Foschini Group Financial Services
Positioning
The group’s financial services division consists of two independent businesses:
- FG Financial Services (previously branded as Foschini Retail Credit) manages the group’s in-store credit card programme that consists of 14 different card formats. Included in this division’s responsibilities are the group’s Club, insurance products and the cellular phone operations.
- RCS Group provides a range of broader financial services to both customers of the group as well as to customers of retailers outside the group. At present these financial services comprise RCS Personal Loans, RCS Cards, RCS Private Label Cards and RCS Home Loans.
Standard Bank held a 35% interest in this business and exercised its option to increase that to 45% on 1 April 2007.
The business is represented graphically alongside:
FG FINANCIAL SERVICES
Review of the Year
As alluded to last year, the levels of account delinquency were at an all-time low and it was highlighted that this scenario was unlikely to continue for much longer.
* The Standard Bank of South Africa Limited (SBSA) has a minority share in this division.
During the past year, household debt came under pressure as many new credit players came into the market offering bank cards and related financial products to a broader range of South African consumers. Many of our customers have been targeted with these new offers. Over and above these offerings, the traditional credit players have sought to maximise their customer footprint in anticipation of a slowdown in lending post 1 June 2007 when the National Credit Act (NCA) comes into effect. The impact of these aggressive strategies and extended terms has seen many customers reach new levels of indebtedness. This situation has also arisen on the back of three interest rate hikes and record fuel price levels. All of these factors have made increased demands on customers’ disposable income.
Despite these factors our customers have shown remarkable resilience reflected in a more responsible attitude toward the management of their personal debt and a greater capacity to service these increased levels of debt.
The strong growth in the economy and therefore in personal household income as well as an expansion of the overall credit market with many new borrowers has led to good growth in advances.
FG Financial Services has had another good year with solid growth in advances, continued good cash flows, but with higher levels of delinquency.
With concentrated focus on reducing arrears, positive benefits were seen in the number of accounts in a buying situation. By year-end 82,1% of the base could buy, up from 81,9% last year.
Our preapproved campaign added 82 401 new customers with better than average
risk levels.
During the course of the year our collection management processes were subjected to an intensive review, particularly in the light of higher levels of customer delinquency seen in the first quarter. The changes that resulted from these reviews have seen significant improvements in overall efficiencies and customer payments particularly toward the latter part of the year. Net bad debt grew by 21,6% compared to overall receivable growth of 5,6%.
Our new account system was overhauled to enhance functionality and ensure that the provisions of the NCA could be accommodated.
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2007 |
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|
% change |
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2006 |
|
| |
|
|
Rm |
|
|
|
|
|
|
Rm |
|
| Interest income |
|
|
299,3 |
|
|
18,3 |
|
|
|
253,0 |
|
| Other income |
|
|
85,2 |
|
|
26,0 |
|
|
|
67,6 |
|
| |
|
|
384,5 |
|
|
19,9 |
|
|
|
320,6 |
|
| Net bad debt |
|
|
(168,0) |
|
|
21,6 |
|
|
|
(138,2) |
|
| Credit costs |
|
|
(148,0) |
|
|
17,4 |
|
|
|
(126,1) |
|
| Profit before tax |
|
|
68,5 |
|
|
21,7 |
|
|
|
56,3 |
|
Interest Income
The maximum usury rate remained at 20% for the majority of the period under review. A change was granted on 7 March 2007 that effectively raises the rate to 23% for balances below R10 000 and 20% for balances above R10 000. This is an effective 3% change. We have elected to move upward by 2% at this stage. This adjustment has no effect on the 2007 numbers.
Book growth slowed down over the period under review with the year-end book up by 5,6% which is significantly lower than last year’s 21,0% growth. Improved collections meant delinquency levels by year-end are on par with last year. As a result the book remains healthy with fewer accounts in arrears resulting in lower interest yields.
Other Income
Insurance
Profit growth in this area was 25,9%. The product offering is being restructured, presenting exciting growth opportunities by offering additional short-term insurance cover to customers.
Club
The Club grants a range of benefits for subscribers who are credit card holders of the group and RCS.
These benefits include:
- Automatic death insurance
- Account balances protection
- Medical and legal helpline
- Qualification in the monthly R300 000 draw
- Discounts at several retailers
- Promotional item discounts
- Bursaries to the value of R2 million per annum
- A monthly magazine with topics of interest
Currently there
are more
than 920
000 Club
and 70
000 SuperClub
paying subscribers. With effect from March 2007 the magazine was brought in-house and is managed in conjunction with Safika Highbury Communications, who produce several top level titles.
The offering from this area has expanded with the introduction of a Kids Club. The success of this new avenue leads us to believe that there is capacity to expand the Club into several other niche club offerings. Tests will commence during 2008.
Profit from this area grew by 19,9% over last year.
Cellular
Cellular continues to be a strong growth area for the group. Handset and airtime sales have been exceptional with group turnover from this source increasing by 31,4%. We remain an exclusive MTN partner.
ONE2ONE
Our newly-established division, ONE2ONE has recently launched its first product called ONE2ONE Top-up Airtime Deal in 33 pilot stores. The aim was to create an airtime product that is very compelling and affordable.
The ONE2ONE Top-up Airtime Deal offers either R75 or R150 worth of airtime downloaded to the customer’s cellphone monthly for 24 months. The airtime rates are currently better than conventional prepaid airtime rates and offer the convenience of a contract without additional credit checks. The uptake in the pilot has exceeded our expectations and we intend rolling this out to a further 132 stores by June 2007.
Net Bad Debt
During the first quarter of the year we saw the delinquency rate spike. As a result of this we took corrective action to focus on the earlier stages of delinquency. This, coupled with a number of other initiatives, saw delinquency levels return to former norms. This improvement has continued into the first part of 2008.
Our behavioural scorecards continue to correctly rank order accounts in value at risk sequence. These scores coupled with bureau score enables us to effectively manage risk and in particular manage the exposure to those accounts with the highest potential to default on payments. During the year optimising software was deployed on our automated dialler. This software determines the most effective time to call arrear customers and therefore maximise customer contact. As a result of this implementation, our yield per customer contact has increased significantly. We expect to see increased benefit from this software in the next financial year.
Our charge-off policy on bad debt remains consistent with last year. Non-performing accounts, defined as accounts whose payment profile scores and recency fall below fixed criteria, are written off monthly.
New applicant fraud
Fraud profiling and extensive databases have enabled us to become very effective at determining application, identity, and transactional fraud, all of which have increased systemically over the past year as sophisticated syndicates target retailers and banks alike. Through the use of database analysis tools, fraud has been maintained at very low levels. All new account applicants are passed through the fraud profiling scorecards and databases. Exceptions are referred to forensic underwriters.
Provisions
Over and above the monthly writeoff, all accounts are examined using a MARKOV model on a quarterly basis. Relying on historical and current delinquency roll rates, the MARKOV model determines what proportion of account balances in the portfolios will roll into writeoff. We use this information to create a provision for doubtful debts. This provisioning method conforms to IFRS standards.
This year the MARKOV model required a R29,0 million charge to the income statement against a R24,5 million charge last year. This charge contributed to net bad debts rising by 21,6% on last year. The doubtful debt provision now stands at R194,8 million which represents 8,0% of the closing book, up from 7,4% last year.
Net bad debt to credit transactions increased to 2,6% from last year’s 2,4%. Net bad debt writeoff to debtors increased to 6,6% from last year’s 5,7%.
| Key debtor statistics |
|
2007 |
|
|
|
2006 |
|
| Number of active accounts (’000) |
|
2 163 |
|
|
|
2 079 |
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| Credit sales as a % of total retail sales |
|
66,7 |
|
|
|
69,2 |
|
| Net debtors book (Rm) |
|
2 235,2 |
|
|
|
2 116,6 |
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| Arrear debtors % to debtors book |
|
25,0 |
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|
|
26,7 |
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| Net bad debt writeoff* as a % of credit transactions |
|
2,6 |
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|
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2,4 |
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| Net bad debt writeoff* as a % of debtors book |
|
6,6 |
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|
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5,7 |
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| Doubtful debt provision as a % of debtors book |
|
8,0 |
|
|
|
7,4 |
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| Applicants granted credit (%) |
|
63,0 |
|
|
|
65,1 |
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| % able to purchase |
|
82,1 |
|
|
|
81,9 |
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| * Including VAT, excluding movement in provision |
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Credit Costs
The credit costs increased by 17,4% in the year. This increase was driven, amongst other factors, by the pre-approved accounts drive and further investment in our systems leading up to the NCA. When these two elements are removed, costs would have increased by 12,4%.
Strategy
We are constantly endeavouring to maximise the range of products and services that we sell to our customers. The challenge is determining the correct combination of products, services, discounts, promotions and special markdowns that drive good value for customers as well as enhanced returns for the group.
During the year we upgraded our debtors decisioning system to TRIAD Release 8.1. This decisioning system has a marketing module that uses a test and control methodology that allows us to run different combinations of products, services and benefit offers, side by side, to a random sample of our customers to establish the combinations that achieve our marketing objectives. We envisage good use of this tool in 2008.
Prospects
We remain confident that FG Financial Services will continue to effectively manage the challenges that 2008 poses and continue to grow and contribute strongly to the group’s overall performance.
In particular, we will be compliant with the provisions of the NCA by 1 June 2007. Customers were advised of the effect of the NCA changes on their accounts during the course of May 2007. We continue to be of the opinion that the NCA will ultimately lead to a more informed and responsible customer base. In the short to medium term, however, as customers adjust to the provisions of this Act, we anticipate some confusion that we are gearing up to deal with. We also anticipate that there will be some undesirable consequences of the Act in that many customers in the emerging market category with informal income will be locked out of the credit process based on their level of affordability. To meet this challenge we have a range of products that we believe will enable our customers to acquire our merchandise without compromising the credit exposure.
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