'Will go mainstream': Warning issued as specialist Yorkshire lender sees customers unable to repay credit card debts
A rise in customers of a specialist Yorkshire lender being unable to repay their credit cards debts due to cost-of-living pressures is an “early indicator” of the problem becoming mainstream, an analyst has warned.
Vanquis Banking Group, which specialises in offering finance to customers who struggle to get credit from mainstream lenders, announced another cut in guidance in its latest results in connection with the issue – resulting in a 34 per cent drop in the company’s share value in early Thursday trading.
It recorded an increase in credit card 'charge-offs’, in which months of missed payments are written off as an accounting loss.
The company said: “Customers have generally remained resilient, but towards the end of the third quarter, signs of affordability pressure emerged in some credit card customer cohorts amid continued cost of living pressures on household finances.
"This was reflected in a rise in credit card charge-offs, driven by an industry trend of increased individual insolvencies, where customer's credit balances are immediately charged-off, rather than a notable deterioration in delinquencies.
"This has also meant the group has recognised increased IFRS 9 expected credit loss provisions, reflecting the modelled risk of continued elevated charge-offs, particularly from individual insolvencies. Together, these factors resulted in the group recognising a small loss in the quarter.”
Its guidance for 2027 was updated to reduce forecast gross customer interest-earning balances from £3.7bn to £3.4bn, while anticipated return on tangible equity has been cut from ‘low double-digits’ to ‘low single-digit’.
Abid Hussain, research analyst for Panmure Liberum, said: “The third quarter to September has proved to be another difficult period, with signs emerging of elevated cost of risk, with its customer base experiencing a cost-of-living squeeze.
"This has led to an increase in individual insolvencies over the period, which in turn require higher provisions to be set aside. This has resulted in a second cut in guidance in as many quarters.
"Management is attempting to get ahead of the situation. The tools at their disposal are slower growth, tighter underwriting criteria, and cost control.
"Management assumes the deteriorating conditions will persist into next year. It is difficult to rule out further deterioration given the macroeconomic backdrop. We cut our earnings estimates and reduce our target price, but retain Buy, given the deep value the shares now trade on.”
He added: “Who Vanquis lends to matters here. Its customers are non-prime households with the least slack in their budgets, so they feel a squeeze first and seek a formal solution to their debts first. That makes Vanquis an early indicator, not an outlier.
"The stress that reached its charge-off line in the third quarter has not yet surfaced in the mainstream card and consumer books, but it usually works its way up the credit spectrum with a lag. We would expect the mainstream lenders to report the same trend over the coming quarters.”
It was announced last month that Vanquis CEO Ian McLaughlin is standing down for personal reasons and will leave his post by the end of the year. Its latest trading statement said an announcement on his successor is due next month.