Vanquis Banking Group (LSE:VANQ) — Capital Optimisation Investor Presentation

0:00 Good afternoon, and welcome to the VANQUIS BANKING GROUP PLC investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and could be submitted at any time via the q and a tab situated on the right hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question that receives during the meeting itself. However, the company can review all questions submitted today and pop with responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Dave Watts, CFO. Good morning, sir. Good afternoon, and thank you everyone for joining what is our second VANQUIS BANKING GROUP Evestimate company presentation. We thought we'd use this this occasion to talk through the significant transaction we've just undertaken, which we said we'd take as as part of our optimizing our capital stack. It also gives you a chance for you to meet up with Steve Granger, our group treasurer.

0:58 The intention is to go through the transaction. I'll do that and then pass on to Steve who'll cover the capital benefits and then we'll open up to q and a. Okay? Okay. So back in March 2024, we VANQUIS BANKING GROUP gave a strategy update and one of the items we said we undertake as part of our strategy delivery was to optimize our capital stack. So this is what we we started doing on the September 23 when we did our inaugural issuance of £60,000,000 of additional tier one capital securities. It's a potential a perpetual instrument, five point five years call window. There's an option to call in the six month period prior to and including the first reset date in May 2031.

1:47 The coupon is 10.875% pay it's paid semiannual. This comes to an annual cost of £56,525,000. It's important to note this instruments would convert to equity if the CET one capital ratio were to four point o 7%. And given that eighteen point five published disclosed CET one ratio at 06/20/2025, we've got 11.5% headroom to this one, so that's very comfortable headroom, available to us there. The previous transaction, the group fulfilled its tier one capital requirements purely in CET one capital, which as you know is is more expensive. In essence, the group had unutilized AT one capacity of of £41,000,000 or 2.2 of the tier one capital ratio.

2:35 By issuing 60,000,000 of AT one, this provides a buffer over the minimum capacity to support both growth and provide liquidity in the instruments. The CET one capital release will be used for general corporate purposes, including growing balances. As we've already published in our RNSs and half year updates and the year end statements, we've delivered two consecutive quarters of profitability and three consecutive quarters of balanced growth as of June 25. We intend to continue growing and and and why we're doing that is to build scale and long term sustainable profitability of the VANQUIS BANKING GROUP. Gross customer interest earning balances were nearly 2,500,000,000 at June 2025, with guides being above 2,600,000,000 balances at December 2025 and circa 3,000,000,000 balances at December 2026.

3:28 Whilst this capital is fungible across our lending products, what we have done is we've seen growth in second charge mortgages of about over a £150,000,000 in the first half of twenty twenty five. And in credit cards, we saw 6% growth in the second quarter twenty twenty five. In vehicle finance, we've been proactively managing the new business growth in this product in the near term while we deliver our new gateway strategic solution in this space, which could deliver better onboarding and servicing for vehicle finance in this product there. So you should expect to see growth in the same sort of lines of second charge mortgages and credit cards and second charge and vehicle finance just sort of trailing down a little bit over the coming months and quarters ahead.

4:14 That was the 81 issuance. At the same time, we did a tier two tender offer. In essence, you know, we we we had we tendered for £58,500,000 of tier two capital. Whilst this tier two capital was not callable till October 2026, the group had regulatory permissions to the PRA to actually go ahead with this tendering. Why would we actually do this? The pretender, had 200,000,000 of tier two capital with a coupon of 8.875% excluding the pre swap costs, which is quite expensive annual cost of the £18,000,000. Yet only about £56,000,000 of this capital was actually eligible for capital purposes. It's still good for funding, but in essence, we had £144,000,000 of surplus capital with no capital benefits.

5:02 Post this transaction, this has reduced the surplus capital down to £85,500,000. And so net net, when you take the cost of issuing the 81 annualized cost of £6,500,000. The saving was 5,190,000 on the tier two. That's an issue cost about £1,400,000. It gives us £60,000,000 more of capital available lending into our businesses. And if I could pass up to Steve now to talk about the benefits of this. Thank you, Dave, and good afternoon. So just on the capital optimization, just really turning what Paige just walked you through into what does that mean for actual capital position. So on the left hand side, you'll see our total capture ratio, which call us is unchanged at 29.2.

5:50 And, basically, you'll see there what we've done is obviously 10 of the tier two equivalent and issued a t one issuance. In terms of what does that mean for capital, if you move to the middle, then you'll see in terms of the tier one ratio, we've obviously increased that tier one ratio from its current 18.5 to 21.7. And going forward, that does mean for us the CET1 ratio displayed on the right hand side at 18.5, that effectively will become our binding constraint and we'll be looking to effectively reset guidance post results in Q1 next year. This really concludes the formal presentation. So we're happy to move to Q and A now. Thank you.

6:36 Steve, Dave, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just by using the Q and A tab situated on the right hand corner of your screen. Just while the company take a few moments to review those questions submitted today, I'd like to remind you that a recording of this presentation along with a copy of the slides and the published q and a can be accessed via investor dashboard. As you can see, we have received a number of questions throughout today's presentation. Now please ask you to read out the questions and give responses where appropriate to do so, and I'll pick up from you at the end. Yep. Thank you very much. Happy to do that. So for those who don't know me, I'm James Crenson, the head of Investor Relations. So I'll moderate the Q and A. And the first question we have is probably for Dave, would suggest. So essentially, the question is, now that this transaction enhances the flexibility for more growth, how much growth can we expect in the fourth quarter of this year, Dave? James, thanks for that question. If I can't give specific guidance on what our 4Q growth aspirations are going to be, but we've guided being above GBP 2,600,000,000 of gross cost of interest earning balances by the end of this year, having delivered nearly GBP 2,500,000,000 balances at the first half of twenty twenty five.

7:53 What we will do, we will provide an update on our position at third quarter to 2025 on our trading statement on the 11/05/2025. So you should be able to see that and relative to our guidance. You know, as we just talked about in the presentation where we've seen the growth in the first half of the year in second charge mortgages is in in credit cards, that's where you should expect to see the same sort of level of growth in the second half of this year in those two products with a so probably moderated decline in vehicle fires due to the pending delivery of the the gateway platform for vehicle fires in the second half of twenty twenty six. What it does do for this capital optimization, it provides a short term boost to growth capacity.

8:39 It frees up CET one capital that's being used to fulfill tier one capital requirements. And as a consequence, we can now use the the freed up CET one capital to to deploy to further lending. We've got capital 81 capacity of £41,000,000 at the time of issuance. We've now issued £60,000,000, so there's an extra 19,000,000 above our capacity. And we this gives us a, you know, a sufficient stuff in our sort of treasure chest of of capital for growth, to grow into the coming couple two to three years to deliver on our growth aspirations for the bank as we go further forwards. Great. Thank you, Dave. The second question probably is for you, Steve.

9:26 It essentially says, as there is still some the tier two notes outstanding, should we expect another transaction like this next year to allow for for further growth as as Dave sort of alluded to there as well. Yeah. Thanks, James. One of the that Dave just touched upon, we've done a 60,000,000 issue of 81 versus something out of the optimum amount that we're targeting of 41,000,000 today. However, you know, we've got sufficient 81 to grow into and I think we're confident we will grow into that in the in the in the short term. In terms of tier two post the tender offer, we've we've got a bit over a 140,000,000 of tier two outstanding relative to an optimal level today of around about 56,000,000.

10:17 We continue to have that excess tier two outstanding, but I think it's important to note that we've got an early call on that instrument in October next year. So that does give us the opportunity to potentially right size the tier two in our capital stack. And it's also worth noting just in terms of regulation, there's change in regulation from the start of next year 2026, which means we may also have the optionality to do a further tender offer on the tier two in advance of that date. Great. Thank you, Steve. So the the next question is about market share. So essentially, Reed, what's your current market share?

11:04 And I think we should answer this by product and how do you hope to grow it organically through acquisitions through partnerships? Dave, that's good for you to answer that one. So I think it's not necessarily related to the transaction in place there, so I think people should take reference to what we maybe talked about in previous presentations to the marketplace at half year and full year from there. I think just just touching on where we are on something like, you know, each of the products in in place there. And we've got nearly 1,700,000 customers across the board, nearly one point actually, 1.3 to 1,400,000 credit cards, over a 100,000 vehicle finance, and we've got nearly 7,000 customers in second charge mortgages.

11:53 Taking those in reverse order, second charge mortgage, grew we've grown from zero balances virtually in May 2024 to having over 400,000,000 in in lending second charge mortgages now. And, through our through our partnerships, fourfold partnerships, one of who is now sort of the lead lead issuance in second charge mortgages in the first half of this year. So I think it's a way to look at with with with in second charge mortgage, we're we're growing business in the actual growing market. The market is growing with 14% CAGR year on year with 2,000,000,000 issuance, new issuance a year. So I think we're very happy to be in that market as it's growing. In terms of vehicle finance, obviously, there's been a lot of thought about this in the marketplace with the issue of court of appeal ruling, then the Supreme Court and the FCA guidance on terms of its potential redress scheme in place there.

12:49 Where where we are is we we continue to be active in the marketplace there. That's probably moderating our new business development there just purely because we've got quite clunky clunky applications in place with a cost income ratio of 71%. So it's not not necessarily logical to sort of try and grow that business with a very with a poor systems architecture. However, we do believe until nine months time, we're gonna be positioned to be on on on delivering our vehicle finance business, utilizing new technology. And we hope to grow our asset book at that time and as the market share comes in that respect change, I think it depends on what happens in the marketplace with other participants in vehicle finance commissions their address scheme and how other banks operate in in that in that space.

13:38 In terms of credit cards, you know, we are we operate in a space where other other banks don't necessarily operate. There are some competitors in terms of a new day or a Capital One. What we'd like to do is we say continuing to is to grow our market share per se from that one there. And today, we we we seen where we wanted to grow. We have to be able to grow, so I'm quite comfortable we can continue to grow our market share in that product. Great. Thank you, Dave. And to, you know, to come back to the point of the call here, having that capital in place now facilitates that growth. Indeed. Next question, again, not directly linked to the transaction, but sticking on the growth theme, is around Snoop. So how the acquisition of Snoop has is being integrated into business and being leveraged to support the growth that we're we're targeting.

14:30 Again, probably for you, though. Look. I think we we acquired Snoop back in August 2023. We said for the first couple of years, we'll keep it quite separated to to the group in terms of entity structure in place there. What we've seen with the Soup acquisition, it's a great management tool for our customers base to actually manage their cost their their income and their expenditure. We see pickup in in terms of number of customers of of VANQUIS who who have access to Snoop. I think it's over 45,000 now. James, can you just confirm it's over 40 Yeah. Over 40. 45,000 now. So that that that's a useful product we offer free to our customers in place there. In terms of, we started using it for deposits from December last year. We got over £200,000,000 of of deposits. We diversified our deposit strategy as a consequence of that, and it's a very nimble tool. It's a good technology. It's based on which our, our customers have access to to create a rainy day fund and to to to safeguard against with times where they may need some some funds at at play, quite quickly in in the marketplace to to to deliver on that border goes wrong or whatever. It's it's working out quite well in that space from, as I say, having 0 to £200,000,000 in just over seven or eight months is a is a very positive step in in that perspective there. But I think, I guess, what what has brought brought into the overall group is the people working with Snoop, some fantastic fantastic technologists, to be perfectly

16:03 honest. And the number of the people we've got in place, both of them, like, that that acquisition now sit at the the table of the ex co of the organization. We've got people running I IT, people running our marketing, people running our cars. This all come from that acquisition. So I think that's been viewed as a very positive transaction per se. Where we do see going forwards in the in the bank is a closer integration of SNOOP capabilities into the VANQUIS mobile app, and you'll read more about that in the in the in the coming months and updates to the to the marketplace, particularly in the strategy update we hope to give at the tail end of February 2026. Great. Thank you, Dave. The next two questions are coupled together because they're they're very similar, but it's essentially about about prioritization of capital. So the quest the two questions combined sort of read, how are you prioritizing your capital between, I suppose, reserving capital to shore up your capital position relative to regulatory requirements, returning capital to shareholders, growth is through dividends and or buybacks, through growth that we've talked about or, you know, the further debt reduction that Steve touched on earlier. So perhaps both of you might may wanna comment on that. So if you want me to start and then Yeah. You you start. Jump in. So look, VANQUIS remains in sort of turnaround transformation

17:33 phase. And as such, we feel that the best use of CAPP sort is deployed into the business for profitable growth rather than return to shareholders. We're really looking to build scale within the business in the near term to in order to generate sustainable long term profitability. So that is the priority. Once we're through the business transformation and we've got sort of clear line of sight on that sustainable profitability, Our intention is to reset capital distribution policy, and I think we've we've we've guided and said we'd do that with the full year results and obviously communicate that in '26. I think it's fair to say, look, we understand the importance of the capital distributions to shareholders and that it we we intend for that to be a meaningful part of our business of the investment proposition going forward. But I think now in terms of what that might look like, whether that's a dividend or a buyback, I mean, that would be dictated by various factors, and we'll consider that at the time.

18:31 Jason, you want to start? Yeah. I I think you've covered all this, Steve. The only thing I'd add in in place there, we we did commit when we come back to the market as as following our full year 2025 results on in in late February next year. We will we will we will tend to set out our capital distribution policy at that point in time. Clearly, that's a matter for the board to consider and and approve on that one there, but we are cognizant of the the needs of different shareholders in terms of growth versus income. And that is point in time, as Steve said, is we we need to get we need to scale up this business. We need to grow the receivables. That's the consistent message we've delivered to the marketplace in the last couple of years. Yeah. That's great. Thank you, VANQUIS. But, Jack, I guess, lastly, the most important thing is we're not just in growth for growth's sake.

19:22 It has to be profitable growth. So we we run a quite tight tight ALCO whereby we look at the capital, we look at the returns payback period on the capital being deployed in new business, and that's the basis where we actually allocate that capital available to the product at this point in time. Great. Thank you, guys. There's another question here, which I think you've sort of answered through the last answer there with when we'll when we'll look to change the capital ratio target and any hints on what that will be. I think the message there is we'll we'll give an update on our capital ratio target with the with the full year results. It will be on a CT one basis, and it will be part of the broader capital allocation and distribution policy going forward. So I don't think we need to answer that one again.

20:14 The next question though, and I think it's the last question in our list at the moment is how resilient is our capital position under extreme macro stress scenarios and how do we sort of assess that when we're considering that our capital position. It'll be steep. I'm happy to pick that one up. So like all UK banks, we're obviously subject to an ICAP and that's really us taking an internal view of our cap on how it might perform under various stresses. And that's anything across sort of an idiosyncratic market wide right through to combined events. We've obviously gone through an annual review of our iCap, and it's something that we've shared with the regulator.

21:03 We do expect feedback from the regulator ideally before year end, and obviously that feeds back into setting our capital ratios. But look, I think the long and short of it is, I would say we we are resilient. We're quite prudent in our approach. But, obviously, in terms of the stress testing, we do take into account the moving parts from a macro perspective, looking at various implications of interest rates, unemployment, GDP, etcetera, which will have a degree of sensitivity on our customers. Dave, Steve, James, thank you for answering all those questions you can from investors. And, of course, the company can review all questions submitted today, and we'll publish those responses on the Investor Meet company platform. Just before redirecting investors to provide you with their feedback, which I know is particularly important to the company, Dave, could I please just ask you for a few closing comments?

21:53 Thanks so much, everybody, for joining us on Friday afternoon. For us, we view this transaction, the 81 issuance coupled with the tier two tender offer as a significant transaction in the step to the turnaround of the VANQUIS BANKING GROUP. If it creates capacity to lend into the market, basically, it is what we wanted for a period of time. It goes to our aspirations to grow this business into a long term sustainable profitable generative organization. One last thing to point out to you from there is we're gonna issue our third quarter trading statement on the November 5. Hope you all get a chance to look at that and, hopefully see some further positive news from the group at that point in time. Thank you very much for joining us, and have a good week weekend when it comes.

22:40 Steve, Dave, thank you for updating investors today. Can I please ask investors not to close the session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations? This may take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of VANQUIS BANKING GROUP PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all.