Interview with Jean-Pascal Duvieusart, CEO of Home Credit

This interview originally appeared in Czech in Seznam Zpravy, a Czech news and information site, in two parts, on July 21st and July 22nd, 2020.

You are coming from Moscow. How did you experience the coronavirus lockdown there?

It was totally normal. You had a lockdown for a few months, and now it’s restarting to work. The rate of infection in Moscow is low now. It’s more concerning to the East; the virus is spreading again in Kazakhstan.

It’s strange for me to see how people talk about countries they are watching from a distance. When I was in Russia, the news from Belgium and France looked catastrophic. But I called my family in Belgium and they were telling me that it’s okay. Here, we have this emotional aspect created by distance.

At any rate, the Czech Republic has managed the situation better than many other countries. You may be the least affected place I know of, along with Vietnam. The rate of infection in Russia was high, but that’s also because the rate of testing is very high.

Maybe the vodka is helping the Russians out…

It’s not strong enough to disinfect: it has to be 98-percent alcohol!

The coronavirus caused a crisis. But when Forbes calculated Petr Kellner’s personal net worth – which is mostly PPF – it concluded that his assets have grown by almost 25% since April. This means that the value of PPF is growing during a crisis…

Between April 2020 and now?

Yes. According to Forbes, Kellner’s wealth was 14 billion in April and it is 17 billion dollars today.

That’s good news! [laughs]

It surprised us.

Look, I don’t know in detail about the maths of Forbes, so I can’t really tell you. But if what they do is take our assets and benchmark them against the price of comparable assets, then they’re comparing the lowest of the capital markets, at the time when everybody was afraid the world would collapse, to a recovery. You can observe this in gold prices, in prices of Polymetal shares (ed. note: Russian mining firm in which PPF holds a 3.9 interest following the sale of a part of its shares in June). Furthermore, Telecom shares have rerated, as have banks’ shares. Maybe this is simply driven by the rerating of the financial market. And let’s not forget that the Dow Jones index is close to its maximum.

So how is your business actually doing?

PPF is quite a diversified holding, diversified geographically and across different sectors: about 40 per cent of our business is in Europe, 20 per cent in Russia, 30 per cent in Asia. Then, from a different angle: about 50 per cent of PPF is financial services, over 30 per cent is telecoms, about 10 per cent is real estate and the rest is engineering and biotechnology. The individual businesses and regions are affected differently by the virus. This is why it is so difficult to say whether everything is going fine or everything is going badly.

Let’s talk about the individual types of business.

In the real estate business, we have two of our own shopping centres in Russia. They’re reopening now, but they’ve been closed. They are in strong locations. They will do fine, but now they’re doing badly. Services have been affected, but the office parts of our buildings are doing fine. Nothing’s changed there.

Financial services are affected by the crisis, there is just no way around it. You know that. All the financial institutions have reported for the first quarter – or will report for the second quarter – increased credit losses. So will we; that’s normal. Economic activity has slowed down; therefore, you have increased credit losses. With that being said, telco has been substantially less affected till now.

Does this mean that PPF’s expansion into telecoms in recent years is helping you to balance out the losses now?

When I joined PPF as a shareholder 10 years ago, we were doing predominantly financial services, insurance and banking. We were extremely focused on Europe and Russia. The rate of our diversification in the last ten years is dramatic, however.

PPF made a foray into telco and expanded in Asia. Then, we added biotechnology and other investments. Sotio, our biotech company, is active in China, Europe and the US. We have been investing in biotechnology in France and the UK. Now we’re adding engineering. We’re also having discussions in other countries and expanding beyond the Czech Republic. So there’s a real effort to diversify across sectors and across countries.

You said the financial services were hit by the corona crisis. But your profit decreased dramatically in comparison with 2019 in the first quarter already, still before the coronavirus. What is the reason?

There are two reasons why the profit of Home Credit Group (ed. note: the holding covering consumer lending services) went down in the first quarter. The first one is that we saw an economic slow-down in China late last year already. That led to the reduction of the profitability of our Chinese company. That’s one point.

The second point is that when I took over the position of CEO at Home Credit in January, together with Jiri and Petr (ed. note: Šmejc and Kellner, other PPF shareholders) we decided to refocus on our core markets. Therefore, we shut down some of the projects that had been launched previously. We stopped our project Velvon in Germany (ed. note: Home Credit was preparing the launch of a German online bank, an affiliate of its Czech-based Air Bank). We stopped our planned expansion of Zonky (ed. note: a firm focusing on P2P loans) in Spain.

These things are not cheap. And they’re not cheap to close, so the result for the first quarter has reflected the effect of these restrictions, or that closing cost.

Are there any other projects that you are considering to close?

The decisions we made when I took over the role were not to expand in Germany and Spain. We had already made the decision to shut down our credit card activity in the US even before my arrival. These decisions were made before the coronavirus. In hindsight, those were good decisions; we would have made them anyway.

The coronavirus has a different impact on business. We, at PPF, often joke that we are experts in crisis. When you’ve been doing consumer finance on emerging markets for more than twenty years, you know well how to manage a crisis. Being successful in Russia means learning how to manage economic crises. The same applies to Kazakhstan.

Will PPF just apply its proven scenarios to the coronavirus?

The coronavirus crisis is different. First, it’s global, so geographic diversification is unfortunately not helping you as much as it would normally.

Second, the coronavirus brought the necessity of social distancing, which means closed shops, among other things. If you want to provide consumer loans in these circumstances you need to be strong enough in online shopping to have it covered well. If you have call centres where people cannot sit next to each other because of the epidemic, you need to be technologically strong enough to reorganise your entire call centre in a matter of days.

Was that your reaction?

We’ve been able to do that in every country. We’ve been able to change the way our call centres operate so that people can work from home. In a few days, their productivity was almost the same as if they were all sitting in the same place. Then there is the app in this [taps his phone]. You need not only to sell, you also need to serve, so you need an app. Thank God we have 17 million downloads of our app. We were able to basically move from face-to-face interaction with customers or telephone-based interactions in call centres to self-service from home – using our mobile app. So that’s the impact of the coronavirus on our business. By the way, do you know that ‘chief officer’ joke about COVID?

No, go ahead!

So they ask this employee: “What’s your chief change officer? Is that CDO (Chief Digitisation Officer), CIO (Chief Information Officer) or COVID?” And the answer is obviously “COVID”.

When I look at the crisis so far, I take pride in two things. One of them is fantastic leadership teams in each country. We have great teams of managers everywhere. And the loyalty to the company even makes me get a bit emotional.

The second thing I take a great pride in is our robust technology. When you survive this kind of storm, you can adapt and survive. While Covid is indeed changing the way we are doing business in this dimension, it’s not a phenomenon that would force us to re-evaluate our presence in any country. We are super liquid, we are sufficiently capitalised, and we will be in a stronger competitive position everywhere where we operate.

Do you have enough customers? People are still afraid to invest, to buy new products, so they do not need loans.

People will likely consume less. Instead of growing at 10, 15 or 20 per cent, we will remain stable for a year, grow or decline depending on the country. The timing of the recovery is still to be seen.

But I don’t expect the consumption in Asia to systematically go down. What we see is a temporary slowdown. Our crisis experience is that you need to manage properly. You need to reduce your costs. You need enough liquidity and enough capital. If you have this, you will survive the crisis and restart stronger, normally with better credit risk.

What is the situation in China now? It is the most important market for you.

China may be the most important market, but…

You have 35 per cent of your assets there. That’s the highest concentration in a single market.

But that means we have 65 per cent of our assets elsewhere. We have Russia, which is doing fairly well; we have Kazakhstan, which is doing fairly well; and we have the Czech Republic, which is doing fairly well.

But China is still your most important market.

I’m not trying to escape your question. China has restarted. The local demand for loans is restarting. Restaurants are not full yet. Travel is still down substantially, and international travel has virtually ceased to exist. Like in the Czech Republic, where there are 10 to 20 people in the Diplomat hotel where I’m staying. But I’m optimistic.

What is the epidemiologic situation in China? According to the statistics published, COVID-19 infection has virtually stopped. Can we believe it?

I have no better information than you on COVID-19 cases in any country. I observe the economy and it is factually restarted. I was reading an HSBC report and it said that the Chinese economy is now at roughly 90 per cent of January levels. If you look at the consumption of electricity, the intensity of lighting, pollution and so on, they are roughly where they used to be.

The question is if the second wave of COVID-19 will come. But that applies to any country. It’s not a Chinese issue. I have to say that I am concerned about a second wave of COVID. There’s no doubt about that, but that’s for every country.

How are your other large markets doing?

Vietnam has barely been affected by COVID. Indonesia is doing quite well. India and the Philippines are my biggest worries as they are still in lockdown. Russia is restarting; we can see that clearly. The Czech Republic has recovered quite quickly.

How much has the number of loans that you are providing now decreased?

At the worst time, we were losing in some cases over half of the new loans a month. Now we are about 20 to 25 per cent lower. But it’s restarting.

Is the rate of non-performing loans increasing?

What do you think?! Obviously, all banks are facing increasing risk costs. So are we. We’ve given payment holidays in most countries: about 15 per cent of our customers have used the opportunity. It’s good for us and for them. It allows them basically to realign their financial capability with the loan.

How that will evolve in the future? How much will our clients will actually repay to us? I cannot tell you because this depends on time. But payment holidays are a good tool to avoid credit losses, if you just make repayment affordable for people.

What will be PPF’s results this year in your opinion?

I knew you would ask, but I can’t offer you any predictions. We have listed bonds, so I wouldn’t be allowed to tell you anyway.

Home Credit generated a profit of EUR 2.5 billion in the last ten years. We had a gross profit of about EUR 550 million over the last few years. I cannot tell you now how much money we will lose this year, but it’s a manageable amount given our capital. It’s a thing that’s expected in a crisis.

PPF is entrepreneurial and extremely prudent. We don’t do things without sufficient ‘safety nets’, without thinking about the risk. The long-term way to survival in business is the ability to manage risks. The important thing is to make sure you have enough capital. We have enough capital to manage the crisis.

Back to China. If you compare the risks on the Chinese market, what is worse – the coronavirus or the deteriorating political relationships between China and the US?

The coronavirus is a much bigger threat. China has a very strong the fundamental economic position. It will be affected by geopolitical issues to a small extent. It will grow a little more or a little less. The way I know the Chinese, they will take certain decisions based on the coronavirus and they will implement these decisions for the next five to ten years, to make sure that their own economic survival is less dependent on global trade. It will be a strong economy in the long-term perspective.

And what about the worsening relationships between the Czech Republic and China? It’s a fact they’re cooling down.

It’s a fact, but I think this is perceived as very important here, and much less important there. And business is simply business in China. We bring something for Chinese consumers. We are running business with retailers, customers and banking partners. People have long-term benefits from this, and that’s what matters for the Chinese. Financial inclusion is important in China – increasing consumption. The Chinese economy is dependent on investments and exports today. They need to change it so the economy depends more on local consumption. Providing retail credit is a way to boost consumption. That matters for China.

The Czech Republic is almost as important for you as China in terms of assets. PPF has an issue with its reputation here. Some politicians, the media and the public perceive it as an arrogant player. Some say you promote Chinese interests too much. Does the reputation issue have an impact on your business?

Let’s have a look at what we have in the Czech Republic: Air Bank. Not there ten years ago. It came to disrupt the current account or deposit market, acquiring 10,000 customers a month and doing extremely well. Why? Because it brings new value for customers. What’s next? Zonky. A major player in cash loans, it does P2P; also very successful, doing very well.

Home Credit has been around for 22 years: car loans, cash loans. It launched the Kamali loans that were voted one of the most ethical loans in the Czech Republic a few weeks ago. All of these are customer-oriented businesses. As long as we bring the customers a meaningful added value, as long as we have customer-friendly technology, we’ll have business.

It caused a scandal last year when Home Credit wanted to become a sponsor of Charles University. Some academics objected that a pro-Chinese firm was not an acceptable partner. Do these situations really not damage you?

From a business perspective, absolutely not. It doesn’t show in any figures. Although it did bother us as individuals. We saw it as extremely unfair. What on Earth is wrong with financially supporting Charles University?

You decided this year to stop enforcing debt under former arbitration clauses in loan agreements. This practice is not allowed for new loans under the rules effective today, but you and other banks stuck to it in old agreements. Did you withdraw because of deteriorating reputation issues?

I am very proud we made this decision. We introduced the clause in some of our contracts a few years ago. We thought it made sense, it was in line with the law. You build a business. Then you realise something is not in line with the society where you’re living, that it is not perceived as fair. So you take the loss and move on. As a business you have to live in a way that is aligned with the society you’re a part of. The legal system here makes arbitration clauses possible, but they are perceived as inappropriate from a social perspective. So you find the right compromise. I’m not saying it was easy.

It took you quite long, considering that you’re saying that if something is not aligned with society, you move on. The practice has been criticised for many years.

What’s okay or not okay with society is not black and white. What’s acceptable in small numbers is not acceptable in high numbers. What was acceptable twenty years ago is no longer acceptable today. Things change and you need to adjust the business. Business has to adapt to society, technologies, the environment… Who would have spoken about the environment fifteen years ago? And you have to be environmentally sustainable today. This was the same thing. So, it’s not fair to ask us why we didn’t know five years ago. We do recognise it today and we moved on.

Does the not-so-good reputation of PPF Group complicate the acquisition of CME with TV Nova, the influential Czech TV?

You know, I know PPF’s philosophy very well, I know Home Credit and I know real estate. I know a lot about Sotio’s business, since I worked for Sotio for several years. I know very little about telco and the TV business. In fact, I haven’t lived in the Czech Republic in the last 13 years, so I don’t know the Czech political and media landscape in great detail.

As a shareholder you must have information on how the process is going with such a major transaction.

I know the intention of the transaction and the business case. But knowledge of where the process currently stands… believe it or not, I don’t have it. When you work in a team of talented people where we all have a lot of work to do – because we have big ambitions and a lot of ideas -, and then the situation gets more complicated because of COVID, you work on whatever it is you have to do. If you all do that as a team, you’ll do very well. If you spend your time wondering what the others are doing, then you’re not doing what you’re supposed to. And Home Credit, which I’m leading right now, is a really big company.

Your financial statements for last year say: “at this moment the group has limited access to finance information regarding the fair value of CME”. Does this mean that you don’t know the value of something you are buying for more than two billion dollars?

I’ll go back to my former answer. You don’t have to believe me, but I don’t know it. On top of that, that company’s shares are still being traded on the stock exchange. We cannot have different information than what the market has.

You were planning to list Home Credit on the stock exchange last year, but it fell through eventually. Is the plan dead with finality?

The current process has stopped. For the future, an IPO is one of our options, but right now it’s too early for this. We have no specific plan at this point. With that said, never say never.

Is PPF planning to increase its interest in Home Credit? We are asking because the financial statements for 2019 mention contracts with Emma Omega, through which Jiří Šmejc, Mr Kellner’s long-time trade partner, is holding his interest in Home Credit. Mr Šmejc has an option to reduce his interest and the report mentions the plan for his company, Emma Omega, to sell all of its Home Credit shares by December 2023.

PPF currently has a 91 per cent interest in Home Credit. We have a very good, long-term, successful and personally very rewarding relationship with Jiří Šmejc, and there is no plan to change it.

The mention in the annual report means that we have an agreement until 2023, and then Mr Kellner and Mr Šmejc will discuss it again.

Back to the coronavirus. Many companies realised this year that the home office working arrangement actually works. Does that pose a threat for commercial real estate for the future? Is there a risk that many offices will remain vacant in the future?

Do you have kids? Do you know what it is like working at home with two kids in your back?

Home office is better sometimes…

That depends, it really depends. Look, I’m sure it will have some impact, but our real estate activity is doing quite well. We have quality assets. From PPF’s viewpoint, real estate is something that I would call a low-risk activity.

Thank God we have increased the occupancy of our buildings well above 90 per cent in the last five years, so we have a very low vacancy rate. We also have warehouses in Russia, close to Moscow, and their importance is growing with the growing volume of e-commerce. These are also high-quality assets, populated with good tenants, well managed. So there’s also value for service.

Is this time good for new opportunities, such as buying new properties? Are you planning any new investments?

We are permanently reviewing assets that are up for sale. Frankly speaking, right now, there is a certain degree of uncertainty; it’s too early to buy. In addition, the crisis may hit some of those assets more, so it’s probably better to wait until it hits the very floor. You know, you don’t want to catch a falling knife. You want to be at the bottom or close to the bottom so the investment is safer. But yes, there will be things to buy.

Maybe in areas other than where PPF is active now?

Definitely in real estate. It’s good to focus on the markets or assets that you understand, that you know how to underwrite properly. With this being said, we may see something in other areas. For example, we have been recently considering outlet centres because it seems that it is a segment that will go up in Russia. We also focus on other office buildings in prime locations, on high-street retail where we did several very good transactions in the past.

We’re also looking in the US into the ‘multi-family office’ segment, which is an area that will go down due to the crisis and then will most likely do well. In terms of new sectors, PPF has had a fantastic track record of almost 30 years of investing in new sectors. Learning how to deal with it, to operate it for five, ten, fifteen, twenty years. And then divest at the right moment. So I wouldn’t be surprised if such a transaction happened at some point in time.

Can you compare government response to the crisis in the countries that PPF has experience with? How do you evaluate government steps in America, Europe, China?

I have to say that, at a certain point, I only expected the Chinese to do a complete lockdown. I never thought that democracies would do it. In the end, democracies did a complete lockdown, no problem. Even in the USA, in New York – I have a daughter, she works there as a vet, so I know that a lockdown was in place. They did a lockdown in California, in France, in Italy, and in the Czech Republic even before other countries. All of the governments had the courage to face their constituencies and say: “we’re sorry, but healthcare is more important; we’d better do a lockdown.” It shows the strength of…

… the strength of fear?

… no, courage. They had to do it and they did it. Even Johnson’s government in the UK eventually had to give in and say, sorry, this is it.

From a business perspective, probably the best regime for that is Vietnam because they had the strictest approach to managing the virus from the very beginning. Vietnam basically introduced very quickly a quarantine for those coming in, and then they were doing a very strict, very localised lockdown. They would lock down a street. They’d bring food in, but it was closed; the people had to stay there. That’s the only way to deal with it. As a result, Vietnam avoided disease propagation. That’s what you call a smart lockdown. There was almost no COVID in Vietnam, so they were the smartest, I guess.

The best support that a government can give the economy is avoiding the virus. Once you have the virus, you have a lockdown, and once you have a lockdown, you have an economic downturn. Vietnam managed this the best from this viewpoint. It is interesting because they have measures everywhere. All the countries have been dispensing huge amounts of money, but it’s like… putting a plaster on a broken leg. It’s better than leaving the broken leg like that, but if you can, not breaking the leg is better.

How do you rate the Czech Republic?

The Czech Republic was very good in quickly locking down – you were quicker than anyone else in Europe. You closed the borders, which was bold. Economically, you are in a better shape than Italy or France. If we had acted quicker and more decisively everywhere, the economic crisis would be weaker.

The question is if it was possible indeed.

Some countries were quicker than others. And by the way, it’s not just the governments but also society. The governments are a reflection of the willingness of society to look at the facts and look at the truth. But I’m no expert in this, so I can’t tell you.

What changes do you expect “after COVID”? They say the world will never be the same.

Now, we are going into philosophical things, but never mind, it’s interesting. In my experience, whenever I predicted long-term trends in a moment of crisis, I was wrong a lot.

It’s fine, then, we can just change it around…

Crises have something in common with super-optimism. It blocks the ability to think rationally. If you’re depressed, your brain is going to look at things negatively. You’re going to look for issues, for concerns, and you will never see the moment when it rebounds.

Human nature has an amazing ability to forget. Just take Europe. The Second World War finished 75 years ago. Thirty years ago we dispensed with communism. The Czech Republic joined the European Union in 2004 and – a fantastic success. Look at what the EU has done for Central Europe! This was not ‘sold’ right, or explained, so now you have rising populism. People say it would be better without the EU. It blows my mind. But I digress from your COVID question. So, changes in people’s social behaviour will last about five to ten years. We will keep our distance. I have not seen my parents in four months. My father is 88 and he just told me: “I won’t hug you.” Okay, dad! [laughs] They just don’t hug.

So you will have that. And that will affect different things. Maybe e-commerce will strengthen in the long-term run, with negative impact on badly located and badly provided shopping centres. There will be more work from home, with all the good and all the bad, because work is also a place of social interaction, a place of professional and personal development. Will we stop travelling? I think the economic crash will have a significant impact, and it will take a couple of years to fully recover. We could lose three or four years of economic development.

Part I:

Part II: