International Personal Finance PLC

LSE:IPF

Earnings Call Transcript 2019-Q1

[Operator]

Welcome to the International Personal Finance 2019 Quarter 1 Trading Update Briefing hosted by Gerard Ryan, Chief Executive Officer; and Justin Lockwood, Chief Financial Officer. [Operator Instructions] Today's conference is being recorded.I will now hand you over to Gerard Ryan to begin today's conference.

[Gerard Jude Ryan, CEO & Executive Director]

Thank you, Simon. Well, good morning, everybody, and thanks for joining the call this morning. With me, I've got Justin Lockwood, our CFO and together we'll take you through the Q1 trading update, which hopefully you've had a chance to read earlier today. And if you had a chance to do that, you'll see that we delivered a solid start to the year in quarter 1, and our numbers, at a group level, are in line with our expectations. But before I get into the detail on the key areas of the business, just to say that European home credit delivered a very good operational performance and IPF Digital continued to grow strongly. Now in contrast, we have met with some challenges in Mexico during the first quarter, and I'll provide you with a bit of color on that in a few minutes' time. Year-on-year we grew credit issued by 9% and that was led by our Digital business, and I'm pleased to report that the quality of the loan portfolio remains very good and our group annualized impairment to revenue is stable at 26.6%. So that's broadly in line with our year-end result, which was 26.2%. In addition, we continued to have a strong funding position and at the quarter end, the headroom on our debt facilities was GBP 183 million. We're also very pleased to see that our credit rating position improved in the quarter. So first of all, Fitch, you -- I think you know we've worked with for several years, retained its BB rating, but they also changed the outlook from negative to stable citing an improvement in the regulatory environment. And then more recently you may have seen that Moody's has signed a long-term credit rating of Baa3 stable outlooks to IPF together with the rating of Baa3 to our senior unsecured debt obligations.This now means we have long-term credit ratings from 2 global credit rating agencies, both with a stable outlook. So moving on now to the detailed trading performance for each of the 3 business segments. I'll start with European home credit. So these are our businesses in Poland, Czech Republic, Hungary and Romania. And I'm sure that you'll remember that these businesses serve over 1 million plus customers and they do generate the cash and capital to drive the growth segments of our strategy and reward our shareholders. We're very pleased with our progress in making these businesses more modern and more efficient with high-quality portfolios and while customer numbers contracted in the quarter in these highly competitive, unregulated markets, actually all 4 businesses delivered good performances and this resulted in credit issued growth of 2%, which as you've probably seen from our statement was a positive compared to our previous expectations.We've been very successful in broadening our appeal to better-quality customers in our target segment and together with good collections by agents and improved postfield collections, credit quality remains very strong. So in these businesses, the annualized impairment as a percentage of revenue improved to 16.3% and that compares to 19.1% a year ago or just at the year-end of '18, it was actually 17.9%. So a significant improvement. Now staying in Europe, let me just cover off the regulatory piece. Relatively quiet actually in the quarter but in Romania, I'm sure you'll recall that the APR cap that was passed in December was subject to a constitutional court challenge, and unexpectedly, the outcome of this challenge resulted in the legislation being declared unconstitutional due to insufficient details being provided in the proposal. And that included the fact that the socioeconomic impacts and the effect on the legal system were not properly addressed. So as a consequence, there is currently no APR cap in Romania.In Poland, there's been no update from the Polish Ministry of Justice on its modified set of proposals and those are the ones to reduce the existing noninterest rate cap. So we refer to this commonly as TCC. You'll probably remember that a public consultation exercise was being undertaken but the responses have not been published in full on the ministry's website. It is our understanding, however, that these responses are broadly in line with the original consultation exercise that was conducted in 2016. Now at this stage, there is no formal time line to progress or finalize the draft proposal, but we will update the market with our assessment of the likely financial impact on the group, when and if it's actually finalized and approved by the parliament there. So to close on Europe, there's no substantive update in respect of our ongoing Polish tax audit matter.So turning now to Mexico. You'll have seen in our update that credit issued grew by 3%, and I'd like you -- I'd like to provide you some color on that. For those of you who remember our 2018 results presentation, we did explain that we had taken a more cautious stance regarding growth for 2019, given that we saw some softening of the macroeconomic environment in Mexico. You've probably read very recently that, in fact, Mexico's economy shrunk in the first quarter when it had been expected to grow. And at the time of our results, we also noted that we would like to see an improvement in our collections performance.Ordinarily, in January, this is a slow month for collections, and we then see a pickup in February and March. Now this year, collections were lower than expected in January and we did see a slight pickup during the remainder of the quarter. But I have to say, the recovery was not good enough and so by the end of March, collections results in Q1 were lower than the same period last year.We also know from other businesses with agent-based network, so Tupperware and the like, that fuel shortages in Mexico have hampered operations and this, too, impacted our collections performance in this period. Now, obviously, one of the reasons we are so successful is that we have a very significant level of repeat business from satisfied customers. However, existing customers only get offered a new loan, providing they are making their payments satisfactorily. So whenever we see a deterioration in collections, we naturally see a reduction in the volume of repeat business, as our lending criteria are quite strict in this regard. So in order to ensure that we turn to the right levels of repeat business, we've therefore, taken the step of heightening our credit criteria a bit further until we bring collections back to a more comfortable level. So these 2 factors are the major contributors to the reduced level of new business in the quarter. And I also just want to mention at this point, that David Parkinson, who I think a number of you will know and he has led our Northern European home credit businesses for some time. David has now relocated to Mexico on a permanent basis to accelerate our progress there.As we mentioned in the trading update, we expect to see softer credit issue growth figures on Mexico for 2019, but in return, I do fully expect to see a significant improvement in our collections performance.Moving on to IPF Digital. I'd say, once again, our teams have delivered a strong top line growth performance and improved credit quality year-on-year. A combination of continued good demand for our digital offerings in all markets delivering a great customer experience and, as always, focusing on good CRM, means that activity was very positive, and we delivered 33% top line growth. The new markets, as you would expect, were the key driver of this and they delivered 77% top line growth whereas the established markets delivered 2%. Now the 2% is lower than previous quarters, but I think we've planned for some time that they were performing well ahead of our expectations. So we're not disappointed with that result. We think that's actually quite fair. Annualized impairment as a percentage of revenue was 40.4% and that compares to 41.1% in the same period last year or 37.8% at the year-end. Now this reflects stable impairment in the established markets and a slight increase in the new markets where we're serving a large portion of new customers, who do have a higher risk profile, but that's just to be expected. So I have to say that we're pleased with Digital's performance and our expectation is that it will continue to deliver good credit issued growth and, most importantly, the maiden profit for IPF Digital in 2019.So if I were to sum up for Q1 then, I'd say that Justin and I are pleased with the solid performance at a group level and particularly the continuing strong operation performance delivered by home credit as well as a really good top line growth in Digital. And clearly, we're addressing the collections challenges that I've just described in Mexico, and I expect that with renewed rigor in that business, this market will return to improved future performance. So that's the summary for our Q1 and with that, I'll hand it back to Simon to open it up for any questions, and we'll be happy to answer those for you.

[Operator]

[Operator Instructions] It appears, Sir, there are no participants signaling for questions at this time.

[Gerard Jude Ryan, CEO & Executive Director]

Okay, thanks, Simon. Well, just to reiterate for both Justin and myself, a solid start to the year. You're going to see a bit of a trade-off between Mexico and European home credit in terms of profitability as we go through the year, but in terms of guidance, the outlook for the year, we're comfortable with that. Balance sheet is very solid. Portfolio quality is excellent. On the treasury side, the funding position is really good, plenty of headroom, and obviously, pleased to see those ratings changes there that I just mentioned. IPF Digital continues to grow very strongly. So all in all, a good quarter and we look forward to updating you further at the half year results. Thank you very much for joining the call this morning. Thank you, Simon.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.