Inter. Pers. Regulatory News (IPF)

International Personal Finance plc

Half-year Financial Report for the six months ended 30 June 2018

This announcement contains inside information

International Personal Finance plc specialises in providing unsecured consumer credit to more than two 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. * since the 2017 year-end # as at 2017 year end

Chief Executive Officer, Gerard Ryan, commented:

"I am pleased to report that we delivered a good financial performance and made excellent progress against our strategic objectives. Group profit before tax increased by £12.6m to £56.5m reflecting profit growth in our home credit operations and IPF Digital's established markets together with significantly reduced start-up losses within IPF Digital's new markets. We also strengthened our funding position and while we expect the regulatory and competitive landscape to remain challenging, we are on track to deliver good returns from our European home credit operations, achieve our medium-term growth strategy in Mexico home credit and IPF Digital, and continue to deliver long-term value for our key stakeholders."

Group performance overview

The performance reporting in this report compares the 2018 actual half-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 below, and a full reconciliation of the 2017 profit and loss account between the reported numbers and the IFRS 9 numbers is set out later in this report.

We continued to perform well against our strategy in the first half of the year which resulted in 2% credit issued growth and a £7.2m (15%) increase in profit before tax to £56.5m (statutory profit before tax increase, IAS 39 2017 to IFRS 9 2018 is £13.5m). This increase in profit comprised £12.6m from our ongoing businesses partially offset by a £5.4m reduction in the contribution from Slovakia and Lithuania which reported a profit in the first half of 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 the first half of 2018.

The increase in profit from our ongoing businesses of £12.6m comprised an increase in like-for-like profit before tax of £7.3m, a benefit of £4.5m from lower new business investment and a £0.8m gain from stronger FX rates. The like-for-like performance reflects profit growth delivered by our home credit operations and IPF Digital's established markets. The lower new business investment comprises £5.1m within IPF Digital's new markets and central functions where start-up losses were significantly reduced year-on-year, partially offset by increased new business investment in Mexico home credit of £0.6m.

The table below details the performance of each of our business segments, highlighting the impact of investment in new business growth and slightly stronger FX rates against sterling to provide a better understanding of like-for-like performance:

In line with our plan, we delivered a 2% increase in credit issued led by our IPF Digital and Mexico home credit businesses, offset partially by a 6% contraction in European home credit. This resulted in an increase in average net receivables of 6% and 2% growth in revenue. Credit quality and good collections were maintained across the Group, and impairment as a percentage of revenue was 25.5% compared to 27.9% at the 2017 year end. Our investments in driving growth and longer-term efficiency, together with modest yield compression, resulted in a 1.4 ppt increase in the cost-income ratio to 45.7% since the year end.

Market overview

Current forecasts for our markets suggest modest GDP growth in 2018, with low but increasing inflation and subdued interest rates and our expectation is that these relatively stable conditions will continue to support growth in demand for consumer credit in our markets.

The rapid increase in mobile device usage and internet penetration continues to influence the way that consumers access credit with a growing number of consumers preferring to take out loans online which has supported growth in the provision of remote digital loans by both fintech lenders including IPF Digital, and banks. We are continuing to take advantage of the growth in digital borrowing by investing in our digital consumer credit businesses and offering Provident-branded digital loans.

Demand for lending via digital platforms continues to increase the overall scale of the market and has led to an intensely competitive operating landscape in Europe. Our home credit offering continues to play an important role in the consumer credit space providing access to regulated credit to people who might otherwise be financially excluded. This business model, with 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. As a result, we are able to lend with more confidence to creditworthy customers where a remote lending business cannot.

Strategy update

Our strategy segments our operations into 'growth' and 'returns' focused businesses, and is centred on delivering sustainable growth, enhancing profitability and making efficient use of capital. To deliver this strategy, we continued to modernise the business through investment in technology and developing our people and their capabilities.

Growth businesses - IPF Digital and Mexico home credit

IPF Digital continues to grow strongly and is making excellent progress against its strategic objectives of building scale in new markets, providing great customer experience through innovation and achieving break-even following the investment phase.

Our new markets delivered year-on-year credit issued growth in the first half of 33% which combined with continuing strong growth of 20% in our established markets, resulted in 25% growth for the digital business as a whole. This strong momentum combined with continuous improvement in credit quality parameters in our new markets is driving strong net revenue growth and improving financial performance in line with our expectations.

A key element of our digital strategy is providing great customer experience. We aim to deliver this by continuously developing and improving our products and processes, and making the customer journey as simple, fast and frictionless as possible. We continue to invest in our central functions and cutting-edge technology to support this critical element of our strategy.

In Mexico, we are leveraging the significant growth opportunities for our home credit business through expanding our geographic footprint, building our micro-business channel 'Negocio' and improving operational efficiency and customer penetration rates in selected longer-established branches. Our expansion programme continued with the opening of five new branches in Q2 which will support future customer and credit issued growth. This completes our branch opening programme for the current year. Our micro-business channel now serves around 20,000 customers, compared to 16,000 at the year end, and we expect further growth in the second half of the year.

Returns businesses - European home credit

We continue to improve the sustainability of our European home credit businesses by creating more modern, efficient and better credit quality operations. Our businesses provide excellent service to customers and continue to generate the cash and capital to fund growth opportunities and returns to shareholders, notwithstanding the fact that we saw a larger reduction in customer numbers than we would have wished. The reduction is, in large part, driven by regulatory changes to debt to income ratios and also an increasing customer preference for digital loans. To meet the growing demand for digital loan offerings among traditional home credit customers, we continue to leverage the value of our well-recognised Provident brand name with an online Provident digital offering. As planned, this offering was launched in the Czech Republic in June 2018 and around 18,000 customers are already using this channel in Poland.

We remain focused on improving the efficiency of our operations through investment in technology. We continued the roll-out of our agent mobile technology which will improve the customer experience, make the role of the agent more efficient and facilitate cost reductions. This technology is now being used by around 9,000 agents in Poland, the Czech Republic and Hungary, and is currently in its testing phase in Romania.

Performance review

European home credit

As we set out in our 2017 full-year announcement, we consolidated our Northern and Southern European home credit businesses into one reporting segment - European home credit.

Our European home credit businesses produced a robust trading performance and delivered a £4.4m increase in profit before tax (on an IFRS 9 basis) to £60.2m in the first half of 2018. This increase reflects an improvement in like-for-like profit of £2.6m driven by an increase in net revenue with better impairment more than offsetting lower revenue, together with a £1.8m benefit from stronger FX rates.

As expected, competition and regulatory tightening impacted customer numbers and credit issued growth which contracted year-on-year by 15% and 6% respectively. Our move to serve better quality customers allows us to lend slightly larger and longer-term loans and, as a result, average net receivables reduced by only 2% and, together with a modest contraction in revenue yield, revenue reduced by 6%.

The quality of the loan portfolio in European home credit is very good. As reported in our 2016 full-year results announcement and following a review of the most effective collections processes, we began to transfer the management of very slow paying customers from our field sales and service teams to our central debt recovery teams. We are pleased to report that this process has improved the effectiveness of recovering payments from these customers. The other factors impacting impairment were good returns from debt sales, lower underlying impairment in Romania, where there was no repeat of the disruption that adversely impacted collections in the first half of 2017, and our focus on serving higher quality customers who are eligible to be served with larger, longer-term loans. Together these factors resulted in a 3.2 ppt improvement in annualised impairment as a percentage of revenue to 17.6% since the 2017 year end.

We are investing in digitising our European home credit businesses to create more modern operations and deliver sustainable cost efficiencies. The cost-income ratio increased by 1.8 ppts since the 2017 year end to 41.6% driven by a modest contraction in revenue yields and the investment in both our Provident-branded digital offering and agent mobile technology. We expect this ratio to improve during the second half of the year as we begin to realise the efficiency benefits from these investments.

We will continue to operate our European home credit businesses in line with our strategy to deliver a high level of service to our customers while optimising returns. Operationally, our focus will be on reducing customer contraction, improving cost-efficiencies and as announced on 13 July 2018, we expect to deliver a better financial performance for the year as a whole than our original expectations.

Mexico

Our home credit business in Mexico delivered a £1.7m improvement in profit before tax (on an IFRS 9 basis) to £7.4m in the first half of the year. This comprises like-for-like profit growth of £3.2m delivered by our established branches, increased investment in future growth of £0.6m through geographical expansion and Negocio, the micro-business channel, together with a £0.9m adverse impact from weaker FX rates.

We were pleased to return to customer growth attracting 37,000 more new customers since the 2017 year end compared to no growth last year, when our focus was on repeat lending to existing customers. Against strong comparative numbers, we delivered a 7% increase in credit issued driven by the branches that we have opened since 2016 and our micro-business lending channel.

Average net receivables increased by 5% which flowed into revenue growth at the same rate. The collections performance was in line with 2017 and annualised impairment as a percentage of revenue was 35.9%, marginally better than the 2017 year end.

Costs were well-managed in our established branches where we are focused on improving operational leverage and this resulted in a modest reduction in costs year-on-year. In line with our growth strategy, we invested in expanding our geographic footprint with the opening of five new branches in Q2 2018 and growing our micro-business channel, which drove a 4% increase in other costs to £43.5m at constant exchange rates (actual reduction of £1.4m). Overall, the increase in investment was in line with revenue growth, therefore the cost-income ratio was maintained at the 2017 year-end level of 40.0%. As previously mentioned, the geographic expansion undertaken in the first half concludes our branch opening programme for the current year.

There are significant growth opportunities for our home credit business in Mexico through expanding our geographic footprint and micro-business loans channel, and improving customer penetration rates in selected established branches. In the second half of the year, we will focus on quality growth and expect to deliver an increased credit issued growth rate of between 12% and 15% for the year as a whole. As we accelerate growth in the second half, we now expect customer growth to be higher than our original plan and this will have a greater drag on net revenue recognition under IFRS 9. This investment will drive long-term profitable growth as the benefits will flow through from repeat lending although it will have a modest negative impact on current year profit.

IPF Digital

Robust demand for IPF Digital's offering and a strong operational performance resulted in a significant year-on-year reduction in start-up losses. Losses before tax in the first half of the year were £3.7m, which is a £6.8m improvement (on an IFRS 9 basis) on the same period in 2017. This result was driven by significantly 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.

Excellent execution of delivering our digital offering, particularly our credit line product, resulted in a 25% increase in credit issued to £135.4m. This growth, combined with the good momentum achieved in 2017, resulted in an increase in average net receivables of 44% and a similar increase in revenue.

The benefits of our strategy to invest in building scale in IPF Digital are now starting to be realised. Development of our score cards and credit settings in the new markets was the key driver of a 5.9 ppt improvement in annualised impairment as a percentage of revenue to 39.8% since the year end. Positive cost-leverage trends, particularly in our new markets, resulted in a 2.3 ppt reduction in the cost-income ratio to 59.5%. The strong operational performance was driven by a significant reduction in start-up losses in the new markets and improved profitability in our established markets, offset partially by further investment in head office capabilities.

The profitability of IPF Digital is segmented as follows:

Established markets

Our established markets delivered a good financial performance reporting a £2.0m improvement in first-half profit before tax to £10.5m. Our customer relationship management, enhanced pricing strategies and increased customer acquisition investment drove demand for our digital offerings, particularly in Finland, and our credit line product helped to deliver faster-than-expected credit issued growth of 20% in these markets. This flowed through to a 32% increase in average net receivables and a similar rate of revenue growth.

Credit quality continued to be well-managed and impairment as a percentage of revenue at 22.0% compares to 20.6% at the 2017 year end.

New markets

Our new markets, where we are working to develop each market's processes to optimise lending and collections, delivered year-on-year credit issued growth of 33%. This was enabled by our investment in brand building and the introduction of tiered pricing, in addition to enhanced customer relationship management and product improvements. Our Australian business doubled credit issued and we saw continued strong rates of growth in Poland and Spain.  Average net receivables grew by 79% which delivered a 71% increase in revenue.

As part of our new market development, we continually make changes to our score cards and credit settings. This enables us to assess how a portfolio is performing before choosing to tighten credit settings to drive improvement in impairment or relax them to deliver higher levels of growth. This dynamic process is critical to improving our lending decisions and, as expected, has been key to delivering the improving impairment trends in our new markets. Annualised impairment as a percentage of revenue improved by 20.1 ppts to 64.6% since the year end and we expect to see further improvement in the second half of the year as these markets grow and mature. Investment in marketing and customer relationship management increased other costs by 35% to £18.8m, however, the growth and economies of scale generated from this activity resulted in a 6.4 ppt improvement in the cost-income ratio to 64.2%.

IPF Digital represents a significant long-term growth opportunity for the Group and is continuing to develop in line with our plans. Looking ahead, we expect IPF Digital to continue to deliver good credit issued growth and a further improvement in the financial performance in the second half of the year as we continue to build scale in our new markets and generate returns in our established markets. We firmly believe that we will deliver a maiden profit for the division as a whole in 2019.

Regulatory update

As previously reported, a proposal to implement an APR cap at 18% for existing and new consumer lending is being debated in the Romanian Parliament. In order to achieve a more balanced outcome which is in the best interests of customers and market participants, we, together with our trade associations and banks, are actively engaged in this discussion by providing evidence to decision makers of the potential unintended consequences on consumers. We expected that an APR cap would have been enacted before this half-year results announcement, however, it is now understood that the parliamentary debate will continue in the Autumn to enable Government stakeholders to better understand the impacts of the proposal. If the legislation is enacted as currently proposed, it would have a material adverse effect on our Romanian business. Additionally, and again as previously reported, our Romanian business has now moved to the Special Registry under the auspices of the National Bank of Romania (NBR). As expected, the NBR is considering the introduction of debt-to-income limits. Although details of the official proposals have yet to be published, we are engaged in discussions with stakeholders through our trade associations with the aim of achieving a balanced outcome. We anticipate the limits coming into effect later this year and expect them to result in a reduction in sales volumes.

The Romanian business had net receivables as at 31 December 2017 of £76.6m (under IFRS 9) and we currently expect to generate a profit before tax in Romania of around £13m in 2018, before any impact from the APR cap proposal and/or debt-to-income limits. In the event that either or both proposals is or are enacted, we will assess the impact and update the market accordingly in our Q3 trading and/or full year results announcement.

There has been no update from the Polish Ministry of Justice on its proposal, published in December 2016, to reduce the existing non-interest price cap in Poland.

Taxation

The taxation charge on profit for the first six months of 2018 has been based on an expected effective tax rate of 34%.

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 the 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. In order to appeal these decisions, with which we strongly disagree, it was necessary to pay 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 £35.1m (comprising tax and associated interest) in our Group financials. During 2017 we initiated a process with the UK tax authority aimed at ensuring that the intra-group arrangement is taxed in accordance with international tax principles and, in response, the Polish court has stayed the hearings of the 2008 and 2009 appeals pending resolution of this process. The 2010 and 2011 financial years are being audited by the tax authorities in Poland currently. In the event that the Polish tax authority were to issue decisions for these years following the same reasoning as the decisions for 2008 and 2009 we would need to pay c. £43m in order to appeal the cases. In this eventuality we would seek to include these years also in the existing process with the UK and Polish tax authorities. All subsequent financial years remain open to future audit.

Funding and balance sheet

We further strengthened our debt funding position in the first half of 2018. In June, we issued a Swedish Krona 450m (£38.6m) 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 £17.6m of new bank funding including facilities provided by two new banks in Romania and Poland.

At June 2018 we had total debt facilities of £864.6m (£584.1m bonds and £280.5m bank facilities) and borrowings of £653.6m, with headroom on undrawn debt facilities of £211m. Of our committed funding, £47.6m now extends beyond the Eurobond maturity in 2021 and we plan to continue to extend the debt maturity profile further. We repaid total bonds of £37.0m which matured in the first half of 2018, and have further bond maturities of £27.6m in Q4 2018 and £14.9m in December 2019.

Our balance sheet remains robust, with an equity to receivables capital ratio at 30 June 2018 of 43.5% compared with 42.2% at December 2017. This 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 £130.5m 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 partially mitigated 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. The impact of IFRS 9 on the opening balance sheet is summarised below.

Dividend

The Board is pleased to declare an unchanged interim dividend of 4.6 pence per share. The dividend will be paid on 5 October 2018 to shareholders on the register at the close of business on 7 September 2018. The shares will be marked ex-dividend on 6 September 2018.

Principal risks and uncertainties

We operate a formal risk management process, the details of which are set out on page 37 of the Financial Statements for the year ended 31 December 2017. A summary of these risks is included in Note 2 of this half-year Financial Report.

Outlook

We are focused on serving our customers responsibly within a regulatory and competitive landscape that we expect will remain challenging. We will continue to improve the sustainability of our European home credit businesses by investing to create a more modern, efficient and higher credit quality operation that provides a good service to customers. These businesses deliver good returns for shareholders and fund growth opportunities in our Mexico home credit and IPF Digital operations. We expect credit issued growth in Mexico home credit to accelerate in the second half of the year alongside higher customer growth than our original plan. This will result in a drag on net revenue recognition under IFRS 9 and therefore we now expect slightly lower profit growth in the current year from this market. In IPF Digital we expect to deliver further strong customer and credit issued growth and an improved financial performance as we increase the scale of our business, particularly in our new markets. At Group level and as announced on 13 July 2018, we now expect to exceed the 2018 profit before tax consensus of £99.4m by approximately 10% as a result of stronger than expected post-field collections in our European home credit businesses. 

Alternative Performance Measures

This half-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 addresses accounting for financial instruments and 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. The new standard became effective on 1 January 2018.

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 in the funding and balance sheet section of this report. 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 half-year reporting is summarised below.

In addition to the overall impact of IFRS 9 on our reporting segments set out above, the application of the new accounting model results in lower seasonal fluctuations in impairment charges and profit before tax than under the old accounting standard. Under IAS 39, 42% of European home credit 2017 profit before tax was reported in the first half of the year whereas under IFRS 9, 50% would have been reported for the same period.

In the condensed consolidated interim financial information included within this half-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.

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, 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.

Investor relations and media contacts

We will host a live webcast of our half-year results presentation at 09:00hrs (BST) today, Wednesday 25 July 2018, which can be accessed at www.ipfin.co.uk.

A copy of this statement can be found on the Group'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 2018

Consolidated income statement

Earnings per share - continuing operations pre-exceptional

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

Earnings per share - continuing operations

Earnings per share - including discontinued operations

Dividend per share

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

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 2018

1. Basis of preparation

This unaudited condensed consolidated interim financial information for the six months ended 30 June 2018 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 2017, 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 25 July 2018.

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 2017 were approved by the Board on 1 March 2018 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 2018 and the forecasts for the two years to 31 December 2020 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 amendments relating to the IFRS 9 'Financial Instruments' standard are mandatory for the first time for the financial year beginning 1 January 2018. Please see note 20 for further information

All other 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 2017 and are detailed in those Financial Statements.

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

IFRS 16 Leases

IFRS 16, which has not yet been endorsed by the EU, introduces a comprehensive model for the identification of lease arrangements and accounting treatments 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 Group expects to adopt IFRS 16 for the year ending 31 December 2019. No decision has been made about whether to use any of the transitional options in IFRS 16.

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 initially measured at cost and subsequently measured at cost (subject to certain exceptions) less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. The lease liability is initially measured 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.

As at 30 June 2018, the Group has non-cancellable operating lease commitments of £27.8 million. IAS 17 does not require the recognition of any right-of-use asset or liability for future payments for these leases. A preliminary assessment indicates that these arrangements will meet the definition of a lease under IFRS 16, although some of them will qualify as low value or short-term leases upon the application of IFRS 16. The Group is in the process of assessing the impact of recognising a right-of-use asset and a related lease liability in the Group Financial Statements. It is not practicable to provide a reasonable estimate of the financial effect until this review has been completed.

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 is set out later in this report 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

We operate a formal risk management process, the details of which are set out on page 37 of the Financial Statements for the year ended 31 December 2017. 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 2018 has been based on an expected effective tax rate for the full year of 34% (30 June 2017: 30%).

The Group is currently subject to a tax audit with respect to Provident Polska for the years 2008-2011. Audits of 2010 and 2011 are ongoing, whilst for 2008 and 2009 decisions were received in January 2017 and have been appealed. Further details are set out above. The Group is also subject to audits in Mexico (regarding 2015) and Slovakia (regarding 2014-15), all of which are still at the information gathering stage.

In late 2017 the European Commission opened a state aid investigation into the Group Financing Exemption contained in the UK controlled foreign currency rules, which was 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 currency rules, the Group may be affected by the outcome of this investigation. The Group is monitoring developments.

6. Earnings per share

Basic earnings per share ('EPS') from pre-exceptional continuing operations is calculated by dividing the earnings attributable to shareholders of £37.3m (30 June 2017: £30.1m, 31 December 2017: £75.0m) by the weighted average number of shares in issue during the period of 222.8m which has been adjusted to exclude the weighted average number of shares held in treasury and by the employee trust (30 June 2017: 222.2m, 31 December 2017: 222.4m).

Basic earnings per share ('EPS') from continuing operations is calculated by dividing the earnings attributable to shareholders of £37.3m (30 June 2017: £30.1m, 31 December 2017: £45.0m) by the weighted average number of shares in issue during the period of 222.8m which has been adjusted to exclude the weighted average number of shares held in treasury and by the employee trust (30 June 2017: 222.2m, 31 December 2017: 222.4m).

Basic earnings per share ('EPS') including discontinued operations is calculated by dividing the earnings attributable to shareholders of £37.3m (30 June 2017: £22.4m, 31 December 2017: £36.6m) by the weighted average number of shares in issue during the period of 222.8m which has been adjusted to exclude the weighted average number of shares held in treasury and by the employee trust (30 June 2017: 222.2m, 31 December 2017: 222.4m).

For diluted EPS the weighted average number of shares has been adjusted to 234.1m (30 June 2017: 231.5m, 31 December 2017: 231.4m) to assume conversion of all dilutive potential ordinary share options relating to employees of the Group.

7. Dividends

The final dividend for 2017 of 7.8 pence per share was paid to shareholders on 11 May 2018 at a total cost to the Group of £17.4m. The directors propose an interim dividend in respect of the financial year ended 31 December 2018 of 4.6 pence per share payable to shareholders who are on the register at close of business on 7 September 2018. This will amount to a total dividend payment of £10.3m based upon the number of shares in issue and ranking for dividends as at 30 June 2018. This dividend is not reflected as a liability in the balance sheet as at 30 June 2018.

8. Discontinued operations

On 28 June 2017, we announced the completion of the sale of Group's home credit business in Bulgaria in order to focus our resources on our larger home credit and rapidly-growing digital businesses. Losses of £7.7m are included in the income statement in respect of Bulgaria for the half-year ended 30 June 2017. These costs can be analysed as follows:

9. Goodwill

10. Intangible assets

11. Property, plant and equipment