Vanquis Banking Group PLC · LSE:VANQ
Vanquis Banking — Provident Financial — Investor Day (November 2010)
153 slides from Vanquis Banking's investor day presentation, Nov 24, 2010
Slide 1: Investor & Analyst Event
Provident Financial plc Investor & Analyst Event 24 November 2010
Slide 2: Agenda
Agenda Time Subject Presenter Section 10.45am Registration and coffee 11.00 – 11.30 Introduction and strategy overview Peter Crook (Chief Executive) 1 11.30 – 12.00 The structure and dynamics of the non-standard David Merrett 2 market (Director of Corporate Strategy) 12.00 – 13.00 Consumer Credit Di
Slide 3: Introduction and strategy overview
Investor & Analyst Event – 24 November 2010 Introduction and strategy overview Peter Crook – Chief Executive
Slide 4: Overview of strategy
Overview of strategy • Our objective is to be the leading non-standard lender in the UK and Ireland, acting responsibly in all our relationships and playing a positive role in the communities we serve • The UK non-standard market is increasingly becoming the domain of specialist lenders with high re
Slide 5: CCD – Resilient performance
CCD – Resilient performance CCD profitability 126.1 126.8 140 123.5 121.2 122.0 120 100 80 £m 60 40 20 - 2006 2007 2008 2009 2010 Consensus • Resilient performance through the downturn – Investment in the infrastructure of the business and customer acquisition after years of under-investment – Trial
Slide 6: Home Credit – Development from 2007 to 2009
Home Credit – Development from 2007 to 2009 Year ended 31 December 2009 2008 2007 Strong customer and receivables growth £m £m £m to provide a platform for future profitable Customers (000) 1,842 1,753 1,650 growth Average receivables 759.2 704.8 636.1 Significant investment in IT infrastructure, Re
Slide 7: The Home Credit product (simple example)
The Home Credit product (simple example) • Core 50-week loan: £100 repaying £175 in equal instalments over 50 weeks Revenue @ B/F 2.463% p.w Collections C/F Week £ £ £ £ 1 100.00 2.46 (3.50) 98.96 2 98.96 2.44 (3.50) 97.90 3 97.90 2.41 (3.50) 96.81 49 6.75 0.17 (3.50) 3.42 50 3.42 0.08 (3.50) - Tota
Slide 8: Home Credit – Credit issued and collections
Home Credit – Credit issued and collections Credit Collections % Collections issued credit issued Year £m £m % 2007 1,322 960 138 2008 1,428 1,064 134 2009 1,517 1,092 139 1.5
Slide 9: Home Credit – Impairment policy
Home Credit – Impairment policy • Impairment based on last 12 weeks performance – Begin to impair if more than 1 weekly payment missed in previous 12 weeks – Impairment increases progressively – 95% provision if no payments made in last 12 weeks – Any loan that has ever missed more than one payment
Slide 10: Home Credit – Stable collections performance
Home Credit – Stable collections performance Hom e Credit collections perform ance and revenue less im pairm ent (indexed to 1994) 200 180 160 140 120 100 80 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Collections performance Revenue less impairment • During the 1
Slide 11: Summary of austerity measures
Summary of austerity measures 2010 -11 2011-12 2012-13 2013-14 2014-15 £m £m £m £m £m Switching of benefits from RPI to CPI - 1,170 2,620 4,285 6,230 Removing child benefit from higher rate tax payers - - 590 2,420 2,500 Other measures 385 1,160 4,055 7,435 9,350 Total Budget and Spending Review sav
Slide 12: Impact of austerity measures
Impact of austerity measures • Less than half of Home Credit households receive some form of benefits in addition to their income from employment • Measures are phased in over 4 years – impairment arises in Home Credit due to unexpected rather than expected changes to customers’ circumstances • Mini
Slide 13: CCD – Poised for good quality growth
CCD – Poised for good quality growth • CCD is poised to take advantage of a recovery in economic conditions • Modernisation complete and business is fully invested – Improved IT systems – Better credit science (SEL/SVC) – More channels to market (direct mail/internet) • 20% growth in customer number
Slide 14: Vanquis Bank – Strong profits growth through the downturn
Vanquis Bank – Strong profits growth through the downturn Vanquis Bank profitability 22.2 25 20 14.1 15 8.0 10 5 £m - (0.9) (5) (10) (9.0) (15) (15.9) (18.3) (20) 2004 2005 2006 2007 2008 2009 2010 Consensus • Strong profits growth from 2007 – Re-pricing of the receivables book to appropriately refl
Slide 15: Vanquis Bank – On track to meet new targets
Vanquis Bank – On track to meet new targets • Recently passed original objective set on demerger of 500,000 customers, receivables of £300m and a post-tax ROE of 30% • On track to achieve new target of £450m receivables generating a post-tax ROE of 30% by the end of 2012 • New targets assume – Simil
Slide 16: Trading update
Trading update • Since the company’s interim management statement on 22 October 2010, it is pleasing to report that the pick-up in Home Credit loan sales has continued. In the twelve weeks since the beginning of September, sales are running approximately 7% ahead of the corresponding period last yea
Slide 17: PFG – Investment case
PFG – Investment case • Non-standard credit market will remain the domain of specialists • An attractive business model – Fully invested and modernised Home Credit business poised for growth – Strong profitable and now capital generative growth in Vanquis Bank • Minimal impact from austerity measure
Slide 18: The structure and dynamics of the non-standard market
Investor & Analyst Event – 24 November 2010 The structure and dynamics of the non-standard market David Merrett – Director of Corporate Strategy
Slide 19: How large is the UK non-standard credit market?
How large is the UK non-standard credit market? Stock Flow Balances Outstanding 2009 Gross Advances 2009 Total Market £1,224bn £1,077bn in 2007 £363bn in 2007 £221bn in 2004 £227bn £199bn in 2004 £171bn £144bn Non-standard c£84bn c£36bn <£1bn c£64bn c10m adults Secured Unsecured Secured Unsecured So
Slide 20: Who is a non-standard credit consumer?
Who is a non-standard credit consumer? • Reverse engineer lender scorecards approach (Datamonitor) 6.9m adults – CCJs, self-employed for less than 3 years, unemployed, (8.3m by 2012) unbanked, mortgage arrears or benefits claimants • Household income driven approach c.10-12m households – Bottom 4,5,
Slide 21: Who is a non-standard credit consumer? ...at the moment?
Who is a non-standard credit consumer? ...at the moment? Prime (c.33m) • c.50m UK potential credit consumers in c.25m households experience changes in: & Near Prime (c.6m) – Income/outgoings – Unemployment/under-employment – Benefit entitlement – Age/births/deaths – Marriage/divorce Direct repayment
Slide 22: What do non-standard customers use credit for?
What do non-standard customers use credit for? 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Gift (Xmas, Household Holiday/ Car items Home Clothes Electrical Furniture Birthday) items Travel improvements goods Top individual merchants: Tesco, Asda, Sainsbury’s, Paypal Source: PFG HC Customer Tracker June 20
Slide 23: What works in non-standard?
What works in non-standard? Direct repayment Over 10 million (c.7 million) consumers Home collected (c.3 million) 2.5
Slide 24: What credit products do non-standard consumers use?
What credit products do non-standard consumers use? 30% 25% 86% have a 20% bank account 15% 10% 5% 0% Overdraft Mail Order Credit Card Personal Mortgage Store Card Payday Loan Pawn Broker Credit Loan • Vanquis customers – All have bank accounts (direct debit repayment) – Less likely than UK average
Slide 25: What credit do non-standard consumers use?
What credit do non-standard consumers use? 2.7
Slide 26: What happened overall?
What happened overall? Consumer Credit CAGR -5% Secured Lending CAGR -37% UK secured lending and consumer credit gross advances 1994-2009 £600,000 £500,000 £400,000 £m £300,000 Secured lending gross advances Consumer credit gross advances £200,000 £100,000 £- 1994 1995 1996 1997 1998 1999 2000 2001
Slide 27: What happened in non-standard credit?
What happened in non-standard credit? Non-standard market and product gross advances 100 £95bn 90 11 Sub-prime mortgages 80 8 7 Sub-prime unsecured 70 £64bn 60 21 Second Charge secured 21 £bn 50 Overdrafts 40 30 Sub-prime credit cards 41 33 20 Specialist models 10 7 10 0 Pre-crunch Post-crunch Sourc
Slide 28: How is the structure of non-standard changing?
How is the structure of non-standard changing? • Channels and distribution – Replacement of traditional branches with multi-product branches – Move from mail order credit agency model and ‘big book’ to online – Disappearance of brokers, especially at the specialist end – Growth of online price compa
Slide 29: Where might the UK non-standard credit market go?
Where might the UK non-standard credit market go? • Outcome 1: Everything returns to normal, no major structural changes – As you were, ‘Mainstream returns’ • Outcome 2: Small changes to the structure of channels and product mix but essentially the same market returns – Adjust a bit, ‘Battle over sh
Slide 30: Where might the UK non-standard credit market go?
Where might the UK non-standard credit market go? Non-standard market and product gross advances 100 £95bn 90 11 £85bn Sub-prime mortgages 4 80 8 31 3 2 7 Sub-prime unsecured 70 £64bn 21 60 21 Second Charge secured 21 £bn 50 Overdrafts 40 36 30 Sub-prime credit cards 41 33 20 Specialist models 10 19
Slide 31: Summary
Summary • Large and continually refreshing UK non-standard credit market • Range of specialist and more mainstream credit products used • Dramatic reduction in non-standard credit supply • Changing structure of channels, products and competitors • Future likely to be the domain of the specialist • N
Slide 32: Questions?
Questions? Provident Financial Group 2.15 PFG
Slide 33: Consumer Credit Division – Understanding 1.8 million customers
Investor & Analyst Event – 24 November 2010 Consumer Credit Division – Understanding 1.8 million customers and how we serve them Chris Gillespie – Managing Director – Consumer Credit Division
Slide 34: Agenda
Agenda • We lend to customers who have more limited credit alternatives – We are cautious about taking on new customers – We utilise a great deal of information about our existing customers in our decision making • Some further insights into our customer base and how it has changed over time • Why t
Slide 35: Agenda
Agenda • We lend to customers who have more limited credit alternatives – We are cautious about taking on new customers – We utilise a great deal of information about our existing customers in our decision making • Some further insights into our customer base and how it has changed over time • Why t
Slide 36: Home Credit serves customers with fewer borrowing alternatives
Home Credit serves customers who tend to have fewer borrowing alternatives Direct repayment (c.7 million) We have a c.60% share of the Home Credit (HC) Home collected market (c.3 million) 3.3
Slide 37: Provident makes cautious lending decisions on prospective customers
Provident makes cautious lending decisions on prospective customers Direct source applications Agent recommend applications The Agent pre-filter 100 Applications 100 Head Office 41 approved 83 Accept Accept Agent 18 issued 63 Overall acceptance rate c.25% 3.4
Slide 38: New customer lending decisions
New customer lending decisions Agent activity Decision support tools • An ‘in the home’ understanding of the • Decision support tools enforce a “no” customer attitude to credit, affordability and • Agent has the final say on a “yes” stability – “3 Cs” – Character (Intent) • Decision support tools we
Slide 39: We know a lot about our existing customers
We know a lot about our existing customers and their economic units Agent “3 C” Weekly insight • We recognise the importance of the economic unit… Manager weekly review of customer HC CRA data with agent • We understand our customers within the context of – Their household – often our Customer Econo
Slide 40: Systematic and continuous process of data capture
Systematic and continuous process of data capture • Application form assessing the customers’ circumstances at the point of original loan application, revisited and augmented as deemed necessary • Weekly – Agent insight – All behavioural score data and our appetite for further credit updated and ref
Slide 41: 'Low and Grow' lending principle
‘Low and Grow’ lending principle • Low: – A cautious approach to new lending is not just reflected in our low acceptance rates New customer issue Existing customer issue Average loan Less than £250 c.£500 % on short term (<33 c.60% c.20% week) product • Grow: – This is followed by rapid learning • I
Slide 42: Central decision/customer contact support
Central decision/customer contact support • Many of our customers have excellent payment relationships with us but struggle with remote repayment models • Decision support tools are an overlay for Agent Central Support decisions – They dictate maximum amounts, weekly rate New/further and term of fur
Slide 43: Agenda
Agenda • We lend to customers who have more limited credit alternatives – We are cautious about taking on new customers – We utilise a great deal of information about our existing customers in our decision making • Some further insights into our customer base and how it has changed over time • Why t
Slide 44: Implications of the Spending Review & June 2010 Budget
Implications of the Govt’s Spending Review & June 2010 Budget on some of our customers • The effect of specific measures relating to welfare benefits included in the Spending Review and the June Budget which are most relevant to Home Credit customers are set out below: – The headline benefit savings
Slide 45: Positive impacts of the Spending Review & June 2010 Budget
Positive impacts of the Govt’s Spending Review & June 2010 Budget on many of our customers • Launching the Universal Credit in early November, Iain Duncan Smith said: – “We will financially protect those who move to the Universal Credit System. There will be no losers” – “2.5 million households will
Slide 46: Our typical customer profile has not changed a great deal
Our typical customer profile has not changed a great deal in the last few years 3.13
Slide 47: Our customers remain predominantly Blue Collar (C2DE)
Our customers remain predominantly Blue Collar (C2DE) 35% Social class 35% Social class 30% 28% 29% 28% 27% 30% 29% 28% 26% 26% 27% 26% 25% 24% 25% 21% 20% 20% 15%16% 16% 15% 15% 15% 10% 10% 8% 5% 4% 5% 3% 3% 0% 0% AB C1 C2 D E AB C1 C2 D E MAA Jun 05 MAA Jun 10 PPC/GPC UK Adult Population Social Cl
Slide 48: Where our customers live
Where our customers live • We are a UK wide business, reflecting our … – Historical brand footprint – Proposition - and therefore the geography of the social-class it fits… – …only 4.6% of customers living in Greater London Note: this map details our mainland UK footprint (we also operate in Norther
Slide 49: Changes to the Local Housing Allowance
Changes to the Local Housing Allowance • What is the Local Housing Allowance (LHA)? – For tenants renting a property or room from a private landlord, the LHA is used to work out how much Housing Benefit they are entitled to – Payments are credited to tenants’ bank or building society accounts or by
Slide 50: How many of our customers may be impacted?
How many of our customers may be impacted by these measures? All customers 100% Private Tenants 18% More than two-thirds of On Government our customers that rent Benefits live in Social Housing and are therefore unaffected 8% by any change to the LHA LHA losers <4% • The DWP estimate that those affe
Slide 51: Typical customer profiles – 2005 vs. 2010
Typical customer profiles – 2005 vs. 2010 70% 65% 61% Gender 30% 26% 26% Age 60% 24% 25% 50% 19% 39% 20% 40% 35% 16% 16% 15% 30% 11% 10% 10% 7% 20% 6% 10% 0% 0% Female Male 18 ‐ 25 26 ‐ 35 36 ‐ 45 46 ‐ 55 56 ‐ 65 Over 65 June 2005 June 2010 50% 46% Children in Household 60% Marital Status 51% 52% 40
Slide 52: Our customer base reflects the impact of our cautious approach
Our customer base reflects the impact of our cautious approach 60% 51% 52% Marital Status • Our vetting procedures for new customers minimise the 50% proportion of “riskier” segments in this population 40% 31% 31% 30% • Less than 5% of customers fall into the following type: 18% 17% • Young (< 35) a
Slide 53: Typical customer profiles – 2005 vs. 2010
Typical customer profiles – 2005 vs. 2010 90% 83% 70% 81% 64% 64% 80% Tenure Household working status 60% 70% 50% 60% 50% 40% 40% 30% 27% 26% 30% 19% 17% 20% 20% 9% 10% 10% 10% 0% 0% Owner Tenant Working Full or Part Other e.g. Retired Registered Time Unemployed 60% Payment Frequency June 2005 June
Slide 54: Our customers make use of a wide range of credit options
Our customers make use of a wide range of credit options 30% 26% MAA Jun 10 25% 21% 20% 19% 15% 15% 12% 12% 10% 6% 5% 5% 5% 4% 3% 3% 2% 0% Overdraft Mail Credit Personal Social Mortgage Hire Store Exchange Hire Payday Pawn Loan with order card loan Fund Purchase card goods for Purchase lending broke
Slide 55: Distribution of Unsecured Credit Balances
3.22 Distribution 0% 5% 10% 15% 20% 25% 30% No Unsecured Debt £0 to £100 £101 to £200 £201 to £300 £301 to £500 £501 to £1,000 £1,001 to £2,000 £2,001 to £3,000 Unsecured Credit Balances £3,001 to £5,000 Distribution of Unsecured Credit Balances £5,001 to £10,000 £10,001 to unsecured debt elsewhere
Slide 56: Of our customers with a mortgage, typical balance is <£10k
Of our customers with a mortgage, the typical outstanding balance is <£10k 3.23
Slide 57: Usage of revolving credit products has remained consistent
Usage of revolving credit products has remained fairly consistent in recent years Overdrafts Credit card usage 40% 40% 35% 35% 29% 30% 30% 26% 26% 26% 26% 25% 25% 23% 25% 22% 21% 21% 20% 20% 20% 19% 15% 15% 10% 10% 5% 5% 0% 0% MAA Jun 05 MAA Jun 06 MAA Jun 07 MAA Jun 08 MAA Jun 09 MAA Jun 10 MAA Jun
Slide 58: Usage of mail order and hire purchase
Usage of mail order and hire purchase had fallen but there is recent evidence of demand returning Hire purchase for anything in the home Mail order usage 10% 50% 9% 9% 45% 8% 40% 7% 7% 7% 35% 7% 35% 6% 31% 6% 30% 5% 5% 24% 25% 21% 21% 4% 19% 20% 3% 15% 2% 10% 1% 5% 0% 0% MAA Jun 05 MAA Jun 06 MAA Ju
Slide 59: Accessibility is a bigger issue than ever
Accessibility is a bigger issue than ever June June 2005 2010 • ‘I have more options available to me than ever before’ 69% 56% • ‘It’s easier to get a loan from a Bank or Building Society than it used to be’ 32% 18% • ‘My application for a credit card would be accepted if I ever wanted one’ 46% 39%
Slide 60: Agenda
Agenda • We lend to customers who have more limited credit alternatives – We are cautious about taking on new customers – We utilise a great deal of information about our existing customers in our decision making • Some further insights into our customer base and how it has changed over time • Why t
Slide 61: Our customers are typically in receipt of modest income levels
Our customers are typically in receipt of modest income levels - this is not a new phenomenon £300 Net Household Weekly Income £259 £265 £249 £251 £252 £250 £243 £241 £237 £234 £234 £200 £150 £100 £50 £0 2005 2006 2007 2008 2009 HC Household (Actual) HC Household Income if inflated by RPIX Source: O
Slide 62: Customers have well established coping mechanisms
With little leeway in income, customers have well established coping mechanisms • Making do – Not updating household goods – Going without luxuries • Utilising the Internet to seek the best value deals 3.29
Slide 63: Internet usage has significantly increased for our customers
Internet usage has been an area of significant increase for our customers % Households with internet access (June MAA) Frequency of usage (Q3 2010) 80% 80% 73% 70% 68% 70% 65% 70% 61% 62% 60% 55% 57% 60% 54% 50% 50% 44% 39% 40% 35% 40% 34% 30% 30% 20% 20% 10% 12% 10% 10% 4% 4% 2% 0% 0% 2005 2006 200
Slide 64: Customers have well established coping mechanisms
With little leeway in income, customers have well established coping mechanisms • Making do – Not updating household goods – Going without luxuries • Utilising the Internet to seek the best value deals • ‘No frills’ supermarkets have become increasingly popular – Highlighting the importance of the p
Slide 65: Provident helps smooth household spending peaks and troughs
Provident helps smooth household spending peaks and troughs • Customers tend to use their HC Loans to supplement their income as part of a routine in order to meet cyclical or seasonal needs e.g. Christmas, household bills or holidays When household budgets are under pressure it is about being suppo
Slide 66: Home Credit loans vs. Personal loans
The differences in loan purposes: Home Credit loans vs. Personal loans HC loan purpose (Top 3) Personal loan purpose (Top 3) 45% 25% 40% Our customers with 20% a Personal Loan. 35% 30% 15% 25% 20% 10% 15% 10% 5% 5% 0% 0% Gifts/Xmas/B'day Household Items Holiday/Travel Car Debt Consolidation Home Imp
Slide 67: It is not just about supplying credit to customers
With little leeway in income, it is not just about supplying credit to customers. They say that they… • want things to be clear cut and certain 81% of customers believe Provident • value a high degree of flexibility in repayment offers good value for money • are careful and want to be in control • a
Slide 68: Our high touch/highly personalised business model
This is where our high touch/highly personalised business model comes to the fore • Disciplined and New / further • ‘Low and Grow’ lending convenient repayments lending request Agent Agent Collect Decision • Highly personal • Flexible repayments assessment of creditworthiness “…customers generally s
Slide 69: Supported by a relevant choice of products
Supported by a relevant choice of products 2010 sales mix 80% 20% Budget Loan Budget Short-term Core product Longer larger loans Direct repayment • 14 weeks • 23 to 33 weeks • 50 to 57 weeks • 81 & 106 weeks • up to 36 months • New and existing • newer customers • established and • best 20% • high q
Slide 70: Provident is an integral part of our customers' coping mechanisms
Provident is an integral part of our customers’ coping mechanisms • ‘I prefer Provident over other credit because I am more disciplined with my money when someone comes to the door every week and I’ve got to pay them.’ • ‘I don’t like direct debit (as) I forget when it’s going to come out of the ban
Slide 71: Our customers remain resolutely fond of what we do
Our customers remain resolutely fond of what we do… Overall Satisfaction remains very high amongst our customers at 92% Overall Satisfaction – PPC/GPC Customers 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% MAA Jun 05 MAA Jun 06 MAA Jun 07 MAA Jun 08 MAA Jun 09 MAA Jun 10 Overall Satisfaction with PPC
Slide 72: … and fond of the way we do it
… and fond of the way we do it Satisfaction with the Agent 3.39
Slide 73: Delivering the proposition – our field focused operating model
Delivering the proposition – our field focused operating model • Harnessing the Agent and organisational Field Management knowledge to help deliver… New / further lending request – Further lending decisions – Customer Contact Strategy Agent Agent • Sales opportunities Collect Decision • Arrears acti
Slide 74: Who are our Agents?
Who are our Agents? • Self-employed • 70% female • Average length of service 8 years • Live in the communities they serve • 75% >1 yr service – Has increased in past 2 years due to economic conditions and the recently introduced commission scheme – Agents have mandates based on experience and the ma
Slide 75: Our Field Management structure exists to support our Agents
Our Field Management structure exists to support our Agents • Responsible for – Business development / credit issue / arrears Field management / compliance Management New / further • Through a branch based management lending request structure – Network of c.11.5k self employed agents Agent Agent • A
Slide 76: What is the Field Management structure?
What is the Field Management structure? Managing Director Head Office based Head of Field Performance Divisional Managers 8 Regional Managers 44 Area Managers Field based 284 Development Managers 1,287 Agents 11,842 3.43
Slide 77: What is the Weekly Routine?
What is the “Weekly Routine”? • Agents typically collect 2 to 4 days per week – Friday and Monday main days • Agents “pay-in” on Tuesday or Wednesday – Reconciliation – Compliance – Customer level payment data collected • Wednesday is processing day. All behavioural score data updated and refreshed
Slide 78: Agenda
Agenda • We lend to customers who have more limited credit alternatives – We are cautious about taking on new customers – We utilise a great deal of information about our existing customers in our decision making • Some further insights into our customer base and how it has changed over time • Why t
Slide 79: Poised for growth as economic conditions improve
We have invested in this business and are poised for growth as economic conditions improve and sentiment returns • As the employment market improves and a more positive sentiment returns, pent up demand for credit will be released • We anticipate 2-3% annual growth in overall customer demand for Hom
Slide 80: Share of Wallet opportunities will create additional lending growth
Share of Wallet opportunities will create additional lending growth • Our customers have borrowing needs that are being met by other forms of credit – Our core proposition resonates with our customers and therefore provides opportunities to win a greater share of their wallet • Recent new propositio
Slide 81: Growth will also come from beyond our current customer footprint
Growth will also come from beyond our current customer ‘footprint’ • Customers can simultaneously be a poor remote payer and a good Provident payer – We will build on our ‘Fresh Start’ capability • Our customers, are very fond of us – and a ‘recommendation’ is a good character reference for a new cu
Slide 82: Agenda
Agenda • We lend to customers who have more limited credit alternatives – We are cautious about taking on new customers – We utilise a great deal of information about our existing customers in our decision making • Some further insights into our customer base and how it has changed over time • Why t
Slide 83: Questions?
Questions? Provident Financial Group 3.50 PFG
Slide 84: Vanquis Bank – Capturing and managing the growth opportunity
Investor & Analyst Event – 24 November 2010 Vanquis Bank – Capturing and managing the growth opportunity Michael Lenora – Managing Director – Vanquis Bank
Slide 85: Agenda
City Day presentation – 24 November 2010 Agenda • Background • Getting the model right – People – Infrastructure – Product and channels – Underwriting and collections – Margin and returns • Economic threats and competition • Growth opportunity • Summary 4.1
Slide 86: Background – History
Background – History • First issued cards in 2003 aimed at under-served market • Banking licence and FSA regulated • Formally launched in 2005 following test period • Broke even in 2007 • Now passed 500,000 accounts and £300m net receivables • Passed 30% post-tax ROE objective in H2 2010 4.2
Slide 87: Background – Key metrics
4.3 - 20 40 60 80 100 120 140 H1 2003 H2 2003 H1 2004 H2 2004 H1 2005 H2 2005 H1 2006 H2 2006 H1 2007 New accounts ('000) H2 2007 H1 2008 H2 2008 H1 2009 H2 2009 H1 2010 - 100 200 300 400 500 600 H1 2003 Background – Key metrics H2 2003 H1 2004 H2 2004 H1 2005 H2 2005 H1 2006 H2 2006 H1 2007 Live ac
Slide 88: Agenda
City Day presentation – 24 November 2010 Agenda • Background • Getting the model right – People – Infrastructure – Product and channels – Underwriting and collections – Margin and returns • Economic threats and competition • Growth opportunity • Summary 4.4
Slide 89: Getting the model right – People
Getting the model right – People • Experienced team of credit card and retail banking professionals • Previous credit card and financial services experience includes Barclaycard, Citi, Lloyds TSB, NatWest, RBS and Providian • 151 year’s experience in financial services and 83 years in credit cards •
Slide 90: Getting the model right – Infrastructure
Getting the model right – Infrastructure London office Chatham call centre c.70 people c.400 people (FTEs) Executive New business Finance Customer contact Legal Collections Marketing IT Department Credit • Recent investments have been made in operational infrastructure – New call centre facility – O
Slide 91: Getting the model right – Target customer
Getting the model right – Target customer • Customer status Prime issuer Vanquis Bank Employment status Employed Employed Annual income £25k+ p.a. £12-25k p.a. Residential status House-owner/mortgaged Tenant (75%) Use of other credit cards High Low Use of secured/unsecured loans Medium Very low • Ca
Slide 92: Getting the model right – Product offering
Getting the model right – Product offering • VISA branded traditional credit card functionality and worldwide network • Low initial credit lines, typically £250 • Basic offering 39.9% APR – No annual fee – 56 days interest free period – Minimum payment - 5%/£5 – Cash advances - 3%/£3 – Late/overlimi
Slide 93: Getting the model right – Channels
Getting the model right – Channels • Initially focused on direct mail • Internet an increasingly important channel – Direct website – Key word search – Routing via affiliates and aggregators – Decline referrals via internet Booked accounts by channel 200k 150k 100k 50k - 2003 2004 2005 2006 2007 200
Slide 94: Getting the model right – Online
Getting the model right – Online 4.10
Slide 95: Getting the model right – Direct Mail
Getting the model right – Direct Mail 4.11
Slide 96: Getting the model right – Initial underwriting
Getting the model right – Initial underwriting • 8 years of investment in scorecard development • Standard industry techniques are supplemented by bespoke scorecards and techniques • Multiple scorecard applications including channel and affiliate level underwriting • Significant investment has been
Slide 97: Getting the model right – Initial underwriting
Getting the model right – Initial underwriting • Significant tightening of underwriting standards since second half of 2007 – Pre-2007 acceptance rate = 30%+ – 2010 acceptance rate = c.18% • Most new customers get a £250 credit line Initial credit line % £150 1.1% £250 58.5% £500 35.7% £1,000 4.6% A
Slide 98: Getting the model right – CLI underwriting
Getting the model right – CLI underwriting • “Low and grow” approach to credit risk mitigates initial write off risk and ongoing risk of undrawn lines • Subsequent line increase decision using: – Further external bureau – Internal behavioural data – Credit and utilisation parameters 4.14
Slide 99: Getting the model right – Collections strategy
Getting the model right – Collections strategy • A high contact approach is employed which works well with target customer group • Rapid recycling through internal and external debt collection agency (DCA) Months past due Action Pre delinquency Calls, SMS 1 down Intensive automated dialler and lette
Slide 100: Getting the model right – Risk-adjusted margin
Getting the model right – Risk-adjusted margin 70% 60% 50% 40% 32% 30% 20% 10% 0% H2-05 H1-06 H2-06 H1-07 H2-07 H1-08 H2-08 H1-09 H2-09 H1-10 Q3-10 Annualised revenue % average receivables Annualised impairment % average receivables • Risk-adjusted margin at minimum target of 30% • Active management
Slide 101: Getting the model right – ROE
Getting the model right – ROE • Returns have grown strongly and target 30% ROE has been achieved as planned in H2 2010 Post tax ROE 40.0% 30.0% 20.0% 10.0% ‐ Jun‐04 Sep‐04 Dec‐04 Jun‐05 Sep‐05 Dec‐05 Jun‐06 Sep‐06 Dec‐06 Jun‐07 Sep‐07 Dec‐07 Jun‐08 Sep‐08 Dec‐08 Jun‐09 Sep‐09 Dec‐09 Jun‐10 Sep‐10 Ma
Slide 102: Agenda
City Day presentation – 24 November 2010 Agenda • Background • Getting the model right – People – Infrastructure – Product and channels – Underwriting and collections – Margin and returns • Economic threats and competition • Growth opportunity • Summary 4.18
Slide 103: Economic threats and competition – Economic threats
Economic threats and competition – Economic threats • Low volatility relative to benchmark is a function of high limit utilisation which restricts £ loss in stressed conditions • Low balance (average £650) and minimum payment (c.£30) means greater likelihood of account staying in order, even after a
Slide 104: Economic threats and competition – Economic threats
City Day presentation – 24 November 2010 Economic threats and competition – Economic threats • Business has demonstrated its ability to manage through the downturn 4.20
Slide 105: Economic threats and competition – Competition
City Day presentation – 24 November 2010 Economic threats and competition – Competition • Low level of activity • Major banks have withdrawn from our market space • Barriers to entry are high – Length of time for scorecard development – Expertise scarce – Pricing £M Non standard mailing spend 7.0 6.
Slide 106: Agenda
City Day presentation – 24 November 2010 Agenda • Background • Getting the model right – People – Infrastructure – Product and channels – Underwriting and collections – Margin and returns • Economic threats and competition • Growth opportunity • Summary 4.22
Slide 107: Growth opportunity
Growth opportunity • We manage account level and cohort profitability closely • High initial acquisition J curve is paid back as average balances grow under the low and grow strategy • With scale cohorts of accounts are now paying back quicker and overall profitability is increasing due to: – The ru
Slide 108: Growth opportunity
Growth opportunity Profit per original booked account Yr 1 Yr 2 Yr 3 Yr4 Yr5 Yr6 Yr7 2003 4.24
Slide 109: Growth opportunity
Growth opportunity Profit per original booked account Yr 1 Yr 2 Yr 3 Yr4 Yr5 Yr6 Yr7 2003 2004 4.25
Slide 110: Growth opportunity
Growth opportunity Profit per original booked account Yr 1 Yr 2 Yr 3 Yr4 Yr5 Yr6 Yr7 2003 2004 2005 4.26
Slide 111: Growth opportunity
Growth opportunity Profit per original booked account Yr 1 Yr 2 Yr 3 Yr4 Yr5 Yr6 Yr7 2003 2004 2005 2006 4.27
Slide 112: Growth opportunity
Growth opportunity Profit per original booked account Yr 1 Yr 2 Yr 3 Yr4 Yr5 Yr6 Yr7 2003 2004 2005 2006 2007 4.28
Slide 113: Growth opportunity
Growth opportunity Profit per original booked account Yr 1 Yr 2 Yr 3 Yr4 Yr5 Yr6 Yr7 2003 2004 2005 2006 2007 2008 4.29
Slide 114: Growth opportunity
Growth opportunity Profit per original booked account Yr 1 Yr 2 Yr 3 Yr4 Yr5 Yr6 Yr7 2003 2004 2005 2006 2007 2008 2009 4.30
Slide 115: Growth opportunity
Growth opportunity Profit of accounts booked during year 2003 2004 2005 2006 2007 2008 2009 2003 4.31
Slide 116: Growth opportunity
Growth opportunity Profit of accounts booked during year 2003 2004 2005 2006 2007 2008 2009 2003 2004 4.32
Slide 117: Growth opportunity
Growth opportunity Profit of accounts booked during year 2003 2004 2005 2006 2007 2008 2009 2003 2004 2005 4.33
Slide 118: Growth opportunity
Growth opportunity Profit of accounts booked during year 2003 2004 2005 2006 2007 2008 2009 2003 2004 2005 2006 4.34
Slide 119: Growth opportunity
Growth opportunity Profit of accounts booked during year 2003 2004 2005 2006 2007 2008 2009 2003 2004 2005 2006 2007 4.35
Slide 120: Growth opportunity
Growth opportunity Profit of accounts booked during year 2003 2004 2005 2006 2007 2008 2009 2003 2004 2005 2006 2007 2008 4.36
Slide 121: Growth opportunity
Growth opportunity Profit of accounts booked during year 2003 2004 2005 2006 2007 2008 2009 2003 2004 2005 2006 2007 2008 2009 4.37
Slide 122: Growth – Market potential
Growth – Market potential Electoral roll refresh (1m+ p.a.) More impaired New channels credit records • Over 10 million consumers Direct repayment • Vanquis opportunity 5-7 (c.7 million) million • Significant opportunity to grow the current penetration of 10% Home collected (c.3 million) 4.38
Slide 123: Growth – Targets
Growth – Targets • £450m receivables by 2012 generating a 30% post-tax ROE • Target based on: – Current growth plans – No changes to underwriting – Prudent assumptions on economic environment • Significant opportunity for Vanquis to grow beyond its new target – Potential for 1 million customers – Wi
Slide 124: Agenda
City Day presentation – 24 November 2010 Agenda • Background • Getting the model right – People – Infrastructure – Product and channels – Underwriting and collections – Margin and returns • Competition and economic threats • Growth opportunity • Summary 4.40
Slide 125: Summary
Summary • The model is right – We have the people and infrastructure – Well established using industry leading underwriting techniques specialised for non standard market – The ‘low and grow’ strategy and high utilisation creates inherent impairment stability – We are further able to actively manage
Slide 126: Questions?
Questions? Provident Financial Group 4a PFG
Slide 127: Regulatory affairs – Managing the politics of non-standard credit
Investor & Analyst Event – 24 November 2010 Regulatory affairs – Managing the politics of non-standard credit John Moulding – Director of Corporate Affairs
Slide 128: Agenda
Agenda • Home Credit needs explaining • Consumer Credit reviews • Provident’s approach to public policy 5.1
Slide 129: Home Credit needs explaining
Home Credit needs explaining • Policy-makers are seldom our customers • Generally… – They don’t live on council estates – They lack experience of sub-prime markets – They don’t understand APR – They do want to do the right thing 5.2
Slide 130: Consumer Credit Reviews
Consumer Credit Reviews • 15 reviews in the last few years, notably: – Competition Commission Inquiry 2004/6 – Consumer Credit Act 2006 – BIS Review of credit and store cards 2009 – Consumer Credit Directive 2010 – OFT High Cost Credit Review 2010 – BIS Consumer Credit and Insolvency call for eviden
Slide 131: Competition Commission
Competition Commission • Data sharing with credit reference agencies • Lenderscompared prices website • Statements on request for customers • Enhanced early settlement rebates • Acceptance that APR is ineffective • Rejection of rate caps 5.4
Slide 132: Consumer Credit Act 2006
Consumer Credit Act 2006 • Increased transparency on contracts and advertising • More post-contract information • Greater rigour by OFT on licensing • Court challenge on unfair relationships • Financial Ombudsman for consumer credit • Irresponsible Lending Guidance • Rejection of rate caps 5.5
Slide 133: BIS Review of credit and store cards 2009
BIS Review of credit and store cards 2009 • Highest interest rate paid off first • Choose not to receive credit limit increases • More time to reject rate increases and pay off card • More information on minimum payments, interest rate and credit limit increases • Annual electronic statement • Propo
Slide 134: Consumer Credit Directive 2010
Consumer Credit Directive 2010 • Duty to provide adequate explanations • Obligation to check creditworthiness • More onerous advertising requirements • Right to withdraw within 14 days • Need to inform when debts are sold on • Rejection of rate caps 5.7
Slide 135: OFT High Cost Credit Review 2010
OFT High Cost Credit Review 2010 • Financial literacy programmes • Price comparison websites • ‘Wealth warning' statements on advertisements? • Further behavioural research • Markets work ‘reasonably well’ • Codes of practice • Insistence that broader society should change • Many consumers find APRs
Slide 136: BIS Consumer Credit and Insolvency call for evidence
BIS Consumer Credit and Insolvency call for evidence • Consumers and lenders making better decisions – Consumers well informed – Responsible borrowing – Lenders understand their customers • Consumers and lenders manage borrowing in consumer’s long term interest – Consumers proactive in borrowing and
Slide 137: Provident's approach to public policy
Provident’s approach to public policy • Investment over long period – Programme began in 1990s – Multiple departments – Civil Servants – Special Advisors – MPs – Ministers – Influential third parties 5.10
Slide 138: Provident's approach to public policy
Provident’s approach to public policy • External support – Bell Pottinger Public Affairs (Westminster) – Fleishman Hillard (Scotland) – Weber Shandwick (Brussels) – Heneghans/Fleishman Hillard (Ireland) – Trade Associations (CBI, CCA and UK Cards Association) 5.11
Slide 139: Provident's approach to public policy
Provident’s approach to public policy • Contact programme – Monitoring – Think tanks – Party conferences – Third sector engagement – Responses to consultations – Evidence-based policy making 5.12
Slide 140: Provident's approach to public policy
Provident’s approach to public policy • Research programme – Nottingham University – Joseph Rowntree Foundation – Friends Provident Foundation – Bristol University Personal Finance Research Centre – Money Advice Trust 5.13
Slide 141: Summary
Summary • Mission to explain non-standard credit • Successive reviews and high scrutiny • Long-standing public affairs programmes • High levels of engagement • Evidence beats assertion 5.14
Slide 142: Questions?
Questions? Provident Financial Group 5.15 PFG
Slide 143: Funding and capital update
Investor & Analyst Event – 24 November 2010 Funding and capital update Andrew Fisher – Finance Director
Slide 144: Committed facilities and headroom
Committed facilities and headroom 30 Sept 30 June 2010 2010 £m £m Committed facilities: - bank facilities 690.0 690.0 - private placement notes 161.9 161.9 - senior bonds 250.0 250.0 - retail bonds 25.2 25.2 - subordinated bonds 6.0 6.0 Total committed facilities 1,133.1 1,133.1 Borrowings on commit
Slide 145: Funding of debt maturities
Funding of debt maturities Maturities 2011 2012 £m £m £m Bank facilities 690 Core facilities with UK-centric banks 380 extended to May 2013 in Q1 2010 310 73 237 Bank maturities Private placement maturities 75 Total contractual maturities 148 237 • 2011 private placement and bank maturities of £148m
Slide 146: Funding options
Funding options • Euro bond issue • UK/US private placement market • Fund Vanquis Bank through retail deposits • Further retail bond • International banks 6.3
Slide 147: Alignment of dividend policy, gearing and growth
Alignment of dividend policy, gearing and growth ALIGNMENT DISTRIBUTION GEARING GROWTH POLICY 3.5x versus covenant Supports £100m+ 80% of earnings of 5x receivables growth p.a • Current dividend of c.£85m 1.25x covered at pre-tax profits of £148m • 20% retention (£22m) supports receivables growth of
Slide 148: Alignment of dividend policy, gearing and growth
Alignment of dividend policy, gearing and growth • Dividend maintained at 63.5p per share as target dividend cover of 1.25x is approached • Gearing has remained flat and capital generation has been strong over the past year as growth in Home Credit has slowed and the yield on the receivables book ha
Slide 149: Vanquis capital generation
Vanquis capital generation 2009 2010 2011 2012 Dividends 2012 £m £m £m £m £m £m Consensus PBT* 22.2 29.6 37.8 37.8 Tax (6.2) (8.1) (9.9) (9.9) PAT 16.0 21.5 27.9 27.9 Share capital 74.2 74.2 74.2 74.2 74.2 Retained profits (15.5) 0.5 22.0 49.9 (22.0) 27.9 Total equity 58.7 74.7 96.2 124.1 (22.0) 102
Slide 150: Questions?
Questions? 6.7 PFG Provident Financial Group
Slide 151: Closing comments and General Q&A
Investor & Analyst Event – 24 November 2010 Closing comments and General Q&A Peter Crook – Chief Executive
Slide 152: PFG – Investment case
PFG – Investment case • Non-standard credit market will remain the domain of specialists • An attractive business model – Fully invested and modernised Home Credit business poised for growth – Strong profitable and now capital generative growth in Vanquis Bank • Minimal impact from austerity measure
Slide 153: Outlook
Outlook • Commenting on current trading, Peter Crook, Chief Executive, said: “I am pleased to report continuing favourable trends in both businesses which reinforces management’s confidence of delivering a good result for the year.” 7.2