Integrated Annual Report
2020

CFO’S REPORT

SEAN DOHERTY

Introduction

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.

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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:

  • Once-off acquisition costs of R5 million incurred in the first half of the 2020 financial year, relating to the acquisition of Fihrst on 1 December 2019, and R9 million relating to the acquisition of a non-controlling 49.9% interest in WeBuyCars on 11 September 2020.
  • Once-off costs of R84 million, which arose in the first half of the 2019 financial year, relating to SA Taxi’s ownership transaction with SANTACO, of which R81 million was non-cash and in accordance with IFRS 2 – Share-based Payment, and a further R3 million related to early debt settlement costs.

The year under review

HIGHLIGHTS IN 2020
PROTECTING SHAREHOLDER VALUE
  • Robust balance sheet with ample capacity to fund organic growth, bolstered by R560 million equity raised via an accelerated bookbuild and the issue of R329 million new equity to part-fund the investment in WeBuyCars.
  • Undrawn approved facilities to the value of R1 billion available at holding company level.
  • Consistent application of provisioning and amortisation methodology supported management in making informed judgements on technical factors and protects the balance sheet going forward. Ongoing and meticulous modelling by the finance teams also tested the robustness and accuracy of the models applied.
  • Value-accretive investment into 49.9% of WeBuyCars for R1.86 billion concluded on 11 September 2020, with efficient post-deal implementation. The acquisition was subject to an in-depth due diligence investigation prior to the investment, with the findings pointing to the suitability of the transaction for driving growth and increasing shareholder value.

CONTINUED IMPROVEMENT DESPITE A CHALLENGING OPERATING ENVIRONMENT

  • Adoption of an ESE framework to assist the board in ensuring that the group’s impacts are appropriately managed to enhance value creation for Transaction Capital and its stakeholders.
  • Continued improvement in disclosure in the annual financial statements by incorporating accounting policies as part of the notes to the annual financial statements in line with international best practice.
  • Continued enhancement of integrated reporting disclosures in response to best practice market trends and stakeholder feedback.
  • Growing the capacity and capability of the internal audit and ethics functions to support the growth of the group’s divisions, with restructuring of these critical functions completed in the year. The internal audit function was further enhanced by introducing an intelligent automation platform.
  • An enhanced risk management and policy framework was introduced this year, which provides a more complete view of our risk universe and a sturdy foundation to mitigate specific material risks.
  • The successful transfer of TC Global Finance to the group executive office, and the subsequent operationalisation of the new structure.

SA Taxi

For the year ended 30 September
    2020 2019 Movement
Financial performance        
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%)
Non-interest revenue Rm 609 584 4%
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  
Credit performance        
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  
Provision coverage % 6.7 4.8  
SA TAXI FINANCE AND SA TAXI AUTO REPAIRS

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.

SA TAXI DIRECT

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 PROTECT

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.

CONCLUSION

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.

FINANCIAL PERFORMANCE

CREDIT PERFORMANCE

Transaction Capital Risk Services

For the year ended 30 September
    2020 2019 Movement
Financial performance        
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.
COLLECTION SERVICES

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.

ACQUISITION OF NPL PORTFOLIOS AS PRINCIPAL

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.

TRANSACTIONAL SERVICES

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

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.

CONCLUSION

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.

FINANCIAL PERFORMANCE

1 Core headline earnings from continuing operations attributable to the group.

WeBuyCars

For the year ended 30 September
2020 2019 Movement
Financial performance        
Core headline earnings Rm 306 311 (2%)
Core headline earnings attributable to the group1 Rm 19  
Operational income attributable to the group1 Rm 10  
Operational performance        
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.

Group executive office and TC Global Finance

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.

Dividend declaration

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.

Accounting policies

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.

Audit report

The auditors issued an unmodified audit opinion for the 2020 financial year.

Subsequent events

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.

Looking forward

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.

Appreciation

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.