Credit quality dogs Zip turnaround

Ian Rogers

Bad debts and arrears are climbing, at least in the core Australian business, of consumer lender Zip Co, while receivables are in decline broadly.

A June quarter trading update released yesterday shows Zip’s arrears in Australia and New Zealand increased to 3.46 per cent over the June quarter from 2.72 per cent in the March quarter.

‘Net bad debts’ Zip said were 4.69 per cent in June, from 3.49 per cent in March.

Zip said the increase in net bad debts over the quarter was “driven by seasonality [and] softening in the external environment.”  Zip also argued the increase “is exaggerated given reducing receivables balance.”

Zip did not share on update on its receivables, but other key metrics show the financier is in reverse in its core market. Receivables were $2.6 billion at December.

Transaction volume of $845 million over the June 2024 quarter was 11.4 per cent lower than in the June 2023 quarter, though 6.8 per cent higher than in the March 2024 quarter.

The number of ‘active customers’ as at the end of June 2024 of 2.2 million was down 5.4 per cent over a year and down 1.7 per cent over three months.

Zip continues to make headway in signing up merchants, with 55,100 merchants at the end of June, up 14.1 per cent over a year.

The metrics on transaction volume and merchants confirm that Zip, in common with what remains of the broader buy now, pay later sector, accounts for an immaterial share of payments activity.

In the US (which is now Zip’s sole international market) transaction volume leapt 41 per cent over a year and lifted nine per cent over the quarter to US$1.16 billion.

But active customers in the US, at 3.8 million, was down 1.4 per cent over a year. The increase in merchant numbers was meagre, with this number standing at 24,200.

Thus there are material qualifications on the turnaround story that Zip is selling – and which investors have been buying into this year.

As is standard, Zip provided (favourable) earnings guidance on an EBITDA basis.

While Zip reported a profit over the December 2023 half, on the basis of the June quarter trading update any FY2024 profit will depend on cost management, interest costs and credit costs.

Accumulated losses for Zip, up to December 2023, were $2.09 billion, which compares with issued capital of $2.2 billion.

Zip yesterday announced an equity capital raise, comprising a fully underwritten placement of $217 million and a share purchase plan expected to raise $50 million.  The new shares represent 12.7 per cent of Zip’s share capital.

Trading in Zip shares was suspended yesterday, pending a bookbuild for the placement. Zip shares last traded at $1.61.

Zip’s shares traded at an all-time low of 25 cents in October 2023 and reached a short-term peak of $1.82 a week ago.