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IPF hit by regulation

IPF is suffering due to a rising regulatory burden.
October 19, 2017

To say regulation hasn’t been a friend to International Personal Finance (IPF) during the past two years would be an understatement. The sub-prime lender has suffered as a result of tighter rules on consumer loan charges and creditworthiness assessments, as well as mounting competition in some of its core European markets. The latest threat to profitability are proposals from the Polish tax authorities that would disallow tax deductions relating to certain transactions. While management has taken some action to try to mitigate some of these pressures, profitability was still eroded last year. What’s more, City analysts expect earnings to decline again this year.

IC TIP: Sell at 189p
Tip style
Sell
Risk rating
High
Timescale
Short Term
Bull points

High dividend yield

Trading at a discount

Bear points

Broker downgrades for 2017 and 2018

Rising competition

Regulatory pressures

Polish tax dispute

IPF has faced particular challenges in Poland. In March last year the Polish government introduced a cap on all non-interest charges associated with consumer credit. Management launched new products, offering credit with longer repayment terms, which it reckons will mitigate around half of the estimated £30m gross financial impact of this legislation. This helped credit issuance recover during the first half of the year, when it grew 4 per cent in the country, although management expects this to be flat for the full year.

However, with the Polish business forced to lower pricing of its doorstep loans, there was also compression in the revenue yield during the first half. Pre-tax profits dipped marginally to £22.3m. Unfortunately, Poland is one of IPF’s core markets, accounting for nearly two-fifths of the sub-prime lender’s pre-tax profits during the first half of the year. And there is the potential for profits here to be eroded further. In December the Polish government published proposals to lower the cap on non-interest costs on consumer loans. If enacted it would mean total annual charges would not be able to exceed 75 per cent of the value of the loan, compared with the 100 per cent cap introduced last year.

Earlier this month the Polish government also published proposals that would no longer allow tax deductions on expenses related to certain related-party transactions. In IPF’s case, these changes would relate to certain aspects of its credit hedging strategy. The changes would have increased its tax charge by around £12m to £14m in 2016. It would also result in a one-time accounting charge this year of up to £30m, following the write-down of a deferred tax asset. If enacted, management reckons the change would come into effect from January 2018. Management could mitigate the proposed changes by employing a third-party to carry out its credit hedging. If left unmitigated, analysts at Shore Capital estimate the proposals would reduce the lender’s earnings by around 15 per cent during 2018 and 2019. The business is already in the process of appealing a tax decision that cost it £20m, relating to its 2008 financial year.

IPF faces similar headwinds in some of its other markets. In the Czech Republic mounting competition within the sub-prime credit market has resulted in a downturn in credit issuance. Its decision to focus on longer-term loans also resulted in a reduction in revenue yields during the first half. Nevertheless, customer numbers for the northern European business – which also includes Poland – declined 13 per cent. Meanwhile, in Romania, business also suffered as a result of the introduction of tighter creditworthiness assessments. Credit issuance declined by almost a quarter. There was some respite in Mexico. After suffering some operational difficulties last year, average net receivables were up 13 per cent at constant currencies to £169m during the first half of this year. 

INTERNATIONAL PERSONAL FINANCE (IPF) 
ORD PRICE:188.8pMARKET VALUE:£ 421m
TOUCH:188.25-189p12-MONTH HIGH:318pLOW: 144p
FORWARD DIVIDEND YIELD:5.8%FORWARD PE RATIO:7
NET ASSET VALUE:214pNET DEBT:137%
Year toTurnoverPre-taxEarningsDividend
31 Dec(£m)profit (£m)per share (p)*per share (p)*
Year to 31 DecTurnover (£m)Pre-tax profit (£m)*Earnings per share (p)*Dividend per share (p)
201478310038.212.0
201573510030.712.4
20167639329.412.4
2017*8228928.414.2
2018*88410332.913.6
% change+8+16+16-4
Normal market size:3,000   
Beta:1.09   
     
*JPMorgan Cazenove forecasts, adjusted PTP and EPS figures