TIDMPFG
RNS Number : 1348X
Provident Financial PLC
26 August 2020
Provident Financial plc
Interim results for the six months ended 30 June 2020
Provident Financial plc ('the Group') is the leading provider of
credit products to consumers who are underserved by mainstream
lenders. The Group serves c.2.2 million customers and its
operations consist of Vanquis Bank, Moneybarn, and the Consumer
Credit Division ('CCD') comprising Provident home credit and
Satsuma.
Key financial results
2020 2019(1)
GBPm GBPm
------- --------
Adjusted profit/(loss) before tax:
- Vanquis Bank 11.8 90.5
- Moneybarn 2.4 15.5
- CCD (37.6) (15.1)
- Central costs (9.2) (10.5)
------- --------
Adjusted (loss)/profit before tax(2) (32.6) 80.4
------- --------
Amortisation of acquisition intangibles (3.7) (3.7)
Exceptional credit/(costs) 8.3 (33.6)
------- --------
(Loss)/profit before tax (28.0) 43.1
------- --------
Adjusted basic EPS(2) (10.1) 23.4
------- --------
Basic EPS (9.1) 9.7
------- --------
Annualised RORE(3) 6.4% 22.9%
------- --------
Malcolm Le May, Chief Executive Officer, commented:
"I would like to thank all my colleagues for their hard work and
compassion in helping our customers through a very difficult period
in their lives. The first six months of this year have been the
most difficult and testing in my career. However, I am very pleased
with how well the Group has responded to the challenges brought
about by Covid-19, and how effectively we have operated. We are
reporting an adjusted loss before tax for the period of GBP32.6m,
this result is better than our initial view of Covid-19's potential
impact on our businesses. Pleasingly, within this number Vanquis
Bank and Moneybarn were both profitable.
Looking forward, our strong financial position will mean that we
can keep helping, and responsibly lending to, our customers, many
of whom are key workers, as we, and they, face the challenge of
furlough support ending and unemployment rising in the coming
months. Provident Financial has performed robustly in the first
half of the year because we focused on our customers, colleagues
and strengthening our balance sheet for the challenges the pandemic
would bring. In fact financial and operational performance were
better than expected, and therefore we have decided to repay all
furlough support to the government. We believe this is the right
thing to do, and on behalf of customers have also advocated the
government should support wider funding for the sector. Our market
will grow due to the pandemic, but at present it appears the supply
of credit into the market is decreasing, which cannot be a good
outcome for customers, nor a public policy one for the UK."
Highlights
Strong capital and liquidity built during H1'20; operational
adaptations to Covid-19 challenges effective
-- Group statutory loss before tax of GBP28.0m (H1'19 PBT:
GBP43.1m(1) ) includes an exceptional provision release of GBP8.3m
(H1'19: GBP33.6m exceptional cost) following the completion of the
ROP refund programme in 2019 and the re-evaluation of the forward
flow of claims that may arise in respect of ROP in future.
-- Group adjusted loss before tax of GBP32.6m (H1'19 PBT:
GBP80.4m(1) ) is favourable to internal plans, created at the
beginning of lockdown.
-- Strong capital and liquidity positions built during the
period with regulatory capital of GBP705m at the end of June, which
equates to a CET1 ratio of 35.4%, and a surplus of GBP215m above
the minimum regulatory requirement.
-- Total Group liquidity at the end of June stood at GBP1.2bn,
including c.GBP1bn held by Vanquis Bank.
-- The Voluntary Requirement (VREQ) entered into by Vanquis Bank
in December 2016, in respect of payments of dividends and loans to
companies within the Group, has been lifted by the Prudential
Regulatory Authority (PRA).
-- In June, a waiver was agreed up to (but excluding) 31
December 2020 and an amendment with respect to its interest cover
covenant on its Revolving Credit Facility (RCF) with the lending
banks.
-- The Group has taken the decision to repay HMRC all money
received to date in respect of the Government's job retention
scheme as well as all deferred tax payments and to not benefit from
future Government support in this respect.
-- The Board is not proposing an interim dividend (H1'19: 9.0p
per share), with the continued aim of preserving capital and
supporting business stability. However, it remains the Group's
intention to resume dividend payments to shareholders as soon as
operational and financial conditions normalise.
Vanquis Bank responded well to the impact of Covid-19; customer
spend trends improving more recently
-- Vanquis Bank reported PBT for the first six months of the
year of GBP11.8m (H1'19 restated: GBP90.5m (1) ), in line with
recently produced internal plans, but lower than last year driven
by the reduction in customer spend and impairment caused by
Covid-19.
-- New customer bookings for the period were 147k (H1'19: 190k).
Decisive action was taken in April to significantly tighten
underwriting and reduce new customer bookings by 75%. New customer
booking has been re-established in July at volumes close to 50% of
pre-Covid-19 levels as scorecards are recalibrated.
-- Customer expenditure trends continue to improve as lockdown
restrictions have eased. In April, spend was 40% lower
year-on-year, but the progressive improvement in customer spending
has continued in the third quarter with the gap to prior year
narrowing to 15% in July and August.
-- Payment holiday take up by Vanquis Bank credit card customers
was c.2% at the end of June representing c.4% of outstanding
balances, comparatively lower than market competitors.
-- The annualised impairment rate at the end of June of 18.0%
(H1'19: 14.9%) reflected additional first half impairment of
approximately GBP70m from the impact of Covid-19 and the adverse
macro-economic outlook.
Moneybarn stayed open for business during lockdown and has seen
new business recover strongly
-- Moneybarn delivered PBT for the period of GBP2.4m (H1'19:
GBP15.5m (1) ) ahead of management plans created post-lockdown but
down year-on-year. The increase in Moneybarn's revenue year-on-year
was offset by increased impairment.
-- Moneybarn remained open to new business throughout April, at
a time when many of its competitors stopped lending, and has
improved its market share, as well as credit quality, as a
result.
-- Demand for used cars has rebounded strongly and new business
volumes have followed suit, with July being a record month with
over 4,500 deals written despite tighter underwriting.
-- Payment holiday take-up by Moneybarn customers peaked at
c.28% of customers and has now reduced to c.3.5% at the end of
July.
-- The annualised impairment rate increased to 12.0% (H1'19:
7.1%) driven by higher arrears across the book and provisions for
the deteriorating macro-economic outlook.
CCD experienced the greatest level of operational challenges but
proved its adaptability & resilience
-- CCD reported a loss before tax (LBT) of GBP37.6m (H1'19 LBT:
GBP15.1m), favourable compared to internal plans but a larger loss
than last year, reflecting a significant reduction in receivables
and an increase in impairment.
-- Customer numbers ended June at c.379k (H1'19: c.531k) driven
by lower customer demand and a reduction in new business.
-- In home credit, collections performance for July was running
at >90% of pre-Covid-19 levels with the split between cash and
remote collections of c.19% and c.81% respectively. Issue values to
existing customers were c.90% of pre-Covid levels in July and c.40%
to new customers, demonstrating our stricter approach to lending
post-lockdown.
-- Receivables at the end of June stood at GBP147m (H1'19:
GBP245m) reflecting lower levels of new lending and better than
expected collections during the first half.
-- Provident Direct (Continuous Payment Authority payment of
loan instalments) was rolled out nationally in the UK by the end of
March, several months ahead of schedule, to provide a
non-face-to-face payment channel.
Enquiries:
Analysts and shareholders:
Owen Jones, Head of Investor
Relations 07341 007842
Owen.jones@providentfinancial.com
Media:
Richard King, Provident Financial 07919 866876
Nick Cosgrove/Simone Selzer,
Brunswick 0207 4045959
providentfinancial@brunswickgroup.com
(1) The 2019 June comparatives have been restated to incorporate
two changes in accounting policies reflected in the 2019 financial
statements: (i) change in treatment of directly attributable
deferred acquisition costs in Vanquis Bank; and (ii) changes in the
recognition of revenue on credit impaired receivables and treatment
of directly attributable acquisition costs in Moneybarn.
(2) Adjusted (Loss)/profit before tax is stated before: (i) GBP
3.7 m of amortisation in respect of acquisition intangibles
established as part of the acquisition of Moneybarn in August 2014
(2019: GBP3.7m); and (ii) an exceptional credit of GBP8.3m (2019:
exceptional cost of GBP33.6m) following the completion of the ROP
refund programme in 2019 and the re-evaluation of the forward flow
of claims that may arise in respect of ROP in future.
(3) Return on average required regulatory capital (RORE)
reflects annualised statutory profit after tax divided by the
annualised average monthly regulatory capital requirement.
Note:
This report may contain certain "forward looking statements"
regarding the financial position, business strategy or plans for
future operations of Provident. All statements other than
statements of historical fact included in this document may be
forward looking statements. Forward looking statements also often
use words such as "believe", "expect", "estimate", "intend",
"anticipate" and words of a similar meaning. By their nature,
forward looking statements involve risk and uncertainty that could
cause actual results to differ from those suggested by them. Much
of the risk and uncertainty relates to factors that are beyond
Provident's ability to control or estimate precisely, such as
future market conditions and the behaviours of other market
participants, and therefore undue reliance should not be placed on
such statements which speak only as at the date of this report.
Provident does not assume any obligation to, and does not intend
to, revise or update these forward looking statements, except as
required pursuant to applicable law or regulation.
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 report.
INTERIM REPORT
Chief Executive Officer's review
Introduction
For January, February and the first three weeks of March, the
Group made good progress against many of its key objectives and Key
Performance Indicators (KPIs) were tracking in line, if not
marginally ahead, of those seen in 2019. Then, from the 23 March
2020, the UK Government ordered that all non-essential travel and
activities should cease immediately because of the threat posed by
Covid-19. This meant that each of the businesses - Vanquis Bank,
Moneybarn and CCD - had to adapt rapidly and introduce new ways of
working. The response was swift and effective, enabling us to
continue supporting our customers whilst ensuring their safety and
that of our colleagues.
At the Capital Markets Day (CMD), in November 2019, my
colleagues and I set out our ambitions for the future of Provident
Financial. These included products and digital initiatives, funding
and capital efficiencies and some medium-term financial targets.
The effects of Covid-19 will, inevitably, delay the timing of these
medium-term targets but it does not mean they must be abandoned
entirely. Encouragingly, Covid-19 has not stopped the Group from
making progress against several strategic objectives: product
initiatives (e.g. Provident Direct) have been delivered ahead of
plan, and we have taken steps to improve the efficiency of the
funding structure, as demonstrated by the Moneybarn securitisation
and the recent tender offer for a portion of the 2023 senior bonds.
Cost efficiency continues to be a key focus and will remain so for
the foreseeable future.
Provident Financial is a responsible lender to consumers whose
needs are not well served by mainstream lenders and we aim to put
people on a path to a better everyday life. Covid-19 has not, and
will not, change this. There continue to be significant growth
opportunities in our current markets. Inevitably, with the UK
economy already in recession, the 10 to 12 million adults in the
UK, who sit outside of prime, high street bank risk appetites, will
increase and, at the same time, the supply of credit into this
segment of the market will decrease as funding and capital
constraints impact many of our immediate peers. There remains a
great deal of uncertainty as to how the impact of Covid-19 will be
felt but the Group has managed well to date.
Group financials
Turning to the financial results, for the first six months, the
Group reported an adjusted loss before tax of GBP32.6m, which is
lower year-on-year reflecting lower revenue less impairment offset
by lower costs, but materially better than internal plans drawn up
after lockdown started. As a management team, we have focused on
operational innovation and capital strength. We have provided
support and all necessary resource to colleagues across the Group,
including ensuring that colleagues have necessary equipment to work
remotely.
The Group's capital and liquidity positions have strengthened
further during the period. At the end of June, the Group held total
regulatory capital of GBP705m, equating to a total CET1 ratio of
35.4% and a surplus above the minimum regulatory requirement of
GBP215m. The VREQ with respect to dividend and loan payments from
Vanquis Bank to the Group has been removed. This development allows
the Group to access lower cost retail deposit funding.
In early August, the Group launched a tender offer to buy up to
GBP75m of the GBP250m senior bonds, due to mature in 2023, for
which we are paying a coupon of 8 1/4 % owing to a downgrade in our
credit outlook by Fitch. This tender was in line with the stated
ambition from last year's CMD to seek funding efficiencies from our
existing liquidity structure. The tender was successful, and the
transaction closed at GBP75m but with total demand of c.GBP130m. We
expect to reduce our cost of funding by around GBP6m on an
annualised basis as a result and we will recognise an exceptional
one-off P&L benefit of c.GBP2.0m in H2'20. This transaction was
funded through an intercompany loan from Vanquis Bank of GBP70m. In
addition, a dividend of GBP30m is due to be paid by Vanquis Bank to
Provident Financial plc following the interim results.
Regulation
A recent statement was made by the FCA on its findings following
a review into the way firms offer relending options in the
high-cost short-term credit market. Management are currently in
dialogue with the FCA on this report and are working with them to
determine how the findings translate into a home credit context. It
is also noted that the persistent debt measures introduced by the
FCA have been delayed until October 2020 to allow firms more time
to comply following the onset of Covid-19. Vanquis Bank has made
good progress in managing the level of customers in persistent
debt, through changes to the credit line increase programme,
increasing minimum payments due and enhanced communication
encouraging customers to make higher than recommended payments.
Payment holidays
Following FCA guidance in April, payment holidays were offered
to customers in Vanquis Bank, Moneybarn and CCD of between 1 and 3
months.
Vanquis Bank saw payment holiday activations grow to a peak of
48k customers (3.5% of total customers) in June. The take-up of
payment holidays since the extension to 6 months has so far been
modest.
For Moneybarn, payment holidays increased significantly in April
to 23k customers (27% of receivables). The activation of payment
holidays has reduced significantly since this point from c.400
activations per day to 20 activations/day in July and August.
Arrears have also improved, with pre-Covid roll rates
returning.
Within CCD, the concept of forbearance is implicit within the
business model. Payment performance deteriorated in late March and
April whilst the revised working practices were rolled out through
remote collection practices. Collections have since broadly
returned to pre-Covid levels, whilst some customers have been
formally placed on payment holidays (c.3%).
Board and Senior management changes
During the period, Neeraj Kapur took up his role on the Group
Board as Group Chief Financial Officer (CFO) from Simon Thomas.
Neeraj brings significant relevant experience as a main board
director of a FTSE business and as a bank CFO. He has gained a
wealth of knowledge in consumer deposit, lending products and
treasury management in his previous roles. Neeraj has been
providing capable leadership to the finance and treasury functions
since he joined after the Covid-19 lockdown began.
In July, Margot James joined the Group Board as an Independent
Non-Executive Director following a successful career in both the
public and private sector. Margot served as an MP from 2010 to
2019, during which she held the position of Minister of State for
the Department of Digital, Culture, Media & Sport. In her role
as Parliamentary Under Secretary of State at the Department for
Business, Energy & Industrial Strategy, Margot had
responsibility for small businesses, consumers and corporate
governance, including labour markets and the retail sector. In
1985, Margot founded Shire Health Group which provided public
relations and medical education services to pharmaceutical
companies.
Gary Thompson was appointed as Finance Director of Vanquis Bank.
Gary has been with the Group for over a decade as Head of Group
Finance and Investor Relations and brings a wealth of knowledge to
his new role, having worked very closely with the Vanquis Bank team
during that period.
After the period end, Hamish Paton was appointed as Managing
Director of CCD and David Shrimpton was appointed to the same
position at Moneybarn. Hamish Paton has worked in the sub-prime
segment of the market for many years having served as CEO of
Brighthouse and Amigo previously. He will join Provident Financial
in mid-September. Chris Gillespie has done an excellent job of
stabilising CCD after 2017 and returning the business to its
trajectory to return to profitability before Covid and we thank him
for all his efforts and wish him well for the future.
David Shrimpton joined Moneybarn as Director of Customer
Experience in January 2019, having spent time in senior roles at
Wonga and Citigroup, and has held the position of interim MD of
Moneybarn since March 2020. His appointment on a permanent basis
follows the key role that David played in establishing Moneybarn's
response to the early stages of Covid-19, which enabled Moneybarn
to lend throughout the lockdown period.
Outlook
The Group's response to challenges brought on by the early
stages of Covid-19 was swift, putting us in a stronger position
heading into the second half of 2020. Since the end of June, some
encouraging signs of increased activity levels in our markets can
be seen, with improving customer demand and spending trends
evident. Indeed, Moneybarn posted record levels of new business in
July despite tighter underwriting. However, the potential economic
shock, and uncertainty, that Covid-19 will bring to the UK economy
over the coming months must not be underestimated. Looking to the
full year results, the Group continues to trade in line with
internal plans.
The Group's CMD last year included some medium-term financial
and strategic objectives. Good progress against some of these
objectives was made during the first six months, such as the
accelerated roll out of Provident Direct and our successful bond
tender offer. It remains the Group's intention to get back to a
position to deliver against our medium-term financial objectives,
albeit Covid-19 will inevitably delay this process. The target is
to deliver a Return on Equity (ROE) of between 20% and 25%. We will
also target significant and sustainable receivables growth through
the cycle.
The focus for the second half of this year and 2021 will be on
continuing our focus and support of our customers, through lending
responsibly as their preferred alternative to inaccessible
mainstream lenders. Our financial strength will help us to navigate
the challenges of further payment holiday take-up, furlough support
finishing for our customers and rising unemployment. Therefore,
when combined with our robust capital position and diverse funding
structure, I am cautiously optimistic about the outlook for 2020
and beyond.
Malcolm Le May
Chief Executive Officer
26 August 2020
Financial review
Group performance
The Group's 2020 interim results can be summarised as
follows:
Six months ended 30 June
2020 2019(1) Change
---------
GBPm GBPm
-------- -------- ---------
Adjusted profit/(loss) before tax:
- Vanquis Bank 11.8 90.5 (87.0%)
- Moneybarn 2.4 15.5 (84.5%)
- CCD (37.6) (15.1) (149.0%)
- Central costs (9.2) (10.5) 12.4%
-------- -------- ---------
Adjusted (loss)/profit before tax(2) (32.6) 80.4 (140.5%)
-------- -------- ---------
Amortisation of acquisition intangibles (3.7) (3.7) -
Exceptional credit/(costs) 8.3 (33.6) 124.7%
-------- -------- ---------
(Loss)/profit before tax (28.0) 43.1 (165.0%)
-------- -------- ---------
Adjusted basic EPS(2) (10.1) 23.4 (143.2%)
-------- -------- ---------
Basic EPS (9.1) 9.7 (193.8%)
-------- -------- ---------
Annualised RORE(3) 6.4% 22.9% (72.1%)
-------- -------- ---------
(1) The 2019 June comparatives have been restated to incorporate
two changes in accounting policies reflected in the 2019 financial
statements: (i) change in treatment of directly attributable
deferred acquisition costs in Vanquis Bank; and (ii) changes in the
recognition of revenue on credit impaired receivables and treatment
of directly attributable acquisition costs in Moneybarn.
(2) Adjusted (loss)/profit before tax is stated before: (i) GBP
3.7 m of amortisation in respect of acquisition intangibles
established as part of the acquisition of Moneybarn in August 2014
(2019: GBP3.7m); and (ii) an exceptional credit of GBP8.3m (2019:
cost of GBP33.6m) following the completion of the ROP refund
programme in 2019 and the re-evaluation of the forward flow of
claims that may arise in respect of ROP in future. In 2019, the
exceptional cost of GBP33.6m included: (i) GBP23.6m of defence
costs associated with Non-Standard Finance's (NSF's) unsolicited
offer; and (ii) GBP10.0m in relation to the turnaround of the home
credit business.
(3) Return on average required regulatory capital (RORE)
reflects annualised statutory profit after tax divided by the
annualised average monthly regulatory capital requirement.
Group adjusted loss before tax of GBP32.6m (H1'19 PBT restated:
GBP80.4m) is favourable when compared to internal plans but lower
year-on-year driven by lower revenues, driven by lower receivables,
and higher impairment charges driven by Covid-19. Group statutory
loss before tax of GBP28.0m (H1'19 PBT restated: GBP43.1m) includes
an exceptional provision release of GBP8.3m (H1'19: exceptional
cost of GBP33.6m) following the completion of the ROP refund
programme in 2019 and the re-evaluation of the forward flow of
claims that may arise in respect of ROP in future.
As a result of the Covid-19 pandemic, for the first six months,
Vanquis Bank has reported profit before tax for the period of
GBP11.8m (H1'19 restated: GBP90.5m) and receivables ended the
period at GBP1,202m (H1'19: GBP1,465m).
For the first six months of the year, Moneybarn generated a
profit before tax of GBP2.4m (H1'19: GBP15.5m), with the reduction
driven by a significant increase in impairment due to the
macroeconomic climate brought about by Covid-19.
For the first six months, CCD reported a loss before tax of
GBP37.6m, down from a loss before tax for H1'19 of GBP15.1m but
significantly better than internal plans. The loss for the period
reflects lower revenue being partially offset by a lower cost
base.
The Group reported a basic loss per share of 9.1p for the period
down from a basic earnings per share of 9.7p in H1'19. This
reflects the loss making position of the Group, driven by lower
receivables, offset by a tax credit of GBP4.9m. On an adjusted
basis, the Group reported a loss per share of 10.1p down from 23.4p
in H1'19.
The Group generated an annualised RORE of 6.4%, down from a RORE
of 22.9% in H1'19, reflecting a 72% reduction in annualised
statutory profits on a relatively flat annualised regulatory
capital requirement.
Impairment provisioning
The Group is the leading provider of credit to the underserved
in the UK. Our customers have similar traits across all our
businesses: they manage their lives on low to average incomes; may
have irregular or variable earnings and are often new to credit in
the UK or have little or no credit history. It is for these reasons
that the impairment provisions held are higher than those which
would be reported by prime banks on similar products.
The Group's IFRS 9 impairment coverage ratio (gross receivables
divided by impairment provision) has increased in the period from
28.3% to 33.5% which reflects increases across all divisions:
June-20 December-19 Increase
Vanquis Bank 27.4% 23.2% 4.2%
-------- ------------ ---------
Moneybarn 18.8% 14.4% 4.4%
-------- ------------ ---------
CCD 71.6% 58.1% 13.5%
-------- ------------ ---------
Group 33.5% 28.3% 5.2%
-------- ------------ ---------
The coverage ratio in Vanquis Bank has increased by 4.2% to
27.4%, reflecting the impact of the forecast worsening economic
outlook and payment holidays.
The Moneybarn coverage ratio increased by 4.4% to 18.8%
reflecting the increased levels of payment holidays activated, the
macro-economic outlook and the nature of the secured assets.
The coverage ratio in CCD increased by 13.5% to 71.6% reflecting
the deterioration in the customer base and those who have
defaulted, and are therefore heavily provided, based on the 12-week
impairment assessment period.
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. However, we
have tightened underwriting over the last six months to manage
credit risk during this period of uncertainty.
Macroeconomic provision
Separate macroeconomic provisions are recognised to reflect an
increased probability of default (PD) and loss given default (LGD),
in addition to the core impairment provisions, already recognised
based on future macroeconomic scenarios.
For Vanquis Bank, the provision reflects the potential for
future changes in unemployment under a range of unemployment
forecasts. For Moneybarn, both changes in unemployment and used car
sales values are assumed.
The PD impacts from rising unemployment in Moneybarn, follows
consistent methodology with Vanquis Bank. Moneybarn also analyse
trends in the used vehicle resale values to estimate recoveries
from the sale of repossessed vehicles at auction.
CCD customers are not considered to be reflective of the wider
economy as they are less indebted and are therefore not impacted by
the same macroeconomic factors or to the same degree. Consequently,
there is no evidence of any significant correlation between the
impairment charge and macro employment statistics. Consistent with
the 2019 year end, a separate macroeconomic provision is not held
for CCD.
For Vanquis Bank and Moneybarn, the unemployment data has been
compiled from a consensus of sources including the Bank of England,
HM Treasury, the Office for Budget Responsibility (OBR), Bloomberg
and several of the prime banks.
The table below shows the annual peak and average unemployment
assumptions adopted by Vanquis Bank and Moneybarn and the
weightings applied to each.
The combined severe and downside scenarios have doubled from 20%
at Dec-19 to 40% at Jun-20 to reflect the uncertain outlook:
Unemployment Base Upside Downside Severe
rate (%)
-------------- ----- ------- --------- -------
Weighting 50% 10% 35% 5%
2020
Peak 8.0 6.3 10.0 13.5
Average 6.1 5.3 6.8 8.0
2021
Peak 7.4 5.7 10.2 14.1
Average 6.7 5.4 9.4 13.4
The impact of the macro-economic scenarios has increased the
Group impairment provision by GBP73m. Whilst the forward-looking
nature of IFRS 9 requires provisions to be established for all
losses arising out of the current Covid-19 crisis, the level of
uncertainty may mean that additional impairment provision, or
releases, may be required in future periods.
Vanquis Bank
Six months ended 30 June
2020 2019(1) Change
--------
GBPm GBPm
--------- -------- --------
Customer numbers ('000) 1,694 1,791 (5.4%)
Period-end receivables 1,202 1,465 (18.0%)
Average receivables(2) 1,341 1,465 (8.5%)
----------------------------------- --------- -------- --------
Revenue 261.1 291.1 (10.3%)
Interest (16.3) (15.9) (2.5%)
----------------------------------- --------- -------- --------
Net interest margin 244.8 275.2 (11.0%)
Impairment (149.9) (96.6) (55.2%)
----------------------------------- --------- -------- --------
Risk-adjusted net interest margin 94.9 178.6 (46.9%)
Costs (83.1) (88.1) 5.7%
----------------------------------- --------- -------- --------
Profit before tax 11.8 90.5 (87.0%)
----------------------------------- --------- -------- --------
Annualised revenue yield(3) 39.4% 40.9% (3.7%)
Annualised impairment rate(4) 18.0% 14.9% 21.0%
Annualised return on equity(5) 19.3% 36.9% (47.7%)
(1) The 2019 June comparatives have been restated to incorporate
two changes in accounting policies reflected in the 2019 financial
statements: (i) change in treatment of directly attributable
deferred acquisition costs in Vanquis Bank; and (ii) changes in the
recognition of revenue on credit impaired receivables and treatment
of directly attributable acquisition costs in Moneybarn.
(2) Calculated as the average of month end receivables for the 6 months ended 30 June.
(3) Revenue as a percentage of average receivables for the 12
months ended 30 June.
(4) Impairment as a percentage of average receivables for the 12
months ended 30 June.
(5) Profit after tax as a percentage of average equity for the
12 months ended 30 June.
Vanquis Bank is a leading specialist in the large and
established credit card market with strong capital and liquidity
positions. As a consequence of Covid-19, the business reported
profit before tax for the first half of GBP11.8m, down from
GBP90.5m in the first half of 2019, and receivables at the end of
the period of GBP1,202m were approximately GBP260m lower than June
2019 (H1'19: GBP1,465m).
In response to the Covid-19 pandemic, Vanquis Bank successfully
moved 80% of contact centre and 100% of head office colleagues to
remote working by mid-April with minimal impact on customer service
levels. Customer support was maintained through dialler technology
and increased use of SMS communications and those customers in
financial difficulty were provided support either through: (i)
payment holidays in line with FCA measures; (ii) the payment freeze
option within the ROP product; and (iii) Vanquis Bank's other
forbearance measures. Alongside this, in early April, underwriting
standards were significantly tightened to reduce new credit card
bookings by 25%, curtail all new loans business and suspend the
Credit Line Increase (CLI) programme.
New account bookings for the first six months of the year were
147k, down from 190k in the first half of 2019, following the
decision taken to reduce new customer bookings by 75% in April.
Vanquis Bank has now initiated a staged re-entry into the market,
increasing new credit card volumes to c.50% of their pre-Covid-19
levels and recently recommenced personal loan lending to existing
credit card customers. Customer numbers ended the period at 1,694k
(H1'19: 1,791k), a reduction of 5.4% on June 2019.
Receivables ended the period at GBP1,202m (H1'19: GBP1,465m), a
decrease of 18% or GBP263m compared with the first half of 2019. In
addition to the impact of lower new customer acquisition and the
suspension of the CLI programme, customer spending was
significantly reduced in the second quarter during the Covid-19
lockdown. On a year-on-year basis, customer spending was
approximately 40% lower in April, 35% lower in May and 20% lower in
June. As a result, account utilisation levels have reduced from
c.60% at the start of the year to c.53% at the end of June. The
progressive improvement in customer spending has continued early in
the third quarter with the gap to prior year narrowing to 15% in
July and August. Vanquis Bank has recently recommenced a phased
introduction of its CLI programme.
Vanquis Bank generated revenue in the first half of GBP261.1m,
down from GBP291.1m in the first half of 2019. The reduction was
driven by a combination of the fall in receivables and a moderation
in the revenue yield. The annualised revenue yield at the end of
June was 39.4%, a year-on-year reduction of c.150bps, reflecting
the ongoing c.GBP15-20m annual reduction in ROP income, changes to
the basis of charging default and over limit fees and the ban on
the use of credit cards for gambling transactions which came into
effect in April.
The impairment charge for the period was GBP149.9m (H1'19:
GBP96.6m), an increase of 55% compared with the first half of 2019
notwithstanding the overall reduction in receivables. This equates
to an annualised impairment rate at the end of June of 18.0%
compared with 14.9% at June 2019, reflecting the impact of
Covid-19, including the forecast of a deterioration in the
macro-economic outlook and the exit performance of customers taking
payment holidays, which has increased the impairment charge in the
first half of 2020 by approximately GBP70m.
The take-up of payment holidays, in line with the FCA measures
introduced in April, amounted to approximately 2% of customers and
4% of gross balances at the end of June. This represents a
reduction from the peak in May of approximately 3% of customers and
5% of receivables. The daily take-up of payment holidays has
continued to be modest in July and August.
The combination of a lower revenue yield and higher impairment
rate resulted in the risk-adjusted margin ('RAM') reducing from
26.0% at June 2019 to 21.4% at June 2020.
First half costs reduced by 5.7% to GBP83.1m (H1'19: GBP88.1m),
reflecting the ongoing cost efficiency programme at Vanquis Bank
together with the cessation of all discretionary spend in response
to Covid-19.
Interest costs increased by 2.5% to GBP16.3m (H1'19: GBP15.9m)
during the first half notwithstanding the reduction in receivables.
This reflects the decisive action taken to raise additional retail
deposits at the onset of Covid-19 to mitigate the potential for a
market wide liquidity stress. Accordingly, Vanquis Bank has been
prudently carrying GBP800m of additional liquidity over and above
its regulatory requirements during the second quarter of the year
which has resulted in additional funding costs of approximately
GBP2m.
The Group notes that the persistent debt measures introduced by
the FCA have been delayed until October 2020 to allow firms more
time to comply following the onset of Covid-19. Vanquis Bank has
made good progress in managing the level of customers in persistent
debt, through changes to the credit line increase programme,
increasing minimum payments due and enhanced communication
encouraging customers to make higher than recommended payments
Vanquis Bank has successfully supported both customers and
colleagues through the significant disruption caused by Covid-19
since the start of the second quarter. The business has delivered
first half profits and has strong capital and liquidity positions
meaning it is well-placed to switch the focus back to re-growing
customers and receivables in a sustainable manner. Enhancing the
customer and digital propositions as well as broadening the range
of products, including an open market launch of loans in early
2021, remain important pillars of developing Vanquis Bank to the
'Bank for the underserved'.
Moneybarn
Six months ended 30 June
2020 2019(1) Change
---------
GBPm GBPm
-------- -------- ---------
Customer numbers ('000) 82 70 17.1%
Period-end receivables 529.4 484.7 9.2%
Average receivables(2) 520.6 436.2 19.3%
----------------------------------- -------- -------- ---------
Revenue 66.1 58.3 13.4%
Interest (13.3) (13.7) 2.9%
----------------------------------- -------- -------- ---------
Net interest margin 52.8 44.6 18.4%
Impairment (37.5) (17.5) (114.3%)
----------------------------------- -------- -------- ---------
Risk-adjusted net interest margin 15.3 27.1 (43.5%)
Costs (12.9) (11.6) (11.2%)
----------------------------------- -------- -------- ---------
Adjusted profit before tax(3) 2.4 15.5 (84.5%)
Annualised revenue yield(4) 25.2% 24.7% 2.0%
Annualised impairment rate(5) 12.0% 7.1% 70.3%
Annualised return on assets(6) 8.9% 10.9% (18.3%)
(1) The 2019 June comparatives have been restated to incorporate
two changes in accounting policies reflected in the 2019 financial
statements: (i) change in treatment of directly attributable
deferred acquisition costs in Vanquis Bank; and (ii) changes in the
recognition of revenue on credit impaired receivables and treatment
of directly attributable acquisition costs in Moneybarn.
(2) Calculated as the average of month end receivables for the 6
months ended 30 June. 2019 is stated prior to the impact of the
balance reduction adjustment of GBP1.8m in respect of the FCA
investigation into affordability, forbearance and termination
options.
(3) Adjusted profit before tax is stated before the amortisation
of acquisition intangibles of GBP 3.7 m (2019: GBP3.7m).
(4) Revenue as a percentage of average receivables for the 12 months ended 30 June.
(5) Impairment as a percentage of average receivables for the 12
months ended 30 June.
(6) Adjusted profit before interest after tax as a percentage of
average receivables for the 12 months ended 30 June.
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. For the first six months of the year, Moneybarn generated
a profit before tax of GBP2.4m (H1'19: GBP15.5m), with the
reduction driven by a significant increase in impairment.
Moneybarn was able to continue lending to its customers
throughout the entire lockdown period thanks to actions taken at
the outset to ensure that all customer facing colleagues were able
to work remotely. Moneybarn's contact centre is now back operating
at close to full capacity thanks to working pattern changes, such
as coordinated shifts and changes to working hours. As a result of
remaining open, Moneybarn has consolidated and increased its market
position and cemented its relationships with key introducers.
New business volumes during January and February remained
strong, and were consistent with 2019 growth trends, as were the
first three weeks of March. For April, new business volumes fell
significantly, before starting to recover in May mainly due to the
fact that car sales outlets were initially closed. Despite
tightening underwriting criteria during the period, which saw the
Tier 3A category - the highest risk level accepted - fall from
c.17% to c.2%, new business volumes were encouraging in June with
July seeing record levels of new business. One feature of the new
business levels has been the migration of customers away from prime
and near-prime lenders towards Moneybarn, i.e. we have started to
see a change in risk appetite elsewhere in the sector. In addition,
since lockdown began in the third week of March, over 40% of
Moneybarn's lending has been to people classified as keyworkers.
Overall, customer numbers and receivables are up by around 10%
since December to 82k and GBP529m, respectively.
Moneybarn ended the period with 82k customers, representing an
increase vs. H1'19 of 12k or 17%. This performance was in line with
management's expectations set at the beginning of the year and was
achieved despite underwriting standards tightening during the
period. Moneybarn wrote over 4,500 new loans in July representing
record new business volumes for a single month. There is a clear
underlying demand for quality used cars, especially within
Moneybarn's core market, driven by post-lockdown concerns around
the use of public transport and prime- and near-prime providers
pulling back from the market.
At the end of June, receivables stood at GBP529.4m vs. GBP484.7m
at H1'19 driven by better than anticipated new business volumes of
16k (H1'19: 20k), particularly towards the end of the period. In
the context of the disruption that Covid-19 brought, and the
knock-on impact to Moneybarn's key introducers and underlying
customer base, the new business performance is significantly ahead
of internal plans.
As a result of the higher receivables base, revenues during
H1'20 increased by 13.4% year-on-year to GBP66.1m (H1'19:
GBP58.3m), in line with internal plans. The growth was partially
offset by a reduction in higher risk lending during the period
which brought the average APR lower. The resulting annualised
revenue yield at the end of June was 25.2% vs. 24.7% in June
2019.
Impairment increased significantly during the period to GBP37.5m
(H1'19: GBP17.5m) as a result of Covid-19 impacting arrears rates
and an increase in provisions driven by a forecast deterioration in
the macroeconomic environment. The annualised impairment rate
increased from 7.1% in June 2019 to 12.0%.
As a result of the increased impairment rate, the risk-adjusted
margin fell to 13.2% at the end of June vs. 17.6% a year earlier.
Moneybarn's impairment rate continues to be impacted by higher
provision amounts as the termination process remains challenging as
the company is restricted in terms of its ability and its partners'
ability to collect vehicles, a situation that is improving but
unlikely to fully recover until October.
Moneybarn took a proactive approach to offering its customers a
solution to ease any potential financial hardship they, or their
households, might be experiencing. Before the FCA's formal
guidance, Moneybarn was offering its customers a payment holiday
arrangement. Therefore, Moneybarn experienced an earlier take-up of
such arrangements than the wider market. At its peak, the take-up
of a payment holiday by Moneybarn customers was 27.5% of customers
(or c.23k customers). Following the expiry of the first 3 month
payment holiday the current live payment holiday number is around
5k customers (c.3.5%) who have come off payment holidays, around a
third then go on to miss a repayment, in line with internal
expectations.
Costs increased slightly in the period to GBP12.9m, from
GBP11.6m last year, reflecting an increase in headcount, an
increase in volume driven costs - such as credit bureau searches -
and arrangements for working remotely. Interest costs are broadly
flat year-on-year reflecting a lower cost of funding being offset
by a higher receivables balance.
After the period end, the FCA announced its intention to ban
motor finance discretionary commission models, following a
consultation in October 2019. This covers some arrangements whereby
car retailers and motor finance brokers receive commission which is
linked to the interest rate that customers pay which, in the eyes
of the FCA, creates an incentive to sell more expensive credit to
certain customers. Moneybarn has never employed this commission
structure, and pays largely fixed commissions except for very
limited volume-related discounts to its larger introducers.
Consumer Credit Division
Six months ended 30 June
2020 2019 Change
---------
GBPm GBPm
-------- -------- ---------
Customer numbers ('000) 379 531 (28.6%)
Period-end receivables 146.9 245.4 (40.1%)
Average receivables(1) 191.2 254.2 (24.8%)
----------------------------------- -------- -------- ---------
Revenue 118.4 152.1 (22.2%)
Interest (4.6) (5.1) 9.8%
----------------------------------- -------- -------- ---------
Net interest margin 113.8 147.0 (22.6%)
Impairment (52.9) (51.8) (2.1%)
----------------------------------- -------- -------- ---------
Risk-adjusted net interest margin 60.9 95.2 (36.0%)
Costs (98.5) (110.3) 10.7%
----------------------------------- -------- -------- ---------
Adjusted loss before tax(2) (37.6) (15.1) (149.0%)
Annualised revenue yield(3) 121.2% 117.3% 3.3%
Annualised impairment rate(4) 45.1% 38.0% 18.7%
Annualised return on assets(5) (15.8%) (5.5%) (187.3%)
(1) Calculated as the average of month end receivables for the 6 months ended 30 June.
(2) In 2019, adjusted loss before tax was stated before
exceptional costs of GBP10.0m in relation to the turnaround of the
home credit business following the poor execution of the migration
to the new operating model in July 2017.
(3) Revenue as a percentage of average receivables for the 12 months ended 30 June.
(4) Impairment as a percentage of average receivables for the 12
months ended 30 June.
(5) Adjusted loss before interest after tax as a percentage of
average receivables for the 12 months ended 30 June.
The Consumer Credit Division ('CCD'), which comprises Provident
home credit and Satsuma, was on track to break even during 2020
prior to Covid-19. It is still the Group's intention to return this
business to standalone profitability, albeit the timing of this has
been delayed. The strategy for CCD will be to focus on leveraging
efficiency in serving its customers, while continuing to be
underpinned by a relationship model, and offering customer
choice.
For the first six months, CCD reported a loss before tax of
GBP37.6m, down from a loss for H1'19 of GBP15.1m but significantly
better than internal plans. The loss for the period reflects lower
net revenue being partially offset by a lower cost base.
The home credit business responded to the challenges presented
by Covid-19 by introducing several new ways of working, in order to
adapt and continue supporting its customers. Home credit
field-based colleagues are able to offer lending and collections
services on a fully remote basis including: taking repayments
online, over the phone or via an Allpay card, managing loan
applications remotely to new, existing or returning customers,
offering Provident Direct and utilising central collections
activity to support with a particular focus on later-stage arrears.
As lockdown restrictions have eased, some field-based colleagues
have been able to make home visits again since mid-June onwards.
However, they are only able to do so when agreed in advance with
the customer.
The home credit team implemented a process to help identify
customers indicating that they have been impacted by Covid-19 and
whose circumstances have changed as a result. At the end of June,
there were c.8.5k customers on a payment holiday which equates to
around 3% of customers and 1% of receivables. In Satsuma, payment
holiday take-up at the end of June represented c.3% of customers
and 4% of receivables.
The significant operational changes outlined above have enabled
new ways of working and our Customer Experience Managers (CEMs)
have become more efficient as a result and are more effectively
aligned to customer preferences. Alongside that, the reduction in
customer numbers and receivables have led to more immediate cost
base action being necessary. At the end of July, home credit
launched a consultation period with a view to removing around 300
CEMs and Customer Service Managers (CSMs). The proposal is to
replace the CEMs/CSMs role with a new Customer Representative
('CR') role, reporting to Business Managers. The proposed CR role
will also see the introduction of a higher level of variable
remuneration.
Customer numbers ended the period at 379k, which represents a
reduction vs H1'19 of c.29%, driven by significantly reduced new
customer bookings during the Covid-19 lockdown period. This is
reflected in new issue volumes being down by c.40% vs H1'19 in home
credit as a result of tighter underwriting standards and
operational restrictions, particularly in the early stages of
lockdown. Lending volumes fell by c.80% in Satsuma in H1'20 due to
changes in the affordability assessment and customer onboarding
processes during the first quarter and a subsequent pause in all
lending in Satsuma during May which will remain in place until more
operational and regulatory certainty can be established.
CCD receivables ended the period at GBP147m, which represents a
decline of 40% year-on-year, driven by lower issue volumes during
the period and higher provisioning levels. Satsuma receivables of
GBP16m at the end of June represented a fall of c.60% year-on-year
as lending to new and existing customers was paused alongside
collection activity remaining strong.
Revenue for the period was GBP118.4m, a reduction of 22% vs
H1'19, which is consistent with the c.25% fall in average
receivables over the same period. The reported annualised revenue
yield for H1'20 is 121%, ahead of the comparable figure for H1'19
of 117%.
Impairment for the first six months of the year amounted to
GBP52.9m, an increase of just 2% vs H1'19. Despite the
significantly smaller book year-on-year, the impairment charge has
remained similar to the prior year owing to a more adverse arrears
distribution as a consequence of Covid-19. The impairment charge
equates to an annualised impairment rate at the end of June of
45.1% vs 38.0% in H1'19. The RAM at the end of June was 76.1%,
lower vs H1'19 by 4.0%, due to lower net revenue including a higher
impairment charge.
Costs of GBP98.5m were GBP11.8m lower vs H1'19. Expenses were
lower, driven by lower salary costs following management action
taken in 2018 and 2019, in restricting and lowering headcount in
both the field and head office, partially offset by higher
complaint costs.
Central costs
Central costs have reduced from GBP10.5m to GBP9.2m year on year
reflecting lower share incentive, Blueprint and Group risk costs. A
GBP1.8m funding cost was incurred from carrying the increased
liquidity headroom in response to Covid-19.
Exceptional items
The exceptional credit in the first half of 2020 reflects the
GBP8.3m release of provisions established in 2017 following the
completion of the ROP refund programme in 2019 and the
re-evaluation of the forward flow of claims which may arise in
respect of ROP complaints. Exceptional costs in 2019 comprised (i)
GBP23.6m of defence costs associated with Non-Standard Finance
plc's (NSF's) unsolicited offer for the Group; and (ii) GBP10.0m in
relation to the ongoing turnaround of the home credit business.
Tax
The tax credit/(charge) for the period has been calculated by
applying the best estimate of the effective tax rate for the
financial year of 21.4% (2019: 26.3%), to the (loss)/profit before
tax, amortisation of acquisition intangibles and exceptional items
for the period. The tax rate reflects the impact of the bank
corporation tax surcharge of 8% which came into force on 1 January
2016 and applies to Vanquis Bank profits in excess of GBP25m. It
also reflects (i) the beneficial impact of measuring deferred tax
assets at 19% (2019: 17%), and in the case of Vanquis Bank at 27%
(2019: 25%), following the announcement in the March 2020 Budget
that the rate of mainstream UK corporation tax would remain at 19%
from 1 April 2020 rather than the previously enacted rate of 17%;
(ii) the benefit of the release of part of the provision for
uncertain tax liabilities which is no longer required; and (iii)
the adverse impact of the write off of deferred tax assets related
to share awards reflecting the reduction in expected tax relief as
a result of the lower share price and expected level of
vesting.
The tax rate also reflects the recognition of deferred tax
assets in respect of losses and other temporary differences on the
basis that the Group is expected to have sufficient taxable profits
available in the future to enable such deferred tax assets to be
recovered.
The tax charge in respect of the exceptional credit in 2020
amounts to GBP2.2m which represents tax at the combined mainstream
corporation tax rate and bank corporation tax surcharge rate of 27%
in respect of the GBP8.3m exceptional release of provisions
established in 2017 following the completion of the ROP refund
programme in 2019 and the re-evaluation of the forward flow of
claims that may arise in respect of ROP complaints more generally.
The tax credit in 2019 in respect of exceptional costs amounted to
GBP2.0m and represented: (i) tax relief of GBP1.9m in respect of
the exceptional restructuring costs in CCD; and (ii) tax relief of
GBP0.1m in respect of exceptional costs associated with the defence
of the unsolicited offer from NSF.
The tax credit in respect of the amortisation of acquisition
intangibles is GBP0.1m (2019: GBP0.7m) and represents a tax credit
of GBP0.7m in respect of the amortisation net of the impact of
measuring the related deferred tax liability at 19% (2019: 17%)
following the announcement that the rate of mainstream UK
corporation tax will remain at 19% from 1 April 2020 rather than
the previously enacted rate of 17%, which amounts to GBP0.6m.
Dividends
The Board is not proposing an interim dividend with respect to
this financial year (H1'19: 9.0p per share), in line with its
decision to preserve capital, and support business stability, when
deciding to not pay the final dividend for FY'19. However, it
remains our intention to resume dividend payments to shareholders
as soon as operational and financial conditions normalise.
Funding and capital
The Group has strong capital and liquidity positions
comprising:
-- Regulatory capital headroom at 30 June 2020 of approximately
GBP215m excluding the capital conservation buffer of approximately
GBP50m which is held and may be used at the Group's discretion
including the advent of a stress scenario such as currently being
experienced in the UK.
-- Liquidity headroom on committed facilities and surplus cash
and liquid resources amounting to approximately GBP200m plus
approximately GBP1bn of liquid resources held by Vanquis Bank
(cGBP200m in respect of their regulatory requirements) as well as
ongoing access to the retail deposits market.
The Group's capital review (C-SREP) with the PRA concluded in
July 2020. The Group's Pillar 2A capital requirement has been
lowered from 20.65% to 19.33% and the fixed monetary add-on in
respect of pension risk has been removed.
The Group's CET1 ratio on an accrued profits basis at 30 June
2020 was 35.4% compared with the Group's Pillar 2A requirement of
19.3%. The regulatory capital headroom above total requirements was
approximately GBP215m. The Board's current view on risk appetite is
to maintain a capital buffer in excess of GBP100m due to market
uncertainties. The increase in headroom from GBP160m at 31 December
2019 reflects: (i) the preservation of capital through the
cancellation of the 2019 dividend; and (ii) reduced risk weighted
exposures in respect of customer receivables. These benefits were
partly offset by the consolidated Group loss to 30 June and the
anticipated third year transitional impact of IFRS 9 (net of
additional capital mitigation in response to Covid-19 noted
below).
As previously reported, the Group has elected to phase in the
impact of adopting IFRS 9 over a five-year period. This is achieved
by applying add back factors of 95%, 85%, 70%, 50% and 25% for
years one to five respectively to the initial IFRS 9 transition
adjustment plus any subsequent increase in expected credit losses
(ECL) in the non-credit-impaired book from transition to the end of
the reporting period. The PRA ratified additional capital
mitigation proposed by the Basel Committee, in response to
Covid-19, with these measures coming into force from 27 June 2020.
The new measures allow for the increase in ECL in the non-credit
impaired book arising in 2020 and 2021 to be fully added back in
those years. This relief is then phased out over the following
three years on a straight line basis (2022: 75%, 2023: 50%, 2024:
25%, 2025: 0%). The impact of the IFRS 9 transitional arrangements
on CET 1 as at 30 June 2020 was GBP159.2m.
The Group continues to actively explore a number of options to
improve capital efficiency. These include, but are not limited to,
supplementing the existing capital base made up entirely of core
equity tier one with tier 2 debt capital to support growth and
improved return on equity. The Board also continues to monitor its
risk appetite in respect of the appropriate level of regulatory
capital headroom with regard to the Group's recovery post
Covid-19.
The Group's current funding strategy is to maintain committed
facilities to meet contractual maturities and fund growth for at
least the following 12 months and maintain access to four main
sources of funding comprising: (i) the syndicated revolving bank
facility; (ii) market funding, including retail bonds,
institutional bonds and private placements; (iii) securitisation;
and (iv) retail deposits.
The flow of retail deposits within Vanquis Bank has continued to
be strong and, at 30 June 2020, Vanquis Bank had retail deposit
funding of GBP1.9bn, up from GBP1.3bn at 31 December 2019, which
reflects the steps taken by Vanquis Bank to increase liquidity in
response to Covid-19.
During the first half of 2020, the Group delivered on a number
of its funding objectives: (i) signed an agreement to fund the
Moneybarn receivables book through securitisation (ii) repaid early
the remaining M&G loan facility of GBP25m on 14 February 2020;
(iii) in line with its contractual maturity, repaid a GBP25m bond
on 14 April 2020. After the period end, the Group secured
intra-Group funding through Vanquis Bank.
In addition, after the period end, consistent with the Group's
strategy of cost effective management of its liabilities, the Group
successfully completed a tender offer for GBP75m of senior bonds
due to mature in 2023. The transaction reduces the Group's overall
cost of borrowing and strengthens its balance sheet in line with
the overall strategy of strengthening its position in the
market.
Headroom on the Group ' s committed debt facilities was GBP196m
at 30 June 2020. Together with the ongoing retail deposits
programme, this comfortably meets the Group's funding strategy.
There are no further contractual maturities of the Group's
facilities until a scheduled maturity of a GBP65m bond in September
2021.
The Group is actively exploring additional funding options
including, but not limited to: (i) changing the funding mix to be
more efficient; (ii) securitisation of the Vanquis Bank receivables
book; and (iii) optimising the mix of debt capital and senior debt
in the funding profile.
On 5 April 2020, Fitch Ratings revised the Group's outlook to
negative, reflecting the economic fallout from the Covid-19
pandemic. The credit rating is therefore currently BB+ with a
negative outlook.
Principal risks and uncertainties
The principal risks and uncertainties affecting the Group are
largely consistent with those set out in the 2019 Annual Report and
Financial Statements and comprise the following risks: credit risk,
capital risk, liquidity and funding risk, information and data
security risk, operational risk, regulatory and conduct risk,
business resilience, people and model risk.
A full assessment of the risks and uncertainties, together with
the controls and processes which are in place to monitor and
mitigate the risks where possible, are set out on pages 42 to 53 of
the 2019 Annual Report & Financial Statements which is
available on the Group's website, www.providentfinancial.com .
The Group Board, directors and management have focused on the
Group's principal risks throughout the first half in response to
the changing and challenging operational environment as a result of
Covid-19. This was essential to ensure the principal risks were
appropriately managed and further mitigated where possible. The
response through the first half, and planned approach for the
remaining six months of the 2020 financial year, are:
Credit risk
All of the Group's divisions have tightened lending policies and
underwriting criteria through the first half, thereby limiting new
business and improving the quality of newly acquired customers. The
relaxation of tightening will be gradual, on a test and learn
basis, and an assessment of repayment performance will be made
before further changes are made. All divisions have also worked
closely with their customers by offering payment holidays, or
payment arrangements, as appropriate. This close relationship with
customers will continue in the second half of the year as the
economic uncertainty continues.
Capital risk
The 2019 final dividend was not proposed for approval at
Provident Financial's AGM in May to preserve both cash and capital.
The Group has also decided not to pay an interim dividend for the
half year. Future dividend decisions will be made as and when
conditions normalise. A reduction in customer receivables, combined
with tighter underwriting has increased surplus capital held. When
combined with the reduction in countercyclical buffer and increased
dynamic provisions, through relief for Covid-19 related provisions,
the Group's surplus regulatory capital has increased from GBP117m
at 31 December 2019 to GBP215m at 30 June 2020.
Liquidity and funding risk
The Group was able to raise additional liquidity rapidly through
April and May resulting in headroom on committed facilities and
surplus cash and liquid resources increasing to approximately
GBP1.2bn in May to mitigate risk of operational disruption and
utilisation of undrawn credit facilities in Vanquis Bank. GBP1bn of
surplus liquidity continues to be held to mitigate against any
ongoing risk.
Operational, people, business resilience and information and
data security risk
All divisions had to adapt rapidly and introduce new ways of
working in response to Covid-19. The response was swift and
effective, enabling us to continue supporting our customers whilst
ensuring the safety and wellbeing of our colleagues. This support
has enabled colleagues from across the Group to have the necessary
equipment to work remotely. The provisions to work remotely have
proved to be effective and therefore the measures will remain in
place for the short to medium-term. Colleagues will return to
working from the Group's offices when this is deemed to be safe and
operationally viable.
Regulatory and conduct risk
The Group has worked closely with its regulators through the
first half to ensure customers could continue to be served
responsibly, recognising that many of these are vulnerable. This
has included offering payment holidays and other forbearance where
appropriate. There continues to be heightened Claims Management
Company (CMC) activity in relation to non-standard lending,
particularly in respect of irresponsible lending in high-cost
credit and more recently in-home credit. As a result, CCD (Home
Credit) has seen an increase in the number of such complaints
during 2020. An increasing proportion of complaints are being
managed internally, reducing referrals to the FOS. CCD continues to
robustly defend inappropriate or unsubstantiated claims.
Model risk
A Model Risk policy has been approved by the Group Board in the
first half. Independent model validation has been initiated for the
Group's most significant models.
Related party transactions
In August 2020 Provident Financial plc agreed a GBP70m
intercompany facility with Vanquis Bank to allow upstream funding
which facilitated the tender of the 2023 bonds.
Unaudited condensed interim financial statements
Consolidated income statement
Six months ended
30 June
Note 2020 2019 (restated)
GBPm GBPm
-------- ----------------
Revenue 4 445.6 501.5
Finance costs (36.0) (36.5)
-------- ----------------
Net interest margin 409.6 465.0
Impairment charges (240.3) (165.9)
-------- ----------------
Risk-adjusted net interest margin 169.3 299.1
-------- ----------------
Administrative and operating costs (197.3) (256.0)
(Loss)/profit before tax 4 (28.0) 43.1
------------------------------------------------------- ----- -------- ----------------
(Loss)/profit before tax, amortisation of acquisition
intangibles and exceptional items 4 (32.6) 80.4
Amortisation of acquisition intangibles 4 (3.7) (3.7)
Exceptional items 4 8.3 (33.6)
------------------------------------------------------- ----- -------- ----------------
Tax credit/(charge) 5 4.9 (18.5)
-------- ----------------
(Loss)/profit for the period attributable to
equity shareholders (23.1) 24.6
-------- ----------------
All of the above activities relate to continuing operations.
Consolidated statement of comprehensive income
Six months ended
30 June
Note 2020 2019 (restated)
GBPm GBPm
------- ----------------
(Loss)/profit for the period attributable
to equity shareholders (23.1) 24.6
------- ----------------
Items that will not be reclassified subsequently
to the income statement:
- actuarial movements on retirement benefit
asset 9 38.3 (15.7)
- fair value movement in investments 10 1.4 3.9
- tax on items that will not be reclassified
subsequently to the income statement (7.7) 2.0
* impact of change in UK tax rate on items that will
not be reclassified subsequently to the income
statement (1.9) (0.3)
Items that may be reclassified subsequently
to the income statement:
- exchange differences on translation of foreign
operations - 0.1
Other comprehensive income/(expense) for the
period 30.1 (10.0)
Total comprehensive income for the period 7.0 14.6
------- ----------------
(Loss)/earnings per share Six months ended
30 June
Note 2020 2019 (restated)
pence pence
------ ----------------
Basic 6 (9.1) 9.7
------ ----------------
Diluted 6 (9.1) 9.7
------ ----------------
Six months ended
Dividends per share 30 June
2020 2019
pence pence
------ ----------------
Interim dividend 7 - 9.0
------ ----------------
Paid in the period* 7 - 10.0
------ ----------------
* Dividends paid in the period were GBPnil (2019: GBP25.1m).
Consolidated balance sheet
30 June 31 December 30 June
Note 2020 2019 2019 (restated)
GBPm GBPm GBPm
---------- --------------------- ----------------
ASSETS
Non-current assets
Goodwill 71.2 71.2 71.2
Other intangible assets 40.7 44.1 51.1
Property, plant and equipment 19.1 19.3 22.3
Right of use assets 62.4 67.1 79.8
Financial assets:
- amounts receivable from customers 8 385.1 418.3 401.4
Retirement benefit asset 9 118.4 78.0 70.3
Deferred tax asset 21.0 25.0 32.0
717.9 723.0 728.1
---------- --------------------- ----------------
Current assets
Financial assets:
* investment held at fair value through other
comprehensive income 10 18.0 16.6 21.1
- amounts receivable from customers 8 1,493.3 1,794.3 1,793.5
- cash and cash equivalents 1,042.7 353.6 440.0
- trade and other receivables 45.5 33.3 49.8
2,599.5 2,197.8 2,304.4
---------- --------------------- ----------------
Total assets 4 3,317.4 2,920.8 3,032.5
---------- --------------------- ----------------
LIABILITIES
Current liabilities
Financial liabilities:
- retail deposits (997.4) (410.0) (375.9)
- bank and other borrowings (0.8) (53.5) (83.8)
---------- --------------------- ----------------
Total borrowings (998.2) (463.5) (459.7)
---------- --------------------- ----------------
- trade and other payables (80.1) (89.3) (92.3)
- lease liabilities (9.5) (10.2) (13.6)
Current tax liabilities (12.0) (34.7) (30.6)
Provisions 12 (9.0) (14.5) (35.6)
---------- --------------------- ----------------
(1,108.8) (612.2) (631.8)
---------- --------------------- ----------------
Non-current liabilities
Financial liabilities:
- retail deposits (919.9) (935.2) (1,096.4)
- bank and other borrowings (475.5) (564.8) (533.5)
---------- --------------------- ----------------
Total borrowings (1,395.4) (1,500.0) (1,629.9)
---------- --------------------- ----------------
- derivatives (1.2) - -
- lease liabilities (64.1) (68.1) (72.7)
---------- --------------------- ----------------
Total liabilities (2,569.5) (2,180.3) (2,334.4)
---------- --------------------- ----------------
NET ASSETS 4 747.9 740.5 698.1
---------- --------------------- ----------------
SHAREHOLDERS' EQUITY
Share capital 52.6 52.5 52.5
Share premium 273.2 273.2 273.2
Other reserves 295.5 295.9 295.6
Retained earnings 126.6 118.9 76.8
---------- --------------------- ----------------
TOTAL EQUITY 747.9 740.5 698.1
---------- --------------------- ----------------
Consolidated statement of changes in shareholders' equity
Share Share Other Retained
capital premium reserves earnings Total
GBPm GBPm GBPm (restated) GBPm
GBPm
-------- -------- -------------- ------------ -------
At 31 December 2018 (restated) 52.5 273.2 292.1 94.3 712.1
-------- -------- -------------- ------------ -------
Impact of adoption of IFRS 16 'Leases' - - - (5.6) (5.6)
-------- -------- -------------- ------------ -------
At 1 January 2019 52.5 273.2 292.1 88.7 706.5
-------- -------- -------------- ------------ -------
Profit for the period - - - 24.6 24.6
-------- -------- -------------- ------------ -------
Other comprehensive income/(expense):
* fair value movement in investments - - 3.9 - 3.9
* actuarial movements on retirement benefit asset (note
9) - - - (15.7) (15.7)
* exchange differences on translation of foreign
operations - - - 0.1 0.1
* tax on items taken directly to other comprehensive
income - - (1.0) 3.0 2.0
* impact of change in UK tax rate - - - (0.3) (0.3)
Other comprehensive income/(expense)
for the period - - 2.9 (12.9) (10.0)
-------- -------- -------------- ------------ -------
Total comprehensive income for the
period - - 2.9 11.7 14.6
-------- -------- -------------- ------------ -------
Transactions with owners:
- share-based payment charge - - 2.1 - 2.1
- transfer of share-based payment
reserve - - (1.5) 1.5 -
- dividends - - - (25.1) (25.1)
-------- -------- -------------- ------------ -------
At 30 June 2019 and 1 July 2019 52.5 273.2 295.6 76.8 698.1
-------- -------- -------------- ------------ -------
Profit for the period - - - 59.8 59.8
-------- -------- -------------- ------------ -------
Other comprehensive income/(expense):
- fair value movement in investments - - 0.6 - 0.6
- actuarial movements on retirement
benefit asset (note 9) - - - 6.0 6.0
- exchange differences on translation
of foreign operations - - - (0.1) (0.1)
- tax on items taken directly to
other comprehensive income - - (0.2) (1.2) (1.4)
- impact of change in UK tax rate - - 0.1 0.1 0.2
-------- -------- -------------- ------------ -------
Other comprehensive income for the
period - - 0.5 4.8 5.3
-------- -------- -------------- ------------ -------
Total comprehensive income for the
period - - 0.5 64.6 65.1
-------- -------- -------------- ------------ -------
Transactions with owners:
- share-based payment credit - - (0.2) - (0.2)
- dividends - - - (22.5) (22.5)
-------- -------- -------------- ------------ -------
At 31 December 2019 52.5 273.2 295.9 118.9 740.5
-------- -------- -------------- ------------ -------
At 1 January 2020 52.5 273.2 295.9 118.9 740.5
-------- -------- -------------- ------------ -------
Loss for the period (23.1) (23.1)
-------- -------- -------------- ------------ -------
Other comprehensive income/(expense):
- fair value movement in investments - - 1.4 - 1.4
- actuarial movements on retirement
benefit asset (note 9) - - - 38.3 38.3
- tax on items taken directly to
other comprehensive income - - (0.4) (7.3) (7.7)
- impact of change in UK tax rate - - (0.3) (1.6) (1.9)
-------- -------- -------------- ------------ -------
Other comprehensive income for the
period - - 0.7 29.4 30.1
-------- -------- -------------- ------------ -------
Total comprehensive income for the
period - - 0.7 6.3 7.0
-------- -------- -------------- ------------ -------
Transactions with owners:
- issue of share capital 0.1 - - - 0.1
- share-based payment charge - - 0.3 - 0.3
- transfer of share-based payment
reserve - - (1.4) 1.4 -
At 30 June 2020 52.6 273.2 295.5 126.6 747.9
-------- -------- -------------- ------------ -------
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
Six months ended
30 June
Note 2020 2019
(restated)
GBPm GBPm
-------- ------------
Cash flows from operating activities
Cash generated from operations 15 330.0 67.4
Finance costs paid (28.7) (31.3)
Tax paid (23.4) (8.1)
-------- ------------
Net cash generated from operating activities 277.9 28.0
Cash flows from investing activities
Purchase of intangible assets (3.8) (2.5)
Purchase of property, plant and equipment (3.9) (3.7)
Proceeds from disposal of property, plant
and equipment 0.7 1.1
Sale of government gilts - 30.6
Net cash (used in)/generated from investing
activities (7.0) 25.5
Cash flows from financing activities
Proceeds from bank and other borrowings 809.3 157.5
Repayment of bank and other borrowings (384.5) (125.7)
Payment of lease liabilities (4.7) (6.8)
Dividends paid to company shareholders 7 - (25.1)
Proceeds from issue of share capital 0.1 -
Net cash generated from/(used in) financing
activities 420.2 (0.1)
Net increase in cash, cash equivalents and
overdrafts 691.1 53.4
Cash, cash equivalents and overdrafts at
beginning of period 350.8 380.9
Cash, cash equivalents and overdrafts at
end of period 1,041.9 434.3
-------- ------------
Cash, cash equivalents and overdrafts at
end of period comprise:
Cash at bank and in hand 1,042.7 440.0
Overdrafts (held in bank and other borrowings) (0.8) (5.7)
-------- ------------
Total cash, cash equivalents and overdrafts 1,041.9 434.3
-------- ------------
Cash at bank and in hand includes GBP1,014.4m (2019: GBP423.3m)
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 30 June 2020, GBP825.0m (2019: GBP143.3m)
of the buffer was available to finance Vanquis Bank's day-to-day
operations.
Notes to the unaudited condensed interim financial
statements
1 . General information
The company is a public limited company, incorporated and
domiciled in the UK. The address of its registered office is No. 1
Godwin Street, Bradford, BD1 2SU. The company is listed on the
London Stock Exchange.
The unaudited condensed interim financial statements do 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 2019 were
approved by the board of directors on 27 February 2020 and have
been delivered to the Registrar of Companies. The report of the
auditor on those financial statements 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 unaudited condensed interim financial statements for the six
months ended 30 June 2020 have been reviewed, not audited, and were
approved by the board of directors on 26 August 2020.
2. Basis of preparation
The unaudited condensed interim financial statements for the six
months ended 30 June 2020 have been prepared in accordance with IAS
34 'Interim Financial Reporting' as adopted by the European Union.
The unaudited condensed interim financial statements should be read
in conjunction with the statutory financial statements for the year
ended 31 December 2019 which have been prepared in accordance with
International Financial Reporting Standards (IFRS) as adopted by
the European Union.
In assessing whether the Group is a going concern, the directors
have reviewed the Group's latest budgets, as approved in July 2020,
which includes capital and liquidity forecasts, on detailed
projections for 2020 and 2021 together with outline projections for
the three subsequent years. This assessment has included
consideration of the Group's principal risks and uncertainties,
including that of Covid-19, and the likelihood of these risks
materialising into losses.
Given the uncertain outlook as a result of Covid-19, additional
stress testing has been performed through modelling a range of
macro-economic scenarios. This initially assumes a severe but
plausible downturn, with 'severe' being defined consistently with
the Group's IFRS 9 'severe' macro-economic weighting. This assumes
that unemployment in the UK reaches a peak unemployment rate of
14%. Further, more severe, scenarios have been modelled which would
need to materialise to prevent the directors from adopting the
going concern assumption. The projections do not assume any further
refinancing, or government support, and the Group's revised TCR has
been assumed in all scenarios modelled.
Based on this review, the directors are satisfied that the Group
has the required resources to continue in business for a period of
at least twelve months following the approval of the interim
financial statements. For this reason, the directors continue to
adopt the going concern basis in preparing the unaudited condensed
interim financial statements.
3. Accounting policies
The accounting policies applied in preparing the unaudited
condensed interim financial statements are consistent with those
used in preparing the statutory financial statements for the year
ended 31 December 2019. The 2019 June comparatives have been
restated to reflect the two changes in accounting policies
reflected in the 2019 financial statements: (i) change in treatment
of directly attributable deferred acquisition costs in Vanquis
Bank; and (ii) changes in the recognition of revenue on credit
impaired receivables and treatment of directly attributable
acquisition costs in Moneybarn.
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 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
was determined that the expected use of the issued credit cards can
be reliably predicted and it was 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.
The Group concluded that the new treatment represented a change
in accounting policy and restated the 2018 results. The June 2019
consolidated income statement, statement of comprehensive income,
balance sheet and statement of changes in shareholders' equity have
therefore also been restated. The prior year restatement has
resulted in an increase in receivables of GBP26.7m at June 2019 and
an increase in profit before tax in the first six months ended 30
June 2019 of GBP5.5m, comprising a reduction in costs of GBP9.0m
and a reduction in revenue of GBP3.5m.
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 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.
The Group concluded that the new treatment reflected a change in
accounting policy required to be applied retrospectively and
accordingly restated the 2018 results. The June 2019 consolidated
income statement, statement of comprehensive income, balance sheet
and statement of changes in shareholders' equity have therefore
also been restated. The restatement results in a reduction in
Moneybarn's revenue for the 6 months ended 30 June 2019 of GBP8.6m
with a corresponding reduction in administrative and operating
costs of GBP8.6m. There is no impact on profit before tax. The
carrying value of receivables at 30 June 2019 has increased by
GBP23.4m with a corresponding reduction in trade and other
receivables.
Critical accounting judgements and key sources of estimation
uncertainty
The significant accounting judgements exercised by management
and key sources of estimation uncertainty in the interim financial
statements are consistent with those adopted in the statutory
financial statements for the year ended 31 December 2019 with the
exception of the impact of Covid-19.
Amounts receivable from customers
As disclosed in the 2019 Annual report and financial statements,
the valuation of amounts receivable from customers remains a
significant accounting judgement.
Expected Credit Losses (ECL) are recognised on inception of a
loan based on the probability of default (PD), exposure at default
(EAD) and the loss given default (LGD). For the purposes of
assessing ECL for amounts receivable from customers, receivables
are categorised based on the PD into IFRS 9 stages and cohorts
which are believed to provide evidence of a significant increase in
credit risk (SICR) or default. These stages are considered to be
the most reliable indication of ECL.
Stage 1 - Losses are recognised on inception of a loan based on
the probability of a customer defaulting within 12 months.
Stage 2 - When an account has suffered a SICR but have not
defaulted, the account is move to Stage 2 based on comparisons of
current PD's to origination PD's. Lifetime losses are recognised
when a significant increase in credit risk is evident.
Stage 3 - When an account defaults.
-- Probability of Default (PD)
A SICR for customers in Vanquis Bank is when there has been a
significant increase in behavioural score or when one contractual
monthly payment has been missed. In Moneybarn and on the Satsuma
monthly product, a significant increase in credit risk is when one
contractual monthly payment has been missed. In CCD, credit risk is
assumed to increase significantly when the cumulative amount of two
or more contractual weekly payments has been missed in the previous
12 weeks, since only at this point do the expected future cash
flows from loans deteriorate significantly.
Default is assumed in Vanquis Bank and the Satsuma monthly
product when three contractual repayments have been missed.
Moneybarn assumes default when the customer's vehicle has been
terminated and CCD when the customer has missed a cumulative amount
of five or more contractual weekly payments in the previous 12
weeks.
The PD and evidence of a SICR has been reassessed by both
Vanquis Bank and Moneybarn in response to Covid-19, In particular
for:
o Customers who have activated a payment holiday where PD
estimates have been revised reflecting customer repayment behaviour
on exiting the payment holiday; and
o In Vanquis Bank, due to the low level of payment holidays
activated in the first half, and detailed customer-level bureau
analysis being held, PD's have also been adjusted for customers who
may activate a payment holiday in the second half of the year. This
is in response to revised FCA guidance on payment holidays to
credit card customers issued in June 2020.
The home credit business has payment holidays implicit within
their business model; customers value the fixed cost product with
no missed payment penalties. The accounting methodology was
therefore not required to be adjusted, at 30 June. This was
supported by customer repayment levels returning to pre Covid-19
levels by 30 June.
-- Exposure at Default (EAD)
EAD in Vanquis Bank reflects the current balance on the card
plus future expected spend and interest. It does not include any
credit line increases which a customer may become eligible for
after the balance sheet date. For loan balances, an estimation is
made of the outstanding loan, based on assumed repayments, at the
point of default, discounted to the balance sheet date.
-- Loss Given Default (LGD)
LGD reflect estimated losses following default and takes account
of subsequent customer repayments, including through payment
arrangements, recoveries through third party debt collection
agencies and external debt sales. For Moneybarn the LGD also takes
account of proceeds from the sale of the vehicle at auction.
Key sources of estimation uncertainty:
The level of impairment recognised by each of the Group's
businesses is calculated using models which utilise historical
payment performance to generate the estimated amount and timing of
future cash flows from each arrears stage, and are regularly tested
using subsequent cash collections to ensure they retain sufficient
accuracy. The impairment models are regularly reviewed to take
account of the current economic environment product mix and recent
customer payment performance.
The impact of Covid-19 has significantly influenced ECL in the
period. Each division has reviewed individual customer behaviour in
light of Covid-19 to adjust the previous calculations of PD, EAD
and LGD. This reflects assumptions in respect of:
-- higher PD for customers who have already activated a payment
holiday including the expectation of how a customer will continue
to repay following the end of the payment holiday;
-- higher PD from increased arrears where a customer may not
have been able to meet their repayments but not activated a payment
holiday. Future repayment expectations have been derived from
detailed analysis of previous customer behaviour, including payment
history or evidence of a SICR from bureau analysis;
-- the potential for further payment holidays where FCA guidance
was in place at the period end, extending the period over which
customers could activate a payment holiday to 31 October;
-- higher loss given default where recoveries from the customer
may be impacted, as well as lower recoveries from third party debt
collection agencies and external debt sales. For Moneybarn, trends
in the used vehicle resale values have been analysed to estimate
recoveries from the sale of the vehicle at auction. This also
reflects assumptions over the timing of resale given the
difficulties in recovering the vehicles; and
-- the potential impact to PD or LGD as a result of changing
forecasts in macro-economic environment.
Based on IASB guidance, the activation of a payment holiday by a
customer is not automatically deemed to be indicative of a SICR. A
customer who is not in arrears on activation of a payment holiday,
would remain in stage 1 unless internal data or external bureau
analysis, utilised by Vanquis Bank and Moneybarn respectively,
indicates a SICR. If this were to be evident, a customer would be
moved to stage 2. Individual customer behaviour has continued to be
analysed to understand repayment behaviour on exit of a payment
holiday to update the PD's, and stage classification,
accordingly.
Macro-economic provision
Separate macroeconomic provisions are recognised to reflect an
increased PD and LGD, in addition to the core impairment
provisions, already recognised based on future macro-economic
scenarios.
For Vanquis Bank, the provision reflects the potential for
future changes in unemployment under a range of unemployment
forecasts For Moneybarn, trends in the used vehicle resale values
have been analysed to estimate recoveries from the sale of the
vehicle at auction. This also reflects assumptions over the timing
of resale given difficulties in recovering the vehicles.
Unemployment is utilised by both Vanquis Bank and Moneybarn as a
key macro-economic indicator as analysis has clearly evidenced
correlation between changes in unemployment and credit losses
incurred by the business. This will continue to be analysed to
assess if there are any additional macro-economic indicators which
also correlate to credit losses.
CCD customers are not considered to be reflective of the wider
economy as they are less indebted and are therefore not impacted by
the same macro-economic factors or to the same degree. Consequently
there is no evidence of any significant correlation between the
impairment charge and macro employment statistics. Consistent with
the 2019 year end, a separate macroeconomic provision is not held
for CCD.
For Vanquis Bank and Moneybarn, the unemployment data has been
compiled from a consensus of sources including the Bank of England,
HM Treasury, the Office for Budget Responsibility (OBR), Bloomberg
and a number of prime banks.
The table below shows the annual peak and average unemployment
assumptions adopted by Vanquis Bank and Moneybarn and the
weightings applied to each. The combined severe and downside
scenarios have doubled from 20% at Dec-19 to 40% at Jun-20 to
reflect the uncertain outlook:
Base Upside Downside Severe
----------- ----- ------- --------- -------
Weighting 50% 10% 35% 5%
2020
Peak 8.0 6.3 10.0 13.5
Average 6.1 5.3 6.8 8.0
2021
Peak 7.4 5.7 10.2 14.1
Average 6.7 5.4 9.4 13.4
Whilst the forward-looking nature of IFRS 9 requires provisions
to be established for all losses arising out of the current
Covid-19 crisis, the level of uncertainty may mean that additional
impairment provision, or releases, may be required in future
periods.
Sensitivities on the key sources of estimation uncertainty are
included within note 8.
Corporation tax
Taxes on profits in interim periods are accrued using the tax
rate that will be applicable to expected total annual profits.
The impact of new standards adopted by the Group from 1 January
2020
There are no new standards adopted by the Group from 1 January
2020.
The impact of new standards not yet effective and not adopted by
the Group from 1 January 2020
There are no new standards not yet effective and not adopted by
the Group from 1 January 2020 which are expected to have a material
impact on the Group.
4. Segment reporting
Revenue Profit/(loss) before
tax
Six months ended Six months ended
30 June 30 June
2020 2019 (restated) 2020 2019 (restated)
GBPm GBPm GBPm GBPm
------ ---------------- --------- -------------------
Vanquis Bank 261.1 291.1 11.8 90.5
Moneybarn 66.1 58.3 2.4 15.5
CCD 118.4 152.1 (37.6) (15.1)
Central costs - - (9.2) (10.5)
------ ---------------- --------- -------------------
Total Group before amortisation
of acquisition intangibles and
exceptional items 445.6 501.5 (32.6) 80.4
Amortisation of acquisition intangibles - - (3.7) (3.7)
Exceptional items - - 8.3 (33.6)
------ ---------------- --------- -------------------
Total Group 445.6 501.5 (28.0) 43.1
------ ---------------- --------- -------------------
All of the above activities relate to continuing operations.
Revenue between business segments is not significant.
Acquisition intangibles represent the fair value of the broker
relationships of GBP75.0m which arose on the acquisition of
Moneybarn in August 2014. The intangible asset was 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. The amortisation charge in the first half
of 2020 amounted to GBP3.7m (2019: GBP3.7m).
The exceptional credit in the first half of 2020 reflects the
GBP8.3m exceptional release of provisions established in 2017
following the completion of the ROP refund programme in 2019 and
the re-evaluation of the forward flow of claims which may arise in
respect of ROP complaints more generally. Exceptional costs in 2019
comprised (i) GBP23.6m of defence costs associated with
Non-Standard Finance plc's (NSF's) unsolicited offer for the Group;
and (ii) GBP10.0m in relation to the ongoing turnaround of the home
credit business following the poor execution of the migration to
the new operating model in 2017, including a voluntary redundancy
programme within central support functions which resulted in a
reduction in headcount of approximately 200 . The redundancy costs
are stated net of an exceptional pension credit of GBP0.5m (see
note 9).
Segment assets Net assets/(liabilities)
30 June 31 December 30 June 30 June 31 December 30 June
2020 2019 2019 (restated) 2020 2019 2019
(restated)
GBPm GBPm GBPm GBPm GBPm GBPm
-------- ------------------ ---------------- -------- ------------ ------------
Vanquis Bank 2,332.1 1,889.5 2,030.3 333.7 397.3 404.5
Moneybarn 566.5 541.0 512.2 39.4 39.6 29.4
CCD 183.6 284.9 294.4 (96.1) (59.9) (28.7)
Central 544.4 443.3 377.2 470.9 363.5 292.9
-------- ------------------ ---------------- -------- ------------ ------------
Total before intra-Group
elimination 3,626.6 3,158.7 3,214.1 747.9 740.5 698.1
Intra-group elimination (309.2) (237.9) (181.6) - - -
-------- ------------------ ---------------- -------- ------------ ------------
Total Group 3,317.4 2,920.8 3,032.5 747.9 740.5 698.1
-------- ------------------ ---------------- -------- ------------ ------------
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 in the UK and Republic of
Ireland.
5. Tax charge
The tax credit/(charge) for the period has been calculated by
applying the best estimate of the effective tax rate for the
financial year of 21.4% (2019: 26.3%), to the (loss)/profit before
tax, amortisation of acquisition intangibles and exceptional items
for the period. This reflects the impact of the bank corporation
tax surcharge of 8% which applies to Vanquis Bank profits in excess
of GBP25m. It also reflects (i) the beneficial impact of measuring
deferred tax assets at 19% (2019: 17%), and in the case of Vanquis
Bank at 27% (2019: 25%), following the announcement in the March
2020 Budget that the rate of mainstream UK corporation tax would
remain at 19% from 1 April 2020 rather than the previously enacted
rate of 17%; (ii) the benefit of the release of part of the
provision for uncertain tax liabilities which is no longer
required; and (iii) the adverse impact of the write off of deferred
tax assets related to share awards reflecting the reduction in
expected tax relief as a result of the lower share price and
expected level of vesting. The tax rate also reflects the
recognition of deferred tax assets in respect of losses and other
temporary differences on the basis that the Group is expected to
have sufficient taxable profits available in the future to enable
such deferred tax assets to be recovered.
The tax charge in respect of the exceptional credit in 2020
amounts to GBP2.2m which represents tax at the combined mainstream
corporation tax rate and bank corporation tax surcharge rate of 27%
in respect of the GBP8.3m exceptional release of provisions
established in 2017 following the completion of the ROP refund
programme in 2019 and the re-evaluation of the forward flow of
claims that may arise in respect of ROP complaints more generally.
The tax credit in 2019 in respect of exceptional costs amounted to
GBP2.0m and represented: (i) tax relief of GBP1.9m in respect of
the exceptional restructuring costs in CCD; and (ii) tax relief of
GBP0.1m in respect of exceptional costs associated with the defence
of the unsolicited offer from NSF.
The tax credit in respect of the amortisation of acquisition
intangibles amounts to GBP0.1m (2019: GBP0.7m) and represents a tax
credit of GBP0.7m in respect of the amortisation net of the impact
of measuring the related deferred tax liability at 19% (2019: 17%)
following the announcement that the rate of mainstream UK
corporation tax will remain at 19% from 1 April 2020 rather than
the previously enacted rate of 17%, which amounts to GBP0.6m.
6. (Loss)/earnings per share
Basic (loss)/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.
Diluted (loss)/earnings per share calculates the effect on
earnings per share assuming conversion of all 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. 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.
Reconciliations of basic and diluted (loss)/earnings per share
are set out below:
Six months ended 30 June
2020 2019 (restated)
Weighted Weighted
average Per average Per
number share number share
Earnings of shares amount Earnings of shares amount
(restated) (restated)
GBPm m pence GBPm m pence
----------- ----------- --------- ------------- ----------- -------------
Basic (loss)/earnings
per share (23.1) 253.5 (9.1) 24.6 253.3 9.7
Dilutive effect of share
options and awards - - - - 1.2 -
----------- ----------- --------- ------------- ----------- -------------
Diluted (loss)/earnings
per share (23.1) 253.5 (9.1) 24.6 254.5 9.7
----------- ----------- --------- ------------- ----------- -------------
An adjusted (loss)/earnings per share has been presented prior
to the amortisation of acquisition intangibles which arose on the
acquisition of Moneybarn in August 2014 and prior to exceptional
items (see note 4). This is presented to show the (loss)/earnings
per share generated by the Group's underlying operations. A
reconciliation of basic and diluted (loss)/earnings per share to
adjusted basic and diluted (loss)/earnings per share is as
follows:
Six months ended 30 June
2020 2019 (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 (loss)/earnings per
share (23.1) 253.5 (9.1) 24.6 253.3 9.7
Amortisation of acquisition
intangibles, net of tax 3.6 - 1.4 3.0 - 1.2
Exceptional items, net
of tax (6.1) - (2.4) 31.6 - 12.5
----------- ----------- --------- ----------- ----------- ---------
Adjusted basic (loss)/earnings
per share (25.6) 253.5 (10.1) 59.2 253.3 23.4
----------- ----------- --------- ----------- ----------- ---------
Diluted (loss)/earnings
per share (23.1) 253.5 (9.1) 24.6 254.5 9.7
Amortisation of acquisition
intangibles, net of tax 3.6 - 1.4 3.0 - 1.2
Exceptional items, net
of tax (6.1) - (2.4) 31.6 - 12.4
----------- ----------- --------- ----------- ----------- ---------
Adjusted diluted (loss)/earnings
per share (25.6) 253.5 (10.1) 59.2 254.5 23.3
----------- ----------- --------- ----------- ----------- ---------
7. Dividends
Six months ended
30 June
2020 2019
GBPm GBPm
---------- --------
2018 final - 10.0p per share - 25.1
Total dividends paid - 25.1
------------------------------ --------
The directors have not declared an interim dividend in respect
of the six months ended 30 June 2020 (2019: 9.0p).
On 27 March 2020, following the unprecedented challenges of
Covid-19, the final dividend for 2019 of 16.0p was no longer
proposed at the Annual General Meeting. in order to retain
liquidity and balance sheet stability during unprecedented levels
of uncertainty. In 2019, the final 2018 dividend of 10.0p per share
was paid.
8. Amounts receivable from customers
30 June 31 December 30 June
2020 2019 2019 (restated)
GBPm GBPm GBPm
-------- ------------ ----------------
Vanquis Bank 1,202.1 1,461.5 1,464.8
Moneybarn 529.4 502.1 484.7
CCD 146.9 249.0 245.4
Total Group 1,878.4 2,212.6 2,194.9
Analysed as:
- due in more than one year 385.1 418.3 401.4
- due within one year 1,493.3 1,794.3 1,793.5
Total Group 1,878.4 2,212.6 2,194.9
-------- ------------ ----------------
Vanquis Bank receivables comprise GBP1,174.1m (31 December 2019:
GBP1,432.6m, 30 June 2019 (restated): GBP1,440.6m) in respect of
credit cards and GBP28.0m (31 December 2019: GBP28.9m, 30 June
2019: GBP24.2m) in respect of loans. The balance at 30 June 2019 is
stated net of a balance reduction provision of GBP1.2m (30 June
2020: GBPnil, 31 December 2019: GBPnil) following the resolution of
the FCA investigation into ROP.
Moneybarn receivables at 30 June 2019 were stated net of a
balance reduction provision of GBP1.8m (30 June 2020: GBPnil, 30
December: GBPnil) in respect of the FCA investigation into
affordability, forbearance and termination options.
CCD receivables comprise GBP130.5m in respect of the home credit
business (31 December 2019: GBP205.2m, 30 June 2019: GBP201.8m),
GBP15.9m in respect of Satsuma (31 December 2019: GBP43.2m, 30 June
2019: GBP42.9m) and GBP0.5m in respect of the collect-out of glo
(31 December 2019: GBP0.6m, 30 June 2019: GBP0.7m).
An analysis of receivables by IFRS 9 stages is set out
below:
30 June 2020
Stage Stage 2 Stage 3 Total
1
GBPm GBPm GBPm GBPm
-------- -------- -------- --------
Gross receivables
Vanquis Bank 1,139.0 165.2 350.6 1,654.8
Moneybarn 367.5 155.6 128.6 651.7
CCD 68.2 22.9 425.3 516.4
Total Group 1,574.7 343.7 904.5 2,822.9
Allowance account
Vanquis Bank (153.8) (86.4) (212.5) (452.7)
Moneybarn (9.9) (32.1) (80.3) (122.3)
CCD (3.4) (5.2) (360.9) (369.5)
Total Group (167.1) (123.7) (653.7) (944.5)
-------- -------- -------- --------
Net receivables
Vanquis Bank 985.2 78.8 138.1 1,202.1
Moneybarn 357.6 123.5 48.3 529.4
CCD 64.8 17.7 64.4 146.9
Total Group 1,407.6 220.0 250.8 1,878.4
-------- ------ ------ --------
An increase of 1% in the gross exposure into stage 2 from stage
1 would result in an increase in the allowance account of GBP5m (
31 December 2019: GBP6m, 30 June 2019: GBP5m).
A 50% reduction in the Group's forecast activation of payment
holidays in the second half of the year would have reduced the
Group's interim impairment charge by c.GBP30m.
31 December 2019
Stage 1 Stage 2 Stage 3 Total
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
-------- ------ ------ --------
30 June 2019 (restated)
Stage 1 Stage 2 Stage 3 Total
GBPm GBPm GBPm GBPm
-------- -------- -------- ----------
Gross receivables
Vanquis Bank 1,281.7 218.6 435.9 1,936.2
Moneybarn 338.5 151.0 150.1 639.6
CCD 137.1 43.7 500.6 681.4
Total Group 1,757.3 413.3 1,086.6 3,257.2
Allowance account
Vanquis Bank (122.5) (97.7) (251.2) (471.4)
Moneybarn (10.4) (29.9) (114.6) (154.9)
CCD (9.0) (11.1) (415.9) (436.0)
Total Group (141.9) (138.7) (781.7) (1,062.3)
-------- -------- -------- ----------
Net receivables
Vanquis Bank 1,159.2 120.9 184.7 1,464.8
Moneybarn 328.1 121.1 35.5 484.7
CCD 128.1 32.6 84.7 245.4
Total Group 1,615.4 274.6 304.9 2,194.9
-------- ------ ------ --------
Macro-economic provision
Macro-economic provisions are recognised to reflect an increased
PD and loss LGD, in addition to the core impairment provisions
recognised, based on future macro-economic scenarios.
For Vanquis Bank, the provision reflects the potential for
future changes in unemployment under a range of unemployment
forecasts. For Moneybarn, both changes in unemployment and used car
sales values are assumed.
CCD customers are not considered to be reflective of the wider
economy as they are less indebted and are therefore not impacted by
the same macro-economic factors, or to the same degree.
Consequently there is no evidence of any significant correlation
between the impairment charge and macro-economic statistics.
Consistent with the 2019 year end, a separate macro-economic
provision is not held for CCD.
The impairment charge in respect of amounts receivable from
customers can be analysed as follows:
Six months ended
30 June
2020 2019 (restated)
GBPm GBPm
------ ----------------
Vanquis Bank 149.9 96.6
Moneybarn 37.5 17.5
CCD 52.9 51.8
Total Group 240.3 165.9
------ ----------------
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. 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:
30 June 31 December 30 June
2020 2019 2019
GBPm GBPm GBPm
-------- ------------ --------
Fair value of scheme assets 933.1 842.6 844.1
Present value of defined benefit obligation (814.7) (764.6) (773.8)
-------- ------------ --------
Net retirement benefit asset recognised
in the balance sheet 118.4 78.0 70.3
-------- ------------ --------
The amounts recognised in the income statement were as
follows:
Six months ended
30 June
2020 2019
GBPm GBPm
--------- --------
Current service cost (0.8) (1.1)
Interest on scheme liabilities (7.6) (9.8)
Interest on scheme assets 8.4 11.0
--------- --------
Net credit recognised in the income statement before
exceptional curtailment credit - 0.1
--------- --------
Exceptional curtailment credit (note 4) - 0.5
--------- --------
Net credit recognised in the income statement - 0.6
--------- --------
The net credit recognised in the income statement has been
included within administrative and operating costs.
Movements in the fair value of scheme assets were as
follows:
Six months ended
30 June
2020 2019
GBPm GBPm
--------- --------
Fair value of scheme assets at 1 January 842.6 788.3
Interest on scheme assets 8.4 11.0
Actuarial movements on scheme assets 95.9 63.6
Contributions by the Group 2.1 1.5
Net benefits paid out (15.9) (20.3)
--------- --------
Fair value of scheme assets at 30 June 933.1 844.1
--------- --------
Movements in the present value of the defined benefit obligation
were as follows:
Six months ended
30 June
2020 2019
GBPm GBPm
--------- --------
Present value of defined benefit obligation at 1
January (764.6) (704.4)
Current service cost (0.8) (1.1)
Interest on scheme liabilities (7.6) (9.8)
Exceptional curtailment credit (note 4) - 0.5
Actuarial movements on scheme liabilities (57.6) (79.3)
Net benefits paid out 15.9 20.3
--------- --------
Present value of defined benefit obligation at 30
June (814.7) (773.8)
--------- --------
The principal actuarial assumptions used at the balance sheet
date were as follows:
30 June 31 December 30 June
2020 2019 2019
% % %
-------- ------------ --------
Price inflation - RPI 2.80 2.95 3.30
Price inflation - CPI 1.90 2.05 2.20
Rate of increase to pensions in payment 2.60 2.70 3.00
Inflationary increases to pensions in deferment 2.00 2.10 2.20
Discount rate 1.50 2.00 2.20
-------- ------------ --------
A 0.1% change in the discount and inflation rates would change
the present value of the defined benefit obligation by
approximately GBP15m (31 December 2019: GBP14m, 30 June 2019:
GBP13m) and GBP7m (31 December 2019: GBP6m, 30 June 2019: GBP6m)
respectively.
The mortality assumptions are based on the self-administered
pension scheme (SAPS) series 2 tables (31 December 2019: series 2
tables, 30 June 2019: series 2 tables), with multipliers of 96% (31
December 2019: 96%, 30 June 2019: 96%) and 101% (31 December 2019:
101%, 30 June 2019: 101%) respectively for males and females. The
4% downwards (31 December 2019: 4% downwards, 30 June 2019: 4%
downwards) adjustment to mortality rates for males and a 1% upwards
(31 December 2019: 1% upwards, 30 June 2019: 1% upwards) 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
latest available Continuous Mortality Investigation (CMI) 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
30 June 31 December 30 June 30 June 31 December 30 June
2020 2019 2019 2020 2019 2019
Years Years Years Years Years years
-------- ------------ -------- -------- ------------ --------
Current pensioner aged
65 21.9 21.8 22.3 23.5 23.3 23.8
Current member aged 45
from age 65 23.2 23.1 23.7 25.0 24.8 25.4
-------- ------------ -------- -------- ------------ --------
If assumed life expectancies were one year greater, the net
retirement benefit asset would have been reduced by approximately
GBP41m (31 December 2019: GBP 38 m, 30 June 2019: GBP30m).
An analysis of amounts recognised in the statement of
comprehensive income is set out below:
Six months ended
30 June
2020 2019
GBPm GBPm
--------- --------
Actuarial movements on scheme assets 95.9 63.6
Actuarial movements on scheme liabilities (57.6) (79.3)
--------- --------
Actuarial movements recognised in the statement
of comprehensive income in the period 38.3 (15.7)
--------- --------
10. Investments
30 June 31 December 30 June
2020 2019 2019
GBPm GBPm GBPm
-------- ------------ --------
Government gilts - - 5.1
Visa Inc. shares 18.0 16.6 16.0
-------- ------------ --------
18.0 16.6 21.1
-------- ------------ --------
Government gilts
Government gilts at 30 June 2019 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
GBP1,014.4m (31 December 2019: GBP321.9m, 30 June 2019: GBP428.4m)
. This includes GBP1,014.4m (31 December 2019: GBP321.9m, 30 June
2019: GBP423.3m) held in cash and cash equivalents.
Visa Inc. shares
The Visa shares represents 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 30 June 2020 of GBP18.0m (31 December 2019:
GBP16.6m, 30 June 2019: GBP16.0m) is held at fair value through OCI
. The increase in the fair value of the investment during the six
month period of GBP1.4m (2019: GBP3.9m) in respect of the movement
in the Visa Inc. share price and the movement in foreign exchange
rates has been recognised in other comprehensive income.
11. Fair value disclosures
The Group holds the following financial instruments at fair
value:
30 June 31 December 30 June
2020 2019 2019
GBPm GBPm GBPm
-------- ------------ --------
Financial assets
Government gilts - - 5.1
Visa Inc. shares 18.0 16.1 16.0
-------- ------------ --------
18.0 16.1 21.1
-------- ------------ --------
Financial liabilities
Derivatives (1.2) - -
-------- ------------ --------
Derivatives of GBP1.2m ( 31 December GBPnil, 30 June 2019:
GBPnil) relate to the balance guaranteed swap entered into as part
of the Moneybarn securitisation in January 2020.
Except as detailed in the following table, the directors
consider that the carrying value of financial assets and financial
liabilities recorded at amortised cost in the financial statements
are approximately equal to their fair values:
Carrying value Fair value
-------------------------------------- ------------------------------------
30 June 31 December 30 June 30 June 31 December 30 June
2020 2019 2019 2020 2019 2019
(restated)
GBPm GBPm GBPm GBPm GBPm GBPm
---------- ------------ ------------ ---------- ------------ ----------
Financial assets
Amounts receivable
from customers 1,878.4 2,212.6 2,194.9 2,336.4 3,008.3 3,233.8
---------- ------------ ------------ ---------- ------------ ----------
Financial liabilities
Retail deposits (1,917.3) (1,345.1) (1,472.3) (1,921.9) (1,351.6) (1,468.3)
Bank and other borrowings (476.3) (618.4) (617.3) (463.4) (631.3) (619.6)
---------- ------------ ------------ ---------- ------------ ----------
Total (2,393.6) (1,963.5) (2,089.6) (2,385.3) (1,982.9) (2,087.9)
---------- ------------ ------------ ---------- ------------ ----------
12. Provisions
30 June 31 December 30 June
2020 2019 2019
GBPm GBPm GBPm
-------- ------------ --------
At 1 January 14.5 53.2 53.2
Created in the period 8.9 - -
Reclassified in the period 8.6 - -
Used during the period (14.7) (21.9) (17.6)
Released in the period (8.3) (16.8) -
At the period end 9.0 14.5 35.6
-------- ------------ --------
In preparing the 2020 interim financial statements, the Group
has reassessed both the probability and the reliability of the
estimates in settling a number of liabilities previously included
within accruals. The level of certainty required to include these
amounts as accruals is not evident. Therefore the existing accrual
has been reclassified to provisions.
Vanquis Bank
As previously reported, Vanquis Bank agreed a settlement with
the FCA into their investigation into ROP. The total estimated cost
of redress settlement amounted to GBP172.1m and was reflected in
the 2017 financial statements.
The ROP refund programme was completed in 2019. As a result, the
provision reduced to GBP11.7m at 31 December 2019. A further review
has been performed at 30 June 2020 to determine the level of
provision required. This assessment has concluded that GBP2.9m
provision continues to be required, as a result GBP8.3m has been
released as an exceptional gain in the period.
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.
Moneybarn
As previously reported, 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.
At 31 December 2019, a provision of GBP2.8m remained, reflecting
the estimated fine payable on completion of the investigation. The
amount was paid to the FCA on 18 February 2020.
Complaints
Claims raised which could subsequently be referred to the
Financial Ombudsman Service (FOS) against CCD. See note 13
below.
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 control of all aspects of the customer relationship.
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 and it is expected that the review could continue for at least
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 national insurance contributions,
on the 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 through self-assessment
which are available for offset, it is difficult to calculate an
accurate liability should the Group be unsuccessful in defending
the position. HMRC has raised protective assessments which have all
been appealed but these are purely a procedural matter to ensure
that, in the event the review concludes that taxes are payable,
HMRC can recover such amounts in respect of the oldest year that
would otherwise drop out due to the lapse of statutory time
limits.
The Group has worked with HMRC over many years to manage
employment status risk and it remains confident based on the advice
received 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 (CMC)
activity in relation to non-standard lending, 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 during 2020. An increasing proportion
of complaints are being managed internally, reducing referrals to
the FOS. CCD continues to robustly defend inappropriate or
unsubstantiated claims.
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. Capital
The Group's capital management policy is focused on optimising
shareholder value, in a safe and sustainable manner. There is a
clear focus on delivering organic growth and ensuring capital
resources are sufficient to support planned levels of growth. The
Board regularly reviews the capital position. The following table
shows the regulatory capital resources as managed by the Group:
30 June 31 December 30 June
2020 2019 2019
GBPm GBPm GBPm
-------- ------------ --------
Share capital 52.6 52.5 52.5
Share premium 273.2 273.2 273.2
Retained earnings and other reserves 422.1 414.8 352.4
-------- ------------ --------
Total equity 747.9 740.5 678.1
-------- ------------ --------
Retirement benefit asset (net of tax) (95.9) (64.7) (58.3)
Goodwill (71.2) (71.2) (71.2)
Intangible assets (net of tax) (35.1) (38.1) (44.5)
IFRS 9 transition adjustment 159.2 183.6 156.4
-------- ------------ --------
CET 1 capital before foreseeable dividend 704.9 750.1 660.5
-------- ------------ --------
Deduction of foreseeable dividend - (40.4) (22.8)
Own funds 704.9 709.7 637.7
-------- ------------ --------
The capital resources shown in the table above include accrued
profits for the periods to June 2019 and December 2019, which were
automatically eligible for inclusion following the audit of the
2019 financial statements. The losses incurred in the period to
June 2020 are automatically deducted from own funds.
The transitional adjustment to capital arises from the Group
making an election to phase in the impact of transitioning to IFRS
9 over a five-year period, by applying add back factors of 95%,
85%, 70%, 50% and 25% for years one to five respectively to the
initial IFRS 9 transition adjustment plus any subsequent increase
in expected credit losses (ECL) in the non-credit-impaired book
from transition to the end of the reporting period. The PRA
ratified additional capital mitigation proposed by the Basel
Committee, in response to Covid-19, with these measures coming into
force from 27 June 2020. The new measures allow for the increase in
ECL in the non-credit impaired book arising in 2020 and 2021 to be
fully added back in those years. This relief is then phased out
over the following three years on a straight line basis (2022: 75%,
2023: 50%, 2024: 25%, 2025: 0%). At June 2020, the impacts of these
adjustments amounted to the following:
30 June 31 December 30 June
2020 2019 2019
GBPm GBPm GBPm
-------- ------------ --------
Initial IFRS 9 transition adjustment 184.0 184.0 184.0
Increase in ECL in the non-credit impaired
book from transition to 31 December 2019 22.7 32.0 -
206.7 216.0 184.0
-------- ------------ --------
Percentage add back 70% 85% 85%
-------- ------------ --------
144.7 183.6 156.4
Increase in ECL on the non performing book
during the 6 months ended 30 June 2020 14.5 - -
Percentage add back 100% - -
-------- ------------ --------
14.5 - -
IFRS 9 transition adjustment 159.2 183.6 156.4
-------- ------------ --------
15. Reconciliation of (Loss)/profit after tax to cash generated from operations
Six months ended
30 June
2020 2019 (restated)
GBPm GBPm
------- ----------------
(Loss)/profit after tax (23.1) 24.6
Adjusted for:
- tax charge (4.9) 18.5
- finance costs 36.0 36.5
- share-based payment charge 0.3 2.1
- retirement benefit credit before exceptional curtailment
credit (note 9) - (0.1)
- exceptional pension curtailment credit (note 9) - (0.5)
- amortisation of intangible assets 7.3 7.6
- depreciation of property, plant and equipment
and right of use assets 8.0 8.7
Changes in operating assets and liabilities:
- amounts receivable from customers 334.2 9.1
- trade and other receivables (11.3) (20.0)
- trade and other payables (9.2) -
- contributions into the retirement benefit scheme
(note 9) (2.1) (1.5)
- derivative financial instruments 0.3 -
- provisions (note 12) (5.5) (17.6)
Cash generated from operations 330.0 67.4
------- ----------------
16. Post balance sheet events
In August 2020, the Group tendered the GBP250m 5-year fixed rate
bonds carrying a semi-annual coupon of 8 1/4 % and mature in June
2023. GBP75m of the GBP250m bonds were tendered and redeemed at a
3.1% discount resulting in an exceptional credit of c.GBP2m which
will be reflected in the full year results. The remaining bonds of
GBP175m will mature on their original maturity date in June
2023.
In August 2020 Provident Financial plc also agreed a GBP70m
intercompany facility with Vanquis Bank to allow upstream funding
which facilitated the tender of the bonds.
Alternative Performance Measures (APMs)
APM Method of calculation Relevance
Adjusted basic earnings Profit after tax, excluding Assesses the Group's
per share (EPS) the amortisation of operational performance
acquisition intangibles from continuing operations
and exceptional items, per ordinary share.
divided by the weighted It removes the effect
average number of shares of amortisation of acquisition
in issue. intangibles and exceptional
items.
--------------------------------- --------------------------------
Average receivables Average of month-end Average receivables
receivables for the smooths the seasonality
6 months ended 30 June. of receivables.
--------------------------------- --------------------------------
Net interest margin Revenue less funding Demonstrates the return
costs for the period generated from the average
divided by average receivables. receivables over the
period after adjusting
for the cost of funding
the receivables book.
--------------------------------- --------------------------------
Return on assets (ROA) Adjusted profit before Measures the return
interest after tax as a company generates
a percentage of average from its assets prior
receivables. to the impact of funding
strategy for each division.
--------------------------------- --------------------------------
Return on equity (ROE) Adjusted profit after ROE shows the return
tax as a percentage being generated from
of average equity. Equity the shareholders' equity
is stated after deducting retained in the business.
the Group's pension
asset, net of deferred
tax, and the fair value
of derivative financial
instruments.
--------------------------------- --------------------------------
Return on required equity Adjusted profit after RORE shows the return
tax as a percentage being generated from
of average required the required regulatory
regulatory capital equity capital held.
for the 12 months ended
30 June.
--------------------------------- --------------------------------
Risk-adjusted net interest Revenue less funding Demonstrates the return
margin costs and impairment generated from the average
charge for the period receivables over the
divided by average receivables. period after adjusting
for impairment provisioning
and the cost of funding
the receivables book.
--------------------------------- --------------------------------
Common equity tier 1 The ratio of the Group's
(CET1) ratio regulatory capital to
the Group's risk-weighted
assets measured in accordance
with CRD IV.
--------------------------------- --------------------------------
Funding headroom Committed bank and debt This represents the
facilities less borrowings difference between the
on those facilities. total amount of committed
contractual debt facilities
provided by banks, bond
holders and other lenders
and the amount of funds
drawn on those facilities.
--------------------------------- --------------------------------
Statement of directors' responsibilities
The directors confirm that, to the best of their knowledge, the
unaudited condensed interim financial statements have been prepared
in accordance with IAS 34 as adopted by the European Union, and
that the interim report includes a fair review of the information
required by DTR 4.2.7R and DTR 4.2.8R, namely:
-- An indication of important events that have occurred during
the first six months of the financial year and their impact on the
unaudited condensed interim financial statements, and a description
of the principal risks and uncertainties for the remaining six
months of the financial year; and
-- Material related party transactions that have occurred in the
first six months of the financial year and any material changes in
the related party transactions described in the last annual report
and financial statements.
A list of current directors is maintained on the Provident
Financial website: www.providentfinancial.com . Simon Thomas
resigned on 31 March 2020 and Neeraj Kapur was appointed to the
Board on 1 April 2020. In addition, Margot James was appointed to
the Board on 27 July 2020. There have been no other changes in
directors during the six months ended 30 June 2020.
The maintenance and integrity of the Provident Financial website
is the responsibility of the directors. The work carried out by the
auditor does not involve consideration of these matters and,
accordingly, the auditor accept no responsibility for any changes
that may have occurred to the unaudited condensed interim financial
statements since they were initially presented on the website.
Legislation in the United Kingdom governing the preparation and
dissemination of unaudited condensed interim financial statements
may differ from legislation in other jurisdictions.
By order of the board
Malcolm Le May - Chief Executive Officer Neeraj Kapur - Chief
Financial Officer
26 August 2020
INDEPENDENT REVIEW REPORT TO PROVIDENT FINANCIAL PLC
We have been engaged by the company to review the condensed
interim financial statements in the interim report for the six
months ended 30 June 2020 which comprise the consolidated income
statement, the consolidated statement of comprehensive income, the
consolidated balance sheet, the consolidated statement of changes
in shareholders' equity, the consolidated statement of cash flows
and related notes 1 to 16. We have read the other information
contained in the interim report and considered whether it contains
any apparent misstatements or material inconsistencies with the
information in the condensed interim financial statements.
Directors' responsibilities
The interim report is the responsibility of, and has been
approved by, the directors. The directors are responsible for
preparing the interim report in accordance with the Disclosure
Guidance and Transparency Rules of the United Kingdom's Financial
Conduct Authority.
As disclosed in note 2, the annual financial statements of the
Group are prepared in accordance with IFRSs as adopted by the
European Union. The condensed interim financial statements included
in this interim report have been prepared in accordance with
International Accounting Standard 34 "Interim Financial Reporting"
as adopted by the European Union.
Our responsibility
Our responsibility is to express to the company a conclusion on
the condensed interim financial statements in the interim report
based on our review.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Financial Reporting Council for use in
the United Kingdom. A review of interim financial information
consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not
express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed interim financial
statements in the interim report for the six months ended 30 June
2020 are not prepared, in all material respects, in accordance with
International Accounting Standard 34 as adopted by the European
Union and the Disclosure Guidance and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
Use of our report
This report is made solely to the company in accordance with
International Standard on Review Engagements (UK and Ireland) 2410
"Review of Interim Financial Information Performed by the
Independent Auditor of the Entity" issued by the Financial
Reporting Council. Our work has been undertaken so that we might
state to the company those matters we are required to state to it
in an independent review report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company, for our review
work, for this report, or for the conclusions we have formed.
Deloitte LLP
Statutory Auditor
Birmingham, United Kingdom
26 August 2020
Information for shareholders
The interim report will be posted to shareholders on 2 September
2020.
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END
IR DZGZRKKVGGZM
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