Inter. Pers. Regulatory News (IPF)

1 March 2023

International Personal Finance plc 

Full-year financial report for the year ended 31 December 2022

Principal activity

International Personal Finance plc is helping to build a better world through financial inclusion by providing unsecured consumer credit to underserved customers across nine markets.

STRONG GROWTH AND FINANCIAL PERFORMANCE

Key highlights

1 Based on required equity to receivables of 40%.

2 Before an exceptional tax credit of £10.5m, see below.

Gerard Ryan, Chief Executive Officer at IPF commented:

"We made further good progress against our strategy in 2022, with reported Group profit before tax up 14.3% and all three divisions performing well. On an underlying basis, Group profit before tax was up 117% year on year. I am delighted to report that, notwithstanding the challenges created by increased costs of living and the war in Ukraine, we delivered strong growth in customer lending and receivables of 14% while maintaining our very good portfolio quality. As a result of our strong performance, the Board is proposing a final dividend of 6.5 pence per share, resulting in full-year dividend growth of 15%.

I would like to thank all my colleagues for their unwavering commitment to serving our customers and delivering this very strong performance. We are very mindful of the potential adverse impacts that the macroeconomic landscape might have on us and our customers, but we are confident our cautious approach and strong balance sheet provide the foundation for delivering significant future growth."

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 full-year financial report, a glossary indicating the APMs that we use, an explanation of how they are calculated and how we use them, and a reconciliation of the APMs we use to a statutory measure, where relevant.

Chief Executive Officer's review

Group performance

We delivered strong growth and a very good financial performance across the Group in 2022, despite the challenges of resurgent Covid-19 outbreaks early in the year, the outbreak of war in Ukraine and the cost-of-living crisis. As we rescaled the business following the pandemic, robust operational execution of our strategy resulted in customer lending and receivables both increasing by 14% (at CER) year on year. Profit before tax showed growth of 14.3% to £77.4m and, pleasingly, all three business divisions delivered good lending growth and contributed profitable performances to the Group result.

Our primary goal continues to be delivering our purpose to build a better world through financial inclusion whilst driving shareholder value. European home credit and Mexico home credit are both delivering our target returns of an RORE of around 20% whilst also delivering strong growth. IPF Digital is not yet delivering our target returns, but we continue to see strong organic opportunities to rebuild scale and deliver our target returns, and it was pleasing that our digital businesses in Mexico and Australia both delivered profit contributions for the first time in 2022.

The Group continues to have a well-capitalised balance sheet and robust funding position, with headroom on debt facilities of £76m, which supports our business plans into 2024. As a result of our performance in 2022 and our strong balance sheet, the Board is proposing a 12.1% increase in the final dividend to 6.5p (2021: 5.8p) which, together with the interim dividend of 2.7p (2021: 2.2p), results in full-year dividend growth of 15.0% to 9.2p (2021: 8.0p).

Full details of the Group financial performance are detailed in the financial review section.

Our purpose and strategy

Building a better world through financial inclusion

Our Group is an internationally important consumer credit provider, helping people excluded from mainstream finance to access simple, personal and affordable finance and insurances to assist and protect them and their families. We aim to support customers on low-to-moderate incomes including those with limited or no credit history, as well as customers who are regularly refused credit by banks. We do so through our family of simple products that meet our customers' specific needs and by creating the channels to make them as accessible as possible.

A strategy for growth

Our growth strategy focuses on delivering excellent service to our existing loyal customers and increasing our number of compelling product choices and channels to attract the next generation of consumers. Over the last 25 years we have built a family of lending products ranging from customer representative-managed loans through to digital instalment loans, revolving credit lines and mobile wallet products. We deploy a range of products across our nine markets tailored to meet both the preferences of our target customers and local regulatory requirements. As well as our credit products, we also provide additional value to our customers through the provision of customised insurances at much lower prices than our customers can obtain themselves.

We continued to successfully execute our strategy to support financial inclusion and deliver growth throughout 2022 and, as a result of our deep understanding of their needs, we remain in a strong position to support our customers even in these more difficult times.

In addition to navigating the impacts of the war in Ukraine and the resulting cost-of-living crisis in 2022, another significant hurdle arose with the introduction of a significantly lower, non-interest rate cap in Poland which was first proposed six years ago, and eventually came into force in December 2022. The new total cost of credit (TCC) legislation reduced the maximum non-interest fees that can be charged on a loan to 45% of the loan value, from 100% previously. Unaffected by these proposals is the ability for consumer credit lenders in Poland to continue to charge interest (currently 20.5% per annum), in addition to non-interest charges. The new legislation also includes new affordability rules and a requirement for nonbank financial institutions to be supervised by the Polish financial supervision authority, the Komisja Nadzoru Finansowego (KNF), which come into force in May 2023 and January 2024 respectively.

To enable us to carry on serving our consumer segment in Poland, we have evolved our product offering to meet changing consumer needs and to prepare for the introduction of the new lower TCC. We are pleased with the progress we have made in diversifying our product range, which includes digital instalment loans, an expanded range of value-added services and the launch of a new credit card product in the third quarter of 2022. Developed specifically for our consumer segment, the credit card combines many features of an instalment loan with the added flexibility of a credit card. Our customer representatives remain at the core of our relationship with customers and will continue to visit their homes regularly to provide service and collect repayments. We have issued almost 10,000 cards and, encouragingly, the rollout is tracking ahead of our plans.

We also made further good progress throughout the Group against our other strategic objectives in 2022. In Mexico, where we are expanding our geographic footprint to capture the significant customer and lending growth potential in this market, we opened in Tijuana in northwest Mexico in July 2022, and will commence operations in Tampico located in the east of Mexico from March 2023. Our research indicates a target market of 1.7m consumers in our segment in these regions. We also increased our customer representative network by 660 agencies in Mexico, within or close to our existing geographic footprint.

In order to support people who apply for a digital loan but whose credit record is not strong enough to warrant a fully digital service, we increased the number of customers taking advantage of our hybrid product offering - a unique blend of customer representative and digital channels available in Poland and Mexico. Our mobile wallet is now available in three markets - Estonia, Latvia and Lithuania, and our retail point of sale partnership tests continue in Romania and Mexico. Following a successful test in Romania, we also invested in and began the rollout of a single, cloud-based customer relationship management (CRM) tool to improve the customer experience, as well as laying the foundation for future digital channels.

Marketplace

The global economic and cost-of-living crisis, particularly in our European markets, is the largest challenge facing our business both in terms of its impact on our customers as well as increased costs across the Group. The onset of the war in Ukraine in February 2022 led to significant inflationary increases in all our territories, and while these levels in Europe have reduced marginally in recent months, high inflation and interest rates are expected to persist in 2023. 

The segment of consumers we serve has been affected by rapidly rising prices because, proportionately, they spend a larger share of their income on food, fuel and energy, all of which have been impacted by high inflation. While their disposable income has come under pressure, these factors have not had a discernible impact on customer demand or repayments to date. However, given the macroeconomic outlook, we took responsible and prudent action in the fourth quarter of 2022 to tighten our credit settings for consumers with higher credit risk profiles, thereby protecting customers from potential over indebtedness and minimising credit risk to the business. We continue to monitor performance carefully and will adjust credit settings as appropriate.

While all our markets remain very competitive, there has been a significant reduction in activity by buy-now-pay-later operators and smaller fintech businesses. We have also seen banks tightening their underwriting as the effects of high inflation continues to impact consumers' disposable income. Our intention is to continue to support loyal, high-quality customers whilst maintaining our focus on maintaining lending quality.

Financial model

As we reported with our 2022 interim results, we formalised our financial model in the first half of the year to underpin our purpose and strategy, while balancing the needs of all our stakeholders. This has been embedded into all of our business decisions, performance analysis and planning.  We aim to deliver sustainable earnings growth whilst maintaining a strong balance sheet, adopting a progressive dividend policy and investing in the continued expansion of the business.

Our financial model is as follows:

• Delivery of a sustainable Return on Required Equity (RORE) of 15% to 20%…

• Supports a minimum return to shareholders of 40%...

• Allows receivables growth of up to 10% per annum…

• Whilst maintaining an equity to receivables ratio at around 40%.

We will calculate our returns based on a required equity base of 40% of receivables rather than actual equity. This allows us to ensure comparability between divisions and is more consistent with the financial model which assumes a 40% equity to receivables ratio. We will also continue to disclose our ROE on a Group basis.

Our financial model is supported by a stringent focus on the revenue yield, impairment rate and cost-income ratio being delivered by each of our businesses. We have made strong progress against each of our core KPI's in 2022 as set out in the financial review section.

We will rigorously deploy our capital and will only make investments in receivables and other assets if they deliver our threshold returns.

Environment, social and governance (ESG)

We have a very strong social purpose and are committed not only to supporting our customers by providing affordable and transparent credit in a responsible way, but also by striving to have a positive effect on all our stakeholders as we invest in promoting financial inclusion, developing the capabilities of our team who serve millions of customers and implementing our climate change strategy.

The key progress made in 2022 included:

• Approval by the Board of the Group's environment strategy.

• Embedding climate change within the Group's Enterprise Risk Management framework.

• Investing more than £1m in community initiatives including the rollout of our new 'Invisibles' programme highlighting the plight of underprivileged, marginalised and excluded members of society. 

• Partnering with Harvard University and LinkedIn Learning to deliver development programmes to colleagues.

• Creating an extensive development programme for customer representatives to extend their careers beyond their current roles.

• Securing the long-term lease on and renovating a large property in Warsaw to create an award-winning safe house for displaced mothers from Ukraine and their children.

During the year, our businesses were also recognised for their customer service, high workplace standards, gender diversity profile and community investment programmes. These awards included Top Employer in Poland; Great Place to Work for Women in Mexico; Superbrand in Hungary; and Global Green Business in Poland. We were included in the European Commission's Diversity Index in the Czech Republic, recognised as a Socially Responsible Company in Mexico and acclaimed the Best Non-Bank Financial Institution in Romania for our contribution to financial education and transparency. We are very proud of these awards, and they are testament to the dedication of our colleagues to our strong social purpose.

Dividend

Based on the successful execution of our growth strategy and continued significant growth potential, the Board is pleased to declare a 12.1% increase in the final dividend to 6.5 pence per share. This is in line with the Group's progressive dividend policy and brings the full-year dividend to 9.2 pence per share (2021: 8.0 pence per share), an increase of 15% on 2021 and representing a pre-exceptional payout rate of 44% (2021: 43%). This is a higher payout rate than the 40% minimum rate within our financial model and, as previously indicated, the Board is utilising surplus capital above our 40% equity to receivables ratio to pay a higher rate whilst the business rebuilds both scale and our returns to the target range of between 15% and 20%. Subject to shareholder approval, the final dividend will be paid on 5 May 2023 to shareholders on the register at the close of business on 11 April 2023. The shares will be marked ex-dividend on 6 April 2023.

Regulatory update

As previously reported, a proposal to reduce the non-interest cost of credit cap in Poland was enacted in December 2022. The new legislation also includes new affordability rules which become effective in May 2023 and all non-bank financial institutions will be supervised by the Polish financial supervision authority, the KNF, from January 2024. Details of our response and credit card launch can be found in the European home credit section of this statement.

There have been no material updates on the EU's review of the Consumer Credit Directive or a revised draft law imposing a total cost of credit cap in Romania, details of which were included in our 2022 half-year results statement. We expect that a final compromise proposal on the Consumer Credit Directive will be published later in 2023.

In Hungary, the temporary Covid-19 debt repayment moratorium expired on 31 December 2022.

Board changes

We saw a number of changes to our Board during the year. Gary Thompson was appointed to the Board as Chief Financial Officer on 4 April 2022 and, with his wealth of sector-specific experience and skills, is a very strong addition to the IPF leadership team. I am also delighted to welcome two new non-executive directors, Katrina Cliffe and Aileen Wallace, who joined the Board in August and December 2022 respectively, bringing extensive experience of retail financial services and technology to the Group. Non-executive directors Bronwyn Syiek and John Mangelaars resigned from the Board in June and December respectively and they both leave the Group with our sincere thanks for their service.

Outlook

Every day we aim to provide underserved consumers with access to simple, personal, and affordable loans and insurances to help and protect them and their families. There is significant demand for affordable credit within our demographic and we see substantial and sustainable long-term growth opportunities through meeting the needs of more consumers with an increased choice of products and distribution channels.   

2022 represented a very good year of operational execution and strong recovery following the Covid-19 pandemic. Both our European and Mexico home credit businesses are delivering our target returns of a RORE of around 20% whilst also delivering strong growth. IPF Digital is also very well placed to rebuild scale and deliver our target returns in the medium term. It is very pleasing that our digital businesses in Mexico and Australia both delivered profit contributions for the first time in 2022.

In 2023, our focus will be on transitioning our Polish business to the new lower TCC, rolling out mobile wallet and continuing the very successful territory extension plan in Mexico home credit. We will also maintain strict control of costs and we see further opportunities to drive operational and structural cost efficiencies.

We have a strong balance sheet and robust funding position with headroom on our funding facilities to support our business plans into 2024. As previously outlined, we expect overall Group receivables growth in 2023 to be more modest and our returns to moderate as we transition the Polish business under the new lower TCC. We are very encouraged by the roll-out of the new credit card which is tracking above our initial expectations, and we remain focused on rebuilding returns in 2024 and then delivering target returns of 15% to 20% from 2025 onwards.

All three business divisions have started 2023 well and we have seen no discernible impact on customer demand or repayment behaviour from the increases in the cost of living. Notwithstanding this, we continue to adopt a cautious approach to credit. We have a strong track record as a resilient business through economic cycles and are well positioned to respond quickly if we see any material changes while continuing to support our customers through more difficult times.

Financial review

Group

We delivered strong growth and a very good financial performance across the Group as we continued to execute well against our strategy in 2022. Profit before tax of £77.4m (2021: £67.7m) shows growth of 14.3% and reflects a strong recovery in lending post Covid-19 and a very good operational performance, despite the challenges of the macroeconomic landscape. Excluding the benefit of Covid-19 impairment provision releases of £32.0m from 2021 reported profits, underlying profit before tax grew 117% in 2022. An analysis of profits between our three trading divisions is set out below:

* Prior to Covid-19 impairment provision releases of £32m in 2021 which have not been repeated in 2022.

The detailed income statement of the Group, together with associated KPIs is set out below:

1 Prior to an exceptional tax credit of £10.5m in 2022.

2 Based on required equity to receivables of 40%.

We play an important role in delivering financial inclusion, enabling people with limited borrowing options to access regulated credit in a responsible way. The successful execution of our growth strategy to rescale the business following the pandemic resulted in customer lending growth of 14% (at CER), driven by strong performances from all three divisions. This growth was achieved despite the Covid-19 restrictions earlier in the year, the impact of the war in Ukraine which resulted in softer demand in the first quarter of 2022 in Europe, and the challenging macroeconomic landscape which subsequently unfolded across the globe. Demand improved though the remainder of the year, although we continue to take a conservative approach to lending and tightened our credit criteria across most of our geographies as a precautionary measure due to the significant increase in the cost of living for our customers. We remain very mindful of the impact of inflation on disposable incomes, particularly the significant increases in food, fuel and utility prices, and will continue to manage our credit settings to match the situation in each of our markets.

Our closing net receivables portfolio increased by £152m (14% at CER) to £869m at the end of 2022 as we continued to successfully execute our rebuild strategy. All three divisions delivered strong receivables growth, despite tightened credit criteria. As communicated at our third quarter update, we expect overall Group receivables growth in 2023 to be relatively modest as we transition our Polish business to the new lower TCC cap.

The Group's annualised revenue yield strengthened from 48.1% in 2021 to 51.9% in 2022, reflecting a combination of four factors: (i) the stronger growth in Mexico home credit which carries a higher yield; (ii) the reduction in customer accounts in stage 3 (which do not attract as much interest under IFRS 9) due to improved repayment performance post Covid-19; (iii) selective price increases, mainly in European home credit; and (iv) a reduction in promotional activity. These factors have been partially offset by an increase in rebates provided to customers in Poland. Based on our current product set and regulation, in the medium term, we expect the Group revenue yield to increase to within a range of 53% to 56% as Mexico home credit grows to represent a larger proportion of the Group's receivables book.

Having close relationships with our customers encourages a strong repayment ethos and is a core strength of the business. Combined with the responsible lending decisions we take when serving them, the quality of our loan portfolio continues to be good in all divisions. Customer repayments remained robust driven by solid operational execution, and this resulted in an annualised impairment rate of 8.6% (2021: 4.9%). This metric continues to be lower than pre-Covid-19 levels and has benefited from improved credit quality and strong execution on debt sale activity and post-charge off recoveries, delivering c.£15m more customer repayments than 2021. We expect our Group annualised impairment rate to rise to around 14% to 16% as we regrow the business and the Covid-19 period flows out of the calculations. Our balance sheet remains robust against the combined impact of cost-of-living increases and the aftereffects of Covid-19, with an impairment coverage ratio of 36.4% at the end of 2022 (2021: 37.8%). This compares with a pre-Covid-19 ratio of 33.5% at the end of 2019.

We continued to maintain a stringent focus on costs as we grew the business and as a result, the annualised cost-income ratio improved by 6.7 ppts year on year to 60.9% in 2022 (2021: 67.6%). We are continuing to drive process efficiency through investing in technology and we expect the cost-income ratio to reduce to within a range of 52% to 54% over the medium term as we achieve greater scale.

Reported EPS was 25.6p per share (2021: 18.8p), up 36% on 2021. Excluding an exceptional tax credit of £10.5m in 2022, EPS growth was 11%.

Our pre-exceptional RORE for 2022 of 14.6% (2021: 15.1%) is close to the lower threshold of our target level of 15% to 20%, reflecting the strong progress made in the year on rebuilding the Group following Covid-19. The Group's pre-exceptional ROE, based on actual equity, was 11.5% in 2022, up from 11.4% in 2021. We anticipate Group returns moderating in 2023 as we transition the Polish business to the new lower TCC cap but expect to rebuild in 2024 and deliver our target returns in 2025.

European home credit

European home credit performed very well in 2022, delivering a profit before tax of £65.6m (2021: £54.5m) up 20.4%, reflecting strong execution against our recovery plan. Excluding the benefit of Covid-19 impairment provision releases of £20.6m from 2021 reported profits, underlying profit before tax grew 93.5% in 2022.

Despite the challenging trading environment in Europe and ongoing concerns about the war in Ukraine, we delivered a 10% increase in customer lending in 2022. This was despite a decline in lending of 1.6% in the first quarter of the year. This strong performance reflects steady growth in demand for credit from the second quarter onwards, and a very good operational performance in all four markets despite continued tight credit standards and the increase in the costs of living for consumers.

Customer numbers reduced modestly by 3% to 784,000, reflecting the weaker demand during the first quarter and our decision to proactively tighten our credit settings for consumers with higher credit risk profiles as a precautionary measure in the fourth quarter of the year. Customer repayment performance in the early months of 2023 remains robust.

Closing net receivables grew by 14% (at CER) to £501m, reflecting the strong growth in customer lending. This, in turn, supported revenue growth of 15% (at CER). The revenue yield improved from 40.2% to 42.5%, reflecting: (i) the reduction in customer accounts in stage 3 (which do not attract as much interest under IFRS 9) due to improved repayment performance post Covid-19; and (ii) actions to bolster the revenue yield, including modest price increases in all four countries and reduced promotional activity. These positive impacts to the yield were partly offset by the impact of changes in rebates in Poland which means that we refund more of the service charge back to customers when they repay early (c.£12m impact in 2022).

Customer repayment performance during the year was strong which, together with tight credit standards, delivered an impairment rate of 0.7%, up from a credit of 0.3% in 2021. The 2021 metric benefited from Covid-19 provision releases of £20.6m and, excluding this provision release the metric would have been 2.5%. The underlying improvement in the year reflects improved credit quality and strong execution on debt sale and centralised post-charge off recoveries which delivered approximately £15m more in customer repayments than the relatively low level achieved in 2021. We will continue to maintain tight credit standards in light of the ongoing uncertainty regarding the cost-of-living crisis.

The cost-income ratio showed a marked reduction of 5.2 ppts year on year to 64.3% (2021: 69.5%), reflecting the growth in lending and continued tight cost control across each of our businesses. We continue to drive more efficient processes and deliver greater synergies across our four countries, including through the deployment of technology.

The pre-exceptional RORE in European home credit strengthened from 20.7% in 2021 to 21.3% in 2022, as a result of strong growth, a sound impairment performance and tight control of costs. This is in line with the Group's expected returns from each of our divisions. We expect European home credit returns to be at a lower level in 2023 and 2024 as we transition our Polish business to the new lower TCC.

In advance of the new lower TCC in Poland being enacted in December 2022 and as part of our strategy to enhance our product offering to existing and new customers, we launched our first credit card proposition in Poland. The new offering features a revolving credit limit and credit card that provides greater flexibility to our customers who can use it for both online and offline transactions. Funds can be withdrawn from ATMs or disbursed through customer representatives, and it is envisaged that repayments will, in the vast majority of cases, be collected by a customer representative, thus retaining the unique relationship they have with their customers. We have issued almost 10,000 cards to customers and expect to build the new portfolio to a broadly similar customer base that we have always served over the next two to three years. We expect the receivables book in Poland to reduce by c.25% in 2023, resulting in an overall decline in European home credit receivables, before substantially recovering through 2024. We estimate that the impact of the transition to our credit card product will reduce European home credit profits by between £15m to £20m in each of 2023 and 2024, after which the Polish business and European home credit will return to delivering our target returns of approximately 20% RORE.

More widely in European home credit, we will continue to expand our remote digital offering in the Czech Republic and examine the feasibility of a digital offering wherever we have a home credit business. We will also continue to closely monitor the impact of the macroeconomic uncertainty on customers' disposable incomes and their demand for credit, and will continue to maintain our strong credit standards.

Mexico home credit

Mexico home credit delivered strong growth and a very good operational performance, reporting profit before tax of £17.7m (2021: £18.4m). Excluding the benefit of Covid-19 impairment provision releases of £7.7m in 2021, underlying profit before tax grew 65.4%.

Mexico home credit is delivering strong returns in a market with high demand for credit and significant growth potential. Our growth strategy to capture Mexico's potential centres on increasing penetration within our existing footprint and extending into new regions. We are also improving the customer experience and leveraging synergies with IPF Digital. We opened 660 new agencies in 2022 within or close to our current territory and launched a new region in the Northwest of Mexico (Tijuana). We will also open a new region in Tampico in March 2023. The investments we made in expanding our reach together with good customer demand supported a 17% increase (at CER) in customer lending year on year and a 6% rise in customers to 696,000.

Closing net receivables increased by 14% (at CER) to £158.5m which drove a significant increase in revenue of 27% year on year (at CER). The revenue yield improved from 81.5% in 2021 to a more normalised level of 88.2% in 2022, reflecting the reduction in customers in stage 3 which attract less interest under IFRS 9. During the peak of Covid-19, approximately 50% of customers were in stage 3 compared with just under 30% at 2022.

At the same time as delivering significant growth, we continued to maintain robust customer repayments. The impairment rate increased by 12.7 ppts to 31.6% year on year reflecting the impact of IFRS 9 on a strongly growing receivables book as well as Covid-19 provisions released in 2021 no longer being included in the calculation (2021: £7.7m). The rate was marginally above our target level for Mexico home credit of approximately 30%. Customer repayments in January 2023 have been strong and we expect to bring the impairment rate down to target levels in 2023.

In line with our growth strategy, we continued to invest in expanding our customer representative network and geographic footprint into the Northwest of Mexico which resulted in costs in 2022 increasing by 10.7% (at CER). However, the cost-income ratio improved by 8.6 ppts to 51.1% year on year (2021: 59.7%) demonstrating the benefit of operational leverage in this growing business and good cost control.

Mexico home credit delivered a pre-exceptional RORE of 19.2% (2021: 27.1%), only marginally below our upper target of 20%, despite delivering significant growth and opening a new region in Tijuana. Investing in sustainable growth whilst maintaining target returns remains our key focus.

Our Mexico home credit business offers very exciting and significant long-term prospects. By successfully delivering on our strategy, we will continue to deliver sustainable growth to ensure consistent returns. We will enhance territory management to maximise customer reach within the current geographic footprint and selectively digitise the customer journey. We will also continue to build on the synergies developed with IPF Digital which is helping us financially include more people in Mexico. 

IPF Digital

IPF Digital delivered very positive growth momentum in all our ongoing markets and reported a profit before tax of £8.8m (2021: £8.7m). Excluding the benefit of Covid-19 impairment provision releases of £3.7m in 2021, underlying profit before tax grew by 76.0% in 2022.

Our strategy to grow our IPF Digital business reflects increasing demand from consumers who are looking for end-to-end digital services, and we are rebuilding receivables to gain scale and deliver our target returns following the closure of our businesses in Finland in 2020 and Spain in 2021. All six ongoing countries of Estonia, Latvia, Lithuania, Poland, Mexico and Australia and our two collect-out countries of Finland and Spain, delivered a profit contribution in 2022. Very pleasingly, 2022 was the first year of Mexico and Australia moving into profit.

We saw very strong demand for credit in 2022 and delivered a 22% increase in customer lending year on year with Mexico (67%) and Australia (36%) growing particularly strongly, and Poland (26%) and the Baltic markets (22%) also delivering good growth. We are now serving 253,000 customers and excluding the impact of the portfolio collect outs in Finland and Spain, customer numbers increased by 7%, mainly driven by the strong growth in Mexico and Australia. 

The strong growth in lending resulted in closing net receivables ending the year at £209m, an increase of 14% (at CER). The growth was delivered despite a £12m reduction in receivables in Finland and Spain, where the collect-outs have exceeded expectations. Excluding the collect-out portfolios, net receivables growth of 22% (at CER) was delivered despite continued tight credit standards, with Mexico (63%) and Australia (37%) delivering the most significant growth whilst the Baltic markets also delivered growth of 13%. The receivables book in Poland showed a modest reduction as we closed one of our two brands to improve returns.

The revenue yield decreased marginally from 46.4% in 2021 to 45.4% in 2022. This reflects the impact of a combination of factors: (i) a tighter rate cap in Latvia; (ii) the reduction in higher yielding Finland receivables during the collect-out; (iii) the impact of increased competition which has resulted in price reductions in Lithuania; and (iv) the growth in Australia which is relatively lower yielding. These adverse variances have been partly offset by the growth in Mexico which has a higher revenue yield.

The impairment rate increased marginally from 9.4% in 2021 to 10.1% in 2022. This reflects two factors. Firstly, the £3.7m release of Covid-19 provisions benefited the impairment rate in 2021 and excluding this release, the impairment rate in 2021 would have been 10.7% showing an underlying improvement of 0.8ppts. The improvement mainly reflects the strong collect-out performance in Finland and Spain which have exceeded expectations.

Although we continued to invest in developing our product offering and marketing to attract new customers and build scale, tight control on costs delivered an 8% (at CER) reduction in costs during 2022 and this was reflected in the cost-income ratio which decreased by 3.8 ppts to 57.2% (2021: 61.0%). We expect the cost-income ratio to further improve as we continue to rebuild the business.

IPF Digital's pre-exceptional RORE in 2022 was 6.9%, little changed from 7.5% in 2021 which benefited from the release of Covid-19 provision of £3.7m. Although IPF Digital currently lacks scale following Covid-19 and the closure of Finland and Spain, we have strong organic growth opportunities in our existing markets, particularly Mexico and Australia, and we will continue to consider inorganic opportunities to deliver scale and increase returns to our target levels. In 2023, we will continue to extend the reach of our mobile wallet in Latvia, Estonia and Lithuania and we will also continue to expand the new hybrid lending opportunities that our digital and home credit businesses are partnering on in Mexico as well as launching a modified mobile wallet offering there.

Taxation

The pre-exceptional taxation charge on the profit for 2022 is £31.1m, which represents an effective tax rate for the year of approximately 40% (2021: 38%). The higher tax rate in 2022 reflects the normalisation of impairment charges in Poland following Covid-19. In Poland, we only get a small deduction for bad debt tax relief.

The full-year results reflect a net exceptional tax credit of £10.5m comprising three items: 

1. Following a favourable Supreme Administrative Court decision, the Group's Polish subsidiary successfully obtained a Ministry of Finance ruling confirming the tax deductibility of certain expenses linked to intra-group transactions in respect of years 2018 onwards. These expenses had originally been disallowed following the introduction of new legislation with more restrictive rules during 2017. The returns for years 2018 to 2021 have been re-filed with the tax office along with claims for repayment of £27.4m, of which £26m has been received in 2022. A further benefit is estimated at £3.5m comprising a reduction in the 2022 corporate income tax liability of £1.5m and a reduction in subsequent years' liabilities of £2m.  As a result, an exceptional tax credit of £30.9m has been recognised in 2022, with £1.4m reflected as a current tax asset (in respect of claims submitted but not refunded at the year end) and £2m held as a deferred tax asset on the balance sheet.

2. An exceptional tax charge of £15.3m has arisen following the derecognition of the non-current asset previously held in respect of the Group's finance company arrangements. This stems from the decision by the General Court of the European Union in June 2022 confirming the European Commission's earlier decision that the United Kingdom's Group Financing Exemption constitutes partial illegal state aid.

3. An exceptional tax charge of £5.1m has been reflected relating to the Hungarian government's announcement in June 2022 which introduced a series of temporary taxes aimed at raising revenue to support the armed forces in view of the ongoing war in Ukraine and protect households against rising energy costs. The new tax package, which was passed by Government Decree, included a new "extra profit special tax" chargeable on the financial sector including non-bank financial institutions, and which is payable in respect of 2022 and 2023 only. This new tax will increase the taxes payable by the Group's Hungarian subsidiary by £5.1m for 2022, with an estimated further £6m payable in respect of 2023.

Funding and balance sheet

We continue to maintain a very conservatively capitalised balance sheet, a strong funding position and robust financial risk management. At the end of 2022, the equity to receivables ratio was 51% (2021: 51%) and this compares with our target of 40%. The ratio has remained unchanged in 2022 despite: (i) receivables growth being greater than 10% in our financial model; (ii) returns being below the lower target threshold of 15%; and (iii) a dividend payout ratio in excess of 40%. The absorption of capital from these factors has been offset directly by a £42m foreign exchange gain being credited to reserves in the year. We will progressively reduce the equity to receivables ratio over the next two to three years as we invest in growth, deliver our progressive dividend policy and build returns to our target level of 15% to 20%. The gearing ratio was 1.2 times (2021: 1.3 times), comfortably ahead of our covenant limit of 3.75 times.

At the end of 2022, the Group had total debt facilities of £611m, comprising £419m of bonds and £192m of bank facilities. We have borrowings of £554m and, together with undrawn facilities and non-operational cash balances, headroom is £76m. The Group's current funding capacity together with strong business cash generation, is expected to meet the Group's funding requirements into 2024. Our additional funding requirement in 2023 is not expected to be significant due to the anticipated contraction in Polish receivables as we transition the business under the new lower TCC cap.

Despite the difficult macroeconomic backdrop, we have successfully extended £169m of bank facilities in 2022 and extended the maturity profile of the Groups' sources of funding to 2.5 years. In addition, consistent with our normal practice, in December we refinanced part of our £78m sterling retail bond maturing in December 2023, one year in advance of its maturity. The new retail bond has a maturity of December 2027 and carries a coupon of 12%, compared with the previous sterling bond which carried a coupon of 7.75%, with the increased rate reflective of the rise in UK gilt prices and the iTraxx crossover rate. In total, £38m of the original bond was exchanged into the new bond with a further £2m of new retail bonds issued. In addition, a further £10m of bonds were retained by the Group in treasury and, in early January 2023, we have begun to issue these to the market. The £40m of the original retail bonds which were not exchanged will be repaid in line with their maturity in December 2023. We are continuing to actively seek new sources of funding in addition to our strong in-country bank relationships and our access to debt capital markets.

Our blended cost of funding in 2022 was 13.3%, up from 11.3% in 2021. This reflects a significant step-up in interest rates across our markets which has resulted in higher costs of bank funding and hedging.

Our credit ratings remain unchanged. We have a long-term credit rating of BB- (Outlook Stable) from Fitch Ratings and Ba3 (Outlook Stable) from Moody's Investors Services.

International Personal Finance plc

Consolidated income statement for the year ended 31 December

Earnings per share - statutory

Earnings per share - pre-exceptional items

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

Consolidated statement of comprehensive income for the year ended 31 December

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

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.

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 2022, which have been prepared in accordance with 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.

Statutory Financial Statements for the year ended 31 December 2021 have been delivered to the Registrar of Companies and those for 2022 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 23 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 2022 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 2022 but do not have any material impact on the Group:

· Amendments to IFRS 3 'Reference to the Conceptual Framework';

· Amendments to IAS 16 'Property, Plant and Equipment - Proceeds before Intended Use';

· Amendments to IAS 37 'Onerous Contracts - Cost of Fulfilling a Contract'; and

· Annual Improvements to IFRS Standards 2018-2021 - Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards, IFRS 9 Financial Instruments, IFRS 16 Leases, and IAS 41 Agriculture.

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 10 and IAS 28 'Sale or Contribution of Assets between an Investor and its Associate or Joint Venture';

· Amendments to IAS 1 'Classification of Liabilities as Current or Non-current';

· Amendments to IAS 1 and IFRS Practice Statement 2 'Disclosure of Accounting Policies';

· Amendments to IAS 8 'Definitions of Accounting Estimates'; and

· Amendments to IAS 12 'Deferred Tax related to Assets and Liabilities arising from a Single Transaction'.

Exceptional items

Exceptional items are items that are unusual because of their size, nature or incidence and which the directors consider should be disclosed separately to enable a full understanding of the Group's underlying results.

Critical accounting judgements and key sources of estimation uncertainty

The preparation of Consolidated Financial Statements requires the Group to make estimates and judgements that affect the application of policies and reported accounts.

Critical judgements represent key decisions made by management in the application of the Group accounting policies. Where a significant risk of materially different outcomes exists due to management assumptions or sources of estimation uncertainty, this will represent a critical accounting estimate. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

The estimates and judgements which have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities are discussed below.

Key sources of estimation uncertainty

In the application of the Group's accounting policies, the directors are required to make estimations that have a significant impact on the amounts recognised and to make estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

The following are the critical estimations, that the directors have made in the process of applying the Group's accounting policies and that have the most significant effect on the amounts recognised in the Financial Statements.

Revenue recognition

The estimate used in respect of revenue recognition is the methodology used to calculate the EIR. In order to determine the EIR applicable to loans an estimate must be made of the expected life of each loan and hence the cash flows relating thereto. These estimates are based on historical data and are reviewed regularly. Based on a 3% variation in the EIR (2021: 3%), it is estimated that the amounts receivable from customers would be higher/lower by £8.7m (2021: £7.7m). This sensitivity is based on historic fluctuations in EIRs.

Amounts receivable from customers

The Group reviews its portfolio of customer loans and receivables for impairment on a weekly or monthly basis. The Group reviews the most recent repayments performance to determine whether there is objective evidence which indicates that there has been an adverse effect on expected future cash flows. For the purposes of assessing the impairment of customer loans and receivables, customers are categorised into stages based on days past due as this is considered to be the most reliable predictor of future payment performance. The level of impairment is calculated using historical payment performance to generate both the estimated expected loss and also the timing of future cash flows for each agreement. The expected loss is calculated using probability of default (PD) and loss given default (LGD) parameters.

Impairment models are monitored regularly to test their continued capability to predict the timing and quantum of customer repayments in the context of the recent customer payment performance. The models used typically have a strong predictive capability reflecting the relatively stable nature of the business and therefore the actual performance does not usually vary significantly from the estimated performance. The models are ordinarily updated at least twice per year. Where the models are expected to show an increase in the expected loss or a slowing of the future cashflows in the following 12 months, an adjustment is applied to the models. At 31 December 2022, this adjustment was a reduction in receivables of £11.6m (2021: reduction of £13.6m).

Post model overlays (PMOs) on amounts receivable from customers

High inflation rates associated with the global cost-of-living crisis may reduce customers' disposable income, which may impact their ability to make repayments. A full assessment of the impact of the cost-of-living crisis and associated reduction to the disposable income of customers has been performed and concluded that it is likely to result in increased risks across both the home credit and IPF Digital businesses. PMOs have been established and based on management's current expectations the impact of these PMOs was to increase impairment provisions at 31 December 2022 by a further £20.6m (2021: £6.8m). In order to calculate this PMO, country-specific expert knowledge, informed by economic forecast data to estimate the increase in losses, has been used and resulted in a range of outcomes from £15.4m to £25.8m. This represents management's current assessment of a reasonable range in assumptions.

The Hungarian debt moratorium, which initially began in March 2020, ended in December 2022. There remains a small proportion of the portfolio that has at some point been in the moratorium. Given the age of these loans, PMOs have been applied to the impairment models in order to calculate the continued risks that are not fully reflected in the standard impairment models. Based on management's current expectations, the impact of these PMOs was to increase impairment provisions at 31 December 2022 by £4.3m (2021: £7.8m). In order to calculate the PMO, the portfolio was segmented by analysis of the most recent payment performance and, using this information, assumptions were made around expected credit losses. This represents management's current assessment of a reasonable outcome from the actual repayment performance on the debt moratorium impacted portfolio.

Polish early settlement rebates

As previously reported, a comprehensive review was conducted in 2020 by UOKiK, the Polish competition and consumer protection authority, of rebating practices by banks and other consumer credit providers on early loan settlement, including those of the Group's Polish businesses. The impact of the resolution of this matter resulted in higher early settlement rebates being payable to customers that settled their agreements early before the balance sheet date. A number of risks and uncertainties remain, in particular with respect to future claims volumes relating to historic rebates paid and the nature of any customer contact exercise required. The total amount provided of £0.6m (2021: £3.3m) represents the Group's best estimate of the likely future cost of increasing historic customer rebates, based on its current strategy to achieve resolution. Whilst the volume of claims could differ from the estimates, the Group's expectation at this stage is that claims rates are unlikely to be more than 25% higher than the assumed rate.

Claims management charges in Spain

The Group holds provisions in respect of claims management charges in Spain following an increase in incidence of these claims since 2020. The charges were reviewed by reference to the claims incidence experience and average cost of resolution in the Spanish business. The provision recorded of £4.7m, split £0.6m against receivables and £4.1m in provisions, (2021: £7.1m, split £5.0m against receivables and £2.1m in provisions) represents the Group's best estimate of future claims volumes and the cost of their management, based on current claims management methodology, together with current and future product plans. Whilst the future claims incidence and cost of management could differ from estimates, the Group's expectation at this stage is that overall costs are unlikely to be more than 25% higher than those assumed in the charges.

Tax

Estimations must be exercised in the calculation of the Group's tax provision, in particular with regard to the existence and extent of tax risks.

Deferred tax assets arise from timing differences between the accounting and tax treatment of revenue and impairment transactions and tax losses. Estimations must be made regarding the extent to which timing differences reverse and an assessment must be made of the extent to which future profits will be generated to absorb tax losses. A shortfall in profitability compared to current expectations may result in future adjustments to deferred tax asset balances.

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 2022, we continued to face a challenging external environment, particularly from changing regulation, and the impact of issues arising from the Covid-19 pandemic. 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.

3. Related parties

The Group has not entered into any material transactions with related parties during the year ended 31 December 2022. 

4. Segmental analysis

Geographical segments

4. Segmental analysis (continued)

5. Interest expense

6. Tax expense

The pre-exceptional taxation charge on the profit for 2022 is £31.1 million, which represents an effective tax rate for the year of approximately 40% (2021: 38%). The higher tax rate in 2022 reflects the normalisation of impairment charges in Poland following Covid-19. In Poland, we only get a small deduction for bad debt tax relief.

The exceptional tax income of £10.5m is detailed in note 9.

The Group is subject to tax audits in respect of the Mexican home credit business (regarding 2017) and in respect of the Polish digital business (regarding 2019).

7. Earnings per share

Basic earnings per share (EPS) is calculated by dividing the profit attributable to shareholders of £56.8m (2021: £41.9m) by the weighted average number of shares in issue during the period of 222.2m which has been adjusted to exclude the weighted average number of shares held in treasury and by the employee trust (2021: 223.2m).

Basic pre-exceptional EPS is calculated by dividing the pre-exceptional profit attributable to shareholders of £46.3m (2021: £41.9m) by the weighted average number of shares in issue during the period of 222.2m which has been adjusted to exclude the weighted average number of shares held in treasury and by the employee trust (2021: 223.2m).

For diluted EPS the weighted average number of shares has been adjusted to 234.0m (2021: 235.3m) to assume conversion of all dilutive potential ordinary share options relating to employees of the Group. 

8. Dividends

Dividend per share

Dividends paid

Based on the leadership's successful execution of our growth strategy, the Board is pleased to declare a final dividend of 6.5 pence per share, bringing the full-year dividend to 9.2 pence per share (2021: 8.0 pence). Subject to shareholder approval, the final dividend will be paid on 5 May 2023 to shareholders on the register at the close of business on 11 April 2023. The shares will be marked ex-dividend on 6 April 2023. 

9. Exceptional Items

The 2022 income statement includes an exceptional tax gain of £10.5m (2021: £nil) which comprises the following items:

Further information relating to the exceptional tax items is included earlier in the taxation section.

10. 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, based on the expected cash flows resulting from the legacy MCB business' outstanding customer receivables and taking into account the collect out of the Finnish business. The key assumptions applied in the value in use calculation relate to the discount rates and the cash flow forecasts used. The rate used to discount the forecast cash flows is 12% (2021: 10%) and would need to increase to 14% for the goodwill balance to be impaired; the cash flow forecasts arise over a 4 year period and would need to be 17% lower than currently estimated for the goodwill balance to be impaired.

11. Intangible assets

Intangible assets comprise computer software and are a mixture of self-developed and purchased assets. All purchased assets have had further capitalised development on them, meaning it is not possible to disaggregate fully between the relevant intangible categories.

12. Property, plant and equipment