Vanquis Banking Group plc

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

Neeraj, over to you. Thank you, Malcolm. I'll take you to slide eight to start with. This shows a summary of the group's financial position, excluding the impact of CCD. Our risk-adjusted net interest margin improved significantly year on year, reflecting the release of some COVID-19 macroeconomic provisions. The improved profitability position resulted in our return on acquired equity improving to 32.6%. The group's net receivables base increased year on year, reflecting an improvement in customer spend trends as lockdown restrictions were eased. Our balance sheet position remained strong to meet our growth ambitions, and we issued a Tier 2 subordinated bond for the first time since 2005, which has performed well in the secondary markets since. And at the same time, we did launch another successful tender for our 2023 senior bonds. The success of the Tier 2 transaction is another example of the continued support from the debt capital markets that we have strengthened. Shortly after the period end, we repaid our outstanding RCF facility as we moved to a retail deposits funded model, which I'll come back to later on. We maintained our prudent approach to risk management during the year and reflecting this, our coverage ratios remain strong. As I'll come back to later on, this positions us well to cope with the short-term economic uncertainty that may result from the inflationary environment we are currently experiencing in the UK. Slide nine, this slide shows the group financial results in a bit more detail. Full product P&Ls can be found in the appendices at the back of the slide deck. Our credit card business generated adjusted profit before tax of £174 million in 2021, driven by improved customer spend dynamics and impairment provision releases. Our vehicle finance business also generated excellent profit growth and delivered an adjusted profit before tax of £29 million for the year. The second hand vehicle market remained buoyant during 2021 and customer demand remained strong whilst our loan to values in the car market remained stable at circa 90%. A newly established personal loans business posted a small loss for the year as it continued to grow well and establish itself and as we invested further in the platform. Group central costs increased during the period reflecting the move to a shared services model and investments we're making in the group's core functionality. We've appointed a new chief information officer as part of our investment in driving to a more digitally enabled customer experience. For 2021, the group delivered an adjusted profit before tax from continuing operations of 167.8 million, representing significant growth year on year as the group started its recovery following the pandemic. After allowing for CCD closure costs and exceptional items, the group delivered a statutory profit before tax of 4 million pounds versus a loss before tax of 114 million for 2020. We have a strong impairment provision position that based on current macro economic indicators is likely to require the release of the remaining COVID overlays in 2022. Costs in 2021 have been driven by regulatory change requirements, as well as the gateway infrastructure, treasury enhancements, and the resumption of bonus payments that were completely withdrawn in 2020, as well as senior managers taking a 20% pay reduction for three months in that same year. I'll come on to the expected cost trajectory later in the presentation. Turning to slide 10, this shows our key performance indicators. I don't intend to go through each of these, but you'll note that these demonstrate a clear recovery, as Malcolm has already mentioned, across our key metrics. The improvement in profitability I've already mentioned led to a material improvement in our returns profile, including an 11.5% return on assets at the group level. The group's revenue yield reduced during the year as we positioned the group towards low-risk customers on average. Despite that, our risk-adjusted net interest margin improved materially to 26.9%. Our cost of risk reduced significantly, reflecting a more benign macroeconomic backdrop, and as we released approximately £40 million of impairment provisions being part of the COVID impact. And in terms of the balance sheet, and as I pointed to already, our CET1 and total capital ratios are both extremely strong, and we have a CET1 capital surplus of just over £220 million before any further ICAP reductions we may achieve this year. Turning to slide 11, this shows a useful snapshot of the products we offer across credit cards, vehicle finance and personal loans. This slide illustrates the decrease in average receivables that the credit card businesses experience owing to the impact of the pandemic in 2020. Year on year, the average receivables booking cards was lowered by approximately 17%. The risk adjusted net interest margin in our cards business increased by around 75%, reflecting the lower impairment charge in that business, which produced adjusted profit before tax of 174 million. In our vehicle finance business, average receivables continue to grow during 2021, reflecting the strong performance of this business during the pandemic. Our vehicle finance business also saw an improvement to its risk-adjusted net interest margin, amounting to circa 80%, which helped drive an adjusted profit before tax of £29 million. Finally, this is the first time that we're able to show separately our newly established personal loans business, which incorporates our Vanquish and Sunflower loans brands. Although we have offered existing vanquished customers personal loans for the last few years, the second half of 2021 was when we launched our first open market product and the pilot phase for this has progressed well since launch with good underlying demand from customers in that segment. Similarly, our sunflower loans product is also in pilot phase at present and will be assessed during H1 of this year. The two brands will target different segments of the market, but both will focus on hardworking customers with average credit scores of at least 500 and above. The increased loss year on year for the loans business reflects a significant investment made in the Gateway IT platform, which Malcolm will discuss in more detail later on. Turning to slide 12. This shows how spend on our cards performed versus the wider market and also how spend has evolved per category over the last three years. The chart on the left hand side shows that our customer spend tracked the wider market for most of 2021, having recovered more quickly as lockdown restrictions were lifted in the early part of the year. Were it not for the Omicron variant impacting spending the run-up to Christmas, spend overall for 2021 would have outpaced 2020 and 2019. The right-hand side shows a continuation of the theme we've discussed before, which is that all spend categories apart from holidays and recreation are now back to or above 2019 levels. Clearly this year, the expectation is for holiday spend to normalize as well as continued increases in non-discretionary spend by customers. Turning to slide 13, This slide shows how custom bookings evolved during the year. In cards, we continue to adopt a prudent approach to new customer bookings with approximately 200,000 new customers being added. We will continue to take a prudent approach to bookings given the inflationary environment in the UK at present, as well as deeper focus on supporting existing customer requirements where we have significant behavioral data available to us. In vehicle finance, new booking volumes remain good throughout the year and underlying customer demand remains strong. Turning to slide 14, and as I've mentioned in relation to bookings, credit issued in our credit card business was on track to meet 2019 levels until midway through the fourth quarter when some restrictions were reintroduced. The right hand side here illustrates the dramatic recovery that our vehicle finance business enjoyed during 2020 and how 2021 is tracking in line with 2019 levels for credit issued. Turning to slide 15, this shows that our strong collections performance continued during the year, particularly within the vehicle finance business. Overall collections were lower in credit card business, but this reflects the smaller book and reduction in customer numbers year on year. Collections per active customer remained strong. Slide 16, this illustrates how delinquency rates were stable throughout 2021 in both credit cards and vehicle finance with the usual seasonal uptick towards Christmas. As Malcolm mentioned earlier, we are watching our delinquency rates extremely carefully for any signs of financial distress from our customers, given the inflation environment in the UK and the potential squeeze in household budgets. However, as I said on the previous slide, we continue to be well positioned given our prudent coverage levels. Slide 17 shows that the material reduction in impairment during 2021 and particularly during the second half of the year across credit cards and vehicle finance. This was driven by a more benign macroeconomic backdrop than originally provided for and delinquency trends remaining favourable, in part helped by government sports teams. Turning to slide 18. And despite this falling impairment driven by provision leases, slide 18 shows that our coverage levels remain robust. And our current provision levels are more than proven for the current inflationary environment in the UK. One thing to note in our vehicle business is that the underlying coverage ratio is lower than shown here. The coverage level is forced to be higher due to the lack of debt sale activity in this market. And we expect coverage here to normalise as this activity resumes. Slide 19 shows at the start of the recovery in our credit card receivable book from a low point in H121, which results in receivables being broadly flat year on year, despite some of the challenges around spend. The vehicle finance book experienced high levels of customer liquidation during quarter 421 as a result of the buoyant secondhand car market. Slide 20 shows how the group has carefully managed its capital position and has a sector-leading capital position coming into 2022. We issued our first debt capital since 2005, which was oversubscribed and is trading above par. This demonstrates the capital debt market's appetite for Provident Financial Group notes. We hold significant surpluses of both CT1 and total capital, which cover the remaining IFRS 9 unwind and the increased regulatory buffers. Together with the removal of any CCD impact leaves us with a strong capital base to support future growth and investment. Turning to slide 21, the group has absorbed the cost of closing CCD and scheduled IFRS line transitional unwind and its capital generated on a continuing basis and has diversified its capital base in 2021, as I mentioned earlier. Slide 22 shows the impact of volume and the improving macroeconomic environment on the expected credit losses. We've taken a proactive approach regarding the impact of interest rate rises and cost of living increases on our customers. We continue to watch for any customer change in delinquency, but have seen nothing to date. We continue to include a more cautious view through our modelling as we navigate 2022. The continued tightening in credit acceptance will help in building out a strong front book. Turning to slide 23, As you'll see, at December 2021, the group held significant levels of liquidity and available funding support to support growth and investment and to deliver the scheme of arrangement settlement in 2022. Important milestones for the group include accessing the Bank of England liquidity schemes and issuing our first Tier 2 bond since 2005. We have further lowered our cost of funds by increasing our securitisation in Money Barn, all without increasing our encumbrance levels. On slide 24, the strong liquidity position we built through 2021 has allowed us to repay and remove the revolving credit facility over 15 months ahead of its contractual maturity, which is an important step as we move towards being a primarily deposit-funded group. Our actions during 2021 have moved all contractual maturities to 2023, allowing time for us to obtain permission for Vanquist Bank to fund other parts of the group, as Malcolm mentioned earlier. And we are in very advanced position with the PRA with this application. As is normal for a banking group such as PFG, we plan to fund our businesses primarily through retail deposits in the future. Finally, turning to slide 25, the financial outlook remains positive based on all that I've said and Malcolm has said as well. Firstly, capital to allow for significant growth in clearly defined and large markets with clear initiatives underway to enable continued receivables growth, such as launching new APR credit card price points, adding Apple and Google Pay, expanding into new vehicle asset classes and further developing Money Barn's introducer network. Secondly, a strong impairment provision position going into 2022, where we still have circa £60 million of remaining overlays relating to COVID. Continued reduction in credit and operational risk, which is changing the impairments profile of the group, and we are on a trajectory to reduce coverage ratios towards the mid-teens in the medium term. Whilst we will invest in 2022, as we did in 2021, as we repositioned the group, we do have a focus on operating leverage and cost control. And as such, from a marginally reduced cost to income ratio in 2022 versus 2021, we will drive towards a 40% cost income ratio by the end of 2024. Strong treasury capabilities will also continue to drive down the group's cost of funding. That's it for me. Over to you, Malcolm.

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

Thank you. So if you would like to ask a question, please press star one on your telephone keypads. Please ensure your line is unmuted locally, as you will be advised when to ask your question. So once again, that's star one if you would like to ask a question. And the first question comes from the line of Gary Greenwood from Shaw Capital. Please go ahead.

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

Yeah, I'll start with the second one, and then Neeraj can embellish and also come on the dividend. I mean, yes, we have got a very strong capital position. I mean, obviously, the capital we hold is to a large extent determined by the PRA. And as you know, that in turn is determined by the ICAP that we have to submit, which is submitted every two years. We will be submitting an ICAP in the first half of this year. Obviously, it is for the PRA to decide how they will look at the capital we have to require. But since we submitted our last ICAP, there have been, as I hope you'd all agree listening today, some fundamental changes in the structure of the group. First of all, we have closed CCD. Our previous ICAP required us to hold a certain amount of capital to support that business, and we no longer have that business. And I think some of the structural changes we've made have also affected, you know, effectively our operating efficiency. So we will be putting in an ICAP and they will give us a, hopefully, a new CT1 ratio we have to perform to, although obviously we can't say what that will be. Having said that, moving on to the second half of your question on capital, regardless of our required regulatory capital, we do have surplus capital. Clearly, we are going through some uncertain times, but equally, we feel we've got enough capital, notwithstanding that, to double the size of our balance sheet with existing organic growth. And I mentioned, you're absolutely right, Gary, that, you know, we also are in a sufficiently strong position now that were opportunities to present themselves, which was suitable. We have the ability to consider inorganic growth. And that's certainly something I'm open minded about. Clearly, we are not in the position to sit on capital and not make the return our shareholders want us to have. And so I think if you look at the waterfall of what will happen is clearly we've got very exciting organic growth opportunities. There may be inorganic growth opportunities. And we've also reinstated the dividend policy, which Neeraj can talk in more detail about. But we're all about making sure we deliver the right sort of level of returns for our shareholders. And we don't do that by sitting on capital that's not being put to work. I mentioned we're going to have a capital markets day in the second half, and clearly we can give you more guidance on what our target returns on equity are, but I am optimistic we'll be able to utilise the capital very efficiently.

Do you want to say anything on dividends? Yeah, sure. Thanks, Gary, for your question on the dividend. How we arrived at the 40% really is obviously with discussions with our brokers and our investors. And the market for bank stocks, as you'll know better than me probably, is that 40% is starting to be the kind of central case for most banks in the So that's kind of where we are. In addition to that, obviously, we are a high net interest margin business, which is able to generate good capital returns as well. And we are capital generative. So on that basis, the 40 percent does seem a sustainable level for us to have included in our planning. And market conditions as they are currently would allow us to continue making those payments going on into the future. As you quite rightly say, it's two things. One is that we have been very clear about the fact that that dividend is based on adjusted earnings, which means that it comes out of our profits, doesn't come out of our earnings. previous reserves and also means that if there are any anomalies in our accounts like large provision releases they're not part of that calculation. As you also pointed out if conditions were to get to a point where it was deemed that it wasn't right to make those dividends and we'd have to make that decision then but it would have to be something as extreme as we saw in 2008 and 20 with COVID, for example, rather than anything less severe, where we think that we're taking that into account by using adjusted earnings. So the expectation is very clear that we will be paying a 40% dividend or ongoing earnings adjusted for any kind of anomaly.

Just to follow up, I presume in doing that, you sort of try and position yourself such that, you know, even if earnings were to fall at some point because of an IFRS 9 move, you know, that wouldn't necessitate necessarily cutting the dividend you'd looked at. So hopefully at least maintain it in that scenario.

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

Understood. That's very clear. Thank you very much.

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

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

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

obviously we've mentioned that over in an overall sense it's a three billion pound plus market but you wanted to talk about how we see it evolving from our perspective yeah and james as as you're sort of alluding to that you know clearly there is a a j curve as we start a business from effectively scratch um we expect 2022 to um be the real establishment of our loads business and therefore in 2023 we'd expect it to start turning a profit um so ultimately um that's kind of a pretty normal trajectory for that kind of business In terms of size? Yeah, in terms of size, I think that, you know, from where we are, we can see it based on that market size that we've got. We see it over the medium term, you know, getting to, you know, £400 million plus receivable space, bearing in mind that these loans are not short term. So I think that's probably quite a reasonable position to get to.

Thank you. It's very helpful.

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

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

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

The next question comes from the Liners. Helene Mong from KBW. Please go ahead. Hiya. Thanks for taking my questions. I've just got two.

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

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

Yeah, that's very clear. Thank you. I don't suppose you normally throw out a sort of, you know, through the cycle cost of risk type number, do you?

Well, what I've just said is that really... Because I can see it coming down, yeah. Yeah, and I think because we're making quite a material change to our risk profile, what I'm trying to say is that that through the cycle is going to be circa mid-teens rather than double that, for example.

Okay, makes sense.

Thank you.

Thank you.

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

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