Thursday 28 August 2008 

CATTLES plc

Interim announcement 

For the six months to 30 June 2008

PROFITS GROW BY 16.8% AT CATTLES WITH CONTINUED FOCUS ON CREDIT QUALITY 

"I am pleased to report another good result for the Cattles Group. Pre-tax profits for the six months to 30 June 2008 have increased by 16.8% to £70.2 million (H1 2007: £60.1 million), underpinned by income growth of 17.8%. 

Demand for the Group's consumer finance products has continued to grow. The business has further tightened its credit criteria to new applications, taking account of the pressure on household budgets. This has led to a lower acceptance rate and reduced volume growth compared to previous years. Acceptance rates reduced to 5.2% (H1 2007: 6.3%) and as a consequence new business volumes in the period were broadly unchanged at £661 million (H1 2007: £659 million). 

The squeeze on consumers' disposable income has had some impact on arrears. Instalment arrears increased to 7.2% (FY 2007: 7.0%) and customer balances with a proportion in arrears rose to 31.4% (FY 2007: 29.2%). The Group's loan loss ratio was 8.4% (FY 2007: 8.4%).

The Group's strategy is to enhance shareholder value by driving growth in traditional markets, managing credit quality and our impairment position, diversifying funding and focusing on profitability and capital strength. I am pleased to report that the Group's trading in the second half of 2008 to date is in line with expectations. Together with my senior management team, I look forward to the completion of another successful year in 2008."

David Postings, Chief Executive

Key results highlights

• Pre-tax profit up 16.8% to £70.2 million

• Basic earnings per share up 7.7% to 11.05p

• Dividend per qualifying share up 5.0% to 6.51p

• Group loan loss ratio unchanged at 8.4%

• Group cost income ratio reduced to 31.8% from 33.9%

• Group return on equity up to 16.1% from 15.4%

  ENQUIRIES

On 28 August 2008:

David Postings, Chief Executive                                                       Tel:     020 3170 7327

James Corr, Finance Director

Mark Collins, Treasury & Risk Director

Geoffrey Pelham-Lane, Financial Dynamics                                 Tel:     020 7269 7194

Paul Marriott, Financial Dynamics                                                   Tel:     020 7269 7252

29 August 2008 onwards:

Cattles plc                                                                                            Tel:    01924 444466

Financial Dynamics                                                                           Tel:    020 7269 7252

A presentation for analysts will be held today at 9.30 am at the London Stock Exchange, 

10 Paternoster Square, London EC4M 7LS.

An audiocast of the presentation will subsequently be available at the Company's website within the Investor Centre section at www.cattles.co.uk/index.php?results_publications_and_presentations.

INTERIM MANAGEMENT REPORT

CHAIRMAN'S STATEMENT

I am pleased to report another good performance by the Group in the first half of 2008. Pre-tax profit increased by 16.8% to £70.2 million (H1 2007: £60.1 million) and basic earnings per share, adjusted for the rights issue, increased by 7.7% to 11.05p (H1 2007: 10.26p).  

Rights issue and dividend

The Board was delighted with the take-up rate of 96.7% on the rights issue which successfully raised £197.6 million, net of expenses. As previously reported this funding will provide the Group with the increased capital strength to support its application to the FSA for a banking licence; diversify the Group's sources of funding and reduce dependence on the wholesale debt market. 

The Board has declared an interim dividend of 6.51p per share (H1 2007: 6.20p), which represents an increase of 5.0% over last year. The interim dividend will be paid on 10 October 2008 to shareholders on the register on 5 September 2008. The new shares issued under the rights issue will not be eligible for the interim dividend declared in respect of 2008. The final dividend, to be declared in 2009, will be adjusted for the rights issue completed this year and will be payable on all shares in issue. As an alternative to receiving the cash dividend, shareholders in the United Kingdom, excluding the Channel Islands, will again be offered the opportunity to have their dividends reinvested in the Company's shares through participation in our Dividend Reinvestment Plan. 

Legal and due diligence fees

As previously announced, the Group was involved earlier this year in discussions regarding a possible acquisition of a substantial consumer finance business, which would have included a banking licence. The Board concluded that the proposed acquisition was not in the best interests of the Group and shareholders and discussions were terminated. Related legal and due diligence fees of £3.9 million have been charged in the first half of 2008.

People

During the first half of 2008 the Group further strengthened its management team with the appointments of Gary Edwards and Robert East.

Gary was appointed as Group IT & Business Services Director, responsible for co-ordinating IT, business change and groupwide support services. He has over 25 years' experience in the financial services industry, both in the UK and abroad, and has a proven track record in delivering large technology and business change projects.

Robert was appointed as the Group's Banking Director and has over 30 years' banking experience in the UK and abroad. He is heading up the team responsible for applying for a banking licence, and I am encouraged by the progress achieved so far. Subsequently, Robert will be responsible for managing the savings division.

As announced this morning James Corr will leave his post as Finance Director of Cattles early in 2009. I would like to echo David's comments about James' considerable contribution to building the diversified business which Cattles is today. He leaves the Company in solid shape, and able to take advantage of the growth opportunities which current markets and the banking licence will bring. James departs with the heartfelt thanks of the Board for the vital role he has played over the past seven years and with our very best wishes for the future.

Outlook

I believe our strategy for enhancing shareholder value through disciplined lending growth, continued focus on credit quality and improving operational and financial efficiency remains sound and appropriate to current market conditions. Together with my fellow directors, I look forward to making further progress during the remainder of the year.

Norman Broadhurst

Chairman

28 August 2008  CHIEF EXECUTIVE'S REVIEW

I am pleased to report another good result for the Cattles Group. Pre-tax profits for the six months to 30 June 2008 have increased by 16.8% to £70.2 million (H1 2007: £60.1 million), underpinned by income growth of 17.8%. 

Demand for the Group's consumer finance products has continued to grow. The business has further tightened its credit criteria to new applications, taking account of the pressure on household budgets.  This has led to a lower acceptance rate and reduced volume growth compared to previous years. Acceptance rates reduced to 5.2% (H1 2007: 6.3%) and as a consequence new business volumes in the period were broadly unchanged at £661 million (H1 2007: £659 million). 

The squeeze on consumers' disposable income has had some impact on arrears. Instalment arrears (note 1) increased to 7.2% (FY 2007: 7.0%) and customer balances with a proportion in arrears (note 2) rose to 31.4% (FY 2007: 29.2%). The Group's loan loss ratio was 8.4% (FY 2007: 8.4%).

The Group's target is to be self-sustaining for equity capital, with growth rates moving in line. Income growth of 17.8%, receivables growth of 12.7% (FY 32.9%) and profit growth of 16.8% show the Group is moving closer to its target. The Board has declared a 5.0% increase in the interim dividend to 6.51p per share 

(H1 2007: 6.20p).

GROUP PERFORMANCE

• Profit growth

Pre-tax profit increased by 16.8% to £70.2 million. Following the successful rights issue in the first half of 2008, return on equity, adjusted on a like-for-like basis, improved to 16.1% (H1 2007: 15.4%). Basic earnings per share, adjusted for the rights issue, rose 7.7% to 11.05p (H1 2007: 10.26p).

• Income and asset growth

Income increased by 17.8% to £453.6 million (H1 2007: £385.1 million). The business has further tightened its credit criteria to new applications, taking account of the pressure on household budgets. This has resulted in acceptance rates falling to 5.2% (H1 2007: 6.3%). New business volumes in the period were broadly unchanged at £661 million (H1 2007: £659 million) and receivables stood at £3.2 billion having grown 12.7% (FY 2007: £2.8 billion). Welcome Finance customer numbers grew by 8.0% to 555,000 

(FY 2007: 514,000).

The net interest margin reduced as expected to 22.1% (H1 2007: 23.1%). This was due to the decrease in early redemption income as a result of a lower number of customers settling their agreements early, a marginal shift in new business mix to lower risk customers and a proportionate reduction in the level of income generated by the higher margin Shopacheck business. 

• Credit quality

The loan loss ratio was 8.4% (FY 2007: 8.4%). Instalment arrears in Welcome Finance increased to 7.2% of receivables (FY 2007: 7.0%). Customer balances with a proportion in arrears were 31.4% (FY 2007: 29.2%). 

• Infrastructure

The cost income ratio was 31.8% (H1 2007: 33.9%). Investment in IT systems continues and the new back office systems in Welcome Finance were successfully implemented in the first half of 2008.

• Diversified funding strategy

The Group continues to follow its long-established approach to funding and liquidity. Good progress continues to be made on the application for a banking licence and a dedicated project team with significant resource (both internal and external) has been engaged. A Senior Executive, Robert East, with over 30 years' experience in banking has been recruited to lead the Group's savings division.

Plans are well advanced to raise retail deposits later this year or early in 2009. This will reduce dependency on the wholesale debt market. Based on independent market analysis and its ability to pay attractive rates, the Group believes it can raise around £1 billion of deposits by the end of 2010. 

Funding headroom at June 2008, following net rights issue proceeds of £197.6 million, was £334.2 million (FY 2007: £226.0 million), with the only facility maturing in 2008 being a tranche of US $40 million private placing funding. The Group successfully raised £350 million in the bank market in the first half of 2008 

(net facility increase £200 million). 

The Group is considering further funding from the debt capital markets and remains confident that it will obtain new funding in the second half of 2008. The next major refinancing is a bank syndication of £500 million in July 2009. The Group intends to begin discussions about the renewal of this facility early in the New Year.

The average cost of borrowing in the period, excluding amortisation of facility fees, was 6.83% (FY 2007: 6.86%), although new funding is likely to be more expensive. As at 30 June 2008, around 80% of borrowings were either fixed or hedged (FY 2007: 85%).

Gearing improved to 3.4x (FY 2007: 4.6x) shareholders' funds following the rights issue, within the covenant of 6.0x.  

The Group's Fitch credit rating has recently been reviewed and reaffirmed at BBB with a stable outlook.

BUSINESS UNIT PERFORMANCE

Welcome Financial Services (WFS)

WFS comprises Welcome Finance and Shopacheck, the Group's non-standard consumer lending businesses. Pre-tax profit increased by 21.3% to £65.7 million (H1 2007: £54.2 million), with net receivables increased in the period by 13.1% to £3.0 billion (FY 2007: £2.6 billion). 

Welcome Finance

Although demand remained strong, the business has further tightened its credit criteria to new applications, taking account of the pressure on household budgets. This has led to a lower acceptance rate of 5.2% 

(H1 2007: 6.3%) and reduced volume growth compared to previous years. New business volumes in the period were broadly unchanged at £661 million (H1 2007: £659 million) whilst customer numbers increased by 8.0% to 555,000 (FY 2007: 514,000). 

The loan loss ratio was 8.6% (FY 2007: 8.6%). The squeeze on consumers' disposable income and the planned reduction in receivables growth has had some impact on arrears. Instalment arrears increased to 7.2% of receivables (FY 2007: 7.0%) and customer balances with a proportion in arrears were 31.4% (FY 2007: 29.2%).  

Shopacheck

Receivables in Shopacheck, the Group's home collected credit business, reduced to £84.6 million 

(FY 2007: £101.3 million).  

Welcome Car Finance (WCF)

WCF, the Group's car retail business operating from 12 sites in the UK, increased pre-tax profit by 88.2% to £3.7 million (H1 2007: £2.0 million). Income grew by 12.8% to £58.6 million (H1 2007: £51.9 million) as vehicle sales increased by 10.8% to 7,455 (H1 2007: 6,726).  

The Lewis Group

Pre-tax profit increased by 46.4% to £5.8 million (H1 2007: £3.9 million), underpinned by continued investment in debt portfolios. Receivables increased to £149.2 million (FY 2007: £132.9 million) following debt acquisitions totalling £34.9 million (H1 2007: £26.0 million) during the period. Commission on third party debt collection reduced by 6.7% to £3.3 million (H1 2007: £3.6 million).  

Cattles Invoice Finance

Pre-tax profit reduced by £0.4 million to £1.0 million (H1 2007: £1.4 million), largely as a result of an increased loan loss charge of £1.2 million (H1 2007: £0.4 million), due to further provisions made against the three specific accounts referred to at the December year end. Net income grew 15.8% to £9.0 million 

(H1 2007: £7.8 million) and the value of invoices factored increased by 8.2% to £480.6 million (H1 2007: £444.0 million). 

More detailed information on the performance of the Group's businesses can be found in the Performance Review.  

JAMES CORR

Following seven years of dedicated service to Cattles, James Corr, the Group Finance Director, will be leaving the Group after the announcement of the preliminary results in February 2009 to spend more time with his family and pursue other interests. 

During his time with the Company, he has been part of the successful team that has transformed a business that was dependent on Home Collect to what is now a market leader in the non-conforming consumer finance sector in the UK.  

I would like to place on record my thanks to James for the commitment he has shown Cattles over the years and his central role in creating the business it is today. Personally, I would also like to thank James for his friendship and support during my first year as CEO. Being able to draw upon his detailed knowledge of the business has greatly assisted me in my transition into the role. Filling James' shoes won't be easy, but the search for his successor is now underway and I'm delighted that James will stay with us to ensure a smooth handover over the next six months.

OUTLOOK

The Group's strategy is to enhance shareholder value by driving growth in traditional markets, managing credit quality and our impairment position, diversifying funding and focusing on profitability and capital strength. I am pleased to report that the Group's trading in the second half of 2008 to date is in line with expectations. Together with my senior management team, I look forward to the completion of another successful year in 2008.

David Postings

Chief Executive

28 August 2008 

Notes

(1) Overdue instalments as a % of closing receivables 

(2) Total value of loans with a proportion in arrears as a % of closing receivables 

  PERFORMANCE REVIEW 

Welcome Financial Services 

Pre-tax profit increased by 21.3% to £65.7 million (H1 2007: £54.2 million), underpinned by income growth of 18.3% to £360.4 million (H1 2007: £304.6 million). Demand has continued to grow with the number of applications increasing by 23% to 1.9 million (H1 2007: 1.5 million). The business has further tightened its credit criteria to new applications, taking account of the pressure on household budgets. This has led to a lower acceptance rate and reduced volume growth compared to previous years. Acceptance rates reduced to 5.2% (H1 2007: 6.3%) and as a consequence new business volumes in the period were broadly unchanged at £661 million (H1 2007: £659 million). 

Welcome Finance 

While some competitors have withdrawn from non-standard consumer credit, particularly unsecured lending, Welcome Finance remains committed to this market, as evidenced by continuing investment in its branch network, systems and people. Accumulated knowledge of customer behaviour in this sector allows the business to continue lending responsibly, taking full account of customers' ability to repay. All new applications are underwritten centrally using bespoke scorecards which ensure consistency of underwriting and tight control of customer selection. Successful applications are subject to a rigorous pre-lending process, including the verification of information supplied by the customer and an assessment of their current financial position. 

Once a loan has been advanced, customers are contacted by a Customer Account Manager from the nearest of over 200 local branches to establish a close working relationship. The business has continued to invest in its branch network in recent years, with a local branch presence seen as a significant strength and a central part of the way both customer relationships and risk are managed. This has enabled it to take advantage of the demand for its products and the reduced competition, while maintaining control of credit quality.

The number of customers increased by a further 41,000 (H1 2007: 49,000) to 555,000 (FY 2007: 514,000), representing growth of 8.0% (H1 2007: 12.0%). The number of new agreements written during the first half of 2008 remained constant at 97,000 (H1 2007: 97,000) and loan volumes were also broadly unchanged at £661 million (H1 2007: £659 million).

Early settlements fell by 6,000 to 12,000 (H1 2007: 18,000), reducing the annualised early settlement ratio to 4.7% (H1 2007: 8.8%). This is largely as a consequence of the 'credit crunch' reducing availability in the market. 

The value of average advances to new customers in the period has remained relatively stable across each product: unsecured personal loans £2,300 (FY 2007: £2,100), hire purchase for WCF vehicles £9,800 (FY 2007: £9,600) and second charge secured loans £9,600 (FY 2007: £9,300). 

• Unsecured personal loans 

Many mainstream lenders have tightened their underwriting criteria, or withdrawn from segments of the unsecured personal loans market altogether. Welcome Finance has experienced a significant rise in the number of unsecured personal loan applications during the period, up by 32.6% to 1.5 million (H1 2007: 1.1 million).

Despite the increased demand, volumes written in the first half of 2008 reduced by 3.8% to 

£245.4 million (H1 2007: £255.2 million) as a result of tightened credit criteria and a move away from higher risk business. 

• Hire purchase 

In April 2008 the business announced its withdrawal from the third party hire purchase market to focus on more profitable personal lending. This resulted in an expected reduction in volumes of 4.1% to £194.4 million (H1 2007: £202.8 million) with almost £75 million (H1 2007: £67.4 million) of the business written being for vehicles sold through WCF. The full volume impact of this decision will be seen in the second half as applications in the pipeline from third party introducers have now been processed.

• Secured loans 

Secured lending volumes grew by 10.4% to £221.6 million (H1 2007: £200.8 million) during the first half of 2008, whilst the business maintained its strategy of not offering large balance, low rate second charge secured loans, as these do not meet its risk profile. 

Welcome Finance does not write first charge mortgages. Its second charge secured loans are underwritten on the same basis as an unsecured loan and the focus is on assessing and verifying a customer's ability to repay rather than the equity in their property. In Welcome Finance's experience, however, registering a legal charge on the customer's property leads to the customer placing a higher priority on meeting their loan repayments.

Loans and receivables increased by 14.3% to £2.9 billion (FY 2007: £2.5 billion) after allowance for loan loss provisions.  

The net interest margin during the first half of 2008 was 19.1% (H1 2007: 20.0%), despite the business achieving higher margins on its new lending volumes. The expected reduction in the net interest margin is due to the decrease in early redemption income as a result of a lower number of customers settling their agreements early, a marginal shift in new business mix to lower risk customers and a proportionate reduction in the level of income generated by the higher margin Shopacheck business.

The loan loss ratio remained stable at 8.6% (FY 2007: 8.6%) of receivables. The squeeze on consumers' disposable income and the Group's planned reduction in receivables growth has had some impact on arrears. Customer balances with a proportion in arrears increased to 31.4% (FY 2007: 29.2%). The proportion of accounts classified as 'past due but not impaired' stands at 17.1% (FY 2007: 14.9%) and 'impaired' at 14.3% (FY 2007: 14.3%). The traditional arrears measure increased to 7.2% (FY 2007: 7.0%).

Control of credit quality is attributable to the business' core operating strengths: its rigorous approach to customer selection and consistency of centralised underwriting, its ability to establish and maintain close relationships with customers through its local branch network, and its ongoing investment in systems and arrears management infrastructure and processes.

Shopacheck

Total advances reduced by 1.9% to £46.8 million (H1 2007: £47.7 million) and the number of customers decreased to 244,000 (FY 2007: 266,000). Net receivables amounted to £84.6 million (FY 2007: 

£101.3 million). 

Welcome Car Finance 

Pre-tax profit increased by 88.2% to £3.7 million (H1 2007: £2.0 million) as income grew by 12.8% to £58.6 million (H1 2007: £51.9 million). Vehicle increased sales by 10.8% to 7,455 (H1 2007: 6,726).

The Lewis Group 

Pre-tax profit increased by 46.4% to £5.8 million (H1 2007: £3.9 million) during the first half of 2008, reflecting strong growth in receivables and income from purchased debt. 

As one of the leading players in the UK market, the business remained highly selective in the period, purchasing debt totalling £34.9 million (H1 2007: £26.0 million). At June 2008 receivables had grown to £149.2 million (FY 2007: £132.9 million). 

Income from purchased debt increased by 49.9% to £14.8 million (H1 2007: £9.9 million) due to the significant growth in receivables. This income growth contributed to the improvement in the cost income ratio to 37.0% (H1 2007: 45.8%). 

Commission on third party debt collection reduced to £3.3 million (H1 2007: £3.6 million).

Cattles Invoice Finance

Pre-tax profit reduced by £0.4 million to £1.0 million (H1 2007: £1.4 million) largely as a result of an increased loan loss charge of £1.2 million (H1 2007: £0.4 million) with the loan loss ratio rising to 2.9% (FY 2007: 2.2%). The additional loan loss charge relates almost entirely to further provisions made against the three specific accounts referred to at the December year end.

Income increased in the first half of 2008 by 15.8% to £9.0 million (H1 2007: £7.8 million). The value of invoices factored increased by 8.2% to £480.6 million (H1 2007: £444.0 million) as net receivables rose by 4.4% to £103.7 million (FY 2007: £99.4 million). The net interest margin improved to 4.1% (H1 2007: 4.0%) and cost income ratio to 64.1% (H1 2007: 67.9%). 

 PRINCIPAL RISKS AND UNCERTAINTIES

The Group has a strong risk management approach and framework. Its Risk Management and Compliance teams are supported by an independent Internal Audit function, provided by Deloitte & Touche LLP.

Full details of the Group's risk management framework, material risks and key controls are detailed in pages 17 to 24 of the 2007 Annual Report and Financial Statements, which is available via the Cattles website, www.cattles.co.uk.

Material risks are reviewed by the Risk Management Group on a twice yearly basis. The key risks identified by this Group for the second half of the year are summarised below.

Liquidity and funding

The latter stages of 2007 saw a marked restriction in capital markets as the 'credit crunch' took hold, placing a severe strain on many organisations' ability to raise funds at a commercially viable price. Maintaining and managing liquidity remains high on the Group's risk management agenda.

The Group's plans are well advanced to raise retail deposits later this year or early in 2009. This will reduce dependency on the wholesale debt market. Based on independent market analysis and its ability to pay attractive rates, the Group believes it can raise around £1 billion of deposits by the end of 2010. 

Funding headroom at June 2008, following net rights issue proceeds of £197.6 million, was £334.2 million (FY 2007: £226.0 million), with the only facility maturing in 2008 being a US $40 million private placing. The Group successfully raised £350 million in the bank market in the first half of 2008 (net facility increase £200 million). The Group is considering further funding from the debt capital markets and remains confident that it will obtain new funding in the second half of 2008. 

Credit risk

The UK economy has enjoyed a sustained period of stable growth with low interest rates and low inflation. The current environment, as a result of the 'credit crunch', could be volatile as the UK experiences increasing fuel, utility and food costs, higher borrowing costs and restricted access to credit facilities. There is also the increased risk of rising unemployment. Tightened markets could also potentially lead to a greater incidence of sophisticated fraud through increased motivation to commit financial crime.

The Group is well prepared to manage these risks and has further tightened its credit criteria to new applications, taking account of the pressure on household budgets. This has led to a lower acceptance rate and reduced volume growth compared to previous years. The second half of 2007 saw the Group introduce its most sophisticated approach to fraud management in its core consumer finance brand, Welcome Finance, utilising the latest technological advances. This, coupled with its bespoke credit scoring and centralised underwriting processes and a continued focus on maintaining strong customer relationships through a national branch network, leave the Group well prepared to continue to mitigate these risks.

Operational risks

The Group has a robust approach to operational risk, and controlling operational losses. During the first quarter of 2008, the Group successfully completed its Siebel conversion, significantly reducing its exposure through provision of a more stable, scalable IT platform. Moreover, the Group has continued to develop its own bespoke enterprise risk management systems which ensure a high level of visibility of key risks throughout the business. Therefore, the Group is confident that operational risks will continue to be managed within its risk appetite.

RELATED PARTY TRANSACTIONS

There have been no changes in the nature of related party transactions as described in note 34 to the 2007 Annual Report and Financial Statements. In addition, there have been no new related party transactions which have had a material effect on the financial position or performance of the Group in the six months to 30 June 2008.  Income Statement

The accompanying notes form an integral part of this condensed consolidated interim financial report.

 Balance Sheet