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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 |
TIDMALD
RNS Number : 2286X
Aldermore Group PLC
27 August 2015
27 August 2015
Aldermore Group PLC
H1 2015: Continued momentum drives doubling of profit
Underlying profit before tax(1) up by 109% to GBP44m
-- Net interest margin expanded to 3.6% (H1 2014: 3.3%) -- Underlying cost/income ratio(1) improved by 11pts to 53% (H1 2014: 64%) -- Excellent credit performance; cost of risk improved by 12bps to 20bps (H1 2014: 32 bps) -- Reported profit before tax up by 112% to GBP40m (H1 2014: GBP19m)
On track to deliver net loan growth of cGBP1.4bn in 2015, equivalent to c30% full year growth
-- Record first half origination of GBP1.2bn; up 14% on prior year (H1 2014: GBP1.0bn) -- Net loans to customers up by GBP635m or 13% to GBP5.4bn (31 December 2014: GBP4.8bn) -- Lending to SMEs up by GBP270m or 12% to GBP2.5bn (31 December 2014: GBP2.2bn) -- Residential Mortgages up by GBP365m or 14% to GBP2.9bn (31 December 2014: GBP2.6bn)
Innovative online deposit franchise funds lending growth
-- Customer deposits up by 11% to GBP5.0bn (31 December 2014: GBP4.5bn) -- Strong growth in SME deposits, up by 20% to GBP1.2bn (31 December 2014: GBP1.0bn)
Successful IPO supports robust capital position
-- Total capital ratio(2) of 15.8% (31 December 2014: 14.8%) -- CET 1 capital ratio(2) of 12.0% (31 December 2014: 10.4%) -- Leverage ratio(2) of 7.2% (31 December 2014: 6.3%)
Delivering strong, sustainable returns to shareholders
-- Underlying return on equity(1) increased to 18.6% (H1 2014: 11.7%) -- Earnings per share 8.8p (H1 2014: 4.8p)
Phillip Monks, CEO, commented:
"It's been an excellent six months for the Group, we've generated continued growth, doubled profits, listed on the London Stock Exchange and joined the FTSE 250. We're supporting more customers than ever before with lending to SMEs up by 12% to GBP2.5bn and Residential Mortgages up by 14% to GBP2.9bn. Our innovative online deposit business supports this lending and our competitive, transparent products together with the recent launch of our SME Rate Checker have helped drive a 20% increase in SME deposits to GBP1.2bn.
We've more than doubled underlying profit before tax to GBP44m compared with GBP21m for the first half of 2014. These excellent results give us great confidence for the rest of 2015 and beyond. We remain committed to delivering strong, sustainable returns to shareholders while generating growth and maintaining our disciplined approach to risk management and increased our underlying return on equity by around 7pts to nearly 19%. We're also making great progress towards our target of delivering a cost/income ratio of less than 40% by the end of 2017.
We're excited by the significant ongoing growth opportunity presented by SMEs and homeowners, who we believe continue to be underserved by the wider market. Our track record and the great customer feedback we receive demonstrate that we're exceptionally well placed to continue to support these customers and grow the business."
(1) Excluding H1 2015 IPO related costs of GBP4.1m pre-tax and GBP3.2m post-tax (H1 2014: GBP2.2m and GBP1.7m)
(2) Capital ratios as at 30 June 2015 include H1 2015 profits
Enquiries:
Analysts Media Claire Cordell Holly Marshall Tel: +44 (0) 20 Tel: +44 (0) 20 3553 4828 3553 4274 Amit Deshpande Andy Homer Tel: +44 (0) 20 Tel: +44 (0) 20 3553 4244 3553 4251 FTI Consulting Neil Doyle/ Paul Marriott Mobile: +44 (0) 7771 978 220 /+44 (0) 7703 330 390
A live webcast of the analyst presentation, including the question and answer session, will be broadcast on our IR website www.investors.aldermore.co.uk at 9:30am today and is available via a listen only conference call by dialling UK Freephone: 0800 368 0649 or International dial in: + 44 (0) 20 3059 8125. An indexed version of the webcast will be available on the website by the end of the day and copies of the slides to be presented at the analyst meeting will be available on the website from 9.00am today.
CONTENTS Page Summary balance sheet 3 Summary income statement 4 CEO review 5 Financial review 8 Principal risks and uncertainties 20 Directors' responsibility statement 23 Independent review report to Aldermore Group PLC 24 Consolidated income statement 26 Consolidated statement of comprehensive income 27 Consolidated statement of financial position 28 Consolidated statement of cash flows 29 Consolidated statement of changes in equity 30 Notes to the consolidated interim financial statements 31
Note on rounding:
The CEO and Financial reviews have been prepared by rounding financial data in GBP thousands to the nearest GBP million to one decimal place. As a result of rounding, some of the tables may not exactly reconcile to the total shown. All percentage movements are calculated using the data shown in GBP thousands in the statutory consolidated financial statements rather than the rounded amounts.
Important disclaimer
Visit www.aldermore.co.uk for more information. This press release may contain 'forward-looking statements' with respect to certain of the Group's plans and its current goals and expectations relating to its future financial condition, performance, results, strategic initiatives and objectives. Generally, words such as "may", "could", "will", "expect", "intend", "estimate", "anticipate", "aim", "outlook", "believe", "plan", "seek", "continue" or similar expressions identify forward-looking statements. These forward-looking statements are not guarantees of future performance. By their nature, all forward-looking statements are inherently predictive and speculative and involve risk and uncertainty because they relate to future events and circumstances which are beyond the Group's control, including amongst other things, UK economic business conditions, market-related risks such as fluctuations in interest rates, the policies and actions of regulatory authorities, the impact of competition, inflation, deflation, the timing impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation or regulations in the jurisdictions in which the Group operates. As a result, the Group's actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in the Group's forward-looking statements. Forward-looking statements in this press release are current only as of the date on which such statements are made. The Group undertakes no obligation to update any forward-looking statements, save in respect of any requirement under applicable law or regulation. Nothing in this press release shall be construed as a profit forecast.
Aldermore
Aldermore is an SME-focused bank which operates with modern, scalable and legacy-free infrastructure. It offers simple financial products and solutions to meet the needs of underserved Small and Medium-sized Enterprises (SMEs) across their business and personal lives, as well as homeowners and savers. Aldermore has no branch network but serves customers and intermediary partners online, by phone and face to face through its network of regional offices located around the UK. Building on its core values of being reliable, expert, dynamic and straightforward, Aldermore aims to deliver banking as it should be. Established in 2009, Aldermore has grown significantly. At the end of June 2015, lending to customers stood at GBP5.4 billion and customer deposits totalled GBP5.0 billion. For more information, please visit www.aldermore.co.uk.
Aldermore Bank PLC is an operating entity of Aldermore Group PLC. In March 2015, Aldermore Group PLC's shares (ALD.L) listed on the Main Market of the London Stock Exchange. Aldermore Bank PLC is regulated by the Prudential Regulation Authority and the Financial Conduct Authority and is registered under the Financial Services Compensation Scheme.
Summary balance sheet
30 June 31 December Movement 2015 2014 % GBPm GBPm Net loans 5,436.3 4,801.1 13% Cash and investments 772.7 706.7 9% Intangible assets 23.1 22.6 2% Fixed and other assets 29.6 35.0 (15)% -------- ------------ --------- Total assets 6,261.7 5,565.2 13% -------- ------------ --------- Customer deposits 4,967.3 4,459.0 11% Wholesale funding 726.5 621.8 17% Other liabilities 87.6 105.6 (17)% -------- ------------ --------- Total liabilities 5,781.4 5,186.4 11% Ordinary shareholders' equity 406.7 305.2 33% AT1 capital 73.7 73.7 -% Equity 480.3 378.9 27% -------- ------------ --------- Total liabilities and equity 6,261.7 5,565.2 13% -------- ------------ --------- Key ratios (%)
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August 27, 2015 02:03 ET (06:03 GMT)
Non-performing loans ratio (NPL) 0.43% 0.43% -% Loans to deposits ratio 109% 108% 1% CRD IV fully loaded CET 1 ratio(1) 12.0% 10.4% 1.6% CRD IV fully loaded total capital ratio(1) 15.8% 14.8% 1.0%
(1) Capital ratios as at 30 June 2015 include H1 2015 profits
Summary income statement
H1 2015 H1 2014 Movement GBPm GBPm % Interest income 139.1 103.8 34% Interest expense (47.1) (42.6) (10)% -------- -------- --------- Net interest income 92.0 61.2 50% Net fee and other operating income 12.3 12.0 2% Net derivatives income and gains on disposal of debt securities 0.4 0.6 (29)% -------- -------- --------- Operating income 104.8 73.9 42% Expenses, depreciation and amortization (56.0) (47.1) (19)% IPO costs (4.1) (2.2) (83)% Operating profit before impairment losses 44.7 24.5 82% Impairment losses (5.2) (5.9) 12% -------- -------- --------- Profit before tax 39.5 18.6 112% Tax (8.3) (4.4) (90)% -------- -------- --------- Profit after tax 31.2 14.2 119% Basic earnings per share (pence) 8.8p 4.8p 4.0p Diluted earnings per share (pence) 8.7p 4.8p 3.9p Underlying profit before tax(1) 43.6 20.8 109% Underlying profit after tax(1) 34.5 16.0 116% H1 2015 H1 2014 Movement Key ratios % % % Gross interest margin 5.4 5.6 (0.2)% Cost of funding 1.8 2.3 0.5% Net interest margin 3.6 3.3 0.3% Cost/income ratio 57 67 10% Underlying cost/income ratio(1) 53 64 11% Cost of risk (annualised) 20bps 32bps 12bps Return on Equity 16.8 10.4 6.4% Underlying return on Equity(1) 18.6 11.7 6.9%
(1) Excluding H1 2015 IPO related costs of GBP4.1m pre-tax and GBP3.2m post-tax (H1 2014: GBP2.2m and GBP1.7m)
CEO review
I'm delighted to be presenting our first set of results since our IPO in March. The transition to life as a listed company has been exciting but busy and I'm exceptionally proud of the way in which the business has continued to deliver. Our half year results are excellent and give us great confidence for the full year 2015 and beyond.
Our vision is to support UK SMEs across their business and personal lives, as well as homeowners, as we believe both groups are underserved by the wider banking sector. We are confident of achieving our strategic objectives of delivering for customers and shareholders while maintaining a prudent risk appetite and strong capital base. We focus on prime credit quality customers across four lending lines chosen for their large market sizes, high levels of tangible asset security and attractive risk adjusted returns and within which we only need to capture a relatively small market share to deliver on our growth plans.
Our DNA is to be Reliable, Expert, Dynamic and Straightforward and this informs everything we do, creating the basis of our culture and brand. We engage with customers through multiple channels and aim to differentiate our service by being easy to do business with and making consistent and transparent credit decisions. We enjoy the advantage of modern, legacy-free and scalable systems which we use to support our expert underwriters in making considered decisions rather than adopting a "computer says no" approach.
At the centre of our funding base is our dynamic online proposition which provides both retail and SME customers with innovative savings products. With our modern systems it is possible for a customer to open and fund an account online, usually in less than fifteen minutes.
Market environment
During the first six months of 2015, macro-economic conditions were relatively benign and our target market segments have grown. Asset finance new business at a market level grew by around 16% compared with H1 2014 and I'm delighted that we grew our origination by 25% over the same period, gaining market share. The most recent statistics available from the invoice finance industry show client numbers flat and a 3% reduction in advances since the end of 2014. Despite this, we have attracted new customers with net lending remaining broadly flat. In commercial mortgages, demand for property development finance continues to grow with planning applications and consents now at their highest level since 2007. We grew our origination by 6% compared with the first half of 2014 with more than a quarter of origination coming from our property development proposition. We maintained our market share in residential mortgages where, according to the Council of Mortgage Lenders, gross mortgage lending reached around GBP97bn in the first half of 2015 with the second quarter 17% higher than the first, potentially due to uncertainty ahead of the general election.
As expected, we are seeing some signs of increased competition with a few new entrants in Asset and Invoice Finance and mortgage lenders exhibiting a greater focus on buy-to-let. We see this less in owner-occupied residential mortgages where we continue to target prime credit quality customers who fall outside of the "cookie-cutter" approach adopted by some larger banks. Differentiating ourselves by delivering exceptional service, every time, to our broker partners and direct customers is a priority. We continue to invest in technology to improve our brokers' and customers' experience including new web-content in Asset Finance, lead-generation functionality in Invoice Finance, a new buy-to-let website hub, as well as optimising our sites for mobile and tablet visitors who, together, now represent close to half of all visitors to our mortgages site. This approach is working and, as described below, we are holding gross margins broadly stable while remaining on track to achieve our target of growth in net lending of around GBP1.4bn for 2015.
First half performance
This first half of 2015, was another excellent six months for the Group as we generated continued momentum and drove further top and bottom line benefits. As at 30 June 2015, we are supporting more UK SMEs and homeowners than ever before with lending customer numbers up by 15% to over 64,000. Net loans to customers were up by 13% to GBP5.4bn (31 December 2014: GBP4.8bn). The balance of the portfolio, as expected, remained broadly consistent over the period with loans to SMEs up by 12% to GBP2.5bn (31 December 2014: GBP2.2bn) and Residential Mortgages up by 14% to GBP2.9bn (31 December 2014: GBP2.6bn).
This growth was driven by a record first half of origination, all of it organic, which was up by 14% compared with the same period in 2014 to GBP1,186m (H1 2014: GBP1,041m). Originations to SMEs were up by 16% to GBP650m (H1 2014: GBP561m) where, in addition to growth in customer numbers, we saw the benefits from more recently launched soft asset and stocking finance propositions in Asset Finance and good progress within property development in SME Commercial Mortgages. New lending through our Residential Mortgages division was up by 12% to GBP536m (H1 2014: GBP480m) with a fairly even spread between owner-occupied and buy-to-let mortgages. This positions us well for the second half of 2015, which historically has been the seasonally stronger six months. We adopt a multi-channel approach and have a broad distribution network. We continued to extend our direct distribution which grew by 24% compared to the first half of 2014 and now accounts for 17% of total origination (H1 2014: 15%).
We actively manage our funding base, balancing the ongoing diversification of funding sources with maintaining a prudent loan to deposit ratio. We remain predominantly deposit-funded and have grown deposits by 11% to GBP5.0bn (31 December 2014: GBP4.5bn) to support our increased lending. We continue to provide innovative savings products to customers and, in response to research we conducted showing that approximately a quarter of SMEs did not know what rate they were receiving on deposits, launched our SME Rate Checker which allows SMEs to compare rates from over 90 providers. The feedback has been excellent and I am delighted that our SME deposits have grown by 20% to GBP1.2bn (31 December 2014: GBP1.0bn).
We are a straightforward business, lending growth drives increased net interest income and we leverage our cost base to deliver accelerating profitability. Our first half results clearly demonstrate this, as our ongoing momentum drove net interest income up by 50% to GBP92.0m (H1 2014: GBP61.2m) and our net interest margin expanded to 3.6% (H1 2014: 3.3%). At the same time, despite continued investment in the business, we improved our underlying cost/income ratio(1) by 11 percentage points to 53% (H1 2014: 64%). As a result, we delivered an 82% increase in operating profit before impairment losses to GBP44.7m (H1 2014: GBP24.5m).
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August 27, 2015 02:03 ET (06:03 GMT)
We take a rigorous approach to credit management, constructing a granular and highly secured portfolio. Our cost of risk was 20bps (H1 2014: 32bps), included no significant recoveries, and was a strong performance aided by our ongoing actions in Invoice Finance, low arrears across the business, as well as being reflective of where we are in the current economic cycle. We stress test affordability at origination and re-score the portfolio each month giving us early sight of any emerging issues.
We are committed to delivering strong and sustainable returns for our shareholders. Profit before tax on a reported basis increased by 112% to GBP39.5m (H1 2014: GBP18.6m). Excluding IPO related costs, the underlying profit before tax(1) increased by 109% to GBP43.6m (H1 2014: GBP20.8m) and we delivered a 7 percentage point improvement on our underlying return on equity (RoE)(1) to 18.6% (H1 2014: 11.7%).
In March 2015, we successfully listed on the London Stock Exchange raising GBP75m of gross primary capital to support our future growth plans. We are strongly capitalised and at 30 June 2015, the Group had a fully loaded CRD IV total capital ratio(2) of 15.8% (31 December 2014: 14.8%), a fully loaded CRD IV CET1 capital ratio(2) of 12.0% (31 December 2014: 10.4%) and a leverage ratio(2) of 7.2% (31 December 2014: 6.3%).
(1) Excluding H1 2015 IPO related costs of GBP4.1m pre-tax and GBP3.2m post-tax (H1 2014:GBP2.2m and GBP1.7m)
(2) Capital ratios as at 30 June 2015 include H1 2015 profits
Outlook
I am delighted by this excellent set of results which demonstrate that we are on track to deliver on our goals for the full year 2015, namely net loan growth of around GBP1.4bn, a net interest margin of c3.6% and underlying expense growth of mid-teens %, whilst maintaining a fully loaded CRD IV CET1 capital ratio of around 11%. Management continue to believe that the normalised cost of risk for the portfolio over the medium term remains in the mid to high 30's basis points. However, if the credit environment remains relatively benign and we continue to see low levels of large losses then I would expect to see a continued good performance on impairments in the second half of 2015.
Along with the rest of the banking sector, we face a changing regulatory and legislative environment. On 8 July 2015, the Summer Budget introduced an 8% surcharge on UK banking profits above GBP25m, effective from 1 January 2016, which will increase our corporate tax rate and impact returns. We will look to mitigate the impact on returns to the extent possible and remain committed to delivering strong, sustainable returns to shareholders while generating growth and maintaining our disciplined approach to risk management.
Additionally, the Summer Budget introduced plans to restrict relief on mortgage interest for individual buy-to-let landlords to the basic rate of income tax. This change applies from April 2017, and will be phased in over four years giving enough time for those investors who will be impacted to adjust to the new regime. We also lend to landlords who prefer to invest via a corporate structure, these customers are not impacted by the proposed changes. Although it is too early to be completely definitive, we do not believe that this will have a significant impact on the economics of investing in, or demand for, buy-to-let properties. The UK is experiencing a demographic shift, with around 26% of households expected to be renting within the private sector by 2022(1) which is expected to generate further growth in the buy-to-let sector.
Despite the above changes to the regulatory landscape, the growth opportunity available to us remains significant. Indicators show that our target market segments will continue to grow with SMEs reporting increased levels of confidence and planned investment. In the housing market, the number of registered house hunters has reached its highest levels since August 2004.
I believe we are uniquely positioned to continue our support of underserved UK SMEs and homeowners and am confident that we will continue to build on our strong track record of delivery for both customers and shareholders.
Phillip Monks
CEO
(1) OGLG/IMLA: Reshaping housing tenure in the UK May 2014
Financial review
Balance sheet
Assets
30 June 31 December Movement * Net loans to customers 2015 2014 % GBPm GBPm Asset Finance 1,196.1 1,044.3 15% Invoice Finance 170.5 180.6 (6)% SME Commercial Mortgages 1,139.5 1,011.3 13% -------- ------------ --------- Net loans to SMEs 2,506.0 2,236.2 12% Residential Mortgages 2,930.2 2,564.9 14% -------- ------------ --------- Net loans to customers 5,436.3 4,801.1 13%
We continued to support UK SMEs and homeowners, with net loans to customers increasing by 13% in the first half of 2015 to GBP5.4bn (31 December 2014: GBP4.8bn).
As expected, the portfolio mix has remained broadly consistent with net loans to SMEs up by 12% to GBP2.5bn (31 December 2014: GBP2.2bn) driven by strong growth in Asset Finance and SME Commercial Mortgages. Invoice Finance remains a small part of our portfolio and net loans were broadly flat at GBP0.2bn (31 December 2014: GBP0.2bn). Net loans to homeowners were up by 14% to GBP2.9bn (31 December 2014: GBP2.6bn).
We remain on track to deliver on our target of around GBP1.4bn growth in net lending for the full year.
30 June 31 December Movement * Gross loans analysis 2015 2014 % GBPm GBPm Neither past due nor individually impaired 5,399.9 4,760.2 13% Past due but not individually impaired 33.5 42.6 (22)% Individually impaired 23.2 20.8 11% --------- ------------ --------- Gross loans 5,456.6 4,823.6 13% Impairments (20.3) (22.6) 10% --------- ------------ --------- Net loans to customers 5,436.3 4,801.1 13% Non-performing loans ratio 0.43% 0.43% - % Allowance for losses - individual provisions GBP10.9m GBP14.0m (23)% Coverage ratio 46.82% 67.40% (20.58)% 82
We take a rigorous approach to credit management and have deliberately constructed a granular and highly secured portfolio. We have also maintained our prudent risk appetite as we've grown the portfolio by 13% since the start of the year. This approach, along with the current benign credit environment, has led to continued low levels of arrears and a consistent non-performing loans ratio of 0.43%. We continue to stress test affordability at origination and re-score the portfolio on a monthly basis to give us early sight of any emerging issues.
The coverage ratio measures the impairment allowance relating to individual loan balances as a percentage of total individually impaired balances. As at 30 June 2015, this ratio had reduced to 46.82% (31 December 2014: 67.40%) as a result of one SME Commercial Mortgage account which was fully recovered in early July and against which no provision was made at the balance sheet date. In addition, the coverage ratio has also reduced due to a number of fully provided loans being written off within Invoice Finance.
Liabilities
Our funding strategy remains to be predominantly deposit-funded whilst actively managing wholesale sources including the Funding for Lending Scheme (FLS) and Residential Mortgage Backed Securitisation (RMBS) to drive an efficient cost of funds. As at 30 June 2015, our loans to deposits ratio was in line with management expectations at 109% (31 December 2014: 108%).
30 June 31 December Movement * Deposits 2015 2014 % GBPm GBPm Retail 3,666.9 3,411.3 7% SME 1,227.9 1,024.4 20% Corporate deposits 72.5 23.3 212% 4,967.3 4,459.0 11%
Our dynamic and innovative online savings franchise provides award winning savings products to customers and grew by 11% to GBP5.0bn (31 December 2014: GBP4.5bn) to support our growth in net lending.
We are particularly pleased with further growth in SME deposits, up by 20% to GBP1.2bn (31 December 2014: GBP1.0bn) which now form 25% of our total customer deposit base.
Corporate deposits, launched in December 2014 are another element in our ongoing funding diversification, have grown by 212% and now total GBP72.5m (31 December 2014: GBP23.3m).
30 June 31 December Movement * Wholesale funding 2015 2014 % GBPm GBPm FLS 444.0 304.2 46% RMBS 238.6 279.1 (15)% Other wholesale funding 43.8 38.7 13% -------- ------------ --------- 726.5 621.8 17%
Wholesale funding grew by 17% to GBP726.5m (31 December 2014: GBP621.8m) and predominantly consists of on-balance sheet funding via repurchase agreements of FLS drawings and our RMBS.
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We took advantage of the cost-effective funding available under the Bank of England's extension of FLS for SME lending, increasing our funding to GBP444.0m (31 December 2014: GBP304.2m).
In April 2014, we issued our inaugural GBP333m RMBS transaction priced at LIBOR + 67bps. The outstanding balance as at 30 June 2015 stood at GBP238.6m (31 December 2014: GBP279.1m).
Other wholesale funding includes Tier 2 capital of GBP37.4m (31 December 2014: GBP36.8m) which was issued in May 2012 with a nominal value of GBP40m, has an effective interest rate of c18% and is callable in May 2017.
Equity GBPm * Movements in ordinary shareholders' equity 31 December 2014 305.2 Profit after tax 31.2 Total other comprehensive income (0.4) Net equity raised at IPO 72.3 Share based payments 1.1 AT1 coupon (net of tax) (2.8) ------ 30 June 2015 406.7
Ordinary shareholders' equity increased to GBP406.7m (31 December 2014: GBP305.2m) predominantly as a result of GBP75m of gross equity raised during the IPO in March 2015 and retained earnings for the period partially offset by the coupon paid on the Additional Tier 1 instrument in April 2015.
- AT1 Capital
On 9 December 2014, the Group issued GBP75m Fixed Rate Reset Additional Tier 1 (AT1) Perpetual Subordinated Contingent Convertible Securities. The securities are listed on the Irish Stock Exchange, pay a coupon of 11.875% annually on 30 April, subject to Board approval, and convert to equity if the Group's CET1 ratio falls below 7%. The first call date is 30 April 2020. From an accounting perspective, the securities are classified as equity with the coupon payments treated like dividends and deducted from retained earnings when paid.
Financial Performance
- Net interest income
During the first six months of 2015, interest income grew by 34% to GBP139.1m (H1 2014: GBP103.8m), driven by continued growth in net loans with the gross interest margin remaining relatively stable at 5.4% (H1 2014: 5.6%).
We continued to benefit from our strategy of diversifying our funding base and interest expense increased by only 10% to GBP47.1m (H1 2014: GBP42.6m) as we drove the cost of funding down to 1.8% (H1 2014: 2.3%).
As a result, the Group's net interest income increased by 50% to GBP92.0m (H1 2014: GBP61.2m) while the net interest margin improved by 0.3 percentage points to 3.6% (H1 2014: 3.3%).
H1 2015 H1 2014 Movement * Net fee and other operating income GBPm GBPm % Fee and commission income 12.6 12.7 (1)% Fee and commission expense (3.8) (4.4) 14% Other operating income 3.5 3.7 (6)% 12.3 12.0 2%
Net fee and other operating income were up by 2% to GBP12.3m (H1 2014: GBP12.0m) with fee and commission income remaining broadly flat at GBP12.6m (H1 2014: GBP12.7m) and a reduction in fee and commission expense by 14% to GBP3.8m (H1 2014: GBP4.4m) predominantly driven by Invoice Finance. Other operating income is mainly related to Invoice Finance and is marginally down.
H1 2015 H1 2014 Movement * Net derivatives income and gains on disposal of debt GBPm GBPm % securities Net (expense)/income on derivatives (2.0) 0.4 n/a Gains on disposal of debt securities 2.5 0.2 n/a 0.4 0.6 n/a
Net income from derivatives and gains on disposal of debt securities was GBP0.4m (H1 2014: GBP0.6m) with the net expense from derivatives offset by the gains on disposal of the related debt securities.
H1 2015 H1 2014 Movement * Expenses, depreciation and amortisation GBPm GBPm % Other administrative expenses 51.6 42.6 (21)% Provisions 2.2 2.7 20% Depreciation and amortisation 2.2 1.8 (23)% -------- -------- --------- 56.0 47.1 19%
Excluding IPO related costs, underlying administrative expenses increased by 19% to GBP56.0m (H1 2014: GBP47.1m). The increase in other administrative expenses was mainly due to an increase in staff costs as we invested in further strengthening our central functions ahead of becoming a listed company and to support the growth of the business. During the first six months of 2015, on average we employed 871 people, including contractors, an increase of 17% on the same period in 2014. Provisions predominantly include the full year charge for the Financial Services Compensation Scheme (FSCS) levy which must be accounted for in the first half. Depreciation and amortisation remained broadly flat in nominal terms.
- Cost/income ratio
The underlying cost/income ratio measures administration expenses, excluding IPO related costs but including depreciation and amortisation, as a percentage of operating income. We continue to make excellent progress towards achieving our target of a cost/income ratio of less than 40% by the end of 2017 with the underlying cost/income ratio for H1 2015 improving by 11 percentage points to 53% (H1 2014: 64%).
- Operating profit before impairments
Operating profit before impairment losses increased by 82% to GBP44.7m (H1 2014: GBP24.5m) as operating income growth of 42% outstripped the growth in our expense base of 19% excluding IPO related costs.
- Impairment losses
Impairment losses decreased by 12% to GBP5.2m (H1 2014: GBP5.9m) despite the growth in the loan book as a result of our rigorous focus on credit management and a relatively benign credit environment. There were no significant one-off recoveries in either period.
Across the portfolio, we experienced low levels of arrears and few large losses and this is reflected in the 19% reduction in individual provisions for the period to GBP3.5m (H1 2014: GBP4.3m). The collective provision element of the charge for H1 2015 increased by 5% to GBP1.7m (H1 2014: GBP1.6m) reflecting growth in the book. Given current stable conditions, no assumption changes have been made since the end of 2014. In the first half of 2014, the collective charge was negatively impacted by an increase in the assumed forced sale discount percentage on the SME Commercial Mortgage portfolio, which was partially offset by a positive collective charge in Residential Mortgages as we reflected our actual experience of loans which were one or two months in arrears becoming three months in arrears, and therefore impaired.
Cost of risk, which measures impairment losses as a percentage of average net loans, improved by 12 basis points to 20bps (H1 2014: 32bps). The specific cost of risk was 14bps (H1 2014: 23bps) reflecting the low levels of both arrears and large losses experienced during the first half of 2015. The collective cost of risk was 7bps (H1 2014: 9bps).
- Profit before tax
Profit before tax for the first six months of this year increased by 112% to GBP39.5m (H1 2014: GBP18.6m). Excluding pre-tax IPO related costs of GBP4.1m (H1 2014: GBP2.2m), the underlying profit before tax increased by 109% to GBP43.6m (H1 2014: GBP20.8m).
- Tax
The tax charge for the first six months of the year increased by 90% to GBP8.3m (H1 2014: GBP4.4m) reflecting the Group's increased profitability. The effective tax rate is 21.0% (H1 2014: 23.5%).
On 8 July 2015, the Summer Budget proposed an 8% corporation tax surcharge on all UK banking profits above GBP25m per annum. This change is expected to be effective from 1 January 2016.
- Profit after tax
Profit after tax increased by 119% to GBP31.2m (H1 2014: GBP14.2m). Excluding post-tax IPO related costs of GBP3.2m (H1 2014: GBP1.7m), the underlying profit after tax increased by 116% to GBP34.5m (H1 2014: GBP15.9m).
- Return on equity
Return on equity as reported is 16.8% (H1 2014: 10.4%) and is calculated as the profit after tax attributable to ordinary shareholders expressed in relation to average shareholders' funds attributable to ordinary shareholders, i.e. the AT1 coupon is deducted from profit after tax.
Excluding post-tax IPO costs of GBP3.2m (H1 2014: GBP1.7m), the underlying return on equity is 18.6% (H1 2014: 11.7%).
The proposed 8% tax surcharge would impact the Group's returns going forward as we are already making profits in excess of the GBP25m annual allowance. We will look to mitigate the impact on returns to the extent possible and remain committed to delivering strong, sustainable returns to shareholders while generating growth and maintaining our disciplined approach to risk management.
- Earnings per share
Basic earnings per share (EPS) of 8.8p (H1 2014: 4.8p) is calculated as net profit attributable to ordinary shareholders of the Group divided by the weighted average number of ordinary shares in issue during the period. On a fully diluted basis, the EPS was 8.7p (H1 2014: 4.8p).
The weighted average number of ordinary shares in issue during the period was 322,075 thousand (H1 2014: 296,178 thousand) and 326,659 thousand (H1 2014: 299,056 thousand) on a diluted basis.
Regulatory capital position(1)
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The fully loaded regulatory capital position of the Group under CRD IV is set out below:
30 June 31 December Movement 2015 2014 % Fully loaded CRD IV CET 1 ratio(1) (%) 12.0 10.4 1.6% Fully loaded CRD IV Tier 1 capital ratio(1) (%) 14.3 13.1 1.2% Tier 2 capital ratio (%) 1.5 1.7 (0.2)% Fully loaded CRD IV total capital ratio(1) (%) 15.8 14.8 1.0% Risk Weighted Assets (GBPm) 3,191.3 2,702.0 18%
As at 30 June 2015, the Group's fully loaded CRD IV total capital ratio(1) was 15.8% (31 December 2014: 14.8%) and its CET1 ratio(1) was 12.0% (31 December 2014: 10.4%). These increases were driven by the issue of GBP75m of gross primary equity during the IPO and retained earnings generated during the period partially offset by growth in Risk Weighted Assets (RWAs).
Leverage ratio(1)
The Group's leverage ratio under CRD IV is set out below:
30 June 31 December Movement 2015 2014 % % % Leverage ratio(1) 7.2 6.3 0.9%
The Group's leverage ratio improved by 0.9 percentage points to 7.2% (31 December 2014: 6.3%) mainly due to the issue of GBP75m of gross primary equity during the IPO and retained earnings generated during the period partially offset by growth in lending assets.
(1) Capital ratios as at 30 June 2015 include H1 2015 profits
Segmental analysis
Asset Finance 30 June 31 December Movement 2015 2014 % GBPm GBPm Net loans to customers 1,196.1 1,044.3 15% NPL ratio 0.29% 0.25% (0.04)% H1 2015 H1 2014 Movement GBPm GBPm % Organic origination 424 339 25% Net interest income 25.2 16.2 56% Net fees and other income 2.0 1.5 36% -------- ------------ --------- Operating income 27.3 17.7 54% Administrative expenses (5.6) (5.5) (2)% Impairment losses (2.2) (0.9) (137)% -------- ------------ --------- Segmental result 19.5 11.3 73% Net interest margin (%) 4.5% 4.1% 0.4% Cost of risk (bps) 40bps 24bps (16)bps
Aldermore supports capital investment in a wide range of business-critical assets from hard assets such as vehicles and agricultural machinery to printing equipment, digital technologies, renewables and a wide array of soft assets. We aim to be our partners' "funder of first choice" by being easy to do business with, quick to respond and consistent in our credit decisions.
The Asset Finance business delivered strong growth in the first half, with net loans growing by 15% to GBP1.2bn (31 December 2014: GBP1.0bn) as we grew customer numbers by 18% to around 38,000 (31 December 2014: c33,000). This growth was also driven by excellent organic origination which increased by 25% to GBP424m (H1 2014: GBP339m). As a result of our service focus, we saw particularly strong origination from our broker distribution channel which grew by 29%. We also continued our focus on soft assets, which now comprise around 6% of the portfolio and saw good progress with our stocking proposition which we launched toward the end of 2014.
Redemptions performed as expected given the amortising nature and average contract duration of these loans and the growing size of the portfolio.
Net interest income grew by 56% to GBP25.2m (H1 2014: GBP16.2m) driven mainly by growth in net loans. The net interest margin improved to 4.5% (H1 2014: 4.1%) as a result of a reduction in cost of funds and a broadly stable gross asset margin.
Administrative expenses were broadly stable at GBP5.6m (H1 2014: GBP5.5m) as we continue to invest to support growth and leverage our efficient operating platform.
Impairment charges for the first half totalled GBP2.2m (H1 2014: GBP0.9m) leading to a cost of risk of 40bps (H1 2014: 24bps). This charge includes a more normal level of specific provisions in H1 2015, compared with a reduced level in the same period in 2014, together with a lower collective provision reflecting low levels of arrears.
Asset Finance delivered an excellent bottom line performance with the segmental result increasing by 73% to GBP19.5m (H1 2014: GBP11.3m).
Invoice Finance 30 June 31 December Movement 2015 2014 % GBPm GBPm Net loans to customers 170.5 180.6 (6)% NPL ratio 1.48% 3.13% 1.65% H1 2015 H1 2014 Movement GBPm GBPm % Organic origination 20 27 (27)% Net interest income 2.6 2.9 (9)% Net fees and other income 7.5 8.8 (14)% -------- ------------ --------- Operating income 10.2 11.7 (13)% Administrative expenses (7.4) (7.7) 5% Impairment losses (0.6) (2.2) 73% -------- ------------ --------- Segmental result 2.2 1.8 25% Net interest margin (%) 3.0% 2.8% 0.2% Net revenue margin (%) 11.6% 11.3% 0.3% Cost of risk (bps) 69bps 213bps 144bps
Invoice Finance is an important working capital tool for SMEs. Aldermore will usually lend up to 85% of the value of approved outstanding invoices issued by the borrower to its customers. Our customers are typically owner-managed SMEs and we focus on key sectors including Manufacturing, Wholesale, Recruitment and Logistics. We employ specialist service teams that spend time understanding our clients' business and design appropriate financing solutions. Although distributed mainly via intermediaries, our direct distribution has grown rapidly in recent years and in the first six months of 2015, represented around 42% of origination.
Invoice Finance is the smallest part of the business at around 3% of the total net loan portfolio. At 30 June 2015, net loans were broadly flat at GBP0.2bn (31 December 2014: GBP0.2bn) as we focused on improving the segmental result. Customer numbers increased marginally, although remain around 1,200. Our trade and construction finance propositions which were launched toward the end of 2014 are starting to gain traction. Given the short term nature of these loans, with the underlying invoices on average converting to cash within 60 days, our average loan balance is equivalent to providing over GBP1bn in working capital finance to UK SMEs per annum.
Net interest income decreased marginally to GBP2.6m (H1 2014: GBP2.9m). The net interest margin improved to 3.0% (H1 2014: 2.8%) with an improvement in cost of funds more than compensating for a marginal reduction in gross interest margin.
Net fee income was down 14% to GBP7.5m (H1 2014: GBP8.8m) due to smaller average facility sizes and improvements in the credit performance of the portfolio leading to lower collect out fees, with the latter offset by improvements generated on impairments. The net revenue margin improved to 11.6% (H1 2014: 11.3%).
Expenses decreased by 5% to GBP7.4m (H1 2014: GBP7.7m) due to efficiency improvements.
In addition to a number of fully provided loans being written off within Invoice Finance, we continue to benefit from actions previously taken to enhance credit and fraud controls and our NPL ratio has reduced by 1.65% to 1.48% since the start of the year. These actions have also led to the improved credit performance of the business with impairments down by 73% to GBP0.6m (H1 2014: GBP2.2m) leading to a 144bps improvement in the cost of risk to 69bps (H1 2014: 213bps).
The segmental result improved by 25% to GBP2.2m (H1 2014: GBP1.8m).
SME Commercial Mortgages 30 June 31 December Movement 2015 2014 % GBPm GBPm Net loans to customers 1,139.5 1,011.3 13% NPL ratio 1.02% 0.62% (0.4)% H1 2015 H1 2014 Movement GBPm GBPm % Organic origination 207 195 6% Net interest income 24.4 18.0 35% Net fees and other income 1.0 0.4 164% -------- ------------ --------- Operating income 25.4 18.4 38% Administrative expenses (3.8) (3.3) (14)% Impairment losses (1.2) (3.0) 59% -------- ------------ --------- Segmental result 20.5 12.1 69% Net interest margin (%) 4.5% 4.4% 0.1% Cost of risk (bps) 23bps 72bps 49bps
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We offer a full range of mortgages from property development through to purchase and refinancing as well as bridging loans. Our SME Commercial Mortgages business focuses on mortgages for shops, warehouses, industrial units and offices as well as professional buy-to-let, where the customer is a corporate entity or may have more specialist lending requirements. In property development, we've created flexible funding solutions for experienced housebuilders working on residential and mixed-use developments. We work closely with our brokers to ensure we are easy to do business with and responsive, providing direct access to our underwriters in more complex cases.
In the first half of 2015, our SME Commercial Mortgage business grew net loans to customers by 13% to GBP1.1bn (31 December 2014: GBP1.0bn) as we grew customer numbers by 13% to around 3,600 (31 December 2014: c3,200). Growth was supported by good organic origination, up by 6% to GBP207m (H1 2014: GBP195m). We are particularly pleased by the growth in the property development portfolio, with brokers attracted by our high quality service and national coverage, and the increase in direct distribution, due to repeat business driven by our small dedicated direct team, which accounted for c19% of total origination in H1 and grew by 148%.
The continued balance sheet momentum is reflected in the increasing net interest income, up by 35% to GBP24.4m (H1 2014: GBP18.0m). The gross interest margin remained broadly stable while we reduced the cost of funding and as a result the net interest margin improved by 0.1 percentage points to 4.5% (H1 2014: 4.4%).
Administrative expenses were up by 14% to GBP3.8m (H1 2014: GBP3.3m) as we invested in front line capabilities particularly to support growth in property development.
As at 30 June 2015, the NPL ratio was 1.02% and included one account which was fully recovered in early July and which was therefore not provided for at the balance sheet date. Impairment losses were down by 59% to GBP1.2m (H1 2014: GBP3.0m) as a result of lower levels of both specific and collective provisions than the same period in 2014 despite the growth in the portfolio. Specific provisions in H1 2014 included an additional charge for one account which was then fully recovered in the second half of the year. The H1 2014 collective charge was impacted by an increase in the assumed forced sale discount percentage on the whole SME Commercial Mortgage portfolio. There have been no changes to methodology or underlying assumptions since the year end 2014. As a result, the cost of risk has reduced by 49bps to 23bps (H1 2014: 72bps).
The segmental result was excellent, growing by 69% to GBP20.5m (H1 2014: GBP12.1m).
Residential Mortgages 30 June 31 December Movement 2015 2014 % GBPm GBPm Net loans to customers 2,930.2 2,564.9 14% NPL ratio 0.19% 0.23% 0.04% H1 2015 H1 2014 Movement GBPm GBPm % Organic origination 536 480 12% Net interest income 44.4 27.2 63% Net fees and other income 1.7 1.5 13% -------- ------------ --------- Operating income 46.1 28.7 61% Administrative expenses (5.4) (4.4) (22)% Impairment losses (1.1) 0.2 (673)% -------- ------------ --------- Segmental result 39.6 24.5 62% Net interest margin (%) 3.2% 2.9% 0.3% Cost of risk (bps) 8bps (2)bps 10bps
Our Residential Mortgages business provides residential buy-to-let and owner-occupied mortgages with around 60% (31 December 2014: 62%) of the portfolio being buy-to-let. In the owner-occupied sector we target underserved prime customers including the self-employed, professionals and first time buyers.
As in our other divisions, we aim to be easy to do business with, transparent and quick to respond. We benefit from our modern technology. In Residential Mortgages, our brokers are able to apply via an online portal and obtain a decision in principle within 90 seconds. This portal takes the application and links to external systems, automatically completing basic identity, fraud and credit checks and builds an underwriting file highlighting any specific issues to our underwriters. This technology allows us to use targeted human underwriting in a cost-effective manner to make considered and consistent credit decisions.
The Residential Mortgages portfolio delivered another strong performance, growing by 14% to GBP2.9bn (31 December 2014: GBP2.6bn) driven by a 12% increase in customers to c21,000 (31 December 2014: c19,000). Organic origination was up by 12% to GBP536m (H1 2014: GBP480m) with more than half being generated in the owner occupied segment as we extended our product range and supported the government's Help to Buy schemes. Our recently launched bridging proposition is also making good progress.
The continued growth in the portfolio drove a strong increase in net interest income, up by 63% to GBP44.4m (H1 2014: GBP27.2m). The gross interest margin remained flat compared with the first half of 2014 with the reduction in the cost of funding leading to a 0.3% expansion in the net interest margin to 3.2% (H1 2014: 2.9%).
Administrative expenses increased by 22% to GBP5.4m (H1 2014: GBP4.4m) as we continued to invest to ensure that the platform is able to support our growth plans.
Impairments of GBP1.1m (H1 2014: GBP0.2m release) reflect an increased specific charge, in line with the growth of the portfolio and a collective provision in line with the second half of 2014. There was a reduction in the collective provision in H1 2014 as we reflected our actual experience of loans which were one or two months in arrears becoming three months in arrears, and therefore impaired. Overall, both the NPL ratio at 0.19% (31 December 2014: 0.23%) and the cost of risk at 8 bps (H1 2014: 2 bps release) remain low.
The business delivered an excellent bottom line performance with the segmental result increasing by 62% to GBP39.6m (H1 2014: GBP24.5m).
Central Functions H1 2015 H1 2014 Movement GBPm GBPm % Net interest income (4.6) (3.1) 50% Net fees and other income 0.4 0.4 -% -------- -------- --------- Operating income (4.2) (2.6) 58% Administrative expenses (excluding IPO costs) (34.0) (26.2) (30)% IPO related costs (4.1) (2.2) (83)% Segmental result (42.2) (31.1) (36)%
Central Functions includes the Group's Treasury and Saving functions as well as common costs which are not directly attributable to the operating segments. Common costs include support function costs such as Finance, IT, Legal & Compliance, Risk and Human Resources.
Net interest income includes the interest expense relating to the Tier 2 subordinated notes and the net interest income or expense from derivatives held at fair value, neither of which are recharged to the segments.
Net fees and other income predominantly includes the net expense or income from derivatives (apart from the interest components of hedging derivatives that are included in net interest income) and other financial instruments at fair value through profit or loss (which represents the market movements) and gains on disposal of available for sale debt securities.
Central administrative expenses, excluding IPO costs, increased by 30% to GBP34.0m (H1 2014: GBP26.2m) mainly driven by a 27% increase in average head office employees (including contractors) to 279 (H1 2014: 220) as we invested in the central support functions ahead of the IPO and to support the growth of the business.
Total IPO costs incurred in 2015 were GBP6.8m of which GBP4.1m was charged to the P&L with the remainder deducted from proceeds.
The segmental result was a charge of GBP42.2m (H1 2014: charge of GBP31.1m)
Principal risks and uncertainties
There has been no significant change to the Group's business model, risk management framework or risk appetite during the six month period ended 30 June 2015. The following section summarises the principal risks and uncertainties to which the Group is exposed, along with the Group's approach to mitigating these risks. A more detailed review of these principal risks is set out in Note 41 of the 2014 Annual Report on pages 97 to 119 which can be accessed via the Group's website at www.aldermore.co.uk.
(a) Principal risks
The principal risks and uncertainties which the Group may face in the remaining six months of the financial year are summarised below:
Risk Mitigation of risk -------------------------- ----------------------------------------------- Strategic risk The Group seeks to mitigate strategic - The risk which risk by focusing on a sustainable can affect the business model which is aligned to Group's ability the Group's business strategy. to achieve its corporate and strategic objectives. -------------------------- ----------------------------------------------- Credit risk - The The Group seeks to mitigate credit risk of financial risk by operating in business sectors loss arising from where it has specific expertise. The a borrower failing Group uses detailed lending policies to meet their financial tailored to each business area combined
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obligations to with performing due diligence on borrowers the Group in accordance and pledged security, reviewing credit with agreed terms. reference agency reports and reviewing financial information and credit scores to assess credit risk. -------------------------- ----------------------------------------------- Capital risk - The Group seeks to mitigate capital The risk that the risk primarily by regulating the volume Group has insufficient of asset origination. The Group also capital to cover performs stress testing and sensitivity regulatory requirements analysis along with monthly capital and growth plans. forecasting over a period of 12-18 months to provide a current and forward view of the Group's capital. Capital requirements under stressed conditions are considered as part of the Group's Internal Capital Adequacy Assessment Process ('ICAAP'). During the period the Group completed its initial public offering and consequently enhanced its capital position as a result. -------------------------- ----------------------------------------------- Liquidity risk The Group uses the Individual Liquidity - The risk that Adequacy Assessment ('ILAA') process the Group is not to mitigate liquidity risk. As part able to meet its of the process, the Group determines financial obligations the appropriate liquidity buffer and as they fall due, assesses the level of liquidity necessary or can do so only to prudently cover systemic and idiosyncratic at excessive cost. risks. The liquidity buffer is monitored on a daily basis in order to ensure there are sufficient liquid assets at all times to cover cash flow movements and fluctuations in funding. -------------------------- ----------------------------------------------- Interest rate risk Where possible the Group seeks to - The risk of financial match the interest rate structure loss through un-hedged of assets with liabilities or deposits or mismatched asset creating a natural hedge. Where this and liability positions is not possible the Group will enter sensitive to changes into swap agreements to convert fixed in interest rates. interest rate liabilities into variable rate liabilities, which are then matched with variable interest rate assets. -------------------------- ----------------------------------------------- Market risk - The The Group does not seek to take or financial impact expose itself to market risk, and from movements does not carry out proprietary trading, in market prices although certain liquid asset investments on the value of which form part of the liquid asset assets and liabilities. buffer may carry a limited amount of mark-to-market risk which is regularly monitored. It is accordingly considered that there is minimal exposure to market risk. -------------------------- ----------------------------------------------- Operational risk The Group aims to minimise operational - The risk of financial failures through the establishment loss and/or reputational and subsequent investment in sound damage resulting systems, controls and audit functions. from inadequate The Group seeks to operate within or failed internal a defined level of operational risk. processes, people The operational risk appetite considers and systems or risks events and the assessment of from external events internal controls as well as holding including financial additional capital for certain operational crime. risks. -------------------------- ----------------------------------------------- Conduct risk - The Group mitigates conduct risk by The risk of detriment monitoring various operational metrics to the Group's and by tracking activities which affect customers due to customers, monitoring customer complaints, the inappropriate implementing process improvements execution of its and adhering to service standards. business activities and processes. -------------------------- ----------------------------------------------- (b) Current risks
The above risks are all classified as principal risks within the Group's Risk Management Framework and are considered to be important to the development, performance and position of the Group. The section below summarises specific current risks which may adversely affect the Group. The current risks have the potential to impact on a number of the principal risks described above. The section below should not be regarded as a complete and comprehensive statement of all current risks:
Area Consideration ----------------------- ---------------------------------------------- The domestic and The domestic economic environment international economy continues to remain relatively stable, with growth trends across all sectors, stable property prices, low levels of unemployment and contained inflationary risks. Interest rates remain abnormally low. As the economy continues to grow, with positive wage inflation, the point at which interest rates may rise is getting nearer, although the timing of rising interest rates remains indeterminate. The Group has a material proportion of mortgage assets which are sensitive to interest rate rises, and the continued low interest rate environment will have a positive effect on mortgage affordability. Gradual increases in interest rates are not expected to have a material effect on the mortgage portfolio. Some international geopolitical risks remain and following the agreement between the Eurozone and International Monetary Fund creditors with Greece, European economic instability risks should moderate over the near term, with a lower risk of a Greek exit from Eurozone. ----------------------- ---------------------------------------------- UK Government Summer On 8 July 2015, the Summer Budget Budget introduced an 8% surcharge on UK banking profits above GBP25 million per annum, effective from 1 January 2016 which will increase our effective corporate tax rate and impact returns. We will look to mitigate the impact on returns to the extent possible and remain committed to delivering strong, sustainable returns to shareholders while generating growth and maintaining our disciplined approach to risk management. The Group operates in the Buy-to-Let ('BTL') sector. The Summer Budget introduced plans to restrict relief on mortgage interest for individual BTL landlords to the basic rate of income tax. This change applies from April 2017, and will be phased in over 4 years, giving enough time for those investors who will be impacted to adjust to the new regime. We also lend to landlords who prefer to invest via a corporate structure, these customers are not impacted by the proposed changes. Although it is too early to be completely definitive, we do not believe that this will have a significant impact on the economics of investing in or the long term demand for buy to let properties. ----------------------- ---------------------------------------------- Cyber risk As the Group grows and expands its activities, with a number of projects running, operational risk will continue to remain an area of focus. Operational risks such as cyber risk and IT security are reviewed at board level as well
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as at management level committees. Cyber risk remains a high profile issue for banks and cyber risk threats are expected to increase over time for the industry. The Group continues to invest in its infrastructure and has an investment plan specifically designed to enhance cyber risk controls. ----------------------- ---------------------------------------------- Financial Services The reduction in the FSCS threshold Compensation Scheme to GBP75,000 may affect the behaviour ('FSCS') of customers with higher value deposits. The change may cause customers to review the value deposited, especially if the balance is between GBP75,000 and GBP85,000. The transitional arrangements will allow the Group to monitor and review the impact, but the effect is not expected to be significant. With the threshold changes affecting all banks, the Group may be a net beneficiary of deposits as customers look to diversify their cash holdings across a greater number of deposit taking institutions. ----------------------- ----------------------------------------------
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 financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting 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 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.
Glyn Jones
Phillip Monks
James Mack
Peter Cartwright
Neil Cochrane
Danuta Gray
John Hitchins
Robert Sharpe
Peter Shaw
Christopher Stamper
Cathy Turner
By order of the Board
James Mack
Director and Chief Financial Officer
26 August 2015
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 2015 which comprises:
-- the consolidated income statement; -- the consolidated statement of comprehensive income; -- the consolidated statement of financial position; -- the consolidated statement of cash flows; -- the consolidated statement of changes in equity; and -- the related explanatory notes.
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 the terms of our engagement to assist the Company in meeting the requirements of the Disclosure and Transparency Rules ('the DTR') of the UK's Financial Conduct Authority ('the UK FCA'). Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this 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 reached.
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 DTR of the UK FCA.
As disclosed in Note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the EU. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the EU.
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 UK. 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 2015 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FCA.
Michael Peck
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London
E14 5GL
26 August 2015
Consolidated income statement Period Period For the six month period ended ended ended 30 June 2015 30 June 30 June 2015 2014 Note GBP'000 GBP'000 Interest income 4 139,088 103,769 Interest expense 5 (47,057) (42,587) Net interest income 92,031 61,182 -------------------------------------------- ---- -------- -------- Fee and commission income 6 12,583 12,701 Fee and commission expense 7 (3,757) (4,381) Net (expense)/income from derivatives and other financial instruments at fair value through profit or loss 8 (2,017) 392 Gains on disposal of available for sale debt securities 2,466 236 Other operating income 9 3,515 3,726 Total operating income 104,821 73,856 -------------------------------------------- ---- -------- -------- Provisions 14 (2,186) (2,738) Costs in preparation for an initial public offering 10 (4,079) (2,231) Other administrative expenses (51,640) (42,566) -------------------------------------------- ---- -------- -------- Administrative expenses 10 (57,905) (47,535) Depreciation and amortisation (2,192) (1,789) Operating profit before impairment losses 44,724 24,532 Impairment losses on loans and advances to customers 13 (5,184) (5,924) Profit before taxation 39,540 18,608 Taxation charge 11 (8,299) (4,364) Profit after taxation - attributable to equity holders of the Group 31,241 14,244 -------------------------------------------- ---- -------- -------- Basic earnings per share 12 8.8p 4.8p Diluted earnings per share 12 8.7p 4.8p -------------------------------------------- ---- -------- --------
The notes and information on pages 31 to 62 form part of these interim financial statements.
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The result for the period is derived entirely from continuing activities.
Consolidated statement of comprehensive Period Period income ended ended For the six month period ended 30 30 June 30 June June 2015 2015 2014 GBP'000 GBP'000 Profit after taxation 31,241 14,244 ------------------------------------------------ -------- -------- Other comprehensive (expense)/income: Items that may subsequently be transferred to the income statement: Available for sale debt securities: (427) 502 Fair value movements 1,914 863 Amounts transferred to the income statement (2,448) (236) Taxation 107 (125) ------------------------------------------------ -------- -------- Total other comprehensive (expense)/income (427) 502 ------------------------------------------------ -------- -------- Total comprehensive income - attributable to equity holders of the Group 30,814 14,746 ------------------------------------------------ -------- -------- Consolidated statement of 30 June 31 December financial position 2015 2014 As at 30 June 2015 Note GBP'000 GBP'000 Assets Cash and balances at central banks 36,591 79,567 Loans and advances to banks 106,259 117,401 Debt securities 629,891 509,684 Derivatives held for risk management 8,971 8,168 Loans and advances to customers 13 5,436,258 4,801,064 Fair value adjustment for portfolio hedged risk 2,523 7,175 Other assets 2,265 3,344 Prepayments and accrued income 5,438 6,856 Deferred taxation 7,871 6,598 Property, plant and equipment 2,581 2,815 Intangible assets 23,068 22,571 Total assets 6,261,716 5,565,243 ------------------------------------- ---- --------- ----------- Liabilities Amounts due to banks 450,442 305,907 Customers' accounts 4,967,340 4,458,962 Derivatives held for risk management 37,948 54,198 Fair value adjustment for portfolio hedged risk (1,043) 1,528 Other liabilities 19,273 18,634 Accruals and deferred income 19,424 21,107 Current taxation 8,737 8,148 Provisions 14 3,265 2,008 Debt securities in issue 15 238,630 279,143 Subordinated notes 37,385 36,758 Total liabilities 5,781,401 5,186,393 ------------------------------------- ---- --------- ----------- Share capital 16 33,924 23,737 Share premium account 16 68,391 - Contingent convertible securities 73,657 73,657 Capital contribution reserve 2 2 Capital redemption reserve 173 - Warrant reserve 2,200 2,200 Available for sale reserve 948 1,375 Retained earnings 301,020 277,879 Equity 480,315 378,850 ------------------------------------- ---- --------- ----------- Total liabilities and equity 6,261,716 5,565,243 ------------------------------------- ---- --------- -----------
These financial statements were approved by the Board and signed on its behalf by:
Phillip Monks
Director and Chief Executive Officer
26 August 2015
Registered number: 06764335
The notes and information on pages 31 to 62 form part of these interim financial statements.
Consolidated statement of cash flows Period Period For the six month period ended 30 ended ended June 2015 30 June 30 June 2015 2014 Note GBP'000 GBP'000 Cash flows from operating activities Profit before taxation 39,540 18,608 Adjustments for non-cash items and other adjustments included within the income statement 18 5,207 3,770 (Increase) in operating assets 18 (611,421) (659,009) Increase in operating liabilities 18 634,340 207,846 Income tax paid (8,138) (2,014) Net cash flows generated from/(used in) operating activities 59,528 (430,799) ----------------------------------------------- ---- --------- --------- Cash flows from investing activities Purchase of debt securities (339,051) (335,773) Proceeds from sale and maturity of debt securities 201,200 100,145 Capital repayments of debt securities 11,879 35,033 Interest received on debt securities 6,056 5,174 Purchase of property, plant and equipment and intangible assets (2,455) (2,028) Net cash used in investing activities (122,371) (197,449) ----------------------------------------------- ---- --------- --------- Cash flows from financing activities Proceeds from issue of ordinary shares 75,000 - Issuance costs of ordinary shares (2,703) - Capital repayments on debt securities issued (40,731) - Proceeds from issue of debt securities - 333,300 Debt securities issuance costs - (2,077) Interest paid on debt securities issued (1,642) - Coupon paid on contingent convertible securities (3,465) - Interest paid on subordinated notes (2,575) (2,575) Net cash from financing activities 23,884 328,648 ----------------------------------------------- ---- --------- --------- Net (decrease) in cash and cash equivalents (38,959) (299,600) Cash and cash equivalents at start of the period 134,019 415,210 Movement during the period (38,959) (299,600) Cash and cash equivalents at end of the period 18 95,060 115,610 ----------------------------------------------- ---- --------- --------- Consolidated statement of changes in equity Share Share Contingent Capital Capital Warrant Available Retained Total capital premium convertible contribution redemption reserve for earnings account securities reserve reserve sale reserve Note GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 Period ended 30 June 2015 As at 1 January 23,737 - 73,657 2 - 2,200 1,375 277,879 378,850 Total comprehensive income - - - - - - (427) 31,241 30,814 Transactions with equity holders: - Capital reorganisation prior to IPO 16 6,263 - - - 173 - - (6,436) - - Share issue proceeds from IPO 16 3,906 71,094 - - - - - - 75,000 - Share issuance costs - (2,703) - - - - - - (2,703) - Issue of free shares to employees 16 18 - - - - - - (18) - - Share based payments, including tax reflected directly in retained earnings 17 - - - - - - - 1,117 1,117 - Coupon paid on contingent convertible securities, net of tax - - - - - - - (2,763) (2,763) As at 30 June 2015 33,924 68,391 73,657 2 173 2,200 948 301,020 480,315 --------------- ---- ------- --------- ----------- ------------ ---------- ------- --------- -------- ------- Period ended 31 December 2014 As at 1 July 23,737 237,305 - 2 - 2,200 1,084 16,055 280,383 Total comprehensive
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income - - - - - - 291 24,190 24,481 Transactions with equity holders: - Reduction in share premium - (237,305) - - - - - 237,305 - - Issuance of contingent convertible securities - - 75,111 - - - - - 75,111 - Issuance costs - - (1,454) - - - - - (1,454) - Share based payments - - - - - - - 329 329 As at 31 December 2014 23,737 - 73,657 2 - 2,200 1,375 277,879 378,850 --------------- ---- ------- --------- ----------- ------------ ---------- ------- --------- -------- ------- Period ended 30 June 2014 As at 1 January 23,737 237,305 - 2 - 2,200 582 1,531 265,357 Total comprehensive income - - - - - - 502 14,244 14,746 Transactions with equity holders: - Share based payments - - - - - - - 280 280 As at 30 June 2014 23,737 237,305 - 2 - 2,200 1,084 16,055 280,383 --------------- ---- ------- --------- ----------- ------------ ---------- ------- --------- -------- -------
During the six month period ended 30 June 2015, the Company completed its initial public offering ('IPO'). The Company also undertook a capital reorganisation in advance of admission to the London Stock Exchange ('LSE'). Further details of both transactions are provided in Note 16.
Notes to the consolidated interim financial statements
1. Accounting policies and presentation (a) Basis of preparation
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 2014 Annual Report and Accounts, which have been prepared in accordance with International Financial Reporting Standards as adopted by the EU ('IFRSs').
The comparative figures for the financial year ended 31 December 2014 are not the Group's statutory accounts for that financial year. The Group's 2014 Annual Report and Accounts have been delivered to the Registrar of Companies in England and Wales in accordance with section 447 of the Companies Act 2006. The auditor has reported on those accounts. Its report was unqualified; did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their 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 26 August 2015.
(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').
The capital position of the Group has been further enhanced during the period as a result of the completion of the Group's IPO.
(d) Accounting policies
The accounting policies are consistent with those applied by the Group in the 2014 Annual Report and Accounts. During the six month period ended 30 June 2015, the accounting policies for share based payments and capital raising costs have been updated to reflect the nature of the share schemes now in force and the specific treatment of IPO costs respectively. The updated policies are as follows:
Share based payments
Employees (including Senior Executives) of the Group may receive remuneration in the form of equity settled share based payment transactions to reward strong long-term business performance and to incentivise growth for the future.
(d) Accounting policies continued
The grant date fair value is recognised as an employee expense with a corresponding increase in equity over the period that the employees become unconditionally entitled to the awards. The grant date fair value is determined using valuation models which take into account the terms and conditions attached to the awards. Inputs into valuation models may include the risk free interest rate, the expected volatility of the Company's share price and other various factors which relate to performance conditions attached to the awards.
The amount recognised as an expense is adjusted to reflect the actual number of awards for which the related service and non-market vesting conditions are expected to be met such that the amount ultimately recognised as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. For share based payment awards with market performance conditions or non-vesting conditions the grant date fair value of the share based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes.
Capital raising costs
Costs directly incremental to the issue of new capital are shown in equity as a deduction from proceeds.
(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 are IFRS 9: 'Financial Instruments', the planned replacement for IAS 39: 'Financial Instruments: Recognition and Measurement' and IFRS 15: 'Revenue from contracts with customers'.
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').
(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 balance sheet 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 2015, gross loans and advances to customers totalled GBP5,457 million (31 December 2014: GBP4,824 million) against which impairment allowances of GBP20 million (31 December 2014: GBP23 million) had 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 2014 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 GBP20 million at 30 June 2015, GBP11 million (31 December 2014: GBP14 million) relates to individual provisions and GBP9 million (31 December 2014: GBP9 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.
Individual
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Individual impairment allowances are established against the Group's individually significant financial assets that are deemed by management to be impaired. The determination of individual impairment allowances requires the exercise of considerable judgement by management 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 and consequently these allowances can be subject to variation as time progresses and the circumstances of the customer become clearer.
Collective
The collective impairment allowance is also subject to estimation uncertainty and in particular is sensitive to changes in economic and credit conditions, including the interdependency of house prices, unemployment rates, interest rates, borrowers' behaviour and consumer bankruptcy trends. All of these factors can influence the key assumptions detailed below. It is, however, inherently difficult to estimate how changes in one or more of these factors might impact the collective impairment allowance.
The key assumptions used in the collective 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 the loans being identified 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. 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 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 'roll 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 'roll 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 GBP1.5 million.
-- A 10 per cent. relative reduction in the scaling factors applied to external data in order to arise at PDs appropriate to the individual nature of lending being undertaken would increase the impairment allowance by GBP0.8 million.
Loss given default:
The model calculates the LGD from the point of repossession. Not all cases that are 3 MIA will reach repossession. Management therefore adjust the model by applying an assumption 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 GBP0.7 million.
The LGD is also sensitive to the application of the House Price Index ('HPI') and Forced Sale Discount ('FSD') 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 GBP1.3 million.
-- A 5 per cent. absolute increase in the FSD would increase the overall impairment provision by GBP1.5 million.
Emergence period:
Management make a judgement, according to the line of business for the underlying loans, on the length of emergence period to apply to the estimated losses expected to be recognised in the next 12 months in order to determine those which are considered as incurred as at the reporting date.
-- A three month increase in all emergence periods would increase the overall impairment allowance by GBP3.8 million.
(b) Effective interest rate
IAS 39 requires interest earned from mortgages to be measured under the EIR method. Management must therefore use judgement to estimate the expected life of each type of instrument and hence the expected cash flows relating to it. The accuracy of the EIR would therefore be affected by unexpected market movements resulting in altered customer behaviour, inaccuracies in the models used compared to actual outcomes and incorrect assumptions.
A critical estimate in determining EIR is the expected life to maturity of the Group's commercial and residential mortgage portfolios, as a change in the estimates will have an impact on the period over which the directly attributable costs and fees, and any discount received on the acquisition of the mortgage loan portfolios, are recognised.
An extension of the estimated expected lives on these portfolios for a period of six months would have the effect of reducing the cumulative profit before tax recognised as at 30 June 2015 by GBP2.6 million (30 June 2014: GBP2.4 million). Included within this sensitivity of GBP2.6 million is a GBP3.0 million cumulative reduction in profits relating to acquired portfolios (30 June 2014: GBP2.9 million) due to a change in the unwind of the discount which is offset by a GBP0.4 million cumulative increase in profits relating to the organic portfolios (30 June 2014: GBP0.5 million).
3. Segmental information
The Group's reportable operating segments are consistent with those disclosed in the 2014 Annual Report and Accounts. Further details regarding the operating segments are available in the 2014 Annual Report and Accounts.
Segmental information for the period ended 30 June 2015 Residential SME Commercial Asset Invoice Central Total Mortgages Mortgages Finance Finance Functions GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 Interest income - external customers 69,929 32,165 36,309 3,797 (3,112) 139,088 Interest expense - external customers - - - - (47,057) (47,057) Interest (expense)/income - internal (25,531) (7,769) (11,090) (1,152) 45,542 - Net fees and other income - external customers 1,707 1,049 2,042 7,544 448 12,790 Total operating income/(expense) 46,105 25,445 27,261 10,189 (4,179) 104,821 ------------------------------ ----------- -------------- --------- -------- ----------- ----------- Administrative expenses including depreciation and amortisation (5,356) (3,765) (5,560) (7,352) (38,064) (60,097) Impairment losses on loans and advances to customers (1,135) (1,214) (2,229) (606) - (5,184) Segmental result 39,614 20,466 19,472 2,231 (42,243) 39,540 ------------------------------ ----------- -------------- --------- -------- ----------- ----------- Tax (8,299) Profit after tax 31,241 Assets 2,930,211 1,139,451 1,196,120 170,476 825,458 6,261,716 Liabilities - - - - (5,781,401) (5,781,401) Net assets/(liabilities) 2,930,211 1,139,451 1,196,120 170,476 (4,955,943) 480,315 ------------------------------ ----------- -------------- --------- -------- ----------- ----------- Segmental information for the period ended 30 June 2014 Residential SME Commercial Asset Invoice Central Total Mortgages Mortgages Finance Finance Functions GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 Interest income - external customers 47,456 25,315 25,410 4,691 897 103,769 Interest expense - external customers - - - - (42,587) (42,587) Interest (expense)/income - internal (20,301) (7,292) (9,215) (1,792) 38,600 - Net fees and other income - external customers 1,507 397 1,506 8,815 449 12,674 Total operating income/(expense) 28,662 18,420 17,701 11,714 (2,641) 73,856 ------------------------------- ----------- -------------- -------- -------- ----------- ----------- Administrative expenses including depreciation and amortisation (4,400) (3,311) (5,475) (7,710) (28,428) (49,324) Impairment losses on loans and advances to customers 198 (2,965) (942) (2,215) - (5,924) Segmental result 24,460 12,144 11,284 1,789 (31,069) 18,608
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------------------------------- ----------- -------------- -------- -------- ----------- ----------- Tax (4,364) Profit after tax 14,244 Assets 2,039,231 894,877 871,119 203,693 752,235 4,761,155 Liabilities - - - - (4,480,772) (4,480,772) Net assets/(liabilities) 2,039,231 894,877 871,119 203,693 (3,728,537) 280,383 ------------------------------- ----------- -------------- -------- -------- ----------- ----------- 4. Interest income Period Period ended ended 30 June 30 June 2015 2014 GBP'000 GBP'000 On financial assets not at fair value through profit or loss: On loans and advances to customers 142,200 103,031 On loans and advances to banks 335 953 On debt securities 4,773 1,843 147,308 105,827 On financial assets at fair value through profit or loss: Net interest expense on financial instruments hedging assets (9,800) (5,389) Net interest income on debt securities designated at fair value 1,580 3,331 139,088 103,769 --------------------------------------- -------- --------
Included within interest income on loans and advances to customers for the six months ended 30 June 2015 is a total of GBP1,653,000 (30 June 2014: GBP791,000) relating to impaired financial advances.
Included within net interest expense on financial instruments hedging assets for the six months ended 30 June 2015 are fair value gains of GBP2,538,000 (30 June 2014: GBP1,473,000) on derivatives held in qualifying fair value hedging arrangements, together with losses of GBP4,652,000 (30 June 2014: GBP1,570,000) representing changes in the fair value of the hedged item attributable to the hedged interest rate risk on loans and advances to customers.
5. Interest expense Period Period ended ended 30 June 30 June 2015 2014 GBP'000 GBP'000 On financial liabilities not at fair value through profit or loss: On customers' accounts 42,582 39,730 On amounts due to banks 1,573 722 On debt securities in issue 1,863 1,072 On subordinated notes 3,202 3,100 49,220 44,624 On financial liabilities at fair value through profit or loss: Net interest income on financial instruments hedging liabilities (2,889) (2,637) Other 726 600 47,057 42,587 --------------------------------------------- -------- --------
Included within net interest income on financial instruments hedging liabilities for the six months ended 30 June 2015 are fair value gains of GBP1,882,000 (30 June 2014: GBP1,592,000) on derivatives held in qualifying fair value hedging arrangements, together with losses of GBP2,571,000 (30 June 2014: GBP1,617,000) representing changes in the fair value of the hedged item attributable to the hedged interest rate risk on customers' accounts.
6. Fee and commission income Period Period ended ended 30 June 30 June 2015 2014 GBP'000 GBP'000 Invoice finance fees 6,085 7,410 Insurance commissions receivable 177 547 Other 6,321 4,744 12,583 12,701 ----------------------------------- -------- --------
Other fee and commission income includes fees charged for valuations, documentation, mortgage services and arrears.
7. Fee and commission expense Period Period ended ended 30 June 30 June 2015 2014 GBP'000 GBP'000 Introducer commissions 834 1,085 Legal and valuation fees 1,342 1,336 Company searches and other fees 989 966 Credit protection and insurance charges 519 581 Insurance commissions payable 73 413 3,757 4,381 ------------------------------------ -------- -------- 8. Net (expense)/income from derivatives Period Period and other financial instruments ended ended at fair value through profit or 30 June 30 June loss 2015 2014 GBP'000 GBP'000 Net gains/(losses) on derivatives 5,959 (728) Net (losses)/gains on assets designated at fair value through profit or loss (177) 1,548 Net losses on available for sale assets held in fair value hedges (7,799) (428) (2,017) 392 ----------------------------------------------- -------- -------- 9. Other operating income Period Period ended ended 30 June 30 June 2015 2014 GBP'000 GBP'000 Disbursements, collect out and other invoice finance income 3,269 3,561 Other 246 165 3,515 3,726 -------------------------------- -------- -------- 10. Administrative expenses Note Period Period ended ended 30 June 30 June 2015 2014 GBP'000 GBP'000 Staff costs 29,720 22,369 Legal and professional and other services 13,012 10,798 Information technology costs 3,770 3,467 Office costs 2,250 1,974 Provisions 14 2,186 2,738 Other 6,967 6,189 57,905 47,535 ---------------------------------- ---- -------- --------
Included in other administrative expenses are costs relating to temporary staff of GBP3,433,000 (30 June 2014: GBP2,151,000), travel and subsistence of GBP1,368,000 (30 June 2014: GBP1,365,000) and staff recruitment of GBP647,000 (30 June 2014: GBP1,425,000).
Costs associated with the IPO
Included within administrative expenses for the six months ended 30 June 2015 is GBP4.1 million (30 June 2014: GBP2.2 million) of non-recurring costs associated with the IPO. The GBP4.1 million consists of GBP0.4 million for a one-off share award to employees and GBP3.7 million for fees associated with listing.
Incremental costs directly attributable to the issuance of capital, including advisory and underwriting fees, have been charged directly to equity. Other costs associated with the listing have been allocated between administrative expenses and equity, based on the proportion of primary shares issued compared to the total number of shares. Total costs associated with the listing for the six months ended 30 June 2015 are GBP6.8 million, comprising GBP4.1 million charged to the income statement and GBP2.7 million charged to equity.
11. Taxation Period Period ended ended 30 June 30 June 2015 2014 GBP'000 GBP'000 Current tax on profits for the period 9,387 5,406 Deferred tax (1,088) (1,042) 8,299 4,364 ------------------------------- -------- --------
The deferred tax asset at 30 June 2015 of GBP7.9 million has been calculated based on the rate of 20% substantively enacted at the balance sheet date, and relates largely to temporary differences between capital allowances and depreciation.
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Reductions in the UK corporation tax rate from 23% to 21% (effective from 1 April 2014) and 20% (effective from 1 April 2015) were substantively enacted on 2 July 2013. In the Budget on 8 July 2015, the Chancellor announced additional planned reductions to 19% with effect from 1 April 2017 and to 18% with effect from 1 April 2020. In addition, the Chancellor announced the introduction of a corporation tax surcharge applicable to banking companies with effect from 1 January 2016. The surcharge will be levied at a rate of 8% on the profits of banking companies chargeable to corporation tax after an allowance of GBP25 million per annum. These changes will result in an overall increase in the Group's tax charge for years commencing from 1 January 2016.
It is expected that the changes outlined in the 8 July 2015 Budget will be substantively enacted in the second half of 2015. Accordingly the 2015 year end deferred tax balance will be provided for at the revised substantively enacted rates that are expected to apply when deferred tax assets are realised or deferred tax liabilities are settled. The estimated impact of this change will be to increase the net deferred tax asset recognised as at 30 June 2015 by GBP2.1 million, with a corresponding reduction to the tax charge recognised in the income statement.
12. Earnings per share
Basic earnings per share ('EPS') 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 30 ended June 2015 30 June 2014 Profit after taxation - attributable to equity holders of the Group (GBP'000) 31,241 14,244 Coupon paid on contingent convertible securities, net of tax (GBP'000) (2,763) - Profit attributable to ordinary shareholders of the Group (GBP'000) 28,478 14,244 --------------------------------------- ---------- ---------- Weighted average number of ordinary shares in issue (thousand) 322,075 296,178 Basic earnings per share (pence) 8.8 4.8 ------------------------------------------ ---------- ----------
The ordinary shares in issue used in the denominator in the calculation of basic earnings per share are the ordinary shares of the Company since the share reorganisation that occurred prior to the Company's admission to the LSE. Further details of the share reorganisation are provided in Note 16. Prior to that date the ordinary shares in issue figure was based on the A1, A2, D and E ordinary shares in issue. The B and C ordinary shares were excluded from the calculation on the basis that they had no entitlement to dividends or other distributions of the Company.
The calculation of basic and diluted EPS in the prior period has been restated to reflect the impact of the bonus share issue that was made to existing shareholders as part of the share reorganisation that occurred prior to the Company's admission to the LSE.
The calculation of diluted earnings per share has been based on the net profit attributable to ordinary shareholders of the Group as for basic earnings, the weighted average number of ordinary shares outstanding after the potential dilutive effect of outstanding share warrants (issued with the subordinated debt in May 2012) and share based payment awards to Directors and employees. The share warrants give the holders the right to subscribe for 3,668,110 ordinary shares at a price of GBP0.89 per share and a further 1,834,054 ordinary shares at a price of GBP1.23 per ordinary share, and are exercisable until 31 May 2022.
Period Period ended 30 ended June 2015 30 June 2014 Weighted average number of ordinary shares in issue (thousand) (basic) 322,075 296,178 Effect of share warrants in issue 3,084 2,878 Effect of outstanding share based payment awards 1,500 - ------------------------------------------- ---------- ------- Weighted average number of ordinary shares in issue (thousand) (diluted) 326,659 299,056 Diluted earnings per share (pence) 8.7 4.8 ------------------------------------------- ---------- ------- 13. Loans and advances to customers 30 June 31 December 2015 2014 GBP'000 GBP'000 Gross loans and advances 5,456,583 4,823,638 less: allowance for impairment losses (20,325) (22,574) 5,436,258 4,801,064 ------------------------------------------ --------- ----------- Amounts include: Expected to be recovered more than 12 months after the reporting date 4,748,755 4,205,825 ----------------------------------------------- --------- -----------
At 30 June 2015, loans and advances to customers of GBP1,599.3 million (31 December 2014: GBP719.9 million) were pre-positioned with the Bank of England and HM Treasury Funding for Lending Scheme. These loans and advances were available for use as collateral with the Scheme, against which GBP710.0 million of UK Treasury Bills had been drawn as at the reporting date (31 December 2014: GBP485.0 million).
At 30 June 2015, loans and advances to customers include GBP253.6 million (31 December 2014: GBP293.1 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 retained 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 GBP'000 GBP'000 GBP'000 Six months ended 30 June 2015 Balance as at 1 January 14,047 8,527 22,574 Impairment loss for the period: Charge to the income statement 3,499 1,685 5,184 Unwind of discounting (897) (756) (1,653) Write-offs, net of recoveries (5,780) - (5,780) Balance as at 30 June 2015 10,869 9,456 20,325 ------------------------------------- ---------- ---------- ------- Six months ended 31 December 2014 Balance as at 1 July 17,575 7,512 25,087 Impairment loss for the period: Charge to the income statement 2,059 1,587 3,646 Unwind of discounting (646) (572) (1,218) Write-offs, net of recoveries (4,941) - (4,941) Balance as at 31 December 2014 14,047 8,527 22,574 ------------------------------------- ---------- ---------- ------- Six months ended 30 June 2014 Balance as at 1 January 14,714 6,314 21,028 Impairment loss for the period: Charge to the income statement 4,314 1,610 5,924 Unwind of discounting (379) (412) (791) Write-offs, net of recoveries (1,074) - (1,074) Balance as at 30 June 2014 17,575 7,512 25,087 ------------------------------------- ---------- ---------- ------- 14. Provisions Financial Customer Total Services redress Compensation Scheme GBP'000 GBP'000 GBP'000 Six months ended 30 June 2015 Balance as at 1 January 2015 1,230 778 2,008 Utilised during the period - (929) (929) Provided/(released) during the period 2,035 151 2,186 Balance as at 30 June 2015 3,265 - 3,265 -------------------------------- ------------- -------- ------- Six months ended 31 December 2014 Balance as at 1 July 2014 3,289 - 3,289 Utilised during the period (2,083) (65) (2,148) Provided during the period 24 843 867 Balance as at 31 December 2014 1,230 778 2,008 -------------------------------- ------------- -------- ------- Six months ended 30 June 2014 Balance as at 1 January 2014 707 450 1,157 Utilised during the period - (606) (606) Provided during the period 2,582 156 2,738 Balance as at 30 June 2014 3,289 - 3,289 -------------------------------- ------------- -------- -------
Financial Services Compensation Scheme ('FSCS')
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In common with all regulated UK deposit takers, the Group pays levies to the FSCS to enable the FSCS to meet claims against it. The FSCS provision at 30 June 2015 of GBP3,265,000 (31 December 2014: GBP1,230,000) represents interest levies for scheme years 2014/2015 and 2015/2016 of GBP1,090,000 and GBP1,062,000, respectively, the estimated capital levy for scheme year 2015/2016 of GBP1,050,000, and management expenses levy for the scheme year 2015/2016 of GBP63,000.
Customer redress
The Group has a small number of loans which are regulated under the Consumer Credit Act ('CCA') and has identified that, following changes to the CCA in 2008, certain letters and statements have been sent to customers that do not fully comply with the requirements prescribed by the CCA. Accordingly, these customers are entitled to redress for interest and fees charged on the relevant loans as a result of this technical non-compliance, notwithstanding there is unlikely to have been any customer detriment. During the year ended 31 December 2014 a provision of GBP999,000 was recorded in relation to CCA non-compliance. A further provision of GBP151,000 has been recorded in the six months ended 30 June 2015. Remediation payments to customers impacted has been completed during the period.
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 2015 2014 GBP'000 GBP'000 In more than one year 238,630 279,143 ------------------------------- -------- ------------
Debt securities in issue with a principal value of GBP239.7 million (31 December 2014: GBP280.5 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. Further disclosure relating to the underlying assets is contained in Note 13.
16. Share capital 31 December 30 June 2014 2015 GBP GBP Type Ordinary shares of GBP0.10 each 33,923,742 - A1 ordinary shares of GBP0.10 each - 3,569,400 A2 ordinary shares of GBP0.10 each - 5,870,427 B ordinary shares of GBP0.10 each - 385,463 C ordinary shares of GBP0.0001 each - 13,200 D ordinary shares of GBP0.10 each - 5,440,522 E ordinary shares of GBP0.10 each - 8,458,428 33,923,742 23,737,440 ------------------------------- ---------- -----------
On 13 March 2015, the Company reorganised its share capital in preparation for listing on the LSE. The restructuring can be summarised as follows:
-- 1,025,586 A1 ordinary shares, 131,593,114 C ordinary shares and 568,253 E ordinary shares were re-designated as deferred shares.
-- 406,886 C ordinary shares (nominal value of GBP0.0999 per share) were issued and allotted to C ordinary shareholders on a pro-rata basis by way of bonus issue using distributable reserves, resulting in an increase of GBP40,648 in share capital.
-- Each C ordinary share with a nominal value of GBP0.0999 was consolidated with a C ordinary share with a nominal value of GBP0.0001, resulting in 406,886 C ordinary shares with a nominal value of GBP0.10 each being in issue.
-- The following shares were re-designated as ordinary shares: 34,668,414 A1 ordinary shares, 58,704,268 A2 ordinary shares, 3,854,632 B ordinary shares, 406,886 C ordinary shares, 54,405,224 D ordinary shares, and 84,016,023 E ordinary shares.
-- 63,944,554 ordinary shares were issued and allotted on a pro-rata basis to all shareholders (excluding holders of deferred shares) by way of bonus issue using distributable reserves, resulting in an increase of GBP6,394,455 in share capital.
-- The Company bought back 133,186,953 deferred shares for an aggregate price of GBP1 using distributable reserves. This resulted in the creation of a capital redemption reserve of GBP172,543 and a reduction in the Company's share capital of the same amount.
Following the reorganisation, 117,934,783 ordinary shares of GBP0.10 each were issued in the IPO at a price of GBP1.92 per share. Of the 117,934,783 shares in the offer, 78,872,283 were sold by the selling shareholders, with the remaining 39,062,500 being issued by the Company, resulting in an increase in share capital of GBP3,906,250 and share premium account of GBP71,093,750.
Ordinary shares have full voting rights, dividend rights and distribution rights in the event of sale or wind up.
At 13 March 2015, after completion of the IPO, there were 339,062,500 shares in circulation.
Following the listing, the Company granted 174,920 shares to eligible employees as free share awards under the Share Incentive Plan ('SIP'). Further details regarding the SIP are provided in Note 17. The shares vested on 17 April 2015 resulting in an increase of GBP17,492 in share capital and a reduction in retained earnings of the same amount.
At 30 June 2015, there were 339,237,420 ordinary GBP0.10 shares in circulation resulting in share capital of GBP33,923,742.
17. Share based payments
The Group implemented a number of new share schemes during the period as described below:
Plan Eligible Nature of Vesting conditions Grant Employees award date --------------- ----------------- --------------- ----------------------- -------- A) Performance Selected Conditional Continuing employment 2 March Share Plan senior employees share award or leavers in 2015 certain limited circumstances and achievement of earnings per share and total shareholder return performance conditions --------------- ----------------- --------------- ----------------------- -------- B) Pre IPO award Selected Conditional Continuing employment 2 March under the senior employees share award or leavers in 2015 Performance certain limited Share Plan circumstances and achievement of total shareholder return based performance conditions --------------- ----------------- --------------- ----------------------- -------- C) Restricted Selected Conditional Continuing employment 2 March Share Plan senior employees share award or leavers in 2015 certain limited circumstances --------------- ----------------- --------------- ----------------------- -------- D) Share Incentive All employees Non-conditional Employment at 17 April Plan share award date of grant 2015 --------------- ----------------- --------------- ----------------------- --------
Further details of each of the schemes are provided below.
A) Performance Share Plan
The Performance Share Plan ('PSP') is open to senior employees including the Executive team. The grant date of awards was 2 March 2015, with individuals being required to remain in employment until 2 March 2018. The awards are subject to a two year holding period which ends on 2 March 2020 and are exercisable between that date and 1 March 2025.
Awards under the PSP are subject to performance conditions. Performance conditions are set by the Remuneration Committee each time awards are granted and determine the extent to which awards can become available to individuals.
The performance conditions for these first awards relate to the growth in Total Shareholder Return ('TSR') for the period to 31 December 2017, measured from the date of admission to the LSE (13 March 2015) for 50% of each award and Earnings per share ('EPS') performance for the year ended 31 December 2017 for the remaining 50% of each award. The outcome of the performance conditions, as assessed by the Remuneration Committee, will determine the vesting outcome of the awards and the shares available for exercise.
In addition, there are 'underpin' performance conditions which must be met, including in relation to the TSR element of the award. The value of the TSR achieved, over the performance period, must be equal to or greater than the TSR of the median company of FTSE 350 companies, excluding Investment Trusts.
B) Pre IPO award under the PSP
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The Pre IPO awards were granted to individuals, as a one-off reward to those who contributed significantly to the development of the Group in the build-up to its IPO. The awards were granted to a number of senior employees, including the Executive team.
The grant date of the awards was 2 March 2015. The awards are subject to performance conditions which must be satisfied in order for individuals to be entitled to receive the shares awarded. If the performance conditions are achieved the awards will vest on 31 December 2016.
The performance conditions relate to growth in TSR for the period to 31 December 2016, measured from the date of admission to the LSE (13 March 2015). The outcome of the performance conditions determine the extent to which shares awarded become available to individual participants. Similar 'underpin' performance conditions apply to the awards as those in the PSP (see A above), including the TSR condition based on a median of FTSE 350 companies excluding Investment Trusts.
C) Restricted Share Plan
The Restricted Share Plan ('RSP') is open to a small number of senior employees. The grant date of awards was 2 March 2015, with individuals being required to remain in employment until 2 March 2018. The awards are subject to a two year holding period which ends on 2 March 2020 and are exercisable between that date and 1 March 2025.
There are no financial performance conditions attached to the awards under the RSP.
D) Share Incentive Plan
All employees are eligible to participate in the Share Incentive Plan ('SIP'). An award of 'free shares' was granted under the SIP on 17 April 2015. Each eligible employee received shares worth GBP200, with an additional GBP200 for each year of service up to a maximum award of GBP1,000. The shares are subject to a minimum holding period of the shorter of three years from their award date or the date to when the employee ceases to be employed. There are no performance conditions associated with the share awards.
Awards granted, forfeited and vested
The table below details the number of awards granted, forfeited and vested during the period, the number outstanding as at 30 June 2015 and the average fair values at grant date of the awards made during the period:
Plan Awards Awards Awards Awards Average Total granted forfeited vested outstanding fair fair value at 30 value to be June per recognised 2015 award over the at grant vesting date period (rounded) ----------------- ---------- ----------- ---------- ------------- ----------- ------------ Number Number Number Number GBP GBP'000 ----------------- ---------- ----------- ---------- ------------- ----------- ------------ Performance Share Plan 1,537,822 (54,360) - 1,483,462 1.13 1,676 ----------------- ---------- ----------- ---------- ------------- ----------- ------------ Pre IPO award under the PSP 7,549,101 (115,092) - 7,434,009 0.31 2,305 ----------------- ---------- ----------- ---------- ------------- ----------- ------------ Restricted Share Plan 105,753 - - 105,753 1.92 203 ----------------- ---------- ----------- ---------- ------------- ----------- ------------ Share Incentive Plan 174,920 - (174,920) - 2.41 422 ----------------- ---------- ----------- ---------- ------------- ----------- ------------
The B, C and E ordinary shares granted to employees in previous periods were included in the reorganisation of the Company's share capital which took place on 13 March 2015 in preparation for the Company's listing on the LSE. Of the 132 million C ordinary shares granted to employees, 113,593,114 were converted to deferred shares on 13 March 2015, which the Company repurchased for total consideration of GBP1 and the remaining C shares were converted into ordinary shares on the same date.
Determination of grant date fair values
Share awards are not entitled to dividends until the awards vest, but the number of shares subject to vested PSP and RSP awards may be increased to reflect the value of dividends that would have been paid up to the end of the holding period for the awards. This is designed to deliver a benefit similar to that which ordinary shareholders may receive in respect of any dividends paid during the vesting period. Accordingly, the grant date fair value of the awards with no performance conditions other than service conditions has been taken as the market value of the Company's ordinary shares at the grant date.
In respect of awards for which there are non-market performance conditions (e.g. EPS), the grant date fair value per award has been taken as the market value of an ordinary share at the grant date. A forecast is made of the number of awards expected to vest in order to determine the overall share based payment charge to be recognised over the vesting period.
In respect of awards for which there are market performance conditions (e.g. TSR), the grant date fair value of each award is required to reflect the likelihood of achieving the market conditions within the valuation. For the awards concerned, the grant date fair values for each award were determined using stochastic simulation models with the following significant inputs:
Pre IPO PSP ----------------------- ----------- ----------- Ordinary share GBP1.92 GBP1.92 price ----------------------- ----------- ----------- Risk free rate 0.59% 0.90% p.a. p.a. ----------------------- ----------- ----------- Probability Log normal Log normal distributions of TSRs for Aldermore and the median FTSE 350 (excluding Investment Trust companies) ----------------------- ----------- ----------- Annual volatility (of logarithm of TSR) for Aldermore share price (based on recently floated banks) 24% 24% ----------------------- ----------- ----------- Annual volatility (of logarithm of TSR) for median of FTSE 350 (excluding Investment Trust companies) (based on 5 years data) 15% 15% ----------------------- ----------- ----------- Correlation None None between volatilities ----------------------- ----------- -----------
The share based payment charge for the six months ended 30 June 2015 totalled GBP1,046,000 (six months ended 30 June 2014: GBP280,000). In addition, there was a tax credit of GBP71,000 (six months ended 30 June 2014: GBPnil) reflected directly in retained earnings.
18. Statement of cash flows
(a) Adjustments for non-cash items and other adjustments included within the income statement Period Period ended ended 30 June 30 June 2015 2014 GBP'000 GBP'000 Depreciation and amortisation 2,192 1,789 Amortisation of securitisation issuance cost 263 139 Discount accretion on subordinated notes 648 546 Impairment losses on loans and advances 5,184 5,924 Unwind of discounting (1,653) (791) Write off net of recoveries (5,780) (1,074) Net loss/(gain) on debt securities designated at fair value through profit or loss 177 (1,548) Net gain on disposal of available for sale debt securities (2,466) (236) Net losses on available for sale assets held in fair value hedges 7,799 428 Interest expense on subordinated notes 2,554 2,554 Interest income on debt securities (6,353) (5,174) Interest expense on debt securities in issue 1,596 933 Equity settled share based payment charge 1,046 280 5,207 3,770 ----------------------------------------- -------- -------- (b) Increase in operating assets Period Period ended ended 30 June 30 June 2015 2014 GBP'000 GBP'000 Loans and advances to customers (632,945) (639,135) Loans and advances to banks 15,858 (18,143) Derivative financial instruments (803) (714) Fair value adjustments for portfolio hedged risk 4,652 1,570 Other operating assets 1,817 (2,587) (611,421) (659,009)
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------------------------------------- --------- --------- (c) Increase in operating liabilities Period Period ended ended 30 June 30 June 2015 2014 GBP'000 GBP'000 Amounts due to banks 144,535 (193,798) Customers' accounts 508,378 394,515 Derivative financial instruments (16,250) 7,842 Fair value adjustments for portfolio hedged risk (2,571) (1,592) Other operating liabilities 248 879 634,340 207,846 -------------------------------------- -------- --------- (d) Cash and cash equivalents Period Period ended ended 30 June 30 June 2015 2014 GBP'000 GBP'000 Cash and balances at central banks 36,591 30,768 Less excluded balances (6,618) (4,989) Loans and advances to banks 65,087 89,831 95,060 115,610 ------------------------------ -------- --------
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. Excluded balances comprise minimum balances required to be held at the Bank of England as they are not readily convertible to cash in hand or demand deposits.
19. Commitments and contingencies
As at 30 June 2015 the Group has undrawn commitments to lend of GBP515.8 million (31 December 2014: GBP404.6 million). These relate mostly to irrevocable commitments to lend 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, including the Consumer Credit Act, 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.
Working Time Directive:
A recent ruling by the European Court of Justice indicated that under the European Working Time Directive, 'normal pay' for the purposes of calculating statutory holiday pay, includes contractual commission rather than being limited to basic salary. A UK Employment Tribunal is now considering the implications for UK employers under the Working Time Regulations 1998.
Meanwhile, the UK Employment Tribunal has ruled that non--guaranteed overtime payments should be included for the purposes of calculating how much holiday pay a worker should receive. It is therefore expected that the UK Employment Tribunal will conclude on a similar basis for certain commissions.
Based on information and advice to date, the Group does not expect the impact of either the non-guaranteed overtime payments or commissions to be material; however, in the event that analysis, judgements and/or appeals are determined to ultimately be different, the Group expects the likely impact to be immaterial.
20. Related parties
Related party transactions and transactions with key management personnel in the six month period to 30 June 2015 are similar in nature to those for the year ended 31 December 2014. Details of those transactions can be found in the Group's 2014 Annual Report and Accounts.
Significant changes to those relationships and transactions are as follows:
(a) Controlling parties
The Group was previously controlled by AnaCap Financial Partners, II L.P. (52.3 per cent. of voting rights) and AnaCap Financial Partners, L.P. (47.7 per cent. of voting rights) who were the sole voting shareholders of Aldermore Group PLC.
On 13 March 2015, the Company was admitted to the LSE, offering 117,934,783 Ordinary shares, of which 78,872,283 shares were sold by the selling shareholders.
At 30 June 2015, AnaCap Financial Partners L.P., AnaCap Financial Partners II L.P., AnaCap Derby Co-Investment (No.1.) L.P. and AnaCap Derby Co-Investment (No.2.) L.P (collectively: the 'Principal Shareholders') held 11.0 per cent, 14.5 per cent, 14.8 per cent and 12.6 per cent of the Company's ordinary share capital respectively. Upon admission, the Principal Shareholders and the Company entered into the 'Relationship agreement'. Details of the Relationship agreement were provided within the Prospectus issued prior to the admission to the LSE.
b) Key management personnel
Transactions with key management personnel ('KMP') remain consistent with those disclosed at 31 December 2014. KMP at 30 June 2015 continue to comprise Directors of the Group and members of the Executive Committee.
There were a number of new transactions which occurred during the six month period ended 30 June 2015. These transactions are described below:
Share Based Payments ('SBP')
As at 31 December 2014, certain KMP held a number of shares in the B, C and E classes. In preparation for the IPO, the rights to these shares were varied and the holdings re-designated.
A number of KMP were awarded shares in the Group under new share incentive plans created upon IPO. In total, KMP were granted awards over 5,938,906 shares. Further details of the share schemes, including performance conditions are provided in Note 17.
Loan forgiveness
Upon admission to the LSE, the Company forgave loans which KMP owed to the Company totalling GBP162,000. A number of KMP continue to have loans and deposits in the ordinary course of business with the Group.
21. Financial instruments and fair values
The following table summarises the classification and carrying amounts of the Group's financial assets and liabilities:
Loans Available Designated Fair Fair Liabilities Total and receivables for at fair value value at amortised sale value through hedges cost through profit profit or loss or loss (required) 30 June 2015 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 Cash and balances at central banks 36,591 - - - - - 36,591 Loans and advances to banks 106,259 - - - - - 106,259 Debt securities - 584,240 45,651 - - - 629,891 Derivatives held for risk management - - - 8,971 - - 8,971 Fair value adjustments for portfolio hedged risk - - - - 2,523 - 2,523 Loans and advances to customers 5,436,258 - - - - - 5,436,258 Other assets 781 - - - - - 781 Total financial assets 5,579,889 584,240 45,651 8,971 2,523 - 6,221,274 ----------------- ---------------- --------- ---------- ----------- ------- ------------- --------- Non-financial assets 40,442 Total assets 6,261,716 ----------------- ---------------- --------- ---------- ----------- ------- ------------- --------- Amount due to banks - - - - - 450,442 450,442 Customers' accounts - - - - - 4,967,340 4,967,340 Derivatives held for risk management - - - 37,948 - - 37,948 Fair value adjustment for portfolio hedged risk - - - - (1,043) - (1,043) Other liabilities - - - - - 16,640 16,640 Debt securities in issue - - - - - 238,630 238,630 Subordinated notes - - - - - 37,385 37,385 Total financial liabilities - - - 37,948 (1,043) 5,710,437 5,747,342 ----------------- ---------------- --------- ---------- ----------- ------- ------------- --------- Non-financial liabilities 34,059 Total liabilities 5,781,401 ----------------- ---------------- --------- ---------- ----------- ------- ------------- --------- Loans Available Designated Fair Fair Liabilities Total and receivables for at fair value value at amortised sale value through hedges cost
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through profit profit or loss or loss (required) 31 December GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 2014 Cash and balances at central banks 79,567 - - - - - 79,567 Loans and advances to banks 117,401 - - - - - 117,401 Debt securities - 355,328 154,356 - - - 509,684 Derivatives held for risk management - - - 8,168 - - 8,168 Fair value adjustments for portfolio hedged risk - - - - 7,175 - 7,175 Loans and advances to customers 4,801,064 - - - - - 4,801,064 Other assets 1,298 - - - - - 1,298 Total financial assets 4,999,330 355,328 154,356 8,168 7,175 - 5,524,357 ----------------- ---------------- --------- ---------- ----------- ------- ------------- --------- Non-financial assets 40,886 Total assets 5,565,243 ----------------- ---------------- --------- ---------- ----------- ------- ------------- --------- Amount due to banks - - - - - 305,907 305,907 Customers' accounts - - - - - 4,458,962 4,458,962 Derivatives held for risk management - - - 54,198 - - 54,198 Fair value adjustment for portfolio hedged risk - - - - 1,528 - 1,528 Other liabilities - - - - - 14,778 14,778 Debt securities in issue - - - - - 279,143 279,143 Subordinated notes - - - - - 36,758 36,758 Total financial liabilities - - - 54,198 1,528 5,095,548 5,151,274 ----------------- ---------------- --------- ---------- ----------- ------- ------------- --------- Non-financial liabilities 35,119 Total liabilities 5,186,393 ----------------- ---------------- --------- ---------- ----------- ------- ------------- ---------
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. As a wide range of valuation techniques are available, it may be inappropriate to compare this fair value information to that of independent market or other financial institutions.
30 June 2015 31 December 2014 Carrying Fair value Carrying Fair value value value GBP'000 GBP'000 GBP'000 GBP'000 Cash and balances at central banks 36,591 36,591 79,567 79,567 Loans and advances to banks 106,259 106,259 117,401 117,401 Loans and advances to customers* 5,436,258 5,490,545 4,801,064 4,830,974 Other assets 781 781 1,298 1,298 Total financial assets 5,579,889 5,634,176 4,999,330 5,029,240 ----------------------------- --------- ---------- --------- ---------- Amounts due to banks 450,442 450,442 305,907 305,907 Customers' accounts 4,967,340 4,982,007 4,458,962 4,469,413 Other liabilities 16,640 16,640 14,778 14,778 Debt securities in issue 238,630 241,002 279,143 281,281 Subordinated notes 37,385 46,525 36,758 47,930 Total financial liabilities 5,710,437 5,736,616 5,095,548 5,119,309 ----------------------------- --------- ---------- --------- ----------
*During the period the methodology used to calculate the fair value of loans and advances to customers has been enhanced based on more granular discounted cash flow calculations. Accordingly, the 31 December 2014 comparatives have been represented on this basis.
Key considerations in the calculation of the disclosed fair values for those financial assets and liabilities carried at amortised cost include the following:
(a) Cash and balances at central banks
These represent amounts with an initial maturity of less than three months and as such their carrying value is considered a reasonable approximation of their fair value.
(b) Loans and advances to banks
These represent either amounts with an initial maturity of less than three months or longer term variable rate deposits placed with banks, where adjustments to fair value in respect of the credit risk of the counterparty are not considered necessary. Accordingly the carrying value of the assets is considered to be not materially different from their fair value.
(c) Loans and advances to customers
For fixed rate lending products the Group has estimated the fair value of the fixed rate interest cash flows by discounting those cash flows by the current appropriate market reference rate used for pricing equivalent products plus the credit spread attributable to the borrower. For standard variable rate lending products, and fixed rate products when they revert to the Group's standard variable rate, the interest rate on such products is considered equivalent to a current market product rate and as such the Group considers the discounted future cash flows of these mortgages to be equal to their carrying value. The fair value estimations do not incorporate adjustments for future credit risk, however, incurred loss provisions are deducted from the fair value amounts.
(d) Other assets and liabilities
These represent short term receivables and payables and as such their carrying value is not considered to be materially different from their fair value.
(e) Amounts due to banks
These mainly represent securities sold under agreements to repurchase which were drawn down from the Bank of England under the terms of the Funding for Lending Scheme. Transactions are collateralised by UK Government Treasury Bills, which have a low susceptibility to credit risk, so adjustments to fair value in respect of the credit risk of the counterparty are not considered necessary. Accordingly the carrying value of the liabilities are not considered to be materially different from their fair value.
(f) Customers' accounts
The fair value of fixed rate customers' accounts have been determined by discounting estimated future cash flows based on rates currently offered by the Group for equivalent deposits. Customers' accounts at variable rates are at current market rates and therefore the Group regards the fair value to be equal to the carrying value. The estimated fair value of deposits with no stated maturity is the amount repayable on demand.
(g) Debt securities in issue
Where securities are actively traded in a recognised market, with readily available and quoted prices, these have been used to value the securities. These securities are therefore regarded as having Level 1 fair values.
(h) Subordinated notes
The estimated fair value of the subordinated notes is based on discounted cash flows using interest rates for similar liabilities with the same remaining maturity, credit ranking and rating. The calculated fair value takes no account of the warrants issued separately to the holders of the subordinated notes, which have been separately accounted for as a capital contribution within equity on issue.
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:
30 June 2015 Level Level Level Total 1 2 3 GBP'000 GBP'000 GBP'000 GBP'000 Financial assets: Derivatives held for risk management - 8,971 - 8,971 Debt securities: Asset backed securities - 76,151 - 76,151 UK Gilts and Supranational bonds 431,493 - - 431,493 Corporate bonds 122,247 - - 122,247 553,740 85,122 - 638,862 ------------------------------------- ------- ------- ------- ------- Financial liabilities: Derivatives held for risk management - 37,948 - 37,948 - 37,948 - 37,948
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------------------------------------- ------- ------- ------- ------- 31 December 2014 Level Level Level Total 1 2 3 GBP'000 GBP'000 GBP'000 GBP'000 Financial assets: Derivatives held for risk management - 8,168 - 8,168 Debt securities: Asset backed securities - 16,328 - 16,328 UK Gilts and Supranational bonds 468,840 - - 468,840 Corporate bonds 24,516 - - 24,516 493,356 24,496 - 517,852 ------------------------------------- ------- ------- ------- ------- Financial liabilities: Derivatives held for risk management - 54,198 - 54,198 - 54,198 - 54,198 ------------------------------------- ------- ------- ------- ------- 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, Supranational and Corporate Bonds are based on quoted bid prices in active markets.
The fair value of asset backed securities are based on prices provided by third party pricing services, 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.
The fair values of derivative assets and liabilities are determined using widely recognised valuation methods for determining the fair values of common derivative financial instruments such as interest rate swaps that used only observable market data that require little management judgement and estimation. Credit value and debt 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 2014 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 2014.
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 Carrying Fair value Fair value Net amount amount of transferred of associated position of transferred of associated assets liabilities assets liabilities not derecognised not derecognised GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 Oak No. 1 Plc 253,624 238,630 259,149 241,002 18,147 --------------- ----------------- -------------- ----------------- -------------- ---------
22. Risk management
A key component of the Group's business strategy is the effective management of risk in order to ensure that the Group runs a sustainable, safe and sound bank that conducts its activities in a prudent and reputable manner, taking in account the interests of customers and also ensuring our obligations to key stakeholders are met.
The Group manages its risks under the Group's Risk Management Framework ('RMF'). Further details of the RMF, the principal risks and the way in which the Group manages these risks are available in the Group's 2014 Annual Report and Accounts.
There have been no significant changes to the principal risks faced by the Group. The principal risks are strategic risk, credit risk, capital risk, liquidity risk, interest rate risk, market risk, operational risk and conduct risk.
The Group's RMF, policies and procedures are subject to ongoing improvement and are regularly reviewed and updated to ensure that they accurately identify the risks that the Group faces in its business activities.
During the six month period ended 30 June 2015, the Board has developed and updated its Risk Appetite Framework ('RAF') and risk appetite statements to reflect a more holistic forward looking approach. The risk appetite statements define clearly in advance, the level and types of risk which the Group is willing and able to accept in pursuit of business objectives and plans, taking due account of obligations to key stakeholders and the Group's risk capacity.
The RAF seeks to demonstrate, amongst other things, a comprehensive understanding of the key dependencies and risks faced in pursuing the Group's strategic and commercial objectives and is directly aligned to the corporate plan. The RAF has been developed to encompass a holistic view of risk which covers prudential, credit, operational and conduct risk dimensions. Based on the Group's corporate plan, objectives, risk strategy and risk choices, the Board sets the Group's overarching risk appetite. The overarching risk appetite is used to define and structure more detailed key risk appetite limits which are supported by bottom up risk metrics and limits which specifically address each principal risk.
The following sections provide an overview of the Group's exposure to credit, liquidity, market and interest rate risk:
(a) Credit risk
Credit risk is the risk of financial loss arising from a borrower or counterparty failing to meet their financial obligations to the Group in accordance with agreed terms. This risk arises from the Group's lending activities as a result of defaulting mortgage, lease and loan contracts and is the most significant risk faced by the Group.
The following table presents the Group's 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.
30 June 31 December 2015 2014 GBP'000 GBP'000 Included in the statement of financial position: Cash and balances at central banks 36,591 79,567 Loans and advances to banks 106,259 117,401 Debt securities 629,891 509,684 Derivatives held for risk management 8,971 8,168 Loans and advances to customers 5,456,583 4,823,638 Other assets 781 1,298 6,239,076 5,539,756 Commitments to lend 515,800 404,593 ------------------------------------- --------- ----------- Gross credit risk exposure 6,754,876 5,944,349 ------------------------------------- --------- ----------- Less: allowance for impairment losses (20,325) (22,574) Net credit risk exposure 6,734,551 5,921,775 ------------------------------------- --------- ----------- i. Impaired and past due loans
The table below provides information on the payment due status of loans and advances to customers:
Residential SME Commercial Asset Invoice Total Mortgages Mortgages Finance Finance 30 June 2015 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 Neither past due nor individually impaired 2,908,049 1,122,576 1,196,382 172,908 5,399,915 Past due but not individually impaired 20,137 10,685 2,632 - 33,454 Individually impaired 5,488 11,637 3,496 2,593 23,214 2,933,674 1,144,898 1,202,510 175,501 5,456,583 ------------------------------ ----------- -------------- --------- -------- --------- Residential SME Commercial Asset Invoice Total Mortgages Mortgages Finance Finance 31 December 2014 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 Neither past due nor
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individually impaired 2,542,738 994,410 1,039,692 183,324 4,760,164 Past due but not individually impaired 19,405 16,061 7,167 - 42,633 Individually impaired 6,003 6,292 2,614 5,932 20,841 2,568,146 1,016,763 1,049,473 189,256 4,823,638 ------------------------------ ----------- -------------- --------- -------- ---------
Past due but not individually impaired loans are further analysed as follows:
30 June 31 December 2015 2014 Past due but not individually GBP'000 GBP'000 impaired - Up to 2 months past due 22,844 29,989 - 2 to 3 months past due 10,610 12,644 Total 33,454 42,633 ------------------------------------ ------- -----------
Impairment coverage is analysed as follows:
30 June 31 December 2015 2014 Coverage ratio GBP'000 GBP'000 Gross loans and advances 5,456,583 4,823,638 Of which individually impaired 23,214 20,841 ------------------------------- --------- ----------- Impaired as a % of gross loans and advances 0.43% 0.43% Allowance for losses - individual provisions 10,869 14,047 Coverage 46.82% 67.40% ------------------------------- --------- -----------
The coverage ratio has reduced to 46.82% as at 30 June 2015 (31 December 2014: 67.40%). The reduction is predominantly driven by a single Commercial case where the exposure is impaired but no provision recorded as the Group achieved full recovery after the period end. In addition, the coverage ratio has also reduced due to a number of fully provided loans being written off within Invoice Finance.
The credit quality of assets that are neither past due nor individually impaired are analysed internally as follows:
Residential SME Commercial Asset Invoice Mortgages Mortgages Finance Finance Residential Buy-to-Let Total Commercial Buy-to-Let Total Total Total 30 June 2015 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 Low risk 766,529 1,450,987 2,217,516 238,100 400,038 638,138 30,819 - Medium risk 441,578 194,413 635,991 274,505 194,222 468,727 1,069,347 4,123 High risk 32,933 21,609 54,542 5,748 9,963 15,711 96,216 168,785 Total 1,241,040 1,667,009 2,908,049 518,353 604,223 1,122,576 1,196,382 172,908 Fair value of collateral held 1,241,021 1,667,008 2,908,029 518,353 603,759 1,122,112 866,386 167,764 ------------ ----------- ---------- --------- ---------- ---------- --------- --------- -------- Residential SME Commercial Asset Invoice Mortgages Mortgages Finance Finance Residential Buy-to-Let Total Commercial Buy-to-Let Total Total Total 31 December GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 2014 Low risk 585,826 1,380,644 1,966,470 257,375 369,693 627,068 59,262 - Medium risk 341,771 172,479 514,250 113,865 105,938 219,803 839,553 6,502 High risk 38,040 23,978 62,018 103,308 44,231 147,539 140,877 176,822 Total 965,637 1,577,101 2,542,738 474,548 519,862 994,410 1,039,692 183,324 Fair value of collateral held 965,559 1,576,914 2,542,473 474,548 519,862 994,410 738,390 181,752 -------------- ----------- ---------- --------- ---------- ---------- ------- --------- --------
The above categorisation of low, medium, high is based on internal grading models. There has been no change in the grading methodology since 31 December 2014. The methodology to calculate the fair value of collateral held disclosed also remains unchanged. Full details of both methodologies are provided in the Group's 2014 Annual Report and Accounts.
Individually impaired balances are further analysed as follows:
Residential SME Commercial Asset Invoice Mortgages Mortgages Finance Finance Residential Buy-to-Let Total Commercial Buy-to-Let Total Total Total 30 June 2015 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 Past due 3-6 months 1,240 1,261 2,501 4,036 2,810 6,846 1,360 - Past due 6-12 months 369 1,009 1,378 63 - 63 1,910 985 Past due over 12 months 125 1,484 1,609 4,365 363 4,728 226 1,608 1,734 3,754 5,488 8,464 3,173 11,637 3,496 2,593 Of which: Possessions 1,384 - 1,384 - - - 1,742 - -------------- ----------- ---------- ------- ---------- ---------- ------- -------- -------- Residential SME Commercial Asset Invoice Mortgages Mortgages Finance Finance Residential Buy-to-Let Total Commercial Buy-to-Let Total Total Total 31 December GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 2014 Past due 3-6 months 1,709 1,688 3,397 436 74 510 1,837 - Past due 6-12 months 186 737 923 2,891 - 2,891 370 3,225 Past due over 12 months 1,407 276 1,683 2,543 348 2,891 407 2,707 3,302 2,701 6,003 5,870 422 6,292 2,614 5,932 Of which: Possessions 1,376 - 1,376 - - - 1,363 - -------------- ----------- ---------- ------- ---------- ---------- ------- -------- --------
Movement in impaired loans is analysed as follows:
Residential SME Commercial Asset Invoice Mortgages Mortgages Finance Finance 2015 GBP'000 GBP'000 GBP'000 GBP'000 At 1 January 6,003 6,292 2,614 5,932 Classified as impaired during the period 2,904 7,571 3,514 3,200 Transferred from impaired to unimpaired (2,075) (192) (1,139) - Amounts written off (240) (684) (653) (4,153) Repayments (1,104) (1,350) (840) (2,386) At 30 June 2015 5,488 11,637 3,496 2,593 ------------------------------- ----------- -------------- -------- -------- Residential SME Commercial Asset Invoice Mortgages Mortgages Finance Finance 2014 GBP'000 GBP'000 GBP'000 GBP'000 At 1 January 3,634 9,979 3,238 7,914 Classified as impaired during the year 4,090 1,828 3,517 4,171 Transferred from impaired to unimpaired (1,147) (581) (630) - Amounts written off (59) (336) (2,190) (4,246) Repayments (515) (4,598) (1,321) (1,907) At 31 December 2014 6,003 6,292 2,614 5,932 ------------------------------- ----------- -------------- -------- -------- ii. Collateral held and other enhancements
The principal indicators used to assess the credit security of performing loans are Loan to Value ratios for commercial and residential mortgages.
a. Residential Mortgages
Loan to Value on indexed origination information on the Group's residential mortgage portfolio is set out below:
30 June 31 December 2015 2014 GBP'000 GBP'000 100%+ 1,086 9,167 95-100% 23,277 82,454 90-95% 205,637 151,447 85-90% 144,006 82,427 80-85% 148,906 117,888 75-80% 223,241 219,839 70-75% 375,173 370,024 60-70% 845,756 770,682
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50-60% 546,491 450,194 0-50% 416,638 310,777 2,930,211 2,564,899 --------------------------------------------- --------- ----------- Capital repayment 1,114,676 898,008 Interest only 1,815,535 1,666,891 2,930,211 2,564,899 --------------------------------------------- --------- ----------- Average Loan to Value percentage - all residential mortgages 65.60% 66.84% Average Loan to Value percentage - buy-to-let residential mortgages 62.14% 64.18% --------------------------------------------- --------- -----------
Residential Mortgages at a Loan to Value of 85% and above have increased as a result of the Group's participation in the Help to Buy Scheme. There is a government guarantee in place for those loans where the LTV is greater than 85%.
b. SME Commercial Mortgages
Loan to Value on indexed origination information on the Group's commercial mortgage portfolio is set out below:
30 June 31 December 2015 2014 GBP'000 GBP'000 90%+ - - 85-90% - 209 80-85% 456 2,113 75-80% 15,512 26,522 70-75% 78,622 73,065 60-70% 262,793 204,627 50-60% 246,539 252,420 0-50% 535,529 452,335 1,139,451 1,011,291 --------------------------------------------- --------- ----------- Capital repayment 539,005 478,760 Interest only 600,446 532,531 1,139,451 1,011,291 --------------------------------------------- --------- ----------- Average Loan to Value percentage - all commercial mortgages 51.19% 52.23% Average Loan to Value percentage - buy-to-let commercial mortgages 54.61% 55.73% --------------------------------------------- --------- ----------- c. Invoice Finance
In respect of invoice finance, collateral is provided by the underlying receivables (e.g. trade invoices). As at 30 June 2015, 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 67.30% (31 December 2014: 68.04%).
d. Asset Finance
In respect of asset finance, collateral is provided by the Group's right and/or title to the underlying leased assets, which the Group is able to repossess in the event of default. Where appropriate, the Group will also obtain additional security, such as parent company or personal guarantees. Asset finance also undertakes a small volume of unsecured lending where it has 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 2015 the total amount of such unsecured lending was GBP13.6 million (31 December 2014: GBP17.4 million).
iii. Concentration of credit risk
The Group monitors concentration of credit risk by product type, geographic location and sector. Analyses of concentrations are shown below, net of impairment provisions. Details of the Group's lending by product type are as follows:
30 June 31 December 2015 2014 GBP'000 GBP'000 Finance lease receivables 1,196,120 1,044,298 Invoice financing 170,476 180,576 SME Commercial Mortgage loans 1,139,451 1,011,291 Residential Mortgage loans 2,930,211 2,564,899 5,436,258 4,801,064 ------------------------------------------ --------- ----------- Including: Value of buy-to-let residential mortgages 1,747,601 1,597,255 Value of buy-to-let commercial mortgages 607,158 401,090 ----------------------------------------------- --------- -----------
Credit concentration of assets by size analysed as follows:
30 June 2015 31 December 2014 Residential SME Commercial Asset Residential SME Commercial Asset Mortgages Mortgages Finance Mortgages Mortgages Finance GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP0 - GBP50k 37,201 8,091 526,479 32,485 7,117 460,409 GBP50 - GBP100k 605,904 77,165 268,594 548,053 64,933 224,912 GBP100 - GBP150k 687,790 83,010 121,485 608,382 69,861 108,361 GBP150 - GBP200k 487,083 78,721 64,219 424,686 71,650 59,135 GBP200 - GBP300k 564,247 133,344 79,776 479,799 114,550 73,556 GBP300 - GBP400k 271,914 91,292 37,332 233,269 80,233 36,274 GBP400 - GBP500k 108,938 74,067 27,695 93,509 62,991 21,644 GBP500k - GBP1m 156,725 204,506 47,991 132,502 190,714 39,988 GBP1m - GBP2m 10,409 194,059 17,711 12,214 181,727 12,208 GBP2m+ - 195,196 4,838 - 167,515 7,811 Total 2,930,211 1,139,451 1,196,120 2,564,899 1,011,291 1,044,298 ----------------- ----------- -------------- --------- ----------- -------------- ---------
An analysis of the Group's geographical concentration is shown in the table below:
30 June 31 December 2015 2014 % % East Anglia 9.3 9.5 East Midlands 6.3 6.3 Greater London 19.6 20.9 North East 2.8 1.6 North West 11.4 11.9 Northern Ireland 0.1 0.1 Scotland 4.6 4.6 South East 18.8 19.5 South West 9.6 9.9 Wales 3.3 3.2 West Midlands 7.3 8.2 Yorkshire And Humberside 6.9 4.3 100 100 ------------------------- ------- -----------
An analysis of the Group's loans and advances to customers by sector is shown in the table below:
30 June 31 December 2015 2014 % % Agriculture, hunting and forestry 1.3 1.3 Construction 2.9 3.2 Education 0.1 0.1 Electricity, gas and water supply 0.5 0.6 Financial intermediation 1.3 1.4 Health and social work 0.2 0.2 Hotels and restaurants 0.3 0.3 Manufacturing 4.2 4.8 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 20.5 18.7 Residential 60.8 61.4 Transport, storage and communication 3.9 3.9 Wholesale & retail trade; repair of motor vehicles, motorcycles and personal household goods 2.9 3.0 100 100 ---------------------------------------------- ------- ----------- iv. Forbearance
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Occasionally, some borrowers experience financial difficulties which impact their ability to meet mortgage and/or SME finance obligations. Management seeks 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 that can be taken to bring the account up to date. In certain circumstances where the borrower is experiencing significant financial distress, management may use forbearance measures to assist the borrower. These are considered on a case-by-case basis and must be in the best interest of the customer. 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. 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.
The most widely used methods of forbearance are 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. Temporary concessions are counted as forborne for 24 months following the end of the concession. Permanent concessions are counted as forborne for 24 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 new terms.
As at 30 June 2015 and as at 31 December 2014, the Group had undertaken forbearance measures as follows in each of its lending divisions, with the values below showing the cumulative levels of forbearance arrangements in place:
30 June 31 December 2015 2014* GBP'000 GBP'000 Residential Mortgages Temporary or permanent switch to interest only 2,859 2,890 Reduced monthly payments 1,287 1,302 Loan-term extension 36 11 Deferred payment 2,314 1,185 Total Residential Mortgages 6,496 5,388 Total forborne as a percentage of the total divisional gross lending book (%) 0.22% 0.21% --------------------------------------------- ------- ----------- SME Commercial Mortgages Temporary or permanent switch to interest only 8,668 8,178 Total SME Commercial Mortgages 8,668 8,178 Total forborne as a percentage of the total divisional gross lending book (%) 0.76% 0.80% Asset Finance Capitalisation 61 21 Reduced monthly payments 291 64 Loan-term extension 222 162 Deferred payment 1,007 1,162 Total Asset Finance 1,581 1,409 Total forborne as a percentage of the total divisional gross lending book (%) 0.11% 0.14% Total forborne Capitalisation 61 21 Temporary or permanent switch to interest only 11,527 11,068 Reduced monthly payments 1,578 1,366 Loan-term extension 258 173 Deferred payment 3,321 2,347 Total forborne 16,745 14,975 Total forborne as a percentage of the total gross lending book (%) 0.30% 0.31% ------------------------------------------- ------- -----------
*During the period, the Group's definition for determining whether a loan is forborne has been updated for temporary concessions. Previously a loan was considered forborne for three months following the end of the concession. The revised definition considers a loan to be forborne for the 24 months following the end of the concession. The 2014 comparatives have been updated accordingly.
Analysis of forborne accounts is shown in the tables below:
Residential SME Commercial Asset Total Mortgages Mortgages Finance 30 June 2015 GBP'000 GBP'000 GBP'000 GBP'000 Neither past due nor individually impaired 4,002 3,600 1,002 8,604 Past due but not individually impaired 1,790 1,478 209 3,477 Individually impaired 704 3,590 370 4,664 6,496 8,668 1,581 16,745 ---------------------------------- ----------- -------------- -------- ------- Residential SME Commercial Asset Total Mortgages Mortgages Finance 31 December 2014 GBP'000 GBP'000 GBP'000 GBP'000 Neither past due nor individually impaired 3,166 3,051 1,157 7,374 Past due but not individually impaired 1,427 5,127 175 6,729 Individually impaired 795 - 77 872 5,388 8,178 1,409 14,975 ---------------------------------- ----------- -------------- -------- ------- v. Credit risk - treasury
Credit risk exists with treasury assets where the Group has acquired securities or placed cash deposits with other financial institutions. The credit risk of treasury assets is considered to be relatively low. No assets are held for speculative purposes or actively traded. Certain liquid assets are held as part of the Group's liquidity buffer.
The table below sets out information about the credit quality of financial assets held by the treasury function. The analysis presented below is derived using ratings provided by Standard and Poor's where applicable. See page 62 for further details.
30 June 31 December 2015 2014 GBP'000 GBP'000 Cash and balances at central banks and Loans and advances to banks - Rated AAA 36,591 - - Rated AA+ to AA- - 79,555 - Rated A+ to A- 97,000 100,043 - Rated BBB+ 9,259 17,370 142,850 196,968 --------------------------------------------- ------- ----------- Debt securities: UK Government Gilts and Treasury Bills, Supranational and Corporate Bonds - Rated AAA 359,880 334,927 - Rated AA+ to AA- 183,848 158,429 - Rated A+ to A- 10,011 - - Rated BBB+ - - Debt securities: Asset backed securities - Rated AAA 74,135 16,328 - Rated AA+ to AA- 2,017 - - Rated A+ to A- - - - Rated BBB+ - - 629,891 509,684 --------------------------------------------- ------- ----------- Derivatives held for risk management purposes - Rated AAA - - - Rated AA+ to AA- 1,541 689 - Rated A+ to A- 3,650 4,182 - Rated BBB+ 3,780 3,297 8,971 8,168 --------------------------------------------- ------- ----------- 781,712 714,820 --------------------------------------------- ------- -----------
As at 30 June 2015 and at 31 December 2014 none of the treasury assets were past due or impaired.
(b) Liquidity risk
Liquidity risk is the risk that the Group is not able to meet its financial obligations as they fall due, or can do so only at excessive cost.
To protect the Group and its depositors against liquidity risks, the Group maintains a liquidity buffer which is based on the Group's liquidity needs under stressed conditions. The liquidity buffer is monitored on a continual basis to ensure there are sufficient liquid assets at all times to cover cash flow movements and fluctuations in funding and to enable the Group to meet all financial obligations and to support anticipated asset growth.
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