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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 | |
|---|---|---|---|---|---|---|---|---|---|---|
| 2.60 | 0.61% | 429.00 | 429.40 | 430.20 | 436.20 | 427.80 | 436.20 | 672,354 | 16:35:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
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TIDMOSB
LEI: 213800WTQKOQI8ELD692
OneSavings Bank plc
Interim report for the six months ended 30 June 2018
OneSavings Bank plc ('OSB' or 'the Bank' or 'the Group'), the specialist
lending and retail savings group, announces today another strong set of
results for the six months ended 30 June 2018.
Financial highlights
-- Profit before tax1 increased 17% to GBP91.8m (H1 2017: GBP78.4m)
-- Net loan book growth of 11%, driven by 17% growth in gross organic
origination to GBP1,444m (H1 2017: GBP1,229m)
-- Continued focus on cost discipline and efficiency alongside strong income
growth delivered a cost to income ratio2 of 27% (H1 2017: 28%)
-- Net interest margin ('NIM')3 of 301bps (H1 2017 restated: 324bps)
-- Loan loss ratio4 of 11bps (H1 2017: 4bps), with prior period benefitting
from increasing property values
-- Fully-loaded Common Equity Tier 1 ('CET1') capital ratio strong at 13.3%
(FY 2017: 13.7%)
-- Basic earnings per share1 27.3p5, up 13% (H1 2017: 24.1p)
-- Return on equity6 of 26% (H1 2017: 28%)
-- Interim dividend of 4.3p per share, up 23% (H1 2017: 3.5p)7
Commenting on the results, Group CEO, Andy Golding said:
"I am delighted that OneSavings Bank has continued to deliver excellent
shareholder returns in the first half of 2018. Volumes grew strongly
with 17% growth in organic originations, driven by high demand for our
professional Buy-to-Let and our commercial and semi-commercial products.
This supported 17% growth in profit before tax to GBP91.8m and a strong
return on equity of 26%.
Whilst regulatory and tax changes in the Buy-to-Let market have dampened
industry-wide demand for new purchase mortgages, this has been partially
offset by an increase in demand for remortgages. We focus on the
professional Buy-to-Let market where trends remain positive. Demand for
five year fixed rate products has risen noticeably across the market
with competition continuing to increase, however we continue to see good
opportunities for growth and our InterBay Commercial business continues
to flourish.
Given the growth already achieved this year and considering the current
pipeline and application levels for the third quarter to date, we now
expect to deliver net loan book growth of high-teens in 2018, whilst
maintaining an appropriate margin for the risks we are underwriting. Our
continued focus on cost efficiency, whilst investing in the future, is
reflected in our market-leading cost to income ratio for the first half
of 27%. There will be further planned expenditure in the second half, as
we invest in technology infrastructure and enhancements to our online
savings and mortgage origination platforms. We continue to expect that
our cost to income ratio will be c.30% for the full year, as previously
guided, with all other guidance for the full year also unchanged."
Key metrics
H1 2018 H1 2017
Total assets (GBPbn) 9.7 7.2
Net loan book (GBPbn) 8.1 6.5
Loan to deposit ratio(8) (%) 90 93
3 months+ arrears(9) (%) 1.3 1.4
Customer net promoter score +60 +60
Enquiries:
OneSavings Bank plc Brunswick Group
Alastair Pate, Investor Relations Robin
Wrench/Simone Selzer
t: 01634 838973 t: 020 7404 5959
Results presentation
OneSavings Bank will be holding an interim results presentation for
analysts at 9:30am on Thursday 23 August at The Lincoln Centre, 18
Lincoln's Inn Fields, WC2A 3ED. The UK dial-in is 0808 109 0700 and the
password is OneSavings Bank. The presentation will be webcast and
available from 9.30am on the OneSavings Bank website at
www.osb.co.uk/investors/results-reports-presentations. Registration is
open immediately.
About OneSavings Bank plc
OneSavings Bank plc ('OSB') 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 highly
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.
Notes
(1) Since the Group did not record any exceptional items in the first
half of 2018 or 2017, the underlying and statutory metrics are equal
(2) Administrative expenses, including depreciation and amortisation as
a percentage of total income
(3) Net interest income as a percentage of average interest bearing
assets including off balance sheet Funding for Lending Scheme drawings,
annualised. The method of annualising NIM for the first half has been
enhanced to use the actual day count instead of an assumed 182.5 days,
to provide comparability with the full year NIM and the Bank's internal
reporting approach. The comparative for the first half of 2017 has been
restated accordingly from 322bps to 324bps.
(4) Impairment losses expressed as a percentage of average gross loans
and advances, annualised, under IAS 39 provisioning approach in H1 2017
and under IFRS 9 approach in H1 2018
(5) Profit after tax attributable to ordinary shareholders (profit after
tax less coupons on equity PSBs and AT1 securities, including the tax
effect, of GBP2.4m (H1 2017: coupons on equity PSBs, including the tax
effect, of GBP0.4m) divided by the weighted average number of ordinary
shares in issue
(6) Profit after tax after deducting coupons on equity PSBs and AT1
securities, including the tax effect, of GBP2.4m (H1 2017: coupons on
equity PSBs of GBP0.4m) as a percentage of average shareholders' equity
(excluding equity PSBs of GBP22m and AT1 securities of GBP60m) of
GBP518.0m in first half of 2018 and GBP417.0m in first half of 2017,
annualised
(7) The proposed interim dividend of 4.3 pence per share for the first
half of 2018 is based on one third of the total 2017 dividend of 12.8
pence per share (H1 2017: 3.5 pence per share, one third of the 2016
dividend of 10.5 pence per share)
(8) Excluding the impact of the Bank of England's Funding for Lending
and Term Funding Schemes
(9) Portfolio arrears rate (excluding legacy problem loans) of accounts
for which there are missing or overdue payments by more than three
months as a percentage of gross loans
Alternative performance measures
OSB believes that the use of alternative performance measures ('APMs')
for profitability and earnings per share provide valuable information to
the readers of the financial statements and present 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.
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. Statements that are not historical facts, including statements
about OSB's, its directors' and/or management's beliefs and expectations,
are forward-looking statements. 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', 'goals', 'forecasts',
'outlook', 'likely', 'guidance', 'trends', 'future', 'would', 'could',
'should' or similar expressions or negatives thereof. By their nature,
forward-looking statements involve risk and uncertainty because they are
based on assumptions that may or may not be accurate, relate to events
that may or may not occur in the future and depend on known and unknown
risks and circumstances which may be beyond OSB's control. 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
or implied in such forward-looking statements made by OSB or on its
behalf include, but are not limited to: general political, social,
economic and business conditions in the UK (such as the UK's exit from
the European Union (the 'EU)) 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 and other benefits including, but without limitation,
as a result of any acquisitions, disposals and other strategic
transactions; 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 EU or the
Eurozone, and the impact of any sovereign credit rating downgrade or
other sovereign financial issues; technological changes and risks
relating to IT and operational infrastructure, systems, data and 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. For additional information
on possible risks to OSB's business, please see the Risk Review section
of the OSB 2017 Annual Report and Accounts. Copies of this are available
at www.osb.co.uk and on request from OSB.
No representation, warranty or assurance is made that any of these
statements or forecasts will come to pass or that any forecast results
will be achieved. Persons receiving this document should not place undue
reliance on any forward-looking statements made in this document. Such
forward looking statements 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 or 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, invitation or
inducement under any applicable law or an offer to purchase, sell or
otherwise deal in any securities or financial instruments or any advice
or recommendation with respect to such securities or financial
instruments. Nothing in this document shall be construed as a profit
forecast. Past performance cannot be relied upon as a guide to future
performance and persons needing advice should consult an independent
financial adviser.
Key Performance Indicators
For definitions of key ratios please see footnotes above
Progress in the first half of 2018
I am delighted that OneSavings Bank delivered excellent progress and
shareholder returns in the first six months of 2018. Continued strength
in our core Buy-to-Let/SME segment supported strong earnings growth,
with an increase in statutory and underlying basic earnings per share to
27.3p, up 13% on the first half of 2017. I am pleased to report
statutory and underlying pre-tax profit of GBP91.8m, a 17% increase on
the same period last year.
OSB continued to deliver on what we do best; providing customer-focused
propositions catering for the needs of professional landlords and
borrowers with more complex requirements. Our attractive market
proposition supported net loan book growth of 11% to GBP8.1bn in the
first half of 2018. This achievement highlights both our strong organic
origination capability, with 17% growth in total organic origination
versus the first half of 2017, and the positive impact of our Choices
programme, with retention rates of c.60% within three months of
borrowers' initial products ending.
OSB maintained its well-established prudent and disciplined approach to
lending, continuing to focus on generating high risk-adjusted returns
without making significant changes to our credit policy or attitude to
risk. Net interest margin ('NIM') for the first half was 301bps,
reflecting the impact of front book pricing, partially offset by the
favourable cost of retail funds, as the wider savings market did not
fully price in the November 2017 Bank of England Base Rate rise, and the
benefit of holding a higher average balance of the Bank of England's
Term Funding Scheme ('TFS').
Net loan book growth of GBP791m was achieved whilst delivering a 26%
return on equity, and our cost to income ratio remains strong at 27% for
the first half. There will be further planned expenditure in the second
half as we invest in our technology infrastructure and enhancements to
online savings and mortgage origination platforms.
Continued development of our strong lending franchise
We continue to differentiate ourselves from the competition by offering
well-defined propositions in markets where we have the experience and
distribution relationships to successfully develop and service those
markets.
Net loan book growth of 11% in the period was driven by a 17% increase
in gross organic origination to GBP1.4bn against the same period in
2017. We continued to see good opportunities with professional landlords
in our core Buy-to-Let market and additional opportunities in our
InterBay Commercial brand.
A high proportion of borrowers choose to take a new product with the
Bank upon the end of their initial product term through Choices, OSB's
mortgage product retention scheme. Under Choices, borrowers are
encouraged to engage with their broker to receive advice and select from
a bespoke product set.
Our coordinated distribution across all brands remains a core strategic
differentiator and we have continued to gain industry recognition,
winning national and broker firm awards throughout the period, including
Best Specialist Mortgage Provider from Moneyfacts as well as Mortgage
Strategy Awards for Best BDM Team, Best Specialist Lender and Best
Buy-to-Let Lender.
The core Buy-to-Let segment, which comprises 80% of the OSB loan book,
is demonstrating robust demand from professional and incorporated
landlords with high levels of refinancing partially offsetting lower
purchase activity and reduced demand from amateur landlords. Landlord
confidence is showing modest signs of recovery as professional landlords
adjust to the new tax regime.(1)
For Buy-to-Let, remortgages continue to represent c.58% of new
origination for our main Kent Reliance brand.
Professional/multi-property landlords accounted for 79% of Buy-to-Let
completions by value during the first half of 2018, with a continued
rise in the demand for five year fixed rate products for Kent Reliance
from c.43% at the end of 2017 to 59% for the first six months of 2018.
Limited company purchase applications for Kent Reliance were 71% of
total purchase applications for the first six months of 2018, up from
69% in 2017.
Our InterBay Commercial business, which provides a range of commercial,
semi-commercial, bridging and more complex Buy-to-Let mortgages, has
gone from strength to strength following the expansion of distribution
to a wider broker audience in the first half. It has achieved a material
presence with its intermediary audience, with its bridging proposition
gaining good traction. This business lends at sensible loan to values
('LTVs'), and generates strong returns on a risk-adjusted basis.
We saw a reduction in originations in the residential sector in the
first half of 2018 to GBP111m (H1 2017: GBP132m). Towards the end of the
second quarter, we launched a new residential product range and we are
seeing good levels of applications for these products in advance of the
implementation of our new mortgage origination platform in early 2019.
Over the medium term, we see an opportunity to deliver attractive
risk-adjusted returns from this new product range, particularly once we
transition to IRB.
We continue to be very pleased with the performance of our Heritable
Development Finance business, which was set up as a joint venture with
our Heritable team in late 2013. The quality of our development finance
business pipeline remains strong, with new applications coming primarily
from a mixture of repeat business from the team's extensive existing
relationships and referrals. The business has written GBP581m of loans
of which GBP287m have been repaid to date since its launch in 2014.
Heritable is now funding over 1,000 residential units, of which 75% are
located outside of London.
The Bank's secured funding line business in both its Buy-to-Let/SME and
Residential segments continues to grow, with cautious risk fundamentals
applied. During the first six months of 2018, gross advances to the
specialty finance market, including bridging loan and asset finance
businesses, totalled GBP94m with total loans outstanding of GBP158m as
at 30 June 2018. During the period, one new GBP50m facility was approved
and a number of existing facilities were increased.
Sustainable funding model with outstanding customer satisfaction
We continue to benefit from our stable and award-winning retail funding
franchise, with over 23,000 new savings customers joining the Bank in
the first half of 2018. The strength and fairness of our retail savings
proposition continues to allow the Bank to raise significant funds
without needing to price at the very top of the best buy tables. Our
excellent customer service is demonstrated by our very strong customer
Net Promoter Score of +60, and our exceptionally strong retention rates
on maturing bonds and ISAs at 96%.
We remain committed to funding our loan book using retail savings and
funding additional liquidity requirements through wholesale markets. We
drew additional funds from the Term Funding Scheme in February 2018,
with a total balance of GBP1.5bn as at 30 June 2018. Net new retail
deposits were up 12% from 31 December 2017 to GBP7.4bn, as OSB took the
opportunity to raise deposits at attractive rates, demonstrating the
strength of our retail savings franchise. We expect to be in a position
to return to the securitisation market in the fourth quarter of 2018.
Well-capitalised with strong risk management
The Group's total arrears balance remains low, and the portfolio arrears
rate remained broadly stable at 1.3% as at 30 June 2018 (30 December
2017: 1.2%). The Group's loan loss ratio(2) for the first half was 11bps
(H1 2017: 4bps), with the increase due primarily to the positive impact
of indexing in the comparative period. On an underlying basis, excluding
the impact of indexing, the loan loss ratio was broadly flat, as we have
seen no deterioration in the credit quality across our lending
portfolio.
We have maintained an appropriate level and quality of capital to
support our growth objectives and to meet prudential requirements. Our
CET1 ratio of 13.3% as at 30 June 2018 (31 December 2017: 13.7%) remains
comfortably in excess of the regulatory requirements. The Bank's total
capital ratio was 16% as at 30 June 2018 (31 December 2017: 16.9%).
The weighted average LTV of the mortgage book remained low at 65% as at
30 June 2018, with an average LTV of 69% on new origination in the first
half. Our average interest coverage ratio ('ICR') increased in the
period to 192% (FY 2017: 185%).
Cost discipline central to our business
The low cost to income ratio of 27% reflects our efficient and scalable
operating platform, and has been achieved despite additional investment
in the business to meet the demands of new regulation. General Data
Protection Regulation ('GDPR') and Payment Services Directive ('PSD 2')
have gone live in the first half and work continues on IRB and other
smaller regulatory projects. These regulatory projects, together with
planned expenditure on our technology infrastructure, enhancements to
our online savings and mortgage origination platforms are expected to
lead to an increase in operating costs in the second half of 2018.
However, we will continue to focus on delivering further efficiencies in
the cost of running the Bank on a 'business as usual basis', through
continued disciplined cost management, the benefits of scale and
leveraging our unique operating platform in India ('OSBI') as we grow.
OSBI undertakes a range of primary processing services at a
significantly lower cost than an equivalent UK-based operation, with
quality of service consistently high, as reflected in an outstanding
customer NPS of +60. The focus on driving improved customer experience
extends to both our savings and lending franchises. Broker NPS was +33
for the first six months of 2018.
The Group successfully implemented its IFRS 9 impairment calculation
approach on 1 January 2018, integrating this approach into core risk
management processes such as the setting of risk appetite, business
planning, stress testing and the Internal Capital Adequacy Assessment
Process ('ICAAP'). We remain pleased with the progress made towards our
IRB application, with the project focusing on delivering shareholder
value by utilising the IRB rating system to drive enhancements to the
Group's approach to risk management.
We continue to develop our business for the future
We continue to see opportunities in our core markets, and in the first
half of 2018 we introduced a range of near prime products ahead of our
strategic re-entry into the residential mortgage market. This initiative
will be supported by the implementation of our enhanced mortgage
origination system in 2019. We also extended the reach of our InterBay
brand during the first half of 2018, leveraging the Group-wide
distribution capability that provides us with competitive advantage in
specialist markets.
We 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, especially for residential lending at sensible loan to
values. The Bank intends to develop and grow its bespoke residential
proposition in time for the transition to IRB. Over the medium term, we
see an opportunity to deliver attractive risk-adjusted returns in this
segment. However, we remain cautious until the final rules are adopted.
OSB has begun to test its entry into the UK asset finance market, and we
anticipate funding our first transactions later this year. This has been
a long-stated goal and entry into this market is in line with OSB's
strategy of targeting secured lending markets where we can bring our
skills to the fore to generate strong returns on a risk-adjusted basis.
As in all our lending segments, our proposition is based on providing
excellent customer service to both brokers and customers, alongside
strong working relationships with both. Our customers will be SMEs and
small corporate businesses and we will be financing their
business-critical assets which maintain an established inherent resale
value. We have recruited a team of experienced high calibre asset
finance professionals to execute our plans. Whilst we plan to become a
meaningful funder in this market, it will not materially affect our
results in the short to medium-term.
Outlook
Even though we are seeing an increased level of competition, especially
for five year fixed rate Buy-to-Let products, we continue to see
opportunities for growth in our core markets. Given the growth already
achieved this year and considering the current pipeline and application
levels for the third quarter to date, we now expect to deliver net loan
book growth of high-teens in 2018 driven by organic lending and strong
retention. All other guidance for the full year remains unchanged.
We are mindful of the macroeconomic environment, primarily driven by
uncertainties surrounding the outcome of Brexit negotiations and the
potential impact on the UK economy, including pressure on house prices,
particularly in London. However, we believe that our specialist
underwriting capabilities across our segments are even more relevant in
times of uncertainty, as they give us a greater and deeper understanding
of the risks that we can actively manage and price for. We manage the
business prudently with careful business planning together with strong
credit risk management across the life cycle, and continue to focus on
achieving high risk-adjusted returns in our chosen markets.
We continue to see opportunities to grow our business at attractive
returns. We remain well-placed to take advantage of our strong
relationships, our distribution reach, manual underwriting and credit
risk management expertise to compete successfully in our chosen markets,
lending responsibly to our customers.
Andy Golding
Chief Executive Officer
(1) BDRC Landlord Panel, July 2018
(2) Under IAS 39 provisioning approach in H1 2017 and under IFRS 9
approach in H1 2018
Financial review
Summarised financial information, including key ratios, is presented in
the tables below:
H1 2018 H1 2017
Summary Profit or Loss GBPm GBPm
Net interest income 135.2 117.1
Fair value losses on financial instruments (1.9) (5.6)
Net fees and commissions 0.2 0.3
External servicing fees (0.4) (1.0)
Administrative expenses(1) (35.9) (30.6)
FSCS and other regulatory provisions (1.1) (0.4)
Impairment losses (4.3) (1.4)
Statutory and underlying profit before tax 91.8 78.4
Statutory and underlying profit after tax 69.5 59.0
H1 2018 H1 2017
Key ratios
Net interest margin (restated)(2) 301bps 324bps
Basic earnings per share, pence 27.3 24.1
Underlying basic earnings per share, pence 27.3 24.1
Return on equity 26% 28%
Management expense ratio(3) , annualised 79bps 89bps
Cost to income ratio 27% 28%
Loan loss ratio(4) 11bps 4bps
30-Jun-18 31-Dec-17
GBPm GBPm
Extracts from the Statement of Financial Position
Loans and advances 8,096.5 7,306.0
Retail deposits 7,423.8 6,650.3
Total assets 9,669.8 8,589.1
Key ratios
Liquidity ratio(5) 16.7% 15.2%
Common equity tier 1 ratio 13.3% 13.7%
Total capital ratio 16.0% 16.9%
Total leverage ratio 5.8% 6.0%
(1) Including depreciation and amortisation
(2) The method of annualising NIM for the first half has been enhanced
to use the actual day count instead of an assumed 182.5 days, to provide
comparability with the full year NIM and the Bank's internal reporting
approach. The comparative for the first half of 2017 has been restated
accordingly from 322bps to 324bps
(3) Administrative expenses including depreciation and amortisation as a
percentage of average total assets
(4) Under IAS 39 provisioning approach in H1 2017 and under IFRS 9
approach in H1 2018
(5) Liquid assets as a percentage of funding liabilities
For definitions of other key ratios please see footnotes above
Strong profit growth
The Group reported strong profitability in the first half of 2018 with
underlying and statutory profit before tax of GBP91.8m, up 17% compared
to GBP78.4m in the first half of 2017, primarily reflecting growth in
the net loan book and net interest income supported by an efficient cost
base.
Statutory and underlying profit after tax for the first half of 2018 was
GBP69.5m (H1 2017: GBP59.0m). This represents an 18% increase compared
to the first six month of 2017. The Bank's effective tax rate fell to
24.3% for the first half of 2018 (H1 2017: 24.7%) due to a reduction in
the rate of corporation tax from 20% to 19% and a reduction in the
proportion of Group profits subject to the Bank Corporation Tax
Surcharge following continued strong performance in the InterBay
Commercial business.
Net interest margin ('NIM')
The Group reported an increase in net interest income of 15% to
GBP135.2m in the first half of 2018 (H1 2017: GBP117.1m) and NIM of
301bps (H1 2017 restated: 324bps(1) ). The lower NIM reflects the
dilutive impact of front book yields, partially offset by a relatively
favourable cost of retail funds and additional benefit from the Bank of
England's Term Funding Scheme ('TFS'). The favourable cost of retail
funds was due primarily to the retail savings market not pricing in the
full November 2017 Bank of England Base Rate rise.
Fair value losses on financial instruments
Fair value losses on financial instruments decreased in the first half
of 2018 to GBP1.9m (H1 2017: GBP5.6m) due primarily to a reduction in
accelerated amortisation of fair value adjustments on hedged assets
relating to cancelled swaps of GBP2.5m compared to GBP6.2m in the first
half of 2017. This balance also includes a GBP0.2m loss on disposal of
the residual personal loan portfolio in June 2018.
Net fees and commissions
Net fees and commissions income of GBP0.2m in the first half of 2018 (H1
2017: GBP0.3m) comprised fees and commissions receivable of GBP0.7m (H1
2017: GBP0.8m) partially offset by fees and commissions payable of
GBP0.5m (H1 2017: GBP0.5m). Fees and commissions receivable include
arrangement fees on funding lines and master servicing fees. Fees and
commissions payable include branch agency fees and commission paid to
the Kent Reliance Provident Society for conducting member engagement
activities for the Bank.
External servicing fees
External servicing fees decreased to GBP0.4m in the first half of 2018
(H1 2017: GBP1.0m) due primarily to the transfer of servicing for a
number of acquired residential loan books to the Bank's operation in
India in July 2017.
Efficient and scalable operating platform
Administrative expenses, including depreciation, were up 17% to GBP35.9m
for the first half of 2018 (H1 2017: GBP30.6m) due to growth in the
business and the increasing cost of meeting new regulation, including
GDPR.
The Group's annualised management expense ratio improved by 10bps to
0.79% for the first half of 2018 (H1 2017: 0.89%) and the cost to income
ratio improved to 27% (H1 2017: 28%) despite the additional investment
in regulatory projects, demonstrating our ability to deliver further
efficiencies in
the cost of running the Bank on a 'business as usual basis', through
continued focus on cost efficiency and leveraging our unique operating
platform in India as we grow.
Regulatory provisions
Regulatory provisions expense, which includes the Financial Services
Compensation Scheme ('FSCS') levies, increased to GBP1.1m for the first
half of 2018 (H1 2017: GBP0.4m) due primarily to an increase of GBP0.9m
in other regulatory provisions on acquired books.
Impairment losses
The continuing shift in portfolio mix and continuing positive arrears
performance of originations post 2011, coupled with the relatively
benign economic environment led to a strong impairment performance
within the period.
Impairment losses in the first half of 2018 were GBP4.3m under IFRS 9
(H1 2017: GBP1.4m under IAS 39), which represent a loan loss ratio(2) of
11bps (H1 2017: 4bps). The increase in the loan loss ratio is due
primarily to the positive impact of enhanced indexing of property values
in the first half of 2017. On an underlying basis, excluding the impact
of indexing in the comparative period, the loan loss ratio was broadly
flat, as we have seen no deterioration in the credit quality across our
lending portfolio.
The arrears performance of the front book continues to be very strong.
From more than 43,500 loans totalling GBP9.6bn organically originated
since the creation of the Bank in February 2011, only 187 were more than
three months in arrears as at 30 June 2018, with a total value of
GBP32.1m and an average loan to value of just 63%.
IFRS 9
The Group successfully implemented IFRS 9 as at 1 January 2018. The day
1 impact of implementation was an increase in impairment provisions of
GBP3.6m. There were no significant provision transfers between
impairment stages in the first half of 2018 (see note 12 to the
condensed consolidated financial statements below).
Dividends
The Group's dividend policy is to declare interim dividends based on one
third of the prior year's total dividend. To that end, the Board has
declared an interim dividend of 4.3 pence per share for the first half
of 2018, based on the 2017 full year dividend of 12.8 pence per share.
The Board continues to target a full year dividend pay-out ratio of at
least 25 per cent of underlying profit after tax less coupons on equity
PSBs and AT1 securities classified as dividends.
Balance sheet growth
Loans and advances grew by 11% in the first half of 2018 to GBP8,096.5m
(31 December 2017: GBP7,306.0m). This growth was funded by a mixture of
retail deposits which increased by 12% to GBP7,423.8m (31 December 2017:
GBP6,650.3m) and GBP250m of additional borrowings under the TFS prior to
its closure to new drawings at the end of February 2018. Total
borrowings under the TFS as at 30 June 2018 stood at GBP1,500.0m (31
December 2017: GBP1,250.0m).
Total assets grew by 13% to GBP9,669.8m (31 December 2017: GBP8,589.1m)
due to the growth in loans and advances and liquid assets.
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. OSB ended the first six months of 2018 with a
liquidity ratio of 16.7% (31 December 2017: 15.2%) as the Bank took the
opportunity to draw down additional funding under the TFS before it
closed to new borrowings at the end of February 2018 and to raise retail
funds at favourable rates.
The Bank's liquidity coverage ratio of 245% as at 30 June 2018 (31
December 2017: 250%) is significantly in excess of the regulatory
minimum of 100%.
The Bank's retail savings franchise continues to provide the business
with long-term sustainable funding for balance sheet growth as evidenced
by the retention rate for maturing deposits of 96% for the first six
months of 2018 and an exceptional level of customer satisfaction with a
Net Promoter Score of +60.
Capital
The Bank's capital position remained strong, with a fully-loaded CET1
ratio of 13.3% as at 30 June 2018 (31 December 2017: 13.7%) and a total
capital ratio of 16.0% (31 December 2017: 16.9%), demonstrating the
strong capital generation capability of the business to support
significant growth through profitability. The decrease in the capital
ratios was primarily due to growth in the loan book, an increase in
loans classified as in default on adoption of IFRS 9 and the annual
recalibration of the Pillar 1 requirement for operational risk based on
higher profitability.
The Bank had a leverage ratio of 5.8% as at 30 June 2018 (31 December
2017: 6.0%) and a Pillar 2a requirement of 1.1% of risk weighted assets
(31 December 2017: 1.1%).
(1) The method of annualising NIM for the first half has been enhanced
to use the actual day count instead of an assumed 182.5 days, to provide
comparability with the full year NIM and the Bank's internal reporting
approach. The comparative for the first half of 2017 has been restated
accordingly from 322bps to 324bps.
(2) Under IAS 39 provisioning approach in H1 2017 and under IFRS 9
approach in H1 2018
Segmental review
The following table shows the Group's loans and advances and
contribution to profit by segment:
First half 2018, Residential
GBPm Total BTL/SME(1) mortgages
Net interest income 135.2 102.3 32.9
Other expense (2.1) (0.6) (1.5)
Total income 133.1 101.7 31.4
Impairment losses (4.3) (3.0) (1.3)
Contribution to
profit 128.8 98.7 30.1
First half 2017,
GBPm
Net interest income 117.1 83.4 33.7
Other expense (6.3) (1.4) (4.9)
Total income 110.8 82.0 28.8
Impairment
(losses)/credit (1.4) (1.5) 0.1
Contribution to
profit 109.4 80.5 28.9
Residential
As at 30 June 2018, GBPm Total BTL/SME(1) mortgages
Gross loans to customers 8,119.4 6,516.3 1,603.1
Provision for impairment
losses (22.9) (13.0) (9.9)
Net loans to customers 8,096.5 6,503.3 1,593.2
Risk weighted assets 3,843.7 3,091.2 752.5
As at 31 December 2017, GBPm
Gross loans to customers 7,327.6 5,654.1 1,673.5
Provision for impairment
losses (21.6) (13.2) (8.4)
Net loans to customers 7,306.0 5,640.9 1,665.1
Risk weighted assets 3,348.5 2,642.8 705.7
(1) The personal loan portfolio was disposed of in June 2018. As at 31
December 2017, the net loan book was GBP0.9m with negative contribution
to profit of GBP0.7m for six months to 30 June 2017.
Buy-to-Let/SME
Buy-to-Let/SME sub-segments: gross loans
30-Jun-18 31-Dec-17
GBPm GBPm
Buy-to-Let 5,801.3 5,033.8
Commercial 428.6 370.8
Residential development 151.2 143.9
Funding lines 135.2 104.5
Personal loans(1) - 1.1
Total 6,516.3 5,654.1
(1) See footnote above
This segment comprises secured lending on property for investment and
commercial purposes as well as residential development finance to small
and medium-sized developers and secured funding lines to other lenders.
OSB delivered 15% net loan book growth to GBP6.5bn in the Buy-to-Let/SME
segment in the first half of 2018, driven by a 21% increase in new
organic originations to GBP1,332.6m for the first half of 2018, compared
to GBP1,097.3m in the first half of 2017.
The core Buy-to-Let market continued to see robust demand from
professional landlords with high levels of refinancing partially
offsetting lower purchase activity and reduced demand from amateur
landlords. Landlord confidence is showing modest signs of recovery as
professional landlords adjust to the new tax regime.(1)
Against this backdrop, our Buy-to-Let sub-segment loan portfolio grew by
GBP767.5m in the first half of 2018 to a gross value of GBP5,801.3m (31
December 2017: GBP5,033.8m) due to strong levels of organic origination
and targeted retention through Choices, our mortgage products transfer
scheme. Our weighted average interest coverage ratio increased to 192%
in the first half (H1 2017: 190%).
In the Buy-to-Let sub-segment, for our main Kent Reliance brand,
remortgages represented c.58% of new originations, and we also saw a
continued rise in the demand for five year fixed rate products from
c.43% during 2017 to 59% for the first six months of 2018. Limited
company purchase applications for Kent Reliance were 71% for the first
six months of 2018, up from 69% in 2017. Professional/multi-property
landlords accounted for 79% of Buy-to-Let completions by value during
the first half of 2018 (H1 2017: 77%).
Our InterBay Commercial business, which offers a range of commercial,
semi-commercial, bridging and more complex Buy-to-Let mortgages,
extended its distribution network in the first half of 2018. This helped
to drive a 16% increase in our commercial and semi-commercial
sub-segment with the gross loan book ending at a value of GBP428.6m as
at 30 June 2018 (31 December 2017: GBP370.8m). The commercial portfolio
has a low weighted average loan to value ('LTV') of 64% and average loan
size of GBP340,000.
Our Heritable residential development business, which was set up as a
joint venture with our Heritable team in late 2013, provides prudent
development finance to small and medium-sized residential developers,
with a preference for forging relationships with those active outside of
the prime central London market. New applications come primarily from a
mixture of repeat business from the team's extensive existing
relationships and referrals. The residential development funding gross
loan book at the end of June 2018 was GBP151.2m with a further GBP110.4m
committed (31 December 2017: GBP143.9m and GBP78.0m, respectively).
Since inception through to 30 June 2018, the business has written
GBP580.6m of loans of which GBP287.2m has been repaid to date. The
business is now funding over 1,000 residential units, mostly located
outside of London.
In addition, the Bank continued to provide secured funding lines 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 30 June 2018 were GBP305.0m with total loans
outstanding of GBP135.2m (31 December 2017: GBP303.0m and GBP104.5m
respectively). During the period, one new GBP50m funding line was added
and credit approved limits were increased by a further GBP22m across two
existing funding lines. The pipeline remains robust, however, given
macroeconomic uncertainties the Bank continues to adopt a cautious risk
approach.
The average LTV in the Buy-to-Let/SME segment remained low at 69% (31
December 2017: 69%) with 0.3% of loans by value with an LTV exceeding
90% (31 December 2017: 0.7%). The average LTV of new Buy-to-Let/SME
origination in the first half of 2018 was 70% (H1 2017: 70%).
The Buy-to-Let/SME segment made a contribution to Group profit of
GBP98.7m in the first half of 2018, up 23% compared to GBP80.5m in the
first half of 2017, primarily reflecting the growth in the balance sheet
partially offset by lower asset yields.
Residential mortgages
Residential sub-segments: gross loans
30-Jun-18 31-Dec-17
GBPm GBPm
First charge 1,190.2 1,240.6
Second charge 389.9 415.3
Funding lines 23.0 17.6
Total 1,603.1 1,673.5
This segment comprises bespoke first charge mortgages, typically to
prime credit quality borrowers with more complex circumstances via the
Kent Reliance brand which also operates in the shared ownership market
as well as second charge mortgages via the Prestige Finance brand and
secured funding lines to other lenders.
During the first half of 2018, OSB's total residential loan portfolio
decreased by 4% with a net carrying value of GBP1,593.2m as at 30 June
2018 (31 December 2017: GBP1,665.1m) with organic residential lending of
GBP111.2m in the first half (H1 2017: GBP131.9m).
Our first charge residential book had a gross value of GBP1,190.2m as at
30 June 2018 (31 December 2017: GBP1,240.6m) with new organic lending in
the first half of 2018 more than offset by redemptions on the back book
and acquired mortgage portfolios in run-off.
During the first months of 2018, we focused on developing a new
residential product range which launched towards the end of the second
quarter.
The second charge residential loan book reduced by 6% as at 30 June 2018
with a gross value of GBP389.9m (31 December 2016: GBP415.3m) with
organic origination more than offset by redemptions on the organic book
and acquired books in run-off. We maintained appropriate pricing for
risk in this sub-segment as competitive pressure in the second charge
market caused price reductions and we allowed our market share to fall.
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 continues to adopt a cautious risk
approach to these more cyclical businesses given macroeconomic
uncertainties. Total credit approved
limits as at 30 June 2018 were GBP32.4m, with total loans outstanding of
GBP23.0m (31 December 2017: GBP33.6m and GBP17.6m respectively).
The average LTV in the Residential segment remained low at 56% (31
December 2017: 56%) with only 3% of loans by value with LTV's exceeding
90% (31 December 2017: 3%). The average LTV of new residential
origination in the first half of 2018 was 65% (H1 2017: 66%).
Residential mortgages made a contribution to Group profit of GBP30.1m in
the first half of 2018, up 4% from GBP28.9m in the first half of 2017,
primarily reflecting lower accelerated amortisation of hedged assets
relating to cancelled swaps, partially offset by higher loan losses,
with the comparative period benefitting from the positive impact of
property value indexing.
(1) BDRC Landlord Panel, July 2018
Risk Management
Progress made during the six months to 30 June 2018
During the six months to 30 June 2018 the Group made strong progress
against its strategic risk management objectives for the year.
Key highlights included the continued enhancement of the Group's
strategic risk management framework, in particular:
-- Continued enhancement to its integrated approach to identifying and
assessing risk against Board risk appetite. Risk identification and
assessment guided investment decisions in systems and controls
-- Improvements to risk quantification to support strategic and business
decisions and setting risk appetite to inform capital and funding plans.
The Group made good progress against its strategic IRB objective of
leveraging internally-developed credit risk models for determining its
capital requirements
-- Key initiatives relating to data governance and controls and establishing
an integrated approach to operational resilience are being leveraged to
enable growth in accordance with the risk appetite.
The Group successfully implemented its IFRS 9 impairment calculation
approach on 1 January 2018. Within the period the Group also integrated
the IFRS 9 approach into other key risk management processes such as the
setting of risk appetite, business planning (including loss forecasting),
stress testing and the Internal Capital Adequacy Assessment Process
('ICAAP').
The Internal Ratings-Based ('IRB') programme progressed well throughout
the period, with enhancements being made to internal models along with
further strengthening of the Group's model risk management arrangements.
Enhancements have been made to the Group's data management and
governance capabilities in accordance with the Group's strategic data
management programme.
Enhanced stress testing and scenario analysis capabilities were
developed and implemented during the period, to support the Group's
delivery of key regulatory submissions including the ICAAP and the
Internal Liquidity Adequacy Assessment Process ('ILAAP').
The Group made significant progress in its Group wide Operational
Resilience Programme which was initiated in August 2017 to deliver the
appropriate framework, planning and testing of the Group's recovery
capabilities. The programme is entering its final phase and is due to
conclude in September 2018. The Group recognises the importance of
ongoing training and testing in order to reflect the changing nature of
the organisation.
The Group continued to make significant investment in people across the
Risk and Compliance functions ensuring that there is sufficient capacity
and capability to deliver the strategic risk enhancements planned for
the second half of the year and beyond. This includes further growth in
the risk reporting and analytics team in India which provides skilled
resource to support the Risk and Compliance functions in the production
of analysis and reporting across multiple risk types.
Principal risks and uncertainties
The Board is responsible for determining the nature and extent of the
principal risks it is willing to take in order to achieve its strategic
objectives.
There has not been a material change in the Group's business strategy,
risk management framework or risk appetite during the six months to 30
June 2018. In the opinion of the Directors, the key principal risks have
not changed materially from the overview provided in the 2017 Annual
Report and Accounts.
Risk Management (continued)
The table below details the principal risks which the Board believes are
the most material with respect to potential adverse movements impacting
the business model, future financial performance, solvency and
liquidity. A more detailed review of the Group's principal risks and
uncertainties is detailed within the Risk review in the 2017 Annual
Report and Accounts on pages 39 to 44, which can be accessed via our
website at www.osb.co.uk.
Principal risks Key mitigating actions
Strategic and
business risk -- Regular monitoring of the Group's strategic and
business performance against market commitments, the
balanced business scorecard and risk appetite by the
Board and the Executive Committees.
-- The Group also extensively uses stress tests to flex
core business planning assumptions to assess
potential performance under stressed operating
conditions.
Reputational risk -- Established processes are in place to proactively
identify and manage potential sources of reputational
risk including monitoring of media coverage.
Credit risk Individual borrower defaults
-- All loans are extended via bespoke and thorough
expert underwriting to ensure the ability and
propensity of borrowers to repay is appropriate,
whilst sufficient security is in place in case an
account defaults.
-- Should there be problems with a loan, the collections
and recoveries team work with customers unable to
meet their loan servicing 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 focused on security
levels, and is scrutinised by the Group's independent
Real Estate team as well as by external valuers.
-- Development finance lending is extended only after a
deep investigation of a borrower's track record and
the specific project details and requires approval by
a dedicated Development Finance Transactional Credit
Committee.
Macroeconomic downturn
-- The Group works within clearly defined portfolio
limits approved by the Risk Committee and the Board
covering loan to value (LTV), affordability, sector
and geographic concentration. These are reviewed at
least annually. In addition, stress testing is
performed to ensure the Group maintains sufficient
capital to absorb losses in an economic downturn and
will continue to meet its regulatory requirements.
Wholesale credit risk
-- The Group only transacts with high quality wholesale
counterparties. Derivative exposures include
collateral agreements to mitigate credit exposures.
Market risk Interest rate risk
-- The Group measures exposure to interest rate risk in
the banking book on a regular basis. Where mismatches
exist, the Group's Treasury function actively hedges
the exposures using interest rate swaps to match the
repricing dates of assets and liabilities.
Basis risk
-- The Group regularly measures exposure to basis risk.
Currently the balance sheet is broadly matched for
basis risk. Where there is a mismatch of market rates
in the portfolio (e.g. base rate vs. LIBOR), the
Treasury function hedges the exposure.
Risk Management (continued)
Principal risks Key mitigating actions
Liquidity and -- The Group's funding strategy is focused on a highly
funding risk stable retail deposit
franchise. The Group's large number of depositors
provides diversification, with a high proportion of
balances covered by the Financial Services Compensation
Scheme which mitigates the risk of a retail run.
-- The Group performs in-depth liquidity stress testing
and maintains a liquid asset portfolio sufficient to
meet obligations under stress.
-- The Group has prepositioned mortgage collateral with
the Bank of England, so that liquidity insurance
facilities can be accessed in the unlikely event that
it should become necessary.
-- The Group's funding plan ensures a diverse funding
profile and initiatives have been put in place to
replace the Term Funding Scheme ('TFS') funding,
including the establishment of a Retail
Mortgage-Backed Securities ('RMBS') programme.
Solvency risk -- The Group 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 Group also holds prudent levels of capital
buffers based on CRD IV requirements, its own risk
appetite and expected balance sheet growth.
-- The Group engages actively with regulators, industry
bodies and advisers to keep abreast of potential
changes providing feedback through the consultation
process and actively manages its capital strategy and
plan.
Operational risk Network/system intrusion
-- A series of tools have been designed and deployed to
identify and prevent network/system intrusions. The
effectiveness of implemented controls is overseen by
a dedicated IT Security Governance Committee, with
specialist IT security staff employed by the Group.
Data risk
-- The Group continues to invest in its data management
architecture, systems governance and controls.
People risk
-- The Group has a series of initiatives that are
intended to respond to people risk. This includes
both the introduction of a range of development
programmes intended to improve retention and increase
the population of in-house developed talent and a
dedicated talent acquisition team to meet the Group's
hiring demands.
Operational resilience
-- The Group 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 is employed to provide real-time
replication on various critical systems while
disaster recovery capabilities are tested annually.
Real-time system performance monitoring has been
established and a dedicated testing team is in place
to reduce the risks associated with change
management.
Operational execution and scalability
-- In order to mitigate incidents materialising from
manual processes the Group maintains an independent
Quality Assurance team. In addition the Group has
initiated a programme to deliver improved automation
across a range of processes.
Risk Management (continued)
Principal risks Key mitigating actions
Conduct risk Product suitability
-- 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.
-- The combination of a dedicated Product Governance
team and an independent Conduct Risk team serves to
effectively manage this risk.
Data protection
-- In addition to a series of network/system controls,
the Group performs extensive root cause analysis of
any data leaks in order to ensure that the
appropriate mitigating actions are taken.
Compliance and -- The Group has an effective horizon scanning process
regulatory risk 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 Group
proactively seeks external expert opinions to support
its interpretation of the requirements and validation
of its response.
-- The Group undertakes risk-based monitoring and
oversight programmes to ensure it continues to meet
existing regulatory requirements, has effective
systems and controls and delivers fair customer
outcomes.
Emerging risks
The Group proactively scans for emerging horizon risks which may have an
impact on its ongoing operations and strategy. The Group considers its
top emerging risks to be:
Emerging risks Key mitigating actions
Political and macroeconomic uncertainty
As the final details around the UK's withdrawal from -- The Group has implemented robust monitoring processes
the European Union remain unclear, there is an increased and via various stress testing activity (i.e. ad hoc,
likelihood of a period of macroeconomic uncertainty. risk appetite and ICAAP) understands how the Group
The Group's lending activity is solely focused within performs over a variety of macroeconomic stress
the United Kingdom and as such will be impacted by scenarios and has subsequently developed a suite of
any risks emerging from changes in the macroeconomic early warning indicators which are closely monitored
environment. to identify changes in the macro environment.
Competition and funding costs -- The Group carefully monitors performance against the
This risk relates to increased competition for retail Board-approved funding plan.
and wholesale funding, driving up funding costs as -- The Group holds liquidity buffers to manage funding
firms look to replace funding raised through the FLS requirements under normal and stressed conditions.
and TFS schemes. -- The Group has initiated a savings transformation
project to deliver proposition enhancements in all
channels.
-- The Group continues to consider alternative funding
sources to ensure it is not reliant solely on retail
savings.
-- The firm is in the process of building a
securitisation capability.
Risk Management (continued)
Emerging risks Key mitigating actions
Cyber security risks -- The Group continues to enhance its suite of
This risk relates to the Group being unable to maintain preventative and detective controls to ensure that
pace with the increasing threat of cybercrime. the control framework is consistent throughout the
Group.
-- Documented response plans are established and testing
performed to ensure that any breach is managed
effectively.
-- Dedicated resources are in place and have been
further increased in order to manage and coordinate
cyber risk-related threats.
Credit risk portfolio performance
The Group's credit profile continues to exhibit strong performance
across all key risk indicators including loan and advances positions,
LTV and arrears levels.
During the six months to 30 June 2018, the Group observed strong lending
growth whilst maintaining credit underwriting standards, with weighted
average LTV ratios for new Buy-to-Let/SME lending remaining stable at
70% (30 June 2017: 70%) and 65% for Residential lending (30 June 2017:
66%). During the period, the average weighted interest coverage ratio
for new lending increased to 192% versus 190% in the six months to 30
June 2017. Across the residential segment the percentage of new lending
with a loan to income greater than 4.5 times reduced to 3.1% versus 3.7%
in the comparable prior year period.
This strong lending growth across the Buy-to-Let/SME segment along with
the continuing success of the Group's Choices customer retention
programme facilitated 11% loan book growth in the period with loans and
advances to customers growing to GBP8.1bn (31 December 2017 GBP7.3bn).
The strong Buy-to-Let/SME growth more than offset a modest contraction
in residential lending exposures. Residential lending acquired
portfolios continue to run off in line with expectations, more than
offsetting new lending in the period.
The total Group weighted average LTV ratio remained broadly stable at
65% as at 30 June 2018, increasing by one percentage point from 64% as
at 31 December 2017, driven by strong BTL/SME lending within the period
with a weighted average LTV of 70%. Importantly, the Group continues to
observe a tighter clustering of LTVs around the weighted average.
Other key risk measures also performed strongly within the period
including:
Measure H1 H1 Variance Commentary
2018 2017
New origination average LTV for BTL/SME lending 70% 70% - -- Stable average weighted LTV ratio observed during H1
2018.
Weighted average Interest Coverage Ratio for new BTL/SME 192% 190% +2ppts -- Marginal increase in average weighted ICR.
lending
New origination average LTV for Residential lending 65% 66% -1ppt
-- Marginal improvement in the average weighted LTV
ratio observed during H1 2018.
Percentage of new Residential lending with a loan 3.1% 3.7% -0.6ppts
to income (LTI) > 4.5 -- Lower level of higher LTI originations within the
period.
During the six months to 30 June 2018, the Group's portfolio composition
continued to evolve favourably with pre-2011 lending continuing to run
down as expected, evidenced by a further reduction in lending
Risk Management (continued)
exposures to Jersey and Guernsey. Post-2011 lending, incorporating
enhanced lending criteria, continued to make up an increasing proportion
of the Group's total loans and advances to customers:
-- exposure to semi-commercial/commercial lending remains low at GBP428.6m
with a weighted average LTV of 63%
-- exposure to residential development finance remains low at GBP151.2m with
a further GBP110.4m committed and a weighted average LTV of 34%, and
-- the Group has limited exposure to high LTV loans on properties worth more
than GBP2m. In total, only 5% of the total loan book is secured on
properties valued at greater than GBP2m with a LTV greater than 65%.
Within the period the Group sold a small number of high exposure problem
loans, which drove a reduction in the total problem loan balance from
GBP11.9m as at 30 June 2017, to GBP6.0m as at 30 June 2018. These loans
were highly provided for on an individually assessed basis and were
managed on a case by case basis. The sale of these loans drove the
higher levels of write-off balances totalling GBP6.3m during the six
months to 30 June 2018 versus the comparable period to 30 June 2017
where write off balances totalled GBP3.8m (see note 13 Impairment
losses).
The Group's total arrears balance remains low, and the portfolio arrears
rate, excluding legacy problem loans, remained broadly stable at 1.3% as
at 30 June 2018 (30 December 2017: 1.2%). An increase in the past due 3
to 6 months balance was observed during the six months to 30 June 2018
within the Buy-to-Let segment driven by two large exposure cases moving
to three months in arrears with low LTV ratios. The Collections and
Recoveries Team continue to carefully manage these cases (see note 15
Risk management and financial instruments BTL/SME table). The Group's
residential arrears performance remained broadly stable in the period,
and negligible arrears were observed across the commercial loan, funding
line and development finance portfolios.
During the six months to 30 June 2018, the Group continued to experience
low levels of new cases requiring forbearance arrangements, with fewer
cases observed during the six months to 30 June 2018 versus first half
of 2017. One large forbearance measure drove the end of period balance
to be higher as at 30 June 2018 versus 30 June 2017 (see note 15
Forbearance measures undertaken).
Impairment losses increased to GBP4.3m in the first half of 2018 (H1
2017: GBP1.4m) representing a loan loss ratio(1) of 11bps on average
gross loans (H1 2017: 4bps). On an underlying basis, adjusting for the
positive effect of indexing of property valuations during the six months
to 30 June 2017, the loan loss ratio would have been consistent with the
performance in the first half of 2018 assessed under the IAS 39
approach.
(1) Under IAS 39 provisioning approach in H1 2017 and under IFRS 9
approach in H1 2018
Risk Management (continued)
The Group continues to closely monitor impairment coverage levels:
Impairment coverage review (assessed under the IFRS 9 approach)
30-Jun-18 1-Jan-18
Gross loans and advances to customers GBPm 8,119.4 7,327.6
Provisions for impairment losses GBPm 22.9 25.2
Incurred loss remaining(1) GBPm 7.4 7.9
Coverage ratio versus loans and advances(2) % 0.37 0.45
Coverage ratio versus stage 3 balances (including
POCI) (3) % 11.5 13.1
(1) Incurred loss is the expected loss of the portfolio at the point of
acquisition and is offset against the modelled future cash flows to
derive the effective interest rate for the book. The incurred loss
protection is therefore recognised over the life of the book against the
unwind of any purchase discount or premium through interest income.
Incurred loss remaining is this protection reduced by the cumulative
losses observed since acquisition.
(2) Coverage ratio versus loans and advances is the total IFRS 9
provision plus incurred losses remaining versus gross loans and
advances.
(3) Coverage ratio versus stage 3 balances is the total IFRS 9 provision
plus incurred losses remaining versus stage 3 balances including
purchase or originated credit impaired balances, which are held in stage
3 where a lifetime loss impairment balance is held against the exposure
for the life of the loan irrespective of whether it is performing and
doesn't meet the Group's stage 3 definition.
The coverage ratios with respect to loans and advances and versus stage
3 balances reduced during the period to 30 June 2018 versus the 31
December 2017 predominantly driven by a reduction in total provision
balances resulting from the sale of a small number of highly provisioned
large problem loan cases within the period, coupled with strong growth
in loans and advances to customers. The Group also observed an increase
in stage 3 balances driven by two large Buy-to-Let loans moving to three
months in arrears within the period, and other three months in arrears
balances waiting to satisfy the Group's cure period definition prior to
being migrated to stage 1.
Under the IFRS 9 approach, there are three stages which an exposure can
be classified into, stage 1, where a 12 months expected credit loss
provision is held, and stages 2 and 3 where a lifetime loss provision is
held.
Purchased or originated credit impaired ('POCI') exposures are held in
stage 3 for the lifetime of the loan, irrespective of whether they have
transitioned to a performing status.
For non-POCI accounts which had previously met the Group's stage 3
criteria, a probation cure period must be satisfied prior to an exposure
being migrated back to stage 1, where a twelve month loss provision is
held.
These factors will result in the Group holding higher provisions than
under the IAS 39 provisioning approach, and will also result in a higher
level of volatility in the provision charge which is recognised in the
Group's income statement.
Liquidity and funding risk management overview
OneSavings Bank's lending strategy is supported by a strong retail
savings franchise, which provides the Bank with a sustainable funding
platform to support long-term balance sheet growth. This strength is
reflected in a high retention level on maturing fixed term products of
96% in the first half of 2018 and strong customer satisfaction scores.
In addition, only 8.5% of the Bank's retail deposits as at 30 June 2018
were above the FSCS protection level of GBP85k. Diversification of
funding is also provided by borrowing from the Bank of England under the
TFS, which closed in February 2018. OSB had total TFS drawings of
GBP1.5bn as at 30 June 2018.
Risk Management (continued)
The Group continues to operate a conservative approach to managing
liquidity with a liquidity ratio of 16.7% as at 30 June 2018 (31
December 2017: 15.2%). The liquidity coverage ratio at 30 June 2018 was
245%, significantly above the regulatory minimum of 100%.
Market risk
The Group has a small amount of foreign exchange exposure, due to the
Rupee denominated running costs of its OSBIndia office. Rupee
denominated running costs during the period to 30 June 2018 were GBP2.9m
(H1 2017: GBP2.4m).
Solvency risk management overview
The Group continued to maintain an appropriate level and quality of
capital to support its growth objectives and to meet its prudential
requirements. The Group maintained a strong capital position in the
first half of 2018 with a CET1 ratio of 13.3% (31 December 2017: 13.7%),
which remains comfortably in excess of the regulatory requirements.
OSB's capital buffers are subject to active monitoring by the Board and
senior management in the context of the Bank's strategic objectives,
performance commitments, economic and market conditions, regulatory
changes and other risks to which the Bank is exposed.
The Basel Committee published their final Basel III framework in
December 2017. A primary objective of the revisions is to reduce
excessive variability of risk weighted asset values and improve the
comparability of banks' capital ratios.
The Group continues to 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 in the United Kingdom.
We confirm that to the best of our knowledge:
-- the condensed set of financial statements has been prepared in
accordance with IAS 34, Interim Financial Reporting, as adopted by the
EU;
-- the interim management report includes a fair review of the
information required by:
(a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being
an indication of important events that have occurred during the first
six months of the financial year and their impact on the condensed set
of financial statements; and a description of the principal risks and
uncertainties for the remaining six months of the year; and
(b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being
related party transactions that have taken place in the first six months
of the current financial year and that have materially affected the
financial position or performance of the entity during that period; and
any changes in the related party transactions described in the last
annual report that could do so.
The Board of Directors, as listed below, represents those individuals
responsible for this interim management report:
Graham Allatt
Eric Anstee
Rod Duke
Andy Golding
Margaret Hassall
Mary McNamara
April Talintyre
David Weymouth
By order of the Board
Date: 23 August 2018
Conclusion
We have been engaged by the Company to review the condensed set of
financial statements in the half-yearly financial report for the six
months ended 30 June 2018 which comprises the Consolidated Statement of
Profit or Loss, the Consolidated Statement of Other Comprehensive Income,
the Consolidated Statement of Financial Position, the Consolidated
Statement of Changes in Equity and the Consolidated Statement of Cash
Flows and the related explanatory notes.
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the
half-yearly financial report for the six months ended 30 June 2018 is
not prepared, in all material respects, in accordance with IAS 34
Interim Financial Reporting as adopted by the EU and the Disclosure
Guidance and Transparency Rules ('the DTR') of the UK's Financial
Conduct Authority ('the UK FCA').
Scope of review
We conducted our review in accordance with International Standard on
Review Engagements (UK and Ireland) 2410 Review of Interim Financial
Information Performed by the Independent Auditor of the Entity issued by
the Auditing Practices Board for use in the UK. A review of interim
financial information consists of making enquiries, primarily of persons
responsible for financial and accounting matters, and applying
analytical and other review procedures. We read the other information
contained in the half-yearly financial report and consider whether it
contains any apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
A review is substantially less in scope than an audit conducted in
accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would become
aware of all significant matters that might be identified in an audit.
Accordingly, we do not express an audit opinion.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been
approved by, the Directors. The Directors are responsible for preparing
the half-yearly financial report in accordance with the DTR of the UK
FCA.
As disclosed in note 1, the annual financial statements of the Group are
prepared in accordance with International Financial Reporting Standards
as adopted by the EU. The Directors are responsible for preparing the
condensed set of financial statements included in the half-yearly
financial report in accordance with IAS 34 as adopted by the EU.
Our responsibility
Our responsibility is to express to the Company a conclusion on the
condensed set of financial statements in the half-yearly financial
report based on our review.
The purpose of our review work and to whom we owe our responsibilities
This report is made solely to the Company in accordance with the terms
of our engagement to assist the Company in meeting the requirements of
the DTR of the UK FCA. Our review has been undertaken so that we might
state to the Company those matters we are required to state to it in
this report and for no other purpose. To the fullest extent permitted
by law, we do not accept or assume responsibility to anyone other than
the Company for our review work, for this report, or for the conclusions
we have reached.
KPMG LLP
Chartered Accountants
15 Canada Square
London, E14 5GL
23 August 2018
Six months ended Six months ended
30-Jun-18 30-Jun-17
Note (Unaudited) (Unaudited)
GBPm GBPm
Interest receivable and similar
income 2 190.1 158.5
Interest payable and similar charges 3 (54.9) (41.4)
Net interest income 135.2 117.1
Fair value losses on financial
instruments 4 (1.7) (5.6)
Loss on sale of financial
instruments (0.2) -
Fees and commissions receivable 0.7 0.8
Fees and commissions payable (0.5) (0.5)
External servicing fees (0.4) (1.0)
Total income 133.1 110.8
Administrative expenses 5 (33.7) (29.0)
Depreciation and amortisation (2.2) (1.6)
Impairment losses 13 (4.3) (1.4)
FSCS and other regulatory provisions (1.1) (0.4)
Profit before taxation 91.8 78.4
Taxation 7 (22.3) (19.4)
Profit for the period 69.5 59.0
Dividend, pence per share 9 4.3 3.5
Earnings per share, pence per share
Basic 8 27.3 24.1
Diluted 8 27.1 23.9
The accompanying notes form an integral part of these condensed
financial statements.
Six months ended Six months ended
30-Jun-18 30-Jun-17
(Unaudited) (Unaudited)
GBPm GBPm
Profit for the period 69.5 59.0
Other comprehensive (expense)/income for
the period
Items which may be reclassified to profit
or loss:
Fair value changes on investment
securities:
Arising in the period (0.1) 0.1
Revaluation of foreign operations (0.5) (0.1)
(0.6) -
Total comprehensive income for the period 68.9 59.0
The accompanying notes form an integral part of these condensed
financial statements.
As at As at
30-Jun-18 31-Dec-17
Note (Unaudited) (Audited)
GBPm GBPm
Assets
Cash in hand 0.3 0.5
Loans and advances to credit institutions 1,476.7 1,187.2
Investment securities 19.1 19.1
Loans and advances to customers 11 8,096.5 7,306.0
Derivative assets 13.2 6.1
Fair value adjustments on hedged assets 14 21.1 31.9
Deferred taxation asset 4.4 5.1
Intangible assets 7.5 6.8
Property, plant and equipment 21.1 21.5
Other assets 9.9 4.9
Total assets 9,669.8 8,589.1
Liabilities
Amounts owed to retail depositors 7,423.8 6,650.3
Amounts owed to credit institutions 1,508.7 1,250.3
Amounts owed to other customers 32.6 25.7
Derivative liabilities 19.9 21.8
Current taxation liability 18.5 18.3
Other liabilities 16.4 16.3
FSCS and other regulatory provisions 2.5 1.4
Subordinated liabilities 10.9 10.9
Perpetual subordinated bonds 15.3 15.3
9,048.6 8,010.3
Equity
Share capital 2.4 2.4
Share premium 158.4 158.4
Retained earnings 381.4 337.5
Other reserves 79.0 80.5
621.2 578.8
Total equity and liabilities 9,669.8 8,589.1
The accompanying notes form an integral part of these condensed
financial statements.
FVOCI
Foreign reserve Share-based
Share Share Capital Transfer exchange Available-for-sale (IFRS payment Retained Equity
capital premium contribution reserve reserve reserve (IAS 39) 9) reserve earnings bonds(1) Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January
2018 2.4 158.4 6.4 (12.8) (0.2) 0.1 - 5.0 337.5 82.0 578.8
IFRS 9
transitional
adjustment - - - - - (0.1) 0.1 - (3.6) - (3.6)
Tax on IFRS 9 - - - - - - - - 0.7 - 0.7
Restated at 1
January 2018 2.4 158.4 6.4 (12.8) (0.2) - 0.1 5.0 334.6 82.0 575.9
Profit for the
period - - - - - - - - 69.5 - 69.5
Coupon paid on
equity bonds - - - - - - - - (3.3) - (3.3)
Dividends paid - - - - - - - - (22.7) - (22.7)
Other
comprehensive
income - - - - (0.5) - (0.1) - - - (0.6)
Share-based
payments - - 0.1 - - - - (1.1) 2.4 - 1.4
Tax recognised
in equity - - - - - - - 0.1 0.9 - 1.0
At 30 June
2018
(Unaudited) 2.4 158.4 6.5 (12.8) (0.7) - - 4.0 381.4 82.0 621.2
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
period - - - - - - - - 59.0 - 59.0
Coupon paid on
equity bonds - - - - - - - - (0.5) - (0.5)
Dividends paid - - - - - - - - (18.5) - (18.5)
Other
comprehensive
income - - - - (0.1) 0.1 - - - - -
Share-based
payments - - 0.1 - - - - 0.9 - - 1.0
Additional
Tier 1
securities
issuance - - - - - - - - (0.8) 60.0 59.2
Tax recognised
in equity - - - - - - - 0.6 0.3 - 0.9
At 30 June
2017
(Unaudited) 2.4 157.9 6.3 (12.8) - 0.1 - 3.4 280.2 82.0 519.5
(1) Equity bonds comprise GBP22m of Perpetual Subordinated Bonds and
GBP60m of AT1 securities.
Six months ended Six months ended
30-Jun-18 30-Jun-17
Note (Unaudited) (Unaudited)
GBPm GBPm
Cash flows from operating activities
Profit before tax 91.8 78.4
Adjustments for non-cash items 19 11.7 10.6
Changes in operating assets and liabilities 19 (18.8) (506.1)
Cash generated from/(used in) operating activities 84.7 (417.1)
Interest paid on bonds and subordinated debt (0.8) (0.7)
Sales of financial instruments 0.4 -
Net tax paid (19.8) (21.5)
Net cash generated from/(used in) operating
activities 64.5 (439.3)
Cash flows from investing activities
Purchases of investment securities (39.9) -
Maturity and sales of investment securities 39.9 40.0
Purchases of equipment and intangible assets (2.5) (9.2)
Cash (used in)/generated from investing activities (2.5) 30.8
Cash flows from financing activities
Bank of England TFS drawdowns 250.0 450.0
Coupon paid on equity bonds (3.3) (0.5)
Dividends paid (22.7) (18.5)
AT1 securities issuance net of costs - 59.2
Repayment of debt - (10.7)
Cash generated from financing activities 224.0 479.5
Net increase in cash and cash equivalents 286.0 71.0
Cash and cash equivalents at the beginning of the
period 10 1,165.9 485.3
Cash and cash equivalents at the end of the period 10 1,451.9 556.3
Movement in cash and cash equivalents 286.0 71.0
The accompanying notes form an integral part of these condensed
financial statements.
1. Accounting policies
The principal accounting policies applied in the preparation of the
accounts for the Group are set out below.
1. Basis of preparation
These Interim Group Financial Statements have been prepared in
accordance with the Disclosure Guidance and Transparency Rules ('DTR')
of the FCA and in accordance with International Accounting Standard 34
Interim Financial Reporting as adopted by the EU.
The accounting policies (apart from IFRS 9), presentation and methods of
computation are consistent with those applied by the Group in its latest
audited financial statements, which were prepared in accordance with
International Financial Reporting Standards ('IFRS') as adopted by the
EU and interpretations issued by the International Financial Reporting
Interpretations Committee. They do not include all the information
required for a complete set of IFRS financial statements. However,
selected explanatory notes are included to explain events and
transactions that are significant to an understanding of the changes in
the Group's financial position and performance since the last Interim
Report as at 30 June 2017 and last Annual Report for the year ended 31
December 2017.
The comparative figures for the year ended 31 December 2017 are not the
Group's statutory accounts for that financial year. The statutory
accounts for the year ended 31 December 2017 have been delivered to the
Registrar of Companies in England and Wales in accordance with section
447 of the Companies Act 2006. The Auditor has reported on those
accounts. Their report was unqualified; did not include a reference to
any matters to which the Auditor drew attention by way of emphasis
without qualifying their report, and did not contain a statement under
section 498(2) or (3) of the Companies Act 2006.
These interim financial statements were authorised for issue by the
Company's Board of Directors on 23 August 2018.
1. Accounting standards
Implementation of IFRS 9
The Group implemented IFRS 9 on 1 January 2018. The new standard has two
key areas of change from the accounting policies applied in the 2017
Annual Report: classification and measurement and impairment. The Group
continues to apply IAS 39 for fair value hedge accounting.
1. Classification and measurement
The Group classifies financial instruments based on the business model
and the contractual cash flow characteristics of the financial
instruments. The Group classifies financial assets into one of three
measurement categories:
-- Amortised cost - assets held in a business model to hold financial assets
in order to collect contractual cash flows, where the contractual terms
of the financial asset give rise on specified dates to cash flows that
are solely payments of principal and interest ('SPPI') on the principal
amount outstanding.
-- Fair value through other comprehensive income ('FVOCI') - assets held in
a business model which collects contractual cash flows and sells
financial assets where the contractual terms of the financial assets give
rise on specified dates to cash flows that are SPPI on the principal
amount outstanding. The Group only measures investment securities under
this category, which were previously classified as available-for-sale
under IAS 39.
-- Fair value through profit or loss ('FVPL') - assets not measured at
amortised cost or FVOCI. The Group only measures derivative assets under
this category.
IFRS 9 has not changed the classification or measurement of the Group's
financial liabilities.
The Group has not irrevocably designated any financial assets or
liabilities as FVPL in order to eliminate or significantly reduce a
measurement or recognition inconsistency.
1. Accounting policies (continued)
2. Derecognition
The Group derecognises financial assets when the contractual rights to
the cash flows expire or the Group transfers substantially all the risks
and rewards of ownership of the financial asset.
The forbearance measures offered by the Group are considered a
modification event, as the contractual cash flows are renegotiated or
otherwise modified. The Group considers the renegotiated or modified
cash flows are not wholly different from the contractual cash flows, and
does not consider forbearance measures to give rise to a derecognition
event.
1. Expected credit loss ('ECL')
IFRS 9 replaced the IAS 39 'incurred loss' impairment recognition
framework with a three stage expected credit loss approach. The three
impairment stages under IFRS 9 are as follows:
-- Stage 1 - entities are required to recognise a 12 month ECL allowance on
initial recognition.
-- Stage 2 - a lifetime loss allowance is held for assets where a
significant increase in credit risk has been identified since initial
recognition. The assessment of whether credit risk has increased
significantly since initial recognition is performed for each reporting
period for the life of the loan.
-- Stage 3 - requires objective evidence that an asset is credit impaired,
at which point a lifetime ECL allowance is required.
Individual assessment
The Group has retained the individual assessment provisioning process
for loans over GBP0.5m which are more than three months in arrears,
where LPA receivers are appointed, the property is taken into possession
or there are any other events that suggest a high probability of credit
loss, as disclosed on page 115 of the 2017 Annual Report. The Group
applies its IFRS 9 models to all loans with no individually assessed
provision.
Measurement of ECL
The assessment of credit risk and the estimation of ECL are unbiased and
probability weighted. ECL is measured on either a 12 month (stage 1) or
lifetime (stage 2) basis depending on whether a significant increase in
credit risk has occurred since initial recognition or where an account
meets the Group's definition of default (stage 3).
The ECL calculation is a product of an individual loan's probability of
default ('PD'), exposure at default ('EAD') and loss given default
('LGD') discounted at the effective interest rate ('EIR'). The ECL
drivers of PD, EAD and LGD are modelled at an account level. The
assessment of whether a significant increase in credit risk has occurred
is based on the lifetime PD estimate.
Significant increase in credit risk ('SICR') (movement to stage 2)
The Group's transfer criteria determines what constitutes a significant
increase in credit risk, which results in an exposure being moved from
stage 1 to stage 2.
At the point of recognition a loan is assigned a lifetime PD estimate.
For each monthly reporting date thereafter an updated lifetime PD
estimate is computed for the life of the loan. The Group's transfer
criteria analyses relative changes in lifetime PD versus the origination
lifetime PD, where if prescribed thresholds are met, an account will be
transferred from stage 1 to stage 2.
1. Accounting policies (continued)
The Group's Risk function constantly monitors the ongoing
appropriateness of the transfer criteria, where any proposed amendments
will be reviewed and approved by the Group's Management Committees and
the Risk and Audit Committees at least semi-annually or more frequently
if required.
IFRS 9 includes a rebuttable presumption that if an account is more than
30 days past due it has experienced a significant increase in credit
risk. The Group considers more than 30 days past due to be an
appropriate back stop measure and therefore has not rebutted this
presumption.
A borrower will move back into stage 1 where the SICR definition is no
longer satisfied.
Definition of default (movement to stage 3)
The Group uses a number of quantitative and qualitative criteria to
determine whether an account meets the definition of default and
therefore moves to stage 3. The criteria currently include:
-- The rebuttable assumption that more than 90 days past due is an indicator
of default. The Group has not rebutted this assumption and therefore
deems more than 90 days past due as an indicator of default. This also
ensures alignment between the Group's Internal Ratings Based Models and
the Basel/Regulatory definition of default.
-- The Group has also deemed it appropriate to classify accounts that have
moved into an unlikeliness to pay position, which includes forbearance or
repossession.
A borrower will move out of stage 3 when their credit risk improves such
that they roll back to zero days past due and remain there for an
internally approved period. The borrower will move to stage 1 or stage 2
dependent on whether the SICR applies.
Forward looking macroeconomic scenarios
IFRS 9 requires firms to consider the risk of default and impairment
loss taking into account expectations of economic changes that are
reasonable.
The Group uses a bespoke macroeconomic model to determine the most
significant factors which may influence the likelihood of an exposure
defaulting in the future. At present, the most significant macroeconomic
factors relate to the house price index ('HPI'), unemployment and the
Bank of England Base Rate.
The Group has derived an approach for factoring probability weighted
macroeconomic forecasts into ECL calculations, adjusting PD and LGD
estimates. An account's lifetime PD is impacted by the probability
weighted macroeconomic scenario and therefore impacts whether an account
meets the Group's SICR transfer criteria moving the exposure between
stage 1 and stage 2. The macroeconomic scenarios feed directly into the
ECL calculation, as the adjusted PD, lifetime PD and LGD estimates are
used within the individual account ECL allowance calculations.
The Group currently does not have an in-house economics function and
therefore sources economic forecasts from an appropriately qualified
third party. The Group will consider a minimum of three probability
weighted scenarios, including base, upside and downside scenarios.
However, the Group will constantly monitor the ongoing appropriateness
of its approach referencing industry best practise.
The base case is also utilised within the Group's impairment forecasting
process which in turn feeds the wider business planning processes. This
economic forecast is also used within analysis to set the Group's credit
risk appetite thresholds and limits.
1. Accounting policies (continued)
Expected life
IFRS 9 requires lifetime expected credit losses to be measured over the
expected life. Currently the Group considers the loan's behavioural life
is equal to the full mortgage term. This approach will continue to be
monitored and enhanced if and when deemed appropriate.
Purchase or originated credit impaired ('POCI')
Acquired loans that meet OSB's definition of default (90 days past due
or an unlikeliness to pay position) at acquisition are treated as a POCI
asset. These assets will attract a lifetime ECL allowance over the full
term of the loan, even when the loan no longer meets the definition of
default post acquisition. The Group does not provide for or have any own
originated credit impaired loans.
All other accounting policies used are consistent with those set out on
pages 112 to 122 of the 2017 Annual Report.
1. Going concern
The Board undertakes regular rigorous assessments of whether the Group
is a going concern in light of current economic conditions and all
available information about future risks and uncertainties.
Projections for the Group have been prepared, covering its future
performance, capital and liquidity for a period in excess of 12 months
from the date of approval of these financial statements including stress
scenarios. These projections show that the Group has sufficient capital
and liquidity to continue to meet its regulatory capital requirements as
set out by the PRA.
The Board has therefore concluded that the Group has sufficient
resources to continue in operational existence for a period in excess of
12 months and as a result, it is appropriate to prepare these Interim
Group Financial Statements on a going concern basis.
1. Segmental reporting
The Group segments its lending by product, focusing on the customer need
and reason for a loan. The Group operates under two segments: BTL/SME
and Residential mortgages.
1. Judgements and estimates
The preparation of the Interim Report requires management to make
estimates and assumptions that affect the reported income and expense,
assets and liabilities and disclosure of contingencies at the date of
the Interim Report. Although these estimates and assumptions are based
on management's best judgement at that date, actual results may differ
from these estimates. Estimates and assumptions are reviewed on an
ongoing basis. Revisions to estimates are recognised in the period in
which the estimate is revised and in any future periods affected.
1. Accounting policies (continued)
There have been no significant changes in the basis upon which estimates
have been determined for loan book acquisition accounting and income
recognition and EIR calculations compared to those applied at 31
December 2017, as described on pages 122 to 123 of the 2017 Annual
Report.
The implementation of IFRS 9 on 1 January 2018 has changed the
judgements and estimates used for loan book impairments, with the new
ECL calculations underpinned by a suite of bespoke PD, LGD and EAD
models using segmentation based on the underlying characteristics of the
Group's loan portfolios.
PD models - the Group uses a number of PD models to assess the
likelihood of a default event occurring within the next 12 months,
utilising internal and external credit bureau information. The Group
also computes a lifetime PD estimate for each loan exposure once
recognised, underpinned by the 12 month PD estimate.
LGD model - the Group uses a single LGD model, which includes a number
of judgement and estimate inputs, including propensity to go to
possession given default ('PGD'), forced sale discount ('FSD'), time to
sale ('TTS') and sale cost estimates.
EAD model - The Group uses a single EAD model to cover all applicable
exposures.
1. Interest receivable and similar income
Restated
Six months ended Six months ended
30-Jun-18 30-Jun-17
(Unaudited) (Unaudited)
GBPm GBPm
At amortised cost:
On BTL/SME mortgages(1) 146.9 114.3
On Residential mortgages(1) 43.9 47.8
On investment securities 0.1 -
On other liquid assets 3.1 0.6
At fair value through profit or loss:
Net expense on derivative financial instruments -
financing activities (3.9) (4.2)
190.1 158.5
(1) The comparative information for residential mortgages has been
restated following a change in allocation, with an additional GBP2.1m of
interest income disclosed compared to the previously reported balance.
This has decreased the BTL/SME mortgages interest income by GBP2.1m.
1. Interest payable and similar charges
Six months ended Six months ended
30-Jun-18 30-Jun-17
(Unaudited) (Unaudited)
GBPm GBPm
On retail deposits 50.3 41.4
On Perpetual Subordinated Bonds 0.4 0.4
On subordinated liabilities 0.4 0.3
On wholesale borrowings 3.4 1.1
Net expense/(income) on derivative financial instruments
- investment activities 0.4 (1.8)
54.9 41.4
1. Fair value losses on financial instruments
Six months ended Six months ended
30-Jun-18 30-Jun-17
(Unaudited) (Unaudited)
GBPm GBPm
Fair value changes in hedged assets (8.3) (5.9)
Hedging of assets 9.3 6.5
Fair value changes in hedged liabilities - 1.2
Hedging of liabilities (0.2) (1.1)
Ineffective portion of hedges 0.8 0.7
Amortisation of fair value adjustments on
hedged assets (2.5) (6.2)
Net gains on unmatched swaps 0.2 -
Debit and credit valuation adjustment (0.2) (0.1)
(1.7) (5.6)
Amortisation of fair value adjustments on hedged assets relates to
hedged assets and liabilities where the hedges were terminated before
maturity and were effective at the point of termination.
The debit valuation adjustment ('DVA') is calculated on the Group's
derivative liabilities and represents exposure of their holders to the
risk of the Group's default. The credit valuation adjustment ('CVA')
reflects the Group's risk of the counterparty's default.
1. Administrative expenses
Six months ended Six months ended
30-Jun-18 30-Jun-17
(Unaudited) (Unaudited)
GBPm GBPm
Staff costs(1) 20.4 17.2
Facilities costs 3.1 1.2
Marketing costs 1.0 1.2
Support costs 3.5 3.1
Professional fees 2.6 2.5
Other costs(2) 3.1 3.8
33.7 29.0
(1) Staff costs include GBP0.1m (2017: GBP0.1m) relating to the IPO
share awards and GBP1.2m (2017: GBP0.9m) of share-based executive and
management compensation.
(2) Other costs mainly consist of irrecoverable VAT expense.
The average number of persons employed by the Group (including executive
Directors) during the first half of 2018 was 956 (first half of 2017:
775).
1. Share-based payments
The Group operates the following equity-settled share-based payment
schemes, full details of which are provided on pages 126 to 128 of the
2017 Annual Report:
-- IPO Share Awards
-- Sharesave Scheme ('SAYE')
-- Deferred Share Bonus Plan ('DSBP')
-- Performance Share Plan ('PSP')
The movement in the number of share awards and their weighted average
exercise prices are presented below:
Deferred
Share
IPO share Bonus Performance
awards Sharesave Scheme Plan Share Plan
Weighted
average
exercise
price,
(Unaudited) Number Number (GBP) Number Number
At 1 January 2018 652,198 732,341 2.60 1,186,762 1,589,030
Granted - - - 376,231 708,146
Exercised/vested (577,661) (6,650) 1.89 (298,631) (559,179)
Forfeited - (26,149) 2.80 - -
At 30 June 2018 74,537 699,542 2.60 1,264,362 1,737,997
Exercisable at
At 30 June 2018 - - - - -
1. Share-based payments (continued)
The weighted average market price at exercise for the IPO share awards
exercised during 2018 was 408 pence per share.
The weighted average market price at exercise for the SAYE options
exercised during 2018 was 393 pence per share.
The market price at vesting for the DSBP and PSP awards was 372 pence
per share.
1. Taxation
Six months ended Six months ended
30-Jun-18 30-Jun-17
(Unaudited) (Unaudited)
GBPm GBPm
Corporation tax (22.3) (18.9)
Tax in respect of prior periods - (0.5)
Total taxation (22.3) (19.4)
The taxation on the Group's profit before taxation differs from the
theoretical amount that would arise using the weighted average taxation
rate applicable to profits of the Group as follows:
Six months ended Six months ended
30-Jun-18 30-Jun-17
(Unaudited) (Unaudited)
GBPm GBPm
Profit before taxation 91.8 78.4
Profit multiplied by the weighted average rate of
corporation tax in the UK during 2018 of 19% (2017:
19.25%) (17.4) (15.1)
Bank surcharge (4.6) (3.8)
Taxation effects of:
Expenses not deductible for taxation purposes (0.2) -
Adjustments in respect of earlier years - (0.5)
Tax adjustments in respect of share-based payments 0.1 0.2
Impact of tax losses carried forward - 0.1
Timing differences on capital items (0.2) (0.4)
Other - 0.1
Total taxation charge (22.3) (19.4)
A reduction in the UK corporation tax rate from 20% to 19% (effective
from 1 April 2017) and a further reduction to 18% (effective from 1
April 2020) were substantively enacted on 26 October 2015. An additional
reduction to 17% (effective 1 April 2020) was substantively enacted on 6
September 2016. This will reduce the Group's future tax charge
accordingly.
1. Earnings per share
Earnings per share ('EPS') are based on the profit for the period and
the number of ordinary shares in issue. Basic EPS are calculated by
dividing profit attributable to ordinary shareholders by the weighted
average number of ordinary shares in issue during the period. Diluted
earnings per share take into account share awards and options which can
be converted to ordinary shares.
For the purpose of calculating earnings per share, profit attributable
to ordinary shareholders is arrived at by adjusting profit for the
period for the after tax amount of the coupon on the Perpetual
Subordinated Bonds ('PSBs') and AT1 Securities classified as equity:
Six months ended Six months ended
30-Jun-18 30-Jun-17
(Unaudited) (Unaudited)
GBPm GBPm
Profit for the period 69.5 59.0
Adjustments:
Coupon on equity bonds (3.3) (0.5)
Tax on coupon on equity bonds 0.9 0.1
Profit attributable to ordinary
shareholders 67.1 58.6
Earnings per share are summarised in the table below:
Six months ended Six months ended
30-Jun-18 30-Jun-17
(Unaudited) (Unaudited)
Weighted average number of shares,
millions
Basic 246.1 243.1
Diluted 248.0 245.1
Earnings per share, pence per share
Basic 27.3 24.1
Diluted 27.1 23.9
1. Dividends
During the period, the Bank paid the following dividends:
Six months ended Six months ended
30-Jun-18 30-Jun-17
(Unaudited) (Unaudited)
GBPm Pence per share GBPm Pence per share
Final dividend for the prior
year 22.7 9.3 18.5 7.6
1. Dividends (continued)
A summary of the Bank's distributable reserves from which dividends can
be paid are shown below:
Six months ended Year ended
30-Jun-18 31-Dec-17
(Unaudited) (Audited)
GBPm GBPm
Net assets 621.2 475.8
Less:
- Share capital (2.4) (2.4)
- Share premium (158.4) (158.4)
- Other non-distributable reserves (1) (91.8) (93.1)
Distributable reserves 368.6 221.9
(1) Other non-distributable reserves include the capital contribution,
equity bonds, foreign exchange reserve, FVOCI reserve and share-based
payment reserve.
The Directors propose an interim dividend for the first half of 2018 of
4.3 pence per share, based on one third of the total 2017 dividend of
12.8 pence per share, payable on 2 November 2018 with an ex-dividend
date of 11 October 2018 and a record date of 12 October 2018. This
dividend is not reflected in these financial statements as it was not
declared as at the reporting date.
1. Cash and cash equivalents
As at As at As at As at
30-Jun-18 31-Dec-17 30-Jun-17 31-Dec-16
(Unaudited) (Audited) (Unaudited) (Audited)
GBPm GBPm GBPm GBPm
Cash in hand 0.3 0.5 0.4 0.4
Unencumbered loans and
advances to credit
institutions 1,451.6 1,165.4 555.9 402.3
Investment securities with
maturity less than 3
months - - - 82.6
1,451.9 1,165.9 556.3 485.3
Unencumbered loans and advances to credit institutions excludes GBP17.3m
(30 June 2017: GBP9.3m) held in the cash ratio deposit with the Bank of
England and excludes GBP7.8m (30 June 2017: GBP14.1m) of encumbered
assets in the form of cash margin collateral paid in relation to the
Group's derivatives.
1. Loans and advances to customers
As at 30-Jun-18 As at 31-Dec-17
(Unaudited) (Audited)
BTL/SME Residential Total BTL/SME Residential Total
GBPm GBPm GBPm GBPm GBPm GBPm
Gross carrying
amount
Stage 1 6,243.8 1,315.5 7,559.3 - - -
Stage 2 188.8 106.3 295.1 - - -
Stage 3 83.4 120.3 203.7 - - -
Stage 3 (POCI) 0.3 61.0 61.3 - - -
IAS 39 - - - 5,654.1 1,673.5 7,327.6
6,516.3 1,603.1 8,119.4 5,654.1 1,673.5 7,327.6
Expected credit
loss
Stage 1 (7.9) (1.8) (9.7) - - -
Stage 2 (1.0) (1.1) (2.1) - - -
Stage 3 (3.9) (5.1) (9.0) - - -
Stage 3 (POCI) - (1.9) (1.9) - - -
Undrawn loan
facilities (0.2) - (0.2) - - -
IAS 39 - - - (13.2) (8.4) (21.6)
(13.0) (9.9) (22.9) (13.2) (8.4) (21.6)
Net carrying
amount 6,503.3 1,593.2 8,096.5 5,640.9 1,665.1 7,306.0
1. Expected credit losses
A reconciliation of the Group's ECLs movement during the period is shown
below:
Stage 3 IAS 39
Stage 1 Stage 2 Stage 3 (POCI) impairments Total
Total
(Unaudited) GBPm GBPm GBPm GBPm GBPm GBPm
At 31 December
2017 - - - - 21.6 21.6
IFRS 9
transitional
adjustment 7.8 2.3 13.3 1.8 (21.6) 3.6
At 1 January
2018 7.8 2.3 13.3 1.8 - 25.2
Originations
and
acquisitions 0.7 0.1 - - - 0.8
Modifications - - - - - -
Disposals and
write-offs (0.1) (0.1) (6.6) (0.1) - (6.9)
Remeasurement
of loss
allowance (0.6) 0.9 2.3 0.2 - 2.8
Transfers:
- To Stage 1 1.2 (0.8) (0.4) - - -
- To Stage 2 (0.1) 0.1 - - - -
- To Stage 3 - (0.4) 0.4 - - -
- To Stage 3
(POCI) - - - - - -
Changes in
assumptions
and model
parameters
(1) 1.0 - - - - 1.0
At 30 June
2018 9.9 2.1 9.0 1.9 - 22.9
(1) The Group continues to track the predictability of all IFRS 9 models,
and an enhancement was made during the six months to 30 June 2018 to
ensure that model performance continued to meet internally defined
performance thresholds.
Stage 3 IAS 39
Stage 1 Stage 2 Stage 3 (POCI) impairments Total
BTL/SME
(Unaudited) GBPm GBPm GBPm GBPm GBPm GBPm
At 31 December
2017 - - - - 13.2 13.2
IFRS 9
transitional
adjustment 6.6 1.1 8.6 - (13.2) 3.1
At 1 January
2018 6.6 1.1 8.6 - - 16.3
Originations
and
acquisitions 0.6 0.1 - - - 0.7
Modifications - - - - - -
Disposals and
write-offs - (0.1) (5.9) - - (6.0)
Remeasurement
of loss
allowance (0.5) 0.3 1.3 - - 1.1
Transfers:
- To Stage 1 0.5 (0.3) (0.2) - - -
- To Stage 2 - - - - - -
- To Stage 3 - (0.1) 0.1 - - -
- To Stage 3
(POCI) - - - - - -
Changes in
assumptions
and model
parameters 0.9 - - - - 0.9
At 30 June
2018 8.1 1.0 3.9 - - 13.0
1. Expected credit losses (continued)
Stage 3 IAS 39
Stage 1 Stage 2 Stage 3 (POCI) impairments Total
Residential
(Unaudited) GBPm GBPm GBPm GBPm GBPm GBPm
At 31 December
2017 - - - - 8.4 8.4
IFRS 9
transitional
adjustment 1.2 1.2 4.7 1.8 (8.4) 0.5
At 1 January
2018 1.2 1.2 4.7 1.8 - 8.9
Originations
and
acquisitions 0.1 - - - - 0.1
Modifications - - - - - -
Disposals and
write-offs (0.1) - (0.7) (0.1) - (0.9)
Remeasurement
of loss
allowance (0.1) 0.6 1.0 0.2 - 1.7
Transfers:
- To Stage 1 0.7 (0.5) (0.2) - - -
- To Stage 2 (0.1) 0.1 - - - -
- To Stage 3 - (0.3) 0.3 - - -
- To Stage 3
(POCI) - - - - - -
Changes in
assumptions
and model
parameters 0.1 - - - - 0.1
At 30 June
2018 1.8 1.1 5.1 1.9 - 9.9
The movement in the 2017 provision for impairment losses under IAS 39 is
shown below:
BTL/SME Residential Total
Specific GBPm GBPm GBPm
At 1 January 2017 16.8 6.6 23.4
Write-offs in period (4.8) (3.0) (7.8)
Charge for the period net of recoveries 0.7 3.3 4.0
At 31 December 2017 (Audited) 12.7 6.9 19.6
Collective
At 1 January 2017 0.4 1.2 1.6
Write-offs in period - - -
Charge for the period net of recoveries 0.1 0.3 0.4
At 31 December 2017 (Audited) 0.5 1.5 2.0
Total
At 1 January 2017 17.2 7.8 25.0
Write-offs in period (4.8) (3.0) (7.8)
Charge for the period net of recoveries 0.8 3.6 4.4
At 31 December 2017 (Audited) 13.2 8.4 21.6
1. Impairment losses
Six months ended Six months ended
30-Jun-18 30-Jun-17
(Unaudited) (Unaudited)
GBPm GBPm
Write-offs in period (1) 6.3 3.8
Decrease in provision (2) (2.0) (2.4)
4.3 1.4
(1) The sale of properties securing a small number of high exposure
problem loan cases within the period drove an increase in total
write-off balances during the six months to the 30 June 2018. Additional
information is disclosed in the Risk Management.
(2) The decrease in provision excludes GBP0.3m of provision on the
personal loan portfolio which was sold in June 2018.
1. Fair value adjustments on hedged items
As at As at
30-Jun-18 31-Dec-17
(Unaudited) (Audited)
GBPm GBPm
Hedged assets
Current hedge relationships 7.6 15.9
Cancelled hedge relationships 13.5 16.0
21.1 31.9
The fair value adjustments on hedged assets in respect of cancelled
hedge relationships represent the fair value adjustment for interest
rate risk on legacy long-term fixed rate mortgages (c.25 years at
origination) where the interest rate swap hedges were terminated before
maturity and were effective at the point of termination.
1. Risk management and financial instruments
The tables below are a summary of the Group's risk management and
financial instruments disclosures, of which a complete disclosure for
the year ended 31 December 2017 is included in the Group's 2017 Annual
Report. The tables do not represent all risks the Group is exposed to
and should be read in conjunction with the Risk Management Report above.
1. Risk management and financial instruments (continued)
Credit risk
The following table shows the Group's maximum exposure to credit risk
and the impact of collateral held as security, capped at the gross
exposure amount, by impairment stage:
As at 30-Jun-18 As at 31-Dec-17
(Unaudited) (Audited)
Gross Capped Gross Capped
carrying collateral carrying collateral
amount held amount held
GBPm GBPm GBPm GBPm
Stage 1 7,559.3 7,552.5 - -
Stage 2 295.1 294.6 - -
Stage 3 203.7 202.9 - -
Stage 3 (POCI) 61.3 61.3 - -
IAS 39 - - 7,327.6 7,313.5
8,119.4 8,111.3 7,327.6 7,313.5
The Group's collateral held in relation to BTL/SME and Residential first
and second charge mortgage loans is property, based in the UK and the
Channel Islands. The Group's collateral held in relation to funding
lines is predominantly property. The Group's personal loan portfolio,
which was sold in June 2018, was unsecured.
The Group uses indexed loan-to-value ('LTV') ratios to assess the
quality of the uncapped collateral held. Property values are updated to
reflect changes in the house price index.
LTV analysis by band for all loans:
As at 30-Jun-18 (Unaudited)
BTL/SME Residential Total
GBPm GBPm GBPm %
Band
0% - 50% 863.9 788.7 1,652.6 20
50% - 60% 999.4 252.1 1,251.5 15
60% - 70% 1,854.8 208.8 2,063.6 25
70% - 80% 2,373.8 176.7 2,550.5 32
80% - 90% 404.4 123.9 528.3 7
90% - 100% 8.4 33.3 41.7 1
>100% 11.6 19.6 31.2 -
Total loans before provisions 6,516.3 1,603.1 8,119.4 100
1. Risk management and financial instruments (continued)
As at 31-Dec-17 (Audited)
BTL/SME Residential Total
GBPm GBPm GBPm %
Band
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 - 1.1 -
Total loans before provisions 5,654.1 1,673.5 7,327.6 100
(1) The Group sold its personal loan portfolio in June 2018, recognising
a loss on sale of GBP0.2m.
LTV analysis by band for BTL/SME:
As at 30-Jun-18 (Unaudited)
Residential
Buy-to-Let Commercial development Funding lines Total
GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 634.7 64.8 120.2 44.2 863.9
50% - 60% 908.1 60.0 17.6 13.7 999.4
60% - 70% 1,648.3 151.4 8.1 47.0 1,854.8
70% - 80% 2,205.4 147.4 5.3 15.7 2,373.8
80% - 90% 387.8 2.0 - 14.6 404.4
90% - 100% 8.0 0.4 - - 8.4
>100% 9.0 2.6 - - 11.6
Total loans
before
provisions 5,801.3 428.6 151.2 135.2 6,516.3
1. Risk management and financial instruments (continued)
As at 31-Dec-17 (Audited)
Residential
Buy-to-Let Commercial development Funding lines Total
GBPm GBPm GBPm GBPm GBPm
Band
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
LTV analysis by band for Residential:
As at 30-Jun-18 (Unaudited)
First charge Second charge Funding lines Total
GBPm GBPm GBPm GBPm
Band
0% - 50% 642.3 129.2 17.2 788.7
50% - 60% 165.5 85.6 1.0 252.1
60% - 70% 128.8 79.0 1.0 208.8
70% - 80% 124.4 50.6 1.7 176.7
80% - 90% 98.4 24.4 1.1 123.9
90% - 100% 23.6 9.1 0.6 33.3
>100% 7.2 12.0 0.4 19.6
Total loans before
provisions 1,190.2 389.9 23.0 1,603.1
As at 31-Dec-17 (Audited)
First
charge Second charge Funding lines Total
GBPm GBPm GBPm GBPm
Band
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 loans before provisions 1,240.6 415.3 17.6 1,673.5
1. Risk management and financial instruments (continued)
Analysis of mortgage portfolio by arrears and collateral held
The table below provides further information on collateral, capped at
the value of each individual mortgage, over the mortgage portfolio by
payment due status for each impairment stage:
As at 30-Jun-18
(Unaudited)
Loan balance Capped collateral
GBPm GBPm
Stage 1
Not past due 7,445.2 7,438.4
Past due < 1 month 114.1 114.1
7,559.3 7,552.5
Stage 2
Not past due 126.0 125.5
Past due < 1 month 111.1 111.1
Past due 1 to 3 months 58.0 58.0
295.1 294.6
Stage 3
Not past due 49.4 49.4
Past due < 1 month 21.9 21.9
Past due 1 to 3 months 42.2 42.2
Past due 3 to 6 months 45.5 45.5
Past due 6 to 12 months 26.5 26.4
Past due over 12 months 9.6 9.5
Possessions 8.6 8.0
203.7 202.9
Stage 3 (POCI)
Not past due 19.9 19.9
Past due < 1 month 6.4 6.4
Past due 1 to 3 months 7.5 7.5
Past due 3 to 6 months 8.6 8.6
Past due 6 to 12 months 8.6 8.6
Past due over 12 months 10.3 10.3
Possessions - -
61.3 61.3
Total loans before provisions 8,119.4 8,111.3
1. Risk management and financial instruments (continued)
The table below provides further information on collateral, capped at
the value of each individual mortgage, over the mortgage portfolio by
payment due status for IAS 39 impairments, where impaired is defined as
loans with a specific provision against them:
Group
As at 31-Dec-17
Loan balance Capped collateral
GBPm GBPm
Not impaired:
Not past due 6,792.9 6,784.8
Past due < 1 month 307.1 307.1
Past due 1 to 3 months 102.0 101.9
Past due 3 to 6 months 20.9 20.9
Past due 6 to 12 months 14.1 14.1
Past due over 12 months 7.6 7.6
Possessions 0.5 0.5
7,245.1 7,236.9
Impaired:
Not past due 12.3 7.7
Past due < 1 month 0.8 0.8
Past due 1 to 3 months 2.2 2.1
Past due 3 to 6 months 23.7 23.7
Past due 6 to 12 months 16.3 16.3
Past due over 12 months 14.5 14.4
Possessions 11.6 11.6
81.4 76.6
Total mortgages before provisions 7,326.5 7,313.5
Personal loans 1.1
Total loans before provisions 7,327.6
1. Risk management and financial instruments (continued)
The tables below show the payment due status of the Group's loan
portfolios by operating segment:
As at 30-Jun-18 (Unaudited)
Residential
BTL/SME Buy-to-Let Commercial development Funding lines Total
GBPm GBPm GBPm GBPm GBPm
Stage 1
Not past due 5,517.4 399.1 151.2 135.2 6,202.9
Past due < 1
month 39.1 1.8 - - 40.9
5,556.5 400.9 151.2 135.2 6,243.8
Stage 2
Not past due 74.4 19.8 - - 94.2
Past due < 1
month 65.1 3.7 - - 68.8
Past due 1 to
3 months 23.9 1.9 - - 25.8
163.4 25.4 - - 188.8
Stage 3
Not past due 25.7 0.8 - - 26.5
Past due < 1
month 8.0 - - - 8.0
Past due 1 to
3 months 15.6 0.6 - - 16.2
Past due 3 to
6 months 18.0 0.5 - - 18.5
Past due 6 to
12 months 8.3 - - - 8.3
Past due over
12 months 1.5 0.1 - - 1.6
Possessions 4.3 - - - 4.3
81.4 2.0 - - 83.4
Stage 3 (POCI)
Not past due - - - - -
Past due < 1
month - 0.2 - - 0.2
Past due 1 to
3 months - - - - -
Past due 3 to
6 months - - - - -
Past due 6 to
12 months - - - - -
Past due over
12 months - 0.1 - - 0.1
Possessions - - - - -
- 0.3 - - 0.3
Total loans
before
provisions 5,801.3 428.6 151.2 135.2 6,516.3
1. Risk management and financial instruments (continued)
As at 31-Dec-17 (Audited)
Residential
BTL/SME Buy-to-Let Commercial development Funding 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 months 31.9 0.6 - - 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
12 months 0.3 0.8 - - 1.1
Possessions - - - - -
5,006.7 365.0 143.9 104.5 5,620.1
Impaired:
Not past due 4.6 4.5 - - 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
12 months 4.0 0.4 - - 4.4
Past due over
12 months 1.6 0.1 - - 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
1. Risk management and financial instruments (continued)
As at 30-Jun-18 (Unaudited)
First
Residential charge Second charge Funding lines Total
GBPm GBPm GBPm GBPm
Stage 1
Not past due 932.5 286.8 23.0 1,242.3
Past due < 1 month 63.8 9.4 - 73.2
996.3 296.2 23.0 1,315.5
Stage 2
Not past due 11.6 20.2 - 31.8
Past due < 1 month 35.0 7.3 - 42.3
Past due 1 to 3 months 25.9 6.3 - 32.2
72.5 33.8 - 106.3
Stage 3
Not past due 19.4 3.5 - 22.9
Past due < 1 month 10.6 3.3 - 13.9
Past due 1 to 3 months 18.0 8.0 - 26.0
Past due 3 to 6 months 18.3 8.7 - 27.0
Past due 6 to 12 months 13.5 4.7 - 18.2
Past due over 12 months 5.8 2.2 - 8.0
Possessions 4.3 - - 4.3
89.9 30.4 - 120.3
Stage 3 (POCI)
Not past due 13.6 6.3 - 19.9
Past due < 1 month 4.3 1.9 - 6.2
Past due 1 to 3 months 4.5 3.0 - 7.5
Past due 3 to 6 months 4.1 4.5 - 8.6
Past due 6 to 12 months 3.4 5.2 - 8.6
Past due over 12 months 1.6 8.6 - 10.2
Possessions - - - -
31.5 29.5 - 61.0
Total loans before provisions 1,190.2 389.9 23.0 1,603.1
1. Risk management and financial instruments (continued)
As at 31-Dec-17 (Audited)
First
Residential charge Second charge Funding 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 loans before provisions 1,240.6 415.3 17.6 1,673.5
1. Risk management and financial instruments (continued)
Forbearance measures undertaken
The Group has a range of options available where borrowers experience
financial difficulties which impact their ability to service their
financial commitments under the loan agreement. These are explained on
pages 45 to 46 of the 2017 Annual Report.
A summary of the forbearance measures undertaken during the period under
review is below:
Restated(1) Restated(1)
H1 2018 As at H1 2017 As at
number of 30-Jun-18 number of 30-Jun-17
accounts GBPm accounts GBPm
Forbearance type:
Interest only switch 16 2.8 27 1.5
Interest rate reduction 3 0.9 - -
Term extension 15 1.5 21 3.7
Payment holiday 27 0.8 34 1.5
Payment concession (reduced
monthly payments) 27 2.5 17 0.4
Capitalisation - - - -
Total 88 8.5 99 7.1
Restated(1) Restated(1)
H1 2018 As at H1 2017 As at
number of 30-Jun-18 number of 30-Jun-17
accounts GBPm accounts GBPm
Loan type:
First charge owner occupier 22 2.6 43 3.5
Second charge owner occupier 52 1.5 43 1.1
Buy-to-Let 14 4.4 13 2.5
Commercial - - - -
Total 88 8.5 99 7.1
(1) Forbearance measures have been restated for second charge owner
occupier mortgages to remove the first charge related balance to align
to the approach adopted for the 2017 Annual Report. The 2017
comparatives also reflect changes to the data capture process.
1. Risk management and financial instruments (continued)
Geographical analysis by region
An analysis of loans by region is provided below:
As at 30-Jun-18 As at 31-Dec-17
(Unaudited) (Audited)
Region GBPm % GBPm %
East Anglia 279.2 3 236.4 3
East Midlands 280.5 3 249.6 4
Greater London 3,561.6 45 3,173.0 43
Guernsey 67.1 1 73.8 1
Jersey 194.6 2 225.1 3
North East 113.4 1 103.0 1
North West 385.7 5 347.9 5
Northern Ireland 15.3 - 16.9 -
Scotland 47.5 1 51.1 1
South East 1,776.5 22 1,591.7 22
South West 583.3 7 522.3 7
Wales 156.3 2 142.9 2
West Midlands 480.6 6 425.4 6
Yorks & Humberside 177.8 2 167.4 2
Total mortgages before provisions 8,119.4 100 7,326.5 100
Personal loans - 1.1
Total loans before provisions 8,119.4 7,327.6
1. Fair values of financial assets and financial liabilities
The following tables provide an analysis of financial assets and
financial liabilities measured at fair value on the Statement of
Financial Position grouped into level 1 to 3 based on the degree to
which the fair value is observable:
As at 30 June Carrying Principal
2018 amount amount Level 1 Level 2 Level 3 Total
(Unaudited) GBPm GBPm GBPm GBPm GBPm GBPm
Financial
assets
Investment
securities 19.1 19.0 19.1 - - 19.1
Derivative
assets 13.2 1,870.0 - 13.2 - 13.2
32.3 1,889.0 19.1 13.2 - 32.3
Financial
liabilities
Derivative
liabilities 19.9 2,951.9 - 19.9 - 19.9
As at 31 Carrying Principal
December 2017 amount amount Level 1 Level 2 Level 3 Total
(Audited) GBPm GBPm GBPm GBPm GBPm GBPm
Financial
assets
Investment
securities 19.1 19.0 19.1 - - 19.1
Derivative
assets 6.1 1,636.1 - 6.1 - 6.1
25.2 1,655.1 19.1 6.1 - 25.2
Financial
liabilities
Derivative
liabilities 21.8 2,493.9 - 21.8 - 21.8
Fair values are determined using the following fair value hierarchy that
reflects the significance and observability of the inputs used in making
the measurements:
Level 1
Fair values that are based entirely on quoted market prices (unadjusted)
in an actively traded market for identical assets and liabilities that
the Group has the ability to access. Valuation adjustments and block
discounts are not applied to level 1 instruments. Since valuations are
based on readily available observable market prices, this makes them
most reliable, reduces the need for management judgement and estimation
and also reduces the uncertainty associated with determining fair
values.
Level 2
Fair values that are based on one or more quoted prices in markets that
are not active or for which all significant inputs are taken from
directly or indirectly observable market data. These include valuation
models used to calculate the present value of expected future cash flows
and may be employed either when no active market exists or when there
are quoted prices available for similar instruments in active markets.
Level 3
Fair values for which any one or more significant input is not based on
observable market data and the unobservable inputs have a significant
effect on the instruments fair value. Valuation models that employ
significant unobservable inputs require a higher degree of management
judgement and estimation in determining the fair value. Management
judgement and estimation are usually required for the selection of the
appropriate valuation model to be used, determination of expected future
cash flows on the financial instruments being valued, determination of
the probability of counterparty default and prepayments, determination
of expected volatilities and correlations and the selection of
appropriate discount rates.
1. Fair values of financial assets and financial liabilities (continued)
The following tables provide an analysis of financial assets and
financial liabilities not measured at fair value on the Statement of
Financial Position grouped into level 1 to 3 based on the degree to
which the fair value is observable:
Estimated fair value
As at 30 June Carrying Principal
2018 amount amount Level 1 Level 2 Level 3 Total
(Unaudited) GBPm GBPm GBPm GBPm GBPm GBPm
Financial
assets
Cash in hand 0.3 0.3 - 0.3 - 0.3
Loans and
advances to
credit
institutions 1,476.7 1,476.7 - 1,476.7 - 1,476.7
Loans and
advances to
customers 8,096.5 8,237.6 - 2,586.3 5,986.3 8,572.6
9,573.5 9,714.6 - 4,063.3 5,986.3 10,049.6
Financial
liabilities
Amounts owed
to retail
depositors 7,423.8 7,396.3 - 2,740.6 4,717.1 7,457.7
Amounts owed
to credit
institutions 1,508.7 1,508.7 - 1,508.7 - 1,508.7
Amounts owed
to other
customers 32.6 32.5 - - 32.6 32.6
Subordinated
liabilities 10.9 10.7 - 10.9 - 10.9
Perpetual
subordinated
bonds 15.3 15.0 15.0 - - 15.0
8,991.3 8,963.2 15.0 4,260.2 4,749.7 9,024.9
Estimated fair value
As at 31
December Carrying Principal
2017 amount amount Level 1 Level 2 Level 3 Total
(Audited) GBPm GBPm GBPm GBPm GBPm GBPm
Financial
assets
Cash in hand 0.5 0.5 - 0.5 - 0.5
Loans and
advances to
credit
institutions 1,187.2 1,187.2 - 1,187.2 - 1,187.2
Loans and
advances to
customers 7,306.0 7,441.9 - 2,788.8 4,926.6 7,715.4
8,493.7 8,629.6 - 3,976.5 4,926.6 8,903.1
Financial
liabilities
Amounts owed
to retail
depositors 6,650.3 6,610.1 - 2,474.4 4,209.6 6,684.0
Amounts owed
to credit
institutions 1,250.3 1,250.3 - 1,250.3 - 1,250.3
Amounts owed
to other
customers 25.7 25.5 - - 25.7 25.7
Subordinated
liabilities 10.9 10.7 - 11.1 - 11.1
Perpetual
subordinated
bonds 15.3 15.0 15.3 - - 15.3
7,952.5 7,911.6 15.3 3,735.8 4,235.3 7,986.4
1. Capital management
The Group's individual regulated entities and the Group as a whole
complied with all of the capital requirements which they were subject to
for the periods presented.
The regulatory capital of the Group is presented below:
As at As at
30-Jun-18 31-Dec-17
(Unaudited) (Audited)
GBPm GBPm
Common equity tier 1 capital
Called up share capital 2.4 2.4
Share premium, capital contribution and share-based
payment reserve 168.9 169.8
Retained earnings 381.4 337.5
Transfer reserve (12.8) (12.8)
Other reserves (0.7) (0.1)
Total equity excluding equity bonds 539.2 496.8
Foreseeable dividends (16.8) (22.6)
Solo consolidation adjustments(1) (4.6) (4.8)
IFRS 9 transitional adjustment(2) 2.7 -
Deductions from common equity tier 1 capital
Intangible assets (7.5) (6.8)
Deferred tax asset (2.2) (2.5)
Common equity tier 1 capital 510.8 460.1
Additional tier 1 capital
AT1 Securities 60.0 60.0
Total tier 1 capital 570.8 520.1
Tier 2 capital
Subordinated debt and PSBs 47.6 47.7
Collective provisions - 2.0
Deductions from tier 2 capital (3.0) (2.5)
Total tier 2 capital 44.6 47.2
Total regulatory capital 615.4 567.3
Risk weighted assets (unaudited) 3,843.7 3,348.5
(1) The Bank has solo consolidation waivers for most of its
subsidiaries. The capital contribution reserve, share-based payment
reserve, foreign exchange reserve and retained earnings for
unconsolidated entities have been removed from CET1.
(2) The regulatory capital has benefitted from a GBP2.7m add-back under
IFRS 9 transitional arrangements. This represents 95% of the IFRS 9
transitional adjustment booked directly to retained earnings of GBP2.9m.
The full impact of IFRS 9, if applied, would reduce total regulatory
capital to GBP612.7m.
1. Operating segments
The Group distinguishes two segments within its operations: BTL/SME
mortgages and Residential mortgages.
The financial position and results of operations of the above segments
are summarised below:
BTL/SME Residential mortgages Total
Six months ended
30-Jun-18 (Unaudited) GBPm GBPm GBPm
Balances at the reporting date
Gross loans and advances to customers 6,516.3 1,603.1 8,119.4
Expected credit loss (13.0) (9.9) (22.9)
Loans and advances to customers 6,503.3 1,593.2 8,096.5
Capital expenditure 2.2 0.6 2.8
Profit for six months ended 30-Jun-18
(Unaudited)
Net interest income 102.3 32.9 135.2
Other expense (0.6) (1.5) (2.1)
Total income 101.7 31.4 133.1
Impairment losses (3.0) (1.3) (4.3)
Contribution to profit 98.7 30.1 128.8
Operating expenses (35.9)
FSCS and other regulatory provisions (1.1)
Profit before taxation 91.8
Taxation (22.3)
Profit for the period 69.5
BTL/SME Residential mortgages Total
Year ended
31-Dec-17 (Audited) GBPm GBPm GBPm
Balances at the reporting date
Gross loans and advances to customers 5,654.1 1,673.5 7,327.6
Provision for impairment losses on
loans and advances (13.2) (8.4) (21.6)
Loans and advances to customers 5,640.9 1,665.1 7,306.0
Capital expenditure 11.0 3.3 14.3
Profit for six months ended 30-Jun-17
(Unaudited)
Net interest income 83.4 33.7 117.1
Other expense (1.4) (4.9) (6.3)
Total income 82.0 28.8 110.8
Impairment (losses)/gains (1.5) 0.1 (1.4)
Contribution to profit 80.5 28.9 109.4
Operating expenses (30.6)
FSCS and other provisions (0.4)
Profit before taxation 78.4
Taxation (19.4)
Profit for the period 59.0
1. Adjustments for non-cash items and changes in operating assets and
liabilities
Six months ended Six months ended
30-Jun-18 30-Jun-17
(Unaudited) (Unaudited)
GBPm GBPm
Adjustments for non-cash items:
Depreciation and amortisation 2.2 1.6
Interest on subordinated liabilities 0.4 0.3
Interest on perpetual subordinated bonds 0.4 0.4
Impairment charge on loans 4.3 1.4
Loss on sale of financial instruments 0.2 -
FSCS and other provisions 1.1 0.4
Fair value losses on financial instruments 1.7 5.6
Share-based payments 1.4 0.9
Total adjustments for non-cash items 11.7 10.6
Changes in operating assets and liabilities:
Decrease in loans and advances to credit institutions (3.3) (7.9)
Increase in loans to customers (799.0) (608.8)
Increase in retail deposits 773.5 94.6
Net (increase)/decrease in other assets (5.0) 3.8
Net decrease in derivatives and hedged items 0.1 5.5
Net increase in credit institutions and other customers
deposits 15.3 13.9
Net increase/(decrease) in other liabilities 0.1 (7.1)
Exchange differences on working capital (0.5) (0.1)
Total changes in operating assets and liabilities (18.8) (506.1)
1. Related parties
The Group had no related party transactions during the six months to 30
June 2018 that would materially affect the position or performance of
the Group. Details of transactions for the year ended 31 December 2017
can be found in the 2017 Annual Report on pages 137 to 139.
Transactions with Key Management Personnel
During the period, the Group granted awards under the Deferred Share
Bonus Plan and Performance Share Plan as described in note 6 to these
interim accounts and note 9 in the 2017 Annual Report on pages 126 to
128. The impact of these awards in the six months ended 30 June 2018 is
reported within staff costs.
1. Events after the reporting date
There have been no material events after the reporting date.
Registered office
Reliance House
Sun Pier
Chatham
Kent, ME4 4ET
Company number
07312896
Internet
www.osb.co.uk
Auditor
KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London, E14 5GL
Registrar
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex, BN99 6DA
Brokers
Barclays Bank PLC
5 The North Colonnade
London, E14 4BB
RBC Europe Limited (trading as RBC Capital Markets)
Riverbank House
2 Swan Lane
London, EC4R 3BF
Media and Public Relations
Brunswick Group LLP
16 Lincoln's Inn Fields
London, WC2A 3ED
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
August 23, 2018 02:00 ET (06:00 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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