International Personal Finance plc

Welcome to the International Personal Finance 2022 Q3 Trading Update Briefing hosted by Chief Executive Officer Mr. Gerard Ryan and Chief Financial Officer Mr. Gary Thompson. Today's conference is being recorded. I will now hand over to Mr. Gerard Ryan to begin today's conference. Please go ahead.

Thank you very much, Priscilla, and good morning, everyone, and welcome to our Q3 trading update call. As Priscilla just said this morning, I'm joined by Gary Thompson, our CFO, and together we'll take you through our trading performance for the quarter. Now, hopefully you've had a chance to read our trading update, which we published earlier today. During the call, I'll cover our trading performance together with some additional color on what we're seeing in each of our divisions. I will also provide additional details on the implications for our business of the likely changes in regulation in Poland and why we are comfortable that we will continue to have a thriving business serving our customers there. As usual, we'll have plenty of time at the end for Q&A. Now, let me start by saying I'm very pleased that the positive momentum we achieved in the first half continued through the third quarter. And in executing our strategy, we delivered a very good operational performance despite slowing global economic growth and the increasingly uncertain macroeconomic environment. We saw a consistent demand for credit throughout the quarter, and in meeting the needs of our customers with our home credit, hybrid, and digital offerings, we delivered a 15% increase in customer lending year-on-year, and that's the year-to-date number. This increase resulted in a 15% uplift in closing net receivables to 851 million, and I'm pleased to say that all of our divisions contributed positively to this sustainable growth. If we look now at each of our divisions in turn, IPS Digital saw very strong demand as we focused on rebuilding the business post-COVID and achieving our target returns. We delivered a 28% increase in customer lending year on year, and Mexico and Australia particularly strongly. In total, we are serving 267,000 customers through our digital division, and our mobile wallet is now available in each of our countries. The collectives of our businesses in Finland and Spain are also progressing very well. Now, our customer sentiment in each of our digital markets has regressed somewhat, It is fair to say that in Australia and Mexico, it feels as if it is predominantly based on the economic outlook, whereas in our European countries, the proximity of the war in Ukraine exacerbates this impact. Turning now to our Mexico home credit business, which delivered another excellent operational performance. The investment we made in expanding our customer representative network during the first half of the year, together with good customer demand, supported a 21% increase in customer lending and an 8% increase in customer numbers to 698,000. We also continue to execute our geographic expansion strategy with the opening of our first branch in Tijuana in July. Located in the northwest of Mexico, there are some 1.4 million consumers in our target segment in this area, and our onboarding of both customer residential services and new customers is progressing very well. Inflation and subdued economic growth are the key talking points in Mexico at this point in time. Our European Home Credit Division increased customer lending by 8% year-on-year, notwithstanding the challenges of the rapidly rising cost of living and ongoing concerns about the war in Ukraine. This growth reflects an excellent operational performance by our colleagues. The governments in most of these countries are actively implementing various forms of subsidies to ease the cost of living issues for the least well-off. And in some instances, we see specific tax increases in particular industries to help governments balance their budgets. Given the global impact of rising inflation, it will not surprise you that all of our key stakeholders would like to understand whether we have seen any changes in customer retainers' behavior. Although our customer segment spends a disproportionate share of their available income, on what I would call essential, so food, energy, and transport, and so are more likely to be hard hit by inflationary increases. I'm pleased to say that we have not seen any discernible impact on their repayment behavior. We have, however, just begun to see some early signs of reduction in customer demand for credit, and in light of this and the uncertain macroeconomic outlook, we have chosen to take a responsible and prudent approach to our lending criteria and have proactively tightened our credit settings for those consumers with higher credit risk profile. In practice, this means we are limiting lending to new, higher-risk customers and have tightened our debt-to-income criteria in some of our markets. If any of our key performance indicators worsen, we will not hesitate to tighten credit settings further to minimize any potential impairment impacts. We can make these changes very quickly, and equally, we can reset them when the macro economic landscape begins to improve. I'll move on now to regulation, and in particular, the potential changes in Poland. For those of you who have followed and invested in IPF for some time, you will be aware that we have operated very effectively under the total cost of credit rate cap that has been in place now since early 2016. You'll also be aware, however, that since December 16, there has been a threat of a significant reduction to the cap And although this introduction has been debated many, many times, no new legislation has emerged. In recent weeks, the proposal, which now includes potential changes to affordability rules and registry supervision, was debated and passed by the lower chamber of the Polish Parliament, so that's the Sen, and we expect it now to be debated by the upper chamber, so the Senate, before the end of October. The proposal will be scrutinised further during the parliamentary process and could, and I want to emphasise does this could still be changed, delayed, or abandoned. But our expectation now is the proposal will become lower by the end of this year. It is disappointing that as a result of the potential change, there will be an increase in the number of Polish consumers who are financially excluded. But based on the time and effort we have invested in our product and channel distribution, I am confident that we will continue to be the main provider of finance for the underbanked and underserved consumers in this very important market. Over the past year, you will have heard us talk about our plans to launch our very first loan card in Poland. Well, I'm pleased to report that we began trialing the card in the last month. The new offering features a revolving credit limit and a payment card that our customers can use both online and offline. and the credit card product is specifically excluded from the TCC regulations. A customer can use their credit limit by withdrawing cash from ATMs, or they can receive the cash from their customer representative, and we envisage that most repayments will be collected by the representatives, thus retaining the unique relationships we have with our customers. As this is a new product for our customer representatives and customers, We are taking a test and learn approach to understanding our customer's experience with the card. We will start with basic functionality and enrich this as our customers become more familiar with the product. Our customers are comfortable with repaying their loans in equal installments, and we therefore intend to replicate this feature from balances drawn down under the credit facility. So, just to be clear, when a customer draws down on the card, they will repay it in equal installments over a period of less than a year. In addition to the loan cards, we have also successfully expanded our range of value-added services, which we know from experience are very popular with our customer segment. Now if the draft legislation becomes low in its current form, we would expect a gradual reduction in our existing portfolio of installment loans written under the current cap and the build of a new loan card portfolio to a broadly similar customer base over a three-year period. In executing this transition, We estimate group profit for tax will reduce by up to 20 million in each of 2023 and 2024, after which we expect the Polish business will return to our social target of 15% or a week. Now, just to be clear, that 20 million is 20 million in each year. So, it's not 20 million in the first year and 40 in the second. So, if you're looking at consensus numbers that are out there, you simply take 20 million of 23 and 20 million of 24. Now, before we move on to our Q&A, I'd like to cover funding and some very positive news on the tax front. As I'm sure you already know, we maintain a very well-capitalized balance sheet, and our robust funding position is sufficient to fund our growth plans and our progressive dividend policies. At the end of Q3, we had debt facilities of $609 million and undrawn facilities and non-operational cash of $93 million. As a result of our very strong banking relationships, We have also made excellent progress in extending 100 million of bank facilities so far this year, of which 17 million actually was extended this month. Unsurprisingly, the group's blended cost of funding increased on the back of rising interest rates and the higher cost of hedging. And as we noted in our statement, the group's blended cost rose by 60 basis points since June of this year. And in positive news on taxation, You may also recall that at the time of our half-year results in July, we recognized that 31 million pound tax receivable on our balance sheet following a favorable ruling in Poland that confirmed the tax deductibility of certain expenses previously denied. Well, I'm pleased to say that we've received a refund of 10 million during Q3, a further 13 million earlier this month, and we're expecting a further cash refund of about 5 million in the coming months, and then the remaining 3 million to be offset through future tax payments. So let me bring all of this together before we move on to questions. Being there to support our customers during good times and more challenging periods is core to our purpose, and that is to build a better world for financial inclusion. We have a very successful nine months in the bag so far this year. And while the change in status of the proposed TCC proposal is disappointing, in many ways, truthfully, This feels like a cathartic moment internally in the business because this threat has been hanging over us for six years. And today, for the first time, we are in a position to clearly state how we will continue to serve our customer segment in Poland and confirm that following the expected two-year transition period, our Polish business will return to our threshold ROE of 15%. For the reasons already stated, we will adopt a more cautious approach to new lending in the coming months, but for 22 as a whole, we still expect to deliver around 15% year-on-year growth and very good credit quality. Our expectations for growth in 2023 are somewhat moderated, but we would still expect somewhere in the region of 10%. But clearly, we'll be mindful of any further changes that may be required if the economic outlook were to worsen significantly. In the 25 years since we began serving customers in our markets, we've proven just how resilient our business is. And we are confident that we will continue to navigate our business successfully in what looks like more uncertain times today. So with that, that is the update from me. And now Gary and I would be happy to answer any questions you might have. So Priscilla, if I can hand it back to you for any possible questions, please.

Thank you. As a reminder, if you would like to ask a question or make a contribution on today's call, please press star one on your telephone keypad. To withdraw your question, please press star two. We'll wait for a moment. We'll take our first question from Stuart Duncan from Peel Hunt. Please go ahead. Your line is open.