Transaction Capital has defied weak macroeconomic conditions and challenging trading conditions in its home market to produce a solid set of financial results.
For the year ended September 30, the non-deposit taking financial services firm grew core headline earnings by 26% to R577 million and core headline earnings per share (Heps) by 20% to 96.4 cents. Growth in earnings was outpaced by that of the group’s total dividend, which it lifted by 33% to 40 cents per share.
David Hurwitz, chief executive of Transaction Capital, said dividend growth is expected to continue to outpace that of earnings. “We’ve seen a greater component of our earnings come from cash generative activities as opposed to financing activities and the greater quality of our balance sheet has enabled us to pay a higher dividend. We would expect this to continue in the 2018 year.”
Despite Transaction Capital’s solid performance, some signs of the challenging conditions vexing South Africa were evident in the group’s business units.
Transaction Capital Risk Services (TCRS), one of the country’s largest recovery agents, saw the collections environment become more challenging and expensive as consumers experienced stress on income. “We are having to use a more expensive collections mechanism [as] someone who used to respond to an SMS, which was very cheap, is now responding to a telephone call [and] someone who used to respond to a telephone call is now only responding to a legal collection mechanism, which is very expensive. We’re spending more money on collections mechanisms, we’re spending more money on data and when the debtor pays he has less disposable income hence the average payment is down,” Hurwitz told investors.
Citing the group’s latest Consumer Credit Rehabilitation Index, which shows that the rehabilitation prospects of consumers already in default deteriorated by 0.9% in the third quarter compared with the same period in 2016, he said the consumer environment is expected to remain bleak.
However, TCRS is using the environment to its advantage in continuing to buy non-performing loan (NPL) portfolios from risk averse clients at a bargain. It acquired 29 NPL portfolios with a face value of R5.2 billion for R356 million during the period, bringing the total number of principal portfolios owned to 195 with a value of R891 million, up 22% from R728 million a year ago. It said estimated remaining collections of R1.7 billion, up from R1.3 billion in 2016, will support future performance.
Despite the challenges, TCRS registered a 39% increase in core headline earnings, which excludes once-off acquisition costs of R22 million, to R233 million. The group’s cost-to-income ratio deteriorated to 79.3% from 77.4% with return on equity falling to 22.2% from 31.5%. Hurwitz told Moneyweb that a portion of the 7% increase in costs relates to the rollout of new technology such as dialers and voice analytic tools to enhance efficiencies in the contingency and fee-based collection units.
Transaction Capital’s SA Taxi business – boasts retail, finance, insurance, repossession and refurbishment capabilities – continued to demonstrate resilience, growing headline earnings by 22% to R303 million.
SA Taxi’s credit metrics improved even as it extended 16% more gross loans and advances to R8.3 billion. The business’s non-performing loan ratio improved to 17.1% from 17.4% while its credit loss ratio came in at 3.2%, well within its 3% to 4% target band. Its net interest margin increased to 11.4% from 11.1% with non-interest revenue increasing by 36% to R427 million, driven by growth in the group’s insurance unit and an unlocking of efficiencies in its repair unit. Its cost:income ratio improved to 48.6% from 51.1%.
According to Hurwitz, sporadic taxi strikes during the course of the year had no meaningful impact on collections in the business.
However, concessions made as a result of the strikes such as capping the interest rates on loans originated at 26.5% – below the National credit act maximum level of 33.75% – are expected to have some impact on the business. He told Moneyweb that the unit has since had to turn away some business from would-be minibus-taxi operators that no longer qualify for loans at the lower rate – SA Taxi operates in a higher risk market with nine out of ten of its clients classified as previously financially excluded and as such struggle to secure funding from banks.
“A client that would originally be included in our finance base would now be excluded. It’s not the desired effect that we want but we did feel that it was important to the industry to try and keep rates lower. There is a component of our applications that we are now declining because unfortunately we just can’t price the risk.
“Since the protest action, the banks have been less active in the space. On the one hand we are losing some of our riskier clients, where we just can’t price for that risk, but we are seeing some of the typical bank business move into our environment. We aren’t pricing that at 26.5%, we’re pricing it at a much lower rate but it does allow us to keep our originations volumes at the same level.”
He went on to say the most positive outcome of the strikes is that the industry is now united in its attempts to address challenges.
Transaction Capital expects conditions to remain difficult and has planned for such, ensuring that the business is fully funded for the 2018 financial year. It aims to drive organic growth across its businesses while on the lookout for potential strategic acquisitions.