International Personal Finance PLC

LSE:IPF

Earnings Call Transcript 2021-Q3

[Operator]

Welcome to the International Personal Finance's 2021 Quarter 3 Trading Update, hosted by Gerard Ryan, Chief Executive Officer. Today's conference is being recorded. I will now hand over to Gerard Ryan to begin today's conference.

[Gerard Jude Ryan, CEO & Executive Director]

Okay. Thank you very much, Molly. Good morning, everybody, and welcome to our 2021 Q3 Trading Update Call. Joining me this morning is our Group Treasurer, Krzysztof Adamski. Hopefully, you've had a chance to read the trading update, which we published earlier this morning, and I'll walk us through the details behind the strong trading performance delivered this quarter, and as always, with a plenty of time for Q&A at the end of the call. Now as you know, 2021 has been a year where we have been fully focused on rebuilding our business to return to profitability and long-term growth, following the impact of the pandemic on the group in 2020. We made excellent progress throughout the year, and I'm delighted to report that the effective execution of our strategy has delivered another strong operational performance in quarter 3 with improved credit issue trends and very good collections. We continue to have a strong funding position, which was enhanced in October with the successful issue of a new 3-year SEK 450 million bond priced at 7%. And that's 3 percentage points lower than our main euro bond, which we secured in Q3 of last year. In addition, Fitch improved the outlook for IPF to stable, reaffirming our long-term credit rating of BB-. I'm also pleased with the way my colleagues in all of our markets are working to serve our customers safely and responsibly, and we continue to provide PPE training and guidance so that they can do so with confidence. I'll take a closer look at the operational performance. Increased appetite for consumer credit is creating a good foundation on which to rebuild the business and deliver sustainable growth. We saw the steady increase in levels of demand over the course of Q2 continued throughout the third quarter of the year. This pickup was driven by the easing of freedom of movement and social distancing rule in most of our markets, the opening up of retail and hospitality sectors and the progression of governments vaccination programs. We've responded well in meeting growing consumer demand, and this has now reversed the reduction in customer numbers that occurred as a result of the pandemic last year. I'm pleased to report that today, we are back to serving 1.7 million customers, a growth of 36,000 customers in the quarter with contributions made by all of our business units. The largest equate was delivered by Mexico home credit, where we added 25,000 customers in the third quarter alone. We also delivered a strong 35% increase in credit issued year-on-year, driven by our home credit operations in Europe and Mexico. The rate of credit issued by IPF Digital also improved as the year progressed. And at the end of quarter 3, new lending was in line year-on-year with Q3 credit issues 12% higher than the previous quarter. These positive sales trends, which we expect to continue in the final quarter of the year, also delivered an 8% increase in closing receivables since the 2020 year-end. As was the case in the first 6 months of the year, the return to growth has been enabled by the excellent operational execution across all of our businesses. This has generated a strong and sustained collections performance, which, together with a higher quality lending, has led to significantly lower impairment. Since the 2020 year-end, annualized impairment as a percentage of revenue improved by more than 25 percentage points to 12%, with all of our divisions contributing to this positive performance. As previously reported, we expect the impairment as a percentage of revenue to remain below our target range of 25% to 30% in 2021 before increasing gradually in 2022 as we continue to rebuild the business. You will recall, I'm sure that we took significant actions to reduce the group's cost base in 2020 in response to the pandemic, including a rightsizing exercise in Q3 of that year. As a result, other costs reduced year-on-year by 2%, which is approximately $5 million of constant exchange rates, reflecting our approach to maintaining tight controller costs while continuing to invest to deliver higher volumes of credit issued. And finally, on the regulatory front. I'd say there's not a whole lot of new needs. The moratorium in Hungary has been extended until June 2022, but it's now under different rules, and we expect fewer customers to avail of this extension, in fact the window for applying has now passed through at the end of October. And we now expect that approximately 4% to 5% of our customers will be in the new moratorium, and that compares to 18% to 20% in the previous one. Now bringing all of this together. As we think about the final quarter of the year and move into 2022, we are well positioned to deliver further growth and maintaining robust collections and good credit quality, we continue to be the core building brands of our sustainable and regrowth strategy. Despite the ongoing challenges caused by the pandemic, and we shouldn't forget it's not gone away. There is significant long-term demand for affordable credit in all of our markets. We will continue to serve our customers responsibly and safely with the products that suit their financial needs and circumstances both now and into the future. And in doing so, we will grow credit issues and the receivables portfolio while remaining firmly focused on maintaining credit quality and managing our cost base. I think we've already proven the resilience of our business throughout the pandemic, and we'll continue to perform the valuable role that our business plays in society. I guess that completes the briefing for Q3. As you know, the Q1 and Q3 are less rich in terms of detail. But I'll hand it back to Molly now to see if there are any questions from anybody who's joined us on the call this morning. So Molly, if you could check if we've got any questions, please?

[Operator]

[Operator Instructions] We will take our first question from Stuart Duncan of Peel Hunt.

[Stuart Duncan, Financials Analyst]

I got a question just on the competitive landscape. And I wonder as we sort of go back to some sort of normality, whether you can give us an update on what the competition looks like? Has it changed that much over the last 18 months or so?

[Gerard Jude Ryan, CEO & Executive Director]

Sure, Stuart. Well, the first thing to say is there are definitely fewer competitors out there because we saw some of the weaker ones disappear on the scene. But in terms of being weaker, there were also the smaller ones. So I would say, by and large, competition remains strong. And the way we tend to look at this is to look at the volume of money people are putting into advertising their products. And what we've seen over the last 3 or 4 months is a return to -- I would say, pre-pandemic or close to pre-pandemic levels of spend, in particular, on TV advertising. And that's right across consumer finance. So not our sector because that's not how it works. So all TV advertising for consumer finance products has increased to that level. So I would say we see strong healthy competition, but no new competitors other than I suppose the emerging buy now pay later. But I have to say that even though those are coming up the track in terms of volumes of new customers, they are unlikely to be our core customer set.

[Operator]

[Operator Instructions] We will take our next question from Neville Harris of Radnor Capital.

[Neville Harris]

A word on the third quarter results. I think one thing I'd be interested in is, just thoughts on dividend going forward really because it's sort of reintroduced this year. Obviously, things have stabilized a bit in the business, looking at a bit of growth going forward. But I don't think you've been specific in terms of what the payout ratio might look like going forward? Or what sort of levels of growth you're thinking about in terms of the dividend. So I just wonder if you got anything to say on that.

[Gerard Jude Ryan, CEO & Executive Director]

Yes. And Sure. Thanks, Nev. Well, I guess -- I think everybody would agree, it was the right decision last year of not to be paying dividends. But we've moved on from there. We've paid out the dividend last month. We will go through our normal process with the end of year results, and then being in front of the Boards talking about the position in terms of the P&L, how we performed, the strength of the balance sheet, all of those things. We'll go through that normal process first. But I think it would be fair for stakeholders to assume that there will be a return to what I would call business as usual in terms of the dividend. So back to our previous payout rate, I'd imagine. But that's not to second guess what we will discuss with the board. But I'd be surprised that the market didn't seem that we were back in BAU mode in terms of dividends because the business is performing really, really very well, so we're happy with where we are today.

[Operator]

[Operator Instructions] At this time, we have -- apologies. We have received a follow-up question from Stuart Duncan of Peel Hunt.

[Stuart Duncan, Financials Analyst]

I'm following up on behalf of someone who can't seem to ask a question. The question is really ramp up cost going into FY '22. And obviously, you've good regress this year, it's holding costs. How do you expect that to progress next year? And then the second asked question is on the impairment provision. You sort of touched on, Gerard, that you saw a more typical range. And how quickly do you see current level moving back towards that? And then I guess sort of follow-up is actually whether that range is still appropriate for the business today?

[Gerard Jude Ryan, CEO & Executive Director]

Okay. Thanks, Stuart. Okay. So let's deal with them in turn. In terms of cost, I think we -- well, my colleagues have done an excellent job in managing costs through the year. We did take a huge chunk of cost out of the business last year, and rightly so, because the volume of credit we were writing were significantly lower than what we were geared up to do. And our intent has always been not just squander the pain that we went through by just going out and rerecruiting and spending that money again this year. And that's why you see continued downward pressure on costs in the numbers we've issued. Now as we think about next year, I have to flag up that not having given our colleagues an increase for 2 years and not having paid any bonuses last year. And for all of my senior team in particular having waived their line to any bonuses last year, we should expect that there will be a reasonable tick up on the personnel cost side of the business. That's partly because of the things I just mentioned, but also it has to be said that wage inflation across our businesses in Europe is very, very strong in those markets. So we are seeing wage inflation in high single digits across some of our markets. And so we're having fairly serious and tough discussions with our businesses about that because I said we want to retain the maximum operating leverage we can. But I would say we will see costs tick up again next year. But at the same time, the business will grow. And so cost as a percentage of impairment, I don't expect to see negative trends there really. But the base cost itself will go up because the business will grow. On impairment, we are significantly below where we would say is our optimal trade-off point of 25% to 30% impairment to revenue. And that is a function of the fact that last year, we were extremely tight on our hurdles on credit issuing, so the credit quality coming through, which is really, really good. The second thing is that we -- the team have been doing outstanding job in terms of collected, and so collections have improved in payment as well. Now the rate the flow through the P&L of some of those reserves that we took last year in relation to COVID, so as we've collected more effectively and the portfolio has performed better than we expected, some of those reserves have come back to the P&L. And you've seen that in particular in the first month, came in much less so in quarter 2 -- I said quarter 3 and will be less in quarter 4, I think. So as a portfolio of -- let's call it the old portfolio while in saying those factors will go away. And if that, in turn, will lead to an increase in the impairment to revenue number. Now I think getting back from where we are today, so let's call it, 12% impairment of revenue back to, let's say, closer to the range of 25% to 30%, that will take a bit of time, and it will be a factor based on how quickly we ramp up sales. The final part of your question was to what extent will that range still be appropriate I think it's a really interesting one and one that we will continue to look at and debate internally. For now, we're going to maintain that range. But I suppose, as we get to the first half of next year, I think we'll have a clearer view as to whether we should tighten up that range or bring it down slightly or whether still that is the optimal point for us in terms of trade-off between volume, revenue and impairment. So probably more of an open question on the last one, but certainly, we'll move from our 12% today to closer to that range as we progress through the first half of 2022.

[Operator]

We will take our next question from Frank Lehmann of [ Pelo ].

[Unknown Analyst]

I have one specific question, which I picked up on one of the rating reports, and it relates to the litigation charges relating to the early settlement in Poland and customer claims in Spain. Could you give us -- and I understand this is all legal and this could probably be moving around a bit. Could you give us an outlook what you expect this for the full year to be? And whether there is a expectation and I hope that this will eventually disappear or solve itself anyway?

[Gerard Jude Ryan, CEO & Executive Director]

Yes. Okay. So there are 2 points. And while Krzysztof -- I'll give Krzysztof a minute to just -- still looking at the numbers, let me just say this, first of all, there are 2 issues there. One is the early settlements we face in Poland, and the other is to do with what our call usury issues in Spain. Now we would term it differently, but it's just a moniker that I think of. As regards to the early settlements process in Poland, we agreed with our regulator there and knew formats for issuing early settlements. Now for those who might not be aware, what this relates to is that when a customer pays up the loan early. There was no pre-agreed with the regulator or market norm for what charges should effectively be forgiven if a customer paid out and the market effectively developed its own range opportunities. But then over the past 18 months or so in the customers regulators, they decided they wanted to enroll Euro bond and came up with a process, and we bought into that process. And so now what we've done is, in the agreement with the regulator, we've done a customer contact exercise for those customers who had previously early settled. And we're contacting them and saying that, on the moment now, what you need to do. You would have been in type of how we've done this, let's say, over the past 2 or 3 years to extra settlement. And we're going back and contacting them and repaying where appropriate. Now what you should expect is that market consensus of GBP 67 million, GBP 68 million PBT for the year includes the impact of that. So that's already in the numbers. So people shouldn't be worried that there's anything else to come that would in any way move that number. That's already in those numbers. And then as we go forward into 2022, the new settlement process is now part -- will be part of our ongoing process, that will be business as usual, and that will be taken care of in the bottom line PBT. So the consensus that people have for 2022 and beyond. Again, that includes all of that already. Now as we look at Spain, what you have there is, it's a really [indiscernible] where there wasn't a new piece of legislation around, nothing like that. There was just a particular court case. Nothing to do with us. There was a different institutions with the bank, in fact, just a court case, they lost us and is in fact, created a [ sealing ] on or could be charged on a loan. And so either result than what we've seen in a number of people coming and saying, well, I think I've been overcharged, and I'm looking at this court case, can you look at my accountant? So where that has happened, we talked it through with those customers. and we are paying out to them to the extent that it is the details in line with that court case and if we've overcharged. So again, all of that is already included in the PBT consensus for the year. And as we stopped using the product, that was the subject of that then you won't see that as an issue for 2022 or beyond because we've now got our new products in place, and we're testing that in the state. So I think -- in a nutshell to answer your question, I think people can be comfortable that both of those 2 regions are already in consensus numbers for the current year and for 2022.

[Krzysztof Adamski, Group Treasurer]

Just to interrupt Gerard to what he just said, so effectively we provided appropriately at half year-end, and you can see that at half year end, we provided over GBP 21 million a Polish early resettlement rebates in respect of this historic portfolio and GBP 7.6 million against these Spain usually credits. And as and when we -- as the year goes by, we would expect that we would be releasing that into our P&L, clearly, as the claims issue has been now resolved. The policy -- sorry issues have been now resolved in Poland, so.

[Gerard Jude Ryan, CEO & Executive Director]

Yes. So just -- thanks, Krzysztof. Just to clarify there. So effectively, those reserves are on the balance sheet, and they will be used to meet the payment -- meet customers. So there won't be, in effect, a flowback of that to the P&L, the 2 will just net out. And that's why I said earlier that in the consensus, in the market, it's already taken care of.

[Krzysztof Adamski, Group Treasurer]

Correct. Yes.

[Gerard Jude Ryan, CEO & Executive Director]

Okay. Molly, do we have any last remaining questions?

[Operator]

We have not received any further telephone questions at the time.

[Gerard Jude Ryan, CEO & Executive Director]

Okay. Well, thank you very much, everybody, for joining us, and thank you for the questions this morning. Just to say, we're pleased with the performance. Actually, we're very pleased with the performance in quarter 3. We're looking forward to a strong Q4. As you've seen from our issue this morning, credit issues have moved from plus 25% of the half year, to except 35% in quarter 3, impairment is down a touch again to 12% from 13.7% at the half year. We've added 36,000 customers in the quarter, and closing receivables are up by 8% since the year-end or at the same time, managing costs in a very positive way. So we are pleased, but we are very committed to being out there and serving our customers in the right way. And I just wanted to thank you to all of my colleagues for everything they're doing for the business and for our customers. So with that, thank you for joining us this morning. And Molly, thank you very much from managing the call today.

[Operator]

Ladies and gentlemen, we'll conclude today's presentation. Thank you very much for your attendance. You may now disconnect.