Vanquis Banking Group plc

Hello and welcome to Provident Financial Interim Results 2022. My name is Suzanne and I will be your coordinator for today's event. Please note this call is being recorded and for the duration of the call, your lines will be on listen only. However, you'll have the opportunity to ask questions. This can be done by pressing star 1 on your telephone keypad to register your question. If you require assistance at any point, please press star 0 and you will be connected to an operator. I will now hand over to your host, Malcolm LeMay, Group Chief Executive Officer of Provident Financial, to begin today's conference.

Thank you. You can all hear me.

Thank you very much for joining the presentation for our 2022 interim results. As is our normal process, I'll take you through the importance of our strategic repositioning of PFG as a specialist banking group over the last few months and how that helps us to support our business, our customers through these rather uncertain times and also give you the strategic highlights of the first half of the year. Then I'll hand over to Neeraj who will take you through the financials in more detail. Once he's done that, I'll return to update you on our strategy now before we take questions at the end. So turning, if I may, to slide four. As I said at our preliminaries, 2021 was a year of significant transformational change for PFG. We are now a specialist banking group focused on the provision of credit cards, vehicle finance and loans to mid-cost and near prime customers, with significant opportunities to grow customer numbers and receivables in what we believe is a £17 billion market. We now have completely left the high cost short term credit market with the closure of CCD and the finalisation of the scheme of arrangement. Growth is a key focus for the group and in the short term taking into account both prudently and sensibly. Following the closure of our consumer credit division, the group's risk profile has reduced dramatically. And this is reflected in our half one results and will also be the case going forward with lower impairment and delinquency trains than we have historically had within the group. Costs is a big area of focus as we implement our new target operating model. Equally investment, and here we're investing in our core strengths and efficiency initiatives, which are expected to result in cost reductions from 2023 onwards. consistent with our cost-to-income target ratio of 40% from the end of 2024. The Group's capital position and access to low-cost funding are a significant competitive advantage for us. It will not only allow us to support our customers grow prudently, but also underpin our dividend and broader shareholder distribution policy, which I'll come on to later. I'd like to remind you that we are in discussions with the regulators regarding our capital requirements following the closure of CCD and also the ability for us to use deposits to help fund our growth outside the direct bank. So in summary, Taking into account the key points I've made, BFG is now uniquely positioned as a specialist banking group with the right products in the right markets, with a strong capital position to deliver sustainable growth and returns for its shareholders. Slide five. Well, the highlights for the first half of 2022. here show, with customer numbers up at over 1.6 million and receivables in excess of 1.7 billion. In terms of impairments, as you can see the trend improving year on year to roughly 4.7% cost to risk, illustrating my earlier point that the risk profile of the group has now fundamentally changed and reduced. Given our repositioning, we expect impairment trends to remain stable in the second half and to be sustained at lower levels than historically have been associated with the group. And we'll talk more about that in the R&D section. Costs. Investment is up as we've invested in our platform, people and created the new loans offering. The target operating model here we have invested to deliver cost efficiency, competitive advantage and future growth opportunities. As I've said, we have a very strong capital and liquidity position with a CET1 ratio of 27.3% and we'll keep you updated regarding our discussions with the regulator in regard to our regulatory capital requirements following the closure of CCD. Turning to our dividend, reflecting the strong growth in the first half and the confidence I have in the future growth prospects of the group, we are declaring an interim dividend of five pence per share. And finally, on regulatory matters, our scheme of arrangement will be finishing at the end of July with all redress paid, and the FCA have now closed their investigation into lending in CCD with no further action to be taken. Now, I've included slide six to show how the exit from the high-cost short-term credit market through the closure of CCD has fundamentally changed the risk profile of the group. The graph on the right-hand side shows how since 2019, our average customer credit score has significantly improved. As we focus on providing credit to customers with APRs of 15% to 50% only, and now serve customers, many of whom are homeowners and who are on national average earnings. This key change, the closure of CCD, and the focus on better quality credit customers has meant our risk-adjusted returns have improved And as I've said, going forward through the brooding of credit cards, vehicle finance and loans, PFG will now only offer APRs going from 15% to 50%, as I've said, with the target market in excess of £17 billion. In the light of this decision, following the conclusion of our two successful loan pilot products, we've decided not to continue offering loans at 65% and 85% APR and will only offer loans at the top end to 50% APR. Slide seven. Customers in our market have always weathered economic challenges better than those in the primary space. As you can see from the graph on the left-hand side, it shows our credit customer base, how our credit customer base performed during the global financial crisis. And also our move to mid-cost and net prime customers have, in my view, made our customer base even more resilient. Clearly the uncertain times we are in, the economic times we're in are uncertain and of course we will support our customer base through them but I'm confident as a group that we're prepared for that. Our customers have delevered through Covid, we've seen no evidence of increased delinquencies or default rates and we expect our impairment trends to remain stable in the second half of the year. We also have a very strong balance sheet with proven provisioning for any potential cost of living impact. So in my view, as you can see on page eight, we are, I believe, one of the biggest ESG banking groups around. We offer credit to around 25% of the UK adult population that are underserved by the high street banks. In the past, you've heard me speak often about the group's social purpose, which is to help put people on a path to a better everyday life. Well, it's in times like this that you need to live it, just like we did during the pandemic. We have, as I said, provisioning in place for the cost of living impact, but helping your customers is clearly more than just provisioning. Now, I believe our customers will actually be impacted, as I've said, less than some of the prime cohorts by the cost of living crisis for the reasons I mentioned earlier. But we are still preparing and have many forbearance initiatives ready to go, if required, and have increased our customer communications to ensure our customers know what help and advice is available if needed. So I'll pause there. Thank you for listening. I'll hand over to you, over to Neeraj, who will take us through the numbers. So, Neeraj.

thank you malcolm um slide 10 if i can go turn to that shows a summary of the group's financial results for h1 2022 the group adjusted profit before tax of 54 million drives a group statutory profit before tax of 37 million for the period based on the strength of these results and the group's robust capital liquidity and balance sheet

position, the Board has prepared for 2022.

These results for H1 2022 therefore underlie the continued execution of our strategy to move to a lower cost of risk model at net interest margins that are aligned to that risk and produce capital generated businesses allowing the group to invest in its platforms for improved cost efficiency as well as more attractive customer experience. At the same time, as Malcolm pointed out, we have greatly increased the size and quality of our addressable market to drive sustainability to our business model through the cycle. Moving to slide 11. Slide 11 shows the group financial results in more detail. Full product P&Ls can be found in the appendices at the back of this slide deck. Our credit card businesses generate adjusted PBT of 75.8 million in H122, driven by improved customer spend dynamics, some impairment provision releases and a reduction in costs. Our vehicle finance business also generated good profit growth and delivered an adjusted PBT of 20.2 million for the half year. The second-hand vehicle market has remained buoyant during 2022, and customer demand remains strong, whilst our LTVs remain stable at around 90%. Profitability in both our credit cards and vehicle finance businesses both improved, notwithstanding the transfer of some of the costs of those businesses to central costs as part of our centralisation plans of providing shared services under Project Bolero, as we've mentioned in previous presentations. Personal loans have started well with strong demand and are now working to increase receivables from £42 million at the end of H1-22 to levels that will sustain the business costs and then on to expected profitability in line with our circa 20% return on required equity target. Excluding the impact of the newly launched loans business, the group suggested continuing million for H122 compared with 63.4 million for the same period in 2021. Costs in H122, however, include increased investment in centralization and IT platforms that will lead to the improvement in operational cost leverage as well as improved customer experience from the new platforms. central costs specifically have increased by the consolidation of support functions and the interest costs of the tier 2 capital bond which we raised last year as well as one-off change costs of 10 million pounds which represents the cost of the group-wide investment in shared services support functions these investments will enable significant improvements in cost efficiency as well as quality through the creation of centres of excellence driving the group's cost by the end of 2024. Our risk adjusted net interest margin continue to improve year on year, reflecting the release of some COVID-19 macroeconomic provisions, as well as the increase in management overlays in anticipation of any as yet undetected impact of increased inflation on our customers. The group's net receivables base increased year on year to 1.7 billion, reflecting continued improvement in customer spend trends post-COVID. A balance sheet position remains strong to meet our growth ambitions. Slide 12 shows our key performance indicators. I don't intend to go through each of these one by one, but you will note that they demonstrate an improving risk position for a strong risk-adjusted net interest margin. In terms of the balance sheet, and as I've pointed out already, our CET1 and total capital ratios are both strong, and we have a CET1 capital surplus of £186 million before any further reductions in capital requirements we may achieve after the C-SHREP process that is scheduled for November of this year. Whilst UK base rates have been increasing and are set to continue to increase, we continue to work to reduce our overall cost of funding as seen here. As the more expensive bond funding is repaying on maturity next year, we still expect to see reductions in the cost of funding after taking account of currently expected rate rises. This is also helped by a liquidity coverage ratio continuing to normalise downwards as we reduce the excess liquidity we held during the COVID crisis. The return on required equity is moving towards the expected 20% level, which should also drive the return on tangible equity to a higher team's value in line with our strategy. The cost-income ratio has been affected by increased cost of both the loans business rollout and investment in our platform and shared services strategy. These investments, as well as the continued growth of our businesses, will drive the cost income ratio post 2023 towards our targeted 40% level at the end of 2024. Slide 13. shows in more detail how costs are being affected by the investments we are making in our newly formed loans business and our continuing investment in our gateway platform, as well as shared services to drive costs down whilst improving quality. We have also remained focused on retaining our staff during these inflationary times and have increased pay levels in line with market norms. Slide 14. provides a snapshot of the products we offer across credit cards, vehicle finance and personal loans. This slide illustrates the increase in average receivables that each business is now experiencing. The risk adjusted net interest margin in our businesses continue to increase reflecting the progressive normalisation of the impairment charge for our targeted customer base. average receivables continued to grow during H1 2022, albeit at a slower rate than the performance experienced during the pandemic when there was little competition. Our vehicle finance business also saw an improvement to its risk-adjusted net interest margin, which helped drive an adjusted PBT of £20 million for H1 2022. Finally, the bankers personal loans business is now driving the scale as it moves through the J curve phase of its development in line with our product strategy. and how spend has evolved to H1 2019 levels, as we have anticipated for a while, spend on holiday and recreation are now back to above 2019 levels. It's also interesting, if not surprising, to see the relative drop in food and grocery spend compared to the Booking is a useful snapshot of the improving asset quality of the credit cards book. The new bookings are now in score bands five or below, which are helping to drive the average portfolio credit score upwards. We will continue to take a prudent approach to bookings given the inflationary environment in the UK at present. The credit score improvement is also driving the expected improvement in delinquency and charge-off levels. Turning to slide 17, this shows the same analysis but for the vehicle finance business. The introduction of the near prime categories in January 2021 can be seen here as well as their relative growth during 2022. The improvement in quality from the mix of new businesses having the expected impact on delinquency and overall book quality. It is also important to note that average deposit levels through the funding of vehicles is being maintained at circa 10%, which is also stabilising influence on the book as a whole. Slide 18 on our new loans business is similar to the previous slides and again shows the nature of the quality of the business being written. Clearly, as a very new business, we continue to monitor the quality of the loans written very closely. Slide 19 illustrates the change in the volume of new cards issued since the tightening of credit in quarter two 2020. The business now also has a greater focus on retention of good credit quality customers through offering better rates and balance transfer offers. The cards business is focusing on stability and quality which should also drive an improved cost of operations in time. the vehicle finance business continues to grow as expected, again with a focus on credit quality. Slide 20 shows the material reduction in impairment during 2021 and particularly during the second half of the year across credit cards and vehicle finance. These levels are now normalising towards the 10% level over the medium term in line with our strategy to maintain through the cycle stability of returns. Slide 21 shows that our coverage levels remain robust for both our cards and vehicle finance businesses. Our provision levels remain prudent for the current inflation environment in the UK, and this has been added by the inclusion of a 10 million management overlay for inflation. Slide 22 shows the group's continued prudent approach to impairment provisions. The coverage ratio is at 27.3%, the quality of the books is very robust. This also includes the £10 million management overlay that I spoke about earlier for the potential effects of inflation. The expectation is for the coverage ratio to fall to somewhere close to 15% as the full effect of the strategy to focus on the higher credit quality customers is driven through with the receivables. In total, the expected credit loss and unexpected credit loss provisions are 56% of the gross loans receivables, which confirms the very high level of prudence we continue to preserve during 2022. Slide 23 shows how the group continues to carefully manage its robust capital position. The PRA have indicated that they will review our current ICAP through a C-SHREP process in November. the current credit risk performance and wholly removes all impacts of CCD at any higher cost lending. As you can see on this slide, we hold significant surpluses of both CET1 and total capital, which cover both the remaining IFRS 9 unwind and the increased regulatory buffers. On slide 24, there is a waterfall that shows the utilisation and generation of capital. There was a final IFRS 9 transitional adjustment unwind in January 23 of 54 million, after which time the group is planned to be net capital generative. Slide 25 shows the diversified mix of funding and the reduction in the excess liquidity buffer held during the COVID pandemic. The group cancelled its revolving credit facility in part, reducing zone excess liquidity, as well as averaging down the cost of funding to the group. Whilst we await the final outcome of the waiver application from the PRA, we have led £70 million from Bankers Bank to Money Barn in H122 within the normal large exposure limit. As the group transitions to be predominantly funded by retail deposits, we will look to broaden the savings products available to our customers into ISAs and other shorter notice accounts, rather than just bonds of one to five years' duration. It is important, however, to maintain our presence in the debt capital markets to retain maximum flexibility should the need arise. We currently achieve this through our Tier 2 bond. Slide 26 shows the funding duration of the groups remain strong versus the funding maturity profile. All maturing bonds in 2023 can be repaid through non-bank liquidity resources. Impact of rising rates is delayed due to the contractually fixed nature of the current funding and the level of excess liquidity that we hold. On slide 27, the strong regulatory liquidity position of the group is set out showing excess high-quality liquid assets at £331 million, with a liquidity coverage ratio of 435% against a regulatory minimum of 100%. The net stable funding ratio of 143% represents headroom of £640 million over the regulatory All surplus funding is deposited in the Bank of England and achieves a base rate return. Slide 28 considers the direction of the group's cost of funding. Cost of funding continues to reduce as non-bank funding as well as TFSME and larger levels of securitisation in Money Bar have been deployed. Excess funding now achieves a base rate return, as I mentioned, on retail deposits in 2023, even though we hold non-bank funding to that amount already. Further changes to the retail deposits mix in bankers' banks, such as the introduction of ISAs, should continue to drive total cost of funding downwards compared to most peer banks. Turning to my final slide, slide 29, and based on the performance of the group in H1 2022, the financial outlook remains positive as we continue to deliver on our purpose to help people on a path to a better everyday life and execute our strategy. So in summary, we have a clear strategy to grow in underserved markets find it difficult to borrow from the large high street banks. We have the capital to allow for significant growth in these clearly defined and large markets or in appropriate M&A. We remain robustly provisioned against impairment of our receivables, which continue to improve in quality. We continue to reduce credit and operational risk. We are controlling costs while investing in the future. income ratio and strong treasury capabilities continue to drive down the group's cost of funding in a rising rate environment. Thank you and I'll pass you back to Malcolm.

Thank you very much, Niraj, for that excellent fly-fast of our financials. To me, it's good to see in such detail how the repositioning has benefited the banking group and also to see clearly just how robust our financial position is. Turning, if I may, to slide 31. PFG has a platform for sustainable growth and returns. The slide shows the three key areas that combine to deliver this. Customer insight, new products and services, and an IT customer platform. We have real customer insights built up over a significant period of time and spanning millions of individual data points. I believe one of the group's strongest assets is understanding its customers and being able to safely and effectively underwrite their credit requirements. As we've repositioned the group's customer base to mid-cost and near prime, we've reaped the benefit of better quality customers and, as highlighted earlier, default and impairment rates have dropped, giving the group a more sustainable growth from customers who can and want to stay with us for longer. Our customer insights are also key to tailoring new products and services that we offer to our new customer base. They allow us to make changes that help our customers and drive growth, on which I'll give a little more detail later. They also show what new products our customers could benefit from, such as secured lending offerings or, for example, when regulated, buy now, pay later. Gateway is our new IT platform, and it's a key area of strategic spend and growth. Going forward, it will mean we can combine customer insight and new products and services onto a single IT customer platform. It was created for loans, but will over time support all of our lending products going forward. The platform will increase our speed to market for new products and services significantly. Importantly, it will also give us and our customers a holistic view of all their PFG products in one single place. On slide 32, I've highlighted some of the customer insights that we have. I won't call them all out, but it illustrates to me very clearly what our new customer base looks like. Many of them have mortgages or own their own homes. The vast majority work full-time or self-employed, and they earn around the national average wage of £30,000, with some having savings. Many work in healthcare, manufacturing and transport, where the labour markets are currently very, very tight. Slide 33 sets out our customer strategy, which is built from our customer insights. As you can see, broadly speaking, our market is divided into five groups from optimistic credit through to lifeline credit. We aim to have our customers mainly in the optimistic spender and consider spender buckets. We know how these targeted customers run their lives, what financial support they need, and how we can help them with our products and services to build a better financial future. Using our customer strategy, built upon our customer insights, combined with our products and services and delivered by a new IT platform, will help us deliver future significant receivables growth. Here, slide 34 shows our industrial markets, split into customers and lending across credit cards, vehicle finance and personal loans. As you can see, the market is now around 17 billion, and as shown in Neeraj's presentation, we have plenty of room to grow in all of our product areas. Looking at the left-hand side of the slide, our old addressable market was around 10.4 million customers. By repositioning the bank into a mid-cost credit and near prime customer segments, we have increased our addressable market effectively to 13.5 million customers. or roughly 25% of the UK adult population. We have, in effect, lost about a million customers who are too high risk for us now, and we've replaced them by a million of just prime customers who will also offer attractive risk-adjusted returns. Also, by repositioning the group, we can now serve the new-to-credit market, which is a sizeable opportunity for the group. That is the market context, but how do we plan to grow into these markets? Well, slide 35 sets out what initiatives the product divisions are taking to deliver sustainable receivables growth going forward. Again, I won't call them all out, but clearly you can see it's an important area of focus for us. In credit cards, in the first six months of 2022, we've launched three new price points, which allow customers to stay with us for longer, but also means that we can attract more new cardholders. And secondly, we've launched an improved balance transfer offering, which will also drive customer receivables growth. And thirdly, we're reaching out to old, dormant, higher quality customers and offering them an ERA Prime credit card from us, which is being very well received. I turn to vehicle finance. We'll continue to seek new business partnerships, which have the potential to drive new customer receivables growth. Also, customer retention programmes will help growth alongside this. In personal loans, as I said earlier, we'll be writing loans in the APR space of 15% to 50%. We're already writing roughly £10 million a month, which I believe is a very good start in a business that in effect has only been going for a year. And we'll keep developing the last proposition, especially in the open market, which will drive an additional new receivables growth. On the penultimate slide, slide 36, we set out the group's capital management framework. The starting point is clearly the Group's strong capital position, the diverse range of funding lines, including access to low-cost retail deposits.

Our 2022 ICAP application has been accepted, which is clearly very important.

As we've also mentioned in this presentation, we're awaiting the pending approval of our large limit waiver. Our strong capital and funding position will enable us to grow into our new reposition of growing credit cards, vehicle finance and personal loan markets, aided by the rollout of the Group's new IT Gateway customer platform. The Group will also continue to optimise our shared services target at operating mall and deliver attractive returns on a sustainable basis. The Board, as we previously indicated, intends to move to a payout ratio of 40% of adjusted earnings for the full year 2022 onwards. And today we've announced a dividend of five pence per share as we move towards that 40% payout ratio. The Board will also consider any surplus capital retained post dividend and growth capital allocation to be assessed for further return to shareholders by way of a special dividend or share backs, obviously subject to market conditions. Finally, as we note at the bottom of the slide, our strong position gives us the opportunity to assess potential inorganic activities should they arise. So to slide 37. In summary, PFG remains well positioned despite macroeconomic uncertainty in growing markets. The group is underpinned by a very robust balance sheet, has a strong focus on credit and risk management, and has a customer-centric business model supported by leading technology. For the second half of the year, obviously subject to market conditions, I expect PFG to deliver a seamless growth across its product lines, stable impairment trends, and supported by the group's reducing cost of funding, a stable net interest margin. Also, as I mentioned earlier, I expect costs to remain flat in the second half before reducing in 2023, culminating in a cost-income ratio of 40% from the end of 2024. Therefore, I mean, over the medium term, as we execute this strategy, it will deliver sustainable returns and attractive returns to shareholders, including the potential for special capital returns. So thank you for listening. We're happy to take questions, which will be run by our moderator, Susannah. So over to you, Susannah.

Thank you. As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. To withdraw your question, please press star 2. The first question comes from the line of Gary Greenwood from Shore Capital. Please go ahead.

Oh, hi, thanks for taking my question. I just had the one and it was around the provisioning level. I think you talked about provision coverage moving down to around about 15% over time and obviously you're currently a lot higher than that at the moment. That's right, Gary, can you hear me? Yeah, I can hear you. I was just wondering what the sort of profile of that reduction down to the 15% will look like. Does it require sort of new, better quality lending to come on board? Or is it a case that there's a sort of cohort of the existing lending that's very well provided at the moment and potentially some of that provision could come off as well? So just a bit of colour around that would be helpful.

thanks yeah no problem gary thanks for the question and i think that it is both of those things so as our book um rolls off the um higher risk lending that's been on it in the past and as you know we've been tightening credit since 2020 and that has continued as we now continue to focus on not only the new business that we're taking on being of higher quality but also the fact that we are focusing on retaining higher quality customers especially in our credit card book that is where the impact over time will come out so that's kind of um That's kind of the direction of travel. And as you know, we stopped writing the lowest score bands some time ago, and it's kind of the highest score bands that are providing for this kind of move. In actual fact, the 15% coverage ratio, as you know, compared to other But ultimately, at this stage, that's kind of where our estimate lies. It may well, depending on where that quality ends up, be lower than that. But as you know, we take a very prudent approach to how we consider provisioning from the group.

That's great. Thank you very much.

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

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

Well, the two are linked. I'll start off with the second one, which is really about the competitive environment. I think you're absolutely 100% right. I think funding on a 12 to 24 month view for people who don't have the benefit of accessing retail deposits is going to increasingly be a factor. We've also, as we've said in the presentation, moved materially towards a better quality of customer within the subprime space, i.e.

mid-cost

What we tend to see in our challenges are the people that probably suffer and they tend to fall down into our marketplace. So that is quite an attractive opportunity for us. In terms of our competitors, you know, I think if credit markets tighten up, as indeed we've seen. We've seen in the wholesale banking market ourselves when we still had CCD, how there was a dramatic reduction in appetite to lend, and the securitisation markets do get difficult in these situations. Now, we obviously will always extend credit prudently, and I think that's something that we've demonstrated in this presentation and delivered, but we are able to carry on because we do have the competitive advantage of having a banking licence. Now, That also then is linked to your first question, which I'll hand over to Niraj, but clearly we have quite a lot of scope in our NIM.

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

Thank you.

Next question comes from from KBW. Please go ahead.

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

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

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

Okay.

Makes sense.

Thank you. Final question comes from Justin Bates from Canaccord. Please go ahead.

Thank you very much. Good morning, gents. Apologies if you've answered any of these questions. The line was dropping out on a couple of occasions, but please tell me if you have. Firstly, can I just draw your attention to slide seven, if we can rewind back to that. I was just keen to understand what you think the performance would look like over the next two or three years relative to the industry. and conscious that um two things have really happened versus uh versus uh 08 09 through to 11 and 12 back then one one bankless was growing very strongly uh from a lower base and secondly you have that you're talking about that repositioning now so wondering what your views are over the next two to three years relative to the industry performance for bankless maybe we'll start

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

Welcome. Secondly, could you outline what your RAM target is? I think you mentioned risk-adjusted returns a couple of times during the presentation, but again, going forward in the next two or three years, what the RAM target is, given the repositioning?

which target adjusted the ROE target? No, sorry, RAM, a risk-adjusted margin target. Oh, the risk-adjusted margin, yes, sorry. So I think ultimately, I mean, it obviously depends on how well the risk performs, but it will certainly be within the range it is currently from between 25% and 20% will be where the current product set will take us.

Okay, thank you. On costs, some activity there to reduce those. Could you give us some sort of feel as to what the split will look like between fixed and variable, or that variable? How much is advertising and marketing, please?

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

Understood. Thank you for that. Just, sorry, very quickly, Niraj. This is unusual for me, but M&A, what markets and products should we be thinking of? Is it outside of credit cards and meta?

Well, I think it's very difficult in these sort of situations to be precise, but I think about You know, PFG is a consumer finance business at the moment. A lot of its customers actually are probably SME, small SMEs, so they might have a different product requirement and they may have a different capital weighting if you do things differently. Equally, one's always got to be mindful about how new technology is coming into the space.

You know, I mentioned in my speech that clearly, I mean, I've been very vociferous about some of the

When you get dislocations in markets, as indeed I think we are going to be seeing, opportunities present themselves that you wouldn't necessarily have thought about. So we've got to be open-minded about it. I'm sorry if that sounds a bit nebulous, but it's always wrong, which is specific on these sort of questions.

No, that's helpful. Thanks very much.

Basically, I would say, sorry, just one thing I would say is the sort of any diversification we would do would stick with the theme of making sure that we are serving either underserved customers or underserved marketplaces. That's our mindset. There's no point for us to hunt in markets which are so competitive that the margins get squeezed to nothing.

Yeah. Thank you. Anyway.

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

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