How can a business be twice as big today than it was in 2018, but see its profit at under a quarter of what it was six years ago?

Access Financial Services Limited is the biggest microcredit company on the Jamaica Stock Exchange with over $5.39 billion in net loans, which are geared towards lower income earners who make up 92 per cent of its loan book. However, this growth in loans is not being fully translated to profits which are a fraction of the company’s peak in 2018 when it had $2.93 billion in loans. Today’s business focus will explore Access as a company and the questions which investors should ask going forward.

Access Financial is a microcredit firm which serves the ordinary Jamaican who needs access to capital to smooth out a tough time, grow their small business or secure something that they saw on hire purchase. The 24-year-old micro lending company is the brainchild of its founder and Executive Chairman Marcus James.

It was a high-flying microcredit firm in the first two decades of the new millennium as it became the first company to list on the Junior Market of the Jamaica Stock Exchange (JSE) in October 2009, the first company to list on the revitalised JSE Bond Market in October 2013, and the first company to receive a microcredit licence by the Bank of Jamaica in August 2022.

At Access’ peak in March 2018, the company brought in $1.46 billion in interest income from its $2.93-billion net loan book ($3.34 billion in gross loans). Overall operating income was $1.70 billion, profit before tax (PBT) was $801.95 million and net profit was $716.03 million. The company had $3.52 billion in total assets and paid over $195.10 million in dividends to shareholders who saw the stock price peak at $56 on March 12, 2018. For context, Access listed at $18.34 or $1.834 after adjusting for the 10-1 stock split.

Fast-forward to March 2024 and it’s a whole different picture. The company earned $2.19 billion in interest income from its $5.39-billion net loan book ($6.15 billion gross loan book). Overall operating income is $1.97 billion, PBT is $595.25 million with net profit of $391.77 million. The company has $7.19 billion in total assets and has paid $98.82 million in dividends with the stock trading at $21.21. PBT is used here, since Access benefited from a tax remission between 2009 and 2019.

What has led to such a drastic shift in Access’ business profile over six years?

Firstly, the microcredit market has become a lot bigger and a whole lot more competitive with the recent Microcredit Act forcing everyone to become regulated. While regulation might weed out a few players, it creates more visibility for all the other players out there who probably have different funding structures, product offerings and general obligations to its key owners. Access, as the largest known player with 17 branches in Jamaica and over 178 full-time employees, has a position advantage in the market.

Secondly, commercial banks and other lending players have stepped up with their data analytics and marketing to capture customers. If you’ve opened your email or a bank’s mobile application, you would have probably been greeted with a message saying that you’ve been offered a payday loan with no interest but a small fee. Other times, it’s getting 200 basis points (two per cent) cut off the bank’s headline rate for an unsecured loan and getting money in your account before midday even kicks in. It’s this speed and lower cost of financing which can make a bank more competitive than a microcredit player which might have to lower their spreads (the difference between how much they earn on lending money and borrowing money to fund their operations) just to retain their customers.

Thirdly, the quality of customers, interest rates in the market and microeconomic reality tend to shift the dynamics of a microcredit business very drastically than that of a bank. The best quality borrowers don’t approach microcredit players but stick with banks and other lenders that are willing to give them very attractive rates and terms to do business with them. Banks and other deposit taking institutions have deposits and various funding sources which tends to cost them a lot less than a microcredit player seeking to capture the same retail customer who either cares about price or speed more than brand loyalty. So, what tends to happen is that a microcredit player might have to end up charging a lot less than their market rate just to retain their customer. This is also impacted by the tenure of loans with these customers and their own personal situation which can be thrown to the wayside for a pandemic or natural disaster like a hurricane.

Just for context, ISP Finance Services Limited, another listed microlender, has annualised loan rates ranging 50-65 per cent as per its 2023 audited financials. The Bank of Nova Scotia Jamaica Limited’s unsecured loan rate is 21.49 per cent.

Even former Access Financial Chief Executive Officer (CEO) Frederick Williams confirmed this premise at their 2022 annual general meeting. He said, “For that analysis over that period, you’d also have to look at events; what’s happening in the competitive environment on interest rates and then, we’re in a very dynamic market and for us to be able to compete, then your pricing also gets affected. So, just to balance that analysis, take a look at what would be happening on the interest rates within the microfinance sector.”

What is happening

Access remains a profitable entity, albeit with a struggling auto equity lender in Florida called Embassy Loans Inc. That business was profitable before the COVID-19 pandemic but has struggled to return to profitability with the outfit cutting its loss before tax to $24.15 million on $124.13 million in interest income.

Access acquired a loan business called Damark Limited in May 2016 for $180 million or effectively its nets assets. This gave Access more inroads to lend to more civil servants in the public sector. However, despite Access being approached by several other microlenders seeking to exit their business, the quality of the loan book didn’t fit Access’ risk parameters.

So, it has avoided new acquisitions as it seeks to ensure these deals don’t drag its returns in the name of acquisitions. Access has instead focused on growing its core business in Jamaica through efficiencies enabled by technology. To this end, it launched the AFS MyAccess Jamaica mobile app in March 2023 to allow customers to apply for loans faster and speed up the process for them to access funding. The company also acquired a customer relationship management tool to further streamline the lending process and the associated handling processes during the lifetime of the loan. A mobile app for the marketing team called the Leads Management App was also created to better track and convert leads into sales.

However, does Access need to pivot to the higher end of the market similar to what Dolla Financial Services Limited has done with their subsidiary, Ultra Financier Limited, which exclusively lends to high-net-worth investors? Does it need to pivot more towards business loans to further diversify its loan portfolio? This question comes as the company wrote off $177.48 million in loans during 2024 with another $289.15 million being past due by 90 days or more. While this is a small amount for the company based on the size of its balance sheet, it should be noted that it wrote off only $224.50 million in 2018 and had $399.92 million past due by 90 days or more.

This is a critical point, considering that the biggest thing that has changed for Access since 2018 to now is interest expense on borrowed funds, staff costs rising due to inflation and higher credit impairment provisions due to the demonstrated history from its clients.

These questions all come at a time when Access’ chairman Marcus James has taken a one-year leave of absence since June 27. Michael Shaw, Access’ lead independent director, has had to step in to be the chairman of the board in the interim. While the reason for the leave of absence wasn’t stated, it should be noted that James is in a legal battle with his wife in Jamaica and Florida for the last two years.

James is the largest shareholder of Access Financial through Springhill Holdings Limited, a St Lucian International Business Company (IBC), which owns 47.33 per cent of the company’s ordinary shares. Springhill Holdings is owned by the Springhill Trust which is based in St Lucia, where James is a beneficial owner.

Access’ second largest shareholder is Proven Group Limited, which owns 24.72 per cent of the company and has already made back its investment on the company when it sold 25 per cent of the business for $32 in September 2019. Note that Proven bought its original Access stake for $9 in December 2014 from Mayberry Investments Limited’s subsidiary.

Another notable shareholder is QWI Investments Limited, the fifth-largest shareholder, whose portfolio swings with Access’ stock price.

While the BOJ has made its first rate cut of 25 basis points, that will take time to permeate the economy. That has presented an opportunity for growth for Access whose consolidated asset base jumped to $7.52 billion at the end of June 2024 with the net loan balance at $5.82 billion. This improved loan book translated to a nine per cent rise in net operating income to $613.63 million, but higher credit impairment provisions meant its PBT only grew 15 per cent to $163.34 million with consolidated net profit of $100.79 million.

The reality on the ground for many businesses and individuals is not rosy, as many people come under pressure from inflation and a general slowdown in the economy. This along with banks offering extremely pricy loans due to higher cost of funds, regulatory changes from Basel III, and other factors give microcredit firms an edge to customers that are priced out by some banks right now and their risk plus lending policies. That along with its loan specials could seriously drum up more business.

Right now, Access aims to be a quarterly dividend-paying stock but has not maintained that consistency since 2020 and just skipped a July dividend recommendation. It will see the return of shareholder appointed director Johann Heaven if and when the BOJ approves his appointment to the board.

Access could always seek to tap the equity markets in good time to raise an extra $403.95 million on the Junior Market if they choose to remain there. The company just listed a $2-billion bond on the JSE Private Market in January 2023. What about a swing for the JSE Bond Market which has gained more retail investor attention due to the favourable minimum investment requirements.

Access Financial is a microcredit firm which serves the regular Jamaican, small and medium businesses, taxi man and everyone that fits their goal as a lending business. The company was founded by Marcus James who got his start at 41b Half-Way-Tree Road when Access began operations in September 2000. Through steady state growth and prudent management, they had already reached over 100,000 customers in 2006 with a team of 40 people operating from six branches. This made it an attractive candidate by Mayberry Investments Limited, which purchased 49 per cent of the company for $38 million in September 2006. Mayberry held Access as an associate before selling its entire stake in December 2014 for $955 million or US$8.34 million.