Latitude float sunk by modest earnings
Accounts filed with regulators show that Latitude Financial's new chief executive Ahmed Fahour has a potentially brutal challenge ahead of him if his shareholders are to score a circa A$3.5 billion windfall from floating the business.
Latitude's Australian and New Zealand operations are owned through a Singapore holding company, controlled by Deutsche Bank, KKR and Varde Partners.
According to recent media reports, the owners are expecting to reap proceeds of up to $4 billion by floating the business towards the end of next year.
However, Latitude's recent financial performance indicates those expectations might be grounded in profoundly optimistic assumptions.
Banking Day has obtained the 2017 financial accounts of KVD Australia Holdco Pty Ltd, which reflect the operating results of Latitude's main Australian businesses, including its sales finance, credit cards, car loans and insurance arms.
The consolidated net profit for 25 local entities operating within the KVD Australia Holdco group was $22 million for the 12 months to the end of December last year.
While that might sound a modest return for a mix of businesses reputed to be worth more than $3.5 billion, it was a significant improvement on the 2016 bottom line loss of $68.9 billion.
The accounts show that Australian lending activities generated interest income of $944 million last year, while the Hallmark insurance arm contributed $67 million of premium income.
That was a big advance on 2016 when the combined revenue of the consumer finance and insurance operations was $890 million.
Clearly, there is earnings momentum in Latitude's Australian operations, but the consolidated entity has emerged from a bleak period of underperformance that eroded its balance sheet.
As at December 31 last year the Australian businesses had net assets valued at $338.8 million.
On these metrics it would require many years of hard toil by Fahour and his executive team to persuade institutional investors that Latitude is worth a ten-figure valuation.
That task could also be complicated by the underperforming New Zealand arm - Latitude Financial Services Limited(LFSL) - which hasn't posted a profit since GE sold it in 2015.
According to accounts lodged with Kiwi regulators, LFSL posted a net loss of NZ$6 million in 2017 - an improvement on the NZ$25 million loss recorded in 2016.
The latest negative return pared the net assets of LFSL to only NZ$21 million.
While it is fair to say that the bottom line performance of the Australian and New Zealand operations is improving, Fahour faces several headwinds to achieve sustained positive returns.
The most significant might be a rapid deterioration in credit quality, particularly on the Kiwi loan book.
Growth in loan impairments outpaced loan growth by a considerable margin in New Zealand last year.
While interest revenue increased by NZ$30 million or 20 per cent, impaired loans more than doubled to almost NZ$40 million.
If the loan loss blowout is not contained swiftly it has the potential to erode the earnings recovery of the Kiwi business.
Fahour believes the roll out of digital platforms will allow Latitude to win market share in credit cards and personal loans.
However, Latitude faces threats to its strong position in the sales finance market from the likes of Amazon and a raft of new players seeking to leverage blockchain technology to facilitate in-store and online payments.
Banking Day has sought comment from Latitude.