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

Hello, and welcome to Provident Financial Interim Results 2022. My name is Suzanne, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand over to your host, Malcolm Le May, Group Chief Executive Officer of Provident Financial, to begin today's conference. Thank you.

Thank you very much for joining the presentation for our 2022 interim results. As it is our normal process, I'll take you through the importance of our strategic repositioning of PFG as a specialist banking group over the last few months and how that helps us to support our business -- our customers through these rather uncertain times, and also give you the strategic highlights in the first half of the year. And then I'll hand over to Neeraj, who will take you through the financials in more detail. Once he's done, then I'll return to update you on our strategy and outlook before we take questions at the end. So if I move to Slide 4. As I said at our preliminaries, 2021 was a year of significant transformational change with PFG. We are now a specialist banking group focused on the provision of credit cards, vehicle finance and loans to mid-cost and near-prime customers with significant opportunities to grow customer numbers and receivables and what we believe is a GBP 17 billion market. We now have completely left the high-cost, short-term credit market with the closure of CCD and the finalization of the scheme of arrangement. Growth. Growth is a key focus for the group. And in the short term, taking into account for both prudently and sensibly. Risk. Following the closure of our consumer credit division, the group's risk profile has reduced dramatically. And this is reflected in our half one results and will also be the case going forward with lower impairment and delinquency trends that we have historically had within the group. Cost is a big area of focus as we implement our new target operating model equally investment. And here, we're investing in our core strengths and efficiency initiatives, which are expected to result in cost reductions from 2023 onwards, consistent with our cost-to-income target ratio of 40% from the end of 2024. Capital. Well, the group's capital position and access to loan cost funding are a significant competitive advantage for us. It will not only allow us for our customers to grow prudently, but also underpin our dividend a broader shareholder distribution policy, which I'll comment on to later. I'd like to remind you that we are in discussions with the regulators regarding our capital requirements following the closure of CCD and also, the ability for us to use deposits to help fund our growth outside the direct bank. So in summary, taking into account the key clients I've made, PFG is now uniquely positioned as a specialist banking group with the right products in the right markets, with a strong capital position to deliver sustainable growth and returns for its shareholders. Slide 5. Well, the highlights for the first half of 2022. We delivered prudent growth, as our key metrics here show, with customer numbers up at over 1.6 million, net receivables in excess of 1.7 billion. In terms of impairments, as you can see, the trend improving here on to roughly 4.7% cost to risk, illustrated in my earlier point that the risk profile of the group has now fundamentally changed and reduced. Given our repositioning, we expect impairment trends to remain stable in the second half and to be sustained at lower levels than historically have been associated with the group, and we'll talk more about that in Neeraj's section. Cost. Investment is up as we invested in our platform, people and created the new loans offering. The target operating model here, we have invested to deliver cost efficiency, competitive advantage and future growth opportunities. Capital. As I've said, we have a very strong capital and liquidity position with a CET1 ratio of 27.3%. And we'll keep you updated regarding our discussions with the regulator in regards to our regulatory group capital requirements following the closure of CCD. Turning to our dividend. Reflecting the strong growth in the first half and the confidence I have in the future growth prospects of the group, we are declaring interim dividend of 5p per share. And finally, on regulatory matters, our Scheme Arrangement will be finishing at the end of July with all redress pay and the FCA have now closed their investigation into the CCD with no further action to be taken. Now I've included in Slide 6 to show how the exit from the high-cost, short-term credit market through the merger of CCD has fundamentally changed the risk profile of the group. The graph on the right-hand side shows how since 2019, our average customer credit score has significantly improved. As we focus on providing credit to customers with APRs of 15% to 50% only and now serve customers, many of them are homeowners and who are on national average earnings. This key change, the closure of CCD and the focus on better quality credit customers, has meant our risk-adjusted returns have improved. And as I've said, going forward, through the proven of credit cards, vehicle finance and loans PFG will now only offer APRs going from 15% to 50%, as I said, with a target market in excess of GBP 17 billion. In the light of this decision, following the conclusion of our 2 successful loan pilot products, we've decided not to continue offering loans at 65% and 80%, at 5% APR, and we'll only offer loans at the top end to 50% APR. Slide 7. Customers in our market have always weathered economic challenges better than those in the prime space. As you've seen from the graph on the left-hand side, which shows our credit customer base, how our credit customer base performed during the global financial crisis. And also, our move to mid-cost and near-prime customers have, in my view, made our customer base even more resilient. Clearly, the uncertain times we are in -- the economic times we're in are uncertain. And of course, we will support our customer base through them. But I'm confident as a group that we are prepared for that. Our customers have delevered through COVID. We've seen no evidence of increased delinquencies or default rates, and we expect our impairment trends to remain stable in the second half of the year. We also have a very strong balance sheet with proven provisioning for any potential Cost of Living impact. So in my view, as you see on Page 8, we are, I believe, one of the biggest ESG banking groups around. We have a credit around 25% of the U.K. adult population that are underserved by the High Street banks. In the past, you've heard me speak often about the group's social purpose, which is to help people live a better path -- on a path to better everyday life. Well, in times like this that you need to limit just like we did during the pandemic. We have, as I said, provisioning in place for the Cost of Living impact, but helping our customers is really more than just provisioning. Now I believe our customers will actually be impacted, as I've said, less than some of the prime cohorts by the Cost of Living crisis for the reasons I mentioned earlier. But we are still preparing and have many forbearance initiatives ready to go, if required, and have increased our customer communications to ensure our customers know what help and advice is available if needed. So I'll pause there. Thank you for listening. I'll hand over to you -- over to Neeraj, who will take us through the numbers. So Neeraj?

Thank you, Malcolm. Slide 10, [indiscernible] going to turn to that, shows a summary the group's financial results for H1 2022. The group adjusted profit before tax of GBP 54 million, rising group's statutory profit before tax of GBP 37 million for the period. Based on the strength of these results and the group's robust capital liquidity and balance sheet position, the Board has [indiscernible]. These results for H1 2022, therefore, underline the continued execution of our strategy to move to a lower cost of risk model and net interest margins that are aligned to that risk and produce capital generative businesses, allowing the group to invest in its platforms for improved cost efficiency as well as more attractive customer experience. At the same time, as Malcolm pointed out, we have greatly increased the size and the quality of our addressable market to drive sustainability to our business model through the cycle. Moving to Slide 11. Slide 11 shows the group financial results in more detail. Full product P&Ls can be found in the appendices at the back of this slide deck. Our credit card businesses generate adjusted PBT of GBP 75.8 million in H1 '22, driven by improved customer spend dynamics, some impairment provision releases and the reduction in costs. Our vehicle finance business also generated good profit growth and delivered an adjusted PBT of GBP 20.2 million for the half year. The second hand vehicle market has remained buoyant through 2022, and customer demand remained strong, whilst our LTVs remained stable at around 90%. Profitability in both our credit cards and vehicle finance businesses both improved, notwithstanding the transfer of some of the costs of those businesses to central costs as part of our centralization brands are providing shared services under Project Valero, as we have mentioned in previous presentations. Personal loans have started well with strong demand and are now working to increase receivables from GBP 42 million at the end of H1 '22 to levels that will sustain the business costs and then on to expected profitability in line with our circa 20% return on required equity target. Excluding the impact of the newly launched loans business, the group's adjusted continuing profit before tax is GBP 65 million for H1 '22 compared with GBP 63.4 million with the same period in 2021. Costs in H1 '22, however, include increased investment in centralization and IT platforms that will lead to the improvement in operational cost leverage as well as improved customer experience from new bankers. Central costs specifically have increased by the consolidation of support functions and the interest costs of the Tier 2 capital bond, which we raised last year, as well as one-off change costs of GBP 10 million, which represents the cost of the group-wide investment in shared services support functions. These investments will enable significant improvements in cost efficiency as well as quality through the creation of centers of excellence, driving the group's cost-income ratio to 40% by the end of 2024. Our risk-adjusted net interest margin continued to improve year-on-year, reflecting the release of some COVID-19 macroeconomic provisions as well as the increase in management overlays in anticipation of any, as yet, undetected impact of increased inflation of our customers. The group's net receivables [indiscernible] increased year-on-year to GBP 1.7 billion, reflecting continued improvement in customer spend trends post COVID. Our balance sheet position remains strong to meet our growth ambitions. Slide 12 shows our key performance indicators. I don't intend to go through each of these one by one, but you will note that they demonstrate an improving risk position through a strong risk-adjusted net interest margin. In terms of the balance sheet, and as I've pointed out already, our CET1 and total capital ratios are both strong, and we have a CET1 capital surplus of GBP 186 million before any further reductions in capital requirement we may achieve after the C-SREP process that is scheduled for November of this year. Whilst U.K. base rates have been increasing and our sector continue to increase, we continue to work to reduce our overall cost of funding, as seen here. As the more expensive bond funding is repaying on maturity next year, we still expect to see reductions in the cost of funding after taking account of currently expected rate rises. This is also helped by our liquidity coverage ratio continuing to normalize downwards as we reduce the excess liquidity we held during the COVID crisis. The return on required equity is moving towards the expected 20% level, which should also drive the return on tangible equity to a higher teens value in line with our strategy. The cost-to-income ratio has been affected by increased cost of both the loans business rollout and the investment in our platform and shared services strategy. These investments, as well as the continued growth of our businesses, will drive the cost-to-income ratio post 2023 towards our targeted 40% level at the end of 2024. Slide 13 shows in more detail how costs are being affected by the investments we are making in our newly formed loans business and our continuing investment in our Gateway platform as well as shared services to drive cost out whilst improving quality. We have also remained focused on retaining our staff during these inflationary times and have increased pay levels in line with market rules. Slide 14 provides a snapshot of the products we offer across credit cards, vehicle finance and personal loans. This slide illustrates the increase in average receivables that each business is now experiencing. The risk-adjusted net interest margin in our businesses continued to increase, reflecting the progressive normalization of the impairment charge for our targeted customer base. In our vehicle finance business, average receivables continued to grow during H1 2022, albeit at a slower rate than the performance experienced during the pandemic when there was little competition. Our vehicle finance business also saw an improvement to its risk-adjusted net interest margin, which helped drive an adjusted PBT of GBP 20 million for H1 2022. Finally, the bank disposable loans business is now driving the scale as it moves through the J curve phase of its development in line with our product strategy. And housing has evolved according to H1 2019 levels, as we have anticipated for a while, spending on holiday and recreation and are back to or above 2019 levels. It's also interesting, if not surprising to see the relative drop in food and grocery spend compared to the last 12 months, especially considering the cost of inflation in this area. Slide 16 is a useful snapshot for the improving asset quality or the credit card's worth. The new bookings are now in score bars 5 or below, which are helping to drive the average portfolio in credit score upwards. We will continue to take a prudent approach to bookings given the inflationary environment in the U.K. at present. The credit score improvement is also driving the expected improvement in delinquency and charge-off levels. Turning to Slide 17. This shows the same analysis, but for the vehicle finance business. The introduction of the near-prime categories in January 2021 can be seen here as well as their relative growth during 2022. The improvement in quality from the mix of new business is having the expected impacts on delinquency and overall book quality. It is also important to note that average deposit levels in the funding of vehicles is being maintained at circa 10%, which is also stabilizing influence on the book as a whole. Slide 18 on our new loans business is similar to the previous slides and again shows the nature and the quality of the business being written. Clearly, as a very new business, we continue to monitor the quality of the loans written very closely. Slide 19 illustrates the change in the volume of new cards issued since the tightening of credit in quarter 2, 2020. The business now also has a greater focus on retention and good credit quality customers through offering better rates and balance transfer offers. The cards business is focusing on stability and quality, which should also drive an improved cost of operations in time. The vehicle finance business continues to grow as expected, again, with a focus on credit quality. Slide 20 shows the material reduction in impairments during 2021 and particularly during the second half of the year across credit cards and vehicle finance. These levels are now normalizing towards the 10% (sic) [ sub-10% ] level over the medium-term, in line with our strategy to maintain through the cycle stability of retailers. Slide 21 shows that our coverage levels remain robust for both our cards and vehicle finance businesses. Our provision levels remain prudent for the current inflation environment in the U.K., and this has been added by the inclusion of a GBP 10 million management overlay for inflation. Slide 22 shows the group's continued prudent approach to impairment provisions. The coverage ratio is at 27.3%, which considering the improvement in the quality of the books, is very robust. This also includes the GBP 10 million management overlay that I spoke about earlier with the potential effects of inflation. The expectation is for the coverage ratio to fall to somewhere close to 15%, as the full effect of the strategy to focus on the higher credit quality customers is proven through the receivables. In total, the expected credit loss and unexpected credit loss provisions are 56% of the gross loans receivables, which confirms the very high level of prudence we continue to preserve during 2022. Slide 23 shows how the group continues to carefully manage its robust capital position. The PRA have indicated that they will review our current ICAAP through a C-SREP process in November of this year. This, of course, includes the current credit risk performance and wholly removes all impacts of CCD at any higher-cost lending. As you can see on this slide, we hold significant surpluses of both CET1 and total capital, which cover both the remaining IFRS 9 unwind and the increased regulatory buffers. On Slide 24, there is a waterfall that shows the utilization and generation of capital. There was a final IFRS 9 transition just from unwind in January '23 of GBP 54 million, after which time the group is planned to be net capital generative. Slide 25 shows the diversified mix of funding and the reduction in the excess liquidity buffer held during the COVID pandemic. The group capsules its Revolving Credit Facility in part reducing its own excess liquidity as well as averaging down the cost of funding to the group. Whilst we await the final outcome of the waiver application from the PRA, we have lent GBP 70 million from Vanquis Bank to Moneybarn in H1 '22 within the normal large expenditure limit. As the group transitions to be predominantly funded by retail deposits, we will look to broaden the savings products available to our customers into ISAs and other shorter entity accounts rather than just bonds of 1 to 5 years duration. It is important, however, to maintain our presence in the debt capital markets to retain maximum flexibility should the need arise. We currently achieve this through our Tier 2 bonds. Slide 26 shows the funding duration of the group's remain strong versus the funding maturity profile. All maturing bonds in 2023 can be repaid through non-bank liquidity resources. Impact of rising rates is delayed due to the contractually fixed nature and current funding and the level of excess liquidity that we hold. On Slide 27, the strong regulatory liquidity position of the group is set out showing excess high quality liquid assets of GBP 331 million with an equity coverage ratio of 435% against a regulatory minimum of 100%. The net stable funding ratio of 143% represents a headroom of GBP 640 million over the regulatory requirement. All surplus funding is deposited in the Bank of England and achieves a base rate return. Slide 28 considers the direction of the group's cost of funding. Cost of funding continues to reduce as non-bank funding as well as TFSME and larger levels of securitization in [indiscernible] have been deployed. [indiscernible] funding now achieves in place rate return, [indiscernible] retail deposits in 2023, even though we held non-bank funding through that amount already. Further changes to retail deposit mix in Vanquis Bank, such as the introduction of ISAs, should continue to drive total cost of funding downwards compared to most peer banks. Turning to our final slide, Slide 29. And based on the performance of the group in H1 2022, the financial outlook remains positive as we continue to deliver on our purpose to help the people on a path to a better everyday life and execute our strategy. So in summary, we have a clear strategy to grow in underserved markets in the U.K., the societal benefit of working people that will find it difficult to borrow from the large High Street banks. We have the traffic also allowed for significant growth in the defined and large markets or in appropriate M&A. We remain robustly provisioned against impairment of our receivables, which continue to improve in quality. We continue to reduce credit and operational risk. We are controlling costs while investing in the future customer proposition and experience driving towards a 40% cost-to-income ratio, and strong treasury capabilities continue to drive down the group's cost of funding in a rising rate environment. Thank you, and I'll pass you back to Malcolm.

Thank you very much, Neeraj, for that excellent [indiscernible] of our financials. To me, it's good to see in such detail how the repositioning has benefited the banking group and also to see how clearly just how robust our financial position is. Turning if I may, to Slide 31. PFG has a platform for sustainable growth and returns. The slide shows the 3 key areas that combine to deliver this: customer insights, new products and services, and an IT customer platform. We have real customer insights built up over a significant period of time and spanning millions of individual data points. I believe one of the group's strongest assets is understanding its customers and being able to safely and effectively underwrite their credit requirements. As we reposition the group's customer base to mid-cost and near-prime, we bring the benefit of better quality customers. And as highlighted earlier, default and impairment rates have dropped, giving the group a more sustainable growth from customers who can and want to stay with us for longer. Our customer insights are also key to tailoring new products and services that we offer to our new customer base. They allow us to make changes that help our customers drive growth on which I'll give a little more detail later. They also show what new products our customers can benefit from, such a secured lending offerings on, for example, when regulated Buy Now Pay Later. Gateway is our new IT platform, and it's a key area of strategic spend and growth. Going forward, it will mean we can combine customer insight and new products and services onto a single IT customer platform. It was created for loans, but will over time support all of our lending products going forward. The platform will increase our speed to market for new products and services significantly. And importantly, it will also give us and our customers a holistic view of all their PFG products in one single place. On Slide 32, I've highlighted some of the customer insights that we have, but I won't call them all out, but it illustrates to me very clearly what our new customer base looks like. Many of them have mortgages or own their own homes. The vast majority were at full time or self-employed. And they earn around the national average wage of GBP 30,000 with some having savings. Many work in health care, manufacturing and transport, where the labor markets are currently very high. Slide 33 sets out our customer strategy, which is built from our customer insights. As you can see, broadly speaking, our market is divided into 5 groups from optimistic credit through to lifeline credit. We aim to have our customers mainly in the optimistic spender and consider spender buckets. We know how these targeted customers run their lives, what financial support they need and how we can help them with our products and services to build a better financial future. Using our customer strategy built upon our customer insights, combined with our products and services and delivered by our new IT platform, will help us deliver future significant receivables strength. Here, Slide 34 shows our addressable markets, split between customers -- split into customers and lending across credit cards, vehicle finance and personal loans. As you can see, the market is now around 17 billion. And as shown in Neeraj's presentation, we have plenty room to grow in all of our product areas. Looking at the left-hand side of the slide, our old addressable market was around 10.4 million customers. By repositioning the bank into a mid-cost credit and near-prime customer segments, we have increased our addressable market effectively, reaching 13.5 million customers or roughly 25% of the U.K. adult population. We have, in effect, lost about 1 million customers who are too high risk for us now, and we replace them by 1 million of just prime customers, who will also offer attractive risk-adjusted returns. Also, by repositioning the group, we can now serve the new to credit market, which is a sizable opportunity for the group. That is the market context, but how do we plan to grow into these markets? Well, Slide 35 sets out what initiatives the product divisions are taken to deliver sustainable receivables growth going forward. Again, I wouldn't call them all out. But clearly, you can see it's an important area of focus for us. In credit cards, in the first 6 months of 2022, we've launched 3 new price points, which allow customers to stay with us for longer, but also means that we can attract more new cardholders. Secondly, we've launched an improved balance transfer offering, which will also drive customer receivables growth. And thirdly, we're reaching out to old dormant, higher-quality customers and offering them a near-prime credit card from us, which is being very well received. I'll turn to vehicle finance. We'll continue to see new business partnerships, which have the protection to drive new customer receivables growth. Also, customer retention programs will help our growth alongside this. In personal loans, as I said earlier, we'll be writing loans in the APR space of 15% to 50%. we're already writing roughly GBP 10 million a month, which I believe is a very good start in a business that we [indiscernible] in. And we'll keep developing the lending proposition, especially in the open market, which will drive an additional new receivables growth. On the penultimate slide, Slide 36, we set out the group's capital management framework. The starting point is clearly the group's strong capital position, the diverse rate of funding clients including access to low-cost retail deposits. Our 2022 ICAAP application has been accepted by them which is clearly very important. As we've also mentioned in this presentation, we're waiting to end the approval of our large limit waiver. Our strong capital and funding position will enable us to grow into to our new reposition of growing credit cards, vehicle finance and personal loan markets, aided by the rollout of the group's new IT Gateway customer platform. The group will also continue to optimize our shared services targeted operating model and deliver attractive returns on a sustainable basis. The Board, and as we previously indicated, intends to move to a payout ratio of 40% of adjusted earnings for the full year '22 onwards. And today, we've announced a dividend of 5p per share as we move towards that 40% payout ratio. The Board will also consider any service capital retained post dividend and growth capital allocation to be assessed for further return to shareholders by way of a special dividend or share backs, obviously, subject to market conditions. Finally, as we noted at the bottom of the slide, our strong position gives us the opportunity to assess potential inorganic activities should they arise. So to Slide 37. In summary, PFG remains well positioned despite the macroeconomic uncertainty in growing markets. The group is underpinned by a very robust balance sheet, has a strong focus on credit and risk management and have a customer-centric business model supported by leading technology. For the second half of the year, obviously, subject to market conditions, I expect PFG to deliver receivables growth across its product lines, stable impairment trends and supported by the group's reducing cost of funding, a stable net interest margin. Also, as I mentioned earlier, I expect costs to remain flat in the second half before reducing it to 2023, culminating in cost to income ratio of 40% from the end 2024. Therefore, I mean, over the medium-term, as we execute this strategy, it will deliver sustainable returns and attractive returns to shareholders, including the potential for special capital returns. So thank you for listening. We're happy to take questions, which will be run by our moderator, Suzanne. So over to you, Suzanne.

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

I just had the one, and it was around the provisioning level. I think you talked about provision coverage moving down to around about 15% over time. And obviously, you're currently a lot higher than that at the moment. So I was just wondering what...

[indiscernible] Can you hear me?

Yes, I can hear you. Yes. I'm just wondering what the sort of profile of that reduction out of the 15% will look like? Does it require sort of new better quality lending to come on board? Or is it a case that there's sort of cohort of the existing lending that's very well provided at the moment and potentially some of that position could come up as well. So just a bit of color around that would be helpful.

Yes. No problem, Gary. Thanks for the question. And I think that it is both of those things. So as our book rolls off the higher risk lending that's been on it in the past. And as you know, we've been tightening credit since 2020, and that has continued as we now continue to focus on not only the new business that we're taking on being of higher quality, but also the fact that we are focusing on retaining higher-quality customers, especially in our credit card book. That is where the impacts over time will come out. So that's kind of the direction of travel. And as you know, we stopped writing the lower score bands some time ago, and it's kind of the highest score bands that are providing for this kind of move. In actual fact, the 15% coverage ratio, as you know, compared to other banks, is still extremely high. But ultimately, at this stage, that's kind of where our estimate lies [indiscernible] well, depending on where that quality ends up being lower than that. But as you know, we take a very prudent approach to how we consider provisioning in the group.

The next question comes from James Hamilton from Numis.

Two, if I may. Firstly, looking towards the sort of more medium-term and you're sort of guiding to lower funding cost of retail deposits to a lower yield on assets with the derisking and similarly lower impairment. So I'm just sort of wondering what we should be looking for in terms of direction of travel? If not actual quantum of numbers for both the net interest margin and the risk-adjusted margin. And second question is really about the environment. And obviously, non-standard securitization market is totally closed. New bank finance is extremely difficult for non-standard filers, and prime bank or risk appetite is also diminished. So could you sort of comment on how you see your competitive position evolving?

Well, it's -- the 2 are linked. I'll start off with the second one, which is really about the competitive environment. I think you're absolutely 100% right. I think funding on a 12- to 24-month view for people who don't have the benefit of accessing retail deposits is going to increasingly be a factor. We've also, as we've said in the presentation, moved materially towards a better quality of customer within the sub prime space in mid-cost. [indiscernible] what we tend to see are challenges that the people that probably suffer, they tend to go down into our marketplace. So that is quite an attractive opportunity for us. In terms of our competitors, I think if credit markets tighten up, as indeed we've seen, when we've seen it in the wholesale banking market ourselves, where we still have CCD, how there was a dramatic reduction in appetite to lend and the securitization markets do get difficult in these situations now. We obviously will always extend credit prudently, and I think that's something we've demonstrated in this presentation and deliver the -- but we are able to carry on because we do have the competitive advantage of having a banking license. Now that also then is linked to your first question, so I hand over to Neeraj. But clearly, we have quite a lot of scope in lending.

Yes. So I think your NIM question is quite right. Clearly, as the quality improves the NIM will reduce at the gross level. At a risk-adjusted level, we'd expect the NIM to reduce a lot lower in reduction, which means that the risk-adjusted net interest margin is probably is just under 25%. If it was somewhere in the 20s post the improvement in quantity, that would probably be right for the kind of products we have out there with our customers currently. So I don't expect the risk-adjusted net interest margin to really fall below 20% as part of that. But the change in the impairment and the stability in the book, James, is kind of going to be a very different picture, and it means that we've got a much more stable earnings profile through cycle.

The next question comes from Perlie Mong from KBW.

I've got a couple. The first one is on credit again. Just noticed that the [ treasury ] loans is up about 10% -- 9%, 10% in the half, which isn't quite what we would expect given the improvement in the quality of the book that you've talked about. So any more details around what's driving that? Because it's not a model number. And as the quality of the book improve, would you start to expect that to start coming down? that's number 1. And then number 2 is on cost. So you've guided to half to flattish to half 1, which means on an underlying basis, we are talking about maybe a 15% year-on-year increase in cost. Now obviously, I know that it will include investments like in personal loans and the GBP 10 billion in venture that you just talked about, but it will be really helpful to have a bit more color on exactly what are the efficiency initiatives to get you -- get costs down next year? And then just very quickly, you mentioned inorganic acquisitions. So just maybe what are you thinking of in terms of KPIs or magnitude?

Well, I'll take the last one first. I think when there's dislocation markets, inorganic opportunities present themselves. But when you're also considering inorganic opportunities, you have to be able to absorb them. I think the journey the group has been on over the last 4 years have been such that it's focused, but it has been sorting out other things. But I think as we've said through this presentation, we've got an extremely strong capital position. We have got arguably more bandwidth now that we've closed down CCD. So should opportunities present themselves, we will look at them. And I think it's not appropriate to go into too much detail here. Obviously, we're just open-minded to opportunities as they present themselves.

Yes, yes, thanks for your questions. Well, on the first point that you raised around Stage 3 receivables. The issue there is the fact that the residual non-performing loans that we have, especially the Moneybarn, we have not been in the market selling those loans in the past 6 to 8 months, clearly because our market hasn't really been that attractive for the purchase of those non-performing loans. And therefore, they remain in our Stage 3 receivables currently obviously fully provided. Now as we go into H2, I understand from Moneybarn, but those purchases of loans are coming back into the market. And therefore, we expect to move those loans out of Stage 3 to do that. On the cost side of the equation that you asked about, I think the cost, interesting situation where it's a number of things happening. Firstly, we did say last year, we did complete Tier 2 bond issuance. And the Tier 2 bond issuance, obviously drives an increased interest costs, which is held centrally and is in those central costs. And the majority of those have come this year. So that's kind of where a part of it is. The other thing, of course, is the investment that we talked about in our centralization and creating shared services centers for our enabling functions. So that's roughly GBP 10 million of that. And I think the rest of it really is the core provisioning of central overhead that we have. And I think that also includes the transformation costs that we are incurring centrally to move to the lower cost models that we require for our new businesses effectively in our new customer cohorts. So as we move from where we are -- from where we were 2 years ago and as we move towards the customers that we now talk about the addressable market that we're facing, we're now moving the investment towards being able to deliver the right operational costs for that business rather than our own business. And that clearly requires some investment. That investment is being funded by the reduction in our impairments mainly and therefore, the consensus profits that we have in the marketplace haven't moved for what any of these movements in costs internally and the investments that we're making. So I think that, that's a very important thing to note, that we are self-sufficient on that investment.

Final question comes from Justin Bates from Canaccord.

Apologies if you've answered any of these questions. The line was dropping out. So on a couple of the case, please help me if you had. Firstly, can I just draw your attention to Slide 7, if we can wind back to that. I was just keen to understand what you think the performance would look like over the next 2 or 3 years relative to the industry and conscious that see things that really happened versus '08, '09, through to , '11 and '12 back then when Vanquis was growing very strongly from a lower base. And secondly, you have the -- you're talking about repositioning now. So wondering what your views are over the next 2 to 3 years relative to the industry performance for Vanquis. Maybe we'll start with that.

It is a very different customer profile that we are lending to now. If you go back to the last time, a significant percentage of what we would call core band 6 and 7. These were cards running at APRs of 59%, 69% APR, and the profile of those customers typically where they come in, they build up balances. Back in those days, a lot of the revenues came in also from a product [indiscernible]. So that customer base has gone, and we're not lending to them now. The customer base that we are getting in now are a better quality customer and therefore, their impairment is going to, by definition, be lower than perhaps historically was the case. The other thing important thing is to think about the profile of these customers. I mean, typically, they are -- I mean the average is always dangerous to talk about. But there are sort of a national average salary around GBP 30,000. They are typically employed. They are operating parts of the economy, which at the moment has gotten a huge shortage of labor. And we've seen that they are also people who certainly in the first 6 months have been benefiting from the large pay rises that we've been seeing around the market. And so that is, I think, one of the reasons why we haven't actually seen much stress coming into the cards portfolio. So how that will pan out in the future is difficult to say. But I think they are probably going to -- is definitely dangerous to make this call proportionally do better than the historic customer base, who would have been more at risk, particularly because they are more by definition behind gear, particularly if one starts to see some areas that we're currently experiencing separation and then, of course, with separation -- unemployment. But at the moment, we're seeing obviously absolutely 0 sign of that. And as we've said several times in Neeraj's presentation, where that economic scenario to manifest itself, we are extremely well provided and extremely capitally strong.

Okay. And secondly, could you wind what your RAM target is? And you mentioned risk-adjusted returns a couple of times during the presentation. But again, going forward the next 2, 3 years would be the RAM target is given the repositioning?

The -- which the adjusted ROE target.

No, sorry, RAM, risk-adjusted margin.

Risk-adjusted margin. Yes. So I think, ultimately, I mean, obviously, it depends on how -- where the risk performs. They will certainly be within the ranges currently from between 25% and 20% will be where the current product set will take us.

Okay. And on costs, so actually to reduce those. Could you give us some sort of feel as to what the split will look like between fixed and variable or variable? How much is advertising and marketing, please?

Well, we don't really split that. We don't split the marketing out. I don't really talk about whether it's fixed or variable. I think what we talk about is that cost income ratio. But also, I think what we're saying is that, ultimately, if you give the consensus over the next 3 years, the 3 years consensus is kind of providing for the kind of cost profile that we are looking to deliver, just the intent and also with bank levels generally, the costs are generally not that variable. You find here, and they are structural. And that's why I think the investment requirement is, I mean, when anyone talks about cost reductions in banking, if they're not investing in something that's going to drive that cost reduction, I would generally not believe it. So you generally do need to structurally change something to get the cost reductions lower. And in our case, that goes hand in hand with the change in customer cohort, which requires a very different service to our previous cohort.

Understood. And just sorry, very quickly, Neeraj. This is unusual for me. But M&A, what markets and products should we be thinking of? Is it outside of credit cards [indiscernible] scale?

I think it's very difficult in these sort of situations to be precise. But I think about PFG is a consumer finance business. A lot of its customers actually are probably SME and small SMEs. And so they might have a different product requirement, and they may have a different capital waiting if you do things differently. Equally, one has always got to be mindful about how new technology is coming into the space. And I mentioned in my speech that clearly, I mean, I've been very [indiscernible] about some of the concerns about if it's pro channels to something that would be provided will turn to another question, which you might have missed. When you get dislocations in markets as indeed, I think we are going to be seeing, the opportunities present themselves you wouldn't necessarily thought about. So we're going to be of mind of that. I'm sorry, that sounds been nebulous. It's always wrong, which is specific on these sort of questions. Sorry, just want to say. Sort of any diversification we would do would stick with the theme of making sure that we are serving either underserved customers or underserved marketplaces. That's our mindset. It is then too much for us to hunt in markets. We're just very competitive. Margins get [indiscernible]

There are no further questions. I'll hand back to your host, Malcolm Le May, to conclude today's conference.

Well, guys, thank you all very much for joining the call. I know it's been a busy morning for a number of you. We're obviously here happy to say follow-up calls and meetings. I appreciate you going into the what used to be the Holiday season. I hope you all have a nice break over summer. But we're looking forward to the second half optimistically, but cautiously. And we have materially repositioned this group now. It's very sad what's happened in high-cost, short-term credit market, but that's not part of our canvas anymore. And we think that the mid-cost near-prime space is very, very on the bank, is very large and presents lots of opportunities. And we've got a very strong capital position and a lot of historic capability, which [indiscernible] over the next few months and beyond. So I look forward to speaking to you again over the next update. Thanks very much for joining.