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 card known as the RCS Card that is accepted at 14 000 retail outlets countrywide; and
  • by managing private label and co-branded retail credit programmes for retailers under their own brands on an outsourced basis.


Currently the private label portfolio consists of the Queenspark card, the Game card, the Dion Wired card and the newly-launched builders card. The co-branded card programmes include retailers such as AD Spitz, Cape Union Mart, Tiger Wheel and Tyre, Galaxy Jewellers and the Busby Group VIP card.

The Fixed Term Finance business unit provides personal loans, home loans and insurance products under the RCS brand to existing RCS group, TFG and external customers through direct marketing methods.

The RCS Group is functionally separate from TFG Financial Services and it has its own governance structure, branding, field of operation, management team, infrastructure, 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 focus of TFG on its traditional trading activities was maintained, and that all profits and costs associated with the RCS business would be clearly ring-fenced.


REVIEW OF THE YEAR

The RCS Group delivered satisfactory full-year results despite the continued challenging market conditions, against a backdrop of high levels of consumer indebtedness, muted credit demand and slow but steadily growing economic activity.

PROFITABILITY

The overall performance of the group resulted in an increase of 22,0% in pre-tax profit, which represents an improvement on published results at the half-year. The profitability breakdown is as follows:

RCS Group profitability

  2011   2010
  Rm % Rm
Interest earned 772,1 (3,3%) 798,4
Other income 383,3 11,5% 343,8
TOTAL CREDIT INCOME 1 155,4 1,2% 1 142,2
Net bad debts (231,1) (34,4%) (352,4)
Operating costs (448,6) 17,0% (383,5)
EBIT 475,7 17,1% 406,3
Interest paid (180,5) (2,6%) (185,4)
PROFIT BEFORE REVENUE SHARE 295,2 33,6% 220,9
Revenue sharing (19,6) (491,0%) 5,0
PROFIT BEFORE TAX 275,6 22,0% 225,9

RCS Group profitability statistics

  
  2011 2010
Interest as a percentage of total revenue 67% 70%
Cost-to-income ratio 39% 33%
Profit before taxation as percentage of average debtors (net margin) 9,9% 8,4%


Overall, revenues grew marginally year on year by 1,2%. The 3,3% drop in interest income arose through the cumulative impact of decreases in the repo rate, totalling 1%, during the full financial year. The interest rate capping formula of the National Credit Act (NCA) translated the 1% drop in the repo rate into a 2,2% interest rate drop on the RCS Group’s portfolio. The impact of the drop in interest rates was countered by a 10% growth in the size of the book which off-set some but not all of the dip in the interest revenue. Other income grew positively by 11,5% year on year because of an increased number of new accounts on book and enhanced insurance revenue.

The primary cause of the increase in profitability for the year as a whole was an improvement in asset quality, resulting in a decrease of 34,4% in bad debts year on year. The net bad debt value includes increased provisions to ensure that RCS maintains an acceptable non-performing loan coverage rate. This resulted in an increase in the cover for non-performing loans compared with prior years.

Operating costs showed a 17,1% increase year on year. There are a number of non-comparable costs included in this value, the chief of which are costs related to the restructuring of some of the RCS Group’s divisions. On a comparative cost basis expenses are well under control and within the required operating parameters. The cost-to-income ratio showed some deterioration year on year but it is anticipated that this ratio will improve in future years.

Capital market fund-raising activities associated with the RCS Group’s domestic medium-term note (DMTN) programme contributed to a lowering in the cost of funds for the RCS Group as a whole.

On a number of programmes the RCS Group enables revenue-sharing with its retail partners if certain performance benchmarks are met. During the course of the year some of the programmes reached the performance benchmarks set for revenue-sharing to occur, with the result that R19,6 million was shared.

The combined effect of the increases in total revenue, bad debts and cost of funds was that the overall margin, when measured against average assets, improved by 1,1% for the year. A divisional breakdown of profits achieved shows that the Transactional Finance business continued a trend of strong growth in profits. The key driver for this increase was the continued improvement in the net bad debt cost, the continued application of risk-based pricing models across the Transactional Finance portfolios, and positive book growth in the private label and co-branded card portfolios.

The Fixed Term Finance business showed modest profit growth compared to previous years. During the second half of the previous year the group had to curtail the advance of new loans in order to manage cash resources during the peak retail trading period of November 2009 to January 2010. As a result, personal lending activities only restarted in earnest in April/May 2010. During the restart phase a decision was taken to switch the business formula from a mail-based direct marketing model to a telemarketing model. It has taken management some time to settle the new telemarketing operations and to achieve a consistent pattern of monthly advances. With this business in a more settled pattern it is anticipated that there will be stronger growth in the next year.

The insurance business remains a key contributor to the growth of profit in this division.

Other investments show a decline in profits because prudent provisions were made for commitments under the home loans joint venture.

Overall, management is pleased with the growth in profit achieved during the year and with the profit growth trend which has again been maintained.

ASSET QUALITY

One of the key reasons for the improved profitability of the group over the year was the continued improvement in the asset quality of the portfolios under management. Improved asset quality continues to remain a key strategic focus for the group. The table below reflects some of the key statistics relating to asset quality.

Asset quality statistics
  2011 2010
Number of active accounts ('000) 665 643
Net debtors' book (Rm) 2 889 2 628
Arrear debt as percentage of total debt1 11,1% 14,4%
Non-performing loans as percentage of total debt2 7,3% 10,1%
Net debt write-off as percentage of turnover (cards) 6,0% 9,3%
Doubtful debt provision as percentage of debtors' book 8,2% 9,2%
Provisions as percentage of non-performing loans 112,3% 90,8%
Percentage of applicants granted credit on cards portfolio3 44,4% 45,7%
1 Arrear debt defined as 60 days+    
2 Non-performing loans defined as 90 days+    
3 Current and prior year include the MDD portfolio    

All the key measures for the quality of the debtors’ book showed positive trends year on year. These include:
  • currency level (i.e. up-to-date accounts as a percentage of total book value);
  • improved arrears;
  • reduced level of non-performing loans (the NPL percentage); and
  • lower percentage of write-off to turnover on the cards portfolios.


Despite an improving NPL percentage, management felt it prudent to increase the level of provisions for doubtful debt. The NPL coverage was accordingly raised from 90,8% in the previous year to a level above 100%.

The RCS Group has set a target of a minimum NPL coverage of 80% and will review this target annually in line with changes in portfolio composition. This supports a strategy to manage the asset quality in line with the expectations of investors in any of the RCS Group’s fund-raising programmes, as well as to maintain and strengthen the group’s existing credit rating.

FUNDING

During March 2010 the RCS Group launched its DMTN programme to augment the current shareholder funding and to position the balance sheet for future growth. During the year the group had three successful issuances. Collectively more than R1 billion has been raised by these issuances with all issuances being oversubscribed. The group raised a mixture of short-, medium- and long-term paper during these issuances including one successful rollover event.

The credit rating of the group, as issued by Moody’s, was also favourably adjusted during the year from a long-term rating of Baa1.za (negative outlook) to Baa1.za (stable outlook). It is worth noting that the spreads paid on the notes have improved on each issuance with a favourable assessment of the rating adjustment by potential investors.

As a result of fund-raising activities the RCS Group has in the region of R600 million in available cash for growth. The group has also set a strong cash flow base with cash inflows now measuring between R250 − R300 million per month, depending on seasonality. The group maintains a healthy debt to equity ratio of 62% compared to 63,5% in the previous year, and currently maintains capital adequacy of 36% to cover any system or asset risks.

DIVISIONAL OVERVIEW


TRANSACTIONAL FINANCE

Overall the Transactional Finance unit had a good year with growth in total account numbers, turnover and book size.

Three categories of portfolios are managed in the Transactional Finance business: the RCS card portfolio, the group’s private label card portfolio, and co-branded card portfolios.

The RCS card portfolio experienced some decline in numbers, turnover and book size compared to the previous year. The slight decline in RCS card numbers was the result of a deliberate strategy to apply more stringent qualification criteria to the opening of accounts. The decline in book size resulted from lower numbers of accounts. It must however be noted that accounts that remain on the portfolio represent much lower risk. They are in a better buying position with a higher increase in the average number of transactions and higher average purchase value than in the past.

During the year the merchant network was again expanded and the general-purpose RCS card and co-branded cards are now accepted nationally in 14 000 merchant outlets across a variety of industries.

The growth in the private label portfolios remains a strategic asset of the group. Currently the RCS Group manages and owns the Queenspark, Game, Dion Wired and Massbuild private label card portfolios.

The Queenspark portfolio continues to perform well, with good growth in account numbers, turnover, book size and margins.

The group’s programmes with Game and Dion Wired have been very successful, with the result that RCS was recognised as the supplier of the year for the Massdiscounters' division for 2010.

The pilot phase of the Massbuild portfolio was launched in March 2011 with acceptance in the three Massbuild' chains − Builders' Warehouse, Builders' Trader Depot, and Builders' Express. Through the launch of the Massbuild programme the group extended its partnership with the Massmart group.

The co-branded card portfolios of AD Spitz and Cape Union Mart are also showing good growth in account numbers, turnover and book size, while delivering acceptable portfolio risk. The co-branded card portfolio was extended by the launch of the Busby Retail group's VIP card and the Tiger Wheel and Tyre card that was launched late in March.

It is expected that the private label and co-branded card portfolios will see the addition of a number of new programmes during the next year.

FIXED TERM FINANCE

The Fixed Term Finance Unit (FTF) focuses on the term lending and insurance portfolios. The unit provides personal loans, home loans and complementary insurance products to existing RCS customers, and to the market at large. It primarily operates on a direct marketing basis. Customers are attracted by the convenience and simplicity of the RCS offering, with a large part of the sales process being handled telephonically.

The high level of cross-selling and repeat business attests to the efficacy of this business model.

The personal loan portfolio showed a slight decline in account numbers, but maintained book size year -on -year. As is indicated in the profitability section, this portfolio was relaunched during April/May 2010 after a period of curtailed advances. Part of the relaunch entailed a change in the business model from a mail-based direct marketing business to a telemarketing operation. The first half of the year was spent bedding down the telemarketing model and building sufficient capacity to handle anticipated business volumes. During the second half the model was more fully deployed and this resulted in a more consistent advances flow for the business. The loan product offering was also changed and loans of up to R100 000 are now offered with a maximum term of 60 months.

The home loan business is an origination model in partnership with SA Home Loans and is an extremely small component of the overall business. Origination activities for home loans remain on hold for the moment.

The insurance business primarily consists of credit life insurance products that are sold in conjunction with the various credit products offered by RCS. The insurance portfolio has shown good growth year on year through the introduction of a number of new credit life offerings. The claims history on all insurance portfolios remains well within industry limits. It is anticipated that there will be steady expansion of this portfolio during the next year.

PROSPECTS

Despite the positive gains made during the year a number of broader market challenges are still present:
  • the budgets of mass middle-market consumers remain under the strain of a high debt servicing burden, resulting in growing but muted credit demand;
  • the competitive landscape intensifies as the pool of available creditworthy customers gradually declines; and
  • current pricing limitations seem set to continue, given the interest rate outlook, because of the NCA's interest-capping formula.


Against this backdrop RCS’ management anticipates that the business will continue to show positive growth in the next year. The gains made in asset quality will be maintained, and more operational efficiencies will be achieved as both the Transactional Finance model and the Fixed Term Finance distribution model are leveraged to their full extent.

SUSTAINABILITY

The RCS Group’s sustainability reporting is based on the JSE’s Social Responsibility Index and takes into consideration King III triple bottom-line reporting requirements. This report reflects initiatives undertaken in the financial year under review.

EMPLOYMENT EQUITY (EE)

Employment equity targets continue to be monitored and employment equity is considered whenever a vacancy arises.

The table below sets out a breakdown of the RCS Group’s EE statistics as reported to the Department of Labour.

Workforce EE% distribution

          
  African Coloured Indian White Total
Female 36 29 2 9 76
Male 8 10 1 5 24
Total 44 39 3 14 100


Implementing EE targets continues to pose a challenge for the RCS Group as it finds itself struggling to find suitable candidates, especially for the strategic areas of the business, where the required skills are either hard to find or are at a premium to affordability.

OCCUPATIONAL HEALTH AND SAFETY IN THE WORKPLACE

The presence of an occupational health and safety facility on-site has seen an increase in the extent of staff utilisation of the service for both occupational and primary health visits. This is mainly the result of increased awareness of occupational health issues and the provision of periodic occupational health evaluations. This service seeks to prevent situations that will lead employees to stay away from work because of illness or injuries sustained as a result of poor seating or other work-related ailments.

ENVIRONMENTAL PERFORMANCE

In the year under review the RCS Group measured its carbon footprint with the help of environmental consultants. It was found that electricity consumption is the biggest source of greenhouse gas emissions. As a result of this the RCS Group has embarked on a programme to reduce electricity usage in the next financial year. In conjunction with the electricity reduction programme the IT infrastructure department of the RCS Group is reducing the number of standalone printers in the business as these add to the wastage of paper and electricity.

Recycling initiatives are being successfully implemented and all IT machines and consumables are disposed of through certified and registered recycling companies. Certificates of proper disposal of such equipment are being received and monitored. Work continues in increasing awareness about the RCS Group’s environmental impact and how employees can play a role in reducing it.

Community involvement

The RCS Group continues to be involved in community development projects as part of its responsible corporate citizenship initiatives. Upwards of R1 million was expended on corporate social investment in the year under review. The projects undertaken include the following:
  • R140 000 was spent in supporting employees with bursaries for school-going children. The objective of this support is to ensure that primary education is a reality for these children. Bursaries are made available for students in multiple years up to grade 12. Of the beneficiaries, all except 4% are from previously disadvantaged groups.
  • TSiBA, a free university institution which provides financial literacy to communities, remains a flagship project. Financial assistance of R650 000 was provided to it during the year.
  • The RCS Group’s partnership with Gugulethu Athletics Club continued during the year. It involved sponsorship for athletes of this club and participation in the Gugs Reconciliation Race which takes place on 16 December every year.
  • Support was again provided to the JAG foundation. The Karl Westvig Bursary Fund, which receives funding from the RCS Group, helps talented child athletes involved with the JAG Foundation to succeed in their sporting ambitions.
  • The RCS Group’s annual Habitat for Humanity building programme has operated for five years, and staff time and resources were donated this year to complete two houses.
  • During the festive season the RCS Group joined forces with Food Bank to feed more than 2 000 needy children.