DF Capital achieves record levels of origination and loan book

Distribution Finance Capital Holdings plc (LON:DFCH) (“DF Capital”), a specialist bank providing working capital solutions to dealers and manufacturers across the UK, has announced its results for the six months ended 30 June 2022 and a trading update.

The Group confirms the following financial highlights, and has provided its full report for the period within this announcement:-

30 June 202230 June 202131 December 2021
6-month6-month12-month
Financial Highlights 
Gross revenues (£m)10.5             6.1                      13.5
Profit/(Loss) after taxation (£m)0.0                      (2.3)                    (3.7)
Loan Book (£m)308.7                 166.8                    249.5
Net assets (£m)           87.3           87.386.1
Customer deposits (£m)304.4160.0297.0
Regulatory capital (£m)82.884.0                      82.7
Common Equity Tier 1 capital ratio30.6%57.1%38.2%
Gross yield7.4%7.9%7.9%
Net interest margin6.1%6.8%6.5%
Cost of risk0.50%0.21%0.32%
Impairment loss coverage on loans to customers0.69%0.80%0.69%
Cost income ratio92%142%128%
Key Performance Indicators 
Loans originated in the period (£m)439295                            690
Number of dealer customers908706                            805
Number of manufacturer partners857478
Total credit available to dealers (£m)724467                            601

·      Breakeven profitability, a reduction in losses of £2.3m

·    Continued c.6% net interest margin, notwithstanding the reduction to gross yield resulting from an increasing proportion of the loan book originated directly through manufacturers with additional security in place

·    Further record new loan origination of c£439m during the period, up 49% on 2021, demonstrating the strength of relationships with dealers and manufacturers, as well as the scalability of the platform

·      Loan book reached £309m, up 24% on year-end, despite continuing headwinds

·      Loan book arrears remains low at 0.2% as a result of direct management and strength of our dealer obligors

·      Loan facilities provided to dealers increased 55% to £724m (June 2021: £467m)

·      Retail deposits reached £304m. feefo score now increased to 4.7 (2021: 4.6)

Post period end highlights and outlook

·      Loan book increased to £313m as at 31 August 2022 with expected continued growth through re-stocking period to achieve year-end loan book range of £400-500m

·      Capital actions progressed: negotiating legal documentation in relation to participation in British Business Bank’s ENABLE Guarantee scheme, subject to contract and approval; completed pre-work for Tier 2 capital raise ahead of 2023 requirement

·      The Group continues to trade in-line with the Board’s expectations

Carl D’Ammassa, Chief Executive, commented: “We have continued to deliver momentum throughout the business, achieving record levels of origination and loan book. Despite the macro-economic headwinds and on-going supply chain challenges, it is pleasing to achieve breakeven during the period.

We remain cautious about the global outlook and have taken action to both strengthen and widen the reach of our commercial teams. Scaling the bank, growing in our core products, whilst diversifying our lending activities underpins our confidence to deliver our medium-term objectives and our ambitions to achieve a mid-to-high teens return on allocated capital”

Chief Executive’s Statement

Introduction

As we approach the two-year milestone of receiving our banking licence, we continue to demonstrate solid progress against our strategic objectives. Strength of relationship, a service focused mindset and digitised capabilities underpin the Group’s financial performance. It is pleasing to report that, during the six-month period ended 30 June 2022, the Group has achieved breakeven financial performance. Through the period we have seen continued resilience and growth in our lending activity unlocking the latent operational leverage we have across the company as we scale the business. This strong performance has been achieved against the backdrop of continued macro-economic uncertainty and market headwinds. The tail-effects of the global pandemic has continued to impact supply chains across many of the sectors in which we operate, exacerbated by further outbreaks of COVID-19 in China and the war in Ukraine. It is therefore pleasing to share these financial results in this economic context, a clear demonstration that our products continue to resonate with our customers.

Lending activities

The Group saw record loan origination exceeding £439m during the six-month period to 30 June 2022, up 49% on the equivalent period in 2021 (H1 2021: £295m), demonstrating the strength of relationships with dealers and manufacturers, as well as the scalability of the platform. 

The Group has continued to increase its reach across its chosen markets supporting 85 manufacturers at 30 June 2022 (30 June 2021: 74 and 31 December 2021: 78) and over 900 dealers (30 June 2021: 706 and 31 December 2021: 805).   Aggregate dealer loan facilities at the end of the period totalled £724m, up 55% on the prior year (30 June 2021: £467m) and up 20% on the end of the last financial year end (31 December 2021: £601m).

Whilst we continue to originate record levels of new loans, the pace of overall loan book growth has continued to be constrained by high dealer sales, on-going supply chain issues, and wider macro-economic factors. Whilst we have seen some modest slowdown in stock turn in the six-month period to 30 June 2022 to c110 days (FY 2021: 105 days), this is significantly below the historic average of c.150 days. Despite the stock turn remaining at elevated levels, the Group’s loan book ended the period at £309m, up 85% on the equivalent period in the prior year (30 June 2021: £167m) and up 24% on the end of the last financial year (31 December 2021: £249m).

Portfolio By Sector

30 June 2022
£’000
30 June 2022
%
30 June 2021
£’000

30 June 2021
%
31 December 2021
£’000
31 December 2021
%
Leisure 
Lodges and holiday homes94,69630.7%40,97724.6%59,93624.0%
Motorhomes and caravans58,10318.8%34,15220.5%47,66019.1%
Marine36,78611.9%24,06014.4%37,06114.9%
Motorcycle15,7305.1%12,9407.8%13,1975.3%
Specialist and prestige cars1,7600.6%
 207,07567.1%112,12967.2%157,85463.3%
Commercial 
Transport54,48917.7%31,70819.0%56,28322.6%
Industrial equipment27,5618.9%17,94910.8%25,84210.4%
Agricultural equipment19,5356.3%4,9783.0%9,4753.8%
 101,58532.9%54,63532.8%91,60036.7%
 
Total gross receivables308,660100%166,764100%249,454100%

The Group successfully launched its inventory finance product to selective specialist and prestige car dealers during the period under review and has a strong pipeline for further growth. 

The Group’s loan book remains well diversified. The modest reduction in commercial lending as a percentage of portfolio in the six-month period ended 30 June 2022 to 32.9% (31 December 2021: 36.7%) relates to a reduction in the transportation sector which has been adversely impacted by further COVID-19 outbreaks in China and global shipping issues. These challenges are now starting to ease as we head in to the second half of the year.

Financial performance

Summarised Statement of Comprehensive Income

30 June 202230 June 202131 December 2021
 6-month6-month12-month
£’000£’000£’000
 
Gross revenues1                      10,511   6,122                      13,641
Interest expense                       (1,865)     (871)                       (2,338)
Net income2                        8,646    5,251                      11,303
 
Impairment charges                          (704)  (163)                          (556)
Other provisions                                 –2525
Other operating expenses                       (7,926)  (7,438)                    (14,507)
Profit/(Loss) before taxation                              16    (2,325)                       (3,735)
 
Taxation                                 –  –                              59
Profit/(Loss) after taxation                              16  (2,325)                       (3,676)
 
Other comprehensive loss                          (172)(89)                          (162)
Total comprehensive loss                          (156)  (2,414)                       (3,838)

1 Sum of interest and similar income, fee income, net gains/(losses) on disposal of financial assets, and net losses from derivatives measured at fair value through profit or loss

2 Gross revenues less interest and similar expenses

Summarised Statement of Financial Position

30 June 202230 June 202131 December 2021
£’000£’000£’000
 
Cash and cash equivalents1                      67,934  34,904                      29,597
Debt securities                      31,997  59,750                    108,867
Loans and advances to customers                    305,629   164,841                    247,205
Other assets                        4,065  3,328                        2,939
Total assets                    409,625  262,823                    388,608
 
Customer deposits                    304,377  159,988                    296,856
Financial liabilities                            499  604                            554
Other liabilities                      18,656  14,858                        5,140
Total liabilities                    323,532  175,450                    302,550
 
Total equity                      86,093  87,373                      86,058

1 Includes cash and balances at central banks, and loans and advances to banks which are deemed as cash and cash equivalents. Refer to note 16 for further details.

Gross revenues (comprising interest and similar income of £10.0m and fee income of £0.5m) increased by 73% to £10.5m compared to H1 2021 of £6.1m (comprising interest and similar income of £5.9m and fee income of £0.2m).  This increase is due to the average loan book balance through the period under review being higher than H1 2021. Gross yield, however, reduced by 50bps to 7.4% (H1 2021: 7.9%) predominantly as a result of an increase in the proportion of loans through manufacturer programmes which tend to have a lower yield than loans originated direct to dealers. Lending through manufacturer programmes have additional security in the form of manufacturer repurchase or redistribution agreements. Net interest margin (“NIM”) reduced to 6.1% (H1 2021: 6.8%) reflecting this reduced yield, but remains slightly ahead of our stated target of 6%.

We have continued to effectively manage our cost base and unlock the operational leverage we have in the business given our digital capabilities. We have continued to invest in areas to support growth and scaling of the business, such as API-connections with dealers, robotic process automation (RPA) and character-recognition technologies. During the six months ended 30 June 2022 operating expenses were £7.9m an increase of 7% on the comparative period (H1 2021: £7.4m). We have completed actions to strengthen our commercial team through the period, with many of the new hires joining during the second half of the year. Given our highly digitised client facing processes and on-going investment in automation, we believe we are building further scalability into our operational capabilities and much of the cost we need to support our near-term loan book targets is already embedded. Our cost to income ratio has reduced significantly to 92% during the six months ended 30 June 2022 (H1 2021: 142%) and we expect to see further reductions in this ratio as we scale the business, underpinning the delivery of our return ambitions.

Arrears

30 June 202230 June 202131 December 2021
 £’000£’000£’000
 
Arrears – principal repayment, fees and interest 
1 – 30 days past due                         541                    161                         105
31 – 60 days past due                         145                      –                         834
61 – 90 days past due                           12                    –                              –
91 + days past due                           56                 162                         164
                          754                 323                      1,103
 Total % of loan book0.2%0.2%0.4%
 
Associated principal balance 
1 – 30 days past due                    13,033  367                         951
31 – 60 days past due                      1,866  –                         834
61 – 90 days past due                              –   –                              –
91 + days past due                         138  162                         184
                     15,037 529                      1,970
 Total % of loan book4.9%0.3%0.8%

Loan book arrears have continued to operate at levels better than pre-pandemic. During the period we have seen ongoing strong credit performance with low arrears and default cases. We are pleased with the underlying quality and financial strength of our dealer obligors, many who have come out of the pandemic achieving record levels of sales and profitability. Accordingly, arrears comprised 0.2% of the loan book at the end of June 2022 (30 June 2021: 0.2% and 31 December 2021: 0.4%). 

In addition, the Group’s lending relative to its security position remains strong with a loan to wholesale value (‘LTV’) of 90% (30 June 2021: 85% and 31 December 2021: 91%). The increase in loan to value compared to June 2021 relates to an increase in the proportion of loans originated through manufacturer programmes, which generally fund at a higher LTV at inception, but monthly principal repayments usually see the LTV fall quickly through the life of a loan. We hold additional security in the form of personal and directors’ guarantees as well as having manufacturer repurchase or redistribution agreements in place across c.65% of our loan book.

Our Security Position

30 June 202230 June 202131 December 2021
 %%%
Loan to wholesale value190%85%91%

1 Wholesale price is the invoice value paid by the dealer to the manufacturer

Cost of risk for the six months ended 30 June 2022 was 0.50%, well below our through-the-cycle expectations. Whilst this represents an increase against the comparator period (H1 2021: 0.21%), H1 2021 included a reduction in the COVID-19 overlay to our IFRS9 model given the improving economic conditions and outlook for the UK economy at that time.

The combination of a significant increase in Gross revenues well in excess of the increase in Interest expense, a relatively small increase in operating expenses, and low cost of risk, has resulted in a breakeven performance for the 6-month period ended 30 June 2022 compared to a loss of £2.3m for the 6-month period ending June 2021.

Deposit activities

We continue to operate an effective and well-diversified deposit raising capability, entering the best buy tables as necessary. We have focused significantly on existing customer retention as they reach maturity of their fixed rate bond.  We have retained c65% of fixed rate bonds that matured during the period and now hold £304m of deposits that support our lending activities. We are pleased that our retail savings proposition has now achieved a feefo score of 4.7 (2021: 4.6).

Delivering future growth.

With our existing manufacturer partners we have access to an additional c2,500 prospective dealers across our core sectors, presenting us with opportunity to increase our market share as we onboard more of them; whilst we recognise we will not convert this entire potential pipeline as it may not meet our credit criteria or may not complete, the associated facility limits total £1.2bn.  In addition, we continue to target new manufacturers in our existing sectors, which in turn presents us with additional dealer prospects.

Whilst the Group has a significant runway for growth in its core lending product, we remain committed to diversifying our product range further and lending into adjacencies, such as hire purchase and leasing that will allow us to lend beyond the forecourt. We continue to explore a range of routes for diversifying our product range including inorganic opportunities, through business combinations, partnerships and internal new product development. 

Given the strength of pipeline, we have made further investments to strengthen our commercial team allowing us to accelerate the pace of dealer onboarding against current levels, whilst ensuring we continue to offer a high-quality level of service to all of our lending customers.

Ciara Raison joins us from Secure Trust Bank, to lead our sales and commercial activities as Chief Commercial Officer. Ciara’s appointment allows Andy Stafferton, co-founder and existing commercial lead, to focus entirely on our product development and partnership strategy.

We have made good progress on our capital strategy. We are negotiating legal documentation in relation to our participation in the British Business Bank’s ENABLE Guarantee scheme, which remains subject to contract and the scheme’s approval processes. We have already completed pre-work required to move forward our Tier 2 capital raise ahead of the 2023 requirement.

Current trading and outlook

The Group’s ability to generate new loan origination has continued through the summer months and for the 8 months to 31 August 2022 the Group originated loans totalling over £585m with dealer loan facilities exceeding £740m at this date.  Our loan book exceeded £313m at 31 August 2022. Whilst the economic environment remains uncertain with numerous headwinds, we remain cautious about the macro-economic outlook. We expect discretionary consumer spend to tighten over the coming months, and although we have no direct credit risk to end-users of the assets we finance, we do expect stock turn at dealers to slow, moving towards more normal levels as dealers enter the re-stocking period during the balance of the year. With over £740m of loan facilities now in place, utilisation levels are expected to increase as we head towards the end of the year, thus increasing our loan book balance, and we remain on track to deliver a year end loan book between £400 – 500m.

We are mindful of the inflationary environment we current operate in and expect an increase to costs in H2 2022, in particular given the further investments in our commercial team. Additionally we also expect an increase in cost of risk as the Group’s loan book grows given provisions are made at loan inception, together with the uncertain economic outlook potentially impacting our provisioning. Despite these factors the Group continues to trade in line with the Board’s expectations.

Scaling the bank, growing in our core products, whilst diversifying our lending activities underpins our confidence to deliver our medium-term objectives and our ambitions to achieve a mid-to-high teens return on allocated capital. 

Carl D’Ammassa

Chief Executive Officer, DF Capital

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