Latitude Financial : LFS FY21 Management discussion and analysis

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LATITUDE GROUP HOLDINGS LIMITED

ABN 83 604 747 391

Management Discussion and Analysis for the year ended 31 December 2021

For personal use only

Table of Contents
Table of Contents ......................................................................................	2
Section A | Results.....................................................................................	3
01	| Summary of Group Performance .............................................................................................	4
02	| Volume......................................................................................................................................	7
03	| Gross Loan Receivables ............................................................................................................	8
04	| Interest income.........................................................................................................................	9
05	| Interest expense .....................................................................................................................	10
06	| Operating Income ...................................................................................................................	11
07	| Net charge offs .......................................................................................................................	13
08	| Risk Adjusted Income .............................................................................................................	15
09	| Operating Expenses ................................................................................................................	17
10	| Provision movement & Coverage rates..................................................................................	18
11	| Significant Items & Investment Spend ...................................................................................	21
12	| Capital and Shareholder Returns metrics...............................................................................	22
13	| Funding and Liquidity metrics ................................................................................................	23
Section B | Supplementary Information ..................................................	26

Date of this Management Discussion & Analysis

This Management Discussion & Analysis has been prepared for the full year ended 31 December 2021 and is current as at 21 February 2022.

Notice to readers

The purpose of Section A is to provide information supplementary to Latitude Group Holdings Limited Financial Report (the Financial Report) for the full-year ended 31 December 2021, including further detail in relation to key elements of Latitude Group Holdings Limited's financial performance and financial position. The Management Discussion & Analysis also outlines the funding and capital profile of the Group.

Comparative information within Section A has been presented to align to the IPO prospectus pro forma information that was previously released rather than the statutory comparatives contained within the Financial Report due to the restructure of the Group prior to the IPO. Further information is contained in Section B.

References to the first half (1H) are to the six months ended 30 June of the respective year.

References to the second half (2H) are to the six months ended 31 December of the respective year.

All amounts disclosed in the tables in Section A are presented in Australian dollars ('A$' or '$') and, unless otherwise noted, are rounded to the nearest A$0.1 million. Calculations within tables, percentage movements and movements with the commentary have been calculated from underlying source information and hence may not reconcile with rounded calculations.

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Section A | Results

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Section A | Results

01 | Summary of Group Performance

only

Statutory profit after tax attributable to members increased by $115.7 million to $160.9 million in FY21 from $45.2 million in FY20. Included in this result was a decrease in Statutory profit after tax attributable to members of $18.2 million from $89.5 million in 1H21 to $71.4 million in 2H21.

Cash NPAT(1) increased by $8.3 million or 3.7% to $232.2 million in FY21 from $223.9 million in FY20. Cash NPAT decreased by $9.6 million or 8.0% from $120.9 million in 1H21 to $111.3 million in 2H21.

For personal use

Table 1: Summary financial results

					Pro forma			Change %
	($m)		FY21		FY20			FY21 vs FY20
	Interest income		932.4		1,058.1		(11.9)%
	Interest expense		(160.3)		(178.0)		(9.9)%
	Net interest income		772.1		880.1		(12.3)%
	Other operating income		54.6		54.1		0.8%
	Total Operating Income		826.6		934.2		(11.5)%
	Net Charge Offs		(149.5)		(227.6)		(34.3)%
	Risk Adjusted Income		677.1		706.7		(4.2)%
	Operating Expenses		(387.1)		(402.9)		(3.9)%
	Pre-provision Profit		290.0		303.8		(4.5)%
	Provision movement		33.3		18.8		77.4%
	Profit before Tax & Significant Items		323.3		322.6		0.2%
	Income tax expense		(91.1)		(98.7)		(7.7)%
	Cash NPAT		232.2		223.9		3.7%
	Amortisation of Acquisition Intangibles		(48.3)		(48.3)		(0.0)%
	Amortisation of Legacy Transaction Costs		(9.4)		(24.8)		(62.2)%
	Significant Items		(43.0)		(62.7)		(31.5)%
	Tax effect of adjustments		28.8		40.1		(28.2)%
	Pro forma NPAT		160.3		128.1		25.1%
	Changes in Capital Structure		-		(80.3)		100.0%
	Transaction and historical IPO costs		-		(19.8)		100.0%
	Tax effect of adjustments		-		18.7		100.0%
	Statutory Profit / (Loss) after tax from		160.3		46.7		243.1%
	continuing operations
	Discontinued operations		-		(1.5)		100.0%
	Statutory Profit / (Loss) after tax		160.3		45.2		254.5%
	Profit/ (Loss) from non-controlling interest		(0.6)		-		100.0%
	Statutory Profit / (Loss) attributable to		160.9		45.2		256.0%
	members
	Dividend per Share (cents)		15.70		n/a
	Payout ratios (% of cash NPAT)		68.9%		n/a
	Pro forma EPS Cash - Basic (cents)		23.1		22.4			3.1%
	Pro forma EPS Statutory - Basic (cents)		15.9		12.8			24.3%
	EPS Statutory from continuing operations		17.8		7.2			147.4%
	- Basic (cents)

		Change %
2H21	1H21	2H21 vs 1H21
451.3	481.1	(6.2)%
(80.1)	(80.2)	(0.1)%
371.2	400.9	(7.4)%
29.4	25.1	17.0%
400.6	426.0	(6.0)%
(67.6)	(81.9)	(17.5)%
333.0	344.1	(3.2)%
(201.4)	(185.7)	8.5%
131.6	158.4	(16.9)%
21.0	12.3	70.6%
152.6	170.7	(10.6)%
(41.3)	(49.8)	(17.1)%
111.3	120.9	(8.0)%
(24.2)	(24.1)	0.3%
(3.8)	(5.6)	(32.8)%
(28.2)	(14.8)	90.2%
15.6	13.1	18.8%
70.7	89.5	(21.0)%
-	-	n/a
-	-	n/a
-	-	n/a
70.7	89.5	21.0%
-	-	n/a
70.7	89.5	21.0%
0.6	-	100.0%
71.4	89.5	20.3%
7.85	7.85
73.3%	64.9%
11.0	12.1	(9.2)%
7.0	9.0	(22.0)%
7.0	11.3	(38.4)%

1 Cash NPAT is a non-IFRS metric used for management reporting as Latitude believes it reflects what it considers to be the underlying performance of the business. Cash NPAT reflects the reported net profit after tax adjusted for the after-tax impact of Amortisation of acquisition intangibles, Legacy Transaction costs and Significant items. Further information on Cash NPAT is included in Section B - supplementary Information

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Section A | Results

For personal use only

During FY21 group volumes increased 4.3% despite challenging trading conditions due to COVID-19 related lockdowns, travel restrictions and inconsistent consumer confidence. Customer repayments remained at elevated levels consistent with FY20, which contributed to a reduction in Gross receivables of 2.6% compared to FY20. Despite the impacts of the Omicron variant in 4Q21, receivables stabilised in 2H21, reducing by 1.9% in the half, in contrast to the 14.6% reduction in gross receivables in FY20 compared to FY19.

Cash NPAT of $232.2 million increased by 3.7%, with key drivers as follows:

• Total Operating Income decreased by $107.6 million or 11.5% to $826.6 million. The reduction was driven by the 7.9% reduction in Average Gross Receivables compared to FY20 combined with a 53bps contraction in Operating Income yield. The yield decrease was a result of product mix and strategic pricing changes implemented to attract high quality customers.
• Net Charge offs decreased by $78.1 million or 34.3% to $149.5 million. The decrease in charge offs was as a result of the ongoing improvement in the credit quality of the portfolio driven by tightening of underwriting standards during FY20, improved portfolio credit mix at origination, and elevated repayment rates during this period. The above drivers resulted in a reduction in the Net charge off rate of 94bps in FY21 compared to FY20.
• Operating expenses decreased by $15.8 million or 3.9% to $387.1 million from $402.9 million. Operating expenses continued to benefit from the implementation of a productivity agenda and investments in simplification and disciplined cost management despite higher levels of marketing expenses.
• Provision movement increased by $14.5 million or 77.4% to $33.3 million in FY21. The provision movement was driven by the Coverage ratio improvement, reducing 34bps to 4.28% from FY20 in line with the improvements in underlying asset quality and hardship metrics in 2021 (after the initial surge in hardship levels during 2020). The reduction in Gross Loan Receivables also contributed to the increased provision

movement.

During the year, the Group maintained a robust funding position, remaining active in the funding markets with warehouse refinancing, ABS term transactions the establishment of a new corporate facility. The Group systematically manages its maturity profile within the target range of no more than 50% of funding maturities in any given year and no more than 40% of funding maturities within the next 12 months. Further information on Funding and Liquidity metrics is contained in Section 13.

The Group's Return on Equity (ROE) of 16.6% remains strong alongside the 31% increase in tangible equity during FY21. The Tangible Equity to Net Receivables (TER) increased by 217bps to 8.7% in 2021 from 6.5% in FY20, in part due to the issuance of $150 million of Capital Notes during FY21. The ROE and TER metrics demonstrate the strength and resilience of the Group and its ability to support a dividend payout ratio of 60- 70% of Cash NPAT.

The Group acquired Symple Loans in October 2021 which will deliver enhanced digital capabilities for our Lending business, followed by the acquisition of Octifi, a Singapore based Instalments business, both of these acquisitions expand our footprint for both Lending and Instalments globally. The Group announced on 18 February 2022, it had executed a binding transaction to acquire the consumer business of Humm Group Limited, incorporating its BNPL, Instalments and Cards operations.

The Directors have declared a final dividend of 7.85 cents per share, fully franked, taking the full year dividend distribution to 15.7 cents per share.

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