Inter. Pers. Regulatory News (IPF)

International Personal Finance plc 

Financial Report for the year ended 31 December 2019

This announcement contains inside information

International Personal Finance plc specialises in providing unsecured consumer credit to 2.1 million customers across 11 markets. We operate the world's largest home credit business and a leading fintech business, IPF Digital.

Key highlights

Chief Executive Officer, Gerard Ryan, commented:

"We delivered a good financial performance in 2019 increasing profit before tax to £114.0 million, driven by strong operational execution in European home credit and our established digital businesses. We are also very pleased to report IPF Digital's maiden profit, demonstrating our ability to profitably serve customers with digital credit. Looking ahead, we are focused on improving performance in Mexico home credit and IPF Digital's new markets before accelerating growth in 2020. For the Group as a whole, we will continue to evolve the products and channels we offer to meet the requirements of our customers, enabling us to deliver enhanced shareholder value and contribute to the communities in which we operate."

Strategy update

We provide small-sum, unsecured personal loans to customers who are either underbanked or underserved by mainstream operators. Our strategy is to build a long-term sustainable future by providing consumers in our segment with a wider choice of channels, products and price points. Our European home credit businesses are the financial foundation of the Group and our strategy centres on providing a great customer experience and generating strong returns. We use these returns to invest in modernising the European home credit businesses, growing Mexico home credit and IPF Digital, and delivering returns to our shareholders. We continue to improve our service and effectiveness by investing in technology and our people in both the home credit and digital businesses.

Our European home credit business is making excellent progress in providing a more modern and affordable service to its customers and during the year we developed further functionality for our agent mobile technology, and launched a number of new products and channel offerings. We also increased the number of customers choosing to take our Provident-branded digital offering in Poland. The business delivered a very strong operational and financial performance in 2019, reporting like-for-like profit growth of £4.5 million. Credit quality is excellent and, as planned, we successfully slowed the rate of customer contraction year on year. 

In Mexico, reflecting the challenging first-half performance, we strengthened our leadership team including the appointment of a new country manager and refined our strategy to improve performance, implementing a range of operational actions which prioritised credit quality over growth. There have been some encouraging signs in key performance indicators for the newer cohorts of loans issued and we will continue to focus on delivering consistency of execution that will act as a platform to improve portfolio quality before recommencing growth in 2020.

Our strategy to grow our IPF Digital offering reflects increasing demand from consumers who are looking for end-to-end digital services. Since the acquisition of our digital business, we have focused on building scale and increased customer numbers more than three-fold to 305,000. Importantly, the business delivered on its promise of a maiden profit before tax in 2019, clearly demonstrating our ability to build a fintech business that can serve customers profitably. Earlier in the year we began testing our innovative digital mobile wallet product in Finland. This is a virtual wallet on a mobile device which gives customers a transparent, easy and flexible way to pay for everyday purchases either on-line or in store. Using our test and learn approach, we expect to roll out our mobile wallet into more countries during 2020, enhancing the customer experience and driving growth.

Market overview

The market for consumer credit is growing steadily driven by increasing numbers of customers borrowing from and transacting with financial services providers online. Customer expectations have also risen in terms of their customer journey, demanding faster, more convenient and personalised offerings. 

Macroeconomic conditions in all our European markets are expected to deliver positive GDP growth, low unemployment and moderately increasing inflation in 2020. While GDP growth in Mexico is estimated to have contracted during 2019, it is forecast to return to modest growth in 2020.

Increasing regulation in our sector has resulted in more stable levels of competition in Europe as some lenders have found it more difficult to operate in tougher regulatory environments. While market dynamics and customer preferences are changing, we continue to see home credit co-existing with digital credit offerings as the combination of the two can serve the vast majority of the customers in our segment. In particular, our home credit model with the involvement of an agent at the customer's home, allows us to gain a unique and in-depth understanding of a customer's financial circumstances and propensity to repay. As a result, we can lend with more confidence to creditworthy customers where a remote lending business cannot.

Group performance overview

We delivered a good financial performance in 2019 reporting a £4.7 million increase in profit before tax to £114.0 million. This reflects an increase in like-for-like profit before tax of £6.9 million, driven by a strong performance by European home credit and a maiden profit in IPF Digital, offset partially by lower profit in Mexico home credit. Weaker FX rates impacted the overall result by £2.2 million.

The table below details the performance of each of our business segments, highlighting the like-for-like improvement in profit before tax that has been delivered.

Customer numbers reduced year on year by 8% with the growth delivered by IPF Digital more than offset by reductions in European and Mexico home credit. Credit issued was in line with 2018 reflecting growth in IPF Digital and European home credit, offset by a contraction in Mexico home credit. Average net receivables increased by 8%, and revenue grew by the slower rate of 3%, driven by our focus on lower yielding, higher quality customers in European home credit. At Group level, credit quality remains good and annualised impairment as a percentage of revenue at 27.4% is in the middle of our target range of 25% to 30%. The cost-income ratio improved year on year by 1.4ppts to 43.5%, reflecting significantly improved operating leverage in IPF Digital and an improvement in Mexico home credit, partially offset by European home credit where the impact of lower revenue yields offset a reduction in the cost base. 

Business Division Performance Review

European home credit

We continued to deliver well against our strategy of providing a great customer experience and generating strong returns to invest in building a more customer-focused business that offers products that are relevant and affordable. As part of this strategy, the business now has fewer customers than in the past, but our products are more competitive, our customer journey more user friendly and our business more technologically enabled and efficient.

Excellent operational execution by our European teams delivered a very strong financial performance in 2019 and resulted in a £1.3 million increase in profit before tax to £115.1 million. This reflects an improvement in like-for-like profit of £4.5 million driven by excellent collections, offset partially by a £3.2 million adverse effect from weaker FX rates.

One of our key performance objectives for 2019 was to reduce the rate of customer contraction in our European home credit businesses, and it is pleasing to report that campaigns implemented to improve customer acquisition and retention were successful, with the rate of decline in customer numbers improving by 4 percentage points year on year to 8%. We also delivered 1% growth in credit issued reflecting our focus on extending loan values and term while managing credit quality, and this contributed to an increase in average net receivables of 3%. Revenue, however, reduced by 6% as a result of price promotions to support both customer acquisition and retention together with the impact of longer product terms with lower revenue yields. We believe this price-to-volume trade-off is sensible for our customers and our business.

Credit quality of the loan portfolio is excellent as a result of good agent collections alongside stable post-field collections, and year on year this delivered a 5.5ppt improvement in impairment as a percentage of revenue to 12.4%.

To further modernise the business model and improve the customer experience we enhanced our agent mobile technology with the completion of the roll out of a collections app to all agents in Europe. This is being followed by new sales functionality which will deliver further administrative efficiencies and cost savings. We also invested in new products and channel offerings to meet the changing demands of our customers, and our Provident-branded digital product in Poland continues to grow and we now serve 32,000 customers alongside our home credit offering. Costs continue to be very well controlled and we delivered a £5.7 million (at CER) reduction in costs during 2019. The cost-income ratio increased by 1.8ppts to 42.7% as a result of the lower revenue yields.

During 2020 we will be focused on significantly enhancing our customer journey. We will also enrich our agent mobile technology by completing the roll out of the new sales application during 2020 and plan to further grow the Provident-branded digital loan offering in Poland. We unified the leadership of our European home credit businesses in 2019 and this is already helping to improve collaboration, and drive efficiencies and the sharing of best practice.

Mexico home credit

We are seeing signs of recovery in our Mexico home credit business following, as previously reported, a challenging first half during which time a softer macroeconomic backdrop and deterioration in credit quality and collections adversely impacted performance. We took decisive action on the operational challenges we faced with the key focus being to prioritise credit quality over growth and create an operational environment that ensures we take full advantage of the significant, long-term potential of this market.

To accelerate the changes needed, we appointed a highly experienced country manager and operationally, we introduced significantly more cautious credit settings to improve the quality of the receivables portfolio and reduce impairment to a more acceptable level. We also implemented a series of actions to improve agent collections performance, including revised territory management, rebalanced incentivisation and tighter operational controls.

During the second half of the year, we continued to execute our operational improvement plans and further strengthened the Mexico management team with the appointment of a number of senior leaders. We have also developed a refined growth strategy that segments the business between units generating acceptable returns and those where we are continuing to invest or focus on a step change in operating performance. There is still more to do before we decide to rebuild growth momentum, but we have stabilised impairment as a percentage of revenue at 41.3%, which is broadly in line with the half year. There have been some encouraging signs in other key performance indicators with recently issued loans performing significantly better and improving collections performance. We also expect to see the result of our actions feeding through into improved levels of impairment during 2020.

These operational changes to improve quality and consistency of performance across the business impacted performance and we delivered profit before tax of £10.5 million which comprises a £6.2 million reduction in like-for-like profit and a £1.0 million benefit from FX movements.

The focus on quality across the business resulted in a 13% reduction in customer numbers year on year to 795,000 and credit issued contracted by 12%. Notwithstanding this, average net receivables increased slightly due to credit issued growth in 2018 and this drove 5% growth in revenue year on year.

We managed costs tightly in 2019 in response to the challenging collections performance and restricted the increase in the overall market cost base to 2.2%, despite incremental investment in geographic expansion and other business development activities. The cost-income ratio improved by 1.1ppt to 37.6% due to the benefit of operational leverage.

Looking ahead, our priority is to deliver a more consistent performance and embed operational rigour and collections strategies to improve credit quality. We expect to see a continuation of positive early credit quality indicator trends and to deliver sufficient improvement in portfolio quality in the first half of 2020 that will give us confidence to rebalance our focus onto growth.

IPF Digital

We are very pleased to report that IPF Digital delivered its maiden profit of £3.2 million in 2019, which represents a year-on-year increase in profit of £8.8 million.

Against strong year-on-year comparators, our digital offering and targeted marketing delivered an 8% increase in credit issued driven primarily by our new markets. We also grew customer numbers by 4% to 305,000, with more than half of these now being served in our new markets. This top-line growth resulted in a 26% increase in average net receivables and growth in revenue of 30%.

Annualised impairment as a percentage of revenue increased by 7.2ppts year on year to 45.0%. This was driven by a shift in the mix of the portfolio away from the established markets, which operate with lower and more stable loss rates, together with higher than planned impairment in the new markets. Our strategy to increase scale and invest in technology alongside robust cost control enabled us to better leverage our infrastructure and improve our cost efficiency, delivering a very strong 12.2ppt year-on-year reduction in the cost-income ratio to 45.7%. 

The profitability of IPF Digital is segmented as follows:

Established markets

Our established markets delivered a strong operational performance in 2019 and increased profit before tax by £7.2 million to £32.7 million driven by the benefits of increased scale, very good credit quality and improving cost efficiency. This was ahead of our original expectations.

As expected, credit issued growth moderated to 3% in these more mature markets, where volumes were adversely impacted by regulatory changes in Finland in the second half of the year. Average net receivables increased by 6% which, in turn, drove a similar increase in revenue.

Credit quality in the established markets continues to be very good. Impairment as a percentage of revenue improved by 1.1ppts year on year to 19.7% reflecting the strength of our credit strategies and scorecards in these well-regulated markets. Strong cost management and the benefits of increasing scale and efficiency delivered a 5.8ppt improvement in the cost-income ratio to 32.3%.

During the year, revised regulations were introduced in Finland and Latvia and we adapted our product offering to comply with the new pricing and debt-to-income requirements. Whilst the new rate cap in Latvia is set at a similar level to Estonia and Lithuania where we generate good returns, the new cap in Finland is very low for the risk profile of our lending. We will continue to monitor the development of the business model in Finland and the returns that it generates and apply discipline to the capital that we deploy to it. As previously reported, we expect that the contribution of our established markets to divisional profitability will reduce in 2020.

New markets

Start-up losses in the new markets reduced by £2.3 million to £15.5 million, driven by portfolio and revenue growth and improved cost leverage, partially offset by an increase in impairment.

As reported with our half-year results, impairment as a percentage of revenue was higher than planned specifically as a result of higher-than-expected credit losses in Poland and Spain. In response, we focused our efforts on improving credit quality in these markets by tightening our lending policies. This resulted in a 13% increase in credit issued year on year although credit issued contracted in the second half against strong comparators. Average net receivables increased by 58% which delivered a similar rate of growth in revenue. We now serve 155,000 customers in our new markets, a 15% increase year on year.

Impairment as a percentage of revenue was 64.8% at the year end, which represents a 6.9ppt increase year on year. We expect the impact of tighter credit settings will drive an improvement in impairment during 2020 after which we will progressively ease credit settings in order to take further advantage of the significant digital growth opportunities our new markets present. 

The economies of rapidly increasing scale in the new markets resulted in a significant 18.5ppt improvement in the cost-income ratio to 43.0% year on year and we expect this trend to continue as the businesses grow.

IPF Digital represents a significant long-term growth opportunity for the Group and reaching profitability demonstrates our ability to build a successful digital lending business in the fintech sector. Our short-term focus will be on improving the credit performance in our new markets before accelerating growth and managing the impact of the new legislation in Finland and Latvia. We expect profit growth in 2020 to be relatively modest with a lower contribution from the established markets and an improved result in the new markets. Providing a great customer experience through innovative products, including our mobile wallet offering, will ensure that we can build on the very solid foundations of this exciting business.

Regulatory update

In December 2016 the Polish Ministry of Justice published a draft bill which, amongst other things, proposed a significant reduction in the cap on non-interest costs chargeable in consumer lending. The proposals were revised by the Ministry in early 2019, subsequently adopted as Government proposals in mid-2019, and then further revised by the Government. Having failed to proceed through the legislative process prior to Polish general election in November 2019, the proposals are no longer on the current legislative agenda. The reintroduction of the proposals onto the legislative agenda, in the most recent or a further revised form, is a possibility and we continue to monitor the situation closely.

UOKiK, the Polish competition and consumer protection authority, is conducting a comprehensive review of rebating practices by banks and other consumer credit providers on early loan settlement, including those of the Group's Polish businesses. In light of this and a recent European Court of Justice declaratory judgment on the matter, we expect new market standard rebating practices to evolve in Poland. When we have clarity on the new emerging standards, our Polish businesses will conform their rebating practices accordingly. There is a wide range of possible outcomes from this review. Our current expectation is that the annual financial impact is likely to be in the range of £5 million to £15 million and we are working on a number of mitigating strategies.

In Romania legislation that was enacted in 2019 applying a price cap on the cost of consumer lending was successfully challenged by political opponents of the Government as being unconstitutional, with the result that the new cap did not take effect. Revised proposals have been tabled in the Romanian Parliament, which include a cap on the total amount payable, being twice the amount borrowed for loans below 3,000 EUR, while defining an APR cap of 15% plus base rate for the rest of consumer credit. This proposal is going through Parliamentary discussions and may progress to enactment in 2020 or later. The vast majority of the Group's Romanian business's current portfolio would be subject to the 100% total cost of credit limit and not the 15% APR cap, if enacted in the proposed form.

Taxation

The taxation charge on profit for 2019 has been based on an effective tax rate of 37%. The taxation charge for the year on statutory pre-tax profit was £42.2 million (2018: £33.9 million). The change in effective tax rate was impacted primarily by new tax legislation in Poland which came into force on 1 January 2019 and resulted in certain cross-border transactions entered into by our Polish subsidiary becoming economically inefficient. We expect the effective tax rate to be around 40% in 2020.

As announced on 24 October 2019, the Polish tax audits of 2010 - 2012 were closed and adjustments to the remaining years up to and including 2017 were agreed with the Polish tax authority. This resulted in an overall payment of £3.8 million for 2010 to 2017. The years 2008 and 2009 remain open. Following expert advice regarding the strength of the case both from a procedural and substantive position, we withdrew our application for mutual agreement procedure between the Polish and UK tax authorities in December 2019 and the cases are expected to be heard in the Polish courts in the first half of 2020. Further details on this matter are set out in note 20.

As previously reported, in late 2017 the European Commission opened a State Aid investigation into the Group Financing Exemption contained in the UK controlled foreign company rules, which were introduced in 2013. In April 2019 the EU announced its finding that the Group Financing Exemption is partially incompatible with EU State Aid rules. In common with other UK-based international companies whose intra-group finance arrangements are in line with current controlled foreign company rules, the Group is affected by this decision. The total tax benefit obtained by the Group in all years as a result of the structure affected by the decision is estimated at up to £13.9 million. The amount repayable by the Group under the decision however is expected to be lower than this as the final decision only found the UK tax regime to be partially incompatible. HMRC has begun a process of gathering information from taxpayers, including IPF, in order to quantify the amount of alleged State Aid received. The UK government has announced that it has filed an annulment application before the General Court of the EU. In common with a number of other affected taxpayers, IPF has also filed its own annulment application. Nevertheless, the amount of finally agreed State Aid will need to be paid by the Group to HMRC in accordance with the State Aid rules pending the hearing of the applications. Based on legal advice received by management regarding the strength of the technical position set out in the annulment applications, it is expected to be more likely than not that any payment that the Group makes to HMRC as a result of the State Aid decision will ultimately be repaid. HMRC has stated that it does not consider that the timing and form of the UK's exit from the EU will have any practical impact on this matter.

Funding and balance sheet

We further strengthened our funding position by adding and refinancing £106 million of debt funding in 2019.

In June, we refinanced a significant proportion of the £101.5 million retail-eligible bond maturing 2020, with £57.4 million of the existing bonds being exchanged, and £20.7 million of new bonds issued for cash, to create a new £78.1 million 7.75% bond maturing 2023. The remaining £44.1 million bonds not exchanged will stay in place until May 2020. In addition, we added £28 million of new bank funding in 2019.

At December 2019 we had total debt facilities of £862 million (£542 million bonds and £320 million bank facilities) and borrowings of £679 million, with headroom on undrawn facilities of £182 million. We continued to extend debt facilities during 2019, and now have £322 million of facilities extending beyond the Eurobond maturity in 2021. In the final quarter of 2019, we repaid £14 million of bonds that matured, and bought back £5 million of 2021 Eurobonds at an average price of 97.3. We have two bonds totalling £84 million maturing in May/June 2020, and our £344 million Eurobond matures in April 2021. The settlement of the Polish tax dispute removes a significant liquidity risk for IPF and this, combined with the high level of headroom on undrawn debt facilities, will allow more flexibility in the refinancing of the Eurobond, which we aim to complete by the end of 2020.

Our credit rating improved in April 2019 following the affirmation of a BB rating by Fitch and the revision of the outlook from negative to stable, together with a new rating from Moody's of Ba3 stable outlook.

Our balance sheet remains robust, with an equity to receivables capital ratio at December 2019 of 44.8% compared with our target level of 40%.

Dividend

Subject to shareholder approval, a final dividend of 7.8 pence per share will be payable, which will bring the full-year dividend to 12.4 pence per share (2018: 12.4 pence per share). The final dividend will be paid on 11 May 2020 to shareholders on the register at the close of business on 14 April 2020. The shares will be marked ex-dividend on 9 April 2020.

Board changes

Dan O'Connor has informed the Board that he intends to retire as Chairman of the Company at the close of our Annual General Meeting on 30 April 2020. We are pleased to announce that Stuart Sinclair has been appointed to the Board with effect from 16 March 2020 and that, subject to Stuart's election as a director at the AGM, he will succeed Dan as Chairman.

Stuart is an experienced non-executive director, committee chair and senior independent director who brings a background in consumer financial services with RBS, GE Capital and Provident Financial. He currently sits on the boards of Lloyds Banking Group, where he chairs the Remuneration Committee, and, as Senior Independent Director, of QBE Europe, the European subsidiary of the major Australian insurance group. Stuart was also a Council member of The Royal Institute for International Affairs for six years.

Commenting, Dan O'Connor said: "Having reflected on the success of the Group in 2019 in overcoming the significant tax challenge we faced in Poland, I believe that this is an ideal time to hand over the leadership of a board that has an excellent mix of established and new talent. Stuart brings a wealth of experience in financial services and is ideally qualified to lead the company through the next stage of its development."

We are also pleased to announce the appointment of Richard Holmes to the Board as an independent non-executive director, also with effect from 16 March 2020. Richard is a qualified accountant and former senior executive with over 40 years of broad international financial services experience, including 20 years as CEO and board member in private banking, wholesale banking, capital markets, trading, operations, strategy and finance. In his final executive role, he was CEO, Europe for Standard Chartered Bank plc. Having retired from executive roles in October 2016 he currently sits on the board of Ulster Bank where he is a member of the audit, risk and sustainability committees. Richard will join our Board's Audit and Risk Committee.

Chief Executive Officer Gerard Ryan said: "I am delighted to welcome both Stuart and Richard as non-executive directors. Their skills, talent and wealth of experience will be a great addition to our Board. I should also like to thank Dan for his invaluable contribution to IPF as Chairman and for the support he has given me."

Outlook

We are confident that our strategy will continue to support growth across the Group by successfully addressing the demands of our core stakeholders: meeting our customers' needs, creating value for our shareholders and contributing to the communities in which we operate. Our passion to serve our customers with products that meet their needs and provide a positive customer experience will deliver further sustainable growth and attractive future returns.

We will continue to invest in modernising our European home credit businesses, enhancing our offering to attract and retain customers and improving efficiency. In Mexico home credit we are focused on driving greater execution consistency and improving operational performance before recommencing growth and delivering progressive improvements in profit in 2020. In IPF Digital we will continue our journey of building a profitable fintech business by focusing on continued portfolio growth balanced with improved credit quality, while creating innovative products and services to deliver an enhanced customer experience and so support our growth plans.

Alternative Performance Measures

This full-year Financial Report provides alternative performance measures (APMs) which are not defined or specified under the requirements of International Financial Reporting Standards. We believe these APMs provide stakeholders with important additional information on our business. To support this we have included an accounting policy note on APMs in the notes to this Financial Report, a glossary indicating the APMs that we use, an explanation of how they are calculated and why we use them, and a reconciliation of the APMs we use to a statutory measure, where relevant.

International Personal Finance plc

Consolidated income statement for the year ended 31 December

Earnings per share

Consolidated statement of comprehensive income for the year ended 31 December

Balance sheet as at 31 December

The notes to the financial information are an integral part of this consolidated financial information. 

Statement of changes in equity

* Includes foreign exchange reserve, hedging reserve, capital redemption reserve and amounts paid to acquire shares held in treasury and by employee trust.

Cash flow statement for the year ended 31 December

Notes to the financial information for the year ended 31 December 2019

1. Basis of preparation

The financial information, which comprises the consolidated income statement, statement of comprehensive income, balance sheet, statement of changes in equity, cash flow statement and related notes, is derived from the full Group Financial Statements for the year ended 31 December 2019, which have been prepared in accordance with European Union endorsed International Financial Reporting Standards ('IFRSs') and those parts of the Companies Act 2006 applicable to companies reporting under IFRS. It does not constitute full Financial Statements within the meaning of section 434 of the Companies Act 2006. This financial information has been agreed with the auditor for release.

Statutory Financial Statements for the year ended 31 December 2018 have been delivered to the Registrar of Companies and those for 2019 will be delivered following the Company's annual general meeting. The auditor has reported on those Financial Statements: its reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498 (2) or (3) of the Companies Act 2006.

The directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly they continue to adopt the going concern basis in preparing this financial information (see note 21 for further details).

The accounting policies used in completing this financial information have been consistently applied in all periods shown. These accounting policies are detailed in the Group's Financial Statements for the year ended 31 December 2019 which can be found on the Group's website (www.ipfin.co.uk).

The following amendments to standards are mandatory for the first time for the financial year beginning 1 January 2019 but do not have any material impact on the Group:

·; Amendments to IAS 19 Employee Benefits - 'Plan amendment, curtailment or settlement';

·; IFRS 10 and IAS 28 (amendments) 'Sale or Contribution of Assets between an Investor and its Associate or Joint Venture'.

The following standards, interpretations and amendments to existing standards are not yet effective and have not been early adopted by the Group:

·; IFRS 17 'Insurance Contracts';

·; Amendments to IFRS 3 'Definition of a Business';

·; Amendments to IAS 1 and IAS 8 'Definition of Material';

·; Amendments to IAS 39 'Pre-replacement issues in the context of the IBOR reform'; and

·; Conceptual framework 'Amendments to References to the Conceptual Framework in IFRS Standards'.

IFRS 16 Leases

The amendments relating to the IFRS 16 'Leases' standard are mandatory for the first time for the financial year beginning 1 January 2019. Please see note 22 for further information.

Alternative Performance Measures

In reporting financial information, the Group presents alternative performance measures, 'APMs' which are not defined or specified under the requirements of IFRS.

The Group believes that these APMs, which are not considered to be a substitute for or superior to IFRS measures, provide stakeholders with additional helpful information on the performance of the business. The APMs are consistent with how the business performance is planned and reported within the internal management reporting to the Board. Some of these measures are also used for the purpose of setting remuneration targets.

Each of the APMs, used by the Group are set out below including explanations of how they are calculated and how they can be reconciled to a statutory measure where relevant.

The Group reports percentage change figures for all performance measures, other than profit or loss before taxation and earnings per share, after restating prior year figures at a constant exchange rate. The constant exchange rate, which is an APM, retranslates the previous year measures at the average actual periodic exchange rates used in the current financial year. These measures are presented as a means of eliminating the effects of exchange rate fluctuations on the year-on-year reported results.

The Group makes certain adjustments to the statutory measures in order to derive APMs where relevant. The Group's policy is to exclude items that are considered to be significant in both nature and/or quantum and where treatment as an adjusted item provides stakeholders with additional useful information to assess the year-on-year trading performance of the Group.

2. Principal risks and uncertainties

In accordance with the Companies Act 2006, a description of the principal risks and uncertainties (and the mitigating factors in place in respect of these) is included below. Effective management of risks, uncertainties and opportunities is critical to our business in order to deliver long-term shareholder value and protect our people, assets and reputation. In 2019, we continued to face a challenging external environment, particularly from changing regulation and competition. Internally, our operational governance framework and risk management processes are continually reviewed to ensure that where areas of improvement are identified, a plan of action is put in place and can become a key focus for the Board. The effectiveness of operating these processes is monitored by the Audit and Risk Committee on behalf of the Board.

As at the year end, the Board considered that there are 17 principal risks which require ongoing focus (noted with asterisks in the table below).

The risks facing the business by risk category are: 

*Risks currently considered by the Board as the principal risks facing the Group.

3. Related parties

The Group has not entered into any material transactions with related parties during the year ended 31 December 2019.

4. Segmental analysis

Geographical segments

5. Tax expense

The taxation charge for the year on statutory profit before taxation was £42.2 million (2018: £33.9 million) which equates to an effective rate of 37.0% (2018: 31.0%).

The effective tax rate for 2020 is expected to be c.40%.

The Group is currently subject to a tax audit with respect to Provident Polska for the years 2008 and 2009. Decisions were received in January 2017 and have been appealed. Audits of years 2010 to 2012 were closed during the year. Further details are set out above. The Group is also subject to audits in Mexico (regarding 2017), Finland (2018-2019), Spain (2015-2017) and Hungary (2017-2018). An audit of Slovakia (2015) was closed in the year.

6. Earnings per share

Basic earnings per share ('EPS') is calculated by dividing the earnings attributable to shareholders of £71.8 million (31 December 2018: £75.4 million) by the weighted average number of shares in issue during the period of 223.1 million which has been adjusted to exclude the weighted average number of shares held in treasury and by the employee trust (31 December 2018: 223.0 million). 

For diluted EPS the weighted average number of shares has been adjusted to 237.1 million (31 December 2018: 234.1 million) to assume conversion of all dilutive potential ordinary share options relating to employees of the Group. 

7. Dividends

Dividend per share

Dividends paid

The directors are recommending a final dividend in respect of the financial year ended 31 December 2019 of 7.8 pence per share which will amount to a full year dividend payment of £27.6 million. If approved by the shareholders at the annual general meeting, this dividend will be paid on 11 May 2020 to shareholders who are on the register of members at 14 April 2020. This dividend is not reflected as a liability in the balance sheet as at 31 December 2019 as it is subject to shareholder approval.

8. Goodwill

Goodwill is tested annually for impairment or more frequently if there are indications that goodwill might be impaired. The recoverable amount is determined from a value in use calculation. The key assumptions used in the value in use calculation relate to the discount rates and growth rates adopted. We adopt discount rates which reflect the time value of money and the risks specific to the legacy MCB business. The cash flow forecasts are based on the most recent financial budgets approved by the Board. The rate used to discount the forecast cash flows is 9% (2018: 10%). No reasonably foreseeable reduction in the assumptions would give rise to impairment, and therefore no further sensitivity analysis has been presented.

9. Intangible assets

Intangible assets comprise computer software (2019: £43.2 million; 2018: £38.0 million).

10. Property, plant and equipment

As at 31 December 2019 the Group had £2.7 million of capital expenditure commitments contracted with third parties that were not provided for (2018: £4.9 million).

11. Deferred tax assets

Deferred tax assets have been recognised in respect of tax losses and other temporary timing differences (principally relating to recognition of revenue and impairment) to the extent that it is probable that these assets will be utilised against future taxable profits.

12. Non-current tax asset

Non-current tax asset includes an amount of £34.2 million in respect of the tax paid to the Polish Tax Authority, see note 20 for further details.

13. Amounts receivable from customers

All lending is in the local currency of the country in which the loan is issued.

Amounts receivable from customers are held at amortised cost and are equal to the expected future cash flows receivable discounted at the average effective interest rate of 105% (2018: 109%). All amounts receivable from customers are at fixed interest rates. The average period to maturity of the amounts receivable from customers is 12.2 months (2018: 11.5 months).

Determining an increase in credit risk since initial recognition

IFRS 9 requires the recognition of 12 month expected credit losses (the expected credit losses from default events that are expected within 12 months of the reporting date) if credit risk has not significantly increased since initial recognition (stage 1) and lifetime expected credit losses for financial instruments for which the credit risk has increased significantly since initial recognition (stage 2) or which are credit impaired (stage 3).

When determining whether the risk of default has increased significantly since initial recognition the Group considers both quantitative and qualitative information based on the Group's historical experience.

The approach to identifying significant increases in credit risk is consistent across the Group's products. In addition, as a backstop, the Group considers that a significant increase in credit risk occurs when an asset is more than 30 days past due.

Financial instruments are moved back to stage 1 once they no longer meet the criteria for a significant increase in credit risk.

Definition of default and credit impaired assets

The Group defines a financial instrument as in default, which is fully-aligned with the definition of credit-impaired, when it meets one or more of the following criteria:

·; Quantitative criteria: the customer is more than 90 days past due on their contractual payments in home credit and 60 days past due on their contractual payments in IPF Digital;

·; Qualitative criteria: indication that there is a measurable movement in the estimated future cash flows from a group of financial assets. For example, if prospective legislative changes are considered to impact the collections performance of customers.

The default definition has been applied consistently to model the probability of default (PD), exposure at default (EAD) and loss given default (LGD) throughout the Group's expected credit loss calculations.

An instrument is considered to no longer be in default (i.e. to have cured) when it no longer meets any of the default criteria.

The breakdown of receivables by stage is as follows:

The Group has one class of loan receivable and no collateral is held in respect of any customer receivables.

14. Borrowing facilities and borrowings

The maturity of the Group's external bond and external bank borrowings and facilities is as follows:

Total undrawn facilities as at 31 December 2019 were £182.4 million (2018: £185.5 million), excluding £2.8 million unamortised arrangement fees (2018: £2.2 million).

15. Derivative financial instruments

At 31 December 2019 the Group had an asset of £0.3 million and a liability of £16.2 million (2018: £1.6 million asset and £7.3 million liability) in respect of foreign currency contracts and interest rate swaps. Foreign currency contracts are in place to hedge foreign currency cash flows. Interest rate swaps are used to cover a proportion of current borrowings relating to the floating rate Polish bond and a proportion of floating rate bank borrowings. Where these cash flow hedges are effective, in accordance with IFRS, movements in their fair value are taken directly to reserves.

16. Retirement benefit asset

The amounts recognised in the balance sheet in respect of the retirement benefit obligation are as follows:

The credit recognised in the income statement in respect of defined benefit pension costs is £0.1 million (2018: £nil).

17. Fair values of financial assets and liabilities

IFRS 7 requires disclosure of fair value measurements of derivative financial instruments by level of the following fair value measurement hierarchy:

·; quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1);

·; inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2); and

·; inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).

All of the Group's financial instruments held at fair value fall into hierarchy level 2 (2018: all of the Group's financial instruments held at fair value fell into hierarchy level 2). The fair value of derivative financial instruments has been calculated by discounting expected future cash flows using interest rate yield curves and forward foreign exchange rates prevailing at the relevant period end.

Except as detailed in the following table, the carrying value of financial assets and liabilities recorded at amortised cost, which are all short-term in nature, are a reasonable approximation of their fair value:

The fair value of amounts receivable from customers has been derived by discounting expected future cash flows (as used to calculate the carrying value of amounts due from customers), net of collection costs, at the Group's weighted average cost of capital.

Under IFRS 13 'Fair value measurement', receivables are classed as level 3 as their fair value is calculated using future cash flows that are unobservable inputs.

The fair value of the bonds has been calculated by reference to their market value.

The carrying value of bank borrowings is deemed to be a good approximation of their fair value. Bank borrowings can be repaid within six months if the Group decides not to roll over for further periods up to the contractual repayment date. The impact of discounting would, therefore, be negligible.

18. Reconciliation of profit after taxation to cash generated from operating activities

19. Average and closing foreign exchange rates

The table below shows the average exchange rates for the relevant reporting periods and closing exchange rates at the relevant period ends.

The £42.2 million exchange loss (2018: loss of £8.7 million) on foreign currency translations shown within the statement of comprehensive income arises on retranslation of net assets denominated in currencies other than sterling, due to the change in foreign exchange rates against sterling between December 2018 and December 2019 shown in the table above.

20. Contingent Liability Note

Polish tax audit

The Group's home credit company in Poland, Provident Polska, has been subject to tax audits in respect of the company's 2008 and 2009 financial years. During these audits the Polish tax authorities have challenged an intra-group arrangement with a UK entity, and the timing of the taxation of home collection fee revenues.

These audits culminated with decisions being received from the Polish Tax Chamber (the upper tier of the Polish tax authority) in January 2017 in relation to both the 2008 and 2009 financial years. Provident Polska appealed these decisions to the District Administrative Court, but had to pay the amounts assessed totalling approximately £34.2 million (comprising tax and associated interest) in order to make the appeals. Subsequently an application was made to initiate a process ("mutual agreement procedure") involving the UK and Polish tax authorities aimed at ensuring that the intra-group arrangement is taxed in accordance with international tax principles and as a result the court hearings were stayed. Tax audits were also opened in Poland in respect of 2010 - 2012.

As announced on 24 October 2019, the Polish tax audits of 2010 - 2012 were closed and adjustments to the remaining years up to and including 2017 were agreed with the Polish tax authority. This resulted in an overall payment of £3.8 million for 2010 to 2017. The years 2008 and 2009 remain open. Following expert advice regarding the strength of the case both from a procedural and substantive position, we withdrew our application for mutual agreement procedure between the Polish and UK tax authorities in December 2019 and the cases are expected to be heard in the Polish courts in the first half of 2020.

The directors have received strong external legal advice and note that during a previous tax audit by the same tax authority the Company's treatment of these matters was accepted as correct; and as noted above, in recent months the same tax authority has accepted the Company's treatment for years 2010 onwards with only small adjustments. Therefore, the payments of the sums outlined above are not a reflection of the directors' view on the merits of the case, and accordingly the payments made in January 2017 have been recognised as a non-current tax asset in these Financial Statements given the uncertainties in relation to the timing of any repayment of such amounts.

State Aid investigation

In late 2017 the European Commission opened a State Aid investigation into the Group Financing Exemption contained in the UK controlled foreign company rules, which were introduced in 2013. On 2 April 2019 the EU announced its finding that the Group Financing Exemption is partially incompatible with EU State Aid rules. In common with other UK-based international companies whose intra-group finance arrangements are in line with current controlled foreign company rules, the Group is affected by this decision. The total tax benefit obtained by the Group in all years as a result of the structure affected by the decision is estimated at up to £13.9 million. The amount repayable by the Group under the decision however is expected to be lower than this as the final decision only found the UK tax regime to be partially incompatible. HMRC has begun a process of gathering information from taxpayers, including IPF, in order to quantify the amount of alleged State Aid received.

The UK government has announced that it has filed an annulment application before the General Court of the European Union. In common with a number of other affected taxpayers, IPF has also filed its own annulment application. Nevertheless, the amount of finally agreed State Aid will need to be paid by the Group to HMRC in accordance with the State Aid rules pending the hearing of the applications. Based on legal advice received by management regarding the strength of the technical position set out in the annulment applications, it is expected to be more likely than not that any payment that the Group makes to HMRC as a result of the State Aid decision will ultimately be repaid. HMRC has stated that it does not consider that the timing and form of the UK's exit from the EU will have any practical impact on this matter.

21. Going concern

The Board has reviewed the budget for the year to 31 December 2020 and the forecasts for the two years to 31 December 2022 which include projected profits, cash flows, borrowings, headroom against debt facilities, and funding requirements. The plan is stress tested in a variety of downside scenarios that reflect the crystallisation of the Group's principal risks with particular reference to regulatory, taxation, funding, market and counterparty risks as outlined in note 2 to this financial information and the consequent impact on future performance, funding requirements and covenant compliance. Consideration has also been given to multiple risks materialising concurrently and the availability of mitigating actions that could be taken to reduce the impact of the identified risks. The Group's total debt facilities including a range of bonds and bank facilities, combined with a successful track record of accessing debt funding markets over a long period (including periods of adverse macroeconomic conditions and a changing competitive and regulatory environment), is sufficient to fund business requirements for the foreseeable future. Taking these factors into account, together with regulatory and taxation risks set out in note 2 to this financial information, the Board has a reasonable expectation that the Group has adequate resources to continue in operation for the foreseeable future. For this reason, the Board has adopted the going concern basis in preparing this financial information.

22. IFRS 16 Leases

IFRS 16, which was endorsed by the EU on 9 November 2017, provides a comprehensive model for the identification of lease arrangements and their treatment in the Financial Statements for both lessors and lessees. IFRS 16 supersedes the current lease guidance including IAS 17 Leases and the related interpretations and became effective for accounting periods beginning on or after 1 January 2019. The date of initial application of IFRS 16 for the Group is 1 January 2019.

IFRS 16 distinguishes leases and service contracts on the basis of whether an identified asset is controlled by the lessee. Distinctions of operating leases (off balance sheet) and finance leases (on balance sheet) are removed for lessee accounting, and are replaced by a model where a right-of-use asset and a corresponding liability have to be recognised for all leases by lessees (i.e. all on balance sheet) except for short-term leases and leases of low value assets.

The right-of-use asset is measured initially at cost and measured subsequently at cost (subject to certain exceptions) less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. The lease liability is measured initially at the present value of the lease payments that are not paid at that date. Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications, amongst others. Furthermore, the classification of cash flows is also affected because operating leases under IAS 17 are presented as operating cash flows, whereas under the IFRS 16 model, the lease payments are split into a principal and interest portion, which are both presented as financing cash flows.

All of the Group's leasing arrangements have been reviewed in light of the new rules in IFRS 16 and they will primarily affect the accounting for the Group's operating leases. The Group has adopted IFRS 16 from 1 January 2019, but has not restated comparatives for the 2018 reporting period, as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening balance sheet on 1 January 2019.

On adoption of IFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as 'operating leases' under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the interest rate implicit in the lease, or if that rate cannot be readily determined, at the lessee's incremental borrowing rate. The weighted average lessee's incremental borrowing rate applied to the lease liabilities on 1 January 2019 was 8%.

Furthermore, the Group has applied exemptions available under the standard relating to low value assets and short-term leases.

As at the 1 January 2019, the Group had non-cancellable operating lease commitments of £29.0 million. The Group recognised right-of-use assets of £21.5 million on 1 January 2019 and lease liabilities of £21.5 million, overall there was a £nil impact on net assets.

Analysed as:

Right-of use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the balance sheet as at 31 December 2018.

The recognised right-of-use assets relate to the following types of assets:

The movement in the right-of-use assets in the period is as follows:

The change in accounting policy affected the balance sheet on 1 January 2019 by increasing segmental assets by £21.5m and increasing segmental liabilities by £21.5m for the right-of-use asset and lease liability respectively. The net impact on retained earnings on 1 January 2019 was £nil.

At 31 December 2019 segmental assets were affected by an increase of £18.8m and segmental liabilities by an increase of £19.5m.

The total cash outflow in the year in respect of lease contracts is £13.1m.

Responsibility statement

This statement is given pursuant to Rule 4 of the Disclosure Guidance and Transparency Rules.

It is given by each of the directors as at the date of this report, namely: Dan O'Connor, Chairman; Gerard Ryan, Chief Executive Officer; Justin Lockwood, Chief Financial Officer; Richard Moat, Senior independent non-executive director; Deborah Davis, non-executive director; John Mangelaars, non-executive director; Cathryn Riley, non-executive director, and Bronwyn Syiek, non-executive director.

To the best of each director's knowledge:

a) the financial information, prepared in accordance with the IFRSs, give a true and fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in the consolidation taken as a whole; and

b) the management report contained in this report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

Alternative performance measures

This financial report provides alternative performance measures (APMs) which are not defined or specified under the requirements of International Financial Reporting Standards. We believe these APMs provide readers with important additional information on our business. To support this we have included a reconciliation of the APMs we use, where relevant, and a glossary indicating the APMs that we use, an explanation of how they are calculated and why we use them.

Constant exchange rate reconciliations

Return on assets (ROA)

ROA is calculated as profit before interest after tax divided by average receivables.

Return on equity (ROE)

ROE is calculated as profit after tax divided by average net assets