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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Aldermore | LSE:ALD | London | Ordinary Share | GB00BQQMCJ47 | ORD GBP0.10 |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 312.40 | 312.40 | 312.60 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Apr 2019 to Apr 2024
TIDMALD
RNS Number : 5872N
Aldermore Group PLC
10 August 2017
10 August 2017
Aldermore Group PLC
Half Year 2017 Results
32% increase in profit before tax to GBP78m (H1 2016: GBP59m)
-- Operating income up 17% to GBP150m (H1 2016: GBP128m)
-- Underlying cost to income ratio(1) improved to 44% (H1 2016: 46%) while continuing to invest in the Group
Delivering a high-teens return on equity
-- Return on equity of 19% (H1 2016: 16%) -- Basic earnings per share grew by 45% to 14.9p (H1 2016: 10.3p)
Continued strong, profitable organic growth and robust credit control across the diversified portfolio
-- Excellent loan origination; up by 10% to GBP1.6bn (H1 2016: GBP1.5bn)
-- Loan growth of 8% to GBP8.1bn (FY 2016: GBP7.5bn), with healthy pipeline at GBP0.8bn (H1 2016: GBP0.7bn)
-- Business Finance loans +8% to GBP1.9bn; Mortgages +9% to GBP6.2bn -- Net interest margin in line with guidance at 3.5% (H1 2016: 3.6%) -- Continued secure and well controlled credit performance; cost of risk 14bps (H1 2016: 20bps)
Continued strong organic capital generation
-- CET1 capital ratio up 30bps to 11.8% (FY 2016: 11.5%)
-- Anticipate delivering a CET1 above 12% by FY17, enabling the Board to consider the payment of dividends
-- Total capital ratio of 14.9% and leverage ratio of 6.9% (FY 2016: 15.6%, 7.0%) with GBP40m Tier 2 notes called in May
-- Tangible book value per share up 9% to 167p (FY 2016: 153p)
Further strategic progress
-- Announced investment in SME Broker AFS demonstrates our commitment to the broker market and provides strategic opportunities to enhance returns
-- Continuing focus on dynamic service, enhancing our proposition to intermediaries in both Business Finance and Mortgages through our "we back you" campaign
-- Continue to delight our customers, with Net Promoter Score ("NPS") increasing to +44 (2016: +43)
Phillip Monks OBE, Chief Executive Officer, commented:
"We have made excellent progress during the first half of 2017, building on our track record of delivery in loan growth, deposit growth and profitability, leaving us well positioned entering the second half with a strengthened capital position and a strong pipeline of new lending.
"We have continued to adopt a balanced approach to growth through strong organic origination and a consistent, robust approach to risk management. We approved GBP1.6bn of new customer loans in the period taking total lending to customers to more than GBP8.1bn.
"SMEs play a vital role in the UK's economic prosperity and we remain focused on helping them access the working capital and investment funding they need to succeed. Business Finance lending grew by 8% during the first half of the year and our agreed investment in AFS, one of the UK's largest asset and commercial finance introducers, highlights our continued commitment to this market. Mortgage lending increased by 9%, to GBP6.2bn, as we continue to serve landlords, first time buyers and the self-employed.
"We are delighted with the performance and strategic progress made so far in 2017. Whilst we remain vigilant to the risks posed by the economic uncertainty facing the UK, continued earnings and balance sheet momentum provide us with greater resilience and position us well to capitalise on further strategic opportunities."
(1) Underlying basis excludes goodwill impairment of GBP4.1m (pre-tax and post-tax) in 2016. No exceptional items have been recognised with respect to 2017 financial results.
Enquiries
Hot Features
Premium
Analysts Media
Martin Adams Holly Marshall
Tel: +44 (0) 20 8185 Tel: +44 (0)
3108 20 3553 4828
Ryan Jones Tom Baldock -
Lansons
Tel: +44 (0) 20 8185 Tel: +44 (0)
3146 786 010 1715
A live webcast of the analyst presentation will be broadcast on our IR website www.investors.aldermore.co.uk at 9:30am on 10 August 2017 and is available via a listen only conference call by dialling +44 (0) 20 3059 8125. An indexed version of the webcast will be made available on the website shortly after the event.
Press release contents Page
Summary financials 3
CEO review 4
Financial review 7
Risk report 33
Consolidated financial statements 36
Notes to the consolidated financial
statements 43
Glossary of Alternative Performance
Measures ("APMs") 61
Important disclaimer
This document contains certain forward-looking statements with respect to the business, strategy and plans of Aldermore Group PLC ("Aldermore") and its current goals and expectations relating to its future financial condition and performance. Such forward-looking statements include, without limitation, those preceded by, followed by or that include the words "targets", "believes", "estimates", "expects", "aims", "intends", "will", "may", "anticipates", "projects", "plans", "forecasts", "would", "could", "should" or similar expressions or negatives thereof. Statements that are not historical facts, including statements about Aldermore's, its directors' and/or management's beliefs and expectations, are forward-looking statements. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that will or may occur in the future. Factors that could cause actual business, strategy, plans and/or results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements made by Aldermore or on its behalf include, but are not limited to: general economic and business conditions in the UK and internationally; market related trends and developments; fluctuations in exchange rates, stock markets, inflation, deflation, interest rates and currencies; policies of the Bank of England, the European Central Bank and other G8 central banks; the ability to access sufficient sources of capital, liquidity and funding when required; changes to Aldermore's credit ratings; the ability to derive cost savings; changing demographic developments, and changing customer behaviour, including consumer spending, saving and borrowing habits; changes in customer preferences; changes to borrower or counterparty credit quality; instability in the global financial markets, including Eurozone instability, the potential for countries to exit the European Union (the "EU") or the Eurozone, and the impact of any sovereign credit rating downgrade or other sovereign financial issues; technological changes and risks to cyber security; natural and other disasters, adverse weather and similar contingencies outside Aldermore's control; inadequate or failed internal or external processes, people and systems; terrorist acts and other acts of war or hostility and responses to those acts; geopolitical, pandemic or other such events; changes in laws, regulations, taxation, accounting standards or practices, including as a result of an exit by the UK from the EU; regulatory capital or liquidity requirements and similar contingencies outside Aldermore's control; the policies and actions of governmental or regulatory authorities in the UK, the EU or elsewhere including the implementation and interpretation of key legislation and regulation; the ability to attract and retain senior management and other employees; the extent of any future impairment charges or write-downs caused by, but not limited to, depressed asset valuations, market disruptions and illiquid markets; market relating trends and developments; exposure to regulatory scrutiny, legal proceedings, regulatory investigations or complaints; changes in competition and pricing environments; the inability to hedge certain risks economically; the adequacy of loss reserves; the actions of competitors, including non-bank financial services and lending companies; and the success of Aldermore in managing the risks of the foregoing.
Any forward-looking statements made in this document speak only as of the date they are made and it should not be assumed that they have been revised or updated in the light of new information of future events. Except as required by the Prudential Regulation Authority, the Financial Conduct Authority, the London Stock Exchange PLC or applicable law, Aldermore expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this document to reflect any change in Aldermore's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. The information, statements and opinions contained in this document and subsequent discussion do not constitute a public offer under any applicable law or an offer to sell any securities or financial instruments or any advice or recommendation with respect to such securities or financial instruments.
Aldermore
Aldermore Bank PLC is an operating entity of Aldermore Group PLC. Aldermore Group PLC's shares (ALD.L) are listed on the Main Market of the London Stock Exchange. Aldermore Bank PLC is authorised by the Prudential Regulation Authority, regulated by the Financial Conduct Authority and the Prudential Regulatory Authority and is registered under the Financial Services Compensation Scheme.
Summary financials
Income statement (GBPm, underlying(1,2)
basis) HY 2017 HY 2016 Movement
%
Net interest income 135.6 115.6 17
Other income 14.0 12.1 16
Operating income 149.6 127.7 17
Underlying(2) expenses (65.9) (58.1) (13)
Impairments (5.6) (6.4) 13
----------------------------------------------------- -------- ---------
Underlying(2) profit
before tax 78.1 63.2 24
Goodwill impairment - (4.1) -
------------------------ --------------------------- -------- ---------
Statutory profit
before tax 78.1 59.1 32
Tax (20.3) (16.9) (20)
Statutory profit
after tax 57.8 42.2 37
----------------------------------------------------- -------- -------- ---------
Key financial ratios(1) (%, unless
stated)
Margin Gross interest yield 4.93% 5.43% (0.50)pp
Cost of funding 1.45% 1.85% 0.40pp
Net interest margin 3.48% 3.57% (0.09)pp
Underlying(2) cost
Efficiency and returns to income ratio 44.1% 45.5% 1.4pp
Effective tax rate(3) 26.0% 28.6% 2.6pp
Underlying(2) return
on equity 18.8% 18.0% 0.8pp
Statutory return
on equity 18.8% 16.3% 2.5pp
Credit quality Cost of risk (annualised) 0.14% 0.20% 0.06pp
Basic earnings per
Shareholder value share (pence) 14.9p 10.3p 4.6p
Diluted earnings
per share (pence) 14.8p 10.3p 4.5p
Shares in issue at
period end (million) 344.9m 344.7m 0.2m
30 Jun 31 Dec
2017 2016 Movement
Non-performing loans
Credit quality ("NPL") ratio 0.43% 0.47% 0.04pp
Balance sheet strength Loan to deposit ratio 110% 112% (2)pp
Fully loaded CRD
IV CET1 ratio 11.8% 11.5% 0.3pp
Fully loaded CRD
IV total capital
ratio 14.9% 15.6% (0.7)pp
Tangible book value/share
Shareholder value (pence) 167p 153p 14p
Balance sheet (GBPm)
Loans and advances
to customers 8,107.7 7,477.3 8%
Customer deposits 7,345.9 6,673.7 10%
(1) For details of Alternative Performance Measures ("APMs") please refer to the glossary on page 61
(2) Underlying basis excludes goodwill impairment of GBP4.1m (pre-tax and post-tax) in 2016. No exceptional items have been recognised with respect to 2017 financial results.
(3) The effective tax rate for 2016 is impacted by the goodwill impairment which is not allowable for tax purposes.
CEO review
Banking as it should be
The credit crunch which began ten years ago, revealed the UK's high-street banks to be failing their customers. Aldermore was founded in 2009 specifically to address institutionalised weaknesses in service and culture among the UK's large banks and we have sought since then to challenge the status quo, empowering more people across Britain to seek and seize opportunities in their professional and personal lives by providing "banking as it should be". In doing so, we are addressing a market opportunity that is as real today as it was in the aftermath of the global financial crisis. In fact, as the market has matured, companies and individuals have increasingly recognised that a different kind of banking experience is not only possible but available.
As a specialist bank, we don't compete head on with the traditional banks in their main markets. We go beyond their one-size fits all approach by employing specialist underwriters to understand our customers' circumstances, and by making sure we offer a service that works for them. We operate in carefully selected segments where we have the necessary experience and expertise to deliver strong and sustainable risk-adjusted returns through responsible lending. We benefit from a modern infrastructure and an efficient distribution model, working with approved specialist intermediaries, direct with customers and via partner relationships avoiding the need for a costly branch network.
A strong start to the year
We have made a strong start to 2017, continuing to build on our track record of consistent delivery and performance. Against a backdrop of ongoing economic uncertainty and increasing competitive pressure we have remained focused on our strategic priorities to be 'Customer driven' in our approach, 'Simply delivered' through an efficient and scalable operating model and 'Securely managed' in our approach to risk across the Group.
In the first half of 2017 we have made progress in broadening our customer proposition, enhancing our service promise and developing new market opportunities. We have continued to generate further operating leverage, whilst investing in the business, and we have maintained a well-controlled approach to risk management, which along with the benign credit environment has resulted in continuing low levels of loan impairments and arrears.
This strong start to the year supports our confident outlook for the remainder of 2017, enabling us to enhance our financial guidance.
Continuing commitment to UK businesses, homeowners, landlords and savers
Net loans to customers increased by GBP0.6bn, or 8%, to GBP8.1bn, driven by organic origination, across both Business Finance and Mortgages where, respectively, GBP0.6bn and GBP1.0bn of new customer loans were provided.
In Business Finance we help small businesses to access working capital and acquire the assets and equipment they need to grow by providing invoice and asset finance facilities. In Asset Finance we have leveraged our efficient broker-led distribution model to build a market leading position in this channel and we have also diversified routes to market via wholesale channels direct with funders, which together contributed to growth in lending of 8% to GBP1.7bn.
Across our Mortgages franchise we grew lending by 9% to GBP6.2bn. This was led by robust growth in Buy-to-Let ("BTL") lending, up 15% to GBP3.8bn. As expected, growth was particularly strong in Q1, as we converted the large pipeline of customers with which we closed 2016. In SME Commercial Mortgages, our expertise in underwriting multi-let investment properties resulted in loan growth of 1% to GBP0.9bn. In our Residential Mortgages business, where we have strong positions within market niches, lending reduced by 1% to GBP1.5bn, reflecting increased competition and a higher pace of redemptions, particularly among Help to Buy customers.
Loan growth continues to be primarily funded by our award-winning deposit franchise. The performance of our savings business is driven by our straightforward and transparent proposition and our promise that savers get "great returns effortlessly". Our dynamic online franchise enables customers to tailor products to their needs and our straightforward approach means we don't use teaser rates. This approach drove an increase in deposits of 10% to GBP7.3bn in the first half of 2017.
CEO review continued
Double-digit earnings growth continues
Statutory profit before tax rose 32% to a record first half high of GBP78m, driven by our growing franchises, a healthy net interest margin of 3.5% and further improvement in operational leverage, reflected in a cost to income ratio of 44%. Our management of risk remains robust and central to our lending decisions which, together with the benign economic environment experienced over the first half of 2017, resulted in our cost of risk declining to 0.14% and less than 0.5% of our loans by value being classed as non-performing.
Strong organic capital generation and shareholder returns
After becoming capital accretive during 2016 we have continued to generate strong levels of organic capital over the first half of 2017 with our fully loaded CRD IV CET1 ratio increasing by 0.3% to 11.8%. We expect our CET1 capital ratio to continue rising to above 12% by the end of 2017.
Overall, the Group generated earnings per share of 14.9p and a return on equity of 19%.
Strategic priorities
As we seek to enhance the sustainability of returns, our strategic priorities will continue to be delivering growth, increasing efficiency and further strengthening our robust approach to risk management.
Customer driven: Helping more customers to seek and seize opportunities
Our focus remains on growth in large markets through diverse pools of customer demand, where we can operate as a service-focused specialist lender to meet customers' needs.
Highlights in H1 2017:
-- Further growth in originations with GBP1.6bn lent across Business Finance and Mortgages. Total customer numbers also continued to grow to over 230,000, while our customer advocacy continued to improve with our NPS now at +44
-- Agreed 48% minority stake in AFS, one of the largest introducers to asset and commercial finance funders in the UK. The investment provides Aldermore with strategic options to enhance our proposition within the broker market and leverage expertise in adjacent markets. We will continue to assess inorganic opportunities to develop our franchise
-- Further developed our service proposition to intermediaries across both Business Finance and Mortgages, including enhanced service commitments, increased relationship management and digital upgrades
-- Awarded 'Best Service from a Buy-to-Let provider' and Highly Commended as 'Best Service from a Business Bank' by Business MoneyFacts and named 'Best Cash ISA Provider' at MoneyNet's Personal Finance Awards
Simply delivered: Developing our scalable, effective and efficient operating model
Aldermore benefits from a simple system architecture and an efficient online broker-led distribution model as opposed to a costly branch network. We continue to invest in key capabilities and technology, optimising our operating model to support the delivery of growth with enhanced levels of service, capability and efficiency.
Highlights in H1 2017:
-- We continued to generate greater operational leverage in the business, bringing the underlying cost to income ratio down further to 44% while continuing to invest in franchise capability
-- We have continued to invest in digital technology and enhancements across the bank, including an upgraded Asset Finance broker portal, and enhancing system functionality to support product development
-- We are reviewing the Group's organisational structure to ensure we are operating as efficiently as possible
CEO review continued
Securely managed: maintaining a diverse and well controlled business model
As a specialist underwriter, our ability to understand our customers' circumstances and the value of underlying assets is a source of competitive advantage. Growth is controlled and supported by a consistent risk appetite and robust risk management framework, which drives our prudent approach across all areas of the Group.
Highlights in H1 2017:
-- Our credit quality remained well within our appetite as we incurred a cost of risk of 14bps and maintained non-performing loans below 0.5% of our portfolio, supported by benign credit conditions
-- We consistently originate in line with centrally controlled underwriting standards including affordability stress tests and monthly re-scoring of the portfolio
-- We have completed enhancements to our credit risk models and have entered a parallel run phase as part of our ongoing work to become IFRS 9 compliant ahead of the January 2018 implementation date
A confident outlook
Delivering another great performance reinforces confidence in our ability to continue growing both our business and our capability. However, we are not complacent and we remain alert to the risks presented by the ongoing economic uncertainty in the UK. No concerning trends have emerged within our loan portfolios, but we remain vigilant to any emerging risks in our environment and will continue to appropriately balance growth, risk and returns across the Group, with our priority continuing to be the delivery of high-teens returns.
The Group's cost of risk has remained low and well controlled over the first half of 2017 reducing to 14 basis points. While we remain alert to any deterioration in credit conditions and continue to expect an upward normalisation of impairments over the medium term, we now anticipate the cost of risk for 2017 to be below our medium term range of between 25 - 35 basis points.
Our loan growth of 8% during the first half, achieved with a broadly stable net interest margin, gives us confidence in the delivery of our guided range of 10 - 15% growth for the year. The exact level of lending will depend on market conditions and the continuing opportunity to lend within our prudent risk appetite and to our targeted level of returns. However, we enter the second half of the year in a strong position with a healthy pipeline of GBP0.8bn, up 8% on the first half of 2016.
Strong loan growth over the first half of the year has driven further operating leverage, demonstrated by an improvement in the cost to income ratio, while continuing our investment in the business. We continue to anticipate an increase of GBP15 - GBP20m on the 2016 underlying cost base in 2017 and for the cost to income ratio to trend below 40% over the medium term.
Consistent delivery means that we now anticipate generating sufficient capital to reach a CET1 ratio of above 12% by the end of 2017. As previously stated, at this level, the Board will be in a position to consider the payment of dividends while taking into account growth opportunities available, anticipated changes in capital requirements and the prevailing economic environment.
In conclusion...
I'm delighted with the continued strategic and financial progress that Aldermore is making across the Group. We have performed very strongly over the first half of the year, delivering a 19% return on equity and I would like to thank all of our colleagues who have worked so hard to deliver on our strategy and build on the success we have achieved to date. Together I am confident that we can continue delivering further value for our customers and generating strong, sustainable returns for our shareholders.
Phillip Monks OBE, Chief Executive Officer
Financial review
Loans to customers are up 8% so far in 2017, with originations up 10% versus H1 2016
Loan growth in the first six months of 2017 was driven by origination across both our Business Finance and Mortgages divisions as we continue to build our diversified portfolio. This growth in originations exceeded redemptions of GBP1bn in the period resulting in the Group's net lending to customers surpassing GBP8.1bn at the end of June 2017.
Net lending in Business Finance grew by 8% to GBP1.9bn, primarily driven by Asset Finance, up 8% to GBP1.7bn as our expertise in a broad range of asset classes allowed us to maintain our strong position in the broker-channel and to grow our wholesale proposition by 50%. Invoice Finance also grew 8% to GBP166m as the business continues to focus on enhancing returns through invoice discounting for small businesses and structured finance.
In Mortgages, net loans increased by 9% to GBP6.2bn. Commercial Mortgages grew by 1% to GBP0.9bn despite having tightened our appetite for development-based lending following the EU referendum in 2016. In Buy-to-Let, we entered the year with a strong pipeline of applications as a result of the market-wide changes in affordability tests, which combined with our broad customer offering, has enabled us to grow lending by 15% to GBP3.8bn. Residential Mortgages reduced by 1% to GBP1.5bn as we continue to see redemptions on the large number of mortgages written two years ago.
Deposit growth of 10%, as GBP947m Term Funding Scheme ("TFS") utilised to date
Deposits grew 10% to GBP7.3bn in the first half of 2017 with the mix remaining broadly stable (70% from retail; 30% from SME and corporate customers).
We continued to diversify our sources of funding, utilising cost effective sources offered by the Bank of England, including the TFS and Indexed Long Term Repo scheme ("ILTR") with GBP947m and GBP100m respectively drawn as at the end of June. The Group also repaid all Funding for Lending Scheme on-balance sheet liabilities in the period.
The underlying mortgages within our Oak 1 securitisation continued to be repaid as reflected in the 18% reduction in the Residential Mortgages Backed Security balance. The balance of subordinated liabilities also reduced as GBP40m of Tier 2 securities issued five years previously were called in May 2017.
30 Jun 31 Dec
2017 2016 Movement
GBPm GBPm %
Retail deposits 5,116.5 4,766.8 7
SME deposits 1,825.9 1,647.2 11
Corporate deposits 403.5 259.7 55
Customer deposits 7,345.9 6,673.7 10
---------------------------------------- -------- -------- ---------
Funding for Lending Scheme ("FLS") - 354.8 -
Term Funding Scheme ("TFS") 946.5 396.1 139
Indexed Long Term Repo scheme ("ILTR") 100.2 - -
Residential Mortgages Backed Security
("RMBS") 107.1 130.6 (18)
Deposits by banks 8.5 0.7 1114
Subordinated liabilities 60.4 100.0 (40)
Wholesale funding 1,222.7 982.2 24
---------------------------------------- -------- -------- ---------
Financial review continued
Profits up 32% demonstrating continued strong, sustainable returns
Profit before tax for the period increased by 32% to GBP78.1m (H1 2016: GBP59.1m) as we maintained healthy net interest margins across a larger loan book. Adjusting for the GBP4.1m goodwill impairment in the first half of 2016, profit before tax on an underlying basis increased by 24%. The post-tax profit for the period stood at GBP57.8m, a 37% increase over the first half of 2016.
The return on equity generated in the period was 18.8%, in line with our commitment to delivering returns in the high teens. The half year 2017 basic earnings per share were 14.9p and 14.8p on a fully diluted basis.
Operating income increases 17% as average net loans rise 20%
Compared to the first half of 2016, interest income grew by 9% to GBP192m for the first half of 2017 driven by continuing net loan growth. The Group's average gross yield reduced by 50bps to 4.93%, primarily as a result of the lower rate environment but also as a result of competition in Asset Finance and a slight change in business mix, with the comparatively lower yielding Buy-to-Let portfolio growing at a faster pace than other portfolios.
Despite the balance sheet growth, interest expense reduced by 6% to GBP56m. The Group's diversified funding base benefitted from a lower cost of deposits combined with access to the Bank of England's TFS, which together helped drive the Group's cost of funding down by 40bps to 1.45%.
As a result, the Group's net interest income rose by 17% to GBP136m while the net interest margin reduced slightly by 9bps to 3.48%, in line with guidance.
Net fee and other operating income decreased by 7% to GBP12m driven mainly by a shift away from factoring business in our Invoice Finance portfolio. Movements on derivative contracts were the primary driver in a GBP2.8m increase on the net derivatives and disposal of debt securities line.
HY 2017 HY 2016 Movement
GBPm GBPm %
Interest income 192.0 175.6 9
Interest expense (56.4) (60.0) 6
-------------------------------------- -------- -------- ---------
Net interest income 135.6 115.6 17
Net fee and other operating income 12.0 12.9 (7)
Net derivatives and disposal of debt
securities 2.0 (0.8) n/a
-------- --------
Operating income 149.6 127.7 17
-------------------------------------- -------- -------- ---------
Average net loans 7,792.5 6,811.1 14
Gross interest income yield (%) 4.93 5.43 (0.50)pp
Cost of funding (%) 1.45 1.85 0.40pp
Net interest margin (%) 3.48 3.57 (0.09)pp
Financial review continued
Greater operating leverage despite investment to support the Group's strategy
Our simple operating model and efficient distribution network of brokers supported us in further leveraging our capabilities, with operating income growing by 17%, while underlying cost growth was controlled to 13%. This resulted in our underlying cost to income ratio declining by 1.4 percentage points to 44.1%.
Operating expenses rose by 6% to GBP65.9m in the first half of 2017 compared to the same period in 2016. Given its material and one-off nature, costs related to the impairment of goodwill in our Invoice Finance business in 2016 are removed from our financial metrics to provide an 'underlying' view of our performance. On this basis, underlying costs grew 13%, in line with management expectations, and is reflective of the investment made in both the recruitment of colleagues to further support growth and enhance risk management, and expenditure on strategic, regulatory and mandatory projects.
HY 2017 HY 2016 Movement
GBPm GBPm %
Administrative expenses 62.3 54.6 (14)
Provisions 1.0 1.3 23
Depreciation and amortisation 2.6 2.2 (18)
------------------------------------- -------- --------
Underlying operating expenses 65.9 58.1 (13)
Goodwill impairment - 4.1 100
---------
Operating expenses 65.9 62.2 (6)
------------------------------------- -------- -------- ---------
Underlying cost to income ratio (%) 44.1% 45.5% 1.4pp
Loan impairments fall as cost of risk reduces to 14bps
We continue to apply a robust approach to risk management and this, combined with a benign credit risk environment, has resulted in our cost of risk remaining low at 0.14%. Impairments reduced by 13% to GBP5.6m, within which our collective charge fell by 34% to GBP1.9m primarily reflecting increased conservatism applied to the loss emergence period for mortgages made in 2016. Individual impairments remained low increasing by 6% to GBP3.7m.
HY 2017 HY 2016 Movement
GBPm GBPm %
Individual 3.7 3.5 (6)
Collective 1.9 2.9 34
------------------ -------- --------
Impairments 5.6 6.4 13
------------------ -------- -------- ---------
Cost of risk (%) 0.14% 0.20% 0.06pp
Further information on the Group's credit risk can be found on pages 11 to 26.
Financial review continued
Capital continues to build as profit outstrips balance sheet growth and seasonal costs
After growing CET1 in the second half of 2016, the Group is continuing to build capital with 30bps of CET1 capital accreted in the first half of 2017 bringing the CET1 ratio to 11.8%. This growth reflects the generation of GBP58m of profit after tax in the period, partly offset by a GBP300m, or 7%, growth in Risk Weighted Assets ("RWAs") and the post-tax AT1 coupon of GBP6.6m, payable annually in April.
The 7% growth in RWAs reflects loan growth of 8%, the difference being a lower risk-weighting density due to the portfolio having a greater proportion of mortgages which typically receive a lower risk-weighting relative to other loans, and an increase in the Basic Indicator Approach ("BIA") Operational Risk charge which is updated in the first quarter of each year and is a function of the average of the last 3 years' net operating income.
The Group's total capital ratio reduced by 68bps to 14.9% in the first half of 2017 as GBP40m of Tier 2 securities were called, while the Group's leverage ratio remains significantly above forthcoming regulatory minimums at 6.9%.
We have completed enhancements to our credit risk models and entered a parallel run phase as part of our ongoing work to become IFRS 9 compliant ahead of the January 2018 implementation date. This takes us closer to the sophistication required for an Internal Ratings-Based approach ("IRB") to capital which may help to mitigate the risk of future changes in capital requirements. Whilst pursuing IRB in the context of IFRS 9, we will continue to monitor the cost and benefits of transition, as the regulatory changes and timeframes for implementation become clear.
30 Jun 31 Dec
2017 2016 Movement
GBPm GBPm %
Shareholders' equity 604.8 552.0 10
Intangible assets (28.3) (26.1) 8
Prudential valuation adjustments (0.1) (0.1) -
---------
CET 1 capital 576.4 525.8 10
AT1 capital 74.0 74.0 -
Tier 2 capital 75.9 113.1 (33)
------------------------------------- -------- -------- ---------
Total capital 726.3 712.9 2
Asset Finance 1,194.3 1,105.7 8
Invoice Finance 113.6 104.3 9
SME Commercial Mortgages 1,087.3 1,125.9 (3)
Buy-to-Let 1,447.5 1,277.4 13
Residential Mortgages 535.6 560.7 (4)
---------
Lending credit risk weighted assets 4,378.3 4,174.0 5
Operational risk charge 410.7 308.5 33
Other 87.4 93.6 (7)
Total Risk weighted assets 4,876.4 4,576.1 7
------------------------------------- -------- -------- ---------
Fully loaded CRD IV CET1 ratio
(%) 11.8 11.5 0.3pp
Fully loaded CRD IV Tier 1 capital
ratio (%) 13.3 13.1 0.2pp
Fully loaded CRD IV Total capital
ratio (%) 14.9 15.6 (0.7)pp
------------------------------------- -------- -------- ---------
Leverage ratio (%) 6.9 7.0 (0.1)pp
Financial review continued
Credit risk
Credit risk is the risk of financial loss arising from the borrower or a counterparty failing to meet their financial obligations to the Group in accordance with agreed terms. The risk primarily arises from our lending activities as a result of defaulting mortgage, lease or loan contracts. Although credit risk arises from our loan book, it can also arise from treasury investment and off-balance sheet activities.
The credit risk section of this report includes information on the following:
1. The Group's maximum exposure to credit risk 2. Credit quality and performance of loans 3. Forbearance granted through the flexing of contractual agreements 4. Diversity and low concentrations within our loan portfolio 5. The value of assets against which loans are secured and details of provisioning coverage 6. Information on credit risk within our treasury operations
1. The Group's maximum exposure to credit risk
The following table presents our maximum exposure to credit risk of financial instruments on the balance sheet and commitments to lend before taking into account any collateral held or other credit enhancements. The maximum exposure to credit risk for loans, debt securities, derivatives and other on-balance sheet financial instruments is the carrying amount, and for loan commitments the full amount of any commitment to lend that is either irrevocable or revocable only in response to material adverse change.
Our net credit risk exposure grew by 9% in the first six months of 2017. This was in line with the growth in loans and advances to customers, our largest credit risk exposure, of 8% to GBP8,135.6 million.
Note 30 June 31 December
2017 2016
Included in the statement of financial GBPm GBPm
position:
Cash and balances at central banks 368.1 116.4
Loans and advances to banks 94.7 67.2
Debt securities 712.7 664.5
Derivatives held for risk management 19.1 12.4
Loans and advances to customers 13 8,135.6 7,504.7
Other financial assets 0.8 2.9
9,331.0 8,368.1
Commitments to lend 20 809.2 968.8
---------------------------------------- ----- --------- ------------
Gross credit risk exposure 10,140.2 9,336.9
---------------------------------------- ----- --------- ------------
Less: allowance for impairment
losses 13 (27.9) (27.4)
Net credit risk exposure 10,112.3 9,309.5
---------------------------------------- ----- --------- ------------
Financial review continued
Credit risk continued
2. Credit quality and performance of loans
The Group has maintained low levels of impairment reflecting both the controlled approach to risk management and the benign economic environment. The tables below provide our gross lending of GBP8,135.6 million split by credit risk exposure on the following basis:
A. Whether they are performing (neither past due nor individually impaired) B. Payments missed, but no impairment is required (past due but not individually impaired)
C. Loans against which an impairment has been recorded, for example, as a result of payments having been missed (individually impaired)
SME
Asset Invoice Commercial Residential
Finance Finance Mortgages(1) Buy-to-Let Mortgages Total
30 June 2017 GBPm GBPm GBPm GBPm GBPm GBPm
Neither past
due nor individually
A impaired 1,693.7 168.4 930.8 3,809.3 1,457.3 8,059.5
Past due but
not
individually
B impaired 4.6 - 8.7 11.8 15.9 41.0
Individually
C impaired 6.6 2.9 5.9 11.5 8.2 35.1
1,704.9 171.3 945.4 3,832.6 1,481.4 8,135.6
----------------------------- ---------- --------- -------------- ----------- ------------ ----------
SME
Asset Invoice Commercial Residential
Finance Finance Mortgages(1) Buy-to-Let Mortgages Total
31 December 2016 GBPm GBPm GBPm GBPm GBPm GBPm
Neither past
due nor individually
A impaired 1,569.2 155.9 921.6 3,308.4 1,470.8 7,425.9
Past due but
not
individually
B impaired 3.3 - 6.9 13.2 19.8 43.2
Individually
C impaired 9.3 3.6 7.8 8.7 6.2 35.6
1,581.8 159.5 936.3 3,330.3 1,496.8 7,504.7
----------------------------- ---------- --------- -------------- ----------- ------------ ----------
(1) The above analysis includes Property Development.
The three categories shown above are further analysed over the following pages.
Due to the more bespoke nature of the Property Development business the analysis in the following sections of the report exclude the portfolio from a number of tables indicated with a footnote. Gross Property Development exposure at 30 June 2017 was GBP235 million (31 December 2016: GBP230 million), and net exposure was GBP234 million (31 December 2016: GBP229 million).
Financial review continued
Credit risk continued
A. Loans and advances that are neither past due nor individually impaired
The credit quality of assets that are neither past due nor individually impaired is assessed internally as follows:
SME
Asset Invoice Commercial Residential
Finance Finance Mortgages(1) Buy-to-Let Mortgages Total
30 June 2017 GBPm GBPm GBPm GBPm GBPm GBPm
Low risk - - 389.2 3,129.8 1,062.1 4,581.1
Medium risk 1,320.9 8.8 298.8 642.8 353.0 2,624.3
High risk 372.7 159.6 8.0 36.7 42.2 619.2
Total 1,693.6 168.4 696.0 3,809.3 1,457.3 7,824.6
Fair value of
collateral held 1,157.0 167.1 696.0 3,807.9 1,457.3 7,285.3
------------------ --------- --------- -------------- ----------- ------------ --------
SME
Asset Invoice Commercial Residential
Finance Finance Mortgages(1) Buy-to-Let Mortgages Total
31 December 2016 GBPm GBPm GBPm GBPm GBPm GBPm
Low risk - - 368.6 2,710.7 1,083.8 4,163.1
Medium risk 1,282.4 6.9 315.8 523.4 345.4 2,473.9
High risk 286.8 149.0 7.1 74.3 41.6 558.8
Total 1,569.2 155.9 691.5 3,308.4 1,470.8 7,195.8
Fair value of
collateral held 1,102.8 155.8 691.5 3,308.3 1,470.8 6,729.2
------------------ --------- --------- -------------- ----------- ------------ --------
(1) This analysis excludes Property Development.
The categorisation of high, medium and low risk is based on internal grading models utilised in portfolio monitoring. The models are used to generate a consistent Group-wide approach for the grading of customer credit risk exposures for all lending businesses and provide a relative internal ranking of risk. Drivers for the grade mapping include external credit reference agency risk scores, property valuations and qualitative factors. The relative measure of risk reflects a combined assessment of the probability of default by the customer and an assessment of the expected loss in the event of default.
The resulting classification of balances between low, medium and high is consequently driven by a combination of the Probability of Default ("PD") and Loss Given Default ("LGD") grades as further explained. A matrix of eighteen PD (fifteen of which apply to accounts that are not past due) and ten LGD grades determine the category within which each loan is categorised, i.e. those accounts that have a low PD and low LGD are graded as 'low'. Those graded 'high' will be accounts that have either a high PD and/or high LGD.
Financial review continued
Credit risk continued
B. Loans and advances that are past due but not individually impaired
As at 30 June 2017, there was a balance of GBP41.0 million in relation to loans where customers had missed one or more repayments but no specific loss had yet been recognised. This represented a 5% decrease in the first half of 2017, despite the 8% growth in net loans in the period.
The table below provides further analysis according to the number of months past due:
30 June 31 December
2017 2016
GBPm GBPm
- Up to 2 months past due 32.6 35.6
- 2 to 3 months past due 8.4 7.6
Total 41.0 43.2
------------------------------- -------- ------------
Fair value of collateral held 39.8 42.3
C. Loans and advances that have been individually impaired
Individually impaired balances are as follows:
SME
Asset Invoice Commercial Residential
Finance Finance Mortgages(1) Buy-to-Let Mortgages Total
30 June 2017 GBPm GBPm GBPm GBPm GBPm GBPm
Impaired but not
past due 0.8 - 0.3 1.7 0.1 2.9
Past due less
than 3 months 1.6 - 1.7 1.0 1.3 5.6
Past due 3-6 months 2.1 - 3.2 3.8 3.5 12.6
Past due 6-12
months 1.3 0.7 0.4 3.2 2.5 8.1
Past due over
12 months 0.8 2.2 0.3 1.8 0.8 5.9
6.6 2.9 5.9 11.5 8.2 35.1
----------------------- --------- --------- -------------- ----------- ------------ ------
Of which: Possessions 0.7 - 0.6 5.4 0.2 6.9
Non-performing
Loan Ratio (%) 0.39 1.69 0.62 0.30 0.55 0.43
SME
Asset Invoice Commercial Residential
Finance Finance Mortgages(1) Buy-to-Let Mortgages Total
31 December 2016 GBPm GBPm GBPm GBPm GBPm GBPm
Impaired but not
past due 1.0 - 2.4 0.5 0.1 4.0
Past due less
than 3 months 2.5 0.6 0.2 1.5 0.6 5.4
Past due 3-6 months 3.1 0.1 - 2.8 3.8 9.8
Past due 6-12
months 2.0 1.0 1.2 3.2 1.4 8.8
Past due over
12 months 0.7 1.9 4.0 0.7 0.3 7.6
9.3 3.6 7.8 8.7 6.2 35.6
----------------------- --------- --------- -------------- ----------- ------------ ------
Of which: Possessions 0.7 - 0.6 5.5 0.2 7.0
Non-performing
Loan Ratio (%) 0.59 2.26 0.83 0.26 0.41 0.47
(1) The above analysis includes Property Development.
Financial review continued
Credit risk continued
Against the above individually impaired balances at 30 June 2017 of GBP35.1 million (31 December 2016: GBP35.6 million), the fair value of collateral was GBP30.5 million (31 December 2016: GBP28.8 million). We always seek to pursue timely realisation of collateral in an orderly manner and do not use the collateral for our own operations.
The year to date movement in impaired loans is as follows:
SME
Asset Invoice Commercial Residential
Finance Finance Mortgages(1) Buy-to-Let Mortgages Total
2017 GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 9.3 3.6 7.8 8.7 6.2 35.6
Classified as
impaired during
the period 4.6 0.4 1.2 6.8 4.5 17.5
Transferred from
impaired to unimpaired (2.2) (0.1) - (1.9) (1.8) (6.0)
Amounts written
off (2.7) (0.4) - (0.1) - (3.2)
Repayments (2.4) (0.6) (3.1) (2.0) (0.7) (8.8)
At 30 June 2017 6.6 2.9 5.9 11.5 8.2 35.1
------------------------- --------- --------- -------------- ----------- ------------ ------
SME
Asset Invoice Commercial Residential
Finance Finance Mortgages(1) Buy-to-Let Mortgages Total
2016 GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 6.7 2.9 7.9 6.4 4.1 28.0
Classified as
impaired during
the period 7.3 2.1 1.0 3.5 3.1 17.0
Transferred from
impaired to unimpaired (0.3) - (1.0) (1.1) (0.7) (3.1)
Amounts written
off (4.4) (1.4) (0.1) (0.1) (0.1) (6.1)
Repayments - - - - (0.2) (0.2)
At 31 December
2016 9.3 3.6 7.8 8.7 6.2 35.6
------------------------- --------- --------- -------------- ----------- ------------ ------
(1) The above analysis includes Property Development.
Financial review continued
Credit risk continued
3. Forbearance granted through the flexing of contractual agreements
Forbearance is defined as any concessionary arrangement that is made for a period of three months or more where financial difficulty is present or imminent. It is inevitable that some borrowers experience financial difficulties which impact their ability to meet their obligations as per the contractual terms. We seek to identify borrowers who are experiencing financial difficulties, as well as contacting borrowers whose loans have gone into arrears, consulting with them in order to ascertain the reason for the difficulties and to establish the best course of action to bring the account up to date. In certain circumstances, where the borrower is experiencing financial distress, we may use forbearance measures to assist the borrower. These are considered on a case-by-case basis and must result in a fair outcome. The forbearance measures are undertaken in order to achieve the best outcome for both the customer and the Group by dealing with financial difficulties and arrears at an early stage.
The most widely used methods of forbearance are temporarily reduced monthly payments, loan term extension, deferral of payment and a temporary or permanent transfer to interest only payments to reduce the borrower's financial pressures. Where the arrangement is temporary, borrowers are expected to resume normal payments within six months. Both temporary and permanent concessions are reported as forborne for twenty four months following the end of the concession. In all cases, the above definitions are subject to no further concessions being made and the customers' compliance with the new terms.
Forbearance levels remain low, with the volume of forborne accounts by payment status shown in the tables below:
Asset Invoice SME Commercial Residential
Finance Finance Mortgages(1) Buy-to-Let Mortgages Total
30 June 2017 GBPm GBPm GBPm GBPm GBPm GBPm
Neither past
due nor individually
A impaired 4.4 10.5 18.1 1.9 5.1 40.0
Past due but
not
individually
B impaired 0.3 - 6.3 - 1.0 7.6
Individually
C impaired 0.4 0.5 5.2 - 1.1 7.2
5.1 11.0 29.6 1.9 7.2 54.8
----------------------------- --------- --------- --------------- ----------- ------------ -------
Asset Invoice SME Commercial Residential
Finance Finance Mortgages(1) Buy-to-Let Mortgages Total
31 December 2016 GBPm GBPm GBPm GBPm GBPm GBPm
Neither past
due nor individually
A impaired 3.2 10.4 23.8 1.4 4.9 43.7
Past due but
not
individually
B impaired - 0.6 0.2 0.3 1.5 2.6
Individually
C impaired 0.1 0.1 0.3 0.3 1.4 2.2
3.3 11.1 24.3 2.0 7.8 48.5
----------------------------- --------- --------- --------------- ----------- ------------ -------
(1) This analysis excludes Property Development.
Financial review continued
Credit risk continued
As at 30 June 2017, we had undertaken forbearance measures as follows in each of our segments:
30 June 31 December
2017 2016
GBPm GBPm
Asset Finance
Capitalisation 2.3 1.3
Reduced monthly payments 0.3 0.2
Loan-term extension 0.8 0.3
Deferred payment 1.7 1.5
-------- ------------
Total Asset Finance 5.1 3.3
Forborne as a percentage of the total
divisional gross lending book (%) 0.30% 0.21%
Invoice Finance
Agreement to advance funds in excess
of normal contractual terms 11.0 11.1
-------- ------------
Total Invoice Finance 11.0 11.1
Forborne as a percentage of the total
divisional gross lending book (%) 6.42% 6.96%
SME Commercial Mortgages(1)
Temporary or permanent switch to interest
only 29.6 24.3
-------- ------------
Total SME Commercial Mortgages 29.6 24.3
Forborne as a percentage of the total
divisional gross lending book (%) 3.13% 2.60%
Buy-to-Let
Temporary or permanent switch to interest
only 0.8 0.7
Reduced monthly payments 1.0 1.0
Deferred payment 0.1 0.3
-------- ------------
Total Buy-to-Let 1.9 2.0
Forborne as a percentage of the total
divisional gross lending book (%) 0.05% 0.06%
Residential Mortgages
Temporary or permanent switch to interest
only 4.4 4.5
Reduced monthly payments 1.7 2.0
Deferred payment 1.1 1.3
-------- ------------
Total Residential Mortgages 7.2 7.8
Forborne as a percentage of the total
divisional gross lending book (%) 0.49% 0.52%
Total forborne
Total capitalisation 2.3 1.3
Total reduced monthly payments 3.0 3.2
Total loan-term extension 0.8 0.3
Total deferred payment 2.9 3.1
Total agreement to advance funds in
excess of normal contractual terms 11.0 11.1
Total temporary or permanent switch
to interest only 34.8 29.5
Total forborne 54.8 48.5
Total forborne as a percentage of
the total gross lending book (%) 0.67% 0.65%
------------------------------------------- -------- ------------
(1) This analysis excludes Property Development.
When forbearance is granted to a borrower on a specific exposure, all exposures which are connected with that borrower, e.g. by reason of common ownership, are deemed as forborne for reporting purposes.
Financial review continued
Credit risk continued
4. Diversity and low concentrations within our loan portfolio
Aldermore continues to pursue a diversified portfolio. As shown below, we monitor concentration of credit risk by segment, geography, sector and size of loan:
Credit concentration by segment
Details of our net lending by segment are as follows:
30 June 2017 31 December 2016
GBPm % GBPm %
Asset Finance 1,697.4 21 1,573.4 21
Invoice Finance 166.2 2 154.1 2
SME Commercial Mortgages(1) 938.9 12 929.9 12
Buy-to-Let 3,827.1 47 3,326.0 45
Residential Mortgages 1,478.1 18 1,493.9 20
8,107.7 100 7,477.3 100
----------------------------- -------------- ------ --------------- -------
(1) The above analysis includes Property Development.
Credit concentration by geography(1)
An analysis of our loans and advances to customers by geography is shown in the table below:
30 June 31 December
2017 2016
% %
East Anglia 9.7 9.6
East Midlands 6.2 6.1
Greater London 20.2 20.7
North East 1.5 2.6
North West 10.8 10.7
Northern Ireland 0.3 0.2
Scotland 5.1 4.9
South East 20.1 19.9
South West 9.8 9.5
Wales 3.0 2.9
West Midlands 7.2 6.7
Yorkshire and Humberside 6.1 6.2
100.0 100.0
-------------------------- -------- ------------
(1) The above analysis includes Property Development.
Financial review continued
Credit risk continued
Credit concentration by sector
An analysis of our loans and advances to customers by sector is shown in the table below:
30 June 31 December
2017 2016
% %
Agriculture, hunting and forestry 1.0 1.1
Construction 4.7 4.4
Education 0.1 0.1
Electricity, gas and water supply 0.5 0.5
Financial intermediation 1.9 1.7
Health and social work 0.3 0.3
Hotels and restaurants 0.3 0.3
Manufacturing 2.9 3.1
Mining and quarrying 0.2 0.2
Private households with employed persons 0.8 0.8
Public administration and defence; compulsory
social security 0.1 0.1
Real estate, renting and business activities 19.6 19.2
Residential 61.3 61.9
Transport, storage and communication 3.8 3.8
Wholesale & retail trade; repair of
motor vehicles, motorcycles & personal
household goods 2.5 2.5
100.0 100.0
----------------------------------------------- -------- ------------
(1) The above analysis includes Property Development.
Credit concentration by quantum of exposure
An analysis of loans and advances to customers by quantum of exposure is shown in the table below:
SME
Asset Commercial Buy-to- Residential
Finance Mortgages(1) Let Mortgages
30 June 2017 GBPm GBPm GBPm GBPm
GBP0 - GBP50k 658.8 2.0 28.6 13.8
GBP50 - GBP100k 371.0 21.2 558.4 248.7
GBP100 - GBP150k 172.5 27.6 529.2 403.5
GBP150 - GBP200k 105.6 24.1 465.2 294.3
GBP200 - GBP300k 118.5 50.2 871.9 321.1
GBP300 - GBP400k 69.5 35.9 582.8 119.8
GBP400 - GBP500k 47.0 36.1 274.2 22.7
GBP500k - GBP1m 74.9 122.1 359.7 51.0
GBP1m - GBP2m 44.8 151.2 90.8 3.2
GBP2m+ 34.8 234.9 66.3 -
--------- -------------- -------- ------------
Total 1,697.4 705.3 3,827.1 1,478.1
------------------ --------- -------------- -------- ------------
(1) The above analysis excludes Property Development.
Financial review continued
Credit risk continued
Credit concentration by quantum of exposure continued
SME
Asset Commercial Buy-to- Residential
Finance Mortgages(1) Let Mortgages
31 December 2016 GBPm GBPm GBPm GBPm
GBP0 - GBP50k 639.7 2.9 25.4 15.9
GBP50 - GBP100k 361.3 24.7 518.1 252.9
GBP100 - GBP150k 145.4 31.7 480.6 414.9
GBP150 - GBP200k 96.1 26.1 400.5 299.6
GBP200 - GBP300k 107.4 52.3 709.1 314.1
GBP300 - GBP400k 54.9 36.7 457.5 120.7
GBP400 - GBP500k 40.3 40.1 219.1 21.4
GBP500k - GBP1m 79.6 119.0 306.3 51.2
GBP1m - GBP2m 34.2 140.2 116.0 3.2
GBP2m+ 14.5 227.1 93.4 -
Total 1,573.4 700.8 3,326.0 1,493.9
------------------ --------- -------------- -------- ------------
(1) The above analysis excludes Property Development.
5. The value of assets against which loans are secured and details of provisioning coverage
The principal indicators used to assess the credit security of performing loans are loan-to-value ("LTV") ratios for SME Commercial, Buy-to-Let and Residential Mortgages.
SME Commercial Mortgages(1)
Loan-to-value on indexed origination information on our SME Commercial Mortgage portfolio is set out below:
30 June 31 December
2017 2016
GBPm GBPm
95-100% 0.4 0.4
90-95% 0.4 0.5
85-90% 1.3 0.7
80-85% 0.2 1.7
75-80% 11.0 12.1
70-75% 48.2 34.8
60-70% 164.4 153.2
50-60% 201.0 211.9
0-50% 278.4 285.5
705.3 700.8
--------------------------------- -------- ------------
Capital repayment 472.6 568.4
Interest only 232.7 132.4
705.3 700.8
--------------------------------- -------- ------------
Average loan-to-value percentage 52.45% 51.74%
--------------------------------- -------- ------------
(1) The above analysis excludes Property Development.
Financial review continued
Credit risk continued
Property Development
We use "loan-to-gross-development-value" as an indicator of the quality of credit security of performing loans for the Property Development portfolio. Loan-to-gross-development-value is a measure used to monitor the loan balance compared with the expected gross development value once the development is complete. Average loan-to-gross-development-value at origination for Property Development loans at 30 June 2017 was 60 percent (31 December 2016: 58 percent).
Buy-to-Let
Loan-to-value on indexed origination information on our Buy-to-Let Mortgage portfolio is set out below:
30 June 31 December
2017 2016
GBPm GBPm
100%+ 0.4 -
95-100% 0.3 0.4
90-95% 5.3 9.6
85-90% 14.4 14.8
80-85% 95.1 136.5
75-80% 587.8 461.4
70-75% 786.0 561.2
60-70% 1,147.5 984.3
50-60% 701.9 669.6
0-50% 488.4 488.2
3,827.1 3,326.0
--------------------------------- -------- ------------
Capital repayment 267.9 251.1
Interest only 3,559.2 3,074.9
3,827.1 3,326.0
--------------------------------- -------- ------------
Average loan-to-value percentage 64.18% 63.21%
--------------------------------- -------- ------------
Financial review continued
Credit risk continued
Residential Mortgages
Loan-to-value on indexed origination information on our Residential Mortgage portfolio is set out below:
30 June 31 December
2017 2016
GBPm GBPm
100%+ 0.2 0.2
95-100% 10.6 17.2
90-95% 150.3 139.9
85-90% 160.3 178.4
80-85% 158.6 170.4
75-80% 147.2 166.1
70-75% 171.5 172.8
60-70% 265.8 251.4
50-60% 178.0 168.4
0-50% 235.6 229.1
1,478.1 1,493.9
--------------------------------- -------- ------------
Capital repayment 1,300.7 1,303.1
Interest only 177.4 190.8
1,478.1 1,493.9
--------------------------------- -------- ------------
Average loan-to-value percentage 68.79% 69.48%
--------------------------------- -------- ------------
Lending at higher LTV bandings continues to be largely as a result of the Group's participation in mortgage guarantee schemes. We participated in the Help to Buy ("HTB") mortgage guarantee scheme, which covered lending with an LTV over 85%, until the retirement of this scheme at the end of 2016. Following the cessation of the HTB scheme we have introduced the Mortgage Indemnity Guarantee ("MIG") product to cover all new lending over 80% LTV (excluding fees).
As at 30 June 2017, 98% of the exposures with an LTV in excess of 85% relate to either HTB (31 December 2016: 96%) or MIG. The average indexed LTV for mortgages with a guarantee was 87% (31 December 2016: HTB - 87%). As at June 2017, the average indexed LTV of the non-mortgage guarantee owner occupied book is 60% (31 December 2016: 61%).
Invoice Finance
In respect of Invoice Finance, collateral is provided by the underlying receivables (e.g. trade invoices). As at 30 June 2017, the average advance rate against the fair value of sales ledger balances which have been assigned to the Group, net of amounts considered to be irrecoverable, is 61.6% (31 December 2016: 62.3%).
In addition to the value of the underlying sales ledger balances, we will wherever possible, obtain additional collateral before offering invoice finance facilities to a client. These may include limited personal guarantees from major shareholders, charges over personal and other business property, cross guarantees from associated companies and unlimited warranties in the case of frauds or certain other breaches. These additional forms of security are impractical to value given their nature.
Asset Finance
In respect of Asset Finance, collateral is provided by our rights and/or title to the underlying assets which we are able to repossess in the event of default. Where appropriate, we will also obtain additional security such as parent company or personal guarantees.
Financial review continued
Credit risk continued
Asset Finance also undertakes a small volume of unsecured lending where we have obtained an understanding of the ability of the borrower's business to generate cash flows to service and repay the facilities provided. As at 30 June 2017, the total amount of such unsecured lending was GBP46.6 million (31 December 2016: GBP40.7 million).
Group impairment coverage ratio
Impairment coverage is as follows:
30 June 31 December
2017 2016
Coverage ratio GBPm GBPm
Gross loans and advances 8,135.6 7,504.7
Of which individually impaired 35.1 35.6
---------------------------------------------- -------- ------------
Impaired as a % of gross loans and advances 0.43% 0.47%
Allowance for losses - individual provisions 12.4 14.3
Coverage 35.3% 40.2%
---------------------------------------------- -------- ------------
The total value of individually impaired loans has decreased despite the growth in lending portfolios. This reflects both our controlled approach to credit risk management and the benign economic environment, resulting in a lower coverage ratio.
Financial review continued
Credit risk continued
6. Information on credit risk within our treasury operations
Credit risk exists where we have acquired securities or placed cash deposits with other financial institutions as part of our treasury portfolio of assets. We consider the credit risk of treasury assets to be relatively low. No assets are held for speculative purposes or actively traded. Certain liquid assets are held as part of our liquidity buffer.
Credit quality of treasury assets
The table below sets out information about the credit quality of treasury financial assets. As at 30 June 2017 and at 31 December 2016, none of the treasury assets were past due or impaired. The analysis presented below is derived using ratings provided by Standard and Poor's (see below disclaimer for further details) and Fitch. The worst rating from the credit agencies for each of the counterparties is used as the basis for assessing credit risk of treasury financial assets.
30 June 31 December
2017 2016
GBPm GBPm
Cash and balances at central banks and
loans and advances to banks
- Rated AAA - -
- Rated AA+ to AA- 385.1 139.3
- Rated A+ to A- 21.8 35.6
- Rated BBB+ 55.9 8.7
462.8 183.6
------------------------------------------ -------- ------------
High quality liquid assets included
in the liquidity buffer
- Rated AAA 480.0 430.9
- Rated AA+ to AA- 163.0 163.2
- Rated A+ to A- - -
- Rated BBB+ - -
Debt securities: Asset backed securities
- Rated AAA 69.7 70.4
- Rated AA+ to AA- - -
- Rated A+ to A- - -
- Rated BBB+ - -
712.7 664.5
------------------------------------------ -------- ------------
Derivatives held for risk management
purposes
- Rated AAA - -
- Rated AA+ to AA- 4.3 2.6
- Rated A+ to A- 11.1 6.1
- Rated BBB+ 3.7 3.7
- Rated BBB - -
19.1 12.4
------------------------------------------ -------- ------------
1,194.6 860.5
------------------------------------------ -------- ------------
Standard and Poor's disclaimer notice in relation to the ratings information set out above:
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Financial review continued
Funding and Liquidity risk
Liquidity risk is the risk that we are not able to meet our financial obligations as they fall due, or can do so only at excessive cost.
To protect the Group and its depositors against liquidity risk, we maintain a liquidity buffer which is based on our liquidity needs under stressed conditions. The liquidity buffer is monitored on a daily basis to ensure there are sufficient liquid assets at all times to cover cash flow movements and fluctuations in funding, enabling us to meet all financial obligations and to support anticipated asset growth.
The components of the Group's liquidity buffer are shown below:
30 June 31 December
2017 2016
GBPm GBPm
----------------------------------------------- -------- ------------
Level 1
Bank of England reserve account and
unencumbered cash and bank balances 358.5 118.4
UK gilts and Treasury bills, other Sovereign,
Supranational and Covered bonds 603.1 554.0
Treasury bills held under the FLS scheme 204.8 294.8
Level 2
Covered bonds 36.5 36.8
Asset backed securities 69.7 70.4
Total liquidity buffer 1,272.6 1,074.4
----------------------------------------------- -------- ------------
As a % of funding liabilities 14.5% 13.5%
Our liquidity buffer ensures the Group holds sufficient liquidity under stressed conditions. We monitor stress and ongoing commitments to our statement of financial position on a daily basis. We also have access to liquidity through pre-positioned collateral with the Bank of England (until drawn, this remains off-balance sheet so is not included within the calculation).
Financial review continued
Interest rate and market risk
Interest rate risk is the risk of loss through mismatched asset and liability positions which are sensitive to changes in interest rates. Interest rate risk consists of asset-liability gap risk and basis risk.
Asset-liability gap risk
Where possible, we seek to match the interest rate structure of assets with liabilities creating a natural hedge. Where this is not possible, we enter into interest rate swap transactions to convert the fixed rate exposures on loans and advances, customer deposits and available for sale securities into variable three month LIBOR liabilities.
Given timing differences and the price of hedging small gaps, it is not cost effective to have an absolute match of variable rate assets and liabilities. The risk exposure of the overall asset-liability interest rate profile is monitored against approved limits using changes in the economic value of the balance sheet as a result of a modelled 2 percentage point shift in the interest yield curve.
The impact of a 2 percentage point shift in the interest yield curve is as follows:
30 June 31 December
2017 2016
GBPm GBPm
2% shift up of the yield curve:
As at period ended (8.9) (7.0)
Average of month end positions reported
to ALCO (6.4) (3.7)
----------------------------------------- -------- ------------
2% shift down of the yield curve:
As at period ended 3.6 1.8
Average of month end positions reported
to ALCO 2.1 0.9
----------------------------------------- -------- ------------
Financial review continued
Segmental analysis: Asset Finance
HY 2017 HY 2016 Movement
GBPm GBPm %
Net interest income 32.4 29.9 8
Net fees and other income 2.6 1.7 53
--------------------------- -------- -------- ---------
Operating income 35.0 31.6 11
Administrative expenses (6.6) (6.3) (5)
Impairment losses (1.9) (2.4) 21
--------------------------- -------- -------- ---------
Segmental profit 26.5 22.9 16
--------------------------- -------- -------- ---------
Origination 583.3 509.3 15
Gross interest yield (%) 5.4 6.2 (0.8)pp
Net interest margin (%) 4.0 4.2 (0.2)pp
Cost of risk (%) 0.24 0.34 0.1pp
30 Jun 31 Dec
2017 2016 Movement
GBPm GBPm %
Net loans to customers 1,697.4 1,573.4 8
Asset Finance predominantly supports the growth of SMEs, providing financing for capital investment in business critical assets. Leveraging our depth and breadth of expertise, we finance a wide array of assets such as plant and machinery, commercial vehicles, technology, office equipment and cars. This flexibility enables us to meet the needs of customers of all sizes across key industries. In addition, we offer wholesale, receivables purchase and block discounting facilities to smaller finance companies and brokerages enabling them to extend credit directly to SMEs.
Performance
Net loans to customers were up GBP124m to GBP1.7bn, an increase of 8% driven by organic origination of GBP0.6bn, extending our Asset Finance franchise to c50,000 small UK businesses.
We maintain a leadership position in the competitive broker-introduced market, supporting a range of customer segments across a broad range of asset classes. We have also expanded our wholesale proposition, up 50% to GBP150m compared with the six months to June 2016, including a small number of large deals with target clients. Net interest income increased 8% to GBP32.4m driven by lending growth, with the NIM down slightly to 4.0%, driven by competitive dynamics and the increased use of our wholesale channel. Other income grew by 53% to GBP2.6m driven primarily by an increase in documentation fees.
Impairments were low at GBP1.9m (H1 2016: GBP2.4m), driving the cost of risk down by 10bps to 24bps, reflecting the high quality book backed by high-levels of tangible collateral. The overall segmental profit increased 16% to GBP26.5m (H1 2016: GBP22.9m).
Outlook
Asset Finance has made a strong start to the year, growing lending balances by 8% and progressing strategic initiatives to support medium term growth. We continue to maintain underwriting and return standards, despite competition from new entrants and consolidation activity among intermediaries.
Aldermore is well positioned to manage and capitalise on these competitive dynamics, as demonstrated by our agreed investment in AFS Group Holdings, and is expected to continue to generate robust new lending growth via both the broker and wholesale channels over the second half of the year.
Financial review continued
Segmental analysis: Invoice Finance
HY 2017 HY 2016 Movement
GBPm GBPm %
Net interest income 2.4 2.2 9
Net fees and other income 6.6 7.2 (8)
--------------------------- ----------- -------- ---------
Operating income 9.0 9.4 (4)
Administrative expenses (4.7) (5.3) 11
Impairment losses (0.2) (1.0) 80
--------------------------- ----------- -------- ---------
Segmental profit 4.1 3.1 32
--------------------------- ----------- -------- ---------
Origination 23.8 18.9 26
Net revenue margin (%) 11.3 11.9 (0.6)pp
Net interest margin (%) 3.0 2.8 0.2pp
Cost of risk (%) 0.27 1.27 1.0pp
31 Dec
30 Jun 2016 Movement
2017 GBPm GBPm %
Net loans to customers 166.2 154.1 8
Invoice Finance helps the UK's SMEs to unlock working capital and vital cash flow for their businesses, providing facilities ranging from vanilla invoice discounting and full-service factoring to more bespoke structured products requiring Aldermore's in-house expertise.
Performance
Performance trends in Invoice Finance have shown continued momentum as a result of our strategy to consolidate and focus on larger discounting facilities to small businesses, demonstrated by a 32% increase in segmental profit.
Invoice Finance has a relatively short lifecycle compared to the Group's other portfolios, with strong growth in originations of 26% translating to net lending growth of 8% to GBP166.2m (2016: GBP154.1m). An 8% reduction in fee income to GBP6.6m reflects our continuing focus toward invoice discounting and structured finance and away from lower value and labour intensive factoring business, which has also contributed to a more than 10% reduction in administrative expenses.
Impairments have fallen by 80% to GBP0.2m, significantly reducing the cost of risk to 0.27%, down 1.0pp reflecting the improved credit profile of the portfolio.
Outlook
The refocused strategy in Invoice Finance continues to generate strategic and financial benefit, through a higher quality customer base and greater returns. Given the nature of the portfolio balances we anticipate modest growth over the second half of 2017 as new specialist proposition development, such as football finance, offsets the planned attrition from the factoring business.
Financial review continued
Segmental analysis: SME Commercial Mortgages
HY 2017 HY 2016 Movement
GBPm GBPm %
Net interest income 26.4 23.7 11
Net fees and other income 0.2 0.6 (67)
--------------------------- ----------- -------- ---------
Operating income 26.6 24.3 10
Administrative expenses (1.4) (1.8) 22
Impairment losses (0.6) (1.2) 50
--------------------------- ----------- -------- ---------
Segmental profit 24.6 21.3 16
--------------------------- ----------- -------- ---------
Origination 150.3 209.9 (28)
Gross interest yield (%) 6.7 6.9 (0.2)pp
Net interest margin (%) 5.6 5.4 0.2pp
Cost of risk (%) 0.13 0.27 0.14pp
31 Dec
30 Jun 2016 Movement
2017 GBPm GBPm %
Net loans to customers 938.9 929.9 1
Our SME Commercial Mortgages business works with a panel of specialist intermediaries and direct with customers to provide mortgages for experienced property investors, small business owners and regional property developers. Our mortgages cover a variety of premises, including shops, warehouses, industrial units, residential developments and offices.
Performance
New lending reduced by 28% to GBP150m, whilst net loans to customers grew by just over 1% to GBP939m (2016: GBP930m), reflecting in part our decision to refine our risk appetite following the Brexit vote and the focus of operational capacity toward Buy-to-Let in response to the surge in customer demand.
The net interest margin expanded by 0.2% to 5.6% reflecting favourable funding conditions which, combined with growth of the portfolio, has driven an 10% increase in operating income to GBP26.6m (H1 2016: GBP24.3m).
Impairments over the first half of 2017 have reduced by 50% compared to the first half of 2016 to GBP0.6m, driving a reduction in the cost of risk of 0.14pp to 0.13%, reflecting a low level of specific charges and the increase in the emergence period to 12 months applied to collective provisioning during the first half of 2016. The book remains backed by high quality tangible collateral with loan-to-value, excluding Property Development, of 52% (2016: 52%). Our Property Development business had GBP234m of net loans outstanding at the year end, with a loan-to-gross-development-value at origination of 60%. In total, the segmental profit for SME Commercial Mortgages increased by 16% to GBP24.6m in the first half of 2017 (H1 2016: GBP21.3m).
Outlook
Our investment in our intermediary Centre of Excellence over the first half of the year has enhanced the service we provide to brokers and this should support the business in the second half of the year and beyond. Competition continues to intensify in SME Commercial Mortgages as new entrants seek to take market share. We will continue to adhere to our clear and controlled standards of underwriting and will remain focused on the delivery of sustainable risk-adjusted returns.
Financial review continued
Segmental analysis: Buy-to-Let Mortgages
HY 2017 HY 2016 Movement
GBPm GBPm %
Net interest income 56.4 40.9 37.9
Net fees and other income 1.9 2.3 (17.4)
--------------------------- ----------- -------- ---------
Operating income 58.3 43.2 35.0
Administrative expenses (6.1) (4.7) (29.8)
Impairment losses (2.0) (0.9) (122.2)
--------------------------- ----------- -------- ---------
Segmental profit 50.2 37.6 33.5
--------------------------- ----------- -------- ---------
Origination 695.3 518.6 34.1
Gross interest yield (%) 4.5 4.9 (0.4)pp
Net interest margin (%) 3.2 3.2 -
Cost of risk (%) 0.10 0.07 (0.03)pp
31 Dec
30 Jun 2016 Movement
2017 GBPm GBPm %
Net loans to customers 3,827.1 3,326.0 15.1
Our Buy-to-Let ("BTL") business provides a holistic offering for the UK's private property investors, catering for both individual and corporate landlords, simple to complex properties, including Houses in Multiple Occupation and from single property investments to large professional portfolios.
Performance
Buy-to-Let had a very strong start to the year, growing net loans by 15% to GBP3.8bn, driven by organic origination of GBP0.7bn, up 34%. Growth was particularly strong over the first quarter, due to the spike in applications seen during the final quarter of 2016, as customers sought to secure mortgages ahead of PRA changes to affordability testing.
As previously communicated, Q2 2017 saw a lower level of originations due to the Group's initial conservative interpretation of new affordability tests. We have since revised our approach to balance prudent risk management with a competitive proposition, which has supported the return of applications to what is considered a more normal level.
This strong first half lending growth and broadly stable margin have driven a 38% increase in net interest income driving operating income up 35% to GBP58.3m, slightly offset by a GBP0.4m reduction in other income, due to fee discounts on new lending.
The GBP1.4m increase in administrative expenses is driven by growth to support new lending and an increased allocation of operational resources to support the strong loan growth delivered during the first half of the year.
Cost of risk has increased modestly to 0.10% but remains low with impairments of GBP2.0m (H1 2016: GBP0.9m). The quality of the book remains robust. The average loan balance in the portfolio is just GBP175k, with an indexed LTV of 64%. The segmental result demonstrates excellent progress, growing by over a third to GBP50.2m (H1 2016: GBP37.6m).
Outlook
As expected, the changes to personal tax relief and affordability testing have reduced the rate of growth in the overall buy-to-let market. However, the fundamentals supporting the market remain strong and are increasingly favouring specialist lenders like Aldermore who can continue to build on small market shares, capitalising on the anticipated professionalisation of investors in the market.
We outperformed the market over the first half of the year and are well positioned to continue to do so over the second half, as forthcoming changes to underwriting standards with regard to professional portfolio landlords are likely to favour the human approach adopted by specialist lenders.
Financial review continued
Segmental analysis: Residential Mortgages
HY 2017 HY 2016 Movement
GBPm GBPm %
Net interest income 24.5 22.8 7.5
Net fees and other income 0.8 0.9 (11.1)
--------------------------- ----------- -------- ---------
Operating income 25.3 23.7 6.8
Administrative expenses (2.4) (2.2) (9.1)
Impairment losses (0.9) (0.9) -
--------------------------- ----------- -------- ---------
Segmental profit 22.0 20.6 6.8
--------------------------- ----------- -------- ---------
Origination 193.2 243.2 (20.6)
Gross interest yield (%) 4.7 5.4 (0.7)pp
Net interest margin (%) 3.3 3.1 0.2pp
Cost of risk (%) 0.12 0.12 -
31 Dec
30 Jun 2016 Movement
2017 GBPm GBPm %
Net loans to customers 1,478.1 1,493.9 (1.1)
Residential Mortgages serves creditworthy first-time buyers, the self-employed and professionals, who often fall outside the automated and inflexible lending criteria of some of the mainstream providers.
Performance
The Residential Mortgages portfolio reduced marginally over the first half of the year to GBP1.5bn (2016: GBP1.5bn), driven by a slower pace of origination and increased redemptions, in particular from a cohort of Help to Buy customers coming to the end of two-year fixed rates. Whilst overall originations declined, as operational focus was directed to Buy-to-Let, we have seen a strong uptake in our Mortgage Indemnity Guarantee ("MIG") product targeting customers with a deposit of less than 20%, which we introduced as a follow-on to the Government's Help to Buy scheme, which ended in 2016.
Stable lending balances and an expansion in the net interest margin by 20bps to 3.3% (H1 2016: 3.1%), helped support a 7% rise in operating income to GBP25.3m (H1 2016: GBP23.7m).
Impairments remained low at GBP0.9m (H1 2016: GBP0.9m), reflecting the relatively low levels of arrears and the continuation of the relatively benign credit environment. The overall segmental profit increased 7% to GBP22.0m (H1 2016: GBP20.6m).
Outlook
Residential Mortgages is expected to return to growth during the second half of 2017, supported by increased originations and ongoing activity to improve retention. Whilst competition for retail mortgages remains high, Aldermore has carved out core niches, including the self-employed and first time buyers. We also continue to look at options to develop into adjacent markets, such as lending in to retirement, which present additional levers for growth.
Financial review continued
Segmental analysis: Central Functions
HY 2017 HY 2016 Movement
GBPm GBPm %
Net interest expense (6.5) (3.9) (66.7)
Net fees and other income (expense) 1.9 (0.6) 416.7
------------------------------------- -------- -------- ---------
Operating loss (4.6) (4.5) (2.2)
Administrative expenses (44.7) (37.8) (18.3)
Impairment of Invoice Finance
goodwill - (4.1) -
------------------------------------- -------- -------- ---------
Segmental loss (49.3) (46.4) (6.3)
------------------------------------- -------- -------- ---------
Central Functions includes the Group's Treasury function and Savings division as well as common costs which are not directly attributable to the operating segments. Common costs include central support function costs such as Finance, IT, Legal & Compliance, Risk and Human Resources.
Performance
Net interest income includes the interest expense relating to the Tier 2 notes and part of the income or expense arising from derivatives held at fair value in hedging relationships, neither of which are recharged to segments.
Net fees and other income predominantly includes the net expense or income from derivatives not currently recognised as being in hedging relationships and other financial instruments at fair value through profit or loss, and gains on disposals of available for sale debt securities.
Central administrative expenses increased by 18% to GBP44.7m (H1 2016: GBP37.8m), driven by the recruitment of colleagues over the second half of 2016 and at the start of 2017 as we invested to further support growth and risk management.
Goodwill of GBP4.1m arising on the acquisition of Absolute Invoice Finance (Holdings) Limited which was fully impaired in 2016.
The segmental result was a charge of GBP49.3m (H1 2016: charge of GBP46.4m).
Savings and funding outlook
Deposit pricing conditions have remained relatively stable over the first half of 2017, which is expected to continue into the second half. Deposit balances have grown strongly during the first half of the year, such that the loan to deposit ratio (110% end June 2017) is below our medium term guidance of 115 - 120%. We anticipate this increasing over the second half of the year as we continue to utilise the TFS to fund new lending.
Risk report
Principal risks
Effective risk management is a core component of the Group and is embedded throughout the organisation. The Board and senior management ensure that a strong risk culture is at the heart of everything we do, with risk appetite clearly defined and managed against. There has been no significant change to our business model or risk appetite, and our risk management framework has been enhanced during the six months to 30 June 2017. The following section summarises the principal risks and uncertainties that we inherently face, along with our approach to their mitigation.
Principal risk Mitigation
------------------------------- -------------------------------------------------------------
Credit risk
The risk that customers * Continue to focus lending where we have specific
may be unable to make expertise
their loan repayments
* Limit concentration of lending by size, geography and
sector
* Obtain appropriate level of security cover and
perform affordability testing at origination
* Embed clear lending policies in each business area
* Regularly review performance against risk appetite
* Stress test the portfolio to test resilience
------------------------------- -------------------------------------------------------------
Capital and liquidity
risk * Conduct stress testing on, and sensitivity analysis
The risk that we fail for both capital and liquidity
to hold sufficient
or appropriate reserves
to support growth, * Monitor capital adequacy position against internal
meet regulatory requirements, targets and forecasts on a monthly basis
or repay obligations
as they fall due
* Maintain an appropriate liquidity buffer based on
stressed requirements
* Monitor the liquidity buffer on a daily basis
* Maintain and annually review the Contingency Funding
Plan
* Conduct impact assessments of regulatory changes on
an ongoing basis
------------------------------- -------------------------------------------------------------
Market risk
The risk that market * Do not seek to take or expose the Group to market
movements adversely risk and do not carry out proprietary trading
impact the Group
* Match interest rate structures of assets and
liabilities to create a natural hedge where possible
* Hedge unmatched interest rate exposures with
derivative swap contracts
------------------------------- -------------------------------------------------------------
Operational risk
The risk of loss due * Embed and ensure all staff understand and follow the
to failure in processes, Operational Risk Management Framework
systems or human error,
including outsourcing
* Centrally analyse Risk Event Reporting and the
Group's response to risk events
* Continue to invest in information security and cyber
controls in line with our Cyber strategy
* Maintain our Third Party Supplier Framework which was
implemented in 2017
------------------------------- -------------------------------------------------------------
Compliance, conduct
and financial crime * Provide simple, straightforward and transparent
risk products and operate solely in the UK market
The risk of sanctions
or financial loss
as a result of a failure * Embed and ensure all staff understand and follow
to comply with applicable clear policies, including Conduct Risk and Product
laws, including anti Governance
money-laundering and
the risk of causing
unfair outcomes or * Continue to invest in staff training and supporting
detriment to customers systems
* Perform horizon scanning and impact assessments to
track regulatory change
* Unlike many other lenders, we do not have legacy
conduct issues such as payment protection insurance
litigation
------------------------------- -------------------------------------------------------------
Reputational risk
Failure to meet the * Ensure all governance committees have reputational
expectations and standards risk considerations as a key part of their remit
of our customers,
investors, regulators
or other counterparties * Maintain a dedicated team, Group Corporate Affairs,
to monitor and help the business mitigate
reputational risk under the executive direction of
the Group CEO
* Ensure all employees remain aware of their
responsibilities under the Bank's Reputational Risk
Policy
* Maintain open and transparent relationships with
regulators and other key stakeholder groups
------------------------------- -------------------------------------------------------------
Risk report continued
Emerging risks
We define 'emerging risks' as those risks that may impact our future performance, compromise our existing strategy or threaten our business model. At this point, emerging risks include:
Themes Risk What we are currently
doing
------------------ ---------------------------------------- ----------------------------
Regulatory Change/Intervention
------------------------------------------------------------------------------------------
Basel Committee In December 2015 the BCBS The IFRS 9 work
on Banking issued a second consultative on credit models
Supervision document (Revisions to the takes us closer
("BCBS") Standardised Approach for to the sophistication
Credit Risk) containing proposals required for an
to increase the capital requirements IRB approach to
for certain asset classes capital, which may
including buy-to-let and help mitigate the
commercial real estate lending. risk of future changes
If these proposals were implemented in capital requirements.
as outlined, the capital We continue to assess
requirements for these market a range of BCBS
segments would increase significantly outcomes as part
and require the execution of our capital planning
of management actions to process and now
mitigate their impact. anticipate final
requirements by
the end of 2017.
------------------ ---------------------------------------- ----------------------------
IFRS 9 New reporting requirements We are on track
under IFRS 9 introduce forward-looking with enhancements
credit loss models which required to support
will lead to changes in the IFRS 9 and expect
timing of impairment recognition. to be compliant
The risk is that the Group with the new accounting
is unable to deliver full standard for January
compliance before new regulation 2018. We note regulators'
takes effect. intention to phase-in
the capital impact
over several years.
------------------ ---------------------------------------- ----------------------------
Buy-to-Let The risk of an adverse impact The buy-to-let market
Mortgages on the buy-to-let market is changing following
Tax changes of changes to UK tax regime government and regulatory
and revised and failure to comply with changes. Aldermore
PRA underwriting regulatory expectations set is responding to
standards out in the PRA Supervisory ensure it continues
Statement on Buy-to-Let Underwriting to provide appropriate
Standards, issued in September products for our
2016. customers.
The second phase
of changes to underwriting
standards introduced
by the regulator
will be implemented
by the 30 September
2017.
------------------ ---------------------------------------- ----------------------------
General New data protection regulation We have undertaken
Data Protection which strengthens and unifies a gap assessment
Regulation data protection for all individuals against the requirements
within the European Union. and established
It gives greater control a dedicated project
to individuals on the use to support compliance
and processing of their personal by May 2018.
data, with increased obligations
on firms holding personal
data. The risk is that the
Group is unable to deliver
the required change before
the new regulation takes
effect on 25 May 2018.
------------------ ---------------------------------------- ----------------------------
Payment Introduction of strict security Whilst Aldermore
Service requirements for the initiation does not have accounts
Directive and processing of electronic defined as 'payment
2 payments and the protection accounts,' we are
of consumers' financial data awaiting further
across the EU. It will increase direction from the
competition by making transaction government to clarify
data available to other service regulatory expectations
and payment providers. In regarding the broader
addition to the regulatory requirements.
and competition requirements, We continue to observe
there is risk of a change the impact on competition
in customer behaviour, which and customer behaviour
cannot be fully ascertained as the Directive
at this time. is implemented.
------------------ ---------------------------------------- ----------------------------
Risk report continued
Emerging risks continued
Themes Risk What we are currently
doing
------------------ ----------------------------------------- -----------------------------------
Economic and Political Environment
--------------------------------------------------------------------------------------------------
The UK's Heightened economic and Uncertainty has increased
decision political risks following following triggering
to leave the UK's decision to leave of Article 50 and
the European the European Union. As the outcome of the
Union a UK focused Group, we UK General Election.
are protected from the The Bank continues
more direct impacts of to monitor progress
the Referendum such as and will decide on
access to European markets any actions required
but we are exposed to the as appropriate to
wider economic impacts. our business model.
To date, we have seen no
direct impact on either
the lending or deposit
sides of our business.
-------------------- ------------------------------------- -------------------------------------
International The geopolitical environment There remains a possibility
economic presents risks to global that material international
and political markets, including the events could adversely
environment impact of a new administration affect the UK economy
in the USA, modest growth and the sectors to
in the EU and continued which we lend. We
political risks in Russia manage these risks
and the Middle East. by maintaining a well-diversified
product base and will
continue to monitor
developments.
-------------------- ------------------------------------- -------------------------------------
Exposure We have a substantial lending House price growth
to real exposure to the residential, has slowed in the
estate buy-to-let and commercial first half of the
property sectors. Any property year and we remain
value falls, or an increase vigilant to the potential
in unemployment, may lead impact on credit performance.
to a rising number of defaults. Government and institutional
guarantees continue
to protect our higher
loan-to-value residential
mortgages.
-------------------- ------------------------------------- -------------------------------------
Interest The low interest rate environment, We continue to monitor
rate environment introduced to stimulate the external environment
growth following the financial and will respond to
crisis, has persisted for any interest rate
longer than first expected. rises as appropriate.
If interest rates are increased,
unemployment may rise and
loan servicing costs may
increase which could cause
an increase in credit losses.
-------------------- ------------------------------------- -------------------------------------
Competitive Environment
--------------------------------------------------------------------------------------------------
New entrants The competitive landscape We continue to monitor
and increased contains risks from new the external environment
competition entrants, increased competition and adapt accordingly.
from incumbent lenders
and disruptive products/software
solutions potentially affecting
both lending and deposit
taking activities. The
effect of this could result
in lower volumes, higher
customer attrition and/or
lower net interest margins.
-------------------- ------------------------------------- -------------------------------------
Technology Risk
--------------------------------------------------------------------------------------------------
Cyber-crime Cyber-crime is a significant This remains a key
threat in our increasingly risk area and the
interconnected world and Group continues to
exposes all businesses invest in security
and in particular financial improvements in line
services companies to potential with its Cyber Strategy.
financial and reputational
damage.
Cyber threats continue
to evolve as demonstrated
by high profile cases.
Growth in the Group's customer
base could increase its
profile to potential cyber
attackers.
-------------------- ------------------------------------- -------------------------------------
System failure The Group has a number This is a continued
/ outsourcing of major outsource partners focus during 2017
and critical supplier relationships with the appointment
which are key elements of a new CIO and the
of the overall supply chain. enhancement of risk
The failure of one of these management practices
key partners could significantly to oversee the supplier
impact the Group's customers, estate.
operations and reputation.
-------------------- ------------------------------------- -------------------------------------
A more detailed review of principal and emerging risks is set out in the Risk Management section of the 2016 Annual Report on pages 33 to 35 and 106 to 139, which can be accessed via our Investor Relations website at www.investors.aldermore.co.uk.
Financial statements
Directors' responsibility statement
The Directors are responsible for preparing the interim financial report in accordance with applicable law and regulations.
We confirm that to the best of our knowledge:
-- The condensed set of consolidated financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting, as required by DTR 4.2.4, as adopted by the European Union ("EU"); and
-- The interim management report includes a fair review of the information required by:
Ø DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first half of the financial year and their impact on the condensed set of consolidated financial statements; and a description of the principal risks and uncertainties for the remaining half of the year; and
Ø DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first half of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.
The Board of Directors, as listed below, represents those individuals responsible for these condensed consolidated interim financial statements.
Danuta Gray - Interim Chairman
Phillip Monks OBE - Chief Executive Officer
James Mack - Chief Financial Officer
Christine Palmer - Chief Risk Officer
John Hitchins
Chris Patrick
Robert Sharpe - resigned with effect 31 October 2017
Peter Shaw
Christopher Stamper
Cathy Turner
By order of the Board
James Mack
Director and Chief Financial Officer
9 August 2017
Financial statements continued
Independent review report to Aldermore Group PLC
Introduction
We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2017 which comprises: the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated cash flow statement, the consolidated statement of changes in equity and related notes 1 to 23. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
This report is made solely to the company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.
As disclosed in Note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting' as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.
Scope of review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.
A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2017 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.
Deloitte LLP
Statutory Auditor
London
United Kingdom
9 August 2017
Financial statements continued
Consolidated income statement (unaudited)
For the six month period ended 30 June 2017
Period Period
ended ended
30 30
June June
2017 2016
Note GBPm GBPm
Interest income 4 192.0 175.6
Interest expense 5 (56.4) (60.0)
Net interest income 135.6 115.6
--------------------------------------- ----- ------- -------
Fee and commission income 6 12.9 13.5
Fee and commission expense 7 (3.8) (3.8)
Net income/(expense) from derivatives
and other financial instruments
at fair value through profit or
loss 8 1.5 (1.5)
Gains on disposal of available
for sale debt securities 0.5 0.7
Other operating income 9 2.9 3.2
Total operating income 149.6 127.7
--------------------------------------- ----- ------- -------
Provisions (1.0) (1.3)
Impairment of goodwill - (4.1)
Other administrative expenses (62.3) (54.6)
--------------------------------------- ----- ------- -------
Administrative expenses 10 (63.3) (60.0)
Depreciation and amortisation (2.6) (2.2)
---------------------------------------
Operating profit before impairment
losses 83.7 65.5
Impairment losses on loans and
advances to customers 13 (5.6) (6.4)
--------------------------------------- ----- ------- -------
Profit before taxation 78.1 59.1
Taxation 11 (20.3) (16.9)
--------------------------------------- ----- ------- -------
Profit after taxation - attributable
to equity holders of the Group 57.8 42.2
--------------------------------------- ----- ------- -------
Basic earnings per share (pence) 12 14.9p 10.3p
Diluted earnings per share (pence) 12 14.8p 10.3p
--------------------------------------- ----- ------- -------
The notes and information on pages 43 to 60 form part of these financial statements.
The result for the period is derived entirely from continuing activities.
Financial statements continued
Consolidated statement of comprehensive income (unaudited)
For the six month period ended 30 June 2017
Period Period
ended ended
30 30
June June
2017 2016
GBPm GBPm
Profit after taxation 57.8 42.2
--------------------------------------------- ------- -------
Other comprehensive expense:
Items that may subsequently be transferred
to the income statement:
Available for sale debt securities:
Fair value movements 0.4 (1.0)
Amounts transferred to the income statement (0.5) (0.7)
Taxation - 0.4
--------------------------------------------- ------- -------
Total other comprehensive expense (0.1) (1.3)
--------------------------------------------- ------- -------
Total comprehensive income - attributable
to equity holders of the Group 57.7 40.9
--------------------------------------------- ------- -------
The notes and information on pages 43 to 60 form part of these financial statements.
Financial statements continued
Consolidated statement of financial position (unaudited)
As at 30 June 2017
30 June 31 December
2017 2016
Note GBPm GBPm
Assets
Cash and balances at central banks 368.1 116.4
Loans and advances to banks 94.7 67.2
Debt securities 712.7 664.5
Derivatives held for risk management 19.1 12.4
Loans and advances to customers 13 8,107.7 7,477.3
Fair value adjustment for portfolio
hedged risk (11.2) (3.5)
Other assets 3.2 3.1
Prepayments and accrued income 4.8 3.4
Deferred taxation 11 8.4 11.2
Property, plant and equipment 3.6 3.1
Intangible assets 28.3 26.1
Total assets 9,339.4 8,381.2
-------------------------------------- ----- -------- ------------
Liabilities
Amounts due to banks 1,055.2 753.8
Customers' accounts 14 7,345.9 6,673.7
Derivatives held for risk management 27.3 35.8
Fair value adjustment for portfolio
hedged risk (1.4) (1.2)
Other liabilities 24.7 25.0
Accruals and deferred income 24.6 27.0
Current taxation 15.1 9.7
Provisions 1.7 0.8
Debt securities in issue 15 107.1 130.6
Subordinated notes 16 60.4 100.0
Total liabilities 8,660.6 7,755.2
-------------------------------------- ----- -------- ------------
Equity
Share capital 17 34.5 34.5
Share premium account 73.4 73.4
Contingent convertible securities 74.0 74.0 Capital redemption reserve 0.1 0.1 Available for sale reserve 1.7 1.8 Retained earnings 495.1 442.2 Total equity 678.8 626.0 -------------------------------------- ----- -------- ------------ Total liabilities and equity 9,339.4 8,381.2 -------------------------------------- ----- -------- ------------
The notes and information on pages 43 to 60 form part of these interim financial statements.
These financial statements were approved by the Board and were signed on its behalf by:
Phillip Monks OBE James Mack Director Director 9 August 2017 9 August 2017
Registered number: 06764335
Financial statements continued
Consolidated statement of cash flows (unaudited)
For the six month period ended 30 June 2017
Period Period
ended ended
30 30
June June
2017 2016
Note GBPm GBPm
Cash flows from operating activities
Profit before taxation 78.1 59.1
Adjustments for non-cash items and
other adjustments included within
the income statement 19 8.4 (4.7)
(Increase) in operating assets 19 (645.7) (687.6)
Increase in operating liabilities 19 963.0 738.4
Income tax paid (9.8) (12.6)
Net cash flows generated from operating
activities 394.0 92.6
----------------------------------------- ----- -------- --------
Cash flows from investing activities
Purchase of debt securities (243.8) (192.0)
Proceeds from sale and maturity
of debt securities 176.5 55.5
Capital repayments of debt securities 17.4 43.4
Interest received on debt securities 4.1 7.6
Purchase of property, plant and
equipment and intangible assets (5.3) (4.1)
Net cash used in investing activities (51.1) (89.6)
----------------------------------------- ----- -------- --------
Cash flows from financing activities
Repayment of subordinated debt (40.0) -
Capital repayments on debt securities
issued (23.6) (38.2)
Coupon paid on contingent convertible
securities (8.9) (8.9)
Purchase of own shares by employee
benefit trust - (0.9)
Interest paid on debt securities
issued (0.6) (1.1)
Interest paid on subordinated notes (5.1) (2.6)
Net cash used in financing activities (78.2) (51.7)
----------------------------------------- ----- -------- --------
Net increase/(decrease) in cash
and cash equivalents 264.7 (48.7)
Cash and cash equivalents at start
of the period 140.9 149.4
Movement during the period 264.7 (48.7)
Cash and cash equivalents at end
of the period 19 405.6 100.7
----------------------------------------- ----- -------- --------
Financial statements continued
Consolidated statement of changes in equity (unaudited)
Available
Share Contingent Capital for
Share premium convertible redemption sale Retained
capital account securities reserve reserve earnings Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Period ended
30 June 2017
As at 1 January
2017 34.5 73.4 74.0 0.1 1.8 442.2 626.0
Total comprehensive
income - - - - (0.1) 57.8 57.7
Transactions
with equity holders:
* Share-based payments, including tax reflected
directly in retained earnings - - - - - 1.7 1.7
* Coupon paid on contingent convertible securities,
net
of tax - - - - - (6.6) (6.6)
As at 30 June
2017 34.5 73.4 74.0 0.1 1.7 495.1 678.8
--------------------------------------------------------- -------- -------- ------------ ----------- ---------- --------- ------
Period ended
31 December 2016
As at 1 July
2016 34.5 73.4 74.0 0.1 (2.3) 388.9 568.6
Total comprehensive
income - - - - 4.1 51.3 55.4
Transactions
with equity holders:
* Share-based payments, including tax reflected
directly in retained earnings - - - - - 2.0 2.0
As at 31 December
2016 34.5 73.4 74.0 0.1 1.8 442.2 626.0
--------------------------------------------------------- -------- -------- ------------ ----------- ---------- --------- ------
Period ended
30 June 2016
As at 1 January
2016 34.5 73.4 74.0 0.1 (1.0) 352.6 533.6
Total comprehensive
income - - - - (1.3) 42.2 40.9
Transactions
with equity holders:
* Share-based payments, including tax reflected
directly in retained earnings - - - - - 1.6 1.6
- Own shares
adjustment - - - - - (0.9) (0.9)
* Coupon paid on contingent convertible securities,
net
of tax - - - - - (6.6) (6.6)
As at 30 June
2016 34.5 73.4 74.0 0.1 (2.3) 388.9 568.6
--------------------------------------------------------- -------- -------- ------------ ----------- ---------- --------- ------
Financial statements continued
Notes to the consolidated financial statements
1. Basis of preparation a) Accounting basis
These consolidated interim financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34 "Interim Financial Reporting" as adopted by the EU. These consolidated interim financial statements should be read in conjunction with the Group's 2016 Annual Report and Accounts, which have been prepared in accordance with International Financial Reporting Standards as adopted by the EU ("IFRSs").
The comparative financial information for the year ended 31 December 2016 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for that period have been delivered to the Registrar of Companies in England and Wales. The former auditor has reported on those accounts. The auditor's report was unqualified; did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.
The consolidated interim financial statements were approved by the Board of Directors on 9 August 2017.
b) Basis of consolidation
The consolidated interim financial statements incorporate the consolidated results of Aldermore Group PLC ("the Company") and its subsidiaries (including Aldermore Bank PLC) which are entities controlled by the Company (jointly referred to as "the Group").
c) Going concern
The consolidated interim financial statements are prepared on a going concern basis, as the Directors are satisfied that the Group has the resources to continue in business for the foreseeable future (which has been taken as 12 months from the date of approval of these consolidated interim financial statements). In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including the current state of the balance sheet, future projections of profitability, cash flows and capital resources and the longer term strategy of the business.
The Group's capital and liquidity plans, including stress tests, have been reviewed by the Directors. The Group's forecasts and projections show that it will be able to operate at adequate levels of both liquidity and capital for the foreseeable future, including a range of stressed scenarios, taking management actions into account as appropriate. After making due enquiries, the Directors believe that the Group has sufficient resources to continue its activities for the foreseeable future and to continue its expansion, and the Group has sufficient capital and liquidity to enable it to continue to meet its regulatory requirements as set out by the Prudential Regulation Authority ("PRA").
d) Accounting policies
The accounting policies are consistent with those applied by the Group in the 2016 Annual Report and Accounts. There have been no changes to these policies during the six month period ended 30 June 2017.
e) Future accounting developments
There are a number of standards, amendments and interpretations which have been issued by the International Accounting Standards Board ("IASB") but which have not yet been endorsed by the EU. The most significant of these is IFRS 9: "Financial Instruments", the planned replacement for IAS 39: "Financial Instruments: Recognition and Measurement". Others include IFRS 15: "Revenue from contracts with customers" and IFRS 16: "Leases".
Financial statements continued
Notes to the consolidated financial statements continued
1. Basis of preparation continued
IFRS 9: "Financial Instruments", endorsed by the EU on 22 November 2016, is effective for annual periods beginning on or after 1 January 2018. The standard includes requirements for classification and measurement of financial assets and liabilities, hedge accounting and the impairment of financial assets. There is a requirement to apply the standard retrospectively. However, no prior period restatement is necessary. An adjustment will be reflected in opening retained earnings at the start of the period when IFRS 9 is first adopted.
The Group's IFRS 9 programme continues with its cross-functional representation from (but not limited to) Finance, Risk and IT. Progress is regularly reported to the IFRS 9 Steering Group and the Audit Committee and the programme continues to be sponsored by the Chief Financial Officer, Chief Risk Officer and Chief Operating Officer.
We are making good progress towards IFRS 9 compliance, with the expected credit loss models built and parallel run started. Additionally, the target operating model has been defined and the majority of the updated accounting and credit risk policies have been drafted and are progressing through the appropriate governance forums.
The financial impact of IFRS 9 will be quantified during the parallel run and is expected to be disclosed no later than in the financial statements for the year ending 31 December 2017. Further information detailing the effect of IFRS 9 can be found in the 2016 Annual Report and Accounts.
IFRS 15: "Revenue from contracts with customers" provides a principles-based approach for applying the concept of recognising revenue for performance obligations as they are satisfied. The Standard was endorsed on 29 October 2016 and will be effective for annual reporting periods beginning on or after 1 January 2018 and will impact our treatment of fees and commissions and other operating income. We have completed a review of the fees and commissions within the Invoice Finance and Asset Finance businesses, where the majority of the impact is expected to be, and are extending the review to include our Mortgage businesses. Once the review is complete, we will be able to assess the impact. However, it is currently thought to be immaterial.
IFRS 16: "Leases" was released by the IASB on 13 January 2016 as a replacement for IAS 17: "Leases". The Standard will be effective for annual reporting periods beginning on or after 1 January 2019, with early application being permitted for companies that also apply IFRS 15. The impact for the Group is currently being assessed. A significant change will be the inclusion of a "right of use asset" within the statement of financial position in respect of the benefit the Group receives where it leases assets under operating leases, together with a financial liability in respect of the obligation to make operating lease payments. Within the income statement, an operating charge will be reflected in respect of the use of the asset together with interest expense in relation to the financing, replacing the current operating lease charges included in administrative expenses.
f) Presentation of risk and capital disclosures
The disclosures prepared under IFRS 7: "Financial instruments: disclosures" have been included within the Risk section in the Financial Review on the following pages: wholesale funding note on page 7 and credit risk, liquidity and funding and interest rate and market risk notes pages 11-26. The Principal and Emerging risks are described in the Risk report on pages 33-35.
Financial statements continued
Notes to the consolidated financial statements continued
2. Use of estimates and judgements
The preparation of financial information requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
Estimates and assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. The judgements and assumptions that are considered to be the most important to the portrayal of the Group's financial condition are those relating to loan impairment provisions and effective interest rates ("EIR"). Share-based payments have been previously considered a key judgement. However, the estimates and assumptions are well understood and we no longer consider them to be critical as there is no significant risk of any changes resulting in a material adjustment during the next year.
a) Loan impairment provisions
Loan portfolios across all divisions of the Group are reviewed on at least a monthly basis to assess for impairment. In determining whether an impairment provision should be recorded, judgements are made as to whether there is objective evidence that a financial asset, or portfolio of financial assets, is impaired as a result of loss events that occurred after recognition of the asset and by the reporting date. The calculation of impairment loss is management's best estimate of losses incurred in the portfolio at the statement of financial position date and reflects expected future cash flows based on both the likelihood of a loan or advance being
written-off and the estimated loss on such a write-off.
At 30 June 2017, gross loans and advances to customers totalled GBP8,135.6 million (31 December 2016: GBP7,504.7 million), against which impairment allowances of GBP27.9 million (31 December 2016: GBP27.4 million) have been made (see Note 13). The Group's accounting policy for loan impairment provisions on financial assets classified as loans and receivables is described in the Group's 2016 Annual Report and Accounts (Note 2g). Impairment allowances are made up of two components, those determined individually against specific assets and those determined collectively. Of the impairment allowance of GBP27.9 million at 30 June 2017, GBP12.4 million (31 December 2016: GBP14.3 million) relates to individual provisions and GBP15.5 million (31 December 2016: GBP13.1 million) relates to collective provisions. The section below provides details of the critical elements of judgement within the loan impairment calculations. Less significant judgements are not disclosed.
(i) Individual
Individual impairment allowances are established against the Group's individual financial assets that are judged by management to be impaired. The determination of individual impairment allowances requires management to make significant estimates and assumptions involving matters such as local economic conditions, the financial status of the customer and the realisable value of the security held. The actual amount of the future cash flows and their timing may differ significantly from the assumptions made for the purposes of determining the impairment allowances. Consequently, these allowances can be subject to variation as time progresses and when the circumstances of the customer and the valuation of realisable collateral become clearer.
(ii) Collective
The collective impairment allowance is also subject to estimation uncertainty and, in particular, is sensitive to changes in economic and credit conditions including house prices, unemployment rates, interest rates, borrowers' behaviour and consumer bankruptcy trends. All of these factors can influence the key assumptions detailed below. However, it is inherently difficult to make a judgement on how changes in one or more of these factors might impact the collective impairment allowance.
Financial statements continued
Notes to the consolidated financial statements continued
2. Use of estimates and judgements continued
The key assumptions used in the collective impairment model are: Probability of Default ("PD"), the Loss Given Default ("LGD") and the loss Emergence Period ("EP") (the time between a trigger event occurring and identifying the loans as individually impaired). An additional element is included within the collective provision to reflect fraud losses that are incurred as at the reporting date but are yet to be individually identified.
The Group uses two types of underlying models to calculate the LGD depending on the availability of default data. For SME Commercial Mortgages, Buy-to-Let and Residential Mortgages, the models use a range of assumptions and estimates to derive an expected LGD. The key assumptions and estimates are based on management expertise and are validated against available data. For Asset Finance and Invoice Finance, the models are empirical models which use historical loss data to determine the risk drivers behind the loss.
This allows the portfolios to be segmented into homogenous buckets to derive an LGD. Further details in respect of assumptions and details of the sensitivity of the estimate to changes in significant assumptions are as follows:
Probability of Default:
The PD estimate is based on external individual customer credit rating information updated for each reporting date. This external credit rating information gives a PD in the next 12 months where 'default' is defined as loans which are 2 months or more in arrears ("2 MIA") and incorporates credit information from a broad range of financial services products for each customer.
Management make an estimate so as to adjust the external data to reflect both the individual nature of the Group's lending and the Group's policy of classifying loans which are 3 months or more in arrears ("3 MIA") as 'impaired'. This adjustment is achieved by using two management assumptions: firstly a 'conversion rate' that reflects how many of the loans which fall into 2 MIA will also fall into 3 MIA; and secondly, a scalar that adjusts the external PDs to reflect the individual nature of the Group's lending.
-- A 10 per cent. absolute increase in the 'conversion rate' assumed by management between 2 MIA and 3 MIA (e.g. a PD increasing from 50 per cent. to 60 per cent.), when the loans are considered to be individually impaired would increase the impairment allowance by GBP0.3 million.
-- A 10 per cent. relative reduction in the scaling factors applied to external data in order to arrive at PDs appropriate to the individual nature of lending being undertaken would increase the impairment allowance by GBP0.6 million.
Loss Given Default:
The model estimates the LGD from the point of repossession of the asset. Not all cases that are 3 MIA will reach repossession. Management therefore adjust the model by applying their estimate of the percentage of accounts 3 MIA that will reach repossession.
-- A 10 per cent. absolute reduction in this assumption would decrease the impairment allowance by GBP1.1 million.
The LGD is also sensitive to the application of the House Price Index ("HPI") and Forced Sale Discount ("FSD") future estimates which affect the underlying value of the collateral which is expected to be received.
-- A 10 per cent. relative reduction in the HPI would increase the overall impairment allowance by GBP2.1 million.
-- A 5 per cent. absolute increase in the FSD would increase the overall impairment provision by GBP1.5 million.
Financial statements continued
Notes to the consolidated financial statements continued
2. Use of estimates and judgements continued
For the Asset Finance and Invoice Finance model, the most sensitive estimate is the absolute LGD value calculated.
-- A 10 per cent. relative increase in the LGDs applied would increase the impairment allowance by GBP0.4 million.
Emergence Period:
The Group's collective models estimate the expected losses for the next 12 months. For Asset Finance and Invoice Finance these expected losses are then scaled back, using the emergence period, to reflect the level of incurred loss as at the reporting date. The emergence period is the time taken from the trigger event (such as a job loss) to the Group identifying the loan as impaired.
The emergence period varies by segment and requires management to make judgements due to the limited data available.
-- A further three month increase in emergence periods for Asset Finance and Invoice Finance would increase the impairment allowance by GBP5.0 million.
b) Effective interest rate ("EIR")
IAS 39 requires interest earned to be measured under the EIR method. Management must therefore make estimates about the expected future life of each type of instrument and hence the expected related cash flows. The accuracy of the EIR would therefore be affected by unexpected market movements resulting in altered customer behaviour and inaccuracies in the models used compared to actual outcomes.
A critical estimate in determining EIR is the expected life to maturity of the Group's SME Commercial, Buy-to-Let and Residential Mortgage portfolios, as a change in these estimates will impact the period over which the directly attributable costs and fees, reversionary income and any discount received on the acquisition of mortgage portfolios are recognised as part of the EIR.
A review of the critical estimates for determining EIR was undertaken at 30 June 2017. No overall adjustment was considered necessary in these financial statements as a result of the review.
A change in the estimated expected lives to extend the expected lives of the SME Commercial, Buy-to-Let and Residential Mortgage portfolios by six months would have the effect of reducing the cumulative profit before tax recognised as at 30 June 2017 by GBP1.1 million (30 June 2016: GBP1.8 million reduction). Included within this sensitivity of GBP1.1 million, is a GBP2.5 million cumulative reduction in profit relating to acquired portfolios (30 June 2016: GBP2.9 million reduction) due to a change in the unwind of the discount which is partially offset by a GBP1.4 million cumulative increase in profit relating to the organic portfolios (30 June 2016: GBP1.1 million increase).
A 0.5 per cent. increase in the rate of early redemptions, expressed as a percentage of the outstanding balance, in respect of the Asset Finance portfolio would have the impact of reducing cumulative profit before tax recognised as at 30 June 2017 by GBP0.5 million (30 June 2016: GBP0.4 million reduction).
Financial statements continued
Notes to the consolidated financial statements continued
3. Segmental information
The Group's reportable operating segments remain consistent with those disclosed in the 2016 Annual Report and Accounts.
Segmental information for the period ended 30 June 2017
Asset Invoice SME Commercial Residential Central
Finance Finance Mortgages Buy-to-Let Mortgages Functions Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Interest income
- external customers 44.4 3.2 31.1 80.5 34.6 (1.8) 192.0
Interest expense
- external customers - - - - - (56.4) (56.4)
Interest (expense)/income
- internal (12.0) (0.8) (4.7) (24.1) (10.1) 51.7 -
Net fees and
other income
- external customers 2.6 6.6 0.2 1.9 0.8 1.9 14.0
Total operating
income 35.0 9.0 26.6 58.3 25.3 (4.6) 149.6
--------------------------- --------- --------- --------------- ----------- ------------ ----------- ----------
Administrative
expenses including
depreciation
and amortisation (6.6) (4.7) (1.4) (6.1) (2.4) (44.7) (65.9)
Impairment losses
on loans and
advances to customers (1.9) (0.2) (0.6) (2.0) (0.9) - (5.6)
Segmental result 26.5 4.1 24.6 50.2 22.0 (49.3) 78.1
--------------------------- --------- --------- --------------- ----------- ------------ ----------- ----------
Tax (20.3)
Profit after
tax 57.8
--------------------------- --------- --------- --------------- ----------- ------------ ----------- ----------
Assets 1,697.4 166.2 938.9 3,827.1 1,478.1 1,231.7 9,339.4
Liabilities - - - - - (8,660.6) (8,660.6)
Net assets/(liabilities) 1,697.4 166.2 938.9 3,827.1 1,478.1 (7,428.9) 678.8
--------------------------- --------- --------- --------------- ----------- ------------ ----------- ----------
Segmental information for the period ended 30 June 2016
Asset Invoice SME Commercial Residential Central
Finance Finance Mortgages Buy-to-Let Mortgages Functions(1) Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Interest income
- external customers 44.2 3.4 30.4 63.3 36.6 (2.3) 175.6
Interest expense
- external customers - - - - - (60.0) (60.0)
Interest
(expense)/income
- internal (14.3) (1.2) (6.7) (22.4) (13.8) 58.4 -
Net fees and
other income
- external customers 1.7 7.2 0.6 2.3 0.9 (0.6) 12.1
------------------------
Total operating
income 31.6 9.4 24.3 43.2 23.7 (4.5) 127.7
------------------------ --------- --------- --------------- ----------- ------------ -------------- ----------
Administrative
expenses including
depreciation
and amortisation (6.3) (5.3) (1.8) (4.7) (2.2) (41.9) (62.2)
Impairment losses
on loans and
advances to customers (2.4) (1.0) (1.2) (0.9) (0.9) - (6.4)
Segmental result 22.9 3.1 21.3 37.6 20.6 (46.4) 59.1
------------------------ --------- --------- --------------- ----------- ------------ -------------- ----------
Tax (16.9)
Profit after
tax 42.2
------------------------ --------- --------- --------------- ----------- ------------ -------------- ----------
Assets 1,498.2 155.3 926.0 2,704.0 1,515.7 946.5 7,745.7
Liabilities - - - - - (7,177.1) (7,177.1)
Net
assets/(liabilities) 1,498.2 155.3 926.0 2,704.0 1,515.7 (6,230.6) 568.6
------------------------ --------- --------- --------------- ----------- ------------ -------------- ----------
(1) Central Functions administrative expenses of GBP41.9 million includes an impairment charge of GBP4.1 million in relation to Invoice Finance goodwill.
Financial statements continued
Notes to the consolidated financial statements continued
4. Interest income
Period Period
ended ended
30 30
June June
2017 2016
GBPm GBPm
On financial assets not at fair value
through profit or loss:
On loans and advances to customers 193.7 177.9
On loans and advances to banks 0.3 0.5
On debt securities 4.8 5.9
----------------------------------------------- ------- -------
198.8 184.3
On financial assets at fair value through
profit or loss:
Net interest expense on financial instruments
hedging assets (6.8) (8.7)
192.0 175.6
----------------------------------------------- ------- -------
Included within interest income on loans and advances to customers for the six months ended 30 June 2017 is a total of GBP2.0 million (30 June 2016: GBP1.5 million) relating to impaired financial advances.
Included within net interest expense on financial instruments hedging assets for the six months ended 30 June 2017 are fair value gains of GBP8.0 million (30 June 2016: losses of GBP10.8 million) on derivatives held in qualifying fair value hedging arrangements, together with losses of GBP7.7 million (30 June 2016: gains of GBP8.9 million) representing changes in the fair value of the hedged item attributable to the hedged interest rate risk on loans and advances to customers, and net interest payable on the hedging of derivatives of GBP7.1 million (30 June 2016: GBP6.8 million).
5. Interest expense
Period Period
ended ended
30 30
June June
2017 2016
GBPm GBPm
On financial liabilities not at fair
value through profit or loss:
On customers' accounts 48.7 54.6
On amounts due to banks 1.2 3.9
On debt securities in issue 0.8 1.3
On subordinated notes 5.5 3.3
56.2 63.1
On financial liabilities at fair value
through profit or loss:
Net interest income on financial instruments
hedging liabilities (0.3) (4.0)
Other 0.5 0.9
56.4 60.0
---------------------------------------------- ------- -------
Included within net interest income on financial instruments hedging liabilities for the six months ended 30 June 2017 are fair value losses of GBP1.2 million (30 June 2016: gains of GBP4.7 million) on derivatives held in qualifying fair value hedging arrangements, together with gains of GBP0.2 million (30 June 2016: losses of GBP3.7 million) representing changes in the fair value of the hedged item attributable to the hedged interest rate risk on customers' accounts, and net interest receivable on the hedging of derivatives of GBP1.3 million (30 June 2016: GBP3.0 million).
Financial statements continued
Notes to the consolidated financial statements continued
6. Fee and commission income
Period Period
ended ended
30 30
June June
2017 2016
GBPm GBPm
Invoice finance fees 5.6 5.9
Valuation fees 1.7 2.4
Documentation fees 1.5 1.3
Other fees 4.1 3.9
12.9 13.5
---------------------- ------- -------
7. Fee and commission expense
Period Period
ended ended
30 30
June June
2017 2016
GBPm GBPm
Introducer commissions 0.7 0.8
Legal and valuation fees 1.6 1.5
Company searches and other fees 0.8 0.5
Credit protection and insurance charges 0.7 0.6
Other - 0.4
3.8 3.8
----------------------------------------- ------- -------
8. Net income/(expense) from derivatives and other financial instruments
at fair value through profit or loss
Period Period
ended ended
30 30
June June
2017 2016
GBPm GBPm
Net gains/(losses) on derivatives 4.1 (14.4)
Net (losses)/gains on available for sale
assets held in fair value hedges (2.6) 12.9
1.5 (1.5)
------------------------------------------ ------- -------
9. Other operating income
Period Period
ended ended
30 30
June June
2017 2016
GBPm GBPm
Disbursements, collect out and other
invoice finance income 2.9 3.1
Other - 0.1
2.9 3.2
-------------------------------------- ------- -------
Financial statements continued
Notes to the consolidated financial statements continued
10. Administrative expenses
Period Period
ended ended
30 30
June June
2017 2016
GBPm GBPm
Staff costs 38.1 35.2
Legal and professional and other services 11.2 10.5
Information technology costs 8.7 5.2
Office costs 2.6 2.2
Provisions 1.0 1.3
Other 1.7 1.5
Impairment of goodwill - 4.1
63.3 60.0
------------------------------------------- ------- -------
Included within Staff costs there are expenses relating to permanent staff and contractors, travel and subsistence and staff recruitment which were previously reported within other costs.
During the first half of 2016, the Invoice Finance goodwill was fully impaired and an impairment charge of GBP4.1 million was recognised in the income statement.
11. Taxation
Period Period
ended ended
30 30
June June
2017 2016
GBPm GBPm
Current tax on profits for the period 17.4 12.0
Prior year adjustment - 4.1
Overall current tax on profits for the
period 17.4 16.1
---------------------------------------- ------- -------
Deferred tax 2.9 0.8
Total tax charge 20.3 16.9
---------------------------------------- ------- -------
Current tax on profits reflects UK corporation tax levied at a rate of 19.25% for the year ending 31 December 2017 (year ended 31 December 2016: 20.00%) and the Banking surcharge levied at a rate of 8% on the profits of banking companies chargeable to corporation tax after an allowance of GBP25 million per annum.
The deferred tax asset at 30 June 2017 of GBP8.4 million has been calculated at an overall rate of 25.75%. This is based on substantively enacted tax rates at the statement of financial position date. These are expected to apply when the temporary differences giving rise to the deferred tax are expected to reverse. The deferred tax assets relate largely to temporary differences between capital allowances and depreciation.
There were no unrecognised deferred tax balances at 30 June 2017 (30 June 2016: GBPnil).
Financial statements continued
Notes to the consolidated financial statements continued
12. Earnings per share
Basic earnings per share is calculated by dividing the net profit attributable to ordinary shareholders of the Group by the weighted average number of ordinary shares in issue during the period.
Period Period
ended ended
30 30
June June
2017 2016
Profit after taxation - attributable
to equity holders of the Group (GBPmillion) 57.8 42.2
Coupon paid on contingent convertible
securities, net of tax (GBPmillion) (6.6) (6.6)
----------------------------------------------
Profit attributable to ordinary shareholders
of the Group (GBPmillion) 51.2 35.6
---------------------------------------------- ------- -------
Weighted average number of ordinary shares
in issue (million) 344.5 344.7
Basic earnings per share (p) 14.9p 10.3p
---------------------------------------------- ------- -------
The ordinary shares in issue used in the denominator in the calculation of basic earnings per share are the ordinary shares of the Company.
Period Period
ended ended
30 30
June June
2017 2016
Weighted average number of ordinary shares
in issue (million) (basic) 344.5 344.7
Effect of share based payment awards 1.8 0.4
Weighted average number of ordinary shares
in issue (million) (diluted) 346.3 345.1
Diluted earnings per share (p) 14.8p 10.3p
-------------------------------------------- ------- -------
The calculation of diluted earnings per share has been based on the same profit attributable to ordinary shareholders of the Group as for basic earnings and the weighted average number of ordinary shares outstanding after the potential dilutive effect of share based payment awards to Directors and employees.
13. Loans and advances to customers
30 June 31 December
2017 2016
GBPm GBPm
Gross loans and advances 8,135.6 7,504.7
less: allowance for impairment losses (27.9) (27.4)
8,107.7 7,477.3
--------------------------------------- -------- ------------
Amounts include:
Expected to be recovered more than 12
months after the reporting date 6,990.9 6,466.4
--------------------------------------- -------- ------------
During 2017, the Group took advantage of the HM Treasury Indexed Long Term Repo scheme. The accounting for this scheme follows that described in the Group 2016 Annual Report and Accounts Note 2(d) Term Funding Scheme.
At 30 June 2017, loans and advances to customers of GBP650.7 million (31 December 2016: GBP1,066.2 million) were pre-positioned with the Bank of England for use with HM Treasury Funding for Lending Scheme and the Indexed Long Term Repo scheme. These loans and advances were available for use as collateral within the Schemes, against which at the reporting date, GBP204.8 million of UK Treasury Bills drawn under the Funding for Lending Scheme (31 December 2016: GBP650.0 million) with GBP100.0 million (31 December 2016: nil) drawn against the Indexed Long Term Repo scheme.
At 30 June 2017, loans and advances to customers of GBP1,544.3 million (31 December 2016: GBP578.7 million) were pre-positioned with the Bank of England and HM Treasury Term Funding Scheme. These loans and advances were available for use as collateral with the Scheme against which GBP946.5 million (31 December 2016: GBP396.1 million) had been drawn at the reporting date.
Financial statements continued
Notes to the consolidated financial statements continued
13. Loans and advances to customers continued
At 30 June 2017, loans and advances to customers include GBP130.5 million (31 December 2016: GBP148.7 million) which have been used in secured funding arrangements, resulting in the beneficial interest in these loans being transferred to Oak No. 1 PLC, a securitisation vehicle consolidated into these financial statements. All the assets pledged are recognised within the statement of financial position as the Group retains substantially all the risks and rewards relating to the loans.
Allowance for impairment losses
Individual Collective Total
GBPm GBPm GBPm
Six months ended 30 June 2017
Balance as at 1 January 2017 14.3 13.1 27.4
Impairment loss for the period:
Charge to the income statement 1.9 3.7 5.6
Unwind of discounting (0.7) (1.3) (2.0)
Write-offs net of recoveries (3.1) - (3.1)
Balance as at 30 June 2017 12.4 15.5 27.9
--------------------------------- ----------- ----------- ------
Individual Collective Total
GBPm GBPm GBPm
Six months ended 31 December
2016
Balance as at 1 July 2016 10.6 12.5 23.1
Impairment loss for the period:
Charge to the income statement 7.3 1.8 9.1
Unwind of discounting (0.7) (1.2) (1.9)
Write-offs net of recoveries (2.9) - (2.9)
Balance as at 31 December 2016 14.3 13.1 27.4
--------------------------------- ----------- ----------- ------
Individual Collective Total
GBPm GBPm GBPm
Six months ended 30 June 2016
Balance as at 1 January 2016 10.2 10.5 20.7
Impairment loss for the period:
Charge to the income statement 3.5 2.9 6.4
Unwind of discounting (0.6) (0.9) (1.5)
Write-offs net of recoveries (2.5) - (2.5)
Balance as at 30 June 2016 10.6 12.5 23.1
--------------------------------- ----------- ----------- ------
14. Customers' accounts
30 June 31 December
2017 2016
GBPm GBPm
Retail deposits 5,116.5 4,766.8
SME deposits 1,825.9 1,647.2
Corporate deposits 403.5 259.7
7,345.9 6,673.7
----------------------------------- -------- ------------
Amounts repayable within one year 5,930.6 5,397.1
Amounts repayable after one year 1,415.3 1,276.6
-----------------------------------
7,345.9 6,673.7
----------------------------------- -------- ------------
Financial statements continued
Notes to the consolidated financial statements continued
15. Debt securities in issue
Debt securities in issue are repayable from the reporting date in the ordinary course of business as follows:
30 June 31 December
2017 2016
GBPm GBPm
In more than one year 107.1 130.6
----------------------- -------- ------------
Debt securities in issue with a principal value of GBP107.6 million (31 December 2016: GBP131.2 million) are secured on certain portfolios of variable and fixed rate mortgages through the Group's securitisation vehicle, Oak No. 1 PLC. These notes are redeemable in part from time to time, such redemptions being limited to the net capital received from mortgage customers in respect of the underlying assets. There is no obligation for the Group to make good any shortfall. The carrying value relating to the underlying assets are contained in Note 13.
16. Subordinated notes
30 June 31 December
2017 2016
GBPm GBPm
Subordinated notes 60.4 100.0
-------------------- -------- ------------
In May 2017, the Group exercised its option to require the holders of the GBP40 million subordinated 12.875 per cent. loan notes issued in 2012 to redeem the notes at par value.
17. Share capital
30 June 31 December
2017 2016
GBPm GBPm
Type
Ordinary shares of GBP0.10 each 34.5 34.5
--------------------------------- -------- ------------
34.5 34.5
--------------------------------- -------- ------------
Ordinary shares have full voting rights, dividend rights and distribution rights in the event of sale or wind up.
During 2017, an additional 180,654 shares were allotted to an Employee Benefit Trust ("EBT") in order to satisfy the vesting of nil-cost options granted under the Deferred Share Plan ("DSP"). The DSP is the deferred part of the Annual Incentive Plan as described in the Remuneration Report of the 2016 Annual Report and Accounts. On 31 March 2017, the first tranche of the Recruitment Award vested and an option over 93,235 shares already held by the EBT became available for exercise.
When awards such as the DSP and Recruitment Award, vest any shares held by the EBT are considered to be held on behalf of the awardee and are no longer reflected within these financial statements. Any shares which are held by the EBT in respect of awards which still have to vest as at the reporting date, are recorded as a deduction from retained earnings.
As at 30 June 2017, the EBT held 372,944 shares (31 December 2016: 466,179 shares) which had not vested and which are recorded as a deduction from retained earnings.
As at 30 June 2017, there were 344,920,238 ordinary GBP0.10 shares in issue resulting in share capital of GBP34,492,024 (31 December 2016: 344,739,584 and GBP34,473,958 respectively).
Financial statements continued
Notes to the consolidated financial statements continued
18. Share-based payments
The share-based payment charge, excluding tax reflected directly in retained earnings, comprises:
Period Period
ended ended
30 30
June June
2017 2016
GBPm GBPm
Share plans issued up to 31 December
2016 1.3 1.1
Share plans issued up to 30 June 2017 0.4 0.3
------- -------
1.7 1.4
--------------------------------------- ------- -------
Details of existing share plans can be found in Note 37 to the 2016 Annual Report and Accounts. New awards have been granted in 2017 under the Performance Share Plan, Restricted Share Plan and Deferred Share Plan. The new awards have been granted on the same basis as previous awards, other than the targets for Earnings Per Share in relation to the awards made under the Performance Share Plan. The total IFRS 2 charge to be recognised in respect of the 2017 share plans over the vesting period is estimated as GBP3.6 million.
The first tranche of the awards granted under the Deferred Share Plan in 2016 and the first tranche of the Recruitment Award both vested during the period as described in Note 17.
19. Statement of cash flows
(a) Adjustments for non-cash items and other adjustments included within the income statement
Period Period
ended ended
30 30
June June
2017 2016
GBPm GBPm
Depreciation and amortisation 2.6 2.2
Impairment of goodwill - 4.1
Amortisation of securitisation issuance
cost 0.2 0.2
Discount accretion on subordinated notes 0.5 0.7
Impairment losses on loans and advances 5.6 6.4
Unwind of discounting (2.0) (1.5)
Write-offs net of recoveries (3.1) (2.5)
Net (gains) on disposal of available
for sale debt securities (0.5) (0.7)
Net losses/(gains) on available for sale
assets held in fair value hedges 2.6 (12.9)
Interest expense on subordinated notes 5.0 2.5
Interest income on debt securities (4.8) (5.9)
Interest expense on debt securities in
issue 0.6 1.1
Equity settled share-based payment charge 1.7 1.6
-------------------------------------------
8.4 (4.7)
------------------------------------------- ------- -------
Financial statements continued
Notes to the consolidated financial statements continued
19. Statement of cash flows continued
(b) Increase in operating assets
Period Period
ended ended
30 30
June June
2017 2016
GBPm GBPm
Loans and advances to customers (630.9) (656.8)
Loans and advances to banks (14.5) (13.8)
Derivative financial instruments (6.7) (5.8)
Fair value adjustments for portfolio
hedged risk 7.7 (8.9)
Other operating assets (1.3) (2.3)
--------------------------------------
(645.7) (687.6)
-------------------------------------- -------- --------
(c) Increase in operating liabilities
Period Period
ended ended
30 30
June June
2017 2016
GBPm GBPm
Amounts due to banks 301.4 (78.3)
Customers' accounts 672.2 796.0
Derivative financial instruments (8.5) 22.1
Fair value adjustments for portfolio
hedged risk (0.2) 3.7
Other operating liabilities (1.9) (5.1)
963.0 738.4
-------------------------------------- ------- -------
(d) Cash and cash equivalents
Period Period
ended ended
30 30
June June
2017 2016
GBPm GBPm
Cash and balances at central banks 368.1 34.6
Less restricted balances (9.6) (8.7)
Loans and advances to banks 47.1 74.8
405.6 100.7
------------------------------------ ------- -------
For the purpose of the statement of cash flows, cash and cash equivalents comprise cash on demand and overnight deposits, classified as cash and balances at central banks (unless restricted), and balances within loans and advances to banks as shown in the table above.
20. Commitments and contingencies
As at 30 June 2017, the Group had undrawn commitments to lend of GBP809.2 million (31 December 2016: GBP968.8 million). These relate mostly to irrevocable lines of credit granted to customers.
Legislation
As a financial services group, Aldermore Group PLC is subject to extensive and comprehensive regulation. The Group must comply with numerous laws and regulations which significantly affect the way it does business. Whilst the Group believes there are no unidentified areas of failure to comply with these laws and regulations which would have a material impact on the financial statements, there can be no guarantee that all issues have been identified.
Financial statements continued
Notes to the consolidated financial statements continued
21. Related parties
Related party transactions and transactions with key management personnel ('KMP') in the six month period to 30 June 2017 are similar in nature to those for the year ended 31 December 2016. Details of those transactions can be found in the Group's 2016 Annual Report and Accounts.
Transactions with KMP remain consistent with those disclosed at 31 December 2016. KMP at 30 June 2017 continue to comprise Directors of the Group and members of the Executive Committee.
There were new share based payment transactions that occurred during the six month period ended 30 June 2017 and a number of KMP were granted share awards in the Group. In total, KMP were granted awards over an additional 1,267,755 shares.
22. Financial instruments and fair values
The following table summarises the classification and carrying amounts of the Group's financial assets and liabilities:
Fair
value
through
Available profit Liabilities
Loans for or loss Fair value at amortised
and receivables sale (required) hedges cost Total
30 June 2017 GBPm GBPm GBPm GBPm GBPm GBPm
Cash and balances
at central banks 368.1 - - - - 368.1
Loans and advances
to banks 94.7 - - - - 94.7
Debt securities - 712.7 - - - 712.7
Derivatives held
for risk management - - 19.1 - - 19.1
Loans and advances
to customers 8,107.7 - - - - 8,107.7
Fair value adjustment
for portfolio
hedged risk - - - (11.2) - (11.2)
Other assets 0.8 - - - - 0.8
Total financial
assets 8,571.3 712.7 19.1 (11.2) - 9,291.9
----------------------- ----------------- ---------- ------------ ----------- -------------- ------------------
Non-financial
assets 47.5
----------------------- ----------------- ---------- ------------ ----------- -------------- ------------------
Total assets 9,339.4
----------------------- ----------------- ---------- ------------ ----------- -------------- ------------------
Amounts due to
banks - - - - 1,055.2 1,055.2
Customers' accounts - - - - 7,345.9 7,345.9
Derivatives held
for risk management - - 27.3 - - 27.3
Fair value adjustment
for portfolio
hedged risk - - - (1.4) - (1.4)
Other liabilities - - - - 23.1 23.1
Debt securities
in issue - - - - 107.1 107.1
Subordinated notes - - - - 60.4 60.4
Total financial
liabilities - - 27.3 (1.4) 8,591.7 8,617.6
----------------------- ----------------- ---------- ------------ ----------- -------------- ------------------
Non-financial
liabilities 43.0
Total liabilities 8,660.6
----------------------- ----------------- ---------- ------------ ----------- -------------- ------------------
Financial statements continued
Notes to the consolidated financial statements continued
22. Financial instruments and fair values continued
Fair value
through
Loans Available profit Fair Liabilities
and for or loss value at amortised
receivables sale (required) hedges cost Total
31 December 2016 GBPm GBPm GBPm GBPm GBPm GBPm
Cash and balances
at central banks 116.4 - - - - 116.4
Loans and advances
to banks 67.2 - - - - 67.2
Debt securities - 664.5 - - - 664.5
Derivatives held
for risk management - - 12.4 - - 12.4
Loans and advances
to customers 7,477.3 - - - - 7,477.3
Fair value adjustment
for portfolio
hedged risk - - - (3.5) - (3.5)
Other assets 2.9 - - - - 2.9
Total financial
assets 7,663.8 664.5 12.4 (3.5) - 8,337.2
--------------------------- ------------- ---------- ------------ ----------------- -------------- --------
Non-financial assets 44.0
--------------------------- ------------- ---------- ------------ ----------------- -------------- --------
Total assets 8,381.2
--------------------------- ------------- ---------- ------------ ----------------- -------------- --------
Amounts due to
banks - - - - 753.8 753.8
Customers' accounts - - - - 6,673.7 6,673.7
Derivatives held
for risk management - - 35.8 - - 35.8
Fair value adjustment
for portfolio
hedged risk - - - (1.2) - (1.2)
Other liabilities - - - - 20.9 20.9
Debt securities
in issue - - - - 130.6 130.6
Subordinated notes - - - - 100.0 100.0
Total financial
liabilities - - 35.8 (1.2) 7,679.0 7,713.6
--------------------------- ------------- ---------- ------------ ----------------- -------------- --------
Non-financial liabilities 41.6
Total liabilities 7,755.2
--------------------------- ------------- ---------- ------------ ----------------- -------------- --------
The following table summarises the carrying amounts and fair values of those financial assets and liabilities not presented in the statement of financial position at fair value. The fair values in this note are stated at a specific date and may be significantly different from the amounts which will actually be paid on the maturity or settlement dates of the instruments.
30 June 2017 31 December 2016
Carrying Fair value Carrying Fair value
value value
GBPm GBPm GBPm GBPm
Cash and balances at central
banks 368.1 368.1 116.4 116.4
Loans and advances to
banks 94.7 94.7 67.2 67.2
Loans and advances to
customers 8,107.7 8,200.4 7,477.3 7,613.0
Other assets 0.8 0.8 2.9 2.9
Total financial assets 8,571.3 8,664.0 7,663.8 7,799.5
------------------------------ --------- ----------- --------- -----------
Amounts due to banks 1,055.2 1,055.2 753.8 753.8
Customers' accounts 7,345.9 7,359.7 6,673.7 6,705.9
Other liabilities 23.1 23.1 20.9 20.9
Debt securities in issue 107.1 108.1 130.6 131.9
Subordinated notes 60.4 63.1 100.0 101.8
Total financial liabilities 8,591.7 8,609.2 7,679.0 7,714.3
------------------------------ --------- ----------- --------- -----------
Financial statements continued
Notes to the consolidated financial statements continued
22. Financial instruments and fair values continued
The following table provides an analysis of financial assets and liabilities held on the consolidated statement of financial position at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable:
Level Level Level
1 2 3 Total
30 June 2017 GBPm GBPm GBPm GBPm
Financial assets:
Derivatives held for risk management - 19.1 - 19.1
Debt securities:
Asset-backed securities - 69.7 - 69.7
UK Gilts and Supranational
bonds 445.5 - - 445.5
Corporate bonds - - - -
Covered bonds 197.5 - - 197.5
643.0 88.8 - 731.8
--------------------------------------- -------------- -------------- -------------- --------------
Financial liabilities:
Derivatives held for risk management - 27.3 - 27.3
- 27.3 - 27.3
--------------------------------------- -------------- -------------- -------------- --------------
Level Level Level
1 2 3 Total
31 December 2016 GBPm GBPm GBPm GBPm
Financial assets:
Derivatives held for risk management - 12.4 - 12.4
Debt securities:
Asset-backed securities - 70.4 - 70.4
UK Gilts, other Sovereign and
Supranational bonds 392.1 - - 392.1
Corporate bonds 29.7 - - 29.7
Covered bonds 172.3 - - 172.3
594.1 82.8 - 676.9
--------------------------------------- -------------- -------------- -------------- --------------
Financial liabilities:
Derivatives held for risk management - 35.8 - 35.8
- 35.8 - 35.8
--------------------------------------- -------------- -------------- -------------- --------------
Level Fair value determined using quoted prices (unadjusted)
1: in active markets for identical assets or liabilities.
Level Fair value determined using directly or indirectly
2: observable inputs other than unadjusted quoted
prices included within Level 1 that are observable.
Level Fair value determined using one or more significant
3: inputs that are not based on observable market
data.
The fair values of UK Gilts, other Sovereign bonds, Supranational bonds, Corporate bonds and Covered bonds are based on quoted bid prices in active markets.
The fair value of asset-backed securities are based on indicative prices provided by market counterparties, but before relying on these prices, the Group has obtained an understanding of how the prices were derived to ensure that each investment is assigned an appropriate classification within the fair value hierarchy.
Financial statements continued
Notes to the consolidated financial statements continued
22. Financial instruments and fair values continued
The fair values of derivative assets and liabilities are determined using widely recognised valuation methods for financial instruments such as interest rate swaps and use only observable market data that require little management judgement and estimation. Credit value and debit value adjustments have not been applied as the derivative assets and liabilities are largely collateralised.
Fair value measurement - financial assets and liabilities held at amortised cost
All the fair values of financial assets and liabilities carried at amortised cost are considered to be Level 2 valuations which are determined using directly or indirectly observable inputs other than unadjusted quoted prices, except for debt securities in issue which are Level 1 and loans and advances to customers which are Level 3.
Fair value of transferred assets and associated liabilities
Securitisation vehicle
The Bank has previously transferred the beneficial ownership of a number of loans and advances to customers to a securitisation vehicle as described in the Group's 2016 Annual Report and Accounts. The loans and advances fail the derecognition criteria and consequently, these loans remain on the balance sheet of the seller. The results of the securitisation vehicle are consolidated in to the results of the Group. There has been no change in the relationship with the securitisation vehicle since 31 December 2016.
The table below shows the carrying value and fair value of the assets transferred to the securitisation vehicle and its associated liabilities. The carrying value presented below is the carrying amount recorded in the consolidated Group accounts. Some of the notes are held internally by the Group and as such are not shown in the consolidated statement of financial position of the Group.
Carrying
amount of Carrying Fair value
transferred amount of of transferred Fair value
assets not associated assets of associated
derecognised liabilities not derecognised liabilities Net position
Oak No. GBPm GBPm GBPm GBPm GBPm
1 PLC
30 June
2017 130.5 107.1 137.4 108.1 29.3
------------- -------------- ------------- ------------------ --------------- -------------
31 December
2016 148.7 130.6 155.0 131.9 23.1
------------- -------------- ------------- ------------------ --------------- -------------
23. Post balance sheet events
Aldermore Group PLC has agreed, subject to regulatory approval, to acquire a minority stake (48 percent) in AFS Group Holdings Limited, an introducer to asset and commercial finance funders in the UK. In 2016, the AFS Group originated approximately GBP210 million in lending (up from cGBP167 million in 2015), with the AFS Group generating net revenues of approximately GBP1.3 million. The intention is to account for the investment as an associate. The acquisition is expected to complete in H2 2017.
There have been no material post balance sheet events.
Glossary of Alternative Performance Measures
Average loans: A simple average of the opening and closing loan balances for the period.
Gross interest yield: Annualised interest received on assets as a percentage of average loans.
Cost of funding: Annualised interest paid on liabilities as a percentage of average loans.
Net interest: The difference between interest received on assets and interest paid on liabilities after taking into account the effect of hedging derivatives.
Net Interest Margin ("NIM"): Net interest income as a percentage of average net loans.
Net revenue margin: Total operating income as a percentage of average loans.
Cost to income ratio: Administrative expenses including depreciation and amortisation divided by total operating income.
Underlying cost to income ratio: Administrative expenses, depreciation and amortisation, excluding any significant one-off or non-recurring expenses, divided by total operating income.
Statutory return on equity ("ROE"): The ratio of profit attributable to shareholders for the year (after tax) to average shareholders' equity, expressed as a percentage.
Underlying return on equity ("ROE"): The ratio of profit for the year (after tax), excluding any significant one-off or non-recurring expenses to average shareholders' equity, expressed as a percentage.
Cost of risk: Cost of risk is defined as credit impairment losses divided by average net loans for a given period.
Basic earnings per share: The profit attributable to equity shareholders divided by the number of ordinary shares in issue.
Diluted earnings per share: The profit attributable to equity shareholders divided by the number of shares in issue adjusted for any future dilutive effects of share-based payments.
Non-performing loans ratio ("NPL"): Individually impaired loans expressed as a percentage of gross loan balances at the period end date.
Loan to Deposit Ratio: The ratio of net loans to customers as a percentage of customer deposits.
Fully loaded CRD IV: Reflects end state Capital Requirements Directive IV rules, post any applicable transitional provisions.
Fully loaded CRD IV Common Equity Tier 1 ("CET1") capital: A measure of capital that is predominantly common equity as defined by the Capital Requirements Regulation. CET 1 capital is the highest quality capital and comprises of share capital, share premium, capital redemption reserve, available for sale reserve and retained earnings. The book values of goodwill and intangible assets as well as other regulatory adjustments are deducted from Common Equity Tier 1 capital for the purposes of capital adequacy.
Risk Weighted Assets ("RWA"): A measure of a bank's assets adjusted for their associated risks. Risk weightings are established in accordance with Basel III.
Fully loaded CRD IV CET1 ratio: The ratio of fully loaded CRD IV CET 1 capital to Risk Weighted Assets.
Additional Tier 1 Capital ("AT1"): Fixed Rate Reset Additional Tier 1 Perpetual Securities issued by the company.
Tier 2 capital: The Group's subordinated notes and collective impairment allowance (for exposures treated on a Basel III standardised basis). Certain regulatory deductions may be made for the purposes of assessing capital adequacy.
Fully loaded CRD IV total capital: The sum of CET1, AT1 and Tier 2 capital.
Fully loaded CRD IV total capital ratio: The ratio of fully loaded CRD IV total capital to Risk Weighted Assets.
Tangible book value per share: The total net asset value excluding intangible assets and AT1 notes as a ratio of ordinary shares in issue.
Net promoter score: An external scoring system that measures the willingness of customers to recommend a company's products or services to other people.
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR DKLFBDVFEBBF
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