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Currency in GBP
Last close As at 09/06/2023
GBP0.24
— 0.00 (0.00%)
Market capitalisation
GBP27m
Research: Financials
Manx Financial Group (MFG) had a strong H122, with a PBT of £2.3m more than doubling and a return on average equity (ROE) of 16.8%. Loans grew 16% as the group continues to reposition itself into prime lending segment ahead of the more challenging macroeconomic environment. The net interest margin improved to 8.9% (8.5% in H121) and impairments remain under control with an annualised charge of 1.9% (2.1% in H121). Conister Bank (MFG’s bank) has formally applied for a UK branch deposit-taking licence on 25 October. This will give this Isle of Man bank a greater foothold in the UK for growth. The balance sheet is well capitalised (total capital 17.7%, CET1 of 14.2%) and still carries surplus liquidity to fund expansion plans. The bank is trading at an FY21 P/BV of only 0.8x despite its track record of ROE being above its cost of equity (COE, which we estimate at 10–11%) and ability to expand its balance sheet.
Manx Financial Group |
Strong H122, well positioned for macro headwinds |
FY22 interims |
Banking |
1 November 2022 |
Share price performance
Business description
Next events
Analyst
Manx Financial Group is a research client of Edison Investment Research Limited |
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Manx Financial Group (MFG) had a strong H122, with a PBT of £2.3m more than doubling and a return on average equity (ROE) of 16.8%. Loans grew 16% as the group continues to reposition itself into prime lending segment ahead of the more challenging macroeconomic environment. The net interest margin improved to 8.9% (8.5% in H121) and impairments remain under control with an annualised charge of 1.9% (2.1% in H121). Conister Bank (MFG’s bank) has formally applied for a UK branch deposit-taking licence on 25 October. This will give this Isle of Man bank a greater foothold in the UK for growth. The balance sheet is well capitalised (total capital 17.7%, CET1 of 14.2%) and still carries surplus liquidity to fund expansion plans. The bank is trading at an FY21 P/BV of only 0.8x despite its track record of ROE being above its cost of equity (COE, which we estimate at 10–11%) and ability to expand its balance sheet.
Year end |
Revenue |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/18 |
13.2 |
2.7 |
1.5 |
0.00 |
9.3 |
N/A |
12/19 |
16.5 |
3.0 |
1.5 |
0.00 |
9.3 |
N/A |
12/20 |
16.4 |
2.0 |
1.2 |
0.00 |
11.7 |
N/A |
12/21 |
20.0 |
3.0 |
1.9 |
0.17 |
7.4 |
1.2 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Good momentum
The bank has positioned itself well to take advantage of recession resilient markets both in the UK and the Isle of Man. It has also been accredited by the British Business Bank to support UK SMEs through their government guaranteed loan schemes. And while the volatile markets have hurt MFG’s financial advisory business, its foreign exchange segment has done quite well. In September the group completed its acquisition of Payment Assist, the UK’s leading provider of auto repair point-of-sale finance, with a fast-growing loan book of £21.3m (9% of MFG).
Positioned for growth
Management has been moving into more prime, recession-proof sectors since the 2016 Brexit vote to both protect and allow for future loan growth. At the same time, the bank remains confident in its strategy mix of organic growth and acquisitions. A UK deposit banking licence will open greater avenues for growth, both in terms of business opportunities and funding.
Valuation: P/BV of 0.8x, with ROEs well above COE
There are no consensus forecasts for MFG, but its strong loan book and track record of growth bodes well for future revenue. MFG is trading at a P/BV of only 0.8x, which seems low given its track record of delivering ROEs above its COE (we estimate this at 10–11%). Its trailing FY21 P/E of 7.8x does not seem demanding, given the bank’s strong growth profile and potential. UK bank valuations are being affected by market concerns regarding macroeconomic and pollical uncertainty.
H122: PBT doubled
16% loan growth
MFG loan balances grew 16% y-o-y as MFG continued its strategy of repositioning towards the prime lending segment. The group reported that prime lending as a percentage of the total rose from 78.5% at the end of FY21 to 85%.
A key driver for loan growth has been the COVID-19 related government business support loans. Conister Bank has applied to continue participating in the government’s extension of the Recovery Loan Scheme, although it is likely that growth in this segment will slow down; additionally, it is dependent on government plans and policies. Wholesale funding arrangements and block discounting (structured product that allows companies to release money tied in commercial agreements with clients) have also been growing strongly.
Conversely, hire purchase and financial leases have continued to decline – they fell 9% and 32% y-o-y. This trend was expected and reflects the repositioning.
Despite the de-risking, the net interest margin has remained resilient and increased from 8.5% at end-June 2021 to 8.9% as a percentage of average loans.
Asset quality stable
Asset quality seems to be remaining under control. Impairment charges as a percentage of loans were 1.9% in H122; this compares with 2.1% in H121. Stage 3 loans as a percentage of net loans were 10.8% in H122, similar to end-June 2021 (10.4%). Impairments were 41% of stage 3 gross loans. This compared with 36% a year ago and 48% recorded at the end of FY21. About 76% of loans are collateralised.
Loans more than 30 days overdue were 10.7% of net loans, and this figure has been relatively stable over the last 12 months.
ROE of 16.8%
The doubling of net earnings in H122 resulted from a combination of strong revenue growth of 30%, while operating expenses rose 20% and impairment charges 6%. The reported ROE of 16.8% followed the 14.9% for the second half of FY21. In previous years, ROE has been relatively resilient and robust, at between 9% and 13%.
The market volatility adversely affected MFG independent financial advisory business and this has hurt fee income. Conversely, foreign exchange advisory business has benefited from the same. Manx FX’s revenue grew 6% and PBT by 5% y-o-y.
Healthy balance sheet
MFG’s balance sheet remains robust, and this is helped by the bank’s good profitability and capital headroom. The group can afford the 10% pay-out ratio started in 2021 without it materially interfering in MFG’s ability to grow and seize opportunities. MFG’s total capital ratio was 17.7% as at 30 June 2022 (it was 17.8% a year ago), while the regulator requires 14%. MFG’s CET1 ratio of 14.2% is also comfortable and higher than a year ago (13.7%) despite the balance sheet expansion.
Balance sheet liquidity remains fine and MFG benefits from a good retail deposit base in the Isle of Man and will be further bolstered by the ability to market for UK deposits assuming their branch banking licence is approved. Its loan to deposit ratio was 99% at the end of H122.
Exhibit 1: H122 vs previous interims – selected numbers
H119 |
H120 |
H121 |
H122 |
H122 vs H121 (%) |
|
Net interest income |
8,877 |
7,811 |
8,555 |
10,532 |
23.1 |
Net fee income |
(1,118) |
287 |
478 |
986 |
106.3 |
Fee and commission expense |
(2,934) |
(1,870) |
(1,878) |
(1,517) |
(19.2) |
Depreciation on leasing assets |
0 |
(203) |
(173) |
(16) |
(90.8) |
Core operating income |
7,759 |
7,895 |
8,860 |
11,502 |
29.8 |
Other operating income |
139 |
111 |
129 |
275 |
|
Gains on securities and asset revaluations |
104 |
455 |
(1) |
(113) |
|
Total operating income |
8,002 |
8,461 |
8,988 |
11,664 |
29.8 |
Operating expenses |
(5,211) |
(5,503) |
(5,879) |
(7,059) |
20.1 |
Operating profit before impairments |
2,791 |
2,958 |
3,109 |
4,605 |
48.1 |
Impairment on loans and advances to customers |
(1,469) |
(1,895) |
(2,142) |
(2,268) |
5.9 |
Associates profit |
46 |
(91) |
59 |
0 |
|
VAT recovery |
52 |
36 |
113 |
0 |
|
Profit before tax |
1,420 |
1,008 |
1,139 |
2,337 |
105.2 |
Income tax expense |
(184) |
(16) |
(122) |
(160) |
|
Net profit |
1,236 |
992 |
1,017 |
2,177 |
114.1 |
Minority interests |
0 |
5 |
12 |
(16) |
|
Net attributable profit |
1,236 |
997 |
1,029 |
2,161 |
110.0 |
Key ratios and balance sheet |
|||||
NIM (NII as % average loans) |
11.2 |
8.7 |
8.5 |
8.9 |
|
Impairment charge % average loans |
1.8 |
2.1 |
2.1 |
1.9 |
|
Cost income ratio (%) |
65.1 |
65.0 |
65.4 |
60.5 |
|
ROE (%) |
12.1 |
9.0 |
8.9 |
16.8 |
|
Loan as % deposits |
95.8 |
83.4 |
91.5 |
96.6 |
|
Total capital ratio (%) |
17.0 |
16.0 |
17.8 |
17.7 |
|
Stage 3 loans as % net loans |
5.2 |
7.2 |
8.3 |
8.5 |
|
Stage 3 loans as % gross loans |
5.0 |
12.7 |
10.4 |
10.8 |
|
Impairments % stage 3 loans (net) |
85.1 |
85.9 |
52.6 |
67.7 |
|
Impairments % stage 3 loans (gross) |
53.1 |
26.7 |
28.5 |
32.4 |
|
Loans (£ thou) |
170,035 |
181,581 |
211,445 |
244,923 |
15.8 |
Equity (£ thou) |
20,986 |
21,870 |
23,133 |
26,987 |
16.7 |
Source: MFG
|
|
Exhibit 3: Loan breakdown (H122) |
|
|
|
Source: MFG |
Source: MFG |
|
|
|
|
Source: MFG |
|
Exhibit 3: Loan breakdown (H122) |
|
|
Source: MFG |
|
|
Exhibit 5: Stage 2 and stage 3 loans as % of net loans |
|
|
|
Source: MFG |
Source: MFG |
|
|
|
|
Source: MFG |
|
Exhibit 5: Stage 2 and stage 3 loans as % of net loans |
|
|
Source: MFG |
Payment Assist acquisition completed
MFG completed the acquisition of a 50.1% stake in Payment Assist in September 2022, after announcing the deal in May 2022. Payment Assist is a leading auto repair point-of-sale finance provider with a loan book of £21.3m and EBITDA of £2.5m in FY21. It is a fast-growing business (loans grew 72% and EBITDA doubled since 2019). It is a company with which MFG has worked with over the years, it knows the management well and sees both the growth opportunity and the leverage it provides as an entry to the UK.
UK deposit-taking licence via Conister Bank
Conister Bank has started the process of becoming the next deposit-taking institution in the UK and formally applied for a UK branch licence on 25 October. The bank has been expanding year-on-year, with total assets compounding over 20% per year in recent years. Obtaining a UK banking licence will allow the Isle of Man-based bank to extend its footprint in the UK. It intends to further disrupt the structured finance market and a UK branch licence, if granted, will give it a foothold in the UK deposit-taking market. In addition, it will allow the bank to gain greater access to the UK payments infrastructure as it opens up discussions with other service providers. Finally, there is the opportunity to explore more significant financial resources via government bodies such as the British Business Bank, which will only deal with UK corporations and non-financial resources, such as the UK employment market, with a specialist and diverse talent pool in the financial services industry.
2023 likely to be a challenging year
2023 is shaping up to be a challenging year. The economic slowdown is now a reality, as is the higher interest rate outlook. There is still much uncertainty to the extent of the downturn and how much rates will rise. Currently the overnight index swaps are pricing in a Bank of England policy rate of close to 5%, which would represent quite a considerable series of rate hikes in a very short period were this to happen.
Interest rate increases are often good for banks as they tend to boost interest margins. However, excessive rate hikes, especially when coupled with other issues such as a cost of living squeeze, can raise asset quality concerns for banks.
We draw comfort from the fact that MFG has been bracing itself for a recession for a couple of years, has a robust balance sheet, good interest margins and a strong franchise in the Isle of Man.
Valuation: Undemanding multiples
There are currently no consensus forecasts for MFG. However, MFG is currently trading at an FY21 P/BV of 0.8x, which is broadly comparable to banks in our peer sample that have similar resilient ROEs during the lockdown period. We note that MFG usually delivers ROEs that are above its COE (we estimate this at 10–11%). MFG P/E trailing ratios are not demanding if we factor the growth potential of a small bank such as MFG. In general, the valuations of the UK banking sector in general are currently depressed by the current macroeconomic and political uncertainty.
Exhibit 6: Challenger/specialist lender comparative table
Price |
Market cap |
P/E (x) |
P/E (x) |
Div. yield (%) FY 21 |
ROE (%) |
ROE (%) |
P/BV (x) last reported |
|
MFX |
14.37 |
16.5 |
11.6 |
7.8 |
1.2 |
8.8 |
11.8 |
0.80 |
Arbuthnot Financial |
863 |
127 |
n.a |
20.9 |
4.4 |
n.a. |
3.2 |
0.64 |
Close Brothers |
993 |
1473 |
7.7 |
8.6 |
0.0 |
10.0 |
12.4 |
0.90 |
Metro Bank |
72 |
122 |
n.a |
n.a |
0.0 |
(17.9) |
(16.3) |
0.12 |
Secure Trust Bank |
624 |
115 |
2.5 |
4.0 |
9.8 |
5.9 |
16.7 |
0.37 |
Paragon |
427 |
994 |
12.6 |
8.1 |
6.1 |
9.1 |
12.7 |
0.86 |
Average ex-Metro & Arbuthnot |
7.6 |
6.9 |
5.3 |
8.3 |
14.0 |
0.71 |
||
MFG versus average |
53% |
13% |
(77%) |
5% |
(15%) |
13% |
Source: Refinitiv, Edison Investment Research. Note: Priced at 26 October 2022.
Exhibit 7: Financial summary
Year end December, £ unless stated |
FY18 |
FY19 |
FY20 |
FY21 |
Profit and loss |
||||
Net interest income |
15,568 |
17,929 |
15,470 |
17,980 |
Net commission income |
(2,738) |
(1,630) |
384 |
1,282 |
Other income |
336 |
233 |
551 |
785 |
Total operating income |
13,166 |
16,532 |
16,405 |
20,047 |
Total operating expenses |
(9,748) |
(11,632) |
(11,394) |
(12,789) |
Operating profit pre impairments & exceptionals |
3,418 |
4,900 |
5,011 |
7,258 |
Impairment charges on loans |
(857) |
(1,900) |
(3,950) |
(4,360) |
Associates |
30 |
124 |
54 |
32 |
VAT recovery |
119 |
(101) |
906 |
113 |
Profit before tax |
2,710 |
3,023 |
2,021 |
3,044 |
Corporation Tax |
(243) |
(350) |
(53) |
(234) |
Tax rate |
9% |
12% |
3% |
8% |
Profit after tax |
2,467 |
2,673 |
1,968 |
2,810 |
Minority interests |
0 |
0 |
(33) |
(16) |
Net income attributable to equity shareholders |
2,467 |
2,673 |
1,935 |
2,794 |
Reported underlying earnings after tax |
2,467 |
2,673 |
1,935 |
2,794 |
Shares and per share ratios |
||||
Average basic number of shares in issue (m) |
131.1 |
131.1 |
119.0 |
114.3 |
Average diluted number of shares in issue (m) |
172.8 |
172.8 |
155.5 |
150.8 |
Period end shares in issue (m) |
131.1 |
131.1 |
114.1 |
114.3 |
Reported diluted EPS (p) |
1.54 |
1.55 |
1.24 |
1.85 |
Underlying diluted EPS (p) |
1.54 |
1.55 |
1.24 |
1.85 |
Ordinary DPS (p) |
0.00 |
0.00 |
0.00 |
0.17 |
NAV per share (p) |
11.4 |
12.9 |
14.4 |
16.6 |
Tangible NAV per share (p) |
8.9 |
9.4 |
10.1 |
10.7 |
Income ratios and per share |
||||
Net interest/average loans |
11.5 |
10.9 |
8.3 |
8.5 |
Impairments /average loans |
0.6 |
1.2 |
2.1 |
2.1 |
Cost income ratio |
74.0 |
70.4 |
69.5 |
63.8 |
Return on average equity |
13.3 |
12.7 |
8.8 |
11.8 |
Return on average TNAV |
17.2 |
16.9 |
12.3 |
17.6 |
Balance sheet |
||||
Net customer loans |
148,278 |
179,370 |
193,143 |
229,251 |
Other assets |
48,636 |
73,517 |
74,818 |
79,502 |
Total assets |
196,914 |
252,887 |
267,961 |
308,753 |
Total customer deposits |
158,500 |
209,933 |
218,285 |
253,459 |
Other liabilities |
18,691 |
20,635 |
27,241 |
30,309 |
Total liabilities |
177,191 |
230,568 |
245,526 |
283,768 |
Net assets |
19,723 |
22,319 |
22,435 |
24,985 |
Minorities |
0 |
0 |
84 |
56 |
Shareholders' equity |
19,723 |
22,319 |
22,351 |
24,929 |
Reconciliation of movement in equity |
||||
Opening shareholders' equity |
||||
Profit in period |
2,467 |
2,673 |
1,968 |
2,809 |
Other comprehensive income |
(6) |
(77) |
(292) |
236 |
Ordinary dividends |
0 |
0 |
0 |
(185) |
Minority changes from subsidiaries |
0 |
0 |
(1,560) |
(310) |
Closing shareholders' equity |
19,723 |
22,319 |
22,435 |
24,901 |
Balance sheet ratios |
||||
Loans as % deposits |
93.6 |
85.4 |
88.5 |
90.4 |
Loans to equity (x) |
7.5 |
8.0 |
8.6 |
9.2 |
Stage 3 as % loans |
2.8 |
5.9 |
10.6 |
8.0 |
Impairments as % stage 3 loans gross |
81.5 |
45.3 |
34.7 |
47.8 |
Impairments as % stage 3 loans net |
327.3 |
75.1 |
51.5 |
85.9 |
Total capital ratio (%) |
18.1 |
16.9 |
19.1 |
19.1 |
Source: MFG
|
|
Research: TMT
The Pebble Group operates within the large, global promotional products market, estimated by management at $50bn, under a highly experienced team. The group combines two operations: a fast-growing, high-margin SaaS business supplying independent distributors of promotional goods; and a dependable and expanding international business supporting brand engagement programmes for major global brands. The group has a strong balance sheet, with end FY21 net cash (excluding leases) of £12.1m, set to be exceeded in the current year. The share price does not, in our opinion, reflect the group’s positioning or opportunities.
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