International Personal Finance plc (IPF) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to our results presentation for 2020. Now I'm really sorry that we can't be with you in person this morning. But over the next hour or so, Justin and I will do our very best to talk you through in detail our financial results for the year. I'll start by dealing with the challenges that COVID has presented our business and how we've dealt with these through our 4-pillar strategy. In particular, focusing on pillars 1 and 2 upfront as these are already complete. After that, Justin will deal with the financial results for each of our business units. And he will also talk about the balance sheet and how we've restructured our cost base. I'll then deal with pillars 3 and 4, which deal with the return of momentum to the business and how we're going to create long-term stakeholder value. As always, again, we'll have plenty of time for Q&A. Now I'm sure that the businesses, each of us work in, have faced very difficult challenges in 2020. And this is particularly the case for a business like ours, where we rely so heavily on face-to-face interaction between our colleagues and our customers. With 17,000 agents and 6,000 employees, our colleagues and their families have had to bear their share of personal loss and grief. And this is something we have been very mindful of as we manage our business through the pandemic. Government restrictions on freedom of movement struck at the very heart of our agent customer relationships, preventing our agents from visiting their customers and even when the most severe restrictions were lifted, many agents and indeed, customers were reluctant to meet each other for personal health reasons. This severely interrupted the flow of our business. And the dual challenge we had to overcome was how to make our agents and customers feel more secure, and at the same time, develop alternative sales and collections practices, so we could maintain our portfolio quality and manage liquidity effectively. At the same time, we needed to enable remote working for 6,000 colleagues who were no longer able to attend their offices. And I'm delighted to say that we've managed to do this in a matter of weeks without any business interruption. Further challenges arose as governments understood the true scale of the pandemic and how it was inflicting damage on the financial standing of their citizens, and they took action to offer them some protection by implementing temporary repayment moratoria and, in some cases, reduced rig counts. All of these actions had a significant disruptive impact on our business, and some are still in place today. Moving on to the next challenge. You would have been aware, I'm sure, that we intended to refinance our Eurobond in 2020. What you would not have known is that in March of last year, we were within days of launching our refinancing roadshow. All of our documentation was ready, and we and our professional advisers were about to push the start button when the pandemic arrived. Initially, we thought this suspension would be for a few weeks. But clearly, that is not how it played out, and we eventually completed a successful refinancing in November. The final major hurdle that was placed in our way came in the form of the effective closure of the consumer debt purchase markets. This industry forms an important part of our business model and when it ceased purchasing consumer receivables, we had to reorganize our operating cycle to coupe with this fundamental change. Happily, these businesses are now purchasing debt again. It's fair to say that in any given year, just 1 of these challenges will be seen as a stern test for our business to contend with. But we've experienced all of these cumulative impacts over a period of 9 months. As we can see on this page, however, our business has proven to be resilient and has now been fully tested in the most trying and difficult of circumstances. The highly strategic response we adopted was implemented with effect from mid-March, and we have stuck with this strategy through 2020 and into 2021. The core element of our approach was recognizing that our business had surplus organizational capacity as we weren't transacting as much volume as we had anticipated. And we, therefore, undertook a significant rightsizing exercise that directly led to cost savings of approximately GBP 58 million. This and other elements of our strategic response laid the foundations for our robust trading performance in the second half of the year, and we saw a significant swing in profitability from a loss of GBP 47 million in H1 to a profit of GBP 18 million in H2. And as I mentioned a moment ago, we did refinance the business in quarter 4, whilst at the same time, our effective management of liquidity improved our equity to receivables ratio to over 55%. Turning now to our 4-pillar strategy. As you can see on this page, Pillar 1 is where we set out as our #1 priority, the protection of our people, prioritizing our loyal customers and protecting the group as a whole. Pillar 2, broadly speaking, took place in the second half of 2020, and that involved the rightsizing of the business and the refinancing of the balance sheet. Pillars 3 and 4 deal with rebuilding momentum and regrowing the business, and I'll talk to these after Justin has taken us through the detailed financials. So let's look now at the detail of pillars 1 and 2. As I mentioned, we have 17,000 or so agents who meet with their customers every week, and we needed to ensure that their health and safety was our #1 priority. In fact, from mid-March 2020, we've have made that our mantra across the business, ensuring that everybody who worked in the field was provided with full support in terms of PPE and appropriate health and safety training. We also provided the same level of support to our branch-based staff. Notwithstanding these actions, many agents still couldn't call and see their customers because of restrictions on freedom of movement. But as soon as these restrictions were eased, and because we have provided them with the right PPE, they felt comfortable going back to do business as they had done prior to the pandemic. Clearly, during this highly disruptive period, agents were unable to be as productive as they would ordinarily be. And in the normal course of events, this would result in reduced earnings for our agents. However, we took the strategic decision to recognize that it wasn't through any thought of their own that they were less productive. And so we decided to protect as, far as possible, their commissions during this period. We did incur additional costs as a result of this, but it is very clear that the loyalty we have shown our agents is now being repaid in kind as we work our way into 2021. Now when our agents couldn't call and see their customers, that didn't mean our customers wanted to start repaying their loans. And so we very quickly established alternative payment methods for these customers. Of course, we wouldn't normally come between an agent and a customer. But in these very special circumstances, we believe this was the right thing to do for our business and our customers. And as we'll see in a second, these alternative payment methods helped us to deliver month-on-month improvements in our collections performance. It's also worth noting however that as soon as restrictions were lifted, our customers requested to go back to paying via their agents, which is, I think, a very clear sign of the bond that operates between the agent and the customer. In addition, recognizing that some of our customers were experiencing difficulties, we decided to propose higher volumes of payment holidays and deferred payments right across the group. Another key focus area was the effective management of our liquidity position, something we executed very well, and we will talk more about this in a moment. Looking now to pillar 2. It was clear to us that given the restrictions on the volume of new loans issued, our business had excess organizational capacity. And so we took the difficult but, I think, very necessary decision to rightsize our operations during the summer period, removing over 1,200 roles and significant associated costs. In addition, we decided to look again at the returns we were making on each of our investments. And as a result, we closed or merged some operations. In Mexico, we merged a small number of branches where we didn't believe that individually they were going to achieve our hurdle rates. And in Poland, we merged our 2 digital businesses into 1 to drive synergies and improve portfolio quality. Of course, we were very pleased to have got the bond refinancing completed in November, though naturally disappointed we couldn't have gone ahead in March prior to COVID when rates would have been far more attractive. And the final element of pillar 2 was the month-by-month rebalancing between collections and sales, whereby we increased the drive on sales as we demonstrated our ability to collect effectively. To demonstrate how this element of our strategy worked in practice, if we look at this page, we can see how collections effectiveness improving month-on-month. You can see here that the worst month was April when the initial tranche of restrictions came into force, and we were ramping up our PPE rollout for our field staff. We achieved 76% of the collections we would have expected for that period. However, with the rollout of PPE complete, new payment methods in place and with our decision to support agent commissions, we improved collections month-on-month so that by quarter 4, we were operating close to 100% effectiveness. Now if you look to the right-hand side of the page, the graph here demonstrates the impact of COVID on our sales. Again, April was our most difficult month. But what you will notice now is that there is a lag between collections improving and a subsequent increase in loans issued. At the time, we were extremely concerned about the worsening macroeconomic situation, and we've really tightened up on our scorecard to reduce the volume of credit issued. We also wanted to see clear evidence of sustained positive momentum in our collections performance before relaxing the credit settings. As we gained more and more confidence about our collections effectiveness, you can see that with a month or so lag, we started to step up the volume of sales so that by the end of the year, real momentum had returned to the business. Taking all of these factors into account. If we look now at the year as a whole, we can see that we have suffered a very significant reduction in the scale of the portfolio and the volume of sales achieved in the period. In addition and for very obvious reasons, the pandemic has had a seriously negative impact on impairment. However, the quality of the business we did write during the year was very good because we had tightened our scorecard setting so much. One of the notable effect is that we are now a significantly more efficient business because of the restructuring we undertook, and we did return to profitability in the second half of the year. With our refinancing in place, we have the funding to go out there and build on the momentum we created in the second half of the year and start to regrow the business again. And with that now, I'll hand you over to Justin, who's going to walk us through the detailed financials of the business. Justin, over to you.

Thank you, Gerard, and good morning, everyone. I'm going to talk through the group's financial performance in 2020. And as part of this, I'll go into detail about the drivers of each key line in the P&L account and draw out the specific factors that have impacted our different reporting segments. I'll then close with an update on the strength of the group's balance sheet and funding position. This first slide sets out a summary of the financial performance reported in 2020. As Gerard explained earlier, we responded to lower collections, temporary price gaps and the risk of an economic downturn by implementing a significant timing of our credit scorecard in the second half of March. And we did that in order to manage credit risk and liquidity. We are very encouraged by the improving collections performance towards the end of the second quarter. And this gave us the confidence to start easing those very tight credit settings during the rest of the year. For the year as a whole, this resulted in a reduction in credit issued of 41% and and a 19% reduction in average net receivables. Revenue contracted by 22% due to a combination of lower receivables and a reduction in revenue yields. The reduction in collections from disruption to agent service, the impact of government debt repayment moratoria and constrained household budgets resulted in a material adverse impact on the impairment charge, and now increased by 10 percentage points year-on-year. All of this increase was reported in the first half of the year, and we were really pleased to see the significant improvement in impairment in half 2. In response to the pandemic, we implemented a highly affected cost control program that delivered savings totaling GBP 58 million. However, the contraction in revenue arising from the reduced scale of the business meant that the cost income ratio increased by 4 percentage points despite the pleasing reduction in costs. The contraction in revenue and the pandemic related increase in impairment was partially offset by a reduction in the cost base, and the group reported a pre-exceptional loss before tax of GBP 28.8 million. This comprised a loss in the first half of the year of GBP 46.8 million followed by a return to profitability in the second half with a profit of GBP 18 million, from which we expect to build, grow profitability in 2021. On the next few slides, I'll talk through the key performance drivers, starting with credit issued. As mentioned on the last slide, at the onset of the pandemic, we implemented a very significant timing of credit settings across all our businesses. And we did that in order to manage liquidity and credit risk in what was then a very uncertain environment. During this time, our reduced lending volumes were focused on our most loyal, high-quality customers to ensure that they continue to have access to credit. The improvements in collections as agents were allowed to start visiting customs again, gave us confidence to ease the very tight credit settings from June onwards. And while cautious in approach, it was pleasing to see increases in the amount of credit that we issued on a quarter-by-quarter basis, as is illustrated by the chart on the top right-hand side of the slide. In the second quarter, credit issued was around 1/3 of 2019 levels. And with careful management, we're pleased to increase that to just over 2/3 in the fourth quarter. As you'll see from the chart on the bottom right of the slide, group credit issued for the year as a whole was 41% lower year-on-year, with larger reductions in both Mexico and IPF Digital and home credit in Europe. This reflected a combination of 3 factors. Firstly, the early resumption of full agent service in Europe allowed us to ease credit settings more quickly in these markets. Secondly, credit settings in Mexico and IPF digital's new markets had already been tightened to improve credit quality. And this resulted in reduced volumes before the onset of COVID-19. Finally, we took the decision to cease lending in Finland from July 2020 and collect out the portfolio as a result of the government's decision to tighten the rate cap in that country. Turning now to receivables and revenues. Group average net receivables contracted by 19%, as set out in the chart on the top right of the slide. This was driven by a reduction in the size of the portfolio resulted from lower credit issued, together with higher impairment provisions booked in response to the pandemic. The reduction was most significant in Mexico, where average net receivables contracted by 31% due to credit timing in both the second half of 2019 and in 2020, together with the relatively short average duration of the portfolio in that market. Revenue, which is illustrated in the chart on the bottom right of the slide, contracted year-on-year by 22%. And and this was driven by a combination of the reduction in receivables and a compression in revenue yield. This compression was driven by higher early settlement rebate charges and the impact of the temporary rate cap in Poland and high levels of claims management charges in Spain. Turning now to impairments, which was impacted significantly by the pandemic and is above our target range of 25% to 30% of revenue for the first time in IPF's history. The bars on the chart set out impairment as a percentage of revenue for 2020. And and the line illustrates the year-on-year change in percentage points. Group impairment increased by 10 percentage points to 37.4%, with the increase being recorded in the first half of the year. This was principally driven by the impact of COVID-19 on our operations and its flow through into impairment accounting under IFRS 9. And that's covered in detail in today's results statement and is consistent with the approach that we adopted at the half year. Impairments in H2 was at more normalized levels as the business recovered from the impact of the pandemic. In our European home credit businesses, impairment increased by 24 percentage points to 36.4%, which was driven by the operational impacts of COVID-19 on cash flows and impairment accounting. Impairments increased further in the second half of the year, which is due to the continued impact of the opt-out debt repayment moratoria in Hungary and its extension through to June 2021. I'm pleased to report that we delivered a significant improvement in Mexico's impairment despite the impact of COVID-19. The charge reduced by 8 percentage points year-on-year to 33.7%. And that was driven by changes to improve the consistency of operational execution and credit quality that were implemented from the second half of 2019. These actions delivered a substantial improvement to the underlying collections performance in 2020, and we expect to see further improvements in impairment during 2021. Impairments as a percentage of revenue was largely unchanged year-on-year in IPF Digital. In common with Mexico, we have been focused on improving impairment in the new markets since mid-2019. And it was pleasing to see the benefit on the underlying performance, which is partially offset by the pandemic related incremental impairment charges. In our established digital markets, the underlying quality of our portfolio remains very good, but was impacted by higher COVID-19 provisions and lower debt sale prices. Overall, we expect impairment to normalize during 2021 as the group continues to recover from the impact of the pandemic. Moving on now to costs. And this slide sets out the actions that we took to manage our cost base in 2020 and the reductions that we delivered. As Gerard mentioned earlier, we instigated an immediate cost reduction exercise in response to the pandemic which was initially focused on the elimination of discretionary expenditure alongside targeted reductions in headcount in both Poland and Mexico. In the second half of the year, we implemented a right-sizing program to align the business to its reduced scale of operations. And this targeted back office roles where possible in order to maintain frontline flexibility to rebuild the business in 2021 and beyond. This extremely painful exercise for our business and many of our colleagues, together with the actions taken in the first half, resulted in the removal of around 1,200 roles from the organization. Group costs reduced year-on-year by 16% or GBP 58 million, with savings being generated right across the business. We expect to retain these costs savings into 2021 and to maintain an efficient cost base going forward. As you know, the personal relationships that our agents have with their customers is at the heart of the success of the home business credit model. And that's because it drives sales, regular collections and customer retention. As Gerard mentioned earlier, we chose to support the incomes of our agents in order to help maintain agent customer relationships. And as a result, agent commission costs declined year-on-year by 6%, and that was significantly lower than the reduction in collections. Our decision to support agent incomes proved to be the right course of action and was the key to underpinning the progressive improvements in collections effectiveness that we delivered in the second half of the year. The next slide sets out a walk between the profit reported in 2019 to this year's pre-exceptional loss of GBP 28.8 million, and therefore, brings together the P&L drivers explained over the last few slides. To recap, the key drivers of the year-on-year reduction in profitability were lower revenues arising from a combination of the small portfolio and a reduction in revenue yields. Together with a modest increase in the absolute level of impairment. The walk also draws out the very positive impact from the successful cost reduction program that we delivered in the year, alongside lower agent commission and financing costs. I'm very pleased to be able to report a return to profitability in the second half of 2020, which is a GBP 65 million swing from the first half loss. This was driven by a combination of materially improved impairment and a reduction in the cost base, partially offset by lower revenues. The group's results in 2020 include an exceptional charge of GBP 11.9 million, which is summarized on the slide. The charge comprises 3 items: firstly, a GBP 10.6 million charge arising from the decision to close the group's business in Finland, following the timing of the rate cap. This include an incremental impairment charge and accelerated amortization of certain software assets. And secondly, a one-off cost of GBP 9.5 million was incurred in respect of the restructuring activities that were completed during the year. These 2 items were partially offset by exceptional interest income of GBP 8.2 million received in August following the successful closure of the long-running tax dispute in Poland. The amount recorded as an exceptional item relates to the interest that accrued between 2017 and 2019. Turning now to the tax charge of GBP 23.5 million. And you may typically expect tax credit rather than a charge when a business reports a loss. But this charge arises largely from 3 factors. Firstly, the impairment charge in our Polish businesses is not deductible for tax purposes; secondly, certain taxes in Hungary are levied based on income statement measures from prior periods; and finally, we have written off certain deferred tax asset balances in the period. The first 2 of these factors have been a feature of the group's tax charge for a few years. And will continue to have an impact going forward, whilst the third is not expected to be repeated. The tax charge is expected to normalize progressively as profitability recovers in future years. And finally, turning to the balance sheet, cash flow and liquidity. The group's balance sheet continues to be very robust. With the equity to receivables ratio strengthening by 10 percentage points year-on-year to 55%. Our focus on liquidity and risk management during much of 2020 resulted in cash generation before financing of GBP 269 million. The contraction in this size of the group's balance sheet during the year reduced our debt funding requirements and borrowings net of nonoperational cash balances reduced by GBP 265 million to GBP 414 million. In November 2020, we completed the refinancing of our 2021 Eurobond with the issuance of a 2025 [ 341 million Eurobond ]. We also obtained covenant amendments from other providers of debt financing, including the holders of our Sterling and Swedish krona bonds and our funding banks. At December 2020, we had debt facilities totaling GBP 624 million with a weighted average maturity profile of over 3 years. Total headroom against debt facilities together with nonoperational cash balances at December 2020 was GBP 210 million, and that comprised nonoperational cash balances of GBP 85 million and GBP 125 million of undrawn debt facilities. This funding, together with a robust balance sheet strength, will provide a solid platform from which we can regrow the business. So to conclude, the profit and loss account illustrates that 2020 was a very challenging year for IPF. But I'm very pleased with how our teams responded to the pandemic. I'm pleased with the return to profitability that we delivered in the second half of the year and also with the strong capital foundations now in place from which we will rebuild the business in 2021 and beyond. And with that, I'll hand back to Gerard for the strategy update.

Thanks, Justin. Let's now turn to pillars 3 and 4 of our strategy and to help us with this discussion, I thought it would be useful to have a very brief reminder of the importance we attach to the role we play in society. This is a chart that we have used many times before, and it very effectively sets out our view that we are here to make a positive difference to the lives of our customers and that we do this by the provision of straightforward financial products that are appropriate for our customers' needs. The customers we serve are those who are in the medium to low-income brackets and who are likely to have imperfect credit ratings and therefore, find it more difficult to obtain mainstream finance. And that's where we play it, and we do so very effectively. Having successfully executed pillars 1 and 2 of our strategy, we are now fully focused on rebuilding the business and delivering sustainable long-term growth for our stakeholders. Pillar 3 is currently underway, and we can see this in the momentum that has returned to our business. We are gradually relaxing our credit settings and bringing them back towards pre pandemic levels. As the temporary COVID restrictions and price caps are removed, we will reprice and adjust our products to the new settings and begin to push more credit when it is appropriate to do so. And in Pillar 4, we will be adding digital offerings to our European home credit markets, developing our hybrid sales channel, which seeks to serve those customers who fall somewhere between a full agent service and a digital service and we will be expanding our operations in Mexico and digital. To see how this is reflected across the group, let's turn now to each of our individual business units, starting with European home credit. You will have seen from the numbers that Justin took us through a moment ago that the impairment charge in our European home credit business increased significantly as a result of COVID. However, it is also abundantly clear that these businesses are tremendously resilient and that they have been tested and proven in these difficult circumstances. Notwithstanding the level of change that they have had to deal with from COVID or other regulatory matters, they continue to generate significant cash and earnings. And we only have to look at the graph on the right-hand side of the page to see how consistently these businesses have delivered for the group year after year. In the months ahead, we will be focused on relaxing our credit settings as restrictions ease. And in particular, we look forward to getting back to full-service in Poland and Hungary with a temporary moratoria and rate caps that have impacted the economics of our business expire. And finally, maintaining robust collections performance is a must, but something that we feel we are perfectly capable of delivering. As we look beyond 2021, we aim to take market share from those competitors who have exited these markets because of the difficulties of COVID or whose balance sheets are insufficiently robust to withstand the extra pressure on consumer finance businesses today. We will continue our very successful strategy of improving our portfolio quality and extending slightly larger and slightly longer-term loans to our best customers. We now have a digital offering available in our Czech business. And as this model is proven in the months ahead, we fully expect to roll out similar operations in our other markets. And I mentioned earlier, hybrid. This is the offering for those customers who would prefer to get a digital loan, but find that their credit quality is slightly short of the requirements necessary. In that case, we would expect to be able to fulfill much of their journey with us digitally and then to complete the final elements of the process with the help of an agent. This is something that is unique to our business, and we fully expect it to help us to regrow the portfolio in the years ahead. Our value-added services are also playing a more important role in our business today. And we will seek to expand these in the coming years. And finally, just a comment on digitization. As we mentioned earlier, we have taken significant cost out of our business through our rightsizing strategy. And we fully intend to maintain the additional operating leverage this has created. We do also, however, expect to be able to digitize further non-value added processes within the organization. And this is something that we will be focused on through 2021 and beyond. Turning now to Mexico. As Justin explained earlier, we were delighted with the progress our leadership in Mexico made in 2019 as they sought to improve our overall portfolio credit quality. As a result of their efforts, the COVID impact on impairment was significantly less than it would otherwise have been. And it is our intention to maintain this improved portfolio quality as we cautiously relax our credit settings in the months ahead. Clearly, these relaxations are fully dependent on how COVID develops in the country. We also expect to see further efficiencies coming from our focus on branch network productivity and the rigorous cost management approach that has been adopted by our leadership team will drive further synergies as we regrow the business during the year. Now as we look to our longer-term growth prospects, the 1 thing I would like to emphasize is that our view of the scale of the opportunity in Mexico is unchanged. There are over 45 million people in our target consumer segment in Mexico. And we believe that our agent service is perfectly positioned to serve this demographic. We are presently in the process of modernizing our agent network by rolling out the handheld technology that we use across our operations in Europe. In addition, we will also be dedicating reserves to improving the speed of our credit decisioning and what I would call time to cash. And improvements in these areas can only lead to better outcomes in terms of satisfied customers and volumes of new business written. Now many of you will have heard us talk about Negocio, our micro business lending unit. As COVID eases, we expect to start to rebuild business volumes in this segment, focusing on the opportunities around Mexico City and the surrounding area. And finally, our home credit and digital operations in Mexico are collaborating to understand the opportunities for a hybrid offering for our target customer segment. It is clear that as a result of the impacts of COVID, more consumers in Mexico are willing to try digital offerings, and we fully intend to examine the product and channel opportunities that this might provide. Let's now look at Digital. As you know, we have a thriving digital business in our group. And for ease of reporting, we split this into the established markets of Estonia, Latvia, Lithuania and Finland, and our new markets in Poland, Spain, Australia and Mexico. Although our digital markets do not rely on face-to-face interaction with customers, they were nevertheless, significantly impacted by the pandemic. As with our other businesses, we restricted very rapidly and quite severely the volume of credit we were issuing through our digital operations. And we saw this earlier when Justin talked about the reduction in the volume of credit issued across the group. We have begun to relax these credit settings on a country-by-country basis, and I fully expect that in the coming months, we should get back to pre pandemic levels once COVID has subsided and customer appetite for borrowing and spending returns to more normal levels. We will be using our new mobile wallet, which is currently being rolled out across Latvia and Estonia to attract new customer segments and help us to build longer, more productive relationships with our customers. Our mobile wallet product offers bank like facilities and when used in conjunction with our revolving credit product, offers our customer segment a single point from which they can manage their finances should they wish to do so. We have already seen early signs that those customers who use our mobile wallet increase their volume of transactions with us. And it is our intention to add to the functionality of the wallet in the coming months. I should also mention that we are successfully collecting out our Finnish portfolio, and we will scale these operations appropriately as we make further progress in this area. Referring to our new markets, the same commentary applies in respect of relaxing credit settings as and when appropriate. In Poland, we are delivering efficiencies of scale by uniting our 2 digital businesses in this country, hapi and Provident Direct. In Spain, we have launched a new product construct that went live in the past couple of weeks, and we are cautiously optimistic about its prospects for rebuilding quality growth in this significant market. Clearly, as we progress the development of mobile wallet in our established markets, we will use the lessons learnt to launch this product in our new markets. Our businesses in Australia and Mexico are progressing well. And for the new markets as a whole, we are now focused on building scale and bringing these markets to profitability. In truth, I see our plan for IPF digital as a relaunch. The news in Finland has been a significant setback for our business. And the arrival of COVID so soon after we had delivered our maiden profit was a major blow and interrupted the momentum we were so clearly building. The good news is that we have really strong technology, a dedicated and professional team and strong brands. And we have significant room for operational leverage in each of our new markets. 2020 was certainly disappointing, but it does not change our view of the potential for our digital business. Well, that completes the walk-through of our 3 business units. So let me summarize briefly before we go to our live Q&A. I know I said this in my opening remarks, but I want to repeat it here. We have a proven business model that has been tested in the most trying of circumstances and its resilience is unquestioned. I fully believe this is the case because we are so clear as to the role we play in society, providing credit responsibly to those who are underbanked and underserved. We are uniquely well positioned to meet the demand from this customer segment, and we have unrivaled knowledge built up over decades of serving these customers. 2020 was a very difficult year for our business, but we are now in rebuilding mode, slowly but progressively relaxing our credit settings, whilst maintaining our focus on credit quality and cost efficiency. Having completed our refinancing, our balance sheet is in a very strong position, and this will enable us to move ahead and expand our operations in Digital and Mexico home credit, whilst improving all the time, our technology, product and channel offerings for our customers, both in European home credit and our other divisions. That completes our review. And I would now like to move to our live Q&A.

[Operator Instructions] Now Rachel is going to act as our moderator for these questions. And while Rachel is compiling any inbound questions, I'd just like to take this opportunity to thank my colleagues. 2020 has been an incredibly difficult year for all of us. And we have a lot of people working very hard across this business to deliver these results. So my sincere thank you to all of my colleagues in all of our operations. So Rachel, over to you then if we have any inbound questions, please?

Yes, sure. Thank you for the questions so far. Please keep them coming. The first 2 are from [ Jorge Moreno ]. Thanks, [ Jorge ]. The first question he's asked is can you run through the debt liquidity position of the company? And his second question is, can you provide guidance for 2021?

Thanks, Rachel. I'll pick those ones up. So in terms of the liquidity position, the group has total debt facilities of GBP 624 million at the end of 2020. And we had a headroom against those facilities of GBP 125 million of cash that we could draw from the facilities, together with GBP 85 million of cash. That isn't currently being used in our operations and therefore, could be deployed to start to rebuild our receivables portfolio. So in total, GBP 210 million of liquidity. And the weighted average maturity profile of the debt facilities is about 3.3 years. So we've got a really strong funding position following the refinancing of the Eurobond in November. In terms of the guidance position, well, before today, the consensus for profitability in 2020 was around about GBP 33 million and we actually expect that to increase by few single-digit millions as a result of the guidance we're providing to analysts. So we expect that to increase by, as I said, a few single digits millions. And we're pretty comfortable with that position for now.

Thank you. [ Nicholas Pelosi ] has asked -- he'd like to know a little bit more about how collections were processed when customers were perhaps reluctant to see agents or that they weren't actually able to meet?

Sure. Well, as I said earlier, we don't ordinarily get in between the agent and the customer. That's a very special relationship. But these were very special circumstances. And so what we organized was the ability for those customers who wanted to keep paying to be able to do so, either through, for instance, SMS, debit card, convenience stores. And we offered a range of options for customers in each of our countries. And that proves to be extremely helpful as we saw in those earlier graphs where we talked about the increasing collections effectiveness month-on-month. Now I just want to reiterate that we kept those options open, but as the restrictions came off, customers wanted to go back to their tried and tested methodology of dealing directly with their agent.So very, very effective. It also proves useful to us. Because it's told us that customers are willing to use these options if there is an issue. And that could be helpful to us in the future.

Thank you. A question now from Stuart Duncan. A couple of questions actually. Can you talk about how you -- what you've seen in terms of changing demand for credit? Has it increased in recent months? And then also how long will it take for the loan book to run off in Finland? And how do you balance this with the reducing cost base?

Justin, do you want to pick that up?

So I'll take the second 1 of those, yes. So the portfolio in Finland as at the end of December is about GBP 17 million and we're really pleased with how that's running off, very disappointed obviously to be exiting that market. But in terms of the collect out, they're going pretty well. We'd expect it to be substantially completed during 2021. And I guess it's been a digital business. It's a much simpler proposition to collect the portfolio out compared to a home credit business. So the cost base in Finland is pretty small, and we'll balance that off against the collections cash flow as we move through, particularly at the second half of 2021. But the cost position isn't a significant consideration in that regard.

And in terms of customer demand, I guess in Q3, we saw demand picking up again. But then towards the end of Q3, I suppose wave 2 or wave 3, whichever it was of the pandemic was rolling through, particularly Central Europe, but also the kind of Baltic countries. And those countries went back into more serious lockdown and waves of lockdown that were being extended. And so what we saw then was demand coming off reasonably significantly to start with. But clearly, then we do have seasonal demand around the Christmas period. So I would say we're seeing anything from a 5% to 10% reduction over what we would ordinarily expect in terms of demand, and we would expect to see demand rebound when physical restrictions are removed. And by that, I mean retail outlets, in particular, because our type of customer tends to be the individual who goes to a retail store rather than spend their life online purchasing things. So I wouldn't say it's a huge number. I'd like to see it rebound, but it will depend on the easing of restrictions.

Okay. We've got 4 questions now from Gary Greenwood of Shore Capital. I'll take them individually. What has the pandemic done to the competitive landscape? Have you seen permanent capacity withdrawal? And if so, where has this been most evident?

I'll get it. Well, I guess it's been on the capacity side. It's been most noticeable on the digital space. And there, we've seen a number of collapses for want of a better description of businesses. So [ CrediTech ] is out, and we know that their operations have ceased. We also know that 4finance and others are withdrawing from specific countries. So the way I would describe it is that prior to the pandemic, there was a lot of what I would call flag planting going on by digital operations. And they wanted to show that they were global, and they were in 20 countries. But truthfully, if you were to look at a lot of those numbers, divide their customer number by the number of countries, it didn't amount to that many customers in any 1 country, except for their home base. But it costs a lot of money to keep those things running. So what we've seen is, I would say, a contraction back to a core number of countries for a lot of those digital players and some of the digital players actually exiting in total. So I think that was the first question.

Yes, the second question is, assuming collections performance remains resilient, what levels of credit issuance do you need to see for the loan book to grow? And what do you see -- and when do you see this happening if it hasn't already started to happen?

Okay. Let me pick that 1 up. So at a group level, we expect credit issued to grow by around about 30% in 2021. And clearly, the comparators will get a lot easier when we get into the second half of March, and we're comparing ourselves against the initial impact of the pandemic and as we run through the second quarter. The portfolio is -- in January and February is expected to contract modestly. And then we expect it to rebound into growth in -- from the second quarter onwards. So by the time we get to the end of the first half, we'd expect the receivables portfolio to be broadly similar to the end of December and then to see substantial growth in the second half of the year.

Thank you. Third question, what proportion of the cost reduction do you see as being permanent savings as opposed to cyclical reductions? And what do you see as the appropriate cost income ratio for the group in the medium term?

So I think the cost savings year-on-year at constant exchange rates were GBP 58 million. And we expect to maintain a similar cost base in 2021 as we had in 2020. But the composition of that cost base will change a little bit. There'll be a bit less depreciation, and there'll be a bit more focus on money to -- sorry, on spending to generate top line growth. But broadly speaking, I'd expect the cost base to be similar. As part of the actions on the right size and we're trying to protect the customer-facing roles across the organization to give us capacity to start to rebuild the business in 2021. And therefore, we feel pretty comfortable with that overall level of costs. As we move forward from -- into 2022 and beyond, I'd expect the cost base to increase a little bit, but it will be largely driven by costs associated with driving the topline. Cost income ratio in 2021, I'd expect to be a touch higher than 2020, and that's just a function of the math around the revenue and the cost base. But then I'd expect a substantial improvement in 2022. And I'd expect the cost-to-income ratio to move into the [ low 40s ] beyond that.

Gary's final question is, when do you think if IPF Digital will reach profitability?

Well, our expectations for this year are around about breakeven and then moving into profitability in 2022 with further growth from there onwards.

Now we've got a question from [ Volchek ]. Would we expect the dividend in 2021?

I think we are very positively minded about returning to paying dividends. That's what we want to do. I think as we demonstrate to the Board that the momentum we've seen in the second half is sustained. And by that, I mean, collections continues as is, and we fully expect them to. And then also the pandemic hasn't gotten any worse, so therefore, sales are -- where they are today are a little bit better. And that as Justin just explained, we retain the cost savings. When all of those things come together, I think we'd be in a position to have a very positive discussion with the Board about the resumption of paying dividends. And it would be our view to get back to paying dividends as soon as is sensible for the business. So it's certainly our aim to do so.

A question now from Lucy. Do you expect to terminate the home credit model and switch to a digital 1 sometime in the future?

You know, Lucy, absolutely not. And the reason is it was partly what I addressed upfront in the start of my presentation. If you look just, for instance, at European home credit, and just how strong that business has been over the years in terms of its ability to generate cash and profitability, we don't see that changing in the future because the way I think about this is for every 100 applicants in our consumer segment who'd come to us for credit, for every 100 that comes through digital, we are going to be rejecting anything from about 60% or 70% of those right up to 95% of those applicants. And simply because their credit history isn't strong enough. Now for a lot of those applicants, if they were coming through the home credit model, and we were meeting those consumers at home and discussing their needs with them, we'd be able to take far more risk in that case because we have a business model that works for that type of risk. And the other thing to say is that if you were to look at the U.K., which is 1 of the most developed markets in the world when it comes to consumer finance, there is still a thriving home credit market there. Yes, it's being updated by technology and other things. But truthfully, there is a large consumer segment in most countries that can't be dealt with remotely when it comes to the provisional credit, they need face-to-face interaction. So that a business like ours can assess the risk they're taking on. And so for that reason, no, absolutely, we'd never see ourselves switching out from [indiscernible] and just going digital.

A question from [ Shenda ]. Do you plan to refinance the 2022 and 2023 bonds this year?

No. The -- our intention would be to refinance the SEK bond possibly towards the end of year, more likely into 2022. The bond itself is relatively small in the context of our debt funding portfolio. it's been about -- at about GBP 40 million. The sterling bond is a GBP 78 million bond, which matures in December '23. So there's quite a lot of time left on that bond and we would look to refinancing that much closer to the time.

We've got a question now from Portia Patel. You mentioned factors affecting the revenue yield, including higher charges in Spain and early settlement rebates. Please, can you expand on the BPS impact from these? Why early settlement rates have increased? And are they going to be meaningful factors going forward?

Gerard, so I'll pick up on that one. So early -- well, so what we have in Poland is there has been a long-running review of -- and it's an industry-wide review of rebating practices when customers choose to repay their credit agreements early. We've been in discussions now for well over 12 months with the Consumer Protection Authority, and this is a body called UOKiK, about how we expect our rebating practices to evolve going forward. And we've previously given guidance that we expect that to have an impact of between GBP 5 million and GBP 10 million on the profitability of our Polish business. There is also -- there will be a requirement for us to make additional payments to customers over a period of time. And that reference in the statements refers to provisions that we booked in order to settle those historic obligations. So going forward, the impact of the higher early settlement rebates is factored into our profit expectations. And certainly, will be factored into the discussions that we have with you, Portia, when we come to give you some guidance on the model. So essentially, it's baked into the forward-looking numbers. And in terms of the historic provisioning, we're very comfortable with the provisions that we currently have, based on where we are with discussions with UOKiK.

Thanks, Justin. Next question from [ Frank Lehman ]. Mexico is standing out in 2020, but it also appears to be quite a competitive market with numerous nonbanking financial institutions being active there. Have you ever considered exiting that market?

No, absolutely not, Frank. We see Mexico as a huge opportunity for our business. And over the past probably 48, 72 hours, the results of some of our direct competitors in Mexico have come out. And it has to be said that our business in Mexico has weathered this storm a lot more effectively than some of our competitors. The truth is that the opportunity in Mexico is in the tens of millions. It's unlike any other country that we operate in. And the banking system is so heavily skewed towards what I would call A and B segment and never even approaches the C and D. But for us, that is the best opportunity we could ever ask for. Because the home credit model is perfectly suited to consumers who want to deal in cash, have always been brought up to deal in cash. Now, as I mentioned in the presentation earlier, we did see through the pandemic in 2020, more consumers willing to use some digital means to repay and so on. And so that's an opportunity we will be exploring. But we would never dream of walking away from Mexico. The opportunity is just far too too big.

The next question is from [ Aaron Hassan ]. Could you clarify whether the covenants on all the facilities have been renegotiated? Or are there still a number of bank facilities, where the covenant changes have not yet been agreed?

No. The covenant changes or covenant amendments have been made on all the bank facilities and all the bonds that are in existence at the end of December. So the GBP 624 million of debt facilities that I mentioned earlier, are all based on amended covenants.

Next question from [ Maria ]. What -- are there any potential legal or regulatory issues that we would expect in the coming year that might aggravate performance -- make an impact on performance?

No, is -- obviously, there is a tax issue in the U.K., which Justin could touch on. But other than Maria, obviously, we had a very successful outcome to that big polish tax base. So we were really happy with that. And there's nothing else of any significance that we should be talking about. But Justin, do you want to just touch on the tax rule?

Yes, just very briefly. So the -- quite complicated cases, but the European Commission has reviewed some of the U.K.'s tax rules, which go back to some reforms that were put in place by George Osborne in 2013, which allowed the introduction of offshore financing companies into group structures. IPF, along with many, many of the corporates took advantage of this change in legislation. And we gathered a tax benefit of between about GBP 2 million and GBP 3 million a year. If we roll forward to 2019, these rules were reviewed by the European Commission. And determine to partially breach state aid rules. And therefore, there was an obligation on the U.K. government to collect or to recover that state aid. Now we disagree with the European Commission's assessment as do most of the corporates that have put this in place. We have submitted an enormous appeal to the European General Court as have a number of other corporates, as has the U.K. government. But the government is now obligated to collect these monies. And as a result, we were required to pay about GBP 14 million in tax and that was paid in February of this year. So it's paid after the balance sheet date. Our view on this based on the [ professional advice ] that we've received is that we're more likely than not to be successful in our annulments appeal. And therefore, we don't intend to book a provision with regard to that tax payment at this point in time.

And this is our final question unless anything comes in the meantime. What strategy would you consider if the rate cap was extended in countries like Poland?

Currently, in most of the countries in which we work, we now have some form of cap that we have to work within, and we do so quite successfully I think. What you've seen in Poland is that the first rate cut came in March 2016. It was in place for less than a year when there was talk about reducing it almost halving it give or take. And that created a real risk overhang for our business that worried a lot of people. But ruled on 3, 4 years and nothing was done about that. Then the pandemic happened, and then effectively, the cap was reduced to cope with the pandemic and to help out the Polish citizens which is very understandable. Now that was due to expire at the end of last year, but the government looked at what's happening in the country and decided to extend it. Now the original government proposal to extend it was for it to be extended for the whole of 2021. However, there was lots of debate about that. And then when it finally came to Parliament, actually, of I think the whole of parliament, every member bar 1 individual actually voted to have it extended to the end of June. And the 1 person who didn't vote for it admitted afterwards he pressed the wrong button. But I think the important thing is -- here is what that meant is there's a real signal out there that politicians recognize there's a need to return to some sense of normality in these markets. Because these businesses do, like ours, provide a really good service to the consumers they serve. We also employ a lot of people. We generate a lot of tax in the country. But there's a sense, I think in the [indiscernible] politics to want to get back to normality. And so our view would be that when we get to June, hopefully, with nothing untoward happening on the pandemic, we would see that revert to the old rate, the old cap. Now to the extent that a cap was brought in that was significantly tighter in Poland then clearly, we'd have to adapt our product structure. We've already spoken about this, I think, the last year and even the year before about the various types of product structure you can come up with that would be compliant with a much lower cap. But our view would be that all things being equal, we should see a return to the old cap on the 1st July 2021.

Thank you. We've no further questions. So I'll hand back over to you two.

Okay. Well, thank you very much everybody for joining this morning. Obviously, we're always available to talk bilaterally if you'd like to do that, and we've got a lot of meetings coming up over the next couple of weeks, but we'll be happy to have conversations with any of you wish to do so. 2020 was a very difficult year for everybody, a very difficult year for our business. I'm really pleased with the momentum we're now seeing and the momentum that built up, particularly towards the end of last year. And our job now is to build on that momentum. And to do so at the pace that is appropriate for each country's circumstances. So maintain the collections, build out the sales and to rebuild the portfolio because that's what we need to do, rebuild the portfolio that generates the future income stream. And then as Justin touched on earlier, retain the savings that we made in the business. So we continue to be a more flexible, more efficient business going forward. So thank you very much, everybody, for joining, and I look forward to speaking to many of you over the coming weeks. Thanks a lot. Take care.

Thank you. Good bye.

Thank you. Bye.