Good morning, everyone, and welcome to our Q3 trading update call. As usual, this morning I'm joined by Gary Thompson, our CFO, and together, we'll update you on our third quarter performance. I'd also like to give you some additional color on what we're seeing in each of our divisions, including the transformation of our Polish business and recent successes that we've had on funding. As usual, there'll be plenty of time at the end of the briefing for us to answer any questions you might have. Now, if you've had a chance to read our statement, you'll know that this year's very positive performance has continued into the third quarter across all our divisions, and we are trading ahead of our internal plans.
This has been driven by excellent operational execution of our growth strategy, and for that, I'd like to say thank you to all of my colleagues, whose hard work and dedication is the key to increasing financial inclusion for our customers, and that, in turn, delivers these results. There's strong demand for credit across our markets, and we are responsibly providing financial assistance to underbanked and underserved consumers with our broadening range of products, be that a home credit installment loan in Mexico or Romania, a digital credit line in the Baltics, a credit card in Poland, or one of our value-added services such as healthcare, insurance, or educational packages. Excluding our business in Poland, servicing this strong demand resulted in the group delivering 11% growth in customer lending in the year to date.
Now, the reason I excluded Poland is because we are transitioning our organization there to be a credit card-focused business, as well as adapting to new affordability regulations that were introduced in May of this year. Adapting to these changes in Poland led to lending moderating in this market, and as a result, customer lending for the group as a whole reduced by 1% year-over-year. I'll come back to Poland in more detail shortly. One of our key strategic objectives is to rebuild our portfolio, and I'm pleased to report another period of growth in closing net receivables, which increased by GBP 24 million year-over-year to GBP 875 million, and that's up 4% at constant exchange rates. This, together with an improving revenue yield, resulted in a very strong 15% increase in revenue.
All our divisions contributed to the receivables growth, and excluding the impact of the business transformation in Poland, group receivables showed strong year-on-year growth of 15%. We also made good progress towards our medium-term KPI targets, which underpin our financial model, and of course, that's revenue yield, impairment rates, and cost-income ratio. The group annualized revenue yields continued to strengthen, increasing by four percentage points to 54.8% and is firmly within our target range. This improvement reflects the actions we've taken to bolster the yield, including lower levels of promotional activity introduced during the second half of 2022 and carefully considered price increases implemented in some of our markets. Alongside strong growth, customer repayments, performance, and credit quality is very good.
Despite the increased cost of living for consumers in our markets, we have not seen any discernible impact from the cost of living crisis, and we now believe we can attribute this to the combination of our very disciplined, responsible lending decisions, which are focused on affordability, plus consistent collection processes across both our home credit and digital operations. The group annualized impairment rate of 12% at the end of September is fully in line with our expectations as impairment rates normalize and we expand the business. We continue to maintain a very conservative balance sheet position with an impairment coverage ratio in excess of 36%.
The improving trajectory of our cost-income ratio continued into the third quarter, and our tight control of costs and the strong increase in revenue yield resulted in a significant 7.2% point improvement in the cost-income ratio to 56.7%. In addition to focusing on costs, we are deploying technology to deliver process improvements, which, together with ongoing growth, will continue to improve this ratio towards our target of around 50% over the course of the next couple of years. And to complete the group picture, we continue to maintain a robust funding position and well-capitalized balance sheet to support our growth ambition and deliver our progressive dividend policy. And at the end of September, we had headroom on undrawn facilities and non-operational cash balances of GBP 100 million, and that's an increase of GBP 16 million since the half year.
We've also successfully secured GBP 44 million of debt facilities during the third quarter, including GBP 41 million of bank facilities and GBP 3 million of retail bonds held in treasury. In addition, we are actively exploring a number of other opportunities to diversify and extend the duration of our funding. And just this week, we announced that we have returned to the Polish debt capital market and successfully acquired GBP 14 million of new bonds, which have a maturity date in November 2026. We're also meeting with a number of sterling fixed income investors tomorrow and on Monday, and depending on market conditions, we may pursue a sterling retail bond issuance. These very positive outcomes from our treasury activities, together with strong business cash generation, mean that we now expect to meet our funding requirements out to the fourth quarter of 2024.
So with that as a backdrop, let me take you through a high-level overview of each of our divisions in turn. Our European Home Credit division continued to execute well in the third quarter. Consumer demand in our markets remains good, and together the Czech Republic, Hungary and Romania delivered 15% lending growth year to date... offsetting the expected reduction of 23% we saw in Poland, and this resulted in European Home Credit lending being 2% down year-on-year. Closing net receivables increased by 2% to GBP 474 million, with 18% combined growth in the Czech Republic, Hungary and Romania, offset by a 17% reduction in Poland. Customer repayment performance has remained robust in all of our European Home C redit markets.
Moving on now to Poland, I have to say how pleased I am with our business transformation and the implementation of our credit card offering. We now have issued over 100,000 cards, and that's up from 50,000 at the half year. Our customers have shown that they value the new credit card, and in addition to their initial drawdown, a significant and growing proportion are using the credit card to buy goods online, in stores, and to take cash at ATMs. Let me give you a few figures to illustrate how the card is working. The average line on the card is around GBP 670, and the average initial draw on the card is 85% of that. So that gives you an average balance of around GBP 475.
Since the beginning of the year, we've had more than 140,000 ATM transactions and over 300,000 retail transactions, and these volumes are growing rapidly month-on-month. We're also pleased with portfolio quality and customer repayment behavior, both of which are tracking in line with our expectations, and we've continued to monitor the performance very closely as this huge transformation progresses. And we're certainly on track to meet the 120,000-150,000 cards issued by the end of this year. Now, the other thing I should mention is that earlier this week, Gary and I were with the whole of the board in Warsaw, and we spent two days there talking to the team and understanding how everything is working.
I have to say, the board came back really very well assured as to how the transformation is progressing. Turning now to our Mexico Home Credit business. Our team there delivered another solid operational performance. Consumer demand is strong, and despite a slightly cautious stance on credit settings, customer lending is up 5% year-on-year. Customer numbers increased to 710,000, and closing receivables grew by 8% to MXN 185 million. Customer retention behavior has improved from the first half, and credit quality is now in line with our plan, which is testament to our disciplined approach to growth. As you know, the growth potential in Mexico is significant, and our expansion strategy is progressing well.
Our teams in our two new regions of Tijuana and Tampico are well established and are now attracting new customers to choose our home credit and value-added service offerings. Although these two are in their infancy, we believe that both regions will become important contributors to our overall growth in Mexico. I'll move now to IPF Digital, which also delivered another good performance in the third quarter. Excluding Poland, customer lending year to date grew strongly by 12%, with the Baltics, Mexico and Australia all performing very well. This contrasts with lending in Poland, which reduced by 36% as we transition to the new rate cap and affordability rules in that market.
Our growth strategy is key to rebuilding receivables to scale, scale, and deliver our target returns, and our actions drove a 7% increase in closing net receivables to GBP 260 million at the end of the quarter. Now, stripping out Poland and the collect-out markets of Spain and Finland, receivables growth was very strong at 20%. Alongside the progress we've made growing our digital operations, customer repayment performance is robust, and portfolio quality continues to be very good. So that brings me to the end of our Q3 review. As I mentioned at the start, we've delivered a strong performance through the first three quarters of the year, and we are confident of increasing financial inclusion for consumers in our markets and delivering a good performance for the year as a whole.
Now, all the details of our Q3 announcement can be found on our website at www.ipfin.co.uk. So that's IPFIN.co.uk. Just before we move to Q&A, I'd also like to highlight that we plan to host our next investor analyst webinar on Thursday, the seventh of December. This time, I'll be chatting with our Chief Marketing Officer, Tom Allder, and we will focus on customers, products, and the actions we're taking to capture demand, enhance customer loyalty, and grow the customer base. Further details of those and the invitations will be sent out shortly. So with that, let me hand it back to you, Jordan, to see if we have any questions for both Gary and myself.
Thank you. As a reminder to those on the phone lines, if you'd like to register an audio question, please press Star followed by one on your telephone keypad. If you change your mind, please press Star followed by two, and please ensure you're unmuted when speaking. For those of you connecting online, you can type any questions into the Q&A chat box. Our first question comes from Dave Storms of Stonegate Capital. Dave, the line is yours.
Morning.
Morning, Dave.
Morning. Just was hoping to see if either of you had a sense of what the stable growth rate of credit card issuance would be in Poland once that transition is complete. I'm assuming it's not going to grow 100%, quarterly.
Yeah, well, that's the one thing we could guarantee you, Dave, is that it won't grow 100% quarterly. You know, our expectation is that 50% or more, maybe even as much as 60% of the portfolio, will turn to be credit cards. Now, we expect to push credit cards quite strongly through to probably June of next year, and then we'd expect the rate of growth to slow down because we'd be getting towards that halfway mark in the portfolio. And after that, Gary, do you have a view on what you think it might be?
Yeah. I mean, broadly speaking, we probably expect, overall, I mean, we, we expect customer numbers to be broadly split at probably about two-thirds, one-third, credit cards to loans. Portfolio, the receivables, but will be, sort of a bit different to that. But that's what we're looking for. As Gerard said, we, you know, the first half of next year, it'll be pretty steady growth. And then, from there on, again, we'll be growing probably at a bit faster rate because, we're, we're under slight restrictions with the, the payment license, small payment license in Poland. But, you know, we'd obviously be looking to get the full payment license, and that obviously then, that doesn't have any restrictions on credit issued or, or lending growth.
The receivables will be slightly different-
Yes.
- because the average installment loan will be bigger than the credit card.
Yeah. Correct.
Yeah.
Understood. Very helpful. And then just one more from me before I jump back in queue. With the expansion in Mexico, it's great to hear, you know, that Tijuana and Tampico are kind of setting down roots. Is there another leg of expansion expected there? And is that going to coincide with any changes in credit lending standards?
Well, we would expect that we can expand around the Tampico and Tijuana region for some time to come. There are other areas obviously available to us, but for us, it's a question of balancing the amount of investment and, you know, resources, in particular, people resources, that we put into each of these openings. So I would say for the next year, we should be thinking more about those two regions, possibly a third. But we wouldn't need to adjust any of our credit settings. Obviously, when we go into new regions, we're always slightly cautious, but, you know, we've been there for more than 20 years, so we've got plenty of experience on opening them up.
That's very helpful. I appreciate you taking my questions.
No problem.
Our next question comes from Gary Greenwood of Shore Capital. Gary, the line is yours.
Hi, thanks for taking my question. It was just one on IPF Digital this year, looking to rebuild the portfolio there to get scale and return. So I, I'm just wondering how big the portfolio needs to be to get returns back into your target range. Thanks.
Hi, Gary. We sort of, the portfolio is around GBP 220 million-ish at the moment, and we said somewhere, yeah, GBP 280 plus, for us to be hitting around our target return.
That's great. Just in terms of timeframe to get there, is that sort of a two-year view?
Yeah, it is.
Yeah. That's great. Thank you.
Thanks, Gary.
We've received some text questions sent in to us. Firstly, with regards to strong collections performance, have you had to change any processes to deliver this? Is this different from the new credit card business in Poland? And then, have you seen any change in competitive landscape in Poland as the market adapts to new regulations?
Okay, so probably three questions there. So have we had to change any of our collection processes? The short answer is no. They are remarkably consistent. They're tried and tested. But clearly, with an agent workforce, what you can do is you can change the focus if you want to, by varying the commission structure. So you can emphasize more collections than sales, if that's what you want to do. But over the period, it's been very, very consistent. As for Poland, and as to whether collection processes there are different because of the credit card portfolio, yes, they are slightly, because, you know, at the moment, those credit cards are on a monthly cycle for repayment. So a lot of the installment lending would be on a weekly cycle. So there is that difference.
Because they're cards, and obviously they're more digital than you'd expect more of the customers to pay digitally. And the final part of the question was-
Any change.
Any change in competitive landscape in Poland? Yeah, well, we, we noted at the half year that we've seen a couple of exits there. Not big players, but medium-sized to smaller players, and nothing new to report. We do know that some of the players are under stress, let's put it that way. In terms of adapting to the new regulation, clearly, it's been a challenge for everybody, us included, particularly the affordability rules. I have to say that I'm very, very comfortable that we've taken a very conservative stance, stance in terms of the interpretation of those rules, because we want to be on the right side of the regulator. We do know that some of our competitors have taken a more relaxed view of some of those rules. I'm comfortable with where we're sitting on that.
Thank you. Our next question is, just a quick one on the application for a full payment institution license in Poland. Is there any specific reason this might not be granted? And if it isn't, what constraints would there be over your credit card issuance?
Well, there's no specific reason, but what the regulators, that's the KNF, has to do, is they have to look at all of the documentation that an institution provides, and mostly that documentation talks to your capability to run a large card business. So your controls, your ability to have proper control of data, protect consumer information systems, the right people, the right knowledge, and so on. So they review all of that. So I suppose if they were ever going to reject an application, it would be on the basis that they felt something was missing there. Now, my expectation, certainly, is that that wouldn't be the case for us, given the maturity of our business. So I don't see any reason why we wouldn't get our license there.
Thank you. Our next question asks; Could you provide some more detail about where you are attracting customers to the credit card in Poland? And, are they new to IPF or coming from existing customer base?
Well, it's a combination of the two. So at the moment, and this, this should be expected, the majority of the cards we're issuing are to existing customers, because we're trying to convert the portfolio to be more cards rather than just installment lending. When we were in Poland with the team there and the board this week, you know, we went through an enormous amount of data on the card's performance. One interesting statistic was that 66% of all the customers who are taking a card have never had a credit card before. So I think that's a, a really strong point for us in terms of building financial inclusion. As we go forward and the portfolio builds up and more of the portfolio converts to card, then the proportions of new customers versus existing customers taking cards will change.
But that will take some time because clearly we're in the build-up at the moment. Anything else, Gary, you should say about cards, given we were there for the week?
No, I mean, it's the... I mean, the, the level of what is really pleasing to see is that level of transaction per customer increasing. If you remember, probably at half year, it was about 3 retail sort of ATM transactions per customer. We're seeing that being 5. And to your point about obviously the, you know, the 66% of customers have never had a card, it's really good that they're getting the utility and the value from the credit card. So that's been a really pleasing aspect, you know, of the launch of cards in Poland.
We shouldn't forget, because I suppose to some extent, we all take it for granted. But, you know, with the ability to shop online with a credit card type facility, you do get better value for money. So now we're providing that opportunity to our customers for the first time, so we're very pleased with that.
Yeah, and then importantly, credit performance of cards is sort of bang in line with our previous experience on installment loans. So that's obviously very pleasing.
Yeah.
Thank you. Our next question asks, "Any potential impact on regulation with the election of the new government in Poland?
Well, the new government hasn't been elected yet, but yes, it's surely coming. So we reviewed all of that, as I said earlier this week, and our expectation is that a new government will probably be installed in mid-December, early December to mid-December, and likely to be a coalition led by Donald Tusk. Now, our view, based on our knowledge of these parties, is that we're not anticipating change in terms of the regulation that governs our markets. In fact, we're expecting a Tusk-led coalition probably to be more friendly towards industry, because, you know, the current, I suppose, coalition, to some extent, have been bashing international companies, to try and win votes. I think Donald Tusk has a more European-wide view of things. But we don't anticipate any major changes, in the short term anyway.
Thank you. As a final reminder, that's star followed by one to register an audio question, or you can type any questions into the Q&A chat box. Our next question asks, "Can you give a bit more color to the impact of the second Consumer Credit Directive on your business plan?
Well, as you know, not everybody might know, but the Consumer Credit Directive has been around for some time, and it came up for what I think was called a 10-year review. That took a lot of time, a lot of negotiation, and has been formally agreed, and countries have two years to implement this. So there's a further two years to go. Now, what happens then is each of the countries has basically to enact that in their own law. They have to interpret those and see to what extent there's a gap between what they have today and what the updated Consumer Credit Directive says. For us, we believe that what it's going to do is involve different changes to some of our paperwork, so our documentation.
Because a lot of the updated version talks to protecting customers, assessing creditworthiness, doing underwriting in a particular type of way, training our people, and then consumer protection rules in general. So I think, and we spent a lot of time on this because it's been in the middle for some time, I suppose. We feel pretty comfortable that the changes for our business won't be particularly dramatic. We, you know, we'll have changes to make to certain documentation. Some parts of our training will update for this, but in the main, this won't have a big impact in our business going forward.
Thank you. Our next question asks, "Could you provide an update on the funding outlook for 2024?
Yeah, sure. My first point to note there is, as Gerard mentioned, we've got GBP 100 million of headroom that takes us all the way through to Q4 next year. So we've been really pleased with you know, how we've been able to continue accessing funding, particularly actually when you look at the bank facilities that have been renegotiated, as Gerard mentioned, with some big banks in Poland. So Alior, you're there and we've obviously issued the new bond in Poland, and I think that's really a big take for the group, 'cause obviously Poland's going through a big transition. It shows the strength of those relationships, and it shows the strength of our business in Poland. So I've been really pleased with that.
You know, we continue to look at other sources of funding. You know, don't be surprised if there are potentially other bonds in Europe. I mean, clearly you can see we're looking at the retail bond. Actually, you know, given the profile of the group through this year, where our funding requirements, because of the contraction we expected in Poland, haven't been great. We've just been looking to get ahead of the curve on that. Clearly, we're looking at the Eurobond, which you know we've talked about previously and refinancing that, so we're working with our advisors on that. Obviously, what we've been looking at is, as I say, you know, getting some work done now on funding.
You can see that both the retail bond we issued last year and the Eurobond yield have improved quite significantly over the last 12 months. And, you know, that's, that's obviously to do with the execution and strong execution of the group, and also the dialogue we've been having with debt investors. So, you know, we're, we're going really well, and as I say, there will be... You know, we'll continue to look at market conditions and look to refinance the Eurobond when the time is right.
Thank you. Our next question asks: Can you discuss any changes in the spread of annual funding costs as you've been accessing new credit sources?
Yeah. If you look at the, I mean, the margin we're paying with our banks has remained unchanged, in each of the local countries. So that's really good. And that again, as I say, reflects the strength of the relationships we have there. In terms of the bond we've just issued in Poland, the margin on that is pretty similar to what we were paying, or what we paid for the retail bond last year. So that was pleasing to see. So, you know, in terms of our plan and where we've guided that we expect the funding rate to go and the revised yields, impairment rates, and cost income ratios that we set out the half year, it's all tracking where we'd expected it to be.
Our next question asks: Can you share how the Mexico business has grown since the half year?
Sure. So as I mentioned, I think in the earlier call, customer numbers are now 710,000, so that's up 10,000 in the quarter. So the customer growth was about 1.7%, give or take. Lending grew closer to 5%, so receivable is now MNX 185 million. So that was receivables growth of about 7.5%. Revenue yield, pretty much where it was. Impairment rates, for the year as a whole, improving. And the cost-income ratio, nearly bang on 50%. So, you know, all in all, a good set of numbers coming out of Mexico.
Yeah, probably what you also. I'll just add to that. You will know, obviously, that we tightened credit quite, you know, by about 10% in the back end of 2022, and that was just reflected. It was actually mainly certain regions in Mexico. And so what you saw is that really translated into probably Q2 being probably, you know, a bit lighter than you might expect from Mexico, and we said that in the half year, but that was the reflection of David and the team really working on the what we call the operating rhythm of those, you know, three regions that were particularly impacted.
What we can certainly see now in Q3 is that the growth rate being delivered on the back of really good operating rhythm, good credit quality, is getting back to something more like what we'd expect. So, you know, we took action where we saw some little pockets of credit, and that wasn't a cost of living thing, it was just probably in terms of growth rates that we saw in those regions. But we've corrected that, and you can see clearly now that the business is back to growing, you know, as you'd probably expect Mexico to be doing. So it's performing really well.
Thank you. We have no further questions, so I'll hand back for any closing remarks.
Thank you, Jordan, and thank you, everybody, for those questions. So just because the results that you have today are as a result of the work of a very, very dedicated group of colleagues. So across 9 different markets, 5,500 colleagues, 17,000 agents, all focused on delivering for our customers. So a huge thank you to every one of them. The results are very consistent, which I think is what we want and what shareholders want. I'm really pleased with the progress we're making on the treasury side. As I said, for Gary and the treasury team, great work there. And we're looking forward to Q4. You know, momentum is continuing. We are still very mindful that, you know, cost of living crisis is still out there.
It's not easy for people, but we have concluded at this stage, that the reason our customer payment behavior is so consistent for us, is because of the processes that we have in place, and that can only be a good thing. So balance sheet's in good health, P&L and everything else is going well. Good growth, and looking forward to chatting with you all next time, which will be for the Q4 results. But don't forget that we will be doing the webinar in December, and as I said earlier, that will be very much focused on customers, rather, with Tom, our Marketing Director, so that should be quite interesting. Thank you very much, everybody, for joining the call, and if any of you would like to follow up and have a bilateral chat, we're always available. Thanks very much.
Thank you, Jordan, for managing the call for us.