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Good morning, ladies and gentlemen, and thank you for standing by, and welcome to the Provident Financial PLC quarter 1 Trading Statement Call. [Operator Instructions] I must advise you that this call is being recorded today, Wednesday, 9th of May 2018. And I would now like to hand the call over to your speaker today, Mr. Malcolm Le May, please go ahead, sir.
Hello. Good morning, everybody, and apologies for being a few minutes late. This is obviously to update you on our first quarter's trading. We issued a statement this morning to the market at which I hope you will see -- I mean, clearly the highlights are is that we've had -- each of our businesses have had a good start to the year, which I think is producing a strong foundation for the rest of the year. Banquets, in particular, has delivered profits ahead of plan in its first quarter and has retained good margins and good operational leverage. More importantly in the home credit division, our recovery plan is on track. We've delivered good collections during the first quarter, which obviously, as you know, is a critical trading period for us off the back of the last quarter of last year. Moneybarn has seen some extremely strong volumes -- [ the ] business volumes coming through although clearly impairment has continued to track modestly above our expectations, largely because of an increased level of terminations. But as their lead indicator shows, that the delinquency trends are now improving.We -- during the course of the first quarter, as you know, did our rights issue, that was well-received. I think the group's capital position now is extremely strong both from a capital perspective and liquidity. And from a governance perspective, we continue to seek to build on our relationship with the regulators, which I think is going reasonably well, it's a continuing process, however, and we are making progress, as we said we would in terms of looking for a new Chairman and strengthen the board by having some non-executive directors.So overall, I'm pleased with the performance in the first quarter. Obviously, we've got a lot of work still to do, a lot of wood to chop. But we're making good progress. Rather than go through any more detail at this stage, I think, bearing in mind the time constraints we're under I should open for to questions, which Andrew and I am happy to answer. Any questions, moderator?
[Operator Instructions] First question comes from the line of Owen Jones.
I have 2 questions on home credit and one on governance. In terms of home credit, can you tell us how the sales efforts went during the first quarter? I appreciate that's not necessarily the focus for the first quarter of the year, but just to give us an indication as to how the sales effort is running either year-on-year or, sequentially, that would be rather useful. And the second part for sort of home credit. The collection performance, how has that been impacted by some of the adverse weather that we saw in the first quarter? And did that have any sort of material impact in terms of, perhaps, closing up disparity versus your historical performance? And then the question on governance. You mentioned it briefly then, Malcolm, just in terms of your additional NEDs that you're looking to bring on, can you give us a more indication as to which areas you are looking to hire into or the skill sets that you're looking for? And if there's anything with regards to the current board compensation that you feel needs addressing.
Okay. Andrew, do you want to take the first 2?
Yes, thanks for your questions. The sales effort in quarter 1, home-collected credit, I mean, you're absolutely right in your observation quarter 1 is not the period in which we're focused particularly on sales. Sales followed the normal relatively subdued pattern that we all saw in the first quarter, and of course, on a much reduced customer base relative to last year. What we haven't done is sought to push hard in relation to sales or in relation to reengaging what is a significant number of those customers who we failed to reengage with, following the dislocation of the business last year. So that's not been our focus. And if I can extend that, where our focus has been during the first quarter and into the early part of the second quarter, is on improving effectiveness and the efficiency within the field organization and taking cost out of the support functions at the center of the organization as we're rightsizing the cost base to the reduced size of the business compared to where it was a year ago. Both those programs -- the cost reduction in the center and the action in the field have been successfully executed slightly ahead of time. Within the field, it was -- it's a process of normal performance management in the sense of dealing with the weaker performers within the field, which in turn, has improved the quality of the workforce out there as well as having eliminated some of the additional capacity that is currently served us which was put in through the back end of last year and order to try and maximize the reengagement of customers who we let down through service failure in the third quarter. So that's where our priority has been together with executing on the plan that we've -- the turnaround plan that we have agreed with the regulator. That's home credit. In terms of the collections performance and the seasonality in that. There are always -- we want to always point to the weather, to the ice and particular weeks where you might have been slightly off against the previous year, and there were a couple of weeks when the ice was a bit of an issue. Quite interesting though, and we're not going to sit here and use the ice as an excuse for performance, because it's not appropriate. . The key thing is that we, overall for the quarter, our collections were in line with where we expected them to be in line with that business plan and did close the gap moving back towards the historic norm. That's the critical point. As a matter of interest, Chris Gillespie is obviously -- but having an important workforce funnily enough, does place a slightly higher obligation, it would appear on the workforce turning out in less inclement weather versus self-employed agents who clearly have a greater discretion as to when they choose to get -- carry out their work. So actually, versus historical standards, the impact of the adverse weather that we did see in March is probably slightly less pronounced on it might otherwise have been.
Yes, Chris Gillespie tells me the best weather for us is a miserable, gray, cloudy, drizzly day -- but we haven't had enough of those.
The -- turning to Chris on governance. You'll appreciate that when a company goes through what we went through last year, it's inevitable that one looks at the structure of the board. Tragically, we lost our Chairman, and so we have to find a new Chairman. That work is well underway. In terms of the areas of governance that I think we should be looking at, I mean, clearly, we have to have non-executive directors who are strong competent non-executive directors, but I think the 3 areas where we're particularly focusing on is risk where finding someone who's got some experience, obviously, in banking and credit analysis for those understanding risk is going to be important. We currently have a situation where the chair of audit is also the chair of [REM], that's not a sustainable position, so we're looking for someone who's got strong audit experience. And you'll recall that if you planned your way through all the perspectives that we issued, we talked about setting up a new committee of the board, which would focus on the customer and ethics, that's the third area. So there are other 3 broad areas that we're looking from a functional perspective to add people to the board. Clearly, it will have to be -- also a board is only as good as its teamwork and the people and the personalities that come on board will have to fit into -- with the rest of the board. There will be a natural progression of people off the board, as one has to under the governance model, people who've served their time, and so the -- additions we're making are basically a combination of adding skills to the board and also making sure that we're rolling people off in the appropriate way. So I hope that answers your question.
Any more questions? Next question?
Yes. The next question comes from the line of Peter Testa, you line is open, please go ahead..
Two questions on bank risk. One is just on the historically -- we got some of the numbers on balances and risk-adjusted margin. And I was wondering if doing the numbers if you could give us at least a directionality i.e, balances overall, are they up or down and per client and a risk-adjusted margin. What sort of trajectory, if you could clarify the sequential journey to get to your expecting risk-adjusted margin through this year so we've got some idea of what your expectations are. And then as you bring down the new clients, I was wondering what impact that's having on profitability, given the early customer impairment trends, historically, if you can tighten the risk criteria and bring down the new customers, how that's helping the P&L? And then lastly, just on home credit. I was wondering if you could give just sort of sense of what volume increase and balances and customers that you feel are needed to bring you back to breakeven in H2 from the current position.
So yes, I'll deal with your question around risk-adjusted margin, we haven't published risk-adjusted margins in this Q1, the reason for that is we've [ crossed ] the wire for IFRS 9 and therefore our intention is to be helpful ahead of the half year and publish IFRS 9 numbers, including the risk-adjusted margin so that you've got perhaps a proper reference point from which to measure our performance. And so I'm not apologizing there, I'm just saying we're in a period of transition, and the Q1 [ IMS ] isn't really the place have a teach in on that. But however, what I can tell you is if you look at the risk-adjusted margin and Vanquis, it's been relatively flat as we've gone through the first quarter of the year. Where we've guided to and what's implicit in the content is out there is a reduction in risk-adjusted margin through 2018 versus 2017 of something approaching 2%, of which something of the -- which is split roughly between further reduction. The penetration of the ROP product into book, but we haven't made any heroic assumptions about having that product back on sale before we're -- until we progress reasonably well through the remediation program to the 1.2 million customers who we have to contact over the next year or so. And the other piece is around delinquencies. So we've assumed that actually delinquency would show, which would show a little bit of deterioration in terms of delinquency through 2018. The out-performance that we refer to -- build a robust margin that we've referred to in the statement here is largely, because we haven't seen any real deterioration in the delinquency through the first quarter, we haven't seen any deterioration in the delinquency profile within the books. So we're tracking slightly ahead of those planning assumptions as I referenced a minute ago. At the same time, you're right. We have tightened, and that's -- we tightened a couple of times over the last 6 months. Also, that's being done very much by reference to a specific cohorts of customers where we've seen an opportunity to eliminate more marginal business rather than an across the board tightening, because we haven't got anything specific -- systemic across the book, which would lead us to tighten on a broader basis.So those are the dynamics really around the risk-adjusted margin and its trajectory. We're not seeking to change any guidance in relation to the Vanquis or the projection of the risk-adjusted margin. We still expect to see some downward pressure through the balance of the year.On the average balances within Vanquis, we're really not seeing a great deal of change there when you[Audio Gap]Where clearly, we've been writing Chrome business now for 15 months or so. It's becoming a -- clearly that's -- the penetration of that product into the overall book is increasing gradually. And with that being a slightly nearer prime business, the average balance is a bit, is a bit a little higher. But that purely mix effect rather than any change in risk appetite against the particular propositions that Vanquis has out there in the market. The -- your question around home credit and getting to breakeven. Just really continuing the logic that I first tried to apply to Owen's question a little earlier. Focusing the first half of the year very much around getting the cost out of the center and improving the efficiency effect of the field organization done on time, in full. Of course, the other thing that's really important to the financial performance through '18, and that trajectory to breakeven and that we continue to see the collections performance improve back towards norms. I should just remind you that our financial plans assumes that, that gap, which was 12% at the end of year, 10% now, is expected to from a financial planning point of view to return to around parity by sometime in spring 2019. So we're on track, but we need to continue to stay on track and see that progressive improvement because if that progressive improvement together with the cost reduction that I've described that deliver the breakeven on a run-rate basis, the -- deliver the breakeven position and as we go into the second half of the year and deliver a profitable business as we go into 2019.
So we're not assuming massive volume increase?
No, we're sort of doing it the hard way, if you like.
Okay. And just a point on the overall balances and the impact of new clients, slower new clients, tighter terms on profitability?
Yes, the -- it's not particularly material, I mean, we booked less accounts in Vanquis Bank in the first quarter that's to an extent down to phasing and marketing spend, so our direct mail volumes have been low in the first quarter. We're not on the TV. We will be on the TV relatively shortly. So we have some -- in fact, very, very shortly. So we have some phasing going on there. We've probably spent almost GBP 1 million or GBP 2 million less on the customer acquisition programs through the first quarter of the year. But just to be clear, we'd expect to feed that back into the program as we go through the balance of the year.
That's set against an exceptional first quarter last year.
It is. Yes, indeed.
Your next question comes from the line of Ian White.
I just got 2 please. The first one on capital. You've given us the 29.8% CET1 ratio. I'm assuming that's on a transitional IFRS 9 basis. What was the ratio on the fully loaded IFRS 9 basis? And if you're not there already, by when would you expect to be at your 25.5% minimum on a fully-phased IFRS 9 net basis, please? That's question 1. And then secondly, on home credit. Obviously, you've recruited quite a number of new collections people into the business over the past 12 months. Could you tell us what the CEM attrition rate was in the first quarter, please, versus what it was in, say, 2016?
Okay. Thanks, Ian. I'll have to say, I can't answer question 2. I don't have the data in front of me and it would take a little bit of sorting out, because we have to take out the fourth attrition that we put through the field, which amounts to 250 people. What I can say is that the attrition is very much something that we are managing. So we're not seeing attrition -- voluntary attrition, which is surprising in any way. But I can possibly come back to you with some basic points on that, if that explanation isn't full enough for you.And in terms of capital. Yes, we're at 29.8%, so -- and that's after -- on an improved process basis. And to be clear that gives us about 120 -- we publish GBP 120 million of surplus capital over and above the minimum ratio of 25.5% that we have to hold, and that figure of about GBP 100 million is consistent with where we've been historically in terms of having a management buffer and a sensible amount of strategic flexibility. In terms of IFRS 9, you'll be aware there are transition arrangements that feed in over a 4, 5-year period relating to IFRS 9. We have not fully scored IFRS 9 in arriving at the 29.8%. But if we were to do so, the surface -- if you think of it this way, if you like, the GBP 120 million of capital that we have would deal with IFRS 9. How we think about it, however, is that IFRS 9 has an impact of somewhere between GBP 20 million and GBP 30 million a year over the next 4 years or so. And the dividend policy that we've set of 1.4x from 2019 onwards fully takes account of the impact of IFRS 9 and whilst retaining at least GBP 100 millionof surplus regulatory capital over and above the minimum requirement at 25.5%. So is that -- does that help you?
It does. Yes, that's clear.
Just going back to your first question. You'll recall when we got into difficulties last year, we actually [ referred to ] an awful lot of people and flooded the market so that we can get back to our customers. Part of the plan for 2018 was to look at that canned sales force and basically evaluate it and make sure that we focused on those agents that, and or employees now, I should say that were delivering what we expected them to deliver. So we have actually planned to address that during the first half of this year. We've actually been through that ahead of schedule and now got the sales force that we want to have. And so to what extent that there is attrition, it's being driven by us and while we don't have precise numbers we're not facing the sort of challenges we faced last year, which was very much part of the plan that we set out to do.
And your next question comes from the line of Gary Greenwood.
I'm obviously, a bit slow on the drill this morning.
You just got in because I think you're going to have to make this last question.
Well, 3.5. then So Vanquis, just to clarify on the comments around delinquency being a little bit better-than-expected. Is that underlying? Or is that as a result of this sort of greater mix of Chrome in there?
No, no. That's just looking at delinquency. On a disaggregated basis, it's flattish rather than having shown a deterioration across the book.
Okay. And then also on Vanquis, I know you reference the mobile app in the announcement. So I just wondered if you wanted to give a little bit more color around the benefits from that?
Yes. Well, I think they -- the 1.7 million customers and about 600,000 -- 60,000 on the app and it's basically an increasingly important part of our business. And I think looking at the future, I mean, technology, it's a fact of life. We've got to get our heads around the fact that 5 years ago people used to think about digital as sort of something that's a startup. It's part of everyday life now. And I think the app is going to a very important part of this good future.
And the ability of people to self-serve is colossal. People want to interact with us when they want to interact with us. We can and through digital means such as that allows that to happen in mostly this way. Customers prefer to deal with us, with service requests, with the calls, in the -- when it suits them rather than necessarily receiving calls at times that may not suit them. The other thing to say is the whole digital journey is raising awareness and people are putting other propositions in front of as customers. 660,000 is a lot of customers to be able to raise awareness of what we can do for them, whether it's credit cards or potentially other products when you look -- or loans or indeed most of accounts as you look into the future.
And increasingly, it's providing us with data on our customer base, which is invaluable. And how we use and modify that, it's going to be very important for the future.
Okay. That's very helpful and then just on the business on your Moneybarn. In your opening comments you mentioned the impairments being impacted by re-termination, so if you could just talk a little bit more around the drivers of that? And then the other question was just on Satsuma, where I think you tightened the underwriting criteria. If so should we expect growth to slow down from here?
Yes. So Moneybarn, as you know, we've been picking up some additional impairments. Some of that has been through the rate of growth that we've been achieving. So new business strain and part of it's been -- as we've expanded the proposition - [ lent ] up to retail value in recent times. We picked up some additional impairments, and we learn from that and we tightened as you've seen through last year, and we've done some further tightening and work -- we're in the process of doing some further tightening right now we're eliminating -- we mentioned here -- one of the higher risk tiers of business. I think what's critical here, just to -- is that the lead indicators that we're seeing now in terms of both the performance of Moneybarn and assessing the quality of the acceptances that we're taking on to the book are both in positive territory, firmly in positive territory. So if you look at quality -- and we measure things Gary, like the experience [LC] score, which looks at creditworthiness, and we look at the CII, the Consumer Index -- Indebtedness Index, again, which is an observable experience score around customer indebtedness. When we look at those objective measures of the quality business that we're writing and putting on the books, they've been improving quite sharply in fact, since Q3 of last year. So we know that the quality of the business that we're writing from that point of view has improved significantly. And then in terms of our own metrics, and when we look at customers moving into arrears, and we look at the customers where we're terminating the contract because of defaults, we're beginning to see those internal performance measures also improve during Q1. So you'll appreciate it takes a little bit of time for the business to turn, the books duration is 3.5 years also. And so the forward indicators will improve the performance, but there still a little bit of noise in the back book. And it's just assessing the -- those relative dynamics, which is the art form here. But we are comfortable with where the business is and just to be clear, the reason for writing high volumes of business is because it is now operating in the market where there has been some withdrawal by some of the players from the near prime area as the business. So the opportunity in the space that Moneybarn has in the marketplace to write business is more attractive than it was. So you can point too many ways and you can point clearly signal withdrawal, from, or cease that subprime business in 2017. You can -- if you read First Round accounts, [ Motonovo ] similarly, have reduced their exposure set to high-risk lending. And, those 2 I can talk about, it's broader than that based on, obviously, on the confidential information that we held within Moneybarn. So that's why we're getting a combination of tightening of credit, improving quality and still at relatively high volumes of business being written.
I'm afraid we're going to have to full-stop there. Clearly we're happy, Andrew and I have to take any calls privately, separately and speak to Gary as well. Unfortunately, we got to go and have our AGM now. But thank you very much for your time and for calling in.
Thank you.
Thank you. That concludes our call for today. Thank you all for participating. you may all disconnect. Speakers please stand bye.