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.

Good morning. Thank you for the comments, Gerard. I've got three questions, if that's okay. The first is on the new loan product in Poland. Just be interested in how the fees or the costs of that compare to the existing installment loan product. The second question is on, you sort of touched on the change to affordability rules under the potential new regulation. Just be interested in a little more details on that and what that could mean for the business. And then thirdly, you touched on growth expectations next year of 10%. Just to be clear, does that, or extra impact from the rundown of Poland over the next however many months.

Thank you. Okay. So, let me take those questions in turn. So, on the card, the loan stroke credit card, as you would expect with a credit card, there would be various fees. But probably the easiest way to look at it is It will be a standard card that will go out with a loan effectively embedded. So, if you were my customer, as an agent, I would come to you, you would ask for a sign of a slotted loan, and I would say, well, our priority is a credit card or loan card, and I would explain the features of that. And then we would sign you up, and that would just have our standard fee for our account to go into detail today in terms of what those fees are, because we're testing in the market. But we're reasonably clear on how it will all work. But in any event, this is going to be a cheaper product for the customer, clearly, than the current product that we have out there. But there won't be any unusual fees. It will be very standard because most important for us is customer affordability. And our customers always think about what it is they have to repay on a weekly or monthly basis. So whatever way we structure a product and whatever fees are in there, whether it's interest or fees, and there's a split between those, all of that has to be affordable for the customer. Now, in terms of the affordability rules, that one is a little bit tricky because the affordability rules, as I understand it, are still the basis. So, it's not absolutely clear exactly where those rules are going to land, but it does seem to be the case that the rules don't land on the 1st of January. They land later in the year. So, there will be a further period where Those new rules, I believe, won't kick in. Now, as we get more detail on that, we can obviously update in our next scheduled call. But what we've done here is taken what we believe is quite a conservative approach in terms of our understanding of what those rules are likely to be.

And then on the growth, Gary, do you just want to comment on the growth? Yeah, good morning, everybody. In terms of growth, the 10% that obviously Gerard mentioned was more as a BAU basis for our other divisions or businesses. In terms of Poland, we'd probably expect as the installment loan business repays down through the year, and we transition customers onto loan cards, we'd expect the receivable book in Poland to be broadly 75% of what you might expect at the end of next year. clearly it's a year-on-year reduction. So you'd want to take that off. If you're looking on a group basis at that 10%, you'd want to deduct the reduction that you might see from the Polish book overall. Broadly, you'd get into low single digits if you did that for the group as a whole, which is 10% with the rest of the group and a reduction for Poland. Excellent. Thank you both.

Thank you Stuart. We'll now move forward to James Hamilton from Numis. Please go ahead, your line is open. Hi there James. Can you hear me?

Yeah, we can hear you now James.

Okay, sorry. technical problem at mind. Could you comment about how you see the landscape changing in Poland and what you expect to happen from a competitive position in the marketplace given the changes? And following on from that, if you do think there might be a benefit to you in terms of competitive position given your strength and the fact that you already have a card product Do you think it's conceivable that the Polish business can recover in profitability and scale terms to where it is today?

Sure. Well, yes. I mean, it's a very important point, James, that clearly not everybody is going to be able to cope with these changes because the changes are quite significant. And I'm sure a lot of people... who knew our business, that we've been working on our solution there for two years. And it's fair to say not everybody has the capacity to do that. So we basically built the underlying technology that will serve this product and integrate it into an already existing business structure. And that is, to be fair to my colleagues, no mean feat. So I'm really, really delighted with the work they've put in there. Now, as I think about a lot of our competition in our particular segments on the bank underserved consumers in Poland, I'd be fairly positive by saying that quite a few of those competitors simply won't have the wherewithal to basically do what we've done. So, in short, I would expect to see some exit from the market. I'm not going to comment on particular names. But I would expect to see some people struggling. And I can also say that we're already aware that we're in where they're at. You know, some people are finding it hard both in terms of financing as well as thinking about changes that might be required under that. So, once we do have to go through this, let's call it a two-year transition period, we're comfortable with the product that we have and that we'll be able to roll it out successfully. We do think some competitors will exist. And that would give us the opportunity to build back the portfolio over time. But, you know, we're quite conservative in the way we put out our messages and our numbers. So, we have taken a conservative approach to this also. But our intention would be to build this business back up and still be the predominant player in the underbanked on the south market in Poland. Thank you.

Thank you, James. We'll now move forward to Mr. Rakesh Balasundaram from Anacap. Please go ahead. Your line is open.

Hi, guys. I hope you can hear me. Thanks for your time today. Just had a couple of questions. If I could maybe ask them both to start with. Just personally, where do you see the business shaking out currently in terms of gross yields, impairments, and cost-to-income ratios as you're scaling back up? Can you give a sense for, you know, what sort of proportional levels that's coming down to sort of pre-COVID levels that would be very helpful? And the second one is with regard to kind of, I guess, a model to hit about 20 million from the Polish regular exchanges on a PBT basis. Can you give us a sense for what that is on a proportional basis? Obviously, this is sort of doing 100 million plus PBT pre-COVID. you know more recently a bit lower because of that because it's upscale book and coming out of COVID so if you can give us you know an idea for the base on which that 20 million you're sort of modeling and and what that looks like as a proportional impact both at a group level and and sort of at a Polish business level that that'll be super helpful sure cool yeah I'll I'll take those I'll start with the the first one in terms of

The overall metrics, I mean, I think probably firstly, if I deal with Poland first and what we expect, fundamentally we, as Gerard mentioned, we expect the economics of that business to be the same once we return the business to a receivables book of the similar scale. And that's our base assumption and the basis of this guidance is we've got a receivables book currently It's in the 250 to 300 mark for Poland, so we'd expect to build it back to that. What you would see is probably a lower yield. You'd see slightly better impairment and a more cost-efficient business, and that would be the driver of the 15% return. So on a similar book, you'd have a lower yield, but you'd have better impairment, and the team in Poland would do a great job from a cost-efficiency perspective. So that's That's the general economics of Poland, just to take it in. Now, in terms of the group, you know, we're not moving from any of our core targets that we've issued and would expect to move along to those again as we've indicated next year. There'll be some sort of moving parts from the transition in Poland, so if you look at Poland for next year, why do we think it's profit? And it will, it is still a profitable business, by the way. its profits are impacted by, obviously, a reduction in receivables, so less revenue. The cost base being maintained as we transition the receivables book. And clearly, we might see a little bit of impairment pressure as, you know, some of the customers we don't serve under the new rate cap, you know, payout over the duration. So that's the base of the 20 million reduction next year. And then if you look at 24, why do profits not particularly move forward much? That's really because we're really starting to rebuild scale. And as you'll be aware, with IFRS 9 and taking the impairment up front, when you're growing reasonably sizably, that really sort of hinders profits in year one. But clearly, as you get back to scale, that's when you get the boost in profits. So that's just how that flows through the income statement of the group. But overall, you know, we're not moving from, you know, our overall target, you know, revenue yield or the impairment rate or indeed our cost to income. In fact, we're being, you know, we're really heavily focused on cost efficiency. And I think, you know, we'd like to drive below our target from a cost effectiveness. And there's lots of initiatives that we're driving through the business to deliver that.

And we should also go over an ad. just for clarification here, that as we rebuild the portfolio in Poland, it's not going to become a card-only portfolio. In fact, we would expect it to be probably 50-50 cards and installment loans, and that can change. And the reason that that is the case is that despite the proposed changes to TCC, if we were to look at an installment loan under the new TCC cap, the APR that possible to charge on that actually comes out at around 68, 69%. So we envisage a business in Poland where for the best quality customers who don't want a card, they will continue to get an installment loan and they would be our best ones. And then for those who aren't in that category, then they would have the card product. So it will be a mix of the two in the business in the future.

Yes. And to your second question about the scale on Poland and the group, I mean, clearly the profit impact is the same on both. So as I mentioned earlier, if you took Poland, its receivable book is in that between the 250 and 300 million pound mark. So I think if you work backwards in terms of looking at our equity to receivable ratio, you know, the 15% ROE that we target, and, you know, tax rate in Poland of low 40s, you'll see that, you know, you'll ascertain what level of profitability that business delivers to the group as a whole.

Great. Thank you.

Thank you, Mr. Rakesh. We will move on to Mr. Nik Laisiek. Please go ahead. Your line is open.

Hi, morning all. It's Nick at Canaccord. I guess you might be reticent to kind of have views on the political backdrop in Poland, but I just wondered if you had any sort of thoughts on the potential resolution of these sort of blocked payments from the COVID-19 Recovery Fund and the Cohesion Fund that have been held back from Europe as to sort of timings on how that might resolve.

I'm not sure I want to be a political pundit, but I'll tell you what my understanding is. So for those in the call who might know what Nick's referring to, clearly, you know, Poland has what you might call an uneasy relationship with the European Union at the moment, and has been the case for some time. And the genesis of the biggest part of that unease some changes to the judicial system that were brought in a number of years ago that really upset the EU. Now, the EU has effectively withheld these funds, let's call them COVID funds, until Poland comes to the table and agrees to effectively rewrite what they had changed. For a long time, there's been absolutely no movement on that, and the architect of all those changes was the Minister of Justice, Mr. Jobrow. He's in very firm in his view that there should be no political interference from the EU on this. However, Poland would like to have this money, and Jobrow is the Minister of Justice, and he's the leader of one of the minority parties in the coalition. So, his stance is, I'm not willing to go back on what I put in place. The government itself would like to get up in these funds. And probably about three or four weeks ago, we thought that there was a coming together, a meeting of minds of this, and some proposed changes were made, which When they were verbalized, it sounded like they were addressing the concerns of the EU. But as I understand it, once the EU went through them in detail, they were thoroughly dissatisfied. And so, those funds are still locked up. Now, it has to be said that the coalition government that runs the country is a grouping of parties that don't necessarily see eye to eye on multiple matters, this being one of them. So, it's actually quite hard to see when these funds might be released, because the Polish government will have to come to the table on these judicial changes. Now, it could be the case that that comes about when the largest party, the PiS party, they want to make, we believe, some changes to how elections are conducted. In particular, I think they'd like to make some changes along the lines of what we see in Hungary, where effectively greater weight is given to rural populations and rural voters, and clearly they will do that because the police party gets most of their votes from that area. So, there might be some trade-offs that happen further down the line, and included in the mix might be this judicial reform, but very hard to say because it's something that is purely politics in the best sense. but Poland could certainly do with the money, but at this point in time, there's no indication of size.

That's really useful. Thank you. Okay.

Thank you, Mr. Nick. We will move on to Mr. Alex Fife from Apollo. Please go ahead. Your line is open.

Hi, guys. Thanks very much for taking my questions. This new regulation in Poland. That affects only the front book, right? New loans, like the back book is unaffected by that?

Yes, correct. It's forward-looking, yeah.

Forward-looking, okay. And second question is just the size of a loan book in Poland is 250 or 200 million sterling today. How much of that is the loan card product versus the traditional installment product today?

Zero loan card product because there is no, you know, we're only in test mode at the moment. So we literally launched the card in the past month and what we have to do is clearly train our own customer representatives how to use this, how it works. And then for them to train them to explain that to their customers. So we're in the trial period at the moment. So you can look at that portfolio in Poland and just say that there is no loan card effectively at the moment because it's literally trial period.

Got it. Okay. And then last question. Someone asked earlier about the 20 million, up to 20 million impact in 23 and 24. Like what number that compared to? But I didn't quite understand what the answer was. The $20 million is on a base of what?

Well, basically, if you, and I'll just give you round numbers because you'll pick them up on the website and places like that. But let's say consensus in the market for us next year is $80 million. You would take $20 million off that. Let's say consensus in the market for 2024 is $90 million. You would take $20 million off that. Does that explain to you?

Yep, that makes sense. Cool, that was it. Thanks very much, guys.

Thank you. Once again, if you would like to ask a question, please press star 1 on your telephone keypad. It appears there is no further questions at this time. I'd like to turn the conference back to you, Mr. Gerard Ryan, for any additional or closing remarks.

Thank you, Priscilla. Okay. Well, thank you, everybody, for joining. Just very, very briefly, we've had a very successful quarter and a very successful nine-month year to date. Despite everything that's going on right now, we continue to see growth for the business in the move towards the end of the year and into 2023. We are being cautious. We are tightening our code settings, but we haven't seen to date any change to customer repayments behavior. We've had some really good wins on tax, some great work by our treasury team on bank financing and things like that. And so, all of that is really good news. However, the change to the potential change on the regulation side in Poland is quite significant for us, but we have been preparing for this for quite some time. And as I said earlier, for us internally, this feels like a cathartic moment because it literally has been hanging over us for six years. And now, today's the first day where we can come out and be able to say, this is what we've been working on. This is what we're trying at the moment. how we see it working, and say quite confidently that we believe once we get through the transition period that we'll get back in Poland to having the business with the hurdle rates that we require. So we feel good about that. So thank you to everybody who's joined. And as always, if you have any further questions, we're always available for calls or by naturally if you'd like to do that. And Priscilla, thank you very much for hosting the call for us.

Thank you for joining today's call. You may now disconnect.