Small Cap Value Report (Tue 18 Dec 2018) - Overdrafts/High-Cost Credit, ANG, SDI, TOOP

Tuesday, Dec 18 2018 by

Good morning!

Paul has added new sections to yesterday’s report, so that’s worth checking out first thing.

Mourinho has been sacked - quite upsetting for me, as I bought some José-related memorabilia during my recent trip to Old Trafford, which I planned to give as Christmas presents.

On the other hand, maybe we can see some attractive football from the old club again, at some point in future.

Today I am looking at:

Financial Conduct Authority

FCA Proposals on Overdrafts and other High-Cost Credit Products

This FCA work has been rumbling away in the background for a while.

Indeed, I reckon that the regulatory mood in relation to credit products has been affecting the valuation at H & T (LON:HAT) (in which I have a long position). This share currently trades at less than 8x forward earnings according to Stockopedia. But it won't be affected by today's proposals.

Where the proposals will have a massive impact is on overdrafts.

Several years ago, I was a very regular user of my overdraft - and deliberately so. The rate being charged wasn't particularly high, so it was worth it.

That all changed when the bank introduced flat daily fees - fixed fees up to £1,000, £2,000 and £3,000.

This was trumpeted as an improvement, as it made the overdraft fee easier to calculate, according to my bank (I didn't agree, because it meant that a complicated calculation was needed to figure out the implied APR).

Perhaps due to pressure from the powers that be, the bank also cut some of the heavy charges that applied to customers who went over their borrowing limits and who requested payments which could not be made.

The abolition of those charges meant that higher charges needed to be made to customers for their ordinary use of overdrafts.

Put it all together and the implied interest rate on my facility had become exorbitant. It was no longer economic for me to use it, and I have only rarely done so since.


There are several proposals announced today. This is one of…

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All my own views. I am not regulated by the FSA. No advice.

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Scientific Digital Imaging Plc designs and manufactures scientific and technology products for use in applications, including life sciences, healthcare, astronomy, consumer manufacturing and art conservation. The Company's segment encompassing Synoptics three marketing brands, Syngene, Synbiosis and Synoptics Health. The Company, through its subsidiary, Synoptics Limited, develops and manufactures scientific instruments and systems that develop digital imaging technology for a range of disciplines. Synoptics Limited offers its products through four divisions: Syngene, Synbiosis, Syncroscopy and Synoptics Health.The Company through its Opus Instruments Limited, manufactures the infrared imaging system designed for art conservators to provide images in a portable camera. The Company, through Artemis CCD Limited, manufactures light imaging cameras. The Company through Fistreem International Ltd manufactures water purification products and vacuum ovens. more »

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Angling Direct plc is a United Kingdom-based fishing tackle retailer company. The Company is principally focused on selling fishing tackle products and related products through retail stores and also online via its own Website ( The Company’s product categories include reels, terminal tackle, rods, bait and additives and bivvies and shelters. The Company fishing tackles products, including capital items, consumables, luggage and clothing. Theses all fishing tackle products sells under its own brand Advanta. The Company operates approximately 15 retail stores. The Company has developed angling superstores. more »

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Toople Plc is a United Kingdom-based provider of telecom services to the United Kingdom small and medium-sized enterprises (SMEs). The Company's services include business broadband, fiber, data services, business mobile phones, cloud private branch exchange (PBX) and traditional services. These services are delivered and managed through Merlin, its software platform. Its data services include Ethernet First Mile and Ethernet. Merlin provides an end-to-end automated process that allows customers to place orders. The Company's cloud business telephony service for its SME market include Classic and Premium, which provide a way for small businesses to have a maintenance free phone system. These products can be ordered online or over the phone. Premium provides customers with phone system functionality and mobility through an additional iPhone Operating System (IOS) or Android application on their mobile, tablet or laptop. more »

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26 Comments on this Article show/hide all

FREng 18th Dec '18 7 of 26

I'm not an overdraft user, but this seems to be a big shake up that must create winners and losers in the market - though I haven't worked out who wins and who loses.

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brucepackard 18th Dec '18 8 of 26

Yes - I think that your interpretation of high cost credit is correct. This also applies to credit cards - from memory I think roughly half the customers with credit cards pay off their balances every month. And then there are the other half of customers that use credit cards as an expensive source of high APR borrowing who are cross subsidising the first set of customers. Inevitably many of the latter group are low income groups. I think the Govt / regulator was worried about low income groups providing a subsidy to wealthy customers of the same bank / credit card.
All that from memory - but I think the trend is to stop banks gouging vulnerable customers, hence might become more expensive for financially literate customers like you and me.

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Graham Neary 18th Dec '18 9 of 26

In reply to post #428283

Hi Mark, done Angling Direct (LON:ANG) now. Cheers. G

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gbjbaanb 18th Dec '18 10 of 26

I've never ever used an overdraft. Save some money and use it as a virtual overdraft, by keeping your account in credit and assume the first £1k is not to be touched. For anyone not on the breadline, that should be easy, for those on the breadline (and me, when I was) never use an overdraft as you cannot afford it anyway.

Meanwhile Redt Energy (LON:RED) is interesting - they only book revenue once their machines are not just sold and contract signed, but also delivered, installed and chugging away. Other companies try their hardest to get revenue booked ASAP (including one company I worked for whose CEO ended up in prison for booking it rather a bit too early), but it seems Red want to do the opposite. Good practice, or some form of dodgy accounting?

ResearchTree has had a flurry of notes recently. I think its one to buy into, when the results come in, it'l turn from a "tech startup, trying to sell" company into a "now selling stuff hand over fist" and the SP will pop upwards.

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Aislabie 18th Dec '18 11 of 26

SCVR does not normally look at financial companies but Funding Circle Holdings (LON:FCH) announcement today is worth a note.
Funding Circle is issuing a profit warning less than three months after floating, this may not be a record but it must be close.
While being fairly predictable it is so very disappointing. I was an early enthusiast of its original peer-to-peer auction based lending. The problem with lending to small companies has always been the time it takes to analyse them and their often incomplete financial history. By having private individuals do this analysis on their own time, and bid the interest rate that they felt relevant, FCH solved that problem.
But I guess it was too slow a growth for them so they killed off the direct lending aspect and now you can only choose a risk level, and given their previous assessment of risk was, to my taste, far too optimistic I stopped lending, expecting that bad debts would start to mount.
There is a popular opinion that the traditional banks are far too conservative in lending to small businesses, regrettably this is more myth than reality. There are a lamentable number of small businesses whose knowledge and control of their finances is very limited, over the years banks have come to know this well. FCH is probably starting out on this painful learning process.

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timarr 18th Dec '18 12 of 26

There may be a read across to H & T (LON:HAT) and Ramsdens Holdings (LON:RFX) - although that depends on the way the restructured overdraft charges work. 

The people who use these services are often surprisingly financially sophisticated - they're just poor.  They're often having to balance the cost of the loan versus the certainty of it - and the sheer complexity of overdraft fees has been off-putting. I looked at this a few years ago and concluded that the banks were deliberately making it confusing so that customers were accidentally triggering fees - and that's pretty much the opposite of what the pawnbrokers do.

So, overdraft fee certainty may tempt some customers of H & T (LON:HAT) and Ramsdens Holdings (LON:RFX) across - although I suspect the banks will have to become much more customer friendly before that becomes a trend. And as Graham says, they'll probably just raise the fees on arranged overdrafts to compensate.

As an aside the UK banks are nowhere near as bad as those in the US who engage in payment rescheduling to maximise their fees. Assume a customer has a $100 overdraft and the account is hit by three payments in order of $30, $50 and $70. The first two payments are still under the overdraft so only the last one triggers an overdraft fee - you'd think.

But no, the banks will re-order the payments so that they go $70, $50, $30 - and thus get two extra overdraft charges as the second payment takes you over the limit. All perfectly legal - and there are specialist consultancies and payment providers who enable this kind of thing. No matter how bad we think our banks are they're a lot worse across the pond.


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Edward John Canham 18th Dec '18 13 of 26

In reply to post #428343

Funding Circle Holdings (LON:FCH)

I can't find anything on my news feed.

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timarr 18th Dec '18 14 of 26

It's related to Funding Circle SME Income Fund (LON:FCIF), not Funding Circle Holdings (LON:FCH).


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rick 18th Dec '18 15 of 26

We have a late runner, Goodwin (LON:GDWN) with what look like decent numbers.

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mrosbiston 18th Dec '18 16 of 26

In reply to post #428353

it was not a warning from Funding Circle Holdings (LON:FCH) but monthly commentary from the Funding Circle SME Income Fund - which is probably being read across as difficult for Funding Circle Holdings (LON:FCH)

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Aislabie 18th Dec '18 17 of 26

In reply to post #428358

Indeed I was reading across from the Income Fund and my apologies if this is irrelevant.
I am sorry I was not clear about this

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Zipmanpeter 18th Dec '18 18 of 26

In reply to post #428348

Mainstream Banks have all but eliminated personal banking (even over the phone) in favour of internet/call centres and have had, in my view, disgracefully high and hidden fees for non-standard customers in order to pretend to offer 'free' overdrafts and low interest APR rates on loans.

I think another winner will therefore be Non-Standard Finance (LON:NSF) (I hold) whose national network of EveryDay Loans branches (now 65 strong) offers simple unsecured term loans at APR's from 25% to >250% and de facto money management services.....customer servive but paid for. Their rates may be high but they are transparent and reflect risk with branches where you can meet staff face to face. (This is a growth area for H & T (LON:HAT) but I fear their expertise is pawnbroking, a different skillset which is also a brand/category that many consumers will never go for for snobbery reasons)

High financial skill, well resourced clients (call them Graham's) will find other means to manage, balancing zero interest credit cards, etc or increasingly snazzy new financial products and challenger banks.

The net continues to close on mainstream banks.....only deep inertia keeps the retail deposits coming.

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barnetpeter 18th Dec '18 19 of 26

A company I jointly own took out a 100K loan from Funding Circle three years ago; process was straight forward and repayment finishes early next year. A second sister company I am involved in asked about the rates for a 30K loan and the process has been a complete and utter shambles. Funding Circle did not seem to know about the previous loan or that it had been paid off without an issue or how this affected risk profile. So much hassle and very time consuming for a small amount. So no thanks. The danger is that only the very desperate companies will put up with all this....and they will more than likely turn out to be the most riskiest. When the economy turns down sharply I would not want to be a significant lender.

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Michael C 18th Dec '18 20 of 26

'... it meant that a complicated calculation was needed to figure out the implied APR'....
Many years ago I was studying for a degree which included a financial mathematics module. I learned how mortgage payments are calculated and just out of interest I checked my own mortgage payments. They were wrong. It took a while to put things right because it was hard to find anyone in the building society who could do math, but I eventually got a refund, and reduced monthly payments thereafter. Unofficial explanation, by phone, was that their software included a mathematical error. Did they correct it? Did they tell any other customers? I just don't know. Not long after that Excel came into existence and now anyone can check their payments using standard functions, so hopefully it never happens nowadays. Hopefully.

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Emperor 18th Dec '18 21 of 26

Taxi for Mourinho! Graham, can't believe you were so short-sighted as to buy the gear - or that you were prepared to endorse his tenure! Delighted as many will be that Old Trafford might once again be worth a visit in the new year, or maybe next season. Ho, ho, ho and very merry Christmas. They thought it would soon be over - it is now!!

Thanks for your commentary through the year. Some great insights from you and the Gilet rouge.

And Mourinho is a lovely man when not managing a football club...

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Kayserasera 18th Dec '18 22 of 26

Yes I occasionally use my overdraft which is charged simply on a daily basis at around 18% APR and no other charges, not bad value when it's just for a few days but not quite as good when it was originally about 8% APR.

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Kayserasera 18th Dec '18 23 of 26

In reply to post #428393

Was this with Nationwide? I had exactly the same problem with Nationwide years ago, as a trainee accountant I was able to work out that I was being overcharged but the cashiers in the local branch didn't have a clue. I had to write to head office but eventually got it corrected downwards.

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Fangorn 18th Dec '18 24 of 26

Man U is bigger than its manager. Or so I gather given I wouldn't watch kevball if you paid me.

Suspect recipients of said Man U gear will be happy nonetheless - regardless of whether the manager is in situ or not.

or you could tuck it away for scarcity value in 20 years time!

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Michael C 19th Dec '18 25 of 26

In reply to post #428453

It was about 34 years ago, and I think at that time of my life it would probably have been Abbey National, but I really can't remember.

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jonesj 19th Dec '18 26 of 26

I had C&G overcharging me about 20 years ago. Took 5 letters to get a refund.

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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