Australian households are on the brink of financial turmoil as an increasing number of fixed-rate home loans expire, leaving them exposed to higher variable interest rates. With the Reserve Bank of Australia (RBA) reporting a significant spike in borrowers experiencing negative cash flows, Credit Clear (ASX: CCR) anticipates that more Australians will fall behind on their bills, leading to a surge in demand for their debt recovery services.
As reported by the RBA’s Financial Stability Review in October 2023, there has been a sharp increase in the percentage of borrowers with negative cash flows, indicating their inability to make debt repayments after covering living costs. This figure has risen over 300% in the past year, from 3% in 2022 to 13% in 2023. This increase in financial stress has occurred just as more than half (55%) of borrowers who previously had lower-rate fixed-interest loans have shifted to higher variable loan rates.
The RBA’s report also suggests that 18% of fixed-rate borrowers will experience negative cash flows once they transition to variable rates, assuming no additional interest rate hikes occur before this transition. This economic environment is expected to place significant pressure on Australian households, pushing them toward utility, insurance, and other accounts. This will likely lead to an increased demand for Credit Clear’s debt recovery services as utility providers queue up as secondary bills to be paid after mortgage payments.
For the three months ended 30 September 2023, Credit Clear recorded record revenue for the quarter, amounting to $10 million, reflecting a 12.2% quarter-on-quarter increase.
The Company’s digital technology segment, which offers high-margin digital debt collection services, experienced substantial growth, with payments made via the digital platform rising 26.4% quarter-on-quarter to reach $26.3 million. This marks the first time that the company has collected over $20 million on this platform. With the company’s Consumer Division actively embracing and deploying digital technology, digital collections now account for 56% of consumer division payments in portfolios where digital engagement has been introduced.
Credit Clear’s inventory of debt files has continued to expand, with the volume of files increasing by 16.7% quarter-on-quarter, and the value of these files growing by 9.5% to $2.3 billion. This growth can be attributed to various factors, including an increased share of work from existing clients, the onboarding of new clients, particularly major tier-1 clients, and challenging economic conditions such as interest rate increases and rising living costs leading to an overall increase in overdue accounts.
During the Q1 of FY24, Credit Clear signed 114 new clients, among them tier-1 and tier-2 consumer businesses, including non-bank credit providers, energy retailers, and insurers. These clients are looking to adopt innovative engagement strategies and strengthen their collection capabilities in the current challenging economic environment.
Despite the economic challenges, Credit Clear has noted that their collection rates have remained steady, mainly due to high levels of employment in Australia, which has helped many borrowers meet their financial obligations. Nevertheless, the company is prepared to address the expected surge in debt recovery needs as more Australians grapple with mounting financial pressures.
Alfred Chan is a Business Reporter at The Sentiment specialising in ASX-listed small cap companies, a bloodstock enthusiast and former equities analyst.
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