NSF.L Regulatory News (NSF)

Non-Standard Finance plc

('NSF', the 'Company' or the 'Group')

15 November 2019

Trading update

Strong top line growth has been a key feature of NSF's performance over the last four years as we have successfully established ourselves as a major competitor in each of our segments of the UK's non-standard finance market: branch-based lending, guarantor loans and home credit.

Substantial investment has ensured that each business is well-placed to take full advantage of the significant market opportunities that exist, but the Board of NSF is also mindful that after a sustained period of economic growth in the UK, the economic outlook is currently more uncertain than at any point in the last 10 years. As such, it is taking steps to ensure that each of the Group's businesses is well-positioned to manage any future macroeconomic headwinds.

Against this backdrop, the Group announces the following trading update as the Board positions NSF for the next phase in its development, including revisions to medium-term targets.

Trading update

Trading overall in the quarter to 30 September 2019 has been softer than expected with solid performances by both branch-based lending and home credit, offset by lower volumes in guarantor loans. As a result, it is expected that the Group's normalised full year operating profit in 2019 will be lower than expected but still well ahead of 2018.

Branch-based lending - since 30 June 2019, Everyday Loans has traded broadly in line with management's expectations with strong loan book growth, albeit not quite at the same rate achieved in the first half of 2019. Rates of delinquency and risk adjusted margins remain in-line with expectations.

Guarantor loans - While the operations in Trowbridge have performed strongly since 30 June 2019 with volume growth as expected and steady rates of delinquency, the operations in Bourne End delivered lower volumes than expected, albeit with rates of arrears remaining stable. This has prompted the decision to accelerate the planned consolidation of the division's activities into a single location in Trowbridge under the leadership of Mark Burgess, the new divisional CEO. This will incur an exceptional charge of c£0.2m in the current year but is expected to reduce costs as a percentage of revenue and improve operational efficiencies, helping us progress towards our medium-term target of 20% return on assets.

Home credit - overall trading has been in-line with expectations and the trends seen in the first half of 2019 have continued in the third quarter. As expected, our strategy of shortening the loan book has impacted lending volumes, but this has been offset by a further significant improvement in the rate of impairment. New customer growth has been particularly encouraging, up 17% versus the same period last year, while existing customers are re-financing less frequently than previously with the result that overall customer numbers are down 1% versus the second quarter of 2019. 

Positioning NSF for the future: increasing provisions and moderating loan book growth

The Board of NSF is focused on ensuring that the Group is well-positioned for the next recession, whenever it comes, drawing upon the significant experience of its directors in guiding similar lending businesses through previous recessions. By widening risk-adjusted margins, tightening score-cards and moderating loan book growth as well as by having long-term credit facilities in place, the Board believes that NSF is now in a strong position to continue to make good progress should a meaningful downturn occur. This is a strategy that several of the Directors have executed successfully in the past.

Rates of delinquency in all three divisions have remained stable or reduced and the credit quality of the Group's new customers has remained steady or improved. High levels of employment and growth in real incomes have generally been good for our customers and resulted in reduced rates of refinancing in all three business divisions.

However, due to the increasingly uncertain macroeconomic outlook, the negative impact of previous downturns on performance, and in-line with a number of other financial services firms, the Board expects to increase the probability weighting of a stressed, or downside scenario. This will impact provisioning for the loan books of both branch-based lending and guarantor loans. Having increased the probability weighting earlier in the year from a rate of 10% in 2018, the Board now expects to increase the rate to 50% as part of the Group's IFRS 9 provisioning policy. This non-cash adjustment will have the effect of increasing the level of provision held against customer receivables, ensuring that the business is well-positioned for the future in the face of an uncertain economic environment. This decision is based on an assessment of potential future outcomes as there has been no increase in delinquency rates in the period since 30 June 2019. There are not expected to be any changes to provisioning within home credit which has a strong track record of resilience during economic downturns.

We will keep the new probability weighting and increased level of provisioning under review and should the Group's collections performance remain in-line with current trends, then there may be a need to revise the weightings and provisioning policy accordingly. 

However, the expected impact on normalised operating profit of the step-change in provisioning (6%-8% impact) and the trading performance to-date (4%-5% impact ), is that in aggregate, normalised operating profit for 2019 is now expected to be between 10-13% lower than current consensus of analyst forecasts, although still well ahead of 2018. 

Revision to medium-term targets

In positioning the Group for the next downturn, the Board is moderating the Group's medium-term targets for loan book growth and has also reflected the expected change to the Group's provisioning policy outlined above. The Group therefore provides the following update to its medium-term targets for both loan book growth and impairment as a percentage of revenue. The Group continues to target 20% return on assets across all three divisions.

A summary of the changes to our previous targets is set out below: 

1 Normalised operating profit as a percentage of average net receivables

Should the macroeconomic outlook change or if the Group outperforms these metrics substantially, then the Board will look to revise such targets as appropriate and in-line with IFRS 9 provisioning policy and will provide a further update to the market.

Dividend policy unchanged

The Group maintains a progressive dividend policy and has previously outlined a medium-term objective of a pay-out ratio of approximately 50% of normalised earnings, before exceptional items. In order to take account of the impact of the expected change to provisions in 2019, it is expected that the pay-out ratio will be above 50% in the current year. By way of guidance and subject to the performance of the Group over the remainder of 2019, the Board expects that the total dividend per share for the year ending 31 December 2019 will be approximately 3.0p (2018: 2.6p).

New debt facility

The Group has signed a letter of intent regarding an additional, lower cost debt facility that will be used to fund further growth and underpin the Group's next stage of development. The process is well-advanced and the Company hopes to make a further announcement in this respect before the end of the year.

Directorate change

In a separate announcement issued today, the Group has confirmed that Nick Teunon, Group CFO will be stepping down from the Board in March 2020 and will be replaced by Jono Gillespie, current Deputy CFO, in line with our succession plans. 

Conference call

There will be a conference call at 9.30 am on 15 November 2019 to be hosted by John van Kuffeler, Group Chief Executive, Nick Teunon, Group CFO and Jono Gillespie, Deputy CFO. To dial in to the conference call, please follow the instructions below.

 All times are Greenwich Mean Time (GMT).

Investor day

Given the timing of a general election in the UK on 12 December 2019, the Group has elected to hold its annual investor day in late January 2020 and will provide further details in due course.

For more information: