California Subprime Lender Gets Star Treatment on Wall St.

Lenders catering to borrowers with limited resources or tainted credit histories are hot on Wall Street these days - and none more than Aames Financial Corp.

Shares of the Los Angeles-based company soared to another record last week - $55, up 144% from the 1996 low, in mid-March. And that's despite a three-for-two stock split in May.

(Aames share price is being added today to the stock value tables featured Mondays in American Banker's Market Monitor.)

Gary K. Judis, Aames' president and chief executive officer said he was pleased, but also mystified, by the explosive rise. "I can't explain what's happening to our stock," he said in a telephone interview last week. "I really can't."

On Aug. 29, Mr. Judis sold $6 million of his own Aames shares.

A record number of bankruptcy filings has spurred the subprime lending industry, analysts say.

Aames is leading an impressive parade. Share of many consumer finance companies have risen significantly in recent months.

Shares at United Bankshares closed at TK last week, and Cityscape closed at TK. Shares of Money Store, the industry leader, have been sluggish.

In recent weeks Aames, a home equity lender, has done several important things that have pleased Wall Street analysts, including diversifying its financial services and expanding nationwide.

This month the company bought a One Stop Mortgage Inc., a wholesaler of second mortgages. One Stop is based in Costa Mesa, Calif., but most its offices are in the East.

Aames has also gotten the attention of investors by posting higher-than- expected earnings for nine consecutive quarters.

"The perception is that Aames is hitting on all cylinders, doing everything right," said John Heffern, a financial analyst at Natwest Securities Corp.

"Their delinquencies are rising, but their costs are low, and their reserves are very good. Plus, they have some of the best management in the business," the analyst said.

Mr. Judis and analysts agreed that the stock's popularity this year means investors have accepted subprime lenders as a legitimate business.

Aames went public in 1991. "There was a lot of skepticism from analysts," Mr. Judis said, "simply because of the kind of business we do and the clients we deal with."

The reluctance is relatively easy to understand. More than its competitors, Aames accommodates the worst credit risks. Over half its customers have C or D ratings. But because the company lends less money to its customers and at much higher rates than conventional lenders, the profit potential is vast.

Kevin Spinner, an analyst at Keefe, Bruyette & Woods Inc. said Aames has a lower loan-to-value ratio than its competitors. In addition, its collection rate is excellent, he says.

Mr. Spinner also said the company's advertising had generated brand-name recognition. He predicted that per-share earnings will rise to $2.70 in 1997, from $2 this year.

Mr. Heffern said he expects Aames stock to calm down some in the coming weeks, He recently downgraded it from "buy" to "accumulate" on the feeling that the price had peaked.

But the analyst said the outlook for the entire subprime industry is excellent, because consumers will probably be looking to consolidate their debts through the end of the decade.

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