Amigo Resources PLC (AMGO) Earnings Call Transcript

Good morning, and thank you for joining us for Amigo Holdings' financial results for the 9 months to the end of December 2019. I'm Nayan Kisnadwala, CFO; and with me is Nick Beal, Chief Regulatory and Public Affairs Officer. As you are aware, Amigo remains under strategic review, and the formal sales process announced at the end of January is ongoing. As such, we are limited in what we can discuss on this call regarding future performance, governed as we are by the takeover code whilst we remain in the offer period. I also have with me representatives from our adviser, RBC, who will be able to advise us on what we can say when we come to questions. In a moment, I will take you through the numbers. Nick will give us a brief update on the regulatory environment. And we will then, at the end of the call, take questions. Owing to the restrictions placed on us under the takeover code, we are asking that you limit your questions to reported trading only. Thank you for your understanding. Moving to the next slide. While it is disappointing that today we're announcing a larger provision for complaints, which I will come to shortly, our financial results for the last 9 months have been within expectations across all key operating metrics. Customer numbers are up 18% year-on-year, demonstrating continued demand for our guarantor product. Our net loan book is up 3.5% (sic) [ 3.8% ] year-on-year but down as expected on the quarter. The revised lending policy announced today will impact future lending volumes. As expected, we have seen a year-on-year increase on the impairment charge. This is largely due to resource constraints within collections as strong demand for our product resulted in a significant increase in customer numbers. Since the period end, we have reorganized collections with the recruitment of a new chief operating officer, and we have redirected more resource into our collections team. We have taken a cautious approach to complaints provisioning as we manage the evolving regulatory environment. We have increased the provision for both existing and future complaints. Largely as a result of this larger provision, we have seen a decrease in statutory profit after tax of 26.6%. Now let's turn to the key financials on the next slide. For the 9-month period through the 31st of December 2019, revenue grew by 8.5% with a 3.8% increase in the net loan book. Initiatives to optimize the group's capital structure, including the open-market repurchase of high-yield senior secured notes, have allowed us to reduce underlying finance costs once nonrecurring senior secured note buyback and RCF fees are excluded. We have made no further repurchases of the senior secured notes in the third quarter. The year-to-date complaints costs recognized in the income statement has risen to GBP 26.6 million, with a balance sheet provision of GBP 18.7 million. This provision relates to both the estimated cost of customer complaints received up to 31st December 2019 and the projected cost of potential future complaints on certain higher-risk historic loans. Excluding complaints cost, the ratio of operating expense to revenue is in line with guidance at 20.7%. The increase on the prior year reflects investments made to improve the customer journey and to promote positive customer outcomes. Basic earnings per share decreased by 30% to 9.7p, and adjusted basic earnings per share decreased by 41.3% to 9.4p. This reflects both the lower profit numbers primarily due to complaints as well as the increase in average number of shares post IPO. Net borrowings to adjusted tangible equity has improved to 1.8x. Let's look at the complaints provision on the next slide. We have adopted a cautious approach to complaints. Although complaint levels have been low historically, we have seen an increase in volumes over the 9 months and an evolution in the approach to its handling of complaints by the FOS. The increase in provision is largely a result of our review of FOS cases throughout the sector and the application of a higher uphold rate assumption in our analysis. We have increased the provision in the balance sheet over the period to GBP 18.7 million, up from GBP 7.5 million at the half year. The provision relates to both the estimated cost of customer complaints received up to 31st December 2019 and the projected cost of potential future complaints on certain high-risk historic loans. You can see from the slide the breakdown quarter-on-quarter between the additional and utilized provision. The year-to-date complaints costs recognized in the income statement has risen to GBP 26.6 million, up from GBP 10.4 million in the half year. We have resourced and upscaled the complaints team to ensure fair outcomes for all our customers. Excluding complaints, you'll see on the next slide the ratio of operating expense to revenue is in line with previous guidance at 20.7%. As we have said at the half year, our intention of showing operating cost to income is to give insight into how we expect to manage the operational efficiency of our business. Whilst dealing with complaints should not be treated as an exception and we do not do so, we believe stripping it out of our calculation gives us a better idea of our underlying operating leverage. On the next slide, we focus on loan origination. On the left-hand side, we have the origination split between homeowner, non-homeowner and pilot lending. On the right-hand side, we have the acquisition channel mix. We originated over GBP 300 million of new loans in the U.K. over the first 9 months, a decrease of GBP 25.3 million compared to the prior year. Lending to new customers represent 71% of total originations in the 9-month period to end of December '19 versus 61% in the prior year, an increase of GBP 14 million year-on-year in absolute terms. In Q3, repeat lending to existing customers was at 26% versus 22% in Q2. As expected, we have seen a moderate increase in the percent of repeat lending over the third quarter as customers become eligible under the enhanced credit policy introduced in July 2019. As part of our ongoing strategic review, we are reviewing our lending policy and risk appetite and could see a substantial reduction in both new and repeat lending. We are in the process of trialing our new policies and procedures, and we will have a better estimate by year-end results announcement. Whilst there is a high degree of uncertainty in the final number, the lower risk appetite would result in a material reduction of -- in future lending volume, impacting net loan book growth. On Slide 10, we focus on revenue and margins. We delivered revenue of GBP 218 million over the first 9 months, which is 8.5% above the same period in the prior year. The growth has been driven by the rise in number of customers. We saw a 3.8% increase in the loan book. We have a simple business model with a representative APR of 49.9% and no other fees. This translates into a gross interest margin of 41.2%, which remains unchanged from the prior year. Our average cost of funds improved in the fiscal year from 5.1% to 4% without the impact of the capitalized RCF fees, and the actions we have taken will have a full year positive impact. Our stable gross margin and improving cost of funds gives us a net interest margin of 31.5%, a slight improvement over the prior year. The improvement in NIM is dampened by the GBP 2.2 million of capitalized RCF fees written off in the first half. Moving to the next slide. The chart on this page shows impairment as a percentage of revenue. The impairment ratio of 31.5% for the 9 months is in line with previously given guidance. We saw a slight seasonal uplift in impairments over the third quarter, which has been offset by further debt sales. The calendar 2020 year-to-date trends are favorable. The year-on-year increase is primarily due to previously highlighted capacity constraints caused when our teams did not grow in line with strong demand we have seen for our product and the corresponding increase in customer numbers. We have seen increased resource in collections. Since the period end, we have a new chief operating officer in place with extensive prior experience of Amigo and the guarantor loan product. Increased training and team reorganization is already having a significant positive impact on the customer journey, with significantly reduced collection call times and abandonment rates and is expected to positively impact impairment levels over time. On the left-hand side of Slide 12, we have the impairment provision, the staging components. And on the right-hand side are the loan book aging buckets. We have an impairment provision balance of GBP 90.9 million at the third quarter, which is GBP 16.5 million higher than at the end of prior third quarter. Provision coverage has increased from 9.7% to 11.2%. From a staging perspective, you will note the provision related with Stage 3 assets has grown to GBP 40.1 million and that related to Stage 2 assets has grown marginally to GBP 22.4 million. Stage 1 decreased slightly year-on-year. The key driver for this change is the increase in customers falling into arrears, particularly impacting Stage 3 as a result of the issues discussed in collections. Additionally, we have a seasonal uptick in December. The loan aging reflects the same trend. Our proportion of receivables which are current or less than 31 days past due declined to 92.7% compared to 95.2% last year. Slide 13 shows the continued cash generation of our business. Our high cash flows reduced gearing. Gearing, defined here as net borrowings to adjusted tangible equity, continues to improve as all our outlays are predominantly covered by internally generated cash. Before I hand over to Nick to give an update on regulatory developments, I'd like to give a quick update on our operation in Ireland. We've seen continued growth in loan book and customer numbers, which at the end of December '19 stood at EUR 7.1 million and almost 3,000, respectively. It's a great start from just February of last year and gives us confidence in our ability to roll out a much needed product into new markets. With that, I'll hand over to Nick.

Thanks, Nayan. As we have discussed before, the Financial Conduct Authority, the FCA, has several sector-specific reviews going on. These include looking at affordability, a review of repeat lending and guidance on the treatment of vulnerable customers. Specific to the guarantor sector, the FCA, having completed its work into guarantor understanding and loan payments, is now carrying out a review into affordability and forbearance. We aim to stay ahead of regulation and review our processes regularly and make ongoing adjustments to our already rigorous processes. We've always carried out separate detailed assessments of affordability for both the borrower and the guarantor and have recently increased the level of verification we require during the income and expenditure checks. While we've assessed the customer as a high risk, we investigate invidious expenditure further. As part of our continued improvement and as open banking technology continues to develop and becomes more acceptable to consumers, we're looking at opportunities to use this more with our customers. Although our customers have had problems in the past, it's vastly important they can afford to repay us in the future. The fact that less than 10% of payments come from a guarantor is evidence that our affordability assessments are working and provide good outcomes for customers. In July last year, we enhanced the eligibility criteria for those customers looking to take out further loans with us. The changes we made have seen our lending figures come down as expected, but we continue to consider this to be the right action for all our stakeholders. We offer forbearance to both borrowers and guarantors and look to work with both, especially where they demonstrate specific signs of vulnerability. We have a dedicated team in place to help our more vulnerable customers. We've helped the FCA with its review into this area and expect the FCA to publish its findings in the spring of this year. We continue to implement the changes to the information provided to guarantors as recommended by the FCA following its multi-firm work on guarantor understanding. These enhancements will be implemented before the end of June 2020. Moving on to the Financial Ombudsman Service, the FOS. Earlier this month, the FOS published complaints data for the guarantor sector, which had an increase in new complaints received from Q2 to Q3 2019, up from 172 to 303. It also showed a continuation of the higher uphold rate quarter-on-quarter, which is more than 4x the uphold rate published last year. We continue to work with the FOS to understand its approach, and we've resourced and upskilled our complaints team. In conclusion, we continue to seek improvements in our business to remain compliant with future regulatory expectations and are committed to the fair treatment and financial well-being of all our customers. I will now hand you back to Nayan.

Thank you, Nick. As we have said, the formal sales process first announced on 27th January is ongoing. We continue to be bound by the restrictions of the takeover code while we remain in the offer period, and we'll update further as and when we can. As part of the strategic review, we have been trialing a more restrictive approach to new and repeat lending, reflecting a lower risk appetite. We have been using a significant proprietary data history to develop scorecards where we have identified reduced risk and higher expected profitability. We continue to optimize our credit worthiness assessment. And while this will mean more in-depth checks for some of our borrowers, we strive to find the right balance between providing an easy, nonintrusive customer experience and minimizing risk for our borrowers, guarantors and ourselves. We have also discontinued loans under GBP 1,000. While these adjustments are expected to have minimal impact this financial year and the precise outcome is subject to a degree of uncertainty, we could see a material reduction in the future lending volume impacting net loan book growth. In light of the strategic review, including the current lending trial, Amigo is withdrawing guidance previously given for the financial year so it's no longer considered valid. We remain confident in the market of -- for our guarantor loan product and in our business model. Differential pricing trials are also ongoing and are aimed at lower-risk segments of the market. We will give further detail with our full year results in May. So in summary, while it is disappointing to post an increased provision for complaints, we believe we are taking a series of actions to build a sustainable business for the future. Amigo has a leading market position. We are cash generative and have significantly reduced our cost of funding over the period. As a result, we have a strong and flexible balance sheet. We are focused on driving the required operational improvements. And as we have seen as part of the strategic review, Amigo is reviewing its risk appetite on new lending, trialing the reduction of lending in higher-risk segments. This could lead to a material reduction in future lending volumes, impacting net loan book growth. Before we open the call for questions, I'd like to remind you again that the formal sales process is ongoing and we remain in an offer period as determined by the takeover code. As such, we are limited to what we can comment on, particularly with respect to future performance, and we'll be answering questions on trading in the last 9 months only. Thank you for your understanding. May we have the first question, please. Maxine?

[Operator Instructions] We have a question from John Cronin from Goodbody.

Can you hear me?

Yes, John.

Just 2 questions from me, please. First of all, on the repeat lending, can you just give us some more color in terms of what's underpinning the decision to pull back even further? Because I guess -- look, you have messaged that -- previously that there was a reduced risk appetite in that vein. And I'm just wondering what's happening. Or what particularly is driving the decision to pull back now even further? For example, are there any problem dossiers with respect to previous repeat lending decisions in your engagement with the regulator? And any color you can give us on that would be helpful. And look, the second question, just on the complaint point. I appreciate you can't give forward guidance here. Just based on the current run rate of complaints year-to-date, so post 31st December, like how high on a scale of 1 to 10 -- or how confident are you, I guess, in terms of the sufficiency of the provision that you -- sitting on your balance sheet at 31st of December? And yes, that's -- those are my 2 questions.

Thanks, John. First question is about repeat lending. So we had announced last time that we have increased the number of good payments we expect from our customers before they become eligible for repeat lending, and that continues. And what we are doing across the portfolio for new and repeat lending is just reducing our risk appetite of our higher-risk accounts within each of the risk segments. And so we are just pulling back from a risk perspective along every dimension. Your second question about complaints, I think as we had spoken in the morning, we are taking a cautious approach in building a provision. And we have -- based on the review of FOS cases, not just for us but in the sector, and we have increased the uphold rate assumptions and analysis for the higher-risk accounts on our loan book. So most of the increase is for future complaints. I think that's all I can say at this point of time.

We have a question from Shailesh Raikundlia from Panmure Gordon.

Just a couple of questions, follow-ups actually. On -- I mean you suggest that the net loan book growth might be -- you talked about net loan book adjustments coming through and not providing guidance for that, and you've particularly focused on the higher-risk segment. I'm just trying to work out whether you can give any disclosure in terms of what percentage of your loan book do you regard as higher risk and what proportion you think will continue to grow as such or even stay stable. So I mean if you could give us any sort of guidance on what you're talking about in terms of the higher-risk segment. And I'd like to just come back on the complaints. I appreciate you can't say much, but -- and you've given the data from FOS in general. But obviously, at a previous trading update, you mentioned -- or at your previous update, you mentioned that there was significant increase in complaints and stuff. I was wondering whether you could give any disclosure in terms of either the number or the increase in the complaints that are coming through, the uphold rate for yourself. But also, I'm just trying to get a sense of your level of provisioning currently. How comfortable are you in terms of where that goes in the future?

Thanks, Shailesh. Unfortunately, we cannot give you any guidance on the net loan book. We are trialing all our new policies and procedures, and it takes months to bed that down. And so that's why we are committing to give you an update when we do the year-end announcement. In terms of complaints, it's for commercial reasons we are not disclosing number of complaints, uphold rates, et cetera, our average redress rate. And the prime driver for the increase in level of provision is our assumption on average redress, which we have increased after we reviewed FOS cases across the sector.

We have a question from Alex Nordhagen from Goldman Sachs.

I have 2. The first one is your loan book and the quality of that. I see the percentage of your gross loan book that's now overdue is 17.7%, which is up from 14.4% in the prior period and against the 13.4% last year, so quite a jump. Where do you see that number topping out?

Thanks, Alex. Again, we cannot give you any more guidance on future loan book growth.

I mean that's -- I mean it's more about impairments to your loan book than it is about the growth.

The impairment, we've said that they'll be within guidance for the first 9 months, and we cannot give guidance for any metrics at all.

Okay. But I guess you'd agree with the statement that the quality of your loan book is deteriorating.

I don't agree with that.