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

Hello, and welcome to the Provident Financial 2020 Full Year Results Call. My name is Rosie, and I'll be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to Malcolm Le May, Group Chief Executive of Provident Financial to begin today's conference. Thank you.

Thank you, Rosie, and good morning, everyone, and thank you for joining us for the presentation of our 2020 results. Now I'll take you through some of the highlights from the year, including some of the important strategic views, which we've announced this morning, and also how we've performed year-to-date in 2021. I'll hand over to Neeraj, our CFO, and he'll take you through the detailed financial review of last year. I then plan to return to give an update on our strategy and outlook, including how we see the group evolving in the future and to focus around the 3 core products that we have: credit cards, vehicle finance and unsecured personal loans. After that, we'll take your questions. Turning to Slide 4. Stating the obvious, 2020 was a tremendously difficult people for many year (sic) [ difficult year for many people ], including our customers. And the impacts of the COVID-19 pandemic are still being felt, obviously, today. So even though lockdown restrictions are easing, we still need to be very cognizant of the associated risks and any consequential macroeconomic shocks, which may become more apparent later in the year. That having been said, I believe the group adapted well to the challenges of COVID-19. And as a result, our customers continue to receive the vital support that they needed. The group overall reported an adjusted loss before tax of GBP 47 million in 2020, which was better than market expectations. And within that, Vanquis and Moneybarn remained profitable for the year as a whole despite the challenging circumstances that they faced. We made a conscious decision at the start of the pandemic to focus on our capital and liquidity, which with the benefit of hindsight was, I think, absolutely the right thing to do. In fact, it's really emphasized one of the key competitive advantages against our peers, that of having a banking license within the group. And this enabled us to lend to our customers throughout the pandemic when some others were holding back. It also means that as lockdown eases, we can keep on lending to our customers as the demand for credit reemerges. So far this year, we've seen credit card expenditure recover quite quickly as restrictions are eased. And we expect the demand for vehicle finance to continue as well. Now as you know, we informed the market in March of our intention to launch a Scheme of Arrangement for CCD. In April, the court approved seeking a customer both on the scheme. And we're working hard towards delivering this successfully. Alongside that, the operational review of CCD that we announced last November has concluded. And it is with deep regret that we are today announcing that we've taken a very, very difficult decision to withdraw from the high-cost credit market entirely, which now obviously includes our home-collected credit business and our Satsuma business. Initially, we're going to place the home credit business into a managed runoff. That will be likely to run until the end of 2021. And obviously, during that time, we'll be open to selling the business if a suitable acquirer comes forward. As of today, sadly, we'll also be entering a collective consultation with CCD's 2,100 employees. Some 1,500 of these are located across the country. And obviously, 600 of them are included in our center in Bradford, which obviously also includes operations from group and Vanquis. As a result, the group will now focus instead on the larger segments of the mid-cost market, those being sub- and near-prime credit cards, vehicle finance and unsecured personal loans. And I'll come back to this in greater detail a little later on. I think going forward with the inclusion of an unsecured personal loans mid-cost offering, we'll be presenting a much more product view -- product-based view of the group, which serves the needs of our customers with a range of products and moving away from separate divisions and, over time, focusing everything around the bank and its balance sheet. And through this, accessing its access to its retail deposit base where appropriate, which I think, as I said, is a key strategic advantage. Slide 5 highlights this more product-based view of the group and gives, I think, a useful snapshot of our markets, where we sit within them and the opportunities they present. To my mind, the key takeaway here is the scale of the opportunity that we as a group have to pursue. Our credit card and vehicle businesses have already got market-leading positions in large growing segments. And our ambition of growing our presence in the unsecured loan space will benefit from our significant existing expertise across underwriting collections and financing in the near- and sub-prime segments. Turning to Slide 6. The next few slides will focus on how we responded to the operational and financial challenges of COVID-19 and the lockdown restrictions that were associated with it. Our credit card business, Vanquis, reported an adjusted profit before tax of GBP 38 million for the year. I think a good result given the challenges of COVID-19, and it maintained resilience and appropriate capital and liquidity positions throughout the year. The VREQ, which is the PRA's voluntary requirements around capital preservation, was also removed by the PRA during the year. And that allows dividend payments to the group to resume. Customer receivables fell to around GBP 1.1 billion as tighter underwriting standards impacted new customer acquisition volumes and also as customer expenditure was impacted by the various periods during 2020 of lockdown. In terms of the trends that we've seen in the first quarter of 2021, credit card delinquency trends have remained favorable, as Neeraj will show in his section. And customer spending patterns have improved as the lockdown restrictions have eased, although obviously, it's early days. In fact, in early April, credit card spending was back to the levels we last saw in April 2019, i.e., before the pandemic. And credit card receivables at the end of the first quarter stood at approximately GBP 1 billion. Slide 7 shows our unsecured personal loans business. Our intention is to build on our existing expertise within the personal loans segment and expand our offering over time significantly. This will cater to a wider range of customer credit scores over time. Our starting point is a business that's just under GBP 20 million of receivables, operating in a market which we estimate to have an aggregate size in excess of GBP 1.6 billion or dealer at the end of 2020. And you can clearly see that we have a significant opportunity with this product segment. And I'll come back to you in a little more detail later on. Slide 8 shows our vehicle finance business, which reported an adjusted profit before tax of GBP 10.9 million during 2020. It was able to continue lending to customers throughout the year, taking market share and growing its receivables books and customer numbers by approximately 16% and 19%, respectively. Indeed, over the last 3 years, our vehicle finance business has grown its customer number by around 80% and its receivables by approximately 60%, which I think is an excellent achievement. Given the size of this market and our nearly 10% share, I continue to see this as an attractive multiyear opportunity for the group. Clearly, the demand for privately owned vehicles increased during the pandemic as people avoided public transport but still needed to get to work and take children to school, et cetera. I mean also, I think it's interesting to note that of the new business we wrote during 2020, approximately 38% of the loans went to key workers. In early 2021, we expanded our vehicle finance customer proposition by moving more into the near-prime segment, with loans there priced at around 15% APR. This launch has gone well and customer demand is currently in line with our expectations. In terms of the trends that we've seen during the first quarter, arrears trends have improved as we've been able to repossess vehicles once again, which was constrained during the period up until the lockdown ended. And also the underlying demand for preowned vehicles has remained healthy. And we do see no reason for this trend not to continue. As at the end of March, our first quarter receivables in Moneybarn stood at approximately GBP 585 million, which is an increase of around 4% since the end of 2020. Now turning to Slide 9, the Consumer Credit Division, which includes our home-collected credit business and also Satsuma. As you know, CCD was on track to break even during 2020. But I'm afraid the impact of COVID-19 and rising volumes of customer complaints on the division meant it reported an adjusted loss before tax of some GBP 75 million for the year. Again, as you can see from this slide, the home credit market has been in decline for some time. In fact, it's not the only high-cost, short-term market to have had significant challenges in recent years, as payday loan, rent-to-own and other segments have virtually disappeared as well. Rising volumes of customer complaints driven by claims management companies has become a real issue for the high-cost, short-term credit sector over the last 12 months. I think CCD obviously was not immune to that trend. To this end, we notified the market in March of the challenges it was presenting and, therefore, our intention to launch a Scheme of Arrangement for CCD to quarterize the risk of claims arising from historic numbers. The scheme is an important part of the plans we've announced today. And we firmly believe that it is the fairest compromise we can offer to those customers past and present with legitimate redress claims. As I've said before, if the scheme is not sanctioned in July, then it's very likely that we will be forced to place this business into administration or liquidation. And in that scenario, customers on the trade would receive or -- no redress payments. So far, in April, the court approved the scheme proceeding to customer votes. The next significant date for us in this process is May 17, when we will recontact creditors and inform how to vote, with voting staying open until July, when the creditor meeting is due to take place. And after that, we will ask the court to formally sanction the scheme. Moving on to the outcome of the operational review of CCD and taking account of the decline of the home credit market, the rise of complaints driven by CMCs and the financial impact I referred to with COVID and the evolving regulatory environment and also our natural footprint. It isn't -- it's clear to me that it's unlikely that CCD will be viable in the future. And we will not achieve the scale that we have in our cards -- in our car finance business going forward. Therefore, as I've said, it's with deep regret that we've announced today that we have decided to take the difficult decision to place the division into a managed runoff for the remainder of 2021, obviously, with the option to sell all or part of the division if the opportunity arises. And as I said, this really was a very difficult decision for us to make, particularly given the significant contribution this business has made to the group's history. But I do believe, sad as it is, this is the right decision for our stakeholders. Going forward, our focus will shift to building on our strong position in credit cards and car finance and to expanding our offering to customers in the mid-cost unsecured personal loan area, building on the Vanquis loans worked to-date, entering the course of 2021. I think this will fit seamlessly with our existing credit card and vehicle finance offerings. As mentioned already, the regulatory -- the regulation of our markets continued to evolve during 2020. And it's vital to me that we maintain a collaborative approach across the group, as shown here on Slide 10. In 2020, payment holiday and persistent best guidance came into effect. And more recently, at the beginning of May, we've adapted to the new breathing space guidelines, which have been introduced. Undoubtedly, I think, though, during 2020, the most significant announcement was the Woolard Review, which was published in 2021. And the review has outlined FCA's direction of travel and its approach to unsecured credit, which will impact, I think, all providers, whether prime or sub-prime. And it clearly flagged, to my mind, more regulatory activity in the high-cost space but also emphasized the lack of mid-cost credit options for many consumers. And we've obviously studied the reports. We were perfectly involved in it. We started with the aim to making sure that we are at the forefront of regulatory developments and good practice. As I mentioned earlier, we are repositioning the group in the near-prime and mid-cost space. And that's very much in keeping with the findings of the review. Finally, we also informed the market in February that CCD is the subject of an enforcement investigation by the FCA on some of its affordability and sustainability lending practices. There's no further update at this stage, nor do we actually expect the investigation to be concluded until 2022. Moving to Slide 11. In summary, I think the group finished ahead of market expectations for the year. I believe the group has a very resilient capital liquidity position, and that served the group very well during the pandemic. And I think it provides optionality as to -- as lockdown eases and consumer spending increases, putting us in a good position. Looking to the future, we've announced our move away from providing any high-cost credit products, which is a key part of making, I think, the group more sustainable. And we'll now focus on the larger credit card, vehicle finance and personal loan markets. These markets are likely to grow as a result of COVID-19. And I think we have strong scalable platforms in 2 of them already, and we're building on our existing platform in the third. As outlined in our Capital Markets Day of November 2019, the future of this group would be based around its bank's balance sheet. And it will be more of a near-prime and mid-cost credit provider. So with that, I'm going to hand over to Neeraj. He will run you through the numbers. And I'll wrap up on strategy and outlook before hosting Q&A at the end of the session. Neeraj, over to you.

Thank you, Malcolm. I'll take you all to Slide 13. As you can see here, the group adjusted loss before tax for 2020 was GBP 47.1 million compared with a profit in 2019 of GBP 151 million. The group adjusted profit before tax and impairment for 2020 was GBP 311 million, and that compares with GBP 497 million in 2019. Important to point out that Moneybarn and Vanquis have remained profitable throughout 2020. And 2020 clearly has been a year of great challenges for everyone, especially our customers, and this is clearly borne out in our results. However, despite this, we have continued to help our customers on their path to a better everyday life. Our receivables have been negatively impacted unsurprisingly at the same time as increasing our impairment provisions pro-cyclically under IFRS 9 driven mainly by the worsening unemployment forecasts in 2020. These forecasts are improving in 2021 but a lot less on the pandemic not resurging, as we've seen in other parts of the world and the impact post furlough, ending in September. I'll go through these elements in more detail shortly, but we remain cautiously optimistic. Financially and strategically, the group has positioned itself during 2020 to deliver the ambitions it set out at the Capital Markets Day in November 2019, albeit COVID has delayed progress. Appropriate capital and liquidity resources have been maintained during 2020 and will be central to the delivery of the group strategy for the benefit of all stakeholders after taking into account the financial impact of the CCD Scheme of Arrangement and its controlled rundown. We've seen evolving supply and demand dynamics in our chosen markets driven by strong moves towards electronic delivery channels as well as significant regulatory change. On Slide 14, you will have seen that towards the end of 2020, we had an intermediate -- we had added an intermediate holding company into the group structure, called Provident Financial Holdings Limited. This structure is more typical of a listed group and establishes a buffer to protect the group-listed entity's balance sheet and thereby reducing the volatility risk in the reserves, which is to the benefit of the Vanquis and Moneybarn customers as well as the debt and equity holders. This structure also anticipates the future direction of the group as set out in our Capital Markets Day in 2019. We are planning on the basis that the controlled runoff and closure or sale of CCD will cost up to GBP 100 million, which is split roughly 40% redundancy and lease termination costs; and the remaining, the operating costs, to the end of that runoff period. The consensus in the market for this is actually higher currently than this level. I'll turn to Slide 15. The group results are set out here by division. Exceptional costs include the provision for the CCD Scheme of Arrangement and its related costs. The most significant impact with group's products have been from reduced receivables in credit card balances and the IFRS 9 impact than all of our product loans. Moneybarn has done well to grow its receivables during 2020 while remaining open to new business during the lockdowns and thereby predominantly helping the key working community. The key focus of the group during 2021 will be overhead reduction. Slide 16 shows us the product snapshot and is useful in showing the impact of the pandemic on our 2020 results. You'll see in the credit card business that our average receivables were down 15%. Our interest margin was down 19%. However, our impairment charges increased by 21%, and that led to risk-adjusted net interest margin down 41%. The adjusted PBT was down 25%. And that led to an adjusted PBT reduction of 78%, leading to a 38% profit for Vanquis. The vehicle finance division actually did well on receivables and was up 12%. And its net interest margin was also up 20%. The impairment, however, was significantly higher at 47%, again, driven by 2 things: Mainly, the macroeconomic impact on that business is IFRS 9 charge as well as the fact that during lockdown, we were unable to collect cars or bring cars that were repossessed out for sale in the market. So that had quite an impact in 2020, which is now being dissipated. The risk-adjusted net interest margin was down 13%. And that's led to an 18% reduction in adjusted PBT for the year. However, it has left Moneybarn in quite a strong position in terms of its increasing balances. The home credit and short-term loans business that Malcolm alluded to earlier reduced significantly in the year in terms of its balances by 33%. And against a GBP 200 million cost base, this left CCD in a difficult position when it comes to profitability, as you can see on the slide. The key performance indicators show a significant cost of risk increase in 2020, up 18.6%, driven by the poor macroeconomic outlook in 2020. Cost of funding was higher purely due to the decision to hold significant levels of liquidity in the group during 2020. The cost-to-income ratio was negatively impacted by the 19% drop in group income due to the pandemic. And there was a small decrease in total group costs during the year. The revenue yield reduction during 2020 also indicates the impact of a tightening of credit risk across the group as well as the falling CCD balances. Slide 18 shows credit card spend during 2020, and it has been indexed to February 2020. And this shows a dramatic impact of the lockdowns in the year but also shows that our customers have behaved, on the whole, as the wider market has. The latest view on spend week on week shows differentials between 2020 now are negligible. Slide 19 discussed -- looks at the payment holiday position. Soon after lockdown, we saw the introduction of payment holidays by the FCA. We saw a large take-up of these in the initial days, especially in the motor loan segment. As we can see from the graph, this demand for payment holidays has dissipated to immaterial levels by the end of 2020 and remain such currently. Slide 19 -- sorry, Slide 20 looks at the increase in impairment driven by the COVID-19 pandemic. What you'll see here is the increase in impairment was driven predominantly by the macroeconomic overlay, which increased the amount of impairment charge we held by just over GBP 70 million. The underlying credit quality and core delinquency trends remained favorable during the period. You'll see that CCD levels are higher than the other products, but this is based on a significantly lower level of receivables. Slide 21 demonstrates the robust coverage ratios that we have in the group. Coverage ratios remained strong during 2020. And this slide shows that the coverage ratios have been strengthened throughout the year despite a prudent starting point to 2020. Increases in H1 '20 versus H2 '19 reflects significant deteriorations in the macroeconomic forecasts. Again, the CCD percentage are applied to significantly lower balances than the other products. Slide 22 is particularly interesting. This slide provides some reason for optimism for 2021. But we remain cautious of both furlough coming to an end and the potential for more powerful strains of COVID. But what this does show is the resilience of our customers, which we have pointed out in the past. The group's significant history and knowledge in this part of the market allows us to both understand and manage our customers through these difficult times. And what you'll see with these graphs is that reducing delinquency rate. Slide 23 looks at our expected credit losses. The expected credit losses have been increased by GBP 73 million, as you see in the graph, due to the negative impact of the macro outlook. The basis of that macro outlook is set out in the table to the right and shows a peak severe downside of 12.7 million -- 12.7% for unemployment. These current consensus, which include Lloyds, Barclays, Bank of England, et cetera, are coming down quite significantly currently. But we remain prudent on the basis that our customers are yet to come out of furlough and maybe, in proportional terms, more affected by unemployment than other parts of market. The group's coverage ratio at 35% at the end of the year is very strong at an ECL level, but that is enhanced by ECLs which would take that coverage ratio to beyond 50% if they were to take them into account. Slide 24 shows that the receivables fell recently, proactively during the COVID impact period of 2020. As stated previously, the group's net receivables were down 18%. Credit card business is seeing some green shoots of improvement now. Most of this is driven by spend in the beauty and hairdressing areas as well as pubs and restaurants unsurprisingly. There's also a continuing trend towards online purchasing. The motor finance business continues to grow steadily and into the near-prime adjacent market. This is substantially larger than the addressable market that Moneybarn has been in historically. Turning to regulatory capital on Slide 25. You see that the regulatory capital remains well managed, meeting the requirements of the group over the next 3 years after taking into account the cost of running down CCD. The capital reduction of GBP 35 million during 2020 is driven mostly by the post-tax statutory loss in 2020. Slide 26 looks at our capital stack and some opportunities that arise from it. It shows that the makeup of our group capital base is predominantly -- well, is 100% CET1. And there is an opportunity to use other common forms of debt capital to support the group's growth into the future. The first step, in our view, would be to consider the feasibility of a Tier 2 issuance with -- and that would be based upon both the demand for that issuance as well as the market pricing that, that would give us. So turning to Slide 27 and looking at the diversified funding mix that we have. We continually look to diversify our funding sources. And we've been able to add the Moneybarn securitization to that diversification. We have also repaid our bonds on time and have remained covenant compliant. We also bought back GBP 75 million of bonds during 2020 [indiscernible]. We've improved our undrawn capacity during 2020, allowing the nonbank group to end the year with GBP 144 million of available liquidity. We continue to optimize both the cost and diversity of funding within the group. And we are creating a contingent funding line through the Bank of England's TFSME offering. In future, the group will also look to include a greater use of customer deposits in our balance sheet. In conclusion, 2020 has been a very difficult year financially for most. But we have navigated these difficult times with a strong focus on capital and liquidity. We continue to target the objectives set out in Capital Markets Day in 2019 and, specifically, a return on equity of between 20% and 25%, cost-to-income ratio of less than 40%, with receivables growing in appropriately sized addressable markets. We will focus on costs as well as funding and capital efficiencies to support our strategic goals. Malcolm will now provide you with more insight into how we will evolve and develop to support our financial ambitions. Over to you, Malcolm.

Thanks, Neeraj, and I hope those of you listening found our excellent summary of actions for 2020 and the first quarter helpful. Slide 29 shows one of the key changes that we've made from Provident a little over 3 years ago, which was really to renew our focus on our purpose and culture across the group and maybe helping put people on the path to a better everyday life. This is actually central to what we want to achieve here at PFG and how we want to operate and indeed why we exist. It's helped to unify colleagues, it's increased customer centricity and it's certainly making, I believe, us a more sustainable business. In fact, in our most recent survey, approximately 90% of the colleagues understood our purpose. And that's obviously central to what we are trying to achieve over the next few years. Turning to Slide 30. I think it's an important slide as it illustrates how we see our product offering going forward. It clearly sets out why we think credit cards, vehicle finance and unsecured personal loans are the right products to offer and also why we are moving away from the high-cost, short-term credit offerings we used to offer. On the left-hand side, the pie chart sets out the significant difference in size between the markets that we're going to be focusing on going forward and versus those which we are exiting. In aggregate, the sub- and near-prime credit card market, vehicle finance and personal loan markets are worth approximately GBP 15 billion. And that compares to some GBP 600 million, being the aggregate size as we see it in the home credit and high-cost short-term loans market. The right-hand side of this slide shows an illustration of where the various markets sit across the APR spectrum. Our personal loans product will bridge the gap from where we used to operate to where we have existing platforms. And perhaps by way of example, our personal loan product will be focused on lower-risk customers, with approximately 70% of them sitting in the near-prime or better segments and typically with credit scores ranging from the low 500 to 600 or above. And by comparison, over 70% of historic home-collected credit customers sit in the sub-prime segment, where their credit score is typically less than 500. So it's a significant shift in master cohort that we're addressing. I think, as I said earlier, the mid-cost segment is the regulated preferred part of the market and where we see the direction of travel we're going. We already have large and scalable platforms in this segment with our credit card and vehicle finance businesses. And we'll seek to scale up our personal loan offering using our existing expertise. Our vision for the future, as set out on Slide 31, was actually first articulated to you all in the Capital Markets Day in 2019. Our aim has always been to have 3 core products centered around the bank with the group driving capital funding and cost efficiencies. And by this year-end, we'll have made a significant step towards achieving that with our credit card, vehicle finance and unsecured loans businesses, all operating in large markets in the near-prime and mid-cost space. Our credit card platform has market-leading capabilities across underwriting, collections and distribution. It maintains a deep understanding of its customers and their behavior, which has been very important and, in fact, more important than ever in the last 12 months. We will continue to diversify our core credit card business. And we'll include new offerings for customers with a potential to introduce a self-employed credit card in due course and by continuing to explore partnerships and white-label opportunities, such as those we have already with [indiscernible] and LOQBOX, and they were announced obviously in 2020. Similarly, turning to vehicle finance. We have excellent privacy rates for our brokers and a market-leading credit and underwriting capability built on our long history of operating within this market. The expansion of the product offering will continue. And we'll obviously seek to work closer further still with our network of introducing agents and brokers. We see our personal loan product complementing our existing offerings extremely well. And we're building on an already established presence we have in that market to take the business forward. This group is uniquely positioned in this regard and will benefit from our deep understanding and detailed insights into how our customers behave, which has been established over many years of lending to the customer segment that we serve. This is why we're confident that this development will be successful and why our offering will be differentiated against those of our peers. We plan to hold a further Capital Market Day later this year, at which point we'll update the market further on our progress. Finally, turning to Slide 32. We see reasons for us to be optimistic. But equally, I am aware and Neeraj is aware of the possible macroeconomic shocks that may yet arise as government support is withdrawn also this year. As I said earlier, we've seen customer spend increase materially as lockdown restrictions have eased and demand has picked up. And we are starting to see early signs of recovery already. And obviously, we're excited by the opportunity in each of our markets, as I illustrated earlier on. And I think we're well positioned to exploit this given our balance sheet strength. Turning to dividends. I plan to update the market on our thinking with our interim results, when hopefully I think we'll have a greater line of sight in the economic environment and the progress we're making on our strategic initiatives I outlined earlier, including, obviously, the Scheme of Arrangement and the managed runoff of CCD. Going forward, I'm convinced that we have the right strategy in place with the capital and divestiture funded to support both our products and their distribution and enable us to grow PFG and create a broader bank for the underserved customer, delivering attractive long-term sustainable returns for our shareholders over the medium term. So that covers the slides. Thank you for listening today. We'll obviously now take any questions that you have, which will be coordinated by our moderator, Rosie. So Rosie, back over to you.

[Operator Instructions] Our first question comes from the line of James Hamilton from Numis.

Clearly, the group has a very substantial amount of surplus capital sloshing around in it. And my understanding is that you have a relatively sort of cautious outlook ahead of the end of furlough. How much of that capital do you think could be deployed should the macroeconomic environment continue to improve? And do you hope to be able to utilize the vast majority of that capital over the next 3 or 4 years?

Thanks, James. I'll start off and then I'll hand over to Neeraj. Me, I think it's a very fair observation. We have maintained a very prudent approach to capital preservation throughout the pandemic. And obviously, if you look at some of the more established prime banks in their recent announcements, they've been perhaps growing back a bit from that standpoint. The reason that I think we've been prudent at the year-end is that, clearly, relative to their customer base and their overall profile, where obviously, their lending is heavily influenced by asset-backed lending in the real estate markets, mortgage and the likes of that. Our customer cohorts are slightly different. And yes, whilst the macroeconomic assumptions haven't been as difficult as I think people were assuming in September last year, we've yet to see the impact fully on the economy of the unwinding later this year. And I fear that our particular customer base is more exposed to any blip there. So we have been prudent. I think we'll need to look at it again very seriously at the half year. But I'll hand over to Neeraj to talk about the detail of the utilization as we see it going forward.

Thanks, Malcolm. Thanks, James, for your question. The way that we're looking at the capital plan over the next 3 years is that with the cost of the scheme and the rundown cost of CCD, it leaves us in a position which allows us to grow our balance sheet, not overly significantly but to a level which I think consensus would be accepting of, but also taking into account the fact that NatWest lie charging building up our balance sheet, and where it has dropped to will not be insignificant. And that has to be taken into account when we're looking at our capital base. So the capital is adequate and appropriate for the rate of growth that we're considering, which is at a level which we believe bounces both profitability during that period with levels of operational resilience to allow us to put that growth going safely.

The next question comes from the line of Gary Greenwood from Shore Capital.

I've got 3 questions, if I can. So the first one is on the profitability and return on equity outlook. So I think in Neeraj's comments, you reiterated the sort of 20% to 25% ROE medium term that you'd set out at the Capital Markets Day in 2019. So just wondering how we should think about the ongoing businesses building back towards that sort of return and how important the new unsecured lending product will be in achieving that. That's the first one. Second one was on CCD and around the up to GBP 100 million of potential closure costs. I'm just wondering if you could talk around the sensitivities to that and why it might be lower in terms of collecting out the portfolio maybe and also whether it includes the potential cost of the FCA investigation. And then the last question is on credit cards. I hear what you're saying about the big pickup in spending. I'm hearing from some of the lenders such as Barclays that they're concerned that it might take a little bit longer for that to feed through to balance growth because customers have built up quite a lot of deposits. I'm guessing that your customer base is probably different that it doesn't have a lot of deposits. So do you think that increasing spending will translate into growth in interest-earning balances faster for you guys?

Thank you. Three very good questions. I think we haven't given any formal guidance on return on capital employed and the like. So I think that's something we will return to with our Capital Markets Day. But the sort of range that I anticipate that we will be in is probably north of 20%, 25%, as you said. So I think that's a reasonable assumption. I'll let Neeraj get into the details of your second question in terms of the breakup -- makeup, I should say, rather than the breakup, of the GBP 100 million closure costs and the sensitivities around it. But we haven't factored in any number for the FCA investigation because, as I've said, it's very, very early days. We don't even know whether it's going to conclude, whether there was anything wrong in what they're looking at. There's really nothing further to say at this juncture on that. And as I said, I don't think that we'll frankly see any material progress on the outlook until 2022. But Neeraj, do you want to get into a bit more detail about the sensitivities there, maybe around GBP 100 million? I think perhaps it would be helpful to talk about the extent to which the collector book is covered and this will really help us more on operations.

Yes. Thanks, Gary, for your questions. On the GBP 100 million closure costs, the main costs really cover the start redundancy announced, the termination of leases, et cetera, for various offices around the country. And therefore, the rest of it is the running cost of getting it to the point where it's no longer running. So those are kind of costs. The actual book itself is very well provisioned from an ECL perspective, which you'll see in the pack, but also the fact that the ECLs in that area pretty much covered a whole lot of that. That book has reduced. We did say at -- in March, in our announcement that it was down to around GBP 100 million. Since then, it's got below GBP 80 million certainly, circa GBP 70 million in size. And therefore, it has really got that kind of size or length duration left for there to be much coming from the book in terms of additional provisioning. So it is really about that. And the quicker that we are able to collect out the rest to close the operations, that GBP 100 million figure that we've set out could be lower based on that. So that's kind of what that is.

Your third question, comparing balance growth of our book relative to our prime book. I mean it's interesting. Obviously, you've got 2 aspects of receivables growth. One is new customers that you bring on and the extent to which they spend immediately and build our balances. And also then, all importantly, I think, for us the growth of our existing customer base. Now we have seen -- we've got -- we've been quite prudent in terms of bringing on new customers during the pandemic. And we've been quite prudent in that we've actually also tightened the poorer credit end of the spectrum for our card offers in Category 7 through 9. Having said that, there is quite a considerable amount for existing customers to grow. And that's where we're seeing the growth as the lockdown has eased. And as Neeraj referred to in his section, we've seen the dynamic of expenditure has been higher, obviously, as you would probably expect in food and beverage. The week of April 12 was particularly high as people sort of went out for the first time. They could get out lately. So it slowed down a bit more weaker than '19 because the weather was so cold. I don't think many people wanted to sit outside. But that's been picking up again. We saw it in the beauty and hair space, that sort of expenditure, which actually, customers naturally turn to. Where we haven't seen the pickup, which we would perhaps normally see at this time of the year, is on things like holiday bookings and certainly any sort of international flight travel. But that is something I think we'll anticipate. So I think we will see -- this trend continues at the moment, the pickup expenditure from our existing cardholders who'd be very suppressed. And that might slightly be a different dynamic to that, which you're seeing in the prime book.

The next question comes from the line of Ian White from Autonomous Research.

I have 3 as well, please. Just first of all, just a clarification on the CCD costs. Can I just confirm that the cost to run down the business are pretax? And can you tell us how would those costs differ, if at all, in the event that the business were placed into liquidation, please? That's the first question. Secondly, when do you think you might be in a position to resume the full new customer onboarding and the credit line increases within Vanquis? I think at the release, I think you're about 50% on both of those at the moment. Or what are you looking for? What will you need to see in order for that to return to pre-pandemic levels? And what would be the incremental costs that would be associated with that, please, particularly on the new customer booking side? That's question 2. And just finally, can you just clarify, has there been a further cut to the Pillar 2A capital requirement during the second half of the year? And if I'm getting myself into a model, I think the Pillar 2A requirement was given as 19.33% at 1H '20. And now it looks to me to be 100 bps lower. Can you just help us understand what's changed there, if anything, please?

Okay. We'll try and answer those. I mean first question was are the costs associated with the rundown of CCD pretax, yes?

Yes, please, and how they would differ on a liquidation scenario, if at all.

Yes. We have done quite a lot of work, obviously, looking at the liquidation scenario versus what we're doing with the scheme or the runoff. And actually, there's very little difference between the 2. And clearly, we are already managing the book down as we described quite considerably. If you put that situation into an administration, I think you've got to work on the premise that you pay, find there'd be interest recovery of that book. And also, you would lose a number of other benefits that the group will have, for example, tax loss that has accumulated over the last 3 years, which could be utilized elsewhere if you put the thing into administration. So our analysis suggests economically that there is little difference between an ordinary runoff with the scheme versus putting it into the administration. Turning to your second question in terms of our -- actually towards new customers and onboarding them and the incremental cost of that. We have -- we are starting to allow new customers to come on board. We are starting in limited ways to do credit line increases. We are still being reasonably prudent. There's an advertising campaign kicking off in the second half which will facilitate that. And that's all within our budgets for this year in a planned way. And then I'll let Neeraj answer the question on the Pillar 2A.

Ian, thank you. There hasn't been any -- there has been no change to the Pillar 2A during the year, just to confirm that. And we can pick it up later maybe, any calculation that you have that shows a difference, so we can sort of reconcile a little more carefully. But yes, there's been no change there, and it remains as was throughout 2020.

The next question comes from the line of Ed Firth from KBW.

I had, yes, 3 questions, sorry. The first one was just in terms of the core Tier 1. Should we -- I mean do you think it'd be reasonable to expect that, that minimum may come down once you close CCD? I mean I imagine some of the operational risk requirements, et cetera, must be quite high for that business. So I guess that would be my first question. The second one was in terms of economic scenarios. And I apologize if you've already put this in the announcement. But it looks to me like your upper, your most optimistic outlook is pretty much now where consensus is. So can you give us some sort of sensitivity? If we were to see -- if you were to use just your most optimistic scenario or what sort of write-backs might -- would be sort of reasonable to expect? What's the sort of sensitivity around that, if that's possible to give us some numbers there? And then the final question was just at the time of the Scheme of Arrangement, the FCA sent you what I think was -- I would describe as a pretty strongly worded letter. I mean I don't know how it compares with others, but it seemed to me to be pretty strongly worded. And I'm just wondering what happens to that now. Is that just it, and we just forget about it? Or is the further action being taken there? Or are you in further discussions with them about that?

Okay. I'll cover the first part of the question 1 and number 3 and let Neeraj get into the details of the economic side in particular. In terms of the question about -- a general question, should we be anticipating a cut in our Core Tier 1 requirement. I mean, clearly, yes. The -- with the closure of CCD, the operational risk profile of the group will change. And you'll remember, those of you who can remember back to when we did the rights issue in 2018, that we had quite a material operational add-on onto the start of our then ICAAP. The question of the degree and time line of any release being forthcoming is really a matter that's out of our hands. We'll obviously submit our views on the ICAAP during the course of later this year. But I can't predict how the PRA will react to that. So that's part of question 1. I'll let Neeraj embellish that. And then if you take the second question on the economic scenarios, I'll then come back on the scheme at the end.

Yes. Thanks, Malcolm. Ed, thanks for your questions. Yes, the CET1, as Malcolm said, is in the hands with the PRA. You're quite right to point out the significant risk changes that come from the decisions we've made. And clearly, we will put our case forward as strongly as we can, but it's not within our gift to come up with any difference...

But do you have any sort of scale as to what the CCD operational risk add-on is or anything like that you can help us with? Just -- I mean I'm not trying to [indiscernible] you, but just so we can do some numbers on that.

No, I will say it's very difficult. It's very difficult. So I wouldn't really want you to take a view on something as significant as that in terms of a reduction, and that reduction doesn't come through because that's not the issue. I mean the issue isn't to do with the numerics. It has to do with where the PRA would like to see that CET1 ratio going forward. So I think it will be better for us. If we did have some indication of that, then we would definitely provide some guidance at that point. And as Malcolm says, that's probably, if not later this year, early next year. So yes, on the macroeconomic scenarios, you're quite right. One of the things you'll see on Slide 23 is the impact of the macroeconomic downgrading during 2020 was GBP 73 million. So ultimately, there's a view that says, will that reverse out if we start seeing the kind of positives that we're seeing? And when we look at the current consensus and where that consensus is seemingly going, on unemployment specifically, then you could say that it's moving back towards the 2019 level, which would then remove that GBP 73 million. So that's kind of -- that would give you some kind of boundary on there.

And then to your third question, obviously, there's limits on what I can say about that. I mean yes, the FCA rate -- as they told us they were going to write to us, setting out their concerns, which were in that letter. It's something that they have expressed. It's something that was considered in the court meeting that's put place a couple of weeks ago. And notwithstanding that, the judge has obviously allowed the convening of the court to go forward to charge. We will -- well, inevitably, I think the FCA are not going to a full steam. They've made that clear. This one pays a pound in the pound to complaints that they will always have areas of concern. And they certainly, I think broadly, are happy with the methodology we're putting into the Scheme. We will continue to have a dialogue with them. But where we are now on the scheme as it's proceeding, it would go -- we're writing to all the creditors, as I said, on March 17. And it will then -- for them to vote at a meeting, which is taking place in the 19th of July, I think it is. And assuming they voted in favor of the scheme, which is our working assumption, then it will be sanctioned, I hope, by the judge at the end of July. So I don't think you should read too much into that letter, really, from the FCA. It's important. We're considering it. We're in dialogue with them. But it's the nature of these things, frankly.

But things like their suggestion that they think you can pay more than GBP 50 million, they're reviewing whether you meet threshold conditions. That -- as an external observer, that all sounds pretty serious stuff. But my sense from you is that you feel pretty relaxed about it. Is that fair? Or am I putting words into your mouth?

No. No, you weren't. It's important for us to think carefully about that. But we put after this the amount that we think that we can afford to pay when we look at the capital requirements that we have and the plans that we've got for the next few years. And we're not changing anything. And we've also put equally for much. So we maintain a good dialogue with the FCA because, obviously, they regulate our other businesses. So we'll continue to be in touch with them. But we believe the scheme will proceed, and it's in customers' interest to do so.

Our final question for today comes from the line of John Cronin from Goodbody.

The first one is on the topic that you've previously raised around the potential to bring Moneybarn into the banking group. I'm just wondering, are there any updates in relation to the dialogue with the regulator on that? Or anything you can say in relation to potential expected timing, noting that you first flagged this at some -- in some level of detail at the 2019 CMD? The second question I have is just on this opportunity in mid-cost credit. Like you've called out this GBP 1.6 billion addressable market opportunity. Vanquis has been writing personal loans for years, very small receivables book. What makes you confident that you can make it work? And where are you going to win the customers? And look as well as that, can you give us any context in terms of what kind of scale to be thinking about more from a capital consumption perspective at the outset than anything else? Just to get a sense as to whether or not that would impinge on your ability to distribute any surplus capital in time. And then thirdly, just coming back to the closure costs of up to GBP 100 million. Look, I think you've called out about 2,100 CCD employees working with an average, say, GBP 15,000 or GBP 20,000 of a redundancy check. That's GBP 30 million to GBP 40 million of cost approximately. It seems significant that it could be up to GBP 50 million or GBP 60 million of extra cost. Anything -- any observations on my attempt as high level of calculation on the redundancy point? Or -- and could you give a bit more detail in terms of the breakdown of other costs associated with the closure? Because that $100 million does seem a high figure.

Okay. Thanks, John. Taking the first question first. Absolutely right, we have flagged our intention to use the bank's balance sheet to fund Moneybarn. It's something -- we also, in the time since the Capital Markets Day in November 2019, started to diversify its funding anyway by utilizing securitization program, which obviously you're aware of what we're doing with NatWest. But absolutely, it is our intention to utilize the bank's balance sheet. In terms of funding Moneybarn's growth in the future, it's a delicate subject which will require further conversations with the PRA. We obviously are as strict as any bank is under our large exposure. And that would require conversations with the Bank of England to lift that. But it's something we're planning on doing. The extent to which we haven't put our foot on the gas pedal to do it during 2020 was really more around all of the hygienes that are going on more generally with the pandemic. And I just didn't think that we'd really get half the attention of the PRA. But it's certainly something that's more coming into focus now. In terms of mid-cost credit market, it basically -- in terms of scale, I think this is something that's going to evolve over time. And I don't think -- I think, again, it's something we'll come back to at our Capital Markets Day to give you more parameters on it. It's very early stage at the moment. But I think we've also said that we'll come back to you in our view on future dividend strategy at that point in time. But I think the -- they're not usually exclusive topics, let's put it like that. And then I'll basically let Neeraj talk a little bit more about detail of the closure costs.

Yes. Thanks for the questions, John. On the closure costs, you're right in your kind of broad views of how those costs split out. If we then consider the fact that the normal running costs of CCD were approximately GBP 200 million a year, you can take from that, that if it takes 6 months to get to a point where if there's closure of that division, then that next 6 months could cost in itself GBP 100 million. Now clearly, what we're talking about here is a much reduced level compared to that because, obviously, we are looking to reduce costs as we go through the process as well. And therefore, this kind of determines if we're talking about the end of that process towards the end of this year, then actually that cost level would seem quite reasonable, if not demanding, of our management to deliver. So I think the up to GBP 100 million is definitely something we'd like to beat, but it will be a tough ask.

Yes.

Can I throw in one final quick one? Just in terms of the language on Moneybarn loan demand. I don't want to read into it too much. But it sounds like your -- the trends are a bit more positive in Vanquis than Moneybarn at the moment. Is that fair to say?

No. I don't think you should assume that. And I apologize if I created that impression. I think -- both businesses, I think, are doing very well. But as I said, because of the natural customer base that we have, we're a little bit more conservative about the future than perhaps some of the prime banks. But I think in the circumstances, they're both doing very well. I appreciate -- that was the last question. I wanted to say thank you, first of all, for dialing in and listening. I also wanted to apologize. There's probably a lot of banging in the middle of that presentation, and I should perhaps explain that because [indiscernible] and obviously knocked it over [indiscernible]. So I'm sorry for that. Let's -- I'm looking forward to giving you the update on our half year results, as you know, that will be in August. And then we are planning, as I say, a Capital Markets Day for later in the year, when we'll be able to get into a little bit more granularity about some of the questions you've been asking. And let's hope that we can do that by then face-to-face. It would be good to see you all. So thank you with that. If there are any further questions, please contact Owen, and we'll make sure that they are addressed. So thanks, again, for listening.

Thank you for joining today's conference. You may now disconnect your lines. Thank you.