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It’s not exactly a household name but it may become one: Mutual bank Finbond was named the Sunday Times Top 100 company this week, due in the main to a share price rally that has taken it from 25c five years ago to its current level of 335c – a gain of 1,240%. However, much of that gain was made in the first year after the microlender was awarded its mutual bank licence, and its recent plan to acquire a full commercial banking licence will pit it against the likes of new entrants Thyme and Discovery, as well as the resuscitated African Bank and business banker Sasfin.

Business Day asked chief operating officer Carel van Heerden why Finbond wanted to convert its mutual banking licence to a commercial banking licence.

Our business model and product ranges are more akin to that of a commercial bank than a mutual bank. It will thus make sense for us to convert.

How successful has Finbond been in making itself more of a household brand?

[We feel] we have been very successful in making Finbond a household brand within our market segment. Key to the success of Finbond is focusing on our "one thing" (short-term unsecured loans). We expanded our branch network in SA to 410 branches in urban and rural areas and, according to the latest statistics, enjoy a 40% market share in short-term unsecured lending. In our target market, we are turning into a preferred financial services provider and this is very exciting.

Finbond is also fully committed to the TCF (treating customers fairly) principle. This business model has successfully established Finbond as a household brand, seeing that the majority of borrowers are repeat customers and the majority of depositors reinvest their money upon maturity.

How much will it cost the company to expand its branch network in SA?

We believe we can expand our South African branch network at a relatively low cost. This is based on the fact that our current and established infrastructure has room for expansion within the South African operations. Therefore, the cost for expansion will be relatively low and attributable to the one-off physical cost associated with opening a branch and the running costs thereafter, which will be determined by market dynamics.

Are the majority of your South African customers borrowers or depositors?

This depends on how you define majority. Based on the number of customers served, we see that our borrowers are the majority, while based on value [capital granted or deposits received] our depositors would be the majority. Typically, the borrowers consist of a large number of customers borrowing smaller amounts, whereas our deposit portfolio is made up of a smaller number of large deposits.

Finbond’s experience has been very favourable. The North America acquisitions delivered results that exceeded expectations.

Our core strength or "one thing" is short-term unsecured lending. This is our focus in SA and North America. Our depositor book and transactional savings accounts has grown very well over the period, but advancing short-term unsecured credit remains our most active customer base.

You moved into North America in 2016 with the acquisition of a series of payday lenders, which you funded through a R525m rights offer. What has been Finbond’s experience in the US market?

Finbond’s experience has been very favourable. The North America acquisitions delivered results that exceeded expectations. This success can mainly be attributable to Finbond’s strategy of investing in established market players with a wealth of experience and knowledge in the various states they operate in.

At the moment, the US is contributing more than half of Finbond’s sales, but only 13.6% of net profit. At what point will that start moving higher?

The US currently contributes 39.6% of ebitda [earnings before interest, taxes, depreciation and amortisation] and we expect this number to increase to 70% to 80% within the next three years. The lower contribution to net profit after tax at this point is temporary and relates specifically to the interest cost relating to shareholder loan funding of R33.2m at 13.3% per year, [which we used] to acquire certain of the North America subsidiaries. The US would have contributed 46.7% of net profit after tax if not for the impact of the interest on shareholders’ loans.

We are confident that the US will contribute 70% to 80% of net after-tax profit within the next three to five years.

So the US will become more important to Finbond than its local operations?

The US is, in fact, significantly more profitable than SA. Finbond’s 223 branches in the US make more or less the same as its 410 branches in SA. US ebitda for the six months to August 2017 was R125.1m, whereas ebitda in SA was R190.7m.

We have a much larger network and more customers in SA than in the US and our continued expansion in the US will result in the US overtaking SA as the main profit centre. The North America business has significant room for expansion compared to the South African business.

In your interim results to end-August, total assets increased by 44.5%, to R3.3bn, while liabilities increased by 58.5%, to R2.1bn. Your level of provisioning is above Basel requirements. Why?

Despite not being subject to Basel III, Finbond considers these requirements as best practice and therefore to be prudent, Finbond Mutual Bank already adheres to a number of Basel III requirements. Provision requirements are informed by International Financial Reporting Standards and conservative internal policies. Given our responsibility to our stakeholders, Finbond has adopted a prudent and conservative provisioning policy to ensure that expected losses will comfortably be provided for.

On a five-year basis your shares have rallied hugely, but from January 2014, they’re actually flat. How will you get the market on your side?

As management of Finbond, we are responsible for running the business and delivering above-average returns for our investors. Over the past five years, Finbond has consistently grown EPS [earnings per share] by more than 50% per annum — and we intend to continue to do that.

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