Distribution Finance Capital Holdings plc (DFCH) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Distribution Finance Capital Holdings plc Interim Results Investor Presentation. [Operator Instructions] Before we begin, I would like to submit the following poll. I would now like to hand you over to the management team. Carl, good afternoon.

Good afternoon, everyone. I'm delighted to be here with Sameera to share our interim results for the financial year ending the 30th of June 2026. I've got to say that this has been another period of record results for us. We've had record loan origination, resilient margins and stable funding base, robust credit quality and a continuing focus on cost management as well. And I think what's most exciting for us is that the extent of profitability that we continue to build on year-over-year really underpins the capital base that supports our growth moving forward. So I thought it would be worth just spending just a few minutes before we launch into the details of the results, just reflecting on our journey since we became a bank back in 2020. And I think you can see from this chart how far we've come. And all the things that we've achieved since 2020 have really been on the foundation of us supporting manufacturers, dealers and distributors. Firstly, as an inventory finance lender. But more recently, as a multiproduct lender, helping dealers grow and support their sales beyond the forecourt. I think what we've also demonstrated, as you can see from the chart on the right-hand side, is a laser focus on reaching profitability pretty soon after we were authorized as a bank. And that's put us in an enviable position as far as capital accretion is concerned. And that's really, really supported our growth. We're now 4 years -- 4 full years and a 4.5 years profitable as a bank. And I think for most of you that will perhaps have been following our story and certainly those of other early-stage banks, you'll recognize that achieving profitability so soon after authorization is fairly unique. I think it's also worth saying that you can see through the numbers here that we have built considerable shareholder value over the last 4 or 5 years. And that really has supported and earned us the right, frankly, to push on to the other segments that we want to grow as we become a multiproduct lender. So just moving on to the interim results. We've -- the momentum that we built at the back end of last year, which was, frankly, a record year for us, has continued into the first half. And as I said earlier, it has been a period of further record breaking. And as we've continued through the year, it's been pretty clear to us that our expectations, financial expectations have materially exceeded those that we thought were going to unfold when we started 2026. And so new lending reached a record high of almost GBP 1.1 billion, which was up 31% on the prior year. And that's delivered a significant increase, a 27% increase or GBP 200 million increase in our loan book, which closed the period at GBP 932 million. That with the discipline that I mentioned earlier around things like margins, credit quality and cost, has enabled us to deliver a record profit before tax of GBP 13.4 million, up almost 50% on the prior year. And our return -- statutory return on equity reached 15.3%, which gives us significant confidence about our journey ahead as we look to achieve a 20% equity return. Overall, our tangible net asset per share increased to just over 82% (sic) [ 82% ], which is a 17% increase on the prior year. So we've set out previously very clear targets through initially to 2028 and onwards to 2030. And you can see these laid out on the slide in front of you here. And I think it's -- the numbers here demonstrate that all of the financial fundamentals that underpin our ambitions to '28 and 2030 are being achieved. We're demonstrating delivery across all areas. And that fundamentally gives us the confidence about that objective of that 20% equity return as we get to 2030. So loan book growth, our story is very much at the moment about continuing to scale and scaling in our new products and services, holding margins is important, opening the jaws between cost and income from a cost-income ratio perspective and managing our credit risk in a disciplined way and holding to a less than 1% through the cycle. So you can see we've delivered on all of those objectives that we've set out and are well on our way to the targets that we've set for 2028 and 2030. But as I mentioned, so much of our story is really about scale and diversification and moving from being what we have perhaps been historically a monoline product just providing inventory, inventory finance. And we brought more products and services to life, particularly our structured finance and our asset finance proposition, which we'll talk about a little bit more detail later. We've delivered growth across the board. And our loan book, as I mentioned, has increased by 27% and pretty much across every category. On the inventory finance side of things, we've held our market-leading position in the Motorhome & Caravan space. In Transportation, we've rebalanced the portfolio there as well through the period. In the Lodges space, we've seen a resurgence in the lodges and holiday home market, particularly off the back of an increased demand in the staycations given the global climate at the moment and the geopolitical uncertainties that are out there. I guess what we've been most pleased with is the structured finance delivery, which is a bespoke set of lending products to our existing customers who are operating in the markets that we like to support. And this product set, whilst each individual opportunity is bespoke in nature, has a virtuous impact on the rest of our lending and our relationships. And our ambition here really is to increase the vitality of the markets and bring the ambitions of those people that participate in the markets that we operate in, bring those ambitions to life. I think what's been particularly exciting has been the launch of asset finance. And we've been really pleased with the progress that we've made here. This is a massive market opportunity for us. We've estimated that it's about GBP 10 billion of annualized sales that we can look to convert into funding opportunities, what we call beyond the forecourt financing. The first half progress has been exceptional. New lending of GBP 28 million, significantly up on the same period last year. Loan book of GBP 40 million as we close the year -- closed the half year. But what's really pleasing is that, that business unit now is run rate breakeven. But I guess it's worth sharing with you the snapshot of where we're at August because I think that really demonstrates the pace that we're starting to deliver on our ambitions in asset finance. We've originated about GBP 55 million worth of loans in the year, and that's come from over 1,500 individual transactions in the period. And our reach is extending considerably. We've got 273 dealers that have signed up to provide us with asset finance, and that represents over 370 unique retail locations where transactions are sold and where ultimately finance can be signed up. The majority of our new loan origination has come from our existing dealer relationships. And we're making progress both on the consumer side of things, but also the business side of things, given that we do support what we would describe as leisure assets, but also commercial assets as well. Really pleased with the progress that we've also made in building a direct-to-consumer proposition. So we won't need to just originate loans through our dealer network, which is quite extensive already. And we're expecting to launch our direct-to-consumer application process in the fourth quarter of this year. So with the reach that we have through our existing dealers with a massive market opportunity of at least GBP 10 billion a year across all of the sectors that we support, it feels like we're well on track to achieve GBP 100 million milestone in short order. So on that note, I'll hand over to Sameera just to talk around the details of the financials, but also perhaps where we're heading over the next few years.

Thank you, Carl, and good morning, everyone. I'm equally delighted to take you through another period of strong financial performance. We've delivered across all our key measures while continuing to invest for growth and drive value for our shareholders. But as Carl said, before I take you through the detail of our P&L, balance sheet and credit performance, I wanted to take a moment to reflect on our road map to 2030 as a reminder of our ambitions. So at the beginning of the year, we extended the targets we had set for 2028 through to 2030. Our strategy is straightforward. It's to remain focused on the dealers, manufacturers and distributors we know well and to create significant value by building on those strengths. And underpinning that is our growth strategy and the target to deliver a loan book of GBP 1.5 billion by 2030. We now have everything in our armory to deliver that ambition. We have the multiple products, as Carl just talked about. We have the deep customer relationships. We have the capital and liquidity resources. And as we grow, what's really key is the operational leverage that we drive as we continue to scale. So we've invested heavily in our infrastructure and our digital capabilities will allow us to absorb greater activity in the future without the same rise in costs. And together, we expect this to support TNAV growth of 10% to 15% a year and returns on equity of around 20%. It's worth noting today, we have more equity than our regulatory requirements demand. But as the business scales, that excess capital will be deployed, and we expect reported return on equity to move closer to the underlying return. The higher profitability that would come with this trajectory will support us generating capital organically and creating that flexibility to fund further growth, pursue any opportunities that may fit our strategy and our risk appetite or return surplus capital to shareholders through share buybacks or indeed dividends. And we have already signaled our intention to pay a maiden dividend in 2029 based on 2028 results. So that's just a reminder of where we are heading. And so to just touch on our financial performance for the last 6 months to the period ending 2026 -- 30th of June 2026. Now the 3 main drivers of our P&L are net interest income, costs and impairment charges for credit losses. And I'll take each of those in turn. So from an income perspective, we've continued to grow strongly period-on-period, increasing by around 24% from June 2025. And the main driver of this has been growth in the loan book. So as Carl mentioned, we've continued to broaden our lending opportunities. And with the book growing by around 20%, 27% even, that larger and more diverse base has generated materially more income. And at the same time, from a pricing perspective, as we talked about at the year-end, net interest margin has begun to normalize from the exceptional levels that we discussed previously, but remains very strong at 7.5% and still a very significant contributor to our overall income. And as the book grows and that lending mix broadens, we continue to expect NIM to move towards that 7% mark that we've previously communicated. I think importantly, both asset yields and cost of funding remains in line with our expectations. We've continued to direct lending selectively towards the most attractive and profitable segments. And I think the breadth of the opportunities that we've just talked through now gives us the flexibility to maintain that discipline as we scale. And then likewise, on the funding side, despite a competitive savings environment and pricing volatility, we've been able to secure funding required to support our growth at competitive costs, and I'll return to that when we talk about the balance sheet. So just turning to costs. Outside of the usual inflationary impacts, the increase that you see in costs is reflective of our investment in growth priorities. So that includes technology and core capabilities. But crucially, we've maintained good discipline of underlying costs while continuing to drive efficiencies from those investments. So as our volumes grow, we expect absolute cost to increase, but at a slower rate than income, so effectively widening the jaws between income and costs. And you can see that in the cost-income ratio, which has improved from 58.1% at June 2025 down to 53% at the end of this period. So we're making our way towards that 2030 target. And then just touching very quickly on provisions. Our disciplined credit management and quality of our security and the recourse arrangements that we have in place have all helped to keep losses low and our cost of risk has reduced by 14 basis points to 0.49% at the end of the period. And I'll cover provisions in a bit more detail when we talk about credit performance. So I think bringing those drivers together, pretax profit has increased by almost 50% to GBP 13.4 million. That's ahead of the expectations that we set at the start of the year. And that stronger performance is translating into improved returns for our shareholders. So return on tangible equity increased by almost 4 percentage points to 15.4%. And if we remove that excess capital that I spoke about, that's closer to 20%. Now that has been supported by the exceptional performance on cost of risk. But nevertheless, it reflects the underlying earning power of the business. And you can also see that in EPS, which has increased to 6p. So just moving on to the balance sheet and looking at growth first. Carl has already covered both the profile of our growth and the increasing diversity of our portfolio, which together have driven the loan book to GBP 932 million at the period end. And that strong momentum has continued even in Q2 despite the usual seasonal reduction in inventory finance. And I think importantly, that growth is now coming from an increasingly broad range of opportunities, which means that we're strengthening the resilience and giving ourselves more routes to grow when individual markets are challenging. Retail savings remains fundamental to our growth and 2026 has been no exception. We grew retail ahead of our lending, in fact, taking advantage of an early window to raise funding before geopolitical tensions led to more market volatility. And that early action kept us ahead of a highly competitive savings market and secured the liquidity that we needed to support our growth at a very good cost. So good news there. And our funding has also diversified in the period across fixed and variable products. Early in the year, we attracted a good level of easy access balances following the product's return to the market in Q1. Provision coverage is stable at 1%. It's consistent with our risk appetite and the quality of our borrower profile. And again, I'll return to this on the next slide. So that leads me to just talk about capital, which again remains in a very strong and stable position even with the GBP 200 million of balance sheet growth. Both CET1 and total capital are comfortably above our regulatory minimums at 17.8% and 20.8%, respectively, so a very good level. During the half, we drew the final GBP 5 million of our Tier 2 facility, and we renewed the BBB ENABLE Guarantee scheme for a further 2 years. The renewed scheme supports a GBP 350 million pool with the eligibility criteria now more closely aligned to our lending, we expect to fully utilize that. And alongside those external levers, our growing profitability is generating capital organically and combined with that significant capital regulatory headroom, it gives us the confidence that we can fund our growth plans to 2030 without a dilutive capital raise. And it also gives us flexibility to pursue strategic opportunities as they arise. And as I said earlier, over time, consider capital returns to shareholders. And finally, TNAV per share increased to 82.2p over the period. That's up 17%, which is consistent with our medium-term targets of 10% to 15% growth per annum and again, demonstrating our focus on generating shareholder value. So finally, I'll just spend a few moments on credit performance, which remains a key pillar of our strategy. As we grow, we remain just as focused on the quality of the lending we write as well as the volume. And just on impairment, I think the disciplined credit management and the quality of our security and recourse arrangements have meant that despite the geopolitical environment and economic backdrop, our portfolios have remained resilient with no sign of widespread credit deterioration. And that reflects the discipline we've embedded across both origination and in-life portfolio management. All our lending remains within credit policy and appetite and we stay close to the customers through regular monitoring of trading activity and repayments and where accounts do become overdue, we have a specialist credit management team that engages quickly in establishing dialogue with dealers from day 1 to remediate any arrears as early as possible. So the chart that you see on this page reflects that performance. To the left, it shows the number of dealers in arrears, which reduced to 36 at the end of the period, and that represents just 2.5% of our overall dealer base. In the middle, you can see the value of those arrears, which again remains low at 0.7% of the loan book. And together, that translated into an improved cost of risk, which you see to the right of just 0.49% at the half year, and that's 14 basis points less than the previous period. Now despite that strong performance, we do remain appropriately cautious. We understand the economic headwinds, and we expect cost of risk to move back towards appetite in the second half as some of those macroeconomic pressures play through. And just finally, to touch on the arrears table in the bottom left, you can see the profile of our arrears across early arrears all the way through to default, which is where customers are more than 90 days past due. Early and mid arrears remain very low, and we have 30 cases in what we call aged recovery, which is where we continue to work through asset recovery over the necessary period. But I think encouragingly, the net realizable value of those assets, which we have in our possession for these cases, is GBP 2.7 million at the period end compared to the GBP 4.8 million in default and that remaining balance is individually assessed and appropriately provided for so we are covered across those balances in arrears. So overall, I would say it's a strong credit performance, low arrears, improving cost of risk and proactive resolution to problem cases. And where dealers do fail, we protect recoveries by redistributing products through our customer network or indeed selling secured assets to third parties.

Great. Thanks, Sameera. So just to wrap everything up, I mean, look, I think you can tell by the enthusiasm that Sameera and I have talked through the half year results that we're really, really pleased with the performance, which has exceeded the expectations that we set at the start of the year. That being said, it won't be lost on anyone the challenging macroeconomic and geopolitical environment right now, which doesn't show any immediate signs of letting up or becoming any easier. We've been through, since authorization, twists and turns. For those of you who have been on the journey, you'll know the story very, very well. And we've navigated those uncertainties very well. So we've got a track record of working through these things. But the foundation really is the strong credit disciplines and approach to credit risk management that we have in place. But we also have a very high-quality customer base. That being said, we're not complacent. We're vigilant, and we will make the necessary calls whilst trying to be supportive to our manufacturers and dealers to make sure that we are managing our credit profile and our asset security. We do have an awful lot of opportunities, as you've seen earlier, as to where to lend to support our growth. And I think that diversification, both from a customer perspective, a product perspective and a sector perspective, gives us enhanced resilience to navigate these uncertain times. So as we look through to the balance of the year, we are expecting everything to fall into place and for our results to land in line with the latest expectations of the market. We're going to see further growth as we head into the restocking period from our core inventory finance product. We're expecting the pace of growth in asset finance to continue through the balance of this year into next year and us to achieve that milestone of GBP 100 million loan book over the coming months. As Sameera has laid out, the financial fundamentals are all well under control, margins, costs, and we are continuing to widen those jaws between costs and income. So I think in light of what we know at the moment, we're expecting our loan book to fall at the end of the year in the range of GBP 920 million to GBP 950 million. So I guess in summary, you can see from all these results that we're well on track to our journey to 2030. Scaling the asset finance business is absolutely key. We've built excellent momentum so far. And this is a ginormous market opportunity, which we do not need to take an awful lot of market share in. We've demonstrated period-on-period that we can continue to be disciplined around cost and unlock operational -- latent operational leverage in the business. We've made the investment over the years to ensure that our growth is cost efficient. And so we do expect to continue to see our cost-income ratio improve and land towards that 45% to 48% range. But I think what's most exciting for us, we don't need Tier 1 capital. We've got all the capital firepower that we need from retained earnings, but also the capital instruments that are available to us, whether that's Tier 2 and Sameera and the team can make some choices for us to make sure that we're capital efficient. In fact, we're that confident about our plan that we believe that from the financial year 2028 onwards, we consider buybacks or distributions back to shareholders and those are something that could be regularized thereafter, while still supporting our journey to at least a loan book of GBP 1.5 billion by 2030. And ultimately, that equity return of 20%. It genuinely feels as if that's within our sights, within our grasp. So thanks very much for listening to the presentation. What we'd like to now do is hand back to our host and open up to some questions.

[]Operator Instructions] Carl, at this point, if I may hand over to you to take us through the Q&A session, and I'll pick up from you at the end. Thank you.

Thanks very much. So we've got a few questions here. So we'll start with Justin's question, which is -- and I'll hand it straight over to Sameera, how do we expect net interest margins to evolve as the lending mix continues to change? So over to you, Sameera.