Interim results 2009

Financial results

Principal risks and uncertainties

A full assessment of the principal risks and uncertainties facing the group, together with the controls and processes which are in place to monitor and mitigate those risks where possible, are set out in the General & specific risks to our business section of the 2008 annual report and financial statements which is available on the company's website, The principal risk and uncertainty most affecting the remaining six months of the financial year is credit risk.

The risk of a continued rise in unemployment in the UK presents the risk of increased impairment charges throughout the financial services sector. Management's view that the economy would experience a marked deterioration has resulted in an increasingly cautious approach to lending since the middle of 2007. The progressive tightening of underwriting has continued during the first half of 2009, resulting in greater selectivity and an increasing proportion of customers being declined in both Home Credit and Vanquis Bank. Nevertheless, impairment charges as a percentage of revenue in both businesses have increased marginally compared with last year.

Both businesses have unique characteristics which leave them well placed to continue to manage impairment effectively through the current challenging economic conditions and mitigate the potential risk of further increases in impairment charges.

Home Credit loans are short term advances of small sums. Agents' commission is based on collections from customers rather than from the issue of new loans which reinforces the core principle of responsible and affordable lending. The business is conducted through agents who have regular face-to-face contact with customers, with all loans underwritten in the customers' home and collections made by a weekly agent visit. Agents often live in the same communities as their customers and are quick to identify and deal with changes to customers' circumstances. These characteristics of the business model make Home Credit uniquely placed to manage the impact on customers of changes in economic conditions effectively.

The Vanquis Bank operating model is very different to mainstream credit card issuers. The business has developed highly bespoke underwriting scorecards and the customer application process normally involves a telephone interview. The initial credit line granted to a new customer is low, normally £250, and only increased if a customer establishes a satisfactory payment history. Credit bureau data is re-checked regularly for existing customers to mitigate the risk of over-indebtedness. There is an intensive customer interface from the call centre in Chatham focussed on collections and customer service. The criteria applied to underwriting and credit line increases have been tightened continuously since the middle of 2007, reflecting a cautious stance in anticipation of deteriorating economic conditions. In addition, Vanquis Bank has an established record of managing the revenue yield on its receivables book to reflect the underlying risk.