Pawnbroker H&T (HAT:AIM) is up 71% since we flagged the stock in late 2014 – and the rally could have further to run.

A contrarian call at the time, H&T was struggling in the aftermath of a gold price collapse and stricter consumer lending rules.

Investors remain wary of consumer lending stocks: FTSE 100 giant Provident (PFG) has shed 12% of its value in the last 12 months while Non-Standard Finance (NSF) is down 40%.

But H&T is a little different to its peers and we remain positive on the stock for a few reasons.

Asset-backed lending

First, its loans are usually backed by collateral. Pawnbroking customers borrow money in exchange for an item they pledge to the lender. This collateral usually transfers to the lender if cash borrowed is not repaid. Bad debts tend to be low.

Second, precious metal prices can be a driver of H&T’s profitability, unlike normal lending businesses. H&T operates jewellery stores and also buys gold for cash across its high street estate.

When the price of gold rises, customers who pledge jewellery or other precious metal items also tend to be more likely to try repay their debts because their asset has increased in value. This is good when the gold prices are rising but proved to be bad news when prices crashed in 2012.

Risks to earnings

Regulation, and the increasing cost of complying with new rules, remains a key challenge to the industry’s smaller players like H&T.

Japan began to tighten regulations around consumer credit in 2006, a move that almost finished its consumer lending industry.

UK-listed International Personal Finance (IPF) has also fallen foul of stricter regulation on lending in eastern Europe.

The direction of travel on regulation isn’t encouraging for lending businesses.

One industry executive told Shares that similar outcomes in the UK are unlikely. Imposing onerous conditions on legitimate, regulated lending businesses would force the public into the hands of unaccountable and unscrupulous black market lenders, they said.

There is evidence of an increase in black market lending in Japan following its clamp down, a factor which led the country’s government to retreat on the policy more recently.

We’d expect common sense to prevail in the UK.

Offering a centuries-old service at relatively fair rates to borrowers mean we’re still bullish on H&T.

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