Distrib. Fin. Regulatory News (DFCH)

29 September 2023

Distribution Finance Capital Holdings plc

("DF Capital" or the "Company" together with its subsidiaries the "Group")

Results for the six months ended 30 June 2023 and Trading Update

Scaling the bank to deliver strong growth in profitability

Distribution Finance Capital Holdings plc, the specialist bank providing working capital solutions to dealers and manufacturers across the UK, today announces its results for the six months ended 30 June 2023 together with a trading update.

• Delivered £3.2m profit before tax; more than entire FY 2022 (H1: 2022: breakeven).

• 8 consecutive quarters of loan book growth; loan book up 69% to new record of £519m (H1 2022: £308m) including £15m of new lending products.

• Record new lending up 38% to £607m (H1 2022: £439m); supported by £926m of facilities (30 June 2022: £724m) and 1,152 dealers (30 June 2022: 908).

• Retail deposits total £498m (H1 2022: £304m) from over 13,600 accounts.

• Net interest margin (NIM) increased to 7.5% (H1 2022: 6.1%), ahead of 6% target.

Post period end highlights and outlook

• Loan book growth continued ahead of seasonal expectations over summer; closed August 2023 at more than £518m.

• Launched maiden easy access saving account: £44m of deposits raised from 1,150 applications in c.36 hours.

• British Business Bank ENABLE Guarantee extended to £250m.

• Obtained £20m non-dilutive Tier 2 capital facility from British Business Investments; first £5m drawn in September 2023.

• Potential aggregate capital capacity provides optionality to deliver attractive loan book growth to in excess of £800m, without the requirement for additional dilutive Tier 1 equity raise.

• FY 2023 loan book expected to be in the range of £550-600m and profit before tax expected to be in line with Board expectations.

Carl D'Ammassa, Chief Executive, commented: "It is pleasing to report the continued strong momentum within the bank. Reporting eight consecutive quarters of loan book growth and profitability during the period under review that outpaces the whole of 2022, truly demonstrates that our products and services resonate with our dealer and manufacturer customers.

Having the aggregate capital firepower to provide loans in excess of £800m, provides the ability to support an attractive growth plan without the need for additional dilutive Tier 1 equity. Notwithstanding the macro-economic outlook, we remain optimistic about our full year performance."

For further information contact:

Chief Executive's Statement

Strong growth in profitability; on-track to hit full year expectations

The Group is pleased to report on the progress made during the first half of 2023, delivering eight consecutive quarters of loan book growth and profit for the period in line with the Board's expectations. The Group has built on the momentum reported in 2022. Despite a macroeconomic environment that has proven increasingly challenging, with rising interest rates and a tightening of consumer demand across a number of sectors in which our customers operate, our products and services continue to resonate with our manufacturer and dealer customers, playing an important role in supporting their working capital needs.

During the period, we increased lending ahead of seasonal expectations and hit record loan balances of £519m as at 30 June 2023, whilst delivering net interest margin well above our 6% target. In addition, by gaining access to the British Business Bank ENABLE Guarantee, we have unlocked capacity to drive further organic growth without the need for additional Tier 1 capital which would have otherwise required us to raise further equity. These factors, alongside effective cost control and strong portfolio management have delivered a profit before tax in the first six months of 2023 of £3.2m, materially outpacing what was achieved through the entire twelve months of 2022 (FY22: £1.3m). 

These results underpin the Board's belief that the strategy is effective as we can profitably scale the bank and move forward at pace on our journey to deliver a mid-to-high teens return on capital over the medium term.

Record loan origination; supporting more customers than ever before

The Group originated new loans of £607m during the six-month period to 30 June 2023, up 38% on the equivalent period in 2022 (H1 2022: £439m), increasing its reach across our chosen markets and now supporting 1,152 dealers (30 June 2022: 908 and 31 December 2022: 998). Aggregate dealer loan facilities at the end of the period totalled £926m, up 28% on the prior year (30 June 2022: £724m) and up 13% on the end of FY22 (31 December 2022: £817m).

The Group's loan book ended the period at £519m, up 69% on the equivalent period in the prior year (30 June 2022: £308m) and up 18% on the end of FY22 (31 December 2022: £439m). At this critical time for dealers and manufacturers, it is clear that our products and services continue to resonate. Our digitised approach to lending, coupled with the depth of relationship management are the foundation of our growth story. 

The impact of high inflation and rising interest rates has been felt across a number of sectors, where discretionary spend has tightened, adversely impacting dealer sales. This dynamic has a positive impact on our loan book balance, as slowing sales means that dealers hold more stock on their forecourts, and for longer.

Overall, stock turn (i.e. the weighted average duration of repaid loans in the period) has slowed to 133 days (6 months to 30 June 2022: 110 days), extending by 13 days over FY22 (12 months to 31 December 2022: 120 days). Whilst this was expected, it is still below our historical annualised average of 150 days and our seasonally adjusted expectations, leaving additional capacity for loan book growth should sales slow further.

The average age of outstanding loans has extended quarter on quarter to 145 days in Q2 2023, from 128 days in Q1 2023 and 109 days in Q4 2022, with a further extension seen so far in this quarter at 158 days.

In the transportation sector, as an example, we have seen lower relative demand from end users for electric vehicles versus combustion engines, whereas by comparison demand has remained relatively high particularly in the motorhome and caravan sectors. In these markets new loan origination and therefore stock flowing to dealers has remained robust, despite this dynamic.

Portfolio By Sector

The following table analyses the portfolio at the reporting date by principal outstanding:

1 Principal balance outstanding at the reporting date for loans and advances to customers.

During the period, we originated c.£21m of new lending across adjacent receivables financing (better known as invoice discounting) and wholesale funding products. Whilst these lending opportunities remain small in the context of our entire loan book at £15m (c3%) at the end of June 2023, they present attractive risk-adjusted returns for the Group and diversification within the loan book, as well as offering routes to deepen relationships with our customers, providing them with alternative lending products that support their businesses' needs.

Becoming a multi-product lender remains a strategic imperative for the Group over the medium term. We have continued to explore inorganic opportunities, be that through business combination or partnership with others, but are yet to identify an opportunity that demonstrates acceptable financial characteristics which would be additive to the Group's longer-term ambitions. As we continue to scale the bank, building diversification in both lending product and obligor mix are important for the Group to effectively manage its risk weighted assets, control concentration risk and remain capital efficient.

Financial performance

Summarised Statement of Comprehensive Income

1 Sum of interest and similar income, fee income, net gains/(losses) on disposal of financial assets, and net losses from derivatives measured at fair value through profit or loss

2 Gross revenues less interest and similar expenses

Summarised Statement of Financial Position

Net Interest Margin ahead of 6% target

Net Interest Margin (NIM), which is gross yield less interest expense, increased during the period to 7.5% (H1 2022: 6.1%), being well ahead of our NIM target of 6%, largely influenced by movements in UK base rates.

Gross yield increased by 43% to 10.6% (H1 2022: 7.4%), as base rate rises were passed on through newly originated loans. This coupled with a higher average loan book through the period saw gross revenues, which predominantly comprise interest and similar income of £26.5m and fee income of £0.8m, increased by 161% to £27.4m (H1 2022: £10.5m).

As expected, and given the rising base rate, the average cost of retail deposits increased during the period to 3.7% (H1 2022: 1.3%). As the Group's deposit book is predominantly an array of fixed rate tenors, it takes time for increasing deposit rates to fully flow through to the deposit book as a whole, only impacting as older maturing deposits are replaced by newer deposits at higher rates.

Accordingly, the loan book has repriced more quickly than the deposit book given its shorter average tenor, which has driven much of the favourable NIM expansion. This positive mis-match has been more pronounced in 2023 given the speed of base rate increases and whilst we expect some favourability in the near-term it is less likely to be as significant over the medium term; unwinding over time as the base rate reduces. Our target NIM remains unchanged at 6%.

Unlocking our operational leverage

During 2022, the Group bolstered and upgraded its commercial and relationship management team. Accordingly, most of the people resources we require to scale the bank over the near term are embedded in the business already, allowing us to unlock operational leverage as we grow our lending. Our platform is highly digitised and we continue to make investments in robotic process automation and character-recognition technologies to provide us with further operational capacity.

As a Group, we are not immune to the general and wage inflationary pressures. We have carefully managed these inflationary pressures whilst being mindful of the cost-of-living pressures faced by a number of our employees and our need to attract and retain high quality colleagues to support our growth ambitions.

As such, we expect any increase in cost relating to the core lending product, to be predominantly driven by increased relationship management and client facing employees and any on-going inflationary pressures. During the period under review operating expenses were £11.1m, an increase of 41% on the comparative period (H1 2022: £7.9m). 

Whilst our overall operating expenses increased during the period, this increase was considerably lower than the relative increase in net income and our cost to income ratio reduced significantly to 61% (H1 2022: 92%). We expect our cost to income ratio to reduce further as we continue to scale the bank.

Strong portfolio and credit risk management

We are operating in a more challenging macro-economic environment, where a number of businesses will find it increasingly difficult to navigate rising interest rates, high inflation and potentially contraction in demand. Accordingly, we have held a highly cautious and vigilant approach to credit risk management.

We have continued to invest in technology and analytics to provide us with greater early warning of issues amongst our customers, as well as adding further capacity to visit dealers to ensure our security remains in place. Dealers selling assets and not repaying us directly (sale out of trust) is our single biggest credit risk.

We have made adjustments to our credit criteria for new dealer relationships to ensure we maintain a high-quality portfolio of relationships. Through this period of uncertainty and as we bring on new dealers, our focus is on the quality of dealer relationship rather than quantity of new dealers onboarded.

Scalability and credit quality of our manufacturer partners has been in focus for us through the period, making tough decisions to reposition relationships that do not meet our revised expectations. Whilst the Group added 16 new manufacturers in the period, the total number reduced to 86 key manufacturers and distributors who meet the Group's revised criteria (FY22: 90). The 20 manufacturers where relationships were terminated represented approximately £3.5m of the new loan origination to end of August, c0.4% of total new lending; management believe these relationships do not present scalable opportunities for the bank.

Arrears

The following table analyses the arrears balances of lending portfolio at the respective reporting dates. This table includes the arrears balance (principal, fees, and interest) by past due days, and a following table which summarises the maximum arrears days past due by total principal outstanding on the respective loan receivable:

Despite the economic uncertainty, the actions we have taken to manage our portfolio have delivered a continued low number of arrears cases during the period, with just 29 dealers out of c1,150 in arrears at 30 June 2023. Total value of arrears has increased from the end of FY22 at 2.5% of the loan book (30 June 2022: 0.2% and 31 December 2022: 1.6%). The Group's arrears balance includes £10.4m outstanding in respect of a previously communicated large single obligor, which excluding this balance would have been 0.5% (31 December 2022: 0.6%).

This large single obligor, who has been a customer of the Group since June 2018, has been undergoing a major refinance and restructure. As a result, its facility is not currently operating in the normal course, and we are aware of a number of assets that have been sold out of trust or are missing from confirmed locations. While we had expected the restructuring and refinancing process to complete during Summer 2023, given the complexity of the situation and unique characteristics of our customer's position, progress has been slower than expected. We have been in regular direct communication with the firm's principal, its largest existing secured lenders, new shareholders and new lender throughout, despite the Group not being a direct counterparty to the refinance. Whilst the successful conclusion of this refinancing and restructure is not without risk, we are both confident and reassured by the extent of our dialogue with stakeholders. The Group continues to have cross company and personal guarantees relating to the facility in force. The Group will make further announcements as soon as it is able.

Cost of risk, which includes provisions for credit losses and write-offs, for the six months ended 30 June 2023 was 1.55% (H1 2022: 0.50%). Our approach to credit loss provisioning is principally a function of expected probability of default and loss given default, with additional consideration given for aged arrears cases. Where there are instances of more complex cases or obligor default, which remain in progress, the Group undertakes analysis of a range of scenarios, associating a likely outcome probability against each. These scenarios, which determine the size of any provision, are based on the specific circumstances of an individual case, known factors and the Group's relative security position. Following the principles of IFRS9 and given the probability-based approach to calculations, any individual case specific provision is unlikely to represent the anticipated financial impact in either the most positive or least favourable outcome. Additionally, the Group's credit loss provision for the period incorporates an IFRS9 overlay increase for the general uncertain macro-economic environment and outlook. The Group has aggregate credit loss provisions for the whole portfolio and all arrears cases of £7.2m at 30 June 2023 (31 December 2022: £3.7m) with impairment charges of £3.8m for the period (H1 2022: £0.7m). The Group expects its full year cost of risk to trend back towards its through the cycle estimate of 1% of average gross receivable.

The Group's lending relative to its security position remains strong with a Loan to Wholesale Value ('LTV') of 88% (30 June 2022: 90% and 31 December 2022: 91%). This reduction in LTV is due to a slowdown in stock turn with an increase in the associated monthly capital repayments.

Our Security Position

1 Wholesale price is the invoice value paid by the dealer to the manufacturer

On balance and given the current macro-economic environment, we are pleased with the underlying high quality and financial strength of our dealer obligors as a whole.

Effective deposit raising capability

We continue to operate an effective and well-diversified deposit raising capability, entering the best buy tables as necessary. Over £168m of deposits were raised or retained on maturity during the period (H1 2022: £84m), at an average interest rate of 4.4%. We continue to focus on existing customer retention, with c.70% of maturing deposits retained through loyalty products and a seamless online product change process. As at 30 June 2023, we had retail deposits totalling £498m (30 June 2022: £304m; 31 December 2022: £480m) from over 13,600 accounts. We continue to offer exceptional service to our deposit customers receiving over 1,800 feefo customer reviews with an average score of 4.7 over the past 12 months.

Well capitalised balance sheet to support near-term growth ambitions

The Group is well-capitalised. At 30 June 2023 the Group's equity stood at £98.8m (30 June 2022: £86.1m; 31 December 2022: £96.2m).

Supporting our growth ambitions, in January 2023, the British Business Bank agreed an initial £175m ENABLE Guarantee, which could be increased in the future to £350m. This Guarantee commitment provides the Group with incremental capacity to scale its loan book without the need for additional Tier 1 equity capital by up to £75m on the basis of the initial £175m facility and up to £150m if the facility is increased to £350m. In August 2023, this Guarantee was upsized to £250m, unlocking an additional c£105m of loan capacity without the need for any further Tier 1 capital.

Earlier this month, we announced that the Group secured a new £20m Tier 2 capital facility from British Business Investments, a wholly-owned commercial subsidiary of the British Business Bank. The facility, which has a term of 10 years, can be drawn in quarterly tranches of up to £5m.

Utilising the Group's existing equity, the entire £350m ENABLE Guarantee and the £20m Tier 2 facility, the firm has aggregate capacity to grow its loan book to over £800m.

Our CET1 ratio as at 30 June 2023 was 22% (30 June 2022: 31%; 31 December 2022:22%) which reflects the benefit of the reduction in Risk Weighted Assets provided by the British Business Bank Enable Guarantee and is well above our regulatory capital minimum limits.

Current trading and outlook

Notwithstanding the slower repayment of our single large arrears case, the Board is pleased with the Group's operational and financial performance year-to-date. Over the summer months, the loan book has continued to perform ahead of our seasonally adjusted expectations closing August 2023 at more than £518m. New loan origination has remained strong, stock turn has extended further and with continued elevated NIM, we have generated additional profits. Given current trading, our expectation of further loan book growth and the rebalancing of the cost of risk through the balance of the year, we expect full year results for 2023 remain in line with the Board's expectations.

I am very proud of what the entire DF Capital team has achieved since the Group obtained its banking licence in September 2020, not least eight consecutive quarters of loan book growth. The progress we have made this year is a testament to the quality of business we are building, the dedication of our colleagues and the breadth and depth of relationships we have with our manufacturer and dealer customers. 

Carl D'Ammassa

Chief Executive Officer

Financial Highlights and Key Performance Indicators

1 Sum of interest and similar income, fee income, net gains/(losses) on disposal of financial assets, and net losses from derivatives measured at fair value through profit or loss

2 Principal balance outstanding for loans and advances to customers.

3 The equity held in the Group

4 Regulatory capital is the Common Equity Tier 1 capital held

5 The effective interest rate we charge our customers including fees

6 Gross yield including fees less interest expense

7The weighted average interest rate we pay our depositors

8 Impairments and provisions in the period (annualised) as a % of average gross receivables.

9Impairment allowance as a % of gross receivables at the period end

10 Operating cost as a % of total operating income.

11 Number of borrower relationships

12 Number of vendors and manufacturers with whom we have programs that support our lending

13 Amount of credit available to our customers to draw (uncommitted)

Alternative Performance Measures

Certain financial measures disclosed in the Interim Financial Report do not have a standardised meaning prescribed by International Financial Reporting Standards (IFRS) and may therefore not be comparable to similar measures presented by other issuers. These measures (defined above) are deemed to be alternative performance measures ("APMs").

APMs may be considered in addition to, but not as a substitute for, the reported IFRS results. The Group believes that these APMs, when considered together with reported IFRS results, provide stakeholders with additional information to better understand the Group's financial performance.

Principal Risks

Based on the Group's strategy and business model, there are six principal risk categories used to help shape our policy and control framework. This categorisation creates structure for the risk policy framework and clear ownership/responsibility for assessing risk performance.

There are certain risk themes that cut across many of these risk types. We have chosen at this stage to manage them within the principal risks framework rather than separate them out, but keep this approach under active consideration. The most relevant cross cutting risk is climate change, which is considered in our risk assessment and controls but has not crystallized to the extent that we would separate it out into its own principal risk category.

Enterprise-wide Key and Emerging Risks

The Enterprise-wide key and emerging risks of the Group are: Macroeconomic risks; Operational execution and change; Cyber risk; and Climate change. Full details of each emerging risk, including the potential impact of the risk and how the risk is managed, are set out in the 2022 Annual Report and Accounts. As for any organisation, we are exposed to near-term plan risk, given the comments made about macroeconomic risk below.

Relevant updates for these risks are provided below.

Macroeconomic risk

We are operating in a more challenging macro-economic environment where the impact of high inflation and rising interest rates has been felt across a number of sectors, where discretionary spend has tightened, adversely impacting dealer sales. This dynamic has a positive impact on our loan book balance, as slowing sales means that dealers hold more stock on their forecourts, and for longer. But a prolonged and/or deep recession could ultimately lead to a rise in loan losses. The Group is protected through its various layers of security and is employing enhanced controls in preparation for an expected turn in the credit cycle.

Statement of Directors' Responsibilities

We, the Directors, confirm that to the best of our knowledge:

§ the interim condensed consolidated financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the United Kingdom (UK);

§ the interim report includes a fair review of the performance of the business and the position of the Group and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and

§ the interim report and financial statements, taken as a whole, are fair, balanced and understandable.

By order of the Board

.................................

Carl D'Ammassa

Director

28 September 2023

Independent Review Report to Distribution Finance Capital Holdings plc

Conclusion We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2023 which comprises the condensed consolidated statement of comprehensive income statement, the condensed consolidated statement of financial position, the condensed consolidated statement of changes in equity, the condensed consolidated cashflow statement and related notes 1 to 28.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2023 is not prepared, in all material respects, in accordance with United Kingdom adopted International Accounting Standard 34 and the AIM Rules of the London Stock Exchange.

Basis for Conclusion 

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council for use in the United Kingdom (ISRE (UK) 2410). A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with United Kingdom adopted international accounting standards. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with United Kingdom adopted International Accounting Standard 34, "Interim Financial Reporting".

Conclusion Relating to Going Concern

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis for Conclusion section of this report, nothing has come to our attention to suggest that the directors have inappropriately adopted the going concern basis of accounting or that the directors have identified material uncertainties relating to going concern that are not appropriately disclosed.

This Conclusion is based on the review procedures performed in accordance with ISRE (UK) 2410; however future events or conditions may cause the entity to cease to continue as a going concern.

Responsibilities of the directors

The directors are responsible for preparing the half-yearly financial report in accordance with the AIM rules of the London Stock Exchange.

In preparing the half-yearly financial report, the directors are responsible for assessing the group's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.

Auditor's Responsibilities for the review of the financial information

In reviewing the half-yearly financial report, we are responsible for expressing to the company a conclusion on the condensed set of financial statements in the half-yearly financial report. Our Conclusion, including our Conclusion Relating to Going Concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report.

Use of our report

This report is made solely to the company in accordance with ISRE (UK) 2410. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

Deloitte LLP

Statutory Auditor

London, United Kingdom

28 September 2023

Condensed Consolidated Statement of Comprehensive Income

Condensed Consolidated Statement of Financial Position

Condensed Consolidated Statement of Changes in Equity

1  See note 19 for further details of the share premium account cancellation transaction in the six-month period ended 30 June 2023.

Condensed Consolidated Cash Flow Statement

Notes to the Interim Financial Report

1. Basis of preparation

The interim condensed consolidated financial statements of Distribution Finance Capital Holdings plc (the "Company" or "DFCH plc") include the assets, liabilities and results of its wholly owned subsidiaries, DF Capital Bank Limited ("the Bank") and DF Capital Financial Solutions Limited, together form the "Group".

DFCH plc is registered and incorporated in England and Wales under company registration number 11911574. The registered office is St James' Building, 61-95 Oxford Street, Manchester, M1 6EJ. The Company's ordinary shares are admitted to trading on AIM, a market operated by the London Stock Exchange.

The principal activity of the Company is that of an investment holding company. The principal activity of the Group is as a specialist personal savings and commercial lending bank group. The Group provides niche working capital funding solutions to dealers and manufacturers across the UK, enabled by competitively priced personal savings products.

The interim report is presented in pounds sterling, which is the currency of the primary economic environment in which the Group operates, and are rounded to the nearest thousand pounds, unless stated otherwise.

1.2 Basis of accounting

The condensed consolidated set of consolidated financial statements included in this Interim Financial Report has been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting' ('IAS 34').

The condensed set of financial statements included within this Interim Financial Report for the six months ended 30 June 2023 should be read in conjunction with the annual audited financial statements of Distribution Finance Capital Holdings plc for the year ended 31 December 2022.

The annual consolidated financial statements of Distribution Finance Capital Holdings plc are prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and the UK adopted IFRS.

The condensed consolidated financial information for the six months ended 30 June 2023 has been prepared using accounting policies consistent with IFRS. The interim information does not constitute statutory financial statements within the meaning of section 434 of the Companies Act 2006. The financial information for the periods ending 30 June 2023 and 30 June 2022 are unaudited but has been reviewed by the Company's auditor, Deloitte LLP, and their report appears on page 16 of this Interim Financial Report. The comparative figures for the year ended 31 December 2022 are the Group's statutory accounts and have been reported on by its auditor and delivered to the Registrar of Companies. The report of the auditor on those statutory accounts was unqualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and did not contain a statement under Section 498(2) or (3) of the Companies Act 2006.

1.3 Principal accounting policies

The principal accounting policies adopted in the preparation of this financial information are set out below. These policies have been applied consistently to all the financial periods presented.

1.4 Going concern

The financial statements are prepared on a going concern basis as the Directors are satisfied that the Group has adequate resources to continue operating in the foreseeable future. In making this assessment the Directors have considered the Group's current available capital and liquidity resources, the business financial projections and the outcome of stress testing. Based on this review, the Directors believe that the Group is well placed to manage its business risks successfully within the expected economic outlook. Accordingly, the Directors have adopted the going concern basis in preparing the Interim Financial statements.

1.5 Critical accounting estimates and judgements

In accordance with IFRS, the Directors of the Group are required to make judgements, estimates and assumptions in certain subjective areas whilst preparing these financial statements. The application of these accounting policies may impact the reported amounts of assets, liabilities, income and expenses and actual results may differ from these estimates.

Any estimates and underlying assumptions used within the statutory financial statements are reviewed on an ongoing basis, with revisions recognised in the period in which they are adjusted, and any future periods affected.

Further details can be found in note 3 of these financial statements on the critical accounting estimates and judgements used within these financial statements.

1.6 Foreign currencies

The financial statements are expressed in Pounds Sterling, which is the functional and presentational currency of the Group.

Transactions in foreign currencies are translated to the Group's functional currency at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are retranslated to the functional currency at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign exchange differences arising on translation are recognised in the statement of income.

1.7 New accounting standards issued but not yet effective

The Group assesses on an ongoing basis the impact of new accounting standards which are not yet effective at the reporting date and the likely impact of the new accounting standard on the financial statements. At 30 June 2023, the Group has applied all new IFRS and foresees no additional standards with a likely material impact to consider at this time.

2. Summary of significant accounting policies

The same accounting policies, presentation and methods of computation are followed in the condensed consolidated set of financial statements as applied in the Group's latest annual audited financial statements for the year ended 31 December 2022.

3. Critical accounting judgements and key sources of estimation uncertainty

The preparation of financial information in accordance with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and reported amounts of assets and liabilities, income and expenses.

The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The areas involving the most complex and subjective judgements and areas where assumptions and estimates are considered to have the most significant effect on the financial statements are the same as those set out in Note 3 of the 2022 Annual Report and Accounts. A summary and updates regarding these critical accounting judgements and estimates are set out below.

Judgements

3.1. Expected credit losses loan impairment

Significant increase in credit risk for classification in stage 2

Counterparties are classified into stage 2 where the risk profile of the borrower profile has significantly increased from inception of the exposure. This increase in credit risk is signified by either increases in internal or external credit ratings, the counterparty becoming over 30 days past due, or forbearance measures being applied.

Definition of default

The Group aligns its definition of default to the regulatory definition for default in all periods presented. The Group applies the regulatory guideline of 90+ days in arrears and also uses internal and external information, along with financial and non-financial information, available to the Group to determine whether a default event has either occurred or is perceived to have occurred.

Should a default event occur the Group applies a probationary ("cooling off") period to Stage 3 counterparties before being transferred back to either stage 1 or 2. The probationary period is typically 3 months but is extended up to 12 months for more severe scenarios. During the probationary period the counterparty must no longer meet the criteria for Stage 3 inclusion for the entire applicable period.

Estimates

The Group has made the following estimates in the application of the accounting policies that have a significant risk of material adjustment to the carrying amount of assets and liabilities:

3.2. Expected credit losses loan impairment

See the Group's Annual Report for the year ended 31 December 2022 which outlines the assumptions the Group includes to best estimate the probability of default ("PD"), exposure at default ("EAD"); and loss given default ("LGD") inputs within the impairment model in order to calculate the expected credit loss ("ECL"). The general design of the impairment model remains unchanged for the period ended 30 June 2023, however certain assumptions have been updated to reflect changes in circumstances.

Probability of Default ("PD")

In the six-month period ended 30 June 2023, the Group observed a strong performance of defaults and a migration of counterparties into lower risk rating categories, which in turn has reduced the stage 1 and 2 PD in the six months since the 2022 annual report. The Group is closely monitoring the evolving macro-economic environment and is aware that some factors within the Group's PD modelling are lagging indicators. Resultantly, the Group has elected to increase its PD modelling within the baseline scenario by approximately 20%, resulting in a £270,000 additional impairment charge. To support this estimation, the Group has recently engaged with an external economics research company to provide industry-specific economic forecasts.

A 100% deterioration in PDs (excluding stage 3 exposures, which are already in default) would result in an additional impairment charge of £1,643,000 at 30 June 2023 (30 June 2022: £871,000; 31 December 2022: £1,130,000).

Loss Given Default ("LGD")

The Group reviewed its LGD modelling assumptions as at 30 June 2023 by comparing actual loss given default values against modelled LGD. The Group concluded its current LGD modelling was closely aligned to recent historical actuals.

Although the Group has observed strong performance in default recoveries within the six-month period ended 30 June 2023, the Group has elected to review its LGD modelling assumptions to reflect an uncertain economic outlook. Collateral haircuts have been reviewed at industry-level, along with an adjustment of "sold-out-trust" (SOTs) probabilities, which weaken the Group's recovery position due to becoming uncollateralised. The total additional impairment charge from these LGD modelling adjustments in the period is £119,000.

A 10% reduction in the expected discounted cashflows from the collateral held by the Group would result in an additional impairment charge of £2,356,000 at 30 June 2023 (30 June 2022: £956,000; 31 December 2022: £2,389,000).

The Group's arrears balance includes £10.4m outstanding in respect of a large single obligor. This obligor has been undergoing a major refinance and restructure. As a result, its facility is not currently operating in the normal course, and we are aware of a number of assets that have been sold out of trust or are missing from confirmed locations. This obligor balance is therefore assessed as a stage 3 exposure. For those counterparties who are in stage 3, where there are instances of more complex cases or obligor default, which remain in progress, the Group undertakes analysis of a range of scenarios, associating a likely outcome probability against each. These scenarios, which determine the size of any provision, are based on the specific circumstances of an individual case, known factors and the Group's relative security position. Given the probability-based approach to calculations, any individual case specific provision is unlikely to represent the anticipated financial impact in either the most positive or least favourable outcome.

Forward looking macroeconomic scenarios

The Group considers four economic stress scenarios within its impairment modelling whereby the Group stresses PD and LGD inputs in accordance with expected macro-economic outlooks. This provides an ECL impairment allowance for each scenario which is multiplied by the likelihood of occurrence over the next 12-month period from the balance sheet date to give a probability weighted ECL. 

1 ECL Coverage is calculated by dividing the ECL impairment by the Exposure At Default (EAD). EAD is typically higher than the gross loan receivable balance.

In the event one of the above scenarios occurs and applied a 100% probability weighting the impact on the impairment allowances would be as follows:

3.3. Deferred taxation asset

In the year ended 31 December 2022, the Group recognised a deferred taxation asset, which was based on the latest recently approved financial forecasts through to December 2026 with the deferred taxation asset being fully utilised during this period.

The forecast is inherently sensitive to the assumptions and estimates which underpin it, including macroeconomic conditions (such as interest rates, inflation and future tax rates), and is dependent on the Group's ability to successfully execute its strategy. As such, the expected utilisation of the deferred tax asset may vary significantly.

In the six-month period ended 30 June 2023, the Group has performed favourably in accordance with the forecasts used to estimate the deferred taxation asset. The Group has updated its forecasts for actual performance in the elapsed period to ensure the deferred taxation asset recognition is still valid.

Further, as detailed in note 3 of the audited consolidated financial statements of the Group for the year ended 31 December 2022, the Group has performed the same sensitivity analysis and is comfortable there is minimal risk to the deferred taxation asset recognition.

4. Operating segments

It is the Directors' view that the Group's products and the markets to which they are offered are so similar in nature that they are reported as one class of business. All customers are currently UK-based only. As a result, it is considered that the chief operating decision maker uses only one segment to control resources and assess the performance of the entity, while deciding the strategic direction of the Group.

5. Interest and similar income

6. Interest and similar expenses

7. Staff costs

Contractor costs are recognised within personnel costs where the work performed would otherwise have been performed by employees. Contractor costs arising from the performance of other services is included within other operating expenses.

Refer to note 8 for further details on the share option schemes introduced by the Group in the six-month period ended 30 June 2023.

8. Share-based payments

Summary of movements in long-term incentive schemes during the period:

During the six-month period ended 30 June 2023, the Group granted the following to employees:

General Award

Nil cost options over 365,000 ordinary shares of £0.01 each of the current share capital of the Company were granted to all employees (excluding Directors) in April 2023. These options vest over a 3-year period and are not subject to specific performance conditions.

Senior Manager Award

Members of the Group's Executive Committee and other senior managers were granted nil-cost options over 3,725,000 ordinary shares of £0.01 each of the current share capital of the Company in April 2023. These options vest over a 3-year period and are subject to specific non-market performance conditions.

Two Directors of the Group were granted options as part of this award. Carl D'Ammassa and Gavin Morris were granted 1,168,000 and 753,000 shares respectively.

Leader & High Performer Award

Managers and high performers (excluding Directors) were granted nil-cost options over 620,000 ordinary shares of £0.01 each of the current share capital of the Company during February 2023 to April 2023. These options vest over a 3-year period and are not subject to specific performance conditions.

Recruitment Award

Senior managers were granted nil-cost options over 300,000 ordinary shares of £0.01 each of the current share capital of the Company in April 2023. These options vest over a 3-year period and are not subject to specific performance conditions.

9. Other operating expenses