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Business was booming at a nearby shopping centre in the lead-up to Christmas. Armed with credit cards and other forms of debt, consumers were loading up on gifts and other seasonal goodies. I wondered: how will they pay for this spending frenzy?
The Reserve Bank’s chart on household finances (below, left) is a constant, scary reminder of how much debt Australians have. Personal indebtedness keeps rising despite a sluggish economy, record-low wages growth and already strained finances. 
The chart’s other side provides some relief: interest paid as a percentage of household finances has been falling for the past decade, thanks to record-low interest rates. But that will not last for much longer, amid expectations that interest rates in Australia have bottomed. 

The next chart helps explain consumer willingness to take on more debt. New wealth as a percentage of annual household income has risen because of higher property prices. That, too, will not last. Signs of cooling property markets in Sydney and Melbourne are emerging and fears of a glut of new investment apartments, and a subsequent crash, are escalating.

Rising interest rates, stagnant wages growth and an uptick in unemployment (or underemployment for those who cannot get enough hours) will push more household budgets to breaking point and create a spike in mortgage stress levels. Mortgage stress is reportedly rising in Western Australia, Queensland, Tasmania, the Northern Territory and some regional areas. Up to one in four mortgage holders is experiencing a form of mortgage stress, on some estimates.
I have been reasonably sanguine on household debt levels for the past few years, partly because of the effect of rising prices for property and other assets. But we are at a point when aggregate household balance sheets surely cannot be stretched any further. They collectively have little margin for error if interest rates rise sooner and faster than expected. 
Credit Corp, Collection Group, Pioneer Credit, Thorn Group and Cash Converters benefit, to varying degrees, when consumers need help with their finances, be it through short-term lending, equipment rentals or the ability to pawn goods for cash.
FSA Group, Australia’s largest provider of consumer-debt solutions, is another beneficiary. A lender to individuals through non-conforming home and personal loans, FSA benefits from demand for household finance solutions and is a stock worth watching. 
It is best known for the Fox Symes Debt Solutions business, which offers debt solutions such as budgeting advice, informal creditor arrangements, personal insolvency agreements and bankruptcy advice. Its target market is consumers drowning in debt and urgently needing help.
Founded in 2000, FSA listed on ASX in 2002 through a “backdoor listing” and $600,000 capital raising. From humble beginnings and funding mostly from directors, it is now capitalised at $164 million.
FSA says it has a 41 per cent share of the market for people who enter into arrangements to pay creditors through debt and personal insolvency agreements, and bankruptcies. It helped 19,553 clients who owed $346 million at FY16.
The other key division lends to home owners. FSA provides “low-doc” home loans to people who otherwise would not meet bank lending criteria and want to consolidate their debt, and is among few remaining non-conforming home-loan lenders in Australia. Low-doc lending creates an extra element of risk in FSA.
FSA’s home loan book was $281.8 million in FY16, up 18 per cent on the previous year. 
The stock slumped from above $1.40 in August 2015 to a 52-week low of 92 cents after a lower-than-expected FY16 result. Profit before tax fell 16 per cent to $16.8 million. 
Lower staff numbers (since resolved) weighed on profits in FSA’s critical debt-services division, and higher staffing and marketing expenditure hurt profit growth in its consumer-lending business. 
The stock has recovered to $1.31 as the market recognises FSA’s growing loan book and amid expectations of higher demand for its debt-restructuring and consolidation services. 
FSA Group

Source: The Bull 
FSA is well run and has a good long-term performance record. The 10-year average annual total shareholder return (including dividends) is 15 per cent, Morningstar data shows. Over five years, the annualised total return is 44 per cent. 
Return on equity has averaged 21 per cent over the past five years. High, rising ROE (above 15 per cent) is always a good sign, for it is usually a precursor to a higher intrinsic or fair value for a company, and inevitably a rising share price. 
FSA’s ROE dipped to 14 per cent in FY16, but it looks well placed to get that back above 20 per cent in the next few years.
The company noted at its Annual General Meeting in November: “Consumer debt levels are at a record high and demand for our products and services is strong. However, we may face a number of headwinds over the next few years, including historically low interest rates adversely affecting certain areas of our business.”
The headwinds could ease in the next year or two, and possibly begin to reverse as interest rates in Australia eventually follow the United States’ lead and start to rise. Either way, FSA’s share-price rally should have further to run in the medium term.
FSA suits experienced long-term investors comfortable with micro-cap stocks and the extra risks in this form of investment. 

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Tony Featherstone is a former managing editor of BRW and Shares magazines. The information in this article should not be considered personal advice. The article has been prepared without considering your objectives, financial situation or needs. Before acting on the information in this article you should consider the appropriateness of the information, with regard to your objectives, financial situation and needs. Do further research of your own or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at December 20, 2016.