Sancus Lending : Interim Report 2022

Sancus Lending Group Limited

Interim Report and

Unaudited Condensed Consolidated Financial Statements

For the six month period ended 30 June 2022

Sancus Lending Group Limited

For the period ended 30 June 2022

CONTENTS

	Page
Overview
Highlights	3
Chairman's Statement	4
Chief Executive Officer's Review	5-8
Risks, Uncertainties and Responsibility Statement	9
Financial Statements
Independent Review Report	10
Condensed Consolidated Statement of Comprehensive Income (Unaudited)	11
Condensed Consolidated Statement of Financial Position (Unaudited)	12
Condensed Consolidated Statement of Changes in Shareholders' Equity (Unaudited)	13
Condensed Consolidated Statement of Cash Flows (Unaudited)	14
Notes to the Condensed Interim Financial Statements	15-32
Officers and Professional Advisers	33-34

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Sancus Lending Group Limited

For the period ended 30 June 2022

HIGHLIGHTS

Rory Mepham, Chief Executive Officer of Sancus Lending Group Limited, commented:

"We started 2022 with a clear strategy to return the business to profitability, and a management team focussed on execution. In the first half of the year we have made good progress towards this as well as a number of significant positive achievements. The number of new facilities written is significantly up on last year in the UK and Ireland and I am pleased to report no further IFRS9 provisions have been made during the period, following a thorough review of the loan book last year.

Our focus on returning the Group to profitability remains our top priority. We are also looking to broaden our funder base and improve funding terms, expand the Group's presence in the UK and Ireland and grow its loan book in the Offshore markets of the Channel Islands and Gibraltar.

The next step of our plan is to address and secure our long-term financing strategy, and our ZDPs remain an integral part of this. The current maturity date of the ZDPs is 5 December 2022 and we will shortly be engaging with the holders to agree a long-term plan meeting the needs of all stakeholders whilst enabling the Group to reinvest for growth."

Financial Highlights

• Impressive growth of new loan facilities written of £86m in the first half of the year (H1 2021: £53m) and exceeding the full year loans written in 2021 of £83m;
• Stabilisation of the loan book with no new IFRS9 provisions made in the period (H1 2021: £3.0m loss);
• Group revenue for the first half of the year was £4.8m (H1 2021: £5.0m); and
• Group operating loss for the period halved to £2.1m (H1 2021: loss £4.1m).

Operational Highlights

• Significant investment in the sales and credit teams at the end of 2021 and into 2022, to support and drive growth over the coming years;
• Focus on the maintenance of robust institutional grade credit processes, smooth loan execution, active loan management, data integrity and a proactive approach to loans that become stressed or distressed; and
• Geographic focus remains unchanged, with the UK and Ireland the key areas of growth for the business whilst the Offshore markets currently remain the Group's largest market. UK revenue increased by 36% on last year and Ireland is up 227%. Uncertain market outlook may present opportunities for well capitalised alternative lenders.

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Sancus Lending Group Limited

For the period ended 30 June 2022

CHAIRMAN'S STATEMENT

Introduction

Our structured change programme which will reposition the Group for growth is well underway. Our chosen markets continue to present compelling opportunities and with reduced appetite amongst traditional balance sheet lenders, we are confident we can write high quality new business.

The expansion of the sales teams has started to pay dividends with a significant improvement in new loan facilities written in the first half of the year of £86m, versus £53m written in the same period last year.

As part of a wider review of the business and the expansion of the credit and recoveries teams, we carried out a detailed review of the Group's loan book last year resulting in impairments of £6.4m in FY 2021 which at the time we believed drew a line under recent losses. I am therefore pleased to report no further IFRS9 provisions in the period.

Our People

Following last year's personnel changes, the team has settled in well and are working collaboratively to deliver our key goals of profitability and growth. The Group has invested in rebuilding and reinforcing the team and our headcount has increased from 32 at the end of 2021 to 42 at 30 June 2022. We do not envisage further material hires. The new resource is focussed on expansion in our growth markets of the UK and Ireland and our credit and management focus as we deliver new business in the coming years.

Zero Dividend Preference Shares ("ZDPs")

The key milestones at the end of 2020 were the new equity raise, the restructuring of our debt (Bonds and ZDPs) and the increase and extension of our facility with HIT. Somerston Group, our largest shareholder, participated in both the equity raise and new bond issue and I thank them for their continued support.

On 15 July 2022 the Group entered into a ZDP share buyback programme to purchase up to £0.5m of the ZDPs pursuant to the authority granted to the Directors by shareholders at the Group's AGM in May 2022. We fully deployed the funds we were looking to return by 19 August 2022.

The ZDPs are an integral part of the Group's finance strategy and given the maturity date of 5 December 2022, we will engage with the ZDP shareholders shortly and seek their support to restructure enabling the Group to implement its plan to return to profitability.

Dividend and Shareholders

It is the Board's intention to reinvest surplus resources for growth. As such, the Group does not intend to declare a dividend for the period. The Board intends to revisit this policy at the appropriate time, should the profitability and cash flow profile of the business support the reinstatement of a dividend.

On behalf of the Board, I would like to thank shareholders for their continuing support and patience and for the efforts of the management and employees.

While the Group has made good progress in the first half of the year, we do not underestimate the scale and continuing challenge ahead. I am firmly of the view that we have the right strategy, systems and personnel to put the business onto a firmer footing and return to profitability and I look forward to reporting more positive developments in the coming period.

Steve Smith

Chairman

Date: 23 September 2022

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Sancus Lending Group Limited

For the period ended 30 June 2022

CHIEF EXECUTIVE OFFICER'S REVIEW

Overview

The first half of the year saw a number of significant achievements and I am pleased with the progress made.

We saw a significant increase in loans written in H1 2022 with £86m written in the six months to June 2022 versus £53m written in the same period in 2021. This will lead to corresponding growth of loans under management as these loans are drawn.

This loan book growth has been prevalent in the UK (144% growth versus June 2021) and Irish markets (150% growth versus June 2021) where the Sancus name and reputation continue to develop. In the UK we are particularly proud to have been shortlisted for the award of Development Finance provider of the year at the Bridging & Commercial awards, a clear demonstration of our growing reputation as a straightforward and trusted business partner.

It will take time for the loan writing process to deliver revenue uplift as there is a time lag between execution and drawdown, though fees are paid upfront on new deals and we generally receive exit fees when the loan is repaid. At the end of H1 2022 the loan book stood at £147m, a modest increase of £5 million versus FY 2021, but we expect growth in the loan book to increase in the second half of the year as the newly written loans continue to be drawn.

Strategic KPIs

The Board agreed the following KPI's and we have started to see improvements:

• Revenue growth

• 1. 4% down on last year due to modest progress on loan deployment. Positive upticks in our growth areas of the UK and Ireland, with the UK revenue up 36% on last year and Ireland up 227%.
• Growing loans under management
• 1. Loan book increase from £142m at the end of 2021 to £147m at the end of June 2022.
• Reducing cost of funding
• 1. This remains a focus for the Group, and we continue to seek cheaper cost of funding. We are cognisant of recent rises in base rates. To address this, we have started to implement a variable rate to borrowers based on Bank of England base rates.
• Become a capital efficient business
• 1. We continue to reduce the amount of own capital within loans, which at 30 June 2022 represented 4.2% of the total loan book, in comparison to 5.9% at the end of June 2021.
• Increasing operating profits - by increasing gross margin and reducing costs
• 1. Operating loss for H1 2022 was £2.1m against an operating loss of £4.1m last June. We have reported no further IFRS9 losses in the period.

• 1. Our cost base has increased on prior year as we focus on growth but in the future we expect the cost ratio to revenue to reduce.
• Return on Equity ("ROE")
• 1. Going forward we plan to become profitable and increase our ROE.
• Ensuring a risk based approach is taken on all decision making
• 1. Embedding institutional credit processes and becoming increasingly technology enabled has been a focus of the Group over the last year.

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