Geneva Finance Limited Analysis

Overview

The company was established in 2002, with the aim of providing personal loans; hire purchase finance; motor vehicle financing; home loans; and insurance and commercial finance to SME's. At its peak, in 2006, the company had $168m in assets, 325 staff and 21 branches around New Zealand.

In late 2007, the company found itself facing increasing liquidity problems as a result of declining debenture reinvestment levels across the NZ finance company sector. This situation was exacerbated as main trading banks began pulling back on their exposure to the non bank finance sector and Geneva became at risk of not being able to meet all of payment obligations to investors.

In November 2007, GFL held a meeting of secured debenture stock, subordinated notes and unsecured deposit investors who voted by a 99% majority in favour of implementing a moratorium on investor repayments. It was determined that the company would list on the NZAX with a net asset backing of 36.492c per share. Geneva Finance debenture investors had 15% of their existing principal amount converted into ordinary shares, and subordinated note investors had 55% of their existing principal amount converted into ordinary shares. Financial Investment Holdings Ltd (Geneva Finance's holding company) also agreed to provide additional equity support of $4.4m. The scheme left debenture and subordinated note holders with a collective share of 74.6% of the company, and the shares were listed on the NZAX on 1 July 2008. GFL then pursued a capital restructuring strategy closing its branch network across the country, cutting costs and laying off approximately 150 staff.

From late 2008 through to 2011, the fallout from the Global Financial Crisis, saw all the NZ trading banks (including the company's own bank) withdraw from the sector, a decline in demand for the company's products and increased bad debts as customers lost their jobs and were unable to repay their loans. This "perfect storm" (despite cost cutting a further 150 staff were laid off, and the companies receivables ledger being reduced to maintain debt repayments) effectively derailed the restructure plan. Consequently, the company needed to return to subordinated note investors with a new proposal.

On 31 March 2011 the subordinated note holders' approved the restructuring plan and the remaining 45% of their principal was converted in to ordinary shares at 5 cents per share. At the same time the shareholders of GFL approved the restructuring of the company into four operating subsidiaries, being:

(1) Geneva Financial Services Limited: New lending business model

(2) Stellar Collections Limited: Debt collection operation including responsibility for collection of the old business model ledgers

(3) Quest Insurance Group Limited: Insurance Company

(4) Pacific Rise Limited: Property owning company.

The March 14 saw the completion of:

• $30m securitisation facility with a major trading bank.
• Repayment of all secured debentures and its term facility with Bank of Scotland International (Australia) Limited, approximately 2 years ahead of schedule.
• A $4.0m write down of old ledger receivables

As a consequence, the company incurred $4.2m after tax loss, but was now well positioned to build on its core lending, insurance and debt collection competencies; had reliable funding facilities and conservative gearing ratio. At this juncture the company had total assets of $40m and 31 staff.

During May 2014 $5.0m of new equity was raising through a rights issue.

Since then the company has returned to profitability, reporting an after tax profit of $2.2m in 2015, followed by a 61% increase in after tax profit to $3.5m in 2016.

Performance

The following information was extracted from Geneva Finance Limited's full year results, released 30 May 2024:

COMMENTARY

Trading Performance

The Group reported an unaudited pre-tax profit of $3.6 million, which represents a decrease of $0.96 million (-21.1%) compared to last year’s restated profit (after allowing for IFRS 17 adjustments). This decline is primarily due to both the adverse impact of higher funding costs (up $2.8 million, 51%) and increased impaired asset expenses (up $4.7 million). Additionally, a number of large one-off costs were incurred as part of the announced organization-wide strategic review and these included goodwill write-offs, for the debt litigation and invoice financing businesses, staff exiting costs, the move to the new premises plus various compliance and governance related costs. These combined to adversely impact the current years’ results.

Geneva Financial Services’ (auto lending business) pretax profit decreased by $1.1 million, representing a 39.2% decline from the previous year, bringing the pretax profit to $1.7 million. The primary reasons for this reduction are the higher cost of funds compared to the prior year and increased impaired asset expenses. Despite the overall profit decline, there was an interest margin improvement in the latter part of the year as the positive impact of new lending interest rate adjustments balanced out funding rate increases. The current challenging economic environment has led to an increase in receivables arrears, necessitating additional provisioning. The directors have assessed the year-end provisioning levels and consider them to be adequate. The net receivables ledger increased by $8.3 million, reaching $99.2 million by the end of the period.

Quest Insurance Group (Quest) reported a normalized pretax profit of $8.4 million representing a 100% increase from the $4.2 million reported in 2023. However, after a tax subvention payment of $2.7 million was made to Stellar Collections to utilize available tax losses, Quests final pretax profit reduced to $5.7 million, up 36% from the prior period. Quests written premium increased to $46.3 million in the current year, up $7 million (18%) from the prior year. Investment Income of $1.9 million was up $1.2 million (187%) from the prior year, driven by higher deposit rates and increased cash on hand. Cash of $39.3 million was up $7.6 million (24%) on the previous year. Quest’s financial performance showed continued growth and strong financial health. The increase in both normalized pretax profit and investment income, coupled with robust premium growth and enhanced liquidity now positions Quest well for the coming year.

Group costs not included in operations results amounted to $6.4 million, up $2.5 million on the prior year.

Federal Pacific Tonga (60% owned by the Group) reported a pre-tax profit of NZD $1.8 million, was up 21% on last year. The Group’s share amounted to $1.08 million pre-tax profit ($0.8 million after tax).

Stellar Collections Limited, including MFL (the debt litigation business), reported a $1.3 million profit for the period which included the $2.7 million tax subvention payment received from Quest Insurance. The normalized result was a $1.4 million loss for the period. The board's strategic decision to exit the debt litigation operations led to a $0.7 million goodwill write-off.

Geneva Capital Limited (invoice financing), reported a $0.5 million loss for the period which included a $0.4 million goodwill write-off following the board’s strategic decision to exit this business.

The after-tax unaudited financial result for the period was a profit of $1.8 million, down $1.5 million (45.2%). The variance between pretax variance and after-tax variance is mainly due to the non-tax deductible goodwill write-offs incurred in the year.