International Personal Finance plc

Good morning everyone and welcome to our first half results call. This morning I'm joined by Gary Thompson, our CFO, and together we will update you on what has been a very strong six months for our group. I will start with the headlines for the period and I'm happy to say it is all very positive news. I will also provide an update on our progress on our strategy to return to sustainable growth and I will explain where we have got to with our purpose, which we first introduced to you just a few months ago. Gary will then pick up and take us through the detailed financials, both at a group and a divisional level, and he will introduce our new business terminology, which will make it easier for you to compare us to some other businesses that operate in the same segment. In addition, Gary will cover the robustness of our balance sheet from a capital and funding perspective. I will then pick up and comment on current regulatory topics before providing closing remarks on the outlook for the group as a whole. As always, we will have plenty of time for Q&A at the end. Now, just in relation to that Q&A, if you'd like to ask a question, there should be a dialogue box at the bottom of your screen. And if you key your question into there at any stage, it will go straight through to Rachel, who will ask us that question at the end of the session. So with that, let's get started. Now, hopefully you will have had a chance to look at the announcement we made this morning. And if you did, you will know that we had a very strong first half across the whole group. We delivered a 45% year-on-year increase in underlying profit before tax, a great result and one which was driven by excellent operational execution and delivered by a fantastic group of colleagues who are fully committed to serving our customers and supporting the communities in which we work. It is also very pleasing to note that all three business divisions were profitable in the period. And you will see from the pie chart on the bottom of this slide that we continue to be very well capitalized with equity to receivables above 52% at the end of June. I'm sure you will remember that at our full year results presentation, we talked about our new progressive dividend policy. And I can confirm that with the very positive results for the first six months, a well capitalized balance sheet and sufficient funding for our growth plans, the board is happy to confirm an interim dividend payment of 2.7 pence per share. So now, if we look at how we delivered this very positive outcome. Our results in the first six months are a clear indication that our strategy to deliver sustainable growth is proving very effective. You may recall that at the height of COVID, we introduced our four-phase strategy. Phase one was about protecting our people and staying loyal to our customers. Phase two was rightsizing the business and refinancing the balance sheet. Phase 3, where we are now, is about rebuilding the business, and we are putting in place the foundations to move to Phase 4, which is designed to deliver sustainable growth and capture the longer-term opportunity that fulfilling our purpose presents. When we discussed our trading update in April, we talked about the fact that Quarter 1 had been slow for our European-based businesses. This being driven by weak consumer confidence arising out of growing inflation combined with the unnerving impacts of the start of the war in Ukraine. This weaker demand persisted into April, but by mid-May it was good to see a return to greater consumer demand, and this has continued through to June and now also into July. We are meeting this demand with the broadest set of products we have ever had, and I'll talk you through that in a minute. Being there to meet the demand delivered 14% growth in customer lending for the period and all three divisions delivered growth. One of the most pleasing aspects of our performance is that we have also continued to maintain very good portfolio quality and customer repayments remain robust. Although our credit standards are in the main almost back to pre-COVID settings, we are nonetheless very mindful of the risk that inflation poses for the disposable incomes of the consumer segment that we serve. This is an area that we monitor very carefully, and if we see a change in customer behaviour, we can and will tighten some of our credit settings if we feel appropriate. Turning now to our purpose and our strategy, I'd like to spend a few minutes bringing you up to speed on the very good progress we have made in the past six months. At our full year results, we articulated for the first time our purpose, which is building a better world through financial inclusion. Our aim is to bring as many financially excluded consumers as we can into the financial world, with transparent, affordable and appropriate products that are carefully designed and responsibly served to meet their needs. And then, over a period of time, work with them to build strong credit histories that would enable them to have access to a broader and cheaper set of services, many of which we are already providing. We have been, for some time now, the largest home credit business in the world. And we aim to use that preeminent position in combination with our growing digital businesses to address this vastly underserved market. In addition to our very strong social purpose, we are striving to have a positive effect on all our stakeholders. We are rolling out a really interesting and effective community program called the Invisibles in all our markets, supporting the underprivileged, marginalized and excluded members of society. And that comes on the back of a very successful campaign that we ran in the Czech Republic last year. We are also working on our climate-related strategy and will finalize our environmental commitments during the second half of this year. And for our people, we have launched a new leadership development program, Global Leaders Connect, to ensure that we develop the next generation of leaders within the group. Our strategy to deliver on this promise consists of two key elements. The first is providing excellent service to our loyal customers. And the second is expanding our product and channel choice to make ourselves more attractive and accessible to the next generation of consumers. To ensure that we consider all of our stakeholders as we execute this strategy, we're confirming our financial model, which is based on sustainable portfolio growth, backed by a strong capital base, delivering an appropriate ROE for the risk that we take. and resulting in the progressive dividend policy that you heard us set out a few months ago. And Gary's going to take us through that in a lot more detail shortly. As we continue to successfully execute our growth strategy, I'd like to give an update now on the really solid progress that we're making in this regard. As I mentioned, our strategy aims to reward loyal customers with excellent service and make our proposition more attractive and relevant to new consumers. To do this, we are executing simultaneously across three fronts. First of all, we will continue to invest in technology to benefit our customers. Our workforce of more than 16,000 customer representatives will continue to be the key point of contact for the majority of our customers. but we will make our onboarding experience significantly more hassle-free by digitizing as many of the elements of their interaction with us as possible. As you know, all our customer representatives already use handheld technology in their day-to-day dealings with their customers, automatically receiving offers of credit for existing customers and helping providing the professional and modern service that our customers now expect. We are now going to the next stage and digitizing wherever possible many of the interactions around the loan application, the loan agreement and how we get credit to our customers quickly. This will improve the customer experience significantly and our Mexico business is at the forefront of this drive. Our customer app in Poland and our mobile wallet in IPF Digital both seek to put the customer in charge of their own financial affairs. The app allows customers for the first time to interrogate their account live online, look at the balance due if they wish to repay early, and also see if they can access a larger loan should they wish to do so. Mobile Wallet, which we are currently rolling out in the Baltics, provides our customers with bank-like facilities on their mobile and the ability to use the revolving credit facility in conjunction with a payment card to buy goods online or in stores. Ultimately, we will provide customers with an omni-channel experience where they decide the most appropriate means to interact with us. Now, clearly, there is a crossover between investing in technology and our strategy to expand our product range. In addition to the payment card that accompanies our mobile wallet in IPF Digital, we are also about to test one of our most significant developments in some time, a loan card for use in home credit. We expect that in Q4 this year, we will trial a loan card for our Provident Polska customers in Poland. As this product takes a different approach to serving customers, we will take our time to learn how they use the card before we switch on additional functionality to enhance their user experience. And one area we shouldn't forget is value-added services. Using the benefit of our significant purchasing power, we can provide insurance-type products and services that our customers either cannot access individually or cannot access at an acceptable price. These services include life assurance, medical cover and funeral expenses, just to name a few. And we now serve over 700,000 customers with these extra benefits for being a customer of IPF. And the final and equally critical element of our strategy execution is our drive to build our distribution. One of our biggest opportunities is how to make ourselves accessible to new customers at the point at which they want finance and in a way that is economically sensible for us to do so. We have started building more access points and will expand our reach in two ways. Firstly, through retail partnerships, which are currently in test and development mode in Mexico and Romania, meeting the need of point of sale finance for our segment. And secondly, through branch expansion in the northwest of Mexico, around the densely populated area of Tijuana, where there are approximately 1.4 million consumers in our target segment. And I'm delighted to say that we opened our first branch there last week. And at the same time as expanding access points for customers, we are focused on being more efficient in attracting new customers and reducing our average cost of acquisition. Now, this can be achieved through point-of-sale finance, as we've just discussed, or equally by converting a higher proportion of applicants to customers. Our hybrid strategy is a perfect example of how we aim to achieve this higher conversion rate. We've mentioned before that more consumers want to access finance digitally, but unfortunately, for a large proportion of these, their credit record is simply not strong enough to warrant a fully digital service. For these customers, we are now successfully providing hybrid services in Poland and in Mexico, where the initial journey is carried out online and the transaction completed in many cases by a customer representative. These three strands taken together, investing in technology, expanding our product range and building distribution, are forging the path to extending financial inclusion to more consumers and capturing the longer-term potential for the group. For most of you, you will not have heard anything new in this strategy, but what you will have seen is excellent progress on this journey and a consistently positive level of execution. So with that, let me pass you over now to Gary to take us through a more detailed operational review of the group. Gary.

Thank you, Gerard, and hello, everybody. I'd like to start by saying that I am delighted to be here presenting at my first set of IPF results. Having been with the group for nearly four months now, I've been really impressed with the passion, energy and quality of all of our colleagues towards our purpose of building a better world through financial inclusion. I'm very excited by the excellent opportunities we have to grow the business through a broadened product offering in order to deliver sustainable business for all of our stakeholders. Now, before I go on to the financials, let me take you through some changes in terminology and KPIs we have made, as well as introducing you to our financial model. IPF is a far broader business than the traditional home credit business it was when it was established 25 years ago. We have multiple products and distribution channels and multiple ways in which customers make repayments. For instance, over 40% of our new customer leads are now generated digitally, and around a third of our customer repayments are made with no involvement of a customer representative, but rather through their bank account, SMS, debit card, or in convenience stores. As a result, we have changed some of our terminology to both reflect our business today, but also to be more consistent with other consumer finance lending businesses. So credit issued is now referred to as customer lending and collections are now referred to as customer repayments. In addition, we have changed three of our core KPIs. Again, this better reflects who we are, but will also enable much easier comparison to other consumer finance lenders. Firstly, revenue yield. Historically, this metric was calculated as revenue divided by average net receivables after impairment provision. However, the majority of our revenue is recognised on gross receivables before impairment provision, which is consistent with how interest or revenue is charged in practice. Accordingly, we will now measure revenue yield as revenue divided by average gross receivables. So if we use 2019 as a benchmark, and this is not distorted by the pandemic, the group's revenue yield actually reduces from 90% on the old basis to 59% on the new basis. There's no change to the actual revenue figure, but this metric more accurately reflects the revenue we earn from our receivables and the amounts charged to our customers. Now, secondly, impairment rate. Previously, impairment performance was measured as impairment as a percentage of revenue. However, in reality, impairment is a function of gross receivables and not revenue. As a result, going forward, we will measure impairment performance or impairment rate as impairment as a percentage of average gross receivables before impairment provision. In this way, we are better assessing the amount of principal we actually write off. And again, using 2019 as a benchmark, the group's impairment to revenue ratio reduces from 27% to 16% when measured as an impairment rate. This more appropriately reflects actual impairment performance and is akin to what we call gross cash loss. The final change to our metrics is to the cost to income ratio. Historically, this metric excluded commissions earned by our customer representatives. However, given we have multiple repayment channels, we feel it is now better that all costs associated with serving our customers are included within costs, whilst income or revenue remains unchanged. Using 2019 figures again, the cost-to-income ratio increases from 44% on the old basis to 53% on the new basis. These new metrics link very closely with our financial model, which I will take you through now. So we have recently formalised our financial model and embedded it into all of our business decisions, performance analysis and planning. Some aspects of this model are not new, but we feel that it is important to clearly articulate what we are aiming to achieve both internally and externally. We will live and breathe by this financial model and we will only undertake activity which is consistent with it. It underpins both our strategy and, very importantly, our purpose. The first, most integral part of our model is that we must deliver a return on equity of at least 15%. This is a return which we consider to be sustainable and balances the needs of all of our stakeholders, customers, politicians, regulators, colleagues, debt providers, and, of course, shareholders. You will see that we have said 15% plus. And in practice, we believe this to be in a range of 15% up to 20%. any higher than 20% and we would not be appropriately balancing the needs of all of our stakeholders, which would be inconsistent with our purpose of creating a better world through financial inclusion. The delivery of an ROE of 15% supports the distribution of between 35% and 40% of our post-tax earnings in the form of dividends to shareholders. It allows us to fund receivables growth of up to 10% per annum, and it maintains our equity to receivables ratio at a consistent level of 40%. A target equity to receivables ratio of 40% is our current view of an appropriate balance sheet offering plenty of security both in good and more difficult times. Now with this financial model, you have in effect a virtuous circle as shown on the slide. With the 10% growth in receivables at an ROE of 15%, leading to an equivalent increase in dividends. Now there are two really important points to add here. Firstly, we can and do intend to grow receivables at a greater rate than 10% as we rebuild scale. This utilises some of the capital we hold in excess of our target of 40%. Indeed, this is the position we are currently in as our receivables growth was 14% in the first half and our equity to receivables ratio is currently 52%. Secondly, our returns are currently below our threshold level at 10.4%, mainly due to the reduction in the scale of the group during COVID-19. As a result, we intend to build our ROE to 15% over the next two to three years and steadily reduce the equity to receivables ratio towards our target as we deliver strong receivables growth rebuild the business following the pandemic and deliver our progressive dividend policy. So on this next slide, I thought it would be worthwhile showing the interlinkage between our financial model and our new KPIs. Our main KPIs going forward are set out on this slide together with the associated ranges to deliver an ROE of 15%. Now, I've shown a high and a low range for each of revenue yield, impairment rate, and the cost to income ratio. For funding, tax, and the equity to receivables ratio, there is just the threshold level. In addition, I have also shown the equivalent annualized metrics at the 30th of June 2022, so you can see how these metrics will need to move as we progress towards our financial model. And also for reference, I have shown the metrics at the end of 2019, so pre-pandemic. Starting with the revenue yield, here we have a range of 53% to 56%, which is based on our current product structure and today's regulation. Now, this is a lower, more sustainable yield than the equivalent group revenue yield of 59% in 2019, and reflects a number of factors. Firstly, the impact of the change in rebates in Poland in 2020, which means that we refund more of the service charge back to customers when they repay their loans early. Secondly, changes in the yield at IPF Digital due to the closure of Finland, which delivered a relatively high yield, and also due to reductions in the level of price caps in the Baltics. Thirdly, there has been overall price reduction in European Home Credit over the last three years due to changes in regulation and in response to competition. On the impairment rate, we have a target range of between 14% and 16%, which is comparable with 2019. We are well below that at the moment due to this distorting impact of COVID-19. But we expect this to increase as we regrow the business. And I'll come back to this later. Next, we have the cost to income ratio. We have a range of between 52% and 54%, which is again consistent with 2019. Now, we are currently well above this level due to the reduction in scale during COVID-19. But as we regrow the business and maintain tight cost control, we expect to move towards this range over the next two to three years. On to funding, I've used a funding rate of 10%, which, after taking account of the cost of hedging, is around the rate we were at prior to the very volatile market conditions we are currently seeing. And finally, on to tax, a tax rate of around 40% reflects the group structure and we consider to be our normalised rate. So, these metrics taken together will deliver our target ROE of 15% plus. And we've actually included a worked example in an appendix to this presentation for those of you who would like to work through the detail. Now, clearly, each of our countries has a different income statement composition, and that reflects their credit risk and their respective regulatory funding and tax environments. We believe that each of our businesses is capable of delivering our target returns, and we have established similar KPI targets for each territory. We will rigorously manage each business to deliver those targets in order to deliver the target group financial model. So now, turning now to the financial results in the first half of 2022. As Gerard highlighted earlier, we are delighted to report that we've seen strong customer lending growth in the first six months of the year. Customer lending grew by 14% with standout performances from IPF Digital and Mexico Home Credit. IPS Digital delivered really strong lending growth of 32%, with Mexico growing at 90%, Poland at 60%, and Australia at 20%. In addition, we also saw strong growth of 25% in our more established Baltic markets. and it is encouraging to see our new mobile wallet beginning to gain traction, which expands our product range and will help bolster growth. We'd expect growth for IPF Digital to moderate a little for the year as a whole, reflecting the tougher second half comparative last year as the business began to recover from the pandemic. Subject to market conditions, lending growth of somewhere in the region of between 15% and 20%. Mexico Home Credit delivered an impressive performance again with customer lending growth of 24% as we continued to expand our customer representative network with the opening of 470 new agencies in the first half. This market continues to offer us significant potential and as Gerard mentioned, we have recently launched a new region in the Northwest which will open up even more growth opportunity. Similar to IPF, digital and subject to market conditions, we expect full-year lending growth to moderate a little to between 15% and 20% as the second half comparative gets tougher. European Home Credit delivered 5% lending growth in the first half, and this was definitely a tale of two quarters. As we set out at the time of the Q1 statement, demand was weak in the first quarter due to the combined impact of COVID-19 and the onset of the Ukraine war, affecting both customers and also our colleagues. This resulted in a small contraction of 2% in customer lending year on year in Q1. However, since then, And despite the backdrop of the rising cost of living, we have seen a steady improvement in demand and lending during the second quarter showed a year-on-year increase of 11%. This growth was delivered against consistently tight credit standards and reflects an excellent operational performance from all of our colleagues. We will continue to maintain a cautious approach in the second half of the year, and we expect full year lending growth to be at a similar level to the first half, given the tougher second half comparative. Now, on to receivables. The growth in lending has resulted in a 14% increase in closing net receivables to £770 million. The growth has been delivered despite an 18 million reduction from the collect out of the Finland and Spain receivables books, both of which are progressing really well and ahead of our expectation. And as I've just mentioned, the strong growth delivered in the first half is higher than our target financial model growth of up to 10% and is being funded through our capital resources, which are above target levels. Now, the chart on the bottom left shows that our current receivables book is still over 200 million, lower than the book of nearly 1 billion at the end of 2019 pre-pandemic. So we still have plenty of growth potential just to get back to those levels. It's also worth noting that part of the shortfall on 2019 is due to our overall higher provision coverage ratio at the end of June of 38% compared with a pre-pandemic level of 34% in 2019. We continue to maintain a robust balance sheet in light of the uncertain economic environment. I'd now like to turn to our core KPIs supporting our financial model. The group's annualized revenue yield has shown an increase from 48% to 50% in the first half. The revenue yield in Mexico home credit has increased from 77% to 87%, and it has returned to a more normalized level. This follows an artificially low yield during COVID-19 due to more accounts missing payments and ageing to the extent that revenue was no longer being recognised. IPF digital's yield also increased from 44% to 47%, reflecting the growth in our higher yielding newer markets of Mexico, Poland and Australia. Part of setting these improvements, the yield in European home credit actually reduced from 42% to 41%. And this was due to the ongoing impact of the moratorium in Hungary and the year-on-year increase of £10 million in customer rebates in Poland. We expect the group's revenue yield to increase to within the range of 53% to 56% in the medium term, as Mexico Home Credit grows to represent a larger proportion of the group's receivables book and yields continue to stabilise post-COVID-19. The overall annualised group impairment rate has increased from 6.5% to 7.5%. and notwithstanding the very strong level of receivables growth, which typically increases impairment, credit quality and the rate of customer repayments have been very strong in all markets. The impairment rate remains at an artificially low level, primarily due to the release of COVID-19 provisions. As you will recall, the first half of 2021 benefited by £20 million from COVID-19 provision releases, whilst the second half benefited by a further 12 million. So a total of 32 million in 2021 as a whole. In the first half of 22, we haven't seen any of those releases, but we have seen a benefit of approximately 5 million from an uplift in debt sale activity to more normal levels following lower activity during the pandemic. And finally on impairment, we expect the rate to rise to between 14% and 16% over time as we serve more new customers and regrow the business. Our annualised cost to income ratio has shown a small improvement from 65.8% to 65%. However, the ratio in the first half of last year benefited from the removal of all discretionary expenditure in the second half of 2020 during the peak of COVID-19. So if we look at the cost income ratio in the first six months of each half, the ratio has actually improved from 69% to 64%, reflecting the growth in lending and continued tight cost control. Now, as the book continues to grow and we regain scale, we expect our cost income ratio to move into a range of between 52 and 54%, similar to their level in 2019. The group delivered underlying profit growth of 45% to 33.8 million in the first half of the year. Now, that reflects an improvement in customer demand and robust customer repayments. This growth rate excludes the beneficial impact of the COVID-19 impairment provision releases on 2021 performance that I just mentioned. Now, our pre-exceptional EPS showed a reduction of 11.7% to 9.1 pence. However, excluding the benefit of impairment provision releases in the first half of last year, underlying EPS has increased strongly by 65%. Now, it's worth noting that the EPS calculation in the first half of 22 is stated before the impact of an exceptional tax credit of £11 million, which comprises three items. Firstly, we've recognised an asset of £31 million in respect of Poland following a favourable Ministry of Finance ruling. The ruling has confirmed the tax deductibility of certain expenses linked to intergroup transactions in respect of years 2018 onwards, which you may recall had been previously written off in 2017. We have now refiled our tax returns for 2018 to 2021 and we expect repayment during the second half of the year. The second exceptional item is for a charge of £15 million in respect of the EU's challenge against the UK's group financing exemption constituting illegal state aid. Following a recent general court decision in favour of the EU, the likelihood of recovery of the amounts paid over in respect of the group's finance company arrangements is now uncertain, and so the associated asset has been de-recognised. Thirdly, the Hungarian government announced a new extra profit special tax, chargeable on the financial sector and which is payable in respect of 2022 and 2023. The additional tax is aimed at raising revenue to support the armed forces in view of the ongoing war in Ukraine and protect households against rising energy costs. The additional tax is expected to amount to around £5 million in both 2022 and 2023. And given its non-recurring nature, the 2022 amount has been included as an exceptional item. The underlying tax rate excluding these exceptional items is expected to be 40% for 2022 as a whole. Now on to ROE. Our annualised ROE before the exceptional tax credit is 10.4%, up from 6.4% last year. As I said earlier, our overall ROE is currently below our threshold level due to the contraction in the receivables book during COVID-19. We expect to increase to our ROE target over the next two to three years as we regain scale and the impairment rate normalises. On to funding and capital. At the end of the first half, we have debt facilities of 571 million, comprising 408 million of bonds and 163 million of bank facilities. I'm really pleased to say that we have recently successfully extended 46 million of bank facilities, despite the difficult market backdrop. We continue to explore other funding opportunities to diversify our funding base, and we're also looking to access bond market as and when market conditions improve. Our average period to maturity is two and a half years, with the next major maturity being nearly 18 months away with the sterling retail bond in December 2023. And our current funding headroom of 68 million is sufficient to fund our significant growth plans into the fourth quarter of 2023. Our funding rate in the first half of the year was 12.2%, up from 10.6% in the first half of last year. And the increase reflects increased interest rates across all of our markets, as well as the cost of hedging, due to interest rate differentials between sterling, the euro, and the foreign currencies of each of our countries. We have a strong capital position, as I mentioned earlier, with an equity to receivables ratio of 52%, currently above a target of 40. And we will use this to fund growth and support our progressive dividend policy. So, to round up, we've delivered strong lending and receivables growth in the first half, Credit quality is very good, and we have a robust funding position and capital position to support our ambitious growth plans. On that note, I will now hand back to Gerard to give you an update on regulation and to talk about the outlook. Thank you.

Thank you, Gary. And now let's take a look at regulation across our markets. And I will do this by going through each of the ones one by one. So first of all, starting with Hungary, as you know, in Hungary, we've got this temporary COVID regulation and that was due to expire in June of this year. But it got extended once again, and now it's due to expire at the end of 2022. What I can tell you is that we don't expect any significant impact in our business from that because the number of customers who are now in the moratorium is actually quite low. If we move on now to Romania, what we see here is that there is a new type of regulation that's come in to deal with the COVID situation. But again, there are eligibility criteria. And so the number of customers we expect to be in that moratorium actually to be very limited. So very little impact on the business as we look forward. Then turning to Poland. Now, Poland is where we have the proposal to reduce the total cost of credit cap. And that's the one that's been around for more than six years now, I think. What I'd say here is that, as you heard from us earlier, we're cracking on with getting our new product strategy ready to test in Q4 of this year in Poland. And at the moment, in terms of this piece of potential regulation, there's no real parliamentary progress as we speak. Then we look at Romania once again, and that's because for probably more than two years now, there's been a debate going on there about introducing a total cost of credit cap. But once again, there is no real progress update at all, no parliamentary progress anyway. And finally, if we look at the EU Consumer Credit Directive, now this review has been ongoing for some time. We expect it will be completed sometime around the end of 2022. So no meaningful update for us to provide here today. And that's the run through of all of the regulation in all of our markets at this point in time. So with that now, let me turn to the wrap-up and just some comments on the outlook. Well, first of all, the one thing that we can consistently say is that our consumer segment will always need credit, but that credit needs to be provided responsibly, and that is what we are here to do. What you heard from us earlier is that we are expanding our product range and our distribution channels to meet the growing demand that we see in each of our markets. We're leveraging our investment in technology. That will help us insofar as it will reduce our own cost of running the business, but primarily it's aimed at improving our customer journeys. We're navigating the challenges that we see in each of our markets. Some of them, I suppose the majority, are to do with inflation, but also still the worries about the impacts of the war in Ukraine. But overall, the business, as you've heard from Gary this morning and you've heard from me, the business is in great shape. We delivered a very solid set of results in the first six months of the year. And we feel comfortable that the momentum that we've picked up, particularly in the second quarter in Europe, will carry through into the second half of the year. So a very solid set of results. Balance sheet in great health. Obviously, you've heard about the dividend. And now we'd be happy to turn to Rachel and take any questions that you might have for us on these results. So with that, I'll ask Gary to come back up now and join me for the Q&A session.

Okay, good morning everybody. First question from James Hamilton at Numis. Thanks, James. Could you comment on how you view the balance between growth and economic risk in each of our markets, please? And the second part, growth was very strong in Mexico. Could you tell us how much investment spend was made in future growth in the first half and how you expect this to develop in the second half?

I'll take the first part. So in terms of the growth versus economic risk, each of our businesses is treated separately, and each business has its own market-specific scorecard, and that is tailored to the situation in each country. And so that scorecard is adapted and changed based on the circumstances. So as we look at each country today and we think about economic risk, I suppose primarily we're thinking about the impacts of inflation, which are definitely going to feed through over the coming months. And so, as I said just a few minutes ago, our view would be if we see those impacts coming through in terms of customer repayment ability, then we would certainly trim the scorecards at the margin. So I think each business will be treated separately. Inflation, obviously, at the moment is a global phenomenon, but there are wide discrepancies on a market-by-market basis, and that's why we treat each of these individually.

In terms of the investment in growth in Mexico, if you look at the metrics in Mexico, it's had a pretty consistent level of growth over recent years. And in terms of revenue yield, the impairment rate, cost to income ratio, they aren't actually far from its target. So I wouldn't say there's been any incremental investment in growth in Mexico. There's probably a little bit more to come on the cost-income ratio as we go forward, potentially touch more on the impairment rate, but as a business overall I would say it's in a pretty consistent level of growth and its metrics are pretty much around where you'd expect the business to be.

Okay, now we've got a question from Marek, first of a number I believe. How have interest rate hikes affected your business and also how do you see it impacting the total cost of credit legislation in Poland?

There are two ways that we think about increasing interest rates in our markets. The first is the impact on our customer. And clearly, increasing interest rates generally make life tougher for our customer segment. The other side, however, is that a lot of the... regulatory type caps that you see in our countries are somehow related to base rates. So if we were to take Poland, I think was the question there. In Poland, there is a total cost of credit cap that relates to non-interest charges. So interest stands to one side. And there in Poland, where interest rates have been going up, the base is currently, I think, about 6.5. The way the formula works, you add 3.5 to that, so you get 10, and you can do 2x, so you can charge 20%. So in Poland, for every 1% increase, you effectively could double up. But we're not doing that because we're mindful of the impact on the customers. Two parts. On the one side, it impacts customers' ability to repay. On the other side, if we want to, it gives us the opportunity to increase prices.

Okay, now we've got a question from Ash Thomas. Can you help us understand how the digitisation of the process relating to credit impact underwriting and collections? They're cognisant of the experience in Provident in the UK where changes to workflow negatively impacted the business.

Okay, that's an interesting reference to Provident in the UK. To be fair, they did a wholesale change and their change there, and Gary will know this, their change there was to do with the number of agents they were employing, that the agents had to become full-time employees. As I remember, they changed their rota and how they had to go and see their customers. We're doing none of that. Absolutely none of that. What we're talking about here is digitizing parts of the customer journey to make it more efficient and effective for the customer. To some extent, it will help us on a cost side, but it's not really designed for that. It's designed to improve the customer journey. So I wouldn't really put those two scenarios in the same thing. I think they were entirely different circumstances.

Yeah, I'd probably add that clearly here with ourselves, the customer relationship with the customer representative doesn't change. It's the same customer representative serving the same customer, and that's really important.

Okay, we've had a number of questions along this theme around how do you assess the impact of a significant increase in inflation on the customer's ability to repay loans?

I suppose to some extent I might have picked that up earlier in two parts. One is as we think about increasing interest rates and whether or not we would increase our prices for customers. So we'd be mindful of that because inflation does impact our customer segment particularly because a lot of the inflation is feeding through to what I would call essentials. So food, travel, light, heat, those kinds of things. And that is where most of our consumers spend their money. And then the second part is what I mentioned earlier. If we see any deterioration in customers' repayment behaviour, then we will probably take action to trim the scorecard at the margins.

Yeah, I'd add as well, I mean, as I mentioned during the presentation, as a business, we've got a pretty robust balance sheet, in fact, a very robust balance sheet with a coverage ratio of 38% versus... Pre-pandemic at 34%. So in terms of how we look at the business, we've made sure that we are in a good position going into the difficult environment that we're in.

Okay, we've got a question here from James Lowen. The 15% ROE looks low versus what we've had in history in the risk profile. There is a plus next to it. Can you highlight whether there's a degree of prudence in that? So should we be focusing on the plus when considering the real aspiration of the business or whether we should focus on 15% and should that reflect the ROE going forward for a more sustainable and secure business?

Yeah, 15% plus. 15 is the minimum and that's in terms of when we're assessing business activity, something's got to deliver a minimum 15% ROE. We do consider 15% plus to be 15% to 20%. That's what we believe is sustainable. It meets the requirements of all our stakeholders. So yeah, 15% is the low end, probably 20% is the upper end. Somewhere in that range is where we believe that we'll be serving our customers, meeting the needs of shareholders, debt holders and every other stakeholder. So yeah, 15% bottom end, but 20% would be the top.

Okay, and this one relates to Poland actually. Can you discuss the dynamics in lending in Poland with regards to the Ukrainian refugees in that market?

Sure. Well, I suppose when we last updated the market, we talked a lot about this because we had seen a significant impact on consumer sentiment in Poland, which is only natural given the sheer scale of the refugee crisis and how it hit Poland. And to be fair to the Polish people, how generous they were in taking in all those refugees without question. And so what we saw then was a significant drop in consumer sentiment and that then translated into a drop in consumer demand for credit because people were just uncertain as to what the impacts would be on them personally but on the country as a whole. That lasted from probably March, April and then into the very start of May. But then as we got into the second half of May and particularly June and now into July, Customer sentiment has come back a reasonable amount, but in particular customer demand for credit in our segment has come back a reasonable amount. And that's not to say that the Polish people or anybody else have now forgotten the issue with the Ukrainian crisis. It is still very much there and impacting all of them. But they need to get on with their own lives, and a lot of them need to borrow money, and we're there to facilitate that in the best way possible.

Okay, thank you. What is the target equity ratio in IPF subsidiaries?

Consistent with the group as a whole, 40% is what we believe our balance sheet should look like in terms of making sure that we're in a good position both through good times and bad. So we look at each business with a 40% equity to receivables ratio.

Okay, now we've had a number of questions along another theme, which is a question regarding bond buybacks, bearing in mind where the yield is on the Euro bond today.

Yeah, in terms of IPF, I mean, clearly, you know, through COVID, you know, we've probably, the receivables book contracted by around 300 million. And what is key for us is to regain scale. So our ROE at the moment is about 10%. If you think about the incremental business we're writing, it's more than that, probably 20%-ish if you look at the fixed cost base of around two-thirds. So we believe that the right thing to do is to grow. We've got strong growth at the moment. We want to get scale back as soon as we can to meet that target ROE of 15%. And, you know, if you look at our purpose, it's about serving more customers and creating financial inclusion and therefore growing the ROE to 15% plus is what we believe is the right and best thing to do for the group as a whole.

And the other thing I'd say is that, you know, just looking at the screens, the volume of bonds being traded is de minimis. So, you know, yes, the bonds are trading significantly below par. And I'm sure if we did go out with some money and buying some bonds, the price would react pretty much immediately. But why would we do that? Because, as Gary said, we want to invest this money in growing the business where we're going to get the best possible return for shareholders. So, yeah, I think it makes sense to follow our growth strategy.

Gary, you just mentioned fixed cost components of around two-thirds there in that previous answer. Ash is asking, can you give us some indication of what the components of those fixed costs are?

Well, obviously, a lot of our fixed costs are people costs, serving customers, the branches, the buildings that we serve our customer base. They're the greatest fixed costs. Clearly, we do have incremental costs in terms of recruiting new customers and then the customer representatives, commissions, which are more variable in nature. But if you look at it as a whole, we believe about two-thirds of the cost base is fixed in nature. About a third is variable.

And we took out a lot of costs during the COVID restructuring. And it would be our view that the cost we took out there was, to some extent, structural in nature. And we took out about 1,200 heads. Now, we stated the last time we updated the market that we don't have any intention of just simply re-recruiting 1,200 people. Our view is that we need to be more efficient. And so we'll build some of that efficiency back into the business now.

Yeah, and as we indicated today, the cost-income ratio, we'll look to get that down to around 52% to 54%. I think we're around 60% at the moment. So as we get scale, you should see that cost-to-income ratio come down because of that ratio of fixed cost to variable cost.

Okay, we've got a question here from Robert at Peel Hunt. You've observed that returns in different markets vary. Can you comment on which business lines or markets generate the highest returns and which have the lowest?

They're actually all reasonably similar, to be honest. They've all got slightly different structures. As you can see today, Mexico's yield is a little bit higher. Its impairment rate is clearly higher because of the credit risk there. But in terms of differentiators, we are confident that they all deliver 15% plus. There isn't a massive discrepancy between the 15 to low 20s that you might expect. We're confident that they all deliver our returns is probably what I'd say.

Okay. A couple of questions that have just come in from Andrew, from Duncan. I think there's one other as well. How are you thinking about funding development over the next couple of years? The increase in the bank facility is helpful, but what do you anticipate going forward?

Yeah, I mean, we're still working to refinance our bank facilities, but certainly as and when market conditions do improve, we'd like to be back in the bond market. We've obviously got the retail bond that matures next year. The euro bond obviously is a lot longer than that, but with the strength and the core of the business going really well, we would look to potentially refinance when market conditions are right and go back into those markets. Yeah.

Okay, this one's on Hungary. Can I ask, have you got any information regarding digitization plans specifically for sales activity in Hungary?

No, at the moment we're concentrating on digitizing in Mexico, where we see a huge opportunity. We will introduce digital options in every country wherever we have home credit, so that would include Romania and Hungary because we currently have a digital option in Czech and we clearly have a big digital business in Poland. So it's further down the track.

Okay, so we've got three questions here from Gary Greenwood at Shaw Capital. What are the lead indicators that you're currently looking at to determine if and when to change credit criteria? Second one is, what proportion of your cost base is reflected in discretionary investment for growth versus business as usual in the first half?

So if I take the first one, Gary, two Garys. So on those credit settings and tightenings, what we'll look at is customer repayment behaviour and the thing to remember, I guess, is that for the vast majority of our customers, they're on a weekly cycle. So we get pretty much instantaneous feedback on how customers are faring with inflation and their own disposable incomes and that feeds through literally day by day into repayment behaviour through the agents. So what we'd be looking at though is whether or not customers are consistently making full payments Or in some cases, they might go to partial payments, and that would be a little warning bell there. And then if there was some missed, then clearly we would trim around the scorecard edges, as I said.

Yeah, discretionary expenditure. I would say there's nothing out of the norm other than probably IPF Digital, where we've been investing a little bit more in new customer acquisition. As you can see with that business, clearly a great business, but obviously with the closure of Finland and Spain, it did lose some scale. So we've been very keen to regain scale, and therefore we've been investing a little bit more in marketing there. But I wouldn't say it's a

particularly unusual or significant amount more than more than normal levels okay and this is the third question from Gary and I think this might be the last one unless we get any through in the next couple of minutes how much revenue are you currently generating from value-added services

How much revenue? Well, actually, if you look at, I mean, we look at the business as a whole in terms of the overall revenue yield that each business can deliver. I mean, if you look at value-added service, we've probably got about 700,000 customers in total that have value-added services. You know, for us, we look at it as a yield as a whole. in terms of looking at the business. So we don't specifically look at what revenue yield do we specifically get from VAS. It's part of the overall product structure that we see, but we've broadly got about 700,000 customers that have value added services within the group.

Okay, that's it. We have no more questions for today.

Oh, fantastic. There was quite a few there. Thank you, Rich. Thank you, Gary. So just in closing, a very, very positive set of results for the first six months of the year. I'm feeling good because we're carrying a lot of momentum into the second half. And I just want to take this opportunity to thank all of my colleagues for their tremendous work on behalf of our customers because our teams are really dedicated to the people that they serve in each of our communities. So thank you guys for all of your hard work and dedication. It's really appreciated. Thank you, everybody, for joining us. And we look forward to catching up with many of you on the one-to-one sessions that we've got organized over the next week to 10 days. So thank you.