(MCRB) MCB Finance

7 February 2012

MCB FINANCE GROUP PLC

Final results for the 12 months ended 31 December 2011

MCB Finance Group plc (AIM: MCRB.L) ("MCB", the "Group" or the "Company"), the consumer finance company providing flexible credit solutions to retail customers in Finland, Estonia, Latvia and Lithuania, today announces its results for the 12 months ended 31 December 2011.

Operational and financial highlights

·      Principal lent grew 66% to €60.0 million (2010: €36 million)

·      Revenue grew 54% to €18.2 million (2010 revenue: €11.8m)

·      Pre-tax profit of €3.7 million (2010: €0.6 million)

·      Net income of €3.0 million (2010: €0.2 million)

·      Return on equity of 32.5%. Return on assets of 20.3%

·      Net consumer loan receivables outstanding at 31 December 2011 grew by 85% to  €22.4 million (2010: €12.1 million)

·      Credit quality remained strong with impairment down to 16% of revenue (2010: 24%)

·      Continued profitable growth expected into 2012

Rami Ryhanen, CEO, said:

"MCB delivered a strong result in 2011, demonstrating its ability to grow profitably in competitive markets while keeping tight control over credit risk. The business is now well established in its current markets where we see continued opportunities for growth. MCB will during 2012 seek to expand to additional markets and segments with attractive characteristics."

 A copy of the Company's 2011 final results presentation is available at www.mcbfinance.com.

Further information:

Nominated adviser and broker:

Merchant Securities Limited:

Media enquiries:

Allerton Communications:

Business overview

MCB Finance Group is a consumer finance company providing fast, convenient, easily understood and flexible credit solutions under the Credit24 brand to retail customers in Finland and the Baltic countries of Estonia, Latvia and Lithuania. In its markets, the Company is a leading participant in the non-bank consumer credit sector, providing unsecured loans up to €2,000 to qualifying customers, with maturities ranging up to two years. Loan products are designed to suit customers' needs, with simple and transparent terms and flexible repayment schedules. The Company operates in a segment of the market that is typically under-served by larger financial institutions, and is focused on serving high quality customers with strong credit histories.

Loans are mainly offered online through the Company's Credit24-branded websites in Estonia, Finland, Lithuania and Latvia, as well as through certain distribution partners in the Baltic countries.

OPERATIONAL REVIEW

MCB Finance delivered strong lending volume growth during 2011 as a result of continued active marketing activities in all markets and further improvements to the product offering. Loan principal extended to customers during the year totalled €60m, up 66% from 36m in 2010. Credit performance remained very strong with impairment as a percentage of revenue of 16%, down from 24% in 2010. This growth, together with strong credit performance and controlled increases in fixed costs allowed the Group to generate EBT of €3.67m (2010: €0.58m) and net income of €2.97m for the year (2010: €0.23m).

Economic environment

Economic conditions in all four markets in which the Group operates have been strong with GDP growth well above the average in EU markets. Unemployment levels have decreased markedly from previous highs, declining during the year from approximately 17% to 15% in Lithuania and Latvia, from 15% to 11% in Estonia, and from 8.0% to 7.5% in Finland. While economic conditions have continued to improve, we have remained vigilant and maintained a cautious approach to the Group's lending criteria.

GDP Growth

Source: Eurostat 31/1/2012

Lending volumes

The Group extended a total of €60.0m in loan principal during the year, up 66% from €36m in 2010. €25.7m of principal was lent in the first half (2010: €16.2m) and €34.3m was advanced in the second half (2010: €19.8m), a 33% increase over the first half of the year. The year-on-year growth is a result of sustained marketing activities and positive customer response from the introduction of a number of innovative loan services.

Finland accounted for approximately 47% of lending volumes, followed by Lithuania (30%), Estonia (14%) and Latvia (9%). In Finland the Group lent €28.0m, up 31% from €21.3m in 2010. Lending volumes in Estonia were €8.6m, up 55% from €5.5m in 2010. In Lithuania the Group lent €17.8m, a 105% increase over €8.7m in 2010. After re-launching the business in late 2010, the Group lent €5.6m in Latvia during 2011, up ten-fold from €0.5m in 2010.

Loan principal issued

Credit quality

The credit quality of MCB's ongoing lending operations remained strong. Provisions for impairment related to our continuing lending operations represented 24% of revenue, in line with our expectations. We expect impairment from our current lending activities to remain at similar levels as a percentage of revenue going forward.

During the year we continued to see strong recoveries from aged receivables over two years in arrears, for which the Company maintains active monitoring and collection. During the year write-backs from the collection of these aged receivables totalled €1.45m, primarily from the Baltics.

As a result, total impairment as a percentage of revenue was 16% during the period, down from 24% of revenue in 2010. Details of the Group's impairment are provided below:

Impairment

Net credit write-backs by country were as follows: Finland 11keur (2010: 360keur), Estonia 509keur

(2010: 132keur), Lithuania 421keur (2010: 162keur) and Latvia 513keur (2010: -220keur)

The trend in credit write-backs is a result of the Company's conservative receivables write-off policies and continued strong recoveries of receivables in arrears. We expect write-backs to continue impacting our accounts positively going forward, however at a lower level.

The strong credit performance is a testament to the quality of MCB's customer base and the Group's rigorous credit extension, monitoring and collection processes. We have maintained strict credit criteria throughout the year in all markets, keeping default rates below target levels. Our credit criteria are continually reviewed based on analysis of lending and repayment data.

Product development

The Group made a number of improvements to its consumer offering during the year, including new loan products and a complete upgrade of its customer service websites. In Finland the Group introduced a wider range of longer maturity (6-12 months) loans to qualifying customers, and we expanded our product range in Latvia in line with the positive development of the business here. Starting in the second half of the year the Company introduced significantly improved customer service websites with improved product presentation, application and self-service functionality. Credit24 continues to set the benchmark in the industry for its wide selection of flexible consumer loans, excellent customer service, and an overall reputation as a transparent and trustworthy provider of financial services.

The Group currently offers loans up to €2,000 and with maturities up to 24 months. Average maturities are currently between six and seven months. Over time we expect to continue to gradually expand the product range into longer maturities, subject to market conditions and availability of capital.

During 2012, in addition to its current offering of online instalment loans, the Group will consider entering additional non-bank financing segments with attractive characteristics.

Financial performance

Revenue for the 12 months ended 31 December 2011 grew 54% to €18.12m (2010: €11.78m), as a result of the sustained lending volume growth in all markets. Revenue in 2H 2011 was €10.21m, up 28.1% from €7.97m in 1H 2011.

Impairment totalled €2.90m for the period, or 16% of revenue, down from €2.81m or 24% of revenue during 2010. The continued low impairment reflects the very strong credit performance of the company's loan portfolio, itself a result of the Group's strict credit policies and focus on serving high quality customers with strong credit histories.

Direct operating expenses are costs which are directly related to the Group's lending operations, including loan processing, monitoring and collections. These were €3.02m in 2011 (2010: €2.17m). Administrative expenses include overhead, marketing and other expenses related to the Group's business. Proforma administrative expenses were €7.39m (2010: €5.50m) as a result of increased marketing expenses and other costs required to support the growth of the business going forward. Net finance costs were €1.20m (2010: €0.73m) as the Group drew more from its financing facility to support the growing loan portfolio.

The proforma pre-tax profit for the period was €3.67m (2010: €0.58m), a significant increase resulting from higher lending volumes and revenue, and the significant operational leverage available from the Group's organisation. Proforma net profit for the period was €2.97m (2010: €0.23m). The proforma figures above exclude non-cash reserves arising on employee share options. These totalled €94,216 during 2011.

All markets contributed positively to Group results. Pre-tax profit of MCB's Finnish country operations was €2.32m (2010: €1.97m), Estonia €1.34m (2010: €0.51m), Latvia €0.46m (2010: -€0.42m), and Lithuania €2.10m (2010: €0.71m). Central costs, which include Group management, financial and credit control, and systems development and maintenance, among others, were -€2.55m (2010: -€2.19m).

The Company continued to improve the profitability of its lending operations compared to earlier periods. Net revenue (defined as revenue less impairment) as a percentage of average net customer loan receivables outstanding was 88% in 2011, up from 80% in 2010, a result of lower impairment and further improvements to the Company's lending margins.

The Group's return on equity increased to 32.5% during the period (2010: 3.1%), in line with the Group's long-term targets. Return on assets was 20.2% (2010: 6.2%). The strong return on assets is a testament to the Company's strong business model and tight control over credit risk.

Summary financials

Taxation

The Company accrued a €0.70m (2010: €0.34m) tax liability for the year, primarily from its Finnish and Lithuanian operations. No corporation tax arises in Estonia unless a distribution is made. The Group's Latvian operations will continue to benefit from tax losses carried forward for some time.

Balance sheet

At the end of the period net customer loan receivables totalled €22.36m (net of impairment), up from €12.05m at the end of 2010. Average net customer loan receivables during 2011 were €17.30m, up 55% from €11.17m during 2010. The relatively low receivables balance compared the volumes of lending during the year (€59.99m) reflect the Group's average customer loan maturity of between six and seven months, which allow the Company to re-deploy capital and generate high returns on capital deployed to lending operations.

At the end of the year MCB had debt drawn of €13.70m (2010: €5.20m) under its €17m credit facility. Cash at year-end was €2.17m (2010: €1.95m). The Group maintained a strong balance sheet with debt as a percentage of total assets of 53% (2010: 34%), and debt as a percentage of net receivables of 61% (2010: 43%). The equity ratio (equity as a percentage of total assets) was 41% at the end of the year.

The Group's debt and equity capital is used to finance a strongly cash generative and revolving customer loan portfolio which currently generates cash inflows in excess of €18m per quarter (Q4 2011).

Financing

The Company has agreed with Rietumu Bank the yearly extension of its €17m revolving credit facility to the end of March 2014. The facility was previously scheduled to mature in March 2012. The interest on amounts drawn will be reduced to 12.5% starting April 2012, compared to the current 13%.

The Group has strong liquidity and sufficient financing to support its current lending activities. One of the main constraints to growth into new markets and market segments is further access to adequate debt capital to finance a profitable and growing loan portfolio. In addition to its current bank facility, the Company is exploring the possibility to expand its access to debt financing through the issuance of corporate bonds or other debt-related instruments.

Regulation and legislation

In April 2011, with follow-up legislation in January 2012, Lithuania introduced a strengthened regulatory regime including certain annual percentage rate limitations. These had a generally positive impact on the business as they favoured the longer-maturity, lower annual percentage rate products offered by the Company compared to those of certain competitors. In November Latvia introduced registration requirements for non-bank lenders similar to those in place and followed by the Company in Finland, Estonia and Lithuania. These were met and the Company is now a licensed consumer lender in Latvia. In Finland the Ministry of Justice recently established a working group with the purpose of reviewing current legislation related to the granting of distance and instant loans. This process is expected to lead to some changes to the regulatory environment in Finland. The Company maintains an active role in this and other regulatory processes, and remains confident of its ability to comply fully with our obligations in this regard.

New markets

The strong growth in lending volumes during the year compelled the Group to focus its available capital on current markets during 2011, to good effect. MCB Finance has a strong central organisation with a demonstrated capability to cost-effectively manage lending operations in multiple countries. During the year MCB Finance has continued to make preparations for expansion of the business into additional markets beyond the current four, including possibly Australia, New Zealand and/or the Nordics (Sweden, Norway, Denmark). Any market expansion is subject to the Group having secured sufficient debt capital on attractive terms to finance a growing loan portfolio.

When considering new markets MCB takes into consideration a number of factors, including the regulatory environment, the availability of consumer and credit data, online penetration, market size, and the structure and competitive landscape in the consumer lending market, among other criteria.

MCB's four current markets are relatively small with a combined population of 12 million people. These four markets contributed €6.22m of EBT to Group profitability during the year (2010: €2.76m). We expect their contribution to continue to grow strongly in the coming year, in line with current run-rates. Over time, we expect the Group's entry into larger markets uniquely suited to the Company's business model will offer the Group significant additional opportunities for expansion and enhanced profitability.

Outlook

The Group's results during 2011 reflect its strong market position, robust organisation and attractive business model. The current business is experiencing strong lending volume run rates and we expect continued growth in current markets going forward, however naturally at lower rates. We expect profit margins in current markets to remain at or above current levels as operations continue to benefit from operational leverage.

In current markets we will continue to improve the product and service offering as we roll-out further improvements to our customer-facing websites, and continue to expand the product range.

Additionally, the Group is focused on making preparations for launching new markets during 2012, subject to the availability of sufficient debt capital to finance a profitable loan portfolio.

The last two years have allowed the Company to demonstrate the strength of its business model and its capacity for profitable growth. The Board believes the time is right to invest in the growth of the business into new markets and segments in order to take advantage of the very significant opportunities available in the non-bank consumer lending market.

REVIEW OF COUNTRY OPERATIONS

MCB Finance's current operations in Finland, Estonia, Latvia and Lithuania together contributed €6.22m in pre-tax profits in 2011, excluding Group central costs, an increase of 125% from €2.76m in 2010. All countries were profitable during the year, including Latvia which was re-launched late 2010.

MCB's central organisation, based in Tallinn and Helsinki, comprises its senior management, credit and financial control, systems development and maintenance, and other key functions. Total costs for the central organisation were €2.55m in 2011, up slightly from €2.19m in 2010.

Profit before tax

Finland

Finland is the Group's largest market, representing 47% of principal lent during 2011, down from 59% during 2010. Finland continued to grow profitably during the year. Lending volumes increased 31% while EBT reached €2.32m, up from €1.97m in 2010. The expansion of the product range and launch of the new customer service website during the year were well received. Provisions were 28% of revenue, within the Group's target range. Direct and administrative costs rose 27% primarily as a result of higher marketing spend supporting higher lending volumes.

Finland

Credit24 remains well positioned in the Finnish market with a strong and positive marketing message, one of the widest product offerings in the market and excellent customer service. We expect continued positive development in the Finnish market during 2012.

Estonia

Lending volumes in Estonia grew 55% during the year, to €8.6 million, making MCB one of the largest non-bank lenders in a relatively small market of 1.3 million people. Country EBT grew 164% to €1.34m, from €0.51m in 2010. The low impairment reflects the very strong credit performance in this market. Direct and administrative costs were increased to support lending volume growth.

In Estonia Credit24 is one of two largest participants in a competitive market. We see continued opportunities for growth in this market, although at a more moderate pace, as we continue to expand and develop our product offering.

Latvia

Latvia developed positively after the Group re-launched its operations in this market late 2010. Lending volumes grew to €5.56m, a ten-fold increase over 2010. The country returned to profitability, contributing EBT of €0.46m to the Group. Impairment benefited from strong write-backs of receivables previously written-off during the 2009 financial crisis. We expect provisioning levels to be more normalised going forward. Direct and administrative costs grew as we resumed marketing activities in connection with the re-launch.

We expect to see meaningful continued growth in this market going forward.

Lithuania

Lithuania saw very strong lending volume growth during the year, consolidating the Group's position as one of the largest non-bank lenders in this market. Lending volumes were up 105% to €17.77m during the year. EBT increased to €2.10m, up from €0.71m in 2010. Impairment remained low at 14% of revenue, reflecting strong credit performance and write-backs. Direct and administrative expenses grew in line with increased marketing activities.

Credit24 maintains a strong position in the Lithuanian market and we expect continued growth going forward.

All of the activities of the group during the year are classed as continuing.

The accompanying notes form an integral part of these financial statements.

The accompanying notes form an integral part of these financial statements

The accompanying notes form an integral part of these financial statements.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

As at 31 December 2011

Share capital relates to the nominal value of shares issued.

Share premium relates to the amounts subscribed for share capital in excess of the nominal value of the shares.

The capital redemption reserve arises following the share buy-back by the company which reduces the company's share capital.

Other reserves relates to the equity-settled employee reserve, arising on the grant of share options to employees under the employee share option plan, and the foreign currency translation reserve, arising on the share buy-back transaction.  At 31 December 2011 €519,570 (2010: €556,428) relates to the equity-settled employee reserve.

Retained earnings relates to cumulative profits and losses recognised in the statement of comprehensive income.

The accompanying notes form an integral part of these financial statements.

Notes to the consolidated financial statements

1       STATUTORY ACCOUNTS

The final results for the year ended 31 December 2011 are unaudited.  The financial information contained within this report does not constitute statutory accounts as defined by Section 396 of the Companies Act 2006.  Statutory accounts for the year to 31 December 2010, upon which the auditors have given an unqualified report and made no statement under Sections 498(2) or (3) of the Companies Act 2006, have been delivered to the Registrar of Companies.  Further copies of the report are available from the Company Secretary at the registered office, and on the Company's website at www.mcbfinance.com.

2       BASIS OF PREPARATION

MCB Finance Group Plc is registered and domiciled in England and Wales.

The financial statements have been prepared in accordance with International Financial Reporting Standards, as adopted by the European Union.  They do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements for the year ended 31 December 2010.  The financial information is presented in Euros and has been prepared under the historical cost convention and on a going concern basis.

3       TAXATION

The tax liability for the period relates to the group's subsidiary undertakings in Finland and Lithuania, where the calculative tax liability for the period is €395,450 (2010: €291,866) and €306,973 (2010: €51,405), respectively.

No corporation tax arises in Estonia unless a distribution is made.  No distribution has been made in current or prior periods and so no liability to corporation tax arises in this country. 

Notes to the consolidated financial statements (continued)                

4          EARNINGS PER SHARE

(a) Basic

The calculation of basic earnings per ordinary share is based on:

(b) Diluted

The calculation of diluted earnings per share is based on:

Adjustment for the dilutive effect of share options are based on an average price of 41.01p per ordinary share during the period (2010: 46.55p).

Notes to the consolidated financial statements (continued)                

5      TRADE AND OTHER RECEIVABLES

Current receivables

Non-current receivables

Current and non-current trade and other receivables are measured at amortised cost.  The directors consider that the carrying value of the financial instrument approximates to their fair value.

Bad debt provisions

Customer loan receivables are stated net of bad debt provisions. The movement in the bad debt provision during the year is as follows:

The provisions charged to the statement of comprehensive income during the period were €4,355,639 (2010: €3,238,356).  During the year there was a net credit write back of €1,454,437 (2010: €433,594).

The other classes within trade and other receivables do not contain impaired assets.

The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable.  The group does not hold any collateral as security.

Notes to the consolidated financial statements (continued)

6          CALLED UP SHARE CAPITAL

The group has one class of ordinary share which carry no right to fixed income.

(A)        SHARE ISSUES DURING THE YEAR

During the year ended 31 December 2011 no ordinary shares were issued (2010: nil).

(B)        SHARE CANCELLATION AND CAPITAL REDUCTION

During the year, the shareholders approved a reduction in the company's capital. As a result, the consolidated share premium account was reduced by €3,852,264 from €8,453,870 to €4,601,606. The retained earnings account was increased by the same amount.

In addition, a share buyback was approved of 700,000 of the company's Ordinary shares. Subsequently, these shares will be cancelled, reducing the number of Ordinary shares from 17,394,247 to 16,694,247. This has the effect of increasing the shareholders' percentage of the company by 4.02%.

(C)        SHARE OPTION SCHEMES

During the year to 31 December 2011, 915,000 options were issued over the ordinary shares of the company (2010: 65,000). One-twelfth of the options granted vest at the end of each calendar quarter, subject to the holder remaining an employee of the company. None of these options lapsed or were exercised during the year.

During the year 175,000 options lapsed as a result of those share option holders ceasing employment with the company.  Those share options that have lapsed do not represent a gain to the company.  A further 90,000 options were cancelled.  A total movement of €131,074 has been recognised within equity to reflect that the share options are no longer outstanding.

On 13 June 2011, the company announced that 988,000 options will have their expiry period extended by one year such that they now expire 4 years after the date of grant.

During the year, no share options were exercised.  At 31 December 2011, the company had 2,108,362 (2010: 1,458,362) options outstanding with a range of exercise price of 41.0p - 176.5p (2010: 41.0p - 176.5p).  The expense charged to the statement of comprehensive income during the year was €94,216 (2010: €43,144).

Notes to the consolidated financial statements (continued)

7          TRADE AND OTHER PAYABLES

8          SHORT TERM BORROWINGS

The interest on the loan from Rietumu Bank is 13% pa on drawn amounts, and 1% on undrawn amounts. The loan is secured against the company's outstanding customer loan receivables in Estonia, Latvia, Lithuania and Finland, and against certain bank accounts of the company. The credit agreement with Rietumu is secured also by all property of MCB Finance Latvia SIA, including existing and future tangible and /or intangible property owned by the MCB Finance Latvia SIA. The credit facility has a loan limit of €17 million and is repayable on 31 March 2012. 

In addition Rietumu has an option to purchase 724,760 shares (approximately 4% of shares issued) in MCB Finance Plc (parent company) at a strike price of 45p. The option expires 31 March 2012.

Rietumu Bank is a related party under the AIM Rules as IIU Nominees Limited ("IIU") has, since February 2008, owned 1,856,521 ordinary shares in the Company, comprising 11.1% of its issued share capital (9.5% on a fully-diluted basis) and IIU is controlled by Mr Dermot Desmond, who through Boswell (international) Consulting Limited also owns a 33.1% shareholding in Rietumu Bank.

The directors of MCB consider, having consulted with the Company's nominated adviser, Merchant Securities Limited, that the yearly extension of the loan is fair and reasonable insofar as the shareholders in MCB are concerned.

Notes to the consolidated financial statements (continued)

9          RECONCILIATION OF PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION TO OPERATING CASH FLOWS

10      POST-BALANCE SHEET EVENTS

The Company has agreed with Rietumu Bank the yearly extension of its €17m revolving credit facility to the end of March 2014. The facility was previously scheduled to mature in March 2012. The interest on amounts drawn will be reduced to 12.5% starting April 2012, compared to the current 13%.