International Personal Finance PLC

LSE:IPF

Earnings Call Transcript 2018-Q3

[Operator]

Welcome to International Personal Finance's 2018 Quarter Three trading update briefing hosted by Gerard Ryan, Chief Executive Officer; and Justin Lockwood, Chief Financial Officer. [Operator Instructions] I will now hand you over to Gerard Ryan to begin today's conference. Please go ahead.

[Gerard Jude Ryan, CEO & Executive Director]

Thank you very much, Cloda. Good morning, everybody. Sorry for the slight delay, but some people were just having a little difficulty getting on the line. I'm joined this morning by Justin Lockwood, our CFO, and together, we'd be delighted to take you through our Q3 trading update. Now hopefully you have had a chance to read the update, and what you'll see is that we delivered a good performance in Q3, and we're continuing to execute very well against our agreed strategy.For the group as a whole, we delivered credit issue growth of 6% year-on-year and obviously, that was driven by our growth businesses, which are IPF Digital and Mexico home credit. And then there was a partial offset by European home credit and we'll talk about that in a second. Also pleased to report that credit quality continues to be very good, and our collections performance was very well managed. So our annualized impairment to revenue now stands at 25.2%, and that's down from 25.5% at the half year. And just to close out, on the balance sheet, we currently have funding headroom on our facilities of GBP 226 million, so a very robust position.If we move into the detailed trading then, and we'll start with European home credit. Well, as I'm sure, you'll know that these businesses generate all of the cash and capital that we use, both to reward our shareholders, but also to fund the growth opportunities in Mexico and in Digital. They do operate in very challenging regulatory environments and very competitive environments and that continues to be the case. And in particular, as in previous quarters, what we've seen is that payday lenders, digital lenders and banks are all now competing for our best quality customers in this segment. So against that backdrop, we saw a 7% contraction in credit issue growth year-on-year and I have to just confirm that, that is actually in line with our expectations. We did, however, reduce the rate of customer contraction in European home credit businesses, and you may remember that at the half year, we said that was one of our key performance targets. So through various campaigns, we saw an increase in new customers and improvement in retention and so we delivered a 2.4 percentage point reduction on moderation in the attrition rates of the half year, so it currently stands at 12.7%.The credit quality of the European home credit portfolios continues to be very good, and that's driven by a combination of good collections by our agents and strong post-field collections. As a result, the annualized impairment revenue, which is the one that we always target, currently stands at 17.8%, which is in line with the half-year results.Before we move on to Mexico and IPF Digital, I think it makes sense to cover off regulatory in Europe. So as you probably are aware, in Romania, we're now regulated by the National Bank of Romania, and you will recall that we said that we expected new debt-to-income regulations to come in prior to the end of this year. Well, in fact, the NBR announced its regulations at about 5 p.m. or 5:30 p.m. yesterday afternoon. So we're currently studying the detail of that, and we do expect to see some reduction in sales volumes and the value of credit issued.Now once we understand the detail and we look to develop whatever are the appropriate mitigating strategies, I think we'd be able to update the market more fully, and I'd expect to do that at our next standard trading update. But the low -- this new debt-to-income low will take effect from the 1st of January, 2019, so it's forward looking only.You probably also recall that we talked about the fact that there is a debate going on in parliament in Romania around an APR cap of 18%, and that will be for both new and existing consumer lending. Now our teams have worked very solidly with our trade associations, and it has to be said, with other market participants, to explain the potential for unintended consequences of setting an APR cap at such a low rate. And I'm pleased to say that a result of the desire on behalf of the people we've spoken to, so that will be politicians, regulators and other interested parties, there's been a slowdown in the timetable for this particular piece of legislation. So initially, we thought it would be Q2, then Q3, and you'll see in our announcement, we had now said it's sometime in the next few months, but I would view that delay as being positive because what it really means is that people are engaged and they want to understand the full potential impacts. We will, of course, come back to the marketing in due course and update them with any relevant announcement on that one.And then finally for clarity on the one that everybody watches, and that is the announcement by the Polish Ministry of Justice some 2 years ago, so December 2016, that they wanted to reduce the existing noninterest raised price cap. There is no further update on that, but I think we should just always be mindful that this is a politically driven initiative and so change could happen, but at this point in time, we see nothing happening in the market on that particular one.So just to sum up on Europe then, where we delivered a good operational performance, portfolio quality is excellent and we're continuing to work to reduce the attrition on the customer number.Moving on to Mexico, where we had a very good quarter there. We are clearly in growth mode, and I'm pleased to report that the team, through the branch expansion and micro business loan strategy, delivered 13% increase in credit issued and an additional 32,000 customers since the half year. Now all of this expansion is being supported by a range of marketing activities, which include field canvassing, leafleting, radio, outdoor advertising and digital marketing campaigns and is proving very successful, it has to be said.Now while we're growing well in Mexico, we're also maintaining credit quality, and annualized impairment to revenue stands at 35.9%, so broadly in line with where we were at the half year. You'll have seen from the announcement that what we have said now is that we expect credit issue growth for the year of approximately 12%, so that's at the lower end of our target range of 12% to 15%. I don't think you should be worried about this, it's really driven by the mix of customers and because we added so many new customers, then that shifts the balance on average issue value, because all new customers start on what we call our low and grow strategy, so their initial loan is much lower than the loan they would get subsequently. So overall, very pleased with what's happening in Mexico.Turning to IPF Digital, well, very pleased to be able to report that our team delivered strong topline growth and good operational performance across those businesses. There is robust demand from all of our target segment of consumers for digital credit, particularly our credit lines, that is the revolving credit rather than installment loan. And this resulted in us delivering credit issue growth of 39% year-on-year. Now you'll know that we segment the business into 2 parts, so we have our established markets, which are Finland and the Baltic states, and then we have our new markets, which are Poland, Spain, Australia and Mexico. And as you'd expect, the growth was principally driven by the new markets and they delivered 76% year-on-year growth, but it's also pleasing to see that the established markets delivered 14% year-on-year growth. The credit quality is in line with our expectations, and we delivered a 4.4 percentage point improvement in annualized impairment as a percentage of revenue for IPF Digital as a whole, so that now stands at 35.4%. So it's quite a good improvement since the half year. That improvement, that 4.4 percentage point improvement, was driven mostly by our new markets, all of which improved their impairment loss levels. So significant growth opportunities for all our digital businesses is what we have seen in the past and continue to see, and our expectation is that we'll continue to deliver good credit issue growth for the whole year and look to deliver the maiden profit as agreed in 2019.So that completes the operational overview. But before I just mention the outlook, we need to address the draft law proposing amendments to existing tax legislation in Poland, and you'll have seen that referenced in the announcement this morning. Now the proposal was submitted to the Polish parliament and it's currently being debated by the parliamentary finance committee, and that debate started yesterday and we believe it's continuing today. Now if the bill is approved, it will become effective from 1st of January, '19, and if enacted without any further amendment from what we've seen so far, certain cross-border transactions that our Polish subsidiaries entered into in the past would most likely become economically inefficient and the result of that would be that our expected effective tax rate for the group would probably be of the order of 42% in 2019, versus our expected outturn of about 34% for 2018.Now we mentioned this in our statement, but it's worth reiterating that we and many other financial and nonfinancial businesses are making very strong overtures to try and have this piece of proposed legislation changed. I would say the prospect of having a change materially in the short term are low, but clearly we would be continuing to work with other parties to have it amended, if not now, sometime over the coming months.So finally just to sum up on Q3, Justin and I are very pleased with the performance of all of our businesses in fact. Looking ahead, obviously, we've got regulatory challenges to deal with, and we will do that as we normally do. Competition robust in European home credit in particular, but portfolio quality excellent. Hence whilst we make the sustainability of that business even better, we'll continue to deliver strong growth and improved operational efficiencies in both Mexico home credit and IPF Digital. And then just a final comment and that is that we announced some board changes. So we've appointed 2 new nonexecutive directors, [ 2 ones that appoint to our board that draws ] great track record, and we believe they will be a very positive addition to our board as we take the business forward. So with that, let me hand it back to Cloda, who can open up the lines for any questions that you might have.

[Operator]

[Operator Instructions] We will take our first question from Owen Jones from Citi.

[Owen E Jones, Analyst]

I was looking for an update really around the agent tech and the progress that you're making there and if there is any update that you can provide. I think you said at the half year that you're looking to roll that out in Romania at some point in the second half. So just to hear how that's going and wondering whether or not there's any update around potential cost savings that you can tell us about from that initiative?

[Gerard Jude Ryan, CEO & Executive Director]

Yes, good morning, Owen. Yes, actually the rolling out of agent tech is going very well. It's fully rolled out in Poland, Czech and Hungary. And as you say, it's actually going into Romania now, and that's going in on an accelerated program, so that should be fully complete before the end of the year. In addition, I can also tell you that it's currently in test in Mexico, and we're expanding that test because we are happy with how it's going. So our expectation would be Europe completed this year and then Mexico to be completed in 2019. Now the part that's gone in so far is the piece that deal with collections and clearly, there are other modules that will be rolled out in due course to deal with sales and, what we call, balancing, which allows the agent to balance the ins and outs of their cash on a daily basis, and those modules will come over the coming months. So what we are starting to see now is that we should be getting cost savings from the fact that, for instance, in Poland, we no longer issue any paper to our agents. So the way it works is that the agents used to go out with lots of paper for every single customer. In Poland, we issue no paper, everything is digital and so we'd expect that to be the modus operandi in the other markets in due course.

[Justin Lockwood, CFO & Executive Director]

Yes. Owen, so as we said at the half year, we expect to see some modest cost savings flowing through from those activities in the second half of this year, but further cost savings will follow. And they'll follow because we'll be able to talk to [ my zah ] and administration teams in our branches, where a lot of the cost savings will be delivered. As Gerard said, we're already delivering paper savings in Poland. That might sound quite insignificant, but when you consider that we have over -- across Europe, we've got the best part of 10,000 agents, each of which receives over 100 pieces of paper every week, the numbers really start to become quite, quite significant, but next year will be the year when we see more cost savings flow through.

[Operator]

[Operator Instructions] Our next question comes from Mark Thomas from Hardman.

[Mark Thomas, Analyst]

I've two questions, if I may. In the past, there had been question you were considering externalizing some of the Polish-related swaps in order to offset the tax, and then obviously, there is a cost to that. I was just wondering if you could give us any update both on if [ both staff like annals ] can expect for that. The second aspect was for Mexican growth. Is the business -- obviously very good in terms of new customers, is the business from existing customers in line with what you expected?

[Gerard Jude Ryan, CEO & Executive Director]

Okay, Mark, this is Gerard. Let me take the second question and then Justin can deal with the tax. So as you would expect with an agent, when they are out there, they are both collecting cash from existing customers and providing cash to new and existing customers. And depending on where they put their focus, then you change the mix of the business, and we've been promoting very heavily, trying to attract new customers to the business and that's where a lot of their focus is gone and so the mix has shifted towards new -- rather new. The second thing is that we would like to see a bit more uplift in the collections front in Mexico. And so, what you see in the short term is just a slight reduction in the number of offers that we make to existing customers. So the combination of really good traction on new customers, with us wanting to see a slightly better improvement in collections, means that the mix shifted. So I would say that, in all, we are very happy with where we've landed there, but the AIV, the average issued value, on new is slightly lower than on current customers.

[Justin Lockwood, CFO & Executive Director]

In terms of a -- the credit default swap situation, so we have an arrangement in place where a U.K. entity issued credit default swaps to the Polish entity for many, many years, was started back in 2003. Some changes in legislation that were implemented at the start of 2018 made those transactions tax inefficient and at that time, we said we'd investigate a number of options to mitigate that. We actually have put a new arrangement in place towards the end of first half of the year, which was essentially an insurance arrangement with a captive insurer based in Guernsey, which gave us a tax effective hedging solution and therefore that was -- we've decided to follow that particular route rather than an external transaction. Now the piece of legislation that Gerard touched on earlier that, if it is passed, it will make that particular transaction economically inefficient. So we've been looking at a range of potential solutions, one of which may be an external arrangement. But at the moment, I think the best working assumption is, as we said in the paper, that we would have an effective tax rate in 2019 of around 42%.

[Gerard Jude Ryan, CEO & Executive Director]

It's worth noting that the tax proposals that are currently being debated are not just to do with financial services, they are across every industry in Poland. And so, there are lots of people looking at this very hurriedly now to try and understand the implications, because it gives more authority and flexibility to the tax authorities and then puts the onus on the taxpayer to be able to dispute and prove otherwise than what the taxes authorities believe. So it's a fairly big shift, and we're looking at it and as are others and trying to influence that.

[Mark Thomas, Analyst]

And so to be clear, a slight follow-up on that. Is the 42% what you'd then regard as being a normalized ongoing sustainable tax rate? Or does the 42% include any elements of sort of one-off catch-up, so 2020 would then be at a lower rate?

[Justin Lockwood, CFO & Executive Director]

Well, I think the guidance that we've given is for 2019. We'll be looking at options that are available to us, we'll be talking to stakeholders in Poland about the taxation of our business because the entity there will be paying a -- will have an effective tax rate of more than 50%. And there is essentially an unequal treatment between MDFIs and banks, so we'll be engaging stakeholders around that. But certainly, there is no one-off element to the 2019 charge in the sense of a catch-up, but we'll be engaging to just try and arrive at a more sensible tax rate going forward.

[Operator]

[Operator Instructions] There are no questions in the queue at this time, if you wish to raise any additional remarks.

[Gerard Jude Ryan, CEO & Executive Director]

Thank you, Cloda. Well, just to sum up then, good trading performance in Q3, executing well against the strategy, really excellent growth in both home credit Mexico and IPF Digital. And we've reduced the rate of contraction in European home credit, but clearly still quite a bit of work to do there. Lots of challenges on the regulatory fronts, but we've proven before that we tend to manage our way through those. As we look toward the year-end, we are comfortable with the numbers that the market is expecting for 2018. And the balance sheet in good order, both from a funding perspective and the quality of the portfolio. So that's it, thank you very much for joining, thank you from Justin and myself. Thank you, Cloda.

[Justin Lockwood, CFO & Executive Director]

Goodbye.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.