Prior to the effects of COVID-19, the group was on track to deliver earnings growth in line with past performance and guidance given at the time of our AGM in March 2020. Despite the disruption of COVID-19, with most of our business operations restricted and in some cases fully closed for more than two months, the group’s core pre-provision profit from continuing operations grew 10%. Positive operational leverage supported this resilient performance.
We have adopted a conservative approach in accounting for the impact of COVID-19, which has given rise to far higher non-cash credit impairments at SA Taxi and adjustments to the carrying value of TCRS’s purchased book debts compared to historical periods. In SA Taxi, the credit impairment charge against loans and advances for 2020 increased 160% to R836 million, compared to R322 million in 2019. In TCRS, the adjustment to the carrying value of purchased book debts was R588 million in 2020, 270% higher than the R159 million adjustment in 2019.
As noted, these charges resulted in our financial performance deviating from our historical earnings growth trend. The group’s core headline earnings from continuing operations fell 65% to R276 million, and core headline earnings per share from continuing operations decreased 66% to 44.3 cents.
As a measure of maintainable performance and as key metrics used by management in the business, Transaction Capital has presented non-IFRS measures referred to as core financial ratios throughout this report. These may be referenced to headline earnings from continuing operations of R262 million (2019: R705 million) by excluding:
|The audited consolidated annual financial statements are available online at www.transactioncapital.co.za.|
|For more on the actions taken to enhance the group’s financial flexibility and strategic agility, see the Q&A with Mark Herskovits, CIO.|
CONTINUED IMPROVEMENT DESPITE A CHALLENGING OPERATING ENVIRONMENT
|For the year ended 30 September|
|Core pre-provision profit||Rm||1 117||1 005||11%|
|Core headline earnings||Rm||221||519||(57%)|
|Core headline earnings attributable to the group||Rm||181||446||(59%)|
|Net interest income||Rm||1 358||1 217||12%|
|Net interest margin||%||11.8||12.2|
|Core cost-to-income ratio||%||43.2||44.2|
|Core return on average equity||%||8.1||24.6|
|Gross loans and advances||Rm||12 243||10 753||14%|
|Non-performing loan ratio||%||32.3||17.9|
|Credit loss ratio||%||7.3||3.2|
SA Taxi’s gross loans and advances book grew 14% to R12.2 billion, comprising 32 890 loans. The retention of market share and higher retail prices for new vehicles supported this growth. It is important to note that in normal conditions, book growth is a function of loans originated and vehicle price increases, less attrition. Historically, attrition accounts for about 20% of the loan book being rolled off each year through repossession and settlements (i.e. full repayment of loans in the ordinary course).
Restricted repossession and settlement activity due to COVID-19 slowed the attrition rate, which resulted in gross loans and advances growing despite the lower number of loans originated. By September 2020, repossession activity was back to normal, although collections are only expected to normalise by January 2021.
The number of loans originated was 27% lower than last year. Contributing to this decline was interrupted new vehicle supply due to industrial action at the Toyota plant in January 2020, and the closure of the plant during lockdown. Furthermore, the closure of SA Taxi’s and other external dealerships curbed the division’s ability to originate vehicle loans. In the 2021 financial year to date, Toyota’s monthly output of minibus taxis is slightly lower than but nearing pre-COVID-19 levels.
Nonetheless, growth in loans and advances translated into net interest income growth of 12% to R1.4 billion. The negative endowment effect from lower interest rates partially offset the benefit of settling R1.0 billion of interest-bearing debt (from the proceeds of SANTACO’s acquisition of 25% in SA Taxi in February 2019). This resulted in a marginal decrease in the net interest margin to 11.8% (2019: 12.2%), despite the average cost of borrowing reducing to 9.8% (2019: 11.1%). SA Taxi targets a net interest margin of 11% to 12%.
In April 2020, SA Taxi’s monthly collections reduced to 23% of pre-COVID-19 levels but recovered consistently month-on-month to more than 90% by September 2020. We now expect collections to normalise early in the 2021 calendar year. SA Taxi has adequately provided for this impact, increasing provision coverage to 6.7% for 2020 (2019: 4.8%). Provision coverage should return to historic levels of between 4.5 % to 5.5% over the medium term.
Cash flows will be protected as the useful life of a minibus taxi significantly exceeds SA Taxi’s average loan term of 71 months.
Lower origination of new loans and the disruption to collections resulted in a higher NPL ratio of 32.3% (2019: 17.9%). A high proportion of NPLs may well convert to performing loans, as these customers’ propensity to pay is higher than typically observed. The NPL ratio is thus expected to improve to around 25% in 2021, returning to normal levels of approximately 20% over the medium term.
Besides the loan repayment and insurance premium relief provided in April 2020, and specific payment relief in May and June 2020, SA Taxi continued to age and provide for the loan book as usual – and in line with our conservative approach. This resulted in a credit loss ratio of 7.3%, above the target range of 3% to 4% (2019: 3.2%). We expect the credit loss ratio to normalise around or slightly above the upper limit of the target range by 2022.
|For details on payment relief provided to SA Taxi clients, see the Q&A with Terry Kier, SA Taxi CEO.|
SA Taxi’s retail dealerships generated gross revenue of about R600 million in the year, down on the prior year due to the disruption in new and pre-owned vehicle supply and the closure of SA Taxi’s dealerships in April and May 2020. Higher vehicle prices partly offset the decline.
SA Taxi’s insurance business is the main contributor to non-interest revenue, with gross written premiums up 10% to R907 million. This was a good result given the deferred repayment of insurance premiums in April 2020 under SA Taxi’s COVID-19 relief programme and other disruption. As expected, higher lapse rates were experienced as COVID-19 affected the affordability of insurance cover. Despite the extraordinary conditions, SA Taxi Protect’s broader product offering and the continued expansion of our addressable market to include insuring minibus taxi operators financed by other banks, supported high single-digit growth in the number of policies on book.
Despite the impact of COVID-19 in 2020, SA Taxi posted a resilient performance, growing its core preprovision profit 11% for the year. Positive operational leverage supported a core cost-to-income ratio of 43.2% (2019: 44.2%). This was achieved despite once-off COVID-19 related expenditure of R9 million. Although the division did not grow its core headline earnings for the year, SA Taxi remained profitable even after the effect of the conservatively modelled credit provision. SA Taxi posted core headline earnings of R221 million for 2020, of which R181 million was attributable to the group. ROE of 8.1% for 2020 is expected to return to approximately 20% over the medium term.
SA Taxi is adequately capitalised, albeit slightly below the target equity of between 18% to 20%, with a Tier I capital adequacy ratio of 15.7% and R2.7 billion of equity. SA Taxi is expected to return to its target equity range in the medium term. Its access to liquidity remains unfettered with more than R4.0 billion of new debt facilities concluded since 1 April 2020. Ample liquidity is available in undrawn debt facilities to fund loan origination into 2022.
|For the year ended 30 September|
|Core pre-provision profit||Rm||649||578||12%|
|Core headline earnings from continuing operations attributable to the group||Rm||55||298||(82%)|
|Non-interest revenue||Rm||2 385||2 018||18%|
|Core return on average equity||%||2.6||19.9|
|Purchased book debts|
|Cost price of purchased book debts acquired||Rm||733||1 186||(38%)|
|Carrying value of purchased book debts||Rm||2 520||2 382||6%|
|Estimated remaining collections||Rm||5 181||4 480||16%|
|NOTE:||Comparative information has been restated for the application of IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations and IFRS 8 – Operating Segments.|
TCRS’s collection revenue grew 14%. On average, collection revenues on its owned NPL Portfolios in South Africa and Australia were only about 20% lower than the pre-COVID-19 benchmark.
A significant proportion of the division’s collections is annuity based, collected via recurring payment arrangements, which supported the better than expected collection rates. The remaining portion is collected by call centre and legal collection agents in South Africa, who were enabled to work from home during lockdown and with higher productivity per agent recorded.
The Australian collections business performed well despite COVID-19, with revenue growing more than 20% and earnings in line with pre-COVID-19 expectations. Its Australian collection agents were fully enabled to work from home and its Fiji based call centre operated efficiently with flexible working hours, supporting this strong result.
TCRS invested R653 million in South Africa and R80 million in Australia in acquiring NPL Portfolios. This was lower than we intended pre-COVID-19 and well below 2019 levels. The division spent R177 million in the second half of 2020, down 76% from R749 million the year before, and far lower than the R556 million spent in the first half of 2020.
At 30 September 2020, TCRS’s NPL Portfolios were valued at R2 520 million, up only 6% compared to a year ago. This was mainly due to the R588 million adjustment to the carrying value of this asset, but also as fewer NPL Portfolios were acquired in the second half. We expect annuity revenue from this asset of R5 181 million over the medium term, up 16% from R4 480 million a year ago.
While collections on NPL Portfolios have performed better than initially expected, ERC is still expected to be about 4% lower over the medium term. As such, we adjusted the carrying value of purchased book debts down by R588 million (2019: R159 million) to ensure future yields remain aligned with those achieved in the past.
GROWTH TRAJECTORY TO SUPPORT FUTURE POSITIVE PERFORMANCE (Rm)
COLLECTION MULTIPLE VINTAGE PERFORMANCE1
AS AT 30 SEPTEMBER 2020
TCRS has almost 20 years of experience in acquiring NPL Portfolios at attractive risk-adjusted returns. To this end, TCRS has the ability to adjust its pricing methodology to the prevailing environment to ensure NPL Portfolios are priced accurately, to achieve targeted returns and collection multiples. In 2021, TCRS plans to invest less than the R1.2 billion reported for 2019. However, as market dynamics become clearer, there may be an opportunity to accelerate investment beyond 2019 levels. Similarly, we expect to invest over R1 billion in the 2022 financial year in acquiring NPL Portfolios.
In the Australian collections market, clients are more actively favouring FFS and contingency collection mandates over the sale of their NPL Portfolios. However, TCRS’s diversified business model positions it to respond effectively to this shift.
CONTINGENCY AND FEE-FOR-SERVICE REVENUE
Recoveries Corporation in Australia posted a robust performance and adapted well to the COVID-19 environment despite the initial disruption. The business gained new mandates from new and existing clients to achieve organic growth in revenue by double-digit percentages. Operating costs were well managed given the shift in revenue mix to FFS mandates.
The South African contingency and FFS division performed in line with expectation given the difficult consumer environment. Muted retail sales and credit extension from March 2020 translated into lower volumes of matters handed over for collection by clients. Going forward, recoveries and contingency collection revenues will be lower as consumers struggle to repay their debt. However, as noted, we expect to see higher volumes of outsourced collections mandates on larger NPL portfolios in this environment.
Although TCTS operated during lockdown, as a relatively small services-orientated business it is difficult for it to make operational adjustments to counter market conditions. Lower transactional activity due to lower payments and payroll-related transactions, and lower yields earned on overnight bank balances held due to interest rate cuts, impacted its performance for the year.
Transaction Capital Business Solutions (TCBS) has collected most of its outstanding portfolio, with only R218 million of net loans and advances remaining on book at 30 September 2020. TCBS has been accounted for as a discontinued operation since the first half of 2020, with its business and assets available for sale pending appropriate disposal strategies.
With the impact of extreme conditions in the second half, and the accounting effect of our conservative valuation of NPL Portfolios owned by TCRS, the division was unable to grow headline earnings for the year. However, resilient collection revenues in South Africa and Australia allowed the division to remain profitable, with core headline earnings of R55 million from continuing operations. Strong growth in revenue from the collection of NPL Portfolios acquired as principal and a solid performance from its Australian collections business supported this resilient performance. ROE of 2.6% for 2020 is expected to return to approximately 19% over the medium term.
TCRS’s costs grew 13% (excluding adjustments to the carrying value of purchased book debts of R588 million and once-off COVID-19 related expenditure of R57 million) as the division implemented a highly effective work-from-home capability and proactively restructured its staff complement and infrastructure in South Africa. As noted, these initiatives will benefit the business into 2021, achieving cost savings in excess of R90 million. The division is well positioned to manage difficult conditions and capture emerging opportunities, supported by its proven operational agility and enduring cash flows.
|1||Core headline earnings from continuing operations attributable to the group.|
|For the year ended 30 September|
|Core headline earnings||Rm||306||311||(2%)|
|Core headline earnings attributable to the group1||Rm||19||–|
|Operational income attributable to the group1||Rm||10||–|
|Number of vehicles sold||Number||59 177||58 343||1%|
|Advertising expense per vehicle sold||R||1 545||1 549||–|
|Days to sale per vehicle||Number||27.4||24.9||10%|
|1.||Effective from 11 September 2020.|
WeBuyCars’s revenue and profit have shown strong CAGR of 62% and 58% respectively in the last three years. In 2020, WeBuyCars generated headline earnings of R306 million, 2% down on the prior year. This was due to lower sales volumes in March, April and May 2020 as a result of the national lockdown in South Africa in response to COVID-19. From 11 September 2020, WeBuyCars contributed earnings of R19 million to the group for the period. Despite its operations being closed during lockdown levels 4 and 5 (27 March 2020 to 1 June 2020), WeBuyCars recovered strongly, with sales exceeding pre-COVID-19 levels in July, August and September 2020.
Transaction Capital’s investment in WeBuyCars is accounted for as an associate of the group in accordance with IAS 28 – Investments in Associates and Joint Ventures by applying the equity method.
|For more on the WeBuyCars deal construct, see Introducing WeBuyCars.|
The group executive office added R21 million (2019: R45 million) to the group’s core headline earnings. The reduced contribution was due to interest earned on a lower balance of undeployed capital held over the period as well as the decrease in the South African Reserve Bank’s repo rate, and once-off COVID-19 related costs of R8 million.
The group executive office now manages TC Global Finance. The group has to date invested €8.7 million in the higheryielding niche of the European specialised credit market. We invested €7.4 million in the first half of 2020 with no further investment in the second half. Transaction Capital’s investment in TC Global Finance is accounted for as an associate of the group in accordance with IAS 28 – Investments in Associates and Joint Ventures by applying the equity method.
Transaction Capital’s ordinary dividend policy is 2.0 to 2.5 times cover. After extensive deliberation and in view of the impact of COVID-19, the board has opted to retain capital and not to pay a dividend for 2020 2019: 61 cents per share). This cautious and conservative approach to preserve capital will help to ensure adequate financial capacity and flexibility.
Transaction Capital’s objective is to ensure that appropriate, understandable and sustainable accounting policies are adopted and implemented, which are aligned with the group’s commercial realities, risks and strategies to the greatest extent possible. The group has consistently applied all accounting policies in the current financial year, with the exception of the adoption of IFRS 16 – Leases.
The group adopted IFRS 16 – Leases based on the modified retrospective approach from 1 October 2019, with no restatement of comparative information as permitted under the specific transitional provisions in the standard. The cumulative effect arising from the initial adoption of IFRS 16 – Leases is presented as a R51 million post-tax adjustment to the opening balance of retained earnings at 1 October 2019.
|Refer note 2 in the annual financial statements, available online at www.transactioncapital.co.za, for further disclosure in this regard.|
The auditors issued an unmodified audit opinion for the 2020 financial year.
|Refer to the annual financial statements, available online at www.transactioncapital.co.za, for more detail.|
Royal Bafokeng Holdings Proprietary Limited acquired 12 million ordinary Transaction Capital shares (representing 1.8% of existing ordinary shares in issue) via a secondary purchase in an off-market transaction on 20 November 2020. Furthermore, Transaction Capital and RBH will enter into a subscription agreement in terms of which RBH is expected to increase its holding in Transaction Capital, in terms of a specific issue for cash, by subscribing for a further 12.4 million ordinary shares at R20 per share in January 2021, subject to shareholder approval. For further detail, see the SENS announcement released on 24 November 2020, available online at www.transactioncapital.co.za.
The group is focused on returning to pre-COVID-19 operational levels by the start of the new financial year, while continuing to manage risk appropriately. This will provide a strong foundation on which to deliver against the budget in 2021 and grow off the 2019 base.
|For Transaction Capital’s prospects statement, see the Chairman’s report .|
To my colleagues on the board and the group executive team, thank you for your support and ongoing strategic guidance during the year. Thank you to the dedicated and hardworking finance, risk and governance teams for ensuring that we maintained our high standards and professionalism throughout a complex and difficult time.