Vanquis Banking Group plc

Good morning, everyone. Thank you for joining us for our 2023 results webcast. My name is Ian McLaughlin. I'm the Chief Executive of Vanquish Banking Group. As you know, we're holding a strategy seminar at 2pm this afternoon, and this will give you the opportunity to hear from me and from some of the key members of the Vanquish management team about how we're going to turn this business around to deliver mid-teens adjusted roti in 2026 and beyond. And this morning, we want to describe the foundations for this transformation, starting with our 2023 results. So in a moment, I'm going to hand to Dave Watts for his first outing as Chief Financial Officer of Vanquish Banking Group. Dave's impact since he arrived in November has been transformative. He has investigated multiple aspects of our previous financial performance with rigour and with discipline. The result of this is that we can give you a much clearer picture of the key drivers of our business today than ever before. And I'm delighted to have Dave on the team and look forward to him sharing the greatly improved clarity and transparency where this business is today and, more importantly, where we're going to take it to. Before I hand over to Dave, just a few words from me. I want to start with the story behind these numbers. And in September last year, when we started our planning in detail for today, we were staring at a substantial potential loss for 2023. As we reviewed the business through the second half of the year, the challenges that we had to address became clear, and they were fundamentally one and under investment in key capabilities for this business over a number of years. IFRS write-backs were contributing disproportionately to the profitability being stated. The group needed to refocus on customer numbers and receivables growth, both of which had been lagging and then grown too quickly in H1 of 2023 and grown at the wrong margin. So pricing changes were needed to prevent further unprofitable business from being written. Product pricing needed to increase to properly cover the cost of funds, our cost of risk and our operating costs. And we also needed to simplify our structure and our organisational design to remove operational silos, reduce duplication and again help better manage our costs. And as we told you in our Q3 market update, we took immediate actions to start putting things right, the results of which you can begin to see in our numbers for the second half of 2023. You can see our financial highlights on this slide, and Dave will drill into these in a moment. But at a headline level, we introduced appropriate product price increases and stopped unprofitable open market personal loans. We took immediate actions on our cost base, including making the tough decision to take out around 350 roles and cancel all bonuses for the entire team for 2023. We reviewed and reset our technology transformation programme. We restructured and recruited to upgrade our senior team. And we started work on a complete strategy review. And today we can show you some early signs of progress. As you know, we hit our key profit milestone that we set ourselves in October with adjusted PBT of 24.9 million. NIM has been stabilised, cost initiatives are delivering and capital exceeds our CET1 ratio target of 20%. However, you also know that it has not been plain sailing. It has taken us longer than we would have liked to get the right pricing in place to allow us to get back to profitable growth. But all our planned pricing actions will be live by tomorrow. We've also been experiencing a significant ramp up in complaints. These turn out to be mainly spurious, but hit critical levels from the end of Q4 and into Q1. Even though most of these complaints turn out not to be upheld, we still have to absorb the costs of reviewing them, including the financial ombudsman service fees. Over the second weekend of March, it became clear that we could not continue to offset these associated cost increases through the other cost saving actions we were taking elsewhere in our operations. And this was the major trigger of our revised 2024 profit guidance that we gave in our market announcement back on the 11th of March. We know we have to keep relentlessly improving the way we operate in order for all the good work and excellent insight that we've developed to show through in our bottom line results. We're looking forward to telling you about how we're going to do that in our strategy seminar this afternoon, but I'm getting ahead of myself. So for now, let me leave you with this. I am acutely conscious that the turnaround of Vanquish Banking Group is now set to go on for over a decade. There have been too many false dawns. So the question we've been asking ourselves as a management team on your behalf is why should you believe this time? As I said, we'll discuss this in more detail this afternoon. But for now, all I'd say is that our new team understand how to balance customer focus, customer acquisition, digital banking, customer service and cost management. Perhaps more important than all of that, we have a growing customer base out there that need and deserve better support from the UK banking system. And at Vanquis, we intend to lead on that. We have started the work. There's a lot to do, but we believe we have the right plan and we are on the right track. More to come later, as I said. But with that, Dave, welcome and let me hand over to you.

Thanks, Ian. Good morning, everyone. This will be my first time presenting our results, having joined Vanquish as CFO on the 1st of November 2023. After 29 years at HSBC, I moved to Vanquis as I support its vital role in meeting the financial needs of individuals who are not banked by the mainstream UK banks. I remain excited about the future potential of Vanquis. Due to the challenges of 2023 and the last couple of weeks, and with this being my first opportunity to present our financial results, I wanted to start with a few opening remarks to provide some context around what I'm going to share. We intend to provide transparency and clarity on what we want to achieve as we rebase ourselves for the future. You will therefore note that the content is richer and more granular than you've seen from us before. There are 15 slides I will talk through with further information provided in the appendix. The overall aim is to present our 2023 performance the impact of the turnaround that we initiated during the second half of 2023 with a new management team and how we look to progress in 2024 and beyond. We will present this in more detail this afternoon. From a P&L perspective, this presentation will focus on income, impairments and adjusted operating costs, which resulted in adjusted PBT of £24.9 million in line with management guidance provided at a third quarter. That said, there's no shying away from the fact that our 2023 results show a statutory loss after tax of £6 million. In the first half, interest income growth was driven by receivables growth, which was not necessarily profitable, given a significant increase in the cost of funds. This led to a mismatch in receivables and income growth. In the second half, the new management team introduced additional cost-saving initiatives and reassessed financial priorities. This led to better managed volume growth and up of repricing on our cards book. We have also revised our vehicle finance pricing strategy, impacting new business with the income benefit expected to come through in 2024. Impairments increased significantly during the year, driven by lower model enhancement tailwinds, lower profits on debt sales and increased new originations. Adjusted operating costs reduced by 10% in the second half of 2023 compared to the first half, predominantly driven by transformation and one-off actions taken by the new senior management team. Operating costs were negatively impacted by complaint-rated costs due to increased claims management company activity and inflation. Moving on to metrics and key ratios. Both gross and net receivables have grown net more than gross due to the impact of debt sales and IFRS 9 model enhancements leading to provision and release. We are proposing a final dividend of 1p, which would take the full year dividend to 6p. Asset yields have been a mix across our products. We are taking action to ensure we are deploying our balance sheet appropriately, ensuring sustained profitability across our book. Two ratios to highlight here are adjusted ROTI and adjusted cost income ratio. Our adjusted ROTI reduced from 21.8% in 2022 to 3.2% in 2023 as a result of our significantly reduced adjusted PBT in 2023. You will hear more about ROTI this afternoon and how we will make enduring and impactful changes to achieve an improving trend in this key metric going forwards. there has been a reclassification of liquidity income from non-interest income to interest income to line with market convention for which a reconciliation is included in the appendix. Note, this reclassification and re-presentation does not alter the total income or PBT for 2022. To help you reconcile your 2023 forecast with what we're presenting today, the movement between non-interest income and interest income is circa 28 million pounds. Our cost income ratio is broadly flat year on year, but it's too high. I'm confident that the technology platform changes that you'll hear more about this afternoon will make a material and positive contribution to the shift required in this key measure of performance. Looking at income, we remain a balance sheet driven business with over 90% of income driven by receivables. Interest income grew quarter on quarter throughout 2023, primarily through receivables growth in the first three quarters and then by pricing actions in the fourth quarter. You will note that the quarter on quarter increase in interest expense is due to a mix of increased underlying market rates and higher funding balances. As shown on the following slide, our cost of funds remains below the Bank of England base rate. In summary, our pricing did not compensate for the increase in both funding costs and administration costs in the first half of the year. Positive steps were taken by the new management team in the third quarter with an upwards repricing in cards, which drove an overall increase in interest income in the fourth quarter. Receivables were also managed more closely with a small absolute reduction in the fourth quarter. This should be viewed as a short-term step taken to manage pockets of the business which were being booked below acceptable hurdles and allow time to implement the right disciplines to ensure that all new business written meets and exceeds financial hurdles. Moving on to margins. Asset yields improved during the second half of 2023 due to our repricing actions in cards. volume management in vehicle finance in the fourth quarter of 2023 meant that the repricing impact was limited. Repricing is developing into a core competency and an important lever we can pull on with the right data and insights on performance post the repricing action. In 2023, we repriced our vehicle finance products on the 9th of January and the 21st of September, impacting new customers, and our cars portfolio with effect from the 5th of September and the 7th of November. Repricing your cars impacted approximately 50 to 60% of our book. Some of our customers are deemed to be vulnerable, either through being in arrears or in financial difficulty, and therefore we have not increased prices for them. Whilst repricing has a positive impact on NIM, there is a lag between announcing a car's reprice and the repricing coming into effect due to the terms and conditions requiring at least a 30-day notice period for price increases, plus we had some operational inefficiencies. These operational inefficiencies need to be addressed so we can be more responsive to the need for future rate changes. The Gateway programme that you hear about this afternoon will improve the speed to market changes. Further appropriate price increases are planned for both our vehicle finance and cars products imminently. In 2023 our annualised cost of funds was lower than the Bank of England base rate. We need to maintain our cost of funding competitive advantage through our predominantly retail funded book. To benefit both ourselves and our customers, we will be expanding our retail savings products in the second quarter of 2024 so that we can be more reactive as and when interest rates change in the future. We will ensure the associated interest rate risk is appropriately managed. We expect our overall cost of funds, excluding Tier 2, to peak at around the Bank of England base rate and to fall in line with market interest rates on a lag, reflecting the duration of the group's funding. Most importantly, you will also note the stabilisation of NIM at 19% in the second half of the year. You will also note from an earlier slide that our risk adjusted margin was 20.3% in 2022, but decreased to 13.9% in 2023. This is primarily due to movements in impairment from model changes and provision releases rather than income. As I will cover later, I expect some variability in our 2024 impairment numbers. Hence, it's difficult to provide a clear steer on our future risk adjusted margin at this point in time. But if pushed, I would expect this to be in the 12 to 13% range going forwards. Let's look at receivables in more detail. Receivables increased in the first three quarters of 2023 as the group focused on receivables growth across all products. Newly developed acquisition scorecards in cars and vehicle finance in 2022 and 2023 have led to a slight improvement in our book quality with a higher proportion of receivables in stages one and two. you will note that net receivables move a bit differently. This is mostly due to the timing of IFS 9 model development releases and debt sales throughout the year. As mentioned earlier, we ended the year at a lower position when compared to the end of the third quarter as a result of conscious new business volume management whilst we assessed our financial priorities. During the first two months of 2024, gross receivable balances have reduced, predominantly in cards, noting the customary lower activity in these two months. We expect gross receivables to return to modest growth in the second quarter of 2024. This slide contains quite a lot of information. However, it is important to provide this detailed insight as we reset the base for the business going forwards. The 100 million year-on-year increase in impairments is the biggest driver of our financial performance in 2023. What I want to show you here is that this increase is driven both by new business origination and a number of other drivers. Our impairment charge increased as our receivables grew more in 2023 than in 2022 in absolute terms. New origination charges have moved in line with our receivables growth Known challenges in our IFRS 9 modelling have historically resulted in various overlays being established. Subsequent IFRS 9 model enhancements have led to a significant number of model and other related provision releases in recent years, which has benefited our reported impairments. Note that COVID-19 provisions previously booked in 2020 were fully released in 2021 and 2022, so did not occur in 2023. Our balance sheet is becoming cleaner with our cars forward flow debt sales programme maturing. Therefore, we do not expect to see significant one-off debt sales in cars in 2024 as we experienced in 2022 and to a lesser extent in 2023. Historically, we've undertaken limited debt sales in our vehicle finance book. Going forwards, we are turning our attention to this opportunity to clean up this part of our balance sheet. It is too early for any indications of profitability impacts that may arise as a consequence, so no impacts from this are included in our current forecasts. As we look forwards into 2024, I expect the IFRS 9 modelling enhancements to largely be concluded in the first half of the year, while we will continue to make progress on our ears management throughout the rest of the year. Consequently, there will be some expected continued volatility in reported impairments in 2024. Impairment charges always have some idiosyncratic variability, particularly with IFRS 9 accounting. However, from 2025, we expect a much cleaner impairment charge and consequently greater clarity and consistency in our cost of risk. This slide shows our expected credit loss provision movements, again at a more transparent level than you have seen before. Our ECL balance is reducing, driven by active cards debt sales. However, this reduction is in part being offset by increased stage three balances within vehicle finance, which now comprise over 50% of our ECL balance. As I've already said, we're looking at debt sales in relation to vehicle finance in 2024. Our cost base is that of a business in transition. our costs have been increasing significantly over recent years. Without the additional cost savings plans initiated by the new management team in the second half of 2023, coupled with avoidance of further plan expenditure, costs for 2023 would have been significantly higher than the £298 million we reported. The cost fall shows that we're continuing to invest while at the same time driving efficiency to also offset the headwinds of inflation and complaints. New management have reconsidered the IT Transformation Programme Gateway and are fully committed to continuing investment in this programme. This will be covered in more detail this afternoon, noting that the Gateway Programme is expected to deliver significant cost savings from 2026 onwards. The increase in complaint costs is primarily driven by speculative CMC claims, which I will cover on the next slide. Building on initial steps in the first half of 2023, we have successfully delivered further transformative cost savings and one-off cost savings in the second half of 2023, mostly in streamlining our organisation and through the use of outsourcing partners. We continue to be on track to deliver the 60 million of cost savings announced. A number of these says have already positively impacted our 2023 results. During 2024, we will continue to embed cost management as a key discipline throughout Banquis. In summary, our cost base points to a significant opportunity to positively reshape the business and not just to cut costs, but to make sustainable change and to reset the business plan for the future. This slide provides more detail on customer complaint costs. We saw a significant increase in complaints activity in the second half of 2023, which has continued unabated into 2024 and impacts our ability to resolve genuine complaints quickly. The increase in 2023 related to vehicle finance in the first half of the year, with an increase in cars from April 23 onwards, which ramped up significantly in the fourth quarter. These claims are focused on historical business written, relate to lending origination rather than in-life servicing, and are from CMCs rather than directly from our customers. We do have genuine complaints from customers which are upheld, i.e. vanquished compensates the customer. Looking at lending origination complaints in 2023, you will see that CMC activity accounts for over 90% of complaints received and nearly two thirds of these came from one particular CMC. This particular CMC also refers a significant portion of complaints to the Financial Ombudsman Service or FOS, regardless of the outcome of internal review. We have recently taken appropriate legal action against this particular CMC. Every time a case is referred to FOSS, we are required to pay the £750 fee, irrespective of the outcome, hence the significant increased FOSS costs in 2023. Uphold rates for CNC complaints remain low at circa 11% and reduces to 6% when referred to FOSS. This really emphasises the speculative nature of the majority of claims received and the costs associated with dealing with these claims. Lending origination complaint costs relate to a wide range of different matters in the customer lending process, but with no particular underlying common theme or systemic issue. This increase in CNC complaints has resulted in a backlog, driving the end of year provision increase, and is requiring us to increase resourcing levels in 2024 to process these claims. We have engaged an outsourcing partner for the first half of 2024 to clear this backlog by mid-year. Further operational programmes are also expected to be in place with our outsourcing partner by mid-year to deal with the increased volume of complaints received. We are also in the process of automating certain actions, such as complaints logging, which should drive operational efficiencies in our complaints handling process. Forward projections are dependent on a variety of factors, including the impact of legal action. But for the moment, we have modelled a circa 50% increase in 2024, followed by a modest normalisation into 2025. Resource costs reduced slightly in 2023 due to a reduction in headcount and outsourcing. This should continue in 2024 with further benefits coming through, offset slightly by the increased cost of processing the backlog of complaints. For completeness, in terms of service quality complaints, redress amounts and force fees are significantly less. This is due to the amounts to be remediated being much lower when compared to genuine lending origination complaints. Next, let me give you a bit more insight into our two main products, cards and vehicle finance. Looking at some card metrics in a bit more detail. Management action on pricing in the third quarter of 2023, so that we price for the risk we're underwriting and the increasing costs to administer has led to the change in APR percentage booking mix, i.e. it is not driven by a change in the risk segment we are writing business in. No new cards were issued with an APR percentage under 26.5% from October 2023 onwards, following a front book restructure. As a result of our volume management, not only did we restrict our new lending, we also reduced limits for new customers. Arrears percentage have risen slightly towards the end of 2023. This is mostly a function of lower volumes and lower receivables at year end. On vehicle finance, we initiated two price reviews in 2023, one in January and one in September. The impact of the latter should start coming through in 2024, especially when returning to volume growth. It should be noted that when we reprice vehicle finance, this is setting the income for the product sold for the next five years or so. Hence, the focus on ensuring this pricing is appropriate over the lifetime of the product. Careers had an uptick towards the end of 2023, which is due to usual seasonality, the impact of volume management and operational challenges. The latter have now been resolved. Turning to liquidity and funding. We have a strong liquidity and funding position with an increased level of liquidity as I speak, being £784 million at the 21st of March. Since the beginning of 2022, we have shifted to a retail-led funding approach, replacing expensive senior wholesale and retail bonds that attracted higher coupons. This gives us a competitive advantage in terms of both pricing and predictability. 84% of our funding is now from retail savings and deposits, and we expect this proportion to increase gradually over time. In addition, 97% of our deposits are protected by the Financial Services Compensation Scheme. We are introducing new products to better serve our customers, which at the same time help to optimise liquidity. An example is the introduction of 90 and 120 day notice period accounts in 2023, which provide both our customers and ourselves a bit more flexibility. Importantly, as covered earlier, this will also enable us to better manage our cost of funds as interest rate changes in the future. We continue to focus on financial resource optimisation, which I will cover further this afternoon. We maintain a strong capital position with a CT1 ratio of 20.5%, which is slightly above management guidance provided at the third quarter. The PRA's review of the Group's capital management led to a significant reduction in our Tier 1 requirement in the first quarter of 2023, allowing a more optimal capital strategy. Excluding the IFRS 9 transition and a prior year restatement, our capital position has moved in line with expectations towards our target operating level in 2023. we remain well capitalised, noting that approximately 35% of our Tier 1 capital, or £142 million, is surplus to publish regulated requirements. As with any regulated bank, there are three potential components of such a surplus which are confidential and therefore cannot be disclosed. a confidential management buffer to cover any volatility in planned financial performance. Secondly, genuine excess capital held over risk appetite at any point in time. And thirdly, a confidential buffer set by the PRA in their periodic capital assessment of the bank related to stress impact, risk management and governance, or supervisory judgment. Looking forwards, I'd like to summarise some key messages. As Ian said in his introduction, the transformative action we took in the second half of 2023 prevented a potential loss arising and instead we delivered an adjusted PBT of £24.9 million. We have increased our focus on pricing to ensure it is appropriate There is some further cleanup of our balance sheet to come, and there will be some enhancements in our IFRS 9 impairment model calculations. However, these enhancements will not have the same level of benefit as delivered in recent years. We will deliver on the remaining transformation cost saves from our 60 million target. And to reiterate, we will remain highly liquid and strongly capitalized for future growth. As Ian has said, we are in a phase of transition with our strategy expected to deliver a mid-teens adjusted roti by 2026 and a low single-digit adjusted roti in both 2024 and 2025. Financial progress will not be linear across the coming three years, noting the adverse impact arising from IFRS 9 accounting requirements, while the benefits from the Gateway IT programme will predominantly arise in the second half of this transformation period. During this transition phase, we expect to deliver a net interest margin of above 18% in 2024. Diversification through our second charge mortgage proposition will start having a minor impact on the product mix in 2024. Noting the impact on NIM, we would expect to provide information on NIM excluding second charge mortgages going forwards. As a result of the complaints increase, inflation and the reversal of some one-off cost savings, we do not expect our cost income ratio to improve in 2024. We have actionable plans to improve our retail deposit offering and we will deliver on this, taking our retail deposit funding to over 85%. The Group CC1 ratio will be in line with the current guideline as stated, subject to any change in regulatory requirements or any change in risk appetite, positive or negative. I would like to thank you for your time this morning and look forward to presenting the strategy seminar alongside Ian and Exco colleagues this afternoon. I welcome any questions regarding forward-looking information at the Q&A session this afternoon. But for now, I'm happy to take any questions that you may have on the 2023 results. Thank you.

Starting with a couple of questions around complaints. So the first question is to clarify. You mentioned an expected 50% increase of complaints from CMCs. Does this translate to 50% increase in complaints costs from £28.5 million in 2023 to around £40 million in 2024? And has this been taken into account in your profit outlook for 2024?