Annual Report and Financial Statements 2007

Transcription

1 Financial Statements 2007 RISK.MANAGED.

2 CATTLES PLC WHAT WE DO We operate in the UK financial services markets of non-standard consumer credit, debt recovery and invoice finance that provide significant opportunities for sustained growth. OUR PLATFORM FOR GROWTH We have been able to sustain strong income and profit growth because our experience, commitment, people and infrastructure enable us to benefit from market opportunities in both buoyant and tough economic conditions. We aim to increase shareholder value significantly by becoming the UK s leading non-standard financial services group. How? By deploying six key strengths: CONSERVATIVELY MANAGED FUNDING Our philosophy is to lend short and borrow long, ensuring we have funding headroom, secured ahead of need and hedged against interest rate volatility. ROBUST UNDERWRITING We have refined our credit scoring and underwriting processes over many years, so our acceptance of credit risk is rigorously controlled. BEING CLOSE TO OUR CUSTOMERS Knowing customers personally is what our community branches are for. They help us to build relationships and manage arrears if customers circumstances change. MOTIVATED, WELL TRAINED PEOPLE We have consistently benefited from investment in our people: their skills and experience enable us to manage risk successfully while providing excellent customer service. INVESTMENT IN SYSTEMS AND PROCESSES High quality IT helps us recruit and select customers, matching their credit status and needs to our products. Our scalable systems will grow with our customer base. BREADTH OF DISTRIBUTION CHANNELS We reach our customers through our network of brokers, strategic partners and introducers, our nationwide branches and online. RISK.MANAGED. The Risk.Managed. culture underpinning our businesses has helped us ensure robust credit quality over many years. The Group s key strengths are demonstrated in each of its businesses. An illustration of these strengths, as well as an explanation of the benefits they bring, is shown on pages 2 to 7. 00

3 AT A GLANCE CATTLES PLC is a financial services group specialising in providing consumer credit to non-standard customers in the UK. We also provide debt recovery services to external clients and our consumer credit business, and working capital finance for small and mediumsized businesses. We also have a car retail operation, which is the largest introducer of hire purchase customers to our consumer credit business. In the consumer credit market, non-standard refers to customers who may currently not have access to mainstream facilities typically due to perceived shortcomings in their employment, residency or credit histories. We give them an opportunity to build or repair their credit profile. Effective risk management is paramount in all our markets, and underpins our strategy for continued strong growth. GEOGRAPHIC COVERAGE Branches Welcome Financial Services The Lewis Group Cattles Invoice Finance OUR BUSINESSES Welcome Financial Services The Lewis Group Cattles Invoice Finance Pre-tax profit 164.8m Welcome Financial Services comprises three businesses: Welcome Finance Shopacheck Welcome Car Finance Receivables 2,611.8m Welcome Finance, the principal lending business, serves more than 500,000 customers, providing direct repayment loans from 183 branches across the UK. Its product range includes unsecured personal loans, second charge secured loans and hire purchase for cars. Details on its business model are set out on the opposite page. Shopacheck provides short-term home collected loans to some 260,000 customers through 52 branches. Welcome Car Finance sells around 14,000 used cars a year from 12 sites and is the largest introducer of hire purchase business to Welcome Finance. Pre-tax profit 10.2m Receivables 132.9m The Lewis Group is a UK leader in debt recovery and investigation services, serving both external clients and Welcome Financial Services. It is one of the UK s largest buyers of non-performing debt. Pre-tax profit 2.5m Receivables 99.4m Cattles Invoice Finance provides working capital finance to small and medium-sized businesses. It operates through six regional offices in England and Scotland. OUR CUSTOMERS The great majority of our customers (over 500,000) have loans from Welcome Finance. We only advance these direct repayment loans to customers who are in employment, have a bank account and can repay by direct debit. Most are in socio-economic groups C and D, but a significant proportion come from higher categories. These are some typical customer scenarios: Welcome Finance Unsecured personal loan Mr A, 25, is a mechanic who is single and lives with his parents in Manchester. He earns 17,500 and borrowed 2,000 over three years to pay for a holiday and repay an existing loan. He applied online after being rejected by his bank. Second charge secured loan Mr B, 46, is a fireman and his wife, 42, is a part-time teacher. They live in Norwich and have a joint income of 30,000. They borrowed 9,000 over 10 years for home improvements. They applied through a broker, who referred them to Welcome Finance as they had limited equity in their home. Hire purchase Mr C, 38, is an office manager in Watford earning 25,000. He borrowed 6,000 over four years to buy a car from Welcome Car Finance. He applied direct to Welcome Car Finance after seeing an advert on TV. Shopacheck Mrs D, 36, is an administrator and single. She bought her East London council house. She earns 300 a week, paid into her bank account. She borrowed 200 over 30 weeks to fund Christmas shopping. The Lewis Group Credit card company, E plc, has several million customers and each month it sells accounts which are in default. Lewis buys these, at a discount, and collects the sums outstanding. Bank F plc also has customers in default but it prefers to outsource the collection of overdue accounts. Lewis carries out this work and charges the bank a commission on the amounts it collects. Cattles Invoice Finance G Ltd specialises in wholesale organic food products, turning over 1.5 million a year. Its business was growing and the company had to take on 12 additional employees to meet demand, but wholesalers were requiring extended credit and G Ltd needed access to extra capital. Cattles Invoice Finance provided flexible finance, securing advances against invoices.

4 WELCOME FINANCE A RISK.MANAGED. BUSINESS MODEL Welcome Finance lends to individuals with non-standard credit profiles providing unsecured and secured personal loans, and hire purchase for cars. Its interest rates are priced to reflect the credit risk exposure. It has a well-developed national network of introducers. Managing credit risk is integral to the business model principally through effective bespoke credit scoring and centralised underwriting processes, and the close customer relationships maintained by the national network of local community branches. Distribution A significant factor in Welcome Finance s business model is the relationships it has built with its external distribution channels. Customers are reached through a well-established national network of: Brokers and introducers Car dealerships Strategic partners Nationwide branches Online Customer Sales and Service Centres (CSSCs) Welcome Finance ensures consistency of credit quality by scoring and underwriting applications centrally in its three CSSCs. Credit risk assessment of the customer is based on: Bespoke scorecards tailored to the non-standard market based on Welcome Finance s own data Affordability tests and proofs of both income and identity Policy rules Once assessment is complete, products are allocated according to the applicant s risk rating. Branch Network Welcome Finance s extensive network of community branches exists so that staff can get to know customers personally, build relationships with them, and manage arrears should their circumstances change. Relationships are managed as follows: Branches employ local people with good communication skills, who understand local conditions Once a loan has been advanced, customers are contacted by a customer account manager to begin establishing a close working relationship This ensures a prompt response if they experience difficulty with repayments and enables a practical plan to be agreed to help them avoid arrears If an account misses two payments, it is passed to a Local Management Branch. Local Management Branches (LMBs) At the LMBs, specialist account managers work with customers to ensure regular payments resume. This enables the accounts to be transferred back to the Branch Network and prevents them from falling into more serious arrears. Local Collection Units (LCUs) At the LCUs, account managers agree new repayment plans with customers. At this stage the business is focused on recovering the outstanding balance and would no longer consider these customers for additional credit. The Lewis Group The Lewis Group is able to collect accounts economically and manages any necessary legal action. If a customer s financial difficulties prove to be longer-term, the account is transferred to a Local Collection Unit. If a customer is unable to make a meaningful payment at the LCU, their account is transferred to The Lewis Group.

5 HIGHLIGHTS OF 2007 FINANCIAL Income 2006: 619.6m 822.2m +32.7% Pre-tax profit 2006: 132.2m 165.2m +24.9% Basic earnings per share 2006: 28.01p 32.30p +15.3% Dividend per share 2006: 17.50p 19.30p +10.3% Overview 00 What We Do 00 At a Glance 01 Highlights of Our Key Strengths 08 Chairman s Statement 10 Chief Executive s Review Operating and Financial Review 12 Our Markets 15 Our Objectives and Strategies 17 Risks 26 Key Resources 31 Performance Review 35 Financial Review OPERATIONAL Welcome Finance volumes 2006: 988.3m 1,408.6m +42.5% Welcome Finance customers 2006: 409, , % Instalment arrears 2006: 7.4% 7.0% Cost income ratio 2006: 35.5% 31.4% CORPORATE RESPONSIBILITY Speak Up survey colleague participation 2006: 84% 87% Colleague volunteer hours in community activities 2006: 2,059 2, % Governance 42 Directors and Secretary 44 Corporate Governance Report 50 Audit Committee Report 53 Nomination Committee Report 54 Directors Remuneration Report 65 Directors Report 68 Independent Auditors Report Financial Statements 70 Group Income Statement 71 Group and Company Balance Sheets 72 Group and Company Statements of Recognised Income and Expense 73 Group and Company Cash Flow Statements 74 Notes to the Accounts Shareholder Information 119 Shareholder Information 120 Registered Office and Advisers 01

6 02

7 We choose our customers with care and build close relationships with them. CHRIS NAYLOR, HEAD OF CUSTOMER SERVICE, WELCOME FINANCIAL SERVICES Our underwriting is tightly controlled. Scorecards are regularly reviewed by our credit quality team and experienced colleagues check and verify applicant documentation to ensure we don t lend more than they can afford to repay. Once a loan is approved we allocate the customer to their nearest branch. Within 24 hours the customer receives a call from their branch account manager to start building a personal relationship. The manager will run through all the details again and make sure they re comfortable with everything and check that they know when the first repayment is due. Robust underwriting Our key strength We have refined our credit scoring and underwriting processes over many years to give us rigorous control of credit risk. The same applies when we buy debt portfolios in The Lewis Group, where we have developed sophisticated and robust portfolio valuation models. The benefits it brings Robust underwriting is part of our Risk. Managed. approach, helping us maintain consistent credit quality and keep arrears within our target range. It also helps us to be a responsible lender: we would not benefit our customers or ourselves by lending them more than they can afford. Being close to our customers Our key strength Knowing customers personally is another aspect of our Risk. Managed. approach. It helps ensure that customers keep us in the picture if their circumstances change or if they encounter repayment difficulties. The benefits it brings By acting quickly and constructively, perhaps by rescheduling repayments, we can often prevent a temporary setback escalating into arrears. Our loan can be repaid in full, and the customer avoids a major blow to their credit profile. OVERVIEW OPERATING AND FINANCIAL REVIEW GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION

8 Before we take on debt, we make sure we can handle it. GRAHAM HOCKLEY, HEAD OF RISK, THE LEWIS GROUP Welcome is well down the road of investing in new IT systems. Now we ve begun the journey of completely re-engineering our systems in Lewis. We re re-designing our whole collection process so we can adapt faster and more flexibly to market, economic and regulatory changes. Speed and flexibility are also crucial when we re acquiring debt portfolios. When attractive opportunities arise, we need to be able to act fast. In today s market, having funding in place gives us a vital competitive advantage. Investment in systems and processes Our key strength High quality IT helps us recruit and select customers, matching their credit profile and needs to our products, and enhances the effectiveness and efficiency of our processes. Our scalable systems will grow with our customer base. The benefits it brings Investment in scalable systems is ensuring that our growth will not be held back by capacity constraints. It is also contributing to that growth by enabling us to respond faster to enquiries from loan applicants and intermediaries and, in the case of Lewis, manage larger portfolios of debt. Conservatively managed funding Our key strength Our philosophy is to lend short and borrow long, ensuring we have funding headroom, secured ahead of need and hedged against interest rate volatility. We have an excellent track record for raising funding in bank, bond and equity markets. The benefits it brings Our prudent, consistent approach to funding and proactive approach to hedging enables us to take advantage of opportunities when they arise, while maintaining stable medium-term funding costs. 04

9 OVERVIEW OPERATING AND FINANCIAL REVIEW GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION

10 06

11 With people like ours, it s no wonder we re widely recommended. CAROLINE McDONALD, MARKET DEVELOPMENT MANAGER, CATTLES INVOICE FINANCE The majority of our business comes from intermediaries such as accountants, brokers and banks though we re now reaching an increasing number of business owners directly through the internet and telemarketing. Our research says intermediaries think highly of us because we re independent, responsive and flexible. Clients say they re impressed by the way we understand their needs and issues. And that s down to the quality of our people. We have good communications so that knowledge and experience are shared, and a strong training culture. I m halfway through a 12-month management and leadership course myself, and it s motivating when your company wants to invest in you. Motivated, well trained people Our key strength We have consistently benefited from investment in our people: their skills and experience enable us to manage risk successfully while providing excellent customer service. This investment, whether in recruitment, training, communication, or cultural development, supports the growth of the business. The benefits it brings Last year we set new records for colleague training, continued to improve colleague benefits and increased leadership training for managers. Clearly, that is good for those who work for us. It helps us attract the quality of people we want and to retain them. It also helps customers who want quality service from positive people who know what they are doing. Breadth of distribution channels Our key strength Across the Group, we reach our customers through our networks of brokers, strategic partners and introducers, our nationwide branches and online. Ongoing investment in developing these relationships allows us to provide high quality, consistent service to both intermediaries and customers. The benefits it brings The breadth of our distribution channels helps to reduce our reliance on any one source and to access a greater number of customers. It is also good for customers, who can reach us through whichever channel suits them. The internet is increasingly important as more consumers and businesses look to research and apply for credit online. OVERVIEW OPERATING AND FINANCIAL REVIEW GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION

12 CHAIRMAN S STATEMENT NORMAN BROADHURST Chairman It gives me great pleasure to report an excellent performance by the Group in 2007, building on our success of previous years. Pre-tax profit increased by 24.9% to million and basic earnings per share increased by 15.3% to 32.30p. DIVIDEND The Board recommends an increased final dividend of 13.10p per share, payable on 13 May Together with the interim dividend of 6.20p per share, this gives a total dividend for the year of 19.30p an increase of 10.3% over the previous year. As an alternative to receiving the cash dividend, shareholders in the UK, excluding the Channel Islands, will again have the opportunity to reinvest their dividends in the Company s shares through our Dividend Reinvestment Plan. PEOPLE Seán Mahon retired as Chief Executive on 30 September On behalf of the Board I thank him for his outstanding leadership over the past seven years and wish him the best for the future. He was succeeded by David Postings, previously Managing Director of Lloyds TSB Commercial, who joined the Board on 1 September David s experience in senior roles at both Lloyds TSB and Barclays will be invaluable as the Group pursues further profitable growth. The quality of our people, and the strength and stability of the management team, have been critical to our success. To continue to grow the business we have increased our investment in training and development. Our positive, performanceoriented culture is reflected in the continued rise in colleagues satisfaction and pride in working for the Group. On behalf of the Board, I thank them for their contribution to another year s strong performance. OUTLOOK I believe our strategy for enhancing shareholder value through disciplined lending growth, robust credit quality and improving operational and financial efficiency remains sound and appropriate to current market conditions. Together with my fellow directors, I look forward to another successful year in Our positive, performance-oriented culture is reflected in the continued rise in colleagues satisfaction in working for the Group. Norman Broadhurst Chairman 28 February

13 OVERVIEW OPERATING AND FINANCIAL REVIEW GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Going through the details of the loan with a customer in our Welcome Finance branch in Bulwell, Nottingham.

14 CHIEF EXECUTIVE S REVIEW DAVID POSTINGS Chief Executive I am pleased to report another year of strong profit growth for the Cattles Group. Our pre-tax profits have increased by 24.9% underpinned by strong income growth of 32.7%. Critically, this has been achieved without compromising credit quality: instalment arrears improved to 7.0% of receivables. Extensive experience in our markets enables us to continue lending responsibly, taking full account of customers ability to repay. So, as many lenders withdraw from these markets, we remain committed to meeting the needs of customers, as evidenced by continuing investment in our branch network, systems and people. GROUP KEY PERFORMANCE INDICATORS Pre-tax profit 2006: 132.2m 165.2m Return on equity 2006: 24.0% 21.8% Loan loss ratio 2006: 7.4% 8.4% Cost income ratio 2006: 35.5% 31.4% Welcome Finance customers 2006: 409, ,000 GROUP PERFORMANCE Continued profit growth Group pre-tax profit increased by 24.9% to million (2006: million). Following the successful share placing in March 2007, return on equity remained high at 21.8% (2006: 24.0%). Basic earnings per share rose 15.3% to 32.30p (2006: 28.01p). These achievements give us confidence to recommend a 10.5% increase in the final dividend to 13.10p per share (2006: 11.85p). The year s success was achieved through continued income and customer growth, robust credit quality, improved productivity and a consistent funding strategy. Continued income and customer growth Group income increased by 32.7% to million (2006: million), reflecting buoyant demand for the Group s products. In particular, Welcome Finance achieved strong growth in customer numbers up 25.7% to 514,000 (2006: 409,000). Group net interest margin remained robust at 23.2% (2006: 23.3%). Robust credit quality The Group loan loss ratio of 8.4% (2006: 7.4%), remains well within our target range and reflects a change in the mix of Welcome Finance s business in the period, in particular, growth in its higher interest yielding unsecured loan book. Instalment arrears 1 in Welcome Finance improved to 7.0% of receivables (2006: 7.4%) and customer balances in arrears 2 remained stable at 29.2% (2006: 29.1%). Improved productivity Group cost income ratio 3 improved to 31.4% (2006: 35.5%), as a result of the growing efficiency of our infrastructure. Ongoing investment in IT systems will continue to provide the processing capacity to sustain our growth. Consistent funding strategy The average cost of borrowing was 6.86% (2006: 6.79%) due to our proactive hedging strategy that aims to provide stable medium-term funding costs to match the maturities of our liabilities. Group year-end gearing improved to 4.6 times shareholders funds (2006: 5.1 times), and is well within our covenant of 6.0 times. The Group raised 533 million from a share placing and bond issue, and agreed a further 150 million unsecured bilateral bank facility in December. Year-end funding headroom was million (2006: million), with the only facility maturing in 2008 being a US $40 million private placing (2007: 125 million). The 150 million bilateral facility we announced in December 2007 has recently been increased to 250 million. We are confident that we will be able to raise debt funding to support our planned growth while maintaining a highly attractive net interest margin. 1 Instalment arrears overdue instalments as a percentage of closing receivables 2 Customer balances in arrears total value of loans in arrears as a percentage of closing receivables 3 Revised basis for ratio overheads as a percentage of total income (net of interest expense) and excluding Welcome Car Finance income and costs 10

15 BUSINESS UNIT PERFORMANCE Welcome Financial Services (WFS) WFS comprises Welcome Finance and Shopacheck, the Group s non-standard consumer lending businesses, and Welcome Car Finance, our car retail operation. Pre-tax profit increased by 21.0% to million (2006: million). Total net receivables increased by 35.0% to 2.6 billion (2006: 1.9 billion). Welcome Finance The loan loss ratio in the principal business, Welcome Finance, was well within our target at 8.6% (2006: 7.4%). This reflected a change in the mix of the business in the year and, in particular, growth in its unsecured loan book which delivers a higher interest yield. Instalment arrears improved to 7.0% of receivables (2006: 7.4%) and customer balances in arrears remained stable at 29.2% (2006: 29.1%). Customer numbers increased by 25.7% to 514,000 (2006: 409,000). Welcome Car Finance Income from Welcome Car Finance grew by 75.8% to million (2006: 60.4 million) as it raised unit sales by 53.0% to 13,763 vehicles (2006: 8,993). Shopacheck Receivables in our Shopacheck home collected credit business reduced to million (2006: million), representing less than 4% of the Group s total receivables. The Lewis Group Pre-tax profit increased by 107.1% to 10.2 million (2006: 4.9 million), driven by our strategy to increase investment in debt portfolios. Receivables increased to million (2006: 91.0 million) following debt acquisitions totalling 74.3 million (2006: 69.5 million) during the year. Commission on third-party debt collection increased by 10.5% to 7.2 million (2006: 6.6 million). Cattles Invoice Finance Income grew 15.6% to 16.9 million (2006: 14.6 million), and client numbers by 11.4% to 725 (2006: 651). Pre-tax profit reduced by 6.9% to 2.5 million (2006: 2.7 million) 4 largely as a result of provisions for three specific accounts. The loan loss charge increased to 2.5 million (2006: 1.0 million). More detailed information on the performance of our businesses can be found in the Performance Review on pages 31 and 32. CURRENT YEAR The Group has made a strong start to the year. All key indicators are in line with expectations. Through continuing to focus on customer service and increasing our investment in people, IT and infrastructure, our strategy is to deliver enhanced shareholder value. Together with my senior management team, I look forward to another successful year in David Postings Chief Executive 28 February 2008 We continue to focus on customer service and increase our investment in people, IT and infrastructure. OVERVIEW OPERATING AND FINANCIAL REVIEW GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Before prior year disposal profit of 0.8 million 11

16 OPERATING AND FINANCIAL REVIEW Our Markets Welcome Finance benefits from its accumulated knowledge of customer behaviour in identifying profitable lending opportunities and screening loan applications. This Operating and Financial Review has been prepared in accordance with Reporting Standard 1: Operating and Financial Review as published by the Accounting Standards Board. WELCOME FINANCIAL SERVICES Welcome Financial Services (WFS) is one of the UK s leading players in non-standard consumer finance. It comprises Welcome Finance and Shopacheck, its lending businesses, and Welcome Car Finance, its car retail operation. Competition for its principal business, Welcome Finance, primarily comes from specialist subsidiaries of major banks. The opportunity for WFS continues to grow as the banks progressively tighten their lending criteria as they find it difficult to lend economically to borrowers with non-standard credit profiles. WFS lends to individuals with non-standard credit profiles people who may not have access to mainstream lending, typically because of perceived shortcomings in their employment, residency or credit histories. It gives customers an opportunity to build or repair their credit profiles. WFS s credit assessment processes are designed to ensure that customers repayment commitments are manageable and that they are not over-committed. Welcome Finance Welcome Finance provides unsecured and secured personal loans, and hire purchase for cars. The sums involved are relatively modest: typical advances are 2,100 for unsecured loans, 9,300 for second charge secured loans and 6,000 for car hire purchase loans. Welcome Finance has over 500,000 customers and repayments are mainly collected monthly by direct debit. Outstanding loans of this type at the end of 2007 totalled over 3 billion, before allowance for loan loss provisions, accounting for over 85% of the Group s total receivables. Welcome Finance s customers are primarily in socio-economic groups C and D, which make up some 65% of the UK adult population. However, its market also includes people in the higher categories who may have irregular earnings patterns or need to repair their credit history. Welcome Finance s market is dynamic, and independent research estimates the total size to be approximately 13 million potential customers. Of this, there is a potential addressable market of 7.1 million customers, of whom 5.3 million would meet Welcome Finance s underwriting criteria. During 2007 there has been a reduction in competitor capacity and credit risk appetite. Welcome Finance presently has a share of around 8% of its growing addressable market and management expects it to gain further market share through ongoing development in its systems, products and customer and intermediary service. Unsecured lending, Welcome Finance s main activity, faces varying degrees of competition. New entrants come into the market from time to time, particularly during credit boom periods when prime lenders soften their lending criteria to extend into the non-standard sector of the consumer lending market. However, there are significant barriers to maintaining a successful presence in this market. One is the need to build a substantial knowledge base: while credit history data is available from credit reference agencies, Welcome Finance benefits from its accumulated knowledge of customer behaviour in identifying profitable lending opportunities and screening loan applications. This proprietary knowledge is difficult to accumulate quickly. New entrants also need the expertise and resources to deal with customers face-toface through a well-developed multibranch infrastructure. Against the trend in the financial services industry, Welcome Finance continues to invest in its branch network. It views its local branch presence as a significant strength research shows that many customers prefer to discuss their payment arrangements, when their personal circumstances have changed, on a face-toface basis and Welcome Finance has made it a central part of the way it manages both customer relationships and risk. Shopacheck The home collected credit market is mature. Datamonitor, a leading market research agency, forecasts a modest increase in advances each year from 1.6 billion to 1.8 billion between 2007 and Shopacheck remains the second largest player in this market. However, the number of its customers is reducing, down 15% in 2007 to 266,000, as it continues to disengage from sectors of the market which are considered uneconomic to serve. At 31 December 2007 home collected loans represented less than 4% of the Group s total receivables at 102 million. Typical Shopacheck advances are around 300 and repayments are collected weekly by local agents. 12

17 Welcome Car Finance and The Lewis Group have both experienced significant growth in Welcome Car Finance The non-standard motor finance sector is predicted to grow modestly over the next few years, despite the market remaining flat during Non-standard lending accounts for about 20% of the total asset financed car market. Welcome Car Finance has experienced strong growth in 2007, despite softening in the UK market overall, and is the Group s largest introducer of hire purchase customers. Impact of the credit crunch Demand in the UK non-standard consumer lending market has been growing strongly in recent years. However, as credit markets have tightened, a number of mainstream lenders who had entered the non-standard market have begun to withdraw from segments of it. As this trend continues, increasing demand is likely to remain fed not only by existing non-standard borrowers but also by a tightening of credit qualification criteria by mainstream lenders, which will squeeze some customers out of the prime segment into the non-standard sector. This is expected to create further opportunities for Welcome Finance, which has robust expertise in pricing risk and managing collections. Welcome Finance typically lends smaller amounts than the companies that are withdrawing from the sector, at interest rates priced to reflect the risk. It also has systems and infrastructure to provide close relationship management and support for customers key elements in its model for maintaining robust credit quality. Regulation Government regularly reviews regulation and legislation to ensure a robust and fair consumer finance market. The significant strengthening of regulation in recent years favours responsible, well-managed businesses: Cattles welcomes the reassurance that it provides to customers and investors alike. Cattles corporate values require the Company to be a responsible lender and the Group has always seen treating customers fairly and responsibly as an essential part of how it operates and how it manages risk. The Group s consumer lending businesses are licensed under the Consumer Credit Act To maintain high standards of integrity and honesty among lenders, all providers of consumer credit must have a licence of fitness to trade from the Office of Fair Trading, which they must renew every five years. The sale of general insurance products by Welcome Finance is regulated by the Financial Services Authority (FSA). All relevant Welcome Finance employees receive prescribed training and accreditation to maintain the required standards of customer care and compliance. Cattles fully supports the FSA s Treating Customers Fairly principles which have been embedded in Welcome Finance s culture and values training, and in its operating policies and procedures. The Competition Commission inquiry into the sale of Payment Protection Insurance (PPI) began in February 2007 and is currently in the information gathering stage. Cattles has provided all the requested information and attended a Private Hearing in June 2007 to provide further evidence to the Commission. The sale of PPI has been regulated by the FSA since January 2005 and continues to contribute around 10% of the Group s revenues. The Commission produced its Emerging Thinking document in November 2007 and advised that its Provisional Findings Report would be published in May The Inquiry has to provide a Final Report by its statutory end date of February Cattles is an active member at board level of various trade associations including the Consumer Credit Association, the Consumer Credit Trade Association and the Finance & Leasing Association. THE LEWIS GROUP The Lewis Group (Lewis) is a UK leader in debt recovery and investigation services, serving both external clients and WFS. Its external clients are mainly large issuers of credit cards and unsecured loans as well as both central and local government departments, insurance companies, catalogue retailers, utilities, telecommunications businesses and educational institutions. Lewis has a reputation for quality and ethical collection practices, and subscribes to the Credit Services Association s code of conduct. This provides comfort to bluechip clients concerned to manage risk to their own reputations. Debt collection and recovery is a diverse and competitive market with over 500 firms operating in the UK. Consolidation is expected and the market is becoming more sophisticated as buyers and sellers of debt obtain better data and develop enhanced models that enable them to price debt more accurately. Some 74% of Lewis income comes from purchasing and recovering portfolios of non-performing debt. It buys these from credit providers, at a discount to their face value, and then recovers the outstanding amounts. Lewis helped to establish the purchased debt market in the UK with a ground-breaking transaction in It is one of the top three players in this fastgrowing market segment which grew by OVERVIEW OPERATING AND FINANCIAL REVIEW GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION

18 OPERATING AND FINANCIAL REVIEW Our Markets continued Cattles Invoice Finance offers its clients a high quality and responsive service. around 40% a year between 2004 and 2006, compared with growth of around 15% between 1998 and 2006 for the contingent debt collection market. Most single portfolios coming to market now realise around million apiece, but there is a trend to selling larger parcels. Lewis is well-placed to bid on much larger transactions and is particularly interested in longer-term forward flow deals. Market growth accelerated strongly in 2007, and an estimated 8-10 billion of face value debt was sold during the year, according to the Debt Buyers & Sellers Group of the Credit Services Association. Lewis continued to take advantage of the opportunities provided by its strong market position, spending some 74 million on debt purchases during the year (2006: 70 million). Investment in debt purchase is central to Lewis growth, and any economic slowdown is likely to increase the availability of debt on attractive terms. Lewis is also a significant re-seller of debt, which has completed its progress through the company s collection strategies. The balance of Lewis business comes from recovering debts for clients on a commission basis and supplying investigation services, such as customer care visits for insurance companies and arrears and pre-litigation visits for creditors. Lewis operates one of the largest self-employed field collection teams in its sector. Impact of the credit crunch The purchased debt market is expected to continue growing faster than commissioned debt collection driven by liquidity pressures on banks, which are the largest debt vendors, and their need to free-up capital by reducing the amount of debt on their own books. There is room for further growth among smaller businesses and the public sector, which are relatively under-penetrated and may also face pressure to recover capital faster. Prices for purchased debt are likely to soften if, as expected, private equity-backed debt collection agencies face increased funding pressures. CATTLES INVOICE FINANCE Cattles Invoice Finance (CIF) provides working capital finance to small and medium-sized businesses throughout the UK. It has a broadly spread portfolio of 725 clients. It reaches clients through three main channels: intermediaries, corporate partnerships and direct marketing, such as internet and telemarketing. Direct marketing generated almost 10% of new clients in Like WFS, CIF manages risk through its underwriting processes and by maintaining exceptionally close personal contact with clients. Its client managers generally handle around clients each about a third of the typical industry level to ensure high quality client service and a thorough understanding of clients financial position. Around 60 companies operate in the UK invoice financing market. The clearing banks dominate, with a combined share of about 60%. A number of overseas banks and larger independent lenders, such as CIF, operate nationwide and there are also a large number of smaller regional players. Consolidation of the sector has been under way in recent years. The UK invoice financing market has grown strongly in recent years. The average annual growth rate has been 8% for client numbers and 18% for advances, which indicates that more larger businesses are now using invoice finance. Historically CIF has served smaller companies with turnover up to 5 million, where the annual growth in advances has been slower at around 10%. The UK market currently comprises approximately 3.7 million small and medium-sized businesses with 250,000 suitable for invoice finance. Less than 20% are using invoice financing services, indicating significant potential for increased penetration across the marketplace. CIF has an immediate addressable market (excluding borrowing over 5 million and the market share of the Big 4 banks) of approximately 16,500 businesses (40% of the total). CIF currently funds approximately 700 businesses, giving it an addressable market share of around 4% in terms of client numbers. Impact of the credit crunch Any tightening of credit is likely to increase companies demand for invoice financing. Pressures on funding among the clearing banks may reduce their capacity. 14

19 OPERATING AND FINANCIAL REVIEW Our Objectives and Strategies GROUP STRATEGY The overall objective of Cattles is to increase shareholder value significantly by becoming the UK s leading non-standard financial services group. The Group intends to achieve this objective by: Continuing to focus on non-standard consumer lending; and Supplementing this with a broadening range of complementary financial services and distribution channels for non-standard consumers. The Key Performance Indicators (KPIs) to measure the Group s progress are: Income growth Earnings per share growth Return on equity The Group s investment over recent years has built a strong, scalable business in three complementary markets: non-standard consumer finance, debt recovery and SME invoice finance. The Group intends to continue growing in all three areas. There is a great opportunity to leverage the Group s expertise, track record and leadership skills in non-standard consumer finance. The recent contraction in this market has been due to a reduction in supply as lenders have withdrawn from sectors of this market or have tightened their underwriting criteria, rather than to any softening in demand: demand has in fact continued to grow. The Group will continue to invest in building upon its strong position in this sector, without compromising underwriting criteria, through organic development of Welcome Finance and through the acquisition of complementary non-standard consumer finance businesses. The Group will also continue to invest in growing Lewis and to develop CIF. Investment in infrastructure and IT systems has already enabled the Group to accelerate its growth. This investment is enabling loans to be approved more efficiently, improving the effectiveness of collection processes, enhancing customers experience and making it easier for brokers and dealers to promote the Group s products. These new systems are scalable. The Group will continue to invest in its branch network, processes and IT to support further growth. The quality and motivation of the Group s people is a clear strength, both in gaining new business and in maintaining robust credit quality. The Group will continue to focus on employee engagement linked to reward and to develop a shared culture across the organisation which involves and energises all employees to grow the business and enhance the quality of customer service. Welcome Financial Services The Group aims to maintain strong growth in income and profits in WFS whilst maintaining robust credit quality and intends to achieve this aim by: Focusing on non-standard direct repayment lending by increasing customer origination and retention through enhanced customer relationship management; Establishing new distribution channels and becoming the lender of choice for intermediaries; Leveraging WFS s customer base to develop non-interest income streams, either organically or by acquisition; and Continuing the development of Welcome Car Finance. The KPIs to measure progress are: Growth: customer numbers Credit quality: loan loss ratio Yield: net interest margin The Lewis Group The Group aims to maintain strong growth in income and profits in Lewis and intends to achieve this aim by: Continuing to invest in acquiring debt portfolios; Building new strategic partnerships with major lenders; and Maintaining Lewis rigorous debt valuation criteria. The KPIs to measure progress are: Growth: total receivables Yield: net interest margin Cattles Invoice Finance The Group aims to continue to increase CIF s share of its growing market and intends to achieve this aim by: Focusing on organic growth through customer acquisition and broadening the product range; and Continuing to enhance CIF's client service offering. The KPIs to measure progress are: Growth: total receivables Credit quality: loan loss ratio Yield: net interest margin Corporate Responsibility Cattles aims to retain the confidence of all stakeholders and to maintain their trust in its businesses. The Group will continue to demonstrate a responsible approach to customers, colleagues, local communities and the environment. Corporate Responsibility (CR) is about managing risks to the confidence and trust placed in Cattles businesses by customers, colleagues and other stakeholders. If the Group fails to recognise its responsibilities or underestimates their importance, it risks damaging its reputation and ultimately its business. Cattles has a straightforward CR strategy based on three cornerstones: Being a responsible financial services organisation The Group s businesses treat their customers fairly and with respect. They lend carefully, making sure customers financial circumstances are understood to ensure the right products are offered. Open and honest relationships are sought with customers and constructive support is offered to customers if they encounter difficulties. Being a good people business The Group s success depends on the skills and professionalism of its employees. The Group aims to create an environment that is motivating and stimulating and to treat its employees with fairness and respect. Listening to what employees have to say, helping them to fulfil their career aspirations and offering them equal opportunities to progress are important priorities. The Group seeks to build strong bonds with the communities in which it operates because these are where its customers and employees live and work. Being environmentally responsible As a growing business the Group recognises its impact on the environment. It has a duty to manage this impact and minimise it where it can, and to raise awareness of environmental issues among colleagues. Stakeholders expect the Group to do this, and using resources more efficiently will also help to reduce costs. OVERVIEW OPERATING AND FINANCIAL REVIEW GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION

20 16 Reviewing performance in our Shopacheck branch in Bradford.