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Edited Transcript of PFG.L earnings conference call or presentation 30-Jul-19 8:30am GMT

Half Year 2019 Provident Financial PLC Earnings Presentation

Bradford Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Provident Financial PLC earnings conference call or presentation Tuesday, July 30, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Gillespie

Provident Financial plc - MD of Consumer Credit Division

* Malcolm John Le May

Provident Financial plc - CEO & Director

* Neil Chandler

Provident Financial plc - MD of Vanquis Bank

* Simon George Thomas

Provident Financial plc - CFO & Director (Leave of Absence)

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Conference Call Participants

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* Gary Greenwood

Shore Capital Group Ltd., Research Division - Research Analyst

* Ian White

Autonomous Research LLP - Research Analyst

* John Cronin

Goodbody Stockbrokers, Research Division - Financials Analyst

* Portia Anjuli Patel

Canaccord Genuity Corp., Research Division - Analyst

* Shailesh Mansukhlal Raikundlia

Panmure Gordon (UK) Limited, Research Division - Analyst

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Presentation

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Malcolm John Le May, Provident Financial plc - CEO & Director [1]

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Right. I think we'll start. Good morning, everybody, and thank you very much for coming. It's been an eventful 6 months at Provident Financial. But that said, the group's operational and financial performance has been very strong. I think we've made significant progress in transforming the group against a changing regulatory environment and the home credit turnaround remains on track. I'm not going to dwell on the distraction of the unsolicited bid we faced, but feel the strong performance of the group has only been achieved by the immense hard work of everyone at Provident Financial. And I'd like to thank them for all of their endeavors. And in their ability to stay focused on delivering for our customers and our shareholders over the last 6 months despite all distraction. Indeed, in the audience today, several of our colleagues are here and I'm sure you're going to have a chat with them at the end of the presentation.

In relation to today's presentation, Simon will be presenting the half year numbers and I'll be reporting on the operational progress, strategy and the outlook before we host question and answers.

Provident Financial in 2018 was all about getting its house in order, which I feel we achieved. This gave the group a strong platform with the right board and the senior leadership team in place to drive forward the momentum and to continue its evolutional journey throughout 2019 of striking the right balance between good customer outcomes and sustainable shareholder returns. As you can see from the numbers, they show we're making good progress, with group adjusted profit before tax of GBP 74.9 million. And importantly, the resumption of our interim dividend, the first interim dividend since 2016 of 9p per share. Vanquis profits were a little lower at GBP 85 million due to the expected impact of the ROP attrition and the planned operational changes to adapt to further regulatory change. Moneybarn significantly increased its profits by 46% to GBP 15.5 million and the Consumer Credit Division reduced its losses by over 50% to GBP 15.1 million.

To achieve these numbers, all the divisions delivered strong new business numbers with stable delinquency, which meant as a group we made good progress towards achieving our key annualized return on assets target of 10%, which, as you know, equates to a return on equity of the order of 20% to 25%. Vanquis and Moneybarn are both delivering our target returns. And ROP for the overall group is now standing at 7.7%, which roughly equates to an 18% return on equity. We expect to see this continuing to improve as CCD moves to breakeven in 2020 and then begins to generate profit. The group, since I became CEO, has also sought to drive down costs and is committed to further reducing the cost-to-income ratio from 43% to 38% over the next 3 years. In fact, we've already achieved a run rate annual saving of GBP 90 million per annum, predominantly from CCD where we've taken out a little over 1,000 headcount.

As flagged in our quarter 1 trading statement, we've now successfully refinanced our revolving credit facility at a planned level of GBP 235 million, which reflects the lower funding requirement due to our smaller home credit business, and importantly the fact with Vanquis Bank, which is obviously the fulcrum of the group is ring-fenced and now fully funded by retail deposits. The Board, therefore, reflecting on the good operational and financial performance of the group and the confidence it has in the ongoing recovery as well as our robust capital position has recommended a reinstated interim dividend, I said, of 9p per share as we move towards a coverage ratio of at least 1.4x as the Home Credit business recovers and moves into profitability. As I said, this is the first interim dividend since 2016 and obviously builds on the final dividend we paid last year of 10p per share earlier this year.

As you can see from the slide, over the last couple of years, the regulatory change in the southern nearer prime space has been substantial. In this period, we strive to get ahead of it or to ensure that our divisions are well prepared for the impacts on our business model and customers going forward. So Vanquis Bank has adapted its business model to the FCA's enhanced affordability guidance and persistent debt measures by making changes in its interest and fee structure by raising monthly minimum payments and introducing recommended payments. It's begun reducing APRs for customers where appropriate, implementing revised affordability processes for new customers and credit line increases for existing customers. New customer origination is skewed towards lower price point mix. And we have ceased the -- for new customers the 69.9% APR. And it's putting in place solutions for customers who reach persistent debt at 36 months in 2020. This has been done against the backdrop of delivering a large customer refund program, as you know, which was successfully completed in March this year.

The outcome of all this change is that customer numbers are up, their profit is slightly down, primarily, as I said, driven by the expected reduction in ROP. We believe we're adapting the bank's business model well to the new regulatory environment, and we are already achieving our target return of 10%. And the bank -- as a result of this, the bank's model is much more sustainable and resilient.

Turning to Moneybarn, the FCA review of the motor finance is expected to be completed at the end of September. And it was -- an update was already published, as you know, in March. We've been helping the FCA with this review. And as we do not pay variable commission, we believe that we're well positioned when the FCA published their final recommendations.

Just a brief word on the investigation into Moneybarn. It is close to being concluded in near future and all within the previously announced provisions that you know about. The changes in the Home Credit implemented post 2017 meant it was well placed for the introduction for the new FCA's high-cost short-term credit review recommendations and indeed the enhanced affordability guidance measures. The introduction of voice recording means that Home Credit can evidence compliance to these new rules and new customer numbers are up since the guidance came into effect in the first quarter of this year. The new rules mean that customers must specifically ask for a new loan and must be showing the cost of the concurrent loan versus a refinancing. This change has so far meant customers are borrowing slightly lower numbers in loan sizes. Voice recording is also an important enabler in the trial for our new Provident Direct product which is now well underway. And Provident Directors are hybrid home credit product, which combines face-to-face origination with digital collections via the use of continuous payment authority. And we believe that Provident Direct will prove to be an attractive proposition for both new and existing customers. The testing of our enhanced performance management in Home Credit is going well. Having been initially piloted earlier this year in a small area and then rolled out towards the end of the first half in the region, it's now being rolled out nationally. And what we're seeing from this trial is performance improving in the areas where it's been rolled out. This initial outcome is clearly promising and it's good for both customers and home credit alike.

Satsuma has had a very good 6 months. It's delivered good growth. It's produced a breakeven result in the first half of the year. So the outcome of all these model changes in CCD is that losses are down around 50% from half 1 last year. Seasonality, as you know, plays a part in Home Credit, and we expect the division to perform better in the second half of this year. Clearly, a division making a loss is not a good thing, but we've got a clear plan to return it to profitability, while at the same time executing against the changing regulatory backdrop.

In the first half of the year, the group has continued to attract talented people, and we've strengthened our governance and senior management team. Graham Lindsay and Robert East have both joined the main Group Board. Robert also has become Chairman of Vanquis Bank. Neil Chander, who you'll chat to later in this period became Managing Director of the bank, and we recruited a new General Counsel and Company Secretary. And actually, we've combined the group function with the bank function to bring the group closer together and start netting out some efficiencies.

As our results in March this year -- sorry, at our results in March this year, you'd have heard me talk about the work we've also been doing on culture and purpose. What we do for our customers, indeed, why, why we exist. The FCA and we believe that a strong culture and purpose helps companies to deliver the right outcomes for our customers. Since then, we've rolled out the new culture to all of our colleagues in Vanquis and Moneybarn. The CCD rollout will be completed by the end of August. We would call this our blueprint. It's a significant piece of work which has resonated really well with our colleagues throughout all of the divisions and which I believe will help us to deliver a competitive advantage and the right outcomes for our customers.

Well, thank you for listening whilst I've outlined the financial and operational highlights, our achievements and the operational momentum accomplished over the last 6 months. I'll now hand over to Simon and he'll run you through the half year numbers in more detail. I'll then come back and wrap up on strategy, and then we can have some questions and answers. Thank you. Simon?

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Simon George Thomas, Provident Financial plc - CFO & Director (Leave of Absence) [2]

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Thank you, Malcolm, and good morning, everybody. The group has reported an adjusted profit before tax of GBP 74.9 million in the first half, in line with last year and in line with our internal plans. As expected, Vanquis Bank's profits have reduced due to the lower ROP income, CCD has reduced its losses and Moneybarn continues to show strong profits growth. Central costs have increased by a modest GBP 0.8 million in the first half, mainly due to unallocated interest cost taken centrally. Despite the additional interest costs, we'd expect to maintain full year central cost at a similar level to 2018, as we've previously communicated. Exceptional costs in the first half comprised GBP 23.6 million in defending NSF's unsolicited offer for the group and GBP 10 million mainly in respect to the ongoing turnaround in Home Credit. As a result, our statutory profit before tax was up 8.8% to GBP 37.6 million. If the bid defense costs were excluded, our reported profit before tax show growth of 76.9% to GBP 61.2 million.

Adjusted earnings per share has reduced by 9.9%, reflecting the impact of the 105 million shares issued as part of the rights issue in April 2018. And the group's annualized return on assets was 7.7%, up from 5.3% last year, mainly due to the reduced losses in CCD. Vanquis and Moneybarn are both delivering returns in excess of 10%.

As a result of the group's first half financial and operational performance, the Board has declared an interim dividend of 9p per share. As previously communicated, the interim dividend will be paid in late September rather than late November, as was historically the case.

Now turning to each of the businesses. Vanquis, in line with our plans, delivered first half adjusted profits reduced by 12.6% to GBP 85 million. This reduction primarily reflects the continued moderation in revenue yield resulting from reduced ROP income and the shift in mix of business towards nearer prime. It's important to note that profits in 2018 were more weighted towards the first half of the year as the second half of the year was adversely impacted by an increase in impairment as a result of increased forbearance and the introduction of higher minimum payments, which both led to an increase in payments arrangements. We'd expect profits to be more evenly spread in 2019.

The new underwriting engine introduced towards the end of 2018 has enabled Vanquis Bank to enhance the customer on-boarding process. As a result, new customer bookings of 190,000 were 3,000 higher than the first half of last year. This performance is particularly impressive given our tighter underwriting, the withdrawal of the 69.9% APR product and the implementation of revised affordability processes, which has reduced new booking volumes by approximately 25%. Customer numbers ended the first half up 2.5% at 1.79 million. It's worth that flagging that Vanquis Bank is planning to undertake a reactivation campaign on approximately 250,000 inactive customers in the second half of this year. Accounts which do not reactivate will be closed down to manage contingent risk. So you may see a modest drop in customer numbers in the second half.

In line with our guidance of the 2018 year-end results, receivables have shown modest growth of 0.4% in the first half. This reflects the impact of 2 changes in regulation, both of which Malcolm mentioned earlier. Firstly, in response to the FCA's definition of persistent debt within the credit card market study, Vanquis has increased its minimum payment due and introduced higher recommended payments. Approximately 15% of Vanquis customers currently meet the definition of being in persistent debt. And the business is actively working with these customers in an attempt to remove them from this position in advance of March 2020. This date is the first 36-month checkpoint, after which customers who still meet the definition of being in persistent debt may be suspended and placed into pay down if they can't increase their payments. Secondly, revised affordability processes introduced in November 2018, together with the impact of not extending credit to those customers meeting the definition of persistent debt has resulted in a reduction in the level of further credit extended to existing customers under the credit line increase program. Credit line increases in the first half were approximately 50% lower than in the first half of last year. We'd expect to see continued modest receivables growth in the second half of 2019.

Revenue has shown a year-on-year reduction of 11.2% in the first half compared with a 3.1% reduction in average receivables. The revenue yield has fallen from 45% to 41.9% due to 2 main factors. Firstly, a further decline in the penetration of ROP within the customer base following the voluntary suspension of sales in April 2016. This has resulted in a year-on-year reduction in ROP income of approximately GBP 10 million. Secondly, there has been some further moderation in the interest yield from a group of smaller factors, including the continued increase in the mix of nearer prime customers, downwards repricing of higher APR accounts where the customer has improved their credit standing and balance reductions applied to accounts as part of the ROP refund program which were typically at the higher APRs.

Impairment has shown a 17.6% reduction in the first half, with annualized impairment rates improving from 15.7% to 15.1% of average receivables. Delinquency trends showed a favorable movement compared to the first half of last year, benefiting from the progressive tightening of underwriting over the last 2 years. In addition, the rate of increase in payments arrangements experienced in the second half of 2018 due to the enhanced forbearance and increase in minimum due payments has moderated through the first half of 2019.

Vanquis Bank's annualized risk-adjusted margin has reduced from 29.3% to 26.8%. The 2.5% reduction reflects the 3.1% reduction in the revenue yield, partly offset by the 0.6% reduction in the impairment rate, both of which I've just explained.

Costs have reduced by just over 2% in the first half. Despite stronger new account bookings, Vanquis has been able to access operational leverage, reflecting tight cost control. Cost efficiency remains a key focus for Vanquis in the light of the reduction in the revenue yield. Interest costs benefited from a reduction in Vanquis Bank's blended funding rate, which after taking account of the cost of holding a liquid assets buffer reduced from 3.5% in the first half of 2018 to 3.0% in this half year. As you're aware, Vanquis fully repaid its intercompany loan to PFG in November 2018 and importantly is now fully funded with retail deposits.

Vanquis Bank's annualized return on assets has reduced from 11.2% to 10.4%, which reflects the moderation in the risk-adjusted margin, partly offset by the cost benefits that I've just talked you through.

Now moving on to Moneybarn. Moneybarn has delivered a strong 46% increase in adjusted profit before tax to GBP 15.5 million in the first half. Customer numbers of 70,000 at the end of June show year-on-year growth of 23%. Notwithstanding the tighter underwriting standards implemented over the last 2 years, new business volumes during the first half have been at record levels and showed year-on-year growth of 34%. Against a tougher comparative, we'd expect a lower level of year-on-year growth in the second half of the year. The growth in customers corresponded to average receivables growth of 21% and revenue growth of 26%. The revenue yield has increased from 34.5% to 35.6%, reflecting a lower mix of near prime business, mainly due to increased competition in that segment of the market.

Following the progressive tightening of underwriting through 2017 and 2018, default rates and arrears levels have now been stable for 12 months compared with the modestly deteriorating profile prior to that. As a result, the annualized impairment rate has reduced from 14.1% to 12.3%. The annualized risk-adjusted margin has, therefore, strengthened by nearly 300 basis points to 23.3% due to the combined improvements in the revenue yield and the impairment rate. Cost growth was 26% compared with average receivables growth of 21%. Headcount increases in the first half of 2019 have been relatively modest. So this increase is mainly due to the flow-through of the investment made last year in the executive team and the customer service and collections teams.

Interest costs have shown growth of 40%. As I mentioned at the year-end result, this reflects the increased cost of funding for the nonbank segment of the group, now that Vanquis is fully funded through retail deposits. Overall, Moneybarn has delivered an annualized return on assets of 11.5%, up from 9.5% last year as a result of the strengthening of the annualized risk-adjusted margin.

So turning to CCD. CCD has reported an adjusted loss before tax of GBP 15.1 million in the first half, some 35% lower than the GBP 23.2 million of losses in the first half of last year as the business continues its turnaround. CCD customer numbers ended the first half at 531,000, 31% lower than June 2018. It is worth remembering, however, that customer numbers last year included approximately 200,000 Home Credit customers who ceased paying in the second half of 2017 following the change in the operating model and who have now been removed from the customer numbers. Home Credit customer numbers in the first -- ended the first half at 403,000, reducing from 440,000 at December 2018 and a restated 482,000 at June '18. Despite year-on-year U.K. Home Credit new customer growth of 15%, the number of new customers recruited was not at a level to stabilize the customer base during the seasonally quieter first half. However, we'd expect new customer recruitment to continue its upwards trajectory during the busier second half of the year.

Satsuma customer numbers have shown strong year-on-year growth of 30% to 128,000, despite further refinements to underwriting and Satsuma has delivered a breakeven result in the first half of the year. Home Credit receivables have reduced by 23% to GBP 203 million, which is a higher rate of reduction than the 16% reduction in customer numbers. Average issue values were approximately 14% lower in the first half of 2019 following the introduction of the new Home Credit guidance, Malcolm mentioned earlier. This has been caused by a modest shift in the mix of customers choosing concurrent loans, which are typically of a lower amount and duration rather than refinancing their existing loan which is typically of a larger value and a longer duration.

Satsuma's receivables showed 37% year-on-year growth to GBP 43 million. This reflects a combination of the 30% increase in customer numbers, together with the continued development of further lending to good quality customers. The annualized revenue yield of 117% is little changed, with no real change to product pricing in either Home Credit or Satsuma.

Impairment, however, has fallen by nearly 27% in the first half. The annualized impairment rate of 38% is significantly lower than the rate of 78.6% last year. This reflects the improvements in collections performance despite the higher new customer volumes and as a result of improved field efficiency and the focus on collections. The collections performance of credit originated since the fourth quarter of 2017 remains broadly in line with the levels achieved prior to the change of operating model in July '17. Credits issued prior to July '17 continues to perform much worse than historic levels. Importantly, however, these balances now represent less than GBP 11 million of the receivables.

CCD's annualized risk-adjusted margin has shown a substantial improvement from 42.1% to 79.3% due to the significant improvements in impairment which I've just explained. This level of margin is now only marginally below the levels of just over 80% historically enjoyed. As previously reported, CCD undertook a voluntary redundancy program in central support functions, which was completed in March 2019 and has reduced central headcount by over 200. Together with actions already taken and the ongoing tight control of costs, this has resulted in an 11% reduction in the cost base. There has now been a reduction in roles within CCD of 1,000 over the last 18 months and cost efficiency remains a key priority for the business going forward.

Interest costs have fallen by 36%, a greater reduction than the average fall in receivables. CCD's funding rate has been reduced to reflect a more balanced allocation of funding costs between CCD and Moneybarn now that Vanquis Bank is fully funded with retail deposits.

Before I conclude on CCD, it's worth taking stock of the turnaround and our expectations for the future. The chart on the left clearly highlights the huge loss incurred in the second half of 2017 and the reduction in losses in each half year since. As I've already discussed, CCD's results in the first half of 2019 have been impacted by the new home credit guidance in the high cost credit review. This has reduced average issue values and resulted in our receivables book being lower than originally envisaged. As Malcolm discussed earlier, the business has implemented a number of actions to return the business to profitability. These include: the ongoing cost reduction program, which has already delivered a reduction in headcount of 1,000 over the last 18 months; the agreement with the FCA to introduce enhanced performance management and variable pay. This has now been successfully tested and will be rolled out in the second half of the year; and finally, the recent trial of Provident Direct, which will be tested further in the second half of the year. As a result of these actions, we'd expect the second half of 2019 to show a further reduction in losses from the first half. If you followed the group for some time, you'll be aware that the first half is always seasonally quieter than the second half. So you should, therefore, also expect a small loss in the first half of 2020. However, we then expect the momentum from our actions to deliver a profit in the second half of 2020.

Overall, we therefore expect 2020 to be breakeven for the year as a whole.

Now turning to capital. The group's regulatory capital requirement to maintain a fully loaded CET1 ratio of 25.5% is the main determinant of the group's capital structure. The group's regulatory capital at June was GBP 638 million, which represents a CET1 ratio of 28.2% and provides regulatory capital headroom of around GBP 60 million. This is consistent with the Board's current risk appetite of maintaining headroom in excess of GBP 50 million. The reduction in headroom from GBP 100 million at the end of 2018 reflects the impact of 3 factors, which have more than offset the retention of profits. Firstly, the anticipated second year transitional impact of IFRS 9 was GBP 18 million. You might remember that in quantifying regulatory capital the impact of IFRS 9 is being recognized over a 5-year period which started in 2018. The adjustment you see in the table on the left of GBP 156 million is an add back to the group's net assets in order to recognize both the 5% impact of IFRS 9 taken in 2018 which was GBP 9 million and the 10% impact amounting to GBP 18 million taken in 2019. The second influence on the reduction in headroom is the impact from the implementation of IFRS 16 leases from the 1st of January 2019. This has reduced regulatory capital headroom by GBP 26 million, despite no increase in the risk profile of the group.

And finally, exceptional costs of some GBP 34 million have been incurred in the first half of the year, GBP 24 million of which were not budgeted. The group's next regular capital review with the PRA is scheduled for the first quarter of 2020. We're actively exploring a number of options to improve capital efficiency. These include potential reductions in capital, requirements for pensions, IFRS 9 and IFRS 16. We'll also continue to monitor our risk appetite in respect of the appropriate level of regulatory capital headroom in light of the group's ongoing recovery.

Now moving on to funding and liquidity. Retail deposits of nearly GBP 1.5 billion fund -- fully fund Vanquis Bank. The inflow of deposits has been deliberately moderated in the first half, given the modest level of Vanquis Bank receivables growth. We successfully refinanced the revolving syndicated bank facility on the 24th of July 2019 with 4 leading U.K. banks. The facility has reduced from GBP 450 million to GBP 235 million, mainly due to reduced requirements as Vanquis Bank is now fully funded with retail deposits and the Home Credit business is significantly smaller than when the previous facility was established. The group's other sources of funds comprise senior and retail bonds and private placements.

In early 2019, we repaid GBP 15 million of the M&G term loan, which is the only movement in these sources of funds since the 2018 year-end. At the end of June, after adjusting for the new revolving bank facility, the group had headroom on committed facilities of GBP 104 million. Together with the ongoing retail deposits program, this provides sufficient capacity to fund forecast growth and contractual maturities until September 2020. The group is actively exploring a number of additional funding options. These include discussing with the PRA, the potential to fund the group's other businesses with retail deposits; funding Moneybarn through securitization; and issuing further bonds private placements or a Tier 2 instrument.

With that, I'll now hand you back to Malcolm.

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Malcolm John Le May, Provident Financial plc - CEO & Director [3]

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Thank you, Simon. Just a few comments on vision and outlook for the future. I think in May, at our quarter 1 trading statement, we set out what we call our vision for the future for Provident Financial and the aim behind this was really to deliver good customer outcomes, combined with sustainable, attractive returns to shareholders. To achieve this, we said we would firstly deliver a broader product range. Secondly, we would enhance our distribution capabilities. Thirdly, establish a single view of the customer; I think it's got to become increasingly important in our marketplace. And fourthly, grow responsibly and, importantly, deliver sustainable shareholder returns. Now there's a lot of detail in today's announcement, updating the market on the progress we've made so far. So I won't go through each of the strategic initiatives individually. But suffice to say, I think we've made very good progress since May, which we will aim to build on through the rest of this year. We are bringing together the Satsuma and Vanquis loan capabilities in order to provide a joint up online loan offering for the group. The Vanquis Bank app now has well over 1 million active users and is now being expanded with Moneybarn products already being placed on it and other group products to follow.

In Home Credit, as Simon and I both highlighted earlier, the trial of Provident Direct has now started. We believe this will be very attractive to both new and existing customers. And indeed, the enhanced performance management framework for Home Credit has been successfully trialed and is now being rolled out nationally. This is a key initiative for returning CCD to profitability in the second half of 2020. As flagged earlier, the group has continued to focus on driving down costs and has achieved, as I said, an annualized savings of GBP 90 million per year since I became CEO in 2018. And we're committed to carry on reducing this. And the cost income ratio will reduce from 43% to 38% over the next 3 years. At the same time, we will be obviously accommodating investment for growth in that number. As Simon has just outlined, on funding, we have successfully renewed the revolving credit facility and have begun the process of assessing the use of retail deposits to fund Moneybarn and started the preparations to engage with the PRA on the regular review of the group's capital requirements, which will take place in spring 2020.

Provident Financial reinstated its interim dividend at 9p per share. I think this is an important step for the group and our shareholders who we recognize of being very patient since 2016. The group has evolved significantly since that time and the regulatory environment now is very different and the business models have changed to reflect that. Vanquis Bank is the biggest and the most important part of the group and will be the principal engine of growth going forward.

To that end, it is important that our financial and shareholder return metrics reflect what the group has become which in reality is a bank. And therefore, over the medium term, we'll aim to deliver return on assets of 10% for the group as a whole and deliver return on -- targeted return on equity of between 20% and 25%. We'll target sustainable receivables growth throughout the cycle of between 5% and 10% per annum. And as I've said, a target cost-to-income ratio of approximately 38%, while maintaining a dividend cover of 1.4x in due course. These metrics are aligned with what we set out at the time of the rights issue, and we're making very good progress I think towards achieving them, as indeed, today's numbers showing.

2018 was about recovery and stability. I think 2019 is about delivering momentum and the group's turnaround. Here, we are making good progress, delivering on the group's long-term strategic goals despite the distraction of the hostile bid.

That said, we appreciate that the short-term imperative of returning -- we appreciate the short-term imperative of returning CCD to profitability as soon as possible. And we're on track, as I said, of achieving profitability in the second half of 2020 as Simon has shown on the graph he showed you earlier. And I think when this is accomplished, it will have a material impact on the perception of the group's valuation. I think it would also be remissive of me not to flag that we've achieved all this against a background of heightened political and economic uncertainty. More importantly though, this fog of uncertainty does not appear to be clearing. And as such, we've been very cautious in our underwriting to ensure that we are best placed as we can be for whatever comes in the future. The Board has also confirmed that the group is trading in line with its internal plans today. And indeed, on the 7th of November, we're going to have a -- team leadership will have a Capital Markets Day, which obviously you'll all be invited to in due course.

Thank you for listening. Before we move to Q&A, I'll just sum up by saying a lot done. Good progress I think is being made across the group, but also a lot more wood still to chop. And I believe in doing that, we're going to make Provident Financial the company that its shareholders, its customers, the regulators and colleagues know it really can be. And again, just before going to Q&A you may have seen the RNS today that we've announced that Simon is going to be retiring at next year's results, so 9 months hence. It's very sad for us, but we wish him very well. He and I'll work over the next 9 months to ensure there's an orderly hand over to his successor.

And I think with that, I'll open the floor to questions.

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Questions and Answers

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Shailesh Mansukhlal Raikundlia, Panmure Gordon (UK) Limited, Research Division - Analyst [1]

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It's Shailesh Raikundlia from Panmure Gordon. Just 2 questions, but first one on Vanquis Bank. I mean, there's a lot of moving parts to Vanquis Bank at this moment in time. Obviously, revenues as well as impairments. And you went through a lot of detail in there, but I was just wondering whether sort of briefly you could talk about for the second half of this year sort of where the revenue yield is going, sort of receivables growth as well. Obviously, it's pretty flat at this moment in time and the impairment rate, obviously, the -- it has come down quite a bit, but is that expected to continue as well? And secondly, just on the CCD business. Briefly on the lending that you did prior to 2017, you do talk about the fact that impairments have remained high. I was just wondering whether you're now provisioned for all that or expecting some further increases coming through at some stage this year.

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Malcolm John Le May, Provident Financial plc - CEO & Director [2]

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Well, I'll take the last part of the question first and I'll let Simon answer the first part about Vanquis. CCD is fully provisioned. It's now a very small part of the book. I mean I think of the lending prior to 2017 is only GBP 11 million left on the book, which is less than 5% of the book now.

And you want to talk about Vanquis.

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Simon George Thomas, Provident Financial plc - CFO & Director (Leave of Absence) [3]

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Yes. In terms of the receivable growth that we expect to see going forward, I think we'd expect it to be relatively flat for the remainder of this year into next year. And obviously, that's part of the regulatory changes that have been taking place. So it will be generally muted, I would say, for the next 18 months. After that, though, I think we would then expect to see it start to pick up again. And you'll remember that we were talking about the longer term of sort of 5% to 10% revenue growth receivables growth going forward. On impairment rates, clearly we benefited in this half -- this half compared to the second half of last year. If anything, actually I'd expect actually the impairment rate to be slightly better in the second half of this year because you effectively lose last second half year, which if you remember we had those payment arrangements spike up in that period of time. So if anything, those 2 will go down.

In terms of the overall risk-adjusted margin though, I think you can see obviously we have got a situation whereby obviously the revenues are muted, impairments have improved, but I think we'd expect to see the returns there to be more around the mid-20s as an ongoing expectation. But we may get there through a different methodology. Clearly, cost control is another area we're looking at, and there are certain things that we need to do from a cost perspective. But we believe that the returns are still going to be sustainable there going in the future.

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Malcolm John Le May, Provident Financial plc - CEO & Director [4]

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The one in the front row here.

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Gary Greenwood, Shore Capital Group Ltd., Research Division - Research Analyst [5]

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It's Gary Greenwood from Shore Capital. I was just interested in the financing plans that you'd got with regards to expanding use of deposits. And I was wondering whether you saw any tax implications from that. I think at the moment the bank levy only applies to the Vanquis Bank. So if you started to fund the parts of the business, whether those then be captured by bank levy as well?

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Simon George Thomas, Provident Financial plc - CFO & Director (Leave of Absence) [6]

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Yes. I think -- Gary, I think it is early days on this. We have opened up the initial discussions with the PRA. And it is very much initial discussions. But logically, it's something we must explore because we have a substantial advantage by the fact that obviously Vanquis Bank can raise funding at a substantially lower rate. I'm not saying it's going to happen, but we've opened up those negotiations. You're right, you need to take account of the tax implications associated with that. But actually, with the benefits in terms of the actual yield changes, it may well still be worth looking out. The other thing I'd say though is, of course, I did mention as well that we -- from a Moneybarn perspective, we might be looking there to some form of securitization. And again, that's something that over the next sort of 12, 18 months, we'll be looking at further. I hope we'll be able to give you a bit more detail on that in the Capital Markets Day in November.

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Malcolm John Le May, Provident Financial plc - CEO & Director [7]

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One -- two more there.

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John Cronin, Goodbody Stockbrokers, Research Division - Financials Analyst [8]

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It's John Cronin from Goodbody. My first one is on, look a lot has been said about your travails in recent years, not only with respect to ROP products of MoneyBarn but also with respect to the measures that have been instituted to improve the CCD business. And how likely do you think it is that the regulator will look at some of those, I suppose, for one of the better description best practice measures you've brought in and try to apply them across the wider industry at Home Credits? Then my second question is, looking again at your CET-1 capital ratio requirement and stripping out the CCP and CCyB, it's pretty elevated at 21.5%. What -- do you think there is scope for that to come down on a 12-month view, particularly following your discussions with the regulator through the next ICAAP? And how does that make you think about wider strategic optionality from a group perspective noting previously your comments around some of the difficulties there would be into merging Moneybarn, for example? So anything you can say around how you might think in response to that would be helpful. And then, look, finally one further. And on Vanquis Bank -- sorry, on CCD in terms of getting back to that profitability in the second half of next year, what kind of level of average receivables growth do we need to be penciling in from here to get to that number?

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Malcolm John Le May, Provident Financial plc - CEO & Director [9]

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Okay. We'll try and run through those and if I miss any of them between you can surely raise again. On the first one, on a level playing field. I think clearly it's something that was -- attention was drawn to during the course of the bid. We believe we were the most recently regulated in terms of being authorized by the FCA and we believe they've authorized us the standard that they see should be adopted across the industry. We're the biggest and I think their philosophy must be that people should rise to our standard. I can't dictate what the FCA may or may not say to others, but I think the line of travel will be more in terms of people coming to our standards than us -- thus being about to move away from that thing has made quite clear during the course of the bid. Certainly, speaking to some people in government, they recognize the need across the industry to have a level playing field if we go to adopt a common standard to servicing the underserved. Otherwise, it breeds people doing bad practice basically. So I think that will definitely be the line of travel.

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Simon George Thomas, Provident Financial plc - CFO & Director (Leave of Absence) [10]

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I'll get the CET1.

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Malcolm John Le May, Provident Financial plc - CEO & Director [11]

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Yes.

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Simon George Thomas, Provident Financial plc - CFO & Director (Leave of Absence) [12]

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John, on the CET1 ratio, I mean let's face it, I think we recognized that 25.5% is a high TCR, it really is. And I think that, clearly, part of that was reflective of the events of 2017. So from operational risk and a conduct risk perspective, things were pushed up in part of that process. But from our perspective, we have discussions that are coming up as part of our normal regular engagement with the PRA through the C-SREP and that's going to happen in the first quarter of 2020. And I think there are a number of areas that we want to look at, and I think we did talk about volatilities last time. So the IFRS 16 one, the fact there's been no change to the balance sheet yet we get hit for that GBP 26 million. We're certainly going to be talking about that. IFRS 9 as well. But also things like the pension fund. The pension fund has an effect of something. Even though it's in surplus, it has an effect of a hit of about GBP 20-odd million. That bearing in mind was done in 2015, the pension fund since then has been de-risked from an investment perspective. So I would hope that a discussion could take place with the PRA to say hang on a minute, isn't that a little bit heavy.

However, quite rightly, the PRA are cautious people and getting capital back from the PRA is always a difficult thing to do, but we are going to engage within part of the C-SREP. And obviously, that will be in the first quarter of next year.

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Malcolm John Le May, Provident Financial plc - CEO & Director [13]

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I think -- just to add to that. When we had to do the rights issue, it was the last time we submitted an ICAAP, the PRA requested GBP 100 million of add-ons for operational conductors. They're not about to say fine, you've turned the corner. We'll take all of that away. But I think when they do recognize that they did put that add on. And actually, at the time of submitting that ICAAP, we were aware of the pension point that Simon just mentioned, and indeed we told the PRA. But I'm afraid, it was just -- they didn't have enough time to go through it, so it's the first time they've addressed it. So I would hope for some relief there.

Yes. And I think also, I mean, as you know, our capital is a bit like an accordion. At the beginning of each year, as we know over the next few years, we're going to have a squeeze from the IFRS 9 coming off, IFRS 16 was a one-off, but then the profitabilities won't move it back on. I think the more that when we go through this next spring with the regulator they will see that. But as Simon says, they do tend to move quite slowly. So I'm not expecting anything instantaneously. So that was 3 of the questions, I think. I've forgotten the next...

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Simon George Thomas, Provident Financial plc - CFO & Director (Leave of Absence) [14]

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The final one was on CCD, I think, John was...

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Malcolm John Le May, Provident Financial plc - CEO & Director [15]

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Yes, receivables and CCD.

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Simon George Thomas, Provident Financial plc - CFO & Director (Leave of Absence) [16]

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Was that on receivables? Yes. I mean, I'm not going to give you an exact figure, John, I won't do that, but as you can imagine. But I think one thing, clearly, we're all focused on this point, we've got to get this company to a breakeven position. And we've said, certainly in this division this year, we've got probably 2 key strategic themes. The first one is growing the receivables and stopping that reduction that we're seeing coming through and leveling it out and the removal of costs. The removal of costs, you've already seen we've talked about the 1,000 redundancies that have been put through, and I think it's fair to say Chris and the team have made real strides in terms of addressing the cost base. That will continue in the next 12 to 18 months through different mechanisms. The other thing though on the receivables side though and the performance of the CAM side is the fact that this new FCA, the enhanced performance management that we've got certainly gives us a far, far better tool to manage the business going forward.

It's been trialed. It was trialed in an office to start off with and then went to an area and has now moved to a region. Now anecdotally, that region has actually become outperforming since that was put in place. So we're going to be rolling that out in the remaining 6 months of this year and that should then give us a better push in terms of overall performance generically, whether it be collections and whether it would be potentially sales side.

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Christopher Gillespie, Provident Financial plc - MD of Consumer Credit Division [17]

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I think he's right. The region we selected was the worst-performing region originally and then we've basically and I'll come to the top of the table.

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Simon George Thomas, Provident Financial plc - CFO & Director (Leave of Absence) [18]

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And then the third thing I'd say is Provident Direct. Our Provident Direct has only been going 20-odd days, Chris, I think, something like that, one branch so far. Initial results, green shoots. Yes, it's been a good take-up by the CAMs. The CAMs seem to like it. They understand the difference it will make. And we've had the first payment room come back with 100% compliance. In other words, people have paid properly through that process. So it's only green shoots. But again, that, I think, is positive from an anecdotal perspective.

And fundamentally, if you think about it, if you're in a position, whereby, you can go to a client and go through the normal introduction process for a loan, but then you can get yourself into a situation whereby they pay through a CPA, it means that you are far more efficient from a CAM process in focusing on those clients that you need to focus on and the ones that are paying regularly, you can frankly go and see once a month or whatever, but also it allows you to generate new business more effectively as well. So it makes the process far, far more efficient from a CAM perspective.

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Malcolm John Le May, Provident Financial plc - CEO & Director [19]

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And I really do believe it's import part of the future because I think from our perspective, it makes the cost of collection fundamentally cheaper. I mean, if you take our [Venice] area, for example, if you've got to go out as the CAM does there, drive miles and miles each week to get the physical cash collection, that's just not efficient. Actually, I think as the demographic of our Home Collection customers evolves, more and more people have got the digital payment capability and they don't want to have necessarily waiting every week to pay the cash. And then on top of that, there's obviously from an obvious health and safety perspective, it is handling that much cash. So I think it's a very important step forward. Mic coming. You got to go first on -- sorry, you go next. Okay.

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Ian White, Autonomous Research LLP - Research Analyst [20]

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Ian White from Autonomous. Two questions for my side, please. First of all, on the FCA's persistent debt measures. You've previously given us a bit of help in terms of the proportion of the customer base that currently meets the FCA's definition of persistent debt. Where do you see that ending up by the time you get to the 36-month intervention stage, please? And what are the implications if a customer is placed into pay down? Are we talking there about a restructuring of the debt into a term loan that would bear interest or something slightly more generous like sort of outright forbearance on interest expense, for example? If you give us some help with that, please, that would be appreciated. And then just secondly, in turn on Vanquis, how are you thinking at the moment about both the timing of the reintroduction and the size of the contribution from ROP sales going forward, please?

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Malcolm John Le May, Provident Financial plc - CEO & Director [21]

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Okay. Turning up to the first point, I think and Neil jump in if I -- and Simon jump in I guess. Roughly, 15% of our customer base we anticipate if we have taken no action at all would be susceptible to be persistent debt. By doing the increased minimum pay, we've reduced that down to roughly 9%. And assuming, I think it's 50% of the people we suggest to a recommended pay, we can get that down to 6% or 7%, which wouldn't be far away from our normal sort of level of delinquency with that if you look across the whole customer base. And in terms of the ROP too, and I'll let the others go into the more detail in terms of the precise forbearance treatment of people in persistent debt. We are in discussions with the FCA. I think we've always said it's never going to be a complete replacement of the ROP that we had. It will be smaller. Those discussions are ongoing. I don't think they're going to be concluded anytime soon. So I don't think what we're factoring into our thinking, it's going to be contributed to the group profits going forward to a material amount in the future.

Do you want to add a little bit about forbearance, terms on persistent debt?

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Neil Chandler, Provident Financial plc - MD of Vanquis Bank [22]

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It's Neil Chandler. So we'll get down to something between 5% to 10% of the customer base by May next year in terms of people still with NPD. And we're still -- we're trialing a whole series of contacts with customers right now. As an example, we've just done a trial to a few thousand customers to see how we can best help those people manage it. We are seeing customers respond to those messages to increase the level they're paying to get themselves a PD. So I think there are positive shoots there. I think from a forbearance perspective or treatment perspective for the balances, if they do -- if they are still NPD or PD 36, in essence, we're designing a number of options to work out what is the right answer for the customer. Undoubtedly, there will be a significant reduction in yield on those balances as a consequence of that and that's dictated by the CCMS.

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Malcolm John Le May, Provident Financial plc - CEO & Director [23]

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Thanks, Neil. Port, I think you had a -- you have a question?

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Portia Anjuli Patel, Canaccord Genuity Corp., Research Division - Analyst [24]

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Portia Patel from Cannacord. I've got 3, please. One on Vanquis. With regard to the reactivation program you mentioned for H2 and in the case of no response, those accounts will be shut down. What impact, if any, would that have on the impairment rate? And turning to CCD, I was wondering, firstly, with regard to the regulatory changes and the impact on the receivables, but that's hard. Has that changed your outlook for what level of profitability CCD might reach on a medium-term basis? And secondly, if you could explain what the incentives for CEMs are actually linked to, that would be helpful.

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Malcolm John Le May, Provident Financial plc - CEO & Director [25]

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Okay. In terms of reactivation on the CEB, I don't think we see a material change in impairment on the whole...

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Simon George Thomas, Provident Financial plc - CFO & Director (Leave of Absence) [26]

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No, I mean, clearly, these are 250,000 customers who've actually got a 0 balance at the moment. And from managing the contingent risk on this Portia, going through and actually talking to these people to say, do you really need this card going forward, I think it's obviously a good thing for managing the balance sheet. IFRS 9 actually if we remove those people, we're slightly beneficial because, of course, you're removing that potential risk that you've got on your balance sheet. But we would expect, therefore, the customer numbers to come up modestly after that process has been completed. What's the next one?

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Malcolm John Le May, Provident Financial plc - CEO & Director [27]

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The CCD, in terms of our outlook is the regulatory change going to materially change our perception on the profitability of the business. The answer is no. I mean, what we are assuming for the profitability business in the future is what we factored into our plans and that reflects the regulatory changes we're making. The size of the business, as we always said, will be smaller than it was historically. I'm sorry, can you remind me your third question, again?

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Portia Anjuli Patel, Canaccord Genuity Corp., Research Division - Analyst [28]

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It was just about the variable pay for the agents within Home Credit, what those incentives were actually linked to. But just to actually follow-up on your point about the size of CCD, I seem to remember in the past you're talking about GBP 30 million to GBP 40 million being kind of ballpark figure for CCD profitability? Is that still your expectation?

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Malcolm John Le May, Provident Financial plc - CEO & Director [29]

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In the future when it recovered, that's the sort of size we're talking about, yes. Chris, do you want to talk about how the scorecard's linked to the variable pay, which I think would be quite interesting.

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Christopher Gillespie, Provident Financial plc - MD of Consumer Credit Division [30]

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It's Chris Gillespie. So the scorecard is a suite of measures, some of which are qualitative and some of which are quantitative. So it's a mixture of the sort of traditional targets that people would have had plus a range of sort of measures based on outcomes and how they do the job rather than just what's been delivered. What we've found, and it's worth remembering that we've been operating the business since the end of 2017 without targets or variable pay linked to performance in the business. And this is just a -- if you like a step back in that direction, a significant proportion of our people were not here under the previous model. So we're going to have to learn our way into managing the business against targets and with incentives. What we found is the fact that someone now is clearer as to what's expected of them. That leads to better quality conversations about performance and about how -- coaching for how well the job is being done, but it's a suite of measures on a balanced scorecard. It's not just 2 or 3 traditional targets.

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Malcolm John Le May, Provident Financial plc - CEO & Director [31]

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Okay. Any other questions?

Well, thank you very much for coming along listening. As I said, I think we are making good progress. We're around for chat now. If anyone has got any other questions and indeed obviously you can always pick the phone up to us, and we'll be seeing a number of you in the next few days. And thank you very much for listening. Thanks.