Inter. Pers. Regulatory News (IPF)

International Personal Finance plc

Half-year Financial Report for the six months ended 30 June 2017

This announcement contains inside information

Key highlights

† Excluding Slovakia, Lithuania and Bulgaria. * From continuing operations. ** Adjusted following change to treatment of very slow paying customers in our home credit businesses

Chief Executive Officer, Gerard Ryan, commented:

"I am pleased to report a good financial and operational performance in the first half with 10% growth in credit issued and an increase in profit to £43.0M. Our ongoing European home credit businesses performed in line with expectations, Mexico continued to deliver positive business momentum and IPF Digital reported excellent top-line growth together with improved profitability in its established markets. We continue to engage with the Polish Ministry of Justice concerning proposed changes to the total cost of credit regulations. While we expect the regulatory landscape in Europe to remain challenging, we continue to believe our Mexico home credit business and IPF Digital offer significant growth opportunities for the Group."

Group performance overview

We delivered a good financial and operational performance in the first half of 2017 and profit before tax increased to £43.0M. This performance was driven mainly by an increase in underlying profit of £12.0M, the largest share of which came from the stronger-than-expected outcome from the wind down of our businesses in Slovakia and Lithuania together with a solid contribution from IPF Digital's established markets. Stronger FX rates resulted in a £6.7M positive impact which was offset by additional new business investment in IPF Digital of £8.7M.

We delivered a 10% increase in credit issued as a result of strong growth in our Mexico home credit and IPF Digital businesses. Credit quality was managed effectively and impairment as a percentage of revenue at 26.4% remains within our target range of 25% to 30%.

Market overview

Demand for consumer credit continues to be strong in most of our markets, the competitive landscape remains intense and there is continued development of digital loan capabilities with some payday lenders extending their offerings to include instalment loans. In addition, major banks are developing online capabilities that will appeal to a younger and more technology focused audience. 

Whilst lending via digital platforms continues to increase the overall scale of the market, the involvement of an agent at the customer's home allows us to gain a unique and greater understanding of their financial circumstances and propensity to repay so we are able to lend with more confidence where a remote lending business cannot.

Regulatory update

There have been no material changes to the regulatory framework since our Q1 trading update.

There is currently no significant update on the Polish Ministry of Justice's proposal to further reduce the existing cap on non-interest charges on consumer loans in Poland. We continue to engage with various Government ministries and interested parties in Poland to encourage a more positive outcome that is good for consumers and business. We will update the market with any material developments.

In Romania, as previously reported, we have seen our ability to service customer demand decrease as a result of significantly more restrictive creditworthiness assessment requirements which became effective at the start of this year. We operate within price cap environments in all our European markets, with the current exceptions of the Czech Republic and Romania. Whilst no formal proposals have been made to date, we continue to believe that caps on loan costs in some form are likely to be implemented in these markets at some point in the future and that proposals will be presented in Romania in the second half of the year.

Strategy update

Growth businesses - IPF Digital and Mexico home credit

Demand for digital loans is increasing within our target segment of consumers and our digital business delivered strong growth in the first half of the year. Our strategy is to drive increased profitability in our established digital markets of Finland and the Baltics, build on the significant digital opportunity in our new markets of Poland, Australia, Spain and Mexico, and invest in our technology platform and head office functional capabilities to support a much larger business. We achieved these objectives in the first half of 2017; we grew profit in the established digital markets by £5.6M year-on-year and our focus on brand building and customer relationship management activities supported the delivery of very strong customer and credit issued growth in our new markets. We continue to expect IPF Digital to deliver its maiden profit in 2018 as it benefits from increased scale as a result of the investments we are making.

The strategic focus of our Mexico home credit business is to leverage the growth potential in this market by expanding our geographic footprint and developing 'Negocio', our micro business channel. As previously guided we opened six branches during the first half of 2017 and this completes our expansion plan for the year. Our micro business channel is now available in around two thirds of our branches in Mexico and is growing well.

Returns businesses - European home credit

Our strategy in our European home credit businesses is to focus on offering our customers more choice in terms of product and channel whilst improving our efficiency through technology in order to optimise returns from these markets. To accelerate the execution of this strategy, we took the decision to simplify our business structure, consolidating the management of our Polish and Czech businesses into the Northern Europe region in order to focus on operational performance, cost efficiency and sharing of best practice. We also completed the sale of our home credit business in Bulgaria, thus enabling us to focus our resources on our larger home credit and rapidly-growing digital businesses. This disposal resulted in a one-off accounting charge of £5.0M which together with the operating loss of £2.7M generated in 2017 has been accounted for as a discontinued operation in accordance with IFRS 5.

Our continued emphasis on generating efficiencies in our cost base delivered a £4.9M reduction in overheads at CER (Actual: £0.9M) during the first half of the year. Modernising the business through investment in technology forms a key element of this programme and we continued to roll out our agent mobile technology which will facilitate further cost reductions from the second half of 2018.

We are leveraging the value of our well-recognised Provident brand name with a Provident digital offering in Poland where around 14,000 customers are being served through this on-line channel, an increase of over 70% since the year end. We plan to introduce this offering in the Czech Republic before the end of the year.

Performance review

Home credit 

Our home credit businesses delivered profit before tax of £58.3M in the first half of 2017 which comprised £52.9M from our ongoing businesses and £5.4M from Slovakia and Lithuania which are being wound down. The increase delivered by our ongoing home credit businesses reflects a reduction in underlying profit of £4.0M before a £7.7M benefit from stronger FX rates. The underlying profit growth in Slovakia and Lithuania was £10.0M driven by a strong collections performance in these operations.

Excluding Slovakia and Lithuania, the results for our ongoing home credit businesses are shown in the table below:

Northern Europe

Our Northern Europe region, which comprises our home credit businesses in Poland and the Czech Republic, delivered profit before tax of £28.6M which reflects a reduction in underlying profit of £7.4M offset by a £4.8M benefit from stronger FX rates.

Credit issued growth in the first half of 2017 was flat with 4% growth in Poland and a 16% contraction in the Czech Republic. Customer numbers for the region as a whole reduced by 13% and revenue decreased by 12%. In Poland, the reduction in revenue resulted from a compression in revenue yield due to lower pricing necessitated by the introduction of the total cost of credit cap in March 2016. In the Czech Republic, the key factors impacting revenue were the contraction in the receivables book and a reduction in revenue yield as a result of our strategy of serving customers with longer-term loans.

We continued to deliver a good collections performance which together with higher profit generated by debt sales in the Czech Republic resulted in a 0.3ppt improvement in annualised impairment as a percentage of revenue to 22.7% since the 2016 year end.

Our focus on cost optimisation and efficiencies supported the delivery of a £4.3M reduction in other costs at CER (Actual: increase of £2.3M). The cost-income ratio increased by 1.3ppts year-on-year to 37.6% due to the contraction in revenue.

In the absence of any further regulatory change, we expect credit issued in the second half of 2017 to be broadly similar to the prior year and importantly, we continue to believe we can mitigate up to half of the estimated £30M gross financial impact resulting from the implementation in March 2016 of the total cost of credit legislation in Poland.

Southern Europe 

Our Southern Europe region, comprising Hungary and Romania, increased profit before tax in the first half of the year to £19.0M driven by a strong performance in Hungary. This reflects underlying profit growth of £1.2M and a £2.1M positive impact of FX rates.

As previously reported, new creditworthiness assessments for non-banking financial institutions were introduced in Romania in January 2017 and, as expected, this legislative change negatively impacted rates of growth in Southern Europe. Credit issued for the region reduced by 5% reflecting good growth in Hungary offset by a 23% contraction in Romania.

Average net receivables increased by 12%, driven largely by the growth in credit issued in the second half of 2016. However, revenue growth was significantly lower at 1% due to the impact of our strategy to offer lower yielding longer-term loans in response to customer demand. Credit quality and our collections performance in Hungary were very good and this was offset partially by some weakness in Romania, particularly in the first quarter of the year as the new regulations were bedded in. Annualised impairment as a percentage of revenue remains at a very comfortable level of 20.5%, largely unchanged since the year end.

Our cost optimisation programme delivered a £0.6M reduction in other costs at CER (Actual: increase of £1.7M) and, as a result, the cost-income ratio improved by 2.0 ppts to 35.2% year-on-year.

Overall we expect credit issued trends for Southern Europe to be similar to the first half of 2017. We also believe it is likely that a rate cap in some form will be implemented in Romania in the near future.

Mexico

We continued to build on the business momentum achieved in Mexico in the second half of 2016 and this resulted in strong growth, improving impairment and an increase in profit to £5.3M. This reflects underlying profit growth of £2.2M and a £0.8M benefit from stronger FX rates.

The operational improvements implemented in 2016 together with growth flowing through from our expansion programme resulted in a 20% increase in credit issued. Average net receivables increased by 13% and revenue increased at a similar rate. We expect credit issued growth to moderate in the second half of the year as comparatives become more challenging.

In addition to delivering strong growth, we improved our collections performance and, as a result, annualised impairment as a percentage of revenue improved by 2.5 ppts from the 2016 year end to 34.0%. Our investment in business growth led to an increase in other costs of £7.5M at CER (Actual: £9.5M) and, consequently, the cost-income ratio for Mexico increased 2.7ppts year-on-year to 40.7%.

We continue to see significant growth potential in Mexico which is underpinned by our investment in new branches and continued expansion of our micro business channel. For 2017 as a whole, we expect to deliver credit issued growth of around 15% together with well-managed collections to further reduce annualised impairment as a percentage of revenue towards 32% in line with previous guidance.

Slovakia

The successful execution of the wind down of our Slovakia operation, following the introduction of new rate cap legislation in December 2015, resulted in a profit contribution of £3.9M in the first half of 2017 compared to a loss of £2.5M in the same period of 2016. Field collection activities were concluded in March and the majority of the outstanding loan portfolio has since been sold at higher-than-expected prices.

The positive performance in the first half of 2017 has improved our outlook for the full year and we now expect to report a profit of around £4M which would result in total profit during the wind-down period of around £2.4M. Of the £41.1M December 2015 receivables balance, our final net cash collections are expected to be £36M, which is £11.3M higher than the 60% portion of the portfolio funded by debt.

Lithuania

In Q4 2016 we decided to move to a fully digital business model in Lithuania and booked a provision for home credit exit costs of £3.2M. The collect out of the portfolio has been more effective than our original expectations and, as a result, we have reported a profit of £1.5M in the first half of 2017.

IPF Digital

IPF Digital represents a significant growth opportunity for the Group and is continuing to develop in line with our plans. We delivered excellent top-line growth and improved profitability in our established markets in the first half of 2017. This was offset by the expected increase in investment in our new markets and head office capabilities, and as a result we incurred a loss before tax of £8.2M.

Demand for our digital loans and credit line offering is growing and credit issued increased faster-than expected in the first half, up 61% to £106.0M. This growth resulted in an increase in average net receivables of 81% which, in turn, drove a 72% increase in revenue.  Annualised impairment as a percentage of revenue increased year-on-year by 3.1 ppts to 35.7% and reflects the increased weighting of new markets in our portfolio. 

We invested an additional £8.7M in building our new markets of Poland, Spain, Australia and Mexico and strengthening our head office capabilities to deliver future growth. Nevertheless, the increase in revenue offset this investment and resulted in a modest reduction in the cost-income ratio to 73.7%.

The profitability of IPF Digital is segmented as follows:

In the second half of 2016, we performed a review to better allocate head office costs between the individual businesses which has resulted in more of these costs being borne in the established and new market numbers with a lower residual cost in the IPF Digital head office. We have restated the comparatives to allow a comparison of trends.

Established markets

Our established markets of Finland and the Baltics delivered further good growth and a strong financial performance in the first half of the year, reporting a £5.6M increase in profit before tax year-on-year to £8.0M through enhanced pricing strategies and increased penetration of our credit line product.

In these markets, we increased credit issued by 22%. Average net receivables grew by 46% which delivered a 30% increase in revenue. Credit quality is good and annualised impairment as a percentage of revenue reduced 3.4 ppts to 13.3% since the year-end. The annualised number includes the benefit of a sale of non-performing receivables in the second half of 2016 and we expect impairment as a percentage of revenue to increase to around 20% by the end of the year. The cost-income ratio improved by 6.3 ppts to 45.6% demonstrating the strong economies of scale in the digital business despite continuing to invest in generating growth and our digital capabilities.

New markets

The strong growth delivered by IPF Digital was also driven by our new markets, particularly Poland and Spain. The new markets as a whole delivered credit issued growth of 213% to £42.3M, average net receivables growth of over 300% and revenue up by a similar rate to £16.2M.

As we would expect in these rapidly growing markets, annualised impairment as a percentage of revenue is elevated at 83.7%. We expect to see improving impairment trends in the second half of the year as these markets grow and mature. Other costs increased by 128% to £13.9M reflecting increased expenditure on brand building.

Looking ahead for IPF Digital as a whole, we expect to deliver further good progress in the second half of the year and are targeting full-year credit issued growth of around 40%. Given the growth opportunity, we have chosen to invest at a faster rate than originally targeted, particularly in Poland and Spain, and therefore we now expect our full year P&L investment to be in the range of £10M to £12M rather than the £8M to £10M previously guided. We expect to deliver a maiden profit in 2018.

Taxation

The taxation charge on profit for the first six months of 2017 has been based on an expected effective tax rate for the full year of 30%. This excludes a £0.5M tax charge relating to the disposal of our operation in Bulgaria, which is reported as a loss on discontinued operations.

As previously reported, our home credit business in Poland appealed decisions received in January 2017 from the Polish Tax Chamber (the upper tier of the Polish tax authority) with respect to its 2008 and 2009 financial years. The decisions for both years involve a transfer pricing challenge relating to an intra-group arrangement with a UK entity together with a challenge to the timing of taxation of home collection fee revenues. We strongly disagree with the interpretation of the tax authority and will defend our position robustly in court. In order to make the appeals, we paid the amounts assessed. The payment is not a reflection of our view on the merits of the case and accordingly it has been recognised as a non-current financial asset of £36M (comprising tax and associated interest) in our Group accounts. As we believe our case to be very strong, no provision has been recognised against this asset and there is no charge to the income statement as a result of this decision. The 2010 financial year is currently being audited by the tax authorities in Poland and a decision is expected in the coming months. In the event that the decision follows the same reasoning as the decisions for 2008 and 2009, which appears likely, we would pay c.£20M in order to appeal the case. All subsequent financial years remain open to future audit.

Funding and balance sheet

We have a strong funding position with a balanced debt portfolio including a range of bonds at competitive cost across a number of currencies, wholesale and retail, with varying maturities; and a range of bank facilities from a core group of banks. We have added £21.6M of new bank funding in 2017, including increased commitments in Poland and Hungary, and our first Asian funding bank. In addition the funding position has benefitted from the strong cash collection in Slovakia and Lithuania together with the sale of our Bulgarian operation. At 30 June 2017 we had total debt facilities of £824.1M (£583.3M bonds and £240.8M bank facilities) and borrowings of £684.3M with headroom on undrawn debt facilities of £139.8M. We have significant long-term funding in place, with £494.0M of bonds maturing in 2020/21. There are no bond maturities in 2017 and in 2018 £46.4M and £27.6M mature in the first and second half of the year, respectively.

Our balance sheet remains robust, with an equity to receivables capital ratio at 30 June 2017 of 47.2% against our target of around 40%.

Dividend

The Board is pleased to declare an unchanged interim dividend of 4.6 pence per share. The dividend will be paid on 6 October 2017 to shareholders on the register at the close of business on 8 September 2017. The shares will be marked ex-dividend on 7 September 2017.

Outlook

The competitive and regulatory landscape for the Group is expected to remain challenging. We await an update from the Polish Ministry of Justice on its proposed reduction to the existing non-interest pricing cap in Poland and will continue to engage with various Government ministries and interested parties to encourage a more positive solution that is good for consumers and business.

We continue to focus on delivering our strategy to optimise our European home credit operations and to invest in growing Mexico home credit and IPF Digital. In Mexico home credit, we expect to achieve further growth and well-managed collections, and we also expect to deliver further strong growth in IPF Digital together with reduced levels of impairment in our new markets.

Note

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, underlying 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 2017 in order to present the underlying performance variance.

Investor relations and media contacts

International Personal Finance will host a live webcast of its half-year results presentation at 09:00hrs (BST) today - Wednesday 26 July 2017, which can be accessed www.ipfin.co.uk.

The team will also host a conference call for analysts and investors at 16:15hrs (BST) today - Wednesday 26 July 2017. An audio recording will be available at www.ipfin.co.uk from 27 July 2017.

A copy of this statement can be found on the Company's website - www.ipfin.co.uk.

Legal Entity Identifier: 213800II1O44IRKUZB59 

International Personal Finance plc

Condensed consolidated interim financial information for the six months ended 30 June 2017

Consolidated income statement

Earnings per share - continuing operations

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

Earnings per share - including discontinued operations

Dividend per share

Dividends paid

Consolidated statement of comprehensive income

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

Consolidated balance sheet

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

Consolidated statement of changes in equity

* Includes foreign exchange reserve, hedging reserve, own shares and capital redemption reserve.

Consolidated cash flow statement

Notes to the condensed consolidated interim financial information for the six months ended 30 June 2017

1. Basis of preparation

This unaudited condensed consolidated interim financial information for the six months ended 30 June 2017 has been prepared in accordance with the Disclosure and Transparency Rules ('DTR') of the Financial Conduct Authority and with IAS 34 'Interim Financial Reporting' as adopted by the European Union. This condensed consolidated interim financial information should be read in conjunction with the Annual Report and Financial Statements ('the Financial Statements') for the year ended 31 December 2016, which have been prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union. This condensed consolidated interim financial information was approved for release on 26 July 2017.

This condensed consolidated interim financial information does not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006. The Financial Statements for the year ended 31 December 2016 were approved by the Board on 1 March 2017 and delivered to the Registrar of Companies. The Financial Statements contained an unqualified audit report and did not include an emphasis of matter paragraph or any statement under Section 498 of the Companies Act 2006. The Financial Statements are available on the Group's website (www.ipfin.co.uk).

The Board has reviewed the budget for the year to 31 December 2017 and the forecasts for the two years to 31 December 2019 which include projected profits, cash flows, borrowings and headroom against facilities. The Group's committed funding through a combination of bonds and committed bank facilities, combined with a successful track record of accessing debt funding markets, is sufficient to fund the planned growth of our existing operations and new markets for the foreseeable future. Taking these factors into account 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 Half-year Financial Report.

The accounting policies adopted in this condensed consolidated interim financial information are consistent with those adopted in the Financial Statements for the year ended 31 December 2016 and are detailed in those Financial Statements.

The following amendments to standards are mandatory for the first time for the financial year beginning 1 January 2017 but do not have any impact on the Group:

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

2. Principal risks and uncertainties

We operate a formal risk management process, the details of which are set out on page 53 of the Financial Statements for the year ended 31 December 2016. Details of our principal risks can be found on pages 36 to 43 of the Financial Statements and are summarised below:

3. Related parties

The Group has not entered into any material transactions with related parties in the first six months of the year.

4. Segment analysis

2 Although the UK is not classified as a separate segment in accordance with IFRS 8 'Operating Segments', it is shown separately above in order to provide a reconciliation to consolidated total assets and liabilities.

5. Tax expense

The underlying taxation charge on profit for the first six months of 2017 has been based on an expected effective tax rate for the full year of 30%. This excludes a £0.5M tax charge relating to the disposal of our operation in Bulgaria, which is reported as a loss on discontinued operations.

6. Earnings per share