The credit environment remained challenging during the year under review. Significant changes to credit legislation were implemented during the course of the year, the most impactful being the implementation of the Affordability Regulations along with the practical complexity of proof of income requirements from a customer perspective. This necessitated major IT changes, a complete redesign of business processes, and a comprehensive training exercise that encompasses stores across the whole of South Africa. This is on top of a difficult macroeconomic environment where recent interest rate increases, higher levels of unemployment and inflationary impacts led to reduced disposable income and increased pressure on credit consumers.
Notwithstanding these pressures, consistent, deliberate and prudent risk management strategies, coupled with operational improvements in collections efforts, led to further positive movements in most key metrics and numbers, including bad debts.
Process refinement and workforce optimisation resulted in improvements in customer service measures, with reductions in average query handling times, abandonment rates and customer response rates.
The growth of interest income of 12,9% (2015: 18,3%) is reflective of a net book growth of 8,0% and interest rate increases during the course of the year. During the year, the average nominal rate in South Africa increased to 23,3% (2015: 22,5%), following repo rate increases in July 2015 (25 bps), November 2015 (25 bps), January 2016 (50 bps) and March 2016 (25 bps). The interest yield on the portfolio increased from 19,4% to 20,4%.
Net bad debt contracted by 7,4% (2015: +9,4%), which is a very pleasing result. This is due to a continued slowdown in the growth of gross write-offs and significant improvements in yields from post write-off recoveries. The investment in the prior financial year in a new recovery system and related processes enabled significant improvements in the agility and ability of data-driven strategies that were deployed this year.
Write-off, provisioning and re-age/restructure policies remain consistent with prior years. The ratio of overdue values to the book improved to 14,0% (2015: 14,6%).
Credit costs increased by 10,2% (2015: 19,2%), reflecting our continued efforts in running an optimised workforce, which is right-sized for our business needs, and our strategic investment in key capabilities. During the course of the year, and as part of our fraud prevention strategies, we rolled out new card verification value (CVV) cards to our entire credit base. This had the effect of reducing the value of our disputed fraud transactions by 67,3%. We also continued to invest in the evolution of our group analytics team to employ data analytics to optimise commercial decisions across the group.
New regulations prescribing the affordability assessment that has to be undertaken when a consumer applies for credit were introduced by the Department of Trade and Industry (dti) and were effective from 13 September 2015 (the Regulations). These Regulations required all credit providers to undertake prescribed affordability assessments by, among others, verifying an applicant’s income by means of three months’ worth of payslips, bank statements or other acceptable proof of income, which had to be provided by the consumer at the time of opening the account.
These new requirements had a significant impact on the business and contributed to a drop in new account openings from 13 September 2015. The population most affected was consumers informally employed who could not readily provide acceptable proof of income (as per the Regulations) and were, as a consequence, denied credit.
As a result, the overall active account base contracted slightly, down by 4,4%. In spite of this contraction and a consistent risk appetite, credit sales increased by 5,9% (2015: 4,3%) over the financial year.
|Key credit statistics||2016||2015||/|
|Number of active accounts (’000)||2 560,7||2 677,5|
|Credit sales as a percentage of total retail sales (excluding Phase Eight)||51,7||54,4|
|Net debtors’ book (Rm)||6 695,0||6 199,9|
|Overdue value as a percentage of debtors’ book (%)||14,0||14,6|
|Net bad debt write-off as a percentage of credit transactions (%)||8,0||8,0|
|Net bad debt write-off as a percentage of debtors’ book (%)||13,4||13,6|
|Doubtful debts provision as a percentage of debtors’ book (%)||13,2||13,6|
|Provision value (Rm)||1 015,0||976,3|
|Percentage able to purchase (%)||81,0||80,9|
Ease of opening new accounts, given the Affordability Regulations, remains a focus for the forthcoming financial year. In order to continuously improve our customer experience, we have expedited the deployment of our digital application channel, which enables customers to apply for an account online. This approach is aimed at improving the quality of application data submitted while reducing the turnaround time to respond to customers.
Given the improvement in our collection and recoveries results, and enhancements in our ability to employ data and analytics when opening new accounts, we will look to test changes in our account acquisition strategies. In addition, we will focus on process efficiencies related to the opening of new accounts, leverage internal customer bases and focus on digital acquisition initiatives. This will enable us to continue to grow our credit sales in a responsible and sustainable manner.
The advancement of credit rewards remains a key focus and we will continue to test various initiatives in this space. A number of ideas have been implemented during the financial year and we continue to actively monitor and evaluate these results to determine the optimal approach.
Investment in group analytics remains a focus to assist the credit division and to provide analytics to drive our vision of being the leading fashion retailer in Africa whilst growing our international footprint through becoming a more customer-centric omnichannel retailer.