Vanquis Banking Group's 88% Decline: A Deep Dive into Causes and Potential Recovery

Vanquis Banking Group (LON:VANQ) has witnessed a significant decline in its stock price over the past five years, with a 18% drop this week exacerbating its five-year losses to 88%. This article delves into the specific factors contributing to the company's decline and explores potential avenues for recovery.

**Factors Contributing to Vanquis' Decline**

1. **Exposure to Subprime Credit:** Vanquis' focus on subprime credit and high-risk customers has led to higher default rates and increased impairment charges. In 2023, the company reported an adjusted loss before tax of £24.9 million, a stark contrast to the £126.6 million profit in 2022. This decline is primarily due to the company's exposure to high-risk customers and the associated costs of managing defaults.
2. **Regulatory Challenges:** The Financial Conduct Authority's (FCA) review of motor finance commission arrangements has significantly impacted Vanquis' performance. The FCA's investigation into historic motor finance commission arrangements has led to increased administration costs for Vanquis, as it faces a surge in third-party complaint submissions. Despite the majority of these complaints being unfounded, the associated costs have materially impacted the group's profitability in 2024.
3. **Strategic Direction and Management Changes:** The appointment of Ian McLaughlin as CEO in July 2023 marked a significant shift in the company's leadership. While McLaughlin's appointment was seen as a positive move, his plans to save around £60m by 2024 via cost-cutting measures, including a 20% reduction in the workforce, have raised concerns about the company's long-term prospects. The strategic direction under McLaughlin has been characterized by a focus on redeveloping the customer proposition and resetting pricing to achieve modest lending growth. However, these efforts have been offset by increased costs, particularly from the FCA's review of historic motor finance commission arrangements. These costs, combined with a surge in claims over motor finance deals, have led to a substantial decrease in expected profits for 2024.

**Vanquis' Financial Performance and Liquidity**

Over the past five years, Vanquis' balance sheet has shown a mixed picture. In 2018, regulatory capital stood at £552.8m, increasing to £703.3m in 2023. However, liquidity has decreased from £734.2m in 2018 to £(4.4)m in 2023, indicating a potential risk to the company's short-term financial health. The decrease in liquidity may be attributed to the scheduled unwind of IFRS 9 transitional relief and dividends paid. The company's total customer numbers have grown from 1.42m in 2018 to 1.75m in 2023, while amounts receivable from customers have increased from £1.5bn to £2.2bn. Despite the growth in customer numbers and receivables, the company's adjusted profit before tax has decreased from £163.7m in 2018 to £24.9m in 2023, raising concerns about its long-term sustainability.

**Potential Recovery Paths**

To turn around its performance, Vanquis Banking Group must address the challenges it faces and execute its strategic plans effectively. This may involve:

1. **Improving Risk Management:** Vanquis should enhance its risk management strategies to better identify and mitigate risks associated with subprime credit and regulatory challenges.
2. **Focusing on Core Competencies:** The company should prioritize its core competencies, such as caring banking and offsetting its operational carbon footprint, to differentiate itself in the market.
3. **Restructuring and Cost Optimization:** Vanquis should continue to optimize its cost structure, potentially through further restructuring, to improve profitability and maintain long-term sustainability.

In conclusion, Vanquis Banking Group's 88% decline over the past five years can be attributed to various factors, including its exposure to subprime credit, regulatory challenges, and strategic direction changes. To recover, the company must address these challenges, improve its risk management, focus on its core competencies, and optimize its cost structure. Investors should closely monitor Vanquis' progress and assess the potential risks and rewards associated with its strategic direction.