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

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

Thanks very much, Priscilla, and good morning, everyone, and welcome to our Q3 trading update call. As Priscilla just said this morning, I'm joined by Gary Thompson, our CFO. And together, we'll take you through our -- the trading performance for the quarter. Now hopefully, you've had a chance to read our trading update, which we published earlier today. During the call, I'll cover our trading performance together with some additional color on what we're seeing in each of our divisions. I will also provide additional details on the implications for our business of the likely changes in regulation in Poland. That's why we are comfortable that we will continue to have a thriving business serving our customers there. As usual, we'll have plenty of time at the end for Q&A. Now let me start by saying that I'm very pleased that the positive momentum we achieved in the first half continued through the third quarter, and in executing our strategy, we delivered a very good operational performance, despite slowing global economic growth and increasingly uncertain macroeconomic environment. We saw consistent demand for credit throughout the quarter. And then meeting the needs of our customers with our home credit, hybrid and digital offerings, we delivered a 15% increase in customer lending year-on-year, and that's the year-to-date number. This increase resulted in a 15% uplift in closing net receivables to GBP 851 million. And I'm pleased to say that all of our divisions contributed positively to this sustainable growth. If we look now at each of our divisions in turn. IPF Digital saw very strong demand as we focused on rebuilding the business post-COVID and achieving our target returns. We delivered a 28% increase in customer lending year-on-year, and Mexico and Australia grew particularly strongly. In total, we are serving 267,000 customers through our Digital division, and our Mobile Wallet is now available in each of our Baltic countries. The collect-out of our businesses in Finland and Spain are also progressing very well. Now while the customer sentiment in each of our digital markets has regressed somewhat, it is fair to say that in Australia and Mexico, it feels as if it is predominantly based on the economic outlook. Whereas in our European countries, the proximity of the war in Ukraine exacerbates this impact. Turning now to our Mexico home credit business, which delivered another excellent operational performance. The investment we made in expanding our customer representative network during the first half of the year, together with good customer demand, supported a 21% increase in customer lending and an 8% increase in customer numbers to 698,000. We also continued to execute our geographic expansion strategy with the opening of our first branch in Tijuana in July. Located in the Northwest of Mexico, there are some 1.4 million consumers in our target segment in this area and our onboarding of both customer representatives and new customers is progressing very well. Inflation and subdued economic growth are the key talking points in Mexico at this point in time. Our European home credit division increased customer lending by 8% year-on-year, notwithstanding the challenges of the rapidly rising cost of living and ongoing concerns about the war in Ukraine. This growth reflects an excellent operational performance by our colleagues. The government in most of these countries are actively implementing various forms of subsidies to ease the cost of living issues for the least wealth. And in some instances, we see specific tax increases in particular industries to help governments balance their budgets. Given the global impact of rising inflation, it would not surprise you that all of our key stakeholders would like to understand whether we have seen any changes in customer repayments behavior. Although our customer segment spends a disproportionate share of their available income on what I would call essential, so food, energy and transport and so are more likely to be hard hit by inflationary increases, I'm pleased to say that we have not seen any discernible impact on their repayments behavior. We have, however, just begun to see some early signs of reduction in customer demand for credit. And in light of this and the uncertain macroeconomic outlook, we have chosen to take a responsible and prudent approach to our lending criteria and have proactively tightened our credit settings for those consumers with higher credit risk profile. In practice, this means we are limiting lending to new, higher risk customers and have tightened our debt-to-income criteria in some of our markets. If any of our key performance indicators worsen, we will not hesitate to tighten credit settings further to minimize any potential impairment impacts. We can make these changes very quickly, and equally, we can reset them when the macroeconomic landscape begins to improve. I'll move on now to regulation and, in particular, the potential changes in Poland. For those of you who have followed and invested in IPF for some time, you will be aware that we have operated very effectively under the total cost of credit rate cap that has been in place now since early 2016. You'll also be aware, however, that since December '16, there has been a threat of a significant reduction to the cap. And although this reduction has been debated many, many times, no new legislation has emerged. In recent weeks, the proposal, which now includes potential changes to affordability rules and registry supervision, was debated and passed by the Lower Chamber of the Polish Parliament, so that's the Sejm. And we expect it now to be debated by the Upper Chamber, so the Senate, before the end of October. The proposal will be scrutinized further during the parliamentary process and could -- and I want to emphasize this, could still be changed, delayed or abandoned. But our expectation now is, the proposal will become law by the end of this year. It is disappointing that as a result of the potential change, there will be an increase in the number of Polish consumers who are financially excluded. But based on the time and effort we have invested in our product and channel distribution, I am confident that we will continue to be the main provider of finance for the underbanked and underserved consumers in this very important market. Over the past year, you will have heard us talk about our plans to launch our very first loan card in Poland. Well, I'm pleased to report that we began trialing the card in mid last month. The new offering features a revolving credit limit and payment card that our customers can use both online and offline, and the credit card product is specifically excluded from the TCC regulations. The customers are to use their credit limit by withdrawing cash from ATMs or they can receive the cash from their customer representatives, and we envisage that most repayments will be collected by the representatives, thus retaining the unique relationships we have with our customers. As this is a new product for our customer representatives and customers. We are taking a test-and-learn approach to understanding our customers' experience with card. We will start with basic functionality and enrich this as our customers become more familiar with the product. Our customers are comfortable with repaying their loans in equal installments, and we therefore intend to replicate this feature from balances drawn down under the credit facility. So just to be clear, when a customer draws down on the card, they will repay it in equal installments over a period of less than a year. In addition to the loan card, we have also successfully expanded our range of value-added services, which we know from experience are very popular with our customer segments. Now if the draft legislation becomes law in its current form, we would expect a gradual reduction in our existing portfolio of installment loans written under the current cap and a build of a new loan card portfolio to a broadly similar customer base over a 3-year period. In executing this transition, we estimate group profit before tax will reduce by up to GBP 20 million in each of 2023 and 2024. After which, we expect the Polish business will return to our threshold target of 15% ROE. Now just to be clear, that GBP 20 million is GBP 20 million in each year. So it's not GBP 20 million in the first year and GBP 40 million in the second. So if you're looking at consensus numbers that are out there, you simply take GBP 20 million of '23 and GBP 20 million of '24. Now before we move on to outlook and Q&A, I'd like to cover funding and some very positive news on the tax front. As I'm sure you already know, we've maintained a very well-capitalized balance sheet and our robust funding position is sufficient to fund our growth plans and our progressive dividend policy. At the end of Q3, we had debt facilities of GBP 609 million and undrawn facilities and nonoperational cash of GBP 93 million. As a result of our very strong banking relationships, we have also made excellent progress in extending GBP 100 million of bank facilities so far this year, of which GBP 17 million actually was extended this month. Unsurprisingly, the group's blended cost of funding increased on the back of rising interest rates and the higher cost of hedging. And as we noted in our statement, the group's blended cost rose by 60 basis points since June of this year. And then positive news on taxation, you may also recall that at the time of our half year results in July, we recognized that GBP 31 million tax receivable on our balance sheet following a favorable ruling in Poland that confirmed the tax deductibility of certain expenses previously denied. While I'm pleased to say that we've received a refund of GBP 10 million during Q3, a further GBP 13 million earlier this month, and we're expecting a further cash refund of about GBP 5 million in the coming months and then the remaining GBP 3 million to be offset through future tax payments. So let me bring all this together before we move on to questions. Being there to support our customers during good times and more challenging periods is core to our purpose, and that is to build a better world through financial inclusion. We have a very successful 9 months in the bag so far this year. And while the change in phases of the proposed TCC proposals is disappointing, in many ways, truthfully, this feels like a cathartic moment internally in the business because this threat has been hanging over us for 6 years. And today, for the first time, we are in a position to clearly state how we will continue to serve our customer segment in Poland and confirm that following the expected 2-year transition period, our Polish business will return to our threshold ROE of 15%. For the reasons already stated, we will adopt a more cautious approach to new lending in the coming months. But for '22 as a whole, we still expect to deliver around 15% year-on-year growth and very good credit quality. Our expectations for growth in 2023 are somewhat moderated, but we would still expect somewhere in the region of 10%. But clearly, we'll be mindful of any further changes that may be required if the economic outlook were to worsen significantly. In the 25 years since we began serving customers in our markets, we've proven just how resilient our business is, and we are confident that we will continue to navigate our business successfully in what looks like more uncertain times today. So with that, that is the update from me. And now Gary and I would be happy to answer any questions you must have. So Priscilla, if I can hand it back to you for any possible questions, please.

[Operator Instructions] We will take our first question from Stuart Duncan from Peel Hunt.

I've got 3 questions, if that's okay. First is on the new loan product in Poland. Just be interested in how the fees or the cost of that compared to existing installment loan product? And the second question is on -- you sort of touched on the change the affordability rules under the potential new regulation. Just be interested in a little more details on that, and what that could mean for the business? And then thirdly, you touched on growth expectations next year of 10%. Just to be clear, does that include or exclude the impact from the rundown of the loan book in Poland over the next several many months?

Okay. So let me take those questions in turn. So on the card, the sort of credit card, as you would expect with the credit card, there will be various fees. But this is probably the easiest way to look at is that it will be standard cards that will go out with a loan effectively embedded. So if you were my customer, as an agent, I would come to you, you would ask for PLN 1,000 of loan. And I would say, well, our product is the credit card or loan card, and I will explain the features of that, and then we would sign you up. And then we just have a standard fees, but I can't go into detail today in terms of what those fees are because we're testing in the market, but we're reasonably clear on how it will all work. But in any event, this is going to be a cheaper product for the customer, clearly, than the current product that we have out there. But there won't be any unusual fee. They will be very standard because most important for us is customer affordability, and our customers always think about what it is they have to repay on a weekly or monthly basis. So whatever way we structure our product and whatever fees are in there, whether it's interest or fees, and there's a split between those, all of that has to be affordable for the customer. Now in terms of the affordability rules, that one is a little bit tricky because the affordability rules, as I understand, are still being debated. So it's not absolutely clear exactly where those rules are going to land, but it does seem to be the case that the rules don't land on the 1st of January, they land later in the year. So there will be a further period where those new rules, I believe, would kick in. Now as we get more detail on that, we can have the updates in our next scheduled call. But what we've done here is taken what we believe is quite a conservative approach in terms of our understanding of what those rules are likely to be. And then on the growth, Gary, do you just want to comment on the growth?

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

We will now move forward to James Hamilton from Numis.

Can you hear me?

Yes, we can hear you now, James.

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

Sure. Well, yes. I mean it's a very important point, James, but clearly, not everybody is going to be able to cope with these changes because the changes aren't quite significant. And as I'm sure most people who are new on our business don't know that we've been working on our solution now for 2 years. And it's fair to say, not everybody has the capacity to do that. So we basically built the underlying technology that will serve this product and integrate it into an already existing business structure. And that is to be fair to my colleagues, no mean feat. So I'm really, really delighted with the work they put in there. Now as I think about a lot of our competition in our particular segments of underbanked, underserved consumers in Poland, I'd be fairly positive by saying that quite a few of those competitors simply won't have the wherewithal to basically do what we've done. So in short, I would expect to see some exit from the market. I'm not going to comment on particular names, but I would expect to see some people struggling. And I can also say that we're already aware that with capital markets being where they're at, some people are finding it hard both in terms of financing as well as thinking about changes that might be required under that. So once we do have to go through this, let's call, a 2-year transition period, we're comfortable with the products that we have and that we'll be able to roll it out successfully. We do think some competitors will exit, and that will give us the opportunity to build back the portfolio over time. But you have known us for a long time, James. We're quite conservative in the way we put out our messages and our numbers, and so we have taken a conservative approach to this also. But our intention would be to build this business back up and still be the predominant player in the underbanked, underserved market in Poland.

We will now move forward to Mr. Rakesh Balasundaram from AnaCap.

I hope you can hear me. I just had a couple of questions. If I can maybe ask them both to start with. Just firstly, where do you see the business shaking out currently in terms of gross yields, impairments and cost-to-income ratios as you're scaling back up? If you could give us a sense for what sort of proportional levels that's coming down to sort of pre-COVID level, that would be very helpful. And the second one is, with regard to kind of like, I guess, the model to hit about GBP 20 million from the Polish regulatory changes on a PBT basis. Could you give us a sense for what that is on a proportional basis? Obviously, business is sort of doing GBP 100 million plus PBT pre-COVID. More recently, a bit lower because of the subscale booking coming out of COVID. So if you can give us an idea for the base on which that GBP 20 million you're sort of modeling, and what that looks like as a proportional impact both at a group level and sort of at a Polish business level? That will be super helpful.

Sure. Cool.

Yes, I'll take those. I'll start with the first one. In terms of the overall metrics, I mean, I think probably firstly, if I deal with Poland first and what we expect. Fundamentally, we -- as Gerard mentioned, we expect the economics of that business to be the same once we return the business to a receivable book of the similar scale. And that's our base assumption and the basis of this guidance is, we've got a receivables book currently. It's in the GBP 250 million to GBP 300 million mark for Poland. So we'd expect to build it back to that. What you would see is probably a low yield. You'd see slightly better impairment and a more cost-efficient business and that would be the driver of the 15% returns. So on a similar book, you have a low yield, but you have better impairment, and as the team in Poland did a great job from a cost efficiency perspective. So that's the general economics of Poland, just to take in. Now in terms of the group, we're not moving from any of our core targets that we've issued and would expect to move along to those, again, as we've indicated next year. There'll be some sort of moving part from the transition in Poland. So if you look at Poland for next year, why do we think it's profit, and it will -- and it is still a profitable business, by the way. Its profits are impacted by obviously a reduction in receivables, so less revenue. The cost base being maintained as we transition the receivables book, and clearly, we might see a little bit of impairment pressure as some of the customers we don't serve under the new rate cap payout over the duration. So that's the base of the GBP 20 million reduction next year. And then if you look at '24 winded profits not particularly move forward much, that's really because we're really starting to rebuild scale. And as you'll be aware, with IFRS 9 and taking the impairment upfront, when you're growing reasonably sizably, that really sort of hinders profits in year 1. But clearly, as you get back to scale, that's when you get the boost in profit. So that's just how that flows through income statement of the group. So -- but overall, we're not moving from our overall target revenue yield of the impairment rate or indeed our cost to income. In fact, we're being -- we're really heavily focused on cost efficiency. And I think we'd like to drive below our target from a cost effectiveness, and there's lots of initiatives that we're driving through the business to deliver that.

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