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

Good morning, and thank you for taking the time to join us for our 2024 interim results presentation. This slide explains the basis of reporting in the presentation, references made throughout to adjusted results which reflects continuing operations, excluding exceptional items as reported in our interim report for the 6 months ended 30th of June 2024. A reconciliation of adjusted results to total results is included in the appendix of the presentation. I will make some comments on our overall performance before Rachel covers off the financial results in more detail. I'll then talk about the performance of each business and the outlook for the rest of the year, and then we will take questions. We have made further progress in the first half of the year. And we have been available to help and support our customers in what has been a challenging environment. We've been operating in a higher interest rate environment than we had expected in recent years as action was taken by the Monetary Policy Committee to tackle inflation. We were pleased to see the first reduction in the bank base rate earlier this month. We believe that this important first step signals improved confidence that inflation is at and likely to remain at or around the targeted 2% level. Interest rate increases are designed to dampen demand and of course, the opposite is also true. We expect consumer and business confidence to improve and demand for credit to pick up as we move through the second half of the year and into 2025. Reduced pressure on customers will support our plans to grow our net lending further as we move towards our GBP 4 billion ambition. It will also reduce the pricing pressure in the savings market. We remain confident that the group's track record and agility will stand us in good stead to capture the opportunities that will arise as sentiment improves. We are a focused specialist lender and have made significant progress over recent years. Our growth plan has been executed effectively. And as a result, our net lending has grown by GBP 1 billion or 43% over the last 3 years. We have further growth potential in each of our large addressable markets. We've been able to support our lending growth by extending our range of savings products to serve a broader range of customer needs. Total deposit balances have grown by GBP 1.1 billion over the same 3-year period. We're focused on managing our costs in support of our financial targets and have a good track record in doing so. We see further opportunities to deliver operational cost efficiencies, and we will share more insight on that shortly. And we're making solid progress towards achieving our GBP 4 billion net lending target that will support an attractive return on capital. Our core purpose is to help more consumers and businesses fulfill their ambitions. This provides clarity of direction and is a common focus in each of our businesses, even though they operate in a range of diverse specialist lending segments. You can see that by focusing our efforts on helping customers, each of our businesses have grown in recent years with faster growth rates in our consumer businesses than in our Business Finance segments. As a result, and as planned for lending to consumers now represents 53% of net lending, which supports our net interest margin. So across all areas, including deposits, we've delivered on our commitment to scale the group. Let me call out some key highlights from our first half performance. Our lending balances grew to GBP 3.4 billion, an increase of 3.2% since the end of 2023. Deposits from customers grew to GBP 3 billion, an increase of 6% since the end of 2023. We also took the opportunity to recommence early repayment of TFSME funding that was due to be paid in the second half of 2025. We repaid GBP 50 million in the first half. On the back of lending growth and disciplined cost management, our profit before tax pre impairments of GBP 45.2 million was 12.4% higher than for the first half of 2023. Our net interest margin reduced to 5.3% from 5.4% at the same point last year, slightly lower than our expectations given the impact of higher retail funding costs. Our NIM exited the half year period at 5.4%. Our operating costs increased by only GBP 1.8 million or 3.8%, and our cost income ratio improved by 220 basis points to 53.7%, reflecting our excellent work across the group to control costs. We have continued to identify opportunities to drive further cost efficiencies and are upgrading our target for project fusion savings from GBP 5 million by the end of 2024 to GBP 8 million of annualized savings by the end of 2025. Our risk-adjusted margin of 4.1% compares to 4.5% in the first half last year, and was impacted by a 20 basis points increase in our cost of risk from 1.5% to 1.7%. The increase was driven by a pause in collections activity in our vehicle finance business following the FCA's borrowers and financial difficulty review. Rachel will provide further insight on this. Our return on average equity reduced to 7.3% due to the increase in payment charges in the period. The Board has approved an interim dividend of 11.3p per share, in line with the new progressive dividend policy we announced in March. We continue to show positive progress towards achieving our medium-term targets including the enhanced targets for total lending balances and cost income ratio that we announced in November last year. The chart show the progress on each of these in recent years, including the year-on-year comparison for the first half. The first chart demonstrates the progression in scaling our lending balances towards our GBP 4 billion ambition despite the challenging interest rate environment in recent years, having dampened demand slightly. As you're aware, as we simplified the group, exited certain businesses and focused on increasing the mix of lower-risk consumer lending, we plan for a net interest margin to reduce. We remain comfortable with our target for a net interest margin at or above 5.5%. I've commented on the further improvement in our cost income ratio in the first half of this year to 53.7% and you can see the improvement over a longer period in the middle chart, the ratio having peaked at 60% in 2021. As we continue our growth trajectory and deliver further cost savings from Project Fusion, we remain extremely confident in delivering a refresh target of 44% to 46% with a GBP 4 billion loan book. I've already commented on the return on average equity being impacted by the increase in impairment charges in vehicle finance. This remains our key financial priority, and we remain confident in delivering 14% to 16% returns in line with our medium-term target. At 12.7%, our CET1 ratio remains comfortably ahead of our target to remain above 12% and well ahead of our minimum regulated requirement of 9.6%. As shown on the bottom half of this slide, we are very clear on how we unlock our target for 14% to 16% returns. That requires a GBP 4 billion loan book, stable cost of risk and increased mix of lending towards consumer businesses and proactive management of our costs. Based on the track record of recent years, we remain very confident and continue to grow and delivering against that target. Let me hand over now to Rachel to go through the financial review.

Thanks, David, and morning, everyone. I will start with a brief overview of the income statement on Slide 10. As you've heard from David, our growth plan continues to be executed effectively, and we delivered a 7.9% increase in operating income in comparison to the first half of 2023. Continued focus on operating costs has minimized cost growth to 3.6% in the period and coupled with a 7.9% increase in operating income, we delivered a further reduction of 2.2% in our cost income ratio. Our strategy of adding scale to our specialist lending businesses alongside simplifying the group and driving operational efficiency has delivered another significant increase in profit before tax pre-impairments, a 12.4% increase over the first half of 2023. Impairments in our vehicle finance business has been impacted in the first half of the year as a direct result of the pause and collections activity following the FCA's borrowers in financial difficulty review. That is the main driver of the 23.2% increase in impairments for the period. NIM at 5.3% is slightly below half 1 2023, but the June 2024 exit rate was 5.4%, giving confidence that reductions in NIM have bottomed out. Profit before tax of GBP 17.1 million was down 1.7% on the same period last year, and statutory profit before tax was up 3.6% on the same period last year. Net interest income in the first half at GBP 88.2 million is an 8.9% increase on the same period last year, with 11.8% increase in the average lending balances being the key driver of this performance. As David has already mentioned, we are operating in a higher interest rate environment than we had expected in recent years, and we were pleased to see the first reduction in the bank base rate. As previously signed posted, the key drivers to achieve our 5.5% or greater medium-term target are an increase in the proportion of the balance sheet in consumer lending and a reducing yield curve. In the period, we delivered a 2% shift in mix towards consumer lending, delivering a 0.1% increase in NIM. Retail finance NIM increased to 6.6%, up 0.3% on half year 2023 as the impact of the Bank of England base rate increases abated and flowed through to pricing. The June exit rate NIM was 5.4%, which gives us confidence of an upward movement in our NIM for the full year. Asset repricing was at a lower rate than liability repricing, reflecting the high interest rate and the short duration of our funding, but the rate of liability increases has begun to soften, which you can see on the next slide. New retail deposit funding and retention customer rates have continued to increase in the period, as you will see from the chart on the right. Encouragingly, the rate of change has now started to soften with only a 0.1% increase in half year 2024 against a 1.4% increase for the same period in 2023. Market rates have also reduced with the expectation of further base rate changes, leading to reductions in instant access rates, all positive news for managing our NIM for the remainder of 2024 and onwards. We have contained our cost growth to GBP 1.8 million in the period, which coupled with a GBP 7 million increase in operating income, drives a 2.2% reduction in our cost income ratio to 53.7%. One of the key drivers of meeting our medium-term target of a return on average equity in the mid-teens is by delivering growth in income, whilst keeping cost growth lower, i.e., widening the doors. As you can see from the chart on the right, we have been improving our doors over the last year from 1.7% at half year '23 to 4.3% at half year 2024. We continue to find opportunities for cost optimization through our Fusion project, and we have delivered an additional GBP 0.4 million of savings in the first half. As a management team, we have been focused on driving our cost income ratio down and the Fusion program has been successful in delivering the outcome. On the next slide, I will give you some further insight into the program and the upgrade to the savings target for 2025. GBP 4.4 million cost savings have been delivered up to half year 2024, with those savings being delivered through property optimization, sourcing and supplier management and organization design. We are on track to deliver the GBP 5 million previously indicated for full year 2024. We're also upgrading the target for full year 2025 to GBP 8 million annualized, an additional GBP 3 million of savings. The savings of GBP 3.6 million for half '24 and full year 2025 will be delivered from a proposed organization redesign. The additional GBP 3.6 million would translate to a further circa 2% reduction in our cost income ratio and supports the delivery of our 44% to 46% medium-term target. Cost of risk for the first half of 2024 at 1.7% was 0.2% higher than the previous period. The increase was mainly driven by a pause in collections activity in our vehicle finance business following the FCA's borrowers in financial difficulty review. I will provide some further analysis on the next slide. On a more positive note, retail finance cost of risk decreased to 0.7% from 1.6% at half year 2023 as a result of continued improvements in asset quality and model enhancements. Coverage ratios are elevated at 2.9%, an increase of 0.3% on full year 2023, reflecting the increased mix in consumer lending and the increased stock of defaults in vehicle finance. Impairment provisions increased by GBP 13.5 million in the first half. If I can point you to the waterfall on this slide, you can see the impact of growth in net lending increased provisions by GBP 7.3 million offset by a management overlay of GBP 2.4 million to reflect the current risks in the portfolio and other movements of GBP 3.8 million. As previously mentioned, the group cost of risk has increased to 1.7% in the first half. You can see from the waterfall on this slide, the contribution of our divisions on the group number. With commercial finance returning to its normal low level of impairments following the one-off large case in half 1 2023, positive contribution from retail finance, reflecting the quality of the portfolio and model enhancements and vehicle finance being impacted by the pause in collections and increased defaults as a result of the FCA's BiFD review. The pause in collections in quarter 3 2023 as we work through the BiFD review actions resulted in an elevated level of defaults emerging in October 2023 and peaking in January 2024, as you can see on the graph top right. As collections activities recommence, the increase in defaults has tapered back down with June 2024 tracking back nearly in line with January 2023 levels. However, this has resulted in a higher level of provisions as the stock of defaults are elevated, with Stage 3 lending balances at GBP 57 million at June '24, circa GBP 32 million higher than at June 2023. We are confident that the elevated provisions are as a result of excess defaults rather than the underlying quality of new business written in Vehicle Finance. As you've seen on the bottom right chart, highlighting average credit scores have been rising since 2022. Work is underway to recover these excess defaults and the benefits of this work should be seen in the second half of the year. At a summary level, the balance sheet grew with total assets increasing by 3.2% in comparison to the position at the end of 2023, driven by an increase in loans and advances to customers of 3.2%. With strong growth being delivered in both our Consumer divisions, Retail Finance grew 7.5% and Vehicle Finance by 6.6%. Business Finance remained relatively flat, reflecting the subdued market. Real Estate Finance grew by 2.2%, but Commercial Finance saw a contraction in lending balances of GBP 44 million, reflecting seasonality and a cautious approach to new clients in a challenging economic environment. We are a diversified business and have proven our ability to be flexible in adapting to volatile market conditions, and we see further opportunities to grow strongly in our specialist lending markets. Loan-to-deposit ratio increased by 2.9% as we prefunded lending in early half 2 2024 and repaid GBP 50 million of TFSME funding. Importantly, tangible book value per share increased by 3.1% to GBP 18.36p. CET1 ratio was maintained at 12.7% as a result of the capital required to support lending growth, the unwind of IFRS 9 relief and dividends being funded by retained profits. Our capital ratios remain significantly above the regulatory minimums with headroom to support our planned growth. Total funding increased by 3.8% in the half to support the growth in lending. Retail deposits grew by 6% in the period, mainly through growth in access and ISA products. GBP 75 million of TFSME maturing in 2025 has been repaid early with retail deposits in June and July. Lastly, all our regulatory metrics remain strong and significantly in excess of regulatory minimums. Let me now hand back to David to take you through the performance of each business and the outlook for the rest of the year.

Thank you, Rachel. As you're aware, we have a clear vision, purpose and strategy. We refreshed the articulation of our strategic priorities last year as part of our optimizing for growth strategic framework. We remain focused on continuing to simplify the group and our operations, enhance the customer experience and leverage our distribution networks. We've made further progress against those priorities and some examples are shown for each on the slide. As Rachel has outlined, we're on track to deliver GBP 5 million of cost savings from Project Fusion by the end of the year, having driven efficiencies across people costs, supplier costs, digitalization and property and technology optimization. We have now completed the consolidation of our IT and operations teams under the group's Chief Operating Officer, and we've also reviewed and proposed changes to our organizational design. The proposed changes will drive a simpler and more cost-efficient structure, remove duplication and provide clearer career paths and development opportunities. As a result, we are increasing the cost savings to be delivered by Project Fusion to GBP 8 million by the end of 2025. In Retail Finance, we migrated the e-signing of lending agreements to use in-house technology during the period removing the reliance on a third party. And in vehicle finance, we're on track to complete the IT development work by the end of this year so that our modern platform is capable of hosting all new business across products and risk segments. This will enable us to offer loans to more customers. We'll continue to focus on customer outcomes and improving customer satisfaction. We see continued use of our digital platforms as a route to delivering improved customer experience and customers have continued to adopt a more digital-first approach. 84.2% of our retail finance customers have registered to use our online account management system, facilitating convenient self-service. 95% of our savings customers are registered to use online banking, and now 25% of our savings customers have registered for the mobile app we launched last September. We've made it easier for savings customers to perform internal transfers in online banking, and we also automated the savings bond maturity process, making it more straightforward for customers and removing the need for manual intervention by our customer service team. And the group was accredited with the Customer Service Excellence Award for the 11th year running, and we continue to grow highly with FIFO, scoring 4.7 stars out of 5 for our consumer finance businesses. The group success is built on the importance of strong relationships with business partners, and we've continued to develop those. We work with retailers, car dealers, brokers, Internet introducers, private equity groups, accountants and other professional advisory firms. We secured longer-term contracts with both a large furniture retailer and a large jewelry retailer in retail finance, supporting a further improvement in our new business market share. We continue to introduce new retailer relationships, supported by our efficient onboarding technology and further strengthened our position as one of the major lenders in the point-of-sale credit market. In vehicle finance, our distribution partners helped to deliver an 8% increase in customer numbers in the first 6 months, and we continue to expand our stock funding relationships. As we outlined at our recent Capital Markets event, we have seen the level of repeat business in our real estate finance business improve as clients increasingly recognize the benefits of our specialist relationship approach. And in Commercial Finance, we continue to support our existing clients and business introducers in what has been a challenging environment. Our technology capability is a key enabler, and we continue to strengthen our technology platform. By doing so, we remain well positioned to drive efficiency improvements, enhance our service delivery and grow in our specialist lending segments. Everything we do is underpinned by technology, and we've invested in new capabilities in recent years having continued to increase process digitalization, replace legacy platforms and launch new products. We made several technology enhancements during the first half of the year. For example, to drive efficiency, we use an AI tool to handle the increased volume of complaints received after the FCA announced its review of historic discretionary commission arrangements in the motor finance market. We've also automated the data gathering processes for our consumer duty reporting, started work to evolve our app to pay proposition to offer a mobile-based service platform for all retail finance products and made enhancements to our Savings mobile app. And we've seen an increase in a number of business partners in vehicle finance utilizing our API integrations. So really good progress against our optimizing for growth strategic priorities, underpinned by our technology capability. Let me now comment briefly on the performance of each business. The retail finance business that we reviewed in detail at last November's capital markets event has continued to perform strongly with net lending of just over GBP 1.3 billion, growth of 7.5% compared to the end of last year. Our new business market share increased to 17%, a new high. Our strategy to focus on supporting furniture and jewelry retailers, which offer interest-free credit as a key part of their sales strategy has continued to benefit us. That lending is much better quality and lower risk, and as a result, we saw a continued improvement in our year's levels and the cost of risk, which also benefited from the introduction of enhanced IFRS 9 models. As we have highlighted previously, based on our review of industry data, our arrear rates in our retail finance business are significantly lower than is the case for other forms of unsecured lending, such as credit cards and personal loans. These are used by customers to finance revolving debt and for debt consolidation amongst other things. Our retail finance customers don't typically need credit, but the cost of providing it is priced in by the retailer to the product sales price. We delivered an improvement in net interest margin to 6.6% as pricing increases to retailers were passed through and risk-adjusted margin also increased from 4.9% to 6.1%. The business has delivered an excellent performance. We executed a smooth leadership transition in our retail finance business in line with our internal succession plan. Andy Phillips, previously Commercial Director who was appointed Managing Director in April. Andy has been with the business for 9 years, and I'm delighted with the positive impact he's already had in his new role. Our vehicle finance business has also delivered strong levels of lending growth, although, as mentioned earlier, the impact of reduced collections activity earlier in the year has impacted the overall financial performance. Net lending grew by 6.6% compared to the end of 2023 and ended the period at GBP 498 million having doubled in the last few years. Market share of new business remained stable at 1.2% over the period with a period exit rate of 1.5% market share in June. Our prime lending to better quality, lower risk customers represented just under 28% of new business and 38% of total lending. As a result, we saw a reduction in gross yield to 9.5%. And with the elevated cost of risk of 8.8%, risk-adjusted margin reduced to 1.1%. Arrears levels in vehicle finance have returned to normal levels. Regarding the FCA's review of historic commission arrangements, the FCA recently announced that it plans to set out its next step in May 2025 now rather than September 2024, as initially indicated. As we said in March, we operated discretionary commission arrangements historically for a low mid-single-digit proportion of our vehicle finance lending. We stopped using those structures in 2017, ahead of the requirement to do so in 2021. The real estate finance leadership team did an excellent job at our recent Capital Markets event and articulating their track record of growth and tailored specialist property lending, their low cost and scalable operating model, and the further opportunities for profitable loan growth. The team had experienced specialists with many years of property lending experience and the relationship-led approach leads to a high retention rate of existing clients. With a higher interest rate environment and with the expectation that interest rates would reduce in the second half of the year, the market for new business origination was subdued. Despite this and following strong client retention, net lending grew by 2.2% since the end of 2023. Net interest margin in this business increased to 2.6%. The portfolio mix remained consistent with lower risk residential investment lending representing 82.6% of the book at the end of June and the loan-to-value of the book remains stable at 57.1%. We see positive sentiment returning to this market in the second half of the year and are well positioned to continue growing lending balances and profitability. Our commercial finance business was built organically and is run by an experienced team of bankers with special skills in underwriting complex transactions and managing these in life. The leadership team will be holding our Capital Markets webinar in November to share more details on their market, our capabilities and their own expertise. The asset-based lending market was quiet in the first half of the year, with fewer private equity back to buyouts, which suppressed new business activity. New business lending was low and flat compared to last year. Net lending balances of GBP 337 million were 11.6% lower than the end of 2023, although 6.4% higher than June 2023. Utilization levels of these revolving credit facilities remained broadly consistent at 59%. Fee income was lower, reflecting the reduced activity. And as a result, net revenue margin reduced from 7.3% to 6.3%. Risk-adjusted margin improved strongly from 2.2% last year to 6.3%, with last year's result having been impacted by a large single client loss. Businesses continue to feel the pressure of economic headwinds, and we had 6 client failures in the business during the period with our exits managed effectively. We expect to see activity levels increasing commercial finance as market conditions improve and the bank base rate reduces further easing the cost of borrowing for clients and our investors. Turning to savings products. We only take deposits from consumers and over 95% of their balances are fully protected under the financial services compensation scheme. As Rachel highlighted earlier, deposit balances grew by 6% since the end of 2023 to GBP 3 billion for the first time. We've seen a slight mix change towards access account funding from noticed account and term funding. Total access account balances of GBP 731 million now represent 24% of total savings balances. We've again proven our ability to raise and retain existing deposits in a competitive environment. 69% of maturing term deposits were retained, and we raised GBP 742 million of new deposits. This performance demonstrates again our ability to continue growing savings balances and fund our growth in lending. As mentioned earlier, we have started making early repayments of TFSME funding. Let me make a few closing comments. Our optimizing for growth strategic priorities are guiding our actions to simplify, enhance customer experiences and expand and leverage our distribution networks. We have excellent growth potential in large addressable markets and have again captured growth opportunities in the first half of the year, driven by strong performances in both of our consumer lending businesses. We've made good progress in delivering cost savings as part of Project Fusion, our cost optimization program and are on track to deliver GBP 5 million of annualized savings by the end of this year. Our proposed organization redesign will complete during the second half of the year and unlock cost savings in support of a more ambitious cost/income ratio target. As a result, we are upgrading our Project Fusion target to GBP 8 million of annualized savings by the end of 2025. We have sufficient capital to support our growth plans and have good momentum towards achieving our GBP 4 billion net loan book target, the level required to unlock an attractive return on capital of 14% to 16%. Looking forward to the rest of the year, we expect to see demand for credit increase as confidence continues to improve. Market pricing for new deposits has started to reduce which will support net interest margin expansion as we move into next year. Our top priority in the coming months is to increase collections activity further in vehicle finance, allowing us to reduce the inflated level of stage C balances. As we do so and impairments reduce, I'm confident we will deliver a significant increase in profitability in the second half of the year. Much has been achieved, and there's more to go after. We are looking forward with confidence and moving closer to delivery of all our medium-term targets. And finally, just a reminder, we will be holding our commercial finance capital markets webinar on the 13th of November and we'll issue invites well ahead of time. With that, let us now open up for questions.

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

So I have 2 questions, if I can. So the first one is on vehicle finance. And I was just wondering to what extent you think the defaulted loans that have built up in the first half of the year can be recovered in the second half of the year, and therefore, the impairments that are held against them be released back to the P&L versus being utilized? And then the second question was on TFSME, which I know that you've repaid a chunk of that early. I think there's still quite a bit outstanding. I was just wondering about your thought process regarding repaying earlier and where do you plan to repay the remainder before its maturity date too?

Okay. Thanks, Gary. I'll pick up the legal finance impairment first and then hand over to Rachel for the TFSME question. So the level of confidence is high and improving in terms of recovery of those inflated default balances and releasing impairments in the second half. And that confidence really comes from the activity and improvements we've seen already. So we have been progressively getting back to near normal levels of collections activity. We have been repossessing again, which were also paused since December last year. And that is part of the reason why you're seeing in tandem with improved quality of lending, the default numbers on the chart that we showed in the slide earlier coming down. So clearly, there are timing impacts. The longer you take time value of money to collect the outstanding balances. And there's also clearly a depreciating asset as well. So the importance here is really to get on to this and continue the positive momentum we've seen in recent months and continue that into the second half of the year. So the confidence to your question really comes from the progress already made and the clear plans we've got in place in the second half. But clearly, it is the #1 priority for us to solve as our business, and we are making sure all the appropriate resources are made available for that to happen and unlock that value.

Just on TFSME, Gary. Yes, we obviously have started to early repay. We have a peak in September 2025, and we have decided to pay down GBP 75 million of that early. Our plan really is just to continue to monitor the markets. We had an opportunity where we thought we could raise some ISA deposits and pay off the TFSME early, and we'll continue to monitor the markets. We have a plan to -- if the market allows and the pricing is correct to continue to do that over the coming months and into 2025.

And our next question comes from Alex Bowers from Berenberg.

I just had 3 questions, if I may. Just firstly, on business mix going forward, particularly on the consumer side of the business. You're focused on a high portion of high-quality lending. But I just want to understand how you expect mix change going forward? Are you happy with the current mix? Or are you looking to adjust in either direction over the next few years? Secondly, on the Motor Finance collections process review, I think you said that you're still on track to complete the review by year-end. In terms of discussions with the FCA on this topic, have you -- have all sort of change been agreed? Or are there still some areas that you're sort of discussion with them on. And then lastly, just on costs. I think, just on the GBP 5 million in H1, I just wanted to understand your expectations for H2 costs. Is there anything else that impact H2 that wasn't in H1?

Thanks, Alex, for those questions. On the first one, just relatively quickly, you can really think about another 1%, 2% potential movement towards the consumer side. So I think we've always been quite clear. We wouldn't expect it really to move in the medium term side, sort of 55% to 45% split. So we've clearly moved closer at 43% in the consumer -- sorry, 53% in the consumer side. So another 1 or 2 percentage points. You can even see just that 2 percentage point change in the first half, late to that 0.1% improvement in NIM that Rachel referenced earlier. In terms of the interactions with the regulator, the FCA, I have to say we are very far down the track on this. So we engaged proactively, very quickly with the regulator last year. We introduced additional forbearance options at 2 different points in the second half of '23, one in August and one in October. So they have been available for some time now, approaching a year. The interactions with the regulator really now are just us updating them on progress. And the final part of why we've referenced that it would be the back end of '24, the whole exercise completes is because there is a requirement, as we called out in the full year results announcement in March for us to contact some customers just to check our understanding of their circumstances at the time that they were in contact with us about their account being in our years. So we are -- we have just started the communications to those customers, and that's the last part of the tail really. And then we just need to also evidence that the changes we made are embedded. And we're having good interactions and supporting customers when they are in a financial situation, which requires a bit more support to see if we can keep them in the vehicle. So I would say the conversations have moved pretty far on, good progress made in additional options and really moving towards the last stage of contacting customers and then closing this off towards the back end of the year. Costs, Rachel?

Yes. On costs, yes, so I wouldn't expect to see a material uplift in the second half in terms of costs. We -- over the last few years, we haven't seen a material uptick in the second half versus the first. So I would suggest there's nothing material. And there was no one-off specifics within the first half that wouldn't happen in the second half.

The next question comes from Jens Ehrenberg from Investec.

Just 2 questions left from my side, if that's all right. Firstly, just curious sort of what do you see in terms of the competitive landscape on the deposit side at the moment? So you had the first rate cut there may be some more coming. What do you see on the ground there? And do you reckon you might end up having a bit of a benefit given that you're slightly more diversified than some of the specialist banks that are heavily geared towards sort of property lending where there might be a little bit more pricing competition? And then secondly, another one on vehicle finance, but just more on sort of how to think about the plans there going forward. So you've built a very, very interesting platform for lending going forward. At the same time, we've now had the impact from we start the outstanding FCA review on sort of the discretionary commission schemes. Just sort of the regulatory impact have any sort of effect on your growth plans? Or is that sort of just going at as previously anticipated.

Do you want to pick up savings?

Yes. On savings, I think you make an interesting point around how our diversified portfolio against some of the other peers who are predominantly buy to let, I mean their margins are lower than ours. And therefore, we do have the ability and the margin available to us in terms of being able to hold on to asset pricing as we bring down the cost of funds. I would say we are obviously a price taker in the market. We have to be at the top of the tables if we are acquiring funds, which to support our growth plans, we need to do. So we are monitoring very, very closely this first cut on the base rate to make sure that we are going to pass it through and make sure that we don't see old back book assets coming -- liabilities coming off and repricing on acquisition rates. But principally, we will be passing through, and we will try to hold on in terms of repricing the assets for as long as possible so that we get some margin expansion. So that's the plan. We hope that there will be maybe 1 or 2 more rate cuts this year, but we will see following the slight uptick in inflation this morning. It will be interesting to see what the Bank of England does. But it's a something we monitor daily, and we will keep a very close eye on what's going on in the market.

Thanks, Rachel. Yes, in terms of -- yes, in terms of the vehicle finance business, I think we've obviously had the impact of the BiFD review and then the impact in terms of the activity to drive to make enhancements to our processes. We view that as pretty much being done, as I've just said in response to the earlier question from Alex. We also still have, as you're alluding to the final outcome of the regulatory review to historic discretionary commission arrangements. So that is something that seems like it's going to be later than we had initially expected. We'll find out by the middle of next year with the new time scale the regulator has indicated. And of course, there's a lot can happen between now and then on that front. There's also been a large bank has raised a judicial review against the decision by false against it. So we need to see how that all unfolds. Taking a step back from those 2 regulatory interactions, our view is those are being dealt with on the former and to be dealt with the historic issue on the latter. And therefore, our focus as well as dealing with these as appropriate, will be to just make sure we continue to do what we've always said we have to do, which is to scale the vehicle finance business on the back of the quite large investment we've made in technology in the last 3 years or so. To make sure we get the business generating the level of returns that we expect and more in line with what we already generate in the 3 other business lines. So I think the regulatory piece, we will deal with as appropriate, but they really are dealing with some historic issues. And looking forward and scaling the business is a continuation of what we've been doing really. And the fact that we've doubled lending balances in that business line over the last few years gives us the confidence we can continue to grow as well. So I hope that answers the question.

Our next question comes from Lord Lee Private Investor.

I wanted to ask a question on dividend policy, David, if I may. Historically, the dividend cover was which I thought was too high then. But nevertheless, that was the Board decision. You then talk in the last annual report of moving to a more progressive approach without really clarifying what that meant. And now we have a situation where the interim dividend, as far as I can see, has been reduced quite significantly despite the fact that the dividend cover is now 6x. So I'm afraid, I just do not understand the dividend policy. And frankly, I suggest this half explains the derisory level of the share price in the market at the present time.

Okay. Thank you. So the progressive policy that we put in place largely is really thinking about the full year. So I take on board your feedback, perhaps I wasn't clear in the communication at the year-end in March. But we are still looking to apply that policy for the full year. And we are probably thinking about it which really was in line with consensus expectations of a sort of third -- 2/3 split between interim and final payments. So take on both that feedback, which obviously we'll consider. But you would therefore expect with the business growing and the level of profitability increasing that the -- this period was actually the last point where you'll see a reduction in the dividend at the interim stage. So going forward from here, looking at it from a full year perspective, it will be progressive.

Well, I think that is encouraging, but could I suggest that I think you should have explained that a lot better. There are only a couple of sentences in the interim statement on dividend and there's no clarification at all. And I have to say linked to that, I think it's very disappointing that half the Board have no shares in the business at all. Virtually all the nonexecutives apart from the last Chairman don't have a shareholding and yet they're paid pretty well. And I think it's pretty depressing and it doesn't actually indicate their confidence in the business on which they're -- in which they're on the board.

Okay. Well, listen, we'll take that feedback and obviously share that as well. I mean I can't tell you, they are very confident for the business, but we'll share that feedback as well.

Well, then they should have a shareholding in the business. I found this frankly, with so many small cap structure it were, and I think given the level of remuneration and hopefully, the confidence of that business, there should be a significant shareholding shown.

And our next question comes from Mike Trippitt from Progressive.

David, Rachel, just one further question on costs, if I may. It's great to see the increased cost reduction targets. Could you give a flavor of the scale of investment that you see going forward over the next couple of years. In other words, I suppose the 5% up to 8% is the net reduction, but I'd be interested to know just within that the scale of investment that you think is required to continue on with the digitization process, et cetera, and the streamlining of the business.

Yes. So thanks, Mike, for the question. Listen, I can tell you, this is a pretty capital-light business in terms of work that still needs to be done. The bulk of the investment that we've made in recent years really has been into the vehicle finance new modern technology platform. And of course, it's allowed us to launch new products for new segments and start scaling the business in line with our internal plans and ambitions. In terms of other digitalization, it really is relatively low levels of spend. So sub GBP 1 million for any enhancements, for example, or development of a new app because that was where we wanted to go to. So I wouldn't be indicating to you if there's any significant investment in the near term into just making sure we've got the right capability in place to start pushing the business harder towards that GBP 4 billion level. Most of that is already behind us. Now it doesn't mean in the next 2 years might not be new things we need to think about. But at this stage, we don't have significant levels of investment ahead of us.

As there are no further questions in the phone queue, I would like to hand over to Phil for any webcast questions.

Thanks, Sergei. We've only had one follow-up question on the webcast, which is around the progressive dividend policy, which I think, David, you probably already answered, so that's no further questions on the webcast. So I hand back to you, David, for closing comments.

Okay. Thanks, Phil. Well, thanks, everyone, again, for joining this morning. And just in terms to reiterate a couple of key points. We have seen the interest rate cycle start to turn as Rachel says, there may be 1 or 2 further reductions to come either this year or certainly in the coming 6 months or so. And that will be supportive of our plans to grow the business further towards the $4 billion level. Clearly, the #1 priority in the second half of this year is to continue the progress we are making currently to recover the excess default balances within vehicle finance. So we will make sure the right results are in place to do what needs to be done. From a cost perspective, we made very good progress again and highlighted additional savings and increased the target to a new GBP 8 million division of cost removal from Project Fusion. And that, of course, will allow us to move towards the medium-term target of a 44% to 46% cost-income ratio against a GBP 4 billion loan book. We do remain confident in that look for the business. We do believe the sentiment will start to improve as interest rates cut further. And we believe, therefore, with the track record we've built up of growing each of our specialist lending businesses and managing our cost base effectively that we will move towards that medium-term target of 14% to 16% returns. So we look forward to talking to many of you in the coming days and also providing further progress in our update when we get to the Q3 trading statement. But thank you again for joining Rachel and myself.

Thank you.