Half-year Report - 30 June 2021

International Personal Finance plc 

Consolidated Half-year Financial Report for the period ended 30 June 2021

Management Board Report

Principal activity

International Personal Finance plc specialises in providing unsecured consumer credit to 1.7 million customers across 11 markets. We operate the world's largest home credit business and a fintech operator, IPF Digital.

Financial and operational highlights

Gerard Ryan, Chief Executive Officer at IPF commented:

"Our business plays a very important role in society by providing credit responsibly to those who are underbanked or underserved and, against a challenging backdrop of frequently changing lockdown restrictions, our teams have worked hard to serve our customers safely and rebuild our business. I am very pleased to report a significantly improved financial performance, with the Group delivering £43.3 million profit in the first half of the year. Demand for credit is beginning to recover in our segment and we are well positioned to meet the significant longer-term demand for affordable credit from the consumers we serve and deliver long-term value to our stakeholders. Based on our rapid and sustainable return to profitability and the undoubted strength of our balance sheet, the Board has recommended a resumption of dividend payments to shareholders."

Market overview and Covid-19 response strategy

The early part of the year was affected by the third wave of the Covid-19 pandemic as infection rates increased rapidly and significantly, particularly throughout our European markets, impacting our customers, our people and operations. Governments imposed sweeping restrictions on freedom of movement and social distancing rules were in place in most of our operating countries. Other than businesses deemed to be essential, most retail outlets were closed for periods of time and governments continued to encourage employees to work remotely wherever possible. Together, these challenges resulted in suppressed demand for consumer credit, particularly in Q1 and early Q2. As vaccination rates began to increase and infection rates fell, lockdown restrictions were eased and we saw improving levels of demand over the course of Q2. Current forecasts for our markets published by Citigroup and the EU Commission, indicate a rebound in GDP growth from -3% to -5% in 2020 to +3% to +5% in 2021 and 2022. While there is a degree of uncertainty ahead, our expectation is that these conditions will continue to support growth in demand for consumer credit in our markets. Although consumer finance continues to be a very competitive industry across all our countries, following a number of business exits, we expect there to be fewer competitors supplying credit to our market segment in the near term.

Our business has also been directly impacted by three significant temporary Covid-19 related regulations since April 2020. The Polish government initially introduced a reduced cap on non-interest costs of new lending until 8 March 2021, and in January this was extended until 30 June 2021. This temporary regulation has now expired. The temporary debt repayment moratorium in Hungary, due to expire on 30 June 2021 has been extended until 30 September 2021. As previously reported, borrowers can opt-out of this moratorium if they wish to continue to repay their loans and a significant majority of our customers have chosen to do so. A separate temporary reduction of the APR cap in Hungary which was in place from April 2020 reverted to the pre-Covid cap at the start of this year.

Protecting our people and customers remains our top priority and we continue to provide personal protective equipment and appropriate training to all of our colleagues, and maintain a range of remote alternative repayment options if agents are unable to visit their customers.

Group performance

We are pleased to report that the Group continued to effectively execute its strategy to rebuild the business and return to full-year profitability and long-term growth. Building on the momentum achieved in the second half of 2020, we delivered a robust trading performance in H1 despite the challenging operational landscape caused by the ongoing Covid-19 pandemic. Our focus on rebuilding the business delivered a significant improvement in the Group's financial performance, with first-half profit before taxation of £43.3 million. This very positive result was driven by a combination of lower impairment charges resulting from strong collections, very good new business credit quality and cost reductions, all of which more than offset lower revenue resulting from the smaller portfolio. The result comprised profit before tax of £24 million in Q1 and £19.3 million in Q2. The slight reduction in reported Q2 profit was a result of increased investment to deliver growth, the tailing off of Covid-19 impairment provision releases, and higher levels of IFRS 9 up-front impairment as we increased the amount of credit issued. 

The improved year-on-year profit performance was reflected across all our business divisions, each of which was profitable in the first half of 2021.

Group collections performance remained strong throughout the first half of the year and this, combined with the improving macroeconomic backdrop and our confidence in the quality of the portfolio, supported our continued easing of credit settings. These changes helped us to deliver credit issued growth of 25% in H1. Within this period, we reported a significant step up in credit issued from £214 million in Q1, when the third wave of the pandemic suppressed demand, to £245 million in Q2 as restrictions were eased and consumer appetite for credit began to increase. The decision to support agent incomes during the pandemic also continued to deliver benefits as it helped us to retain our specialist workforce, maintain customer relationships and drive growth in our home credit operations.

Although customer numbers contracted year on year by 8%, increasing demand from April onwards saw customer numbers grow by 19,000 in Q2. Year on year, average net receivables reduced by 22% in H1 and 12% in Q2. This reduction resulted in a 25% contraction in revenue in H1, although the rate slowed from 31% in Q1 to 19% in Q2. 

The success of our strategy to rebuild the loan portfolio through carefully easing credit settings and capturing recovering demand is illustrated by the 5% increase in the period end receivables since the 2020 year end (at CER) to £674 million. All the receivables growth was delivered in Q2, demonstrating the strong rebound in credit issued as Covid restrictions were eased and demand started to recover. Looking ahead, with the increasing success of vaccination programmes in our European markets, we expect to deliver further growth in both credit issued and the size of our receivables portfolio in the second half of the year.

Although we planned for a weakening in collections performance arising from subsequent waves of the pandemic in the first half of 2021, we are pleased to report that our teams continued to deliver a very strong operational performance, resulting in a significantly lower than anticipated impairment charge of £11.7 million in H1, which includes the benefit of Covid-19 discounting and expected credit loss provisions releases totalling £20 million. The H1 charge comprised £4.6 million in Q1 and £7.1 million in Q2, the increase being driven by reduced Covid-19 provision releases and higher levels of up-front IFRS 9 impairment resulting from our increased level of sales. The performance of the receivables portfolio issued since June 2020, which was largely granted under tighter than normal credit settings, has also been better than predicted by our impairment models and this had a further positive impact on our impairment charge. In addition, the annualised impairment charge in each reporting segment benefited from the Covid-19 impairment booked in H1 2020 dropping out from the annualised calculation. Taken together, these factors resulted in a faster-than-anticipated improvement in impairment as a percentage of revenue, with the annualised rate reducing by 23.7 ppts since the 2020 year end to 13.7%. We expect impairment as a percentage of revenue to remain below our target range of 25% to 30% in 2021 before increasing in 2022 as we continue to rebuild the business.

In 2020 we implemented significant cost saving and rightsizing programmes to reflect the smaller scale of our operations and to accelerate a return to full-year profitability in 2021. We are now seeing the benefits of these decisions and, together with continued tight cost control, we were able to reduce Other costs year on year by £13.4 million (6% at CER). The reduction was skewed to Q1 as the 2020 comparatives from Q2 onwards included the early benefits of our restructuring programmes. Driven by the near two thirds cut in new business volumes in Q2 2020 compared to the increased investment to drive sales in Q2 2021, Other costs increased year on year by 13% in Q2. Finance costs reduced by 3% due to the lower average borrowing requirements resulting from the contraction in the scale of the receivables portfolio, partially offset by higher funding costs on the 2025 Eurobond.

Strategy

We play a very important role in society, providing affordable finance responsibly to underbanked and underserved consumers. Our strategy centres on delivering a positive customer experience and an expanded product range across all our businesses, recapturing growth as consumer demand increases in each of our markets. Our European home credit businesses are successfully rebuilding their portfolios, profitability and returns. Mexico home credit and IPF Digital continue to have opportunities to grow significantly in the coming years, all of which will enable us to deliver progressive returns to our shareholders. The first step in this journey is the recommencement of dividend payments at H1 2021.

For the remainder of 2021 we will continue to focus on rebuilding the receivables portfolio by progressively increasing credit issued in each of our businesses and we continue to believe that there will be lower levels of supply of credit in our markets over the next few years. Beyond a strong return to full-year profitability, we plan to use our digital expertise combined with our market-leading positions and unrivalled knowledge of our core customer segment to enhance our product proposition for customers and deliver longer-term growth across the Group. As a result, we expect to be uniquely positioned to meet the needs of underserved consumers in our segment.

Business division performance review

As highlighted at the 2020 year end, we merged our two digital businesses in Poland in order to deliver efficiencies of scale and, as a result, the digital lending arm previously reported as part of European home credit is now included in IPF Digital. All comparatives have been amended accordingly and are presented on a like-for-like basis.

European home credit

Our European home credit businesses delivered a robust performance in H1 and profit before tax increased to £34.9 million against a challenging trading backdrop as the third wave of the pandemic impacted this region. This result was driven by a significant reduction in impairment alongside cost savings, partially offset by the smaller business scale, and comprised profit before tax of £17.4 million in Q1 and £17.5m million in Q2.

Our improved collections effectiveness during the second half of 2020 enabled the continued implementation of our strategy to carefully ease credit settings and rebuild the receivables portfolio. This resulted in a significant improvement in sales momentum through the period and, notwithstanding weaker comparators year on year, it is pleasing to report that credit issued increased by 48% in H1, with Q2 credit issued 13% higher than Q1. Customer numbers reduced year on year by 5% to 808,000, but as lockdown restrictions eased and demand increased we were able to serve more customers and, as a result, customer numbers were broadly flat in Q2. Year on year, average net receivables reduced by 17% in H1 and 6% in Q2. However, as our rebuild strategy gained momentum, we delivered an 8% (at CER) increase in period end receivables since December 2020 to £406 million. This receivables growth was largely delivered in Q2. 

Our collections performance remained strong during the first half despite planning for some reductions in effectiveness. This, together with the unwinding of Covid-19 impairment provisions booked in 2020 and higher quality lending, resulted in annualised impairment as a percentage of revenue improving by 26.4 ppts since the 2020 year end to 9.2%. Other costs were broadly flat in the first half of the year with a cost reduction in Q1 being offset by a 28% year-on-year increase in Q2. This latter increase was driven by the much lower Q2 2020 comparatives that arose from the Covid-19 cost reduction programme together with a modest increase in costs to fund higher credit issuance.

Our focus for the remainder of 2021 will be to rebuild scale in our European home credit operations. We will continue to grow credit issued and rebuild the receivables portfolio while maintaining robust collections, credit quality and strong cost control.

Mexico home credit

Mexico home credit reported a £17.8 million increase in profit before taxation year on year to £9.4 million. This significantly improved performance comprised profit before tax of £4.9 million in Q1 and £4.5 million in Q2, and was driven primarily by a reduction in impairment and a lower cost base, partially offset by a reduction in the scale of the business.

Our focus on collections and the impact of tighter credit settings resulting from significant continued Covid-19 challenges led to a 7% contraction in customer numbers year on year to 624,000, however increased demand for credit from April onwards resulted in customer growth of 21,000 in Q2. Credit issued increased by 30% year on year, with Q2 20% higher than Q1. Year on year, average net receivables reduced by 16% in H1 due to lower credit issued in 2020 and incremental impairment provisions, and grew by 2% in Q2. This contraction resulted in a 26% reduction in revenue, the rate of which reduced to 16% in Q2. Our focus on rebuilding the business delivered a 13% (at CER) increase in period end receivables since December 2020 to £100 million at the end of Q2. Closing receivables growth in Q2 was 9% (at CER). 

The benefits of actions taken to improve collections and credit quality in Mexico during the past two years continued to flow through the business, and together with the unwinding of Covid-19 impairment provisions booked in 2020, resulted in annualised impairment as a percentage of revenue improving by 21.1 ppts since the 2020 year end to 12.6% in H1 2021. This ratio is now well below our target range for the Group of 25% to 30% and we expect it to increase during the remainder of the year as trading conditions normalise. We continued to manage costs tightly maintaining the benefits of cost savings achieved in 2020 and delivering a 12% reduction in Other costs year on year, and 5% in Q2.

Our strategy is focused on maintaining the improvements made in operational execution and returning the business to sustainable growth. We will continue to ease credit settings and rebuild the receivables portfolio, which will result in an increase in the very low impairment charge reported in the first half, while maintaining tight control of the cost base. The digital transformation of the business will also continue. The roll-out of the collections functionality of our MyProvi agent app is now complete with additional functionality to be introduced this year and next, all of which will further improve cost efficiency.

IPF Digital

IPF Digital reported a £14.9 million improvement in profit before tax to £6.1 million driven by significantly improved impairment and a reduction in costs, offset partially by lower revenue. This improved performance comprised profit before tax of £4.9 million in Q1 and £1.2 million in Q2.

Consumer appetite for credit, suppressed in Q1 by pandemic-related restrictions, began to increase in the second quarter as these restrictions were relaxed. The relatively soft consumer demand earlier in the year, our continued cautious credit settings in Spain and the cessation of lending in Finland resulted in a 17% reduction in customers to 247,000. Excluding the reduction in customers in Finland, customer numbers increased by around 4,000 during Q2. These factors also impacted credit issued which, year on year, contracted by 20% in H1, with Q2 credit issued 19% higher than Q1. Excluding Finland, where the portfolio collect-out is progressing well, credit issued increased year on year by 1%. Average net receivables reduced by 33% in H1 and 29% in Q2, with revenue contracting at a similar rate in the first half and by 25% in Q2.

Our collections performance continued to be strong, driven by higher-quality lending and robust collections processes, which resulted in a 19.3ppt improvement in annualised impairment as a percentage of revenue from 45.4% at the 2020 year end to 26.1%. Costs continue to be tightly managed and reduced 16% year on year, driven mainly by the benefits of our rightsizing exercise in 2020, lower marketing expenditure and other volume-related costs. Costs increased by 6% in Q2 compared with Q1, driven by a combination of higher spend to support growth with the 2020 comparatives including the benefit of the significant cost reduction programme delivered last year.

The pre-exceptional profitability of IPF Digital is segmented as follows:

Established markets

The established markets delivered a £4.2 million increase in profit before tax to £11.2 million, driven by lower impairment and a reduction in costs, partially offset by lower net revenue arising from a contraction in our portfolio. This improved performance comprised profit before tax of £7.3 million in Q1 and £3.9 million in Q2.

Customers and credit issued contracted year on year by 25% and 45% respectively, as a result of tighter credit settings introduced in response to Covid-19 together with our decision to cease lending in Finland and collect out the portfolio. Recognising weaker comparatives, credit issued in Q2 contracted by just 7% as we responded to growing demand when lockdown restrictions began to ease. Average net receivables contracted year on year by 32% (Q2: contraction of 30%) due to the lower credit issued and this resulted in a similar reduction in revenue for both the H1 and Q2 periods. Excluding Finland, the contraction in average net receivables and revenue in the first half was significantly lower at 18% and 19% respectively.

Good collections, the benefit of debt sales and lower levels of credit issued resulted in a lower impairment charge in the period and a 17.2 ppt improvement in annualised impairment as a percentage of revenue to 11.4% since the year end. Continued tight management of costs and the benefit of the 2020 rightsizing programme resulted in a 20% reduction in costs year on year, predominantly in Q1 as costs in Q2 were broadly flat year on year.

New markets

The new markets delivered profit before tax of £0.6 million, an increase of £9.8 million in the period, with a reduction in the cost base and improved credit quality partially offset by the impact of smaller scale. This improved performance comprised profit before tax of £0.3 million in both Q1 and Q2.

Customer numbers reduced year on year by 11% to 145,000, however, growth recommenced in Q2 with customer numbers increasing by 6,000. As lockdown restrictions eased and demand from consumers increased, we relaxed credit settings which resulted in credit issued growth of 9% in H1, with Q2 credit issued 11% higher than Q1. Both average net receivables and revenue reduced by 34% in the first half. In Q2, average net receivables contracted by 29% and the rate of revenue contraction reduced to 21%.

Credit quality continued to improve driven by tighter credit settings and good collections which, together with the lower credit issued, resulted in a 20.5ppt improvement in impairment as a percentage of revenue since the 2020 year end to 39.6%. Other costs reduced by 15% year on year in H1 and 14% in Q2, driven by the benefits of the rightsizing exercise in 2020. 

IPF Digital continues to offer excellent long-term growth opportunities. In H2, we will continue to progressively rebuild the receivables portfolio and accelerate new customer growth, particularly in our new markets. We also plan to expand our mobile wallet offering in Latvia, leverage the benefits of merging our two digital businesses in Poland and deliver a successful collect-out of our business in Finland.

Taxation

The taxation charge on profit for the first half of 2021 (£20.4 million) is based on an expected effective tax rate for the full year of approximately 47%.

With regard to the European Commission's State Aid challenge to the UK's Group Financing Exemption regime, following the enactment of new legislation in December 2020, HMRC issued a Charging Notice seeking payment of £14.2 million in respect of the alleged State Aid for the affected years. The payment of this amount is a procedural matter, and the new law does not allow for postponement. Accordingly, this amount was paid in February 2021 and we appealed the Charging Notice on the grounds of the quantum assessed. Whether the UK's Group Financing Exemption regime constitutes State Aid is ultimately to be decided and we continue to await a decision of the General Court of the European Union on this matter. The £14.2 million paid is held on the balance sheet as a non-current tax asset reflecting the Directors' judgement that it is more likely than not that the amount will ultimately be repaid. This judgement is based on legal advice received on the strength of the technical position included in IPF's annulment application. Further details are set out at note 22.

Funding and balance sheet

We continue to maintain a well-capitalised balance sheet, a strong funding position and robust financial risk management. At 30 June 2021, the equity to receivables ratio was 53.8% (31 December 2020: 55.4%) and the gearing ratio was 1.3x (31 December 2020: 1.4x).

As at 30 June 2021, the Group had total debt facilities of £596 million (£410 million of bonds and £186 million of bank facilities) and borrowings of £472 million, with undrawn facilities and non-operational cash balances of £173 million. Total cash balances at 30 June 2021 were £100 million and include £56 million that was not required for operational purposes but is available to drive receivables growth that is anticipated in the second half of the year and beyond. 

Dividend

The Board has considered the Group's trading performance in the first half of the year, the outlook for the full year and the strength of the balance sheet, and is pleased to declare an interim dividend of 2.2 pence per share. The interim dividend will be paid on 1 October 2021 to shareholders on the register at the close of business on 3 September 2021. The shares will be marked ex-dividend on 2 September 2021. The deadline to elect for the Dividend Reinvestment Plan (DRIP) is 10 September 2021. As at the date of this report, 223,196,486 ordinary shares are authorised to receive the dividend with a total dividend payment of £4,910,322.69.

Outlook

Our business plays an essential role in society, providing credit responsibly to those who are underbanked or underserved, and there remains significant long-term demand for affordable credit from this group of consumers in all our markets. Our strategy is to build on the positive momentum generated in the first six months of 2021 by continuing to serve our customers safely, increasing credit issued and growing the receivables portfolio while maintaining a clear focus on portfolio quality. Although the Covid-19 environment remains dynamic, we have proven the resilience of the business model and expect to continue to deliver a strong rebound in full-year profitability in 2021.

For details relating to the opportunities and risks facing the business, see below.

Alternative performance measures

This Consolidated Half-year Financial Report provides alternative performance measures (APMs) which are not defined or specified under the requirements of International Financial Reporting Standards. We believe these APMs provide stakeholders with important additional information on our business. To support this we have included an accounting policy note on APMs in the notes to this Consolidated Half-year Financial Report, a glossary indicating the APMs that we use, an explanation of how they are calculated and how we use them, and a reconciliation of the APMs we use to a statutory measure, where relevant.

Financial Highlights - additional information in accordance with the Warsaw Stock Exchange listing

The financial highlights have been translated into PLN and EUR as follows:

Items relating to the income statement and cash flow statement have been translated using the mean of mid rates quoted by the National Bank of Poland for the last day of each month in the period; the exchange rates calculated are:

Items relating to the balance sheet have been translated using the mid rate quoted by the National Bank of Poland for the end of the reporting period; the exchange rates calculated are:

Financial Statements

Consolidated income statement

Earnings/(loss) per share - statutory

The notes to the financial statements are an integral part of these consolidated financial statements.

Consolidated statement of comprehensive income

The notes to the financial statements are an integral part of these consolidated financial statements.

Consolidated balance sheet

The notes to the financial statements are an integral part of these consolidated financial statements.

Consolidated statement of changes in equity

* Includes foreign exchange reserve, hedging reserve, own shares and capital redemption reserve.

Consolidated cash flow statement

Notes to the Financial Statements

1. Basis of preparation

These unaudited condensed consolidated interim financial statements for the six months ended 30 June 2021 have been prepared in accordance with the Disclosure and Transparency Rules ('DTR') of the Financial Conduct Authority and with IAS 34 'Interim Financial Reporting' as adopted by the United Kingdom. These condensed consolidated interim financial statements should be read in conjunction with the Annual Report and Financial Statements ('the Financial Statements') for the year ended 31 December 2020, which have been prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union. These condensed consolidated interim financial statements were approved for release on 27 July 2021.

These condensed consolidated interim financial statements do not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006. The Financial Statements for the year ended 31 December 2020 were approved by the Board on 3 March 2021 and delivered to the Registrar of Companies. The Financial Statements contained an unqualified audit report and did not include an emphasis of matter paragraph or any statement under Section 498 of the Companies Act 2006. The Financial Statements are available on the Group's website (www.ipfin.co.uk).

The accounting policies applied to prepare these condensed consolidated interim financial statements are consistent with those applied to the most recent full year Financial Statements for the year ended 31 December 2020.

The figures for the six months ended 30 June 2021 have been reviewed by the auditor; those for the three months ended 30 June 2021 are neither audited or reviewed. 

Board members As at 30 June 2021, the Group's Board members were as follows:

1 Justin Lockwood resigned from the Board on 23 July 2021

Subsidiaries included in the condensed consolidated interim financial statements

The subsidiary companies of IPF plc, which are 100% owned by the Group and included in these condensed consolidated interim financial statements are detailed below:

All UK subsidiaries are registered at the same registered office as the Company, Number Three, Leeds City Office Park, Meadow Lane, Leeds, LS11 5BD.

Going Concern

In considering whether the Group is a going concern, the Board has taken into account the Group's financial forecasts, its principal risks (with particular reference to regulatory risks), and the expected trajectory of recovery from the Covid-19 pandemic. The forecasts have been prepared for the three years to 31 December 2023 and include projected profit and loss, balance sheet, cashflows, borrowings, headroom against debt facilities and funding requirements. These forecasts represent the best estimate of the expected recovery from the impact that Covid-19 had on the Group's businesses, and in particular the evolution of credit issuance and collection cash flows.

The financial forecasts have been stress tested in a range of downside scenarios to assess the impact on future profitability, funding requirements and covenant compliance. The scenarios reflect the crystallisation of the Group's principal risks (with particular reference to regulatory risks) and evaluate the impact of a more challenging recovery from the impact of the Covid-19 pandemic than assumed in the business plan. Consideration has also been given to multiple risks crystallising concurrently and the availability of mitigating actions that could be taken to reduce the impact of the identified risks. In addition, we examined a reverse stress test on the financial forecasts to assess the extent to which a recession would need to impact our operational performance in order to breach a covenant. This showed that net revenue would need to deteriorate significantly from the financial forecast and the Directors have a reasonable expectation that it is unlikely to deteriorate to this extent.

At 30 June 2021, the Group had £173 million of non-operational cash and headroom against its debt facilities (comprising a range of bonds and bank facilities), which have a weighted average maturity of 3 years. The total debt facilities as at 30 June 2021 amounted to £596 million of which £138 million (including £39 million which is uncommitted) is due for renewal over the following 12 months. A combination of these debt facilities, the embedded business flexibility in respect of cash generation and a successful track record of accessing funding from debt capital markets over a long period (including periods with challenging macroeconomic conditions and a changing regulatory environment), are expected to meet the Group's funding requirements for the foreseeable future (12 months from the date of approval of this report).Taking these factors into account, together with regulatory risks set out on page 51 of the Annual Report, the Board has a reasonable expectation that the Group has adequate resources to continue in operation for the foreseeable future. For this reason, the Board has adopted the going concern basis in preparing the Consolidated Half-Year Financial Report for the period ended 30 June 2021.

Exceptional items

Exceptional items are items that are unusual because of their size, nature or incidence and which the directors consider should be disclosed separately to enable a full understanding of the Group's underlying results.

Critical accounting judgements and key sources of estimation uncertainty

The preparation of condensed consolidated interim financial statements requires the Group to make estimates and judgements that affect the application of policies and reported accounts.

Critical judgements represent key decisions made by management in the application of the Group accounting policies. Where a significant risk of materially different outcomes exists due to management assumptions or sources of estimation uncertainty, this will represent a critical accounting estimate. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

The estimates and judgements which have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities are discussed below.

Key sources of estimation uncertainty

In the application of the Group's accounting policies, the directors are required to make estimations that have a significant impact on the amounts recognised and to make estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

The following are the critical estimations, that the directors have made in the process of applying the Group's accounting policies and that have the most significant effect on the amounts recognised in these condensed consolidated interim financial statements.

Revenue recognition

The estimate used in respect of revenue recognition is the methodology used to calculate the EIR. In order to determine the EIR applicable to loans an estimate must be made of the expected life of each loan and hence the cash flows relating thereto. These estimates are based on historical data and are reviewed regularly.

Amounts receivable from customers

The Group reviews its portfolio of customer loans and receivables for impairment on a weekly or monthly basis. The Group reviews the most recent collections performance to determine whether there is objective evidence which indicates that there has been an adverse effect on expected future cash flows. For the purposes of assessing the impairment of customer loans and receivables, customers are categorised into stages based on days past due as this is considered to be the most reliable predictor of future payment performance. The level of impairment is calculated using historical payment performance to generate both the estimated expected loss and also the timing of future cash flows for each agreement. The expected loss is calculated using probability of default ('PD') and loss given default ('LGD') parameters.

The application of IFRS 9 to the effects of Covid-19 had a significant impact on the Group's impairment accounting and charge, and our post model overlays (PMOs) have been prepared to ensure that the impacts of the pandemic are included within the Group's impairment provisions, see below for further details. Impairment on lending from June 2020 onwards has been recorded using our standard impairment accounting models without applying these overlays due to the reduction in operational disruption and the tightened credit settings on new lending.

Impairment models are monitored regularly to test their continued capability to predict the timing and quantum of customer repayments in the context of the recent customer payment performance. The models used typically have a strong predictive capability reflecting the relatively stable nature of the business and therefore the actual performance does not usually vary significantly from the estimated performance. The models are ordinarily updated at least twice per year. In line with this, we updated the models in Q2 2021 and data that would normally be included within this periodic update contained Covid-19 impacted data. This included data from when there were restrictions on movements of agents and customers together with data driven by the tighter credit settings that were put in place as part of the Group's pandemic response strategy. This data is not considered to be representative of the expected future performance and therefore we excluded it from our periodic update.

On the basis that the payment performance of customers could be different from the assumptions used in estimating expected losses and the future cash flows, an adjustment to the amounts receivable from customers may be required. A 5% increase/decrease in expected loss parameters would be a decrease/increase in amounts receivable from customers of £6.1 million. This level of estimated impact is based on historic fluctuations in performance compared to the models and is subject to impairment overlay provisions.

Covid-19 post model overlay (PMO) on amounts receivable from customers

In 2020 Government imposed restrictions on the freedom of movement and the introduction of debt repayment moratoria, together with the economic impact of the pandemic on our customers, had a significant adverse impact on collection cash flows in all our businesses. These events were unprecedented and, as a consequence, we reviewed our impairment modelling under IFRS 9 to identify risks that are not fully reflected in the standard impairment models. This included a full assessment of expected credit losses, including a forward-looking assessment of expected collection cash flows. As a result, for home credit lending issued before June 2020 and IPF Digital lending, we have prepared post model overlays (PMOs) to our impairment models in order to calculate the expected impact of the pandemic on the Group's impairment provisions. Based on management's current expectations, the impact of these PMOs was to increase impairment provisions at 30 June 2021 by £26.0 million as set out below.

Expected credit loss ('ECL')

Missed collections as a result of government imposed restrictions on the freedom of movement and the introduction of debt repayment moratoria is not considered to be an indicator of a significant increase in credit risk (SICR). However, our impairment models cannot distinguish between a missed payment arising from these factors and a missed payment arising from a customer not making a payment. Therefore, we have reduced the modelled ECL based on historic customer roll rates before calculating the increase in ECL arising from the pandemic. This latter assessment is based on estimated future repayment patterns on a market by market basis, taking into account operational disruption, debt repayment moratoria and the expected recessionary impact. We then assessed the extent to which the reduction in cash flows is likely to be permanent or temporary. In H1 2021 the collections performance was better than expected and we have adjusted the PMO to reflect this, however a significant amount of risk related to increased ECL remains. The estimated permanent difference in cashflows has been recorded as an increase of £14.3 million in ECL in the Group's home credit businesses as a Covid-19 PMO.

In our digital businesses, in line with our home credit markets, we have reviewed the expected recessionary impact of the pandemic on our customers' debt repayment capacity. We used this information to calculate the increased probability of customers defaulting. The estimated increase in PD has been included as a £4.4 million Covid-19 PMO.

Discounting

We expect temporary missed repayments in our home credit businesses to be repaid at the end of the credit agreement, rather than at the point when agent service is resumed. The charges for lending are largely fixed and therefore these delayed cash flows have been discounted using the effective interest rate to arrive at a net present value. Included within this, is a further delay of the cashflows in Hungary driven by an extension of the moratorium that was announced in Q2 2021. In total this results in an additional impairment provision of £7.3 million that is expected to continue to unwind during the next 18 months as the temporary missed collections are collected from customers.

We have performed analysis on the ECL and discounting Covid-19 PMOs to show the estimated variation to amounts receivable from customers as a result of the key variables influencing ECL (namely operational disruption, repayment moratoria and recessionary) being different to management's current expectations based on the following collection scenarios:

· ECL - variations in the key variables resulting in a 3% increase/decrease in the ECL would result in an increase/decrease in the Covid-19 PMO of £6.2 million.

· Discounting - temporary missed repayments in home credit, that are assumed to be repaid at the end of the loan, being received three months later/earlier than forecast would result in an increase/decrease in the Covid-19 PMO of £3.6 million.

These variations reflect management's current assessment of a reasonable range of outcomes from the actual collections performance.

Polish early settlement rebates

As previously reported, a comprehensive review is being conducted by UOKiK, the Polish competition and consumer protection authority, of rebating practices by banks and other consumer credit providers on early loan settlement, including those of the Group's Polish businesses. We reviewed the likelihood of the resolution of this matter resulting in higher early settlement rebates being payable to customers that settled their agreements early before the balance sheet date. A number of risks and uncertainties remain, in particular with respect to future claims volumes relating to historic rebates paid from a customer contact exercise. The total amount provided of £21.7 million (30 June 2020: £12.1 million; 31 December 2020: £17.6 million) represents the Group's best estimate of the likely future cost of increasing historic customer rebates. Whilst the volume of claims could differ from the estimates, the Group's expectation at this stage is that claims rates are unlikely to be more than 25% higher than the assumed rate.

Claims management charges in Spain

The Group holds provisions in respect of claims management charges in Spain following an increase in incidence of such claims in 2020. We reviewed the charges by reference to the claims incidence experience and average cost of resolution in the Spanish business. The provision recorded of £7.6 million (split £5.1 million against receivables and £2.5 million in provisions) represent the Group's best estimate of future claims volumes and the cost of their management, based on current claims management methodology, together with current and future product plans. Whilst the future claims incidence and cost of management could differ from estimates, the Group's expectation at this stage is that overall costs are unlikely to be more than 25% higher than those assumed in the charges.

Tax

Estimations must be exercised in the calculation of the Group's tax provision, in particular with regard to the existence and extent of tax risks. This exercise of estimation with regards to the EU State Aid investigation, which is disclosed in note 22, could have a significant effect on the Financial Statements, as there are significant uncertainties in relation to the amount and timing of associated cash flows.

Deferred tax assets arise from timing differences between the accounting and tax treatment of revenue and impairment transactions and tax losses. Estimations must be made regarding the extent to which timing differences reverse and an assessment must be made of the extent to which future profits will be generated to absorb tax losses. A shortfall in profitability compared to current expectations may result in future adjustments to deferred tax asset balances.

Critical accounting judgements

Accounting judgements have been made over whether the EU State Aid investigation requires a provision or disclosure as a contingent liability, see note 22 for further details.

There are no new standards adopted by the Group in 2021, and there are no new standards not yet effective and not adopted by the Group from 1 January 2021 which are expected to have a material impact on the Group.

Alternative Performance Measures

In reporting financial information, the Group presents alternative performance measures, 'APMs' which are not defined or specified under the requirements of IFRS.

The Group believes that these APMs, which are not considered to be a substitute for or superior to IFRS measures, provide stakeholders with additional helpful information on the performance of the business. The APMs are consistent with how the business performance is planned and reported within the internal management reporting to the Board.

Each of the APMs used by the Group is set out below including explanations of how they are calculated and how they can be reconciled to a statutory measure where relevant.

The Group reports percentage change figures for all performance measures, other than profit or loss before taxation and earnings per share, after restating prior year figures at a constant exchange rate. The constant exchange rate, which is an APM, retranslates the previous year measures at the average actual periodic exchange rates used in the current financial year. These measures are presented as a means of eliminating the effects of exchange rate fluctuations on the year-on-year reported results.

The Group makes certain adjustments to the statutory measures in order to derive APMs where relevant. The Group's policy is to exclude items that are considered to be significant in both nature and/or quantum and where treatment as an adjusted item provides stakeholders with additional useful information to assess the year-on-year trading performance of the Group.

2. Related parties

The Group has not entered into any material transactions with related parties in the first six months of the year.

3. Segment analysis

As highlighted at the 2020 year end, we merged our two digital businesses in Poland in order to deliver efficiencies of scale and, as a result, the digital lending arm previously reported as part of European home credit is now included in IPF Digital. All comparatives have been amended accordingly and are presented on a like-for-like basis.

1 Although UK costs are not classified as a separate segment in accordance with IFRS 8 'Operating Segments', they are shown separately in order to provide a reconciliation to other operating costs; administrative expenses and profit before taxation.

2 Although the UK is not classified as a separate segment in accordance with IFRS 8 'Operating Segments', it is shown separately above in order to provide a reconciliation to consolidated total assets and liabilities.

4. Finance costs

In 2020, interest income was received in respect of the successful appeal against the 2008 and 2009 tax decisions. £8.2 million of this income, which related to the period from January 2017 to December 2019 was treated as an exceptional item (see note 8 for further details).

5. Tax expense

The taxation charge on the profit for the first six months of 2021 (£20.4 million) has been based on an expected effective tax rate for 2021 of 47%.

The Group is subject to tax audit in Mexico (regarding 2017).

6. Earnings/(loss) per share

Basic earnings/(loss) per share ('E/(L)PS') for the six months ended 30 June 2021 is calculated by dividing the profit attributable to shareholders of £22.9 million (three months ended 30 June 2021: profit of £10.3 million, six months ended 30 June 2020: loss of £61.5 million, three months ended 30 June 2020: loss of £66.5 million, 31 December 2020: loss of £64.2 million) by the weighted average number of shares in issue during the period of 223.0 million which has been adjusted to exclude the weighted average number of shares held in treasury and by the employee trust (three months ended 30 June 2021: 223.3 million, six months ended 30 June 2020: 222.2 million, three months ended 30 June 2020: 222.4 million, 31 December 2020: 222.4 million). 

For diluted E/(L)PS for the six months ended 30 June 2021 the weighted average number of shares has been adjusted to 236.1 million (three months ended 30 June 2021: 236.4 million, six months ended 30 June 2020: 234.2 million, three months ended 30 June 2020: 234.2 million, 31 December 2020: 234.1 million) to assume conversion of all dilutive potential ordinary share options relating to employees of the Group.

7. Dividends

The Board has considered the trading performance in the first half of the year, the outlook for the full year and the strength of the balance sheet, and is pleased to declare an interim dividend of 2.2 pence per share. The dividend will be paid on 1 October 2021 to shareholders on the register at the close of business on 3 September 2021. The shares will be marked ex-dividend on 2 September 2021. The deadline to elect for the Dividend Reinvestment Plan (DRIP) is 10 September 2021. As at the date of this report, 223,196,486 ordinary shares are authorised to receive the dividend with a total dividend payment of £4,910,322.69.

8. Exceptional items

The June 2020 income statement included an exceptional loss of £6.7 million which comprised a pre-tax exceptional loss of £6.5 million and an exceptional tax charge of £0.2 million.

The decision to close our business in Finland and to collect out the portfolio following a tightening of the rate cap resulted in a loss of £11.7 million. It comprised a £10.6 million charge against loss before tax and the write-off of a deferred tax asset of £1.1 million that we no longer expect to be realised. The pre-tax loss comprised a provision taken against the carrying value of the receivables book based on our best estimate of the value of collections of £2.5 million and £8.1 million from accelerated amortisation of intangible assets. The restructuring charge of £4.1 million arose in connection with a downsizing exercise that was conducted in H1 2020 and there was an associated tax credit of £0.9 million relating to this item. In addition, the H1 2020 profit and loss account included exceptional interest income of £8.2 million, relating to the interest accrued on the payments to the Polish tax authority made in January 2017 in respect of the 2008 and 2009 cases for 2017 to 2019.

The full year 2020 income statement included an exceptional loss of £10.9 million which comprised a pre-tax exceptional loss of £11.9 million and an exceptional tax credit of £1.0 million.