Inter. Pers. Regulatory News (IPF)

International Personal Finance plc 

Full-year Financial Report for the year ended 31 December 2018

International Personal Finance plc specialises in providing unsecured consumer credit to more than 2.3 million customers across 11 markets. We operate the world's largest home credit business and a leading fintech business, IPF Digital.

Key highlights

† Excluding Slovakia and Lithuania. 

Notes

In this financial report, we compare the 2018 actual full-year performance against the 2017 numbers adjusted for IFRS 9 because the Board believes that this provides the most relevant comparison of performance trends. More detail on IFRS 9 can be found in this report, and a full reconciliation of the 2017 profit and loss account between the reported numbers and the IFRS 9 numbers is also set out in this report.

This report has been prepared solely to provide additional information to shareholders to assess the Group's strategies and the potential for those strategies to succeed. The report should not be relied on by any other party or for any other purpose. The report contains certain forward-looking statements. These statements are made by the directors in good faith based on the information available to them up to the time of their approval of this report but such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, like-for-like any such forward-looking information. Percentage change figures for all performance measures, other than profit before taxation and earnings per share, unless otherwise stated, are quoted after restating prior year figures at a constant exchange rate (CER) for 2018 in order to present the like-for-like performance variance.

Chief Executive Officer, Gerard Ryan, commented:

"I am delighted with the excellent progress we made against our strategic objectives which delivered a very strong financial performance in 2018. Profit before tax increased by £15.3 million to £109.3 million as a result of improving profits across all our businesses. We are particularly pleased with IPF Digital's profit trajectory, with a strong contribution from established markets and reduced start-up losses within new markets, driven by both excellent customer acquisition and strong credit growth. 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."

Strategy update

Our business provides small sum, unsecured personal loans to customers who are either underbanked or underserved by mainstream operators. Our strategy is to provide consumers in this segment with a greater choice of channels, products and price points, and to make their journey with us as seamless as possible. We made very good progress against our strategy in 2018 which segments our operations into 'growth' and 'returns' focused businesses. We are optimising the returns of our European home credit operations to invest in our growth businesses, Mexico home credit and IPF Digital, and deliver returns to our shareholders. We will continue to improve our service and effectiveness by investing in technology in both our home credit and digital businesses.

Our European home credit business is becoming more efficient and technologically enabled, the loan portfolio quality is excellent and it delivered very good operational and financial results this year. Our investments in growth opportunities in IPF Digital and Mexico home credit are now showing clear signs that they will deliver according to our plan, thereby creating a group with three pillars; a modernised European home credit delivering very good returns; a Mexican home credit business that combines ongoing growth potential with improved levels of profitability; and a global digital lending business that grows through constant innovation and delivers good returns.

Market overview

Macroeconomic conditions in all our European markets in 2018 were stable and current indicators suggest these markets will deliver positive GDP growth, low unemployment and moderately increasing inflation in 2019. In Mexico, political change resulted in some uncertainty in 2018 and GDP growth forecasts for 2019 remain positive but have softened slightly in recent months.

In all our markets, we continue to see a growing number of consumers wanting to access finance, although it is clear that a very significant proportion of our target market do not have the credit quality required to be served remotely by mainstream lenders. Competition for the best quality customers in our demographic is intense and our IPF Digital brands and Provident-branded digital offers are targeted directly at consumers in this segment who have the credit profile to qualify for a remote loan.

Based on our experience across several markets, we see home credit co-existing very comfortably with digital credit offerings as the combination of the two can serve the vast majority of the customers in our segments. 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 are able to lend with more confidence to creditworthy customers where a remote lending business cannot.

Group performance overview

Executing in line with our strategic objectives and remaining committed to strong operational discipline resulted in a £15.3 million (16%) increase in profit before tax to £109.3 million from ongoing businesses. This comprised an uplift in like-for-like profit before tax of £15.2 million, a benefit of £1.7 million from lower new business investment and a £1.6 million adverse impact from weaker FX rates. The reduced new business investment comprised £3.6 million within IPF Digital's new markets and central functions where start-up losses reduced, offset partially by increased new business investment of £1.9 million in Mexico home credit.

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

The increase in profit comprised £15.3 million from our ongoing businesses offset partially by a £3.2 million reduction in the contribution from Slovakia and Lithuania, which reported a profit in 2017 when they were being wound down. We are in the process of liquidating the home credit businesses in Slovakia and Lithuania, and this did not result in any profit and loss account charge or credit during 2018. The statutory profit before tax increase, IAS 39 2017 to IFRS 9 2018, is £3.7 million. 

We delivered a 6% increase in credit issued led by our IPF Digital and Mexico home credit businesses, offset partially by a 5% contraction in European home credit. This growth increased our average net receivables by 6%, and revenue by 4%. We maintained strong credit quality and good collections across the Group and improved impairment as a percentage of revenue by 1.7ppts to 26.2% (2017: 27.9%). Our cost-income ratio increased by 0.6ppts to 44.9%, driven by improved operating leverage in IPF Digital and Mexico home credit offset by a modest increase in the cost-income ratio in European home credit.

Business Division Performance Review

European home credit

Our European home credit businesses are the financial foundation of the Group, providing excellent service to customers and generating the cash and capital needed to fund growth opportunities and returns to shareholders. We continued to improve the sustainability of these businesses by creating more modern, efficient and better credit quality operations which resulted in a very good operational and financial performance in 2018. Together, the European home credit businesses delivered a £1.5 million increase in profit before tax to £113.8 million driven primarily by stronger-than-originally expected post-field collections. This robust performance reflects an improvement in like-for-like profit of £2.2 million with slightly lower net revenue more than offset by lower costs, partially impacted by a £0.7 million adverse effect from weaker FX rates.

Competition remained intense in Europe with payday, digital, home credit and bank operators competing to serve credit to our segment of consumers. This, together with new debt-to-income regulations in Romania, resulted in customer numbers contracting by 12%. We responded with campaigns to increase new customer acquisition and improve retention which, as planned, delivered a 3ppt slower rate of contraction in the second half of the year compared to the first. Credit issued contracted by 5%, which led to a reduction in both average net receivables and revenue of 4% and 5% respectively.

The credit quality of the loan portfolio in European home credit is very strong, driven primarily by better than originally expected post-field collections, supported by good agent collections and our focus on serving higher-quality customers. As a result, impairment as a percentage of revenue improved by 2.9ppts to 17.9%.

We are modernising our European home credit businesses to improve efficiency by investing in technology and we completed the roll-out of our agent mobile technology in this region which is now being used by more than 10,000 agents and field managers. As demand for digital loans has increased, we have evolved the business to offer Provident-branded digital loans to customers in Poland and around 22,000 people are using this channel. We delivered a reduction in costs during 2018 of £5.4 million (at CER) despite these investments in technology as we focused on delivering a sustainably lower cost base in these businesses. However, revenue contraction was slightly faster than the reduction in costs which resulted in a 1.3ppt increase in the cost-income ratio year on year to 40.9%. As planned, this ratio improved during the second half of the year as result of this optimisation strategy.

We will continue to operate our European home credit businesses in line with our strategy to enhance their sustainability, deliver a high-quality service to our customers and optimise returns. We aim to continue the momentum we achieved in the second half of 2018 and further reduce the rate of customer contraction, become more technically enabled with further functionality being added to the MyProvi mobile app, and improve cost-efficiency.

Mexico home credit

Mexico home credit is one of our two strategic investment areas to drive growth. We are taking advantage of the significant scale opportunity in this market by expanding our geographic footprint, building our micro-business channel and improving profitability in our established branches. We opened five new branches in the second quarter of the year and are now serving over 100,000 customers in the 17 branches opened since the beginning of 2016. With an estimated four million individuals running micro-businesses in Mexico, the potential opportunity to generate growth by providing credit to customers who are underbanked is substantial, and we are now serving around 26,000 customers with this offering.

The Mexico home credit business continued to perform well and delivered a 22% (£2.8 million) improvement in profit before tax to £15.7 million in 2018. This comprises like-for-like profit growth of £5.9 million delivered by our established branches, offset partially by increased investment in future growth of £1.9 million through geographical expansion and our micro-business channel, together with a £1.2 million adverse impact from weaker FX rates.

Our strategy to attract new customers through investment in branch expansion and our micro-business loans channel were the key drivers of an 89,000 increase in customers to 917,000. This resulted in credit issued growth of 12% together with a 9% increase in both average net receivables and revenue.

Alongside delivering good growth, we maintained collections at an acceptable level and impairment as a percentage of revenue was 36.7%, which is slightly higher than 2017. In our established branches, where we have a balanced mix of new and repeat customers and stable operational teams, this impairment measure stands at 32.7% of revenue (2017: 34.4%). As newer branches and micro-business lending become more mature, their impairment measure is expected to reach that of the established branches. Our investment in growing Mexico home credit drove a 5% increase in our other costs which was driven by expansion and micro-business lending. Overall, the increase in investment was lower than the revenue growth generated, and together with good cost management, the cost-income ratio improved by 1.4ppts year on year to 38.7%.

Mexico offers significant opportunities for our home credit business and we will continue our successful strategy to expand our geographic footprint and micro-business loans channel to deliver further top-line growth. In addition, we will focus on driving further improvements in returns from our established branches. 

IPF Digital

IPF Digital is also a key strategic growth opportunity for the Group serving the increasing demand for digital credit within our target segment of consumers. We delivered another year of very strong growth and made further progress against our strategic priorities of providing a great customer experience through innovation, building scale in our new markets of Poland, Spain, Australia and Mexico, and moving to profitability in 2019. The growing demand for our revolving credit line product, which now accounts for 60% of our digital lending, demonstrates that we are achieving our stated goal of providing customers with the products they want through the channels they wish to use. Clearly this goal is a journey rather than an end point and we will continue to develop and improve our products and processes to make the customer journey as simple, fast and frictionless as possible.

In 2018, we focused on increasing scale in our new markets while improving our credit decisioning, the result of which was a reduction in start-up losses before tax to £5.6 million, which is a £10.7 million improvement on 2017. This result was driven by reduced losses in our new markets where we delivered strong top-line growth, improved impairment and cost-leverage combined with improved profitability in the established markets.

Strong customer demand and effective marketing delivered a 35% increase in credit issued to £311.8 million, driven primarily by the strong performance in our new markets, but also good levels of growth in our established markets. This resulted in a 41% increase in both average net receivables and revenue.

Alongside this growth, we continued to improve our credit decisioning capabilities, evidenced by a 7.8ppt improvement in impairment as a percentage of revenue to 37.8%. We maintained good credit quality in our established markets and we made considerable improvements in the new markets by optimising our credit settings via constant testing and refinement of different credit strategies. In addition, increased scale and investment in technology has enabled us to better leverage our infrastructure and improve cost efficiency, delivering a 4.1ppt year-on-year reduction in the cost-income ratio to 57.9%. 

The profitability of IPF Digital is segmented as follows:

Established markets

Our established markets delivered a £6.9 million improvement in profit before tax to £25.5 million driven by the benefits of scale and cost leverage. Smarter marketing, customer acquisition and CRM, combined with enhanced risk-based pricing strategies, resulted in a 15% increase in credit issued and a 23% increase in average net receivables. Revenue yield was stable at around 60% and, therefore, revenue growth was in-line with the increase in average net receivables.

Impairment as a percentage of revenue in these well-regulated markets was stable at 20.8%. This reflected a modest increase in underlying impairment as these markets continue to grow and serve new customers, offset partially by the benefit of non-recurring debt sale profits totalling £3.6 million. We continued to manage our cost base closely to improve efficiency, which resulted in an improvement in the cost-income ratio of around 3ppts to 38.1%. 

New markets

Start-up losses in the new markets reduced by £7.4 million, driven by a combination of strong top-line growth together with improved impairment and cost-leverage. We continued to invest in building our digital brands, as well as improving our product and customer experience and enhancing risk-based pricing strategies to appeal to a wider range of customers. These factors delivered a 64% increase in credit issued, an increase in average net receivables of 85% and growth in revenue of 67%, with strong performances from all markets.

Another year of experience in these markets improved our ability to make good credit decisions and enhance our processes to optimise customer repayment behaviours. This delivered a significant 26.6ppt reduction in impairment as a percentage of revenue to 57.9%. Achieving such rapid improvement in credit quality at the same time as strong growth demonstrates our capabilities to continuously improve our credit settings and optimise our use of new technology and data sources. We expect we will continue to deliver positive impairment trends in these markets as they mature. Investment in growing these businesses - both marketing and volume-driven operational costs - resulted in increased costs to £41.5 million, however, economies of rapidly increasing scale resulted in a 9.5ppt improvement in the cost-income ratio to 61.5%, and we expect this trend to continue in the coming years.

IPF Digital as a whole represents a significant long-term growth opportunity for the Group and is making excellent progress against our strategy to build a large, profitable digital lending business. We are confident that we will deliver the division's maiden profit in 2019 as we continue to build scale, improve impairment in our new markets, and further leverage our cost base to drive greater efficiency. 

Regulatory update

As previously reported, the National Bank of Romania introduced debt-to-income limits that became effective on 1 January 2019. The debate in Romania relating to a proposal for an APR cap of 18% for existing and new consumer lending has now been finalised. Following a full consultation, which included engagement with our trade association and banks to enable regulators and politicians to better understand the potential unintended impacts of the proposal on consumers and businesses, an APR cap of 50% for loans under €3,000 and 18% for loans over €3,000 was agreed. The vast majority of our Romanian lending will fall under the 50% cap. While aspects of the new cap are the subject of a constitutional court challenge, we nevertheless expect the new regulation to come into effect later in the year. Although the APR cap and new debt-to-income limits will have an effect on sales volumes and profitability in Romania, we do not expect this to be material at Group level. 

On Monday 18 February, the Polish Ministry of Justice (MoJ) published a draft bill containing a modified set of proposals for a reduction in the cap on non-interest costs that may be charged by lenders in connection with consumer loan agreements. The level of the current cap is as follows: (i) a flat level of 25% of the loan value; and (ii) an additional cap of 30% per annum; the combined total of both of which may not, in any event, exceed 100% of the loan value. The MoJ had previously published a draft bill in December 2016 under which the flat level cap and the additional per annum cap would have been reduced to 10% and 10% respectively, the combined total being limited to 75% of the loan value. As modified, the new proposal regarding non-interest costs is to reduce the flat level cap to 20% and the additional per annum cap to 25%, the combined total being limited to 75% of loan value. There is no proposal to reduce the current cap on interest charges. The proposals are open to public consultation for two weeks from the date of their publication and if approved in their current form, could be effective during the second calendar quarter of 2019. Once the proposals are finalised, we will update the market with our assessment of the likely financial impact on the Group.

Taxation

The taxation charge on profit for 2018 has been based on an effective tax rate of 31%. The taxation charge for the year on statutory pre-tax profit was £33.9 million (2017: £30.6 million on a pre-exceptional tax charge basis). As set out in our Q3 trading update on 18 October 2018, a draft law proposing amendments to existing tax legislation in Poland was submitted to Parliament and came into force on 1 January 2019. The main impact for our business is that certain cross-border transactions entered into by our Polish subsidiary are now economically inefficient. As a result of these changes, we expect the effective tax rate for the Group to be around 41% in 2019. 

In January 2017, our home credit company in Poland received adverse decisions on tax audits in respect 2008 and 2009 and consequently was required to pay £36.1 million (comprising tax and associated interest) in order to lodge an appeal in the Polish courts. The court process was subsequently stayed whilst these decisions became subject to a process involving the UK and Polish tax authorities aimed at ensuring that an intra-group arrangement is taxed in accordance with international tax principles. The tax returns for 2010 to 2012 are currently subject to tax audits and all subsequent years remain open to audit. The total potential liability for all open years (2008 to 2018), if all years were assessed on the same basis as 2008 and 2009, would amount to around £169 million including the £36.1 million that has already been paid, and this is disclosed in the financial information as a contingent liability. We 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. Therefore the payment of the sum outlined above is not a reflection of our view on the merits of the case, and accordingly the £36.1 million already paid has been recognised as a non-current financial asset in these Financial Statements given the uncertainties in relation to the timing of any repayment of such amounts. Further details on this matter are set out in note 21.

Funding and balance sheet

We further strengthened our debt funding position by adding £84 million of new funding in 2018.

In June, we issued a Swedish Krona 450 million (£40 million) senior unsecured floating rate bond due in 2022 under our existing Euro Medium Term Note Programme. This forms part of our funding strategy to support the long-term growth of the business by diversifying sources of debt funding, and extending the debt maturity profile beyond the main Eurobond maturity in 2021. In addition, we put in place £44 million of new bank funding including facilities provided by new banks in Romania, Poland, and Hungary.

At December 2018, we had total debt facilities of £886 million (£570 million bonds and £316 million bank facilities) and borrowings of £698 million, with headroom on undrawn debt facilities of £185.5 million. Of our committed funding, £177 million now extends beyond the Eurobond maturity in 2021, including £73 million in 2022/23. We repaid total bonds of £65 million which matured in 2018, and have one bond maturity in December 2019 of £15 million.

Our balance sheet remains robust, with an equity to receivables capital ratio at December 2018 of 43.6% compared with 42.0% at December 2017.

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 (2017: 12.4 pence per share). The final dividend will be paid on 10 May 2019 to shareholders on the register at the close of business on 12 April 2019. The shares will be marked ex-dividend on 11 April 2019.

Board changes

Tony Hales, who joined the Board in 2007, will not be seeking re-election at the 2019 AGM in May and will stand down from the Board as a Non-Executive Director at that time. We are pleased to announce that Richard Moat will replace Tony as senior independent director with effect from the conclusion of the 2019 AGM, subject to Richard's re-election as a director. Richard joined the Board in 2012 and was appointed Chairman of the Audit and Risk Committee in 2015.

Dan O'Connor, Chairman said: "Following a rigorous selection process to find the right individual to take over the role of senior independent director, I am pleased that Richard Moat accepted this critical position. His skills, knowledge and experience make him a worthy successor to Tony Hales. Tony has been our senior independent director since 2010. On behalf of the Board, I would like to thank him sincerely for his support, valuable insight and significant contribution throughout his time with IPF. Tony has been a great colleague, providing huge assistance to me in my role, and has added greatly to the quality and richness of discussion around the board table."

Outlook

We remain focused on serving our customers responsibly within a regulatory and competitive landscape that we expect will remain challenging. We will continue to focus on the sustainability of our European home credit businesses by investing to create a more modern, efficient and higher credit quality operation that provides a broader array of services to our customers. These businesses deliver good returns for shareholders and fund growth opportunities in our Mexico home credit and IPF Digital operations. In Mexico we will continue to invest in growing the scale of our operations through geographic expansion and micro-business lending in tandem with delivering progressive improvements in profit. In IPF Digital we will focus on continued portfolio growth, further reductions in impairment and as a result we expect to deliver a maiden profit for the division in 2019.

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.

IFRS 9

IFRS 9 is a new accounting standard that became effective on 1 January 2018 and addresses accounting for financial instruments. The main impact on the Group is a change to the methodology used to account for amounts receivable from customers. The key change is a shift from incurred loss to expected loss impairment accounting. Under IFRS 9, we are required to record impairment charges at the inception of a loan based on the losses that are expected to be incurred and this results in negative net revenue at the start of a loan. 

Implementation of the standard results in changes in the recognition of revenue and impairment and, as a consequence, the accounting value of the Group's receivables portfolio. The one-time reduction in the accounting value of receivables has been charged to equity in accordance with the transition rules of IFRS 9 and further details on this are set out below and in note 23. The ongoing impact on profit before tax of our reporting segments varies according to the stage of development of a business. If a reporting segment's receivables portfolio is stable in terms of size and credit quality, IFRS 9 will not have a significant impact on net revenue generation. This is because for every new loan issued where impairment is booked on origination, there is another older loan that reports higher net revenue than under the current accounting standard. However, if a reporting segment's receivables portfolio is growing, net revenue and profit will be lower in the earlier months under IFRS 9. This is because impairment booked on originating loans will be larger than the benefit arising from lower impairment on the older loans, due to portfolio growth.

The profit before taxation impact that IFRS 9 would have had on our 2017 reporting is summarised below.

The total impact of IFRS 9 on the Group's net assets as at 1 January 2018 is as follows:

Opening net assets is stated after the one-time reduction in the accounting value of receivables at the start of the year arising from the implementation of IFRS 9 which totalled £130.5 million or 12.3% of the accounting value of the receivables portfolio under the old accounting standard. This impact has been charged to equity in accordance with the transitional rules included in IFRS 9. The impact of this reduction on net assets was mitigated partially by an increase in the deferred tax asset reflecting the fact that, under IFRS 9, net revenue is recorded more slowly in the Financial Statements than under the old accounting standard, and hence the timing difference between the Financial Statements and the tax returns is larger. 

In the financial information included within this full-year Financial Report, the Group has elected not to restate comparatives on initial application of IFRS 9 and, as such, 2017 comparatives are as previously reported.

International Personal Finance plc

Consolidated income statement for the year ended 31 December

Earnings per share - continuing operations pre-exceptional

Earnings per share - continuing operations

Earnings per share - including discontinued operations

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.

Cash flow statement for the year ended 31 December

Notes to the financial information for the year ended 31 December 2018

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 2018, 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 2017 have been delivered to the Registrar of Companies and those for 2018 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 22 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 Finance Report for the year ended 31 December 2018 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 2018 but do not have any material impact on the Group:

· IFRS 15 'Revenue from contracts with customers (and the related clarifications)';

· IFRIC 22 'Foreign Currency Transactions and Advance Consideration';

· Amendments to IAS 40 'Transfers of investment property'; and

· IFRS 2 (amendment) 'Classification and Measurement of Share-based Payment Transactions'.

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

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

· IFRS 16 'Leases'; and

· IFRIC 23 'Uncertainty over Income Tax Treatments'.

IFRS 9 Financial Instruments

Classification and measurement

With respect to the classification and measurement of financial assets, the number of categories of financial assets under IFRS 9 has been reduced compared to IAS 39. Under IFRS 9 the classification of financial assets is based both on the business model within which the asset is held and the contractual cash flow characteristics of the asset. There are three principal classification categories for financial assets that are debt instruments: (i) amortised cost, (ii) fair value through other comprehensive income (FVTOCI) and (iii) fair value through profit or loss (FVTPL). Equity instruments in the scope of IFRS 9 are measured at fair value with gains and losses recognised in profit or loss unless an irrevocable election is made to recognise gains or losses in other comprehensive income.

There is no impact on the classification and measurement of the following financial assets held by the Group: derivative financial instruments; cash and cash equivalents; other receivables and current tax assets.

There is no change in the accounting for any financial liabilities.

Hedge accounting

On initial application of IFRS 9, an entity may choose, as its accounting policy, to continue to apply the hedge accounting requirements of IAS 39 instead of the hedge accounting requirements of IFRS 9. The Group has elected to apply the IAS 39 hedge accounting requirements.

Impairment

The impairment model under IFRS 9 reflects expected credit losses, as opposed to only incurred credit losses under IAS 39. Under the impairment approach in IFRS 9, it is not necessary for a credit event to have occurred before credit losses are recognised. Instead, an entity always accounts for expected credit losses and changes in those expected credit losses. The amount of expected credit losses should be updated at each reporting date. The new impairment model will apply to the Group's financial assets that are measured at amortised cost, namely amounts receivable from customers.

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.

Forward-looking information

Under IFRS 9 macroeconomic overlays are required to include forward-looking information when calculating expected credit losses. The short-term nature of our lending means that the portfolio turns over quickly, and as a result, any changes in the macroeconomic environment will have very little impact on our amounts receivable from customers.

Where extreme macroeconomic scenarios are experienced, we will use management judgement to identify, quantify and apply any required approach.

Modelling techniques

We have calculated PD, EAD, LGD and cash flow projections based on the most recent collections performance, including management overlays where we deem that historic performance is not representative of future collections performance.

In some markets, the most recent impairment parameters are not considered to be representative of expected future performance due to changes in operational performance. Therefore an overlay has been applied to increase certain parameters at both 1 January 2018 and 31 December 2018.

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 will supersede the current lease guidance including IAS 17 Leases and the related interpretations when it becomes effective for accounting periods beginning on or after 1 January 2019. The date of initial application of IFRS 16 for the Group will be 1 January 2019.

IFRS 16 distinguishes leases and service contracts on the basis of whether an identified asset is controlled by a customer. Distinctions of operating leases (off balance sheet) and finance leases (on balance sheet) are removed for lessee accounting, and is 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 will also be affected because operating leases under IAS 17 are presented as operating cash flows, whereas under the IFRS 16 model, the lease payments will be split into a principal and interest portion, which will be presented as operating and financing cash flows respectively.

Furthermore, extensive disclosures are required by IFRS 16.

The Group has reviewed all of the Group's leasing arrangements in light of the new lease accounting rules in IFRS 16. The standard will affect primarily the accounting for the Group's operating leases. As at the reporting date, the Group has non-cancellable operating lease commitments of £29.0 million. The Group's preliminary assessment is that it will recognise right-of-use assets of approximately £22 million on 1 January 2019 and lease liabilities of £22 million, overall there will be a £nil impact on net assets. Net current assets will be approximately £7 million lower due to the presentation of a portion of the liability as a current liability. The Group's activities as a lessee are not material and hence the Group does not expect any significant impact on the Financial Statements. The impact of IFRS 16 on the profit and loss account in 2019 is not expected to be significant.

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.

A full reconciliation of the 2017 profit and loss account between the IAS 39 reported numbers and the IFRS 9 numbers is included within these APMs.

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 2018, 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 2018.

4. Segmental analysis

Geographical segments

5. Tax expense

The pre-exceptional taxation charge for the year on statutory profit before taxation was £33.9 million (2017: £30.6 million) which equates to an effective rate of 31.0% (2017: 29.0.%).

The exceptional tax charge of £30.0 million in 2017 relates to the write off of a deferred tax asset due to a change in Polish tax legislation effective from 1 January 2018.

The effective tax rate for 2019 is expected to be c.41%.

The Group is currently subject to a tax audit with respect to Provident Polska for the years 2008 - 2012. Audits of 2010 to 2012 are ongoing, whilst for 2008 and 2009; decisions were received in January 2017 and have been appealed. The Group is also subject to audits in Mexico (regarding 2017) and Slovakia (regarding 2015). The Mexican audit is still at the information gathering stage, and the Slovak audit is nearing conclusion.

6. Earnings per share

Basic earnings per share ('EPS') from pre-exceptional continuing operations is calculated by dividing the earnings attributable to shareholders of £75.4 million (31 December 2017: £75.0 million) by the weighted average number of shares in issue during the period of 223.0 million which has been adjusted to exclude the weighted average number of shares held in treasury and by the employee trust (31 December 2017: 222.4 million). 

Basic earnings per share ('EPS') from continuing operations is calculated by dividing the earnings attributable to shareholders of £75.4 million (31 December 2017: £45.0 million) by the weighted average number of shares in issue during the period of 223.0 million which has been adjusted to exclude the weighted average number of shares held in treasury and by the employee trust (31 December 2017: 222.4 million). 

Basic earnings per share ('EPS') including discontinued operations is calculated by dividing the earnings attributable to shareholders of £75.4 million (31 December 2017: £36.6 million) by the weighted average number of shares in issue during the period of 223.0 million which has been adjusted to exclude the weighted average number of shares held in treasury and by the employee trust (31 December 2017: 224.4 million). 

For diluted EPS the weighted average number of shares has been adjusted to 234.1 million (31 December 2017: 231.4 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 2018 of 7.8 pence per share which will amount to a full year dividend payment of £27.7 million. If approved by the shareholders at the annual general meeting, this dividend will be paid on 10 May 2019 to shareholders who are on the register of members at 12 April 2019. This dividend is not reflected as a liability in the balance sheet as at 31 December 2018 as it is subject to shareholder approval.

8. Discontinued operations

On 28 June 2017, we announced the completion of the sale of the home credit business in Bulgaria in order to focus our resources on our larger home credit and rapidly-growing digital businesses. Losses of £8.4 million are included in the income statement in respect of Bulgaria for the year-end 2017. These costs can be analysed as follows:

9. 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 Group Board for the next three years. The rate used to discount the forecast cash flows is 10% (2017: 10%). No reasonably foreseeable reduction in the assumptions would give rise to impairment, and therefore no further sensitivity analysis has been presented.

10. Intangible assets

Intangible assets comprise computer software (2018: £38.0 million; 2017: £31.5 million) and customer relationships on the acquisition of MCB Finance (2018: £nil; 2017: £1.6 million).

11. Property, plant and equipment

As at 31 December 2018 the Group had £4.9 million of capital expenditure commitments contracted with third parties that were not provided for (2017: £8.4 million).

12. 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.

13. Non-current tax asset

Non-current tax asset includes an amount of £36.1 million in respect of the tax paid to the Polish Tax Authority, see note 21 for further details.

14. 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 109% (2017: 99%). All amounts receivable from customers are at fixed interest rates. The average period to maturity of the amounts receivable from customers is 11.5 months (2017: 9.1 months).

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.

15. 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 2018 were £185.5 million (2017: £186.1 million), excluding £2.2 million unamortised arrangement fees (2017: £3.2 million).

As outlined previously, 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. The 2010 to 2012 financial years are currently being audited by the tax authorities in Poland, and all subsequent years up to and including 2018 remain open to future audit. Provident Polska has appealed the decisions made by the Polish Tax Chamber, to the District Administrative Court, for the 2008 and 2009 financial years and has paid the amounts assessed of £36.1 million (comprising tax and associated interest) which was necessary in order to make the appeals. The 2008 and 2009 tax audit decisions are the subject of a process 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 have been stayed. In order to appeal any potential future decisions for 2010 and subsequent years, further payments may be required. There are significant uncertainties in relation to whether future amounts will become due, and if so, the amount and timing of such cash outflows. However, in the event that audits are opened, and similar decisions are issued for each of these subsequent financial years, further amounts of up to c. £133 million may be required to be funded (including approximately £69 million for the 2010 to 2012 years in respect of which audits have commenced). See note 21 for further information.

16. Derivative financial instruments

At 31 December 2018 the Group had an asset of £1.6 million and a liability of £7.3 million (2017: £10.4 million asset and £4.8 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.

17. Retirement benefit asset

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

The charge recognised in the income statement in respect of defined benefit pension costs is £nil (2017: £0.2 million).

18. 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 (2017: 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.

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

20. 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 £8.7 million exchange loss (2017: gain of £51.3 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 2017 and December 2018 shown in the table above.

21. 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 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 £36.1 million (comprising tax and associated interest) in order to make the appeals. As noted on page 12, the 2008 and 2009 tax audit decisions are the subject of a process 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 have been stayed.

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. 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 financial asset in these Financial Statements given the uncertainties in relation to the timing of any repayment of such amounts.

The 2010 to 2012 financial years are currently being audited by the tax authorities in Poland. In the event that the Polish tax authorities were to issue decisions, and those decisions were to follow the same reasoning as for 2008 and 2009, around a further £69 million would become payable. In addition, all subsequent years remain open to future audit, meaning that there are further significant uncertainties in relation to whether future amounts will become due, and if so, the amount and timing of such additional future payments in relation to these periods. In the event that audits are opened in respect of some or all of these open periods, and similar decisions are reached, further amounts may be required to be paid, the timing of which would be dependent upon the timing of decisions made by the Polish tax authorities for these later periods. The total potential liability for all open years 2008-2018, if all years were assessed on the same basis as 2008 and 2009, would amount to around £169 million, including the £36.1 million that was paid in January 2017. Further information is set out in note 15.

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. The UK authorities do not accept that the rules constitute state aid. In common with other UK-based international companies whose arrangements are in line with current controlled foreign company rules, the Group may be affected by the outcome of this investigation. The tax benefit obtained by the Group in all years since 2013 is estimated at up to £13.5 million. We do not believe that any provision is required in respect of this item and we are monitoring developments.

22. Going concern

The Board has reviewed the budget for the year to 31 December 2019 and the forecasts for the two years to 31 December 2021 which include projected profits, cash flows, borrowings, headroom against debt facilities, and funding requirement. 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.

23. Change in Accounting Policies - IFRS 9 'Financial Instruments'

This note explains the impact of the adoption of IFRS 9 Financial Instruments on the Group's financial statements and also discloses the new accounting policies that have been applied from 1 January 2018, where they are different to those applied in prior periods.

IFRS 9 replaces the provisions of IAS 39 that relate to the recognition, classification and measurement of financial assets and financial liabilities, impairment of financial assets and hedge accounting.

The adoption of IFRS 9 Financial Instruments from 1 January 2018 resulted in changes in accounting policies and adjustments to the amounts recognised in the financial statements. The new accounting policies are set out within this note. In accordance with the transitional provisions of IFRS 9 (7.2.15) and (7.2.26), comparative figures have not been restated.

The total impact on the Group's retained earnings as at 1 January 2018 is as follows:

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; Tony Hales, Senior independent non-executive director; Deborah Davis, non-executive director; John Mangelaars, non-executive director; Richard Moat, 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.

Reconciliation of 2017 reported numbers under IAS39 restated under IFRS 9

The performance reporting in this report compares the 2018 actual performance against the 2017 numbers adjusted for IFRS 9 because the Board believes that this provides the most relevant comparison of performance trends. A full reconciliation of the 2017 profit and loss account between the reported numbers and the IFRS 9 numbers is set out below: