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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 | |
|---|---|---|---|---|---|---|---|---|---|---|
| 8.00 | 2.03% | 402.20 | 402.20 | 403.00 | 405.60 | 397.00 | 405.60 | 428,674 | 10:44:59 |
| 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 2017
OneSavings Bank plc ('OSB'), the specialist lending and retail savings
group, announces another strong set of results for the six months ended
30 June 2017.
Financial highlights
-- Underlying profit before tax1 increased 20% to GBP78.4m (1H 2016:
restated2 GBP65.3m)
-- Loan book growth of 10%, driven by 26% growth in gross organic
origination to GBP1,229m (1H 2016: GBP973m)
-- Continued focus on cost discipline and efficiency alongside strong income
growth delivered a cost to income ratio3 of 28% (1H 2016: restated2 26%)
-- Net interest margin ('NIM')4 of 322bps (1H 2016: restated2 309bps)
-- Loan loss ratio5 of 4bps (1H 2016: 18bps)
-- Fully-loaded Common Equity Tier 1 ('CET1') capital ratio strengthened to
13.7% (FY 2016: 13.3%)
-- Total capital ratio strengthened to 17.3% (FY 2016: 15.1%) through issue
of GBP60m Additional Tier 1 Securities ('AT1 securities') in May 2017
-- Return on equity6 of 28% (1H 2016: 29%) despite higher average capital
levels
-- Interim dividend of 3.5p per share, up 21% (1H 2016: 2.9p)7
Commenting on the results, Group CEO Andy Golding, said:
"I am delighted that OneSavings Bank has delivered yet another strong
set of results for the first half of 2017. We continued to successfully
navigate significant regulatory and tax change impacting the Buy-to-Let
market in the first half, delivering 26% growth in total organic
origination versus the first half of 2016. We also generated a 20%
growth in underlying profit before tax and a best in class return on
equity of 28%, whilst maintaining our strong cost discipline and deep
understanding of pricing for risk.
We further strengthened our capital base through the issue of GBP60m of
Additional Tier 1 securities in May 2017. I am delighted with the credit
performance of the book, with a loan loss ratio of 4bps in the first
half, reflecting our robust underwriting standards, lending criteria and
sensible loan to values.
Application levels in our core businesses for the third quarter to date
remain strong and our focus on professional landlords continues to
position us well, with the impact of regulation, including additional
requirements for specialist underwriting from 1 October 2017, expected
to further shift Buy-to-Let activity towards our target market.
Given the current pipeline we expect to deliver net loan book growth of
at least high-teens in 2017, whilst keeping NIM for the full year
broadly flat to 2016 and cost to income ratio broadly flat to the first
half."
Key metrics
1H 2017 1H 2016
Statutory profit before tax (GBPm)(*) 78.4 100.0
Total assets (GBPbn) 7.2 6.3
Net loan book (GBPbn) 6.5 5.4
Basic EPS(8) (pence) 24.1 30.2
Underlying basic EPS(9) (pence) 24.1 19.7
Loan to deposit ratio(10) (%) 93 85
3 months+ arrears(11) (%) 1.4 2.1
Customer net promoter score (%) 60 59
* Statutory profit before tax of GBP100.0m in H1 2016 included a
GBP34.7m exceptional gain on the sale of the Bank's economic interest in
the Rochester Financing No. 1 plc securitisation vehicle
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 24 August at The Lincoln Centre, 18
Lincoln's Inn Fields, WC2A 3ED. The UK dial in is 020 3427 1901 and the
passcode is 2268494. The presentation will be webcast and available from
9.30am on the OneSavings Bank website at www.osb.co.uk/investor
relations/report and accounts. 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 ('PRA'), part of the Bank of England, and regulated
by the Financial Conduct Authority ('FCA') and PRA.
OSB primarily targets underserved market sub-sectors that offer high
growth potential and attractive risk-adjusted returns in which it can
take a leading position and where it has established expertise,
platforms and capabilities. These include private rented sector
Buy-to-Let, commercial and semi-commercial mortgages, residential
development finance, bespoke and specialist residential lending and
secured funding lines. OSB originates organically through specialist
brokers and independent financial advisers. It is differentiated through
its use of high skilled, bespoke underwriting and efficient operating
model.
OSB is predominantly funded by retail savings originated through the
long-established Kent Reliance name, which includes online and postal
channels, as well as a network of branches in the South East of England.
Diversification of funding is currently provided by access to a
securitisation programme, the Funding for Lending Scheme and the Term
Funding Scheme, which OSB joined in 2014 and 2016, respectively.
Notes
(1) Before exceptional items of GBPnil (1H 2016: GBP34.7m gain on sale
of economic interest in the Rochester Financing No. 1 plc securitisation
vehicle)
(2) Prior to 2017, OSB deducted coupons on equity Perpetual Subordinated
Bonds ('PSBs') accounted for as dividends from underlying profit before
and after tax, net interest margin and cost to income ratio. Following a
review of market practice in advance of the Bank's AT1 issue, OSB no
longer deducts these coupons from the calculation of these key
performance indicators. The comparatives have been restated accordingly
(see Financial Review for further details). Interest payments on AT1
securities classified as dividends will be treated in the same way.
(3) Administrative expenses, including depreciation and amortisation as
a percentage of total income
(4) Net interest income as a percentage of average interest bearing
assets including off balance sheet Funding for Lending Scheme (FLS)
drawings, on an annualised basis
(5) Impairment losses expressed as a percentage of average gross loans
and advances, annualised
(6) Underlying profit after tax (profit after tax excluding exceptional
items after tax of GBPnil in the first half of 2017 (1H 2016: GBP25.7m)
and after deducting coupons on equity PSBs, including the tax effect of
GBP0.4m (1H 2016: GBP0.6m) as a percentage of average shareholders'
equity (excluding equity PSBs of GBP22m and AT1 securities of GBP60m as
at 30 June 2017) of GBP417.0m in first half 2017 and GBP326.3m in first
half 2016, on an annualised basis
(7) The proposed interim dividend of 3.5 pence per share for the first
half of 2017 is based on one third of the total 2016 dividend of 10.5
pence per share (1H 2016: 2.9 pence per share, one third of the 2015
dividend of 8.7 pence per share)
(8) Statutory profit after tax attributable to ordinary shareholders
(statutory profit after tax less coupons on equity PSBs) divided by the
weighted average number of ordinary shares in issue
(9) Underlying profit after tax and after deducting coupons on equity
PSBs, including the tax effect of GBP0.4m (1H 2016: GBP0.6m) divided by
the weighted average number of ordinary shares in issue
(10) Excluding the impact of the Bank of England's Funding for Lending
and Term Funding Schemes
(11) Portfolio arrears rate (excluding legacy problem loan book) of
accounts for which there are missing or overdue payments by more than
three months
Non-IFRS performance measures
OneSavings Bank believes that the non-IFRS performance measures included
in this document provide valuable information to the readers as they
enable the reader to identify a more consistent basis for comparing the
business' performance between financial periods, and provide more detail
concerning the elements of performance which the Group is most directly
able to influence or are relevant for an assessment of the Group. They
also reflect an important aspect of the way in which operating targets
are defined and performance is monitored by OneSavings Bank's Board.
However, any non-IFRS performance measures in this document are not a
substitute for IFRS measures and readers should consider the IFRS
measures as well. Refer to Alternative performance measures in the
Financial review for further details, reconciliations and calculations
of non-IFRS performance measures included throughout this document, and
the most directly comparable IFRS measures.
Important disclaimer
This document should be read in conjunction with the documents
distributed by OneSavings Bank plc ('OSB') through the Regulatory News
Service ('RNS'). This document contains certain forward-looking
statements, beliefs or opinions, including statements with respect to
the business, strategy and plans of OSB and its current goals and
expectations relating to its future financial condition, performance and
results. Such forward-looking statements include, without limitation,
those preceded by, followed by or that include the words 'targets',
'believes', 'estimates', 'expects', 'aims', 'intends', 'will', 'may',
'anticipates', 'projects', 'plans', 'forecasts', 'outlook', 'likely',
'guidance', 'trends', 'future', 'would', 'could', 'should' or similar
expressions or negatives thereof. Statements that are not historical
facts, including statements about OSB's, its directors' and/or
management's beliefs and expectations, are forward-looking statements.
By their nature, forward-looking statements involve risk and uncertainty
because they relate to events and depend upon circumstances that may or
may not occur in the future. Factors that could cause actual business,
strategy, plans and/or results (including but not limited to the payment
of dividends) to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in such forward-looking
statements made by OSB or on its behalf include, but are not limited to:
general economic and business conditions in the UK and internationally;
market related trends and developments; fluctuations in exchange rates,
stock markets, inflation, deflation, interest rates and currencies;
policies of the Bank of England, the European Central Bank and other G8
central banks; the ability to access sufficient sources of capital,
liquidity and funding when required; changes to OSB's credit ratings;
the ability to derive cost savings; changing demographic developments,
and changing customer behaviour, including consumer spending, saving and
borrowing habits; changes in customer preferences; changes to borrower
or counterparty credit quality; instability in the global financial
markets, including Eurozone instability, the potential for countries to
exit the European Union (the "EU") or the Eurozone, and the impact of
any sovereign credit rating downgrade or other sovereign financial
issues; technological changes and risks to cyber security; natural and
other disasters, adverse weather and similar contingencies outside OSB's
control; inadequate or failed internal or external processes, people and
systems; terrorist acts and other acts of war or hostility and responses
to those acts; geopolitical, pandemic or other such events; changes in
laws, regulations, taxation, accounting standards or practices,
including as a result of an exit by the UK from the EU; regulatory
capital or liquidity requirements and similar contingencies outside
OSB's control; the policies and actions of governmental or regulatory
authorities in the UK, the EU or elsewhere including the implementation
and interpretation of key legislation and regulation; the ability to
attract and retain senior management and other employees; the extent of
any future impairment charges or write-downs caused by, but not limited
to, depressed asset valuations, market disruptions and illiquid markets;
market relating trends and developments; exposure to regulatory scrutiny,
legal proceedings, regulatory investigations or complaints; changes in
competition and pricing environments; the inability to hedge certain
risks economically; the adequacy of loss reserves; the actions of
competitors, including non-bank financial services and lending
companies; and the success of OSB in managing the risks of the
foregoing.
No representation or warranty is made that any of these statements or
forecasts will come to pass or that any forecast results will be
achieved. Any forward-looking statements made in this document speak
only as of the date they are made and it should not be assumed that they
have been revised or updated in the light of new information of future
events. Except as required by the Prudential Regulation Authority, the
Financial Conduct Authority, the London Stock Exchange PLC or applicable
law, OSB expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements
contained in this document to reflect any change in OSB's expectations
with regard thereto or any change in events, conditions or circumstances
on which any such statement is based. The information, statements and
opinions contained in this document and subsequent discussion do not
constitute a public offer under any applicable law or an offer to sell
any securities or financial instruments or any advice or recommendation
with respect to such securities or financial instruments.
Key Performance Indicators
For definitions of key ratios please see footnotes above
Strong first half performance
I am pleased to report another strong performance for the first half of
2017, with continued growth in our earnings and net loan book. We
continued to successfully navigate significant regulatory and tax change
impacting the Buy-to-Let market in the first half, delivering 26% growth
in total organic origination versus the first half of 2016, and driving
net loan book growth of 10% in the first half to GBP6.5bn. This was
achieved whilst maintaining our strong discipline on understanding and
pricing for risk, with net interest margin improving to 322bps,
underlying profit before tax up 20% to GBP78.4m and underlying basic
earnings per share up 22% to 24.1 pence.
Balance sheet growth was achieved whilst delivering a best in class
return on equity of 28% despite holding higher levels of CET1 capital
following the sale of the Rochester Financing No.1 plc securitisation
('Rochester 1 disposal') in May 2016. The Group's capital position was
further strengthened in May 2017 by the issuance of GBP60m of Additional
Tier 1 Capital ('AT1 securities'). I was delighted with the positive
response to our AT1 issuance, demonstrating the strength of our balance
sheet and investment proposition to debt investors. Focused cost
efficiency, despite additional investment in the business to meet the
growing demands of regulation, continued to drive an excellent cost to
income ratio of 28%.
Continued development of our strong lending franchise
We continue to differentiate ourselves from the competition by offering
well defined propositions in high margin, underserved markets, where we
have the experience and distribution relationships to successfully
develop and service those markets.
The net loan book growth in the period was driven by a 26% increase in
gross organic origination to GBP1,229m, including a particularly strong
increase in our core Buy-to-Let lending sub-segment, as the market
became more focused on our professional landlord audience during the
first half of 2017.
During the first quarter of 2017, we experienced a surge in Buy-to-Let
application volumes as the impact of regulatory changes introducing more
complex underwriting standards took effect. This resulted in temporary
pressure on our service levels which resulted in a short-term negative
broker Net Promoter Score ('NPS') of -7%. We quickly took appropriate
actions to improve turnaround times, and I am pleased that broker NPS is
now positive again with an upward trend.
Mortgage application volumes for the third quarter to date remain strong
in our core products, and for Buy-to-Let, remortgages continue to
represent c.60% of new origination for our Kent Reliance brand. During
the first half of 2017, we have continued to invest in our sales
capability. I am particularly proud that we have continued to win
national and broker firm awards throughout the period, including Best
Specialist Lender and Best Business Development Managers Team from The
Mortgage Strategy Awards, demonstrating our commitment to brokers.
Growth in the overall Buy-to-Let market has slowed in response to tax
and regulatory changes; UK Finance (formerly the Council of Mortgage
Lenders) has forecast that gross advances will fall from GBP40.6bn in
2016 to GBP35bn during 2017. In the main, this reduction is a result of
the reduced attractiveness of the sector to the amateur investor, many
of whom have entered the market in recent years. Demand from
professional landlords has remained strong and we expect to see the
market continue to professionalise in the near term as the tax and
regulatory changes continue to take effect.
Our proposition has always been targeted towards the professional
landlord, hence these changes have had a positive impact on OSB. Our
average market share of new business increased in the first six months
of 2017, given our specialism and expertise in lending to limited
companies and large portfolio landlords.
Average loan size in our core businesses is c.GBP250,000, demonstrating
that our loan book primarily consists of standard family homes and
smaller flats, typically subject to sustained high demand.
We saw a reduction in originations in the residential sector in the
first half of 2017 to GBP131.9m (H1 2016: GBP172.9m). This was primarily
caused by second charge lending falling to GBP24.9m from GBP42.0m in the
first half of 2016, as we allowed our market share to drop where we felt
the second charge market was not pricing fully for risk.
OSB offers a mortgage product transfer scheme ('Choices') to encourage
greater levels of retention amongst those borrowers reaching the end of
their initial product term. Under this programme, borrowers are
encouraged to engage with their broker to receive advice and select from
a bespoke product set. Since the implementation of the scheme in
mid-2016, there has been a significant increase in the number of
borrowers choosing a new product within three months of their initial
product ending, driven by success in switching borrowers who were
otherwise remaining on standard variable rate ('SVR') and who, by
definition, were therefore in the market for other lenders.
We continue to innovate products in other sub-sectors, including the
launch of bridging finance through our InterBay brand in the first half.
Our Group wide distribution capability provides us with competitive
advantage in launching new products in these specialist markets.
We remain pleased with the performance of our more cyclical businesses.
The quality of our Heritable residential 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. We continue to apply the more stringent
loan assessment criteria introduced in 2016, resulting in higher decline
rates, but we are seeing strong loan performance, growth and
profitability.
Sustainable funding model with award winning savings
We continue to benefit from our stable and award winning retail funding
franchise with over 9,000 new savings customers joining the Bank in the
first half of 2017, and our retention rates on maturing bonds and ISAs
remaining exceptionally strong at 87%. The strength and fairness of our
retail savings proposition, together with excellent customer service, a
quality brand and high retention rates, continues to allow the Bank to
raise significant funds without needing to price at the very top of the
best buy tables, which is demonstrated by our excellent NPS for
customers of 60%.
Whilst remaining committed to our retail savings franchise, we have
complemented it by taking advantage of the government funding schemes;
Term Funding Scheme ('TFS') and Funding for Lending Scheme ('FLS').
Total funding through these schemes increased by GBP315m to GBP941m in
the half year to 30 June 2017. Net new retail deposits were up 2% from
31 December 2016 to GBP6bn.
I am delighted that Kent Reliance has been recognised by Moneyfacts in
2017 as the Best Cash ISA Provider for the fifth year running. The Bank
also received the ISA Provider of the Year Award from Consumer
Moneyfacts for the second consecutive year. These awards are a testament
to our savings proposition and to the outstanding customer service
delivered by our staff.
Operational excellence and service are core to our growth
Our low cost to income ratio of 28% reflects our efficient and scalable
operating platform, and has been achieved despite additional investment
in the business to meet the demands of new regulation. Our overseas
operation, OSBIndia, which undertakes a range of primary processing
services at a significantly lower cost than an equivalent UK-based
operation, is a significant differentiator. OSBIndia service quality
remains high, reflected in our improved and outstanding customer NPS of
60%. We continue to focus on driving improved customer experience across
our savings and lending franchises.
The Group's IFRS 9 models and first generation internal ratings-based
approach ('IRB') models were delivered on schedule in late 2016 and we
commenced the parallel run for IFRS 9 at the start of 2017, positioning
us very well to implement the requirements for 2018.
We continue to develop our business for the future
OSB has a depth of specialist underwriting expertise and continues to
exercise strong diligence over loan assessment through an effective
lending policy and specialist manual underwriting process. The
underlying arrears trend is falling and we remain particularly pleased
with the performance of the front book of mortgages, which has
negligible 3 month+ arrears, reflecting our robust underwriting
standards and lending criteria. This helped drive a low loan loss charge
of just 4bps in the first half.
We have continued our focus on disciplined lending in the first half
using criteria and pricing to strengthen the credit mix of new business
post the Brexit referendum. The weighted average loan to value ('LTV')
of the mortgage book remained low at 64% as at 30 June 2017, with an
average LTV of 69% on new origination in the first half. We continue to
have minimal exposure to high end London property with only 2% of our
total loan book secured on properties valued at greater than GBP2m and
with an LTV above 65%. Following regulatory changes to underwriting
standards for Buy-to-Let lending at the start of 2017, our average
interest coverage ratio ('ICR') increased to 190% (FY 2016: 171%).
We have a cautious approach to assessing customer affordability and
welcomed the Buy-to-Let underwriting standards introduced in January
which ensure, inter alia, that lenders reflect the changes to personal
tax on landlords within their affordability assessments. We have always
assessed affordability for borrowers through our specialist underwriting
model and we continue to apply stringent stress tests.
Outlook
Trading conditions in our core businesses remain positive, with strong
application levels for the third quarter to date. We expect full year
net loan book growth driven by organic lending of at least high-teens,
NIM broadly flat to 2016 and cost to income ratio for the full year
broadly flat to the first half.
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 some easing of house price
inflation, particularly in London. However, we believe that our
specialist underwriting capabilities 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 excellent credit
risk management, and continue to focus on achieving risk-adjusted high
returns in our chosen markets.
The market sub-segments targeted by OSB, principally professional
landlords, including limited companies, have remained strong despite the
overall slowdown in the Buy-to-Let market so far in 2017. We remain
confident in the underlying strength of the Private Rented Sector. We
believe that we are well-placed to continue to grow market share as the
Buy-to-Let market continues to professionalise and as it reacts to the
additional requirements for specialist underwriting from 1 October 2017.
We will continue to concentrate on what we have proven we do best; using
our relationships, manual underwriting expertise and secured lending
strategy to lend responsibly to customers in underserved markets. We
remain well-placed to take advantage of opportunities that arise using
these well proven capabilities.
Andy Golding
Chief Executive Officer
Business highlights
OneSavings Bank delivered strong earnings and balance sheet growth
during the first half of 2017. The annualised return on equity was 28%
(H1 2016: 29%) despite holding higher levels of CET1 capital following
the Rochester 1 disposal in May 2016, and basic earnings per share were
24.1p (H1 2016: 30.2p including the gain on Rochester 1 disposal) with
underlying basic earnings per share up 22% to 24.1p (H1 2016: 19.7p).
The net loan book grew 10% in the first half to GBP6,546.6m due to
strong new originations, particularly in Buy-to-Let.
Statutory profit before tax of GBP78.4m was 22% lower than in the first
half of 2016 (H1 2016: GBP100.0m) due to the exceptional gain of
GBP34.7m on Rochester 1 disposal in May 2016. On an underlying basis,
excluding this exceptional gain, profit before tax increased by 20% to
GBP78.4m (H1 2016: restated(1) GBP65.3m). This significant improvement
in underlying profitability reflects the strength of our lending and
funding franchises and efficient operating model.
Gross new organic lending of GBP1,229.2m was up 26% compared to
GBP973.1m in the first half of 2016. This was due to strong levels of
demand for our core Buy-to-Let products aimed at professional landlords,
including limited company Buy-to-Let, as the impact of regulatory
changes introducing more complex underwriting standards and changes to
personal taxation took effect, driving additional business flow to
specialist lenders.
The Bank made no portfolio acquisitions during the first six months of
2017 (H1 2016: portfolios of first and second charge mortgages for
GBP130.7m). However, we will continue to evaluate selective inorganic
opportunities that provide long-term value and meet our strategic
objectives when they arise.
The Bank remained predominantly retail funded during the first half, but
continued to utilise the Bank of England's Funding for Lending ('FLS')
scheme and the Term Funding Scheme ('TFS') drawing down additional net
funding of GBP315.0m in the first half. The Bank also continued its
planned transition out of FLS into TFS. As at 30 June 2017, TFS
drawdowns increased to GBP551.0m and FLS reduced to GBP389.6m (31
December 2016: GBP101.0m and GBP524.6m, respectively).
On 25 May 2017, OSB issued GBP60m of 9.125% AT1 securities, the proceeds
of which will be used to further optimise the capital stack and to
continue to support the general corporate purposes of the Group,
including the growth of the Group's business.
(1) Restated to exclude coupons on equity PSBs classified as dividends
(see reconciliation in the Financial review below)
Financial review
Summarised financial information, including key ratios, is presented in
the tables below:
First half 2017 First half 2016
Summary Profit or Loss GBPm GBPm
Net interest income 117.1 99.1
Fair value losses on financial instruments (5.6) (1.7)
Net fees and commissions 0.3 0.5
External servicing fees (1.0) (1.4)
Administrative expenses(1) (30.6) (25.4)
Regulatory provisions (0.4) (0.9)
Impairment losses (1.4) (4.9)
Exceptional gain on sale - 34.7
Profit before tax 78.4 100.0
Profit after tax 59.0 74.1
Underlying profit before tax 78.4 65.3(2)
Underlying profit after tax 59.0 48.4(2)
First half 2017 First half 2016
Key ratios
Net interest margin 322bps 309bps(2)
Basic earnings per share, pence 24.1 30.2
Underlying basic earnings per share, pence 24.1 19.7
Return on equity 28% 29%
Management expense ratio(3) , annualised 89bps 83bps
Cost to income ratio 28% 26%(2)
Loan loss ratio 4bps 18bps
30-Jun-17 31-Dec-16
GBPm GBPm
Extracts from the Statement of Financial Position
Loans and advances 6,546.6 5,939.2
Retail deposits 6,047.0 5,952.4
Total assets 7,213.0 6,580.9
Key ratios
Liquidity ratio(4) 14.9% 17.9%
Common equity tier 1 ratio 13.7% 13.3%
Total capital ratio 17.3% 15.1%
Total leverage ratio 6.5% 5.5%
(1) Including depreciation and amortisation
(2) Restated to exclude coupons on equity PSBs classified as dividends
(see reconciliation below)
(3) Administrative expenses including depreciation and amortisation as a
percentage of average total assets
(4) Liquid assets as a percentage of funding liabilities
For definitions of other key ratios please see footnotes above
Restated key ratios
The following tables show the impact of removing the deduction of
coupons on equity PSBs classified as dividends from the calculation of
net interest income in certain key ratios from 2017 in line with market
practice.
Change in key ratio calculation
First half 2017 First half 2016
Cost to income ratio % %
Previous method 28 27
Add back coupons on equity PSBs (0) (1)
Current method 28 26
Net interest margin
Previous method 3.20 3.07
Add back coupons on equity PSBs 0.02 0.02
Current method 3.22 3.09
First half 2017 First half 2016
Underlying profit before tax GBPm GBPm
Previous method 77.9 64.6
Add back coupons on equity PSBs 0.5 0.7
Current method 78.4 65.3
Underlying profit after tax
Previous method 58.6 47.8
Add back coupons on equity PSBs 0.4 0.6
Current method 59.0 48.4
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. Prior to 2017, OSB deducted coupons
on equity PSBs accounted for as dividends from underlying profit before
and after tax. Following a review of market practice in advance of the
Bank's AT1 issue, OSB will no longer deduct these coupons and underlying
profit before and after tax for the first half of 2016 have been
restated throughout this document accordingly.
Reconciliation of statutory profit to underlying profit
Profit before tax Profit after tax
Restated
First half Restated
First half 2017 2016 First half 2017 First half 2016
GBPm GBPm GBPm GBPm
Statutory
profit 78.4 100.0 59.0 74.1
Exceptional
gain on
Rochester 1
disposal - (34.7) - (25.7)
Underlying
profit 78.4 65.3 59.0 48.4
Strong profit growth
The Group reported strong profitability in the first half of 2017 with
profit before tax of GBP78.4m (H1 2016: GBP100.0m, including the
exceptional gain of GBP34.7m on the Rochester 1 disposal). Excluding the
exceptional gain on the Rochester 1 disposal in 2016, underlying profit
before tax for the first six months of 2017 was up 20% at GBP78.4m (H1
2016: restated GBP65.3m) primarily reflecting strong balance sheet
growth and net interest income.
Profit after tax for the first half of 2017 was GBP59.0m (H1 2016:
GBP74.1m, including GBP25.7m after tax exceptional gain on the Rochester
1 disposal). Underlying profit after tax, excluding the exceptional gain
in 2016, increased by 22% to GBP59.0m (H1 2016: restated GBP48.4m). The
Bank's effective tax rate fell to 24.7% for the first half of 2017 (H1
2016: 25.9%) due to a reduction in the rate of corporation tax from 20%
to 19% effective 1 April 2017 and a reduction in the proportion of Group
profits subject to the Bank Corporation Tax Surcharge.
Net interest margin (NIM)
The Group reported an increase in net interest income of 18% to
GBP117.1m in the first half of 2017 (H1 2016: GBP99.1m) and NIM of
322bps (H1 2016: restated 309bps). The higher NIM reflected a reduced
cost of retail funds and additional benefit from TFS, more than
offsetting the roll-off of higher yielding acquired loan books.
Fair value losses on financial instruments
Fair value losses on financial instruments in the first half of 2017
were GBP5.6m (2016: GBP1.7m). The increase was due to accelerated
amortisation of fair value adjustments on hedged assets relating to
cancelled swaps of GBP6.2m (2016: GBP1.6m). The Group started to
accelerate the amortisation in-line with the roll-off of the underlying
legacy long-dated fixed rate mortgages in the second half of 2016.
Net fees and commissions
Net fees and commissions income of GBP0.3m in first half of 2017 (H1
2016: GBP0.5m) comprised fees and commissions receivable of GBP0.8m (H1
2016: GBP0.9m) offset by fees and commissions payable of GBP0.5m (2016:
GBP0.4m). 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 GBP1.0m in the first half of 2017
(H1 2016: GBP1.4m) mainly due to the Rochester 1 disposal in May 2016
and the run-off of certain other acquired portfolios.
Efficient and scalable operating platform
Administrative expenses, including depreciation, were up 20% to GBP30.6m
for the first half of 2017 (H1 2016: GBP25.4m) largely due to increased
staff costs in-line with growth in the business and the increased cost
of meeting new regulation.
The Group's annualised management expense ratio was up 6bps to 0.89% for
the first half of 2017 (H1 2016: 0.83%) and cost to income ratio
increased to 28% (H1 2016: restated 26%) reflecting these additional
costs. Both ratios continue to reflect the benefit of the Bank's
efficient and scalable low cost back office based in Bangalore, India.
Regulatory provisions
Regulatory provisions expense, which is primarily in respect of the
Financial Services Compensation Scheme ('FSCS') levies continued to fall
to GBP0.4m for the first half of 2017 (H1 2016: GBP0.9m) based on lower
estimates published in the FSCS outlook for the current period and
reduced final costs for the prior year. This includes the full annual
charge recognised on 1 April in each year, based on retail savings
balances as at the previous 31 December.
Impairment losses
Impairment losses decreased to GBP1.4m in the first half of 2017 (H1
2016: GBP4.9m) representing a loan loss ratio of 4bps on average gross
loans and advances on an annualised basis (H1 2016: 18bps). In June
2016, the Group applied additional conservatism to collectively assessed
impairment assumptions as a prudent measure in response to increased
macroeconomic uncertainty post the UK referendum vote to leave the
European Union. This increased loan losses across the acquired
residential portfolios in the first six months of 2016. In addition, the
reduction in impairment losses was driven by lower underlying loan
losses on acquired residential portfolios, and the effect of increasing
property values reducing potential loss.
The performance of the front book of mortgages remains strong,
reflecting the continued strength of the Bank's underwriting and lending
criteria. From more than 33,500 loans totalling GBP7.0bn organically
originated since the creation of the Bank in February 2011, only 122
were more than three months in arrears as at 30 June 2017, with a total
value of GBP20.6m and an average LTV of just 61%.
Exceptional items
There were no exceptional items in the first half of 2017. Exceptional
income in the first half of 2016 of GBP34.7m comprised of the gain on
disposal of the Bank's entire economic interest in the Rochester 1
securitisation vehicle.
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 3.5 pence per share for first half of
2017, based on the 2016 full year dividend of 10.5 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 10% in the first half of 2017 to GBP6,546.6m
(31 December 2016: GBP5,939.2m). This growth was funded by a mixture of
retail deposits which increased by 2% to GBP6,047.0m (31 December 2016:
GBP5,952.4m) and net new drawings under the TFS. The Bank drew down
GBP315.0m of additional net new funding from the Bank of England in the
first half of 2017. In addition, OSB continued with its planned
transition out of FLS into TFS. The Bank had total borrowings of
GBP389.6m under the FLS and GBP551.0m under the TFS as at 30 June 2017
(31 December 2016: GBP524.6m and GBP101.0m, respectively).
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 2017 with a
liquidity ratio of 14.9% (31 December 2016: 17.9%) following a
recalibration of the Group's liquidity runway. The Bank's liquidity
coverage ratio of 189% as at 30 June 2017, including off-balance sheet
FLS drawdowns, is significantly in excess of the regulatory minimum of
90%.
The Bank's retail savings franchise continues to provide the business
with long-term sustainable funding for balance sheet growth as evidenced
in the first half of 2017 by the continued strong retention rate for
maturing deposits of 87% and an exceptional level of customer
satisfaction with a Net Promoter Score of 60%.
Capital
The Bank's capital position continued to strengthen in the first half
through organic capital generation, with a fully-loaded CET1 ratio of
13.7% as at 30 June 2017 (31 December 2016: 13.3%).
In the first half of 2017, the Bank further strengthened its capital
position by issuing GBP60m of AT1 securities which drove an increase of
2.2 percentage points in the total capital ratio to 17.3% (31 December
2016: 15.1%) and an increase of a percentage point in the leverage ratio
to 6.5% (31 December 2016: 5.5%).
The Bank had a Pillar 2a requirement of 1.2% of risk weighted assets as
at 30 June 2017 and 31 December 2016.
Segmental review
The following table shows the Group's loans and advances and
contribution to profit by segment:
First half 2017, Residential
GBPm Total BTL/SME(1) mortgages
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
First half 2016, GBPm
Net interest income 99.1 62.8 36.3
Other expense (2.6) (0.7) (1.9)
Total income 96.5 62.1 34.4
Impairment losses (4.9) (0.7) (4.2)
Contribution to
profit 91.6 61.4 30.2
Residential
As at 30 June 2017, GBPm Total BTL/SME(1) mortgages
Gross loans to customers 6,569.2 4,801.5 1,767.7
Provision for impairment
losses (22.6) (15.6) (7.0)
Net loans to customers 6,546.6 4,785.9 1,760.7
Risk weighted assets 2,990.9 2,242.0 748.9
As at 31 December 2016, GBPm
Gross loans to customers 5,964.2 4,104.3 1,859.9
Provision for impairment
losses (25.0) (17.2) (7.8)
Net loans to customers 5,939.2 4,087.1 1,852.1
Risk weighted assets 2,743.0 1,944.3 798.7
(1) The personal loan portfolio has largely completed its run-off and is
therefore no longer considered as a separate segment by the Group. The
remaining net loan book of GBP2.3m (31 December 2016: GBP9.1m) and
negative contribution to profit for the period of GBP0.7m (H1 2016:
contribution to profit of GBP1.5m) have been reported in the
Buy-to-Let/SME segment with comparatives restated accordingly.
Buy-to-Let/SME
Buy-to-Let/SME sub-segments: gross loans
30-Jun-17 31-Dec-16
GBPm GBPm
Buy-to-Let 4,266.8 3,613.3
Commercial 302.9 268.3
Residential development 151.3 141.6
Funding lines 77.9 71.7
Personal loans(1) 2.6 9.4
Total 4,801.5 4,104.3
(1) See footnote above
This segment comprises secured lending on property for investment and
commercial purposes.
According to UK Finance (formerly the Council for Mortgage Lenders),
gross Buy-to-Let advances stood at GBP17.3bn in the first six months of
2017, down 24% on the same period in 2016, albeit that period was
inflated by a spike in purchases arising from the implementation of the
3% Stamp Duty Land Tax surcharge on second properties from 1 April 2016.
UK Finance currently forecast gross Buy-to-Let advances to reach GBP35bn
in 2017, compared to GBP40.6bn in 2016. The regulatory and taxation
changes that largely drove this decrease have led to heightened demand
from professional landlords, including limited companies, for OSB's
specialist capabilities and expertise leading to growth in our market
share of new lending in the first six months of 2017.
Against this backdrop, OSB has delivered strong growth, evidenced by
significantly higher originations in the Buy-to-Let/SME segment, up 37%
at GBP1,097.3m for the first half of 2017, compared to GBP800.2m in the
first half of 2016.
The Buy-to-Let sub-segment loan portfolio grew by GBP653.4m in the first
half of 2017 to a gross value of GBP4,266.8m (31 December 2016:
GBP3,613.3m) as we benefited from the strong levels of organic
origination. Following the regulatory changes to underwriting standards
for Buy-to-Let lending at the start of 2017, our average interest
coverage ratio increased to 190% (FY 2016: 171%).
Our exposure to commercial real estate is limited, at a gross value of
GBP302.9m as at 30 June 2017 (31 December 2016: GBP268.3m) and the
portfolio has a low weighted average LTV of 61% and average loan size of
GBP295,000.
In 2014, the Bank launched Heritable Development Finance, to provide
prudent development finance to smaller residential developers, with a
preference for forging relationships with those active outside of the
prime central London market. The business continues to grow in spite of
new entrants to the market, as customers seek an experienced and
knowledgeable lender. However, following the UK vote to leave the EU,
the number of potential development schemes which can withstand our
stringent stress testing has reduced. The residential development
funding gross loan book at the end of the first half of 2017 was
GBP151.3m, with a further GBP76.5m committed (31 December 2016:
GBP141.6m and GBP70.0m respectively).
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 2017 were GBP313.0m with total loans
outstanding of GBP77.9m (31 December 2016: GBP244.0m and GBP71.7m
respectively). During the period, three new funding lines were approved
and are in the documentation process. The pipeline remains robust,
however following the UK's vote to leave the EU, a more cautious risk
approach has been adopted.
OSB's combined Buy-to-Let/SME loan portfolio(1) grew 17% during the
first half of 2017, ending the period with a net carrying value of
GBP4,785.9m (31 December 2016: restated GBP4,087.1m(1) ). The average
loan to value ('LTV') remained low at 69% (31 December 2016: 69%) with
1% of loans by value with an LTV exceeding 90% (31 December 2016: 0.4%).
The average LTV of new Buy-to-Let/SME origination in the first half of
2017 was 70% (H1 2016: 74%).
The Buy-to-Let/SME segment made a contribution to Group profit(1) of
GBP80.5m in the first half of 2017, up 31% compared to GBP61.4m in the
first half of 2016, primarily reflecting the positive impact of new
lending and the falling cost of funds.
(1) Includes the remaining personal loan portfolio.
Residential mortgages
Residential sub-segments: gross loans
30-Jun-17 31-Dec-16
GBPm GBPm
First charge 1,297.1 1,322.1
Second charge 455.3 487.2
Funding lines 15.3 50.6
Total 1,767.7 1,859.9
This segment comprises lending to customers who live in their own homes,
secured via either first or second charges against the residential home.
During the first half of 2017, the Group organically originated
residential lending of GBP131.9m (H1 2016: GBP172.9m). This included
first charge residential lending in the UK, predominantly in London and
the South-East, through the Kent Reliance brand as well as second charge
lending through the Prestige Finance brand. The Bank made no portfolio
acquisitions in the first half of 2017 (H1 2016: portfolios of first and
second charge residential mortgages for GBP130.7m).
Our first charge residential book had a gross value of GBP1,297.1m as at
30 June 2017 (31 December 2016: GBP1,322.1m) with new organic lending in
the first half of 2017 offset by redemptions on the back book and
acquired mortgage portfolios in run-off.
The second charge residential loan book reduced by 7% as at 30 June 2017
with a gross value of GBP455.3m (31 December 2016: GBP487.2m) with
organic origination more than offset by redemptions on the organic book
and acquired books in run-off. We continue to maintain appropriate
pricing for risk in the second charge residential market which has seen
downward pricing pressure as a result of new entrants and an increase in
competition.
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 has adopted a more cautious
approach in our more cyclical businesses following the EU referendum.
Total credit approved limits as at 30 June 2017 were GBP35.1m with total
loans outstanding of GBP15.3m (31 December 2016: GBP86.2m and GBP50.6m
respectively). During the period, one facility of GBP34.4m matured.
OSB's total residential loan portfolio had a net carrying value of
GBP1,760.7m as at 30 June 2017 (31 December 2016: GBP1,852.1m). The
average LTV remained low at 58% (31 December 2016: 58%) with only 2% of
loans by value with LTV's exceeding 90% (31 December 2016: 3%). The
average LTV of new residential origination in the first half of 2017 was
66% (H1 2016: 65%).
Residential mortgages made a contribution to Group profit of GBP28.9m in
the first half of 2017, down 4% compared to GBP30.2m in the first half
2016, following the disposal of higher yielding mortgages in Rochester 1
in May 2016 and accelerated amortisation of hedged assets relating to
cancelled swaps in the first half of 2017, partially offset by the
impact of lower loan losses. The Bank increased prudency in collective
provision assumptions in the first half of 2016, following the UK vote
to leave the EU, which particularly impacted acquired second charge
mortgages.
Risk Management Report
Progress made during the six months to 30 June 2017
During the half year to 30 June 2017 the Group made strong progress
against its strategic risk management objectives for the year.
Key highlights included the delivery of enhanced risk appetite
statements for 2017, further embedding the risk appetite framework
whilst enhancing governance arrangements in relation to the oversight,
review and challenge of proposed limits and thresholds, coupled with
improvements in stress testing and scenario analysis across all risk
types.
The IFRS 9 programme continued to progress to plan, with the Group
running parallel impairment calculations throughout the period. An
independent model validation review was conducted via an independent
third party, reviewing the underlying models, implementation standards
and governance arrangements in place which confirmed that the Group is
well-positioned to meet the requirements for adoption at January 2018.
The Group has prioritised integration of the IFRS 9 capability into
other core risk processes including risk appetite, future loss
forecasting, stress testing and the Internal Capital Adequacy Assessment
Process ('ICAAP') as a key priority for the second half of 2017.
Progression to an Internal Ratings Based ('IRB') approach for
calculating credit risk capital requirements remains a key strategic
initiative, building on the development of the Group's first generation
IRB models and rating engine which completed during December 2016; the
Group ran IRB capital calculations in parallel throughout the period to
30 June 2017. Good progress has also been made in relation to building
out a robust road map to the Group's IRB waiver application, via the
completion of an internal self-assessment against the Capital
Requirements Regulation articles and wider application requirements.
A strategic data management programme has been mobilised to oversee
tactical and strategic enhancements being made to the Group's data
management and governance capabilities. External third party data was
acquired to underpin enhanced analytics across the credit and
operational risk types, also allowing the Group to benchmark stress
testing activity.
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 Assessment Process ('ILAAP').
The Group continued to make significant investment in people across the
Risk and Compliance function ensuring there is sufficient capacity to
deliver the strategic risk enhancements planned for the second half of
the year and beyond.
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 2017. In the opinion of the Directors, the key principal risks have
not changed materially from the overview provided in the 2016 Annual
Report and Accounts.
The table below details, at a high level, 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 Chief Risk Officer's
Report in the 2016 Annual Report and Accounts on pages 42 to 45, 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, and
the balanced business scorecard and risk appetite by
the Board and the Executive Committee.
-- The Group also extensively uses stress testing 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.
Credit risk Individual borrower defaults
-- All loans are extended via thorough bespoke and
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 works 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, 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's Treasury department actively hedges to
match the timing of cash flows from assets and
liabilities.
Basis risk
-- The Group strategically focuses on products linked to
administered rates to keep control of yield. Where
there is a mismatch of market rates in the portfolio
(e.g. base rate vs. LIBOR), the Treasury department
hedges the exposure.
Liquidity and -- The Group's funding strategy is focused on a highly
funding risk stable retail deposit franchise. The large numbers of
depositors provide diversification, with a high
proportion of balances covered by the Financial
Services Compensation Scheme and so at no material
risk of a retail run. In addition, the Group performs
in-depth liquidity stress testing and maintains a
liquid asset portfolio sufficient to meet obligations
under stress. Finally, 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.
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 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 has 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 the
introduction of a range of development programmes
intended to improve retention and increase the
population of in-house developed talent.
Operational resilience
-- The Group carries out scenario based Business
Continuity Planning ('BCP'), has crisis management
procedures and recovery and contingency plans. The
BCP is periodically tested to ensure the Group can
execute derived plans if required.
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.
-- In 2016, the Group established an effective mortgage
product transfer scheme Choices.
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
regulatory risk -- The Group has adopted the European Mortgage Credit
Directive and Senior Managers and Certification
Regime in an effective and timely manner.
-- The adoption of the Prudential Regulation Authority
('PRA') underwriting standards for Buy-to-Let
contracts and the lending policy requirements around
affordability mean that the Group should be
well-placed to respond to any macro prudential
regulation of the Buy-to-Let sector.
-- Another consultation of note relates to the recently
published consultation paper by the PRA relating to
proposed refinements to the Pillar 2A capital
framework. The Group is currently assessing the
potential impact this consultation may have on the
Group's capital strategy and plan going forward.
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 -- The Group has implemented robust monitoring processes
As a result of the UK government triggering Article and via various stress testing activity (i.e. ad hoc,
50 and subsequent general election result during the risk appetite and ICAAP) understands how the Group
period to 30 June 2017, there is an increased likelihood performs over a variety of macroeconomic stress
of a period of macroeconomic uncertainty. The Group's scenarios and has subsequently developed a suite of
lending activity is solely focused within the United early warning indicators which are closely monitored
Kingdom and as such will be impacted by any risks to identify changes in the macro environment.
emerging from changes in the macroeconomic environment.
Regulatory capital requirements -- The Group continues to closely monitor and assess any
The Basel Committee on Banking Supervision is consulting potential changes to prudential capital requirements
on changes to the Standardised Approach for assessing and will continue to liaise with the appropriate
capital requirements for institutions. The most material regulators as required.
proposal relates to a potential increase in the risk -- The Group continues to make good progress with
weightings applicable to Buy-to-Let lending assets. respect to transitioning to an IRB approach for
The Group also notes the separate consultation paper assessing capital requirements.
proposing revisions to the IRB approach for assessing
capital, which may limit the impact of institutions
transitioning to an IRB approach in due course.
Cyber security risks -- The Bank 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.
General data usage
From 25 May 2018 the Group will have to comply with -- The Group has mobilised a project (with dedicated
proposed changes to General Data Protection Regulation resources) to implement GDPR as required.
('GDPR'). This will result in increased regulatory
requirements with respect to processing personal customer,
employee and other data in the course of day-to-day
business activities.
Credit risk portfolio performance
The Group's credit profile continues to exhibit strong performance
across all risk indicators and has operated within the Board approved
risk appetite within the period.
During the six months to 30 June 2017, the Group's portfolio composition
mix continued to evolve favourably with pre-2011 lending continuing to
run down as expected. Legacy problem loans reduced from GBP13.8m to
GBP11.9m within the period. Post-2011 lending, incorporating enhanced
lending criteria, continued to make up an increasing proportion of the
Group's total loans and advances to customers.
This portfolio mix shift coupled with the continuing benign economic
conditions supported the portfolio arrears rate(1) remaining stable at
1.4% as at June 2017 (31 December 2016: 1.4%).
There was however an observed increase in the reported balances of
accounts not impaired past due less than 1 month as at 30 June 2017 (see
note 16 Risk management and financial instruments, table Analysis of
mortgage portfolio by arrears and collateral held). The increase was
driven by accounts that completed in June 2017 entering technical
arrears with first contractual payments scheduled to be received during
July 2017. There was an observed increase in Buy-to-Let not impaired
past due 1 to 3 months as at December 2016, driven by a low number of
high balance cases which fell into arrears during 2016 and technical
arrears balance inflow during December 2016 resulting from requested
payments being carried over into the first working day of January 2017.
In all cases, the technical arrears accounts moved back up to date.
Other key risk measures also performed strongly within the period
including:
First First
half half
Measure 2017 2016 Variance Commentary
New origination average LTV for BTL/SME lending 70% 74% -4% -- New lending average LTV reduced
Weighted average Interest Coverage Ratio for new BTL/SME
lending 190% 161% +29% -- Increase in average BTL/SME ICR
New origination average LTV for Residential lending 66% 65% +1.0% -- New lending average LTV remained stable
Percentage of new Residential lending with a loan 3.7% 1.5% +2.2% -- A marginal increase in cases with an LTI > 4.5,
to income (LTI) > 4.5 however the Group has not written any loans with a
debt to income ratio above 85% within the period.
(1) excluding legacy problem loans
-- Exposure to semi-commercial/commercial lending remains low at GBP303m
with a weighted average LTV of 61%;
-- Exposure to residential development finance remains low at GBP151m with a
further GBP77m committed and a weighted average LTV of 44%; and
-- The Group has limited exposure to high LTV loans on properties worth more
than GBP2m. In total, only 2% of its total loan book is secured on
properties valued at greater than GBP2m with a LTV greater than 65%.
The continuing portfolio mix shift and continuing strong arrears
performance of originations post 2011, coupled with the relatively
benign economic environment led to strong impairment performance within
the period. The Group's loan loss ratio improved by 14bps to 4bps from
H1 2016 to H1 2017, noting that in June 2016 the Group applied
additional conservatism to collectively assessed impairment calculations
as a prudent measure due to the increasing likelihood of macroeconomic
uncertainty after the UK referendum vote to leave the European Union.
The Group continues to closely monitor impairment coverage levels:
Impairment coverage review
30-Jun-17 31-Dec-16
Gross loans and advances to customers GBPm 6,569.2 5,964.2
Provisions for impairment losses GBPm 22.6 25.0
Incurred loss remaining(1) GBPm 8.2 8.4
Coverage ratio versus loans and advances(2) % 0.47 0.56
Coverage ratio versus impaired balances(3) % 39.2 41.5
(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 collective and
specific provisions plus incurred losses remaining versus gross loans
and advances.
(3) Coverage ratio versus impaired balances is the total collective and
specific provisions plus incurred loss remaining versus impaired
balances. Impaired balances are defined as loans where a specific
provision has been raised. Personal loans are not included in the
impaired balances.
The coverage ratio with respect to loans and advances to customers
reduced to 0.47% from 0.56% at 31 December 2016 driven by a reduction in
collectively assessed provision balances, strong arrears performance
coupled with increasing property values reducing the overall exposure to
losses post enforcement of security. Within the period a large
individually impaired property was also sold contributing to the
reduction in total Group provision balances. Coverage versus impaired
balances remained strong at 39.2% as at 30 June 2017, although reduced
versus 31 December 2016, again predominantly driven by lower total
provision balances.
Whilst the Bank only lends to borrowers it considers are able to pay the
sums due under the terms of a mortgage, inevitably some borrowers will
fall into arrears. The overriding principle when dealing with a borrower
in arrears is that the Bank follows prescribed policies and procedures
that allow for a flexible and individual approach, tailored to the
circumstances of the particular borrower.
During the six months period to 30 June 2017, the Group continued to
experience a low level of new cases requiring forbearance arrangements.
There were 96 new cases of forbearance with balances totalling GBP10.6m,
which on a run rate basis is broadly comparable with the first half of
2016.
Forbearance measures undertaken
June 2017 June 2016
H1 2017 number month end H1 2016 number month end
of accounts balances of accounts balances
Forbearance type: GBPm GBPm
Interest only
switch 24 1.4 21 3.1
Interest rate
reduction - - 3 2.2
Term extension 21 3.8 16 4.6
Payment holiday 34 3.9 8 0.2
Payment
concession
(reduced monthly
payments) 17 1.5 35 3.3
Capitalisation - - - -
Total 96 10.6 83 13.4
H1 2017 June 2017 H1 2016 June 2016
number of month end number of month end
accounts balances accounts balances
Loan type GBPm GBPm
First charge
owner
occupier 40 3.3 57 7.6
Second charge
owner
occupier 41 4.6 17 0.6
Buy-to-Let 15 2.7 9 5.2
Commercial - - - -
Total 96 10.6 83 13.4
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 high retention levels on maturing fixed term products of
87% in the first half of 2017 and strong customer satisfaction scores.
In addition, only 7% of the Bank's retail deposits as at 30 June 2017
were above the FSCS protection level of GBP85k. Diversification of
funding is also provided by active participation in the FLS and the TFS.
The Group continues to operate a conservative approach to managing
liquidity with a liquidity ratio of 14.9% as at 30 June 2017 (31
December 2016: 17.9%). The liquidity coverage ratio at 30 June 2017 was
189%, significantly above the regulatory minimum of 90%.
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 2017 were GBP2.4m
(H1 2016: GBP1.6m).
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 strengthened its capital position in the first
half of 2017 with a CET1 ratio of 13.7% as at 30 June 2017 (31 December
2016: 13.3%), which remains comfortably in excess of the regulatory
requirements. During the period to 30 June 2017, the Group issued GBP60m
of AT1 securities that qualify as additional Tier 1 capital under CRD
IV.
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 Group continues to closely monitor the ongoing consultation paper
issued by the Basel Committee on Banking Supervision ('BCBS') during
December 2015 regarding revisions to the Standardised Approach for
assessing the capital adequacy of financial services institutions. A key
proposed amendment is a potential increase in the risk weights
applicable to Buy-to-Let exposures. The BCBS approved another
consultation paper during March 2016 which detailed proposed revisions
to the IRB, which may, if implemented, apply floors which would cap the
comparative capital consumption advantage versus the Standardised
Approach.
The PRA also published two further consultation papers, with the first
aiming to reduce distortions in the market for certain asset classes, by
allowing Standardised Approach financial institutions who can
demonstrate a potential over provision to offset against capital
requirements in other areas, aiming to create a more level playing field
versus institutions that adhere to an IRB approach. The second
consultation paper is intended to make the IRB application process more
accessible for smaller UK financial services institutions. The Group
welcomes these proposals as it progresses towards transitioning to an
IRB approach to capital measurement.
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
Andrew Doman
Rod Duke
Andy Golding
Tim Hanford
Margaret Hassall
Mary McNamara
April Talintyre
By order of the Board
Date: 23 August 2017
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 2017 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 2017 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.
Pamela McIntyre (Senior Statutory Auditor)
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London, E14 5GL
23 August 2017
Six months ended Six months ended
30-Jun-17 30-Jun-16
Note (Unaudited) (Unaudited)
GBPm GBPm
Interest receivable and similar
income 2 158.5 153.4
Interest payable and similar charges 3 (41.4) (54.3)
Net interest income 117.1 99.1
Fair value losses on financial
instruments 4 (5.6) (1.7)
Fees and commissions receivable 0.8 0.9
Fees and commissions payable (0.5) (0.4)
External servicing fees (1.0) (1.4)
Total income 110.8 96.5
Administrative expenses 5 (29.0) (24.2)
Depreciation and amortisation (1.6) (1.2)
Impairment losses 13 (1.4) (4.9)
FSCS and other provisions (0.4) (0.9)
Exceptional gain on sale 6 - 34.7
Profit before taxation 78.4 100.0
Taxation 7 (19.4) (25.9)
Profit for the period 59.0 74.1
Dividend, pence per share 8 3.5 2.9
Earnings per share, pence per share
Basic 9 24.1 30.2
Diluted 9 23.9 30.1
The accompanying notes form an integral part of these condensed
financial statements.
Six months ended Six months ended
30-Jun-17 30-Jun-16
(Unaudited) (Unaudited)
GBPm GBPm
Profit for the period 59.0 74.1
Other comprehensive income for the
period
Items which may be reclassified to
profit or loss:
Fair value changes on
available-for-sale securities
Arising in the period 0.1 (0.8)
Transferred to profit or loss - 0.7
Revaluation of foreign operations (0.1) 0.4
Tax on items in other comprehensive
income - 0.1
- 0.4
Total comprehensive income for the
period 59.0 74.5
The accompanying notes form an integral part of these condensed
financial statements.
As at As at
30-Jun-17 31-Dec-16
Note (Unaudited) (Audited)
GBPm GBPm
Assets
Cash in hand 0.4 0.4
Loans and advances to credit
institutions 579.3 417.8
Investment securities 19.1 141.7
Loans and advances to customers 11 6,546.6 5,939.2
Derivative assets 0.7 1.8
Fair value adjustments on hedged
assets 14 34.8 46.9
Deferred taxation asset 4.2 3.4
Intangible assets 5.7 4.7
Property, plant and equipment 19.7 13.1
Other assets 2.5 11.9
Total assets 7,213.0 6,580.9
Liabilities
Amounts owed to retail depositors 6,047.0 5,952.4
Amounts owed to credit
institutions 552.0 101.7
Amounts owed to other customers 17.6 4.0
Derivative liabilities 17.9 24.4
Fair value adjustments on hedged
liabilities 14 0.7 1.9
Current taxation liability 18.2 21.1
Other liabilities 12.2 18.6
FSCS and other provisions 1.9 1.5
Subordinated liabilities 10.7 21.6
Perpetual subordinated bonds 15.3 15.3
6,693.5 6,162.5
Equity
Share capital 2.4 2.4
Share premium 157.9 157.9
Retained earnings 280.2 240.7
Other reserves 15 79.0 17.4
519.5 418.4
Total equity and liabilities 7,213.0 6,580.9
The accompanying notes form an integral part of these condensed
financial statements.
Foreign Share-based
Share Share Capital Transfer exchange Available-for-sale payment Retained Equity
capital premium contribution reserve reserve reserve reserve earnings bonds(1) Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 1
January 2017 2.4 157.9 6.2 (12.8) 0.1 - 1.9 240.7 22.0 418.4
Profit for the
period - - - - - - - 59.0 - 59.0
Coupon paid on
equity
bonds(2) - - - - - - - (0.4) - (0.4)
Dividends paid (18.5) (18.5)
Other
comprehensive
income - - - - (0.1) 0.1 - - - -
Share-based
payments - - 0.1 - - - 1.5 - - 1.6
Additional
Tier 1
securities
issuance(3) - - - - - - - (0.6) 60.0 59.4
Balance 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 fixed rate resetting perpetual subordinated contingent
convertible securities.
(2) Coupon paid on Perpetual Subordinated Bonds is shown net of tax.
(3) Additional Tier 1 securities issuance costs of GBP0.6m are shown net
of tax.
The accompanying notes form an integral part of these condensed
financial statements.
Foreign Share-based
Share Share Capital Transfer exchange Available-for-sale payment Retained Equity
capital premium contribution reserve reserve reserve reserve earnings bonds(1) Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 1
January 2016 2.4 157.9 5.8 (12.8) (0.8) (0.1) 0.9 144.0 22.0 319.3
Profit for the
period - - - - - - - 74.1 - 74.1
Coupon paid on
equity
bonds(2) - - - - - - - (0.6) - (0.6)
Dividends paid - - - - - - - (16.3) - (16.3)
Other
comprehensive
income - - - - 0.4 - - - - 0.4
Share-based
payments - - 0.3 - - - - - - 0.3
Balance at 30
June 2016
(unaudited) 2.4 157.9 6.1 (12.8) (0.4) (0.1) 0.9 201.2 22.0 377.2
(1) Equity bonds comprise GBP22m of Perpetual Subordinated Bonds.
(2) Coupon paid on Perpetual Subordinated Bonds is shown net of tax.
The accompanying notes form an integral part of these condensed
financial statements.
Restated
Six months ended Six months ended
30-Jun-17 30-Jun-16
Note (Unaudited) (Unaudited)
GBPm GBPm
Cash flows from operating
activities
Profit before tax 78.4 100.0
Adjustments for non-cash items:
Depreciation and amortisation 1.6 1.2
Interest on subordinated liabilities 0.3 0.6
Interest on Perpetual Subordinated Bonds 0.4 0.4
Impairment charge on loans 1.4 4.9
FSCS and other provisions 0.4 0.9
Fair value losses on financial instruments 5.6 1.7
Share-based payments 0.9 0.4
Exceptional items - (34.7)
Changes in operating assets and
liabilities
Increase in loans and advances to credit
institutions (7.9) (3.8)
Increase in loans to customers (608.8) (500.2)
Increase in retail deposits 94.6 447.3
Decrease/(increase) in other assets 3.8 (1.2)
Decrease in derivatives and hedged items 5.5 0.7
Increase/(decrease) in bank and other
deposits 13.9 (5.2)
(Decrease)/increase in other liabilities (7.1) 9.7
Exchange differences on working capital (0.1) 0.4
Cash (used in)/generated from operating
activities (417.1) 23.1
Interest paid on bonds and subordinated
debt (0.7) (0.5)
Tax paid (21.5) (15.3)
Net cash (used in)/generated from
operating activities (439.3) 7.3
Restated
Six months ended Six months ended
30-Jun-17 30-Jun-16
Note (Unaudited) (Unaudited)
GBPm GBPm
Cash flows from investing activities
Maturity and sales of investment securities 40.0 361.3
Purchases of investment securities - (243.2)
Purchases of equipment and intangible assets (9.2) (5.3)
Proceeds from disposal of a subsidiary(1) - 80.2
Cash generated from investing activities 30.8 193.0
Cash flows from financing activities
Increase in amounts owed to credit institutions 450.0 -
Coupon paid on equity bonds (0.5) (0.7)
Dividends paid (18.5) (16.3)
Additional Tier 1 securities issuance net of costs 59.2 -
Repayment of debt(2) (10.7) (16.7)
Cash generated from/(used in) financing activities 479.5 (33.7)
Net increase in cash and cash equivalents 71.0 166.6
Cash and cash equivalents at the beginning of the
period 10 485.3 370.5
Cash and cash equivalents at the end of the period 10 556.3 537.1
Movement in cash and cash equivalents 71.0 166.6
(1) Proceeds from a disposal of a subsidiary relate to the Group's
disposal of its entire economic interest in Rochester Financing No. 1
plc during 2016.
(2) Repayment of debt comprises the 2017 LIBOR linked floating rate
subordinated liabilities of GBP5.7m and the 2017 average standard
mortgage rate linked floating subordinated liabilities of GBP5.0m.
The 2016 comparatives have been restated to include investment
securities with maturity less than three months and to exclude
encumbered loans and advances to credit institutions within cash and
cash equivalents.
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.
a) 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, 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 2016 and last Annual Report and Accounts for the
year ended 31 December 2016.
The comparative figures for the year ended 31 December 2016 are not the
Group's statutory accounts for that financial year. The statutory
accounts for the year ended 31 December 2016 have been delivered to the
Registrar of Companies in England and Wales in accordance with section
447 of the Companies Act 2006. The Auditor has reported on those
accounts. Its report was unqualified, did not include a reference to any
matters to which the 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 2017.
b) Accounting standards
The accounting policies used are consistent with those set out on pages
104 to 113 of the 2016 Annual Report and Accounts.
Additional Tier 1 Securities
The new Additional Tier 1 Securities ('AT1 securities') have been
recognised as equity as OSB has full discretion over the payment of
interest. Accordingly, the interest paid on the AT1 securities and the
related tax effect will be recognised directly within retained earnings
when paid. Costs directly associated with the AT1 securities issuance
and the related tax effect have been taken directly to retained
earnings.
c) Going concern
The Board undertakes regular rigorous assessments of whether the Group
is a going concern in the 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.
1. Accounting policies (continued)
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.
d) Segmental reporting
The Group segments its lending by product, focusing on the customer need
and reason for a loan. From 1 January 2017, the Group operates under two
segments: BTL/SME and Residential mortgages.
The personal loan portfolio has largely completed its run-off and is
therefore no longer considered as a separate segment by the Group. The
remaining net loan book of GBP2.3m (31 December 2016: GBP9.1m) and
negative contribution to profit for the period of GBP0.7m (first half of
2016: contribution to profit of GBP1.5m) have been reported in the
BTL/SME segment with comparatives restated accordingly.
The comparatives have been restated in note 2 - Interest receivable and
similar income, note 11 - Loans and advances to customers, note 12 -
Provisions for impairment losses on loans and advances, note 16 - Risk
management and financial instruments and note 18 - Operating segments.
e) 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. There have been no significant changes in the
basis upon which estimates have been determined compared to that applied
at 31 December 2016, as described on pages 110 to 112 of the 2016 Annual
Report and Accounts. 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.
f) IFRS 9 programme
The Group has made good progress in its IFRS 9 programme, described on
pages 112 and 113 of the 2016 Annual Report and Accounts and has been
parallel running since the start of 2017. Business as usual ('BAU')
processes are being implemented with a complete end-to-end control
framework substantially completed in the second quarter of this year
that will be finalised in the third quarter.
The Group has satisfactorily completed its classification and
measurement review of financial assets and liabilities with no material
impacts expected to its classification of financial assets and
liabilities. The Group has also satisfactorily completed its assessments
of solely payment of principal & interest compliance that reviews the
cash flow characteristics of financial assets to ensure they can
continue to be classified within an amortised cost model under IFRS 9.
These are still subject to external audit.
The IFRS 9 models have been developed, subject to audit, with their
performance being monitored as part of the parallel run process since
January this year. Whilst the macroeconomic variables the Group will use
in its modelling and the scenarios have been finalised, the Group has
engaged an external provider of industry standard macroeconomic
information to further enhance the quality of macroeconomic data and
scenarios that will be used in existing models over the next quarter.
The IFRS 9 models have been developed to a high standard in conjunction
with the Group's first generation IRB models. Both IFRS 9 and IRB models
have satisfactorily undergone an external independent review process
that was finalised in the second quarter of 2017.
1. Accounting policies (continued)
The adoption of IFRS 9 is likely to increase the Group's loan loss
provision balance and expense, although the financial impact will be
spread over the year of adoption and restated opening reserves. Aside
from a minor personal loans portfolio that accounts for less than 0.1%
of the Group's total assets, the Group only provides secured loans. The
IFRS 9 regulatory capital impact cannot be fully assessed until a final
determination is made on the transitional arrangements from IAS 39 to
IFRS 9. However based on information available to date, we do not expect
there will be a material impact.
IFRS 9 is expected to have a significant impact on operations,
particularly in the risk and finance functions of the Group. The
appropriate governance framework is near completion in terms of the
necessary oversight for reviewing expected credit losses and models,
with the establishment of a BAU model review committee to assess ongoing
model monitoring, model developments, and assessment of judgements made.
Ongoing model monitoring, recalibrations and parallel running is being
undertaken by the current BAU teams who will also be part of the BAU
teams once IFRS 9 is live. External consultants have been engaged to
develop additional IFRS 9 and IRB loss forecasting and stress testing
models that will be required for the Group's ICAAP in 2018. The external
consultants will also provide a layer of external review over model
enhancements and recalibrations performed in-house in the third quarter
this year.
Hedge accounting will become more closely aligned with risk management
practices under IFRS 9. The Group has elected to continue with IAS 39
hedging that is an option under IFRS 9 until a separate IASB project to
address macro hedge accounting strategies is finalised and can be
assessed. Whilst at this stage the Group expects to continue with IAS 39
hedge accounting, it will implement the revised hedge accounting
disclosures required by the related amendments to IFRS 7 Financial
Instruments: Disclosures.
The Group continues to make solid progress in its IFRS 9 implementation
programme and is well-placed to implement the requirements for 2018.
2. Interest receivable and similar income
Restated
Six months ended Six months ended
30-Jun-17 30-Jun-16
(Unaudited) (Unaudited)
GBPm GBPm
At amortised cost:
On BTL/SME mortgages 116.4 97.2
On Residential mortgages 45.7 59.4
On investment securities - 0.6
On other liquid assets 0.6 1.0
At fair value through profit or loss:
Net expense on derivative financial
instruments (4.2) (4.8)
158.5 153.4
3. Interest payable and similar charges
Six months ended Six months ended
30-Jun-17 30-Jun-16
(Unaudited) (Unaudited)
GBPm GBPm
On retail deposits 41.4 53.1
On Perpetual Subordinated Bonds 0.4 0.4
On subordinated liabilities 0.3 0.6
On wholesale borrowings 1.1 2.3
Net income on derivative financial
instruments (1.8) (2.1)
41.4 54.3
4. Fair value losses on financial instruments
Six months ended Six months ended
30-Jun-17 30-Jun-16
(Unaudited) (Unaudited)
GBPm GBPm
Fair value changes in hedged assets (5.9) 10.7
Hedging of assets 6.5 (10.6)
Fair value changes in hedged liabilities 1.2 (3.7)
Hedging of liabilities (1.1) 3.6
Ineffective portion of hedges 0.7 -
Amortisation of fair value adjustments on
hedged assets (6.2) (1.6)
Net gains on unmatched swaps - 0.1
Debit and credit valuation adjustment (0.1) (0.2)
(5.6) (1.7)
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 Group
commenced accelerating the amortisation in line with the roll-off of the
underlying legacy long-dated fixed rate mortgages in the second half of
2016.
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.
5. Administrative expenses
Six months ended Six months ended
30-Jun-17 30-Jun-16
(Unaudited) (Unaudited)
GBPm GBPm
Staff costs(1) 17.2 13.0
Facilities costs 1.2 1.2
Marketing costs 1.2 1.4
Support costs 3.1 3.3
Professional fees 2.5 3.1
Other costs(2) 3.8 2.2
29.0 24.2
(1) Staff costs include GBP0.1m (2016: GBP0.1m) relating to the IPO
share awards and GBP0.9m (2016: GBP0.3m) of share-based executive
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 period was 775 (first half of 2016: 618).
6. Exceptional items
There were no exceptional items in the six month period to 30 June 2017.
Exceptional items in the six month period to 30 June 2016 consisted of
the gain on disposal of the Group's entire economic interest in
Rochester 1. The sale resulted in derecognition of securitised mortgage
assets from the Group's balance sheet and the deconsolidation of
Rochester 1. This removed a total of GBP239.8m of securitised mortgage
assets and cash reserves in the vehicle and GBP171.6m of debt securities
in issue from the Group's balance sheet.
Exceptional items are summarised in the table below:
Six months ended Six months ended
30-Jun-17 30-Jun-16
(Unaudited) (Unaudited)
GBPm GBPm
Gain on Rochester 1 disposal - 34.7
- 34.7
7. Taxation
Six months ended Six months ended
30-Jun-17 30-Jun-16
(Unaudited) (Unaudited)
GBPm GBPm
Corporation tax (19.4) (25.9)
Total current taxation (19.4) (25.9)
Deferred taxation - -
Total taxation (19.4) (25.9)
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-17 30-Jun-16
(Unaudited) (Unaudited)
GBPm GBPm
Profit before taxation 78.4 100.0
Profit multiplied by the weighted average rate of
corporation tax in the UK during 2017 of 19.25% (2016:
20.00%) (15.1) (20.0)
Bank surcharge(1) (3.8) (5.9)
Taxation effects of:
Adjustments in respect of earlier years (0.5) -
Tax adjustments in respect of share-based payments 0.2 -
Impact of tax losses carried forward 0.1 -
Timing differences on capital items (0.4)
Other 0.1 -
Total taxation charge (19.4) (25.9)
(1) Introduced from 1 January 2016 and charged at 8% on all taxable
profits above GBP25.0m in the parent company which is a retail deposit
taker.
A reduction in the UK corporation tax rate from 20% to 19% (effective
from 1 April 2017) was substantively enacted on 26 October 2015. A
further reduction to 18% (effective from 1 April 2020) was substantively
enacted on 26 October 2015, and 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.
8. Dividends
During the period, the Group paid the following dividends:
Six months ended Six months ended
30-Jun-17 30-Jun-16
(Unaudited) (Unaudited)
GBPm Pence per share GBPm Pence per share
Final dividend for the
prior year 18.5 7.6 16.3 6.7
18.5 16.3
The Directors propose an interim dividend for the first half of 2017 of
3.5 pence per share, based on one third of the total 2016 dividend of
10.5 pence per share, payable on 3 November 2017 with an ex-dividend
date of 12 October 2017 and a record date of 13 October 2017. This
dividend is not reflected in these financial statements as it was
declared after the reporting date.
9. 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 options, awards and
preference shares 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 Perpetual Subordinated
Bonds classified as equity:
Six months ended Six months ended
30-Jun-17 30-Jun-16
(Unaudited) (Unaudited)
GBPm GBPm
Profit for the period 59.0 74.1
Adjustments:
Coupon on Perpetual Subordinated Bonds classified
as equity (0.5) (0.7)
Tax on coupon 0.1 0.1
Profit attributable to ordinary shareholders 58.6 73.5
9. Earnings per share (continued)
Earnings per share are summarised in the table below:
Six months ended Six months ended
30-Jun-17 30-Jun-16
(Unaudited) (Unaudited)
Weighted average number of shares,
millions
Basic 243.1 243.1
Diluted 245.1 243.9
Earnings per share, pence per share
Basic 24.1 30.2
Diluted 23.9 30.1
10. Cash and cash equivalents
As at As at As at As at
30-Jun-17 31-Dec-16 30-Jun-16 31- Dec-15
(Unaudited) (Audited) (Unaudited) (Audited)
GBPm GBPm GBPm GBPm
Cash in hand 0.4 0.4 0.4 0.4
Unencumbered loans and
advances to credit
institutions 555.9 402.3 435.8 345.1
Investment securities with
maturity less than 3
months - 82.6 100.9 25.0
556.3 485.3 537.1 370.5
Unencumbered loans and advances to credit institutions includes
GBP514.4m (30 June 2016: GBP417.7m) placed with the Bank of England and
excludes GBP23.4m (30 June 2016: GBP13.4m) of encumbered assets.
11. Loans and advances to customers
Restated
As at As at
30-Jun-17 31-Dec-16
(Unaudited) (Audited)
GBPm GBPm
BTL/SME mortgages 4,801.5 4,104.3
Residential mortgages 1,767.7 1,859.9
6,569.2 5,964.2
Less: Provisions for impairment losses on loans and
advances (see note 12) (22.6) (25.0)
6,546.6 5,939.2
12. Provisions for impairment losses on loans and advances
2017 Residential
Specific BTL/SME mortgages Total
GBPm GBPm GBPm
At 1 January 2017 16.8 6.6 23.4
Write-offs in period (3.1) (0.7) (3.8)
Charge/(credit) for the period net of recoveries 1.7 (0.1) 1.6
At 30 June 2017 (Unaudited) 15.4 5.8 21.2
Collective BTL/SME Residential mortgages Total
GBPm GBPm GBPm
At 1 January 2017 0.4 1.2 1.6
Write-offs in period - - -
Charge/(credit) for the period
net of recoveries (0.2) - (0.2)
At 30 June 2017 (Unaudited) 0.2 1.2 1.4
Total BTL/SME Residential mortgages Total
GBPm GBPm GBPm
At 1 January 2017 17.2 7.8 25.0
Write-offs in period (3.1) (0.7) (3.8)
Charge/(credit) for the period
net of recoveries 1.5 (0.1) 1.4
At 30 June 2017 (Unaudited) 15.6 7.0 22.6
12. Provisions for impairment losses on loans and advances
(continued)
2016 (Restated) Residential
Specific BTL/SME mortgages Total
GBPm GBPm GBPm
At 1 January 2016 17.3 0.9 18.2
Write-offs in period (2.9) (1.6) (4.5)
Transfer between reserves 0.4 4.8 5.2
Charge for the period net of recoveries 2.0 2.5 4.5
At 31 December 2016 (Audited) 16.8 6.6 23.4
Collective BTL/SME Residential mortgages Total
GBPm GBPm GBPm
At 1 January 2016 7.8 1.3 9.1
Write-offs in period (1.2) - (1.2)
Disposals (5.6) - (5.6)
Transfer between reserves (0.4) (4.8) (5.2)
Charge/(credit) for the period
net of recoveries (0.2) 4.7 4.5
At 31 December 2016 (Audited) 0.4 1.2 1.6
Total BTL/SME Residential mortgages Total
GBPm GBPm GBPm
At 1 January 2016 25.1 2.2 27.3
Write-offs in period (4.1) (1.6) (5.7)
Disposals (5.6) - (5.6)
Charge/(credit) for the period
net of recoveries 1.8 7.2 9.0
At 31 December 2016 (Audited) 17.2 7.8 25.0
13. Impairment losses
Six months Six months
ended ended
30-Jun-17 30-Jun-16
(Unaudited) (Unaudited)
GBPm GBPm
Write-offs in the period 3.8 1.5
(Decrease)/increase in provision (2.4) 3.4
1.4 4.9
14. Fair value hedges
As at As at
30-Jun-17 31-Dec-16
(Unaudited) (Audited)
GBPm GBPm
Hedged assets
Current hedge relationships 17.7 23.6
Cancelled hedge relationships 17.1 23.3
34.8 46.9
Hedged liabilities
Current hedge relationships (0.7) (1.9)
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.
15. Other reserves
On 25 May 2017 OSB issued GBP60m of Fixed Rate Resetting Perpetual
Subordinated Contingent Convertible Securities ('AT1 securities') that
qualify as Additional Tier 1 capital under CRD IV. The securities will
be subject to full conversion into ordinary shares of OSB in the event
that its CET1 capital ratio falls below 7%. The AT1 securities will pay
interest at a rate of 9.125% per annum until the first reset date of 25
May 2022, with the reset interest rate equal to 835.9 basis points over
the five-year semi-annual mid-swap rate for such a period. Interest is
paid semi-annually on 25 May and 25 November. OSB may at any time cancel
any interest payment at its full discretion and must cancel interest
payments in certain circumstances specified in the terms and conditions
of the AT1 securities. The AT1 securities are perpetual with no fixed
redemption date. OSB may, in its discretion and subject to satisfying
certain conditions, redeem all (but not some) of the AT1 securities at
the principal amount outstanding plus any accrued but unpaid interest
from the first reset date and on any interest payment date thereafter.
16. 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 2016 is included in the Group's 2016 Annual
Report and Accounts. The tables do not represent all risks the Group is
exposed to and should be read in conjunction with the Risk Management
Report above.
Credit risk
The following table shows an analysis of the lending portfolio by
borrower type at the reporting date:
Restated
As at 30-Jun-17 As at 31-Dec-16
GBPm % GBPm %
BTL/SME mortgages 4,801.5 73 4,104.3 69
Residential mortgages 1,767.7 27 1,859.9 31
Total loans before provisions 6,569.2 100 5,964.2 100
Property values are updated to reflect changes in the house price index.
A breakdown of the table above by indexed loan-to-value ('LTV') is as
follows:
LTV analysis by band for all loans:
As at 30-Jun-17
BTL/SME Residential Total
GBPm GBPm GBPm %
Band:
0% - 50% 738.2 871.3 1,609.5 24
50% - 60% 962.5 294.5 1,257.0 19
60% - 70% 1,488.0 260.5 1,748.5 27
70% - 80% 1,357.7 188.5 1,546.2 24
80% - 90% 203.4 118.4 321.8 5
90% - 100% 9.5 21.8 31.3 -
>100% 39.6 12.7 52.3 1
Total mortgages before provisions 4,798.9 1,767.7 6,566.6 100
Personal loans 2.6 - 2.6 -
Total loans before provisions 4,801.5 1,767.7 6,569.2 100
16. Risk management and financial instruments (continued)
As at 31-Dec-16
BTL/SME Residential Total
GBPm GBPm GBPm %
Band:
0% - 50% 755.9 761.7 1,517.6 25
50% - 60% 859.6 278.7 1,138.3 19
60% - 70% 1,202.4 282.7 1,485.1 25
70% - 80% 1,041.2 257.1 1,298.3 22
80% - 90% 194.8 196.9 391.7 7
90% - 100% 5.0 48.0 53.0 1
>100% 36.0 34.8 70.8 1
Total mortgages
before provisions 4,094.9 1,859.9 5,954.8 100
Personal loans 9.4 - 9.4 -
Total loans before
provisions 4,104.3 1,859.9 5,964.2 100
LTV analysis by band for BTL/SME:
As at 30-Jun-17
Residential Funding
Buy-to-Let Commercial development lines Total
GBPm GBPm GBPm GBPm GBPm
Band:
0% - 50% 603.5 47.1 83.5 4.1 738.2
50% - 60% 856.4 67.3 34.1 4.7 962.5
60% - 70% 1,309.2 95.7 29.8 53.3 1,488.0
70% - 80% 1,269.6 68.4 3.9 15.8 1,357.7
80% - 90% 201.2 2.2 - - 203.4
90% - 100% 6.8 2.7 - - 9.5
>100% 20.1 19.5 - - 39.6
Total
mortgages
before
provisions 4,266.8 302.9 151.3 77.9 4,798.9
Personal
loans 2.6
Total loans
before
provisions 4,801.5
16. Risk management and financial instruments (continued)
As at 31-Dec-16
Residential Funding
Buy-to-Let Commercial development lines Total
GBPm GBPm GBPm GBPm GBPm
Band:
0% - 50% 534.1 85.2 104.7 31.9 755.9
50% - 60% 750.4 67.1 23.5 18.6 859.6
60% - 70% 1,096.8 71.0 13.4 21.2 1,202.4
70% - 80% 1,006.2 35.0 - - 1,041.2
80% - 90% 193.0 1.8 - - 194.8
90% - 100% 5.0 - - - 5.0
>100% 27.8 8.2 - - 36.0
Total
mortgages
before
provisions 3,613.3 268.3 141.6 71.7 4,094.9
Personal
loans 9.4
Total loans
before
provisions 4,104.3
LTV analysis by band for Residential:
As at 30-Jun-17
First Funding
charge Second charge lines Total
GBPm GBPm GBPm GBPm
Band:
0% - 50% 680.1 180.4 10.8 871.3
50% - 60% 189.6 104.0 0.9 294.5
60% - 70% 169.4 89.0 2.1 260.5
70% - 80% 132.9 54.3 1.3 188.5
80% - 90% 101.2 17.2 - 118.4
90% - 100% 16.2 5.4 0.2 21.8
>100% 7.7 5.0 - 12.7
Total mortgages before provisions 1,297.1 455.3 15.3 1,767.7
16. Risk management and financial instruments (continued)
As at 31-Dec-16
First Funding
charge Second charge lines Total
GBPm GBPm GBPm GBPm
Band:
0% - 50% 579.6 154.5 27.6 761.7
50% - 60% 166.4 103.1 9.2 278.7
60% - 70% 173.3 102.3 7.1 282.7
70% - 80% 188.3 64.0 4.8 257.1
80% - 90% 168.3 27.2 1.4 196.9
90% - 100% 31.9 16.0 0.1 48.0
>100% 14.3 20.1 0.4 34.8
Total mortgages before
provisions 1,322.1 487.2 50.6 1,859.9
16. Risk management and financial instruments (continued)
Analysis of mortgage portfolio by arrears and collateral held
The tables below provide further information on collateral in the
mortgage portfolio by payment due status. Capped collateral only
recognises collateral to the value of each individual mortgage and does
not recognise over-collateralisation.
Below is a summary of capped collateral:
As at 30-Jun-17 As at 31-Dec-16
Loan
balance Capped collateral Loan balance Capped collateral
GBPm GBPm GBPm GBPm
Not past due
and not
impaired 6,070.4 6,058.7 5,478.4 5,464.5
Past due but
not impaired 417.8 417.1 395.9 395.8
Impaired 78.4 69.9 80.5 69.1
Total mortgages
before
provisions 6,566.6 6,545.7 5,954.8 5,929.4
Personal loans 2.6 9.4
Total loans
before
provisions 6,569.2 5,964.2
A breakdown of the table above by payment due status
is as follows:
As at
As at 30-Jun-17 31-Dec-16
Loan Capped
balance collateral Loan balance Capped collateral
GBPm GBPm GBPm GBPm
Not impaired:
Not past due 6,070.4 6,058.7 5,478.4 5,464.5
Past due < 1
month 271.3 271.2 183.5 183.5
Past due 1 to 3
months 87.2 87.2 168.2 168.2
Past due 3 to 6
months 35.5 35.5 24.4 24.3
Past due 6 to
12 months 15.8 15.2 12.8 12.8
Past due over
12 months 7.2 7.2 6.2 6.2
Possessions 0.8 0.8 0.8 0.8
6,488.2 6,475.8 5,874.3 5,860.3
Impaired:
Not past due 11.2 6.6 3.2 0.4
Past due < 1
month 3.6 3.4 1.0 1.0
Past due 1 to 3
months 0.2 0.2 1.2 1.2
Past due 3 to 6
months 15.8 15.8 14.8 14.8
Past due 6 to
12 months 12.4 12.2 16.3 16.2
Past due over
12 months 24.8 22.2 31.8 24.9
Possessions 10.4 9.5 12.2 10.6
78.4 69.9 80.5 69.1
Total mortgages
before
provisions 6,566.6 6,545.7 5,954.8 5,929.4
Personal loans 2.6 9.4
Total loans
before
provisions 6,569.2 5,964.2
16. Risk management and financial instruments (continued)
Analysis of mortgage portfolio by arrears for BTL/SME
As at 30-Jun-17
Residential Funding
Buy-to-Let Commercial development lines Total
GBPm GBPm GBPm GBPm GBPm
Not impaired:
Not past due 4,068.9 291.0 151.3 77.9 4,589.1
Past due < 1
month 136.8 2.2 - - 139.0
Past due 1 to
3 months 20.7 0.9 - - 21.6
Past due 3 to
6 months 14.3 - - - 14.3
Past due 6 to
12 months 1.2 0.7 - - 1.9
Past due over
12 months - 0.4 - - 0.4
4,241.9 295.2 151.3 77.9 4,766.3
Impaired:
Not past due 1.4 4.5 - - 5.9
Past due < 1
month 2.7 0.1 - - 2.8
Past due 1 to
3 months - 0.1 - - 0.1
Past due 3 to
6 months 3.4 1.0 - - 4.4
Past due 6 to
12 months 0.7 0.1 - - 0.8
Past due over
12 months 8.5 1.2 - - 9.7
Possessions 8.2 0.7 - - 8.9
24.9 7.7 - - 32.6
Total
mortgages
before
provisions 4,266.8 302.9 151.3 77.9 4,798.9
Personal
loans 2.6
Total loans
before
provisions 4,801.5
16. Risk management and financial instruments (continued)
As at 31-Dec-16
Residential Funding
Buy-to-Let Commercial development lines Total
GBPm GBPm GBPm GBPm GBPm
Not impaired:
Not past due 3,468.7 252.9 141.6 71.7 3,934.9
Past due < 1
month 62.5 3.3 - - 65.8
Past due 1 to 1.1
3 months 56.5 - - 57.6
Past due 3 to 0.3
6 months 2.0 - - 2.3
Past due 6 to 0.7
12 months 0.4 - - 1.1
Past due over 0.3
12 months - - - 0.3
3,590.1 258.6 141.6 71.7 4,062.0
Impaired:
Not past due 2.5 0.1 - - 2.6
Past due < 1
month - 0.4 - - 0.4
Past due 1 to 0.3
3 months - - - 0.3
Past due 3 to 0.2
6 months 1.1 - - 1.3
Past due 6 to 0.1
12 months 2.3 - - 2.4
Past due over 6.0
12 months 9.0 - - 15.0
Possessions 8.3 2.6 - - 10.9
23.2 9.7 - - 32.9
Total
mortgages
before
provisions 3,613.3 268.3 141.6 71.7 4,094.9
Personal
loans 9.4
Total loans
before
provisions 4,104.3
16. Risk management and financial instruments (continued)
Analysis of mortgage portfolio by arrears for Residential
As at 30-Jun-17
First Funding
charge Second charge lines Total
GBPm GBPm GBPm GBPm
Not impaired:
Not past due 1,102.2 363.8 15.3 1,481.3
Past due < 1
month 105.4 26.9 - 132.3
Past due 1 to 3
months 44.4 21.2 - 65.6
Past due 3 to 6
months 11.7 9.5 - 21.2
Past due 6 to 12
months 6.8 7.1 - 13.9
Past due over 12
months 2.9 3.9 - 6.8
Possessions 0.8 - - 0.8
1,274.2 432.4 15.3 1,721.9
Impaired:
Not past due 5.3 - - 5.3
Past due < 1
month 0.8 - - 0.8
Past due 1 to 3
months - 0.1 - 0.1
Past due 3 to 6
months 5.4 6.0 - 11.4
Past due 6 to 12
months 5.1 6.5 - 11.6
Past due over 12
months 4.8 10.3 - 15.1
Possessions 1.5 - - 1.5
22.9 22.9 - 45.8
Total mortgages
before
provisions 1,297.1 455.3 15.3 1,767.7
16. Risk management and financial instruments (continued)
As at 31-Dec-16
First Funding
charge Second charge lines Total
GBPm GBPm GBPm GBPm
Not impaired:
Not past due 1,100.6 392.3 50.6 1,543.5
Past due < 1
month 99.8 17.9 - 117.7
Past due 1 to 3
months 80.2 30.4 - 110.6
Past due 3 to 6
months 12.8 9.3 - 22.1
Past due 6 to 12
months 5.0 6.7 - 11.7
Past due over 12
months 2.8 3.1 - 5.9
Possessions 0.8 - - 0.8
1,302.0 459.7 50.6 1,812.3
Impaired:
Not past due 0.6 - - 0.6
Past due < 1
month 0.6 - - 0.6
Past due 1 to 3
months 0.9 - - 0.9
Past due 3 to 6
months 6.0 7.5 - 13.5
Past due 6 to 12
months 5.8 8.1 - 13.9
Past due over 12
months 4.9 11.9 - 16.8
Possessions 1.3 - - 1.3
20.1 27.5 - 47.6
Total mortgages
before
provisions 1,322.1 487.2 50.6 1,859.9
16. Risk management and financial instruments (continued)
Geographical analysis by region
An analysis of loans by region is provided below:
As at As at
30-Jun-2017 31-Dec-2016
Region GBPm % GBPm %
East Anglia 215.1 3 182.2 3
East Midlands 224.0 3 204.5 3
Greater London 2,808.2 43 2,543.1 43
Guernsey 80.8 1 93.4 2
Jersey 258.6 4 282.0 5
North East 94.7 1 90.3 2
North West 305.0 5 273.2 5
Northern Ireland 17.5 - 16.8 -
Scotland 53.7 1 56.1 1
South East 1,403.9 22 1,278.5 21
South West 467.5 7 380.6 6
Wales 128.1 2 114.7 2
West Midlands 359.9 6 308.6 5
Yorks & Humberside 149.6 2 130.8 2
Total mortgages before
provisions 6,566.6 100 5,954.8 100
Personal loans 2.6 9.4
Total loans before provisions 6,569.2 5,964.2
16. Risk management and financial instruments (continued)
Fair values of financial assets and financial liabilities
The following tables show a comparison of book and fair values of the
Group's financial assets and liabilities at the reporting date:
As at 30 June
2017
(Unaudited) Fair value
Carrying Principal Level
amount amount 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm GBPm GBPm
Financial
instruments
measured at
fair value
Financial
assets
Investment
securities 19.1 19.0 19.1 - - 19.1
Derivative
assets 0.7 2,222.1 - 0.7 - 0.7
19.8 2,241.1 19.1 0.7 - 19.8
Financial
liabilities
Derivative
liabilities (17.9) (889.4) - (17.9) - (17.9)
Financial
instruments
not measured
at fair
value
Financial
assets
Cash in hand 0.4 0.4 - 0.4 - 0.4
Loans and
advances to
credit
institutions 579.3 579.3 - 579.3 - 579.3
Loans and
advances to
customers 6,546.6 6,675.3 - - 6,888.9 6,888.9
7,126.3 7,255.0 - 579.7 6,888.9 7,468.6
Financial
liabilities
Amounts owed
to retail
depositors (6,047.0) (6,028.0) - (6,079.1) - (6,079.1)
Amounts owed
to credit
institutions (552.0) (552.0) - (552.3) - (552.3)
Amounts owed
to other
customers (17.6) (17.5) - (17.6) - (17.6)
Subordinated
liabilities (10.7) (10.7) - (10.9) - (10.9)
Perpetual
subordinated
bonds (15.3) (15.0) - (15.1) - (15.1)
(6,642.6) (6,623.2) - (6,675.0) - (6,675.0)
16. Risk management and financial instruments (continued)
As at 31
December 2016
(Audited) Fair value
Carrying Principal Level
amount amount 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm GBPm GBPm
Financial
instruments
measured at
fair value
Financial
assets
Investment
securities 141.7 141.6 141.7 - - 141.7
Derivative
assets 1.8 2,267.1 - 1.8 - 1.8
143.5 2,408.7 141.7 1.8 - 143.5
Financial
liabilities
Derivative
liabilities (24.4) (612.4) - (24.4) - (24.4)
Financial
instruments
not measured
at fair
value
Financial
assets
Cash in hand 0.4 0.4 - 0.4 - 0.4
Loans and
advances to
credit
institutions 417.8 417.8 - 417.8 - 417.8
Loans and
advances to
customers 5,939.2 6,069.4 - - 6,259.1 6,259.1
6,357.4 6,487.6 - 418.2 6,259.1 6,677.3
Financial
liabilities
Amounts owed
to retail
depositors (5,952.4) (5,906.5) - (5,992.4) - (5,992.4)
Amounts owed
to credit
institutions (101.7) (101.6) - (101.7) - (101.7)
Amounts owed
to other
customers (4.0) (4.0) - (4.0) - (4.0)
Subordinated
liabilities (21.6) (20.7) - (24.0) - (24.0)
Perpetual
subordinated
bonds (15.3) (15.0) - (17.2) - (17.2)
(6,095.0) (6,047.8) - (6,139.3) - (6,139.3)
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
These are valuation techniques 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.
16. Risk management and financial instruments (continued)
Level 2
These are valuation techniques 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.
The Group uses LIBOR curves to value its derivatives; however, using
overnight index swap ('OIS') curves would not materially change their
value. The fair value of the Group's derivative financial instruments
incorporates CVA and DVA. The DVA and CVA take into account the
respective credit ratings of the Group and counterparty and whether the
derivative is collateralised or not. In considering which similar
instruments to use, management takes into account the sensitivity of the
instrument to changes in market rates and the credit quality of the
instrument. Basis risk derivatives are valued using discounted cash flow
models and observable market data and will be sensitive to benchmark
interest rate curves.
The fair value of loans and advances to credit institutions, which is
predominantly placements with the Bank of England, is estimated to be
their carrying value.
The fair value of amounts owed to retail depositors, credit institutions
and other customers, together with the Group's subordinated liabilities
and perpetual subordinated bonds is estimated using discounted cash flow
techniques, applying the rates that are offered for deposits of similar
maturities and terms. The fair value of deposits payable on demand is
the amount payable at the reporting date.
Level 3
These are valuation techniques 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 instrument's 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 selection of
appropriate discount rates.
Valuation techniques for level 3 instruments may include net present
value models, comparison to similar instruments with observable prices,
Black-Scholes and other methods.
As disclosed in the tables above, financial instruments with fair value
measured at level 3 comprise loans and advances to customers which are
measured at amortised cost in the statement of financial position.
Loans to customers belong to this level because their valuation uses
unobservable inputs on collectability rates and redemption profiles.
Their fair value is calculated using modelled receipts of interest and
principal which are discounted at market rates.
17. 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-17 31-Dec-16
(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 167.6 166.0
Retained earnings(1) 261.4 217.0
Transfer reserve (12.8) (12.8)
Other reserves 0.1 -
Deductions from common equity tier 1 capital
Intangible assets (5.6) (4.7)
Deferred tax asset (2.4) (2.3)
Common equity tier 1 capital 410.7 365.6
Additional tier 1 capital
AT1 securities 60.0 -
Total Tier 1 capital 470.7 365.6
Tier 2 capital
Subordinated debt and PSBs 47.7 48.5
Collective provisions 1.4 1.6
Deductions from tier 2 capital (2.5) (2.0)
Total Tier 2 capital 46.6 48.1
Total regulatory capital 517.3 413.7
Risk weighted assets (unaudited) 2,990.9 2,743.0
(1) Within retained earnings, foreseeable dividends in the period are
deducted in-line with the Group's dividend policy.
The Bank has solo consolidation waivers for most of its subsidiaries.
The impact of this has been included in the above table.
18. Operating segments
From 1 January 2017, the Group distinguishes two segments within its
operations: BTL/SME mortgages and Residential mortgages, see note 1 d)
for additional details.
The results of operations and the financial position of the above
segments are summarised below:
Residential
BTL/SME mortgages Total
Balances as at 30-Jun-17 (Unaudited) GBPm GBPm GBPm
Gross loans and advances to customers 4,801.5 1,767.7 6,569.2
Provision for impairment losses on loans and
advances (15.6) (7.0) (22.6)
Loans and advances to customers 4,785.9 1,760.7 6,546.6
Capital expenditure 6.7 2.5 9.2
Profit for six months ended 30-Jun-17 BTL/SME Residential mortgages Total
(Unaudited) GBPm GBPm GBPm
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
18. Operating segments (continued)
Restated
Residential
Balances as at 31-Dec-16 (Audited) BTL/SME mortgages Total
GBPm GBPm GBPm
Gross loans and advances to customers 4,104.3 1,859.9 5,964.2
Provision for impairment losses on loans
and advances (17.2) (7.8) (25.0)
Loans and advances to customers 4,087.1 1,852.1 5,939.2
Capital expenditure 5.3 2.4 7.7
Profit for the six months ended 30-Jun-16
(Unaudited)
Net interest income 62.8 36.3 99.1
Other expense (0.7) (1.9) (2.6)
Total income 62.1 34.4 96.5
Impairment losses (0.7) (4.2) (4.9)
Contribution to profit 61.4 30.2 91.6
Operating expenses (25.4) FSCS and other provisions (0.9) Exceptional items 34.7 Profit before taxation 100.0 Taxation (25.9) Profit for the period 74.1 19. Related parties The Group had no related party transactions during the period to 30 June 2017 that would materially affect the position or performance of the Group. Details of transactions for the year ended 31 December 2016 can be found in the 2016 Annual Report and Accounts. Transactions with Key Management Personnel During the period, the Group issued executive management awards under the Deferred Share Bonus Plan and Performance Share Plan as described in note 8 in the 2016 Annual Report and Accounts. The impact of these awards in the six months ended 30 June 2017 is reported within staff costs. 20. 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 Chartered Accountants 15 Canada Square London, E14 5GL Registrars 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 24, 2017 02:00 ET (06:00 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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