TIDMPFG
RNS Number : 2656E
Provident Financial PLC
27 February 2020
Provident Financial plc
Preliminary results for the year ended 31 December 2019
Provident Financial plc ('Provident Financial' or 'the group')
is the leading specialist provider of credit products which provide
financial inclusion for those consumers who are not well-served by
mainstream lenders. The group serves 2.3 million customers and its
operations consist of Vanquis Bank, Moneybarn and the Consumer
Credit Division (CCD), comprising Provident home credit and
Satsuma.
Group highlights
Continued good operational and financial recovery of the group
underpins the Board's 150% increase in total dividend
-- Group adjusted profit before tax up 1.6% to GBP162.6m (2018
(restated(1) ): GBP160.1m), as the business continues to adapt to
the evolving regulatory environment and successfully defended the
hostile NSF bid.
-- Statutory profit before tax up 32.4% to GBP128.8m (2018
(restated(1) ): GBP97.3m), reflecting lower exceptional costs.
-- Strategic initiatives outlined at the Capital Markets Day in
November are well underway to deliver the group's 'Vision for the
Future' and financial targets.
-- Agreement of a GBP275m bilateral securitisation facility in
early January 2020 to fund Moneybarn's business flows.
-- ROP refund programme at Vanquis Bank and FCA investigation at Moneybarn both now complete.
-- Regulatory capital headroom of approximately GBP90m at 1 January 2020(4) .
-- The Board proposes a final dividend of 16.0p per share (2018: 10.0p), up 60.0% on 2018.
-- Total dividend per share of 25.0p per share (2018: 10.0p), up
150% on 2018, and representing dividend cover of 1.9 times (2018
(restated): 4.9 times).
2019 2018 Change
(restated(1)
)
-------------------- -------------- -------
Adjusted profit before tax GBP162.6m GBP160.1m 1.6%
Amortisation of acquisition intangibles (GBP7.5m) (GBP7.5m) -%
Exceptional items(2) (GBP26.3m) (GBP55.3m) 52.4%
-------------------- -------------- -------
Statutory profit before tax GBP128.8m GBP97.3m 32.4%
Adjusted basic earnings per share(3) 47.3p 48.7p (2.9%)
Basic earnings per share 33.3p 27.3p 22.0%
Final dividend per share 16.0p 10.0p 60.0%
Total dividend per share 25.0p 10.0p 150.0%
Malcolm Le May, Group Chief Executive, commented:
" I am pleased with both the group's operational and financial
performance in 2019 and the momentum behind our strategic
initiatives as we enter 2020. We have delivered an increase in
profits as we have continued to adapt our businesses and culture to
changing customer needs and the evolving regulatory
environment.
As a result of our good progress and the group's strong funding
and capital positions, the Board proposes a final dividend of 16.0p
per share, which represents a 150% increase in the total dividend
in 2019 and a dividend cover of 1.9 times as we progress towards
our dividend cover target of at least 1.4 times.
All of our businesses have progressively tightened underwriting
over the last two years and we have built good momentum entering
2020 as we continue to adapt the group to the evolving regulatory
landscape and to meet our customers' needs. We are making good
progress towards the medium-term financial targets set out at our
Capital Markets Day in November."
Divisional highlights
Vanquis Bank results in line with plan as it recalibrates the
business model to changing regulation and customer needs
-- As expected, Vanquis Bank's adjusted profit before tax
reduced by 9.1% to GBP173.5m (2018 (restated(1) ): GBP190.9m),
primarily reflecting the previously guided reduction in ROP
income.
-- Statutory profit before tax reduced by a lower amount of 2.6%
to GBP185.9m (2018 (restated(1) ): GBP190.9m), mainly due to an
exceptional provision release of GBP14.2m (2018: GBPnil) in respect
of the ROP refund programme.
-- New customer account bookings of 369,000, 3,000 higher than
2018 and ahead of management's plans, despite tighter underwriting
and the impact of revised affordability processes in line with
regulatory requirements .
-- Improvement in the impairment rate(5) from 16.0% in 2018 to
13.6% in 2019, reflecting an improvement in delinquency trends due
to tighter underwriting.
-- Strong focus on cost efficiency resulted in the cost base remaining flat on 2018.
-- Refreshed and strengthened Vanquis Bank management team under
the leadership of the new Managing Director, Neil Chandler, who
joined the business in April 2019.
Moneybarn continues to deliver strong growth in new business and
receivables
-- Adjusted profit before tax up 10.0% to GBP30.9m (2018:
GBP28.1m), reflecting continued strong growth.
-- Statutory profit before tax up by a higher level of 19.2% to
GBP33.5m (2018: GBP28.1m), due to an exceptional provision release
of GBP2.6m (2018: GBPnil) following completion of the FCA
investigation.
-- Demand for used cars has remained robust which, together with
an improved customer experience, has resulted in strong growth in
new business volumes of 30% and receivables growth of 20.6% to just
over GBP500m.
-- Impairment rate(5) broadly unchanged at 8.6% (2018
(restated): 8.7%) with underwriting tightened in response to a
modest increase in defaults following the stronger than forecast
growth during the year.
CCD finished 2019 strongly and is well-placed to deliver a
break-even result in 2020
-- Significant reduction of 46.3% in adjusted loss before tax to
GBP20.8m (2018: loss before tax of GBP38.7m), reflecting continued
improvement in new customer acquisition, collections performance
and cost efficiency.
-- Statutory loss before tax reduced by 48.7% to GBP35.2m (2018:
loss before tax of GBP68.6m), after taking account of exceptional
costs of GBP14.4m (2018: GBP29.9m) in respect of the ongoing
turnaround of CCD.
-- Reduction in customer numbers and receivables beginning to
stabilise, ending the year at 522,000 (2018: 560,000) and GBP249.0m
(2018: GBP292.5m) respectively.
-- Reduction in the cost base of 14.1% in 2019 reflects the
impact of headcount reductions and tight cost control over the last
two years which has resulted in the annualised cost run rate
entering 2020 at around GBP200m.
-- The trial of Provident Direct, a hybrid product leveraging
both home credit and Satsuma capabilities, has progressed well and
roll-out of the new product has commenced.
Enquiries:
Media
Richard King, Provident Financial 01274 351 900
Nick Cosgrove/Simone Selzer,
Brunswick 020 7404 5959
Investor Relations
Gary Thompson/Vicki Turner,
Provident Financial
investors@providentfinancial.com 01274 351 900
(1) 2018 comparatives have been restated for: (i) the change in
treatment of directly attributable acquisition costs in Vanquis
Bank following a refresh of contractual terms with affiliates in
2019 - this has resulted in a GBP6.6m increase in 2018 profit
before tax, a benefit of GBP10.5m to 2019 profit before tax and is
expected to result in a reduction of approximately GBP6m in 2020
profit before tax compared with previous plans; and (ii) the
changes in recognition of revenue on credit impaired receivables
and treatment of directly attributable acquisition costs in
Moneybarn which have resulted in a reduction in revenue, impairment
and administrative and operating costs but have had no impact on
Moneybarn's profits. See note 2 to the financial information.
(2) Exceptional items in 2019 represent net exceptional charges
of GBP26.3m (2018: exceptional charges of GBP55.3m) comprising: (i)
GBP23.8m (2018: GBPnil) of defence costs associated with
Non-Standard Finance plc's (NSF's) unsolicited offer for the group;
(ii) GBP 19.3m (2018: GBP29.9m) of restructuring costs, primarily
in respect of the ongoing turnaround of the home credit business in
CCD following the migration to the employed operating model in July
2017; (iii) a credit of GBP14.2m ( 2018: GBPnil) in Vanquis Bank in
respect of the release of provisions established in 2017 following
completion of the refund programme in respect of ROP and a
re-evaluation of the forward flow of claims that may arise in
respect of ROP complaints more generally; and (iv) a credit of
GBP2.6m (2018: GBPnil) in Moneybarn in respect of the release of
provisions established in 2017 following completion of the FCA
investigation into affordability, forbearance and termination
options . Exceptional costs in 2018 also included GBP18.5m in
respect of the refinancing of the senior bonds maturing in October
2019 and GBP6.9m of non-cash pension charges in respect of the
equalisation of Guaranteed Minimum Pensions following the High
Court judgement against Lloyds Bank PLC and others in October 2018
. See note 3 to the financial information.
(3) Profit after tax, prior to the amortisation of acquisition
intangibles and exceptional items, divided by the weighted average
number of shares in issue.
(4) Regulatory capital headroom against the group's Total
Capital Requirement (TCR) of 25.5% at 31 December 2019 was
approximately GBP117m, prior to the third year transitional impact
of IFRS 9 on 1 January 2020 of GBP28m.
(5) Impairment as a percentage of average receivables for the 12
months ended 31 December.
Note:
This announcement contains certain forward-looking statements.
These statements are made by the directors in good faith based on
the information available to them up to the time of their approval
of this announcement but such statements should be treated with
caution due to the inherent uncertainties, including both economic
and business risk factors, like-for-like any such forward-looking
information. This announcement is intended solely to provide
information to shareholders to assess the group's strategies and
neither the company nor its directors accept liability to any other
person, save as would arise under English law. The announcement
should not be relied on by any other party or for any other
purpose.
No statement in this announcement is intended as a profit
forecast or estimate for any period. No statement in this
announcement should be interpreted to indicate a particular level
of profit and, as a consequence, it should not be possible to
derive a profit figure for any future period from this
announcement.
Chief Executive's review
Introduction
Provident Financial is the market leader in helping the
underserved access finance, as we have been for the past 140 years.
We are excited about using our market-leading proposition as a
platform for growth to provide more and better customer
propositions. Growth can, and will, be achieved by attracting new
customers, by launching new products as demanded by our customers,
and by expanding into new markets. This is our Vision for the
Future as we set out at our Capital Markets Day (CMD) in November
2019.
Our market
There are approximately 10 to 12 million adults in the UK, or 1
in 5 of the adult population, who are not well served by mainstream
lenders. The market is reasonably dynamic with 1.5 to 2 million
consumers moving in and out of it each year and it is often
counter-cyclical with the number of consumers increasing during and
immediately following a downturn as prime lenders tighten their
risk appetite. Provident Financial is the biggest provider of
consumer finance in this market and has 2.3 million customers.
There are no high street banks in our market, nor do we believe
the more established banks have any desire to enter the space with
a material presence. The more stringent regulatory environment
requires companies to operate at much higher standards of
compliance with positive customer outcomes a priority, which we
fully support. To operate at these standards requires scale and
smaller companies find this environment tougher to operate within.
With our market-leading position, Provident Financial has a
platform to deliver attractive and sustainable growth.
Our businesses, products and customers
We operate through three divisions: Vanquis Bank, which provides
credit cards, loans and savings products; Moneybarn, which provides
vehicle finance; and CCD, which comprises Provident home credit and
Satsuma digital loans. Each of our businesses seeks to lend
responsibly and has a tailored business model and product suite for
underserved customers.
Though served by different products from different divisions,
our customers have common traits. They manage their everyday lives
on low to average incomes; they may have irregular or variable
earnings; they are often new to credit in the UK and have little or
no credit history; or they may have experienced a significant life
event, for example divorce or loss of a job. Our customers are also
typically less sensitive to changes in economic conditions as they
are more used to managing on tight budgets and they have lower
levels of debt than prime customers. They are, therefore, often
better placed to manage a recession than prime customers which is
why our businesses have proven to be resilient during a downturn in
economic conditions. Nevertheless, we have progressively tightened
underwriting over the last two years to alleviate the impact of any
weakening in the UK economy.
Given their circumstances, it is not surprising our customers
need a lender to deliver them the tailored products and service
they need. Provident Financial is the largest specialist credit
provider to this segment of society, and, if companies like us did
not exist, alternative customer options would be severely
limited.
Adapting to regulation
Regulators have quite rightly had a more intensive focus on
customer outcomes recently, which has led to increased regulatory
standards. To do business in our markets, and have a sustainable
business, stakeholders need to know we operate to both the highest
customer conduct rules and with prudence.
Since early 2018, Provident Financial has been at the forefront
of changing its business model and approach to evolving sector-wide
regulation. We see this as a competitive advantage for us going
forward.
There have been a significant number of changes within the group
over the last two years in response to the change in regulation and
our focus on delivering the right customer outcomes. Provident home
credit has changed and adapted to its employed business model,
became Financial Conduct Authority (FCA) authorised in late 2018
and implemented the home credit part of the high-cost credit review
earlier in 2019. Satsuma has continued to adapt its business model
to reflect evolving FCA guidance following the high-cost,
short-term credit review. Vanquis Bank has completed its Repayment
Option Plan (ROP) remediation programme following the FCA
investigation in 2017/2018, has introduced new affordability
criteria at the end of 2018, and is on track in implementing
measures to meet the new FCA persistent debt requirements.
Moneybarn has now completed its customer redress programme and
received the final notice following the FCA investigation into
affordability, forbearance and termination options. It also does
not pay variable commission so will not be impacted by the FCA
review into motor finance that came out in the third quarter of
2019.
Regulation will of course continue to evolve in our sector, as
it does in all financial sectors. We continue to work with the
Financial Ombudsman Service (FOS), particularly in CCD, in respect
of any customer complaints referred to them. In addition, we also
continue to assist HM Revenue & Customs (HMRC) on its
market-wide review of the self-employed status of agents prior to
the change in the home credit operating model in 2017.
We believe we are well prepared given the changes we have made
and the improved relationships we have with our regulators.
Customer outcomes are now front and centre at Provident Financial,
which benefits all stakeholders and will help to deliver long-term
attractive sustainable growth.
Our Blueprint
Linked closely to regulatory attitudes, we launched a new
Blueprint in early 2019 to define our purpose and create a stronger
culture across the group. Our purpose sets out what we do for our
customers, and why we need to exist. A strong purpose running
through the organisation improves the culture and helps deliver the
right outcome for customers, and is increasingly an important
consideration for all stakeholders.
Our purpose at Provident Financial is: "We help put customers on
a path to a better everyday life." This purpose is the guiding
principle for everything we do, and we have continued to
successfully embed our purpose throughout the group in 2019.
Initial key performance indicators have been devised for the
Blueprint, are being monitored by the Culture, Customer &
Ethics Board committee and are embedded in employee performance
objectives.
Our purpose is supported by strategic business drivers and
behaviours. These, in combination with our purpose and new culture,
help to deliver more sustainable business models, increase customer
centricity and unify colleagues, thereby creating a business
advantage for Provident Financial.
Our performance in 2019
Despite the distractions of the hostile NSF bid, we have made
good operational and financial progress over the last 12 months.
Adjusted profit before tax, prior to the impact of the amortisation
of acquisition intangibles and exceptional items, of GBP162.6m was
up 1.6% on 2018 (2018 (restated): GBP160.1m). Statutory profit
before tax increased by 32.4% to GBP128.8m (2018 (restated):
GBP97.3m) due to a reduction in exceptional costs from GBP55.3m in
2018 to GBP26.3m in 2019, of which GBP23.8m related to defending
the NSF hostile bid.
Adjusted basic earnings per share, prior to the impact of the
amortisation of acquisition intangibles and exceptional items,
reduced by 2.9% to 47.3p (2018 (restated): 48.7p) due to the impact
of the rights issue shares issued in April 2018. Basic earnings per
share of 33.3p increased by 22.0% (2018 (restated): 27.3p) due to
lower exceptional costs.
Divisional performance
Vanquis Bank
Vanquis Bank has continued to successfully evolve its business
model in 2019, increasing its customer centricity and responding to
the regulatory direction of travel. It introduced new measures in
relation to the FCA's new persistent debt regime, which are
designed to help customers pay debt off faster, pay less in total,
and prevent customers getting into persistent debt. We have also
made changes to our interest and fees structure, including
downwards repricing for around 100,000 customers, and reduced late
and over-limit fees. The ROP settlement was successfully completed
in the year and we have been able to release, as an exceptional
credit, GBP14.2m of the provisions originally established in
2017.
As expected, the transition to the new regulatory and
customer-focused measures has impacted receivables and customer
growth in 2019, but puts us in a strong position going forward. The
receivables book ended the year 2.2% down on 2018, with customer
numbers down 3.0% to 1.7 million. Vanquis Bank continues to
proactively support customers meeting the definition of persistent
debt and we are on track with our plans set out at the CMD to
reduce the level of customers meeting the persistent debt
definition as we approach the first 36-month checkpoint in March
2020.
Vanquis Bank's adjusted profit before tax, prior to the impact
of exceptional items, of GBP173.5m was, as expected, 9.1% lower
than last year (2018 (restated): GBP190.9m), mainly due to the
GBP20m reduction in ROP income and 2018 benefiting from the release
of GBP10m of remuneration-related accruals. Statutory profit before
tax reduced by a lower amount of 2.6% to GBP185.9m (2018
(restated): GBP190.9m), principally due to the impact of the
aforementioned exceptional provision release of GBP14.2m in respect
of the ROP refund programme.
The business has already started delivering on the strategic
objectives outlined at the CMD which focus on growth, cost
efficiency and a number of funding and capital opportunities.
Significant progress on these objectives is planned for 2020.
The bank came under new leadership with the appointment of Neil
Chandler as Managing Director in the first half of 2019. Neil has
made a number of management changes during the second half of 2019
and the business has a stronger leadership team to develop a
broader bank offering for the underserved and return the business
to profitable growth over the medium term.
Moneybarn
Moneybarn delivered a 10.0% increase in adjusted profit before
tax, prior to the impact of exceptional items, to GBP30.9m (2018:
GBP28.1m). The business has grown its customer numbers, receivables
and profits for five consecutive years since its acquisition and
the business now serves 77,000 customers with a receivables book of
just over GBP500m. Statutory profit before tax increased by a
higher rate of 19.2% to GBP33.5m (2018: GBP28.1m), due to an
exceptional provision release of GBP2.6m following completion of
the FCA investigation.
The strong growth in 2019 led to a modest pick-up in impairment.
However, underwriting standards were quickly tightened and
collections processes enhanced early in the fourth quarter and we
expect impairments to stabilise in 2020.
Moneybarn successfully moved into a new office in Petersfield
which will facilitate the growth plans of the business in the
attractive and growing used-car finance sector.
The customer redress in respect of the FCA investigation into
affordability, forbearance and termination was completed in 2019
and the final notice was received from the FCA in February 2020.
The total cost of the investigation has come in below the GBP20m
provision originally established in 2017 leading to the release, as
an exceptional credit, of GBP2.6m of the provision as noted
above.
After 12 years with the business, Moneybarn's Managing Director,
Shamus Hodgson, will be stepping down from his role at the end of
the first quarter of 2020 to pursue other career opportunities. I
would like to thank Shamus for his leadership of Moneybarn over the
last three years and for building a strong team to take the
business forward as it continues its growth and becomes a larger
part of the group. A search for his successor is well underway.
CCD
CCD has made significant operational and financial progress in
2019. The customer base has now started to stabilise at just over
500,000 and the receivables book ended the year at nearly GBP250m.
The adjusted loss before tax, prior to the impact of exceptional
items, was significantly reduced by 46.3% to GBP20.8m (2018: loss
before tax of GBP38.7m) as the business has successfully introduced
a new performance management framework and delivered on its cost
efficiency programme. The business enters 2020 with an annual run
rate cost base of around GBP200m, down from GBP260m in late 2017.
CCD's s tatutory loss before tax reduced by 48.7% to GBP35.2m
(2018: loss before tax of GBP68.6m), after taking account of
exceptional costs in respect of the ongoing turnaround of the
business.
CCD has successfully tested Provident Direct, which leverages
the capabilities in both home credit and Satsuma, with the
relationship managed in the home by a Customer Experience Manager
(CEM) and payments collected remotely via Continuous Payment
Authority (CPA). This product enhancement allows CCD to attract new
and former customers of suitable quality who value the face-to-face
home relationship but who either do not wish to have a weekly
collections visit by a CEM or for whom it is simply inconvenient.
The test has demonstrated that there is strong demand for Provident
Direct from both the customer and the field force. I am excited
about the potential of Provident Direct and it will be rolled out
nationally in the UK during 2020.
Satsuma, CCD's online digital lending platform, took the
decision to temporarily reduce volumes towards the end of the year
as it continues to adapt its business model in line with the
evolving dialogue with the FCA. A number of competitors have exited
the market and we expect home credit and Satsuma to work more
closely together going forward, especially with the roll-out of
Provident Direct in 2020.
CCD remains the market leader in the UK and Republic of Ireland
home credit markets and is now also a leading player in digital
loans within the high-cost, short-term credit market through
Satsuma. Our actions over the last two years and our ongoing
strategic initiatives mean that we are well placed to return the
business to breakeven in 2020 and profitable growth in the medium
term.
Our significant growth opportunities
The work on reshaping the group over the last two years under
increased regulatory standards means we are well-placed to continue
to evolve going forward. Indeed, we see our ability to adapt to the
regulatory environment as a competitive advantage and a key
underpin of the delivery of sustainable shareholder returns. We now
also believe that, following our evolution, we are in a strong
position to focus on growth in 2020 and beyond through a number of
areas.
Firstly, we firmly believe that we can deliver organic growth in
each of our key markets and gain market share, particularly as
competitors find it difficult to adapt to increased regulatory
standards and scrutiny.
Secondly, our businesses have the opportunity to expand their
product range and distribution and increase their digitisation. For
example, we will be rolling out Provident Direct in home credit in
2020 as well as launching a pilot of longer, larger digital
personal loans in Satsuma towards the end of 2020 as we continue to
develop a pathway to cheaper credit for our customers . We are also
expanding into other non-mainstream segments, with digital personal
loans in Vanquis Bank and near-prime motor finance in
Moneybarn.
Thirdly, we are ensuring that Vanquis Bank and Moneybarn work
much more closely together in developing a number of these areas to
deliver increased synergies.
Provident Financial is the market leader in a large market,
where there are clear opportunities to grow customers, market
share, product, distribution, and move into new market segments.
There are very few financial services companies out there that have
this opportunity set, and we have built a management team with the
appropriate skills which is committed to delivering our vision.
Capital, funding and cost efficiency
Capital, funding and cost efficiency will also play a part in
delivering better customer propositions and sustainable returns for
shareholders. The composition of our returns is changing due to
lower revenue yields across our sector. Our response has been to
tighten underwriting to improve quality and lower impairment, and
we have also taken action to reduce the cost base by 7.5% in 2019.
In addition, the group has historically focused primarily on the
assets side of the balance sheet and we see an opportunity on the
liability side which will support delivery of our target returns to
shareholders.
The group's CET1 ratio at the end of 2019 was 30.7% which
provides headroom of approximately GBP117m compared with the fully
loaded minimum regulatory capital requirement of 25.5%. The
headroom reduced to approximately GBP90m on 1 January 2020
following the third year transitional impact of IFRS 9 and this
level is consistent with the Board's risk appetite of maintaining
regulatory capital headroom in excess of GBP50m and progressively
absorbing the remaining transitional impact of IFRS 9 on regulatory
capital by 1 January 2023. The group's next capital review (C-SREP)
with the Prudential Regulation Authority (PRA) is scheduled for
March 2020 with the results expected in the second quarter of the
year. The group has a strong capital base and we continue to review
options to improve our capital efficiency.
We have made excellent progress in strengthening the group's
funding position. In January 2020, the group successfully completed
a bilateral securitisation facility to fund Moneybarn business
flows. This new facility provides up to GBP100m of initial funding
and is anticipated to grow to GBP275m over the next 18 months.
After taking account of this securitisation and the ongoing retail
deposit programme in Vanquis Bank, the group has sufficient
facilities to fund contractual debt maturities and projected growth
in the group until mid-2022.
Looking ahead, we have identified a programme of further funding
opportunities to diversify our funding sources and ultimately
reduce the cost of funding, including potentially funding some of
Moneybarn's receivables through retail deposits. By operating an
efficient capital and funding structure, we are confident in
delivering attractive and sustainable returns for shareholders.
Our medium-term vision to be a broader bank
Our aim in the medium term is to create a bank for the
underserved. A market of 12 million customers needs a bank that can
cater for all their financial needs.
To do this we are working towards bringing the Provident
Financial group and Vanquis Bank closer together. This will take
time and will need regulatory approval, and could potentially
involve bringing Moneybarn into the bank structure. This would
allow Moneybarn to be funded in part through retail deposits which
would deliver further funding synergies. CCD remains an important
part of the group, but would not naturally sit under a bank
umbrella.
This potential new group structure would be optimal for all
stakeholders - customers, employees, regulators and shareholders -
allowing us to serve more customers with the products and services
they need in the most efficient manner.
Our financial targets
As part of our Vision for the Future, we have developed a clear
set of financial targets to measure our success. The outcome for
our shareholders will be sustainable attractive returns based upon
two very clear pillars.
Firstly, we plan to deliver receivables growth within a range of
between 5% and 10% per annum over the next five years from a loan
book which is currently GBP2.2 billion. We expect growth to be
weighted more towards years three, four and five as our growth
initiatives gain traction.
Secondly, through a series of management actions we plan to
deliver a reduction in the cost income ratio from 43% in 2019 to
38% by 2022 as previously guided.
As a result, from the current return on equity (ROE) of
approximately 18%, we expect to be delivering an ROE within our
target range of 20% to 25% in 2021, sooner than the timeframes for
the receivables and cost income targets.
Importantly, the returns that we generate will allow us to
evolve our dividend cover to at least 1.4 times as the home credit
business recovers and returns to profitability.
Chief Financial Officer (CFO)
As we announced in July 2019, Simon Thomas, CFO, informed the
Board he was stepping down from the role for personal health
reasons following the 2019 preliminary results announcement. Simon
has been a great CFO and I would like to thank him for everything
he has achieved and wish him all the best for the future.
In December 2019, we announced that Neeraj Kapur will join the
Board and replace Simon as CFO on 1 April 2020. Neeraj has deep
retail banking, consumer finance and savings experience and
expertise, and will be an excellent addition to the senior
leadership team as we continue to re-establish Provident Financial
as the market-leading lender for the underserved.
Outlook
Our good performance in 2019 means that, despite continuing
regulatory headwinds, we are well placed both operationally and
financially as we enter 2020.
I am pleased to report that collections performance and
impairment trends have remained stable in the important
post-Christmas period.
Our focus in 2020 will be on progressing our strategic
initiatives outlined in the CMD, in particular rolling out
Provident Direct, developing Vanquis Bank loans, delivering funding
and capital opportunities, and continuing to improve our cost
efficiency through digitisation.
We will be relentless in adapting our businesses to evolving
customer needs and working closely with the regulator to ensure
that our businesses lead the way in our sector and provide us with
a competitive advantage to deliver sustainable returns for our
shareholders.
The economic outlook post-Brexit remains uncertain and we need
to see the full impact of persistent debt regulation on receivables
and impairment in Vanquis Bank. However, our actions in 2019, and
our strong funding and capital positions, give me confidence that
we will continue to make good progress towards our medium-term
financial targets in 2020 .
I would like to thank everyone in the group for their hard work
throughout 2019 and their continued efforts in helping put our
customers on a path to a better everyday life.
Malcolm Le May
Chief Executive Officer
27 February 2020
Financial review
Group performance
The group's 2019 results can be summarised as follows:
Year ended 31 December
2018 Change
(restated(1)
2019 )
GBPm GBPm %
-------- -------------- -------
Adjusted profit/(loss) before tax:
- Vanquis Bank 173.5 190.9 (9.1)
- Moneybarn 30.9 28.1 10.0
- CCD (20.8) (38.7) 46.3
- Central costs (21.0) (20.2) (4.0)
-------- -------------- -------
Adjusted profit before tax 162.6 160.1 1.6
-------- -------------- -------
Amortisation of acquisition intangibles (7.5) (7.5) -
Exceptional items (26.3) (55.3) 52.4
-------- -------------- -------
Statutory profit before tax 128.8 97.3 32.4
Receivables 2,212.6 2,204.0 0.4
-------- -------------- -------
Cost income ratio(2) 42.8% 42.3%
-------- -------------- -------
Return on assets(3) 7.9% 7.7%
-------- -------------- -------
Return on equity(4) 18.2% 19.1%
-------- -------------- -------
Adjusted basic EPS 47.3p 48.7p (2.9)
-------- -------------- -------
Basic EPS 33.3p 27.3p 22.0
-------- -------------- -------
DPS 25.0p 10.0p 150.0
-------- -------------- -------
(1) 2018 comparatives have been restated for: (i) the change in
treatment of directly attributable acquisition costs in Vanquis
Bank following a refresh of contractual terms with affiliates in
2019 - this has resulted in a GBP6.6m increase in 2018 profit
before tax, a benefit of GBP10.5m to 2019 profit before tax and is
expected to result in a reduction of approximately GBP6m in 2020
profit before tax compared with previous plans; and (ii) the
changes in recognition of revenue on credit impaired receivables
and treatment of directly attributable acquisition costs in
Moneybarn which have resulted in a reduction in revenue, impairment
and administration and operating costs but have had no impact on
Moneybarn's profits. See note 2 to the financial information.
(2) Administrative and operating costs, before exceptional
items, as a percentage of revenue for the 12 months ended 31
December.
(3) Adjusted profit before interest after tax as a percentage of
average receivables for the 12 months ended 31 December.
(4) Adjusted profit after tax as a percentage of average equity
(average equity is stated after deducting the pension asset, net of
deferred tax) for the 12 months ended 31 December. 2018 average
equity has been restated as though the GBP300m rights issue in
April 2018 had occurred on 1 January 2018.
Group adjusted profit before tax of GBP162.6m was 1.6% higher
than 2018 (2018 (restated): GBP160.1m). Statutory profit before tax
increased by 32.4% to GBP128.8m (2018 (restated): GBP97.3m) mainly
due to a reduction in exceptional items.
Exceptional items amounted to a net charge of GBP26.3m in 2019,
52.4% lower than the charge of GBP55.3m in 2018. The net
exceptional charge in 2019 comprised bid defence costs of GBP23.8m
in respect of the NSF unsolicited offer and GBP19.3m in respect of
group restructuring costs, mainly in respect of the ongoing
turnaround of the home credit business. These exceptional costs
were partly offset by credits totalling GBP16.8m as a result of the
release of provisions established in 2017 following completion of
the ROP refund programme at Vanquis Bank (GBP14.2m) and the FCA
investigation at Moneybarn (GBP2.6m) .
Group receivables grew by 0.4% in 2019 (2018 (restated): 4.9%).
This was, as expected, a lower level than the medium-term guidance
of growth of between 5% and 10% per annum. Vanquis Bank receivables
reduced by 2.2% to GBP1,461.5m (2018: (restated): GBP1,495.1m)
which is consistent with wider industry trends and the impact of
persistent debt regulation. Moneybarn receivables continued to show
strong growth and were up 20.6% to GBP502.1m (2018 (restated):
GBP416.4m) whilst CCD receivables are now beginning to stabilise
reflecting the ongoing recovery of the home credit business, ending
the year down by 14.9% to GBP249.0m (2018: GBP292.5m). The group's
target is to deliver receivables growth within a range of between
5% and 10% per annum over the next five years with growth more
weighted towards years three, four and five as growth initiatives
gain traction.
As expected, the group's cost income ratio has shown a modest
increase from 42.3% (restated) in 2018 to 42.8% in 2019,
notwithstanding the 7.5% reduction in the group's cost base from
tight cost control. The increase in the ratio mainly reflects the
reduction in revenue at Vanquis Bank from reduced ROP income and
the impact of fee changes and downwards re-pricing. The group's
target is to deliver a cost income ratio of 38% by 2022 through
delivery of a number of growth initiatives across the group
together with continued cost efficiency.
The group's ROA has shown a marginal improvement to 7.9%, up
from 7.7% (restated) in 2018, mainly due to the reduction in losses
in CCD. The group's ROE has, however, moderated from 19.1%
(restated) in 2018 to 18.2% in 2019, reflecting the planned
retention of equity in line with group's dividend policy - the 2018
final dividend paid in June 2019 was restricted to a nominal
dividend as communicated at the time of the right issue. More
normalised dividends were resumed with the 2019 interim dividend
which was paid in September 2019. The group's medium-term target is
to deliver an ROE in the range of between 20% and 25% by 2021.
ROE is the main returns measure used in the banking sector and
Vanquis Bank is now by far the biggest contributor to group
profits. Accordingly, for both the group as a whole and Vanquis
Bank, ROE will be the main measure of returns performance. However,
for CCD and Moneybarn, which are capitalised differently, ROA is
still considered to be the more appropriate returns measure.
Moneybarn and CCD delivering a target ROA of 10% is consistent with
the group's ROE targets.
Adjusted basic earnings per share of 47.3 p (2018 (restated):
48.7p) reduced by 2.9 %, reflecting the impact of the rights issue
shares issued in April 2018. Basic earnings per share increased by
22.0% to 33.3p (2018 (restated): 27.3p), despite the impact of the
rights issue shares issued in April 2018, reflecting the reduction
in exceptional items in the year.
Vanquis Bank - Financial performance
Year ended 31 December
2019 2018 Change
(restated(1)
)
GBPm GBPm %
-------- -------------- -------
Customer numbers ('000) 1,720 1,773 (3.0)
Year-end receivables 1,461.5 1,495.1 (2.2)
Average receivables(2) 1,459.9 1,507.4 (3.2)
----------------------------- -------- -------------- -------
Revenue 580.9 644.9 (9.9)
Impairment (198.9) (241.6) 17.7
-------- -------------- -------
Revenue less impairment 382.0 403.3 (5.3)
Revenue yield(3) 39.8% 42.8%
Impairment rate(4) 13.6% 16.0%
Risk-adjusted margin(5) 26.2% 26.8%
Costs (177.1) (176.4) (0.4)
Interest (31.4) (36.0) 12.8
Adjusted profit before tax 173.5 190.9 (9.1)
-------- -------------- -------
Exceptional items(6) 12.4 - n/a
Statutory profit before tax 185.9 190.9 (2.6)
-------- -------------- -------
Cost income ratio(7) 30.5% 27.4%
Return on assets(8) 10.4% 11.1%
Return on equity(9) 32.4% 44.0%
(1) 2018 comparatives have been restated for the change in
treatment of directly attributable acquisition costs following a
refresh of contractual terms with affiliates in 2019 - this has
resulted in a GBP6.6m increase in 2018 profit before tax, a benefit
of GBP10.5m to 2019 profit before tax and is expected to result in
a reduction of approximately GBP6m in 2020 profit before tax
compared with previous plans. See note 2 to the financial
information.
(2) Average of month-end receivables for the 12 months ended 31 December.
(3) Revenue as a percentage of average receivables for the 12
months ended 31 December.
(4) Impairment as a percentage of average receivables for the 12
months ended 31 December.
(5) Revenue less impairment as a percentage of average
receivables for the 12 months ended 31 December.
(6) Represents a net exceptional credit of GBP12.4m (2018:
GBPnil) comprising: (i) an exceptional credit of GBP14.2m (2018:
GBPnil) in respect of the release of provisions established in 2017
following completion of the refund programme in respect of ROP and
a re-evaluation of the forward flow of claims that may arise in
respect of ROP complaints more generally; and (ii) exceptional
restructuring costs of GBP1.8m (2018: GBPnil) .
(7) Costs, before exceptional items, as a percentage of revenue
for the 12 months ended 31 December.
(8) Profit before interest after tax as a percentage of average
receivables for the 12 months ended 31 December.
(9) Adjusted profit after tax as a percentage of average equity
for the 12 months ended 31 December. 2018 average equity has been
restated as though the GBP50m of rights issue proceeds injected
into Vanquis Bank in April 2018 had occurred on 1 January 2018.
Vanquis Bank is a leading specialist in the large and
established credit card market. It has a strong capital base and
has access to liquid funds through the resilient retail deposit
markets. During 2019, Vanquis Bank has continued to make good
progress in adapting and changing its business model to changes in
regulation and a better understanding of customer needs. As a
result, the shape of the income statement is changing, with lower
revenue yields being mitigated by lower impairment, increased cost
efficiency and managing the balance sheet more effectively to
reduce interest costs. Management is making good progress in
developing and executing plans to return the business to profitable
growth in the medium term with a number of strategic initiatives
underway.
Vanquis Bank's adjusted profit before tax reduced by 9.1% to GBP
173.5 m in 2019 (2018 (restated): GBP190.9m). The reduction in
adjusted profits mainly reflects the continued moderation in ROP
income of approximately GBP20m and 2018 benefiting from the release
of GBP10m of remuneration-related accruals as a result of the
business performing below expectations throughout 2017 and 2018. T
hese adverse variances were partly offset by an improved impairment
rate, tight control of costs and a reduction in interest costs.
Vanquis Bank's statutory profit before tax reduced by 2.6% to
GBP185.9m (2018 (restated): GBP190.9m), a lower rate of reduction
than adjusted profits. This reflects the benefit of an exceptional
provision release of GBP14.2m (2018: GBPnil) in respect of the ROP
refund programme partly offset by exceptional restructuring costs
of GBP1.8m (2018: GBPnil) .
Demand for Vanquis Bank's credit cards continues to be strong.
Despite tighter underwriting standards, including the withdrawal of
the 69.9% APR product, and the implementation of revised
affordability processes which have reduced new booking volumes by
approximately 25%, new customer bookings of 369,000 were 3,000
higher than last year and ahead of management's plans. This
reflects the benefit from the implementation of the new
underwriting engine towards the end of 2018 which has enabled
Vanquis Bank to enhance the customer onboarding journey. This
includes the full roll-out of soft search pre-application for all
channels and the pre-approval and pre-population for all affiliate
channels, both of which have resulted in an improvement in
application completion rates.
Despite strong booking volumes, customer numbers ended 2019 at
1,720,000, 3.0% lower than last year (2018: 1,773,000). The
year-on-year reduction reflects the closure of approximately 65,000
inactive customer accounts in the fourth quarter in order to manage
contingent risk if there is any deterioration in the economic
environment and the sale of 56,000 customers on payment
arrangements during the year.
Receivables ended 2019 at GBP1,461.5m, a 2.2% reduction on
December 2018 (2018 (restated): GBP1,495.1m), and compares with
management's internal plan of delivering broadly flat receivables
in 2019. The reduction is consistent with recent Bank of England
industry data showing that credit card customers repaid more than
they borrowed in November and December 2019 and, in the case of
Vanquis Bank, includes the greater than expected impact of changes
in regulation in respect of persistent debt remedies and revised
affordability processes.
In response to the FCA's definition of persistent debt within
the Credit Card Market Study (CCMS), Vanquis Bank has introduced a
number of measures including: (i) increasing minimum payments due
in the last quarter of 2018 and communicating higher recommended
payments in early 2019; (ii) placing restrictions on the credit
line increase programme; and (iii) implementing a number of
communication strategies during 2019. At September 2018,
approximately 11% of active Vanquis Bank customers were up to date
but met the definition of being in persistent debt (including
customers in arrears and in payment arrangements this increases to
15% of active customers). The business has been actively working
with these customers with a view to removing them from this
position in advance of March 2020, which is the first 36-month
checkpoint after which customers who still meet the definition of
being in persistent debt will be offered a way to repay their
balance in a reasonable period of no more than four years.
Management anticipates that approximately 2% of the September 2018
cohort of customers will still meet the definition of persistent
debt at March 2020. Vanquis Bank continues to proactively work with
the remaining customers in advance of March 2020 as well as those
customers who have met the definition of being in persistent debt
after September 2018.
Vanquis Bank, consistent with the remainder of the group,
implemented revised affordability processes in November 2018.
Together with the impact of not extending credit to those customers
meeting the definition of persistent debt, this has resulted in a
reduction in the level of further credit extended to existing
customers under the credit line increase programme. Credit line
increases in 2019 were approximately 35% lower than in 2018.
Revenue has shown a 9.9% reduction to GBP580.9m in 2019 (2018
(restated): GBP644.9m) compared with the 3.2% reduction in average
receivables. The revenue yield has moderated from 42.8 % (restated)
in 2018 to 39.8 % in 2019 due to three factors. Firstly, there was
a further decline in the penetration of ROP within the customer
base following the voluntary suspension of sales from April 2016.
This resulted in a year-on-year reduction in ROP income of
approximately GBP 20 m. Secondly, there has been some further
moderation in the interest yield from: (i) a modest increase in the
mix of nearer-prime customers; (ii) downwards repricing of higher
APR accounts where the customer has improved their credit standing;
and (iii) balance reductions applied to accounts as part of the ROP
refund programme were typically at higher APRs. Finally, there have
been some changes to the basis for charging late and over-limit
fees to customer accounts.
The ROP refund programme was completed during March 2019 and the
FCA has confirmed that the programme is now closed. There has been
no material change in the level of complaints arising in relation
to ROP following the announcement of the settlement in February
2018. Accordingly, following completion of the refund programme and
a re-evaluation of the forward flow of claims expected in respect
of ROP more generally, GBP14.2m of the provision originally
established in 2017 has been released as an exceptional credit in
2019. The remaining provision held in the balance sheet of GBP11.7m
(2018: GBP45.7m) reflects management's revised expectation of
future claims which may arise in respect of ROP more generally
together with sundry costs of dealing with those claims.
Delinquency trends showed a favourable movement compared with
last year due to a shift in mix towards better quality customers .
In addition, the second half of 2018 was adversely impacted by the
impact of enhanced forbearance and an increase in minimum payments
due in response to persistent debt regulation which resulted in a
step-up in payment arrangements which has not been repeated in
2019. Accordingly, the impairment rate in 2019 has reduced to 13.6%
of average receivables compared with 16.0% in 2018. Underwriting
standards have been progressively tightened over the last two years
which, together with the historical resilience of the business
model, means that Vanquis Bank is well positioned if there is any
deterioration in the UK economic environment.
The risk-adjusted margin has moderated from 26.8% (restated) in
2018 to 26.2% in 2019, reflecting the reduction in the revenue
yield substantially offset by the improvement in the impairment
rate discussed above.
Costs have shown a modest 0.4% increase to GBP177.1m in 2019
(2018 (restated): GBP176.4m) with cost efficiency remaining a
strong focus for Vanquis Bank. The stable cost base has been
delivered despite 2018 benefiting from the release of approximately
GBP10m in respect of share-based payment, incentive and bonus
arrangements as a result of the business performing below
expectations throughout 2017 and 2018.
Interest costs of GBP31.4m have reduced by 12.8% during 2019
(2018: GBP36.0m) due to the reduction in Vanquis Bank's blended
funding rate, after taking account of the cost of holding a liquid
assets buffer, from 3.5% in 2018 to 3.0% in 2019. This reflects the
impact of Vanquis Bank repaying its intercompany loan from
Provident Financial and becoming fully funded with retail deposits
in November 2018. The intercompany loan represented a higher cost
of funding for Vanquis Bank.
Vanquis Bank's return on assets has reduced to 10.4% in 2019
(2018 (restated): 11.1%) due to the moderation in the risk-adjusted
margin partly offset by cost efficiency. Return on equity has
reduced from 44.0% (restated) in 2018 to 32.4% in 2019. This
primarily reflects the rebuilding of the equity base following the
implementation of IFRS 9 on 1 January 2018 (which resulted in a
GBP111.4m reduction in equity) and the ROP refund provision
reflected at the end of 2017 (which resulted in a GBP178.0m
reduction in equity). Vanquis Bank's return on equity is expected
to moderate to the group's target range of between 20% to 25% over
the medium term reflecting: (i) the average equity base
stabilising; and (ii) the risk-adjusted margin reducing to between
23% to 25% due to the ongoing reduction in ROP income and the
impact of downwards repricing and fee changes implemented in
2019.
Vanquis Bank paid a dividend to Provident Financial of GBP80m in
February 2020.
Vanquis Bank - Growth initiatives
Vanquis Bank's medium-term target is to deliver GBP2bn
receivables (currently GBP1.5bn) and an ROE of between 20% to 25%.
In addition to growing and developing the core credit cards
proposition, the business is pursuing a number of strategic
initiatives to deliver these targets:
Loans
The focus of the Vanquis Bank loans proposition has so far
remained on providing unsecured loans to existing credit card
customers and the loans receivables book ended 2019 at GBP28.9m
(2018: GBP26.0m). Volumes have been kept at modest levels during
2019 as Vanquis Bank has been preparing for a relaunch of the loans
proposition, leveraging the capabilities of both Vanquis Bank and
Satsuma, in order to provide a joined-up range of online unsecured
lending products. Unsecured loans remains an attractive market for
Vanquis Bank to expand into with over GBP1bn of credit issued each
year and approximately 12% of Vanquis Bank customers already having
a loan from another provider. To capitalise on this opportunity, a
new Director of Loans has been appointed and a new business and
financial plan has been developed based on price points up to
59.9%. The medium-term aim is to grow to a receivables book of
GBP150m, based on serving both Vanquis Bank customers and the open
market.
White label credit card partnerships
The way in which customers are researching and applying for
credit cards is evolving mainly due to digitisation. Growth in
traditional direct marketing channels has slowed as more customers
are choosing to source credit cards through affiliates and
aggregators. Vanquis Bank is very active in this area and has
formed strategic distribution partnerships with key players,
widening distribution reach and obtaining attractive acquisition
costs. There is the opportunity for Vanquis Bank to develop this
further by establishing white label credit card partnerships with
affiliates, leveraging the affiliates brand and digital marketing
specialism with Vanquis Bank's balance sheet, credit decisioning
and customer servicing capabilities. Vanquis Bank is working toward
launching a new white label partnership in the first half of
2020.
Self-employed ecosystem
Developing a tailored proposition for self-employed consumers
also represents an attractive opportunity. There are approximately
5 million adults (and growing) in the UK who are self-employed and
Vanquis Bank serves approximately 250,000 of those consumers.
Providing the self-employed segment with a distinct card, with
attractive and tailored features, represents a good fit with
Vanquis Bank's core competencies. The business plans to undertake a
test in 2020 and then, subject to satisfactory progress, build out
the proposition through 2021 with product enhancements, including
the potential to establish a broader, multi-product, self-employed
ecosystem, leveraging wider group and third-party partners.
Digitisation
The continuing development of digital capability is an essential
driver in delivering good customer outcomes and maintaining the
returns of Vanquis Bank in the context of a moderating revenue
yield. Vanquis Bank has continued to make good progress in its
digitisation programme during 2019. T here are now over 1.1 million
active users and 85% of new customers register on the Vanquis Bank
app. C ustomers are actively using the app to engage with the
business with over 200,000 push notifications being sent out per
month and almost GBP100m of payments being processed via the app.
In addition, over 300,000 customers have taken up the option to
receive statements via the app rather than receiving the
traditional paper copy. Vanquis Bank also successfully introduced a
chatbot in March 2019. Historically, one of the most effective
channels to contact customers who may be about to miss, or have
just missed, payments was via SMS. The chatbot provides a much more
interactive way to automate these SMS conversations and now
instigates approximately 70% of SMS conversations which has led to
improved customer response rates. Both the app and the chatbot are
examples of scalable, customer-led concepts that can be developed
for wider application and deliver benefits for both the customer,
through a better experience, and Vanquis Bank, through cost
efficiency. Vanquis Bank's medium-term aim is to deliver
operational leverage by maintaining a stable cost base whilst
growing the business.
Vanquis Bank - Management changes
Neil Chandler joined Vanquis Bank as Managing Director in April
2019 having previously been the Chief Executive Officer of Shop
Direct Financial Services and prior to that the Chief Executive
Officer of Sainsbury's Bank. The Vanquis Bank Executive Team has
been significantly refreshed and strengthened under Neil's
leadership with the appointments of a new Operations Director,
Chief Risk Officer, Customer Director, Product Director and a
Digital Transformation Director.
Robert East joined as Chairman of Vanquis Bank and a member of
the group Board in June 2019. Robert is also Chairman of Skipton
Building Society.
Oliver White, Finance Director of Vanquis Bank will be leaving
the business to pursue other career opportunities. The Board would
like to thank Oliver for his efforts over the last three years in
helping reshape Vanquis Bank, commencing the cost efficiency
programme and the completion of the ROP refund programme, and wish
him all the best in his new role. A search for his successor is
underway.
Moneybarn - Financial performance
Year ended 31 December
2019 2018 Change
(restated)(1)
GBPm GBPm %
------- --------------- -------
Customer numbers ('000) 77 62 24.2
Year-end receivables 502.1 416.4 20.6
Average receivables(2) 481.5 395.1 21.9
----------------------------- ------- --------------- -------
Revenue 122.0 104.3 17.0
Impairment (41.8) (34.4) (21.5)
------- --------------- -------
Revenue less impairment 80.2 69.9 14.7
Revenue yield(3) 25.3% 26.4%
Impairment rate(4) 8.6% 8.7%
Risk-adjusted margin(5) 16.7% 17.7%
Costs (20.9) (19.9) (5.0)
Interest (28.4) (21.9) (29.7)
Adjusted profit before tax 30.9 28.1 10.0
------- --------------- -------
Exceptional items(6) 2.6 - n/a
Statutory profit before tax 33.5 28.1 19.2
------- --------------- -------
Cost income ratio(7) 17.1% 19.1%
Return on assets(8) 10.0% 10.3%
(1) 2018 comparatives have been restated for the changes in
recognition of revenue on credit impaired receivables and treatment
of directly attributable acquisition costs which have resulted in a
reduction in revenue, impairment and costs but have had no impact
on Moneybarn's profits. See note 2 to the financial
information.
(2) Average of month-end receivables for the 12 months ended 31
December.
(3) Revenue as a percentage of average receivables for the 12
months ended 31 December.
(4) Impairment as a percentage of average receivables for the 12
months ended 31 December.
(5) Revenue less impairment as a percentage of average
receivables for the 12 months ended 31 December.
(6) Represents an exceptional credit of GBP2.6m (2018: GBPnil)
in respect of the release of provisions established in 2017
following completion of the FCA investigation into affordability,
forbearance and termination options at Moneybarn.
(7) Costs, before exceptional items, as a percentage of revenue
for the 12 months ended 31 December.
(8) Adjusted profit before interest after tax as a percentage of
average receivables for the 12 months ended 31 December.
In the five years since acquisition by Provident Financial,
Moneybarn has become one of the largest suppliers of vehicle
finance to underserved customers in the UK. The business has a
strong track record, delivering high levels of growth and strong
returns, and is in an excellent position to continue to deliver
profitable growth in the medium term from existing and adjacent
markets.
Moneybarn's adjusted profit before tax increased by 10.0% to GBP
30.9 m in 2019 (2018: GBP28.1m). The business has continued to
deliver strong new business volumes and receivables growth although
profits growth has been impacted by a modest reduction in margins
and increased funding costs as Moneybarn has been allocated a more
appropriate share of group funding costs in 2019. Moneybarn's
statutory profit before tax increased by 19.2% to GBP33.5m (2018:
GBP28.1m), a higher rate of increase than adjusted profits. This
reflects the benefit of an exceptional provision release of GBP2.6m
(2018: GBPnil) following finalisation of the FCA investigation into
affordability, forbearance and termination options.
The non-standard vehicle finance market remains competitive.
However, demand for used cars has remained robust and new business
volumes have been very strong. Continued development of core
broker-introduced distribution channels, including revising
affordability processes and a number of other operational
developments, has resulted in a better customer experience and
reinforced Moneybarn's position amongst its broker network. As a
result, new business volumes in 2019 were 30% higher than last
year. Due to the particularly strong growth in new business volumes
in the first three quarters of the year and the emergence of a
modest deterioration in impairment trends, underwriting was
tightened early in the fourth quarter to remove the bottom tier of
higher-risk customers. Accordingly, fourth quarter volumes showed a
lower year-on-year growth rate of 14%. Customer numbers ended the
year at 77,000, up from 62,000 at the end of 2018 and showing
growth of 24.2%.
Receivables showed strong growth of 20.6% to GBP502.1m (2018
(restated): GBP416.4m). This was a lower rate of growth than the
24.2% increase in customer numbers, reflecting the sale of
delinquent debt with a modest carrying value in December. This was
the first sale of delinquent debt since the commencement of the FCA
investigation in 2017.
The redress required to resolve the issues arising in respect of
the FCA investigation into affordability, forbearance and
termination options was completed in the third quarter of 2019 and
Moneybarn received the final notice from the FCA in February 2020.
The total cost of the investigation is lower than the original
GBP20m set aside at the end of 2017, and, accordingly, GBP2.6m of
the provision has been released as an exceptional credit in 2019.
The remaining provision held in the balance sheet of GBP2.8m (2018:
GBP7.5m) reflects the cost of the fine based on the final FCA
notice.
Revenue has increased by 17.0% to GBP122.0m (2018 (restated):
GBP104.3m) compared with the growth in average receivables of
21.9%. The revenue yield has reduced from 26.4% (restated) in 2018
to 25.3% in 2019 reflecting the impact of the tightening of
underwriting which has removed higher-yielding, lower-quality
business and the cessation of charging default fees during
2018.
Default rates and arrears levels were stable in the first three
quarters of 2019, continuing the trend experienced since the end of
the first quarter of 2018. However, the final quarter of 2019
showed a modest deterioration in impairment trends reflecting: (i)
the flow through of higher-risk customers prior to the tightening
of underwriting early in the fourth quarter; and (ii) the impact of
stronger than forecast growth in new business volumes earlier in
the year as Moneybarn's peak in defaults is approximately 9 to 12
months following inception of a loan. Accordingly, Moneybarn's
impairment rate of 8.6% in 2019 was in line with last year (2018
(restated): 8.7%), having tracked at a lower rate of around 8%
earlier in the year. The tighter underwriting standards being
applied throughout the fourth quarter together with improvements in
collections processes are expected to stabilise impairment trends
in 2020.
The modest fall in the revenue yield and the stable impairment
rate has resulted in Moneybarn's risk-adjusted margin reducing from
17.7% (restated) in 2018 to 16.7% in 2019.
Cost growth of 5.0% in 2019 is stated after the benefit from an
estimated VAT recovery of GBP2.0m. Excluding the VAT recovery, cost
growth was 15.0%, lower than the growth in revenue of 17.0% as the
business has delivered some operational leverage.
Due to the strong growth in the business over recent years,
Moneybarn has recently moved into new premises, very close to the
existing site in Petersfield. The new office will accommodate up to
420 employees, compared with headcount of 320 currently, and will
support growth well into the medium term.
Interest costs have shown growth of 29.7% in 2019, higher than
the 21.9% growth in average receivables. This reflects an increase
in Moneybarn's group funding rate as the cost of funding the
non-bank segment of the group has increased following Vanquis Bank
becoming fully funded through retail deposits during the second
half of 2018. Moneybarn's funding rate in 2020 will benefit from
the recently signed securitisation of its receivables book.
Moneybarn has delivered a return on assets of 10.0% in 2019,
marginally lower than 10.3% (restated) in 2018, but in line with
the group's target of 10%.
Moneybarn - Growth initiatives
Moneybarn's medium-term target is to deliver GBP750m receivables
(currently GBP502m) whilst maintaining an ROA of approximately 10%.
The business continues to expect continued growth in its core
products as the use of car finance on used car purchases continues
to rise from relatively modest penetration levels. In addition, the
business is pursuing a number of strategic initiatives to support
delivery of its targets. In particular, Moneybarn continues to
explore opportunities to extend its product offering and
distribution channels through:
-- Expansion of relationships with lead generators and quotation
search partners such as ClearScore, Confused.com and Totally Money,
leveraging Moneybarn's quotation search and digital onboarding
capabilities;
-- Introduction of a resolicitation programme to retain
high-quality customers who currently settle early and move to other
lenders;
-- Continuing to develop the B2C proposition, including using
the Vanquis Bank app to offer bespoke Moneybarn products to Vanquis
Bank customers which is now live; and
-- Introduction and development of new asset classes that
resonate with Moneybarn's target customer base, such as light
commercial vehicles, motorbikes and touring caravans, as well as
products tailored to the self-employed.
In addition, Moneybarn is developing plans to move further into
the near-prime segment, leveraging its scalable platform and the
group's funding base. This would significantly increase the size of
Moneybarn's addressable customer base.
Moneybarn - Management changes
After 12 years with the business, Shamus Hodgson, Managing
Director of Moneybarn, will step down from his role at the end of
March 2020 to pursue other career opportunities. Malcolm Le May,
the group's Chief Executive Officer, will become Managing Director
of Moneybarn on an interim basis. The search for a successor has
already commenced. The Board would like to thank Shamus for his
leadership of Moneybarn since taking over as Managing Director
three years ago and his role in establishing Moneybarn as the UK's
leading provider of vehicle finance to the underserved.
CCD - Financial performance
Year ended 31 December
2019 2018 Change
GBPm GBPm %
-------- -------- -------
Customer numbers ('000) 522 560 (6.8)
Year-end receivables 249.0 292.5 (14.9)
Average receivables(1) 247.3 296.2 (16.5)
--------------------------- -------- -------- -------
Revenue 295.4 342.2 (13.7)
Impairment (96.2) (120.8) 20.4
-------- -------- -------
Revenue less impairment 199.2 221.4 (10.0)
Revenue yield(2) 119.5% 115.5%
Impairment rate(3) 39.0% 40.8%
Risk-adjusted margin(4) 80.5% 74.7%
Costs (210.3) (244.7) 14.1
Interest (9.7) (15.4) 37.0
Adjusted loss before tax (20.8) (38.7) 46.3
-------- -------- -------
Exceptional items(5) (14.4) (29.9) 51.8
Statutory loss before tax (35.2) (68.6) 48.7
-------- -------- -------
Cost income ratio(6) 71.2% 71.5%
Return on assets(7) (3.6%) (6.4%)
(1) Average of month-end receivables for the 12 months ended 31
December.
(2) Revenue as a percentage of average receivables for the 12
months ended 31 December.
(3) Impairment as a percentage of average receivables for the 12
months ended 31 December.
(4) Revenue less impairment as a percentage of average
receivables for the 12 months ended 31 December.
(5) Represents exceptional costs of GBP14.4m in relation to the
ongoing turnaround of the home credit business following the
migration to the employed operating model in July 2017 (2018:
GBP29.9m).
(6) Costs, before exceptional items, as a percentage of revenue
for the 12 months ended 31 December.
(7) Adjusted loss before interest after tax as a percentage of
average receivables for the 12 months ended 31 December.
CCD is the market leader in the UK and Republic of Ireland home
credit markets and is now also a leading player in digital loans
within the high-cost, short-term credit market through Satsuma. The
ongoing turnaround of the home credit business has continued to
progress well in 2019 and the business is now on a stable footing
following the events of 2017. With an operating model which has
fully embraced the direction of regulatory travel, the development
of new product propositions and continuing market dislocation due
to tougher regulation, CCD is now well placed to return the
business to profitability and customer and receivables growth in
the medium-term.
CCD has reported a 46.3% reduction in adjusted loss before tax
to GBP20.8m in 2019 (2018: loss before tax of GBP38.7m ) , in line
with management's internal plan, as the business has continued to
successfully adapt to the ongoing evolution in the regulatory
environment. As a result of the actions taken by management, the
business delivered a reduced adjusted loss of GBP5.7m (2018:
GBP15.5m) in the second half of the year and the business is well
placed entering 2020. As previously communicated, the business is
expecting to deliver a loss in the first half of 2020, consistent
with the normal seasonality of the business, a profit in the second
half of 2020 and a breakeven result for 2020 as a whole. CCD's
statutory loss before tax reduced by 48.7% to GBP35.2m (2018: loss
before tax of GBP68.6m), with exceptional restructuring costs
reducing from GBP29.9m in 2018 to GBP14.4m in 2019 .
CCD customer numbers ended the year at 522,000, 6.8% lower than
560,000 last year, which represents a significantly reduced rate of
decline compared with 28.2% in 2018. The focus for 2019 has been
on: (i) s tabilising the rate of decline in the home credit
customer base against the backdrop of increased regulation, ongoing
enhancement of business processes and increased efficiency to
reduce the cost base; and (ii) continuing to grow Satsuma customer
numbers in a responsible and sustainable manner.
The improved momentum in new customer recruitment experienced in
the fourth quarter of 2018 was maintained in home credit during
2019, despite the significant reduction in field resources. New and
returning customer volumes were broadly in line with last year
despite a 20% reduction in average CEM resources through the year.
Home credit customer numbers ended the year at 386,000 (2018:
443,000), in line with the end of the third quarter. The customer
base is now beginning to stabilise having previously shown
reductions in the first three quarters of the year as the number of
new customers recruited had not been at a level sufficient to
stabilise the customer base . New and returning customers volumes
were marginally ahead of plan in the fourth quarter and are
expected to continue to improve during 2020, benefiting from the
ongoing embedding of performance management and new ways of
working, including the use of a balanced scorecard with an element
of variable pay, and the roll-out of an enhancement to the home
credit product, Provident Direct.
Satsuma continued to experience a good flow of lending volumes
during 2019 and new business and further lending volumes increased
by approximately 10% and customer numbers ended the year at
136,000, up 16.2% on last year (2018: 117,000). However, following
a number of high-cost lenders exiting the market and discussions
with the FCA, Satsuma took the decision to temporarily reduce
lending volumes in early December. Accordingly, new business and
further lending volumes in December and January were significantly
lower than last year. Satsuma and home credit are expected to work
more closely together as Provident Direct is rolled out through
2020 and a lower proportion of Satsuma loan applications are
processed wholly digitally. This reflects the decision to increase
the level of interaction with customers during the application
process, including, in some circumstances, the involvement of a
field-based CEM. This puts CCD in a unique position to build a
sustainable business based on a 'hybrid' operating model utilising
the best of both digital and home credit capabilities.
Total CCD receivables were GBP249.0m at the end of 2019 (2018:
GBP292.5m), 14.9% lower than the end of 2018, and comprised
GBP205.8m in respect of the home credit business (2018: GBP253.0m)
and GBP43.2m in respect of Satsuma (2018: GBP39.5m).
Home credit receivables have fallen by 18.7% in 2019 compared
with the 12.9% reduction in customer numbers. This primarily
reflects average issue values being approximately 9% lower in 2019
following the introduction of the new high-cost credit guidance
issued by the FCA as part of its review of the high-cost credit
sector which came into force between December 2018 and March 2019.
The new guidance i ncludes the requirement for CEMs to present
customers with the cost of either taking out a concurrent loan or
refinancing their existing loan when they require further credit.
Experience to date shows that there has been a modest increase in
the proportion of customers opting for concurrent loans, which are
typically lower value and shorter in duration than refinanced
loans.
Satsuma's receivables have shown 9.4% growth in 2019 compared
with the 16.2% increase in customer numbers due to the significant
reduction in lending volumes in December.
Revenue in CCD has fallen by 13.7% in 2019, a modestly lower
rate than the 16.5% reduction in average receivables. The revenue
yield of 119.5% in 2019 has increased from 115.5% in 2018,
reflecting a modest shift in mix to shorter-term, higher-yielding
products.
Impairment in CCD has reduced by 20.4%, better than the rate of
reduction in average receivables. This reflects the improvement in
collections performance due to the benefit from the ongoing
improvement in business processes and the introduction of the
enhanced performance management framework. As a result, the
impairment rate of 39.0% in 2019 has reduced from 40.8% in 2018 .
The business has recently completed the roll-out of electronic card
readers for CEMs to allow customers to make their repayments with
debit cards as well as cash. This has been well received by both
field employees and customers and is expected to support further
improvement in collections performance during 2020.
CCD's target risk-adjusted margin is between 80% to 85%. The
combined improvement in revenue yield and impairment rate during
the year has resulted in the risk-adjusted margin increasing from
74.7% in 2018 to 80.5% in 2019, within the target range.
Costs have reduced by 14.1% to GBP210.3m in 2019 (2018:
GBP244.7m). Despite cost headwinds from increased regulatory
requirements, upgrading certain elements of the old IT
infrastructure and higher complaints costs, CCD has continued to
take the necessary actions to reduce headcount and tightly manage
costs in response to the reduction in customer numbers. As
previously reported, in January 2019, CCD announced a voluntary
redundancy programme in central support functions which reduced
central headcount by approximately 200. There was also a further
reduction of 50 head office roles during the year, mainly through
non-replacement of leavers. In addition, approximately 600 CEMs and
field managers left the business during 2019 either through natural
attrition and non-replacement of roles or through redundancy.
Overall, there has now been a reduction in roles within CCD of
1,500 since September 2017. Together with actions already taken and
the ongoing tight control of costs, this has resulted in CCD's
annual run rate cost base entering 2020 at around GBP200m as
communicated at the CMD.
Despite some upgrades in the year, CCD's legacy IT systems are
old, inflexible and expensive to maintain. Accordingly, the
business is planning a programme of investment over the next two
years to modernise and refresh the IT infrastructure and support
both better customer service and the growth of the business going
forward.
Interest costs in CCD have fallen by 37.0% to GBP9.7m in 2019
(2018: GBP15.4m). This is a larger reduction than the reduction in
average receivables as CCD's funding rate has been reduced to
reflect a more balanced allocation of funding costs between CCD and
Moneybarn now that Vanquis Bank is fully funded with retail
deposits.
CCD - Growth initiatives
CCD's medium-term target is to grow the business to GBP300m
receivables (currently GBP249m) whilst delivering an ROA of
approximately 10%. CCD's focus is now on developing the customer
proposition and growing the business. Accordingly, management has
developed a number of strategic initiatives to support growth:
Provident Direct
Following discussions with the FCA in the second quarter of
2019, CCD commenced testing of Provident Direct, in the Birmingham
South area in the third quarter of the year. Provident Direct is
relationship managed in the home by a CEM with payments collected
remotely via CPA. The test has indicated that there is strong
demand for the product from both customers and the field
organisation and that collections performance is comparable to home
collection. In addition, the test has allowed the business to
refine the customer journey and supporting processes whilst
avoiding disrupting the field organisation during the seasonal peak
in trading in the run-up to Christmas. Following the successful
test, Provident Direct is now being rolled out progressively,
firstly in Wales/West (c.15% of the business) in the first quarter
of 2020, with a view to having national coverage across the UK by
the end of the year. The product retains the essence of home credit
but should enable CCD to attract new and former customers of
suitable credit quality who value the relationship-based home
credit proposition but do not wish to have a weekly collections
visit by a CEM or for whom the home visit is inconvenient, such as
shift workers. The CEM will maintain regular contact with the
customer and will make home visits if the customer's circumstances
change or if they are experiencing payment difficulties. Longer
term, the business envisages 30% or more of business being
transacted through Provident Direct.
Enhanced performance management
The FCA confirmed in early March 2019 that the business could
implement enhanced performance management of CEMs based on a
balanced scorecard supported by an element of variable
performance-related pay. The implementation of this full suite of
performance measures is essential in continuing to improve the
efficiency and effectiveness of the field organisation whilst
delivering consistently good customer outcomes. The balanced
scorecard was tested for impact on customer outcomes in the
Warrington area during May and was expanded to the North West
region in June, including testing an element of variable pay.
Following successful testing, the business completed full roll-out
of the framework in the UK during the third quarter of the year as
well as implementing new ways of working for field management to
support and oversee CEMs. These measures have contributed to the
ongoing improvement in CCD's performance in 2019. Management will
continue to calibrate the balanced scorecard and the variable pay
element to both enhance customer outcomes and improve
performance.
Satsuma personal loans
Satsuma forms an important part of future strategy, particularly
as Satsuma and home credit are expected to work more closely
together as Provident Direct is rolled out through 2020. Satsuma
intends to test a product extension of a loan product priced
between 79.9% and 99.9% APR under the Satsuma brand towards the end
of 2020. This will further expand CCD's product range, addressable
market and provide customers with a pathway to cheaper credit.
Central costs
Central costs in 2019 were GBP21.0m, up from GBP20.2m in 2018.
The increase primarily reflects unallocated interest costs of
GBP2.5m (2018: credit of GBP0.1m) taken centrally, primarily in
respect of the cost of maintaining a high level of headroom on the
revolving credit facility in the first half of the year and the
costs of defending the unsolicited NSF offer.
Exceptional items
Exceptional items are amounts which the Board consider material
and one-off in nature. In 2019, the income statement reflects a net
exceptional charge of GBP26.3m (2018: charge of GBP55.3m)
comprising:
2019 2018
Charge/(credit) GBPm GBPm
------- -----
Bid defence costs associated with NSF's unsolicited
offer for the group 23.8 -
Restructuring costs, primarily in respect of the
ongoing turnaround of CCD 19.3 29.9
Release of provisions in respect of ROP refund
programme (14.2) -
Release of provisions in respect of Moneybarn FCA
investigation (2.6) -
Premium and fees paid on the redemption of senior
bonds - 18.5
Pension charges in respect of the equalisation
of Guaranteed Minimum Pensions - 6.9
Exceptional items 26.3 55.3
------- -----
Further detail is provided in note 3 to the financial
information.
Prior year restatements
As part of a refresh of contractual terms with affiliates in
2019, and to align with market practice, directly attributable
acquisition costs within Vanquis Bank are now capitalised as part
of credit card receivables and amortised over the expected life of
customer accounts rather than being charged to the income statement
as incurred. Directly attributable acquisition costs represented
approximately 70% of total acquisition costs in 2019 compared with
approximately 30% in 2017. This reflects the progressive shift in
mix of new customer booking volumes towards internet affiliates as
opposed to other channels such as direct marketing or direct mail
where costs are not directly attributable to individual customer
bookings. The new treatment results in a reduction in the interest
income recognised on credit card receivables and a reduction in
administrative and operating costs. Prior year comparatives have
been restated resulting in an increase in receivables of GBP21.3m
at 31 December 2018 and an increase in profit before tax in 2018 of
GBP6.6m, comprising a reduction in costs of GBP12.0m and a
reduction in revenue of GBP5.4m. The change in treatment benefited
2019 profit before tax by GBP10.5m and is expected to result in a
reduction in 2020 profit before tax of approximately GBP6m compared
with previous plans (see note 2 to the financial information).
Moneybarn has made two changes in accounting treatment in
2019:
(i) R ecognition of revenue on credit impaired receivables -
Historically, the group has recognised revenue on Moneybarn's
credit impaired receivables 'gross' of the impairment provision and
subsequently impaired this additional revenue through the
impairment charge resulting in a gross-up in the income statement.
In 2019, the group has determined that revenue on Moneybarn's
credit impaired receivables should be recognised 'net' of the
impairment provision to align the previous accounting treatment
under IFRS 16 with the requirements of IFRS 9 and also with the
treatment adopted for similar assets in both Vanquis Bank and
CCD.
(ii) Treatment of directly attributable acquisition costs -
Historically, directly attributable deferred acquisition costs in
respect of Moneybarn's broker commissions were deferred within
trade and other receivables and amortised through administrative
and operating costs over the expected life of the associated
customer contract. Following the change in treatment of directly
attributable acquisition costs in Vanquis Bank, and to align the
treatment across the group, the group has concluded that directly
attributable acquisition costs in Moneybarn should be deferred as
part of amounts receivable from customers with amortisation
therefore being treated as a deduction from revenue.
Prior year comparatives have been restated in respect of the two
restatements described above. The restatements result in a
reduction in Moneybarn's 2018 revenue of GBP27.6m, a reduction in
impairment of GBP13.6m and a reduction in administrative and
operating costs of GBP14.0m. There has been no impact on earnings.
The carrying value of receivables at 31 December 2018 has increased
by GBP19.8m with a corresponding reduction in trade and other
receivables.
Tax
The tax charge for 2019 represents an effective tax rate of
26.3% (2018 (restated): 27.2%) on profit before tax, amortisation
of acquisition intangibles and exceptional items which reflects:
(i) the mainstream corporation tax rate of 19.0% on group profits
(2018: 19.0%); and (ii) the 8.0% bank corporation tax surcharge on
Vanquis Bank's profits in excess of GBP25m (2018: 8.0%). The group
is expected to benefit from the further reduction in the mainstream
corporate tax rate to 17% on 1 April 2020 announced by the
Government and enacted in 2016.
The tax charge (2018: tax credit) in respect of net exceptional
charges in 2019 (2018: exceptional charges) amounts to GBP2.9m
(2018: GBP10.2m).
Despite changing the operating model of the UK home credit
business from a self-employed agent model to an employed workforce
in July 2017, the group continues to be subject to status claims
brought against it by either former agents in the UK or agents in
the Republic of Ireland, or tax authorities challenging the
historic employment status of the group's agents. It is understood
from discussions with HMRC that they have commenced an industry
wide review of the self-employed status of agents. To date the
group has successfully defended these claims and challenges
although there can be no guarantee that future claims or challenges
will be successfully defended. See note 13 to the financial
information.
Dividends
The group's dividend policy is to maintain a dividend cover
ratio of at least 1.4 times as the home credit business recovers
and moves into profitability . This will reflect the group's
current risk appetite of maintaining regulatory capital headroom in
excess of GBP50m and progressively absorbing the remaining
transitional impact of IFRS 9 on regulatory capital by 1 January
2023.
The Board is recommending an increase in the final dividend of
60.0% to 16.0p per share (2018: 10.0p) which, together with the
9.0p interim dividend (2018: nil), represents a 150.0% increase in
the total dividend per share to 25.0p (2018: 10.0p). Dividend cover
for 2019, prior to the amortisation of acquisition intangibles and
exceptional items, is 1.9 times (2018 (restated): 4.9 times).
As communicated in March 2019, as well as bringing forward the
payment of interim dividends from late November to late September,
the Board has brought forward the payment of final dividends from
late June to late May. The 2019 final dividend will therefore be
paid on 22 May 2020.
Funding
The group's funding structure has historically comprised retail
deposits, the syndicated revolving bank facility, senior bonds,
private placements and retail bonds. The group's current funding
policy is to maintain committed facilities to meet contractual
maturities and fund growth for at least the following 12
months.
The group successfully refinanced its revolving syndicated bank
facility on 24 July 2019 with four leading UK banks. The facility
reduced from GBP450m to GBP235m, reflecting: (i) a reduction in the
requirement of the group for a revolving facility as Vanquis Bank
is now fully funded with retail deposits and the home credit
business is significantly smaller than when the previous facility
was established; and (ii) the exit of two non-UK banks from the
syndicate. The new facility has a maturity of July 2022 and an
interest rate of 300 bps plus 3 months LIBOR, up from 225 bps plus
3 months LIBOR in the previous facility. The covenant package and
limits remain unchanged but are being assessed under IFRS 9 rather
than under IAS 39 in the old facility. Headroom on the revolving
syndicated bank facility at 31 December 2019 was GBP69m.
The flow of retail deposits within Vanquis Bank has continued in
line with its internal funding plan and, at 31 December 2019,
Vanquis Bank had retail deposit funding of GBP1,345.1m, down from
GBP1,431.7m at 31 December 2018. This reflects the modest reduction
in Vanquis Bank receivables during the year and a reduction in the
liquid assets buffer due to reduced internal liquidity requirements
.
The group's funding rate during 2019 was 4.3 %, a modest
reduction from 4.4% in 2018 as Vanquis Bank is now fully funded
with retail deposits. This was partly offset by the impact of the
significant amount of headroom of over GBP300m being carried on the
group's revolving credit facility during the first half of the
year.
On 5 April 2019, Fitch Ratings reaffirmed the group's credit
rating at BBB- with a negative outlook.
The group's historic funding structure has served the group very
well. However, as part of the focus on cost efficiency, the group
has undertaken a full review of funding and outlined at the CMD a
number of opportunities to further diversify the group's sources of
funding, reduce the funding cost and improve the long-term
stability of the group.
The first opportunity was in respect of a securitisation of the
Moneybarn receivables book. The group successfully signed a
bilateral securitisation facility with NatWest Markets to fund
Moneybarn business flows on 14 January 2020. The new facility
provides up to GBP100m of initial funding and is anticipated to
grow to GBP275m over the next 18 months. The facility provides a
comparable funding rate to the revolving credit facility which
reduced from GBP450m to GBP235m as indicated above. The successful
completion of this facility builds the group's capability in
securitisation, allowing similar funding to be deployed elsewhere
in the group. Vanquis Bank would be the business with the greatest
potential for further securitisation. As a part of obtaining
consent for the securitisation from the group's existing lenders,
the group's revolving syndicated credit facility has reduced from
GBP235m to GBP211m and the group early repaid the remaining M&G
loan facility of GBP25m on 14 February 2020. After taking account
of the securitisation of Moneybarn's receivables and the ongoing
retail deposits programme in Vanquis Bank, the group has sufficient
facilities to fund contractual debt maturities and projected growth
in the group until mid-2022.
The second identified opportunity is in respect of retail
deposits funding some element of Moneybarn. The group is currently
exploring a number of potential structures to enable Moneybarn to
access Vanquis Bank's retail deposits capability and the group is
aiming to provide a formal proposal to the PRA in the first half of
2020. As demonstrated by Vanquis Bank, there is a deep and liquid
market of deposits available to support growth as and when it
happens. This would increase funding efficiency and flexibility
compared with the existing non-bank group funding sources which
typically have to be sourced in large tranches up front. Vanquis
Bank's weighted all-in average deposits rate is approximately 3.0%.
This compares with a funding cost for the non-bank group of
approximately 6.0% to 6.5%, which means the ability to fund part of
Moneybarn through deposits would significantly reduce Moneybarn's
overall cost of funding.
The group also continues to actively consider issuing further
senior bonds, private placements and potentially a tier 2
instrument. In addition, the group is also assessing ways in which
to manage the Vanquis Bank balance sheet more efficiently. In
respect of funding, this would be through diversifying the funding
mix into instant access deposits or into wholesale markets through
further securitisation. In respect of liquidity, this would be in
respect of revisiting the mix of the assets held in the liquid
assets buffer rather than solely relying on the Bank of England
Reserve Account. The group aims to make further progress on these
areas through 2020.
Capital
The group's minimum regulatory capital requirement set by the
PRA, together with the capital conservation buffer (2.5%) and
counter cyclical buffer (1.0%), represents a TCR of 25.5%. The
Board currently expects to maintain headroom in excess of GBP50m
against this requirement and a capital structure to support ongoing
access to funding from the bank and debt capital markets.
The group's CET 1 ratio on an accrued profits basis at 31
December 2019 was 30.7% compared with the group's TCR of 25.5%. On
this basis, the regulatory capital headroom was 5.2%, equivalent to
approximately GBP117m based on the group's risk weighted assets of
GBP2.2bn. The increase in headroom from approximately GBP100m at 31
December 2018 reflects: (i) retained profits less accrued
dividends; (ii) an increase in regulatory capital of approximately
GBP15m from the prior year restatement in respect of the change in
treatment of directly attributable acquisition costs in Vanquis
Bank; and (iii) the release of the FCA provisions in respect of ROP
and Moneybarn which, after tax, benefited regulatory capital by
approximately GBP10m. These favourable impacts were offset by the
anticipated second year transitional impact of IFRS 9 of GBP18m and
the impact of the implementation of IFRS 16 'Leases' from 1 January
2019 of GBP26m.
The group's regulatory capital headroom reduced to approximately
GBP90m on 1 January 2020, when the third year transitional impact
of IFRS 9 of GBP28m came into effect meaning that the group has
absorbed 30% of the IFRS 9 impact at this date. This level of
headroom is consistent with the Board's current risk appetite of
maintaining regulatory capital headroom in excess of GBP50m whilst
progressing towards the group's dividend cover target of at least
1.4 times in the medium term and progressively absorbing the
remaining 70% (GBP129m) transitional impact of IFRS 9 by 1 January
2023. For illustrative purposes, after adjusting for the impact on
risk weighted assets, the CET 1 ratio at 31 December 2019 would
reduce from 30.7% to 24.1% if the IFRS 9 transitional arrangements
did not apply.
The group's internal plans and medium-term guidance, including
receivables growth expectations and dividend guidance, are
consistent with maintaining regulatory capital headroom of at least
GBP50m above the current TCR of 25.5% . However, the group
continues to actively explore a number of options to improve
capital efficiency and management has identified a number of areas
which may result in potential future reductions in the TCR ,
including, but not limited to, potential reductions in capital
requirements for pensions and Pillar 2A add-ons . The group's next
capital review (C-SREP) with the PRA is confirmed for March 2020,
with the result expected in the second quarter.
The Board also continues to monitor its risk appetite in respect
of the appropriate level of regulatory capital headroom in light of
the group's ongoing recovery.
Regulation
Enhanced supervision by the FCA
As a consequence of: (i) the disruption to the home credit
business following the migration to the employed operating model in
July 2017 and the subsequent implementation of the recovery plan in
response to the disruption; (ii) the FCA's investigation into
Vanquis Bank's ROP product; and (iii) the FCA's investigation into
Moneybarn, the group continues to be subject to enhanced
supervision as notified by the FCA in their Watchlist Letter. Firms
placed under enhanced supervision may be required to provide formal
commitments, where appropriate, to tackle the underlying concerns
raised by the FCA and the FCA may also exercise other wide-ranging
powers. The group has a detailed plan of activities agreed with the
FCA with plans to formally attest that it has addressed the
outstanding regulatory concerns by the end of 2020.
FCA review of high-cost credit
On 18 December 2018, the FCA published CP18/43 in respect of its
review of high-cost credit, including final rules and guidance in
respect of home-collected credit. The rules introduced a package of
reforms to raise standards in disclosure and sales practices to
prevent home credit firms from offering new loans or refinancing
existing loans during home collection visits without the customer
specifically requesting it. CCD made the necessary changes to its
processes to ensure compliance with the new rules in advance of
them coming into force on 19 March 2019. This included the
requirement for CEMs to explain all available options to a customer
who wishes to borrow, including refinancing their existing loan or
taking out a concurrent loan . The changes made to the home credit
operating model over the last two years, including the voice
recording of all sales interactions with customers, means that the
business can effectively evidence compliance with the revised
requirements.
FCA CCMS
In February 2018, the FCA published PS18/4 setting out its final
policy rules in respect of persistent debt and earlier intervention
remedies from the CCMS. The overall objective of the package of
remedies is to reduce the number of customers in problem credit
card debt and put borrowers in greater control of their borrowing.
In particular, the rules require credit card firms to undertake
specific measures in respect of customers defined as being in
persistent debt. The FCA define persistent debt as a customer who
pays more in interest, fees and charges than principal over an 18
month period. Under this definition, where customers are in
persistent debt, firms need to undertake the following actions:
-- At 18 months, prompt customers in persistent debt to change
their repayment behaviour if they can afford to.
-- At 27 months, send another reminder if payments indicate a
customer is still likely to be in persistent debt at the 36-month
point. Customers need to be made aware that, if they do not change
their repayment behaviour, their card may be suspended, which may
be reported to credit reference agencies. The customer should also
receive contact details for debt advice services.
-- At 36 months, intervene again if a customer remains in
persistent debt with strategies to help the customer repay their
outstanding debt more quickly over a reasonable period, usually
between 3 and 4 years.
The proposals in PS18/4 came into force on 1 March 2018 and
firms had 6 months to be fully compliant. Approximately, 11% of
Vanquis Bank's active customers met the FCA's definition of
persistent debt at September 2018 and the first 36-month checkpoint
for persistent debt customers is in March 2020. Vanquis Bank
increased its minimum payment rates in the second half of 2018 and
has introduced a number of proactive measures in 2019, including
recommended payments and the testing of a number of communication
strategies, to encourage increased monthly repayments and reduce
the number of customers meeting the FCA's definition of being in
persistent debt.
FCA review of the motor finance market
In the FCA's Business Plan for 2017/18 the FCA stated that it
was looking at the motor finance market to ensure that it works
well and to assess whether consumers are at risk of harm. The FCA
published an update on this work on 15 March 2018 with its final
findings issued on 4 March 2019. The FCA's final findings indicated
that they have concerns regarding four areas of the motor finance
market: (i) commission arrangements, in particular non-flat rate
structures; (ii) sufficient, timely and transparent information,
mainly in respect of broker practice and information about
difference in commission (DIC) type commission arrangements; (iii)
lender controls in respect of the oversight of dealers and brokers;
and (iv) affordability assessments, whereby the FCA reference the
additional clarity given in PS18/19 last year around affordability
checks, and the expectation that all lenders have implemented the
appropriate additional practices.
Moneybarn has flat fee commission structures and has never given
discretion to brokers in setting the interest or commission levels.
Customers are made aware of the existence of a payment of
commission in Moneybarn's pre-contractual paperwork that all
brokers must provide to the customer and evidence that the customer
has received it. Moneybarn has an active physical audit programme
for all of its brokers and was the first vehicle finance lender in
the market to have such an audit process in place. Like all of the
group's other businesses, Moneybarn made all necessary changes to
its processes required by PS18/19 in advance of the 1 November 2018
deadline and there has been no further updates since then from the
FCA.
Irresponsible lending complaints and the Financial Ombudsman
Service (FOS)
There continues to be heightened claims management company
activity around non-standard lending sectors, particularly in
respect of irresponsible lending in high-cost credit and more
recently in home credit. As a result, CCD has seen an increase in
the number of such complaints and referrals to the FOS,
particularly in the first half of 2019, although complaint levels
have now stabilised. CCD continues to robustly defend inappropriate
or unsubstantiated claims and is working closely with the FOS in
this regard. See note 13 to the financial information.
Gambling commission ban on credit cards for gambling
On 14 January 2020, the Gambling Commission announced that with
effect from 14 April 2020, gambling through credit cards will be
banned. The ban follows a detailed review by the Commission and the
government. While it is incumbent on merchants to enforce the ban,
it is estimated that this will have a modest impact on Vanquis Bank
earnings.
Consolidated income statement for the year ended 31 December
Note 2019 2018
(restated)
GBPm GBPm
-------- ------------
Revenue 3 998.3 1,091.4
-------- ------------
Finance costs (72.0) (91.7)
Impairment charges 8 (336.9) (396.8)
Administrative and operating costs (460.6) (505.6)
-------- ------------
Total costs (869.5) (994.1)
-------- ------------
Profit before tax 3 128.8 97.3
--------------------------------------------------------- ----- -------- ------------
Profit before tax, amortisation of acquisition
intangibles and exceptional items 3 162.6 160.1
Amortisation of acquisition intangibles 3 (7.5) (7.5)
Exceptional items 3 (26.3) (55.3)
--------------------------------------------------------- ----- -------- ------------
Tax charge 4 (44.4) (32.0)
-------- ------------
Profit for the year attributable to equity shareholders 84.4 65.3
-------- ------------
All of the above activities relate to continuing operations.
Consolidated statement of comprehensive income
2018
Note 2019 (restated)
GBPm GBPm
------ ------------
Profit for the year attributable to equity shareholders 84.4 65.3
------ ------------
Items that will not be reclassified subsequently
to the income statement:
- actuarial movements on retirement benefit
asset 9 (9.7) (21.7)
- fair value movements in investments 10 4.5 2.2
- tax on items taken directly to other comprehensive
income 4 0.6 3.6
* impact of change in UK tax rate on items that will
not be subsequently reclassified to the income
statement 4 (0.1) (0.7)
Other comprehensive expense for the year (4.7) (16.6)
Total comprehensive income for the year 79.7 48.7
------ ------------
Earnings per share
Note 2019 2018
(restated)
pence pence
------ ------------
Basic 5 33.3 27.3
------ ------------
Diluted 5 33.1 27.2
------ ------------
Dividends per share
Note 2019 2018
pence pence
------ ------
Proposed final dividend 6 16.0 10.0
------ ------
Total dividend for the year 6 25.0 10.0
------ ------
Paid in the period* 6 19.0 -
------ ------
* The total cost of dividends paid in the year was GBP47.6m
(2018: GBPnil).
Consolidated balance sheets
Note 31 December 31 December 1 January
2019 2018 2018
(restated) (restated)
GBPm GBPm GBPm
------------ ------------ ------------
ASSETS
Non-current assets
Goodwill 71.2 71.2 71.2
Other intangible assets 7 44.1 55.0 79.4
Property, plant and equipment 19.3 24.6 30.9
Right of use assets 67.1 - -
Financial assets:
- amounts receivable from customers 8 418.3 364.8 320.3
Retirement benefit asset 9 78.0 83.9 102.3
Deferred tax assets 25.0 33.0 30.1
723.0 632.5 634.2
------------ ------------ ------------
Current assets
Financial assets:
* investment held as fair value through other
comprehensive income 10 16.6 47.8 45.8
- amounts receivable from customers 8 1,794.3 1,839.2 1,781.2
- cash and cash equivalents 353.6 387.9 282.9
- trade and other receivables 33.3 29.8 28.5
2,197.8 2,304.7 2,138.4
------------ ------------ ------------
Total assets 3 2,920.8 2,937.2 2,772.6
------------ ------------ ------------
LIABILITIES
Current liabilities
Financial liabilities:
- retail deposits (410.0) (339.3) (350.8)
- bank and other borrowings (53.5) (49.8) (38.1)
------------ ------------ ------------
Total borrowings (463.5) (389.1) (388.9)
------------ ------------ ------------
- derivatives - - (0.1)
- trade and other payables (89.3) (91.8) (96.9)
- lease liabilities (10.2) - -
Current tax liabilities (34.7) (24.6) (15.9)
Provisions 11 (14.5) (53.2) (104.6)
------------ ------------ ------------
(612.2) (558.7) (606.4)
------------ ------------ ------------
Non-current liabilities
Financial liabilities:
- retail deposits (935.2) (1,092.4) (950.2)
- bank and other borrowings (564.8) (574.0) (853.9)
------------ ------------ ------------
Total borrowings (1,500.0) (1,666.4) (1,804.1)
------------ ------------ ------------
- lease liabilities (68.1) - -
------------ ------------ ------------
(1,568.1) (1,666.4) (1,804.1)
------------ ------------ ------------
Total liabilities (2,180.3) (2,225.1) (2,410.5)
------------ ------------ ------------
NET ASSETS 3 740.5 712.1 362.1
------------ ------------ ------------
SHAREHOLDERS' EQUITY
Share capital 52.5 52.5 30.7
Share premium 273.2 273.2 273.0
Other reserves 295.9 292.1 13.4
Retained earnings 118.9 94.3 45.0
------------ ------------ ------------
TOTAL EQUITY 740.5 712.1 362.1
------------ ------------ ------------
Consolidated statement of changes in shareholders' equity
Share Share Other Retained
capital premium reserves earnings Total
(restated)
GBPm GBPm GBPm GBPm GBPm
--------- --------- ---------- ------------ --------
At 31 December 2017 30.7 273.0 13.4 34.0 351.1
--------- --------- ---------- ------------ --------
Prior year adjustment - directly
attributable acquisition costs (note
2) - - - 11.0 11.0
--------- --------- ---------- ------------ --------
At 1 January 2018 30.7 273.0 13.4 45.0 362.1
--------- --------- ---------- ------------ --------
Profit for the period - - - 65.3 65.3
--------- --------- ---------- ------------ --------
Other comprehensive income/(expense):
- actuarial movements on retirement
benefit asset (note 9) - - - (21.7) (21.7)
- fair value movement in investments
(note 10) - - 2.2 - 2.2
- tax on items taken directly to
other comprehensive income - - (0.5) 4.1 3.6
- impact of change in UK tax rate - - (0.2) (0.5) (0.7)
--------- --------- ---------- ------------ --------
Other comprehensive income/(expense)
for the period - - 1.5 (18.1) (16.6)
--------- --------- ---------- ------------ --------
Total comprehensive income for the
period - - 1.5 47.2 48.7
--------- --------- ---------- ------------ --------
Transactions with owners:
- proceeds from rights issue 21.8 - 278.2 - 300.0
- issue of share capital - 0.2 - - 0.2
- share-based payment charge - - 1.1 - 1.1
- transfer of share-based payment
reserve - - (2.1) 2.1 -
At 31 December 2018 52.5 273.2 292.1 94.3 712.1
--------- --------- ---------- ------------ --------
Impact of adoption of IFRS 16 'Leases'
(note 2) - - - (5.6) (5.6)
--------- --------- ---------- ------------ --------
At 1 January 2019 52.5 273.2 292.1 88.7 706.5
--------- --------- ---------- ------------ --------
Profit for the period - - - 84.4 84.4
--------- --------- ---------- ------------ --------
Other comprehensive income/(expense):
- actuarial movements on retirement
benefit asset (note 9) - - - (9.7) (9.7)
- fair value movement in investments
(note 10) - - 4.5 - 4.5
- tax on items taken directly to
other comprehensive income - - (1.2) 1.8 0.6
- impact of change in UK tax rate - - 0.1 (0.2) (0.1)
--------- --------- ---------- ------------ --------
Other comprehensive income/(expense)
for the period - - 3.4 (8.1) (4.7)
--------- --------- ---------- ------------ --------
Total comprehensive income for the
period - - 3.4 76.3 79.7
--------- --------- ---------- ------------ --------
Transactions with owners:
- share-based payment charge - - 1.9 - 1.9
- transfer of share-based payment
reserve - - (1.5) 1.5 -
- dividends - - - (47.6) (47.6)
At 31 December 2019 52.5 273.2 295.9 118.9 740.5
--------- --------- ---------- ------------ --------
The rights issue in April 2018 was undertaken through a cash box
structure which allowed merger relief to be applied to the issue of
shares rather than recording share premium. The resulting merger
reserve of GBP278.2m is included within other reserves, of which
GBP228.2m is distributable as the capital was retained for the
purposes of the company with the remaining GBP50.0m not
distributable as it was used to inject capital into Vanquis
Bank.
Consolidated statement of cash flows for the year ended 31
December
Note 2019 2018
GBPm GBPm
-------- --------
Cash flows from operating activities
Cash generated from operations 12 190.7 67.2
Finance costs paid (66.1) (66.1)
Premium and fees paid on refinancing of senior
bonds 3 - (18.5)
Tax paid (24.3) (22.3)
-------- --------
Net cash generated from/(used in) operating
activities 100.3 (39.7)
Cash flows from investing activities
Purchase of intangible assets (7.4) (7.6)
Purchase of property, plant and equipment (6.6) (5.3)
Proceeds from disposal of property, plant
and equipment 2.7 1.5
Sale of government gilts held as an investment 35.7 0.2
Net cash generated from/(used in) investing
activities 24.4 (11.2)
Cash flows from financing activities
Proceeds from bank and other borrowings 288.3 737.1
Repayment of bank and other borrowings (379.7) (885.3)
Payment of lease liabilities (15.8) -
Dividends paid to company shareholders 6 (47.6) -
Net proceeds from rights issue - 300.0
Proceeds from issue of share capital - 0.2
Net cash (used in)/generated from financing
activities (154.8) 152.0
Net (decrease)/increase in cash, cash equivalents
and overdrafts (30.1) 101.1
Cash, cash equivalents and overdrafts at
beginning of year 380.9 279.8
Cash, cash equivalents and overdrafts at
end of year 350.8 380.9
-------- --------
Cash, cash equivalents and overdrafts at
end of year comprise:
Cash at bank and in hand 353.6 387.9
Overdrafts (held in bank and other borrowings) (2.8) (7.0)
-------- --------
Total cash, cash equivalents and overdrafts 350.8 380.9
-------- --------
Cash at bank and in hand includes GBP321.9m (2018: GBP384.9m) in
respect of the liquid assets buffer, including other liquidity
resources, held by Vanquis Bank in accordance with the PRA's
liquidity regime. As at 31 December 2019, GBP138.2m (2018:
GBP106.5m) of the buffer was available to finance Vanquis Bank's
day-to-day operations.
Notes to the financial information
1. Basis of preparation
The financial information, which comprises the consolidated
income statement, statement of comprehensive income, balance sheet,
statement of changes in equity, cash flow statement and related
notes, is derived from the consolidated financial statements for
the year ended 31 December 2019, which have been prepared under
International Financial Reporting Standards (IFRS) as adopted by
the European Union and those parts of the Companies Act 2006
applicable to companies reporting under IFRS.
The financial information does not constitute the statutory
financial statements of the group within the meaning of Section 434
of the Companies Act 2006. The statutory financial statements for
the year ended 31 December 2018 have been filed with the Registrar
of Companies. The report of the auditor was unqualified, did not
draw attention to any matters by way of emphasis and did not
contain any statement under section 498(2) or (3) of the Companies
Act 2006.
The directors have reviewed the group's budgets, plans and cash
flow forecasts for 2020 and 2021 together with outline projections
for the three subsequent years. Based on this review, they are
satisfied that the group has adequate resources to continue to
operate for the foreseeable future. For this reason, the directors
continue to adopt the going concern basis in preparing the
financial information.
2. Accounting policies
The accounting policies applied in preparing the financial
information are consistent with those used in preparing the
statutory financial statements for the year ended 31 December 2018
with the exception of: (i) the adoption of IFRS 16 'Leases'; (ii) a
change in treatment of directly attributable deferred acquisition
costs in Vanquis Bank; and (iii) changes in the recognition of
revenue on credit impaired receivables and treatment of directly
attributable acquisition costs in Moneybarn .
(i) The impact of new standards adopted by the group from 1 January 2019 - IFRS 16
IFRS 16 'Leases' has been adopted by the group from the
mandatory adoption date of 1 January 2019. IFRS 16 replaces IAS 17
'Leases' and provides a model for the identification of lease
arrangements and the treatment in the financial statements of both
lessees and lessors.
The standard distinguishes leases and service contracts on the
basis of whether an identified asset is controlled by the customer.
Distinctions between operating leases and finance leases are
removed for lessee accounting, and has been replaced by a model
where a right-of-use asset and a corresponding liability are
recognised for all leases where the group is the lessee, except for
short-term assets and leases of low value assets.
The right of use asset is initially measured at cost and
subsequently measured at cost less accumulated amortisation and
impairment losses, adjusted for any re-measurement of the lease
liability. The lease liability is initially measured at the present
value of future minimum lease payments. Subsequently the lease
liability is adjusted for interest and lease payments, as well as
the impact of lease modifications, amongst others. The
classification of cash flows is affected as under IAS 17 operating
lease payments were presented as operating cash flows whereas under
IFRS 16 the lease payments are split into a principal and interest
portion which is presented as operating and financing cash flows
respectively.
The adoption of IFRS 16 into the group's opening balance sheet
on 1 January 2019 resulted in an increase in assets of GBP81.9m and
liabilities of GBP89.0m. Net of deferred tax of GBP1.5m, this
resulted in a reduction in net assets of GBP5.6m which has been
reflected through opening reserves at 1 January 2019. The group has
taken the modified retrospective approach as permitted by IFRS 16.
Accordingly, comparative information has not been restated.
(ii) The impact of new standards not yet effective and not
adopted by the group from 1 January 2019
There are no new standards not yet effective and not adopted by
the group from 1 January 2019 which are expected to have a material
impact on the group.
(iii) Changes in accounting treatment in 2019
Change in treatment of directly attributable acquisition costs
in Vanquis Bank
As part of a refresh of contractual terms with affiliates during
2019, the group has reviewed the treatment of directly attributable
acquisition costs paid by Vanquis Bank to third parties upon
acceptance of new credit card customers introduced by those third
parties. Historically, such costs were charged to the income
statement as incurred on the basis that the credit card customer is
not required to use the credit card. Upon review of this policy, it
has been determined that the expected use of the issued credit
cards can be reliably predicted and it is probable that the issued
credit cards would be used resulting in the recognition of credit
card receivables with the associated benefits flowing to Vanquis
Bank. Accordingly, directly attributable acquisition costs are now
capitalised as part of credit card receivables and amortised over
the expected life of customer accounts. Directly attributable
acquisition costs represented approximately 70% of total
acquisition costs in 2019 compared with approximately 30% in 2017.
This reflects the progressive shift in mix of new customer bookings
towards internet affiliates as opposed to other channels such as
direct marketing or direct mail where costs are not directly
attributable to individual customer bookings. Under the revised
treatment, the acquisition costs are recognised over the same term
as when the benefits from credit cards (i.e. interest income) are
received by Vanquis Bank. The new treatment results in a reduction
in the interest income recognised on credit card receivables and a
reduction in administrative and operating costs.
The group has concluded that the new treatment represents a
change in accounting policy on the 2018 financial statements and
accordingly has restated the 2018 consolidated income statement,
statement of comprehensive income, balance sheet and statement of
changes in shareholders' equity. The prior year restatement has
resulted in an increase in receivables of GBP21.3m at 31 December
2018 and an increase in profit before tax in 2018 of GBP6.6m,
comprising a reduction in costs of GBP12.0m and a reduction in
revenue of GBP5.4m . The prior year adjustment to retained earnings
at 1 January 2018 amounted to GBP11.0m.
Changes in treatment of revenue recognition on credit impaired
receivables and directly attributable acquisition costs in
Moneybarn
In preparing the 2019 financial statements, the group has made
two changes in accounting treatment in Moneybarn relating to: (i)
revenue recognition on the conditional sale agreements within
Moneybarn which are classified as credit impaired (i.e. stage 3
assets under IFRS 9), following adoption of IFRS 16 on 1 January
2019; and (ii) the treatment from a disclosure perspective of
directly attributable acquisition costs to align with the rest of
the group.
(i) Revenue recognition on credit impaired receivables
In 2018, revenue on Moneybarn's credit impaired receivables was
recognised 'gross' of the impairment provision with this additional
revenue reflected as an impairment charge resulting in a gross-up
in the income statement. On reviewing its accounting policies in
preparing the 2019 financial statements, the group has determined
that revenue on Moneybarn's credit impaired receivables should be
recognised 'net' of the impairment provision to align the
accounting treatment under IFRS 16 with IFRS 9 and also with the
treatment in both Vanquis Bank and CCD.
The group has concluded that the new treatment reflects a change
in accounting policy required to be applied retrospectively and
accordingly has restated the 2018 income statement balances in the
2019 financial statements. The restatement results in a reduction
in Moneybarn's revenue and impairment in 2018 of GBP13.6m with no
impact on profit before tax, earnings per share, retained earnings
or carrying values in the balance sheet.
(ii) Disclosure of directly attributable acquisition costs
Historically, directly attributable deferred acquisition costs
in respect of Moneybarn's broker commissions were deferred within
trade and other receivables and amortised through administrative
and operating costs over the expected life of the associated
customer contract.
Following the change in treatment of directly attributable
acquisition costs in Vanquis Bank, and to align the treatment
across the group, the group has concluded that directly
attributable acquisition costs in Moneybarn should be deferred as
part of amounts receivable from customers with amortisation
therefore being treated as a deduction from revenue.
The change has been applied retrospectively and, accordingly,
the 2018 income statement and balance sheet have been restated in
the 2019 financial statements. The restatement results in a
reduction in Moneybarn's 2018 revenue of GBP14.0m with a
corresponding reduction in administrative and operating costs of
GBP14.0m. There is no impact on profit before tax, earnings per
share or retained earnings. The carrying value of receivables at 31
December 2018 has increased by GBP19.8m with a corresponding
reduction in trade and other receivables.
A summary of the impact of the changes in treatment set out
above in respect of Vanquis Bank and Moneybarn on the group's
primary statements is set out below:
2019 2018
Previous Vanquis As Previously Vanquis As
policy Bank Moneybarn presented disclosed Bank Moneybarn restated
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------- -------- ------------ ----------- ----------- -------- ------------ ------------
Revenue 1,045.6 (7.8) (39.5) 998.3 1,124,4 (5.4) (27.6) 1,091.4
--------- -------- ------------ ----------- ----------- -------- ------------ ------------
Finance costs (72.0) - - (72.0) (91.7) - - (91.7)
Impairment
charges (358.2) - 21.3 (336.9) (410.4) - 13.6 (396.8)
Administrative
and operating
costs (497.1) 18.3 18.2 (460.6) (531.6) 12.0 14.0 (505.6)
--------- -------- ------------ ----------- ----------- -------- ------------ ------------
Total costs (927.3) 18.3 39.5 (869.5) (1,033.7) 12.0 27.6 (994.1)
--------- -------- ------------ ----------- ----------- -------- ------------ ------------
Profit before
tax 118.3 10.5 - 128.8 90.7 6.6 - 97.3
Tax charge (41.8) (2.6) - (44.4) (30.4) (1.6) - (32.0)
Profit for
the year
attributable
to equity
shareholders 76.5 7.9 - 84.4 60.3 5.0 - 65.3
Total
comprehensive
income for
the period 71.8 7.9 - 79.7 43.7 5.0 - 48.7
Basic earnings
per share
(pence) 30.3 3.0 - 33.3 25.2 2.1 - 27.3
Diluted earnings
per share
(pence) 30.1 3.0 - 33.1 25.1 2.1 - 27.2
Amounts
receivables
from customers 2,156.2 31.8 24.6 2,212.6 2,162.9 21.3 19.8 2,204.0
Deferred
tax 32.9 (7.9) - 25.0 38.3 (5.3) - 33.0
Trade and
other
receivables 57.9 - (24.6) 33.3 49.6 - (19.8) 29.8
Share capital 52.5 - - 52.5 52.5 - - 52.5
Share premium 273.2 - - 273.2 273.2 - - 273.2
Other reserves 295.9 - - 295.9 292.1 - - 292.1
Retained
earnings 95.0 23.9 - 118.9 78.3 16.0 - 94.3
--------- -------- ------------ ----------- ----------- -------- ------------ ------------
Total equity 716.6 23.9 - 740.5 696.1 16.0 - 712.1
--------- -------- ------------ ----------- ----------- -------- ------------ ------------
3. Segment reporting
Profit/(loss) before
Revenue tax
2019 2018 2019 2018
(restated) (restated)
GBPm GBPm GBPm GBPm
------ ------------ ---------- ---------------
Vanquis Bank 580.9 644.9 173.5 190.9
Moneybarn 122.0 104.3 30.9 28.1
CCD 295.4 342.2 (20.8) (38.7)
Central costs - - (21.0) (20.2)
------ ------------ ---------- ---------------
Total group before amortisation
of acquisition intangibles and
exceptional items 998.3 1,091.4 162.6 160.1
Amortisation of acquisition intangibles
(note 7) - - (7.5) (7.5)
Exceptional items - - (26.3) (55.3)
------ ------------ ---------- ---------------
Total group 998.3 1,091.4 128.8 97.3
------ ------------ ---------- ---------------
All of the above activities relate to continuing operations.
Revenue between business segments is not significant.
Exceptional items in 2019 represent a net exceptional charge of
GBP26.3m (2018: charge of GBP55.3m) and comprise:
2019 2018
Charge/(credit) GBPm GBPm
------- -----
Bid defence costs associated with NSF's unsolicited
offer for the group 23.8 -
Restructuring costs, primarily in respect of the
ongoing turnaround of CCD 19.3 29.9
Release of provisions in respect of ROP refund
programme (see note 11) (14.2) -
Release of provisions in respect of Moneybarn FCA
investigation (see note 11) (2.6) -
Premium and fees paid on the redemption of senior
bonds - 18.5
Pension charges in respect of the equalisation
of Guaranteed Minimum Pensions (see note 9) - 6.9
Net exceptional charges 26.3 55.3
------- -----
Restructuring costs comprise: (i) CCD costs of GBP14.4m (2018:
GBP29.9m) in relation to the ongoing turnaround of the home credit
business following the migration to the employed operating model in
July 2017, comprising redundancy and other costs of GBP13.0m (2018:
GBP16.7m) , an exceptional impairment charge of GBP1.9m in respect
of intangible assets (2018: GBP13.8m, comprising GBP12.8m in
respect of intangible assets and GBP1.0m in respect of property,
plant and equipment) and an exceptional pension credit of GBP0.5m
(2018: GBP0.6m); and (ii) redundancy and other one-off costs in
respect of central activities and Vanquis Bank of GBP3.1m (2018:
GBPnil) and GBP1.8m (2018: GBPnil) respectively.
Segment net
Segment assets assets/(liabilities)
2019 2018 2019 2018
(restated) (restated)
GBPm GBPm GBPm GBPm
---------- ------------- ----------- ------------------
Vanquis Bank 1,889.5 1,974.7 397.3 397.3
Moneybarn 541.0 438.9 39.6 17.0
CCD 284.9 342.6 (59.9) (9.5)
Central 443.3 368.7 363.5 307.3
---------- ------------- ----------- ------------------
Total before intra-group elimination 3,158.7 3,124.9 740.5 712.1
Intra-group elimination (237.9) (187.7) - -
---------- ------------- ----------- ------------------
Total group 2,920.8 2,937.2 740.5 712.1
---------- ------------- ----------- ------------------
The presentation of segment net assets reflects the statutory
assets, liabilities and net assets of each of the group's
divisions. This results in an intra group elimination reflecting
the difference between the central intercompany funding provided to
the divisions and the external funding raised centrally.
The group's businesses operate principally in the UK and
Republic of Ireland.
4. Tax charge
The tax charge in the income statement is as follows:
2018
2019 (restated)
GBPm GBPm
------- ------------
Current tax:
- UK (34.4) (32.3)
- overseas - 0.3
------- ------------
Total current tax (34.4) (32.0)
Deferred tax (10.3) 0.5
Impact of change in UK tax rate 0.3 (0.5)
Total tax charge (44.4) (32.0)
------- ------------
The tax charge in respect of exceptional costs in 2019 amounts
to GBP2.9m (2018: credit of GBP10.2m) and represents: (i) tax
relief of GBP3.7m in respect of the exceptional restructuring costs
in CCD and the wider group (2018: GBP5.5m); (ii) tax relief of
GBP0.1m in respect of exceptional costs associated with the defence
of the unsolicited offer from NSF (2018: GBPnil); (iii) a tax
charge of GBP6.0m which represents tax at the combined mainstream
corporation tax rate and bank corporation tax surcharge rate of 27%
in respect of the GBP14.2m exceptional release of provisions
established in 2017 following completion of the refund programme in
respect of ROP and a re-evaluation of the forward flow of claims
that may arise in respect of ROP complaints more generally, as well
as tax at 27% on the 10% deemed taxable receipt on customer balance
reductions related to charged off accounts which are treated as
bank compensation payments as well as tax on the release of the
related impairment provision (2018: GBPnil); and (iv) a tax charge
of GBP0.7m in respect of the GBP2.6m release of provisions
established in 2017 following completion of the FCA investigation
into affordability, forbearance and termination options at
Moneybarn. The tax credit in 2018 also comprised: (i) tax relief of
GBP3.5m in respect of the premium and fees paid on redemption of
senior bonds; and (ii) tax relief of GBP1.2m in respect of the GMP
equalisation charge in respect of the group's defined benefit
scheme.
The tax credit in respect of the amortisation of acquisition
intangibles amounts to GBP1.3m (2018: GBP1.3m).
The effective tax rate for 2019, prior to the amortisation of
acquisition intangibles and exceptional items, is 26.3% (2018
(restated): 27.2%).
In addition to the introduction of bank corporation tax
surcharge with effect from 1 January 2016, during 2015, changes
were also enacted reducing the mainstream corporation tax rate from
20% to 19% with effect from 1 April 2017 and from 19% to 18% with
effect from 1 April 2020. In 2016, a further change was enacted,
which further reduced the mainstream corporation tax rate from 18%
to 17% with effect from 1 April 2020. Deferred tax balances at 31
December 2019 have been measured at 17% (2018: 17%) and, in the
case of Vanquis Bank, at the combined mainstream UK corporation tax
and bank corporation tax surcharge rates of 25% (2018: 25%) to the
extent that the temporary differences on which deferred tax has
been calculated are expected to reverse after 1 April 2020 (2018: 1
April 2020). In 2019, movements in deferred tax balances have been
measured at the mainstream corporation tax rate for the year of
19.0% (2018: 19.0%), and, in the case of Vanquis Bank, at the
combined mainstream UK corporation tax and bank corporation tax
surcharge rates for the year of 27.0% (2018: 27.0%). A tax credit
of GBP0.3m (2018 (restated): charge of GBP0.5m) represents the
income statement adjustment to deferred tax as a result of these
changes and an additional deferred tax charge of GBP0.1m (2018:
charge of GBP0.7m) has been taken directly to other comprehensive
income in respect of items reflected directly in other
comprehensive income.
The tax credit on items taken directly to other comprehensive
income is as follows:
2019 2018
GBPm GBPm
------ ------
Deferred tax charge on fair value movements in investments (1.2) (0.5)
Deferred tax credit on actuarial movements on retirement
benefit asset 1.8 4.1
------ ------
Tax credit on items taken directly to other comprehensive
income prior to impact of change in UK tax rate 0.6 3.6
Impact of change in UK tax rate (0.1) (0.7)
------ ------
Total tax credit on items taken directly to other
comprehensive income 0.5 2.9
------ ------
The deferred tax charge of GBP1.2m (2018: charge of GBP0.5m) on
the fair value movements in investments represents the deferred tax
at the combined mainstream corporation tax and bank corporation tax
surcharge rates of 27.0% (2018: 27.0%) on the change in the
valuation of the Visa Inc. preferred stock during the year.
The movement in deferred tax asset during the year can be
analysed as follows:
2018
2019 (restated)
GBPm GBPm
------- ------------
At 1 January as previously reported 33.0 33.8
Charge on prior year adjustment in respect of directly
attributable acquisition costs
(note 2) - (3.7)
Credit on adjustment arising on transition to IFRS
16 (note 2) 1.5 -
At 1 January as restated 34.5 30.1
(Charge)/credit to the income statement (10.3) 0.5
Credit on other comprehensive income prior to impact
of change in UK tax rate 0.6 3.6
Impact of change in UK tax rate:
- credit/(charge) to the income statement 0.3 (0.5)
- charge to other comprehensive income (0.1) (0.7)
At 31 December 25.0 33.0
------- ------------
The deferred tax charge of GBP3.7m at 1 January 2018 represents
deferred tax at the combined mainstream corporation tax and the
bank corporation tax surcharge rate on the opening balance sheet
adjustment in respect of the change of accounting treatment of
directly attributable acquisition costs in Vanquis Bank which is
taxable over 10 years.
The deferred tax credit of GBP1.5m at 1 January 2019 represents
deferred tax at the mainstream rate of corporation tax and, in the
case of Vanquis Bank, at the combined mainstream corporation tax
and the bank corporation tax surcharge rate on the opening balance
sheet adjustment in respect of the adoption of IFRS 16 'Leases'
which is deductible over the average remaining term of the relevant
leases.
The rate of tax charge on the profit (2018: profit) before
taxation for the year is higher than (2018: higher than) the
average rate of mainstream corporation tax in the UK of 19.00%
(2018: 19.00%). This can be reconciled as follows:
2018
2019 (restated)
GBPm GBPm
------- ------------
Profit before taxation 128.8 97.3
------- ------------
Profit before taxation multiplied by the average
rate of mainstream corporation tax in the UK of 19.00%
(2018: 19.00%) (24.5) (18.5)
Effects of:
- impact of lower tax rates overseas (1.1) (0.4)
- adjustment in respect of prior years 0.7 1.2
- non-deductible general expenses net of non-taxable
income 0.2 (0.1)
- non-deductible bid defence costs (4.5) -
- non-deductible bank compensation payments (1.4) -
- additional 10% of bank compensation payments (0.2) -
- impact of change in UK tax rate 0.3 (0.5)
- impact of bank corporation tax surcharge (13.9) (13.7)
Total tax charge (44.4) (32.0)
------- ------------
The home credit business in the Republic of Ireland is subject
to tax at the Republic of Ireland statutory tax rate of 12.5%
(2018: 12.5%) rather than the UK statutory mainstream corporation
tax rate of 19.0% (2018: 19.0%). In 2019, the home credit business
in the Republic of Ireland made a loss (2018: loss) which can only
be relieved against profits of the business in the Republic of
Ireland at the 12.5% statutory tax rate rather than the 19.0% UK
statutory tax rate. No deferred tax has been recognised in respect
of this loss giving rise to a total adverse impact on the group tax
charge of GBP1.1m in 2019 (2018: GBP0.4m).
The GBP0.7m credit (2018: GBP1.2m) in respect of prior years
represents the benefit of resolving historic tax liabilities net of
the release of part of the provision for uncertain tax liabilities
and, in the case of 2018, also securing tax deductions for employee
share awards which are higher than those originally
anticipated.
Most of the costs associated with the defence of the unsolicited
offer from NSF are, at this point, considered to be non-tax
deductible in computing the group's taxable profits. This gives
rise to an adverse impact on the tax charge of GBP4.5m in 2019
(2018: GBPnil).
The additional balance reductions related to charged off
accounts, net of the release of provisions related to balance
reductions and settlements on other accounts which have arisen
following completion of the refund programme in respect of ROP, are
treated as bank compensation payments and are therefore
non-deductible in computing Vanquis Bank's profits for tax
purposes. This gives rise to an adverse impact on the tax charge of
GBP1.4m (2018: GBPnil). It also gives rise to an additional 10%
deemed taxable receipt under the bank compensation provisions on
the additional balance reductions related to charged off accounts.
This gives rise to an adverse impact on the tax charge of GBP0.2m
(2018: GBPnil).
The adverse impact of the bank corporation tax surcharge amounts
to GBP13.9m (2018 (restated): GBP13.7m) and represents tax at the
bank corporation tax surcharge rate of 8% on Vanquis Bank's taxable
profits in excess of GBP25m where taxable profits are calculated
after adding back bank compensation payments, the 10% deemed
taxable receipt, the FCA fine and other add backs.
5. Earnings per share
Basic earnings per share is calculated by dividing the profit
for the year attributable to equity shareholders by the weighted
average number of ordinary shares outstanding during the year. The
weighted average number of shares in the period prior to the rights
issue in April 2018 has been adjusted to take account of the bonus
element of the rights issue of 1.367 in accordance with IAS 33
'Earnings per share'.
Diluted earnings per share calculates the effect on earnings per
share assuming conversion of all dilutive potential ordinary
shares. Dilutive potential ordinary shares are calculated as
follows:
(i) For share awards outstanding under performance-related share
incentive schemes such as the Performance Share Plan (PSP) and the
Long Term Incentive Scheme (LTIS), the number of dilutive potential
ordinary shares is calculated based on the number of shares which
would be issuable if: (i) the end of the reporting period is
assumed to be the end of the schemes' performance period; and (ii)
the performance targets have been met as at that date.
(ii) For share options outstanding under non-performance related
schemes such as the Save As You Earn scheme (SAYE), a calculation
is performed to determine the number of shares that could have been
acquired at fair value (determined as the average annual market
share price of the group's shares) based on the monetary value of
the subscription rights attached to outstanding share options. The
number of shares calculated is compared with the number of share
options outstanding, with the difference being the dilutive
potential ordinary shares.
Potential ordinary shares are treated as dilutive when, and only
when, their conversion to ordinary shares would decrease earnings
per share or increase loss per share.
Reconciliations of basic and diluted earnings per share are set
out below:
2019 2018 (restated)
Weighted Weighted
average Per average Per
number share number share
Earnings of shares amount Earnings of shares amount
GBPm m pence GBPm m pence
----------- ----------- --------- ----------- ----------- ---------
Basic earnings per share 84.4 253.4 33.3 65.3 239.5 27.3
Dilutive effect of share
options and awards - 1.9 (0.2) - 0.7 (0.1)
----------- ----------- --------- ----------- ----------- ---------
Diluted earnings per share 84.4 255.3 33.1 65.3 240.2 27.2
----------- ----------- --------- ----------- ----------- ---------
The directors have elected to show an adjusted earnings per
share prior to the amortisation of acquisition intangibles which
arose on the acquisition of Moneybarn in August 2014 and prior to
exceptional items (see note 3). This is presented to show the
earnings per share generated by the group's underlying operations.
A reconciliation of basic and diluted earnings per share to
adjusted basic and diluted earnings per share is as follows:
2019 2018 (restated)
Weighted Weighted
average Per average Per
number share number share
Earnings of shares amount Earnings of shares amount
GBPm m pence GBPm m pence
----------- ----------- --------- ----------- ----------- ---------
Basic earnings per share 84.4 253.4 33.3 65.3 239.5 27.3
Amortisation of acquisition
intangibles, net of tax 6.2 - 2.5 6.2 - 2.6
Exceptional items, net
of tax 29.1 - 11.5 45.1 - 18.8
----------- ----------- --------- ----------- ----------- ---------
Adjusted basic earnings
per share 119.7 253.4 47.3 116.6 239.5 48.7
----------- ----------- --------- ----------- ----------- ---------
Diluted earnings per share 84.4 255.3 33.1 65.3 240.2 27.2
Amortisation of acquisition
intangibles, net of tax 6.2 - 2.4 6.2 - 2.6
Exceptional items, net
of tax 29.1 - 11.4 45.1 - 18.8
----------- ----------- --------- ----------- ----------- ---------
Adjusted diluted earnings
per share 119.7 255.3 46.9 116.6 240.2 48.6
----------- ----------- --------- ----------- ----------- ---------
6. Dividends
2019 2018
GBPm GBPm
------- -------
2018 final - 10.0p per share 25.1 -
2019 interim - 9.0p per share 22.5 -
Total dividends paid 47.6 -
------- -------
The directors are recommending a final dividend in respect of
the financial year ended 31 December 2019 of 16.0p per share (2018:
10.0p) which will amount to an estimated dividend payment of
GBP40.5m (2018: GBP25.1m). If approved by the shareholders at the
annual general meeting on 7 May 2020, this dividend will be paid on
22 May 2020 to shareholders who are on the register of members at 3
April 2020. This dividend is not reflected in the balance sheet as
at 31 December 2019 as it is subject to shareholder approval.
7. Other intangible assets
2019 2018
Acquisition Computer Acquisition Computer
intangibles software Total intangibles software Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------- ---------- ------- ------------- ---------- -------
Cost
At 1 January 75.0 76.2 151.2 75.0 92.1 167.1
Additions - 7.4 7.4 - 7.6 7.6
Disposals - (18.2) (18.2) - (23.5) (23.5)
------------- ---------- ------- ------------- ---------- -------
At 31 December 75.0 65.4 140.4 75.0 76.2 151.2
------------- ---------- ------- ------------- ---------- -------
Accumulated amortisation
and impairment
At 1 January 32.5 63.7 96.2 25.0 62.7 87.7
Charged to the income statement 7.5 8.9 16.4 7.5 11.7 19.2
Exceptional impairment charge
(note 3) - 1.9 1.9 - 12.8 12.8
Disposals - (18.2) (18.2) - (23.5) (23.5)
------------- ---------- ------- ------------- ---------- -------
At 31 December 40.0 56.3 96.3 32.5 63.7 96.2
------------- ---------- ------- ------------- ---------- -------
Net book value
At 31 December 35.0 9.1 44.1 42.5 12.5 55.0
------------- ---------- ------- ------------- ---------- -------
At 1 January 42.5 12.5 55.0 50.0 29.4 79.4
------------- ---------- ------- ------------- ---------- -------
Acquisition intangibles represents the fair value of the broker
relationships arising on acquisition of Moneybarn on 20 August
2014. The intangible asset has been calculated based on the
discounted cash flows associated with Moneybarn's core broker
relationships and is being amortised over an estimated useful life
of 10 years .
8. Amounts receivable from customers
2019 2018
(restated)
GBPm GBPm
-------- ------------
Vanquis Bank 1,461.5 1,495.1
Moneybarn 502.1 416.4
CCD 249.0 292.5
Total group 2,212.6 2,204.0
Analysed as:
- due in more than one year 418.3 364.8
- due within one year 1,794.3 1,839.2
Total group 2,212.6 2,204.0
-------- ------------
Vanquis Bank receivables comprise GBP1,432.6m (2018 (restated):
GBP1,469.1m) in respect of credit cards and GBP28.9m (2018:
GBP26.0m) in respect of loans. The balance at 31 December 2019 is
stated net of an estimated balance reduction provision of GBPnil
(2018: GBP3.7m) in respect of the FCA investigation into ROP.
CCD receivables comprise GBP205.8m in respect of the home credit
business (2018: GBP253.0m) and GBP43.2m in respect of Satsuma
(2018: GBP39.5m).
Moneybarn receivables are stated net of an estimated balance
reduction provision of GBPnil (2018: GBP1.8m) in respect of the FCA
investigation into affordability, forbearance and termination
options.
An analysis of receivables by IFRS 9 stages is set out
below:
2019
Stage 1 Stage 2 Stage Total
3
GBPm GBPm GBPm GBPm
-------- -------- -------- --------
Gross receivables
Vanquis Bank 1,367.9 171.6 363.6 1,903.1
Moneybarn 335.4 188.4 63.0 586.8
CCD 155.9 36.0 402.0 593.9
-------- -------- -------- --------
Total group 1,859.2 396.0 828.6 3,083.8
-------- -------- -------- --------
Allowance account
Vanquis Bank (146.6) (85.2) (209.8) (441.6)
Moneybarn (9.5) (35.8) (39.4) (84.7)
CCD (10.4) (10.1) (324.4) (344.9)
Total group (166.5) (131.1) (573.6) (871.2)
-------- -------- -------- --------
Net receivables
Vanquis Bank 1,221.3 86.4 153.8 1,461.5
Moneybarn 325.9 152.6 23.6 502.1
CCD 145.5 25.9 77.6 249.0
-------- -------- -------- --------
Total group 1,692.7 264.9 255.0 2,212.6
-------- -------- -------- --------
2018 (restated)
Stage 1 Stage 2 Stage Total
3
GBPm GBPm GBPm GBPm
-------- -------- -------- ----------
Gross receivables
Vanquis Bank 1,303.3 174.7 519.8 1,997.8
Moneybarn 292.8 130.7 117.3 540.8
CCD 183.6 48.4 493.6 725.6
-------- -------- -------- ----------
Total group 1,779.7 353.8 1,130.7 3,264.2
-------- -------- -------- ----------
Allowance account
Vanquis Bank (187.0) (58.7) (257.0) (502.7)
Moneybarn (9.2) (28.4) (86.8) (124.4)
CCD (12.0) (12.9) (408.2) (433.1)
Total group (208.2) (100.0) (752.0) (1,060.2)
-------- -------- -------- ----------
Net receivables
Vanquis Bank 1,116.3 116.0 262.8 1,495.1
Moneybarn 283.6 102.3 30.5 416.4
CCD 171.6 35.5 85.4 292.5
-------- -------- -------- ----------
Total group 1,571.5 253.8 378.7 2,204.0
-------- -------- -------- ----------
The movement in directly attributable acquisition costs included
within amounts receivable from customers can be analysed as
follows:
2019 2018
Vanquis
Vanquis CCD Total Bank Moneybarn CCD Total
Bank Moneybarn (restated) (restated) (restated)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------- ---------- ------ -------- ------------ ------------- ------ -------------
Brought forward 21.3 19.8 1.3 42.4 14.7 15.5 1.0 31.2
Capitalised 18.3 23.0 8.8 50.1 12.0 18.3 4.4 34.7
Amortised (7.8) (18.2) (8.2) (34.2) (5.4) (14.0) (4.1) (23.5)
Carried forward 31.8 24.6 1.9 58.3 21.3 19.8 1.3 42.4
-------- ---------- ------ -------- ------------ ------------- ------ -------------
The impairment charge in respect of amounts receivable from
customers can be analysed as follows:
2018
2019 (restated)
GBPm GBPm
------ ------------
Vanquis Bank 198.9 241.6
Moneybarn 41.8 34.4
CCD 96.2 120.8
Total group 336.9 396.8
------ ------------
9. Retirement benefit asset
The group operates a defined benefit pension scheme: the
Provident Financial Staff Pension Scheme. The scheme is of the
funded, defined benefit type and has been substantially closed to
new members since 1 January 2003.
All future benefits in the scheme are now provided on a 'cash
balance' basis, with a defined amount being made available at
retirement, based on a percentage of salary that is revalued up to
retirement with reference to increases in price inflation. This
retirement account is then used to purchase an annuity on the open
market. The scheme provides pension benefits which were accrued in
the past on a final salary basis, but which are no longer linked to
final salary. The scheme also provides death benefits.
The scheme is a UK registered pension scheme under UK
legislation. The scheme is governed by a Trust Deed and Rules, with
trustees responsible for the operation and the governance of the
scheme. The trustees work closely with the group on funding and
investment strategy decisions. The most recent actuarial valuation
of the scheme was carried out as at 1 June 2018 by a qualified
independent actuary. The valuation used for the purposes of IAS 19
'Employee benefits' has been based on the 2018 valuation to take
account of the requirements of IAS 19 in order to assess the
liabilities of the scheme at the balance sheet date. Scheme assets
are stated at fair value as at the balance sheet date.
The group is entitled to a refund of any surplus, subject to
tax, if the scheme winds up after all benefits have been paid.
The net retirement benefit asset recognised in the balance sheet
of the group is as follows:
2019 2018
GBPm GBPm
-------- --------
Fair value of scheme assets 842.6 788.3
Present value of defined benefit obligation (764.6) (704.4)
-------- --------
Net retirement benefit asset recognised in the balance
sheet 78.0 83.9
-------- --------
The amounts recognised in the income statement were as
follows:
2019 2018
GBPm GBPm
------- --------
Current service cost (1.7) (2.7)
Interest on scheme liabilities (19.5) (17.4)
Interest on scheme assets 21.9 19.9
------- --------
Net credit/(charge) recognised in the income statement
before exceptional past service credit/(charge) 0.7 (0.2)
------- --------
Exceptional past service charge - Plan amendment
(note 3) - (6.9)
Exceptional past service credit - Curtailment credit
(note 3) 0.5 0.6
------- --------
Exceptional past service credit/(charge) 0.5 (6.3)
------- --------
Net credit/(charge) recognised in the income statement 1.2 (6.5)
------- --------
The net credit/(charge) recognised in the income statement has
been included within administrative and operating costs.
Movements in the fair value of scheme assets were as
follows:
2019 2018
GBPm GBPm
------- -------
Fair value of scheme assets at 1 January 788.3 835.5
Interest on scheme assets 21.9 19.9
Actuarial movements on scheme assets 67.4 (31.3)
Contributions by the group 2.6 9.8
Net benefits paid out (37.6) (45.6)
------- -------
Fair value of scheme assets at 31 December 842.6 788.3
------- -------
Movements in the present value of the defined benefit obligation
were as follows:
2019 2018
GBPm GBPm
-------- --------
Present value of defined benefit obligation at 1
January (704.4) (733.2)
Current service cost (1.7) (2.7)
Interest on scheme liabilities (19.5) (17.4)
Exceptional past service charge - Plan amendment
(note 3) - (6.9)
Exceptional past service credit - Curtailment credit
(note 3) 0.5 0.6
Actuarial movement - experience 0.1 (9.1)
Actuarial movement - demographic assumptions 19.9 (31.4)
Actuarial movement - financial assumptions (97.1) 50.1
Net benefits paid out 37.6 45.6
-------- --------
Present value of defined benefit obligation at 31
December (764.6) (704.4)
-------- --------
The principal actuarial assumptions used at the balance sheet
date were as follows:
2019 2018
% %
----- -----
Price inflation - RPI 2.95 3.30
Price inflation - CPI 2.05 2.20
Rate of increase to pensions in payment 2.70 3.00
Inflationary increases to pensions in deferment 2.10 2.20
Discount rate 2.00 2.80
----- -----
A 0.1% change in the discount and inflation rates would change
the present value of the defined benefit obligation by
approximately GBP14m (2018: GBP12m) and GBP6m (2018: GBP5m)
respectively.
The mortality assumptions are based on the self-administered
pension scheme (SAPS) series 2 tables (2018: series 1 tables), with
multipliers of 96% (2018: 96%) and 101% (2018: 101%) respectively
for males and females. The 4% downwards (2018: 4%) adjustment to
mortality rates for males and a 1% upwards (2018: 1%) adjustment
for females reflects higher life expectancies for males and lower
life expectancies for females within the scheme compared to average
pension schemes following an updated study of the scheme's
membership. Future improvements in mortality are based on the
Continuous Mortality Investigation (CMI) 2018 model with a
long-term improvement trend of 1.25% per annum. Under these
mortality assumptions, the life expectancies of members are as
follows:
Male Female
2019 2018 2019 2018
years Years Years years
------------ ----------- ------------ -----------
Current pensioner aged 65 21.8 22.2 23.3 23.8
Current member aged 45 from
age 65 23.1 23.6 24.8 25.3
------------ ----------- ------------ -----------
If assumed life expectancies were one year greater, the net
retirement benefit asset would have been reduced by approximately
GBP38m (2018: GBP 30 m).
An analysis of amounts recognised in the statement of
comprehensive income is set out below:
2019 2018
GBPm GBPm
------- -------
Actuarial movements on scheme assets 67.4 (31.3)
Actuarial movements on scheme liabilities (77.1) 9.6
------- -------
Actuarial movements recognised in the statement
of comprehensive income in the period (9.7) (21.7)
------- -------
10. Investments
2019 2018
GBPm GBPm
----- -----
Government gilts - 35.7
Visa Inc. shares 16.6 12.1
----- -----
16.6 47.8
----- -----
Government gilts
Government gilts in 2018 comprised UK government gilts which
formed part of the liquid assets buffer and other liquid resources
held by Vanquis Bank in accordance with the PRA's liquidity regime.
Vanquis Bank's total liquid assets buffer and other liquid
resources, held in accordance with the PRA's liquidity regime
together with an additional operational buffer, amounted to
GBP321.9m (2018: GBP420.6m) . This includes GBP321.9m (2018:
GBP384.9m) held in cash and cash equivalents.
Visa Inc. shares
The Visa shares represent preferred stock in Visa Inc. held by
Vanquis Bank following completion of Visa Inc.'s acquisition of
Visa Europe Limited on 21 June 2016. In consideration for Vanquis
Bank's interest in Visa Europe Limited, Vanquis Bank received cash
consideration of EUR15.9m (GBP12.2m) on completion, preferred stock
with an approximate value of EUR10.7m and deferred cash
consideration of EUR1.4m which was due, and received, on the third
anniversary of the completion date in June 2019. The preferred
stock is convertible into Class A common stock of Visa Inc. at a
future date, subject to certain conditions.
The fair value of the preferred stock in Visa Inc. held by
Vanquis Bank as at 31 December 2019 of GBP16.6m (2018: GBP12.1m) is
held at fair value through the OCI . The increase in the fair value
of the investment during the year of GBP4.5m (2018: GBP2.2m) in
respect of the movement in the Visa Inc. share price and the
movement in foreign exchange rates has been recognised in the
statement of comprehensive income.
The valuation of the preferred stock has been determined using
the common stock's value as an approximation as both classes of
stock have similar dividend rights. However, adjustments have been
made for: (i) illiquidity, as the preferred stock is not tradeable
on an open market and can only be transferred to other VISA
members; and (ii) future litigation costs which could affect the
valuation of the stock prior to conversion.
11. Provisions
2019 2018
GBPm GBPm
------- -------
At 1 January 53.2 104.6
Used during the year (21.9) (62.2)
Released during the year (16.8) -
Reclassification from balance reduction provisions - 10.8
At 31 December 14.5 53.2
------- -------
Vanquis Bank
On 27 February 2018, Vanquis Bank agreed a settlement with the
FCA into their investigation into ROP. The investigation concluded
that Vanquis Bank did not adequately disclose in its sales calls
that the charges for ROP would be treated as a purchase transaction
and therefore potentially incur interest. The total estimated cost
of settlement amounted to GBP172.1m and was reflected in the 2017
financial statements, of which GBP75.4m was reflected as a balance
adjustment to receivables with the remaining GBP96.7m reflected as
a provision. The provision comprised: (i) cash settlements to
customers of GBP51.7m; (ii) higher expected forward flow of ROP
complaints more generally in respect of which compensation may need
to be paid of GBP30.7m; (iii) administration costs of GBP12.3m; and
(iv) the fine levied by the FCA of just under GBP2.0m.
The ROP refund programme was completed in 2019 with over 1.3
million current and former ROP customers refunded. As a result, the
provision has reduced from GBP45.7m at 31 December 2018 to GBP11.7m
at 31 December 2019 reflecting: (i) cash settlements and
administration costs of GBP19.8m (2018: GBP61.8m); and (ii) the
release of GBP14.2m of the provisions originally established in
2017 as an exceptional credit (see note 3) following completion of
the refund programme and a re-evaluation of the forward flow of
claims that may arise in respect of ROP complaints more generally .
The balance reduction provision has also reduced from GBP3.7m at
the end of 2018 to GBPnil at 31 December 2019 (see note 8).
The remaining ROP provision principally reflects the estimated
cost of the forward flow of ROP complaints more generally in
respect of which compensation may need to be paid . The provision
is calculated using a number of key assumptions:
-- Customer complaints volumes - an estimate of future claims
which may be initiated by customers where the volume is anticipated
to cease after 31 December 2021;
-- Average claim redress - the expected average payment to customers for upheld claims; and
-- Customer and FOS complaints upheld rates - the number of
claims redressed as a percentage of total claims received.
These assumptions involve management judgement and are
subjective, particularly in respect of the uncertainty associated
with future claims levels. It is therefore possible that the
eventual outcome may differ from the current estimate. A +/- 10%
variation in customer complaints volumes would result in a GBP1.0m
increase/decrease in provisions, a +/- 10% variation in average
claim redress would result in a GBP1.0m increase/decrease in
provisions and a+/- 10% variation in upheld rate would result in a
GBP1.8m increase/decrease in provisions.
Moneybarn
In the 2017 financial statements, a provision of GBP20.0m was
reflected in respect of the FCA's investigation into affordability,
forbearance and termination options at Moneybarn. The provision
comprised a GBP12.1m balance adjustment to receivables with the
remaining GBP7.9m reflected as a provision in respect of potential
cash restitution, administration costs and an FCA fine.
The redress required to resolve the issues arising in respect of
the FCA investigation into affordability, forbearance and
termination options was completed in the third quarter of 2019 and
Moneybarn has now received the final notice from the FCA. As a
result, the provision has reduced from GBP7.5m at 31 December 2018
to GBP2.8m at 31 December 2019 in respect of: (i) refund activity
and the costs of the investigation of GBP2.1m; and (ii) the release
of GBP2.6m of the provision as an exceptional credit (see note 3)
following receipt of the final notice. The remaining provision of
GBP2.8m at 31 December 2019 relates to the fine included in the
final notice. The balance reduction provision has also reduced from
GBP1.8m at the end of 2018 to GBPnil at 31 December 2019 (see note
8).
12. Reconciliation of profit after tax to cash generated from operations
2019 2018
(restated)
GBPm GBPm
------- ------------
Profit after tax 84.4 65.3
Adjusted for:
- tax charge (note 4) 44.4 32.0
- finance costs before exceptional premium and fees
paid on refinancing of senior bonds 72.0 73.2
- exceptional premium and fees paid on refinancing
of senior bonds (note 3) - 18.5
- share-based payment charge 1.9 1.1
* retirement benefit (credit)/charge before exceptional
past service (credit)/charge (note 9) (0.7) 0.2
* exceptional past service (credit)/charge in respect
of retirement benefit pension scheme (note 9) (0.5) 6.3
- amortisation of intangible assets (note 7) 16.4 19.2
- exceptional impairment of intangible assets (note
7) 1.9 12.8
- depreciation of property, plant and equipment
and right of use assets 24.6 9.1
- loss on disposal of property, plant and equipment 2.2 -
- exceptional impairment of property, plant and
equipment and (note 3) - 1.0
- exceptional release of provisions (note 11) (16.8) -
Changes in operating assets and liabilities:
- amounts receivable from customers (8.6) (91.7)
- trade and other receivables (3.5) (1.9)
- trade and other payables (2.5) (5.9)
- contributions into the retirement benefit scheme
(note 9) (2.6) (9.8)
- provisions (note 11) (21.9) (62.2)
Cash generated from operations 190.7 67.2
------- ------------
13. Contingent liabilities
Challenge to self-employed status of UK home credit agents
It is understood from discussions with HMRC that they have
commenced an industry wide review of the self-employed status of
agents.
In July 2017, the group changed its home credit operating model
in the UK from a self-employed agent model to an employed workforce
to take direct control of all aspects of the customer relationship.
Policies and procedures were in place up to the transition to the
new operating model to ensure that the relationship between the
business and the agents it engaged were such that self-employed
status was maintained. Compliance with policies was routinely
evidenced and tested. To date, the group has successfully defended
claims and challenges against the historic employment status of the
group's UK home credit agents although there can be no guarantee
that this will also be the case with future claims and
challenges.
The group's discussions with HMRC, which are focusing on the
period from when the FCA took over responsibility for the
regulation of consumer credit in April 2014 to the change of
operating model in July 2017, remain in the initial fact-finding
stages. The group is working positively and collaboratively with
HMRC who have indicated that the review could continue for another
year.
Were the group to be unsuccessful in defending the historic
self-employed position of agents, it may be required to pay
additional taxes, in particular employer's national insurance
contributions, on the approximate GBP80 million per annum
commission it paid to agents in the UK for the years concerned. As
discussions with HMRC remain in the preliminary stages and the
group does not know the amounts of tax and national insurance
contributions paid by agents though self-assessment which are
available for offset, it is difficult to calculate an accurate
liability should the group be unsuccessful in defending the
position.
The group has worked with HMRC over many years to manage
employment status risk and it remains confident that agents were
self-employed as a matter of law throughout their engagement by the
home credit business.
Irresponsible lending complaints and the Financial Ombudsman
Service (FOS)
There continues to be heightened claims management company
activity around non-standard lending sectors, particularly in
respect of irresponsible lending in high-cost credit and more
recently in home credit. As a result, CCD has seen an increase in
the number and cost of such complaints and an increase in referrals
to the FOS, particularly in the first half of 2019. CCD continues
to robustly defend inappropriate or unsubstantiated claims and is
working closely with the FOS in this regard. Complaints of
irresponsible lending and referrals to the FOS stabilised during
the second half of 2019.
CCD incurs the cost of settling complaints as part of its normal
business as usual activity. However, were the group to be
unsuccessful in defending certain irresponsible lending complaints
referred to above, it may lead to a material increase in the cost
of settling such complaints. It is not possible to calculate the
aggregated increased cost of such a scenario.
Other legal actions and regulatory matters
In addition, during the ordinary course of business the group is
subject to other complaints and threatened or actual legal
proceedings (including class or group action claims) brought by or
on behalf of current or former employees, agents, customers,
investors or other third parties, as well as legal and regulatory
reviews, challenges, investigations and enforcement actions, both
in the UK and overseas. All such material matters are periodically
reassessed, with the assistance of external professional advisers
where appropriate, to determine the likelihood of the group
incurring a liability. In those instances where it is concluded
that it is more likely than not that a payment will be made, a
provision is established to management's best estimate of the
amount required at the relevant balance sheet date. In some cases
it will not be possible to form a view, for example because the
facts are unclear or because further time is needed properly to
assess the merits of the case, and no provisions are held in
relation to such matters. However, the group does not currently
expect the final outcome of any such case to have a material
adverse effect on its financial position, operations or cash
flows.
14. Post balance sheet events
The group successfully signed a bilateral securitisation
facility with NatWest Markets to fund Moneybarn business flows on
14 January 2020. The new facility provides up to GBP100m of initial
funding and is anticipated to grow to GBP275m over the next 18
months. As a part of obtaining consent for the securitisation from
the group's existing lenders, the group's revolving syndicated
credit facility has reduced from GBP235m to GBP211m and the group
repaid early the remaining M&G loan facility of GBP25m on 14
February 2020.
Directors' responsibility statement
Each of Patrick Snowball, Chairman; Malcolm Le May, Chief
Executive Officer; Simon Thomas, Chief Financial Officer; Andrea
Blance, Senior independent non-executive director; Angela Knight,
non-executive director; Paul Hewitt, non-executive director;
Elizabeth Chambers, non-executive director; Robert East,
non-executive director; and Graham Lindsay, non-executive director,
confirms that, to the best of his or her knowledge that:
(i) the group financial statements which have been prepared in
accordance with IFRS as adopted by the EU, give a true and fair
view of the assets, liabilities, financial position and profit of
the group, the company and the undertakings included in the
consolidation taken as a whole; and
(ii) the Strategic Report contained in the 2019 Annual Report
and Financial Statements includes a fair review of the development
and performance of the business and the position of the company and
group, and the undertakings included in the consolidation taken as
a whole, and a description of the principal risks and uncertainties
they face.
Information for shareholders
1. The shares will be marked ex-dividend on 2 April 2020.
2. The final dividend will be paid on 22 May 2020 to
shareholders on the register at the close of business on 3 April
2020. Dividend warrants/vouchers will be posted on 20 May 2020.
3. The last date for elections to participate in the PFG
Dividend Re-investment Plan for the final dividend is 30 April
2020.
4. The 2019 Annual Report and Financial Statements together with
the notice of the annual general meeting will be posted to
shareholders on or around 24 March 2020.
5. The annual general meeting will be held on 7 May 2020 at the
head office of Provident Financial plc, No. 1 Godwin Street,
Bradford, BD1 2SU.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR EAPAKAFNEEFA
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February 27, 2020 02:00 ET (07:00 GMT)
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