Secure Trust Bank PLC (STB) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for taking the time to join us for our 2023 full year results presentation. Before I start, I'll let you read this slide to explain the basis of reporting. References made throughout to adjusted results, which reflects continuing operations, excluding exceptional items as reported in our annual reporting accounts for the year ended 31st December 2023. A reconciliation of adjusted results to total results is included in the appendix of the presentation. This is the running order for this morning. I'll provide an overview on the year and comment on our growth potential, some key metrics and share the progress made last year and over recent years. Rachel will then cover the financial performance in more detail before I comment on the progress made by each of our businesses. Over the last few years, we've made significant progress continuing to take a prudent approach to assessing customer affordability, and we remain focused on supporting our consumer and business customers in this challenging environment. The group is more focused and simpler following our decision to exit a number of subscale businesses. We've improved the quality of our consumer lending, have grown our net lending by GBP 1 billion since the end of 2020, have an improving cost-to-income ratio and have significantly improved our profit pre-impairments. We have confidence in our ability to make continued progress and deliver on our optimizing for growth strategic priorities. Overall, this is a good set of numbers, and I look back at what analysts were forecasting for 2023 at this time last year, and we have outperformed against our expectations. These numbers represent a lot of hard work against a challenging macro backdrop, and I'd like to thank my colleagues for their hard work and dedication. We've grown strongly in recent years. Our net lending was 52% higher than 3 years ago. We operate across a diverse range of large specialist lending segments, serving both consumers and businesses and delivering attractive margins. We've established positions in our markets and have long-standing relationships with introducers, which we continue to expand and nurture, with a stable and efficient funding model, we are a resilient and agile business and have proven ourselves to be adaptable to market conditions. We still have excellent growth potential in large addressable markets and are confident in our ability to continue growing in each of our businesses. We have demonstrated our ability to identify and deliver operational efficiencies. As outlined at our Capital Markets Day last November, we will now deliver GBP 5 million of annualized savings from our Project Fusion cost optimization program by the end of 2024. We won't stop there, through and continue to identify opportunities to drive further improvements. Our disciplined approach to managing our costs as we scale our lending supports a more ambitious target for our cost income ratio of 44% to 46% against a GBP 4 billion net loan book. Ultimately, our focus is on delivering an improvement in the returns we generate, building our net loan book prudently towards the GBP 4 billion level supports delivery of the 14% to 16% return on average equity. And you'll be able to calculate that is now on the horizon for us and requires lower growth rates to achieve it than we have delivered in recent years. We delivered record levels of new lending in each business last year and have delivered a strong, consistent financial performance. We're on track to deliver major enhancements and returns. You'll be familiar with this group overview slide from previous presentations. I'll talk about the progress made in each of the businesses later. The key message though from this slide is the growth we have delivered in each business as shown at the bottom. Consistently across all areas, we've delivered on our commitments to scale businesses and there's much more to go after. In the last 3 years, we have grown lending in our consumer businesses by 87% to GBP 1.7 billion and in business lending by 27% to GBP 1.6 billion. Consumer lending now represents 51% of total lending compared to 41% in 2020. Deposit growth has also been very strong at 44% in the same period. 2023 was another year of robust progress. Some key performance metrics for the year are shown on this slide. Total lending balances grew by 13.6% to GBP 3.3 billion, and our customer savings balances grew by 14% to GBP 2.9 billion. We've consistently highlighted our growth potential, and I'm delighted with our progress. On the back of strong lending growth and disciplined cost management, our profit before tax pre-impairments of GBP 85.5 million was 12.4% higher than in 2022. The cost-to-income ratio improved from 55% to 54% and costs in the second half of the year were flat compared to the first half. Our net interest margin for the full year was consistent with the first half at 5.4%. This remains close to our medium-term target. We have, of course, experienced increases in our cost of funds in a rising rate environment. The refinancing of our Tier 2 capital, which provides capital to support our future growth, also impacted on net interest margin. Risk-adjusted margin was 4.6%. The Board has approved a final dividend of 16.2p per share, in line with our policy to return 25% of earnings to shareholders. This brings the total dividend for the year to 32.2p per share. At advise of the Board has decided to move to aggressive dividend policy for the 2024 financial year, reflecting feedback from shareholders. We continue to show good momentum towards achieving our medium-term targets. The charts on the slide show the progress on each of these, including the recently enhanced targets for lending balances and cost income ratio. The first chart demonstrates the progression in building the scale of our lending balances as we move towards our GBP 4 billion ambition. We planned for our net interest margin to come down as we scale the business lines and focused on increasing the mix of lower-risk consumer lending. We remain comfortable with our target for net interest margin to be around or above 5.5%. I've already commented on the further improvement in cost-to-income ratio, and you can see that demonstrated again here over a longer period of time. There has been a 600 basis points improvement over the last 2 years. As we continue our growth trajectory, we will see this move further towards our refreshed and more ambitious target. We delivered an increase in our return on average equity, which remains our key financial priority. As expected, we have consumed capital as we continue to deliver lending growth. That will remain a feature as we keep growing our businesses and until we achieve the GBP 4 billion loan book threshold. As a reminder, our medium-term target for CET1 ratio to remain above 12% is comfortably above our minimum regulatory requirement of 9.6%. We remain confident in continuing to grow and delivering these targets. As you can see in the bottom half of the slide, we are also clear on the level of loan book scale that is required to deliver attractive mid-teen returns. That requires us to get to GBP 4 billion, maintain our credit discipline, increased slightly the mix of lending towards our consumer businesses and maintain focus on controlling our cost base. At that point, the group becomes capital accretive, and we'll have different options to consider and choices to make. Let me now hand over to Rachel.

Thank you, David, and good morning, everyone. I'm now going to provide you with some further details on our financial results for the full year 2023. I think these results represent a solid performance against a challenging backdrop. 2023 saw a continued focus on net lending growth whilst maintaining strong credit discipline and cost management. Growth has been focused on higher-quality lending, particularly in our consumer finance businesses. Average net lending growth of 14.8% generated an 8.9% increase in operating income, and this has been achieved with a 7% increase in costs, which we believe is a strong performance against a high inflation backdrop. This has resulted in a significant increase in profits before tax pre-impairments of 12.4% to GBP 85.5 million. Impairments did increase by 15.6% to GBP 42.9 million but were impacted by the previously announced single loss in commercial finance. Excluding this loss, impairment would have reduced by 3.8% year-on-year. Adjusted profit before tax improved by 9.2% year-on-year to GBP 42.6 million and return on average equity was 0.2 percentage points higher than 2022 at 9.6%. On a statutory basis, profits were impacted by GBP 6.5 million of exceptional costs. Following the FCA's borrowers in financial difficulty review across the industry and in response to specific feedback we received on our collection activities, costs of GBP 4.7 million have been incurred or provided for. In addition, costs of GBP 1.8 million were incurred in relation to corporate activity that took place in Half 1 2023. Taking these items into account, continuing profit before tax was GBP 36.1 million. The group's net interest margin remained consistent with the first half at 5.4%. This was 30 basis points lower than in 2022 but reflects our focus on increasing the mix of lower risk lending. The last 2 years have been challenging given the steep rise in interest rates, but we have actively managed the repricing of new lending and retail deposits to maintain margins. Asset yields have risen by 2 percentage points in the year as base rate increases have been passed on and a 2% mix increase in consumer lending has also delivered an additional 0.3 percentage points. Liability yields have increased by 2.5 percentage points, reflecting the repricing of our customer deposits and the maturity profile with circa 60% of funds repricing within 1 year. The new Tier 2 capital also reduced NIM by 0.19 percentage points, but provides important capital for our growth strategy. Margin management will continue to be a focus in 2024. The potential for falling rates, active management of pass-through and mix increases in consumer lending will be our levers to drive margin expansion in the medium term. We remain comfortable with our medium-term target for the net interest margin to be 5.5% or above. The key to achieving our medium-term target of 44% to 46% cost-to-income ratio is through growing our income at a faster rate than our cost base. The group delivered a 1 percentage point reduction in the cost-to-income ratio in the period with the second half costs being in line with the first half. Lending growth net of direct costs delivered a reduction of 3.5 percentage points on the cost-to-income ratio, providing the proof point that the group has the capability to drive the cost to income ratio down as we add scale. Inflationary pressures resulted in a GBP 1.7 million increase in employee costs, which represents 0.9 percentage point increase in the cost-to-income ratio. Other costs were also impacted by inflation, and we had investment in people and processes, representing an increase of GBP 2.9 million. However, these increases were offset by good progress being delivered under our Project Fusion efficiency program, a further GBP 2.1 million or 1.1 percentage point reduction in the cost to income ratio was delivered in 2023. This program has now delivered circa GBP 4 million of savings between '22 and '23, and we are on track to deliver a further million in '24, and we will continue to identify further opportunities to drive cost efficiencies. Cost of risk at the group level was 1.4% and in line with full year 2022. In Consumer Finance, cost of risk improved materially to 1.9% from 2.9% in '22, reflecting an increased mix of higher quality lending. Arrears in consumer finance have remained stable. Business Finance cost of risk increased by 0.2% to 0.9%, reflecting the one-off loss in Commercial Finance and a small number of default cases in real estate finance. Excluding the single loan loss in Commercial Finance, the group cost of risk would have been 1.2%, which we think reflects the underlying credit quality of the book. Coverage ratios also remained robust at 2.6% and flat year-on-year. At a summary level, the balance sheet grew with total assets increasing by 11.8%. Loans and advances increased by 13.6%, reflecting continued strong growth and customer deposits increased by 14.2%, reflecting that increase in lending balances. Shareholders' equity increased by 5.5% to GBP 344.5 million and tangible book value per share increased by 4% to GBP 17.80, which I'm sure most of you will notice is materially ahead of the current share price. Our capital position is strong and has improved in both quantum and efficiency with the new Tier 2 issuance of GBP 90 million, a net increase of GBP 40 million in the year. We will continue to evaluate any further optimization of the capital stack. RWAs increased by GBP 0.4 billion as a result of the growth in lending balances. CET1 ratio decreased by 130 basis points to 12.7%, driven by, firstly, net profits, contributing 100 basis points, but offset by proposed dividends consuming 30 basis points, the net reduction in IFRS 9 transitional relief consuming 40 basis points and the increases in RWAs consuming 160 basis points. Total capital ratio at 15% provides a strong position for growth, and both our CET1 and total capital have significant headroom above our regulatory minimums. Total funding increased by 13.5% to fund growth in lending balances and the 2024 pipeline of new business. We have raised over GBP 1.7 billion of retail deposits during the year with a noticeable shift towards Access and ISA deposits. Driven by customer demand for shorter-term products, more than 50% of our deposits have a duration of under 1 year. This creates a sensitivity to year-on-year changes in rates. We continue to be retail funded and 95.6% of those retail deposits are fully protected under the FSCS scheme. During the year, we have evaluated potential options for securitization to facilitate the replacement of our maturing TFSME, but have concluded that the cost of setting this program up and the current pricing would be prohibitive. Our current plan is to replace TFSME with retail deposits on maturity during 2025. We remain well funded with significant excesses to regulatory minimums. Thank you. And I'll pass back to David so he can give you an update on the performance of our businesses and comment on the outlook.

Thanks, Rachel. We remain committed to our aspirational longer-term vision to be the most trusted specialist lender in the U.K. Our core purpose to help more consumers and businesses fulfill their ambitions provides clarity of direction and is a common focus for each of our diverse businesses. As we previously articulated, our new optimizing for growth strategic priorities will guide our decision-making, and we remain focused on continuing to simplify the group, enhance the customer experience and leverage our distribution networks. We have made significant progress against those priorities and some examples are shown for each on this slide. As you know, we have exited 4 subscale businesses and become more focused, and we have streamlined our senior leadership structures as a result. We've reduced the office space we occupied by 51% and plan to reduce the space we occupy in London. Reducing our property footprint and other actions we have taken have helped to reduce our CO2 Scope 1 and Scope 2 emissions by 36% in the last 2 years, and we're making good progress towards our target of a 50% reduction by the end of 2025. We continue to review our operating model, remove duplication and adjust plans of control as part of Project Fusion. We're now on track to deliver GBP 5 million of annualized savings by the end of 2024, a higher value of savings than outlined at this time last year. We've also now completed the full closure of the Debt Manager Services business and applied to the FCA to hand back our regulatory permissions for that business. There'll be no further costs incurred on DMS. The net gain on exit was GBP 2.3 million with a gain on sale recognized in 2022 and the closure costs in 2023 under discontinued operations. Under enhancing the customer experience, we launched our first mobile banking app for our existing savings customers at the end of Quarter 3, making it easier for them to access their account information and transfer money. 1 in 6 of our savings customers registered for the service in the initial months and 25% of all customer withdrawals on our savings accounts are now initiated via the app. The retail finance team has continued to add new functionality to V12 online self-service portal and customer adoption has now increased to over 80%. And we've also enhanced our collections and forbearance options in vehicle finance and completed the migration to a modern single collections platform, which now supports customers across all products in that business. On leveraging networks, we're working now with over 1,200 retailers and have continued to expand distribution in vehicle finance. We have over 640 introducer relationships for our consumer products and over 250 dealers for our stock funding product. And we continue to see the levels of repeat business grow in both commercial finance and real estate finance as our reputation for service quality, flexibility and speed of response grows. Everything we do is underpinned by our technology platform. We've invested in new capabilities in recent years, and we've continued to increase process digitalization, replace legacy platforms and launch new products. In our consumer businesses, we integrate easily with our partners at sales platforms via APIs, allowing us to onboard new partners at pace. Our credit decisioning and affordability assessments are automated, allowing us to provide quick decisions for business partners and customers. Our technology solutions are part of the reason we are gaining market share. And as has been demonstrated, our platform is scalable and has capacity to support our future growth ambitions. So really good progress against our optimizing for growth, strategic priorities. So let's look now at the businesses in more detail. I'll start with Retail Finance where we provide point-of-sale finance solutions for the benefit of retailers and end consumers. This business really is an emerging powerhouse in the sector. Most of the lending is interest free credit where a retailer would pay us a fee for providing finance to their customers as part of their sales strategy, and then customers can repay their product purchases by fixed monthly installments over a period of time. We spotlighted this business at our Capital Markets event, and the team did a great job articulating their track record and why they are well placed to continue winning business and make further market share gains. Our record level of new lending, GBP 1.2 billion was delivered last year, helping to grow net lending balances by 16% in the period. We also launched AppToPay allowing our retail partners and customers to access a shorter-term interest free credit offer. Market share increased to 13.5% as the team continued to focus on winning business in high-quality, lower-risk lending in the furniture and jewelry sectors. These high-quality sectors now represent 81% of lending. And you can see that mix change progression on the bottom right chart of the slide. You can also see the impact of that strategy on net interest margin, risk-adjusted margin in arrears, and arrears remain at record lows. As we highlighted at the Capital Markets event, not all unsecured lending has the same risk and our arrears rates are significantly lower than in other unsecured lending products in the market, including credit cards and personal loans. We see further opportunities to grow this business, and we are confident that we can continue to take more share from existing retail partners and that we can gain share in segments that we are currently less well represented in. There are also opportunities to drive digital adoption even higher, and we intend to develop our AppToPay technology as a mobile account management tool for all our retail finance customers, and I'm excited about the opportunities that could open up for us. In Vehicle Finance, we help customers to buy secondhand vehicles and dealers to purchase their stock for their forecourts. We've continued to make good progress scaling this business, and the team delivered record new business levels of GBP 471 million last year, 24% of which was leading to better quality, lower-risk customer segments. This growth follows our technology investment, which has allowed us to introduce new products and serve broader segments of the market as well as a significant expansion of our distribution network. This growth contributed to our net lending increasing by just over 25% and our market share increasing to 1.2%. You can see the net interest margin and risk-adjusted margin trends in the chart. As we planned for net interest margins reduced as the mix of better quality lending increased, but the real story is that risk-adjusted margin increased from 6.1% last year to 7.3 as we benefited from improved lending quality feeding through into a lower cost of risk, which improved from 6.3% in 2022 to 3.4%. Arrears levels were flat. I want to comment on the 2 regulatory initiatives in the vehicle finance market that we first highlighted in our pre-close trading statement in January. Regarding the FCA's review of discretionary commission arrangements, we did operate these in the past for a small proportion of our lending. We stopped doing so in 2017. Since we made our pre-close statement, there has been coverage that the FCA's review will consider the time period 2007 to 2021. Over that expanded period, a mid-single-digit proportion of new vehicle finance loans included such arrangements. We will provide further information on this once the FCA has concluded its review, which is expected to be in Quarter 3 2024 when the implications for the industry should become clearer. Like others, we're seeing an increase in customer inquiries about commissions. To date, 97% of those inquiries are from customers who did not have a loan where there was a discretionary commission arrangement. We are managing those customer inquiries efficiently with the use of an AI tool that we've developed internally, significantly reducing the manual effort it would take to review and respond to those inquiries. With regards to our engagement with the FCA on our collections processes, we expect that engagement to complete in the second half of the year. Looking forward for Vehicle Finance, we'll continue to expand our network of dealers and brokers to support our growth ambitions. And we'll also complete our platform build this year so that all new business across the product range is written on our modern platform, allowing us to simplify the business and reduce costs further. In Real Estate Finance, we have a focus on supporting professional landlords and developers and helping them to improve and grow their property portfolios. We have an experienced team of bankers with a real specialism in underwriting and managing more complex property transactions. All of our lending is secured against U.K. assets. The team delivered record levels of new business of GBP 434 million, and that represented growth of 12.7% despite the challenging interest rate and economic environment. Net lending in this business increased by 11.5% to GBP 1.24 billion. Risk-adjusted margin of 2.2% was impacted by a single development loan moving to Stage C. That loan had GBP 3.9 million of provisions recognized last year, reducing risk-adjusted margin by 0.3%. Without that, risk-adjusted margin would have been broadly flat year-on-year. The LTV on the loan book reduced slightly to 57%, reflecting the high levels of security we hold in this portfolio and a relatively low risk appetite. The mix of lending remained consistent year-on-year with 84% of lending against the residential investment loans, just under 11% in residential development loans and the remainder of commercial investment loans, so very low exposure to commercial real estate. We're positive about outlook for real estate lending. Our specialist and bespoke services and partner relationships mean we're well placed to deliver sustainable growth. We will hold a Capital Markets webinar event focused on this business in the summer. Our Commercial Finance business provides asset-based lending solutions for working capital finance and for strategic events. Lending is predominantly secured against receivables, typically releasing funds against up to 90% of qualifying invoices under invoice discounting facilities. This business was built organically and is run by an experienced team of bankers with special skills in underwriting complex transactions and management of these through their life. The team has a strong reputation across the asset-based lending market and lending balances were GBP 381 million at the year-end. Cumulative growth since 2020 is an impressive 65%. Businesses sourced directly and through professional introducers including accounting practices and private equity firms. New business lending increased by 37% to a record GBP 215 million. We did see 10 client failures last year, higher than normal, as you can see in the purple line on the default management chart towards the bottom right. The team successfully managed out of 9 of those exposures without loss as they have done consistently in previous years. As reported in our first half results, we did experience a large loss on one client earlier in the year, a long-running problem debt case. The cost of risk for 2023 was 2.3% in this business as a result. The team does have a fantastic track record in managing the portfolio though, and the cost of risk since launched almost 10 years ago, including that single loss was 0.6%. The lessons learned exercise we undertook confirmed there were no loan exposures with similar circumstances in the rest of the portfolio. Commercial Finance's net revenue margin grew strongly in the period to 7%. The lending portfolios they have all repriced and linked to the bank base rate. You can also see the utilization of lending facilities at 57% remains below pre-pandemic levels, reflecting increased market liquidity and more recently, the challenging trading environment as well. We're committed to supporting our clients and continue to leverage our relationships with key introducers to grow further in 2024. So a year of strong progress against each of our 4 diverse specialist lending businesses and confidence that we will continue to grow these in the coming years. Our savings products are used by our customers to save for special events and generate income. All of our customers receive a competitive interest rate. We only take deposits from consumers, and we offer a full range of products across instant access, short-term notice accounts, fixed term accounts and cash ISAs and you can see the breakdown of balances by product type at the bottom right of the slide. As Rachel highlighted, there was a move to access products and longer-term fixed products from notice accounts in the last year. We raised a record GBP 1.7 billion of new savings balances and total deposits grew to GBP 2.87 billion. As mentioned earlier, we're seeing a positive response from customers to our new mobile app, which allows them to manage their accounts on their phone. And we're also progressing development of the app to allow customers to open a new account on their mobile device. Our savings proposition is an area where we have been able to drive operational efficiencies and cost reductions. We migrated a large number of communications from paper to electronic channels in the year, and we now deliver 59% of these communications to our customers electronically, and we've identified further opportunities to do so. As the bank base rate starts to fall, we expect demand for fixed-rate accounts to pick up and for shorter-term notice accounts to become an attractive alternative to access accounts. Whatever the customer preference, we're well placed to meet their needs. We have a clear focus on our specialist lending businesses where we've proven we can win and take market share, evidenced by our loan book growing by GBP 1 billion since 2020, a growth of 52%. Although we're focused, we remain well diversified. Our business model has proven to be resilient through challenging periods, and this remains a strength of the group. We've been improving the credit quality of our lending in our consumer businesses. And as you've seen today, despite a large loan loss in our business during the first half of the year, the group's cost of risk remained low and stable at 1.4%. Our optimizing for growth strategic priorities are guiding our actions to simplify, enhance the customer experience and expand and leverage our distribution networks. I would like to leave you with 3 key messages. We have excellent growth potential in large addressable markets. We're on track to deliver on our upgraded target of GBP 5 million annualized cost savings by the end of this year. We have sufficient capital to support our growth plans and our results demonstrate we have really good momentum towards achieving our GBP 4 billion net loan rate target, the level required to support our 14% to 16% returns target. We are very pleased with our underlying performance and are confident in and excited about the future. The next update from us will be the Capital Markets webinar event focused on our real estate finance business. That will be held on Wednesday, 3rd of July, and we'll issue invites well ahead of time. That brings this morning's presentation to a close, and we're happy to take any questions that you may have.

[Operator Instructions] The first question comes from Gary Greenwood from Shore Capital.

I just had a question on costs. Obviously, 2023 was I think quite a good performance with cost up 7%, given the inflationary backdrop, you're targeting reducing the cost income ratio quite a bit over the next few years to 44% to 46%. I just want to sort of get a sense of how confident you are of achieving those targets and sort of what you need to do to make sure that you deliver, so if you can just talk maybe a little bit about sort of further operational changes that you might have to put through the business.

Okay. Thank you, Gary. Thanks for joining the call. Listen, the GBP 5 million to recall the annualized savings are things that we've identified already. As I mentioned there, the webinar we're not going to rest, there's plenty more that we want to keep investigating. It just needs to become part of a habitual operations of the business and we're continuing to look for efficiency savings. So looking ahead terms of potential further beyond the GBP 5 million, it is as you're looking to -- looking at the operating model, structure of the organization, where there are opportunities still to remove any duplication that might still exist within different teams doing similar tasks. Clearly, a big focus will continue to be the digitalization of processes, particularly those that interact with customers. So yes, we've seen a very positive start with the mobile app take-up in savings. That is for existing customer servicing an account. There's still more penetration also and take-up to go after, but we're also working on the development of the mobile app to be extended so that new customers can apply. And typically, there are quite a lot of manual processes when you are setting up a new account in our savings products today. So there's more opportunity to go after that. We also got a little bit of further work to do on property rationalization, the footprint in London is probably beyond what we now need so we will continue to look at that. And there's still a little bit of technology work around the Vehicle Finance business, where we are still writing our new prime business on our older platform. All the other products are now on the new platform. And so this year, we will finish the job there so that we are on a single platform for all new originations. So a combination of looking at structures, digitalization, central overheads, linked property and the opportunity with IT, some of the [indiscernible] systems continue going up after additional savings on top of the GBP 5 million.

I just had one other question, if I can, on net interest margin outlook. And just in terms of how we should think of that evolving as interest rates start to fall.

Yes, Gary, I'll take that. So I mean, we delivered 5.4%, which was the same between 2 halves of this year. There is pressure in terms of cost of funding. I mean, we raised our deposits in the market, and we have been at the top of the table. But as you say, we are looking now hopefully towards the curve that's coming down and breakups, so we'll actively manage that pass-through on both sides of the balance sheet. The other point probably is what I tried to call out on the waterfall that as we continue to make even small moves between the mix of the portfolio towards consumer, we see a margin expansion coming from that just by the nature of the yield on those products. So it's both of those. I'd say that '24 there'll still be some pressure in terms of being able to raise deposits at good rates and our ability to look at that pass-through on the asset side will continue to be a focus in '24. And hopefully, in '25, it'll be a little bit more stable, and we'll be able to see some of those positive changes on the mix towards consumer.

We have a question from Robert Murphy from Edison.

Just a quick question on the mix shift to retail. And I noted DFS had a bit of a profit warning the other day. So maybe you could say something around that. And then just coming back to the net interest margin question again. Have you basically factored in the curve into your estimates? Or have you made any other assumptions around that?

I'll pick up the first one on retail finance. So we are not seeing any impact in our Retail Finance business of the pressures that some larger retailers in particular sectors that we are active in at this point in time. Now that's not to say that, that doesn't flow through. Our overall performance has benefited from the fact that we're actually taking a larger share from some larger clients than we've taken historically. So as you know, 1 or 2 larger clients operate a range of potential lending adherents with different lenders in place. So we've been able to take us a larger share. And that, to this point, has been offsetting any potential reduction in overall demand that particular retailer may have. So we're open-minded to the fact that, that pressure may build. I mean our view looking forward is a bit more positive in terms of the outlook of the consumers. Clearly, we start to see that this is now the peak of the interest rate cycle. And know that we're getting commentary and 1.5 hour time on that. Then think you'll start to see, as -- seems to be building in last month or so a bit more positivity about consumer outlook, so it's a sort of timing point here. You've still got some consumers who are still likely yet feel the full impact of the rate rises we've already gone through, particularly the mortgage holders have yet to reprice some fixed term arrangements. However, beyond that, you're looking forward to a lower rate cycle, which generally does tend to feel a little bit more positivity on outlook and confidence. So we're not seeing any impact yet, certainly taking a bit more share from larger clients, are aware of the potential risks but also positive about outlook and our view into consumer spending as well.

Just to the other question on NIM. Yes, we do obviously plan for the yield curve when we're looking at our forward numbers. So we have the assumptions that were around the quarter 4 of last year. So there is an assumption that base rate does start to come down towards the back end of this year and obviously into 2025. So yes, that is reflecting to our forward numbers.

Yes. And just to add to that, I think in reality if you look at commentary from other banks, you have to remember that our specialist lending model is very different from some other banks, particularly those with very large exposures to residential property in particular. So they have called out that they have seen the net interest margins peak. What we are saying today is we remain very comfortable looking forward with our net interest margin target of just above 5.5%. So yes, there's a little bit of pressure on that for the reasons that Rachel's mentioned, and we were at 5.4% for the 2023 year. We remain very confident in the 5.5% level.

[Operator Instructions] And as there are no further questions, I'd like to hand the call over to -- for any web questions any webcast questions.

We have one question from [ Jan Arenberg ] at Investec. There are 2 parts to the question. The first part is some of the retailers within your consumer businesses have seen some challenges to their financial performances. For example, Watches of Switzerland and DFS. Could you provide some color as to what extent this might impact your lending operations? And the second question is, after a year of strong loan book growth across the business, do you have a view as to which parts of the business are likely to sustain some of this into financial year '24 and any other divisions that you are particularly excited about having almost finished the first quarter of the year.

Thanks for the questions, Jan. I'll take -- the first one is a repeat, I think the question we just had on the retailers in a particular segment. So I would just give the same response to that rather than repeating it. I mean other business lines as we have plans to continue growing these businesses. What we did call out to the Capital Markets Day in November is that we were retiring the target to grow at 15% CAGR and recognizing that we're in quite unsettled times. And more important was to refocused on the GBP 4 billion net loan book target, which is the required level to unlock those medium-term targets, particularly the return on average equity. So we have plans for growth. As I said in response to the previous question, the outlook is looking perhaps at an interest rate environment looking positive and hopeful we'll see some benefits of that in the second half. But we're not seeing anything in the company that's impacting our view about moving towards -- through '24 and into 2025, that GBP 4 billion level. And as called out in the presentation earlier, I think growing 52% are likely over the last 2 years, then you clearly will need to grow roughly about half -- just under half that level again to get to the GBP 4 billion target. So opportunity still exists in each of our business lines. We've got plans for growth in '24 and '25 in each of them, and we believe it was a favorable wind on economic outlook improving that will solidify our confidence of getting to the GBP 4 billion level.

There are no more questions over the web. So I'll hand back to the conference call host.

Thank you everyone for joining the call and also for the questions. 2023 was a year of strong progress in a challenging environment. We continue to see growth momentum with net lending growing by 13.6% and expanded our distribution of our consumer business and gained market share. We continue to see, as I just said, in response to the question, excellent opportunities for growth in each of our large addressable markets, and we continue to deliver operational cost savings and are confident in achieving that GBP 5 billion enhanced target by the end of this year and still looking forward to what else we can get out of the cost base. The growth with action we've taken to simplify the group and a more disciplined approach to managing those costs gives us great confidence in getting to the medium-term target for cost-income ratio in the 44% to 46% level against the GBP 4 billion net loan book. And again, as we've just restated getting to that level is now within our reach, it's on the horizon, it does require a growth but growth at a much lower level than we've delivered in the last 3 years. We do have a strong track record of growing each of these businesses and put clear plans to continue doing so. So we are confident we've got the right team, the right capabilities and the right distribution partners to deliver on those commitments. We hope that you can join us at the Capital Markets webinar that we'll be holding in early July on our real estate finance business, that will just get an opportunity for you to meet more of the team, understand what they have delivered in recent years and more importantly, the outlook for positive growth continuing. So we look forward to meeting people and seeing you then. And likewise, there's quite a number of you we'll be meeting in the course of the next few days. So Rachel and I look forward to discussing the results in a bit more detail with you. Thank you for joining again and have a good day.

Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect.