I don't think about a recession being good or bad per se, just...

I don't think about a recession being good or bad per se, just that they happen and the business needs to cope with it.

Look at 2008, the business barely flinched. Bankruptcy and debt agreement increases didn't show in the Consumer division profits immediately, yet home loan impairments started moving up (albeit very slightly compared to competitors)
The AFSA quarterly stats on bankruptcies and debt agreements is a great place to look for trends (they have a nice data set in XLS format from memory)

On your next post:
are you factoring in any risk that Westpac pulls out of the 75mil facility? I don’t see any reason why they would but just wondering as we haven’t heard anything since Nov. Also with 9mil in the back at the fy and personal loans just under 50 mil, do you see the extra 15mil funding (from fsa) required to get to 100mil as easy? I understand they may reduce the dividend to 5c to help with this but what sort of cash balance do you think fsa should carry at the least?also assuming everything goes to plan and they reach 100m while maintain asset quality, and they refinance with a new mezzanine investor and get the equity down from 30% to 10%, where to then? They’d obviously have an extra 20mil cash to fund growth. Any thoughts? thanks

There is a funding risk, just because the FSA is tied to Westpac's institutional lending arm. However, if I remember correctly Westpac own 10% of the FSA Home loan entity, as well as all the risk for the loans within. Given the quality of the personal loan book, I think Westpac would be absolutely crazy to turn them down.
As for the delays in the new facility, I would take what management say at face value, at least in my experience. Westpac have recently caused > 1 month delay on another holding of mine because they setup the wrong account types (so I'm told). When facilities are this large, they take time - it's not as simple as a $500k home loan.

Regarding cash balances - truth be told, I don't know what sort of balance the company should be running at any given point. However, all of FSA's behavior to date has been prudent, so I would imagine the cash balance would also be prudent. 
As for funding, the consumer business generates nice cash flows without significant investment. So that could fund a large chunk of the extra funding required. That said, if the business had JUST enough to meet the $100m mark, I would suggest that Tim will wait until it's prudent to hit that milestone, instead of risk a lack of cash.

Once they obtain the mezzanine facility, ROE grows, as you'd expect. Even paying a 10% rate when you lend it out at 17% is beneficial, and means little investment for FSA in future.

At this point, the business would use the $20m to write more loans and securitise, should they meet the volume requirements. Tim did mention some numbers at the FSA about the required size of the book, which I think I listed in my previous AGM post.


The way I view this business at present is a company trading at about 8 times earnings (12.5% yield), with a clear path to growth, management aligned with shareholders, a history of prudent management and strong investor returns. Back in 2008, when share prices tanked, management had no hesitation to buy up on market... In hindsight, a great move.

There are three risks I keep in mind, being the relationship with Westpac (funding risk), the ever changing legislation around bankruptcy (although this seems to benefit, not hinder the largest player) and the risk around mortgage changes in light of the Royal Commission, although I do think this won't be as significant for sub-prime lenders.