It seems that you, Tom Hagen and I sing from the same hymn book, we like CCP's conservative accounting. Tom Hagen's explanation mirrors what I had presumed. The rest of this post is mostly what I saw when I looked into the matter.
I could not find what CCP had stated in the past about provisioning for doubtful debts, but my memory is that the business started with up-front provision of 20%, but some years later that was dropped to something like 18.5%.
When Covid-19 hit, people initially were loath to borrow, and CCP tightened its lending criteria, so new loans declined rapidly. Also, access to sources of lump-sum funds inclined borrowers to repay outstanding loans. Consequently, the outstanding balance dropped, but CCP has started advertising again. These are points in the FY21 chairman's report.
As to why CCP left so much accumulated fat in the balance sheet, rather than move the excess into the trading accounts, and this boosting profit, the Annual Report states. “Arrears and losses on the consumer loan book were at record low levels during the year. Despite this, new loans were still provided for at pre-COVID-19 levels [of provisioning]resulting in the provision for losses increasing to 26.5 per cent of the pre-provision carrying value of the loan book. The assumption is that this phenomenon is temporary and that the additional loan provision will be absorbed [as profit] as more normal economic conditions resume.” I added the comments in blue font.
The history of the provision for expected credit losses in $m is:
The difference year-on-year is the value posted as an expense in the trading accounts.
Management can move as much of the $14.607 into revenue as suits their agenda, subject to leaving a sufficient balance that the auditors will accept. In loose terms, I suggest that some $10m of the $14.607 is play money that can be used to engineer NPAT to meet guidance, as adjusted in FY22. In effect that $10m is profit made in the past to be shifted into the future – time shifting.
Management can take that mooted $10m and hurl it at US or other expansion expenditure to be absorbed in FY22 to gain a benefit later – more time shifting. And of course, provisioning each new loan in advance is time shifting, which is why in times of rapid Loan Book growth, the profits for the lending business drops.
No tax-delay advantage flows from time shifting provisions for doubtful debts, because the ATO only accepts actual bad-debt losses, and ignores the provisioning as an expense.
CCP Price at posting:
$30.03 Sentiment: Hold Disclosure: Not Held
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