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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Osb Group Plc | LSE:OSB | London | Ordinary Share | GB00BLDRH360 | ORD 1P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 1.20 | 0.32% | 380.00 | 379.00 | 380.20 | 381.60 | 370.40 | 372.20 | 93,330 | 08:56:53 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
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15 March 2018
OneSavings Bank plc
Preliminary results for the year ended 31 December 2017
Financial highlights
-- Underlying profit before tax1 increased 21% to GBP167.7m (2016: restated2
GBP138.2m)
-- Loan book growth of 23% to GBP7.3bn (2016: GBP5.9bn) driven by 14% growth
in gross originations to GBP2.6bn (2016: GBP2.3bn)
-- Strong income growth alongside continued focus on cost discipline and
efficiency delivered a stable cost to income ratio3 of 27% (2016: 27%)
-- Net interest margin ('NIM')4 stable at 316bps (2016: restated2 316bps)
-- Further improved loan loss ratio5 of 7bps (2016:16bps)
-- Return on equity ('RoE')6 remained strong at 28% (2016: 29%), despite
strengthening our Common Equity Tier 1 ('CET1') capital ratio to 13.7%
(2016: 13.3%)
-- Underlying basic earnings per share7 grew 23% to 51.1 pence (2016: 41.7
pence)
-- Recommended final dividend8 of 9.3 pence per share giving a full year
dividend of 12.8 pence per share, in line with our target dividend payout
ratio
-- Further optimisation of capital structure through the issue of GBP60m of
Additional Tier 1 securities
Andy Golding, CEO of OneSavings Bank, said:
"I am delighted that OneSavings Bank has delivered another excellent set
of results for 2017, whilst successfully negotiating significant
regulatory and tax changes in our core Buy-to-Let market.
We generated a 21% increase in underlying profit before tax and a 23%
increase in underlying basic earnings per share. This was underpinned by
strong organic originations, up 14% to GBP2.6bn, maintaining attractive
margins and prudent risk management alongside continued cost efficiency
and discipline. We delivered a strong return on equity of 28% despite
strengthening our CET1 ratio to 13.7%.
Despite market sentiment linked to political and economic uncertainty
going forward, we entered 2018 with a strong pipeline of new business in
our core markets and intend to deploy our proven credit risk and
operational competencies to expand our residential and commercial
product offerings in 2018.
We also expect to deliver net loan book growth in the mid-teens in 2018
and NIM of c. 3%, reflecting current asset pricing and an expectation of
a rising cost of funds after the end of TFS. We anticipate a cost to
income ratio of c. 30% for 2018, reflecting the significant increase in
the cost of regulation and planned investment in the business to support
our growth strategy.
OneSavings Bank is well placed to take advantage of growth opportunities
in 2018 and we remain confident in our ability to generate attractive
returns for our shareholders."
Key metrics
2017 2016
Loan loss ratio(5) (bps) 7 16
Statutory profit before tax (GBPm) 167.7 163.1
Total assets (GBPbn) 8.6 6.6
Statutory basic EPS(9) (pence) 51.1 49.4
Loan to deposit ratio(10) (%) 92 90
3 months + arrears(11) (%) 1.2 1.4
Customer net promoter score +62 +59
Enquiries:
OneSavings Bank plc: Alastair Pate t: 01634 835728
Brunswick Group: Robin Wrench / Simone Selzer t: 020
7404 5959
Analyst presentation
A presentation for analysts will be held at 9:30am on Thursday 15 March
at The Lincoln Centre, 18 Lincoln's Inn Fields, WC2A 3ED. The UK dial in
is 0808 109 0700, standard international access is +44 (0) 20 3003 2666.
For both the password is One Savings. The presentation will be webcast
and available from 9.30am on the OneSavings Bank website at osb.co.uk in
the Investor Relations, Report and Accounts section. Registration is
open immediately.
About OneSavings Bank plc
OneSavings Bank plc began trading as a bank on 1 February 2011 and was
admitted to the main market of the London Stock Exchange in June 2014
(OSB.L). OSB joined the FTSE 250 index in June 2015. OSB is a specialist
lending and retail savings group authorised by the Prudential Regulation
Authority, part of the Bank of England, and regulated by the Financial
Conduct Authority and Prudential Regulation Authority.
OSB primarily targets market sub-sectors that offer high growth
potential and attractive risk-adjusted returns in which it can take a
leading position and where it has established expertise, platforms and
capabilities. These include private rented sector Buy-to-Let, commercial
and semi-commercial mortgages, residential development finance, bespoke
and specialist residential lending and secured funding lines. OSB
originates organically through specialist brokers and independent
financial advisers. It is differentiated through its use of high skilled,
bespoke underwriting and efficient operating model.
OSB is predominantly funded by retail savings originated through the
long established Kent Reliance name, which includes online and postal
channels, as well as a network of branches in the South East of England.
Diversification of funding is currently provided by access to a
securitisation programme and the Term Funding Scheme.
---------------------------------------
1. Before exceptional items of GBPnil (2016: exceptional items of
GBP24.9m, see Alternative performance measures and Exceptional items
in the Financial review for further details).
2. Prior to 2017, OSB deducted coupons on equity Perpetual Subordinated
Bonds ('PSBs') accounted for as dividends from underlying profit before
and after tax, net interest margin and cost to income ratio. Following a
review of market practice in advance of the Bank's AT1 issue in May
2017, OSB no longer deducts these coupons from the calculation of these
key performance indicators. The comparatives have been restated
accordingly (see Financial review for further details). Interest
payments on AT1 securities classified as dividends are treated in the
same way.
3. Administrative expenses, including depreciation and amortisation, as
a percentage of total income.
4. Net interest income as a percentage of average interest bearing
assets including off balance sheet Funding for Lending Scheme (FLS)
drawings.
5. Impairment losses expressed as a percentage of average gross loans
and advances.
6. Profit after tax excluding exceptional items after tax of GBPnil in
2017 (2016: after tax exceptional items of GBP18.5m, see Alternative
performance measures and Exceptional items in the Financial review for
further details), and after deducting coupons on equity PSBs, including
the tax effect of GBP0.7m (2016: GBP0.9m) and coupons on AT1 securities,
including the tax effect of GBP2.0m, as a percentage of average
shareholders' equity (excluding equity PSBs of GBP22m and AT1 securities
of GBP60m) of GBP446.6m in 2017 and GBP346.9m in 2016.
7. Underlying profit after taxation and after deducting coupons on
equity PSBs, including tax effect of GBP0.7m (2016: GBP0.9m) and AT1
coupons, including tax effect of GBP2.0m, divided by the weighted
average number of ordinary shares in issue.
8. Representing 25% of underlying profit after tax. To be paid on 16 May
2018, subject to approval at the Annual General Meeting on 10 May
2018, with a record date of 23 March 2018. For 2016, the dividend of
7.6p per share represented a final two-thirds dividend.
9. Statutory profit after taxation divided by the weighted average
number of ordinary shares in issue.
10. Excluding the impact of FLS/TFS drawdowns. The unadjusted ratio was
109% as at 31 December 2017 (2016: 100%).
11. Portfolio arrears rate (excluding legacy problem loan book) of
accounts for which there are missed or overdue payments by
more than three months.
Non-IFRS performance measures
OneSavings Bank believes that the non-IFRS performance measures included
in this document provide valuable information to the readers as they
enable the reader to identify a more consistent basis for comparing the
business' performance between financial periods, and provide more detail
concerning the elements of performance which the Group is most directly
able to influence or are relevant for an assessment of the Group. They
also reflect an important aspect of the way in which operating targets
are defined and performance is monitored by OneSavings Bank's Board.
However, any non-IFRS performance measures in this document are not a
substitute for IFRS measures and readers should consider the IFRS
measures as well. Refer to Alternative performance measures in the
Financial review for further details, reconciliations and calculations
of non-IFRS performance measures included throughout this document, and
the most directly comparable IFRS measures.
Important disclaimer
This document should be read in conjunction with the documents
distributed by OneSavings Bank plc ('OSB') through the Regulatory News
Service ('RNS'). This document contains certain forward-looking
statements, beliefs or opinions, including statements with respect to
the business, strategy and plans of OSB and its current goals and
expectations relating to its future financial condition, performance and
results. Such forward-looking statements include, without limitation,
those preceded by, followed by or that include the words 'targets',
'believes', 'estimates', 'expects', 'aims', 'intends', 'will', 'may',
'anticipates', 'projects', 'plans', 'forecasts', 'outlook', 'likely',
'guidance', 'trends', 'future', 'would', 'could', 'should' or similar
expressions or negatives thereof. Statements that are not historical
facts, including statements about OSB's, its directors' and/or
management's beliefs and expectations, are forward-looking statements.
By their nature, forward-looking statements involve risk and uncertainty
because they relate to events and depend upon circumstances that may or
may not occur in the future. Factors that could cause actual business,
strategy, plans and/or results (including but not limited to the payment
of dividends) to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in such forward-looking
statements made by OSB or on its behalf include, but are not limited to:
general economic and business conditions in the UK and internationally;
market related trends and developments; fluctuations in exchange rates,
stock markets, inflation, deflation, interest rates and currencies;
policies of the Bank of England, the European Central Bank and other G8
central banks; the ability to access sufficient sources of capital,
liquidity and funding when required; changes to OSB's credit ratings;
the ability to derive cost savings; changing demographic developments,
and changing customer behaviour, including consumer spending, saving and
borrowing habits; changes in customer preferences; changes to borrower
or counterparty credit quality; instability in the global financial
markets, including Eurozone instability, the potential for countries to
exit the European Union (the "EU") or the Eurozone, and the impact of
any sovereign credit rating downgrade or other sovereign financial
issues; technological changes and risks to cyber security; natural and
other disasters, adverse weather and similar contingencies outside OSB's
control; inadequate or failed internal or external processes, people and
systems; terrorist acts and other acts of war or hostility and responses
to those acts; geopolitical, pandemic or other such events; changes in
laws, regulations, taxation, accounting standards or practices,
including as a result of an exit by the UK from the EU; regulatory
capital or liquidity requirements and similar contingencies outside
OSB's control; the policies and actions of governmental or regulatory
authorities in the UK, the EU or elsewhere including the implementation
and interpretation of key legislation and regulation; the ability to
attract and retain senior management and other employees; the extent of
any future impairment charges or write-downs caused by, but not limited
to, depressed asset valuations, market disruptions and illiquid markets;
market relating trends and developments; exposure to regulatory scrutiny,
legal proceedings, regulatory investigations or complaints; changes in
competition and pricing environments; the inability to hedge certain
risks economically; the adequacy of loss reserves; the actions of
competitors, including non-bank financial services and lending
companies; and the success of OSB in managing the risks of the
foregoing.
No representation or warranty is made that any of these statements or
forecasts will come to pass or that any forecast results will be
achieved. Any forward-looking statements made in this document speak
only as of the date they are made and it should not be assumed that they
have been revised or updated in the light of new information of future
events. Except as required by the Prudential Regulation Authority, the
Financial Conduct Authority, the London Stock Exchange PLC or applicable
law, OSB expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements
contained in this document to reflect any change in OSB's expectations
with regard thereto or any change in events, conditions or circumstances
on which any such statement is based. The information, statements and
opinions contained in this document and subsequent discussion do not
constitute a public offer under any applicable law or an offer to sell
any securities or financial instruments or any advice or recommendation
with respect to such securities or financial instruments.
Chief Executive's Statement
I am delighted to report another excellent year for OneSavings Bank
('OSB'). The Group's clear strategy and unique business model have
proven robust as we successfully navigated significant regulatory and
tax changes during the year. Underlying basic earnings per share grew by
23% to 51.1 pence with underlying pre-tax profit up by 21% to GBP167.7m.
We finished the year with a strong balance sheet, a high quality secured
asset portfolio and an excellent reputation for customer service. Our
strategy continues to provide the platform for us to grow and develop
our business.
The Group grew its loan book by 23% to GBP7.3bn in 2017, whilst
maintaining its strong discipline on understanding and pricing for risk,
and delivering a stable net interest margin ('NIM') of 3.16% for the
year.
Balance sheet growth was achieved whilst delivering a best in class
return on equity of 28% and a low cost to income ratio of 27%. Our CET1
capital ratio increased to 13.7% from 13.3% in 2016, demonstrating the
strength of our organic capital generation capability to support
significant growth through profitability. I am very pleased that we
further optimised our capital structure through the issuance of GBP60m
of Additional Tier 1 securities ('AT1 securities') in May 2017.
The Board is recommending a final dividend of 9.3 pence per share.
Together with the interim dividend of 3.5 pence this gives a total
dividend per share for the year of 12.8 pence, in line with our stated
dividend policy.
Best specialist lender
OneSavings Bank continued to grow its loan book through its specialist
lending brands, with total organic origination up by 14% in 2017 to
GBP2.6bn. Our core Buy-to-Let lending sub-segment grew by 39% to
GBP5.0bn, with our target audience of professional landlords continuing
to deliver strong application and completion volumes.
This performance has been achieved despite the overall Buy-to-Let market
shrinking in response to tax and regulatory changes. These changes have
reduced the attractiveness of the sector to amateur investors, whilst
largely maintaining the interest of professional landlords, and have
driven the reduction in gross advances from GBP40.6bn in 2016 to
GBP35.8bn(1) in 2017. In this context, the Bank's performance
demonstrates the sustainable strength of our proposition targeted at
professional landlords, particularly our specialist, manual underwriting,
and our deep relationships with mortgage intermediaries.
New Buy-to-Let mortgage origination increased during 2017, reflecting
our specialism and expertise in lending to limited companies and large
portfolio landlords. Professional/multi-property landlords accounted for
80% of completions for OSB by value during 2017, up from 75% in 2016.
We have also seen significant growth in the commercial side of our
Buy-to-Let/SME segment. Organic origination grew to GBP176m, as we
focused on innovation and building scale in our established InterBay
Commercial business. In March, we successfully piloted an entry to the
bespoke bridging market, again leveraging the Bank's strengths in asset
risk assessment and manual underwriting.
We saw a reduction in originations in the residential segment in 2017.
This contributed to the first charge gross loan book reducing to
GBP1,241m from GBP1,322m in 2016, with new organic lending more than
offset by redemptions in the back book and acquired mortgages in
run-off. However, we see opportunities for growth in the residential
market in 2018 and beyond.
I am pleased that our more cyclical commercial businesses continued to
perform strongly. The Bank's Heritable Development Finance business
provides development finance to smaller residential developers, with a
preference for forging relationships with those active outside prime
central London.
The business continued to grow in 2017, in spite of new entrants to the
market, as customers sought an experienced and pragmatic lender.
In addition, we have also grown the provision of secured funding lines
to other lenders that operate in certain high yielding, specialist
sub-segments, such as residential bridge finance and asset finance.
Whilst we continue to carefully consider inorganic acquisition
opportunities, market pricing did not meet our high return targets
during the year.
Our broker net promoter score ('NPS') recovered from the short-term
negative NPS of -7 in the first half of the year, the result of a surge
in Buy-to-Let volumes. For the second half of the year, our NPS was +25.
We made significant investment in our sales capability and continued to
gain recognition from mortgage customers and intermediaries, winning
multiple awards during the year. I am particularly pleased that OSB won
the Mortgage Strategy Awards Best Specialist Lender and The Mortgage
Introducer Awards Specialist Lender of the Year in 2017.
To encourage greater levels of retention amongst borrowers reaching the
end of their initial product term, OSB offers a mortgage product
transfer scheme ('Choices'). Under this programme, borrowers are
encouraged to engage with their broker to receive advice and select from
a bespoke product set. Since the implementation of the scheme in
mid-2016, we have seen a consistently strong proportion of our borrowers
choose a new product within three months of their initial product ending,
at around 60% by December 2017. This is driven by success in switching
borrowers who were otherwise remaining on standard variable rate ('SVR')
and who, by definition, were therefore in the market for other lenders.
Sustainable funding model with award winning savings
Our stable and award winning retail funding franchise continues to
support lending growth, with retail deposits up 12% to GBP6.7bn during
the year. Over 27,000 new savings customers joined the Bank during 2017
and our successful programme of creating long-term savings relationships
by offering market competitive rates to all customers, including those
with maturing fixed rate bonds and ISAs, continued to deliver a very
strong 90% retention rate. The strength and fairness of our retail
savings proposition, coupled with excellent customer service and high
retention rates, continues to allow the Bank to raise significant funds
without needing to price at the very top of the best buy tables and
provides a consistent and stable source of liquidity.
I am delighted that Kent Reliance has been recognised by Moneyfacts in
2017 as the Best Cash ISA Provider for the fifth year running. The Bank
also received the ISA Provider of the Year Award from Consumer
Moneyfacts for the second consecutive year. These awards are a testament
to our savings proposition and to the outstanding customer service
delivered by our staff.
The Bank remained predominantly retail funded during 2017, with a loan
to deposit ratio for the year of 92%(2) delivering on our strategy to
primarily fund our loan book using retail deposits. We continued to make
judicious use of the Bank of England's Funding for Lending Scheme
('FLS') and the Term Funding Scheme ('TFS'), drawing down additional net
funding of GBP624m in the year. The Bank completed its planned
transition out of the FLS into the TFS by year end. As at 31 December
2017, TFS drawdowns stood at GBP1.25bn.
Leveraging our unique business model
As the Group has grown, costs and efficiency have remained a key focus
for the business, resulting in a stable cost to income ratio of 27%
(2016: 27%(3) ) despite significant investment during the year. We
continued to invest in our risk management and modelling capabilities in
preparation for IFRS 9 and our planned internal ratings based ('IRB')
application. We also invested in technology to offer an automated
solution to brokers to help the Bank meet the PRA's new specialist
underwriting rules in an efficient way.
OSBIndia continues to undertake a range of primary processing services
at a significantly lower cost than an equivalent UK-based operation and
with very high quality levels. I am especially pleased that we achieved
this whilst maintaining our focus on customers, borne out by an increase
in customer NPS to an outstanding 62% (2016: 59%).
We continue to differentiate ourselves from the competition by offering
well-defined propositions in high margin, underserved markets, where we
have the experience, as well as the internal and intermediary
infrastructure, to successfully develop and service those markets.
Building our business for the future
The Group continued to exercise strong diligence over loan and customer
assessment. The loan loss ratio fell to 7bps in the year to 31 December
2017 (2016: 16bps) mainly due to assumption updates that took place in
2016. We remain particularly pleased with the performance of the front
book of mortgages. From more than 38,500 loans totaling GBP8.3bn of new
organic originations since the Bank's creation in February 2011, we have
only 137 cases of arrears over three months in duration, with an
aggregate balance of GBP18.4m and an average loan to value ('LTV') of
63%, reflecting the continued strength of the Bank's underwriting and
lending criteria.
The weighted average LTV of the overall mortgage book remained low at
64% at the end of 2017, with an average LTV of 69% on new origination
during the year.
In 2017 we saw the market adjusting to the new Buy-to-Let underwriting
standards, including ensuring that lenders reflect the changes to
personal tax on landlords within their affordability assessments. We
have seen a clear trend for borrowers to seek to mitigate this by opting
to borrow via a limited company during 2016 and 2017, with a continued
increase in the proportion of purchase applications via limited
companies for our main Buy-to-Let brand, Kent Reliance, to 69% in 2017.
The Group has always specialised in lending to limited companies, and
given market trends, this gives us a competitive advantage over those
lenders without such a capability.
From 1 January 2017, The Prudential Regulation Authority ('PRA')
required lenders to adopt more stringent affordability assessments. We
have always assessed affordability for borrowers through our specialist
underwriting model and applied stringent stress tests, so were
well-placed to benefit from these changes. This can be seen in our
weighted average interest coverage ratio ('ICR') for Buy-to-Let
origination during 2017, which increased to 185%, demonstrating our
cautious approach to the assessment of customer affordability.
Further market-wide measures to strengthen underwriting standards were
implemented from October 2017. We already substantively met the
regulatory requirements for assessment of landlords with four or more
mortgaged properties, and sought to enhance this proposition through the
use of technology, creating a simple and automated way of providing
comprehensive portfolio information. This has been embedded within our
underwriting process to create a strong proposition for brokers and
borrowers alike.
These measures and an expectation of further interest rate rises also
caused a shift in the demand amongst our professional landlords towards
five year fixed rate products which accounted for c. 43% of our
Buy-to-Let completions in 2017. Competition has increased in this area,
and the market has not yet fully repriced following the Bank of England
base rate rise in November 2017 or for subsequent widening of swap
spreads, putting pressure on margins.
Outlook
Trading conditions in our core markets are positive and current
application levels are strong. In line with UK Finance forecasts, the
overall Buy-to-Let market is expected to contract further in 2018,
however, we expect to continue to grow market share through the
relevance of our proposition to professional landlords.
The Group's IFRS 9 models and first generation IRB models were delivered
on schedule in late 2016 and we ran the models in parallel throughout
2017. We remain pleased with progress towards our IRB application and
also welcomed the recalibration of risk weights in the final revisions
to the Basel III reforms on standardised capital requirements published
in December 2017. We believe that these new calibrations combined with
the final IRB output floor will be beneficial to the Bank's capital
requirements, however we remain cautious until the final rules are
adopted.
The market sub-segments targeted by OSB, principally professional
landlords, including limited companies, have remained strong despite the
overall slowdown in the Buy-to-Let market in 2017. We remain confident
in the underlying strength of the Private Rented Sector and believe that
we are well-placed as the Buy-to-Let market continues to professionalise
in response to tax and regulatory changes. We will continue to
concentrate on what we have proven we do best; using our relationships,
manual underwriting expertise and secured lending strategy to lend
responsibly to our customers.
We see opportunities for growth in other segments of the lending market
where we already have expertise and a platform to build from. In
particular, we expect to grow commercial and bridge finance lending
through our InterBay Commercial brand and see further opportunities to
grow our residential lending franchise.
We will remain predominantly retail funded, aiming to fund our loan book
through our Kent Reliance savings brand. In addition, we intend to
invest in our online savings platform during 2018 to attract a broader
customer base and grow SME and other lower cost deposits in future
years. Our additional liquidity will continue to come from wholesale
funding, and we intend to return to the securitisation market during
2018 following the closure of the TFS in February. We drew down an
additional GBP250m in 2018 before the scheme closed, bringing the total
balance to GBP1.5bn. Over time we will use these different funding
sources to optimise our cost of funds.
The pipeline of regulatory change continues to grow, with GDPR and PSD 2
both going live in 2018 and work continuing on IRB and other smaller
regulatory projects. We expect to expense c. GBP7m on regulatory
projects in 2018, around double the total in 2017. In addition, we plan
to continue to invest in our technology infrastructure, mortgage
origination system and online savings platforms to support our future
growth strategy and enable us to broaden our reach into adjacent markets,
such as sub-segments of residential mortgages, where we see
opportunities, particularly once we transition to IRB. All of these
projects are expected to lead to a significant increase in operating
costs in 2018. However, we expect to offset this in part, by delivering
further efficiencies in the cost of running the Bank on a 'business as
usual' basis, by continuing to focus on cost discipline and leveraging
our unique operating platform in India.
We are now live with IFRS 9 after a successful parallel run throughout
2017. The day one impact of the implementation of IFRS 9 is an increase
in the provisions of c. GBP4m, representing 9bps on the Bank's CET1
ratio as at 31 December 2017, on an end game basis, reflecting the
strength of security underpinning our loan book.
Our achievements in 2017 are a testament to the management and staff of
OSB and I would like to thank my colleagues for their hard work and
commitment throughout the year.
Looking forward to 2018
Over the coming year, organic lending through the Buy-to-Let segment
will remain the key driver of loan book growth, but we expect to grow
our residential lending, and our commercial and bridge finance lending
through our InterBay Commercial brand.
We expect to deliver net loan book growth in the mid teens in 2018 and
NIM of c. 3%, reflecting current asset pricing, in particular for five
year fixed loans and an expectation of a rising cost of retail funds
after the end of TFS. We anticipate a cost to income ratio of c. 30%,
reflecting the significant increase in the cost of regulation and
planned additional investment in the business.
We start 2018 with a fully loaded CET1 ratio of 13.7% and a proven
organic capital generation capability through profitability. We
anticipate maintaining a CET1 ratio at a minimum 12% going forward. Our
dividend policy for 2018 remains a payout ratio of at least 25% of
underlying profit after taxation attributable to ordinary shareholders.
Our primary growth strategy remains organic origination, but we continue
to look at inorganic opportunities, including portfolio purchases, where
they meet the Bank's return hurdles.
I believe that OneSavings Bank is well placed to take advantage of
opportunities that arise and we remain capable of generating attractive
returns for our shareholders.
Andy Golding
Chief Executive Officer
15 March 2018
1. UK Finance, New and outstanding Buy-to-Let new mortgages, 2 Feb 2018.
2. Excluding the impact of TFS/FLS drawdowns. The unadjusted ratio was
109% as at 31 December 2017 (2016: 100%).
3. Prior to 2017, OSB deducted coupons on equity Perpetual Subordinated
Bonds ('PSBs') accounted for as dividends from underlying profit before
and after tax, net interest margin and cost to income ratio. Following a
review of market practice in advance of the Bank's AT1 issue in May
2017, OSB no longer deducts these coupons from the calculation of these
key performance indicators. The comparatives have been restated
accordingly. Interest payments on AT1 securities classified as dividends
are treated in the same way.
Operating and financial review
Business highlights
2017 was another year of exceptional performance underpinned by organic
originations of GBP2.6bn at attractive margins, strong risk management
and cost efficiency and discipline.
Net loans and advances grew by 23% in 2017 to GBP7.3bn. The growth was
due primarily to an increase in new lending in the Buy-to-Let
sub-segment, as the market became increasingly focused on our core
audience of professional landlords. Regulatory change, introducing more
complex underwriting standards to the Buy-to-Let industry in 2017, has
driven additional business flow to specialist lenders resulting in
growth in our market share. This growth was achieved whilst improving
the Group's CET1 ratio to 13.7% from 13.3% in 2016, demonstrating the
strength of the capital generation capability of the business through
profitability. The Group's capital position was further strengthened in
May 2017 by the issuance of GBP60m of Additional Tier 1 capital
securities ('AT1 securities'), with the total capital ratio
strengthening to 16.9% from 15.1% in 2016 and the leverage ratio also
increasing to 6% from 5.5%. The successful issuance of AT1 securities
highlights OSB's strong balance sheet and attractive investment
proposition to debt investors.
The Group remains focused on organic origination as its core growth
strategy and gross new organic lending of GBP2.6bn in 2017 was up 14%
compared with GBP2.3bn in 2016. OSB continued to experience high demand
for its products during 2017, particularly in Buy-to-Let where the Group
targets professional landlords with larger portfolios. Buy-to-Let/SME is
the Group's largest segment comprising 77% of the gross loan book with
Residential Mortgages at 23% as at 31 December 2017. New organic
originations in our residential book decreased, which, combined with
redemptions in the back book and acquired mortgages in run-off,
contributed to the first charge gross loan book reducing to GBP1,240.6m
from GBP1,322.1m in 2016.
The Bank made no portfolio acquisitions during 2017 (2016: portfolios of
first and second charge residential mortgages for GBP180.7m). However we
continue to evaluate selective inorganic opportunities that provide
long-term value and meet our strategic objectives when they arise. The
Group conducts extensive due diligence when considering any portfolio
acquisitions and in 2017, market pricing for deals under consideration
did not meet the Group's stringent return conditions.
For all our lending segments, we manually underwrite all risks,
providing us with a competitive advantage over more automated lenders,
as we are able to identify and understand complex cases that others
cannot. The weighted average LTV of the mortgage book remained low at
64% at the end of 2017, with an average LTV of 69% on new origination
during the year, reflecting the strength of our balance sheet. Both the
loan loss ratio and portfolio arrears rate improved in the year to 7bps
and 1.2% respectively (2016: 16bps and 1.4% respectively) further
demonstrating our disciplined underwriting and lending criteria. We also
have limited exposure to high value properties, with only 4% of our
total loan book secured on properties valued at greater than GBP2m and
with an LTV above 65%.
The broker-led Choices mortgage product transfer scheme that we
introduced in 2016 has encouraged greater levels of retention amongst
those borrowers reaching the end of their initial product term. Since
the implementation of the scheme in mid-2016, we have seen a
consistently strong proportion of our borrowers choose a new product
within three months of their initial product ending, at around 60% by
December 2017. This is driven by success in switching borrowers who were
otherwise remaining on standard variable rate ('SVR') and who, by
definition, were therefore in the market for other lenders.
The Bank continued to offer secured funding lines to non-bank lenders,
however kept a cautious approach in light of macroeconomic uncertainty.
Total credit approved limits as at 31 December 2017 were GBP336.6m with
total loans outstanding of GBP122.1m (31 December 2016: GBP330.2m and
GBP122.3m respectively). During the year, two new funding lines in the
Buy-to-Let/SME segment were extended.
The Group remained predominantly retail funded during the year with a
loan to deposit ratio of 92%(1) as at 31 December 2017 (2016: 90%(1) ).
Our customer-centric strategy of providing transparent savings products
which offer long-term value for money continued to deliver high levels
of customer satisfaction and loyalty during the year. Our customer net
promoter score ('NPS') increased to +62 for 2017 and the maturing fixed
term bond and ISA balance retention rate remained strong at 90% (2016:
+59 and 87% respectively). Retail deposits were up 12% to GBP6.7bn as at
31 December 2017.
The business savings account which was introduced in 2016 had a
successful year with total deposits constituting just over 1% of the
entire savings book, or GBP69.5m total balance as at 31 December 2017.
Whilst remaining committed to our retail savings franchise, throughout
2017 we complemented it as a funding source by taking advantage of the
government funding schemes: Term Funding Scheme ('TFS') and Funding for
Lending Scheme ('FLS'). By the end of 2017, the Bank had completed its
planned transition out of the FLS into the TFS and as at 31 December
2017, TFS drawdowns stood at GBP1,250.0m (31 December 2016: TFS at
GBP101.0m and FLS GBP524.6m). Total funding through the schemes
increased by GBP624.4m in the year.
1. Excluding the impact of TFS/FLS drawdowns. The unadjusted ratio was
109% as at 31 December 2017 (2016: 100%).
Financial overview
The Group reported strong profit growth in 2017. Statutory profit before
taxation of GBP167.7m was 3% higher than in 2016 (2016: GBP163.1m)
despite the GBP24.9m net gain on exceptional items in the prior year. On
an underlying basis, profit before taxation increased by 21% to
GBP167.7m (2016: restated GBP138.2m(2) ). This significant improvement
in underlying profitability reflects the strength of our lending and
funding franchises and our efficient operating model. Statutory and
underlying basic earnings per share ('EPS') strengthened to 51.1p (2016:
49.4p and 41.7p respectively).
Our focus on cost discipline and efficiency continued throughout 2017,
helping to deliver a very strong cost to income ratio of 27% (2016:
27%(2) ) despite increased investment in the business and in meeting the
growing cost of regulation.
Return on equity remained strong at 28% (2016: 29%) despite our
strengthened capital position.
The Board is recommending a final dividend of 9.3 pence per share, which
together with the interim dividend of 3.5 pence per share, represents
25% of underlying profit after taxation attributable to ordinary
shareholders for the year, in line with the Bank's stated dividend
policy.
2. Prior to 2017, OSB deducted coupons on equity PSBs accounted for as
dividends from underlying profit before and after tax, net interest
margin and cost to income ratio. Following a review of market practice
in advance of the Bank's AT1 issue in May 2017, OSB no longer deducts
these coupons from the calculation of these key performance indicators.
The comparatives have been restated accordingly. Interest payments on
AT1 securities classified as dividends are treated in the same way.
Segmental review
The following tables show the Group's loans and advances, risk weighted
assets and contribution to profit by segment.
31 December 2017, GBPm BTL/SME(1) Residential Total
Gross loans to customers 5,654.1 1,673.5 7,327.6
Provision for impairment losses (13.2) (8.4) (21.6)
Net loans to customers 5,640.9 1,665.1 7,306.0
Risk weighted assets 2,642.8 705.7 3,348.5
Net interest income 177.1 68.3 245.4
Other income/expense (1.5) (5.8) (7.3)
Total income 175.6 62.5 238.1
Impairment losses (0.8) (3.6) (4.4)
Contribution to profit 174.8 58.9 233.7
BTL/SME
31 December 2016, GBPm restated(1) Residential Total
Gross loans to customers 4,104.3 1,859.9 5,964.2
Provision for impairment losses (17.2) (7.8) (25.0)
Net loans to customers 4,087.1 1,852.1 5,939.2
Risk weighted assets 1,944.3 798.7 2,743.0
Net interest income 135.2 71.4 206.6
Other income/expense (0.5) (4.7) (5.2)
Total income 134.7 66.7 201.4
Impairment losses (1.8) (7.2) (9.0)
Contribution to profit 132.9 59.5 192.4
1. The personal loan portfolio has largely completed its run-off and is
therefore no longer considered as a separate segment by the Group. The
remaining net loan book of GBP0.9m (31 December 2016: GBP9.1m) and
negative contribution to profit for the period of GBP0.8m (2016:
contribution to profit of GBP2.7m) have been reported in the
Buy-to-Let/SME segment with comparatives restated accordingly.
Buy-to-Let/SME
Buy-to-Let/SME sub-segment: gross loans
Group Group
31-Dec-2017 31-Dec-2016
GBPm GBPm
Buy-to-Let 5,033.8 3,613.3
Commercial 370.8 268.3
Residential development 143.9 141.6
Funding lines 104.5 71.7
Personal loans(1) 1.1 9.4
Total 5,654.1 4,104.3
1. The personal loan portfolio has largely completed its run-off and is
therefore no longer considered as a separate segment by the Group. The
remaining net loan book of GBP0.9m (31 December 2016: GBP9.1m) and
negative contribution to profit for the period of GBP0.8m (2016:
contribution to profit of GBP2.7m) have been reported in the
Buy-to-Let/SME segment with comparatives restated accordingly.
The Buy-to-Let market contracted during the year in response to tax and
regulatory changes, which led to increased withdrawal of the amateur
landlord from the private rented sector. According to UK Finance,
Buy-to-Let gross advances in 2017 fell by 12% to GBP35.8bn(2) (2016:
GBP40.6bn) with the decrease also reflecting the spike in lending
recorded in March 2016 ahead of the stamp duty land tax ('SDLT') change.
Even though the overall Buy-to-Let market shrank in 2017, the demand
from professional landlords with larger portfolios continued its
momentum, leading to strong growth in our market share over the year
from c. 4% of new Buy-to-Let mortgages in 2016 to c. 6% in 2017.
Professional/multi-property landlords accounted for 80% of completions
for OSB by value during 2017, up from 75% in 2016.
The Group significantly increased its volume of new organic lending in
this segment in 2017 to GBP2.4bn, an increase of 23% on 2016 new organic
lending of GBP1.9bn. This included a significant increase in the
Buy-to-Let and Commercial sub-segments lending through the Kent Reliance
and InterBay brands. We continued to see strong growth opportunities
particularly in Buy-to-Let with gross loans of GBP5,033.8m at 31
December 2017 (2016: GBP3,613.3m), weighted average LTV of 69% and
average loan size of c. GBP250,000.
A significant proportion of the Buy-to-Let market comes from
refinancing. OSB's Buy-to-Let refinancing percentage was 60% during
2017, up from 58% in 2016.
From 1 October 2017, more comprehensive underwriting rules, including
affordability assessment for multi-property landlords came into effect.
We have always assessed affordability for borrowers through our
specialist underwriting model and apply stringent stress tests. Our
weighted average interest coverage ratio ('ICR') for Buy-to-Let
origination during 2017 increased to 185% (2016: 171%). The new
underwriting rules and an expectation of further interest rate rises
also caused a shift in the demand amongst our professional landlords
towards five year fixed rate products, which accounted for c. 43% of
Buy-to-Let completions in 2017.
In addition, to aid brokers in complying with the new underwriting rules,
OSB partnered with a technology provider to develop a bespoke tool for
assessing the health of a landlord's overall property portfolio, the
first of its kind in the market.
Recent tax changes also had an impact on how borrowers structure their
portfolios. In 2016, we saw a clear trend for borrowers to form limited
companies in order to mitigate reductions in yield resulting from
changes to personal taxation, and in 2017 OSB saw an increase in
applications from limited companies for our main Buy-to-Let brand Kent
Reliance, from 42% in 2016 to 69% in 2017.
We invested in sales capability across all of our lending brands and
attracted new talent from large lenders in the year. Through the Kent
Reliance and InterBay brands, the Bank distributes via intermediaries
throughout England and Wales with a bias towards properties in London
and the South East, where the demand supply gap is widest and most
sustainable. We have further extended the geographical coverage of our
business through investment in the intermediary sales team, ensuring we
are seeing appropriate opportunities in other regions.
We have grown our commercial lending with a gross value of the portfolio
at GBP370.8m as at 31 December 2017 (2016: GBP268.3m), low weighted
average LTV of 63% and average loan size of GBP330,000. In March, we
successfully piloted an entry to the bespoke bridging market, again
leveraging the Bank's strengths in asset risk assessment and manual
underwriting.
The Bank's Heritable Development Finance business provides development
finance to smaller residential developers, with a preference for forging
relationships with those active outside prime central London. The
business continued to grow in spite of new entrants to the market, as
customers sought an experienced and cautious lender. However, in line
with our prudent approach given macroeconomic uncertainty, the number of
potential development schemes which have withstood the business'
stringent stress testing has reduced significantly. The residential
development funding gross loan book at the end of 2017 was GBP143.9m,
with a further GBP78.0m committed (31 December 2016: GBP141.6m and
GBP70.0m respectively). Gross advances during 2017 totalled GBP123.7m
(31 December 2016: GBP98.4m). Since inception the business has written
GBP479m of loans.
In addition, the Bank continued to grow the provision of secured funding
lines it provides to non-bank lenders which operate in certain
high-yielding, specialist sub-segments, such as bridging finance and
asset finance. Total credit approved limits as at 31 December 2017 were
GBP303.0m with total loans outstanding of GBP104.5m (31 December 2016:
GBP244.0m and GBP71.7m respectively). During 2017, two new funding lines
were added. The pipeline remains robust, however given the macroeconomic
uncertainties, the Bank continues to adopt a cautious approach.
OSB's combined Buy-to-Let/SME net loan book grew by 38% in 2017 to
GBP5,640.9m (2016: restated GBP4,087.1m(1) ) due to the gross new
lending in the year, partially offset by back book redemptions, and is
the Group's largest segment. Buy-to-Let/SME made a contribution to
profit of GBP174.8m in 2017, up 32% compared to GBP132.9m(1) in 2016,
primarily due to the growth in the loan book and low impairment losses
of GBP0.8m (2016: restated GBP1.8m(1) ).
The Group remains highly focused on the credit quality of new lending as
demonstrated by the average LTV in the Buy-to-Let/SME segment as at 31
December 2017 of 69% (31 December 2016: 69%) with only 0.7% of loans
exceeding 90% LTV (31 December 2016: 0.4%). The average LTV for new
Buy-to-Let/SME origination was 70% (2016: 70%).
2. UK Finance, New and outstanding buy-to-let new mortgages, UK, MM17, 2
February 2018.
Residential mortgages
Residential sub-segment: gross loans
Group Group
31-Dec-2017 31-Dec-2016
GBPm GBPm
First charge 1,240.6 1,322.1
Second charge 415.3 487.2
Funding lines 17.6 50.6
Total 1,673.5 1,859.9
During the year, the Group organically originated residential lending of
GBP243.9m (2016: GBP382.1m). We saw a significant reduction in
originations in the residential sector in 2017. This contributed to the
first charge gross loan book reducing to GBP1,240.6m from GBP1,322.1m in
2016, with new organic lending more than offset by redemptions in the
back book and acquired mortgages in run-off.
Organic lending remains the Group's core strategy, however we continue
to actively consider inorganic opportunities as they arise, particularly
where we have in-house servicing expertise. However, in 2017, the Group
made no acquisitions of portfolios due to market pricing not meeting our
return hurdles (2016: portfolios of first and second charge mortgages
for GBP180.7m).
Our Kent Reliance brand provides bespoke first charge mortgages,
typically to prime credit quality borrowers with more complex
circumstances, for example high net worth borrowers with multiple income
sources and self-employed borrowers. These circumstances often preclude
them from the mainstream market, where most lenders favour automated
decision making over manual underwriting.
Kent Reliance also operates in the shared ownership market, where
borrowers buy a property in conjunction with a housing association.
Our second charge mortgage brand, Prestige Finance, provides secured
finance to good credit quality borrowers who are seeking a loan to raise
funds rather than refinancing their first charge mortgage. Competitive
pressure in the second charge market caused price reductions and we
allowed our market share to fall to ensure we continue to appropriately
price for risk. The second charge residential loan book had a gross
value as at 31 December 2017 of GBP415.3m (2016: GBP487.2m).
OSB continued to provide secured funding lines to non-bank lenders which
operate in certain high-yielding, specialist sub-segments, such as
residential bridge finance. The Bank continued its cautious approach in
the more cyclical businesses given macroeconomic uncertainty. Total
credit approved limits at 31 December 2017 were GBP33.6m with total
loans outstanding of GBP17.6m (2016: GBP86.2m and GBP50.6m
respectively). During 2017, one facility of GBP34.4m matured.
OSB's total residential loan portfolio had a net carrying value of
GBP1,665.1m as at 31 December 2017 (2016: GBP1,852.1m). The average LTV
remained low at 56% (2016: 58%) with only 3% of loans by value with LTVs
exceeding 90% (2016: 3%). The average LTV of new residential origination
during 2017 was 65% (2016: 66%).
Residential mortgages made a contribution to Group profit of GBP58.9m in
2017, down 1% (2016: GBP59.5m), reflecting the fall in the loan book,
partially offset by the benefit of lower cost of funds and impairment
losses. Impairment losses in 2016 included the impact of additional
prudence in collectively assessed provision assumptions following the EU
referendum result.
Financial review
Group Group
31/12/2017 31/12/2016
Summary Profit or Loss GBPm GBPm
Net interest income 245.4 206.6
Net losses on financial instruments (6.3) (4.3)
Net fees and commissions 0.5 1.7
External servicing fees (1.5) (2.6)
Administrative expenses(1) (65.1) (53.7)
FSCS and other regulatory provisions (0.9) (0.5)
Impairment losses (4.4) (9.0)
Exceptional items - 24.9
Profit before taxation 167.7 163.1
Profit after taxation 126.9 120.9
Underlying profit before taxation(3) 167.7 138.2(2)
Underlying profit after taxation(3) 126.9 102.4(2)
Key ratios
Net interest margin(3) 316bps 316bps(2)
Cost to income ratio(3) 27% 27%(2)
Management expense ratio(4) 0.86% 0.86%
Loan loss ratio(3) 0.07% 0.16%
Basic EPS(3) , pence per share 51.1 49.4
Underlying basic EPS(3) , pence per share 51.1
41.7
Return on equity(3) 28% 29%
Dividend per share, pence per share 12.8 10.5
Extracts from the Statement of Financial Position
GBPm GBPm
Loans and advances 7,306.0 5,939.2
Retail deposits 6,650.3 5,952.4
Total assets 8,589.1 6,580.9
Key ratios
Liquidity ratio(5) 15.2% 17.9%
Common equity tier 1 ratio(6) 13.7% 13.3%
Total capital ratio 16.9% 15.1%
Leverage ratio 6.0% 5.5%
1. Including depreciation and amortisation.
2. Prior to 2017, OSB deducted coupons on equity Perpetual Subordinated
Bonds ('PSBs') accounted for as dividends from underlying profit before
and after tax, net interest margin and cost to income ratio. Following a
review of market practice in advance of the Bank's AT1 issue in May
2017, OSB no longer deducts these coupons from the calculation of these
key performance indicators. The comparatives have been restated
accordingly. Interest payments on AT1 securities classified as dividends
are treated in the same way.
3. See definition in key performance indicators table on page 1.
4. Administrative expenses including depreciation and amortisation as a
percentage of average total assets.
5. Liquid assets as a percentage of funding liabilities.
6. Fully-loaded under Basel III /CRD IV.
Alternative performance measures
OSB believes that the use of alternative performance measures ('APMs')
for profitability and earnings per share provides valuable information
to the readers of the financial statements and presents a more
consistent basis for comparing the Group's performance between financial
periods, by adjusting for exceptional non-recurring items. APMs also
reflect an important aspect of the way in which operating targets are
defined and performance is monitored by the Board. However, any APMs in
this document are not a substitute for IFRS measures and readers should
consider the IFRS measures as well.
Reconciliation of statutory profit to underlying profit
Profit before taxation Profit after taxation
Group Group Group Group
31-Dec-2017 31-Dec-2016 31-Dec-2017 31-Dec-2016
GBPm GBPm GBPm GBPm
Statutory profit 167.7 163.1 126.9 120.9
Gain on Rochester 1 disposal - (34.7) - (25.8)
Exceptional amortisation of fair value adjustments
on hedged assets - 9.8 - 7.3
Underlying profit 167.7 138.2 126.9 102.4
Statutory basic EPS of 51.1 pence per share (2016: 49.4 pence per share)
is calculated by dividing profit attributable to ordinary shareholders
of GBP124.2m (2016: GBP120.0m) which is profit after taxation of
GBP126.9m (2016: GBP120.9m) less coupons on equity PSBs, including the
tax effect of GBP0.7m (2016: GBP0.9m) and coupons on AT1 securities,
including the tax effect of GBP2.0m (2016: GBPnil) by the weighted
average number of ordinary shares in issue during the year of 243.2m
(2016: 243.1m).
Underlying basic EPS of 51.1 pence per share (2016: 41.7 pence per
share) is calculated by dividing underlying profit attributable to
ordinary shareholders of GBP124.2m (2016: GBP101.5m), which is
underlying profit after taxation of GBP126.9m (2016: restated GBP102.4m)
less coupons on equity PSBs, including the tax effect of GBP0.7m (2016:
GBP0.9m) and coupons on AT1 securities of GBP2.0m (2016: GBPnil) by the
weighted average number of ordinary shares in issue during the year of
243.2m (2016: 243.1m).
Prior to 2017, OSB deducted coupons on equity PSBs accounted for as
dividends from underlying profit before and after tax. Following a
review of market practice in advance of the Bank's issuance of AT1
securities in May 2017, OSB no longer deducts these coupons and
underlying profit before and after taxation for 2016 have been restated
throughout this document accordingly.
The table below illustrates the key ratios under previous and current
methods and the impact of the change in calculation methodology.
Change in key ratio calculation
2017 2016
Cost to income ratio % %
Previous method 27 27
Add back coupons on equity PSBs (0) (0)
Current method 27 27
Net interest margin
Previous method 3.15 3.14
Add back coupons on equity PSBs 0.01 0.02
Current method 3.16 3.16
2017 2016
Underlying profit before tax GBPm GBPm
Previous method 166.7 137.0
Add back coupons on equity PSBs 1.0 1.2
Current method 167.7 138.2
Underlying profit after tax
Previous method 126.2 101.5
Add back coupons on equity PSBs 0.7 0.9
Current method 126.9 102.4
Strong profit growth
The Group reported profit growth of 3% in 2017 with profit before
taxation of GBP167.7m (2016: GBP163.1m including net gain from
exceptional items of GBP24.9m). On an underlying basis, the Bank
recorded a 21% increase in underlying profit before taxation to
GBP167.7m (2016: restated GBP138.2m(1) ) reflecting strong balance sheet
growth and a stable net interest margin combined with continued focus on
cost discipline and efficiency.
Profit after taxation in 2017 increased by 5% to GBP126.9m (2016:
GBP120.9m including the net gain after taxation from exceptional items
of GBP18.5m). On an underlying basis, profit after taxation increased by
24% to GBP126.9m (2016: restated GBP102.4m(1) ). The Group's effective
tax rate was 24.1%(2) in 2017 (2016: 25.6%), with a lower proportion of
the Group's profits subject to the Bank Corporation Tax Surcharge.
Net interest margin
The Group reported an increase in net interest income of 19% to
GBP245.4m in 2017 (2016: GBP206.6m) reflecting the growth in the loan
book and a stable NIM of 316bps (2016: restated 316bps(1) ). The stable
NIM in 2017 represents a reduction in asset yields in line with the
falling cost of funds.
The average cost of retail funds fell year on year, although market
rates started to rise again in 2017.
The Bank benefited from a higher average balance in the Bank of England
schemes in 2017 versus the prior year and the transition from FLS into
the cheaper TFS. As at December 2017, the TFS drawdowns stood at
GBP1,250.0m (2016: GBP101.0m) and FLS at GBPnil (2016: GBP524.6m).
Margins on the Bank's fixed rate mortgage products, particularly five
year fixed rate Buy-to-Let, declined in the fourth quarter of 2017 as
the market did not reprice these products following the Bank of England
base rate rise and subsequent widening of swap spreads in anticipation
of future increases in interest rates.
Losses on financial instruments
Fair value loss on financial instruments in 2017 of GBP6.3m (2016: loss
GBP4.9m) includes GBP7.3m amortisation of fair value adjustments on
hedged assets relating to cancelled swaps (2016: GBP4.9m). The
amortisation of fair value adjustments in both years includes the impact
of accelerating the amortisation in line with the run-off of the
underlying legacy long-term fixed rate mortgages due to faster than
expected prepayments.
In 2016, the Group also made a GBP0.6m gain on disposal of a portion of
non-performing personal loans with a gross value of GBP10.9m.
Net fees and commission
Net fees and commission income of GBP0.5m (2016: GBP1.7m) comprises fees
and commission receivable of GBP1.5m (2016: GBP2.5m) partially offset by
commission expense of GBP1.0m (2016: GBP0.8m). Fees and commissions
receivable decreased in 2017 due primarily to lower arrangement fees on
funding lines.
External servicing fees
External servicing fees decreased to GBP1.5m in 2017 (2016: GBP2.6m) due
to the transfer of servicing for acquired first charge residential loan
books to the Bank's operation in India during the year and the further
run-off of the personal loans portfolio.
Efficient and scalable operating platform
Administrative expenses including depreciation were up 21% to GBP65.1m
in 2017 (2016: GBP53.7m), reflecting the growth in the business and the
increased demands of regulation, including projects relating to IFRS 9
and an internal ratings based approach to risk weights ('IRB').
The Group's cost to income ratio of 27% and the management expense ratio
of 0.86% remained stable (2016: 27%(1) and 0.86% respectively) despite
the increased cost of regulation, reflecting the Bank's focus on
efficiency and use of its scalable low cost back office based in
Bangalore, India.
FSCS and other regulatory provisions
Regulatory provisions expense of GBP0.9m (2016: GBP0.5m) includes levies
due to the Financial Services Compensation Scheme ('FSCS') which
continued to decrease and other regulatory provisions.
Impairment losses
Impairment losses decreased to GBP4.4m in 2017 (2016: GBP9.0m)
representing 7bps on average gross loans and advances (2016: 16bps). The
decrease was primarily due to increased prudency in assumptions
introduced in 2016 following the UK referendum vote to leave the EU, as
well as lower underlying loan losses on acquired residential portfolios,
and the effect of increasing property values reducing potential loss.
The performance of the front book of mortgages remains strong,
reflecting the continued strength of the Bank's underwriting and lending
criteria. We kept tight control on credit quality, as seen in our
reportable arrears statistics. From more than 38,500 loans totalling
GBP8.3bn of new organic originations since the Bank's creation in
February 2011, there were only 137 cases of arrears over three months or
more as at 31 December 2017, with an aggregate value of just GBP18.4m
and average LTV of 63%.
IFRS 9
We had a successful parallel run of the IFRS 9 models throughout 2017
and were operating live under the new standard from 1 January 2018. The
day one impact of the implementation of IFRS 9 is an increase in the
provisions of c. GBP4m, representing 9bps on the Bank's CET1 ratio as at
31 December 2017 on an end game basis, reflecting the strength of
security underpinning our loan book. The Group continues to monitor the
performance of the underlying IFRS 9 models whilst assessing the ongoing
appropriateness of all key judgement and estimate areas ahead of the
full reporting of IFRS 9 impact later in 2018.
Exceptional items
There were no exceptional items in 2017.
Exceptional items in 2016 of GBP24.9m comprised the gain on disposal of
the Bank's entire economic interest in Rochester 1 of GBP34.7m and an
exceptional loss of GBP9.8m in respect of accelerated amortisation of
fair value adjustments on hedged assets relating to legacy back book
long-dated swap cancellations, in line with the underlying mortgage
asset run-off, due to faster than expected prepayments. The exceptional
loss represented the impact of accelerating the amortisation in prior
years from 2012 to 2015.
Dividend
The Board recommends a final dividend for 2017 of 9.3 pence per share.
Together with the 2017 interim dividend of 3.5 pence per share, this
represents 25% of underlying profit after taxation attributable to
ordinary shareholders for 2017, in line with the Bank's target dividend
pay-out ratio. The proposed final dividend will be paid on 16 May 2018,
subject to approval at the AGM on 10 May 2018, with an ex-dividend date
of 22 March 2018 and a record date of 23 March 2018.
Balance sheet growth
Net loans and advances grew by 23% in 2017 to GBP7,306.0m (31 December
2016: GBP5,939.2m) attributable primarily to an increase in new lending
in the Buy-to-Let/SME segment.
Retail deposits and total assets grew by 12% and 30%, respectively in
2017 with additional funding of GBP624.4m supplied by the FLS and TFS
throughout the year. By the end of 2017, the Group had completed its
planned transition out of the FLS scheme (31 December 2016: GBP524.6m)
to the TFS with drawings under the scheme of GBP1,250.0m (31 December
2016: GBP101.0m).
The TFS drawdowns are offered in the form of collateralised cash loans.
The scheme closed to new drawings at the end of February 2018 and the
Group has four years from the date of the drawing to repay the existing
loans.
Liquidity
OneSavings Bank operates under the PRA's liquidity regime. The Bank
operates within a target liquidity runway in excess of the minimum
regulatory requirement. In addition, the Bank maintains a strong
retention track record on fixed term bond and ISA maturities. As at 31
December 2017, our liquidity coverage ratio of 250% (2016: 239%) was
significantly in excess of the 2017 regulatory minimum of 90%, including
drawings under the Bank of England FLS and TFS funding facilities. The
Group's liquidity ratio as at 31 December 2017 was 15.2% (31 December
2016: 17.9%).
Capital
The Bank's fully-loaded CET1 capital ratio under CRD IV strengthened to
13.7% as at 31 December 2017 (31 December 2016: 13.3%), demonstrating
the strong organic capital generation capability of the business to
support significant growth through profitability.
We further optimised our capital structure through the issuance of
GBP60m of AT1 securities in May 2017.
The Bank had a total capital ratio of 16.9% and a leverage ratio of 6.0%
as at 31 December 2017 (31 December 2016: 15.1% and 5.5% respectively).
The Bank had a Pillar 2a requirement of 1.1% of risk weighted assets as
at 31 December 2017 (31 December 2016: 1.2%).
Cash flow statement
In 2017, the Group replaced GBP524.6m of Bank of England FLS off balance
sheet securities with cash drawn down under the TFS. This led to cash
and cash equivalents increasing by GBP680.6m during the year to
GBP1,165.9m as at 31 December 2017 (2016: restated GBP485.3m(1) ).
The Group's loans and advances to customers grew by GBP1,371.2m during
the year, partially funded by an additional GBP697.9m of deposits from
retail customers which mainly contributed to GBP512.9m of cash used in
operating activities. The remaining funding came primarily from
additional drawdowns under the TFS, which in conjunction with replacing
the FLS securities, totalled GBP1,149.0m during the year. Together with
GBP59.4m of funding from the issuance of AT1 securities, this generated
GBP1,167.5m of cash from financing activities. Cash generated from
investing activities was GBP26.0m, primarily driven by the sale and
maturity of investment securities and the purchase of additional
equipment and intangible assets.
In 2016, the Group increased its loans and advances to customers by
GBP1,031.3m. This was partially funded by an additional GBP588.6m of
deposits from retail customers. Collectively, these were the main
drivers of the GBP323.8m (restated(3) ) of cash used in operating
activities. The remaining funding came primarily from the Group
replacing its maturing on balance sheet available for sale investment
securities (GBP309.4m decrease, restated(3) ) with off balance sheet
securities under the FLS (GBP363.9m increase) in its liquidity
portfolio. Together with GBP80.2m of cash received from the Rochester 1
disposal, this generated GBP381.9m (restated(3) ) of cash inflows from
investing activities. In addition, the Group drew down GBP101.0m of cash
under the TFS which is reflected in the cash generated from financing
activities.
1. Prior to 2017, OSB deducted coupons on equity Perpetual Subordinated
Bonds ('PSBs') accounted for as dividends from underlying profit before
and after tax, net interest margin and cost to income ratio. Following a
review of market practice in advance of the Bank's AT1 issue in May
2017, OSB no longer deducts these coupons from the calculation of these
key performance indicators. The comparatives have been restated
accordingly. Interest payments on AT1 securities classified as dividends
are treated in the same way.
2. Effective tax rate excludes GBP0.4m of adjustments relating to prior
years.
Summary cash flow statement
Restated(3)
Group Group
31-Dec-2017 31-Dec-2016
GBPm GBPm
Profit before tax 167.7 163.1
Net cash generated/(used in):
Operating activities (512.9) (323.8)
Investing activities 26.0 381.9
Financing activities 1,167.5 56.7
Net increase/(decrease) in cash and cash equivalents 680.6 114.8
Cash and cash equivalents at the beginning of the
period 485.3 370.5
Cash and cash equivalents at the end of the period 1,165.9 485.3
3. The 2016 comparatives have been reclassified to include investment
securities with maturity less than three months and to exclude
encumbered loans and advances to credit institutions within cash and
cash equivalents.
Statement of Profit or Loss
For the year ended 31 December 2017
Group 2017 Group 2016
GBPm GBPm
Interest receivable and similar income 332.7 309.5
Interest payable and similar charges (87.3) (102.9)
Net interest income 245.4 206.6
Fair value losses on financial instruments (6.3) (4.9)
Gains on sales of financial instruments - 0.6
Fees and commissions receivable 1.5 2.5
Fees and commissions payable (1.0) (0.8)
External servicing fees (1.5) (2.6)
Total income 238.1 201.4
Administrative expenses (61.6) (51.1)
Depreciation and amortisation (3.5) (2.6)
Impairment losses (4.4) (9.0)
FSCS and other regulatory provisions (0.9) (0.5)
Exceptional gain on sale - 34.7
Exceptional accelerated amortisation of fair value
adjustments on hedged assets - (9.8)
Profit before taxation 167.7 163.1
Taxation (40.8) (42.2)
Profit for the year 126.9 120.9
Dividend, pence per share 12.8 10.5
Earnings per share, pence per share
Basic 51.1 49.4
Diluted 50.7 49.0
The above results are derived wholly from continuing operations.
Statement of Other Comprehensive Income
For the year ended 31 December 2017
Group 2017 Group 2016
GBPm GBPm
Profit for the year 126.9 120.9
Items which may be reclassified to profit or loss:
Fair value changes on available-for-sale securities
Arising in the year 0.1 0.1
Revaluation of foreign operations (0.3) 0.9
Other comprehensive income for the year (0.2) 1.0
Total comprehensive income for the year 126.7 121.9
Statement of Financial Position
As at 31 December 2017
Group Group
2017 2016
GBPm GBPm
Assets
Cash in hand 0.5 0.4
Loans and advances to credit institutions 1,187.2 417.8
Investment securities 19.1 141.7
Loans and advances to customers 7,306.0 5,939.2
Derivative assets 6.1 1.8
Fair value adjustments on hedged assets 31.9 46.9
Deferred taxation asset 5.1 3.4
Intangible assets 6.8 4.7
Property, plant and equipment 21.5 13.1
Other assets 4.9 11.9
Total assets 8,589.1 6,580.9
Group Group
2017 2016
GBPm GBPm
Liabilities
Amounts owed to retail depositors 6,650.3 5,952.4
Amounts owed to credit institutions 1,250.3 101.7
Amounts owed to other customers 25.7 4.0
Derivative liabilities 21.8 24.4
Fair value adjustments on hedged liabilities - 1.9
Current taxation liability 18.3 21.1
Other liabilities 16.3 18.6
FSCS and other regulatory provisions 1.4 1.5
Subordinated liabilities 10.9 21.6
Perpetual subordinated bonds 15.3 15.3
8,010.3 6,162.5
Equity
Share capital 2.4 2.4
Share premium 158.4 157.9
Retained earnings 337.5 240.7
Other reserves 80.5 17.4
578.8 418.4
Total equity and liabilities 8,589.1 6,580.9
Statement of Changes in Equity
For the year ended 31 December 2017
Foreign Share-based
Share Share Capital Transfer exchange Available-for-sale payment Retained Equity
Group capital premium contribution reserve reserve reserve reserve earnings bonds(1) Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 1
January 2017 2.4 157.9 6.2 (12.8) 0.1 - 1.9 240.7 22.0 418.4
Profit for the
year - - - - - - - 126.9 - 126.9
Coupon paid on
equity
bonds(2) - - - - - - - - (2.7) - (2.7)
Dividends paid - - - - - - - (27.0) - (27.0)
Other
comprehensive
income - - - - (0.3) 0.1 - - - (0.2)
Share-based
payments - 0.5 0.2 - - - 3.1 0.2 - 4.0
Additional
Tier 1
securities
issuance(3) - - - - - - - (0.6) 60.0 59.4
Balance at 31
December
2017 2.4 158.4 6.4 (12.8) (0.2) 0.1 5.0 337.5 82.0 578.8
Foreign Share-based
Share Share Capital Transfer exchange Available-for-sale payment Retained Equity
Group capital premium contribution reserve reserve reserve reserve earnings bonds(1) Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 1
January 2016 2.4 157.9 5.8 (12.8) (0.8) (0.1) 0.9 144.0 22.0 319.3
Profit for the
year - - - - - - - 120.9 - 120.9
Coupon paid on
equity
bonds(2) - - - - - - - (0.9) - (0.9)
Dividends paid - - - - - - - (23.3) - (23.3)
Other
comprehensive
income - - - - 0.9 0.1 - - - 1.0
Share based
payments - - `0.4 - - - 1.0 - - 1.4
Balance at 31
December
2016 2.4 157.9 6.2 (12.8) 0.1 - 1.9 240.7 22.0 418.4
1. Equity bonds comprise GBP22.0m of Perpetual Subordinated Bonds and
GBP60.0m of Additional Tier 1 securities ('AT1 securities').
2. Coupon paid on equity bonds is shown net of tax.
3. Additional Tier 1 securities issuance costs of GBP0.6m are shown net
of tax.
Statement of Cash Flows
For the year ended 31 December 2017
Restated(1)
Group Group
Year
ended Year ended
31-Dec-17 31-Dec-16
GBPm GBPm
Cash flows from operating activities
Profit before tax 167.7 163.1
Adjustments for non-cash items:
Depreciation and amortisation 3.5 2.6
Interest on subordinated liabilities 0.9 1.2
Interest on perpetual subordinated bonds 0.9 0.9
Impairment charge on loans 4.4 9.0
Gain on sale of financial instruments - (0.6)
FSCS and other provisions 0.9 0.5
Fair value losses on financial instruments 6.3 4.9
Share-based payments 2.4 1.5
Exceptional items - (24.9)
Changes in operating assets and liabilities:
Increase in loans and advances to credit
institutions(1) (6.3) (5.9)
Increase in loans to customers (1,371.2) (1,031.3)
Increase in retail deposits 697.9 588.6
Increase in intercompany balances - -
Net decrease/(increase) in other assets 7.0 -
Net (increase)/decrease in derivatives and hedged
items (0.1) 0.9
Increase/(decrease) in credit institutions and other
customers deposits 21.3 (2.7)
Net (decrease)/increase in other liabilities (3.3) (1.4)
Exchange differences on working capital (0.3) 0.9
Cash used in operating activities (468.0) (292.7)
Interest paid on bonds and subordinated debt (1.8) (2.1)
Sales of financial instruments - 1.9
FSCS and other provisions paid (1.0) (1.3)
Net tax paid (42.1) (29.6)
Net cash used in operating activities (512.9) (323.8)
Cash flows from investing activities
Maturity and sales of investment securities 40.0 712.2
Purchases of investment securities(1) - (402.8)
Proceeds from disposal of a subsidiary(2) - 80.2
Purchases of equipment and intangible assets (14.0) (7.7)
Cash generated from investing activities 26.0 381.9
Cash flows from financing activities
Bank of England TFS drawdowns 1,149.0 101.0
Coupon paid on equity bonds (3.7) (1.2)
Dividends paid (27.0) (23.3)
AT1 securities issuance net of costs 59.4 -
Proceeds from issuance of shares under employee SAYE
schemes 0.5 -
Repayment of debt(3) (10.7) (19.8)
Net cash generated from in financing activities 1,167.5 56.7
Net increase in cash and cash equivalents 680.6 114.8
Cash and cash equivalents at the beginning of the
year(1) 485.3 370.5
Cash and cash equivalents at the end of the year(1) 1,165.9 485.3
Movement in cash and cash equivalents 680.6 114.8
1. The 2016 comparatives have been restated to include investment
securities with maturity less than three months and to
exclude encumbered loans and advances to credit institutions (being the
cash ratio deposit and swap margin paid) within
cash and cash equivalents. This has no effect on the balance sheet.
2. Proceeds from a disposal of a subsidiary relate to the Group's
disposal of the entire economic interest in Rochester
Financing No.1 plc during 2016.
3. Repayment of debt comprises the 2017 LIBOR linked floating rate
subordinated liabilities of GBP5.7m and the 2017 average
standard mortgage rate linked floating subordinated liabilities of
GBP5.0m.
Extract from notes to the financial statements
1. Interest receivable and similar income
Group Group
31-Dec-17 31-Dec-16
GBPm GBPm
At amortised cost:
On BTL/SME mortgages 247.3 208.8
On Residential mortgages 91.8 107.1
On investment securities 0.1 1.2
On other liquid assets 2.0 1.6
At fair value through profit or loss
Net expense on derivative financial instruments (8.5) (9.2)
332.7 309.5
Included within interest receivable is GBP1.3m (2016: GBP1.3m) in
respect of interest accrued on accounts with an individually assessed
specific provision.
1. Interest payable and similar charges
Group Group
31-Dec-17 31-Dec-16
GBPm GBPm
On retail deposits 86.1 101.8
On Perpetual Subordinated Bonds 0.9 0.9
On subordinated liabilities 0.9 1.2
On wholesale borrowings 3.1 3.2
Net income on derivative financial instruments (3.7) (4.2)
87.3 102.9
3. Risk management
Segment and sub-segment credit risk analysis
Loan to value analysis by band for all loans:
As at 31-Dec-17
BTL/SME Residential Total
Band GBPm GBPm GBPm %
0 - 50% 747.6 808.3 1,555.9 21
50% - 60% 960.5 260.6 1,221.1 16
60% - 70% 1,606.8 228.3 1,835.1 25
70% - 80% 1,939.4 184.5 2,123.9 29
80% - 90% 359.1 138.2 497.3 7
90% - 100% 15.1 31.6 46.7 1
>100% 24.5 22.0 46.5 1
Total mortgages before provisions 5,653.0 1,673.5 7,326.5 100
Personal loans 1.1 - 1.1
Total loans before provisions 5,654.1 1,673.5 7,327.6
As at 31-Dec-16
BTL/SME Residential Total
Band GBPm GBPm GBPm %
0 - 50% 755.9 761.7 1,517.6 25
50% - 60% 859.6 278.7 1,138.3 19
60% - 70% 1,202.4 282.7 1,485.1 25
70% - 80% 1,041.2 257.1 1,298.3 22
80% - 90% 194.8 196.9 391.7 7
90% - 100% 5.0 48.0 53.0 1
>100% 36.0 34.8 70.8 1
Total mortgages before provisions 4,094.9 1,859.9 5,954.8 100
Personal loans 9.4 - 9.4
Total loans before provisions 4,104.3 1,859.9 5,964.2
Loan to value analysis by band for BTL/SME:
As at 31-Dec-17
Residential
Buy-to-Let Commercial development Funding lines Total
Band GBPm GBPm GBPm GBPm GBPm
0 - 50% 567.0 66.8 88.3 25.5 747.6
50% - 60% 841.2 62.3 42.8 14.2 960.5
60% - 70% 1,437.7 120.6 8.9 39.6 1,606.8
70% - 80% 1,811.5 112.8 3.9 11.2 1,939.4
80% - 90% 343.1 2.5 - 13.5 359.1
90% - 100% 14.2 0.4 - 0.5 15.1
>100% 19.1 5.4 - - 24.5
Total
mortgages
before
provisions 5,033.8 370.8 143.9 104.5 5,653.0
Personal loans 1.1
Total loans
before
provisions 5,654.1
As at 31-Dec-16
Residential Funding
Buy-to-Let Commercial development lines Total
Band GBPm GBPm GBPm GBPm GBPm
0 - 50% 534.1 85.2 104.7 31.9 755.9
50% - 60% 750.4 67.1 23.5 18.6 859.6
60% - 70% 1,096.8 71.0 13.4 21.2 1,202.4
70% - 80% 1,006.2 35.0 - - 1,041.2
80% - 90% 193.0 1.8 - - 194.8
90% - 100% 5.0 - - - 5.0
>100% 27.8 8.2 - - 36.0
Total
mortgages
before
provisions 3,613.3 268.3 141.6 71.7 4,094.9
Personal
loans 9.4
Total loans
before
provisions 4,104.3
Loan to value analysis by band for Residential mortgages:
As at 31-Dec-17
First Funding
charge Second charge lines Total
Band GBPm GBPm GBPm GBPm
0 - 50% 647.1 150.2 11.0 808.3
50% - 60% 163.3 94.2 3.1 260.6
60% - 70% 147.9 78.4 2.0 228.3
70% - 80% 136.1 47.2 1.2 184.5
80% - 90% 116.4 21.6 0.2 138.2
90% - 100% 22.2 9.3 0.1 31.6
>100% 7.6 14.4 - 22.0
Total mortgages before
provisions 1,240.6 415.3 17.6 1,673.5
As at 31-Dec-16
First Second Funding
charge charge Lines Total
Band GBPm GBPm GBPm GBPm
0 - 50% 579.6 154.5 27.6 761.7
50% - 60% 166.4 103.1 9.2 278.7
60% - 70% 173.3 102.3 7.1 282.7
70% - 80% 188.3 64.0 4.8 257.1
80% - 90% 168.3 27.2 1.4 196.9
90% - 100% 31.9 16.0 0.1 48.0
>100% 14.3 20.1 0.4 34.8
Total mortgages before
provisions 1,322.1 487.2 50.6 1,859.9
Analysis of mortgage portfolio by arrears and collateral held
The tables below provide further information on collateral in the
mortgage portfolio by payment due status. Capped collateral only
recognises collateral to the value of each individual mortgage and does
not recognise over-collateralisation. The collateral position by LTV
bands is captured in the LTV analysis above.
In 2016 there was an update to the categorisation where collectively
assessed provisions on loans greater than 3 months in arrears are now
treated as specific provisions, in addition to those that are
individually assessed.
Below is a summary of capped collateral:
As at
As at 31-Dec-17 31-Dec-16
Loan Capped Loan Capped
balance collateral balance collateral
GBPm GBPm GBPm GBPm
Not past
due and
not
impaired 6,792.9 6,784.8 5,478.4 5,464.5
Past due
but not
impaired 452.2 452.1 395.9 395.8
Impaired 81.4 76.6 80.5 69.1
Total
mortgages
before
provisions 7,326.5 7,313.5 5,954.8 5,929.4
Personal
loans 1.1 9.4
Total loans
before
provisions 7,327.6 5,964.2
A breakdown of the table above by payment due status is as follows:
As at
As at 31-Dec-17 31-Dec-16
Loan Capped
balance collateral Loan balance Capped collateral
GBPm GBPm GBPm GBPm
Not impaired:
Not past due 6,792.9 6,784.8 5,478.4 5,464.5
Past due < 1
month 307.1 307.1 183.5 183.5
Past due 1 to 3
months 102.0 101.9 168.2 168.2
Past due 3 to 6
months 20.9 20.9 24.4 24.3
Past due 6 to 12
months 14.1 14.1 12.8 12.8
Past due over 12
months 7.6 7.6 6.2 6.2
Possessions(1) 0.5 0.5 0.8 0.8
7,245.1 7,236.9 5,874.3 5,860.3
Impaired(2) :
Not past due 12.3 7.7 3.2 0.4
Past due < 1
month 0.8 0.8 1.0 1.0
Past due 1 to 3
months 2.2 2.1 1.2 1.2
Past due 3 to 6
months 23.7 23.7 14.8 14.8
Past due 6 to 12
months 16.3 16.3 16.3 16.2
Past due over 12
months 14.5 14.4 31.8 24.9
Possessions 11.6 11.6 12.2 10.6
81.4 76.6 80.5 69.1
Total mortgages
before
provisions 7,326.5 7,313.5 5,954.8 5,929.4
Personal loans 1.1 9.4
Total loans
before
provisions 7,327.6 5,964.2
Contractual maturity:
Group
As at
As at 31-Dec-16
31-Dec-17 Loan
Loan balance balance
Past due but not impaired: GBPm GBPm
Less than three months 9.3 5.0
Three months to one year 7.2 4.3
One to five years 27.7 22.4
More than five years 408.0 364.2
452.2 395.9
Impaired:
Less than three months 11.2 17.0
Three months to one year 0.9 1.2
One to five years 5.9 2.5
More than five years 63.4 59.8
81.4 80.5
1. Mortgages with properties in possession are not considered impaired
if the fair value of collateral exceeds the value of debt.
2. Impaired is defined as loans with a specific provision against them.
Analysis of mortgage portfolio by arrears for BTL/SME
As at 31-Dec-17
Residential Funding
Buy-to-Let Commercial development lines Total
GBPm GBPm GBPm GBPm GBPm
Not impaired:
Not past due 4,810.7 360.8 143.9 104.5 5,419.9
Past due < 1
month 160.4 2.8 - - 163.2
Past due 1 to 3 0.6
months 31.9 - - 32.5
Past due 3 to 6
months 2.7 - - - 2.7
Past due 6 to
12 months 0.7 - - - 0.7
Past due over 0.8
12 months 0.3 - - 1.1
Possessions - - - - -
5,006.7 365.0 143.9 104.5 5,620.1
Impaired: 4.5
Not past due 4.6 - - 9.1
Past due < 1
month - 0.1 - - 0.1
Past due 1 to 3
months - - - - -
Past due 3 to 6
months 9.1 - - - 9.1
Past due 6 to 0.4
12 months 4.0 - - 4.4
Past due over 0.1
12 months 1.6 - - 1.7
Possessions 7.8 0.7 - - 8.5
27.1 5.8 - - 32.9
Total mortgages
before
provisions 5,033.8 370.8 143.9 104.5 5,653.0
Personal loans 1.1
Total loans
before
provisions 5,654.1
Contractual maturity:
Past due but not impaired:
Less than three months 5.8 - -- 5.8
Three months to one year 5.6 - -- 5.6
One to five years 5.1 0.8 -- 5.9
More than five years 179.5 3.4 --182.9
196.0 4.2 --200.2
Impaired:
Less than three months 6.9 - -- 6.9
Three months to one year 0.6 - -- 0.6
One to five years 1.1 0.1 -- 1.2
More than five years 18.5 5.7 -- 24.2
27.1 5.8 -- 32.9
As at 31-Dec-16
Residential Funding
Buy-to-Let Commercial development lines Total
GBPm GBPm GBPm GBPm GBPm
Not impaired:
Not past due 3,468.7 252.9 141.6 71.7 3,934.9
Past due < 1
month 62.5 3.3 - - 65.8
Past due 1 to
3 months 56.5 1.1 - - 57.6
Past due 3 to
6 months 2.0 0.3 - - 2.3
Past due 6 to
12 months 0.4 0.7 - - 1.1
Past due over
12 months - 0.3 - - 0.3
Possessions - - - - -
3,590.1 258.6 141.6 71.7 4,062.0
Impaired:
Not past due 2.5 0.1 - - 2.6
Past due < 1
month - 0.4 - - 0.4
Past due 1 to
3 months - 0.3 - - 0.3
Past due 3 to
6 months 1.1 0.2 - - 1.3
Past due 6 to
12 months 2.3 0.1 - - 2.4
Past due over
12 months 9.0 6.0 - - 15.0
Possessions 8.3 2.6 - - 10.9
23.2 9.7 - - 32.9
Total
mortgages
before
provisions 3,613.3 268.3 141.6 71.7 4,094.9
Personal
loans 9.4
Total loans
before
provisions 4,104.3
Contractual maturity
Past due but not impaired:
Less than three months 0.1 - -- 0.1
Three months to one year 0.4 - -- 0.4
One to five years 4.1 - -- 4.1
More than five years 116.8 5.7 --122.5
121.4 5.7 --127.1
Impaired:
Less than three months 15.4 - -- 15.4
Three months to one year - - -- -
One to five years - - -- -
More than five years 7.8 9.7 -- 17.5
23.2 9.7 -- 32.9
Analysis of mortgage portfolio by arrears for Residential mortgages
As at 31-Dec-17
First Funding
charge Second charge lines Total
GBPm GBPm GBPm GBPm
Not impaired:
Not past due 1,023.6 331.8 17.6 1,373.0
Past due < 1 month 123.1 20.8 - 143.9
Past due 1 to 3 months 46.4 23.1 - 69.5
Past due 3 to 6 months 10.5 7.7 - 18.2
Past due 6 to 12 months 8.1 5.3 - 13.4
Past due over 12 months 3.2 3.3 - 6.5
Possessions 0.5 - - 0.5
1,215.4 392.0 17.6 1,625.0
Impaired:
Not past due 2.9 0.3 - 3.2
Past due < 1 month 0.7 - - 0.7
Past due 1 to 3 months 2.2 - - 2.2
Past due 3 to 6 months 7.5 7.1 - 14.6
Past due 6 to 12 months 6.6 5.3 - 11.9
Past due over 12 months 2.2 10.6 - 12.8
Possessions 3.1 - - 3.1
25.2 23.3 - 48.5
Total mortgages before
provisions 1,240.6 415.3 17.6 1,673.5
Contractual maturity
Past due but not impaired:
Less than three months 3.3 0.2 - 3.5
Three months to one year 1.0 0.6 - 1.6
One to five years 11.5 10.3 - 21.8
More than five years 176.0 49.1 -225.1
191.8 60.2 -252.0
Impaired:
Less than three months 4.2 0.1 - 4.3
Three months to one year - 0.3 - 0.3
One to five years 0.8 3.9 - 4.7
More than five years 20.2 19.0 - 39.2
25.2 23.3 - 48.5
As at 31-Dec-16
First Funding
charge Second charge line Total
GBPm GBPm GBPm GBPm
Not impaired:
Not past due 1,100.6 392.3 50.6 1,543.5
Past due < 1 month 99.8 17.9 - 117.7
Past due 1 to 3 months 80.2 30.4 - 110.6
Past due 3 to 6 months 12.8 9.3 - 22.1
Past due 6 to 12 months 5.0 6.7 - 11.7
Past due over 12 months 2.8 3.1 - 5.9
Possessions 0.8 - - 0.8
1,302.0 459.7 50.6 1,812.3
Impaired:
Not past due 0.6 - - 0.6
Past due < 1 month 0.6 - - 0.6
Past due 1 to 3 months 0.9 - - 0.9
Past due 3 to 6 months 6.0 7.5 - 13.5
Past due 6 to 12 months 5.8 8.1 - 13.9
Past due over 12 months 4.9 11.9 - 16.8
Possessions 1.3 - - 1.3
20.1 27.5 - 47.6
Total mortgages before provisions 1,322.1 487.2 50.6 1,859.9
Contractual maturity:
Past due but not impaired:
Less than three months 4.3 0.6 - 4.9
Three months to one year 2.8 1.1 - 3.9
One to five years 9.1 9.2 - 18.3
More than five years 185.2 56.5 -241.7
201.4 67.4 -268.8
Impaired:
Less than three months 1.3 0.3 - 1.6
Three months to one year 0.2 1.0 - 1.2
One to five years - 2.5 - 2.5
More than five years 18.6 23.7 - 42.3
20.1 27.5 - 47.6
Geographical analysis by region
An analysis of loans by region is provided below:
As at 31-Dec-2017 As at 31-Dec-2016
Region GBPm % GBPm %
East Anglia 236.4 3 182.2 3
East Midlands 249.6 4 204.5 3
Greater London 3,173.0 43 2,543.1 43
Guernsey 73.8 1 93.4 2
Jersey 225.1 3 282.0 5
North East 103.0 1 90.3 2
North West 347.9 5 273.2 5
Northern Ireland 16.9 - 16.8 -
Scotland 51.1 1 56.1 1
South East 1,591.7 22 1,278.5 21
South West 522.3 7 380.6 6
Wales 142.9 2 114.7 2
West Midlands 425.4 6 308.6 5
Yorks & Humberside 167.4 2 130.8 2
Total mortgages before provisions 7,326.5 100 5,954.8 100
Personal loans 1.1 9.4
Total loans before provisions 7,327.6 5,964.2
General note to the financial information
The financial information set out in the announcement does not
constitute the Company's statutory accounts for the years ended 31
December 2017 or 31 December 2016, but is derived from those statutory
accounts, which have been reported on by the Company's auditors.
Statutory accounts for the years ended 31 December 2016 have been
delivered to the Registrar of Companies and those for the year ended 31
December 2017 will be delivered to the Registrar following the Company's
Annual General Meeting.
Sections of this preliminary announcement, including but not limited to
the Chief Executive's Report and Operating and Financial Review, may
contain forward-looking statements with respect to certain of the plans
and current goals and expectations relating to the future financial
condition, business performance and results of the Group. These have
been made by the Directors in good faith using information available up
to the date on which they approved this report. By their nature, all
forward-looking statements involve risk and uncertainty because they
relate to future events and circumstances that are beyond the control of
the Group and depend upon circumstances that may or may not occur in the
future. There are a number of factors that could cause actual future
financial conditions, business performance, results or developments to
differ materially from the plans, goals and expectations expressed or
implied by these forward-looking statements and forecasts. Nothing in
this document should be construed as a forecast.
A copy of the Annual Report and Accounts for the year ended 31 December
2017 will be posted to shareholders in due course. Copies of this
announcement can be obtained from the Group Company Secretary,
OneSavings Bank plc, Reliance House, Sun Pier, Chatham, Kent ME4 4ET.
Risk overview
Strategic Risk Management Framework
Ongoing risk identification, assessment, monitoring and reporting are
the primary risk disciplines underpinning the Group's growth strategy
and adherence to the prudential and conduct regulatory requirements. The
Group's approach to risk management is outlined within the Strategic
Risk Management Framework ('SRMF').
The SRMF is the overarching framework which enables the Board and senior
management to actively manage and optimise the risk-reward profile
within the constraints of the Group risk appetite. Specifically, the
SRMF enables the Board and senior management to take informed decisions
by appropriately balancing the interests and expectations of the various
stakeholders and to manage potential trade-offs within the context of
the risk appetite.
Risk principles and culture
The Board adopted a principle-based approach to articulating its
expectations and guidance relating to how the Group should frame its
risk management approach. The risk management principles are designed to
set a clear 'tone from the top' with respect to the Group's risk culture
and values. The risk principles also provide the background context in
which to articulate the Group's risk management objectives, strategy and
appetite. The risk principles are:
-- Customer outcomes: fair treatment and good customer outcomes are core
business values which cannot be put at risk
-- Proportionate and scalable: the approach to risk management needs to be
commensurate with the complexity of the underlying risk profile and
appropriately agile to respond to changing business and regulatory
needs
-- Actively managed: the risk profile needs to be actively managed within
the Board approved risk appetite
-- Comprehensive coverage: all risks and their underlying drivers impacting
the Group's strategic, business, operational and regulatory objectives
should be actively assessed, monitored and reported
-- Segregation of duties: risk taking, oversight and assurance
responsibility to be organised in adherence to the 'three lines of
defence' principle
-- Integration and usage: risk assessment should be a critical feature of
decision making processes at all levels of the organisation
-- Versatile and progressive: the approach to managing risks should be
subject to continuous review and challenge to keep pace with emerging
good practice and regulatory standards.
In adherence to the risk management principles, the Group Board and
senior management have cultivated a risk culture which encourages a
proactive, transparent and analytical approach to risk management. Risks
are assumed in a balanced and considered manner, taking into account
stakeholder expectations, good customer outcomes, risk management
capabilities and controls.
Risk strategy & appetite
Risk strategy
OSB's risk strategy is to create value through informed risk-based
decisions and leveraging the Group's risk data and analytics in a timely
and accurate manner to optimise the risk-reward profile. Risks are only
to be assumed which can be effectively identified, assessed, measured
and controlled across all phases of the risk life cycle.
This risk strategy is based on three key components:
-- Creating value through generating returns which sufficiently exceed
the cost of risk, funding costs and operating costs
-- Risks are only to be assumed where they are subject to a structured
and disciplined approach to risk management
-- Risk management capabilities are scalable and agile enough to
adequately address future evolution of the risk profile.
Risk appetite
The Group effectively aligned its strategic and business objectives with
its risk appetite, ensuring that the Board and senior management are
able to monitor the underlying risk profile relative to the overarching
risk principles, risk strategy and financial performance objectives of
the Group. The risk appetite is a critical mechanism though which the
Board and senior management are able to identify adverse trends and
respond to unexpected developments in a timely and considered manner.
The risk appetite is calibrated to reflect the Group's strategic
objectives, business operating plans, as well as external economic,
business and regulatory constraints. In particular, the risk appetite is
calibrated to ensure that the Bank continues to deliver against its
strategic objectives and operates with sufficient financial buffers even
when subjected to plausible but extreme stress scenarios. The objective
of the Board risk appetite is to ensure that the strategy and business
operating model is sufficiently resilient.
The risk appetite is calibrated using statistical analysis and stress
testing to inform the process by which the Board set management triggers
and limits against key risk indicators. The Board and senior management
actively monitor actual performance against Board approved management
triggers and limits to respond in a timely manner to adverse trends and
breaches.
Risk appetite statements
Overarching risk appetite statement
The Bank has a prudent and proportionate approach to risk taking and
management, which is reflective of its straightforward business model.
The inherent resilience of the Group's business model is underpinned by
the fact that the Bank only lends on a secured basis, has established
robust underwriting practices and relies on intermediary based
distribution. The Group supports its lending activities by being
predominantly reliant on stable retail funding, supported by strong and
high quality financial buffers. The highly efficient business operating
model is an important source of competitive advantage. The Group also
places significant importance on its strong conduct and compliance
culture as an important driver of its overall success.
Strategic and business risk appetite statement
The Group's strategic and business risk appetite states that the Group
does not intend to undertake any long to medium-term strategic actions
that would put at risk its vision of being a leading specialist lender,
backed by a strong and dependable saving franchise. The Group adopts a
long-term sustainable business model which, while focused on niche
sub-sectors, is capable of adapting to growth objectives and external
developments.
Reputational risk appetite statement
The Group does not knowingly conduct business or organise its operations
to put its reputation and franchise value at risk.
Credit risk appetite statement
The Group seeks to maintain a high quality lending portfolio that
generates adequate returns, under normal and stressed periods. The
portfolio is actively managed to operate within set criteria and limits
based on profit volatility, focusing on key sectors, recoverable values,
and affordability and exposure levels. The Group aims to continue to
generate sufficient income and control credit losses to a level such
that it remains profitable even when subjected to a credit portfolio
stress of a 1 in 20 intensity stress scenario.
Market risk appetite statement
The Group actively manages market risk arising from structural interest
rate positions. The Group does not seek to take a significant interest
rate position or a directional view on rates and it limits its
mismatched and basis risk exposures.
Liquidity and funding risk appetite statement
The Group actively maintains stable and efficient access to funding and
liquidity to support its ongoing operations. It also maintains an
appropriate level and quality of liquid asset buffer so as to withstand
market and idiosyncratic liquidity related stresses.
Solvency risk appetite statement
OSB seeks to ensure that it is able to meet its Board Level Capital
buffer requirements under a 1 in 20 stress scenario. The Group's
solvency risk appetite is constrained within the leverage ratio related
requirements. We manage our capital resources in a manner which avoids
excessive leverage and allows us flexibility in raising capital.
Operational risk appetite statement
The Group's operational processes, systems and controls are designed to
minimise disruption to customers, damage to the Bank's reputation and
any detrimental impact on financial performance. The Bank actively
promotes the continual evolution of its operating environment through
the identification, evaluation and mitigation of risks, whilst
recognising that the complete elimination of operational risk is not
possible.
Conduct risk appetite statement
The Bank considers its culture and behaviours in ensuring the fair
treatment of customers and in maintaining the integrity of the markets
in which it operates a fundamental part of its strategy and a key driver
to sustainable profitability and growth. OSB does not tolerate any
systemic failure to deliver fair customer outcomes. On an isolated basis
incidents can result in detriment owing to human and / or operational
failures. Where such incidents occur they are thoroughly investigated,
and the appropriate remedial actions are taken to address any customer
detriment and to prevent recurrence.
Compliance and regulatory risk appetite statement
The Group views ongoing conformance with regulatory rules and standards
across all the jurisdictions in which it operates as a critical facet of
its risk culture. The Group does not knowingly accept compliance risk
which could result in regulatory sanctions, financial loss or damage to
its reputation. The Group will not tolerate any systemic failure to
comply with applicable laws, regulations or codes of conduct relevant
given its business operating model.
Risk Governance and organisational structure
Risk governance refers to the processes and structures established by
the Board to ensure that risks are assumed and managed within the Board
approved risk appetite, with clear delineation between risk taking,
oversight and assurance responsibilities. The Group's risk governance
framework is structured to adhere to the 'three lines of defence' model.
All risk taking, oversight and assurance functions are allocated to
accountable Executives.
The Group Board has the ultimate responsibility for the oversight of the
Group's risk profile and management framework and where it deems it
appropriate, it delegates its authority to its nominated committees. The
Board and its committees are provided with appropriate and timely
information relating to the nature and level of the risks to which the
Group is exposed and the adequacy of the risk controls and mitigants.
The Internal Audit function provides independent assurance to the Board
and its committees as to the effectiveness of the systems and controls
and the level of adherence with internal policies and regulatory
requirements.
2017 highlights
IFRS 9
The Board has identified transition towards IRB based capital treatment
as an important strategic objective and the Group has made significant
progress in the development of its IFRS 9 and Internal Ratings Based
('IRB') frameworks. The Group's IFRS 9 programme progressed to plan,
moving into the parallel run phase for 2017. We are well placed to
implement IFRS 9 in 2018.
Credit risk
The Group's credit profile performed strongly in 2017, driven by deep
market knowledge of the specialist markets in which it operates, prudent
lending policies and sound credit risk management.
During the year, the Group's portfolio composition mix continued to
evolve with pre-2011 lending (prior to OneSavings Bank PLC being
established) continuing to run off. Legacy problem loans reduced further
in 2017 from GBP13.8m to GBP8.6m, following careful management by our
experienced collections team. The Group's acquired portfolios also
continued to perform in line with expectations in terms of run-off rates
and credit profile performance.
The Group's funding lines and development finance businesses delivered a
strong performance in 2017, with no impairment recognised across either
segment.
Strong Group originations performance was observed in 2017, driven by
performance across the Buy-to-Let/SME segment. Importantly, this lending
was underwritten at sensible LTV levels, where underwriting policy,
tightened post the United Kingdom's decision to leave the European Union,
resulted in a greater clustering of LTV levels against the portfolio
average. Post-2011 lending, incorporating enhanced lending criteria,
continued to make up an increasing proportion of the Group's total loans
and advances to customers, where 38,500 loans have been underwritten
with only 137 loans being greater than three months arrears with
aggregate loans totalling GBP18.4m with aggregate weighted average LTV
of 63%.
This portfolio mix shift coupled with strong credit risk management and
continuing favourable economic conditions supported the portfolio
arrears rate reducing to 1.2% as at 31 December 2017 excluding legacy
problem loans (31 December 2016: 1.4%).
Credit profile performance
31-Dec-
Segment Measure 31-Dec-2017 2016 Variance Commentary
New lending
average LTV
remained
BTL/SME New origination average LTV 70% 70% 0% stable
Resulting
from a
tightening of
affordability
Weighted average ICR for new lending 185% 171% +14% rules
New lending
average LTV
Residential New origination average LTV 65% 66% -1% reduced
Percentage of new residential lending with a loan Increase in
to cases with
income (LTI) greater than 4.5 3.2% 2.6% +0.6% LTI>4.5
Other key risk measures also performed strongly within the period:
-- gross exposure to semi-commercial/commercial lending remains low at
GBP370.8m with weighted average LTV of 63%
-- gross exposure to residential development finance remains low at
GBP143.8m with a further GBP78.0m committed with a weighted average LTV
of 37.7%
-- the Group has limited exposure to high LTV loans on properties worth
more than GBP2m. In total only 4% of the Group's loan portfolio is
secured on properties valued at greater than GBP2m with a LTV greater
than 65%.
Forbearance
Where borrowers experience financial difficulties which impacts their
ability to service their financial commitments under the loan agreement,
forbearance may be used to achieve an outcome which is mutually
beneficial to both the borrower and the Bank.
By identifying borrowers who are experiencing financial difficulties
pre-arrears or in arrears a consultative process is initiated to
ascertain the underlying reasons and to establish the best course of
action to enable the borrower to develop credible repayment plans and to
see them through the period of financial stress.
2017 2016 restated(1)
number 2017 number 2016
of year-end balance of year- end balance '17 vs '16 variance of balance
Forbearance type accounts GBPm accounts GBPm '17 vs '16 variance number of accounts GBPm
Interest only
switch 35 3.8 60 6.3 -25 -2.5
Interest rate
reduction - - 3 2.2 -3 -2.2
Term extension 29 4.9 31 5.9 -2 -1.0
Payment holiday 50 1.5 37 1.6 13 -0.1
Voluntary
assisted sale 2 0.7 - - 2 0.7
Payment
concession
(reduced monthly
payments) 42 0.8 58 3.5 -16 -2.7
Capitalisation - - 3 0.1 -3 -0.1
Total 158 11.7 192 19.6 -34 -7.9
2017 2016 restated(1)
number 2017 number 2016
of year-end balance of year- end balance '17 vs '16 variance of balance
Loan type accounts GBPm accounts GBPm '17 vs '16 variance number of accounts GBPm
First
charge
owner
occupier 55 4.5 117 12.4 -62 -7.9
Second
charge
owner
occupier 77 1.6 60 1.3 17 0.3
Buy-to-Let 26 5.6 14 5.5 12 0.1
Commercial - - 1 0.4 -1 -0.4
Total 158 11.7 192 19.6 -34 -7.9
1. The 2016 year end forbearance balances have been restated for second
charge owner occupier to remove the related first charge balance, to
align to the enhanced approach adopted for 2017.
Solvency risk
The Bank has maintained an appropriate level and quality of capital to
support its prudential requirements with sufficient contingency to
withstand a severe but plausible stress scenario. The solvency risk
appetite is based on a stacking approach, whereby the various capital
requirements (Pillar 1, ICG, CRD IV buffers and Board and management
buffers) are incrementally aggregated as a percentage of available
capital (CET1 and total capital).
Solvency risk is a function of balance sheet growth, profitability,
access to capital markets and regulatory changes. The Bank actively
monitors all key drivers of solvency risk and takes prompt action to
maintain its solvency ratios at acceptable levels. The Board and
management also assess solvency when reviewing the Bank's business plans
and inorganic growth opportunities.
In 2017, the Bank strengthened its CET1 ratio by 0.4% to 13.7% and total
capital ratio by 1.8% to 16.9% despite strong organic growth,
demonstrating both the strength of internal capital generation
capabilities through profitability and the ability to raise additional
capital in the market.
Liquidity and funding risk
The Bank has a prudent approach to liquidity management through
maintaining sufficient liquidity resources to cover cash flow imbalances
and fluctuations in funding under both normal and stressed conditions
arising from market wide and Bank specific events. The Bank's liquidity
risk appetite has been calibrated to ensure that the Bank always
operates above the minimum prudential requirements with sufficient
contingency for unexpected stresses whilst actively minimising the risk
of holding excessive liquidity which would adversely impact the
financial efficiency of the business model.
The Bank has successfully utilised the Bank of England FLS and TFS
secured funding facilities to manage its liquidity throughout 2017, and
continues to attract new retail savers and retain existing customers
through loyalty-based product offerings.
In 2017 the Bank actively managed its liquidity and funding profile
within the confines of its risk appetite as set out in the ILAAP. Its
liquidity ratio at 15.2% and liquidity coverage ratio ('LCR') at 250%
remain well above risk appetite and regulatory minimums.
Market risk
The Bank proactively manages its risk profile in respect of adverse
movements in interest rates, foreign exchange rates and counterparty
exposures. The Bank accepts interest rate risk and basis risk as a
consequence of structural mismatches between fixed rate mortgage lending,
sight and fixed term savings and the maintenance of a portfolio of high
quality liquid assets. Interest rate exposure is mitigated on a
continuous basis through portfolio diversification, reserve allocation
and the use of financial derivatives within limits set by ALCO and
approved by the Board.
Interest rate risk
The Bank does not actively assume interest rate risk, does not execute
client or speculative securities transactions for its own account, and
does not seek to take a significant directional interest rate position.
Limits have been set to allow management to run occasional unhedged
positions in response to balance sheet dynamics and capital has been
allocated for this. Exposure limits are calibrated in accordance with a
statistically-derived risk appetite, and are calibrated in proportion to
available CET1 capital in order to accommodate balance sheet growth.
The Group sets limits on the tenor and rate reset mismatches between
fixed-rate assets and liabilities, including derivatives hedges, with
exposure and risk appetite assessed with reference to historic and
potential stress scenarios cast at consistent levels of modelled
severity.
Throughout 2017 the Bank managed its interest rate risk exposure within
its risk appetite limits. The Bank has also made significant progress in
a project to replace its current interest rate risk management system
with a new system allowing greater functionality which will enhance the
management of interest rate risk. Implementation of the new system is
scheduled to be completed during the first half of 2018.
Basis risk
Basis risk arises from assets and liabilities repricing with reference
to different interest rate indices, including positions which reference
variable market, policy and managed rates. As with structural interest
rate risk, the Bank does not seek to take a significant basis risk
position, but maintains defined limits to allow operational flexibility.
As with structural interest rate risk, capital allocation has been set
in proportion to common equity tier 1 capital, with exposure assessed
and monitored monthly across a range of 'business as usual' and stressed
scenarios.
Throughout 2017 the Bank managed its basis risk exposure within its risk
appetite limits.
Operational risk
OSB continues to adopt a proactive approach to the management of
operational risks. The Operational Risk Management Framework has been
designed to ensure a robust approach to the identification, measurement
and mitigation of operational risks, utilising a combination of both
qualitative and quantitative evaluations in order to promote an
environment of progressive operational risk management. The Group's
operational processes, systems and controls are designed to minimise
disruption to customers, damage to the Bank's reputation and any
detrimental impact on financial performance. The Bank actively promotes
the continual evolution of its operating environment through the
identification, evaluation and mitigation of risks, whilst recognising
that the complete elimination of operational risk is not possible.
Where risks continue to exist, there are established processes to
provide the appropriate levels of governance and oversight, together
with an alignment to the level of risk appetite stated by the OSB Board.
A strong culture of transparency and escalation has been cultivated
throughout the organisation, with the operational risk function having a
Group wide remit, ensuring a risk management model that is well embedded
and consistently applied. In addition, a community of Risk Champions
representing each business line and location have been identified.
Operational Risk Champions ensure that the operational risk
identification and assessment processes are established across the Group
in a consistent manner. Risk Champions are provided with appropriate
support and training by the operational risk function.
Regulatory and compliance risk
The Bank is committed to the highest standards of regulatory conduct and
aims to minimise breaches, financial costs and reputational damage
associated with non-compliance. However, given the growing scale and
complexity of regulatory changes, it is acknowledged that there may be
isolated instances whereby the Bank's interpretation and response to new
regulatory requirements reflects the Bank's specific circumstances and
its desire to give the best customer outcomes.
The Bank has an established compliance function which actively
identifies, assesses and monitors adherence with current regulation and
the impact of emerging regulation.
Principal risks and uncertainties
Strategic and business risk
The risk to the Bank's earnings and profitability arising from its
strategic decisions, change in the business conditions, improper
implementation of decisions or lack of responsiveness to industry
changes.
Arising from
Performance against strategic and business targets does not meet
stakeholder expectations. This has the potential to damage the Group's
franchise value and reputation.
Mitigation and control
Regular monitoring by the Board and the Executive Committee of
monitoring of strategic and business performance against market
commitments, the balanced business scorecard and risk appetite. Use of
stress testing to flex core business planning assumptions to assess
potential performance under stressed operating conditions.
Reputational risk
The potential risk of adverse effects that can arise from the Bank's
reputation being sullied due to factors such as unethical practices,
adverse regulatory actions, customer dissatisfaction and complaints or
negative/adverse publicity. Reputational risk can arise from a variety
of sources and is a second order risk - the crystallisation of a credit
risk or operational risk can lead to a reputational risk impact.
Arising from
Potential loss of trust and confidence that our stakeholders and
customers place in us as a responsible and fair provider of financial
services.
Mitigation and control
Culture and commitment to treating customers fairly and being open and
transparent in communication with key stakeholders. Established
processes to proactively identify and manage potential sources of
reputational risk.
Credit risk
The potential for loss due to the failure of a counterparty to meet its
contractual obligation to repay a debt in accordance with the agreed
terms.
Individual borrower defaults
Borrowers may encounter idiosyncratic problems in repaying their loans,
for example loss of a job or execution problems with a development
project. While most of the Bank's lending is secured, some borrowers may
fail to maintain the value of the security.
Mitigation and controls
All loans are extended only after thorough bespoke and expert
underwriting to ensure ability and propensity of borrowers to repay and
sufficient security in case of default.
Should there be problems with a loan, the collections and recoveries
team works with customers unable to meet their loan service obligations
to reach a satisfactory conclusion while adhering to the principle of
treating customers fairly.
Our strategic focus on lending to professional landlords means that
properties are likely to be well managed, with income from a diversified
portfolio mitigating the impact of rental voids or maintenance costs.
Lending to owner-occupiers is subject to a detailed affordability
assessment, including the borrower's ability to continue payments if
interest rates increase. Lending on commercial property is more based on
security, and is scrutinised by the Group's independent Real Estate team
as well as by external valuers.
Development lending is extended only after a deep investigation of the
borrower's track record and stress testing the economics of the specific
project.
The Group's Transactional Credit Committee actively reviews and approves
larger or more complex mortgage applications.
Macroeconomic downturn
A broad deterioration in the economy would adversely impact both the
ability of borrowers to repay loans and the value of the Group's
security. Credit losses would impact across the lending portfolio, so
even if individual impacts were to be small, the aggregate impact on the
Group could be significant.
Mitigation and controls
The Group works within portfolio limits on LTV, affordability, name,
sector and geographic concentration that are approved by Risk Committee
and the Board. These are reviewed on a semi-annually basis. In addition,
stress testing is performed to ensure that the Group maintains
sufficient capital to absorb losses in an economic downturn and continue
to meet its regulatory requirements.
Wholesale credit risk
The Bank has wholesale exposures both through call accounts used for
transactional and liquidity purposes and through derivative exposures
used for hedging.
Mitigation and controls
The Group transacts only with high quality wholesale counterparties.
Derivative exposures include collateral agreements to mitigate credit
exposures.
Market risk
Potential loss due to changes in market prices or values.
Interest rate risk
An adverse movement in the overall level of interest rates could lead to
a loss in value due to mismatches in the duration of assets and
liabilities.
Mitigation and controls
The Group's Treasury department actively hedges to match the timing of
cash flows from assets and liabilities.
Basis risk
A divergence in market rates could lead to a loss in value, as assets
and liabilities are linked to different rates.
Mitigation and controls
The Group strategically focuses on products linked to administered rates
to keep control of yield.
Liquidity and funding risk
The risk that the Group will be unable to meet its financial obligations
as they fall due.
Retail funding stress
As the Group is primarily funded by retail deposits, a retail run could
put it in a position where it could not meet its financial obligations.
Increased competition for retail savings driving up funding costs,
adversely impacting retention levels and wider damage to OSB franchise.
Mitigation and controls
The Group's funding strategy is focused on a highly stable retail
deposit franchise. The large number of depositors provides
diversification and a high proportion of balances are covered by the
FSCS and so there is no material risk of a retail run.
In addition, the Group performs in-depth liquidity stress testing and
maintains a liquid asset portfolio sufficient to meet obligations under
stress. The Group holds prudential liquidity buffers to manage funding
requirements under normal and stressed conditions.
The Group proactively manages its savings proposition through both the
Liquidity Working Group and the ALCO.
Finally, the Group has prepositioned mortgage collateral with the Bank
of England which allows it to consider other alternative funding sources
to ensure it is not solely reliant on retail savings.
The Group's funding plan ensures a diverse funding profile and
initiatives have been put in place to replace TFS with a comprehensive
Retail Mortgage Backed Securities ('RMBS') programme.
Term funding scheme withdrawal
The potential impact of the withdrawal of the TFS programme is
uncertain.
Mitigation and controls
The Group's funding plan ensures a diverse funding profile and
initiatives have been put in place to replace TFS with a comprehensive
Retail Mortgage Backed Securities ('RMBS') programme.
Solvency risk
The potential inability of the Bank to ensure that it maintains
sufficient capital levels for its business strategy and risk profile
under both the base and stress case financial forecasts.
Arising from
Key risks to solvency arise from balance sheet growth and unexpected
losses which can result in the Bank's capital requirements increasing or
capital resources being depleted such that it no longer meets the
solvency ratios as mandated by the PRA and Board risk appetite.
The regulatory capital regime is subject to change and could lead to
increases in the level and quality of capital that the Group needs to
hold to meet regulatory requirements.
Mitigation and controls
Currently the Bank operates from a strong capital position and has a
consistent record of strong profitability.
The Bank actively monitors its capital requirements and resources
against financial forecasts and plans and undertakes stress testing
analysis to subject its solvency ratios to extreme but plausible
scenarios.
The Bank also holds prudent levels of capital buffers based on CRD IV
requirements and expected balance sheet growth.
The Group engages actively with regulators, industry bodies, and
advisers to keep abreast of potential changes and provide feedback
through the consultation process.
Operational risk
The risk of loss or negative impact to the Group resulting from
inadequate or failed internal processes, people or systems, or from
external events.
Cyber/data security risk
The risk of a loss of customer or proprietary data as a result of theft
or through ineffective data management.
Mitigation and controls
A series of tools designed to identify and prevent network / system
intrusions are deployed across the Group.
The effectiveness of the controls is overseen by a dedicated IT Security
Governance Committee, with specialist IT Security staff employed by the
Bank.
Data risk
The use of inaccurate, incomplete or outdated data may result in a range
of risks impacting risk management and reporting services.
Mitigation and controls
The Bank continues to invest in and enhance its data management
architecture, systems, governance and controls.
Regulatory risk
The operational risks arising from the management of a significant
volume of regulatory change.
Mitigation and controls
The Bank operates a series of controls to identify any relevant
regulatory change at an early stage.
Regulatory related changes are appropriately prioritised and resourced
in order to ensure the timely implementation of any operational changes
required.
Operational and IT Resilience
Banks should have business resiliency, continuity monitoring and plans
in place to ensure an ability to operate on an ongoing basis and limit
losses in the event of severe business disruption.
Technical failures (including bugs, network or data) resulting in
critical system outage. These would include OSB's primary mortgage
origination and servicing systems, saving processing system and core
reporting and data management systems leading to loss of service,
revenue, business performance and potential customer detriment.
Mitigation and controls
The Bank has established an Operational Resilience Programme that is
delivering a Group wide approach in respect to planning and testing. In
addition the Programme is designed to highlight any areas of specific
vulnerability.
A range of back-up technologies employed to provide real-time
replication on various critical systems while disaster recovery
capabilities are tested annually.
Real-time system performance monitoring established and a dedicated
testing team in place.
Operational execution and scalability
The inability of the Bank to automate current operational processes at
the speed the business requires in order to successfully meet future
growth.
Mitigation and controls
In order to mitigate incidents materialising from manual processes an
established two tier (dependent and independent within the first line)
risk based quality control program is in place.
Conduct risk
The risk that the Group's behaviours or actions result in customer
detriment or negative impact on the integrity of the markets in which it
operates.
Product suitability
Whilst the Group originates relatively simple products, there remains a
risk that (primarily legacy) products may be deemed to be unfit for
their original purpose in line with the current regulatory definitions.
Mitigation and controls
The Group has a strategic commitment to provide simple, customer-focused
products. In addition, a Product Governance framework is established to
oversee both the origination of new products and to revisit the ongoing
suitability of the existing product suite.
A dedicated Product Governance team which is part of an independent
Conduct Risk team serves to effectively manage this risk.
Data protection
The risk that customer data is accessed inappropriately, either as a
consequence of network / system intrusion or through operational errors
in the management of the data.
Mitigation and controls
In addition to a series of network / system controls (documented within
as part of the operational risks), the Bank performs extensive root
cause analysis of any data leaks in order to ensure that the appropriate
mitigating actions are taken.
Compliance and regulatory risk
The risk that a change in legislation or regulation or an interpretation
that differs from the Group's will adversely impact the Group.
Arising from
Key compliance regulatory changes that impacted the Bank included PRA's
Buy-to-let underwriting standards, certification regime under the SM&CR,
PSD2, GDPR, Criminal Finances Act, European Fourth Money Laundering
Directive, FCA guidance on automatic capitalisation for residential
mortgage customers.
Mitigation and controls
The Bank has an effective horizon scanning process to identify
regulatory change.
All significant regulatory initiatives are managed by structured
programmes overseen by the change management team and sponsored at
Executive management level.
The Bank has proactively sought external expert opinions to support
interpretation of the requirements and validation of its response.
Conduct regulation
Regulatory changes focused on the conduct of business could force
changes in the way the Group carries out business and impose substantial
compliance costs. For example, the Financial Policy Committee's
increased focus on Buy-to-Let lending or tax changes such as the Bank
profits surcharge must be considered.
Mitigation and controls
The Group has a programme of regulatory horizon scanning linking into a
formal regulatory change management programme. In addition, the focus on
simple products and customer oriented culture means that current
practice may not have to change significantly to meet new conduct
regulations.
Emerging risks
The Group proactively scans for emerging risks which may have an impact
on its ongoing operations and strategy. The Group considers its top
emerging risks to be:
Political and macroeconomic uncertainty
As a result of the UK government triggering Article 50 and subsequent
general election result, there is an increased likelihood of a period of
macroeconomic uncertainty. The Group's lending activity is solely
focused in the United Kingdom and as such, will be impacted by any risks
emerging from changes in the macroeconomic environment.
Mitigation and controls
The Group has implemented robust monitoring processes and via various
stress testing activity (i.e. ad hoc, risk appetite and ICAAP)
understands how the Group performs over a variety of macroeconomic
stress scenarios and has subsequently developed a suite of early warning
indicators which are closely monitored to identify changes in the
economic environment.
General data usage
From the 25 May 2018, the Group will comply with GDPR. This will result
in increased regulatory requirements with respect to processing customer
and employee personal and other data in the course of day-to-day
business activities.
Mitigation and controls
The Group has mobilised a project (with dedicated resources) to
implement the GDPR as required.
Viability Statement
In accordance with provision C.2.2 of the UK Corporate Governance Code,
the Board of Directors have assessed the prospects and viability of the
Group over a three-year period by comprehensively assessing the
principal risks and uncertainties to which it is exposed and have
concluded that they have a reasonable expectation that the Group will be
able to continue to operate and meet its liabilities as they fall due
over that period.
The three-year time period was selected for the following reasons:
-- The Group's operating and financial plan covers a three-year period.
-- The three-year operating and financial plan considers, among other
matters: the Board's risk appetite; macroeconomic outlook; market
opportunity; the competitive landscape; and sensitivity of the financial
plan to volumes, margin pressures and capital requirements.
-- The Board believes that there is sufficient visibility over the economic
and regulatory landscape and the market outlook offered by the three-year
time horizon to make a reasonable assessment of viability, and
-- Uncertainty in the UK economic outlook over the medium to long-term
following the EU referendum outcome.
The Company is authorised by the PRA, and regulated by the FCA and PRA,
and undertakes regular analysis of its risk profile and assumptions. It
has a robust set of policies, procedures and systems to undertake a
comprehensive assessment of all the principal risks and uncertainties to
which it is exposed on a current and forward-looking basis (as described
in Principal Risks and uncertainties above).
The Group manages and monitors its risk profile through its strategic
risk management framework, in particular through its risk appetite
statement and risk limits. Potential changes in its risk profile are
assessed across the business planning horizon by subjecting the
operating and financial plan to severe but plausible macroeconomic and
idiosyncratic scenarios.
Stress testing is a vital discipline, which underpins the Company's
Individual Capital Adequacy Assessment Process ('ICAAP') and Individual
Liquidity Adequacy Assessment Process ('ILAAP'). The Group has developed
a bespoke macroeconomic model which identifies the most predictive
macroeconomic variables and their relative relationship to arrears,
collateral valuations and loan losses. As a secured mortgage lender the
Group is most sensitive to changes in house price movements,
unemployment and Bank of England base rate changes. The Group's stress
testing capability then leverages the developed macroeconomic variable
relationships to conduct detailed scenario analysis over a range of
stress scenarios which feed key risk processes such as the setting of
risk appetite, loan loss forecasts and ICAAP and ILAAP stress testing
activity.
In addition, the Company identified a suite of credible management
actions that would mitigate the impact of stress scenarios. The Board
and executive management use the outcome of the stress test analysis to
evaluate the Company's management options and adequacy of the Company's
capital and liquidity resources to withstand an extreme but plausible
stress scenario. The Company holds sufficient capital to withstand such
a stress scenario.
In addition, the Group identifies a range of catastrophic stress
scenarios, which could result in the failure of its current business
model. Business model failure scenarios (reverse stress tests) are
primarily used to inform the Board and executive management of the outer
limits of the Group's risk profile. Reverse stress tests play an
important role in helping the Board and its executives to identify
potential recovery options under a business model failure scenario, and
form an important aspect of the Company's recovery and resolution plans
prescribed by the regulator. During the year, a number of reverse stress
tests were analysed including an extreme macroeconomic downturn (1 in
200 severity), a cyber-attack leading to a loss of customer data which
is used for fraudulent activities, extreme regulatory and taxation
changes impacting Buy-to-Let lending volumes and a liquidity crisis
caused by severe market conditions combined with idiosyncratic
consequences.
The ongoing monitoring of all principal risks and uncertainties that
could impact the operating and financial plan, together with the use of
stress testing to ensure that the Group could survive a severe but
plausible stress, enables the Board to reasonably assess the viability
of the business model over a three-year period.
Directors' responsibility statement
The responsibility statement below has been prepared in connection with
the full Annual Report of the Company for the year ended 31 December
2017. Certain parts of these accounts are not presented within this
announcement.
The Directors are responsible for preparing the Annual Report and the
Group and parent company financial statements in accordance with
applicable law and regulations.
Company law requires the Directors to prepare financial statements for
each financial year. Under that law the Directors are required to
prepare the Group financial statements in accordance with International
Financial Reporting Standards ('IFRS') as adopted by the European Union
and applicable law and have elected to prepare the parent company
financial statements on the same basis.
Under company law the Directors must not approve the accounts unless
they are satisfied that they give a true and fair view of the state of
affairs of the Group and parent company and of the profit or loss of the
Company for that period.
In preparing each of the Group and parent company financial statements,
the Directors are required to:
-- select suitable accounting policies and then apply them consistently
-- make judgements and estimates that are reasonable, relevant and reliable
-- state whether they have been prepared in accordance with IFRSs as adopted
by the EU
-- assess the Group and parents Company's ability to continue as a going
concern, disclosing, as applicable, matters related to going concern; and
-- use the going concern basis of accounting unless they either intend to
liquidate the Group or the parent Company or to cease operations, or have
no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the parent company's
transactions and disclose with reasonable accuracy at any time the
financial position of the parent company, and enable them to ensure that
the financial statements comply with the Companies Act 2006. They are
responsible for such internal control as they determine is necessary to
enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error, and have general
responsibility for taking such steps as are reasonably open to them to
safeguard the assets of the Group and to prevent and detect fraud and
other irregularities.
Under applicable law and regulations, the Directors are also responsible
for preparing a Strategic Report, Directors' Report, Directors'
Remuneration Report and Corporate Governance Statement that complies
with that law and those regulations. The Directors are responsible for
the maintenance and integrity of the corporate and financial information
included on the Company's website. Legislation in the UK governing the
preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.
We confirm that to the best of our knowledge:
-- the financial statements, prepared in accordance with the applicable set
of accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the company and the
undertakings included in the consolidation taken as a whole; and
-- the Strategic Report includes a fair review of the development and
performance of the business and the position of the issuer and the
undertakings included in the consolidation taken as a whole, together
with a description of the principal risks and uncertainties that they
face.
We consider the Annual Report and accounts, taken as a whole, are fair,
balanced and understandable and provide the information necessary for
shareholders to assess the Group's position and performance, business
model and strategy.
Each of the persons who is a Director at the date of the approval of
this report confirms that:
-- so far as the Director is aware, there is no relevant audit information
of which the Company's auditor is unaware;
-- the Director has taken all the steps that he/she ought to have taken as a
Director in order to make himself/herself aware of any relevant audit
information and to establish that the Company's auditor is aware of that
information.
Approved by the Board and signed on its behalf by:
Jason Elphick
Group General Counsel and Company Secretary
15 March 2018
This announcement is distributed by Nasdaq Corporate Solutions on behalf
of Nasdaq Corporate Solutions clients.
The issuer of this announcement warrants that they are solely
responsible for the content, accuracy and originality of the information
contained therein.
Source: OneSavings Bank plc via Globenewswire
http://www.osb.co.uk/
(END) Dow Jones Newswires
March 15, 2018 03:00 ET (07:00 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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