Exclusive interview of Mr Erich Comor for the Czech Business Weekly
04/07/2008
While financial markets around the world are shivering under the impact of the U.S. financial crisis, largest Czech consumer lender Home Credit bets on the growing appetite of local customers for more cash loans and credit cards. It is developing a new business model that could diversify its portfolio, ensure long-term financial growth and secure a key position in the Czech consumer-lending market.Erich Čomor, the general manager of Home Credit, praised the high payment ethics of Czechs, who are already used to living with credit and making smart decisions when taking on loans. Home Credit's default rate decreased below 6 percent across its whole portfolio in 2007, a 15 percent decrease compared with 2006. The industry's average ranks between 5 and 10 percent. The company didn't see default rates increase in 2007 despite the crisis affecting financial institutions worldwide. However, the company enhanced its risk management team last year, Čomor said.
Now, Home Credit offers four types of products: point-of sale (POS) loans-consumer loans obtained in retail outlets and provided for the purchase of household goods and certain services such as health care or travel; cash loans; revolving cards-an older type of credit card with no grace period, no flexible payments and that is slightly more expensive than a current credit card; and credit cards. Čomor said that while now the portfolio is spread at 40 percent for the revolving cards and some 20 percent for each of the other products, the credit cards and cash loans are expected to grow in importance in the future.
The volume of credit has been growing as well. The credit portfolio reached Kč 11.7 billion (€ 464.46 million) at the end of 2007, a 14 percent increase compared with March 31, 2007. That year, Home Credit changed its accounting system from a financial year ending in March to a calendar financial year. The larger volume has been driven by a bigger number of customers and the bulkier size of loans. As the demand for credit is growing, consumer behavior is changing as well, Čomor said. Now, customers take more credit in one move and distribute it according to their needs, compared to the past approach of submitting several credit applications for each purchase. In 2007, Home Credit increased the number of points of sale from 4,637 in March 2007 to 5,153 at the end of 2007 by starting cooperation with the telecommunication company Telefónica O2 Czech Republic and with the furniture retailer Asko-Nábytek. Purchase on credit remained fairly stable in 2007, while goods such as electronics and home furnishings, particularly kitchen equipment, remain a dominant segment. The segment of people paying for holidays or medical services such as plastic surgery on credit has been growing as well, yet remains at a market niche level.
Čomor said his company didn't face similar complaints from clients or legal cases with consumer associations such as the one dealt with by the Russian Home Credit branch (see "Home Credit still struggles in Russia," CBW, Jan. 15, 2007). However, when disputes arise-either when clients complain or default on payments-they can be solved in court within the legal framework, he said.
This year, Home Credit plans to introduce new products such as a top-up for cash loans, a product that would allow clients- once they paid down a part of the cash loan-to draw on another part without changing the monthly payment. It also plans to bring more co- and multi-branded credit cards on the market by mid-2008.
In the last three quarters of 2007, Home Credit had a net profit of Kč 362 million, compared with Kč 298 million in the similar period in 2006. Net profit is expected to grow at a similar rate in 2008.
Q: Have you had any recent complaints from customers or consumer protection associations?
A: Obviously, from time to time we get a letter from a customer who isn't happy, but we didn't have anything recently that we couldn't resolve. One of the last concrete examples was a complaint from a Prague customer who wanted to waive the penalty fees for late payments that we imposed after the client stayed in default despite the collection letters we sent him. We do have complaints, but we monitor and settle them through collections. However, their level is marginal.
Q: How many of your default payers end up in court for settlements?
A: We don't waive late payments and we settle them through court settlements [when the case arises], but we use very legal practices. If the loan payment isn't settled by the customer, then we can end up in court, where we are extremely successful. This proves we don't collect what is unfair; we only collect customers' dues.
Q: However, how many of these cases end up in execution, or seizure of property?
A: We consider execution [against property] as the last resort. If the customer isn't willing to deliver on their duties, yes, the court might decide on executions but customers don't end up in the repossession scenarios that you see on TV, when their furniture is taken away. They pay the cash back rather than dealing with the fuss of having their goods taken away. So, even if the court decides on repossession, in reality what happens is that customers decide to pay and they do.
Q: What are the biggest risks to your business in this market?
A: Obviously on the business side, POS lending is becoming tighter and tighter as the major international retail chains are becoming bigger and the market consolidates. When a fragmented market consolidates into a few large players, you always get squeezed. But we manage this; we work with some of the largest retailers in the country and they like our system and the fact that we provide loans within seconds after they apply for them.
The second business risk is that we're going through a sensitive period in which we're replacing the old revolving card portfolio with new credit cards. The old portfolio is very big and fairly profitable, while the credit cards are a more difficult product: the rates are slightly lower but the complexity of the product is higher. Moreover, as the credit market is growing, we have to keep track of customers and follow their behavior with credit cards, as this behavior isn't standard at all.
Q: Does this put any pressure on your staff?
A: Definitely yes. If you look at how we grow the business, we also grow in terms of people. It's a lot of pressure; for example, the risk staff was reinforced over the last year and plenty of skills were brought there. We also invest a lot of money and time to hire product people, reinforce the credit cards team and the sales team.
Q: How many people did you hire in 2007?
A: We brought in around 40 people in the Czech Republic last year. At the end of 2007, we had 423 employees here and around 116 in Slovakia. This year, the rate will be slightly lower, but in general you should see a staff growth rate around 10 percent.
Did you ever face allegations of hidden charges in the Czech Republic similar to the case Home Credit lost in Russia?
A: Definitely not. We are regularly subject to inspections, but it's been a clear record. The point is that we don't have hidden charges: we have late payment fees, but that's explicitly communicated to the customer. In Slovakia, we have adopted a pre-contractual form that provides all data for the customer make a decision on the loan. That doesn't exist in the Czech Republic, but the European Commission (EC) is pushing for it. There isn't much space for customers to be charged.
Q: What is your current default rate?
A: The delinquencies typically measured in 90 days are between 3 to 6 percent on all our products. We have one product line, the revolving cards, which has an average of 29 percent, but this is technically increased as we don't write off past revolving cards and keep them on the books.
Q: How did your default rate develop last year?
A: It declined on average from about 5.5 to 5.1 percent. We still see some space to decline it, particularly in Slovakia, where the credit bureau isn't strong enough. The default rate was also fairly uniform in the past.
Q: What collection methods do you use to lower the default rate?
A: It's rather about the speed and combination of methods. We use many methods: SMS, phone calls, letters and regular legal procedures such as court cases and repossession. We won't send people to knock on the door and remind clients about paying because it's ineffective and expensive.
Q: Did the U.S. credit crunch have any impact on the behavior of your Czech consumers?
A: No, it's only been translated into the financial market. Now financiers are more diligent when providing loans, but we don't see any impact on the credit appetite or default of consumers.
Q: With this rising credit card interest and the market becoming more competitive, is it possible to arrive in a similar situation when customers are assaulted with credit card offers by lenders, as they are in the U.S.?
A: Maybe in the very long term, but in the mid to normal term you wouldn't see it here. Credit cards in this country aren't used the same way as they are in the U.S., where you see people withdraw the limit twice a week and use it for pay for goods, then they don't keep track of the balance and they are surprised at the end or then even purposely use 10 credit cards with the intention of paying back none. Here, less than 20 percent of usages of credit cards are payments in stores. More than 80 are ATM withdrawals. Czechs don't actually use the credit card, they draw a larger amount of money before Christmas or holidays and then they don't use the card anymore till they pay back the loan they took. When 80 percent of customers are behaving this way, the shift is very slow and it doesn't give a lot of space to create such a mess.
Q: How would you describe the payment ethics in the Czech Republic?
A: It's very good. It comes from three things: the product offer is more transparent and easier to compare; the history of taking credit is long enough, so you see a lot of customers who have experience with credits and understand how it is to live with them, so the decision making is also smarter; third, it's the credit bureau itself, which is a very strong tool that reports credit records. The credit books across the whole industry are much cleaner that they were 10 years ago.
Q: How responsible are Czech lenders when trying to attract more customers with their credit products?
A: Financial institutions here had limited experience in using the credit bureaus in the past and it took us some time to learn to work with them. Now, we love the impact of using the credit bureau. We're fairly conservative in providing money and if you look at all responsible lenders-and I believe the majority of consumer finance providers and banks in this country are responsible lenders-you wouldn't see a bank that would purposefully ignore that the overall exposure of their customers is bigger than their disposable income minus the living minimum. That's how we behave and if the customer has more payments than he can afford to pay, we very kindly explain that it's not in their best interest to take the loan and we don't provide the loan. On the other side, there are patterns of customers, small segments, who circumvent the system by taking loans from irresponsible lenders-those who don't use credit bureaus or purposely ignore the minimum living standard the customer should be left with after taking the loan. Such customers exist and it's the common interest of our industry not to allow such behavior, to enforce the use of the credit bureaus and prohibit excessive rates. Otherwise, it's the responsible lenders who end up in the same mess.
Q: Can you give me some examples of businesses with such practices?
A: I can't name concrete businesses, but they are those where you'd typically find rates above 100 percent, not 30.
Q: Is there anyone on the Czech market supervising the behavior of such lenders?
A: Not really. Banks are regulated and they have to prove explicitly the health of their credit books. Our company has to do the same because we use public funding; so, even if we don't fall under the regulation of the Czech National Bank (ČNB), in reality we have to provide the same level of clarity of our books because banks are financing us. This isn't enforced by the law, but by financial markets.
Q: What is the risk attached to this lack of regulation?
A: I don't think there is any. First, the market is extremely competitive. Along with competitiveness comes the awareness of customers, which is growing and is improving the credit behavior of the population. Customers understand they don't have to resort to excessive rates or irresponsible lending behavior. I believe there is enough legal background against malpractices. Besides, the activities of consumer protection associations are very healthy. So, I don't think regulation is actually missing and the proof is that rates keep declining-that's the best customers can get.
Q: How do you see the development of your income from fees and interest in the mid-term?
A: There is no black and white answer to this. We'd like to remain very user-friendly in the fee policy-this is one of the very strong differences between us and a classic bank, as we don't have monthly maintenance fees, account or opening fees; we don't even have early termination fees on our products. We'd like to continue doing that and keep the balance, even if we provide the same amount of money as banks. I think that if you look at fees three years down the road, you shouldn't see fee increases.
Q: Will your income from interest grow, following the interest rates increase by the ČNB?
A: There is no link between customer and inter-bank interest rate. The rate at which the customer buys the product-cash or POS loans-remains unchanged, whatever ČNB does. On credit cards, we could theoretically adjust rates, but we prefer not to because in our market the rates have actually been declining for the last few years.
Q: What will drive your profit in the future?
A: The drivers are the portfolio mix, the shift to cash loans and credit cards because they bring a grace period and interest rates lower than those on revolving cards. We see a similar situation in cash loans, where we have a model where we distribute our cash loans directly to our customers-we don't have intermediaries, hence we don't pay commissions and all this generates healthy profits. Moreover, we have improved our risk costs and the default rate has been going down steadily.
Q: What is your average interest rate?
A: It's in the range of 20 percent across the whole portfolio. The old revolving cards are around 23 percent, cash loans are below 18 percent.
Q: What are your major business opportunities in the Czech Republic?
A: One obvious one is the growth in the segments I mentioned. We grew 60 percent in cash loans in 2007, we outperformed the market, but the market continues to grow. For credit cards, we grew 345 percent. The demand is shifting from the POS business to cash loans. What we haven't seen yet-it's coming slowly-is a strong shift from closed loans such as POS to credit cards; they are much more flexible and easier to work with, but they also require that you work with them longer. It's a more difficult product, at the end of the month you have to take care of it, look at the balance and pay it down. Then I expect to see the shift to move toward larger ticket lending onto credit cards. Currently, you don't see people renovating their houses using a credit card, but in the mid- to longer-term I'd expect credit cards to take over a part of the larger ticket lending. (Editor's note: Ticket lending typically involves lending smaller amounts of money.)
Q: Is there a risk for credit lenders to go into subprime, as the market is becoming more competitive?
A: It depends on the definition of subprime. I don't think that banks or consumer finance companies will go in that direction, if by subprime you mean customers with a bad credit record. The market will rather compete through consolidation-customers who are heavy on credit, but not on default. I believe we will see a lot of consolidation products in the future.
Q: Do you plan any new partnership with some retailers in 2008?
A: We do. We can't be specific about that as the program is still in the pilot phase and is focused on credit cards. I can only say that in 2008 you'll see news connected to credit cards and retailer cooperation. Of course, we'll fight [to secure the business of] any store that opens up in the Czech Republic, but they are looking for us as well.
Q: Can you give me any concrete names of such partners?
A: I can't give any concrete names.
Q: Will you start offering POS loans to non-Czech residents in the Czech Republic?
A: This isn't planned because the demand is probably still very small and we don't see it. However, this situation can be easily changed because the number of foreigners working in the Czech Republic is increasing. The trick is that demand from foreigners is more driven by the eastern migration than by the western one and, while managing the western citizens on the credit side may be relatively easy, it can be more difficult to manage the eastern citizens as the legal cooperation with countries east of Slovakia proves more difficult. But this can change very easily.
Q: Do you plan any mergers or acquisitions in 2008 or in the mid-term?
A: I can't comment on this topic.
Q: Do you plan to get involved in the university fee program and offer study loans?
A: I'm not aware of the structure of the program yet, so we don't have an answer for that. We will enter the program if we believe there is a demand. If there is tuition introduced in the Czech Republic and demand to finance it through credit, we will consider the opportunity.
Q: Where would you see your business five years from now?
A: We'd like to see a healthily diversified portfolio of cash, credit and POS lending. I expect us to be much stronger in larger ticket lending, nonsecured lending-I want Home Credit to stand not only for the typical refrigerator purchase and cash loans, but we want to become more competitive in larger ticket lending for home refurbishing. Also, we want to be very visible on the credit card market and we try to develop cooperation with retailers. What we can do is we can combine the benefits of credit products and benefits from retailers for customers and this triangle is a very good leverage. Our strategy is to bring more co-branded and multi-branded cards that give customers reasons to return to retailers. Those would be the two major shifts that you would see, except for the major diversification of our portfolio.
04/07/2008
