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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 | |
|---|---|---|---|---|---|---|---|---|---|---|
| 9.80 | 2.49% | 404.00 | 402.00 | 402.40 | 408.80 | 397.00 | 405.60 | 1,458,264 | 16:35:27 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
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TIDMOSB
Principal risks and uncertainties
The Board carried out a robust assessment of the principal risks and
uncertainties facing the Group, including those that could threaten its
strategic objectives, business operating model, future financial
performance and regulatory compliance commitments. The principal risks
and uncertainties are outlined below:
1 Strategic and business risk
Definition
The risk to the Group's earnings and profitability arising from its
strategic decisions, change in business conditions, improper implementation
of decisions or lack of responsiveness to industry changes.
Risk appetite statement
The Group's strategic and business The Group adopts a long-term sustainable
risk appetite states that the Group business model which, while focused
does not intend to undertake any medium on niche sub-sectors, is capable
to long-term strategic actions that of adapting to growth objectives
would put at risk its vision of being and external developments.
a leading specialist lender, backed
by a strong and dependable saving franchise.
Risk Mitigation Direction
----------------------------------- -------------------------------------- --------------------------------
Performance against targets Regular monitoring by the Board Unchanged
Performance against strategic and the Group Executive Committee The benefits realised
and business targets does of business and financial performance from the integration
not meet stakeholder expectations. against strategic agenda and will support the
This has the potential risk appetite. The financial Group in meeting
to damage the Group's plan is subject to regular the challenges posed
franchise value and reputation. reforecasts. The balanced business by increasing levels
scorecard is the primary mechanism of competition in
to support the Board and assesses our key market segments.
management performance against
key targets. Use of stress
testing to flex core business
planning assumptions to assess
potential performance under
stressed operating conditions.
--------------------------------
Economic environment The Group continued to utilise Unchanged
The economic environment and enhance its stress testing The Group's strategic
is an important factor capabilities to assess and and business risk
impacting the strategic minimise potential areas of profile is impacted
and business risk profile. macroeconomic vulnerabilities. by the uncertainty
A macroeconomic downturn surrounding the
may impact the credit impact of trade
quality of the Group's negotiations following
existing loan portfolio Brexit. Economic
and may influence future risks to which the
business strategy as the Group is exposed
Group's new business proposition remain high but
becomes less attractive stable compared
due with 2018.
to lower returns.
--------------------------------
Regulatory requirements The Group continues to invest Increased
The potential for emerging in its IT and data management Increased levels
regulatory requirements capabilities to increase the of regulatory scrutiny
to increase the demands ability to respond to regulatory and increased regulatory
on the Group's operational change. expectations are
capacity and increase A structured approach to change driven by the increased
the cost of compliance. management and fully leveraging size of the Group
internal and external expertise post-Combination.
allows the Group to respond
effectively to regulatory change.
--------------------------------
Integration risk The Board will maintain oversight Increased
The risk that the Combination of the integration process Risk of an ineffective
with CCFS does not create through the Board Integration integration or delays
operational and financial Committee. A dedicated Integration to integration may
benefits as planned. Management Office has been result in synergy
established to drive the integration and cost targets
process forward. being missed, disruption
Independent second line and to business as usual
third line assessment, monitoring activities, operating
and reporting will be undertaken and financial performance
by the Risk function and Internal falling below expectations
Audit function respectively. or damage
to reputation.
--------------------------------
Risk Mitigation Direction
Deterioration of reputation Culture and commitment to treating Increased
Potential loss of trust customers fairly and being Expectations are
and confidence that our open and transparent in communication high to deliver
stakeholders place in with key stakeholders. Established the integration
us as a responsible and processes to proactively identify in a timely and
fair provider of financial and manage potential sources effective manner
services. of reputational risk. while achieving
strategic objectives.
Expectations raised
across all stakeholders
including, employees,
customer, regulators
and shareholders.
-----------------------------
2 Reputational risk
Definition
The potential risk of adverse effects that can arise from the Group's
reputation being sullied due to factors such as unethical practices,
adverse regulatory actions, customer dissatisfaction and complaints or
negative/adverse publicity.
Reputational risk can arise from a variety of sources and is a second
order risk -- the crystallisation of a credit risk or operational risk
can lead to a reputational risk impact.
Risk appetite statement
The Group does not knowingly conduct business or organise its operations
to put its reputation and franchise value at risk.
Definition
Potential for loss due to the failure of a counterparty to meet its contractual
obligation to repay a debt in accordance with the agreed terms.
Risk appetite statement
The Group seeks to maintain a high The Group aims to continue to generate
quality lending portfolio that generates sufficient income and control credit
adequate returns, under normal and losses to a level such that it remains
stressed conditions. The portfolio profitable even when subjected to a
is actively managed to operate within credit portfolio stress of a 1 in 20
set criteria and limits based on profit intensity stress scenario.
volatility, focusing on key sectors,
recoverable values, and affordability
and exposure levels.
3 Credit risk
Definition
Potential for loss due to the failure of a counterparty to meet its contractual
obligation to repay a debt in accordance with the agreed terms.
Risk appetite statement
The Group seeks to maintain a high The Group aims to continue to generate
quality lending portfolio that generates sufficient income and control credit
adequate returns, under normal and losses to a level such that it remains
stressed conditions. The portfolio profitable even when subjected to a
is actively managed to operate within credit portfolio stress of a 1 in 20
set criteria and limits based on profit intensity stress scenario.
volatility, focusing on key sectors,
recoverable values, and affordability
and exposure levels.
Risk Mitigation Direction
Individual borrower defaults Across both OSB and CCFS a Unchanged
Borrowers may encounter robust underwriting assessment The Group continues
idiosyncratic problems is undertaken to ensure a customer to observe strong
in repaying their loans, has the ability and propensity and stable credit
for example loss of a to repay and sufficient security profile performance
job or execution problems is available to support the but remains alert
with a development project. new loan requested. At CCFS to potential macroeconomic
While in most cases of an automated scorecard approach uncertainty arising
default the Group's lending is taken, whilst OSB utilises from Brexit- related
is secured, some borrowers a bespoke manual underwriting negotiations.
may fail to maintain the approach.
value of the security. Should there be problems with
a loan, the Collections and
Recoveries team works with
customers unable to meet their
loan service obligations to
reach a satisfactory conclusion
while adhering to the principle
of treating customers fairly.
Our strategic focus on lending
to professional landlords means
that properties are likely
to be well-managed, with income
from a diversified portfolio
mitigating the impact of rental
voids or maintenance costs.
Lending to owner-occupiers
is subject to a detailed affordability
assessment, including the
borrower's ability to continue
payments if interest rates
increase. Lending on commercial
property is based more on security,
and is scrutinised by the Group's
independent Real Estate team
as well as by external valuers.
Development lending is extended
only after a deep investigation
of the borrower's track record
and stress testing the economics
of the specific project.
----------------------------
Macroeconomic downturn The Group works within portfolio Unchanged
A broad deterioration limits on LTV, affordability, The economic outlook
in the economy would adversely name, sector and geographic is uncertain driven
impact both the ability concentration that are approved by the unknown impact
of borrowers to repay by the Group Risk Committee of trade negotiations
loans and the value of and the Board. These are reviewed following Brexit.
the Group's security. on a semi-annual basis. In Economic risks to
Credit losses would impact addition, stress testing is which the Group
across the lending portfolio, performed to ensure that the is exposed remain
so even if individual Group maintains sufficient high but stable
impacts were to be small, capital to absorb losses in compared with the
the aggregate impact on an economic downturn and continue previous year.
the Group could be significant. to meet its regulatory requirements.
----------------------------
Wholesale credit risk The Group transacts only with Unchanged
The Group has wholesale high quality wholesale counterparties. The Group's wholesale
exposures both through Derivative exposures include credit risk exposure
call accounts used for collateral agreements to mitigate remains limited
transactional and liquidity credit exposures. to high quality
purposes and through derivative counterparties,
exposures used for hedging. overnight exposures
to clearing bank
and swap counterparties.
----------------------------
Definition
Potential loss due to changes in market prices or values.
Risk appetite statement
The Group actively manages market The Group does not seek to take a significant
risk arising from structural interest interest rate position or a directional
rate positions. view on rates and it limits its mismatched
and basis risk exposures.
Definition
The risk that the Group will be unable to meet its financial obligations
as they fall due.
Risk appetite statement
The Group actively maintains stable It also maintains an appropriate level
and efficient access to funding and and quality of liquid asset buffer
liquidity to support its ongoing operations. so as to withstand market and idiosyncratic
liquidity-related stresses.
4 Market risk
Risk Mitigation Direction
Interest rate risk The Group's Treasury department Unchanged
An adverse movement in actively hedges to match the The Group continues
the overall level of interest timing of cash flows from assets to assess interest
rates could lead to a and liabilities. on a regular basis
loss in value due to mismatches ensuring that interest
in the duration of assets rate risk exposure
and liabilities. is limited. The
profile of the asset
book has increased
but this is offset
by frequent hedging.
-------------------------
Basis risk Due to the Group balance sheet Unchanged
A divergence in market structure no active management Product design,
rates could lead to a of basis risk was required balance sheet structure
loss in value, as assets by OSB in 2019. and replacing LIBOR
and liabilities are linked CCFS actively replace back swaps with SONIA
to different rates. book LIBOR asset swaps with swaps has enabled
SONIA swaps to balance basis the Group to maintain
risk across assets and liabilities the overall level
and reduce possible exposure of basis risk across
of dislocation of market rates both Banks through
from base rate. the year.
-------------------------
5 Liquidity and funding
risk
Risk Mitigation Direction
Retail funding stress The Group's funding strategy Unchanged
As the Group is primarily is focused on a highly stable The Group's funding
funded by retail deposits, retail deposit franchise. The mix remained stable
a retail run could put large number of depositors throughout the year.
it in a position where provides diversification and
it could not meet its a high proportion of balances
financial obligations. are covered by the FSCS and
Increased competition so there is no material risk
for retail savings driving of a retail run.
up funding costs adversely In addition, the Group performs
impacting retention levels. in-depth liquidity stress testing
and maintains a liquid asset
portfolio sufficient to meet
obligations under stress. The
Group holds prudential liquidity
buffers to manage funding requirements
under normal and stressed conditions.
The Group proactively manages
its savings proposition through
both the Liquidity Working
Group and the Group Assets
and Liabilities Committee.
Finally, the Group has prepositioned
mortgage collateral with the
Bank of England which allows
it to consider other alternative
funding sources to ensure it
is not solely reliant on retail
savings. The Group also has
a mature RMBS programme and
access to warehouse facilities.
----------------------
Definition
The potential inability of the Group to ensure that it maintains sufficient
capital levels for its business strategy and risk profile under both
the base and stress case financial forecasts.
Risk appetite statement
The Group seeks to ensure that it We manage our capital resources in
is able to meet its Board-level capital a manner which avoids excessive leverage
buffer requirements under a severe and allows us flexibility in raising
but plausible stress scenario. The capital.
Group's solvency risk appetite is
constrained within the leverage ratio-related
requirements.
5 Liquidity and funding risk continued
Risk Mitigation Direction
----------------------------- -------------------------------------- ---------------------------
Wholesale funding stress The Group continuously monitors Decreased
A market-wide stress could wholesale funding markets for The combined Group
close securitisation markets securitisation opportunities has a wider range
or make issuance costs and will execute funding transactions of wholesale funding
unattractive for the Group. or sell additional residual options available,
positions in the securitisations including repo or
when market conditions are sale of retained
advantageous. notes, collateral
The strong retail franchise, upgrade trades and
access to pooled deposits, warehouse facilities.
Bank of England pre-positioned
collateral and warehouse funding
facilities through tier 1 investment
banks provide the Group with
a range
of funding options.
---------------------------
Refinancing of Term Funding The Group has fully factored Unchanged
Scheme in repayment of TFS into the The overall TFS
The Group has drawn a funding plans of both Banks, position for the
total GBP2.6bn of funding with planned repayment prior Group has increased
under the TFS creating to the contractual date to but the combined
a refinancing concentration minimise timing and concentration Group has a wider
around the maturity of risk. The combined Group has range of funding
this scheme. a wider range of funding options options.
to manage this process.
---------------------------
6 Solvency risk
Risk Mitigation Direction
Deterioration of capital Currently the Group operates Increased
ratios from a strong capital position The Group maintained
Key risks to solvency and has a consistent record a prudent and stable
arise from balance sheet of strong profitability. CET1 capital and
growth and unexpected The Group actively monitors total capital position
losses which can result its capital requirements and providing resilience
in the Bank's capital resources against financial against unexpected
requirements increasing forecasts and plans and undertakes losses. The Group
or capital resources being stress testing analysis to continued to fund
depleted such that it subject its solvency ratios its balance sheet
no longer meets the solvency to extreme but plausible scenarios. growth using organic
ratios as mandated by The Bank also holds prudent profit generation.
the PRA and Board risk levels of capital buffers based Following the integration,
appetite. on CRD IV requirements and the Group will be
The regulatory capital expected balance sheet growth. subject to minimum
regime is subject to change The Group engages actively requirements for
and could lead to increases with regulators, industry bodies, own funds and eligible
in the level and quality and advisers to keep abreast liabilities ('MREL')
of capital that the Group of potential changes and provides requirements and
needs to hold to meet feedback through the consultation will need to issue
regulatory requirements. process. MREL-qualifying
debt instruments
to meet
this requirement.
--------------------------------
Definition
The risk of loss or negative impact to the Group resulting from inadequate
or failed internal processes, people or systems, or from external events.
Risk appetite statement
The Group's operational processes, The Bank actively promotes the continuous
systems and controls are designed evolution of its operating environment
to minimise disruption to customers, through the identification, evaluation
damage to the Bank's reputation and and mitigation of risks, whilst recognising
any detrimental impact on financial that the complete elimination of operational
performance. risk is not possible.
7 Operational risk
Risk Mitigation Direction
IT security (including The Group invested significantly Unchanged
cyber risk) in enhancing its protection Whilst IT security
The risks resulting from against IT security threats, risks continue to
a failure to protect the deploying a series of tools evolve, the level
Bank's systems and the designed to identify and prevent of maturity of the
data within them. This network/system intrusions. Group's controls
includes both internal This is further supported by and defences have
and external threats. documented and tested procedures significantly matured,
intended to ensure the effective supported by dedicated
response to a security breach. IT security experts.
The Group's ongoing
penetration testing
continues to drive
enhancements by
identifying potential
areas of risk.
------------------------------
Data quality and completeness The Group established a dedicated Unchanged
The risks resulting from Data Strategy Programme, designed Whilst the Data
data being either inaccurate to ensure a consistent approach Strategy Programme
or incomplete. to the maintenance and use enjoyed some notable
of data. This includes both achievements, there
documented procedures and frameworks remains significant
and also tools intended to work in 2020 in
improve the consistency of order to ensure
data use. all data-related
risks have been
appropriately addressed.
------------------------------
Change management The Group recognises that implementing Increased
The risks resulting from change introduces significant The Group continues
unsuccessful change management operational risk and has therefore to adopt an ambitious
implementations, including implemented a series of control change agenda and
the failure to respond gateways designed to ensure recognises that
effectively to release-related that each stage of the change it is entering a
incidents. management process has the period of significant
necessary level of oversight. change following
the Combination
and that risks of
integration will
be heightened during
this period.
------------------------------
IT failure The Group continues to invest Unchanged
The risks resulting from in improving the resilience Whilst progress
a major IT application of its core infrastructure. was made
or infrastructure failure It has identified its prioritised in reducing both
impacting access to the business services and the infrastructure the likelihood and
Bank's IT systems. that is required to support impact of an IT
them. Tests failure, the Group
are performed regularly to has identified additional
validate its ability to recover enhancements that
from an incident. it will look to
implement in 2020.
------------------------------
Organisational change There is a low risk integration Increased
and integration project plan (e.g. no large The Group is in
The risks resulting from scale integration-related IT the early stages
the Group's ongoing integration project change planned). Experienced of the integration
activities, including and capable project management project, with no
systems, people and infrastructure. office, with close oversight material issues
and direction provided by the identified with
Group Executive and Board Integration respect to delivering
Committees. agreed objectives
within planned timelines
to date. Close oversight
of the integration
risks will be carried
out by the Group's
Risk and Compliance
function.
------------------------------
Definition
The risk that the Group's behaviours or actions result in customer detriment
or negative impact on the integrity of the markets in which it operates.
Risk appetite statement
The Group aims to operate and conduct However, where the Group identifies
its business to the highest standards potential conduct risks it will proactively
which ensure integrity and trust with intervene by managing, escalating and
respect to how the Group operates mitigating them promptly to ensure
and manages its relationships with a fair outcome is achieved.
key stakeholders. In this respect,
the Group has no appetite to knowingly
assume risks which may result in an
unfair outcome for customers and/or
cause disruptions in the market segments
in which it operates.
8 Conduct risk
Risk Mitigation Direction
Product suitability The Group has a strategic commitment Unchanged
Whilst the Group originates to provide simple, customer-focused Whilst this risk
relatively simple products, products. In addition, a Product remained low as
there remains a risk that Governance framework is established a result of increased
products (primarily legacy) to oversee both the origination awareness
may be deemed to be unfit of new products and to revisit and dedicated oversight,
for their original purpose the ongoing suitability of the Bank remains
in line with current regulatory the existing product suite. aware of the changes
definitions. to the regulatory
environment and
their possible impact
on product suitability.
----------------------------
Data protection In addition to a series of Unchanged
The risk that customer network/system controls, the Despite a number
data is accessed inappropriately Bank performs extensive root of additional controls
either as a consequence cause analysis of any data introduced in 2019,
of network/ system intrusion leaks in order to ensure that the network/system
or through operational the appropriate mitigating threats continue
errors actions are taken. to evolve in both
in the management of the volume and sophistication.
data.
----------------------------
Integration risk During the integration process, Increased
The risk that the integration the Group is committed to adopting The Group is in
programme directly or a low-risk approach with a the early stages
indirectly causes poor view to taking reasonable steps of the integration
outcomes for customers to project, with no
and the market. avoid causing poor outcomes material issues
for our customers and the market. identified with
The Group will conduct detailed respect to poor
analysis of potential customer customer outcomes.
harm associated with particular
integration steps.
----------------------------
9 Compliance/regulatory risk
Definition
The risk that a change in legislation or regulation or an interpretation
that differs from the Group's will adversely impact the Group.
Risk appetite statement
The Group views ongoing conformity The Group will not tolerate any systemic
with regulatory rules and standards failure to comply with applicable laws,
across all the jurisdictions in which regulations or codes of conduct relevant
it operates as a critical facet of given its business operating model.
its risk culture. The Group does not
knowingly accept compliance risk which
could result in regulatory sanctions,
financial loss or damage to its reputation.
Risk Mitigation Direction
--------------------------------- ---------------------------------- ----------------------------------
Prudential regulatory The Group has an effective Increased
changes horizon scanning process to The Group has historically
The Group continues to identify regulatory change. responded effectively
see a high volume of key All significant regulatory to all significant
compliance regulatory initiatives are managed by regulatory
changes that impact its structured programmes overseen changes. However,
business activities. These by the Project Management team the level and sophistication
include; change and sponsored at Executive of emerging
in Standardised Approach level. regulation continues
capital rules and implementation The Group has proactively sought to increase.
of an IRB floor, implementation external expert opinions to
of the European Standardised support interpretation of the
Information Sheet, extending requirements and validation
the Senior Managers and of its response, where required.
Certification Regime to The Group has initiated a study
all FCA regulated firms into external wall cladding
and introduction of Strong and is reviewing its own and
Customer Authentication lent portfolio.
requirements. The focus
on external wall cladding
for high-rise buildings
has recently been extended
to cover
all buildings regardless
of height.
----------------------------------
Conduct regulation The Group has a programme of Increased
Regulatory changes focused regulatory horizon scanning The regulatory environment
on the conduct of business linking into a formal regulatory has tightened and
could force changes in change management programme. this is likely to
the way the In addition, the focus on simple continue, exposing
Group carries out business products and customer oriented the Group to increased
and impose substantial culture means that current risk.
compliance costs. practice may not have to change
significantly to meet new conduct
regulations.
----------------------------------
The Group proactively scans for emerging risks which may have an impact
on its ongoing operations and strategy. The Group considers its top
emerging risks to be:
Emerging risks Description Mitigation action
-------------- --------------------------------- ---------------------------------------
Integration The risks resulting from The Board is maintaining oversight
risk the Group's ongoing integration of the integration process through
activities, including systems, the Board Integration Committee.
people and infrastructure. A dedicated Integration Management
Office has been established to
drive the integration process
forward.
Independent second line and third
line assessment, monitoring and
reporting is being undertaken
by the Risk function and Internal
Audit function.
Political and As the outcome of trade The Group implemented robust monitoring
macroeconomic negotiations following processes and via various stress
uncertainty Brexit remains unclear, testing activity (i.e. ad hoc,
there is an increased likelihood risk appetite and ICAAP) understands
of a period of macroeconomic how the Group performs over a
uncertainty. The Group's variety of macroeconomic stress
lending activity is solely scenarios and has subsequently
focused in the United Kingdom developed a suite of early warning
and, as such, will be impacted indicators, which are closely
by any risks emerging from monitored to identify changes
changes in the macroeconomic in the economic environment. The
environment. Group produces and reviews monthly
loan portfolio management information.
Emerging risks Description Mitigation action
------------------ ----------------------------------- ------------------------------------------
Climate change As the worldwide focus The Group developed an approach
on climate change intensifies, to addressing the increasing climate
both the physical risks risks within its Risk Management
and the transitional risks Framework. This includes scenario
associated with climate analysis, development of key risk
change continue to grow. indicators and inclusion of climate
Physical risks can relate risks within operational resilience
to specific weather events, activities. A cross-functional
such as storms and flooding, working
or to longer-term shifts group will drive the Group's climate
in the climate, such as change agenda with Board oversight
rising sea levels. Transitional ensuring climate change is considered
risks may arise from the in key business and strategic
adjustment towards a 'low- decision-making. To assess portfolio
carbon' economy, such as collateral sensitivities to climate
tightening energy efficiency change, the Group is engaging
standards for domestic with a third party to assist with
and commercial buildings. modelling physical risks (flood,
subsidence and coastal erosion)
and transitional risks (Government
policy) against a series of scenarios
relating to
global temperature change.
Model risk The risk of financial loss, Both OSB and CCFS have well-defined
adverse regulatory outcomes, model governance frameworks and
reputational damage or processes in place, including
customer detriment resulting Committees, frameworks, policies,
from deficiencies in the model inventories and independent
development, application validation processes.
or ongoing operation of In light of this emerging risk,
models and ratings systems. the Group implemented a Group
Post the completion of Models and Ratings Committee to
the Combination with CCFS, ensure an appropriate level of
the Group notes the increasing oversight is provided in 2020
usage of models to by the Board, in conjunction with
conduct financial assessments the Models and Ratings Management
whilst informing business Committee.
decisions. The Group also A key area of focus for 2020 will
notes changes in industry be further enhancing the Group's
best practice with respect model risk governance arrangements
to managing model risk. including developing and implementing
Group-level frameworks and policies,
whilst implementing the planned
target operating model.
LIBOR reform The LIBOR benchmark may The Group ALCO has set up a dedicated
cease to be set after the working group to focus on this
end of 2021 due to the risk and transition away from
low level of supporting the LIBOR benchmark is underway.
unsecured loans in the The priority is to remove the
wholesale interbank loan LIBOR component from all new loan
market. The Group has exposure products and new swap hedges.
to the LIBOR benchmark With regard to existing loans
within some of its customer and derivative hedges it is planned
lending products and wholesale that they are transitioned onto
derivative hedging transactions. alternative benchmarks before
If the benchmark were to LIBOR ceases.
cease or become unreliable,
these loans and derivatives
may reflect rates that
do not accurately represent
short- term funding costs,
therefore having an adverse
effect on returns.
Coronavirus The outbreak of Coronavirus The Group has taken a considered
(COVID-19) has now been approach to minimising and managing
labelled a global pandemic the impact of a Coronavirus-related
by the World Health Organization. global pandemic. The Group approach
If this continues to spread represents a comprehensive response
through contagion, it is strategy covering both severity
likely to further intensify and consequences of a global pandemic.
the disruptive The Group's response strategy
impact on the global and covers key aspects of an effective
UK economy. This would pandemic response approach, including
result in deteriorating prevention, continuity, impact
market sentiments, falling assessment and stress testing.
investment and consumer Supporting the Group's response
spending and diminishing strategy are established underlying
trade flows. capabilities to facilitate operational
Government actions, both and financial resilience testing
fiscal and monetary, may and planning, active monitoring
prove to be slow to take and reporting procedures, and
effect and/or uncertain active communications with all
in their impact. staff (UK and India) and supervisory
A spreading global pandemic authorities.
could adversely impact
the Group across a number
of key financial and operational
areas (as described in
Pandemic risk factors on
page 54.
Treating customers The industry-wide and firm-specific All Group entities operate under
fairly practices in relation to arrears, repossession, forbearance
arrears, collections and and vulnerable customer policies
forbearance procedures which are designed to comply with
resulting in poor customer regulatory rules and expectations.
outcomes and financial These policies articulate the
distress continues to be Group's commitment to ensuring
an important area of regulatory that all customers, including
focus. The practices within those that are vulnerable or experiencing
the regulated residential financial hardship, are treated
mortgage markets, both fairly, consistently and in a
first and second charge way that considers their individual
mortgages, have in particular needs and circumstances.
been subject to active The Group does not tolerate any
supervisory monitoring systemic failure to deliver fair
through market data analysis, customer outcomes. On an isolated
complaints to firms, notifications basis, incidents can result in
from firms and multi firm detriment owing to human and/or
thematic reviews. operational failures. Where such
If the Group's arrears, incidents occur they are thoroughly
repossession, forbearance investigated, and the appropriate
and vulnerable customer remedial actions are taken to
policies and procedures address any customer detriment
are assessed to be misaligned and to prevent recurrence.
to the individual needs
of the customers and regulatory
expectations, the Group
runs the risk of causing
harm to its customers,
particularly those experiencing
financial hardship or vulnerable
customers, with the potential
for reputational
damage, redress and other
regulatory actions.
Risk profile performance overview
Credit risk
Throughout 2019 the credit quality of both Banks remained strong, driven
by robust credit risk management, deep knowledge of the specialist
sectors in which both OSB and CCFS operate, coupled with prudent risk
appetite.
Strong organic loan book growth was underpinned by resilient new lending
volumes across the Group's core lending segments including Buy-to-Let,
residential owner-occupier, semi- commercial and commercial. The Group's
asset finance and development finance businesses continued to operate in
line with expectations. New business quality remained strong with
broadly stable loan to value levels. Interest coverage ratios remained
stable across both the OSB and CCFS segments. Loan to income multiples
also remained stable across residential owner-
occupier lending.
Arrears levels remained low during 2019 across both Banks. Across the
CCFS segment greater than three months in arrears balances remained low
at 0.3% of total loans and advances (2018: 0.2%). This marginal increase
was driven by the lending portfolios maturing and was in line with
management's expectations.
Performance of both new and existing loans remained strong.
At OSB, the greater than three months in arrears ratio fell to a low of
1.3% (2018: 1.5%). Falling arrears levels across the residential
owner-occupier lending segment drove the overall Group trend. Buy-to-Let
lending arrears levels remained stable year on year, but improved during
the second half of 2019 as more focused collections activity took
effect. As at 31 December 2019, legacy problem loan balances reduced to
GBP3.0m from GBP5.6m at the
end of 2018.
The Group observed strong demand for semi-commercial
and commercial mortgage products originated via the InterBay commercial
brand, where gross exposure grew to GBP888.0m with a weighted average
loan to value of 67% and an average loan size of GBP375,000.
Gross exposure to residential development finance remained low at
GBP146.1m with a weighted average LTV of 34%.
Expected Credit Losses ('ECL')
Low arrears and sensible loan to value levels resulted in strong loan
loss performance during 2019.
On a statutory basis, impairment losses were GBP15.6m (2018:
GBP8.1m) representing 13bps on average gross loans and advances (2018:
10bps). On a pro forma underlying basis, the loan loss ratio was 10bps1
(2018: 7bps).
The increase in the total value of loan losses was primarily due to
three non-recurring items:
i) More focused collections activity across the Buy-to-Let
portfolio within the OSB segment resulted in an increase in the number
of LPA receivers appointed during the first half of 2019, where under
the IFRS 9 provisioning approach higher provisions are held.
LPA receivers are appointed when a Buy-to-Let account falls into arrears,
as an independent managing agent and
collector of rents. This ensures that rent payments are passed back to
the lender to bring the account back up to date, or to oversee a sale of
the property paying back the lender, whilst supplying the borrower with
any excess funds. During the second half of 2019 OSB observed low and
stable new LPA receiver appointments.
ii) On 4 October 2019, OSB acquired the lending portfolios of
CCFS and consequently raised IFRS 9 provisions totalling GBP3.6m. This
one-off charge was recognised in the Group's profit and loss, increasing
the total quantum of losses recognised in 2019.
Importantly, the provisions raised do not reflect a change in the credit
risk performance of the lending portfolios.
iii) During the fourth quarter of 2019, OSB and CCFS aligned a
number of IFRS 9 methodologies, including stage 2 and 3 transfer
criteria and macroeconomic scenarios and probability weightings. The net
impact of this alignment activity was
a one-off provision charge recognised in the 2019.
Removing the above one-off non-recurring items, the loan loss charge
would have been broadly consistent with the underlying loan loss charge
observed during 2018.
1. The 2019 statutory results reflect 12 months of OSB results and
CCFS' results from 4 October 2019, the date on which the Combination
completed and became effective. The 2018 statutory results include OSB
results only. The pro forma underlying results reflect what
the results would have been had the Combination occurred on 1 January
2019.
The Group continues to closely monitor impairment coverage levels:
Expected
Gross carrying Credit Incurred
amount Losses loss remaining1 Coverage
As at 31 December 2019 GBPm GBPm GBPm ratio2
------------
Stage 1 17,286.9 5.6 -- 0.03%
Stage 2 749.5 5.6 -- 0.75%
Stage 3 (+ POCI) 431.2 31.7 -- 7.35%
Undrawn loan facilities -- -- -- --
Total 18,467.6 42.9 -- 0.23%
As at 31 December 2018
Stage 1 8,286.8 4.3 -- 0.05%
Stage 2 436.8 5.6 -- 1.28%
Stage 3 (+ POCI) 281.6 11.8 7.2 6.75%
Undrawn loan facilities -- 0.2 -- --
Total 9,005.2 21.9 7.2 0.32%
The Group's Risk and Audit Committees closely monitor the ongoing
appropriateness of the provision coverage levels versus expected losses
and peer institutions.
As at 31 December 2019, provision coverage levels remained appropriate.
The Group's total coverage ratio fell slightly to 0.23% as at 31
December 2019 (2018: 0.32%). The fall was driven by the loan to value
profile and low arrears performance of newly-originated mortgages and
the CCFS lending portfolios acquired, resulting in balances growing
faster than ECL provisions raised, resulting in the ratio falling.
Macroeconomic scenarios
The measurement of ECL under the IFRS 9 approach is complex and requires
a high level of judgement. The approach includes the estimation of
probability of default ('PD'), loss given default ('LGD') and likely
exposure at default ('EAD'). An assessment of the maximum contractual
period with which the Group is exposed
to the credit risk of the asset is also undertaken.
IFRS 9 requires firms to calculate ECL allowances simulating
the effect of a range of possible economic outcomes, calculated on a
probability weighted basis. This requires firms to formulate
forward-looking macroeconomic forecasts and incorporate them in ECL
calculations.
i. How macroeconomic variables and scenarios are selected During the
IFRS 9 modelling process the relationship between macroeconomic drivers
and arrears, default rates and collateral values is established. For
example, if unemployment levels increase the Group would observe an
increasing number of accounts moving into arrears. If residential or
commercial property prices fall the risk of losses being realised on the
sale of a property would increase.
The Group has adopted an approach which utilises four macroeconomic
scenarios.
Scenarios are provided by an industry leading economics advisory firm,
who provide Management and the Board with advice on which scenarios to
utilise and the probability weightings to attach to each scenario.
A base case forecast is provided which broadly aligns with
wider consensus forecasts, along with a plausible upside scenario.
Two downside scenarios are also provided (downside and a severe
downside).
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.
In 2019, the Group reclassified incurred loss protection on acquired
portfolios from loans and advances to ECL to reflect the Group's total
ECL position.
2. Coverage ratio is the total provisions plus incurred losses
remaining divided by gross loans and advances.
ii.How macroeconomic scenarios are utilised within ECL calculations
Probability of default estimates are either scaled up or down based on
the macroeconomic scenarios utilised.
Loss given default estimates are impacted by property price forecasts
which are utilised within loss estimates should
an account be possessed and sold.
Exposure at default estimates are not impacted by the macroeconomic
scenarios utilised.
Each of the above components are then directly utilised within the ECL
calculation process.
iii. Macroeconomic scenario governance
The Group has a robust governance process to oversee macroeconomic
scenarios and probability weightings used within ECL calculations.
Updated scenarios are provided on a monthly basis where an assessment is
carried out by the Group's Risk function to determine whether an update
is required.
On a quarterly basis the Group's Risk function and economic adviser
provide the Asset and Liabilities Committee with an overview of recent
economic performance, along with updated base, upside and two downside
scenarios.
The Risk function will then propose a course of action, which once
approved will be implemented. Regular updates are provided
to the Group's Risk and Audit Committees, where the ongoing
appropriateness of the macroeconomic scenarios and probability
weightings are discussed.
iv. Changes made during 2019
In December 2018, OSB implemented a fourth severe downside no-deal
disorderly Brexit scenario, which increased the Group's provision
requirements. During the first half of 2019, the Group did not make any
changes to the macroeconomic scenarios utilised or the probability
weightings assigned.
The CCFS business implemented a Brexit overlay in December 2018 to
reflect the increasing risk of a no-deal Brexit. As at 30 June 2019,
this overlay was adjusted with further provision raised.
Following the Combination completing on 4 October 2019, the Group's Risk
function recommended aligning the macroeconomic scenarios and
probability weightings utilised across both the individual OSB and CCFS
businesses. This entailed moving to
one service provider for economic modelling, aligning scenarios utilised
and probability weightings.
Forecasted macroeconomic variables over a five-year period (includes
average over five years and the peak to trough projections)
Severe
Upside Downside downside
As at 31 December Base case scenario scenario scenario
2019 % % % %
--------------
Weighting applied 40 10 35 15
----------
Economic driver Measure
Gross Domestic Product 5 year average (yearly GDP
('GDP') growth %) 1.2 1.7 0.5 -0.3
Cumulative growth/(fall) to
peak/(trough) (%) 6.4 8.5 -3.6 -5.8
House Price Index 5 year average (yearly HPI
('HPI') growth %) 1.3 3.2 -1.5 -3.2
Cumulative growth/(fall) to
peak/(trough) (%) +5.6 +14.8 -13.4 -21.1
Bank Base Rate ('BBR') 5 year average (%) 1.31 1.45 0.19 0.08
Cumulative growth/(fall) to
peak/(trough) (%) +1.5 +1.7 -0.7 -0.6
Unemployment Rate
('UR') 5 year average (%) 4.49 3.41 6.26 7.15
Cumulative growth/(fall) to
peak/(trough) (%) +0.7 -1.0 +2.9 +4.1
Commercial Real Estate 5 year average (yearly HPI
Index ('CRE') growth %) 1.3 3.2 -1.5 -5.8
Cumulative growth/(fall) to
peak/(trough) (%) +5.6 +14.8 -13.4 -40.0
------------------------------------------------------ ----------
Severe
Upside Downside downside
As at 31 December Base case scenario scenario scenario
2018 % % % %
--------------
Weighting applied 50 0 40 10
----------
Economic driver Measure
House Price Index 5 year average (yearly HPI
('HPI') growth %) 2.6 3.3 -1.7 -3.6
Cumulative growth/(fall) to
peak/(trough) (%) +13.0 +16.1 -10.5 -30.0
Bank Base Rate ('BBR') 5 year average (%) 1.6 2.0 1.6 3.4
Cumulative growth/(fall) to
peak/(trough) (%) +1.5 +1.8 +1.4 +4.5
Unemployment Rate
('UR') 5 year average (%) 4.3 3.8 5.7 6.4
Cumulative growth/(fall) to
peak/(trough) (%) +0.5 -0.4 +2.4 +3.3
Commercial Real Estate 5 year average (yearly HPI
Index ('CRE') growth %) 0.3 1.4 -5.5 -7.8
Cumulative growth/(fall) to
peak/(trough) (%) +2.6 +8.0 -27.0 -48.4
------------------------------------------------------ ----------
Forbearance
Where borrowers experience financial difficulties, which impacts their
ability to service their financial commitments under the loan agreement,
forbearance may be used to achieve an outcome which is mutually
beneficial to both the borrower and the Bank.
By identifying borrowers who are experiencing financial difficulties
pre-arrears or in arrears, a consultative process is initiated to
ascertain the underlying reasons and to establish the best course of
action to enable the borrower to develop credible repayment plans and to
see them through the period of financial stress.
The specific tools available to assist customers vary by product and the
customers' status. The various treatments considered for customers are
as follows:
-- Temporary switch to interest only: a temporary account change to assist
customers through periods of financial difficulty where arrears do not
accrue at the original contractual payment. Any arrears existing at the
commencement of the arrangement are retained.
-- Interest rate reduction: the Group may, in certain circumstances, where
the borrower meets the required eligibility criteria, transfer the
mortgages to a lower contractual rate. Where this is a formal contractual
change the borrower will be requested to obtain independent financial
advice as part of the process.
-- Loan term extension: a permanent account change for customers in
financial distress where the overall term of the mortgage is extended,
resulting in a lower contractual monthly payment.
-- Payment holiday: a temporary account change to assist customers through
periods of financial difficulty where arrears accrue at the original
contractual payment. Any arrears existing at the commencement of the
arrangement are retained.
-- Voluntary-assisted sale: a period of time is given to allow borrowers to
sell the property and arrears accrue based on the contractual payment.
-- Reduced monthly payments: a temporary arrangement for customers in
financial distress. For example, a short-term arrangement to pay less
than the contractual payment.
Arrears continue to accrue based on the contractual payment.
-- Capitalisation of interest: arrears are added to the loan balance and are
repaid over the remaining term of the facility or at maturity for
interest only products. A new payment is calculated, which will be higher
than the previous payment.
-- Full or partial debt forgiveness: where considered appropriate, the Group
will consider writing off part of the debt. This may occur where the
borrower has an agreed sale and there will be a shortfall in the amount
required to redeem the Group's charge, in which case repayment of the
shortfall may be agreed over a period of time, subject to an
affordability assessment or where possession has been taken by the Group;
and on the subsequent sale where there has been
a shortfall loss.
} Arrangement to Pay (CCFS only): where an arrangement is made with the
borrower to repay an amount above the contractual monthly instalment,
which will repay arrears over a period of time.
-- Promise to Pay (CCFS only): where an arrangement is made with the
borrower to defer payment or pay a lump sum at a later date.
-- Bridging loans more than 30 days past due (CCFS only): Bridging loans
which are more than 30 days past their maturity date. Repayment is
rescheduled to receive a balloon or
bullet payment at the end of the term extension where the institution
can duly demonstrate future cash flow availability.
The Group aims to proactively identify and manage forborne accounts,
utilising external credit reference bureau information to analyse
probability of default and customer indebtedness trends over time,
feeding pre-arrears watch list reports. Watch list cases are in turn
carefully monitored and managed as appropriate.
Further information regarding forbearance can be found in note 45 to the
Financial statements.
Fair value of collateral methodology
The Group ensures that security valuations are reviewed on an ongoing
basis for accuracy and appropriateness. Commercial properties are
subject to annual indexing, whereas residential properties are indexed
against monthly House Price Index data. Where the Group identifies that
an index is not representative, a formal review is carried out by the
Group Real Estate function to ensure that property valuations remain
appropriate.
The Group Real Estate function ensures that newly underwritten lending
cases are written to appropriate valuations, where an independent
assessment is carried out by an appointed, qualified surveyor accredited
by RICS.
Solvency risk
The Group has maintained an appropriate level and quality of capital to
support its prudential requirements with sufficient contingency to
withstand a severe but plausible stress scenario. The solvency risk
appetite is based on a stacking approach, whereby the various capital
requirements (Pillar 1, ICG, CRD IV buffers, Board and management
buffers) are incrementally aggregated as a percentage of available
capital (CET1 and
total capital).
Solvency risk is a function of balance sheet growth, profitability,
access to capital markets and regulatory changes. The Bank actively
monitors all key drivers of solvency risk and takes prompt action to
maintain its solvency ratios at acceptable levels. The Board and
management also assess solvency when reviewing the Group's business
plans and inorganic growth opportunities.
The Group's fully-loaded CET1 capital ratio under CRD IV increased to
16.0% as at 31 December 2019 (31 December 2018: 13.3%) demonstrating the
strong organic capital generation capability
of the business and the beneficial impact of the fair value uplift on
CCFS' assets. The Group had a total capital ratio of 17.3% and a
leverage ratio of 6.5% as at 31 December 2019 (31 December
2018: 15.8% and 5.9% respectively).
Liquidity and funding risk
The Group has a prudent approach to liquidity management through
maintaining sufficient liquidity resources to cover cash flow imbalances
and fluctuations in funding under both normal and stressed conditions
arising from market-wide and Bank- specific events. OSB and CCFS'
liquidity risk appetites have been calibrated to ensure that both Banks
always operate above the minimum prudential requirements with sufficient
contingency for unexpected stresses, whilst actively minimising the risk
of holding excessive liquidity which would adversely impact the
financial efficiency of the business model.
The Group continues to attract new retail savers and has high retention
levels with existing customers. In addition, the
Combination allows the Group a wider range of wholesale funding options
including securitisation issuances and use of retained notes from both
Banks.
In 2019, both Banks actively managed their liquidity and funding
profiles within the confines of their risk appetite as set out in each
Bank's Internal Liquidity Adequacy Assessment Process ('ILAAP'). Each
Bank's risk appetite is based on internal stress tests that cover a
range of scenarios and time periods and therefore are a more severe
measure of resilience to a liquidity event than the standalone liquidity
coverage ratio ('LCR'). Both OSB and CCFS' LCR at 199% and 145%
respectively remain above risk appetite and well above regulatory
minimums.
Market risk
The Group proactively manages its risk profile in respect of adverse
movements in interest rates, foreign exchange rates and counterparty
exposures. The Group accepts interest rate risk and basis risk as a
consequence of structural mismatches between fixed rate mortgage lending,
sight and fixed term savings and the maintenance of a portfolio of high
quality liquid assets.
Interest rate exposure is mitigated on a continuous basis through
portfolio diversification, reserve allocation and the use of financial
derivatives within limits set by the Group ALCO and approved by the
Board.
The Group's balance sheet is completely GBP denominated. The Group has
some minor foreign exchange risk from funding the OSBI business. This is
minimised by prefunding a number of months in advance and regularly
monitoring GBP/INR rates. Wholesale counterparty risk is measured on a
daily basis and constrained by counterparty risk limits.
Transition away from LIBOR
The PRA and FCA have continued to encourage banks to transition away
from using LIBOR as a benchmark in all operations before the end of
2021. Throughout the UK banking sector LIBOR remains a key benchmark and,
for each market impacted, solutions to this issue are progressing
through various industry bodies.
In 2018, OSB set up an internal working group comprised of all of the
key business lines that are involved with this change with strong
oversight from the Compliance and Risk departments. Risk assessments
have been completed to ensure this process is managed in a measured and
controlled manner. CCFS no longer write any LIBOR-linked business and
have started to transition back book swaps from a LIBOR to a SONIA
basis. The OSB and CCFS projects have been aligned following the
Combination.
Interest rate risk
The Group does not actively assume interest rate risk, does not execute
client or speculative securities transactions for its own account, and
does not seek to take a significant directional interest rate position.
Limits have been set to allow management to run occasional unhedged
positions in response to balance sheet dynamics and capital has been
allocated for this. Exposure limits are calibrated in proportion to
available CET1 capital
in order to accommodate balance sheet growth.
The Group sets limits on the tenor and rate reset mismatches between
fixed rate assets and liabilities, including derivatives hedges, with
exposure and risk appetite assessed by reference to historic and
potential stress scenarios cast at consistent levels of modelled
severity.
Throughout 2019, both Banks managed their interest rate risk exposures
within risk appetite limits.
Basis risk
Basis risk arises from assets and liabilities repricing with reference
to different interest rate indices, including positions which reference
variable market, policy and managed rates. As with structural interest
rate risk, the Bank does not seek to take a significant basis risk
position, but maintains defined limits to allow operational flexibility.
For both OSB and CCFS exposure is assessed and monitored regularly
across a range of 'business as usual' and stressed scenarios.
Throughout 2019, both Banks managed their basis risk exposure within
their risk appetite limits.
Operational risk
The Group continues to adopt a proactive approach to the management of
operational risks. The operational risk management framework has been
designed to ensure a robust approach to the identification, measurement
and mitigation of operational risks, utilising a combination of both
qualitative and quantitative evaluations in order to promote an
environment of progressive operational risk management. The Group's
operational processes, systems and controls are designed to minimise
disruption to customers, damage to the Group's reputation and any
detrimental impact on financial performance. The Group actively promotes
the continual evolution of its operating environment through the
identification, evaluation and mitigation of risks, whilst recognising
that the complete elimination of operational risk is not possible.
Where risks continue to exist, there are established processes to
provide the appropriate levels of governance and oversight, together
with an alignment to the level of risk appetite stated by the Board.
A strong culture of transparency and escalation has been cultivated
throughout the organisation, with the Operational Risk function having a
Group-wide remit, ensuring a risk management model that is well embedded
and consistently applied. In addition, a community of Risk Champions
representing each business line and location has been identified.
Operational Risk Champions ensure that the operational risk
identification and assessment processes are established across the Group
in a consistent manner. Risk Champions are provided with appropriate
support and training by the Operational Risk function.
Regulatory and compliance risk
The Group is committed to the highest standards of regulatory conduct
and aims to minimise breaches, financial costs and reputational damage
associated with non-compliance.
The Group has an established Compliance function which actively
identifies, assesses and monitors adherence with current regulation and
the impact of emerging regulation.
In order to minimise regulatory risk, the Group maintains a proactive
relationship with key regulators, engages with industry bodies such as
UK Finance, and seeks external expert advice.
The Group also assesses the impact of upstream regulation on itself and
the wider market in which it operates, and undertakes robust assurance
assessments from within the Risk and Compliance functions.
Conduct risk
The Group considers its culture and behaviour in ensuring the fair
treatment of customers and in maintaining the integrity of the market
segments in which it operates to be a fundamental part of its strategy
and a key driver to sustainable profitability and growth. The Group does
not tolerate any systemic failure to deliver fair customer outcomes.
On an isolated basis, incidents can result in detriment owing to human
and/or operational failures. Where such incidents occur they are
thoroughly investigated, and the appropriate remedial actions are taken
to address any customer detriment and to prevent recurrence.
The Group considers effective conduct risk management to be a product of
the positive behaviour of all employees, influenced by the culture
throughout the organisation and therefore continues to promote a strong
sense of awareness and accountability.
Strategic and business risk
The Board has clearly articulated the Group's strategic vision and
business objectives supported by performance targets. The Group does not
intend to undertake any medium to long-term strategic actions, which
would put at risk the Group's vision to become
our customers' favourite bank; one that delivers its very best,
challenges convention and opens doors that others can't.
To deliver against its strategic objectives and business plan, the Group
has adopted a sustainable business model based on a focused approach to
core niche market segments where its
experience and capabilities give it a clear competitive advantage.
The Group remains highly focused on delivering against its core
strategic objectives and strengthening its position further through
strong and sustainable financial performance.
Reputational risk
Reputational risk can arise from a variety of sources and is a second
order risk -- the crystallisation of a credit risk or operational risk
can lead to a reputational risk impact.
The Group monitors reputational risk through tracking media coverage,
customer satisfaction scores, the share price and net promoter scores
provided by brokers.
Viability statement
In accordance with Provision 31 of the 2018 UK Corporate Governance Code,
the Group Board is required to assess the viability of the Group over a
stated time horizon with a supporting statement in the Annual Report.
The viability statement is required to include an explanation of how the
prospects of the Group have been assessed, the time horizon over which
the assessment has been performed and why the assessment period is
deemed appropriate. The viability statement needs to be supported by an
assessment of the principal risks and uncertainties to which the Group
is exposed and based on reasonable expectations to conclude that the
Group will be able to continue to operate and meet its liabilities as
they fall due over that period.
The Group uses a five-year time frame in its business and financial
planning and for internal stress test scenarios. The long-term direction
is informed by business and strategic plans which
are reviewed on, at least, an annual basis and which include multi-year
financial statements. The operating and financial plans consider, among
other matters, the Board's risk appetite, macroeconomic outlook, market
opportunity, the competitive landscape, and sensitivity of the financial
plans to volumes, margin pressures and capital requirements.
While a five-year time frame is used internally, levels of uncertainty
increase as the planning horizon extends and the Group's operating and
financial plans focus more closely on the next three years. The Board
therefore considers a period of three years to be an appropriate period
for the assessment to be made.
The Company is authorised by the PRA, and regulated by the FCA and the
PRA, and undertakes regular analysis of its risk profile and
assumptions. It has a robust set of policies, procedures
and systems to undertake a comprehensive assessment of all the principal
risks and uncertainties to which it is exposed on a current and
forward-looking basis (as described in Principal risks and
uncertainties).
The Group identifies, assesses, manages and monitors its risk profile
based on the disciplines outlined within the Risk Management Framework,
in particular through leveraging its risk appetite framework (as
described in the Risk review).
Potential changes in the aggregated risk profile are assessed across the
business planning horizon by subjecting the operating and financial
plans to severe but plausible macroeconomic
and idiosyncratic stress scenarios.
The viability of the Group is assessed at both the Group and the
underlying regulated Bank levels, through leveraging the risk management
frameworks and stress testing capabilities of both regulated banks. Post
Combination, the risk assessment and stress testing capabilities of OSB
and CCFS will be progressively aligned, however, the strength of the
capital and funding profiles of both Banks provides an appropriate level
of assurance that the Group and its entities can withstand a severe but
plausible stress scenario.
Stress testing is an integral risk management discipline, used to assess
the financial and operational resilience of the Group.
The Group developed bespoke stress testing capabilities to assess the
impact of extreme but plausible scenarios in the context of its
principal risks impacting the primary strategic, financial and
regulatory objectives. Stress test scenarios are identified in the
context of the Group's operating model, identified risks, business and
economic outlook. The Group actively engages external experts to inform
the process by which it develops business and economic stress scenarios.
A broad range of stress scenarios are analysed, including the economic
impact of differing outcomes for the UK leaving the European Union,
regulatory changes relating to lending into the UK housing sector,
governmental housing policy shifts and scenarios prescribed by the Bank
of England. In addition COVID-19 pandemic scenarios have been
introduced.
Stresses are applied to lending volumes, capital requirements, liquidity
and funding mix, interest margins and credit and operational losses.
Stress testing also supports key regulatory submissions such as the
ICAAP, ILAAP and the Recovery Plan. ICAAP stress testing assesses
capital resources and requirements over a five-year period.
The Group has identified a broad suite of credible management actions
which can be implemented to manage and mitigate the impact of stress
scenarios. These management actions
are assessed under a range of scenarios varying in severity and
duration. Management actions are evaluated based on speed
of implementation, second order consequences and dependency on market
conditions and counterparties. Management actions are used to inform
capital, liquidity and recovery planning under stress conditions.
In addition, the Group identifies a range of catastrophic scenarios,
which could result in the failure of its current business model.
Business model failure scenarios (Reverse Stress Tests or 'RSTs') are
primarily used to inform the Board and Executives of the outer limits of
the Group's risk profile. RSTs play an important role in helping the
Board and Executives to assess the available recovery options to revive
a failing business model. The RSTs exercise is based on analysing a
range of scenarios, including an extreme macroeconomic downturn (1 in
200 severity), a cyber-attack leading to a loss of customer data which
is used for fraudulent activities, extreme regulatory and taxation
changes impacting Buy-to-Let lending volumes and a liquidity crisis
caused by severe market conditions combined with idiosyncratic
consequences.
The Group has established a comprehensive operational resilience
framework to actively assess the vulnerabilities and recoverability of
its critical services. The Group also conducts regular business
continuity and disaster recovery exercises.
The ongoing monitoring of all principal risks and uncertainties that
could impact the operating and financial plan, together with the use of
stress testing to ensure that the Group could survive a
severe but plausible stress, enables the Board to reasonably assess the
viability of the business model over a three-year period.
Viability statement continued
The UK's departure from the European Union without defined and agreed
terms could have a significant impact on the economic and business
outlook for the Group. To address this uncertainty, the Group has
developed a range of Brexit-related scenarios of varying severities and
probabilities to inform its IFRS 9 and capital planning processes
The Board has also considered the potential implications of the COVID-19
pandemic in its assessment of the financial and operational viability of
the Group and has a reasonable belief that the Group retains adequate
levels of financial resources
(capital and liquidity) and operational contingency. In assessing the
viability of the Group, the Board has considered the potential impact
and risks facing the Group with respect to the virus as set out in the
Risk review on page 54 and the Principal risks
and uncertainties on page 66.
The Group has recently undertaken a comparative review of the
macroeconomic stress scenarios used to assess the Group's ongoing
viability relative to the COVID 19 pandemic scenarios, as obtained from
the Group's third-party economic advisors.
Given the evolving nature of the COVID 19 pandemic crisis, the Group
will continue to refine and update the scenarios in consultation with
its economic advisors.
This exercise was undertaken to ensure that the shape and severity of
the scenarios used to assess the Group's financial viability are
sufficiently severe to accommodate for the latest assessment
of the potential economic impact of the COVID-19 pandemic.
In particular, the Group has assessed the pandemic scenarios relative to
the Bank of England 'Rates-down scenario', which is used to support the
Group's viability assessment. The Rates- down Scenario is deemed to be
more severe relative to the
current COVID-19 pandemic scenarios across all the key macro- economic
variables. This gives the Board reasonable comfort that the Group's
viability positions have been assessed to a severity level which
accommodates for the current assessment of the economic impact of the
COVID-19 pandemic.
The COVID-19 scenarios take into consideration the following drivers and
implications relevant to a pandemic crisis:
} Government guidance and policy response to the crisis
-- Lost output and productivity as a consequence of travel restrictions,
social distancing, self-isolation and sickness
-- Impact on employment levels, particularly for self-employed and flexible
working segments of the labour force
} Implication for consumer spending and business investment
} Impact on other relevant economic variables, including residential and
commercial property prices, Bank of England base rate, national output
and lending volumes.
The COVID-19 scenarios are designed to be extreme, but plausible, based
on the assumption that the impact on the UK economy is immediate and
quickly feeds through into rising unemployment rates, declining
residential and commercial property prices and
a rapid slowdown in lending volumes. The Treasury and Bank of England
take proactive fiscal and monetary stimulatory actions, but given the
invasive nature of the pandemic, the UK economy does not show signs of
recovery until 2022.
The potential impact of a COVID-19 pandemic on the economy and the
Group's operations is subject to continuous monitoring through the
Group's management committees, operational resilience and business
continuity planning working group, with appropriate escalation to the
Board and supervisory authorities.
The Group has progressively continued to enhance its approach to
assessing the viability of its strategy and business operating model, in
particular the Group has enhanced its capabilities by:
} Enhancing stress testing capabilities through more focused assessment
of more vulnerable cohorts of its lending portfolio supported by
increased granularity of monitoring and
risk reporting
-- Increasing the diversification of its funding profile, supported by
enhanced assessment of funding and liquidity risk profiles
-- Continued improvements to the risk and controls self- assessment
procedures across key areas of operational risk, including operations and
technology
-- Enhancing the assessment of operational resilience through the ongoing
review of priority business functions, including supporting
infrastructure and dependencies through
a simulated business continuity exercise
} Undertaking a war-gaming exercise involving Board and senior
management to review, practice and improve disaster recovery readiness.
Based on the current financial forecasts, risk profile characteristics
and stress test analysis, the Group's capital, funding and operational
capabilities support the Board's assessment that they have a reasonable
expectation that the Group will remain viable over the three-year
horizon.
(END) Dow Jones Newswires
March 31, 2020 13:01 ET (17:01 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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