TIDMNSF
RNS Number : 6933D
Non-Standard Finance PLC
30 October 2020
Non-Standard Finance plc
('Non-Standard Finance', 'NSF', the 'Company' or the
'Group')
Unaudited Half Year Results to 30 June 2020
30 October 2020
Key points
-- COVID-19 had a major impact on the Group in the second
quarter with low levels of lending and collections impacted by the
forbearance measures put in place for customers affected by the
pandemic
-- Normalised revenue(1) up 4% to GBP92.2m (2019: GBP88.3m);
reported revenue of GBP91.2m (2019: GBP87.1m)
-- Normalised operating profit(1) reduced to GBP5.0m (2019:
GBP19.8m); reported operating loss of GBP3.4m (2019: operating
profit of GBP16.0m)
-- Normalised loss before tax(1) of GBP9.9m (2019: normalised profit before tax of GBP6.6m)
-- Exceptional charge of GBP91.3m (2019: GBP25.3m) includes a
provision totalling GBP15.8m based on the Directors' best estimate
of the total costs of a customer redress programme being developed
at the request of the FCA; and the non-cash write-off of all
remaining goodwill assets and acquired intangibles totalling
GBP75.5m (2019: GBP12.5m) to give a reported loss before tax(2) of
GBP102.7m (2019: reported loss of GBP22.4m).
-- Given the loss before tax and the absence of distributable
reserves, no half year dividend per share is being declared (2019:
0.7p per share)
-- At 30 June 2020 the Group had cash balances of GBP75.7m,
gross borrowing of GBP345.0m and has since repaid GBP15m drawn on
its securitisation facility which remains available, subject to
lender consent. At 30 September 2020 the Group had cash balances of
GBP69.9m and gross borrowings of GBP330.0m
-- The Group is continuing to operate within its financial
covenants and is in discussions with its lenders regarding possible
covenant waivers in the future
-- As soon as agreement is reached with the FCA regarding the
methodology for customer redress, the Board will re-engage with
major investors on the terms of an equity raise. Alchemy, the
Group's largest shareholder, has confirmed that it remains
supportive of a substantial equity issue and remains actively
engaged with the Group
-- After careful consideration and despite the presence of a
number of material uncertainties detailed below, the Board has
concluded that it remains appropriate to continue to adopt the
going concern basis of accounting
-- Current trading: since the end of June, loan volumes and
collections at branch-based lending and home credit have been
better than previously expected while the performance at guarantor
loans is below expectations; as a result, the Group's overall
financial performance is broadly in line with management's
expectations
Financial summary
6 months to 30 June 2019
2020 restated % change
GBP'000 GBP'000
------------------------------------------- ---------- ---------- ---------
Normalised revenue(1) 92,223 88,287 4%
Reported revenue 91,252 87,103 5%
Normalised operating profit(1) 5,016 19,796 -75%
Reported operating profit 3,446 16,005 -78%
Normalised (loss)/profit before tax(1) (9,896) 6,618 -249%
Reported loss before tax(2) (102,749) (22,447) 358%
Normalised (loss) / earnings per share(3) (2.55)p 1.72p -248%
Reported loss per share (32.77)p (7.36)p 345%
Half year dividend per share Nil 0.70p n/a
============================================ ========== ========== =========
(1) Normalised figures are before fair value adjustments,
amortisation of acquired intangibles and exceptional items. See
glossary of alternative performance measures and key performance
indicators in the Appendix.
(2) After fair value adjustments, amortisation of acquired
intangible assets and exceptional costs.
(3) Normalised loss per share in 2020 is calculated as
normalised loss after tax of GBP7.952m divided by the weighted
average number of shares of 312,437,422. The restated normalised
earnings per share in 2019 is calculated as normalised profit after
tax of GBP5.362m, divided by the weighted average number of shares
of 312,049,682.
John van Kuffeler, Group Chief Executive, said
"The first half of 2020 has been the most challenging period in
the Group's history. As well as managing the significant
operational and financial challenges presented by COVID-19 that
have impacted the entire UK economy, the Group has also developed a
programme of customer redress for certain of its guarantor loans
customers. While these factors have placed a significant strain on
the Group's resources, the Group has GBP70m in cash and is trading
broadly in line with expectations. Alchemy, the Group's largest
shareholder, has confirmed that it remains supportive of a
substantial equity issue to strengthen the Group's balance sheet
and enable a return to growth."
"The non-standard lending sector provides an invaluable lifeline
for many consumers that would otherwise be unable to manage the
peaks and troughs in their income and expenditure. We believe that
ensuring credit continues to flow to the 10 million UK adults that
are unable to access mainstream lenders has never been more
important, particularly as the FCA has recently stated that 12
million UK adults are struggling to pay bills due to the
pandemic.
"The current tiered system of lockdowns across the country is
continuing to present operational challenges, but our staff are
demonstrating significant resolve to overcome these hurdles and
continue to support the needs of our customers in these
unprecedented times."
The tables below provide an analysis of the normalised results
(excluding fair value adjustments, amortisation of acquired
intangibles and exceptional items) for the Group for the six month
period to 30 June 2020 and 30 June 2019 respectively.
6 months to 30 Jun Branch-based Guarantor Home credit Central NSF plc
20 lending loans costs
Normalised(4)
GBP000 GBP000 GBP000 GBP000 GBP000
------------------------- ------------- ---------- ------------ --------- ----------
Revenue 47,914 17,032 27,277 - 92,223
Other operating income 888 - - - 888
Modification loss (638) (58) - - (696)
Derecognition gain 192 494 - - 686
Impairments (15,593) (15,727) (7,927) - (39,247)
Admin expenses (22,238) (7,114) (16,382) (3,104) (48,838)
Operating profit (loss) 10,525 (5,373) 2,968 (3,104) 5,016
Net finance cost (9,603) (3,871) (774) (664) (14,912)
------------- ---------- ------------ --------- ----------
Profit (loss) before
tax 922 (9,244) 2,194 (3,768) (9,896)
------------- ---------- ------------ --------- ----------
6 months to 30 Jun Branch-based Guarantor Home credit Central NSF plc
19 - restated Normalised(4) lending loans costs
GBP000 GBP000 GBP000 GBP000 GBP000
------------------------------ ------------- ---------- ------------ --------- ----------
Revenue 43,756 13,840 30,691 - 88,287
Other operating income 221 - - - 221
Modification loss (433) (72) - - (505)
Derecognition gain
(loss) 2,071 (402) - - 1,669
Impairments (10,322) (3,386) (8,828) - (22,536)
Admin expenses (20,558) (6,212) (17,560) (3,010) (47,340)
Operating profit (loss) 14,735 3,768 4,303 (3,010) 19,796
Net finance cost (8,399) (3,453) (1,108) (218) (13,178)
------------- ---------- ------------ --------- ----------
Profit (loss) before
tax 6,336 315 3,195 (3,228) 6,618
------------- ---------- ------------ --------- ----------
(4) Excludes fair value adjustments, amortisation of acquired
intangibles and exceptional items
The combination of a significant reduction in lending and a
robust collections performance, albeit with a marked increase in
impairment, meant that the combined net loan book before fair value
adjustments fell by 10% as summarised below:
Reconciliation of 2020 2020 2020 2019 2019 2019
net loan book Normalised Fair value Reported Normalised Fair value Reported
adjustments Restated adjustments Restated
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- ------------ ------------- ---------- ------------ ------------- ----------
Branch-based lending 187.7 - 187.7 201.8 - 201.8
Guarantor loans 87.6 0.4 88.0 95.3 3.1 98.4
Home credit 24.3 - 24.3 35.5 - 35.5
------------ ------------- ---------- ------------ ------------- ----------
Total 299.6 0.4 300.0 332.6 3.1 335.7
====================== ============ ============= ========== ============ ============= ==========
Context for the results
-- A prior year adjustment has been made to the opening 2018
balance sheet to reflect an increase in loan loss provisions
following the transition to IFRS 9 and the 2019 results have been
restated to reflect this change.
-- The 2020 and 2019 reported results include fair value
adjustments, amortisation of acquired intangibles and exceptional
items. Exceptional items in 2020 include the write down of certain
intangible assets and all goodwill assets and a provision for
customer redress of GBP15.8m. Exceptional items in 2019 include
fees and expenses associated with the offer to acquire Provident
Financial plc on the terms set out in an offer document published
on 9 March 2019, as well as an impairment loss on the Loans at Home
goodwill asset.
Investor presentation and dial-in details
There will be an investor presentation at 9.30 am on 30 October
2020. The meeting will be broadcast via webcast and conference
call. To watch the live webcast, please register for access by
visiting the Group's website www.nsfgroupplc.com . For those unable
to access the web, details of a dial-in facility are given below. A
copy of the webcast and slide presentation given at the meeting
will be available on the Group's website later today.
Dial-in details to listen to the analyst presentation at 9.30
am, 30 October 2020
09.20 am Please call +44 (0)330 606 1122
Room number 217833
Access code 5055
9.30 am Meeting starts
All times are Greenwich Mean Time.
For more information:
Non-Standard Finance plc
John van Kuffeler, Group Chief Executive
Jono Gillespie, Chief Financial Officer +44 (0) 20 3869
Peter Reynolds, Director, IR and Communications 9020
Maitland/Amo
Neil Bennett
Andy Donald +44 (0) 20 7379
Finlay Donaldson 5151
The non-standard consumer finance market
The non-standard consumer finance market represents a
significant segment of the UK's retail financial services sector.
It provides credit to consumers that either fail to meet the
lending requirements of high street financial institutions or that
choose not to borrow from them. These consumers represent
approximately a third of the UK's adult population and include
those that have no credit history, low credit status or are credit
impaired. A well-regulated, trusted and sustainable credit sector
is imperative to these consumers, particularly in the current
economic climate. A recent study by the FCA found, that due to the
impact of the pandemic there are now around 12 million people in
the UK with low financial resilience. Each of NSF's businesses is
focused on serving the needs of these sub-prime borrowers for whom
access to appropriate financial services can be important in
helping them manage the peaks and troughs of their income and
expenditure.
About Non-Standard Finance
Non-Standard Finance plc is listed on the main market of the
London Stock Exchange (ticker: NSF) and is a leading player in the
UK's non-standard finance market with leadership positions in three
segments: branch-based lending, guarantor loans and home credit.
The Group's evolution from a cash shell back in 2015 has been
achieved thanks to a period of significant investment in all three
divisions with a clear differentiating feature being the Group's
focus on face-to-face lending unless the applicant has the support
of a guarantor. Our business is founded on building personal
relationships with our customers, many of whom have already been
excluded by high-street lenders and other mainstream providers.
These relationships, supported by significant physical and
technological infrastructure, represent the very heart of our
business model that is focused on addressing the credit needs of a
growing proportion of the 10 million adults(4) that are either
unable or unwilling to borrow from mainstream banks and other
lenders.
(4) UK Specialist Lending Market Trends and Outlook 2019.
Executive insights Volume XX, Issue 39 - L.E.K Consulting
Group Chief Executive's statement
Introduction
Whilst the first two months of the year delivered a solid
trading performance, the impact of COVID-19, the associated
restrictions on social distancing and the slowdown of the entire UK
economy each had a profound and immediate impact on all areas of
the Group's business, operations and financial performance. Despite
these challenges, the Group's business divisions adapted quickly to
a remote-only operating model whilst government rules and health
and safety concerns meant that face-to-face contact was temporarily
restricted.
While plans to address the resulting constraints on the Group's
capital structure through an equity issue had reached an advanced
stage by August 2020, these were put on hold following concerns
raised by the FCA regarding certain operating procedures and
policies at the Group's Guarantor Loans Division ('GLD'). These
concerns had arisen out of a multi-firm review of the guarantor
loans sector following which the FCA wrote to firms in the sector
identifying their concerns and requesting firms develop a possible
redress methodology for affected customers.
Having formulated a detailed redress methodology in conjunction
with its advisers, the Board has made an associated provision
totalling GBP15.8m in the 2020 half year results. While this
represents the Directors' best estimate of the total cost of
settlement of redress amounts due to affected guarantor loans
customers, the Group has yet to agree its methodology and analysis
with the FCA. The Group is continuing to engage with the FCA and is
focused on reaching a conclusion as soon as practicable when a
further announcement will be made. Further details regarding the
provision for customer redress are summarised in 'Redress for
certain customers of Guarantor Loans Division' below.
2020 half year results
Despite a significant reduction in lending volumes from the end
of March 2020 and a marked increase in the levels of forbearance
being offered to affected customers due to COVID-19, normalised
revenue before fair value adjustments increased to GBP92.2m (2019:
GBP88.3m). However, this modest uplift was combined with a marked
increase in impairment due to the pandemic and an increase in the
macroeconomic risk weighting of a severe downside scenario. As a
result, the business delivered a sharp reduction in normalised
operating profit to GBP5.0m in the period (2019 restated: operating
profit of GBP19.8m). The reported operating profit was GBP3.4m
(2019 restated: operating profit of GBP16.0m) and the reported loss
before tax (which was after an exceptional charge of GBP91.3m
(2019: GBP25.3m)), was GBP102.7m (2019 restated: GBP22.4m). The
exceptional charge comprised a provision of GBP15.8m to cover the
estimated costs of redress to certain customers in the Group's
Guarantor Loans Division (see below); and a non-cash GBP75.5m
write-down of certain intangible assets and all remaining goodwill
assets.
Branch-based lending
The planned opening of five new branches during the first half
of 2020 was put on hold following the outbreak of the pandemic at
the end of March when we temporarily closed the branch network and
shifted to a home working model. With lending reduced to almost
zero in April 2020, approximately 40% of staff in the branch
network were placed on furlough although they continued to be paid
in full. We reopened the network on 11 May 2020 and began the
process of restarting lending using a revised process, with updated
scorecards to reflect the significant changes to the macroeconomic
environment. With lower volumes and a highly uncertain outlook, the
decision was taken to reduce staff numbers while those on furlough
returned to work at the beginning of July. Although reduced revenue
and increased impairments and provisions meant that the division
delivered a much reduced normalised operating profit of GBP10.5m
(2019 restated: GBP14.7m), cash generation was strong due to a
robust collections performance and reduced levels of lending.
Since the end of June 2020, lending volumes have recovered
strongly such that the net loan book returned to growth in August
and September 2020. At an average of 89% of pre-COVID levels since
the end of June, collections have also been better than expected.
Whilst further lockdowns and the prospect of a second wave of
infection remain current challenges, the proportion of customers
that remain COVID-flagged has fallen significantly from the peak in
June 2020 with the result that rates of delinquency have also
reduced and whilst not quite back at pre-pandemic levels, the trend
is encouraging.
Guarantor loans
Having already reduced the rate of loan book growth in the
fourth quarter of 2019, the onset of the pandemic reduced lending
further and required that the division switch to home working in
late March 2020. Lending volumes reduced substantially in April
2020 as we adjusted our scorecards and took time to assess the
likely impact on applicants. The younger demographic of guarantor
loans customers relative to the Group's other divisions meant that
a much larger proportion of the loan book was affected by COVID-19
as it is young adults that appear to have suffered the greatest
economic impact from the pandemic. As a result, an even greater
operational shift away from lending to collections and forbearance
management was required. Contrary to the normal collections
process, but in line with FCA guidance, for those loan accounts
affected by COVID, we did not contact borrowers or guarantors for
payment whilst the borrower remained on an emergency payment
freeze. This impacted both the net loan book and revenue growth
during the first half of 2020. At the same time, impairments
increased significantly, reflecting both the severe impact of
COVID-19 on the division's customer base and an increased risk
weighting of a downside scenario against the backdrop of a
deteriorating macroeconomic outlook. The net result was that the
division produced a normalised operating loss, which is before an
exceptional provision for customer redress (see below), of GBP5.4m
(2019 restated: normalised operating profit of GBP3.8m).
While lending volumes began to recover in July, they were
reduced in August following concerns raised by the FCA as part of
its multi-firm review in to the guarantor loans sector. Since then,
while lending has been limited, collections have remained robust,
averaging 81% of pre-COVID levels since the end of June with the
result that the loan book has continued to decline. Although
lending volumes and delinquency performance have both been below
expectations and whilst uncertainty regarding a possible second
wave of infection remains, the proportion of customers that are
COVID-flagged, having been adversely impacted by the pandemic,
appears to have stabilised at around 23% of the total and the
majority of these have returned to making full or part
payments.
Home credit
Prior to the onset of the pandemic, all lending and the majority
of collecting was face-to-face in the customer's home with c.28% of
collections performed remotely. The shift to home working by staff
and agents at the end of March 2020 also required a rapid
transition by both customers and self-employed agents to a 100%
remote collections model. Lending was reduced to nil during April
2020, not only because it was difficult to assess the impact of the
pandemic on applicants' ability or willingness to pay, but also
because, given our historic focus on face-to-face lending, there
was no remote lending capability in place. While the switch to
remote collections took place within a few weeks, the development
of a robust remote lending process took a little longer and was
delivered in a series of stages. As a result, the net loan book
shrank rapidly between April and the end of June 2020, impacting
both revenue and operating profit that reduced to GBP3.0m (2019:
GBP4.3m).
Despite the threat of a second wave of infection, since the end
of June, lending has continued to increase month on month and the
net loan book has returned to growth. Collections have also
remained robust, reaching 89% of pre-COVID levels in September.
Redress for certain customers of Guarantor Loans Division
The Group announced on 5 August 2020 that following its
multi-firm review of the guarantor loans sector, the FCA had raised
some concerns regarding certain processes and procedures at GLD and
a programme of redress would be required for those customers deemed
to have suffered harm as a result.
Together with its advisers, the Group has therefore developed a
detailed redress methodology and while the FCA has not yet reviewed
the proposed methodology and supporting analyses, the Directors
have included an exceptional provision of GBP15.8m in the 2020 half
year results based on their best estimate of the full and final
costs of the redress programme. The estimate includes: (i) the sum
of all redress due to customers, including penalty interest (the
'Gross Redress Amount') of GBP16.0m, offset by existing impairment
provisions of GBP1.2m, resulting in a net amount of GBP14.8m; and
(ii) the associated operational costs of executing the programme
amounting to GBP1.0m. It is possible that the Gross Redress Amount
may differ, perhaps materially from the current estimate and that
this could materially impact the financial statements. This is due
to the risks and inherent uncertainties surrounding the assumptions
used in the provision calculation, as well as the fact that the FCA
has not yet reviewed the methodology proposed.
Having already implemented a number of operational changes since
the acquisition of George Banco on 17 August 2017 and following a
number of further recommendations by the FCA, GLD has begun to
implement additional enhancements to its lending process. Having
reduced lending significantly since the outbreak of the pandemic,
it is expected that the low volume of lending will continue into
2021.
Net assets, going concern and solvency
The combined impact of the challenging trading environment, as
well as the provision for customer redress on the Group's financial
performance, net loan book and balance sheet, has placed the Group
under significant financial strain and expanded the breadth and
potential impact of the principal risks now facing the Group (see
'Principal risks' below). While the Group has significant cash
balances and is continuing to operate within its financial
covenants, it is in discussions with its lenders regarding possible
future covenant waivers and with Alchemy, the Group's largest
shareholder, who remains supportive of a substantial equity issue.
As soon as agreement is reached with the FCA regarding the
methodology for customer redress, the Board will re-engage with its
major shareholders on the terms of such an issue.
As part of its going concern assessment, the Directors reviewed
both the Group's access to liquidity and its future balance sheet
solvency. The Group therefore refreshed its two scenarios since
year end: (i) the most likely (or 'base case') scenario; and (ii)
the 'downside' scenario which applies stresses in relation to the
key risks identified in the base case. Both scenarios assume that
no additional equity is raised by the Group.
As a result of the expected cost of customer redress, under the
base case, the Group is expected to breach covenants in the future
and solvency will be dependent upon: the ultimate cost of the
proposed redress programme being equal or less than the provision
being made (refer to note 6 to the financial statements); the cost
of any waivers granted from lenders; and any mitigating actions
which could be implemented to offset any adverse movement from the
base case. In addition, the Group may have to further restrict
lending activities and/or exercise further financial levers around
costs in order to maintain solvency.
Due to the uncertainty regarding the full impact of COVID-19,
particularly if there is a sustained and significant second wave of
infection, together with the final cost of the proposed redress
programme on its forecasts and the cost of any waivers granted by
lenders, there is a material uncertainty that may cast significant
doubt on the Group's ability to continue as a going concern.
Further details are set out in note 2 to the financial
statements.
However, having considered the matter carefully and taking all
of the above factors into account, the Board has adopted the going
concern basis of accounting in its preparation of the 2020 half
year results whilst recognising that there exist a number of
material uncertainties which could impact the Group's status as a
going concern. In arriving at this conclusion, the assumption of
lender and shareholder support for covenant breaches and solvency
forms a significant judgement of the Directors in the context of
approving the Group's going concern status.
Other regulatory developments
In addition to the outcome of the multi-firm review into the
guarantor loans sector, the following regulatory developments in
2020 have been particularly relevant to the Group's business:
-- Support for consumers affected by COVID-19 - On 9 April 2020,
the FCA published guidance setting out its expectation that firms
should provide, for a temporary period only, exceptional and
immediate support to consumers facing payment difficulties due to
circumstances arising out of COVID-19. This was updated on 1 July
2020 and supplemented with additional guidance on 16 September
2020. Affected consumers are entitled to opt for an initial
three-month payment deferral that can be extended by a further
three months up to and including 31 October 2020. The Group is
continuing to offer a range of support options to those customers
affected by the pandemic.
-- FCA draft guidance and feedback statement on the fair
treatment of vulnerable customers - Building on its previous work
in this area, the latest guidance from the FCA was published in
July 2020 and, inter alia, seeks to provide examples of best
practice for firms that can assist in the protection of vulnerable
customers. Having already integrated the FCA's previous guidance on
this area into the Group's business operations, the latest guidance
is not expected to have a material impact on the Group.
-- Kerrigan v Elevate Credit International Ltd. - The High Court
handed down its decision in the payday lending test case on 5
August 2020. Among other issues, the judgment includes a detailed
assessment of the affordability and creditworthiness procedures
that Elevate (trading as Sunny) had in place including the
assessment of the customer's level of repeat borrowing that is a
particular area of focus in payday lending. The Group is continuing
to assess how the judgment may affect the Group including the
demand for and supply of non-standard credit in the UK and the
wider implications for the sector and the UK economy.
-- FCA multi-firm review of repeat lending by high cost lenders
- The FCA published its review findings in August 2020 and has
required firms to ensure that relending does not cause harm. The
Group has reviewed its lending processes and procedures and,
following some minor amendments, is confident that each of its
business divisions meets the expectations of the regulator.
-- Breathing space - The Debt Respite Scheme (Breathing Space
Moratorium and Mental Health Crisis Moratorium) (England and Wales)
Regulations 2020 were laid before the House of Lords on 9 September
2020 and approved on 6 October 2020. The regulations, inter alia,
will afford two types of moratorium for borrowers: (i) a breathing
space moratorium lasts for 60 days and is open to anyone who
engages with debt advice and meets certain eligibility criteria;
and (ii) a mental health crisis moratorium, available where a
person is in mental health crisis treatment and extends the
breathing space protections for as long as that treatment lasts,
plus 30 days. The regulations are planned to become effective in
May 2021.
-- Financial Services Future Regulatory Framework Review - HM
Treasury launched phase II of its consultation in October 2020 with
a view to ensuring, inter alia, that: the framework meets the needs
of its stakeholders once the UK leaves the EU; there is a clear
allocation of responsibilities between Parliament, HM Treasury and
financial regulators; regulators are accountable for their actions
and stakeholders are fully engaged in the policy-making process;
and that there is greater cooperation and coordination between HM
Treasury and financial services regulators.
We remain focused on delivering good customer outcomes and
continue to monitor all regulatory developments closely so that we
can anticipate and, if necessary, engage with the relevant
authorities, either directly or through industry associations.
Debt funding
The Group's debt facilities currently include a GBP285m term
loan facility (the 'Term Loan'), provided by a group of
institutional investors. The Term Loan, which is not repayable
until August 2023, bears an interest rate of LIBOR plus 7.25% per
year with interest payable every six months. In addition, the Group
has a GBP45m revolving credit facility provided by Royal Bank of
Scotland at an interest rate of LIBOR plus 3.5% per year. Both
facilities are fully drawn and while the Group has continued to
operate within the financial covenants on both facilities, in the
light of the material uncertainties outlined above, it is in active
discussions with its lenders regarding possible future covenant
waivers.
The Group also has a GBP200m securitisation facility that was
put in place with an initial drawdown of GBP15m during April 2020.
Whilst the onset of the pandemic resulted in the Group breaching
certain performance triggers on the facility during the first half
of 2020, the drawn amount was repaid on 26 August 2020, removing
the outstanding breach. While the facility remains available for
potential future use, current cash balances mean that there is no
requirement for further borrowing at the present time and the
prevailing covenants and the requirement for lender consent mean
that the facility would likely remain unavailable in the absence of
a further capital raise. Given the material uncertainty around
going concern and the Group's ability to access the securitisation
facility in the future, there is a possibility that the capitalised
fees associated with the securitisation facility which totalled
GBP6.0m at 30 June 2020, will be written-off.
As at 30 June 2020 the Group had cash at bank of GBP75.7m (31
December 2019: GBP14.2m) and gross borrowings of GBP345.0m (31
December 2019: GBP323.2m). Since 30 June 2020, the GBP15m drawn on
the securitisation facility has been repaid and as at 30 September
the Group had cash at bank of GBP69.9m and gross borrowings of
GBP330.0m.
Dividend
As a result of the significant reported losses in 2019 and
during the first half of 2020, the Company does not have any
distributable reserves and is therefore not in a position to
declare a half year dividend (2019: 0.7p per share). As part of any
future capital raise, the Board is committed to completing a
process, subject to shareholder and Court approval, to create
sufficient distributable reserves so that the Company is able to
resume the payment of cash dividends to shareholders as soon as it
is appropriate to do so.
Current trading and outlook
Since the outbreak of the pandemic, both branch-based lending
and home credit have traded ahead of management's previous
expectations while the performance at guarantor loans has been
below plan as lending has been limited pending the conclusion of
the review by the FCA and is likely to remain subdued for the rest
of the year. As a result, the Group's financial performance since
the end of June 2020 is broadly in line with management's
expectations.
We are focused on reaching a conclusion on customer redress as
soon as practicable so that we can re-engage with investors
regarding a substantial equity raise in order to strengthen the
balance sheet and enable the Group to return to growth.
Whilst the current three tier system of lockdowns and the threat
of a second wave of infection is once again presenting considerable
operational challenges for all three businesses, our staff are
showing significant resolve to overcome these hurdles as they
continue to address the genuine needs of our customers in these
unprecedented times.
John de Blocq van Kuffeler
Group Chief Executive
30 October 2020
Financial review
Fair value adjustments and amortisation of acquired intangibles
in 2020 include amounts relating to the acquisition of George
Banco. Fair value adjustments and amortisation of acquired
intangibles in 2019 include amounts relating to the acquisitions of
Everyday Loans (including TrustTwo) and George Banco.
6 months to 30 June 2020 2020 2020
Fair value adjustments, amortisation of acquired
Normalised(5) intangibles and exceptional items Reported
GBP'000 GBP'000 GBP'000
-------------------------------- -------------- -------------------------------------------------------- ----------
Revenue 92,223 (971) 91,252
Other operating income 888 - 888
Modification loss (696) - (696)
Derecognition gain 686 - 686
Impairments (39,247) - (39,247)
Admin expenses (48,838) (599) (49,437)
-------------- -------------------------------------------------------- ----------
Operating profit (loss) 5,016 (1,570) 3,446
Exceptional items(6) - (91,283) (91,283)
-------------- -------------------------------------------------------- ----------
Profit before interest and tax 5,016 (92,853) (87,837)
Finance cost (14,912) - (14,912)
-------------- -------------------------------------------------------- ----------
Profit (loss) before tax (9,896) (92,853) (102,749)
Taxation 1,944 (1,569) 375
-------------- -------------------------------------------------------- ----------
Profit (loss) after tax (7,952) (94,422) (102,374)
============== ======================================================== ==========
Loss per share (2.55) (32.77)
Dividend per share - -
================================ ============== ======================================================== ==========
6 months to 30 June - restated 2019 2019 2019
Fair value adjustments, amortisation of acquired
Normalised(5) intangibles and exceptional items Reported
GBP'000 GBP'000 GBP'000
-------------------------------- -------------- -------------------------------------------------------- ----------
Revenue 88,287 (1,184) 87,103
Other operating income 221 - 221
Modification loss (505) - (505)
Derecognition gain 1,669 - 1,669
Impairments (22,536) - (22,536)
Admin expenses (47,340) (2,607) (49,947)
-------------- -------------------------------------------------------- ----------
Operating profit (loss) 19,796 (3,791) 16,005
Exceptional items(6) - (25,274) (25,274)
-------------- -------------------------------------------------------- ----------
Profit before interest and tax 19,796 (29,065) (9,269)
Finance cost (13,178) - (13,178)
-------------- -------------------------------------------------------- ----------
Profit (loss) before tax 6,618 (29,065) (22,447)
Taxation (1,256) 745 (511)
-------------- -------------------------------------------------------- ----------
Profit (loss) after tax 5,362 (28,320) (22,958)
============== ======================================================== ==========
Loss per share 1.72p (7.36)p
Dividend per share 0.70p 0.70p
================================ ============== ======================================================== ==========
(5) Normalised figures, adjusted to exclude fair value
adjustments, amortisation of acquired intangibles and exceptional
items
(6) Refer to note 6 in the notes to the financial statements for
further detail
COVID-19 had a severe impact on the Group's financial
performance in the first half of 2020. Normalised revenue was up
slightly at GBP92.2m (2019: GBP88.3m) but less than was expected
reflecting the significant reduction in lending that took place
following the outbreak of the pandemic in March 2020. Whilst
lending recommenced in earnest during May 2020, volumes remained
well below that achieved in April, May and June the previous year.
At the same time, impairments increased significantly, reflecting
the increase in credit risk as a direct result of the pandemic.
While collections across all three divisions have held up
reasonably well given the challenges faced, a meaningful proportion
of the Group's customers elected to take an 'emergency payment
freeze' which reduced the absolute level of collections received.
Both the deteriorating outlook, as well as the Group's decision
during the second half of 2019 to increase its severe downside
macroeconomic risk weighting, contributed to the increase in
impairment that rose by 74% to GBP39.2m (2019 restated:
GBP22.5m).
The majority of the Group's costs are fixed in nature rather
than variable and so on a normalised basis, despite lower lending
volumes, administration costs increased by 3% to GBP48.8m (2019
restated: GBP47.3m). Whilst the cost:income ratio over the 12
months to 30 June fell to 51.8% (2019 restated: 52.5%) the impact
of more modest revenue growth and increased impairments meant that
normalised operating profit fell by 75% to GBP5.0m (2019 restated:
GBP19.8m). Finance costs increased to GBP14.9m (2019: GBP13.2m),
driven by the continued growth in the loan book up to late March
2020 and the decision to draw down from the new securitisation
facility in April 2020. With revenue broadly flat but with a marked
increase in impairment, the Group delivered a normalised loss
before tax of GBP9.9m (2019 restated: profit before tax of
GBP6.6m). An exceptional provision for customer redress together
with the write-down of certain intangible assets and all remaining
goodwill assets were recorded as an exceptional charge totalling
GBP91.3m (2019: GBP25.3m) and meant that the reported loss before
tax was GBP102.7m (2019 restated: loss before tax of GBP22.4m).
Normalised loss per share was 2.55p (2019 restated: earning per
share of 1.72p), while exceptional items, fair value and other
accounting adjustments meant that the Group's reported loss per
share was 32.77p (2019 restated: loss per share of 7.36p).
Divisional review
Branch-based lending
Face-to-face lending remains central to the branch-based lending
model, a channel in which Everyday Loans is the market leader,
providing unsecured loans to UK adults that are credit-impaired
through a national network of 73 branches. Such a lending approach,
whilst unusual in the internet age, has over the years proven to be
popular with customers and capable of generating attractive levels
of return.
The onset of the COVID-19 pandemic presented a number of
challenges, not least being the introduction of social distancing
and the need to pivot swiftly to a home-working model so as to
ensure the safety and protection of customers and staff. Having
taken the decision to close all branches at the end of March,
albeit temporarily, a concerted effort across IT, human resources,
finance and compliance meant that within just a few days, the
division was once again operational, although our appetite for
lending was significantly reduced whilst we sought to embed revised
lending and underwriting processes to cater for what had become a
very different business environment. The division's strong cultural
ethos played a major part in ensuring staff morale remained strong
during a particularly challenging period and whilst the planned
opening of five further branches during the first half was put on
hold, with revised lending protocols and health and safety
procedures in place, we reopened all 73 branches and recommenced
lending in May 2020.
Being unable to lend face-to-face following the temporary
closure of the branch network, the volume of leads and qualifying
applications reduced significantly in March and fell to almost zero
in April. It was only following the reopening of the network and
our decision to restart lending on 11 May that leads and
'applications to branch' began to increase. Having written no loans
in April, we wrote 297 in May rising to 1,685 in June and just
under 3,000 in July. The net result was that having written
approximately GBP14m of loans in both January and February 2020,
lending volumes halved in March and in April fell to almost zero.
In June we wrote total volume of GBP4.8m of which GBP3.8m was new
cash.
Whilst lending reduced rapidly, we maintained a clear focus on
collections and although the absolute level of collections reduced
from pre-lockdown levels, it remained broadly stable as a
percentage of the outstanding loan book. At 30 June 2020, the net
loan book was GBP187.7m (2019 restated: GBP201.8m) having reached
GBP220.5m at the end of March 2020. The reduced level of lending in
the first half meant that the number of active customers also
reduced from a peak of approximately 77,000 at the end of March
2020 to 70,700 at the end of June 2020 although this remained some
5% above the previous year (2019: 67,400).
Financial results
6 months to 30 June 2020 2020 2020
Normalised Fair value adjustments and exceptional items Reported
GBP'000 GBP'000 GBP'000
-------------------------------- ----------- --------------------------------------------- ----------
Revenue 47,914 - 47,914
Other operating income 888 - 888
Modification loss (638) - (638)
Derecognition gain 192 192
Impairments (15,593) - (15,593)
----------- --------------------------------------------- ----------
Revenue less impairment 32,763 - 32,763
Admin expenses (22,238) - (22,238)
----------- --------------------------------------------- ----------
Operating profit 10,525 - 10,525
Exceptional items - - -
----------- --------------------------------------------- ----------
Profit before interest and tax 10,525 - 10,525
Finance cost (9,603) - (9,603)
----------- --------------------------------------------- ----------
Profit before tax 922 - 922
Taxation (175) - (175)
----------- --------------------------------------------- ----------
Profit after tax 747 - 747
=========== ============================================= ==========
6 months to 30 June - restated 2019 2019 2019
Normalised Fair value adjustments and exceptional items Reported
GBP'000 GBP'000 GBP'000
-------------------------------- ----------- --------------------------------------------- ----------
Revenue 43,756 - 43,756
Other operating income 221 - 221
Modification loss (433) - (433)
Derecognition gain 2,071 - 2,071
Impairments (10,322) - (10,322)
----------- --------------------------------------------- ----------
Revenue less impairment 35,293 - 35,293
Admin expenses (20,558) - (20,558)
----------- --------------------------------------------- ----------
Operating profit 14,735 - 14,735
Exceptional items - - -
----------- --------------------------------------------- ----------
Profit before interest and tax 14,735 - 14,735
Finance cost (8,399) - (8,399)
----------- --------------------------------------------- ----------
Profit before tax 6,336 - 6,336
Taxation (1,203) - (1,203)
----------- --------------------------------------------- ----------
Profit after tax 5,133 - 5,133
=========== ============================================= ==========
2019
IFRS 9 Key Performance Indicators(7) 2020 restated
Number of branches 73 72
Period end customer numbers (000) 70.7 67.4
Period end loan book (GBPm) 187.7 201.8
Average loan book (GBPm) 208.1 184.7
Revenue yield 46.7% 47.0%
Risk adjusted margin 34.2% 36.0%
Impairments/revenue 26.7% 23.5%
Impairment/average loan book 12.4% 11.0%
Cost to income ratio 45.2% 45.3%
Operating profit margin 26.2% 33.8%
Return on asset 12.2% 15.9%
====================================== ====== ==========
(7) All definitions are as per glossary.
As there were no fair value adjustments to revenue or
amortisation of acquired intangibles in the period, reported
results were the same as normalised results. The restatement of the
2019 results reflected an increase in loan loss provisions
following the transition to IFRS 9 and a correction to modification
losses (see note 3 to the financial statements).
Despite the impact on lending activity from late March 2020,
previous loan book growth meant that revenue grew by 9% to GBP47.9m
(2019: GBP43.8m). The sale of non-performing loans in the period
along with government grants received in relation to furloughed
employees produced other operating income of GBP0.9m (2019:
GBP0.2m). The modification loss on loans that had been
substantially deferred in the period was GBP0.6m (2019 restated:
GBP0.4m) while the derecognition gain on rescheduled loans was
GBP0.2m (2019 restated: GBP2.1m). The combined effect of the
pandemic on collections and the Group's decision in 2019 to
increase the severe downside macroeconomic risk weighting meant
that overall impairment increased substantially. With revenue
growth much reduced, impairment as a percentage of revenue
increased to 26.7% on a rolling 12-month basis (2019 restated:
23.5%) and as a percentage of average net receivables it increased
from 11.0% to 12.4%. A full period of costs associated with the
eight new branches opened in 2019 and increased professional fees
were mitigated by cost savings with the result that administrative
expenses grew by 8% to GBP22.2m (2019: GBP20.6m). The net result
was that operating profit fell by 29% to GBP10.5m (2019 restated:
GBP14.7m).
Finance costs increased by 14% to GBP9.6m (2019: GBP8.4m)
reflecting the strong annualised loan book growth until March 2020
and the fact that, following the onset of the pandemic, the Group
chose to hold higher cash balances rather than repaying outstanding
debt so as to ensure maximum flexibility during a heightened period
of uncertainty. As a result, and in conjunction with the reduced
level of operating profit for the reasons outlined above, the
division generated a much reduced pre-tax profit of GBP0.9m in the
first half (2019 restated: GBP6.3m).
A brief description of the key value drivers for the business
(network capacity, lead volumes and quality, productivity and
delinquency management) and how these changed during the first half
of 2020 is set out below.
Network capacity - Whilst the previous goal had been to open a
number of additional branches in 2020, the onset of the pandemic
meant that no new branches were opened during the first half of
2020 and so the network remained steady at 73 branches.
Lead volumes and quality - Whilst total lead volumes and
applications to branch ('ATBs') in January and February 2020 were
up strongly on the previous year (20% and 8% respectively), this
went into reverse in March when we reduced lead volumes by 16% and
ATBs fell by 41% versus the prior year. With no volume in April and
a gradual rebuild during May and into June, in the six months to 30
June 2019, we received a total of 845,600 new borrower applications
(2019: 1.2m) of which 154,600 (2019: 234,700) were accepted in
principle and sent on for processing by staff in the branch nearest
to the applicant (or centrally if no branch is within a reasonable
distance). Having been converting around 7% of ATBs into loans
booked prior to the onset of the pandemic, changes made to our
scorecards and lending process impacted conversion in May 2020 but
by the following month this had recovered substantially to over
5%.
Productivity - The reduced level of applications and lower
conversion meant that we wrote 13,828 loans in the period which was
a 44% reduction on the previous year (2019: 21,958). Anticipating
the drop in lending volume, a total of 155 branch staff were
temporarily placed on furlough but were topped up to receive 100%
of their salary. With no new branch openings and the marked
reduction in lending volumes, 48 staff were made redundant in
August but all other staff have returned to work and there are
currently no branch-based staff on furlough.
Delinquency management - Whilst there was a marked increase in
the rates of delinquency amongst those loans initially flagged as
being affected by COVID, the delinquency rates have steadily
declined since April 2020 and an increasing proportion of those
flagged have since returned to full or part payment and by the end
of June 2020 there were 8,621 COVID-affected customers, or 12% of
the total. Since the end of June, many of those affected have come
to the end of their initial emergency payment freeze prompting a
further reduction in the proportion of total customers that remain
COVID-flagged and by the end of September this had reduced to 6% of
the total. Whilst collections overall have remained robust
throughout the period, the higher delinquency of COVID-flagged
customers, together with a marked increase in the risk weighting of
a downside scenario as part of the IFRS 9 provisioning, meant that
impairment as a percentage of revenue increased to 26.7% (2019
restated: 23.5%) and against average net receivables it increased
to 12.4% (2019 restated: 11.0%).
Plans for the rest of 2020
Our short-term focus is to rebuild the loan book and return it
to growth whilst at the same time continuing to bring down the rate
of impairment to more normalised levels that the business has
delivered previously. Despite the challenges presented by further
lockdowns and social distancing, we remain committed to the
face-to-face lending model, one that is both popular with customers
and capable of generating attractive rates of return.
Since the end of June 2020, lending volumes have continued to
recover so that the net loan book has once again started to grow,
while rates of delinquency have also improved. The challenging
macroeconomic environment means that the demand for our products
and services is expected to increase and our appetite to increase
geographic coverage with further branches remains undiminished - we
continue to see scope for a network of over 100 branches over the
medium-term. The pace at which we are able to realise that vision
will be dependent upon the Group securing additional equity capital
that in turn should unlock access to further, lower cost debt
funding.
Guarantor loans
Since being introduced into the UK market in 2006, guarantor
loans have proven to be an attractive source of credit for those
with a thin or impaired credit file as the presence of a guarantor
often means that the borrower is able to secure credit at a much
lower rate of interest than would be the case were they to try and
borrow on their own. At the same time, by keeping up with their
regular repayments, the borrower can repair or rebuild their credit
score.
However, of the Group's three divisions, guarantor loans has
experienced the greatest impact from the pandemic. As evidenced by
the latest unemployment statistics, COVID-19 has had a
disproportionate economic impact on younger adults and it is this
demographic that makes up the majority of the division's customer
base. The result has been that by the end of June 2020
approximately 23% of the division's customers had been affected and
this in turn impacted both collections and the rate of impairment
with the result that the division delivered a normalised pre-tax
loss of GBP9.2m (2019 restated: normalised pre-tax profit of
GBP0.3m ).
As part of its multi-firm review into the guarantor loans
segment, the FCA raised some concerns regarding certain aspects of
the division's processes and procedures and so the Group and its
advisers have developed a detailed methodology to provide redress
to those customers affected (see 'Redress for certain customers of
Guarantor Loans Division' above). While the FCA has not yet
reviewed the proposed redress methodology, the Directors have
included an exceptional provision of GBP15.8m in the 2020 half year
results based on their best estimate of the total costs of the
redress programme using the methodology described above. Although
the final cost of the redress programme remains subject to the FCAs
approval of the methodology used and a review of those customers
affected, it is hoped that once the programme is finalised the
division can begin its preparations to restart lending in earnest
in 2021.
Financial results
Despite the significant slowdown in lending from late March
2020, strong annualised loan book growth up to this point meant
that normalised revenue grew by 23% to GBP17.0m (2019: GBP13.8m).
The unwinding of the fair value uplift associated with the
acquisition of George Banco in 2017 meant that reported revenue was
almost GBP1m lower than this at GBP16.1m (2019: GBP12.7m). As noted
above, the disproportionate impact of the pandemic on the
division's customers, coupled with a marked increase in provisions
to reflect a more pessimistic macroeconomic backdrop, contributed
to a four-fold increase in the absolute value of impairment to
GBP15.7m (2019 restated: GBP3.4m). This in turn fed through into a
marked increase in the rate of impairment as a percentage of both
revenue and average net receivables. Despite a reduction in
headcount versus the year end, administration costs increased by
15% to GBP7.1m (2019: GBP6.2m) driven by an increase in
professional fees and redundancy costs. The net result was that the
division produced a normalised operating loss of GBP5.4m (2019
restated: operating profit of GBP3.8m). While the marked slowdown
in loan book growth from March 2020 generated positive cashflow in
the period, as increased cash balances were not used to pay down
the Group's drawn facilities, finance costs increased by 12% and
the normalised loss before tax was GBP9.2m (2019 restated: profit
before tax of GBP0.3m).
As noted above, an exceptional provision for customer redress
due to certain customer of the Group's guarantor loans division
totalling GBP15.8m (2019: GBPnil) was made in the period. The
provision represents the Directors' best estimate of the total
costs of redress based on a detailed methodology developed in
conjunction with the Group's advisers. As the FCA has not yet
reviewed the proposed redress methodology and associated analyses,
it is possible that the eventual outcome may differ materially from
the current estimate and that this could materially impact the
financial statements. This is due to the risks and inherent
uncertainties surrounding the assumptions used in the provision
calculation as well as the fact that the FCA has yet to confirm its
agreement to the methodology proposed.
6 months to 30 June 2020 2020 2020
Fair value
Normalised(8) adjustments Reported
------------------------------ -------------- ------------- ---------
GBP'000 GBP'000 GBP'000
Revenue 17,032 (971) 16,061
Other income - - -
Modification loss (58) - (58)
Derecognition gain 494 - 494
Impairments (15,727) - (15,727)
-------------- ------------- ---------
Revenue less impairment 1,741 (971) 770
Admin expenses (7,114) (7,114)
-------------- ------------- ---------
Operating loss (5,373) (971) (6,344)
Exceptional items - (15,753) (15,753)
Loss before interest and tax (5,373) (16,724) (22,097)
Net finance cost (3,871) - (3,871)
-------------- ------------- ---------
Loss before tax (9,244) (16,724) (25,968)
Taxation 1,756 185 1,941
-------------- ------------- ---------
Loss after tax (7,488) (16,539) (24,027)
============== ============= =========
6 months to 30 June - restated 2019 2019 2019
Fair value
Normalised(8) adjustments Reported
-------------------------------- -------------- ------------- ---------
GBP'000 GBP'000 GBP'000
Revenue 13,840 (1,184) 12,656
Other income - - -
Modification loss (72) - (72)
Derecognition gain (402) - (402)
Impairments (3,386) - (3,386)
-------------- ------------- ---------
Revenue less impairment 9,980 (1,184) 8,796
Admin expenses (6,212) - (6,212)
-------------- ------------- ---------
Operating profit 3,768 (1,184) 2,584
Exceptional items - - -
Profit before interest and tax 3,768 (1,184) 2,584
Net finance cost (3,453) - (3,453)
-------------- ------------- ---------
Profit/(loss) before tax 315 (1,184) (869)
Taxation (59) 225 166
-------------- ------------- ---------
Profit/(loss) after tax 256 (959) (703)
============== ============= =========
(8) Normalised figures, adjusted to exclude fair value
adjustments and amortisation of acquired intangibles
2019
IFRS 9 Key Performance Indicators(9) 2020 restated
Period end customer numbers (000) 31.5 28.5
Period end loan book (GBPm) 87.6 95.3
Average loan book (GBPm) 102.1 80.5
Revenue yield 32.3% 31.7%
Risk adjusted margin 12.4% 23.9%
Impairment/revenue 61.6% 24.5%
Impairment/average loan book 19.9% 7.8%
Cost to income ratio 41.8% 45.5%
Operating profit margin (1.1)% 28.2%
Return on asset (0.4)% 8.9%
====================================== ======= ==========
(9) All definitions are as per glossary.
A summary of the key business drivers during the first half of
2020 is set out below:
Lead volumes and quality - Whilst lead volumes were up strongly
in both January and February 2020, inbound volumes fell
significantly at the end of March and were minimal throughout April
when lending reduced to almost zero. The lead volume in May
recovered to c.36% of the average for January and February 2020 and
in June it had reached almost 50%. While financial brokers sought
to recalibrate their business models to reflect our own revised
selection criteria for the new business environment, price
comparison websites proved to be the most resilient channel,
recovering relatively quickly and representing approximately 19% of
the albeit reduced lending volume during the first half (2019:
12%).
Productivity - With almost no volume in April, the changes to
our scorecards and lending process necessarily impacted conversion
in both May and June which meant that whilst the value of new
lending had started to recover, it remained low and was still at
less than 20% of pre-lockdown levels in June 2020. The net result
was that we wrote 4,228 loans which was a 57% reduction versus the
prior year (2019: 9,840 loans) and this fed through into a 60% drop
in the value of loans booked to GBP15.1m (2019: GBP37.3m). The
consolidation of all operations in Trowbridge meant that the
average number of operational staff during the first half fell by
18% to 99 (2019: 118) and in June 2020 there were a total of 85
operational staff (2019: 129) and 19 support staff (2019: 20).
Delinquency management - As noted above, the majority of the
division's customer base are under 40 years old and it is this
demographic that has been one of the hardest it by the pandemic
with the result that approximately 30% of the loan book was
'COVID-flagged' at the end of June 2020 which is significantly
higher than for the other two divisions. However, of those flagged,
approximately 50% are now making full payments with 10% making part
payments while 20% have asked for a second emergency payment freeze
and 20% are currently making no payment. The increased risk
weighting of a macroeconomic downside scenario that was adopted in
2019 and an inability to approach guarantors of those customers
that had opted for an emergency payment freeze meant that
impairment as a percentage of revenue increased to 61.6% (2019
restated: 24.5%) and impairment as a percentage of average net loan
book increased to 19.9% (2019 restated: 7.8%).
Plans for the rest of 2020
Concluding on the proposed methodology for customer redress and
then starting to execute the programme as well as embedding a
series of enhanced lending procedures are the key priorities for
the rest of 2020. We continue to believe that the guarantor lending
model provides a valuable source of credit for thousands of
borrowers and for most of them at a much more affordable rate of
interest than if they were to apply for credit on their own. That
said, we recognise the increasing regulatory demands and are
therefore reviewing all aspects of our business model in order to
ensure that we can meet the needs of consumers whilst also
delivering attractive and sustainable returns for shareholders.
Once complete, we intend to restart lending in earnest during 2021.
In the meantime, we are continuing to focus on delivering good
customer outcomes through careful management of our existing
customers and through an effective collections process.
Home credit
Our home credit business has been founded upon ensuring that our
self-employed agents build and maintain strong face-to-face
relationships with their customers. Maintaining regular personal
contact with customers at the lower end of the credit spectrum
helps the agent to stay up-to-date with the customer's personal
circumstances and also allows them to collect the regular weekly
payment, normally in cash. Our experience is that this delivers
consistently better customer outcomes than pure remote lending
where there is little or no face-to-face contact.
The onset of the pandemic and the requirements for social
distancing required a complete shift in our business model, albeit
temporarily, to one that could continue to operate on a remote-only
basis. Having entered the pandemic with approximately 28% of
collections being conducted remotely (through continuous payment
authority, debit card payment and other remote channels), we
adjusted our agent commission structure and through careful
customer communications, within a few weeks the vast majority of
our previously cash-paying customers had switched to using one of
the remote channels available so that by the end of March close to
100% of all collections were made remotely. Whilst a proportion of
our customers did not switch, either because they were unable or
unwilling to make the change, these customers were then
COVID-flagged, ensuring that their credit record was not impacted
by temporary non-payment simply because they wanted to pay in
cash.
Whilst our commitment to face-to-face lending is undiminished,
the social distancing rules required that we develop a remote
lending capability, one that both customers and agents were
comfortable using and that also met the highest standards of
security and management oversight. Having stopped all agent visits
to the home at the end of March 2020, lending reduced to almost
zero in April while our in-house tech team developed a tailored
solution that was then rolled out in a number of stages. Stage one
included the launch of a temporary and more basic solution that
allowed agents to lend to existing customers and disburse funds
electronically. This was later followed by a more comprehensive
package that meant agents could execute a loan for all applicants
through the existing lending app and using online income
verification and data capture.
As social distancing rules were gradually relaxed, agents were
permitted to return to their preferred face-to-face model for
customers who could not take advantage of the remote options
available, albeit with enhanced safety measures and in line with
government guidelines. In the current circumstances, our preference
is that agents use remote options where possible, coupled with home
visits where appropriate, a combination that has resulted in a
healthy recovery in collections. The absence of any meaningful
lending during April and most of May whilst collections held up
reasonably well meant that the rate of loan book decline
accelerated in April and May but then started to slow down in June
with the result that by 30 June 2020 the net loan book was down 32%
at GBP24.3m (2019 restated: GBP35.5m).
Financial results
As noted above, the pandemic had a sudden and severe impact on
the home credit business both operationally and financially. The
significant reduction in new lending meant that the natural decline
in customer numbers as loans are repaid accelerated and by 30 June
2020 the number of active customers had fallen by 16% to 77,200
(2019: 91,600). Adapting to the new business environment prompted
some changes both to our scorecard and underwriting criteria and we
also focused any new lending on our shorter-term products,
specifically 33-week and 24-week loans.
Whilst the pattern of lending changed from April 2020, lower
lending volumes meant that the impact on the shape of the overall
loan book was less pronounced. However, thanks to a concerted
effort in recent years to shorten the division's loan book, average
yield increased to 169.7% (2019: 165.5%) although with the
significant reduction in loan issuance following the pandemic and
the impact on the size of the outstanding loan book, overall
revenue was down 11% to GBP27.3m (2019: GBP30.7m). Whilst the
absolute level of collections was impacted due to reduced levels of
lending, overall collections as a percentage of book remained
robust and the rate of impairment as a percentage of revenue
declined from 31.9% to 27.1% for the twelve month period to 30 June
2020.
Despite the decision to increase the rate of agent commission in
order to incentivise the switch to remote collections, cost savings
elsewhere (people-related costs, IT and travel) meant that
administration costs fell to GBP16.4m (2019: GBP17.6m) although
with lower revenue, the rolling 12-month cost: income ratio
increased to 59.4% (2019: 56.3%). The net result was that
normalised operating profit fell to GBP3.0m (2019: GBP4.3m). With a
much reduced level of new lending, the business generated
substantial positive cashflow in the period with the result that
finance costs fell to GBP0.8m (2019: GBP1.1m) and pre-tax profit
reduced to GBP2.2m (2019: GBP3.2m).
6 months to 30 June 2020 2020 2020
Normalised(10) Exceptional items(11) Reported
GBP'000 GBP'000 GBP'000
-------------------------------- --------------- ---------------------- ----------
Revenue 27,277 - 27,277
Impairments (7,927) - (7,927)
--------------- ---------------------- ----------
Revenue less impairments 19,350 - 19,350
Admin expenses (16,382) - (16,382)
Operating profit 2,968 - 2,968
Exceptional items - - -
--------------- ---------------------- ----------
Profit before interest and tax 2,968 - 2,968
Finance cost (774) - (774)
--------------- ---------------------- ----------
Profit before tax 2,194 - 2,194
Taxation (417) - (417)
--------------- ---------------------- ----------
Profit after tax 1,777 - 1,777
6 months to 30 June 2019 2019 2019
Normalised(10) Exceptional items(11) Reported
GBP'000 GBP'000 GBP'000
-------------------------------- --------------- ---------------------- ---------
Revenue 30,691 - 30,691
Impairments (8,828) - (8,828)
--------------- ---------------------- ---------
Revenue less impairments 21,863 21,863
Admin expenses (17,560) - (17,560)
Operating profit 4,303 - 4,303
Exceptional items - (129) (129)
--------------- ---------------------- ---------
Profit before interest and tax 4,303 (129) 4,174
Finance cost (1,108) - (1,108)
--------------- ---------------------- ---------
Profit before tax 3,195 (129) 3,066
Taxation (607) 24 (583)
--------------- ---------------------- ---------
Profit after tax 2,588 (105) 2,483
IFRS 9 Key Performance Indicators(12) 2020 2019
Period end agent numbers 887 892
Period end number of offices 65 67
Period end customer numbers (000) 77.2 91.6
Period end loan book (GBPm) 24.3 35.5
Average loan book (GBPm) 33.8 37.9
Revenue yield 169.7% 165.5%
Risk adjusted margin 123.8% 112.7%
Impairments/revenue 27.1% 31.9%
Impairment/average loan book 45.9% 52.8%
Cost to income ratio 59.4% 56.3%
Operating profit margin 13.5% 11.8%
Return on asset 23.0% 19.5%
========================================= ======= =======
(10) Normalised figures are before exceptional items.
(11) Refer to note 6 in the notes to the financial statements
for further detail
(12) All definitions are as per glossary and above.
Plans for the rest of 2020
As is the case for our other business divisions, the clear focus
for the balance of 2020 is on stabilising and then rebuilding the
loan book and active customer base. Having achieved modest loan
book growth in August, we were pleased that this continued in
September. While regional restrictions on social distancing and the
threat of a second wave of infection present some challenges for
agents, with the rollout of our latest remote lending capability
now complete, we are confident that we can continue to make
progress and are looking forward to the important seasonal lending
period in November and December.
Central costs
6 months to 30 Jun e 2020 2020 2020
Normalised(13) Amortisation Reported
of acquired
intangibles
and exceptional
items
GBP000 GBP000 GBP000
------------------------------ ---------------- ----------------- ----------
Revenue - - -
Admin expenses (3,104) (599) (3,703)
---------------- ----------------- ----------
Operating loss (3,104) (599) (3,703)
Exceptional items(14) - (75,530) (75,530)
Loss before interest and tax (3,104) (76,129) (79,233)
Net finance (cost)/income (664) - (664)
---------------- ----------------- ----------
Loss before tax (3,768) (76,129) (79,897)
Taxation 780 (1,754) (974)
---------------- ----------------- ----------
Loss after tax (2,988) (77,883) (80,871)
================ ================= ==========
6 months to 30 Jun e 2019 2019 2019
Normalised(13) Amortisation Reported
of acquired
intangibles
and exceptional
items
GBP000 GBP000 GBP000
--------------------------- ---------------- ----------------- ----------
Revenue - - -
Admin expenses (3,010) (2,607) (5,617)
Exceptional items(14) - (25,145) (25,145)
Operating loss (3,010) (27,752) (30,762)
Net finance (cost)/income (218) - (218)
---------------- ----------------- ----------
Loss before tax (3,228) (27,752) (30,980)
Taxation 613 495 1,108
---------------- ----------------- ----------
Loss after tax (2,615) (27,257) (29,872)
================ ================= ==========
(13) Adjusted to exclude exceptional items (refer to notes to
the financial statements note 6), as well as the amortisation of
acquired intangibles related to the acquisition of George
Banco.
(14) Refer to note 6 in the notes to the financial statements
for further detail
Despite a reduction in employee costs, normalised administrative
expenses for the period increased by 3% to GBP3.1m (2019: GBP3.0m)
reflecting higher professional fees. In addition, the Group
incurred a charge of GBP0.6m relating to the amortisation of
intangible assets recognised on the acquisition of Everyday Loans
and George Banco (2019: GBP2.6m).
As identified at the time of the 2019 full year results, the
decline in the valuations of non-standard lenders and the impact of
COVID-19 on the profitability of each of the Group's divisions
might require that the Group write down all of the remaining
goodwill assets on its balance sheet to nil. This has now taken
place and resulted in an exceptional non-cash charge of GBP75.5m in
the first half of 2020 (2019: GBP25.1m).
The exceptional charges in the prior year related to GBP12.7m of
advisory fees and other costs associated with the offer to acquire
Provident Financial plc on the terms set out in an offer document
published on 9 March 2019, as well as the related proposal to
demerge Loans at Home, a GBP12.5m impairment loss on the Loans at
Home goodwill asset (see note 11) and GBP0.1m of restructuring
costs at Loans at Home that took place in January 2019.
Principal risks
Since the publication of the Group's 2019 full year results on
25 June 2020, a number of developments have prompted an update to
the principal risks now facing the Group which are as follows:
-- Regulation - the Group faces significant operational and
financial risk through changes to regulations, changes to the
interpretation of regulations or a failure to comply with existing
rules and regulations. Following a multi-firm review, the Group has
revised certain processes and procedures in its Guarantor Loans
Division and developed a proposed methodology for redress to
certain guarantor loans customers that is estimated to cost GBP15.8
million in total, including the cost of the redress process. It is
possible that the actual amount of redress may differ, perhaps
materially from the current estimate and that this could materially
impact the financial statements. This is due to the risks and
inherent uncertainties surrounding the assumptions used in the
provision calculation, as well as the fact that the FCA has not yet
reviewed the methodology proposed. In addition, whilst the Group
believes that the scope and scale of the operational changes made
will not have a material impact on the future profitability of the
Group, this may prove to be incorrect and could result in the Group
incurring significant financial costs and may mean that the
Guarantor Loans Division is no longer able to deliver the level of
returns required by the Group's management and equity
shareholders.
In its recent paper on relending(1) the FCA has said that it
expects firms to consider waiving any right to Early Settlement
Charges under the Consumer Credit (Early Settlement) Regulations
2004 on loans that are refinanced. Such charges totalled
approximately GBP2.3m in 2019 and if such charges were waived and
no mitigating actions were taken, then this would reduce revenue
and the future profitability of the Group;
-- Going concern and solvency - As a result of the provision to
fund redress to certain of the Group's guarantor loans customers,
the impact of COVID-19 on the Group's business performance in the
first half of 2020 (see below) and the associated write-down of
goodwill and certain other assets, the Group had net assets of
GBP22.0 million as at 30 June 2020. Given the prevailing
uncertainties regarding the macroeconomic outlook, the future
trading performance of the Group and the level of customer redress
that will ultimately become payable, there remains a material
uncertainty as to the Group's ability to remain as a going concern
and to continue to operate within its financial covenants. The
Group is in active discussions with its lenders regarding possible
covenant waivers in the future and with Alchemy, the Group's
largest shareholder, who remains supportive of a substantial equity
issue. In the event that sufficient further capital cannot be
raised in a timely manner then there would be a significantly
increased risk that the Group would no longer remain a going
concern and could become insolvent;
-- Liquidity - the Group had cash balances at 30 June 2020 of
GBP75.7 million. Since then it has repaid GBP15m drawn on its
GBP200 million securitisation facility and met other operating
expenses so that as at 30 September 2020 it had cash at bank of
GBP69.9 million. The payment of redress due to affected guarantor
loans customers outlined above will reduce the Group's cash
balances significantly and while the securitisation facility
remains undrawn, it is unlikely that this would be available in the
absence of a further capital raise due to covenant constraints and
the required consent of the provider which may be influenced by
other factors such as the prevailing macroeconomic and regulatory
environments. As a result, while the Group is in active discussions
regarding a possible capital raise to strengthen its balance sheet
and help fund the redress programme, in the absence of such a raise
there is a significant risk that the Group will require waivers
from its lenders in order to meet its future obligations. In
addition, while no repayments are due on any of the Group's
facilities until August 2022, the current uncertainty regarding the
Group's financial position means that there is a risk that the
Group may be unable to secure sufficient finance in the future to
execute its long-term business strategy;
-- COVID-19 - the pandemic and the associated restrictions on
face-to-face contact by HM Government, caused significant
disruption to the Group's operational and financial performance
during 2020. In the absence of any mitigating actions or
circumstances, continued macroeconomic uncertainty and any
sustained period where current and/or additional restrictions are
in place could result in the Group suffering additional and
significant financial loss due to the consequential impact upon the
Group's customers, its staff, self-employed agents and/or business
operations;
-- Conduct - risk of poor outcomes for our customers or other
key stakeholders as a result of the Group's actions that may in
turn result in financial claims being made against the Group;
-- Credit - risk of loss through poor underwriting or a
diminution in the credit quality of the Group's customers (also see
COVID-19 above);
-- Business strategy - risk that the Group's strategy fails to
deliver the outcomes expected; and
-- Business risks :
- operational - the Group's activities are large and complex and
so there are many areas of operational risk that include technology
failure, fraud, staff management and recruitment risks,
underperformance of key staff, the risk of human error, taxation,
health and safety as well as disaster recovery and business
continuity risks;
- reputational - a failure to manage one or more of the Group's
principal risks may damage the reputation of the Group or any of
its subsidiaries which in turn may materially impact the future
operational and/or financial performance of the Group; and
- cyber - increased connectivity in the workplace coupled with
the increasing importance of data and data analytics in operating
and managing consumer finance businesses means that this risk has
been identified separately from operational risk.
(1) "Relending by High Cost Lenders" - FCA, 6 August 2020
On behalf of the Board of Directors
Jono Gillespie
Chief Financial Officer
30 October 2020
Statement of Directors' responsibilities
The Directors confirm that, to the best of their knowledge, the
unaudited condensed interim financial statements have been prepared
in accordance with IAS 34 as adopted by the European Union, and
that the interim report includes a fair review of the information
required by DTR 4.2.7R and DTR 4.2.8R, namely:
-- An indication of important events that have occurred during
the first six months of the financial year and their impact on the
unaudited condensed interim financial statements, and a description
of the principal risks and uncertainties for the remaining six
months of the financial year; and
-- Material related party transactions that have occurred in the
first six months of the financial year and any material changes in
the related party transactions described in the last annual report
and financial statements.
The current directors of Non-Standard Finance plc are listed in
the 2019 Annual Report & Financial Statements. A list of
current directors is also maintained on the Non-Standard Finance
website: www.nsfgroupplc.com .
The maintenance and integrity of the Non-Standard Finance
website is the responsibility of the Directors.
Legislation in the United Kingdom governing the preparation and
dissemination of unaudited condensed interim financial statements
may differ from legislation in other jurisdictions.
On behalf of the Board of Directors
Jono Gillespie
Chief Financial Officer
30 October 2020
Financial Statements
Condensed consolidated statement of comprehensive income for the
six months ended 30 June 2020
Before fair Fair value
value adjustments, adjustments,
amortisation amortisation Six months
of acquired of acquired ended 30
intangibles intangibles Six months June
and exceptional and exceptional ended 30 June 2019 as
items items 2020 restated(1)
Note GBP000 GBP000 GBP000 GBP000
-------------------------------- ---- ----------------------- ---------------------------------- ---------------------------- -----------
Revenue 92,223 (971) 91,252 87,103
Other operating
income 13 888 - 888 221
Modification gain/(loss) (696) - (696) (505)
Derecognition gain 686 - 686 1,669
Impairment (39,247) - (39,247) (22,536)
Administrative expenses (48,838) (599) (49,437) (49,947)
-----------
Operating profit 5 5,016 (1,570) 3,446 16,005
Exceptional items 6 - (91,283) (91,283) (25,274)
---------------------------------- ---------------------------- -----------
Profit/(loss) on
ordinary activities
before interest
and tax 5,016 (92,853) (87,837) (9,269)
Finance cost (14,912) - (14,912) (13,178)
---------------------------- -----------
Profit/(loss) on
ordinary activities
before tax (9,896) (92,853) (102,749) (22,447)
Tax on profit/(loss)
on ordinary activities 8 1,944 (1,569) 375 (511)
----------------------- ---------------------------------- ---------------------------- -----------
Profit/(loss) for
the period (7,952) (94,422) (102,374) (22,958)
-------------------------------- ---- ----------------------- ---------------------------------- ---------------------------- -----------
Total comprehensive
loss for the year (102,374) (22,958)
-------------------------------- ---- ----------------------- ---------------------------------- ---------------------------- -----------
Loss attributable
to:
* Owners of the parent (102,374) (22,958)
* Non-controlling interests -
Loss per share
Six months Six months
ended ended
30 June 2020 30 June 2019
Restated(1)
Note Pence Pence
------------------ ---- ------------- -------------
Basic and diluted 7 (32.77) (7.36)
------------------ ---- ------------- -------------
(1) 2019 statement of comprehensive income has been restated,
refer note 3 to the financial statements for further detail.
There are no recognised gains or losses other than disclosed
above and there have been no discontinued activities in the
year.
Condensed consolidated statement of financial position as at 30
June 2020
30 June 31 December
2020 2019
Note GBP000 GBP000
---------------------------------- ---- --------- -----------
ASSETS
Non-current assets
Goodwill 11 - 74,832
Intangible assets 7,936 8,572
Derivative asset 1 1
Deferred tax asset - 1,677
Right of use asset 9,698 10,560
Property, plant and equipment 6,523 6,556
Amounts receivable from customers 10 150,270 185,269
---------------------------------- ---- --------- -----------
174,428 287,467
Current assets
Amounts receivable from customers 10 149,757 176,379
Trade and other receivables 11,428 2,643
Cash and cash equivalents 75,704 14,192
---------------------------------- ---- --------- -----------
236,889 193,214
---------------------------------- ---- --------- -----------
Total assets 411,317 480,681
---------------------------------- ---- --------- -----------
LIABILITIES AND EQUITY
Current liabilities
Trade and other payables 20,727 26,909
Provisions 16 17,650 1,466
Lease liability 1,560 1,830
Total current liabilities 39,937 30,205
---------------------------------- ---- --------- -----------
Non-current liabilities
Lease liability 8,848 9,275
Bank loans 340,500 317,590
Total non-current liabilities 349,348 326,865
---------------------------------- ---- --------- -----------
Equity
Share capital 15,621 15,621
Share premium 180,019 180,019
Other reserves 2,733 2,152
Retained loss (176,341) (74,181)
================================== ==== ========= ===========
22,032 123,611
Total equity 22,032 123,611
---------------------------------- ---- --------- -----------
Total equity and liabilities 411,317 480,681
---------------------------------- ---- --------- -----------
Condensed consolidated statement of changes in equity for the
six months ended 30 June 2020
Share Share Other Retained
capital premium reserves loss Non-controlling interest Total
Note GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
----------------------------- ---- -------- -------- --------- ----------- ------------------------ -----------
At 31 December 2018 15,852 254,995 (2,011) (61,635) 255 207,456
----------------------------- ---- -------- -------- --------- ----------- ------------------------ -----------
Total comprehensive loss for
the year - - - (76,308) - (76,308)
IFRS 16 transition opening
balance adjustment - - - (295) - (295)
Transaction with owners,
recorded directly in equity:
Dividends paid 9 - - - (8,425) - (8,425)
Capital reduction 15 (75,000) 75,000 - -
Credit to equity for
equity-settled share-based
payments - - 1,183 - - 1,183
Transfer of share-based
payments on vesting of share
awards - - (734) 734 - -
Issue of shares 23 24 - (47) - -
Equity for founder shares(1) - - 255 - (255) -
Cancellation of shares (254) - 3,459 (3,205) - -
At 31 December 2019 15,621 180,019 2,152 (74,181) - 123,611
Total comprehensive loss for
the period - - - (102,374) - (102,374)
Transactions with owners,
recorded directly in equity:
Dividends paid 9 - - - - - -
Credit to equity for
equity-settled share-based
payments - - 795 214 - 1,009
Transfer of share-based
payment reserve on vesting
of share awards - - (214) - - (214)
At 30 June 2020 15,621 180,019 2,733 (176,341) - 22,032
----------------------------- ---- -------- -------- --------- ----------- ------------------------ -----------
(1) In 2019, GBP255,000 relating to Founder Shares has been
re-presented as equity rather than non-controlling interest because
it reflects other reserves for the Group
Condensed consolidated statement of cash flows for the six
months ended 30 June 2020
Six months Six months
ended ended
30 June 2020 30 June 2019
Note GBP000 GBP000
--------------------------------------- ---- ------------- -------------
Net cash used in operating activities 12 49,314 (10,633)
Cash flows from investing activities
Purchase of property, plant and
equipment (2,793) (4,061)
Proceeds from sale of property,
plant and equipment - 37
Net cash used in investing activities (2,793) (4,024)
--------------------------------------- ---- ------------- -------------
Cash flows from financing activities
Finance cost (6,809) (5,316)
Debt raising 21,800 29,680
Dividends paid - (6,240)
Net cash from financing activities 14,991 18,124
--------------------------------------- ---- ------------- -------------
Net increase in cash and cash
equivalents 61,512 3,467
Cash and cash equivalents at beginning
of year 14,192 13,894
--------------------------------------- ---- ------------- -------------
Cash and cash equivalents at end
of year 75,704 17,361
--------------------------------------- ---- ------------- -------------
As at 30 June 2020 the Group had cash of GBP75.7m (30 June 2019:
GBP17.4m) with gross debt of GBP345.0m (30 June 2019:
GBP302.7m).
Notes to the preliminary announcement
1. General information
Non-Standard Finance plc is a public limited company
incorporated and domiciled in the United Kingdom. The address of
the registered office is 7 Turnberry Park Road, Gildersome, Morley,
Leeds, England, LS27 7LE.
The unaudited condensed interim financial statements do not
constitute the statutory financial statements of the Group within
the meaning of section 434 of the Companies Act 2006. The statutory
financial statements for the year ended 31 December 2019 were
approved by the Board of Directors on 25 June 2020 and have been
delivered to the Registrar of Companies. The report of the auditor
was unqualified and did not contain a statement under s498(2) or
(3) of the Companies Act 2006, but did include a section
highlighting a material uncertainty that may cast significant doubt
on the Group and Company's ability to continue as a going concern
given the possible impact of the COVID-19 pandemic. The Group notes
this material uncertainty continues to exist as at 30 June 2020 as
a result of potential reduced levels of collections and lending on
the Group's financial performance, the potential impact of the
guarantor loan redress programme on the liquidity and solvency
position of the Group, along with compliance with existing
financial covenants and whether waivers will be granted by lenders
(and under what terms) in the event of a covenant breach.
The condensed interim financial statements for the six months
ended 30 June 2020 have not been reviewed or audited by the
independent auditor of the Group.
2. Basis of preparation
The unaudited condensed interim financial statements for the six
months ended 30 June 2020 have been prepared in accordance with IAS
34 'Interim Financial Reporting' as adopted by the European Union.
The unaudited condensed interim financial statements should be read
in conjunction with the statutory financial statements for the year
ended 31 December 2019 which have been prepared in accordance with
International Financial Reporting Standards (IFRS) as adopted by
the European Union.
Going concern
In adopting the going concern assumption in preparing the
interim financial statements, the Directors have considered the
activities of its principal subsidiaries, as well as the Group's
principal risks and uncertainties.
The impact of COVID-19 meant that at the date of signing the
accounts for the year ended 31 December 2019, the Group had
breached certain portfolio performance covenants relating to the
Group's securitisation facility, thereby preventing further
drawdowns from this facility. On 26 August 2020 the Group repaid
the amount previously drawn in full, thereby resolving the covenant
breach and the Group has agreed with the provider that, subject to
their consent and the satisfaction of standard covenants for a
facility of this type, the facility will remain open for future
use.
As part of its going concern assessment, the Directors reviewed
both the Group's access to liquidity and its future balance sheet
solvency. The Group therefore refreshed its two scenarios since
year end: (i) the most likely (or 'base case') scenario; and (ii)
the 'downside' scenario which applies stresses in relation to the
key risks identified in the base case.
(i) Base case scenario
Liquidity
The base case forecasts assume no additional equity is raised
and reflect a business plan of slower loan book growth across the
Group in order to mitigate the risk of possible covenant breaches.
In this forecast, we have taken into account:
-- recent government initiatives to support borrowers affected
by the outbreak of COVID-19, such as the FCAs 'emergency payment
freeze' which remains available until 31 October 2020;
-- the proportion of customers who are expected to return to
normal payments, are rescheduled and/or deferred and those who will
ultimately not return to normal payments based on detailed analysis
of past and present customer behaviours;
-- recent Government guidance around social distancing and localised restrictions;
-- a more severe macroeconomic impact on loan loss provisions
since the year end as explained in the notes to the financial
statements. This has involved an increase in the macroeconomic
weightings and worsening of macroeconomic variables which are used
to calculate expected credit losses (ECL);
-- a slower rate of growth in lending over the forecast period;
-- no dividends are assumed to be paid over the forecast period;
-- a lower cost base than was forecast before COVID-19, which
would be achieved through increased efficiencies and cost saving
initiatives, consistent with the aforementioned slower growth path
of the Group;
-- the requirement to pay HMRC-related taxes which were deferred
from May-August 2020 in line with the time-to-pay arrangement
agreed with HMRC.
-- the potential costs of obtaining covenant waivers from
lenders in the event of a covenant breach.
-- that the Group has recognised a provision for customer
redress and associated costs and this has been incorporated into
the base case (see note 16 to the financial statements). The
quantum of provision for redress represents the Directors' best
estimate of the ultimate cost of the redress as at the reporting
date. The ultimate redress amount will be subject to a number of
factors including the FCAs approval of the redress methodology used
and a case-by-case review of those customers affected.
As noted in the 2019 Annual Report and Accounts, since the onset
of COVID-19, the Group has implemented a number of initiatives in
order to conserve cash including:
-- A reduction in staff numbers; and
-- A 70% reduction in the bonus potential for Executive Directors in 2020.
Under the base case, which incorporates the impact of COVID-19
and the provision for customer redress to certain GLD customers,
and in the absence of mitigating actions, is it is forecast the
Group will breach its financial covenants within the next 12
months. There is a material uncertainty regarding the assumptions
and outcome of the base case in the following areas:
-- the impact of current COVID-19 affected customers on trading
performance; including the impact of a second and possible
subsequent waves;
-- the potential future impact of COVID-19 on the macroeconomic environment;
-- the ultimate cost of the GLD redress programme;
-- the outcome of discussions with lenders; and
-- the ability to raise capital.
The Group is continuing to discuss the forecast impact of the
customer redress provision on covenants with its lenders as well as
a possible capital raise with its major shareholder in order to
both strengthen the Group's balance sheet and help fund the redress
programme. While it is expected that waivers could be granted by
the Group's lenders at a cost, this remains uncertain. No capital
raise is assumed in the base case. The challenge in predicting the
trajectory of the pandemic and its impact on the Group's business
means that there is also a material uncertainty around the timing
of a return to profitability.
As at 30 September 2020, the Group had a total cash balance of
GBP69.9m which, when combined with the Group's ability to conserve
cash through a reduction in future lending, means the Group expects
to be able to fund operating expenses and interest payments for at
least the next 12 months should the quantum of the customer redress
be at or below the value of the provision disclosed.
Solvency
Under the base case, the Group would remain solvent from a
balance sheet perspective; however the headroom is tight and
solvency is dependent upon the above assumptions not varying
materially, and any mitigating actions which could be implemented
to offset any adverse movement from the base case. In addition, the
Group may have to further restrict lending activities and/or
exercise further financial levers around costs in order to maintain
solvency.
Due to the uncertainty regarding the full current and future
impact of COVID-19 and the customer redress programme on its
forecasts, the Group notes that the movement in any one or a number
of these assumptions creates a material uncertainty in the
liquidity and/or solvency position of the Group.
Key risks to the assumptions made include:
-- The possibility that the Group is unable to negotiate
appropriate waivers with its lenders (or, in the absence of such
waivers, raise sufficient equity capital in a reasonable
timeframe)
-- The possibility that the current performance of the loan book
deteriorates beyond current delinquency trends and that a recovery
of customer performance is not as anticipated;
-- Further changes in the regulatory environment which
negatively impact the Group's divisions;
-- A further negative shift in the macroeconomic environment;
-- A higher level of loans rescheduled and/or deferred over and above that currently forecast;
-- The inability to realise planned savings in operating
expenses as the business shifts to a recovery phase during 2020 and
2021;
-- Higher than anticipated pay-outs required in relation to
complaints and the customer redress scheme;
-- In the event of a covenant breach, the response of the
lenders to such breaches in terms of their willingness to waive
such breaches and if they agree to do so, the terms on which they
propose to grant such a waiver may differ from that forecast;
-- changes in the regulatory environment which could impact the
viability of any of the divisions; and
-- changes in the pricing assumptions around substantially modified loans
(i) Downside scenario
Liquidity
This scenario also assumes that no additional equity is raised
and reflects stresses to the key risks described above.
Under this scenario we have assumed:
-- The reimplementation of social restrictions across the UK and
more frequent local lockdowns in an effort to curb the recent rise
in COVID-19 cases, therefore leading to lower lending than
expected.
-- The coronavirus jobs retention scheme comes to an end on 31
October 2020 (offset by the effects of the Job Support Scheme that
has already been implemented) which may place employees at risk of
losing their jobs therefore leading to higher delinquency than
expected.
-- The actual cost of the GLD customer redress is higher than
the provision which has been included in the half year results
(refer to note 16to the financial statements)
Under this scenario, it is expected that the Group would breach
certain borrowing covenants during the next 12 months, would not be
able to access further funding over the period of breach and would
require waivers from its lenders in order to remain viable as well
as being required to raise additional equity. The waivers required
under this scenario are beyond the range discussed in previous
negotiations with lenders.
Solvency
The Group would not remain solvent from a balance sheet
perspective if some or all of the downside stresses were to take
place without a significant injection of further equity.
As at 30 September 2020, the Group had a total cash balance of
GBP69.9m which combined with the Group's ability to conserve cash
through a reduction in lending, means that the Group expects to be
able to fund operating expenses and interest payments for at least
the next 12 months should the actual amount of customer redress
paid be in line with the downside provision assumed. However, as
noted above, as the amount remains subject to FCA approval there is
a risk that the amount ultimately due could be higher than our
downside assumptions and therefore impact negatively our forecast
cash position.
Assessment
On the basis of the above analysis, the Directors note that a
material uncertainty exists regarding the current and future
impacts of COVID-19 and the extent of the redress to be paid to
certain GLD customers. The impact on liquidity and solvency under
both the base case and downside scenarios therefore may cast
significant doubt on the Group's and the Company's ability to
continue as a going concern.
The Directors felt that the range of assumptions made in both
the base case and downside scenario were such that given the
uncertainties around the impact of COVID-19 and the customer
redress programme, there remains a material uncertainty as to the
likelihood of a waiver being granted by the lenders and the level
and timing of support which might be provided by shareholders.
The Directors believe that the most immediate and appropriate
mitigant to the material uncertainties is an injection of
additional equity. Given the widespread government-led support to
consumers and businesses, the ongoing business performance of the
branch-based and home credit division, as well as discussions held
to date with lenders and the Group's largest shareholder, the
Directors have a reasonable belief that the Group's lenders will
agree to waive potential covenant breaches to an extent, albeit at
a higher cost and/or, that the Group will be able to raise
sufficient further capital in a timely manner. As noted above
however, there is a material uncertainty around the extent of this
support, especially whilst the quantum of the customer redress
remains uncertain.
The assumption of lender and shareholder support for covenant
breaches and solvency forms a significant judgement of the
Directors in the context of approving the Group's going concern
status.
The Directors acknowledge the considerable challenges presented
by the outbreak of COVID-19, the impact of the FCA's review into
guarantor loans and the material uncertainty which may cast
significant doubt on the ability of both the Group and the Company
to continue to adopt the going concern basis of accounting.
However, despite these challenges, it is the Directors' reasonable
expectation that the Group and Company will continue to operate and
meet its liabilities as they fall due for the next 12 months and
therefore it has adopted the going concern basis of accounting.
The Directors will continue to monitor the Group and Company's
risk management, access to liquidity, balance sheet and internal
control systems.
3. Accounting policies
The accounting policies used in these condensed consolidated
interim financial statements are consistent with those used in the
Non-Standard Finance Plc Annual Report 2019, with the exception
of:
Other operating income
Other operating income relates to amounts received as a result
of debt sales made and Government grants received in relation to
the Coronavirus job retention scheme. The debt sales made relate
only to those amounts receivable from customers which have fallen
into arrears and have subsequently been charged off. Therefore, as
the Group makes every effort to collect on receivables and has no
intention of selling loans when originated, the Group's business
model remains consistent with the definition of to hold and collect
(further detail under Financial Assets). The accounting policy in
relation to CJRS income is detailed below.
Coronavirus Job Retention Scheme (CJRS)
Under the CJRS employers receive compensation from the
government for part of the wages, associated national insurance
contributions (NIC) and employer pension contributions of employees
who have been placed on furlough. The grant receipts have been
measured at the fair value of the assets receivable and have been
recognised under the performance model.
Under the performance model, grants shall be recognised:
-- when received, where the grant does not impose future
performance-related conditions on the recipient; or
-- when performance-related conditions are met, where the grant
imposes such conditions on the recipient.
Under the CJRS grant, the Company deems all performance related
conditions to have been met when the claim was submitted, therefore
income is recognised when received and no contingent liability has
been recognised in the accounts for future liabilities in relation
to this grant.
The amount received as part of the CJRS has been included within
other operating income for the six months ended 30 June 2020 (refer
note 13 for further detail).
Exceptional items
Exceptional items of GBP91.3m have been incurred in the six
months ended 30 June 2020 (2019: GBP25.3m). These 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 results. Refer to note 6 for
further detail.
Prior year restatement
The Group transitioned to IFRS 9 on 1 January 2018. IFRS 9
introduced a revised impairment model which requires entities to
recognise expected credit losses based on unbiased forward-looking
information and replaced the IAS 39 incurred loss model which only
recognises impairment if there is objective evidence that a loss
has already been incurred and measures the loss at the most
probable outcome. Through the review of the 2019 financial
statements, it was determined that an error in the data used to
calculate the post model adjustments had resulted in an
underestimation of the level of loan loss provision required at 1
January 2018 by GBP3.2m. The input data did not adequately capture
all relevant elements of the underlying loan population required by
the model to calculate an accurate impairment provision. As a
result, the level of loan loss provisions remained below that
required at the time of transition and thereafter with the
provision GBP4.0m lower than that required at 31 December 2018. A
prior year adjustment to 31 December 2018 amounts receivable from
customers was made to the loan loss provision of both branch-based
lending and guarantor loans of GBP3.6m and GBP0.4m respectively in
the 2019 Annual Report and Accounts and the full effect of this
adjustment on the Group is summarised in the statutory financial
statements for the year ended 31 December 2019.
As part of the reporting for the year ended 31 December 2019
Annual Report and Accounts, it was determined that the accounting
for modification gains/losses on amounts receivable from customers
did not adequately capture the impact of modification gains/losses
in relation to non-substantial modifications to the contractual
cash flows of the financial assets. In addition, it was determined
that for substantially modified loans that resulted in
derecognition and that subsequently met the significant increase in
credit risk criteria, lifetime expected credit losses were not
recognised. Whilst this was identified and corrected for in the 31
December 2019 Annual Report and Accounts, as this was not
identified at the time of reporting for the six months ended 30
June 2019, a prior year adjustment to 30 June 2019 amounts
receivable from customers has been made to both the branch-based
lending and guarantor loans division of GBP0.9m and GBP0.1m
respectively.
The impact of this adjustment on the Group's profit or loss for
the six months ended 30 June 2019 is summarised below. In line with
the 2019 Annual Report and Accounts, in the restated statement of
comprehensive income, the portion of the derecognition gain/(loss)
relating to substantial modifications during 2019 has been
re-presented from modification loss to derecognition gain/(loss),
and the impact of the prior year adjustment on the derecognition
gain/loss has also been reflected in the restated amounts
below:
Six months ended 30 June 2019 impact:
Restated
Six months Six months
ended Adjustment Adjustment ended
30 Jun to branch-based to guarantor 30 Jun
2019 Reported lending loans 2019 Reported
GBP000 GBP000 GBP000 GBP000
------------------------------- -------------- ---------------- ------------- --------------
Revenue 87,103 - - 87,103
Other operating income 221 - - 221
Modification loss (287) (187) (31) (505)
Derecognition gain (loss) - 2,071 (402) 1,669
Impairments (21,404) (987) (145) (22,536)
Administration expenses (49,947) - - (49,947)
------------------------------- -------------- ---------------- ------------- --------------
Operating profit 15,686 897 (578) 16,005
Exceptional items (25,274) - - (25,274)
------------------------------- -------------- ---------------- ------------- --------------
Profit before interest and tax (9,588) 897 (578) (9,269)
Finance cost (13,178) - - (13,178)
------------------------------- -------------- ---------------- ------------- --------------
Profit/(loss) before tax (22,766) 897 (578) (22,447)
Taxation (451) (170) 110 (511)
------------------------------- -------------- ---------------- ------------- --------------
Profit/(loss) after tax (23,217) 727 (468) (22,958)
------------------------------- -------------- ---------------- ------------- --------------
Earnings (loss) per share (7.44) (7.36)
------------------------------- -------------- ---------------- ------------- --------------
4. Critical accounting assumptions and key sources of estimation
uncertainty
The critical accounting assumptions exercised by management and
key sources of estimation uncertainty in the interim financial
statements are consistent with those adopted in the statutory
financial statements for the year ended 31 December 2019, with the
exception of the impact of COVID-19 and the recognition of
complaints provisions and a provision for the guarantor loan
redress programme for the Group.
Amounts receivable from customers
As disclosed in the 2019 Annual Report and Accounts, the
valuation of amounts receivable from customers continues to be a
significant accounting estimate, dependent on the Group's
measurement of the Expected Credit Losses (ECL), equal to the
12-month ECL for stage 1 assets, or lifetime ECL assets for stage 2
or stage 3 assets. The onset of COVID-19 has required the Group to
alter its macroeconomic data and to also estimate the impact on ECL
of emergency payment freezes taken by customers. The changes to key
estimates in relation to amounts receivable from customers are
outlined below for each division:
Macroeconomic data
Branch-based lending and guarantor loans
As noted in the 2019 Annual Financial Statements, the
branch-based lending and guarantor loans divisions incorporate
macroeconomic data in order to form an assessment of whether the
credit risk of a financial asset has increased significantly since
initial recognition, as well as in its measure of ECL. This is
achieved through the development of several potential economic
scenarios and modelling ECL for each scenario. The outputs from
each scenario are combined using the estimated likelihood of each
scenario occurring to derive a probability weighted ECL. The Group
recognises that, whilst the severity of the impact of the COVID-19
pandemic on the economy remains uncertain, risks to rising
unemployment and falling GDP have heightened since 31 December
2019, warranting an increase in the severe downside weightings used
to model the ECL. The weightings used for the year ended 31
December 2019 Annual Report and Accounts did not consider the
impact of recent economic changes arising from the effects of
COVID-19. As a result, for the unaudited interim consolidated
financial statements, the Group has increased its macroeconomic
weightings, in the form of an increase to the severe downside
weighting, and a reduction in the downside weighting, as reflected
below:
30 June 31 Dec
Scenarios 2020 2019
Base 50% 50%
------- ------
Downside 15% 30%
------- ------
Severe downside 30% 15%
------- ------
Positive 5% 5%
------- ------
In addition to the change in weightings of the relevant
scenarios, the macroeconomic forecasts for the above scenarios have
also changed since 31 December 2019 in order to reflect the latest
economic outlook which includes the effects of COVID-19. The
macroeconomic variables which are modelled include the Bank of
England (BoE) base rate, GDP, CPI, HPI and the unemployment
rate.
The base scenario represents the most likely economic forecast
and is based largely upon the Bank of England's ('BOE') base
scenario. However, unemployment and GDP forecasts have been based
on recent Office for Budget Responsibility ('OBR') base trend
information applied to Office for National Statistics (ONS) and
consideration has also been given to KPMG's Economic Outlook
(September 2020). Under this scenario, base rate remains low, HPI
grows steadily in line with past trends, and CPI increases only
gradually. The downside scenario is slightly more severe than the
2008 financial crisis, where GDP and HPI fall substantially, whilst
CPI increases further. Unemployment is anticipated to peak in the
second half of 2020 and then gradually decrease thereafter. In
2008, base rate fell to 0.25% and stayed at that level for a
considerable period, however this downside scenario assumes a more
prudent minimum base rate of 0.5%. In addition, unemployment and
GDP forecasts are based on recent OBR trend information calculated
at an average of the OBR base and OBR downside scenarios and
therefore have been adjusted to reflect a more stressed position
than under the base scenario. The severe downside scenario is based
upon the BOE's own stress scenario and OBR downside forecasts. This
represents, for each individual variable, a severe downside with
sharp falls in GDP and HPI, combined with sharp increases in
unemployment, CPI, and base rate. Management have adjusted the base
rate in this scenario to near zero. Consistent with the other
scenarios, unemployment and GDP forecasts are derived from recent
OBR base and downside data, combined with the BOE stress scenarios
such that it reflects a position more severe than that under the
downside scenario. The positive scenario is constructed in-house
using PwC's Economic Outlook and OBR data, which is updated
annually. For the positive scenario management use a low, stable
base rate of interest and low levels of unemployment, estimates
that are based on PwC's UK Economic Outlook, and OBR data.
Home credit
Due to the nature of the home credit industry and based on
historical evidence, management has determined that the impact of
traditional macroeconomic downside indicators is minimal for the
industry and therefore a macroeconomic adjustment is currently not
necessary for the home credit division. This was noted in the 2019
Annual Report and Accounts and still holds true for the unaudited
interim consolidated financial statements. There are therefore no
adjustments required with respect to the macroeconomic data for
this division.
Emergency payment freeze overlays
On 9 April 2020, the FCA published guidance setting out its
expectation that firms should provide, for a temporary period only,
exceptional and immediate support to consumers facing payment
difficulties due to circumstances arising out of COVID-19. This was
updated on 1 July 2020 and supplemented with additional guidance on
16 September 2020. Affected consumers are entitled to opt for an
initial three-month payment deferral that can be extended by a
further three months up to and including 31 October 2020. In
response to this the Group has been and is continuing to offer a
range of support options, including an emergency payment freeze, to
those affected.
The support provided in the form of an emergency payment freeze
for affected customers has therefore had an impact on the ECL
recognised across all divisions in the six months ended 30 June
2020. In order to determine the impact of this, the Group has
reviewed the behaviour of customers who have opted for an emergency
payment freeze and/or have notified us as being affected by
COVID-19 ('COVID-19 flagged') and have used this data to inform
updates to the PD, LGD and staging profile of those affected
receivables. The Group recognises that, in line with IASB guidance,
the activation of an emergency payment freeze by a customer is not
automatically deemed a significant increase in credit risk
(SICR).
Branch-based lending and guarantor loans
As disclosed in the 2019 Annual Report and Accounts, customer
accounts in the branch-based lending and the guarantor loans
divisions have been categorised into the three stages as defined by
IFRS 9 with reference to the following criteria:
-- Loans in stage 1 comprise all amounts receivable from
customers which do not fall into stages 2 and 3.
-- Loans in stage 2 comprise those amounts receivable from
customers which show a significant increase in credit risk since
origination, as determined by management to be the earlier of:
- the point at which the credit status of a loan has
deteriorated to such an extent that had the future performance been
expected, it would not have been written in the first place (or had
the ultimate state been presented initially, it would not have been
written). This is derived by evaluating the impact of increased
credit losses on risk adjusted margin by score band across the loan
portfolio; or
- the point at which a loan is 30 days past due (but less than
90 days past due); or.
- loans which have been subject to curing treatment.
-- Loans in stage 3 comprise amounts receivable from customers
in default (in line with IFRS 9, the definition of default is over
90 days in arrears) as well as those accounts identified as
insolvent
The branch-based lending and the guarantor loans divisions use
historical data and risk models to determine the PD, LGD and the
EAD. ECL are then predicted by multiplying these three
forward-looking parameters and the result is discounted at the
original EIR.
As a result of the impact of COVID-19, the Group has adjusted
ECL for these divisions after undertaking detailed reviews of their
respective COVID-19 flagged accounts. Customers were analysed with
respect to:
-- Customers who have paid in excess of their repayment schedule
-- Customers who have paid according to their repayment schedule
-- Customers who have made part payments
-- Customers who have halted repayments
Furthermore, the COVID-19 flagged accounts were further
sub-categorised as temporarily or permanently impacted by
COVID-19.
These categories were reviewed alongside past and expected
customer behaviour in order to establish the appropriate level of
impairment provisions which need to be held against the COVID-19
flagged accounts.
As a result of this review, the Group has recognised that whilst
a customer who has activated an emergency payment freeze does not
necessarily in itself represent a SICR, a higher PD and LGD exists
for COVID-19 flagged accounts within the branch-based lending and
guarantor loans division where an emergency payment freeze has been
activated and there is an expectation that customer performance
will not improve and/or the customer will continue to not repay at
the end of the emergency payment freeze. Therefore, an overlay has
been applied to reflect the increased likelihood of these customers
not recovering. In coming to this view, the Group has determined
estimates which reflect the expectation of the proportion of
customers who are likely to recover to full payments, those who are
likely to be cured (either by way of rescheduling or loan
deferrals), those no longer affected and the remaining proportion
of customers likely to go into write-off. In addition, as future
changes in macroeconomic variables such as unemployment have the
potential to impact repayment behaviours of the branch-based
lending and guarantor loans customer base, in applying management's
overlay, consideration has also been given to the changes in
macroeconomic variables (as detailed earlier) and their impact on
the PD and LGD of COVID-19 flagged customers.
As the activation of an emergency payment freeze does not
necessarily represent a SICR in line with IASB guidance, for the
branch-based lending and guarantor loans divisions, a customer who
is not in arrears at the time of activating an emergency payment
freeze will remain in stage 1, unless:
-- The PD of the loan has increased to the extent that, had the
future performance been expected, it would not have been written to
the customer in the first place; or
-- The loan is 30+ days past due; or
-- It is a loan requiring curing treatment.
Individual customer behaviour continues to be analysed to
understand repayment behaviour on exit of an emergency payment
freeze to update the PD's, and stage classification, as
necessary.
Home credit
As disclosed in the 2019 Annual Report and Accounts, ECL in home
credit is estimated by reference to future cash flows based upon
observed historical data and updated as management considers
appropriate to reflect current and future conditions . This
methodology encapsulates PD, EAD and LGD collectively. Given the
short-term nature of lending in the home credit division, the
difference between 12-month ECL and lifetime expected losses is
minimal.
The provisioning for the home credit division for the six months
ended 30 June 2020 follows the same methodology as outlined in the
2019 Annual Report and Accounts. This provision inherently reflects
a higher PD for those customers who have activated an emergency
payment freeze and are in arrears due to inability to meet
repayments, as well as a higher LGD where recoveries from customers
may be impacted. In addition, for the current year, as the
activation of an emergency payment freeze by a customer does not
necessarily mean there has been a SICR (as noted above),
consideration has been made to a range of other factors which might
impact ECL, including analysis of past and expected customer
repayment behaviours. The Group has therefore also applied an
overlay to provisions in line with the aforementioned guidance, the
determination of which follows a set methodology depending on
whether or not the customer has activated an emergency payment
freeze .
In the six months ended 30 June 2020, of those customers who
have taken an emergency payment freeze and shown worsening loan
loss provisions, the Group has made an adjustment in order to
reflect the lower collective PD, LGD and EAD for the proportion of
customers who are expected to recover in payment performance at the
end of the emergency payment freeze . This has been informed by the
Group's detailed analysis of past repayment behaviours and expected
repayments behaviour across the entire home credit customer base.
As not all customers who have been granted an emergency payment
freeze will fully recover their payment, the Group does not apply
an overlay to the proportion of customers deemed to fall in this
category and provisions are held at the levels reflective
of missed payments to date resulting from the payment freezes taken.
In addition, the Group has performed further assessments of the
home credit division customer base in order to identify certain
customers who have been impacted by COVID-19 but did not have an
emergency payment freeze applied to their account, either due to
the inability to contact the customer remotely to discuss an
emergency payment freeze or, because the customer did not apply for
an emergency payment freeze . A similar adjustment has therefore
also been recognised for these customers, as informed by analysis
of past performance and customer repayment behaviour that shows for
a certain portion of customers, payment performance will improve
when contact can be re-established.
Customer behaviour in all three divisions is monitored closely
so that the Group can improve its understanding of repayment
behaviour upon the exit of an emergency payment freeze in order to
ensure that all relevant inputs into the calculation of the
impairment provision (PDs, LGDs, EADs and stage classifications)
are up to date with the latest performance data.
Provisions
Provision for customer complaints
Provisions for customer complaints are recognised when the Group
has a present obligation (legal or constructive) as a result of a
past event, it is probable that the Group will be required to
settle that obligation and a reliable estimate can be made of the
amount of the obligation.
Judgement is applied to determine whether the criteria for
establishing and retaining a provision have been met. Provisions
for customer redress are in respect of complaints received where
the outcome has not yet been determined. Judgement is applied to
determine the quantum of such provisions, including making
assumptions regarding the extent to which the complaints received
may be upheld, average redress payments and related administrative
costs. Past experience is used as a predictor of future
expectations with management applying overlays where necessary
depending on the nature and circumstances. The cost could differ
from the Group's estimates and the assumptions underpinning them,
and could result in a further provision being required. There is
also uncertainty around the impact of proposed regulatory changes,
claims management companies and customer activity.
The key assumptions in these calculations which involve
management judgement and estimation relate primarily to the
projected costs of existing complaints where it is considered
likely that customer redress will be appropriate.
These key assumptions are:
-- uphold rate percentage - the expected average uphold rate
applied to existing complaint volumes where it is considered more
likely than not that customer redress will be appropriate; and
-- average redress cost - the estimated compensation, inclusive
of balance adjustments and cash payments, for upheld complaints
included in the provision.
These assumptions remain subjective due to the uncertainty
associated with future complaint volumes and the magnitude of
redress which may be required. Complaint volumes may include
complaints under review by the Financial Ombudsman Service, cases
received from complaint management companies or cases lodged
directly by customers.
Provision for guarantor loans division redress programme
Part of the provision included in the statement of financial
position relates to a provision recognised for the customer redress
programme in the guarantor loans division. The provision represents
an accounting estimate of the expected future outflows arising
using information available as at the date of signing these
financial statements.
Identifying whether a present obligation exists and estimating
the probability, timing, nature and quantum of the redress payments
that may arise from past events requires judgements to be made on
the specific facts and circumstances relating to the individual
customers.
It is possible that the eventual outcome may differ, perhaps
materially from the current estimate and this could impact the
financial statements. This is due to the risks and inherent
uncertainties surrounding the assumptions used in the provision
calculation. Whilst the current estimate represents the Directors'
best estimate of the total cost of redress, based upon a detailed
methodology and analyses developed in conjunction with its
advisers, the FCA has not yet reviewed the methodology proposed.
Therefore, although the Directors believe their best estimate
represents a reasonably possible outcome; there is a risk of a less
favourable outcome. Refer to note 16 for more detail regarding the
customer redress provisions.
Sensitivity Analysis
Amounts receivable from customers - Macroeconomic weightings
Branch-based lending
Assuming a more optimistic macroeconomic weighting of 50% base,
30% downside stress, 15% severe downside stress and 5% positive,
results in a GBP0.105m reduction to ECL.
Assuming a more severe macroeconomic weighting of 50% base, 0%
downside stress, 50% severe downside stress and 0% positive,
results in a GBP0.973m increase in ECL.
Guarantor loans
Assuming a more optimistic macroeconomic weighting of 50% base,
30% downside stress, 15% severe downside stress and 5% positive,
results in a GBP0.369m reduction to ECL.
Assuming a more severe macroeconomic weighting of 50% base, 0%
downside stress, 50% severe downside stress and 0% positive,
results in a GBP0.614m increase in ECL.
Amounts receivable from customers - Emergency payment freeze
overlay
A change in the estimated proportion of customers who are
expected to go into write-off by +/-10% would result in a GBP2.3m
decrease/increase in ECL provisions for the Group.
Provisions
Provision for customer complaints
A +/-10% variation in customer complaints volumes would result
in a GBP0.05m increase/decrease in provisions for the Group, a
+/-10% variation in average claim redress would result in a
GBP0.05m increase/decrease in provisions for the Group, and a
+/-10% variation in upheld rate would result in a GBP0.05m
increase/ decrease in provisions for the Group
5. Segment information
Management has determined the operating segments by considering
the financial and operational information that is reported
internally to the chief operating decision maker, the Board of
Directors, by management. For management purposes, the Group is
currently organised into four operating segments: branch-based
lending (Everyday Loans), guarantor loans (TrustTwo and George
Banco), home credit (Loans at Home) and central (head office
activities). The Group's operations are all located in the United
Kingdom and all revenue is attributable to customers in the United
Kingdom.
Branch-based Guarantor Home 2020
lending loans(1) credit Central Total
GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------------- ------------ --------- -------- --------- --------------- ---------
Six months ended 30 June
2020
Interest income 47,914 17,032 27,277 - - 92,223
Fair value unwind on acquired
loan portfolio (971) - - (971)
-------------------------------- ------------ --------- -------- --------- --------------- ---------
Total revenue 47,914 16,061 27,277 - - 91,252
Operating profit/(loss)
before amortisation 10,525 (6,344) 2,968 (3,104) - 4,045
Amortisation of intangible
assets (599) - (599)
-------------------------------- ------------ --------- -------- --------- --------------- ---------
Operating profit/(loss)
before exceptional items 10,525 (6,344) 2,968 (3,703) - 3,446
Exceptional items(3) - (15,753) - (75,530) - (91,283)
Finance cost (9,603) (3,871) (774) (664) - (14,912)
------------ --------- -------- --------- ---------------
Profit/(loss) before taxation 922 (25,968) 2,194 (79,897) - (102,749)
Taxation (175) 1,941 (417) (974) - 375
-------------------------------- ------------ --------- -------- --------- --------------- ---------
Profit/(loss) for the period 747 (24,027) 1,777 (80,871) - (102,374)
-------------------------------- ------------ --------- -------- --------- --------------- ---------
Capital expenditure 1,622 - 1,171 - - 2,793
Depreciation of plant, property
and equipment 752 - 168 19 - 939
Depreciation of right of
use asset 638 - 314 65 - 1,017
Amortisation and impairment
of intangible assets 225 - 828 1,309 - 2,362
30 June
Branch-based Guarantor Home Consolidation 2020
lending loans(1) credit Central adjustments(2) Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------------- ------------ --------- -------- --------- --------------- ---------
Total assets 254,348 88,511 35,780 430,608 (397,930) 411,317
Total liabilities (304,019) (15,753) (11,314) (332,588) 274,389 (389,285)
-------------------------------- ------------ --------- -------- --------- --------------- ---------
Net assets (49,671) 72,758 24,466 98,020 (123,541) 22,032
-------------------------------- ============ ========= ======== ========= =============== =========
(1) Guarantor loans division includes George Banco and TrustTwo.
TrustTwo is supported by the infrastructure of Everyday Loans but
its results are reported to the Board separately and have therefore
been disclosed within the Guarantor Loans Division above.
(2) Consolidation adjustments include the acquisition
intangibles of GBPnil (2019: GBP5.9m), goodwill of GBPnil (2019:
GBP128.2m), fair value of loan book of GBP0.5m (2019: GBP3.1m) and
the elimination of intra-Group balances.
(3) Refer to note 6 for further details.
Branch-based Guarantor Home 2019
lending loans(1) credit Central Total
GBP000 GBP000 GBP000 GBP000 GBP000
----------------------------------- ------------ --------- -------- ---------- --------------- ---------
Six months ended 30 June
2019 as restated
Interest income 43,756 13,840 30,691 - - 88,287
Fair value unwind on acquired
loan portfolio - (1,184) - - - (1,184)
----------------------------------- ------------ --------- -------- ---------- --------------- ---------
Total revenue 43,756 12,656 30,691 - - 87,103
Operating profit/(loss)
before amortisation 14,735 2,584 4,303 (3,010) - 18,612
Amortisation of intangible
assets - - - (2,607) - (2,607)
----------------------------------- ------------ --------- -------- ---------- --------------- ---------
Operating profit/(loss)
before exceptional items 14,735 2,584 4,303 (5,617) - 16,005
Exceptional items(2) - - (129) (25,145) - (25,274)
Finance cost (8,399) (3,453) (1,108) (218) - (13,178)
------------ --------- -------- ---------- ---------------
Profit/(loss) before taxation 6,336 (869) 3,066 (30,980) - (22,447)
Taxation (1,203) 166 (582) 1,108 - (511)
----------------------------------- ------------ --------- -------- ---------- --------------- ---------
Profit/(loss) for the period 5,133 (703) 2,484 (29,872) - (22,958)
----------------------------------- ------------ --------- -------- ---------- --------------- ---------
Capital expenditure 2,810 - 1,238 12 - 4,060
Depreciation of plant, property
and equipment 860 - 179 35 - 1,074
Depreciation of right-of-use-asset 610 - 352 65 - 1,027
Amortisation of intangible
assets - - 665 2,607 - 3,272
31 Dec
Branch-based Guarantor Home Consolidation 2019
lending loans(1) credit Central adjustments(2) Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
----------------------------------- ------------ --------- -------- ---------- --------------- ---------
Total assets 244,740 106,960 51,931 633,759 (556,709) 480,681
Total liabilities (302,987) (29,202) (332,406) 307,525 (357,070)
----------------------------------- ------------ --------- -------- ---------- --------------- ---------
Net assets (58,247) 106,960 22,729 301,353 (249,184) 123,611
----------------------------------- ============ ========= ======== ========== =============== =========
The results of each segment have been prepared using accounting
policies consistent with those of the Group as a whole.
The carrying value on financial assets and liabilities are not
materially different to their fair value, except for amounts
receivable from customers.
6. Exceptional items
In the six months ended 30 June 2020, the Group incurred
exceptional costs totalling GBP91.3m (including VAT) (2019:
GBP25.3m). These comprise: an impairment of goodwill assets and
other acquired intangible assets; and a provision for redress to
certain guarantor loans customers.
The emergence of the COVID-19 pandemic alongside the significant
decline in market multiples across the sector resulted in an
impairment to the value of the goodwill assets of two of the three
divisions in the Group's balance sheet. Whilst non-cash in nature,
the impact is summarised as follows: GBP47.1m of the exceptional
items reflect the write-down of the value of goodwill associated
with Everyday Loans; GBP27.7m of the exceptional items reflect the
write-down of the value of goodwill associated with Loans at Home;
and GBP0.7m of the exceptional items reflect the write-down of the
value of the intangible assets at Everyday Loans. Further details
pertaining to the write-down of the value of goodwill are set out
in note 11.
In addition, a provision of GBP15.8m has been made in the half
year results based upon the Directors' best estimate of the total
redress payable to certain customers of the Group's guarantor loans
division which includes: (i) the sum of all redress due to such
customers of GBP16.0m, offset by existing impairment provisions of
GBP1.2m, resulting in a net amount of GBP14.8 million; and (ii) the
associated operational costs amounting to GBP1.0 million. Refer to
note 16 for further detail.
7. Loss per share
Six months
Six months ended
ended 30 June
30 June 2020 2019 restated
---------------------------------------------------- ------------------- --------------
Retained loss attributable to Ordinary Shareholders
(GBP000) (102,374) (22,892)
Weighted average number of Ordinary Shares at
year ended 31 December 312,437,422 312,049,682
Basic and diluted loss per share (pence) (32.77) (7.34)
---------------------------------------------------- ------------------- --------------
The loss per share was calculated on the basis of net loss
attributable to Ordinary Shareholders divided by the weighted
average number of Ordinary Shares in issue. The basic and diluted
loss per share is the same, as the exercise of share options would
reduce the loss per share and is anti-dilutive. At 30 June 2020,
nil shares were held in treasury (2019: 5,000,000). 5,000,000
ordinary shares of the Company that were purportedly repurchased by
the Company as at 30 June 2019 were cancelled on 30 July 2019.
Six months
Six months ended
ended 30 June
30 June 2020 2019
------------------------------------------------- ------------- ----------
Weighted average number of potential Ordinary
Shares that are not currently dilutive (GBP000) 6,895 9,313
------------------------------------------------- ------------- ----------
The weighted average number of potential Ordinary Shares that
are not currently dilutive includes the Ordinary Shares that the
Company may potentially issue relating to its share option schemes
and share awards under the Group's long-term incentive plans and
Save As You Earn schemes.
8. Taxation
The tax charge for the period has been calculated by applying
the Directors' best estimate of the effective tax rate for the
financial year of 19% (2019: 19%), to the profit before tax for the
period, however in addition, the current year also includes the
write off of GBP1.9m of deferred tax assets in the period.
9. Dividends
As a result of the significant reported losses in 2019, the
Company does not have any distributable reserves and is therefore
not in a position to declare a half year dividend (2019: 0.7p per
share). As part of any future capital raise, the Board is committed
to completing a process, subject to shareholder and Court approval,
to create sufficient distributable reserves so that, the Company is
able to resume the payment of cash dividends to shareholders as
soon as it is appropriate to do so.
With no interim dividend being proposed by the Directors in
respect of the six months ended 30 June 2020 (interim dividend
2019: 0.7 pence per share), there will be no dividend payment in
relation to the current period (2019: GBP2,184,348).
10. Amounts receivable from customers
30 June 31 Dec
2020 2019
GBP000 GBP000
---------------------------------- -------- ---------
Gross carrying amount 362,498 410,849
Loan loss provision (62,471) (49,201)
---------------------------------- -------- ---------
Amounts receivable from customers 300,027 361,648
---------------------------------- -------- ---------
30 June 31 Dec
Included within the gross carrying amount above 2020 2019
are unamortised broker commissions, see table below: GBP000 GBP000
Unamortised broker commissions 11,379 14,311
Total unamortised broker commissions 11,379 14,311
------------------------------------------------------ ------- -------
Analysis of amounts receivable from customers due within/more
than one year:
30 June 31 Dec
2020 2019
GBP000 GBP000
---------------------------------- ------- --------
Due within one year 149,757 176,379
Due in more than one year 150,270 185,269
---------------------------------- ------- --------
Amounts receivable from customers 300,027 361,648
---------------------------------- ------- --------
Analysis of amounts receivable from customers
Stage 1 Stage 2 Stage 3 Total
30 June 2020 GBP000 GBP0000 GBP000 GBP000
----------------------- ------- -------- -------- --------
Branch-based lending 159,768 36,828 10,060 206,656
Guarantor Loans 65,996 30,278 9,329 105,603
Home Credit 19,070 22,896 8,273 50,239
----------------------- ------- -------- -------- --------
Gross carrying amount 244,834 90,002 27,662 362,498
----------------------- ------- -------- -------- --------
Branch-based lending (5,427) (9,134) (4,390) (18,951)
Guarantor Loans (2,507) (11,162) (3,889) (17,558)
Home Credit (780) (17,759) (7,423) (25,962)
----------------------- ------- -------- -------- --------
Loan loss provision (8,714) (38,055) (15,702) (62,471)
----------------------- ------- -------- -------- --------
Branch-based lending 154,341 27,694 5,670 187,705
Guarantor Loans 63,489 19,116 5,440 88,045
Home Credit 18,290 5,137 850 24,277
----------------------- ------- -------- -------- --------
Net amounts receivable 236,120 51,947 11,960 300,027
----------------------- ------- -------- -------- --------
Stage 1 Stage 2 Stage 3 Total
31 December 2019 GBP000 GBP000 GBP000 GBP000
----------------------- -------- -------- -------- --------
Branch-based lending 196,140 26,839 8,651 231,630
Guarantor Loans 99,449 9,993 3,488 112,930
Home Credit 35,472 16,442 14,375 66,289
----------------------- -------- -------- -------- --------
Gross carrying amount 331,061 53,274 26,514 410,849
----------------------- -------- -------- -------- --------
Branch-based lending (8,050) (5,206) (3,592) (16,848)
Guarantor Loans (2,110) (2,391) (1,468) (5,969)
Home Credit (1,844) (11,115) (13,425) (26,384)
----------------------- -------- -------- -------- --------
Loan loss provision (12,004) (18,712) (18,485) (49,201)
----------------------- -------- -------- -------- --------
Branch-based lending 188,090 21,633 5,059 214,782
Guarantor Loans 97,339 7,602 2,020 106,961
Home Credit 33,628 5,327 950 39,905
----------------------- -------- -------- -------- --------
Net amounts receivable 319,057 34,562 8,029 361,648
----------------------- -------- -------- -------- --------
During the first half of the year, the COVID-19 pandemic has
severely impacted the UK economy. As a result, the Group assessed
the sensitivity and increased the probability weighting of a
stressed scenario during the first half of the year and furthermore
implemented additional overlays to account for the impact of FCA
guidance in relation to emergency payment freezes (refer note 4 for
details). The Group will continue to monitor the potential impact
over the coming months and expects any further impact to be
recognised in the second half of this year.
Fair value of amounts receivable from customers
30 June 2020 31 Dec 2019
GBP000 GBP000
---------------------------------- ------------ --------------
Branch-based lending 284,165 322,852
Guarantor Loans 109,989 127,095
Home Credit 35,146 60,668
---------------------------------- ------------ --------------
Amounts receivable from customers 429,300 510,615
================================== ============ ==============
Fair value has been derived by discounting expected future cash
flows (net of collection costs) at the credit risk adjusted
discount rate at the balance sheet date. Under IFRS 13, 'Fair value
measurement', receivables are classed as Level 3 which defines FV
measurements as those derived from valuation techniques that
include inputs for the asset or liability that are not based on
observable market data (unobservable inputs).
11. Goodwill
30 June 2020 31 Dec 2019
GBP000 GBP000
----------------------- ------------ -----------
Opening balance 74,832 140,668
Impairment of goodwill (74,832) (65,836)
----------------------- ------------ -----------
At 30 June 2020 - 74,832
======================= ============ ===========
The goodwill recognised represents the difference between the
purchase consideration paid and the value of net assets acquired
(including intangible assets recognised upon acquisition), less any
accumulated impairment.
Under IFRS 13, 'Fair Value Measurement', the fair value used in
the goodwill impairment assessment is classified as Level 3.
The Group tests goodwill annually for impairment or more
frequently if there are indications that goodwill might be
impaired. The assessment of impairment of goodwill as at 30 June
2020 utilised actual price earnings ('PE') multiples of comparable
companies as at 30 June 2020 and applied these to forecast earnings
for the 12 month period ended 31 December 2020.
Determining whether goodwill is impaired requires an estimation
of the recoverable amount of each CGU. The recoverable amount is
the higher of its fair value ('FV') less cost to sell or its value
in use ('VIU').
Fair value ('FV') less cost to sell
The calculation to determine the fair value less cost to sell
for each CGU uses forecasted earnings for the year ended 31
December 2020, multiplied by the 30 June 2020 PE multiple for
comparable companies. Earnings represent profit after tax before
fair value adjustments, amortisation of intangibles and exceptional
items. Disposal costs have been estimated at 2%. As part of this
assessment, we have applied PE multiples to forecasted 2020 profit
after tax in order to determine management's best estimate of the
fair value to be attributed to each of the CGUs.
Value in use
The calculation to determine recoverable amount based on VIU
uses the cash flows derived from earnings projections for the years
ended 31 December 2020, 2021 and 2022, together with a terminal
value based on the cash flow forecast for 2022 at a perpetuity
growth rate. The resulting cash flow forecasts are then discounted
at a discount rate appropriate to the CGU to produce a VIU to the
Group.
Loans at Home goodwill assessment
In the 2019 Annual Report and Accounts, the Group concluded that
no further impairments to the Loans at Home goodwill asset were
necessary beyond the GBP12.5m that was recognised and disclosed in
the Group's results for the six months ended 30 June 2019.
In the current period, the Group has utilised the actual 30 June
2020 PE multiple of comparable companies, along with 2020
forecasted profit after tax to determine recoverable amount. It is
worth highlighting that 2021 is likely to continue to see a
recovery phase from COVID-19 before a return to normality in 2022.
However, due to the difficulties in reliability of forecasting into
2022 in a COVID-19 impacted environment, and in line with prior
year methodologies, this approach has not been used. The result of
this is a FV less cost to sell below the carrying value of the
CGU.
Management have also run a VIU calculation to determine
recoverable value. It is noted that 2020 forecasts and results have
been impacted by the COVID-19 pandemic, and therefore VIU is less
suited to this scenario where 2021 sees a period of recovery to
normality and building back of the loan book and therefore net cash
outflows. Nevertheless, assuming a nil growth into perpetuity
results in a VIU which, whilst higher than the FV less cost to sell
calculated for LAH, remains below the carrying value of the LAH
CGU.
The impact of COVID-19 on the profitability of the CGU in the
current year along with the significant decline in peer group PE
multiples since 31 December 2019 (driven by uncertainties in the
economic, market and regulatory environment) has meant that on the
basis of the analysis above, the Group has concluded to impair the
entire goodwill asset attributable to the LAH CGU as at 30 June
2020 totalling GBP27.7m. This reduced the Loans at Home goodwill
asset to GBPnil as at 30 June 2020.
Everyday Loans goodwill assessment
As at 30 June 2020, the Group performed a FV less cost to sell
for the Everyday Loans CGU using actual PE multiples as at 30 June
2020 and 2020 forecast profits. Given the unique circumstances of
COVID-19 on 2020 performance, along with the significant decline in
peer group PE multiples since 31 December 2019 driven by
uncertainties in the economic, market and regulatory environments,
the Group has calculated the FV less costs to sell to be below the
carrying value, therefore indicating an impairment to the remaining
goodwill value held on the balance sheet for the six months ended
30 June 2020.
As noted in the 2019 Annual Report and Accounts, the use of
value in use is less appropriate for use for the branch based
lending CGU, and especially in a post COVID-19 environment where
management forecasts expect a return to normality during the second
half of 2020 and into 2021 that requires investment in lending
activities to rebuild the division's loan book, which in turn
impacts cash flows. Nevertheless, a VIU base case forecast was
conducted to ascertain whether or not the VIU of the CGU was
greater or less than the FV less cost to sell. Assuming a nil
growth into perpetuity, the VIU of the CGU is below the FV less
costs to sell, and therefore it is appropriate to recognise a
goodwill impairment of GBP47.1m for this CGU.
Guarantor Loans goodwill assessment
During the second half of 2019, the value of goodwill for the
Guarantor Loans CGU was written down to GBPnil. The remaining asset
component which comprises carrying amount is the value of the net
loan book which is assessed for impairment under IFRS 9.
12. Net cash used in operating activities
Six months ended 30 June 2020 Six months ended 30 June 2019
GBP000 GBP000
---------------------------------------------------- ----------------------------- -----------------------------
Operating profit/(loss) (87,837) (9,269)
Taxation paid - (670)
Depreciation 1,956 2,101
Share-based payment charge 795 597
Amortisation of intangible assets 1,663 3,272
Goodwill impairment loss 74,832 12,452
Fair value unwind on acquired loan book 971 1,184
Intangibles impairment loss 698 -
Profit on disposal of property, plant and equipment 6 (16)
Decrease in amounts receivable from customers 60,651 (25,629)
Decrease/(Increase) in other assets - 98
Decrease/(Increase) in receivables (6,734) 1,014
(Decrease)/increase in payables and provisions 2,313 4,233
Cash used in operating activities 49,314 (10,633)
---------------------------------------------------- ----------------------------- -----------------------------
13. Government Grants and Support
During the six months ended 30 June 2020 the Company received
grants totalling GBP0.6m under the Coronavirus Job Retention Scheme
('CJRS') which has been presented within 'other operating income'
in the statement of comprehensive income (refer accounting policies
note 3).
Coronavirus Job Retention Scheme
During March 2020, the Group implemented a series of steps
designed to mitigate, as far as possible, the impact of COVID-19 on
its business operations. These measures included the furloughing of
over 120 employees, and utilisation of government grants offered
through the Coronavirus Job Retention Scheme ('CJRS') . The
original direction was signed by the Chancellor on 15 April 2020
and further directions were signed on 22 May 2020 and 25 June
2020.
A breakdown of these grants is provided below:
Six months ended 30 June 2020 Six months ended 30 June 2019
GBP000 GBP000
--------------------------------- ----------------------------- -----------------------------
Salaries 519 -
National Insurance contributions 9 -
Pension contributions 24 -
--------------------------------- ----------------------------- -----------------------------
Total CJRS grant received 552 -
--------------------------------- ----------------------------- -----------------------------
HMRC have announced that the CJRS grant must be included as
income within taxable profits for Corporation Tax purposes, however
businesses can also deduct employment costs as normal when
calculating taxable profits for Corporation Tax purposes.
Deferred Payroll Taxes
In addition to the steps taken above to mitigate the impact of
COVID-19 on business operations, the Group has deferred its payroll
taxes due for the months of May and June in the current financial
year. The amounts deferred equate to GBP2.33m excluding interest as
at 30 June 2020.The current interest rate as published on HMRC's
website is 2.6% per annum as at the 30 June 2020. The Group has
subsequently agreed a Time to Pay Arrangement with HMRC.
14. Related party transactions
Transactions between the Company and its subsidiaries, which are
related parties, have been eliminated on consolidation and are not
disclosed in this note. Two members of key management personnel
(Executive Directors of Non-Standard Finance plc and/or senior
management) are Trustees of the charity Loan Smart. During the six
months ended 30 June 2020, the Company donated GBP80,500 to Loan
Smart (six months ended 30 June 2019: GBPnil) and has a debtor
balance of GBPnil as at 30 June 2020 for a loan to the charity
(2019: GBP80,500).
One Director is a member of the Non-Standard Finance plc
Long-Term Incentive Plan.
During the six month period ended 30 June 2020, the Group put in
place a new six-year securitisation facility provided by Ares
Management Corporation, of which GBP15m was drawn at the balance
sheet date. The nature of the facility required the setup of a
Special Purpose Vehicle (SPV) NSF Funding 2020 Limited, which is
consolidated into the Group in line with the requirements of IFRS
10. Over the course of the interim period, the SPV transacted
multiple times with Everyday Lending Limited (a subsidiary within
the Group) to facilitate the securitisation of loans. As these
transactions took place between two or more subsidiaries, they are
deemed to be related party transactions, and have been eliminated
on consolidation.
Subsequent to the 30 June 2020, the Group repaid the GBP15m
(GBP10.5m net) previously drawn on its GBP200m securitisation
facility. Refer to note 17 for more information in relation to this
transaction.
There have been no other changes in the nature of related party
transactions as described in note 31 to the 2019 Annual Report
& Financial Statements.
15. Distributable Reserves of the Parent Company
At 30 June 2020, the Company had no distributable reserves.
In the prior year it was identified that on account of certain
technical infringements regarding historic distributions, in
particular a transaction between the Group and certain subsidiary
entities which had resulted in a circularity issue between the
entities and following an intercompany dividend of GBP11 million in
June 2016, none of the entity's distributions to shareholders since
incorporation to 2018 were made out of distributable profits. In
order to rectify this issue, on 30 July 2019 the Company effected a
capital reduction which consisted of: (i) a cancellation of
5,070,234 ordinary shares in the Company that were purportedly
purchased through the Company's share buy-backs made between 2017
and 2019 but which, as a result of certain infringements of the
Companies Act 2006, were not validly purchased; and (ii) the
reduction of the amount of GBP75 million standing to the credit of
the Company's share premium account.
16. Provisions
Provisions are recognised for present obligations arising as
consequences of past events where it is more likely than not that a
transfer of economic benefit will be necessary to settle the
obligation, which can be reliably estimated.
Guarantor
Plevin Complaints Dilapidation Restructuring loans redress Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
----------------------- ------- ---------- ------------ --------------- -------------- -------
Opening at 31 December
2018 231 - 357 - - 588
Charge during the
year 284 - 845 170 - 1,299
Utilised (423) - - - - (423)
----------------------- ------- ---------- ------------ --------------- -------------- -------
Balance at 31 December
2019 92 - 1,202 170 - 1,464
Charge during the
year - 582 - - 15,753 16,335
Utilised (17) - - (132) - (149)
----------------------- ------- ---------- ------------ --------------- -------------- -------
Balance at 30 June
2020 75 582 1,202 38 15,753 17,650
----------------------- ------- ---------- ------------ --------------- -------------- -------
In the current year, the Group has recognised additional
provisions for complaints and for the guarantor loans redress
programme (further detailed below).
Guarantor loans redress programme
As part of its multi-firm review into the guarantor loans
segment, the FCA raised some concerns regarding certain aspects of
the division's processes and procedures and so the Group, together
with its advisers, has developed a detailed methodology to provide
redress to those customers affected. While the FCA has not yet
reviewed the proposed redress methodology, the Directors have
included an exceptional provision of GBP15.8m as at 30 June 2020
based on their best estimate of the full and final costs of the
redress programme using the methodology described above. The final
cost of the redress programme remains subject to the FCAs approval
of the methodology used and a case-by-case review of those
customers affected. As a result, it is possible that the eventual
outcome may differ materially from the current estimate and this
could materially impact the financial statements.
The Guarantor Loans Division continues to monitor its policies
and processes. The Division will continue to assess both the
underlying assumptions in the calculation and the adequacy of this
provision periodically using actual experience and other relevant
evidence to adjust the provisions where appropriate.
17. Subsequent Events
As at 30 June 2020, the Group held a temporary waiver in regards
to certain performance covenant breaches on its securitisation
facility. Since 30 June 2020, a permanent solution was reached with
the securitisation facility lenders whereby, in addition to
agreeing a permanent waiver for the breaches identified, in order
to improve the efficiency of its balance sheet and reduce funding
costs, the Group repaid the GBP15m (GBP10.5m net) previously drawn
on its GBP200m securitisation facility. As a result, the breach of
certain performance triggers that arose as a direct result of
COVID-19 has now been waived and the Group has agreed with the
provider that, subject to their consent and the satisfaction of
standard covenants for a facility of this type, the facility will
remain open for future use.
As noted in the going concern statement, the impact of COVID-19
and the GLD redress programme on the Group's future profitability,
liquidity and solvency is materially uncertain and therefore there
exists uncertainty around the Group's ability to access the
securitisation facility in the future. As a result it may result in
the future impairment of capitalised debt fees associated with the
securitisation facility which totalled GBP6.0m as at 30 June
2020.
On the 24(th) of July 2020, the Financial Conduct Authority
('FCA') informed the Group that, following a visit to the Group's
Guarantor Loans Division in March 2020 as part of a multi-firm
review into the sector, and having examined a selection of customer
files, it has raised a number of concerns regarding certain aspects
of the operating procedures and processes at the Division. NSF
continues to work closely with the FCA, to clarify the scope and
scale of its concerns and to develop a possible redress
methodology. The group is treating this as an adjusting event in
line with IAS 10, as it is an event that has occurred after the
reporting date that provides evidence of conditions that existed at
the end of the reporting period. Refer to note 16 and note 4 for
further details.
APPIX
Glossary of alternative performance measures ('APMs') and key
performance indicators
The Group has developed a series of alternative performance
measures that it uses to monitor the financial and operating
performance of each of its business divisions and the Group as a
whole. These measures seek to adjust reported metrics for the
impact of non-cash and other accounting charges (including
modification loss) that make it more difficult to see the true
underlying performance of the business. These APMs are not defined
or specified under the requirements of International Financial
Reporting Standards, however we believe these APMs provide readers
with important additional information on our business. To support
this, we have included a reconciliation of the APMs we use, how
they are calculated and why we use them on the following page.
Alternative performance measure Definition
Net debt Gross borrowings less cash at bank
-------------------------------- ------------------------------------------------------------------------------------
Normalised revenue Normalised figures are before fair value adjustments, amortisation of acquired
Normalised operating profit intangibles
Normalised profit before tax and exceptional items (refer note 7).
Normalised earnings per share
-------------------------------- ------------------------------------------------------------------------------------
Key performance indicators Definition
Impairments/revenue Impairments as a percentage of normalised revenues
Impairments/average loan book Impairments as a percentage of 12 month average loan book excluding fair value
adjustments
Normalised net loan book Net loan book before fair value adjustments but after deducting any impairment due
Net loan book growth Annual growth in the net loan book
Operating profit margin Normalised operating profit as a percentage of normalised revenues
Cost to income ratio Normalised administrative expenses as a percentage of normalised revenues
Return on asset Normalised operating profit as a percentage of average loan book excluding fair
value adjustments
Revenue yield Normalised revenue as a percentage of average loan book excluding fair value
adjustments
Risk adjusted margin Normalised revenue less impairments as a percentage of average loan book excluding
fair value
adjustments
================================ ====================================================================================
Alternative Performance Measures reconciliation
1. Net debt
30 Jun 31 Dec
2020 2019
GBP000 GBP000
---------------------------- -------- --------
Borrowings 330,000 323,200
Cash at bank and in hand(1) (70,709) (13,997)
---------------------------- -------- --------
259,291 309,203
---------------------------- -------- --------
1 Cash at bank and in hand excludes cash held by Parent Company
that sits outside of the security group.
This is deemed useful to show total borrowings if cash available
at year end was used to repay borrowing facilities.
2. Normalised revenue
Branch-based
lending Guarantor loans Home credit
-------------------------------- ---------------- ----------------- ----------------
30 Jun 30 Jun 30 Jun 30 Jun 30 Jun 30 Jun
2020 2019 2020 2019 2020 2019
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------------- ------- ------- -------- ------- ------- -------
Reported revenue 97,160 84,883 30,857 22,470 57,421 62,655
Add back fair value adjustments - 1,979 2,155 3,044 - -
-------------------------------- ------- ------- -------- ------- ------- -------
Normalised revenue 97,160 86,862 33,012 25,514 57,421 62,655
-------------------------------- ------- ------- -------- ------- ------- -------
Fair value adjustments have been excluded due to them being
non-business-as-usual transactions. They have resulted from the
Group making acquisitions and do not reflect the underlying
performance of the business. Removing this item is deemed to give a
fairer representation of revenue within the financial year.
3. Normalised operating profit
Branch-based
lending Guarantor loans Home credit
-------------------------------- ------------------ ----------------- -----------------
30 Jun 30 Jun 30 Jun 30 Jun 30 Jun 30 Jun
2020 2019 2020 2019 2020 2019
GBP0000 GBP0000 GBP000 GBP000 GBP0000 GBP000
-------------------------------- -------- -------- -------- ------- -------- -------
Reported operating profit 25,445 24,372 (2,528) 1,547 7,768 6,056
Add back fair value adjustments - 1,979 2,155 3,044 - -
Add back amortisation of
intangibles - 3,017 - 2,600 - 1,331
-------------------------------- -------- -------- -------- ------- -------- -------
Normalised operating profit 25,445 29,368 (373) 7,191 7,768 7,387
-------------------------------- -------- -------- -------- ------- -------- -------
Fair value adjustments have been excluded due to them being
non-business-as-usual transactions. They have resulted from the
Group making acquisitions and do not reflect the underlying
performance of the business. Removing this item is deemed to give a
fairer representation of revenue within the financial year.
4. Normalised profit before tax
30 Jun 2020 30 Jun 2019
GBP000 GBP000
--------------------------------------------------- ----------- -----------
Reported loss before tax (102,749) (22,447)
Add back fair value adjustments 971 1,184
Add back amortisation and write-off of intangibles 599 2,607
Add back exceptional items 91,283 25,274
--------------------------------------------------- ----------- -----------
Normalised profit before tax (9,896) 6,618
--------------------------------------------------- ----------- -----------
Fair value adjustments, amortisation of intangibles, and
exceptional items have been excluded due to them being
non-business-as-usual transactions. The fair value adjustments and
amortisation of intangibles have resulted from the Group making
acquisitions, whilst the exceptional items are one-off and are not
as a result of underlying business-as-usual transactions (refer to
note 8 for further detail on exceptional costs in the year) and
therefore do not reflect the underlying performance of the
business. Hence, removing these items is deemed to give a fairer
representation of the underlying profit performance within the
financial year.
5. Normalised profit for the year
Group
------------------------
30 Jun 2020 30 Jun 2019
GBP000 GBP000
------------------------------------------- ----------- -----------
Reported loss for the year (102,374) (22,958)
Add back fair value adjustments 971 1,184
Add back amortisation of intangibles 599 2,607
Add back exceptional items 91,283 25,274
Adjustment for tax relating to above items 1,569 (745)
------------------------------------------- ----------- -----------
Normalised loss for the year (7,952) 5,362
------------------------------------------- ----------- -----------
Weighted average shares 312,437,422 312,049,682
------------------------------------------- ----------- -----------
Normalised earnings per share (pence) (2.55)p 1.72p
------------------------------------------- ----------- -----------
As noted above, fair value adjustments, amortisation of
intangibles and exceptional items have been excluded due to them
being non-business-as-usual transactions. The fair value
adjustments and amortisation of intangibles have resulted from the
Group making acquisitions, whilst the exceptional items are one-off
and are not as a result of underlying business-as-usual
transactions (refer to note 8 for further detail on exceptional
costs in the year) and therefore does not reflect the underlying
performance of the business. Hence, removing these items is deemed
to give a fairer representation of the underlying earnings per
share within the financial year.
6. Impairment as a percentage of revenue
Branch-based
lending Guarantor loans Home credit
--------------------------- ---------------- ----------------- ----------------
30 Jun 30 Jun 30 Jun 30 Jun 30 Jun 30 Jun
2020 2019 2020 2019 2020 2019
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------- ------- ------- -------- ------- ------- -------
Normalised revenue 97,160 86,862 33,012 25,514 57,421 62,655
Impairment 25,906 20,394 20,337 6,246 15,534 19,991
--------------------------- ------- ------- -------- ------- ------- -------
Impairment as a percentage
revenue 26.7% 23.5% 61.6% 24.5% 27.1% 31.9%
--------------------------- ------- ------- -------- ------- ------- -------
Impairment as a percentage revenue is a key measure for the
Group in monitoring risk within the business.
7. Impairment as a percentage loan book
Branch-based lending Guarantor loans Home credit
---------------------------- ---------------------- ----------------- ----------------
30 Jun 30 Jun 30 Jun 30 Jun 30 Jun
30 Jun 2020 2019 2020 2019 2020 2019
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------------------- ------------- ------- -------- ------- ------- -------
Reported opening net loan
book 201,817 169,064 98,440 69,099 35,534 39,562
Less fair value adjustments - (1,979) (3,126) (6,170) -
Normalised opening net loan
book 201,817 167,085 95,314 62,929 35,534 39,562
Reported closing net loan
book 187,707 201,817 88,043 98,440 24,276 35,534
Less fair value adjustments - - (466) (3,126) - -
Normalised closing net loan
book 187,707 201,817 87,577 95,314 24,276 35,534
Normalised opening net loan
book 201,817 167,085 95,314 62,929 35,534 39,562
Normalised closing net loan
book 187,707 201,817 87,577 95,314 24,276 35,534
Average net loan book 208,092 184,680 102,097 80,540 33,844 37,853
Impairment 25,906 20,394 20,337 6,246 15,534 19,991
---------------------------- ------------- ------- -------- ------- ------- -------
Impairment as a percentage
loan book 12.4% 11.0% 19.9% 7.8% 45.9% 52.8%
---------------------------- ------------- ------- -------- ------- ------- -------
Impairment as a percentage loan book allows review of impairment
level movements year on year.
8. Net loan book growth
Branch-based lending Guarantor loans Home credit
---------------------------- ---------------------- ----------------- ----------------
30 Jun 30 Jun 30 Jun 30 Jun 30 Jun 30 Jun
2020 2019 2020 2019 2020 2019
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------------------- ---------- ---------- -------- ------- ------- -------
Normalised opening net loan
book 201,817 167,085 95,314 62,929 35,534 39,562
Normalised closing net loan
book 187,707 201,817 87,577 95,314 24,276 35,534
---------------------------- ---------- ---------- -------- ------- ------- -------
Net loan book growth (7.0)% 20.8% (8.1)% 51.5% (31.7)% (10.2%)
---------------------------- ---------- ---------- -------- ------- ------- -------
9. Return on asset
Branch-based lending Guarantor loans Home credit
---------------------------- ---------------------- ----------------- ----------------
30 Jun 30 Jun 30 Jun 30 Jun 30 Jun 30 Jun
2020 2019 2020 2019 2020 2019
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------------------- ---------- ---------- -------- ------- ------- -------
Normalised operating profit 25,445 29,368 (373) 7,191 7,768 7,387
Average net loan book 208,092 184,680 102,097 80,540 33,844 37,853
---------------------------- ---------- ---------- -------- ------- ------- -------
Return on asset 12.2% 15.9% (0.4)% 8.9% 23.0% 19.5%
---------------------------- ---------- ---------- -------- ------- ------- -------
The return on asset measure is used internally to review the
return on the Group's primary key assets.
10. Revenue yield
Branch-based
lending Guarantor loans Home credit
------------------------- ---------------- ----------------- ----------------
30 Jun 30 Jun 30 Jun 30 Jun 30 Jun 30 Jun
2020 2019 2020 2019 2020 2019
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------------------- ------- ------- -------- ------- ------- -------
Normalised revenue 97,160 86,862 33,012 25,514 57,421 62,655
Average net loan book 208,092 184,680 102,097 80,540 33,844 37,853
------------------------- ------- ------- -------- ------- ------- -------
Revenue yield percentage 46.7% 47.0% 32.3% 31.7% 169.7% 165.5%
------------------------- ------- ------- -------- ------- ------- -------
Revenue yield percentage is deemed useful in assessing the gross
return on the Group's loan book.
11. Risk adjusted margin
Branch-based
lending Guarantor loans Home credit
--------------------------------- ------------------ ----------------- ------------------
30 Jun 30 Jun 30 Jun 30 Jun 30 Jun 30 Jun
2020 2019 2020 2019 2020 2019
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------------- -------- -------- -------- ------- -------- --------
Normalised revenue 97,160 86,862 33,012 25,514 57,421 62,655
Impairments (25,906) (20,394) (20,337) (6,246) (15,534) (19,991)
Normalised risk adjusted revenue 71,254 66,468 12,675 19,268 41,887 42,644
Average net loan book 208,092 184,680 102,097 80,540 33,844 37,853
--------------------------------- -------- -------- -------- ------- -------- --------
Risk adjusted margin percentage 34.2% 36.0% 12.4% 23.9% 123.8% 112.7%
--------------------------------- -------- -------- -------- ------- -------- --------
The Group defines normalised risk adjusted revenue as normalised
revenue less impairments. Risk adjusted revenue is not a
measurement of performance under IFRSs, and you should not consider
risk adjusted revenue as an alternative to profit before tax as a
measure of the Group's operating performance, as a measure of the
Group's ability to meet its cash needs or as any other measure of
performance under IFRSs. The risk adjusted margin measure is used
internally to review an adjusted return on the Group's primary key
assets.
12. Operating profit margin
Branch-based
lending Guarantor loans Home credit
----------------------------------- ---------------- ----------------- ----------------
30 Jun 30 Jun 30 Jun 30 Jun 30 Jun 30 Jun
2020 2019 2020 2019 2020 2019
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
----------------------------------- ------- ------- -------- ------- ------- -------
Normalised operating profit 25,445 29,368 (373) 7,191 7,768 7,387
Normalised revenue 97,160 86,862 33,012 25,514 57,421 62,655
----------------------------------- ------- ------- -------- ------- ------- -------
Operating profit margin percentage 26.2% 33.8% (1.1)% 28.2% 13.5% 11.8%
----------------------------------- ------- ------- -------- ------- ------- -------
13. Cost to income ratio
Branch-based
lending Guarantor loans Home credit
----------------------- ---------------- ----------------- ----------------
30 Jun 30 Jun 30 Jun 30 Jun 30 Jun 30 Jun
2020 2019 2020 2019 2020 2019
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
----------------------- ------- ------- -------- ------- ------- -------
Normalised revenue 97,160 86,862 33,012 25,514 57,421 62,655
Administration expense 43,915 39,377 13,797 11,602 34,119 35,277
----------------------- ------- ------- -------- ------- ------- -------
Cost to income ratio 45.2% 45.3% 41.8% 45.5% 59.4% 56.3%
----------------------- ------- ------- -------- ------- ------- -------
This measure allows review of cost management.
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