Group business routinely encounters and addresses risks, some of which may cause future results to be different than presently anticipated. The information that follows describes risk factors that may impact Group activities and the actions taken to mitigate / remediate their effect on the business.
Prospective Euroloan Group Plc investors are advised to review the risk factors described herein and the information in this entire section. Additional information can be found in the 2016 Annual Report.
Euroloan Group Plc Risk Exposure
The Group’s risk exposure consists mainly of the following:
- Strategic and business risks
- Operational risk
- Financial risk
- Liquidity risk
- Credit risk
- Market risk
- Non-compliance risk
These risk factors are should be read in conjunction with other relevant information in this section and the associated sections of the 2016 Annual Report.
Strategic risk and business risks
Strategic and business risk comprise the cost risk associated with a company choosing the wrong business strategy or failing to adapt the business to a new operating environment, such as changes in the regulatory environment affecting the company, global macro-environment in which it operates, competitive threats, or changes in technology or product innovation.
The following risks relate to the operating environment:
- Regulatory and legislative risk
- Cyclical risk
- Access to the investment and lending market
If realised, strategic risks may lead to losses, competitive disadvantage or a reduction in capital adequacy, for example. These risks may also lead to reputation risk, i.e. the risk that the company’s reputation and trademark are adversely affected. Strategic risks are managed mainly through normal business planning and updating the company’s strategic market positioning. Capital and pricing buffers reduce the business sensitivity to temporary disturbances (market liquidity).
Group results may be affected by regional market exposure
Euroloan Group Plc businesses and performance are mainly sensitive to changes in the consumer credit market in Northern European countries.
The Group operates in competitive industries, including in its home market
The Group is subject to competition in the local markets in which it operates.
The Group has taken steps to mitigate the effects of competition. Customer acquisition is directed toward the lowest-cost acquisition channels, while marketing is optimised continuously toward a diversified mix of marketing channels. Strategically, the Group has increased emphasis on captive channels, such as E-commerce and points-of-sale, to reduce reliance on channels with high competition (diversification through technology).
The Group’s business may be affected by current or future regulation
The Group is subject to a less extent to regulation and supervision than traditional financial institutions. The rules applicable to the Group seek principally to protect consumer debtors.
Credit risk is a core risk in the Group’s business sector. For unsecured consumer loans, for instance, it is likely that some debtors will not be able to repay the credit in full and on time.
Credit risk arises in lending operations, investments and other business operations where future incoming cash-flows are expected from counterparties.
Risks related to creditworthiness and payment behaviour have been taken into account in pricing (cf. insurance operations where the amount of claims paid affects the price of premiums). Therefore, the credit risk is mainly due to unexpected variations in customers’ ability to meet their payment obligations. Independent of general economic trends, the payment behaviour of the customer base as a whole has not changed in an unanticipated way during the company’s existence.
The Group may be exposed to a deterioration of its clients’ creditworthiness, and if the assumptions and estimates it relies on are incorrect, it could impair its financial statements
The Group is exposed to credit risk with respect to numerous counterparties in the ordinary course of its lending activity. These counterparties include exclusively retail customers and the Group may realize losses if a customer defaults to honour its obligations. By spreading the credit risk across tens of thousands of counterparties (consumer receivables), the Group ensures a stable level with little variance in total credit risk levels.
As a consumer lending specialist the Group has built up common processes among the lending entities, which take into account client risk profile and use centralisation and automation to minimise the duration of the loan application process and monitoring of the client portfolio. To serve the fast on-boarding but also mitigate the client creditworthiness, Euroloan has developed an innovative credit scoring model based on four components (data provision from the client, verification and consolidation from 3rd party provider, scoring assessment and calculation of the payment reserve), the outcome of which is a credit acceptance or rejection. The scoring model used follows a generic process together with adapted specificities of each market and is re-assessed regularly to evaluate its predictability.
In order to support a strong and thorough credit scoring monitoring process, the system is maintained and adapted via different types of adjustments:
- Monthly maintenance (coefficient only adjustments)
- Minor to major changes to existing parameters
- Annual credit quality assurance process (including sample back-testing)
- Constant credit score monitoring to capture changes in customer status
- Analysis on potential credit losses under exceptional but plausible shocks (stress-test process)
The Group operates in capital-intensive business sectors. Loans, for example, are paid out in cash. This requires liquidity management and the company having the cash available prior to the loan being granted.
Liquidity risk is the risk that the company cannot at some point generate sufficient cash-flows to meet outgoing cash-flows to customers or to meet other obligations that require liquidity.
Liquidity risk normally arises when the cash-flows from operations are not balanced.
The Group depends on access to financing and other sources of liquidity, which may be restricted for reasons beyond its control.
The ability to access short-term and long-term funding is essential for the Group’s businesses. The Group funds itself by issuing long-term debt and also through a secured funding structure where the Group as originator sells current consumer receivables portfolios.
Regarding the current funding consumption, the possibility to experience unforeseen outflows of cash is negligible on the asset side as the Group can, at any moment, block new credit requests as well as mirroring any off-balance sheet position to the level of the current client credit outstanding.
The Group’s liquidity could be impaired if the current funding sources cease to be viable. In that regard, the Group may be forced to turn to more expensive funding sources which could reduce the Group’s net interest margin and financial result.
Operational risk is defined as the risk of financial or reputational loss due to insufficient or deficient internal processes systems, human error, external incidents or compliance issues.
Operational risks include the following main areas:
- Personnel risk
- System risk
- Process risk
- External risk (crime, malware attack, fraud…)
The loss of key personnel may potentially affect Group performance
The Group’s employees are its most important asset and there is a general demand for qualified personnel in the industry. In order to protect itself from potential adverse effects, the Group has put in place a contingency plan for addressing the potential departure of key resources. Particular emphasis has been put on ensuring that all the critical functions have sufficient replacement capacity and documentation for smooth knowledge transfer.
Failure or breach of the Group’s information technology systems could adversely affect business performance
System failure, interruption, intrusion attempts or information breaches could adversely affect the Group’s business processes or the service to its clients. The Group emphasizes information security and has implemented an ISO-certified Information Security Management System to ensure that innovative and robust technology solutions and processes are maintained and monitored in this regard.
The Group is also exposed to the risk of operational failure of external service providers as the Group is interconnected with them and relies heavily on communications and information systems to conduct its business. To mitigate the external risk, procedures have been put in place to replace failed services within set time limits.
Interest Rate Risk
Changes in interest rates may adversely affect the Group’s operations and revenue
Group performance could potentially be influenced by changes and fluctuations in interest rates, in countries it operates in. Interest rate sensitivity refers to the relationship between changes in market interest rates and changes in net interest margins and balance sheet values. Because of the nature of the Group’s business with high margins compared with variable market interest rates, the market interest rate sensitivity of the Group is low.
A mismatch between interest owed by the Group and interest due to it (in the absence of adequate hedging) could have some adverse effects on the Group’s business, financial situation and results of operations.
However, regarding the interest rate structure in place within the Group, where the interest rate risk is related to the banking book and is limited to repricing risk or timing mismatch in the maturity and repricing of assets and liabilities, the Group is presenting a low interest risk profile. This profile is characterized by stable interest rate sensitive funding and stable maturities on its asset side products.
Legal risk is defined as the risk of financial sanctions due to insufficient knowledge about laws and regulations or insufficient documentation or control of contractual issues.
Legal risks could potentially negatively affect the financial situation or results of operations of the Group
Various types of litigation including civil, administrative and criminal proceedings could potentially affect the Group. Such proceedings may arise from transactions or events that occur in the Group’s ordinary course of business. In preparing the Group’s financial statements, the management makes estimates regarding the outcome of legal and arbitration matters and records a provision when related losses are probable.
To reduce the probability of future proceedings and regarding the international expansion and growing interest of potential investors, the Group has taken steps to ensure adequate competence and resources (internal and external) in this area.
Specific Risks Associated with Other Group Companies
Euroloan Consumer Finance Plc
Euroloan Consumer Finance Plc is the Group’s largest subsidiary by operating volume, having a significant impact on the risks and performance of the entire Group. A separate risk description for Euroloan Consumer Finance Plc is available on our website, which also includes the risks associated with its subsidiaries.
Crédito Cobro Ltd
The collection business of the company is regulated and subject to license. Regulatory risk in this business is significant and has been partly realised through a decrease in the maximum allowed debt-collection expenses. Future regulatory changes may have a significant effect on business operations and profitability. The company actively monitors regulatory changes with the aim of predicting and preparing for future changes affecting the operations well in advance. Changes are typically known well in advance.
As part of the mitigation of regulatory risk, operations have been adapted to comply with regulations and costs have been cut to minimise profitability impact. The company has assessed the regulatory environment of other countries and will make any changes necessary to comply with regulations in countries where it intends to do business.
Modern debt collection requires functional information systems. Automation reduces relative cost as volumes increase. The company has invested significantly in modern collection systems and related services. There is an investment risk associated with a low usage volume. The risk is mitigated by the fact that some of the collection systems developed can be utilised in other Group business areas. Risks associated with system usability have been mitigated through good quality control, testing and a sensible choice of platforms.
The typical delay between the collection service sales efforts and the customer agreement causes a volume risk. Another risk associated with customers is up-front costs. On the other hand, customers typically have long-term agreements that last several years. Efforts to improve customer satisfaction also reduce the risk of losing customers.
The company’s goal is to offer its customers agreements that comply with industry standards, protect both parties and follow fair business practice.
Risks Associated with Investing in the Company
Bonds and other investment products issued by the company do not include security of capital or separate collateral. Therefore, the investment products are associated with issuer credit risk. This means that the investor may lose the invested capital entirely or partly in the event of a company credit transaction such as a serious payment default, debt restructuring or bankruptcy for example.
The repayment of invested capital and profit carry a risk relating to the issuer’s repayment ability.
With the company being the issuer, the issuer risk is comparable to the issuer credit risk associated with bonds (see ‘credit risk’).
Issuer risk refers to the risk of the issuer becoming insolvent and unable to meet its obligations. The investor may risk entirely or partly losing the invested capital and potential profit.
Secondary Market and Liquidity Risk
Secondary market risk refers to the risk associated with the investor selling the investment before the agreed maturity date, at which time the price may be higher or lower than the nominal value. In this case, the investor may not get back the entire capital invested. Bonds or other investment products issued by the company are primarily intended to be held until their respective maturity date. However, bonds may be sold before their maturity dates. The issuer will have no obligations to repurchase, but a third party can do so. In this case, the value of the investment loan may be lower or higher than its subscription price. Market price is affected by changes in market rates of interest, among other matters.
Selling the loan before its agreed maturity date also carries a liquidity risk, meaning that it may be difficult to find a buyer for the loan or that the price offered is lower than the actual value. Major market fluctuations, the closing of trading venues or technical problems may affect the secondary market.
Any taxes related to investments in Euroloan are paid by the investor. Tax legislation and local taxation may change, which may have adverse effects for the investor. In isolated cases, investors would be well advised to seek advice from their tax consultant or tax authority.