Jul 27, 2020 (Thomson StreetEvents) — Edited Transcript of PCF Group PLC earnings conference call or presentation Wednesday, June 3, 2020 at 9:30:00am GMT

Hello, and welcome to the PCF Bank Half Year Results Call. (Operator Instructions) And just to remind you, this call is being recorded. Today, I’m pleased to present Scott Maybury, the Chief Executive Officer; Robert Murray, the Managing Director; and David Bull, the Finance Director. Please go ahead with your meeting.

Good morning, everyone, and this is Scott Maybury speaking. Thank you. Thank you for joining us and taking the time to hear of our results this morning. It would have been good to, of course, meet up in person. Actually, it would have been good to meet anyone at the moment, but we’ll try it this way, and hopefully, it will be informational for you and provide some good support to the statement we’ve already put out this morning.

Alongside that statement, you will have seen a presentation on our website, and hopefully, everyone’s got access to that, and that will be the document that we’ll be using to take you through today.

Just to open up, I think the statement is very much about 2 very distinctive parts through our half 1 results. We were progressing quite well up to the point of the pandemic. As you will see, the new business volumes were strong. Our portfolio growth was strong as well. We were heading towards — tracking towards targets as well as far as profitability. So it’s a little bit disappointing to be blown off course by the external events, which have hit not just us, but all companies and banks but the U.K. more generally. But I guess, what’s the most important is how you respond to those things. So we want to give you reassurance today that we’ve proven operationally resilience post the crisis and put in place very quickly and effectively the controls and processes that you would need to operate in this environment.

I think over the course of the next half hour, we’ll cover those areas, and we’ll open up for questions at the end of that. I think the headlines really for us just to — will be to highlight profitability, the underlying profitability, speak in detail about COVID-19 and impairment effects. And then, also as I said, reassurance on liquidity and capital going forward.

David Bull will take the question on operational highlights and financial highlights. And he’ll also take any point on IFRS 9, which has its own specific slide. Robert will take you through operational resilience as well as business lines and how they were building quite nicely pre-COVID and then returning to myself to actually finish up with some summary and take your comments.

So I think without any further ado, let’s hand over to David and let him take you to Page 5 through the operational highlights.

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David Richard Bull, PCF Group plc – Finance Director & Executive Director [3]

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Good morning. And yes, it’s David here. So I’ll go through the operational highlights to begin with. As mentioned, our new business originations were going well, up 26% to GBP 153 million. I think probably the last 2 weeks in March saw a decline as we went into lockdown, but good first 6 months for originations and the portfolio growth due to those originations that increased by 18% to GBP 401 million. And you’ll see a breakdown of that in further slides.

Retail deposits supporting that growth of GBP 340 million. We are — we also had the Term Funding Scheme of GBP 25 million. And indeed, we’ve got the ability to draw further on the PCF SME facility that the Bank of England offered up for banks.

We have a diversified asset-backed lending portfolio. And I think the next point, the operational resilience, we have been testing ourselves in terms of continuity plans and DR plans over the course of the last 2 or 3 years, and it was testament to those plans that we were able to 100% work from home within a couple of days of making that decision. So a testament to our IT teams, but also our resilient plans that we’ve put together.

Originations are — 80% of those are prime customers. Again, that’s reinforcing our strategy of going more prime, and our growth is in that prime area.

Impairment charge. Our cost of risk is 1.7%, and I’ll come on to that in a later slide. GBP 138 million of our book is forborne at this stage, 34% of the total book. Fair to say that about 50% of the Business Finance book is forborne, about 22% of the customer individual personal finance book was forborne.

So if I move on to financial highlights. Looking at the underlying profit, that’s up 27%. So if you exclude the COVID-19 impairment charge, the GBP 4.2 million, but the true number, of course, is the GBP 2.6 million, which is down 21% on last year’s 6 months.

Operating income, up 26% to GBP 12.7 million. Net interest margin is down to 6.8%, and that is really our strategy of moving prime. It is our strategy, and I think we’ve signaled that, that will come down. And of course, part of that income is early settlements, and early settlements is probably not something that customers are doing now because of the pandemic.

Cost-to-income is encouragingly coming down, 52.4%. I imagine that would stay put as second half. Growth is likely to be limited as our volumes are about half of what we predict. Return on assets are down 48% to 1.4%, again, largely due to that COVID impairment and return on equity at 6.8%.

So if I move on to my third slide, the IFRS 9 loan loss impairment. I’ve tried to reflect the changes that have been brought about by COVID. So if we hadn’t had the effects of the pandemic, our portfolio would have been that the cost of risk would have been about 80 basis points, but with the effects of COVID-19, 170 basis points. We had seen a little bit of stress and less benign environment in the SME book, but nothing untoward, but that was a slight increase in the previous period.

So the areas of focus when we look to IFRS 9 and what brought about by the COVID-19 is looking at our base macroeconomic curves, the short, medium-term view has severely impacted the likes of ABR and other forecasters in the market were showing deep changes to the curve, be it significant increases in unemployment or reduction in GDP.

The third important one was used car index — price index, which is again something that we use to model our book. We did also increase our pessimistic weighting, and we showed that in more detail in our annual accounts that, that pessimistic equation has increased due to our outlook view of the market. And in the areas that our model, which is the model would be very good in terms of it understands, based on our curves, the future and then it looks at what’s happened in terms of the past. But of course, you can’t predict that. 34% of our book was forborne. Certain sectors are going into stress and particular ones that we identified was the broadcast and media industry and the audio/video and photography loans that we have. And so we drew those out as well as the falling asset values in secondhand car prices, for example, and the market becoming less liquid.

So bringing those ideas and those additional model adjustments to the IFRS 9 calculation, it did increase our probability of defaults, which had the effect of changing some of our books from stage 1 to stage 2. Forgive me for the technicality of this and happy to answer questions later on.

Also in terms of recovery rates dropping, that does increase the loss in default, and the net effect of that is the overall expected credit loss provision increased by 27% to 2.8% of our lending book. What’s going to happen in the next 6 months? It’s very difficult to predict. One would say that when the forborne loans, for example, start to come back to being paid, which is likely probably in September and later, we will truly know how it’s affected those customers.

I will leave it at that point. And perhaps there will be some questions later, and I can answer those. But if I can now hand over to Robert Murray to Slide 8 and onwards.

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Robert John Murray, PCF Group plc – MD, Company Secretary & Director [4]

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Thank you, David. Good morning to everybody. What I was going to do is sort of cover 3 things from an operational basis and predominantly focus on the lending side of the business, which is to talk you through H1 performance, what the impacts were on us, particularly on the lending side of the business as a result of COVID-19 in mid-March and onward and also what trends we’re seeing.

So during H1, I guess more particularly over the last 2 months since we’ve started to see the impacts of COVID-19. So the first slide here is just a real, very simplistic picture of our business model. The 2 sides to the balance sheet, funding and lending. On the funding side, you’ll see that 92% of our money comes in via deposits. We’ve seen growth during H1. Post 31 March, we’ve not really had much need to access the markets because of the drop in lending volumes. But when we have had to go into the market, we found it largely unchanged and quite easy to access deposits as and when we need them. So we feel comfortable on that front in terms of availability of fund as and when we you need them.

On the lending side, you’ll see there that over 50% of the portfolio is Business Finance. That’s actually trending in a downwards direction. So the final, that’s September ’19, it was 54%. In the previous year, it was 55%, and that’s really a factor of a slowdown in growth of Business Finance and an uptick in growth, particularly in Consumer Finance, which I’ll come on to later. And a trend that we will probably see in the full year results is Bridging Finance, having an increase in share of the portfolio.

On the next slide, we talk about the COVID-19 impact and how we’ve dealt with it. So I think Scott and Dave already mentioned that we’ve had business continuity plans in place for — well, since 9/11, but certainly as a bank, they’ve been increased to a far high level. And we check those plans on a fairly regular basis. So I think 2 weeks before COVID-19, we had our collections team working from home for 2 days and that worked satisfactory. And we find out where we can improve our remote working. But it put us in a position when the initial lockdown started on the 17th of March that we could start having staff work from home.

And by the following Monday, on 23rd, the entire workforce was working from home, and it’s worked very effectively. And as David said, our IT department has done a fantastic job, enabling us to remain open in all of our business segments, whether it’s savings or any of the different lending divisions. We made use of the government’s furlough scheme, particularly in sales and sales support. And even more particularly Azule, which is effectively a sales unit for us. Although we do write some of that business on our own book, it’s a sales machine. And then progressively, over the last 2 months, we’ve furloughed for the staff as and when we’ve thought it necessary.

Capital and liquidity has been a focus for the Board from the immediate start of the crisis. We’ve had weekly meetings to review both our capital and our liquidity position. We feel very comfortable with where we stand at the moment. We’re well above where we would like to be both in terms of our TCR and our LCR. We have availability on Tier 2 facility and also, as David mentioned, have access to the TFS, any funding scheme, which will give us further liquidity going forward.

I guess the key areas to discuss were on how COVID has affected both our lending and forbearance. So on the lending side, we saw an immediate drop-off in demand, most severely hit Azule. It’s probably because of social distancing, people canceling TV filming concept. It had the impact most dramatically. And then progressively, we’ve seen an uptick, but the uptick has been more obvious in consumer motor finance and bridging finance. I’ll come on to those in more detail.

And then what we’ve done in terms of lending is obviously have a flight for quality. So we’ve been progressively tightening our lending terms over the last 2 months. We’ve upped our targets for credit quality from 75% to 90% in our prime credit grades and were, in fact, tightening that even further during June. So I think a clear message to everybody that we’re focusing on top-quality business now.

In terms of forbearance, you’ve got stats there as to which areas have been most affected. And in particular, it’s been Azule and our Business Finance business. During the course of the crisis, we improved our processes through increased automation. We started to get a handful of requests very early on in March, maybe the second or third week of March. By the middle of April, it progressed to quite a constant stream of requests. And we improved all of our processes, redeployed staff, and thankfully, we’re ready to be on top of the situation before the end of May and have no sort of outstanding requests.

During the April-May period, we had some fluctuations in arrears with customers going into arrears, but then asking for forbearance, and there we’ve really seen the true picture on how the portfolio has performed during that 2-month period. But effectively at 31 May, our arrears statistics have regularized. And certainly, the percentage of up-to-date accounts is back where it was pre-COVID. The only caveat to that, obviously, is that we have a significant portion of our portfolio, which is forborne. And the big question mark is how many of those can see through the next 3 to 6 months. Sadly, I can’t give you the answer to that.

If we then move on to the next slide, where we just talk about new business originations across the group. You see from this slide that the real growth over H1 has come from consumer motor finance, which was up 48% to GBP 43 million. And this was on the back of something which we’ve mentioned in previous presentations about launching an automated prime proposition in our consumer motor finance division, where we had real speed with decision-making.

So if you drill down into the numbers for H1, what you’ll actually see is that Consumer Finance went from GBP 18 million in Q1 to GBP 25 million in Q2, whereas Business Finance dropped from GBP 38 million in H1 to GBP 28 million in H2. I think going back to the original slide that I started off on the mix of our portfolio, I think what that’s going to show is the trend going forward is that Consumer Finance is going to grow. And as a percentage of our portfolio, Business Finance is going to reduce, as I’ll comment to shortly. I think you’ll see Bridging Finance grow materially as well.

So the next slide is on Business Finance volumes. They were up 16% to GBP 66 million. We’ve seen growth, as you can see on the chart over the last 3 years, but that’s probably starting to — the growth rate will drop. And certainly, over the last 2 months, we haven’t seen a lot of opportunities in the business finance market.

Consumer Finance, as I said, starting to see some real growth. The prime proposition’s proved to be a success. We’ve developed some real momentum during February and March. And although we had a drop-off in — immediately in March and early April in proposal level, we’ve seen that increase over the last 6 weeks. And clearly, there’s more demand for consumer motor finance in the current climate than there is business finance.

Azule, as I mentioned, was most affected, the immediate impact. Its business in the first half of our year is typically quite low anyway because it’s a seasonal product. There’s not much filming goes on during the winter months because of the lack of daylight hours. But on the other hand, as you would expect to see this time of the year as being its busiest and it’s, without doubt, it’s most quiet at the moment. So we don’t see a huge amount of opportunity in Azule in the current climate.

And the one area, turning to my final slide, is bridging finance, which had a good first 6 months. It’s really been able to take advantage of market conditions since COVID impacted the economy insofar as the number of the nonbank lenders in the bridging market have withdrawn because of liquidity issues or they have investors that just want to revert back to cash and have their positions liquidated as quickly as possible.

So it’s created a lot of opportunities for us at a time when we had also in January recruited an experienced business development manager to join our team. So in addition to seeing an uptick in February and March in new business within the bridging division, we’ve seen continued growth during April and May and would expect that to continue in June and feel that we’re now starting to establish a good foothold in that market.

So I think that covers my area, and I’ll hand you back to Scott to round up.

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Scott David Maybury, PCF Group plc – CEO & Director [5]

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Great. Thank you, David and Robert. I’m on to Page 15. It’s with COVID, the effect of COVID in the pandemic. It’s sometimes easy to forget about achievements, but there were certainly plenty of them in the first half leading up to the disruption.

As you’ve seen from David, the underlying profitability was strong, and we’re tracking towards our previously ambitious targets. It will take some time to rebuild that momentum. But we shouldn’t forget that we were on track and performing strongly up to that point. We’ve seen continued growth, as Robert’s taken you through each of the business lines, and our focus on the prime segment has been reinforced and more than 74% of our total book is in prime now, having really increased our penetration into the prime sector since becoming a bank in 2017.

Our strong growth you’ve heard in bridging, a very successful launch of our automated consumer motor product. We’ve spoken at length in the past about that. But seeing the model proven, seeing the success and momentum we’ve built up, that is ready to go as soon as we see a return in economic activity in the U.K.

And we have shown that through scale, the operational gearing of the business has delivered a lower cost-to-income ratio. All the time we’ve been investing in people and systems and infrastructure such as the automation of consumer motor and not stopping the spend in any of those areas.

On Page 16, very much our focus at the moment is around the well-being of our staff, looking after our customers, both whether they need to borrow money at the moment or whether that’s the assistance in forbearance and really protecting the capital and shareholder value of the business.

So our strategic plans and targets that have been previously announced are largely on hold, I would guess, at the moment. We’ll reset those targets and we’ll refocus those strategies as we move through the course of this year and we have some sort of idea about how this pandemic is going to play out and have some sort of certainty on as and when the U.K. starts to go through some form of recovery.

So at the moment, it’s about resilience and minimizing the impact of COVID-19. As Robert said, we’re open for business across all business lines. Our systems allow us to do that, with tightened credit terms across all business lines as well, which is only sensible from both a capital preservation point of view, but also not knowing how deep this recession should be. It makes absolute sense to take just the best quality business while continuing to support out the U.K. consumer and the U.K. SME.

We will take the knowledge that we’ve gained from building an automated consumer motor product and push on with building a market-leading portal for SME lending. Robert identified that after 40%-plus growth in our Business Finance originations over the last 2 years, that’s plateauing slightly. We feel as though we can instigate another level of growth through better processes and a better customer experience when it comes to SME lending, and we learned quite a bit through the motor project.

We’ve spoken about the capital base and our access to TFSME with its 10 basis points cost of funding. We’ll continue to invest. And we do feel when we do refocus our strategies over the latter part of this year, the prime proposition is ready to push on again. The bridging market you’ve heard from Robert, I think we’re really forging a presence in that space. And I do believe that opportunities will arise through fewer competitors in the marketplace, opportunities for us to diversify. And I also think there’ll be some market consolidation as well.

I wasn’t going to spend too long on Slide 17. The strengths of our business model [are that see] in our ability to continuing to operate successfully through this crisis. But a number of those can’t be stressed enough at times like this. Things such as a Board and management team who have seen several recessions operated through a collection environment that’s obviously going to be quite tricky and come out with a business that’s strong at the end of the day and in a position to take the opportunities as they arise.

So just to summarize, we’ve proved resilient. We’re continuing to operate. We’re limiting the effects of COVID-19 on business. It’s difficult at the moment to, with any certainty, estimate the effects on the collectibility of our portfolio. But I would stress that forbearance cases in the majority to good paying customers, 96%, 97% of our book is up to date. So there is no reason why you wouldn’t be wanting to help those people. So the sooner we see some economic activity, as soon as those SMEs can recover.

We had strong portfolio growth ahead of the crisis. Our results have been hit by a COVID impairment charge of GBP 1.6 million as you’ve seen. So many of our KPIs, which you’ve measured us against in the past are down, but we will continue to focus on those, and we’ll reset those in the near future. We’ve got a successful track record through previous credit cycles. We have entered this in as good a position as possible with a strong capital and liquidity position and where our intention is following the disruption to come out of this in the best possible conditions to take advantage of the opportunities as they arise.

So I believe there’s no doubt this is disruptive to the whole of the U.K. banks and companies, and our results will reflect that over the course of this year. But I still believe there’s substantial opportunity for us to grow as the U.K. recovers and as we embark back on our regional growth strategy that we’ve had in the previous 2 years.

So I was going to leave it there, open up for questions. There are several appendices, which we weren’t going to go through, but if you’ve got questions on the income statement specifically or the balance sheet or any of the more granular sides on portfolio analysis and credit quality, we’ll be happy to take those or more generally, just outlook questions and questions on the presentation today. So let me hand over to Ed, who I think is going to facilitate the questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Vivek Raja of Shore Capital.

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Vivek Raja, Shore Capital Group Ltd., Research Division – Analyst [2]

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I just want to explore the quality of the loan book. And I appreciate — thank you for the disclosure on the IFRS 9 impairment overlay. Obviously, I’m not — I don’t understand exactly what you’ve assumed there in terms of asset value fall. So first question is, what proportion of the loan book is in the highest LTV bands? And I leave that to you to interpret in terms of what I mean by high LTV bands. I see obviously that — forgetting about collections that as the obvious risk. And then sort of connected to that, what are you thinking about secondhand car prices in the second half of the year? And what are the comments you can give to what you’ve applied in your IFRS 9 modeling with respect to that? That’s what I wanted to know, please.

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Scott David Maybury, PCF Group plc – CEO & Director [3]

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David, perhaps the IFRS 9 question, you’re best to start on that, and then Robert can finish off on any other points.

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David Richard Bull, PCF Group plc – Finance Director & Executive Director [4]

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Okay. I guess, from a — just on the LTV point, our books, so bridging, for example, we only go up to 75% loan at the end of the loan. So nothing gets more than 75% [sitting] in time in bridging. Whereas on the other books, we would go potentially higher than 100%, but I think our overall average is just below 100% on LTV across those books.

In terms of recovery rates, we looked at those. And of course, the recovery rate is one input to what we calculate for our loss given default calculation in the IFRS 9 model. We’ve looked at — we looked at a couple of options in terms of reducing recovery rates by 20%, 10% and 30%. So we look for those options, and that’s the kind of ballpark reduction in values that we’ve modeled.

Don’t want to be too specific there, but we’re talking about a blended rate across those numbers.

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Scott David Maybury, PCF Group plc – CEO & Director [5]

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I would just add that we were able to look at those recovery rates as well and the performance of the book against previous experience in the global financial crisis, where we saw similar falls in recovery rates and asset values. So we’ve been able to borrow on behavioral performances of past recessions. And I guess that’s one of the strengths of the business. I focus on the management strength in the experience of collections, but it’s also the experience of going through a downturn before. So I think a lot of our past experience can be built into our modeling when it comes to IFRS 9, which is a real strength.

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Vivek Raja, Shore Capital Group Ltd., Research Division – Analyst [6]

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I wonder if you could comment on your view on car crisis, please.

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Robert John Murray, PCF Group plc – MD, Company Secretary & Director [7]

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Should I pick up on that one?

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Scott David Maybury, PCF Group plc – CEO & Director [8]

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Robert, do you want to pick that up?

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Robert John Murray, PCF Group plc – MD, Company Secretary & Director [9]

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Yes, sure. I think we’ve always been a used car lender. I think we’ve been saying over the last couple of years, while new car sales is — have been on a downward trend, whereas used car sales have been on an upward trend that we feel in a more comfortable position than a lot of lenders. I think that’s still true. And I think sort of the anecdotal evidence we’re seeing at the moment, an industry chat is that more people are going to start looking to buy cars now because of the reluctance to use public transport, and that demand is more likely to be in the used car market. Now whether that — what that does to prices is hard to say, and the area where we don’t have any real evidence is from auction prices. So we track what we achieve when we get vehicles back from customers through repossession, what we sell before auction versus the cap, trade value.

But the auction houses have been closed until beginning of this week. So they’re probably closed in 6 to 8 weeks. So we haven’t been in a position where we had any statistics to show what’s going on in the market. I attended a webinar in April where prices were — that sign was pretty stagnant. They weren’t going up or down. So it’s hard to say, Vivek, really. I think it’ll come out over the next 2 months. But as I said at the outset, I think the important thing is, as a used car lender, I think we’re in the best position than those new car lenders. And certainly, those who are in the PCP market are now sitting on vehicles coming back and probably being significantly underwater.

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Vivek Raja, Shore Capital Group Ltd., Research Division – Analyst [10]

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Okay. What portion of your dealers are actually trading at the moment? How many of them have sort of closed up because of COVID-19? How many of them have sort of remained trading?

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Robert John Murray, PCF Group plc – MD, Company Secretary & Director [11]

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So don’t necessarily have a statistic for you on that. What I can tell you is that during April and May, we saw quite a flow of business for customers who had agreements with other funders with the balloon payment and the balloon is set at a level where it is an attractive lend in terms of current LTVs. And we saw that as quite a rich stream of business because you had a customer who already had the vehicle, wanted to clear a balloon with a sub-100% LTV. They’ve been paying for the vehicle for 3 years and the new installments were less than they were paying before, and they were in our top 2 credit grades. So that’s a sort of a niche of business that we found quite attractive during the last 2 months. Dealerships are starting to open. So some of that growth is particularly on the Consumer Finance side as some of the dealerships were closing in March and April. The growth has effectively closed down. But they’re all back in business now. And I think the opening of car dealerships this week will probably give an emphasis to that sector.

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Vivek Raja, Shore Capital Group Ltd., Research Division – Analyst [12]

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Okay. That’s very helpful. Forgive me for asking one follow-up question. David, when you talk about the LTVs, the 100% across the books ex bridging, can you just remind us your basis for calculating your LTV? Because I think that’s quite important.

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David Richard Bull, PCF Group plc – Finance Director & Executive Director [13]

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Yes. So when we talk about an LTV, we’re comparing to the trade price that we get from capital [glasses guide] against the capital balance of the loan that we first lend them in the — at the start. I mean, obviously, now as an average across the book, you would expect it to be slightly lower. But typically, the loan is paid off quicker than the value of the asset drops. But of course, that may well be corrected with the slight reduction in recovery rates just now.

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Vivek Raja, Shore Capital Group Ltd., Research Division – Analyst [14]

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Okay. And to get a sense of the price to the sort of end consumer, what is the sort of typical markup on that trade value?

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Robert John Murray, PCF Group plc – MD, Company Secretary & Director [15]

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Depends on the vehicle, Vivek. And one of the things that’s interesting is it depends on the ticket size. So you may well have a dealer who has an approach of I want to make a profit of GBP 2,000 on every car. So if you say that GBP 2,000 is the difference between trade and retail, you can see how the percentage would be different if you had a car which had a retail value of GBP 6,000 and a trade value of GBP 4,000 versus a car that’s got a retail value of GBP 25,000 and trade value of GBP 23,000. So we do — we find some unusually high LTVs on low-value vehicles. But the actual pound risk is relatively small.

So to give you an example. If I said, well, a car retails at GBP 6,000, the customer puts in GBP 1,000 deposit and the trade value is GBP 4,000. That is 125% LTV. But the risk is actually only GBP 1,000. And what you would find is that a vehicle of that ticket size would probably only be financed over 3 years. And so that LTV risk of GBP 1,000 would diminish quite quickly. I think the customer would repay the money faster than the car depreciates.

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Vivek Raja, Shore Capital Group Ltd., Research Division – Analyst [16]

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Okay. I guess, I mean, what I’m pushing for, which it sounds like you’re not able to give, is what that 100% means if you assess that value based on what you can actually ultimately realize in the market at that — in a normal market, the retail price. That’s what I’m asking. I appreciate you’re saying that it depends on the credit in each given circumstance and you’re not able to sort of provide a rule of thumb on that.

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Robert John Murray, PCF Group plc – MD, Company Secretary & Director [17]

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Could you just ask the question again? Just so I’m clear what your…

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Vivek Raja, Shore Capital Group Ltd., Research Division – Analyst [18]

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Yes. So your LTV is based, obviously, on the trade price. And that, I suppose, is in principle, what you would have if you had to repossess the car you could ultimately realize in the trade market. What I’m trying to work out is, if you could give a blend of that 100%, what does that mean in terms of the retail price? But I appreciate you’ve said that it depends on credit by credit, but can you give us a sense of what that 100% is on a retail value?

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Robert John Murray, PCF Group plc – MD, Company Secretary & Director [19]

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Well, I guess if you looked at those 2 examples I gave, if we are to lend GBP 100,000 — oh sorry, 100% LTV, on the first example of a car retailing at GBP 6,000, but having a trade value of GBP 4,000, the customer will be paying a deposit of GBP 2,000. So if it was…

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Vivek Raja, Shore Capital Group Ltd., Research Division – Analyst [20]

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Sorry. Robert, forgive me. I understand that, but I’m asking if you could just give a sense of where you think it has been and where it is at March across the overall book.

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Robert John Murray, PCF Group plc – MD, Company Secretary & Director [21]

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No, we don’t have that for you.

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Operator [22]

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Our next question comes from the line of Robert Sage of Peel Hunt.

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Robert Ian Sage, Peel Hunt LLP, Research Division – Analyst [23]

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I have 2 questions. The first is on the net interest margin. And I hear what you say in terms of further erosion of the margin is likely going forward. I was just wondering whether you could comment on the likely trajectory of the margin. Do you expect it to continue to decline at roughly the same rate as we’ve seen over the last 6 months? Or do you expect that to slow down?

The second entirely unconnected question is just looking at the COVID-19 provisions and the capital ratio, which I think you quote 17%. Have you been able to claim transitional relief for the COVID-19 provision?

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David Richard Bull, PCF Group plc – Finance Director & Executive Director [24]

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Shall I?

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Scott David Maybury, PCF Group plc – CEO & Director [25]

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Thanks for that, Robert. Yes, please do.

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David Richard Bull, PCF Group plc – Finance Director & Executive Director [26]

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So the COVID-19 impairment is — unfortunately, there’s no transition available. Although IFRS 9 as an accounting standard has got transitional rules attached to it, there’s nothing specific that we can get regarding the COVID-19, unfortunately.

In terms of the NIM, I would say NIM, to some extent, is a factor of how much of our book is in prime. And as we’ve said, our prime new business percentages have been in the 80%, and we’re targeting 90% or more going forward. So by that mere fact, you’d expect NIM to come down. But I don’t — because we are circa 75% prime already, I wouldn’t expect NIM to come down as markedly as it has done in the last couple of years. So we should start to see in the next probably year to 18 months of bottoming out of that NIM and operational gearing starting to kick in as we grow the book post the fallout of the COVID-19 pandemic.

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Operator [27]

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Our next question comes from the line of Rae Maile of Panmure Gordon.

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Rae Anthony Maile, Panmure Gordon (UK) Limited, Research Division – Research Analyst [28]

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Just picking up from Robert’s question about the NIM. Obviously, the improvement in the underlying impairment charge we saw in the first half, presumably, you would have expected that to be trending lower as well to match off against the lower NIMs. Is that a fair view?

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Scott David Maybury, PCF Group plc – CEO & Director [29]

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Yes.

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David Richard Bull, PCF Group plc – Finance Director & Executive Director [30]

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Yes.

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Rae Anthony Maile, Panmure Gordon (UK) Limited, Research Division – Research Analyst [31]

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And in view on where, in normal circumstances, you might have expected that otherwise to have gone towards?

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David Richard Bull, PCF Group plc – Finance Director & Executive Director [32]

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I think it’s a difficult one. But if you look at our previous results, and we’ve sort of talked about maybe 70 basis points has been something that was our kind of benign impairment cost of risk charge. But I’d certainly say, because of our split of prime increasing, you would expect 70 to become 60 or even 50 basis points. But that’s slightly crystal ball viewing because what is a benign market, not — I don’t think we’ll be seeing one for a couple of years.

But nonetheless, I think from a curious point of view, I would expected that to come down by 10 or 20 basis points from what we saw previously.

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Rae Anthony Maile, Panmure Gordon (UK) Limited, Research Division – Research Analyst [33]

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Okay. And can I pick up on…

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Scott David Maybury, PCF Group plc – CEO & Director [34]

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Rae, I might —

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Rae Anthony Maile, Panmure Gordon (UK) Limited, Research Division – Research Analyst [35]

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Yes. Sorry, Scott, carry on.

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Scott David Maybury, PCF Group plc – CEO & Director [36]

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I was just to add to that, Rae…

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Rae Anthony Maile, Panmure Gordon (UK) Limited, Research Division – Research Analyst [37]

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I’ll let you go, Scott. How about that?

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Scott David Maybury, PCF Group plc – CEO & Director [38]

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I was only going to add that I think Vivek was touching on the same point here that there’s a combination of being in that fall in impairment charge, that I think David’s right to sort of signal the direction of that charge. There’s the credit quality, which will lead to it as well. But I think over the short term, we are going to see some pressure on asset prices. And of course, our collection strategy is about can we, should a customer default, it’s about getting the vehicle back. So as long as you’re forecasting less than trade in a normal market, which we do, you should cover the balance of the vehicle. And in the case of where the vehicle hasn’t been well looked after and it doesn’t achieve trade value in a distressed sales situation, you have the customers to pull back on as well. So it depends. That can be a slightly long (inaudible) and as before, as the global finance crisis can take a number of years to collect all that money, but we have a very successful track record of getting in excess of 75% of anything that’s left on any balances back from our customers.

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Rae Anthony Maile, Panmure Gordon (UK) Limited, Research Division – Research Analyst [39]

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Okay. I suppose following on from that then. I mean in the forbearance, which you’ve been granting to date, I mean, have there been any particular pockets of demand for forbearance? Or has it been fairly widespread across the book?

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Scott David Maybury, PCF Group plc – CEO & Director [40]

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Perhaps, Robert, you can take that?

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Robert John Murray, PCF Group plc – MD, Company Secretary & Director [41]

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Yes. It’s been pretty widespread across the book. There are obviously certain areas that it affects more than others. I mean you see that within our own provisional statistics as you’ll have the highest level of — or a high percentage of its portfolio being forborne because that is the sector which really has been hit very hard. If you looked within the business finance arena, certainly, coach and bus is the one that we’ve seen greater incidence or — okay, yes, I guess all of our coach and bus customers, there’s been a high percentage that have asked for forbearance simply because they can’t — they have not been able to operate. And when they are able to operate, they’ve got social distancing issues to continue as well. So those are the 2 that immediately come to mind.

What I would say is we were quite surprised that we saw some of our longer standing, what we would classify as our best customers, come to us for forbearance. But equally, we saw some fairly new businesses be able to survive without having to ask or request (inaudible).

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Operator [42]

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Our next question comes from the line of Neil Gordon of Investec.

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Ian David Gordon, Investec Bank plc, Research Division – Head of Banks Research [43]

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It’s Ian from Investec here. One comment really, and then 2 questions. Just on the earlier discussion around the reopening of car showrooms. I was at a couple of dealers yesterday and it’s absolutely bubbling. The only problem they had was a lack of stock given the interruptions at the auction houses and retail punters bringing in cars for sales. But hopefully that’s a good sign of how things would evolve. My question, I wondered if you could just say something about the materiality of your use of the furlough scheme. Is that, for example, sufficient to offset frictional costs or dealing with people working from home, i.e., might be thinking of costs as perhaps being broadly flattish half-on-half looking into the second half?

And then secondly, just coming back to the COVID-19 overlay on impairments. Can you just say something about your high-level macro assumptions around unemployment and GDP, just to give some context in terms of the absolute number?

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Scott David Maybury, PCF Group plc – CEO & Director [44]

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Okay. Thanks, Neil (sic) [Ian]. Perhaps if I take the first part and then I defer to David on anything IFRS 9, not going to get into those discussions.

The first one on furloughing and costs, it’s a good point. I think we will probably find it difficult to see our cost-to-income ratio continue to fall in the second half. Certainly, furloughing costs won’t offset the costs in the business, and that’s partly because we have remained open for business across all areas. So service levels are important, but also we have redeployed staff within the organization to make sure that customers under stress as far as requiring forbearance have a good experience with this as well. And we don’t make trouble times like this even worse for them. So those staff who would normally may be producing income to the top line, they’re protecting and safeguarding the assets.

And I think the other reason why we will find it a little harder in the second half to continue to bring that down is, of course, we were very much gearing up for continued strong growth. You’ve seen the last 2 years in the first — our first 2 years of operation as a bank. We’ve got a lot of resource, increased staff numbers, put quite a bit of money into infrastructure as well, premises as well, we have increased our premises’ size. All of those things were put in place pre-pandemic. So we’ve got — in some ways, we’re going to live within that cost base for a little while until we can get back onto that growth path. David?

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David Richard Bull, PCF Group plc – Finance Director & Executive Director [45]

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Just looking at my statistics, which — so in terms of our macroeconomic curves, as you say, we have 4 that we look at: CPI, unemployment, GDP and the used car price index, which is part of the CPI sort of bucket of indexes. I think what we’ve — what we like — we considered on the GDP a significant drop. And I think it’s something like 20 — was it 20% or so in the first quarter after March and then it starts this — the curve starts to come slightly back towards the end of the year. I think unemployment rates, we looked at stressing that out to about 8% as a pessimistic level.

So these significant changes from what was previously, so doubling unemployment, significant reduction in GDP has had that — has contributed quite a lot to that GBP 1.6 million of our impairment charge.

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Operator [46]

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Our next question comes from the line of Rob Sanders of Shore Capital.

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Robert Edward Sanders, Shore Capital Group Ltd., Research Division – Analyst [47]

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Can you hear me?

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Scott David Maybury, PCF Group plc – CEO & Director [48]

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Yes.

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Robert Edward Sanders, Shore Capital Group Ltd., Research Division – Analyst [49]

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Okay. Just first quickly, so the business is in much better shape now than it was in 2012 when I first started analyzing you. And I think you’re in a much better position to gain market share as you leave this crisis.

So that’s sort of key questions. What’s happening with the competition? You’ve touched upon it in the statement about potential M&A. Which areas do you think you would like to get into? Is it more of the same? Or is it a new leg?

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Scott David Maybury, PCF Group plc – CEO & Director [50]

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Okay. Perhaps if I take that. Thanks, Rob. The — I think there will be fewer participants. I think it’s amplified probably most in the bridging finance area at the moment. Anyone that doesn’t have a banking model and access to liquidity is obviously struggling at the moment. That will leave them a shadow of their former self, I think, if that goes on for any length of time. And not just the strength of that business coming out of this, it’s also our ability to get in with the introducers of that market and make part of that market our own.

So I think there’s some real opportunity there. I think also the fact that some of these businesses will be in a weaker position will allow for some consolidation. So that would — for us, that would fall along our normal business lines because we feel most comfortable with perhaps a portfolio acquisition in areas that we already operate in. But we will continue to look for diversification targets as well.

I think one of the strengths of our model and one of the reasons that you touched on that we are stronger as a business isn’t just — it is certainly the access to funding in the retail deposit market, but it’s also a more diversified balance sheet that we had. I know myself that there have been a number of people looking at our asset classes, and some people have positive and others have negative views on the motor sector, but it looks like they’re probably the more resilient part of the book coming through this crisis.

So when a lot of people probably saw a really strong future in SME lending in the U.K., having a balanced portfolio with all those areas has been a real strength for us. So I think M&A in another business line related to either consumers or SME, and I’m not picking anyone out in particular, I think it will come down to the opportunity. And what we always say with an acquisition, it’s about the people, people who buy into our strategy, our story and have a real knowledge in the business sector is what’s really attractive to us.

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Robert John Murray, PCF Group plc – MD, Company Secretary & Director [51]

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Just to follow on, Rob, with what Scott just said. I guess from my perspective, the question you asked is what’s happening with the competition. I think the majority of banks like ourselves have tightened credit, reduced LTV, [up rates]. Because in some areas, there’s probably more demand than there is supply, and the suppliers predominantly gone from the independents, and that would be both in Business Finance — well, across 3 pieces really: Business Finance, where the independent finance companies in the way that PCF was pre-banking license, who use discounts as a means of funding, and they’ve been very severely restricted over the last 2 months by those lenders. Some of the competition, independent competition in the consumer car finance market who are backed by very large bank facilities, they’ve pulled out the market. And then as I mentioned earlier, in the bridging market, in particular, we’ve seen withdrawal from the market of nonbank-funded lenders who typically use high-net-worth individuals to fund their business.

So that creates opportunity across the board. I think it also — what it does do is highlight what a good move it was for us to get a banking license. So we insulate ourselves from that funding risk that we already identified back in 2011, ’12, that if you put yourself at the mercy of one funder, you have the risk that you can be out of the market before you know it.

And then on top of that, as a bank, you got — we now have the advantage of the Term Funding Scheme, which we’ll certainly be using over the coming months, which is a great source of funding for us at a very, very cheap rate, and will probably help our NIM a bit over the next year.

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Operator [52]

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Our next question comes from the line of James Fletcher of Cenkos.

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James Fletcher, Cenkos Securities plc., Research Division – Research Analyst [53]

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Just 2 quick ones from me. Just on the Business Finance Division, specifically. Just I appreciate there’s a lot of looking into crystal balls here and it’s early days. But just from your actual team speaking with customers, can you give us a bit of color just on — in terms of those customers in forbearance, just how permanent this feels. Do they feel they’ve got model which was permanently challenged in the new world or this is just an effect of lockdown?

And then secondly, just on kind of government intervention and things like bounce back loans, do you think that has helped perhaps some of your customers in terms of accessing cheaper finance or just accessing finance to pay your current loans back at all? Have you seen any impact there?

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Robert John Murray, PCF Group plc – MD, Company Secretary & Director [54]

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Very good questions, James. I guess — but in terms of forbearance, we’re in a very interesting period now because we have — as I said, we had our initial request coming in, in early mid-March, and they were 10 — like 2 or 3 a day at that point. But then, of course, it builds up progressively. So we have a number of customers who are going to — is coming to us possibly in the next 4 to 6 weeks, asking for an extension of that moratorium. And we’ve had a couple already. As I mentioned, coach and bus, they are the people that just said, look, the coaches are still parked outside and I can’t use them. So can I extend?

The imponderables for us are multifaceted. So we don’t know how many people who approached us in March that went on to get CBILS or bounce back loans, which will tie them over without the need to come back to a second moratorium. We don’t know how many of them have really got their feet back on the ground and don’t need a moratorium. So it’s a tough one to answer, really. I guess it’s one of those ones that maybe in 2 months’ time we’ll be able to give you a really clearer picture on it.

We’re going into — I mean, we got into uncharted territory 3 months ago. I think it’s just as uncharted at the moment as to how those forbearance requests will play out.

The other thing is that what we had found is that a lot of people who’ve gotten early were doing it not because they were desperate for cash flow benefit, but more as a matter of prudence. So to give you some anecdotal, we have had customers come back to us and say, “Oh, I’m now thinking of buying a new vehicle or a new machine. Would you fund it?” And we’ve given them the forbearance in April. And we’ve had a policy where we just say, well, we can’t because we can’t give you forbearance on the one hand. And some of them have come back with, well, I only asked for forbearance because the world is falling apart at the end of March, and I just thought I have to protect my business. So I’ll get whatever help I can. And obviously, there was a lot of media attention that time into what the FCA and what banks were doing in terms of forbearance. So I think a lot of people probably got on the bandwagon. And I thought, well, if it’s there, I’m going to take advantage of this opportunity. So some of it was not desperation. It was more prudence.

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James Fletcher, Cenkos Securities plc., Research Division – Research Analyst [55]

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Yes. That’s good. Excellent.

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Scott David Maybury, PCF Group plc – CEO & Director [56]

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I’m sorry. Sorry, it doesn’t really answer your question.

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James Fletcher, Cenkos Securities plc., Research Division – Research Analyst [57]

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No, no, no. It’s just early stage. I appreciate it.

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Robert John Murray, PCF Group plc – MD, Company Secretary & Director [58]

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No. It’s one of those things. We just don’t know how it plays out, and that’s why we’ve had to make this IFRS PMA.

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Operator [59]

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Our last question comes from the line of Vivek Raja of Shore Capital.

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Vivek Raja, Shore Capital Group Ltd., Research Division – Analyst [60]

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Sorry, me again. I just wanted to tie up your useful comments on competition with your earlier comments on net interest margin. So I guess looking over the last couple of years, the squeeze on net interest margin has been largely about the shift in mix as you improve quality of lending, offset partially by funding costs. So if I could sort of separate that into 2 parts then. So there’s also, on top of that being competition in some of the segments you operate in, I mean, for example, prime consumer before you sort of get it — got into it was an area of quite some conditions. What I’m asking is, you’ve already talked about bridging where there’s been some presumed let-up in condition. The question is, is that feeding through to price that you think you can achieve on new lending?

You sort of intimated the same thing on Business Finance, although I appreciate the focus on lending isn’t likely to be there in the second half for the near term. On consumer, what are you seeing in terms of the asset yields you can achieve compared to what you would have been doing last year?

And then on the other side of the balance sheet, on funding, since the base rate cut, what sort of savings have you been able to achieve on sort of similar tenor deposits?

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Robert John Murray, PCF Group plc – MD, Company Secretary & Director [61]

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Scott, pick up the lending one quickly?

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Scott David Maybury, PCF Group plc – CEO & Director [62]

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Yes, sure.

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Robert John Murray, PCF Group plc – MD, Company Secretary & Director [63]

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I think pricing is a combination of 2 factors at the moment, Vivek. So we are inching our pricing up on a regular basis. And the 2 factors are, one, supply and demand. So as I said, there’s less supply in the market, and so we feel there’s an opportunity to increase rates. The other one, I think, is just the cost of risk in the current environment should be going up anyway. And I think that’s an argument that most of our brokers understand. At the time when banks are all making pretty hefty impairment charges and they foresee credit environment tightening, now is the time to be putting up your rates.

So I think to answer your question…

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Scott David Maybury, PCF Group plc – CEO & Director [64]

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David, can you pick up?

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Robert John Murray, PCF Group plc – MD, Company Secretary & Director [65]

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Yes. We are seeing it, and we are actively managing our rates of return and pushing them upwards.

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Vivek Raja, Shore Capital Group Ltd., Research Division – Analyst [66]

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And that’s across the book?

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Robert John Murray, PCF Group plc – MD, Company Secretary & Director [67]

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Yes.

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David Richard Bull, PCF Group plc – Finance Director & Executive Director [68]

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I was — sorry, I was saying grace with Robert.

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Scott David Maybury, PCF Group plc – CEO & Director [69]

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Sorry, the question — the other side is the NIM impact for the funding. So since the base rate cut, was there anything [made] on deposits?

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David Richard Bull, PCF Group plc – Finance Director & Executive Director [70]

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Yes. Yes. So I suppose, certainly having looked in the market, and I think you’ll all see it yourself, we’ve seen the 1-year rate for deposits come down for what was precrisis, touching nearly 2% to now I think it’s more 125 basis points, 130. So there is a significant drop, more than perhaps the base rate drop we’re seeing. So there’s — it’s just that we’ll drop in the market. And we’ve seen, particularly when we go to market on a rate within a few days, the market’s moved typically downwards.

So I would say, of new money, you’re looking at 50 to 75 basis points reduction in cost, which is a blend, won’t have a huge impact on our NIM, but it obviously will show a reduction as time goes on.

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Operator [71]

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And there are no further questions on the line, so I’ll hand back to our speakers for closing comments.

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Scott David Maybury, PCF Group plc – CEO & Director [72]

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Okay. Thank you. Thank you very much. And thank you, everyone. Thank you for your questions. A really good round of questions. Again, I (inaudible) with you through the core presentation that we’re open for business and we’re resilient. We’re in a good position — as good a position as we could have been entering this crisis. (inaudible) likely after having overall consecutive improved years of growth post banking (inaudible) but we have confidence that we’ll return to that in the not-too-distant future.

I hope this format worked for you (inaudible) face-to-face as we normally (inaudible) any follow-up questions, please (inaudible) and we’re happy to providing any information, follow-on information that you’d like. So take care, everyone, and we hope to see you all again soon. Thank you.

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Operator [73]

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This now concludes our call. Thank you for attending. Participants, you may disconnect your lines.