Integrated Annual Report
2020

Transaction capital risk services

Strategic and operational highlights

REPOSITIONING FOR GROWTH
CONSERVATIVE APPROACH TO ANTICIPATED IMPACT OF COVID-19 PROTECTING THE BALANCE SHEET
  • Estimated remaining collections expected to decline 4% over medium term.
  • Adjustment to carrying value of purchased book debts up 270% to R588 million (2019: R159 million).
  • Adjustments ensure future yields align with past performance and protect the balance sheet.
A RESILIENT PERFORMANCE IN A CHALLENGING ECONOMIC AND OPERATING ENVIRONMENT, WITH PRE-PROVISION PROFIT UP 12%
  • Collection services in South Africa and Australia proved resilient in weak economic conditions.
  • Operational flexibility demonstrated through quick alignment of operating models, financial structures and growth plans.
    • Growth of 14% in 2020 collections revenue.
  • Strong performance from Recoveries Corporation in Australia:
    • Earnings growth in line with pre-COVID-19 expectations.
    • ~R100 million revenue from collection on NPL Portfolios acquired. - Growth rate three times higher than 2019.
  • Headline earnings of R55 million attributable to the group.
COLLECTIONS1 ON NPL PORTFOLIOS OWNED AS A PRINCIPAL PERFORMED BETTER THAN EXPECTED
  • Future collections are however expected to recover more slowly and over a longer period.

Figures expressed as a % of pre-COVID-19 levels.

1. Collections on NPL Portfolios owned as a principal in South Africa.

Performance overview

CORE PRE-PROVISION PROFIT
R649 million
12%
ADJUSTMENT TO THE CARRYING VALUE OF PURCHASED BOOK DEBTS
R588 million
270%
CORE HEADLINE EARNINGS FROM CONTINUING OPERATIONS ATTRIBUTABLE TO THE GROUP
R55 million
82%
COST PRICE OF PURCHASED BOOK DEBTS ACQUIRED
R733 million
(2019: R1.2 billion)
ESTIMATED REMAINING COLLECTIONS
R5 181 million
16%
NON-INTEREST REVENUE
R2 385 million
18%
STRUCTURAL REALIGNMENT OF TCRS
  • Integration of Transaction Capital Payment Services, Fihrst and Accsys to establish Transaction Capital Transactional Services.
    • Creates a single scaled transactional services platform.
  • Disposal of Principa, a sub-scale business non-core to TCRS operations, concluded.
  • Wind-down of Transaction Capital Business Solutions portfolio ongoing, with portfolio accounted for as a discontinued operation with assets available for sale.
PROGRESS MADE ON IMPLEMENTING ENHANCED ESE FRAMEWORK
  • Formalises a shared-value model for delivering commercial returns and social benefits.
  • Informs strategy development and sustainability initiatives.
  • Provides measurable ESE reporting to stakeholders through an objective view of corporate impact.
WELL PLACED TO RESUME LONG-TERM TRACK RECORD OF GROWTH
  • Business model will gain in relevance in a
    post-COVID-19 environment as:
    • The effective functioning of consumer credit sector is critical to economic recovery.
    • Indebtedness has increased and this impairs consumers’ ability to service debt, which creates larger NPL Portfolios to manage or acquire (referred to as the debt cliff in financial commentary).
  • TCRS is well positioned to win new mandates and acquire NPL Portfolios due to its:
    • Capital flexibility.
    • Highly effective work-from-home capabilities.
    • Proactively restructured staff complement and infrastructure to accommodate COVID-19 protocols.
    • Ongoing focus on efficiencies, with expected cost savings of ~R90 million in 2021.
  • Strategic initiatives remain valid as market conditions settle.
Market context

TCRS remains defensively positioned in a challenging macro- and socioeconomic environment, with pressure on South African consumers exacerbated by the adverse impact of COVID-19.

South Africa

~37 million

Adults1

27 million

Credit-active consumers2

10.0 MILLION CREDIT CONSUMERS ARE NON-PERFORMING (~40% of credit-active consumers)2

Unsecured loans significantly more overdue than secured loans (Q2 20203):

Unsecured lending
R307 billion

  • 7.6 million individuals with 13.3 million loans.
  • 77% overdue.

Mortgage and vehicle asset
lending R1 400 billion

  • 3.9 million loans.
  • 23% overdue.

Elevated levels of unemployment (Q3 20204)

  • 30.8% – the highest rate in 12 years.
  • By expanded definition, unemployment at 43.1%.
  • Youth unemployment at 43.0%.
  • 2.2 million jobs lost in Q2 2020.

Not factored into unemployment levels:

No-work-no-pay policies

which are further increasing strain on consumers and impacting household debt.

HOUSEHOLD DEBT-TOINCOME RATIO5 AT 72.8%

( from 72.7% in Q2 2019) Monthly household income deteriorating compared to three years ago6.
  Ultra-poor
and survivors
Skilled strugglers
and middle class
Upper middle class
and top end
Monthly earnings <R8 000 R8 000 – R22 000 >R22 000
June 2020 ~73% adults ~19% adults ~8% adults
 
June 2017 ~56% adults ~28% adults ~16% adults
CREDIT EXTENSION
DECLINING
  • Challenging economic environment strained by COVID-19.
  • Cautious approach expected by lenders.
  • Consumers’ propensity to repay debt deteriorating with weak economic conditions exacerbated by COVID-19.
  • Q3 2020 decreased 3.4% compared to Q3 2019 – the largest decline since the index’s inception in June 2017.
IMPACT OF COVID-19 ON TCRS’S CLIENTS
  • Larger NPL Portfolios (per BA 900 returns in September 2020, provisions for year-to-date increased by ~37%, with credit extension only up by ~2%).
  • Balance sheets and operations under pressure.
  • Increasing appetite to sell NPL Portfolios.
  • Shift from fixed to variable cost structures through outsourced collection services.
TCRS’S BUSINESS MODEL GAINS RELEVANCE IN A POST-COVID-19 ENVIRONMENT
  • Credit rehabilitation crucial in growing an inclusive and efficient credit economy.
  • TCRS supports the healthy functioning of credit markets by continuing to restructure and recover NPL Portfolios on behalf of clients.
  • TCRS strongly positioned to accelerate the acquisition of NPL Portfolios and win agency collection mandates due to our:
    • 20 years’ experience in acquiring NPL Portfolios.
    • Ability to adjust pricing methodology to current market conditions, to achieve targeted returns and collection multiples.
    • Omni-channel and data analytics capabilities that support ongoing contacting and transacting with consumers.
    • Work-from-home capabilities instituted quickly and efficiently, with increased productivity.
1. Stats SA, adults aged 15 to 59. | 2. National Credit Regulator (NCR) data at June 2020. | 3. XDS Credit Stress Report: Q2 2020. |
4. Stats SA – 12 November 2020; increase of 6% from 29.1% (Q3 2019). | 5. December 2020 and June 2019 – Trading Economics website. |
6. UCT Liberty Institute of strategic marketing – Impact of COVID on household income.

AUSTRALIAN CONSUMERS EMPLOYED BUT HIGHLY LEVERAGED

Australia

Unemployment at 6.9% (September 2020)

  • Increasing unemployment an emerging risk.

Persistently high levels of household debt to disposable income at ~190%

  • Monthly debt servicing costs at >50% (excluding home loans).

Economy entered its first recession in almost 30 years

  • Decline in economic activity exacerbated by COVID-19.
DEBT COLLECTION ENVIRONMENT

CONSUMERS

  • Risk of unemployment increasing.
  • Respond well to non-voice and digital channels, with high levels of ‘right-party contact’.
  • Significant support from government support programmes, but these are coming to an end.

MARKET PARTICIPANTS

  • Fragmented collections market with ~550 participants and early-stage market consolidation.
  • Lower access to funding and increasing regulatory compliance requirements.
  • Decreasing sales of NPL Portfolios prompting shift towards FFS.
  • Decreasing sales of NPL Portfolios prompting shift towards FFS.
AUS millions     2020   2019  
Credit Corp   ~246   ~229  
Collection House   ~25   ~133  
Pioneer Credit Limited down   ~60   ~77  
Panthera down   ~44   ~58  
Recoveries Corporation (TCRS) down   7   12  
Other smaller players in fragmented market down   ~126   ~150  
Total NPL Portfolios sold in Australia2 down   ~510   ~650  
Versus South Africa down   ~R1.1 billion   ~R1.5 billion  
 

~75%

of sales done on a forward-flow basis

1. IBIS World Report Debt Collection in Australia 2020; market share based on revenue. | 2. Debt Sale Market Update by Bravure Group 2020; based on price paid for NPL Portfolios.

Business activities

Defensive positioning and a diversified business model support performance in varying
market conditions and reduce concentration risk.

ALL BUSINESSES UNDERPINNED BY LEADING CAPABILITIES IN DATA, TECHNOLOGY AND ANALYTICS

Ongoing investments into data, technology and analytics inform precise and informed internal and external decision-making.

1. Approximate revenue composition at 30 September 2020.

Strategic growth initiatives to create value

As market dynamics post-COVID-19 become clearer, the acquisition of NPL Portfolios in South Africa, Australia and Europe provide opportunities to accelerate capital deployment for attractive risk-adjusted returns, with funding requirements for these acquisitions into 2022 already secured.

ACQUISITION OF NPL PORTFOLIOS IN SOUTH AFRICA

TCRS is leading the expansion of this underdeveloped and growing sector in the collections market.

  • New sellers are entering the market, with TCRS educating clients on best practice for the sale of NPL Portfolios to support balance sheet strength.
  • TCRS is expanding the asset classes in which it invests, including NPL Portfolios sold prior to write-off, those collected via legal process, and portfolios sold on a bilateral or recurring contractual basis.

ACQUISITION OF NPL PORTFOLIOS IN AUSTRALIA
  • Australia’s collections market is significantly larger than that of South Africa.
  • It mainly comprises unsecured consumer loan and credit portfolios, a market segment where TCRS has over 20 years’ experience in South Africa.
  • Further investment is underpinned by:
    • A growing database in Australia informing improved book pricing and collections.
    • The deployment of technologies proven in South Africa into the Australian business.
    • TCRS’s analytics and pricing expertise.
COMMON MARKET ATTRIBUTES FOR AUSTRALIA AND EUROPE
  • The Australian and European collections markets are significantly larger than in South Africa.
  • A small position in these large markets provides a meaningful growth opportunity for TCRS and the group.
ACQUISITION OF NPL PORTFOLIOS IN EUROPE
  • Our strategy remains valid and will continue to be pursued, while maintaining a cautious and selective approach.
  • The portfolio will be diversified by asset originator, collection platform and geographic region, with:
    • Direct investment on a bilateral basis, and/or
    • Co-investment in partnership with specialist credit managers.
  • Provides a hard-currency revenue stream for the group.
BUILDING SCALABLE SERVICING PLATFORMS THAT LEVERAGE THE GROUP’S IP AND TCRS’S BUSINESS MODEL
  • Opportunity to leverage TCRS’s high IP and low-cost infrastructure developed in South Africa into other geographies.
  • Market entry within TCRS’s skill set and competencies.