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

Good morning, everyone, and thank you for joining us for the presentation of our 2023 interim results. As in previous years, I will take you through the strategic highlights of the first year before Neeraj takes you through the financials. I'll then return to strategy and outlook and then finish with questions. As you know, this is my last results presentation, and I'll be handing over to handing over the CEO of [indiscernible], today to Ian McLaughlin, who's joined us on the call as an observer.

Thanks, Malcolm. I'll just very quick hello, everyone. Good morning. Fishtake will take the basin from next week. So we look forward to meeting you all in due course, but they just want to take a minute to say hi. Malcolm, I'll hand straight back to you, too.

Thanks, Ian. Right. Turning partly to Slide 4. As you can see, we've made significant progress in the first half of this year. We've completed our transformation to a specialist banking group, and our customers are now in the mid-cost and near-prime market, so lower risk. Which means the credit risk profile of the group has changed significantly. And Neeraj will give you more detail of this later in the presentation. In the first half, we successfully launched our Google Pay facility, our cards. And last week, we added Apple Pay. Interestingly, Apple Pay only launched 10 days ago, is having a materially positive impact on card usage with 54,000 customer registrations and already almost GBP 0.5 million in spend. In addition, in May, we repriced over 800,000 of our card customers, something we've never done before, and we've done it cautiously with concern for their affordability but obviously, it's necessary to do so in a rising rate environment. Our vehicle finance business has grown strongly in the first half, particularly in the near prime space, as we benefited enormously from being able to use our banking license to reduce our funding costs. This funding advantage is something that none of our competitors have. They have suffered from the rising rate environment. In vehicle finance, we've also introduced a new PCP product, allowing customers who meet stringent affordability tests to have access to brand-new cars for the first time. The group's second charge mortgage pilot is going well, which diversifies our lending offering. And on the funding side, we've also recently launched a new term notice account, these savings products of 90 to 120 days duration and initial marketing shows they appeal to our borrowing customers as many of them have savings. In fact, during the testing phase, nearly 50% of applicants already had a Vanquis card. Obviously, notice accounts will additionally help diversify our funding base. I'm pleased to say we're also ready for the introduction of the FCA's new consumer duty. Obviously, that starts on the 31st of July. It will be an important factor as we go forward. Financially, the group has delivered strong receivables growth year-on-year at 26%, which equates to almost GBP 500 million of new receivables since June last year. All of which is from lower risk customers and then those perhaps we meant to historically. As I said at our preliminary presentation this year, our focus for 2023 is sustainable receivables growth with planned increased initial charges due to IFRS 9 accounting. The group has also continued to invest in transformational platform change, and this is on track and has also executed robust cost control and those costs that we can control as we're obviously in an inflationary environment. Once the investment in the platform is complete, significant operational and scalability efficiencies will be delivered to the group. Turning to dividend. The group board, reflecting on the group's strong connect Brazil fontal dividend of [indiscernible] per share. In June, we announced our new Chair, Peter Estlin, strengthening the Board's banking experience and also Michele Greene's appointment added to our cards and banking strength. And as I said at the start of the call and as you've heard, we have Ian joining us who starts as Group's new CEO at the beginning of next week. So in summary, the group performed well in the first half of 2023. As previously outlined, we have grown customers and balances strongly, achieved a flat net interest margin during the phase migration to better quality customers and higher -- have had higher planned IFRS 9 impairment charges due to strong receivables growth. We've also controlled costs well and where possible, mitigated inflation. We've completed strategic -- important strategic investitives, appointed a new Chair and CEO and are well positioned to continue growing the loan book responsibly and sensibly in the second half. Slide 5 shows why becoming a bank was so important to us, and also to our customers. It was a journey we started several years ago is now complete and is, to my mind, our biggest and most important change in the group. Being a bank basically means we get access to funding that for the group through retail deposits. This funding is cheaper than wholesale financing. That means we can borrow -- can be more competitive than our competitors who are banks and therefore, offer our customers better pricing. So a win for us, our customers and shareholders. To achieve this change, we closed the consumer credit division and fully deployed our banking license. Now all of our products are funded through the bank, either directly accessing retail deposit funding or through the PRA approved waiver. In total, now 75% of the group is funded by retail deposits compared to 58% when we started making this change. Also, the change meant that we now serve mid-cost and near-prime customers, a factor which helped the PRA in the first half reduced our total capital requirement by about 1/3 as our customers are seen by them now to be lower risk. So the change becoming a bank has opened up a larger customer market made the group's funding costs cheaper. Average is the amount of regulatory capital we need to hold to run the group. So as I said earlier, becoming a bank was a big and significant change for us successfully completed and one which will benefit the group, our customers and shareholders, I think, for many years to come. So thank you for listening, and I'll now hand over to Neeraj, who will take you through the numbers in more detail. Neeraj, over to you.

Thank you, Malcolm, and good morning, everyone. We'll turn to Slide 7. Slide 7 shows a summary of the group's financial results for the first 6 months of 2023. The group delivered exceptional net receivables growth of 26% year-on-year to over GBP 2 billion, marking the first time the group has exceeded the GBP 2 billion mark in the last 4 years. We've achieved this encouraging result in challenging macroeconomic conditions, while significantly improving asset quality, which underlines the group's expertise in underwriting credit risk for our specific customers. Our net interest margin decreased by 3.5% year-on-year to 18% during that period. The group's net interest margin profile is evolving to reflect the product mix of new business the move towards lower-risk near prime reducing asset yields and cost of funding increases driven by higher base rates, offset by changes in the funding mix. This is reflected in the H1 '23 net interest income. As the group has grown its receivables much more quickly than in previous periods, we have attracted, as anticipated IFRS 9 provision costs in the P&L, which have inflated the year-on-year comparison in risk-adjusted margin. The prior year period was also deflated by release of COVID-19 impairment provisions that were no longer required. On a risk-adjusted basis, the margin was 6.8% lower than prior year at 13.5%. As part of our continual focus in improving the precision of our IFRS 9 ECL models a provision release of GBP 9.3 million was identified during the period in vehicle finance. This provision related to receivable balances on the book in 2021. And as a result, this provision release has been recognized as an adjustment to reserves in 2021 rather than recognized through the P&L in H1 '23. However, the H1 '23 balance sheet has improved through increased net receivables and capital position accordingly. Our cost base has been tightly controlled despite some significant unplanned inflation headwinds and our continued investment in our businesses. Excluding this investment, the group underlying profit was GBP 6 million in the first 6 months of 2023. The group's balance sheet position remains strong as we have communicated to the market previously, and will strengthen further by capital requirement reduction from the PRA, reflecting the group's evolution since its last ICAP submission in 2019. I will revisit the topic in more detail later on in my presentation. Moving to Slide 8. This shows the group's financial results in 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 34 million in H1 '23. Our vehicle finance business performed well again during H1 '23 and issued a record amount of credit to customers of GBP 249 million relative to GBP 155 million issued in the same period last year. The personal loans business also had an excellent first half performance and ended the period with net receivables of approximately GBP 130 million and customers of 50,000, representing growth of GBP 88 million and 26,000, respectively. Reflecting this growth as well as ongoing investment in the business, losses for the period in the loans business were GBP 9 million. The split of the group's central cost items are shown here, it's important to understand the moving parts. As I've explained previously, the group central items have increased in recent periods as part of the expansion of the shared services model for all group functions which reduces the cost previously charged to each business unit, respectively, as well as reflecting the elevated levels of business investment during the first 6 months of the year. We continue to invest in our operating capabilities in order to drive efficiency and scalability in future periods. The continuing inflationary environment has driven an increase in our H1 '23 cost base of approximately GBP 12 million. Bringing these items together for H1 '23 and including increased IFRS 9 charges driven by the 26% growth in the receivables for the period, the group delivered an adjusted loss before tax from continuing operations of GBP 5.5 million. After allowing for exceptional items, which include costs relating to the transfer of activities to South Africa driving cost savings into the future as well as CCD liquidation costs. The group delivered a statutory loss before tax of GBP 14.5 million versus a statutory profit of GBP 37.3 million in the H1 '22. The next slide, slide 9 shows how the group net interest margin has evolved over the last 6 months. NIM compression of 3.5% has been driven by lower asset yield and higher funding costs. Our focus on growing receivables in lower-risk near-prime customer segments, whilst higher risk, higher margin receivables run off has reduced asset yields, particularly in our cards and vehicle finance businesses. In addition, the cost of funding increase is driven by higher base rates as further deflated headline net interest margin. Our full year net interest margin is expected to be upwards of 18%. Slide 10 shows a walk-through of the main drivers of the group's cost base for the first 6 months of '23. We have continued to invest in areas such as IT, operations and our change in transformation teams. These investments are designed to provide a more efficient and scalable platform for growth in the coming years and into the future as well as to provide improvements to our customers' experience and access to products across the group in one place. This includes initiatives such as our new loan management platform, Gateway and the new mobile app, which we anticipate rolling out during the second half of the year. These investments are planned to reduce towards the end of '23 before falling away more meaningfully in 2024, leaving the group on track to meet its underlying cost-income ratio target of 40% on an exit run rate basis in quarter 4 '24, all else be equal. The macroeconomic environment is presenting headwinds for most organizations as well as us. Inflation has added GBP 12 million to our cost base in H1 '23, mainly in staff costs and third-party costs. We have also experienced some extra processing costs in dealing with various claims from claims management companies in our vehicle finance business during the last few months. 95% of these claims have little to no substance, and we expect despite the volume to dissipate over the coming months. Slide 11 will be familiar to many of you, and it shows our key performance indicators. The group's asset yield, net interest margin and risk-adjusted margin reflects the growth in receivables and the associated recognition of additional IFRS 9 impairment charges due to the 26% growth in receivables. As I pointed out already, our CET1 and total capital ratios are both strong, and I'll cover our treasury strategy later in the presentation. The final point to bring out on this slide is our underlying cost income ratio which we are targeting to reduce to 40% on an exit run rate basis by the end of 2024, subject to inflation abating. Slide 12 shows a snapshot of the core products we offer to our customers. This slide illustrates the solid progress that each of our products have made in growing the receivables book back towards prepandemic levels in a disciplined manner over the last 12 months. The risk-adjusted margin in our cards business reduced year-on-year, driven by the higher impairment charge due to the growth in the loan book and the associated IFRS 9 impact, as well as release of the COVID-19 provision no longer required in the prior period. This was partially offset by robust cost controls to deliver an adjusted PBT of GBP 34 million for the period. In our Vehicle Finance business, net receivables grew strongly year-on-year as the business leveraged its access to capital and deposit funding, thereby capitalizing on an evolving competitive landscape, driving an adjusted profit before tax of GBP 16 million for H1 '23. Finally, the personal loans business delivered strong growth in receivables and customer numbers, once again reflecting its competitive positioning, product offering and customer demand in this segment. Slide 13 illustrates how net receivables by product have evolved in recent periods in more detail. All three product lines show a year-on-year upward trajectory in receivables. And I'm pleased to report that total group net receivables as of 30th of June had increased beyond the levels achieved in 2019. Credit card net reported receivables grew by GBP 189 million year-on-year on -- or 18% from balanced growth initiatives, including balanced transport promotions. It attracted a substantial number of new customers during the period, which helps to create a significant platform for future growth as these customers start to utilize their credit limit. Vehicle Finance new business volumes increased to 31,000 with the average loan size remaining broadly flat year-on-year at GBP 8,400. This has increased net receivables by GBP 156 million to GBP 764 million and driven net interest income growth year-on-year. The Personal Loans business also had an excellent first half performance and ended the period with net receivables of approximately $130 million and customers of 50,000, representing growth of GBP 88 million and GBP 26,000, respectively. For the remainder of 2023, the group plans to continue growing its receivables. However, given the persistent high inflation evident in the U.K. economy at present, we will monitor for any signs of distress on the part of our customers extremely closely, even though none has emerged to date. Turning to Slide 14. The chart on the left-hand side shows spend per customer which shows that spend per customer for H1 '23 was maintained at similar levels to H2 '22, but was 6% higher than the same period last year. This is an interesting illustration of the group's focus on lower risk, better quality customers since 2020. And we're attracting these customers now at higher average scores with higher initial limits on average. And this is feeding through into spend per customer rates showing an improving trend since 2020. It is worth noting these customers have a tendency to pay down outstanding balances over a shorter time frame. And this is reflected in our utilization rates of circa 60% for near prime versus 75% for subprime customers. The right-hand chart shows the spend categories and how they have evolved notably customer spend on recreational and travel has increased significantly in the last two quarters. The proportion of spend on services, food and retail activities has remained broadly steady state over the same period. Slide 15. Over the next 3 slides, starting with this slide, our credit card business. I will set out some of the ways in which the repositioning towards lower-risk customers across our business can be evidenced. Slide 15 illustrates how delinquency rates have steadily fallen throughout the period in credit cards. We are watching our delinquency rates extremely carefully for any signs of financial distress from our customers given the prolonged inflationary environment in the U.K. and the potential squeeze on household budgets. However, we remain well positioned given our prudent provisioning levels. There is a similar message on Slide 16 and for the vehicle finance business. And Slide 16 shows the material reduction in arrears rates since quarter 4 '21 and an increasing proportion of the book becoming composed of lower-risk customers. Moving to Slide 17. Again, there is a similar improvement in the bookings mix for the personal loans business, the expected 12-month bad rate and the arrears rate both showing an improving trend throughout the last 6 months. Slide 18, the cost of risk for the credit card business has begun to normalize after releases of provisions created for COVID-19 and back book impairment provisions in 2020 and 2021, but have now largely washed through. For the Vehicle Finance business, the cost of risk continues to improve as the business has repositioned with a focus on lower-risk customers. This message is consistent with the trend that we've reported in previous periods. For the group overall, we continue to expect the cost of risk to normalize towards our previously indicated range of between 5% to 10% through the cycle. Slide 19 shows how the coverage ratios for the credit card and vehicle finance businesses have evolved in recent years. As you can see on the left, the coverage level for credit cards in H1 '23 has reduced, partly reflecting the execution of debt sales during quarter 2 '23. The vehicle finance coverage level has decreased, reflecting the continued shift towards lower-risk near prime new business volumes. Overall, the group's coverage level reduced during H1 2023 to 21.5% from 26.9% a year earlier. Over time, as with our cost of risk profile, we expect the group's coverage ratio to continue to reduce and eventually settle to somewhere below 15%. Slide 20. The next few slides set out the group's capital funding and liquidity positions, which remain strong and healthy. Shown here on Slide 20 is an illustration of the group's regulatory capital position and its associated requirements and ratios. As at 30th of June, the group had total capital resources of GBP 624 million and Tier 1 of GBP 424 million or 21.7%. The group's total capital requirement, which was reduced by the PRA earlier in the year, remains robust at 15.4% and which equates to a total capital surplus, excluding any confidential or management buffers of 16.5%. The post CE capital surplus has reduced by GBP 77 million over the last 6 months due to the scheduled unwind of the IFRS transitional relief absorbed in January, and growth in lending volumes leading to an increase in requirement of GBP 22 million. The group's Tier 1 surplus has reduced to GBP 181 million from GBP 255 million previously for the same reasons driving the change in surplus total capital. Utilized Tier 2 is GBP 58 million, and the group retains AT1 capacity of GBP 43 million. As I've stated before, we plan to target a CET1 ratio of 20% over time prior to any optimization of the -- over the capital stack to include AT1 versus the 21.7%, which we currently hold. The AT1 market remains challenging at present, driven by a number of macro factors. So we do not plan to issue an AT1 imminently. However, our EMTN program has been updated to allow us to do so quickly in the future when conditions allow. Slide 21 shows how the group has transitioned into primarily retail funded group. The proportion of group retail funding now stands at 75% and which is a significant increase on the 58% proportion of retail deposit funding reported this time last year. Total facilities of GBP 1.9 billion comprised of GBP 1.4 billion of retail deposits, GBP 250 million of secured funding and GBP 174 million of TFSME. 95% of retail depositors are covered under the government FSCS scheme. Slide 22 shows the group's funding costs on upcoming funding maturities. At the end of June, the group's senior bond matured, and this was repaid using existing resources. In October, a final retail bond will mature of approximately GBP 60 million. Again, this will be easily catered for using existing liquidity raised from the retail market. The plan changes in the group's funding mix and stable duration of our retail funding means that the group has significantly lower funding costs relative to market interest rates than previously. As of 30th of June, the group held GBP 297 million in liquidity excess over its liquidity coverage requirements, which equated to a coverage ratio of 429%. Whilst on the subject of liquidity, during H1 '23, we introduced two new notice accounts for our customers, 90 days and 120 days. These should be seen as an attractive extension of our existing savings options to the market. So far, these new accounts have attracted GBP 32.5 million of applications from customers. Finally, before I hand back to Malcolm for his closing remarks, Slide 23 sets out our financial outlook for the second half of 2023 and beyond. The remainder of 2023, the group will continue to focus on disciplined receivables growth in the lower risk mid-cost and near prime segments of the market. Our underwriting expertise and credit risk management frameworks enable us to keep growing our receivables by underwriting only the best customers in our markets, which is especially important during periods of macroeconomic uncertainty as we are experiencing currently. We will deliver this growth whilst carefully and prudently maintaining asset quality, keeping impairment levels within budget and prudently reducing coverage ratios on our balance sheet in line with these improvements. Inflation during H1 '23 has added approximately GBP 12 million to the group's cost base. In H2 '23, management will continue to work to mitigate the impact of this as much as possible as we did during H1 '23, with continued savings expected from our cost reduction program. We will continue to invest in the group's long-term capabilities during the second half of 2023 to improve operating leverage, flexibility and scalability of our operating platforms in the future. As a result, we plan to invest a similar amount in H2 2023 as we did in H1 2023. And the group's total costs are expected to remain broadly flat year-on-year, in full year '23 versus full year '22. We expect business investment to reduce materially in 2024 as we complete the replatforming projects as we have stated previously. At present, the group remains on track to meet its cost-to-income ratio target of approximately 40% on an exit run rate basis in quarter 4 2024. Finally, the group's NIM profile is expected to reflect of factors I've just outlined, which include an evolving product mix, greater levels of near prime pricing and cost of funding increases offset by changes to our funding mix. I expect the group to deliver an attractive net interest margin in 2023 of upwards of 18%, all else being equal. And before I hand back to Malcolm, I would like personally to take this opportunity to thank Malcolm for his thoughtful leadership and oversight over the last 5 years. Since I joined the group in April 2020, Malcolm has been an excellent source of trusted advice and support for me. And together, we have seen the group successfully navigate a number of extreme challenges, which started with COVID in 2020 and culminating with the closing of the home collected credit division in 2021. However, whilst managing all that, he spearheaded the repositioning of the group into what it is today, a specialist banking group with a unique and strong customer franchise underpinned by a robust financial footing and with a clear strategy for the future. Malcolm, you'll be missed by everyone across the group, and I'm sure they will join me in wishing you all the very best for the future. With that, back to you, Malcolm.

Thank you, Neeraj. That's very kind of you. Right. Just to round off, Slide 25. Vanquis Banking Group, I think now is a specialist banking group with a diverse core product offering, which meets our customer needs and our position, I think, in growing addressable markets. In addition, we are and will, in the future, diversified to further new products such as the second charge mortgages, which, as you know, we've just started off with a pilot [indiscernible]. The customer-led strategy is driven by our social purpose, which ensures that we provide customers with products that deliver financial inclusion to customers who can't access credit from traditional lenders. That means that we have the right culture, mission and vision in place to deliver it. The strategy and product offering are then underpinned by our solid balance sheet as we heard from Neeraj. Here, as I've discussed previously, we have a significant capital and funding competitive advantage as we can access long-term retail deposits to fund the growth of all of our products, where many of our peers are struggling to access the wholesale markets, particularly in this environment of rising rate environment. This, in tandem with our operational leverage enables us to deliver attractive and sustainable growth for our shareholders as we've shown during the first half of this year. Also on this slide, you can see the size of our addressable markets, which are large and underbanked. Our markets are growing and will continue to do so with the cost of living challenge and inflation pushing people down from the prime space to the near prime and mid-cost markets. This presents us with a great growth opportunity, one which we are cautiously exploiting, coupled with growing market share through targeted product [indiscernible]. As you can see, year-on-year, we've added some GBP 400 million, GBP 500 million in net receivables growth and over 100,000 additional customers. In the second half, the group's priority will again be disciplined receivables growth while maintaining asset quality being focused on risk-adjusted returns with a cautious eye to the future macroeconomic outlook. An [wise] old colleague once said to me in a previous life, anyone can lend money, it's lending and getting it back, which is the key. And I think that's a lesson that we hear very much so in this group. So thank you for listening to what was my last and 12th results presentation. And Neeraj, thanks for your kind words. I wasn't expecting that. Thank you. And he and I will now take some questions. And that session will be run by Richard.

[Operator Instructions]. We have a question from Michael Sanderson.