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Financial review

Group profit before tax

Group profit before tax and exceptional costs was £130.1m in 2009, up £1.3m on 2008.

Home credit 128.9 128.8 0.1
Real Personal Finance (7.7)   (2.7) (5.0)
Consumer Credit Division 121.2 126.1 (4.9)
Vanquis Bank 14.1 8.0 6.1
Yes Car Credit 0.2 (2.9) 3.1
– costs (7.0) (5.5) (1.5)
– interest receivable 1.6 3.1 (1.5)
Total central (5.4) (2.4) (3.0).
Profit before tax andexceptional items 130.1 128.8 1.3

After deducting an exceptional finance cost of £4.4m in 2009, group profit before tax was £125.7m (2008: £128.8m).

A review of the performance of the Consumer Credit Division and Vanquis Bank can be found on the Consumer Credit Division and Vanquis Bank pages respectively.

Yes Car Credit

The collect-out of the Yes Car Credit receivables book was successfully completed in October 2009 and the collections operation has now been closed. The business produced a small profit before tax of £0.2m in its last year of operation (2008: loss of £2.9m).

Central costs

Central costs of £7.0m in 2009 (2008: £5.5m) were higher than in 2008 as a result of an increased investment in the group’s community programme and higher share-based payment charges in respect of the group’s various employee share schemes.

Central interest receivable was £1.6m in the year (2008: £3.1m), reflecting the surplus capital currently held by the group.

Basic EPS before exceptional costs (pence)

A bar chart showing the basic EPS before exceptional costs (pence) for the years 2009 to 2007

  • 2007
  • 2008
  • 2009

Exceptional finance cost

On 23 October 2009, the group successfully issued £250m of 10-year senior public bonds carrying a coupon of 8.0%. At the same time, the group repurchased £94m of its £100m subordinated loan notes at 97.5p in the £ following a tender offer. The net new funds of £156m were used to make repayments on the group’s revolving syndicated bank facilities.

A net exceptional finance cost of £4.4m arose as a result of this refinancing, comprising two elements:

  • The group routinely uses interest rate swaps to hedge the interest rate exposure on its floating rate borrowings. The interest rate swaps are designated and effective as cash flow hedges on inception in accordance with IAS 39, ‘Financial instruments: Recognition and measurement’. The repayments made on the group’s revolving bank facilities as part of the refinancing has meant that certain of the group’s interest rate swaps became ineffective in IAS 39 terms. Accordingly, an amount of £6.8m, representing the fair value of the interest rate swaps that were recorded as a deduction from equity, has now been transferred as a charge to the income statement in 2009.
  • The 2.5% discount on the repurchased subordinated loan notes, amounting to £2.4m, has been credited to the income statement in 2009 following the elimination of the existing liability and its replacement with a new debt instrument on substantially different terms.


The effective tax rate for the year on profit before the exceptional finance cost was 28.0% (2008: 28.5%), in line with the UK corporation tax rate. The future tax rate is expected to be in line with the statutory UK corporation tax rate.

Earnings per share

Basic earnings per share for the year were 67.5p (2008: 70.9p).

In order to provide a more comparable view of the performance of the group’s ongoing operations, the directors have elected to show an adjusted earnings per share figure excluding the after tax impact of the exceptional finance cost in 2009. Adjusted basic earnings per share on this basis amounted to 71.4p, 0.7% higher than 2008. Dividends were covered 1.1 times on this basis (2008: 1.1 times).

Total Shareholder Return (TSR)

TSR is an important measure of performance for the group’s shareholders as it combines the increase in the value of the group’s shares with any dividend returns made to shareholders. This measure also forms one of the performance conditions within the Long-Term Incentive Scheme (LTIS) for directors and senior management.

Since the demerger in July 2007, the group has generated a TSR of 16.9%, significantly outperforming both the Financials sector and the FTSE 250.

Total Shareholder Return

A bar chart showing the Total Shareholder Return

Equity to receivables (%)

A bar chart showing the  equity to receivables (%) for the years 2009 to 2007

  • 2007
  • 2008
  • 2009

CCD and Vanquis Bank receivables (£m)

A bar chart showing the CCD and Vanquis Bank receivables (£million) for the years 2009 to 2007

  • 2007
  • 2008
  • 2009


The directors have recommended a full year dividend per share of 38.1p (2008: 38.1p). Total dividends per share, after taking account of the interim dividend per share of 25.4p (2008: 25.4p), amount to 63.5p per share (2008: 63.5p). Based on the year end share price, this represents a dividend yield of 6.8% (2008: 7.4%).

Balance sheet

The group’s summary balance sheet is set out below:

Credit Division 883.8 852.1 31.7
Vanquis Bank 255.5 205.4 50.1
Yes Car Credit 5.8 (5.8)
Total receivables 1,139.3 1,063.3 76.0
Pension asset 19.9 50.9 (31.0)
Borrowings* (883.4) (803.9) (79.5)
Other net liabilities (7.4) (32.4) 25.00
Net assets 268.4 277.9 (9.5)

*The fair value of derivative financial instruments which are used to hedge the foreign exchange rate risk on the group’s US private placement loan notes has been excluded from borrowings to state borrowings at their hedged exchange rate. In 2009, this reduces borrowings by £6.9m (2008: reduced borrowings by £24.6m) with a corresponding movement in other net liabilities.

Andrew Fisher

Andrew Fisher
Finance Director

The group has a target ordinary shareholders’ capital to receivables ratio of 15%.

The group’s equity to receivables ratio, calculated to exclude the group’s pension asset net of deferred tax, the fair value of derivative financial instruments held in the hedging reserve and after taking account of the proposed final dividend, was 18.9% at the year end (2008: 19.1%). After taking into account operational seasonality and the timing of dividend payments, this implies that the group holds surplus capital of some £50m (2008: £55m). In view of the high dividend payout ratio, the surplus will be retained to fund further growth opportunities and provide a sensible degree of strategic flexibility.


Receivables ended the year at £1,139.3m (2008: £1,063.3m), up by £76.0m compared with 2008. Receivables in the Consumer Credit Division increased by £31.7m (3.7%) from £852.1m to £883.8m, primarily reflecting the growth in customer numbers, which are up by 5.3% on 2008. At Vanquis Bank, growth in customer numbers of 5.4% together with credit line increases to good quality existing customers led to a £50.1m (24.4%) growth in receivables from £205.4m to £255.5m. The Yes Car Credit receivables book was fully collected-out during 2009.

Pension asset

The group operates a defined benefit pension scheme. The scheme has been substantially closed to new employees since 1 January 2003. New employees joining the group after this date are invited to join a stakeholder pension plan into which the company typically contributes between 5.1% and 10.6% of members’ pensionable earnings, provided the employee contributes, through a salary sacrifice arrangement, a minimum of between 3.0% and 8.0%.

The group’s defined benefit pension asset stood at £19.9m at the end of 2009, compared with £50.9m at the end of 2008. The major movements can be analysed as follows:

Pension asset as at 1 January 50.9 61.5
(Charge)/credit to the income statement (2.7) 1.2
Employer contributions 8.4 5.3
Actuarial loss (37.3) (17.1)
Section 75 pension contribution 0.6
Pension asset as at 31 December 19.9 50.9

The key assumptions used in determining the pension asset were as follows:

  2009 2008
Discount rate 5.6% 6.3%
Inflation 3.6% 2.9%
Mortality assumptions:    
– Male retiring at 65 23 yrs 22 yrs
– Female retiring 65 22 yrs 25 yrs

The actuarial loss during 2009 primarily reflects: (i) a decrease in corporate bond yields which are used to discount the value of the scheme liabilities, which reduced from 6.3% at the end of 2008 to 5.6% at 31 December 2009; and (ii) an increase in the inflation rate used to predict inflationary increases in pensions from 2.9% to 3.6%. The scheme’s investment strategy is to maintain a balance of assets between equities and bonds in order to reduce the risk of volatility in investment returns. The return on scheme assets throughout 2009 was approximately 13%.

The group is now using the S1PA standard tables, together with the medium cohort improvement factors for projecting mortality. These base calculations are adjusted to reflect: (i) lower life expectancies of scheme members based on a postcode analysis; and (ii) an annual minimum improvement factor of 1.0%. In more simple terms it is now assumed that members who retire at age 65 will live on average for a further 23 years if they are male (2008: 22 years) and for a further 25 years (2008: 25 years) if they are female. Further details are set out in note 18 to the financial statements.


Group borrowings at the end of 2009 were £890.3m compared with £828.5m at the end of 2008. These borrowings are stated using the year end exchange rate to translate the group’s US private placement loan notes rather than the rate hedged at the time of issue by cross currency swaps. After adjusting borrowings to reflect the hedged rate of exchange on the group’s US private placement loan notes, borrowings were £883.4m at the end of 2009 compared with £803.9m at the end of 2008. Borrowings have increased during the year in line with the increase in receivables in both the Consumer Credit Division and Vanquis Bank.

The group borrows mainly to provide loans to customers. The seasonal pattern of lending results in peak funding requirements in December each year. The group’s main sources of funding are committed term and revolving syndicated and bilateral bank facilities, senior public bonds and US private placement loan notes.

On 13 February 2009, the group secured a 12-month extension to its three-year syndicated bank facility. Of the £270.7m due to expire on 9 March 2010, £213.2m was extended to 9 March 2011.

As part of the group’s strategy to diversify its funding sources, the group successfully issued its first senior public bonds amounting to £250m on 23 October 2009. The bonds are repayable in 2019 and carry a coupon of 8.0%.

Committed borrowing facilities 2009*

A bar chart showing the Committed borrowing facilities from December 2009 to June 2013

  • Pink key - Public bondsPublic bonds
  • Light grey key - Syndicated and bilateral bank facilitiesSyndicated and bilateral bank facilities
  • Dark grey key - Private placement loan notesPrivate placement loan notes

*Adjusted to take account of the extension of syndicated facilities which took place on 26 February 2010.

At the same time as the issue of the senior public bonds, the group repurchased £94m of the £100m subordinated loan notes prior to their call date on 15 June 2010 at a price of 97.5p in the £ following a tender offer. The group no longer required this lower Tier 2 regulatory capital following confirmation of its Individual Capital Guidance (ICG) by the Financial Services Authority (FSA).

At the end of 2009, the group had available borrowing facilities of £1,240.8m (2008: £1,102.5m), almost all of which were committed facilities. These facilities provided committed headroom of £331.0m as at 31 December 2009 (2008: £251.2m) and the average period to maturity was 3.5 years (2008: 3.0 years).

On 26 February 2010, the group secured an extension to its syndicated bank facilities due to expire on 9 March 2011 and 9 March 2012 by means of forward-starting facilities. Of the £213.2m due to expire on 9 March 2011, £135.7m has been extended to 9 May 2013 and £4.8m has been extended to 9 March 2012, and of the £436.8m due to expire on 9 March 2012, £243.8m has been extended to 9 May 2013. Including these extensions, the group’s average period to maturity on committed facilities is now 4.0 years. As part of the extension, the margin on the group’s syndicated bank facilities was adjusted and the gearing covenant rebased from 6.0 times to 5.0 times to reflect current market conditions.

The group will seek to continue diversifying its funding sources throughout 2010. In addition, Vanquis Bank holds a banking licence and has the potential to take retail deposits.

In September 2009, Fitch Ratings reaffirmed the rating of the group’s senior long-term debt at BBB+ with a stable outlook. The senior public bonds issued in October 2009 are also rated BBB+ with a stable outlook.

The movement in borrowings during the year is as follows:

  2009 2008
  1. Borrowings have been adjusted to reflect the hedged rate of exchange on the group’s US private placement loan notes.
  2. Stated after the exceptional finance cost of £4.4m in 2009.
  3. Other comprises other working capital movements, purchase of own shares and proceeds from the issue of share options.
Opening borrowings1 803.9 670.9
Profit before tax 2 (125.7) (128.8)
Increase in receivables 76.0 137.9
Tax payments 28.4 29.7
Dividends 84.1 83.4
Net capital expenditure 11.8 13.9
Other 3 4.9 (3.1)
Closing borrowings 1 883.4 803.9

Interest cover

Bar chart showing the Interest cover for the years 2009 to 2007

  • 2007
  • 2008
  • 2009


Bar chart showing the Gearing for the years 2009 to 2007

  • 2007
  • 2008
  • 2009

Interest costs, prior to the exceptional finance cost, in 2009 were £53.8m, compared with £45.7m in 2008. The increase primarily reflects the increase in borrowings to support the growth in receivables in the year and an increase in the group’s average cost of borrowing from 6.5% in 2008 to 7.0% in 2009. The increase in the average cost of funding principally reflects the higher borrowing margin on bank borrowings following the extension of facilities in February 2009, together with the issue of the 10-year £250m 8.0% senior public bonds in October 2009. The group aims to hedge the interest cost on a high proportion of its borrowings over the following 18 months. The group’s estimated average cost of borrowings in 2010 is expected to be approximately 8.0%.

Interest payable was covered 3.4 times by profit before interest, tax and exceptional costs (2008: 3.8 times) compared with the relevant borrowings covenant of 2.0 times.

The group’s gearing (calculated as the ratio of the group’s borrowings to equity after excluding the pension scheme asset and the fair value of derivative financial instruments both stated net of deferred tax) stood at 3.3 times at 31 December 2009 (2008: 3.2 times), compared with the relevant borrowings covenant applied to 2009 of 6.0 times and the rebased covenant of 5.0 times which will be applied to 2010 onwards. The group has continued to comply with all of its borrowing covenants.


The group’s equity has reduced during the year from £277.9m at the end of 2008 to £268.4m at the end of 2009. The movements are set out below:

Opening equity 277.9 295.9
Profit after tax 88.6 92.1
Actuarial loss, net of deferred tax (26.9) (12.3)
Issue of shares for share schemes 8.4 2.0
Dividends paid (84.1) (83.4)
Movement in hedging reserve (0.6) (12.4)
Purchase of treasury shares (0.9) (8.7)
Share-based payment charge 6.1 4.7
Other (0.1)
Closing equity 268.4 277.9

Profit after tax and the exceptional finance cost contributed £88.6m (2008: £92.1m) to equity in the year, while the actuarial loss on the group’s pension scheme, net of tax, reduced the group’s equity by £26.9m (2008: £12.3m).

Return on equity

Bar chart showing the Return on equity for the years 2009 to 2007

  • 2007
  • 2008
  • 2009

Dividends paid, comprising payment of the 2008 final dividend and the 2009 interim dividend, amounted to £84.1m (2008: £83.4m).

The movement in the hedging reserve of £0.6m (2008: £12.4m), net of deferred tax, reflects the change in the fair value during the year of derivative financial instruments, predominantly interest rate swaps, which are used for hedging purposes. This treatment is in accordance with IAS 39. This reduction in equity will reverse in future periods as the derivative financial instruments mature.

The purchase of own shares of £0.9m (2008: £8.7m) represents the purchase of Provident Financial plc shares which are granted under the group’s share schemes. IFRS requires the cost of these shares to be deducted from equity.

The increase in the share-based payment reserve of £6.1m (2008: £4.7m) reflects the charge made to the income statement in the year in respect of the group’s various share schemes.

The group calculates return on equity (ROE) as profit after tax (prior to the impact of exceptional costs) divided by average equity. Average equity is stated after deducting the group’s pension asset and the fair value of derivative financial instruments, both net of deferred tax, and after deducting the proposed final dividend.

The group continued to generate a strong ROE in 2009 of 45%, marginally reduced from 46% in 2008 following the increased loss from Real Personal Finance.

Capital generated

The Consumer Credit Division is a highly capital generative business which allows the group to invest in the growth in Vanquis Bank and continue to maintain a high dividend payout. The table below shows the capital generated by the group’s businesses after retaining the extra capital needed to support receivables growth in the business. This is the amount of capital available to pay dividends.

Consumer Credit Division 69.1 72.0
Vanquis Bank 7.6 (1.8)
Yes Car Credit (0.8) 0.8
Central (16.5) (0.6)
Net surplus capital before dividends 59.4 70.4

Capital generated is calculated as operating cash flows less net capital expenditure and tax paid after assuming that 85% of the growth in customer receivables is funded with debt.

The Consumer Credit Division generated £69.1m of capital in 2009 compared with £72.0m in 2008 and continues to be highly capital generative. The reduction of £2.9m in the year primarily reflects the increased loss from Real Personal Finance.

Vanquis Bank generated £7.6m of capital during 2009 (2008: absorbed capital of £1.8m) and the business is now generating sufficient profits to fund the capital required to grow its receivables book.

Yes Car Credit absorbed capital of £0.8m in 2009 (2008: generated capital of £0.8m) following full collect-out of the receivables book and closure of the collections operation in the year. Central costs absorbed £16.5m of capital in 2009 compared with £0.6m in 2008.

Overall, the group generated £59.4m of capital in the year (2008: £70.4m) which compares with the cost of the full-year dividend in respect of 2009 of £84.7m (2008: £84.0m). The shortfall was in line with internal plans and has been funded by using part of the group’s surplus capital.

Accounting policies

The group’s financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU. The group’s accounting policies are chosen by the directors to ensure that the financial statements present a true and fair view. All of the group’s accounting policies are compliant with the requirements of IFRS, interpretations issued by the International Financial Reporting Interpretations Committee and UK company law. The continued appropriateness of the accounting policies, and the methods of applying those policies in practice, is reviewed at least annually. The principal accounting policies, which are consistent with the prior year other than in respect of the new presentational requirements of IAS 1 (revised), ‘Presentation of financial statements’ and IFRS 8, ‘Operating segments’, are set out on the statement of accounting policies page.

Treasury policy and financial risk management

The group is subject to a variety of financial risks including liquidity risk, interest rate risk, credit risk and, to a lesser extent, foreign exchange rate risk. The treasury policies of the group, which are approved annually by the board, are designed to reduce the group’s exposure to these risks through securing appropriate funding, careful monitoring of liquidity and ensuring that effective hedging is in place.

Our treasury policies ensure that the group’s borrowings are sufficient to meet business objectives; are sourced from high quality counterparties; are limited to specific instruments; the exposure to any one counterparty or type of instrument is controlled; and the group’s exposure to interest rate and foreign exchange rate movements is maintained within set limits. The treasury function periodically enters into derivative transactions principally interest rate swaps, cross-currency swaps and forward foreign exchange rate contracts. The purpose of these transactions is to manage the interest rate and foreign exchange rate risks arising from the group’s underlying business operations. No transactions of a speculative nature are undertaken and written options may only be used when matched by purchased options.

The group’s central treasury function manages the day-to-day treasury operations and application of the treasury policies for all of our businesses. The board delegates certain responsibilities to the treasury committee. The treasury committee, which is chaired by the Finance Director, is empowered to take decisions within that delegated authority. Treasury activities and compliance with treasury policies are reported to the board on a regular basis and are subject to periodic independent reviews and audits, both internal and external.

Regulatory capital

As Vanquis Bank holds a banking licence it is regulated by the FSA. In its supervisory role, the FSA sets requirements relating to capital adequacy, liquidity management and large exposures.

The Consumer Credit Division operates under a number of consumer credit licences granted by the Office of Fair Trading but is not regulated by the FSA. However, the Provident Financial group, incorporating both the Consumer Credit Division and Vanquis Bank, is the subject of consolidated supervision by the FSA by virtue of Provident Financial plc being the parent company of Vanquis Bank. The FSA set requirements for the consolidated group in respect of capital adequacy and large exposures but not in respect of liquidity.

The group adopted the Capital Requirements Directive (CRD) on 1 January 2008. The CRD implements the supervisory framework set out in the Revised BASEL Accord (BASEL II). The CRD framework revised the calculation of regulatory capital required to be held by firms and places more emphasis on the risks firms face and the risk management processes that they have in place.

The CRD requires the group and Vanquis Bank to conduct an Internal Capital Adequacy Assessment Process (ICAAP) on an annual basis. The key output of the ICAAP is a document which considers the risks faced by the group and the adequacy of internal controls in place, ascertains the level of regulatory capital that should be held to cover these risks and undertakes stress testing on the capital requirement. The group and Vanquis Bank have operated to interim capital guidance set by the FSA since 1 January 2008 whilst the group’s ICAAP was being considered by the FSA. In September 2009, the FSA set the final ICG for the group and Vanquis Bank, both of which are not materially different from the interim capital guidance set by the FSA.

The ICG is expressed as a percentage of the minimum Pillar I requirement for credit risk and operational risk calculated using predetermined formulas. As at 31 December 2009, the regulatory capital held as a percentage of the minimum Pillar I requirement was 293% for the supervised group (2008: 419%) and 259% for Vanquis Bank (2008: 270%). These were comfortably in excess of the ICG set by the FSA. The reduction in the supervised group ratio from 2008 is primarily as a result of the repurchase of £94.0m of the group’s subordinated loan notes which qualified as lower tier 2 regulatory capital.

The CRD requires the group to make annual Pillar III disclosures which set out information on the group’s regulatory capital, risk exposures and risk management processes. A considerable amount of the information required by the Pillar III disclosures is included within the 2009 Annual Report & Financial Statements. However, the group’s full Pillar III disclosures can be separately found on the group’s website,

During 2009, the FSA has introduced a new liquidity regime in response to the credit crisis and liquidity concerns in the banking sector. The new regime is not applicable to the group as a whole but does impact Vanquis Bank on a solo basis. The key requirements of the new regime include increased systems and controls requirements, more granular and regular reporting to the FSA and the requirement to hold a liquid assets buffer in the form of government bonds or money-market deposits. The systems and controls elements of the new regime were implemented by Vanquis Bank in 2009 whilst the other aspects of the regime will be introduced during 2010 in line with the FSA’s implementation timetable.

Going concern

The directors have reviewed the group’s budgets, plans and cash flow forecasts for the year to 31 December 2010 and outline projections for the four subsequent years. Based on this review, they have a reasonable expectation that the group has adequate resources to continue to operate for the foreseeable future. For this reason, the directors continue to adopt the going concern basis in preparing the financial statements.