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Non-Standard Finance PLC   -  NSF   

Unaudited Half Year Results to 30 June 2019

Released 07:00 20-Aug-2019

RNS Number : 5509J
Non-Standard Finance PLC
20 August 2019
 

Non-Standard Finance plc

('Non-Standard Finance', 'NSF', the 'Company' or the 'Group')

Unaudited Half Year Results to 30 June 2019

 

20 August 2019

 

Financial highlights

 

§ Continued strong underlying growth in H1 2019, driven by our personalised approach to customer engagement

§ Normalised revenue1 up 12% to £88.3m (2018: £78.9m); reported revenue of £87.1m (2018: £75.1m)

§ Normalised operating profit1 up 28% to £19.5m (2018: £15.2m); reported operating profit of £15.7m (2018: £7.0m)

§ Normalised profit before tax1 up 12% to £6.3m (2018: £5.6m) led by a strong performance in home credit

§ Exceptional charge of £25.3m (2018: £nil) includes fees and costs associated with the offer for Provident Financial plc of £12.7m (2018: £nil) and Loans at Home goodwill impairment of £12.5m (2018: £nil) to give a reported loss before tax2 of £22.8m (2018: reported loss of £2.6m).

§ Half year dividend per share up 17% to 0.7p (2018: 0.6p per share)

§ The 2019 and 2018 results are not strictly comparable as from 1 January 2019, the Group adopted IFRS 16. The context for results set out below provides further details.

 

Operational highlights

 

§ We remain committed to our personalised and responsible approach of lending only once we have met the applicant face-to-face, unless they have a guarantor to support their planned borrowing

§ Total net loan book up 26% to £335.6m (30 June 2018: £267.4m) before fair value adjustments:

Branch-based lending: up 22% with seven new branches opened in the first half

Guarantor Loans: up 53% reflecting further investment and strong market demand

Home credit: down 6%  but with a significant increase in operating profit

§ Further reduction in overall impairment as a percentage of normalised revenue to 24.5% (H1 2018: 25.6%)3

§ Overall customer numbers up 7% driven by branch-based lending (+22%) and guarantor loans (+36%) since 30 June 2018

 

Current trading and outlook

 

§ Current trading: trading in-line with market expectations and we remain cautiously optimistic about the full-year

§ Whilst macroeconomic uncertainties remain, the Group remains resilient and well-placed to meet its objectives

 

Financial summary

 

6 months to 30 June

 

2019

2018

% change

 

 

£'000

£'000

 

Normalised revenue1

 

88,287

78,895

+12%

Reported revenue

 

87,103

75,056

+16%

 

 

 

 

 

Normalised operating profit1

 

19,477

15,173

+28%

Reported operating profit

 

15,686

6,994

+124%

 

 

 

 

 

Normalised profit before tax1

 

6,299

5,620

+12%

Reported (loss) before tax2

 

(22,766)

(2,559)

790%

 

 

 

 

 

Normalised earnings per share4

 

1.64p

1.45p

+13%

Reported (loss) per share

 

(7.44)p

(0.66)p

+1027%

 

 

 

 

 

Half year dividend per share

 

0.7p

0.60p

+17%

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   Rolling 12-month to 31 December 2018

4   Normalised earnings per share in 2019 is calculated as normalised profit after tax of £5.103m divided by the weighted average number of shares of 312,049,682. Normalised earnings per share in 2018 is calculated as normalised profit after tax of £4.551m, divided by the weighted average number of shares of 313,388,139.   

 

John van Kuffeler, Group Chief Executive, said

"The Group delivered another good performance in the first half of 2019 with strong loan book growth and a further reduction in impairment as a percentage of revenues.  We have secured a leading position in three highly attractive segments following a four-year programme of investment.  During this period, Everyday Loans has doubled the size of its loan book, our Guarantor Loans Division has more than doubled and Loans at Home has grown substantially.  Now this phase of significant investment is complete, we expect a greater proportion of future revenue growth to be translated into profit.

"Whilst we believe strongly that a combination with Provident Financial plc would have accelerated the delivery of benefits for customers, employees and shareholders, each of our businesses continued to perform well during the first half. Our strategy remains unchanged and we remain on course to deliver attractive long-term returns through a combination of income and capital growth.

"As well as fees and other deal-related costs, exceptional items in the first half also include an impairment charge for Loans at Home goodwill.  Whilst Loans at Home is highly profitable, is performing strongly and is ahead of plan, the significant decline in the peer group multiples since December 2018 has prompted the impairment of the goodwill asset in the Group's balance sheet.  We are continuing to see a strong level of demand in both branch-based lending and guarantor loans while in the more mature home credit market, demand remains steady.

"Reflecting our cautious optimism about the full year outlook, we have declared a 17% increase in the half year dividend to 0.7p per share."

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 2019 and 30 June 2018 respectively.  

6 months to 30 Jun 19

Normalised5

Branch-based lending

Guarantor loans

Home credit

Central costs

 

NSF plc

 

 

£000

£000

£000

£000

£000

Revenue

43,756

13,840

30,691

-

88,287

Other operating income

221

-

-

-

221

Modification loss

(246)

(41)

-

-

(287)

Impairments

(9,335)

(3,241)

(8,828)

-

(21,404)

Admin expenses

(20,558)

(6,212)

(17,560)

(3,010)

(47,340)

Operating profit (loss)

13,838

4,346

4,303

(3,010)

19,477

Net finance cost

(8,399)

(3,453)

(1,108)

(218)

(13,178)

Profit (loss) before tax

5,439

893

3,195

(3,228)

6,299

 

 

 

 

 

 

 

6 months to 30 Jun 18

Normalised5

Branch-based lending

Guarantor loans

Home credit

Central costs

 

NSF plc

 

 

£000

£000

£000

£000

£000

Revenue

35,802

9,897

33,196

-

78,895

Other operating income

890

-

-

-

890

Modification loss6

-

-

-

-

-

Impairments

(6,998)

(1,416)

(11,653)

-

(20,067)

Admin expenses

(17,669)

(4,593)

(19,497)

(2,786)

(44,545)

Operating profit (loss)

12,025

3,888

2,046

(2,786)

15,173

Net finance cost

(5,637)

(2,583)

(1,271)

(62)

(9,553)

Profit (loss) before tax

6,388

1,305

775

(2,848)

5,620

 

 

 

 

 

 

5     Excludes fair value adjustments, amortisation of acquired intangibles and exceptional items

 

6     As at 30 June 2018, the Group had not yet finalised the application of IFRS 9. Per the annual audited accounts for the year ended 31 December 2018, it was concluded that as a result of the Group's forbearance activities, a modification gain or loss may be recognised in respect of rescheduled loans. The Group has recognised a modification loss in the six months ended 30 June 2019 in line with the approach taken and reflected in the annual audited accounts for the year ended 31 December 2018. We have not restated for the six months ended 30 June 2018.

 

 

Context for the results

§ The 2019 and 2018 results are not strictly comparable as from 1 January 2019 the Group adopted IFRS 16 Leases, a new accounting standard covering Leases which replaces IAS 17 Leases. As permitted by IFRS 16, the Group has applied IFRS 16 using the modified retrospective approach, without restatement of the comparative information. Refer to notes to the financial statements for the transitional impact of IFRS 16.

 

§ As at 30 June 2018, the Group had not yet finalised the application of IFRS 9. Per the annual audited accounts for the year ended 31 December 2018, it was concluded that as a result of the Group's forbearance activities, a modification gain or loss may be recognised in respect of rescheduled loans. The Group has recognised a modification loss in the six months ended 30 June 2019 in line with the approach taken and reflected in the annual audited accounts for the year ended 31 December 2018. We have not restated for the six months ended 30 June 2018 and therefore comparative KPIs are for the rolling twelve month period to 31 December 2018.

 

§ The 2019 and 2018 reported results include fair value adjustments, amortisation of acquired intangibles and exceptional items. There were no exceptional items in 2018. 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.

 

Analyst meeting, webcast and dial-in details

There will be an analyst meeting at 9.30 am on 20 August 2019 for invited UK-based analysts at the offices of Liberum, Ropemaker Place, 25 Ropemaker Street, London EC2Y 9LY. The meeting will be simultaneously broadcast via webcast and conference call. To watch the live webcast, please register for access by visiting the Group's website www.nsfgroupplc.com. Details for the 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, 20 August 2019

09.20 am

Please call +44 (0)330 336 9125

Access code

3540398

9.30 am

Meeting starts

 All times are British Summer Time (BST).

 

For more information:

 

Non-Standard Finance plc

John van Kuffeler, Group Chief Executive

Nick Teunon, Chief Financial Officer

Peter Reynolds, Director, IR and Communications

 

+44 (0) 20 3869 9020

Finsbury

Faeth Birch

Michael Turner

Angharad Knill

 

+44 (0) 20 7251 3801

 

About Non-Standard Finance

Non-Standard Finance plc is listed on the main market of the London Stock Exchange (ticker: NSF) and was established in 2014 to acquire and grow businesses in the UK's non-standard consumer finance sector. Under the direction of its highly experienced main board, the Company has acquired a sustainable group of businesses offering credit to the c.10-12 million UK adults who are not served by (or choose not to use) mainstream financial institutions. Its three business divisions are: unsecured branch-based lending, guarantor loans and home credit.  Each division is fully authorised by the FCA and has benefited from significant investment in branch expansion, recruitment, training and new IT infrastructure and systems. These investments have supported the delivery of improved customer outcomes together with growing financial returns for shareholders. 

 

 

Group Chief Executive's statement

Introduction

NSF is a leading player in the UK's non-standard finance market with leadership positions in three attractive 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 adults7 that are either unable or unwilling to borrow from mainstream banks and other lenders.

7 UK Specialist Lending Market Trends and Outlook 2018. Executive insights Volume XX, Issue 39 - L.E.K Consulting

Results

In the six months to 30 June 2019 the Group grew normalised revenue before fair value adjustments by 12% to £88.3m (2018: £78.9m) and normalised operating profit by 28% to £19.5m (2018: £15.2m).  Reported revenue, which is after fair value adjustments was £87.1m (2018: £75.1m); reported operating profit was £15.7m (2018:  £7.0m) and reported loss before tax, which was after an exceptional charge of £25.3m (2018: £nil), was £22.8m (2018: £2.6m). 

The combined net loan book across all three divisions as at 30 June 2019 grew by 26% from £267.4m at 30 June 2018 to £335.6m before fair value adjustments and by 23% to £338.7m after fair value adjustments. 

Branch-based lending

We opened seven new branches as planned during the first half of 2019 with an eighth branch opened in July 2019.  As a result, we now have a total of 73 branches open, which is more than double the number when we acquired the business in April 2016.  Whilst the new branch openings incurred additional costs in the first half, the business delivered a 15% increase in normalised operating profit to £13.8m (2018: £12.0m).

Guarantor loans

By providing borrowers with access to credit, usually at a significantly lower cost than they would be able to achieve borrowing on their own, the demand for guarantor loans remains strong.  In the six months to 30 June 2019 revenue grew by 40% to £13.8m (2018: £9.9m) and normalised operating profit was up 12% to £4.3m (2018: £3.9m).  The rate of loan book growth remains above our medium-term target of 30% and we continue to take market share from competitors.

Home credit

Loans at Home delivered a strong performance in the period.  This was achieved by shortening the average term of loans issued and improving the quality of our customer base.  The small decline in the net loan book in the first half was more than compensated by a marked reduction in impairment as a percentage of revenue.  As a result, normalised operating profit increased by 110% to £4.3m (2018: £2.0m) and bodes well for a strong performance in the seasonally important second half of the year.  Despite this strong performance, which was ahead of our budget for the first half of 2019, the significant decline in the valuations of all the listed companies in the non-standard sector since the end of 2018 means that we have reduced the carrying value of goodwill on the balance sheet by £12.5m.

Business strategy

Our long-term vision and strategy for the Group is unchanged.  We continue to see significant opportunity for the Group with approximately 10 million adults either unwilling or unable to access credit from more mainstream banks and financial institutions. 

We remain focused on our three chosen sub-segments of the non-standard market: branch-based lending, guarantor loans and home credit.  Having completed what has been a period of significant investment over the past four years, the Group is a top three player in all three segments, has high risk-adjusted margins and is well-positioned to deliver good customer outcomes and drive attractive long-term equity returns.  These outcomes and returns will flow from the continued execution of the three elements of our business strategy:

·      be a leader in each of our chosen segments;

·      invest in our core assets (networks, people, technology and brands); and

·      act responsibly.

 

Debt funding

The Group's debt facilities currently comprise a £285m term loan facility (the 'Term Loan'), provided by a group of institutional investors, led by Alcentra Limited. 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 £45m revolving credit facility provided by Royal Bank of Scotland at an interest rate of LIBOR plus 3.5% per year.

As at 30 June 2019 the Group had cash at bank of £17.4m (31 December 2018: £13.9m) and gross borrowings of £302.7m (31 December 2018: £272.8m) leaving total headroom on the Group's debt facilities of £27.3m (31 December 2018: £57.2m). 

The Group is in advanced discussions regarding an additional, lower cost debt facility that will be used to fund further growth and underpin the Group's long-term plans.  Whilst such discussions have not yet concluded, it is hoped that we will be in a position to make a further announcement in due course.

Regulation

The Group is dedicated to the delivery of good customer outcomes and seeks to be at the vanguard of best practice in the non-standard finance sector.  Whilst the Group has continued to invest in the careful management of its regulatory and other risks, during the first half of 2019 the following developments are of particular relevance to the Group's business:   

·      FCA review of guarantor loans - During a speech given on 21 March 2019, Jonathan Davidson, Executive Director of Supervision at the FCA, announced that the FCA had identified some potential concerns in the guarantor loans market regarding affordability checks and the level of guarantors' understanding of their obligations before entering into a legally binding agreement. Since then, the FCA has requested a variety of data from operators across the sector and is continuing to broaden its understanding of best practice across the industry.  We believe that our policies, procedures and day-to-day working practices are delivering good customer outcomes and we are continuing to engage with the FCA on these and other related topics.   

·      Breathing space - in June 2019, HM Treasury published its response to the Government's so-called 'breathing space' proposal setting out a summary of the proposed operating framework and how it is expected that this will work in practice.  The Government's proposal is centred around providing debtors with a 60 day period during which they will be left alone by creditors in order to fully engage with debt advice and seek a sustainable solution to their debts.  Whilst a number of issues remain to be clarified including eligibility for the scheme, which debts can be included and how borrower's data will be recorded, the full and final details of the scheme are expected to be contained in legislation due to be laid before parliament in the autumn of 2019 and becoming law some time in 2021.

·      Vulnerable customers - in July 2019, the FCA launched a consultation (GC19/3) seeking feedback on a series of guidance proposals on how regulated firms are expected to interact with vulnerable customers.  With the benefit of this feedback, the FCA will then publish revised draft guidance, including a cost benefit analysis as well as details and a further consultation on any further interventions that it deems necessary.

·      Senior Managers and Certification Regime ('SM&CR') - From December 2019 all consumer credit firms will be affected by the SM&CR which replaces the Approved Persons regime.  Each of the Group's businesses is well advanced in its preparations for the change and on course to comply by the due date.

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. 

Half year dividend

The Board is declaring a 17% increase in the half year dividend to 0.7p per share (2018: 0.6p) with a total half year dividend pay-out of approximately £2.2m (2018: £1.9m) or 43% of normalised post-tax profits. 

The half year dividend of 0.7p per share (2018: 0.6p) will be payable on 17 October 2019 to those shareholders on the register of shareholders on 20 September 2019 (the 'Record Date').

Current trading and outlook

Since the end of June 2019, the Group has continued to experience strong loan book growth in both branch-based lending and guarantor loans while in the more mature home credit market, demand remains steady.  As a result, whilst macroeconomic uncertainties continue, with a leading market position in each of our chosen segments, high risk-adjusted margins and long-term funding in place, we believe we are well-placed for the future and remain cautiously optimistic about the full year outlook.

John de Blocq van Kuffeler

Group Chief Executive

20 August 2019
 

Financial review

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

2019

2019

2019

 

Normalised8

Fair value adjustments, amortisation of acquired intangibles and exceptional items

Reported

 

£'000

£'000

£'000

Revenue

88,287

(1,184)

87,103

Other operating income

221

-

221

Modification loss

(287)

-

(287)

Impairments

(21,404)

-

(21,404)

Admin expenses

(47,340)

(2,607)

(49,947)

Operating profit (loss)

19,477

(3,791)

15,686

Exceptional items9

-

(25,274)

(25,274)

Profit before interest and tax

19,477

(29,065)

(9,588)

Finance cost

(13,178)

-

(13,178)

Profit (loss) before tax

6,299

(29,065)

(22,766)

Taxation

(1,196)

745

(451)

Profit (loss) after tax

5,103

(28,320)

(23,217)

 

 

 

 

Loss per share

1.64p

 

(7.44)p

Dividend per share

0.70p

 

0.70p

 

6 months to 30 June

2018

2018

2018

 

Normalised8

Fair value adjustments and amortisation of acquired intangibles

Reported

 

£'000

£'000

£'000

Revenue

78,895

(3,839)

75,056

Other operating income

890

-

890

Impairments

(20,067)

-

(20,067)

Admin expenses

(44,545)

(4,340)

(48,885)

Operating profit (loss)

15,173

(8,179)

6,994

Finance cost

(9,553)

-

(9,553)

Profit (loss) before tax

5,620

(8,179)

(2,559)

Taxation

(1,069)

1,554

485

Profit (loss) after tax

4,551

(6,625)

(2,074)

 

 

 

 

Loss per share

1.45p

 

(0.66)p

Dividend per share

0.60p

 

0.60p

8 Normalised figures, adjusted to exclude fair value adjustments, amortisation of acquired intangibles and exceptional items

9 Refer to note 5 in the notes to the financial statements for further detail

Normalised revenue was up 12% to £88.3m (2018: £78.9m) reflecting strong growth in both branch-based lending and guarantor loans that more than offset a small reduction in home credit which benefited from a significant improvement in the quality of its loan book.  Underlying this performance was strong loan book growth in both branch-based lending and guarantor loans.

The increased cost of expansion in both branch-based lending and guarantor loans was mitigated by further cost efficiencies in home credit with the result that overall administration costs on a normalised basis increased by 6% to £47.3m (2018: £44.5m) and the cost:income ratio over the 12 months to 30 June fell from 56.5% to 53.6%.   The net result was that normalised operating profit increased by 28% to £19.5m (2018: £15.2m).

The net loan book before fair value adjustments grew by 26% as summarised below:

 

Reconciliation of net loan book

 

2019

Normalised

2019

Fair value
adjustments

2019

Reported

2018

Normalised

2018

Fair value
adjustments

2018

Reported

 

£m

£m

£m

£m

£m

£m

Branch-based lending

203.8

-

203.8

166.6

2.0

168.6

Guarantor loans

96.3

3.1

99.4

62.9

6.2

69.1

Home credit

35.5

-

35.5

37.8

-

37.8

Total

335.6

3.1

338.7

267.4

8.2

275.6

Finance costs increased by 38% to £13.2m (2018: £9.6m), driven by the strong loan book growth in both branch-based lending and guarantor loans mitigated in part by positive seasonal cash flow from home credit.  As a result, normalised profit before tax was up 12% to £6.3m (2018: £5.6m) and the reported loss before tax (after fair value adjustments, amortisation of acquired intangibles and exceptional items of £29.1m (2018: £8.2m)), was £22.8m (2018: loss before tax of £2.6m). Normalised earnings per share were 1.64p, a 13% increase over the prior year (2018: 1.45p), while exceptional items, fair value and other accounting adjustments meant that the Group's reported loss per share was 7.44p (2018: loss per share of 0.66p).

A detailed review of each of the operating businesses is outlined below on both a normalised as well as a reported basis.

Divisional review

Branch-based lending

Everyday Loans is the market-leader in its field and has doubled in size since it was acquired in 2016.  It is also the largest contributor to the Group's overall financial performance.  The business has now passed through the significant milestone of net loan book (before fair value adjustments) of £200m reaching £203.8m by 30 June 2019, a 22% increase over the prior year (2018: £166.6m).  The number of active customers has also continued to grow strongly, up by 22% versus the prior year to 67,400 (2018: 55,300), driven by the opening of a further seven new branches in the period and growth across the network.  With the opening of an eighth branch in July 2019, there are now 73 branches open, up from 64 at the end of June 2018. 

 

What makes our model different from many of our competitors is that, as well as offering customers all of the digital touchpoints when they apply for a loan and conducting all of the digital checks and procedures carried out by the fintech sectors, we also seek to meet all of our customers face-to-face.  Building personal relationships with our customers and conducting our underwriting face-to-face has proven to be a powerful and profitable model. Building personal relationships remains essential, even in the digital age and although it requires a large network of branches and highly trained staff, the cost is more than outweighed by the relatively low levels of impairment and the delivery of good customer outcomes that our model has achieved versus other providers - a position we have maintained since taking control of the business in April 2016.  As a result, we believe that in the event of any economic downturn, we are in a relatively strong position.

Financial results

6 months to 30 June

2019

2019

2019

 

 

Normalised10

Fair value adjustments

Reported

 

£'000

£'000

£'000

Revenue

43,756

-

43,756

Other operating income

221

-

221

Modification loss

(246)

-

(246)

Impairments

(9,335)

-

(9,335)

Admin expenses

(20,558)

-

(20,558)

Operating profit

13,838

-

13,838

Finance cost

(8,399)

-

(8,399)

Profit before tax

5,439

-

5,439

Taxation

(1,033)

-

(1,033)

Profit after tax

4,406

-

4,406

 

 

 

 

 

 

 

 

6 months to 30 June

2018

2018

2018

 

 

Normalised10

Fair value adjustments

Reported

 

£'000

£'000

£'000

Revenue

35,802

(1,979)

33,823

Other operating income

890

-

890

Modification loss

-

-

-

Impairments

(6,998)

-

(6,998)

Admin expenses

(17,669)

-

(17,669)

Operating profit

12,025

(1,979)

10,046

Finance cost

(5,637)

-

(5,637)

Profit before tax

6,388

(1,979)

4,409

Taxation

(1,214)

376

(838)

Profit after tax

5,174

(1,603)

3,571

 

 

 

 

 

10 Normalised figures, adjusted to exclude fair value adjustments, amortisation of acquired intangibles and exceptional items

 

IFRS 9 Key Performance Indicators11

2019

2018

Number of branches

72

65

Period end customer numbers (000)

67.4

61.2

Period end loan book (£m)

203.8

186.2

Average loan book (£m)

188.1

170.0

Revenue yield

46.2%

46.8%

Risk adjusted margin

36.1%

36.7%

Impairments/revenue

21.8%

21.5%

Impairment/average loan book

10.1%

10.1%

Cost to income ratio

45.3%

45.9%

Return on asset

15.3%

15.8%

11 Key performance indicators have been provided using normalised data only. All definitions are as per glossary. 2018 KPIs are rolling 12 months to 31 December 2018.

Revenue grew by 22% to £43.8m (2018: £35.8m) thanks to annual growth in the net loan book (before fair value adjustments) of 22% to £203.8m (2018: £166.6m). As the fair value adjustment made to the loan portfolio at the time of acquisition has now been fully unwound, reported revenue was also £43.8m (2018: £33.8m). A sale of non-performing loans in the period resulted in other operating income of £0.2m (2018: £0.9m).

Impairment as a percentage of revenue on a rolling 12-month basis was 21.8%, broadly in-line with that achieved for the full year in 2018 and within our previous guidance of between 20-22%.  Having opened seven new branches in the first half (and an eighth branch in July), additional investment in premises, new staff and training together with the cost of organic business growth meant that administrative expenses grew by 16% to £20.6m (2018: £17.7m).  Total normalised operating profit increased by 15% to £13.8m (2018: £12.0m).

Finance costs increased to £8.4m (2018: £5.6m) reflecting the continued loan book growth and network expansion with the result that, despite strong growth in operating profit, pre-tax profits in the first half were lower than the prior year.  As was the case in 2018, with the absence of any branch openings in the second half and an improvement in the performance of branches opened in previous periods, it is expected that this position will reverse in the second half of 2019.

As noted above, on a reported basis the absence of any fair value adjustments meant that revenue was up 29% to £43.8m (2018: £33.8m) and reported operating profit was up 38% to £13.8m (2018: £10.0m). Reported profit before tax increased by 23% to £5.4m (2018: £4.4m).

Key drivers for the business include network capacity, lead volume and quality, network productivity and management of impairment.  A summary of our progress on each of these drivers is highlighted below. 

Network capacity - We opened three new branches in March 2019 (Kingswood Bristol, Wigan and Scunthorpe) a further four in April 2019 (Darlington, Oldham, Erdington and Slough) and Dunfermline in July 2019.  Reducing the distance that applicants have to travel to come into a branch is one factor that can help us to further improve our conversion of pre-screened applications into loans (see below), a factor that enhances our appeal to brokers that are harvesting leads from a variety of sources.

Lead volumes and quality - The continued expansion of our branch network has required that we maintain a healthy flow of quality leads from a variety of sources. In the six months to 30 June 2019, we received a total of 1.24m new borrower applications (2018: 761,400) of which 234,700 (2018: 177,700) successfully passed through our screening criteria and were then sent to the branches for a more detailed assessment.  Financial brokers remain our most important source of applications and in the six months to 30 June represented 88% of the total (2018: 84%) and 50% of the number of loans booked (2018: 51%).  Of the balance, 22% of loans booked came to us direct (2018: 25%) and 28% came from existing or former borrowers (2018: 24%).

Productivity - We wrote a record number of 24,833 loans in the first six months of 2019 (2018: 21,958).  Whilst this was achieved with a record number of branches and full time employees, we are clear that increasing productivity can provide an additional source of profitable growth.  A newly established 'productivity forum' comprising key managers from across the business is now identifying, developing and then allocating responsibility for new initiatives designed to help drive maximum value from our existing infrastructure.  As well as inducting the 72 new staff that joined the business in the period, we have also produced a number of training videos for all staff that include tips and helpful advice from some of their most experienced colleagues on how to improve their own individual performance and that of their branch.

Delinquency management - Careful control of impairment is vital for any lending business and it was therefore pleasing to see the recent trends continue during the first half of 2019, with impairment as a percentage of average net receivables steady at 10.1% (2018: 10.1%) and against revenue it was up slightly at 21.8% (2018: 21.5%).

Plans for the rest of 2019

Having more than doubled the size of the branch network in three years, we now have a presence in most of the UK's larger population centres and in some locations we already have more than one branch.  Whilst this has meant we have been able to meet our medium-term target of 20% loan book growth in each of the last two years, the rapid expansion since 2016 has also delayed reaching our target of a 20% return on assets12

 

We continue to see scope for a network of over 100 branches.  However, in order to bring forward the achievement of our medium-term target of 20% return on assets, we now plan to open fewer branches each year than we have in the past, thereby allowing the full benefit of the improving performance of recently opened branches to feed through into operating profit, which we expect will increase earnings and overall returns.  A more moderate pace of expansion should also help us to maintain a tight control on impairment which we continue to expect will be between 20-22% of revenue.

 

12 Normalised operating profit before central costs as a percentage of average net receivables excluding fair value adjustments

Guarantor loans

The FCA estimates that the guarantor loans market is worth approximately £1 billion of receivables13 which is a significant increase from the £440 million of receivables that it estimated was outstanding just three years ago14.   This market continues to grow rapidly, providing credit at mid-cost interest rates to those who would otherwise be at risk of being excluded or having to borrow at higher rates, thus providing a vital lifeline to those who may have suffered a financial shock or unexpected expense, frequently not of their own making.

 

Having acquired George Banco in August 2017, guarantor loans is now the Group's second largest division with a net loan book before fair value adjustments of £96.3m at 30 June 2019, an increase of 53% versus the prior year (2018: £62.9m).  This growth reflects continued strong demand for a product that in most cases enables the borrower to obtain credit at a much lower cost than were they to borrow on their own.  By performing well and making their repayments as due, borrowers can also benefit by rebuilding or improving their credit score over time so that they can return to mainstream lending at some point in the future. 

           

Unlike our other two divisions, the presence of a guarantor means that our lending criteria are different and we do not need to meet customers face-to-face before making a loan.  However, in all cases we spend a considerable amount of time on the phone with both the borrower and the guarantor as part of our underwriting process, building a relationship with them both and ensuring that each understands clearly all of their respective obligations, how the loan product works in practice and ensuring that both the borrower and the guarantor (in the event of default) are capable of repaying the loan. We also explain carefully what happens when and if a payment is missed. 

13 Speech by Jonathan Davidson, Executive Director of Supervision - Retail and Authorisations at the FCA, 21 March 2019

14 High-Cost Credit Review Technical Annex 1 - FCA, July 2017

Financial results

The strong growth in net loan book fed through into a meaningful uplift in normalised revenue that grew by 40% to £13.8m (2018: £9.9m).  The benefit of this growth was partially offset by an increase in impairment following the strategic relocation of the TrustTwo collections function to the division's Trowbridge premises which caused some disruption, together with an increase in admin expenses due to a further increase in headcount (see details below).  The result was that normalised operating profit was up 12% to £4.3m (2018: £3.9m).  The pace of growth in the net loan book drove the increase in finance costs meaning that normalised pre-tax profits were down slightly to £0.9m (2018: £1.3m), although we expect this position to reverse during the second half.

6 months to 30 June

2019

2019

2019

 

 

Normalised15

Fair value adjustments

Reported

 

£'000

£'000

£'000

Revenue

13,840

(1,184)

12,656

Modification loss

(41)

-

(41)

Impairments

(3,241)

-

(3,241)

Admin expenses

(6,212)

-

(6,212)

Operating profit

4,346

(1,184)

3,162

Net finance cost

(3,453)

-

(3,453)

Profit/(loss) before tax

893

(1,184)

(291)

Taxation

(169)

225

56

Profit/(loss) after tax

724

(959)

(235)

 

 

 

 

 

6 months to 30 June

2018

2018

2018

 

 

Normalised15

Fair value adjustments

Reported

 

£'000

£'000

£'000

Revenue

9,897

(1,860)

8,037

Modification loss

-

-

-

Impairments

(1,416)

-

(1,416)

Admin expenses

(4,593)

-

(4,593)

Operating profit

3,888

(1,860)

2,028

Net finance cost

(2,583)

-

(2,583)

Profit/(loss) before tax

1,305

(1,860)

(555)

Taxation

(248)

353

105

Profit/(loss) after tax

1,057

(1,507)

(450)

 

 

 

 

 

15 Normalised figures, adjusted to exclude fair value adjustments and amortisation of acquired intangibles

 

IFRS 9 Key Performance Indicators16

2019

2018

 

 

 

Period end customer numbers (000)

28.5

25.1

Period end loan book (£m)

96.3

83.1

Average loan book (£m)

81.4

67.6

Revenue yield

31.3%

32.2%

Risk adjusted margin

24.0%

25.8%

Impairment/revenue

23.3%

20.0%

Impairment/average loan book

7.2%

6.4%

Cost to income ratio

44.3%

45.9%

Return on asset

10.1%

11.3%

16 Key performance indicators have been provided using normalised data only. 2018 KPIs are rolling 12 month to 31 December 2018.

All definitions are as per glossary.

A summary of our progress on the key business drivers during the first half of 2019 is set out below:

Lead volumes and quality - We continue to attract a large number of leads through a broad range of channels with the broker channel remaining the most significant at 54% of the total (2018: 53%),.  The strength of our broker relationships has meant that lead quality has improved with the result that whilst the overall number of leads reduced by 6% to 1.17m (2018: 1.25m), the number of qualified applications passing through our screening criteria increased by 12% to 415,400 (2018: 372,000) implying a pass-through rate of 35% (2018: 30%). Top-ups to existing borrowers remains tightly controlled and whilst it increased slightly to 21% of the total versus 18% for the whole of 2018, the bulk of loans issued were to new customers with the result that the number of active customers increased by 36% to 28,500 versus the prior year and up 14% since the year end.

Productivity - From the qualifying applications received we wrote a total of 9,840 loans which was an increase of 21% versus the prior year (2018: 8,150) with an improved conversion rate of 2.37% (2018: 2.19%).  The value of loans booked in the period increased by 25% to £37.3m (2018: £29.9m) which was an all-time record for the division in a six month period.  Having increased the number of operational staff by 43% versus a year ago, we experienced a temporary dip in average volume per employee, but with our continued focus on training and the launch of a 'productivity forum' similar to that in place at Everyday Loans, we believe that we can improve productivity further and look forward to sharing details of our progress in due course.

Delinquency management - As part of our efforts to scale up our operations as well as ensure a consistent approach across both the TrustTwo and George Banco brands, during the first half we moved all of our collections activities to a single site at the Division's new premises in Trowbridge.  While this caused some disruption and a consequent increase in impairment to 23.3% of revenue during the first half, this was only slightly above our previous guidance of 20-22%.  The operational issues are being addressed and we remain focussed on ensuring that the rate of impairment returns to being within our previous guidance by the year end.

Plans for the rest of 2019

Returning our collections performance to within our previously guided range of 20-22% of revenue is a key priority, as is our focus on raising productivity.  The execution of a number of initiatives already identified by the productivity forum, together with a much improved customer journey following completion of the final piece of the technical integration in July 2019 should help to drive performance in the second half.  Productivity should also benefit from an improved performance from the 30 operational staff  were added during the first half of 2019.

Home credit

After the significant investment in new agents, offices and associated infrastructure that took place in both 2017 and 2018, our focus during the first half of 2019 has been on delivering a significant step-up in profitability.  We have also made good progress in shortening our loan book as well as rolling out further improvements to our suite of online apps in conjunction with a number of new operational processes and procedures. Whilst our focus on quality customers meant that there was a small decline in both the number of customers and net loan book compared with the end of December 2018, the business delivered a strong growth in operating profit thanks to a marked reduction in the rate of impairment and careful management of operating costs.

Like branch-based lending, our home credit business is founded upon building face-to-face relationships with our customers. As well as facilitating the weekly collection, regular personal contact also provides us with the very latest information regarding a customer's circumstances, ensuring we are best-placed to make an informed decision on new lending or whether or not to provide due forbearance should the customer face difficulty regarding their repayments.  We believe that this delivers consistently better customer outcomes than remote lending where there is no face-to-face contact.

Following completion of the FCA's review into high-cost credit, home credit firms were required to effect a number of operational changes including to provide consumers with a comparison of the relative costs of refinancing an existing loan versus taking out an additional loan.  At the same time, new rules on when and how an agent can discuss a new loan with their customers has also been introduced.  All of these changes were embedded into our systems and processes on time and after some early uncertainty, both agents and customers are now much better informed and familiar with the new rules and procedures. 

As part of our ongoing efforts to improve performance, in addition to the continuous evolution of our management information systems and controls, we are testing a new scorecard for our better-performing agents to see whether performance improves if they are given a greater degree of flexibility regarding their underwriting decisions, based upon their historic performance and ability to underwrite effectively. 

Financial results

As at 30 June 2019, Loans at Home had a network of 892 self-employed agencies serving approximately 91,600 customers (2018: 98,500).  With a clear focus on improving its quality, the net loan book was down slightly on the previous year at £35.5m (2018: £37.8m).  Whilst making good progress on our stated objective of shortening the loan book, a proportion of customers with longer-term loans are choosing to either delay the replacement of existing loans with shorter-term ones and/or are seeking to reduce their level of borrowing so as to avoid any increase in their weekly repayment amount. Whilst we expect that this effect will unwind over time, the impact in the first half was that new loan issuance was lower than expected.

The average yield on newly issued loans improved but given the reduction in loan issuance and the size of the net loan book, revenue was down to £30.7m (2018: £33.2m). However, with a significant uplift in the quality of the loan book as well as the benefit of an improved collections performance, the rate of impairment as a percentage of revenue declined to 31.9% for the twelve month period to 30 June 2019 from 32.6% in the twelve months to 31 December 2018 - well below our previously guided range of 33-37%. 

A revised organisation structure was put in place in January 2019 and, together with a concerted effort to control other key operating costs, contributed to a 10% reduction in administration costs that fell to £17.6m (2018: £19.5m). The net result was that the rolling 12-month cost:income ratio fell to 56.3% (December 2018: 57.1%) and normalised operating profit was up substantially to £4.2m (2018: £2.0m). Exceptional costs of £0.1m (2018: £nil) were recognised in relation to the management restructuring. The reduction in net loan book coupled with the highly cash generative characteristics of our business, meant that finance costs fell to £1.1m (2018: £1.3m) and normalised pre-tax profit increased more than three-fold to £3.2m (2018: £0.8m), with reported profit before tax increasing to £3.1m
(2018: £0.8m).

 

6 months to 30 June

2019

2019

2019

2018

 

Normalised17

Exceptional items18

Reported

Reported

 

£'000

£'000

£'000

£'000

Revenue

30,691

-

30,691

33,196

Impairments

(8,828)

-

(8,828)

(11,653)

Admin expenses

(17,560)

-

(17,560)

(19,497)

Operating profit

4,303

-

4,303

2,046

Exceptional items

-

(129)

(129)

-

Profit before interest and tax

4,303

(129)

4,174

2,046

Finance cost

(1,108)

-

(1,108)

(1,271)

Profit before tax

3,195

(129)

3,066

775

Taxation

(607)

25

(583)

(147)

Profit after tax

2,588

(104)

2,483

628

 

 

 

 

 

 

IFRS 9 Key Performance Indicators19

 

 

2019

2018

 

 

 

 

 

Period end agent numbers

 

 

892

897

Period end number of offices

 

 

67

66

Period end customer numbers (000)

 

 

91.6

93.8

Period end loan book (£m)

 

 

35.5

41.0

Average loan book (£m)

 

 

37.9

38.0

Revenue yield

 

 

165.5%

171.5%

Risk adjusted margin

 

 

112.7%

115.6%

Impairments/revenue20

 

 

31.9%

32.6%

Impairment/average loan book20

 

 

52.8%

55.9%

Cost to income ratio

 

 

56.3%

57.1%

Return on asset

 

 

19.5%

17.7%

17 Normalised figures are before fair value adjustments, amortisation of acquired intangibles and exceptional items.

18 Refer to note 5 in the notes to the financial statements for further detail

19 Key performance indicators have been provided using normalised data only. 2018 KPIs are rolling 12 month to 31 December 2018. All definitions are as per glossary and above.

20 For the 12 months to 30 June 2019 the impairment KPIs have been adjusted upwards to smooth the impact of the adoption of revised provisioning levels in October 2018.

 Plans for the rest of 2019

We are continuing to attract a small number of high quality third-party agents that are keen to join Loans at Home which is helping us to maintain a low vacancy rate at below 4% and is also presenting opportunities to expand our geographic coverage. Following some positive responses to a number of recent marketing initiatives, we are testing similar initiatives across other locations with a view to attracting new customers and boost lending volumes. As well as continuing to evolve our online applications for agents and managers, we are trialling a new customer portal that allows customers to check their balance, make a payment or enquire about a new loan.  As well as reducing the total cost of credit for our customers, by shortening the loan book and reducing the proportion of loans in issue with a term longer than 12 months we should start to see an improvement in revenue yield and return on assets.

 

Central costs

6 months to 30 June

2019

Normalised21

2019

Amortisation of acquired intangibles and exceptional items

2019

Reported

 

£000

£000

£000

Revenue

-

-

-

Admin expenses

(3,010)

(2,607)

(5,617)

Exceptional items22

-

(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)

 

 

 

 

 

6 months to 30 June

2018

Normalised21

2018

Amortisation of acquired intangibles

2018

Reported

 

£000

£000

£000

Revenue

-

-

-

Admin expenses

(2,786)

(4,340)

(7,126)

Exceptional items

-

-

-

Operating loss

(2,786)

(4,340)

(7,126)

Net finance (cost)/income

(62)

-

(62)

Loss before tax

(2,848)

(4,340)

(7,188)

Taxation

540

825

1,365

Loss after tax

(2,308)

(3,515)

(5,823)

 

 

 

 

21 Adjusted to exclude exceptional items (refer to notes to the financial statements note 5), as well as the amortisation of acquired intangibles related to the acquisition of Loans at Home, Everyday Loans and George Banco.

22 Refer to note 5 in the notes to the financial statements for further detail

Normalised administrative expenses for the period increased by 8% to £3.0m (2018: £2.8m) reflecting further investment in our governance and risk management controls.  In addition, the Group incurred a reduced charge of £2.6m relating to the amortisation of intangible assets (2018: £4.3m) recognised on the acquisition of Everyday Loans and George Banco. 

In the 6 months ended 30 June 2019 the Group incurred exceptional costs totalling £25.1m (including VAT) (2018: £nil). These related to £12.7m 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 £12.5m impairment loss on the Loans at Home goodwill asset (see note 10) and £0.1m of restructuring costs at  Loans at Home that took place in January 2019.

IFRS 16

From 1 January 2019 the Group adopted a new accounting standard: IFRS 16 Leases, replacing the previous standard, IAS 17 Leases.  With a sizeable portfolio of leases in both branch-based lending and home credit, the Group has incurred an additional interest charge of £0.5m in the six months ended 30 June 2019, partly offset by a reduction of £0.3m in administrative expenses. As at 1 January 2019, the impact of the adoption of IFRS 16 was a decrease in net assets of £0.3m. Please refer to note 3 in the notes to the financial statements for further details. 

 

 

Principal risks

There are a number of potential risks and uncertainties which could have a material impact on the Group's performance over the remaining six months of the financial year and could cause reported and normalised results to differ materially from expected and historical results.

The principal risks facing the Group, together with the Group's risk management process in relation to these risks, are unchanged from those reported in the Group's Annual Report for the period ended 31 December 2018 (which is available for download at www.nsfgroupplc.com) and relate to the following areas:

 

§  Conduct - risk of poor outcomes for our customers or other key stakeholders as a result of the Group's actions;

 

§  Regulation - risk through changes to regulations or a failure to comply with existing rules and regulations;

 

§  Credit - risk of loss through poor underwriting or a diminution in the credit quality of the Group's customers;

 

§  Business strategy - risk that the Group's strategy fails to deliver the outcomes expected;

 

§  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, taxation, health and safety as well as disaster recovery and business continuity risks;

 

reputational - a failure to manage one or more of the risks above 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;

 

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;

 

§  Liquidity - whilst the Group is well-capitalised with £285m of committed debt facilities until August 2023, as well as a revolving credit facility for a further £45m, prevailing uncertainty in global financial markets 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.

 

On behalf of the Board of Directors

 

Nick Teunon

Chief Financial Officer

20 August 2019

 

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 2018 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. The work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the unaudited condensed interim financial statements since they were initially presented on the website.

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

 

Nick Teunon

Chief Financial Officer

 

20 August 2019

 

 

Independent review report to Non-Standard Finance plc

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2019 which comprises the consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of changes in equity, the consolidated statement of cash flows and related notes 1 to 14. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council.  Our work has been undertaken so that we might state to the Company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the Directors.  The Directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union.  The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2019 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

Deloitte LLP

Statutory Auditor

London, United Kingdom

 

20 August 2019

 

 

 

 

Financial statements

 

Condensed consolidated statement of comprehensive income

for the six months ended 30 June 2019

 

 

Note

 

Before fair value adjustments, amortisation of acquired intangibles and exceptional items

Fair value adjustments, amortisation of acquired intangibles and exceptional items

Six months ended 30 June 2019

Six months ended 30 June 2018

 

 

 

 £'000

 £'000

 £'000

£'000 

Revenue

 

 

88,287

(1,184)

87,103

75,056

Other operating income

 

 

221

-

221

890

Modification loss1

 

 

(287)

-

(287)

-

Impairments

 

 

(21,404)

-

(21,404)

 (20,067)

Administrative expenses

 

 

(47,340)

(2,607)

(49,947)

(48,885)

Operating profit

4

 

19,477

(3,791)

15,686

 6,994

Exceptional items

5

 

-

(25,274)

(25,274)

-

Profit/(loss) on ordinary activities before interest and tax

 

 

19,477

(29,065)

(9,588)

6,994

Finance cost

 

 

(13,178)

-

(13,178)

 (9,553)

Profit/(loss) on ordinary activities before tax

 

 

6,299

(29,065)

(22,766)

 (2,559)

Tax on profit/(loss) on ordinary activities

7

 

(1,196)

745

(451)

485

Profit/(loss) for the period

 

 

5,103

(28,320)

(23,217)

 (2,074)

Total comprehensive loss for the period

 

 

 

 

(23,217)

 (2,074)

 

 

 

 

 

 

 

Loss attributable to:

 

 

 

 

 

 

- Owners of the parent

 

 

 

 

(23,217)

 (2,074)

- Non-controlling interests

 

 

 

 

 

-

 

1As at 30 June 2018, the Group had not yet finalised the application of IFRS 9. Per the annual audited accounts for the year ended 31 December 2018, it was concluded that as a result of the Group's forbearance activities, a modification gain or loss may be recognised in respect of rescheduled loans. The Group has recognised a modification loss in the six months ended 30 June 2019 in line with the approach taken and reflected in the annual audited accounts for the year ended 31 December 2018. We have not restated for the six months ended 30 June 2018.

 

Loss per share

 

 

 

 

Note

Six months ended 30 June 2019

Six months ended 30 June 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Pence

Pence

Basic and diluted

 

 

 

6

(7.44)                      

                       (0.66)

 

There are no recognised gains or losses other than disclosed above and there have been no discontinued activities in the period.

 

 

 

Condensed consolidated statement of financial position as at 30 June 2019

 

 

Note

 

30 June 2019

31 December 2018

 

 

 

£'000

£'000

ASSETS

 

 

 

 

Non-current assets

 

 

 

 

Goodwill

10

 

128,216

140,668

Intangible assets

 

 

11,198

13,431

Other assets

 

 

143

241

Deferred tax asset

 

 

509

-

Right-of-use asset

 

 

11,187

-

Property, plant and equipment

 

 

8,441

7,723

 

 

 

159,694

162,063

Current assets

 

 

 

 

Amounts receivable from customers

9

 

338,740

314,614

Trade and other receivables

 

 

2,955

3,967

Cash and cash equivalents

 

 

17,361

13,894

 

 

 

359,056

332,475

Total assets

 

 

518,750

494,538

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

Current liabilities

 

 

 

 

Trade and other payables and provisions

 

 

29,718

17,242

Lease liability

 

 

1,659

-

Total current liabilities

 

 

31,377

17,242

 

 

 

 

 

Non-current liabilities

 

 

 

 

Deferred tax liability

 

 

-

252

Lease liability

 

 

9,803

-

Bank loans

 

 

296,002

266,322

Total non-current liabilities

 

 

305,805

266,574

 

 

 

 

 

Equity

 

 

 

 

Share capital

 

 

15,852

15,852

Share premium

 

 

254,995

254,995

Other reserves

 

 

(1,414)

(2,011)

Retained loss

 

 

(88,120)

 (58,368)

 

 

 

181,313

210,468

Non-controlling interests

 

 

255

255

Total equity

 

 

181,568

210,723

Total equity and liabilities

 

 

518,750

494,538

 

These financial statements were approved by the Board of Directors on 20 August 2019.

 

Signed on behalf of the Board of Directors

 

Nick Teunon

Chief Financial Officer

Condensed consolidated statement of changes in equity

for the six months ended 30 June 2019

 

 

 

Share capital

Share premium

Other reserves

Retained loss

Non-controlling interest

Total

 

Note

£'000

£'000

£'000

£'000

£'000

£'000

At 31 December 2017

 

15,852

254,995

(1,066)

 (36,793)

255

233,243

Total comprehensive loss for the period

 

-

-

 

-

 (1,679)

-

 (1,679)

IFRS 9 transition opening balance adjustment

 

 

 

 

(12,718)

 

(12,718)

Transactions with owners, recorded directly in equity:

 

 

 

 

 

 

 

Dividends paid

 

-

-

-

 (7,177)

-

 (7,177)

Credit to equity for equity-settled share based payments

 

-

-

 

1,157

-

-

 

1,157

Purchase of own shares

 

-

-

(2,102)

-

-

(2,102)

At 31 December 2018

 

15,852

254,995

(2,011)

 (58,368)

255

210,723

Total comprehensive loss for the period

 

                        -

                        -

 

-

               (23,217)

                        -

               (23,217)

IFRS 16 transition opening balance adjustment

3

-

-

 

-

(295)

-

(295)

Transactions with owners, recorded directly in equity:

 

 

 

 

 

 

 

Dividends paid

 

-

-

-

 (6,240)

-

 (6,240)

Credit to equity for equity-settled share based payments

 

-

-

 

597

-

-

597

 At 30 June 2019

 

15,852

254,995

(1,414)

 (88,120)

255

181,568

 

 

 

Condensed consolidated statement of cash flows

for the six months ended 30 June 2019

 

 

 

Note

 

Six months ended 30 June 2019

Six months ended 30 June 2018

 

 

 

£'000

£'000

Net cash used in operating activities

11

 

 (10,633)

 (20,613)

Cash flows used in investing activities

 

 

 

 

Purchase of property, plant and equipment

 

 

 (4,061)

 (3,191)

Proceeds from sale of property, plant and equipment

 

 

37

81

Net cash used in investing activities

 

 (4,024)

 (3,110)

Cash flows from financing activities

 

 

 

 

Finance cost

 

 

 (5,316)

 (3,024)

Debt raising

 

 

29,680

31,712

Dividends paid

 

 

 (6,240)

 (5,305)

Purchase of own shares

 

 

-

(2,103)

Net cash from financing activities

 

18,124

21,280

 

 

 

 

 

Net increase/(decrease) in cash and cash equivalents

 

 

3,467

 (2,443)

Cash and cash equivalents at beginning of period

 

 

13,894

10,954

Cash and cash equivalents at end of period

 

17,361

8,511

 

 

 

Notes to the condensed set of financial statements

for the six months ended 30 June 2019

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 2018 were approved by the Board of Directors on 14 March 2019 and have been delivered to the Registrar of Companies. The report of the auditors on those financial statements was unqualified, did not draw attention to any matters by way of emphasis and did not contain any statement under section 498(2) or (3) of the Companies Act 2006.

The unaudited condensed interim financial statements for the six months ended 30 June 2019 have been reviewed, not audited, and were approved by the Board of Directors on 20 August 2019.

 

1.   Basis of preparation

The unaudited condensed interim financial statements for the six months ended 30 June 2019 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 2018 which have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.

The Directors have reviewed the Group's budgets, plans and cash flow forecasts for 2019 together with outline projections for the subsequent years. Based on this review, they are satisfied that the Group has adequate resources to continue to operate for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the unaudited condensed interim financial statements.

 

2.   Accounting policies

The amendments relating to the IFRS 16 'Leases' standard are mandatory for the first time for the financial year beginning 1 January 2019. Please see note 3 for further information. All other accounting policies adopted in preparing the unaudited condensed interim financial statements are consistent with those adopted in preparing the statutory financial statements for the year ended 31 December 2018.

Exceptional items have been incurred in the six months ended 30 June 2019 (2018: £nil). 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 note 5 for further detail.

Taxes on profits in interim periods are accrued using the tax rate that will be applicable to expected total annual profits.

The carrying value of financial assets and financial liabilities are not materially different to the fair value (with the exception of amounts receivable from customers, refer note 9 for further detail).

 

3.   Changes in accounting policies

In the current year, the Group, for the first time, has applied IFRS 16 Leases. The date of initial application of IFRS 16 for the Group was 1 January 2019.

IFRS 16 introduces new or amended requirements with respect to lease accounting. It introduces significant changes to the lessee accounting by removing the distinction between operating and finance leases, requiring the recognition of a right-of-use asset and a lease liability at commencement for all leases, except for short-term leases and leases of low value assets. In contrast to lessee accounting, the requirements for lessor accounting have remained largely unchanged.

The Group is not party to any material leases where it acts as a lessor, but the Group does have a large number of material property and vehicle/equipment leases.

Details of the Group's accounting policies under IFRS 16 are set out below, followed by a description of the impact of adopting IFRS 16. Significant judgements applied in the adoption of IFRS 16 included determining the lease term for those leases with termination or extension options and determining an incremental borrowing rate where the rate implicit in a lease could not be readily determined.

 

 

 

3.1 Accounting policies under IFRS 16 Leases

The Group assesses whether a contract is or contains a lease, at inception of the contract. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets. For these leases, the Group recognises the lease payments as an operating expense (included within administrative expenses in the consolidated statement of comprehensive income) on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Group uses its incremental borrowing rate. Lease payments included in the measurement of the lease liability comprise:

•     fixed lease payments (including in substance fixed payments), less any lease incentives;

•     variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date;

•     the amount expected to be payable by the lessee under residual value guarantees;

•     the exercise price of purchase options, if the lessee is reasonably certain to exercise the options; and

•     payments of penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate the lease.

The lease liability is presented as a separate line in the consolidated statement of financial position. The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made.

The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever:

•     the lease term has changed or there is a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate.

•     the lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using the initial discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used).

•     a lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate.

The Group did not make any such adjustments during the periods presented.

The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses.

Whenever the Group incurs an obligation for costs to dismantle and remove a leased asset, restore the site on which it is located or restore the underlying asset to the condition required by the terms and conditions of the lease, a provision is recognised and measured under IAS 37. The costs are included in the related right-of-use asset, unless those costs are incurred to produce inventories. The Group does not hold any inventories as at 30 June 2019.

Right-of-use assets are depreciated over the shorter period of lease term and useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Group expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease. The Group does not have any leases that include purchase options or transfer ownership of the underlying asset.

The right-of-use assets are presented as a separate line in the consolidated statement of financial position.

Variable rents that do not depend on an index or rate are not included in the measurement of the lease liability and the right-of-use asset. The Group does not have any lease payments which fall under the definition of variable lease payments.

For short-term leases (lease term of 12 months or less) and leases of low-value assets (such as personal computers and office furniture), the Group has opted to recognise a lease expense on a straight-line basis as permitted by IFRS 16. This expense is presented within administrative expenses in the consolidated statement of comprehensive income.

As a practical expedient, IFRS 16 permits a lessee not to separate non-lease components, and instead account for any lease and associated non-lease components as a single arrangement. The Group has not used this practical expedient.

 

 

 

3.2 Approach to transition on 1 January 2019

The Group has applied IFRS 16 using the modified retrospective approach, without restatement of the comparative information. In respect of those leases the Group previously treated as operating leases, the Group has elected to measure its right of use assets arising from property leases using the approach set out in IFRS 16.C8(b)(i). Under IFRS 16.C8(b)(i) right of use assets are calculated as if the Standard applied at lease commencement, but discounted using the borrowing rate at the date of initial application.

The Group's weighted average incremental borrowing rate applied to lease liabilities as at 1 January 2019 was 9.5%.

Practical expedients adopted on transition

The Group has made use of the practical expedient available on transition to IFRS 16 not to reassess whether a contract is or contains a lease. Accordingly, the definition of a lease in accordance with IAS 17 and IFRIC 4 will continue to be applied to those leases entered into or modified before 1 January 2019. As part of the Group's adoption of IFRS 16 and application of the modified retrospective approach to transition, the Group also elected to use the following practical expedients:

•     a single discount rate has been applied to portfolios of leases with reasonably similar characteristics;

•     right-of-use assets have been adjusted by the carrying amount of any onerous lease provisions at 31 December 2018 instead of performing impairment reviews under IAS 36; and

•     hindsight has been used in determining the lease term.

Impact on lessee accounting

Former operating leases

IFRS 16 changes how the Group accounts for leases previously classified as operating leases under IAS 17, which were off-balance sheet. Applying IFRS 16, for all leases (except short term and low value leases - see 3.1), the Group now recognises right-of-use assets and lease liabilities in the consolidated balance sheet, initially measured at the present value of the future lease payments as described in 3.1.

Lease incentives (e.g. rent free periods) are recognised as part of the measurement of the right-of-use assets and lease liabilities whereas under IAS 17 they resulted in the recognition of a lease incentive liability, amortised as a reduction of rental expenses on a straight line basis.

Under IFRS 16, right-of-use assets will be tested for impairment in accordance with IAS 36 Impairment of Assets. This replaces the previous requirement to recognise a provision for onerous lease contracts.

Under IFRS 16 the Group recognises depreciation of right-of-use assets and interest on lease liabilities in the consolidated statement of comprehensive income, whereas under IAS 17 operating leases previously gave rise to a straight-line expense in the administrative expenses line within the consolidated statement of comprehensive income.

Under IFRS 16 the Group separates the total amount of cash paid for leases that are on balance sheet into a principal portion and interest portion (presented within financing activities) in the consolidated cash flow statement. Under IAS 17 operating lease payments were presented as operating cash outflows.

Former finance leases

The main differences between IFRS 16 and IAS 17 with respect to assets formerly held under a finance lease is the measurement of the residual value guarantees provided by the lessee to the lessor. IFRS 16 requires that the Group recognises as part of its lease liability only the amount expected to be payable under a residual value guarantee, rather than the maximum amount guaranteed as required by IAS 17. This change did not have a material effect on the Group's consolidated financial statements.

 

3.3 Financial impact

The application of IFRS 16 to leases previously classified as operating leases under IAS 17 resulted in the recognition of right-of-use assets and lease liabilities. Any provisions for onerous lease contracts have been derecognised and operating lease incentives previously recognised as liabilities have been derecognised and factored into the measurement of the right-to-use assets and lease liabilities. The Group has chosen to use the table below to set out the adjustments recognised at the date of initial application of IFRS 16.

 

 

 

 

 

Condensed consolidated statement of financial position

 

 

Note

 

31 December 2018

As originally presented

IFRS 16 adjustment

1 January 2019

Restated

 

 

 

£'000

£'000

£'000

Non-current assets

 

 

 

 

 

Right-of-use asset

 

 

-

11,004

11,004

Deferred tax asset

 

 

-

60

60

 

 

 

 

 

 

Total increase in assets

 

 

-

11,064

11,064

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Lease liability

 

 

-

1,732

1,732

Trade and other payables and provisions

 

 

 

260

260

 

 

 

 

 

 

Non -current liabilities

 

 

 

 

 

Lease liability

 

 

-

9,367

9,367

 

 

 

 

 

 

Total increase in liabilities

 

 

-

11,359

11,359

 

 

 

 

 

 

Equity

 

 

 

 

 

Retained loss

 

 

(58,368)

(295)

(58,663)

Of the total right-of-use assets of £11m recognised at 1 January 2019, £10.4m related to leases of property and £0.6m to leases of motor vehicles. The table below presents a reconciliation from operating lease commitments disclosed at 31 December 2018 to lease liabilities recognised at 1 January 2019.

 

 

£'000

Operating lease commitments disclosed under IAS 17 at 31 December 2018

10,403

Discounted using the lessee's incremental borrowing rate of 9.5% as at the date of initial application

(1,816)

(Less): short-term leases recognised on a straight-line basis as expense

(83)

(Less): low-value leases recognised on a straight-line basis as expense

(76)

Add: adjustments as a result of a different treatment of extension and termination options

2,671

Lease liabilities recognised at 1 January 2019

11,099

In terms of the consolidated statement of comprehensive income impact, the application of IFRS 16 resulted in a decrease in other operating expenses and an increase in depreciation and interest expense compared to IAS 17. During the six months ended 30 June 2019, in relation to leases under IFRS 16 the Group recognised the following amounts in the consolidated statement of comprehensive income:

 

 

£'000

Depreciation

997

Interest expense

536

Variable lease payments (not depending on index or rate)

-

Short-term lease expense

155

Low-value lease expense

55

 

1,743

 

4.   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.

 

 

 

Six months ended 30 June 2019

Branch-based lending

Guarantor loans1

Home credit

Central

 

2019

 

£'000

£'000

£'000

£'000

 

£'000

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

                       13,838

                   3,162

                      4,303

               (3,010)

 

18,293

 

Amortisation of intangible assets

                               -

                        -

                           -

           

   (2,607)

 

  (2,607)

 

Operating profit/(loss)

                      13,838

                   3,162

                      4,303

               (5,617)

 

15,686

Exceptional cost3

-

-

(129)

(25,145)

 

(25,274)

Finance cost

 (8,399)

 (3,453)

 (1,108)

 (218)

 

 (13,178)

Profit/(loss) before taxation

5,439

(291)

3,066

 (30,980)

 

 (22,766)

Taxation

 (1,033)

56

 (583)

1,109

 

(451)

Profit/(loss) for the period

                       4,406

                    (235)

                      2,483

               (29,871)

 

               (23,217)

 

 

 

 

 

 

 

 

 Branch-based lending

Guarantor loans1

 Home credit 

 Central

Consolidation adjustments2

2019

 

 £'000

 £'000

 £'000

 £'000

 £'000

 £'000

Total assets

233,211

96,286

48,386

776,120

 (635,253)

518,750

Total liabilities

 (285,732)

-

 (27,549)

(312,424)

288,523

 (337,182)

Net assets

(52,521)

96,286

20,837

463,696

 (346,730)

181,568

 

 

 

 

 

 

 

Capital expenditure

2,810

-

1,238

12

-

4,061

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

 

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 has therefore been disclosed within the Guarantor loans division above.

 

2 Consolidation adjustments include the acquisition intangibles of £5.9m (2018: £12.9m), goodwill of £128.2m (2018: £140.7m), fair value of loan book of £3.1m (2018: £8.1m) and the elimination of intra group balances.

 

3 Refer note 5 for further detail

 

 

 

 

 

 

Six months ended 30 June 2018

Branch-based lending

Guarantor loans1

Home credit

Central

 

2018

 

£'000

£'000

£'000

£'000

 

£'000

Interest income

35,802

9,897

33,196

-

 

78,895

Fair value unwind on acquired loan portfolio

 (1,979)

(1,860)

-

-

 

 (3,839)

Total revenue

33,823

8,037

33,196

-

 

75,056

 

 

 

 

 

 

 

Operating profit/(loss) before amortisation

                       10,046

                   2,028

                      2,046

               (2,786)

 

                11,334

 

Amortisation of intangible assets

                               -

                        -

                           -

           

   (4,340)

 

  (4,340)

 

Operating profit/(loss)

                      10,046

                   2,028

                      2,046

               (7,126)

 

6,994

Finance cost

 (5,637)

 (2,583)

 (1,271)

 (62)

 

 (9,553)

Profit/(loss) before taxation

4,409

(555)

775

 (7,188)

 

 (2,559)

Taxation

 (838)

105

 (147)

1,365

 

485

Profit/(loss) for the period

                       3,571

                    (450)

                      628

               (5,823)

 

               (2,074)

 

 

 

 

 

 

 

 

 Branch-based lending

Guarantor loans1

 Home credit 

 Central

Consolidation adjustments2

2018

 

 £'000

 £'000

 £'000

 £'000

 £'000

 £'000

Total assets

207,520

67,123

46,682

271,480

 (129,503)

463,302

Total liabilities

 (170,065)

(48,216)

 (29,840)

(2,068)

136

 (250,053)

Net assets

37,455

18,907

16,842

269,412

 (129,367)

213,249

 

 

 

 

 

 

 

Capital expenditure

1,848

217

1,047

79

-

3,191

Depreciation of plant, property and equipment

                          493

                           39

                          655

                     34

                        -

                   1,221

Amortisation of intangible assets

                               -

                           -

                               -

               4,340

                        -

               4,340

The results of each segment have been prepared using accounting policies consistent with those of the Group as a whole.

 

5.   Exceptional items

In the 6 months ended 30 June 2019, the Group incurred exceptional costs totaling £25.3m (including VAT) (2018: £nil). £12.7m of these costs related to 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. The offer lapsed on 5 June 2019. 

 

£12.5m of the exceptional items reflect the write-down of the value of goodwill associated with Loans at Home in the Group's balance sheet.  Further details are set out in note 10.

 

The remaining £0.1m of exceptional costs related to the management restructuring that took place in Loans at Home in January 2019. No exceptional costs were incurred in the 6 months ended 30 June 2018.

 

 

 

 

6.   Loss per share

 

Six months ended 30 June 2019

Six months ended 30 June 2018

 

 

 

Retained loss attributable to Ordinary Shareholders (£'000)

                     (23,217)

                     (2,074)

Weighted average number of Ordinary Shares

312,049,682

            313,388,139

Basic and diluted loss per share (pence)

                       (7.44)

                       (0.66)

 

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. 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 2019, 5,000,000 shares were held in treasury (2018: 5,000,000).

 

Six months ended 30 June 2019

Six months ended 30 June 2018

 

'000

'000

Weighted average number of potential Ordinary Shares that are not currently dilutive

9,313

11,706

 

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.

 

7.   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% (2018: 19%), to the profit before tax for the period.

 

8.   Dividends

The Directors have proposed an interim dividend in respect of the six months ended 30 June 2019 of 0.7 pence per share (interim dividend 2018: 0.6 pence per share) which will amount to a dividend payment of £2,184,348 (2018: £1,872,298). This dividend is not reflected in the balance sheet as it will be paid after the balance sheet date. Refer to note 13 for analysis of distributable reserves.

 

9.   Amounts receivable from customers

 

30 June 2019

31 December 2018

 

£'000

£'000

Gross carrying amount

379,646

354,794

Loan loss provision

 (40,906)

 (40,180)

Amounts receivable from customers

338,740

314,614

The movement on the loan loss provision for the period relates to the provision at branch-based lending, the guarantor loans division and home credit for the period. The amounts receivable from customers were recognised at fair value (net loan book value) at the date of acquisition, the amounts receivable are subsequently measured at amortised cost net of any impairment.

Included within the gross carrying amount above are unamortised broker commissions, see table below:

 

30 June 2019

31 December 2018

 

£'000

£'000

Unamortised broker commissions

12,619

11,182

Total unamortised broker commissions

12,619

11,182

 

 

30 June 2019

31 December 2018

Maturity of amounts receivable from customers:

£'000

£'000

Due within one year

103,914

113,066

Due in more than one year

234,826

201,547

Amounts receivable from customers

338,740

314,614

 

 

 

Analysis of receivables from customers:

 

Stage 1

Stage 2

Stage 3

Total

30 June 2019

£000

£000

£000

£000

Branch-based lending

189,712

17,971

6,619

214,302

Guarantor Loans

72,653

27,572

2,920

103,145

Home credit

31,803

24,436

5,960

62,199

Gross carrying amount

294,168

69,979

15,499

379,646

 

 

 

 

 

Branch-based lending

5,442

2,469

2,596

10,507

Guarantor Loans

1,241

1,681

812

3,734

Home credit

2,498

18,779

5,388

26,665

Loan loss provision

9,181

22,929

8,796

40,906

 

 

 

 

 

Branch-based lending

184,270

15,502

4,023

203,795

Guarantor Loans

71,412

25,891

2,108

99,411

Home credit

29,305

5,657

572

35,534

Net amounts receivable

284,987

47,050

6,703

338,740

 

 

Stage 1

Stage 2

Stage 3

Total

31 December 2018

£000

£000

£000

£000

Branch-based lending

173,359

17,032

6,353

196,744

Guarantor Loans

78,089

9,922

2,192

90,204

Home credit

38,692

16,524

12,631

67,846

Gross carrying amount

290,139

43,479

21,176

354,794

 

 

 

 

 

Branch-based lending

5,393

2,665

2,463

10,521

Guarantor Loans

814

1,412

613

2,839

Home credit

3,523

11,355

11,942

26,820

Loan loss provision

9,730

15,432

15,018

40,180

 

 

 

 

 

Branch-based lending

167,966

14,367

3,890

186,223

Guarantor Loans

77,275

8,510

1,579

87,365

Home credit

35,169

5,169

688

41,026

Net amounts receivable

280,409

28,047

6,158

314,614

 

During the first half of the year, changes in the political climate have resulted in a heightened risk of a no deal Brexit and general sentiment is that this could have an adverse effect on the 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. 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:

£'000

£'000

Branch-based lending

301,852

274,291

Guarantor loans

131,344

112,157

Home credit

53,402

67,717

Amounts receivable from customers

486,598

454,165

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 as they are not traded on an active market and the fair value is therefore determined through future cash flows.

 

10.  Goodwill

 

 

£'000

Cost and net book amount as at 31 December 2018

140,668

Accumulated impairment

(12,452)

At 30 June 2019

128,216

 

The goodwill recognised represents the difference between the purchase consideration and the net assets acquired (including intangible assets recognised upon acquisition), less any accumulated impairment. Total goodwill as at 30 June 2019 comprises £40.2m related to the acquisition of Loans at Home, less impairment recognised in the year of £12.5m, £91.9m related to the acquisition of Everyday Loans, and £8.6m related to the acquisition of George Banco.

Under IFRS 13, 'Fair value measurement', the fair value used in the Goodwill impairment assessment is classified as Level 3, as the fair value is determined using discounted future cash flows.

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 reflects a number of key estimates, each of which can have a material effect on the carrying value of the asset.

These include:

       earnings forecasts which have been extracted from the budget, which involves inherent uncertainty, particularly in respect of gross loan values, collections performance and the cost base of the business;

       the price earnings multiple applied to the forecasts;

       estimates made on the disposal costs of the business; and

       the discount rate applied to determine future earnings.

Determining whether goodwill is impaired requires an estimation of the recoverable amount of each cash generating unit ('CGU'). The recoverable amount is the higher of its value in use ('VIU') or its fair value less cost to sell. Consistent with the methodology used as at 31 December 2018, recoverable amount has been determined based on a 'fair value less cost-to-sell' calculation. That calculation uses earnings projections approved by management covering a one-year period to 31 December 2019 multiplied by the price earnings ('PE') multiple for comparable companies based on their forecast earnings per share for 2019 and their share price at 30 June 2019.  Disposal costs have been estimated at 2%.  In addition the Directors have calculated the recoverable amount based on 'value in use' which uses the cash flows derived from the same earnings projections for the year ended 31 December 2019 but then additionally incorporates the cash flows for the years ended 31 December 2020 and 2021 together with a terminal value based on the cash flow forecast for 2021 at a perpetuity growth rate.  The resulting cash flow forecasts are then discounted at a 12% discount rate to produce a 'value in use' to the Group.  This second approach has not been utilised in previous years as IAS 36, the standard which determines how to value the recoverable amount, requires the use of the higher of the two valuation methods when assessing value.  This requirement meant that there was no need to calculate 'value in use' as 'fair value less cost-to-sell' was in excess of the carrying value.

Loans at Home goodwill assessment

In the 2018 Annual Report and Accounts the Group had calculated the fair value less costs to sell of Loans at Home to be in the range of £64m to £67m (headroom of between £2m and £5m from the carrying value) as at 31 December 2018. A key estimate driving this result was 2019 forecast earnings where it was determined that a reduction of 3% to 8% would have necessitated an impairment charge.

Whilst Loans at Home performed ahead of budget in the six months ended 30 June 2019, the significant decline in peer group PE multiples since 31 December 2018  represented an indicator of impairment as at 30 June 2019, and therefore the Board has taken the decision to undertake an impairment assessment of the CGU. Consistent with prior year, as part of this assessment, the Group has calculated the fair value less cost to sell and compared this to the carrying value of the CGU.

The Group has calculated the fair value less costs to sell to be in the range of £48.0m to £61.0m compared to the carrying value of £60.8m. The lower end of this range would suggest impairment of £12.8m compared to headroom of £2m to £5m at 31 December 2018.  This decrease is due to a 33% decline in the PE multiple applied to the 2019 Loans at Home earnings forecast as PE multiples in the non-standard lending sector have declined significantly in the first half of 2019 (as noted above Loans at Home's performance in the first half of 2019 has exceeded budget). The Group notes that had market multiples remained at the level they were as at 31 December 2018, there would have existed headroom of between £6.5m and £11m based on the latest forecast earnings of Loans at Home for 2019.

Under IAS 36, the recoverable amount represents the higher of the fair value less costs to sell and value in use. The Group notes that as the FV less cost to sell model is reliant on the use of non-standard sector PE multiples at a point in time, these multiples may be influenced by a number of factors unrelated to the value of Loans at Home as a standalone CGU which may not depict the appropriate recoverable amount for this business. As at 30 June 2019, the lower range of outputs calculated under the fair value less cost to sell model is below the carrying value of the CGU. This is reflective of the increased sector wide risks to future cash flows and new originations which have arisen since 31 December 2018 in light of changes in the market and regulatory environment in the recent months. As a result, the Group has also performed a value in use assessment in order to determine the recoverable amount as permitted by the standard.

The value in use to the Group has been calculated to be in the range of £48.3m to £65.4m. In calculating this range, the Group has applied sensitivities to the percentage of cash flows achieved and terminal growth rate.  The lower end of this range suggests impairment of £12.5m and assumes that Loans at Home delivers 90% of forecast cash flows over the period and a nil perpetuity growth rate. Assuming cash flow forecasts are achieved, the VIU increases by £5.4m to £53.7m under the nil perpetuity growth rate scenario. The higher end shows headroom of £4.6m and assumes cash flow forecasts are achieved with a 1% perpetuity growth rate. Assuming only 90% of cash flows are achieved under a 1% perpetuity growth rate reduces the VIU by £8.9m to £56.5m.

Whilst the upper end of the valuations suggest no impairment is required and, although LAH has been performing ahead of budget in the six months ended 30 June 2019, the Group recognises there remains uncertainty around the future forecast numbers, particularly given external factors including macro-economic risk, such as recent changes in the UK political climate resulting in a heightened risk of a 'no deal' Brexit, as well as potential changes in regulation.  In addition, the Group recognises the uncertainty around the selection of an appropriate perpetuity growth rate given the recent decline in the size of the home credit market which means that Loans at Home needs to take market share in order to grow.  Finally, there is a lack of certainty regarding the possible return to previous market multiples.  In light of the uncertainties outlined above the Group has taken its best estimate and decided to recognise a £12.5m impairment loss in the Loans at Home goodwill asset. This loss is non-cash and represents the difference between the VIU to the Group, assuming 90% of cash flows are achieved and a nil perpetuity growth rate, and the carrying value of the CGU.

Everyday Loans and Guarantor Loans goodwill assessment

For the Everyday Loans branch based lending division, the Group has concluded that no indication of impairment exists and therefore no further testing has been conducted for the six months ending 30 June 2019.

For the guarantor loans division the Directors considered the recent announcements of focus on this area by regulators and the performance of the business to 30 June 2019. It was determined that there exists sufficient headroom between the recoverable amount and carrying value of the CGU. It was concluded that there was no impairment as at 30 June 2019. The Directors note however that this calculation remains sensitive to the outcomes of regulatory reviews of the guarantor loan sector and the future performance of the business.

 

11.  Net cash used in operating activities

 

Six months ended 30 June 2019

Six months ended 30 June 2018

 

£'000

£'000

(Loss) profit before interest and tax

(9,588)

6,994

Taxation(paid) / refund

(670)

449

Depreciation

2,101

1,221

Amortisation of intangible assets

3,272

4,340

Loans at Home goodwill impairment loss

12,452

-

Share based payment charge

597

473

Fair value unwind on acquired loan book

1,184

3,839

Profit on disposal of property, plant and equipment

 (16)

 (21)

Increase in amounts receivable from customers

 (25,310)

 (30,542)

Decrease in other assets

 98

-

Decrease/(Increase) in receivables

1,014

(4,550)

Increase/(Decrease)/ in payables

4,233

(2,816)

Cash used in operating activities

(10,633)

 (20,613)

 

12.  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) are Trustees of the charity Loan Smart, during the six months ended 30 June 2019, the Company donated £nil to Loan Smart (six months ended 30 June 2018: £nil) and has a debtor balance of £80,500 as at 30 June 2019 for a loan to the charity (2018: £80,500). Amounts owed to Non-Standard Finance plc are non-interest bearing and repayable on demand.

Three Directors are members of the Non-Standard Finance plc Long-Term Incentive Plan.

There have been no changes in the nature of related party transactions as described in note 29 to the 2018 Annual Report & Financial Statements.

 

13.  Distributable reserves of the Parent Company

At 30 June 2019, Non-Standard Finance plc (the 'Company') had no distributable reserves. Since 30 June 2019, the Company has effected a capital reduction which became effective on 30 July 2019. This capital reduction 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 £75 million standing to the credit of the Company's share premium account. Assuming the capital reduction had taken place prior to 30 June 2019, distributable reserves as at 30 June 2019 would have increased.

As permitted by the Companies Act 2006, the Company intends to file interim accounts prior to the payment of the interim dividend on 17 October 2019. It is expected that these interim accounts will demonstrate sufficient distributable reserves to support the interim dividend payment.

 

14.  Subsequent events

Since 30 June 2019, the company has effected a capital reduction which became effective on 30 July 2019 (refer note 13).  This has no financial impact on the 30 June 2019 financial statements.

There have been no other events that require disclosure in or adjustment to the financial statements.

 

APPENDIX

Glossary of alternative performance measures 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.  

 

Alternative performance measure

Definition

Net debt

Gross borrowings less cash at bank

Normalised revenue

Normalised operating profit

Normalised profit before tax

Normalised earnings per share

 

Normalised figures are before fair value adjustments, amortisation of acquired intangibles and exceptional items

Key performance indicators

Definition

Impairments/revenue

Impairments as a percentage of normalised revenues

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
 

Cost to income ratio

Normalised admin 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

     

 

 


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Unaudited Half Year Results to 30 June 2019 - RNS