Provident Financial : 2018 Interim results transcript

Malcolm

Good morning everybody, thank you very much indeed for coming. I think it was February that I was standing here setting out what our 2017 numbers were and explaining the outcome of the conversations we'd had with the FCA and indeed, announcing the rights issue. I think since then the group has made significant progress on many key fronts, and that's what I, together with Andrew are going to run through with you today. However of course, there's still a lot more to do to put the group back where we want it to be as the events of 2017 cannot be put right in just a matter of months. That said, the board and I feel that today's numbers, the actions that we've taken and will indeed continue to take, have cemented the group onto the road of recovery. I thought, as I've always said, that I saw 2018 as a year of getting our house in order and the priorities I set for the year clearly reflect that. Perhaps it would be worthwhile quickly to recap on what were the five clear objectives I set for the year. Firstly, we wanted to implement the home credit recovery plan with a view to obtaining full FCA authorisation during the course of 2018. Secondly, we wanted to progress the ROP Vanquis Bank refund programme, and adapting our business model to the changes that were being clearly highlighted by the Regulators. Thirdly, we wanted to strengthen the group's board, its governance structure, and refocus its culture. Fourthly, we wanted to make progress obviously resolving the ongoing investigation that the FCA had initiated into the historic affordability forbearance and determination practices at Moneybarn and finally, we wanted to recapitalise the group and re-access the debt markets. The next part of my presentation is going to update you on the progress we've made against these five objectives and then Andrew will take you through some of the numbers and then obviously I'll finish up with a view on strategy and outlook and then we'll open it up to Q&A. Turning firstly to our home credit division, I think we've made very good progress here implementing the operational recovery plan, thanks to the tremendous efforts and work done by Chris Gillespie and all of his team. And in fact all of the colleagues in that division, particularly the field force. Our aim for the business has always been to improve operational and financial performance of the group, and get the business authorised by the FCA during the course of this year. We've made progress on all of these objectives and importantly, I believe have significantly improved our relationship with the FCA and indeed with the PRA and in Ireland another important regulator, the CBI. For authorisation to happen, the new model we have needs to be implemented and also to be clearly shown to be working. I think Chris and his team have achieved this, though of course I'm not pre-judging what the FCA's decision will be, but I think we're very much moving in the right direction. On the slide, you can see many of the initiatives and actions that have already been delivered. I'm not going to call them out individually, but a new arrears strategy, enhanced activity management, and piloting the new field structure, are all helping to drive forward improved operational and financial performance across the business to the benefit of our customers and ultimately our shareholders. Improving collections remains a critical factor in our recovery, our analysis of collections showsus that the shortfall in quarter two is primarily down to customers who were live during the poorly executed model migration last summer. We refer to these people as being on the back book. Interestingly, customers who took credit from us in the fourth quarter 2017 onwards, who we call the front book, are in fact showing collections performance at normal historic levels, indicating to me that the changes we are making to our model are clearly beginning to work. Therefore as we rolled out the new field structure with enhanced controls and processes, I believe we'll begin to address the shortfall in collections in this specific group of back book customers. Next, turning to Vanquis, who delivered an IFRS 9 adjusted profit before tax of £97.2 million, that's up 6.1 percent on the equivalent period last year. I think we've had a good performance from the bank, especially when you consider that this has been achieved alongside the huge operational exercise involved in working through the ROP refund. In February, as we know, the Vanquis Bank agreed to refund ROP to 1.2 million customers. This type of exercise on this scale, has never been done before in the United Kingdom, so the systems and capabilities had to be built from scratch, and the pilot was run in June. It was successful and so far around 200,000 customers have been put into the programme. I should point out here that since we announced the ROP settlement, there's been no material change in the level of complaints that we have received. As you can see, what looks simple on paper requires a lot of hard work and effort for it to be executed successfully. This is a critical and key project, as well as running the bank it's been driven by Chris Sweeney, and his team, and I'd like to thank all of them for their hard work and effort putting this effort on course, and of course it's going to continue for the rest of the year. Vanquis Bank, in line with its own customer agenda and regulatory initiatives from the FCA, has also enhanced the affordability assessments and introduced an increase in minimum payments and will shortly roll out a new higher recommended payment option. Recommended payment has not been done before in the UK but clearly shows our customers and the Regulator that we're putting our customers first, and delivering a better outcome for them. In our view, working with the regulatory direction of travel can only enhance the long term prospects for the group. As you will see, today we've announced a new chairman, Patrick Snowball, and three new non executive directors. They're all joining the board, non executive directors, with effect from today and Patrick in September. Angela Knight, Libby Chambers and Paul Hewitt will be chairing the audit risk and a new customer ethics committee that we've put in place and I think all four of these new members are excellent appointments.

They will add to the board's financial services experience, their consumer finance expertise, regulatory and non-executive director skillset. So, on behalf of the board, I'd like to welcome them. I look forward to working with them as I and the team drive the group forward to further recovery. The governance of the group and its leadership team has also been strengthened by setting up the new group executive committee in

2018, that makes decision for and across the group. We also have made appointments as you know of an interim CRO, Chief IT Officer and recently a new Head of Internal Audit, and a new Group HR Director all of whom will help me drive through the change that's necessary at the group. Significant activity is also underway to help realign the group's culture, focusing on our customers and our social purpose and getting people generally access to credit. The new customer culture and ethics committee is part of this new initiative, and the new behaviours and attitudes being driven through and embedded will improve the business across the board. Moneybarn in the first half delivered an IFRS 9 adjusted profit before tax of £10.6 million, up 2.9 percent on the previous half year. Sales volumes are up by 16 percent, notwithstanding the tighter credit standards, and I think the team under Shamus have worked with the FCA over the last six months in progressing the investigation into the historical affordability, forbearance and terminal option issues, and I think good progress is being made in this regard. We still expect the investigation to run for up to a further 18 months. We are working as quickly as we can, but we remain very confident that the estimated cost that we announced back with our preliminary announcement of our results of £20 million remains comfortably within the scope of the investigation. So for Moneybarn in the first half, we've seen profit up, sales up, progress being made on the FCA investigation. A good first half and I'd like to thank Shamus and the team for all of their hard work. The last objective to us to recapitalise the group and to re-access the debt markets, this objective has been completed, but only due to the support of our shareholders and bond holders. As you know, we completed the rights issue and raised a net £300 million, but we've also issued a £250 million five year fixed bond carrying a semi-annual coupon of seven percent - lower than the bond it redeemed. We redeemed the old bond through a tender, 89 percent of our existing bonds tendered into that and this was done in the first half of the year after the rights issue, and I'd like to thank Andrew and his team who led that effort. So these actions have left the group CET 1 ratio at 30th of June at around 30 percent, that compares with a fully loaded capital requirement of 25.5 percent, and this level at 30 percent is consistent with the board's risk appetite levels. So, thank you for listening to this update on the progress I think we've made against our key objectives. I'll now hand over to Andrew who will get into a little detail on the numbers, then I'll come back and wrap up on strategy and take some questions. Thanks.

Andrew

Good morning everybody. Thank you Malcolm. As you know, 2018 represents the first set of results under IFRS 9, following adoption on the 1st January. So here's a brief recap of what it means for us. IFRS 9 significantly changes the recognition of impairment on customer issues by introducing an expected loss model. Under this approach impairment provisions are recognised on inception of a loan, based on the probability of default, and the loss given default. This approach differs from the current incurred loss model under IAS 39 where impairment provisions are only reflected when there's an objective evidence of a credit affecting event, which is typically a missed payment. The result is that impairment under IFRS 9 is recognised earlier. This has resulted in a one-off adjustment to receivables and reserves on adoption, and delays the recognition of profits, having a more significant impact on growing businesses, like Vanquis Bank and Moneybarn. We've now finalised IFRS 9 accounting methodology in each of the divisions which has resulted in only modest changes to the provisional figures we provided with the year end results. Whilst we've made an opening balance sheet adjustment at 1 January to restate for IFRS 9, we have not restated our statutory comparatives and this is because IFRS does not permit full restatement on a like-for-like basis. We have however provided unaudited proforma 2017 income statements, and balance sheet comparatives on a full IFRS 9 basis, and that is what I am presenting here today. The shape of those numbers is that Vanquis Bank and Moneybarn's 2017 profits under IFRS 9 are lower than under IAS 39, due to the strong growth in both businesses during that year and CCD's loss is modestly lower due to the shrinkage in home credit business following the operational disruption. We've included a full comparison of the IFRS 9 and IAS 39 numbers for the 2017 half year and full year for the group and each of the businesses as an appendix to this presentation. It is of course important to note that IFRS only changes the timing of profits made on a loan. It does not change the cash flows or the economics of a loan. The calculation of the group's bank covenants are unaffected by IFRS 9 as they're based on accounting standards that were effectively frozen at the time the covenants were set. As regards to regulatory capital, there are transitional arrangements with the impact of IFRS 9 being phased in over a five year period and I'll return to this later. Here's a summary of the group's first half results with the 2017 comparatives on a full IFRS 9 basis to aid comparison. The group has reported profit before tax as £75 million which shows year on year reduction of 24 percent. This is broadly in line with ourinternal plans, and the reduction is wholly attributable of course to the losses in CCD as the business continues to recover. Both Vanquis Bank and Moneybarn have reported an increase in profits. First half central costs have increased by nearly £2 million as greater group oversight across risk, IT, HR and regulation is established in the manner Malcolm described. As a result, central costs for the full year will reflect an uplift of some £5 million in expenditure associated with providing this oversight and are likely to total some £23 million for the full year. Adjusted EPS in the first half was reduced by 36 percent which exceeds the reduction in profits due to the impact of the rights issue in April. Within the EPS calculation, the weighted average number of shares in the period prior to the rights issue have been adjusted to take account of the bonus element of the rights issue, using a factor of 1.367. The group's annualised ROA to June was 5.3 percent. This annualised measure still reflects the significant home credit losses incurred in the second half of last year that will drop out of the calculation at the full year of course. Vanquis Bank and Moneybarn are delivering returns in excess of ten percent, and for the group as a whole, to do so requires CCD to return to an acceptable level of profitability. The results set out here are stated before the recurring charge of £3.7 million in respect of the amortisation of Moneybarn intangibles recognised on the acquisition of that business. In addition, they are stated before exceptional costs of £36.6 million. This includes £18.1 million in respect of the home credit recovery plan, and £18.5 million in respect of the premium of eight percent attached to the redemption of the 2019 senior bonds. The home credit exceptional costs comprise £11 million of IT asset write offs, following the decision to now permanently decommission the majority of the software built to support routing and scheduling and CRM, £4 million in respect of redundancies following the downsizing of the central support functions in the first quarter and £3 million in respect of ongoing consultancy, supporting the delivery of the recovery plan. Turning now to the businesses, Vanquis Bank delivered a 6.1 percent increase in adjusted profit before tax of £97.2 million. That is in line with its internal plan. The increase in profits reflects the beneficial profit effect under IFRS 9 of lower new account bookings which together with tight cost control, have more than compensated for the expected moderation in the risk adjusted margin. New customer bookings of 187,000 were in line with management's plans, and 47,000 lower than the very strong first half of last year. The year on year reduction reflects the timing of marketing spend, the impact of the tightening of underwriting during the third quarter of last year that curtailed booking