Morning, everyone, and thank you for taking the time to join us for our 2022 interim results presentation. I'll let you read this slide to explain the basis of reporting today. Reference is made to statutory results, which reflects both continuing or core and discontinued or non-core operations, as reported in our interim report for the six months ending 30th June. When we presented the group's 2021 annual results at the end of March, we acknowledged the changing external environment, including the Russian invasion of Ukraine. Inflationary pressures were mounting for households and businesses, and that has continued to build in recent months. The rate of inflation has continued to increase to levels not seen for several decades, and the Monetary Policy Committee has increased base rates from 0.1% at the start of the year to 1.25% currently.
Of course, the MPC will announce their latest rate decision at noon today, and we expect a further increase now and further increases before the end of the year. We are confident, though, that the group's track record and reputation for prudence and our agility will stand us in good stead during this rising rate environment and extended period of uncertainty. With that context, let me turn to some of the key headlines from our results and talk about the performance of our core specialist lending businesses before I hand over to Rachel to cover off the group's financial performance in more detail. The usual performance metrics for each of our medium-term targets is presented on the right-hand side of the slide, and we'll talk to many of the underlying drivers of these in the presentation.
We've continued to grow and build positive momentum across our core businesses in the first half of the year. At the Capital Markets Day in November, we articulated the opportunities for growth in each of our specialist lending businesses. Plans to capture those opportunities have been executed effectively since then. Core net lending balances increased by 12.2% in the six months since December, and core new business lending increased by 86% on the first half of 2021. We saw strong operational performances across each of our businesses, and core operating income increased by 14.1% compared to the first half of last year. We spoke previously about our confidence in our plans to become more efficient.
Our strong top-line income growth and our cost management program supported an improvement in the cost income ratio in the first half to 57% for the core business. As you know, in 2021, the group benefited from a release in impairments. Having constrained growth and tightened lending criteria through the pandemic, we've seen impairments start to normalize now, and they have returned to business as usual activities with growth accelerating. The group's cost of risk in the first half was 1.3%. With increased impairments, we saw lower statutory profits before tax in the first half, as expected, compared to the same period last year. Statutory profit before tax was GBP 24.7 million, and core business profit before tax was GBP 17.1 million. Core operating profit before impairments increased by 21.6% to GBP 34.3 million.
In March, we announced the disposal of the Debt Managers (Services) loan portfolio and our planned exit from the debt purchase market. We completed that transaction at the end of May and have recognized a gain on sale of GBP 8.1 million in the first half of the year. The phased migration of customer accounts to the purchaser is progressing well, and we're finalizing plans for a full market exit. There will be costs incurred during the second half as we complete those activities. Our acquisition of AppToPay Limited, the digital buy now, pay later technology company, also completed in May, and the team are working now to integrate the business and technology into V12 Retail Finance's infrastructure and to prepare for the launch of a regulated digital buy now, pay later proposition that provides the necessary protections to customers.
In summary, we've continued to accelerate our lending growth. We're growing income again. We're now a more efficient and focused group, and we delivered a significant increase in core operating income pre-impairments. You'll recall that the board introduced a new dividend policy last year to return 25% of full-year earnings per share to holders. The board has proposed an interim dividend of GBP 0.16. The team has delivered a positive performance in the first half. We remain confident that our strategy, diversification, and strong balance sheet position us to continue to capture further sustainable growth and deliver our medium-term targets. Let me turn now to show you some of the breakdown of new lending in the period.
As mentioned, we delivered an 86% increase in total new lending compared to the first half last year, and we are consistently outperforming new business lending compared to pre-pandemic levels of 2019. All core businesses delivered growth, and we continue to adopt a disciplined risk-based approach to our lending. We took action during the first half to tighten our credit scoring criteria in our consumer businesses, given the expected impact of rising prices on customers' net disposable incomes. The green bars represent new lending in our consumer finance businesses, which increased by 72%. In Retail Finance, new business lending was up by 52% as the team continued to win new business and extend the proportion of business we underwrite for existing retailers.
In Vehicle Finance, our existing near prime business and the products launched for prime customers on a new platform and our stock funding product continued to grow as we extended our distribution reach. New lending was up 166%. The purple bars represent new lending in business finance. This was 119% higher than the same period last year. Real Estate Finance's lending grew by 87%, and Commercial Finance's new lending increased by 222%. Let's take a walk through of the key information from each of these businesses.
In retail finance, spot lending balances and average lending balances, shown in the top part of the table, grew by 20% and 18% respectively in the six months since the end of December 2021. The business continued to increase the volume of lower risk interest-free lending, with success in growing the help we provide to retail partners in the furniture and jewelry sectors. The cost of risk returned to a more normal 1.4% in retail finance, and net revenue margin reduced to 7.6% due to the increased mix of lower risk, lower margin business. Operating income increased by 10% to just under GBP 36 million. We continue to focus on digitizing more of our processes, and over 75% of all interactions are now processed by customers themselves on our self-service portal without the need to contact us.
Finally, as mentioned, the acquisition of AppToPay will allow us to provide an app-based regulated buy now, pay later proposition. We've spoken previously about our plans to increase the scale of our Vehicle Finance business, and in recent times have invested in new technology and the capability of our sales team. This has allowed us to expand our product range, the customer needs we can serve, and extend our distribution. As a result, spot lending balances and average lending balances increased by 26% and 20% respectively compared to the end of December. Having taken the decision to reduce lending in this business during the pandemic, we're now growing strongly again.
Our market share in the consumer second hand point of sale motor finance market increased from 0.6% to 1.1% in the 5 months to May 2022 compared to that same period last year. The cost of risk in Vehicle Finance is at an elevated level due to the IFRS 9 models being overly sensitive to short-term movements in defaults. Our actual arrears remain below the pre-pandemic levels of 2019, and Rachel will walk through the breakdown of the impairment charges and movements and provisions shortly. With a growing proportion of lending to lower risk prime customers, we saw a reduction in our net revenue margin as we expected. This remained at a healthy 13%, and Vehicle Finance's operating income grew by 15% over the first half of 2021.
Turning to Real Estate Finance, spot lending balances increased by 3% and average lending by 7% in the first six months. The team had a strong pipeline of business coming into the start of the year, and as a result, new business lending increased to GBP 242 million. We've seen development activity in the market cool as inflationary pressures and supply side constraints impact. New business levels in the second half will be lower as a result, and of course, we'll also be lapping the strong volumes generated by the success of our Green Home Loan proposition in the second half of last year. From a credit perspective, this is a really good performing group.
We've a relatively low risk appetite, and that's reflected in the cost of risk, which remained at a low level and benefited from an impairment credit due to improved stage two and stage three cases, and the continued effectiveness of the team's portfolio management skills. The mix of investment loans increased from 75% to 88% compared to last year, reflecting the maturity of a number of development loans. Although the mix has remained relatively stable compared to the end of December 2021. That reduced mix does lead to an impact on the net revenue margin as the higher yielding development loans are not at the same level, and the net revenue margin reduced by 30 basis points to 2.7%. The net impact of all those factors is that operating income in Real Estate Finance reduced slightly to GBP 27 million.
In Commercial Finance, where we provide working capital solutions against asset-based lending, we saw growth in new clients and also existing clients increase utilization of their facilities, continuing the strong performance of 2021. Spot lending balances increased by 15% and average lending balances by 36% in the six months. You may recall the new business volumes were more muted in the first half of 2021 as we'd focused our attention on helping existing clients during the early stages of the pandemic rather than focusing on new business for potential customers we knew less well. The new business growth is a reflection of us returning to business as usual. Lending under the government backed schemes, CBILS, CLBILS, and the Recovery Loan Scheme, reduced to GBP 36.3 million at the end of June. All of that lending is to customers we had an existing relationship with.
Just as a reminder, we did not seek accreditation for Bounce Back Loans and have no exposures under that scheme. Given our risk appetite, the security held, and the team's excellent stewardship of our lending exposures, the cost of risk remained negligible. Net revenue margin, driven by higher fee income, increased by 40 basis points to 5.9% and operating income by 63% to GBP 12.5 million. That covers off our walkthrough on the business units. Let me now hand over to Rachel to take you through the financial review.
Thank you, David, and good morning, everyone. David has given you the highlights of our half year 2022 performance, and I will now go through them in a little more detail. The group achieved a positive trading performance for the first six months of 2022. As expected, we did deliver a lower statutory profit of GBP 24.7 million than in the same period of 2021 as impairment charges returned to a more normalized level. Operating income pre-impairment grew by 21.6% for the half, reflecting strong income as the balance sheet continued to grow, coupled with efficient control of our cost base.
We're also reporting an initial GBP 8.1 million profit on the sale of the DMS portfolio, which financially completed in the half, but there will be costs in the second half of the year as we fully migrate the portfolio and wind down the business. Impairment charges normalized in the half from a position of releases in 2021, and I will provide some further color on this later on in the presentation. Consequently, earnings per share decreased from 139.5 pence per share to 102.4 pence per share, and the return on average equity decreased from 19% down to a still healthy 12.5%. As David mentioned at the beginning of the presentation, the focus of the majority of the following slides and analysis is on a core basis and therefore reflects our continuing divisions.
Firstly, some further detail on net interest income and margin. Net interest income at GBP 73.1 million for the half was over 12% higher than the same period last year. There are a number of significant movements to highlight, as you can see in the waterfall bridge. Firstly, funding costs were up by GBP 2.7 million in the period, reflecting the growth in the balance sheet. Cost of funds was flat on H1 2021, but up by 20 basis points on December 2021, reflecting the base rate rises. Growth in the lending balance sheet drove over GBP 15 million of additional income in the half, and a slight shift in mix to the higher yielding consumer lending had a further small increase in income. A large proportion of the net lending balance growth was delivered by our retail division.
However, the lower yielding interest-free lending in Retail Finance did drive a reduction in yield of over 1% and a corresponding reduction in income of GBP 5.5 million, albeit with a positive impact on the cost of risk. Consequently, NIM reduced by 30 basis points to 5.7%. Continued focus on margin and mix management in H2 2022 will help mitigate the ever-rising and steep yield curve and its impact on funding costs in the medium term. Briefly on net fee and commission income, that increased by 36.2% to GBP 7.9 million, reflecting the growth in Commercial Finance net lending and the new business in Retail Finance. I'll move on now to operating expenses.
We indicated at our 2021 year-end results announcement that our focus on cost efficiency would support our medium-term target of a cost income ratio of under 50%. I am pleased to report that the cost income ratio for the half, excluding some one-off corporate activity costs, reduced by 4.6 percentage points to 55.7%, driven by the return to growth in income and effective cost control. Including the corporate activity cost, the ratio reduced to 57%. Underlying operating costs did increase by GBP 2.3 million, with GBP 1.5 million driven by employee costs and payroll inflation. However, the non-employee cost growth was low, considering the increase in the balance sheet and inflation due to the positive action taken to focus on efficiency opportunities and leveraging our operating model. Further cost efficiencies will continue in the medium term.
For example, our property optimization plan, where we'll be consolidating buildings in both Solihull and Cardiff. Now moving on to impairment. We have engaged with external economic advisors and reviewed the macroeconomic scenarios in terms of both weightings and the key indicators of unemployment and HPI, which has resulted in some reductions from the position as at December 2021. A reduction in the peak unemployment rate in all scenarios has been applied, resulting in a weighted average peak unemployment rate of 4.4% from 5.5% at year-end 2021. However, weightings remain consistent with year-end 2021. These changes to macroeconomic assumptions released GBP 2.6 million of provisions in the first half of 2022. Take a look at the impairment charges themselves and provisions next.
Impairment charges of GBP 17.2 million for the first half of 2022 reflects the normalization of impairment charges from a period of reductions in 2021. The cost of risk at 1.3% is in line with management expectations at a group level. Vehicle finance cost of risk at 8% was greater than expected as a result of higher IFRS 9 model PDs and consequently a higher level of loans moving into stage two and attracting a lifetime ECL. The drivers of the increased model PDs are a result of the relative changes in arrears and defaults from a low starting position and the model over-extrapolating this relative change. The observed defaults and arrears have returned to near pre-pandemic levels, but over a relatively short period of time.
As a result, we have taken an underlay of GBP 2.2 million to take into account a proportion of this over-extrapolation, and we will continue to monitor the arrears levels in vehicle finance closely. Coverage ratios reduced by 20 basis points at a group level, and excluding the discontinued portfolios, remained static at 2.4%. Balance sheet provisions reduced from GBP 67.5 million at December 2021 to GBP 67 million at June 2022. The drivers of this reduction of GBP 0.5 million are shown on the waterfall bridge. Firstly, new lending in the period added GBP 11.2 million of provisions. Movements in stages and write-offs added GBP 7.1 million of provisions. Portfolio maturity and aging reduced provisions by GBP 6.1 million. DMS provisions of GBP 7.3 million were released as a result of the sale of the portfolio.
Various changes to overlays, including an increase of GBP 0.7 million to the affordability overlay we introduced at the 2021 year-end, now standing at GBP 5.3 million. The change in macroeconomic assumptions I just mentioned also resulted in a reduction of GBP 2.6 million in provisions. On to the balance sheet next. At a high level, the balance sheet grew, with total assets increasing by 8.6%. Loans and advances increased by 12.2%, continuing on from the excellent growth in Q4 of 2021. Total funding increased by 8.9%, reflecting the increasing lending balances, and shareholders equity increased by 4% to GBP 314.4 million. Total loans and advances increased by over GBP 300 million or 12% in the first half of 2022.
All divisions delivered increases in net lending, as David mentioned earlier, and this slide details the bridge of growth by business unit between the periods. Retail Finance grew by nearly 20% to GBP 916.2 million, following new retailer wins in furniture and growth with existing clients in the higher quality, lower yielding interest-free market. Vehicle Finance grew by over 26% to GBP 332.6 million, with continued momentum in near prime and in our new products of stock funding, Prime HP and PCP, as we indicated at our Capital Markets Day back in November 2021. In business finance, REF grew by 3%, mainly in residential investment portfolios, and Commercial Finance delivered healthy growth of nearly 15% to GBP 359.8 million through new clients and increasing utilization from our existing clients.
Now on to funding and capital in the next couple of slides. Total funding increased by 8.9% to fund growth in lending balances and the H2 2022 pipeline of new business. Fixed term deposits as a share of total deposits increased by 6% with a corresponding reduction in notice accounts. The largest increase in term funding in the one-year bond and ISA products. The rising rate environment has placed funding pricing challenges, both from an acquisition and a retention perspective, and resulted in an increase in cost of funds from December 2021 of 20 basis points to 1.4%. Acquisition focus will continue to be on short-term funding and lower cost ISA products to support the management of our net interest margin.
The balance sheet remains robust and materially contractually matched with a weighted average residual duration of 1.3 years, and we are behaviorally funded long. We remain well-funded with significant excesses to regulatory minimums. Our capital position is strong. However, we have consumed some capital in the period as a result of balance sheet growth and the corresponding increases in RWAs. Of course, this new growth will provide pure profit in future years. CET1 ratio reduced by 50 basis points to 14%, driven by net profits contributing 90 basis points, but offset by the reduction in IFRS 9 transitional relief, both the quick fix and the original relief consuming 20 basis points and the proposed dividends and increases in RWAs consuming 110 basis points. Total capital ratio at 16.3% provides a strong position for growth.
Thank you, and I'll pass back to David so he can give you an update on the strategy and outlook. Thank you.
Thank you, Rachel. Our new vision, purpose and strategy has been communicated to all colleagues and embedded across the group. We held an all-colleague event to bring to life our diverse specialist businesses. Despite the different customer segments they serve, all support our core purpose, to help more consumers and businesses fulfill their ambitions. We have a clear strategy focused on our core markets, where we have deep expertise and further opportunity to grow. Let me now cover the progress made against our strategic themes of grow, sustain, care in the first half and pick out a few priorities for the second half and beyond. Under grow, as you've heard, we've consistently said we have many opportunities to grow in our specialist lending markets. We are ambitious, want to help more customers, and are delivering growth.
In the first 6 months, we grew the core lending book by 12.2%, ahead of the run rate required to achieve a medium-term target of 15%+ CAGR. We announced the disposal of DMS in March and completed the transaction in May, finishing the work of the last 18 months to create a simpler, more focused group. We'll complete the migration of customers from DMS in quarter four this year. Having announced the acquisition of AppToPay in November last year, that transaction is also complete. The team are preparing for launch, and I now expect our digital buy now, pay later proposition to launch in quarter one next year.
We have a number of retailers who want to offer AppToPay to their customers, but it wouldn't make sense to launch in quarter four in the lead up to their key Christmas trading period. We also launched our first access savings product during the first half and expect to deliver continued growth of balances during the rest of the year, given customers' current interest in easy access products in the current rising rate environment. Under sustain, we started to return to our pre-pandemic lending policies, as you know, in our consumer businesses from the middle of last year, reflecting a desire to return to managing risk rather than minimizing risk, as had been the case in the early stages of the pandemic. We continue to enhance our risk management capabilities so that we can continue to control and protect our business and our customers.
Mindful of the economic pressures that consumers are facing, we tightened elements of our lending criteria during the first half of the year again. We'll only grow when it's sensible to do so and within our risk appetite. We've developed a better understanding of our cost drivers and have delivered cost efficiencies now that the business is growing again. This is reflected in the improved cost income ratio in the first half to 57%. We've also identified further opportunities to remove additional costs. Under care, I am pleased that we've maintained positive feedback scores from customers as measured by Feefo. We must continue to improve the experience for customers and business partners when they interact with us.
Once again, we saw positive responses from colleagues to our survey questions, and 85% of colleagues in our recent pulse survey said the group was a great place to work and our trust score increased to 87%. We've a responsibility to help colleagues as well as customers at this time, and we have provided financial well-being information and resources to all colleagues. Although price increases impact everyone, we know that those who earn less are most affected. Recognizing this, we announced an exceptional one-off payment of GBP 1,000 to all colleagues who earn GBP 35,000 or less. We were listed as a UK Best Workplace for the fourth year running and received a trio of accolades from Great Place to Work, Best Workplace, Best Workplace for Wellbeing, and Best Workplace for Women.
We're committed to improving diversity and inclusion and signed HM Treasury's Women in Finance Charter earlier this year. We have a diverse board, and our executive committee is now more diverse, but there's still progress we need to make to improve representation of women and other underrepresented groups in our middle management population. We've been working to define a new environmental strategy. We're finalizing our plan and associated targets to reduce our Scope 1 and Scope 2 CO2 emissions. We'll be asking our board to consider and approve our plan and targets during quarter four and will then communicate our commitments as part of year-end reporting. In the meantime, we've made progress in converting more of the company car fleet to hybrid and electric vehicles and have installed charging points for colleagues to use at our owned offices.
Good progress across growth, sustain, and care strategic themes and more to follow in the period ahead. Finally, let me make a few short comments on the outlook. We've demonstrated our ability to deliver on our commitments to capture growth in our specialist lending markets and to become more efficient by leveraging our capabilities as we scale up. We expect lending growth to continue in the second half of the year, although in the current economic environment, with growing pressures being faced by consumers and businesses, I expect the rate of growth will be lower than during the first half. We've already adjusted our lending criteria in our consumer businesses to reflect the squeeze on household finances and affordability, and we'll continue to keep that under review and take further action if necessary.
Our diversified and resilient model remains a key strength, and we'll be flexible and disciplined when helping our customers and managing our loan portfolios. We face inflationary pressures ourselves, but remain confident that the initiatives already underway within our cost program will help to ease some of that upward pressure. We're a growth business with further opportunities ahead of us, and although the near-term outlook is more uncertain than it was at the start of 2022, we have the necessary resources and expertise to manage the group effectively, as we did during the pandemic. We remain well positioned to deliver on our growth ambitions, create further shareholder value, and have established the momentum that gives us confidence to deliver on all of our medium term targets. That brings the presentation session today to a close, and we'll be happy to take any questions you may have.
Thank you.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll now take our first question from Purlie Mong from KBW. Please go ahead.
Hi, can I just check that I understand the guidance correctly? Because it looks like that it's now 15%+ for the medium term instead of 15. Obviously, loan growth has been very strong in the first half. You know, just wondering sort of where you see that 15%+ in the medium term and where it's going to come from more specifically. Thank you.
Yeah. Thank you, Purlie. That target hasn't changed, actually. It was 15%+ loan book CAGR that we announced in November at the Capital Markets Day, so there's no change to it, just to be clear on that point. Listen, I think you've seen today, even in the first half of this year, that we're seeing growth across each of the four business units, but that growth is skewed in the consumer side of the business. Vehicle Finance, we know, we have said that, you know, there was a need, having invested in new capability and platform, that we look to scale up that business. You know, it's a less mature business than our others, and that's part of the plan. We'll see continued growth there.
In Retail Finance, you know, the growth in the first half of the year was ahead of our expectations. You know, the team have been very successful in winning new business through the back end of last year and into this year, and we're seeing that coming on stream now. I still expect that you'll probably see, you know, more significant levels of growth in the consumer businesses than you will across the business finance areas. Even there, and as demonstrated in the first half of the year, there's growth, it's just at a lower level than you're seeing elsewhere.
Okay, that makes sense. Well, I was just looking at your 2021 full year results, and that's past target 15% in the medium-term targets. It's good to know that has not changed.
Okay, thank you.
Okay. Now take our next question from Alexander Bowers from Berenberg. Please go ahead.
Morning, everyone. Two questions, if I may. Firstly, please can you talk a little bit more about what you're seeing in terms of customers' ability to repay, particularly in Retail Finance and Vehicle Finance, given cost of living increases. And secondly, just wanted to understand how much of your Retail Finance volumes is driven by acquiring new retailers to your network versus increasing volumes of existing retailers? How would a slowdown in the kind of consumer discretionary environment impact your Retail Finance lending volumes?
Yeah. On the retail side of things, Alex, thanks for the question. The reality is we're not seeing any impact on customers' ability to repay. I mean, the business has been shifted over the last 2 to 3 years to focus on industry credit products and in categories which have, you know, prime customers making the rational choice not to use cash to purchase their goods, but to spread the payments. We're not seeing any change, actually. Now, that's not to say that that can't change looking forward, but just at this point, that's not the case. In vehicle finance, you know, as Rachel articulated, we have seen a bit more of a normalization of arrears and defaults, but they still remain below pre-pandemic levels.
In fact, you know, recently the data is indicating that's starting to reduce again. It's not to say that, you know, there's not further pressures to build. You know, we look to see what the impact today from the MPC is and decision on rate, and how that might feed through to further constraints on affordability. At this stage, it isn't hitting us. We're clearly mindful of the uncertainty that's out there. I think on the question about the new business, how much of that is being driven by new retailers, we can get back to you with a specific question.
Certainly the level of growth in Retail Finance, there's a decent proportion of it that's coming from new retailer wins from the back end of last year.
Thank you.
As a reminder, to ask a telephone question, please signal by pressing star one. We will now take our next question from Gary Greenwood from Shore Capital. Please go ahead.
Hi. Thanks for taking my question. It was just on the capital position. I think your regulatory minimum requirement is 11.5%, which you show on slide 20. I think that includes or excludes, sorry, the potential increase in the countercyclical capital buffer of 2%. That would take it to 13.5%. If I look at your core Tier 1, that's at 13.7% excluding the transitional relief benefit that you get at the moment.
I'm just wondering, in terms of the Tier 2 bond, which I know is callable next year, how sort of contingent is your continued growth in the business, which has been obviously strong over the last sort of 6-12 months, dependent on you being able to refinance those bonds, or put additional capital in place? Thanks.
I'll pick that up. Thanks, Gary. Yes. I mean, as you know, our Tier 2, the two tranches of GBP 25 million we have out there come up for renew in 2023. We have started a project to look at that, and the chances are we will early redeem them. In terms of our capital position and our growth, yeah, our plans take into consideration our need for capital to fund that growth, and we do take into consideration the CCyB, which has been indicated that it was gonna come back in in the mid part of next year at the full level. Our plans do take into consideration that, but we will be looking at refining the Tier 2.
We potentially will look at taking a little bit more because the balance sheet allows us to do that, and we may well look at the opportunity to look at AT1 if we can find some counterparties that would be interested in AT1. That will optimize our capital stack going into the medium term.
That's great. Thank you very much.
Thanks, Gary.
There appears to be no further questions. I'll turn it back to Scott.
Thanks very much, Tracy. We just have a few questions that have come through on the webcast today. Just as a reminder, if you'd like to ask a question, please use the question button in the toolbar below. Our first question is from Robert Sage from Peel Hunt. Could you comment further on arising arrears in Vehicle Finance? Other peers have not reported this, e.g. Moneybarn. Are there particular products or borrower types where the increase is most notable?
Sure. Okay, thanks, Robert. Actually, the thing I'd probably comment on first is, I think what we have to remember is our decision to stop lending in 2020 was quite different compared to other lenders. As a result, we saw a significant reduction in new business volume, clearly. Once we got through quarter two 2020, we gradually started to increase the level of lending. It wasn't 'til really into, sort of middle of 2021 and through the back end of 2021 that we were really getting back to where we had been historically in terms of new business volume. We had record volumes in quarter four 2021 in Vehicle Finance.
As a result, what you saw is through 2021, 'cause you hadn't been writing much new business, and the business you had written, you were writing, having tightened the credit acceptance criteria, was much better quality than it would be in a normal run rate basis. Our arrears and defaults were at a record low last year. What we started to see, now that we're back to business as usual, is those defaults and arrears are picking back up, but they still are below the 2019 pre-pandemic levels. It's a slightly different context, I think, to what others might be reporting, who continued to lend throughout the pandemic period.
It's probably a you know a specific point to us that record lows last year, back to normalization this year. In terms of the borrower types, you know, the reality is where you typically see higher levels of arrears is clearly those who are more constrained and lower income, which is also part of the reason why we have taken the overlay at the end of 2021 and topped up that overlay to recognize that those lower income households are likely to feel the pressure further as we go through the rest of this year.
Superb. Thank you, Frederick. Further question from Robert. Are you confident that JAWS, in brackets income growth less cost growth, will be positive in 2H 2022, second half of 2022?
Rachel, do you want to?
Yeah. Robert, thank you. Yes, I believe it will. It probably won't be as stark. We will see obviously the impact of DMS coming off of our cost base into the second half, and obviously fully out in 2023. We are confident that we will, even if the income line doesn't grow in the same way as it did in the first half, in the second half we should see further widening of that JAWS and a reduction in the cost income ratio. We have obviously said over the medium term we intend to get that down below 50%, so we've made good progress in the first half.
further questions from Robert from Peel Hunt. What are your expectations for the cost of funds in the second half of 2022, and can you confirm that the earnings for the purpose of computing the dividend payout ratio will include the contribution from discontinued activities?
The first point, Robert, yes. The cost of funds will be going up. The exit rates, depending on what happens with the MPC today, we will see, you know, the yield curve is steep, and that will continue to go up. Obviously we will then be passing that through onto the asset side of the balance sheet. We are out in the market raising funds. We don't have the current accounts that the big banks do have, so we have to raise funds in the current market, and that predominantly will be somewhere near the top of the best buy table. We will see an expansion in the cost of funds in the second half, depending on where the rates go. Depends what number that ends up as being. Sorry, I've forgotten the second point. Apologies.
Can you confirm the earnings for the purpose of computing the dividend payout ratio, will it include the contribution from discontinued activities?
Yes. Obviously we have a stated policy. When we get to the year-end, we will take into consideration what our numbers obviously that we post at that point. We have been very clear that our payout ratio is 25% of EPS, and that's statutory EPS. Obviously that decision is to be made after we've completed year-end in March next year.
Superb. Now, thanks for that, Rachel. Further question from Portia Patel from Canaccord Genuity. Please, can you talk about competitor behavior given macro conditions? Any notable changes? Have you grown market share in vehicle and retail, and who are you taking market share from?
In terms of at this point, Portia, thanks for those questions. We're not seeing huge amounts of change yet in competitor behavior other than what, you know, as we are doing ourselves, starting to feed through rate increases. That, you know, that's fairly consistent with, you know, what you would expect. I mean, you know, we have done some credit tightening, as I've covered already in our consumer business through the first half of the year. It's quite difficult to see exactly what competitors are doing in that space. You know, I would expect they're probably doing similar things.
In terms of the market share points, I mean, it's again it's difficult to know specifically, but you know I think you know some of the key competitors we have in some of the consumer businesses. In retail, you know, Barclays, BNP Paribas, Hitachi are key competitors, you know. In terms of where the business is coming from, it's more difficult to be specific. Likewise, likes of MotoNovo, Blue, Close Brothers are competitors depending on you know slightly different depending on which product, whether it's prime or near prime. The reality is that the motor market we've grown our share of what has been a growing market.
The first five months for secondhand vehicle finance at point of sale of this year was up quite strongly, 15% in volume and over 30% on value. We have benefited from some of that, but you're certainly seeing a slowdown the last couple of months. The increase is pretty minimal in April and May, the last couple of months of that five-month period. You know, you know, we do expect there was a tempering down of demand from customers as well.
That's great. David, Rachel, we have no further questions from the webcast or the conference call. David, I'm gonna pass back to you for closing remarks.
Yeah, no, absolutely fine. Listen, again, thank you to everyone for taking the time this morning to join us. You know, a number of the questions clearly are about the macroeconomic outlook, and there's no doubt that has changed from the start of the year. I think the reality is we're well placed, given our track record and our agility, just to protect the business and continue to serve customers through this period. A number of things in terms of momentum building. Clearly, the 12% growth in net lending in the core businesses in the first half of the year is strong. It's ahead of the run rate required for that medium-term target. We also have seen operating income as a result jump by 14%.
We've become a more focused and more efficient group, you know, reflected in the improvements in the cost income ratio as well. I know. I think the work to do in completing the finalization of the simplification is really just now migrating the rest of the customer accounts to the purchaser from the DMS portfolio. That's something we'll finish by, you know, quarter four this year, as I said. Despite all of the uncertainties, you know, we feel that we're in a strong position. It's much better when you have momentum, and if you need to make decisions to tone that momentum down, you can do that. It's much harder to build momentum, as we know. We've got a good track record, as I say.
We are very focused on the economic outlook and what it means for businesses and consumers. Having already taken some tightening decisions in the first half, we will make sure we are, you know, monitoring the data closely, and will take any further action that's required to make sure we protect and deliver sustainable growth, not growth at all costs. I know we'll be talking to many of you, I think, later today and in the days ahead. Thank you for joining us. Hopefully the key messages have come across. I hope you have a good day. Thank you.