International Personal Finance PLC

LSE:IPF

Earnings Call Transcript 2019-Q3

[Operator]

Good day, ladies and gentlemen, and welcome to the International Personal Finance 2019 Q3 Trading Update Briefing hosted by Gerard Ryan, Chief Executive Officer; and Justin Lockwood, Chief Financial Officer. For your information, today's conference is being recorded. I'd now like to turn to the conference over to your host, Mr. Gerard Ryan. [Operator Instructions] Please go ahead, sir.

[Gerard Jude Ryan, CEO & Executive Director]

Thank you, George. Good morning, everybody, and welcome to our call. I'm joined this morning by Justin, our CFO, and together, we'll take you through our Q3 trading update. Now hopefully, you've had a chance to read the update, and what you'll see there is that we delivered a solid group performance in the quarter. Now for the group as a whole, we delivered a 1% increase in credit issued year-on-year, and that's similar to what we saw at the half in so far that it was driven by a strong performance in European home credit offset by a reduction in Mexico home credit. I'm pleased to report that impairment as a percentage of revenue, so our key indicator for credit quality, is in the middle of our target range. So it stands at 27.8%, and this is also in line with our half year performance. And this reflects the combination of strong credit quality in European home credit and more challenging performances in Mexico home credit and IPF Digital's new markets, but specifically Poland and Spain. I'm sure many of you will have heard our news from last week which was very positive, and that was about the tax audits for our Polish home credit business, and those have now been settled for the years 2010 to 2017 inclusive. Now this resulted in an overall payment of about GBP 3.8 million, but most importantly, it extinguished a contingent liability of GBP 137 million that you'll have heard us speak about before. Now not only does it eliminate that contingent liability but it also removes the uncertainty for our investors and our colleagues, and it makes the liquidity risk and refinancing of our Eurobond a lot simpler, and we intend to refinance that before the end of 2020. Currently, we have approximately GBP 200 million of headroom on our debt facilities. Moving on now to the trading update detail. I'll begin with European home credit where we are continuing to deliver our strategy to modernize and improve the credit quality of these operations. So here now, we're talking about Poland, Czech, Hungary and Romania. And despite the intense competitive and regulatory nature that we encounter in each of these 4 markets, our teams delivered an excellent operational performance, which resulted in 6% growth in credit issued. And this reflects our continued strategy to offer slightly longer and slightly larger loans to our better-quality customers. Over the past 15 months or so, we've also been focused on reducing the rate of customer contraction in these businesses. And we now serve over 1 million customers in this region, and the 9% moderation in customer numbers is in line with the half year outcome. The credit quality of the European home credit loan portfolio is really very good, and that's driven by a combination of very effective collections by our agents and stable post field collections. And as a result, annualized impairment as a percentage of revenue improved by a further 1.5 percentage points and now stands at 14.2%. So to summarize on European home credit, I'd say another strong operational performance, and we expect this to continue for the remainder of the year; excellent credit quality; and a business that's serving 1 million customers with credit that is particularly suited to their lifestyles and their financial circumstances. Moving on to Mexico now, Mexico home credit. We explained in detail at the half year that we're focusing on improving credit quality over growth and delivering a much higher level of execution consistency in the short term. Now under the leadership of our highly experienced country manager, David Parkinson, and I know that many of you will recall him from the fact that he led a number of our European home credit businesses. Well, David has tightened the credit settings in order to improve the quality of the business that we're writing. And we've also implemented a range of operational measures in order to improve the collections performance, and I'm pleased to say that we're beginning to see some encouraging signs of improvements as a result of these changes. You'll also recall that we spoke about the difficulty of our 12-week loan because it would make repayments for our customers a bit troublesome. And we've expanded those term now, and we're beginning to see improvements in early collections for new business. And in Mexico City, we've unified the leadership of our branches there under one leader, and again, we're beginning to see some improvements in the early indicators there also. So coming back specifically to Q3 performance in Mexico. Our strong focus on collections activity and improving the credit quality resulted in customer numbers reducing by 7% and the contraction in credit issued of 12%. Now it's worth remembering that Q2 to Q3 '18 saw a significant step up in credit issued, and so the comparators here are tougher by definition. Annualized impairment as a percentage of revenue is broadly in line with what we had at the half year, so 41.2%. The commission structure of our agents and their managers will remain very strongly focused on collections activity for the remainder of the year in order to improve the quality of the portfolio. And when we see this delivered, then we'll recommence growth in 2020. I'd like to turn now to IPF Digital, and this is one of our 2 big growth opportunities, and particularly in digital where we see more and more people seeking credit online. And I'm pleased to say that the division is on track to deliver the maiden profit that we've harnessed for 2019. We increased customer numbers here by 18%, and we now serve 380,000 customers with our digital offerings. We've also delivered year-on-year credit issue growth of 3%, and that's made up of 7% growth in the established markets, so that's Finland and the Baltic states. And the performance for our new markets, so that's Poland, Spain, Australia and Mexico, that was broadly in line with Q3 2018. With a more modest rate of credit issue growth in these markets result from our decision at the half year to tighten credit settings in Poland and Spain where impairment levels were higher than our plan. Our Q3 annualized impairment as a percentage of revenue for the Digital division as a whole increased by a couple of percentage points to 43.7%, specifically driven by those new markets. We will continue to focus on improving credit quality, specifically Poland and Spain here now we're talking about. And these 2 markets continue to have great potential for our business. The focus on portfolio quality, together with the impact of new rate caps, which you may have heard about in Finland in last year, and these were introduced in quarter 3, means that we now expect credit issue growth in the second half of the year to be broadly similar to the first half of the year for our Digital division as a whole. IPF Digital is a very positive story that offers us fantastic growth potential, and we're confident that we'll deliver this maiden profit for the year of 2019. So that completes the trading update for Q3, but before we move to outlook, let me just cover a couple of important points on regulation. Now firstly, there's been no update on the Polish Ministry of Justice's proposals to reduce the existing cap on noninterest costs on consumer loans. At the half year, we reported that the Polish government had referred the draft proposal to the EU for comment, and I can confirm that no substantive questions were raised as a result of that process. There was also a general election in Poland, which I'm sure you're all aware of, and that resulted in the previous coalition led by the Law and Justice party as being reelected. The new parliament is expected to convene sometime in mid-November, and we await news of the government's legislative priorities at that point. And we're still working in dialogue with the relevant stakeholders to find a solution that benefits consumers and works for all businesses as well. Now also included in today's announcement are details of a review of the rebating practices of banks and other lending institutions by UOKiK, which many of you will know, is the competition and consumer protection authority in Poland. Now in light of this review and a recent European court of justice declaratory judgment on the matter, we expect new rebating practices to evolve in Poland and potentially in other markets in the EU. Now when we have clarity on these emerging stances, we will, of course, conform our own rebating practices to be in line. And we'll update the market in due course when we understand the potential of financial impact of any changes that might come. Finally, just to sum up on Q3, a solid performance at group level and very positive news on the tax audits in Poland gives greater certainty to our investors. And for us, it also provides greater flexibility in refinancing the Eurobond in 2020 at the latest. Our outlook for 2019 is unchanged from the half year, though we expect European home credit's excellent operational performance to continue. And we're fully committed to improving our performance in Mexico because getting that right is our priority and the actions we're undertaking will deliver progressive improvements in profitability and enable us to recommence growth next year. And as I said earlier, we're confident of delivering our digital maiden performance in terms of profit for 2019. So that's the detail of our Q3 trading update, and I'll hand it back to George now to open up the lines for any questions you might have.

[Operator]

[Operator Instructions] We do have a question coming in now. The question is coming in from Andy Brough calling in from Schroders.

[Andrew John Brough, Portfolio Manager]

Can you just give us some idea how big the rebating sort of profits are for you? And how material anything could be because, obviously, regulation and this company seem to go hand in glove together?

[Gerard Jude Ryan, CEO & Executive Director]

So the -- as you'd expect, from a customer, if they early settle a loan, then some of the fees are rebated. Now it varies from country to country because, as you know, the product structure varies within each of our businesses to cope with local regulation. So what we're waiting for here is to hear UOKiK in particular because it was -- Poland drove this, what UOKiK in particular wants to do. Now the way the declaratory judgment works is it basically says you should rebate when customers early settle, but it doesn't tell any of the jurisdictions, how that should be done. So it will be down to each individual country, and within country, in many cases, it'll be down to whether or not existing legislation is going to be appropriate. And even if it is, then it'll be down to individual courts to decide how they might want to do it. So the short -- that's the long answer. But the short answer is there's no way for us to tell at the moment to what extent there'd be any impact from this. We just have to wait to see country by country if -- a, if changes are made. And if those changes are made, how it impacts compared to the settlements that we currently do. The other thing that's worth noting is that there is or should be a difference here between customers who early settle and then customers who might refinance, and we'd have to consider that as well when we look at the mix.

[Andrew John Brough, Portfolio Manager]

So currently, if people early settle you rebate, too, some of the fee?

[Gerard Jude Ryan, CEO & Executive Director]

Yes, we do. But it -- as I say, it depends on the fee and it depends on the country. So it'll be a question of quantum, depending on what changes.

[Andrew John Brough, Portfolio Manager]

And then if we just look at Digital now, are you -- how worried should we be that it's going to put rate caps of that particular product?

[Gerard Jude Ryan, CEO & Executive Director]

Well, the rate caps that you see actually don't specify Digital. The rate caps that you see cover consumer finance in the main. And so Digital, obviously, gets hoovered up in that. And what we've always said is that we should expect to have rate caps in every country. And at the moment, the countries where we don't have them are in Czech, Romania and Spain. So our Digital business operates very effectively within the rate cap. And in fact, it's probably easier for the Digital business to be more flexible when rate cap changes because you can adjust the parameters more easily online than you can with thousands of agents. And the second thing is it's, obviously, a lower cost of delivery, so substantially less infrastructure. So a digital business should be more adaptable for rate caps.

[Operator]

Gentlemen, we have no further questions at this time. We'll turn the call back over to you for any additional or closing remarks.

[Gerard Jude Ryan, CEO & Executive Director]

Okay. Everybody, thank you for joining the call. So just to sum up, a solid performance in Q3. And as we look towards the year-end, we're on track to deliver full year profit before tax in line with consensus expectations. That's it for now. Thank you, everybody, for joining, and thank you, George, for hosting the call.

[Operator]

Thank you very much, sir. Ladies and gentlemen, this will conclude today's presentation. Thank you very much for you attendance. You may now disconnect. Have a good day.