reporting revenue and profit in step with collections. CCP's loan businesses expenses are exaggerated via up-front provisioning in CCP's statutory accounting, but not its tax accounting, because the ATO disallows debt provisioning as an expense (debts must be written off when they are deemed not to be collectable). CCP shareholders must hence took through the up-front provisioning quirk in times of Loan-Book growth, as we experienced in H1FY23.

The short-cut method of handling all the above issues is simply to keep an eye on the EPS guidance issued at the beginning of each year, and updated twice or thrice during the year. These forecasts have been accurate for the last decade, with a tendency to be conservative by a small percentage. I do not know of a single ASX-listed company that is prepared to give that level of guidance.