Group CEO Jiří Šmejc's interview for the Czech edition of Forbes online

Jiří Šmejc: Asia is a both a joy and a wild ride, we are thinking about a partner for China

by Jaroslav Mašek

Home Credit Group has returned to robust growth this year. You have earned more than a billion Czech crowns in the first half-year; you are growing fast in Asia and you have had a first profitable quarter in Russia after more than two years. What have the two years of loss been like for your business?

We have carried out a major restructuring in Russia and heavily invested in Asia. The Russian market is stagnant, with no signs of a dramatic recovery in the short term; however, we have significantly streamlined our bank there, and our increased prudence does not interfere with the growth of our market share. We are making profit, and we expect the figures to become even stronger, still more optimistic by the end of the year.

Does the end of losses in Russia mean that you have finally written off the non-performing loans that appeared after the crisis caused by the fall of oil prices, the European sanctions, and the weakened rouble?

Yes. All of this combined there and, in addition, people were over-indebted, and this bubble became visible. The coincidence could hardly be worse. To cope with the situation, we have slightly reduced the time for which we lend. We think it’s better to lose some potential customers than to run a greater risk should the macroeconomic situation deteriorate again. Yes, it did affect us, but we have proved to be able to emerge from the crisis without having to invest additional capital, unlike many other market players.

You say you are investing heavily in Asia. What do you like the most about business there?

Its dynamics, agility, and atmosphere. Just imagine: we have 47,000 employees in China, and they all still have the energy of a start-up. And it’s the same in other markets across Asia. Some time ago I told our people: either we can be part of local history there, or we ourselves can write the local history of lending and thereby in fact the history of development of the economy as a whole. The latter is what I want. There is a really big potential to develop a huge business.

What is the current situation in China where you obtained a national customer credit licence at the beginning of 2014?

China is a huge country. We will have 55,000 employees there by the end of the year and we plan to provide new consumer loans amounting to more than 10 billion euros there next year. We have successfully launched online lending and we receive 35,000 applications for cash loans every day, although we still intentionally keep the online volumes low. It’s a wild ride; the market is extremely fast and competitive. We must be very smart to keep our leading position, and cautious not to fall from where we are. We therefore have by far the largest number of expats there and we are delighted to see the risk diminishing. This allows us to grow even faster than we planned. I have always been in favour of doing business in Asia. I saw a lot of potential in focusing our business in that direction and now we see that this strategy is beginning to pay off.

Do you have an idea of how far you can grow in China?

We have 90,000 points of sale in Russia and over 100,000 in China. And I think we should be able to run at least 300,000 POS there – three times as many as today. If we are able to boost the penetration of the goods that people buy on hire purchase from today’s three or four percent to, say, one-fifth, which is usual elsewhere, we can logically grow to fifteen times the current level as far as new loans are concerned over the next five years.

What are the risks associated with such a massive and rapid growth?

First of all, there is our operational risk – the risk of a critical operational failure. This is why we have an extremely strong management team there: recently, we have sent there fifty more expats and we invest a lot in the team. In addition, almost half of the Prague head office employees are involved in risk management. We use the four-eyes rule to monitor in detail any variance in risk and in portfolio development in order to be able to respond immediately. This is necessary, as we process up to almost 100,000 loan applications a day, and this number may well double next year. However, we have already launched several start-ups and have gathered a lot of experience in different markets. Being present in many countries helps us to pool our know-how centrally and then tailor it to local conditions. This helps us to reduce our risks significantly. I like to tell the companies that provide us with funding, i.e. with the money we lend to our customers, that they in fact lend us their money for the risk of China itself, because our portfolio is already as big and diversified as to make the probability of loan non-performance closely linked to the development of the Chinese economy as such.

There are speculations that you could soon team up with a local partner in China. What sense would it make for you?

We have always been saying that we could team up with a minority partner at a certain point in time. It would add a lot of value to the business, provided the partner understands the details of the Chinese market and knows how to operate in that market. We are thinking about it for the future.

In China you have grown so big that you have in fact eliminated the risk of falling out of favour with the market and lose your business …

The size of a business may partly reduce such a risk, but it can never guarantee full security. In Russia, it used to be common that the bigger you were the less trouble you had with the various questionable local structures. What I think first of all is that you have to respect the local environment in each country, avoid acting against it, and understand it. It will work if you do so. We really are pioneers in consumer financing in China and we engage heavily in awareness raising and in the implementation of the best practice rules for the sector. It is already paying off, and positively. We have completed internal studies showing that if customers understand the entire process, they have much less trouble paying the instalments.

How come you are pioneers in consumer financing in China?

It is a sector that has no tradition there. For the older generation of the Chinese, it is improper to have debts. Chinese banks do not provide consumer credit services, or they pick just a part of the market and are not able to serve, for example, people with no credit history. We know how to do all this. Some competitors’ posters recruiting new employees say, for example: ‘If you have worked for Home Credit, your wages will be higher by as much as …’ We serve as a sort of training centre for the entire market, but this is something to be reckoned with if you are the Number One.

How do you manage 47,000 people who, as you said, still have the energy of start-ups?

This is exactly the point. You must teach them the standard processes and you must balance everything correctly. Let’s take collection (recovery of non-performing loans) as an example. Unlike large online players, we have much more know-how in this area. We employ 5,000 people in collection in China and these people are creative. We have to tackle all kinds of issues, including extremes: some are sloppy in their work, while others harass defaulting debtors, threatening them with whatever if they do not pay. We must filter off all this and guide the organisation to work correctly and efficiently. We have taken a lot of time to learn this and spent a lot of money on it all over the world.

Is Home Credit a European, Asian or global group?

Global. I’m very optimistic as to our progress in the US market. We certainly are the world’s biggest consumer credit group in terms of the number of points of sale where we offer hire purchase schemes.

And what about credit cards? Are they likely to be your future focus?

We want to place more emphasis on them. We are learning how to handle them. We invest in implementing the know-how gathered in the domestic markets, and this year we want to go with cards to Vietnam, and then to the Philippines and to Indonesia. In China, they have skipped credit cards as a development stage – they use mobile applications to send money and use QR codes to make payments. This is also an area of our focus.

What value can Home Credit add to the US market, one of the most advanced consumer credit markets in the world?

After the crisis, most of the players in the US gave up lending to riskier customers, but we have scoring processes that make it possible, at the same risk level, to provide loans to more people. We are just better able to tell whom we can still lend money and who will be able to repay the loan well. In the subprime segment, we have added another ten percent to the initially predicted number of the clients of Sprint, our US partner and mobile operator. If it were not for us, those people would have bought phones somewhere else. We have been developing and refining our scoring processes and risk management for twenty years, pooling experience from all our markets. This is what keeps pushing us forward. Thanks to this we have been able to bring a competitive advantage even in the US. This is also the reason why Sprint has chosen us as its partner although we are from Central Europe and have never operated in the US market.

What is your position in Vietnam?

It is a market that vindicates our long-term strategy. About a year ago we were the first there to provide loans for consumer goods with a zero interest rate. As a result, our overall market share continues to grow fast. We have exceeded 50% and, in fact, have completely changed the market. We make profit in spite of zero interest thanks to our cooperation with manufacturers and merchants. Seeing that we are able to increase their sales substantially, they are ready to support this mode of sale.

How do the new markets such as the Philippines, Indonesia and India actually work?

We are clearly number one in the Philippines. We were at the right place at the right time, which we can see now. We expect to make an operating profit next year – three years on from the start. In Indonesia, we are number two, although there were already established market players there, and we are also number two in India. All our risk data is good and declining. Having learned a lesson from the crisis in Russia, we think it’s better to check everything three times. We carefully watch the trends in economy to see whether or not as bubble or excessive debt appears somewhere. It feels great to see our business in Asia thrive.

Is India the hardest market for you?

Yes. We are growing quickly, currently for example 30 percent month on month. We have more than 10,000 employees there. But margins are thin in India and you must be big enough to be able to make a profit. We are therefore investing heavily there at present. There is a strong, well-established market leader there, and people’s mentality is very different. For example, it is difficult to attract good employees from other parts of the world to Delhi. It’s perhaps more for adventure-seekers.

Is Home Credit in the best ever condition now?

Certainly. It’s present across geographies and has chances for extreme growth in terms of profitability and volume. However, this will require a lot of work to be done.

And a lot of money. Is it a problem to maintain funding, i.e. the flow of new money into the Group for further lending?

I believe that it’s no longer so. In all markets, we are able to find solutions for how to deal with local partners. I don’t say Home Credit is free of risk. We do business in developing markets, which are evolving and changing rapidly, and our industry is complicated. However, I think that the way we have enhanced our risk management processes gives us a great competitive advantage.

How much do you value Home Credit? Last year, when you were selling two percent of your stake to Petr Kellner’s PPF, you valued the Group at about EUR 3.7 billion.

More than a year has passed since then, and it was an internal transaction. We would certainly not sell now even for five billion euros.