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Edited Transcript of IPF.L earnings conference call or presentation 26-Feb-20 9:00am GMT

Full Year 2019 International Personal Finance PLC Earnings Presentation

Leeds Mar 11, 2020 (Thomson StreetEvents) -- Edited Transcript of International Personal Finance PLC earnings conference call or presentation Wednesday, February 26, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Gerard Jude Ryan

International Personal Finance plc - CEO & Executive Director

* Justin Lockwood

International Personal Finance plc - CFO & Executive Director

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Conference Call Participants

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* Gary Greenwood

Shore Capital Group Ltd., Research Division - Research Analyst

* Stuart Duncan

Peel Hunt LLP, Research Division - Financials Analyst

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Presentation

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Gerard Jude Ryan, International Personal Finance plc - CEO & Executive Director [1]

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Good morning, everybody, and welcome. And welcome to everybody on the webcast. This morning, Justin Lockwood, our CFO, and I will be happy to take you through our results for 2019. And with us this morning, we also have Rami Ryhänen, who leads our Global Digital Business; and David Parkinson, who leads our home credit business in Mexico, and they'll be around afterwards if you want to come up and have a chat with any of us.

Now as usual, I'll take us through the group highlights to start with. Then Justin is going to go on and talk us through the individual trading performance of each business unit and also cover the balance sheet and funding. Then I'll pick up and cover regulatory and strategy for each business unit and then some closing remarks before we have got plenty of time for Q&A at the end. Now if you've got a chance to look at the statement we released this morning, you'll see that we delivered a very good financial performance for 2019.

Clearly, we still have some customer contraction but we've made some very good progress on that in European home credit. Then all of that feeds into receivables, which feeds our revenue line, which was up 3% year-on-year. Impairment to revenue, which is our key portfolio quality metric, is bang in the middle of our target range of 25% to 30%. Then we had some good progress on our cost side, all of which then feeds through to the PBT line where we're up nearly GBP 5 million year-on-year and delivered GBP 114 million PBT for the period.

Now as is always the case with us, we have a really robust balance sheet and our equity to receivables that we measure is significantly higher than our minimum target of around 40%. So with a really robust balance sheet and a good financial performance, the Board are happy to recommend maintaining the annual dividend of GBP 0.124 per share.

Now no review of the highlights of 2019 will be complete without mentioning the tax case in Poland. And really, we were very pleased with the outcome of that settlement there, and Justin is going to cover that in a few moments.

So with that, I'll hand it over to Justin to talk us through the individual trading on each entity.

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Justin Lockwood, International Personal Finance plc - CFO & Executive Director [2]

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Thank you, Gerard, and good morning, everyone. So I'm going to talk through an overview of our group PBT by reporting segments, I'll then go into a much more detail on each of those reported segments and talk you through the drivers of profitability and then I'll close with an update on the strength of our balance sheet and funding position.

So this slide summarizes group PBT by reporting segment. And I'm pleased to be able to report another period of excellent operational execution by our European home credit teams. And that's spread through to a very good financial outcome for the year and a profit of GBP 115.1 million, and that's up GBP 1.3 million year-on-year.

Our home credit business in Mexico had a more challenging year, and that was driven by a subpar collections performance and a softer macroeconomic backdrop and as a result, PBT was down GBP 5.2 million to GBP 10.5 million.

Now most of that reduction in PBT arose in the first half of the year, and we're now starting to see much more encouraging performance indicators that give us confidence to say that the recovery in that business is now well underway.

IPF Digital reported its maiden profit and delivered an increase in PBT year-on-year of GBP 8.8 million to GBP 3.2 million for the year, and that was driven by an excellent increase in profitability in the established markets and a reduction in start-up losses in the new markets. So taken together, that resulted in the PBT of GBP 114 million, and that's up GBP 4.7 million year-on-year.

If we look at that on an underlying basis, though, and take out the impact of FX movements, profits were actually ahead by GBP 6.9 million, and there was a GBP 2.2 million adverse impact from the weaker FX rates that we started to see towards the end of the year.

So turning now to European home credit. And this business delivered an excellent operational execution of strategy in 2019, and that fed through to a very good financial result that was ahead of our original expectations. These businesses are the financial foundation of our group and our strategy revolves around delivering great customer service and generating good returns. That allows us to invest in building a more modern customer focused business that offers products that are both relevant and affordable for our customer base.

Competition continues to be very strong in these markets. And that, combined with regulation, which restricts lending to customers that we'd have previously served resulted in a reduction in customer numbers. However, campaigns to improve both acquisition and retention, reduce that rate of declining customers by 4 percentage points. And by the year-end, it was down 8% year-on-year.

At the same time, though, we've delivered credit issued growth of 1%, and that was driven by our strategy of issuing slightly larger and slightly longer-term loans to our better credit quality customers. And that fed through to growth in average net receivables of 3%.

Credit quality continues to be excellent in these markets. And that's driven by good agents' collections performance with notable improvements in both the Czech Republic and Romania, together with our focus on serving higher credit quality customers. And as a result, impairments improved by 5.5 percentage points and closed the year at 12.4%, and that's a record low for these businesses. We continue to invest in modernizing the businesses in order to enhance the customer experience and improve efficiency.

And in 2019, we rolled out our collections app to our agents, right across our European businesses. And we'll add further functionality in 2020 around sales and administration. And that will unlock further cost-saving opportunities. We managed cost though really tightly, and we reduced cost year-on-year by 3%. And that's despite these investments in technology.

The cost-income ratio, though, as you can see, increased by 1.8 percentage points and that's because the reduction in revenue was slightly faster than the cost savings that we delivered. So taken together, that resulted in a very strong financial performance and uplift in PBT of GBP 1.3 million to GBP 115.1 million.

As we look forward into 2020, we'll continue to focus on enhancing customer experience, and Gerard will give much more color on that later. And we'll -- and we'll further develop our Provident branded digital offering in Poland.

Now turning to Mexico home credit. And as previously reported, this business has had a challenging performance in 2019. And that was driven by a softer macroeconomic backdrop and a deterioration in credit quality and collections.

We took decisive action in response to these operational challenges and chose to focus on improving credit quality at the expense of top line growth, and that's in order to put the strong foundations in place from which we can capture the long-term opportunity that this market offers.

Among these changes with the appointment of a very experienced new country manager and further strengthening of the local management team. We put in place more cautious credit settings and took a series of actions that are designed to improve the agent collections performance. And Gerard will go through those in much more detail later.

So in the context of this collections focused year, customer numbers and credit issued declined by 13% and 12%, respectively. And the subpar collections performance resulted in a 4.6 percentage point increase in impairments.

In response to these operational challenges, we managed the cost base very tightly. And the cost-to-income ratio -- sorry, the cost-income ratio improved by 1.6 (sic) [1.1] percentage points as a result of a positive impacts of an operational leverage. And so taken together, that resulted in a GBP 5.2 million reduction in PBT to GBP 10.5 million.

Going forward, we'll continue to focus on improving the agents' collections performance in order to drive impairment down to a more acceptable level. And in 2020, we expect to see a continuation of the very positive trends that we are seeing in collections performance and other early performance indicators that give us confidence to say that the recovery is now underway. And during the year, we expect to be shifting our focus from collections towards growth when we've got comfortable with that.

So turning now to IPF Digital, which represents a significant long-term growth opportunity to the group as an increasing number of customers choose to borrow online. And that's a trend that's forecast to continue going forward as our day-to-day lives become increasingly digitized. We've continued to capture this opportunity in 2019, delivering a combination of revenue growth of 30% and our maiden PBT of GBP 3.2 million. This slide sets out the composition of the different components of PBT within IPF Digital, and the key highlight there is the GBP 8.8 million improvement in profitability year-on-year. And that comprised a very strong PBT outcome from our established markets where we saw a profit growth of GBP 7.2 million. The benefits of scale resulted in a GBP 2.3 million reduction in start-up losses in the new markets, and we had slightly higher head office costs.

The businesses in our established markets have been operating successfully for more than 10 years. We serve 150,000 customers, and they generate a very good levels of profitability. As expected, the rate of credit issued growth moderated in these mature markets in 2019 to 3%, and that fed through to growth in average net receivables and revenue of 6%.

Credit quality continues to be very good, and we delivered a 1.1 percentage points improvement in impairment at 19.7%. And we focused on the cost base in these businesses as well, very tightly. And with the benefits of operational leverage, we've delivered a 5.8 percentage points improvements in the cost-income ratio.

So taken together, the increased scale, slight improvement in credit quality and a significant improvement in efficiency, resulted in a GBP 7.2 million improvement in profitability to GBP 32.7 million. That was ahead of our original expectations, and we are really pleased with such a great result.

Now as previously reported, in 2019, new rate count legislation has been implemented in both Finland and Latvia. And whilst in Latvia, that new rate cap is set at a similar level to the other Baltic States where we generate good returns. In Finland, it's been set at a very low level for the type of risk that we take in lending to our customer base. We're currently executing a plan in response to this challenge, and we'll continue to monitor the returns that we generate from this market, and apply our usual discipline when deploying capital. As previously highlighted, we expect the profitability of the established markets to reduce in 2020 compared to 2019.

Our new digital markets at Poland, Spain, Mexico and Australia represent a long-term growth opportunity for the group, and we now serve 155,000 customers in these markets. Customer growth and credit issued growth was 15% and 13%, respectively, and that was slower than our original expectations.

Now you probably recall at the time of our half year results, we highlighted that impairments in Spain and Poland was running at slightly elevated levels, and we chose to focus on improving credit quality at the expense of growth. As a result of that, impairment increased by 6.9 percentage points. Although we expect that to now trend in the other direction in 2020 as we get the benefits of the credit tightening actions that we have taken.

Average net receivables and revenue grew by about 60%. And with the benefits of rapidly increasing economies of scale, the cost-income ratio improved by 18.5 percentage points. So the combined impact of increased scale and improved efficiency was partially offset by slightly higher levels of impairment, where it result in a GBP 2.3 million reduction in start-up losses to GBP 15.5 million. As we look forward, we'll continue to focus on managing down the impairments in the new markets and managing the impacts of the new regulation in the established markets. And for 2020, as a whole for the division, we expect to deliver modest profit growth, with a lower contribution from the established markets and an improved performance for the new markets.

So turning now to the balance sheet. And as Gerard mentioned earlier, one of the significant corporate highlights of 2019 was a settlement of the long-running Polish tax dispute for the years 2010 through to 2017. And that removed the liquidity and capital risk of GBP 137 million. And that has transformed the risk profile of the group's balance sheet. During the year, we continued to execute our funding strategy of diversifying the source of funds and extending the maturity profile. And we've put in place GBP 106 million of new debt facilities. And that included refinancing a substantial part of the 2020 sterling bond with a new bond that matures in December 2023, alongside GBP 28 million of new bank facilities.

Total debt facilities at the end of the year were GBP 862 million, and we had a really strong headroom against that of GBP 182 million. The pie chart on the right of the slide, sets out the maturity profile of our debt facilities. And it highlights those facilities, which need to be refinanced in the next couple of years.

Our largest single debt instrument is a EUR 400 million or a circa EUR 400 million bond that matures in the second quarter of 2021. And it's our plan to refinance that bond during 2020, alongside the business as usual, extension of our bank facilities. The improved credit rating position in 2019 with the addition of a second BB rating and the settlement of the Polish tax dispute for 2010 through to 2017, is expected to support this process.

The balance sheet itself remains really robust. And our preferred measure of capital strength, the equity to receivables ratio strengthened further during the year to almost 45%, and that compares to our target ratio of 40%.

And with that, I'll hand back to Gerard.

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Gerard Jude Ryan, International Personal Finance plc - CEO & Executive Director [3]

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Thank you, Justin. So let's move on now and deal with regulatory matters and strategy.

And clearly, all of you know that over the last number of years, probably 5 years, we've had a number of significant regulatory hurdles to overcome. And I can say today that I believe we have really strong teams in each of our markets now capable of dealing with these issues. And also they're out there building really strong relationships with external stakeholders, which is very important to our business.

So if we move on to regulatory. This morning, I want to touch on just 2 countries, Poland and Romania. And clearly, in Poland, we need to talk about TCC, the total cost of credit cap. This has been around since March '16, when it was first introduced, and then subsequently, later that year, there was a proposal to dramatically reduce the cap. It then went quiet, nothing happened there. And they then came back up as a new story in summer of 2019. It then went quiet again. And subsequent to that, we had a general election in Poland. We now have a new government, constituent parties are pretty much the same. But what happens when a new government comes into power, is that the old are waiting, passing legislation disappears.

So at the moment, there is no current proposal on the agenda for TCC. Now I wouldn't get too excited. It doesn't mean it can't come back. But we continue to trade under the existing cap, and we do so very effectively.

The second area to talk about in Poland then is this sector-wide review on rebating. And this is being carried out by UOKiK, who are the consumer protection authority in Poland. And partly, it's driven also by a European court decision that came out in September '19. And in effect, that decision said that in principle, all fees relating to a consumer loan should, in theory, be rebatable. But it didn't say how and so now we and other market participants, and I can confirm all of the banks that are included in that are in bilateral discussions with UOKiK to understand how this should be effected.

So at some stage later this year, we expect some kind of market norm will be established on this. But until then, based on what we know today, our current estimates, our range is around GBP 5 million to GBP 15 million of an annual impact from this. But clearly, you know from our history on any regulatory challenge, we'll be working on mitigating strategies to try and offset some of this.

Then the other country to talk about is Romania. And in Romania, around this time last year, a piece of legislation was passed, that introduced an APR cap. That was challenged in court and subsequently found to be unconstitutional. So it never became effective.

Now what I would call version 2 is currently being debated in the Romanian parliament. But now it's not an APR cap, it's more like a TCC, some -- just a total cost of credit cap. The important thing to note is that what it says in the draft that's being debated is that for loans of approximately EUR 3,000 or below, the institution would be allowed to charge up to 100% on top of that, in any form of interest or charges.

And I can confirm that virtually all of our business in Romania is below that EUR 3,000 cap. And we believe that we will trade quite effectively within that kind of sector there, okay? So we'll be back in due course on that. And that's it really on regulation.

Moving on then to strategy. Now this page, you will be familiar with. It's our 3 pillar strategy. But what you'll hear from us today and going forward are slightly nuanced changes in relation to each of these businesses.

So first of all, if we turn to European home credit, it's still very much a returns-focused business. But as of today, and going forward, you're going to hear us talk a lot more about investing in innovation in the business to do 2 things: one is drive an improved outcome for the customer, so a better customer journey; but also to improve our own internal efficiency. Then when we look at Mexico home credit, where clearly, the short-term goal has got to be to improve portfolio quality, as Justin discussed. And doing that with a view to get back into growth mode but also to deliver consistent performance in a market that we think has outstanding opportunities for us. And then finally, on IPF Digital, it's continuing to innovate the product and the customer journey. But at the same time, we also need to take corrective action to improve the credit quality, specifically in Poland and in Spain. And then deliver a better and enhanced product set for the customer to attract more customers into the business.

So if we talk about each of these in turn, starting with European home credit. Now Justin described for us how successfully these businesses traded in 2019. And really, it's based on the 2 key things that you see up here, which is leveraging the Provident brand and investing in innovation. And when we talk about leveraging the brand here, we're really talking about aligning our business with how customers want to deal with us today and tomorrow. And broadly speaking, I would categorize our customers in this in 3 segments. First of all, you have what I would call traditionalists. And those are customers who like their agent relationship or they've been introduced to it by their parents or family or friends and they want to continue dealing with an agent. And that's a really strong channel for us. Then the second channel would be, by definition, probably a slightly younger cohort of customers who are probably slightly more affluent, but they want to do things in a digital format. And we are now demonstrating we can do that very successfully through Provident Direct in Poland, and our view would be we should roll that out everywhere.

And then in the middle, we have a segment of customers who start out on a digital journey with us. So either online, mobile phone, into the call center, but for any one of a multitude of reasons, that journey needs to be completed by an agent. So what we're doing now is we're investing in innovation on the back of that, to as much as possible, allow the customer to choose the journey they want. And by choosing the journey they want, their customer experience will be enhanced. And on top of that, then we're going to add more price points and more value-added services.

Now it may surprise you if I tell you that in a couple of our European countries in 2019, we actually started offering some loan products at single-digit interest rates. And so you could say, well, how does that work in a business like ours? Well, we tried and tested this. And what we discovered was, if you take a brand as strong as the Provident brand, and you attached to it, a product with a really keen interest rate, you attract a cohort of customers that previously wouldn't have dealt with you. But you also have a halo effect, and you attract a lot more customers around that.

Now for the best quality customers, clearly, they get the best interest rate. But many of the other customers, once we explain the product to them and the forbearance element of home credit, they're happy to pay a higher price point. And net-net, it works for us and it works for the customer as well.

Then the second area that we're investing in innovation is on technology. You heard Justin talk about MyProvi, so the agent app, which is fully rolled out on the collections side. And literally, within a matter of a couple of months, will be fully rolled out on the sales side.

But we want to go a step further. And to the extent that the law will commit us in each of these countries, we would like to go fully paperless. And if we can go fully paperless, then automation will reduce administration or eliminate it and then you'll see even more benefits flowing through to the P&L.

And then the final piece on innovation is what we've talked about before, which is a unified leadership team for European home credit. And so now all of these businesses over-the-top are led by Botond Szirmak, our Hungarian country leader. And already, we're beginning to see benefits of that flowing through to the P&L. And it comes in a number of different forms, but just a couple of examples. One would be we're seeing more European level contracts with external suppliers, so leveraging our purchasing power. And then on where we spend a lot of money, which is technology, we're seeing a more unified and coherent strategy on technology investment for the 4 countries together instead of each running their own agenda. So some really good developments and probably a lot more to come from this.

We look then at Mexico home credit. So clearly, a difficult first half to the year, second half better and really most recent cohorts of business performing significantly better again. But ultimately, to get to where we need to be on portfolio quality, we've had to take a number of decisive actions. So we have significantly enhanced the leadership team.

So David has been out there now for 9 months in the business. We've also appointed a Chief Financial Officer, a Chief Risk Officer, and we're also investing in leadership quality across the business and in particularly, in the field. In addition, one of the things we're doing is importing the European operational rhythm. And I have no embarrassment in saying it, literally we've lifted and shifted this from Poland with some of the people who engineered it there, across into Mexico. So it means better BI, more consistent KPIs and holding our people to account more regularly against those KPIs.

In addition, we want to improve the field resilience. Now what does that mean? Well, in our experience, the longer an agent stays with us and the longer their manager, the development manager stays with us, the better the agent relationship with the customer, the more they sell and the more they collect. And so we need to improve that retention rate. And so what we've done is, we started to roll out this field manager experience program. We put 1/5 of the DMs, the Development Managers through this. And we've seen, as a result, a 38% improvement in retention rates for those managers who have gone through the program.

Now part of that program is to provide these people with the right tools to do the job. And that would come in 2 components. First of all, there will be agent technology. But Mexico is a big country. It has its own differences, and we need to cater for those. So we're currently testing agent technology in Mexico. But I fully believe in due course, it will come for the whole country.

And the second part is to do with transport, believe it or not. Up until now, our Development Managers and their managers have had to provide their own transport and that has provide a number of logistical issues for us.

So in Mexico City, over the last number of months, we've taken the policy decision to roll out company cars to each of these managers. And the impact has actually been quite dramatic. Engagement is up significantly. The productivity is up significantly. And actually, the retention rate, not just of these managers, but of the agents has improved. So we will roll this out across the country through 2020 and into 2021, because we believe the benefits will more than outweigh the costs here.

And then finally, on recognition and engagement, just a small thing to say here. There's a lot of activity going on. But one area to highlight would be our working practices. In Mexico, we've always operated on the belief that the field force need to work for 6 full days a week, and I mean full days a week. Now in 6 of the branches, we have changed our working practices to fit that into 5 working days, and what we're seeing is a tremendous positive feedback from the agent workforce.

And so our view would be, we'll continue with this test for a little longer. And if it turns out the way we think it will, then we would engineer that throughout the business.

But ultimately, where is all of this going? And it's going to try and improve portfolio quality to get us back into growth mode. And so part of that is about the credit settings for new customers.

Now by the end of quarter 1 last year, we were really dissatisfied with collections performance in Mexico. So we significantly curtailed the credit settings for new customers.

And as of today, just under 1/3 of the branches have now had some form of relaxation to go through those credit settings because we're happy that we have seen sufficient improvement in credit quality to do that. And we're looking for more of that to get all of the branches with more relaxed settings.

In addition, you probably heard us talk last time about regional scorecards. So what we had was a scorecard for the whole country. And then as a challenger, our data science team helped us to build regional scorecards that were tightly linked to the economic performance of the individual region in which the branches are situated. And that challenger, those regional scorecards performed more effectively than the champion, the countrywide one. So in 2020, the country-wise scorecard will be (inaudible) with regional scorecards.

And then finally, on improved territory management. Again, the data science team are helping us here with internal mapping tools that we have for each branch. And they're overlaying that with external database data on all consumer borrowing, and what we're looking for are insights as to whether our performance in a particular branch and a particular region, are to do with our own effectiveness or to do with something to do with the region. So we're looking for a lot of insights on that to move the business forward.

Now behind all of this, David has decided to look at his business differently and is categorized the individual components of the business by the basis -- by the rate of return that they are generating. And broadly speaking, he is categorizing into what I would call high-returning areas. So branches that are effectively delivering at the rate of a good branch in Europe.

Then the second category would be areas where we're still in investment mode, so new branches, for instance, and where he might want to improve the momentum in some of those. And then the final piece would be branches or other areas where he's dissatisfied with the rate of return. And there's a lot of energy and impetus going into that. But the thing to say about Mexico is, it's still a huge opportunity, but we just need to fix that portfolio quality so that we can get back to growth and deliver it consistently.

And then turning on to IPF Digital. Well, it was really pleasing to deliver the maiden profit of GBP 3.2 million. But for me, the biggest thing here was the swing. So a near GBP 9 million swing year-on-year in a business of this size, which I think really was an outstanding result. And it's all attributable to the fact that the customer or the consumer really likes what we're saying. They like our brands, they like the product that we have to offer. And you can see that reflected in the charts on the right, in terms of the buildup of the average receivables, but also the near -- I would say, almost near-perfect investment curves that you've got there.

But obviously, we want to go further, and we need to build on that. And to do that, the first thing we have to do is to improve the portfolio quality in Poland and Spain specifically.

Now you'd have heard us talk before about how we build these new markets. Essentially, we pushed the scorecard to what we think is the limit. And if that works effectively, we hold it for a period and then we move forward again. If we overstep the mark and we get higher losses than we're expecting, we step back. And that's where we're at in Poland and Spain. But if you will -- but the thing to say here is that's the natural way of building these markets.

If you were looking for reasons to believe, I can tell you that in January of this year, Spain actually made a profit. So still a lot of work to do here, but we believe that we'll be able to move this forward quite significantly in 2020.

And then the second part of building out the business will be to enhance the customer offering. And our latest iteration on that is what we call our mobile wallet. So it's effectively a new banking app on your mobile phone. You draw it down, and it's got lots of features, one of which clearly would be a debit card, and the debit card can be physical in your hand or it can be virtual.

The app allows you to move money around to other accounts that you have or to friends or whatever. It allows you to pay bills. In addition, we have in there, our value-added services, such as insurance, and over time, what we want to do is build out the ecosystem around that for our loyal customers to offer them our purchasing power to the extent that we can get it with people that they do business with, to effectively build that whole ecosystem in order to move this business forward.

The feedback for the number of thousands of customers who are currently using this is really very positive. And we're seeing a significant uplift in terms of the number of transactions they're doing. And clearly, that really is the gold dust of financial services is to get a lot of transactional data from your consumers so you can understand their behaviors and tailor your products for them going forward. So we're really excited about this.

So just to move on then to outlook before we go to Q&A. On European home credit, clearly, an outstanding result in 2019. But still a lot more to come. And you're going to hear, as I said, talk a lot more about investing in innovation to improve the customer journey, give the customer more choices. At the same time, and this is reflected in our numbers, the yield will come down slightly, but the trade-off for us is very positive in terms of better quality and better standing in the marketplace with key stakeholders. So we're really positive about that.

In Mexico, the leadership changes, I am really pleased with. I think that's having the impacts that we need. Obviously, the most recent cohorts of business, we are very happy with. And we see ourselves returning to growth in 2020. And after that, what we have to do is deliver that consistently. That's what we're looking for is consistency of performance in a huge market.

And then finally, on Digital. Poland and Spain, I've talked about. We're going to get those into the right place and then start to push on this mobile wallet and create more functionality around that to attract more customers, and build out what is really a very positive story in terms of a fintech business that actually makes a profit. Probably unusual these days, but a business that makes a profit in the fintech arena.

So that's our story in terms of the 2019 results. We'll go now to Q&A. And while we're getting the microphone, I just want to take the opportunity to thank all of my colleagues who are live on the webcast. I'm really pleased with the results. And on behalf of the board, I want to say thank you for your commitment and energy in delivering for the business and for our customers, really pleased with all of that. Thank you.

And then Justin and Rami, will do Q&A.

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Questions and Answers

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Stuart Duncan, Peel Hunt LLP, Research Division - Financials Analyst [1]

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Stuart Duncan from Peel Hunt. I've got a 2.5 questions, if that's okay. First one on European home credit and sort of investment for innovation and efficiency. Can you just sort of frame that in terms of the cost-income ratio, particularly compared against Mexico, where the cost-income ratio is lower, but the business is clearly materially smaller? And then secondly, on the equity to receivables ratio, clearly, about 5% ahead of your target. At what point might you think to address that? And I suppose the half question is around the dividend as well. When you might think to look at that as well?

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Gerard Jude Ryan, International Personal Finance plc - CEO & Executive Director [2]

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Well, let me deal with it, I'll deal with the dividend one, and you can pick up on the cost-income?

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Justin Lockwood, International Personal Finance plc - CFO & Executive Director [3]

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Yes.

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Gerard Jude Ryan, International Personal Finance plc - CEO & Executive Director [4]

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So on the capital, you're right. So at nearly 45%, you've got 5% headroom over the 40% equity to receivables target which in it of itself is really conservative anyway. But based on where we stand with regulatory and all of that, we're comfortable running a conservative balance sheet. I think it will be appropriate for us later in the year as we get through more of these issues to think about what we do with that surplus as it were.

We want to run a progressive dividend. Clearly, we've held the dividend the same for a number of years for fairly obvious reasons. But we've had a really good outcome on the tax, there's another piece of the tax that needs to be cleared away, but we feel positive about that. And as we get more clarity on the rebating issue, we'll get -- we'll be able to refine our estimates there. And I think at that stage, we'll be in a position to come back and think about the dividend. But at the moment, we're comfortable with that more conservative position. But clearly, as we clear these issues away, it gives us a lot more opportunities to deal with that surplus.

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Justin Lockwood, International Personal Finance plc - CFO & Executive Director [5]

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And so picking up on the cost-income ratio. Firstly, I'll deal with the comparison of Europe to Mexico. So I guess, the cost-income ratio reflects both the size of the income stream and the size of the cost base. And what we have in Mexico is a relatively high revenue yield which reflects the fact that lending there is relatively short term, but it also reflects the market conditions, which are sanctioned at higher prices.

The cost base in Mexico, is actually larger. It's less efficient than the European business. And we think there's a long runway to go to improve the efficiency there. If I come back to the European business. What we saw this year was quite a significant reduction in revenue yields. Now part of that was driven by the -- our structure of lengthening or issuing slightly longer loans to our customer base. And those longer loans typically have lower revenue yields. And in addition to that, I also talked about campaigns we've got for customer, acquisition retention. And a lot of that is being based around price discounting. So those 2 factors have reduced the revenue yield during the year. And the revenue has fallen by around about 6%.

The flip side of that is actually the quality of that portfolio has improved. So as we -- if you think about the numbers of impairment to revenue ratio improved by 5.5 percentage points. So when you get to a net revenue basis, so revenue less impairment, it's much more comparable. Now the revenue yield -- sorry, the cost-income ratio did go up a little bit because actually, the 6% reduction in yield was slightly faster than the 3% reduction in the cost base. Going forward, I'd expect there to be some further dilution of revenue yield, but nothing like we saw in 2019, and we'll continue to manage the cost base. And the costs very tightly. And things like the further developments around sales and administration apps will certainly help in that process. So I'd expect yields to continue to be a little bit lower but we should be offsetting that on the cost line going forward.

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Gerard Jude Ryan, International Personal Finance plc - CEO & Executive Director [6]

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And it's worth noting that when we talk about extending term and extending the average issue value alone. Now we're talking about adding GBP 50 or GBP 150 or GBP 200 to the value of a loan, and we're talking about adding a couple of weeks. So we're not talking here about moving away from what we do and going out to 3, 5, 10 year lending, it's incremental on what we offer today.

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Justin Lockwood, International Personal Finance plc - CFO & Executive Director [7]

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And what we're finding within that, actually, the quality is really good. So whilst the loans are slightly longer, and they're slightly larger, actually the ability of the customer base to service those loans is improving as, as wage and salaries increase in our markets. And also social transfers are -- tends to be -- well have increased materially over recent years as well, which has helped affordability.

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Gary Greenwood, Shore Capital Group Ltd., Research Division - Research Analyst [8]

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It's Gary, Shore Capital. It feels like a lot of the work that you're doing in the European business is sort of working with or preempting the potential regulatory change. And so I guess, getting ahead of the curve in terms of mitigating what the impact of the price cut might be if it does eventually come in. And so I guess, question is, is that the correct interpretation? And then in terms of the business, how big is the balance sheet that would potentially be exposed to that price cap if it came in? So that's first part.

And then the second part, and I guess, linked to that is on the impairment ratio, which is now very low. Again, it feels like some of that is structural rather than just good performance in the business. So I'm just trying to get a feel for what a normalized impairment ratio should be for that business going forward?

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Gerard Jude Ryan, International Personal Finance plc - CEO & Executive Director [9]

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Okay. So let's deal with the mitigating strategies. Well, yes, we work extremely hard and our teams in Poland and all the other countries work really hard to try and come up with strategies to help us whenever there's a regulatory challenge that might impact us in any adverse way. And we do it clearly in a very transparent way and in accordance with the legislation, where we obviously try to optimize our position. And so when we think about the TCC in Poland, if that were to come down to the proposed lower rate cap, which I think is what you're talking about. That makes life very difficult for everybody. And I think we talked at the half year about the fact that we would expect that a lot of people will be thinking about the issuing of credit cards because credit cards are outside of this total cost of credit cap. And I can confirm that, yes, we would be thinking about that as well. But if you were to ask me, would tomorrow morning, I as a strategy, unprompted, go out and start issuing credit cards to our cohorts of customers? The answer would be no. I prefer to stick with my installment loans where I see them getting paid down. But it's clearly entirely possible to have different forms of credit card. And credit cards, where you could have a pre-agreed repayment schedule, so that you have a balance on a card, which stands outside of a TCC, and where you kind of see that balance amortizing over time. So that will be just one example of a strategy that we would run. But that type of product wouldn't be smart for everybody. So we'd be very careful. But I can confirm that we, and I'm sure a lot of other people are thinking about those types of strategies. Now when we think then about the impairment. Would you want to deal with the balance sheet and the impairment?

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Justin Lockwood, International Personal Finance plc - CFO & Executive Director [10]

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Yes, I'll pick up on that. So I guess, you're right. The prices are reducing and we actually see that as being pretty positive because we're able to maintain a very good profitability. So that trade-off between sort of the customer pricing I think -- and the impacts on our business, is actually really positive from a long-term perspective, and makes the business more regulatory friendly.

In terms of the balance sheet. Well, look, the receivables portfolio in the home credit business and digital business in Poland is around about GBP 350 million, okay? And clearly, the vast majority of that is in the home credit business. And from an impairment perspective, I think you are right. I think there is a structural change that over time, the customer numbers in this business have reduced. Partially that's due to competition, whereas the really significant part of it is this increased regulations that we've seen, particularly focused around debt -- around debt to income, which actually has knocked a number of customers out of being able to be served by us.

In addition to that, as price caps have come in, in some markets, and then some customers are no longer -- it's no longer economic to serve them as well. So structurally, the portfolio has become lower risk. Now is the impairment rate going to stay at 12.4% in 2020? My expectation is that it will increase a little, but by a little, I'm talking about 1 or 2 percentage points in 2020.

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Gerard Jude Ryan, International Personal Finance plc - CEO & Executive Director [11]

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But I have to say how impressed I am with our teams in-country that where regulation has squeezed the area that we can do business in, we've ended up with fewer customers. And the inflation is always driving costs forward. We've ended up with a business that has a fewer number of customers, better quality, better efficiency and a better ratio of return. So it's a complement to the work that the teams are doing in-country that we can arrive at that conclusion. Now clearly, we're doing a lot of work to reduce that customer attrition rate and try and get back to 0. And that's ultimately the aim of a lot of the strategies that we've talked about here today, and that's where we put a huge amount of our energy.

Any other question, guys? Okay. Well, look, thank you very much for taking the time for coming this morning. We're going to be here for the remainder of the morning, and we're available to have a chat with you. Thank you to everybody who has joined online, and we look forward to catching you up -- with you again shortly. Thanks, a lot.

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Justin Lockwood, International Personal Finance plc - CFO & Executive Director [12]

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Thank you.