Magazine article American Banker

Finance Firms' Clients No Easy Pickings for Banks

Magazine article American Banker

Finance Firms' Clients No Easy Pickings for Banks

Article excerpt

Lending to customers usually shunned by banks has brought finance companies huge profits in the last few years.

Flush with capital raised on Wall Street, the companies are eager to expand. Many have grown from local to regional to national businesses. Now, they are pushing beyond North America and into uncharted lending territory.

"We're not just the little loan shop on the corner anymore," said H. Randy Lively, chief executive of the American Financial Services Association, the trade group for finance companies. "This is a whole different industry than it was a few years ago."

Excitement over both the industry's performance and its prospects was evident here as more than 700 finance company executives gathered for the association's 80th annual convention.

Finance companies fund their loans entirely with capital raised in the financial markets or by securitizing the loans. They often make smaller loans than banks and accommodate borrowers with much lower incomes or poor credit histories.

The high profit margins and ballooning customer base have even attracted the attention of large banking companies. But after years of ignoring the market, banks won't find entry easy, finance company executives say.

"One-third of the American population doesn't have a banking relationship," said Charles Walters, chief executive of World Acceptance Corp. and the association's new chairman. "Between 1989 and 1993, half of all tax filers had incomes of less than $20,000 . This is the segment that our membership serves."

World Acceptance makes small consumer loans to borrowers whose incomes average between $15,000 and $25,000. During fiscal year 1996, the company saw net income increase 22.5% from 1995.

Big jumps in earnings have been the norm so far this year. For established players like Household Finance, Prospect Heights, Ill., 20% growth is typical. Relative newcomers like RAC Financial Group, Dallas, have watched earnings increase tenfold this year .

And the pool of customers that fits the finance company profile is growing, economists say, as consumer debt rises and stretched borrowers miss payments. Corporate downsizing is also said to be swelling the market.

In the past two years, subprime auto and home equity lenders have gone public at breakneck speed and enjoyed record profits. Gary Gordon, an analyst for PaineWebber Inc., New York, estimates that 25 to 30 finance companies tapped Wall Street capital in th e past two years. Five years ago, such financing wasn't even considered.

Now, established players are looking globally.

Ford Motor Credit has launched operations in India, Indonesia, Korea, and Thailand, using start-up offices and joint ventures. …

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