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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| International Personal Finance Plc | LSE:IPF | London | Ordinary Share | GB00B1YKG049 | ORD 10P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.50 | 0.47% | 106.00 | 105.00 | 106.00 | 106.50 | 105.00 | 106.00 | 116,884 | 16:35:14 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Personal Credit Institutions | 690.8M | 48M | 0.2155 | 4.87 | 233.89M |
From Apr 2019 to Apr 2024
TIDMIPF
RNS Number : 3179G
International Personal Finance Plc
01 March 2018
International Personal Finance plc
Full-year Financial Report for the year ended 31 December 2017
This announcement contains inside information
Key highlights
Hot Features
Premium
Ø Group - solid financial and operational performance
o Group profit before tax from continuing operations of
GBP105.6M, an increase of GBP9.6M including a GBP11.3M
positive FX benefit
o Credit issued growth of 6% led by IPF Digital
o Consistent credit quality management - group impairment
to revenue ratio at 24.4%
Ø Home credit
o Credit issued broadly flat
o Credit issued growth of 13% in Mexico and strong operational
recovery following earthquakes in Q3
o Very good portfolio quality in European home credit
o Collect-out in Slovakia and Lithuania completed successfully
Ø IPF Digital
o Strong top-line growth - credit issued increased by 44%
to GBP230.8M
o Strong growth in new markets - credit issued growth of
105%
o Established markets delivered good profit growth
Ø Robust funding and balance sheet position; dividend maintained
o GBP53M of new and increased three-year bank funding
o GBP189M headroom on undrawn bank facilities
o Equity to receivables of 47.0%, after exceptional deferred
tax charge of GBP30M
o Proposed final dividend maintained at 7.8 pence per share
Group key statistics from continuing FY 2016 FY 2017 YOY change
operations at CER
Customers (000s) 2,521 2,290 (9.2%)
Credit issued (GBPM) 1,145.0 1,301.5 5.9%
Revenue (GBPM) 756.8 825.8 1.5%
Impairment % revenue 24.4% 24.4% -
Cost-income ratio 45.3% 45.8% (0.5 ppts)
PBT (GBPM) 96.0 105.6
EPS (pence) 32.2 20.2
Pre-exceptional EPS* (pence) 32.2 33.7
----------------------------------------------- -------------------- ----------------- ------------------------
*see alternative performance measures below
Chief Executive Officer, Gerard Ryan, commented: "IPF delivered a solid operational and financial performance in 2017. We continued to serve creditworthy customers who might otherwise be financially excluded, while maintaining credit quality. Credit issued increased by 6%, with particularly strong performances delivered by IPF Digital and Mexico home credit. Looking ahead, we will progress our strategy to serve our customers responsibly within a challenging regulatory and competitive landscape, and optimise returns from our European home credit businesses to fund growth in IPF Digital and Mexico home credit, and deliver progressive returns to shareholders."
Alternative Performance Measures
This full-year financial report provides alternative performance measures (APMs) which are not defined or specified under the requirements of International Financial Reporting Standards. We believe these APMs provide stakeholders with important additional information on our business. To support this we have included an accounting policy note on APMs in the notes to the financial statements, a glossary indicating the APMs that we use, an explanation of how they are calculated and why we use them, and a reconciliation of the APMs we use to a statutory measure, where relevant.
Group performance overview
We delivered a solid financial and operational performance in 2017 and profit before tax increased to GBP105.6M. We generated an increase in like-for-like profit before tax of GBP5.3M primarily as a result of improved profitability delivered by IPF Digital's established markets. Overall, like-for-like profit in home credit was broadly flat reflecting an GBP11.4M reduction in our ongoing businesses offset largely by an GBP11.1M year-on-year increase in Slovakia and Lithuania arising from lower costs of closure. Stronger FX rates resulted in an GBP11.3M positive impact which was offset partially by incremental new business investment in IPF Digital of GBP7.0M.
2016 reported Like-for-like New Stronger 2017 reported
Profit profit movement business FX rates profit
investment
GBPM GBPM GBPM GBPM GBPM
------------------------ --------------- ----------------- ------------ ----------- --------------
Home credit 120.2 (0.3) - 12.3 132.2
Digital (9.3) 5.6 (7.0) (1.0) (11.7)
Central costs (14.9) - - - (14.9)
------------------------ --------------- ----------------- ------------ ----------- --------------
Profit before taxation
from
continuing operations 96.0 5.3 (7.0) 11.3 105.6
------------------------ --------------- ----------------- ------------ ----------- --------------
We delivered a 6% increase in credit issued as a result of strong growth in our Mexico home credit and IPF Digital businesses, and this resulted in growth in average net receivables and revenue of 7% and 1% respectively. We managed credit quality effectively and impairment as a percentage of revenue at 24.4% was slightly below our target range of 25% to 30%. The compression of revenue yields and our investments in driving growth and longer-term efficiency resulted in a slight increase in our cost-income ratio, up 0.5 ppts to 45.8%.
Market overview
The market for consumer credit continues to evolve in all of our markets. Consumers are increasingly choosing to apply for credit online and this has driven the increase in competition from digital lending operators and major retail banks, as well as more regulatory oversight from national banks and consumer protection authorities.
Notwithstanding these changes, it is clear that home credit will co-exist with digital credit offerings, providing access to regulated credit for people who might otherwise be financially excluded. The involvement of an agent at the customer's home allows us to gain a unique and more in-depth understanding of their financial circumstances and propensity to repay. This means we are able to lend with more confidence to creditworthy customers where a remote lending business cannot.
Regulatory update
There has been no update from the Polish Ministry of Justice on its proposal, published in December 2016, to reduce the existing non-interest pricing cap in Poland. We continue to be in dialogue with various interested parties to encourage a more positive outcome for both consumers and credit providers.
At the beginning of 2017, more stringent creditworthiness assessments were introduced in Romania which impacted growth in that market. As reported in our Q3 trading update, there were further regulatory changes which have since resulted in our business being supervised by the National Bank of Romania for the first time. This is likely to lead to a further tightening of credit criteria and a reduction in the volume of loans we are allowed to provide to customers in that market.
Our business in the Czech Republic has been granted a licence by the Czech National Bank. This follows, as previously announced, the introduction of legislation in this market requiring all non-banking financial institutions to obtain a licence to trade.
We operate within price cap environments in all our European markets with the exception of the Czech Republic, Romania and Spain, and expect pricing regulations to be implemented in these markets at some point in the future. A proposal to implement an APR cap of 18% for existing and new consumer lending is being debated in the Romanian Parliament and we are contributing to this discussion.
Strategy update
Our strategy is focused on delivering sustainable growth in our targeted markets, enhancing Group profitability and making efficient use of our capital base. We made steady progress in each of these areas in 2017.
Growth businesses - IPF Digital and Mexico home credit
Growing our digital lending business and demonstrating that the IPF Digital business model can deliver a good financial return are key strategic priorities for the Group, and we made good progress against both objectives. Focusing on providing a superior customer experience through product and process innovation helped deliver strong demand for our credit line product. In many of our markets this line of credit facility has replaced instalment loans as our core customer offering. In our new markets of Poland, Spain, Mexico and Australia, we continued to refine our credit scorecards and delivered strong receivables growth as well as improved credit quality and cost efficiency. In our established markets of Finland and the Baltics, we delivered further credit issued growth through smarter, risk-based pricing strategies, enhanced customer relationship management activities and increased penetration of our credit line product. We expect to deliver further strong growth and improved operational performance in 2018.
In Mexico, there are significant growth opportunities for our home credit business. We remain focused on expanding our geographic footprint, building our micro-business channel, and improving operational efficiency and customer penetration rates in selected longer-established branches. We opened six branches in the first half of 2017 which, together with those branches opened in 2016, now serve around 55,000 customers and we plan to open a similar number of branches in 2018. We also took the opportunity to review the operational efficiency of our established branches and decided to close two branches in Monterrey. Consequently, our results include a reduction of 16,000 customers and a charge of GBP1.9M for the write-down of the associated receivables portfolio and closure costs. Our micro-business channel, now available in the majority of our branches in Mexico, is growing well with around 16,000 customers and we expect further expansion in 2018.
Returns businesses - European home credit
We are focused on improving the sustainability of our European home credit businesses by creating more modern, efficient and higher credit quality operations that provide a good service to customers and continue to generate the cash and capital to fund growth opportunities and progressive returns to shareholders. We have done this in response to the regulatory and competitive market conditions in which we operate in Europe by offering customers a broader choice of more competitively priced products, and improving the efficiency of our operations through investment in technology.
We continued to roll out our agent mobile technology which will improve the customer experience, make the role of the agent more efficient and facilitate cost reductions. At the end of 2017, all agents in Hungary and the Czech Republic were using the technology and the implementation in Poland is expected to be completed in the first half of 2018. There has been no significant operational disruption as a result of these changes and agent feedback is supportive.
To enable us to serve more customers with digital offerings, we are leveraging our Provident brand with a Provident digital offering in Poland. This has been well received and around 15,000 customers are being served through this channel. We plan to introduce this offering in the Czech Republic in the first half of 2018.
In order to protect the business model, we continued to dedicate resource to working more closely with governments and other key stakeholders so that new legislation affecting our sector is beneficial for both consumers and providers of finance. In response to greater regulatory oversight of the consumer credit market we have also introduced more competitive rates on our home credit products in Europe through longer-term lending.
As reported at the half year, we simplified our business structure and created a Northern Europe region comprising our Polish and Czech businesses to complement the existing Southern Europe region of Hungary and Romania. This is enabling our teams to better share best practice and is expected to support the delivery of cost efficiencies over the longer-term. This management structure is now fully integrated into the business. In order to further simplify our financial reporting in alignment with our strategy, we have decided to consolidate all European home credit businesses into one reporting segment. Accordingly, in 2018 our segmented reporting will comprise European home credit, Mexico and IPF Digital.
Performance review
Home credit
Our home credit businesses delivered profit before tax of GBP132.2M in 2017 which comprised GBP129.0M from our ongoing businesses and GBP3.2M from our home credit operations in Slovakia and Lithuania, which are being wound down. The increase in profit delivered by our ongoing home credit businesses reflects a reduction in like-for-like profit of GBP11.4M before a GBP12.8M benefit from stronger FX rates. The like-for-like increase in profit in Slovakia and Lithuania of GBP11.1M, after a loss in 2016 of GBP7.4M, was driven by a strong collections performance together with a significantly lower cost base following the wind-down of these operations.
2016 reported Like-for-like FX rates 2017 reported
profit profit movement profit
GBPM GBPM GBPM GBPM
----------------------------- -------------- ----------------- ---------- --------------
Northern Europe 75.6 (24.9) 9.1 59.8
Southern Europe 40.3 11.3 2.9 54.5
Mexico 11.7 2.2 0.8 14.7
----------------------------- -------------- ----------------- ---------- --------------
Ongoing home credit 127.6 (11.4) 12.8 129.0
Slovakia and Lithuania (7.4) 11.1 (0.5) 3.2
Profit before taxation
from continuing operations 120.2 (0.3) 12.3 132.2
----------------------------- -------------- ----------------- ---------- --------------
Excluding Slovakia and Lithuania, the results for our ongoing home credit businesses are shown in the table below:
2016 2017 Change Change Change
GBPM GBPM GBPM % at CER
%
------------------------- -------- -------- ------- ------- --------
Customer numbers (000s) 2,284 2,064 (220) (9.6) (9.6)
Credit issued 991.3 1,070.7 79.4 8.0 0.6
Average net receivables 758.5 833.9 75.4 9.9 2.1
------------------------- -------- -------- ------- ------- --------
Revenue 687.9 721.7 33.8 4.9 (2.4)
Impairment (179.4) (166.7) 12.7 7.1 13.5
------------------------- -------- -------- ------- ------- --------
Net revenue 508.5 555.0 46.5 9.1 1.5
Finance costs (41.8) (46.8) (5.0) (12.0) (4.2)
Agents' commission (82.0) (85.5) (3.5) (4.3) 2.6
Other costs (257.1) (293.7) (36.6) (14.2) (7.3)
------------------------- -------- -------- ------- ------- --------
Profit before taxation 127.6 129.0 1.4 1.1
------------------------- -------- -------- ------- ------- --------
Northern Europe
Our Northern Europe region delivered profit before tax of GBP59.8M which reflects a reduction in like-for-like profit of GBP24.9M, driven primarily by intense competition in the Czech Republic and lower pricing introduced following the price cap on consumer loans which came into force in Poland in March 2016. In addition, we took the decision to increase our credit score cut-off threshold in Poland which resulted in a smaller but higher quality portfolio. The result for the region was offset partly by a GBP9.1M benefit from stronger FX rates.
2016 2017 Change Change Change
GBPM GBPM GBPM % at CER
%
------------------------- -------- -------- ------- ------- --------
Customer numbers (000s) 849 737 (112) (13.2) (13.2)
Credit issued 468.9 508.6 39.7 8.5 (1.3)
Average net receivables 403.3 424.0 20.7 5.1 (4.3)
------------------------- -------- -------- ------- ------- --------
Revenue 330.6 327.0 (3.6) (1.1) (10.1)
Impairment (76.2) (74.1) 2.1 2.8 12.2
------------------------- -------- -------- ------- ------- --------
Net revenue 254.4 252.9 (1.5) (0.6) (9.5)
Finance costs (21.7) (24.4) (2.7) (12.4) (2.5)
Agents' commission (35.5) (32.1) 3.4 9.6 17.7
Other costs (121.6) (136.6) (15.0) (12.3) (3.5)
------------------------- -------- -------- ------- ------- --------
Profit before taxation 75.6 59.8 (15.8) (20.9)
------------------------- -------- -------- ------- ------- --------
Credit issued for the region reduced by 1% in 2017 with 3% growth in Poland and a 16% contraction in the Czech Republic, due mainly to intense competition from banks, and payday and digital lenders. Average net receivables contracted by 4% reflecting the reduction in credit issued in the Czech Republic. The smaller receivables portfolio, together with a reduction in revenue yield from 82% to 77%, resulted in a 10% contraction in revenue. In Poland, our decision to implement increased credit score thresholds combined with price cap driven yield compression led to a reduction in revenue. In the Czech Republic, reduced revenue arose due to the contraction in the receivables book and a reduction in yield as a result of our strategy of serving customers with longer-term loans.
We continued to deliver a good collections performance which resulted in a 0.3 ppts year-on-year improvement in impairment as a percentage of revenue to 22.7%. The cost-income ratio for the region increased by 5.0 ppts to 41.8%, which reflected the contraction of revenue yields together with higher costs. The cost increase was driven by further investment in our Provident-branded digital offering in both markets together with higher levels of depreciation and increased IT spend largely arising from the rollout of our agent mobile technology.
In the absence of an update from the Polish Ministry of Justice on its proposal to further tighten existing cost of credit legislation, we will continue to operate in line with our strategy and manage our Northern Europe region to deliver a high level of service to our customers while optimising returns. We also expect to deliver progressive improvements in the cost-income ratio in 2018 as we see the benefits of agent mobile technology being used across the region.
Southern Europe
Southern Europe delivered improved profit performances in both markets, increasing total profit before tax for the region to GBP54.5M driven by good growth in Hungary and a significant contribution from debt sale profits in Romania. This result reflects like-for-like profit growth of GBP11.1M and a GBP2.9M positive impact of FX rates.
2016 2017 Change Change Change
GBPM GBPM GBPM % at CER
%
------------------------- ------- ------- ------- ------- --------
Customer numbers
(000s) 594 499 (95) (16.0) (16.0)
Credit issued 289.0 288.4 (0.6) (0.2) (5.9)
Average net receivables 205.5 237.7 32.2 15.7 8.7
------------------------- ------- ------- ------- ------- --------
Revenue 170.8 177.7 6.9 4.0 (2.4)
Impairment (35.2) (17.0) 18.2 51.7 55.3
------------------------- ------- ------- ------- ------- --------
Net revenue 135.6 160.7 25.1 18.5 11.5
Finance costs (11.5) (12.2) (0.7) (6.1) -
Agents' commission (22.2) (24.5) (2.3) (10.4) (3.8)
Other costs (61.6) (69.5) (7.9) (12.8) (6.8)
------------------------- ------- ------- ------- ------- --------
Profit before taxation 40.3 54.5 14.2 35.2
------------------------- ------- ------- ------- ------- --------
Non-banking financial institutions in Romania were required to operate under tighter creditworthiness assessment legislation from January 2017, and serving customers under this new framework resulted, as expected, in a contraction in growth rates in Southern Europe. For the region as a whole, credit issued reduced by 6% reflecting growth in Hungary offset by a 20% contraction in Romania. Average net receivables increased by 9% as a result of our continued strategy to offer higher value, longer-term loans in response to customer demand. Revenue contracted by 2% due to the lower yields earned on this longer-term lending.
We delivered very good collections with a strong, consistent performance in Hungary throughout the year and a progressive improvement in Romania following a difficult first quarter as we transitioned the business to operate under the new regulations. In the second half of the year, we also executed a number of significant debt sales, principally in Romania, and this contributed approximately GBP11M to profit growth in the year. We expect approximately half of this benefit to recur in 2018 as we move to forward flow agreements in both countries. The good collections performance together with the debt sale profit delivered an 11.0 ppts improvement in impairment as a percentage of revenue to 9.6% at the year end.
The cost-income ratio increased by 3.0 ppts to 39.1% which reflects higher levels of IT investment to support the digitisation of our business together with compression in revenue yields.
Like Northern Europe, we will continue to focus on transitioning our business in Romania to operate within the requirements of the National Bank of Romania Special Registry framework and improve the efficiency of our operations.
Mexico
Our business in Mexico delivered a GBP3.0M improvement in profit before tax to GBP14.7M, despite being impacted by two earthquakes in September. This result includes a GBP4.3M investment (2016: GBP2.5M) in geographic expansion and building our micro-business channel.
2016 2017 Change Change Change
GBPM GBPM GBPM % at CER
%
------------------------- ------- ------- ------- ------- --------
Customer numbers
(000s) 841 828 (13) (1.5) (1.5)
Credit issued 233.4 273.7 40.3 17.3 12.9
Average net receivables 149.7 172.2 22.5 15.0 10.9
------------------------- ------- ------- ------- ------- --------
Revenue 186.5 217.0 30.5 16.4 12.0
Impairment (68.0) (75.6) (7.6) (11.2) (7.4)
------------------------- ------- ------- ------- ------- --------
Net revenue 118.5 141.4 22.9 19.3 14.7
Finance costs (8.6) (10.2) (1.6) (18.6) (14.6)
Agents' commission (24.3) (28.9) (4.6) (18.9) (14.7)
Other costs (73.9) (87.6) (13.7) (18.5) (14.2)
------------------------- ------- ------- ------- ------- --------
Profit before taxation 11.7 14.7 3.0 25.6
------------------------- ------- ------- ------- ------- --------
Our objective in 2017 was to maintain the growth momentum achieved in Q4 2016 (8% annualised). We delivered credit issued growth of 19% in the year to August and, notwithstanding the disruption caused by the two earthquakes in September (which resulted in a contraction of 7% rather than growth), our teams worked hard to react to these events and achieved credit issued growth in the fourth quarter of 8% and 13% for the year as a whole. We also executed our programme of investment in our micro-business channel and geographic expansion, opening six new branches in the first half of 2017.
This growth delivered an increase in average net receivables of 11% and, with revenue yields remaining consistent year-on-year, revenue increased at a similar rate. The growth in credit issued was accompanied by an improvement in our collections performance and impairment as a percentage of revenue improved by 1.7 ppts to 34.8%. This is higher than our original guidance for 2017 but in line with the expectations set out in our Q3 trading update following the earthquakes. It also includes GBP1.5M of impairment arising from our decision to close two branches in the north of Mexico in order to focus on improved operational efficiency.
We continued to invest in growth which resulted in an increase in other costs of GBP10.9M at constant exchange rates (actual: GBP13.7M). Around half of this investment supported improved operating performances in our existing branches with the balance invested in our expansion programme and micro-business channel. For Mexico as a whole, this led to a small increase of 0.8 ppts in the cost-income ratio to 40.4%.
There are significant growth opportunities for our home credit business in Mexico and we expect to return to customer growth in 2018. We will continue to implement our new branch opening programme and build our micro-business channel to maximise these opportunities, while simultaneously focusing on managing selected longer-established branches to deliver improved operational leverage.
Slovakia and Lithuania
The collect-out of our portfolios in Slovakia and Lithuania was more effective than our original expectations and we reported a combined profit in 2017 of GBP3.2M compared to a loss of GBP7.4M in 2016. The result for 2017 is GBP2.2M lower than we reported at the half year reflecting an increase in the expected costs of the liquidation of our Slovakia business following a delay in the surrender of our operating licence to the National Bank.
IPF Digital
IPF Digital represents a significant growth opportunity for the Group and continued to develop well in 2017. Our established digital markets delivered a strong increase in credit issued and good profit growth to GBP18.5M, which was offset by the planned increase in investment in our new markets and head office capabilities. IPF Digital as a whole incurred a loss before tax of GBP11.7M.
2016 2017 Change Change Change
GBPM GBPM GBPM % at CER
%
------------------------- ------- ------- ------- -------- --------
Customer numbers
(000s) 194 226 32 16.5 16.5
Credit issued 150.2 230.8 80.6 53.7 43.6
Average net receivables 86.4 159.2 72.8 84.3 72.9
------------------------- ------- ------- ------- -------- --------
Revenue 58.1 104.1 46.0 79.2 67.6
Impairment (17.5) (42.9) (25.4) (145.1) (127.0)
------------------------- ------- ------- ------- -------- --------
Net revenue 40.6 61.2 20.6 50.7 41.7
Finance costs (4.0) (8.4) (4.4) (110.0) (100.0)
Other costs (45.9) (64.5) (18.6) (40.5) (30.8)
------------------------- ------- ------- ------- -------- --------
Loss before taxation (9.3) (11.7) (2.4) (25.8)
------------------------- ------- ------- ------- -------- --------
Demand continued to grow for our credit line and digital instalment loans, which drove a 44% increase in credit issued to GBP230.8M. Average net receivables increased by 73% which resulted in 68% revenue growth while impairment as a percentage of revenue increased year-on-year by 11.1 ppts to 41.2%. This reflects an improved credit performance in our established markets, offset by the increased weighting of new markets in our portfolio and the inclusion of the benefit of a one-off debt sale in our established markets in our 2016 impairment charge.
As previously guided, we invested an additional GBP7.0M in building our new markets of Poland, Spain, Australia and Mexico, and strengthening our head office capabilities and technology platform to deliver future growth. The strong increase in revenue offset these additional costs and resulted in a 17.0 ppts reduction in the cost-income ratio to 62.0%.
The profitability of IPF Digital is segmented as follows:
2016 2017 Change Change
GBPM GBPM GBPM %
--------------------- ------- ------- ------- -------
Established markets 12.4 18.5 6.1 49.2
New markets (15.4) (20.5) (5.1) (33.1)
Head office costs (6.3) (9.7) (3.4) (54.0)
--------------------- ------- ------- ------- -------
IPF Digital (9.3) (11.7) (2.4) (25.8)
--------------------- ------- ------- ------- -------
Established markets
2016 2017 Change Change Change
GBPM GBPM GBPM % at CER
%
------------------------- ------- ------- ------- ------- --------
Customer numbers (000s) 137 141 4 2.9 2.9
Credit issued 108.4 138.7 30.3 28.0 19.9
Average net receivables 70.9 109.5 38.6 54.4 44.8
------------------------- ------- ------- ------- ------- --------
Revenue 45.5 63.4 17.9 39.3 30.5
Impairment (7.6) (13.2) (5.6) (73.7) (57.1)
------------------------- ------- ------- ------- ------- --------
Net revenue 37.9 50.2 12.3 32.5 24.9
Finance costs (3.4) (5.8) (2.4) (70.6) (61.1)
Other costs (22.1) (25.9) (3.8) (17.2) (9.3)
------------------------- ------- ------- ------- ------- --------
Profit before taxation 12.4 18.5 6.1 49.2
------------------------- ------- ------- ------- ------- --------
Our established markets of Finland and the Baltics continued to grow strongly and delivered an excellent financial performance in 2017, reporting a GBP6.1M year-on-year increase in profit before tax to GBP18.5M. This was achieved through smarter risk-based pricing strategies, strong CRM activities and increased penetration of our credit line product, all of which delivered credit issued growth of 20%.
Average net receivables grew by 45% which generated a 31% increase in revenue. Credit quality remains excellent and impairment as a percentage of revenue was 20.8% compared to 16.7% in 2016, which included a GBP4.4M benefit from a one-off debt sale. The cost-income ratio improved by 7.7 ppts to 40.9% demonstrating the benefits of increased scale and tight cost control, while continuing to invest in generating growth.
New markets
2016 2017 Change Change Change
GBPM GBPM GBPM % at CER
%
------------------------- ------- ------- ------- -------- --------
Customer numbers (000s) 57 85 28 49.1 49.1
Credit issued 41.8 92.1 50.3 120.3 104.7
Average net receivables 15.5 49.7 34.2 220.6 201.2
------------------------- ------- ------- ------- -------- --------
Revenue 12.6 40.7 28.1 223.0 201.5
Impairment (9.9) (29.7) (19.8) (200.0) (182.9)
------------------------- ------- ------- ------- -------- --------
Net revenue 2.7 11.0 8.3 307.4 266.7
Finance costs (0.6) (2.6) (2.0) (333.3) (333.3)
Other costs (17.5) (28.9) (11.4) (65.1) (52.9)
------------------------- ------- ------- ------- -------- --------
Loss before taxation (15.4) (20.5) (5.1) (33.1)
------------------------- ------- ------- ------- -------- --------
Our new markets delivered another year of strong growth driven by Poland and Spain. We accelerated our investment in building consumer awareness of our brand and CRM activities, which resulted in strong credit issued growth of 105% to GBP92.1M, and average net receivables and revenue growth of over 200%.
Impairment as a percentage of revenue in these rapidly growing markets continues to run at a relatively elevated level reflecting the greater mix of new customers who have a higher risk profile, and the normal learning curve for managing credit risk in new markets. We are continuously refining the credit settings and collections processes and, as expected, impairment as a percentage of revenue improved to 73.0% at the 2017 year end representing a 10.7 ppts improvement since the half year. Other costs increased by 53% to GBP28.9M reflecting increased expenditure on brand building and CRM activities. The cost-income ratio improved from 140% in 2016 to 71% in 2017 driven by increasing economies of scale.
Looking ahead to 2018 for IPF Digital as a whole, we expect to deliver continuing strong growth and an improved performance, driven by increased scale and further enhancements in impairment and cost-efficiency trends as our new markets grow and mature. Our previous guidance, based on accounting standard IAS39, was that we expected IPF Digital to deliver its maiden profit in 2018. Under the new accounting standard IFRS 9, the timing of impairment and therefore profit recognition, particularly in our new markets which are growing strongly, will be negatively impacted. For further detail on IFRS 9 see below.
Discontinued operations
The sale of our home credit business in Bulgaria in June 2017 resulted in a one-off accounting charge of GBP5.7M which, together with the trading loss of GBP2.7M generated in 2017, has been accounted for as a discontinued operation in accordance with IFRS 5. The 2016 comparatives have been adjusted accordingly.
Taxation
The taxation charge for the year on statutory pre-tax profit from continuing operations excluding exceptional items was GBP30.6M (2016: GBP24.8M) which equates to an adjusted effective rate of 29.0% (2016: 25.8%). This excludes a GBP30M one-off tax charge arising in respect of a change of tax law in Poland, which is explained further below. Including this item, the tax charge was GBP60.6M, which equates to an effective tax rate of 57.4%. It also excludes a GBP0.5M tax charge in respect of our Bulgarian operation, which was disposed of during 2017 and is reported as a loss on discontinued operations. The effective tax rate for 2018 is expected to be in the region of 33% to 35%, which assumes the impact of changes to our business operations in Poland that we are currently evaluating following the change in tax legislation on 1 January 2018.
As previously reported, our home credit business in Poland appealed decisions received in January 2017 from the Polish Tax Chamber (the upper tier of the Polish tax authority) with respect to the 2008 and 2009 financial years. The decisions for both years involve a transfer pricing challenge relating to an intra-group arrangement with a UK entity, together with a challenge to the timing of taxation of home collection fee revenues. In order to appeal these decisions, with which we strongly disagree, it was necessary to pay the amounts assessed. The payment is not a reflection of our view on the merits of the case and, accordingly, it has been recognised as a non-current financial asset of GBP37M (comprising tax and associated interest) in our Group accounts. At the time of our original announcement in January 2017, we said that we intended to initiate a process with the UK tax authority aimed at ensuring that the intra-group arrangement is taxed in accordance with international tax principles. This has now been initiated and, in response, the Polish court has stayed the hearings of the 2008 and 2009 appeals pending resolution of this process. The 2010 and 2011 financial years are being audited by the tax authorities in Poland currently. In the event that the Polish tax authority were to issue decisions following the same reasoning as the decisions for 2008 and 2009 we would need to pay c.GBP44M in order to appeal the cases. All subsequent financial years remain open to future audit.
As indicated in our statement of 4 October 2017, a comprehensive set of proposed changes to Polish corporate income tax was approved by the Polish Government's Council of Ministers. This came into force on 1 January 2018. The main impact for our business relates to the tax deductibility of certain expenses linked to intra-group transactions. Due to the absence of adequate transitional provisions in the new law, payments made prior to 1 January 2018 under long-standing arrangements have become tax ineffective. Historically, these amounts were treated as giving rise to a deferred tax asset, which has now been written off. The overall impact of this is a one-off deferred tax charge of GBP30M in 2017, which has been treated as an exceptional tax expense in the 2017 accounts.
Funding and balance sheet
We have a strong funding position with a balanced debt portfolio including a range of bonds at competitive cost across a number of currencies, wholesale and retail, with varying maturities; and a range of bank facilities from a core group of banks. In 2017, we added GBP53.0M of new and increased three-year bank funding, including increased commitments in Poland and Hungary, and two new banks. We also issued EUR12M (GBP10.7M) of new bonds as a tap of our existing 2021 bonds, and at the same time bought back EUR11.75M (GBP10.5M) of our 2018 bonds. In addition, our funding position in 2017 benefitted from the strong cash collection in Slovakia and Lithuania. At 31 December 2017, we had total debt facilities of GBP867.0M (GBP593.2M bonds and GBP273.8M bank facilities) and borrowings of GBP677.7M with headroom on undrawn debt facilities of GBP189.3M. In January 2018, we repaid GBP11.5M of Hungarian bonds and have further bond maturities in 2018 of GBP25.3M in May and GBP28.3M in November/December. We have significant long-term funding, with over GBP500M of bonds in place until 2020/21.
Our balance sheet remains robust, with an equity to receivables capital ratio at 31 December 2017 of 47.0%, after the exceptional deferred tax charge of GBP30M. While the capital ratio is higher than our target level of 40%, it ensures we have sufficient capital for growth while maintaining the resilience of the balance sheet, given the regulatory and tax challenges that the Group faces.
Dividend
Subject to shareholder approval, a final dividend of 7.8 pence per share will be payable, which will bring the full-year dividend to 12.4 pence per share (2016: 12.4 pence per share). The full-year dividend of 12.4 pence per share represents a total payment equivalent to approximately 61.3% of post-tax earnings from continuing operations for 2017. As a percentage of pre-exceptional profit after tax from continuing operations for 2017, it equates to a pay-out ratio of approximately 36.8%, which is modestly above our target pay-out rate of 35%. The final dividend will be paid on 11 May 2018 to shareholders on the register at the close of business on 13 April 2018. The shares will be marked ex-dividend on 12 April 2018.
IFRS 9
IFRS 9 is a new accounting standard that addresses accounting for financial instruments with the main impact on the Group being a change to the methodology used to account for loan balances due from customers. The key change compared to the old accounting standard is a shift from incurred loss to expected loss impairment accounting. Under IFRS 9, the Group will be required to record impairment charges at the inception of a loan based on the losses that are expected to be incurred and this will result in negative net revenue at the start of a loan. The new standard became effective from 1 January 2018.
The overall impact of the new standard will be a reduction in the carrying value of receivables on the balance sheet and our preliminary assessment is that it will have an impact of between 11% and 13%. The day one impact of this charge will be charged to equity after adjusting related deferred tax balances. After this one-time adjustment to receivables, IFRS 9 will have no impact on net revenue generation if a receivables book is stable both in terms of size and quality. This is because for every new loan issued where impairment is booked on origination, there is another older loan where net revenue is higher than under the current accounting standard. However, if a receivables book is growing, profit will be lower under IFRS 9 because impairment booked at origination is larger than the benefit arising from higher net revenue on older agreements. In contrast, if the receivables book is contracting, profit will be higher under IFRS 9 because the early impairment booked at origination is more than offset by higher net revenue on the older agreements. Under IFRS 9, our preliminary assessment is that profit in 2017 would have been around 6% to 8% lower than under the current accounting standard, principally due to the lower net revenue that would have been recognised in IPF Digital and our Mexican home credit business, where receivables portfolios are growing.
The financial covenants on our debt funding facilities are based on the current accounting standard and therefore are not impacted by this change.
IFRS 9 is an accounting change that has no impact on our business model, credit quality, cash flows and economic value or returns.
Board change
Jayne Almond, a non-executive member of our Board of Directors, has advised the Board that she will not be seeking re-election at the our upcoming AGM on 4 May 2018, and that she will step down with effect from the conclusion of the AGM, having served on the Company's Board since June 2015. The Board would like to thank Jayne for her service and valuable contribution in that time. A process to select a new non-executive director to replace Jayne is underway.
Outlook
We are focused on serving our customers responsibly within a regulatory and competitive landscape that we expect will remain challenging. We will continue to improve the sustainability of our European home credit businesses by creating more modern, efficient and higher credit quality operations that provide a good service to customers, and continue to generate the cash and capital to fund growth opportunities and progressive returns to shareholders. We expect IPF Digital to deliver further strong growth and an improved performance driven by increased scale and further enhancements in financial metrics as our new markets grow and mature. In Mexico, we expect to return to customer growth, expand our geographic footprint and micro-business channel, and deliver improved operational efficiency in our established branches.
Note
This report has been prepared solely to provide additional information to shareholders to assess the Group's strategies and the potential for those strategies to succeed. The report should not be relied on by any other party or for any other purpose. The report contains certain forward-looking statements. These statements are made by the directors in good faith based on the information available to them up to the time of their approval of this report but such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, like-for-like any such forward-looking information. Percentage change figures for all performance measures, other than profit before taxation and earnings per share, unless otherwise stated, are quoted after restating prior year figures at a constant exchange rate (CER) for 2017 in order to present the like-for-like performance variance.
International Personal Finance plc
Consolidated income statement for the year ended 31 December
2017 2016
Notes GBPM GBPM
--------------------------------------- ------ -------- --------
Revenue 4 825.8 756.8
Impairment 4 (201.1) (184.9)
Revenue less impairment 624.7 571.9
-------- --------
Finance costs (55.2) (46.8)
Other operating costs (135.2) (129.1)
Administrative expenses (328.7) (300.0)
Total costs (519.1) (475.9)
-------- --------
Profit before taxation - continuing
operations 4 105.6 96.0
Tax expense - UK (0.7) (3.1)
- Overseas (29.9) (21.7)
--------------------------------------- ------ -------- --------
Total pre-exceptional tax expense 5 (30.6) (24.8)
--------------------------------------- ------ --------
Profit after pre-exceptional taxation
- continuing operations 75.0 71.2
--------------------------------------- ------ -------- --------
Exceptional tax expense 5 (30.0) -
--------------------------------------- ------ -------- --------
Profit after taxation - continuing
operations 45.0 71.2
--------------------------------------- ------ -------- --------
Loss after taxation - discontinued
operations 8 (8.4) (4.3)
--------------------------------------- ------ -------- --------
Profit after taxation attributable
to owners of the Company 36.6 66.9
--------------------------------------- ------ -------- --------
Earnings per share - continuing operations pre-exceptional
2017 2016
Notes pence pence
--------- ------ ------ ------
Basic 6 33.7 32.2
Diluted 6 32.4 31.3
--------- ------ ------ ------
Earnings per share - continuing operations
2017 2016
Notes pence pence
--------- ------ ------ ------
Basic 6 20.2 32.2
Diluted 6 19.5 31.3
--------- ------ ------ ------
Earnings per share - including discontinued operations
2017 2016
Notes pence pence
--------- ------ ------ ------
Basic 6 16.5 30.2
Diluted 6 15.8 29.4
--------- ------ ------ ------
The notes to the financial information are an integral part of this consolidated financial information.
Consolidated statement of comprehensive income for the year ended 31 December
2017 2016
GBPM GBPM
------------------------------------------------------- ------ -------
Profit after taxation attributable to owners
of the Company 36.6 66.9
------ -------
Other comprehensive income/(expense)
Items that may subsequently be reclassified
to income statement:
Exchange gains on foreign currency translations 51.3 65.1
Net fair value (losses)/gains - cash flow
hedges (2.5) 1.5
Tax credit/(charge) on items that may be reclassified 0.2 (0.1)
Items that will not subsequently be reclassified
to income statement:
Actuarial gains/(losses) on retirement benefit
obligation 10.3 (10.0)
Tax (charge)/credit on items that will not
be reclassified (1.9) 1.9
------ -------
Other comprehensive income net of taxation 57.4 58.4
------------------------------------------------------- ------ -------
Total comprehensive income for the year attributable
to owners of the Company 94.0 125.3
------------------------------------------------------- ------ -------
The notes to the financial information are an integral part of this consolidated financial information.
Balance sheet as at 31 December
2017 2016
Notes GBPM GBPM
-------------------------------------------- -------- --------
Assets
Non-current assets
Goodwill 9 24.4 23.3
Intangible assets 10 33.1 32.6
Property, plant and equipment 11 23.2 23.4
Deferred tax assets 12 103.1 112.0
Non-current tax asset 13 37.0 -
Retirement benefit asset 17 2.1 -
-------------------------------------- ---- -------- --------
222.9 191.3
-------- --------
Current assets
Amounts receivable from customers
- due within one year 866.9 808.3
- due in more than one year 190.0 131.6
-------- --------
14 1,056.9 939.9
Derivative financial instruments 16 10.4 15.4
Cash and cash equivalents 27.4 43.4
Other receivables 19.3 20.8
Current tax assets 5.7 3.1
-------------------------------------- ---- -------- --------
1,119.7 1,022.6
-------- --------
Total assets 1,342.6 1,213.9
-------- --------
Liabilities
Current liabilities
Borrowings 15 (79.6) (22.4)
Derivative financial instruments 16 (4.8) (4.7)
Trade and other payables (145.7) (123.2)
Current tax liabilities (7.4) (16.5)
-------------------------------------- ---- -------- --------
(237.5) (166.8)
-------- --------
Non-current liabilities
Retirement benefit obligation 17 - (9.1)
Deferred tax liabilities 12 (10.1) (8.1)
Borrowings 15 (598.1) (600.4)
-------------------------------------- ---- -------- --------
(608.2) (617.6)
-------- --------
Total liabilities (845.7) (784.4)
-------------------------------------- ---- -------- --------
Net assets 496.9 429.5
-------------------------------------- ---- -------- --------
Equity attributable to owners of the
Company
Called-up share capital 23.4 23.4
Other reserve (22.5) (22.5)
Foreign exchange reserve 60.0 8.7
Hedging reserve (1.2) 1.1
Own shares (47.6) (50.8)
Capital redemption reserve 2.3 2.3
Retained earnings 482.5 467.3
-------------------------------------- ---- -------- --------
Total equity 496.9 429.5
-------------------------------------- ---- -------- --------
The notes to the financial information are an integral part of this consolidated financial information.
Statement of changes in equity
Called-up Other Other Retained Total
share reserve reserves* earnings equity
capital GBPM GBPM GBPM GBPM
GBPM
--------------------------------------- ---------- ---------- ------------ ----------- ---------
At 1 January 2016 23.4 (22.5) (113.3) 439.6 327.2
---------- ---------- ------------ ----------- ---------
Comprehensive income:
Profit after taxation for
the year - - - 66.9 66.9
Other comprehensive income/(expense):
Exchange gains on foreign
currency translation - - 65.1 - 65.1
Net fair value gains - cash
flow hedges - - 1.5 - 1.5
Actuarial losses on retirement
benefit obligation - - - (10.0) (10.0)
Tax (charge)/credit on other
comprehensive income - - (0.1) 1.9 1.8
---------- ---------- ------------ ----------- ---------
Total other comprehensive
income/(expense) - - 66.5 (8.1) 58.4
Total comprehensive income
for the year - - 66.5 58.8 125.3
---------- ---------- ------------ ----------- ---------
Transactions with owners:
Share-based payment adjustment
to reserves - - - 4.4 4.4
Shares granted from treasury
and employee trust - - 8.1 (8.1) -
Dividends paid to Company
shareholders - - - (27.4) (27.4)
--------------------------------------- ---------- ---------- ------------ ----------- ---------
At 31 December 2016 23.4 (22.5) (38.7) 467.3 429.5
---------- ---------- ------------ ----------- ---------
At 1 January 2017 23.4 (22.5) (38.7) 467.3 429.5
Comprehensive income:
Profit after taxation for
the year - - - 36.6 36.6
Other comprehensive income/(expense):
Exchange gains on foreign
currency translation - - 51.3 - 51.3
Net fair value losses - cash
flow hedges - - (2.5) - (2.5)
Actuarial gains on retirement
benefit obligation - - - 10.3 10.3
Tax credit/(charge) on other
comprehensive income - - 0.2 (1.9) (1.7)
---------- ---------- ------------ ----------- ---------
Total other comprehensive
income - - 49.0 8.4 57.4
Total comprehensive income
for the year - - 49.0 45.0 94.0
---------- ---------- ------------ ----------- ---------
Transactions with owners:
Share-based payment adjustment
to reserves - - - 1.0 1.0
Shares granted from treasury
and employee trust - - 3.2 (3.2) -
Dividends paid to Company
shareholders - - - (27.6) (27.6)
--------------------------------------- ---------- ---------- ------------ ----------- ---------
At 31 December 2017 23.4 (22.5) 13.5 482.5 496.9
--------------------------------------- ---------- ---------- ------------ ----------- ---------
* Includes foreign exchange reserve, hedging reserve, capital redemption reserve and amounts paid to acquire shares held in treasury and by employee trust.
Cash flow statement for the year ended 31 December
2017 2016
GBPM GBPM
----------------------------------------------- ------- -------
Cash flows from operating activities
Continuing operations
Cash generated from operating activities 143.6 136.2
Finance costs paid (54.7) (44.3)
Income tax paid (94.0) (68.4)
Discontinued operations (2.7) (1.7)
Net cash generated from operating activities (7.8) 21.8
------- -------
Cash flows from investing activities
Continuing operations
Purchases of intangible assets (14.9) (15.8)
Purchases of property, plant and equipment (10.1) (8.2)
Proceeds from sale of property, plant and 0.7 -
equipment
Discontinued operations
Purchases of property, plant and equipment - (0.1)
Disposal of subsidiary, net of cash and 3.0 -
cash equivalents
Net cash used in investing activities (21.3) (24.1)
------- -------
Net cash used in operating and investing
activities (29.1) (2.3)
------- -------
Cash flows from financing activities
Continuing operations
Proceeds from borrowings 92.5 69.9
Repayment of borrowings (53.2) (41.7)
Dividends paid to Company shareholders (27.6) (27.4)
Net cash generated from financing activities 11.7 0.8
------- -------
Net decrease in cash and cash equivalents (17.4) (1.5)
Cash and cash equivalents at beginning
of year 43.4 39.9
Exchange gains on cash and cash equivalents 1.4 5.0
----------------------------------------------- ------- -------
Cash and cash equivalents at end of year 27.4 43.4
----------------------------------------------- ------- -------
Notes to the financial information for the year ended 31 December 2017
1. Basis of preparation
The financial information, which comprises the consolidated income statement, statement of comprehensive income, balance sheet, statement of changes in equity, cash flow statement and related notes, is derived from the full Group Financial Statements for the year ended 31 December 2017, which have been prepared in accordance with European Union endorsed International Financial Reporting Standards ('IFRSs') and those parts of the Companies Act 2006 applicable to companies reporting under IFRS. It does not constitute full Financial Statements within the meaning of section 434 of the Companies Act 2006. This financial information has been agreed with the auditor for release.
Statutory Financial Statements for the year ended 31 December 2016 have been delivered to the Registrar of Companies and those for 2017 will be delivered following the Company's annual general meeting. The auditor has reported on those Financial Statements: its reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498 (2) or (3) of the Companies Act 2006.
The directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly they continue to adopt the going concern basis in preparing this financial information (see note 22 for further details).
The accounting policies used in completing this financial information have been consistently applied in all periods shown. These accounting policies are detailed in the Group's Financial Statements for the year ended 31 December 2017 which can be found on the Group's website (www.ipfin.co.uk).
The following amendments to standards are mandatory for the first time for the financial year beginning 1 January 2017 but do not have any impact on the Group:
-- Amendments to IAS 12 'Recognition of deferred tax assets for unrealised losses'; -- Annual Improvements to IFRSs: 2014-2016 cycle; and -- IAS 7 (amendment) 'Disclosure initiative'.
The following standards, interpretations and amendments to existing standards are not yet effective and have not been early adopted by the Group:
-- IFRS 9 'Financial instruments' (for more detail see below); -- IFRS 15 'Revenue from contracts with customers (and the related clarifications)'; -- IFRS 16 'Leases' (for more detail see below); -- IFRIC 22 'Foreign Currency Transactions and Advance Consideration'; -- Amendments to IAS 40 'Transfers of investment property'; -- IFRS 2 (amendment)'Classification and Measurement of Share-based Payment Transactions'; and -- IFRIC23 'Uncertainty over Income Tax Treatments'.
IFRS 9 Financial Instruments
The Group will apply IFRS 9 from 1 January 2018. The Group has elected not to restate comparatives on initial application of IFRS 9. The full impact of adopting IFRS 9 on the Group's Consolidated Financial Statements will depend on the financial instruments that the Group has during 2018 as well as on economic conditions and judgements made as at the year end. The Group has performed a preliminary assessment of the potential impact of adopting IFRS 9 based on the financial instruments and hedging relationships as at the date of initial application of IFRS 9 (1 January 2018).
Classification and measurement
With respect to the classification and measurement of financial assets, the number of categories of financial assets under IFRS 9 has been reduced compared to IAS 39. Under IFRS 9 the classification of financial assets is based both on the business model within which the asset is held and the contractual cash flow characteristics of the asset. There are three principal classification categories for financial assets that are debt instruments: (i) amortised cost, (ii) fair value through other comprehensive income (FVTOCI) and (iii) fair value through profit or loss (FVTPL). Equity instruments in the scope of IFRS 9 are measured at fair value with gains and losses recognised in profit or loss unless an irrevocable election is made to recognise gains or losses in other comprehensive income.
There will be no impact on the classification and measurement of the following financial assets held by the Group: derivative financial instruments; cash and cash equivalents; other receivables and current tax assets.
There will be no change in the accounting for any financial liabilities.
Impairment
The impairment model under IFRS 9 reflects expected credit losses, as opposed to only incurred credit losses under IAS 39. Under the impairment approach in IFRS 9, it is not necessary for a credit event to have occurred before credit losses are recognised. Instead, an entity always accounts for expected credit losses and changes in those expected credit losses. The amount of expected credit losses should be updated at each reporting date. The new impairment model will apply to the Group's financial assets that are measured at amortised costs.
The Group expects to apply the simplified approach to recognise lifetime expected credit losses for amounts receivable from customers as required or permitted for IFRS 9. The Group's preliminary calculation of the loss allowance for these assets as at 1 January 2018 is around 11% to 13% greater compared to IAS 39.
Determining an increase in credit risk since initial recognition
IFRS 9 requires the recognition of 12 month expected credit losses (the expected credit losses from default events that are expected within 12 months of the reporting date) if credit risk has not significantly increased since initial recognition (stage 1) and lifetime expected credit losses for financial instruments for which the credit risk has increased significantly since initial recognition (stage 2) or which are credit impaired (stage 3).
When determining whether the risk of default has increased significantly since initial recognition the Group considers both quantitative and qualitative information based on the Group's historical experience.
The approach to identifying significant increases in credit risk is consistent across the Group's products. In addition, as a backstop, the Group considers that a significant increase in credit risk occurs when an asset is more than 30 days past due.
Financial instruments are moved back to stage 1 once they no longer meet the criteria for a significant increase in credit risk.
Definition of default and credit impaired assets
The Group defines a financial instrument as in default, which is fully-aligned with the definition of credit-impaired, when it meets one or more of the following criteria:
-- Quantitative criteria: the customer is more than 90 days past due on their contractual payments;
-- Qualitative criteria: indication that there is a measurable movement in the estimated future cash flows from a group of financial assets. For example, if prospective legislative changes are considered to impact the collections performance of customers.
The default definition has been applied consistently to model the probability of default (PD), exposure at default (EAD) and loss given default (LGD) throughout the Group's expected credit loss calculations.
An instrument is considered to no longer be in default (i.e. to have cured) when it no longer meets any of the default criteria.
Forward-looking information
Under IFRS 9 macroeconomic overlays are required to include forward-looking information when calculating expected credit losses. The short-term nature of our lending means that the portfolio turns over quickly, and as a result, any changes in the macroeconomic environment will have very little impact on our amounts receivable from customers.
Where extreme macroeconomic scenarios are experienced, we will use management judgement to identify, quantify and apply any required approach. We have not applied any overlays in the calculation of the loss allowance at 1 January 2018.
Modelling techniques
We have calculated PD, EAD, LGD and cash flow projections based on the most recent collections performance, including management overlays where we deem that historic performance is not representative of future collections performance.
The most recent LGD performance is not deemed to be representative of future collections performance due to operational changes implemented in 2017. As such, an overlay has been applied to the LGD parameters resulting in an increase in LGDs.
Hedge accounting
On initial application of IFRS 9, an entity may choose, as its accounting policy, to continue to apply the hedge accounting requirements of IAS 39 instead of the hedge accounting requirements of IFRS 9. The Group has elected to apply the IAS 39 hedge accounting requirements.
IFRS 16 Leases
IFRS 16, which has not yet been endorsed by the EU, introduces a comprehensive model for the identification of lease arrangements and accounting treatments for both lessors and lessees. IFRS 16 will supersede the current lease guidance including IAS 17 Leases and the related interpretations when it becomes effective for accounting periods beginning on or after 1 January 2019. The Group expects to adopt IFRS 16 for the year ending 31 December 2019. No decision has been made about whether to use any of the transitional options in IFRS 16.
IFRS 16 distinguishes leases and service contracts on the basis of whether an identified asset is controlled by a customer. Distinctions of operating leases (off balance sheet) and finance leases (on balance sheet) are removed for lessee accounting, and is replaced by a model where a right-of-use asset and a corresponding liability have to be recognised for all leases by lessees (i.e. all on balance sheet) except for short-term leases and leases of low value assets.
The right-of-use asset is initially measured at cost and subsequently measured at cost (subject to certain exceptions) less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at that date. Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications, amongst others. Furthermore, the classification of cash flows will also be affected because operating leases under IAS 17 are presented as operating cash flows, whereas under the IFRS 16 model, the lease payments will be split into a principal and interest portion which will be presented as operating and financing cash flows respectively. Furthermore, extensive disclosures are required by IFRS 16.
As at 31 December 2017, the Group has non-cancellable operating lease commitments of GBP33.0 million. IAS 17 does not require the recognition of any right-of-use asset or liability for future payments for these leases; instead, certain information is disclosed as operating lease commitments in note 29. A preliminary assessment indicates that these arrangements will meet the definition of a lease under IFRS 16, although some of them will qualify as low value or short-term leases upon the application of IFRS 16. The Group is in the process of assessing the impact of recognising a right-of-use asset and a related lease liability in the Group Financial Statements. It is not practicable to provide a reasonable estimate of the financial effect until this review has been completed.
Alternative Performance Measures
In reporting financial information, the Group presents alternative performance measures, 'APMs' which are not defined or specified under the requirements of IFRS.
The Group believes that these APMs, which are not considered to be a substitute for or superior to IFRS measures, provide stakeholders with additional helpful information on the performance of the business. The APMs are consistent with how the business performance is planned and reported within the internal management reporting to the Board. Some of these measures are also used for the purpose of setting remuneration targets.
Each of the APMs, used by the Group are set out below including explanations of how they are calculated and how they can be reconciled to a statutory measure where relevant.
The Group reports percentage change figures for all performance measures, other than profit or loss before taxation and earnings per share, after restating prior year figures at a constant exchange rate. The constant exchange rate, which is an APM, retranslates the previous year measures at the average actual periodic exchange rates used in the current financial year. These measures are presented as a means of eliminating the effects of exchange rate fluctuations on the year-on-year reported results.
The Group makes certain adjustments to the statutory measures in order to derive APMs where relevant. The Group's policy is to exclude items that are considered to be significant in both nature and/or quantum and where treatment as an adjusted item provides stakeholders with additional useful information to assess the year-on-year trading performance of the Group.
2. Principal risks and uncertainties
In accordance with the Companies Act 2006, a description of the principal risks and uncertainties (and the mitigating factors in place in respect of these) is included below. Effective management of risks, uncertainties and opportunities is critical to our business in order to deliver long-term shareholder value and protect our people, assets and reputation. In 2017, we continued to face a challenging external environment, particularly from changing regulation and competition. Internally, our operational governance framework and risk management processes are continually reviewed to ensure that where areas of improvement are identified, a plan of action is put in place and can become a key focus for the Board. The effectiveness of operating these processes is monitored by the Audit and Risk Committee on behalf of the Board.
As at the year end, the Board considered that there are 16 key risks which require ongoing focus (noted with asterisks in the table below).
The risks facing the business by risk category are:
Risk Definition Risks Description
Category
------------ --------------- ------------------------------------------------------------- -----------------------------------------------------------
MARKET The risk that Regulatory
CONDITIONS we cannot * Legal compliance * * Compliance with existing laws and regulations
identify,
respond to,
comply * Legal and regulatory challenges and issues* * Challenges to interpretation or application of
with or take existing laws and regulations
advantage
of external * Future legal and regulatory development*
market * Anticipating and responding to changes to laws and
conditions. regulations and their interpretation
Competition
and product
proposition
* Competition*
-- Responding to changes
in market conditions
* Product proposition* * Meeting customer requirements
Funding, market
and counterparty
* Funding* * Funding availability to meet business needs
* Interest rate and currency * Market volatility impacting performance and asset
values
* Counterparty
* Loss of banking partner
World economic
environment* * Adapting to economic conditions
Taxation*
* Changes to, or interpretation of, tax legislation
------------ --------------- ------------------------------------------------------------- -----------------------------------------------------------
STAKEHOLDER The risk that
key * Reputation* * Reputational damage
stakeholders
take a
negative * Customer service * Maintenance of customer service standards
view of the
business
as a direct
result
of our actions
or our
inability
to effectively
manage their
perception
of the Group.
------------ --------------- ------------------------------------------------------------- -----------------------------------------------------------
OPERATIONAL The risk of
unacceptable * Credit* * Customers fail to repay
losses as a
result
of * Safety* * Harm to our agents/employees
inadequacies
or failures in
our internal * People* * Calibre of people
core
processes,
systems * Business continuity* and information security*
or people * Recoverability and security of systems and processes
behaviours.
* Financial and performance reporting
* Failure of financial reporting systems
* Technology*
* Maintenance of effective technology
* Fraud
* Theft or fraud loss
------------ --------------- ------------------------------------------------------------- -----------------------------------------------------------
BUSINESS The risk that
DEVELOPMENT our earnings * Change management* * Delivery of strategic initiatives
are
impacted
adversely * Brand * Strength of our customer brands
by a
sub-optimal
business
strategy
or the
sub-optimal
implementation
of that
strategy,
due to
internal
or external
factors.
------------ --------------- ------------------------------------------------------------- -----------------------------------------------------------
*Risks currently considered by the Board as the principal risks facing the Group.
Key: Risk Environment Risk Environment Risk Environment Worsening
Improving Stable
-------------------------- ----------------------------- ---------------------------- -----------------------------
Risk Relevance to Strategy Mitigation Commentary
-------------------------- ----------------------------- ---------------------------- -----------------------------
1. Regulatory
We suffer losses Changes in regulation, We have highly Lead responsibility: Chief
or fail to differences in skilled and Executive Officer
optimise profitable interpretation experienced See Chief Executive
growth or legal and public Officer's
due to a failure clarification/enforcement affairs teams review and operational
to operate in of at Group level review for details of key
compliance with, laws not previously and in each regulatory changes in 2017
or enforced by courts of our markets. and proposals for future
effectively anticipate and other bodies regulation
changes in, all can lead to challenge Expert third-party
applicable of our products/practices. advisors are A number of legislative
laws and regulations, used where necessary. and regulatory changes
or due to a regulator We must monitor have been
interpreting legal and regulatory Strong relationships implemented in 2017 and
these in a different developments to are established further potential changes
way. ensure we maintain and maintained continue to be proposed
compliance, remain with regulators, and debated, particularly
Objective competitive and legislators in Europe. As stated
We aim to ensure provide value and other stakeholders. elsewhere
that for our customers. The strategy in this report, these have
effective arrangements of strengthening had a significant impact
are in place Likelihood relevant associations on our business in Romania
to enable us The frequency contributes in
to comply with of legal and regulatory to the monitoring, particular this year, and
legal and regulatory change and the as well as to there continues to be the
obligations and likelihood of the influencing potential for a significant
take assessed challenge vary capabilities. impact on our business
and fully informed by market. In in Poland.
commercial risks. 2017, notable Co-ordinated
changes occurred legal and public We continued to evolve
in Romania. affairs teams, and strengthen our approach
at a Group level to
We also expect and in each governing this risk focusing
pricing regulations market, monitor on establishing and
to be implemented political, legislative maintaining
at some point and regulatory constructive relationships
in the future developments. with regulators, politicians
in those markets and other stakeholders,
where there are Compliance programme participating in sector
no price caps focused on key associations and informing
currently. consumer legislation. our stakeholders about
the role our services play
in society and the economy.
-------------------------- ----------------------------- ---------------------------- -----------------------------
2. Competition
and product proposition In an environment Regular monitoring Lead responsibility: Chief
We suffer losses of increasing of competitors Executive Officer
or fail to competition and and their offerings, In Europe, competition
optimise profitable broadening advertising in 2017 remained intense
growth customer choice, and share of particularly from digital
through not responding ensuring our product voice in our lenders, home credit
to the competitive meets customers' markets. operators
environment or needs is critical and banks as they enhanced
failing to ensure to delivering Regular surveys their customer propositions.
our proposition growth. of customer In Mexico competition is
meets customer views on our stable and digital lending
needs. Likelihood product offerings. remains small-scale.
Competition varies
Objective by market and Product development IPF Digital continued to
We aim to ensure is likely to remain committees established grow strongly in 2017 and
we understand at a high level across the Group diversification into digital
competitive threats particularly in to manage product lending enables us to offer
and deliver customer Europe. change and introduce further product choices
focused products new products. to customers in our target
to drive growth. segment.
In 2017 we launched a number
of pricing promotions in
our European home credit
markets to acquire new
and retain existing
customers.
-------------------------- ----------------------------- ---------------------------- -----------------------------
3. Taxation
We suffer additional Against a backdrop Binding rulings Lead responsibility: Chief
taxation or financial of increasing or clearances Financial Officer
penalties associated fiscal challenges obtained from We have ongoing tax audits
with failure for most economies, authorities in Poland, Mexico and
to comply with many authorities where appropriate. Slovakia.
tax legislation are turning to In Poland, where we appealed
or adopting an corporate taxpayers External advisors two adverse decisions made
interpretation to increase revenues, used for all by the Polish tax authority
of the law that either via taxation material tax in respect of 2008 and
cannot be sustained. reforms or through transactions. 2009, hearings have been
changes to interpretations stayed pending resolution
Objective of existing legislation. Qualified and of a process with the UK
We aim to generate experienced tax authority aimed at
shareholder value Likelihood tax teams at ensuring the intra-group
through effective The likelihood Group level arrangement being challenged
management of of changes or and in-market. is taxed in accordance
tax while acting challenges arising with international tax
as a good corporate from tax legislation principles. In order to
citizen. We are varies by market. appeal these decisions,
committed to Globally, OECD we had to pay c.GBP37M
ensuring compliance and EU-led developments in tax and interest, and
with tax law may lead to an further payments could
and practice increase in transfer be required in respect
in all of the pricing audits. of future years that are
territories in still open to audit,
which we operate. including
2010 and 2011 where audits
are ongoing. All subsequent
years remain open to audit.
-------------------------- ----------------------------- ---------------------------- -----------------------------
4. Technology
and A core part of Executive director Lead responsibility: Chief
change management our strategy is and country Executive Officer
We suffer losses to modernise our manager level Our change programme
or fail to optimise home credit operation prioritisation encompasses
profitable growth and invest in of key initiatives. a broad technological remit
due to a failure digital developments. and we are rolling out
to develop and Standard project mobile technology
maintain effective Effective management management methodology applications
technology solutions of the initiatives principles defined. to agents.
or manage change within this programme
in an effective is essential. Governance structure A revised IT strategy was
manner. in place launched in 2016 to ensure
Likelihood to oversee ongoing we
Objective Our change programme change at are able to respond
We aim to effectively is complex covering Group and market effectively
manage the design, numerous markets. levels, and to changing regulatory,
delivery and By centralising review existing competitor and customer
benefits realisation our IT resources systems architecture. behaviour dynamics.
of major technology into an expanded
and change initiatives Group IT structure
and deliver according and strengthening
to requirements, our programme
budgets and timescales. management capabilities
we are better
placed to minimise
the likelihood
of programme-wide
issues.
-------------------------- ----------------------------- ---------------------------- -----------------------------
5. People
Our strategy Our strategy segments Strategic people Lead Responsibility: Chief
is impacted by our review processes Executive Officer
not having sufficient operations into (people and Our people strategy focuses
depth and quality 'growth' focused organisational on building and maintaining
of people or and 'returns' planning) operate a
being unable focused businesses throughout the culture of high engagement
to retain key to reflect the Group. and performance and we
people and treat fact that they devote significant
them in accordance are at different Group-wide personal leadership
with our values stages of maturity. development time to identifying,
and ethical standards. In order to achieve review process developing
our goals, we and continuous and empowering our people.
Objective must continue development
We aim to have to attract, engage, through targeted We made structural changes
sufficient retain and reward leadership programmes. in our European home credit
breadth of capabilities the right people. business with the creation
and Periodic employee of the Northern Europe
depth of personnel Likelihood and agent engagement region and introduced a
to ensure that Our People Organisation surveys and Group-wide functional matrix
we can meet our and Planning processes improvement structure. These changes
strategic objectives. ensure that we plans. are further facilitating
develop appropriate the sharing of best practice
and significant Focus on HR and collaboration.
strength and depth governance and
of talent across maintenance We strengthened our
the Group and of our employer Group-level
we have the ability value proposition leadership team with the
to move people across the Group. appointment of a new Group
between markets, HR Director and Chief Legal
which reduces Plan to introduce Officer.
our exposure to specific HR
critical roles performance
being under resourced. metrics in 2018.
During 2018, we
will continue
to develop resource,
retain and reward
the right people.
-------------------------- ----------------------------- ---------------------------- -----------------------------
6. Business continuity
and information Technology systems Lead responsibility: Chief
security Globally, we have and services Executive Officer
We suffer losses 2.3 million customers are designed During 2017, we have
or fail to optimise and we record, for resilience performed
profitable growth update and maintain and tested before a number of tests of our
due to a failure data for each launch. information security and
of our systems, of them on a regular continue to work towards
suppliers or basis, often weekly. Periodic ongoing further improvement using
processes or testing and expert advice.
due to the loss, The availability monitoring of
theft or corruption of this data, security and In addition to periodic
of information. and the continued recovery capability testing of technology,
operation of our for technology we perform regular tests
Objective systems and processes, and premises. and rehearsals of our
We aim to maintain is essential to communication
adequate arrangements the effective processes and our plans
and controls operation of our for alternative worksites,
that reduce the business and the where applicable.
threat of service security of our
and business customer information. We are working to ensure
disruption and compliance in all our
the Likelihood European
risk of data While the external markets with the new General
loss to as low threat to our Data Protection Regulation,
as is reasonably systems is increasing which will be introduced
practicable. in the digital 25 May 2018.
age, the tools
in place reduce
the likelihood
of a significant
failure or information
loss.
-------------------------- ----------------------------- ---------------------------- -----------------------------
7. Reputation
We suffer financial Our reputation Group Reputation Lead responsibility: Chief
or reputational can have an impact and Regulation Executive Officer
damage due to on both customer Committee. Our home credit and digital
our methods of sentiment and businesses have achieved
operation, the Clearly defined industry awards for the
ill-informed engagement of corporate way we conduct our business
comment or malpractice. key stakeholders, values and ethical and we have been recognised
impacting our standards as a top employer and
Objective ability to operate are communicated socially
We aim to promote and serve our throughout responsible business. We
a positive reputation customer segment. the organisation also undertake a range
based on a mutual and all employees of corporate responsibility
understanding Likelihood and agents are programmes. We take a
of what we do We maintain strong mandated to proactive
that will help relationships undertake annual approach to reputation
the Group deliver with key stakeholders ethics e-learning. management and update the
its strategic across the Group market on material
aims. in order to develop Regular monitoring challenges
their understanding of key reputation that we are required to
of our business drivers. disclose.
model and how
we deliver services
to our customers.
This
helps protect
the business from
unforeseen events
that could damage
our reputation.
-------------------------- ----------------------------- ---------------------------- -----------------------------
8. World economic
environment Changes in economic Treasury and Lead responsibility: Chief
We suffer financial conditions have credit committees Financial Officer
loss as a result a direct impact review economic There were reasonably stable
of a failure on our customers' indicators. macroeconomic conditions
to identify and ability to make in all our markets in 2017.
adapt to changing repayments. Monitoring of Current indicators suggest
economic conditions economic, political our markets will deliver
adequately. Likelihood and national positive GDP growth, low
While we operate news briefings. but increasing inflation
Objective in numerous markets, and subdued interest rates
We aim to have the likelihood Strong, personal in 2018.
business processes of a change in customer relationships
that allow us economic markets inform us of We continue to monitor
to respond to that we are unable Individual customer the impact of Brexit and
changes in economic to respond to, circumstances. other
conditions and and that impacts geopolitical events on
optimise business our financial markets and
performance. strategy, is minimised macroeconomic
by our short-term conditions.
lending business
models.
-------------------------- ----------------------------- ---------------------------- -----------------------------
9. Safety
The risk of personal A significant Group and market Lead responsibility: Chief
accident to, element of our committees and Executive Officer
or assault on, business model annual safety We continued to make
our agents or involves our agents survey. progress
employees. and employees in our safety management
interacting with Bi-annual risk systems and maintained
Objective our customers mapping for our Occupational Health
We aim to maintain in their homes each and Safety Assessment Series
adequate arrangements or travelling agency including (OHSAS) certification in
that reduce the to numerous locations mitigation planning all home credit businesses.
risks to as low daily. Their and field safety
as is reasonably safety is paramount training. Safety continues to be
practicable. to us. a significant area of focus
Annual self-certification for the Group.
Likelihood of safety compliance
The likelihood by managers.
of an individual
incident depends Quarterly branch
on many factors, safety meetings.
including the
local environment. Role-specific
We strive to ensure training and
that our agents competence matrix.
and
employees can Safety management
carry out their systems based
work without risk on internationally
of harm. recognised standards.
-------------------------- ----------------------------- ---------------------------- -----------------------------
10. Credit
The risk of the With the expansion Weekly credit Lead responsibility: Chief
Group suffering of our IPF Digital reporting on Executive Officer
financial loss and Mexico home the Credit risk in our European
if its customers credit businesses, quality of business home credit markets is
fail to meet it is important at time of issue stable.
their contracted that we retain as well as the Our Mexico home credit
obligations. control of credit overall portfolio. business delivered improved
losses in order This feeds into growth during the first
Objective to achieve our weekly half of 2017 but there
We aim to maintain intended returns. performance was some instability from
credit and collections For the European calls between September following two
policies and home credit businesses each business earthquakes which hit the
regularly monitor we focus on writing and the Group country. Improved
credit performance. profitable business credit director. performance
to optimise returns. In addition, returned in Q4.
there
Likelihood are monthly The credit risk environment
Our control environment local credit in our established IPF
in place means committees, Digital markets is generally
that we will see a monthly Group stable with very low loss
issues quickly credit committee rates. In our new markets
and the systems and monthly there have been rapid
in place mean performance changes
that we can change calls between and learnings applied to
credit settings each business credit settings resulting
quickly, and the Group in strongly improving credit
and therefore management team. quality.
the likelihood When a new change
of suffering large is introduced,
losses is low. the credit systems
allow for a
testing approach
that gives direct
comparison of
the current
'champion' regime
against the
new 'challenger'.
-------------------------- ----------------------------- ---------------------------- -----------------------------
11. Funding,
market Funding at appropriate Adherence to Lead responsibility: Chief
and counterparty cost and on appropriate Board-approved Financial Officer
The risk of insufficient terms, and management policies monitored Our business has a strong
availability of financial market through the funding position with good
of funding, unfavourable risk, is necessary Treasury Committee, headroom on undrawn bank
pricing, a breach for the future finance facilities and long-term
of debt facility growth of the leadership team funding in place.
covenants, or business. and regular
that performance Board reporting. Hedging of market risk
is significantly Likelihood and limits on counterparty
impacted by interest Board-approved Funding plans risk in line with policies.
rate or currency policies require presented as
movements, or us to maintain part of budget
failure of a a resilient funding planning.
banking counterparty. position with
good headroom Strong relationships
Objective on undrawn bank maintained with
We aim to maintain facilities, appropriate debt providers.
a robust funding hedging of market
position, and risk, and appropriate to limit the limits to counterparty impact of interest risk. rate and currency movements and exposure to financial counterparties. -------------------------- ----------------------------- ---------------------------- -----------------------------
3. Related parties
The Group has not entered into any material transactions with related parties during the year ended 31 December 2017.
4. Segmental analysis
Geographical segments
2017 2016
GBPM GBPM
------------------------------------ ------ -------
Revenue
Home credit
Northern Europe 327.0 330.6
Southern Europe 177.7 170.8
Mexico 217.0 186.5
Slovakia and Lithuania - 10.8
721.7 698.7
Digital 104.1 58.1
------------------------------------ ------ -------
Revenue - continuing operations 825.8 756.8
Discontinued operations 3.7 6.6
------------------------------------ ------ -------
Revenue 829.5 763.4
------------------------------------ ------ -------
Impairment
Home credit
Northern Europe 74.1 76.2
Southern Europe 17.0 35.2
Mexico 75.6 68.0
Slovakia and Lithuania (8.5) (12.0)
158.2 167.4
Digital 42.9 17.5
------------------------------------ ------ -------
Impairment - continuing operations 201.1 184.9
Discontinued operations 2.6 2.6
------------------------------------ ------ -------
Impairment 203.7 187.5
------------------------------------ ------ -------
Profit before taxation
Home credit
Northern Europe 59.8 75.6
Southern Europe 54.5 40.3
Mexico 14.7 11.7
Slovakia and Lithuania 3.2 (7.4)
132.2 120.2
Digital (11.7) (9.3)
Central costs* (14.9) (14.9)
-------------------------------------------------- -------- --------
Profit before taxation - continuing operations 105.6 96.0
Discontinued operations (2.7) (3.4)
-------------------------------------------------- -------- --------
Profit before taxation 102.9 92.6
-------------------------------------------------- -------- --------
*Although central costs are not classified as a separate segment
in accordance with IFRS 8 'Operating segments', they are shown
separately above in order to provide a reconciliation to profit
before taxation.
2017 2016
GBPM GBPM
-------------------------------------------------- -------- --------
Segment assets
Home credit
Northern Europe 550.0 494.6
Southern Europe 272.3 255.0
Mexico 220.3 223.1
Slovakia and Lithuania 0.9 9.6
1,043.5 982.3
Digital 231.9 148.7
UK 67.2 72.7
-------------------------------------------------- -------- --------
Total - continuing operations 1,342.6 1,203.7
Discontinued operations - 10.2
-------------------------------------------------- -------- --------
1,342.6 1,213.9
-------- --------
Segment liabilities
Home credit
Northern Europe 213.0 196.8
Southern Europe 119.0 138.9
Mexico 145.2 170.0
Slovakia and Lithuania 7.7 37.8
484.9 543.5
Digital 157.0 120.7
UK 203.8 111.6
------------------------------- ------ ------
Total - continuing operations 845.7 775.8
Discontinued operations - 8.6
------ ------
845.7 784.4
------ ------
Capital expenditure
Home credit
Northern Europe 3.9 2.1
Southern Europe 2.8 1.5
Mexico 2.7 2.9
Slovakia and Lithuania - -
9.4 6.5
Digital 0.6 0.4
UK 0.1 1.3
---------------------------------- ----- -----
Total - continuing operations 10.1 8.2
Discontinued operations - 0.1
---------------------------------- ----- -----
10.1 8.3
---------------------------------- ----- -----
Depreciation
Home Credit
Northern Europe 3.2 2.4
Southern Europe 1.9 1.7
Mexico 2.4 1.8
Slovakia and Lithuania - 0.4
7.5 6.3
Digital 0.4 0.1
UK 2.4 3.5
---------------------------------- ----- -----
Total - continuing operations 10.3 9.9
---------------------------------- ----- -----
Discontinued operations - 0.2
---------------------------------- ----- -----
10.3 10.1
---------------------------------- ----- -----
Expenditure on intangible assets
Home Credit
Northern Europe - -
Southern Europe - -
Mexico - -
Slovakia and Lithuania - -
- -
Digital 5.9 3.6
UK 9.0 12.2
---------------------------------- ----- -----
Total - continuing operations 14.9 15.8
---------------------------------- ----- -----
Discontinued operations - -
---------------------------------- ----- -----
14.9 15.8
---------------------------------- ----- -----
Amortisation
Home Credit
Northern Europe - -
Southern Europe - -
Mexico - -
Slovakia and Lithuania - -
- -
Digital 2.9 2.2
UK 8.5 6.8
---------------------------------- ----- -----
Total - continuing operations 11.4 9.0
---------------------------------- ----- -----
Discontinued operations - -
---------------------------------- ----- -----
11.4 9.0
---------------------------------- ----- -----
5. Tax expense
The pre-exceptional taxation charge for the year on statutory profit before taxation was GBP30.6M (2016: GBP24.8M) which equates to an effective rate of 29.0% (2016: 25.8%).
The exceptional tax charge of GBP30.0M (2016: GBPnil) relates to the write off of a deferred tax asset due to a change in Polish tax legislation effective from 1 January 2018. For more information see above.
The effective tax rate for 2018 is expected to be c.33-35%.
The Group is currently subject to a tax audit with respect to Provident Polska for the years 2008 - 2011. Audits of 2010 and 2011 are ongoing, whilst for 2008 and 2009, decisions were received in January 2017 and have been appealed. Further details are set out above. The Group is also subject to audits in Mexico (regarding 2011) and Slovakia (regarding 2014-2015), all of which are still at the information gathering stage.
In late 2017 the European Commission opened a state aid investigation into the Group Financing Exemption contained in the UK controlled foreign currency rules, which was introduced in 2013. The UK authorities do not accept that the rules constitute state aid. In common with other UK-based international companies whose arrangements are in line with current controlled foreign company rules, the Group may be affected by the outcome of this investigation. The Group is monitoring developments.
6. Earnings per share
2017 2016
pence pence
----------------------------------------------------- ------ ------
Basic EPS - continuing operations pre-exceptional
tax 33.7 32.2
Dilutive effect of awards (1.3) (0.9)
------
Diluted EPS - continuing operations pre-exceptional
tax 32.4 31.3
----------------------------------------------------- ------ ------
2017 2016
pence pence
------------------------------------- ------ ------
Basic EPS - continuing operations 20.2 32.2
Dilutive effect of awards (0.7) (0.9)
------
Diluted EPS - continuing operations 19.5 31.3
------------------------------------- ------ ------
2017 2016
pence pence
------------------------------------------------- ------ ------
Basic EPS - including discontinued operations 16.5 30.2
Dilutive effect of awards (0.7) (0.8)
------
Diluted EPS - including discontinued operations 15.8 29.4
------------------------------------------------- ------ ------
Basic earnings per share ('EPS') from pre-exceptional continuing operations is calculated by dividing the earnings attributable to shareholders of GBP75.0M (31 December 2016: GBP71.2M) by the weighted average number of shares in issue during the period of 222.4M which has been adjusted to exclude the weighted average number of shares held in treasury and by the employee trust (31 December 2016: 221.2M).
Basic earnings per share ('EPS') from continuing operations is calculated by dividing the earnings attributable to shareholders of GBP45.0M (31 December 2016: GBP71.2M) by the weighted average number of shares in issue during the period of 222.4M which has been adjusted to exclude the weighted average number of shares held in treasury and by the employee trust (31 December 2016: 221.2M).
Basic earnings per share ('EPS') including discontinued operations is calculated by dividing the earnings attributable to shareholders of GBP36.6M (31 December 2016: GBP66.9M) by the weighted average number of shares in issue during the period of 222.4M which has been adjusted to exclude the weighted average number of shares held in treasury and by the employee trust (31 December 2016: 221.2M).
For diluted EPS the weighted average number of shares has been adjusted to 231.4M (31 December 2016: 227.5M) to assume conversion of all dilutive potential ordinary share options relating to employees of the Group.
7. Dividends
Dividend per share
2017 2016
pence pence
-------------------------- ------ ------
Interim dividend 4.6 4.6
Final proposed dividend 7.8 7.8
-------------------------- ------ ------
Total dividend 12.4 12.4
-------------------------- ------ ------
Dividends paid
2017 2016
GBPM GBPM
------------------------------------------ ------ ------
Interim dividend of 4.6 pence per share
(2016: interim dividend of 4.6 pence
per share) 10.2 10.2
Final 2016 dividend of 7.8 pence per
share (2016: final 2015 dividend of
7.8 pence per share) 17.4 17.2
------------------------------------------ ------ ------
Total dividends paid 27.6 27.4
------------------------------------------ ------ ------
The directors are recommending a final dividend in respect of the financial year ended 31 December 2017 of 7.8 pence per share which will amount to a full year dividend payment of GBP27.6M. If approved by the shareholders at the annual general meeting, this dividend will be paid on 11 May 2018 to shareholders who are on the register of members at 13 April 2018. This dividend is not reflected as a liability in the balance sheet as at 31 December 2017 as it is subject to shareholder approval.
8. Discontinued operations
On 28 June 2017, we announced completion of the sale of the home credit business in Bulgaria in order to focus our resources on our larger home credit and rapidly-growing digital businesses. Losses of GBP8.4M are included in the income statement in respect of Bulgaria for the half-year ended 30 June 2017. These costs can be analysed as follows:
2017 2016
GBPM GBPM
-------------------------------- ------ ------
Revenue 3.7 6.6
Impairment (2.6) (2.6)
-------------------------------- ------ ------
Revenue less impairment 1.1 4.0
Finance costs (0.2) (0.3)
Other operating costs (0.7) (1.6)
Administrative expenses (2.9) (5.5)
-------------------------------- ------ ------
Trading losses (2.7) (3.4)
Write-off of assets (5.2) -
-------------------------------- ------ ------
Loss before taxation (7.9) (3.4)
Taxation charge (0.5) (0.9)
Loss - discontinued operations (8.4) (4.3)
-------------------------------- ------ ------
9. Goodwill
2017 2016
GBPM GBPM
------------------------------- ----- -----
Net book value at 1 January 23.3 20.1
Exchange adjustments 1.1 3.2
Net book value at 31 December 24.4 23.3
------------------------------- ----- -----
Goodwill is tested annually for impairment or more frequently if there are indications that goodwill might be impaired. The recoverable amount is determined from a value in use calculation. The key assumptions used in the value in use calculation relate to the discount rates and growth rates adopted. We adopt discount rates which reflect the time value of money and the risks specific to the legacy MCB business. The cash flow forecasts are based on the most recent financial budgets approved by the Group Board for the next three years. The rate used to discount the forecast cash flows is 10% (2016: 10%). No reasonably foreseeable reduction in the assumptions would give rise to impairment, and therefore no further sensitivity analysis has been presented.
10. Intangible assets
2017 2016
GBPM GBPM
------------------------------- ------- ------
Net book value at 1 January 32.6 25.6
Additions 14.9 15.8
Impairment (3.3) (0.7)
Amortisation (11.4) (9.0)
Exchange adjustments 0.5 0.9
Disposal of subsidiary (0.2) -
------------------------------- ------- ------
Net book value at 31 December 33.1 32.6
------------------------------- ------- ------
Intangible assets comprise computer software (GBP31.5M; 2016: GBP30.0M) and customer relationships on the acquisition of MCB Finance (GBP1.6M; 2016: GBP2.6M).
11. Property, plant and equipment
2017 2016
GBPM GBPM
------------------------------- ------- -------
Net book value at 1 January 23.4 24.3
Exchange adjustments 0.9 1.7
Additions 10.1 8.3
Disposals (0.7) (0.8)
Depreciation (10.3) (10.1)
Disposal of subsidiary (0.2) -
Net book value at 31 December 23.2 23.4
------------------------------- ------- -------
As at 31 December 2017 the Group had GBP8.4M of capital expenditure commitments contracted with third parties that were not provided for (2016: GBP6.1M).
12. Deferred tax assets
Deferred tax assets have been recognised in respect of tax losses and other temporary timing differences (principally relating to recognition of revenue and impairment) to the extent that it is probable that these assets will be utilised against future taxable profits.
13. Non-current tax asset
Non-current tax asset includes an amount of GBP37.0M in respect of the tax paid to the Polish Tax Authority, see note 21 for further details.
14. Amounts receivable from customers
All lending is in the local currency of the country in which the loan is issued.
2017 2016
GBPM GBPM
------------------- -------- ------
Polish zloty 393.3 345.7
Czech crown 83.3 84.2
Euro 148.4 96.3
Hungarian forint 162.7 139.6
Mexican peso 165.1 161.2
Romanian leu 93.4 98.6
Bulgarian lev - 7.8
Australian Dollar 10.7 6.5
------------------- -------- ------
Total receivables 1,056.9 939.9
------------------- -------- ------
Amounts receivable from customers are held at amortised cost and are equal to the expected future cash flows receivable discounted at the average effective interest rate of 99% (2016: 105%). All amounts receivable from customers are at fixed interest rates. The average period to maturity of the amounts receivable from customers is 9.1 months (2016: 7.8 months).
The Group has one class of loan receivable and no collateral is held in respect of any customer receivables. The Group does not use an impairment provision account for recording impairment losses and, therefore, no analysis of gross customer receivables less provision for impairment is presented.
Revenue recognised on amounts receivable from customers which have been impaired was GBP429.6M (2016: GBP437.0M).
15. Borrowing facilities and borrowings
The maturity of the Group's external bond and external bank borrowings and facilities is as follows:
2017 2016
Borrowings Facilities Borrowings Facilities
GBPM GBPM GBPM GBPM
------------------------- ----------- ----------- ----------- -----------
Repayable:
- in less than one year 79.6 133.4 22.4 56.8
----------- ----------- ----------- -----------
- between one and two
years 15.2 68.1 73.2 85.3
- between two and five
years 582.9 665.5 527.2 633.1
598.1 733.6 600.4 718.4
----------- ----------- ----------- -----------
Total borrowings 677.7 867.0 622.8 775.2
------------------------- ----------- ----------- ----------- -----------
As shown above, total undrawn facilities as at 31 December 2017 were GBP189.3M (2016: GBP152.4M).
As outlined previously, the Group's home credit company in Poland, Provident Polska, has been subject to tax audits in respect of the Company's 2008 and 2009 financial years. The 2010 and 2011 financial years are currently being audited by the tax authorities in Poland, and all subsequent years up to and including 2017 remain open to future audit. Provident Polska has appealed the decisions made by the Polish Tax Chamber, to the District Administrative Court, for the 2008 and 2009 financial years and has paid the amounts assessed of approximately GBP37 million (comprising tax and associated interest) which was necessary in order to make the appeals. As noted above, the 2008 and 2009 tax audit decisions are the subject of a process involving the UK tax authority aimed at ensuring that the intra-group arrangement is taxed in accordance with international tax principles and as a result the court hearings have been stayed.
In order to appeal any potential future decisions for 2010 and subsequent years, further payments may be required. There are significant uncertainties in relation to the amount and timing of such cash outflows. However, in the event that audits are opened, and similar decisions are reached for each of these subsequent financial years, further amounts of up to c. GBP123M may be required to be funded (including approximately GBP44M for the 2010 and 2011 years on which audits have commenced).
16. Derivative financial instruments
At 31 December 2017 the Group had an asset of GBP10.4M and a liability of GBP4.8M (2016: GBP15.4M asset and GBP4.7M liability) in respect of foreign currency contracts and interest rate swaps. Foreign currency contracts are in place to hedge foreign currency cash flows. Interest rate swaps are used to cover a proportion of current borrowings relating to the floating rate Polish bond and a proportion of floating rate bank borrowings. Where these cash flow hedges are effective, in accordance with IFRS, movements in their fair value are taken directly to reserves.
17. Retirement benefit asset / (obligation)
The amounts recognised in the balance sheet in respect of the retirement benefit obligation are as follows:
2017 2016
GBPM GBPM
----------------------------------------- ------- -------
Equities 11.7 22.1
Bonds 10.2 9.6
Index-linked gilts 8.5 8.3
Diversified growth funds 11.6 -
Other 0.2 0.2
------- -------
Total fair value of scheme assets 42.2 40.2
Present value of funded defined benefit
obligations (40.1) (49.3)
----------------------------------------- ------- -------
Net asset / (obligation) recognised in
the balance sheet 2.1 (9.1)
----------------------------------------- ------- -------
The charge recognised in the income statement in respect of defined benefit pension costs is GBP0.2M (2016: GBPnil).
18. Fair values of financial assets and liabilities
IFRS 7 requires disclosure of fair value measurements of derivative financial instruments by level of the following fair value measurement hierarchy:
-- quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1);
-- inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2); and
-- inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).
All of the Group's financial instruments held at fair value fall into hierarchy level 2 (2016: all of the Group's financial instruments held at fair value fell into hierarchy level 2). The fair value of derivative financial instruments has been calculated by discounting expected future cash flows using interest rate yield curves and forward foreign exchange rates prevailing at the relevant period end.
Except as detailed in the following table, the carrying value of financial assets and liabilities recorded at amortised cost, which are all short-term in nature, are a reasonable approximation of their fair value:
2017 2016
Fair value Carrying Fair value Carrying
value value
GBPM GBPM GBPM GBPM
----------------------- ----------- --------- ----------- ---------
Financial assets
Amounts receivable
from customers 1,433.0 1,056.9 1,206.1 939.9
----------- --------- ----------- ---------
1,433.0 1,056.9 1,206.1 939.9
----------- --------- ----------- ---------
Financial liabilities
Bonds 567.8 590.0 480.8 565.0
Bank borrowings 87.7 87.7 57.8 57.8
----------- --------- ----------- ---------
655.5 677.7 538.6 622.8
----------------------- ----------- --------- ----------- ---------
The fair value of amounts receivable from customers has been derived by discounting expected future cash flows (as used to calculate the carrying value of amounts due from customers), net of collection costs, at the Group's weighted average cost of capital.
Under IFRS 13 'Fair value measurement', receivables are classed as level 3 as their fair value is calculated using future cash flows that are unobservable inputs.
The fair value of the bonds has been calculated by reference to their market value.
The carrying value of bank borrowings is deemed to be a good approximation of their fair value. Bank borrowings can be repaid within six months if the Group decides not to roll over for further periods up to the contractual repayment date. The impact of discounting would, therefore, be negligible.
19. Reconciliation of profit after taxation to cash generated from operating activities
2017 2016
GBPM GBPM
-------------------------------------------------- ------- -------
Profit after taxation from continuing operations 45.0 71.2
Adjusted for:
Tax charge 60.6 24.8
Finance costs 55.2 46.8
Share-based payment (credit)/charge (0.2) 3.5
Depreciation of property, plant and equipment
(note 11) 10.3 9.9
Loss on disposal of property, plant and
equipment - 0.8
Amortisation of intangible assets (note
10) 11.4 9.0
Impairment of intangible assets (note 10) 3.3 0.7
Changes in operating assets and liabilities:
Amounts receivable from customers (65.9) (41.5)
Other receivables 2.0 (6.6)
Trade and other payables 20.2 18.9
Retirement benefit obligation (0.9) (1.1)
Derivative financial instruments 2.6 (0.2)
-------------------------------------------------- ------- -------
Cash generated from continuing operating
activities 143.6 136.2
-------------------------------------------------- ------- -------
20. Average and closing foreign exchange rates
The table below shows the average exchange rates for the relevant reporting periods and closing exchange rates at the relevant period ends.
Average Closing Average Closing
2017 2017 2016 2016
------------------- -------- -------- -------- --------
Polish zloty 4.8 4.7 5.3 5.2
Czech crown 30.3 28.4 33.3 31.6
Euro 1.1 1.1 1.2 1.2
Hungarian forint 351.4 346.9 377.7 362.1
Mexican peso 24.5 26.3 25.6 25.6
Romanian leu 5.2 5.2 5.4 5.3
Bulgarian lev 2.3 2.2 2.4 2.3
Australian dollar 1.7 1.7 1.8 1.7
-------------------- -------- -------- -------- --------
The GBP51.3M exchange gain (2016: gain of GBP65.1M) on foreign currency translations shown within the statement of comprehensive income arises on retranslation of net assets denominated in currencies other than sterling, due to the change in foreign exchange rates against sterling between December 2016 and December 2017 shown in the table above.
21. Contingent Liability Note
The Group's home credit company in Poland, Provident Polska, has been subject to tax audits in respect of the company's 2008 and 2009 financial years. During these audits the Polish tax authorities have challenged an intra-group arrangement with a UK entity, and the timing of the taxation of home collection fee revenues.
These audits culminated with decisions being received from the Polish Tax Chamber (the upper tier of the Polish tax authority) on 5 January 2017 in relation to the 2008 financial year, and on 23 January 2017 in respect of the 2009 financial year. Provident Polska has appealed these decisions to the District Administrative Court, but has had to pay the amounts assessed totalling approximately GBP37M (comprising tax and associated interest) in order to make the appeals. As noted below, the 2008 and 2009 tax audit decisions are the subject of a process involving the UK tax authority aimed at ensuring that the intra-group arrangement is taxed in accordance with international tax principles and as a result the court hearings have been stayed.
The directors have received strong external legal advice, and note that during a previous tax audit by the same tax authority, the Company's treatment of these matters was accepted as correct. Therefore the payments of the sums outlined above are not a reflection of the directors' view on the merits of the case, and accordingly the payments made in January 2017 have been recognised as a non-current financial asset in this financial information given the uncertainties in relation to the timing of any repayment of such amounts.
The 2010 and 2011 financial years are currently being audited by the tax authorities in Poland. In the event that the Polish tax authorities were to issue decisions following the same reasoning as for 2008 and 2009 around a further GBP44M would become payable. In addition, all subsequent years remain open to future audit, meaning that there are further significant uncertainties in relation to the amount and timing of potential additional future payments in relation to these periods. In the event that audits are opened in respect of some or all of these open periods, and similar decisions are reached, further amounts may be required to be paid, the timing of which would be dependent upon the timing of decisions made by the Polish tax authorities for these later periods. Further details in this are set out in note 15.
22. Going concern
The Board has reviewed the budget for the year to 31 December 2018 and the forecasts for the two years to 31 December 2020 which include projected profits, cash flows, borrowings, headroom against debt facilities, and funding requirement. The Group's total debt facilities including a range of bonds and bank facilities, combined with a successful track record of accessing debt funding markets over a long period (including periods of adverse macro-economic conditions and a changing competitive and regulatory environment) is sufficient to fund business requirements for the foreseeable future. Taking these factors into account, together with regulatory and taxation risks set out in note 2 to this financial information, the Board has a reasonable expectation that the Group has adequate resources to continue in operation for the foreseeable future. For this reason the Board has adopted the going concern basis in preparing this financial information.
Responsibility statement
This statement is given pursuant to Rule 4 of the Disclosure Guidance and Transparency Rules.
It is given by each of the directors as at the date of this report, namely: Dan O'Connor, Chairman; Gerard Ryan, Chief Executive Officer; Justin Lockwood, Chief Financial Officer; Tony Hales, Senior independent non-executive director; Jayne Almond, non-executive director; John Mangelaars, non-executive director; Richard Moat, non-executive director; and Cathryn Riley, non-executive director.
To the best of each director's knowledge:
a) the financial information, prepared in accordance with the IFRSs, give a true and fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in the consolidation taken as a whole; and
b) the management report contained in this report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
Alternative performance measures
This financial report provides alternative performance measures (APMs) which are not defined or specified under the requirements of International Financial Reporting Standards. We believe these APMs provide readers with important additional information on our business. To support this we have included a reconciliation of the APMs we use, where relevant, and a glossary indicating the APMs that we use, an explanation of how they are calculated and why we use them.
APM Closest equivalent Reconciling Definition and purpose
statutory items to
measure statutory measure
----------------------- ------------------- ------------------- ----------------------------------------------
Income statement measures
-------------------------------------------- ------------------- ----------------------------------------------
Credit issued None Not applicable Credit issued is the principal value
growth (%) of loans advanced to customers and
is an important measure of the level
of lending in the business. Credit
issued growth is the period-on-period
change in this metric which is calculated
by retranslating the previous year's
credit issued at the average actual
exchange rates used in the current
financial year. This ensures that
the measure is presented having
eliminated the effects of exchange
rate fluctuations on the
period-on-period reported results.
----------------------- ------------------- ------------------- ----------------------------------------------
Average net None Not applicable Average net receivables are the
receivables average amounts receivable from
(GBPM) customers
translated at the average monthly
actual exchange rate. This measure
is presented to illustrate the change
in amounts receivable from customers
on a consistent basis with revenue
growth.
----------------------- ------------------- ------------------- ----------------------------------------------
Average net None Not applicable Average net receivables growth is
receivables the period-on-period change in average
growth at constant net receivables which is calculated
exchange rates by retranslating the previous year's
(%) average net receivables at the average
actual exchange rates used in the
current financial year. This ensures
that the measure is presented having
eliminated the effects of exchange
rate fluctuations on the period-on-period
reported results.
----------------------- ------------------- ------------------- ----------------------------------------------
Revenue growth None Not applicable The period-on-period change in revenue
at constant which is calculated by retranslating
exchange rates the previous year's revenue at the
(%) average actual exchange rates used
in the current financial year. This
measure is presented as a means
of eliminating the effects of exchange
rate fluctuations on the period-on-period
reported results.
Revenue yield None Not applicable Revenue yield is reported revenue
(%) divided by average net receivables
and is an indicator of the gross
return being generated from average
net receivables.
Impairment None Not applicable Impairment as a percentage of revenue
as a is reported impairment divided by
percentage reported revenue and represents
of a measure of credit quality that
revenue (%) is used across the business. This
measure is reported on a rolling
annual basis (annualised).
Cost-income None Not applicable The cost-income ratio is other costs
ratio (%) divided by reported revenue. Other
costs represent all operating costs
with the exception of amounts paid
to agents as collecting commission.
This measure is reported on a rolling
annual basis
(annualised). This is useful for
comparing performance across markets.
Pre-exceptional Profit before Exceptional Profit before tax and exceptional
profit before tax items items. This is considered to be
tax (GBPM) an important measure where exceptional
items distort the operating performance
of the business.
----------------------- ------------------- ------------------- ----------------------------------------------
Effective tax Effective Exceptional Total tax expense for the Group
rate tax items and their excluding exceptional tax items
before exceptional rate tax impact divided by profit before tax and
items (%) exceptional items. This measure
is an indicator of the ongoing tax
rate for the Group.
----------------------- ------------------- ------------------- ----------------------------------------------
Pre-exceptional Earnings Items identified Earnings per share before the impact
earnings per per as exceptional of exceptional items. This is considered
share share items to be an important measure where
(pence) exceptional items distort the operating
performance of the business.
Like-for-like None Not applicable The period-on-period change in
profit profit adjusted for the impact
growth or contraction of exchange
(GBPM) rates and, where appropriate, investment
in new business development opportunities.
The impact of exchange rates is
calculated by retranslating the
previous period's profit at the
current year's average exchange
rate. This measure is presented
as a means of reporting like-for-like
profit movements.
----------------------- ------------------- --------------------- --------------------------------------------
Balance sheet and returns measures
-----------------------------------------------------------------------------------------------------------------
Return on assets None Not applicable Calculated as profit before interest
('ROA') (%) and exceptional items less tax
at the effective tax rate before
exceptional items divided by average
net receivables. We believe that
ROA is a good measure of the financial
performance of our businesses,
showing the ongoing return on the
total equity and debt capital invested
in average net receivables of our
operating segments and the Group.
Return on equity None Not applicable Calculated as profit after tax
('ROE') (%) (adjusted for exceptional items)
divided by average opening and
closing equity. It is used as a
measure of overall shareholder
returns adjusted for exceptional
items.
Equity to receivables None Not applicable Total equity divided by amounts
ratio receivable from customers. This
(%) is a
measure of balance sheet strength
and the Group targets a ratio of
around 40%.
----------------------- ------------------- --------------------- --------------------------------------------
Headroom (GBPM) Undrawn None Headroom is an alternative term
external for undrawn external bank facilities.
bank
facilities
----------------------- ------------------- --------------------- --------------------------------------------
Other measures
----------------------- ------------------- --------------------- --------------------------------------------
Customers None Not applicable Customers that are being served
by our agents or through our money
transfer product in the home credit
business and customers that are
not in default in our digital business.
Customer retention None Not applicable The proportion of customers that
(%) are retained for their third or
subsequent loan. Our ability to
retain customers is central to
achieving our strategy and is an
indicator of the quality of our
customer service. We do not retain
customers who have a poor payment
history as it can create a continuing
impairment risk and runs counter
to our responsible lending commitments.
Employees and Employee Agents are self-employed individuals
Agents information who represent the Group's subsidiaries
and are engaged under civil contracts
with the exception of Hungary and
Romania where they are employees
engaged under employment contracts
due to local regulatory reasons.
Agent and employee None Not applicable This measure represents the proportion
retention (%) of our employees and agents that
have been working for or representing
the Group for more than 12 months.
Experienced people help us to achieve
and sustain strong customer relationships
and a high quality service, both
of which are central to achieving
good customer retention. Good agent
and employee retention also helps
reduce costs of recruitment and
training, enabling more investment
in people development.
----------------------- ------------------- --------------------- --------------------------------------------
Constant exchange rate reconciliations
2017
GBPM Ongoing IPF Digital Ongoing Lithuania Central Group
home credit Group and Slovakia costs
------------------------- ------------- ------------ -------- -------------- -------- --------
Customers 2,064.2 226.0 2,290.2 - - 2,290.2
Credit issued 1,070.7 230.8 1,301.5 - - 1,301.5
Average net receivables 833.9 159.2 993.1 0.8 - 993.9
Revenue 721.7 104.1 825.8 - - 825.8
Impairment (166.7) (42.9) (209.6) 8.5 - (201.1)
Net revenue 555.0 61.2 616.2 8.5 - 624.7
Finance costs (46.8) (8.4) (55.2) - - (55.2)
Agents' commission (85.5) - (85.5) (0.4) - (85.9)
Other costs (293.7) (64.5) (358.2) (4.9) (14.9) (378.0)
------------------------- ------------- ------------ -------- -------------- -------- --------
Profit/(loss) before
tax 129.0 (11.7) 117.3 3.2 (14.9) 105.6
------------------------- ------------- ------------ -------- -------------- -------- --------
2016 performance, as reported in our 2016 financial report
GBPM Ongoing IPF Digital Ongoing Lithuania Central Group
home credit Group and Slovakia costs
------------------------- ------------- ------------ -------- -------------- -------- --------
Customers 2,284.0 194.0 2,478.0 43.0 - 2,521.0
Credit issued 991.3 150.2 1,141.5 3.5 - 1,145.0
Average net receivables 758.5 86.4 844.9 19.2 - 864.1
Revenue 687.9 58.1 746.0 10.8 - 756.8
Impairment (179.4) (17.5) (196.9) 12.0 - (184.9)
Net revenue 508.5 40.6 549.1 22.8 - 571.9
Finance costs (41.8) (4.0) (45.8) (0.9) (0.1) (46.8)
Agents' commission (82.0) - (82.0) (3.9) - (85.9)
Other costs (257.1) (45.9) (303.0) (25.4) (14.8) (343.2)
------------------------- ------------- ------------ -------- -------------- -------- --------
Profit/(loss) before
tax 127.6 (9.3) 118.3 (7.4) (14.9) 96.0
------------------------- ------------- ------------ -------- -------------- -------- --------
Foreign exchange movements
GBPM Ongoing IPF Digital Ongoing Lithuania Central Group
home credit Group and Slovakia costs
------------------------- ------------- ------------ -------- -------------- -------- -------
Credit issued 72.7 10.5 83.2 0.3 - 83.5
Average net receivables 58.5 5.7 64.2 1.6 - 65.8
Revenue 51.8 4.0 55.8 1.0 - 56.8
Impairment (13.4) (1.4) (14.8) 0.5 - (14.3)
Net revenue 38.4 2.6 41.0 1.5 - 42.5
Finance costs (3.1) (0.2) (3.3) (0.2) - (3.5)
Agents' commission (5.8) - (5.8) (0.3) - (6.1)
Other costs (16.7) (3.4) (20.1) (1.5) - (21.6)
------------------------- ------------- ------------ -------- -------------- -------- -------
Profit/(loss) before
tax 12.8 (1.0) 11.8 (0.5) - 11.3
------------------------- ------------- ------------ -------- -------------- -------- -------
2016 performance, restated at 2017 average exchange rates
GBPM Ongoing IPF Digital Ongoing Lithuania Central Group
home credit Group and Slovakia costs
------------------------- ------------- ------------ -------- -------------- -------- --------
Credit issued 1,064.0 160.7 1,224.7 3.8 - 1,228.5
Average net receivables 817.0 92.1 909.1 20.8 - 929.9
Revenue 739.7 62.1 801.8 11.8 - 813.6
Impairment (192.8) (18.9) (211.7) 12.5 - (199.2)
Net revenue 546.9 43.2 590.1 24.3 - 614.4
Finance costs (44.9) (4.2) (49.1) (1.1) (0.1) (50.3)
Agents' commission (87.8) - (87.8) (4.2) - (92.0)
Other costs (273.8) (49.3) (323.1) (26.9) (14.8) (364.8)
------------------------- ------------- ------------ -------- -------------- -------- --------
Year-on-year movement at constant exchange rates
GBPM Ongoing IPF Digital Ongoing Lithuania Central Group
home credit Group and Slovakia costs
------------------------- ------------- ------------ -------- -------------- --------- ------- Credit issued 0.6% 43.6% 6.3% (100.0%) - 5.9% Average net receivables 2.1% 72.9% 9.2% (96.2%) - 6.9% Revenue (2.4%) 67.6% 3.0% - - 1.5% Impairment 13.5% (127.0%) 1.0% (32.0%) - (1.0%) Net revenue 1.5% 41.7% 4.4% (65.0%) - 1.7% Finance costs (4.2%) (100.0%) 12.4% - (100.0%) (9.7%) Agents' commission 2.6% - (2.6%) (90.5%) - 6.6% Other costs (7.3%) (30.8%) 10.9% (81.8%) (0.7%) (3.6%) ------------------------- ------------- ------------ -------- -------------- --------- -------
Return on assets (ROA) for ongoing home credit
ROA is calculated as profit before interest after tax divided by average receivables.
Northern Southern Europe Mexico Ongoing
Europe Europe home
credit
---------------------------- --------- --------- ------- ------- --------
Profit before tax (GBPM) 75.6 40.3 115.9 11.7 127.6
Interest (GBPM) 21.7 11.5 33.2 8.6 41.8
Profit before interest
and tax(GBPM) 97.3 51.8 149.1 20.3 169.4
Taxation (GBPM) (25.1) (13.4) (38.5) (5.2) (43.8)
Profit before interest
after tax(GBPM) 72.2 38.4 110.6 15.1 125.6
Average receivables (GBPM) 403.3 205.5 608.8 149.7 758.5
---------------------------- --------- --------- ------- ------- --------
Return on assets 2016 17.9% 18.7% 18.2% 10.1% 16.6%
---------------------------- --------- --------- ------- ------- --------
Profit before tax (GBPM) 59.8 54.5 114.3 14.7 129.0
Interest (GBPM) 24.4 12.2 36.6 10.2 46.8
Profit before interest
and tax (GBPM) 84.2 66.7 150.9 24.9 175.8
Taxation(1) (GBPM) (24.4) (19.3) (43.7) (7.2) (50.9)
Profit before interest
after tax (GBPM) 59.8 47.4 107.2 17.7 124.9
Average receivables (GBPM) 424.0 237.7 661.7 172.2 833.9
---------------------------- --------- --------- ------- ------- --------
Return on assets 2017 14.1% 19.9% 16.2% 10.3% 15.0%
---------------------------- --------- --------- ------- ------- --------
(1) Adjusted for exceptional tax charge
Return on assets from continuing operations
HC Europe HC Mexico IPF Digital Central Slovakia Group
costs and Lithuania
--------------------- ---------- ---------- ------------ -------- --------------- -------
Profit before tax
(GBPM) 115.9 11.7 (9.3) (14.9) (7.4) 96.0
Interest (GBPM) 33.2 8.6 4.0 0.1 0.9 46.8
PBIT (GBPM) 149.1 20.3 (5.3) (14.8) (6.5) 142.8
Taxation (GBPM) (38.5) (5.2) 1.4 3.8 1.7 (36.9)
PBIAT (GBPM) 110.6 15.1 (3.9) (11.0) (4.8) 105.9
Average receivables
(GBPM) 608.8 149.7 86.4 - 19.2 864.1
--------------------- ---------- ---------- ------------ -------- --------------- -------
Return on assets
2016 18.2% 10.1% (4.5%) - (25.1%) 12.3%
--------------------- ---------- ---------- ------------ -------- --------------- -------
Profit before tax
(GBPM) 114.3 14.7 (11.7) (14.9) 3.2 105.6
Interest (GBPM) 36.6 10.2 8.4 - - 55.2
PBIT (GBPM) 150.9 24.9 (3.3) (14.9) 3.2 160.8
Taxation(1) (GBPM) (43.7) (7.2) 1.0 4.3 (0.9) (46.6)
PBIAT (GBPM) 107.2 17.7 (2.3) (10.6) 2.3 114.2
Average receivables
(GBPM) 661.7 172.2 159.2 - 0.8 993.9
--------------------- ---------- ---------- ------------ -------- --------------- -------
Return on assets
2017 16.2% 10.3% (1.5%) - 284.1% 11.5%
--------------------- ---------- ---------- ------------ -------- --------------- -------
(1) Adjusted for exceptional tax charge
Return on equity (ROE)
ROE is calculated as profit after pre-exceptional tax divided by average net assets (after adding back exceptional tax charge)
2017 2015 2016
GBPM GBPM GBPM
----------------------------------------- ------ ------ ------
Equity (net assets) 496.9 327.2 429.5
Add back exceptional tax charge 30.0 - -
Adjusted equity 526.9 327.2 429.5
Average adjusted equity 478.2 378.4
Profit after pre-exceptional tax charge 75.0 71.2
----------------------------------------- ------ ------ ------
Return on equity 15.7% 18.8%
----------------------------------------- ------ ------ ------
Earnings before interest, tax, depreciation and amortisation (EBITDA)
2017 2016
GBPM GBPM
---------------------------------------------- ------ ------
Profit before tax from continuing operations 105.6 96.0
Add back:
Interest 55.2 46.8
Depreciation 10.3 9.9
Amortisation 11.4 9.0
---------------------------------------------- ------ ------
EBITDA 182.5 161.7
---------------------------------------------- ------ ------
Information for shareholders
1. The shares will be marked ex-dividend on 12 April 2018.
2. The final dividend, which is subject to shareholder approval, will be paid on 11 May 2018 to shareholders on the register at the close of business on 13 April 2018. Dividend warrants/vouchers will be posted on 9 May 2018.
3. A dividend reinvestment scheme is operated by Link Registrars. For further information contact them at The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU (telephone 0371 664 0381. Calls cost 12 pence per minute plus your phone company's access charge, or +44 (0)20 8639 3367 (from outside the UK charged at the applicable international rate). Lines are open 8.30am to 5.30pm Monday to Friday excluding bank holidays).
4. The Annual Report and Financial Statements 2017, the notice of the annual general meeting and a proxy card will be posted on 20 March 2018 to shareholders who have elected to continue receiving documents from the Company in hard copy form. All other shareholders will be sent a proxy card and a letter explaining how to access the documents on the Company's website from 22 March 2018 or an email with the equivalent information.
5. The annual general meeting will be held at 10.30am on 4 May 2018 at the Company's registered office, Number Three, Leeds City Office Park, Meadow Lane, Leeds, LS11 5BD.
This report has been prepared solely to provide additional information to shareholders to assess the Group's strategies and the potential for those strategies to succeed. The report should not be relied on by any other party or for any other purpose. The report contains certain forward-looking statements. These statements are made by the directors in good faith based on the information available to them up to the time of their approval of this report but such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information. Percentage change figures for all performance measures, other than profit before taxation and earnings per share, unless otherwise stated, are quoted after restating prior year figures at a constant exchange rate (CER) for 2017 in order to present the underlying performance variance.
Investor relations and media contacts
International Personal Finance Rachel Moran - Investor Relations
plc +44 (0)7760 167637 / +44 (0)113
285 6798
Gergely Mikola - Media
+36 20 339 02 25
FTI Consulting Neil Doyle
+44 (0)20 3727 1141 / +44 (0)7771
978 220
Laura Ewart
+44 (0)20 3727 1160 / +44 (0)7711
387085
International Personal Finance will host a live webcast of its full-year results presentation at 08:30hrs (GMT) today - Thursday 1 March 2018, which can be accessed in the Investors section of our website at www.ipfin.co.uk. A copy of this statement can also be found on our website at www.ipfin.co.uk.
Legal Entity Identifier: 213800II1O44IRKUZB59
This information is provided by RNS
The company news service from the London Stock Exchange
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