VM Cards Spotlight April 2016

Transcription

1 VM Cards Spotlight April

2 Agenda Introduction Jayne-Anne Gadhia Introduction Jayne-Anne Gadhia Cards Business Overview Michele Greene Q&A Michele Greene, Jayne-Anne Gadhia, Dave Dyer 2

3 Myth busting Dispelling the top 10 key concerns upfront Myth Myth Balance transfer only business where customer makes initial transfer, minimum payments at 0% then pays down in full Book dominated by transactors where customers make only retail purchases and pay in full each month New business where data and knowledge to support EIR assumptions and financial projections is limited Book with 0% interest and no cash yield Book dominated purely by 0% cash (balance / money transfers) Book built only on 0% market leading products Reality 4% of book, over 40% stick rate Less than 1% of book are pure transactors 15+ years of transactional and P&L data via MBNA partnership agreement Back book yield greater than 12% First year interest yield of 2% 1bn cash + 0.5bn retail in % market leading offers were 48% of new accounts in Book is essentially a 3 year fixed loan 82% activity rate in 2015 vs. industry avg. of 70% Portfolio where EIR yield is only earned post promo A product customers dislike A high risk product In 2015, 66% of EIR income earned, interest and fees earned on ongoing cash basis Flexible, low cost, easy to switch Less than one complaint per 1,000 transactions Positive selection increases quality Average loss rate per account matures at 2% 3

4 0% Balance Transfer Card A compelling economic profile in NPV terms historic single card view Year 1 Year 2 & 3 Initial Balance Transfer 3,500 Ongoing Engagement Promo expiry Average Balance at expiry 2,000 Stable revenues, characterised by large degree of certainty Further Cash Transactions Average Retail use Average 650 Initial Balance Transfer Year 1 Fee 122 Ongoing cash use Average Continued retail transactions Average 650 Further Balance Transfer Fee 36 Ongoing cash use + Continued retail transactions Further Balance Transfer Fee 70% of retail incur interest at contract rate : 2% each year 1-3 Interest yield expiry: 16% Settles at 12% 70% of accounts transact cash on an ongoing basis Cost to acquire 30 Servicing cost 27 Low costs Low credit losses Year 1 NCL 0.4% 5 year average NCL 2% Adjustment for funding and capital costs NPV averages 58 Source: Company data 4

5 Strong profit metrics evidence quality of returns Material contribution from older vintages Yield Portfolio composition (2015 m) 12% 9% 2.5% Key drivers of profitability 2015 contribution of 51m = RoA 3% NCL 2.3% 2.8% 1.1% 890 Interest bearing balances Delivering yield generated from both back book and front book Cash volumes (new advances ) cash fees plus interest on non-0% cash balances 460 Retail spend interest income plus interchange income Outstandings Low cost of risk Low cost base Source: Company data 5

6 Strong profit metrics evidence quality of returns An engaged portfolio - 75% of the book is mixed use KPIs & Implications Attrition c.8% p.a. Back book stimulation slows down natural attrition Activity rate 82% (520k active accounts) 520k customers actively engaged with the portfolio Transaction value 1.5bn Mix of transactions not cash only - new advances 65%; avg. 1,500 balance Revenue generating mainly through cash fee - retail 35%; avg. 75 transaction Revenue generating through full rate interest & interchange Total payments 1.1bn Paying portfolio - average paydown rate 7.5% Low payment rate relative to industry benchmark; engaged portfolio Paid by direct debit 15% High % utilising the flexible payment options Average line / utilisation 7,500 / 47% Room to utilise the card for spend as well as for cash Default fee 9 (lowest in market) Evidence of the low operating cost Cost to serve 27 Low cost allows investment in promo offers to customers Behavioural view 2015 New advances and retail spend on ongoing basis 75% 15% 10% 0.5% pay in full 75% transact both cash and retail on an ongoing basis 15% use the card for retail only but on an ongoing basis 0.5% of the book pay in full 10% use facility for cash only transactions but on a frequent basis 4% of the book use for cash once and pay in full Mixed balances Retail spend only BT / MT only Source: Company data 6

7 An overview of EIR Focus on certainty of delivery and reliability of estimations 2015 assets split by accounting treatment Percentage of 2015 EIR earned in cash 40% Non EIR accounted EIR accounted 2012 and prior vintages 34% Income recognised under EIR accounting 60% vintages 66% Income earned in cash terms 2015 card assets Total income Assumptions underlying EIR accounting (2012) VM estimate 2012 actual Initial BT 3,500 3,502 Year 1 yield 2% 2.8% Post promo yield 12% 13% Stick rate 40% 45% A validation check Actual metrics (2012 vintage) higher than estimated Spread between EIR rate and cash yield 7.0% 7.0% 7.0% 7.0% 7.0% 4.4% 3.1% 3.4% Year 1 Year 2 Year 3 Promo expiry 13.4% 13.6% EIR rate Cash yield Post promo Source: Company data 7

8 An Overview of EIR sensitivities There are three key sensitivities underlying our EIR analysis Sensitivity Impact to EIR Reduction in promo balance curve (10%) (15bps) Reduction in post-promo stick rate (5%) (10bps) Reduction in full interest yield curve, all years (100bps) (50bps) EIR relatively stable vs. variation in stick rate EIR most sensitive to reduction in the yield curve Source: Company data 8

9 An overview of EIR Performance based on management of three key categories Expected life Element(s) Prudent 7 year assumption Auditor approved Source of confidence Based on mature data 30% of outstanding balances from 2009 and prior Degree of certainty Early cash earnings Customer value management Estimation stability Yr 1 4.3% cash yield (3.1%/3.4% Yr 2/3) Targeted stimulation for rest of life of good standing account 40%+ stick rate Reliability Asset make up Assumptions Not concentrated in one product or year Effective tracking and performance metrics Early indicators easily measurable Sensitivity analysis conducted Strong understanding and management of model mean no material true ups to date, and continued protection against earnings volatility Source: Company data 9

10 A strong and experienced executive team 90 credit card experts with collective focus on results, data, and fact based analysis Michele Greene Director of Credit Card Chris Taylor Director of Credit Operations & Strategy Will Loughnane Director of Business Insights John Natalizia Director of Product Strategy & Operations Prior experience Prior experience Prior experience Prior experience KPMG Credit Lyonnais Goldman Sachs Associates Capital Corporation Citigroup Price Waterhouse Grant Thornton Corporate Finance KPMG CFO, MBNA Europe, 17 years Customer Risk Management Executive, MBNA Europe, 6 years Head of Business Analysis, MBNA Europe, 8 years Strategic Change Executive, MBNA Europe, 9 years 10

11 An unrivalled foundation versus peers A unique start up built on mature data, deep credit card experience & unencumbered by legacy issues Timeline of events Significant future opportunities Finalise build Migrate >675k mature accounts Launch front book offering User acceptance test commenced Second closing of 300m cards No delays Delivered on time and on budget Balances Target 3bn by end bn 1.1bn 2013 January acquisition of 1bn of VM branded cards from MBNA Operations build initiated No legacy issues No PPI No cards with 30d+ arrears 4.6bn at peak 2002 Established cards business with MBNA Source: Company data 11

12 Migration Acquired not only balances and relationships, but also a deep transactional history Financial Performance Robust build Acquired Portfolio 1bn + 0.3bn balances 12% Acquired yield Portfolio 1bn + 0.3bn balances 675k mature 675k customer mature accounts custoer accounts Outsourced operating model to TSYS enables flexible, scalable growth Income Statement ( m) Total income Total costs (37.1) (40.5) Net impairments (27.3) (14.6) Contribution Balance Sheet ( bn) Balances ( bn) RWAs Acquired Data Deep foundations 15 years of data Transactional Vintage Segmentation P&L history Application scores 15 years of data underlying current forecasts of future performance Source: Company data 12

13 May June July August September October November December January February March Target of 3bn in balances by end of 2017 Confidence in tried and tested features of model - origination engine and customer stimulation Outstandings Monthly outstandings growth Monthly average since launch Targeted monthly average Originations Target origination band Annual originations 2015 annualised 600k+ 70m 60m 250k 200k 60m/month; c.20% lower than monthly average growth in k accounts/yr; k annualised, historic high >600k Source: Company data 13

14 Philosophy behind prime credit card business Data driven, execution focused, monoline business, benefitting from Virgin brand Operational excellence and scalability End to end view of the business Data and Analytics Deep understanding of profitability drivers Virgin brand marketing edge Philosophy combined with brand delivers: Stronger quality customer Higher average balances Low cost to acquire Delivering strong and sustainable returns 14

15 A high quality customer profile We aim to attract those can both afford to repay their balance and are very likely to do so VM cards customer UK population 1 Average age 45yrs >75% homeowners Majority mid to high affluence Average age 40yrs 64% homeowners Average affluence distribution Average income > 38k Average income 26k VM targets prime customers Overrepresented in affluent segments Market financial strategy segmentation (FSS) 2 8% 5% 10% 9% 3% 6% 27% 7% Affluence is a key driver of quality 25% Balancing Budgets Bright Futures Career Climbers Cautious Retirement Comfortable Transition Golden Retirement Mainstream Wealth Secure Futures Striving Families Source: Company data Note: (1) ONS data (2) Experian 15

16 Virgin Money in market context Plenty of opportunity for future growth Virgin Money Balances ( bn) Market 1.8% 1.1bn +45% 2.5% 1.6bn Strong growth with significant headroom in market context 62bn +5% 65bn Market share of balances Balances Portfolio breakdown (%) Not just BT, and potential for future product extensions Low Fee BT Market Leading Cash BT Matched Offer 0% Purchase Other Retail Credit Builder Low Rate 2015 Issuance (cards) % avg 18% high 1m Outsized share in digital distribution channel m 1.1m 3.7m VM market share Digital Non digital Source: Company data, Experian 16

17 Customer acquisition overview Almost exclusively online means low cost of acquisition 75% Represented on the top 12 aggregators at any point in time 25% c.50% of aggregator volume Aggregators Direct (homepage) Customer acquisition cost of only 30 in 2015 Note: VM 2015 origination split by channel 17

18 Broad range of competitive products All products designed to ensure a fair value exchange with customers Customer needs met by a broad range of cards with positive NPV Debt Consolidation Long duration Balance Transfer cards Borrowing for purchases Low rate card Money transfer card Everyday spending All round card 65% of originations 35% of originations 1 Consistent foundations Transparency Affordability Simplicity Note: (1) at 31 December

19 Customer value management Monoline enables comprehensive in house analytics for successful portfolio management Monoline model Best in class analytics Portfolio management Facilitates understanding of customer through the life cycle: Application decisioning Customer usage Customer behaviour System configuration Risk analytics + Customer analytics + Commercial analytics + Digital analytics Aims to: Maintain customer engagement & increase share of wallet Through targeted stimulation: Eligibility criteria for existing customers aligns with new customer risk appetite ~85% of existing customers qualify for marketing stimulation 19

20 Validation of VM cards financial returns VM 2015 risk adjusted return 14% higher than average card in the market Metric VM Benchmark Variance Performance Balance per active account 3,523 1, % Interest income % Total revenues % Average credit line 7,550 6, % 2 cycles past due asset delinquency 1.2% 1.7% (0.5)% Repayment rate 7% 26% (73)% Line utilisation 47% 27% +20% Outcome Risk adjusted return % Source Argus report 4Q

21 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Financial Impact of Credit Quality Conservative risk appetite and strong credit quality combined provide superior performance Strong NCL performance (NPV basis) Impairment performance 3.0% Metric % Impairments ( m) 2.0% 1.5% 1.0% 0.5% 0.0% M1 M4 M7 M10 M13 M16 M19 M22 M25 M28 Gross Credit Loss Rate (before Recoveries) Net Credit Loss Rate (after Recoveries) M31 M34 M37 M40 M43 M46 M49 M52 M55 M58 Gross Net Debt sales Cost of risk Inc. debt sale 2.00% 1.51% Portfolio losses 1 Ex. debt sale 2.50% 2.43% 6% 4% NCL % 2% 0% -2% -4% -6% -8% -10% -12% Bulk sale of debt A simple collections model focused on matching customer circumstances to long term sustainable payment options -14% Source: Company data Note: (1) Smoothed for the impact of the migration event on collections 21

22 Managing Risk Strong framework aligns with VM s conservative risk appetite Prime, low risk, <10% NCL appetite at the margin Conservative loss recognition and forbearance Risk appetite Credit Quality Standards Early MOB 2 delinquency targets Robust lending limits Non-performing accounts charged off after 180 days Credit bureau tools Behavioural data Tools Approach Data driven Automated Consistent risk appetite across customer life cycle Notes: (1) Financial strategy segments (2) Month on Book 22

23 Credit Quality A robust underwriting process underpinned by diligent credit scoring and strict policy rules Origination Targeted stimulation of existing customers Application Aggregator Market position a key driver of quality Acceptance Peak of 50% in 2015 Decision Automated Predictable and consistent Risk appetite Predictable performance Custom risk scoring Analytical Approach Credit bureau data Experian: (1) industry sample of BT product applicants (2) enhanced indebtedness (i.e. changing credit usage) Delphi: depth of credit history and repayment performance at trade line level Behavioural and transactional information Cash flow analysis Affordability test We use information to assess each applicant s ability to repay 23

24 % change unemployment rate % change gross write offs Downturn experience Risk appetite optimised for affluent segments, key indicators closely monitored and managed 1 2 Same risk scoreband does not mean same credit risk Key leading indicators are monitored closely Rate of change 1 : unemployment vs. credit loss performance Behavioural indicators 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% VM gross write offs UK unemployment % 10% 5% 0% -5% -10% Reduced payment rates unrelated to usage Transactions skewed to essential spend Fewer missed payments of greater consequence 3 Migrated portfolio has inbuilt resilience A high quality portfolio with improved resilience throughout economic cycle Note: (1) Trends lines for both series reflect moving average over 2 quarterly periods. The UK unemployment series is lagged by one period Source: Company data 24

25 Regulatory environment Initial findings of the FCA card market study confirm product valued by consumers Market importance 30 million customers 61 billion debt outstanding Consumers value flexibility credit cards offer Encouraging interim focus areas Product flexibility Disclosure Technology Income data sharing Benefits to consumers Increased transparency and comparability Improved affordability and debt control Source: FCA interim report available at: 25

26 Further developing VM s capability and reach Continued focus on quality and returns whilst staying relevant and driving value for customers Propositions for additional customer segments Broaden distribution Maximise use of advanced analytics Rewards based product Rewards based products Broaden product range Continued improvement of operational support model Demonstrable track record of delivery 26

27 Delivery of financial performance 2015 was a strong year and we expect that strength to continue Highlights Measurements Took 2.6% market share in 2015 Up from 1.8% in 2014 Completed business build Market leading extended duration cash card and intentionally market disrupting offers Disrupted market; innovative products and pricing Strong growth via new and existing customers All time low delinquency and impairment levels On time, on budget, migrated 675k accounts 40 month offer, and All Round 24/24 product; took market share to 18% peak in September Industry recognised, award-winning products 50% portfolio growth; cash volumes of 600m in new accounts, 400m from stimulation 8 successful debt sales ( 6.9m in proceeds) A credit card centre of excellence within a retail bank Source: Company data 27

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29 An illustration of EIR The maths supporting the 7% rate Year One Account Total Interest Cash Advance Fee Acquisition Cost (31) (31) Total Net income ,129 Average Balance 3,524 3,340 2,860 1,806 1,436 1,275 1,131 2,593 Ending Balance 1,110 Ending Balance + Asset 2,239 EIR (7 years) 7.20% 7.20% 7.20% 7.20% 7.20% 7.20% 7.20% Cash Interest Rate 1.78% 2.01% 2.12% 12.03% 12.16% 12.25% 12.22% Cash Fee Rate 3.47% 1.08% 1.27% 1.37% 1.48% 1.63% 1.90% Marketing -0.88% Blended Cash Rate 4.37% 3.09% 3.40% 13.40% 13.63% 13.88% 14.12% Key assumptions Market leading product and related behaviours Modelling supports NPV of 58 High level mathematical representation to allow understanding of calculation behind EIR rate NPV 58 Source: Company data 29

30 Disclaimer This document contains certain forward looking statements with respect to the business, strategy and plans of Virgin Money Group and its current goals and expectations relating to its future financial condition and performance. Statements that are not historical facts, including statements about Virgin Money Group s or its directors and/or management s beliefs and expectations, are forward looking statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that will or may occur in the future. Factors that could cause actual business, strategy, plans and/or results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward looking statements made by the Group or on its behalf include, but are not limited to: general economic and business conditions in the UK and internationally; inflation, deflation, interest rates and policies of the Bank of England, the European Central Bank and other G8 central banks; fluctuations in exchange rates, stock markets and currencies; the ability to access sufficient sources of capital, liquidity and funding when required; changes to Virgin Money s credit ratings; the ability to derive cost savings; changing demographic developments, including mortality, and changing customer behaviour, including consumer spending, saving and borrowing habits; changes in customer preferences; changes to borrower or counterparty credit quality; instability in the global financial markets, including Eurozone instability, the potential for one or more countries to exit the Eurozone or European Union (EU) (including the UK as a result of a referendum on its EU membership), and the impact of any sovereign credit rating downgrade or other sovereign financial issues; technological changes and risks to cyber security; natural and other disasters, adverse weather and similar contingencies outside Virgin Money s control; inadequate or failed internal or external processes, people and systems; terrorist acts and other acts of war or hostility and responses to those acts; geopolitical, pandemic or other such events; changes in laws, regulations, taxation, accounting standards or practices; regulatory capital or liquidity requirements and similar contingencies outside Virgin Money s control; the policies and actions of governmental or regulatory authorities in the UK, the EU, the US or elsewhere including the implementation and interpretation of key legislation and regulation; the ability to attract and retain senior management and other employees; the extent of any future impairment charges or write-downs caused by, but not limited to, depressed asset valuations, market disruptions and illiquid markets; market relating trends and developments; exposure to regulatory scrutiny, legal proceedings, regulatory investigations or complaints; changes in competition and pricing environments; the inability to hedge certain risks economically; the adequacy of loss reserves; the actions of competitors, including non-bank financial services and lending companies; and the success of Virgin Money in managing the risks of the foregoing. Any forward-looking statements made in this document speak only as of the date they are made and it should not be assumed that they have been revised or updated in the light of new information of future events. Except as required by the Prudential Regulation Authority, the Financial Conduct Authority, the London Stock Exchange plc or applicable law, Virgin Money expressly disclaims any obligation or undertaking to release publicly any updates of revisions to any forward-looking statements contained in this document to reflect any change in Virgin Money s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. 30