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

Good morning, everyone, and welcome to our Q3 Trading Update call. As usual, this morning, I'm joined by Gary Thompson, our CFO. And together, we'll update you on our third quarter performance. I'd also like to give you some additional color on what we're seeing in each of our divisions, including the transformation of our Polish business and recent successes that we've had on funding. As usual, there will be plenty of time at the end of the briefing for us to answer any questions you might have. Now if you've had a chance to read our statements, you'll know that this year's very positive performance has continued into the third quarter across all our divisions, and we are trading ahead of our internal plans. This has been driven by excellent operational execution of our growth strategy. And for that, I'd like to say thank you to all of my colleagues whose hard work and dedication is the key to increasing financial inclusion for our customers and that, in turn, delivers these results. There's strong demand for credit across our markets, and we are responsibly providing financial assistance to underbanked and underserved consumers with our broadening range of products, be that a home credit installment loan in Mexico or Romania, a digital credit line in the Baltics, a credit card in Poland or one of our value-added services, such as health care insurance or educational packages. Excluding our business in Poland, servicing this strong demand resulted in the group delivering 11% growth in customer lending in the year-to-date. Now the reason I excluded Poland is because we are transitioning our organization there to be a credit card-focused business as well as adapting to new affordability regulations that were introduced in May of this year. Adapting to these changes in Poland led to lending moderating in this market, and as a result, customer lending for the group as a whole reduced by 1% year-on-year. And I'll come back to Poland in more detail shortly. One of our key strategic objectives is to rebuild our portfolio, and I'm pleased to report another period of growth in closing net receivables, which increased by GBP 24 million year-on-year to GBP 875 million, and that's up 4% at constant exchange rates. This, together with an improving revenue yield, resulted in a very strong 15% increase in revenue. All our divisions contributed to the receivables growth and excluding the impact of the business transformation in Poland, group receivables showed strong year-on-year growth of 15%. We also made good progress [ towards ] our medium-term KPI targets, which underpin our financial model, and of course, that's revenue yield, impairment rates and cost/income ratio. The group annualized revenue yield continued to strengthen, increasing by 4 percentage points to 54.8% and is firmly within our target range. This improvement reflects the actions we've taken to bolster the yield, including lower levels of promotional activity introduced during the second half of 2022 and carefully considered price increases implemented in some of our markets. Alongside strong growth, customer repayment performance and credit quality is very good. Despite the increased cost of living for consumers in our markets, we have not seen any discernible impact from the cost of living crisis, and we now believe we can attribute this to the combination of our very disciplined, responsible lending decisions, which are focused on affordability, plus consistent collection processes across both our home credit and digital operations. The group annualized impairment rate of 12% at the end of September is fully in line with our expectations as impairment rates normalize and we expand the business. We continue to maintain a very conservative balance sheet position with an impairment coverage ratio in excess of 36%. The improving trajectory of our cost/income ratio continued into the third quarter, and our tight control of costs and the strong increase in revenue yield resulted in significant 7.2 percentage point improvement in the cost/income ratio to 56.7%. In addition to focusing on costs, we are deploying technology to deliver process improvements which, together with ongoing growth, will continue to improve this ratio towards our target of around 50% over the course of the next couple of years. And to complete the group picture, we continue to maintain a robust funding position and well-capitalized balance sheet to support our growth ambitions and deliver our progressive dividend policy. And at the end of September, we have headroom on undrawn facilities and nonoperational cash balances of GBP 100 million, and that's an increase of GBP 16 million since the half year. We've also successfully secured GBP 44 million of debt facilities during the third quarter, including GBP 41 million of bank facilities and GBP 3 million of retail bonds held in treasury. In addition, we are actively exploring a number of other opportunities to diversify and extend the duration of our funding. And just this week, we announced that we have returned to the Polish debt capital market and successfully acquired GBP 14 million of new bonds, which have a maturity date in November '26. We're also meeting with a number of sterling fixed income investors tomorrow and on Monday. And depending on the market conditions, we may pursue a sterling retail bond issuance. These very positive outcomes from our treasury activities, together with strong business cash generation, mean that we now expect to meet our funding requirements out to the fourth quarter of 2024. So with that as a backdrop, let me take you through a high-level overview of each of our divisions in turn. Our European home credit division continued to execute well in the third quarter. Consumer demand in our markets remains good. And together, the Czech Republic, Hungary and Romania delivered 15% lending growth year-to-date, offsetting the expected reduction of 23% we saw in Poland. And this resulted in European home credit lending being 2% down year-on-year. Closing net receivables increased by 2% to GBP 474 million with 18% combined growth in the Czech Republic, Hungary and Romania, offset by a 17% reduction in Poland. Customer repayment performance has remained robust in all of our European home credit markets. Moving on now to Poland, I have to say how pleased I am with our business transformation and the implementation of our credit card offering. We now have issued over 100,000 cards, and that's up from 50,000 at the half year. Our customers have shown that they value the new credit cards. And in addition to their initial drawdown, a significant and growing proportion are using the credit card to buy goods online in stores and to take cash at ATMs. Let me give you a few figures to illustrate how the card is working. The average line on the card is around GBP 670, and the average initial [ withdrawal ] on the card is 85% of that. So that gives you an average balance of around GBP 475. Since the beginning of the year, we've had more than 140,000 ATM transactions and over 300,000 retail transactions, and these volumes are growing rapidly month-on-month. We're also pleased with the portfolio quality and customer repayment behavior, both of which are tracking in line with our expectations, and we'll continue to monitor the performance very closely as this huge transformation progresses. And we're certainly on track to meet the 120,000 to 150,000 cards issued by the end of this year. Now the other thing I should mention is that earlier this week, Gary and I were with the whole of the Board in Warsaw, and we spent 2 days there talking to the team and understanding how everything is working. And [ I have to say, the ] Board came back really very well assured as to how the transformation is progressing. Turning now to our Mexico home credit business. Our team there delivered another solid operational performance. Consumer demand is strong. And despite a slightly cautious stance on credit settings, customer lending is up 5% year-on-year. Customer numbers increased to 710,000 and closing receivables grew by 8% to GBP 185 million. Customer repayments behavior has improved from the first half, and credit quality is now in line with our plan, which is a testament to our disciplined approach to growth. As you know, the growth potential in Mexico is significant, and our expansion strategy is progressing well. Our teams in our 2 new regions of Tijuana and Tampico are well established and are now attracting new customers to choose our home credits and value-added service offerings. Although these 2 are in infancy, we believe that both regions will become important contributors to our overall growth in Mexico. I'll move now to IPF Digital, which also delivered another good performance in the third quarter. Excluding Poland, customer lending year-to-date grew strongly by 12% with the Baltics, Mexico and Australia all performing very well. This contrasts with lending in Poland, which reduced by 36% as we transition to the new rate cap and affordability rules in that market. Our growth strategy is key to rebuilding receivables to gain scale and deliver our target returns, and our actions drove a 7% increase in closing net receivables to GBP 216 million at the end of the quarter. Now stripping out Poland and the collect-out markets of Spain and Finland, receivables growth was very strong at 20%. Alongside the progress we've made growing our digital operations, customer repayment performance is robust and portfolio quality continues to be very good. So that brings me to the end of our Q3 review. As [indiscernible], we've delivered a strong performance through the first 3 quarters of the year, and we are confident of increasing financial inclusion for consumers in our markets and delivering a good performance for the year as a whole. Now all the details of our Q3 announcement can be found on our website at www.ipfin.co.uk. So that's I-P-F-I-N.co.uk. And just before we move to Q&A, I'd also like to highlight that we plan to host our next investor analyst webinar on Thursday, the 7th of December. This time, I'll be chatting with our Chief Marketing Officer, Tom Allder, and we will focus on customers, products and the actions we're taking to capture demand, enhance customer loyalty and grow the customer base. And further details of those and the invitations will be sent out shortly. So with that, let me hand it back to you, Jordan, to see if we have any questions for both Gary and myself.

[Operator Instructions]. Our first question comes from Dave Storms of Stonegate Capital.

Just was hoping to see if either of you had a sense of what the stable growth rate of credit card issuance would be in Poland once that transition is complete. I'm assuming it's not going to grow 100% quarterly.

Yes. Well, the one thing we could guarantee you, Dave, is that it won't grow 100% quarterly. Our expectation is that 50% or more, maybe even as much as 60%, of the portfolio will turn to be credit cards. Now we expect to push credit cards quite strongly through to probably June of next year, and then we'd expect the rate of growth to slow down because we'd be getting towards that halfway mark in the portfolio. And after that, Gary, do you have a view on what you're thinking might be?

Yes. I mean broadly speaking, we probably expect that overall -- I mean, we expect customer numbers to be broadly split at probably about 2/3, 1/3 credit cards to loans portfolio, the receivables, but will be sort of a bit different to that. But that's what we're looking for. As Gerard said, we -- the first half of next year, it will be pretty steady growth. And then from there on, again, we'll be growing probably at a bit faster rate because we're under slight restrictions with the payment license -- small payment license in Poland. But we'd obviously be looking to get the full payment license and that obviously then -- that doesn't have any restrictions on credit issued or lending growth.

And the receivables will be slightly different because the average installment [ loan ] would be bigger than the credit card.

Yes. Correct.

Understood. Very helpful. And then just one more for me before I jump back in queue. With the expansion in Mexico, it's great to hear that Tijuana and Tampico are kind of setting down roots. Is there another leg of expansion expected there? And is that going to coincide with any changes in credit lending standards?

Well, we would expect that we can expand around the Tampico and Tijuana region for some time to come. There are other areas, obviously, available to us. But for us, it's a question of balancing the amount of investment and resources, in particular, people resources that we put into each of these openings. So I would say for the next year, we should be thinking more about those 2 regions, possibly a third. But we wouldn't need to adjust any of our credit [indiscernible]. So obviously, when we go into new regions, we're always slightly cautious. But we've been there for more than 20 years, so we've got plenty of experience on opening them up.

Our next question comes from Gary Greenwood of Shore Capital.

Just one on IPF Digital, this year looking to rebuild the portfolio there to get scale and return. So I'm just wondering how big the portfolio needs to be to get returns back into your target range.

Gary, we -- the portfolio is around GBP 220 million-ish at the moment, and we said somewhere GBP 280 million plus for us to be hitting around our target returns.

And just in terms of time frame to get there, is that sort of a 2-year view?

Yes, it is.

We've received some text questions sent in to us. Firstly, with regards to strong collections performance, have you had to change any processes to deliver this? Is this different from the new credit card business in Poland? And then have you seen any change in competitive landscape in Poland as the market adapts to new regulations?

Okay. So probably 3 questions there. So have we had to change any of our collection processes? The short answer is no. They are remarkably consistent. They are tried and tested. But clearly, with an Asian workforce, what you can do is you can change the focus if you want to by varying the commission structure. So you can emphasize more collections than sales if that's what you want to do. But over the period, it's been very, very consistent. As for Poland and as to whether collection processes there are different because of the credit card portfolio, yes, they are [ slightly ] because at the moment, those credit cards are on a monthly cycle for repayment. So a lot of the installment lending would be on a weekly cycle. So there is that difference. And because they're cards and obviously they're more digital, then you'd expect more of the customers to pay digitally. And the final part of the question was any change in competitive landscape in Poland. Yes, we have noted at the half year that we've seen a couple of exits there, not big players, but medium-sized to smaller players, and nothing new to report. We do know that some of the players are under stress, let's put it that way, in terms of adapting to the new regulation. Clearly, it's been a challenge for everybody, us included, particularly the affordability rules. I have to say that I'm very, very comfortable that we've taken a very conservative stance in terms of the interpretation of those rules because we want to be on the right side of the regulator. We do know that some of our competitors have taken a more relaxed view of some of those roles. I'm comfortable with where we're stressing on that.

Our next question is just a quick one on the application for a full payment institution license in Poland. Is there any specific reason this might not be granted? And if it isn't, what constraints would that be over your credit card issuance?

Well, there's no specific reason. But what the regulators, that's the KNF, have to do is they have to look at all of the documentation that an institution provides. And mostly, that documentation talks to your capability to run a large cards business. So your controls, your ability to have proper control of data, consumer information systems, the right people, the right knowledge and so on. So they review all of that. So I suppose if they were ever going to reject an application, it would be on the basis that they felt something was missing there. Now my expectation certainly is that, that wouldn't be the case for us given the maturity of our business. So I don't see any reason why we wouldn't get our license there.