Debt consolidation: The risks and potential impact on future loan growth

Transcription

1 Debt consolidation: The risks and potential impact on future loan growth

2 What is a consolidation loan? A consolidation loan includes as a feature, the full or partial redemption of the customer s other debt obligations in terms of the transaction. Consolidation loans tend to be larger and longer term Most consolidation loans will offer a combination of debt settlement and additional cash to the customer 2

3 Why consolidation loans? For the customer Increased affordability One convenient payment, with lower bank charges Additional cash Buying time to tide over financial difficulties Lower pricing, provided customers aren't over extended For the banks Transfer transaction accounts as well Loyalty based play targeting a larger proportion of the customer wallet Improved risk adjusted return At African Bank Very selective offering low offer rate of 25% Defensive product - effective in defending low risk customers against competitive poaching, but losing higher risk customers to larger loan offers from competitors As with all African Bank products total exposure is capped - both in terms of percentage of monthly sales and of total capital Useful tool to ease affordability for customers Profitable product supplementing our overall product offering 3

4 Do s and don ts? Do s Prudent limits for overall exposure to Consolidation loans just one product in a suite Don ts Don t get involved in churning of credit-promiscuous customers continuously increasing loan sizes Choose which debt to consolidate high yielding short term debt ( ) vs interest free retail debt ( ) Cannot force the customer to close No home loans, no vehicle finance Only unsecured loans Customer affordability has to be managed carefully Loans with a short period to full settlement No clothing accounts Key is to provide value to the customer 4

5 R million Consolidation loans in African Bank Oct 2010 National in-branch launch month Consolidation loans campaign putting learning into practice Consolidation loans advanced (gross) Dec Repeat New Pilot to 6 branches

6 A recap from our Q3 trading update issued 6 August 2012 Total disbursements increased by 26% relative to the comparable 9 months to R19,5 billion Sales focus has shifted to lower risk groups Consolidation loan Effective in defending low risk customers, but losing higher risk customers Approximately 40% external settlement, 20% internal settlement, 40% new capital Offer rates 25%, new customer offer rates 18% 6

7 High level statistics 9 months to June 2012 Total CL Capital R5,7 bn (R4,4bn disbursed in cash and external settlements) Total CL Loans loans New customers loans R 625 million 11% of total CL Avg CL Capital New customers R Existing customers R

8 Who gets a consolidation loan? Affordability criteria met Monthly Wage Frequency Term >= 24 Low to medium risk bands CL Offer Term >= 24 months smaller instalment greater affordability Normal stringent underwriting rules apply 8

9 Conservative offer rates on consolidation loans 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Offer rates 74% 73% 73% 72% 71% 70% 69% 69% 70% 23% 22% 19% 22% 22% 21% 25% 26% 25% Consol offer rate Overall offer rate Low offer rate is also a function of African Bank s appetite for the type of debt the customer wants to consolidate, that s business as usual 9

10 R million Consolidation loan risk profile at African Bank Consolidation loan capital per risk group (9 months to 30 June 2012) African Bank guards against credit shoppers (credit promiscuity) through tests for debt acceleration and medium term deteriorating trends in customer s bureau profile A B C D E F G H I J K L M N O P Q R T U W Low risk Medium risk High risk Risk exposure is managed carefully 10

11 Consolidation loan capital split 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Capital split 15% 20% 18% 25% 25% 26% 23% 21% 19% 43% 40% 40% 36% 36% 40% 36% 34% 32% 41% 40% 41% 39% 34% 40% 42% 43% 41% Internal settlement Cash to client External settlement External Settlement - 40% of total - R5.7bn CL sales (YTD) - R2.3bn/R19.5bn gross - 12 % of total sales Split has been fairly consistent over time, averaging 20:40:40 11

12 Case study Client applies for a Consolidation and Internal settlement Before (Bureau profile) Outstanding balance of all debt before CL = R Total instalment of all debt = R4 141 Max original term = 36 Consolidation loan taken with African Bank Client took a new loan of R Used R to settled external subscribers and R to settle current African Bank loan New instalment with African Bank is R2 557 and new term is 60 months After (Bureau Profile) Outstanding balance of all remaining debt (including African Bank) = R (Opening R R R R R2 771 (portion of cash disbursed to client used to settle other debt)) Total instalment of all remaining debt (including African Bank instalment) = R2 947 Client still has R 390 other debt instalments + R2 557 instalment with African Bank Overall instalment dropped by R

13 How are Consolidation loans performing? Vintage graph - > 3 cumulative missed instalments 12% 10% 8% 6% 4% 2% 0% Months on book Normal loan Consol loan 13

14 Issues to contemplate Regular balance transfers will affect customer s credit record in credit bureaus. Beware of churning and extending customers beyond their affordability. As competition heats up special offers and reduced yield? Repeated consolidations suggest customer financial distress. Extended term, while decreasing the instalment and increasing affordability, does increase event risk and the total repayable. Read the small print. Don t allow underwriting standards to drop, risk based pricing does provide protection but it is not a solution for everything, it s just part of the solution. High levels of consolidation loans across the industry can suggest future losses. 14

15 Conclusion Consolidation loans are just one product in a range of products that offer value to customers not the be-all and end-all Great value to customer and credit provider if handled judiciously Has developed into a substantial business in more developed retail markets like UK & USA, but lessons learned in the process 15

16 The way forward depends on prudency Premature scrapping of product as too risky? or Full scale development into a sophisticated product? The normal rules must apply, accompanied by a heightened degree of diligence and common sense 16

17 Thank you Questions?