Operational review
Group
Group impairment as a percentage of revenue (%)
All our markets performed well in 2008. Our established Central European business reported pre-tax profits of £106.0 million. We made good progress in Mexico and Romania continues to perform in line with expectations. We also commenced pilot operations in Russia.
Average net customer receivables grew by 13.9%, benefiting from increased average loan sizes to better quality customers and this caused revenue to increase by 11.4% to £557.1 million.
As expected, credit quality softened a little during the first half of the year driven by growth in credit issued and customer numbers. As a result, impairment grew by 27.1% to £127.2 million, including a release of impairment provisions of £2.0 million in Poland compared with a release of £6.0 million in 2007. Before provision releases, impairment was at 23.2% of revenue compared with 21.8% in 2007, well within our target range. In addition, the credit tightening implemented in October resulted in a much improved early credit performance for lending in the final four months of the year.
Finance costs increased by 25.5% to £29.5 million as a result of increased net borrowings to fund growth in Mexico and Romania and higher interest margins on our borrowings. Year-end borrowings, net of cash, were 9.2% higher than 2007 and the interest rate margin that we pay on our syndicated loan facilities increased from 135 bps to 225 bps following the refinancing in October. Finance costs represented 5.3% of revenue.
Operating and administration costs increased by less than revenue, up by 6.9% to £330.1 million. Cost increases were driven by expansion in Mexico and Romania, with Central European costs flat.
All markets performed well and the profit before taxation by market is set out below:
| 2008 £m |
Pro forma 2007 £m |
Change £m |
Change % |
Change at CER % |
|
|---|---|---|---|---|---|
| Central Europe | 106.0 | 80.6 | 25.4 | 31.5 | 7.4 |
| Central costs | (13.2) | (12.5) | (0.7) | (5.6) | (5.6) |
| Established businesses | 92.8 | 68.1 | 24.7 | 36.3 | 7.7 |
| Mexico | (8.7) | (13.3) | 4.6 | 34.6 | 37.4 |
| Romania | (7.8) | (4.2) | (3.6) | (85.7) | (77.3) |
| Russia | (6.0) | (0.5) | (5.5) | (1,100.0) | (1,100.0) |
| Developing markets | (22.5) | (18.0) | (4.5) | (25.0) | (19.7) |
| Profit before taxation | 70.3 | 50.1 | 20.2 | 40.3 | 4.3 |
| Taxation | (19.7) | (15.0) | (4.7) | (31.3) | |
| Profit after taxation | 50.6 | 35.1 | 15.5 | 44.2 | |
| 2008 £m |
Pro forma 2007 £m |
Change £m |
Change % |
||
| Earnings per share (pence) | |||||
| Established businesses | 26.04 | 18.55 | 7.49 | 40.4 | |
| Developing markets | (6.31) | (4.90) | (1.41) | (28.8) | |
| Total | 19.73 | 13.65 | 6.08 | 44.5 |
Our established Central Europe business reported pre-tax profits of £106.0 million, an increase of £25.4 million (31.5%) on the prior year. This reflects a good performance in the year but also the strength of the Central European currencies, which meant that the rates used to retranslate profits were approximately 23% better than 2007. Excluding exchange rate movements but including the negative short-term impact of the credit tightening, profits increased by 7.4%.