Credit scores well with investors
As regulators continue to focus on lending practices, we look at investor sentiment towards providers of credit related services such as pre-paid credit cards, ID protection and the credit reference agencies, which help lenders determine whether or not to issue loans. Companies include: CPPGroup Plc (LON:CPP), PNC Financial Services (NYSE:PNC), BB&T Corporation (NYSE:BBT), Experian (LON:EXPN), Equifax Inc. (NYSE:EFX) and Fair Isaac Corporation (NYSE:FICO).
The odd short seller foresaw the share price crash in CPPGroup. This took place on the back of the FSA investigation into the way the company sells its ‘life assistance’ and ID theft insurance to credit card customers who ring up to activate their cards. But many more short sellers jumped in subsequent to the fall in the share price from 270p to 150p. This is in line with academic findings which show that hedge funds react quickly to news. Despite doubling, the short interest is low at 1% of total shares outstanding on loan and represents a low proportion of supply, given that institutional funds who lend hold a lot of this company. In fact, these funds saw the fall in price as a buying opportunity, raising their holdings from 8% to 11% of the firm, clearly believing CPP’s comment that ID theft protection is a tiny proportion of its revenues.
This could be good news for Experian for whom selling ID protection to consumers (via Credit Expert in the UK and FreeCreditReport in the US) is part of its broader offering. The highly regulated company is the world’s largest credit reference agency and sees very low levels of short interest. However, smaller competitor, Equifax has seen increased short interest with stock on loan spiking up from nothing to 1.5% since early March, ahead of results next week.
Fair Isaac has become the de-facto standard for credit scores in the US through its FICO score. Yet crucially, Fair Isaac is not a credit reference agency and does not collate the underlying data on people’s loans. The share price has rallied by almost a third this year and shorts aggressively covered positions from over 16% of total shares to around 10% in late March. Since then, the percentage of stock on loan has surged back up to 15% of total shares. This represents almost a third of the stock that can be borrowed. It should be noted that the company has convertible bonds in issue, which can inflate the amount of stock on loan.
On a related theme, the FT reports a trend by US lenders to use pre-paid credit cards to recoup lost fees and target the nine million Americans who do not possess a bank account. These are being touted as a way to help customers spend within their means as they involve a cash down-payment and will not go overdrawn, without being topped up. People using these cards are not subject to a credit check and they are attractive to lenders, as the cards are not subject to the “swipe fees” being introduced later this year, which cap how much card providers can charge retailers.
PNC Financial Services Group, BB&T Corp and Citigroup are cited to be spearheading the push into pre-paid credit cards. While they are only a small part of the banking services of these groups, it is interesting to note that short interest in PNC has fallen from 1.5% to 0.5% of total shares outstanding on loan since August of last year. Short interest in BB&T stands at just over 4% of total shares and is virtually zero in Citigroup.
