Vanquis Banking Group's 2024 Earnings: A Missed EPS Target

In the ever-evolving landscape of finance, Vanquis Banking Group's 2024 earnings report has left investors with a mix of caution and optimism. The company, known for its focus on the mid-cost credit market, has faced significant challenges that have impacted its earnings per share (EPS). Let's delve into the key factors contributing to this EPS miss and explore the strategic initiatives that could shape the company's future.

The EPS Miss: A Closer Look

Vanquis Banking Group's 2024 earnings report revealed an adjusted loss before tax of £(34.8)m, a stark contrast to the profit of £17.3m reported in 2023. Several factors contributed to this miss:

1. Vehicle Finance Stage 3 Receivables Review: The review, completed in the second half of 2024, resulted in a loss of £(31.7)m. This action, while creating a cleaner and lower-risk balance sheet, significantly impacted the company's financial performance.

2. Complaint Costs: Complaint costs surged by 66% to £47.4m, with Financial Ombudsman Service (FOS) fees tripling to £24.8m. This increase was driven by unmerited Claims Management Company (CMC) claims, weighing heavily on the company's performance.

3. Goodwill Write-Off: The statutory loss before tax of £(136.3)m included a £(71.2)m goodwill write-off related to Moneybarn. This write-off, while not impacting the Group's capital position, contributed to the overall loss.

4. Cost Efficiencies: Despite delivering £64.3m in transformation cost savings by the end of 2024, the company still faced significant headwinds that impacted its EPS.



Strategic Transformation and Cost-Saving Initiatives

Vanquis Banking Group's strategic transformation and cost-saving initiatives have had a significant impact on its financial performance. The company achieved over £64 million in cost savings, exceeding its £60 million target. This was part of a broader effort to address underlying structural issues, simplify the operating model, and refresh the strategy. The company is set to deliver an additional £15 million in cost savings by the end of 2025. The technology transformation program, Gateway, is expected to complete by mid-2026, providing a scalable, digital-first platform to support growth and delivering an additional £23-28 million in cost efficiencies.

Despite these cost-saving measures, the company reported an adjusted loss before tax of £(34.8)m for 2024, impacted by the Vehicle Finance Stage 3 receivables review and one-off items. However, these actions have created a cleaner and lower-risk balance sheet, giving greater clarity to the cost of risk across portfolios. The company's Tier 1 capital ratio remained strong at 18.8%, ensuring sufficient capital for future growth.

Expected Outcomes for the Next Fiscal Year

For the next fiscal year, Vanquis Banking Group expects to deliver low single-digit return on tangible equity (ROTE) in 2025. The company now expects to achieve sustainable mid-teens ROTE in 2027, with double-digit ROTE delivered in 2026. This financial trajectory is supported by the foundations laid in 2024, including targeted strategies for efficiency and a commitment to long-term, profitable growth. The company's strategic transformation and cost-saving initiatives are expected to continue driving financial performance in the coming years.

Risks and Opportunities in the Mid-Cost Credit Market

Vanquis Banking Group's focus on the mid-cost credit market presents both potential risks and opportunities that could significantly influence future earnings and stock performance.

# Potential Risks

1. Credit Quality and Default Risk: The mid-cost credit market inherently involves higher risk due to the nature of the customers it serves. Any deterioration in the economic conditions could lead to increased defaults, impacting the company's earnings.

2. Regulatory and Compliance Costs: The company has faced substantial complaint costs, with complaint costs rising by 66% to £47.4m. These costs can erode profitability and divert resources away from growth initiatives. Additionally, the ongoing legal proceedings and regulatory engagement related to Vehicle Finance commission disclosures add to the uncertainty and potential financial burden.

3. Operational Efficiency: While the company has made significant progress in cost savings, achieving over £64 million of savings by the end of 2024, there is a risk that these savings may not be sustainable in the long term. The company's ability to continue delivering cost efficiencies will be crucial for maintaining profitability.

# Potential Opportunities

1. Market Growth and Diversification: The mid-cost credit market offers growth opportunities, especially as the company diversifies its product range. This diversification can help mitigate risks associated with any single product line and provide a more stable revenue stream.

2. Technology and Innovation: The company's investment in technology, such as the "Gateway" technology transformation programme, can enhance operational efficiency and customer experience. This programme is expected to deliver an additional £23-28 million in cost efficiencies and provide a scalable, digital-first platform to support growth. Improved technology can also attract more customers and increase market share.

3. Customer Satisfaction and Engagement: High customer satisfaction scores, such as Vanquis customer satisfaction (Trustpilot score) 4.2/5 stars and Moneybarn customer satisfaction (Trustpilot score) 4.4/5 stars, indicate a strong customer base. Maintaining and improving customer satisfaction can lead to increased loyalty and repeat business, which is crucial for long-term earnings growth.

Influence on Future Earnings and Stock Performance

The company's focus on cost efficiencies and technology transformation can lead to improved profitability. However, the risks associated with credit quality and regulatory compliance could offset these gains. The company's guidance for low single-digit return on tangible equity (ROTE) in 2025 and sustainable mid-teens ROTE in 2027 indicates a cautious but optimistic outlook.

Investors will closely monitor the company's ability to manage credit risk and regulatory costs while leveraging technology and innovation for growth. Positive developments in these areas could drive stock performance, while setbacks could lead to volatility. The company's stock price of $0.70 as of 19-Feb-2025 and a market cap of $179M reflect current market sentiment, which could be influenced by future earnings reports and strategic initiatives.

Conclusion

Vanquis Banking Group's 2024 earnings report highlights the challenges and opportunities the company faces in the mid-cost credit market. While the EPS miss was significant, the company's strategic transformation and cost-saving initiatives provide a foundation for future growth. Investors should closely monitor the company's progress in managing credit risk, regulatory compliance, and technology innovation to assess its potential for long-term earnings growth and stock performance.