Vanquis Banking Group plc (VANQ) Earnings Call Transcript & Summary

Good morning, everybody. I think we're good to go. Hi. Thank you very much for coming on what is, obviously, a rather miserable day outside, to hear our 2019 full year results. As you can see, it's been a busy year for us at Provident Financial. Financial and operational performance has been good. I think significant progress has been made, transforming the group against the changing regulatory environment we face. And indeed, the strategic initiatives outlined at our Capital Markets Day here in November are now well underway. As we said we'd do at the Capital Markets Day, we're delivering on our promises and establishing Provident to be the leading provider of credit to the underserved, producing, I think, attractive and indeed, sustainable returns for our shareholders. In today's presentation, Simon will be presenting the full year numbers. I'll be reporting on the operational progress and the financial highlights and then we'll talk about strategy and outlook. And then, of course, as usual, we'll turn it over to questions and answers. So if Provident Financial in 2018 was all about getting our house back in order, I think 2019 was about creating a strong business platform for long-term sustainable growth for the benefit of our customers, shareholders and colleagues, as well as obviously seeing off NSF's unwelcome and opportunistic bid. Progress, as the numbers and operational changes show, has been good. And the group has delivered an increase in adjusted profit before tax of GBP 162.6 million. The FCA money by investigation into historic practices ended this month. And as promised, it came within the GBP 20 million we provided for in 2018. So we now no longer have any outstanding FCA investigations into the group. As also, the Vanquis Bank ROP investigation ended in the first quarter of 2019. Also, the strategic initiatives we set out in the Capital Markets Day in November to deliver long-term sustainable growth are well underway, and I'll provide more detail of those as I cover them in our strategy and outlook section. Indeed, as Simon will explain in more detail, the group's regulatory capital headroom is around GBP 90 million, which puts us in a robust capital position going forward. And we have funding in place to keep the group strong until mid '22. And that's obviously a much stronger position than we were in 2018. Turning to the dividend. The Board, having reflected on the strong financial year that we've had and the operational progress that we are making, have recommended a final dividend of 16p per share, taking the total dividend for the year to 25p, which is 150% increase on last year. I think this shows we're making good progress as we move towards our coverage ratio of at least 1.4x as the home credit business recovers and returns to profitability. Vanquis Bank, as you can see from this slide, like all of the group's divisions, had a busy and productive year in 2019, as they and the other divisions have managed to -- or have been managing a significant change and implement new ways of working against the evolving regulatory environment. Now I don't intend to call out every change on this slide, but I will flag some of the key outcomes. Neil Chandler, who's here, and his new leadership team in 2019 focused on the bank's digitalization, it's cost efficiency and ensuring its treatment of customers is at the forefront of regulation. Some of these changes have moderated returns. Revenue yield like impairment is down; there is still circa around 40%. But what we've done is the right thing in relation to the long-term sustainability of the business. Vanquis is also focused on persistent debt and is well prepared for its introduction in a few days' time. We have, of course, been planning for this for some considerable time and higher minimum payments, recommended payments and adapting our CLI growth, which is credit line increase strategy, have all played a major part in reducing the number of customers who will be classified as being in persistent debt at 36 months. That said, we forecast approximately 25,000 of Vanquis' customers will be impacted in March, managed down from the 162,000 in September of 2018, as we outlined at the Capital Markets Day. And these impacted customers, if it's in their best interest, could have their cards stopped or have their cards removed and moved into a payment plan over the next month or 2. So I believe we approach persistent debt in good shape, but the market is entering uncharted territory here. So it is possible that its introduction could create a few bumps in the road as the industry witnesses how it plays out with customer behavior. As you can see from this slide, Moneybarn, over the last 3 years has grown its receivables and adjusted profits by approximately 33% and 70%, respectively. In 2019, its year-end receivables growth was 20.4% and the adjusted profit before tax was 10%. In January this year, Moneybarn agreed a GBP 275 million bilateral facility to fund its new business flows, which was a Capital Markets Day delivery and will provide cheaper funding for Moneybarn going forward. They also agreed as I said earlier, the outcome with the FCA into their historic investigation into forbearance and termination options, which removes any regulatory uncertainty for the division and it resulted, in fact, to a GBP 2.5 million release of the original GBP 20 million provision. Finally, the division moved into new premises in 2019. And in the last quarter, tightened its underwriting and strengthened its collection processes. Moves can sometimes impact business but not for Moneybarn, which is a testament to their strong business track record. Home credit and Satsuma finished 2019 strongly and are on track to deliver breakeven results in 2020, as again stated in our Capital Markets Day. Chris Gillespie has made significant progress in turning CCD around, especially when you consider that at the prelims in 2017, CCD announced a loss of adjusted before tax of GBP 120 million. Now 2 years later, the loss is just above EUR 20 million. And as I said at the CCD (sic) [ CMD ], CCD is on track to breakeven this year as we have said many times before. In 2019, [indiscernible] has managed his cost base well. It's introduced new sales and onboarding practices for home credit and Satsuma and successfully trialed Provident Direct, which will be rolled out across the whole of the business during the course of 2020. In reality, CCD has rebuilt itself over the last couple of years, and it's adapted to the changing regulatory environment. It's worked well with the FCA and FOS and modernized its operations. It's focused on listening to its customers and responded with Provident Direct, the hybrid credit product with home origination and online collections. And importantly, has recently introduced card readers, which will increase its efficiency yet further. Also, the migration to an employee-based sales force, whilst badly handled by former management remains, in my opinion, one of the key strengths and has offer -- offers strategic market advantage. CCD's evolution, though, is not complete. The FCA's new onboarding rules for online lending platforms like Satsuma, now require greater manual intervention for some customers before credit is issued. And this has impacted our new customer bookings at the end of last year, and will continue to do so during the course of the first half. This change, though, is potentially more difficult for others to navigate as they don't have the home credit expertise or its operational strength that we have. Over time, we expect home credit and Satsuma to work more closely together as customers and regulators see the benefit of having a multichannel service -- having a multichannel service proposition. So thank you for listening whilst I've highlighted some of the operational and financial successes of 2019. The momentum achieved throughout the year has helped us to build a strong business platform, which will deliver long-term sustainable growth for our customers, shareholders and colleagues. I now hand over to Simon, who'll run you through some of the full year numbers. And then I'll wrap up with some strategy and outlook thoughts, and then we'll open up to some Q&A. Simon?

Thank you, Malcolm, and good morning, everybody. The group has reported an adjusted profit before tax of GBP 162.6 million in 2019, 1.6% higher than last year. And a statutory profit before tax of GBP 128.8 million, 32.4% higher than last year. I'll cover the divisional results shortly. We've made 3 prior year restatements to the 2018 comparatives, one in respect of Vanquis and 2 in respect of Moneybarn. The restatement in Vanquis is in respect of the treatments directly attributable to acquisition costs. During 2019, Vanquis refreshed its contractual terms with Internet affiliates. These costs can be directly attributable to a new customer booking and are now capitalized as part of credit card receivables and amortized over the expected life of customer accounts, rather than being charged to the income statement as previously incurred. This change brings Vanquis into line with industry practice. The change has been reflected as a prior year restatement. The new treatment results in a reduction in the interest income recognized on credit card receivables and the reduction in costs. The restatements of prior year comparatives has resulted in an increase in 2018 profits of GBP 6.6 million. 2019 profits have benefited by approximately GBP 10 million. However, we now expect 2020 profits to be approximately GBP 6 million lower than our original plans as a result of treating the change as a prior year adjustment. The 2 changes we've made in Moneybarn both impact revenue, but have no impact on reported earnings. Firstly, we've changed treatments in respect of revenue recognition on credit impaired receivables. Previously, revenue on these assets was recognized on a gross basis, with the corresponding recognition of an impairment charge. These assets are now recognized on a net basis, consistent with the rest of the group. In conjunction with this change, we've also chosen to change the way we disclose directly attributable acquisition costs in Moneybarn. Historically, these costs were part of trade and other debtors and the amortization charge was taken through costs. To ensure consistency with the new Vanquis Bank treatment, the costs are now capitalized as part of the receivables and the amortization charge is deducted from revenue. The cumulative impact of the 2 changes in respect of the Moneybarn result -- in respect of Moneybarn result in a reduction in revenue, impairment and costs, but there's no impact on reported earnings. They're purely in respect of geography on the income statement. We've incurred net exceptional charges this year of GBP 26.3 million, as shown on the slide. The bid defense costs in the first half of the year were GBP 23.8 million, and we've incurred GBP 19.3 million of restructuring costs, mainly in respect of the ongoing turnaround of CCD. You can see here that we've also had 2 exceptional provision releases in the year. Firstly, following completion of the refund program, and the reevaluation of the forward flow of claims in respect of ROP, GBP 14.2 million of the provision originally established in 2017 has been released. The remaining provision held on the balance sheet of GBP 11.7 million reflects our revised expectation of future claims, which may arise in respect of ROP, together with sundry costs of dealing with those claims. Secondly, we have released GBP 2.6 million of the original GBP 20 million set aside in respect of the FCA investigation at Moneybarn, following completion of the refund program and receipt of the final notice. The remaining provision held in the balance sheet of GBP 2.8 million reflects the cost of the fine, which we've now paid. Now just going back to the group results. As expected, the group's cost income ratio has shown a modest increase to 42.8%, despite the 7.5% reduction in the group's cost base. This is due to the reduction in revenues at Vanquis Bank mainly from reduced ROP income. Our target is to reduce to deliver -- this to deliver a cost income ratio of 38% by 2022, through delivery of a number of growth initiatives across the group, together with continued cost efficiency. As we explained on the Capital Markets Day, ROE is the main returns measure used in the banking sector, and Vanquis Bank is now by far the biggest contributor to group profits. As a result, for both the group and Vanquis Bank, ROE will be the main measure of returns performance. As expected, the group's ROE has moderated to 18.2% in 2019, as a result of the planned retention of equity in line with the group's dividend policy. The group's medium-term target is to deliver an ROE in the target range of between 20% and 25%. And we'd expect to be at the lower end of this range in 2021. Adjusted earnings per share has reduced by 2.9%, reflecting the dilutive impact of the 105 million shares issued as part of the rights issue in April 2018. And finally, the group's final dividend has been increased by 60% to 16p. Together with the interim dividend, this represents an increase in the total dividend at 150% and a dividend cover of 1.9x as we move progressively towards our target of, at least, 1.4x in the medium term. Turning now to each of the businesses. Vanquis Bank's adjusted profit before tax has reduced by 9.1% to GBP 173.5 million. This is mainly due to the expected moderation in ROP income of approximately GBP 20 million. And the prior year benefiting from the release of GBP 10 million of remuneration-related accruals. The new underwriting engine introduced towards the end of 2018 has enabled Vanquis to enhance customer onboarding process. As a result, new customer bookings of 369,000 were 3,000 higher than last year. This performance is particularly impressive given our tighter underwriting, the withdrawal of the 69.9% APR product, and the implementation of revised affordability processes, which has reduced new booking volumes by approximately 25%. Customer numbers ended the year 3% lower than last year at 1.72 million, despite the impressive new customer booking performance. This reduction is wholly due to the closure of 65,000 inactive customers to manage contingent risk and the sale of 56,000 customers on payment arrangements. Receivables reduced by 2.2% during 2019, compared with our internal plans and guidance of broadly flat receivables. This reduction is consistent with recent industry trends and for Vanquis, in particular, reflects the greater-than-expected impact of changes in regulation, in respect of persistent debt remedies and revised affordability processes. Vanquis has continued to make good progress in respect of those customers meeting the FCA's definition of persistent debt. As a result of the introduction of increased minimum payments, recommended payments and increased communication, the September 2018 cohort is expected to have reduced from 11% to 2% by the first 36-month checkpoint in March 2020. However, it's important to reiterate, we still need to observe the behavior of those customers remaining in persistent debt, when they're offered a way to repay their balance in a reasonable period of no more than 4 years. As a result, whilst we factored this into our plans for 2020, the impact on receivables and impairment remains uncertain. Vanquis Bank's revenue yield has reduced from 42.8% to 39.8% in 2019, due to 3 main factors: firstly, the expected reduction in ROP income of GBP 20 million following the section of sales in April 2016. Secondly, there's been some further moderation in the interest yield from a modest increase in the mix of nearer prime customers, together with some downwards repricing of higher APR accounts where the customer has improved their credit standing. And finally, some changes to the basis for late charging and over limit fees for customer accounts. Delinquency trends showed a favorable movement compared with last year due to a shift in mix towards better quality customers. In addition, as you may recall, the second half of 2018 was adversely impacted by the impact of enhanced forbearance and an increase in minimum due payments in response to persistent debt regulation, which resulted in a step-up in payment arrangements. This has not been repeated in 2019. As a result, the impairment rate in 2019 has reduced to 13.6% of average receivables compared with 16% in 2018. Costs have remained flat in 2019 as Vanquis has been able to access operational leverage, reflecting tight cost control. Cost efficiency and digitization remains a key focus for Vanquis in light of the reduction in the revenue yield. Interest costs have benefited from a reduction in Vanquis Bank's blended funding rate, which after taking account of the cost of holding a liquid asset buffer, reduced from 3.5% in 2018 to 3% this year. As you're probably aware, Vanquis fully repaid its intercompany loan to PFG in November 2018, and importantly, is now fully funded with retail deposits. On to returns, Vanquis' ROE has reduced from the artificially high 44% to 32% in 2019. This is mainly due to the rebuilding of the equity base following the implementation of IFRS 9 on the 1st of January 2018, which reduced equity by GBP 111 million and the ROP refund provision of GBP 172 million, reflected at the end of 2017. We'd expect Vanquis Bank's return on equity to moderate towards the group's target range of between 20% to 25% over the medium term. As the average equity base stabilizes, and the risk-adjusted margin reduces to between 23% to 25% due to the ongoing reduction in ROP income and the impact of downwards repricing and fee changes implemented in 2019. And finally, it's worth mentioning that Vanquis Bank paid a dividend to Provident Financial of GBP 80 million in February 2020. Now on to Moneybarn. Moneybarn's adjusted profit before tax increased by 10% to GBP 30.9 million in 2019 as the businesses continued to deliver strong growth, although there has been a modest reduction in margins together with higher funding costs. New business volumes have been very strong in 2019, showing a year-on-year growth of 30%. However, due to the particularly strong growth in new business volumes in the first 3 quarters of the year and the emergence for a modest deterioration in impairment trends, underwriting was tightened early in the fourth quarter to remove the bottom tier of high-risk customers. As a result, fourth quarter volumes showed a lower year-on-year growth of 14%. Customer numbers ended the year at 77,000 up from 62,000 at the end of 2018, and showing growth of approximately 24%. Receivables growth was nearly 21% in the year, lower than customer growth of 24% due to the sale of delinquent debt with a modest carrying value in December. This was the first sale of delinquent debt since the commencement of the FCA investigation in 2017. Moneybarn's impairment rate was 8.6% in 2019, consistent with 2018. The rate it was tracking is around 8% until the final quarter of the year showed the modest deterioration. This reflects 2 factors. Firstly, the flow-through of higher risk customers prior to the tightening of underwriting early in the fourth quarter. And secondly, the impact of stronger than forecast growth in new business volumes earlier in the year as Moneybarn's peak in defaults is typically 9 to 12 months following inception of a loan. We'd expect the tighter underwriting standards, together with improvements in our collection processes to stabilize impairment trends in 2020. Headline cost growth was 5%, and it is stated after the benefits of a VAT recovery of GBP 2 million. Excluding the VAT recovery, underlying cost growth was 15%, lower than the revenue growth of 17%, with the business delivering some operational leverage. And finally, interest costs showed a near 30% increase compared with the 22% increase in average receivables. As we've previously guided, this reflects the higher cost of funding, the nonbank group since Vanquis Bank became fully funded with retail deposits in 2018. So now turning to CCD. CCD has reported an adjusted loss before tax of GBP 20.8 million in 2019, significantly lower than the GBP 38.7 million of last year. The business delivered a reduced loss of GBP 5.7 million in the second half of the year, and the business is well placed entering 2020. As we previously communicated, we'd expect CCD to deliver a loss in the first half of 2020, consistent with the normal seasonality of the business and the profit in the second half of the year of 2020, with an overall breakeven result for 2020 as a whole. The home credit business continues to benefit from the rollout of the enhanced performance management framework, including an element of variable pay. The good momentum on new customer acquisition, we saw at the back end of 2018 continued through into 2019. As a result, CCD customer numbers and receivables are now beginning to stabilize. We saw a significant reduction in Satsuma volumes in December and January. As Malcolm mentioned earlier, this is expected to be only temporary whilst we develop more manual intervention onto onboarding processes following dialogue with the FCA. We expect home credit in Satsuma to work much more closely together going forward, particularly with the rollout of Provident Direct, and we also expect a lower proportion of bookings to be wholly digital. The benefit from management's actions over the last 2 years has resulted in CCD's risk-adjusted margin improving to 80.5%. This is now within the target range of between 80% and 85% and similar to the historic margins delivered by the self-employed model. CCD's costs reduced by 14.1% in 2019. Despite headwinds from increased regulatory requirements, upgrading certain elements of the old IT infrastructure and higher complaints costs, CCD has continued to take the necessary actions to reduce headcount and tightly manage costs in response to the reduction in customer numbers. Overall, there has now been a reduction in roles of around 1,500 since September 2017. Together with the actions already taken and the ongoing tight control of costs, this is expected to result in CCD's cost base reducing to around GBP 200 million in 2020, as communicated at the Capital Markets Day. Interest costs have fallen by 37%, a much larger reduction than the reduction in average receivables as CCD's funding rate has been reduced to reflect a more balanced allocation of funding of costs between CCD and Moneybarn, now that Vanquis is fully funded with retail deposits. Now moving on to funding and liquidity. On this slide, I've set out the funding position as of the end of December, in the left-hand column. And then a pro forma position in the right-hand column, after taking account of the recent securitization of the Moneybarn receivables book. Starting with the left-hand column. Retail deposits of nearly GBP 1.35 billion fully fund Vanquis Bank. The inflow of deposits has been deliberately moderated in 2019, given the modest reduction in Vanquis Bank receivables and a reduction in the liquid assets buffer due to reduced internal liquidity requirements. As we reported at the interim results, we successfully refinanced the revolving syndicated bank facility in July with 4 leading U.K. banks. The facility reduced from GBP 450 million to GBP 235 million, mainly due to a reduced requirement as Vanquis is now fully funded with retail deposits, and the home credit business is significantly smaller than when the previous facility was established. After taking account of the group's bonds and the M&G facility, the group had headroom on committed facilities of GBP 69 million at the end of December. Now shifting to the right-hand column of the table. As we reported in the trading update, the group successfully signed a bilateral securitization facility with NatWest Markets to fund Moneybarn business flows on the 14th of January 2020. The new facility provides GBP 100 million of initial funding and is anticipated to grow to GBP 275 million over the next 18 months. The facility provides comparable funding rate to the revolving credit facility. As part of obtaining consent to the securitization from the group's existing lenders, the revolving syndicated credit facility has reduced from GBP 235 million to GBP 211 million, and the group has repaid in full the M&G loan facility of GBP 50 million. After taking account of these transactions, pro forma headroom increases to some GBP 270 million. Together with the ongoing retail deposits program in Vanquis Bank, this provides sufficient capacity to fund forecast growth and contractual maturities until mid-2022. Now as we set out in our Capital Markets Day, our fundamental aim is to continue to diversify the group's funding sources, whilst also lowering the cost of funding. In the light of that, the group is actively exploring a number of additional funding opportunities. The first is the potential fund -- is the potential to fund some elements of the Moneybarn assets with retail deposits, and we started initial discussions with the PRA. Other potential options include a securitization of part of the Vanquis Bank receivables book, diversifying Vanquis Bank's funding mix into instant access deposits and issuing further bonds, private placements or a tier 2 instrument. In addition, we're continuing to explore ways in which we can improve liquidity management of the liquid assets buffer. For the avoidance of doubt, none of these opportunities are yet included in our internal plans. Now turning to capital, the group's CET1 ratio was 30.7% at the end of 2019 compared with our fully loaded TCR of 25.5%. On this slide, I've set out a reconciliation of our regulatory capital headroom compared with last year. As you are aware, regulatory capital headroom at the end of last year was approximately GBP 100 million or GBP 96 million to be more exact. Most of the movements in regulatory capital headroom that you see in the table are relatively self-explanatory. But I'll pick out 4 to explain in more detail. Firstly, the anticipated second year transitional impact of IFRS 9 was GBP 18 million. You may remember that in quantifying regulatory capital, the impact of IFRS 9 is being recognized over a 5-year period, which started on the 1st of January 2018 and ends on the 1st of January 2023. The second influence on headroom is the impact from the implementation of IFRS 16 leases from the 1st of January 2019. This reduced regulatory capital headroom by GBP 26 million, despite the fact there was no increase in the risk profile of the group. The third factor is the prior year adjustment in respect of directly attributable acquisition costs in Vanquis Bank, which I discussed earlier. This increases regulatory capital headroom by GBP 15 million, but puts us in line with the rest of the industry, ensuring that our capital base is on a comparable basis relative to our peers. And fourthly, net exceptional costs have reduced regulatory capital by GBP 29 million on an after-tax basis. This is stated net of the provision releases in respect of ROP and Moneybarn, which have benefited regulatory capital by some GBP 10 million. Taking the benefit from the provision releases, with the prior year adjustments in respect to the deferred acquisition costs, regulatory capital headroom has been boosted by around GBP 25 million, which was not previously in our forecast. Our regulatory capital headroom at the end of December was, after taking account of dividends in respect to 2019 of GBP 63 million was GBP 117 million. This headroom reduces to approximately GBP 90 million after taking account of the third year transitional impact of IFRS 9 on the 1st of January 2020. This level of headroom is consistent with the Board's risk appetite of maintaining headroom in excess of GBP 50 million, whilst progressing to the group's target dividend cover of at least 1.4x in the medium term and absorbing the remaining IRS 9 transitional impact of GBP 129 million by the 1st of January 2023. The group's next regular capital review with the PRA is scheduled for March. And we'd expect the results in the second quarter of this year. With that, I'll now hand back to Malcolm. Thank you.

Thank you, Simon. Can I just say before I go on, this will be our last preliminary results presentation for us. From a personal perspective, it's been an absolute pleasure working with you over the last year. Thanks for all your hard work, and I wish you well for the future. Neeraj, who's here, will be joining us on the 1st of April, and I'm sure you'll all get to know him. Anyway, moving swiftly on. On this slide, you can see our new purpose and our culture. And I want to talk a bit about this because I think this is central to what we want to achieve here at Provident, and how we want to operate. I believe the company's purpose and culture is very important, and it's increasingly also valued by our regulators and investors, as it unites the business and helps to create a sustainable platform for us as a group. As I've said before, having a mutually respectful relationship with regulators is also of paramount importance for us as we operate sustainably in our sector, and our purpose is the key driver for this. Our purpose sets out what we for our customers and why we need to exist. The Board and I believe that if you have a strong purpose running through a company, it will improve the culture and help to deliver the right outcomes for our customers. It is this outcome, delivering the right outcomes for our customers, that makes it so important to us and why we will continue to ensure that all of our colleagues embrace this new culture and also purpose. Importantly, it's already starting to have an impact on the way that we operate. For example, with Vanquis lowering the APR for over 100,000 of their customers during the course of 2019 because their credit ratings have improved. This was the right thing to do for these customers. But it also makes good business sense because for them, lower APRs mean the customers will stay with us for longer. As you can see on the slide, the purpose is supported by strategic drivers and behaviors. These, in combination with our purpose and culture, helped to deliver a sustainable business model, increased customer centricity and unifies our colleagues, all of which help our customers, but also creates a business advantage for Provident Financial. On this slide, I set out again the significant opportunities we see in this space, and I've mentioned them before, as you know, at the Capital Markets Day last November. As I said then, and as I'm reiterating now, I believe that Vanquis, Moneybarn, Satsuma and home credit can all grow in their respective markets and also grow their market share. Secondly, they can expand their product range, distribution and increase their digitalization. Thirdly, they can move into other non-mainstream markets. And finally, they all have cost funding and capital opportunities, which can be delivered upon. This slide sets out our vision for the future, underpinned by the number of growth and efficiency initiatives, which capitalize on the opportunities highlighted on the previous slide. As flagged earlier, all of the initiatives outlined here have started. Bankers are making good progress across a number of the products which we should deliver for future growth. The bank is relaunching their loans proposition this year with a price point of 59.9% APR. It's also expanding its white label partnerships, and it's working towards launching a new white label partnership at the end of the first half of this year. The team are also developing a self-employed proposition. [ Moneybarn ] continues to have plenty of opportunity for continued core market growth. The team are introducing a resolicitation program to retain high-quality customers who settle early and who would otherwise have moved on to other lenders. And they're also expanding their relationship with lead generators and quotation search partners, such as ClearScore. In terms of new products, the Moneybarn team are also introducing new asset classes and are developing plans to move further into the adjacent near prime sector. Home credit, again, as set out in the Capital Markets Day is on track to break even in the second half of this year. And as previously mentioned, set service planning to trial a new loan product below 100% APR during the course of the year. The key growth in this initiative through -- though for home credit is obviously Provident Direct, which was trialed successfully in South Permian last year, and is now being rolled out in Wales and the West performing national before the year-end. The hybrid product retains the essence of home credit that should enable CCD to attract new and former customers who value the home credit relationship but do not desire weekly collections. Longer term, we envisage approximately 30% or more of the business being transacted through Provident Direct. Turning to the group, as you know, our medium-term aim is to create a bank for the underserved. To do this, we'll need to bring Provident Group and Vanquis Group closer together. We would need, obviously, regulatory approval. And potentially, we could bring Moneybarn into this structure. Creating this simplified structure could deliver capital and funding efficiencies for the group and is an ambition we have for the medium term. CCD, though, remains a very important part of the group, but it does not naturally sit under a bank umbrella. Here, you see the medium-term financial targets we set out on the Capital Markets Day, which we believe will deliver sustainable and attractive returns for all of our shareholders. Firstly, we aim to deliver receivables growth of between 5% and 10% per annum over a 5-year time frame. Secondly, we will deliver, as Simon mentioned earlier, a cost income ratio of 38% by 2022. Consequently, our strategy and the actions taken to deliver it, we will -- we believe will deliver a return on equity of between 20% to 25% in 2021. And that return will allow us to continue to evolve our dividend cover to at least 1.4x as the home credit business recovers and returns to profitability. So Provident Financial has had a good start to -- had a good year in 2019. Operationally and financially, I think, the group performed extremely well. The group is well placed as we start 2020 due to the business -- due to the evolutionary changes we made to the business model last year, which created a strong platform for growth, enabled us to make progress against our strategic growth and efficiency initiatives. Operationally, we made a good start to the year with our collections and impairment trends remaining stable during the all-important Christmas period. Our focus on -- in 2020 will be on growth and progressing the strategic initiatives outlined at the Capital Markets Day. As you can see on the slide, we are rolling out Provident Direct, developing Vanquis Bank loans, delivering funding and capital opportunities and continuing to improve our cost and efficiency through digitalization. And these will all be key if we're going to deliver on our medium-term growth and financial targets. And I'm obviously confident that we will. I have so far focused on the positives. And though I believe our customer base are basically more resilient than most and exhibit some countercyclicality, I think we have to acknowledge that the economic outlook for post-Brexit remains uncertain. And even though we have tightened our underwriting progressively over the last 2 years, we will need to be open to things changing economically. I've also earlier in this presentation, talked about persistent debt and regulatory interventions, which sometimes have unintended consequences. So we and the regulator and the industry more broadly, need to be cautious as to how the new rules might play out. And potentially impact both customers and obviously, consequently Vanquis Bank receivables and impairment. I'm also, as I say, open-minded as to how the macroeconomic environment will evolve in the coming months. While we now have a stable political environment, much work still remains to be chopped and agreeing how we finally negotiate our trade relationships with Europe. That said, we start 2020 in a strong position. We have strong funding and capital and the actions that we took in 2019 have built a strong business platform to deliver sustainable growth for our investors. It is, therefore, our strong operational position and the momentum that we have generated over the last couple of years that gives me confidence that we'll deliver attractive profits in 2020 and achieve our medium-term fundings. Thanks for listening. We now have some questions. And if you could just state who you are, we'll try and answer. Thanks.

Simon, do you want to come up here?

Yes. Sure.

It's Ian White from Autonomous. Three from my side, please. Just first of all, on Vanquis costs. I wonder if you could give us a bit of help thinking about that for FY '20. I think the 2H or the sort of 2H run rate for costs looks like it was something around GBP 80 million. Is that kind of a real number? Or am I being kind of tricked there by changes that you [indiscernible] fulfill your contracts? I just want to make sure I haven't missed something basically in terms of the impact of the restatement. Is 2H a reasonable basis for thinking about what might happen in FY '20? And that would be question one, please.

I think -- so I'm not -- hello, I'm back on?

Yes.

I think, Ian, that -- certainly we've discussed before about the fact that actually Vanquis as a business, possibly in the past hasn't focused as much as it could have done on the cost base itself because the business wasn't performing extremely well. I think it's fair to say that we've got a good initiative that's ongoing in the business at the moment, which is looking at a number of different aspects including looking at technologically efficiencies together with digitalization. And also what I would describe as structural changes in terms of thinking about how we do business, let's put it that way. So our view is that the cost base overall for next year is probably likely to be broadly flat. That's our sort of aim. That's the way to think of it, which, of course, would be a very, very good result. But it is an area of focus for the business. Because I think as we discussed before, the shape of the P&L accounts in Vanquis is changing. We've seen, and we've continued to see the revenue yields coming off. Impairments has been a good result for this year. But the other lines we need to focus on is the cost line and indeed the funding line as well.

Okay. That's clear. Second question, please, just on Satsuma. Just your comments around the regulatory sort of shift there suggests we might go through sort of another mini shift in Satsuma's business over the coming months. I just want to understand kind of what needs to happen from here for that business to start delivering an acceptable return on capital? And what is a realistic time frame to assume that would occur, please?

We think the changes that the FCA brought into bear in November-December last year will probably take the beginning of this year, probably the first 6 months to work their way through, and then we'll be back on the curve. So over the course of the year, we'll be back to where we thought we would be. What the FCA have done, as I'm sure a number of you realize is that they have systematically gone through the high-cost short-term credit market, looking at the different sorts of products and adjusting them. And obviously, that's led to the demise of payday. It's led to the exit, predominantly of rent-to-own. And in terms of digital loans, what they have sought to do is to inject more friction into the process of handing out digital loans to customers. And the background to that is, it was very easy for someone who was perhaps previously a home collections customer to move straight to digital loan, press a button for the foreman and then they get a loan. What the FCA did, and they did it across the whole of the industry, was to make for certain categories of customers, you get slightly more involved in the income expense assessment of handing out that loan. So we have something called a tax score. If a tax score is 8% to 9%, there's no change. But for those below, they need to -- they're expecting you to interject a little bit more human interface in the process of giving a loan. And that slowed down the number of loans going out. Now actually, we think that's really encouraging for us because to actually do that from -- across the industry, you have to have an infrastructure where you can actually have human contact with these people or greater interface. And because we've got a combination of the Provident Direct model, and we've got the actual home collections business, we've got that capability. Some of the other digital loan providers in the market just don't have that capability and that's one of the reasons, I think, some of them we've seen withdrawing from the market. Interestingly, for the high-cost short-term credit customer, there has been a massive contraction on the supply side of credit for them, because of things I've just said. We actually feel it's quite positive for our home collection business or our CCD division because we've got the capabilities others don't have. So I think we're seeing some short-term slowdown in the loans going out of the door as we adapt to that model. But overall, in the course of the year, we're not expecting any change. Third question?

Maybe just lastly on funding costs, if I look at the yields on the debt you issued in 2018, it looks like those have tightened by -- some 200 bps or so since they were issued. Is there any reason we kind of shouldn't think of that as indicative of the group's ability to access new sources of funding at significantly more favorable rates?

Yes. Good question. I'd love to be able to say to you, yes, that that's a real indication. But as you know Ian as well as I do, funding costs do vary quite quickly depending on how the market is perceiving general market movements and the company itself. I think I would say that, clearly, as going out into the market today and issuing at 7% or 8%, I think I'll be disappointed about -- if I did that, let's put it that way. But obviously, clearly, there are other actions that we talked about -- I talked about earlier, whereby there's a number of different items on the program that we've effectively got, which, frankly, may also give us a decent amount of benefit coming forward, including the Moneybarn access to the retail deposits in Vanquis. I -- clearly, I don't want to sort of come back to you now and talk to you about concrete proposals until we've got them. Clearly, we did the first step of that program, which was the securitization we did just at the start of January this year. But we've got others that are on the blocks, and we will come back and give you a better idea once we've got more concrete proposals there. John?

I have 3 questions. The first one is actually a follow-up on Ian's question one, and just around trying to ascertain the OpEx run rate out of Vanquis Bank level. Would it be fair to just assume a relatively even split of the 10.5% of profits and the GBP 7.8 million of amortization on the deferred acquisition costs between H1 and H2 if we're trying to allocate that?

Yes. Yes. Okay. Great. That's easy. So one question down.

Number two, that is -- one of your -- another company in the nonstandard lending universe is under pressure from a compliance perspective. Those pressures have been well documented. What comments do you have about your experience in the complaints context, while I appreciate...

That's very good question. Actually, I assume you're referring to me. I saw the announcement this morning. We actually, as you know, I think we said last year, we saw a -- first, let's take a step back. Our industry complaints is part and parcel of our industry. And we have to plan for that, we manage it. In the first half of last year, we did see an increase in the level of complaints. But actually since then across all the business, we've actually been seeing a slight declining trend in complaints. We do from time to time, get a blip, more often than not driven by some sort of media event. And actually, more often than not, quite unrelated to us. I mean we had one a couple of weeks ago, where I think on a single day, we got 2,000 complaints. But of those, I think a significant percentage, probably nearly half, weren't even our customers. And so it's a factor of our business. But on a trend basis, we are seeing a declining picture. Equally, obviously, linked to that is our relationship with the FOS, and we've been working quite hard with the FOS. Because as you know, one of the things that we have focused on consistently for the last 2 years is building relationship through our regulators. Maybe that's not the way the industry used to work. But I think going forward, you have to have an open dialogue with these people rather than a confrontational dialogue. And I think that's beginning to work. So we haven't experienced some of the things that others are seeing.

And finally, just picking up on your comment on sector consolidation on Slide 18.