annual report 2009
Schalk van der Merwe
RCS Group
The RCS Group is an operationally independent consumer finance business that provides a broad range of financial services under its own brand and in association with a number of retail entities in South Africa, Namibia and Botswana. The RCS Group is majority owned by The Foschini Group (55%) with Standard Bank holding the balance of the shares (45%).
The RCS Group is structured into two operating business units named Transactional Finance and Fixed Term Finance. The operating units are supported by a number of shared services. In addition, the RCS Group has an investment interest (60%) in an independent data management company named Effective Intelligence.
The Transactional Finance business unit is focused on facilitating credit sales for retailers at point of sale. Retail credit sales are supported in one of two ways:
- through an own-branded general-purpose private label card known as the RCS Card that is accepted at 12 000 retail outlets countrywide
- by managing private label retail credit programmes for retailers under their own brands on an outsourced basis.
Currently the private label portfolio consists of the Queenspark Card as well as in store credit offerings in Game and Dion Wired stores.
The Fixed Term Finance business unit provides personal loans, home loans and insurance products under the RCS brand to existing RCS Group, Foschini group and external customers through direct marketing methods.
The RCS Group is functionally separate from the FG Financial Services division and it has its own governance structure, field of operation, management team, budgets and profit models. The decision to differentiate the businesses was taken at the establishment of the RCS business in 1999 in order to ensure that the Foschini group’s focus on its traditional trading activities was not lost, and that all profits and costs associated with the RCS business would be clearly ring-fenced.
REVIEW OF THE YEAR
The RCS Group was not shielded from the weak economic conditions which prevailed in the past year and the outcome was a decline of 24,9% in profit before tax. While the result is disappointing it must be seen against the backdrop of very difficult trading conditions and the poor performance of the financial services industry overall. The profit before tax contribution of each division is as follows:
| 2009 | % | 2008 | |
| Profit contribution | Rm | change | Rm |
| Transactional finance | 48,4 | (51,8) | 100,4 |
| Fixed term finance | 148,7 | (12,1) | 169,2 |
| Other investments | 5,4 | – | |
| Profit before tax | 202,5 | (24,9) | 269,6 |
Factors leading to this decline were:
- a significant pullback in credit purchases during the second half of the year coupled with generally unfavorable market conditions
- the continued effect of rising inflation and high interest rates on consumers’ budgets
- the liquidity crisis and in its wake rising cost of funds and reducing product margins
- a worsening in the pattern of payment by arrear customers
- increased costs of customer acquisition and of trading operations.
Despite the disappointing results, the RCS Group continued to make significant investments in moving towards its goal of becoming a fully-fledged consumer finance business by expanding its product range, improving its solid business platform, enhancing its infrastructure and adding to the skills base.
There was a change in the leadership of the RCS business during the last year with the founder and CEO, Karl Westvig, stepping down from his role as group CEO to serve as a non-executive director on the RCS Group board. He was succeeded by Schalk van der Merwe, who has had a long-standing association with the Foschini group, having worked at an executive level in the Foschini retail credit division in the period 1995–1998. After leaving the group he spent seven years at an executive level building the Woolworths financial services business. He rejoined the RCS Group in 2006.
TRANSACTIONAL FINANCE
The RCS Cards portfolio experienced continued growth although at a more moderate rate compared to previous years. The general-purpose RCS Card is now accepted in the businesses of more than 8 000 merchants representing 12 000 outlets nationally across a variety of industries. A number of national retailers were added to the merchant network during the year, giving RCS cardholders broader utility than before.
Growth of the Private Label portfolio continues to be a strategic goal of the RCS business. The purchase of the credit operations of Massdiscounters (MDD), with effect from July 2008, has had a significant impact on the scale of the Transactional Finance business. The purchase added 150 000 new customers to its base with a book value of R175 million. RCS also gained 400 staff members and 85 points of presence in MDD stores throughout South Africa, Botswana and Namibia. Since July RCS has been active in integrating the MDD operations into the Transactional Finance business with the minimum of disruption to existing operations in both MDD and RCS. There has been modest growth in the portfolio since the acquisition of the book.
The Queenspark portfolio continues to perform well, with positive growth on all fronts.
| Transactional | 2009 | % | 2008 |
| Finance | Rm | change | Rm |
| Interest income | 452,2 | 29,6 | 348,8 |
| Interest expense | (147,0) | 85,1 | (79,4) |
| Other income | 169,2 | 20,4 | 140,5 |
| Total income | 474,4 | 15,7 | 409,9 |
| Net bad debt | (220,7) | 30,3 | (169,4) |
| Credit costs | (212,6) | 51,7 | (140,1) |
| Program fee | 7,3 | – | |
| Profit before tax and minorities | 48,4 | (51,8) | 100,4 |
| Transactional Finance | ||
| – Key debtor statistics | 2009 | 2008 |
| Number of active accounts (’000) | 568 | 435 |
| Net debtors’ book (Rm) | 1 484,4 | 1 068,3 |
| Arrear debtors % to debtors | 20,0 | 29,1 |
| Net bad debt write-off as a % of credit transactions | 12,8 | 9,3 |
| Net bad debt write-off as a % of debtors' book | 16,7 | 11,2 |
| Doubtful debt provision as a % of debtors' book | 8,7 | 10,7 |
| Applicants granted credit % (Excl MDD) | 36,8 | 44,5 |
Review of the year
Merchant turnover on the RCS Card product in the past year was R1,33 billion (2008: R1,36 billion). The first half of the year was characterised by positive turnover growth while the second half reflected the difficult retail trading conditions. Sales growth in the private label portfolios has however offset the slight downturn in the RCS Card turnover, yielding total turnover of R1,65 billion across the business unit.
The overall account base has increased to 568 000 (2008: 435 000). The primary driver for this growth was the incorporation of the MDD credit portfolio.
Revenue growth was positive for the year but more moderate than in previous years. This was the result of slower turnover growth on the RCS Card portfolio and some interest margin reduction caused by the growth in the private label portfolio, which generally operates at a lower interest rate. The maximum cap formula for private label card products under the National Credit Act (NCA) also lowered gross interest earnings because of the accelerated effect on rates chargeable during downward interest rate cycles. Increased interest expense charges also eroded the net interest margin for the year.
Arrear debtors improved to 20,0% of the portfolio (2008: 29,1%). The improved debtors’ currency is a result of the significant investment that was made over the past 18 months in building RCS’ collections capability, and the implementation of stricter credit qualification criteria.
The improved risk trend of the book is also reflected in an improvement in the provision levels.
Growth in credit costs exceeded revenue growth for the year primarily as a result of the take-on of the MDD credit operations.
The staff complement of the Transactional Finance business has increased from 265 before the take-on to more than 600 staff members in 90 different locations.
This growth in capacity and infrastructure is a necessary investment to position the Transactional Finance business for significant growth in the future.
As a result of the increased operating costs, the cost to income ratio increased to 44,8% (2008: 34,2%).
Prospects
Credit turnover is expected to increase modestly despite the tough trading conditions now prevailing and foreseen. Turnover growth will come mainly from the private label portfolio. The turnover increase should lead to growth in the overall book for the year and to subsequent revenue growth. There will be renewed focus on margin management through an active treasury management strategy and appropriate pricing for risk.
It is anticipated that bad debt will moderate during the year with continued efforts to maintain the improved level of collections. Operating cost ratios should also improve as current capacity is leveraged to support future growth of the book.
The Transactional Finance business is well positioned to grow the merchant base and to add to the existing private label programmes. The business model fundamentals are therefore in place to provide growing profits over the medium term.
FIXED TERM FINANCE
The Fixed Term Finance business (FTF) provides personal loans, home loans and complementary insurance products to existing RCS customers, to the Foschini Group customer base and to external customers. It operates on a direct marketing basis. Customers are attracted by the convenience and simplicity of the RCS offer, with a large part of the process being handled telephonically. The high level of cross-selling and repeat business attests to the efficacy of the business model.
The home loans business is an origination model in partnership with SA Home Loans and is an extremely small component of the overall business.
The insurance business primarily consists of credit life insurance products that are sold in conjunction with the various credit products offered by RCS.
The selection criteria for customers remain strict, while response modelling is continually refined to ensure operating efficiency.
| 2009 | % | 2008 | |
| Fixed Term Finance | Rm | change | Rm |
| Interest income | 309,8 | (2,1) | 316,6 |
| Interest expense | (46,7) | 21,9 | (38,3) |
| Other income | 124,7 | 34,8 | 92,5 |
| Total income | 387,8 | 4,6 | 370,8 |
| Net bad debt | (96,4) | 14,3 | (84,3) |
| Credit costs | (142,7) | 21,7 | (117,3) |
| Profit before tax and minorities | 148,7 | (12,1) | 169,2 |
| Fixed Term Finance | ||
| – Key debtor statistics | 2009 | 2008 |
| Number of active accounts (’000) | 110 | 155 |
| Net debtors’ book (Rm) | 988,2 | 716,2 |
| Arrear debtors % to debtors' | 12,8 | 14,3 |
| Net bad debt write-off as a % of debtors' book | 10,3 | 14,3 |
| Doubtful debt provision as a % of debtors book | 9,1 | 10,9 |
Review of the year
FTF’s profit before tax declined by 12,1% on the previous year. The decline can be attributed to a combination of increases in the cost of funds, in bad debt and in customer acquisition costs as well as a decrease in gross interest margin.
On the positive side, the net debtors book grew significantly (38%) on the previous year as the roll-out of the new personal loan product was concluded. At year-end more than 80% of the book consisted of the new product offering which attracts a lower risk customer and provides longer terms on a risk-based pricing basis. The drop in the number of active accounts is in part due to the roll-out of the new loans product which offers larger loans than in prior years, resulting in a decrease in second loans to the same customers.
Revenue grew, reversing a trend from the previous year. Interest revenue showed a slight decrease despite the larger book. The decrease is attributable to the fact that the risk-based pricing model provides a lower weighted average interest charge. The pricing models are continuously refined to ensure that margins are optimised.
There has been improvement in the collections processes with the result that arrear debtors diminished to 12,8% of the portfolio (2008: 14,3%). The improvement also translated into decreased growth in bad debt costs and to a lower doubtful debt provision.
Credit costs increased by 21,7% because of higher costs of acquisition and continued investment in key analytical systems and skills. As a result, the cost-to-income ratio remains acceptable at 36,8% although being higher than the 31,6% of the previous year.
Prospects
FTF remains a highly profitable business with continued growth potential. The full roll-out of the new personal loans offering provides a unique platform from which to provide a variety of target markets with very competitive offerings. It is anticipated that the book will continue to grow during the next year by the application of more sophisticated analytical techniques which should lead to improved acquisition costs and operating margins.
The home loans business is not anticipated to grow significantly in the current market, but the origination model continues to be refined. There will be a more significant investment in the insurance business in the coming year which should result in a positive profit contribution.
FUNDING
Currently the greater part of funding for RCS is provided by the shareholders. Sufficient funding lines have been secured from the shareholders to ensure the modest growth of the business in the short to medium term. It is however prudent to diversify the sources of funding for the business given the growing size of the asset base. With this in view, RCS has embarked on a process to launch a medium-term note programme (MTNP) in order to raise an appropriate mix of funding for the business. It is expected that the MTNP will be launched during the latter part of the new financial year.
NEW VENTURES
On acquiring the Massdiscounters financial services business RCS established a presence in Namibia and Botswana. The required operating structures were set up in these territories during the past year and possibilities of further expansion of the RCS footprint in these markets will be explored in the coming year.
A number of private label opportunities also exist within the current market and are currently being explored by the Transactional Finance team.
