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Manx Financial Group
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==Company description: Independent banking group== MFG was founded in 1935 and listed in 2012 on the LSE’s AIM market. Its executive chairman, Jim Mellon, has a 19% stake. Gregory Bailey, a biotech entrepreneur and MFG non-executive director has 16%; the remaining 65% is free float. Conister Bank is the largest company in MFG, accounting for 78% of its operating income in H121 and more than half of its profits. Conister has a solid capital base (total capital ratio was 17.8% in H121) and proved capable of accessing commercial liquidity rates through its Isle of Man banking licence (Class 1 deposit taking). MFG had a loan to deposit ratio of 91.5% (H121). Conister operates in several SME and retail lending niches; Exhibit 6 shows the breakdown as of H121. Hire purchase loans (32%), wholesale funding arrangements (15%) and financial leases (14%) are the biggest segments. It has been very active in the COVID-related, government-backed loans programme and this segment has quickly grown to 19% of the loan book. Conister has been repositioning its loan book away from subprime to near prime over the last couple of years. Conister Bank is regulated by the Isle of Man Financial Services Authority and the UK’s Financial Conduct Authority (FCA). Most of its lending is secured; it has 8% in unsecured consumer loans. The other two relevant companies owned by MFG are Edgewater Associates (EA) and Manx FX. The former is the largest independent financial advisory business in the Isle of Man, while the latter is a currency broker and provider of international payment processing facilities. MFG’s debt collection company (Manx Collections) obtained an FCA licence in June 2021 with the aim not only of making recoveries but also of winning collection mandates from other financial services businesses during this economic downturn. There seem little operating expenses allocated to Manx FX, which contributes to it having an outsized contribution to earnings relative to its operating income. In 2020 and 2021, it also benefited from a strong increase in FX trading due to volatility from both COVID and Brexit. Conversely, market volatility has hurt Edgewater as investors have delayed investment decisions and fewer face-to-face meetings have also hurt business. It is possible that calmer markets may adversely affect Manx FX income. We note that fee income and total operating income in H120 (when COVID started) was £875k and £872k respectively, but only £457k and £224k in the calmer H220 (usually FX markets are busier towards the end of the calendar year). '''Exhibit 1: Operating income by segment (H121)''' [[File:Operating income by segment (H121).png]] Source: Manx Financial Group. '''Exhibit 2: Earnings contribution (H121)''' [[File:Earnings contribution (H121).png]] Source: Manx Financial Group. '''Exhibit 3: Full year operating income progression (£000s)''' [[File:Full year operating income progression (£000s).png]] Source: Manx Financial Group. '''Exhibit 4: Full year net profit and ROE progression''' [[File:Full year net profit and ROE progression.png]] Source: Manx Financial Group. MFG has a solid record of profitability with ROE of 12–17% over the years before COVID-19. The business was relatively resilient during the COVID-19 lockdowns and posted an ROE of 9% in FY20 and in H121. Although Conister Bank’s loan impairments rose to 2.1% of loans in FY20 as a result of the crisis, MFG’s strong operating margin was able to absorb this (Exhibit 5). The amount of stage 3 loans increased from 5.9% in FY19 to 10.6% in FY20 and then declined to 8.3% during the first six months of 2021. MFG’s strategy is to continue to grow both organically and through value-creating acquisitions. Management highlighted in its 2021 interim report that the ‘current economic conditions’ could provide some buying opportunities that it would analyse. '''Exhibit 5: Profit versus impairments (as % of loans)''' [[File:Profit versus impairments (as % of loans).png]] Source: Manx Financial Group. '''Exhibit 6: Loan book breakdown (H121)''' [[File:Loan book breakdown (H121).png]] Source: Manx Financial Group.
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