Ann: Credit Corp Group H1 of 2023 Media Release, page-38

Joewolf

Flattery will get you far, because we humans cannot get enough of it. I'll comment on three sentences that you wrote. However, my answers that include accounting and taxation conventions may not suffice to inform folk who do not have reasonable knowledge of both those fields, so feel free to ask for clarification.

It seems that if they upfront provision against loans made then they incur a charge that isnt directly linked to the interest earnings.

That is correct, and the ATO disallows provisions for doubtful debts to be treated as a tax-deductible expense, so no delay in paying some of the tax is achieved by over provisioning. Statutory accounting is not the same as taxation accounting. A valid argument could be made to align provisioning to “days overdue” to give a factual basis supporting the provisioning.
It is counter intuitive to think CCP is doing well because it secures more loan business, and then have to adjust the poor NPAT in the statutory accounting as a CCP quirk.

Then the big issue there is a PDL purchase amount and then collections and at the end a carrying value of the book. Buy lots of PDL seems to mean that you will directly earn lower income until they start getting the revenue in from that book.

PDL revenue and the expense is, in effect, based on collections, because CCP twists the mandated “fair-value” accounting standard to effect this. CCP could use the standard to distort reasonable reality. The “fair-value” accounting standard has abandoned PDL amortisation in favour of revaluing PDLs at fair value, but unlike bonds, there is no open market for PDLs, so management must invent a value, which gives them a handy tool to inflate statutory profitability in the short term, if it suits their agenda. To its credit, CCP's management has stuck to the laudable amortisation-based accounting in effect, which is why I often use the term “effective amortisation” when writing about CCP.

Collections from fresh PDLs tends to come in quickly initially. I have forgotten metrics that I read years ago, but the purchase price of a PDL tends to be recovered in a few months longer than a year, (I think 16 months) then the tempo declines.

Add a third team of collectors - that will be a cost until collections start paying for those costs.

That is correct, there is always an expense incurred when hiring and training new collectors, but in the normal setting of expanding slowly, that expense is not patent. The massive increase in PDL volumes purchases in the US is hence a drag on profitability, and CCP may have been wiser not to have entered the large forward flow commitments to which it had agreed.

CCP had to struggle in its early years of operating in the US, because it was not on the “buyer panels” of the main sellers (Tier 1 banks) who sold the quality of PDLs that CCP likes to buy. In CCP's eagerness to get on those panels, it may have offered to buy more PDLs under forward-flow agreements than was optimal. CCP came close to destroying itself in FY2008 by aggressively buying more PDLs than it could handle, so there is bound to be a good reason behind its buying spurt in the US. The Announcement stated that the tempo of buying will be low in H2FY23, so we are likely to see a much better H2, as Management opined, and this should flow into FY24 as one could deduce. Comment from Management on this point would be welcome, and should be forthcoming in the EOY Announcements, or at least deducible from the profit guidance for FY24.

Recruiting, training and retaining collections staff is a key goal in a business that does not appeal to many job seekers, and when CCP was new to the US, the then chairman, mentioned staff poaching as a problem. CCP had some success recruiting people who had worked in either casinos or restaurants, because if they passed an aptitude test biased toward verbal ability, their people-handling skills were usually above average. Working fixed hours on normal weekdays, attracted many women and men who wanted to work more sociable hours than is the norm for restaurant and casino businesses.