Technology Transformation And Second Charge Mortgages Will Drive Powerful Long Term Earnings Rebound

Catalysts

About Vanquis Banking Group

Vanquis Banking Group is a specialist UK bank focused on serving underserved customers through credit cards, vehicle finance, second charge mortgages and digitally enabled savings.

What are the underlying business or industry changes driving this perspective?

• Technology transformation through the Gateway program, including modern data infrastructure, a new mobile app and automated decisioning, is expected to materially lift operating leverage, lower unit servicing costs and support structurally higher net margins and earnings.
• Expansion in second charge mortgages, where Vanquis is rapidly becoming a market leader with low cost of risk and attractive capital efficiency, should drive above-system balance growth, resilient fee and interest income and structurally higher returns on tangible equity.
• Rising demand for affordable used-vehicle finance in a constrained consumer environment, combined with the strong position of Vanquis in the resilient non-prime segment, supports continued risk-adjusted yield strength and earnings growth as the vehicle finance book scales on a more efficient platform.
• Digital engagement via Snoop, the new app and data-led marketing across social channels is reducing customer acquisition costs and improving cross-sell, supporting faster balance growth at lower CPA and enhancing revenue and profit scalability.
• Normalization of complaint volumes and regulatory clarity on historic issues, coupled with tighter fraud controls and mature debt sale programs, is expected to structurally reduce drag from remediation and complaints, improving cost-to-income, net margins and free capital generation.

Assumptions

This narrative explores a more optimistic perspective on Vanquis Banking Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Vanquis Banking Group's revenue will grow by 33.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -28.4% today to 18.7% in 3 years time.
• The bullish analysts expect earnings to reach £123.2 million (and earnings per share of £0.45) by about December 2028, up from £-78.9 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as £95.6 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 4.1x on those 2028 earnings, up from -3.7x today. This future PE is lower than the current PE for the GB Consumer Finance industry at 6.2x.
• The bullish analysts expect the number of shares outstanding to decline by 0.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.31%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The Gateway technology transformation carries significant execution and timing risk. Any delays, cost overruns or failures to deliver the planned automation and new platforms by mid 2026 could trap Vanquis in a high cost, high manual processing model for longer, limiting scalability and putting structural pressure on both net interest margin and net earnings.
• Vanquis is increasing exposure to non prime, economically vulnerable customers and older used vehicles at a time of persistent cost of living pressures in the UK. Any macro downturn, higher unemployment or stress in this cohort could quickly reverse the current resilience in credit quality, driving higher impairments, a rising cost of risk and weaker risk adjusted income.
• Although complaint volumes and CMC driven referrals are falling, the long term regulatory and legal backdrop remains uncertain, including the FCA consultation on motor finance redress and the PRA capital review. A less favorable outcome on redress scope, CMC practices or capital requirements could sustain elevated remediation costs, raise capital intensity and compress return on tangible equity and free capital generation.
• The strategy is heavily reliant on continuing strong growth in second charge mortgages and a return to scale in vehicle finance. These segments are already diluting net interest margin as mix shifts to lower yielding secured products, so if competitive pressure or weaker demand forces further pricing concessions, revenue growth could undershoot expectations and margins and earnings could stagnate despite higher balances.
• Customer acquisition is being pushed through digital channels such as TikTok, influencers and Snoop. While this has reduced cost per acquisition, there is a risk that marketing economics deteriorate as these channels mature or competitors copy them, which could drive customer acquisition costs back up, slow balance growth and pressure operating leverage and long term profit margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Vanquis Banking Group is £1.55, which represents up to two standard deviations above the consensus price target of £1.32. This valuation is based on what can be assumed as the expectations of Vanquis Banking Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £1.55, and the most bearish reporting a price target of just £0.83.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be £660.5 million, earnings will come to £123.2 million, and it would be trading on a PE ratio of 4.1x, assuming you use a discount rate of 9.3%.
  
• Given the current share price of £1.13, the analyst price target of £1.55 is 26.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.