investor day - non-standard finance plc/media/files/n/non-standard... · 2018-01-22 · overview 3...

Investor day 1 November 2016

1

John van Kuffeler Founder and Executive Chairman

NON-STANDARD FINANCE – INVESTOR DAY, 1 NOVEMBER 2016

Agenda

2

09.30 Introduction John van Kuffeler, Executive Chairman and Founder, NSF plc

09.45 Everyday Loans Danny Malone, CEO Everyday Loans

10.45 Loans at Home Mark Bardsley, CEO Loans at Home

11.45 Break

12:00 Trusttwo Richard Sharp, Managing Director, Trusttwo

12.30 Market review Miles Cresswell-Turner, Executive Director, NSF plc

12.45 Funding and accounting Nick Teunon, CFO NSF plc

13.00 Summary John van Kuffeler

Lunch


Overview

3

In February 2015 we set out our investment case to build a sizeable player in the non-standard finance sector

20 months later we have three significant businesses with 80 offices and over 140,000 customers

Our thesis also remains on-course:

- Sector is growing with no sizeable new entrants

- Structural and regulatory change means that each of our chosen segments has strong growth potential

- There is regulator support for a well-managed, well-capitalised group like NSF

- Further opportunities may be presented through a second wave of M&A/consolidation due to:

- Further regulatory constraint

- Lack of available funding

- Change in risk appetite from current owners


We continue to make good progress towards our goal:

overall loan book growth of 20% per annum and

20% return on assets in each of our operating businesses

Overview - our three divisions

4

Branch-based lending Home credit

Guaranteed loans


Overview – each division has strong growth potential

Branch-based lending

• Market:

• £5bn of receiveables withdrawn post 2007/8

• Closure of over 400 branches post-crisis

- Welcome (183)

- HFC (135)

- Citifinancial (90)

- London Scottish Bank (52)

• Barriers to entry:

• Branch network

• Skilled management team

• Proven underwriting capability and scorecard

• Everyday Loans

• National coverage via 39 branches

• Experienced management team

• Proven and scaleable infrastructure

5

Home collected credit

• Market:

• Structural shift at market leader:

- Shed nearly 1m customers

- Consequent reduction in agents

- Focused on opportunities outside home credit

• #2 focused on other opportunities

• Low income earners are better off and under-borrowed


• Agent network

• Skilled management team

• Funds to invest in growth and technology

• Loans at Home:

• National coverage, clear #3

• Experienced management team

• Yet to reap benefits from technology investment

Guaranteed loans

• Market:

• First launched in 2006

• Market leader dominates with 80% share

• No clear #2 has yet emerged

• Complex product, poorly understood by consumers

• Attractive features for customers and regulator


• Back-office and associated infrastructure

• Significant investment in marketing required

• Trusttwo:

• Proven and scaleable infrastructure

• New MD hired

• Financial backing of well-capitalised parent


Overview – our key risks and how we manage them

6 NON-STANDARD FINANCE – INVESTOR DAY, 1 NOVEMBER 2016

Conduct

Training

Quality assurance and internal audit

Regulation

Building strong relationship with FCA

Active regulatory affairs programme

Credit

Proven scorecard, continuous improvement

Strong MI and KPI monitoring

Meeting the customers face-to-face

Business strategy and operations

Experienced management

Strong Board oversight

Liquidity

Committed debt facilities in place until 2018 and 2019

Exploring other options to diversify our source of funding

Brexit – threat or opportunity? GDP growth much better than

expected in 3 months post-June

Nissan to invest in Sunderland,

securing jobs and the local economy

Income for bottom fifth of earners up 6.2% in April 2016

But…

Inflation expected to rise following fall in Sterling

Our current view

Customers on low incomes are better-off than they have

been for many years

Food/petrol price rises will have an impact for customers,

but this will be relatively small

If impairments do start to rise, loans are short-term and we

can adjust our scorecard to compensate

If economy worsens, pool of potential customers should

expand

We do not expect a material impact from Brexit

Overview – progress to-date

7

Phase one of our plan is now complete:

NSF is a significant player in the non-standard segment:

- #1 in branch-based unsecured lending

- #3 in home credit

- Over 140,000 customers

- Over 80 branches

- Over 500 employees

- Combined loan book of £147m at 30 June 16 (£169m after fair

value adjustments)

H1 16 saw strong loan book growth in all three businesses:

- Everyday Loans +17%

- Loans at Home +19%

- Trusttwo +28%


Loans at Home branch

Everyday Loans branch

Overview – future plans

8

Phase two will see us:

Grow Everyday Loans:

- More branches planned for 2017 and 2018

- Develop new and complementary products

- Manage loan book growth with appropriate control of impairment

Grow Loans at Home:

- More measured pace of growth will reduce rate of impairment and temporary agent commissions

- Full roll-out of hand-held technology:

o Collections app being implemented before December 2016

o Lending app during H1 2017

Grow Trusttwo:

- Position Trusttwo as an attractive alternative to the market leader

- Expand in-house team

- Invest in marketing

Put in place longer-term funding as part of a broader financial strategy


everydayloans for everydayliving

Everyday Loans

Group

Danny Malone CEO


1. Introduction

Page 10


Agenda

1. Introduction

2. History

3. Management team

4. Regulation

5. Everyday Loans business model

6. The lending process

7. Collections

8. Impairments

9. Market overview/competitive landscape

10. Strategy for growth

11. Summary

Page 11


• Everyday Loans is the UK’s largest branch-based lender of unsecured loans to sub-prime borrowers

• It has a network of 39 national branches (36 full branches, including Central, and three satellite branches)

- Preston, Reading and Derby have opened since H1

- Manchester and Walsall scheduled to open in Q4

• By using a face-to-face model, our USP is being able to lend profitably to those customers that others can’t or won’t

• Our loans are unsecured and distributed through three main channels:

- Brokers 35%

- Direct to brand 27%

- Own book renewals and former borrowers 38%

1. Introduction - overview

Page 12


Vision To be the most effective and easy to deal with consumer finance business in the UK Mission To double the size of the business - Everyday Loans and Trusttwo – within three - four years Values Respect for each other as employees Outstanding customer service and outcomes Total commitment and effort Attractive returns for our shareholders

1. Introduction – vision, mission and values

Page 13


Financial crisis • Large numbers of consumer

finance businesses exited the

market including:

o Black Horse

o Citifinancial

o HFC/Beneficial

o Welcome

o London & Scottish

• Everyday Loans was the only

remaining branch based

consumer lender (not high cost,

short-term) in the UK

Founded in 2006;

initial £30m from

Alchemy/

management

8 June 2012

Purchased by

Secure Trust Bank

in June 2012 for

£72m (£34m equity

/ sub debt and

£38m of bank debt)

26

13 April

2016

Acquisition

completed

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2006

21 June 2016

Full FCA

Licence granted

27 32 36 34 36^ 26 26 No. of

branches

2. History - timeline

26 30

^ As at 30 June 2016, incl 3 Satellites

4 Dec 2015

Sold to NSF

for £235m

(£170m equity

and £65m debt)

60 67 78 105 89 114^ 54 47 Receivables (£m) 41 27

Page 14


30 26 26 26 26 27 31 31 33 33

136

104 106 104 108 118

129 141 145 148

0

50

100

150

200

2007 2008 2009 2010 2011 2012 2013 2014 2015 H1 2016

Full branches and employees

Branches (Full) Branch Employees

35% 33% 33%

36% 35% 36% 37%

42% 43% 45%

0%

10%

20%

30%

40%

50%

2007 2008 2009 2010 2011 2012 2013 2014 2015 H12016

Interest revenue as % of average net receivables

27.1 40.9 47.3 53.7 60.5 67.4

77.9 88.9

105.2 114.4

11.8

16.6 19.9

22.9 24.8 25.3 29.0

34.3 35.5 37.2

0

10

20

30

40

50

60

£0m

£20m

£40m

£60m

£80m

£100m

£120m

2007 2008 2009 2010 2011 2012 2013 2014 2015 H1 2016

Unsecured receivables and customer numbers

Unsecured Receivables (£m)

Customer numbers (RH scale) (000)

2. History - timeline

28 25 24 24 29 30 35 44 46

25

7 16 11 15 15 19

23

29

49

26

0

20

40

60

80

100

2007 2008 2009 2010 2011 2012 2013 2014 2015 H12016

Unsecured loan volumes (£m)

Existing and former unsecured volume (£m)

New borrower unsecured volume (£m)

Page 15


Danny Malone

CEO

Mark Ridlington

COO

Jason Bovington

Credit Risk

Andrew Wayland

Marketing

Steven White

CFO

Angela Bascombe-McCarthy

Compliance

Richard Sharp

Trusttwo

Danny Malone:

25 years’ experience in Financial Services industry

Co-founder of Everyday Loans in 2006

Previously CEO of Citifinancial UK and Future Mortgages and CFO of

Citifinancial Europe

Chartered Accountant ICAEW

Steven White:


Arthur Andersen, UBS & Deutsche Bank

Previously at Link Financial UK

Chartered Accountant ICAEW

Andrew Wayland:

Helped set up Everyday Loans as Head of Marketing in 2006

Business owner Columbell Communications for 5 years

Previously Head of Commercial Development Tech start-up

Mark Ridlington:

35 years’ experience in Financial Services Industry

14 years’ experience as Senior Manager in Financial Services

Co-founder of Everyday Loans in 2006

Previously COO of Citifinancial UK and Future Mortgages Ltd

Jason Bovington:

Helped set up Everyday Loans as Head of Risk in 2006.

20 years’ Financial Services experience

Previously Head of Risk HFC Bank PLC

Angela Bascombe-McCarthy:


Joined Everyday Loans in March 2016

Previously Head of Compliance Future Mortgages and NS&I

Also worked for FCA

Richard Sharp:

15 years’ sector experience

Joined Everyday Loans in July 2016

Previously GE, DFC Global & Cattles

3. Management – a highly experienced team

Page 16


• FCA replaced the OFT in April 2014 and is now responsible for over 50,000 consumer credit companies

• Thematic reviews:

• Incentives and remuneration

• Guarantor loans

• Early stage collections

• New guarantor loan default process introduced in April 2016 following an apparent shift in opinion by the FCA

• Everyday Loans (including Trusttwo) received its full FCA licence in June 2016 and is also a member of The Finance and Leasing Association

• FOS complaints – very few complaints are upheld

4. Regulation

Page 17

http://fla.org.uk/


• Branches offer full service and do their own lending and collecting

• Off-high street retail premises and first floor offices in town centres.

• Majority of customers live within five miles or 30 minutes of branch (location, location, location)

• Customers are able to establish/repair credit history and branches provide “money management” service for financially unsophisticated customers

• All loans are unsecured with homeowners making up approximately 20%-25% of customers.

• Risk based pricing allows true full-spectrum lending for the right loan amount at the correct price.

• Customers are focused on payment, not rate:

• £1,000 to £15,000

• 24% APR to 299% APR

• 24 months to 60 months (no high cost, short term credit)

5. Everyday Loans business model

Page 18


• Over 75% of unique applications are screened out

• Duplicates

• They fail initial criteria or minimum credit score

• Detailed evaluation of customer circumstances includes existing debt coverage, income, expenditure and affordability with the customer.

• Managers will frequently decline a loan which has passed credit score.

• Face to face contact significantly enhances credit segmentation, facilitates collections and allows relationship building.

• Over 85% of qualifying applications to branches get declined following branch review

• Full, verified affordability checks undertaken in branches

• Loan is provided over the shortest term that suits the customer. This means we can adapt the loan to changing customer needs. Our average balance on new customer loans is low by industry standards

• For customers wishing to renew, previous loan repayment history will be considered, however they will still be required to go through a full underwrite for the new loan including the same affordability calculation as new customers

Page 19

5. Everyday Loans business model - the added value of our branch network


Page 20

6. The lending process


6. The lending process - typical loan and customer profile

• Customers must be in employment or have verified self employment, have a bank account and three years’ address history in the UK

• Average loan size is £3,000-£4,000; 63% of loans being £4,000 or less

• Over 57% are under the age of 40

• 45% are single

• 68% earn more than £1,500 per month, 40% earn more than £2,000 per month (i.e. close to national average)

• Typically a C/D-type customer

• 48% of loans are at an interest rate of less than 50%

• 63% have no dependents

• 43% rent; 25% are homeowners; 23% live with parents

• 69% have been at the same address for more than three years

• 75% have been at their job for more than three years

Page 21


• Branches have full service responsibility for lending and collecting.

• Incentives are based on a balanced scorecard between lending and collections, with strong controls over both supported by proven management information systems providing timely alerts on a range of different performance metrics

• All loans are set-up with electronic payment method, preferably direct debit

• Customers in default or arrears difficulties are treated sympathetically; with forbearance and due consideration

• Forbearance is shown to those who need it. Central approval of all account modifications prevents misuse

• Our control environment is best in class:

• Deferments - for those with past short-term payment issue, but have demonstrated ability and intent to repay contractual payment ongoing. A number of full contractual payments are required before deferment in order to defer arrears

• Re-schedules - for those with demonstrated intent to repay, but lack of ability to make full payments, due to change in circumstances. All re-schedules require a full income & expenditure review as well as monthly payment of revised amounts before reschedule and without follow-up, in order to qualify

• All accounts are collected locally until the account charges off. All accounts 180 days + contractual delinquency at month-end are charged-off

Page 22

7. Collections


• This is an independently hosted review site. In addition to the very high ratings, The comments are very supportive of the customer journey

Anonymous Customer comment

The most friendly helpful staff I have ever dealt with, it was so personal, I felt I actually knew the persons I was talking to.

Everything was done securely and professionally, I would recommend everyday loans to anyone.

Page 23

7. Collections – customer feedback


• An internal review of FCA guidelines led a change in collections procedures in December 2015

• Removal of STB’s restrictions under NSF ownership, has led to a small increase in impairment but is more than

compensated for by increased yield and has a net positive impact on EBIT.

• Delinquency continues to receive management focus as we strive to optimise growth.

• Collection policies and procedures are being continually revised and updated to take into account experiences

learned.

8. Impairments

16% 16%

18%

10% 10% 8% 8% 8% 7% 8%

0%

5%

10%

15%

20%

2007 2008 2009 2010 2011 2012 2013 2014 2015 H1 2016

Impairments as % of average net receivables

Page 24


• Transfer from the OFT to the FCA has significantly shaken-up the consumer credit market

• New sub-segment - High Cost Short Term Credit (HCSTC) - has replaced payday sector and has fundamentally changed this part of the market

• We have increased minimum loan term from 13 months to 24 months

• We may consider applying for a HCSTC licence in order to offer 12 month loans to existing profile of customers

• FCA is focused on a number of areas including:

• the guarantor lending market • affordability • financial incentives • advertising • collection processes • data protection

• Technology is a key enabler to gaining competitive advantage in the lending space

• Current conditions remain favourable but if capital markets become more buoyant, increased competition is anticipated in all market segments

• We are exploring new product segments that would sit comfortably on our platform and provide further operating leverage

Page 25

9. Market overview


9. Market overview

Page 26


• Invest in our branch network

• Three new branches opened in 2016: Preston, Reading and Derby

• Two further branches in Q4 16: Walsall and Manchester

• Additional branches planned for 2017 and also in 2018

• Rolling programme of renewal or relocation of branches

• Invest in our supporting infrastructure

• New IT Infrastructure & Data Centre just installed

• Introduction of paperless Direct Debits and Faster Payments

• Operational focus on expansion

• Product development

• New scorecard introduced February 2016

• Return to higher APR segments (A9)

• New pricing introduced April 2016 to compensate for higher cost of funds

• New complementary products under development

10. Strategy for growth

Page 27


• Clear market leader in unsecured branch-based lending

• Highly experienced management team

• Scaleable lending platform

• Well-funded with debt facilities from RBS, Shawbrook and Secure Trust Bank

• Full FCA licences received in June 2016

• Strong H1 2016

• New scorecard introduced February 2016

• New pricing introduced April 2016

• Return to higher APR segments (A9)

• 17% loan book growth in H1 16

• Increased yield on new business from 51% to 56%

• Clear strategy for growth

• Expand our branch network

• Invest in our supporting infrastructure

• Expand our product offering

11. Summary

Page 28

Mark Bardsley

CEO

Agenda

• Introduction

• History and highlights

• The opportunity

• Agent value proposition

• Customer value proposition and lending and collecting

• Post-acquisition actions

• Summary

30

Introduction

• Home credit lender established in 1938, with over 77 years of experience in the Home Credit market

• Business acquired by NSF from S&U in August 2015 for £82.4m in cash

• Operates from 44 branches throughout England, Wales and Scotland; has over 300 employees and

c.800 self-employed agents

• National infrastructure and platform for future growth and business development

• Loans at Home operating under interim permissions (as are Provident and Morses)

• Products are fixed-term loans from 24 to 75 weeks mostly repaid weekly in home

• No default fees or default interest applied to the any loans – customers appreciate certainty of cost

• Agents visit customer in home to issue loan and usually collect weekly repayments in home.

Personal contact and understanding of circumstances appreciated by customer

• Provident and Morses are largest competitors with Loans at Home with third largest market share

History and highlights

32

A highly experienced management team

Mark

Bardsley

CEO

Lindsay

Banbridge

Risk

Director

Paul Gill

Chief Risk

Officer

Jono

Gillespie

CFO

Chris

Graham

Commercial

Director

David

Thompson

National

Operations

Manager

Jonathan

Hague

Head of

Credit Risk

Sam

Beardsley

Head of

Operational

Risk

Manjeet

Bhogal

Management

Accountant

Chris

Pearson

Head of FPA

Jamie Place

Head of IT

Kat Hackett

Head of

Marketing

Christine

Rangeley

Head of

HR

Compliance

Manager

Customer care &

compliance

managers

Marketing

Products

Acquisitions

Corp Comms

Strategy

Central Operations

Business Change

6 Regional Managers

24 Area Managers

120 Business Managers

c.800 Agents

Sarah Day

Company

Secretary

33

• Around 3 million regular users of which 1.5m to 2.0m borrow at any one time.

• Customer incomes approximately £10,000 to £15,000 in C2, D and E socio-economic groups.

• Customers by market participant:

•

• Typical loan size £200 to £1,000.

• Weekly collections from the customer's home.

• Regulated by the FCA from 1st April 2014 (formerly OFT).

UK home credit market

c.0.8m

c.0.2m

c.0.1m

c.0.5m Others

34

http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=http://www.shopacheck.co.uk/&ei=1LSWVYG3KMfSUdv_gZgK&bvm=bv.96952980,d.d24&psig=AFQjCNGoMHqVXxDgpm6RLFxlTLWpIX9Lfg&ust=1436026450930477

http://www.providentfinancial.com/

Products

All loans issued in cash in customer’s home

No default fees or default interest charged on any loans

Term in Weeks Charges

per £100 Total Payable Weekly Rate APR

24 £60 £160 £6.67 732.70%

33 £65 £165 £5 433.40%

45 £80 £180 £4 340.00%

75 £87.50 £187.50 £2.50 163.80%

35

Customer profile

• 95% have a mobile phone

• 88% have online access

• 86% have a bank account

• 22% overdraft facility

• 15% have direct debit loan

• 19% have goods on credit

• 20% use other home credit

• c.80% aged 21-50

• c.70% female

• c.95% C2DE

• c.50% have employed person in household

• 89% rent

• 61% receive benefits excl. child benefit

• Average annual household income £14,500 pa

36

Customer profile

Use of loan

• 27% home improvement

• 26% presents

• 9% holidays

• 5% car expenses

• 5% baby/child expenses

37

Customer satisfaction

93

94

95

96

97

98

99

100

Very/Quite Satisfied Use next Time Need to Borrow

%

Customer Satisfaction

Source: Customer research undertaken by PCP Market Research among 400 customers

Other NPS scores taken from Satmetrix.com – UK consumer net promoter benchmark

0

10

20

30

40

50

60

70

80

90

Loans at Home First Direct Santander(credit card)

Prudential(health ins.)

Net Promoter Score

38

Regulation

• Of the 576 home credit companies applied for full permission from the FCA:

- 403 authorised

- 22 withdrawn

- 31 withdrawn from home credit

- 2 refused

• None of the top three lenders yet fully authorised though on-going dialogue with FCA

• Key areas for regulator:

- Agent oversight - put in place business assurance calls and document checking processes

- Affordability - reviewed procedures and documentation

- Arrears and Collections Activity - review of field and central collections activity underway

- Financially vulnerable customers - process in place to support, product is naturally helpful for those financially vulnerable

- Staff remuneration - on-going review

• Mobile technology facilitates improvements in compliance

39

The opportunity

The opportunity

• Alternative lending is the domain of specialists with mainstream providers lacking expertise, experience and appetite

• Home credit typically serves lower socio-economic group customers smaller value loans - £200 to £1,000. These customers and their needs are often neglected by mainstream lenders

• While the overall market for home credit is not growing, there is an opportunity to take share

• Each of the major competitors are pursuing different strategies creating an opportunity to grow Loans at Home through recruiting new agents and increasing customer density

• To succeed, we need to:

1. Expand the agent network; and

2. Attract profitable customers

41

Agent Value Proposition

Why agents choose us At Loans at Home we really value agents. We know that they are key to our long term success. We believe

that we’re the best home credit company that an agent can work with. Here are some reasons why:

• Highly experienced management team - over 175 years’ experience in Home Credit.

• Exciting and ambitious growth plans - we’re looking to build and grow our business; not just rationalise and cut costs.

• We’re investing - attracting new agents as well as installing new technology to support our agents and allow them to maximise their earning potential

• Competitive and easy to understand reward structure - we pay flat commission based on what is collected providing agents with certainty regarding their income, avoiding any nasty surprises

• All size of journeys and agencies are welcome - an agent doesn’t have to have hundreds of customers to be a good agent. We want our agents to have successful businesses but we also know that one size doesn’t fit all

• We’re committed to great customer service - being fair and clear to our customers, our agents and our people lies at the centre of what we do

43

Agent profiles

• All agents self-employed

• Majority are female – reflecting customer base

• Many have come to us from competitors

• All agents DBS checked and credit searched

• Rigorous 12-week induction programme with support from existing agents and managers

• Additional ongoing training via Learning Management System

• Agents earn 10% of collections (8% on card payments) – no commission is paid on sales

• Earn reward for new customers – reflecting time and cost involved

• Weekly meetings with managers to discuss and support

• Managers undertake dual visits

44

Customer Value Proposition

Why customers use us

• Customers like accessible and inclusive nature of product

• Like to deal with people who take time to understand their circumstances and treat them as an

individual

• Product gives customers total control – unlike problems people sometimes encounter with revolving

credit

• No default fees or default interest give customers certainty and means they have no fear of spiralling

debt

• Ability to budget weekly means repayments affordable

• Home service is convenient

• Customers grew from 87k in August 2015 to 92k in February 2016 and are expected to be around

95k at the end of 2016

46

Customer recruitment

Ag

en

t ac

tivity

Rec

om

me

nd

atio

n

On

line

47

Digital plans and new website

• Complete redesign of website

• New site is fully responsive

• Paid search and search engine optimisation in development

• Developing relationships with third parties to further drive customer reach

• We will start slowly and build over time – tracking and refining marketing and credit decisions

48

New website

49

Customer recruitment

Agent generates

lead

Agent calls contact

centre with

customer details

Decision in principle

Agent visits

customer, assesses

affordability, final

decision

Customer calls

contact centre


Lead allocated to

agent

Agent visits

customer, assesses


decision

Customer applies

online


Lead allocated to

agent

Agent visits

customer, assesses


decision

AGENT TELEPHONE ONLINE

Customer

generates lead

Agent calls contact

centre with

customer details


Agent visits

customer, assesses


decision

RECOMMEND

50

Decision in principle process

1) Collect customer name,

address, date of birth

2) Check against internal

data:

Current/previous customer

Previous write off

Out of area

3) Callcredit data pull

4) Scorecard + check for

bankruptcy, sequestration,

DMA, IVA

5) Decision in principle

• Decision engine produces result in seconds

• Continual process of scorecard improvement

• Affordability and sustainability assessment involves individual income and expenditure check

which is validated and documented

6) Affordability

assessment by agent in

home

51

Customer Application Waterfall – H2 to date

AIP = Approval in Principle

In H2 c.25% of new customers sourced online

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

WebAppplications

AIP Customers

Web Application Waterfall

0%

20%

40%

60%

80%

100%

Agent Applications AIP Customers

Agent Generated Application Waterfall

52

Further lending to current customers

• Most customers visited weekly by agents

• 75% of lending to existing customers

• Opportunity to discuss any needs

• Customer must meet strict payment performance criteria to receive a further loan

• Behavioural scoring will be introduced to further support agent decisions

• Affordability assessment is documented and validated for every loan

• Agent always makes final decision – company may say ‘no’, but never ‘yes’

53

Collections

• Loans collected weekly in cash by agents at customers’ homes. In some circumstances card payments may be accepted

• Agents receive 10% of cash collected as commission (8% on cards)

• Agents attend weekly meetings with managers to discuss customer performance and compliance

• If customer misses a payment there are no additional charges and there is no default interest – built-in forbearance

• If a customer is identified as suffering financial difficulty e.g. missing multiple payments or telling an agent their circumstances have changed, a new affordability assessment will be undertaken and a formal payment arrangement made

• Home credit is uniquely positioned to identify and understand vulnerable customers. Loans at Home has clear vulnerable customer policies and procedures and all staff and agents are trained in identifying and managing vulnerable customers

54

Post-acquisition actions

and performance

Post-acquisition actions

• New management team recruited (see appendix)

• Revised accounting policy implemented

• Reviewed all regulatory and compliance matters with extensive revisions/structural changes:

• Newly appointed Chief Risk Officer

• Committed to ensuring Risk & Compliance resources and processes keep pace with regulatory needs and growth of the business

• Business Improvement project underway

• Risk & Compliance committee working well

• Branch assurance and thematic reviews commenced

• Three lines of defence model embedded in business, key focus on first line controls

• Compliance reporting developed including business assurance calls and document checking

• Transfer of complaint handling and reporting to Customer services

• Document checking and Business Assurance calls underway

• Policy review

• Developed a long-term strategic plan and clear vision for the business

• Began a recruitment drive to increase number of agents and customers – fill the void left by PFG

• Established a programme of investment in hand-held technology, systems and training 56

Mobile technology developments

Stage 1 – Collections All collections will be keyed directly into central

systems by agents via mobile device

Increased efficiency

Instant access to customer status – quicker decisions

Reduce manual errors

Remove paper collecting lists

Stage 2 - Balancing Centralisation of remaining administrative

tasks in Customer Service Centre

Reduction/removal of unnecessary balancing and reconciliation tasks currently undertaken

in Head Office

Stage 3 - Lending Ability to lend via mobile device

Electronic agreements, request to call forms and affordability assessment forms

Greatly enhanced agent and customer experience

Processes built to ensure regulatory compliance

Integration All fully integrated with new application

process via website, brokers and Customer Service Centre

Decision engine rules built into new application process

57

Mobile technology examples

58

Sharon Stone

41 Tommy Ave, Widnester, WA9 OTB

Mick Mouse

H1 16 performance

• Substantial growth in:

• new agencies;

• loan book; and

• customers

• Growth metrics much higher than major competitors

• But, greater than expected rate of growth resulted in additional costs:

• Temporary period of fixed commissions for new, experienced agents

• Increased impairments as we added a large number of new customers

While operational KPIs were strong,

costs and impairments impacted

financial performance in H1 16

59

Post-H1 16 actions

• Adjusted management reporting structure

• Enhanced management information has enabled increased focus on:

• Rigorous early care of new customers

• Detailed monitoring of new agent performance – not all agents succeed, even with experience

• Recruiting agents with home credit experience

• Those customers eligible for additional credit where customer demand exists

• Embedded refined compliance procedures into day-to-day operations

• Consolidated a number of newly opened, sub-scale agencies

• Reduce admin costs

• Improve operational efficiency

• Reduce vacancies

• Continued development of scorecard based on customer data since change of control

• Commenced hand-held technology trial in a number of branches

60

Experienced agents deliver better performance

50

55

60

65

70

75

80

85

90

95

100

Agents with HC Experience Agents Without HC Experience

New customer collection performance after 20 Weeks (indexed)

61

HC experience refers to agents who have previously worked in the home credit industry

Experienced customers deliver better performance

0

10

20

30

40

50

60

70

80

90

100

Impairment % of revenue New versus existing customers (indexed)

New Existing

-

10

20

30

40

50

60

70

80

90

100

H2 2016 New Customers Expected Collections After 4 Weeks

HC Experience No HC Experience

HC experience refers to customers who have previously used home credit

62

Improved recent collections performance

Actions taken to improve collections has started to reduce impairment

ahead of the important seasonal lending period

70

100

6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37

Ind

ex

Co

llect

ion

s

Week

New customer early collection performance* (indexed)

* Collections to maturities at 5 weeks for new customers on 5 week rolling

63

Summary

• Growth thesis unchanged – significant opportunity for Loans at Home

• Rapid growth in H1 – pace of agent recruitment and customers incurred temporary additional costs

• Remedial actions taken are having a positive effect

• Focus for the rest of 2016 and into 2017:

• Continue to recruit new agents

• Less aggressive pace of growth in order to better select agents and target support payments

• Agent recruitment will focus on those with previous experience

• Customer recruitment will continue to be driven by agents with increasing numbers coming from online channels

• Further embedding of regulatory good practice will be supported by the introduction of new technology

• New technology will drive operational efficiencies, improved customer service, better lending decisions and improved collections capability

64

Coffee break



Richard Sharp Managing Director


Guarantor loans – UK market dynamics

Overview

• Total outstanding receivables of around £350m

• Annual new loans of £250-300m

• Growing market, in part driven by product expansion

• Attractive risk-adjusted returns

• No sign of margin compression

• FCA supportive of the product (greater customer choice

at a lower cost), whilst also requiring a small change in

collections methodology

• Significant long-term potential

• Amigo dominates (85-90% share) and is continuing to

innovate under new management

• Number of other players but few have the capacity to grow

Key success factors:

• Scaleable infrastructure (Amigo, Trusttwo and Glo – although

Glo not currently writing new loans)

• Ability to lend across most of the credit spectrum

• Multiple fulfilment options and products

• Access to low cost funding

• Easy customer journey and sales process

• Strong marketing campaigns

Page 67


• Trusttwo makes loans that are secured by guarantee, to those who either cannot obtain an unsecured loan by

themselves or cannot get the amount they require by themselves

• A guarantor can be a family member, friend or work colleague, but not spouse / partner

• 90% of guarantors are family e.g. parent, sister, uncle

• The customer base is sub-prime, often at the bottom end or below of Everyday Loans customer range

• Guarantors tend to be prime or near prime

• As the APR is lower, due to credit enhancement from Guarantor, affordability can be better than unsecured loan.

• Loans are fulfilled online with any customer interaction from a centralised lending operation in Bourne End

• The main channels for applications are:

• Internet (direct to brand)

• Brokers and lead generators

• Declines and referrals from the Everyday Loans branch network

• Collections are by direct debit from the borrower’s account, or in the event of default, that of the guarantor

Page 68

Guarantor loans - market dynamics


1. Customer applies on Trusttwo website

2. Customer is asked for password and given

access to a ‘My account’ area

3. Customer then sends unique link/URL to

preferred Guarantor which is highlighted in the ‘My account’ area

4. Guarantor clicks link and is taken into ‘My

account’ area to complete their details

5. Credit search is undertaken on the

Guarantor & Applicant

6. If successful, Operations team

contact both Guarantor and Applicant to

undertake Affordability and ID Review

7. If successful, Guarantor is then asked

electronically sign their loan agreement

8. Applicant then electronically signs their

agreement

9. Funds are then disbursed through to the

Guarantor’s bank account who transfers it

to the borrower

Guarantor loans – the lending process

Page 69


Operational changes already made

• Organisational restructure to aid focus, efficiency and customer experience

• Richard Sharp has joined as Managing Director

• Branch referral scheme rolling out to Everyday Loans branch network

• Significant increase in overall conversion in Q2/3

• Implementation of additional automated fraud checks

• Improvements to web, allowing an easier application journey for customers

• Enhanced default procedures introduced following new FCA rules on enforcing guarantees on guarantor loans

that resulted in a temporary increase in impairments that are now starting to reduce

Strong H1 16 performance

• 28% loan book growth in H1 16 vs H1 15

• Fully automated credit and affordability engine being designed utilising Call Credit as a CRA

• Pricing, product features and full customer journey overhaul

• Significant opportunity to grow loan book

• Well-capitalised parent to fund loan book growth and integrated marketing plans

• Well-positioned to become the clear ‘number two’ in the market

• Excellent relationships with financial brokers

• Referrals from branch network

Trusttwo update

Page 70

71

Miles Cresswell-Turner Executive Director



• Note: *Outstanding balances contain a proportion of lending at rates below 20% APR

• Source: L.E.K. analysis of company accounts; Bank of England Credit Union accounts; Competition commission – Home credit, 2013; OFT payday lending compliance review 2013; FLA News

Sub-prime consumer finance – market overview

-

-

?

-

Sub-prime unsecured consumer finance – market overview Loan Size

APR

£500

£1000

£5000

30% 50% 75% 100% 200% 1000%


High cost, short-term Lower cost, short-term

Larger amount, longer-term

Sub-prime unsecured consumer finance – market overview Loan Size

APR

£500

£1000

£5000

30% 50% 75% 100% 200% 1000%


(Lift)

HCSTC price cap

https://www.oakam.com/en2/why-us/lift-loan

75

Nick Teunon Chief Financial Officer


Future funding strategy

76

We have committed funds of £95m with an

opportunity to extend to up to £120m with

banks’ consent

At 30 September 2016:

- Gross debt was £77.6m

- Cash at bank of £2.8m

- Committed undrawn facilities of £15.4m

In 2017 we are considering a number of

options to broaden our capital structure:

- Additional bank finance

- Bond issue

- Retail bond

- Mezzanine

- Zero dividend preference shares

- Private placement


M&A – acquisition criteria

77

M&A not required to achieve growth targets

We continue to monitor developments across a number of sub-sectors

Areas of interest include

Unsecured, non-standard consumer lending

High barriers to entry

Face-to-face preferred

Ability to grow loan book by 20% per annum

Target 20% ROA over the medium-term


Accounting - revenue

78

Calculate EIR, or Effective Interest Rate (IRR on anticipated loan repayments)

Apply to loan balance weekly/monthly which reduces as cash collected

Revenues are front-end loaded – impact more pronounced in Loans at Home given high levels of lending in November

and December

Can also generate revenue in excess of amount due if loan runs over term as keep accruing at EIR – offset by matching

impairment – the “gross up”


0

1

2

3

4

5

6

1 4 7 10 13 16 19 22 25 28 31

£ p

er

week

33-week loan of £100; repayment of £5 per week

Cash Revenue

0

20

40

60

80

100

120

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33

Value of loan pre-impairment

Accounting - impairment

79

When evidence of impairment, we calculate NBV of expected cash flows using EIR and impair loan balance to that NBV

Loans at Home: payments missed over past 13 weeks (start at two missed for new customers and four for existing)

Everyday Loans and Trusttwo: number of days overdue

Then apply EIR to reduced loan balance

Reassess at end of next week/month


Same Loans At Home loan:

• pay 4 weeks at £5

• miss 2 payments

• expect to pay £3.50 for next 35

weeks – so £142.50 of cash and

profit of £42.50 not £65.00

0

20

40

60

80

100

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41

Valu

e o

f lo

an

on

b

ala

nce s

heet

80

John van Kuffeler Founder and Executive Chairman


The next phase in our development:

81

Phase I complete; future growth will be driven by

Everyday Loans – additional yield; expanding the branch network; and launch of new products

Loans at Home – measured growth in agents and customers in a wide-open market

Trusttwo – commencement of growth after completing investment in infrastructure

Key focus on profit and dividends

M&A not required to achieve growth targets

Market background remains positive; any change will be carefully managed through scorecard

Our businesses have a history of robust performance in economic downturns


We continue to make good progress towards our goal:

overall loan book growth of 20% per annum and

20% return on assets in each of our operating businesses

Investor day 1 November 2016

investor day - non-standard finance plc/media/files/n/non-standard... · 2018-01-22 · overview 3...

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