Berenberg initiates Vanquis with buy rating on credit growth By Investing.com

Berenberg initiated coverage of Vanquis Banking Group with a buy rating and a 165p price target, citing four consecutive profitable quarters and a c.24.2m UK addressable market across credit cards, vehicle finance and second-charge mortgages. The broker forecasts RoTE of 15% in FY27 and 17% in FY28 (blue‑sky 18% implying ~£53m of shareholder returns via dividends), and notes the shares trade at 0.7x calendar‑2027 price-to-tangible book versus peers at 0.9x. Management has de-risked the balance sheet, migrated to lower-cost funding and expanded into second-charge mortgages and sub‑prime used-car finance, supporting the growth thesis.

Analysis

Vanquis’s story should be read as a play on execution-sensitive credit compounding rather than a pure macro lever. If management can sustain tighter loss rates through better origination and collateral mix, incremental funding tailwinds will disproportionately flow to equity given the business’s operational gearing; conversely, a small deterioration in vintage performance will compress returns quickly because sub-prime portfolios have a steep loss curve late in cycles.

A near-term oil/energy-driven inflation blip raises two second-order threats: (1) discretionary squeeze that lifts short-term delinquencies among the most rate-sensitive cohorts, and (2) potential reversal in used-car prices that would deepen losses in vehicle-secured vintages. Both are high-convexity vectors — losses accelerate nonlinearly once household cash buffers are exhausted — so timing of macro shocks matters as much as their magnitude.

Strategically, the clearest optionality is valuation rerating if market confidence in underwriting and funding durability becomes entrenched. That rerating is binary and multi-quarter: investors should focus on observable inflection points (sustained NPL roll rates, funding cost stability, and traction in ancillary products) rather than headline profitability metrics alone. Monitoring these will separate durable improvement from transitory easing of costs or one-off gains.

Key Decisions for Investors

• Long VANQ (LON:VANQ) in tranches over 3–12 months with a protective tail hedge: accumulate on 5–15% pullbacks from local highs and buy 9–12 month puts ~10–15% OTM sized to limit downside to ~30% of position value. R/R: asymmetric — equity upside if underwriting remains intact; capped downside via puts.
• Pair trade: long VANQ / short PFG.L (or a small-cap UK consumer finance basket) for 6–18 months. Trade seeks to monetize execution dispersion — go 1.5:1 long:short notional to bias toward Vanquis’s execution optionality; unwind if NPL 3-month roll rates cross a pre-set threshold indicating systemic stress.
• Event-driven options play: buy VANQ 12–18 month call spreads (buy ATM, sell 25–30% OTM) financed by selling nearer-dated calls. This captures medium-term rerating while funding part of cost via near-term theta — target 2:1 reward:risk if underwriting metrics and funding spreads stabilize over 6–12 months.
• Risk-off hedge: buy short-dated protection on UK consumer credit through a banking/credit ETF or short small-cap UK consumer lenders for 0–6 months if oil-driven inflation or a policy shock materializes. Rationale: protects portfolio during clustered delinquencies while leaving longer-term tactical longs intact.