Good morning, everyone. Thank you for joining us for our 2023 Results webcast. My name's Ian McLaughlin. I'm the Chief Executive of Vanquis Banking Group. As you know, we're holding a strategy seminar at 2:00 P.M. this afternoon, and this will give you the opportunity to hear from me and from some of the key members of the Vanquis management team about how we're going to turn this business around to deliver mid-teens adjusted ROTE in 2026 and beyond. This morning, we want to describe the foundations for this transformation, starting with our 2023 results. In a moment, I'm going to hand to Dave Watts for his first outing as Chief Financial Officer of Vanquis Banking Group. Dave's impact since he arrived in November has been transformative. He has investigated multiple aspects of our previous financial performance with rigor and with discipline.
The result of this is that we can give you a much clearer picture of the key drivers of our business today than ever before. I'm delighted to have Dave on the team and look forward to him sharing the greatly improved clarity and transparency where this business is today and, more importantly, where we're going to take it to. Before I hand over to Dave, just a few words from me. I want to start with the story behind these numbers. In September last year, when we started our planning in detail for today, we were staring at a substantial potential loss for 2023. As we reviewed the business through the second half of the year, the challenges that we had to address became clear, and they were fundamentally one: an underinvestment in key capabilities for this business over a number of years.
IFRS writebacks were contributing disproportionately to the profitability being stated. The group needed to refocus on customer numbers and receivables growth, both of which had been lagging and then grown too quickly in H1 of 2023 and grown at the wrong margin. So pricing changes were needed to prevent further unprofitable business from being written. Product pricing needed to increase to properly cover the cost of funds, our cost of risk, and our operating costs. And we also needed to simplify our structure and our organizational design to remove operational silos, reduce duplication, and again help better manage our costs. And as we told you in our Q3 market update, we took immediate actions to start putting things right, the results of which you can begin to see in our numbers for the second half of 2023.
You can see our financial highlights on this slide, and Dave will drill into these in a moment. But at a headline level, we introduced appropriate product price increases and stopped unprofitable open market personal loans. We took immediate actions on our cost base, including making the tough decision to take out around 350 roles and cancel all bonuses for the entire team for 2023. We reviewed and reset our technology transformation program. We restructured and recruited to upgrade our senior team, and we started work on a complete strategy review. And today we can show you some early signs of progress. As you know, we hit our key profit milestone that we set ourselves in October with adjusted PBT of GBP 24.9 million. NIM has been stabilized, cost initiatives are delivering, and capital exceeds our CET1 ratio target of 20%.
However, you also know that it has not been plain sailing. It has taken us longer than we would have liked to get the right pricing in place to allow us to get back to profitable growth. But all our planned pricing actions will be live by tomorrow. We've also been experiencing a significant ramp-up in complaints. These turn out to be mainly spurious but hit critical levels from the end of Q4 and into Q1. Even though most of these complaints turn out not to be upheld, we still have to absorb the costs of reviewing them, including the Financial Ombudsman Service fees. Over the second weekend of March, it became clear that we could not continue to offset these associated cost increases through the other cost-saving actions we were taking elsewhere in our operations.
This was the major trigger of our revised 2024 profit guidance that we gave in our market announcement back on the 11th of March. We know we have to keep relentlessly improving the way we operate in order for all the good work and excellent insight that we've developed to show through in our bottom-line results. We're looking forward to telling you about how we're going to do that in our strategy seminar this afternoon, but I'm getting ahead of myself. So for now, let me leave you with this. I am acutely conscious that the turnaround of Vanquis Banking Group is now set to go on for over a decade. There have been too many false dawns. So the question we've been asking ourselves as a management team on your behalf is, why should you believe this time?
As I said, we'll discuss this in more detail this afternoon. But for now, all I'd say is that our new team understands how to balance customer focus, customer acquisition, digital banking, customer service, and cost management. Perhaps more important than all of that, we have a growing customer base out there that need and deserve better support from the UK banking system. And at Vanquis, we intend to lead on that. We have started the work. There's a lot to do, but we believe we have the right plan and we are on the right track. More to come later, as I said. But with that, Dave, welcome, and let me hand over to you.
Thanks, Ian. Good morning, everyone. This will be my first time presenting our results, having joined Vanquis as CFO on the 1st of November 2023. After 29 years at HSBC, I moved to Vanquis as I support its vital role in meeting the financial needs of individuals who are not banked by the mainstream U.K. banks. I remain excited about the future potential of Vanquis. Due to the challenges of 2023 and the last couple of weeks, and with this being my first opportunity to present our financial results, I wanted to start with a few opening remarks to provide some context around what I'm going to share. We intend to provide transparency and clarity on what we want to achieve as we rebase ourselves for the future. You will therefore note that the content is richer and more granular than you've seen from us before.
There are 15 slides that I will talk through, with further information provided in the appendix. The overall aim is to present our 2023 performance, the impact of the turnaround that we initiated during the second half of 2023 with a new management team, and how we look to progress in 2024 and beyond. We will present this in more detail this afternoon. From a P&L perspective, this presentation will focus on income, impairments, and adjusted operating costs, which resulted in an adjusted PBT of GBP 24.9 million in line with management guidance provided at the third quarter. That said, there's no shying away from the fact that our 2023 results show a statutory loss after tax of GBP 6 million. In the first half, interest income growth was driven by receivables growth, which was not necessarily profitable, given a significant increase in the cost of funds.
This led to a mismatch in receivables and income growth. In the second half, the new management team introduced additional cost-saving initiatives and reassessed financial priorities. This led to better managed volume growth and upward repricing on our cards book. We have also revised our Vehicle Finance pricing strategy, impacting new business with the income benefit expected to come through in 2024. Impairments increased significantly during the year, driven by lower model enhancement tailwinds, lower profits on debt sales, and increased new originations. Adjusted operating costs reduced by 10% in the second half of 2023 compared to the first half, predominantly driven by transformation and one-off actions taken by the new senior management team. Operating costs were negatively impacted by complaint-related costs due to increased claims management company activity and inflation. Moving on to metrics and key ratios.
Both gross and net receivables have grown, net more than gross, due to the impact of debt sales and IFRS 9 model enhancements leading to provision release. We are proposing a final dividend of GBP 0.01, which would take the full-year dividend to GBP 0.06. Asset yields have been a mix across our products. We are taking action to ensure we are deploying our balance sheet appropriately, ensuring sustained profitability across our book. Two ratios to highlight here are: It's gone off. Okay. Two ratios to highlight here are adjusted ROTE and adjusted cost income ratio. Our adjusted ROTE reduced from 21.8% in 2022 to 3.2% in 2023 as a result of our significantly reduced adjusted PBT in 2023. You will hear more about ROTE this afternoon and how we will make enduring and impactful changes to achieve an improving trend in this key metric going forwards.
There has been a reclassification of liquidity income from non-interest income to interest income to align with market convention, for which a reconciliation is included in the appendix. Note: this reclassification and re-presentation does not alter the total income or PBT for 2022. To help you reconcile your 2023 forecast with what we're presenting today, the movement between non-interest income and interest income is circa GBP 28 million. Our cost income ratio is broadly flat year on year, but it's too high. I'm confident that the technology platform changes that you will hear more about this afternoon will make a material and positive contribution to the shift required in this key measure of performance. Looking at income, we remain a balance sheet-driven business with over 90% of income driven by receivables.
Interest income grew quarter-on-quarter throughout 2023, primarily through receivables growth in the first three quarters and then by pricing actions in the fourth quarter. You will note that the quarter-on-quarter increase in interest expense is due to a mix of increased underlying market rates and higher funding balances. As shown on the following slide, our cost of funds remains below the Bank of England base rate. In summary, our pricing did not compensate for the increase in both funding costs and administration costs in the first half of the year. Positive steps were taken by the new management team in the third quarter with an upwards repricing in cards, which drove an overall increase in interest income in the fourth quarter. Receivables were also managed more closely, with a small absolute reduction in the fourth quarter.
This should be viewed as a short-term step taken to manage pockets of the business which were being booked below acceptable hurdles and allow time to implement the right disciplines to ensure that all new business written meets and exceeds financial hurdles. Moving on to margins. Asset yields improved during the second half of 2023 due to our repricing actions in cards. Volume management in Vehicle Finance in the fourth quarter of 2023 meant that the repricing impact was limited. Repricing is developing into a core competency and an important lever we can pull on with the right data and insights on performance post the repricing action. In 2023, we repriced our Vehicle Finance products on the 9th of January and the 21st of September, impacting new customers, and our Cards portfolio with effect from the 5th of September and the 7th of November.
Repricing in cards impacted approximately 50%-60% of our book. Some of our customers are deemed to be vulnerable, either through being in arrears or in financial difficulty, and therefore we have not increased prices for them. While repricing has a positive impact on NIM, there is a lag between announcing a card's reprice and the repricing coming into effect due to the terms and conditions requiring at least a 30-day notice period for price increases, plus we had some operational inefficiencies. These operational inefficiencies need to be addressed so we can be more responsive to the need for future rate changes. The Gateway program that you hear about this afternoon will improve the speed to market changes. Further appropriate price increases are planned for both our Vehicle Finance and cards products imminently. In 2023, our annualized cost of funds was lower than the Bank of England base rate.
We need to maintain our cost of funding competitive advantage through our predominantly retail-funded book. To benefit both ourselves and our customers, we will be expanding our retail savings products in the second quarter of 2024 so that we can be more reactive as and when interest rates change in the future. We will ensure the associated interest rate risk is appropriately managed. We expect our overall cost of funds, excluding Tier 2, to peak at around the Bank of England base rate and to fall in line with market interest rates on a lag, reflecting the duration of the group's funding. Most importantly, you will also note the stabilization of NIM at 19% in the second half of the year. You will also note from an earlier slide that our risk-adjusted margin was 20.3% in 2022, but decreased to 13.9% in 2023.
This is primarily due to movements in impairment from model changes and provision releases rather than income. As I will cover later, I expect some variability in our 2024 impairment numbers. Hence, it's difficult to provide a clear steer on our future risk-adjusted margin at this point in time, but if pushed, I will expect this to be in the 12%-13% range going forwards. Let's look at receivables in more detail. Receivables increased in the first three quarters of 2023 as the group focused on receivables growth across all products. Newly developed acquisition scorecards in Cards and Vehicle Finance in 2022 and 2023 have led to a slight improvement in our book quality, with a higher proportion of receivables in stages one and two. You will note that net receivables move a bit differently.
This is mostly due to the timing of IFRS 9 model development releases and debt sales throughout the year. As mentioned earlier, we ended the year at a lower position when compared to the end of the third quarter as a result of conscious new business volume management while we assessed our financial priorities. During the first two months of 2024, gross receivable balances have reduced, predominantly in cards, noting the customary lower activity in these two months. We expect gross receivables to return to modest growth in the second quarter of 2024. This slide contains quite a lot of information, however, it is important to provide this detailed insight as we reset the base for the business going forward. The GBP 100 million year-on-year increase in impairments is the biggest driver of our financial performance in 2023.
What I want to show you here is that this increase is driven both by new business origination and a number of other drivers. Our impairment charge increased as our receivables grew more in 2023 than in 2022 in absolute terms. New origination charges have moved in line with our receivables growth. Known challenges in our IFRS 9 modelling have historically resulted in various overlays being established. Subsequent IFRS 9 model enhancements have led to a significant number of model and other related provision releases in recent years, which has benefited our reported impairments. Note that COVID-19 provisions previously booked in 2020 were fully released in 2021 and 2022, so did not occur in 2023.
Our balance sheet is becoming cleaner, with our cards forward flow debt sales program maturing. Therefore, we do not expect to see significant one-off debt sales in cards in 2024 as we experienced in 2022 and to a lesser extent in 2023. Historically, we have undertaken limited debt sales in our Vehicle Finance book. Going forward, we are turning our attention to this opportunity to clean up this part of our balance sheet. It is too early for any indications of profitability impacts that may arise as a consequence, so no impacts from this are included in our current forecast. As we look forward into 2024, I expect the IFRS 9 model enhancements to largely be concluded in the first half of the year, while we will continue to make progress on our arrears management throughout the rest of the year.
Consequently, there will be some expected continued volatility in reported impairments in 2024. Impairment charges always have some idiosyncratic variability, particularly with IFRS 9 accounting. However, from 2025, we expect a much cleaner impairment charge and consequently greater clarity and consistency in our cost of risk. This slide shows our expected credit loss provision movements, again at a more transparent level than you have seen before. Our ECL balance is reducing, driven by active cards debt sales. However, this reduction is in part being offset by increased stage three balances within Vehicle Finance, which now comprise over 50% of our ECL balance. As I've already said, we are looking at debt sales in relation to Vehicle Finance in 2024. Our cost base is that of a business in transition. Our costs have been increasing significantly over recent years.
Without the additional cost savings plans initiated by the new management team in the second half of 2023, coupled with avoidance of further planned expenditure, costs for 2023 would have been significantly higher than the GBP 298 million we reported. The cost forward shows that we're continuing to invest while at the same time driving efficiency to also offset the headwinds of inflation and complaints. New management have reconsidered the IT transformation program Gateway and are fully committed to continuing investment in this program. This will be covered in more detail this afternoon, noting that the Gateway program is expected to deliver significant cost savings from 2026 onwards. The increase in complaint costs is primarily driven by speculative CMC claims, which I will cover on the next slide.
Building on initial steps in the first half of 2023, we have successfully delivered further transformative cost savings and one-off cost savings in the second half of 2023, mostly in streamlining our organization and through the use of outsourcing partners. We continue to be on track to deliver the GBP 60 million of cost savings announced. A number of these saves have already positively impacted our 2023 results. During 2024, we will continue to embed cost management as a key discipline throughout Vanquis. In summary, our cost base points to a significant opportunity to positively reshape the business and not just to cut costs, but to make sustainable change and to reset the business plan for the future. This slide provides more detail on customer complaint costs.
We saw a significant increase in complaints activity in the second half of 2023, which has continued unabated into 2024 and impacts our ability to resolve genuine complaints quickly. The increase in 2023 related to Vehicle Finance in the first half of the year, with an increase in Cards from April 2023 onwards, which ramped up significantly in the fourth quarter. These claims are focused on historical business written, relate to lending origination rather than in-life servicing, and are from CMCs rather than directly from our customers. We do have genuine complaints from customers, which are upheld, i.e., Vanquis compensates the customer. Looking at lending origination complaints in 2023, you will see that CMC activity accounts for over 90% of complaints received, and nearly two-thirds of these came from one particular CMC.
This particular CMC also refers a significant portion of complaints to the Financial Ombudsman Service, or FOS, regardless of the outcome of internal review. We have recently taken appropriate legal action against this particular CMC. Every time a case is referred to FOS, we are required to pay the GBP 750 fee irrespective of the outcome, hence the significant increase in FOS costs in 2023. Our uphold rates for CMC complaints remain lower at circa 11% and reduces to 6% when referred to FOS. This really emphasizes the speculative nature of the majority of claims received and the costs associated with dealing with these claims. Lending origination complaint costs relate to a wide range of different matters in the customer lending process, but with no particular underlying common theme or systemic issue.
This increase in CMC complaints has resulted in a backlog, driving the end-of-year provision increase, and is requiring us to increase resourcing levels in 2024 to process these claims. We have engaged an outsourcing partner for the first half of 2024 to clear this backlog by mid-year. Further operational programs are also expected to be in place with our outsourcing partner by mid-year to deal with the increased volume of complaints received. We are also in the process of automating certain actions, such as complaints logging, which should drive operational efficiencies in our complaints handling process. Forward projections are dependent on a variety of factors, including the impact of legal action, but for the moment we have modeled a circa 50% increase in 2024, followed by a modest normalization into 2025. Resource costs reduced slightly in 2023 due to a reduction in headcount and outsourcing.
This should continue in 2024, with further benefits coming through, offset slightly by the increased cost of processing the backlog of complaints. For completeness, in terms of service quality complaints, redressed amounts and FOS fees are significantly less. This is due to the amounts to be remediated being much lower when compared to genuine lending origination complaints. Next, let me give you a bit more insight into our two main products: cards and Vehicle Finance. Looking at some card metrics in a bit more detail. Management action on pricing in the third quarter of 2023, so that we price for the risk we're underwriting and the increasing costs to administer has led to the changing APR percentage booking mix, i.e., it is not driven by a change in the risk segment we are writing business in.
No new cards were issued with an APR percentage under 26.5% from October 2023 onwards, following a front book restructure. As a result of our volume management, not only did we restrict our new lending, we also reduced limits for new customers. Arrears percentage have risen slightly towards the end of 2023. This is mostly a function of lower volumes and lower receivables at year-end. On Vehicle Finance, we initiated 2 price reviews in 2023, one in January and one in September. The impact of the latter should start coming through in 2024, especially when returning to volume growth. It should be noted that when we reprice Vehicle Finance, this is setting the income for the product sold for the next 5 years or so, hence the focus on ensuring this pricing is appropriate over the lifetime of the product.
Arrears had an uptick towards the end of 2023, which is due to usual seasonality, the impact of volume management, and operational challenges. The latter have now been resolved. Turning to liquidity and funding. We have a strong liquidity and funding position, with an increased level of liquidity as I speak being GBP 784 million at the 21st of March.
Since the beginning of 2022, we have shifted to a retail-led funding approach, replacing expensive senior wholesale and retail bonds that attracted higher coupons. This gives us a competitive advantage in terms of both pricing and predictability. 84% of our funding is now from retail savings and deposits, and we expect this proportion to increase gradually over time. In addition, 97% of our deposits are protected by the Financial Services Compensation Scheme. We are introducing new products to better serve our customers, which at the same time help to optimize liquidity.
An example is the introduction of 90- and 120-day notice period accounts in 2023, which provide both our customers and ourselves a bit more flexibility. Importantly, as covered earlier, this will also enable us to better manage our cost of funds as interest rate changes in the future. We continue to focus on financial resource optimization, which I will cover further this afternoon. We maintain a strong capital position with a CET1 ratio of 20.5%, which is slightly above management guidance provided in the third quarter. The PRA's review of the group's capital management led to a significant reduction in our Tier 1 requirement in the first quarter of 2023, allowing a more optimal capital strategy. Excluding the IFRS 9 transition and a prior year restatement, our capital position has moved in line with expectations towards our target operating level in 2023.
We remain well capitalized, noting that approximately 35% of our Tier 1 capital, or GBP 142 million, is surplus to published regulatory requirements. As with any regulated bank, there are three potential components of such a surplus, which are confidential and therefore cannot be disclosed: a confidential management buffer to cover any volatility in planned financial performance, secondly, genuine excess capital held over risk appetite at any point in time, and thirdly, a confidential buffer set by the PRA in their periodic capital assessment of the bank related to stress impact, risk management and governance, or supervisory judgment.
Looking forward, I'd like to summarize some key messages. As Ian said in his introduction, the transformative action we took in the second half of 2023 prevented a potential loss arising, and instead we delivered an adjusted PBT of GBP 24.9 million. We have increased our focus on pricing to ensure it is appropriate.
There is some further cleanup of our balance sheet to come, and there will be some enhancements in our IFRS 9 impairment model calculations, however, these enhancements will not have the same level of benefit as delivered in recent years. We will deliver on the remaining transformation cost saves from our GBP 60 million target. To reiterate, we will remain highly liquid and strongly capitalized for future growth. As Ian has said, we are in a phase of transition with our strategy expected to deliver a mid-teens adjusted ROTE by 2026, and a low single-digit adjusted ROTE in both 2024 and 2025. Financial progress will not be linear across the coming three years, noting the adverse impact arising from IFRS 9 accounting requirements, while the benefits from the Gateway IT program will predominantly arise in the second half of this transformation period.
During this transition phase, we expect to deliver a net interest margin of above 18% in 2024. Diversification through our second charge mortgages proposition will start having a minor impact on the product mix in 2024. Noting the impact on NIM, we would expect to provide information on NIM excluding second charge mortgages going forwards. As a result of the complaints increase, inflation, and the reversal of some one-off cost savings, we do not expect our cost-income ratio to improve in 2024. We have actionable plans to improve our retail deposit offering, and we will deliver on this, taking our retail deposit funding to over 85%. The group's CET1 ratio will be in line with the current guideline as stated, subject to any change in regulatory requirements or any change in risk appetite, positive or negative.
I would like to thank you for your time this morning and look forward to presenting a strategy seminar alongside Ian and Exco colleagues this afternoon. I welcome any questions regarding forward-looking information at the Q&A session this afternoon, but for now I'm happy to take any questions that you may have on the 2023 results. Thank you.
Thank you. Ladies and gentlemen, if you would like to ask a question over the telephone today and have not yet connected, please dial in using the following telephone number: +44 for the U.K., then 330 55 10 200. The password "Vanquis Results" when prompted. Once connected, please signal by pressing star one to ask your question. So that is star one for telephone questions. Whilst we wait for telephone questions to come through, I'd like to hand over to Miriam to take questions from the webcast.
Thanks very much, Saskia.
Starting with a couple of questions around complaints. The first question is to clarify. You mentioned an expected 50% increase of complaints from CMCs. Does this translate to 50% increase in complaints costs from GBP 28.5 million in 2023 to around GBP 40 million in 2024? And has this been taken into account in your profit outlook for 2024?
Thanks, Miriam. Yeah, as we've modeled for our forecast for 2024 is a 50% increase in costs for complaints. So it is GBP 28 million, as I stated, and you can do the math up to GBP 42 million-GBP 43 million.
Thank you. And then secondly, on complaints, how do you plan to stop complaints from claims management companies? Is it possible to charge cost for every unsuccessful charge? Is it possible to ask the Bank of England for regulatory support to reduce this cost pressure?
I'll take that one. Thank you, Miriam.
I mean, look, it's a real challenge for us, but it's bigger than a Vanquis Bank challenge. I think there is a systemic issue here. We are in detailed conversations with regulators, with Treasury, and with UK Finance around what the right thing to do here is. And let me be really clear. As Dave said in his presentation, in any business like ours, there will be complaints that we will want to address and stand over if we've done anything wrong in the past. But they are by far the minority of what we're receiving. The issue here is that we are getting swamped with what turn out to be mainly spurious complaints, and therefore our resources can't get to helping the customers who genuinely do need help and have made a complaint to us. So I think there's a lot to come on this.
Dave mentioned that we have taken, I think our phrase is, appropriate legal action on the one firm who are really the worst sort of actor in this. We will obviously update the market as that progresses. Yeah, it's a real issue for us, and it's a real issue for genuine customers who have got genuine complaints as well.
Just to be crystal clear, this question says, does the FCA investigation have any impact on Vanquis' motor vehicles' division?
Let me be crystal clear again. We are not affected by the Discretionary Commission Arrangements review in Vehicle Finance that the FCA are undertaking over the rest of this year. The issue we have in complaints is not that at all.
But as Dave said, this is more around people going onto websites and kind of just clicking, "Would you like some money from Vanquis?" and suddenly a complaint appears. Good complaint management companies, of which there are many, handle that process really well and often really help customers. It's the complaint management companies that are not handling their verification in the way that they are expected to, that is what we're objecting to. But just to be crystal clear again, at the end of that answer, we are not impacted by the discretionary commission review into Vehicle Finance.
Okay, the next question is about the dividend. With your strategy now set, when do you foresee the dividend being restored to historic levels or reset to a high level than the GBP 0.01 ?
I'll just take that, Dave.
As we've said initially in our note on the 11th of March, we're setting a GBP 0.01 dividend for 2024, subject to board approval and regulatory approval from there, and it will progress slightly more from there in 2025. When we get into 2026, we believe we're going to have a significantly different profitability. At that point in time, we'll reassess our dividend payout ratio at that point in time.
Thank you. This question is about directors buying shares. Will you, the chairman, and the other directors be taking advantage of the depressed share price, aligning interests with the shareholders to give us further confidence?
There are discussions on that ongoing at the minute. I'm not going to comment on the individual's activities, but yes, we do see there is value in where our share price is at the moment.
Thank you. This one is from Daniel David at Autonomous Research. You have excess Tier 2 debt. Do you plan to address this excess to help with the cost of funding over the plan? Should we expect any senior issuance in the plan?
Thank you, David. Thank you, Daniel, sorry. We continue to look at our capital stack and what the efficiencies may be. You're correct. We are holding surplus Tier 2. Currently, we don't have any plans in issuance. So we'll look at the opportunities that come to us in the marketplace if we want to take some action in that space, subject obviously to the appropriate approvals.
Okay. We've now got some questions from Robert Sage at Peel Hunt. With regard to the guidance of 8%-12% non-linear receivables growth, could you provide some thoughts around what that might mean for 2024? Should we expect to level towards the upper end of this range in 2026?
One for you, Dave.
Thank you. As I say, what we've set out is going to be non-linear. In terms of where growth may be, I've already commented early on saying that our receivables have come down in the first 2 months of this year. You've got to sort of factor that in terms of what that might mean for 2024. I would expect, once we've got our repricing coming through imminently in the next couple of days, we continue to start going to growth mode on our receivables through into the second quarter, play through into third quarter and fourth quarter. As I say, it will be non-linear over a period of time. You should take the range we've quoted out there to factor into your forecast for 2024.
A second question from Robert Sage. You say the CET1 target range is 19.5%-20.5%. Are you encouraging us to expect the ratio to dip below 20% in 2024?
As set out, that's our current guidance on our capital, between 19.5% and 20.5%. Obviously, this is dependent on the regulatory requirements and also our internal risk appetite, which could go up or down associated with that. But currently, we expect to operate within that range.
Some questions now from James Spalton at Lancaster Investment Management. The Woolard Review called out mid-cost credit as an area of low supply but genuine customer need. Do you have visibility as to whether the FCA stands by that position and whether there is regulatory support for this market segment as there was not for high-cost, James? Comment?
Yeah, I'll take that one, James. Thank you. Great question.
I'll never comment on regulatory opinion. What I'll give you is our opinion, and rest assured that we are in very regular contact with our regulators. We will talk a lot about this this afternoon, particularly with Jill Armstrong, our new Chief Customer Officer, who will give some real insight to the work we've been doing on the customer profiles that we think we can help most. And what you'll hear this afternoon, and I hope you'll all be able to join us, is that there is absolutely, as James is saying, a demand increase and a supply contraction. And that is leading to a move towards non-regulated products or even, in the worst case, black market lending. So I think there's a real challenge for the entire spectrum of customers in this underserved space that we want to serve in Vanquis.
We'll talk this afternoon in detail, as I said, but we really want to take our place as the champion for that profile of customers in that space and make sure that we're looking after them properly. So please tune in later, as they say, for more on that.
So a second question from James Spalton. What would your guided FY 2025 ROTE be if you excluded new business drag, e.g., year one IFRS 9 provision and customer recruitment costs?
We've guided where we think the 2025 ROTE number will be. We said it's the low single digits in place there. If you look at the drag of IFRS 9, it's a pity we can't do IT accounting where we can capitalize the cost upfront, then release the cost out over a period of time.
Unfortunately, when you book new business under IFRS 9, you have to record the cost upfront. So if it's a detriment on your first year of profitability. If I looked at the actual drag and do a calculation excluding that, it probably is a drag of 2%-3% on our ROTE.
Thank you. And a third question from James. Your breakdown of APRs on new lending from Q4 onwards implies a very different NIM and RAM for cards if maintained into 2025 and 2026. Is this a correct inference?
I think, as we've covered in the presentation so far, we weren't necessarily pricing appropriately for all the cost of risks, the cost of funds, and the cost of administration for our products. We've done two credit card increases in 2023. We've got one coming through imminently.
Therefore, you should expect to see the NIM going up in the cards portfolio over the next two-three years in the existing segments we actually bank in.
Thank you. Saskia, could we now take a couple of questions on the audio and then perhaps come back to check if there are more coming through on the web?
Certainly. Thank you. So we have our first telephone question from Gary Greenwood from Shore Capital. Please go ahead.
Oh, morning. I've got three, if I can. So the first one was just on the model enhancements, if you could just give a sort of layman's understanding, I guess, as to what's been going on there and what's been driving those. And then the second one, I think you guided or suggested risk-adjusted margin to stay in a sort of 12%-13% range.
I just wanted to clarify whether that was including or excluding the growth in second charge mortgages. Then my final question was on the legal action that you're taking against the CMC. I'm just trying to understand, well, first of all, timeframe you would expect that to play out. And then secondly, what you're hoping to achieve from it, is it trying to stop the CMC filing those complaints, or is it financial redress, or is it a mixture of both? Thank you.
Not like you to sneak three questions in for one. Well done. Dave, maybe if you want to take the model enhancements and the risk-adjusted margin points, and then I'll comment on the legal action, if that's okay.
On the model enhancements, the work we've been doing on IFRS 9 models has been going on for a number of years.
It's covering all aspects: their probability of loss given default, etc. So I don't think I want to go into all the details behind it. I think what you're probably interested in, the actual numbers, we probably booked I think it's about GBP 57 million in 2023 associated with it. In terms of what we think might come through in 2024, the number will be significantly lower. If it was in the mid-teens, I'll be happy to see that coming through. But that's all I want to guide you through with this one now on model enhancements for IFRS 9. In terms of the second question regarding the, if pushed, 12%-13% risk-adjusted margin, it does include mortgages. However, the component part of our portfolio of mortgages will be still quite small in 2024, and it'll grow out through the period into 2026.
You should stick to 12%-13% across the whole of the portfolio in aggregate.
Thanks, Dave. On the legal action, but, Gary, you'll understand that it is a legal action, so I'm not going to comment too much on it other than to say we submitted our case back on the 11th, so Monday a week ago. That will become public imminently. Just to stress what I said earlier and what Dave said in his detailed update on complaints, we have no issue if customers think something isn't the way it should have been and want to come to us and ask us to look at what's happened and whether there is redress. No issue with that at all. We'll stand over what we've done. We'd prefer customers complain directly to us if they need to complain.
If they want to go through a claims management company, that's fine too. Most claims management companies, as I said earlier, go through a very rigorous process of verification and identification of what the issue is and then submit it. We look at those, and we're very happy to continue to do so. The issue that we've got with this one particular actor is that they do not seem to be doing that. We are getting inundated with a load of claims that turn out in the end to be spurious. As Dave described, we still have to pay the GBP 750 default fee, and we have the cost of physically going through those complaints and trying to identify what they're based on, if anything. We will talk more about that this afternoon as well. Our Chief Operating Officer, Ian Fielder, will cover a section on that.
But we're just not prepared to sit back and let this happen if it's not being done in a way that we think is correct. So that's why we've decided to take legal action. How long that will take and what the outcome will be, the courts are the courts. It's not quick, usually. And we're always happy to have direct negotiations if people would prefer to go that way. But we're not prepared to just sit and take this. You can see the impact it's having on our cost base. And as I said earlier, worse is the impact it's having on our genuine customers that we can't get to because we're snowed under on these spurious complaints.
That's great. Thanks for taking my questions.
Thank you, Gary.
Thank you. And as a brief reminder, to ask a question on the telephone, please signal by pressing star one. We now take a question from Perlie Mong from KBW. Please go ahead.
Hello. It's Perlie from KBW. Thank you for the presentation, and look forward to seeing you in the afternoon. Just two quick questions. One is on impairments and provisions. I guess if I just look at stage three provisions, half and half, it looks like it's gone up about GBP 50 million, most of it coming from Vehicle Finance. I mean, I understand that a lot of the post-model adjustment may have come from the credit card book. But in any case, it looks like stage three receivables have increased, but actually, total allowance has come down because of the post-model adjustment. So just wondering what's your thinking and sort of thought process around that. So that's the first one.
The second one is, I understand that you've taken some active volume management in Q4 as you reposition your product and pricing, etc. Just wondering, I guess, either sort of hypothetically but also in what you've seen in the last couple of months, does that impact your ability to write business in the future? Just, I guess, historically, when banks have a little bit of a stop-start approach, that can have a sort of longer-lasting impact than just when they want to grow, they find it is harder to get hold of customers because they've been out of the market for a little bit. Just wondering what's your thoughts on that.
Thank you. Dave, maybe if you take the first one, and I'll take the second one.
On the first point on impairments and stage three losses, the overall ECL provision has come down.
As I sort of brought out earlier on, the proportion of that relating to stage three has gone up, but that's predominantly dominated by Vehicle Finance. And that has been because we have not executed upon. We did one minor trade in a debt sale and vehicle financing in 2023. It's an area we need to go and focus on going forwards. If you do look at the overall proportion of our portfolio, you'll see the proportion in stages one and two is slightly increased. So de facto, that means that stage three has actually come down a little bit. So I would say we have a slightly improving portfolio in 2023.
And then, Perlie, if I may, particularly your second question on volume management and getting volume started again, which is a very good question.
Look, the first thing I'll start with is this team and this business will have much improved product and pricing discipline from here on, okay? And that's what we've definitely taken a conscious decision to put our foot on the ball and make sure that, as Dave described earlier, this is banking 101, right? You take your central costs, your cost of funds, your cost of risk, your cost of administration, your marketing costs, you add them all up, and then you have to make sure that whatever you're charging for that product actually covers those costs. I mean, Consumer Duty asks you to do that apart from anything else. So we've taken those actions to make sure that we are aligned correctly because there's no point, as we showed in the first half of last year, writing volume if you're below a hurdle, right? It just takes you backwards.
So we're not going to do that. The discipline is now in place. That has taken us some time. As I said, the final price increase goes in tomorrow, actually. So we are then in a position to get back to prudent receivables growth and keeping an eye on that discipline as we go forward from Q2 over the rest of the year. To your point about can you sort of flick a switch and get it straight back on, not really. There tends to be a kind of ramp-up to a sort of a more standardized rate. So we're expecting a little bit of that through Q2, particularly in Vehicle Finance where you're dealing in an intermediated market and motor finance dealers have to change systems and so on for different pricing. So that will take us a little bit of time.
But we're very convinced, and again, we'll talk more about this this afternoon, that our proposition is strong enough to allow us to get back to those volumes as quickly as we possibly can.
Thank you.
Thank you, Perlie.
Thank you. And there are currently no further telephone questions. I'd like to hand back over to you, Miriam.
Thanks very much, Saskia. So a couple more questions coming through on complaints. So the first one is, why was there such a significant and sudden uptick in CMC complaints in Q3 and Q4? And what's the top reason for these complaints?
Again, I'll take that one over if that's okay. We'll cover this in more detail this afternoon. So I don't want to sort of preempt our entire presentation.
I think really what happens with some complaint management companies, and as I stress, not all, they test to see what sort of reaction that they get. We saw this, Dave mentioned in his presentation, that we received from this one particular firm Vehicle Finance complaints initially at some volume, but actually, they didn't really get anywhere, and the uphold rate was very low. So we saw that switch to Card complaints. So I think people just test to see if they can get some volume going. And what was the reason? I mean, this is the challenge, and again, we'll talk about it this afternoon, but we literally get a checklist saying, "Can you check for this customer whether you've done any of these things?" And that's what makes it so time-intensive for us to actually review.
In some cases, we don't have the customer at all on our books, but we've got to look through our entire backbook to see if we do have them or ever have had. And in other cases, even if the customer exists, that product isn't the one that is allegedly being complained about. So it's a very complicated area. It's very frustrating, and I'm trying not to let my frustration show. But it is one that all we're asking for is the complaint management companies to go through the process that they agree they will go through about verifying complaints before they're submitted. If that's done, and most do that, then we're very happy to look at them. It's the spurious speculative complaints that are just scraped off TikTok or social media that we're really having an issue with.
Thank you. Here's one from Ghilan Cortina at Melqart, who asks, "How should we think about the assumptions that you're making on complaints volumes and costs for 2024? And how could ongoing legal action impact your assumptions?"
I'll take that one here.
Sure.
So one of the things I'd first do when I came into role, I commissioned a third-party firm to come in and look at the basis of doing our complaints provisioning to make certain it was right. In essence, to summarize what they came up with, we're doing the right things, so no issues there in terms of provisioning at year-end. Essentially, how we do it, we model it based on recent claims in terms of what our uphold rates have been, what's the amount of redress being paid, and we put it through a model to calculate that number.
Every single month we go through, we look at history for that month and adapt it from there so we keep live to what's coming through in terms of our volumes. That's what we saw as we're coming through, as Ian said, in the beginning of March. The numbers were just getting bigger and bigger and bigger. Our models are showing a larger number coming through, hence the reason why we've had to update our forecasts for 2024 in terms of complaints costs.
Maybe just to come in on that as well, Miriam, it's a very tricky thing to model because you don't know when a court case is actually going to be heard, and you don't know what the outcome is going to be.
So we think we've been sensible in terms of what we've put in for 2024, but we will continue, obviously, to update the market as things progress.
Thank you. I've got a question now about impairments. The question is, there were significant impairments of GBP 166.1 million in 2023 versus GBP 66.1 million in 2022. What impairment levels are we expecting in 2024 and 2025, and what is management doing to reduce these going forward?
Okay. In terms of the number of 2024, I would say it's going to be increased from the GBP 166 million we booked this year. As I said in our presentation, we've had a significant number of credits coming through from model enhancements in the last 2023, 2022, and 2021 for that side of things there. So you expect to see that coming through.
In terms of what are we doing about it, I think there's three ways you can look at this. Firstly, better understanding of our customer base, making sure that we're lending out to the right people. Secondly, we have been looking at our models. There will be some more improvements coming through. And thirdly, we look at some of the sort of IT enhancements we could put in place for impairments. There's a couple of simple things we could be doing. For example, if we look at when people get paid, and this makes sense when they get the chance to self-set, make the payment of their credit card post the day they get paid. Other things like when you set up your card, make sure you can automatically set up a direct debit so the payment goes through.
So therefore, we're trying to help the customer in terms of how they can actually sort of manage their own financial position. And I guess to add on from there, we haven't really talked about Snoop this morning. Snoop is a great application that our customers have access to. They can use that to start sort of modeling their own financial expenditure during the month and to help them to try and stop them getting to that stage where they will actually fall into a position where they default on their or get behind on their payments and therefore create impairments.
Thank you. And this is our final question. And I've got a couple of questions like this, but I'm going to try and run them in together so that we answer them once.
This one's phrased as follows, "As a long-term shareholder and savings customer, I have a couple of questions. Has there been an increase in customers closing accounts or a run-on deposit caused by the share price and media speculation? And as a shareholder, as Ian put it, we've got 10 years of turnaround ahead. Or rather, we've had 10 years of turnaround. Apologies. How can we have confidence that this is going to happen this time and it's not just more jam tomorrow?"
Yeah. Look, let me take that. That's a great summary question, really. On the savings side, the simple answer is no. We've seen no change in customer behavior whatsoever. But as Dave said, 97% of our deposits are covered by the Financial Services Compensation Scheme anyway, but no sign of any change there whatsoever.
And look, to the point on I raised it in my opening remarks anyway, why believe this time? That's the question as a management team we're asking ourselves on your behalf. We do understand how difficult this has been as an investor. And that's what this afternoon we are going to set out very clearly. What is our plan based around customer understanding, based around the efficiency of our organization, and how you can actually see and track the progress of the plan that we're going to describe later on? So hopefully, I'm not sure who asked that question, Miriam, but hopefully, they'll be able to join us this afternoon, and we can maybe get a comment from them at the end as to how they feel.
Thank you to you both. And with that, I'm going to draw this morning's session to a close.
As Ian said, please join us at 2:00 P.M. this afternoon when Dave, Ian, and our management team will be running a strategy seminar to tell you how we're going to get to mid-teens ROTE in 2026. But for this morning, thank you very much for all your questions and goodbye.