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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Osb Group Plc | LSE:OSB | London | Ordinary Share | GB00BLDRH360 | ORD 1P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 1.80 | 0.46% | 394.20 | 395.40 | 396.20 | 401.00 | 384.40 | 384.40 | 1,019,459 | 16:35:09 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
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Independent Auditor's Report
To the Members of OneSavings Bank plc
Report on the audit of the financial statements
1. Opinion
In our opinion:
-- the financial statements of OneSavings Bank plc (the 'parent company')
and its subsidiaries (the 'Group') give a true and fair view of the state
of the Group's and of the parent company's affairs as at 31 December 2019
and of the Group's profit for the year then ended;
-- the Group financial statements have been properly prepared in accordance
with International Financial Reporting Standards (IFRSs) as adopted by
the European Union;
-- the parent company financial statements have been properly prepared in
accordance with IFRSs as adopted by the European Union and as applied in
accordance with the provisions of the Companies Act 2006; and
-- the financial statements have been prepared in accordance with the
requirements of the Companies Act 2006 and,
as regards the group financial statements, Article 4 of the IAS
Regulation.
We have audited the financial statements which comprise:
} the consolidated statement of comprehensive income;
-- the consolidated and parent company statement of financial position;
-- the consolidated and parent company statements of changes in equity;
} the consolidated and parent company statement of cash flows;
} the statement of accounting policies; and
} the related notes 1 to 52.
The financial reporting framework that has been applied in their
preparation is applicable law and IFRSs as adopted by the European Union
and, as regards the parent company financial statements, as applied in
accordance with the provisions of the Companies Act 2006.
2. Basis for opinion
We conducted our audit in accordance with International Standards on
Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under
those standards are further described in the auditor's responsibilities
for the audit of the financial statements section of our report.
We are independent of the Group and the parent company in accordance
with the ethical requirements that are relevant to our audit of the
financial statements in the UK, including the Financial Reporting
Council's (the 'FRC's') Ethical Standard as applied to listed public
interest entities, and we have fulfilled our other ethical
responsibilities in accordance with these requirements. We confirm that
the non-audit services prohibited by the FRC's Ethical Standard were not
provided to the Group or the parent company.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
3.
Summary of our audit approach
Key audit matters The key audit matters that we
identified in the current year were:
} accounting for the acquisition of Charter Court Financial Services
Group;
} classification of exceptional transaction costs and integration costs;
} loan impairment provisions; and
} effective interest rate income recognition.
Materiality The materiality that we used
for the Group financial statements was GBP14m which was determined by
reference to normalised profit before tax and net assets. Normalised
profit before tax is explained on page 156
Scoping Our Group audit scope focused
primarily on three subsidiaries subject to a full scope audit. The
subsidiaries selected for a full scope audit were OneSavings Bank plc
(company only), Charter Court Financial Services Limited and Interbay ML
Ltd. These three subsidiaries account for 98% of the Group's total
assets, 98% of the Group's total liabilities, 96% of the Group's
interest receivable and similar income and 97% of the Group's profit
before tax
4.
Going concern is the basis of preparation of the financial statements
that assumes an entity will remain in operation for a period of at least
12 months from the date of approval of the financial statements. We
confirm that we have nothing material to report, add or draw attention
to in respect of these matters. Conclusions relating to going concern,
principal risks and viability statement
4.1. Going concern
We have reviewed the directors' statement in note 2 to the financial
statements about whether they considered it appropriate to adopt the
going concern basis of accounting in preparing them and their
identification of any material uncertainties to the Group's and parent
company's ability to continue to do so over a period of at least twelve
months from the date of approval of the financial statements.
We considered as part of our risk assessment the nature of the Group,
its business model and related risks including where relevant the impact
of Brexit and COVID 19, the requirements of the applicable financial
reporting framework and the system of internal control. We evaluated the
directors' assessment of the group's ability to continue as a going
concern, including challenging the underlying data and key assumptions
used to make the assessment, and evaluated the directors' plans for
future actions in relation to their going concern assessment.
We are required to state whether we have anything material to add or
draw attention to in relation to that statement required by Listing Rule
9.8.6R(3) and report if the statement is materially inconsistent with
our knowledge obtained in the audit.
4.2. Principal risks and viability statement
Viability means the ability of the group to continue over the time
horizon considered appropriate by the directors. We confirm that we have
nothing material to report, add or draw attention to in respect of these
matters. Based solely on reading the directors' statements and
considering whether they were consistent with the knowledge we obtained
in the course of the audit, including the knowledge obtained in the
evaluation of the directors' assessment of the Group's and the parent
company's ability to continue as a going concern, we are required to
state whether we have anything material to add or draw attention to in
relation to:
-- the disclosures on pages 58 to 66 that describe the principal risks,
procedures to identify emerging risks, and an explanation of how these
are being managed or mitigated;
-- the directors' confirmation on page 58 that they have carried out a
robust assessment of the principal and emerging risks facing the group,
including those that would threaten its business model, future
performance, solvency or liquidity; or
-- the directors' explanation on pages 73 and 74 as to how they have
assessed the prospects of the Group, over what period they have done so
and why they consider that period to be appropriate, and their statement
as to whether they have a reasonable expectation that the Group will be
able to continue in operation and meet its liabilities as they fall due
over the period of their assessment, including any related disclosures
drawing attention to any necessary qualifications or assumptions.
We are also required to report whether the directors' statement relating
to the prospects of the group required by Listing Rule 9.8.6R(3) is
materially inconsistent with our knowledge obtained in the audit.
5. Key audit matters
Key audit matters are those matters that, in our professional judgement,
were of most significance in our audit of the financial statements of
the current period and include the most significant assessed risks of
material misstatement (whether or not due to fraud) that we identified.
These matters included those which had the greatest effect on: the
overall audit strategy, the allocation of resources in the audit; and
directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion thereon, and
we do not provide a separate opinion on these matters.
Independent Auditor's Report continued
To the Members of OneSavings Bank plc
5.1. Accounting for the acquisition of Charter Court Financial
Services Group ("CCFSG")
Refer to the key areas of judgements in applying accounting policies and
critical accounting estimates on page 180 and Note 4 on page 181
Key audit matter description
How the scope of our audit responded to the key audit matter
As detailed on page 181, the Group completed the acquisition of CCFSG on
4 October 2019. The acquisition resulted in a credit of GBP11m being
recognised in the consolidated income statement in respect of negative
goodwill as the amount of total consideration transferred was less than
the fair value of the net assets acquired. The acquisition of CCFSG was
a significant unusual transaction in the year that could give rise
to material misstatement in the financial statements due to fraud or
error.
Accounting for the acquisition gives rise to two key areas of management
judgement and estimation uncertainty:
} the valuation of adjustments required to reflect the assets and
liabilities of CCFSG at their fair value as at 4 October 2019; and
} the valuation of separately identifiable intangible assets as at 4
October 2019.
The Directors engaged external specialists to support their assessment
of the acquisition accounting and the completeness and valuation of
intangible assets. In accordance with IFRS 3, the Group has recognised
separate intangible assets in the combination of GBP24m and GBP187m of
net fair value adjustments to assets and liabilities.
The most significant fair value adjustment is a circa GBP300m uplift to
the valuation of loans and advances to customers compared to the
carrying amount in the books and records of CCFSG. The fair value
adjustment is individually material and is highly sensitive to changes
in key assumptions.
The Group has recognised GBP24m of separately identifiable intangible
assets of which the most significant separately identifiable intangible
asset is GBP17m and relates to broker relationships.
We obtained an understanding of the design and implementation of
relevant controls relating to the provisional accounting for the
acquisition of CCFSG.
To challenge the valuation of the loan book, we:
-- Tested the accuracy and completeness of data used by management in
deriving the fair value of the loan book;
-- Engaged our own valuation specialists to derive an independent fair value
for the two largest portfolios that make up over 90% of the fair value of
the loan book acquired and compared this to the fair value derived by
management; and
-- For the key assumptions to which the fair value was most sensitive, such
as the discount rate and prepayment rates, where relevant we examined the
consistency of those assumptions with other models used within the Group.
To challenge the valuation of the broker relationship intangible assets,
we:
-- Assessed the objectivity and expertise of the Group's external specialist
meeting with them to discuss their approach and the findings within their
final report;
-- Engaged our own valuation specialists to challenge the methodology and
assumptions used in the valuation through comparison to industry
practice;
-- Challenged the cash flow forecasts used in the valuation by reference to
historical performance and management's track record of forecasting
accuracy; and
-- Tested the appropriateness of other inputs and significant assumptions
used in valuing the broker relationships including the discount rate.
We also challenged whether further fair value adjustments are required
to the assets and liabilities of CCFSG or whether additional intangible
assets should be recognised by reference to the requirements of IFRS and
our understanding of the CCFSG balance sheet.
Key observations For the two loan portfolios that we
independently valued, we determined the fair value of the portfolios
recognised by management to be within 2% of our independent valuation.
We considered management's valuation to be reasonable.
We considered the identification of the broker relationships and the
valuation methodology used to be appropriate and in line with industry
practice. We considered the cash flow forecasts, key inputs and
assumptions to be reasonable in the context of the known facts and
circumstances and historical performance. We did not identify any
significant unrecognised fair value adjustments or intangible assets.
5.2. Classification of exceptional transaction costs and
integration costs
Refer to the Statement of Comprehensive Income, Note 12 on page 190 and
Note 13 on page 190
Key audit matter description
How the scope of our audit responded to the key audit matter
The Directors have presented exceptional transaction costs relating to
the acquisition of CCFSG of GBP15.6m and integration costs of GBP5.2m
relating to the integration of the two businesses as separate line items
on the face of the consolidated statement of comprehensive income.
Management has also excluded these items from underlying profit before
tax disclosed in the front half of the Annual Report.
There is a risk that items that reflect the underlying performance of
OSB Group are incorrectly classified as exceptional transaction and
integration costs on the face of the income statement due to fraud or
error and are therefore inappropriately excluded from the underlying
performance of the business.
We obtained an understanding of the design and implementation of
management's controls over the identification and classification of
exceptional transaction costs and integration costs.
For a sample of exceptional transaction costs and integration costs we
obtained supporting evidence to test whether the items were related to
the acquisition of CCFSG or the integration of the two businesses and
therefore whether the items were appropriately classified.
Key observations We identified no items within
exceptional transaction costs and integration costs that were
incorrectly classified.
We reviewed management's presentation of exceptional transaction costs
and integration items and consider it to be fair, balanced and
understandable.
5.3. Loan impairment provisions
Refer to the judgements in applying accounting policies and critical
accounting estimates on page 179 and Note 23 on page 196
Key audit matter description
IFRS 9 requires impairment losses to be recognised on an expected credit
loss ("ECL") basis. ECL provisions as at 31 December 2019 were GBP43m
(2018: GBP22m), which represented 0.23% (2018: 0.24%) of loans and
advances to customers. ECLs are calculated both for individually
significant loans and collectively on a portfolio basis which require
the use of statistical models incorporating loss data and assumptions on
the recoverability of customers' outstanding balances. The ECL provision
requires management to make significant judgements and estimates. We
therefore consider there to be a significant risk of material
misstatement due to fraud or error in respect of the Group's ECL
provision.
We identified five specific areas in relation to the ECL that require
significant management judgement or relate to assumptions to which the
overall ECL provision is particularly sensitive.
-- Significant increase in credit risk ("SICR"): The assessment of whether
there has been a significant increase in credit risk since origination
date of the exposure to the reporting date. Following the acquisition of
CCFSG, management aligned the staging criteria across the Group to
include both quantitative and qualitative factors in the SICR assessment.
-- Macroeconomic scenarios: Management has reassessed the macroeconomic
scenarios used in the ECL model and the probability weightings applied.
As set out on page 173, the Group sources economic forecasts from a third
party economics expert and considers a minimum of four probability
weighted scenarios, including base, upside, downside and severe downside
scenarios.
-- Propensity to go into possession given default ("PPD") assumption: The
loss given default by loan assumed in the ECL provision calculation is
sensitive to the PPD assumption which is based on historical data. PPD
measures the likelihood that a defaulted loan will progress to
repossession.
-- Forced sale discount ("FSD") assumption: The loss given default is also
sensitive to the FSD assumption which is based on historical data. FSD
measures the difference in sale proceeds between a sale under normal
conditions and a sale at auction.
-- Commercial and individually assessed collateral valuation: Management
uses an internally developed index for commercial property valuations.
The internally developed commercial property index ("CPI") is applied
annually to adjust management's commercial collateral valuations to
reflect changes
in market prices. Management uses an in-house real estate team to
estimate the market value of collateral on a case by case basis for
individually assessed loans.
Independent Auditor's Report continued
To the Members of OneSavings Bank plc
How the scope of our audit responded to the key audit matter
We obtained an understanding of the design and implementation of the key
financial controls over the ECL provision with particular focus on
controls over significant management assumptions and judgements used in
the ECL determination.
To challenge management's SICR criteria, we:
-- Assessed the probability of default ("PD") thresholds used in the SICR
assessment by reference to emerging standard validation metrics including
the proportion of transfers to stage two driven solely by being 30 days
past due, the volatility of loans in stage two and the proportion of
loans that spend little or no time in stage two before moving to stage
three.
-- Assessed the transfer criteria methodology applied against best practice
and considered whether the Group's staging judgements have been
appropriately implemented in the model design.
-- Tested whether the PD thresholds set by management had been appropriately
applied in practice as at 31 December 2019.
-- Performed an independent assessment for a sample of loan accounts to
determine whether they have been appropriately allocated to the correct
stage.
To challenge management's macro-economic scenarios and the probability
weightings applied we:
-- Reviewed management's assessment of scenarios considered and the
probability weightings assigned to them in light of the economic position
as at 31 December 2019.
-- Agreed the macroeconomics scenarios used in the ECL model to a report
prepared by the third party economics expert dated December 2019.
-- Made specific inquiries of the third party economics expert to understand
their approach and modelling assumptions to derive the scenarios.
} Assessed the competence, capability and objectivity of the third party
economics expert.
-- Engaged our economic specialists to challenge the third party economics
expert's outlook by reference to other available economic outlook data.
-- Performed a peer benchmarking exercise to check the appropriateness of
selected macroeconomic variables and weightings. The key economic
variables were the house price index ("HPI"), unemployment and base rate.
-- Engaged our analytics and modelling specialists to review the model
methodology and computer code in the macroeconomics overlay model which
applies the scenarios to each ECL component.
-- For a sample of loans, we independently recalculated the ECL using the
macroeconomic variables to check they were being applied appropriately.
To challenge management's PPD and FSD assumptions we:
-- Involved our analytics and modelling specialists to challenge the model
methodology and computer code in the loss given default ("LGD") models.
-- Recalculated the PPD rates observed on defaulted cases and compared them
with the rates used by management.
-- Recalculated the FSD observed on recent property sales on defaulted
accounts and compared them with the rates used by management.
-- Assessed the appropriateness of PPD and FSD assumptions adopted by
management through benchmarking to industry peers.
We performed the following procedures to challenge management's
internally developed index for commercial property valuations and
management's case by case estimate of the market value of collateral for
individually assessed loans:
-- Engaged our in-house property valuation specialists to examine
management's valuation policies and to challenge a sample of collateral
valuations for individually assessed loans by reference to available
market data.
-- Selected a sample of the commercial properties used by management to
derive the CPI and worked with our property valuation specialists to
challenge the collateral valuations used by reference to available market
data.
-- Selected a sample of other commercial properties not considered by
management in determining the CPI to challenge the collateral valuations
and assess whether management had applied any bias in their selection of
properties.
-- Tested the mechanical accuracy of management's CPI calculation and that
the indexed valuation was appropriately applied in the ECL determination.
Key observations We determined that the methodology
used and the SICR criteria, PPD and FSD assumptions management have made
in determining the ECL provision as at 31 December were reasonable.
We determined management's collateral valuations to be reasonable and
the CPI to be appropriately determined and applied.
We did not identify any issues in the competence, capability and
objectivity of the third party economic expert. Notwithstanding that
estimating the probability and impact of future economic outcomes is
inherently judgemental, on balance, we consider that the macroeconomic
scenarios selected by the Directors and the probability weightings
applied generate an appropriate portfolio loss distribution including a
15% weighting to a relatively severe economic downturn scenario. The
Directors have appropriately included sensitivity analysis on page 180
showing the impact on the ECL of a 100% weighting to each scenario.
5.4. Effective interest rate income recognition
Refer to the judgements in applying accounting policies and critical
accounting estimates on page 180, the accounting policy on page 168 and
Notes 5 and 6 on page 183
Key audit matter description
In accordance with the requirements of IFRS 9, the Group is required to
spread directly attributable fees, discounts, incentives and commissions
on a constant yield basis ("effective interest rate, EIR") over the
shorter of the expected and contractual life of loan assets. EIR is
complex and the Group's approach to determining the EIR involves the use
of models and significant estimation in determining the behavioural life
of loan assets. Given the complexity and judgement involved in
accounting for EIR, there is an opportunity and incentive for management
to potentially manipulate the amount of interest income reported in the
financial statements and revenue recognition is an area susceptible to
fraud.
The Group's net interest income for the year ended 31 December 2019 was
GBP345m.
EIR adjustments arise from revisions to estimated cash receipts or
payments for loan assets that occur for reasons other than a movement in
market interest rates or credit losses. They result in an adjustment to
the carrying amount of the loan asset, with the adjustment recognised in
the income statement in interest income and similar income. As the EIR
adjustments reflect changes to the timing and volume
of forecast customer redemptions, they are inherently judgemental. The
level of judgement exercised by management is increased given the
limited availability of historical repayment information. For two of the
loans portfolios, KRBS and Precise, the EIR adjustments are sensitive to
changes in the behavioural life "curves". We have therefore identified
the estimation of the behavioural life for these portfolios as focus
area of our audit.
We also identified a significant risk of material misstatement in
relation to EIR adjustments on the Group's legacy acquired portfolios.
EIR on acquired loan portfolios is inherently more judgemental than
originated loan portfolios as it involves modelling the expected cash
flows on acquisition and comparing to actual and forecast cash flows at
each balance sheet date. These loan portfolios are also underwritten
outside of the Group's standard processes and therefore may have
different profiles than self-originated loans.
As set out on page 168, the Group monitors the actual cash flows for
each acquired book and where they diverge significantly from expectation,
the future cash flows are "reset". In assessing whether to adjust future
cash flows on an acquired portfolio, the Group considers the cash
variance on an absolute and percentage basis. The Group also considers
the total variance across all acquired portfolios. Where cash flows for
an acquired portfolio are reset, they are discounted at the EIR to
derive a new carrying value, with changes taken to profit or loss as
interest income.
Independent Auditor's Report continued
To the Members of OneSavings Bank plc
How the scope of our audit responded to the key audit matter
We obtained an understanding of the design and implementation of key
controls over EIR, focusing on the calculation and review of EIR
adjustments and the determination of prepayment curves.
For the two portfolios where the EIR adjustments were most significant
and sensitive to changes in behavioural life, we involved our in-house
modelling specialists to run the Group's loan data for all products
through our own independent EIR model, using the behavioural life curves
derived by the Group. We compared our calculation of the EIR adjustment
required to the amount recorded by management.
For the same portfolios, we also worked with our in-house modelling
specialists to independently derive a behavioural life curve using the
Group's loan data tapes over recent years. We used these curves in our
own independent EIR model to derive an independent output showing the
EIR adjustments that should have been recorded in 2019. We compared this
output to the amounts recorded by management.
We also tested the completeness and accuracy of a sample of inputs into
the EIR model for originated loans.
For the legacy acquired portfolios, we tested the completeness and
accuracy of actual cash flow data used in the Group's reset analysis.
For a sample of legacy acquired portfolios where the Group's analysis
determined that a reset was required based on variances in actual cash
flow data compared to expected cash flows, we challenged the assumptions
and modelling approach taken to determine the EIR adjustment by testing
a sample of inputs to the analysis, reperforming the discounted cash
flow calculation for a sample of loans and challenging whether forecasts
were consistent with historical performance and our understanding of the
nature of the cash flows.
Key observations We determined that the EIR models
and assumptions used were appropriate and that net interest income for
the period is not materially misstated.
6. Our application of materiality
6.1. Materiality
We define materiality as the magnitude of misstatement in the financial
statements that makes it probable that the economic decisions of a
reasonably knowledgeable person would be changed or influenced. We use
materiality both in planning the scope of our audit work and in
evaluating the results of our work.
Based on our professional judgement, we determined materiality for the
financial statements as a whole as follows:
Group financial statements Parent
company financial statements
Materiality GBP14.0m GBP10.2m
--------------------- -----------------------------------------------------------------
Basis for determining We determined materiality for the Group by We determined
materiality materiality based on 5% of reference to a range of GBP11m
to GBP15m based on 5% normalised profit before tax. We
excluded
of normalised profit before tax of GBP219m and 1% of integration
costs and exceptional transaction costs net assets of
GBP1,477m as at 31 December 2019. from statutory profit
before tax, consistent with our
approach to Group materiality.
Normalised profit before tax is statutory profit before
tax of GBP209m excluding the negative goodwill credit
of GBP11m, integration costs of GBP5m and the exceptional
transaction costs of GBP16m.
6.2. Performance materiality
As a listed company, we normally consider a profit based measure to be
the most relevant benchmark for users of the accounts given the Group's
stakeholder focus on maximising returns. However, we have not used a
purely profit based measure to determine materiality as the balance
sheet of the consolidated Group has increased significantly as a result
of the acquisition of CCFSG but, given the timing of the acquisition,
there has not been a commensurate increase
in the consolidated Group's profit before tax. As a result, we concluded
that a materiality based solely on the profit of the consolidated Group
is
not appropriate and we therefore also considered the net assets as at 31
December 2019.
Given the volatility expected in statutory profit before tax as a result
of the CCFSG acquisition, we consider normalised profit before tax to be
a more stable metric for the consolidated Group's profitability.
We consider a profit based measure to be the most relevant benchmark for
users of the accounts given the parent company is publically listed with
stakeholder focus on maximising returns.
We set performance materiality at a level lower than materiality to
reduce the probability that, in aggregate, uncorrected and undetected
misstatements exceed the materiality for the financial statements as a
whole. Group performance materiality of GBP9.8m was set at 70% of Group
materiality for the 2019 audit. In determining performance materiality,
we considered a number of factors, including: our understanding of the
control environment, including entity-level controls and the degree of
centralisation of controls and processes; our understanding of the
business through our work performed at the planning stage and as part of
the interim review for the six months ended 30 June 2019; and the low
number of uncorrected misstatements identified in the prior year.
6.3. Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee
all audit differences in excess of GBP0.7m for the Group and GBP0.5m for
the parent company, as well as differences below that threshold that, in
our view, warranted reporting on qualitative grounds. We also report to
the Audit Committee on disclosure matters that we identified when
assessing the overall presentation of the financial statements.
7.An overview of the scope of our audit
Our Group audit was scoped by obtaining an understanding of the Group
and its environment, including group-wide controls and assessing the
risks of material misstatement at the Group level.
Our Group audit scope focused primarily on three subsidiaries: the two
main banking entities OneSavings Bank plc (company only) and Charter
Court Financial Services Limited, as well as Interbay ML Ltd, another
significant lending subsidiary. These three subsidiaries were
significant components and subject to a full scope audit. They represent
96% of the Group's interest receivable
and similar income, 97% of profit before tax, 98% of total assets and
98% of total liabilities. The subsidiaries were selected to provide an
appropriate basis of undertaking audit work to address the risks of
material misstatement including those identified as key audit matters
above. Our audits of each of the subsidiaries were performed using lower
levels of materiality based on their size relative to the Group. The
materiality for each subsidiary audit ranged from GBP5.4m to GBP10.2m.
Independent Auditor's Report continued
To the Members of OneSavings Bank plc
Interest receivable and similar income
Profit before tax
Total assets
Total liabilities
-- Full audit scope 96%
-- Review at group level 4%
-- Full audit scope 97%
-- Review at group level 3%
-- Full audit scope 98%
-- Review at group level 2%
-- Full audit scope 98%
-- Review at group level 2%
All audit work for the purposes of the Group audit was performed by
Deloitte LLP in the UK. The audit team for the Group and the parent
company were based in London. There was a separate component audit team
for the component audit of Charter Court Financial Services Limited
which is based in Wolverhampton. The Senior Statutory Auditor has
responsibility for directing and supervising all aspects of the audit
work of the component auditor. In discharging this responsibility, he
met local management and had regular meetings with the component audit
team to oversee the component audit. Members of the Group audit team
also visited the component audit team as well as performing a remote
file review of their work. The Group audit team maintained dialogue with
the component auditor throughout all phases of the audit and received
written reports from the component auditor setting out the results of
their audit procedures.
We tested the Group's consolidation process and carried out analytical
procedures to confirm that there were no significant risks of material
misstatement in the aggregated financial information of the remaining
subsidiaries not subject to a full scope audit or specified audit
procedures.
8. Other information
The directors are responsible for the other information. The other
information comprises the information included in the annual report,
other than the financial statements and our auditor's report thereon.
Our opinion on the financial statements does not cover the other
information and, except to the extent otherwise explicitly stated in our
report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent with
the financial statements or our knowledge obtained in the audit or
otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent material
misstatements, we are required to determine whether there is a material
misstatement in the financial statements or a material misstatement of
the other information. If, based on the work we have performed, we
conclude that there is a material misstatement of this other information,
we are required to report that fact.
In this context, matters that we are specifically required to report to
you as uncorrected material misstatements of the other information
include where we conclude that:
-- Fair, balanced and understandable -- the statement given by the directors
that they consider the annual report and financial statements taken as a
whole is fair, balanced and understandable and provides the information
necessary for shareholders to assess the group's position and performance,
business model and strategy, is materially inconsistent with our
knowledge obtained in the audit; or
-- Audit committee reporting -- the section describing the work of the audit
committee does not appropriately address matters communicated by us to
the audit committee; or
-- Directors' statement of compliance with the UK Corporate Governance Code
-- the parts of the directors' statement required under the Listing Rules
relating to the company's compliance with the UK Corporate Governance
Code containing provisions specified for review by the auditor in
accordance with Listing Rule 9.8.10R(2) do not properly disclose a
departure from a relevant provision of the UK Corporate Governance Code.
We have nothing to report in respect of these matters.
9. Responsibilities of directors
As explained more fully in the directors' responsibilities statement,
the directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view,
and for such internal control as the directors determine is necessary to
enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for
assessing the Group's and the parent company's ability to continue as a
going concern, disclosing as applicable, matters related to going
concern and using the going concern basis of accounting unless the
directors either intend to liquidate the Group or the parent company or
to cease operations, or have no realistic alternative but to do so.
10. Auditor's responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the
financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor's report that
includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with ISAs
(UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material
if, individually or in the aggregate, they could reasonably be expected
to influence the economic decisions of users taken on the basis of these
financial statements.
Details of the extent to which the audit was considered capable of
detecting irregularities, including fraud and non-compliance with laws
and regulations are set out below.
A further description of our responsibilities for the audit of the
financial statements is located on the FRC's website at: www.frc.org.uk/
auditorsresponsibilities. This description forms part of our auditor's
report.
11. Extent to which the audit was considered capable of detecting
irregularities, including fraud
We identify and assess the risks of material misstatement of the
financial statements, whether due to fraud or error, and then design and
perform audit procedures responsive to those risks, including obtaining
audit evidence that is sufficient and appropriate to provide a basis for
our opinion.
11.1. Identifying and assessing potential risks related to
irregularities
In identifying and assessing risks of material misstatement in respect
of irregularities, including fraud and non-compliance with laws and
regulations, we considered the following:
-- the nature of the industry and sector, control environment and business
performance including the design of the Group's remuneration policies,
key drivers for directors' remuneration, bonus levels and performance
targets;
-- the Group's own assessment of the risks that irregularities may occur
either as a result of fraud or error that was approved by the Board;
-- results of our enquiries of management, internal audit and the audit
committee about their own identification and assessment of the risks of
irregularities;
} any matters we identified having obtained and reviewed the Group's
documentation of their policies and procedures relating to:
-- identifying, evaluating and complying with laws and regulations and
whether they were aware of any instances of non-compliance;
-- detecting and responding to the risks of fraud and whether they have
knowledge of any actual, suspected or alleged fraud;
-- the internal controls established to mitigate risks of fraud or
non-compliance with laws and regulations;
-- the matters discussed among the audit engagement team including the
component audit team and involving relevant internal specialists,
including tax, valuations, real estate, IT and credit specialists
regarding how and where fraud might occur in the financial statements and
any potential indicators of fraud.
As a result of these procedures, we considered the opportunities and
incentives that may exist within the organisation for fraud and
identified the greatest potential for fraud in the following areas which
are referred to as key audit matters above: accounting for the
acquisition of CCFSG, classification of exceptional transaction costs
and integration costs, loan impairment provisions and effective interest
rate income recognition. In common with all audits under ISAs (UK), we
are also required to perform specific procedures to respond to the risk
of management override.
We also obtained an understanding of the legal and regulatory frameworks
that the Group operates in, focusing on provisions of those laws and
regulations that had a direct effect on the determination of material
amounts and disclosures in the financial statements.
The key laws and regulations we considered in this context included the
relevant provisions of the UK Companies Act 2006, Listing Rules and tax
legislation.
In addition, we considered provisions of other laws and regulations that
do not have a direct effect on the financial statements but compliance
with which may be fundamental to the Group's ability to operate or to
avoid a material penalty. These included the Group's prudential
regulatory requirements and capital, liquidity and conduct requirements.
Independent Auditor's Report continued
To the Members of OneSavings Bank plc
11.2. Audit response to risks identified
As a result of performing the above, we identified accounting for the
acquisition of CCFSG, classification of exceptional transaction costs
and integration costs, loan impairment provisions and revenue
recognition using the effective interest rate as key audit matters
related to the potential risk of fraud. The key audit matters section of
our report explains the matters in more detail and also describes the
specific procedures we performed in response to those key audit matters.
In addition to the above, our procedures to respond to risks identified
included the following:
-- reviewing the financial statement disclosures and testing to supporting
documentation to assess compliance with provisions of relevant laws and
regulations described as having a direct effect on the financial
statements;
-- enquiring of management, the audit committee and in-house and external
legal counsel concerning actual and potential litigation and claims;
-- performing analytical procedures to identify any unusual or unexpected
relationships that may indicate risks of material misstatement due to
fraud;
-- reading minutes of meetings of those charged with governance, reviewing
internal audit reports and reviewing correspondence with the Prudential
Regulation Authority, the Financial Conduct Authority and HMRC;
-- in addressing the risk of fraud through management override of controls,
testing the appropriateness of journal entries and other adjustments;
assessing whether the judgements made in making accounting estimates are
indicative of a potential bias; and evaluating the business rationale of
any significant transactions that are unusual or outside the normal
course of business.
We also communicated relevant identified laws, regulations and potential
fraud risks to all engagement team members including internal
specialists and the component audit team and remained alert to any
indications of fraud or non-compliance with laws and regulations
throughout the audit.
Report on other legal and regulatory requirements
12. Opinions on other matters prescribed by the Companies Act 2006
13. Opinion on other matter prescribed by the Capital Requirements
(Country-by-Country Reporting) Regulations 2013
In our opinion the information given in note 49 to the financial
statements for the financial year ended 31 December 2019 has been
properly prepared, in all material respects, in accordance with the
Capital Requirements (Country-by-Country Reporting) Regulations 2013.
14. Matters on which we are required to report by exception
14.1. Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our
opinion:
} we have not received all the information and explanations we require
for our audit; or
} adequate accounting records have not been kept by the parent company,
or returns adequate for our audit have not been received from branches
not visited by us; or
} the parent company financial statements are not in agreement with the
accounting records and returns.
We have nothing to report in respect of these matters.
14.2. Directors' remuneration
Under the Companies Act 2006 we are also required to report if in our
opinion certain disclosures of directors' remuneration have not been
made or the part of the directors' remuneration report to be audited is
not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
15. Other matters
15.1. Auditor tenure
Following the recommendation of the audit committee, we were appointed
by the shareholders of the Group on 9 May 2019 to audit the financial
statements for the year ended 31 December 2019 and subsequent financial
periods. The period of total uninterrupted engagement including previous
renewals and reappointments of the firm is one year, covering the year
ended 31 December 2019.
15.2. Consistency of the audit report with the additional report
to the audit committee
Our audit opinion is consistent with the additional report to the audit
committee we are required to provide in accordance with ISAs (UK).
16. Use of our report
This report is made solely to the company's members, as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the company's
members those matters we are required to state to them in an auditor's
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 and the company's members as a body, for our audit work, for
this report, or for the opinions we have formed.
Robert Topley FCA (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor London, United Kingdom 19 March 2020
Statement of Comprehensive Income
For the year ended 31 December 2019
Restated
Group Group1
2019 2018
Note GBPm GBPm
------------- --------------
Interest receivable and similar income 5 539.9 407.9
Interest payable and similar charges 6 (195.2) (121.6)
------------- --------------
Net interest income 344.7 286.3
Fair value losses on financial instruments 7 (3.3) (5.1)
Loss on sale of financial instruments 8 (0.1) (0.1)
Fees and commissions receivable 3.4 1.7
Fees and commissions payable (1.2) (1.1)
External servicing fees (0.1) (0.6)
Total income 343.4 281.1
Administrative expenses 9 (108.7) (79.6)
Provisions 38 -- (0.8)
Impairment losses 24 (15.6) (8.1)
Gain on Combination with CCFS 4 10.8 --
Integration costs 12 (5.2) --
Exceptional items 13 (15.6) (9.8)
Profit before taxation 209.1 182.8
Taxation 14 (50.3) (43.2)
Profit for the year 158.8 139.6
-------------
Other comprehensive expense
Items which may be reclassified to profit or loss:
Fair value changes on financial instruments
measured as FVOCI:
Arising in the year 0.8 (0.2)
Revaluation of foreign operations (0.6) (0.2)
Tax on items in other comprehensive expense (0.2) --
Other comprehensive expense -- (0.4)
Total comprehensive income for the year 158.8 139.2
-------------
Dividend, pence per share 16 16.1 14.6
Earnings per share, pence per share 15 52.6 55.5
Basic Diluted 15 52.2 55.0
--------- ------------- --------------
1. The Group has restated the prior year comparatives to recognise
interest expense and taxation on the GBP22.0m Perpetual Subordinated
Bonds previously classified as equity (see note 1).
The above results are derived wholly from continuing operations. The
notes on pages 166 to 258 form part of these accounts.
The financial statements on pages 162 to 258 were approved by the Board
of Directors on 19 March 2020.
Statement of Financial Position
As at 31 December 2019
Restated Restated
Group Group1 Bank1
2019 2018 Bank 2019 2018
Note GBPm GBPm GBPm GBPm
----------- ------------ --------------- ------------
Assets
Cash in hand 0.4 0.4 0.4 0.4
Loans and advances to credit institutions 18 2,204.6 1,347.3 1,196.0 1,340.0
Investment securities 19 635.3 58.9 149.8 58.9
Loans and advances to customers 20 18,446.8 8,983.3 8,394.2 7,208.2
Fair value adjustments on hedged assets 26 16.8 19.8 52.8 19.8
Derivative assets 25 21.1 11.7 8.7 11.7
Other assets 27 14.3 5.7 7.5 5.5
Deferred taxation asset 28 4.8 3.5 2.2 1.6
Property, plant and equipment 29 41.6 21.8 21.2 15.6
Intangible assets 30 31.4 7.8 7.7 7.1
Investments in subsidiaries and intercompany
loans 31 -- -- 3,629.4 1,900.7
---------------
Total assets 21,417.1 10,460.2 13,469.9 10,569.5
---------------
Liabilities
Amounts owed to credit institutions 32 3,068.8 1,584.0 1,671.1 1,584.0
Amounts owed to retail depositors 33 16,255.0 8,071.9 9,435.7 8,071.9
Fair value adjustments on hedged liabilities
26 (5.1) -- (0.1) --
Amounts owed to other customers 34 29.7 32.9 8.9 32.9
Debt securities in issue 35 296.3 -- -- --
Derivative liabilities 25 92.8 24.9 54.3 24.9
Lease liabilities 36 13.3 -- 4.3 --
Other liabilities 37 34.9 18.7 17.1 14.7
Provisions 38 1.6 1.8 1.6 1.8
Current taxation liability 41.5 19.2 16.4 15.0
Deferred taxation liability 28 63.1 -- -- --
Deemed loan liabilities 21 -- -- 240.2 --
Intercompany loans 31 -- -- 643.9 262.4
Subordinated liabilities 39 10.6 10.8 10.6 10.8
Perpetual subordinated bonds 40 37.6 37.6 37.6 37.6
Equity 19,940.1 9,801.8 12,141.6 10,056.0
Share capital 42 4.5 2.4 4.5 2.4
Share premium 42 864.2 158.8 864.2 158.8
Retained earnings 553.2 439.3 407.0 296.7
Other reserves 43 55.1 57.9 52.6 55.6
1,477.0 658.4 1,328.3 513.5
---------------
Total equity and liabilities 21,417.1 10,460.2 13,469.9 10,569.5
---------------
1. The Group has restated the prior year comparatives to classify
the GBP22.0m Perpetual Subordinated Bonds previously classified as
equity as a liability (see note 1).
The profit after tax for the year ended 31 December 2019 of OneSavings
Bank plc as a Company was GBP155.2m (2018: GBP96.2m).
As permitted by section 408 of the Companies Act 2006, no separate
Statement of Comprehensive Income is presented in respect of the
Company.
The notes on pages 166 to 258 form part of these accounts. The financial
statements on pages 162 to 258 were approved by the Board of Directors
on 19 March 2020.
Andy Golding April Talintyre
Chief Executive Officer Chief Financial Officer
Company number: 07312896
Statement of Changes in Equity
For the year ended 31 December 2019
Share capital
Share premium
Capital contribution
Transfer reserve
Own shares1
Foreign exchange reserve
FVOCI
reserve
Share- based payment reserve
Retained earnings
Equity bonds2
Total
Group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------- ------- -------
At 31 December 2017 2.4 158.4 6.4 (12.8) -- (0.2) 0.1 5.0 334.6 82.0 575.9
PSB restatement -- -- -- -- -- -- -- -- (0.3) (22.0) (22.3)
------- ------- -------
Restated at 31 December
2017 2.4 158.4 6.4 (12.8) -- (0.2) 0.1 5.0 334.3 60.0 553.6
Profit for the year -- -- -- -- -- -- -- -- 139.6 -- 139.6
Coupon paid on equity
bonds -- -- -- -- -- -- -- -- (5.5) -- (5.5)
Dividends paid -- -- -- -- -- -- -- -- (33.2) -- (33.2)
Other comprehensive
income -- -- -- -- -- (0.2) (0.2) -- -- -- (0.4)
Share-based payments -- 0.4 0.1 -- -- -- -- (0.3) 2.6 -- 2.8
Tax recognised in
equity -- -- -- -- -- -- -- -- 1.5 -- 1.5
------- ------- -------
At 31 December 2018 2.4 158.8 6.5 (12.8) -- (0.4) (0.1) 4.7 439.3 60.0 658.4
Profit for the year -- -- -- -- -- -- -- -- 158.8 -- 158.8
Shares issued as consideration
for CCFS Combination3 2.0 705.1 -- -- -- -- -- -- (6.4) -- 700.7
Own shares1 -- -- -- -- (3.7) -- -- -- -- -- (3.7)
Coupon paid on equity
bonds -- -- -- -- -- -- -- -- (5.5) -- (5.5)
Dividends paid -- -- -- -- -- -- -- -- (37.3) -- (37.3)
Other comprehensive
income -- -- -- -- -- (0.6) 0.8 -- -- -- 0.2
Share-based payments 0.1 0.3 -- -- -- -- -- (0.2) 4.3 -- 4.5
Tax recognised in
equity -- -- -- -- -- -- (0.2) 1.1 -- -- 0.9
At 31 December 2019 4.5 864.2 6.5 (12.8) (3.7) (1.0) 0.5 5.6 553.2 60.0 1,477.0
Share-
based
Share Capital Transfer Own FVOCI payment Retained Equity
Share capital premium contribution reserve shares1 reserve reserve earnings bonds2 Total
Bank GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 31 December 2017 2.4 158.4 6.1 (15.2) -- 0.1 4.9 236.1 82.0 474.8
PSB restatement -- -- -- -- -- -- -- (0.3) (22.0) (22.3)
Restated at 31 December
2017 2.4 158.4 6.1 (15.2) -- 0.1 4.9 235.8 60.0 452.5
Profit for the year -- -- -- -- -- -- -- 95.5 -- 95.5
Coupon paid on equity
bonds -- -- -- -- -- -- -- (5.5) -- (5.5)
Dividends paid -- -- -- -- -- -- -- (33.2) -- (33.2)
Other comprehensive
income -- -- -- -- -- (0.2) -- -- -- (0.2)
Share-based payments -- 0.4 0.1 -- -- -- (0.2) 2.6 -- 2.9
Tax recognised in equity -- -- -- -- -- -- -- 1.5 -- 1.5
At 31 December 2018 2.4 158.8 6.2 (15.2) -- (0.1) 4.7 296.7 60.0 513.5
Profit for the year -- -- -- -- -- -- -- 155.2 -- 155.2
Shares issued as consideration
for CCFS Combination3 2.0 705.1 -- -- -- -- -- (6.4) -- 700.7
Own Shares1 -- -- -- -- (3.7) -- -- -- -- (3.7)
Coupon paid on equity bonds -- -- -- -- -- -- -- (5.5) -- (5.5)
Dividends paid -- -- -- -- -- -- -- (37.3) -- (37.3)
Other comprehensive income -- -- -- -- -- 0.1 -- -- -- 0.1
Share-based payments 0.1 0.3 -- -- -- -- (0.2) 4.3 -- 4.5
Tax recognised in equity -- -- -- -- -- -- 0.8 -- -- 0.8
At 31 December 2019 4.5 864.2 6.2 (15.2) (3.7) -- 5.3 407.0 60.0 1,328.3
1. OSB has adopted look-through accounting and recognised the CCFS Employee
Benefit Trust within the Bank.
2. Equity bonds comprise GBP60.0m of Additional Tier 1 securities. The Group
has restated the prior year comparatives to classify the GBP22.0m
Perpetual Subordinated Bonds previously classified as equity as a
liability (see note 1).
3. Shares issued as consideration for CCFS Combination includes GBP6.4m of
expenses recognised directly in equity relating to the issuance of new
shares.
The reserves are further disclosed in note 43.
Statement of Cash Flows
For the year ended 31 December 2019
Restated Restated
Group Group1 Bank1
2019 2018 Bank 2019 2018
Note GBPm GBPm GBPm GBPm
----------- ------------ --------------- ------------
Cash flows from operating activities
Profit before taxation 209.1 182.8 189.4 128.6
Expenses recognised in equity (6.4) -- (6.4) --
Adjustments for non-cash items2 50 26.2 36.7 33.2 35.1
Changes in operating assets and liabilities2
50 (711.8) (265.8) (577.4) (219.0)
Cash used in operating activities (482.9) (46.3) (361.2) (55.3)
Provisions (0.2) (0.4) (0.2) (0.4)
Net tax paid (53.0) (39.1) (32.4) (30.3)
Net cash used in operating activities (536.1) (85.8) (393.8) (86.0)
Cash flows from investing activities
Unencumbered cash acquired on CCFS
Combination 870.4 -- -- --
Maturity and sales of investment securities 19 357.7 39.9 349.0 39.9
Purchases of investment securities 19 (389.9) (79.9) (389.9) (79.9)
Sales of financial instruments 8 -- 0.4 -- 0.4
Purchases of equipment and intangible
assets 30,29 (11.6) (6.0) (6.7) (5.2)
Cash generated from/(used in) investing activities 826.6 (45.6) (47.6) (44.8)
Cash flows from financing activities
Financing received2 41 872.7 330.7 601.8 330.7
Financing repaid2 41 (338.5) (0.1) (275.0) (0.1)
Interest paid on bonds and subordinated debt (2.6) (2.6) (2.5) (2.6)
Coupon paid on equity bonds (5.5) (5.5) (5.5) (5.5)
Dividends paid 16 (37.3) (33.2) (37.3) (33.2)
Proceeds from issuance of shares under employee
SAYE schemes 42 0.4 0.4 0.4 0.4
Cash payments on lease liabilities 36 (1.1) -- (0.8) --
Cash generated from financing activities 488.1 289.7 281.1 289.7
---------------
Net increase/(decrease) in cash and cash
equivalents 778.6 158.3 (160.3) 158.9
Cash and cash equivalents at the beginning
of the year 17 1,324.2 1,165.9 1,316.9 1,158.0
Cash and cash equivalents at the end
of the year 17 2,102.8 1,324.2 1,156.6 1,316.9
---------------
Movement in cash and cash equivalents 778.6 158.3 (160.3) 158.9
1. The Group has restated the prior year comparatives for the interest
expense on the GBP22.0m Perpetual Subordinated Bonds previously
classified as equity (see note 1).
2. The Group has reclassified the prior year comparatives to include all
components of amounts owed to credit institutions as financing
activities. Previously the Group only classified the Bank of England Term
Funding Scheme and Indexed Long-Term Repo scheme as financing activities.
Notes to the Financial Statements
For the year ended 31 December 2019
1. Restatement of prior year
During the year the Group and Bank identified that a clause in the terms
of the Group's GBP22.0m Perpetual Subordinated Bonds ('PSB') relating to
the Board's discretion over the payment of coupons was conditional and
hence the PSBs were incorrectly classified as equity. The Group and Bank
have restated the 2018 comparatives accordingly to classify the GBP22.0m
PSBs as a financial liability. The impact of adjusting the prior year
reported balances is shown in the table below:
Restated Restated
Group Adjustment Group Bank Adjustment Bank
1 January 2018 GBPm GBPm GBPm GBPm GBPm GBPm
Statement of Financial Position
Liabilities:
Perpetual subordinated bonds 15.3 22.3 37.6 15.3 22.3 37.6
Equity:
Retained earnings 334.6 (0.3) 334.3 236.1 (0.3) 235.8
Other reserves 82.0 (22.0) 60.0 82.0 (22.0) 60.0
31 December 2018
Statement of Financial Position
Liabilities:
Perpetual subordinated bonds 15.3 22.3 37.6 15.3 22.3 37.6
Equity:
Retained earnings 439.6 (0.3) 439.3 297.0 (0.3) 296.7
Other reserves 79.9 (22.0) 57.9 77.6 (22.0) 55.6
Statement of Changes in Equity
Retained earnings 439.6 (0.3) 439.3 297.0 (0.3) 296.7
Equity bonds 82.0 (22.0) 60.0 82.0 (22.0) 60.0
Statement of Cash Flows
Profit before taxation 183.8 (1.0) 182.8 129.6 (1.0) 128.6
Adjustments for non-cash items 32.7 1.0 33.7 31.1 1.0 32.1
Interest paid on bonds and subordinated
debt (1.6) (1.0) (2.6) (1.6) (1.0) (2.6)
Coupon paid on equity bonds (6.5) 1.0 (5.5) (6.5) 1.0 (5.5)
Statement of Comprehensive Income
Interest expense (120.6) (1.0) (121.6)
Profit before taxation 183.8 (1.0) 182.8
Taxation (43.5) 0.3 (43.2)
Profit for the year 140.3 (0.7) 139.6
2. Accounting policies
The principal accounting policies applied in the preparation of the
financial statements for the Group and the Bank are set out below.
a) Basis of preparation
The financial statements have been prepared in accordance with
International Financial Reporting Standards ('IFRSs') as adopted by the
European Union ('EU') and interpretations issued by the International
Financial Reporting Interpretations Committee ('IFRIC').
The financial statements have been prepared on a historical cost basis,
as modified by the revaluation of investment securities held at fair
value through other comprehensive income ('FVOCI') and derivative
contracts and other financial assets held at fair value through profit
or loss ('FVTPL') (see note o(vi)).
As permitted by section 408 of the Companies Act 2006, no Statement of
Comprehensive Income is presented for the Bank.
b) 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. The stress scenarios include Brexit scenarios, the impact of
Bank of England ('BoE') Term Funding Scheme ('TFS') repayments and the
introduction of a COVID-19 pandemic scenario.
These pandemic scenarios may continue to evolve, but at the present time
they are less severe across the key macroeconomic
variables than the most severe stress tests run by the Group, including
the BoE's rates down scenarios. The Group's projections and stress
scenarios show that the Group has sufficient capital and liquidity to
continue to meet its regulatory requirements as set by the Prudential
Regulatory Authority ('PRA').
The Board has therefore concluded that the Group has sufficient
resources to continue in operational existence for a period in excess of
12 months and as a result it is appropriate to prepare these financial
statements on a going concern basis.
c) Basis of consolidation
The Group accounts include the results of the Bank and its subsidiary
undertakings. Subsidiaries are fully consolidated from the date on which
control is transferred to the Group and are deconsolidated from the date
that control ceases. Upon consolidation,
intercompany transactions, balances and unrealised gains on transactions
are eliminated. Unrealised losses are also eliminated unless the
transaction provides evidence of impairment of the asset transferred.
Accounting policies of subsidiaries have been changed where necessary to
ensure consistency with the policies adopted by the Group.
Subsidiaries are those entities, including structured entities, over
which the Group has control. The Group controls an entity when it is
exposed, or has rights, to variable returns from its involvement with
the entity and has the ability to affect those returns through its power
over the investee. The Group has power over an entity when it has
existing rights that give it the current ability to direct the
activities that most significantly affect the entity's returns. Power
may be determined on the basis of voting rights or, in the case of
structured entities, other contractual arrangements.
The Group manages the administration of its securitised assets and is
exposed to the risks and rewards of the underlying mortgage assets
through its continued subordinated investment in the securitisation
structures. Where the Group does not retain a direct ownership interest
in a securitisation entity, but the Directors have determined that the
Group controls those entities, they are treated as subsidiaries and are
consolidated. Control is determined to exist if the Group has the power
to direct the activities of each entity (for example, managing the
performance of the underlying mortgage assets and raising debt on those
mortgage assets which is used to fund the Group) and in addition to this
control is exposed to a variable return (for example, retaining the
residual risk on the mortgage assets). Securitisation structures that do
not meet these criteria are not treated as subsidiaries and the mortgage
assets are derecognised when they are sold. The Bank applies the net
approach in accounting for securitisation structures where it retains an
interest in the securitisation, netting the loan notes held against the
deemed loan balance.
The Group's Employee Benefit Trusts ('EBT') are controlled and
recognised by the Bank using the look-through approach.
The Group is not deemed to control an entity when it exercises power
over an entity in an agency capacity. In determining whether the Group
is acting as an agent, the Directors consider the overall relationship
between the Group, the investee and other parties to the arrangement
with respect to the following factors: (i) the scope of the Group's
decision-making power; (ii) the rights held by other parties; (iii) the
remuneration to which the Group is entitled; and (iv) the Group's
exposure to variability of returns. The determination of control is
based on the current facts and circumstances and is continuously
assessed. In some circumstances, different factors and conditions may
indicate that different parties control an entity depending on whether
those factors and conditions are assessed in isolation or in totality.
Significant judgement is applied in assessing the relevant factors and
conditions in totality when determining whether the Group controls an
entity. Specifically, judgement is applied in assessing whether the
Group has substantive decision- making rights over the relevant
activities and whether it is exercising power as a principal or an
agent.
d) Business combinations
The Group uses the acquisition method to account for business
combinations. The Group recognises the identifiable assets acquired and
liabilities assumed at their acquisition date fair values. The Group
recognises deferred tax on the difference between fair value and the
acquisition date carrying value in accordance with International
Accounting Standard ('IAS') 12. The consideration transferred for each
business combination is measured at fair value, and comprises the sum of
equity interest issued by the Group. Acquisition-related costs are
recognised as exceptional items within profit or loss.
The Group recognises goodwill on business combinations when the fair
value of consideration transferred exceeds the fair value of
identifiable assets acquired and liabilities assumed. The Group
recognises a gain within profit or loss when the fair value of
consideration transferred is less than the fair value of identifiable
assets acquired and liabilities assumed.
The Group reports provisional amounts for business combinations when the
accounting is incomplete at the reporting date following the
combination. During the measurement period, the Group adjusts
provisional amounts recognised at the acquisition date to reflect new
information obtained that existed as of the acquisition date and would
have affected the measurement of the amounts recognised as at that date.
The Group also recognises additional assets or liabilities during the
reporting period if new information is obtained that existed as of the
acquisition date and would have resulted in the recognition of those
assets or liabilities as at that date. The Group adjusts the gain taken
to profit or loss where there is negative goodwill, or adjusts goodwill
recognised on the balance sheet, when provisional amounts are finalised
or additional assets and liabilities are recognised during the
measurement period.
The measurement period ends as soon as the Group receives the
information it was seeking or learns that more information is
unobtainable. The measurement period shall not exceed one year from the
acquisition date.
Notes to the Financial Statements continued
For the year ended 31 December 2019
2. Accounting policies continued
e) Foreign currency translation
The consolidated financial statements are presented in Pounds Sterling
which is the presentation currency of the Group. The financial
statements of each of the Bank's subsidiaries are measured using the
currency of the primary economic environment in which
the subsidiary operates (the 'functional currency'). Foreign currency
transactions are translated into the functional currencies using the
exchange rates prevailing at the date of the transactions. Monetary
items denominated in foreign currencies are retranslated at the rate
prevailing at the period end.
Foreign exchange ('FX') gains and losses resulting from the
retranslation and settlement of these items are recognised in profit or
loss. Non-monetary items measured at cost in the foreign currency are
translated using the spot FX rate at the date of the transaction.
The assets and liabilities of foreign operations with functional
currencies other than Pounds Sterling are translated into the
presentation currency at the exchange rate on the reporting date. The
income and expenses of foreign operations are translated at the rates on
the dates of transactions. Exchange differences on foreign operations
are recognised in other comprehensive income and accumulated
in the foreign exchange reserve within equity.
f) Segmental reporting
IFRS 8 requires operating segments to be identified on the basis of
internal reports and components of the Group which are regularly
reviewed by the chief operating decision maker to allocate resources to
segments and to assess their performance. For this purpose, the chief
operating decision maker of the Group is the Board of Directors.
The Group lends within the UK and the Channel Islands.
Following the combination with Charter Court Financial Services Group
plc ('CCFS') ('the Combination'), the Group segments its lending
business and operates under two segments:
} OneSavings Bank plc ('OSB')
} CCFS
In 2018, the Group operated under two segments: Buy-to-Let/SME
('BTL/SME') and Residential mortgages.
The Group has disclosed the risk management tables in note 45 at a
sub-segment level to provide granular level analysis of the Group's core
lending business.
g) Interest income and expense
Interest income and interest expense for all interest-bearing financial
instruments measured at amortised cost are recognised in profit or loss
using the effective interest rate ('EIR') method. The EIR is the rate
which discounts the expected future cash flows, over the expected life
of the financial instrument, to the net carrying value of the financial
asset or liability.
When calculating the EIR, the Group estimates cash flows considering all
contractual terms of the instrument and behavioural aspects (for example,
prepayment options) but not considering future credit losses. The
calculation of the EIR includes transaction costs and fees paid or
received that are an integral part of the interest rate, together with
the discounts or premiums arising on the acquisition of loan portfolios.
Transaction costs include incremental costs that are directly
attributable to the acquisition or issue of a financial instrument.
The Group monitors the actual cash flows for each acquired book and
where they diverge significantly from expectation, the future cash flows
are reset. In assessing whether to adjust future cash flows on an
acquired portfolio, the Group considers the cash variance on an absolute
and percentage basis. The Group also considers the total variance across
all acquired portfolios. Where cash flows for an acquired portfolio are
reset, they are discounted at the EIR to derive a new carrying value,
with changes taken to profit or loss as interest income.
The EIR is adjusted where there is a change to the reference interest
rate (LIBOR or base rate) affecting portfolios with a variable interest
rate which will impact future cash flows. The revised EIR is the rate
which exactly discounts the revised cash flows to the net carrying value
of the loan portfolio.
Interest income on investment securities is included in interest
receivable and similar income. Interest on derivatives is included in
interest receivable and similar income or interest expense and similar
charges following the underlying instrument it is hedging.
Coupons paid on Additional Tier 1 securities ('AT1 securities') are
recognised directly in equity in the period in which it is paid.
h) Fees and commissions
Fees and commissions which are an integral part of the EIR of a
financial instrument are recognised as an adjustment to the EIR and
recorded in interest income. The Group includes early redemption charges
within the EIR.
Fees received on mortgage administration services and mortgage
origination activities are accounted for in accordance with IFRS 15
Revenue from Contracts with Customers. Income from the rendering of
these services and mortgage origination activities is recognised when
the services are delivered and the benefits are transferred to clients
and customers.
Other fees and commissions are recognised on the accruals basis as
services are provided or on the performance of a significant act, net of
VAT and similar taxes.
i) Taxation
Income tax comprises current and deferred tax. It is recognised in
profit or loss, other comprehensive income or directly in equity,
consistently with the recognition of items it relates to. In accordance
with IAS 12, from 1 January 2019 the Group recognises tax on the AT1
securities directly in profit or loss (2018: directly in equity).
Current tax is the expected tax charge or credit on the taxable income
or loss in the period and any adjustments in respect of previous years.
Deferred tax is the tax expected to be payable or recoverable in respect
of temporary differences between the carrying amounts of assets or
liabilities for accounting purposes and carrying amounts for tax
purposes.
Deferred tax assets are recognised only to the extent that it is
probable that future taxable profits will be available to utilise the
asset. The recognition of deferred tax is mainly dependent on the
projections of future taxable profits and future reversals of temporary
differences. The current Board projections of future taxable income
assume that the Group will utilise its deferred tax asset within the
foreseeable future.
The Bank and the OSB UK subsidiaries are in a group payment arrangement
for corporation tax and show a net corporation tax liability and
deferred tax asset accordingly. The Group's CCFS subsidiaries are not
part of the group payment arrangement at the reporting date and have not
been netted.
j) Dividends
Dividends are recognised in equity in the period in which they are paid
or, if earlier, approved by shareholders.
k) Cash and cash equivalents
For the purposes of the Statement of Cash Flows, cash and cash
equivalents comprise cash, non-restricted balances with central banks
and highly liquid financial assets with original maturities of less than
three months subject to an insignificant risk of changes in their fair
value.
l) Intangible assets
Purchased software and costs directly associated with the development of
computer software are capitalised as intangible assets where the
software is a unique and identifiable asset controlled by the Group and
will generate future economic benefits. Costs to establish technological
feasibility or to maintain existing levels of performance are recognised
as an expense. The Group only recognises internally-generated intangible
assets if all of the following conditions are met:
} an asset is being created that can be identified after establishing
the technical and commercial feasibility of the resulting product;
} it is probable that the asset created will generate future economic
benefits; and
} the development cost of the asset can be measured reliably.
Subsequent expenditure on an internally-generated intangible asset,
after its purchase or completion, is recognised as an expense in the
period in which it is incurred. Where no internally-generated intangible
asset can be recognised, development expenditure is recognised as an
expense in the period in which it is incurred.
Upon the Combination, the Group performed a purchase price allocation
process to recognise separate identifiable intangible assets acquired.
The Group has recognised intangible assets for brand name, broker
relationships, technology and banking licence.
Notes to the Financial Statements continued
For the year ended 31 December 2019
2. Accounting policies continued
Intangible assets are reviewed for impairment annually, and if they are
considered to be impaired, are written down immediately to their
recoverable amounts.
Intangible assets are amortised in profit or loss over their estimated
useful lives as follows:
Software and internally generated assets 3--5 years straight line
Development costs, brand and technology
4 years straight line Broker relationships
3 year profile
Bank licence 3 years straight line
The Group reviews the amortisation period on an annual basis. If the
expected useful life of assets is different from previous assessments,
the amortisation period is changed accordingly.
m) Property, plant and equipment
Property, plant and equipment comprise freehold land and buildings,
major alterations to office premises, computer equipment and fixtures
measured at cost less accumulated depreciation. These assets are
reviewed for impairment annually, and if they are considered to be
impaired, are written down immediately to their recoverable amounts.
Items of property, plant and equipment are depreciated on a
straight-line basis over their estimated useful economic lives as
follows: Buildings 50 years
Leasehold improvements 5--10 years
Equipment and fixtures 3--5 years
Land, deemed to be 25% of purchase price of buildings, is not
depreciated.
The cost of repairs and renewals is charged to profit or loss in the
period in which the expenditure is incurred.
n) Investment in subsidiaries
In the Bank's financial statements, investments in subsidiary
undertakings are stated at cost less provision for any impairment. A
full list of the Bank's subsidiaries consolidated into the Group's
financial statements can be found in note 31.
The Bank performs an annual impairment assessment of it's investment in
subsidiary undertakings, assessing the cost of investment against the
subsidiaries' net asset values at the reporting date for indication of
impairment. Where there is indication of impairment, the Bank estimates
the subsidiaries value in use by estimating future profitability and the
impact on the net assets of the subsidiary. The Bank recognises an
impairment directly in profit or loss when the value in use is less than
the cost of investment. Impairments are subsequently reversed if future
annual impairment assessments show the value in use of the subsidiary
has increased.
o) Financial instruments
i. Classification
The Group classifies financial instruments based on the business model
and the contractual cash flow characteristics of the financial
instruments. Under IFRS 9, the Group classifies financial assets into
one of three measurement categories:
-- Amortised cost -- assets held in a business model to hold financial
assets in order to collect contractual cash flows, where the contractual
terms of the financial asset give rise on specified dates to cash flows
that are solely payments of principal and interest ('SPPI') on the
principal amount outstanding.
-- Fair value through other comprehensive income ('FVOCI') -- assets held in
a business model which collects contractual cash flows and sells
financial assets where the contractual terms of the financial assets give
rise on specified dates to cash flows that are SPPI on the principal
amount outstanding.
-- Fair value through profit or loss ('FVTPL') -- assets not measured at
amortised cost or FVOCI. The Group measures derivatives and an acquired
mortgage portfolio under this category.
The Group classifies non-derivative financial liabilities as measured at
amortised cost.
The Group has no financial assets nor liabilities classified as held for
trading or held to maturity. The Group reassesses its business models
each reporting period.
The Group classifies certain financial instruments as equity where they
meet the following conditions:
-- The financial instrument includes no contractual obligation to deliver
cash or another financial asset on potentially unfavourable conditions.
-- The financial instrument is a non-derivative that includes no contractual
obligation for the issuer to deliver a variable number of its own equity
instruments; or
-- The financial instrument is a derivative that will be settled only by the
issuer exchanging a fixed amount of cash or another financial asset for a
fixed number of its own equity instruments.
Equity financial instruments comprise own shares and AT1 securities.
Accordingly, the coupon paid on the AT1 securities is recognised
directly in retained earnings when paid.
ii. Recognition
The Group initially recognises loans and advances, deposits, debt
securities issued and subordinated liabilities on the date on which they
are originated or acquired. All other financial instruments are
accounted for on the trade date which is when the Group becomes a party
to the contractual provisions of the instrument.
For financial instruments classified as amortised cost, the Group
initially recognises financial assets and financial liabilities at fair
value plus transaction income or costs that are directly attributable to
its origination, acquisition or issue. These financial instruments are
subsequently measured at amortised cost using the effective interest.
Transaction costs relating to the acquisition or issue of a financial
instrument at FVOCI and FVTPL are recognised in the profit or loss as
incurred.
iii. Derecognition
The Group derecognises financial assets when the contractual rights to
the cash flows expire or the Group transfers substantially
all risks and rewards of ownership of the financial asset. In assessing
the broker-led Choices programme the principles of IFRS 9 and relevant
guidance in IAS 8 in respect of debt issuance, results in the original
mortgage asset being derecognised with a new financial asset recognised.
The forbearance measures offered by the Group are considered a
modification event as the contractual cash flows are renegotiated
or otherwise modified. The Group considers the renegotiated or modified
cash flows are not wholly different from the contractual cash flows, and
does not consider that forbearance measures give rise to a derecognition
event.
Financial liabilities are derecognised only when the obligation is
discharged, cancelled or has expired.
iv. Offsetting
Financial assets and financial liabilities are offset and the net amount
presented in the Statement of Financial Position when, and only when,
the Group currently has a legally enforceable right to offset the
amounts and it intends either to settle them on a net basis or to
realise the asset and settle the liability simultaneously in accordance
with the requirements of IAS 32.
The Group's derivatives are covered by industry standard master netting
agreements. Master netting agreements create a right of set-off that
becomes enforceable only following a specified event of default or in
other circumstances not expected to arise in the normal course of
business. These arrangements do not qualify for offsetting under IAS 32
and as such the Group reports derivatives on a gross basis.
Collateral in respect of derivatives is subject to the standard industry
terms of International Swaps and Derivatives Association ('ISDA') Credit
Support Annex. This means that the cash received or given as collateral
can be pledged or used during the term of the transaction but must be
returned on maturity of the transaction. The terms also give each
counterparty the right to terminate the related transactions upon the
counterparty's failure to post collateral. Collateral paid or received
does not qualify for offsetting under IAS 32, and is recognised in loans
and advances to credit institutions and amounts owed to credit
institutions respectively.
v. Amortised cost measurement
The amortised cost of a financial asset or financial liability is the
amount at which the financial asset or financial liability is measured
at initial recognition, plus or minus the cumulative amortisation using
the EIR method of any difference between the initial amount recognised
and the maturity amount, minus any reduction for impairment.
Notes to the Financial Statements continued
For the year ended 31 December 2019
2. Accounting policies continued
vi. Fair value measurement
Fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants at the measurement date in the principal or, in its absence,
the most advantageous market to which the Group has access at that date.
When available, the Group measures the fair value of an instrument using
the quoted price in an active market for that instrument.
A market is regarded as active if transactions for the asset or
liability take place with sufficient frequency and volume to provide
pricing information on an ongoing basis. The Group measures the fair
value of its investment securities and PSBs using quoted market prices.
If there is no quoted price in an active market, then the Group uses
valuation techniques that maximise the use of relevant observable inputs
and minimise the use of unobservable inputs.
The Group uses a combination of LIBOR and SONIA 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 credit valuation adjustments ('CVA')
and debit valuation adjustments ('DVA'). The DVA and CVA take into
account the respective credit ratings of the Bank and counterparty and
whether the derivative is collateralised or not. Interest rate
derivatives are valued using discounted cash flow models and observable
market data and will be sensitive to benchmark interest rate curves.
vii. Identification and measurement of impairment of financial assets
The Group assesses all financial assets for impairment.
Loans and advances to customers
The Group uses the IFRS 9 three-stage expected credit loss ('ECL')
approach for measuring impairment. The three impairment stages under
IFRS 9 are as follows:
-- Stage 1 -- entities are required to recognise a 12-month ECL allowance
where there is no significant increase in credit risk ('SICR') since
initial recognition.
-- Stage 2 -- a lifetime loss allowance is held for assets where a SICR is
identified since initial recognition. The assessment of whether credit
risk has increased significantly since initial recognition is performed
for each reporting period for the life of the loan.
} Stage 3 -- requires objective evidence that an asset is credit
impaired, at which point a lifetime ECL allowance is required. The Group
measures impairment through the use of individual and modelled
assessments.
Individual assessment
The Group's provisioning process requires individual assessment for high
exposure or higher risk loans, where Law of Property Act ('LPA')
receivers have been appointed, the property is taken into possession or
there are any other events that suggest a high probability of credit
loss. Loans are considered at a connection level, i.e. including all
loans belonging to and connected to the customer.
The Group estimates cash flows from these loans, including expected
interest and principal payments, rental or sale proceeds, selling and
other costs. The Group obtains up-to-date independent valuations for
properties put up for sale.
If the present value of estimated future cash flows discounted at the
original EIR is less than the carrying value of the loan, a provision is
recognised for the difference. Such loans are classified as impaired. If
the present value of the estimated future cash flows exceeds the
carrying value no provision is recognised.
The Group applies its IFRS 9 models to all loans with no individually
assessed provision.
IFRS 9 modelled impairment
Measurement of ECL
The assessment of credit risk and the estimation of ECL are unbiased and
probability weighted. ECL is measured on either a 12-month (stage 1) or
lifetime basis depending on whether a SICR has occurred since initial
recognition (stage 2) or where an account meets the Group's definition
of default (stage 3).
The ECL calculation is a product of an individual loan's probability of
default ('PD'), exposure at default ('EAD') and loss given default
('LGD') discounted at the EIR. The ECL drivers of PD, EAD and LGD are
modelled at an account level. The assessment of whether
a significant increase in credit risk has occurred is based on
quantitative relative PD thresholds and a suite of qualitative triggers.
Significant increase in credit risk (movement to stage 2)
The Group's transfer criteria determine what constitutes a SICR, which
results in an exposure being moved from stage 1 to stage 2.
At the point of recognition a loan is assigned a PD estimate. For each
monthly reporting date thereafter, an updated PD estimate is computed
for the life of the loan. The Group's transfer criteria analyses
relative changes in PD versus the PD assigned at the point of
origination, coupled with qualitative triggers using both internal and
external credit bureau information.
IFRS 9 includes a rebuttable presumption that if an account is more than
30 days past due it has experienced a SICR. The Group considers more
than 30 days past due to be an appropriate back stop measure and
therefore has not rebutted this presumption.
The Group's Risk function constantly monitors the ongoing
appropriateness of the transfer criteria, where any proposed amendments
are reviewed and approved by the Group's Management Committees and the
Risk and Audit Committees at least annually or more frequently if
required. Post Combination the SICR approaches across both OSB and CCFS
were aligned under a common framework including a quantitative PD
threshold approach supplemented by a set of qualitative rules, with
bespoke thresholds implemented
to reflect the individual portfolio characteristics of each firm.
A borrower will move back into stage 1 where the SICR definition is no
longer satisfied. Definition of default (movement to stage 3)
The Group uses a number of quantitative and qualitative criteria to
determine whether an account meets the definition of default and
therefore moves to stage 3. The criteria currently include:
-- The rebuttable presumption that more than 90 days past due is an
indicator of default. The Group has not rebutted this presumption and
therefore deems more than 90 days past due as an indicator of default.
-- The Group has also deemed it appropriate to classify accounts that have
moved into an unlikeliness to pay position, which includes forbearance,
bankruptcy, repossession and interest-only term expiry.
A borrower will move out of stage 3 when its credit risk improves such
that it no longer meets the 90 days past due and unlikeliness to pay
criteria and following this has completed an internally approved
probation period. The borrower will move to stage 1 or stage 2 dependent
on whether the SICR applies.
Forward-looking macroeconomic scenarios
IFRS 9 requires firms to consider the risk of default and expected
credit loss taking into consideration expectations of economic changes
that are deemed to be reasonably possible.
The Group conducts analysis to determine the most significant factors
which may influence the likelihood of an exposure defaulting in the
future. The macroeconomic factors relate to the House Price Index
('HPI'), unemployment rate ('UR'), Gross domestic product ('GDP'),
Commercial Real Estate Index ('CRE') and the BoE Base Rate ('BR').
The Group has derived an approach for factoring probability-weighted
macroeconomic forecasts into ECL calculations, adjusting PD and LGD
estimates. The macroeconomic scenarios feed directly into the ECL
calculation, as the adjusted PD, lifetime PD and LGD estimates are used
within the individual account ECL allowance calculations.
The Group currently does not have an in-house economics function and
therefore sources economic forecasts from an appropriately qualified
third party. The Group will consider a minimum of four
probability-weighted scenarios, including base, upside, downside and
severe downside scenarios.
The base case is also utilised within the Group's impairment forecasting
process which in turn feeds the wider business planning processes. This
ECL models are also used to set the Group's credit risk appetite
thresholds and limits.
Notes to the Financial Statements continued
For the year ended 31 December 2019
2. Accounting policies continued
Period over which ECL is measured
Expected credit loss is measured from the initial recognition of the
asset which is the date at which the loan is originated or the date a
loan is purchased and at each balance sheet date thereafter. The maximum
period considered when measuring ECL (either 12-month or lifetime ECL)
is the maximum contractual period over which the Group is exposed to the
credit risk of the asset. For modelling purposes the Group considers the
contractual maturity of the loan product and then considers the
behavioural trends of the asset.
Purchased or originated credit impaired ('POCI')
Acquired loans that meet OSB's definition of default (90 days past due
or an unlikeliness to pay position) at acquisition are treated
as a POCI asset. These assets will attract a lifetime ECL allowance over
the full term of the loan, even when the loan no longer meets the
definition of default post acquisition. The Group does not originate
credit-impaired loans.
Intercompany loans
Intercompany receivables in the parent Company financial statements are
assessed for ECL based on an assessment of the PD and LGD, discounted to
a net present value.
Other financial assets
Other financial assets comprise cash balances with the BoE and other
credit institutions and high grade investment securities. The Group
deems the likelihood of default across these counterparties as low, and
hence does not recognise a provision against the carrying balances.
p) Loans and receivables
Loans and receivables are predominantly mortgage loans and advances to
customers with fixed or determinable payments that are not quoted in an
active market and that the Group does not intend to sell in the near
term. They are initially recorded at fair value plus any directly
attributable transaction costs and are subsequently measured at
amortised cost using the EIR method, less impairment losses. Where
exposures are hedged by derivatives, designated and qualifying as fair
value hedges, the fair value adjustment for the hedged risk to the
carrying value of the hedged loans and advances is reported in fair
value adjustments for hedged assets.
Loans and the related provision are written off when the underlying
security is sold. Subsequent recoveries of amounts previously written
off are taken through profit or loss.
Loans and advances over which the Group transfers its rights to the
collateral thereon to the BoE under the TFS and Indexed Long-Term Repo
('ILTR') schemes are not derecognised from the Statement of Financial
Position, as the Group retains substantially all the risks and rewards
of ownership, including all cash flows arising from the loans and
advances and exposure to credit risk. The Group classifies TFS and ILTR
as amortised cost under IFRS 9 Financial Instruments.
Loans and advances include a small acquired mortgage portfolio whose
contractual cash flows include payments that are not solely payments of
principal and interest and as such are measured at fair value through
profit or loss. The Group initially recognises these loans at fair value,
with direct and incremental costs of acquisition recognised directly in
profit or loss, and subsequently measures them at fair value.
Loans and receivables contain the Group's asset finance lease lending.
Finance leases are initially measured at an amount equal to the net
investment in the lease, using the interest rate implicit in the finance
lease. Direct costs are included in the initial measurement of the net
investment in the lease and reduce the amount of income recognised over
the lease term. Finance income is recognised over the lease term, based
on a pattern reflecting a constant periodic rate of return on the net
investment in the lease.
q) Investment securities
Investment securities comprise securities held for liquidity purposes
(UK treasury bills, Residential Mortgage-Backed Securities ('RMBS') and
supranational bonds). These assets are non-derivatives that are
designated as FVOCI or classified as amortised cost.
Assets classified as amortised cost are originally recognised at fair
value and subsequently measured amortised cost using the EIR method,
less impairment losses.
Assets held at FVOCI are measured at fair value with movements taken to
other comprehensive income and accumulated in the FVOCI reserve within
equity, except for impairment losses which are taken to profit or loss.
When the instrument is sold, the gain or loss accumulated in equity is
reclassified to profit or loss.
r) Deposits, debt securities in issue and subordinated liabilities
Deposits, debt securities in issue and subordinated liabilities are the
Group's sources of debt funding. They comprise deposits from retail
customers and credit institutions, including collateralised loan
advances from the BoE under the TFS and ILTR, asset backed loan notes
issued through the Group's securitisation programmes and subordinated
liabilities. Subordinated liabilities include the Sterling PSBs where
the terms allow no absolute discretion over the payment of interest.
These financial liabilities are initially measured at fair value less
direct transaction costs, and subsequently held at amortised cost using
the EIR method.
Cash received under the TFS and ILTR is recorded in amounts owed to
credit institutions. Interest is accrued over the life of the agreements
on an EIR basis.
s) Sale and repurchase agreements
Financial assets sold subject to repurchase agreements ('repo') are
retained in the financial statements if they fail derecognition criteria
of IFRS 9 described in paragraph o(iii) above. The financial assets that
are retained in the financial statements are reflected as loans and
advances to customers or investment securities and the counterparty
liability is included in amounts owed to credit
institutions or other customers. Financial assets purchased under
agreements to resell at a predetermined price where the transaction is
financing in nature ('reverse repo') are accounted for as loans and
advances to credit institutions. The difference between the sale and
repurchase price is treated as interest and accrued over the life of the
agreement using the EIR method.
t) Derivative financial instruments
The Group uses derivative financial instruments (interest rate swaps and
basis swaps) to manage its exposure to interest rate risk. In accordance
with its treasury policy, the Group does not hold or issue derivative
financial instruments for proprietary trading.
Derivative financial instruments are recognised at their fair value with
changes in their fair value taken to profit or loss. Fair values are
calculated by discounting cash flows at the prevailing interest rates.
All derivatives are classified as assets when their fair value is
positive and as liabilities when their fair value is negative. If a
derivative is cancelled, it is derecognised from the Statement of
Financial Position.
The Group also uses derivatives to hedge the interest rate risk inherent
in irrevocable offers to lend. This exposes the Group to movements in
the fair value of derivatives until the loan is drawn. The changes to
fair value are recognised in profit or loss in the period.
The Group is party to a limited number of options and warrants. These
are recognised as a derivative financial instruments as applicable where
a trigger event takes place and the fair value of the option or warrant
can be reliably measured.
u) Hedge accounting
The Group has chosen to continue to apply the hedge accounting
requirements of IAS 39 instead of the requirements in Chapter 6 of IFRS
9. The Group uses fair value hedge accounting for a portfolio hedge of
interest rate risk.
Portfolio hedge accounting allows for hedge effectiveness testing and
accounting over an entire portfolio of financial assets or liabilities.
To qualify for hedge accounting at inception, the hedge relationship is
clearly documented and the derivative must be expected to be highly
effective in offsetting the hedged risk. In addition, effectiveness must
be tested throughout the life of the hedge relationship.
The Group applies fair value portfolio hedge accounting to its fixed
rate portfolio of mortgages and saving accounts. The hedged portfolio is
analysed into repricing time periods based on expected repricing dates,
utilising the Group Assets and Liabilities Committee ('ALCO') approved
prepayment curve. Interest rate swaps are designated against the
repricing time periods to establish the hedge relationship. Hedge
effectiveness is calculated as a percentage of the fair value movement
of the interest rate swap against the fair value movement of the hedged
item over the period tested.
The Group considers the following as key sources of hedge
ineffectiveness:
} The mismatch in maturity date of the swap and hedged item, as swaps
with a given maturity date cover a portfolio of hedged items which may
mature throughout the month
} The actual behaviour of the hedged item differing from expectations,
such as early repayments or withdrawals and arrears
} Minimal movements in the yield curve leading to ineffectiveness where
hedge relationships are sensitive to small value changes, and
} The transition relating to LIBOR reforms whereby some hedged
instruments and hedged items are based on different benchmark rates
Where there is an effective hedge relationship for fair value hedges,
the Group recognises the change in fair value of each hedged item in
profit or loss with the cumulative movement in their value being shown
separately in the Statement of Financial Position as fair value
adjustments on hedged assets and liabilities. The fair value changes of
both the derivative and the hedge substantially offset each other to
reduce profit volatility.
Notes to the Financial Statements continued
For the year ended 31 December 2019
2. Accounting policies continued
The Group discontinues hedge accounting when the derivative ceases
through expiry, when the derivative is cancelled or the underlying
hedged item matures, is sold or is repaid.
If a derivative no longer meets the criteria for hedge accounting or is
cancelled whilst still effective, the fair value adjustment relating to
the hedged assets or liabilities within the hedge relationship prior to
the derivative becoming ineffective or being cancelled remains on the
Statement of Financial Position and is amortised over the remaining life
of the hedged assets or liabilities. The rate of amortisation over the
remaining life is in-line with expected income or cost generated from
the hedged assets or liabilities. Each reporting period the expectation
is compared to actual with an accelerated run-off applied where the two
diverge by more than set parameters.
v) Debit and credit valuation adjustments
The DVA and CVA are included in the fair value of derivative financial
instruments. The DVA is based on the expected loss a counterparty faces
due to the risk of the Group's default. The CVA reflects the Group's
risk of the counterparty's default.
The methodology is based on a standard calculation, taking into account:
} the one-year PD, updated on a regular basis
} the expected exposure at default
} the expected LGD, and
} the average maturity of the swaps
w) Provisions and contingent liabilities
A provision is recognised when there is a present obligation as a result
of a past event, it is probable that the obligation will be settled and
the amount can be estimated reliably.
Provisions include ECLs on the Group's undrawn loan commitments.
Contingent liabilities are possible obligations arising from past events,
whose existence will be confirmed only by uncertain future events, or
present obligations arising from past events which are either not
probable or the amount of the obligation cannot be reliably measured.
Contingent liabilities are not recognised but disclosed unless they are
not material or their probability is remote.
x) Employee benefits -- defined contribution scheme
The Bank and the OSB subsidiaries contribute to personal pension plans
for eligible employees. The Group's CCFS subsidiaries operate defined
contribution retirement benefit schemes for all qualifying employees who
subscribe to the terms and conditions of the schemes' policies.
Obligations for contributions to defined contribution pension
arrangements are recognised as an expense in profit or loss as incurred.
y) Share-based payments
In accordance with IFRS 2 Share-based Payments, equity-settled options
and awards granted to employees over the Bank's shares under the Group's
share-based incentive schemes are measured at fair value at grant and
are charged on a straight-line basis to profit or loss (with a
corresponding increase in the share-based payment reserve within equity)
over the vesting period in which the employees become unconditionally
entitled to the awards. The cumulative expense within the share-based
payment reserve is reclassified to retained earnings upon vesting.
The amount recognised as an expense is adjusted to reflect the actual
number of awards for which the related service and non-market vesting
conditions are expected to be met, such that the amount ultimately
recognised as an expense is based on the number of awards that do meet
the related conditions at the vesting date. The amount recognised as an
expense for awards subject to market conditions is based on the
proportion that is expected to meet the condition as assessed at the
grant date. No adjustment is made for the actual proportion that meets
the market condition at vesting. Share-based payments that vest on grant
are expensed in the year services are received with a corresponding
increase in equity.
The grant date fair value of a nil price award over the Bank's shares
which vests at grant or which carries the right to dividends or dividend
equivalents during the vesting period (IPO share awards) is the share
price at the grant date. The grant date fair value of awards of the
Bank's shares that do not carry automatic rights to dividends or
dividend equivalents (the Deferred Share Bonus Plan ('DSBP')) is based
on the Bank's share price at the grant date adjusted for the impact of
the expected dividend yield. The fair value at grant date of awards made
under the Sharesave Schemes is determined using a Black-Scholes model.
The grant date fair value of awards that are subject to non-market
conditions and which do not carry automatic rights to dividends or
dividend equivalents (the earnings per share ('EPS') and return on
equity ('ROE') elements of the Performance Share Plan ('PSP'))
is based on the share price at the grant date adjusted for the impact of
the expected dividend yield. An assessment is made at each reporting
date on the proportion of the awards expected to meet the related
non-market vesting conditions.
The fair value of an award that is subject to market conditions (the
relative share price element of the PSP) is determined at grant date
using a Monte Carlo model. No adjustment is made for the actual
proportion that meets the market condition at vesting.
Where the allowable cost of share-based options or awards for tax
purposes is greater than the cost determined in accordance with IFRS 2,
the tax effect of the excess is taken to the share-based payment reserve
within equity. The tax effect is reclassified to retained earnings upon
vesting.
Employer's national insurance is charged to profit or loss at the share
price at the reporting date on the same vesting schedule as the
underlying options and awards.
z) Leases
The Group recognises right-of-use assets and lease liabilities for most
leases over 12 months long. Right-of-use assets and lease liabilities
are initially recognised at the net present value of future lease
payments, discounted at the rate implicit in the lease or, where not
available, the Group's incremental borrowing cost. Subsequent to initial
recognition, the right-of-use asset is depreciated on a straight-line
basis over the term of the lease. Future rental payments are deducted
from the lease liability, with interest charged on the lease liability
using the incremental borrowing cost at the time of initial recognition.
The Group recognises lease liability payments within financing
activities on the Statement of Cash Flows.
The Group assesses the likely impact of early terminations in
recognising the right-of-use asset and lease liability where an option
to terminate early exists.
Leases with low future payments or terms less than 12 months are
recognised on an accruals basis directly to profit or loss.
aa) Adoption of new standards
In 2019 the Group adopted IFRS 16 Leases and amendments to IAS 12 Income
Taxes. The Group also early adopted the amendments to IFRS 9, IAS 39 and
IFRS 7 Interest Rate Benchmark Reform.
IFRS 16: Leases
The Group adopted IFRS 16: Leases effective from 1 January 2019. The
Group elected to apply the requirements of IFRS 16 retrospectively with
the cumulative effect of initial application recognised directly in
equity. The Group applied the practical expedients of IFRS 16 in
applying a single discount rate of 1.99% to a portfolio of leases over
property in calculating the initial lease liability and for not applying
the requirements of IFRS 16 to leases for which the lease term ended
within 12 months of the date of initial application.
The adoption of IFRS 16 resulted in the Group recognising GBP3.7m (Bank:
GBP2.3m) of right-of-use assets and GBP3.7m (Bank: GBP2.3m) of lease
liabilities. There was no cumulative effect of initial application
recognised directly in equity.
The table below shows a reconciliation of the Group's and Bank's minimum
lease commitments under operating leases to the initial lease liability
recognised on adoption of IFRS 16:
Group Bank
GBPm GBPm
Operating lease commitments at 31 December 2018 4.5 2.5
Short leases not subject to IFRS 16 (0.1) --
OSBI leases outside the scope (0.2) --
Reassessment of lease term (0.1) (0.1)
----------- ---------
Lease commitments subject to IFRS 16 4.1 2.4
Net present value adjustment @ 1.99% (0.3) (0.1)
-----------
Lease liability at 1 January 2019 3.8 2.3
----------- ---------
Notes to the Financial Statements continued
For the year ended 31 December 2019
2. Accounting policies continued
IAS 12: Income Taxes
Effective from 1 January 2019 IAS 12 required the tax effect of interest
recognised directly in equity to be recognised in profit or loss. This
has resulted in GBP1.2m of additional tax credits being recognised in
the Statement of Comprehensive Income.
IFRS 9, IAS 39 and IFRS 7 Interest Rate Benchmark Reform
The Group has elected to early adopt the amendments to IFRS 9, IAS 39
and IFRS 7 Interest Rate Benchmark Reform issued in September 2019. In
accordance with the transition provisions, the amendments have been
adopted retrospectively to hedging relationships that existed at the
start of the reporting period or were designated thereafter.
The amendments provide temporary relief from applying specific hedge
accounting requirements to hedging relationships directly affected by
IBOR (Interbank Offered Rates) reform. The reliefs have the effect that
IBOR reform should not generally cause hedge accounting to terminate.
However, any hedge ineffectiveness continues to be recorded in the
income statement. Furthermore, the amendments set out triggers for when
the reliefs will end, which include the uncertainty arising from
interest rate benchmark reform no longer being present.
In summary, the reliefs provided by the amendments that apply to the
Group are:
-- When considering the 'highly probable' requirement, the Group has assumed
that the IBOR interest rates upon which our hedged items are based do not
change as a result of IBOR reform
-- In assessing whether the hedge is expected to be highly effective on a
forward-looking basis the Group has assumed that the IBOR interest rates
upon which the cash flows of the hedged items and the interest rate swaps
that hedge them are based are not altered by IBOR reform
-- The Group will not discontinue hedge accounting during the period of
IBOR-related uncertainty solely because the retrospective effectiveness
falls outside the required 80--125% range
-- The Group has assessed whether the hedged IBOR risk component is a
separately identifiable risk only when it first designates a hedged item
in a fair value hedge and not on an ongoing basis
Further amendments are expected for future accounting periods following
completion of the second part of the IASB's two-phased project which
focuses on the impacts of IBOR reform on financial reporting.
Standards in issue but not yet effected
Included below are standards and amendments which are being considered
for future reporting periods which have not been applied in preparing
these financial statements.
} Amendments to the Conceptual Framework for Financial reporting,
including amendments to references to the Conceptual Framework in IFRS
Standards
} Amendments to IFRS 3 -- Definition of a business
} Amendments to IAS 1 and IAS 8 -- Definition of material
The Directors do not expect that the adoption of the Standards listed
above will have a material impact on the financial statements of the
Company in future periods.
3. Judgements in applying accounting policies and critical accounting
estimates
In preparing these financial statements, the Group has made judgements,
estimates and assumptions which affect the reported amounts within the
current and next financial year. Actual results may differ from these
estimates.
Estimates and judgements are regularly reviewed based on past experience,
expectations of future events and other factors.
Judgements
The Group has made the following judgements in applying the accounting
policies:
(i) Loan book impairments
Significant increase in credit risk for classification in stage 2
The Group's transfer criteria determines what constitutes a significant
increase in credit risk, which results in an exposure being moved from
stage 1 to stage 2. The transfer criteria analyses relative changes in
PD versus the origination PD, where if prescribed thresholds are met, an
account will be transferred from stage 1 to stage 2. The Group's
transfer logic also includes a qualitative set of rules using both
internal and external credit bureau information, which if triggered
results in an account being moved to stage 2 from stage 1.
Setting the appropriate thresholds to determine what is a 'significant'
increase is a key area of judgement.
(ii) IFRS 9 classification
The Group has applied judgement in determining whether the contractual
terms of a financial asset give rise on specified dates to cash flows
that are SPPI on the principal amount outstanding when applying the
classification criteria of IFRS 9. The main area of judgement is over
the Group's loans and advances to customers which have been accounted
for under amortised cost with the exception of one acquired book of
GBP22.1m that is recognised at FVTPL.
Estimates
The Group has made the following estimates in the application of the
accounting policies that have a significant risk of material adjustment
to the carrying amount of assets and liabilities within the next
financial year:
(i) Loan book impairments
This section provides details of the critical accounting estimates which
underpin loan impairment calculations. Less significant estimates are
not disclosed. The Group has recognised total impairments of GBP42.9m
(2018: GBP21.9m) at the reporting date as disclosed in note 23.
Modelled impairment
Modelled provision assessments are also subject to estimation
uncertainty, underpinned by a number of estimates being made by
management which are utilised within impairment calculations. Key areas
of estimation within modelled provisioning calculations include those
regarding the PD, the LGD and forward-looking macroeconomic scenarios.
Loss given default model
The Group has a number of LGD models, which include a number of
estimated inputs including propensity to go to possession given default
('PPD'), forced sale discount ('FSD'), time to sale ('TTS') and sale
cost estimates. The LGD is sensitive to the application of the HPI. For
the OSB segment at 31 December 2019 a 10% fall in house prices would
result in an incremental GBP13.6m (2018: GBP11.0m) of provision being
required. The combined impact across both OSB and CCFS businesses of a
10% fall in house prices would result in an increase in total provisions
of GBP17.4m as at 31 December 2019.
Forward-looking macroeconomic scenarios
The forward-looking macroeconomic scenarios affect both the PD and LGD
estimates. Therefore the expected credit losses calculations are
sensitive to both the scenarios utilised and their associated
probability weightings.
As the Group does not have an in-house economics function it sources
economic forecasts from an appropriately qualified third party. The
Group will consider a minimum of four probability-weighted scenarios,
including base, upside, downside and severe downside scenarios. Due to
the current uncertainty regarding the Brexit trade agreement
negotiations the choice of scenarios and weightings are subject to a
significant degree of estimation.
Post the Combination the Group aligned the macro-economic scenarios and
probability weightings utilised across both the individual OSB and CCFS
businesses.
Notes to the Financial Statements continued
For the year ended 31 December 2019
3. Judgements in applying accounting policies and critical accounting
estimates continued
The following tables disclose the ECL scenario sensitivity analysis with
each scenario weighted at 100% probability. The purpose of using
multiple economic scenarios is to model the non-linear impact of
assumptions surrounding macro economic factors and ECL calculated:
100% 100% 100% 100% Severe
As at Base case Upside Downside downside
31-Dec-19 Weighted scenario scenario scenario scenario
---------------- --------------- --------------- --------------
Total mortgages before provisions,
GBPm 18,419.9 18,419.9 18,419.9 18,419.9 18,419.9
ECL, GBPm 42.9 29.9 20.0 53.6 67.9
ECL coverage, % 0.23 0.16 0.11 0.29 0.37
100% 100% 100% 100% Severe
As at Base case Upside Downside downside
31-Dec-18 Weighted scenario scenario scenario scenario
---------------- --------------- --------------- --------------
Total mortgages before provisions,
GBPm 8,998.0 8,998.0 8,998.0 8,998.0 8,998.0
ECL, GBPm 21.9 15.7 15.1 19.3 62.7
ECL coverage, % 0.24 0.17 0.17 0.21 0.70
The above tables cover modelled provisions only. Individually assessed
provision or provisions calculated under a bespoke approach are not
included. Post model adjustments or incurred loss remaining provisions
have also not been included in the above analysis.
(ii) Loan book acquisition accounting and income recognition
Acquired loan books are initially recognised at fair value. Significant
estimation is exercised in calculating their EIR using cash flow models
which include assumptions on the likely macroeconomic environment,
including HPI, unemployment levels and interest rates, as well as loan
level and portfolio attributes and history used to derive prepayment
rates, the probability and timing of defaults and the amount of incurred
losses which are discounted for the market rate for these loans. Through
the Combination in 2019 the Precise book is treated as an acquisition
book with a fair value uplift of GBP301.0m being the premium applied to
the book. Sensitivities have been completed on the Precise book
including the market rate applied to the discounted cash flows being one
month LIBOR plus a margin (margin blended average used 2.91%). Where the
margin applied is increased/decreased by 25bps the premium recognised on
the book increases/decreases by GBP66.0m/GBP67.0m.
The EIR on loan books purchased at significant discounts or premiums is
particularly sensitive to the weighted average life of the book through
cumulative prepayment rate ('CPR') and cumulative default rate ('CDR')
derived, as the purchase discount or premium is
recognised over the expected life of the loan book through the EIR. New
defaults are modelled at zero loss (as losses will be recognised in
profit or loss as impairment losses) and therefore have the same impact
on the EIR as prepayments.
Incurred losses at acquisition are calculated using the Group's modelled
provision assessment (see (i) Loan book impairments above for further
details).
The EIR calculated at acquisition is not changed for subsequent
variances in actual to expected cash flows. The Group monitors the
actual cash flows for each acquired book and where they diverge
significantly from expectation, the future cash flows are updated with a
reset gain or loss taken. In assessing whether to adjust future cash
flows on an acquired portfolio, the Group considers the cash variance on
an absolute and percentage basis. The Group also considers the total
variance across all acquired portfolios and
the economic outlook. Where cash flows for an acquired portfolio are
reset, they are discounted at the EIR calculated at acquisition to
derive a new carrying value, with changes taken to the Statement of
Comprehensive Income as interest income. The Group recognised
GBP0.5m gain in 2019 as a result of resetting cash flows on acquired
books (2018: gain of GBP2.0m). The largest acquired book is Precise with
sensitivities completed on increasing/reducing the life of the book by
six months which results in a reset gain/loss of c.GBP48.0m/GBP50.0m.
(iii) Effective interest rate on organic lending
A number of estimates are made when calculating the EIR for newly
originated loan assets. These include their expected lives, likely
redemption profiles and the anticipated level of any early redemption
charges.
Mortgage products offered by the Group include directly attributable net
fee income and a period on reversion rates after the fixed/ discount
period. Products revert to the standard variable rate ('SVR') for the
Kent Reliance book or a LIBOR/Base plus a margin for the Precise brand.
The Group uses historical experience in its assessment of prepayment
rates.
Estimation is used in assessing whether and for how long mortgages that
reach the end of the product term stay on reversion rates. The most
significant area of judgement is the period spent on SVR or LIBOR/Base
plus a margin. In 2018 Kent Reliance recognised a period on SVR for
two-year products only as behavioural data emerged and this has been
extended to three and five year products in 2019. On the Kent Reliance
brand estimates were used to assess planned enhancements to and
automation of the Choices programme (in 2018 only) and the potential for
changes in regulation on SVR might impact future behaviour.
Sensitivity is completed through increasing and decreasing the weighted
average life of the Kent Reliance and Precise Mortgages book (for
originations from 4 October 2019) which results in a reset gain/loss of
c.GBP24.0m/GBP5.0m.
4. Acquisition of Chartered Court Financial Services Group plc
On 14 March 2019, the OSB Board and the CCFS Board jointly announced
that they had reached agreement on the terms of a recommended all-share
combination pursuant to which OSB would acquire the entire issued and to
be issued ordinary share capital of CCFS to form the combined Group.
Under the terms of the Combination, which was subject to terms and
conditions which were set out in the Scheme Document, each CCFS
shareholder was entitled to receive 0.8253 new OSB shares for each CCFS
share.
Immediately following completion of the Combination, CCFS shareholders
owned approximately 45% of the share capital of the combined Group
(based on the existing ordinary issued share capital of OSB and the
fully diluted share capital of CCFS).
The Combination completed on 4 October 2019, following approvals from
the Shareholders, Competition and Markets Authority, PRA, Financial
Conduct Authority ('FCA') and the final court sanction.
CCFS targets underserved specialist mortgage market segments with a
focus on specialist Buy-to-Let, residential, bridging and second charge
lending. The Combination with CCFS brings increased scale,
diversification and product capabilities to the Group.
Consideration and goodwill
On 4 October 2019, OSB issued 199,643,055 new GBP0.01 nominal value
shares as consideration for the acquisition of the entire CCFS share
capital. The fair value of the OSB share price on 4 October 2019 was
GBP3.542 per share, equating to a total consideration of GBP707.1m.
Included within this amount is GBP3.7m in relation to shares OSB now
holds through the CCFS Employee Benefit Trust, bringing total external
consideration to GBP703.4m.
The carrying value of the CCFS tangible assets acquired and liabilities
assumed on 4 October 2019 was GBP504.0m. In accordance with IFRS 3, the
Group has recognised separate intangible assets in the Combination of
GBP23.6m and fair value adjustments on assets and liabilities of
GBP256.7m and associated deferred tax liabilities of GBP70.1m. In total,
the Group has recognised net assets of GBP714.2m in the Combination.
The Group has recognised GBP10.8m of negative goodwill generated in the
Combination directly in profit or loss within Gain on Combination with
CCFS. The negative goodwill was generated through a combination of a
decrease in the OSB share price between announcement and completion and
an increase in fair value gains on the loan book acquired due to
movements in the LIBOR curve between announcement and completion.
The Group continues to assess the acquisition date fair values of the
assets acquired and liabilities assumed to determine if any additional
information existed, at the date of acquisition, that would alter the
fair values of the assets and liabilities recognised as at 31 December
2019. This assessment will be completed no later than 3 October 2020.
Transaction costs
The Group has recognised GBP15.6m of transaction costs as an exceptional
item in profit or loss. In addition, the Group has recognised
GBP6.4m of costs directly in equity, net of corporation tax. Additional
information is provided in note 13.
Notes to the Financial Statements continued
For the year ended 31 December 2019
4. Acquisition of Chartered Court Financial Services Group plc continued
Identifiable assets acquired and liabilities assumed
The table below sets out the fair value of the identifiable assets
acquired and liabilities assumed as at the acquisition date:
Provisional
Fair Value
GBPm
-------------
Assets
Loans and advances to credit institutions 962.2
Investment securities 493.5
Loans and advances to customers 7,248.3
Derivative assets 11.4
Deferred taxation asset 1.9
Intangible assets 23.6
Property, plant and equipment 10.0
Other assets 3.6
Total assets 8,754.5
Liabilities
Amounts owed to retail depositors 6,545.3
Amounts owed to credit institutions 1,168.4
Amounts owed to other customers 16.0
Derivative liabilities 84.6
Debt securities in issue 75.1
Deferred taxation liability 70.1
Current taxation liability 19.4
Lease liabilities 7.7
Other liabilities 53.7
Total liabilities 8,040.3
Net assets 714.2
The following table shows the acquisition accounting adjustments made on
Combination together with the associated amortisation periods:
GBPm Amortisation period
--------
Carry value of net tangible assets
acquired 503.8
Fair value adjustments: c.4 years in line with mortgage
Fair value asset of mortgage book 300.6 book run-off
Fair value asset of undrawn loan c.4 years in line with mortgage
commitments 16.4 book run-off
Fair value liability of savings c.1.5 years in line with savings
book (7.5) book run-off
Offset by:
EIR balance (0.4) n/a
Loss provision reset -- reduce provision
to nil 7.7 n/a
Loss provision reset -- POCI loan
provision (3.6) n/a
Hedge item adjustments (56.3) Unwind over life of swaps
Fair value of net tangible assets
acquired 760.7
Intangible assets 23.6 4--5 years
Deferred taxation liability (70.1) In line with fair value unwinds
Total net assets acquired 714.2
Contribution to profit or loss
Since the acquisition date, CCFS has contributed GBP40.1m to Group total
income and GBP24.8m to Group profit. If the acquisition of CCFS had been
completed on 1 January 2019, Group total income for the year would have
been GBP504.1m and Group profit before taxation would have been
GBP308.6m.
Acquired receivables
The table below sets out additional information on the receivables
acquired through the Combination as at 4 October 2019.
Expected
Contractual Fair credit
receivable value losses
GBPm GBPm GBPm
------------- ------------
Receivables:
Loans and advances to credit institutions Loans and 962.2 962.2 --
advances to customers 6,937.7 7,248.3 9.0
Other receivables 2.4 2.4 --
7,902.3 8,212.9 9.0
------------- ---------- ------------
5. Interest receivable and similar income
Group Group
2019 2018
GBPm GBPm
----------- -----------
At amortised cost:
On OSB mortgages 480.5 408.1
On CCFS mortgages 80.2 --
On investment securities 0.6 --
On other liquid assets 12.2 7.6
Amortisation of fair value adjustments on CCFS Combination1 (22.6) --
At fair value through profit or loss:
Net expense on derivative financial instruments -- lending
activities (14.0) (8.1)
On CCFS mortgages 0.3 --
At FVOCI:
On investment securities 2.7 0.3
539.9 407.9
1. Amortisation of fair value adjustments on CCFS loan book at
Combination.
6. Interest payable and similar charges
Restated
Group Group2
2019 2018
GBPm GBPm
----------- ------------
On retail deposits 177.3 109.6
On BoE borrowings 13.3 8.7
On perpetual subordinated bonds2 1.8 1.9
On subordinated liabilities 0.7 0.7
On wholesale borrowings 1.9 0.4
On debt securities in issue 3.7 --
On lease liabilities 0.1 --
Amortisation of fair value adjustments on CCFS
Combination1 (1.0) --
Net (income)/expense on derivative financial instruments
-- savings activities (2.6) 0.3
195.2 121.6
1. Amortisation of fair value adjustments on CCFS customer deposits at
Combination.
2. The Group has restated the prior year comparatives to include the
interest expense on the GBP22.0m PSBs previously classified as equity
(see note 1).
Notes to the Financial Statements continued
For the year ended 31 December 2019
7. Fair value losses on financial instruments
Reclassified
Group Group1
2019 2018
GBPm GBPm
----------- --------------
Fair value changes in hedged assets 70.1 (13.8)
Hedging of assets (75.1) 11.0
Fair value changes in hedged liabilities (4.6) 0.4
Hedging of liabilities 4.8 (0.3)
Ineffective portion of hedges (4.8) (2.7)
Net gains on unmatched swaps 3.5 2.4
Amortisation of inception adjustment 3.3 --
Amortisation of fair value adjustments on hedged
assets (5.5) (4.6)
Debit and credit valuation adjustment 0.2 (0.2)
(3.3) (5.1)
1. The Group has reclassified the 2018 comparatives as the fair value
changes in hedged assets/liabilities had been incorrectly disclosed as
hedging of assets/liabilities and vice versa.
Amortisation of inception adjustment relates to hedged assets and
liabilities recognised on the Combination where pre-existing hedge
relationships ceased on the date of Combination. The inception
adjustment is being amortised over the life of the derivative
instruments acquired on Combination and recognises an offsetting asset
or liability to the fair value of the derivative instruments on the date
of Combination.
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
amortisation includes GBP2.8m (2018: GBP3.0m) of accelerated unwind due
to faster run-off on the previously hedged long-dated fixed rate
mortgages compared to the run-off profile at cancellation date.
8. Loss on sales of financial instruments
During 2018, OSB disposed of its final portion of the personal loan
portfolio. OSB sold personal loans with a gross value of GBP0.9m for
proceeds of GBP0.4m. Adjusting for loan loss provisions of GBP0.3m and
recovering servicing costs of GBP0.1m, the Group made a GBP0.1m loss on
disposal.
During 2019 the Group identified that an additional GBP0.1m of customer
receipts was due to the purchaser of the personal loan portfolio,
recognising an additional loss on sale of GBP0.1m.
9. Administrative expenses
Group Group
2019 2018
GBPm GBPm
----------- -----------
Staff costs 60.5 43.6
Facilities costs 3.6 3.3
Marketing costs 4.0 3.2
Support costs 12.7 9.2
Professional fees 10.4 7.7
Other costs1 9.3 7.9
Depreciation (see note 29) 3.9 2.2
Amortisation (see note 30) 4.3 2.5
108.7 79.6
1. Other costs mainly consist of irrecoverable VAT expense.
Included in professional fees are amounts paid to the auditor of the
Group as follows:
Group Group
2019 2018
GBP'000 GBP'000
-------------- --------------
Fees payable to the Company's auditor for the audit of the
Company's annual accounts Fees payable to the Company's auditor 1,269 626
for the audit of the accounts of subsidiaries 846 188
--------------
Total audit fees 2,115 814
Audit-related assurance services 187 95
Other assurance services 142 31
Tax compliance services -- 9
Total non-audit fees 329 135
Total fees payable to the Group's Auditor 2,444 949
Included within the audit of the accounts of subsidiaries is GBP592k in
relation to CCFS entities and GBP65k in relation to Canterbury Finance
No.1 plc.
Staff costs comprise the following:
Group Group
2019 2018 Bank 2019 Bank 2018
GBPm GBPm GBPm GBPm
----------- ----------- --------------- -------------
Salaries, incentive
pay and other
benefits 49.1 36.0 31.4 27.7
Share-based payments 4.0 2.5 4.0 2.6
Social security
costs 4.4 3.4 3.4 3.0
Other pension costs 3.0 1.7 2.3 1.5
60.5 43.6 41.1 34.8
The average number of people employed by the Group (including Executive
Directors) during the year is analysed below. The average for CCFS is
based on the post acquisition period.
Reclassified
Group Group1
2019 2018 Bank 2019 Bank 2018
----------- -------------- --------------- ---------------
OSB
Operations 812 744 325 307
Support
functions 286 245 204 172
CCFS
Operations 530 -- -- --
Support
functions 161 -- -- --
1,789 989 529 479
1. During the year, there was reclassification of the sales
department from Operations to Support functions.
Notes to the Financial Statements continued
For the year ended 31 December 2019
10. Directors' emoluments and transactions
Restated
Bank1
Bank 2019 2018
GBP'000 GBP'000
--------------- ------------
2,334 2,116
Short-term employee benefits2 Post-employment benefits Share-based 112 109
payments3 632 500
3,078 2,725
--------------- ------------
1. The prior year comparatives have been restated to include the amounts
received by Directors upon vesting of share-based payment schemes.
2. Short-term employee benefits comprise salary costs, Non-Executive
Directors' fees and other short-term incentive benefits are disclosed in
the Annual Report on Remuneration.
3. Share-based payments represent the amounts received by Directors for
schemes that vested during the year.
In addition to the total Directors' emoluments above, the Executive
Directors were granted a deferred bonus of GBP511k (2018: GBP579k) in
the form of shares deferred for three years under the DSBP. The DSBP
does not have any further performance conditions attached. However, it
is subject to clawback and is forfeited if the Executive Director leaves
prior to vesting unless a good leaver reason applies such as redundancy,
retirement or ill-health.
The Executive Directors received a further share award under the PSP
with a grant date face value of GBP1,305k (2018: GBP1,265k) using a
share price of GBP3.90 (2018: GBP4.20) (the average mid-market quotation
for the preceding five days before grant). These shares vest in three
years subject to performance conditions discussed in note 11 and the
Annual Report on Remuneration.
There was no compensation for loss of office during either 2019 or 2018.
There were no outstanding loans granted in the ordinary course of
business to Directors and their connected persons as at 31 December 2019
and 2018.
The Annual Report on Remuneration and note 11 Share-based payments
provide further details on Directors' emoluments.
11. Share-based payments
The Group operates the following share-based schemes:
IPO Share Awards
Certain Directors, senior managers and other employees of the Bank
received one-off share awards in the form of nil price awards
of shares in the Bank on its admission to the London Stock Exchange in
June 2014. A proportion of these awards vested on admission with the
remainder vesting over a 12, 24 or 48-month period. The cost of IPO
Share Awards is reported within administrative expenses in profit or
loss and is offset fully by an additional capital contribution as the
awards were granted by OSB Holdco Limited, the Bank's major shareholder
at the time of the IPO. The Group's IPO awards were fully vested by the
end of 2018.
Sharesave Scheme
The Save As You Earn ('SAYE') or Sharesave Scheme is an all-employee
share option scheme which is open to all UK-based employees. The
Sharesave Scheme allows employees to purchase options by saving a fixed
amount of between GBP5 and GBP500 per month over a period of either
three or five years at the end of which the options, subject to leaver
provisions, are usually exercisable. The Sharesave Scheme has been in
operation since 2014 and is granted annually, with the exercise price
set at a 20% discount of the share price on the date of grant.
As part of the Combination, CCFS employees were given three choices in
relation to their Sharesave Schemes: (i) roll their CCFS 2017 and 2018
Sharesave options into the OSB schemes; (ii) exercise the options
available from contributions made to date through an early exercise; or
(iii) continue to contribute to the CCFS 2017 and 2018 schemes and
exercise the options available from contributions made to date within
six months of the date of the Combination. Those participants that chose
to roll-over their options are included in the table below. The options
that were not rolled over will convert into OSB shares on exercise.
Deferred Share Bonus Plan
The DSBP applies to Executive Directors and certain senior managers and
requires 50% of their performance bonuses to be deferred in shares for
three or five years. There are no further performance conditions
attached, but the share awards are subject to clawback provisions. The
DSBP is a share-based award and as such is expensed over its vesting
period. The first DSBP relating to 2014 bonuses was granted in March
2015.
During the year the Group accelerated the vesting date of the DSBP for
certain senior managers, with the 2017 and 2018 schemes vesting in
December 2019. The 2019 scheme is anticipated to vest in March 2020.
There were no changes to the DSBP relating to Executive Directors. The
2020 scheme awards for certain senior managers will no longer be
deferred with only a one year holding period applied from grant date.
Performance Share Plan
Executive Directors and certain senior managers are also eligible for a
PSP based on performance conditions linked to EPS, total shareholder
return ('TSR') and return on equity ('ROE') over a three-year vesting
period. The first award was issued in March 2015.
The performance conditions applying to PSP awards since 2017 are based
on a combination of EPS (40%), TSR (40%) and ROE (20%). Prior to 2017
PSP awards were equally weighted between EPS and TSR. The PSP conditions
are assessed independently. For the EPS element, growth targets are
linked to the Company's three-year growth plan, measuring growth from
the base figure for the prior year. For the TSR element, OSB share's
relative performance is measured against the FTSE All-Share Index
excluding investment trusts. For the ROE element, growth rates are
assessed against OSB's underlying profit after taxation as percentage of
average shareholders' equity.
As part of the Combination, OSB granted mirror PSP awards for the 2018
and 2019 CCFS schemes that terminated upon the Combination. The mirror
PSP schemes follow the same performance conditions as the OSB 2018 and
2019 PSP awards.
The share-based expense for the year includes a charge in respect of the
Sharesave Scheme, DSBP and PSP. All charges are included in employee
expenses within note 9 Administrative expenses. The IPO Award Scheme
fully vested in 2018.
The share-based payment expense during the year comprised the following:
Group Group
2019 2018
GBPm GBPm
----------- -----------
IPO Share Award -- 0.1
Sharesave Scheme 0.2 0.3
Deferred Share Bonus Plan 1.3 1.1
Performance Share Plan 2.5 1.0
4.0 2.5
Notes to the Financial Statements continued
For the year ended 31 December 2019
11. Share-based payments continued
Movements in the number of share awards and their weighted average
exercise prices are presented below:
Deferred
Share Bonus
Performance
Sharesave Scheme Plan Share Plan
Weighted average exercise
Number price, GBP Number
Number
-----------------------------------------
841,629 2.93 1,258,712 1,737,997
1,261,307 2.65 476,933 1,079,392
1,183,475 2.42 -- 931,853
(154,963) 1.96 (920,891)
At 1 January 2019 Granted (235,241)
CCFS mirror/roll over schemes Exercised (262,302) 3.23 (76,281)
Forfeited (417,630)
At 31 December 2019 2,869,146 2.63 738,473 3,096,371
Exercisable at:
31 December 2019 -- -- -- --
-----------------------------------------
IPO Share
Awards Sharesave Scheme
Deferred Share Bonus
Plan
Performance Share Plan
Weighted
average
exercise
price,
Number Number GBP Number Number
---------- --------- ----------- ----------- ---------
At 1 January
2018 652,198 732,341 2.60 1,186,762 1,589,030
Granted -- 313,443 3.35 376,231 708,146
Exercised (652,198) (162,093) 2.25 (301,575) (559,179)
Forfeited -- (42,062) 2.86 (2,706) --
At 31 December
2018 -- 841,629 2.93 1,258,712 1,737,997
Exercisable
at:
31 December
2018 -- 2,861 3.15 -- --
For the share-based awards granted during the year, the weighted average
grant date fair value was 208 pence (2018 restated: 276 pence).
The range of exercise prices and weighted average remaining contractual
life of outstanding awards are as follows:
Exercise price 2019 2018
----------------------------- ----------------------------
Weighted
Weighted average
average remaining
remaining contractual
contractual life
Number life (years) Number (years)
---------------- ---------------
Sharesave Scheme
134--335 pence
Deferred Share Bonus Plan
Nil 2,869,146 2.0 841,629 2.1
Performance Share Plan 738,473 0.6 1,258,712 1.3
Nil 3,096,371 1.7 1,737,997 1.4
6,703,990 1.7 3,838,338 1.5
---------------- ---------------
The grant date fair values of options/awards under the Group's
share-based payment schemes are determined using a Black-Scholes model.
The share price at the grant date for all schemes is adjusted for the
impact of dividends as the options/awards do not carry automatic rights
to dividends. The valuation of share options/awards is based on the
following input assumptions:
} Expected volatility --based on the Bank's share price volatility
} Attrition rate -- based on the attrition rate of eligible employees
and updated annually for the DSBP and PSP awards
} Dividend yield -- based on the average dividend yield across external
analysts' reports for the quarter prior to scheme grant date
Sharesave Scheme
2019 2018 2017 2016 2015
------------ ---------- ---------- ---------- ------------
Contractual
life,
years 3 5 3 5 3 5 3 5 3 5
Share price
at issue,
GBP 3.32 3.32 4.19 4.19 3.93 3.93 3.00 3.00 2.84 2.84
Exercise
price, GBP 2.65 2.65 3.35 3.35 3.15 3.15 2.40 2.40 2.27 2.27
Expected
volatility,
% 31.9 31.9 16.1 16.5 18.0 17.3 18.4 20.1 16.6 19.4
Dividend
yield, % 4.8 4.8 4.4 4.4 4.1 4.1 4.6 4.6 3.6 3.6
---------- ---------- ----------
Grant date
fair value,
GBP 0.90 0.91 0.40 0.43 0.75 0.70 0.10 0.15 0.75 0.79
---------- ---------- ----------
Deferred Share Bonus Plan
2019 2018 2017 2016
----------
Contractual life, years 3 3 3 5 3
Mid-market share price, GBP 3.96 3.80 4.04 4.04 3.09
Expected volatility, % 26.8 33.8 63.7 63.7 43.9
Attrition rate, % 8.4 9.7 11.8 11.8 12.0
Dividend yield, % 4.7 4.6 4.0 4.0 4.6
----------
Grant date fair value, GBP 3.47 3.34 3.61 3.37 2.71
----------
Performance Share Plan
2019 2018 2017 2016
Contractual life, years 3 3 3 3
Mid-market share price, GBP 3.96 4.11 4.04 3.09
Expected volatility, % 26.8 29.1 63.7 43.9
Attrition rate, % 8.4 9.7 11.8 12.0
Dividend yield, % 4.7 4.6 4.0 4.6
Vesting rate -- EPS, % 35.0 55.0 75.0 79.0
Vesting rate -- TSR, % 44.9 54.0 60.0 60.0
Vesting rate -- ROE, % 39.0 -- -- --
Grant date fair value, GBP 3.47 3.61 3.61 2.71
Notes to the Financial Statements continued
For the year ended 31 December 2019
11. Share-based payments continued
CCFS PSP Mirror Schemes
2019 2018
Contractual life, years 3 2
Mid-market share price, GBP 3.54 3.54
Expected volatility, % 28.6 28.6
Attrition rate, % -- --
Dividend yield, % 4.8 4.8
Vesting rate -- EPS, % 35.0 56.0
Vesting rate -- TSR, % 37.4 37.4
Vesting rate -- ROE, % 39.0 73.0
Grant date fair value, GBP 3.29 3.17
IPO Share Awards
The grant date fair value of the IPO Share Awards was the issue price of
GBP1.70 as they are in the form of nil price awards which carry rights
to dividends during the vesting period. The charge in respect of awards
with future vesting provisions assumed a weighted average attrition of
nil (2018: nil) per annum. This is lower than the overall expected
employee attrition rate as nil attrition was assumed for certain senior
managers who received larger awards. All IPO Share Awards were fully
vested at 31 December 2018.
12. Integration costs
Group Group
2019 2018
GBPm GBPm
----------- -----------
Consultant fees Staff costs 3.0 --
2.2 --
-----------
5.2 --
-----------
Consultant fees relate to advice on the Group's future operating
structure.
Staff costs relate to key personnel who will leave the Group under the
new operating model, but have been retained to assist in the integration
for a fixed period.
13. Exceptional items
Group Group
2019 2018
GBPm GBPm
----------- -----------
Consultant fees 4.0 --
Legal and professional fees 4.6 --
Success fees 7.0 --
Heritable option -- 9.8
15.6 9.8
Consultant, legal and professional and success fees relate to the
all-share Combination with CCFS.
The Heritable option recognised in 2018 was surrendered for a one-off
payment of GBP9.8m in 2019, with the Bank acquiring the joint ventures
('JV') partners' interest in the business. At the same time a new
revenue sharing arrangement was signed allowing the
JV partners to continue to lend alongside the Bank, sharing revenues in
accordance with a profit waterfall.
14. Taxation
The Group publishes its tax policy on its corporate website. The table
below shows the components of the Group's tax charge for the year:
Restated
Group Group1
2019 2018
GBPm GBPm
------------ ------------
(57.1) (42.5)
Corporation taxation Deferred taxation (0.2) (0.7)
Release of deferred taxation on CCFS Combination2 7.0 --
Total taxation (50.3) (43.2)
------------ ------------
1. The Group has restated the prior year comparatives for the taxation on
the interest expense on the GBP22.0m PSBs previously classified as equity
(see note 1).
2. Release of deferred taxation on CCFS Combination relates to the unwind of
the deferred tax asset recognised on the fair value adjustment of the
CCFS assets and liabilities at the acquisition date.
The charge for taxation on the Group's profit before taxation differs
from the charge based on the standard rate of UK Corporation Tax of 19%
(2018: 19%) as follows:
Restated
Group Group1
2019 2018
GBPm GBPm
------------- ---------------
Profit before taxation 209.1 182.8
Profit multiplied by the standard rate of UK Corporation (39.7)
Tax Bank surcharge (10.4) (34.6)
Taxation effects of: (3.0) (8.6)
Expenses not deductible for taxation purposes Negative goodwill 2.0 0.1
on acquisition not taxable 1.9 --
Rate difference on unwind of deferred tax arising on acquisition (2.7) --
Adjustments in respect of earlier years (0.7) 0.1
Tax adjustments in respect of share-based payments Impact 0.5 0.2
of tax losses carried forward 1.0 --
Tax on AT1 securities 0.2 -- (0.4)
Timing differences on capital items Other 0.6 --
------------- ---------------
Total taxation charge (50.3) (43.2)
1. The Group has restated the prior year comparatives for the taxation
on the interest expense on the GBP22.0m PSBs previously classified as
equity (see note 1).
The effective tax rate for the year ended 31 December 2019, excluding
the impact of adjustments in respect of earlier years, was 22.8% (2018:
23.4%).
During the year GBP1.1m (2018: nil) of tax has been recognised directly
within equity relating to the Group's share-based payment schemes.
Following the amendments to IAS 12, the tax on AT1 securities has been
recognised directly in profit or loss (2018: GBP1.5m directly in
equity).
During the year a tax credit of GBP0.2m (2018: nil) has been recognised
within other comprehensive income relating to investment securities
classified as FVOCI.
A reduction in the UK corporation tax rate from 19% to 18% (effective
from 1 April 2020) was enacted on 26 October 2015. A further reduction
to 17% (effective from 1 April 2020) was substantively enacted on 6
September 2016. In the March 2020 Budget it was announced that the cut
in the rate to 17% will now not occur and the corporation tax rate will
be held at 19%. As this has not been enacted by the balance sheet date,
deferred tax balances as at 31 December 2019 continue to be measured at
17%.
Notes to the Financial Statements continued
For the year ended 31 December 2019
15. Earnings per share
Earnings per share ('EPS') are based on the profit for the period and
the weighted average 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 year.
Diluted EPS take into account share options and awards which can be
converted to ordinary shares.
For the purpose of calculating EPS, profit attributable to ordinary
shareholders is arrived at by adjusting profit for the year for the
coupons on AT1 securities classified as equity. The tax on coupons for
the current period is included within the profit for the period, in line
with the changes to IAS 12 Income Taxes. The tax on coupons for the
prior period is based on the rate of taxation applicable to the Bank,
including the bank surcharge:
Restated
Group Group1
2019 2018
GBPm GBPm
----------- ------------
Profit for the year 158.8 139.6
Adjustments: (5.5) (5.5)
Coupon on AT1 securities classified as equity Tax on coupons -- 1.5
------------
Profit attributable to ordinary shareholders 153.3 135.6
----------- ------------
Group Group
2019 2018
----------- -----------
Weighted average number of shares, millions
Basic 291.6 244.2
Dilutive impact of share-based payment schemes 1.8 2.0
Diluted 293.4 246.2
Earnings per share, pence per share 52.6 55.5
Basic Diluted 52.2 55.0
----------- -----------
1. The Group has restated the prior year comparatives for the interest
expense and tax on the GBP22.0m PSBs previously classified as equity
(see note 1).
16. Dividends
During the year, the Bank paid the following dividends:
Bank 2019 Bank 2018
--------------- ---------------
Pence per Pence per
GBPm share GBPm share
Final dividend for the prior year Interim dividend 25.3 10.3 22.7 9.3
for the current year 12.0 4.9 10.5 4.3
--------------- ---------------
37.3 33.2
--------------- ---------------
The Directors propose a final dividend of GBP49.9m, 11.2 pence per share
(2018: GBP25.2m, 10.3 pence) payable on 13 May 2020 with an ex-dividend
date of 26 March 2020 and a record date of 27 March 2020. This dividend
is not reflected in these financial statements as it is subject to
approval by shareholders at the AGM on 7 May 2020. Together with the
interim dividend of GBP12.0m, 4.9 pence (2018: GBP10.5m, 4.3 pence) per
share, the total dividend for 2019 is GBP61.9m, 16.1 pence (2018:
GBP35.8m, 14.6 pence) per share.
A summary of the Bank's distributable reserves from which dividends can
be paid is shown below:
Restated
Bank1
Bank 2019 2018
GBPm GBPm
--------------- ------------
Retained earnings 407.0 296.7
Unrealised gains2 (52.8) (19.8)
Other distributable reserves (see note 43) 5.3 4.7
Distributable reserves 359.5 281.6
---------------
1. The Bank has restated the prior year comparatives to classify the
transfer reserve as non-distributable.
2. Unrealised gains relate to the Bank's fair value adjustments on hedged
assets.
17. Cash and cash equivalents
The following table analyses the cash and cash equivalents disclosed in
the Statement of Cash Flows:
Group Group
2019 2018 Bank 2019 Bank 2018
GBPm GBPm GBPm GBPm
----------- ----------- --------------- -------------
Cash in hand
Unencumbered loans and advances to credit institutions 0.4 0.4 0.4 0.4
Investment securities with original maturity 2,052.5 1,323.8 1,106.3 1,316.5
less than 3 months 49.9 -- 49.9 --
2,102.8 1,324.2 1,156.6 1,316.9
----------- ----------- --------------- -------------
18. Loans and advances to credit institutions
Group Group
2019 2018 Bank 2019 Bank 2018
GBPm GBPm GBPm GBPm
----------- ----------- --------------- -------------
Unencumbered:
BoE call account 1,916.2 1,295.2 1,081.8 1,295.2
Call accounts 81.7 28.6 24.0 21.3
Cash held in special
purpose vehicles1 44.0 -- 0.5 --
Term deposits 10.6 -- -- --
Encumbered:
BoE cash ratio deposit 41.7 20.0 27.5 20.0
Swap margin given 110.4 3.5 62.2 3.5
2,204.6 1,347.3 1,196.0 1,340.0
1. Cash held in special purpose vehicle is ring-fenced for the use in
managing the Group's securitised debt facilities under the terms of
securitisation agreements.
19. Investment securities
Group Group
2019 2018 Bank 2019 Bank 2018
GBPm GBPm GBPm GBPm
----------- ----------- --------------- -------------
Held at FVOCI: 149.8 58.9 149.8 58.9
UK and EU Sovereign debt RMBS loan notes 358.9 -- -- --
Held at amortised cost: 508.7 58.9 149.8 58.9
RMBS loan notes 126.6 -- -- --
-----------
635.3 58.9 149.8 58.9
----------- ----------- --------------- -------------
At 31 December 2019 the Group had GBP173.0m of FVOCI RMBS loan notes
sold under repos. The Group had no investment securities sold under
repos or pledged as at 31 December 2018. The Bank had no investment
securities sold under repos or pledged as collateral as at the 2019 and
2018 reporting dates.
The Directors consider that the primary purpose of holding investment
securities is prudential. These securities are held as liquid assets
with the intention of use on a continuing basis in the Group's
activities and are classified as FVOCI and amortised cost in accordance
with the Group's business model for each security (2018: FVOCI).
Movements during the year of investment securities held by the Group and
Bank are analysed as follows:
Group Group
2019 2018 Bank 2019 Bank 2018
GBPm GBPm GBPm GBPm
----------- ----------- --------------- -------------
At 1 January 58.9 19.1 58.9 19.1
Additions1 439.8 79.9 439.8 79.9
CCFS Combination 493.5 -- -- --
Disposals and
maturities (357.7) (39.9) (349.0) (39.9)
Changes in fair
value 0.8 (0.2) 0.1 (0.2)
--------------------
At 31 December 635.3 58.9 149.8 58.9
---------------
1. Additions include GBP49.9m of investment securities with an original
maturity of less than three months, as disclosed in note 17 (2018: nil).
Notes to the Financial Statements continued
For the year ended 31 December 2019
20. Loans and advances to customers
Group Group
2019 2018 Bank 2019 Bank 2018
GBPm GBPm GBPm GBPm
----------- ----------- --------------- -------------
Held at amortised cost:
Loans and advances (see note 21) 18,419.9 8,998.0 8,420.8 7,224.3
Finance leases (see note 22) 47.7 7.2 -- --
18,467.6 9,005.2 8,420.8 7,224.3
Less: Expected credit losses (see
note 23) (42.9) (21.9) (26.6) (16.1)
18,424.7 8,983.3 8,394.2 7,208.2
---------------
Residential mortgages held at fair
value 22.1 -- -- --
18,446.8 8,983.3 8,394.2 7,208.2
---------------
21. Loans and advances
Group 2019 2018
------------------------------------
OSB CCFS Total OSB
GBPm GBPm GBPm GBPm
----------- ----------- -----------
Gross carrying amount
Stage 1 9,999.2 7,240.0 17,239.2 8,279.6
Stage 2 442.4 307.1 749.5 436.8
Stage 3 277.7 16.7 294.4 225.4
Stage 3 (POCI) 53.6 83.2 136.8 56.2
10,772.9 7,647.0 18,419.9 8,998.0
2019 2018
Bank GBPm GBPm
Gross carrying amount
Stage 1 7,785.0 6,657.0
Stage 2 371.3 346.6
Stage 3 211.1 164.8
Stage 3 (POCI) 53.4 55.9
8,420.8 7,224.3
The mortgage loan balances pledged as collateral for liabilities are:
Restated Restated
Group Group1 Bank1
2019 2018 Bank 2019 2018
GBPm GBPm GBPm GBPm
----------- ------------ --------------- ------------
BoE under TFS and
ILTR 4,458.3 2,552.5 2,775.7 2,552.5
Securitisation 366.7 -- 234.3 --
Warehouse funding 97.4 -- -- --
Master servicer for
securitisation
vehicle 40.4 16.0 40.4 16.0
4,962.8 2,568.5 3,050.4 2,568.5
1. The Group and Bank have restated the 2018 comparatives to show
excess collateral with the BoE under TFS and ILTR as unencumbered in
line with guidance from the PRA.
The Group's securitisation programmes, use of TFS and ILTR and Warehouse
funding arrangements result in certain assets being encumbered as
collateral against such funding. Assets that are encumbered cannot be
used for any other purposes. As at 31 December 2019 the percentage of
the Group's gross customer loans and receivables that are encumbered is
27% (2018: 28%) and the Bank's 36% (2018: 36%).
The Bank's deemed loan liability of GBP240.2m is comprised of GBP464.3m
of mortgage loans sold by the Bank to Canterbury Finance No.1 plc and
GBP6.5m of deemed loan premium, offset by retained notes issued by
Canterbury Finance No.1 plc of GBP230.6m as the bank adopts the net
accounting approach for retained interests.
The tables below show the movement in loans and advances to customers by
IFRS 9 stage during the year, based on the following assumptions:
Stage 3
Stage Stage
Stage 1 2 3 (POCI) Total
Group GBPm GBPm GBPm GBPm GBPm
---------
At 31 December 2017 6,782.5 292.4 183.0 69.7 7,327.6
Originations1 3,043.4 -- -- -- 3,043.4
Repayments and write--offs2 (1,265.3) (50.8) (43.4) (13.5) (1,373.0)
Transfers:
-- To Stage 1 170.5 (150.0) (20.5) -- --
-- To Stage 2 (353.8) 375.1 (21.3) -- --
-- To Stage 3 (97.7) (29.9) 127.6 -- --
----------------------------
At 31 December 2018 8,279.6 436.8 225.4 56.2 8,998.0
Originations(1) 4,098.6 -- -- -- 4,098.6
CCFS Combination3 Repayments and write--offs(2) 7,091.1 43.5 -- 94.4 7,229.0
Transfers: (1,825.2) (21.6) (47.5) (17.3)
-- To Stage 1 (1,911.6)
-- To Stage 2 176.9 (162.7) (14.2) -- --
-- To Stage 3 (495.9) 517.7 (21.8) -- --
Incurred loss protection4 (86.1) (64.5) 150.6 -- --
0.2 0.3 1.9 3.5 5.9
----------------------------------
At 31 December 2019 17,239.2 749.5 294.4 136.8
18,419.9
----------------------------------
1. Originations include further advances and drawdowns on existing
commitments.
2. Repayments and write-offs include customer redemptions.
3. The mortgages acquired in the all-share Combination with CCFS are shown
at the acquisition date fair value.
4. During the period the Group reclassified GBP5.9m of incurred loss
protection on acquired portfolios from loans and advances to ECL to
reflect the Group's total ECL position. The Group has not reclassified
the comparative information where the incurred loss balance included
within loans and advances was GBP7.2m.
The Group did not purchase any external mortgage books during 2019
(2018: nil) other than those acquired in the Combination.
Stage Stage Stage
Stage 1 2 3 3 (POCI) Total
Bank GBPm GBPm GBPm GBPm GBPm
------------
At 31 December 2017 5,679.0 185.8 131.6 69.1 6,065.5
Originations(1) 2,276.2 -- -- -- 2,276.2
Repayments and
write--offs(2) (1,049.4) (28.7) (26.1) (13.2) (1,117.4)
Transfers:
-- To Stage 1 101.0 (83.6) (17.4) -- --
-- To Stage 2 (279.0) 297.5 (18.5) -- --
-- To Stage 3 (70.8) (24.4) 95.2 -- --
----------------------
At 31 December 2018 6,657.0 346.6 164.8 55.9 7,224.3
Originations(1) 2,395.3 -- -- -- 2,395.3
Repayments and write--offs(2) Transfers: (1,153.2) (19.1) (26.4) (6.0)
-- To Stage 1 (1,204.7)
-- To Stage 2 117.8 (106.8) (11.0) -- --
-- To Stage 3 (178.7) 196.4 (17.7) -- --
Incurred loss (53.4) (46.1) 99.5 -- --
protection3 0.2 0.3 1.9 3.5 5.9
------------------------------------
At 31 December 2019 7,785.0 371.3 211.1 53.4 8,420.8
------------------------------------
1. Originations include further advances and drawdowns on existing
commitments.
2. Repayments and write-offs include customer redemptions.
3. During the period the Bank reclassified GBP5.9m of incurred loss
protection on acquired portfolios from loans and advances to ECL to
reflect the Bank's total ECL position. The Bank has not reclassified the
comparative information where the incurred loss balance included within
loans and advances was GBP7.2m.
Notes to the Financial Statements continued
For the year ended 31 December 2019
22. Finance leases
The Group commenced asset finance lending in October 2018 through an
existing subsidiary in the Group, InterBay Asset Finance Limited.
Group Group
2019 2018
GBPm GBPm
----------- -----------
Net investment in finance leases, receivable 11.5 2.2
Less than one year Between one and five years More than five 35.0 4.9
years 1.2 0.1
47.7 7.2
----------- -----------
The Group has recognised GBP0.3m of ECLs on finance leases as at 31
December 2019 (2018: GBP0.1m).
23. Expected credit loss
The ECL has been calculated based on various scenarios as set out below:
Weighted Weighted
ECL ECL ECL
provision Weighting provision ECL provision Weighting provision
Group 2019 2019 2019 2018 2018 2018
At 31 December GBPm % GBPm GBPm % GBPm
----------------------------
Scenarios
Upside 14.6 10 1.5 8.6 -- --
Base case 24.4 40 9.7 9.2 50 4.6
Downside scenario 48.1 35 16.8 12.8 40 5.1
Severe downside scenario 62.5 15 9.4 56.2 10 5.6
Total weighted provisions 37.4 15.3
Non-modelled Provisions:
Individually assessed provisions -- -- 4.2 -- -- 5.4
Post model adjustments1 -- -- 1.3 -- -- 1.0
Undrawn loan facilities -- -- -- -- -- 0.2
Total provision 42.9 21.9
Weighted Weighted
ECL ECL ECL
provision Weighting provision ECL provision Weighting provision
Bank 2019 2019 2019 2018 2018 2018
At 31 December GBPm % GBPm GBPm % GBPm
----------------------------
Scenarios
Upside 9.9 10 1.0 7.0 -- --
Base case 17.2 40 6.9 7.6 50 3.8
Downside scenario 31.1 35 10.9 11.2 40 4.5
Severe downside scenario 39.1 15 5.9 54.6 10 5.4
Total weighted provisions 24.7 13.7
Non-modelled Provisions:
Individually assessed provisions -- -- 0.8 -- -- 1.3
Post model adjustments1 -- -- 1.1 -- -- 0.9
Undrawn loan facilities -- -- -- -- -- 0.2
Total provision 26.6 16.1
1. Post model adjustments have been made to a number of probability of
default models and the OSB segment mortgage loss given default model to
ensure predicted estimates are aligned to recently observed actual
performance. Where model predictions more closely align with actual
performance these post model adjustments will be reduced or removed over
time. The Group is currently developing second generation models which
will replace existing models, with a target implementation date within
2020.
The Group's ECL by segment and IFRS 9 stage is shown below:
Group 2019 2018
-----------------------------
OSB CCFS Total OSB
GBPm GBPm GBPm GBPm
----------- --------- -----------
Stage 1 3.5 2.1 5.6 4.3
Stage 2 3.6 2.0 5.6 5.6
Stage 3 23.4 0.4 23.8 10.2
Stage 3 (POCI) 5.1 2.8 7.9 1.6
Undrawn loan facilities1 -- -- -- 0.2
35.6 7.3 42.9 21.9
2019 2018
Bank GBPm GBPm
Stage 1 2.8 3.4
Stage 2 3.3 4.7
Stage 3 15.4 6.2
Stage 3 (POCI) 5.1 1.6
Undrawn loan facilities1 -- 0.2
26.6 16.1
1. Following the Combination, the Group has adopted a consistent
approach in recognising ECL on undrawn loan facilities within provisions
(see note 38). The ECL on undrawn loan facilities was previously
classified as Stage 1.
The tables below show the movement in the ECL by IFRS 9 stage during the
year. ECLs on originations reflect the IFRS 9 stage of loans originated
during the year as at 31 December and not the date of origination.
Remeasurement of loss allowance relates to existing loans which did not
redeem during the year and includes the impact of loans moving between
IFRS 9 stages.
Stage 3
Stage Stage
Stage 1 2 3 (POCI) Total
Group GBPm GBPm GBPm GBPm GBPm
----------
At 31 December 2017 7.8 2.3 13.3 1.8 25.2
Originations 2.1 -- -- -- 2.1
Repayments and write-offs (0.3) (0.2) (7.0) (0.2) (7.7)
Remeasurement of loss allowance (6.1) 6.9 4.0 -- 4.8
Transfers:
-- To Stage 1 1.4 (0.8) (0.6) -- --
-- To Stage 2 (0.8) 1.3 (0.5) -- --
-- To Stage 3 (5.8) (0.4) 6.2 -- --
Changes in assumptions and model
parameters 6.2 (3.5) (5.2) -- (2.5)
----------
At 31 December 2018 4.5 5.6 10.2 1.6 21.9
Originations 1.9 -- -- -- 1.9
CCFS Combination Repayments and write-offs -- -- -- 3.6 3.6
Remeasurement of loss allowance Transfers: (0.6) (0.4) (4.3) (0.2) (5.5)
-- To Stage 1 (3.4) (0.5) 18.8 (0.6) 14.3
-- To Stage 2 1.9 (1.6) (0.3) -- --
-- To Stage 3 (0.2) 0.6 (0.4) -- --
Changes in assumptions and model parameters (0.1) (1.0) 1.1 -- --
Incurred loss protection1 1.4 2.6 (3.2) -- 0.8
0.2 0.3 1.9 3.5 5.9
At 31 December 2019 5.6 5.6 23.8 7.9 42.9
------------------------------
1. During the period the Group reclassified GBP5.9m of incurred loss
protection on acquired portfolios from loans and advances to ECL to
reflect the Group's total ECL position. The Group has not reclassified
the comparative information where the incurred loss balance included
within loans and advances was GBP7.2m.
Notes to the Financial Statements continued
For the year ended 31 December 2019
23. Expected credit loss continued
Stage
3
Stage Stage
Stage 1 2 3 (POCI) Total
Bank GBPm GBPm GBPm GBPm GBPm
-----------
At 31 December 2017 5.1 1.4 8.6 1.8 16.9
Originations 1.8 -- -- -- 1.8
Repayments and write-offs (0.1) (0.1) (4.1) (0.2) (4.5)
Remeasurement of loss allowance (1.7) 6.8 1.6 -- 6.7
Transfers:
-- To Stage 1 0.9 (0.4) (0.5) -- --
-- To Stage 2 (0.6) 1.0 (0.4) -- --
-- To Stage 3 (4.4) (0.3) 4.7 -- --
Changes in assumptions and model
parameters 2.6 (3.7) (3.7) -- (4.8)
-----------
At 31 December 2018 3.6 4.7 6.2 1.6 16.1
Originations 1.3 -- -- -- 1.3
Repayments and write-offs Remeasurement (0.3) (0.4) (2.8) (0.1) (3.6)
of loss allowance Transfers: (4.5) (2.3) 12.8 0.1 6.1
-- To Stage 1 1.4 (1.2) (0.2) -- --
-- To Stage 2 (0.2) 0.5 (0.3) -- --
-- To Stage 3 (0.1) (0.9) 1.0 -- --
Changes in assumptions and model parameters 1.4 2.6 (3.2) -- 0.8
Incurred loss protection1 0.2 0.3 1.9 3.5 5.9
--------------------------------------------
At 31 December 2019 2.8 3.3 15.4 5.1 26.6
--------------------------------------------
1. During the period the Bank reclassified GBP5.9m of
incurred loss protection on acquired portfolios from loans and advances
to ECL to reflect the Bank's total ECL position. The Bank has not
reclassified the comparative information where the incurred loss balance
included within loans and advances was GBP7.2m.
The tables below show the stage 2 ECL balances by transfer criteria:
Carrying ECL Coverage Carrying ECL Coverage
value 2019 2019 2019 value 2018 2018 2018
Group GBPm GBPm % GBPm GBPm %
--------------- ----------------
Criteria:
Relative PD movement 588.2 4.8 0.82 414.4 5.4 1.28
Qualitative measures 79.8 0.4 0.44 -- -- --
30 days past due
backstop 81.5 0.4 0.54 22.4 0.2 1.09
Total 749.5 5.6 0.75 436.8 5.6 1.27
Carrying ECL Coverage Carrying ECL Coverage
value 2019 2019 2019 value 2018 2018 2018
Bank GBPm GBPm % GBPm GBPm %
--------------- ----------------
Criteria:
Relative PD movement 306.8 3.0 0.98 325.7 4.5 1.37
Qualitative measures 35.2 0.1 0.32 -- -- --
30 days past due
backstop 29.3 0.2 0.80 20.9 0.2 1.13
Total 371.3 3.3 0.90 346.6 4.7 1.35
The Group has a number of qualitative measures to determine whether a
SICR has taken place. These triggers utilise both internal performance
information, to analyse whether an account is in distress but not yet in
arrears, and external credit bureau information, to determine whether
the customer is experiencing financial difficulty with an external
credit obligation.
24. Impairment losses
Group Group
2019 2018
GBPm GBPm
----------- -----------
Write-offs in year 4.1 11.1
Disposals -- 0.3
CCFS Combination 3.6 --
Increase/(decrease) in provision 7.9 (3.3)
15.6 8.1
The CCFS Combination losses relate to the initial ECL recognised on the
CCFS loan book following Combination in October 2019.
25. Derivatives
The table below reconciles the gross amount of derivative contracts to
the carrying balance shown in the Statement of Financial Position:
Net amount Contracts
Group Gross amount of financial subject Cash collateral Net amount
of assets/ to master paid/(received) GBPm
recognised (liabilities) netting not offset
financial presented agreements in the Statement
assets/ in the not offset of
(liabilities) Statement in the Financial
GBPm of Statement Position
Financial of GBPm
Position Financial
GBPm Position
GBPm
-----------------
At 31 December 2019
Derivative assets: 21.1 21.1 (9.8) (8.0) 3.3
Interest rate risk hedging Derivative (92.8) (92.8) 9.8 110.4 27.4
liabilities:
Interest rate risk hedging
At 31 December 2018
Derivative assets:
Interest rate risk hedging 11.7 11.7 (10.3) (1.0) 0.4
----------------------------- ---------- -----------
Derivative liabilities:
Interest rate risk hedging (15.1) (15.1) 10.3 3.5 (1.3)
Heritable option(1) (9.8) (9.8) -- -- (9.8)
----------------------------- ---------- -----------
(24.9) (24.9) 10.3 3.5 (11.1)
---------- -----------
Included within the Group's derivative liabilities GBP3.4m (2018:
GBP3.0m) of derivative contracts not covered by master netting
agreements and therefore no cash collateral has been paid.
Net amount Contracts
Bank Gross amount of financial subject Cash collateral Net amount
of assets/ to master paid/(received) GBPm
recognised (liabilities) netting not offset
financial presented agreements in the Statement
assets/ in the not offset of
(liabilities) Statement in the Financial
GBPm of Statement Position
Financial of GBPm
Position Financial
GBPm Position
GBPm
-----------------
At 31 December 2019
Derivative assets: 8.7 8.7 (2.5) (7.8) (1.6)
Interest rate risk hedging Derivative (54.3) (54.3) 2.5 62.2 10.4
liabilities:
Interest rate risk hedging
At 31 December 2018
Derivative assets:
Interest rate risk hedging 11.7 11.7 (10.3) (1.0) 0.4
----------------------------- ---------- -----------
Derivative liabilities:
Interest rate risk hedging (15.1) (15.1) 10.3 3.5 (1.3)
Heritable option(1) (9.8) (9.8) -- -- (9.8)
----------------------------- ---------- -----------
(24.9) (24.9) 10.3 3.5 (11.1)
---------- -----------
1. The Group had a put/call option over Heritable Capital Limited
('HCL') as part of the development finance joint venture, as further
discussed in note 13.
Included within the Bank's derivative liabilities is GBP3.4m (2018:
GBP3.0m) of derivative contracts not covered by master netting
agreements and therefore no cash collateral has been paid.
Notes to the Financial Statements continued
For the year ended 31 December 2019
25. Derivatives continued
The tables below profile the timing of nominal amounts for interest rate
risk hedging derivatives based on contractual maturity:
More
Total Less than 3--12 1--5 than
nominal 3 months months years 5 years
Group GBPm GBPm GBPm GBPm GBPm
-------------- ----------- ----------
At 31 December 2019
Derivative assets 7,795.4 1,110.8 2,608.2 3,760.9 315.5
Derivative
liabilities 9,982.4 144.3 2,528.6 7,155.5 154.0
--------------
17,777.8 1,255.1 5,136.8 10,916.4 469.5
--------------
At 31 December 2018
Derivative assets 1,999.0 106.0 330.0 1,563.0 --
Derivative
liabilities 4,532.2 195.0 2,090.0 1,966.2 281.0
--------------
6,531.2 301.0 2,420.0 3,529.2 281.0
--------------
The Group has 1,175 (2018: 206) derivative contracts with an average
fixed rate of 0.91% (2018: 1.23%).
More
Total Less than 3--12 1--5 than
nominal 3 months months years 5 years
Bank GBPm GBPm GBPm GBPm GBPm
-------------- ----------- ----------
At 31 December 2019
Derivative assets 3,080.0 475.0 1,395.0 1,110.0 100.0
Derivative
liabilities 4,462.9 8.3 789.6 3,549.0 116.0
7,542.9 483.3 2,184.6 4,659.0 216.0
At 31 December 2018
Derivative assets 1,999.0 106.0 330.0 1,563.0 --
Derivative
liabilities 4,532.2 195.0 2,090.0 1,966.2 281.0
6,531.2 301.0 2,420.0 3,529.2 281.0
The Bank has 205 (2018: 206) derivative contracts with an average fixed
rate of 1.17% (2018: 1.23%).
26. Hedge accounting
The tables below analyse the Group's and Bank's portfolio hedge
accounting for fixed rate loans and advances to customers:
Loans and advances to customers Group 2019 Group 2018
---------------- ----------------
Hedged Hedging Hedged Hedging
item instrument item instrument
GBPm GBPm GBPm GBPm
Carrying amount of hedged item/nominal value 10,312.5
of hedging instrument 10,248.3 3,168.7 3,166.2
Cumulative fair value adjustments 64.2 (75.6) 2.5 (2.2)
Fair value adjustments for the period 70.1 (75.1) (13.8) 11.0
Cumulative fair value on cancelled hedge
relationships 20.4 -- 17.3 --
The cumulative fair value adjustments of the hedging instrument comprise
GBP13.2m (2018: GBP11.7m) recognised within derivative assets and
GBP88.8m (2018: GBP13.9m) recognised within derivative liabilities.
Loans and advances to customers Bank 2019 Bank 2018
---------------- ----------------
Hedged Hedging Hedged Hedging
item instrument item instrument
GBPm GBPm GBPm GBPm
Carrying amount of hedged item/nominal value
of hedging instrument 4,574.0 4,537.9 3,168.7 3,166.2
Cumulative fair value adjustments 36.1 (45.5) 2.5 (2.2)
Fair value adjustments for the period 39.8 (43.7) (13.8) 11.0
Cumulative fair value on cancelled hedge
relationships 16.7 -- 17.3 --
The cumulative fair value adjustments of the hedging instrument comprise
GBP6.8m (2018: GBP11.7m) recognised within derivative assets and
GBP52.3m (2018: GBP13.9m) recognised within derivative liabilities.
The cumulative fair value adjustments on cancelled hedge relationships
represent the fair value adjustment for interest rate risk predominantly
on the 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.
The movement in cancelled hedge relationships is as follows:
Group Group
2019 2018 Bank 2019 Bank 2018
GBPm GBPm GBPm GBPm
----------- ----------- --------------- -------------
At 1 January 17.3 16.0 17.3 16.0
New cancellations(1) 8.6 5.9 4.9 5.9
Amortisation (5.5) (4.6) (5.5) (4.6)
At 31 December 20.4 17.3 16.7 17.3
1. Following the securitisation of mortgages during the year, the
Group cancelled swaps which were effective prior to the securitisation,
with the designated hedge moved to cancelled hedge relationships to be
amortised over the original life of the swap.
The tables below analyse the Group's and Bank's portfolio hedge
accounting for fixed rate amounts owed to retail depositors:
Customer deposits Group 2019 Group 2018
---------------------------- ----------------------------
Hedged Hedging Hedged Hedging
item instrument item instrument
GBPm GBPm GBPm GBPm
----------- --------------- ----------- ---------------
Carrying amount of hedged item/nominal value
of hedging instrument 6,684.6 6,687.5 3,250.0 3,250.0
Cumulative fair value adjustments (2.9) 3.5 -- (1.5)
Fair value adjustments for the period (4.6) 4.8 0.4 (0.3)
The cumulative fair value adjustments of the hedging instrument comprise
GBP5.9m (2018: GBP0.1m) recognised within derivative assets and GBP2.4m
(2018: GBP1.6m) recognised within derivative liabilities.
Customer deposits Bank 2019 Bank 2018
---------------------------- ----------------------------
Hedged Hedging Hedged Hedging
item instrument item instrument
GBPm GBPm GBPm GBPm
----------- --------------- ----------- ---------------
Carrying amount of hedged item/nominal value
of hedging instrument 2,804.9 2,805.0 3,250.0 3,250.0
Cumulative fair value adjustments (0.1) 0.5 -- (1.5)
Fair value adjustments for the period (1.8) 2.2 0.4 (0.3)
The cumulative fair value adjustments of the hedging instrument comprise
GBP1.0m (2018: GBP0.1m) recognised within derivative assets and GBP0.5m
(2018: GBP1.4m) recognised within derivative liabilities.
27. Other assets
Group Group
2019 2018 Bank 2019 Bank 2018
GBPm GBPm GBPm GBPm
----------- ----------- --------------- -------------
Prepayments 9.3 2.3 3.2 2.1
Other assets 5.0 3.4 4.3 3.4
14.3 5.7 7.5 5.5
Notes to the Financial Statements continued
For the year ended 31 December 2019
i)
28. Deferred
taxation
Losses IFRS 9
carried Accelerated Share--based transitional
forward depreciation payments adjustments Others1 Total
Group GBPm GBPm GBPm GBPm GBPm GBPm
------------- -------------------
At 31 December
2017 2.5 0.1 2.5 0.7 -- 5.8
Profit or loss
(charge)/credit (1.1) (0.2) 0.6 -- -- (0.7)
Transferred to
corporation tax
liability -- -- (1.6) -- -- (1.6)
At 31 December
2018 1.4 (0.1) 1.5 0.7 -- 3.5
Deferred taxation asset:
Profit or loss (charge)/credit (0.5) 0.3 0.8 (0.1) (0.7) (0.2)
CCFS Combination -- (0.1) 0.5 0.1 1.4 1.9
Transferred to corporation tax
liability -- -- (1.3) -- -- (1.3)
Tax taken directly to OCI -- -- -- -- (0.2) (0.2)
Tax taken directly to equity -- -- 1.1 -- -- 1.1
--------- -----
At 31 December 2019 0.9 0.1 2.6 0.7 0.5 4.8
---------
1. Others include deferred taxation assets recognised on financial
assets classified as FVOCI, derivatives and short-term timing
differences.
As at 31 December 2019, the Group had GBP3.5m (2018: GBP3.5m) of losses
for which a deferred tax asset has not been recognised as the Group does
not expect sufficient future profits to be available to utilise the
losses.
IFRS 9
Accelerated Share--based transitional
depreciation payments adjustments Total
Bank GBPm GBPm GBPm GBPm
-------------------
At 31 December
2017 -- 2.5 0.3 2.8
Profit or loss
(charge)/credit (0.2) 0.6 -- 0.4
Transferred to
corporation tax
liability -- (1.6) -- (1.6)
At 31 December
2018 (0.2) 1.5 0.3 1.6
Profit or loss credit 0.3 0.8 -- 1.1
Transferred to corporation tax liability Tax -- (1.3) -- (1.3)
taken directly to equity -- 0.8 -- 0.8
---------- ------- -----------
At 31 December 2019 0.1 1.8 0.3 2.2
--------- ---------- ------- -----------
ii) Deferred taxation liability:
The deferred tax liability recognised on the Combination relates to the
timing differences of the recognition of assets and liabilities at fair
value, where the fair values will unwind in future periods in-line with
the underlying asset or liability. The deferred tax liability has been
measured using the relevant rates for the expected periods of
utilisation.
Group
CCFS
Combination
GBPm
At 31 December 2018 --
70.1
CCFS Combination Profit or loss credit (7.0)
------------
At 31 December 2019 63.1
------------
29. Property, plant and equipment
Right of use
Freehold assets Property
land Leasehold Equipment Other
and buildings improvements and fixtures leases leases Total
Group GBPm GBPm GBPm GBPm GBPm GBPm
-------------------
Cost
At 1
January
2018 16.2 0.6 9.9 -- -- 26.7
Additions -- 0.3 2.5 -- -- 2.8
Disposals
and
write-offs -- -- (1.3) -- -- (1.3)
Foreign
exchange
difference (0.2) -- (0.1) -- -- (0.3)
At 31
December
2018 16.0 0.9 11.0 -- -- 27.9
Adoption of IFRS 16
(see note 2) -- -- -- 3.8 -- 3.8
-------- -------
At 1 January 2019 16.0 0.9 11.0 3.8 -- 31.7
Additions 3.1 1.5 2.4 2.5 0.1 9.6
CCFS Combination -- 0.3 2.1 6.4 1.2 10.0
Disposals and
write-offs(1) -- -- (1.2) -- -- (1.2)
Foreign exchange
difference 0.2 -- 0.1 -- -- 0.3
-------- -------
At 31 December 2019 19.3 2.7 14.4 12.7 1.3 50.4
-------- -------
Depreciation
At 1 January 2018 0.6 0.2 4.4 -- -- 5.2
Charged in year 0.2 0.1 1.9 -- -- 2.2
Disposals and
write-offs -- -- (1.3) -- -- (1.3)
---------
At 31 December 2018 0.8 0.3 5.0 -- -- 6.1
0.3 0.2 1.0 0.1
Charged in year CCFS Combination -- -- 2.3 -- -- 3.9
Disposals and write-offs(1) -- -- -- (1.2) -- -- -- (1.2)
-------- -------------- --------------
At 31 December 2019 1.1 0.5 6.1 1.0 0.1 8.8
--------- -------- -------------- ------- ------- --------------
At 31 December
2019 18.2 2.2 8.3 11.7 1.2 41.6
---------------- ---------- -------- -------- -------- -------- --------
Net book value
At 31 December 2018 15.2 0.6 6.0 -- -- 21.8
1. During the year the Group wrote off fully depreciated assets.
Notes to the Financial Statements continued
For the year ended 31 December 2019
29. Property, plant and equipment continued
Right of use assets
Freehold land and Leasehold Equipment Property Other
buildings improvements and fixtures leases leases Total
Bank GBPm GBPm GBPm GBPm GBPm GBPm
Cost
At 1 January 2018 11.5 0.6 7.4 -- -- 19.5
Additions -- 0.1 1.8 -- -- 1.9
Disposals and
write-offs -- -- (1.0) -- -- (1.0)
At 31 December 2018 11.5 0.7 8.2 -- -- 20.4
Adoption of IFRS 16 (see note
2) -- -- -- 2.3 -- 2.3
At 1 January 2019 11.5 0.7 8.2 2.3 -- 22.7
Additions -- 1.5 1.9 2.6 0.1 6.1
Disposals and write-offs1 -- -- (0.9) -- -- (0.9)
At 31 December 2019 11.5 2.2 9.2 4.9 0.1 27.9
Depreciation
At 1 January 2018 0.6 0.2 3.3 -- -- 4.1
Charged in year 0.1 0.1 1.5 -- -- 1.7
Disposals and write-offs -- -- (1.0) -- -- (1.0)
---------
At 31 December 2018 0.7 0.3 3.8 -- -- 4.8
Charged in year
Disposals and 0.2 0.1 1.8 0.7 -- 2.8
write-offs1 -- -- (0.9) -- -- (0.9)
---------- ----- -----------
At 31 December
2019 0.9 0.4 4.7 0.7 -- 6.7
--------- ------ ---------- ------- ----- -----------
At 31 December 2019 10.6 1.8 4.5 4.2 0.1 21.2
-------------------- ---------- -------- --- ------- -------- --------
Net book value
At 31 December 2018 10.8 0.4 4.4 -- -- 15.6
1. During the year the Bank wrote off fully depreciated assets.
Computer
software Assets arising
Development and on
costs licences consolidation2 Total
Group GBPm GBPm GBPm GBPm
-------------- ---------------------
Cost
At 1 January 2018 -- 12.4 -- 12.4
Additions -- 3.5 -- 3.5
Disposals and
write-offs -- (2.3) -- (2.3)
At 31 December 2018 -- 13.6 -- 13.6
30. Intangible assets
0.5 3.8 4.3
Additions -- -- -- 23.6 23.6
CCFS Combination Disposals and write-offs1 -- (2.0) -- (2.0)
------------ ------------- ------------
At 31 December 2019 0.5 15.4 23.6 39.5
Amortisation
At 1 January 2018 -- 5.6 -- 5.6
Charged in year -- 2.5 -- 2.5
Disposals and write-offs -- (2.3) -- (2.3)
At 31 December 2018 -- 5.8 -- 5.8
-- -- -- --
CCFS Combination Charged in year Disposals -- 3.0 1.3 4.3
and write-offs1 -- (2.0) -- (2.0)
----------
At 31 December 2019 -- 6.8 1.3 8.1
---------- --------- --------- ---------
Net book value
At 31 December 2019 0.5 8.6 22.3 31.4
-------------------- --------- --------- --------- ----------
At 31 December 2018 -- 7.8 -- 7.8
1. During the year the Group wrote off fully amortised assets.
2. Assets arising on consolidation comprise broker relationships of GBP17.1m,
technology of GBP3.2m, brand name of GBP1.8m and banking licence of
GBP1.5m.
Bank
Cost
Computer software and
licences
GBPm
At 1 January 2018 10.4
Additions 3.2
Disposals and write-offs (1.5)
At 31 December 2018 12.1
Additions 3.3
Disposals and write-offs1 (1.9)
------------
At 31 December 2019 13.5
Amortisation
At 1 January 2018 4.3
Charged in year 2.2
Disposals and write-offs (1.5)
At 31 December 2018 5.0
2.7
Charged in year Disposals and write-offs1 (1.9)
------------
At 31 December 2019 5.8
------------
Net book value
At 31 December 2019 7.7
--------------
At 31 December 2018 7.1
--------------
1. During the year the Bank wrote off fully amortised assets.
31. Investments in subsidiaries, intercompany loans and
transactions with related parties
The balances between the Bank and its subsidiaries at the
reporting date are summarised in the table below:
Shares in Intercompany Intercompany
subsidiary loans loans
undertakings receivable payable
GBPm GBPm GBPm
-------------
At 1 January 2018 1.8 1,192.5 (31.2)
Additions -- 782.4 (231.4)
Repayments -- (76.0) 0.2
At 31 December 2018 1.8 1,898.9 (262.4)
(378.9)
Additions -- 707.1 1,062.2 (3.6)
CCFS Combination Repayments -- -- (40.6) 1.0
--------------
At 31 December 2019 708.9 2,920.5 (643.9)
-------------- ----------- -----------
The Bank assesses intercompany loans receivable for impairment.
Notes to the Financial Statements continued
For the year ended 31 December 2019
31. Investments in subsidiaries, intercompany loans and transactions
with related parties continued
A list of the Bank's direct subsidiaries is shown below:
At 31 December 2019 Registered
Direct investments Activity office Ownership
--------------
Charter Court Financial Services Charter
Group plc Holding company Court 100%
Reliance
Easioption Limited Holding company House 100%
Reliance
Guernsey Home Loans Limited Mortgage provider House 100%
Guernsey Home Loans Limited
(Guernsey) Mortgage provider Guernsey 100%
Heritable Development Finance Mortgage originator Reliance
Limited and servicer House 100%
Reliance
Interbay Group Holdings Limited Holding company House 100%
Reliance
Jersey Home Loans Limited Mortgage provider House 100%
Jersey Home Loans Limited
(Jersey) Mortgage provider Jersey 100%
Back office
OSB India Private Limited processing India 100%
Mortgage originator Reliance
Prestige Finance Limited and servicer House 100%
Reliance
Reliance Property Loans Limited Mortgage provider House 100%
Reliance
Rochester Mortgages Limited Mortgage provider House 100%
--------------
The Company holds ordinary shares in all its direct subsidiaries.
OSB India Private Limited is owned 70.28% by the Bank, 29.72% by
Easioption Limited and 0.001% by Reliance Property Loans Limited. A list
of the Bank's indirect subsidiaries is shown below:
At 31 December 2019 Activity Registered office Ownership
Indirect investments
--------------------------- ---------------
5D Finance Limited Broadlands Mortgage servicer Reliance House Charter 100%
Finance Limited Canterbury Mortgage administration Court Reliance House 100%
Finance No.1 plc services Special Charter Court Charter -- 100%
Charter Court Financial Services purpose vehicle Court 100%
Limited Charter Mortgages Mortgage lending Canada Square, London --
Limited and deposit taking Great St. Helen's, --
CMF 2020-1 plc1 Mortgage administration London Great St. -- 100%
CML Warehouse Number 1 Limited and analytical services Helen's, London Charter 100%
CML Warehouse Number 2 Limited Special purpose vehicle Court 100%
Exact Mortgage Experts Limited Special purpose vehicle Reliance House Reliance 100%
Inter Bay Financial I Limited Special purpose vehicle House 100%
Inter Bay Financial II Limited Group service company Reliance House Reliance 100%
InterBay Asset Finance Limited Holding company Holding House Reliance House 100%
Interbay Funding, Ltd company Reliance House --
InterBay Holdings Ltd Interbay Asset finance and Great St. Helen's, --
ML, Ltd mortgage provider London Great St. --
Precise Mortgage Funding 2014-1 Mortgage servicer Helen's, London Great --
plc Precise Mortgage Funding Holding company Mortgage St. Helen's, London --
2014-2 plc Precise Mortgage provider Special Great St. Helen's,
Funding 2015-1 plc Precise purpose vehicle Special London Canada Square,
Mortgage Funding 2015-3R plc purpose vehicle Special London
Precise Mortgage Funding 2020-1B purpose vehicle
plc2 Special purpose vehicle
Special purpose vehicle
---------------------------
1. Incorporated on 4 November 2019.
2. Incorporated on 22 November 2019.
Special purpose vehicles which the Group controls are treated as
subsidiaries for accounting purposes.
All of the entities listed above have been consolidated into the Group's
consolidated financial statements.
All of the above investments are reviewed annually for impairment. Based
on assessment of the future cash flows of each entity no impairment has
been recognised.
At 31 December 2018 Direct
investments Activity Registered Office Ownership
Easioption Limited Holding company Reliance House 100%
Guernsey Home Loans Limited Mortgage provider Reliance House 100%
Guernsey Home Loans Limited
(Guernsey) Mortgage provider Guernsey 100%
Heritable Development Finance Mortgage originator and
Limited servicer Reliance House 85%
Interbay Group Holdings Limited Holding company Reliance House 100%
Jersey Home Loans Limited Mortgage provider Reliance House 100%
Jersey Home Loans Limited
(Jersey) Mortgage provider Jersey 100%
OSB India Private Limited Back office processing India 100%
Mortgage originator and
Prestige Finance Limited servicer Reliance House 100%
Reliance Property Loans Limited Mortgage provider Reliance House 100%
Rochester Mortgages Limited Mortgage provider Reliance House 100%
----------------------------- --------------------
Indirect investments
Inter Bay Financial I Limited Holding company Reliance House 100%
Inter Bay Financial II Limited Holding company Reliance House 100%
Interbay Funding, Ltd Mortgage servicer Reliance House 100%
Interbay ML, Ltd Mortgage provider Reliance House 100%
InterBay Holdings Ltd Holding company Reliance House 100%
5D Finance Limited Mortgage servicer Reliance House 100%
InterBay Asset Finance Limited Asset finance and mortgage
(formerly: 5D Lending Ltd) provider Reliance House 100%
----------------------------- --------------------
The following are the registered offices of the subsidiaries:
Charter Court -- 2 Charter Court, Broadlands, Wolverhampton WV10 6TD,
United Kingdom Guernsey -- 1st Floor, Tudor House, Le Bordage, St Peter
Port, Guernsey, GY1 1DB
Great St. Helen's, London -- 35 Great St. Helen's, London, EC3A 6AP
India -- Salarpuria Magnificia, 9th & 10th floor, 78 Old Madras Road,
Bangalore, India, 560016. Jersey -- 26 New Street, St Helier, Jersey,
JE2 3RA
Reliance House -- Reliance House, Sun Pier, Chatham, Kent, ME4 4ET,
United Kingdom Canada Square, London -- Level 37, 25 Canada Square,
London, E14 5LQ
Notes to the Financial Statements continued
For the year ended 31 December 2019
31. Investments in subsidiaries, intercompany loans and transactions
with related parties continued
The transactions between the Bank and its subsidiaries are disclosed
below:
2019 2018
----------------- ------------------
Charged Charged
by/ by/
(to) the Balance (to) the Balance
Bank due Bank due
during to/(by) during to/(by)
the the the the
year Bank year Bank
Direct investments GBPm GBPm GBPm GBPm
Charter Court Financial Services Group
plc -- (3.6) -- --
Easioption Limited -- 0.5 -- 0.5
Guernsey Home Loans Limited 0.2 9.6 0.3 13.0
Guernsey Home Loans Limited (Guernsey) 0.7 29.9 0.8 36.8
Heritable Development Finance Limited (1.8) (0.9) (1.5) (0.8)
Interbay Group Holdings Limited -- -- -- --
Jersey Home Loans Limited -- 2.5 0.1 2.0
Jersey Home Loans Limited (Jersey) 2.9 123.2 3.3 152.3
OSB India Private Limited (8.9) 9.0 (6.8) 5.7
Prestige Finance Limited (2.8) (0.2) (2.7) (1.2)
Reliance Property Loans Limited 0.1 3.4 0.1 3.8
Rochester Mortgages Limited -- -- -- --
Indirect investments
5D Finance Limited -- 0.5 -- 0.4
Canterbury Finance No.1 plc -- 3.7 -- --
Inter Bay Financial I Limited 0.4 19.3 0.3 20.1
Inter Bay Financial II Limited 0.4 125.7 0.2 6.8
InterBay Asset Finance Limited 0.5 46.0 0.1 6.2
Interbay Funding, Ltd (7.6) (639.2) (2.1) (260.3)
InterBay Holdings Ltd -- -- -- --
Interbay ML, Ltd 37.5 2,547.2 19.3 1,651.2
21.6 2,276.6 11.4 1,636.5
In addition to the above subsidiaries, the Bank has transactions with
Kent Reliance Provident Society ('KRPS'), one of its founding
shareholders. KRPS runs member engagement forums for the Bank. In
exchange, the Bank provides KRPS with various services including IT,
finance and other support functions. During the year the Bank was
charged for services provided by KRPS amounting to GBP0.2m (2018:
GBP0.2m). As at 31 December 2019, KRPS had GBP0.3m (2018: GBP0.3m)
deposited with OSB.
All related party transactions were made on terms equivalent to those
that prevail in arm's length transactions. During the year there were no
related party transactions between the key management personnel and the
Bank other than as described below.
Transactions with key management personnel
During the year the Board extended the definition of key management
personnel to comprise the Directors and Executive team, previously
Directors only. Directors' remuneration is disclosed in note 10 and in
the Annual Report on Remuneration. The table below shows the Executive
team's aggregate remuneration:
Group Group
2019 2018
GBP'000 GBP'000
-------------- --------------
4,282 3,844
Short-term employee benefits Post-employment benefits Share-based 45 76
payments 1,888 3,080
6,215 7,000
-------------- --------------
No loans were issued to related parties during 2019 (2018: nil).
Key management personnel and connected persons held deposits with the
Group of GBP1.8m (2018 restated: GBP1.9m).
32. Amounts owed to credit institutions
Group Group
2019 2018 Bank 2019 Bank 2018
GBPm GBPm GBPm GBPm
----------- ----------- --------------- -------------
BoE TFS 2,632.8 1,502.9 1,502.8 1,502.9
BoE ILTR 290.6 80.1 160.5 80.1
Warehouse funding 93.6 -- -- --
Commercial repo 41.4 -- -- --
Swap margin received 8.0 1.0 7.8 1.0
Loans from credit
institutions 2.4 -- -- --
3,068.8 1,584.0 1,671.1 1,584.0
33. Amounts owed to retail depositors
Group Group
2019 2018 Bank 2019 Bank 2018
GBPm GBPm GBPm GBPm
----------- ----------- --------------- -------------
Fixed rate deposits 10,525.5 5,155.5 5,617.9 5,155.5
Variable rate
deposits 5,729.5 2,916.4 3,817.8 2,916.4
-----------
16,255.0 8,071.9 9,435.7 8,071.9
-----------
34. Amounts owed to other customers
Group Group
2019 2018 Bank 2019 Bank 2018
GBPm GBPm GBPm GBPm
----------- ----------- --------------- -------------
Fixed rate deposits
Variable rate 26.0 32.9 8.9 32.9
deposits 3.7 -- -- --
----------- ---------------
29.7 32.9 8.9 32.9
----------- ----------- --------------- -------------
35. Debt securities in issue
Group Group
2019 2018
GBPm GBPm
------------ -----------
Asset backed loan notes at amortised cost 296.3 --
Amount due for settlement within 12 months Amount due for 40.1 --
settlement after 12 months 256.2 --
------------
296.3 --
The asset backed loan notes are secured on fixed and variable rate
mortgages and are redeemable in part from time to time, but such
redemptions are limited to the net principal received from borrowers in
respect of underlying mortgage assets. The maturity date of the funds
matches the maturity date of the underlying mortgage assets. It is
likely that a large proportion of the underlying mortgage assets, and
therefore these notes, will be repaid within five years.
Asset backed loan notes may all be repurchased by the Group at any
interest payment date on or after the call dates (see below),
or at any interest payment date when the current balance of the
mortgages outstanding is less than or equal to 10% of the principal
amount outstanding on the loan notes on the date they were issued.
Interest is payable at fixed margins above LIBOR or SONIA.
As at 31 December 2019, notes were issued through the following funding
vehicles:
Group Group
2019 2018
GBPm GBPm
----------- -----------
Canterbury Finance No.1 plc 256.2 --
Precise Mortgage Funding 2015-1 plc 40.1 --
-----------
296.3 --
-----------
Notes to the Financial Statements continued
For the year ended 31 December 2019
36. Lease liabilities
Group
GBPm
Bank
GBPm
IFRS 16 Adjustment 3.8 2.3
----------
At 1 January 2019 3.8 2.3
CCFS Combination 7.7 --
New Leases 3.6 3.5
Lease terminated (0.8) (0.8)
Lease repayments (1.1) (0.8)
Interest accruals 0.1 0.1
----------
At 31 December 2019 13.3 4.3
----------
At 31 December 2018 -- --
During the year the Group incurred expenses of GBP0.7m in relation to
short-term leases and GBP0.1m in relation to low-value assets.
37. Other liabilities
Group Group
2019 2018 Bank 2019 Bank 2018
GBPm GBPm GBPm GBPm
----------- ----------- --------------- -------------
Falling due within
one year:
Accruals 23.1 11.0 11.7 9.5
Deferred income 1.1 2.0 1.0 0.9
Other creditors 10.7 5.7 4.4 4.3
34.9 18.7 17.1 14.7
38. Provisions and contingent liabilities
The Financial Services Compensation Scheme ('FSCS') provides protection
of deposits for the customers of authorised financial services firms,
should a firm collapse. FSCS protects retail deposits of up to GBP85k
for single account holders and GBP170k for joint holders. As OSB and
CCFS both hold banking licences, the full FSCS protection is available
to customers of each bank.
The compensation paid out to consumers is initially funded through loans
from the BoE and HM Treasury. In order to repay the loans and cover its
costs, the FSCS charges levies on firms regulated by the PRA and the
FCA. The Group is among those firms and pays the FSCS a levy based on
its share of total UK deposits.
The Group has reviewed its current exposure to Payment Protection
Insurance ('PPI') claims, following the FCA deadline for PPI claims on
29 August 2019, and has recognised a provision of GBP0.3m as at 31
December 2019 (2018: GBP0.4m). The Group has maintained its provision
for FCA conduct rules exposures and has recognised a provision of
GBP1.3m (2018: GBP1.3m) to cover potential future claims.
Following the Combination, the Group recognises ECLs on undrawn loan
facilities within provisions (2018: within loans and advances to
customers) (see note 23).
An analysis of the Group's and Bank's FSCS and other provisions is
presented below:
Group 2019 2018
---------------------------------------------------- --------------------------------------
ECL on
Other undrawn
regulatory loan Other regulatory
FSCS provisions facilities Total FSCS provisions Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- ----------------- ---------------------
At 1 January 0.1 1.7 -- 1.8 0.5 0.9 1.4
Paid during the
year (0.1) (0.1) -- (0.2) (0.3) (0.1) (0.4)
(Credit)/charge (0.2) -- 0.2 -- (0.1) 0.9 0.8
---------------------
At 31 December (0.2) 1.6 0.2 1.6 0.1 1.7 1.8
---------------------
Bank 2019 2018
---------------------------------------------------- --------------------------------------
ECL on
Other undrawn
regulatory loan Other regulatory
FSCS provisions facilities Total FSCS provisions Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- ----------------- ---------------------
At 1 January 0.1 1.7 -- 1.8 0.5 0.9 1.4
Paid during the
year (0.1) (0.1) -- (0.2) (0.3) (0.1) (0.4)
(Credit)/charge (0.1) -- 0.1 -- (0.1) 0.9 0.8
---------------------
At 31 December (0.1) 1.6 0.1 1.6 0.1 1.7 1.8
---------------------
In January 2020 the Group was contacted by the FCA in connection with a
multi-firm thematic review into forbearance measures adopted by lenders
in respect of a portion of the mortgage market. The Group is responding
to information requests from the FCA. It is not possible to reliably
predict or estimate the outcome of the review, if any, on the Group.
39. Subordinated liabilities
Group Group
and and
Bank 2019 Bank 2018
GBPm GBPm
At 1 January 10.8 10.9
Repayment of debt at maturity (0.2) (0.1)
At 31 December 10.6 10.8
The Group's outstanding subordinated liabilities are summarised below:
Group Group
and and
Bank 2019 Bank 2018
GBPm GBPm
Linked to LIBOR:
Floating rate subordinated loans 2022 (LIBOR +5%) Floating
rate subordinated loans 2022 (LIBOR +2%) 0.2 0.3
Fixed rate: 0.2 0.3
Subordinated liabilities 2024 (7.45%)(1) Subordinated liabilities 5.1 5.1
2024 (7.45%) 5.1 5.1
10.6 10.8
---------- ----------
1. On 27 September 2019, the Group decided not to call the GBP5.0m
second tranche of the subordinated debt with original maturity of 27
September 2024. As the debt was not called, the coupon rate reset to
7.45% until maturity.
The fixed rate subordinated liabilities are repayable at the dates
stated or earlier, in full, at the option of the Group with the prior
consent of the PRA. All subordinated liabilities are denominated in
Pounds Sterling and are unlisted.
The rights of repayment of the holders of these subordinated liabilities
are subordinated to the claims of all depositors and all creditors.
Notes to the Financial Statements continued
For the year ended 31 December 2019
40. Perpetual Subordinated Bonds
Restated
Group
Group and
and Bank1
Bank 2019 2018
GBPm GBPm
------------
Sterling Perpetual Subordinated Bonds (4.5991%) 22.3 22.3
Sterling Perpetual Subordinated Bonds (4.6007%) 15.3 15.3
37.6 37.6
1. The Group has restated the prior year comparatives to include the
GBP22.0m PSBs previously classified as equity (see note 1).
The bonds are listed on the London Stock Exchange. The 4.6007% bonds
were issued with no discretion over the payment of interest and may not
be settled in the Group's own equity. They are therefore classified as
financial liabilities. The coupon rate was 5.9884% until the reset date
on 27 August 2019. Subsequent to this, the coupon rate is 4.6007% until
the next reset date on 27 August 2024.
The 4.5991% bonds were issued with discretion over the payment of
interest which is not conditional. They are therefore classified as
financial liabilities. The coupon rate is 4.5991% until the next reset
date on 7 March 2021.
(END) Dow Jones Newswires
March 31, 2020 13:04 ET (17:04 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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