Pioupiou, you are correct – this is all about risk adjusted...

Pioupiou, you are correct – this is all about risk adjusted returns.

However, historically equipment financing has provided very poor returns over investment cycles whilst consumer financing has provided consistently great returns. Nobody would ever choose to deploy capital into equipment financing, if they could deploy that same capital into consumer financing.

If you look back over the past 10 years of TGA’s consumer finance division, their loan book has performed remarkably consistently, even so during post GFC years when they continued to rake in money. This is in large part due to a significant amount of their loan book having payments linked to Centrepay. It’s also due to the essential living assets that are being leased. If you’re under financial pressure, you’re going to stop making repayments on your investment property or business loan before you will on your fridge or bed. So the 15-20% ROA they’re getting are really quite cracking risk adjusted returns. The issue TGA’s consumer financing division has, is they can’t find enough people to rent assets to, so aren’t able to deploy the amount of capital they used to.

Conversely, equipment financing will always have a big blowup over a cycle when the economy turns. Like you mentioned, equipment financiers use leverage because ROA is so poor that without leverage it, you’re eeking out 7% returns. However, the collateral underpinning the loans are always very low quality. For example, 11% of Thorn’s equipment book is made up of financed furniture for a business – this consists of fitouts for restaurants and offices. Imagine what the resale value would be for a restaurant fitout, it’s almost worthless. Combine losses on the loan book with leverage, and you will have large chunks of equity wiped out. Like night follows day, this happens every cycle.

Any day of the week, you would put $100 to work in consumer financing rather than equipment financing. The issue Thorn has, is that consumers are no longer wanting to take Thorn’s $100 and management, rather than return excess capital to shareholders, are plowing the funds into equipment financing.