International Personal Finance plc

Good morning, everybody, and welcome. Now, over the next hour or so, Gary Thompson, our CFO, and I will take you through our financial results for the first six months of this year. If you've had an opportunity to look at the RNS we released this morning, then I hope you'd agree that we're going to be talking about a very credible set of results based on excellent operational execution. We have double digit growth in receivables, stable portfolio quality, strong cost control and profit before tax significantly up on the prior year. Now, I'll start by providing an overview of our results and I'll then do a recap of our strategy, which is consistent with what you have already seen before. And I'll highlight the progress we've made in adding new products and new geography and successfully digitising more and more of our manual processes. to improve our productivity and enhance our customers' experience with us. Then Gary will pick up and start with a reminder of our financial model and how we use that to guide our investment decisions. And he'll then explain our results in detail and show the progress we've made across our key performance indicators. Gary will also confirm our progress on returns and why we're reconfirming our dividend policy that we introduced last year. Now, because of how debt capital markets have changed over the last six months, Gary will also spend time explaining our funding strategy and how we're adapting our business to achieve our target returns despite increased funding costs. After that, I will provide some insights on our outlook for the business and we'll then have plenty of time for Q&A. Now, just regarding the Q&A, and I hope you're used to this by now. you should be able to see a dialogue box at the bottom of your screen. At any time during the presentation, please just type in any questions you have there, and Rachel will put those to us at the end of the process. Now, before I dive into an overview of our results, I thought it would be helpful to provide some context for what we're about to discuss. Our purpose is to increase financial inclusion by providing appropriate products and services to consumers who are excluded from what you and I might think of as mainstream finance. It is clear to us that the requirement for these facilities, those that we provide, is increasing all the time. driven by a combination of the negative impacts of high inflation rates and the reduced risk appetite of banks, which in effect marginalises even more consumers. In our view, it is at times like these that our business demonstrates its true value to society, providing valuable assistance to over 1.7 million consumers across multiple countries. We are always mindful to prevent over indebtedness, but wherever possible, we seek to provide financial assistance to our consumers, balancing their needs with those of other key stakeholders. It's a job that I feel my colleagues carry out in a very professional manner, and it is that which is the foundation for our continued success. So with that as our backdrop, let's get started. Now, as we announced earlier this morning, we delivered profit before tax of 37.8 million, up 12% year on year. We benefited from excellent operational execution as well as favourable exchange rate movements. And it is particularly pleasing to note that all three business divisions continue to be profitable in the period. Our strategy to rebuild scale, combined with consistent credit discipline and strong cost management, means that we're getting closer to our target return range, and our return on required equity for the period was just under 15%. We continue to maintain a very well-capitalized balance sheet, and we have sufficient funding in place to meet our growth projections into the latter part of 2024, albeit that the cost of that funding is increasing, and Gary will talk about that shortly. So based on another set of very strong results and with our equity to receivables standing at 52%, the board is happy to recommend an interim dividend of 3.1 pence per share, being one third of the previous full year dividend and an increase of 15% year on year. Now, as I mentioned earlier, these strong results were delivered through the excellent operational performance of all three business divisions. As you can see from the charts on the right, customer lending was up 5% and closing net receivables grew by double digit percentages in all three divisions. The story behind this growth, however, is much more positive than the numbers it might initially lead you to believe. And that is tied into the changes that we're implementing in Poland. But I'll let Gary explain that in more detail in a few minutes. What I can confirm is consistent customer demand and customer repayment behavior is showing no signs of weakness or deterioration. Because of the macroeconomic backdrop, however, our concerns about the potential impacts of high inflation on the disposable incomes of our customer segment, we have maintained tighter than normal lending criteria for our most vulnerable customers to protect them from over indebtedness and maintain our portfolio quality. So with this strong performance as a backdrop, let's look now at how we are progressing with our strategy. As I'm sure you know, we have three distinct divisions, all of which serve the same customer segment in their various markets. Even though we refer to them as European Home Credit, Mexico Home Credit and IPF Digital, the truth is that with effective execution of our strategy, the old distinctions between Home Credit and Digital are being eroded. This positive change is happening across three broad streams. The most visible change is apparent in the range of products and services we offer from each of the divisions and how we provide access to our customers. Whereas in the past, Home Credit would have purely been a provider of instalment loans in cash, it has now been transformed into a provider of small-sum cash loans, digitally provided loans, value-added services such as insurance and revolving credit products. Customers can access us through their customer representatives, but now more predominantly through our online portals, our call centers, and through dedicated customer apps. The second major area of change is coming about because of our investments in technology. More and more, our internal processes are being digitized, and this is benefiting both the customer in terms of improved experience, but also our own productivity, and that can be seen in our cost-income ratio. For example, in Mexico, more than 84% of our business in the field, and by that I mean business that goes through our customer representatives, more than 84% now comes through some form of digitized means. Our customer representatives continue to be the critical factor when we make a credit decision. But increasingly, our ability to access digital stores of customer data means our credit quality is improving and that can only be a positive thing. And then the final area of change relates to how we are organising and managing our businesses internally. Clearly, we are very focused on cost management and productivity, and this is effectively making the internal processes of our home credit business look more and more like a digital business as time progresses. Moving on now to Poland and the huge transformation we have underway in what is our largest business. I'm really pleased to report that the phased approach we have adopted to rolling out credit cards across all the region has proven to be exactly the right strategy. We now have national coverage, all of our customer representatives have been fully trained, and our sales practices and internal processes are all fully compliant with the new regulations. Now, just as a reminder, our credit card has been specifically designed to meet consumer and regulatory requirements in the Polish market. Whilst most of our customers would ordinarily deal in cash, the rollout of the card offers them very real benefits. The all-important relationship with our customer representative is maintained, but the card offers them the ability to shop online and get better value. To protect the customer from persistent debt, All drawdowns on the card need to be fully repaid within 12 months. Even though this is still a very new product, adoption of the card by both our customers and their representatives has exceeded our expectations. The average credit line on the card is about £625 and the average initial draw on the card is 80% of that, giving you an average credit balance of about £500. In June alone, we had 21,000 ATM transactions and more than 46,000 retail transactions, and that was an increase of over 70% month-on-month. Now, in terms of portfolio quality and customer repayment behavior, we are very pleased with the results to date. I do want to reiterate, however, that this is still a very new and immature portfolio, and it will take some time before we have enough performance data to talk consistently about the trends. By the end of the year, our expectation is that we should have somewhere between 120,000 and 150,000 cards in issue. And just as a reminder, we expect that over time, our portfolio will be at least 50% cards and the balance installment lending. And whilst talking about Poland, I should also note that we effectively implemented the new affordability rules in mid-May. And whilst these have clearly reduced the volume of business in the short term, this was already accounted for in our plans for the business. So very positive news in Poland. If we move now to Mexico... I'm sure you know there is a huge need for financial inclusion in Mexico, with around two-thirds of the population not effectively banked. Today, we have coverage for approximately 27.7 million of these consumers, and we are executing on our strategy to increase this coverage by over 50% to 43.3 million. With our 2022 results presentation in February, we talked about how we would achieve this goal by expanding around our existing branch network and also entering new regions. We started business in Tijuana, which you can see on the highlighted map here near the border with the US, in July of 2022, and we're really very pleased with how that area is progressing. A few months ago, we opened our second new region in Tampico, and we're now building out our team there and adding new customers. Both of these regions bring with them the opportunity to increase our coverage to several million extra consumers. Now, whenever we open new regions in home credit, we build these businesses in a very measured and very conservative way, as that is the surest way to guarantee a good quality portfolio and a profitable business. Although these two are still in their infancy, both Tijuana and Tampico will become important contributors to our overall growth in Mexico. And moving now to digital, a few weeks ago, Creditea, our digital business in Mexico, rolled out mobile wallets for the very first time. And this has gained traction very, very quickly, and we already have signed up more than 10,000 customers to this new app. This is further proof for us that we can make both home credit and fully digital products and services work for all of our customers in Mexico. Now, I mentioned in my introduction our strong social purpose, and that's to build a better world through financial inclusion. Whilst what we do for our customers every day fulfills that purpose, I thought it would be worthwhile mentioning a number of other areas where I believe my colleagues excel in delivering above and beyond that. Our board has now approved a new Responsible Business Framework, which formally sets out the positive difference we intend to make for all of our key stakeholders in the coming 12 months. This framework builds on the activities we have successfully completed to date, and that includes, for instance, our flagship community engagement programme known as Invisibles, which we started a couple of years ago and which seeks to highlight the difficulties experienced by those who are marginalised in society. This has now spread to several of our other countries and has won awards and is being supported by NGOs and politicians as a unique way of creating a fairer society. We intend to build on this programme in the years ahead, so we'll be reporting back on that in future. And as part of our Volunteer and Financial Inclusion Month, over 2000 colleagues dedicated their own time to help people in our communities. Now, each year we carry out our Global People Survey to ensure that we get direct feedback on how our colleagues are feeling about how we run the business and how we deliver for our customers. Our 2023 survey results came in just a few weeks ago, and I think it says a lot about our business that with 5,400 employees and 17,000 customer representatives, We achieved a response rate in excess of 95% and we had a 77% positive response rate to questions asked across a broad range of topics. These results perfectly highlight the strength of our culture and the shared sense of purpose within the organisation. In addition to engagement, the health and safety of our colleagues is a key priority. We have held the ISO 45001 occupational health and safety management standard in all of our European home credit markets since 2020. And I'm really delighted to say that in the first half of 2023, we achieved this same accreditation in Mexico home credit. And that's particularly important to us with 10,000 customer representatives there. Now, our work in this area is gaining recognition externally. And for the third year in a row, our Polish business received the Diversity in Czech certification issued by Poland's Responsible Business Forum. And also, our Mexico business received an award for Best Place to Work for Women. And these are just a couple of examples of the awards that our businesses have been winning over the past few months. So on that very positive note, let me hand over now to Gary, who's going to take us through our results in a lot more detail.

Thanks Gerard, and hello everybody. As Gerard set out in his introduction, we delivered a strong performance in the first half of the year, and one which I am pleased to report was ahead of our internal plans. Before going into the financial in more detail, I always like to start by giving a reminder of our financial model, which underpins both our strategy and our purpose. I am sure that many of you are now very familiar with this slide. Our financial model sets out the target returns we need to support our dividend policy, fund our growth, and ensure the balance sheet remains secure at all times. We look at our financial model as a virtual circle and delivering a return on required equity or RORE of between 15% to 20% is the most fundamental part of it. Moving clockwise around the circle on this slide, these returns enable us to pay a minimum of 40% of our earnings to our shareholders, allow us to grow receivables by up to 10%, It can be higher or lower, but we believe 10% is sustainable. And at the same time, we are able to maintain a robust balance sheet position with an equity to receivables ratio of 40%. The increase in receivables leads to an equivalent growth in dividend and so on, providing we continue to deliver our target returns. And I always like to stress that we target each division to deliver an RORE of at least 20% to ensure that we can deliver our group returns after taking account of central costs. In addition, every investment decision we make at IPF, whether it be capital or expenditure, changes to products or promotional activity within a particular market, is based on this financial model and must be capable of delivering a return of 20%. We use this model every day and every week in the business and have numerous examples of potential initiatives we have either not gone ahead with or indeed stopped because they were not capable of delivering our target returns over a reasonable timeframe. We support the delivery of our financial model with a rigorous focus on revenue yield, impairment rate and cost income ratio, which I will cover in more detail shortly. And finally, it is really important to recognise that our financial model is wholly consistent with our purpose of building a better world through financial inclusion and we are of the view that returns materially higher than 20% would not appropriately balance the needs of all our stakeholders. Now moving on to growth. Despite operating in competitive markets, we continue to see strong demand for our broad range of products. Our headline growth in lending was 5% in the first half. However, as Gerard has just explained, both our face-to-face and digital businesses in Poland are going through a significant transition, introducing credit cards and adapting to the new total cost of credit cap and affordability requirements. If Poland is excluded from this result, The remaining markets delivered an impressive 15% lending growth in the first half, despite tighter credit standards being introduced in the second half of last year. An important action we took to protect customers and the business in light of the uncertain macroeconomic landscape. As expected, our face-to-face and digital businesses in Poland combined saw a 16% contraction in lending in the first half. Now, we anticipate full-year lending in Poland to be a reduction of around 25% as the affordability rules, which came into effect on the 18th of May, have a bigger impact on lending. However, we expect the business to return to growth in 2024 and 2025 as it adapts to the new regulation and credit cards become a larger proportion of the receivables book. European Home Credit delivered 6% lending growth in the first half, despite a 13% reduction in Poland. It is worth remembering that the first quarter of last year was relatively weak due to the combined impact of COVID-19, and as you may remember, the onset of the Ukraine war affecting both customers and our colleagues. However, this year we have seen very good performances from Hungary, with growth of 26%, The Czech Republic returned to growth for the first time in a number of years, delivering 19%. And Romania continued to perform very well with 17% growth. We continue to monitor credit performance very carefully and will maintain our cautious approach in the second half of 2023. And taking into account the impact on Polish lending I have just mentioned, we expect Europe lending to show a full year reduction of around 5%. Mexico Home Credit delivered another good performance delivering lending growth of 5%. Whilst this probably looks a bit lower than you might expect, there are two very important factors at play here. Firstly, the first half of last year was particularly strong for Mexico, with growth of 24% when we saw a resurgence in demand as the country recovered from the pandemic. And secondly, we tightened underwriting in the fourth quarter of last year, which restricted volumes by between 5 and 10%. Mexico continues to offer us significant potential And the new regions of Tijuana, which reopened in 2022, and Tampico, which reopened in the first quarter of 2023, are both performing well. We expect second half lending growth to be around 8% to 10%, so more in line with our financial model as we come up against the more normal growth rate achieved in the second half of last year. IPF Digital delivered 3% lending growth in the first half of the year, but again, this was heavily distorted by Poland. There were very strong performances from the higher growth markets of Mexico and Australia, which both saw lending growth of 24%. And there were also very good performances from the more mature Baltic markets, which combined delivered growth of 13%. We continue to be encouraged by the growth in our mobile wallet product, both in the Baltics and now in Mexico, which we introduced in the first half. After taking account of the contraction in polling lending, we expect IPF Digital's lending growth for the year as a whole to be similar to the first half of the year. Now on to receivables. The growth in lending has resulted in a 10% increase in closing net receivables to £893 million, with all three divisions delivering similar levels of growth. This level of growth is in line with our financial model which I outlined earlier. It is also worth mentioning that our receivables book is now only £80 million lower than it was before the pandemic and I am very pleased with the progress we have made in the past two years to successfully rebuild scale whilst managing returns and paying our progressive dividend. In European Home Credit, Hungary's receivables grew by 26% in line with lending growth Romania was up 23% and the Czech Republic increased by 9%. Poland, as expected, saw a reduction of 4%. In Mexico home credit, receivables grew by 10% and we continue to maintain a disciplined approach to growth as we have learned from previous experience that it is very important to maintain operational processes and spans of control whilst growing in order to avoid impairment shocks. In addition, we ensure that when we open new territories such as Tijuana and Tampico, we adopt a steady approach to growth, building infrastructure and capability before looking to accelerate lending. This importantly results in a relatively shallow J curve from territory expansion, which means we can continue to deliver good, sustainable growth whilst maintaining our target returns. In IPF Digital, we delivered 11% receivables growth, with increases in Mexico of 46%, 29% in Australia, and 13% in the Baltics combined. Poland saw a 14% reduction, similar to the reduction we saw in our face-to-face business. And finally, before I leave this slide, the two collect-out receivables portfolios in Finland and Spain continued to perform really well, and due to the nuances of IFRS 9 impairment accounting, both remained profitable, albeit to a lesser extent than last year. The combined receivables books have now reduced from 4 million last year to around 1 million. And we expect the collect outs to be completed by the end of the year. And it is really worth reinforcing that in both cases, the cash we have collected net of costs has exceeded the carrying value of receivables on closure. And this is a perfect illustration of the strong cash generation of our receivables books. I'd now like to turn to the core KPIs I mentioned earlier that support our financial model. The group's revenue yield has strengthened by 4.4 percentage points over the last 12 months to 54.2%, and I'm pleased to say is now firmly within our target range. The yield in European Home Credit has strengthened by 4.9 percentage points over the last 12 months and now stands at 45.6%. This reflects the implementation and number of actions to bolster the yield, including some price increases in each of our markets, as well as a concerted reduction in promotional activity. I will add that price increases are only made after due consideration of rate caps, which are often linked to movements in local base rates, stringent consideration of customer affordability and also the competitive landscape in each of our markets. The revenue yield in Mexico home credit increased from 86.5% last June to 88.5% and has now returned to a more normalised level. This follows an artificially low yield during the COVID-19 period due to more customers missing payments, which resulted in more aged accounts on which revenue was no longer being recognised. IPF digital yield reduced from 46.7% a year ago to 45%, and this reflects a combination of factors, including the flow-through of a tighter rate cap in Latvia, the reduction in higher yield in Finland and Spain receivables during the collect-outs, the impact of the lower total cost of credit cap in Poland, and the growth in Australia, which is relatively lower yielding. These adverse variances have been partly offset by growth in Mexico, which does carry a higher revenue yield. We are always very disciplined and responsible in our lending decisions, and never more so than in difficult economic times. The close relationships we have with our customers also encourages a strong repayment ethos. Despite the increased cost of living in all of our markets, we have not seen any discernible impact on customer repayment behaviour, and together with our tight credit standards, the quality of our loan portfolio continues to be very good. The overall annualised group impairment rate has increased from 7.5% to 11.4%, which is fully in line with our expectations as impairment rates continue to normalise post-COVID-19. The rate remains below our target range of 14% to 16%, but we expect it to increase towards the range as Mexico continues to represent a larger portion of receivables. And finally on impairment, our overall impairment coverage ratio is currently 36.5%. Little change from the December 2022 year end, but higher than the pre-pandemic level of 33.5% in 2019. Now this roughly equates to 40 million of additional provisions, despite the tighter credit standards that we are now using. So I'm sure you'll agree a really robust position. Our cost to income ratio continues to show an excellent trajectory, improving from 65% 12 months ago to 57.4% at the end of June. Now this is due to the growth in lending, but importantly also continued tight cost control. And we have a rigorous focus on costs as we mitigate both the inflationary environment and an increased cost of funding. We are delivering process improvements through the deployment of technology, and we're also working on how we better leverage centres of excellence around the group to make us more cost efficient. These actions together with ongoing growth will continue to drive down this ratio to our target over the next two years. The group delivered reported profit growth of 12% or £4 million to £37.8 million in the first half of the year. This really good performance is ahead of our internal plans benefiting from strong operational execution and some favourable exchange rates which contributed about 4 million to the results. All divisions contributed profitable performances while also delivering the good growth I have just shown you. Our pre-exception EPS also increased by 12% to 10.2 pence. Our underlying tax rate remains 40% in line with last year, and the EPS calculation is stated before the impact of an exceptional tax charge of £4 million in respect of the temporary hungry special profits tax that we also reflected last year. As Gerard mentioned earlier, the Board has declared an interim dividend of 3.1 pence per share, which represents 15% growth on last year. The dividend is wholly consistent with our policy of paying 33% of the prior year, full year dividend at the interim. And the dividend is fully supported by our good performance in the first half, a strong balance sheet, and the board's confidence on the group's future prospects. Now on to returns. Now you may remember this slide from the year-end results announcement. Here you can see four charts showing the development of returns at a group level and for each of our three divisions. The solid green lines are the return on required equity, and that's at 40% of receivables. The dotted lines are RORE, excluding the benefit of COVID-19 provisions, releases in 2021, which you may remember. And the blue line on the group chart also shows the return on actual equity. For group, you can see that our annualised pre-exceptional RORE at 14.7% is very similar to the year end and is very close to the lower end of our target threshold. ROE based on the current level of capital is 11.3% and that's slightly down from 11.5% December due to favourable exchange rate movements that have increased equity. As previously guided, we expect our group returns to moderate in the second half as we continue to transition the Polish business to the new lower TCC and affordability rules. We then expect returns to improve again in 2024 with the aim of reaching our target returns in 2025. You can see here that both European Home Credit with an RORE of 21% and Mexico Home Credit with an RORE of 20.5% are both delivering returns around the 20% level we target our divisions to deliver. We expect Europe's returns to moderate a little in the second half due to the transition in Poland I just mentioned. And then finally, IPF Digital's RORE is currently 6.3%, modestly lower than 6.9% six months ago. The reduction mainly reflects the IFRS 9 impact of continued strong growth in receivables in Mexico, Australia and the Baltics, as well as the impact of the new regulation in Poland and reduced profits from the collect outs in Finland and Spain. Now, whilst IPF Digital is not currently delivering our target returns, we do see continued strong organic growth opportunities in our existing markets to deliver further scale and increase returns to our target levels in 2025. And as we have previously indicated, we will also continue to consider inorganic opportunities to reach our target returns in a shorter timeframe. So now onto funding and capital. At the end of the first half we had debt facilities of 609 million comprising 413 million of bonds and 196 million of bank facilities. We have successfully extended 39 million of debt facilities in the first half comprising 32 million of bank facilities and 7 million of the 10 million of retail bonds that we had been holding in Treasury from the December 2022 retail bond refinancing. Our average period to maturity is 2.1 years, with the next major maturity being the residual 39 million of retail bonds maturing in December 2023. Our additional funding requirement over the next 12 months is not significant due to the expected contraction in Polish receivables and our strong cash generation. As a result, our current funding headroom of £84 million is sufficient to fund our business plans into the third quarter of 2024. And we are actively exploring a number of options with our advisors to extend the debt maturity profile and refinance the Euro bond. Now, we have a strong capital position, as you're aware, with an equity receivables ratio of 52%, little change from the December year end and above our target of 40%. Now, the capital base has not reduced over the last 18 months due to 55 million of foreign exchange gains on retranslation of opening net assets, which has been taken to reserves. Excluding these gains, our equity to receivables ratio would have reduced to 46%. And then finally, as a reminder, we are holding the additional capital above our target in order to invest in growing the receivables book, build our group returns up to the minimum target level of between 15% and 20%, and finally, to maintain our progressive dividend policy. On to funding costs. Our funding rate in the first half was 14%, up from 12.2% a year ago. The increase reflects higher interest rates across our markets as governments target inflation as well as the cost of hedging due to higher interest rate differentials between sterling and the euro and the foreign currencies of each of our countries. As our hedging costs have increased quite a lot over the last 18 months, I thought I'd provide you with a little more detail. Our hedging policy is to match our local currency receivables with borrowings in the same denomination to provide certainty of cash flows and avoid significant volatility in the income statement from movements in exchange rates. Now, as a result, our borrowings in sterlings and euros, such as the euro bond and our retail bonds, are swapped through forward contracts into local currency when we onward lend to our markets. Now, with this mechanism, the margin on the sterling or euro bond is effectively added to the local base rate for determining the cost of funding for that market. So, for example, if I take the UK retail bond issued in December 2022, the margin over base rates in the UK for that instrument was around 850 basis points. If we assume... This is onward lent to Hungary, which, as you can see from the slide, has the biggest interest rate differential to the UK. The margin of 850 basis points is added to Hungary's base rate of 13%, meaning the overall cost of funding for Hungary is 21%. Now, along with Mexico, where the local base rate is 11.25%, these are the two countries which have led to a significant growth in the cost of hedging over the last 18 months. Now, we anticipate the group's overall cost of funding to show a modest increase again in 2024 as we refinance maturing fixed interest funding. And really importantly, we have been very mindful of the increase in interest rate environment. And this has been a key driver behind the actions we have taken to improve both the revenue yield and our cost income ratio. And moving on, as I set out right at the start, our financial model is underpinned by a stringent focus on revenue yield impairment rate and cost to income ratio. It's also dictated by the cost of funding I've just mentioned and the rate of tax that we pay. Now, we set targets for each of these metrics 12 months ago, and in light of strong operational performance over the last year, together with the global rise in interest rates, we have re-evaluated the targets for each of these metrics. Our previous target for revenue yield was a range of 53% to 56%. We are already operating in this range, and as the receivable book seasons and Mexico continues to represent a larger proportion of the group, we are of the view that a revised range of 56% to 58% is more appropriate. Now, our impairment rate remains unchanged at between 14% and 16%, despite that higher yield I've just talked about. This reflects strong operational execution and a robust balance sheet. We are making excellent progress on cost efficiency. Together with our growth ambitions and the actions we are taking, we are now targeting a cost income range of 49% to 51% compared with 52% to 54% previously. Our revised targets are supported by our internal financial forecasts, which support the delivery of target returns of between 15 and 20% after taking account of increased funding costs and an ongoing tax rate of approximately 40%. So to round up, we have again delivered strong lending and receivables growth in the first half. Credit quality remains very good, costs continue to be tightly controlled, and we have a robust funding and capital position to support our business plans. And on that note, I will now hand back to Gerard to talk you through the outlook. Thank you, Gary.

Now Gary has provided us with a very good set of insights on our performance for the period and explained how we are managing our business to deliver our targeted returns. So let me draw all of this together and then we can move on to Q&A. As you can tell from everything we've said in the past 35 or 40 minutes, we are very pleased with the execution of our strategy and the result it is delivering. Customer demand for our products and services is consistently strong. Customer repayment behavior is very stable and we have a strong balance sheet and plenty of funding headroom as Gary has just talked to us about. We are cognizant of the increased funding costs and we are working to offset that with our own actions to improve portfolio yield and deliver further productivity gains. There's no doubt that our transformation in Poland is a very significant undertaking. All of the early indicators are positive, and so we feel good about that. Our Mexico expansion is going to plan, and we're rebuilding scale in digital. Our expectation for the second half now is that growth and returns will moderate as our Polish business moves to a more cards-based portfolio. But all of that is in line with the plan we set out with our annual results in February of this year. Based on these results today and with our view of the next six months, my own expectation is that market consensus on full-year profit before tax will improve yet again. And that will be fully in line with our focus on bringing the business back to our target returns in the next couple of years. So with that, let's move now to the Q&A part of the presentation. And Gary and Rachel are going to come up and join me for this part of the session.

Good morning, everybody. Thank you for your questions. I've got a few financial ones to start for yourself, Gary. Firstly, from Stuart Duncan at Peel Hunt. Can you talk through the moving parts as to how we should think about IFRS 9? There are different parts of the receivables base are going, and we've got contraction in Poland.

Everybody loves IFRS 9.

I know. It's a tough first question. Before IFRS 9, we had a different accounting standard, IS39, that basically it was an incurred loss model. So when you issued a loan, I'll say £100, you didn't actually make any impairment provision until there were signs that there was adverse payment behavior. So you had a revenue stream and then it got hit a little bit later if there was difficulties with the customer. So it was a little bit more profits were a bit more front-ended. With IFRS 9, it's completely different. You take an expected loss approach and you make a provision on day one. So if you've got a £100 loan and the probability of default is, say, 10% and you, on average, lose £50 when someone defaults, 10% times 50, a five provision. So you book that provision on day one. So you take a loss when you issue a loan. then your profit builds up after that so you get to the same profit position but it just means that upfront you get the losses whereas under the old model it was a little bit the profits were a bit more front-ended and the way it impacts us is when you've got rapidly growing small businesses you tend to have a lot of that day one impact and basically you get a lag in profits and then on our collect out books of Finland and Spain you get completely the opposite They are fully provided for. As we collect them out, there is actually no impairment. So actually, they end up being profitable in collect out. So that's the dynamic you get. When you've got rapid growth, you get some IFRS 9 drag. We see that in Mexico home digital, a bit in Australia. But elsewhere, once you're in a normal growth pattern, it's pretty much already in the P&O and it doesn't distort things.

Interestingly, the fact that those collect-out books are always profitable shows you that our provisioning is actually very conservative.

Okay, thank you. Now, one on IPF Digital. What sort of scale do you think you need to deliver the target 15% to 20% RORE?

It's about, if you think about the growth rate we're currently doing, you need to exclude Poland a little bit, but in that sort of 15% receivables growth per annum, get to a receivables book of around 280, 290 million, that's when we'll be hitting our target returns. And as we've talked about with people previously, we expect that to be in around 2025.

Okay, thank you. We've got Jonathan here at ABG. A couple of questions here. You mentioned growth is forecasted to be more modest this year. Do you still expect growth in H2 versus H1?

Well, in every business versus Poland, certainly we do. We expect, as I said, just now for Mexico, we're expecting 8% to 10% growth in lending. Similar rates in IPF Digital and Europe Home Credit. It's just in Poland, we've guided that we expect the receivables book and lending to contract in the second half. That's what we're seeing. We're completely in line with what we're expecting. But overall for a group, the lending will probably be flat year on year, but that's really just Poland, all our other markets growing in line with where we expect them to be.

Great. Now, we've got an awful lot of questions around the credit card in Poland. The first one is about volume and yields, and then we get on to various other aspects of it. What is the outlook for volume and yields outside of credit cards in Poland?

In Poland, it's specifically whether we're excluding Poland. If we talk about the group as a whole, I'll just explain what's happening with growth, and I think we've been through the direction of travel in terms of revenue yield, I mean, fundamentally, in Poland, the economics of the card and our installment lending are pretty similar. You know, as we said in the presentation, we expect anything we do to deliver a minimum of 15% to 20% returns. Otherwise, we wouldn't be doing it. So the economics are very similar. We've guided that the receivables book in Poland overall this year will reduce by about 25%. We said that about 12 months ago. We're pretty much... totally in line with that, so completely going with where we expect it to be.

How many clients have you got with credit cards in Poland?

Oh, so I wonder if they mean how many clients have a credit card before they come to us. Well, I would say that virtually none of our customers would have a credit card. Some of them might, but they would be in the minority. So we have 53,000 customers now with cards. And as we stand here today, because that number is at the end of June, as we stand here today, that number is probably closer to 70,000, I guess. So I would say for most of our customers, having a credit card is a first-time event.

And what would be the average credit card limit?

Well, I think on one of my slides it showed £500. So the way it works is that the limit is about £625, which is about two-thirds of what our instalment loan would have been. So we're being conservative to start with. So about £625. And the average utilisation on that, so that initial drawdown, probably around 78%, 80%. And that's how you get from the £625 down to the £500, which I think was on my slide. So, but just in terms of versus the installment loan, probably travelling along at around two-thirds of the value of our average installment loan pre the new changes in there.

Okay. Talking about the payment licence that we need in Poland, does it need to be renewed?

The short answer is no. So what we have in Poland is what they call a small payment institutional license. I can't do it in Polish, but the translation is small payment institutional license. And that allows you to do what we're doing, which is to write business with a credit card under this license. And obviously we will be subject to lots of supervision. And obviously that supervision changes on the 1st of January 24 to the KNF. But the licence remains, and provided you abide by all the regulations, you hold on to that licence. Now, we've also mentioned that we've applied for the large payments institution licence. because that allows us to grow to be bigger and clearly we expect this to be a big business because we're building momentum as the months go on. So we've applied for that large payment institution licence and we're hopeful that in the coming months with successful negotiation we will be granted that licence.

Thank you. On to retail bonds, will it be renewed this year?

Well, we've got the 40 million retail bond, the stub of the retail bond that we refinanced coming up for maturity in December. We are working on a number of options. I set out that we were working on a number of options. Our short-term requirement is pretty minimal, mainly because of the Poland contraction we've talked about. More substantially, we are looking with our advisors, as I said, just to how we refinance the group for the more into the medium term to minimize our cost of funding because this business, as you've seen, it's got a great track record of generating cash. and we just want to make sure that we get the right funding costs for the group as a whole. So I'm not saying anything specifically is going to be refinanced but there are a number of things that we're working on for both this year and also for next year as well.

Great. On to the next question. Is the 13% lending contraction in Poland due to the transition to new regulation driven by the new affordability rules?

It's a combination. So there are two things that happened in Poland. One is the new TCC cap, which I think everybody understands by now. And our response to that was to introduce a new product, a new product structure that will be fully compliant, but also very appropriate for our customer segment. Now at the same time, on the 17th to 18th of May of this year, they brought in new affordability rules. And essentially what that really demands is that for slightly larger value loans, you have to have demonstrable income, you have to have proof of income. And we already know that a lot of our consumers don't because they work in the cash end of society. And so by virtue of those regulations, we've had to cut out a swathe of consumers who previously were actually very good customers of ours. You know, as in good customers in terms of borrowing and perfect repayment behaviour. So it's a sad day for us, but we have to be compliant. So I'd say the 13% reduction is a combination of our gradual transition to the credit card, but at the same time implementing these new affordability rules.

Okay. Now more generally, what are the main lending growth drivers?

Well, I mean, you've seen our lending growth was 5% overall in the first half, but that really is distorted by Poland. Throughout all our markets, there are strong demand for our broad range of products. And, you know, that's really underpinning that really good operational execution, both digitally, but through the face to face. Obviously, you know, you've got Poland, which is sort of doing the transition as we've just talked about. But really, you know, it's strong demand, good execution, you know, making sure our products are ones which our customers want.

Thank you. Why is impairment, why is the impairment ratio growing?

It's growing because it's normalising and, you know, that sort of sounds, what does that mean? During COVID, obviously, most businesses had really high impairment because we everybody booked a lot of provisions for COVID. And then what you've seen is some of those provisions come out. And, you know, you went through a period where really customers were just, They weren't spending, so actually we're just repaying. And because of what we talked about IFRS 9, you had not as much provision build as you'd normally get when you're growing. And so what you're seeing now is the impairment rate completely, completely in line with where we expect it to be. It's still lower than our target rate. We've talked about credit quality being really good. And really, really importantly for us, our balance sheet and our provision coverage ratio is very strong. You know, 36 percent is higher than it was pre-COVID, even though quality is better. So we're feeling pretty good about the strength of the balance sheet and the impairment rate is exactly where we where we expect it to be.

OK, and I'll stick with KPIs, actually. What are you planning to what plans have you got in place in order to meet the other KPIs and the financial model?

Well, as I outlined, I think that's the important thing. We've already taken a lot of actions around revenue yield. We've already taken a lot of action around cost. There's more to go. We're still deploying technology. We're still sharing best practice and sense of excellence. Overall, a lot of the actions are already underway and we, as I said in the presentation, that was really because we knew that funding costs were rising, we wanted to get ahead of the game and it's really just about continuing the momentum we've got in the business. There's nothing particularly significantly different in delivering the target yields and cost income and impairment ratios that will deliver our target returns.

And as we said, the team have done a fantastic job in executing that. It's a big, complex business, but to be growing and taking costs out at the same time is really a great result.

Yeah, and just on that point, costs were up 5% at constant exchange rates, but our countries have been 20% inflation rates. So to that point, it just shows the great work that has been done around the whole company.

Okay. Moving on to IPF Digital. Can you elaborate on the inorganic opportunities that you see for the business?

Well, I can't give any detail. I can confirm we're not targeting any specific business. But we do know that there are a lot of people out there in the digital space particularly who are struggling. And they're struggling because they can't get the funding or they're struggling with new regulation and they don't have a balance sheet as robust as ours so they find it difficult to make the scale changes that we've made. And so we keep an open eye on all of these things. I can tell you in Poland that we saw three exits in the first six months. So I think Tacto are out, Increditor are out, Cardina are out. So we see lots of people who are probably struggling at this point. And if an opportunity comes along and it would be beneficial to us in terms of tying up with our digital business, we would certainly have a look at that.

Moving on to a question from James Hamilton at Numis. In Mexico, how much of the cost growth is investment spend for future growth? Or should we expect improved credit quality to continue?

I think most of the investment in Poland is in building out the geography, because obviously we've opened up in Tampico and in Tijuana, and those, because they are very new, essentially you have to open up offices, you have to staff the offices, you have to bring on the agents, and you do all of that before you see your very first customers. So there's quite a bit of investment there, but we're doing it in a phased approach so that we don't have a very deep J-curve. It's quite shallow compared to what we used to do in the past. And equally, the business is growing, and that draws in cost. But at the same time, David and his team in Mexico are doing a wonderful job of trying to keep costs down. And as Gary said, Mexico suffers from inflation as well. So I think the investments that we're making there are investments for the future. So I'm happy to spend that money for want of a better description.

And Mexico's cost-income ratio is right. In terms of our new target range, it's already operating there. So to Gerard's point, the investment is not heavy investment when we go into new territory. We do it steadily, progressively, to ensure that the business keeps delivering its target returns.

And then the second part, I think James mentioned credit quality. So they are a touch above where we like, I think it's around 32%.

Yes.

And so we'd like to see that come back over time, probably back to about the 30% mark. So you'll see a little bit of improvement gradually come into the business there.

Okay, I've got another one on credit cards that's come through. How do customers repay? Do they use a bank account, cash collection?

It's a combination. So I think the first thing to point out, and this is really important, is that the credit card we've constructed is deliberately to suit our customer base. And the best example of that would be that every draw a customer makes on the card, they have to repay within 12 months. So they effectively repay 12 installments. So it's not like the credit card you and I would use where you can keep that balance open forever. Our customers need to repay it down in 12 installments, and that works for them. So what was the... So do they use a bank account or cash collection through the customer? They use a combination of both but the truth is what we want to do is we want to maintain that customer representative customer relationship and so I would expect the majority of repayments will be through the customer representatives. But we'll be giving customer choices.

Thank you. I think this is one of the last questions we've got, actually, from Ray Mayle at Panmure. We touched a little bit on competitive environment in Poland, but more generally, have you seen any other broader changes?

There is no shortage of competition, absolutely no shortage of competition. Clearly what we do see is that the banks have a lower risk appetite. They were coming down into the top end of what we would consider our customer segment, but truthfully it's not that attractive to them because it is reasonably small loans with extended duration to make it affordable for the customer. So we've seen the banks more or less withdraw from some of that space. I've mentioned a few exits that we've seen in Poland. I expect to see a few more of those. And certainly, I'd say Gary and I, as we travel around the businesses and talk to our teams, what we do see is that this whole we're a digital company, not a finance company, that kind of conversation has gone out the window. That's a busted flush for a lot of people there. They had stratospheric valuations but they had practically no profitability and that's a finite time period. So I would say plenty of competition but probably competition changing a little. The buy now pay later piece is quieter than it was. It had a really rapid climb. I would say it's come off a bit there. It's probably going to get more regulated and that will change the nature of competition. But there's never going to be shortage of competition. We're all here to serve our customers, and we're happy to have competitors.

Okay, well, I think that's it. I think if any more questions do come through, I can come back to people on a one-to-one basis.

Sure. And that's probably a good way to end. So we're always available if you want to talk to us about the business. We welcome you to either see us. You can come to Leeds. We've actually had people go to our businesses to see the business in action. And we'll come and meet you if that's what you prefer. Just very briefly, I want to do a shout-out to all of my colleagues, so our 5,400 employees and 17,000 customer representatives. You've done an absolutely outstanding job in delivering for our customers, and it's great for Gary and me to be up here representing you today. So thank you for that. And thank you very much for joining us. Any further questions, please, just give Rachel a shout. Thank you. Thank you. Thank you.