With fewer and fewer of its own vendors, betting on technology is the right way forward for Home Credit. Covid has only speeded up the changes, says PPF’s Chief Financial Officer
Kateřina Jirásková is one of financier Petr Kellner’s closest associates. In PPF Group’s last annual report, she chose the motto “What doesn’t kill you makes you stronger” to accompany her profile. Those words now sound like they verge on the prophetic. As the CFO of Kellner’s conglomerate of companies, reporting total assets on a par with the annual receipts of the Czech government budget, she has had to deal with tough challenges as, one by one, the coronavirus pandemic has shut down all markets in which its subsidiary Home Credit sells its instalment loans and express consumer credits. Besides China and Russia, operations have been hit in India, Indonesia and other countries. Home Credit has reported its biggest half-year loss to date, amounting to some 16.7 billion crowns, tightened lending conditions, and laid off 42,000 people, mostly in China. “On the face of it, that’s a huge number, but you need to see the bigger picture,” explains Jirásková in an interview with HN. “When we look back, it will become clear that the path we are following cannot be judged solely on the basis of a single six-month result.”
HN: For PPF Group’s Home Credit, the past six months have been a bruising stress test that, obviously, no one saw coming. Can you take us through what happened?
Needless to say, our business was constrained by the shuttering of economies. Not so many people wanted a loan and, anyway, in the circumstances, credit became – and remains – out of the reach of many after we tightened our criteria. In short, we had to switch from a growth mode to crisis mode and, rather than try to land new customers, we needed to focus on those we already had. Although our business was essentially shut down in almost every market, it did not come to a halt everywhere at once. In China, as early as January we were able to take action quickly so that our people, including call centre operators, could work from home. The lockdown there was relatively short-lived. China never closed in its entirety. Instead, it was a rolling process that progressed from one province to another. This was very different to the response in India, for example. In the Philippines, everything – shops and companies – was closed completely for more than nine weeks. Then there was Vietnam, which was locked down only briefly because they handled the situation very well.
HN: By how much did lending decline?
Taking the group as a whole, it was down by about 40%. It’s true that we were lending little, but we were able to maintain contact with customers and collect repayments from them even on those markets that had closed. In fact, we were more successful than we had thought we would be, despite providing hundreds of thousands of customers with repayment holidays. This goes to show that, all things considered, Home Credit isn’t that badly off. In fact, the excess liquidity we reported was much greater than usual. Compared to ordinary banks, Home Credit’s business is very flexible. We are in a position to drastically reduce our balance sheet virtually overnight, which paradoxically improves our capital adequacy. Our business is cyclical and we can be very malleable. Ordinary banks operate differently and cannot scale down their balance sheet at the flip of a switch.
HN: Even so, the loss over the first six months of the year is a huge figure. Do you really think it’s not such a bad result?
On the face of it, it’s a large number, but you need to see the bigger picture. Last year’s profit for PPF as a whole was a billion euros, and we have earned about four billion euros in the last five years. The bottom line is that all this money stays in the group and doesn’t go anywhere. Don’t forget that PPF Group’s total assets at the end of last year stood at around 48.6 billion euros, which is very similar to the Czech government budget’s receipts.
HN: How quickly have you reduced fixed costs, such as salaries? On what sort of scale?
At the end of this year, Home Credit’s fixed costs will be about a quarter less than at the end of last year. For the most part, the job cuts behind this have not been made because of the Covid-driven decline in demand. Instead, what we are seeing is simply the broader use of digital technologies. What Covid has done is fast-forward this process. As far back as three years ago, we told ourselves that, in a rapidly changing world, digital transformation was the way forward for us.
HN: Home Credit’s global headcount in June was somewhere in the region of just 78,300 employees. At the same time last year, employees numbered more than 124,000. That’s an even steeper decline than we saw at Home Credit six years ago in the face of Russian losses.
The number of people working for us was on a downward trajectory even before Covid because we were rolling out advanced technologies. If you go back further, we had 158,000 people at the end of 2017. Home Credit is evolving into a lighter company in terms of costs. This is one of the strategic plans we are implementing and we are doing the right thing. Then, when a situation comes along that no one had been expecting, we can be a little better prepared.
HN: How do you view the role of point-of-sale credit advisers now – your people who help customers in shopping centres and at phone, electronics and home appliance stores? Are they still important for this business?
At points of sale, we are swiftly transferring to a model with ever fewer company employees. Our loans are offered by the shop’s own assistants themselves, or, alternatively, customers can use the counter-top self-service tablets. Another option is commission-based “tippers” – associates who have our application on their mobile phone and will help customers to fill in their loan application digitally. Consequently, we are turning fixed costs (for example, spending on our own vendors) into variable costs in the form of third-party services. And then there are loans sold entirely online – customers can take out loans from the comfort of their own home by using an app that generates a QR code for them, which they take to the shop to pick up their new television or phone. They simply show the code to the vendor. This is self-service at its purest.
HN: Do you believe that your business model can be driven by technology alone and that you can do without sales reps on the ground?
We don’t want to get rid of all sales staff. The aim is to reduce the ratio. This is a change that we have been making anyway, it’s just that Covid has really speeded everything up. Putting our faith in technology and reducing the sales team is plainly the right path, but the pandemic has shown that we should have been much faster. This could have reduced the loss from the first half of this year.
HN: Amid a pandemic crisis and economic lockdowns, are the Home Credit online platform’s risk models any use at all? Won’t there be an abrupt about-turn in their reliability?
There will, and we have taken that into account. We revise them instantaneously. Let me give you an example: if customers are given a repayment holiday, the late payment of these instalments will no longer be reported in the credit registers. We then have no one to rely on but ourselves for evaluating certain criteria. The result is that we will grant far fewer loans. In some countries, in the first half of the year we even briefly returned to the daily lending levels last recorded when we were just starting out there.
HN: At the end of last year, your non-performing loans were below five per cent in most countries. In China, the NPL ratio was under 10%. Is there any way of telling how many NPLs Home Credit had in the first half of the year, considering that some countries still had repayment holidays in place?
There was a slight rise from 5.6 to 6.1 per cent. You need to remember that not every loan granted a repayment holiday will automatically fail to perform. Different countries introduced repayment holidays differently. In the Czech Republic, customers could register for the moratorium themselves. In some markets, debtors were automatically included in the moratorium and had to actively withdraw from it if they didn’t want to be in it. Many customers are continuing to repay their loans despite being granted a holiday.
HN: What should we make of the fact that there has been a twofold increase in loan loss provisions to €1.8bn?
What we are trying to get across is that we have been very conservative in our calculation, which is based on how we see the situation now, and that the result may actually not be as bad as that in the end.
HN: So what is the situation now?
Although people remain cautious, we have registered a gradually increasing interest in borrowing again. Starting at the end of June and extending into July, August and September, we have seen the situation improve significantly across all our markets. Assuming we are not hit by anything of the magnitude we experienced in the spring, Home Credit’s full-year result could be better than in the first half of the year.
HN: Why is Home Credit’s business in India still so modest compared to China? Have you had trouble getting it going?
But do we actually want to get it going any more than it is? I’d say it’s growing at a pace we think is reasonable. And in line with what we can afford given our capacities. India is completely different to China.
HN: All the more reason. It might be less of a political hot potato for you to focus more on India instead of China, wouldn’t you say?
That’s not for me to judge. If you look at India, it is very reluctant to open the gates to major international players and give them banking licences, for instance.
HN: The same could be said of China.
I realise this is going to sound coarse, but in China they’re better at managing this stuff. Precisely because it’s China. In India, we are simply growing at a pace that suits us. In China, the state plays a greater role in the banks, so of course they are governed differently than in India.
HN: Hasn’t this crisis also shown that it would be useful for Home Credit to have a banking licence in certain markets so that you can collect deposits from savers and get access to cheaper money?
It goes without saying that business is much easier in those countries where we hold a banking licence – in the Czech Republic, Russia, and Kazakhstan. Not because of fluctuations in borrowing opportunities on the market, but because this sort of financing through retail credit is cheaper. So of course we are interested in licences. On the other hand, owning a bank is not all plain sailing in this day and age. The regulatory environment is becoming increasingly stringent.
HN: So are you, or are you not, trying to get a banking licence in China?
We are not. Many large European banking houses partner up with local institutions over there. This could be a way forward.
HN: Last year, you wanted to float part of Home Credit on the Hong Kong Stock Exchange to make the company a more credible prospect, for example, for licensing and partnerships. So that – as Home Credit’s second shareholder, Jiří Šmejc, said at the time – it would not come across as this “curious beast” owned by two Czechs. Now you’re perhaps happier that the shares are not on the stock exchange. Do you agree?
I am not in a position to say whether we’re now happier this way. The simple fact is that not everything we try to do will work out. It’s not the end of the world. There are pros and cons to having our shares on the stock market. From my point of view as a number-cruncher, one of the advantages is that it would automatically raise the investor community’s awareness of the company. There also tends to be a positive impact on the price of wholesale financing. Going public would be the icing on the cake. So, we still have our cake, it’s just without icing.
HN: Do you have anything like a Plan B for a possible float?
Well, we are not hard at work preparing for admission to a stock exchange. But PPF always has a Plan B. And usually Plans C and D. Home Credit may be a behemoth, but PPF is still rather like a family business. Plus, for me at least, the current pandemic has given us a lot to work on. The fallout is keeping us very busy. Not to mention the fact that the CME acquisition is around the corner. That will also keep us occupied.
HN: What will Home Credit’s loss mean for PPF Group as a whole?
PPF’s other lines of business are far less affected by the Covid crisis than Home Credit. Some have sidestepped it altogether. This is especially important for telecommunications, our second largest arm of business. But, as in any crisis, there are opportunities. This is a chance not only to buy distressed assets, but also to get our own house in order. It is an opportunity to start thinking differently – whether there really need to be so many of us at the table and whether certain areas could do with reorganising. This is something we do all the time anyway, but now it is underpinned by more compelling arguments. Elsewhere in the group, we are not laying people off or cutting pay. Nor would I say that recruitment has been halted. Despite Covid, parts of the group, such as Škoda Transportation, are in a growth stage. Here, new staff are being taken on to ensure that all contracts can be delivered on.
HN: So what lessons have you learnt from the pandemic crisis?
Something we all know: that there are limits to everything. That we need to be prepared, and that our business needs to be diversified. So that, when hard times roll in, the effects of anything that doesn’t work well can be neutralised by areas that run smoothly. And we believe that we have a mix that works pretty well for us. History will show that the path we are following cannot be judged solely on the basis of a single six-month result. In the past, our business anchor was the insurance industry. Now it’s telecommunications – a stable, relatively countercyclical money-generating sector. Home Credit is the exact opposite, but its value lies in the fact that it grows much faster over time. Telecommunications will not double in three years. In the middle of this, there is a third pillar that is made up of real estate. This is between the two previous ones: stable in the long run, with fluctuations in the short term. The important thing is that we try to leverage our business sensibly. Then, when a storm breaks, we will have the buffer we need to withstand it.
HN: Has PPF’s business felt any aftershocks from the Czech Senate President Miloš Vystrčil’s trip to Taiwan?
I am in a position where I view the group through numbers. They don’t suggest there has been an immediate impact on business in China. I can’t say whether there will be any repercussions in the future.
HN: In December, Aktuálně.cz reported that a PR agency commissioned by Home Credit was secretly influencing the debate on China in the Czech Republic. At that time, you released a statement saying that you wanted to “rationalise the public debate on China”. At the same time, you said it was a mistake that you had not supported the Sinoskop project directly with sponsorship, and instead you had done this through a PR agency. I have not seen PPF provide any further explanation on this, even though it aroused great concern among many people. Did you at least discuss internally the fact that that this is not the way PPF wants to work?
The explanations we gave to you journalists were the same ones we gave to people within PPF. Of course, we want our people to be proud to work for PPF. The lesson is clear: in the future, if we want to say something, we’ll say it ourselves. That’s also one of the reasons we’re having this interview now. We feel we need to work on awareness and information about us. The less we talk about ourselves, the more rumours there are about what PPF and Home Credit do and do not stand for.
HN: Last year, PPF’s plan to merge the Czech and Slovak Home Credit and Air Bank with Moneta Bank didn’t come to fruition. Is that an end to it? It stands to reason that small banks in the Czech market are in a difficult position in relation to the major players.
Nothing is ever final. We have not completely abandoned the idea of going down this path. However, I have nothing more to say on that matter. Also, as you know, we are bringing Zonky and Air Bank together a little so that there are lower costs and more synergies between their systems.
HN: In the last two or three years, PPF has been bolstering its position in telecommunications, and now it is adding media. We are waiting to find out whether the European Commission will approve your purchase of CME. What makes these industries attractive? How are these investments linked?
For me, as CFO, these companies are a steady element that further diversifies the portfolio of projects and businesses that PPF currently owns. They are not cyclical businesses. These are businesses that generate money. The worlds of telecommunications and the media are not entirely separate. Here you have data and there you have content. The content can be either global – consider Netflix or Apple TV – or local, such as a country’s soap operas or national football coverage. It is important to have local content and, on top of that, data and telecommunications. In this light, integration makes sense. If you look at other markets, there are others acting the same way.
HN: What is your take on Škoda Transportation’s future growth?
Škoda is undeniably growing, but there are limits to the organic growth of an engineering company like that. It’s not the same as Home Credit.
HN: So, acquisitions. Are targets in the West or in the East a better fit for Škoda?
It is a matter of opportunity. Škoda has partnerships and acquisitions in all directions. From the steps you can see, it looks set to continue growing, and we will be developing it.
Author| Marek Miler