Transaction Capital Risk Services (TCRS) used the weak macroeconomic conditions to its advantage, buying several non-performing loan (NPL) portfolios from risk averse clients, including South African banks, at a bargain.
The firm, a unit of financial services group Transactional Capital, purchased 13 NPL portfolios with a face value of R2.8 billion for R210 million in the six months ended March 31, compared with the 15 books acquired for R184 million during the previous financial year. It now holds 18 NPL portfolios with a face value of R18.1 billion and a fair value of R930 million.
David Hurwitz, chief executive of Transaction Capital, said the likes of banks, specialist lenders and telecommunications companies are now opting to sell their NPL portfolios more aggressively rather than outsource collections.
Despite the tough consumer environment, TCRS said revenue collected from non-performing loans grew 19% during the first half, up from 9% over the prior comparable period. It collects around R300 million every month.
After improving from October last year, collections hit a blip in March and April. During this time, public holidays and politically driven protests saw tens of thousands of South Africans miss work.
Hurwitz told investors and analysts that TCRS is a defensive business in that it can grow by acquiring NPL portfolios during weak economic conditions and generate solid revenue through its contingency and fee-based collection services when conditions improve.
He said the tighter, more conservative lending criteria – announced by a host of credit service providers including most banks – is unlikely to affect growth prospects of the business.
“You can’t lend money and not take risk, you have to have some loans going bad. If you don’t, you won’t be growing your book big enough. If you only take the good stuff, by implication your book is just going to get smaller and smaller.
“We’ve found that in tough environments like this, NPLs expand out and there’s more to do. In a good environment, the banks come back to a level of NPL that they’re comfortable with and that is sufficient enough to run our business and keep going,” he said.
It is also considering buying NPL portfolios in Australia through the contingency collector Recoveries Corporation, which it acquired in January.
TCRS grew core headline earnings by 33% to R93 million and delivered a return on equity of 20.6% during the interim period.
Transaction Capital’s SA Taxi business – which boasts retail, finance, insurance, repossession and refurbishment capabilities – grew loans and advances by 16% to R7.8 billion. Its NPL ratio improved to 17.2% from 18% and credit loss ratio fell to 3.3% from 3.4%.
SA Taxi grew headline earnings by 22% to R144 million, with non-interest revenue increasing by 30% to R195 million. It delivered a return on equity of 24.1%.
The business remains resilient in trying times as minibus taxis, used by most South Africans, are responsible for 15 million daily commuter trips and 68% of public transport trips to work. Demand for minibus taxis also exceeds monthly supply by 10 years, Hurwitz said.
Overall, Transaction Capital grew headline earnings and headline earnings per share by 21% and 17% to R254 million and 43.3 cents respectively. The group’s return on equity improved to 16.1% from 15.9%. It lifted the dividend by 25% to 15 cents per share.
Hurwitz expects the group to deliver better results in the second half as TCRS’s recent acquisitions – Recoveries Corporation, Road Cover and The Beancounter – are fully integrated within the business.
The group is fully funded until September 2018 and is currently sitting on R600 million in surplus cash, which may fund acquisitions should opportunities arise.