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Chairman's statement

Maintaining the flow of credit through turbulent times.

The group's strategy is focused on lending responsibly and maintaining the flow of small-sum, unsecured credit to non-standard consumers who are typically less able to access credit from other lenders and may otherwise face financial exclusion.

John van Kuffeler Chairman

Group results

The group has produced a solid performance in 2009, as a result of the careful management of growth, impairment and costs against the backdrop of a worsening economic environment. As planned, the rate of growth in customer numbers in both businesses has been slower than in 2008. Underwriting criteria were tightened further in the first half of the year in order to maintain credit quality during a period when the economy was deteriorating quite sharply. During the second half of the year, the pressure on customers’ incomes from a weak employment market did not abate and both businesses maintained a tight stance on the granting of credit. In addition, existing customers exhibited increasingly cautious behaviour during 2009 which tempered demand for credit and was exacerbated by the adverse weather conditions during the peak trading weeks in December.

The investments made towards the end of 2008 in creating an additional 120 field management roles to increase the home credit collections capacity and in expanding contact centre capacity at Vanquis Bank have proved to be the right approach to managing through these difficult market conditions. As a result, both businesses have maintained good collections performances during 2009.

The market test of Real Personal Finance has been completed and a decision made to focus direct repayment business solely on known prospects generated through the home credit branch network and customer database.

Group profit before tax and exceptional costs was up 1.0% to £130.1m (2008: £128.8m) and basic earnings per share, as adjusted for exceptional costs, was 71.4p (2008: 70.9p).

The group’s funding and liquidity positions have been further enhanced, with the balance sheet showing modest gearing in comparison to bank covenants and a significant surplus of regulatory capital. The group has successfully diversified its funding sources during 2009 through the issue of its £250m 10-year senior bonds. Undrawn committed bank facilities at the year end amounted to £331.0m. The group has also recently entered into forward-starting arrangements which extend syndicated bank facilities totalling £380m to May 2013 and has ample funding to execute its growth plans and meet contractual maturities for at least 18 months.

The proposed final dividend is maintained at 38.1p per share (2008: 38.1p) reflecting the company’s policy set out at the time of the demerger to at least maintain a full-year payment of 63.5p per share whilst moving to a target payout ratio of 80% of post-tax profit in the medium term.

The group has reported a solid performance in 2009 against the backdrop of pressure on customers' household budgets.

Market conditions

The group’s strategy is focused on lending responsibly and maintaining the flow of small-sum unsecured credit to non-standard consumers who are typically less able to access credit from other lenders and may otherwise face financial exclusion.

Household incomes in those segments of the non-standard lending market served by the group’s businesses have been and remain under pressure from the impact of rising unemployment and, more importantly, under-employment resulting from restrictions on working hours and wage rates.

Management have carefully positioned the group’s businesses since the middle of 2007 in anticipation of a material deterioration in the economic environment. Underwriting standards have been progressively tightened to maintain credit quality which, together with the investments made to enhance collections capacity, have been successful in mitigating the impact of the deteriorating economic environment on the group’s impairment charge.

The group’s planning assumptions do not anticipate that employment conditions will improve for some time. Accordingly, a tight stance to underwriting will be maintained throughout 2010.

During the second half of 2009, there was an increase in the level of caution exhibited by some consumers who are experiencing pressure on their household incomes and face uncertainty over their future prospects. This increased caution, exacerbated by adverse weather conditions in the run-up to Christmas, tempered the demand for credit from established home credit customers during the peak fourth quarter trading period. Cautious consumer behaviour is expected to persist through 2010, resulting in relatively modest growth in receivables. As a result, there will be a strong focus on cost efficiency.

The competitive landscape for home credit providers has remained largely unchanged throughout the economic downturn. Whilst Provident Financial continues to be the largest operator in this segment, there are some 500 other home credit businesses that compete actively, many of whom operate in a single town or region.

In contrast, most businesses which operated in the direct repayment or credit card segment of the UK non-standard lending market have either failed, withdrawn or restructured. This presents a strong market opportunity for Vanquis Bank as an established participant in the non-standard credit card market. At present, the direct repayment unsecured lending market has become dislocated by the collapse of the primary broker distribution channel and it is apparent from the market test of Real Personal Finance that many potential customers are carrying far too much debt. Accordingly, direct repayment loans will be restricted to customers already known through the home credit branch network.

Regulation

The group is assisting with the Office of Fair Trading’s review of the £35bn high-cost consumer credit market which it announced in July 2009. The review, which covers a broad range of lending activities of which home credit represents less than 5%, published its interim findings in December 2009 and is expected to conclude in April 2010.

The EU Directive on Consumer Credit has to be implemented in the UK by 31 January 2011. The regulations are still in draft form but the group has already commenced work to ensure it is able to comply with the new requirements by the implementation date.

The Department for Business Innovation and Skills is nearing its conclusion of the consultation on the future regulation of credit and store cards. The measures being debated centre upon transparency and putting the customer in control. Vanquis Bank is working closely with the UK Cards Association which is leading the industry’s response to the consultation.

Outlook

The group has reported a solid performance in 2009 against the backdrop of pressure on customers’ household budgets from rising unemployment and reduced working hours. The group’s plans assume that these conditions will continue during 2010 and credit standards will be maintained to underpin the quality of new lending.

In 2010, the Consumer Credit Division is planning for relatively low receivables growth coupled with tight cost control. Accordingly, the business has recently implemented an efficiency programme across its central functions whilst leaving field collections and arrears management capacity unaffected. In addition, following the completion of the market test of Real Personal Finance, the decision has been made to focus direct repayment lending solely on known prospects sourced through the home credit business. This will result in a significant overhead reduction and losses will not continue through 2010.

Vanquis Bank is generating excellent growth and strong returns which leave it well placed to achieve its target of a 30% post-tax return on equity by the end of 2010.

Overall, the group’s balance sheet and liquidity are extremely sound and it has positioned itself to deliver good quality growth for 2010 in market conditions that are unlikely to improve in the near term.

John van Kuffeler
Chairman
2 March 2010

The group's funding and liquidity positions have been further enhanced, with the balance sheet showing modest gearing.