Vanquis Banking Group plc

Hello and welcome to the Provident Financial 2020 Full Year Results Call. My name is Rosie and I'll be your coordinator for today's events. Please note this call is being recorded and for the duration your lines will be on listen only. However, you will have the opportunity to ask questions at the end. This can be done by pressing star 1 on your telephone keypad to register your question at any time. If you require assistance, please press star 0 and you'll be connected to an operator. I will now hand you over to Malcolm LeMay, Chief Executive of Provident Financial, to begin today's conference. Thank you.

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

Thank you, Malcolm. I'll take you all to slide 13. As you can see here, the group adjusted loss before tax for 2020 was 47.1 million, compared with a profit in 2019 of 151 million. The group adjusted profit before tax and impairment for 2020 was 311 million, and that compares with 497 million in 2019. Important to point out that Money Barn and Banquist have remained profitable throughout 2020. And 2020 clearly has been a year of great challenges for everyone, especially our customers, and this is clearly borne out in our results. However, despite this, we have continued to help our customers on their path to a better everyday life. Our receivables have been negatively impacted, unsurprisingly, at the same time as increasing our impairment provisions pro-cyclically under IFRS 9, driven mainly by the worsening unemployment forecasts in 2020. These forecasts are improving in 2021, but a lot rests on the pandemic not resurging, as we've seen in other parts of the world, and the impact post-furlough ending in September. I'll go through these elements in more detail shortly, but we remain cautiously optimistic. Financially and strategically, the group has positioned itself during 2020 to deliver the ambitions it set out at the Capital Markets Day in November 2019, albeit COVID has delayed progress. Appropriate capital and liquidity resources have been maintained during 2020 and will be central to the delivery of the group strategy for the benefit of all stakeholders after taking into account the financial impacts of the CCD scheme of arrangement and its controlled rundown. We've seen evolving supply and demand dynamics in our chosen markets, driven by strong moves towards electronic delivery channels, as well as significant regulatory change. In slide 14, you will have seen that towards the end of 2020, we had we had added an intermediate holding company into the group structure called Provident Financial Holdings Limited. This structure is more typical of a listed group and establishes a buffer to protect the group listed entities balance sheet and thereby reduce any volatility risk in the reserves, which is to the benefit of the bank risk and money bond customers, as well as the debt and equity holders. This structure also anticipates the future direction of the group as set out in our capital markets in 2019. We are planning on the basis that the controlled runoff and closure or sale of CCD will cost up to £100 million, which is split roughly 40% redundancy and lease termination costs and the remaining being the operating costs to the end of that runoff period. The consensus in the market for this is actually higher currently than this level. I'll turn to slide 15. The group results are set out here by division. The exceptional costs include the provision for the CPV scheme of arrangement and its related costs. The most significant impacts to the group's products have been from reduced receivables in credit card balances and the IFRS 9 impact on all of our product lines. Money Barn has done well to grow its receivables during 2020 by remaining open to new business during the lockdowns and thereby predominantly helping the key worker community. The key focus of the group during 2021 will be overhead reduction. Slide 16 shows us the product snapshot and is useful in showing the impact of the pandemic on our 2020 results. You'll see in the credit card business that our average receivables were down 15%. Our interest margin was down 19%. However, our impairment charges increased by 21%. And that led to risk-adjusted interest margin down 41%. The adjusted PBT was down 25%, and that led to an adjusted PBT reduction of 78%, leading to a 38% profit for bankers. The Vehicle Finance Division actually did well on receivables and was up 12%, and its net interest margin was also up 20%. The impairment, however, was significantly higher at 47%, Again, driven by two things, mainly the macroeconomic impact on that business's IFRS 9 charge, as well as the fact that during lockdown, we were unable to collect cars or bring cars that were repossessed out for sale in the market. So that had quite an impact in 2020, which is now being dissipated. The risk-adjusted net interest margin was down 13%, and that's led to an 18% reduction in adjusted PBT for the year. However, it has left MoneyBard in quite a strong position in terms of its increasing balances. The home credit and short-term loans business that Malcolm alluded to earlier reduced significantly in the year in terms of its balances by 33%, and against a £200 million cost base, This left CCD in a difficult position when it comes to profitability, as you can see on the slide. The key performance indicators show significant cost of risk increase in 2020, up 18.6%, driven by the poor macroeconomic outlook in 2020. Cost of funding was higher purely due to the decision to hold significant levels of liquidity in the group during 2020. The cost-income ratio was negatively impacted by the 19% drop in group income due to the pandemic, and there was a small decrease in total group costs during the year. The revenue yield reduction during 2020 also indicates the impact of a tightening of credit risk across the group. as well as the falling CCD balances. Slide 18 shows credit card spend during 2020, and it has been indexed to February 2020. And this shows a dramatic impact of the lockdowns in the year, but also shows that our customers have behaved on the whole as the wider market has. The latest view on spend week on week shows differentials between 2020 and now are negligible. Slide 19 looks at the payment holiday position. Soon after lockdown, we saw the introduction of payment holidays by the FCA. We saw a large take up of these in the initial phase especially in the motor loan segment. As we can see from the graph, this demand for payment holidays has dissipated to immaterial levels by the end of 2020 and remains such currently. Slide 19, sorry, slide 20 looks at the increase in impairment driven by the COVID-19 pandemic. What you'll see here is the increase in impairment was driven predominantly by the macroeconomic overlay, which increased the amount of impairment charge we held by just over 70 million. The underlying credit quality and core delinquency trends remained favorable during the period. You'll see that CCD levels are higher than the other products, but this is based on a significantly lower level of receivables. Slide 21 demonstrates the robust coverage ratios that we have in the group. Coverage ratios remain strong during 2020, and this slide shows that the coverage ratios have been strengthened throughout the year, despite a prudent starting point to 2020. Increases in H120 versus H219 reflect significant deteriorations in the macroeconomic forecasts. Again, Mercedes CCD percentage applied to significantly lower balances than the other products. Slide 22 is particularly interesting. This slide provides some reason for optimism for 2021, but we remain cautious of both furlough coming to an end and the potential for more powerful strains of COVID. But what this does show is the resilience of our customers which we have pointed out in the past. The group's significant history and knowledge in this part of the market allows us to both understand and manage our customers through these difficult times. And what you'll see with these graphs is that reducing delinquency rate. Slide 23 looks at our expected credit losses. The expected credit losses have been increased by 73 million, as you see in the graph, due to the negative impact of the macro outlook. The basis of that macro outlook is set out in the table to the right and shows a peak severe downside of 12.7% for unemployment. These current consensuses, which include Lloyds, Barclays, Bank of England, et cetera, are coming down quite significantly currently, but we remain prudent on the basis that our customers are yet to come out of furlough and may be in proportional terms more affected by unemployment than other parts of the market. The group's coverage ratio at 35% at the end of the year is very strong at an ECL level, But that is enhanced by UCLs, which would take that coverage ratio to beyond 50% if they were taken into account. Slide 24 shows that the receivables fell reasonably dramatically during the COVID impact period of 2020. As stated previously, the group's net receivables were down 18%. credit card business is seeing some green shoots of improvement now. Most of this is driven by spend in the beauty and hairdressing areas, as well as pubs and restaurants, unsurprisingly. There's also a continuing trend towards online purchasing. The motor finance business continues to grow steadily and into the near prime adjacent market. This is substantially larger than the addressable market that has been in historically. Turning to Regency Capital on slide 25, we see that the Regency Capital remains well managed, meeting the requirements of the group over the next three years after taking into account the costs of running down CCB. The capital reduction of £35 million during 2020 is driven mostly by the post-tax statutory loss in 2020. 526 looks at our capital stack and some opportunities that arise from it. It shows that the makeup of our group capital base is 100% CET1. And there is an opportunity to use other common forms of debt capital to support the group's growth into the future. The first step in our view would be to consider the feasibility of a tier two issuance and that would be based upon both the demand for that issuance as well as the market pricing that that would give us. So turning to slide 27 and looking at the diversified funding mix that we have, we continually look to diversify our funding sources. And we've been able to add the money bond securitization to that diversification. We have also repaid our bonds on time and have remained covenant compliant. We also brought back £75 million of bonds during 2020 at a discount. We've improved our undrawn capacity during 2020, allowing the non-banked group to end the year with £144 million of available liquidity. We continue to optimise both the cost and diversity of funding within the group, and we are creating a contingent funding line through the Bank of England's TF SME offering. In future, the group will also look to include a greater use of customary deposits in our fund sheet. In conclusion, 2020 has been a very difficult year financially for most. but we have navigated these difficult times with a strong focus on capital and liquidity. We continue to target the objectives set out in Capital Markets Day in 2019, and specifically a return on equity of between 20 and 25%, cost income ratio of less than 40%, with receivables growing in appropriately sized addressable markets. We will focus on costs, as well as funding and capital efficiencies, to support our strategic goals. Malcolm will now provide you with more insight into how we will evolve and develop to support our financial ambitions. Over to you, Malcolm.