Hello everyone, and welcome to the International Personal Finance Q1 2024 trading update. My name is Seb, and I'll be the operator for your call today. If you'd like to ask a question during the Q&A session, you can do so by pressing star one on your telephone keypad, or if you're listening to the call via the online stream, you can submit a written question using the Q&A function located in the top right-hand corner of the screen. I'll now hand the floor over to Gerard Ryan, CEO, to begin the call. Please go ahead when you're ready.
Thank you, Seb, and good morning, everybody, and welcome to our Q1 trading update call. Today, I'm joined by Gary Thompson, our CFO, and together we'll take you through the highlights of our strong first quarter performance. I'll also give you more details on customer demand for our broadening range of products, explain how we're progressing our next gen strategy, and cover the actions we're taking to adapt our Polish business to the evolving regulatory landscape. As usual, there'll be plenty of time at the end of the briefing for us to answer any questions you might have. Let me start with an overview of our Q1 performance. If you've had a chance to read today's trading update, you'll have seen that we made a very good start to the year, and we're progressing well against our 2024 financial plan.
Building on the strong performance we delivered in 2023, all three divisions, so that's European Home Credit, Mexico Home Credit, and IPF Digital, performed well as we execute against our Next Gen strategy. And thanks to the excellent efforts and hard work of all of our loyal colleagues and customer representatives, we are growing the business and increasing financial inclusion. I'm pleased to report that customer demand for our products and services remains consistently strong, and we're meeting this demand with the broad range of credit products and insurance services we now offer. From our weekly home credit loans with an increasingly digital service to our credit card offering in Poland, fully remote digital loans, and value-added services, which include healthcare and life insurances.
As a result, and excluding Poland for the moment, we delivered a 5% year-on-year increase in customer lending in quarter one, and I'm happy to let you know that we saw increased momentum in lending in March and through into April. We're also progressing our strategy to regrow the business, evidenced by, and this excludes Poland, the 11% increase in closing net receivables year on year to GBP 865 million. Now, for those of you who follow IPF, you'll be aware that we're adapting our business in Poland to the changing regulatory backdrop in this market, and as expected, this has led to a year-on-year reduction in customer lending and receivables of 21% and 32% respectively. And so for the group as a whole, customer lending and closing net receivables both reduced by 3% year on year.
In the first quarter, customer numbers increased by 2% to 1.7 million, excluding the impact of the transition in Poland, where customer numbers declined by 14%. As I explained with our full year results presentation, one of our longer term goals, linked to our purpose of building a better world through financial inclusion, is to serve more than 2.5 million customers, and we are very focused on the growth opportunities available to us in order to achieve this target. We also made good progress towards our medium-term KPI targets, which underpin our financial model, so namely, revenue yield, impairment rate, and cost-income ratio. The group annualized revenue yield strengthened by 1.8 percentage points to 55.2% year-on-year and is now close to our target range of 56%-58%.
Alongside the sustainable growth we delivered, credit quality is excellent across all of our divisions, despite the increased cost of living that our customers continue to face. This is down to our responsible approach to granting credit to our customers, together with our strong operational discipline, which have ensured there's very strong customer repayment performance in the first quarter. The group's annualized impairment rate of 11.4% is tracking better than our financial plan and provides a very strong foundation for increasing lending growth as 2024 progresses. Our rigorous focus on cost control and efficiency delivered a further reduction in the cost-income ratio to 58% year-over-year. The ratio is 1 percentage point higher than at the year-end, due wholly to the reduction in revenue in Poland.
Looking forward, we expect the group ratio to improve in 2024 as we increase growth and execute our cost efficiency and technology programs. Now to funding before I take you through the divisional performances. We continue to maintain a very robust funding position and a conservatively capitalized balance sheet to support our growth ambitions and deliver our progressive dividend policy. At the end of the quarter, we had headroom on undrawn facilities and non-operational cash balances of GBP 174 million, which is sufficient to support our growth plans through to the second quarter of 2025. I'm also very pleased that we've continued to progress our funding strategy, having successfully secured GBP 26 million of debt facilities in the first quarter, which includes GBP 23 million of bank facilities and the issuance of GBP 3 million of retail bonds that we held in treasury.
With our advisors, we're also continuing to explore the range of debt refinancing options open to us as we look to refinance the Eurobond, which is due to mature in November 2025. So onto our divisional performance now, starting with European Home Credit, where our teams delivered another good operational performance in the first quarter. In particular, customer repayment performance has been very strong and ahead of our plans in all four markets. Good demand for borrowing helped to achieve a 6% increase in customer lending in Romania, Hungary, and the Czech Republic combined. And I'd like to note that we saw this demand increase as the quarter progressed and also into April.... In contrast, but as expected, we saw a reduction of 21% in lending in Poland.
Receivables ended the first quarter at GBP 440 million, which overall is a reduction of 11% year-on-year, but comprised good growth of 9% in Romania, Hungary, and Czech Republic combined, offset as expected by a 32% reduction in Poland. Now, before I close out on European Home Credit, let me update you on our credit card rollout in Poland. At the end of Q1, we had issued more than 140,000 cards, and customers are continuing to react very positively, especially as they can now benefit from being able to shop online and in stores, as well as withdraw cash from ATMs. We're very pleased with the portfolio quality and customer repayment behavior. The impairment performance is consistent with our installment loans, as customers enjoy the convenience of making repayments through their customer representatives.
We introduced a new pricing structure for our credit card offering in March, in response to the letter we received in February from Poland's Financial Supervision Authority, which set out its expectations on non-interest costs for credit cards. Our leadership team in Poland has an excellent track record of adapting the Polish business to regulatory change, and together, we are working to ensure it delivers our target returns while building financial inclusion in this important market. In Q1, this included the difficult decision to restructure our field force as part of our cost efficiency program, which resulted in an exceptional redundancy cost of GBP 5 million. So overall, we're very pleased with the Q1 performance of our European home credit businesses, which is the bedrock of our group returns and continue to offer good growth opportunities.
Turning now to Mexico Home Credit business, which delivered another good financial performance and growth momentum in the first quarter of the year. Customer lending and closing net receivables increased by 4% and 8% respectively in the quarter. As you know, Mexico is a significant growth market for us, and we expect the rate of customer lending to increase to our target range of 8%-10% for the year as a whole as we complete the actions we've taken to improve performance in Mexico City and Sureste, which account for around 20% of our business in Mexico. As we also see the benefits of our ongoing expansion strategy continue to build. Our 2024 plans to extend our geographic footprint include new branch openings in Mexicali, which is located in northern Mexico, and another branch in the Norte region.
The plans for these exciting developments are progressing very well. Customer repayment performance and write-off volumes in Mexico improved in the first quarter, and we were pleased to see the impairment rate improve by one percentage point since the year end to 31.3%. Looking ahead, we expect this to continue to improve towards our target level of 30% for the year as a whole. Moving on now to IPF Digital, which also performed well in the quarter. Customer demand remains robust in all of our markets, and excluding Poland, customer lending increased by 4% against a strong prior year comparator. We also delivered strong growth in receivables of 17%, again excluding Poland. And as we saw in our other divisions, customer repayments and credit quality are very good indeed.
We are gaining good lending traction, particularly in Mexico, Australia, and the Czech Republic, and excluding Poland, we expect to deliver lending growth of around 15%-20% for the year as a whole. Looking specifically at our digital business in Poland, the impact of lower non-interest cap for installment loans and the new affordability regulations that came into force in 2022 and 2023 resulted in a 27% year-on-year reduction in both lending and receivables during the quarter. This contraction is now slowing, as demonstrated by the modest GBP 2 million reduction in receivables since the 2023 year end, and we expect to return to growth as the year progresses.
Taking IPF Digital as a whole, its receivables grew by 7% to GBP 232 million in quarter one, and with the excellent portfolio quality we have achieved, this provides a very good foundation for acceleration growth through the remainder of the year. We're very focused on executing our next gen growth strategy to rebuild the scale of IPF Digital and deliver our target returns over the next two years. Well, that brings me to the end of our Q1 review. So before we begin our Q&A section, let me just summarize here. We made a very good start to the year and we're progressing well against our 2024 financial plan. With the exception of Poland, we delivered good growth in all of our markets, and credit quality is excellent across the group.
We're executing well against our Next Gen strategy, which includes deploying our full product and distribution channel family, expanding our reach in Mexico, developing our people capabilities, while all the time remaining fully focused on cost efficiency and the rollout of smart technology. Our balance sheet and funding position are in good shape, and we are well positioned to deliver further growth and attractive returns to our shareholders in 2024 and beyond. Now, all the details of today's Q1 announcement, together with a host of ESG-related information and on-demand investor videos about our business, can be found on our website. So that's www.ipfin, I-P-F-I-N, .co.uk. So with that, let me hand you back to Seb, and we can cover off any questions that you might have. Seb, over to you.
Thank you. If you'd like to ask a question, please press star one on your telephone keypad. If you've joined the call via the online stream, you can submit a written question using the Q&A box in the top right-hand corner of the screen. Okay, our first question comes from James Lowen, from J O Hambro Capital Management. This says: Can you provide an update on the Polish situation? Has it been codified by the regulator? Is the direction settled? How much offsets for fees or, for other services have you been able to do, and how much does the cost reduction save PA in Poland?
All right. Morning, James. So five for the price of one there. So first of all, it hasn't been codified because it doesn't need to be codified. The regulator was simply making clear their interpretation of the regulations, so that's as much as they need to do. And clearly, we've responded to that by making sure we are fully compliant, hence our change in pricing. So in terms of direction, and that's all very clear for us, we fully understand what's expected, and as I said, we are compliant. So what we've done to date is we've reduced the price, so we've gone from the 4.5% to down to the new regulated price, as it were.
Now what we are doing is we're working on redesigning the product, which would include additional fees to recover some of the lost income. So just to make clear, for anybody of you who may not know the detail, we, in the past, had gone for the simplest possible product for our customers, because the credit card is a very new product to most of our customers. And we've gone for a straightforward interest rate on a monthly basis, and basically, fees were, I would say, nonexistent. Clearly, with this new interpretation, where the interest rate, the charge comes down quite significantly, we're now having to make the product unfortunately somewhat more complex in adding in fees. And as you would expect, it takes time to first of all code all that in our systems, redesign the documentation, and then train our sales force.
So all of that work is currently ongoing, and we'll be rolling that out as we go forward. Gary, do you want to comment on the cost reduction?
Yeah, sure. Hi, good morning, everybody. In terms of the structural change we made in Poland, that was actually predated the KNF letter, and basically, that was our continuing Next Gen strategy. And actually the field changes that we did make pretty much aligned Poland with what we've been doing in the rest of Europe. So don't associate that with the KNF letter. That was effectively BAU changes we were making. And in effect, the savings from that restructuring are already built into the GBP 10 million guidance impact that we gave at the year end. But you should assume that you know, the saving is you know, sort of mid-single digit sort of saving on a ground up basis.
But as I say, that's already, that saving is within the guidance that we've given, so it's not. It doesn't change the GBP 10 million impact. It was already within that number.
Yeah. Okay, Seb?
Thank you. Next question comes from Rae Maile from Panmure Gordon. Can you give some practical examples of the Next Gen strategy being applied?
Well, there are multiple examples. You know, Gary announced one the other day in terms of fully restructuring his commercial finance team. We're rolling out smart technology across our businesses. So for instance, we have a customer app we've developed in Poland over a number of years. We put up a Challenger app in Mexico, which was developed, I have to say, much faster and much more cheaply, and we've now brought that across to Europe, and we're testing that in Hungary as we speak. I mean, those are just two examples, but there are multiple across the business that we could go into if we had enough time.
Yeah, it's, it's effectively, you know, rather than necessarily doing things four times in four countries, how do we utilize best practice and standardize processes to drive both cost efficiency, but also, you know, being enabling us to be more commercially efficient as well as, so driving the top line? So that, that's, that's what we're trying to do, is make rather than four silos, you know, how do we share best practice between our each of the countries?
And then that Next Gen obviously falls into our three pillars. You could term the first one growth. That's about rolling out our existing products and distribution channels across our businesses. So we're currently looking at where could we take our credit cards in next? The other one is about, as Gary said, redesigning the org to get efficiencies. The third pillar, as you may remember, is all about technology, being technology smart. That's a continuing sort of development for us. One we're very pleased with the returns we're getting out of it. We're also embarking on using AI. I suppose everybody is. But we've got quite a few people. We created a team of volunteers who are testing AI across the business to see what benefits we can get out of that.
So lots of action around Next Gen across the organization.
Thank you.
Mm-hmm.
Next question, next question comes from Marek Talaga from Santander. So how do credit card sales in Poland look? Has sales increased month-on-month?
Well, we're obviously had a period there where we had to adjust the pricing of the credit card, and that takes some time, so we probably slowed it down a little, quite deliberately, as we were managing that transition. And as I explained the response to James' question earlier, we're now redesigning the product. So I would say the credit card roll out is what I would call a steady state. We're not pushing it, and we're not reducing it in any significant way. But we are keen to get the new product structure out there in the next few months. There is plenty... I suppose what I should say is, there's plenty of demand for us. It's more about us wanting to make sure we make the required return on the receivables that we build on credit cards.
Thank you. Next questions come from Stuart Duncan, Peel Hunt. So it says: Thinking about the refinance of Eurobond, what can you do to diversify sources of funding? Once you have refinanced, are growth targets enough to reduce equity receivables towards the target, or could this be accelerated through a buyback, given how cheap shares are? And are there any potential non-organic routes to delivering greater scale in digital?
Shall I take the first three of those, and you take the last, Gerard? In terms of Eurobond, as Gerard mentioned, you know, that's something what obviously we're actively looking at, and we've been... you've seen us talk about that in, in, you know, a number of our recent statements, and so, that's progressing really well. And, you know, why is that? I think people will have seen over the last 12-18 months, market sentiment obviously is far better. And also, you know, sentiment towards business in terms of delivery and really understanding what we're about, and us delivering on our promises, you know, has helped that.
And you saw that at the back end of last year. In terms of, clearly we diversified our funding sources through a Polish and a Hungarian bond, which was really pleasing, and that's sort of a toe in the water in those markets. And equally, we obviously did the retail bond, which was really successful towards the back end of the year. And let's not forget banks as well. You know, we continue to actually extend, but increase our relative there. And indeed, there are a number of new banks that we're finding as well. So there's plenty of diversification ongoing. Clearly, the Eurobond's a big part of our funding stack.
I mean, our aim is to, you know, continue to have it as an important part of our funding stack, but clearly grow by diversifying them. So that's the aim of the game for us. And as I say, you know, really progressing well there. In terms of equity receivables ratio, clearly, we've got a very strong balance sheet, you know, quite a bit above our target. That's been partly benefited by some favorable effects, but more through our own design, as we've wanted to make sure the balance sheet is in good shape for the Eurobond refinance, as I mentioned, but also to continue, you know, adapting Poland, and also delivering on our, you know, pretty ambitious growth targets, whilst maintaining our progressive dividend policy.
So, you know, that's... We're in good shape for that. And clearly, there's obviously a question there in terms of share buybacks. That's something we always keep on the table, we'll always consider, you know, at the right time, that's out there, and, you know, as I say, balance sheet's in great shape, so we do have, let's say, flexibility, and optionality.
Let me pick up the last one on non-organic options for growing our digital business. The short answer is, yes, we think there are possibilities out there. We've said this for a while now that, you know, the word fintech is not quite the word it used to be before. We believe there are a lot of people out there who've invested a lot of investors' money, particularly private equity types, and they've burned through a lot of cash trying to build a business. But it's one thing to be able to lend, and it's another thing to be able to create a profitable lending business, and that's where we're very good, I think. So we think there are people who are exiting.
I can tell you that in the past, I don't know, probably three months in Poland, the number of registered non-bank financial institutions has gone from somewhere in the 400s, down to just over 100. It probably gives you an idea that you need to have a substantial balance sheet, and a lot of max and experience, to be able to cope with this kind of market. So we think there will be opportunities, but nothing to talk about at this point in time.
Thank you. We'll move on to the next question. This one comes from James Lowen at J O Hambro. On Mexico, you referenced a strong recovery in two problem markets in RNS. Can you give a flavor for how quick this is rebuilding, slash, confidence they will rejoin pack this year?
Yeah, well, James, the confidence is certainly back. I was out there a few weeks ago with David. Our Chairman was out there I'd say a week or two after me. And we both actually visited these particular regions. And I have to say, we're very pleased with the new leadership that's been put in place there by David. It's performing well. Portfolio quality is improving, and you're seeing that now coming through in the numbers. And obviously, what you need in order to push the acceleration on growth a little bit, is confidence in your impairment rates. And I have to say, that confidence is returning. So I would say later this year, we'll see those businesses return to growth.
Thank you.
Thanks.
So just for any further questions, please press star one on your telephone keypad, or you can submit a written question using the Q&A box in the top right-hand corner of the screen.
Okay. So no further questions, then?
Currently, no further questions on the call.
Okay. So thank you. So let me wrap it up there. Thank you, everybody, for joining us this morning. From our point of view, we would say it was a very solid quarter. Nice growth rates, superb customer repayment behavior, excellent impairment, good control of costs, which obviously benefits our P&L quite strongly. What I'd like to see for the rest of the year now, is a push on growth. A sensible push on growth, but I'd like to see more growth coming through the business. I believe the demand is out there, and so we'll be looking to deliver that in the coming quarters. Clearly, the work that Gary and the treasury team are doing on the funding side is very positive, and we're getting really good feedback.
All in all, we feel good about the first quarter, and we're looking forward to catching up with you at the half year. But if you have any questions in between then, please feel free to contact us directly. Thank you very much for joining us this morning. Thank you, sir.