Final Results

International Personal Finance plc  Full-year Financial Report for the period ended 31 December 2020This announcement contains inside informationInternational Personal Finance plc specialises in providing unsecured consumer credit to 1.7 million customers across 11 markets.  We operate the world’s largest home credit business and a successful fintech operator, IPF Digital.Key takeaways

¹Collections effectiveness defined as percentage of collections made (adjusted for portfolio size) compared to pre Covid-19 expectationsGerard Ryan, Chief Executive Officer at IPF commented: “We have managed the business effectively through this turbulent period and proven the resilience of our international business model.   We responded quickly to the pandemic, taking the strategic decision to establish three principles to guide our decision-making - to protect our people, prioritise our loyal customers and protect our business. This approach, together with the implementation of our return to growth plan and the exceptional dedication of our workforce, allowed us to continue serving our customers safely, deliver an improving operational performance and return the business to profitability in the second half of the year. Our business plays a key role in society and we are well-placed to remain at the forefront of lending responsibly to underbanked and underserved consumers and, in turn, deliver long-term growth and value to all our stakeholders.”Market overview and Covid-19 response strategy From mid-March, the Covid-19 pandemic posed significant, unforeseen challenges for many businesses, particularly those that rely on face-to-face interactions with consumers such as our home credit businesses.  We responded quickly and took the strategic decision to establish three principles to guide our decision-making through this turbulent period. These were to protect our people, prioritise our loyal customers and protect our business. We subsequently developed and implemented our phased return to growth plan to safeguard the business, drive our recovery and return to profitability and future long-term growth. This approach, together with the exceptional dedication of our workforce, allowed us to continue serving our customers safely, deliver an improving operational performance and returned the business to profitability in the second half of the year.   As we have reported previously, regulators and governments introduced a range of measures in our markets to manage the effects of the pandemic, some of which had a significant impact on our businesses.  Over the course of the year, these measures have been lifted, modified or extended as governments sought to manage their economies through the evolution of the pandemic.People movement restrictionsDuring April and May significant restrictions on non-essential contact prevented most of our agents in Europe from visiting customers to collect repayments or grant new loans.  In Mexico, where there is a state-by-state response rather than a central government plan, disruption to our agent service has not been market-wide or as severe as our experience in Europe. We used our digital expertise to rapidly develop and deploy remote repayment facilities in all our home credit markets, thus enabling customers to continue repaying their loans while minimising personal contact.  We also transitioned all 6,000 office and call centre employees to remote working practices.  Since lockdown restrictions were eased, we have continued to provide personal protective equipment and safety guidance to ensure our agents are able to serve customers safely and with confidence.  We have also introduced flexible working practices to allow colleagues to work from remote locations or our offices as most befits their needs. Temporary tightening of existing rate caps Temporary tightening of existing rate caps was introduced in Poland, Hungary and Finland during the first wave of the pandemic. The temporary reduction of the APR cap in Hungary reverted to the previous level of 24% plus base rate at the start of 2021. The Polish government introduced a temporarily reduced cap on non-interest costs of new lending until 8 March 2021 and this has been extended until 30 June 2021. As we reported at the half-year, the temporary tightening of the existing rate cap in Finland to 10% for all new lending resulted in our decision to close our digital business in this market and collect-out the portfolio.  Temporary debt repayment moratoriaIn order to ease financial difficulties for borrowers during the pandemic, the Hungarian government implemented a debt repayment moratorium available for all consumers until the end of 2020, and this was subsequently extended to 30 June 2021.  Borrowers can opt-out if they wish to continue to repay their loans and a significant majority of our customers have chosen to do so. Temporary moratoria allowing customers to suspend loan repayments for defined periods were also introduced in a number of our other European markets, but on an “opt-in” basis (unlike Hungary).  Take-up was not significant due to the eligibility criteria and our proactive actions to offer alternative forbearance solutions to our customers, including payment holidays.Group performance                             We started 2020 with a good performance before the outbreak of the Covid-19 pandemic in mid-March.  While the remainder of 2020 was challenging, and we continue to face macroeconomic uncertainty as a result of the pandemic, our swift and decisive actions early in the year to manage the business through this turbulent period resulted in an improving operational performance from June onwards, and a return to profitability in the second half of the year.  It also demonstrated the resilience of our business model, the effectiveness of our credit risk management systems and our ability to generate cash.  The full-year result reflects the significant impact that the pandemic had on our business, both operationally and financially, with a pre-exceptional loss before tax of £28.8 million (statutory loss before tax of £40.7 million). 

Our adherence to tighter credit settings and our liquidity management strategy resulted in a 41% reduction in credit issued, a 19% decline in average net receivables and a 22% contraction in revenue.  Our collections performance was disrupted by the pandemic, particularly the restrictions on people movement, and this resulted in a significant increase in the IFRS 9 impairment charge, part of which is assessed as being temporary and is expected to unwind in 2021 (see below for more details).  A key component of our Covid-19 response was a significant cost reduction programme.  This included the elimination of discretionary expenditure in Q2 and a rightsizing exercise that aligned the cost base to the reduced scale of the business, removing around 1,200 roles from the organisation. These actions delivered a £58.3 million (at CER) reduction in other costs year on year. Finance costs reduced by 10% due to lower average borrowing requirements resulting from our focus on liquidity management and a reduction in base rates.  We took a strategic decision to support agent incomes during the pandemic in order to reward the loyalty of our agents and maintain agent - customer relationships, and this resulted in agents’ commission reducing at a slower rate than the contraction in revenue.The income statement includes a net exceptional loss before taxation of £11.9 million which comprises a £10.6 million charge arising from the decision to close our business in Finland (further details are set out in note 9 of this report) and a £9.5 million charge for rightsizing, partially offset by the receipt of £8.2 million of interest income in respect of our successful court challenge to the Polish tax audit cases for 2008 and 2009. Following a reported pre-exceptional loss before tax of £46.8 million in H1, it is pleasing to report that the business delivered a pre-exceptional profit before tax of £18.0 million in the second half of the year, an improvement of £64.8 million between the periods.

This significantly improved performance was driven by a combination of lower impairment charges and cost reductions, partially offset by lower revenue.  Revenue reduced by £63.1 million in the second half due to the contraction in the receivables portfolio arising from our credit quality and liquidity management actions. Impairment in the second half of the year was £116.8 million lower than the first half when significant charges were booked to account for the expected impact of the pandemic. Collections effectiveness, which reduced to 76% in April, improved to reach 97% in Q4 2020.  As a result, impairment as a percentage of revenue improved significantly from 50.3% in H1 to 21.9% in the second half and this included a 5.4 ppt benefit resulting from the unwinding of discounting provisions.  Costs in the second half of the year reduced by £10.9 million compared to H1, reflecting the initial benefits of our rightsizing programme.Strategy We play an important role in society by providing affordable finance responsibly to underbanked and underserved consumers.  Our strategy centres on delivering a positive customer experience and expanded product range in European home credit to enable these businesses to return to delivering good levels of profitability and returns.  These returns will be used to maintain our investment in improving the customer journey and operational efficiency while reinvigorating growth in Mexico home credit and IPF Digital.   As we reported at the half-year, our underlying strategy has not changed, but in light of the pandemic, we redefined our strategic goals in April to safeguard the business and develop firm foundations to return quickly to profitability and long-term growth. Our strategic goalsPhase 1 – H1 2020: CompletedProtect our people, prioritise loyal customers and protect the businessPhase 2 – H2 2020: CompletedRightsize the business to accelerate recovery and refinance the balance sheetPhase 3 – 2021: UnderwayRebuild the business Phase 4 – 2022+Deliver long-term, sustainable growthWe successfully executed phases 1 and 2 of our plan, and this supported the delivery of the improved operating and financial performance in the second half of the year.  In managing the impact of the pandemic, we ensured that our people were well-protected, that we retained our loyal customers and preserved liquidity.  Through our rightsizing programme, we significantly reduced our cost base to reflect the smaller scale of our operations and to accelerate a return to full-year profitability.  Role reductions were weighted towards back-office positions in order to protect the key field and agent roles that are crucial to retaining loyal customers and delivering future growth. In addition, following a review of the level of expected returns and the capital requirements of each business unit, we closed four weaker-performing branches in Mexico, merged our two digital businesses in Poland to create operational synergies and we decided to collect out the IPF Digital Finland portfolio due to the further tightening of the APR cap in that market.Despite the challenges of the pandemic, we also made progress on a number of strategic developments.  We rolled out our new mobile wallet in Latvia and launched our Creditea digital offering in the Czech Republic.  We continued the digital transformation of our home credit operations, completing the roll-out of the sales and collections functionality of our MyProvi mobile app for agents in Europe and commenced the introduction of the first apps in Mexico.  Our new MyNews mobile communications app, which proved critical to delivering health and safety information directly to agents and field staff during the pandemic, has been rolled out to all agents and most employees in Europe and 8,000 agents and employees in Mexico, to date.Phase 3: Rebuild the business In 2021 we are focused on rebuilding the receivables portfolio and we expect to progressively increase credit issued in each of our businesses.  We continue to believe that there will be lower levels of supply of credit in the course of the next few years, and we expect to be in a good position to meet the needs of underserved consumers in our segment. Phase 4: Deliver longer-term growthBeyond the return to profitability, we plan to use our digital expertise combined with our market-leading positions and unrivalled knowledge of our core customer segment to enhance our product proposition for customers and deliver longer-term growth across the Group.Business division performance reviewEuropean home credit Our European home credit businesses are well-established, resilient operations with a long history of delivering good returns. Following a good start to the year, the impact of the pandemic and government policy responses had a significant impact on these operations.  This resulted in European home credit delivering a pre-exceptional loss before tax of £13.6 million for 2020 (statutory loss before tax of £11.1million).  This comprised a loss of £25.6 million in the first half followed by a return to £12.0 million profit in H2, an improvement of £37.6 million.  The recovery was primarily driven by a £55.9 million reduction in the impairment charge partially offset by reduced revenue arising from the contraction in the receivables portfolio.  The reduction in impairment was driven by an improved collections performance and the partial unwinding of discounting provisions booked in H1.

Customer numbers and credit issued contracted year on year by 15% and 35% respectively, attributable largely to the significant tightening of credit settings implemented from March onwards.  Collections effectiveness, which reduced in April to 71% of the pre-Covid-19 level when agent service was suspended in a number of markets, improved through the remainder of the year, reaching 95% in Q4 2020. This robust performance enabled a progressive monthly increase in credit issued focused on our loyal, higher-quality customers from June onwards. Average net receivables reduced by 14% year on year, due to reductions in credit issued and Covid-19 related impairment provisions.  Revenue contracted at the faster rate of 18%, driven by higher early settlement rebate charges and the temporary reduction in the rate cap in Poland.The impairment charge for the year increased by £76.3 million to £132.3 million and this increase mainly arose during the first half of the year as a result of the incremental impairment provisions recorded in response to Covid-19 (see below for further details).  Impairment as a percentage of revenue increased by 24.0 ppts to 36.4%, driven primarily by the incremental provisions, the most significant uplift of which was in Hungary where the temporary opt-out debt repayment moratorium had a greater impact on collections than in other markets.  Successful cost-saving measures implemented across these businesses resulted in a 15% (£28.4 million at CER) reduction in costs.  Agents’ commission costs increased by 2%, reflecting our objective of supporting agent incomes during this difficult period and the shift in the balance of incentives from sales to collections.In 2021, we will focus on continuing to regrow credit issued while maintaining robust collections and credit quality.  We will also maintain strong cost control as we rebuild scale in these businesses through the year. Mexico home credit Actions introduced in 2019 to improve portfolio quality in Mexico were delivering an improved financial performance in the first quarter before the pandemic impacted operations.   Lessons learned in Europe, where the onset of the pandemic began earlier than in Mexico, guided pre-emptive action in this market in order to protect our people and the business.  For the year as a whole, Mexico home credit reported a pre-exceptional profit of £3.5 million (statutory profit before tax of £0.8 million).  This comprised a loss of £8.4 million in the first half followed by a profit of £11.9 million in H2; a turnaround of £20.3 million.  This improved performance was driven by a combination of a £37.2 million reduction in the impairment charge together with a lower cost base, partially offset by materially lower revenues arising from the contraction of the receivables portfolio.  The strong reduction in impairment in H2 was driven by a continuation of the improvements in collection trends reported before the pandemic and the benefit of the partial unwinding of discounting provisions booked in the first half of the year.

Our focus on improving credit quality throughout 2019 and the further tightening of credit settings resulting from Covid-19 led to a 25% contraction in customer numbers to 599,000 and a 40% reduction in credit issued year on year. Due to the shorter average loan duration in Mexico, lower credit issued and incremental impairment provisions, average net receivables reduced by 31% and this resulted in a 29% contraction in revenue. The actions taken to improve operations from the second half of 2019 had begun to deliver increased collections and credit quality at the beginning of the year.  However, the onset of the pandemic and subsequent restrictions on people-movement resulted in collections effectiveness reducing initially to 81% in April before improving to 100% in Q4 2020.  Impairment as a percentage of revenue reduced year on year to 33.7%, which represents a 7.6 ppt improvement, reflecting the improved operational performance partially offset by incremental charges arising in respect of the pandemic.Significant cost savings were realised following cost reduction measures taken in response to the pandemic, delivering a 15% (£12.4 million at CER) reduction in other costs.  The reduction in agents’ commission was driven by lower collections, partially offset by higher commission rates designed to protect agent incomes and maintain customer relationships.The operational improvements introduced in 2019 had a positive impact on performance during 2020 although this was negatively impacted by the pandemic.  The pre-pandemic improvements give us the confidence to continue our strategy of easing credit settings and rebuilding the receivables portfolio whilst maintaining credit quality at the improved level delivered in 2020.  The digital transformation of the business will continue as we complete the roll-out of the collections functionality of our MyProvi agent app, which will further improve cost efficiency. We will also focus on improving branch profitability and ensuring rigorous cost management in order to deliver a much-improved financial performance in 2021 and return the business to sustainable growth thereafter.IPF DigitalIPF Digital provides an end-to-end remote lending model and, as such, experienced significantly less disruption arising from Covid-19 freedom of movement restrictions in 2020. However, as part of our strategy to protect credit quality and manage liquidity, we tightened credit settings significantly in the second half of March, from which point lending was focused on the very best quality new customers and higher-quality existing customers.  This resulted in the business reporting a pre-exceptional loss before tax of £6.0 million (statutory loss before tax of £17.3 million), driven by reduced scale and incremental Covid-19 related impairment, partially offset by lower costs.  This result comprised a pre-exceptional loss of £5.9 million in the first half and a £0.1 million loss in H2, with the improved performance resulting from lower impairment and reduced costs, partially offset by reduced revenues.

Year on year, customer numbers reduced by 27% to 223,000 and credit issued contracted by 55%, driven by the restricted credit settings introduced in response to Covid-19, our ongoing strategy to improve credit quality in our new markets and the cessation of lending in Finland following a tightening of the rate cap in that country. Average net receivables reduced by 21% and revenue contracted at the slightly faster rate of 26%. Collections effectiveness reduced to 82% in April with the main drivers of this being fewer customers overpaying the minimum repayment obligation on their credit line facility, together with higher payment holiday requests. Collections effectiveness improved over the course of the year to 99% in Q4 2020. Impairment as a percentage of revenue at 44.2%, was in line with 2019 and comprised a reduction in the new markets, reflecting the benefit of our credit quality improvement strategy, and an increase in the established markets arising from Covid-19.  Tight cost control resulted in an 18% reduction in costs (£15.5 million at CER) driven mainly by the benefits of the rightsizing exercise, lower marketing expenditure and other volume-related costs.The pre-exceptional profitability of IPF Digital is segmented as follows:

Established marketsThe established markets delivered a pre-exceptional profit before tax of £18.4 million (statutory profit before tax of £8.7 million), driven by a combination of lower revenues and higher levels of impairment arising from Covid-19, partially offset by lower costs.  This comprised a profit in the first half of £7.0 million and £11.4 million in H2 with the increase in the second half year driven by reduced impairment.

Credit issued contracted by 49% year on year, impacted by tighter credit settings introduced in response to Covid-19 together with our decision to cease lending in Finland and collect out the portfolio. Average net receivables contracted by 16% due to the lower credit issued and this resulted in a 15% reduction in revenue. Excluding Finland, the contraction in average net receivables and revenue was significantly lower at 6% and 3% respectively.Impairment as a percentage of revenue increased by 8.9 ppts year on year to 28.6% due to the Covid-19 related incremental impairment that is set out above.  Our cost reduction programme resulted in an 8% reduction in costs (£2.2 million at CER).New marketsLosses in the new markets narrowed year on year to £12.8 million (statutory loss before tax of £14.4 million), which was driven by lower impairment and costs, partially offset by reduced revenue.  Losses in the first and second half of the year were broadly similar with lower revenue offsetting reduced impairment and costs.

Customer numbers reduced to 107,000 and credit issued contracted by 61% year on year due to a combination of credit tightening implemented in the second half of 2019 in Poland and Spain to manage credit risk together with further restrictions implemented in response to Covid-19. Average net receivables reduced by 27% and revenue contracted at the faster rate of 34% due to higher levels of claims management charges in Spain.Impairment as a percentage of revenue improved by 4.4 ppts year on year to 60.4% driven by underlying improvements in credit quality, partially offset by higher provisions booked in respect of Covid-19.   Costs reduced by 24% year on year (£10.7 million at CER), driven principally by the benefits of rightsizing, lower marketing expenditure and other volume-related costs as we reduced our credit issued volumes.IPF Digital continues to offer significant long-term growth opportunities.  In 2021, we will focus on progressively rebuilding the receivables portfolio and accelerating new customer growth, delivering further improvements in credit quality and maintaining tight control of costs. We also plan to expand our mobile wallet offering in Latvia, leverage the benefits of merging our two digital businesses in Poland and deliver our collect-out plan in Finland.Funding and balance sheet We have a very strong balance sheet, funding position and robust financial risk management. At December 2020, the equity to receivables ratio was 55.4% (2019: 44.8%) and the gearing ratio was 1.3 (2019: 1.5). The Group refinanced its April 2021 Eurobond in November 2020 with the issuance of a new 2025 €341 million 9.75% Eurobond and a partial cash settlement at par.  In addition, we obtained covenant amendments from our other bondholders (2022 SEK and 2023 sterling bonds) and from our current banking partners.  At December 2020 the Group had total debt facilities of £624 million (£423 million of bonds and £201 million of bank facilities) and borrowings of £499 million, with headroom on undrawn facilities and non-operational cash balances of £210 million.  The average period to maturity of this debt funding is 3.3 years (2019: 1.7 years).  Total cash balances at December 2020 were £116 million (2019: £37 million) and include £85 million that was not required for operational purposes but is available to support future receivables growth.  The equity to receivables ratio is materially higher than in previous years and reflects the contraction of the receivables portfolio that resulted from our liquidity management response to Covid-19.  This level of equity funding will provide sufficient capital to fund expected receivables growth while maintaining the resilience of the balance sheet given the ongoing Covid-19 pandemic and regulatory uncertainty. Regulatory updateAs previously reported, UOKiK, the Polish competition and consumer protection authority, has been conducting a comprehensive review of early loan settlement rebating practices by banks and other consumer credit providers. In light of this and a recent European Court of Justice declaratory judgment on the matter, new market standard rebating practices are expected to be implemented in Poland during 2021. Our current expectation for our Polish business is that the annualised financial impact on profit before tax is likely to be in the range of £5 million to £10 million and we are working on a number of mitigating strategies. In Romania, legislation enacted by parliament in May 2020 implementing a cap on the total amount payable on a consumer loan agreement was successfully challenged at the Constitutional Court in January of this year. As a result, the law, which was suspended pending the court challenge, has been annulled and any further effort to implement similar proposals would require a new and complete legislative process.Taxation The taxation charge on the post-exceptional loss for 2020 is £23.5m.  The pre-exceptional tax charge is £24.5 million.   The tax charge arises from a combination of factors but is largely driven by the non-tax deductible impairment charges, liability to certain taxes that are computed with reference to profits for prior periods rather than current year, and the write-off of deferred tax assets.The exceptional tax credit of £1 million is stated net of a £1.1 million write-off of a deferred tax asset held in respect of the Finnish business.   Following our successful appeals against the Polish Tax Chamber’s decisions for 2008 and 2009 earlier in 2020, the Group currently has no open tax audits in Poland.  With regard to the European Commission’s State Aid challenge to the UK’s Group Financing Exemption regime, following the enactment of new legislation in December 2020, HMRC has issued a Charging Notice seeking payment of £14.2 million in respect of the alleged State Aid for the affected years. The payment of this amount is a procedural matter, and the new law does not allow for postponement.  Accordingly this amount was paid in February 2021 and we are appealing the Charging Notice on the grounds of the quantum assessed. Whether the UK’s Group Financing Exemption regime constitutes State Aid is ultimately to be decided and we continue to await a decision of the General Court of the European Union on this matter. Further details are set out in note 23.DividendThe Board considered the financial performance in 2020 and concluded that it is not appropriate to propose a final dividend; however, it remains committed to paying a progressive dividend in the future.  The Board will review dividend payments regularly, taking into account the financial performance and financial position of the Group and we intend to recommence dividend payments as soon as circumstances permit.Board changesRichard Moat, who joined the Board in 2012, and Cathryn Riley who joined in 2014, will not be seeking re-election at the 2021 AGM in April and will stand down from the Board as non-executive directors at that time. We are pleased to announce that Richard Holmes will replace Richard Moat as the Senior Independent Director and Chair of the Audit and Risk Committee and Deborah Davis will replace Cathryn as the Remuneration Committee Chair with effect from the conclusion of the 2021 AGM, subject to their re-election as directors. The Board would like to thank Richard and Cathryn for their service, insight and contribution during their time at IPF and is confident that Richard and Deborah will prove to be worthy successors.OutlookOur business plays an important key role in society by providing credit responsibly to those who are underbanked or underserved, and there remains significant demand for affordable credit from this group of consumers in all our markets. As a more nimble, more cost-effective business than we were before the pandemic we remain well placed to satisfy this demand in the long term.  Credit issued during 2021 to date continues to show encouraging trends with year-on-year improvements that are ahead of Q4 2020 despite renewed restrictions on people movement having an impact on customer demand, and we expect to progressively rebuild the receivables portfolio as the year unfolds.  Our strategy is supported by our strong balance sheet and funding position, which will allow us to rebuild our European home credit business, capture the substantial growth opportunities in both Mexico home credit and IPF Digital, return the Group to full-year profitability in 2021 and deliver further growth thereafter.  Covid-19 impact on impairmentThe application of IFRS 9 to the effects of Covid-19 had a significant impact on the Group’s impairment accounting and charge in 2020.  As reported in our half-year financial report, government-imposed restrictions on freedom of movement and the introduction of debt repayment moratoria, together with the anticipated economic impact of the pandemic on our customers, had a significant adverse impact on collection cash-flows in all our businesses.  These events are unprecedented and, accordingly, we reviewed the appropriateness of our impairment modelling under IFRS 9 in the first half of the year. This included a full assessment of expected credit losses, including a forward-looking assessment of expected collection cash-flows. As a result, we applied overlays to our impairment models in order to calculate the expected impact of the pandemic on the Group’s impairment charge. These overlays were refreshed at the year end.Home credit impairment In our home credit markets, the restrictions on freedom of movement resulted in agent service to customers being disrupted from mid-March through to the end of June, albeit with a reducing impact as the restrictions were progressively eased from May onwards. We implemented alternative payment options in most of our markets, which partially mitigated the reduction in customer repayments normally collected by agents. The opt-out repayment moratorium in Hungary had a more significant impact on performance than those implemented in other European markets, resulting in slower collections and an expectation of a larger increase in credit losses. In addition to these factors, some customers’ incomes have been negatively impacted and this has reduced their capacity to make repayments. The calculation of the expected credit loss (“ECL”) is model-driven and is based on contractual arrears, thereby assuming that all missed collections are a result of credit quality deterioration and generating a disproportionately increased ECL. Therefore, for all lending issued before June 2020, we have reduced the modelled ECL based on historic customer roll-rates before calculating the increase in ECL arising from the pandemic.  This latter assessment is based on estimated future repayment patterns on a market-by-market basis, taking into account operational disruption, repayment moratoria and the expected recessionary impact.  We then assessed the extent to which the reduction in cash-flows is likely to be permanent or temporary. The permanent reduction in cash-flows has been recorded as an increase in ECL, and this has resulted in an incremental impairment provision of £33 million.  We expect temporarily missed repayments to be repaid at the end of the credit agreement, rather than at the point when agent service is resumed.  The charges for lending are largely fixed and therefore these delayed cash flows have been discounted using the effective interest rate to arrive at a net present value. This has resulted in an additional impairment charge of £16 million.  We expect this element of the incremental impairment charge to reverse during the next 12 months as the temporarily missed payments are collected from our customers.  Impairment on lending from June 2020 onwards has been recorded using our standard impairment accounting models without applying these overlays due to the reduction in operational disruption and the tightened credit settings on new lending.In addition to the increased impairment provisions resulting from the model overlays, a further £20 million impairment charge was taken in the home credit business to account for reduced collections during the first half of the year.  IPF Digital impairmentThe key impacts of the pandemic on the digital business have been a reduction in the number of customers regularly paying more than their minimum monthly repayment and the disruption to forward-flow arrangements with debt purchasers.Having reviewed the expected economic impact of the pandemic on our customers’ debt repayment capacity and used this information to calculate the increased probability of customers defaulting, we recorded an appropriate impairment overlay provision. As a result of the pandemic, some of the forward-flow agreements we have with purchasers of our delinquent accounts have been disrupted.  As these agreements are used to calculate loss given default rates (‘LGD’) which form an integral part of our impairment accounting, this has resulted in an increase in LGDs in all markets and an incremental impairment charge. The combined impact of the overlay provision and the increase in LGDs on the impairment charge was £11 million.Alternative performance measures This full-year Financial Report provides alternative performance measures (APMs) which are not defined or specified under the requirements of International Financial Reporting Standards. We believe these APMs provide stakeholders with important additional information on our business. To support this we have included an accounting policy note on APMs in the notes to this full-year Financial Report, a glossary indicating the APMs that we use, an explanation of how they are calculated and how we use them, and a reconciliation of the APMs we use to a statutory measure, where relevant.International Personal Finance plcConsolidated income statement for the year ended 31 December

(Loss)/earnings per share - statutory

(Loss)/earnings per share – pre-exceptional items

The notes to the financial information are an integral part of this consolidated financial information.Consolidated statement of comprehensive income for the year ended 31 December

The notes to the financial information are an integral part of this consolidated financial information.Balance sheet as at 31 December

The notes to the financial information are an integral part of this consolidated financial information.Statement of changes in equity

* Includes foreign exchange reserve, hedging reserve, capital redemption reserve and amounts paid to acquire shares held in treasury and by employee trust.Cash flow statement for the year ended 31 December

1.  Basis of preparationThe financial information, which comprises the consolidated income statement, statement of comprehensive income, balance sheet, statement of changes in equity, cash flow statement and related notes, is derived from the full Group Financial Statements for the year ended 31 December 2020, which have been prepared in accordance with European Union endorsed International Financial Reporting Standards (‘IFRSs’) and those parts of the Companies Act 2006 applicable to companies reporting under IFRS. It does not constitute full Financial Statements within the meaning of section 434 of the Companies Act 2006. Statutory Financial Statements for the year ended 31 December 2019 have been delivered to the Registrar of Companies and those for 2020 will be delivered following the Company's annual general meeting. The auditor has reported on those Financial Statements: its reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498 (2) or (3) of the Companies Act 2006.The directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly they continue to adopt the going concern basis in preparing this financial information (see note 24 for further details).The accounting policies used in completing this financial information have been consistently applied in all periods shown. These accounting policies are detailed in the Group’s Financial Statements for the year ended 31 December 2020 which can be found on the Group’s website (www.ipfin.co.uk). The following amendments to standards are mandatory for the first time for the financial year beginning 1 January 2020 but do not have any material impact on the Group:

• Impact of the initial application of Interest Rate Benchmark Reform amendments to IFRS 9 and IFRS 7;
• Impact of the initial application of Covid-19-Related Rent Concessions Amendment to IFRS 16;
• Amendments to References to the Conceptual Framework in IFRS Standards;
• Amendments to IFRS 3 Definition of a business; and
• Amendments to IAS 1 and IAS 8 Definition of material.

The following standards, interpretations and amendments to existing standards are not yet effective and have not been early adopted by the Group:

• IFRS 17 ‘Insurance contracts’;
• Amendments to IFRS 10 and IAS 28 ‘Sale or Contribution of Assets between an Investor and its Associate or Joint Venture’;
• Amendments to IFRS 3 ‘Reference to the Conceptual Framework’;
• Amendments to IAS 1 ‘Classification of Liabilities as Current or Non-current’;
• Amendments to IAS 37 ‘Onerous Contracts – Cost of Fulfilling a Contract’;
• Annual Improvements to IFRS Standards 2018-2020 – Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards, IFRS 9 Financial Instruments, IFRS 16 Leases, and IAS 41 Agriculture.

Exceptional items Exceptional items 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 underlying results.

Critical accounting judgements and key sources of estimation uncertainty

The preparation of Consolidated Financial Statements requires the Group to make estimates and judgements that affect the application of policies and reported accounts.Critical judgements represent key decisions made by management in the application of the Group accounting policies. Where a significant risk of materially different outcomes exists due to management assumptions or sources of estimation uncertainty, this will represent a critical accounting estimate. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.The estimates and judgements which have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities are discussed below.

Key sources of estimation uncertainty

In the application of the Group’s accounting policies, the directors are required to make estimations that have a significant impact on the amounts recognised and to make estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.The following are the critical estimations, that the directors have made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in the Financial Statements.

Revenue recognition

The estimate used in respect of revenue recognition is the methodology used to calculate the EIR. In order to determine the EIR applicable to loans an estimate must be made of the expected life of each loan and hence the cash flows relating thereto. These estimates are based on historical data and are reviewed regularly. Based on a 3% variation in the EIR, it is estimated that the amounts receivable from customers would be higher/lower by £7.7 million (2019: £12.1 million). This sensitivity is based on historic fluctuations in EIRs.

Amounts receivable from customers

The Group reviews its portfolio of customer loans and receivables for impairment on a weekly or monthly basis. The Group reviews the most recent collections performance to determine whether there is objective evidence which indicates that there has been an adverse effect on expected future cash flows.  For the purposes of assessing the impairment of customer loans and receivables, customers are categorised into stages based on days past due as this is considered to be the most reliable predictor of future payment performance. The level of impairment is calculated using historical payment performance to generate both the estimated expected loss and also the timing of future cash flows for each agreement. The expected loss is calculated using probability of default (‘PD’) and loss given default (‘LGD’) parameters. The application of IFRS 9 to the effects of Covid-19 had a significant impact on the Group’s impairment accounting and charge in 2020, and our post model overlays (PMOs) have been prepared to ensure that the impacts of the pandemic are included within the Group’s impairment provisions, see below for further details. Impairment on lending from June 2020 onwards has been recorded using our standard impairment accounting models without applying these overlays due to the reduction in operational disruption and the tightened credit settings on new lending.Impairment models are monitored regularly to test their continued capability to predict the timing and quantum of customer repayments in the context of the recent customer payment performance. The models used typically have a strong predictive capability reflecting the relatively stable nature of the business and therefore the actual performance does not usually vary significantly from the estimated performance. The models are ordinarily updated at least twice per year.  Data that would normally be included within the periodic update this year contains Covid-19 data. This includes data from when there were restrictions on movements of agents and customers together with data driven by the tighter credit settings that were put in place as part of the Group’s pandemic response strategy.  This data is not considered to be representative of the expected future performance and therefore we have excluded it from our periodic update. On the basis that the payment performance of customers could be different from the assumptions used in estimating expected losses and the future cash flows, an adjustment to the amounts receivable from customers may be required.   A 5% increase/decrease in expected loss parameters would be a decrease/increase in amounts receivable from customers of £4.5 million.  This level of estimated impact is based on historic fluctuations in performance compared to the models and is subject to impairment overlay provisions.

Covid-19 post model overlay (PMO) on amounts receivable from customers

As discussed above, Covid-19 had a significant impact on our businesses in 2020. Government imposed restrictions on the freedom of movement and the introduction of debt repayment moratoria, together with the economic impact of the pandemic on our customers, had a significant adverse impact on collection cash flows in all our businesses. These events are unprecedented and, as a consequence, we have reviewed our impairment modelling under IFRS 9 to identify risks that are not fully reflected in the standard impairment models. This included a full assessment of expected credit losses, including a forward-looking assessment of expected collection cash flows. As a result, for home credit lending, issued before June 2020 and IPF Digital lending, we have prepared post model overlays (PMOs) to our impairment models in order to calculate the expected impact of the pandemic on the Group’s impairment provisions. Based on management’s current expectations, the impact of these PMOs was to increase impairment provisions at 31 December 2020 by £38.7 million as set out below.

Expected credit loss (‘ECL’)Missed collections as a result of government imposed restrictions on the freedom of movement and the introduction of debt repayment moratoria is not considered to be an indicator of a significant increase in credit risk (SICR). However, our impairment models cannot distinguish between a missed payment arising from these factors and a missed payment arising from a customer not making a payment. Therefore, we have reduced the modelled ECL based on historic customer roll rates before calculating the increase in ECL arising from the pandemic. This latter assessment is based on estimated future repayment patterns on a market by market basis, taking into account operational disruption, debt repayment moratoria and the expected recessionary impact. We then assessed the extent to which the reduction in cash flows is likely to be permanent or temporary. The estimated permanent difference in cashflows has been recorded as an increase of £17.1 million in ECL in the Group’s home credit businesses as a Covid-19 PMO.In our digital businesses, in line with our home credit markets, we have reviewed the expected recessionary impact of the pandemic on our customers’ debt repayment capacity. We used this information to calculate the increased probability of customers defaulting. The estimated increase in PD has been included as a £5.2 million Covid-19 PMO. DiscountingWe expect temporary missed repayments in our home credit businesses to be repaid at the end of the credit agreement, rather than at the point when agent service is resumed. The charges for lending are largely fixed and therefore these delayed cash flows have been discounted using the effective interest rate to arrive at a net present value. This results in an additional impairment provision of £16.4 million that is expected to unwind during the next 12 months as the temporary missed collections are collected from customers. We have performed analysis on the ECL and discounting Covid-19 PMOs to show the estimated variation to amounts receivable from customers as a result of the key variables influencing ECL (namely operational disruption, repayment moratoria and recessionary) being different to management’s current expectations based on the following collection scenarios:

• ECL – variations in the key variables resulting in a 3% increase/decrease in the ECL would result in an increase/decrease in the Covid-19 PMO of £9.3 million.

• Discounting – temporary missed repayments in home credit, that are assumed to be repaid at the end of the loan, being received three months later/earlier than forecast would result in an increase/decrease in the Covid-19 PMO of £7.2 million.

These variations reflect management’s current assessment of a reasonable range of outcomes from the actual collections performance.

Polish early settlement rebates

The Regulatory update section of this report sets out details of a comprehensive review being conducted by UOKiK, the Polish competition and consumer protection authority, of rebating practices by banks and other consumer credit providers on early loan settlement, including those of the Group’s Polish businesses. We reviewed the likelihood of the resolution of this matter resulting in higher early settlement rebates being payable to customers that settled their agreements early before the balance sheet date. A number of risks and uncertainties remain, in particular with respect to future claims volumes relating to historic rebates paid and the nature of any customer contact exercise required. The total amount provided of £17.6 million (31 December 2019: £4.0 million) represents the Group’s best estimate of the likely future cost of increasing historic customer rebates, based on its current strategy to achieve resolution. Whilst the volume of claims could differ from the estimates, the Group’s expectation at this stage is that claims rates are unlikely to be more than 25% higher than the assumed rate. Claims management charges in Spain The operational review section of this report in relation to IPF Digital’s New markets makes reference to revenue contraction resulting from higher levels of claims management charges in Spain.  We reviewed the charges by reference to the claims incidence experience and average cost of resolution in the Spanish business. The provision recorded of £8.0 million (split £6.4 million against receivables and £1.6 million in provisions) represent the Group’s best estimate of future claims volumes and the cost of their management, based on current claims management methodology, together with current and future product plans.  Whilst the future claims incidence and cost of management could differ from estimates, the Group’s expectation at this stage is that overall costs are unlikely to be more than 25% higher than those assumed in the charges.

Tax

Estimations must be exercised in the calculation of the Group’s tax provision, in particular with regard to the existence and extent of tax risks. This exercise of estimation with regards to the EU State Aid investigation, which is disclosed in note 32, could have a significant effect on the Financial Statements, as there are significant uncertainties in relation to the amount and timing of associated cash flows. Deferred tax assets arise from timing differences between the accounting and tax treatment of revenue and impairment transactions and tax losses.  Estimations must be made regarding the extent to which timing differences reverse and an assessment must be made of the extent to which future profits will be generated to absorb tax losses.  A shortfall in profitability compared to current expectations may result in future adjustments to deferred tax asset balances

Critical accounting judgements

Accounting judgements have been made over whether the EU State Aid investigation requires a provision or disclosure as a contingent liability, see note 23 for further details.Alternative performance measuresIn reporting financial information, the Group presents alternative performance measures, ‘APMs’ which are not defined or specified under the requirements of IFRS.The Group believes that these APMs, which are not considered to be a substitute for or superior to IFRS measures, provide stakeholders with additional helpful information on the performance of the business. The APMs are consistent with how the business performance is planned and reported within the internal management reporting to the Board. Some of these measures are also used for the purpose of setting remuneration targets.Each of the APMs, used by the Group are set out below including explanations of how they are calculated and how they can be reconciled to a statutory measure where relevant.The Group reports percentage change figures for all performance measures, other than profit or loss before taxation and earnings per share, after restating prior year figures at a constant exchange rate. The constant exchange rate, which is an APM, retranslates the previous year measures at the average actual periodic exchange rates used in the current financial year. These measures are presented as a means of eliminating the effects of exchange rate fluctuations on the year-on-year reported results.The Group makes certain adjustments to the statutory measures in order to derive APMs where relevant. The Group’s policy is to exclude items that are considered to be significant in both nature and/or quantum and where treatment as an adjusted item provides stakeholders with additional useful information to assess the year-on-year trading performance of the Group.2. Principal risks and uncertainties In accordance with the Companies Act 2006, a description of the principal risks and uncertainties (and the mitigating factors in place in respect of these) is included below.  Effective management of risks, uncertainties and opportunities is critical to our business in order to deliver long-term shareholder value and protect our people, assets and reputation. In 2020, we continued to face a challenging external environment, particularly from changing regulation, and the impact of issues arising from the Covid-19 pandemic. Internally, our operational governance framework and risk management processes are continually reviewed to ensure that where areas of improvement are identified, a plan of action is put in place and can become a key focus for the Board.  The effectiveness of operating these processes is monitored by the Audit and Risk Committee on behalf of the Board. Risk key

The risks facing the business by risk category are: