REG - Non-Standard Fin - Unaudited Half Year Results to 30 June 2021
Non-Standard Finance plc
('Non-Standard Finance', 'NSF', the 'Company' or the 'Group')
Unaudited Half Year Results to 30 June 2021
28 September 2021
Key points
· The Group is continuing its discussions with the FCA regarding its redress programme for guarantor loans customers at an estimated total cost of £16.9m that has already been provided for in the Group's balance sheet
· The independent regulatory reviews of both branch-based lending and home credit are ongoing
· Plans for a substantial capital raise ('the Capital Raise') remain subject to, inter alia, the satisfactory completion of the independent regulatory reviews; the continued support of Alchemy and other key shareholders as well as the Group's lenders
· In the absence of the Capital Raise, the Group remains balance sheet insolvent and the Group's ability to remain a going concern is subject to material uncertainties, but the Directors continue to believe there is a good prospect of resolving this position
· The Group's performance in the first half was better than expected and current trading is also encouraging:
o Branch-based lending: normalised pre-tax profit of £2.1m (2020: £0.9m) with promising levels of loans issued and impairment at historically low levels;
o Home credit: normalised pre-tax profit of £1.0m (2020: £2.2m) with steady growth in customer numbers and impairment at record lows as the quality of our customer base has improved; and
o Guarantor loans: reduced normalised pre-tax loss of £1.9m (2020: loss of £9.2m) thanks to a collections performance that exceeded expectations and a marked reduction in impairment
· Normalised revenue1 down 26% to £67.8m (2020: £92.2m); reported revenue of £67.8m (2020: £91.2m)
· Normalised operating profit1 increased by 87% to £9.4m (2020: £5.0m); reported operating profit of £7.4m (2020: operating loss of £12.3m)
· Normalised loss before tax1 of £3.5m (2020: normalised loss before tax of £9.9m)
· Exceptional charge of £4.0m (2020: £91.3m) includes a small increased provision for redress in guarantor loans and costs associated with the Capital Raise resulting in a much reduced reported loss before tax2 of £7.5m (2020: reported loss of £102.7m)
· No half year dividend per share is being declared (2020: 0.0p per share).
· At 30 June 2021 the Group had cash balances of £103.7m (2020: £75.7m), gross borrowing of £330.0m (2020: £345.0m)
· After careful consideration, and despite the presence of a number of material uncertainties as detailed in note 1 to the financial statements, the Board has concluded that it remains appropriate to continue to adopt the going concern basis of accounting. The Group has remained within its financial covenants to date
· Current trading and outlook: all three divisions are trading ahead of budget and the Group remains confident of being able to complete the Capital Raise that will fund customer redress, strengthen the balance sheet and provide funding for future growth
Financial summary
6 months to 30 June
2021
2020
% change
£'000
£'000
Normalised revenue1
67,842
92,223
-26%
Reported revenue
67,842
91,252
-26%
Normalised operating profit1
9,385
5,016
87%
Reported operating profit/(loss)
7,467
(12,307)
-161%
Normalised (loss)/profit before tax1
(3,510)
(9,896)
65%
Reported loss before tax2
(7,535)
(102,749)
93%
Normalised (loss) / earnings per share3
(1.12)p
(2.55)p
56%
Reported loss per share
(2.41)p
(32.77)p
93%
Half year dividend per share
Nil
Nil
n/a
1 Normalised figures are before fair value adjustments, amortisation of acquired intangibles and exceptional items. Operating profit/(loss) is before finance costs. 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 Normalised loss per share in 2021 is calculated as normalised loss after tax of £3.510m divided by the weighted average number of shares of 312,437,422. The normalised earnings per share in 2020 is calculated as normalised profit after tax of £7.952m, divided by the weighted average number of shares of 312,437,422.
Jono Gillespie, Group Chief Executive Officer, said
"The Group delivered a strong operational performance in the first half and both branch-based lending and home credit enjoyed a much improved financial result versus the prior year that was severely impacted by the pandemic.
"When Non-Standard Finance was founded in 2015 it had one main purpose and belief: that people on low incomes or with a poor credit history deserve access to credit they can afford, provided in a transparent, effective and efficient way that takes account of their needs and individual circumstances. Since then, we have provided credit to more than 428,000 customers, helping them to manage the peaks and troughs in their expenditure, often when they had few other places to turn to.
"Today there are more than 10 million people in Britain whose financial circumstances mean that they are effectively excluded from mainstream credit but whose financial needs - whether to repair a car or buy a new washing machine - still need to be addressed. It is also clear that in the past two years the landscape has changed, prompting the exit of a number of leading companies that have either quit the sector altogether or have severely curtailed their activities, leaving many consumers with even fewer options to access regulated credit.
"After a great deal of work over the past year and despite the challenges presented by the pandemic and a complex regulatory landscape, we are determined to continue to deliver on our original purpose. We are progressing our discussions with the FCA and hope to reach a conclusion soon. While this work is ongoing, the Group has concluded that an additional exceptional provision of £1.9m is required to cover expected costs of redress due to customers that may have suffered harm. The methodology of this estimate remains unchanged, but the amount has increased due to the continued accrual of estimated penalty interest.
"As soon as we are able to resolve the Group's outstanding regulatory issues, we are focused on executing a substantial capital raise of around £80m that will be used to both fund the payment of redress as well as strengthen significantly the Group's balance sheet, underpinning our return to profitable growth."
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 2021 and 30 June 2020 respectively.
6 months to 30 June 2021
Normalised4
Branch-based lending
Guarantor loans
Home credit
Central costs
NSF plc
£000
£000
£000
£000
£000
Revenue
39,443
10,380
18,019
-
67,842
Other operating income
237
1
607
8
853
Modification loss
(1,306)
(1,904)
-
-
(3,210)
Derecognition (loss) gain
(1,621)
130
-
-
(1,491)
Impairments
(4,041)
(984)
(1,419)
-
(6,444)
Admin expenses
(23,200)
(6,870)
(15,752)
(2,343)
(48,165)
Operating profit (loss)
9,512
753
1,455
(2,335)
9,385
Net finance cost
(7,367)
(2,611)
(486)
(2,431)
(12,895)
Profit (loss) before tax
2,145
(1,858)
969
(4,766)
(3,510)
6 months to 30 June 2020
Normalised4
Branch-based lending
Guarantor loans
Home credit
Central costs
NSF plc
£000
£000
£000
£000
£000
Revenue
47,914
17,032
27,277
-
92,223
Other operating income
888
-
-
-
888
Modification loss
(638)
(58)
-
-
(696)
Derecognition gain
192
494
-
-
686
Impairments
(15,593)
(15,727)
(7,927)
-
(39,247)
Admin expenses
(22,238)
(7,114)
(16,382)
(3,104)
(48,838)
Operating profit (loss)
10,525
(5,373)
2,968
(3,104)
5,016
Net finance cost
(9,603)
(3,871)
(774)
(664)
(14,912)
Profit (loss) before tax
922
(9,244)
2,194
(3,768)
(9,896)
4 Excludes fair value adjustments, amortisation of acquired intangibles and exceptional items
Given the significant reduction in lending that took place during 2020, combined with a healthy collections performance during the second half of 2020 and into 2021, the combined net loan book before fair value adjustments reduced by 23% versus 2020 as summarised in the table below:
Reconciliation of net loan book
2021
Normalised
2021
Fair value
adjustments2021
Reported
2020
Normalised
2020
Fair value
adjustments2020
Reported
£m
£m
£m
£m
£m
£m
Branch-based lending
163.8
-
163.8
187.7
-
187.7
Guarantor loans
41.4
-
41.4
87.6
0.4
88.0
Home credit
24.3
-
24.3
24.3
-
24.3
Total
229.5
-
229.5
299.6
0.4
300.0
Context for the results
The 2021 reported results include exceptional items whilst the 2020 reported results include fair value adjustments, amortisation of acquired intangibles and exceptional items. Exceptional items in 2021 include an additional provision for customer redress of £1.9m, advisory fees in connection with the Group's proposed capital raise of £1.6m and restructuring costs of £0.5m. Exceptional items in 2020 include the write down of certain intangible assets and all goodwill assets and a provision for customer redress of £15.8m.
Investor presentation and dial-in details
There will be an investor presentation at 1.00pm on 28 September 2021. The meeting will be broadcast via webcast and conference call. To watch the live webcast, please register for access by visiting the Group's website www.nsfgroupplc.com. For those unable to access the web, details of a 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 1.00 pm, 28 September 2021
12.50 pm
Please call +44 (0)330 336 9125
Access code
1882529
1.00 pm
Meeting starts
All times are British Summer Time.
For more information:
Non-Standard Finance plc
Jono Gillespie, Group Chief Executive Officer
Peter Reynolds, Director, IR and Communications
+44 (0) 20 3869 9020
Maitland/AMO
Neil Bennett
Finlay Donaldson
+44 (0) 20 7379 5151
The non-standard consumer finance market
The non-standard consumer finance market represents a significant segment of the UK's retail financial services sector. It provides credit to consumers that either fail to meet the lending requirements of high street financial institutions or that choose not to borrow from them. These consumers represent approximately a third of the UK's adult population and include those that have no credit history, low credit status or are credit impaired. A well-regulated, trusted and sustainable credit sector is imperative to these consumers, particularly in the current economic climate. Between March and October 2020, the FCA found, that due to the impact of the pandemic there are now over 14 million people in the UK with low financial resilience. Focused on face-to-face lending through both branch-based lending and home credit, NSF's businesses are focused on serving the needs of these sub-prime borrowers for whom access to appropriate financial services can be important in helping them manage the peaks and troughs of their income and expenditure.
About Non-Standard Finance
Non-Standard Finance plc is listed on the main market of the London Stock Exchange (ticker: NSF) and is a leading player in the UK's non-standard finance market with leadership positions in branch-based lending 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. Our business is founded on building 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 adults4 that are either unable or unwilling to borrow from mainstream banks and other lenders.
4 UK Specialist Lending Market Trends and Outlook 2020. Executive insights Volume XX, Issue 39 - L.E.K Consulting
Group Chief Executive's statement
Introduction
Against an uncertain but slowly improving macroeconomic backdrop and despite a number of operational, regulatory and financial challenges, the Group has performed ahead of management's expectations with encouraging performances by the continuing business divisions: branch-based lending and home credit. It was announced on 30 June 2021 that the guarantor loans division was being placed into a managed run-off due to the sub-scale nature of the business and complex regulatory requirements, and would ultimately be closed. As expressed at the time of the Group's 2020 full year results, whilst hugely disappointing, this was the only logical conclusion and based on a detailed analysis, is expected to deliver the best outcome for shareholders.
We are continuing to work with the FCA to resolve a number of outstanding regulatory issues (see below) so that the Board can move to complete a substantial capital raise of approximately £80m (the 'Capital Raise') to fund customer redress, strengthen the Group's balance sheet and underpin future loan book growth.
2021 half year results
The Group delivered a pleasing first half performance with both branch-based lending and home credit ahead of budget and delivering positive pre-tax profit before exceptional items. Despite not having issued any loans in the period, the Guarantor Loans Division also delivered an improved performance although remained loss-making at the pre-tax level.
The significant reduction in the net loan books of all three divisions versus the prior year meant that normalised revenue before fair value adjustments reduced to £67.8m (2020: £92.2m). However, this reduction was also accompanied by a marked reduction in impairment due to the reduced levels of lending and a good collections performance by all three divisions. This fed through into a strong uplift in normalised operating profit to £9.4m in the period (2020: £5.0m). A much reduced exceptional charge of £4.0m (2020: £91.3m) meant that the reported loss before tax was also significantly lower at £7.5m (2020: loss of £102.7m). The exceptional charge included an additional provision for redress of £1.9m, advisory fees associated with the Capital Raise of £1.6m and restructuring costs in guarantor loans of £0.5m (see Financial review below).
Branch-based lending
An uptick in both the number of leads and qualifying applications to branch ('ATBs') more than justified the opening of an additional branch in Leeds during the first half, taking the total number of branches to 75. Whilst the sustained presence of COVID-19 restrictions held back the pace of recovery during the first four months of the year, both lead volume and ATBs increased as these were gradually removed. While staff numbers had been reduced during 2020, given the more gradual pace of recovery in lending volumes there was still some surplus capacity in the network during the first half although it is expected that this will be removed by the usual seasonal increase in demand in the autumn. Whilst the impact of lower lending volumes during 2020 and 2021 meant that revenues were down year-on-year, the impact on profitability was mitigated by a strong collections performance that also fed through into lower interest costs. The result was that normalised profit before tax increased by 133% to £2.1m (2020: £0.9m).
Since the end of June 2021, lending volumes have remained robust and in-line with budget and the net loan book has continued to recover. A reduction in the number of customers requiring forbearance has helped to boost average yields and collections have remained strong so that impairment remains at or below historic norms. Whilst any return to COVID-19 restrictions or lockdowns would hamper the pace of recovery, the current trading performance is encouraging.
Home credit
As COVID-19 restrictions were gradually lifted, our agents were able to return to making more face-to-face visits and overall customer numbers began to increase. At the same time, the quality of our customer base improved with an increase in the proportion deemed to be 'quality customers' (i.e. those that have made 9 or more payments out of the last 13 payments due) which is now back to the levels seen in 2019. While the reduced levels of lending during 2020 and into 2021 meant that the net loan book declined year-on-year, a step-up in lending volume in May and June drove a return to month-on-month growth in the loan book. The collections performance was particularly strong in the period with non-cash payments remaining the most popular channel for customers. Whilst a temporary spike in complaints in March meant that overall administration costs were not down by as much as had previously been expected, they were still down on last year and normalised pre-tax profit was ahead of budget at £1.0m (2020: £2.2m).
Since the end of June, we have continued to grow the active customer base as well as the number of quality customers on our books which bodes well for future financial performance. Whilst the summer months are traditionally a quieter lending period, with lending volumes in July and August softer than expected, an excellent collections performance meant that overall, the business remains ahead of budget as we approach the important peak lending period during the final quarter.
Guarantor loans
Following a detailed review of the Group's Guarantor Loans Division, it was announced on 30 June 2021 that the division was to be placed into a managed run-off and ultimately closed. Whilst hugely disappointing, the Board determined that collecting out the division's loan book was the only rational conclusion given the combined impact of the pandemic, the sub-scale nature of the business and complex regulatory requirements that would necessarily impede any potential future recovery in profitability.
Having not written any new loans in the period, the loan book declined by 53% and revenues were sharply down on the prior year. However, collections were ahead of plan reflecting the dedication and hard work of our staff, as well as a better than expected payment performance by customers that had been affected by COVID-19. This helped to reduce impairment significantly and the delivery of a much reduced normalised pre-tax loss of £1.9m (2020: pre-tax loss of £9.2m).
Since the end of June, the business has continued to deliver strong collections performance alongside a carefully managed reduction in the number of staff following the announcement that the loan book was being placed into managed run-off.
Liquidity, funding and going concern
As at 30 June 2021 the Group had cash at bank of £103.7m (31 December 2020: £78.0m) and gross borrowings of £330.0m (31 December 2020: £330.0m). As at 31 August 2021 cash at bank was £100.8m while the level of gross borrowings remained unchanged at £330.0m.
The Group has a number of debt facilities including a £285m term loan facility that matures in August 2023 and a £45m revolving credit facility ('RCF') maturing in August 2022. Both facilities remain fully drawn. The Group is in discussions with its lenders regarding extensions to the term of its existing facilities. Any such amendments to the existing facilities would be conditional on the completion of the Capital Raise.
The Group also has a multi-year £200m securitisation facility that remains undrawn. Whilst current cash balances mean that there is no need for additional funding at the present time, the facility remains in place. However, in the absence of the Capital Raise, it is unlikely to be available for use owing to the associated covenant requirements embedded within the facility agreement and the need for permission from the lender prior to any drawdown. It is hoped that following a successful capital raise the facility will be available for future use, if required.
The Directors acknowledge the considerable challenges presented over the last year and the material uncertainties which may cast significant doubt on the ability of both the Group and the Company to continue to adopt the going concern basis of accounting. However, despite these challenges, it is the Directors' reasonable expectation that the Group and Company will raise sufficient equity in the timeframe required and will continue to operate and meet its liabilities as they fall due for the next 12 months and beyond and therefore it has concluded the business is viable.
Should the Capital Raise be unsuccessful or take longer than expected to execute then it is expected that the Group would remain in a net liability position from a balance sheet perspective, would breach certain borrowing covenants during the next 12 months and as a result would not be able to access further funding over the period of breach and would require waivers from its lenders. In such circumstance, the Group may fall under the control of its lenders and there is a possibility of the Group going into insolvency.
Refer to note 1 to the financial statements for further detail.
Outstanding regulatory issues
Redress programme for guarantor loans customers
The Group announced on 5 August 2020 that, following its multi-firm review of the guarantor loans sector, the FCA had raised some concerns regarding certain processes and procedures at GLD and a programme of redress would be required for those customers deemed to have suffered harm as a result.
Having proposed a detailed redress methodology, the Group is continuing to discuss this with the FCA with a view to commencing the execution of the redress programme in 2021. In addition to the exceptional provision of £15.4m that was included in the 2020 full year results to cover the total expected costs of the redress programme, an additional exceptional provision of £1.9m has been included in the 2021 half year results to reflect the continued accrual of estimated penalty interest, as the scheme has taken longer than expected to implement. The total estimated cost of the programme, which remains subject to confirmation by the FCA, includes: (i) the sum of all redress due to customers, including penalty interest (the 'Gross Redress Amount') of £18.2m, offset by existing impairment provisions of £1.9m; and (ii) the associated operational costs of executing the programme amounting to £0.6m, resulting in a net amount of £16.9m. It is possible that the Gross Redress Amount may differ, perhaps materially from the current estimate and that this could materially impact the financial statements. This is because the Group and the FCA are continuing to review the methodology as well as the risks and inherent uncertainties surrounding the assumptions used in the provision calculation.
Independent reviews of both branch-based lending and home credit
In the light of its proposed redress methodology in guarantor loans, the Group confirmed that it had commenced an independent review of its lending processes and procedures in both branch-based lending and home credit, taking account of recent decisions at the Financial Ombudsman Service. These reviews are ongoing and we are continuing to work closely with the FCA so that we can reach a conclusion soon. The Directors recognise that whilst the independent reviews at the branch-based lending and home credit divisions remain ongoing there remains a risk that the final outcome of these reviews may result in the identification of customers who may require redress, and the cost of redress for the Group could be materially higher than is currently provided for in the financial statements.
Capital Raise
It is expected that the Capital Raise will involve a firm placing and open offer and the Board has received indications of support from the Group's major shareholder Alchemy, subject to the outcome of the Group's engagement with its lenders, Alchemy's analysis of the FCA and Group's regulatory reviews, and greater levels of certainty around redress and claims.
Other regulatory developments
In addition to the matters outlined above, there have been a number of other regulatory developments in late 2020 and in 2021 that have been particularly relevant to the Group's business and these are summarised below:
· Climate related disclosures - On 21 December 2020, the FCA published a policy statement and final rule and guidance promoting better climate-related financial disclosures for UK premium listed commercial companies. They will be required to include a statement in their annual financial report which sets out whether their disclosures are consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures ('TCFD') and to explain if they have not done so. The rule applies for accounting periods beginning on or after 1 January 2021. The FCA has recently consulted on proposals to: introduce climate-related financial disclosure rules and guidance for asset managers, life insurers and FCA-regulated pension providers; and extend climate-related disclosure rules to standard listed issuers and we await the outcome of this review. The FCA has also sought views on other topical ESG issues in capital markets.
· Woolard Review - On 2 February, the FCA published the much-anticipated Woolard Review, a significant and wide-ranging review of change and innovation in the unsecured credit market. The report contains 26 recommendations for the FCA, government and other bodies, including an urgent recommendation to bring all buy now pay later products into the remit of FCA regulation.
· Vulnerable customers - On 23 February 2021, the FCA published its guidance for firms on the fair treatment of vulnerable customers. The FCA wants to drive improvements in the way that firms treat vulnerable customers and bring about a practical shift in firms' actions and behaviour. It wants vulnerable customers to experience outcomes that are as good as for other customers and to receive consistently fair treatment.
· Operational resilience - On 29 March 2021, the FCA published its final rules and guidance on new requirements to strengthen operational resilience in the financial services sector. They come into force on 31 March 2022. By that date, affected firms must have identified their important business services, set impact tolerances for the maximum tolerable disruption and carried out mapping and testing to a level of sophistication necessary to do so. Firms must also have identified any vulnerabilities in their operational resilience.
· Consumer Duty - The FCA issued a consultation on a new Consumer Duty that would seek to set clearer and higher expectations for firms' standards of care towards consumers. It is proposed that the Consumer Duty would be a package of measures, comprised of a new Consumer Principle that provides an overarching standard of conduct, supported by a set of cross-cutting rules and four outcomes that set clear expectations for firms' cultures and behaviours. Firms would be expected to monitor, test and (where necessary) adapt their policies, practices and processes so they can satisfy themselves, and demonstrate to the FCA where required, that the outcomes for their customers are in line with the FCA's expectations.
The FCA has sought views on two options for the wording of the Consumer Principle: 'A firm must act to deliver good outcomes for retail clients'; and 'A firm must act in the best interests of retail clients'. The FCA is not consulting at this stage on the drafting of the proposed remaining rules. A second consultation is expected to follow by 31 December 2021 and any new rules will be made by 31 July 2022.
We 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.
Dividend
As a result of the significant reported losses in 2020 and during the first half of 2021, the Company does not have any distributable reserves and is therefore not in a position to declare a half year dividend (2020: £nil per share). As part of any future capital raise, the Board is committed to completing a process, subject to shareholder and Court approval, to create sufficient distributable reserves so that the Company can resume the payment of cash dividends to shareholders when it is appropriate to do so.
Current trading and outlook
All three divisions remain ahead of budget with strong collections and better than expected rates of impairment. While the pace of recovery in lending volumes has been a little softer than expected during the summer months, given the structural changes in the home credit market and our pre-eminent position in branch-based lending, subject to the successful execution of the Capital Raise, we are well placed to achieve our financial objectives of year-on-year loan book growth and an improving return on asset.
Jono Gillespie
Group Chief Executive Officer
28 September 2021
Financial review
Fair value adjustments and amortisation of acquired intangibles in 2020 include amounts relating to the acquisition of George Banco. There were no such adjustments in 2021.
6 months to 30 June
2021
2021
2021
Normalised1
Fair value adjustments, amortisation of acquired intangibles and exceptional items
Reported
£'000
£'000
£'000
Revenue
67,842
-
67,842
Other operating income
853
-
853
Modification loss
(3,210)
-
(3,210)
Derecognition gain
(1,491)
-
(1,491)
Impairments
(6,444)
-
(6,444)
Exceptional provision for customer redress
-
(1,918)
(1,918)
Admin expenses
(48,165)
-
(48,165)
Operating profit (loss)
9,385
(1,918)
7,467
Exceptional items2
-
(2,107)
(2,107)
Profit (loss) before interest and tax
9,385
(4,025)
5,360
Finance cost
(12,895)
-
(12,895)
Loss before tax
(3,510)
(4,025)
(7,535)
Taxation
-
-
-
Loss after tax
(3,510)
(4,025)
(7,535)
Loss per share
(1.12)
(2.41)
Dividend per share
-
-
6 months to 30 June
2020
2020
2020
Normalised1
Fair value adjustments, amortisation of acquired intangibles and exceptional items
Reported
£'000
£'000
£'000
Revenue
92,223
(971)
91,252
Other operating income
888
-
888
Modification loss
(696)
-
(696)
Derecognition gain
686
-
686
Impairments
(39,247)
-
(39,247)
Exceptional provision for customer redress
-
(15,753)
(15,753)
Admin expenses
(48,838)
(599)
(49,437)
Operating profit (loss)
5,016
(17,323)
(12,307)
Exceptional items2
-
(75,530)
(75,530)
Profit (loss) before interest and tax
5,016
(92,853)
(87,837)
Finance cost
(14,912)
-
(14,912)
Loss before tax
(9,896)
(92,853)
(102,749)
Taxation
1,944
(1,569)
375
Loss after tax
(7,952)
(94,422)
(102,374)
Loss per share
(2.55)
(32.77)
Dividend per share
-
-
1 Normalised figures, adjusted to exclude fair value adjustments, amortisation of acquired intangibles and exceptional items2. Refer to note 6 in the notes to the financial statements for further detail
Whilst the UK economy bounced-back strongly during the first half of 2021, the impact of the pandemic on the Group during 2020 together with sustained COVID-19 restrictions in certain sectors continued to impact the Group's financial performance in the first half of 2021. Normalised revenue was down 26% at £67.8m (2020: £92.2m) reflecting the decline in the net loan books of all three divisions following the significant reduction in lending and higher impairment experienced in 2020. Whilst lending volumes at both branch-based lending and home credit showed steady growth month-on-month in 2021, there was no new lending at guarantor loans and, as announced at the time of the Group's full year results in June 2021, the loan book of that division is now in managed run-off. Modification and derecognition losses increased in the period following increased levels of forbearance offered to customers affected by the pandemic, whilst better than expected collections performance in all three divisions meant impairments fell by 84% to £6.4m (2020: £39.2m).
Administration costs were 1% lower at £48.2m (2020: £48.8m) with lower staff and marketing costs offset by an increase in complaint handling costs following a temporary spike in complaints during the first quarter. The spike was driven by certain claims management companies ('CMCs') and has since reduced significantly. Whilst still some way off from operating at full strength, the net result was that normalised operating profit rose by 87% to £9.4m (2020: £5.0m). Having repaid the securitisation facility that was first drawn in April 2020, finance costs were some £2.0m lower at £12.9m (2020: £14.9m) that led to a much reduced normalised loss before tax of £3.5m (2020: loss before tax of £9.9m).
An exceptional charge totalling £4.0m (2020: £91.3m) comprised an increased provision for customer redress together with restructuring costs and fees associated with the Capital Raise. The net result was a much reduced reported loss before tax of £7.5m (2020: loss before tax of £102.7m) and normalised loss per share was 1.12p (2020: loss per share of 2.55p) while exceptional items meant that the Group's reported loss per share was 2.41p (2020: loss per share of 32.77p).
Divisional review
Branch-based lending
Despite the continued presence of government restrictions, the business remained fully operational throughout the period with all branches open and delivered a better than expected performance in the period. While remote channels remain popular in many areas of the consumer credit market, we remain committed to face-to-face lending which we continue to believe drives better outcomes for customers, can deliver attractive shareholder returns and is at the heart of our business model.
Financial results
6 months to 30 June
2021
2021
2021
Normalised
Fair value adjustments and exceptional items
Reported
£'000
£'000
£'000
Revenue
39,443
-
39,443
Other operating income
237
-
237
Modification loss
(1,306)
-
(1,306)
Derecognition loss
(1,621)
-
(1,621)
Impairments
(4,041)
-
(4,041)
Revenue less impairment
32,712
-
32,712
Admin expenses
(23,200)
-
(23,200)
Operating profit
9,512
-
9,512
Exceptional items
-
-
-
Profit before interest and tax
9,512
-
9,512
Finance cost
(7,367)
-
(7,367)
Profit before tax
2,145
-
2,145
Taxation
-
-
-
Profit after tax
2,145
-
2,145
6 months to 30 June
2020
2020
2020
Normalised
Fair value adjustments and exceptional items
Reported
£'000
£'000
£'000
Revenue
47,914
-
47,914
Other operating income
888
-
888
Modification loss
(638)
-
(638)
Derecognition gain
192
-
192
Impairments
(15,593)
-
(15,593)
Revenue less impairment
32,763
-
32,763
Admin expenses
(22,238)
-
(22,238)
Operating profit
10,525
-
10,525
Exceptional items
-
-
-
Profit before interest and tax
10,525
-
10,525
Finance cost
(9,603)
-
(9,603)
Profit before tax
922
-
922
Taxation
(175)
-
(175)
Profit after tax
747
-
747
The business saw an increase in the volume of leads and qualifying 'applications to branch' ('ATBs') during the first half of 2021 versus the prior year although activity levels remained below that in 2019. This increase, coupled with higher conversion rates of new borrower ATBs drove an increase in the total number of loans booked. Taken together these factors combined to have a positive impact on monthly lending volumes and the total level of new lending increased from £7.9m in January to £11.6m in June 2021, of which £10.0m was new cash. While the impact of the pandemic on lending volumes in 2020 meant that the net loan book declined year-on-year, the positive recovery in lending volumes throughout 2021 meant that the net loan book returned to month-on-month growth in June 2021 and ended the period at £163.8m (2020: £187.7m).
Collections performance has been strong in the period and although the absolute level of collections remains below 2019 levels, it has been an encouraging performance with the result that both delinquency and impairment rates are at historic lows. Contributing to this strong performance has been the significant progress made on improving our lending processes, including the assessment of creditworthiness, where we have made great strides over the past nine months. The nature of IFRS 9 accounting means that lower lending volumes also helps to reduce impairment charges however, it is expected that impairment rates will gradually return to historic norms as volumes recover. While the number of active customers was down year-on-year at 65,500 in June 2021 (2020: 70,700), June delivered the first month-on-month increase in 2021 and this has been sustained into July and August.
IFRS 9 Key Performance Indicators7
2021
2020
Number of branches
75
73
Period end customer numbers (000)
65.5
70.7
Period end loan book (£m)
163.8
187.7
Average loan book (£m)
173.2
208.1
Revenue yield
47.0%
46.7%
Risk adjusted margin
35.7%
34.2%
Impairments/revenue
24.0%
26.7%
Impairment/average loan book
11.3%
12.4%
Cost to income ratio
51.8%
45.2%
Operating profit margin
15.2%
26.2%
Return on asset
7.2%
12.2%
7 All definitions are as per glossary.
Despite an improvement in revenue yield, the decline in the net loan book meant that revenue fell by 18% to £39.4m (2020: £47.9m). Lower debt sales and government support in relation to furloughed employees meant that other operating income was £0.2m (2020: £0.9m). The increase in modification losses to £1.3m (2020: £0.6m) and derecognition losses that increased to £1.6m (2020: gain of £0.2m) reflected the increased level of deferred and rescheduled loans that remain the division's primary forbearance tools and that have been deployed extensively during the pandemic. However, these higher costs were more than offset by the strength of the collections performance that helped to drive a significant reduction in the level of impairment. Impairment as a percentage of revenue reduced to 24.0% on a rolling 12-month basis (2020: 26.7%) and as a percentage of average net receivables it fell from 12.4% to 11.3% which is only marginally higher than it was in the six months to June 2020. Savings in staff and marketing-related costs were offset by an increase in complaint handling costs with the result that administrative expenses grew by 4% to £23.2m (2020: £22.2m). The net impact of these factors was that normalised operating profit fell by 10% to £9.5m (2020: £10.5m).
Strong cash generation and lower lending volumes meant that finance costs fell by 23% to £7.4m (2020: £9.6m) which more than offset the reduction in operating profit outlined above with the result that the pre-tax profit more than doubled to £2.1m in the first half (2020: £0.9m).
Despite the additional challenges presented by the pandemic, we have continued to monitor a series of key value drivers (network capacity, lead volumes and quality, productivity and delinquency management) in order to manage the business and a description of how these drivers changed during the first half of 2021 is set out below.
Network capacity - Having suspended our previous branch opening programme in 2020, given the steady increase in leads and ATBs, we proceeded to open the planned new branch in Leeds during the first half of 2021, taking the total number of open branches to 75. There was however a net reduction of staff versus the prior year following the decision to adjust our capacity after the first lockdown in 2020. As a result, the total number of staff reduced to 436 as at the end of June 2021 (2020: 514). Whilst this still resulted in some excess capacity during the first half, we were focused on ensuring that we would be able to take full advantage of the return to growth as the economy recovered and so accepted an increase in the cost:income ratio during the period.
Lead volumes and quality - New borrower lead volumes and ATBs were up strongly versus 2020 (10% and 21% respectively), although this was still below the levels seen over the same period in 2019. However, the trajectory was particularly encouraging and in the six months to 30 June 2021, we received a total of 926,400 new borrower applications (2020: 845,600) of which 188,400 (2020: 154,600) passed our screening criteria and qualified as ATBs.
Productivity - Despite the strong increase in new borrower ATBs, we still managed to increase conversion over the six month period to 6.5% (2020: 6.2%), providing a further boost to the total number of loans issued, which increased month-on-month throughout the period to reach 17,577 (2020: 13,828), a 27% increase over the prior year. We continued to invest in our technology with the roll-out of an enhanced creditworthiness initiative, a more effective telephony solution as well as an open banking pilot, all of which are expected to drive better outcomes for customers and increase productivity. New cash issued was up 36% to £48.3m (2020: £35.5m).
Delinquency management - Whilst we remain extremely sensitive to the challenges being faced by a number of customers at this difficult time, the collections performance in the period was ahead of expectations and reflects the effectiveness of both our underwriting process as well as our forbearance tools and collections procedures. The number of customers affected by COVID-19 on 30 June 2021 had reduced to less than 800 versus over 8,600 at the end of June 2020 and rescheduled loans continued to reduce as a percentage of the overall book while deferments had also returned to normalised levels. The net result was that delinquency levels overall were at historically low levels during the first half of 2021 and this helped to drive lower rates of impairment.
Other operational developments included the launch of an independent review to ensure that there are no implications for the division as a result of the multi-firm review into guarantor loans or from recent decisions at the Financial Ombudsman Service. This review is ongoing and there remains a risk that the final outcome of the review may result in the identification of customers who may require redress, and the cost of redress for the Group could be materially higher than is currently provided for in the financial statements.
Plans for the rest of 2021
We remain focused on rebuilding the loan book and returning the branch network to full capacity whilst continuing to maintain a tight grip on impairment. We remain committed to servicing the needs of those consumers that may have been excluded from mainstream lenders through the use of our face-to-face lending model, one that is both popular with customers and capable of generating attractive rates of return. Whilst more expensive to operate than pure online lenders, we continue to believe that it delivers better outcomes for customers and that our position in the market offers scope for substantial growth.
Since the end of June 2021, whilst the summer months are traditionally a softer trading period for the division, we have continued to trade ahead of budget and lending volumes are in-line with plan. Our collections performance is ahead of plan and while we expect the historic low levels of impairment to return to more normalised rates, we also expect that an improving yield will help to sustain an attractive risk adjusted margin. We continue to expect that the demand for our products and services will increase as a result of the continued economic recovery as well as from some of the structural changes in the market as a number of competitors and product categories have been withdrawn. As a result, and whilst we remain vigilant given the rapidly changing environment, based on our performance to-date and the steps already taken, we plan to return to our branch opening programme with a small number of additional branches opening before the end of the year. Beyond that, our medium-term vision remains to reach a network of over 100 branches and whilst this will first require the Group to complete the Capital Raise as planned, once achieved, the business will be well placed to realise that vision.
Home credit
As a face-to-face lender, the start of the pandemic in 2020 forced us to pivot, albeit temporarily, to an exclusively remote lending and collections model. However, as soon as it was safe to do so, we reverted to our face-to-face model. While a number of customers have continued to use remote channels both to make payments and also to borrow, our c.900 agencies are maintaining their regular contact with customers, not just to make a physical collection or to lend but importantly to ensure they know what is happening in the household so that they are better placed to anticipate future needs and/or can apply appropriate forbearance should payment difficulties appear on the horizon. This insight lies at the core of a successful home credit business and we believe delivers a consistently better outcome for customers than pure remote lending models where there is no face-to-face contact.
2021 began with the UK in lockdown and this hampered the new lending performance in home credit, especially during the early months of the year. Whilst there is always a seasonal reduction in loan volumes at the start of the calendar year following the Christmas peak lending period, the demand for credit in the first quarter of 2021 was a little softer than we might have expected, with the result that the net loan book continued to decline until April 2021 before returning to growth as COVID-19 restrictions came to an end and as consumers began to feel more positive about the macroeconomic outlook. This recovery in lending volumes continued throughout the period rising from £1.4m in January and reaching £5.9m in June 2021. Whilst this was still below 2019 volumes in absolute terms (where the increase was from £3.5m in January to £7.4m in June), the pace of recovery from May onwards was encouraging.
Financial results
6 months to 30 June
2021
2021
2021
Normalised
Exceptional items
Reported
£'000
£'000
£'000
Revenue
18,019
-
18,019
Other income
607
607
Impairments
(1,419)
-
(1,419)
Revenue less impairments
17,207
-
17,207
Admin expenses
(15,752)
-
(15,752)
Operating profit
1,455
-
1,455
Exceptional items
-
-
-
Profit before interest and tax
1,455
-
1,455
Finance cost
(486)
-
(486)
Profit before tax
969
-
969
Taxation
-
-
Profit after tax
969
-
969
6 months to 30 June
2020
2020
2020
Normalised
Exceptional items
Reported
£'000
£'000
£'000
Revenue
27,277
-
27,277
Impairments
(7,927)
-
(7,927)
Revenue less impairments
19,350
-
19,350
Admin expenses
(16,382)
-
(16,382)
Operating profit
2,968
-
2,968
Exceptional items
-
-
-
Profit before interest and tax
2,968
-
2,968
Finance cost
(774)
-
(774)
Profit before tax
2,194
-
2,194
Taxation
(417)
-
(417)
Profit after tax
1,777
-
1,777
As the vast majority of the Group's customers tend to borrow more than once, the size of the existing customer base is an important key performance indicator for the business. With lower lending volumes and a better than expected collections performance, the number of active customers fell to 69,800 at the end of June 2021 (2020: 77,200) although this was above a low in the period of 68,500 in March 2021. Since then, lending volumes have continued to increase and with it the number of active customers, of which an increasing proportion are quality customers i.e. they have made at least 9 out of the last 13 payments due. As at 30 June 2021, 55% of the active customer base were quality customers, up from 40% in June 2020 (in June 2019 the proportion of quality customers was 56%).
In 2021 the number of staff remained broadly steady at just over 300 throughout the period and so the business has continued to deliver increasing levels of productivity as lending volumes increased. However, the improvements would have been even greater were it not for a significant spike in the number of customer complaints received during the first quarter, following which there was a marked increase in the number of staff (and contractors) focused on reducing the volume of outstanding complaints. Most of these staff were redeployed from other roles internally although there was a need to also use third party contractors during the period. Having already provided for this significant investment in complaint handling in the 2020 full year results, the additional manpower successfully reduced the backlog of outstanding complaints and the numbers of complaints received has since reduced back down to normalised levels. However, if the level of complaints were to return to Q1 levels, this would have a material adverse impact on the division.
The productivity improvements outlined above were in part thanks to our persistent drive to improve and in particular our ongoing investment in technology that in 2021 included the continued evolution of our mobile lending app for agents that saw version 6 go live during the period. We also continued to develop our customer portal that, among other things, allows customers to view their balance, make a payment or request access to further credit - approximately 9,200 customers or 11% of the total accessed the portal during the first half of 2021, up from 7% in the first half of 2020.
Despite lower lending volumes, the collections performance was ahead of expectations, driven by our strong customer relationships and underwriting approach. The result was that the rates of impairment were also better than expected reaching unprecedented low levels that are rarely seen in the home credit industry. Taken together, the impact on the net loan book was that it ended the period flat at £24.3m (2020: £24.3m).
Key Performance Indicators8
2021
2020
Period end agency numbers
896
887
Period end number of offices
64
65
Period end customer numbers (000)
69.8
77.2
Period end loan book (£m)
24.3
24.3
Average loan book (£m)
24.4
33.8
Revenue yield
141.9%
169.7%
Risk adjusted margin
125.5%
123.8%
Impairments/revenue
11.5%
27.1%
Impairment/average loan book
16.4%
45.9%
Cost to income ratio
101.9%
59.4%
Operating profit margin
(11.6)%
13.5%
Return on asset
(16.5)%
23.0%
8 All definitions are as per glossary and above
Whilst there was a slight shift towards shorter-term loans in 2020, albeit with much lower lending volumes, the picture in 2021 returned to a more normalised mix, helped by the launch of a new 52-week product late in 2020 that is now our most popular product. Around 34% of loans issued in the first six months of 2021 were for 34 weeks or less versus 36% in 2020. However, due to unprecedented levels of forbearance offered in 2020, average yield dropped from 169.7% to 141.9% reflecting a marked increase in the number of slow-paying loans that whilst continuing to be collected, reached beyond their original term at which point, due to the fixed service charge of the product, they no longer generate revenue. A lower net loan book and reduced yield meant that overall revenue was 34% lower at £18.0m (2020: £27.3m). As noted above, the collections performance was better than expected and despite lower revenue, the absolute level of impairment declined by 82% to £1.4m (2020: £7.9m) and the rate of impairment as a percentage of revenue declined from 27.1% in the prior year to 11.5% for the twelve month period to 30 June 2021, an historic low for the business.
Solid cost savings in a number of areas including staff-related costs, IT and travel, helped to reduce administration costs to £15.8m (2020: £16.4m). However, given the reduction in revenue for the reasons outlined above, the rolling 12-month cost:income ratio increased to 101.9% (2020: 59.4%). This is clearly not sustainable, but is a consequence of, among other things, the lower net loan book due to COVID-19 and the accounting treatment of slow-paying accounts. Assuming that the recent current trading performance is sustained and the loan book continues to recover, revenue will increase and the cost:income ratio will start to fall. The net result was that normalised operating profit fell from £3.0m to £1.5m and while strong cash generation meant that finance costs fell to £0.5m (2020: £0.8m) pre-tax profit reduced to £1.0m (2020: £2.2m).
Other operational developments included the launch of an independent review to ensure that there are no implications for the division as a result of the multi-firm review into guarantor loans or from recent decisions at the Financial Ombudsman Service. This review is ongoing and so there remains a risk that the final outcome of the review may result in the identification of customers who may require redress, and the cost of redress for the Group could be materially higher than is currently provided for in the financial statements.
Plans for the rest of 2021
The business is continuing to grow its customer base, that was significantly reduced by the effects of the pandemic. The number of quality customers is also continuing to increase which bodes well for future levels of impairment and a recovery in the return on assets. That said, we remain focused on maintaining our strong collections performance and exploring how we can continue to improve our lending approach, leveraging many of the in-house tools that we have developed as well as through the deployment of new tools such as open banking, taking into account any learnings from the ongoing external reviews. Assuming the Capital Raise is successful and given the structural changes in the market, the Group believes that a significant opportunity exists to attract a number of highly experienced competitor agents that could help to accelerate the recovery in the division's loan book. The encouraging current trading performance gives us a strong platform as we look forward to the forthcoming peak lending period in November and December.
Guarantor loans
The ongoing discussions with the FCA regarding the Group's proposed redress methodology for certain of its guarantor loans customers meant that the division didn't issue any new loans in the period. However, the business continued to collect ahead of management's expectations and whilst this was good for impairment and cash flow, it also meant that the net loan book continued to decline, reaching £41.4m at 30 June 2021 (2020: £87.6m). As noted below, this impacted the financial performance of the division and, as announced with the Group's 2020 full year results on 30 June 2021, the Board concluded that shareholder interests would be best served by placing the division into a managed run-off and ultimately closing the business. Whilst hugely disappointing, the Board determined that collecting out the loan book was the only rational conclusion given the combined impact of the pandemic, the sub-scale nature of the business and complex regulatory requirements that would necessarily impede any potential recovery in profitability in the future.
Financial results
The reduction in the net loan book meant that revenue declined by 39% to £10.4m (2020: £17.0m). An increased number of customers receiving forbearance drove up modification losses and reduced derecognition gains while the smaller loan book and strong collections performance meant the division saw a reduction in the absolute value of impairment from £15.7m in 2020 to £1.0m. As a percentage of both revenue and average net receivables, the rate of impairment fell to 41.2% (2020: 61.6%) and 16.5% (2020: 19.9%) respectively due to the reasons above. Whilst there was a meaningful reduction in headcount versus the prior year, the full benefit was partially offset by additional costs relating to the proposed redress programme with the result that administration costs fell by 3% to £6.9m (2020: £7.1m and the division achieved a normalised operating profit of £0.8m which was a marked improvement on the prior year (2020: operating loss of £5.4m). Strong cashflow contributed to lower finance costs that reduced the normalised loss before tax to £1.9m (2020: loss before tax of £9.2m).
An additional exceptional provision for customer redress of £1.9m (2020: £15.8m) reflected the impact of a delayed start to the redress program which increased the penalty interest accrued and also the amount to be returned to customers from more recent collections. The total provision in the Group's balance sheet represents the Directors' best estimate of the total costs of redress based on the detailed methodology developed in conjunction with the Group's advisers. As the redress review is still ongoing, it is possible that the eventual outcome may differ materially from the current estimate and that this could materially impact the financial statements due to the risks and inherent uncertainties surrounding the assumptions used in the provision calculation.
6 months to 30 June
2021
2021
2021
Normalised9
Fair value adjustments
Reported
£'000
£'000
£'000
Revenue
10,380
-
10,380
Other income
1
-
1
Modification gain loss
(1,904)
-
(1,904)
Derecognition gain loss
130
-
130
Impairments
(984)
-
(984)
Revenue less impairments
7,623
-
7,623
Exceptional provision for customer redress
-
(1,918)
(1,918)
Admin expenses
(6,870)
-
(6,870)
Operating profit (loss)
753
(1,918)
(1,165)
Exceptional items
-
(527)
(527)
Profit (loss) before interest and tax
753
(2,445)
(1,692)
Finance cost
(2,611)
-
(2,611)
Loss before tax
(1,858)
(2,445)
(4,303)
Taxation
-
-
-
Loss after tax
(1,858)
(2,445)
(4,303)
6 months to 30 June
2020
2020
2020
Normalised9
Fair value adjustments
Reported
£'000
£'000
£'000
Revenue
17,032
(971)
16,061
Other income
-
-
-
Modification loss
(58)
-
(58)
Derecognition gain
494
-
494
Impairments
(15,727)
-
(15,727)
Revenue less impairment
1,741
(971)
770
Exceptional provision for customer redress
-
(15,753)
(15,753)
Admin expenses
(7,114)
-
(7,114)
Operating loss
(5,373)
(16,724)
(22,097)
Exceptional items
-
-
-
Loss before interest and tax
(5,373)
(16,724)
(22,097)
Finance cost
(3,871)
-
(3,871)
Loss before tax
(9,244)
(16,724)
(25,968)
Taxation
1,756
185
1,941
Loss after tax
(7,488)
(16,539)
(24,027)
9 Normalised figures, adjusted to exclude fair value adjustments and amortisation of acquired intangibles
IFRS 9 Key Performance Indicators10
2021
2020
Period end customer numbers (000)
19.9
31.5
Period end loan book (£m)
41.4
87.6
Average loan book (£m)
60.7
102.1
Revenue yield
40.1%
32.3%
Risk adjusted margin
23.6%
12.4%
Impairment/revenue
41.2%
61.6%
Impairment/average loan book
16.5%
19.9%
Cost to income ratio
55.6%
41.8%
Operating profit margin
(23.0)%
(1.1)%
Return on asset
(9.2)%
(0.4)%
10 All definitions are as per glossary.
Plans for the rest of 2021
The Group is focused on reaching a conclusion regarding its proposed redress methodology which is a pre-requisite for the execution of the Capital Raise and will also allow us to start to execute the redress programme for those customers that may have suffered harm. In the meantime, we are continuing to manage the collect-out of the remaining loan book, a process that is currently working well.
Central costs
6 months to 30 June
2021
Normalised11
2021
Amortisation of acquired intangibles and exceptional items
2021
Reported
£000
£000
£000
Revenue
-
-
-
Other income
8
8
Admin expenses
(2,343)
-
(2,343)
Operating loss
(2,335)
-
(2,335)
Exceptional items14
-
(1,580)
(1,580)
Loss before interest and tax
(2,335)
(1,580)
(3,915)
Net finance (cost)/income
(2,431)
-
(2,431)
Loss before tax
(4,766)
(1,580)
(6,346)
Taxation
-
-
-
Loss after tax
(4,766)
(1,580)
(6,346)
6 months to 30 June
2020
Normalised11
2020
Amortisation of acquired intangibles and exceptional items
2020
Reported
£000
£000
£000
Revenue
-
-
-
Admin expenses
(3,104)
(599)
(3,703)
Operating loss
(3,104)
(599)
(3,703)
Exceptional items
-
(75,530)
(75,530)
Loss before interest and tax
(3,104)
(76,129)
(79,233)
Net finance (cost)/income
(664)
-
(664)
Loss before tax
(3,768)
(76,129)
(79,897)
Taxation
780
(1,754)
(974)
Loss after tax
(2,988)
(77,883)
(80,871)
11 Adjusted to exclude exceptional items (refer to notes to the financial statements note 6), as well as the amortisation of acquired intangibles related to the acquisition of George Banco
14 Refer to note 6 in the notes to the financial statements for further detail
Normalised administrative expenses fell by 25% to £2.3m (2020: £3.1m) driven principally by lower staff and professional fees. Finance fees increased as surplus cash was held at Group level, rather than paying down any facilities due to the expectation of the future cash requirements for loan book growth.
An exceptional charge of £1.6m related to professional fees associated with the forthcoming Capital Raise (2020: £nil). The exceptional charges of £75.5m in the prior year related to the write-off of goodwill and intangible assets (see note 12).
Principal risks
The principal risks facing the Group are:
§ Going concern, solvency and liquidity - although as at 31 August 2021 the Group had £100.8m in cash, the Directors note that material uncertainties exist regarding the successful execution of a capital raise, current and future impacts of COVID-19 and the impact of potential levels of redress and complaints across the Group. The range of assumptions and the likelihood of them all proving correct creates material uncertainty and therefore the impact on liquidity and solvency under both the base case and downside scenarios may cast significant doubt on both the Group's and individual division's ability to continue as a going concern. In such circumstance, the Group may fall under the control of its lenders and there would be a possibility of the Group going into insolvency;
§ Regulation - the Group faces significant operational and financial risk through changes to regulations, changes to the interpretation of regulations or a failure to comply with existing rules and regulations. This risk may be impacted by the outcome of the ongoing reviews of each of the Group's divisions. Following a multi-firm review, the Group has developed a proposed methodology for redress to certain guarantor loans customers and has made a provision totalling £16.9m to cover the expected costs. Whilst the provisions made represent the Directors' best estimate of the total cost of redress across all divisions, based upon a detailed methodology and analyses developed in conjunction with its advisers, discussions with the FCA are ongoing and therefore, although the Directors believe their best estimate represents a reasonably possible outcome; there is a risk of a less favourable outcome. The reviews into branch-based lending and home credit are ongoing and there remains a risk that the final outcome of the reviews may result in the identification of customers who may require redress, and the cost of redress for the Group could be materially higher than is currently provided for in the financial statements. While the numbers of complaints received has declined significantly from the peak seen earlier in the year, there remains a risk of increasing levels of complaints and if the level of complaints were to return to the levels seen during the first quarter of 2021, this would have a material adverse impact on the Group;
§ Conduct - risk of poor outcomes for our customers or other key stakeholders as a result of the Group's actions;
§ 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:
o 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, the risk of human error, taxation, increasing numbers of customer complaints, health and safety as well as disaster recovery and business continuity risks;
o reputational - a failure to manage one or more of the Group's principal risks 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;
o 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; and
o Pandemic - a large pandemic such as COVID-19, coupled with restrictions on face-to-face contact by HM Government, may cause significant disruption to the Group's operations and severely impact the supply and level of demand for the Group's products. As a result, any sustained period where such measures are in place could result in the Group suffering significant financial loss.
On behalf of the Board of Directors
Jono Gillespie
Group Chief Executive Officer
28 September 2021
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 2020 Annual Report & Financial Statements, with the exception of John van Kuffeler who resigned from his role as Group Chief Executive Officer and ceased to be a Director of the Company with effect from 31 August 2021. 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.
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
Jono Gillespie
Group Chief Executive Officer
28 September 2021
Financial Statements
Condensed consolidated statement of comprehensive income for the six months ended 30 June 2021
Note
Before fair value adjustments, amortisation of acquired intangibles and exceptional items
£000
Fair value adjustments, amortisation of acquired intangibles and exceptional items
£000
Six months
ended 30 June
2021
£000
Revenue
67,842
-
67,842
Other operating income
9
853
-
853
Modification gain/(loss)
(3,210)
-
(3,210)
Derecognition gain/(loss)
(1,491)
-
(1,491)
Impairment of financial assets
(6,444)
-
(6,444)
Exceptional provision for customer redress
6
-
(1,918)
(1,918)
Administrative expenses
(48,165)
-
(48,165)
Operating profit (loss)
5
9,385
(1,918)
7,467
Other exceptional items
6
-
(2,107)
(2,107)
Profit (loss) on ordinary activities before interest and tax
9,385
(4,025)
5,360
Finance costs
(12,895)
-
(12,895)
Loss on ordinary activities before tax
(3,510)
(4,025)
(7,535)
Tax on profit (loss) on ordinary activities
8
-
-
-
Loss for the period
(3,510)
(4,025)
(7,535)
Total comprehensive loss for the year
(7,535)
Loss attributable to:
- Owners of the parent
(7,535)
- Non-controlling interests
-
Loss per share
Note
Six months ended
30 June 2021
PenceBasic and diluted
7
(2.41)
There are no recognised gains or losses other than disclosed above and there have been no discontinued activities in the year.
Condensed consolidated statement of comprehensive income for the six months ended 30 June 2020
Note
Before fair value adjustments, amortisation of acquired intangibles and exceptional items
£000
Fair value adjustments, amortisation of acquired intangibles and exceptional items
£000
Six months
ended 30 June
2020
£000
Revenue
92,223
(971)
91,252
Other operating income
9
888
-
888
Modification loss
(696)
-
(696)
Derecognition gain
686
-
686
Impairment of financial assets
(39,247)
-
(39,247)
Exceptional provision for customer redress
6
-
(15,753)
(15,753)
Administrative expenses
(48,838)
(599)
(49,437)
Operating profit (loss)
5
5,016
(17,323)
(12,307)
Other exceptional items
6
-
(75,530)
(75,530)
Profit (loss) on ordinary activities before interest and tax
5,016
(92,853)
(87,837)
Finance costs
(14,912)
-
(14,912)
Loss on ordinary activities before tax
(9,896)
(92,853)
(102,749)
Tax on profit (loss) on ordinary activities
8
1,944
(1,569)
375
Loss for the period
(7,952)
(94,422)
(102,374)
Total comprehensive loss for the year
(102,374)
Loss attributable to:
- Owners of the parent
(102,374)
- Non-controlling interests
-
Loss per share
Note
Six months ended
30 June 2020
PenceBasic and diluted
7
(32.77)
Condensed consolidated statement of financial position as at 30 June 2021
Note
30 June
2021
£000
31 December 2020
£000
ASSETS
Non-current assets
Goodwill
12
-
-
Intangible assets
8,287
8,237
Derivative asset
-
-
Deferred tax asset
-
-
Right of use asset
9,145
10,079
Property, plant and equipment
5,437
6,277
Amounts receivable from customers
11
111,083
124,128
133,952
148,721
Current assets
Amounts receivable from customers
11
118,466
134,073
Trade and other receivables
2,958
2,080
Corporation tax asset
1,497
1,550
Cash and cash equivalents
103,682
77,956
226,603
215,659
Total assets
360,555
364,380
LIABILITIES AND EQUITY
Current liabilities
Trade and other payables
17,334
15,895
Provisions
13
23,717
21,813
Lease liability
1,873
1,928
Total current liabilities
42,924
39,636
Non-current liabilities
Lease liability
8,254
8,961
Bank loans
327,675
326,587
Total non-current liabilities
335,929
335,548
Equity
Share capital
15,621
15,621
Share premium
180,019
180,019
Other reserves
255
551
Retained loss
(214,193)
(206,995)
Total equity
(18,298)
(10,804)
Total equity and liabilities
360,555
364,380
Condensed consolidated statement of changes in equity for the six months ended 30 June 2021
Note
Share
capital
£000
Share
premium
£000
Other
reserves
£000
Retained
loss
£000
Non-controlling interest
£000
Total
£000
At 31 December 2019
15,621
180,019
2,152
(74,181)
-
123,611
Total comprehensive loss for the period
-
-
-
(102,374)
-
(102,374)
Transactions with owners, recorded directly in equity:
Dividends paid
10
-
-
-
-
-
-
Credit to equity for equity-settled share-based payments
-
-
795
-
1,009
Transfer of share-based payment reserve on vesting of share awards
-
-
(214)
214
-
(214)
At 30 June 2020
15,621
180,019
2,733
(176,341)
-
22,032
Total comprehensive loss for the period
-
-
-
(33,183)
-
(33,183)
Transactions with owners, recorded directly in equity:
Dividends paid
10
-
-
-
-
-
-
Credit to equity for equity-settled share-based payments
-
-
347
-
-
347
Transfer of share-based payment reserve on vesting of share awards
-
-
(2,529)
2,529
-
-
At 31 December 2020
15,621
180,019
551
(206,995)
-
(10,804)
Total comprehensive loss for the period
-
-
-
(7,535)
-
(7,535)
Transactions with owners, recorded directly in equity:
Dividends paid
10
-
-
-
-
-
Credit to equity for equity-settled share-based payments
-
-
41
-
-
41
Transfer of share-based payment reserve on vesting of share awards
-
-
(337)
337
-
-
At 30 June 2021
15,621
180,019
255
(214,193)
-
(18,298)
Condensed consolidated statement of cash flows for the six months ended 30 June 2021
Note
Six months ended
30 June 2021
£000Six months ended
30 June 2020
£000Net cash from operating activities
15
32,451
48,813
Cash flows (used in)/from investing activities
Purchase of property, plant and equipment
(139)
(907)
Purchase of software intangibles
(1,275)
(1,725)
Proceeds from sale of property, plant and equipment
15
-
Net cash (used in)/from investing activities
(1,399)
(2,632)
Cash flows (used in)/from financing activities
Finance cost
(4,446)
(5,612)
Repayment of principal portion of lease liabilities
(880)
(857)
Debt raising
-
21,800
Repayment of borrowings
-
-
Dividends paid
-
-
Net cash (used in)/from financing activities
(5,326)
15,331
Net increase in cash and cash equivalents
25,726
61,512
Cash and cash equivalents at beginning of the period
77,956
14,192
Cash and cash equivalents at end of the period
103,682
75,704
As at 30 June 2021 the Group had cash of £103.7m (30 June 2020: £75.7m) with gross debt of £330.0m (30 June 2020: £345m).
Notes to the preliminary announcement
1. 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 2020 were approved by the Board of Directors on 30 June 2021 and have been delivered to the Registrar of Companies. The report of the auditor was unqualified and did not contain a statement under s498(2) or (3) of the Companies Act 2006, but did include a section highlighting a material uncertainty that may cast significant doubt on the Group and Company's ability to continue as a going concern due to the requirement for additional capital to be raised to secure the Group's future covenant compliance, solvency and liquidity position; the impact of the guarantor loans division ('GLD') regulatory redress programme and customer complaints across the Group; and the disruption within the Group caused by COVID-19, specifically taking into account the impact on collections and lending volumes. The Group notes this material uncertainty continues to exist as at 30 June 2021 as a result of the reasons above.
The unaudited condensed interim financial statements for the six months ended 30 June 2021 have been reviewed, not audited, and were approved by the Board of Directors on 28 September 2021.
2. Basis of preparation
The condensed consolidated financial statements for the six months ended 30 June 2021 have been prepared in accordance with International Accounting Standard 34: Interim Financial Reporting, as adopted by the UKEB, and the requirements of the Disclosure and Transparency Rules ('DTR') of the Financial Conduct Authority ('FCA') in the United Kingdom as applicable to interim financial reporting. The unaudited condensed interim financial statements should be read in conjunction with the statutory financial statements for the year ended 31 December 2020 which have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards ('IFRS Standards') adopted pursuant to Regulation (EC) No 1606/2002 as it applies to the European Union.
There are no new standards adopted by the Group from 1 January 2021. There are no new standards not yet effective and not adopted by the Group from 1 January 2021 which are expected to have a material impact on the Group.
Going concern
In adopting the going concern assumption in preparing the half year end financial statements, the Directors have considered the activities of its principal subsidiaries, as well as the Group's principal risks and uncertainties.
As part of its going concern assessment, the Directors reviewed both the Group's liquidity and its future balance sheet solvency. The Group produced two scenarios: (i) the more likely (or 'base case') scenario; and (ii) the 'downside' scenario which applies stresses in relation to the key risks identified in the base case.
(i) Base case scenario
Liquidity
The base case forecasts assume additional equity is raised during 2021 and reflects a business plan where the Group rebuilds its loan book back up to historic levels and achieves further growth within its branch-based lending and home credit divisions. It also assumes that GLD remains in managed run-off. In this model, any potential covenant breaches are cured by the injection of capital into the Group. As at the date of these financial statements, the Group expects to raise equity funds in the region of £80m before expenses with support from Alchemy, its largest shareholder, and other investors, subject to greater levels of certainty around redress and claims, Alchemy's analysis of the FCA's and the Group's regulatory reviews, and the outcome of the Group's engagement with its lenders.
In this forecast, we have taken into account:
· the potential future costs of complaints and the provision for customer redress made in GLD and its associated costs. Whilst the methodology for redress has not yet been agreed with the FCA, the quantum of provision for redress represents the Directors' best estimate of the ultimate cost of the redress as at the reporting date;
· the ongoing independent reviews commissioned by the Group around the lending and complaints handling activities of the branch-based lending and home credit divisions as far as we have been able to do so as they are not yet complete;
· the pay-outs required in relation to complaints across the Group;
· the expected performance of customers impacted by COVID-19, as informed by experience to date;
· recent Government guidance around the proposed future COVID-19 roadmap;
· consideration of the macroeconomic impact on loan loss provisions since the year end as a result of COVID-19;
· the potential costs of obtaining extensions to existing Revolving Credit Facilities (RCF) and Term Loan facilities which currently mature in August 2022 and August 2023 respectively; and
· no dividends are assumed to be paid over the forecast period.
Under the base case, it is forecast that the Group is at risk of breaching its financial covenants within the next 12 months, however any breach will be either mitigated or cured by the injection of new equity capital as outlined above. Under the base case, the covenant position as at 30 September 2021 is assumed to be very tight and there remains a risk that the Group will breach as at 30 September 2021. If this were to happen, then the Group would maintain its strategy as described under the base case, however this would result in a requirement to request a temporary waiver from lenders until the Group is able to raise capital. Therefore, if the Group finds itself in such a scenario, the risks associated with executing on the base case would be increased due to the need to agree waivers with lenders, and consequently the likelihood of the Group ending up in the downside scenario and becoming insolvent would also be increased.
There are material uncertainties regarding the assumptions and outcome of the base case in the following areas:
· the full and final cost of the redress programme in GLD and any future complaint / redress costs across the Group;
· the outcome of the independent reviews commissioned by the Group around the lending and complaints handling activities of the branch-based lending and home credit divisions, and any associated cost of redress which, if materially higher than in the base case, may lead to the ring- fencing or closure of the divisions;
· the ultimate execution of the planned equity raise by the end of Q4 21 at the earliest, support of Alchemy and other investors for this, as well as uncertainty that in the event of a covenant breach, the Group will be able to raise equity within sufficient timeframes to enable it to continue as a going concern;
· the impact of the macroeconomic environment, including COVID-19, on future trading performance, including the impact of the vaccination programme, potential new strains of the virus and the Government response to any changes in infection rates;
· the subsequent performance of COVID-19 impacted customers who have come off an emergency payment freeze;
· the impact of the GLD run-off on customer behaviour;
· the actions of Claims Management Companies (CMCs) and results of Financial Ombudsman Service (FOS) decisions made which may increase the costs of complaints across the Group;
· the nature of any agreement with the debt providers in case covenants are breached; and
· the expectation that debt maturing in August 2022 and August 2023 will be rolled over and/or refinanced.
As at 31 August 2021, the Group had a total cash balance of £100.8m which, when combined with the Group's ability to conserve cash through a reduction in future lending, means the Group expects to be able to fund operating expenses and interest payments for at least the next 12 months, subject to the above assumptions not being materially different from the base case.
Solvency
Under the base case, after the Capital Raise, the Group would be in a net asset position from a balance sheet perspective; this however is dependent upon a number of factors including:
· the Group raising additional capital and the extension and/or refinancing of the Group's debt facilities as outlined above;
· the assumptions not varying materially from the base case; and
· any mitigating actions which could be implemented to offset any adverse movement from the base case.
In the absence of the Capital Raise, the Group is forecast to remain in a net liability position from a balance sheet perspective over the next 12 months and beyond. It is also likely to breach its financial covenants and as a result, if waivers are not forthcoming, the Group may fall under the control of its lenders. This is considered further in the downside scenario.
Due to the uncertainties regarding the current and future impact of COVID-19 on the macroeconomic environment and regulatory uncertainties, the Group notes that movement in any one or a number of these assumptions creates a material uncertainty in the liquidity and/or solvency position of the Group.
Key risks to the assumptions made include:
· higher than anticipated payouts required in relation to complaints and the GLD customer redress programme;
· the outcome of the independent reviews at the branch-based lending and home credit divisions resulting in the identification of customers who may require redress materially beyond that already provided for;
· the possibility that the Group is unable to raise sufficient capital within the time frame forecast;
· the possibility that the current performance of the loan book deteriorates beyond current expected delinquency trends and that recovery of customer performance is not as anticipated;
· further changes in the regulatory environment which negatively impact the Group's divisions;
· a further negative shift in the macroeconomic environment;
· costs relating to the managed run-off of GLD; and
· the Group is unable to agree acceptable terms with its lenders or they do not roll over loans when due and refinancing is not available.
(ii) Downside scenario
Liquidity
This scenario assumes that no additional equity is raised in 2021 and also reflects stresses to the key risks described above.
Under this scenario we have assumed:
· the ultimate cost of the GLD customer redress programme is higher than the provision which has been included in the financial statements on the basis of amendments to the external harm criteria of the Group's proposed methodology; and
· higher complaint levels than expected under the base case across all divisions.
· the planned equity raise is not successful;
· there are prolonged social restrictions and lockdowns across the UK in response to COVID-19, therefore leading to lower lending than expected and;
· a higher proportion of customers are at risk of losing their jobs therefore leading to even higher delinquency than expected under the base case.
Under this scenario it is expected that the Group would breach certain borrowing covenants during the next 12 months, would not be able to access further funding over the period of breach and would require waivers from its lenders. If waivers are not forthcoming, the Group may fall under the control of its lenders and there is a possibility of the Group going into insolvency.
As at 31 August 2021, the Group had a total cash balance of £100.8m which, combined with the Group's ability to conserve cash through a reduction in lending, means that the Group expects to be able to fund operating expenses and interest payments for at least the next 12 months, provided that forbearance is received from its lenders in the event of a covenant breach, existing loans are rolled over, and subject to the above assumptions not being materially different from the downside case.
Solvency
The Group would remain in a net liability position from a balance sheet perspective if some or all of the downside stresses were to take place without a significant injection of further equity.
Conclusion
The Directors acknowledge the considerable challenges presented by the current regulatory position including potential customer redress, the outbreak of COVID-19 and the financial performance of the Group, which have created a material uncertainty around the going concern and viability status of the Group. However, despite the material uncertainties associated with forecast assumptions, the conditional support from Alchemy and other investors means that it is their reasonable expectation that the Group will continue to operate and meet its liabilities as they fall due over the viability period from both a liquidity and solvency perspective.
On the basis of the above analysis, the Directors note that a material uncertainty exists regarding the impact of potential levels of redress across the Group, the successful execution of a capital raise, the potential action of lenders, and the current and future impacts of COVID-19. The impact of these factors on liquidity and solvency under both the base case and downside scenarios therefore may cast significant doubt on the ability of both the Group and Company to continue as a going concern and remain viable.
In making their assessment, the Directors took account of the Group's current financial and operational positions, the status of conversations with the regulator and advisors as well as its recent trading activity. They noted the indications of support for the Capital Raise received from investors to support the Group subject to the outcome of the proposed GLD redress programme and independent reviews across the branch-based lending and home credit divisions, and in addition the proposed extension to the term of the Group's existing facilities by its lenders on acceptable terms, which would be conditional upon the completion of a successful capital raise. The Directors also note the existence of the securitisation facility, however they note that this is currently suspended and the ability to use this facility remains outside of the Group's control as it is subject to the consent of the lenders and the satisfaction of standard covenants for a facility of this type. The Directors recognise there exists a risk around covenant compliance as at 30 September 2021 and that should a breach occur, it would result in a requirement to request a temporary waiver from the lenders until it is able to raise capital. Therefore, if the Group finds itself in such a scenario the Directors note the risks associated with executing on the base case would be increased due to the need to agree waivers with lenders and consequently the likelihood of the Group ending up in the downside scenario and becoming insolvent would also be increased.
The Directors additionally considered the 'reverse stress test' conducted by the Group which showed that, assuming no changes to lending levels and operating expenses, collections would have to fall by over 22% from current expected levels in the base case for the Group to then be unable to fund operating expenses and interest payments beyond the next 12 months. With regards to the balance sheet solvency of the Group, the Directors noted that under the base case scenario the Group returns to a net asset position and remains there for the going concern period, however this remains dependent on the injection of additional capital into the Group.
As the possible outcomes detailed above remain dependent on a number of factors not directly within the Group's control, the Board will continue to monitor the Group's financial position carefully over the coming weeks and months as a better understanding of the impact of these various factors are developed. The Board recognises the importance of the issuance of further equity to mitigate the uncertainties noted above and to support the future growth prospects of the Group.
The Directors acknowledge the considerable challenges presented over the last 18 months and the material uncertainty which may cast significant doubt on the ability of both the Group and the Company to continue as a going concern. However, despite these challenges, it is the Directors' reasonable expectation that the Group and Company will raise sufficient equity in the timeframe required, obtain extensions to the borrowing term on a reasonable basis from its lenders, and continue to operate and meet its liabilities as they fall due for the next 12 months and beyond and therefore it has concluded the business is viable.
The assumption of shareholder support for additional equity, lender support for the extension of existing financing facilities and the satisfactory outcome of regulatory and redress matters and that the ultimate conclusions on those matters are not materially different to that envisaged under the base case, forms a significant judgement of the Directors in the context of approving the Group's going concern status.
The Directors will continue to monitor the Group and Company's risk management, access to liquidity, balance sheet solvency and internal control systems.
Reviews of internal controls across the Group are undertaken by the Group's Internal Audit function, providing comment over the design and effectiveness of controls. Report findings are regularly reported to the Audit Committee for monitoring, assessment and where necessary management action.
3. Accounting policies
The accounting policies used in these condensed consolidated interim financial statements are consistent with those used in the Non-Standard Finance Plc Annual Report 2020.
4. Critical accounting assumptions and key sources of estimation uncertainty
The critical accounting assumptions exercised by management and key sources of estimation uncertainty in the interim financial statements are consistent with those adopted in the statutory financial statements for the year ended 31 December 2020 and these are also described below:
Critical accounting judgements:
Amounts receivable from customers - significant increase in credit risk
Expected Credit Losses ('ECL') are measured as an allowance equal to 12-month ECL for stage 1 assets, or lifetime ECL for stage 2 assets or stage 3 assets. An asset moves to stage 2 when its credit risk has increased significantly since initial recognition. IFRS 9 does not define what constitutes a significant increase in credit risk and therefore the Group makes assumptions to determine whether there are indicators that credit risk has increased significantly which indicates that there has been an adverse effect on expected future cash flows. In assessing whether the credit risk of an asset has significantly increased, the Group takes into account qualitative and quantitative reasonable and supportable forward-looking information. for branch-based lending and guarantor loans, a Probability of Default ('PD') above the minimum level (deemed as the 'stage 2 threshold') provides a very close approximation to the point at which the Group would not have written the loan and therefore represents a significant increase in credit risk. Management therefore consider the stage 2 threshold to be a critical accounting judgement in the determination of ECL.
Given the short-term nature of lending in the home credit division, the difference between the 12-month ECL and lifetime losses is minimal; therefore, this judgement applies only to the branch-based and Guarantor Loans Division.
Key sources of estimation uncertainty:
Amounts receivable from customers
The Group assesses its portfolio of amounts receivable from customers for ECL at each balance sheet date. The following are key estimations that the Directors have used in the process of applying the Group's recognition of ECL policy:
Branch-based lending and Guarantor Loans Division
Incorporation of macroeconomic data: establishing the number and relative weightings of macroeconomic scenarios for each type of product/market and determining the macroeconomic information relevant to each scenario. The Group incorporates macroeconomic information into both its assessment of whether the credit risk of a financial asset has increased significantly since initial recognition and its measurement of PD. This is achieved by developing a number of potential economic scenarios and modelling the PD for each scenario. The outputs from each scenario are combined using the estimated likelihood of each scenario occurring to derive a probability weighted PD which is then used to calculate ECL. Therefore, when measuring PD and ECL the Group uses reasonable and supportable forward-looking information, which is based on assumptions for the future movement of different economic drivers and how these drivers will affect each other. This is only applicable to branch-based lending and Guarantor Loans Division as due to the nature of the home credit industry and based on historical evidence, management has determined that the effect of traditional macroeconomic downside indicators on home credit is minimal.
COVID-19 overlay: During the current and prior year, the Group made adjustments in order to reflect the higher PD, Loss Given Default ('LGD') and Expected loss At Default ('EAD') for the proportion of branch-based lending and guarantor loan customers who were financially impacted by the pandemic. This was informed by the Group's detailed analysis of past repayment behaviours and expected repayments behaviour across the entire customer base. In branch-based lending, a COVID-19 overlay was derived having considered the recent collection performance on COVID-19 affected accounts and whether any impact on collection performance was deemed to be temporary or permanent. An overlay adjustment was therefore made to increase provisions for accounts for which the impact was deemed permanent and/or who were not making full payments. For GLD, recent payment performance of those customers who were impacted by COVID-19 but are no longer on an emergency payment freeze ('EPF') were used to inform expected delinquency trends of customers who had not yet resumed payment following an EPF. A provision overlay was then applied to reflect expected performance consistent with the recent performance behaviours observed.
Home credit
Under IFRS 9, ECL assessment is based upon forward-looking modelled probability of default ('PD'), exposure at default ('EAD') and loss given default ('LGD') parameters which are run at account level, and applied across all receivables from initial recognition. ECL in home credit is estimated by reference to future cash flows based upon observed historical data and updated as management considers appropriate to reflect current and future conditions. Loan loss provisions are thereby calculated by reference to their stage (criteria for categorisation into stages is as described above) and are measured as the difference between the carrying value of the loans and the present value of estimated future cash flows discounted at the original EIR. A receivable can move from having a provision calculated on a lifetime expected loss basis back to a 12-month expected loss basis (or vice versa) depending on the performance of the receivable at the review date. This methodology encapsulates PD, EAD and LGD collectively which together forms a key source of estimation uncertainty.
Sensitivity Analysis
Branch-based lending and Guarantor Loans Division - COVID-19 overlay
The sensitivity of the COVID-19 overlay adjustments applied by Branch-based lending and the Guarantor Loans Division are noted below. The below sensitivities assume all other variables used in the calculation of ECL remains constant.
Branch-based lending
If no overlay is applied to 50% of COVID-19 impacted customer accounts who have missed payments and are deemed to be permanently impacted, ECL would reduce by £0.3m. If 50% of COVID-19 impacted customer accounts deemed as temporarily impacted and have missed payments, are permanently impacted, ECL would increase by £0.2m.
Guarantor Loans Division
A 5% increase/decrease in the collections pertaining to COVID-19 impacted customer accounts who have missed payments would increase/decrease the ECL by £0.8m.
Probability of default and loss given default
Branch-based lending
The calculation of ECL in branch-based lending uses historical data to forecast future cash flows, discounted at the receivable's Effective Interest Rate ('EIR'). A sensitivity run on collections performance shows that a 5% increase or decrease in expected cash collections would result in an £7.4m increase in the provision and an £8.4m decrease in the provision respectively. The suitability of the 5% sensitivity run has been reviewed and considered appropriate based on historical performance.
Home credit
The home credit policy for provisioning uses historical cash flow data to gain the best view of prospective collections performance from receivables held on the balance sheet, which are discounted at the product's EIR to value the receivables at balance sheet date. Recent experience has shown that a 5% increase or decrease in expected cash collections is possible in a 12-month horizon and if collections performance were to vary by such an amount, the provision recognised would change by -/+ £1.2m effectively changing the receivable valuation by 5%. The suitability of the 5% sensitivity run has been reviewed and considered appropriate based on historical performance.
Guarantor Loans Division
The calculation of ECL in GLD uses historical data to forecast future cash flows, discounted at the receivable's EIR. A sensitivity run on collections performance shows that a 10% increase or decrease in expected cash collections would result in a £4.1m increase/ decrease in provisions. The suitability of the 10% sensitivity run has been reviewed and considered appropriate based on historical performance.
Provisions
Provision for customer complaints
Provisions for customer complaints are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation.
Judgement is applied to determine whether the criteria for establishing and retaining a provision have been met. Provisions for customer redress are in respect of complaints where the outcome has not yet been determined. Judgement is applied to determine the quantum of such provisions, including making assumptions regarding the extent to which the complaints received may be upheld, average redress payments and related administrative costs. Past experience is used as a predictor of future expectations with management applying overlays where necessary depending on the nature and circumstance of the complaints. The cost could differ from the Group's estimates and the assumptions underpinning them and could result in an increased provision being required. There is also uncertainty around the impact of proposed regulatory changes, claims management companies and customer activity.
The key assumptions in these calculations, which involve management judgement and estimation, relate primarily to the projected costs of existing complaints where it is considered likely that customer redress will be appropriate.
These key assumptions are:
• uphold rate percentage - the expected average uphold rate applied to existing complaint volumes where it is considered more likely than not that customer redress will be appropriate;
• average redress cost - the estimated compensation, inclusive of balance adjustments and cash payments, for upheld complaints included in the provision; and
• customer complaint volumes - the level of claims which would be due remediation in future based on recent experience of valid claims.
These assumptions remain subjective due to the uncertainty associated with future complaint volumes and the magnitude of redress which may be required. Complaint volumes may include complaints under review by the Financial Ombudsman Service, cases received from claims management companies or cases lodged directly by customers.
Sensitivity Analysis
Branch-based lending
A +/-50% increase/decrease in customer complaints volumes would result in a £0.8m increase/decrease in provisions for the Group, a +/-50% increase/decrease in average claim redress would result in a £0.8m increase/decrease in provisions for the Group, and a +/-50% increase/decrease in upheld rate would result in a £0.8m increase/ decrease in provisions for the Group.
Home credit
A +/-25% increase/decrease in customer complaints volumes would result in a £0.2m increase/decrease in provisions for the Group, a +/-25% increase/decrease in average claim redress would result in a £0.2m increase/decrease in provisions for the Group, and a +/-25% increase/decrease in upheld rate would result in a £0.2m increase/ decrease in provisions for the Group.
Guarantor Loans division
Part of the provision included in the statement of financial position relates to a provision recognised for the proposed programme of redress for customers of GLD totalling £16.9m (31 December 2020: £15.3m). The provision represents an accounting estimate of the expected future outflows arising using information available as at the date of signing these financial statements. Identifying whether a present obligation exists and estimating the probability, timing, nature and quantum of the redress payments that may arise from past events requires judgements to be made on the specific facts and circumstances relating to individual customers. It is possible that the eventual outcome may differ, perhaps materially, from the current estimate and this could impact the financial statements. This is due to the risks and inherent uncertainties surrounding the assumptions used in the provision calculation. Whilst the current estimate represents the Directors' best estimate of the total cost of redress, based upon a detailed methodology and analyses developed in conjunction with its advisers, the uncertainty surrounding the final cost of redress is heightened by the fact that the FCA has not yet approved the methodology proposed. Therefore, although the Directors believe their best estimate represents a reasonably possible outcome; there is a risk of a less favourable outcome. Refer to note 13 for more detail regarding the customer redress provisions.
As at the date of these condensed interim financial statements, the Group continues to work closely with the FCA to reach a conclusion regarding the redress methodology. The FCA has raised questions around the Group's assessment of whether or not the customer has suffered harm (in instances where we have concluded that the affordability assessment at the time of underwriting was not appropriate). Under the Group's proposed methodology there are a range of factors which need to be met in order to conclude that a customer has suffered harm, including external indicators that harm may have been incurred. The current methodology requires multiple indicators to be present to trigger redress, however, should only one of these factors in isolation be taken as a definition of harm, then the redress provision could be c.£10m higher than that currently provided for in the financial statements. Furthermore, until such time the redress approach has been agreed with the FCA, there remains uncertainty around this estimate and therefore the ultimate cost could be higher than this £10m sensitivity indicates. The ultimate redress amount will also be subject to a manual case-by-case review of customers who have incomplete electronic records that may be affected. This could result in the ultimate pay-out being higher than estimated under the proposed methodology.
5. 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.
Branch-based lending
£000
Home
credit
£000
Guarantor loans1
£000
Central
£000
2021
Total
£000
Six months ended 30 June 2021
Interest income
39,443
18,019
10,380
-
67,842
Fair value unwind on acquired loan portfolio
-
-
-
-
-
Total revenue
39,443
18,019
10,380
-
67,842
Exceptional provision for customer redress
-
-
(1,918)
-
(1,918)
Operating profit/(loss) before amortisation
9,512
1,455
(1,165)
(2,335)
7,467
Amortisation of intangible assets
-
-
-
-
-
Operating profit/(loss) before exceptional items
9,512
1,455
(1,165)
(2,335)
7,467
Exceptional items3
-
-
(527)
(1,580)
(2,107)
Finance cost
(7,367)
(486)
(2,611)
(2,431)
(12,895)
Profit/(loss) before taxation
2,145
969
(4,303)
(6,346)
(7,535)
Taxation
-
-
-
-
-
Profit/(loss) for the period
2,145
969
(4,303)
(6,346)
(7,535)
Capital expenditure
790
657
-
85
1,532
Depreciation of plant, property and equipment
835
121
-
12
968
Depreciation of right of use asset
688
289
-
75
1,052
Amortisation and impairment of intangible assets
360
852
-
12
1,224
Branch-based lending
£000
Home
credit
£000
Guarantor loans1
£000
Central
£000
Consolidation adjustments2
£000
30 June 2021
Total
£000
Total assets
191,699
35,044
41,449
359,812
(267,449)
360,555
Total liabilities
(226,726)
(16,248)
-
(333,904)
198,025
(378,853)
Net assets
(35,027)
18,796
41,449
25,908
(69,424)
(18,298)
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 have therefore been disclosed within the Guarantor Loans Division above
2 Consolidation adjustments include the acquisition intangibles of £nil (2020: £nil), goodwill of £nil (2020: £nil) fair value of loan book of £nil (2020: £0.5m) and the elimination of intra-Group balances
3 Refer to note 6 for further details
Branch-based lending
£000
Home
credit
£000
Guarantor loans
£000
Central
£000
2020
Total
£000
Six months ended 30 June 2020
Interest income
47,914
27,277
17,032
-
-
92,223
Fair value unwind on acquired loan portfolio
-
-
(971)
-
-
(971)
Total revenue
47,914
27,277
16,061
-
-
91,252
Exceptional provision for customer redress
-
-
(15,753)
-
-
(15,753)
Operating profit/(loss) before amortisation
10,525
2,968
(22,097)
(3,104)
-
(11,708)
Amortisation of intangible assets
-
-
-
(599)
-
(599)
Operating profit/(loss) before exceptional items
10,525
2,968
(22,097)
(3,703)
-
(12,307)
Exceptional items2
-
-
-
(75,530)
-
(75,530)
Finance cost
(9,603)
(774)
(3,871)
(664)
-
(14,912)
Profit/(loss) before taxation
922
2,194
(25,968)
(79,897)
-
(102,749)
Taxation
(175)
(417)
1,941
(974)
-
375
Profit/(loss) for the period
747
1,777
(24,027)
(80,871)
-
(102,374)
Capital expenditure
1,622
1,171
-
-
-
2,793
Depreciation of plant, property and equipment
752
168
-
19
-
939
Depreciation of right-of-use-asset
638
314
-
65
-
1,017
Amortisation of intangible assets
225
828
-
1,309
-
2,362
Branch-based lending
£000
Home
credit
£000
Guarantor loans
£000
Central
£000
Consolidation adjustments
£000
31 Dec 2020
Total
£000
Total assets
220,702
38,745
59,794
391,597
(346,458)
364,380
Total liabilities
(271,981)
(19,021)
-
(332,946)
248,764
(375,184)
Net assets
(51,279)
19,724
59,794
58,651
(97,694)
(10,804)
The results of each segment have been prepared using accounting policies consistent with those of the Group as a whole.
The carrying value of financial assets and liabilities are not materially different to their fair value, except for amounts receivable from customers.
6. Exceptional items
In the six months ended 30 June 2021, the Group incurred exceptional costs totalling £4.0m (including VAT) (2020: £91.3m). This comprised the following:
The Group announced on 3 August 2020 that following its multi-firm review of the guarantor loans sector, the FCA had raised some concerns regarding certain processes and procedures at the Group's Guarantor Loans Division and a programme of redress would be required. Whilst discussions with the FCA have not yet concluded in regard to the Group's proposed redress methodology, the Group has recognised a provision which represents the Directors' best estimate of the full and final costs of the redress programme (refer to note 13 for further detail). During the six months ended 30 June 2021, a charge of £1.9m has been recognised in addition to the £15.4m charge recognised for the year ended 31 December 2020, which reflects additional interest accrued since the year end.
The Group announced on the 30 June 2021 that shareholder interests will be best served by placing GLD into a managed run-off and ultimately closing the business. As a result, an exceptional redundancy cost of £0.5m has been recognised in the six months ended 30 June 2021 (2020: £nil).
The remaining £1.6m of exceptional costs relate to advisory fees incurred. Equity-related fees are treated as non-deductible for tax purposes.
In the six months ended 30 June 2020, the Group incurred £91.3m of exceptional costs. These comprised: £47.1m of the exceptional items reflect the write-down of the value of goodwill associated with Everyday Loans; £27.7m of the exceptional items reflect the write-down of the value of goodwill associated with Loans at Home; and £0.7m of the exceptional items reflect the write-down of the value of the intangible assets at Everyday Loans (further details pertaining to the write-down of the value of goodwill in the prior year are set out in note 11). In addition, a provision of £15.8m was made during the six months ended 30 June 2020 in relation to the aforementioned guarantor loans redress programme based upon the Directors' best estimate of the total redress payable to certain customers of GLD.
7. Loss per share
Six months ended
30 June 2021
Six months ended
30 June 2020
Retained loss attributable to Ordinary Shareholders (£000)
(7,535)
(102,374)
Weighted average number of Ordinary Shares
312,437,422
312,437,422
Basic and diluted loss per share (pence)
(2.41)
(32.77)
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 in issue. 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 2021, nil shares were held in treasury (2020: nil).
Six months ended
30 June 2021
Six months ended
30 June 2020
Weighted average number of potential Ordinary Shares that are not currently dilutive (000)
5,539
6,895
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.
8. Taxation
Any tax charge for the period is calculated by applying the Directors' best estimate of the effective tax rate for the financial year to the profit or loss before tax for the period. In the six months to 30 June 2021, the effective tax rate was 19% (2020: 19%). As at the 30 June 2021, the Group has not recognised a deferred tax asset (2020: £nil). In the current and prior year the Group has not recognised any tax benefits that would typically accrue based on current year losses due to the uncertainty in the regulatory environment, and the potential future impact of COVID-19 on the macroeconomic environment. The Group reviews the carrying amount of deferred tax assets at each balance sheet date and reduces it to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. The total unrecognised deferred tax asset as at 30 June 2021 is £11.4m (2020: £1.9m).
9. Other Operating Income
Other income comprises of £0.8m in debt sales (2020: £0.3m) and £0.05m in grants pertaining to the Coronavirus Job Retention Scheme (2020: £0.6m).
Coronavirus Job Retention Scheme
In the six months ended 30 June 2021, the Group continued to receive government grants offered through the Coronavirus Job Retention Scheme ('CJRS'). The original direction was signed by the Chancellor on 15 April 2020 and further directions were signed on 20 May 2020, 25 June 2020, 1 October 2020, 12 November 2020, 25 January 2021 and 15 April 2021.
A breakdown of these grants is provided below:
Six months ended 30 June 2021
Six months ended 30 June 2020
£000
£000
Salaries
52
519
National Insurance contributions
-
9
Pension contributions
-
24
Total CJRS grant received
52
552
HMRC have announced that the CJRS grant must be included as income within taxable profits for Corporation Tax purposes, however businesses can also deduct employment costs as normal when calculating taxable profits for Corporation Tax purposes.
10. Dividends
As a result of the reported losses in 2020 and the six months ended 30 June 2021, the Company does not have any distributable reserves and is therefore not in a position to declare a half year dividend for the six months ended 30 June 2021 (2020: nil pence per share).
With no interim dividend being proposed by the Directors in respect of the six months ended 30 June 2021 (interim dividend 2020: nil pence per share), there will be no dividend payment in relation to the current period (2020: £nil).
11. Amounts receivable from customers
30 June 2021
£000
31 Dec 2020
£000
Gross carrying amount
278,192
320,942
Loan loss provision
(48,643)
(62,741)
Amounts receivable from customers
229,549
258,201
Included within the gross carrying amount above are unamortised broker commissions, see table below:
30 June 2021
£000
31 Dec 2020
£000
Unamortised broker commissions
7,434
9,231
Total unamortised broker commissions
7,434
9,231
Analysis of amounts receivable from customers due within/more than one year:
30 June 2021
£000
31 Dec 2020
£000
Due within one year
118,466
134,073
Due in more than one year
111,083
124,128
Amounts receivable from customers
229,549
258,201
Analysis of amounts receivable from customers
30 June 2021
Stage 1
£000
Stage 2
£0000
Stage 3
£000
Total
£000
Branch-based lending
145,593
28,460
4,157
178,210
Home credit
21,511
12,455
9,378
43,344
Guarantor loans
27,951
16,723
11,964
56,638
Gross carrying amount
195,055
57,638
25,499
278,192
Branch-based lending
(6,517)
(4,828)
(3,086)
(14,431)
Home credit
(1,528)
(9,200)
(8,295)
(19,023)
Guarantor loans
(4,173)
(4,019)
(6,997)
(15,189)
Loan loss provision
(12,218)
(18,047)
(18,378)
(48,643)
Branch-based lending
139,076
23,632
1,071
163,779
Home credit
19,983
3,255
1,083
24,321
Guarantor loans
23,778
12,704
4,967
41,449
Net amounts receivable
182,837
39,591
7,121
229,549
31 December 2020
Stage 1
£000
Stage 2
£000
Stage 3
£000
Total
£000
Branch-based lending
140,418
39,472
5,772
185,662
Home credit
23,537
12,316
17,883
53,736
Guarantor loans
34,566
25,831
21,147
81,544
Gross carrying amount
198,521
77,619
44,802
320,942
Branch-based lending
(6,011)
(3,095)
(5,096)
(14,202)
Home credit
(1,876)
(8,124)
(16,789)
(26,789)
Guarantor loans
(1,366)
(5,864)
(14,520)
(21,750)
Loan loss provision
(9,253)
(17,083)
(36,405)
(62,741)
Branch-based lending
134,408
36,377
676
171,460
Home credit
21,661
4,192
1,094
26,947
Guarantor loans
33,200
19,967
6,627
59,794
Net amounts receivable
189,268
60,536
8,397
258,201
Fair value of amounts receivable from customers
30 June 2021
£000
31 Dec 2020
£000
Branch-based lending
209,792
284,911
Home Credit
38,523
44,006
Guarantor Loans
95,851
105,100
Amounts receivable from customers
344,166
434,017
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 which defines fair value measurements as those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).
12. Goodwill
30 June 2021
£000
31 Dec 2020
£000
Gross carrying amount
140,668
140,668
Accumulated impairment
(140,668)
(65,836)
Impairment charge
-
(74,832)
Net carrying amount
-
-
Goodwill recognised in prior years represent the difference between the purchase consideration paid and the value of net assets acquired (including intangible assets recognised upon acquisition), less any accumulated impairment.
Under IFRS 13, 'Fair Value Measurement', the fair value used in the goodwill impairment assessment is classified as Level 3.
The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired. Determining whether goodwill is impaired requires an estimation of the recoverable amount of each CGU. The recoverable amount is the higher of its fair value ('FV') less cost to sell or its value in use ('VIU').
Total goodwill as at 30 June 2021 is £nil (2020: £nil).
In the prior year, for the six months ended 30 June 2020, the Group wrote off all its remaining goodwill balance totalling £74.8m. Detail regarding this impairment is described below.
Impairment of goodwill in the six months ended 30 June 2020:
Fair value ('FV') less cost to sell
The calculation to determine the fair value less cost to sell for each Cash Generating Unit ('CGU') in the 2020 financial year used forecast earnings for the year ended 31 December 2020, multiplied by the 30 June 2020 Price Earnings ('PE') multiple for comparable companies. Earnings represent profit after tax before fair value adjustments, amortisation of intangibles and exceptional items. Disposal costs were estimated at 2%. As part of this assessment, we applied PE multiples to forecast 2020 profit after tax in order to determine management's best estimate of the fair value to be attributed to each of the CGUs.
Value in use ('VIU')
The calculation to determine recoverable amount based on VIU for the 2020 financial year used the cash flows derived from earnings projections for the years ended 31 December 2020, 2021, and 2022, together with a terminal value based on the cash flow forecast for 2022 at a perpetuity growth rate. The resulting cash flow forecasts were then discounted at a discount rate appropriate to the CGU to produce a VIU to the Group.
Loans at Home goodwill assessment
In the six months ended 30 June 2020, the Group utilised the actual 30 June 2020 PE multiple of comparable companies, along with 2020 forecast profit after tax to determine recoverable amount. The result was a FV less cost to sell below the carrying value of the CGU as at 30 June 2020. Management also ran a VIU calculation to determine recoverable value. Assuming a nil growth into perpetuity results in a VIU which, whilst higher than the FV less cost to sell calculated for Loans at Home, remained below the carrying value of the LAH CGU. The impact of COVID-19 on the profitability of the CGU in the 2020 financial year along with the significant decline in peer group PE multiples (driven by uncertainties in the economic, market and regulatory environment) meant that on the basis of the analysis above, the Group concluded to impair the entire goodwill asset attributable to the LAH CGU as at 30 June 2020 totalling £27.7m. This reduced the Loans at Home goodwill asset to £nil as at 30 June 2020. No further assessment was conducted in the six-month period ended 30 June 2021 given the reversal of an impairment loss for goodwill is not permitted.
Everyday Loans goodwill assessment
For the six months ended 30 June 2020, the Group performed a FV less cost to sell for the Everyday Loans CGU using actual PE multiples as at 30 June 2020 and 2020 forecast profits. Given the unique circumstances of COVID-19 on 2020 performance, along with the significant decline in peer group PE multiples since 31 December 2019 driven by uncertainties in the economic, market and regulatory environment, the Group calculated the FV less costs to sell to be below the carrying value, therefore indicating an impairment to the remaining goodwill value held on the balance sheet. A VIU base case forecast was used to ascertain whether or not the VIU of the CGU was greater or less than the FV less cost to sell. Assuming a nil growth into perpetuity, the VIU of the CGU was below the FV less costs to sell, and therefore it was appropriate to impair the entire goodwill asset attributable to the Everyday Loans CGU as at 30 June 2020 totalling £47.1m. This reduced the Everyday Loans goodwill asset to £nil, and therefore no further assessment has been conducted on the goodwill in the current six-month period ended 30 June 2021 given the reversal of an impairment loss for goodwill is not permitted.
13. Provisions
Plevin
£000
Complaints
£000
Dilapidation
£000
Guarantor Loans Redress
£000
Restructuring
£000
Total
£000
Opening at 31 December 2019
93
-
1,203
-
170
1,466
Charge during the year
(44)
5,129
120
15,313
(170)
20,348
Utilised
-
-
(1)
-
-
(1)
Balance at 31 December 2020
49
5,129
1,322
15,313
-
21,813
Charge during the period
-
3,314
-
1,918
527
5,759
Utilised
(49)
(3,432)
(10)
(364)
-
(3,855)
Balance at 30 June 2021
-
5,011
1,312
16,867
527
23,717
Provisions are recognised for present obligations arising as a consequence of past events where it is more likely than not that a transfer of economic benefit will be necessary to settle the obligation, which can reliably be estimated. The restructuring provision includes a provision for redundancies relating to the managed run-off of the Guarantor Loans Division.
Branch-based lending
The Group has recognised a provision for complaints of £1.6m as at 30 June 2021 (31 December 2020: £0.88m) in relation to potential outflows to customers related to past non-compliance with regulations relating to affordability assessments. Judgement is applied to determine the quantum of such provisions, including making assumptions regarding the extent to which the complaints already received may be upheld, average redress payments and related administrative costs (refer to note 4 for sensitivity analysis on this). As part of their assessment, the Directors also considered an independent review commissioned by the Group in April 2021 of the lending and complaints handling activities of the division. This review remains ongoing and includes an assessment of whether the issues identified in guarantor loans have any implications for the branch-based lending division. The review also includes an assessment of recent FOS decisions in order to determine whether there exists a subset of customers that may be eligible for redress on the basis of factors which may indicate instances of unaffordable lending. As at the date of these financial statements, the Directors recognise that as the review is ongoing, there remains a risk that the final outcome of these reviews may result in the identification of customers who may require redress, and the cost of redress for the Group could be materially higher than is currently provided for in the financial statements.
Home credit
The Group has recognised a provision for complaints of £1.5m as at 30 June 2021 (31 December 2020: £3.4m) in relation to potential outflows to customers related to past non-compliance with regulations relating to affordability assessments. Judgement is applied to determine the quantum of such provisions, including making assumptions regarding the extent to which the complaints already received may be upheld, average redress payments and related administrative costs (refer to note 4 for sensitivity analysis on this). As with branch-based lending, as part of their assessment, the Directors also considered an independent review commissioned by the Group in April 2021 of the lending and complaints handling activities of the home credit division. The scope of this review is in line with that detailed above for branch-based lending. As at the date of these financial statements, the Directors recognise that as the review is ongoing, there remains a risk that the final outcome of these reviews may result in the identification of customers who may require redress, and the cost of redress for the Group could be materially higher than is currently provided for in the financial statements.
Redress programme for certain customers of GLD
The Group has recognised a provision for complaints of £1.9m as at 30 June 2021 (31 December 2020: £0.82m) in relation to potential outflows to customers related to past non-compliance with regulations relating to affordability assessments. In addition, part of the provision included in the statement of financial position relates to a provision recognised for the customer redress programme in GLD totalling £16.9m (31 December 2020: £15.3m). The provision represents an accounting estimate of the expected future outflows arising using information available as at the date of signing these financial statements. Identifying whether a present obligation exists and estimating the probability, timing, nature and quantum of the redress payments that may arise from past events requires judgements to be made on the specific facts and circumstances relating to the individual customers concerned. It is possible that the eventual outcome may differ materially from the current estimate and this could impact the financial statements. This is due to the risks and inherent uncertainties surrounding the assumptions used in the provision calculation.
The Group has included the exceptional provision of £16.9m as at 30 June 2021 based on the Directors' best estimate of the full and final costs of the programme using the proposed methodology. The estimate includes: the sum of all redress due to affected customers, including penalty interest, of £18.2m, together with costs of implementation of £0.6m, offset by existing impairment provisions of £1.9m, resulting in a net provision amount of £16.9m. Whilst the current estimate represents the Directors' best estimate of the total cost of redress, based upon a detailed methodology and analyses developed in conjunction with its advisers, discussions with the FCA are still ongoing, therefore, although the Directors believe their best estimate represents a reasonably possible outcome, there is a risk of a less favourable outcome. It is anticipated that the redress will start to be paid in 2021.
The Guarantor Loans Division continues to monitor its policies and processes and will continue to assess both the underlying assumptions in the calculation and the adequacy of this provision periodically using actual experience and other relevant evidence to adjust the provision where appropriate.
14. Contingent Liabilities
A contingent liability is a possible obligation depending on whether some uncertain future event occurs. During the normal course of business, the Group is subject to regulatory reviews and challenges. All material matters arising from such reviews and challenges are assessed, with the assistance of external professional advisors where appropriate, to determine the likelihood of the Group incurring a liability as a result. In those instances, including future thematic reviews performed by the regulator in response to recent challenges noted in the industry, where it is concluded that it is more likely than not that a payment will be made, a provision is established based on management's best estimate of the amount required to meet such liability at the relevant balance sheet date.
The Group recognises that there continue to be risks around CMC activity in the non-standard lending sectors and the Group continues to incur the cost of settling complaints as part of its normal business activity. The Group has included a provision within its financial statements for complaints where the outcome has not yet been determined (refer to provisions in note 13) and continues to defend robustly inappropriate or unsubstantiated claims and is working closely with the FOS in this regard. However, it is possible that claims could increase in the future due to unforeseen circumstances such as COVID-19 and/or if FOS were to change its policy with respect to how such claims are adjudicated. Should the final outcome of these complaints differ materially to management's best estimates, the cost of resolving such complaints could be higher than expected. It is however not possible to estimate any such increase reliably.
15. Net cash used in operating activities
Six months ended 30 June 2021
Six months ended 30 June 2020
£000
£000
Operating profit/(loss)
5,360
(87,837)
Taxation paid
-
-
Depreciation
2,020
1,956
Finance charges on leases
(512)
(501)
Share-based payment charge
41
795
Amortisation of intangible assets
1,224
1,663
Goodwill impairment loss
-
74,832
Fair value unwind on acquired loan book
-
971
Acquired intangibles impairment loss
-
698
(Loss)/profit on disposal of property, plant and equipment and intangible assets
(3)
6
Decrease in amounts receivable from customers
28,652
60,651
Decrease/(Increase) in other assets
-
-
Decrease/(Increase) in receivables
(825)
(6,734)
(Decrease)/increase in payables and provisions
(3,506)
2,313
Cash used in operating activities
32,451
48,813
16. 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.
One member of the Group's key management personnel (Executive Director of Non-Standard Finance plc) is a Trustee of the charity Loan Smart as at 30 June 2021 (31 December 2020: one member). During the six months ended 30 June 2021, the Company donated £15,000 to Loan Smart (six months ended 30 June 2020: £80,500).
The Company receives charges from and makes charges to related parties in relation to shared costs, staff costs and other costs incurred on their behalf. As at 30 June 2021, the Company had £0.5m and £0.2m paid in advance from its subsidiary undertakings Everyday Loans Limited and S.D. Taylor Limited respectively, in relation to recharges described above (31 December 2020: £nil and £nil respectively). Intra-Group transactions between the Company and the fully consolidated subsidiaries or between fully consolidated subsidiaries are eliminated on consolidation.
In October 2020, the Group appointed Toby Westcott to the Board. Toby Westcott as a Nominee Director receives no direct remuneration from the Company. However, Alchemy Special Opportunities LLP were remunerated for the services of Toby Westcott through a services agreement. This figure equates to a £75,000 fee plus VAT per annum. Total fees paid in relation to these services totalled £37,500 (plus VAT) for the period ended 30 June 2021 (six months ended 30 June 2020: £nil).
In the prior year, the Group put in place a new six-year securitisation facility, of which £15m was drawn in April 2020. In August 2020, the Group repaid the £15m (£10.5m net) previously drawn on its £200m securitisation facility. The amount currently drawn under this facility as at 31 June 2021 remains at £nil (31 December 2020: £nil). The nature of the facility required the setup of a Special Purpose Vehicle ('SPV') NSF Funding 2020 Limited, which is consolidated into the Group in line with the requirements of IFRS 10. During the six-month period ended 30 June 2021, the SPV transacted with Everyday Lending Limited (a subsidiary within the Group). As these transactions took place between two or more subsidiaries, they were deemed to be related party transactions, and were eliminated on consolidation.
17. Distributable Reserves of the Parent Company
At 30 June 2021, the Company had no distributable reserves (31 December 2020: £nil).
18. Subsequent Events
On 31 August 2021, the Board of NSF announced that John van Kuffeler would step down from his role as Group Chief Executive Officer with effect from 31 August 2021 and would cease to be a Director of the Company.
Since 30 June 2021 there have been no other events that require disclosure and/or adjustment to the financial statements.
APPENDIX
Glossary of alternative performance measures ('APMs') 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. These APMs are not defined or specified under the requirements of International Financial Reporting Standards, however we believe these APMs provide readers with important additional information on our business. To support this, we have included a reconciliation of the APMs we use, how they are calculated and why we use them on the following page.
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
Impairments/average loan book
Impairments as a percentage of 12 month average loan book excluding fair value adjustments
Normalised 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
Operating profit margin
Normalised operating profit as a percentage of normalised revenues
Cost to income ratio
Normalised administrative 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
Alternative Performance Measures reconciliation
1. Net debt
30 Jun 2021
£000
31 Dec 2020
£000
Borrowings
330,000
330,000
Cash at bank and in hand1
(102,976)
(77,402)
227,024
252,598
1 Cash at bank and in hand excludes cash held by Parent Company that sits outside of the security group
This is deemed useful to show total borrowings if cash available at year end was used to repay borrowing facilities.
2. Normalised revenue (12 months)
Branch-based lending
Guarantor loans
Home credit
30 Jun 2021
£000
30 Jun 2020
£000
30 Jun 2021
£000
30 Jun 2020
£000
30 Jun 2021
£000
30 Jun 2020
£000
Reported revenue
81,444
97,160
23,352
30,857
34,576
57,421
Add back fair value adjustments
-
-
971
2,155
-
-
Normalised revenue
81,445
97,160
24,323
33,012
34,576
57,421
Fair value adjustments have been excluded due to them being non-business-as-usual transactions. They have resulted from the Group making acquisitions and do not reflect the underlying performance of the business. Removing this item is deemed to give a fairer representation of revenue within the financial year.
3. Normalised operating profit (12 months)
Branch-based lending
Guarantor loans
Home credit
30 Jun 2021
£000
30 Jun 2020
£000
30 Jun 2021
£000
30 Jun 2020
£000
30 Jun 2021
£000
30 Jun 2020
£000
Reported operating profit
12,406
25,445
(8,332)
(2,528)
(4,024)
7,768
Add back fair value adjustments
-
-
466
2,155
-
-
Add back amortisation of intangibles
-
-
699
-
-
-
Add back exceptional provision for customer redress
-
-
1,566
-
-
-
Normalised operating profit
12,406
25,445
(5,601)
(373)
(4,024)
7,768
Fair value adjustments have been excluded due to them being non-business-as-usual transactions. They have resulted from the Group making acquisitions and do not reflect the underlying performance of the business. Removing this item is deemed to give a fairer representation of revenue within the financial year.
4. Normalised profit before tax
30 Jun 2021
£000
30 Jun 2020
£000
Reported loss before tax
(7,535)
(102,749)
Add back fair value adjustments
-
971
Add back amortisation and write-off of intangibles
-
599
Add back exceptional items
4,025
91,283
Normalised profit before tax
(3,510)
(9,896)
Fair value adjustments, amortisation of intangibles, and exceptional items have been excluded due to them being non-business-as-usual transactions. The fair value adjustments and amortisation of intangibles have resulted from the Group making acquisitions, whilst the exceptional items are one-off and are not as a result of underlying business-as-usual transactions and therefore do not reflect the underlying performance of the business. Hence, removing these items is deemed to give a fairer representation of the underlying profit performance within the financial year.
5. Normalised profit for the year
Group
30 Jun 2021
£000
30 Jun 2020
£000
Reported loss for the period
(7,535)
(102,374)
Add back fair value adjustments
-
971
Add back amortisation of intangibles
-
599
Add back exceptional items
4,025
91,283
Adjustment for tax relating to above items
-
1,569
Normalised loss for the period
(3,510)
(7,952)
Weighted average shares
312,437,422
312,437,422
Normalised earnings per share (pence)
(1.12)p
(2.55)p
As noted above, fair value adjustments, amortisation of intangibles and exceptional items have been excluded due to them being non-business-as-usual transactions. The fair value adjustments and amortisation of intangibles have resulted from the Group making acquisitions, whilst the exceptional items are one-off and are not as a result of underlying business-as-usual transactions (refer to note 6 for further detail on exceptional costs in the year) and therefore does not reflect the underlying performance of the business. Hence, removing these items is deemed to give a fairer representation of the underlying earnings per share within the financial year.
6. Impairment as a percentage of revenue
Branch-based lending
Guarantor loans
Home credit
30 Jun 2021
£000
30 Jun 2020
£000
30 Jun 2021
£000
30 Jun 2020
£000
30 Jun 2021
£000
30 Jun 2020
£000
Normalised revenue (12 months)
81,444
97,160
24,323
33,012
34,576
57,421
Impairment (12 months)
19,541
25,906
10,011
20,337
3,987
15,534
Impairment as a percentage revenue
24.0%
26.7%
41.2%
61.6%
11.5%
27.1%
Impairment as a percentage revenue is a key measure for the Group in monitoring risk within the business.
7. Impairment as a percentage loan book
Branch-based lending
Guarantor loans
Home credit
30 Jun 2021
£000
30 Jun 2020
£000
30 Jun 2021
£000
30 Jun 2020
£000
30 Jun 2021
£000
30 Jun 2020
£000
Reported opening net loan book
187,707
201,817
88,043
98,440
24,276
35,534
Less fair value adjustments
-
-
(466)
(3,126)
-
Normalised opening net loan book
187,707
201,817
87,577
95,314
24,276
35,534
Reported closing net loan book
163,779
187,707
41,449
88,043
24,321
24,276
Less fair value adjustments
-
-
-
(466)
-
-
Normalised closing net loan book
163,779
187,707
41,449
87,577
24,321
24,276
Normalised opening net loan book
187,707
201,817
87,577
95,314
24,276
35,534
Normalised closing net loan book
163,779
187,707
41,449
87,577
24,321
24,276
Average net loan book
173,189
208,092
60,721
102,097
24,365
33,844
Impairment
19,541
25,906
10,011
20,337
3,987
15,534
Impairment as a percentage loan book
11.3%
12.4%
16.5%
19.9%
16.4%
45.9%
Impairment as a percentage loan book allows review of impairment level movements year on year.
8. Net loan book growth
Branch-based lending
Guarantor loans
Home credit
30 Jun 2021
£000
30 Jun 2020
£000
30 Jun 2021
£000
30 Jun 2020
£000
30 Jun 2021
£000
30 Jun 2020
£000
Normalised opening net loan book
187,707
201,817
87,577
95,314
24,276
35,534
Normalised closing net loan book
163,779
187,707
41,449
87,577
24,321
24,276
Net loan book growth
(12.7)%
(7.0)%
(52.7)%
(8.1)%
0.2%
(31.7)%
9. Return on asset
Branch-based lending
Guarantor loans
Home credit
30 Jun 2021
£000
30 Jun 2020
£000
30 Jun 2021
£000
30 Jun 2020
£000
30 Jun 2021
£000
30 Jun 2020
£000
Normalised operating profit (12 months)
12,406
25,445
(5,601)
(373)
(4,024)
7,768
Average net loan book
173,189
208,092
60,721
102,097
24,365
33,844
Return on asset
7.2%
12.2%
(9.2)%
(0.4)%
(16.5)%
23.0%
The return on asset measure is used internally to review the return on the Group's primary key assets.
10. Revenue yield
Branch-based lending
Guarantor loans
Home credit
30 Jun 2021
£000
30 Jun 2020
£000
30 Jun 2021
£000
30 Jun 2020
£000
30 Jun 2021
£000
30 Jun 2020
£000
Normalised revenue (12 months)
81,444
97,160
24,323
33,012
34,576
57,421
Average net loan book
173,189
208,092
60,721
102,097
24,365
33,844
Revenue yield percentage
47.0%
46.7%
40.1%
32.3%
141.9%
169.7%
Revenue yield percentage is deemed useful in assessing the gross return on the Group's loan book.
11. Risk adjusted margin
Branch-based lending
Guarantor loans
Home credit
30 Jun 2021
£000
30 Jun 2020
£000
30 Jun 2021
£000
30 Jun 2020
£000
30 Jun 2021
£000
30 Jun 2020
£000
Normalised revenue (12 months)
81,444
97,160
24,323
33,012
34,576
57,421
Impairments (12 months)
(19,541)
(25,906)
(10,011)
(20,337)
(3,987)
(15,534)
Normalised risk adjusted revenue
61,903
71,254
14,312
12,675
30,590
41,887
Average net loan book
173,189
208,092
60,721
102,097
24,365
33,844
Risk adjusted margin percentage
35.7%
34.2%
23.6%
12.4%
125.5%
123.8%
The Group defines normalised risk adjusted revenue as normalised revenue less impairments. Risk adjusted revenue is not a measurement of performance under IFRSs, and you should not consider risk adjusted revenue as an alternative to profit before tax as a measure of the Group's operating performance, as a measure of the Group's ability to meet its cash needs or as any other measure of performance under IFRSs. The risk adjusted margin measure is used internally to review an adjusted return on the Group's primary key assets.
12. Operating profit/(loss) margin
Branch-based lending
Guarantor loans
Home credit
30 Jun 2021
£000
30 Jun 2020
£000
30 Jun 2021
£000
30 Jun 2020
£000
30 Jun 2021
£000
30 Jun 2020
£000
Normalised operating profit/(loss) (12 months)
12,406
25,445
(5,601)
(373)
(4,024)
7,768
Normalised revenue (12 months)
81,444
97,160
24,323
33,012
34,576
57,421
Operating profit/(loss) margin percentage
15.2%
26.2%
(23.0)%
(1.1)%
(11.6%)
13.5%
13. Cost to income ratio
Branch-based lending
Guarantor loans
Home credit
30 Jun 2021
£000
30 Jun 2020
£000
30 Jun 2021
£000
30 Jun 2020
£000
30 Jun 2021
£000
30 Jun 2020
£000
Normalised revenue (12 months)
81,444
97,160
24,323
33,012
34,576
57,421
Administration expense (12 months)
(42,197)
43,915
(13,529)
13,797
(35,228)
34,119
Cost to income ratio
51.8%
45.2%
55.6%
41.8%
101.9%
59.4%
This measure allows review of cost management.
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