31 Jan 2018 07:00
31 January 2018
Morses Club PLC
Trading Update and IFRS 9 Update
Morses Club PLC ("Morses Club" or the "Company"), the UK's second largest home collected credit lender, provides the following trading update and issues the following IFRS 9 update.
Trading Update
The Company continues to trade in line with expectations. The directors note a strong performance over the seasonally busy Christmas period.
IFRS 9 Update
IFRS 9 'Financial instruments' is effective for accounting periods commencing from 1 January 2018 and replaces IAS 39 'Financial instruments: Recognition and measurement'.
IFRS 9 requires the recognition of impairment on customer receivables through an expected loss model. Impairment provisions are therefore recognised on inception of a loan based on the probability of default and the typical loss arising on default. This differs from the current incurred loss model under IAS 39, where the requirement is that impairment provisions are only reflected when there is objective evidence of impairment.
However, for home collected credit businesses (HCC) the application of IAS 39 was conceptually difficult as the nature of our product is that customers will, from time to time, miss a payment and, up to a level, we are comfortable with this. Indeed, we apply no additional charges associated with missed payments and are proud of this aspect of forbearance in our products.
It is therefore less definitive to term situations like this an "objective evidence of impairment", as an occasional missed payment does not necessarily indicate that recovery of a loan is at risk. Empirical evidence highlights that loans with occasional missed payments often perform as well as loans with no missed payments.
Under IAS 39, we decided that all loans with more than two payments missing in the last thirteen weeks were to be provided for where there was an expected cash shortfall. For those loans with two payments or fewer missing in the last thirteen weeks we still made an "incurred but not reported" (IBNR) provision to recognise some of the loss risk associated with these loans. As such, under IAS 39 we chose to make some provision for loss against all loan cohorts.
Whilst there are a number of detailed technical differences between IFRS 9 and IAS 39, in summary the impact to Morses Club is primarily the effect of moving loans that are missing two or fewer payments in the last thirteen weeks from an IBNR provision to the more onerous "expected loss" model.
We are well progressed with the methodology and accounting policies that we intend to apply to our loans under IFRS 9. For illustration, the estimated impact would have been a reduction of approximately 4% to 6% in the reported receivables as at February 2017. The directors of Morses Club believe this reflects Morses Club's prudent approach to calculating loan loss provisions.
As this is an accounting adjustment, there is no impact on the Company's cash flows or the underlying profitability of its loans. It will however delay the recognition of profit on a loan because of the higher impairment taken at the beginning of the loan. The negative impact will therefore be more pronounced during periods of high growth.
The movement in reserves is relatively small and will have no impact on our ability to pay a high proportion of our adjusted earnings as dividends. We can also confirm that the change to IFRS 9 does not have a material impact on our banking covenants where there remains significant headroom on the asset based covenants.
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Notes to Editors
About Morses Club
Morses Club is the second largest UK Home Collected Credit lender with 233,000 customers and 2,124 agents (as at 26 August 2017) across 98 locations throughout the UK.
The Company offers a range of loan products to its customers through its extensive agent network. The majority of the Company's borrowers are repeat customers and the Company enjoys consistently high customer satisfaction scores of 95 per cent or above.
The Company is using technology to broaden its offering and provide new products to ensure customers can access credit with the flexibility they require. In April 2016, its cashless lending product, the Morses Club Card, was introduced, enabling its customers to buy online as well as on the high street. Dot Dot Loans, the Company's first online instalment product, was launched in March 2017.
Morses Club successfully listed on AIM in May 2016.
About the UK non-standard credit market
The UK non-standard credit market, of which UK HCC is a subset, consists of both secured and unsecured lending and is estimated to comprise around 12 million consumers.
Non-standard credit is the provision of secured and unsecured credit to consumers other than through mainstream lenders. Lenders providing non-standard credit principally lend on an unsecured basis and the market is characterised by high frequency borrowing.
Since 2009, unsecured personal lending has grown from £161 billion to £244 billion in 2015.
UK Home Collected Credit
UK HCC is considered to be a specialised segment of the broader UK non-standard credit market. UK HCC loans are typically small, unsecured cash loans typically delivered via self-employed agents directly to customers' homes. Repayments are collected in person during weekly follow-up visits to customers' homes.
UK HCC is considered to be stable and well-established, with approximately 3 million people using the services of UK HCC lenders, of which 1.3 million people borrow regularly.