Bad debts may hurt credit retailers

Evan Walker, a fund manager at 36One Asset Management, feels credit retailers will ultimately suffer harsher punishment. "Retail credit is another African Bank waiting to happen," says Walker.

Walker's view, however, places him in the minority even among fund managers bearish on retailers. "You can't extrapolate African Bank's problems onto the credit retail sector," says Ricco Friedrich of Sanlam Investment Management. John Biccard of Investec Asset Management shares this view.

Shrugging off negative sentiment, The Foschini Group's (TFG) financial director Ronnie Stein says: "We are in a tough part of the [retail] cycle. But we have been around a long time and seen it all before."

Friedrich says it appears TFG's share price came under more pressure than its peers because of concerns about its personal loan and private label credit card business, RCS, in which it has a 55% stake. Standard Bank has a 45% stake.

Stein says concerns about RCS are unfounded. "Only one-third of RCS's business is unsecured and provisioning is at 130% of the arrears portion of its [R1,2bn] debtors' book." The comparable level of provisioning by African Bank is 59% and by Capitec 113%.

Debtor delinquency

Unlike African Bank, which appears to have been caught off-guard by a bad debt surge, credit retailers have been cautioning that their debtor delinquency will rise. It is inevitable, given increasing levels of consumer indebtedness, says Truworths chief executive Michael Mark

Stein says TFG's non-performing credit stood at 10,3% of its debtors book at its half year to September. He expects non-performing credit to have risen only slightly, to about 10,5% in the second half to March. Credit criteria, he adds, were tightened in November and will be tightened further if non-performing credit rises to about 11%.

"When sales and debtors book growth slows, the bad debt level is automatically pushed up," says Stein. This, he explains, is because bad debts originating from the previous period of strong sales growth are now measured against a debtors book that is growing more slowly. "But when the retail cycle turns up, this works in reverse and bad debts start to fall sharply," he adds.

Truworths reported non-performing credit at 10,6% of its debtors book in the six months to December, up from 10,1% a year earlier. Mr Price, which has a limited exposure to credit, reported it at 6,1% in the six months to September.

Furniture sales

Furniture retailers JD Group and Lewis reported bad debts, amounts written off and doubtful debt provisions totalling 7,7% and 4,6% of their debtors books respectively in their latest reporting periods.

Retailers' non-performing credit levels compare favourably with that of the overall unsecured credit market.

According to the National Credit Regulator, at the end of December 24,2% of unsecured loans in value terms were 30 days or more in arrears. This was up from 22,1% at the end of the third quarter and 21,3% a year earlier. More telling, 15,7% of unsecured loans and 14,6% of secured loans were 121 days or more in arrears at the end of December.

Retailers have been fairly modest in extending credit. The regulator's data shows credit retailers' gross debtors books grew by a combined 10,8% in 2012 against a 41% rise to R159bn in the credit sector's total gross unsecured debtors book. In the three years to 2012 credit retailers' combined gross debtor books grew by a total of 21,5%.

"We have never intended to grant credit irresponsibly," says JD Group executive chairman David Sussman

His sentiment is echoed by all credit retailers and endorsed by Paul Slot, a director of one of SA's largest debt counselling firms, Octogen

"From what we see, credit retailers are not part of the consumer debt problem," says Slot. "They have acted more responsibly than other lenders and have not been as aggressive."

Stein points to a big difference between credit retailers and other of credit suppliers. "Unsecured lenders such as African Bank lend money to make money," says Stein. "We extend credit to grow sales. We do not make much out of credit. We make our money from sales."

In similar vein, Mark says: "Managing credit risk is tightly coupled with managing the risk of fashion. Customer behaviour patterns show that if the right fashion merchandise is available customers will pay their accounts to be able to purchase more merchandise on [revolving] credit."

Clothing retailers' credit terms are limited to a maximum of 12 months while exposure per credit customer is also small. Balances on TFG's credit accounts average "a little over R1,000 each", says Stein. For Truworths, the average is about R1,725 per customer, says Mark.

Furniture retailers are arguably in a less comfortable position, given their larger loan sizes and longer repayment periods. Sussman believes JD Group's centralised credit granting system is up to the challenge of a faltering consumer market. Lewis' chief executive Johan Enslin is also confident. "Our model has been tested and refined over almost 80 years," he says.

Credit retailers' profit growth will no doubt be retarded by higher bad debt levels and slower growth in credit customer numbers. But bad debt levels on the scale confronting African Bank appear to be remote.

Source: Financial Mail via I-Net Bridge