When I pasted that Morgans link, it looked wrong, but it was 6:000 AM, and I had been up all night, so I was in no mood to investigate. If you Google, “Morgans Credit Corp 2022 two out of three ain't bad”, you will find it. I had to scroll down a fair bit to find the CCP-relevant information. This too may work https://www.morgans.com.au/Blog?month=4&year=2022
What set me off on the path of looking into the provisioning of loans was that the writer of that post opined that the 26.7% provisioning of the loan book was too high, compared to 18.7% before Covid. My respective metrics were 26.51% derived from the FY21 Accounts, and 19% picked up from that, or a similar CCP source as a round number.
CCP historically provisioned loans up-front at 20%, then changed to 18% a few years ago. The 18.7% probably arose because the new up-front provisioning rate of 18% had not fully eroded the effects of the earlier 20%.
We have witnessed that Management has a proclivity to panic in the FY20 CR, and in the impairment and provisioning applied when Covid appeared, and which hindsight tells us was an overreaction. My reading of how Encore Capital and Intrum reacted to Covid inclined me to believe that CCP had overreacted, and I posted this opinion at the time.
I interpret what Morgans stated on the over provisioning matter was that CCP could report a higher profit by bringing provisioning down to a sensible %. I agree that CCP could do that. However, as a long-term investor in CCP, I am ambivalent as to whether it does, or not, because the intrinsic value is there, but hidden as a fat reserve. This tendency to lay down reserves, IMO, is why CCP can predict an NPAT fairly accurately, because it has the reserves to make it happen in spite of a contretemps.
To a feel for the effect of reducing provisioning of the $183.920M loan values in FY21, the following starts with the actual $48.748M provsioning in FY21, and shows three alternatives. The value released would drop to profit before tax.
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