Good morning. Thank you for taking the time to join us for our 2022 full year results presentation. As usual, I'll provide an update on the group's progress and then hand over to Rachel to take you through the detail of numbers, and then I'll summarize the progress we've made and share my views on the outlook for the group. I wanted to comment briefly on recent events in the banking sector and broader markets, and why I believe we remain well-positioned to weather these uncertain times. Through last year, everyone felt the impact of geopolitical uncertainty, the energy crisis, rising inflation, and of course, rising interest rates. In recent weeks, there has been significant volatility with the collapse of Silicon Valley Bank, Signature Bank, and the acquisition of Credit Suisse by UBS. Not surprisingly, there's increased nervousness across the global sector for both equity and debt holders.
We remain confident in our business model and our liquidity and capital positions. 100% of our deposits are from retail customers, and 95% of those deposits are fully covered by the Financial Services Compensation Scheme. We've not seen any change in the behavior of our savings customers. Of course, we strengthened our regulatory capital position recently and have significant headroom against our regulatory requirements. When reporting our half-year results, I reflected on the group's track record and reputation for prudence and our agility, and highlighted that these would be important tributes in our rising rate environment and extended period of uncertainty. That has certainly proven to be the case. In response to the economic environment, we took decisions early in 2022 to start tightening our credit criteria so as to slow down the rate of lending growth in the second half of the year.
That was the right thing to do to manage risk effectively for the group. Our performance once again demonstrated the team's ability to help more customers become more efficient and to scale our specialist lending businesses. We're a more focused business following the decision and the actions we have taken to simplify the group. Let me turn to the key headlines at the group level and then explain how each of our specialist lending businesses performed. 2022 was a year of significant strategic progress and growth momentum. Profit before tax, pre-impairments grew by 28.1% to GBP 76.4 million, with 13.9% growth in operating income and operating cost growth of 4.3%. The group delivered total profit before tax of GBP 44 million. As expected, the benefit of payment releases in 2021 was not repeated.
Consistent with our strategic objective to simplify the group, we completed the disposal of the DMS loan portfolio in May and completed the migration of customer accounts to the purchaser by the end of November. We recognize a GBP 6.1 million profit on sale of the DMS loan portfolio in the year. We do expect to incur up to GBP 2 million of costs over the next 18 months or so as we undertake some residual activities and prepare to wind down the DMS entity and also hang back regulatory permissions for that business. We recently announced the issuance of GBP 90 million of subordinated debt, which qualifies as Tier 2 regulatory capital and the buyback of the GBP 50 million of prior Tier 2 bonds. We were delighted with the support we received from both existing and new holders for this issuance.
With a strengthened regulatory capital base, we're well pleased to continue to scale the group and achieve our medium-term financial targets. We've introduced our ESG strategy. The strategy formalizes and brings together the activities that have been a core part of our practices for many years, as well as additional priorities that are important to our stakeholders, and I'll comment further on this in a few minutes. Our lending growth was strong despite our credit tightening actions, with customer lending balances increasing by 19.1% in the full year. New business lending, which exceeded GBP 2 billion for the first time, grew by 43.5%. With strong lending growth and a disciplined approach to managing our cost base, we delivered a 500 basis points improvement in the cost income ratio to 55%. Rachel will comment further on our management of costs later.
The board has proposed a final dividend of 29.1 pence, bringing the total dividend for the year to 45.1 pence. This is consistent with the policy of returning 25% of full-year earnings per share to shareholders and retaining sufficient capital to support the group's ambitious growth plans. 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. I'll reflect on where we are against the targets towards the end. It's worth reflecting on why we remain confident about the group's future and on some of the key themes we highlighted at our Capital Markets Day at the end of 2021.
We do have established positions in our markets and following disposal of non-core assets, have a real focus on our remaining specialist lending businesses. We have proven our flexibility in adapting to evolving market conditions. We have excellent growth potential in large markets, and we have made market share gains in the consumer businesses. We have a proven ability to generate customer deposits, and this was demonstrated again this year. Deposits grew by just under 20% to support our lending activity. We have attractive risk-adjusted margins and have strategically pivoted towards a greater proportion of lower risk, prime quality customers in the consumer businesses. We have a good stable capital base with capacity for growth, and so we are well-positioned to deliver an improving and attractive return on capital.
The significant strategic progress over the last year puts us in a stronger position to fulfill our growth ambitions and consistently achieve our medium-term targets. We have simplified the group further. We have delivered enhanced experience of our customers driven by technology. We continue to expand our distribution, and we have become much more efficient as we have grown. Let me turn to comment on the performance of each business, starting with V12 Retail Finance. We have explained previously that our in-house developed market-leading technology platform in Retail Finance allows us to integrate seamlessly into the systems of our retail partners, allowing for an integrated finance experience that drives retail sales. You may be aware that one of our main competitors in this business, in fact, the second-largest player in the market, has indicated recently that they would be stepping back from the point-of-sale credit market.
We expect our competitive position to improve. Our network of retail relationships has long been a key strength, and in 2022, we expanded that distribution to over 1,500 retail relationships, and we also extended our share of business with key retail partners. We delivered a significant increase in total lending balances of nearly 38%, with new lending balances exceeding GBP 1.1 billion. Our market share, as a result, increased from 8.4% to 11.4%, and we now have close to 1 million live customers in Retail Finance. We've repositioned this business in recent years to focus on providing interest-free credit to lower risk prime credit quality customers. The cost of risk is at historic lows, as Rachel will demonstrate shortly.
Most of our customers in Retail Finance do not require credit to finance their purchase. The price of offering credit is already priced into the product they are purchasing by the retailer, it's a rational decision to spread the cost interest-free over a defined period. We completed the acquisition of AppToPay Limited during the year. That proposition, which will allow us to offer retailers an interest-free solution for their customers to finance lower ticket purchases over shorter durations. We've completed the work to integrate the proposition onto V12's own technology infrastructure, we'll commence a pilot of the proposition with a small number of existing retail partners in the near future. We will be undertaking a credit check and affordability assessment on customers who apply, As you'd expect, will operate with cautious risk appetite parameters.
The AppToPay proposition, as the name suggests, has a digital application and mobile servicing app. It's a natural extension for a Retail Finance business. Looking ahead, there remains significant further growth for us to capture in this market. In Vehicle Finance, we finance second-hand vehicles. We've been offering products on our new technology platform for over 2 years now, providing solutions for dealers to help them buy their stock and for consumers to help them buy their vehicles from dealers. The consumer products currently on the new platform are for the lower risk prime customer segment. We're working to complete the final part of our technology development and to commence writing new loans for our near-prime products on the new platform. This will be a major change program for us, and once concluded, there'll be further opportunities to simplify the business and become more efficient.
During the year, we extended our distribution. At year-end, we're working with over 450 retailers and brokers, compared to 289 at the start of the year. The market for used cars and bottom point-of-sale finance in 2022 was just under 8% higher by volume in 2021. The amount of finance advanced up just over 18%. With our extended product range and broader distribution, our new business lending doubled in the year to GBP 400 million. Total lending balances grew by 42%, even though we had taken action to reduce the volume of new business that we accepted. On the back of that strong lending growth, revenues in the business, Vehicle Finance, increased by 22%.
Similar to our strategy in Retail Finance, we've also been growing the proportion of lending to lower risk prime customers. Lending to those customer segments from a standing start 2 years ago represented 24% of total lending at the year-end. As highlighted in our trading statement in January, we saw arrears levels settle at pre-pandemic levels during the year. As a reminder, all lending in Vehicle Finance is secured against the asset being purchased and financed by the customer. We see further potential for our Vehicle Finance business and have the capacity to deliver significant levels of growth. Given our recent experience and our low market share, I'm confident we will do just that. Let me turn now to Business Finance and start with an update on our real estate finance business.
We are typically lending here against residential investment pro-properties and have a focus on professional landlords and developers, helping them to improve and grow their property portfolio. At the year-end, 90% of our lending was for investment facilities and 10% for development. Also directly. We have an experienced team of bankers with a real specialism in underwriting and managing more complex property transactions. During the year, we introduced electronic document execution to improve the customer experience and reduce costs. Following a strong first half of the year, new business lending did actually hit a record level in 2022, although we did also have higher repayments than we planned for. Borrowers did become more cautious in a more volatile interest rate environment. We focused attention on supporting our existing customers in managing risk appropriately.
Lending balances grew by 1%, average lending balances grew by 7%, helping to deliver an increase in revenue of 5%. New business lending of GBP 0.4 billion was 2% higher than last year. All lending in this business has first charge security in the property asset, the average loan-to-value in the book at the end of the year was below 60%. This is a large market, we have a very low share, there's plenty of opportunity to grow. The volatility in the market has started to ease in recent months, we have started to see the pipeline of new business opportunities increase again. Turning to commercial finance, where we support the growth of SMEs by providing working capital finance and for strategic events.
This is another business which has been built organically and is run by a team of experienced bankers with specialist skills in underwriting and risk management of complex transactions. The team has an excellent reputation across the asset-based lending market and had a really strong year, exceeding our own expectations. Business is sourced directly and via professional introducers, and the team work with partners across private equity and accounting practices. This strong network and relationship has been key to our success. The team delivered 20% growth in lending balances in the year and GBP 0.2 billion of new lending. Unlike our other businesses, in commercial finance, customers are provided with a revolving credit facility. As their trading activity increases, the amount that customers draw down from that facility also increases.
Lending is secured mainly against receivables, and typically, our invoice discounting facility will fund up to 90% of qualifying invoices. The team has a good track record of managing down facility levels in instances where customers are experiencing trading difficulties. Inevitably, in this uncertain times, we did have a small number of customers go into administration last year. The team works hard to manage these exposures in those circumstances, and it can result in fee income being earned earlier than expected. Total revenue in commercial finance grew by 69% to GBP 29 million last year. We continue to administer the UK government CBILS, CLBILS and recovery loan schemes, and in the year, total exposures under those schemes reduced from GBP 42.7 million to GBP 28.9 million.
A year of strong progress across each of our diverse specialist lending businesses and confidence that we will continue to grow these in the year ahead. We developed our ESG strategy last year to prioritize the ESG factors we determine as material to our stakeholders and important to us. We did this having reviewed several external standards, including the UN Sustainable Development Goals, the World Economic Forum, and the Sustainability Accounting Standards Board. We've used the material ESG issues for us and stakeholders and distilled them into the focus areas which are shown on the slide. We continue to enhance the experience of customers when interacting with us and have made further improvements in our digital processes and customer journeys as we strive to become the most trusted specialist lender in the UK.
We were also recognized for several customer service and product awards last year, including a Platinum Trusted Service Award from Feefo and the best savings notice account provider by Moneyfacts. We're an inclusive business and want all colleagues to feel respected, confidently be themselves, and fulfill their potential. We improved our standing in the Great Place to Work rankings last year and also received recognition from the Employers Network for Equality & Inclusion for the progress we have made on diversity and inclusion initiatives. On climate change, we aim to minimize the harmful impact of our business on the environment by reducing Scope 1 and Scope 2 CO2 emissions from our own operations. We have now developed a plan as part of our ESG strategy to reduce Scope 1 and Scope 2 emissions by 50% by the end of 2025 compared to the levels in 2021.
We will report on our progress in delivering that reduction in future reporting cycles. With that, let me now hand over to Rachel to take you through the financial review.
Thank you, David, and good morning, everyone. I'm going to provide you with some further details of our financial results for the full year 2022. 2022 was another strong year for the group with good progress against our medium-term targets. The group achieved a profit before tax of GBP 39 million on a continuing basis and a statutory profit before tax of GBP 44 million. Although these profits were a reduction on 2021, the main driver was the normalization of impairment charges following COVID releases in 2021. More importantly, growth of 28.1% in profit before tax pre-impairments was delivered through a combination of strong loan book growth, careful management of net interest margin, and the effective management of costs.
We have indicated previously that our strategy of simplifying the group and improving operational efficiency would support our cost income ratio medium-term target of under 50%. I'm very pleased to report that through the combination of tight cost control and growth, we have delivered a 500 basis point reduction in our cost income ratio, now standing at 55%. We delivered record new business lending across all our divisions, achieving volumes of GBP 2.1 billion, an increase of 43.5% year-on-year. Retail Finance delivered over GBP 1.1 billion of new lending, growth of 47.5% year-on-year, and this growth was a result of success in expanding our retailer relationships, and we grew our market share from 8.4% to 11.4%.
Vehicle finance delivered over GBP 400 million of new lending, growth of over 100% year-on-year through the expansion of our distribution channels and new products. With new lending in prime accounting for 23% in 2022 versus just 7% in 2021. We also grew our market share from 0.7% to 1.1%. Real estate finance delivered GBP 384.5 million of new lending, just marginally higher than 2021, reflecting the challenging interest rate environment. Commercial finance delivered GBP 157.3 million of new lending, an increase of 67.9% year-on-year. That growth was from a combination of new clients and increasing utilization rates on current clients as their businesses recovered from the impacts of the pandemic. Now on to operating income.
Net interest income increased by 12% year-on-year to GBP 152.6 million. The interest income element of that increased by GBP 39.1 million on the year as average lending balances increased by 20.5% and the mix of average lending in higher yielding consumer finance increased by 3%. This was offset by an increase in interest expense, reflecting the high interest rate environment and also a 15% increase in term deposits. Consequently, net interest margin decreased by 40 basis points, reflecting the move to better quality, lower risk lending in consumer finance, particularly in retail, and the higher cost of retail deposits. However, there was no further erosion of NIM in the second half of the year, maintaining the 5.7% we reported at the interim.
Fee and commission income increased by 33.9% to GBP 17 million, driven by growth in lending in commercial and retail finance. I'll move on now to operating expenses. We ended full year 2021 with a cost income ratio of 63.2%. The sale of DMS portfolio in 2022 resulted in a reduction in cost income ratio of 3.2% to 60%. Throughout 2022, we have actively managed our cost base through an efficiency program, which delivered GBP 1.2 million in cost savings during the year. On an annualized basis, this will result in GBP 2 million of cost savings, and there are further efficiencies planned in the coming year. In absolute terms, costs increased by GBP 3.8 million or 4.3% in the year. Excluding the one-off corporate activity cost, this increase reduced to six...
GBP 2.6 million or 2.9%, with the majority driven by headcount increases to support growth in the balance sheet. Containing our costs and growing our income has resulted in a 500 basis point or 580 basis points excluding the corporate activity costs reduction in our cost income ratio. With the current high inflation backdrop, this is an excellent result and evidence of our ability to meet our medium-term target of under 50%. Moving on to arrears performance and expected credit losses on the next couple of slides. We have included some arrears performance graphs for the first time this year. It is clear to see the exceptionally low arrears, levels of arrears in our retail finance business, which have been sustained since mid-2020. This is a direct result of our shift to high-quality prime lending.
In vehicle finance, the pandemic period proved more volatile as a consequence of the decision to cease new business lending in Q2 2020, followed by a period of low levels of lending and then a re-entry back into our full product suite in Q4 2021. During 2022, we have seen these levels of arrears stabilize and run below the levels experienced prior to the pandemic. Cost of risk of 1.4% reflects the normalization of impairment charges in 2022 following releases in 2021. Coverage ratios at 2.6% are robust and are increased on 2021 by 20 basis points. This increase is predominantly driven by a higher proportion of the overall lending balances now in consumer, plus increased coverage levels in stage two, reflecting the current macro environment.
Overall impairment provisions increased by GBP 17.8 million, most of which being attributable to significant growth in lending in the year. Management overlays have been reviewed at the year-end, resulting in a reduction of GBP 3.1 million, the most significant overlay being for affordability, which was reduced by GBP 2.1 million to GBP 2.5 million during the year as actual experience is now being reflected in the modeled provisions. Macroeconomic scenarios have been updated for Q4, with a slight improvement in peak unemployment rates, offset by a deterioration in HPI peak to trough. The overall impact of changes in MES for the year was a small release of GBP 0.5 million of provisions. It's worthwhile to note sensitivity to 100% weighting to the severe scenario would result in an increase of GBP 7.1 million of provisions.
Further information on macroeconomic assumptions can be found in the appendix to the presentation. Moving on to the balance sheet. At a summary level, the balance sheet grew with total assets increasing by 17.1%. Loans and advances increased by 19.1%, reflecting the strong return to growth, and total funding increased by 19.6%, reflecting the increase in lending, and shareholders equity increased by 8.1% to GBP 326.9 million. Just going to take you through the balance sheet in a little bit more detail now. Total loans and advances increased by an impressive GBP 468.5 million or 19.1% during the year, delivering a 15.6% CAGR.
Retail finance increased by GBP 289.7 million or 37.9% year-on-year, reflecting success in expanding our relationships with high quality retailers. The furniture and jewelry sectors now represent around 65% of our lending portfolio. Vehicle finance increased by GBP 109.8 million or 41.7% year-on-year, reflecting new distribution channels and new products, and prime lending is now 24% of the lending portfolio. Real estate finance was relatively static over the year, with a small increase in lending in residential investment and away from development. Commercial finance increased by GBP 63.1 million or 20.1% year-on-year as clients returned to utilizing their facilities post-pandemic.
The overall mix of lending balances has shifted during the year towards consumer finance, which now represents 49% from 42% in 2021. On to capital and liquidity in the next couple of slides. Our capital position is strong and has improved in both quantum and efficiency with the new Tier 2 issuance of GBP 90 million, net increase of GBP 40 million. RWAs increased by GBP 0.2 billion as a result of the growth in lending balances. CET1 ratio decreased by 50 basis points to 14%, driven by, firstly, net profits contributing 150 basis points, but offset by the net reduction in IFRS 9 transitional relief and proposed dividends consuming 40 basis points and increased RWAs consuming 170 basis points.
Both CET1 and TCR have significant headroom above regulatory minimums, and total capital ratio at 16.2% provides a strong position for growth. Total funding increased by 16.9% to fund growth in lending balances and the 2023 pipeline of new business. The interest rate environment has driven customers to seek higher yields in term rather than access and notice products, and accordingly, our mix of fixed-term deposits has grown by 10% to 56% in the year. This has impacted our cost of funding, increasing from 1.2% in 2021 to 1.9% in 2022.
In the current macroeconomic environment, it is worth noting that we are 100% retail funded and 95% of those retail deposits are fully protected under the FSCS, and our HQLA comprises of balances held with the Bank of England and operating cash held in instant access accounts. We remain well-funded and have significant excesses to our regulatory minimums. Thank you. I'll pass back to David so he can give you an update on the strategy and outlook.
Thank you, Rachel. I just want to pick out some examples from this summary slide of the progress we've made last year against our strategic themes of Grow, Sustain, Care. Progress is shown on the left and priorities on the right. Looking at growth first, 2022 was a year of continued momentum with significant levels of growth in the loan book and new business lending. In vehicle finance, where new lending doubled, 24% of total lending is now to lower-risk prime customers and helping us to grow our market share, which is also the case in retail finance. We completed the acquisition of AppToPay Limited and are ready to commence the pilot of that proposition in the near future. We'll continue to investigate opportunities for further M&A activity that would complement our specialist lending businesses and add further scale to the group.
Having simplified the group in the last two years, including exiting the debt purchase market, we have growth momentum and have become much more efficient. As we continue to progress our growth priorities, we will deliver improved returns. Under sustain, during a period of rapidly rising interest rates, we delivered a net interest margin of 5.7%, maintaining the same level for the full year as in the first half. We did continue to increase pricing in our lending business throughout the year and continued to increase rates for our deposit customers also. Our planning assumption is that we will pass through 60% of bank base rate increases to our deposit customers.
We have a diverse set of lending businesses, and within these businesses there are different options for managing their portfolios and the product mix. We'll continue to review these options and consider the broader economic climate as we look to optimize capital allocation. We did take progressive action last year to tighten our credit criteria, given the impact of energy costs, cost inflation generally, and the economic uncertainty. We'll continue to manage our risk exposures effectively in these challenging times. As I have confirmed in previous presentations, we will not pursue growth for the sake of it, and we will maintain our credit discipline and appetite. We launched a new collections platform in vehicle finance last September. The new platform enhances workflow management and increases the use of automation and SMS functionality, so we become more effective as we support customers.
We made good progress with the first phase of our cost and efficiency program. We see further opportunities to manage cost growth below the rate of income growth in the coming periods. We remain extremely confident that we'll deliver our cost income ratio below 50% as we continue to scale the group. Under care, our customer satisfaction scores remain excellent. We also received a number of awards in recognition of the support we provide to customers. This will continue to be a key focus as we increase the proportion of customer interactions being delivered via digital channels. In 2022, we did increase the use of those digital channels when issuing communications to our savings customers. We also introduced Confirmation of Payee functionality and also Open Banking payments in retail finance.
Our loan applications in consumer finance are all digital, with most decisions made in seconds, which is critical when dealing with high volumes. For example, we process over 100,000 new applications for credit in retail finance each month. We also have plans now to launch our first banking app for our savings customers this year. Customers continue to appreciate what we do for them, and we'll continue to introduce further enhancements and improvements to our customer journeys as we implement our Consumer Duty plan and continue to focus on customer outcomes. My team and I were delighted with the feedback we received from colleagues in our annual survey. 85% said that Secure Trust Bank was a Great Place to Work, and 89% said they were proud to work for Secure Trust Bank.
These positive responses are testament to our supportive and caring culture and our clearer direction and strategy. Having introduced our ESG framework and strategy, we're now progressing the actions required to deliver a 50% reduction in Scope 1 and Scope 2 CO2 emissions. The most significant impact will come from reducing our property footprint and vehicle fleet. We've already consolidated from two buildings to one in Cardiff. That was completed last September, and we'll complete the same rationalization in Solihull next month. Notwithstanding the market uncertainties, we've made significant strategic progress last year. We have simplified the group. We have delivered enhanced customer experiences. We have expanded our distribution. We have, as you've heard, become more efficient. We remain on track to deliver all of our medium performance targets in the medium term.
Our performance at the end of 2022 against five medium-term targets is shown on the slide. We were in the right place for loan lending growth rate and net interest margin, and our CET1 ratio at 14% remained comfortably ahead of target. There was a significant improvement in our cost income ratio to 55% and by continuing to grow our lending and top-line income coupled with the cost management actions we've discussed, we expect to deliver a further improvement in 2023 as we move closer to the target of being below 50%. The ROE, as expected, was lower this year, having not had the benefit of impairment releases, as was the case in 2021. We remain comfortable with a 14%-16% target in the medium term.
We are at an exciting stage in our development with significant opportunities ahead of us. You'll have seen in our statement earlier that the new financial year has started strongly, especially with ongoing momentum in retail finance and an improving pipeline for real estate finance. With the actions taken to simplify the group, we're now a more focused specialist lending business. We have a diversified and resilient business model, our diversification is a key strength. Despite recent market uncertainties, we'll continue to be flexible and adapt to market conditions. We've demonstrated, again, our ability to grow these businesses by leveraging our market expertise, distribution, relationships, and digital capabilities. Our capital and liquidity positions are strong. Our regulatory capital has been strengthened, and we have a strong franchise of retail depositors with 95% of deposits fully covered by the Financial Services Compensation Scheme.
2022 was a year of significant strategic progress and growth momentum. We're looking ahead with confidence and are well-positioned to deliver all our medium-term performance targets. That brings the presentation to a close. We'll be happy to take any questions you may have. Thank you.
Ladies and gentlemen, in order to ask a question over the telephone today, please signal by pressing star one on your telephone keypad. That is star one for telephone questions. We will pause for a brief moment. We now have a question from Alexander Bowers of Berenberg. Please go ahead.
Morning, everyone. Just two questions from me. Firstly, could you provide a bit more color on what sort of Secure Trust defines as prime lending or prime customers in both the sort of retail and vehicle finance divisions? Secondly, you mentioned the total loan book is now just sort of under half consumer finance. Can you talk a bit about what you might expect the rough shape of the loan book to look like in terms of achieving your 14%-16% ROE target in terms of split between consumer and business finance? Thanks.
Okay. Thanks, Alex, for those questions. Just on the first one on prime lending, I mean, different lenders will have different classifications, but, I mean, really it's based on what the risk score is that we pick up from the bureau and some other demographic characteristics. Typically, our prime customer relative to a near prime customer would have a higher income and a higher proportion of homeowner status. The score is really the main differential that we have. On consumer finance and the mix versus business finance, yes, it has moved 42%-49% on consumer.
I mean, my view is that really, you know, somewhere going from 45% to 55% for consumer, and therefore the opposite effect clearly on business at any point in time is roughly where we'll be. It's never gonna be a significant skew beyond that. The reality is it does come down to how we optimize, where we allocate capital, pricing, NIM opportunities, and also market and competitive dynamics. I don't think you're gonna see a significant move away outside of anything moving from 44% to 55% as we look into the medium term.
Brilliant. Thank you.
Thank you. We move on to our next questioner, which is Perlie Mong of KBW. Please go ahead.
Hello. Good morning. Just two questions from me as well. The first one is on your interest margin. Just wondering how you're seeing the competitive dynamics out there because certainly one of the key themes that we heard from full year results is that consumers have become a lot more price sensitive, and that has force some of the larger incumbent banks to offer better rates as well. And obviously for the smaller banks, as we come to the end of the TFSME, there's a lot of them need for refinancing. Just how are you seeing the dynamics, and how do you expect to have to compete for those deposits? That's number one. The second question is more general on the cost-income ratio.
I guess for 2022, like, you've made a lot of progress both in terms of income and cost. Just wondering when we come to 2023, 2024, how are you going to make more progress on the cost-income ratio? Is it more coming from the loan growth side or the income side, or is it going to be more on the cost side? Just a little bit of color on that would be really helpful. Thank you.
Okay, thank you. Rachel?
Yeah, I'll pick those up. From a competitive perspective on deposits, yes, it is competitive. I mean, the smaller banks will always be raising their funds by being at the top of the table. That's really how we do it. We're very cognizant of making sure that we only go into the top of the tables when we need funding. Obviously the rates have been increasing, but we are also passing that on to the asset side of the balance sheet. Our view is we don't see NIM moving materially either way. It may go down slightly if we see slightly higher mix in some of the lower yielding divisions. It may well go up if we see the opposite effect. I would kind of say that we're not expecting big movements on our margin.
We will pass through, you know, our policies to pass through up to 60% to our deposit holders. We have continued to do most of that in 2022, but we've also been passing it on to our customers on the asset side of the business. As I said, don't expect to see too much NIM compression and hopefully a little bit of expansion towards the end of the, you know, forecast period. Cost-income ratio, I mean, we have a cost efficiency program. I think we've said before that we've spent the last couple of years simplifying the group, and we are now able to take the opportunity to look at the operating model, take out management layers where we don't think we need it because we're smaller in terms of divisions.
Having a, you know, a COO that's definitely focused on the operations side and making sure that our supplier contracts are for the group rather than individual divisions, our property portfolio. All of these things are in train. None of them are, you know, controversial or things that we wouldn't be doing or any other people wouldn't be doing. I think the point really is that we are able now to leverage parts of our division. For instance, in retail finance, we have a very mature business there with a good operating platform. We can put more volume through it. We are seeing the opportunities from a competition perspective with BNP Paribas Personal Finance coming out and our relationships that we've built. We can grow that business and get operational leverage out of it.
It is always going to be more income driven than it is the cost because that's just the way the you know, our cost base is smaller than our income. It's a combination of both, and we're very focused on making sure that we do that because it translates directly to ROE.
Great. Thank you.
Thank you. We're now moving to a question from Gary Greenwood, Shore Capital. Please go ahead.
Morning. I've got two questions if I can please. The first one was on your ROE target, the 14%-16% medium term. Obviously, that was set sort of 18 months or so ago when interest rates were lower. Obviously rates have gone on the risk-free rate higher. You recently raised the Tier 2 bond at a 13% coupon. I was just wondering whether that 14%-16% is still appropriate to the target or whether it needs to be sort of moving higher or you'd be thinking towards the top of that range. Secondly, on the dividend policy, obviously the 25% payout sort of creates quite a bit of volatility in the dividend. When profits go down, dividend goes down. When profits go up, dividend goes up.
Would you consider or reconsider that dividend policy to try and make it more progressive, even if you do get a little bit of volatility and profitability? Thanks.
Thanks, Gary. I'll pick up the dividend point first, then let Rachel answer on the ROE because there's things moving in both directions on that. On the dividend, yeah, the policy, as you know, was only put in place almost 2 years ago. We have, you know, we have, as a board, decided to pay out at that 25% level. There was debate at the time about different approaches. I mean, it's not actually the policy that's causing the volatility. It's actually just been the COVID impact on earnings in previous years. The reality is as we look ahead, couple of things.
One, if you look at consensus earnings compared to where we are for the 2022 year we're discussing today, expectation is obviously for higher levels of profit and therefore the 25% would be higher. Clearly it's something also that the board regularly discusses. I would imagine those discussions will continue each time we review the policy on an annual basis we review the policy. You know, a number of things going on, but the key thing I think is the policy driving the volatility. It's just been the sort of implications of COVID impacting all lenders in recent years. Rachel, on the returns question.
Yes. Gary, I mean, ROE, yes, we are happy with our medium-term target of 14%-16%. There are a few moving parts. On the downside tax, obviously we were hoping that 19% would be the tax rate. In terms of CT, obviously being at 25% and us not really having profits that really hit the original 8% of surcharge means that net-net, you know, from a PAT perspective, that hits us. As we said before, we are primed and ready in terms of the operating model and our growth trajectory and our, you know, capacity in terms of our low market share to grow this business pretty substantially if the market is, is right, and we will continue to maintain our cost base lower than that and therefore get jaws.
That will go directly to our ROE. That's if you look at some of the other banks, that's exactly how they do it. They're a little bit more mature than we are, and probably have all of their divisions throwing off decent ROE. I think we've said before that our vehicle finance business needs a little bit more growth to get to the position of the other divisions, and that obviously, that inflection point will make our ROE double-digit mid to higher, very much more sustainable.
That's great. Thanks for taking my questions.
Thanks, Garry.
Thank you. Up next, we have Robert Murphy from Edison. Please go ahead.
Hi, guys. Can you hear me?
Yes.
Yes, can hear you, Robert.
Great. Yeah, just a quick. In terms of the vehicle finance, what do you think the overall market growth is gonna be this year and the same for the retail? Do you think those markets are both gonna actually grow?
Yeah. Well, yes, our expectation is they will. I think what you're gonna see is in vehicle finance, I think last year by value, the market grew by 18%. You know, we doubled, as you know, on new business. There is some, there's a couple of things tempering, I think, that growth rate. In the second half of the year, so you know, the 18% was a full year in the market. It did temper down, in the second half. We think it'll still grow, but not at the same level as last year. On retail finance, you know, a lot of this will come down to, you know, consumers' views, about, making purchases and their confidence levels.
I mean, if anything, despite some of the noise around banks in the last 2, 3 weeks, if anything, you are starting to see some positive signs about the economy more broadly. Actually the higher inflation rates have actually meant that consumers are making some larger ticket items sooner 'cause they're concerned that the price may be up 5%, 10%, 12% if they hold off 6, 9, 12 months from making a purchase. You're, you know, probably seeing some bringing forward into 2023 into that in particular the interest- free market. Interest- free is now 90% of our new business.
I think the environments are right for continued growth at a macro level, and therefore for us to continue to take share as we extend our distribution.
Right. If I may, just a follow-up. Just on the deposit costs, what's the aggregate to the new term deposit , deposit cost now? You know, if you were sort of to look across the different suite that you're selling right now.
Um-
Well, yeah, I mean, the average you need. I mean, the bulk of the market and what we raise is in one year and two year. I mean, you're a little bit over 4% on an instant access.
Yeah.
You're closer to 3%. It really depends on the mix between the term notice on instant access.
A final one just on the vehicle finance. You talked about the 450 sort of distribution relationships. Are those sort of the new ones, are they sort of fully ramped up now or is there kind of a pipeline effect to come through from the ones you've added?
Yeah, that's right. 'Cause obviously they don't all come on the same point, you're right. There's a maturity curve really, where obviously your volumes start lower before it takes a sort of three, six-month period to start getting to a sort of a stable level of new business coming from those. As on the basis you're always adding them, you know, that'll continue for some time. I mean, against the just over 450 that we had, you know, that was a sort of, I think it was 70% growth compared to last year. Clearly we won't be growing at this rate at 70% in 2023. There's still significant opportunity to grow that.
That's what we're focused on, and then you'll continue to benefit over the next 12, 24 months, from new business coming on stream in a sort of 6-month maturity curve.
Just finally, I just had another one. Across the book now, how much of new business do you think is gonna be prime then this year? I'm just thinking then how that will translate into the overall mix of prime on over the book.
Yeah. Well, it's on retail finance which is obviously if you just look at the quantum of lending is the largest part, it's currently 90%. Yeah.
Yeah.
On vehicle finance on prime, the total was 23%-24% for the year. It's just a little, you know, round about that, a little bit higher, currently on new business. It depends on the distribution.
Just the last-
Depends again on the distribution coming online.
Right. Thanks. That's very helpful.
Thank you. As we have no further telephone questions at this time, I'd like to hand the call back over for questions from the webcast.
Okay. Thank you very much.
A few questions on the webcast. I'll start with Robert from Peel Hunt. A couple of questions, and I'll take them in turn. First one on capital. Post the Tier 2 issuance, is your capital stack now optimal, or would you like to adjust the mix further?
No, the capital stack's optimized. I mean, AT1 is something we would have loved to have had, but it was hard for us prior to the issues with Credit Suisse is probably impossible for us to be doing now. I mean, the Tier 2 upsizing that actually gets us in terms of our forward look out in, you know, a 5-year horizon. We are optimized. We'll obviously start using some of that capacity over the next couple of years, but it gives us quite a long road in relation to having a capital stack that's optimized. We don't have any plans to come back out again to the market.
The second question, can you comment on your appetite to continue lending in the commercial sector, given your comments about insolvencies, are there any particular segments that you're wary of?
Oh, thank you for that one. Listen, we haven't, you know, as you would imagine, we haven't made significant changes to our appetite in terms of new lending. I mean, the reality is it's a business which performed very strongly last year. The reason for calling it out in the in the presentation is really just around, as you'd expect in the current environment. You know, some businesses have been strained, but we've managed to work those out. We, you know, we've got certain sectors that we're active in. We still have an appetite for those, but obviously in the current environment, the team are slightly more cautious in terms of underwriting new businesses that they don't have an existing relationship with.
you know, until we see further positive signs and an improving macroeconomic outlook, we'd expect the team to continue to be diligent and cautious.
A couple of questions from Freya at Federated Hermes. Retail finance business achieved high growth on a high base. How do you create value for customers, and how do you see the untapped opportunities in this area? What's your advantages compared to peers?
Okay, thank you. Listen, the advantage compared to peers really comes down to technology and the, you know, the existing relationships and distribution that we have and our ability to, you know, to grow that. I mean, if I talk about the technology as a secondary, technology in retail finance is all in-house built. You know, it's been kept modern, up to date. I mean, Rachel mentioned one of the larger competitors in this area has recently announced they're coming out of the market. We believe part of that is actually down to their legacy systems and the space and inability to compete. That's really why we can compete and win and bring new retailers on quickly, once we win business.
The team have got, you know, very good market understanding and expertise, which allows them to, you know, to extend the amount of business we do with existing retailers, but also to win new business from competitors. A combination of things really. In terms of how we add value, I mean, the reality is for, you know, the consumer here is really paying 0% interest in 90% of our business. It's really allowing them to spread the cost of making a significant purchase in the case of furniture and jewelry over a typically three or four-year period. It's interest-free credit, which is really wrapped into the proposition of the retailer that they're purchasing from, core proposition.
You know, we don't envisage that demand for that type of proposition is going to change any time soon. In fact, we do, as I said earlier to Robert, expect to see some market expansion. We're well placed given our technology and market understanding.
Thank you. Follow-up from Freya. Can you elaborate on your risk management techniques, especially for vehicle finance?
I mean, in terms of process, we basically integrate dealers and brokers into their systems so they can submit auto data to us electronically to make an automatic decision and return a decision within seconds, including pricing and digital documents if the customer is going to proceed. In terms of the internal process and credits, then we have a range of policies, policy appetites around vehicle, age of vehicle, value of vehicle. We have credit scoring. We have our own scorecards have been developed over time. We've also got an awful lot of existing data and experience of goods and bad performance based on underwriting decisions were made in the past.
You know, as you would expect, typical to what other lenders do, an assessment of the customer, their affordability, their credit status, and obviously, using our past experience and data.
One final one from Freya on funding. It's following the deposit question. Usually deposit rate changes lag asset yields. How does it impact your margin, and do you see material changes in your sources of funding over the next 5 years?
In 2022, when the rate environment completely changed, we had some, the same as most people, hadn't had the operational experience of passing through rates to our retailers, particularly in vehicle finance. Sorry, particularly in retail finance. We got that program up and running. There's a nuance within our retail finance division that you've got some lag in relation to pipeline. If you order a furniture, piece of furniture sofa, you may well be waiting 10-12 weeks for it. Throughout 2020, we were a bit in catch up in relation to passing on those incremental changes that were happening on a regular basis to the base rate. We think we are probably through the end of that. Obviously it's settled down a little bit in terms of the rate environment.
We will still continue to catch up in relation to the yield for retail finance in 2023. One thing to say, obviously, as the rates hopefully flatten and potentially come back down again, we get the positive impact of that delay. Our commercial business is linked to base, so that will get an immediate, and we have an administered rate across some of our real estate finance business. Again, that's passed through immediately. From a deposits perspective, yes, we don't pass through everything, but we are active in relation to making sure that we are passing through to our customers because we're trying to protect the back book as well as we're trying to acquire deposits to fuel the lending on the other side of the balance sheet.
All of this is very actively managed. I think I said earlier, we don't expect to see the impacts through NIM. We expect to see quite a static NIM picture over the next couple of years. Your last question in relation to any changes in funding, the major change in funding will be TFSME rolling off in 2024, 2025, and we have started the process to look into securitization. That's our plan in relation to mitigating that. We have a full suite of products. The only thing we don't have is current accounts, and there's no plans to be having any current accounts.
Got one final question, it's from Portia at Canaccord. Can you elaborate on market share opportunities in consumer lending? Are you taking share from other specialists or mainstream incumbents? What are the reasons behind it? Is it changing risk appetites, funding pressures of competitors, or improvements in the Secure Trust Bank product? Both? Any factors that you might point to.
Okay, thank you. On retail finance, first of all, Portia, I mean, the reality is we're the fourth largest player in this market. We have, you know, we've been growing pretty strongly as you, as you can see. I mean, our view is, and why we had it on the slide, is that, you know, the decision of the second-largest player to come out of the market, means that there will be opportunity for us to further grow that business. As Rachel also mentioned, the reality is we've got, you know, a cost base there that can cope with significantly higher volume.
A lot of that has been driven by the fact that, over, I think it's three-quarters of customers now actually self-service on our online portal for getting payments, requesting statements, you know, making overpayments, early settlement requests, et cetera. Actually we actually have fewer colleagues answering calls in retail finance now than we had two years ago, despite the fact the business has more than doubled. There's operational leverage that we can continue to benefit from. On the vehicle finance side, it's slightly different. I mean, there's actually quite a large number of sub-scale vehicle finance providers, but many of them are banks, but many of them are actually non-banks. We have started to see some pressure on those non-banks as their cost of borrowing has increased.
I, you know, we've seen some stepping back from the market. We know one or two might be thinking about exiting the market, at least for a period of time. Again, I think the position we're in, funded by retail deposits and a good franchise there and, even the last year growing by almost 20% of the deposit base, means we have got the capacity and the ability to grow and take share as some of those other competitors stand back.
That concludes the webcast questions, so I just hand it back to you, David, for any closing remarks.
Okay. Thank you very much. Thank you for the engagement and getting all those questions as well. Listen, I just wanted to say a few things and just leave with some key messages really to take away, really summarizing what we've already spoken about. 2022 was a year of significant strategic progress and growth momentum. As you saw, total lending growth grew by just over 19%. We have become more efficient, so our lending growth, the action that we've taken in the last couple of years to simplify the group and take a more disciplined approach to managing our costs, allow us to make that significant, you know, 500 basis points reduction in the cost-income ratio, and we are confident in, again, improving that in the year ahead. We've expanded our distribution. We've taken market share.
We're continuing to see the benefits of focusing on more prime, lower risk customers in consumer finance. Our progress in the last year has made me even more confident actually about our ambitions, delivering on them, and actually delivering all the medium-term targets, including the return on average equity in that 14%-16% range. A lot of really good progress, importantly, a platform for further growth and progress in the year ahead. You know, those are the key points I'd like you to take away with you. You know, we've had a very good year. If I can just say thanks again for joining. I know we're going to be talking to some of you today and in the coming days, so look forward to talking to you then.
If not, when we present our half-year results in August. Thanks again, and have a good day.
Thank you.
Thanks.