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

Thanks, Jess. Good morning, everybody, and thank you for joining us for the presentation of our 2021 results. I'll take you through the strategic highlights for the year before Neeraj goes into a little bit more detail on the financials, and then I'll return for a check about the strategy and outlook. And then we can take questions at the end. Before I begin, however, I'd just like to take a minute to highlight the awful situation in Ukraine. As a company, we've raised funds for the refugee crisis, and we'll continue to play our part however small. And we're supporting the innocent people impacted by this terrible conflict. We've launched a matched funding program for all employee donations. And I'd like to thank my colleagues who've contributed so far. In addition, and as you'll hear further in the presentation, we've adapted our current underwriting to reflect the inevitable short-term inflation pressures the current situation will bring to bear. Having said that, I'm very glad that the group is in such a robust capital position to deal with any short-term macroeconomic uncertainty, and obviously, to fund the future growth we see as being very exciting for us. So turning to the presentation. 2021, as many of you will know, was a year of transformational change for PFG. And as you can see here on Slide 4, we've delivered on several strategic financial and ESG-based [ significants ] during the course of the year as we changed the group from being a consumer finance company to becoming a leading specialist bank focusing on underserved markets in the U.K. To pick out on some of the key initiatives, CCD was closed on schedule and within budget, meaning that PFG has now completely exited the high-cost credit market. This is really important as it means the risk and impairment profile of our customers, and therefore, our business has changed. Our customers are now in the mid-cost market, not the high-cost market. So PFG is now writing lower-risk business and will do so going forward but still at very attractive yields. It also is changing the impairment profile of the business versus our historic business-as-usual trends. We established a new personal loans business during the course of the year, which incorporates our Vanquis-branded loans and the new Sunflower loans products. I'll say a bit more about that later. And this will diversify our product offering. And I must say the pilot phases of these products are progressing well to date. To support this and other lending products in the future, we've also developed a new state-of-the-art IT platform, which we call Gateway. It's product diagnostic, and it enables us to speed up significantly our time to market for new products. And this is a -- this platform is a meaningful step forward for PFG, and we'll have a number of customer benefits include future lending, enabling a seamless customer experience across all of our products. As with many other companies, the group was negatively impacted by the pandemic, but we recovered well during 2021 and have now returned to growth. We enhanced the capital and funding mix of the group with the issuance of a Tier 2 bond. We also launched a senior bond tender, and we've submitted a large limit waiver application to the PRA, and that will allow, when granted, vehicle finance division to access our retail funding deposit. Reflecting on this strength and indeed our confidence in the outlook for the group, the Board has proposed a dividend of 12p per share for shareholders, which equates to a payout ratio of approximately 30%. And the Board anticipates moving forward towards a payout ratio of circa 40% on a sustainable basis from the financial year 2022, obviously subject to market conditions. And within ISG -- with ESG, which I've said previously is an extremely important topic for us, we announced the streamlining of our corporate governance framework. So our Boards are now substantially aligned. And just last week, we announced the appointment of Fiona Anderson as our Managing Director for Cards. She will join us in April, and that rounds out my senior leadership team. So in summary, I think we've achieved a significant amount in 2021. But obviously, there's still a lot to go for, and I'll address this in more detail later on. Turning to Slide 5. Even though 2021 began in lockdown, it progressed, in our opinion, very differently to 2020. We saw consumer confidence rising as the economic picture improved. Unemployment was falling with wage inflation, and customer spending again rose as government lockdowns were lifted. All of these trends positively impacted PFG. And as you can see that from these charts, receivables growth picked up during the second half of the year. Impairment rates fell as we released COVID-19 macroeconomic provisions, and our profitability improved materially year-on-year. The last chart on this slide illustrates our robust capital position. We have a total capital ratio of over 40%, which provides us with plenty of optionality to drive growth in 2022 and beyond and also to provide shareholder distributions. Our strong capital position enables us to grow confidently during the uncertain macroeconomic periods which we may face ahead. Moving to Slide 6, which illustrates the recovery and strong growth potential point I was just alluding to, but from a product perspective instead. You can see in Cards, we maintained our cost approach to new customer bookings during the course of the year, resulting in approximately 200,000 customers being issued a credit card. The better card spend as a result of lockdown restrictions being lifted resulted in receivables ending year-on-year broadly flat. Turning to vehicle finance. The year-end receivable numbers were slightly held back by higher levels of customers settling their loans early, obviously, driven by the buoyant secondhand car market, but we continue to see good levels of customer demand throughout the segment. The impairment profile of this business also stabilized during 2021 at around 7%. In our new personal loans business, where we now have approximately 20,000 customers, the pilot phases of the Vanquis open market loans and the Sunflower loans continue to track in line with our expectations. We will review these offerings and report back to the market in due course about the next possible steps to take this business forward. Losses in our personal loans business increased during the period, reflecting the investment we made in Gateway, which I referred to earlier, and the reduction in impairment reflects the improving underwriting profile of those business established itself. In summary, we see 2021 as being the beginning of an important growth phase for PFG. We can see positive momentum across our businesses. And we have the balance sheet, customer insight and IT to take the group forward. I'll share more of my thoughts on this later on in the presentation. So -- and I thank you for listening to the introduction. And I'll hand over to Neeraj, who will take you through the numbers. Neeraj, over to you.

Thank you, Malcolm. I'll take you to Slide 8 to start with. This shows a summary of the group's financial position and the impact of CCD. Our risk-adjusted net interest margin improved significantly year-on-year, reflecting the release of some COVID-19 macroeconomic provisions. Improved profitability position resulted in our return on required equity improving to 32.6%. The group's net receivables base increased year-on-year, reflecting an improvement in customer spend trends as lockdown restrictions were eased. Our balance sheet position remains strong to meet our growth ambitions, and we issued a Tier 2 subordinated bond for the first time since 2005, which has performed well in the secondary markets since. And at the same time, we did launch another successful tender for our 2023 senior bonds. The success of the Tier 2 transaction is another example of the continued support from the debt capital markets [indiscernible]. Shortly after period end, we repaid our outstanding RCF facility as we moved to a retail deposits-funded model, which I'll come back to later on. We maintained our prudent approach to risk management during the year. And reflecting this, our coverage ratios remain strong. As I'll come back to later on, this positions us well to cope with the short-term economic uncertainty that may result from the inflationary environment we are currently experiencing in the U.K. Slide 9. This slide shows the group financial results in a bit more detail. Full product P&Ls can be found in the appendices at the back of the slide deck. Our credit card business generated adjusted profit before tax of GBP 174 million in 2021, driven by improved customer spend dynamics and impairment provision releases. Our vehicle finance business also generated excellent profit growth and delivered an adjusted profit before tax of GBP 29 million for the year. The secondhand vehicle market remained buoyant during 2021 and customer demand remained strong, whilst our loan to values in the car market remained stable at circa 90%. Our newly established personal loans business posted a small loss for the year as it continued to grow well and establish itself and as we invested further in the platform. The group's central costs increased during the period, reflecting the move to a shared services model and investments work we are making in the group's core functionality. We have appointed a new Chief Information Officer as part of our investments in driving to a more digitally enabled customer experience. For 2021, the group delivered an adjusted profit before tax from continuing operations of GBP 167.8 million, representing significant growth year-on-year as the group started its recovery following the pandemic. After allowing to see some [ deep ] closure costs and exceptional items, the group delivered a statutory profit before tax of GBP 4 million versus a loss before tax of GBP 114 million for 2020. We have a strong impairment provision position that based on current macroeconomic indicators is likely to require the release of the remaining COVID overlays in 2022. Costs in 2021 have been driven by regulatory change requirements as well as the Gateway infrastructure, treasury enhancements and the resumption of bonus payments that were completely withdrawn in 2020 as well as senior managers taking a 20% pay reduction for 3 months in that same year. I'll come on to the expected cost trajectory later in the presentation. Turning to Slide 10. This shows our key performance indicators. I don't intend to go through each of these, but you'll note that these demonstrated clear recovery, as Malcolm has already mentioned, across our key metrics. The improvement in profitability, I've already mentioned, led to a material improvement in our returns profile, including 11.5% return on assets at the group level. The group's revenue yield reduced during the year as we position the group towards lower-risk customers on average. Despite that, our risk-adjusted net interest margin improved materially to 26.9%. Our cost of risk reduced significantly, reflecting a more benign macroeconomic backlog and as we released approximately GBP 40 million of impairment provisions being part of the COVID impact. And in terms of the balance sheet and as I pointed to already, our CET1 and total capital ratios are both extremely strong. And we have a CET1 capital surplus of just over GBP 220 million before any further ICAAP reductions we may achieve this year. Turning to Slide 11. This shows a useful snapshot of the products we offer across credit cards, vehicle finance and personal loans. This slide illustrates the decrease in average receivables that the credit card business has experienced owing to the impact of the pandemic in 2020. Year-on-year, the average receivables booked in cards was lower by approximately 17%. The risk-adjusted net interest margin in our cards business increased by around 75%, reflecting the lower impairment charge in that business, which produced adjusted profit before tax of GBP 174 million. In our vehicle finance business, average receivables continued to grow during 2021, reflecting the strong performance of this business during the pandemic. Our vehicle finance business also saw an improvement to its risk-adjusted net interest margin amounting to circa 80%, which helped drive an adjusted profit before tax of GBP 29 million. Finally, this is the first time that we're able to show separately our newly established personal loans business, which incorporates our bankers and some of our loans brands. Although we have offered existing bank bankers' customers' personal loans for the last 2 years, the second half of 2021 was when we launched our first open-market product and the pilot phase, but this has progressed well since launch with good underlying demand from customers in that segment. Similarly, our Sunflower loans product is also in pilot phase at present and will be assessed during H1 of this year. The 2 brands will target different segments of the market, but both will focus on hard working customers with average credit scores of at least 500 and above. The increased loss year-on-year for the loans business reflects a significant investment made in the new Gateway IT platform, which Malcolm will discuss in more detail later on. Turning to Slide 12. This shows how spend on our cards performed versus the wider market and also how spend has evolved the category over the last 3 years. The chart on the left-hand side shows that our customer spend tracked the wider market for most of 2021, having recovered more quickly as lockdown restrictions were lifted in the early part of the year. Were it not for the Omicron variant impacting spend in the run up to Christmas, spend overall for 2021 would have outpaced 2020 and 2019. The right-hand side shows a continuation of the theme we've discussed before, which is that all spend categories apart from holidays and recreation are now back to or above 2019 levels. Clearly, this year, the expectation is for holiday spend to normalize as well as continued increases in nondiscretionary spend by our customers. Turning to Slide 13. This slide shows how custom bookings evolved during the year. In cards, we continue to adopt a prudent approach to new customer bookings with approximately 200,000 new customers being added. We will continue to take a prudent approach to bookings given the inflationary environment in U.K. at present as well as deeper focus on supporting existing customer requirements where we have significant behavioral data available to us. In vehicle finance, new booking volumes remained good throughout the year, and underlying customer demand remains strong. Turning to Slide 14. And as I've mentioned in relation to bookings, credit issued in our credit card business was on track to meet 2019 levels until midway through the fourth quarter when some restrictions were reintroduced. The right-hand side here illustrates the dramatic recovery that our vehicle finance business enjoyed during 2020 and how 2021 is tracking in line with 2019 levels for credit issued. Turning to Slide 15. This shows that our strong collections performance continued during the year, particularly within the vehicle finance business. Overall, collections were lower in the credit card business, but this reflects the smaller book and reduction in customer numbers year-on-year. Collections per active customer remained strong. Slide 16. This illustrates how delinquency rates were stable throughout 2021 in both credit cards and vehicle finance with the usual seasonal uptick towards Christmas. As Malcolm mentioned earlier, we are watching our delinquency rates extremely carefully for any [indiscernible] signs of financial distress from our customers given the inflationary environment in the U.K. and the potential squeeze in household budgets. However, as I said on the previous slide, we continue to be well-positioned given our prudent coverage levels. Slide 17 shows that the material reduction in impairment during 2021 and particularly during the second half of the year across credit cards and vehicle finance. This was driven by a more benign macroeconomic backdrop than originally provided for, and delinquency trends remained favorable, in part helped by government's [ sports schemes ]. Turning to Slide 18. And despite this fall in impairment driven by provision releases, Slide 18 shows that our coverage levels will remain robust and our current provision levels are more than prudent for the current inflationary environment in the U.K. One thing to note in our vehicle business is that the underlying coverage ratio is lower than shown here. The coverage level is forced to be higher due to the lack of debt sale activity in this market, and we expect coverage here to normalize as this activity resumes. Slide 19 shows that the start of the recovery in our credit card receivable book from a low point in H1 '21, which results in receivables being broadly flat year-on-year despite some of the challenges around spend. The vehicle finance book experienced high levels of customer liquidation during quarter 4 '21 as a result of the buoyant secondhand car market. Slide 20 shows how the group has carefully managed its capital position and has a sector-leading capital position coming into 2022. We issued our first debt capital since 2005, which was oversubscribed and is trading above par. This demonstrates the capital debt market appetite for Provident Financial Group notes. We hold significant surpluses of both CET1 and total capital, which cover the remaining IFRS 9 unwind and the increased regulatory buffers. Together with the removal of any CCD impact leaves us with a strong capital base to support future growth and investment. Turning to Slide 21. The group has absorbed the cost of closing CCD and scheduled IFRS 9 transitional unwind and is capital-generative on a continuing basis and has diversified its capital base in 2021, as I mentioned earlier. Slide 22 shows the impact of volume and the improving macroeconomic environment and the expected credit losses. We've taken a proactive approach regarding the impact of interest rate rises and cost of living increases on our customers. We continue to watch for any customer change in delinquency but have seen nothing to date. We continue to include a more cautious view through our modeling as we navigate 2022. The continued tightening credit acceptance will help in building out a strong front book. Turning to Slide 23. As you'll see at December 2021, the group held significant levels of liquidity and available funding support to support growth and investment and to deliver the steam of arrangement settlement in 2022. Important milestones for the group include accessing the Bank of England Liquidity Schemes and issuing our first Tier 2 bonds since 2005. We have further lowered our cost of funds by increasing our securitization in Moneybarn, all without increasing our encumbrance levels. On Slide 24, the strong liquidity position we've built through 2021 has allowed us to repay and remove the revolving credit facility over 15 months ahead of its contractual maturity, which is an important step as we move towards being a primarily deposit-funded group. Our actions during 2021 have moved all contractual maturities to 2023, allowing time for us to obtain permission for Vanquis Bank to fund other parts of the group, as Malcolm mentioned earlier. And we are in very advanced position with the PRA with this application. As is normal for a banking group such as PFG, we plan to fund our businesses primarily through retail deposits in the future. Finally, turning to Slide 25. The financial outlook remains positive based on all that I've said and Malcolm has said as well. Firstly, capital to allow for significant growth in clearly defined and large markets with clear initiatives underway to enable continued receivables growth, such as launching new APR credit card price points, adding Apple and Google Pay, expanding into new vehicle asset classes and further developing Moneybarn's introducer network; secondly, a strong impairment provision position going into 2022, where we still have circa GBP 60 million of remaining overlays relating to COVID; continued reduction in credit and operational risk, which is changing the impairments profile of the group. And we are on a trajectory to reduce coverage ratios towards the mid-teens in the medium term. Whilst we will invest in 2022 as we did in 2021 as we reposition the group, we do have a focus on operating leverage and cost control. And as such, from a marginally reduced cost-to-income ratio in 2022 versus 2021, we will drive towards a 40% cost-to-income ratio by the end of 2024. Strong treasury capabilities will also continue to drive down the group's cost of funding. That's it for me. Over to you, Malcolm.

Thanks, Neeraj. It's an excellent summary of our financials. I think it's very good to see the recovery theme continuing and also to see how clearly our robust capital and financial position is. If I can turn to Slide 27. The strap line shown here is that PFG is a leading specialist bank focusing on underserved markets. And this slide shows some of the building blocks and products of that strategy. Firstly, PFG is focused on 3 core credit products: that's credit cards, vehicle finance and personal loans. And in aggregate, the market opportunity in these products totals well over GBP 17 billion, which just illustrates how much of a market we are actually targeting. At present, in aggregate, our receivables book is approximately 1/10 of this. So there's plenty of growth to go for. And obviously, the market is very fragmented. Secondly, our place in those markets is underpinned by a customer-centric vision and a well-capitalized balance sheet. Our customer-centric vision is based on detailed customer insight and our ability to tailor products to their needs. And our balance sheet strength is a real source of competitive advantage as we can use lower-cost retail deposits to fund our growth. Thirdly, what does this mean for shareholders if we execute and deliver on our plans? Well, it's strong receivables growth over the medium term, supporting attractive terms on a sustainable basis, which drives our ability to pay our shareholders a dividend. I plan to provide more details of this in the second half of the year, by which time we hope we'll have a more normalized market situation, and I'll demonstrate that at our Capital Markets Day. In reflection of the Board's confidence in the outlook, it anticipates moving towards a payout ratio of circa 40% on a sustainable basis, as I've said, from 2022 onwards, obviously, subject to market conditions. In essence, we're building a long-term, much more sustainable business, which aims to deliver attractive returns and sustainable returns for our shareholders. So to cover off some of those points in greater detail. Slide 28 shows our addressable markets. Across cards, vehicle and personal loans, our addressable markets in aggregate at the end of December 2020 amounted to some GBP 16 billion. During the course of 2021, these markets grew to some GBP 17 billion as strong demand for credit from customers continues. And we can see scope for these markets to increase in size again to over GBP 18 billions as they -- GBP 18 billion, rather, as they return to pre-COVID levels and as household finances evolve. That is the market context. But how do we plan to grow into these markets? Well, Slide 29 illustrates our customer-centric model, which is underpinned by a leading technology, and that affects our product offering. We have real customer insights built up over a significant period of time, spanning millions of individual data points. One of the group's strongest assets is its understanding of its customers and being able to safely and effectively underwrite their credit performance. As we position PFG in the mid-cost credit market, we're offering products to young professionals within credit cards, key workers such as NHS staff or people working in our emergency services and at the near end prime of the spectrum from people who might present higher-than-average earnings but who just need help managing their finances. There are up to 10 million to 12 million hard working adults in the U.K. who don't have access to the products offered by mainstream members. We understand them, and we're here to help them. They don't use credit for luxuries but for nondiscretionary spend such as food and fuel. And as such, their spending tends to be more resilient in tough economic times. This insight is now underpinned by a brand-new, state-of-the-art IT platform called Gateway, which we developed and implemented over the course of 2021. It currently supports the new personal loans business, but over time, it will be able to support all of our lending products. It is product diagnostic and increases our speed to market for new products significantly. Importantly, it will give us and our customers a holistic view of all of their PFG products in one place. It's quite simply going to be, I think, a game changer [ for us ]. Our customer insight, combined with leading technology, enables us to tailor products to customer needs. It enables us to consider new products such as secure lending offerings or buy now, pay later when it becomes regulated and to introduce them seamlessly. The next 3 slides, I think, set out our strategy for each of our products and the second derivative benefit we expect from them. So Slide 30 sets out different aspects of our credit card strategy, which will include continued investment in the division as we position the business to build back to pre-pandemic levels and beyond. We appraise new strategic initiatives through different lenses to assess their impact. These could be new business growth, cost and operational efficiencies or better credit decisioning tools. For 2022, we aim to capitalize on core credit market growth as it presents post-COVID and are launching 3 new APR price points, providing another option for customer and receivable growth, and additional features such as Apple Pay and Google Pay. Our new mobile app will improve our digital capability of the business, enabling us to improve customer experience and brand awareness campaigns, such as the recently [ launched tool ] with the bankers campaign in 2021 enable us to drive increased customer awareness. The team is working on the next-generation scorecards to improve our credit decisioning process and to help to ensure that customers are being offered the best product for their situation. As I've already mentioned also, Fiona Anderson, our new Manager Director of Cards, will be joining in April, and I'll be working closely with her on those initiatives over the coming months. In our vehicle finance business, as shown on Slide 31, further investment will take place in our vehicle finance platform, and that will enable us to grow -- to capture growth in our core markets post-COVID and through new business partnerships. We will respond to customer feedback and assess potential new asset classes and products such as, for example, leisure vehicles. Our instituted network is clearly very important to the health of our business, and we plan to work closely with them to further improve the customer journey and customer outcomes. And for our vehicle financing business in particular, we hope to be able to talk about meaningful cost-benefit from utilizing retail deposit funding from our bank during the course of 2022, subject to the wave of being [ an order ] which we talked to you about. Finally, our loans business, seen here on Slide 32. We're positioning this business for growth into a significant and exciting market opportunity for us. We currently have circa 1% market share of a roughly GBP 3 billion market with many of our customers already using personal loans with other parties. So we know they want them and want to use them. If the current pilot phases are successful, as they seem to be at the moment, we plan to continue to expand our open-market loans for Vanquis and Sunflower brands and to increase penetration of loans to existing customers across the group. The Gateway platform forms the basis of the operating technology for this business and enables us to develop -- enables the development of an app for customers. Lastly, as business scales, we'll continue to develop and refine its underwriting process and scorecards to ensure credit decisioning improvements. On the penultimate slide, Slide 33, we set out the group's capital management framework. The starting point is clearly the group's strong capital position and our diverse range of funding lines. This supports our position and enables us to grow into large, growing markets across credit cards, vehicle finance and personal loans. With the group's Gateway platform, we have the potential to house all of our lending products in one place in the future. And the ongoing optimization of our operating model, including central shared services across legal risk, HR, finance will help to deliver attractive returns on a sustainable basis. As you've heard us talk about today already, we've reinstated a dividend policy reflecting the strength of the business and our confidence in the outlook for the future over the coming years. As we noted at the bottom of the Slide 33, our position gives us optionality to assess potential inorganic opportunities should they arise. So in summary, on Slide 34, we remain well-positioned despite potential short-term macroeconomic uncertainty in what are growing markets. The group is also underpinned by a very strong balance sheet. And we have a customer business -- customer-centric business model supported by leading technology. Therefore, looking forward due to the transformational changes that we have undertaken and the outcomes we've achieved, I am confident that subject to market conditions PFG will deliver strong receivables growth, attractive and sustainable shareholder returns and a dividend payout ratio circa 40% on adjusted earnings for the full year of 2022 onwards. And that will be continued on a sustainable basis. So thank you very much for listening. And we will now take questions. And with that, I'll hand back to our moderator, Jess.

[Operator Instructions] And the first question comes from the line of Gary Greenwood from Shore Capital.

I've got 2, if I can, please. So the first one is on the dividend and the new payout ratio policy. So I was just wondering how you arrived at 40% as being the right payout ratio for the group. And then secondly, I know you mentioned it's subject to market conditions. So does that mean you'll think about effectively smoothing the dividend through any volatility in IFRS 9, like we saw in 2021, when obviously, you sort of held the dividend back given the extra payout could have done based on the provision releases? So that's the first one. And then the second one on capital. So obviously, your capital position is very strong at the moment. You talked about potential for reducing the regulatory capital requirement going forward. So what's the process that you need to go through to convince the regulator to allow that reduction in regulatory capital? And then secondly, assuming that does happen at some point, what would you then choose to do with that capital? Surplus will be returning to shareholders? Or would you look to invest it? I know you mentioned the inorganic opportunities in your commentary as well.

Yes. I'll start with the second one, and then Neeraj can embellish also on the dividend. I mean, yes, we have got a very strong capital position. I mean, obviously, the capital we hold is to a large extent determined by the PRA. And as you know, that in turn is determined by the ICAAP that we have to submit every 2 years. We will be submitting an ICAAP in the first half of this year. Obviously, it is for the PRA to decide how they will look at the capital we have to require. But since we submitted our last ICAAP, there have been -- as I hope you all have relisted today, some fundamental changes in the structure of the group. First of all, we have closed CCD. Our previous ICAAP required us to hold a certain amount of capital to support that business, and we no longer have that business. And I think some of the structural changes we've made have also affected our operating efficiency. So we will be putting in an ICAAP and they will give us, hopefully, a new CET1 ratio we have to perform to. Although, obviously, we can't say what that will be. Having said that, moving on to the second half of your question on capital, regardless of our required regulatory capital, we do have surplus capital. Clearly, we are going through some uncertain times. But equally, we feel we've got enough capital, notwithstanding that to sort of double the size of our balance sheet with existing organic growth. I'll mention, you're absolutely right, Gary, that we also are in a sufficiently strong position now that were opportunities to present themselves which are suitable, we have the ability to consider inorganic growth. And that's certainly something I'm open-minded about. Clearly, we are not in a position to sit on capital and not make the return our shareholders want us to have. And so I think if you look at the waterfall of what will happen is, clearly, we've got very exciting organic growth opportunities. There may be inorganic growth opportunities. And we've also reinstated the dividend policy, which Neeraj can talk in more detail about. But we're all about making sure we deliver the right sort of level of returns for our shareholders. And we don't do that by sitting on capital that's not being put to work. I mentioned we're going to have a Capital Markets Day in the second half. And clearly, we can give you more guidance on what are our target returns on equity are, but I'm optimistic we'll be able to utilize the capital very efficiently. Do you want to say anything on dividends?

Yes. Sure. Thanks, Gary, for your question on the dividend. How we arrived at the 40% really is obviously with discussions with our brokers and our investors. And the market for bank stocks, as you know better than me probably, is that 40% is starting to be the kind of central case for most banks in the U.K. So that's kind of where we are. In addition to that, obviously, we are a high net interest margin business, which is able to generate good capital returns as well. We are capital-generative. So on that basis, the 40% does seem a sustainable level for us to have included in our planning. And market conditions, as they are currently, would allow us to continue making those payments going on into the future. As you quite really say, it's 2 things. One is that we have been very clear about the fact that, that dividend is based on adjusted earnings, which means that the -- it comes out of our profit, doesn't come out of our previous reserves and also means that if there are any anomalies in our [indiscernible] large provision releases, they're not part of that calculation. As you also pointed out, if conditions were to get to a point where it was deemed that it wasn't right to make those [ dividends ], then we'd have to make that decision then. But it would have to be something as extreme as we saw in 2020 with COVID, for example, rather than anything less severe where we think that we're taking that into account by using adjusted earnings. So we do expect -- the expectation is very clear that we will be paying a 40% dividend on ongoing earnings adjusted for any kind of anomaly.

Follow-up. I presume in doing that, you're sort of trying to position yourself such that even if earnings were to fall at some point because of an IFRS 9 move, that wouldn't -- necessitate, sorry, necessarily cutting the dividend? You'd looked at it to hopefully at least maintain it in that scenario?

Yes. Yes, exactly. So it's more about the fact that our model is generally a capital-creating model. So therefore, the 40% is on what is created by us in any year.

The next question comes from the line of James Hamilton from Numis.

I'd like to ask you a couple of things, please. Firstly, on the unsecured business. And clearly, there's an opportunity there and thank you for the additional disclosure. I was wondering if you could sort of outline for us your sort of broad thoughts as to how you see this business evolving in terms of scale testing and where you would sort of hope to be getting to a breakeven perspective. And the second one I wanted to ask you about on holiday spending, what you're modeling is -- because you sort of suggested that you might get back to sort of 2019 levels, but average balances on cards are lower than where they were in 2019, and many people won't have been away for a couple of years. I mean, is the -- what do you think is the prospect of potentially seeing holiday spending increasing to materially more than where it was in 2019?

Yes. I'll take the second one -- second point first, James. I think that's a very fair observation. I think a lot of people have been in -- they've missed the holiday because of the pandemic. I think they were reticent even as the pandemic was sort of easing last year to sort of commit themselves to holidays. And I think we may see a significant pickup as we move through the second quarter. The only, I suppose, hesitancy I have is whether -- if the cost of living increases go up to the point people get slightly prudent again. But I think -- even so, I think they're still going to go away because they'll commit to the holiday before I think those sort of things are going through. And so yes, you could see them returning to, frankly, above 2019 levels. And certainly, there's going to be an awful lot of encouragement for people to go away for holidays from the travel firms who've obviously been suffering terribly through people not going. So that's really answering the holiday spending point. But on the unsecured business, how -- I'll start off with how I see it developing, and then Neeraj can get into sort of looking at some of the profiles that we're seeing for the future. I mean what we've deliberately done is that we effectively got 2 pilot schemes: one at the lower-end APRs, which is the one being done branding of Vanquis open-market loan; and the other at the higher end, which we're marketing as Sunflower at the moment. They're both pilot schemes. They've both got about 6 months to run before we'll have clear views. But as you know, when you launch a new product, it's not about just the demand. It's also about how people behave in terms of repayment. So it's very early days to say that. We've committed GBP 10 million of capital to -- GBP 10 million of lending to the lower-end range and GBP 4 million at the top end. And I see these 2 pilots as bookends, if you like, which will become, if you like, the top end and lower-end of a spectrum of personal loan products through that rate card. I don't know how many price points we will have, but I want to know from an affordability perspective, there are also -- as you move away from the cheaper rate product, you have to induce -- introduce a lot more friction in the application process. Because clearly, if you are lending at higher rates, the affordability test we have to do is much more stringent. Whereas at the lower rates, you will basically -- it's much more -- the purchasing decision is made much more on sort of, if you like, a comparative website. So we're experimenting with the 2 ends of the spectrum. And I see over the course of this year, assuming the pilots continue as they are at the moment, us moving out and offering other price points, but also doing so on the new Gateway platform that we've established. In terms of size of market, obviously, we've mentioned that in an overall sense it's a GBP 3 billion-plus market. But do you want to just talk, Neeraj, about how we see it evolving from our perspective?

Yes. And James, as you sort of alluded to, clearly, there is a [ J curve ] affect as we start a business from effectively scratch. We expect 2022 to be real establishment of our loans business. And therefore, in 2023, we'd expect it to start turning a profit. So ultimately, that's kind of a pretty normal trajectory for that kind of business.

In terms of size, in terms of.

Yes. In terms of size, I think from where we are, we can -- based on that market size that we've got, we see it over in the medium-term getting into GBP 400 million-plus receivables base, bearing in mind that the loans are not short term. So I think that's probably quite a reasonable position to get to.

The next question comes from the line of Ronan Dunphy from Goodbody.

I might just have one question given the questions that we just heard. [ Anyways ] -- just regarding the decline in vehicle finance net receivables in the second half of the year, your reference to early customer settlements on account of higher secondhand car values and being a factor here, which strikes me as somewhat of an unusual dynamic. But I guess, car prices surging 30% higher year-on-year is an unusual dynamic in itself. So maybe just some color on what's going on there, maybe how prevalent this customer behavior is. And what does it typically mean that the customer is trading down to a lower-value vehicle or essentially cashing in and going without the vehicle? And I guess, is it something that's continuing on this year and more broadly then what the outlook is for that part of the business?

Yes. Thanks, Brad. I think it's an interesting dynamic. And I think that, as you say, the customers have been needed in as well by used car dealers specifically, who are looking to stock because of the demand for used cars. And as you say, it's quite incredible to see the size of appreciation value for cars that are not necessarily that new either. So I think from what we've seen is that people have cashed in, and it's kind of something that's happened pretty much towards quarter 4 of this year -- of last year rather than continuing now. And I think that a lot of these people would have taken money out that deal and then bought cheaper cars from that cash probably to keep them going. But I think that we're not seeing that activity continue in any way. And we have seen actually in the first 3 months of this year that the motor vehicle business has started to come back to kind of budgeted levels of growth that we expected as we said before that activity in quarter 4 had started. So actually, I think it's something that just happened the end of last year. We don't have any evidence of it continuing. And in fact, we've seen a normalization to where we expect that market to be.

The next question comes from the line of [ Billy Mong ] from KBW.

I've just got 2. So one is cost. So I see that year-on-year for most of the divisions, cost has gone up quite a lot. I mean I know a lot of it is investment spend. That's fine. I think you've also talked about cost-to-income ratio being marginally down next year. Just wondering if you -- if that's because you think revenue is going to be so strong. Or are you factoring in lower cost? Or just generally, how you're thinking about it, obviously, given inflation and all that? So that's number one. Number two is on the impairment. So a lot of your peers, large peers and more [indiscernible] peers have talked about a faster normalization, and I know you're still seeing very benign trends. But it still feels quite ambitious given the environment to sort of give the guidance of expecting releases to continue with GDP forecast dropping as they have in the last few months, et cetera. And it was a good thing to see kind of balance going up for sure. But to what extent is that driven by a cost of living squeeze and consumers taking in more credit to sort of make up for that? So just wondering how you're thinking about that.

Yes. Sure. Thank you for your questions. And I think starting with the costs. Yes, we do expect our investment to continue, as we've said. And costs will come down in absolute terms marginally from where they are in 2021. We do expect income to improve, and that's based on the fact that the macroeconomic conditions. And as people obviously are more freer to operate more normally outside of COVID, that will allow for a different kind of spend level. And we have no reason to expect that. In fact, inflation itself will drive some element of increase in spend because our customers don't use their credit cards, for example, for buying luxury items. They generally buy the nondiscretionary items like food, petrol, et cetera. And they're also using these obviously things like holidays, et cetera, which we expect to come back. So I think that the income level will naturally come back. I'm not -- we're not talking about anything particularly out of the ordinary, but we are expecting our cost base to start normalizing slowly during 2022. And therefore, after the investment period that we've talked about comes to an end in terms of its kind of material levels, then we start seeing the benefits of all of that investment, including the fact that we have centralized many of our costs now and we are creating more shared services so that we can get cost efficiencies out over the next 2 or 3 years. So all of those impacts will then drive that cost-to-income ratio as well as the fact that our income will be improving due to the improvement in our balance sheet size and receivables. And all of those things together will drive it towards that 40% as we talk about. On the impairments, I think that the impairment story is quite interesting because I think -- I don't think we talk about our peers. I don't think there is one really because if you look at the coverage levels that we hold compared to other banks out there, we are significantly higher in coverage than just about anybody else that I know of certainly in the banking market. And that has been driven by the fact that we've taken a very cautious view, especially during COVID, where our coverage levels were in excess of 30% of our balance sheet. And where we're now sitting at around 25%, when we compare it to the actual risk of the business we're writing, then it's kind of really a back book/front book play, which says that as the back book runs off -- and bear in mind the higher-risk receivables in the back book have got a much higher level of provision already on them. The exit provision required if they were to deteriorate is quite limited. And actually, the front book then becomes more the important part of what's driving our impairment charge and our coverage. And that's still tending towards a kind of mid-teens level over the next few years. So that is the trajectory, which is even with the positive living squeeze that we're seeing, which we have specifically provided for. So we've provided in addition to the GBP 60 million we're holding on COVID, we've provided another GBP 7.8 million specifically for cost-of-living impact potential for this year, which is at a more conservative end. But I think that we live in uncertain times still. And I think that bringing the macroeconomic COVID provision into this year as well is also something which is a wise choice based on what we're seeing currently in the level of volatility. As that settles and obviously, most commentators are saying that, that will settle, then ultimately, those provisions from an accounting perspective will be forced to be released. But obviously, we are taking a very cautious view during this period, and we will continue to do that until we see real evidence of the alternative. So I think that when we look at back in [ around ], what we're really seeing is something which is moving towards a lower-risk environment. That risk is still not going to be lower than prime businesses banks that are out there. And therefore, our dynamic is very different. And that is why that we have a more than 25% risk-adjusted net interest margin, which is also very, very important when it comes to the capital-generative nature of our business.

Yes. That's very clear. I don't suppose you normally throw out the sort of through-the-cycle cost of risk-type number. Do you?

Well, what I've just said is that really that...

Because I think they're coming down, yes.

Yes. I think because we're making quite a material change to our risk profile, what I just want to say is that through-the-cycle is going to be circa mid-teens rather than double that, for example.

There are no further questions. So I will hand the call back to your host for some closing remarks.

Well, thank you, Jess. And I'm going to start with apologizing, I've been coughing and splashing all the way through. So I hope it hasn't spoiled the presentation. I do think PFG is now a very different business to what it was a couple of years ago. We are in a relatively unique position in terms of servicing the customer base that we want to service in the mid-cost market. And I think we have -- having closed CCD, we're now very much focused on that. We are very well capitalized, and we're in a very strong position to grow. We know that there may be some storm clouds coming on the horizon in the second half of this year, but I think we have got sufficient capital to cope with that, but more importantly, sufficient capital to grow attractively. I think that we said in this, we think our current capital position will allow us to double the size of the book without any problem at all. So I look forward to updating you again with our first quarter results. And as I've said, we will have a Capital Markets Day in the second half of the year. So thank you all for listening. And obviously, Neeraj, myself are here. We are now in a position to have face-to-face meetings, so we can follow up on any other questions you may have. Thank you very much.