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

Hello, and thank you for taking the time to join us for our 2024 full year results presentation. Before I start, I'll let you read this slide to explain the basis of reporting in the presentation. 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 of December 2024. A reconciliation of adjusted results to total results is included in the appendix. And having listened to feedback from shareholders, we've also included business unit segmental reporting for the first time. I will provide an overview on 2024 and comment on our growth potential, some key metrics and share the progress made last year and over recent years and moving towards our medium-term targets. Rachel will then cover the financial performance in more detail before I comment on the progress made against our optimizing for growth strategic priorities and the outlook for 2025. We have delivered strong growth in net lending and significantly improved the efficiency of the group. Of course, we've also faced significant challenges in our Vehicle Finance business over the last 18 months. Those challenges aside, the group performed well with our 3 other specialist lending businesses, each increasing profitability in the year. The outcomes we delivered for customers and our financial results were only possible by the hard work of colleagues. I'd like to thank all of my colleagues for their effort, resilience and dedication. Our priority is to deliver an attractive return on capital. We operate across a diverse range of large specialist lending segments serving both consumers and businesses. We've established positions in our markets and have long-standing relationships with business partners and introducers. We still have excellent growth potential in large addressable markets and are confident in our ability to continue growing net lending. We have demonstrated our ability to deliver operational efficiencies. As previously indicated, we will now deliver GBP 8 million of annualized cost savings by the end of 2025 from our Project Fusion cost optimization program, a significant amount in the context of our total cost base of around GBP 100 million. Our disciplined approach to managing our costs as we scale our lending supports an ambitious target for our cost-to-income ratio of 44% to 46% against a GBP 4 billion net loan book. Our priority is to deliver an improvement in the returns we generate. Building our net loan book prudently towards the GBP 4 billion level supports delivery of a 14% to 16% return on average equity. We are now much closer to that level having delivered GBP 1.4 billion of net lending growth over the last 4 years. That was achieved despite a period of macro uncertainty, high inflation and higher interest rates, the subdued demand for credit. A lower rate environment will further support our growth ambition. We continue to navigate the legal and regulatory challenges in vehicle finance. As we called out in November, the secondary impacts of collections activity being paused during the second half of 2023 following the regulators' borrowers and financial difficulty review, inflated the cost of risk and had a material impact on our financial results. We will also comment today on the legal and regulatory processes ongoing regarding historic commissions. Our Vehicle Finance business sometimes operated historical discretionary commission arrangements until June 2017. Only 4% of our commission payments had these arrangements. In respect of the Court of Appeals judgment, where there are some similar patterns, not all of the [ fat ] partner of these cases is the same as how our group operated. A key feature in those were a linked sale by a dealer of the vehicle and the direct introduction of the finance by that same dealer. That made up just 20% of our motor commission payments. The other 80% was not pay through dealers, but through brokers and various other introducers. Rachel will explain the methodology used to determine the provision of GBP 6.4 million we have recognized for discretionary and fixed commissions as an exceptional item in the 2024 statutory results. The growth we have delivered in each business over the last few years is shown in the middle of this slide. Consistently across all areas, we have delivered on our commitment to scale our businesses. We have added at the very bottom of the slide the size of the addressable market for each, so you can start to get a sense of the remaining opportunity. In the last few years, we have grown net lending in our consumer businesses by 86% to GBP 1.9 billion and in business lending by 19% to GBP 1.7 billion. Consumer lending now represents 53% of total lending compared to 51% last year and 41% in 2020. This mix change supports an attractive level of net interest margin. Deposit growth has also been very strong at 54% in the same 3-year period. 2024 was another year of underlying progress and some key metrics for the year are shown on this slide. I'm delighted with our progress in scaling the group. Total lending balances grew by 8.8% to GBP 3.6 billion, with growth accelerating through the year with 5.5% growth in Half 2 compared to 3.2% in the first half. Our customers' savings balances grew by 13% to GBP 3.2 billion, allowing us to commence early repayment of TFSME funding. On the back of strong lending growth and disciplined cost management, our profit before tax pre impairments of GBP 101 million was 18% higher than in 2023. Our net interest margin for the full year was consistent with last year at 5.4%. Net interest margin improved as the year progressed and was 5.5% for the second half. Operating income grew by 10.4%. Our risk-adjusted margin of 4.2% and return on average equity of 8% were both impacted by the inflated cost of risk. The cost income ratio improved by 3.1 percentage points from 54% to 50.9%. There was a further improvement in the second half that Rachel will comment on. And by the end of the year, GBP 5 million of annualized cost savings have been delivered from Project Fusion initiatives. Reflecting feedback from shareholders, the Board implemented a new progressive dividend policy in 2024. In line with that policy, the Board has proposed a final dividend of 22.5p per share. This brings a total dividend for the year to 33.8p per share, an increase of 5%. We continue to show good momentum towards achieving our medium-term targets. The charts on the top half of this slide show the targets and the progress made. The first chart demonstrates the progression in building the scale of our lending balances as we move towards our GBP 4 billion ambition. We plan for our net interest margin to come down as we scale the business lines and focus on increasing the mix of lower-risk consumer lending. The net interest margin was stable at 5.4% for the full year. 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. We remain confident in our ability to make a further improvement in our cost efficiency as we continue our growth trajectory and tightly manage costs. Improving our return on average equity remains our key financial priority. There were a number of exceptional cost items in the year that impacted our capital ratios, and we continue to invest to deliver lending growth. Our medium-term target for CET1 ratio to remain above 12% is comfortably above our minimum regulatory requirement of 9.6%. We are very clear on the pathway to delivering enhanced returns in line with our target. We need to align a number of the key metrics to do so. We have grown lending by 47% in the last few years and now only require 11% growth to achieve the GBP 4 billion net lending ambition. The pathway requires us to deliver a stable cost of risk. This is obviously the main adverse metric in the year that impacted returns. We continue to explore structural changes to how we manage our collection strategies in Vehicle Finance, and we'll update further on that as 2025 progresses. We need to increase the mix of lending towards our consumer businesses to support our net interest margin. And again, we have delivered against that last year. And we need to maintain focus on controlling our cost base. Cost growth last year was below the 5% level indicated on this pathway, and that will be the case in 2025 also. We've delivered a lot in 2024, and we remain confident on delivering our returns target against a GBP 4 billion net lending book in the near term. Lending growth, net interest margin and income growth and cost control already support that outcome, and our focus is on returning the cost of risk to a normalized level in 2025. Now let me hand over to Rachel.

Thank you, David, and hello, everyone. I'm now going to provide you with some further details on our financial results for the full year 2024. 2024 saw our underlying business perform well in what remains a challenging economic environment. However, our results were significantly impacted by the secondary impacts of collections activity being paused during second half of 2023 in our Vehicle Finance division. On a statutory basis, PBT was GBP 29.2 million and was impacted by 3 exceptional items. Firstly, GBP 1.5 million of additional costs in relation to BiFD. This was due to delays with executing the past business review. GBP 1.5 million of redundancy costs as a result of our organizational redesign. However, this will deliver a GBP 3 million cost saving in full year 2025. And lastly, GBP 6.9 million for potential redress and costs for motor finance commission, both DCA and fixed. The rest of my presentation will focus on our underlying results. Average net lending growth of 8.8% generated a 10.4% increase in operating income, and this has been achieved with a 4.1% increase in costs, resulting in a significant increase in profits before tax, pre-impairments of 18% to GBP 100.9 million. Impairments did increase by 44.1% to GBP 61.8 million as a result of the secondary impacts of the BiFD review in Vehicle Finance and a single loss in Commercial Finance. NIM was maintained at 5.4% for the year, with a half 2 improvement to 5.5%. Adjusted profit before tax decreased by 8.2% year-on-year to GBP 39.1 million and return on average equity, 8%, was impacted by the elevated cost of risk. The group's net interest margin remained consistent with 2023 at 5.4%, with improvements in half 2 2024 with a NIM of 5.5%, up 20 basis points on half 1, 2024. As outlined in 2023, falling rates, active management of pass-through and mix increases in consumer lending are the key levers to drive margin expansion in the medium term. Retail finance is a key highlight for the year with a 40 basis point improvement in NIM year-on-year to 6.8% as the lag effect turned positive as base rate reduced. We remain comfortable with our medium-term target for net interest margin to be 5.5% or above. The cost base and improvement in our cost/income ratio has been a key focus of the bank over the last 2 to 3 years. Driving operational leverage is key to achieving our cost/income ratio, medium-term target of a 44% to 46% ratio. I am pleased to report the group delivered a 3.1 percentage point reduction in the cost/income ratio to 50.9% in the period, and importantly, a half 2 cost income ratio of 48.4%. Lending growth net of direct cost delivered a reduction of 4.1 percentage points and cost growth was limited to GBP 4.1 million in the year. Our cost optimization program, Fusion, continued to deliver in 2024, with GBP 5 million of cost savings now achieved and the additional GBP 3 million already being realized in 2025. The half 2 cost/income ratio of 48.4% and the upgraded cost saving target gives us confidence in delivering our cost/income target in the near term. Cost of risk at group level was 1.8%, an increase of 0.4 percentage points on 2023. The key driver of the increase was in the Vehicle Finance division with the cost of risk increasing from 3.4% to 7.6%, reflecting the secondary impacts of the BiFD review. In Retail Finance, cost of risk decreased from 1.4% to 1% and reflecting the continued focus on high-quality furniture and jewelry lending. Refinements to our suite of PD models concluded with a new model for retail in 2024, and this contributed 0.2% of the 0.4% reduction in cost of risk in that year. Coverage ratios increased to 3%, reflecting the elevated stock of statuary provisions in vehicle finance. Overall, levels of provisions increased by GBP 23.7 million year-on-year. New business continues to represent a significant proportion of this increase at GBP 16.2 million. Notably, this year, stage changes in Vehicle Finance increased by GBP 12.1 million, reflecting the impacts of the pause in collections activity. The BiFD review continued to impact levels of defaults and ultimately, provisions throughout 2024. You can see in the chart at the top right, the peak of defaults were in January 24, and have now returned to near normal levels at the end of the year. The year-on-year impact on our cost of risk can be seen in the waterfall chart with an increase of 0.6 percentage points from Vehicle Finance, offset slightly by positive performance in Commercial and Retail finance of 0.2 percentage points. With default and collection activities returning to near-normal levels, we expect the group cost of risk in 2025 to reduce. As mentioned by David earlier, there has been significant legal and regulatory issues affecting commissions in the motor finance industry. The slide charts the key milestones in relation to this with the Supreme Court hearing scheduled for April 2025. There remains significant legal uncertainty over whether lenders have liabilities and determining the extent of any liability is complex and requires significant judgment of the likely outcome across a number of factors. The fact pattern of the case is being appealed at the Supreme Court involved the linked sale of the vehicle and the direct introduction of that finance by the dealer. Only 20% of our lending were made through dealers in this way. This is a key difference. In calculating a provision for both DCA and fixed commission elements, we have taken into consideration multiple key inputs and variables as outlined on this slide. Multiple scenarios were created using these inputs and then probabilities were assigned to each of these scenarios. The resulting provision of GBP 6.4 million includes both an estimate of potential redress payable and costs. Given the level of uncertainty and judgment in calculating this provision, the actual amount could be materially higher or lower. This provision of GBP 6.4 million and GBP 0.5 million of cost for 2024 have been treated as an exceptional item in this year's results. At a summary level, the balance sheet grew with total assets increasing by 9%. Loans and advances increased by 8.8%, reflecting continued strong growth, and customer deposits increased by 13%, reflecting the increase in lending balances and repayment of TFSME. Shareholders' equity increased by 4.6% to GBP 360.5 million and tangible book value per share increased by 4.7% to GBP 18.64. Net lending grew by 8.8% to GBP 3.6 billion. Growth was delivered across 3 of our 4 divisions. Retail and Vehicle Finance growing 11% and 19.5% year-on-year, respectively, as we grew our market share in furniture and expanded our new channels of stock funding and prime in vehicle finance. Growth was more muted in Real Estate Finance at 7.8% in the year, predominantly in our residential investment product. Commercial Finance contracted by 7.9% in the year, reflecting a subdued market for new business and attrition due to the economic climate. Overall, the mix of the porphyria moved 2% towards Consumer Finance at 53% of the portfolio. Our capital remains adequate with headroom above regulatory minimums to support growth. CET1 and TCR ratios decreased by 40 basis points to 12.3% and 14.5%, respectively, driven by, firstly, underlying profits generating 110 basis points and offset by exceptional items consuming 30 basis points, proposed dividends and remaining IFRS 9 transitional relief consuming 20 basis points and increases in RWAs consuming 100 basis points. Total funding increased by 10% to fund growth in lending balances and the 2025 pipeline of new business. We have raised over GBP 1.6 billion of retail deposits during the year with a continued shift towards access in ISA deposits. Driven by customer demand for shorter-term products, more than 68% 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 circa 96% of these retail deposits are fully protected under FSCS. At the year-end, we had repaid GBP 160 million of TFSME. And as at the end of February '25, this has increased to GBP 220 million. TFSME was replaced with retail deposits and ILTR. This represents 56% of our total TFSME balances. We remain well funded with significant excesses to our regulatory minimums. We have listened to shareholder feedback and included enhanced segmental information on our divisions this year. This slide highlights that operational leverage is key to increasing profitability and return on average equity for the group. We have made considerable progress in driving operating income whilst containing cost growth. This is more evident in Retail Finance with circa 50% increase in profit contribution year-on-year. Retail Finance is the largest contributor of PBT to the group, reflecting the investment in digitalization and increased market share in the high-quality furniture and jewelry sectors. Our Business Finance divisions continue to deliver steady growth in operating income, whilst limiting cost growth, with both divisions contributing year-on-year increases in profit contribution. Vehicle Finance has had a difficult year with the impact of the BiFD review evident in the increased impairments and corresponding cost of risk. We have previously highlighted this division requires net lending growth to cover the cost base and deliver a higher profit contribution. Thank you. And I'll pass back to David, who will take you through the strategic review and outlook.

Thanks, Rachel. Let me now outline the progress made against our strategic priorities. Our longer-term vision is to be the most trusted specialist lender in the U.K., and our core purpose is to help more consumers and businesses fulfill their ambitions. Our core purpose provides clarity of direction and is a common focus in each of our diverse businesses. Our optimizing for growth strategic priorities guide our decision-making, and we remain focused on continuing to simplify the group, enhance the customer experience and leverage our distribution networks. We continue to simplify the group's operations and we have a track record of disciplined cost management. In 2024, we achieved the initial GBP 5 million cost saving target from Project Fusion. We've increased our ambition to GBP 8 million and will deliver the GBP 3 million additional savings from our organizational redesign this year. The redesign has brought together all IT and operations teams under the group's Chief Operating Officer, completing the process started a couple of years ago to move from a group of federated businesses to a more efficient and effective shared service model. The GBP 3 million further cost savings mainly come from the rationalization of management roles, and the Chief Operating Officer's new structure, we're now focused on the opportunity for more consistent service delivery, increased automation and identifying further cost efficiencies. The finance and risk functions have also implemented rule changes to better align to the new structure also [ to moving ] cost. With the retirement of 2 senior colleagues, we have created a new role to simplify the executive committee structure. Luke Jooste joined us as Managing Director of Business Finance earlier this month and will have responsibility for leading and developing all of our Business Finance propositions. Luke was previously the Chief Executive Officer of Momenta Finance, an alternative specialist finance provider offering business loans, property finance and asset finance solutions to SMEs. We have also simplified the executive governance structure to reflect the new leadership accountabilities. We've also agreed the sale of our former head office building in Solihull, which further supports our cost ambitions. And our initiatives in energy efficiency and cost control led to a 55% reduction in Scope 1 and Scope 2 CO2 emissions. This surpasses our target to achieve a 50% reduction by December 2025 compared to the 2021 baseline 1 year early. Across our businesses, we are continually improving how we can help our customers in line with our core purpose. In savings, we are digital first. 96% of our savings customers are registered for online banking and 30% are now registered for our mobile banking app that was launched towards the end of 2023. Adoption by new customers is higher. For example, 74% of our new access account customers have registered for the app. We also automated the process for our savings bond customers, making it easier for them to provide the maturity instructions without having to call us. Our Retail Finance customers also prefer the convenience of having self-service access to their accounts, and adoption of our online account management system is now at over 87%. In addition, we have evolved AppToPay to offer a mobile servicing for all of our retail finance products. This capability went live towards the end of December, and already, without any promotion, we've seen almost 40,000 customers registered so far this quarter. As well as being more convenient for our customers, this will drive further cost efficiencies and marketing opportunities as adoption grows. Customer satisfaction remains high in all of our consumer businesses and our average FICO score improved to 4.7 stars. Our Business Finance propositions offer high-touch specialist support to our customers. Client satisfaction remains extremely high in both Commercial Finance and Real Estate Finance. Commercial Finance was also recognized as asset-based lender of the year in the Midlands Insider Dealmaker Awards. It is satisfying to see that customers are responding positively to our efforts to deliver ongoing enhancements to our services. We work with a range of partners across our businesses and have more extensive distribution relationships across our consumer lending businesses. In Retail Finance, we continue to benefit from our decision to focus on retail sectors that offer industry credit to their own customers. During the year, we expanded contracts with key furniture and jewellery retailers, sectors that represent a significant proportion of our lending. As a result, we delivered a further improvement in new business market share, which grew to 15.3%. Likewise, in Vehicle Finance, there was an improvement from 1.2% to 1.4%. We now have over 400 active dealer relationships in stock funding, helping those clients to finance the stock for their forecourts. In Real Estate Finance, the market was subdued for much of the year, given the higher interest rate environment. The team's focus turned to client retention, and as a result, we're able to grow net lending by 7.8%. New business volumes in Commercial Finance were impacted by fewer private equity-backed buyouts, although the team did deliver high levels of client retention. And in savings, we retained 69% of maturing term deposit customers as we continue to price our propositions competitively. Everything we do is underpinned by technology, and we continue to increase process digitalization. We see further opportunities to leverage our technology capabilities. As an example, this year, we developed an in-house e-signature capability in Retail Finance, removing the dependency and cost of using an external supplier. The self-service enhancement of AppToPay also included the option of open banking payments. Customers have responded positively to the new feature, removing the need for them to enter their card details to make payments. It is also cheaper for us to process open banking payments compared to card payments. In Vehicle Finance, we implemented rate for risk capability on our modern platform. As a result, all of our lending can now be written in that platform with the necessary pricing sophistication. Another example of leveraging technology, we continue to make enhancements to our Savings Mobile app, used AI tools to make our complaints handling processes more efficient and increased our partner API integrations as we extended our distribution relationships. Our technology platforms remain scalable and flexible and can support further volume growth. So against our optimizing for growth strategic priorities, there's been excellent progress as we leverage our business relationships and our own specialisms make service improvements for customers and leverage our technology capabilities. Looking ahead, there are some key points to leave you with as we move closer to delivering our medium-term targets. We have come through a period of rising in higher interest rates and continue to grow our lending strongly. We're already seeing evidence of demand for credit increasing following recent base rate reductions. We have made significant progress in improving our cost/income ratio and have already delivered a 9.1 percentage point reduction in the last 2 years. Our new organizational design, which unlocks an additional GBP 3 million of cost savings, will support a further improvement in 2025. As Rachel showed, the cost of retail funding has peaked. As a result, we are confident in delivering NIM expansion in 2025 compared to the 2024 full year. The adverse impact of excess default balances in Vehicle Finance had a significant impact on last year's financial results. Initiatives are underway to reduce the level of defaulted balances in that business. We have seen improving early arrears and default [indiscernible] and expect the cost of risk to normalize in 2025. There are also a number of strategic considerations as we progress through the year towards our GBP 4 billion net loan book target. We expect clarity to emerge on legal and regulatory processes, reviewing historic commissions in the motor finance market, although it is taking longer than any of us would like. Once the outcome is clear, we will update the market accordingly. We now expect to deliver our existing financial targets in the near term. Given our confidence in doing so, we have initiated a group-wide review to assess opportunities to deliver returns beyond the 14% to 16% range post achievement of our $4 billion net loan book target. We have already taken an initial decision to defocus our Vehicle Finance business on higher returning segments are in the process of implementing organization changes to reflect that decision. We will update the market during the second half of this year on the outcome of our review work. With a clear focus on our specialist lending businesses, we have proven that we can win and take market share. We remain well diversified, our business model has proven to be resilient through challenging periods, and this remains a strength of our group. We have been improving the credit quality of our lending in our consumer businesses, and we expect the cost of risk to normalize in 2025 on the back of actions we are taking, supporting a more consistent delivery on the pathway to enhance returns. Our optimizing for growth strategic priorities are guiding our actions to simplify, enhance the customer experience and leverage our distribution networks in each of our businesses. I will leave you with 3 key messages. We continue to have excellent growth potential in large addressable markets. We're on track to deliver our upgraded target of GBP 8 million annualized cost savings by the end of this year, and we have good momentum towards achieving our GBP 4 billion net loan book ambition, the level required to support a 14% to 16% returns target. We have grown net lending by 47% in the last 2 years and now require just 11% growth to get to GBP 4 billion. We are therefore confident in doing so in the near term. That brings the presentation to a close, and we will now open for any questions that you may have. Rachel and I look forward to meeting with many of you in the days ahead. Thank you.

And our first question today comes from Mike Trippitt from Progressive.

It's Mike Trippitt from Progressive. I've a couple of questions, if possible. Tremendous momentum on the cost and cost discipline. I mean, do you envisage -- can you see a situation where you could actually be operating on the lower cost/income ratio? I'm not asking you to sort of recast your medium-term targets, but you see a situation where you could be close to a 40% cost-to-income ratio target, would be my first question? Secondly, I just wondered if you could give a bit more of the dynamics of how you see the margin operating or what the moving parts are in a lower rate environment? And thirdly, thank you for the guidance around the motor finance provisions. Is it possible to give any kind of sort of probability spread? Is there a -- I realize this is the work that's gone into this, but is there a sort of a worst case that you could see? And just whether you could calibrate around that motor finance provision, that would be very helpful.

Okay. Thank you, Mike, for the question. I'll pick up first of all on the cost/income ratio point. The medium-term target is currently to continue making improvements get down to 44% to 46%, really on the back of operational leverage as we scale the book towards the GBP 4 billion net lending level. Where we go to beyond that really is why we signaled today that -- now in the near term, having confidence of getting to that GBP 4 billion level, we're now looking at what the next 3 years look like. So it would be premature to make speculation on that. But certainly, our focus is on driving the near term to the 44% to 46%. And as Rachel highlighted earlier, second half of 2024 was down to 48.4%. So I'm glad you recognize the progress we made, but a little bit further to go, and then we'll consider what does the future look like.

Yes. So your question around NIM in a lower rate environment. I think we've already indicated that this business and the operating model, particularly within retail finance, suffered in -- when the rates were going up because the lag of delivery times on furniture in particular. So what we've seen as the rates kind of settled and then have now started to come down, that lag effect is actually positive to our NIM. And retail finance being a relatively large proportion of the balance sheet and the income that has obviously seen a stabilization of our NIM for this year, and we see good positivity in the second half so showing the 5.5% rather than the lower 5.3% in H1. In terms of a lower rate environment, yes, it does put pressure. I mean obviously, we are in the rate tables in terms of our cost of funds, but we are managing that across a very diverse portfolio with considerably different margins from high margins in Vehicle Finance to much lower in residential lending within REF. So it is a matter of us managing it, and we's are confident on the 5.5% with our medium term. And as David has just mentioned, we will continue to look at that when we take a look at the strategy for post us delivering these medium-term targets, and we'll look at the returns that we're generating rather than necessarily just the net interest margin across the portfolios.

Sorry, Rachel. Can I just add...

Sorry, Mike, go ahead.

I was thinking at it from a sort of funding perspective, but I think you sort of made it clear that there'll be a bit of pressure, but not -- obviously, not the same sort of pressure as we see if base rates were significantly lower. So there's still sort of room there to maneuver, I think, is the message I'm getting.

Yes, there is. We're not a mortgage portfolio, so we don't get that kind of compression that you would see in the more specialist buy-to-let lenders.

Yes, sure.

Just on the motor provision, you will appreciate that doing a calculation from an accounting perspective on this when there is so much uncertainty about the outcome of both the Supreme Court's review of the Court of Appeal cases and also what the regulator may or may not do in terms of any kind of redress program, plus whether or not this is DCA only or fixed. The variety of scenarios that we have had to create is quite detailed. We're not going to be giving out any further disclosure than we already have I think the key point here that we're trying to make is that those particular Court of Appeal cases, we do not have a vast -- the vast majority of our portfolio, 80% of it, doesn't have the same fact pattern. And that's mainly because of the distribution channel that we have in the way that we deal with the customer. We don't go direct to the customer. We're predominantly broker, which is often online when there is no direct contact with the customer. And we're not selling -- we're not dealing that much with dealers who have got the car as well as anything else that they're trying to package up for the customer. So that is only 20% of our book, 4% of that is -- the whole book is only -- is in DCA. So we're trying to say that we are quite different from some of our peers. And we will wait to see what the Supreme Court says and whatever the outcome is from the regulator, but we feel that we have followed what probably the rest of the market has done and done on probability weighted across numerous scenarios, and therefore, if people want to kind of look at us in comparison to others, that's probably the best benchmark.

And as there are currently no further telephone questions, I'd now like to hand the call over to Scott for any questions via the webcast.

Thanks very much, [ Saskia ]. We've had a number of questions that have been posted on the webcast so far. [Operator Instructions] First question is from Jens Ehrenberg from Investec. As part of your strategic considerations, you have made the initial decision to refocus Vehicle Finance on higher returning segments. Could you give us some color on what this could look like and how quickly the strategic shift within the division might happen?

Thanks, Jens, for that question. Firstly, I'd say just take us back to the segmental reporting that Rachel showed in the slide earlier. And clearly, given the secondary impacts of the regulators BiFD review, there has been a material impact on the impairment charge. So we take a step back and also look at the performance of other divisions and have decided that the level of growth we had previously indicated for Vehicle Finance, we will still continue to grow it, but not at the same rate, and we'll narrow down the focus onto those higher returning segments. Now clearly, because you have got loans with a sort of up to 5-year tenure on the book, it'll take a little bit of time for some of that to come through. But in terms of the new business aspects of that, we are currently in the process of implementing those changes this quarter. So from a new business perspective, we'll see the impact relatively quickly. It might just take a little bit longer time to come through on to the full portfolio. And then clearly, like other businesses already delivered cost efficiencies and leverage on, we will be looking at clearly the cost base within that business as well. So it's a bit of a step back, reassess, make some initial decisions and then also look at the cost management side of it as well.

A further question was once you reach your GBP 4 billion net lending target, how should we think about loan growth thereafter?

Yes. Well, if we go back to 2020, we're at GBP 2.2 billion, and we set out quite clearly the current medium-term targets. And at that point, building towards GBP 4 billion with us of the pathway that we've shown on the slide earlier in the presentation, all those different constituent parts needing to align to get to the mid-teens level. Clearly, that has been in the back of quite strong growth rates per annum. I think the average for the first 3 years of those medium-term targets was 15% on average. Clearly, this year, we're just under 9%. Our sense is as you scale and get beyond the GBP 4 billion level, you would expect to see growth rates in the sort of mid- to high single digits. But again, that's something that we just want to review further as part of the group-wide review that we said we'll undertake for each of the businesses. And during the second half of the year, we'll give more clarity on that new ambition on what the growth rates and other metrics look like.

I'd just add to that, if I can, the GBP 4 billion target was really how do we actually drive mid-teens return on equity? I mean that's really where that kind of medium-term targets come from. The focus will be to continue to deliver more return on equity in the kind of the next planning cycle that we go through, in other words, the next set of targets that we put out. So there will be growth, but we will be much more focused on how do we generate further returns from the balance sheet that we've got.

Super. Further I'd like to Jens' questions. With the ROAE guidance range now in reach, would you expect to gradually trail upwards within the range after our expectation of your -- of you reaching 14% in FY 2026?

Yes. Well, it's probably fair to link that back to the response Rachel just gave to Jens as well. So the -- yes, I mean, obviously, based on the current trajectory and plan, that would be the case that we would see that moving into the 14%, then moving up within the 14% to 16% range. But as Rachel says, our priority is then looking at well beyond that, what is the opportunity given the businesses we're in, some of the segments were perhaps not in that are closely aligned to the business lines we have today and further operational leverage, how can you potentially generate returns beyond that level? So again, we're undertaking the work currently. And during the second half of the year, we'll provide more clarity when obviously, we'll be much closer to that GBP 4 billion level as well.

Superb. And the final part to Jens's questions that are here is looking to 2025, can you provide us with some color around your expectation on loan book mix between the segments?

You want me to get that?

yes.

So I don't think it'll materially change. I think as you can see, 2024 for commercial finance was a difficult year. We've started this year with a really good pipeline. So we expect to see growth within commercial finance to return. Again, where we're expecting growth in across all of the divisions. As David just mentioned, we'll probably see a little bit of retraction within Vehicle Finance. So I think on balance, I don't think that we will see a material shift to the -- we're 52%, 48% towards consumer at the moment, whether that's 51%, 50%, 50%, it will be in that the kind of ballpark, we won't see a material shift either way.

Moving on to next question from a private investor. For motor finance, how has the competitive landscape changed, if at all, over the last 12 months or so given the regulatory focus?

There's really not been a significant change. What we have seen is 1 or 2 competitors slowed down on the consumer lending side of Vehicle Finance. And on the stock funding side of things, we have seen a couple of people actually exit that market. So there's a little movement really. I mean the odd 1 or 2 competitors making a slightly different decision. So it may be that once we have more clarity from the legal process and from the regulatory review on commissions that, that might change more dramatically, which could tend to be opportunities for those who remain within the business line. But at this stage, it's too early to really predict whether that's really where we're going to end up or if things will just settle down and the market may just price differently for those assets going forward.

Our next question is from Gary Greenwood. What will be the key considerations in your strategic review? And I'll do them one by one, if you're happy with that, but yes, there's a few other ones as well.

Rachel alluded to this, obviously. So returns will be the key focus as we go through that work, Gary.

And where do you see the key risks to growth?

Well, I think the key thing to point out is we still have significant growth opportunity in each of these business lines. So we've put into one of the slides earlier in the pack, I think Slide 5, we've put in just to be clear on what is the size of the market in each of our 4 business lines. So you can see that we've got relatively low market shares other than a much stronger performance with the more mature business of Retail Finance. So there's plenty of opportunity still to grow. So I wouldn't say there's any market impediment. I mean clearly, like others, and back to the previous question, we will also need to wait and see what the outcome of the commission's legal and regulatory processes are. But in terms of -- we're certainly up capping out on the growth opportunities. And in fact, we've got some ideas and opportunities that are new that we'll think about as part of the group-wide review we're currently undertaking.

And final question from Gary, how quickly can we expect the impairment charge to normalize in VF?

Well, the intention is that will happen this year. We have been pretty clear. And if you look back to the half year results for 2024, the cost of risk in that business was at 8.8%, for the full year was at 7.6%, from memory?

Yes.

And the reality is it's now closer to 6%. So we are definitely seeing the trajectory improving. And as Rachel highlighted earlier, the levels of arrears are -- at the levels we've not seen for sort of 3, 3.5 years. And similarly, defaults are now -- new-to-default cases are now below the peak, significantly below the peak of the BiFD impacts and back in line with where they were earlier in 2023. So we're confident based on the data we are seeing both in the second half of last year and in the earlier part of 2025 that, that will support a stabilization of the group's cost of risk for this year.

I'd just add one thing to that. I mean we are looking, obviously, as we've just mentioned about some of the -- looking at the higher returning business within Vehicle Finance, that, by nature, will mean that we are looking at risk-adjusted margin for that business rather than the component parts. So you may see that if we shift the mix slightly more towards the high-yielding parts to Vehicle Finance that the cost of risk on its own may not come down to the levels that we saw pre BiFD, but risk-adjusted margin, which is the key part to that will be increasing within 2025.

Excellent. Next question. Thanks for the additional disclosure on divisions? Your Retail Finance business has seen significant growth -- significant profit growth. What have been the key drivers to this, and what has been the key to gaining market share and how is the outlook given the ongoing uncertainty in the consumer confidence?

Taking that last part first, obviously, last year was a period where there was significant pressure on consumers, and therefore, on some retail sectors. We've been actually able to buck that trend, and actually, we have taken share within some of the key retailers that we work with. So you haven't naturally seen that come through into our numbers. Clearly, as base rates we expect to come down further through this year, notwithstanding a lot of current uncertainty, then that would support retail spend as well, clearly. The key point really has been the leveraging of our technology capability, the strong expertise and relationships we've got in the market and also our ability to underwrite appropriately and provide competitive pricing. So those are really the reasons why we've been able to continue to grow our relationships with key larger partners and also drive market share. Also, of course, as that scaling up has taken place, there's been significant operational leverage. So I think you can look and see that, I don't think there was any cost growth or minimal cost growth actually in 2024, despite the fact we continue to grow that lending book strongly. So a combination of our capabilities and relationships, and opportunity in the market and beating the competition to win market share. And we remain confident we'll be able to continue to do so. And also, it now gives us an opportunity given the scale and profitability in that business and the returns that it generates to think about some other segments that we can focus on as well in the retail market.

Excellent. Next question is from Sam Tomlinson from Man Group. Capital headroom was 1 percentage point at year-end. While you note significant uncertainty regarding the financial impact from Vehicle Finance commissions, how confident are you that the capital surplus is appropriate given the uncertainty, stroke would be sufficient to absorb the possible downside scenarios on Vehicle Finance commissions?

Yes. I mean I think we've always indicated that 2025 is our kind of capital low point. We do manage that very, very carefully. We can decide where we put our capital and how much we grow within 2025. So they are in our control. I think the commissions piece, we obviously do ICAPs. We stress test our portfolio. You have to remember that there's very large buffers attached to all banks at the moment at 4.5%, and that gives you enough capacity to take kind of a really big market shock that the downside scenarios to commissions would be existential both from an economic economy point of view and for a number of banks. So we do look at that and we've stress test recently, as part of going concern, and obviously, our accounts have been signed off as part of that work that we do with both our external auditors and our own Board to make sure that we are comfortable on a going concern basis even with that downside risk within commissions for Vehicle Finance.

Great. Thank you for that, Rachel. Now we have no further questions at the present time, so David, maybe I hand back to you for your closing remarks.

Okay. Well, thank you for all those questions. Thank you, Scott. And thanks again for joining us for the presentation. I would just like to repeat some of the key messages that we've highlighted earlier before closing. 2024 was a year of strong progress in quite a challenging environment still. And we continued our growth momentum with net lending increasing by 8.8% and have delivered market share gains in our consumer businesses. We continue to see excellent opportunities for further growth, as I just said in response to the question and what are large addressable markets. We continue to identify and deliver operational efficiencies, and we are confident in achieving our more ambitious plan to deliver GBP 8 million of annualized cost savings by the end of this year. Our growth, the action we have taken to simplify the group's operations and our track record of disciplined cost management mean we are well placed to drive our cost/income ratio down towards our 44% to 46% target against a GBP 4 billion net loan book. We're progressing initiatives to reduce the level of defaulted balances in Vehicle Finance, as we have just covered in the questions, and we do expect the group's cost of risk to normalize in 2025. We have momentum and are moving ever closer towards our GBP 4 billion net loan book target, the level required to support an attractive return on capital in line with our current priority objective of medium-term returns of 14% to 16%. We've got a strong track record of growing our businesses and have clear plans to continue doing so. I'm confident that we will deliver on our commitments in the near term. Rachel and I will, of course, be meeting quite a number of you in the coming days ahead. And we'll be obviously able to answer any more detailed questions that you have. But in the meantime, thank you very much again for joining us for this webinar.