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 Much of the company’s competition has retrenched/withdrawn following the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.
Conclusion
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.
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