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

Good afternoon, and welcome to the Vanquis Banking Group plc Investor Presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Dave Watts, CFO. Good morning, sir.

Good afternoon, and thank you, everyone, for joining what is our second Vanquis Banking Group Investor Meet Company presentation. We thought we'd use this occasion to talk through the significant transaction we've just undertaken which we said we'd take as part of our optimizing our capital stack. And it also gives a chance for you to meet with Steve Grainger, our Group Treasurer. The intention is to go through the transaction, I'll do that and then pass on to Steve, who cover the capital benefits, and then we'll open up to Q&A, okay? Okay. So back in March 2024, we -- Vanquis Banking Group gave a strategy update. And one of the items we said we undertake as part of our strategy delivery was to optimize our capital stack. So this is what we started doing on the 23rd of September when we did our inaugural issuance of GBP 60 million of Additional Tier 1 capital securities. It's a perpetual instrument, 5.5 years call window. The option call in the 6-month period prior to and including the first reset date in May 2031. The coupon is 10.875% paid semiannual and this comes to an annual cost of GBP 6.525 million. It's important to note this instrument would convert to equity if the CET1 capital ratio were to fall below 7%. And given that 18.5% published disclosed CET1 ratio at June 2025, we got 11.5% headroom to this one. So that's very comfortable headroom available to us there. Look, previous transaction, the group fulfilled its Tier 1 capital requirements purely in CET1 capital, which, as you know, is more expensive. In essence, the group had unutilized AT1 capacity of GBP 41 million or 2.2% on the Tier 1 capital ratio. By issuing GBP 60 million of AT1, this provides a buffer over the minimum capacity to support both growth and provide liquidity in the instrument. The CET1 capital release will be used for general corporate purposes, including growing balances. As we've already published in our RNS and half year updates and year-end statements, we've delivered 2 consecutive quarters of profitability and 3 consecutive quarters of balance growth as of June '25. We intend to continue growing and why we're doing that is to build scale and long-term sustainable profitability of the Vanquis Banking Group. Gross customer interest-only balances were nearly GBP 2.5 billion at June 2025. We've guided to being above GBP 2.6 billion of balances at December 2025 and circa GBP 3 billion balances at December 2026. Whilst this capital is fungible across our lending products, what we have done is we've seen growth in Second Charge Mortgages of over GBP 150 million in the first half of 2025. And in Credit Cards, we saw 6% growth in the second quarter 2025. In Vehicle Finance, we've been proactively managing the new business growth in this product in the near term, while we deliver our new gateway strategic solution in this space, which could deliver better onboarding and servicing for Vehicle Finance in this product there. So you should expect to see growth in the same sort of lines of Second Charge Mortgages and Credit Cards and Second Charge and Vehicle Finance sort of trading down a little bit over the coming months and quarters ahead. That was the AT1 issuance. At the same time, we did a Tier 2 tender offer. In essence, we tend to GBP 58.5 million of Tier 2 capital. Whilst this Tier 2 capital was not callable until October 2026, the group had regulatory permissions to the PRA to actually go ahead with this tendering. And why would we actually do this? The pre-tender, we had GBP 200 million of Tier 2 capital with a coupon of 8.875%, excluding the pre-swap costs, which is quite expensive, annual cost of nearly GBP 18 million. Earning about GBP 56 million of this capital was actually eligible for capital purposes. It's still good for funding. But in essence, we had GBP 144 million of surplus capital with no capital benefit. Post this transaction, this has reduced the surplus capital down to GBP 85.5 million. And so net-net, when you take the cost of issuing the AT1 annualized cost of GBP 6.5 million. Saving of GBP 5.19 million on the Tier 2. That's an additional cost of about GBP 1.4 million, but gives us GBP 60 million more of capital available for lending into our businesses. And if I could pass over to Steve now to talk about the benefits of this.

Thank you, Dave, and good afternoon. So just on the capital optimization, just really turning what Dave just walked you through into what does that mean for our actual capital position. So on the left-hand side, you'll see our total capital ratio, which is unchanged at 29.2%. And effectively, you'll see that what we have done is obviously tender of the Tier 2 equivalent and issued AT1 issuance. In terms of what does that mean for capital, if you move to the middle, and you'll see in terms of the Tier 1 ratio, we've obviously increased our Tier 1 ratio from its current 18.5% to 21.7% and going forward, that does mean for us that the CET1 ratio displayed on the right-hand side at 18.5%, that effective will become our binding constraint, and we'll be looking to effectively reset guidance and post results in Q1 next year. This really concludes the formal presentation. So we're happy to move to Q&A now. Thank you.

Steve, Dave, thank you very much for your presentation I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed by investor dashboard. As you can see, we have received a number of questions throughout today's presentation. Can I please ask you to read out the questions and give responses where appropriate to do so, and I'll pick up from you at the end.

Yes. Thank you very much. Happy to do that. So for those who don't know me, I'm James Cranstoun, the Head of Vanquis Investor Relations. So I'll moderate the Q&A. And the first question we have is probably for Dave, I would suggest. So essentially, the question is, now that this transaction enhances the flexibility for more growth, how much growth can we expect in the fourth quarter of this year? Dave?

James, thanks for that question. I can't give specific guidance on what our 4Q growth aspirations are going to be. But we've guided to being above GBP 2.6 billion of gross customer interest earning balances by the end of this year, having delivered nearly GBP 2.5 billion balances at the first half of 2025. What we will do is we will provide an update on our position at the third quarter 2025 on our trading statement on the 5th of November 2025. So you should be able to see that in relative to our guidance. As we just talked about in the presentation, where we've seen the growth in the first half of the year in Second Charge Mortgages and Credit Cards, that's where you should expect to see the same sort of level of growth in the second half of this year in those 2 products with a sort of probably moderated decline in Vehicle Finance due to the pending delivery of the gateway platform for Vehicle Finance in the second half of 2026. What it does do for this capital optimization, it provides a short-term boost to growth capacity. It frees up CET1 capital that's being used to fulfill Tier 1 capital requirements and as a consequence, we can now use the freed up CET1 capital to deploy to further lending. We've got capital AT1 capacity of GBP 41 million at the time of issuance. We've now issued GBP 60 million. So there's an extra GBP 19 million of that capacity. And this gives us sufficient stuff in our sort of treasure of capital for growth to grow into over the coming couple -- 2 to 3 years to deliver on our growth aspirations for the bank as we go further forward.

Great. Thank you, Dave. The second question probably is for you, Steve, and it simply says, as there is still some of the Tier 2 notes outstanding, should we expect another transaction like this next year to allow for further growth, as Dave sort of alluded to as well.

Yes. Thanks, James. Dave just touched upon, we've done a GBP 60 million issue of AT1 versus, something on the optimum amount that we're targeting of GBP 41 million today. However, we've got sufficient AT1 to grow into, and I think we're confident we will grow into that in the short term. In terms of Tier 2, post the tender offer, we've got a bit over GBP 140 million of Tier 2 outstanding relative to an optimal level today of around about GBP 56 million. We continue to have excess Tier 2 outstanding, but I think it's important to note that we've got an early call on that instrument in October next year. So that does give us the opportunity to potentially rightsize the Tier 2 in our capital stack. It's also worth noting just in terms of regulation, there's a change in regulation from the start of next year 2026, which means we may also have the optionality to do a further tender offer on the Tier 2 in advance of that date.

Great. Thank you, Steve. So the next question is about market share. So essentially read what's your current market share? And I think we should answer this by product? And how do you hope to grow it organically through acquisitions, through partnerships? Dave, that's hopefully...

I think this is not related to the transaction in place there. So I think people should take reference to what we maybe talked about in previous presentations to the marketplace at half year and full year from there. I think just touching on where we are on something like each of the products in place there. We've got nearly 1.7 million customers across the board, nearly -- just over 1.3 million to 1.4 million Credit Cards, over 100,000 in Vehicle Finance, and we've got nearly 7,000 customers in Second Charge Mortgages. Taking those in reverse order. Second Charge Mortgage, we've grown from 0 balances virtually in May 2024 to having over GBP 400 million in lending Second Charge Mortgages now. And through our partnerships, 4, 5 partnerships, one of whom is now sort of the lead issuance in Second Charge Mortgages in the first half of this year. So I think it's the way to look at -- in Second Charge Mortgages, we're growing business in an actual growing market. The market is growing probably a 14% CAGR year-on-year with GBP 2 billion issuance, new issuance a year. So I think we're very happy to be in that market as it's growing. In terms of vehicle finance, obviously, there's been a lot about this in the marketplace with the issue of the Court of Appeal ruling, then the Supreme Court and the FCA guidance in terms of its potential redress scheme in place there. Where we are is we continue to be active in the marketplace there. But that's probably moderating our new business development there just purely because we've got quite a clunky applications in place with a cost/income ratio of 71%. So it's not necessarily logical to sort of try and grow that business with a poor systems architecture. However, we do believe into 9 months' time, we're going to be positioned to be on delivering our vehicle finance business, utilizing new technology, and we hope to grow our asset book at that time. And as the market share comes in that respect, James, I think it depends on what happens in the marketplace with other participants in the Vehicle Finance Commissions address scheme and how other banks operate in that space. In terms of credit cards, we are -- we operate in a space where other banks don't necessarily operate. There are some competitors in terms of Nuuday or Capital One. What we'd like to do is we say continuing to grow our market share per se in that one there. And to date, we've seen where we wanted to grow, we have been able to grow. So I'm quite comfortable we can continue to grow our market share in that product. And to come back to the point of the call here, having that capital in place now facilitates that growth.

Next question, again, not directly linked to the transaction, but sticking on the growth is around Snoop. So how the acquisition of Snoop is being integrated into the business and being leveraged to support the growth that we're targeting again [indiscernible].

Look, we acquired Snoop back in August 2023. We said for the first couple of years, we will keep it quite separate to the group in terms of entity structure in place there. What we've seen with the Snoop acquisition, it's a great money management tool for our customers base to actually manage their income and the expenditure. We've seen pickup in terms of number of customers of Vanquis who have access to Snoop. I think it's over 45,000 now. James, can you just confirm that for me.

Yes.

45,000 now. So that's a useful product you offer free to our customers in place there. In terms of -- we started using it for deposits from December last year. We've got over GBP 200 million of deposits. We diversified our deposit strategy as a consequence of that. And it's a very nimble tool. It's a good technology it's based on which our customers have access to, to create a rainy-day fund and to safeguard against with times they may need some funds at play quite quickly in the marketplace to deliver on that boiler goes wrong or whatever. It's working out quite well in that space, as I say, having 0 to GBP 200 million in just over 7 or 8 months is a very positive step in that perspective there. But I think what we have brought into the overall group is the people working with Snoop, some fantastic technologies to be perfectly honest. And a number of the people we've got in place brought that acquisition now sit at the table of the ExCo of the organization. We've got people running IT, people running our marketing, people running our cards business all come from that acquisition. So I think that's been viewed as a very positive transaction per se. Where we do see going forward in the bank is a closer integration of Snoop capabilities into the Vanquis mobile app, and you'll read more about that in the coming months and updates to the marketplace, particularly in the strategy update we hope to give at the tail end of February 2026.

Great. Thank you, Dave. The next 2 questions I'll couple together because they're very similar, but it's essentially about prioritization of capital. So the 2 questions combined sort of read how are you prioritizing your capital between, I suppose, reserving capital to shore up your capital position relative to regulatory requirements. Returning capital to shareholders, growth through dividends and/or buybacks through growth that we've talked about or the further debt reduction that Steve touched on earlier. So perhaps both of you may want to comment on that.

Dave, you want me to start and then -- so look, Vanquis remains in sort of turnaround transformation phase. And as such, we feel that the best use of capital is deployed into the business for profitable growth rather than return to shareholders. We're really looking to build scale within the business in the near term to order to generate sustainable long-term profitability. So that is the priority. Once we're through the business transformation, and we've got sort of clear line of sight on that sustainable profitability, our intention is to reset the capital distribution policy. And I think we've guided and I said we'll do that with the full year results and obviously communicate that in '26. I think it's fair to say, look, we understand the importance of the capital distributions to shareholders, and we intend for that to be a meaningful part of our business or the investment proposition going forward. But I think now in terms of what that might look like, whether that's a dividend or a buyback, I mean, that will be dictated by various factors, and we'll consider that at the time. Dave, and you wanted to add?

Yes. I think you've covered it all there, Steve. The only thing I'd add in place there, we did commit when we come back to the market as following our full year 2025 results in late February next year, we tend to set out our capital distribution policy at that point in time. Clearly, that's a matter for the Board to consider and approve on that one there. But we are cognizant of the needs of different shareholders in terms of growth versus income. And at this point in time, as Steve said, is we need to scale up this business. We need to grow our receivables, and that's a consistent message we've delivered to the marketplace in the last couple of years. But I guess last thing, most important thing is we're not just in growth for growth's sake, it has to be profitable growth. So we run a quite tight ALCO whereby we look at the capital, we look at the returns payback period on the capital being deployed in new business. And that's the basis where we actually allocate that capital available to the product at this point in time.

Great. There's another question here, which I think you sort of answered through the last answer there with when we'll look to change the capital ratio target and any hints on what that will be. I think the message there is we'll give an update on our capital ratio target with the full year results. It will be on a CET1 basis, and it will be part of the broader capital allocation and distribution policy going forward. So I don't think we need to answer that one again. The next question, though, and I think it's the last question in our list at the moment is how resilient is our capital position under extreme macro stress scenarios and how do we sort of assess that when we're considering that have capital solutions, with Steve to answer that.

Yes. I'm happy to pick that one up. So look, like all U.K. banks, we're obviously subject to an ICAAP. And that's really us taking an internal view of our capital and how it might perform under various stresses. And that's anything across sort of an idiosyncratic market-wide right through to combined events. We've obviously gone through an annual review of our ICAAP and it's something that we've shared with the regulator. We do expect feedback from the regulator ideally before year-end. And obviously, that feeds back into setting our capital ratios. But look, I think the long and short of it is, I would say we are resilient. We're quite prudent in our approach, but obviously, in terms of the stress testing, we do take into account the moving parts from a macro perspective, looking at various implications of interest rates, unemployment, GDP, et cetera, which will have a degree of sensitivity on our customers.

Dave, Steve, James, thank you for answering all those questions you have from investors. And of course, the company can review all questions submitted today, and we'll publish those responses on the Investor Meet Company platform. Just before redirecting investors to provide you their feedback, which is now particularly important to the company, Dave, could I please just ask you for a few closing comments?

Thanks very much, everybody, for joining us on a Friday afternoon. For us, we view this transaction, the AT1 issuance, coupled with the Tier 2 tender offer as a significant transaction in the step to the turnaround of the Vanquis Banking Group. It creates capacity to lend into the marketplace, which is what we wanted for a period of time. It goes to our aspirations to grow this business into a long-term sustainable, profitable generated organization. One last thing to point out to you from there is we're going to issue our third quarter trading statement on the 5th of November. Hopefully, you'll get a chance to look at that and hopefully see some further positive news from the group at that point in time. Thank you very much for joining us and have a good weekend when it comes.

Steve, Dave, thank you for updating investors today. Can I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This may take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of Vanquis Banking Group plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.