Vanquis benefits from switch to lower-risk borrowers

The rebranding of Provident Financial as Vanquis Banking (VANQ) was completed in the first quarter of this year. As we pointed out when assessing its performance through 2021, the reincarnation was not simply cosmetic but was instead part of a series of measures designed to leave the lender with a lower-risk profile, perhaps at the expense of gross margins. The group had previously been forced to close its consumer credit division following a claims mismanagement scandal involving the sale of unaffordable loans to borrowers, so the refocus on “mid-cost credit” products was probably unavoidable.

At any rate, the switch to lower-risk customers may have informed the recent decision by the Prudential Regulation Authority to reduce the group's total capital requirement by more than a third, from 18.3 to 11.9 per cent, a development which management believes “will support the group's focus on organic loan book growth”.

Performance through 2022 was of less importance than the strategic change underway, but investors responded positively to news that adjusted profits, at £126.6mn, were “marginally ahead of market expectations”. Profitability was held in check by increased losses from the incipient personal loans business and increased central costs due to the reorganisation of group functions (£15.7mn and £34.5mn respectively) – but this was to be expected.

Meanwhile, the group’s credit card business reported adjusted profits of £178.5mn, against £173.9mn in 2021, helped along by reduced impairments and cost reductions year-on-year, while the personal loans business grew its receivables by 170 per cent.

The swing to the mid-cost and near-prime segments of the market is an ongoing affair and it may be some time before the loans book matches pre-pandemic levels. Numbers are encouraging, but we remain circumspect as it is difficult to predict the impact of wider macroeconomic factors on its client base, “lower-risk profile” notwithstanding. Hold.  

Last IC view: Hold, 297p, 04 Apr 2022