Revenues in Advantage, the motor finance division of consumer lender S&U, hit £78m in 2017, up 30% from the previous year.
Profits reached £30.2m, up 20% from 2016. Advantage wrote 24,500 new contracts over the year, up +22%.
Approval rates were slightly down, 2.7% out of a total 860,000 applications (2016: 750,000). Impairments rose 61% to £19.6m.
Speaking to Motor Finance, S&U executives attributed the fall in approvals to tighter underwriting as well as an increase in introductions by online brokers, which usually result in less certain customer leads.
“The underwriting process … is one we are constantly refining, and in response to macroeconomic issues, we have actually increased some thresholds for affordability, so the actual approval rates have gone down,” an executive said, adding that the facilitation of approval through e-signature had partially offset the fall in acceptance rates.
Advantage said higher impairments were the result of lower credit quality and macroeconomic pressure on incomes.
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Executives said that while they were “not overly concerned about impairments and revenues”, return on capital and impairments were not going “in the direction we would like [them] to go in, and that is why we made the [underwriting] changes”.
Another executive said: “We are not at a critical stage by any means on impairments, but we are concerned about the direction of travel.”
He added Advantage would refine product mix so that credit quality would return to 2013 levels, when internal credit scores averaged 905, versus 2017’s 869.
“We are a four-year-cycle business, so that [fall in quality] has affected the product mix, as we gradually lost over the last couple of years some of the deals that have actually paid us off … and we replaced them with [lower quality] deals,” executives said.
They added: “That has had a knock-on impact on impairments … but it has also had a healthier impact on interest rates.
“The fact that impairment has gone up by slightly more than we had anticipated … suggests that we haven’t quite got our rate of risk right, and again that is one of the reasons behind our tweaking on the underwriting.”
Advantage is another lender to report a tightening in underwriting following worsening impairments this month, after Moneyway reported similar measures in its results last week.