ANNUAL REPORT 2016
PART 1 - UNAUDITED
Digital Lender With a Vision 4
2016 Highlights 5
Letter to Shareholders 6
Strong Leadership 8
More than Money to Everyone 10
Industry-Related Conditions 22
PART 2 - AUDITED
Board of Directors' Report 2016 26
Consolidated income statement 34
Consolidated statement of comprehensive income 34
Consolidated statement of financial position 35
Consolidated statement of cash flow 36
Consolidated statement of changes in equity 37
PART 3 - FURTHER INFORMATION
Consolidated income statement - quarterly overview 76
Consolidated statement of comprehensive income - quarterly overview 76
Financial Calendar 77
Part 1 - Unaudited Ferratum Group Annual Report 2016 | 3
DIGITAL LENDER WITH A VISION
Ferratum is a digital lender with a vision to create a digital financial ecosystem that transcends the hassle of traditional banking and financial transactions.
Our data-driven approach to credit-scoring and knowing our customers puts us at the forefront of the smart banking
revolution. Our mission is to provide the best consumer interface for lending and banking processes and 24/7 personal customer service accessible online through our website, mobile apps
and those of our partners.
We are about more than money. To everyone.
FERRATUM AT A GLANCE
Record annual revenues up 39% year on year to EUR 154.1 million
Record Q4 revenues up 43% year on year to EUR 45.5 million
Operating profit (EBIT) rose 28% year on year to EUR 21.1 million
EBIT margin stable at 13.7%
Strong positive operating cash flow of EUR 23.7 million
EPS (basic & diluted) increased 17.6% to EUR 0.60 per share
Successful issuance of two EUR 25 million bonds
Cost of capital reduced significantly to 5.25%
Management actions taken in Q3 2016
to accelerate growth have been effective
Consumer lending performing well with a strong recovery of growth driven by Credit Limit and PlusLoan in Q4
NBV of loan portfolio as at 31 December 2016 grew by 73% year on year to EUR 184 million
Portfolio quality further improved: impaired loan coverage ratio reduced to 25.4%
Ferratum Mobile Bank launched in Germany, Norway and Sweden - key to our evolution and a critical platform for future growth
Deposit volume at the end of 2016 over EUR 100 million
Ferratum Group well funded with ample available liquidity, including EUR 73.1 million in cash as at 31 December 2016
GROWTH IN REVENUE AND CREDIT VOLUME
Founded Helsinki 2005
EU Banking Licence
Frankfurt Prime Standard
% € mn
Revenue (€ millions) EBIT (€ millions) EBIT margin (%)
Net loans to customers (mn) Customer base (k)
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LETTER TO SHAREHOLDERS
2016 was another year of strong, profitable growth for Ferratum. Our ability to swiftly expand in our countries of operation, based on our scalable, data-driven scoring technology and mobile lending platform, continued to be key to our success. In order to maintain our agility, we further streamlined operations which helped us to deliver full-year results in line with our guidance.
The introduction of our consumer products PlusLoans and Credit Limit, as well as our SME lending service in several of our markets, contributed to overall revenue growth of 39% to EUR 154.1 million, and an increase of our customer base by 27% to 1.6 million, over the course of the year.
While lending continues to be at the core of our business, Ferratum has a much broader vision for the future: to transform the way people conduct their financial lives. We have started to build a global banking platform which connects customers, peers and service providers to offer a full range of financial products.
The first step on this journey was accomplished in 2016 with the public launch of our app-based Mobile Bank in Germany, Norway and Sweden. The services initially offered include multi-currency current accounts, overdraft credit, savings accounts, term deposits and debit cards. In the next phase we will complement these services with other real-time, mobile and easy-to-use products for banking, lending and investment. Our new peer-to-peer (P2P) lending platform, which was launched in the Czech Republic in 2016, will be one of them.
Since launch, demand for our Mobile Bank has exceeded our expectations, attracting over EUR 100 million in total deposits. In combination with the two EUR 25 million bonds successfully placed during the year, Ferratum Group can draw upon a very strong liquidity position of EUR 73 million.
While the Mobile Bank and new products like P2P lending are investments in the future and did not contribute significantly to Group revenue and profit in 2016, our lending business continues to develop strongly, in terms of both absolute revenue growth and profitability. With an operating profit (EBIT) of EUR 21.1 million, which was up 28% from last year's figure, Ferratum achieved an EBIT margin for the period of 13.7%, in line with our guidance published in September 2016.
To further strengthen our core business, we took actions to reorganize our management structures and invest in more scalable IT architecture and systems. This resulted in a record performance in the last quarter of 2016 and will continue to have positive effects this year.
We expect growth to be supported by the roll-out of Credit Limit, PlusLoans and Ferratum Business (SME) lending in additional countries, as well as overall market growth for mobile short-term financing. We will also continue to build the Mobile Bank by launching the service in several additional markets, connecting partners and increasing deposit volumes and cross-selling opportunities. In 2017, we expect revenues to reach a range between EUR 200 million and EUR 225 million while achieving
an operating profitability margin (EBIT margin) of 13% to 16%.
Based on a highly profitable core business and large cash reserves, Ferratum is in an excellent position to pursue its ambition to become a leading international mobile bank offering more than money to its clients and partners.
We hope that you will continue to accompany us on this journey to make banking and lending a more straightforward and accessible experience for all our customers. We thank all our shareholders for the trust they have placed in us and we thank our employees who work tirelessly to develop and grow our business.
Helsinki, March 2017
CEO Ferratum Group
Part 1 - Unaudited Ferratum Group Annual Report 2016 | 7
The Directors Team of Ferratum Group, led by Jorma Jokela,
comprises a passionate and entrepreneurial team combining expertise from a
broad range of relevant industries.
Jorma Jokela is the Group's founder and CEO. He studied accounting at the Commercial College of Kuopio and the Helsinki Business College. He is the founder of Jokela Capital Oy in Helsinki where he headed the company as CEO from 1998 to 2000. He subsequently sold the Jokela Capital business in 2004. In 2005, he founded Ferratum and has been its CEO since then.
Lea Liigus is the Head of Legal and Compliance of the Group and CEO of Ferratum Bank p.l.c., the Group's banking subsidiary. She studied law at the University of Tartu in Estonia and completed the Master of Laws (LL.M) Programme in Contract and
Commercial Law at the University of Helsinki in Finland. Before she joined the Group in 2006, she worked as a lecturer on Commercial Law and EU law at the Estonian Business School in Tallinn and as an attorney-at-law specialised in commercial, financial law and EU law at Sorainen Law Offices in Estonia.
Saku Timonen is the Head of Lending and has worked for the Group since 2009. He studied marketing and finance & economics at the Helsinki School of Economics and Business Administration between 1996 and 2001. From 2000 to 2006 he was marketing planner, product manager and relations manager at Sampo Bank. From 2006 to 2009 he worked as product manager of unsecured products at GE Money Oy.
Clemens Krause is the Company's CFO and the managing director of Ferratum Capital Germany GmbH. He studied business administration at the Westfälische Wilhelms-Universität in Münster. From 1989 to 1994 he worked at the Institut für Rechnungswesen in Münster, while completing his PhD. In 1994, he joined Bankgesellschaft Berlin AG where he worked as a manager and director of Project Finance. Before
he joined the Group in 2012, he held management positions in Germany at Deutsche Bahn, E-Loan Europe,
E*Trade Germany, GE Money Bank (General Electric) and Commerzbank.
Ari Tiukkanen is the Head of Commercial and Operations (COO) of the Group. He studied industrial
engineering at Jyväskylä University of Applied Sciences and graduated with aa BSc (engineering) in 1986. Before he joined the Group in 2015, he was head of the jbuilding and industry business at Metsä Wood from 2012 to 2015, CEO of Icare Finland / Revenio Group from 2008 to 2012, commercial director of Paloheimo Group from 2006 to 2008, head of the building products business line at Finnforest from 1999 to 2006, and held various management positions at Halton Group from 1992 to 1999.
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MORE THAN MONEY TO EVERYONE
Contemporary banking is digital; tomorrow's banking is mobile. This evolution is closely linked to the use of smartphones to organise everyday life - a life increasingly displayed on screens and arranged via apps.
In order for banking and financial services to fit into this digital, mobile world, they need to be reframed in digital terms and offer new solutions for secure, hassle-free verification and authorisation of financial transactions without lengthy acceptance processes.
Traditional banks are restricted by their legacy systems when they try to find their own place in this new environment. Market trends favour new players, able to systematically use the advantages of mobile connectivity, big data and process automation to make life faster and easier for consumers as well as small business owners. New security processes such as biometrics and geolocation are unique to the mobile channel, delivering higher security standards without compromising on customer experience.
Linking mobile banking, retail credit and SME lending, Ferratum is ideally positioned to capture the great potential of the smart banking revolution as well as to tap into under-served credit markets.
Mobile phone subscribers using their phone for banking
Source: Juniper Research, 2016
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MORE THAN A BANK
At Ferratum we don't believe in banks. At least not in the traditional sense. We believe in financial technology that is mobile, user-friendly, international and highly secure.
In the hotly-contested mobile banking and lending market, Ferratum can capitalise on its scalable technology platform as a clear competitive advantage. Our IT architecture is mobile in origin, self-learning by design and open to add-on tools from third parties as well as new products by Ferratum, such as our P2P investing service (see Launch of P2P lending in the Czech Republic).
We make sure that our clients always get state-of-the-art services, wherever and whenever they need them.
LAUNCH OF THE FERRATUM MOBILE BANK
The Ferratum Mobile Bank, launched to the public in 2016 in Germany, Sweden and Norway, is a revolutionary new platform assembling customers' full financial lives in one app. Users can access their current accounts, savings and debit cards in real-time in an easy, secure and mobile manner, regardless of the currency. Opening an account takes just a few minutes with our online application process - no paperwork required.
Client growth is driven by our freemium model, which offers basic account and cross-border payment functions at no charge, as well as attractive term deposit options.
Based on behavioral data analysis, we generate intelligent, real-time and targeted recommendations to improve customer experience and add services over time according to users' preferences.
In addition, the banking platform is designed to provide access to a wide range of premium services from ourselves as well as external partners. This will help the Ferratum Group to grow its lending business and capture additional revenue from commissions and fees.
In 2016, Ferratum Mobile Bank attracted deposits totalling EUR 101 million, which has become a major source of capital for funding the lending business.
MOBILE BANKING SERVICES: FREE BASICS WITH ADDED VALUE
Still, to conduct our business, we have
to be licensed like a bank. In most European countries, Ferratum operates its lending business under an EU banking license
via Ferratum Bank p.l.c. Being a bank also allows us to expand our services to include current accounts and deposits as well as payments
and debit cards (see "Launch of the Ferratum Mobile Bank").
Free current account, 100% mobile and easy to use
Optional overdraft facility for the current account.
Term deposit for three, six or 12 months with competitive interest rates.
Multi-currency debit card from MasterCard
Real-time transactions which enable quick and easy payments anywhere in the EU
Automated savings goals and boosters to maximize savings and spending potential
In future: Access to new lending and investment products like P2P lending and third party features
LAUNCH OF P2P LENDING IN THE CZECH REPUBLIC
On our peer-to-peer (P2P) lending platform, private investors can invest in consumer loans originally granted by Ferratum. Unlike existing marketplaces, where participants are matched on an individual basis, Ferratum offers shares in credit portfolios. Such investments, which are normally only available to large institutional investors, have lower risk than the usual P2P investments while still generating attractive returns. As part
of its service offering, Ferratum handles all payments and collects possible overdue payments. In addition, Ferratum guarantees to buy back payments that are 60 days past due. Thus, the system secures 85%
of outstanding loans for the investors.
Given the low interest rate environment, P2P investments are in high demand as complements to investments in bonds, stocks, bank deposits or mutual funds.
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MONEY FAST AND
The sales representative snatching a last-minute travel deal three weeks before receiving an extra payment from his employer. The young family of four in sudden need of a bridge loan due to moving expenses after a job transition. The small family business needing a loan in order to invest in new data software. No matter how different the customers are, how different their needs and living conditions - they all can rely on Ferratum Group as a
smart, fast and uncomplicated provider of financing.
At Ferratum, it takes just a few minutes from loan application to payment, thanks to an automated credit assessment based on big data analytics and self-learning algorithms. With our proprietary technology, we have 1.6 million active and former customers who have been granted one or more loans
in the past. Since 2005, we have granted EUR 1.5 billion in short-term loans to individuals and businesses - quickly, confidentially and transparently.
Our software-based scoring system combines historical data from all the markets in which we operate with current information on the specific market and the individual customer. We base our lending decisions on a careful assessment of the borrower's financial position, the ability to repay loans, and whether the borrower's requirements and objectives will be met by the loan.
In order to make scoring results more accurate, our software is continually refined and updated. Improvements are clearly reflected by our performance indicators: In 2016, non-performing loans more than 90 days past due, amounted to only 12.4% of net receivables at year-end, compared to 16% the year before. Accordingly, the impairment rate has been reduced from 31.5% to 25.4% of gross receivables.
14 | Ferratum Group Annual Report 2016 Part 1 - Unaudited
STRINGENT CREDIT SCORING
- SUPPORTED BY BIG DATA ANALYTICS
Thanks to its automated credit scoring technology, Ferratum is able to make a loan decision in just a few minutes. The applicant is identified based on automated facial ID verification, bank ID or access
to prior bank account records.
Scoring and credit decisions are controlled centrally. An application scorecard is used to assess new customers and a behavior
scorecard is used to assess repeat customers. The scoring system, which is based on FICO analytics and further developed by Ferratum, draws on public databases, national credit registers, statistics databases, and public
tax databases, where available. It also uses internal big data analytics technology which delivers information based, for example, on browser types, browsing behavior and social network membership. The Group's stringent credit scoring and identification system resulted in an approval rate for consumer loan applications of just 14% as of the end of 2016.
Digital identification based on hard facts such as name and date of birth. Handled via:
Automatic facial ID verification
Effective check of the customer by means of:
External databases with information on credit-worthiness
Tested and dedicated internal scoring
Self-learning software: Increasing approvals while decreasing write-downs
Credit decision within seconds:
Less than 0.1% fraud cases
Professional frauds even 0.0%
QUICK ACCESS TO FUNDS: THE FERRATUM LOAN PRODUCT RANGE
With its pioneering Microloan product available since 2005, Ferratum offers consumers quick and easy access to small cash amounts of EUR 25
to EUR 1,000 with durations of seven to 90 days. Microloans are facilitated through the Group's local websites and mobile app.
PlusLoans are primarily offered to existing customers with a positive track record of repayment. The product features larger amounts (typically EUR 300-EUR 5,000) and longer maturity periods of two to 36 months.
The Credit Limit product, launched in 2013 and currently offered in nine countries, has proven a major growth driver of the Group thanks to its flexibility. Customers are allowed to withdraw,
repay, redraw amounts within the maximum credit limit, any number of times until expiration and in accordance with their cash flow situation. Credit is granted up to a limit of EUR 3,000.
Small business loans, currently available in five countries, are offered to established small businesses with a successful track record of at least two years.
The loans range between EUR 2,000 and EUR 100,000 and are regularly used for working capital and bridge financing.
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TO EVERYONE GLOBALLY
Consumer and SME loans Ferratum Mobile Bank
With 1.6 million customers, Ferratum is one of the few truly international players of significant size in the fast-growing mobile consumer loan market.
Currently, Ferratum is active in 18 European countries as well as in Canada, Mexico, Russia, Australia and
Available in 22 countries around
Financing SMEs in Sweden, Finland, Denmark, the Netherlands and Lithuania
Ferratum Mobile Bank
Launched in Germany, Sweden and Norway
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A FINANCIAL ECOSYSTEM BASED ON CORE VALUES
"Together, we're aiming at encouraging new ideas, maintaining a convincing performance and creating trust among our customers, employees and stakeholders."
Jorma Jokela, CEO and founder
Creating value for customers and investors has been Ferratum's aspiration ever since its launch in 2005. But creating value to partners is just as important. With the launch of the Mobile Bank, Ferratum has established
a global platform connecting customers, peers and service providers alike. The open architecture of the mobile banking app allows the easy integration of service widgets published by other companies. Thus, they gain access
to Ferratum's large and growing international customer base as well as invaluable customer intelligence.
"We need to become the partner of first choice offering important win-win opportunities"
Ari Tiukkanen, COO
(Microloans, PlusLoans, Credit Limit) Revenue: EUR 149.5 million
Revenue share: 97.0%
Unlike traditional banks, Ferratum does not rely solely on its own innovative power, but creates a highly flexible financial ecosystem through partnerships to maximize the customer experience. The partnership approach allows for faster growth with limited capital expenditure. Products will be built around the entire customer lifecycle by involving partners from both the financial industry and non-financial technology companies.
However, new partnerships will not only be based on technology or the relevance to our financial ecosystem. Ferratum favors partnerships with companies sharing similar core values: professionalism, innovation, profitability and clear ethics.
Revenue: EUR 4.3 million Revenue share: 2.8%
Deposits: EUR 101.4 million as at end 2016
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Ferratum competes with traditional and digital banks
as well as other fintechs, mainly in the field of consumer and small business loans. Concurrently, Ferratum looks to fintech peers as partners, as it extends its business model into mobile banking services, including deposits.
Significant external factors influencing Ferratum's business development include:
The demand for consumer loans and SME loans in present and future markets
The global development of smartphone and mobile banking usage
The development of the global fintech sector, with respect to the lending business as well as to mobile banking services
Competition from mobile banking apps by established banks
In 2016, the volume of consumer loans as well as loans to the private sector continued to increase across all relevant markets1 while interest rates remained at a constant low level2. The ratio of overall non-performing loans decreased in almost all European countries, while there was a slight increase in Russia and Canada.3
The use of mobile banking worldwide has continued to rise. The share of smartphone and tablet owners who use mobile banking stood at 47% in April 2016 compared to 41% the previous year across selected European countries, the US and Australia.4 Analysts expect that by 2021 over 2 billion mobile users will use their mobile phones for banking purposes, compared to 1.2 billion in 2016.5
The adoption of mobile banking is highly dependent on regular access to the internet. In 2016, mobile-broadband networks already covered 84% of the world's population.6 Mobile broadband penetration across all OECD countries reached 95.1% in mid-2016, with subscription rates exceeding 100% in northern European countries
and Australia.7 The trend towards mobile banking is also embracing lower income segments of the population which own smartphones and are currently not bank customers or only use limited bank services such as an account provided to receive their salaries (so-called "underbanked" customers).8
The global fintech sector saw a 50% decline of investment in 2016 with an annual funding total of US $24.7 billion, down from US $46.7 billion in 2015.9 However, the outlook remains positive: two thirds of European fintechs expect a strong increase in their segment's market revenue according to a survey conducted in 2016. Crowdfunding and lending fintechs were among the most optimistic, especially regarding P2P lending. The survey also identified a trend to more diversified business models and expansion to other countries.10
At the same time, traditional banks are under pressure to reduce costs as they experience a negative earnings impact from the low interest rate environment. Across Europe, banks have been closing branches in recent years, thereby losing their most important competitive advantage. A study has found that disruption in the banking sector could lead to revenue losses of 10%
to 40% percent by 2025, while fintechs will serve a significant part of the market.11 For the German market, it is expected that fintechs will be able to win an aggregate market share of up to 5% by 2020.12
Tradingeconomics.com: Consumer credit [http://www.tradingeconomics.com]
Euro Area Statistics: Bank interest rates - Loans [https://www.euro-area- statistics.org/bank-interest-rates-loans?cr=eur]
The World Bank: World Development Indicators, Bank nonperforming loans to total gross loans
ING: International Survey Mobile Banking, 2016
Juniper Research: Press Release: Mobile Banking Users to Reach 2 Billion by 2020, Representing More than 1 in 3 of Global Adult Population
International Telecommunication Union (ITU): Press release: ITU releases annual global ICT data and ICT Development Index country rankings, 2016
OECD: Broadband statistics [oecd.org/sti/ict/broadband]
Federal Reserve Board: Consumers and Mobile Financial Services 2016
KPMG: The Pulse of Fintech Q4, 2017
Roland Berger: FinTechs in Europe - Challenger and Partner, 2016 11 McKinsey: The Future of Bank Risk Management, 2015
12 ESN: Sector Report: German Financials: Fintech - threat or opportunity?, 2015
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Ferratum Oyj published this content on 30 March 2017 and is solely responsible for the information contained herein.
Distributed by Public, unedited and unaltered, on 14 April 2017 06:43:13 UTC.