Manx Financial Group — Executing on a high-growth strategy

Manx Financial Group (AIM: MFX)

Last close As at 22/05/2024

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Research: Financials

Manx Financial Group — Executing on a high-growth strategy

Manx Financial Group (Manx) posted record PBT of £7m, a 35% increase year-on-year. Manx benefited from strong volumes, a full year contribution from Payment Assist Limited (PAL) and a £1.9m gain on debt securities, which offset funding cost pressures from higher average interest rates. Alongside a 24% increase in lending to £362.7m, it maintained robust credit quality, with its cost of risk (CoR) decreasing by 20bp y-o-y to 1.3%. As a result, the group delivered a strong return on average equity (RoAE) of 16.4%, 50bp higher than FY22. In line with its 10% dividend payout policy, the group proposed a dividend of 0.4551p/share, up 21% on FY22. The approval of a UK banking licence in October is a major milestone for Manx to continue to pursue its growth strategy.

Written by

Robert Murphy

Managing Director, Financials and Investment Trusts

Financials

Manx Financial Group

Executing on a high-growth strategy

FY23 results

Banks

18 April 2024

Price

20.5p

Market cap

£24m

Common Equity Tier 1 (CET1) ratio

11.5%

Shares in issue

116.2m

Free float

55.9%

Code

MFX

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(4.7)

7.9

(19.6)

Rel (local)

(5.8)

2.8

(19.4)

52-week high/low

27p

15p

Business description

Manx Financial Group is an Isle of Man based diversified financial services group. Through its subsidiaries such as Conister Bank and Payment Assist, the group operates in resilient niche lending and financing markets in both the UK and the Isle of Man.

Next events

H124 results

September 2024

Analysts

Rob Murphy

+44 (0)20 3077 5700

Armando Hoxha

+44 (0)20 3077 5700

Manx Financial Group Manx Financial Groupis a research client of Edison Investment Research Limited

Manx Financial Group (Manx) posted record PBT of £7m, a 35% increase year-on-year. Manx benefited from strong volumes, a full year contribution from Payment Assist Limited (PAL) and a £1.9m gain on debt securities, which offset funding cost pressures from higher average interest rates. Alongside a 24% increase in lending to £362.7m, it maintained robust credit quality, with its cost of risk (CoR) decreasing by 20bp y-o-y to 1.3%. As a result, the group delivered a strong return on average equity (RoAE) of 16.4%, 50bp higher than FY22. In line with its 10% dividend payout policy, the group proposed a dividend of 0.4551p/share, up 21% on FY22. The approval of a UK banking licence in October is a major milestone for Manx to continue to pursue its growth strategy.

Year end

Operating income (£m)

PBT
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/20

16.4

2.0

1.35

0.00

15.2

N/A

12/21

20.0

3.0

1.96

0.24

10.5

1.2

12/22

26.1

5.2

2.93

0.38

7.0

1.8

12/23

31.5

7.0

3.51

0.46

5.8

2.2

Note: *EPS is fully diluted.

Growth curbed by funding costs

Net interest income (NII) increased 33% and net interest margin (NIM) climbed to 7.5% (FY22: 7.1%) through 24% loan growth and the full year contribution from consumer finance subsidiary PAL. However, in H2 the NIM fell to 7.1% from 8.2% in H1, curbing year-on-year growth in NII to 15.6%. The cost of funding reached 4.4% in H2 versus 3.3% in H1 and 2.1% in FY22. Operating expenses increased 20% to £20.3m, relating to the consolidation of PAL and costs relating to the UK deposit-taking licence. However, the group still delivered a 22% y-o-y increase in net attributable profit to £5.3m. Subsequently, basic EPS grew to 4.59p from 3.77p in FY22.

PAL and UK deposit licence to boost growth

PAL made a remarkable contribution in FY23 with profit after tax rising from £0.8m to £2.1m. Manx will incur a maximum cost of £5m to buy out the minority in PAL, which should be largely self-funded: assuming no growth, PAL would generate c £4.8m of retained earnings for the group by end-FY26. The £1.1m minority deduction would disappear; this represents c 20% of group attributable profit in FY23, for example. Meanwhile, Conister Bank is gearing up for an expansion into the UK market, with plans to ramp up deposit-taking activities in H224. The granting of the UK banking licence presents new opportunities to catalyse further growth and bolster Conister’s already solid performance.

Valuation: P/BV of 0.76x with RoAE of 16.4%

Using FY23 results, Manx currently trades at a diluted price to book value (P/BV) ratio of 0.76x and has an RoAE of 16.4%, double the peer average, and above its own FY17–22 average of 13.1%. To trade in line with peers, Manx would need to be trading at c 0.9x P/BV, or 19% above its current price.

Investment summary

Company description

Manx Financial Group, headquartered in the Isle of Man, is an independent banking and financial services group with roots dating back to 1935. Led by CEO Douglas Grant since 3 November 2021, the group operates several subsidiaries specialising in lending services for retail and commercial clients in the Isle of Man and the UK. Key subsidiaries include Conister Bank, Conister Finance and Leasing, MFX, PAL, Blue Star Business Solutions, Edgewater Associates, Ninkasi Rentals and Finance, and The Business Lending Exchange. The group’s operations encompass a wide range of services from banking and specialist lending to FX and advisory. Focused on building scale in attractive market segments, Manx has pursued both organic and inorganic expansion, notably acquiring a 50.1% stake in PAL in 2022, a move that has proved highly successful. This organic and non-organic strategic approach has resulted in lending growth to £362.7m, representing a 24% growth rate y-o-y or a 19% CAGR since 2017. Recent initiatives have centred on driving lending expansion and enhancing cost efficiency through technology upgrades, including a migration to Microsoft Azure.

Valuation

Manx trades slightly above its peers based on 2023 P/E and P/BV metrics. Conservatively we use diluted book value for Manx in our valuation as the nearly £3m in convertible bonds are well in the money with strike prices of 8–9p per share. On a headline book value basis, Manx’s P/BV is above the peer average of 0.68x, although Manx generates a higher ROE at 16.4% compared to the peer average of 8.3%. Manx maintains a relatively low payout ratio, which produces a lower dividend yield as it retains more capital for growth over dividends. Nonetheless, the declared dividend grew 21% in FY23.

Financials

In FY23, Manx saw a substantial 33% rise in NII to £32.4m, on the back of strong loan growth and the first full year of consolidation of PAL. NIM increased to 7.5% despite a major rise in funding costs as the Bank of England raised interest rates, due to the positive mix impact of PAL. NIM in H2 fell to 7.1% from 8.2% in H1 as funding costs increased, curbing NII growth to 15.6% y-o-y. Net fee and commission income declined to negative £3.3m due to expenses from PAL. Operating income rose 21% to £31.5m, including a £1.9m securities gain, while operating expenses increased 20% to £20.3m, resulting in a broadly flat cost-to-income (CiR) ratio. Despite a 4% increase in impairments to £4.1m, PBT rose by 35% to £7.0m, with net profit attributable to shareholders up 22% to £5.3m. The bank’s RoAE increased to 16.4% and EPS grew to 3.51p/share, leading to a 21% increase in the recommended dividend to 0.4551p/share.

Sensitivities

Manx, like its peers in the lending sector, faces macroeconomic risks such as fluctuations in GDP growth, interest rates and employment, which can have an impact on loan growth, margins and credit quality. In addition, lenders are subject to liquidity risks as deposits and debt financing must be maintained.

In terms of interest risk, Manx closely monitors the sensitivity to interest rates using a methodology aligned with Isle of Man Financial Services Authority (FSA) standards. The modelled sensitivity to an instantaneous 2% increase in interest rates across the curve fell to a negligible -£46,000 in FY23 from +£1.1m at the end of FY22. This has reduced due to a mix shift to shorter-term loans and securities and longer-term deposits. Similarly, the cumulative interest rate gap up to one year was +£7m at the end of FY23 compared to -£19.2m the previous year, indicating a broadly neutral sensitivity to shorter-term interest rates.

Likewise liquidity risk appears modest given the broadly matched maturity profile, liquidity buffer and zero exposure to the interbank lending market.

Management is focusing on treasury management to improve the return on the liability side of the balance sheet as we progress to a more normalised interest and inflation rate environment.

As regards credit quality, a 10% increase in the loan impairment rate would reduce PBT by 5.9% based on the FY23 figures.

FY23 results

NII increased 33% to £32.4m and NIM climbed to 7.5% (FY22: 7.1%) through 24% loan growth and the positive mix effect of a full year contribution from PAL, its 50.1% owned consumer finance subsidiary. However, in H2 NIM fell to 7.1% from 8.2% in H1, curbing year-on-year growth in NII to 15.6%. The cost of funding reached 4.4% in H2 versus 3.3% in H1 and 2.1% in FY22. For instance, deposit costs rose to £12.1m in FY23 against £4.6m in FY22 as the deposit base grew to £390.4m in FY23 from £304.2m in FY22. We note the stronger effect of higher funding costs in H223, where the bulk of the increase occurred. Funding cost pressure is likely to remain a headwind into H124 and until we see interest rates fall.

Net fee and commission income declined substantially to negative £3.3m as the group incurred fee and commission expenses of £7.3m, a consequence of the full year consolidation of PAL. The majority of the cost was incurred in H223 (£2.5m in H223 versus £0.8m in H123).

Subsequently, core operating income in the year rose 14% to £29.0m. Total operating income climbed 21% to £31.5m as the group benefited from an increased debt securities portfolio, realising £1.9m in gains in the year versus just £0.3m in FY22. Normalising the gain on securities and asset revaluations to the FY19–22 average of £0.5m, total operating income would be up 15% at £29.9m, while PBT would be up 4% to £5.4m.

Operating expenses grew 20% to £20.3m, predominantly in the form of personnel expenses, reflecting the consolidation of PAL into the group. Manx also incurred an incremental increase in overheads attributable to obtaining its UK deposit taking licence. Despite the extra costs, operating profit before impairments was up 22% to £11.2m (FY22: £9.2m). The CiR (defined as total operating expenses/total operating income) subsequently remained broadly flat at 64.5% (FY22: 64.8%).

Impairments increased modestly by 4% to £4.1m, despite loan balances increasing 24% to £362.7m, implying a CoR of 1.3%, 20bp lower than FY22.

As a result, PBT rose 35% y-o-y to £7.0m. On the back of stronger profit, income taxes increased to £0.9m (FY22: £0.5m), implying a 13% tax rate. Net profit subsequently jumped 31% y-o-y to £6.1m. Accounting for the minority interest owed to PAL, net attributable profit to shareholders was £5.3m, up 22% y-o-y, albeit including the £1.9m securities gain. Stronger profitability resulted in a stronger RoAE, with the metric increasing to 16.4% from 15.9% in FY22. The bank’s common equity tier 1 ratio stood at 11.5% (FY22: 12.4%).

Basic EPS grew to 4.59p/share (FY22: 3.77p/share). In line with its 10% payout policy, the board has recommended a dividend of 0.4551p per share to be paid to shareholders, a 21% increase on FY22 (0.3764p per share).

Exhibit 1: Selected numbers from the P&L

£’000 unless stated otherwise

FY19

FY20

FY21

FY22

FY23

y-o-y

 

H123

H223

H123 vs H223

Interest income

22,320

20,692

22,947

28,978

45,356

57%

21,458

23,898

11%

Other income

0

0

0

1,765

1,535

(13%)

713

822

15%

Interest expense

(4,391)

(5,222)

(4,967)

(6,391)

(14,530)

127%

(5,787)

(8,743)

51%

Net interest income

17,929

15,470

17,980

24,352

32,361

33%

 

16,384

15,977

(2%)

Net fee income

(1,630)

384

1,282

1,150

(3,330)

(390%)

 

(798)

(2,532)

217%

Depreciation on leasing assets

(333)

(406)

(269)

(16)

0

(100%)

 

0

0

 

Core operating income

15,966

15,448

18,993

25,486

29,031

14%

 

15,586

13,445

(14%)

Other operating income

388

200

365

314

364

16%

 

62

302

387%

Gains on securities and asset revaluations

178

757

689

273

2,088

665%

 

664

1,424

114%

Total operating income

16,532

16,405

20,047

26,073

31,483

21%

 

16,312

15,171

(7%)

Operating expenses

(11,632)

(11,394)

(12,789)

(16,890)

(20,305)

20%

 

(9,986)

(10,319)

3%

Operating profit before impairments

4,900

5,011

7,258

9,183

11,178

22%

 

6,326

4,852

(23%)

Impairments

(1,900)

(3,950)

(4,360)

(3,990)

(4,135)

4%

 

(3,294)

(841)

(74%)

Associates profit

124

54

32

18

0

(100%)

 

0

0

 

VAT recovery

(101)

906

113

0

0

 

0

0

 

Profit before tax

3,023

2,021

3,043

5,211

7,043

35%

 

3,032

4,011

32%

Income tax expense

(350)

(53)

(234)

(537)

(903)

68%

 

(493)

(410)

(17%)

Net profit

2,673

1,968

2,809

4,674

6,140

31%

 

2,539

3,601

42%

Minority interests

0

(33)

(16)

(343)

(852)

148%

 

(612)

(240)

(61%)

Net attributable profit

2,673

1,935

2,793

4,331

5,288

22%

 

1,927

3,361

74%

Key ratios

 

 

 

 

 

NIM (NII/average assets)

8.0

5.9

6.2

7.1

7.5

Cost of risk (CoR, %)

1.2

2.1

2.1

1.5

1.3

Cost income ratio (%)

70.4

69.5

63.8

64.8

64.5

RoAE (%)

12.7

8.7

11.8

15.9

16.4

Loan as % deposits

85.4

88.5

90.4

95.8

92.9

Tier 1 ratio (%)

15.2

12.2

11.5

Total capital ratio (%)

16.9

19.1

19.1

15.1

15.9

Stage 3 loans as % of net loans

3.5

7.2

4.4

4.5

3.6

Stage 3 loans as % of gross loans

5.7

10.2

7.7

8.8

8.5

Loans (£'000s)

179,370

193,143

229,251

291,475

362,653

Equity (£'000s)

22,319

22,435

24,985

29,770

35,984

Source: Manx Financial Group

Loan book constituents

The loan mix underwent slight changes between FY22 and FY23, as illustrated in Exhibits 2 and 3. Notably, unsecured personal loans saw their share of the loan book rise from 16% to 23% in FY23, or in absolute terms, from £49.7m to £88.6m, reflecting the exceptional growth in PAL. Both hire purchase balances and secured commercial loans also increased their share of the book by 3%. It is worth mentioning that the group also participated in property-secured lending, accounting for 3% of gross lending in FY23.

Exhibit 2: FY23 gross loans

Exhibit 3: FY22 gross loans

Source: Manx Financial Group

Source: Manx Financial Group

Exhibit 2: FY23 gross loans

Source: Manx Financial Group

Exhibit 3: FY22 gross loans

Source: Manx Financial Group

Robust credit quality

Manx has a well-secured book, with the group holding underlying assets as collateral for HP, finance leases, vehicle stocking plans, block discounting, secured commercial and personal loans and wholesale funding arrangements. Exhibit 4 provides an analysis of its credit risk and the level of provisioning.

Loans in FY23 are categorised from A to C, indicating varying levels of risk, with A being the least risky and C posing the highest risk. Out of the total gross loans and advances of £382.3m in FY23, £32.5m were classified as stage 3 and overdue by 30 days, accounting for 8.5% of total gross loans (compared to 9.4% in FY22), signifying an improvement in credit strength. The group maintains strong coverage, with stage 3 impairment provisioning cover at 60% (compared to 55% in FY22). Additionally, collateral held on stage 3 loans amounts to £13.4m, or 41%, resulting in total coverage of 100% (compared to 100% in FY22).

Note, stage 1 loans are not deemed credit impaired with payments up to date to 30 days. Stage 2 loans are not deemed credit-impaired but payments are over 30 days overdue. Stage 3 loans are deemed credit-impaired and payments are more than 90 days overdue. Grade A loans are the lowest risk within each stage, while Grade C are the highest risk.

Exhibit 4: Credit risk analysis

£’000

FY23

FY22

Stage 1

Stage 2

Stage 3

Total

Stage 1

Stage 2

Stage 3

Total

Grade A

341,953

341,953

273,332

273,332

Grade B

7,822

3,700

11,522

5,006

9,347

14,353

Grade C

2

28,791

28,793

391

19,576

19,967

Allowance for impairment

(184)

(19,425)

(19,609)

(303)

(3)

(15,871)

(16,177)

Carrying value

341,769

7,824

13,066

362,659

273,420

5,003

13,052

291,475

Impairment coverage

0%

0%

60%

5%

0%

0%

55%

5%

Current

333,740

333,740

269,130

269,130

Overdue < 30 days

8,213

8,213

4,593

604

5,197

Overdue > 30 days

7,825

32,490

40,315

4,402

28,923

33,325

Total

341,953

7,825

32,490

382,268

273,723

5,006

28,923

307,652

Collateral

13,410

12,927

Collateral coverage

41%

45%

Total impairment and collateral coverage

100%

100%

Source: Manx Financial Group

Total gross loans overdue by 30 days amount to £40.3m, or 10.5% of total gross loans, slightly lower than the 10.9% in FY22 (refer to Exhibit 5). Additionally, Exhibit 6 demonstrates loans classified as stage 2 and 3 as a percentage of gross loans. These figures remain consistent with the past three years, with stage 3 showing a slight decrease from FY22. This underscores the quality of the loan book and reflects the credit strength observed in the industry.

Exhibit 5: Overdue loans and impairment allowance

Exhibit 6: Stage 2 and 3 as a percentage of gross loans

Source: Manx Financial Group

Source: Manx Financial Group

Exhibit 5: Overdue loans and impairment allowance

Source: Manx Financial Group

Exhibit 6: Stage 2 and 3 as a percentage of gross loans

Source: Manx Financial Group

Sensitivity: Interest rate risk

Manx, like its peers in the lending sector, faces macroeconomic risks such as fluctuations in GDP growth, interest rates and employment, which can have an impact on loan growth, margins and credit quality. In addition lenders are subject to liquidity risks as deposits and debt financing must be maintained.

In terms of interest risk, Manx maintains a conservative risk profile, characterised by a predominantly fixed-term deposit book that aligns closely with a fixed-term loan book, thereby avoiding significant mismatches. Exhibit 7 illustrates the maturity profile of both assets and liabilities, showcasing a well-matched structure with a short aggregate duration. Notably, in FY23, 45% of assets and 31% of liabilities were subject to repricing within six months, while 58% of assets and 62% of liabilities faced repricing within one year (see Exhibit 8). The cumulative interest rate gap up to one year was +£7m at the end of FY23 compared to -£19.2m the previous year, indicating a broadly neutral sensitivity to shorter-term interest rates but away from being slightly liability sensitive.

Manx closely monitors the sensitivity to an interest rate shock using a methodology aligned with FSA standards. The results of this methodology for FY23 and FY22 are illustrated in Exhibits 9 and 10, respectively.

The modelled sensitivity to an instantaneous 2% increase in interest rates across the curve fell to a negligible -£46,000 in FY23 from +£1.1m at the end of FY22. This has reduced due to a mix shift to shorter-term loans and securities and longer-term deposits. The deposit shift reflects customers’ inclination towards high-interest term deposits, with Conister Bank presently offering annual gross rates between 5% and 4.6% on one-to-three-year term deposits.

Likewise, liquidity risk appears modest given the broadly matched maturity profile, liquidity buffer and zero exposure to the interbank lending market.

Management is focusing on treasury management to improve the return on the liability side of the balance sheet as we progress to a more normalised interest and inflation rate environment.

As regards credit quality, a 10% increase in the loan impairment rate would reduce PBT by 5.9% based on the FY23 figures.

Exhibit 7: FY23 exposure to interest rate risk

£’000

Sight–1 month

>1 month –3 months

>3 months–
6 months

>6 months– 1 year

>1 year – 3 years

>3 years –5 years

>5 years

Non-interest bearing

Total

Assets

Cash

12,107

12,107

Debt securities

11,475

28,275

36,379

76,129

Loans and advances

41,574

41,805

42,293

54,800

131,666

49,445

1,070

362,653

Other assets

29,816

29,816

Total assets

65,156

70,080

78,672

54,800

131,666

49,445

1,070

29,816

480,705

Liabilities

Deposits

29,634

27,084

74,397

118,029

118,434

22,843

390,421

Other liabilities

100

1,000

5,800

5,370

16,160

12,265

162

13,443

54,300

Total equity

35,984

35,984

Total liabilities and equity

29,734

28,084

80,197

123,399

134,594

35,108

162

49,427

480,705

Interest sensitivity gap

35,422

41,996

(1,525)

(68,599)

(2,928)

14,337

908

(19,611)

Cumulative

35,422

77,418

75,893

7,294

4,366

18,703

19,611

Source: Manx Financial Group

Exhibit 8: FY22 exposure to interest rate risk

£’000

Sight – 1 month

>1 month – 3 months

>3 months – 6 months

>6 months – 1 year

>1 year – 3 years

>3 years – 5 years

>5 years

Non-interest bearing

Total

Assets

Cash

22,630

22,630

Debt securities

11,973

20,785

7,917

40,675

Loans and advances

18,990

27,913

40,730

47,813

106,755

46,176

3,098

291,475

Other assets

24,481

24,481

Total assets

53,593

48,698

48,647

47,813

106,755

46,176

3,098

24,481

379,261

Liabilities

Deposits

17,258

26,552

64,251

103,561

78,984

13,593

304,199

Other liabilities

650

1,500

3,286

905

20,627

6,240

237

11,847

45,292

Total equity

29,770

29,770

Total liabilities and equity

17,908

28,052

67,537

104,466

99,611

19,833

237

41,617

379,261

Interest sensitivity gap

35,685

20,646

(18,890)

(56,653)

7,144

26,343

2,861

(17,136)

Cumulative

35,685

56,331

37,441

(19,212)

(12,068)

14,275

17,136

Source: Manx Financial Group

Therefore, in the event of rates falling to c 4.75–5.00% by the end of FY24, as anticipated by the market, we would only expect these effects to be relatively subdued. Overall, we anticipate that Manx will perform well in a lower interest rate environment, where the shift to term-funding might reverse to some degree.

Exhibit 9: FY23 interest rate sensitivity of 2% increase (£000s)

Sight – 1 month

>1 month –
3 months

>3 months –
6 months

>6 months – 1 year

>1 year – 3 years

>3 years – 5 years

>5 years

Non-interest bearing

Total

Interest rate sensitivity gap

35,422

41,996

(1,525)

(68,599)

(2,928)

14,337

908

(19,611)

0

Weighting

0.0

0.003

0.007

0.014

0.027

0.054

0.115

0

Weighted impact

0

126

(11)

(960)

(79)

774

104

0

(46)

Source: Manx Financial Group

Exhibit 10: FY22 interest rate sensitivity of 2% increase (£'000)

Sight – 1 month

>1 month –
3 months

>3 months –
6 months

>6 months – 1 year

>1 year – 3 years

>3 years – 5 years

>5 years

Non-interest bearing

Total

Interest rate sensitivity gap

35,685

20,646

(18,890)

(56,653)

7,144

26,343

2,861

(17,136)

0

Weighting

0.0

0.003

0.007

0.014

0.027

0.054

0.115

0

Weighted Impact

0

62

(132)

(793)

193

1,423

329

0

1,082

Source: Manx Financial Group

Outlook: What to look forward to

PAL: Self-funding minority buyout likely

PAL has an appealing business model centred on providing customers with the flexibility to manage one-time or larger expenses over relatively short time frames. As a result, its loan portfolio is characterised by short durations and granularity, facilitating early identification of potential issues with individual customers and swift corrective action. With an average loan duration of approximately 10 months, PAL turns its loan book over 1.2 times per year, leveraging attractive one-year funding from Conister Bank. This short-term focus not only streamlines credit management but also enables prompt identification and mitigation of payment issues, enhancing overall risk management.

Since its full consolidation into the group, PAL has emerged as a highly accretive business for Manx. In FY23, PAL contributed significantly to the group’s financial performance, generating £4m in interest income from a turnover of £10.8m (FY22: £10.1m). This robust performance translated into an operating profit of £2.7m, a 50% uplift from £1.8m in FY22. Consequently, PAL’s contribution to the group’s profit after tax climbed to £2.1m, a substantial growth from £0.8m in FY22. Given the group’s majority ownership of 50.1% in PAL, it retained £1.1m of the profit after minority interests.

Under the assumption of no further growth, PAL is poised to self-fund the buyout of the 49.9% minority interest. When Manx initially acquired PAL in September 2022 for £4.2m, it secured the option to purchase the remaining 49.9% minority for a variable cash consideration, set at two times the average net profit of PAL, with a cap of £5m by the beginning of 2027. If we consider a scenario where Manx opts to acquire the remaining stake at the maximum price of £5m, PAL essentially pays for itself. With PAL contributing £1.1m to Manx in FY23, and conservatively assuming a consistent performance until end-FY26, we project PAL would generate retained earnings of c £4.8m by the end of FY26, inclusive of its initial four-month contribution since acquisition. This creates capital and funding flexibility for Manx in terms of organic and strategic growth options to further enhance shareholder returns. Notably, within just 16 months, PAL has delivered an impressive return on investment of 33% based on cumulative profit contribution since acquisition.

Conister Bank: UK deposit taking to ramp up in H224

In October 2023, Conister obtained deposit-taking authorisation for its UK branch, marking a significant milestone that opens new avenues for funding growth opportunities. Management foresees the initiation of deposit-taking activities primarily through an online platform in the latter half of 2024. With the acquisition of the UK banking licence, Conister Finance and Leasing will undergo restructuring throughout 2024, consolidating regulated operations under the Conister umbrella. The Basingstoke office will continue to serve as Conister’s UK-regulated deposit-taking and lending branch. This expansion into the UK market is expected to act as a catalyst for further growth, enhancing Conister’s franchise and complementing its already robust performance.

In FY23, Conister Bank demonstrated significant asset expansion, with total assets climbing to £451.8m from £354.0m in FY22, marking an impressive growth rate of 28%. Deposits also rose by 28% y-o-y to reach £390.4m, showcasing the bank’s success in both attracting new deposits and maintaining a high 77% retention rate within its Isle of Man depositors.

Manx consistently upholds a prudent lending strategy, evident in its approach to provisioning. In FY23, the stock of provisions decreased to £9.3m (FY22: £9.6m), representing 2.6% of the net loan book compared to 3.3% in FY22. We note that unsecured consumer loans are written off after 30 days past due and provision coverage of stage 3 loans remained at 100% including collateral. Hence the decline in provisions to loans underscores both management’s confidence in the quality of the loan portfolio and the level of collateralisation.

Valuation

In Exhibit 11, we have curated a diverse selection of small and mid-cap UK banks and specialist lenders as a relevant peer group for Manx. Notably, Manx trades above its peers based on 2023 P/E and P/BV metrics. It is important to highlight that we utilise Manx’s diluted book value, resulting in a higher P/BV compared to using its undiluted figure. Using the undiluted book value, Manx’s P/BV of 0.68x is somewhat above the peer average of 0.52x, yet Manx boasts a superior ROE, double the peer average. Given its relatively high growth trajectory, Manx assumes a conservative payout ratio of 10% and hence offers a lower dividend yield. Nevertheless, the declared dividend per share grew by 21% in 2023. We also note that the historical dividend yields in Exhibit 11 distort the relative dividend yield position as Close Brothers has indicated a zero dividend for the next year and Vanquis has indicated a dividend per share of ‘up to’ 1p, which would give a yield of 2.1%. Adjusting for these, the peer average yield would be 3.1% instead of the historical yield of 7.4%

Exhibit 11: Peer comparison table

Company

Ticker

Price
(p)

Market
cap (£m)

P/E 2023
(x)

P/BV
(CY1)

ROE
(CY1)

Dividend yield
(%)

Close Brothers

CBRO.L

440

664

6.7

0.41

6.0

15.3

Virgin Money

VMUK.L

213

2,767

7.1

0.55

6.8

2.5

OneSavings Bank

OSBO.L

374

1,467

5.0

0.73

15.6

8.6

Metro Bank

MTRO.L

33

219

N/A

0.21

0.4

0.0

Paragon

PAGPA.L

667

1,416

7.7

1.02

14.3

5.6

Vanquis

VANQ.L

48

123

6.7

0.20

6.4

12.5

Manx

MFX.L

21

24

5.8

0.76

16.4

2.2

Average

1,109

3.0

0.52

8.3

7.4

Source: LSEG. Note: Priced at 16 April 2024.

In Exhibit 12, we visually analyse the relationship between ROE and P/BV for all peers, constructing a regression line for comparison. It is worth noting that for Manx, we utilise its diluted book value, while for peers, undiluted values are applied. Our observation indicates that Manx trades slightly below the regression line. To trade closer in line with peer valuations, Manx would need to be trading closer to 0.9x book, implying 19% upside from its current share price.

Exhibit 12: ROE versus P/BV

Source: LSEG. Note: Priced at 16 April 2024.


Exhibit 13: Financial summary

Year-end 31 December

FY19

FY20

FY21

FY22

FY23

£m except where stated

Profit and loss

Net interest income

17,929

15,470

17,980

24,352

32,361

Net commission income

(1,630)

384

1,282

1,150

(3,330)

Other income

233

551

785

571

2,452

Total operating income

16,532

16,405

20,047

26,073

31,483

Total operating expenses

(11,632)

(11,394)

(12,789)

(16,890)

(20,305)

Operating profit pre impairments & exceptionals

4,900

5,011

7,258

9,183

11,178

Impairment charges on loans

(1,900)

(3,950)

(4,360)

(3,990)

(4,135)

Associates

124

54

32

18

0

VAT recovery

(101)

906

113

0

0

Operating profit post impairments

3,023

2,021

3,043

5,211

7,043

Non-recurring items

0

0

1

0

0

Profit before tax

3,023

2,021

3,044

5,211

7,043

Corporation Tax

(350)

(53)

(234)

(537)

(903)

Tax rate

12%

3%

8%

10%

13%

Profit after tax

2,673

1,968

2,810

4,674

6,140

Minority interests

0

(33)

(16)

(343)

(852)

Net income attributable to equity shareholders

2,673

1,935

2,794

4,331

5,288

Shares and per share ratios

Average basic number of shares in issue (m)

131.1

119.0

114.3

114.8

115.3

Average diluted number of shares in issue (m)

172.8

155.5

150.8

153.8

155.7

Period end shares in issue (m)

131.1

114.1

114.3

115.1

116.2

Reported EPS (p)

2.04

1.63

2.44

3.77

4.59

Reported diluted EPS (p)

1.66

1.35

1.96

2.93

3.51

Reported DPS (p)

0.00

0.00

0.24

0.38

0.46

NAV per share (p)

12.2

14.4

15.7

17.7

20.7

Tangible NAV per share (p)

9.4

10.1

10.7

10.7

13.6

Income ratios and per share

Net interest/average loans

10.9

8.3

8.5

9.4

9.9

Impairments /average loans

1.2

2.1

2.1

1.5

1.3

Cost income ratio

70.4

69.5

63.8

64.8

64.5

Return on average equity

12.7

8.7

11.8

15.9

16.4

Return on average TNAV

16.9

12.3

17.6

28.6

32.6

Balance sheet

Net customer loans

179,370

193,143

229,251

291,475

362,653

Other assets

73,517

74,818

79,502

87,786

118,052

Total assets

252,887

267,961

308,753

379,261

480,705

Total customer deposits

209,933

218,285

253,459

304,199

390,421

Other liabilities

20,635

27,241

30,309

45,292

54,300

Total liabilities

230,568

245,526

283,768

349,491

444,721

Net assets

22,319

22,435

24,985

29,770

35,984

Minorities

0

84

56

189

1,041

Shareholders' equity

22,319

22,351

24,929

29,581

34,943

Reconciliation of movement in equity

Opening net assets

Profit in period

2,673

1,968

2,809

4,674

6,140

Other comprehensive income

(77)

(292)

236

538

318

Ordinary dividends

0

0

(185)

(217)

(342)

Minority changes from subsidiaries

0

(1,560)

(310)

(210)

0

Closing net assets

22,319

22,435

24,985

29,770

35,984

Balance sheet ratios

Loans as % deposits

85.4

88.5

90.4

95.8

92.9

Loans to equity (x)

8.0

8.6

9.2

9.7

9.8

Stage 3 as % loans

3.5

7.2

4.4

4.5

3.6

Impairments as % stage 3 loans gross

45.3

34.7

47.8

49.2

60.4

Total capital ratio (%)

16.9

19.1

19.1

15.1

15.9

Source: Manx Financial Group, Edison Investment Research

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This report has been commissioned by Manx Financial Group and prepared and issued by Edison, in consideration of a fee payable by Manx Financial Group. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

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United Kingdom

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This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

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London, WC1R 4PS

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General disclaimer and copyright

This report has been commissioned by Manx Financial Group and prepared and issued by Edison, in consideration of a fee payable by Manx Financial Group. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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