Vanquis Banking : Preliminary results for the year ended 31 December 2023

Preliminary results for the year ended 31 December 2023 Action taken to reset and rebuild for sustainable growth

London - 27 March 2024 - Vanquis Banking Group plc ('the Group'), the specialist bank, today published its preliminary results for the twelve months to the end of December 2023.

Ian McLaughlin, Chief Executive Officer, commented: "Today's results and strategy seminar highlight the considerable challenges we are managing as we reset our business. We also describe our opportunity to grow, to deliver benefit to our customers and increase adjusted return on tangible equity (ROTE) from 3.2% in 2023 to the mid-teens by 2026.

"After a first half loss in 2023, we generated adjusted profit before tax of £30.4m in the second half, reflecting cost management actions and impairment provision releases. We assembled the right leadership team and took some important first steps, creating a healthier mix of price and volume driven growth, simplifying our operating model and taking out costs. We have established solid foundations for the transformation of our business.

"We have a strong sense of social purpose and a unique market position. We have a better understanding than ever before of how to serve our large and growing customer base. We will build our position as their chosen banking partner, deploying unique assets like Snoop, improving operational effectiveness and managing our capital to support our growth ambitions. We do have a period of hard work and change ahead of us. It is still early days, but we are making progress."

Key financial results

2023	20221
£m	£m
Net interest income	442.6	432.7	2
Non-interest income	46.2	48.0	(4)
Total income	488.8	480.7	2
Impairment charges	(166.1)	(66.1)	151
Risk-adjusted income	322.7	414.6	(22)
Operating costs	(327.1)	(304.5)	(7)
Statutory (loss)/profit before tax from cont. ops	(4.4)	110.1	(104)
Adjusted profit before tax2	24.9	126.6	(80)
Adjusted operating costs3	(297.8)	(288.0)	(3)
Metrics
Adjusted EPS (p)4	6.8	38.7	(82)
Basic (LPS)/EPS (p)5	(2.4)	32.8	(107)
Net receivables at 31 December	2,175	1,913	14
Gross receivables (average)6	2,325	2,039	14

Change %

Net interest margin7	19.0%	21.2%	(2)
Risk-adjusted margin8	13.9%	20.3%	(6)
Cost:income ratio9	60.9%	59.9%	(1)
Adjusted ROTE10	3.2%	21.8%	(19)
CET1 ratio11	20.5%	26.4%	(6)
2023 headlines

After a first half loss, the new management team took rapid action in 2H23 to improve performance

• • After an adjusted loss before tax of £(5.5)m in 1H23, the Group generated adjusted profit before tax of £30.4m in 2H23. The statutory loss before tax was £(14.5)m in 1H23, followed by a statutory profit after tax of £10.1m in 2H23.

• • The key drivers of profitability in the second half were:

  • o Pro-active management of volume growth, which contained net receivables growth to 2.7% in 2H23 compared to 10.7% in 1H23, to end the year at £2,175m (FY22: £1,913m).

  • o Upward re-pricing strategy in Vehicle Finance and Cards to reflect the rising interest rate environment while shielding vulnerable customers.

  • o Non repeatable provision releases of £74.5m primarily from IFRS 9 impairment model recalibration.

  • o Rapid action to simplify the operating model and reduce duplication which led to the removal of c.350 roles: this delivered cost savings of in 2023 and will in total deliver c.£60m of cost savings.

• • Net interest margin stabilised at 19.0% in 2H23.

• • Impairments increased significantly year on year due to higher new originations, reduced benefits of enhancements in IFRS 9 modelling and post model releases compared to 2022, lower debt sale profits and lower revaluation of the post charge-off asset. The underlying credit quality of the book remains stable.

The Group maintained a robust capital position with a CET1 ratio of 20.5%, within the Group's updated CET1 target range of 19.5 to 20.5%.

Strategy update

At its strategy seminar on the afternoon of 27 March 2024, the Group will describe how it intends to grow its business, deliver benefits to a broader customer base and increase adjusted ROTE from 3.2% in 2023 to the mid-teens by 2026.

The key components of this transition are as follows.

• • In depth market research, which has identified a core target market of 23m consumers in the 'under financial pressure' and 'stretched but managing' cohorts.

• • Favourable market conditions, with a market credit deficit in our target market of £2bn and growing.

• • An increasingly diversified and differentiated customer proposition which serves three core customer needs

  • o Help me borrow healthily.

  • o Help me feel in control of my everyday spending.

  • o Help me build a financial safety net.

• • Broadened distribution channels including a new partnership with H&T Pawnbrokers to help customers who do not qualify for other sources of credit.

• • Benefits from technology transformation programme, which is progressing well.

• • Leveraging Snoop across the Group to integrate the Snoop team's fintech experience and harness Snoop's platform, data, proposition, distribution and customer incubation.

• • Further development of risk management capabilities, with enhanced data and modelling to enable "not yet" options for customers and reduce impairment levels.

• • Operational efficiency through finalising the Group's offshoring programme, a new strategy for debt sales, a revised approach to collections and technology transformation.

• • The Group's existing structural advantages, notably strong capital and liquidity and access to retail funding.

Outlook

The Group is connuing to take significant steps in the first quarter of 2024 to redevelop its customer proposion and reset pricing. With the implementaon of these changes, the Group expects to return to modest lending growth from the start of the second quarter.

The Group is not a subject of the FCA's review of historical motor finance commission arrangements and sales.

Nevertheless, the Group has been experiencing significant levels of third-party complaint submissions. Reviewing them is causing an increase in administraon costs. While the vast majority of these complaints are not upheld, the associated costs are likely to materially impact the Group's profitability in 2024. The Group has taken proacve legal steps to address this situaon.

The Group remains on track to deliver the benefits of its previously announced cost saving commitments. Allowing for the factors described above, the Group expects to deliver a low single digit adjusted ROTE in 2024.

In 2025, the Group intends to deliver accelerated but disciplined growth across its full range of products. However, the near-term adverse impact of IFRS 9 accounng requirements linked to receivables growth means that the Group's adjusted ROTE is expected to remain in the low single digits, as it connues its reposioning and transformaon.

In 2026, the Group intends to deliver an adjusted ROTE in the mid-teens. This significant improvement will be driven by a return to sustainable income growth, together with the benefits of greater efficiency and significant payback from its technology infrastructure investment.

Today's guidance* is summarised as follows. It is supported by expected non-linear receivables growth of

8-12% CAGR.

FY23	FY24 guidance	FY26 target
NIM (exc. 2nd charge mortgages)	19.0%	19%	19%
NIM (inc. 2nd charge mortgages)	19.0%	>18%	>17%
Cost: Income ratio	60.9%	60-63%**	49% or less
Retail funding (% of all funding)	83.7%	>85%	>85%
CET1 ratio	20.5%	19.5-20.5%***	-
ROTE	3.2%	Low single digits	Mid-teens
* All measures are on an adjusted basis

** Adjusted operating costs broadly flat to 2023 exclude complaint costs *** Based on a current regulatory requirements and risk appetite

Dividends

The Board proposes a final dividend of 1.0p per share for 2023, subject to final regulatory approvals. The Group also signals its intenon to pay a dividend of up to 1.0p per share for 2024, subject to Board and regulatory approvals, with measured progression in 2025. From 2026, following full implementaon of the new strategy, the Board will revisit the capital allocaon policy and reset the level of dividend from which to maintain a progressive policy thereaſter.

Results webcast and strategy seminar

Ian McLaughlin, CEO, and Dave Watts, CFO, will host a results webcast at 08:30 today. To register your attendance, please use this link:https://brrmedia.news/VANQ_FY23

Vanquis Banking Group will host a strategy seminar this afternoon from 14:00 to 17:00 at Deutsche Numis, 45 Gresham St, London EC4V 7BF. Attendance in person is encouraged to maximise the opportunity to meet the management team. If you wish to attend via webcast, please use this link:https://brrmedia.news/VANQ_SS

Materials for the results presentation will be published at:https://www.vanquisbankinggroup.com/shareholder-hub/results-reports-and-presentations/ , and materials for the strategy seminar will be added at 1pm.

Enquiries

Analysts and shareholders

Miriam McKay, Interim Head of Investor [e-mail] 07577 390666

Media

Richard King, Head of Corporate [e-mail] 07919 866876

Simone Selzer, Nick Cosgrove - [e-mail] 0207 4045959

Footnotes

• 1. The presentation of the income statement in this report is consistent with that in the Annual Report and Accounts for 31 December 2022, with the exception of interest received from Vanquis Bank Limited's liquid asset buffer and net fair value gains recognised in relation to the Group's derivative financial instruments previously reported in other income now being recognised within interest income, and certain elements of vehicle finance income, which were previously reported in interest income now being recognised in other income.

• 2. Adjusted profit before tax is stated before amortisation of acquisition intangibles, discontinued operations and exceptional items.

• 3. Adjusted operating costs are operating costs excluding exceptional items and amortisation of acquisition intangibles.

• 4. Adjusted EPS is calculated as profit after tax from continuing operations, excluding the amortisation of acquisition intangibles and exceptional items for the 12 months ended 31 December, divided by the weighted average number of shares in issue.

• 5. Basic (LPS)/EPS is calculated as (loss)/profit after tax from continuing operations for the 12 months ended 31 December, divided by the weighted average number of shares in issue.

• 6. Average of gross customer interest earning balances for the 13 months ended 31 December.

• 7. Net interest margin is calculated as interest income less interest expense for the 12 months ended 31 December as a percentage of average gross receivables for the 13 months ended 31 December.

• 8. Risk-adjusted margin is defined as risk-adjusted income for the 12 months ended 31 December as a percentage of average gross receivables for the 13 months ended 31 December.

• 9. Operating costs, excluding exceptional items and amortisation of acquisition intangibles as a percentage of total income, for the 12 months ended 31 December.

• 10. ROTE is defined as adjusted profit after tax net of fair value gains for the 12 months ended 31 December as a percentage of average adjusted tangible equity for the 13 months ended 31 December. Adjusted tangible equity is stated as equity after deducting the Group's pension asset, net of deferred tax, the fair value of derivative financial instruments, net of deferred tax, less intangible assets and goodwill.

• 11. The CET1 ratio is defined as the ratio of the Group's CET1 to the Group's risk-weighted assets measured in accordance with the CRR.

Forward looking statements

This report may contain certain "forward looking statements" regarding the financial posion, business strategy or plans for future operaons of Vanquis Banking Group. All statements other than statements of historical fact included in this document may be forward looking statements. Forward looking statements also oſten use words such as "believe", "expect", "esmate", "intend", "ancipate" 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 Vanquis Banking Group's ability to control or esmate precisely, such as future market condions and the behaviours of other market parcipants, and therefore undue reliance should not be placed on such statements which speak only as at the date of this report. Vanquis Banking Group does not assume any obligaon to, and does not intend to, revise or update these forward-looking statements, except as required pursuant to applicable law or regulaon. No statement in this announcement is intended as a profit forecast or esmate for any period. No statement in this announcement should be interpreted to indicate a parcular level of profit and, as a consequence, it should not be possible to derive a profit figure for any future period from this report.

Chief Executives Officer's review

Introduction

After I started at Vanquis Banking Group on 26 July 2023, we immediately experienced a significant fall in our share price as the market reacted to an unsatisfactory set of interim results on 28 July. I spent my first five months rapidly implementing the immediate changes required to put us on a path to better performance. We also initiated a thorough strategic review which will be presented at our strategy seminar on 27 March 2024. I have been extremely impressed with how my colleagues have responded and I am looking forward to working with them for the benefit of our customers as we bring our new strategic ambition to life.

Reflections on 2023

Despite some serious challenges being evident, I also discovered many positives. First and foremost, our people really care about doing the right thing for our customers; there is a genuine sense of social purpose. Progress had also been made in creating a fit-for-purpose corporate structure, including differentiating ourselves through access to retail funding. However, the business had been operating in product silos and the communication and alignment between teams was not where it needed to be. This had led to duplication in functions and there was little evidence of cost discipline. Particularly evident was a lack of visibility and accountability of centrally held costs.

Financially, the Group generated a £5.5m adjusted loss before tax from continuing operations in the first six months of 2023 (1H22: profit £54.3m), despite 11% growth in net receivables (1H22: 0%). Costs rose by 6% in the 6 month period to 1H23, compared to 1H22 and net interest margin (NIM) declined by 2.5% to 19.1% (1H22: 21.6%). The Group recorded a statutory loss before tax from continuing operations of £14.5m (1H22: profit of £46.9m). These results drove a 29% decline in our share price on the day of publication and crystallised the need for swift remedial action as well as a fundamental review of our strategic direction.

Immediate action was taken in the second half of 2023 to moderate lending growth, reduce IFRS 9 strain, reduce costs and implement appropriate price rises to improve product profitability. In our Q3 trading statement on 17 October 2023, we committed to deliver adjusted PBT for the year of £25-30m, and I am pleased that the business traded broadly in line with our expectations, delivering adjusted PBT of £24.9m (FY22: £126.6m). We recorded a statutory loss after tax for the year of £(6.0)m. H2 performance benefitted from a combination of cost management actions and impairment provision releases. Moderation of net receivables growth in the second half led to year-on-year receivables growth of 14%, and swift action on costs contributed to a 10% half-on-half reduction in adjusted operating costs. NIM for the year amounted to 19.0% (FY22: 21.2%), reflecting the higher funding costs and lower asset yield. Our key financial ratio is adjusted return on tangible equity (ROTE). This rose from (1.8%) in 1H23 to 3.2% for FY23.

Three further priorities were established to help restore overall performance and credibility.

• 1. Refreshed our Executive team to create the right mix of customer experience, capability and personal values with five new hires in key roles - Chief Customer Officer, Chief Financial Officer, Chief Technology Officer, Chief Digital, Data and Analytics Officer, and Chief of Staff - alongside seven seasoned Vanquis Banking Group executives in Operations, Transformation, HR, Communications, Risk, Legal, and Internal Audit.

• 2. Better communication to engage our colleagues, partners and other key stakeholders on the need for substantial change.

• 3. Simplifying our operating model and removing duplication, to deliver total savings of c.£60m in 2024 - without compromising on customer service.

In summary, we have demonstrated an ability to set and execute plans at pace and are seeing early progress from this. However, we still have a lot to do.

Strategy

I am excited by the output of our North Star strategic review and am looking forward to turning our plans into reality. We have a new sense of purpose - 'to deliver caring banking so our customers can make the most of life's opportunities'. The power of purpose to unite and motivate an organisation is immense. For us, the social purpose, the 'S' at the centre of ESG, is vital. Environmental and Governance objectives are also critical, and we will fulfil all our ESG responsibilities, but the 'S' of social purpose is at the heart of our business.

We have always cared about the customers we serve: now we have fundamentally changed the way we organise ourselves to serve them even better. Previously, we defined our customers by risk categories and organised our business around product lines. Now, we put their needs at the very heart of the way we operate. We undertook deep analysis using a well-respected financial segmentation model, augmented by our own customer research and data. From this, we identified three core customer needs:

• • Help me borrow healthily.

• • Help me feel in control of my everyday spending.

• • Help me build a financial safety net.

We are expanding our customer proposition to meet these needs and we are restructuring our service operation to serve them more effectively. We will refresh our distribution strategy, meet our customers where they are, and develop new partnerships to introduce ourselves to them.

Over time, we aspire to measure our success through a series of customer KPIs which are somewhat unusual in the banking sector, such as lifetime value, the increase we can drive in customers' credit scores and the cumulative value of savings delivered to customers by Snoop. To these we will add more traditional measures of sustainable performance such as adjusted ROTE and Cost:Income ratio.

Key initiatives for 2024

As we start to implement our North Star strategy, these initiatives will be our top priorities in 2024:

• • Develop compelling propositions for core customer needs.

• • Establish exceptional 'through the journey' management of risk.

• • Drive our distribution strategy to meet our customers where they naturally are and improve our costs of acquisition.

• • Establish Snoop as a uniquely valuable first point of customer contact.

• • Continue to improve operational effectiveness, for example by building on our successful offshoring programme.

• • Embed strong leadership and innovation, specifically in digital, data and analytics.

• • Better manage our complaint volumes.

Outlook

Our customers have proved their resilience in the face of cost of living pressures, and no discernible impact has been seen in the business's credit performance. We operate in a clearly defined, growing market sector and have attractive points of differentiation versus current peers (for example, Snoop and lower funding costs). As a business, we have short term challenges to address, however I am confident that our new strategy will deliver good outcomes for our customers and attractive and sustainable returns for our shareholders over the medium and longer term.

We are currently experiencing significant levels of third-party complaint submissions many of which are speculative in nature. The majority of complaints, which primarily relate to lending origination rather than in-life servicing and are in respect of a wide range of different matters with no common theme or systemic issue, lack substance and are not upheld. However, the higher than normal volumes and reviewing them is materially impacting our costs and we are therefore exploring proactive legal steps to address the situation.

The next two years, 2024 and 2025, will be periods of restructuring for Vanquis Banking Group. We are already taking significant steps to redevelop our customer proposition and reset pricing, and we expect to return to modest lending growth from the start of the second quarter of 2024. In 2025, we intend to deliver accelerated but disciplined growth across our full range of products, but the near-term adverse impact of IFRS 9 accounting requirements linked to receivables growth means that adjusted ROTE is expected to remain in the low single digits.

Looking ahead to 2026, we expect to be delivering an adjusted ROTE in the mid-teens driven by a return to sustainable income growth serving a broader customer base; together with the benefits of greater efficiency and significant payback from our technology infrastructure investment.

Conclusion

Reflecting on the huge amount of change we have driven in a very short period of time, I want to pay tribute to my colleagues for the way they have embraced it. Thank you, to each and every one of you. I also want to thank our investors for trusting us to turn this business around. The change programme ahead of us will be challenging and exciting. Success is in the hands of a very talented and dedicated team. As the UK's largest

specialist finance provider, we have unmatched dedication to our chosen customers and substantial potential to grow by meeting their needs. We relish the challenge ahead and our colleagues are absolutely focused on delivering caring banking so our customers can make the most of life's opportunities. This is when Vanquis is at its best. It's what we call 'Banking with Heart'.

Financial review

Group performance

The Group's 2023 results are as follows:

Tax charge Amortisation of acquisition intangibles Exceptional items Loss after taxation from discontinued operations	1.6
7.9 21.4
-
Adjusted profit before tax	24.9

2023	2022
£m	£m
Interest income	556.0	491.5
Interest expense	(113.4)	(58.8)
Net interest income	442.6	432.7
Fee and commission income	44.2	47.0
Fee and commission expense	(1.7)	(2.8)
Net fee and commission income	42.5	44.2
Other income	3.7	3.8
Total income	488.8	480.7
Impairment charges	(166.1)	(66.1)
Risk-adjusted income	322.7	414.6
Operating costs	(327.1)	(304.5)
Statutory (loss)/profit before taxation from continuing operations	(4.4)	110.1
Tax charge for continuing operations	(1.6)	(27.8)
Statutory (loss)/profit after taxation from continuing operations	(6.0)	82.3
-
Loss after taxation from discontinued operations	(4.9)
Statutory (loss)/profit for the year attributable to equity shareholders	(6.0)	77.4
Add back:
27.8
7.5
9.0
4.9
126.6

To enhance transparency and understanding of our financial performance, the Group has taken the decision in the current year to enhance the presentation of our financial performance to initially focus on the statutory income statement with a reconciliation to adjusted profit before tax, which is a primary measure to assess our financial performance. All periods presented have been retrospectively re-presented. This change does not constitute a change in accounting policy and there is no impact on recognition, measurement or profit and loss in any period presented in the financial statements.

Profit/(loss) before tax

The Group's statutory loss before tax, including amortisation of acquisition intangibles and exceptional items, was £4.4m; prior year profit before tax was £110.1m, or £99.4m including the discontinued consumer credit division (CCD).

The Group reported a lower adjusted profit before tax of £24.9m (2022: £126.6m). Total income of £488.8m (2022: £480.7m) was £8.1m higher, driven by higher receivables across all product lines and repricing initiatives in cards, offset by higher funding costs. Impairments of £166.1m (2022: £66.1m) reflect higher new originations, comparatively reduced benefits of enhancements in IFRS 9 models and post-model releases than in 2022, lower debt sale profits, and lower revaluation of the post charge-off asset. The back book underlying asset quality remained broadly stable. Higher costs of £327.1m (2022: £304.5m) from inflationary headwinds, elevated customer compensation claims from claims management companies and higher exceptional costs. Exceptional costs of £21.4m were recognised in 2023 (2022: £9.0m), including transformation costs of £17.0m (2022: £5.3m), comprising redundancy and outsourcing (£9.4m), property exit costs (£4.1m) and strategic consultancy (£3.5m).

Income

Net interest income increased by 2% to £442.6m (2022: £432.7m) with interest income rising 13% driven by receivables growth in the first three quarters of 2023. The Group's funding cost increased from £58.8m in 2022 to £113.4m in 2023, as market savings rates on retail deposits increased from their historically low levels as the UK bank base rate has moved upwards.

The Group's NIM, net interest income as a percentage of average gross receivables, decreased by 2.2% from 21.2% in 2022 to 19.0% in 2023, reflecting the higher funding costs and lower asset yields in both vehicle finance and personal loans. Management actions, including repricing, taken during the second half of 2023 increased 4Q23 NIM by 0.2% relative to 3Q23.

Fee and commission income reduced 4% to £42.5m (2022: £44.2m). The Repayment Option Plan (ROP) has been discontinued; excluding ROP, underlying fee and commission income increased £2.8m year-on-year.

Impairment / Cost of Risk

Impairments have benefited from a release of provisions no longer required in credit cards and vehicle finance, arising from ongoing IFRS 9 model refinements (£57.7m in 2023), and the full release of the cost of living post-model adjustment (£10.8m). The level of releases in 2023 (£74.5m) were lower than releases in 2022 (£94.1m), contributing to a higher impairment charge this year.

The macroeconomic environment, the minimal impact of the cost of living crisis, and refreshed model parameters reflecting the refocus onto lower-risk market segments, are the predominant reasons for release of provision. Underlying asset quality remained high and delinquency trends remained stable.

The Group's cost of risk, defined as impairment charges as a percentage of average gross receivables, has increased from 3.2% in 2022 to 7.1% in 2023.

Risk-adjusted net interest margin, defined as risk-adjusted net interest income as a percentage of average gross receivables, has decreased from 20.3% in 2022 to 13.9% in 2023 as a result of higher impairment charges and higher funding costs.

The Group's coverage ratio has reduced from 24% at December 2022 to 21% at December 2023, reflecting the current nature of the macroeconomic environment, the release of impairment provision no longer

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