The Prospa Group Ltd (ASX: PGL) share price and profit results show that the battle between fintech and ASX banks isn't one sided.
Lots have been written about how new nimble technology players will eat the lunch of traditional banks like Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd. (ASX: NAB).
But the small cap business lender's results showed it is on the wrong side of the technology divide. While several tech stocks like the Afterpay Ltd (ASX: APT) share price have surged in this COVID-19 socially distanced world, Prospa is feeling the heat.
COVID-19 dents demand for credit
Loan originations in FY20 have fallen by around $50 million to $450.9 million compared to last year while earnings before interest, tax, depreciation and amortisation (EBITDA) crashed to a loss of $19.5 million. This compares to an EBITDA loss of $800,000 in FY19.
It's a tough time for any company that depends on small and medium companies. The sharp and sudden recession has hit SMBs hardest.
What's more, this sector is unlikely to bounce back anytime soon, in my view. That means weak demand for business credit from the smaller end of town.
Silver lining to Prospa's profit results
There are a few bright spots for Prospa though. If you excluded the financial impact from the coronavirus outbreak and other one-off items, underlying EBITDA would have been a positive $4 million.
Further, total revenue jumped 4.2% to $142.1 million. Just don't count on more growth in FY21 as the gains all came before COVID-19 struck.
On the other hand, the group is only setting aside $18 million in additional provisioning for potential bad debts. The economic impact from the pandemic on its customers isn't as bad as management initially expected and customer repayments are holding up relatively well.
Growing debt pile
Management also pointed out that total unique customers in Australia and New Zealand continue to increase and is up 43.5% compared to FY19. Prospa claims to have lend more than $1.6 billion to over 28,750 customers since it started.
Not only has the total number of customers gone up, but average gross loans have jumped 35.7% over the previous year to $433.3 million. Let's just hope its borrowers can continue to service their obligations, especially after COVID support expires.
How Prospa's balance sheet is holding up
Management also believes it holds a strong balance sheet with $55.3 million in unrestricted cash versus $29 million in FY19.
Its funding partners are still backing the group and Prospa claimed it held $114.1 million of available facilities with total third-party facilities amounting to $442.9million.
More uncertainty on the horizon
"Management have taken steps to ensure Prospa has the right foundations to manage the impact of COVID-19," said Prospa's chair Gail Pemberton.
"While momentum in FY20 slowed due to the impact of COVID-19 in the final quarter, we believe it will be restored as the economy and the small business sector recovers."
The company declined to provide a guidance due to the volatile conditions but committed to providing quarterly updates through FY21.
The Prospa share price slumped 11.1% to $80 cents in after lunch trade.
