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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 | 1,057,764 | 16:35:09 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
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TIDMOSB
LEI: 213800WTQKOQI8ELD692
OneSavings Bank plc
Interim report for the six months ended 30 June 2020
OneSavings Bank plc ('OSB' or 'the Group'), the specialist lending and
retail savings group, announces today its results for the six months
ended 30 June 2020.
Following the Combination with Charter Court Financial Services Group
plc ('CCFS') on 4 October 2019 this press release includes results on an
underlying and pro forma underlying basis in addition to a statutory
basis, to provide a clear basis for comparison with the previous
period.(1)
Highlights
-- Underlying profit before tax2 decreased 14% to GBP156.3m (H1 2019: pro
forma underlying GBP182.8m) and statutory profit before tax increased 10%
to GBP99.3m (H1 2019: restated GBP90.5m3)
-- Underlying net loan book grew by 2% to GBP18.5bn in the period, or 7%
excluding structured asset sales, and statutory net loan book grew by 2%
to GBP18.8bn. Organic originations were GBP2.1bn (H1 2019: pro forma
underlying GBP3.1bn)
-- Continued focus on cost discipline and efficiency delivered an improved
underlying cost to income ratio4 of 26% (H1 2019: pro forma underlying
29%) and statutory cost to income ratio of 31% (H1 2019: restated 29%3)
-- Underlying net interest margin ('NIM')5 of 250bps (H1 2019: pro forma
underlying 270bps) includes the impact of the delay in passing on the
base rate cuts in full to savers and the prudently higher liquidity
levels that the Group was holding. Statutory NIM of 217bps (H1 2019:
278bps) also impacted by the amortisation of the fair value uplift on
acquisition of CCFS' net assets
-- Underlying loan loss ratio6 increased to 60bps (H1 2019: pro forma
underlying 11bps) and statutory loan loss ratio increased to 59bps (H1
2019: 12bps) due primarily to the impact of adopting more adverse
COVID-19 related macroeconomic scenarios in our IFRS 9 models
-- To support its customers, the Group had granted payment holidays to c.
26k accounts as at 30 June 2020. The majority of these customers have
resumed payment with only 18% of these maturing payment holidays by value
being extended
-- Fully-loaded Common Equity Tier 1 capital ratio strengthened to 17.4% (31
December 2019: 16.0%)
-- As expected, the Group has been informed that it will be subject to a
full bail-in requirement for MREL from July 2025 with an expected interim
requirement of 18% of risk weighted assets by July 2023
-- Underlying basic earnings per share7 of 26.1p (H1 2019: pro forma
underlying 30.3p) and statutory basic earnings per share of 15.5p (H1
2019: 25.5p)
-- Underlying return on equity8 of 18% (H1 2019: pro forma underlying 24%)
and statutory return on equity of 9% (H1 2019: 20%)
-- Underlying gain on structured asset sales of GBP33.0m (H1 2019: pro forma
underlying GBP29.8m), as the Group disposed of its remaining notes under
the Canterbury No.1 securitisation and PMF 2020-1B, statutory gain of
GBP19.9m
-- The Board will continue to assess the appropriateness of dividend
payments at year end 2020
Commenting on the results, Group CEO, Andy Golding said:
"I am extremely proud of the way that OSB has performed during the
COVID-19 pandemic. Our business model and systems have proved to be very
resilient and our colleagues have all demonstrated dedication and
flexibility, as they worked hard responding to the needs of our savers
and borrowers.
We remain focused on supporting our customers who may be experiencing
financial difficulty and as at the end of June had provided payment
holidays to c. 26k accounts representing 28% of the loan book by value.
I am however pleased to report that the majority of these customers have
resumed payment after the end of their holiday term, with only 18% of
these maturing payment holidays by value being extended.
We entered 2020 with a robust pipeline and continued to attract strong
application levels in our core businesses prior to the COVID-19 lockdown
restrictions, which then significantly impacted application and
completion volumes in the second quarter. Underlying NIM in the first
quarter was broadly flat to full year 2019, however it was diluted in
the second quarter by delays in passing on the base rate cuts in full to
our savers. The lower NIM also reflects the impact of prudently drawing
down excess liquidity.
I am encouraged by the recovery in application volumes for our products
since the housing market reopened, which are currently approaching 60%
of pre-COVID-19 lockdown levels on tighter lending criteria and higher
pricing. We expect to deliver double digit underlying net loan book
growth for the full year, excluding the impact of the structured asset
sales in January. Based on current pricing we expect underlying NIM for
the full year to be broadly flat to the first half with the base rate
cuts passed on to retail depositors in full by the end of the third
quarter. We also expect the underlying cost to income ratio for the full
year to be marginally higher versus the first half due to higher other
income in the first half from the gain on structured asset sales.
It remains too early to say what the full impact of COVID-19 will be on
the UK economy, nevertheless we will continue to be there for our
customers, supporting them in the best way that we can. The foundations
of our business remain extremely strong, with a very strong capital
position and a prudent business model, all of which position us well to
respond to the challenges and opportunities ahead and to continue to
support our colleagues, customers and communities and deliver value to
our shareholders over the long-term."
Enquiries:
OneSavings Bank plc Brunswick Group
Alastair Pate, Investor Relations Robin
Wrench/Simone Selzer
t: 01634 838973 t: 020 7404 5959
Results presentation
A webcast presentation for analysts will be held at 9:30am on Thursday
27 August.
The presentation will be webcast or call only and will be available on
the OneSavings Bank website at
www.osb.co.uk/investors/results-reports-presentations.
The UK dial in number is 020 3936 2999 and the password is 234706.
Registration is open immediately.
About OneSavings Bank plc
OneSavings Bank plc ('OSB') began trading as a bank on 1 February 2011
and was admitted to the main market of the London Stock Exchange in June
2014 (OSB.L). OSB joined the FTSE 250 index in June 2015. On 4 October
2019, OSB acquired Charter Court Financial Services Group plc ('CCFS')
and its subsidiary businesses. OSB is a specialist lending and retail
savings Group authorised by the Prudential Regulation Authority, part of
the Bank of England, and regulated by the Financial Conduct Authority
and Prudential Regulation Authority.
OneSavings Bank
OSB primarily targets market sub-sectors that offer high growth
potential and attractive risk-adjusted returns in which it can take a
leading position and where it has established expertise, platforms and
capabilities. These include private rented sector Buy-to-Let, commercial
and semi-commercial mortgages, residential development finance, bespoke
and specialist residential lending, secured funding lines and asset
finance.
OSB originates mortgages organically via specialist brokers and
independent financial advisers through its specialist brands including
Kent Reliance for Intermediaries, InterBay Commercial and Prestige
Finance. It is differentiated through its use of highly skilled, bespoke
underwriting and an efficient operating model.
OSB is predominantly funded by retail savings originated through the
long-established Kent Reliance name, which includes online and postal
channels as well as a network of branches in the South East of England.
Diversification of funding is currently provided by securitisation
programmes, the Term Funding Schemes and the Bank of England Indexed
Long-Term Repo operation.
Charter Court Financial Services Group
CCFS focuses on providing Buy-to-Let and specialist residential
mortgages, mortgage servicing, administration and credit consultancy and
retail savings products. It operates through its three brands -- Precise
Mortgages, Exact Mortgage Experts and Charter Savings Bank.
It is differentiated through risk management expertise and best-of-breed
automated technology and systems, ensuring efficient processing, strong
credit and collateral risk control and speed of product development and
innovation. These factors have enabled strong balance sheet growth
whilst maintaining high credit quality mortgage assets.
CCFS is predominantly funded by retail savings originated through its
Charter Savings Bank brand. Diversification of funding is currently
provided by securitisation programmes, the Term Funding Schemes and the
Bank of England Indexed Long-Term Repo operation.
Notes
(1) Statutory basis reflects results for the six months to 30 June 2020
for the combined Group and results for the six months to 30 June 2019
for OSB only as presented in the OSB 2019 Interim Report.
Underlying results for the six months to 30 June 2020 reflect results
for the combined Group, excluding exceptional items, integration costs
and other acquisition-related items.
Pro forma underlying results for the six months to 30 June 2019 assume
that the Combination occurred on 1 January 2019 and include six months
of results from OSB and CCFS, excluding exceptional items, integration
costs and other acquisition-related items.
(2) Before exceptional items, integration costs and other
acquisition-related items of GBP57.0m (H1 2019: GBP9.7m)
(3) The Group restated prior year comparatives to recognise GBP0.5m of
interest expense on the GBP22m Perpetual Subordinated Bonds previously
classified as equity, see note 1 to the financial statements
(4) Administrative expenses as a percentage of total income
(5) Net interest income as a percentage of a 7 point average of interest
earning assets, annualised on an actual days basis
(6) Impairment losses as a percentage of a 7 point average of gross
loans and advances, annualised
(7) Profit attributable to ordinary shareholders, which is profit after
tax and after deducting coupons on AT1 securities, gross of tax, divided
by the weighted average number of ordinary shares in issue
(8) Profit attributable to ordinary shareholders, which is profit after
tax and after deducting coupons on AT1 securities, gross of tax, as a
percentage of a 7 point average shareholders' equity (excluding GBP60m
of AT1 securities), annualised
Non-IFRS performance measures
OneSavings Bank believes that the non-IFRS performance measures included
in this document provide valuable information to the readers as they
enable the reader to identify a more consistent basis for comparing the
business' performance between financial periods, and provide more detail
concerning the elements of performance which the Group is most directly
able to influence or are relevant for an assessment of the Group. They
also reflect an important aspect of the way in which operating targets
are defined and performance is monitored by OneSavings Bank's Board.
However, any non-IFRS performance measures in this document are not a
substitute for IFRS measures and readers should consider the IFRS
measures as well. Refer to Alternative performance measures in the
Financial review for further details, reconciliations and calculations
of non-IFRS performance measures included throughout this document, and
the most directly comparable IFRS measures.
Important disclaimer
This document should be read in conjunction with the documents
distributed by OneSavings Bank plc ('OSB') through the Regulatory News
Service ('RNS'). This document is not audited and contains certain
forward-looking statements, beliefs or opinions, including statements
with respect to the business, strategy and plans of OSB and its current
goals and expectations relating to its future financial condition,
performance and results. Such forward-looking statements include,
without limitation, those preceded by, followed by or that include the
words 'targets', 'believes', 'estimates', 'expects', 'aims', 'intends',
'will', 'may', 'anticipates', 'projects', 'plans', 'forecasts',
'outlook', 'likely', 'guidance', 'trends', 'future', 'would', 'could',
'should' or similar expressions or negatives thereof. Statements that
are not historical facts, including statements about OSB's, its
directors' and/or management's beliefs and expectations, are
forward-looking statements. By their nature, forward-looking statements
involve risk and uncertainty because they relate to events and depend
upon circumstances that may or may not occur in the future. Factors that
could cause actual business, strategy, plans and/or results (including
but not limited to the payment of dividends) to differ materially from
the plans, objectives, expectations, estimates and intentions expressed
in such forward-looking statements made by OSB or on its behalf include,
but are not limited to: general economic and business conditions in the
UK and internationally; market related trends and developments;
fluctuations in exchange rates, stock markets, inflation, deflation,
interest rates and currencies; policies of the Bank of England, the
European Central Bank and other G8 central banks; the ability to access
sufficient sources of capital, liquidity and funding when required;
changes to OSB's credit ratings; the ability to derive cost savings;
changing demographic developments, and changing customer behaviour,
including consumer spending, saving and borrowing habits; changes in
customer preferences; changes to borrower or counterparty credit
quality; instability in the global financial markets, including Eurozone
instability, the potential for countries to exit the European Union (the
'EU') or the Eurozone, and the impact of any sovereign credit rating
downgrade or other sovereign financial issues; technological changes and
risks to cyber security; natural and other disasters, adverse weather
and similar contingencies outside OSB's control; inadequate or failed
internal or external processes, people and systems; terrorist acts and
other acts of war or hostility and responses to those acts; geopolitical,
pandemic or other such events; changes in laws, regulations, taxation,
accounting standards or practices, including as a result of an exit by
the UK from the EU; regulatory capital or liquidity requirements and
similar contingencies outside OSB's control; the policies and actions of
governmental or regulatory authorities in the UK, the EU or elsewhere
including the implementation and interpretation of key legislation and
regulation; the ability to attract and retain senior management and
other employees; the extent of any future impairment charges or
write-downs caused by, but not limited to, depressed asset valuations,
market disruptions and illiquid markets; market relating trends and
developments; exposure to regulatory scrutiny, legal proceedings,
regulatory investigations or complaints; changes in competition and
pricing environments; the inability to hedge certain risks economically;
the adequacy of loss reserves; the actions of competitors, including
non-bank financial services and lending companies; and the success of
OSB in managing the risks of the foregoing.
Accordingly, no reliance may be placed on any forward-looking statement
and no representation, warranty or assurance is made that any of these
statements or forecasts will come to pass or that any forecast results
will be achieved. Any forward-looking statements made in this document
speak only as of the date they are made and it should not be assumed
that they have been revised or updated in the light of new information
of future events. Except as required by the Prudential Regulation
Authority, the Financial Conduct Authority, the London Stock Exchange
PLC or applicable law, OSB expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any
forward-looking statements contained in this document to reflect any
change in OSB's expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based. For
additional information on possible risks to OSB's business, please see
Risk review section in the OSB 2019 Annual Report and Accounts. Copies
of this are available at
https://www.globenewswire.com/Tracker?data=QaVccH_XSuD46OJp5iLtXfcKWsotYVSyKNk4hfZt8GVCVLXZYB2ltaouI9ZE266yQlFeF3wyAz7URIO-QbvtAQ==
www.osb.co.uk and on request from OSB.
Nothing in this document and any subsequent discussion constitutes or
forms part of a public offer under any applicable law or an offer to
purchase or sell any securities or financial instruments. Nor does it
constitute advice or a recommendation with respect to such securities or
financial instruments, or any invitation or inducement to engage in
investment activity under section 21 of the Financial Services and
Markets Act 2000. Past performance cannot be relied on as a guide to
future performance. Nothing in this document is intended to be, or
should be construed as, a profit forecast or estimate for any period.
Liability arising from anything in this document shall be governed by
English law, and neither the Company nor any of its affiliates, advisors
or representatives shall have any liability whatsoever (in negligence or
otherwise) for any loss howsoever arising from any use of this document
or its contents or otherwise arising in connection with this document.
Nothing in this document shall exclude any liability under applicable
laws that cannot be excluded in accordance with such laws.
Certain figures contained in this document, including financial
information, may have been subject to rounding adjustments and foreign
exchange conversions. Accordingly, in certain instances, the sum or
percentage change of the numbers contained in this document may not
conform exactly to the total figure given.
Key Performance Indicators - statutory
Statutory key performance indicators reflect the results for the
combined Group for the six months ended 30 June 2020 and results for OSB
only for the six months to 30 June 2019 as presented in the OSB 2019
Interim Report.
GBP2.1bn GBP18.8bn
Gross new organic lending up 29% Net loan book up 2%
H1 2019: GBP1.6bn FY 2019: GBP18.4bn
---------------------------------- -------------------------------------
GBP99.3m 15.5p(2)
Profit before tax up 10% Basic EPS down 39%
H1 2019: restated GBP90.5m(1) H1 2019: 25.5p
---------------------------------- -------------------------------------
217bps(3) 31%(4)
Net interest margin down 61bps Cost to income ratio up 2pps
H1 2019: 278bps H1 2019: restated 29%(1)
---------------------------------- -------------------------------------
59bps(5) 70bps(6)
Loan loss ratio up 47bps Management expense ratio improved
H1 2019: 12bps 4bps
H1 2019: 74bps
---------------------------------- -------------------------------------
9%(7) 17.4%
Return on equity reduced by 11pps Fully-loaded CET1 ratio strengthened
H1 2019: 20% FY 2019: 16.0%
---------------------------------- -------------------------------------
3 months + in arrears stable(8) Customer NPS improved(9)
OSB 1.3%, CCFS 0.5% OSB +67, CCFS +83
FY 2019: OSB 1.3%, CCFS 0.3% H1 2019: OSB +64, CCFS +72
---------------------------------- -------------------------------------
1. The Group restated prior year comparatives to recognise GBP0.5m of
interest expense on the GBP22m Perpetual Subordinated Bonds previously
classified as equity, see note 1 to the financial statements
2. Profit attributable to ordinary shareholders, which is profit after
tax and after deducting coupons on AT1 securities, gross of tax, divided
by the weighted average number of ordinary shares in issue
3. Net interest income as a percentage of a 7 point average of interest
earning assets, annualised on an actual days basis
4. Administrative expenses as a percentage of total income
5. Impairment losses as a percentage of a 7 point average of gross
loans and advances, annualised
6. Administrative expenses as a percentage of 7 point average total
assets, annualised
7. Profit attributable to ordinary shareholders, which is profit after
tax and after deducting coupons on AT1 securities, gross of tax, as a
percentage of a 7 point average shareholders' equity (excluding GBP60m
of AT1 securities), annualised
8. Portfolio arrears rate of accounts for which there are missing or
overdue payments by more than three months as a percentage of gross
loans
9. OSB customer Net Promoter Score relates to Kent Reliance savings
customers and CCFS customer NPS relates to Charter Savings Bank
customers. It is calculated based on customer responses to the question
of whether they would recommend the Group's products to a friend. The
responses provide a score between -100 and +100
Key Performance Indicators - underlying
Underlying key performance indicators for the six months to 30 June 2020
reflect results for the combined Group, excluding exceptional items,
integration costs and other acquisition-related items.
Pro forma underlying KPIs for the six months to 30 June 2019 assume that
the Combination occurred on 1 January 2019 and include six months of
results from OSB and CCFS, excluding exceptional items, integration
costs and other acquisition-related items.
GBP2.1bn GBP18.5bn
Gross new organic lending down Net loan book up 2%
32% FY 2019: underlying GBP18.2bn
H1 2019: pro forma underlying
GBP3.1bn
--------------------------------- ----------------------------------
GBP156.3m 26.1p(2)
Profit before tax down 14% Basic EPS down 14%
H1 2019: pro forma underlying H1 2019: pro forma underlying
GBP182.8m 30.3p
--------------------------------- ----------------------------------
250bps(3) 26%(4)
Net interest margin down 20bps Cost to income ratio improved
H1 2019: pro forma underlying by 3pps
270bps H1 2019: pro forma underlying
29%
--------------------------------- ----------------------------------
60bps(5) 68bps(6)
Loan loss ratio up by 49bps Management expense ratio improved
H1 2019: pro forma underlying by 13bps
11bps H1 2019: pro forma underlying
81bps
--------------------------------- ----------------------------------
18%(7)
Return on equity reduced by 6pps
H1 2019: pro forma underlying
24%
--------------------------------- ----------------------------------
For definitions of key ratios please see footnotes in KPIs - statutory
above.
Progress in the first half of 2020 -- resilient business
I am very proud of the resilience that OneSavings Bank demonstrated
during the first half of 2020 in the face of challenges presented by the
Coronavirus outbreak. Throughout this period, we rightly prioritised
supporting our customers and partners, acting quickly and assertively to
offer help to those who might have been experiencing financial
difficulties as a result of the COVID-19 pandemic.
I am very pleased with our ability to generate profit despite taking
significant impairment charges under IFRS 9 in the period. The Group
recorded underlying pre-tax profit of GBP156.3m and underlying basic
earnings per share of 26.1 pence per share in the first half, both down
14% on the prior period due to the increased impairment charges (H1
2019: pro forma underlying GBP182.8m and 30.3 pence per share,
respectively). On a statutory basis, profit before tax increased 10% to
GBP99.3m (H1 2019: restated GBP90.5m1) and basic earnings per share was
15.5p (H1 2019: 25.5p).
Impairment losses in the first half of 2020 were GBP54.4m on an
underlying basis (H1 2019: GBP8.6m), representing an underlying loan
loss ratio of 60bps (H1 2019: pro forma underlying 11bps), predominantly
driven by a GBP42m charge due to the adoption of more severe COVID-19
related macroeconomic scenarios.
Underlying net interest margin ('NIM') was 250bps in the first half of
2020 (H1 2019: pro forma underlying 270bps). Underlying NIM in the first
quarter of 2020 was broadly flat to full year 2019, albeit lower than
the first half of 2019 due to the changing mix of the OSB loan book as
the higher-yielding back book refinanced onto front book pricing. The
impact of this mix effect had largely run its course by the end of the
first half of 2019. In the second quarter of 2020, NIM was diluted by
delays in passing on the base rate cuts in full to our retail savers,
and the impact of the higher liquidity that the Group was prudently
holding. Statutory NIM of 217bps (H1 2019: 278bps) was also impacted by
the amortisation of the fair value uplift on acquisition of CCFS' net
assets.
The underlying cost to income ratio improved to 26% (H1 2019: 29%) as
the business retained its focus on cost efficiency and disciplined
running of the combined Group, which was also demonstrated by the
underlying management expense ratio improving by 13bps to 68bps for the
first half of 2020 (H1 2019: 81bps).
We continue to generate excellent returns despite higher impairment
losses, with underlying return on equity for the first half of 2020 at
18% (H1 2019: 24%).
Our colleagues supporting our customers
I am very grateful to each and every colleague, for the effort,
perseverance and dedication that they have shown throughout this
difficult time. To enable our colleagues to assist our customers to the
best of their ability, it was important to ensure that they were
supported and kept safe, which we managed whilst everyone did a
fantastic job of keeping operations running effectively. I am
particularly pleased with the operational performance and resilience
shown by our wholly-owned subsidiary OSBIndia.
The majority of our colleagues, both in the UK and India, are currently
working from home. Our small branch network remains open for those
customers who prefer this channel, and we are responsibly helping those
who work in offices, by operating under appropriate protocols.
Throughout the pandemic, it has become especially clear how well OSB and
CCFS employees are working together, and even though colleagues are not
currently physically close, I feel we have truly become one team.
OSB responded rapidly to support customers who might have been facing
financial difficulty by offering self-certified payment holidays of up
to three months. We are proud that as at the end of June we had helped
c. 26k accounts in this way, equivalent to 28% of the Group's mortgage
book by value, even though it was apparent that many people who
requested payment holidays were doing so to prudently safeguard their
cash flow, rather than as a necessity.
Encouragingly, as at 14 August 2020 the majority of these customers were
paying, with only 18% of accounts by value with a payment holiday, as at
the end of June that have since matured, being extended. We are seeing
low levels of requests for new payment holidays.
Towards the end of the period, the Group's application to participate in
the Coronavirus Business Interruption Loan Scheme was approved, enabling
us to offer financial support to certain smaller business customers,
particularly in the area of asset finance.
Strong credit and risk management
The credit quality of the Group's mortgage books remains strong with
three months in arrears balances stable at 1.3% for OSB and 0.5% for
CCFS at the end of June (31 December 2019: 1.3% and 0.3%, respectively).
The weighted average loan to value ('LTV') of the Group's mortgage book
was 66% as at 30 June 2020 with a weighted average LTV of new business
at 68%. Importantly, the Group continues to observe a tight clustering
of LTVs around the weighted average.
Throughout the first six months of the year and particularly as mortgage
lending began to recover, the Group exercised strong diligence over loan
and customer assessment. On an underlying basis, impairment losses in
the first half of 2020 were GBP54.4m (H1 2019: GBP8.6m), representing an
underlying loan loss ratio of 60bps (H1 2019: pro forma underlying
11bps). The increase in impairment losses was predominantly driven by a
GBP42m charge due to the adoption of more adverse macroeconomic
scenarios used by the Group in modelling the expected credit losses
under IFRS 9 as the onset of the Coronavirus pandemic changed the
outlook for the UK economy. The Group receives updated macroeconomic
scenarios from its advisors on a regular basis.
The Group, in line with the industry and guidance from regulators, does
not consider payment holidays as an automatic transfer from stage 1 to
stage 2 under IFRS 9. However, the Group considered whether there were
other triggers to determine whether payment holiday accounts should be
moved into stage 2, with a lifetime expected credit loss estimate held
against the exposure. This has resulted in a proportion of higher risk
payment holiday accounts being moved into stage 2 and higher provisions
being held. As at 30 June, 26% of payment holiday accounts were in stage
2.
The Group continued to work on its Internal Ratings-Based project in the
period. The progress is encouraging post Combination and the Group is
planning to submit module 1 to the Prudential Regulation Authority
during 2021.
A trusted lender with a strong franchise
The first half of 2020 was a period of contrasting quarters with the
Group attracting strong applications and completions in the first
quarter, in line with management expectations and at attractive margins,
followed by a significant slowdown in the second quarter, through
lockdown, mirroring the wider mortgage market and UK economy in general.
When market activity was subdued at the peak of lockdown, we
concentrated on progressing existing applications for our customers
where we had an existing physical valuation and flexed our operations
ensuring that resources were deployed to support customers, including
those who wished to take a payment holiday. We quickly adjusted lending
criteria, including maximum loan sizes and LTVs, for new business to
match our appetite for risk and lending volumes, given the uncertainty
surrounding the outlook for house prices, employment levels and economic
growth.
When lockdown restrictions began to ease and the mortgage market started
to operate effectively once again, we took the opportunity to undertake
a controlled increase of business volumes in our core Buy-to-Let and
Residential market sub-segments. Our recently introduced product range
continues to reflect the Group's prudent risk appetite. We are
encouraged by the volumes and quality of new applications we are seeing
for our core products, despite tighter lending criteria and have taken
the opportunity to increase asset pricing for those products. We have
reduced lending growth in our other market sub-segments; commercial
business, bridging, development finance, funding lines and second charge,
given the greater dependence these businesses have on the macroeconomic
cycle. Overall, across all products, application levels are currently
approaching 60% of their pre-COVID-19 levels.
Mortgage originations for the Group were GBP2.1bn for the first six
months of 2020, down from GBP3.1bn on a pro forma underlying basis in
the same period last year, reflecting the reduction in lending and
applications during lockdown in all segments, following strong activity
in the first quarter of 2020.
The Group's underlying net loan book increased by 2% in the first half
of 2020 to GBP18.5bn, after removing the impact of acquisition-related
adjustments. The underlying net loan book would have increased by 7%,
excluding the impact of structured asset sales that took place at the
beginning of the year. On a statutory basis, net loans grew by 2% to
GBP18.8bn from GBP18.4bn at the end of 2019.
The Group continued to gain recognition from mortgage customers and
intermediaries, and in the first six months of 2020, OSB was named Best
Specialist Lender by Mortgage Force Awards and the Paradigm Lender
Awards, and Precise Mortgages was recognised by SimplyBiz Mortgage
Awards as Best Buy-to-Let Lender.
Sophisticated funding model
The Group remains highly liquid with retail deposits continuing as the
major source of funding for the Group. Our competitive retail savings
proposition allows the Group to raise significant funds. Through both
Kent Reliance and Charter Savings Bank, retail deposits reached
GBP16.7bn by the end of the first half on an underlying basis, up 3%
from GBP16.2bn at the end of 2019. At the end of June, the Group reduced
new rates offered to savers after the base rate cuts in March. The base
rate cuts are also being passed on in full to the back book of easy
access savings, with the last cuts effective in September.
Over 14,000 new savings customers joined Kent Reliance in the first six
months of 2020 and Charter Savings Bank grew customer numbers by nearly
8,000. The retention rate for savers remained exceptionally high,
reaching 95% amongst Kent Reliance customers with maturing fixed rate
bonds and ISAs, together with a Net Promoter Score ('NPS') of +67 for
the first half. Charter Savings Bank's NPS was exceptional at +83 with a
retention rate of 86% at the end of June 2020. I am delighted that
Charter Savings Bank won ISA Provider of the Year at the Consumer
Moneyfacts awards and that Kent Reliance was highly commended in the
same category.
We have complemented retail funding by further utilising our capital
markets expertise, demonstrating an early success of the integration of
the Group's capital markets teams following the Combination with CCFS.
We securitised GBP725m of mortgages in two transactions under the CMF
and PMF programmes in January, and in March we completed our largest
deal to date, securitising GBP1bn of prime Buy-to-Let originated assets
and retaining all of the notes through the Canterbury programme. This
transaction provides a sizeable pool of collateral which significantly
increases the contingent wholesale funding options available to us
through commercial repo transactions. The bonds can also be used in
place of whole loan mortgage collateral, against the Bank of England's
ILTR, TFS and TFSME facilities at significantly reduced haircuts. In
January 2020, the Group disposed of its remaining notes under the
Canterbury No. 1 issue and PMF 2020-1B, generating a statutory gain of
GBP20m (GBP33m on an underlying basis).
In the first half of 2020, the Group was accepted for the Bank of
England's TFSME with a combined initial allowance of GBP2bn. As at the
end of June 2020, the total borrowings under this scheme were GBP100m.
The Group intends to use the TFSME funding to refinance and extend the
duration of drawings under the previous TFS scheme and the Bank of
England's ILTR scheme. TFSME funding may also be used to fund additional
growth opportunities where appropriate and in line with our strategy. In
the first six months of 2020, the Group repaid GBP60m of the Bank of
England's Term Funding Scheme leaving a remaining balance of GBP2.6bn
and had ILTR borrowings of GBP755m as at 30 June 2020.
Well-capitalised strong and sustainable business
The Group's capital position improved further, with a fully-loaded CET1
ratio of 17.4% as at 30 June 2020 (31 December 2019: 16.0%) and a total
capital ratio of 18.6% (31 December 2019: 17.3%). These capital ratios
include the beneficial impact of the cancelled final dividend payment
for 2019 and the application of the Capital Requirements Regulation
'Quick Fix' package, including more generous IFRS 9 transitional relief,
which relates to stage 1 and stage 2 increases and extension of the SME
support factor.
In addition, liquidity remained significantly in excess of the 2020
regulatory minimum. As at 30 June 2020, OSB and CCFS had liquidity
coverage ratios ('LCR') of 325% and 149%, respectively (31 December
2019: 199% and 145%, respectively). The Group's LCR was 245% as at 30
June, as we took early action to increase liquidity given the uncertain
economic outlook by drawing an additional GBP465m through the Indexed
Long-Term Repo in the first six months of the year. The Group also saw
strong demand for its savings products during the ISA season and
experienced high levels of retention amongst customers with maturing
fixed rate products.
On 23 July 2020, the Group received its Annual Resolution Letter from
the Bank of England setting out its preferred resolution strategy. As
anticipated, the Group is subject to a single point of entry bail-in
requirement which from July 2023 is expected to be equal to 18% of risk
weighted assets, rising to a final requirement of two times Pillar 1 and
Pillar 2a from July 2025. The Group intends to fulfil its MREL
requirement through senior debt issued via a holding company, which we
are in the process of setting up, with the first anticipated debt issue
in late 2021 subject to market conditions.
The Group had a leverage ratio of 6.8% as at 30 June 2020 (31 December
2019: 6.5%).
The underlying cost to income ratio improved to 26% (H1 2019: 29%) as
the business retained its focus on cost efficiency and discipline.
Integrating OSB and CCFS continues to achieve cost efficiencies and we
are on track to deliver the benefits expected in the first year
following the Combination. This includes a streamlined Board,
de-duplication of a significant proportion of senior management roles
and efficiencies from combining some central and support functions. In
light of the pandemic, the Board will take the opportunity to review
whether we still want to fully consolidate locations and suppliers or
maintain the additional operational resilience. This decision is not
expected to have a material impact on the quantum of synergies
previously presented at the time of the Combination. The combined
Group's efficiency in its business as usual activities is demonstrated
by the underlying management expense ratio improving by 13bps to 68bps
for the first half of 2020 (H1 2019: 81bps).
Looking forward
There is still significant uncertainty as the Coronavirus pandemic
continues to evolve and its impact on the economy begins to be felt.
However, we see opportunities in our market segments, demonstrated by
strong current demand and expect to achieve double digit underlying net
loan book growth for the full year, excluding the impact of the
structured assets sales in January. Based on current pricing we expect
underlying NIM for the full year to be broadly flat to the first half
with the base rate cuts passed on to retail depositors in full by the
end of the third quarter. We also expect the underlying cost to income
ratio for the full year to be marginally higher versus the first half
due to higher other income in the first half from the gain on structured
asset sales.
We are seeing the benefits of our combined lending and funding
franchises, our secured loan book and strong risk management
capabilities. Our capital and liquidity levels are stronger than ever
and I am delighted in the way that our people have responded to the
challenges so far. Whilst there will be headwinds in front of us, we are
in good shape to weather the uncertainty going forward.
Andy Golding
Chief Executive Officer
1. The Group restated prior year comparatives to recognise GBP0.5m of
interest expense on the GBP22m Perpetual Subordinated Bonds previously
classified as equity, see note 1 to the financial statements
Mortgage market
The first half of 2020 was a period of contrasting quarters. Prior to
the Coronavirus pandemic, activity in the mortgage market was flat to
the fourth quarter of 2019. From late March 2020, as the Coronavirus
pandemic developed and the government's lockdown and social distancing
measures were imposed, the overall mortgage market experienced a
significant slowdown.
Government restrictions relating to moving home, together with social
distancing measures, meant that large valuation firms suspended physical
valuations, which negatively impacted the ability to progress mortgage
applications. Lenders responded by tightening risk appetite and the
number of residential mortgage products offered fell by more than a half,
from 5,222 in early March to 2,566 in May(1) , a reduction felt
particularly by those who wished to borrow at a higher LTV. In addition,
following the government's announcement that mortgage lenders would
offer three-month mortgage payment holidays for borrowers in financial
difficulties, many lenders chose to concentrate on servicing these
requests and reduced new business flows.
For the UK Buy-to-Let market, total gross advances for the first six
months of 2020 were GBP18.5bn compared with GBP20.8bn in the same period
last year(2) reflecting the impact of the Coronavirus pandemic on the
wider industry. Landlords' confidence continues to be impacted by
macroeconomic uncertainty, although research indicates that confidence
is gradually recovering.(3)
Restrictions in the property industry began to ease on 13 May, and
estate agents, housebuilders and mortgage brokers started reporting
increased levels of interest, although it is too early to predict the
longer term trends. Reduced Stamp Duty Land Tax rates will apply for
residential properties purchased from 8 July 2020 until 31 March 2021
inclusive. This is likely to have a positive impact on the housing
market, encouraging purchases prior to the end of the period. There has
been an increase in the number of mortgages available in the market,
albeit still below the levels seen at the beginning of March. Lenders
reported that overall spreads on new secured lending to households
widened in the second half of 2020 and were expected to widen even more
in the third quarter of the year.
1. Moneyfacts, 'Higher LTV mortgages buck rate trend', 11 May 2020
2. UK Finance, New and outstanding buy-to-let new mortgages, 19 August
2020
3. Bank of England, Credit Conditions Survey -- 2020 Q2
Review of Group's lending segments
Following the Combination, the Group reports its lending business under
two segments: OSB and CCFS.
OneSavings Bank ('OSB') segment
The following tables show the OSB segment's contribution to statutory
profit and statutory loans and advances to customers:
Contribution to profit for the period
BTL/SME Residential Total
H1 2020 GBPm GBPm GBPm
Net interest income 129.7 33.8 163.5
Other income 9.7 1.3 11.0
Total income 139.4 35.1 174.5
Impairment of financial
assets (28.2) (7.7) (35.9)
Contribution to profit 111.2 27.4 138.6
H1 2019, restated(1)
Net interest income 119.6 30.9 150.5
Other expense (5.2) (2.0) (7.2)
Total income 114.4 28.9 143.3
Impairment of financial
assets (5.2) (0.7) (5.9)
Contribution to profit 109.2 28.2 137.4
Loans and advances to customers BTL/SME Residential Total
As at 30 June 2020 GBPm GBPm GBPm
Gross loans to customers 8,986.4 1,950.8 10,937.2
Expected credit losses (48.0) (23.0) (71.0)
Net loans to customers 8,938.4 1,927.8 10,866.2
Risk weighted assets 4,298.2 817.3 5,115.5
As at 31 December 2019
Gross loans to customers 8,983.2 1,837.4 10,820.6
Expected credit losses (21.6) (14.0) (35.6)
Net loans to customers 8,961.6 1,823.4 10,785.0
Risk weighted assets 4,244.0 846.0 5,090.0
(1) The Group restated prior year comparatives to recognise GBP0.5m of
interest expense on the GBP22m Perpetual Subordinated Bonds previously
classified as equity
Buy-to-Let/SME
Buy-to-Let/SME sub-segment: gross loans
30-Jun-2020 31-Dec-2019
GBPm GBPm
------------------------ ----------- -----------
Buy-to-Let 7,762.8 7,727.0
Commercial 852.0 888.0
Residential development 150.0 146.1
Funding lines 221.6 222.1
Total 8,986.4 8,983.2
------------------------ ----------- -----------
This sub-segment comprises Buy-to-Let mortgages secured on residential
property held for investment purposes by experienced and professional
landlords, commercial mortgages secured on commercial and
semi-commercial properties held for investment purposes or for
owner-occupation, bridge finance, residential development finance to
small and medium-sized developers, secured funding lines to other
lenders and asset finance.
Organic originations in the Buy-to-Let/SME sub-segment decreased by 38%
versus the same period in 2019, to GBP858.3m (H1 2019: GBP1,374.5m). The
volume of new business reflects the three-fold dynamic of lending in the
first six months of 2020: strong activity for nearly all of the first
quarter, based on previous applications, the reduction in lending and
applications for purchase and remortgage during lockdown, followed by a
controlled increase in activity as lockdown was eased.
At the end of June 2020, the Buy-to-Let/SME net loan book remained
broadly flat at GBP8,950.0m compared with the year-end value of
GBP8,961.6m and, excluding structured asset sales, it increased by 5% in
the period.
The Buy-to-Let gross loan book remained broadly flat at the end of June
2020 at GBP7,762.8m (31 December 2019: GBP7,727.0m). The profile of
borrowers in this sub-segment continues to reflect the
professionalisation of the market, with lending increasingly dominated
by professional, multi-property landlords, who represented 94% of
completions by value for the Kent Reliance brand and 78% of mortgage
applications for house purchases came from landlords borrowing via a
limited company (H1 2019: 81% and 73%, respectively). The increase in
both of these metrics confirms the continued professionalisation of
Buy-to-Let. The Group's share of Buy-to Let originations was 7% in the
period.
Refinancing continued to account for the majority of Buy-to-Let advances
with 58% of Kent Reliance Buy-to-Let completions comprising remortgages
in the first half, and five-year fixed rate mortgages continued to be in
high demand at 46% (H1 2019: 61% and 51%, respectively). In addition,
Choices, OSB's retention programme, remained popular, with around 69%
(H1 2019: 76%) of existing borrowers choosing a new product with the
Bank within three months of their original product ending.
Towards the beginning of May, Buy-to-Let lending recommenced at up to
75% LTV as borrowers and intermediaries welcomed the return of physical
valuations. Headline prices were increased across the product range,
including for certain specialist products such as Houses of Multiple
Occupation in order to manage volumes, supporting operational capacity
and service levels.
The weighted average loan to value ('LTV') of the Buy-to-Let book as at
30 June 2020 was 68% with an average loan size of GBP260,000 (31
December 2019: 68%(1) and GBP260,000). The weighted average interest
coverage ratio for Buy-to-Let origination during the first six months of
2020 was 203% (H1 2019: restated 189%(2) ).
Through its InterBay brand, OSB lends to borrowers investing in
commercial and semi-commercial property, reported in the Commercial
total, and more complex Buy-to-Let properties, reported in the
Buy-to-Let total. The gross loan book in the commercial business reduced
to GBP852.0m (31 December 2019: GBP888.0m), largely as OSB reviewed its
risk appetite, as a result of the uncertain outlook, leading to
tightened underwriting criteria for semi-commercial loans in light of
the Coronavirus. The business also stopped taking new applications for
its commercial products.
The weighted average LTV of the commercial book remained low at 66% and
the average loan size was GBP385,000 for the first six months of 2020
(31 December 2019: 67% and GBP375,000).
InterBay Asset Finance, which predominantly targets UK SMEs and small
corporates financing business-critical assets, followed a similar
pattern to our other commercial businesses, with a strong start to the
year being halted by the onset of Coronavirus and the impact of lockdown
on its customers which began in early March. The primary focus was to
support our customers and help them protect their cash flows, although
we began to see improvements in the demand for new lending towards the
end of the period. The gross carrying amount under finance leases was
GBP52.6m as at 30 June 2020 (31 December 2019: GBP47.7m).
Our Heritable residential development business provides development
finance to small and medium-sized residential developers. The preference
is to fund house builders who operate outside central London and provide
relatively affordable family housing, as opposed to complex city centre
schemes where affordability and construction cost control can be more
challenging. New applications come primarily from a mixture of repeat
business from the team's extensive existing relationships and referrals.
The residential development funding gross loan book remained broadly
flat at the end of June 2020 at GBP150.0m with a further GBP101.4m
committed (31 December 2019: GBP146.1m and GBP115.1m, respectively). The
construction pipeline was deferred and advances reduced as customers
closed down development sites, in line with government guidance, in late
March 2020. All of these sites have now reopened.
Since inception through to the end of June 2020, Heritable has written
GBP1,191m of loans, of which GBP585m have been repaid to date. In
addition, as at the end of June, the business had commitments to finance
the development of 2,264 residential units, the majority of which are
houses located outside central London. We continue to be cautious on
approving new developments given current macroeconomic uncertainty.
In the first half of 2020, OSB continued to provide most of its secured
funding lines to non-bank lenders which operate in certain high-yielding,
specialist sub-segments, such as bridging finance and asset finance.
Total credit approved limits as at 30 June 2020 were GBP510.0m with
total loans outstanding of GBP221.6m (31 December 2019: GBP540.0m and
GBP222.1m, respectively). During the period, lending was paused for the
bridging business, reopening recently with stricter criteria. However,
the Group continued to fund a small number of non-property borrowers. No
new funding lines were added in the period and overall credit approved
limits decreased by GBP30m across existing funding lines. New business
opportunities were available but, given the macroeconomic uncertainties,
OSB continued to adopt a prudent risk approach.
Buy-to-Let/SME made a contribution to profit of GBP111.2m, up 2%
compared with the restated value of GBP109.2m(3) in the first six months
of 2019, with the benefit of higher income partially offset by an
increase in impairment losses to GBP28.2m (H1 2019: GBP5.2m) as the
Group used more adverse macroeconomic scenarios in modelling the
expected credit losses under IFRS 9.
The Group remains highly focused on the risk assessment of new lending,
as demonstrated by the average LTV in the Buy-to-Let/SME segment of 68%
(31 December 2019: restated 68%(2) ) and with only 2.0% of loans
exceeding 90% LTV (31 December 2019: 1.8%). The average LTV for new
Buy-to-Let/SME origination was 71%.
1. The Group restated the comparative LTVs due to a change in
aggregation methodology
2. Interest coverage ratio was restated for H1 2019 from 175% to 189%
due to an improvement in the calculation methodology
3. Net interest income and contribution to profit were restated as a
result of the recognition of interest expense on the GBP22m of Perpetual
Subordinated Bonds previously classified as equity.
Residential mortgages
Residential sub-segment: gross loans
30-Jun-2020 31-Dec-2019
GBPm GBPm
-------------- ----------- -----------
First charge 1,602.0 1,466.6
Second charge 335.7 358.6
Funding lines 13.1 12.2
Total 1,950.8 1,837.4
This segment comprises lending to owner-occupiers, secured via either
first or second charges against the residential home. The Bank also
provides funding lines to non-bank lenders which operate in high
yielding, specialist sub segments, such as residential bridge finance.
The Residential sub-segment gross loan book was GBP1,950.8m as at 30
June 2020, up 6% compared with GBP1,837.4m at the end of 2019, with
organic originations of GBP184.7m during the period (H1 2019:
GBP259.9m). As with the Buy-to-Let/SME sub-segment, the level of organic
originations reflects strong activity for nearly all of the first
quarter of 2020 based on previous applications, the reduction in lending
and applications during lockdown and the controlled increase in activity
as lockdown was eased. Residential lending was particularly impacted by
the government's restrictions on moving home. Residential first charge
lending recommenced towards the beginning of May at LTVs of up to 75%,
supported by physical valuations, with stricter underwriting criteria in
place and headline price increases.
OSB's first charge gross loan book increased 9% in the period to
GBP1,602.0m from GBP1,466.6m at the end of 2019.
Our Kent Reliance brand provides bespoke first charge mortgages,
typically to prime credit quality borrowers with more complex
circumstances, for example, high net worth borrowers with multiple
income sources and self-employed borrowers. These circumstances often
preclude them from the mainstream lenders, as most favour automated
decision-making over manual underwriting. The product range also
includes near-prime residential products. Kent Reliance also operates in
the shared ownership sector, where borrowers buy a property in
conjunction with a housing association. A revised shared ownership
product set was launched in June 2020, demonstrating commitment to this
sub-segment.
The OSB second charge mortgage brand, Prestige Finance, no longer offers
new mortgages to borrowers and its loan book is in run-off and managed
by Precise Mortgages. Second charge mortgages are currently offered by
the Group under the Precise Mortgages brand as a sub-segment of CCFS.
The Prestige Finance second charge residential loan book had a gross
value of GBP335.7m as at 30 June 2020 (31 December 2019: GBP358.6m).
OSB continued to provide secured funding lines to non-bank lenders which
operate in certain high-yielding, specialist sub-segments, such as
residential first and second charge finance. The Bank continued to adopt
a cautious approach to these more cyclical businesses given
macroeconomic uncertainty. Total credit approved limits as at 30 June
2020 were GBP29.8m with total loans outstanding of GBP13.1m (31 December
2019: GBP31.0m and GBP12.2m, respectively).
Residential mortgages made a contribution to profit of GBP27.4m, down 3%
compared with the restated value of GBP28.2m(1) in the same period of
2019. Growth in income during the period was more than offset by higher
impairment losses which increased to GBP7.7m from GBP0.7m in the prior
period reflecting more adverse macroeconomic scenarios used in modelling
expected credit losses under IFRS 9.
The average book LTV remained low at 58% (31 December 2019: restated
57%(2) ) with 5.2% of loans by value with LTVs exceeding 90% (31
December 2019: 3.3%). The average LTV of new residential origination in
the first six months of 2020 was 69%.
1. Net interest income and contribution to profit were restated as a
result of the recognition of interest expense on the GBP22m of Perpetual
Subordinated Bonds previously classified as equity.
2. The Group restated the comparative LTVs due to a change in
aggregation methodology.
Charter Court Financial Services ('CCFS') segment
The CCFS segment review is presented on an underlying basis and excludes
acquisition-related items and reconciliation to the statutory basis is
presented in the table below.
Segment results for the six months to 30 June 2019 assume that the
Combination occurred on 1 January 2019 and exclude acquisition-related
items.
Contribution to profit for the period
Total Total
Buy-to-Let Residential Bridging Second charge Other(1) underlying Acquisition- related items statutory
H1 2020 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Net interest
income 55.9 33.5 6.8 3.6 3.5 103.3 (33.0) 70.3
Fees and
commissions
income - 0.1 - - 2.8 2.9 - 2.9
Fair value
losses - - - - (10.9) (10.9) 6.5 (4.4)
Gain on sale
of loans - - - - 15.1 15.1 (13.1) 2.0
Total income 55.9 33.6 6.8 3.6 10.5 110.4 (39.6) 70.8
Impairment of
financial
assets (5.7) (10.7) (0.9) (1.2) - (18.5) 0.2 (18.3)
Contribution
to profit 50.2 22.9 5.9 2.4 10.5 91.9 (39.4) 52.5
H1 2019
Net interest
income 57.1 31.1 7.9 3.4 0.6 100.1
Fees and
commissions
income 0.1 0.1 - - 2.1 2.3
Fair value
losses - - - - (7.2) (7.2)
Gain on sale
of loans - - - - 29.8 29.8
Total income 57.2 31.2 7.9 3.4 25.3 125.0
Impairment of
financial
assets (1.0) (1.3) (0.3) (0.1) - (2.7)
Contribution
to profit 56.2 29.9 7.6 3.3 25.3 122.3
1. Other relates to the net interest income from acquired loan
portfolios, fee income from third party mortgage servicing, fair value
losses and gains on structured assets sales.
Loans and advances to customers
Total
As at 30 June Buy-to-Let Residential Bridging Second charge Other underlying Acquisition-related items(1) Total statutory
2020 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Gross loans to
customers 4,986.3 2,248.5 199.4 220.2 19.9 7,674.3 242.1 7,916.4
Expected
credit
losses (9.0) (14.0) (1.4) (1.7) - (26.1) 0.7 (25.4)
Net loans to
customers 4,977.3 2,234.5 198.0 218.5 19.9 7,648.2 242.8 7,891.0
Risk-weighted
assets 2,075.8 964.3 116.5 95.0 7.6 3,259.2 101.9 3,361.1
As at 31
December 2019
Gross loans to
customers 4,748.5 2,170.8 214.4 218.6 22.1 7,374.4 294.7 7,669.1
Expected
credit
losses (3.5) (3.6) (0.5) (0.4) - (8.0) 0.7 (7.3)
Net loans to
customers 4,745.0 2,167.2 213.9 218.2 22.1 7,366.4 295.4 7,661.8
Risk-weighted
assets 2,002.4 934.0 127.9 95.4 8.4 3,168.1 124.9 3,293.0
1. See reconciliation of statutory to underlying and pro forma
underlying results in the Financial review.
CCFS gross loans
30-Jun-2020 31-Dec-2019
GBPm GBPm
-------------- ----------- -----------
Buy-to-Let 4,986.3 4,748.5
Residential 2,248.5 2,170.8
Bridging 199.4 214.4
Second charge 220.2 218.6
Other(1) 19.9 22.1
Total 7,674.3 7,374.4
-------------- ----------- -----------
1. Other relates to acquired loan portfolios
Charter Court Financial Services targets specialist mortgage market
segments with a focus on specialist Buy-to-Let, residential, bridging
and second charge lending.
The CCFS underlying net loan book grew 4% to GBP7,648.2m to the end of
June 2020 (31 December 2019: GBP7,366.4m) and, excluding the impact of
structured asset sales, the underlying net loan book would have been 9%
higher than at the end of 2019.
Organic originations were GBP1,070.8m in the first half of 2020, down
from GBP1,490.0m of new business written in the same period last year.
As with the OSB segment, the volume of new business reflects the
three-fold dynamic of the first half of 2020: a strong first quarter,
followed by a slowdown as the impact of the government's social
distancing measures and UK lockdown took effect, and the measured rise
in business as lockdown was eased. As a result of lockdown, physical
property valuations became extremely limited and the decision was taken
to pause new applications at the beginning of the second quarter of
2020, concentrating instead on managing the existing applications where
possible. The subsequent return was gradual, initially with a limited
suite of products with tighter lending criteria. Additional products
were introduced as the UK mortgage market began to operate more
effectively.
Buy-to-Let sub-segment
In the first half of 2020, CCFS' organic originations in the Buy-to-Let
sub-segment through Precise Mortgages were GBP697.2m (H1 2019:
GBP909.1m), in line with reduced activity in the overall UK mortgage
market during the second quarter of 2020. The net Buy-to-Let loan book
increased 5% in the period to GBP4,977.3m after structured asset sales.
The Group's share of Buy-to Let originations was 7% in the period.
The gradual re-entry into the mortgage market accelerated towards the
end of May with a return to lending with products of up to 75% LTV as
physical valuations became possible again. Despite tightened
underwriting criteria and an increase in headline interest rates
introduced in the second quarter of 2020, CCFS' Buy-to-Let products were
in demand with intermediaries and borrowers, and application levels
increased. Of the Buy-to-Let completions in the first half of 2020, 52%
represented lending to limited companies, loans for specialist property
types including houses of multiple occupation, multi-unit properties and
holiday lets represented 33% and five-year fixed rate products were 57%
(H1 2019: 49%, 30% and 74%, respectively).
Precise Mortgages maintained its top position in the BVA BDRC's Project
Mercury rankings for effectiveness of its marketing efforts for the
first quarter of 2020 reflecting its strong brand image amongst the
intermediaries.
The weighted average LTV of the book in this segment was 74% with an
average loan size of GBP180,000 (31 December 2019: 71% and GBP183,000).
New lending average LTV was 73% and the weighted average interest
coverage ratio for Buy-to-Let origination was 205% in the first half of
2020 (H1 2019: 71% and 204%, respectively).
On an underlying basis, Buy-to-Let made a contribution to profit of
GBP50.2m in the first half of 2020, down 11% (H1 2019: GBP56.2m) as net
interest income decreased 2% to GBP55.9m and the Group recognised higher
impairment losses of GBP5.7m versus GBP1.0m in the prior period
reflecting the impact of more adverse macroeconomic scenarios used in
modelling expected credit losses under IFRS 9.
On a statutory basis, the Buy-to-Let sub-segment made a contribution to
profit of GBP31.6m.
Residential sub-segment
CCFS' specialist residential lending decreased in the first half of 2020
compared with the same period in 2019 with new originations down 37% to
GBP237.2m (H1 2019: GBP376.3m). As a result of the Coronavirus pandemic,
prudent additional underwriting checks were applied to lending in the
second quarter of 2020 and interest rates were increased marginally, to
manage application levels to operational capacity in light of additional
demands including managing customers requesting payment holidays.
However, CCFS' expertise and strong customer propositions, especially in
areas such as Help-to-Buy, allowed it to continue to pursue lending with
stronger risk-adjusted returns versus mainstream markets.
The average loan size for the residential sub-segment was GBP159,000 (31
December 2019: GBP159,000) with an average LTV for new lending of 71%
(H1 2019: 72%) and book LTV of 70% as at 30 June 2020 (31 December 2019:
67%).
The residential sub-segment made a contribution to profit of GBP22.9m on
an underlying basis, down 23% compared with GBP29.9m in the same period
in 2019 as impairment losses increased to GBP10.7m from GBP1.3m in the
same period of 2019 reflecting more adverse macroeconomic scenarios used
in modelling expected credit losses under IFRS 9.
On a statutory basis, the Residential sub-segment made a contribution to
profit of GBP11.6m.
Bridging sub-segment
The Group maintained its focus on high-quality regulated and unregulated
bridging lending, rather than reacting to increased competition in
short-term lending during the first quarter of 2020. Short-term bridging
originations through CCFS reduced to GBP108.7m in the first half of 2020
compared with GBP168.0m in the first half of 2019. This led to a
reduction in the gross loan book in this sub-segment to GBP199.4m (31
December 2019: GBP214.4m).
The business withdrew its bridging products during lockdown and returned
later than with residential and Buy-to-Let lending with a much reduced
suite of products, significantly tighter underwriting criteria and
stronger pricing.
On an underlying basis, the bridging sub-segment made a contribution to
profit of GBP5.9m in the first half of 2020, down 22% compared with
GBP7.6m in the same period of 2019, reflecting a decrease in net
interest income and higher impairment losses of GBP0.9m (H1 2019:
GBP0.3m).
On a statutory basis, the bridging sub-segment made a contribution to
the Group's profit of GBP5.0m.
Second charge sub-segment
The second charge gross loan book remained largely flat at GBP220.2m
compared with GBP218.6m as at 31 December 2019. The organic originations
in this sub-segment were GBP27.7m down 24% on GBP36.6m in the first half
of 2019.
The business withdrew its products during lockdown and a revised and
more limited product set has been introduced for second charge mortgage,
late in the period with a maximum LTV of 50% and loan size of GBP250k.
The second charge sub-segment made a contribution to profit of GBP2.4m
on an underlying basis, down 27% compared with GBP3.3m in the first half
of 2019 as impairment losses increased from GBP0.1m to GBP1.2m in the
first half of 2020.
On a statutory basis, the contribution to profit from the second charge
sub-segment was GBP1.8m.
Summary statutory results
Review of the Group's performance on a statutory basis reflecting
results for the six months to 30 June 2020 for the combined Group and
results for the six months to 30 June 2019 for OSB only as presented in
the OSB 2019 Interim Report.
Restated(1)
H1 2020 H1 2019
Summary Profit or Loss GBPm GBPm
Net interest income 233.8 150.5
Fair value losses on financial instruments (12.1) (7.4)
Gain on sale of financial instruments 19.9 -
Net fees and commissions 3.7 0.3
External servicing fees - (0.1)
Administrative expenses (76.7) (40.9)
Provisions (0.1) (0.1)
Impairment of financial assets (54.2) (5.9)
Impairment of intangible assets (7.0) -
Integration costs (6.3) -
Exceptional items (1.7) (5.9)
Profit before tax 99.3 90.5
--------- -----------
Profit after tax 72.0 65.3
H1 2020 H1 2019
Key ratios
Net interest margin 217bps 278bps
Basic earnings per share, pence 15.5 25.5
Return on equity 9% 20%
Management expense ratio 70bps 74bps
Cost to income ratio 31% 29%(1)
Loan loss ratio 59bps 12bps
30-Jun-20 31-Dec-19
GBPm GBPm
Extracts from the Statement of Financial
Position
Loans and advances to customers 18,757.2 18,446.8
Retail deposits 16,697.3 16,255.0
Total assets 22,404.0 21,417.1
Key ratios
Common equity tier 1 ratio 17.4% 16.0%
Total capital ratio 18.6% 17.3%
Leverage ratio 6.8% 6.5%
(1) The Group restated prior year comparatives to recognise GBP0.5m of
interest expense on the GBP22m Perpetual Subordinated Bonds previously
classified as equity, see note 1 to the financial statements
For definitions of key ratios please see footnotes in statutory KPIs
above.
Statutory profit
The Group reported statutory profit before tax of GBP99.3m for the first
half of 2020, an increase of 10% compared with the restated value of
GBP90.5m in the first half of 2019(1) , as the period included six
months of profit from Charter Court Financial Services Group plc
('CCFS') which more than offset the impact of acquisition-related
items(2) (including the amortisation of the fair value uplift on
acquisition of the net assets of CCFS) and higher impairment losses.
Impairment losses included the impact of adopting more adverse COVID-19
economic scenarios.
Statutory profit after tax of GBP72.0m for the first half of 2020
increased by 10% from GBP65.3m in the first half of 2019 in line with
the increase in profit before tax.
The Group's effective tax rate increased to 27.5% for the first half of
2020 (H1 2019: restated(1) 24.9%(3) ) due to the impact of the
cancellation of the planned corporation tax rate reductions on 19 March
2020 on the deferred tax liability in relation to the Combination.
Statutory return on equity for the first half of 2020 fell to 9% (H1
2019: 20%) as the profit for the period was reduced by the
acquisition-related items(4) (including amortisation of the fair value
uplift on acquisition of the net assets of CCFS) and higher impairment
losses. Statutory basic earnings per share fell to 15.5 pence per share
(H1 2019: 25.5 pence per share), due to the increase in profit after
taxation being more than offset by the impact of the additional shares
issued for the all-share Combination with CCFS.
Net interest income
Statutory net interest income increased by 55% in the period to
GBP233.8m (H1 2019: restated GBP150.5m(1) ), reflecting growth in the
loan book and the inclusion of six months of CCFS' net interest income.
Statutory net interest margin ('NIM') was 217bps compared to 278bps for
OSB only for the six months 30 June 2019.
The reduction in NIM was primarily due to the dilutive impact of
including CCFS' results and the impact of the changing mix of the OSB
loan book in 2019, as well as the dilutive impact in the second quarter
of 2020 of a delay in passing on the base rate cuts in full to retail
savers and the increased levels of liquidity being prudently held by the
Group.
The CCFS business has a lower NIM than the OSB business and statutory
NIM in the first half of 2020 was also negatively impacted by the
amortisation of the fair value uplift on acquisition of the CCFS net
assets.
The mix of the OSB loan book continued to change in 2019 as the
higher-yielding back book refinanced onto front book pricing. The impact
of this mix effect had largely run its course by the end of the first
half of 2019.
Fair value losses on financial instruments
Fair value losses on financial instruments increased to GBP12.1m in the
first half of 2020 (H1 2019: GBP7.4m). This included a GBP13.8m net loss
on unmatched swaps (H1 2019: GBP4.6m loss), due primarily to fair value
movements on mortgage pipeline swaps, prior to them being matched
against completed mortgages, caused by a fall in outlook on the LIBOR
and SONIA curves. The Group economically hedges its committed pipeline
of mortgages and this unrealised loss will unwind over the life of the
swaps.
The Group also made a loss of GBP6.4m (H1 2019: GBP0.9m loss) in respect
of the ineffective portion of hedges and recognised a gain of GBP10.9m
on inception adjustments due to the unwind of acquisition-related
inception items and fair value movements of the hedged item at the start
of hedge accounting (H1 2019: nil).
Gain on sale of financial instruments
In January 2020, the Group disposed of its remaining notes under the
Canterbury No.1 securitisation and PMF 2020-1B generating a gain of
GBP19.9m on a statutory basis.
Net fees and commissions
Net fees and commissions income of GBP3.7m in the first half of 2020 (H1
2019: GBP0.3m) comprised fees and commissions receivable of GBP4.3m (H1
2019: GBP0.9m) partially offset by fees and commissions payable of
GBP0.6m (H1 2019: GBP0.6m).
Fees and commissions receivable increased in the period due to the
inclusion of GBP2.9m of fees and commissions from CCFS as well as
servicing fees on securitised loans which have been deconsolidated from
the Group's balance sheet.
Fees and commissions payable remained flat and include branch agency
fees and commissions paid to Kent Reliance Provident Society Limited for
conducting member engagement activities for OSB.
Administrative expenses
Administrative expenses nearly doubled to GBP76.7m in the first half of
2020 (H1 2019: GBP40.9m), largely as a result of the inclusion of
administrative costs of CCFS.
The Group's statutory cost to income ratio of 31% (H1 2019: restated
29%(1) ) was impacted by the acquisition related adjustments (including
the amortisation of the fair value uplift on CCFS net assets) which
reduced total income on a statutory basis and the inclusion of CCFS'
income and administrative expenses.
The Group continued to focus on integration activities and other cost
efficiencies as demonstrated in the statutory management expense ratio
improving to 70bps in the first half of 2020 (H1 2019: 74bps).
Impairment of financial assets
Impairment losses in the first half of 2020 were GBP54.2m (H1 2019:
GBP5.9m) and the statutory loan loss ratio increased to 59bps compared
to 12bps in the first half of 2019.
The impairment losses in the first half of 2020 included a GBP42.0m
impact of adopting more adverse macroeconomic scenarios as the onset of
the Coronavirus pandemic changed the outlook for the UK economy and
GBP5.0m from enhancements to the Group's staging criteria in line with
PRA guidance, which moved certain higher risk accounts with payment
holidays to stage 2. On a business as usual basis, the loan loss ratio
would have been c. 6bps reflecting the stable arrears profile of the
loan book.
Impairment of intangible assets
The impairment of intangible assets of GBP7.0m related to the intangible
assets recognised on the acquisition of CCFS and the impact of lower
actual and expected lending volumes in CCFS post COVID-19 on the
recoverable amount of the broker relationship intangible.
Integration costs
The Group recorded GBP6.3m of integration costs in the first half of
2020, largely related to staff costs for key personnel retained to
assist in the integration for a fixed period, redundancy costs and fees
incurred for external advice on the Group's future operating structure.
Exceptional items
Exceptional items of GBP1.7m related to consultant, legal and
professional fees in respect of the Combination with CCFS (H1 2019:
GBP5.9m).
Dividend
As a result of the Coronavirus pandemic, on 3 April 2020, the Group took
the decision to cancel payment of its final 2019 dividend. The Board is
not proposing to pay an interim dividend and will consider dividend
payments at the year end, taking into account the performance of the
Group and the macroeconomic conditions at that time.
Balance sheet growth
On a statutory basis, net loans and advances to customers grew by 2% to
GBP18,757.2m as at 30 June 2020, or 6% excluding the impact of
structured asset sales in January 2020 (31 December 2019: GBP18,446.8m).
Retail deposits increased by 3% to GBP16,697.3m as at 30 June 2020 (31
December 2019: GBP16,255.0m) and the Group increased its borrowing under
the Bank of England schemes to prudently increase liquidity going into
the pandemic. Drawings under the Indexed Long-Term Repo scheme were
increased to GBP755m as at 30 June 2020 (31 December 2019: GBP290m) and
the Group drew an initial GBP100m under the Bank of England's Term
Funding Scheme for SMEs ('TFSME') while repaying GBP60m of the original
Term Funding Scheme to leave a balance of GBP2.6bn as at 30 June 2020
(31 December 2019: GBP2.6bn).
In the first half of 2020, the Group was accepted for the TFSME with a
combined initial allowance of GBP2.0bn.
At the end of June 2020, the Group had up to GBP350m (31 December 2019:
GBP600m) of contingent wholesale funding capacity available to it
through the CCFS warehouse facilities, none of which was utilised at the
end of the period (31 December 2019: GBP94m).
The Group also utilises sophisticated securitisation platforms to
complement its funding requirements and in January 2020, the Group
disposed of its remaining notes under the Canterbury No.1 securitisation
and the notes in PMF 2020-1B generating a gain of GBP19.9m on a
statutory basis.
In addition to the placement of GBP847m of RMBS bonds into the market
during the period, the Group also securitised GBP1bn of
organically-originated mortgage assets under Canterbury No.2, which
closed in March 2020. The GBP1.036bn transaction, which was fully
retained, provided the Group with an GBP860m portfolio of AAA rated
senior bonds which are eligible as collateral for commercial and central
bank funding repo facilities at significantly reduced haircuts.
Total assets grew by 5% to GBP22,404.0m (31 December 2019: GBP21,417.1m)
reflecting growth in loans and advances and increased liquidity.
Liquidity
Both OSB and CCFS operate under the Prudential Regulation Authority's
liquidity regime and are managed separately for liquidity risk. Both
Banks hold their own significant liquidity buffer of liquidity coverage
ratio ('LCR') eligible high-quality liquid assets ('HQLA').
As at 30 June 2020, OSB had GBP1,639.3m and CCFS had GBP892.0m of HQLA
LCR eligible assets (31 December 2019: GBP1,231.8m and GBP1,077.3m,
respectively). CCFS also held a portfolio of GBP303.5m of unencumbered
RMBS qualifying securities as Bank of England level 3 collateral
included in the internal liquidity buffer (31 December 2019: GBP186.2m).
Both Banks operate within a target liquidity runway in excess of the
minimum LCR regulatory requirement, which is based on internal stress
testing. Both Banks have a range of contingent liquidity and funding
options available for possible stress periods.
As at 30 June 2020, OSB had a liquidity coverage ratio of 325% and CCFS
149% (31 December 2019: 199% and 145%, respectively) and the Group LCR
was 245%, all significantly in excess of the 2020 regulatory minimum of
100%. The Group took early action to increase liquidity given the
uncertain economic outlook by drawing an additional GBP465m through the
Indexed Long-Term Repo scheme in the first six months of 2020. The Group
also attracted strong retail inflows during the ISA season and
maintained a high level of retention amongst savings customers with
maturing fixed rate bonds.
Capital
The Group's capital position remained exceptionally strong, with a
fully-loaded CET1 ratio of 17.4% as at 30 June 2020 (31 December 2019:
16.0%(5) ) and a total capital ratio of 18.6% (31 December 2019: 17.3%).
The CET1 ratio as at 30 June 2020 benefitted from the following items:
0.6% from the cancelled final dividend for 2019, and 0.5% from the
application of the Capital Requirements Regulation 'Quick Fix' package
(0.4% from changes to the IFRS 9 transitional relief increases, which
relates to stage 1 and stage 2 and 0.1% from the extension of the SME
support factor).
The Group had a leverage ratio of 6.8% as at 30 June 2020 (31 December
2019: 6.5%) and a Pillar 2a requirement of 1.67% of risk weighted assets,
excluding a static integration add-on (31 December 2019: 1.67%).
1. The Group restated prior year comparatives to recognise GBP0.5m of
interest expense on the GBP22m Perpetual Subordinated Bonds previously
classified as equity, see note 1 to the financial statements
2. Acquisition-related items of GBP57.0m, for more details see
Reconciliation of statutory to pro forma underlying results on page 29
3. Effective tax rate excludes GBP2.7m of adjustments relating to prior
year.
4. Acquisition-related items of GBP47.2m, for more details see
Reconciliation of statutory to pro forma underlying results on page 29
5. CET1 ratio of 16.0% includes declared 2019 final dividend which was
subsequently cancelled. Excluding the 2019 dividend, the ratio would
have been 16.6% as at 31 December 2019.
Summary underlying results
Alternative performance measures
The Group presents alternative performance measures ('APMs') below as
management believe they provide a more consistent basis for comparing
the Group's performance between financial periods.
Underlying results for the six months to 30 June 2020 reflect results
for the combined Group, excluding exceptional items, integration costs
and other acquisition-related items.
Pro forma underlying results for the six months to 30 June 2019 assume
that the Combination occurred on 1 January 2019 and include six months
of results from OSB and CCFS, excluding exceptional items, integration
costs and other acquisition-related items.
APMs reflect an important aspect of the way in which operating targets
are defined and performance is monitored by the Board. However, any APMs
in this document are not a substitute for IFRS measures and readers
should consider the IFRS measures as well which can be found on page 21.
For the reconciliation between APMs and the statutory equivalents, see
page 29 and for calculation methods of key performance indicators, see
page 91 in the Appendix.
Pro forma
Underlying underlying
H1 2020 H1 2019
Summary Profit or Loss GBPm GBPm
Net interest income 266.8 250.5
Gain on sale of financial instruments 33.0 29.8
Fair value losses on financial instruments (18.6) (14.3)
Net fees and commissions 3.7 2.4
External servicing fees - (0.1)
Administrative expenses (74.1) (76.8)
Provisions (0.1) (0.1)
Impairment of financial assets (54.4) (8.6)
Profit before tax 156.3 182.8
------------ -----------
Profit after tax 119.2 137.3
H1 2020 H1 2019
Key ratios
Net interest margin 250bps 270bps
Basic earnings per share, pence 26.1 30.3
Return on equity 18% 24%
Management expense ratio 68bps 81bps
Cost to income ratio 26% 29%
Loan loss ratio 60bps 11bps
30-Jun-20 31-Dec-19
GBPm GBPm
Extracts from the Statement of Financial
Position
Loans and advances to customers 18,514.4 18,151.4
Retail deposits 16,692.8 16,248.6
Total assets 22,201.5 21,166.5
Underlying profit
The Group's underlying profit before tax was GBP156.3m in the first half
of 2020, a decrease of 14% compared with GBP182.8m in the first half of
2019, due primarily to higher impairment losses as the Group adopted
more adverse COVID-19 related macroeconomic scenarios.
Underlying profit after tax was GBP119.2m, down 13% (H1 2019: GBP137.3m)
in line with the decrease in profit before tax.
The Group's effective tax rate on an underlying basis remained broadly
flat at 23.7% for the first half of 2020 (H1 2019: 24.9%).
On an underlying basis, return on equity for the first half of 2020
decreased to 18% (H1 2019: 24%) and basic earnings per share decreased
to 26.1 pence per share (H1 2019: 30.3 pence per share), due to the
decrease in profit after tax.
Net interest income
Underlying net interest income increased by 7% to GBP266.8m in the first
half of 2020 (H1 2019: GBP250.5m) due primarily to growth in the loan
book and the underlying net interest margin ('NIM') was 250bps (H1 2019:
270bps).
The reduction in NIM was primarily due to the changing mix of the OSB
loan book in 2019, as well as the dilutive impact in the second quarter
of 2020 of a delay in passing on the base rate cuts in full to retail
savers and the increased levels of liquidity being prudently held by the
Group. The mix of the OSB loan book continued to change in 2019 as the
higher-yielding back book refinanced onto front book pricing. The impact
of this mix effect had largely run its course by the end of the first
half of 2019.
Fair value losses on financial instruments
Underlying net fair value losses on financial instruments increased to
GBP18.6m in the first half of 2020 (H1 2019: GBP14.3m). This included a
GBP13.8m net loss on unmatched swaps (H1 2019: GBP11.8m loss), due
primarily to fair value movements on mortgage pipeline swaps, prior to
them being matched against completed mortgages, due to a fall in outlook
on the LIBOR and SONIA curves. The Group economically hedges its
committed pipeline of mortgages and this unrealised loss will unwind
over the life of the swaps.
The Group made a loss of GBP6.4m (H1 2019: GBP0.9m loss) due to the
ineffective portion of hedges and a GBP5.8m gain on inception
adjustments due to fair value movements of hedged assets and liabilities
prior to new hedge accounting relationships commencing and also
recognised GBP3.1m of amortisation of fair value adjustments on hedged
assets relating to cancelled swaps (H1 2019: GBP1.9m).
Gain on sale of financial instruments
Gains on structured asset sales were GBP33.0m on an underlying basis in
the first half of 2020 (H1 2019: 29.8m) as the Group disposed of its
remaining notes under the Canterbury No.1 securitisation and PMF 2020-1B
in January 2020.
Net fees and commissions
Underlying net fees and commissions income of GBP3.7m in the first half
of 2020 (H1 2019: GBP2.4m) comprised fees and commissions receivable of
GBP4.3m (H1 2019: GBP3.0m) which related to CCFS' fees for servicing
third party mortgage portfolios and servicing fees for securitised
mortgages where the Group continued to service the loans, partially
offset by fees and commissions payable of GBP0.6m (H1 2019: GBP0.6m)
which include branch agency fees and commissions paid to Kent Reliance
Provident Society for conducting member engagement activities for OSB.
Administrative expenses
Underlying administrative expenses were down 4% to GBP74.1m in the first
half of 2020 (H1 2019: GBP76.8m). This includes the benefit of synergies
from integration realised to date, mainly from de-duplication of senior
roles and other efficiencies.
The underlying cost to income ratio improved to 26% (H1 2019: 29%) and
the underlying management expense ratio improved by 13bps to 68bps for
the first half of 2020 (H1 2019: 81bps) as the business delivered
integration synergies and retained its focus on cost efficiency and
discipline through the Coronavirus pandemic.
Impairment of financial assets
Underlying impairment losses in the first half of 2020 were GBP54.4m (H1
2019: GBP8.6m) representing an underlying loan loss ratio of 60bps (H1
2019: pro forma underlying 11bps).
The underlying impairment losses in the first half of 2020 included a
GBP42.0m impact of adopting more adverse macroeconomic scenarios as the
onset of the Coronavirus pandemic changed the outlook for the UK economy,
and GBP5.0m from enhancements to the Group's staging criteria in line
with PRA guidance, which moved certain higher risk accounts with payment
holidays to stage 2. On a business as usual basis, the loan loss ratio
would have been c. 6bps reflecting the stable arrears profile of the
loan book.
Balance sheet growth
On an underlying basis, after adjusting for the fair value uplift on the
CCFS loan book, net loans and advances to customers were GBP18,514.4m
(31 December 2019: GBP18,151.4m) an increase of 2%, or 7% excluding the
impact of structured asset sales in January 2020.
Retail deposits increased by 3% to GBP16,692.8m, after adjusting for the
fair value uplift on the CCFS deposits (31 December 2019: GBP16,248.6m)
and the Group increased its borrowing under the Bank of England's
schemes to prudently increase liquidity going into the pandemic.
Drawings under the Indexed Long-Term Repo scheme were increased to
GBP755m as at 30 June 2020 (31 December 2019: GBP290m) and the Group
drew an initial GBP100m under the Bank of England's Term Funding Scheme
for SMEs ('TFSME') while repaying GBP60m of the original Term Funding
Scheme to leave a balance of GBP2.6bn as at 30 June 2020 (31 December
2019: GBP2.6bn).
In the first half of 2020, the Group was accepted for the TFSME with a
combined initial allowance of GBP2.0bn.
The Group also utilises sophisticated securitisation platforms to
complement its funding requirements and in January 2020, the Group
disposed of its remaining notes under the Canterbury No.1 securitisation
and the notes in PMF 2020-1B generating a gain of GBP33.0m on an
underlying basis.
In addition to the placement of GBP847m of RMBS bonds into the market
during the period, the Group also securitised GBP1bn of
organically-originated mortgage assets under Canterbury No.2, which
closed in March 2020. The GBP1.036bn transaction, which was fully
retained, provided the Group with an GBP860m portfolio of AAA rated
senior bonds which are eligible as collateral for commercial and central
bank funding repo facilities at significantly reduced haircuts.
At the end of June 2020, the Group had up to GBP350m (31 December 2019:
GBP600m) of contingent wholesale funding capacity available to it
through the CCFS warehouse facilities, none of which was utilised at the
end of the period (31 December 2019: GBP94m).
Total assets grew by 5% to GBP22,201.5m (31 December 2019: GBP21,166.5m)
due to the growth in loans and advances and increased liquidity.
Reconciliation of statutory to underlying and pro forma underlying
results
HY 2020 HY 2019
Restated15 CCFS
Statutory Reverse OSB statutory Reverse
results acquisition- related items Underlying results statutory results results exceptional item and adjust presentation Pro forma underlying results
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------
Net interest income 233.8 33.01 266.8 150.5 100.1 (0.1) 250.5
Gain on sale of loans 19.9 13.1(2) 33.0 -- 29.8 -- 29.8
Net fair value losses on financial
instruments (12.1) (6.5)(3) (18.6) (7.4) (7.2) 0.3 (14.3)
Net fees and commissions 3.7 -- 3.7 0.3 2.3 (0.2) 2.4
External servicing fees -- -- -- (0.1) -- -- (0.1)
Total income 245.3 39.6 284.9 143.3 125.0 -- 268.3
Administrative
expenses (76.7) 2.6(4) (74.1) (40.9) (35.9) -- (76.8)
Provisions (0.1) -- (0.1) (0.1) -- -- (0.1)
Impairment of financial assets (54.2) (0.2)(5) (54.4) (5.9) (2.7) -- (8.6)
Impairment of intangible assets (7.0) 7.0(6) --
Integration costs (6.3) 6.3(7) -- -- -- -- --
Exceptional items (1.7) 1.7(8) -- (5.9) (3.8) 9.7 --
Profit before tax 99.3 57.0 156.3 90.5 82.6 9.7 182.8
Profit after tax 72.0 47.2 119.2 65.3 62.3 9.7 137.3
Summary Balance Sheet
Loans and advances to
customers 18,757.2 (242.8)(9) 18,514.4 9,862.0 7,046.9 -- 16,908.9
Other financial assets 3,570.1 48.6(10) 3,618.7 1,724.5 1,162.9 -- 2,887.4
Other non-financial
assets 76.7 (8.3)(11) 68.4 51.3 59.6 -- 110.9
---------------------------
Total assets 22,404.0 (202.5) 22,201.5 11,637.8 8,269.4 19,907.2
Amounts owed to retail depositors 16,697.3 (4.5)(12) 16,692.8 9,175.0 5,976.5 15,151.5
Other financial
liabilities 4,078.9 6.7(13) 4,085.6 1,724.4 1,768.5 3,492.9
Other non-financial
liabilities 80.0 (54.7)(14) 25.3 41.2 33.9 (9.7) 65.4
Total liabilities 20,856.2 (52.5) 20,803.7 10,940.6 7,778.9 (9.7) 18,709.8
Net assets 1,547.8 (150.0) 1,397.8 697.2 490.5 9.7 1,197.4
Notes to the reconciliation of statutory to underlying and pro forma
underlying results table:
1. Amortisation of the net fair value uplift to CCFS' mortgage loans and
retail deposits on Combination.
2. Recognition of additional gain on sale of securitisation notes.
3. Inception adjustment on CCFS' derivative assets and liabilities on
Combination.
4. Amortisation of intangible assets recognised on Combination.
5. Adjustment to expected credit losses on CCFS loans on Combination.
6. Impairment of intangible asset post Combination
7. Costs of integration of the two Banks post Combination, see note 9 to
the accounts
8. Reversal of exceptional items, see note 10 to the accounts
9. Recognition of a fair value uplift to CCFS' loan book of GBP317.0m
less reversal of fair value movement for securitised loans of GBP17.4m
less accumulated amortisation of the fair value uplift of GBP57.5m and a
movement on credit provisions of GBP0.8m.
10. Fair value adjustment to hedged assets
11. Adjustment of GBP1.0m to deferred tax asset, GBP0.2m to other assets
and GBP9.5m relating to recognition of acquired intangibles on
Combination.
12. Fair value adjustment to CCFS' retail deposits of GBP7.4m at
Combination less accumulated amortisation of GBP2.9m.
13. Fair value adjustment to hedged liabilities
14. Adjustment to deferred tax liability.
15. The Group restated the prior year comparatives to recognise interest
expense and taxation on the GBP22m Perpetual Subordinated Bonds
previously classified as equity
Key areas of focus during the six months to 30 June 2020
The six months to 30 June 2020 has been a challenging period for the
Group due to the COVID-19 pandemic, but progress continued to be made
against strategic risk management objectives for the year.
The Group proactively managed its risk profile by leveraging the
well-established Risk Management Framework ('RMF') in accordance with
the Board approved risk appetite. Continuous and close monitoring and
assessment of underlying risk drivers, allowed the Board and management
to take timely actions in response to the changing business, regulatory,
political and economic environment.
Progress was made in implementing Group level credit and model risk
frameworks and policies, to ensure that, where appropriate, common
approaches and practices are exercised across both OSB and CCFS.
The COVID-19 pandemic had a material impact on the Group's business and
operational activities, with a significant volume of customers
requesting payment holidays, whilst new business volumes were reduced
when physical valuations were not possible. The Group's operational
arrangements were also impacted as the UK and Indian governments took
measures to control the spread of the virus.
Extensive oversight and advisory support was provided by the Risk and
Compliance function, to ensure that the Group's response to COVID-19 was
in accordance with regulatory expectations and the Board's risk
appetite. The Group ensured that customers had and continue to have
their account performance reported to credit reference agencies as per
issued guidance, in conjunction with IFRS 9 accounting and regulatory
capital guidance being adopted as recommended.
The Group continues to actively monitor the behaviour of accounts issued
with a payment holiday, whilst conducting scenario analysis and stress
testing to understand the range of possible outcomes which could arise,
to enable appropriate business planning activity to take place.
The Risk function conducted detailed stress tests over a range of
scenarios to allow the Board to understand how the Group's assets and
liabilities could perform in extreme but plausible scenarios and to
assess the adequacy of contingent financial resources (capital and
funding), as well as the robustness of the Group's systems and controls.
Due to the potential impact which COVID-19 could have on the UK economy,
the Board requested additional analysis to be conducted to support the
assessment of whether there was a material uncertainty leading to a
significant going concern risk in respect of the 2019 subsidiary
accounts and the Group 2020 interim accounts.
A capital adequacy assessment was conducted, underpinned by reverse
stress testing analysis, to identify a scenario in which the Group would
breach minimum regulatory capital thresholds. This analysis demonstrated
that the Group could withstand extreme macroeconomic stresses. The
scenarios identified were more severe than the stress scenarios used
within the internal capital adequacy assessment process ('ICAAP') and
the macroeconomic stresses observed in prior recessions, and materially
more adverse than the forecasted impact of COVID-19.
The Board also reviewed detailed liquidity, funding and operational
resilience assessments as part of the wider going concern assessment.
The Board concluded that the probability of the scenarios occurring over
the next 12 months was sufficiently remote to conclude that there was no
material uncertainty leading to a significant going concern risk.
The Group leveraged its operational resilience and contingency planning
frameworks to effectively respond to the onset of the pandemic, with the
majority of staff working from home during the lock down period, in both
the UK and our Indian operations. Business as usual activities were
maintained successfully across the lending and savings franchises.
The Group intensified its focus on supporting customers during the
period, with resources diverted from other areas of the business to
facilitate exceptionally high levels of inbound customer calls, related
to payment holiday requests or queries from the Group's savings customer
base, which were actioned in a timely manner. The Group complied with
all new regulatory guidelines which emerged during the period.
Integration activities continued as planned with synergies being
realised as department level target operating models were rolled out
across the Group. The Group continues to apply a low risk approach to
integration.
During the period, further progress was made by the Group's Internal
Ratings Based ('IRB') project, with a combined project management office
established to oversee both OSB and CCFS banks' IRB projects in an
efficient and optimised manner. Group level model governance
arrangements were implemented, whilst further progress was made in the
development of the end state IRB models, ensuring compliance with
emerging regulatory requirements. The Group is planning to submit module
1 to the PRA during 2021.
The Group successfully managed its funding and liquidity profile
throughout the first half of the year, ensuring that it supported new or
existing customer requests, while maintaining appropriate buffers as the
COVID-19 pandemic developed.
Principal risks and uncertainties
The Board is responsible for determining the nature and extent of the
principal risks it is willing to take in order to achieve its strategic
objectives.
The table below details the principal risks which the Board believes are
the most material with respect to potential adverse movements impacting
the business model, future financial performance, solvency and
liquidity. A more detailed review of the Group's principal risks and
uncertainties can be found within the Risk review in the 2019 Annual
Report and Accounts on pages 58 to 65, which can be accessed via our
website at www.osb.co.uk.
Principal risks Key mitigating actions
---------------------- -----------------------------------------------------------
Strategic and business -- Regular monitoring of the Group's strategic and
risk business performance against market commitments, the
balanced business scorecard and risk appetite by the
Board and the Executive Committees.
-- A structured approach to change management and fully
leveraging internal and external expertise allows the
Group to respond effectively to regulatory change.
---------------------- -----------------------------------------------------------
Reputational risk -- Established processes are in place to proactively
identify and manage potential sources of reputational
risk including monitoring of media coverage.
-- A commitment to treating customers fairly and being
open and transparent in communication with key
stakeholders.
---------------------- -----------------------------------------------------------
Credit risk Individual borrower defaults:
-- Across both OSB and CCFS a robust underwriting
assessment is undertaken to ensure a customer has the
ability and propensity to repay, and sufficient
security is available to support the new loan
requested. At CCFS an automated scorecard approach is
taken, whilst OSB utilises a bespoke manual
underwriting approach.
-- Should there be problems with a loan, the Collections
and Recoveries team works with customers to reach a
satisfactory conclusion while adhering to the
principle of treating customers fairly.
-- Our strategic focus on lending to professional
landlords means that properties are likely to be
well-managed, with income from a diversified
portfolio mitigating the impact of rental voids or
maintenance costs.
-- Lending to owner-occupiers is subject to a detailed
affordability assessment, including the borrower's
ability to continue payments if interest rates
increase. Lending on commercial property focuses on
property security, and is scrutinised by the Group's
independent Real Estate team as well as by external
valuers.
-- Development finance lending is extended only after a
deep investigation of the borrower's track record and
stress testing the economics of the specific project.
-- The risk of defaults emanating from the payment
holiday population is managed via pro-active, careful
monitoring and management of accounts which fall into
arrears by the risk and collections functions.
Macroeconomic downturn
--The Group works within clearly defined
portfolio limits approved by the Risk Committee
and the Board covering loan to value ('LTV'),
affordability metrics, sector and geographic
concentrations. The Group's limits were reviewed
within the period and adjusted as required.
In addition, stress testing is performed
to ensure the Group maintains sufficient
capital to absorb losses in an economic downturn
and will continue to meet its regulatory
requirements.
Wholesale credit risk
--The Group transacts only with high quality
wholesale counterparties. Derivative exposures
include collateral agreements to mitigate
credit
exposures.
---------------------- -----------------------------------------------------------
Principal risks Key mitigating actions
------------------------- -----------------------------------------------------------
Market risk --Due to the Group's balance sheet structure
no active management of basis risk has been
required by OSB in 2020. CCFS actively replaced
back book LIBOR asset swaps with SONIA swaps
to balance basis risk across assets and liabilities
and reduce possible exposure to dislocation
of market rates from the Bank of England
base rate.
------------------------- -----------------------------------------------------------
Liquidity and funding -- The Group's funding strategy is focused on highly
risk stable retail deposits which benefit from the
Financial Services Compensation Scheme which in turn
mitigates the risk of elevated levels of retail
deposit outflows.
-- The Group performs in-depth liquidity stress testing
and maintains a liquid asset portfolio sufficient to
meet obligations under stress.
-- The Group has prepositioned mortgage collateral with
the Bank of England which allows it to consider other
alternative funding sources to ensure it is not
solely reliant on retail savings. The Group also has
a mature RMBS programme and access to warehouse
facilities.
-- The Group continuously monitors wholesale funding
markets for securitisation opportunities, and has in
the past executed funding transactions or sold
additional residual positions in securitisations when
market conditions were advantageous.
------------------------- -----------------------------------------------------------
Solvency risk -- The Group actively monitors its capital requirements
and resources against financial forecasts and plans
and undertakes stress testing analysis to subject its
solvency ratios to extreme but plausible stress
scenarios.
-- The Group holds prudent levels of capital buffers
based on CRD IV requirements, its own risk appetite
and expected balance sheet growth.
-- The Group engages actively with regulators, industry
bodies and advisers to keep abreast of potential
changes, providing feedback through the consultation
process.
-- The Group has also incorporated MREL based bail-in
capital requirements within its capital planning and
forecasting procedures.
------------------------- -----------------------------------------------------------
Operational risk Cyber / IT security risk
-- The Group has invested significantly in enhancing its
protection against IT security threats, deploying a
series of tools designed to identify and prevent
network/system intrusions. This is further supported
by documented and tested procedures intended to
ensure the effective response to a security breach.
-- As a result of the pandemic a high proportion of
employees are working from home, which may increase
the risk of cyber-crime and IT security failures, as
well as an increased vulnerability to fraud risk.
This aspect of the pandemic is being managed through
increased awareness and active monitoring of
incidents and trends.
Data-management
--The Group established a dedicated Data
Strategy Programme, designed to ensure a
consistent approach to the maintenance and
use of data. This includes both documented
procedures and frameworks and also tools
intended to improve the consistency of data
use. The Group has continued its efforts
to enhance its compliance with the requirements
under GDPR.
Organisational change and integration
--There is a low risk integration project
plan (e.g. no large scale integration related
IT change projects planned) and an experienced
and capable project management office, with
close oversight and direction provided by
the Group Executive and Board Integration
Committees with active monitoring against
integration based objectives and cost and
synergies targets.
IT failure
--The Group continues to invest in improving
the resilience of its core infrastructure.
It has identified its prioritised business
services and the infrastructure that is required
to support them. Tests are performed regularly
to validate its ability to recover from an
incident.
Change management
--The Group recognises that implementing
change introduces significant operational
risk and has therefore implemented a series
of control gateways designed to ensure that
each stage of the change management process
has the necessary level of
oversight.
------------------------- -----------------------------------------------------------
Conduct risk Product suitability
-- The Group has a strategic commitment to provide
customers with simple and transparent products. In
addition, a Product Governance framework is
established to oversee both the origination of new
products and to revisit the on-going suitability of
the existing product suite. Customer journey reviews
are undertaken to identify enhancements to customer
outcomes, services and communications.
-- The Group has a dedicated Product Governance team and
an independent Conduct Risk team to effectively
manage this risk.
Vulnerable Customers
--The Group continues to be focused on customers
who, due to their personal circumstances,
are susceptible to detriment, particularly
so with the onset of the pandemic. The Group
has established policies and processes to
identify and respond to individual customers
deemed as vulnerable in accordance with the
Group's conduct risk appetite, policies and
procedures and regulatory expectations.
Data protection
--In addition to a series of network/system
controls, the Group performs extensive root
cause analysis of any data leaks in order
to ensure that the appropriate mitigating
actions are taken and the potential for customer
detriment is identified and appropriately
addressed.
Integration risk
--During the integration process, the Group
is committed to adopting a low-risk approach
with a view to taking reasonable steps to
avoid causing poor outcomes for our customers.
The Group has conducted and will continue
to undertake detailed analysis of potential
customer harm associated with the integration
process.
------------------------- -----------------------------------------------------------
Compliance and regulatory -- The Group has an effective horizon scanning process
risk to identify regulatory change.
-- All significant regulatory initiatives are managed by
structured programmes overseen by the change
management team and sponsored at executive management
level.
-- The Group proactively seeks external expert opinions
to support its interpretation of the requirements and
validation of its response.
-- The Group maintains an open and proactive
relationship with the prudential and conduct based
supervisory authorities.
-- The Group has actively participated in a number of
thematic reviews and responded positively to both
industry and firm specific feedback. Resulting
feedback and areas of enhancements are subject to
Board and executive oversight with clearly defined
closure timelines.
------------------------- -----------------------------------------------------------
Emerging risks
The Group proactively scans for emerging risks which may have an impact
on its on-going operations and strategy. The Group considers its top
emerging risks to be:
Emerging risks Key mitigating actions
---------------------------------------------- -----------------------------------------------------------
COVID-19 -- The Group's response strategy covers key aspects of
The outbreak of the Coronavirus an effective pandemic response approach, including
(COVID-19) pandemic has had a disruptive prevention, continuity, impact assessment and stress
impact on the global and UK economies. testing. Supporting the Group's response strategy are
The length and severity of the established underlying capabilities to facilitate
pandemic and its impact remains operational and financial resilience testing and
uncertain. The risk of further planning, active monitoring and reporting procedures,
waves in the UK and India remains and active communications with all staff (UK and
a possibility. India) and supervisory authorities.
-- The COVID-19 pandemic has introduced a number of
incremental potential credit risks, including the
credit profile impact of the payment holiday
population. This and other higher risk cohorts of
borrowers are subject to active monitoring and
reporting.
-- Uncertainties remain around the economic impact of
future national or localised lock downs and the
impact of furlough schemes coming to an end. The
longer term implications of the various other
governmental support measures and the outcome of the
ongoing Brexit negotiations result in heightened
economic risks, which in turn may result in adverse
movements in operational and financial performance.
Careful monitoring continues to mitigate this risk.
-- The Group continues to closely monitor the
performance of its loan book and its borrower credit
profiles. Additionally the Group has actively engaged
with its economic advisors to ensure business and
financial planning is based on the most accurate and
current economic outlook.
---------------------------------------------- -----------------------------------------------------------
Brexit based political and macroeconomic --The Group's on-going monitoring
uncertainty and assessment processes, business
As the outcome of trade negotiations planning, risk appetite and stress
following Brexit continues to be testing capabilities ensure that
unclear, there remains a level the Group is well placed to understand
of associated uncertainty around and respond to the macroeconomic
the performance of the UK economy. implications of various Brexit
The Group's activity is solely outcomes.
based in the United Kingdom and
therefore the strategic and financial
prospects of the Group are related
to the outcome of these on-going
negotiations.
---------------------------------------------- -----------------------------------------------------------
Integration risk -- The Board is maintaining oversight of the integration
The risks resulting from the Group's process through the Board Integration Committee.
on-going integration activities, -- A dedicated Integration Management Office has been
including systems, people and infrastructure. established to drive the integration process forward.
Independent second and third line
assessments, monitoring and reporting
is being undertaken by the Risk
and Internal Audit functions
respectively.
---------------------------------------------- -----------------------------------------------------------
Climate change -- The Group continues to develop its approach to
As the worldwide focus on climate assessing and managing the impact of increasing
change intensifies, both the physical climate change risks by leveraging its Risk
risks and the transitional risks Management Framework. This includes scenario analysis
continue to grow, albeit from a ,
UK perspective these are seen as development of key risk indicators and inclusion of
longer term horizon risks. climate risks within operational resilience
Physical risks can relate to specific assessment and strategies. A cross-functional working
weather events, such as storms group has been established to design and deliver the
and flooding, or to longer-term Group's climate change risk assessment capabilities
shifts in the climate, such as with Board oversight to ensure appropriate alignment
rising sea levels. Transitional with strategic and business planning.
risks may arise from the adjustment -- To assess portfolio collateral sensitivities to
towards a 'low-carbon' economy, climate change, the Group is engaging with a third
such as tightening energy efficiency party to assist with modelling physical risks (flood,
standards for domestic and commercial subsidence and coastal erosion) and transitional
buildings. risks (Government policy) against a series of
scenarios relating to global temperature change.
-- The Group's approach to developing its climate change
risk assessment, governance and disclosures
requirements have been informed by supervisory
guidelines.
---------------------------------------------- -----------------------------------------------------------
Model risk
The risk of financial loss, adverse -- The Group has well-defined model governance
regulatory outcomes, reputational frameworks and processes in place, including
damage or customer detriment resulting Committees, frameworks, policies, model inventories
from deficiencies in the development, and independent validation processes.
application or on-going operation
of models and ratings systems. -- In light of this emerging risk the Group implemented
COVID-19 may result in an adverse a Group Models and Ratings Committee to ensure an
impact in the performance of existing appropriate level of oversight is provided by the
credit risk models. Board, in conjunction with the Models and Ratings
Management Committee.
---------------------------------------------- -----------------------------------------------------------
LIBOR reform --The Group Asset and Liability
The London Interbank Offered Rate Committee ('ALCO') has set up a
('LIBOR') benchmark may cease to dedicated working group to focus
be set after the end of 2021. The on this risk and transition away
Group has exposure to the LIBOR from the LIBOR benchmark. The priority
benchmark within some of its customer is to remove the LIBOR component
lending products and wholesale from all new loan products and
derivative hedging transactions. new swap hedges. With regard to
If the benchmark were to cease existing loans and derivative hedges
or become unreliable these loans it is planned that they are transitioned
and derivatives may reflect rates onto alternative benchmarks before
that do not accurately represent LIBOR ceases.
short-term funding costs, therefore
having an adverse effect on returns.
---------------------------------------------- -----------------------------------------------------------
Treating customers fairly -- All Group entities operate under arrears,
The risk that industry wide and repossession, forbearance and vulnerable customer
firm specific practices in relation policies which are designed to comply with regulatory
to arrears; collections and forbearance rules and expectations. These policies articulate the
procedures result in poor customer Group's commitment to ensuring that all customers,
outcomes and financial distress, including those that are vulnerable or experiencing
continue to be an important area financial hardship, are treated fairly, consistently
of regulatory focus. and in a way that considers their individual needs
The practices within the regulated and circumstances.
residential mortgage market, both -- The Group does not tolerate any systemic failure to
first and second charge mortgages, deliver fair customer outcomes. On an isolated basis,
have in particular been subject incidents can result in detriment owing to human
to active supervisory monitoring and/or operational failures. Where such incidents
through market data analysis, complaints occur they are thoroughly investigated, and the
to firms, notifications from firms appropriate remedial actions are taken to address any
and multi-firm thematic reviews. customer detriment and to prevent recurrence.
If the Group's arrears, repossession, -- The impact of COVID-19 has increased the risk
forbearance and vulnerable customer associated with treating customers fairly. Proactive
policies and procedures are assessed conversations with the regulator, making sure
to be misaligned to the individual policies are aligned to supervisory guidelines,
needs of the customers and regulatory on-going monitoring and deep dive reviews as required
expectations, the Group runs the ,
risk of causing harm to its customers, support mitigation of this heightened risk.
particularly those experiencing
financial hardship or vulnerable
customers, with the potential for
reputational damage, redress and
other regulatory actions.
---------------------------------------------- -----------------------------------------------------------
Credit risk portfolio performance
The loan book continued to exhibit resilient performance despite the
unprecedented operating environment. Close monitoring and proactive
management of the Group's credit profile continues, as the impact of
COVID-19 evolves.
The Group initially observed a strong take-up of mortgage payment
holidays as customers sought to limit their financial outgoings during
the early phase of the nationwide lockdown. However, as the lockdown has
been progressively relaxed and customers have had time to assess and
organise their financial arrangements, the Group has observed a
progressive decline in the number of customers with a payment holiday.
The Group has actively monitored this and the wider cohort of higher
risk customers to identify accounts which have or could experience
financial difficulties and increased provisions based on enhanced IFRS 9
staging criteria.
The Group has updated its IFRS 9 macroeconomic scenarios and weightings
to reflect the economic uncertainties caused by the pandemic. These
changes have resulted in a material increase in the Group's forward
looking expected credit loss ('ECL') estimates whilst the underlying
credit metrics have remained broadly stable during the period.
The Group remains fully cognisant of the potential risk of future loan
portfolio performance issues linked to the payment holiday and furlough
schemes coming to an end. The Group has assessed and quantified the
potential range of outcomes via stress testing and scenario analysis,
and has raised IFRS 9 impairment provisions on a forward looking basis.
Statutory Group loans and advances to customers increased to GBP18.8bn
as at 30 June 2020 from GBP18.4bn at the year end. This loan book growth
was achieved post the impact of structured asset sales in the first
quarter of 2020 and a marked reduction in new lending volumes due to the
impact of the COVID-19 lockdown period and tightening of lending
criteria.
In accordance with the Group's strategy, lending concentrations in core
markets such as Buy-to-Let, first charge residential and semi commercial
and commercial mortgages continued to increase. Lending growth across
these segments more than offset falling lending balances across second
charge and bridging lending. The Group's acquired loan portfolios
continued to run off as expected.
During the period, forward looking internal and external scoring metrics
remained stable, indicating the underlying credit quality of the loan
portfolios.
Lending growth across the Group's funding lines and development finance
businesses remained broadly stable, with modest and carefully selected
growth in Asset Finance exposures to GBP52.6m as at 30 June 2020.
Exposure to the Group's residential development finance brand Heritable
remained low at GBP150.0m with a weighted average LTV of 52%, which
ensures a high level of protection remains in place should property
prices deteriorate markedly.
The Group continues to have a low exposure to high LTV loans against
properties worth more than GBP2m. As at 30 June 2020 6.9% of OSB and
0.02% of CCFS exposures had a weighted average loan to value greater
than 65%, where the property has a value greater than GBP2m.
Average weighted interest coverage ratios in our Buy-to-Let origination
remained strong at 203% for OSB and 205% for CCFS (31 December 2019:
187% and 202%, respectively).
Given the uncertain macroeconomic backdrop the Group tightened new
lending LTV criteria during the six months to 30 June 2020, where
weighted average loan to value ratios for new lending remained stable
across both OSB 70% and CCFS 71% (31 December 2019: 70% and 71%
respectively).
The total average LTV ratio for existing loans remained stable at 65%
for OSB as at 30 June 2020 (31 December 2019: 65%). The Group continues
to observe a clustering of exposures around the average LTV, which will
support impairment and risk weighted asset performance under stress,
with higher LTV lending as a proportion of total balances continuing to
fall over time. Across the CCFS business weighted average stock LTV
levels across the core business lines remained broadly stable at 74% for
Buy-to-Let lending and 70% for first charge residential owner occupier
lending.
For CCFS arrears balances remained low and in line with expectations,
where the ratio of balances greater than three months in arrears was
0.5% as at 30 June 2020 (31 December 2019: 0.3%). The small increase in
this ratio was driven by the continued seasoning of the CCFS mortgage
portfolios which continue to perform in line with expectations. The OSB
greater than three months in arrears ratio remained stable at 1.3% as at
30 June 2020 (31 December 2019: 1.3%). These stable metrics are in part
supported by accounts being offered payment holidays, which will have
stopped accounts missing payments during the eligible period.
Expected Credit Losses
Following the rapid onset of the COVID-19 pandemic and the lockdown
period the outlook for the UK economy changed markedly. The Group
received regular macroeconomic scenario updates from its economic
advisers, which were reviewed and discussed by management and the Board,
along with the probability weightings applied to each scenario.
Under the IFRS 9 approach, macroeconomic forward looking forecasts are
utilised within the impairment modelling process. Macroeconomic
variables such as unemployment rates, gross domestic product and base
rate trends impact the probability of accounts rolling into arrears and
default (stage 3), whilst house price movements impact potential loss
given default levels. These factors in turn impact expected credit loss
estimates.
Following the industry best practice and guidance from regulators, the
Group did not consider payment holidays as an automatic transfer trigger
for accounts from stage 1 to stage 2.
In accordance with the principles outlined in the PRA letter submitted
to UK banks on the 4 June 2020 in relation to "COVID-19: IFRS 9 and
capital requirements -- further guidance on initial and further payment
deferrals", management and the Board considered all available
information to determine whether payment holiday accounts should be
moved into stage 2 and a lifetime expected credit loss estimate held
against the exposure.
The first iteration enhanced rule set developed resulted in a portion of
higher risk payment holiday accounts being moved into stage 2 and higher
provisions being held, which had an impact on provision levels and loan
loss performance during the period. If the Group reclassified all
customers on a COVID-19 payment holiday at 30 June 2020 as stage 2,
regardless of whether they have shown a significant increase in credit
risk, the Group's ECL would have increased by GBP15.4m.
On an underlying basis, impairment losses in the first half of 2020
totalled GBP54.4m (H1 2019: GBP8.6m), which represented a loan loss
ratio of 60bps (H1 2019: 11bps). The increase in impairment losses was
predominantly driven by the impact of COVID-19 and the introduction of
more adverse macroeconomic scenarios and enhancements made to the
Group's staging logic, which resulted in a proportion of payment holiday
accounts being transferred into stage 2 and higher provisions being
held. As described above the Group's credit profile remained resilient
throughout the reporting period; on an underlying basis removing these
two significant impacts, and less material modelling enhancements, the
loan loss ratio would have been 6bps. The statutory loan loss ratio
increased to 59bps (H1 2019: 12 bps) as described above driven by the
impact of COVID-19.
During the period to 30 June 2020, the Group's economic scenarios were
materially revised due to the potential impact of the COVID-19 pandemic
on the UK economy.
The Group's economic advisers estimated the potential impact of the
lockdown period on productivity, the offsetting impacts of government
interventions, and in the downside scenarios the potential compounding
impact of an adverse outcome with respect to the UK transitioning to new
trading arrangements with the European Union.
Since the lockdown restrictions have been lifted, economic activity has
resumed, however the forecasts assume a certain level of scarring to the
long term economic outlook. The table below discloses the forecasted
year end economic performance during 2020, 2021 and 2022, when the
adverse impact of COVID-19 on the economy will be at its highest.
Macroeconomic scenarios utilised within IFRS 9 impairment calculations
30 June 2020:
Scenario (%)(1)
------------ ----------- ------------------- ----------------------------
Scenario Probability Economic measure Year end Year end Year end
weighting 2020 2021 2022
(%)
------------ ----------- ------------------- -------- -------- --------
Base case 40 GDP (5.9) 3.8 3.6
Unemployment 7.7 7.1 6.6
House price growth (14.3) (0.3) 7.0
------------ ----------- ------------------- -------- -------- --------
Upside 30 GDP (2.6) 3.7 3.6
Unemployment 7.0 5.5 5.2
House price growth (11.9) 6.5 9.0
------------ ----------- ------------------- -------- -------- --------
Downside 23 GDP (8.9) 3.4 3.9
Unemployment 9.3 9.5 9.2
House price growth (19.4) (10.1) 3.0
------------ ----------- ------------------- -------- -------- --------
Severe 7 GDP (10.0) 3.5 3.9
Downside Unemployment 9.8 10.4 10.3
House price growth (21.0) (14.8) (1.3)
Commercial Real (13.4) (30.5) 5.0
Estate
------------ ----------- ------------------- -------- -------- --------
1. Scenarios show annual movement for economic measures.
The material increase in provision levels during the first half of 2020
was driven by the forecasted stress during 2020 and 2021, but also the
forecasted longer term impact of COVID-19 which is forecasted to result
in more subdued long term economic performance. For example, the five
year average house price performance across all scenarios has been
materially downgraded from the forecast used within 31 December 2019
impairment calculations. The future base rate environment and
unemployment rates have also been materially adjusted.
During the period to the 30 June 2020 the Board reflected on the
probability weightings associated with each scenario, taking into
account the changes in the severity of each scenario. A more symmetrical
probability distribution was adopted with 40% assigned to the base case,
30% assigned to the upside and 30% assigned to the downside scenarios.
This includes 23% assigned to the downside scenario and 7% to the severe
downside scenario. As at 31 December 2019, due to the relative severity
of the scenarios, a higher probability was associated to the downside
scenarios, with 35% assigned to the downside, and 15% assigned to the
severe downside. 40% was assigned to the base case with 10% assigned to
the upside scenario.
The table below indicates the increase in provision coverage levels as
at 30 June 2020. The prudent measures taken have materially enhanced
provision coverage against future impairment losses.
Gross carrying Expected Credit Loss Coverage Ratio
As at 30 June 2020 amount (GBPm) (ECL) (GBPm) (%)(1)
Stage 1 16,427.9 28.1 0.17%
Stage 2 1,941.7 26.7 1.38%
Stage 3 + POCI 464.1 41.6 8.96%
Total 18,833.7 96.4 0.51%
Gross carrying Expected Credit Loss Coverage Ratio
As at 31 December 2019 amount (GBPm) (ECL) (GBPm) (%)
Stage 1 17,286.9 5.6 0.03%
Stage 2 749.5 5.6 0.75%
Stage 3 + POCI 431.2 31.7 7.35%
Total 18,467.6 42.9 0.23%
(1) Coverage ratios versus loans and advances is the total IFRS 9
provision versus gross loans and advances.
Liquidity and funding risk management overview
The Group's lending strategy is supported by a strong retail savings
franchise, which provides the Bank with a sustainable funding platform
to support long-term balance sheet growth. This strength is reflected in
a high retention level on maturing fixed term products of 95% for Kent
Reliance and 86% for Charter Savings Bank in the first half of 2020 and
strong customer satisfaction scores. As at 30 June 2020, 6.1% of the
Bank's retail deposits were above the FSCS protection level of GBP85k.
Diversification of funding is also provided by borrowing from the Bank
of England under the Term Funding Scheme ('TFS') and by Indexed
Long-Term Repo ('ILTR'). As at 30 June 2020, the Group's drawings under
TFS remained unchanged at GBP2.6bn and ILTR drawings were GBP755m. In
the first half of 2020, the Group was accepted for the Bank of England's
Term Funding Scheme for SMEs with a combined initial allowance of
GBP2bn. As at the end of June 2020, the total borrowings under this
scheme were GBP100m.
The Group liquidity coverage ratio remained strong at 245% as at 30 June
2020.
Market risk
The key market risk the Group is exposed to is interest rate risk. Gap
and basis risk are managed by defined limits for each Bank. The Group's
Treasury department actively hedges risk to match the timing of cash
flows from assets and liabilities for each Bank. The Group is actively
transitioning from LIBOR to SONIA swaps to reduce possible exposure to a
dislocation of market rates from base rate. The Group has a small amount
of foreign exchange exposure, due to the Rupee denominated running costs
of its OSBIndia office. Rupee denominated running costs during the
period to 30 June 2020 were GBP4.2m (H1 2019: GBP3.1m).
Solvency risk management overview
The Group continued to maintain an appropriate level of capital to
support its strategic objectives and to meet its prudential
requirements. The Group maintained a strong capital position in the
first half of 2020 with a CET1 ratio of 17.4% (31 December 2019: 16.0%),
which remains comfortably in excess of the regulatory requirements and
Board risk appetite.
The Group's capital buffers are subject to active monitoring by the
Board and senior management in the context of the Bank's strategic
objectives, performance commitments, economic and market conditions,
regulatory changes and other risks to which the Bank is exposed.
We confirm that to the best of our knowledge:
-- the condensed set of financial statements has been prepared in
accordance with IAS 34, Interim Financial Reporting, as adopted by the
EU;
-- the interim management report includes a fair review of the
information required by:
(a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being
an indication of important events that have occurred during the first
six months of the financial year and their impact on the condensed set
of financial statements; and a description of the principal risks and
uncertainties for the remaining six months of the year; and
(b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being
related party transactions that have taken place in the first six months
of the current financial year and that have materially affected the
financial position or performance of the entity during that period; and
any changes in the related party transactions described in the last
Annual Report and Accounts that could do so.
The Board of Directors, as listed below, represents those individuals
responsible for this interim management report:
Graham Allatt
Andy Golding
Noël Harwerth
Sarah Hedger
Rajan Kapoor
Mary McNamara
April Talintyre
David Weymouth
By order of the Board
Date: 27 August 2020
We have been engaged by the company to review the condensed set of
financial statements in the half-yearly financial report for the six
months ended 30 June 2020 which comprises the Condensed Consolidated
Statement of Comprehensive Income, the Condensed Consolidated Statement
of Financial Position, the Condensed Consolidated Statement of Changes
in Equity, the Condensed Consolidated Statement of Cash Flows and
related notes 1 to 36. We have read the other information contained in
the half-yearly financial report and considered whether it contains any
apparent misstatements or material inconsistencies with the information
in the condensed set of financial statements.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been
approved by, the directors. The directors are responsible for preparing
the half-yearly financial report in accordance with the Disclosure
Guidance and Transparency Rules of the United Kingdom's Financial
Conduct Authority.
As disclosed in note 2, the annual financial statements of the group are
prepared in accordance with IFRSs as adopted by the European Union. The
condensed set of financial statements included in this half-yearly
financial report has been prepared in accordance with International
Accounting Standard 34 "Interim Financial Reporting" as adopted by the
European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on the
condensed set of financial statements in the half-yearly financial
report based on our review.
Scope of review
We conducted our review in accordance with International Standard on
Review Engagements (UK and Ireland) 2410 "Review of Interim Financial
Information Performed by the Independent Auditor of the Entity" issued
by the Financial Reporting Council for use in the United Kingdom. A
review of interim financial information consists of making inquiries,
primarily of persons responsible for financial and accounting matters,
and applying analytical and other review procedures. A review is
substantially less in scope than an audit conducted in accordance with
International Standards on Auditing (UK) and consequently does not
enable us to obtain assurance that we would become aware of all
significant matters that might be identified in an audit. Accordingly,
we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the
half-yearly financial report for the six months ended 30 June 2020 is
not prepared, in all material respects, in accordance with International
Accounting Standard 34 as adopted by the European Union and the
Disclosure Guidance and Transparency Rules of the United Kingdom's
Financial Conduct Authority.
Use of our report
This report is made solely to the company in accordance with
International Standard on Review Engagements (UK and Ireland) 2410
"Review of Interim Financial Information Performed by the Independent
Auditor of the Entity" issued by the Financial Reporting Council. Our
work has been undertaken so that we might state to the company those
matters we are required to state to it in an independent review report
and for no other purpose. To the fullest extent permitted by law, we do
not accept or assume responsibility to anyone other than the company,
for our review work, for this report, or for the conclusions we have
formed.
Deloitte LLP
Statutory Auditor
London, United Kingdom
27 August 2020
Restated(1)
Six months Six months
ended ended
30-Jun-20 30-Jun-19
Note (Unaudited) (Unaudited)
GBPm GBPm
Interest receivable and similar income 4 371.5 227.9
Interest payable and similar charges 5 (137.7) (77.4)
Net interest income 233.8 150.5
Fair value losses on financial instruments 6 (12.1) (7.4)
Gain on sale of financial instruments 7 19.9 -
Fees and commissions receivable 4.3 0.9
Fees and commissions payable (0.6) (0.6)
External servicing fees - (0.1)
Total income 245.3 143.3
Administrative expenses 8 (76.7) (40.9)
Provisions 28 (0.1) (0.1)
Impairment of financial assets 22 (54.2) (5.9)
Impairment of intangible assets 9 (7.0) -
Integration costs 10 (6.3) -
Exceptional items 11 (1.7) (5.9)
Profit before taxation 99.3 90.5
Taxation 12 (27.3) (25.2)
Profit for the period 72.0 65.3
Other comprehensive (expense)/income
Items which may be reclassified to profit
or loss:
Fair value changes on financial instruments
measured as FVOCI:
Arising in the period (0.5) -
Revaluation of foreign operations 0.1 0.1
Tax on items in other comprehensive expense - -
Other comprehensive (expense)/income (0.4) 0.1
Total comprehensive income for
the period 71.6 65.4
Dividend, pence per share 14 - 4.9
Earnings per share, pence per share
Basic 13 15.5 25.5
Diluted 13 15.5 25.3
(1) Consistent with the restatement in the 2019 Annual Report and
Accounts, the Group has restated the prior period comparatives to
recognise the interest expense 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 47 to 90 form an integral part of these condensed
financial statements.
As at As at
30-Jun-20 31-Dec-19
Note (Unaudited) (Audited)
GBPm GBPm
Assets
Cash in hand 0.5 0.4
Loans and advances to credit institutions 16 2,597.6 2,204.6
Investment securities 17 755.1 635.3
Loans and advances to customers 18 18,757.2 18,446.8
Fair value adjustments on hedged assets 23 195.1 16.8
Derivative assets 21.8 21.1
Other assets 10.8 14.3
Deferred taxation asset 3.6 4.8
Property, plant and equipment 40.3 41.6
Intangible assets 22.0 31.4
Total assets 22,404.0 21,417.1
--------------------------------------------- ---- ----------- ----------
Liabilities
Amounts owed to credit institutions 24 3,426.8 3,068.8
Amounts owed to retail depositors 25 16,697.3 16,255.0
Fair value adjustments on hedged liabilities 23 15.8 (5.1)
Amounts owed to other customers 28.4 29.7
Debt securities in issue 26 325.7 296.3
Derivative liabilities 221.5 92.8
Lease liabilities 27 12.5 13.3
Other liabilities 21.5 34.9
Provisions 28 2.0 1.6
Current taxation liability 1.7 41.5
Deferred taxation liability 54.8 63.1
Subordinated liabilities 10.6 10.6
Perpetual subordinated bonds 37.6 37.6
20,856.2 19,940.1
Equity
Share capital 4.5 4.5
Share premium 864.3 864.2
Retained earnings 625.1 553.2
Other reserves 53.9 55.1
1,547.8 1,477.0
Total equity and liabilities 22,404.0 21,417.1
--------------------------------------------- ---- ----------- ----------
The notes on pages 47 to 90 form an integral part of these condensed
financial statements.
The financial statements on pages 43 to 46 were approved by the Board of
Directors on 27 August 2020.
Andy Golding April Talintyre
Chief Executive Officer Chief Financial Officer
Company number: 07312896
Foreign Share-based
Share Share Capital Transfer Own exchange FVOCI payment Retained Equity
capital premium contribution reserve shares(1) reserve reserve reserve earnings bonds(2) Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2020 4.5 864.2 6.5 (12.8) (3.7) (1.0) 0.5 5.6 553.2 60.0 1,477.0
Total comprehensive
income - - - - - 0.1 (0.5) - 72.0 - 71.6
Own shares - - - - 0.3 - - (0.3) - - -
Coupon paid on AT1
securities - - - - - - - - (2.7) - (2.7)
Dividends paid - - - - - - - - - - -
Share-based payments - 0.1 - - - - - 0.3 2.6 - 3.0
Tax recognised in
equity - - - - - - - (1.1) - - (1.1)
At 30 June 2020
(Unaudited) 4.5 864.3 6.5 (12.8) (3.4) (0.9) - 4.5 625.1 60.0 1,547.8
---------------------- -------- ------- ------------ -------- --------- --------- -------- ----------- --------- --------- -------
At 1 January 2019 2.4 158.8 6.5 (12.8) - (0.4) (0.1) 4.7 439.6 82.0 680.7
PSB restatement(2) - - - - - - - - (0.3) (22.0) (22.3)
Restated at 1 January
2019 2.4 158.8 6.5 (12.8) - (0.4) (0.1) 4.7 439.3 60.0 658.4
Total comprehensive
income - - - - - 0.1 - - 65.3 - 65.4
Coupon paid on AT1
securities - - - - - - - - (2.8) - (2.8)
Dividends paid - - - - - - - - (25.3) - (25.3)
Share-based payments 0.1 - - - - - - (1.1) 2.5 - 1.5
Exceptional items - - - - - - - - (0.1) - (0.1)
Tax recognised in
equity - - - - - - - 0.1 - - 0.1
Restated at 30 June
2019 (Unaudited) 2.5 158.8 6.5 (12.8) - (0.3) (0.1) 3.7 478.9 60.0 697.2
---------------------- -------- ------- ------------ -------- --------- --------- -------- ----------- --------- --------- -------
(1) OSB has adopted look-through accounting and recognised the CCFS
Employee Benefit Trust within the Group.
(2) Equity bonds comprise Additional Tier 1 securities. Consistent with
the restatement in the 2019 Annual Report and Accounts, the Group has
restated the prior period comparatives to classify
the GBP22.0m Perpetual Subordinated Bonds previously classified as
equity as a liability (see note 1).
Restated(1)
Six months Six months
ended ended
30-Jun-20 30-Jun-19
Note (Unaudited) (Unaudited)
GBPm GBPm
Cash flows from operating activities
Profit before taxation 99.3 90.5
Adjustments for non-cash items 33 60.0 19.1
Changes in operating assets and liabilities(2) 33 (957.8) 123.9
Cash generated from operating activities (798.5) 233.5
Provisions refunded/(paid) 0.3 (0.2)
Net tax paid (74.8) (22.4)
Net cash (used)/generated from operating
activities (873.0) 210.9
Cash flows from investing activities
Maturity and sales of investment securities 121.7 139.0
Purchases of investment securities (191.5) (239.9)
Sales of financial instruments 539.8 -
Purchases of equipment and intangible
assets (3.8) (10.1)
Cash used in investing activities 466.2 (111.0)
Cash flows from financing activities
Financing received(2) 29 1,250.7 102.9
Financing repaid(2) 29 (602.4) (81.0)
Cash held in deconsolidated special purpose
vehicles (23.0) -
Interest paid on bonds and subordinated
debt (1.2) (1.3)
Coupon paid on equity bonds (2.7) (2.8)
Dividends paid - (25.3)
Proceeds from issuance of shares under employee
SAYE schemes 0.1 -
Cash payments on lease liabilities (1.0) (0.3)
Cash generated/(used) from financing
activities 620.5 (7.8)
Net increase in cash and cash equivalents 213.7 92.1
Cash and cash equivalents at the beginning
of the period 15 2,102.8 1,324.2
Cash and cash equivalents at the end of
the period 15 2,316.5 1,416.3
Movement in cash and cash equivalents 213.7 92.1
(1) Consistent with the restatement in the 2019 Annual Report and
Accounts, the Group has restated the prior period 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 classified the Bank or England Term
Funding Scheme and Indexed Long-Term Repo scheme as financing activities
and other components as changes in operating assets and liabilities.
The notes on pages 47 to 90 form an integral part of these condensed
financial statements.
1. Restatement of prior period
For the year ended 31 December 2019 the Group 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 has restated the 2019 interim comparatives accordingly
to classify the GBP22.0m PSBs as a financial liability.
The impact of adjusting the prior period reported balances is shown in
the table below:
Restated
Group Adjustment Group
30 June 2019 GBPm GBPm GBPm
Statement of Changes in Equity
Retained earnings 479.2 (0.3) 478.9
Equity bonds 82.0 (22.0) 60.0
Statement of cash flows
Profit before taxation 91.0 (0.5) 90.5
Adjustments for non-cash items 18.6 0.5 19.1
Interest paid on bonds and subordinated
debt (0.8) (0.5) (1.3)
Coupon paid on equity bonds (3.3) 0.5 (2.8)
Statement of Comprehensive Income
Interest payable and similar charges (76.9) (0.5) (77.4)
Profit before taxation 91.0 (0.5) 90.5
2. Accounting policies
The principal accounting policies applied in the preparation of the
accounts for the Group are set out below.
a) Basis of preparation
These Interim Group Financial Statements have been prepared in
accordance with the Disclosure Guidance and Transparency Rules ('DTR')
of the FCA and in accordance with International Accounting Standard 34
Interim Financial Reporting as adopted by the EU.
The accounting policies, presentation and methods of computation are
consistent with those applied by the Group in its latest audited
financial statements, which were prepared in accordance with
International Financial Reporting Standards ('IFRS') as adopted by the
EU and interpretations issued by the International Financial Reporting
Interpretations Committee ('IFRIC'). They do not include all the
information required for a complete set of IFRS financial statements.
However, selected explanatory notes are included to explain events and
transactions that are significant to an understanding of the changes in
the Group's financial position and performance since the last Interim
Report as at 30 June 2019 and last Annual Report and Accounts for the
year ended 31 December 2019.
The comparative figures for the year ended 31 December 2019 are not the
Group's statutory accounts for that financial year. The statutory
accounts for the year ended 31 December 2019 have been delivered to the
Registrar of Companies in England and Wales in accordance with section
447 of the Companies Act 2006. The auditor has reported on those
accounts. Their report was unqualified; did not include a reference to
any matters to which the auditor drew attention by way of emphasis
without qualifying their report, and did not contain a statement under
section 498(2) or (3) of the Companies Act 2006.
2. Accounting policies (continued)
These interim financial statements were authorised for issue by the
Company's Board of Directors on 27 August 2020.
b) Accounting standards
All accounting policies applied are consistent with those set out on
pages 166 to 178 of the 2019 Annual Report and Accounts.
c) Going concern
The Board undertakes regular rigorous assessments of whether the Group
is a going concern in light of current economic conditions and all
available information about future risks and uncertainties.
In assessing whether the going concern basis is appropriate, 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 Interim Group Financial Statements. These forecasts
have been subject to sensitivity tests, including stress scenarios,
which have been compared to the latest Brexit and COVID-19 pandemic
economic scenarios provided by the Group's external economic advisors,
as well as reverse stress tests.
The COVID-19 assessment, which focused on the Group's capital, liquidity
and operational resilience, included the following actions:
-- Financial and capital forecasts were prepared under stress scenarios
which were assessed against the latest COVID-19 related economic
forecasts provided by the Group's external economic advisors. Reverse
stress tests were also run, to assess what combinations of House Price
Index and unemployment variables would utilise regulatory capital buffers
in full and breach the Group's minimum prudential requirements. The
Directors assessed the likelihood of those reverse stress scenarios
occurring within the next 12 months and concluded that the likelihood is
remote.
-- The latest liquidity and contingent liquidity positions and forecasts
were assessed against the ILAAP stress scenarios, which were reviewed for
suitability in the context of COVID-19 related stresses.
Future operational resilience was assessed, including the ability to
achieve social distancing within offices and to continue to support
significant levels of home working; adapt the IT technology and network
to continue to support home working, establish and maintain internal and
external communications; adapt how regulatory engagement is managed; and
plan for a phased return to offices in line with government guidance.
The assessment also covered the operational resilience of material
outsourcing arrangements.
These projections show that the Group has sufficient capital and
liquidity to continue to meet its regulatory capital requirements as set
out by the PRA.
The Board has therefore concluded that the Group has sufficient
resources to continue in operational existence for a period in excess of
12 months and as a result, after considering the impact of COVID-19, it
is appropriate to prepare these Interim Group Financial Statements on a
going concern basis.
d) 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.
2. Accounting policies (continued)
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
Prior to the Combination, the Group operated under two segments:
Buy-to-Let/SME ('BTL/SME') and Residential mortgages. The Group
separately discloses the impact of Combination accounting but does not
consider this a business segment.
The Group has disclosed the risk management tables in note 30 at a
sub-segment level to provide granular level analysis of the Group's core
lending business.
3. Judgements and estimates
The preparation of the Interim Report requires management to make
estimates and assumptions that affect the reported income and expense,
assets and liabilities and disclosure of contingencies at the date of
the Interim Report. Although these estimates and assumptions are based
on management's best judgement at that date, actual results may differ
from these estimates. Estimates and assumptions are reviewed on an
ongoing basis. Revisions to estimates are recognised in the period in
which the estimate is revised and in any future periods affected.
The judgements and estimates made by the Group in the application of its
accounting policies are set out on pages 179 to 181 of the 2019 Annual
Report and Accounts. The following estimates may have a significant risk
of material adjustment to the carrying amount of assets within the next
financial period:
Loan book impairments -- forward-looking macroeconomic scenarios
The following tables disclose the expected credit loss ('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 macroeconomic factors and
ECL calculated. Non-modelled ECL comprises individually assessed
provisions and post model adjustments:
100% Severe
100% Base 100% Upside 100% Downside downside
Weighted case scenario scenario scenario scenario
At 30 June 2020 (Unaudited)
Total loans before provisions,
GBPm 18,833.7 18,833.7 18,833.7 18,833.7 18,833.7
Modelled ECL, GBPm 83.3 65.4 37.8 141.4 190.5
Non-modelled ECL, GBPm 13.1 13.1 13.1 13.1 13.1
Total ECL, GBPm 96.4 78.5 50.9 154.5 203.6
ECL coverage, % 0.51 0.42 0.27 0.82 1.08
------------------------------- -------- -------------- ----------- ------------- -----------
At 31 December 2019 (Audited)
Total loans before provisions,
GBPm 18,467.6 18,467.6 18,467.6 18,467.6 18,467.6
Modelled ECL, GBPm 37.4 24.4 14.6 48.1 62.5
Non-modelled ECL, GBPm 5.5 5.5 5.5 5.5 5.5
Total ECL, GBPm 42.9 29.9 20.1 53.6 68.0
ECL coverage, % 0.23 0.16 0.11 0.29 0.37
------------------------------- -------- -------------- ----------- ------------- -----------
3. Judgements and estimates (continued)
In accordance with PRA COVID-19 guidance, the Group does not
automatically consider the take up of customer payment holidays to be an
indication of a significant increase in credit risk ('SICR'), and in the
absence of other indicators such as previous arrears, low credit score
or high other indebtedness, the staging of these loans remains unchanged
in its ECL calculations. If the Group reclassified all customers on a
COVID-19 payment holiday who have shown no SICR from stage 1 to stage 2
the Group's ECL would increase by GBP15.4m as at 30 June 2020.
Loan book acquisition accounting and effective interest rate
There have been no significant changes in key judgements and assumptions
for acquisition accounting and income recognition and effective interest
rate ('EIR') calculations compared to those applied at 31 December 2019,
as described on pages 179 to 181 of the 2019 Annual Report and Accounts.
Mortgage prepayments slowed in the second quarter of 2020, due to the
pandemic and associated lock-down restrictions. However, the Group
continues to use long term historical observed prepayment data in EIR
accounting, as there remains too much uncertainty as to the longer term
impacts of COVID-19 on the economy, mortgage market and consequent
customer behaviour. The Group continues to monitor the impact of
COVID-19 on the prepayment and attrition rates until consistent trends
within the data can be observed and applied.
A slow-down in the property market and/or a reduced supply of customer
credit, due to the impact of COVID-19 on the economic outlook, could
lead to reduced levels of prepayments in the future, which would extend
the expected weighted average life of the mortgage book and the period
spent on a higher revert rate.
Sensitivities have been applied to the Precise and Kent Reliance loan
books to illustrate the impact on interest income of a change in the
expected weighted average lives of the loan books. The potential
duration of a change in customer behaviour as a result of COVID-19
remains uncertain, however a period of six month's variance in the
weighted average lives of the loan books was selected for this
sensitivity, given the initial quick recovery in the property and
mortgage markets post lockdown. This recovery was due, in part, to
government stimulus in the form of a temporary reduction in stamp duty
and the provision of cheaper funding to banks, in the form of the Bank
of England's Term Funding Scheme for SMEs.
Applying a six month extension in the expected weighted average life of
the loan books, would result in a reset gain of c.GBP57.0m. This
includes a GBP25.0m gain from adjusting the amortisation of the fair
value uplift on the CCFS loan book, which was recognised on the
Combination of OSB and CCFS on 4 October 2019. It also includes a
GBP15.0m gain in relation to the Kent Reliance loan book, where the
impact of the proactive Choices programme, which offers borrowers a new
product as an alternative to paying the Bank's higher Standard Variable
Rate ('SVR'), may significantly reduce the likelihood of borrowers
extending the period of time paying SVR and reduce the amount of the
potential reset gain.
Applying a six month reduction in the expected weighted average life of
the loan books, would result in a reset loss of c.GBP46.0m. This
includes a GBP28.0m loss from adjusting the amortisation of the fair
value uplift on the CCFS loan book and a GBP1.0m loss in relation to the
Kent Reliance loan book.
4. Interest receivable and similar income
Six months Six months
ended ended
30-Jun-20 30-Jun-19
(Unaudited) (Unaudited)
GBPm GBPm
At amortised cost:
On OSB mortgages 248.6 227.5
On CCFS mortgages 166.3 -
On investment securities 1.5 -
On other liquid assets 4.0 5.0
Amortisation of fair value adjustments on
CCFS loan book at Combination (34.9) -
At fair value through profit or loss:
Net expense on derivative financial instruments
- lending activities (17.4) (5.1)
On CCFS mortgages 0.3 -
At FVOCI:
On investment securities 3.1 0.5
371.5 227.9
------------------------------------------------ ----------- -----------
5. Interest payable and similar charges
Restated(1)
Six months Six months
ended ended
30-Jun-20 30-Jun-19
(Unaudited) (Unaudited)
GBPm GBPm
On retail deposits 134.9 70.2
On Bank of England borrowings 4.7 5.6
On Perpetual Subordinated Bonds(1) 0.8 0.9
On subordinated liabilities 0.4 0.4
On wholesale borrowings 2.6 0.6
On debt securities in issue 1.4 -
On lease liabilities 0.2 -
Amortisation of fair value adjustments on
CCFS loan book at Combination (1.9) -
Net income on derivative financial instruments
- savings activities (5.4) (0.3)
137.7 77.4
----------------------------------------------- ----------- -----------
(1) Consistent with the restatement in the 2019 Annual Report and
Accounts, the Group has restated the prior period comparatives to
include the interest expense on the GBP22.0m PSBs previously classified
as equity (see note 1).
6. Fair value losses on financial instruments
Restated(1)
Six months Six months
ended ended
30-Jun-20 30-Jun-19
(Unaudited) (Unaudited)
GBPm GBPm
Fair value changes in hedged assets 137.8 (50.2)
Hedging of assets (145.4) 50.1
Fair value changes in hedged liabilities (15.1) 3.7
Hedging of liabilities 16.3 (4.5)
Ineffective portion of hedges (6.4) (0.9)
Net loss on unmatched swaps (13.8) (4.6)
Amortisation of inception adjustment 10.9 -
Amortisation of fair value adjustments on
hedged assets (1.7) (2.0)
Fair value movements on loans held at FVTPL (1.2) -
Debit and credit valuation adjustment 0.1 0.1
(12.1) (7.4)
-------------------------------------------- ----------- -----------
(1) The Group has reclassified the 2019 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 the fair value of the
hedged item at the start of hedge accounting and includes GBP5.1m of
hedged assets and liabilities recognised on the Combination where
pre-existing hedge relationships ceased on the date of Combination and
fair value movements of hedged assets and liabilities prior to new hedge
accounting relationships commencing. Inception adjustments are amortised
over the life of the underlying derivative instruments.
Net loss on unmatched swaps is due primarily to fair value movements on
mortgage pipeline swaps prior to them being matched against completed
mortgages, following a significant flattening of the LIBOR and SONIA
curves. This unrealised loss will unwind over the life of the swaps.
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.
7. Gain on sale of financial instruments
On 17 January 2020, the Group sold the Canterbury A2 note for proceeds
of GBP225.4m. After incurring costs of GBP0.2m, the Group recognised a
gain on sale of GBP1.9m.
On 23 January 2020, the Group sold the F note and residual certificates
of the Canterbury securitisation for proceeds of GBP23.6m. The sale
resulted in the Group having no remaining interest in the Canterbury
securitisation, with consolidation of Canterbury into the OSB Group
ceasing on disposal. The Group recognised a gain on sale of GBP16.0m
upon deconsolidation.
On 23 January 2020, the Group securitised mortgage loans with a par
value of GBP375.5m through Precise Mortgage Funding 2020-1B plc ('PMF
2020-1B'), issuing GBP388.9m of Sterling floating rate notes. The Group
retained the GBP100.7m class A2 notes, with all other note classes and
the residual certificates being sold to the external market. As such,
the Group has not consolidated PMF 2020-1B as the risks and rewards have
been transferred. The Group recognised a gain on sale of GBP2.0m upon
deconsolidation. Excluding the impact of the fair value adjustment on
the mortgages on Combination with OSB of GBP13.1m, the underlying gain
on sale was GBP15.1m.
8. Administrative expenses
Six months Six months
ended ended
30-Jun-20 30-Jun-19
(Unaudited) (Unaudited)
GBPm GBPm
Staff costs 41.6 22.5
Facilities costs 3.0 1.6
Marketing costs 2.4 1.6
Support costs 9.2 5.0
Professional fees 10.7 3.0
Other costs(1) 2.3 4.2
Depreciation 2.9 1.6
Amortisation 4.6 1.4
76.7 40.9
------------------ ----------- -----------
(1) Other costs mainly comprise irrecoverable VAT. In 2020 the Group has
included the irrecoverable VAT within the underlying expense apart from
reverse recharge VAT on services provided by OSB India.
The average number of people employed by the Group (including executive
Directors) during the first half of 2020 is analysed below:
Reclassified(1)
Six months Six months
ended ended
30-Jun-20 30-Jun-19
(Unaudited) (Unaudited)
OSB
Operations 839 802
Support functions 301 270
CCFS
Operations 585 -
Support functions 103 -
1,828 1,072
------------------ ----------- ---------------
(1.) For the year ended 31 December 2019 the Group updated the
definition of support and operations functions and has reclassified the
2019 interim comparatives accordingly.
9. Impairment of intangible assets
Assets arising on the Combination with CCFS in 2019 included a broker
relationships intangible asset with a fair value of GBP17.1m on
Combination. A key input to the calculation of the fair value was CCFSs
anticipated lending volumes which have been impacted by COVID-19,
indicating that the asset is impaired. The recoverable amount of the
asset has been estimated and an impairment of GBP7.0m has been
recognised. The remaining carrying value of the broker relationships
intangible asset at 30 June 2020 is GBP7.0m (2019: GBP16.1m).
10. Integration costs
Six months Six months
ended ended
30-Jun-20 30-Jun-19
(Unaudited) (Unaudited)
GBPm GBPm
Consultant fees 1.6 -
Staff costs 4.7 -
6.3 -
---------------- ----------- -----------
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, and redundancy costs in relation to transferring the
Prestige Finance Limited activities to Precise Mortgages.
11. Exceptional items
Six months Six months
ended ended
30-Jun-20 30-Jun-19
(Unaudited) (Unaudited)
GBPm GBPm
Consultant fees 0.9 3.9
Legal and professional fees 0.8 2.1
Heritable option - (0.1)
1.7 5.9
---------------------------- ----------- -----------
Exceptional items comprise additional expenses in relation to the
Combination with CCFS in 2019 and fees in relation to the Group's future
operating structure.
12. Taxation
Six months Six months
ended ended
30-Jun-20 30-Jun-19
(Unaudited) (Unaudited)
GBPm GBPm
Corporation taxation (35.8) (21.9)
Deferred taxation 0.4 (0.6)
Tax in respect of prior periods - (2.7)
Release of deferred taxation on CCFS
Combination(1) 8.1 -
Total taxation (27.3) (25.2)
-------------------------------------------------- ----------- -----------
(1) Release of deferred taxation on CCFS Combination relates to the
unwind of the deferred tax liability recognised on the fair value
adjustment of the CCFS assets and liabilities at the Combination date
and intangible assets recognised on Combination.
12. Taxation (continued)
The taxation on the Group's profit before taxation differs from the
theoretical amount that would arise using the weighted average taxation
rate applicable to profits of the Group as follows:
Restated(1)
Six months Six months
ended ended
30-Jun-20 30-Jun-19
(Unaudited) (Unaudited)
GBPm GBPm
Profit before taxation 99.3 90.5
----------------------------------------------- ----------- -----------
Profit multiplied by the weighted average
rate of corporation tax in the UK during
2020 of 19% (2019: 19%) (18.9) (17.2)
Bank surcharge(2) (3.5) (4.4)
Taxation effects of:
Expenses not deductible for taxation purposes (1.8) (1.1)
Impact of deferred tax rate change (4.6) -
Adjustments in respect of earlier years - (2.7)
Income not taxable 1.0 -
Tax adjustments in respect of share-based
payments (0.6) (0.1)
Impact of tax losses carried forward 0.1 -
Tax on AT1 securities 0.7 0.8
Timing differences on capital items 0.4 (0.5)
Other (0.1) -
Total taxation charge (27.3) (25.2)
----------------------------------------------- ----------- -----------
(1) Consistent with the restatement in the 2019 Annual Report and
Accounts, the Group has reclassified the prior period comparatives for
the taxation on the interest expense on the GBP22.0m PSBs previously
classified as equity with: profit before tax reducing by GBP0.5m, profit
multiplied by the average rate of corporation tax increasing by GBP0.1m
and tax on AT1 securities (previously tax on coupon on equity bonds)
decreasing by GBP0.1m.
(2) Charge for the two banking entities of GBP7.1m offset by the tax
impact of unwinding CCFS Combination items of GBP3.6m.
A reduction in the UK corporation tax rate from 19% to 18% (effective
from 1 April 2020) was substantively enacted on 26 October 2015. An
additional reduction to 17% (effective from 1 April 2020) was
substantively enacted on 6 September 2016. The Government cancelled
these rate reductions on 19 March 2020, with the UK corporation tax rate
remaining at 19% from 1 April 2020.
13. Earnings per share
Earnings per share ('EPS') are based on the profit for the period and
the number of ordinary shares in issue. Basic EPS are calculated by
dividing profit attributable to ordinary shareholders by the weighted
average number of ordinary shares in issue during the period. Diluted
EPS take into account share awards and options 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 period for the
coupons on AT1 Securities classified as equity. The tax on coupons is
included within the profit for the period, in line with the requirements
of IAS 12 Income Taxes.
Restated(1)
Six months Six months
ended ended
30-Jun-20 30-Jun-19
(Unaudited) (Unaudited)
GBPm GBPm
Profit before taxation 99.3 90.5
Taxation (27.3) (25.2)
Profit for the period 72.0 65.3
Adjustments:
Coupons on AT1 securities classified as equity (2.7) (2.8)
Profit attributable to ordinary shareholders 69.3 62.5
----------------------------------------------- ----------- -----------
Add-back integration costs:
Add-back integration costs 6.3 -
Tax on integration costs (1.7) -
Add-back exceptional items:
Exceptional items 1.7 5.9
Tax on Heritable option - 2.6
Add-back other CCFS acquisition-related items:
Amortisation of fair value adjustments 33.0 -
Amortisation of inception adjustment (5.1) -
Amortisation of fair value adjustments on
hedged assets (1.4) -
Amortisation of intangible assets acquired 2.6 -
Gain on sale of financial instruments(2) 13.1 -
Impairment of financial assets (0.2) -
Impairment of intangible assets 7.0 -
Release of deferred taxation (8.1) -
Underlying profit attributable to ordinary
shareholders 116.5 71.0
----------------------------------------------- ----------- -----------
(1) Consistent with the restatement in the 2019 Annual Report and
Accounts, the Group has reclassified the prior period comparatives for
the interest expense and tax on the GBP22.0m PSBs previously classified
as equity, decreasing profit before tax and increasing coupons on AT1
securities classified as equity (previously coupons on PSBs and AT1
securities classified as equity) by GBP0.5m (see note 1).
(2) The fair value uplift on Combination on CCFS assets that were
subsequently sold (see note 7).
13. Earnings per share (continued)
Earnings per share are summarised in the table below:
Six months Six months
ended ended
30-Jun-20 30-Jun-19
(Unaudited) (Unaudited)
Weighted average number of shares, millions
Basic 445.9 244.9
Dilutive impact of share-based payment schemes 2.2 1.9
Diluted 448.1 246.8
Earnings per share, pence per share
Basic 15.5 25.5
Diluted 15.5 25.3
Underlying earnings per share, pence per share
Basic 26.1 29.0
Diluted 26.0 28.8
14. Dividends
During the period, the Bank paid the following dividends:
Six months ended Six months ended
30-Jun-20 30-Jun-19
(Unaudited) (Unaudited)
Pence per Pence per
GBPm share GBPm share
Final dividend for the prior
year - - 25.3 10.3
In order to help serve the needs of businesses and households through
the extraordinary challenges presented by COVID-19, the Board cancelled
the payment of the final 2019 dividend in relation to ordinary shares,
which was due to be paid on 13 May 2020. The Board will continue to
assess the appropriateness of dividend payments and decide on any
dividend policy and amounts at year end 2020.
A summary of the Bank's distributable reserves from which dividends can
be paid are shown below:
Six months
ended Year ended
30-Jun-20 31-Dec-19
(Unaudited) (Audited)
GBPm GBPm
Retained earnings 448.7 407.0
Unrealised gains(1) (135.4) (52.8)
Other distributable reserves 4.4 5.3
Distributable reserves 317.7 359.5
------------------------------- ----------- ----------
(1) Unrealised gains relate to the Bank's fair value adjustments on
hedged assets.
15. Cash and cash equivalents
The following table analyses the cash and cash equivalents disclosed in
the Statement of Cash Flows:
As at As at As at As at
30-Jun-20 31-Dec-19 30-Jun-19 31-Dec-18
(Unaudited) (Audited) (Unaudited) (Audited)
GBPm GBPm GBPm GBPm
Cash in hand 0.5 0.4 0.3 0.4
Unencumbered loans and advances
to credit institutions 2,316.0 2,052.5 1,416.0 1,323.8
Investment securities with
an original maturity less
than 3 months - 49.9 - -
2,316.5 2,102.8 1,416.3 1,324.2
-------------------------------- ----------- ---------- ----------- ----------
16. Loans and advances to credit institutions
As at As at
30-Jun-20 31-Dec-19
(Unaudited) (Audited)
GBPm GBPm
Unencumbered:
Bank of England call account 2,150.1 1,916.2
Call accounts 119.0 81.7
Cash held in special purpose vehicles(1) 40.5 44.0
Term deposits 6.4 10.6
Encumbered:
Bank of England cash ratio deposit 47.4 41.7
Swap margin given 234.2 110.4
2,597.6 2,204.6
----------------------------------------- ----------- ----------
(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.
17. Investment securities
As at As at
30-Jun-20 31-Dec-19
(Unaudited) (Audited)
GBPm GBPm
Held at FVOCI:
UK and EU Sovereign debt 191.0 149.8
RMBS loan notes 358.3 358.9
549.3 508.7
Held at amortised cost:
RMBS loan notes 205.8 126.6
205.8 126.6
755.1 635.3
------------------------- ----------- ----------
17. Investment securities (continued)
Movements during the period of investment securities held by the Group
are analysed as follows:
As at As at
30-Jun-20 31-Dec-19
(Unaudited) (Audited)
GBPm GBPm
At 1 January 2020 635.3 58.9
Additions 291.9 439.8
CCFS Combination - 493.5
Disposals and maturities (171.6) (357.7)
Changes in fair value (0.5) 0.8
At 31 June 2020 755.1 635.3
------------------------- ----------- ----------
18. Loans and advances to customers
As at As at
30-Jun-20 31-Dec-19
(Unaudited) (Audited)
GBPm GBPm
Held at amortised cost:
Loans and advances (see note 19) 18,781.1 18,419.9
Finance leases (see note 20) 52.6 47.7
18,833.7 18,467.6
Less: Expected credit losses (see note 21) (96.4) (42.9)
18,737.3 18,424.7
Residential mortgages held at fair value 19.9 22.1
18,757.2 18,446.8
------------------------------------------- ----------
19. Loans and advances
As at 30-Jun-20 As at 31-Dec-19
(Unaudited) (Audited)
OSB CCFS Total OSB CCFS Total
GBPm GBPm GBPm GBPm GBPm GBPm
Gross carrying
amount
Stage 1 9,507.3 6,879.9 16,387.2 9,999.2 7,240.0 17,239.2
Stage 2 1,037.2 898.6 1,935.8 442.4 307.1 749.5
Stage 3 286.6 45.2 331.8 277.7 16.7 294.4
Stage 3 (POCI) 53.5 72.8 126.3 53.6 83.2 136.8
10,884.6 7,896.5 18,781.1 10,772.9 7,647.0 18,419.9
-------- -------
During the period the Group acquired the GBP63.0m residual mortgage pool
from Precise Mortgage Funding ('PMF') 2015-2 at par, recognising the
loans at fair value which was equal to the carrying value.
19. Loans and advances (continued)
The tables below show the movement in loans and advances to customers by
IFRS 9 stage:
Stage 3
Stage 1 Stage 2 Stage 3 (POCI) Total
GBPm GBPm GBPm GBPm GBPm
At 1 January
2019 8,279.6 436.8 225.4 56.2 8,998.0
Originations(1) 4,098.6 - - - 4,098.6
CCFS Combination 7,091.1 43.5 - 94.4 7,229.0
Repayments and
write-offs(3) (1,825.2) (21.6) (47.5) (17.3) (1,911.6)
Transfers:
- To Stage 1 176.9 (162.7) (14.2) - -
- To Stage 2 (495.9) 517.7 (21.8) - -
- To Stage 3 (86.1) (64.5) 150.6 - -
Incurred loss
protection 0.2 0.3 1.9 3.5 5.9
At 1 January
2020 17,239.2 749.5 294.4 136.8 18,419.9
Originations(1) 2,113.8 - - - 2,113.8
Acquisition(2) 60.8 - - 1.5 62.3
Disposals (386.0) (7.8) - - (393.8)
Repayments and
write-offs(3) (1,384.2) (6.2) (19.1) (12.1) (1,421.6)
Transfers:
- To Stage 1 201.6 (185.3) (16.3) - -
- To Stage 2 (1,415.5) 1,441.3 (25.8) - -
- To Stage 3 (42.3) (56.2) 98.5 - -
Incurred loss
protection (0.2) 0.5 0.1 0.1 0.5
At 30 June 2020
(Unaudited) 16,387.2 1,935.8 331.8 126.3 18,781.1
(1) Originations include further advances and drawdowns on existing
commitments.
(2) Mortgages acquired from Precise Mortgage Funding 2015-2.
(3) Repayments and write-offs include customer redemptions.
20. Finance leases
As at As at
30-Jun-20 31-Dec-19
(Unaudited) (Audited)
GBPm GBPm
Gross investment in finance leases receivable
Less than one year 16.9 14.1
Between one and five years 41.1 38.5
More than five years 1.3 1.2
59.3 53.8
Unearned finance income (6.7) (6.1)
Net investment in finance leases 52.6 47.7
---------------------------------------------- ----------- ----------
Net investment in finance leases receivable
Less than one year 14.2 11.5
Between one and five years 37.2 35.0
More than five years 1.2 1.2
52.6 47.7
-----------
The Group has recognised GBP3.5m of ECLs on finance leases as at 30 June
2020 (31 December 2019: GBP0.3m).
21. Expected credit loss
The ECL has been calculated based on various scenarios as set out below:
As at 30-Jun-20 (Unaudited) As at 31-Dec-19 (Audited)
ECL Weighted ECL Weighted
provision Weighting ECL provision provision Weighting ECL provision
Group GBPm % GBPm GBPm % GBPm
Scenarios
Upside 37.8 30 11.3 14.6 10 1.5
Base case 65.4 40 26.2 24.4 40 9.8
Downside scenario 141.4 23 32.5 48.1 35 16.8
Severe downside
scenario 190.5 7 13.3 62.5 15 9.4
Total weighted
provisions 83.3 37.4
Non-modelled Provisions:
Individually assessed
provisions - - 6.0 - - 4.2
Post model
adjustments(1) - - 7.1 - - 1.3
Total provision 96.4 42.9
---------------------- --------- --------- -------------- --------- --------- --------------
(1) Post model adjustments have been made to a number of probabilities
of default models for OSB 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 before the end of the year 2020.
21. Expected credit loss (continued)
The Group's ECL by segment and IFRS 9 stage is shown below:
As at 30-Jun-20 As at 31-Dec-19
(Unaudited) (Audited)
OSB CCFS Total OSB CCFS Total
GBPm GBPm GBPm GBPm GBPm GBPm
Expected credit loss
Stage 1 17.4 10.7 28.1 3.5 2.1 5.6
Stage 2 17.6 9.1 26.7 3.6 2.0 5.6
Stage 3 30.4 2.0 32.4 23.4 0.4 23.8
Stage 3 (POCI) 5.6 3.6 9.2 5.1 2.8 7.9
71.0 25.4 96.4 35.6 7.3 42.9
--------------------- ----- ----- ----- ----- ----- -----
The table below shows the movement in the ECL by IFRS 9 stage during the
period. ECLs on originations reflect the IFRS 9 stage of loans
originated during the period as at 30 June and not the date of
origination. Remeasurement of loss allowance relates to existing loans
which did not redeem during the period and includes the impact of loans
moving between IFRS 9 stages.
Stage Stage Stage Stage
1 2 3 3 (POCI) Total
GBPm GBPm GBPm GBPm GBPm
At 1 January 2019 4.5 5.6 10.2 1.6 21.9
Originations 1.9 - - - 1.9
CCFS Combination - - - 3.6 3.6
Repayments and write-offs (0.6) (0.4) (4.3) (0.2) (5.5)
Remeasurement of loss allowance (3.4) (0.5) 18.8 (0.6) 14.3
Transfers:
- To Stage 1 1.9 (1.6) (0.3) - -
- To Stage 2 (0.2) 0.6 (0.4) - -
- To Stage 3 (0.1) (1.0) 1.1 - -
Changes in assumptions and
model parameters 1.4 2.6 (3.2) - 0.8
Incurred loss protection 0.2 0.3 1.9 3.5 5.9
At 1 January 2020 5.6 5.6 23.8 7.9 42.9
Originations 3.8 - - - 3.8
Repayments and write-offs (0.5) (0.3) (2.1) (0.8) (3.7)
Remeasurement of loss allowance 18.9 20.9 11.1 2.0 52.9
Transfers:
- To Stage 1 1.3 (1.0) (0.3) - -
- To Stage 2 (0.7) 1.8 (1.1) - -
- To Stage 3 (0.1) (0.8) 0.9 - -
Incurred loss protection (0.2) 0.5 0.1 0.1 0.5
At 30 June 2020 (Unaudited) 28.1 26.7 32.4 9.2 96.4
----- ----- ----- --------- -----
21. Expected credit loss (continued)
The table below shows the stage 2 ECL balances by transfer criteria:
As at 30-Jun-20 (Unaudited) As at 31-Dec-19 (Audited)
Carrying Carrying
value ECL Coverage value ECL Coverage
Group GBPm GBPm % GBPm GBPm %
Criteria:
Relative probability
of default movement 897.8 16.1 1.79 588.2 4.8 0.82
Qualitative measures 897.0 9.0 1.00 79.8 0.4 0.44
30 days past due
backstop 146.8 1.6 1.09 81.5 0.4 0.54
Total 1,941.6 26.7 1.38 749.5 5.6 0.75
--------------------- -------- ----- ---------- -------- ----- ---------
22. Impairment of financial assets
Six months Six months
ended ended
30-Jun-20 30-Jun-19
(Unaudited) (Unaudited)
GBPm GBPm
Write-offs in period 1.1 1.5
Disposals (0.4) -
Increase in provision 53.5 4.4
54.2 5.9
---------------------- ----------- -----------
23. Fair value adjustments on hedged items
As at As at
30-Jun-20 31-Dec-19
(Unaudited) (Audited)
GBPm GBPm
Hedged assets
Current hedge relationships 224.8 64.2
Swap inception adjustment (87.7) (67.8)
Cancelled hedge relationships 58.0 20.4
195.1 16.8
------------------------------ -----------
Hedged liabilities
Current hedge relationships (25.8) (2.9)
Swap inception adjustment 10.0 8.0
(15.8) 5.1
------------------------------ ----------- ----------
The fair value adjustments on hedged assets in respect of cancelled
hedge relationships represent the fair value adjustment for interest
rate risk on legacy long-term fixed rate mortgages (c.25 years at
origination) where the interest rate swap hedges were terminated before
maturity and were effective at the point of termination.
23. Fair value adjustments on hedged items (continued)
Amortisation of inception adjustment relates to the fair value of the
hedged item at the start of hedge accounting and includes hedged assets
and liabilities recognised on the Combination where pre-existing hedge
relationships ceased on the date of Combination and fair value movements
of hedged assets and liabilities prior to new hedge accounting
relationships commencing. The inception adjustments are being amortised
over the life of the derivative instruments. The inception adjustment on
Combination recognises an offsetting asset or liability to the fair
value of the derivative instruments on the date of Combination.
24. Amounts owed to credit institutions
As at As at
30-Jun-20 31-Dec-19
(Unaudited) (Audited)
GBPm GBPm
Bank of England TFS 2,568.4 2,632.8
Bank of England TFSME 100.0 -
Bank of England ILTR 756.1 290.6
Warehouse funding - 93.6
Commercial repo - 41.4
Swap margin received - 8.0
Loans from credit institutions 2.3 2.4
3,426.8 3,068.8
------------------------------- ----------- ----------
25. Amounts owed to retail depositors
As at As at
30-Jun-20 31-Dec-19
(Unaudited) (Audited)
GBPm GBPm
Fixed rate deposits 11,087.0 10,525.5
Variable rate deposits 5,610.3 5,729.5
16,697.3 16,255.0
----------------------- ----------- ----------
26. Debt securities in issue
As at As at
30-Jun-20 31-Dec-19
(Unaudited) (Audited)
GBPm GBPm
Asset-backed loan notes at amortised cost 325.7 296.3
Amount due for settlement within 12 months - 40.1
Amount due for settlement after 12 months 325.7 256.2
325.7 296.3
------------------------------------------- ----------- ----------
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.
26. Debt securities in issue (continued)
Asset-backed loan notes may all be repurchased by the Group at any
interest payment date on or after the call dates, 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 30 June 2020, notes were issued through the following funding
vehicles:
As at As at
30-Jun-20 31-Dec-19
(Unaudited) (Audited)
GBPm GBPm
Charter Mortgage Funding 2020-1 plc 325.7 -
Canterbury Finance No.1 plc - 256.2
Precise Mortgage Funding 2015-1 plc - 40.1
325.7 296.3
------------------------------------ ----------- ---------------
27. Lease liabilities
As at As at
30-Jun-20 31-Dec-19
(Unaudited) (Audited)
GBPm GBPm
At 1 January 13.3 3.8
CCFS Combination - 7.7
New leases - 3.6
Lease terminated - (0.8)
Lease repayments (1.0) (1.1)
Interest accruals 0.2 0.1
12.5 13.3
------------------ ----------
28. Provisions and contingent liabilities
An analysis of the Group's FSCS and other provisions is presented below:
Other regulatory ECL on undrawn
FSCS provisions loan facilities Total
GBPm GBPm GBPm GBPm
At 1 January 2019 0.1 1.7 - 1.8
Paid during the year (0.1) (0.1) - (0.2)
(Credit)/charge (0.2) - 0.2 -
At 1 January 2020 (0.2) 1.6 0.2 1.6
Refund during the period 0.3 - - 0.3
Charge - - 0.1 0.1
At 30 June 2020 (Unaudited) 0.1 1.6 0.3 2.0
---------------------------- ----- ---------------- ---------------- -----
28. Provisions and contingent liabilities (continued)
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.
29. Reconciliation of cash flows for financing activities
The tables below show a reconciliation of the Group's liabilities
classified as financing activities within the Statement of Cash Flows:
Amounts owed
to credit
institutions Debt securities
(See note in issue (See Subordinated
24) note 26) liabilities PSBs Total
GBPm GBPm GBPm GBPm GBPm
At 1 January 2020 3,068.8 296.3 10.6 37.6 3,413.3
Cash movements:
Principal drawdowns 915.0 335.7 - - 1,250.7
Principal repayments (553.0) (49.4) - - (602.4)
Deconsolidation of
special purpose vehicles - (256.2) - - (256.2)
Non-cash movements:
Accrued interest movement (4.0) (0.7) - - (4.7)
At 30 June 2020
(Unaudited) 3,426.8 325.7 10.6 37.6 3,800.7
-------------------------- ------------- --------------- ------------ ---- ---------
Amounts owed
to credit Debt securities Subordinated
institutions in issue liabilities PSBs Total
GBPm GBPm GBPm GBPm GBPm
At 1 January 2019 1,584.0 - 10.8 37.6 1,632.4
Cash movements:
Principal
drawdowns 102.9 - - - 102.9
Principal
repayments (81.0) - - - (81.0)
Non-cash
movement:
Accrued interest
movement - - - - -
At 30 June 2019
(Unaudited) 1,605.9 - 10.8 37.6 1,654.3
30. Risk management
The tables below are a summary of the Group's risk management and
financial instruments disclosures, of which a complete disclosure for
the year ended 31 December 2019 is included in the Group's 2019 Annual
Report and Accounts. The tables do not represent all risks the Group is
exposed to and should be read in conjunction with the Risk review above.
Credit risk
The following table shows the Group's maximum exposure to credit risk
from loans and advances and the impact of collateral held as security,
capped at the gross exposure amount, by impairment stage. Capped
collateral excludes the impact of forced sale discounts and costs to
sell.
As at 30-Jun-20 (Unaudited)
OSB CCFS Total
--------------------------- ---------------------------
Capped Capped Capped
Gross carrying collateral Gross carrying collateral Gross carrying collateral
amount held amount held amount held
GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1 9,548.1 9,497.6 6,879.9 6,877.7 16,428.0 16,375.3
Stage 2 1,043.0 1,036.4 898.6 898.6 1,941.6 1,935.0
Stage 3 292.6 285.9 45.2 45.2 337.8 331.1
Stage 3
(POCI) 53.5 53.4 72.8 72.8 126.3 126.2
10,937.2 10,873.3 7,896.5 7,894.3 18,833.7 18,767.6
------- -------------- ----------- -------------- ----------- -------------- -----------
As at 31-Dec-19 (Audited)
OSB CCFS Total
---------------------- ---------------------------
Capped Gross Capped Capped
Gross carrying collateral carrying collateral Gross carrying collateral
amount held amount held amount held
GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1 10,046.9 9,987.1 7,240.0 7,239.5 17,286.9 17,226.6
Stage 2 442.4 441.8 307.1 307.0 749.5 748.8
Stage 3 277.7 275.2 16.7 16.7 294.4 291.9
Stage 3
(POCI) 53.6 50.1 83.2 83.1 136.8 133.2
10,820.6 10,754.2 7,647.0 7,646.3 18,467.6 18,400.5
------- -------------- ----------- --------- ----------- -------------- -----------
The Group's main form of collateral held is property, based in the UK
and the Channel Islands.
30. Risk management (continued)
The Group uses indexed loan-to-value ('LTV') ratios to assess the
quality of the uncapped collateral held. Property values are updated to
reflect changes in the house price index. A breakdown of loans and
advances to customers by indexed LTV is as follows:
LTV analysis by band for all loans:
As at 30-Jun-20 (Unaudited) As at 31-Dec-19 (Audited)
OSB CCFS Total OSB CCFS Total
GBPm GBPm GBPm % GBPm GBPm GBPm %
Band
0% - 50% 1,667.5 440.7 2,108.2 11 1,732.6 567.8 2,300.4 12
50% - 60% 1,419.7 475.1 1,894.8 10 1,301.8 612.3 1,914.1 10
60% - 70% 2,426.1 1,106.4 3,532.5 19 2,435.7 1,588.5 4,024.2 22
70% - 80% 4,003.2 4,774.8 8,778.0 46 4,182.1 4,236.3 8,418.4 46
80% - 90% 1,134.8 1,098.4 2,233.2 12 946.0 641.5 1,587.5 9
90% - 100% 157.5 1.1 158.6 1 91.1 0.6 91.7 -
>100% 128.4 - 128.4 1 131.3 - 131.3 1
Total loans before
provisions 10,937.2 7,896.5 18,833.7 100 10,820.6 7,647.0 18,467.6 100
------------------ -------- ------- -------- --- -------- ------- -------- ---
LTV analysis by band for OSB:
As at 30-Jun-20 (Unaudited) As at 31-Dec-19 (Audited)
BTL/SME Residential Total % BTL/SME Residential Total %
GBPm GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 838.6 828.9 1,667.5 15 905.9 826.7 1,732.6 16
50% - 60% 1,176.3 243.4 1,419.7 13 1,062.8 239.0 1,301.8 12
60% - 70% 2,216.3 209.8 2,426.1 22 2,240.2 195.5 2,435.7 23
70% - 80% 3,782.5 220.7 4,003.2 38 3,993.5 188.6 4,182.1 38
80% - 90% 790.1 344.7 1,134.8 10 621.4 324.6 946.0 9
90% - 100% 69.5 88.0 157.5 1 45.1 46.0 91.1 1
>100% 113.1 15.3 128.4 1 114.3 17.0 131.3 1
Total loans
before provisions 8,986.4 1,950.8 10,937.2 100 8,983.2 1,837.4 10,820.6 100
------------------ ------- ----------- -------- --- ------- ----------- -------- ---
30. Risk management (continued)
LTV analysis by band for OSB BTL/SME:
As at 30-Jun-20 (Unaudited)
Residential Funding
Buy-to-Let Commercial development lines Total
OSB GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 632.8 100.0 10.2 95.6 838.6
50% - 60% 929.5 101.4 81.0 64.4 1,176.3
60% - 70% 1,955.8 197.7 55.4 7.4 2,216.3
70% - 80% 3,290.6 439.6 - 52.3 3,782.5
80% - 90% 778.2 8.5 3.4 - 790.1
90% - 100% 69.4 0.1 - - 69.5
>100% 106.5 4.7 - 1.9 113.1
Total loans before
provisions 7,762.8 852.0 150.0 221.6 8,986.4
---------------------- ---------- ---------- ------------ ------- -------
As at 31-Dec-19 (Audited)
Residential Funding
Buy-to-Let Commercial development lines Total
OSB GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 579.9 96.5 125.7 103.8 905.9
50% - 60% 894.3 119.8 5.0 43.7 1,062.8
60% - 70% 1,994.1 210.2 5.0 30.9 2,240.2
70% - 80% 3,514.5 445.7 - 33.3 3,993.5
80% - 90% 603.3 7.7 10.4 - 621.4
90% - 100% 38.9 1.4 - 4.8 45.1
>100% 102.0 6.7 - 5.6 114.3
Total loans before
provisions 7,727.0 888.0 146.1 222.1 8,983.2
---------------------- ---------- ---------- ------------ ------- -------
LTV analysis by band for OSB Residential:
As at 30-Jun-20 (Unaudited) As at 31-Dec-19 (Audited)
First Second Funding First Second Funding
charge charge lines Total charge charge lines Total
OSB GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 721.5 102.7 4.7 828.9 708.0 115.4 3.3 826.7
50% - 60% 170.1 70.0 3.3 243.4 158.1 77.5 3.4 239.0
60% - 70% 140.1 67.6 2.1 209.8 122.3 70.9 2.3 195.5
70% - 80% 170.2 48.5 2.0 220.7 137.0 49.5 2.1 188.6
80% - 90% 311.6 32.5 0.6 344.7 291.7 32.3 0.6 324.6
90% - 100% 80.9 6.9 0.2 88.0 40.0 5.7 0.3 46.0
>100% 7.6 7.5 0.2 15.3 9.5 7.3 0.2 17.0
Total loans
before provisions 1,602.0 335.7 13.1 1,950.8 1,466.6 358.6 12.2 1,837.4
------------------ ------- ------- ------- ------- ------- ------- ------- -------
30. Risk management (continued)
LTV analysis by band for CCFS:
As at 30-Jun-20 (Unaudited)
Second
Buy-to-let Residential Bridging charge Total
CCFS GBPm GBPm GBPm GBPm GBPm %
Band
0% - 50% 93.7 227.5 85.2 34.3 440.7 6
50% - 60% 189.8 216.6 29.9 38.8 475.1 6
60% - 70% 623.5 375.1 40.5 67.3 1,106.4 14
70% - 80% 3,639.8 1,032.2 44.2 58.7 4,774.8 60
80% - 90% 605.9 466.5 0.1 25.9 1,098.4 14
90% - 100% 0.4 0.7 - - 1.1 -
Total loans before
provisions 5,153.1 2,318.6 199.9 225.0 7,896.5 100
-------------------- ---------- ----------- -------- ------- ------- ---
As at 31-Dec-19 (Audited)
Second
Buy-to-let Residential Bridging charge Total
CCFS GBPm GBPm GBPm GBPm GBPm %
Band
0% - 50% 144.7 261.8 121.1 40.2 567.8 7
50% - 60% 283.9 253.1 29.4 45.9 612.3 8
60% - 70% 957.0 538.6 26.6 66.3 1,588.5 21
70% - 80% 3,246.6 897.7 37.5 54.5 4,236.3 56
80% - 90% 321.5 301.4 1.2 17.4 641.5 8
90% - 100% 0.2 0.4 - - 0.6 -
Total loans before
provisions 4,953.9 2,253.0 215.8 224.3 7,647.0 100
-------------------- ---------- ----------- -------- ------- ------- ---
30. Risk management (continued)
Analysis of loan portfolio by arrears and collateral held
The tables below provide further information on collateral, capped at
the value of each individual mortgage, over the mortgage portfolio by
payment due status and IFRS 9 stage:
As at 30-Jun-20 (Unaudited)
OSB CCFS Total
Loan Capped Loan Capped Loan Capped
balance collateral balance collateral balance collateral
GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1
Not past due 9,452.9 9,402.8 6,865.2 6,863.0 16,318.1 16,265.8
Past due < 1
month 95.2 94.8 14.7 14.7 109.9 109.5
9,548.1 9,497.6 6,879.9 6,877.7 16,428.0 16,375.3
-------- ----------- ------- ----------- -------- -------------
Stage 2
Not past due 698.3 691.9 616.7 616.7 1,315.0 1,308.6
Past due < 1
month 189.2 189.1 251.9 251.9 441.1 441.0
Past due 1
to 3
months 155.5 155.4 30.0 30.0 185.5 185.4
1,043.0 1,036.4 898.6 898.6 1,941.6 1,935.0
-------- ----------- ------- ----------- -------- -----------
Stage 3
Not past due 69.1 62.9 15.1 15.1 84.2 78.0
Past due < 1
month 17.0 17.0 4.8 4.8 21.8 21.8
Past due 1
to 3
months 65.3 65.2 6.4 6.4 71.7 71.6
Past due 3
to 6
months 41.0 41.0 12.4 12.4 53.4 53.4
Past due 6
to 12
months 26.8 26.8 2.8 2.8 29.6 29.6
Past due
over 12
months 24.4 24.0 - - 24.4 24.0
Possessions 49.0 49.0 3.7 3.7 52.7 52.7
292.6 285.9 45.2 45.2 337.8 331.1
-------- ----------- ------- ----------- -------- -----------
Stage 3
(POCI)
Not past due 24.4 24.3 28.8 28.8 53.2 53.1
Past due < 1
month 2.9 2.9 10.8 10.8 13.7 13.7
Past due 1
to 3
months 11.1 11.1 11.5 11.5 22.6 22.6
Past due 3
to 6
months 5.1 5.1 8.3 8.3 13.4 13.4
Past due 6
to 12
months 4.5 4.5 4.9 4.9 9.4 9.4
Past due
over 12
months 5.5 5.5 2.5 2.5 8.0 8.0
Possessions - - 6.0 6.0 6.0 6.0
53.5 53.4 72.8 72.8 126.3 126.2
-------- ----------- ------- ----------- -------- -----------
Total loans
before
provisions 10,937.2 10,873.3 7,896.5 7,894.3 18,833.7 18,767.6
30. Risk management (continued)
As at 31-Dec-19 (Audited)
OSB CCFS Total
Loan Capped Loan Capped Loan Capped
balance collateral balance collateral balance collateral
GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1
Not past due 9,964.3 9,904.5 7,236.2 7,235.7 17,200.5 17,140.2
Past due < 1
month 82.6 82.6 3.8 3.8 86.4 86.4
10,046.9 9,987.1 7,240.0 7,239.5 17,286.9 17,226.6
-------- ----------- ------- ----------- -------- -----------
Stage 2
Not past due 261.0 260.7 239.1 239.0 500.1 499.7
Past due < 1
month 118.9 118.9 38.1 38.1 157.0 157.0
Past due 1
to 3
months 62.5 62.2 29.9 29.9 92.4 92.1
442.4 441.8 307.1 307.0 749.5 748.8
-------- ----------- ------- ----------- -------- -----------
Stage 3
Not past due 71.3 71.0 4.8 4.8 76.1 75.8
Past due < 1
month 36.3 36.1 1.4 1.4 37.7 37.5
Past due 1
to 3
months 28.8 28.5 6.0 6.0 34.8 34.5
Past due 3
to 6
months 45.9 45.3 4.5 4.5 50.4 49.8
Past due 6
to 12
months 27.4 27.2 - - 27.4 27.2
Past due
over 12
months 25.3 24.7 - - 25.3 24.7
Possessions 42.7 42.4 - - 42.7 42.4
277.7 275.2 16.7 16.7 294.4 291.9
-------- ----------- ------- ----------- -------- -----------
Stage 3
(POCI)
Not past due 20.8 20.2 30.6 30.5 51.4 50.7
Past due < 1
month 6.1 5.9 8.5 8.5 14.6 14.4
Past due 1
to 3
months 4.9 4.6 21.9 21.9 26.8 26.5
Past due 3
to 6
months 6.5 6.1 10.5 10.5 17.0 16.6
Past due 6
to 12
months 5.7 5.3 5.5 5.5 11.2 10.8
Past due
over 12
months 8.3 7.2 1.2 1.2 9.5 8.4
Possessions 1.3 0.8 5.0 5.0 6.3 5.8
53.6 50.1 83.2 83.1 136.8 133.2
-------- ----------- ------- ----------- -------- -----------
Total loans
before
provisions 10,820.6 10,754.2 7,647.0 7,646.3 18,467.6 18,400.5
30. Risk management (continued)
Arrears analysis for OSB:
As at 30-Jun-20 (Unaudited) As at 31-Dec-19 (Audited)
BTL/SME Residential Total BTL/SME Residential Total
OSB GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1
Not past due 8,007.9 1,445.0 9,452.9 8,514.9 1,449.4 9,964.3
Past due < 1 month 65.3 29.9 95.2 48.7 33.9 82.6
8,073.2 1,474.9 9,548.1 8,563.6 1,483.3 10,046.9
------------------- ------- ----------- -------- ------- ----------- --------
Stage 2
Not past due 498.8 199.5 698.3 156.9 104.1 261.0
Past due < 1 month 145.4 43.8 189.2 80.0 38.9 118.9
Past due 1 to 3
months 105.4 50.1 155.5 32.3 30.2 62.5
749.6 293.4 1,043.0 269.2 173.2 442.4
------------------- ------- ----------- -------- ------- ----------- --------
Stage 3
Not past due 41.7 27.4 69.1 39.6 31.7 71.3
Past due < 1 month 10.4 6.6 17.0 22.5 13.8 36.3
Past due 1 to 3
months 27.9 37.4 65.3 9.8 19.0 28.8
Past due 3 to 6
months 18.9 22.1 41.0 17.0 28.9 45.9
Past due 6 to 12
months 12.4 14.4 26.8 9.1 18.3 27.4
Past due over 12
months 7.9 16.5 24.4 13.5 11.8 25.3
Possessions 44.4 4.6 49.0 38.7 4.0 42.7
163.6 129.0 292.6 150.2 127.5 277.7
------------------- ------- ----------- -------- ------- ----------- --------
Stage 3 (POCI)
Not past due - 24.4 24.4 0.2 20.6 20.8
Past due < 1 month - 2.9 2.9 - 6.1 6.1
Past due 1 to 3
months - 11.1 11.1 - 4.9 4.9
Past due 3 to 6
months - 5.1 5.1 - 6.5 6.5
Past due 6 to 12
months - 4.5 4.5 - 5.7 5.7
Past due over 12
months - 5.5 5.5 - 8.3 8.3
Possessions - - - - 1.3 1.3
- 53.5 53.5 0.2 53.4 53.6
------------------- ------- ----------- -------- ------- ----------- --------
Total loans before
provisions 8,986.4 1,950.8 10,937.2 8,983.2 1,837.4 10,820.6
30. Risk management (continued)
Arrears analysis for OSB BTL/SME:
As at 30-Jun-20 (Unaudited)
Residential Funding
Buy-to-Let Commercial development lines Total
OSB GBPm GBPm GBPm GBPm GBPm
Stage 1
Not past due 6,866.2 770.1 150.0 221.6 8,007.9
Past due < 1 month 51.4 13.9 - - 65.3
6,917.6 784.0 150.0 221.6 8,073.2
---------- ------------ ------- -------
Stage 2
Not past due 460.0 38.8 - - 498.8
Past due < 1 month 137.9 7.5 - - 145.4
Past due 1 to 3 months 97.4 8.0 - - 105.4
695.3 54.3 - - 749.6
---------- ------------ ------- -------
Stage 3
Not past due 36.4 5.3 - - 41.7
Past due < 1 month 10.0 0.4 - - 10.4
Past due 1 to 3 months 26.9 1.0 - - 27.9
Past due 3 to 6 months 15.6 3.3 - - 18.9
Past due 6 to 12
months 11.3 1.1 - - 12.4
Past due over 12
months 7.7 0.2 - - 7.9
Possessions 42.0 2.4 - - 44.4
149.9 13.7 - - 163.6
Stage 3 (POCI)
Not past due - - - - -
- - - - -
Total loans before
provisions 7,762.8 852.0 150.0 221.6 8,986.4
30. Risk management (continued)
As at 31-Dec-19 (Audited)
Residential Funding
Buy-to-Let Commercial development lines Total
OSB GBPm GBPm GBPm GBPm GBPm
Stage 1
Not past due 7,317.3 829.4 146.1 222.1 8,514.9
Past due < 1 month 32.8 15.9 - - 48.7
7,350.1 845.3 146.1 222.1 8,563.6
---------- ------------ ------- -------
Stage 2
Not past due 128.6 28.3 - - 156.9
Past due < 1 month 78.5 1.5 - - 80.0
Past due 1 to 3 months 29.2 3.1 - - 32.3
236.3 32.9 - - 269.2
---------- ------------ ------- -------
Stage 3
Not past due 37.1 2.5 - - 39.6
Past due < 1 month 21.0 1.5 - - 22.5
Past due 1 to 3 months 9.8 - - - 9.8
Past due 3 to 6 months 16.1 0.9 - - 17.0
Past due 6 to 12
months 8.0 1.1 - - 9.1
Past due over 12
months 13.1 0.4 - - 13.5
Possessions 35.5 3.2 - - 38.7
140.6 9.6 - - 150.2
Stage 3 (POCI)
Not past due - 0.2 - - 0.2
- 0.2 - - 0.2
---------- ---------- ------------ ------- -------
Total loans before
provisions 7,727.0 888.0 146.1 222.1 8,983.2
30. Risk management (continued)
Arrears analysis for OSB Residential:
As at 30-Jun-20 (Unaudited)
First Funding
charge Second charge lines Total
OSB GBPm GBPm GBPm GBPm
Stage 1
Not past due 1,192.3 242.4 10.3 1,445.0
Past due < 1 month 24.6 4.1 1.2 29.9
1,216.9 246.5 11.5 1,474.9
------------------------------ ------- ------------- ------- -------
Stage 2
Not past due 169.5 30.0 - 199.5
Past due < 1 month 40.6 3.2 - 43.8
Past due 1 to 3 months 43.6 6.5 - 50.1
253.7 39.7 - 293.4
------------------------------ ------- ------------- ------- -------
Stage 3
Not past due 22.1 5.3 - 27.4
Past due < 1 month 5.3 1.3 - 6.6
Past due 1 to 3 months 27.5 9.9 - 37.4
Past due 3 to 6 months 16.8 4.9 0.4 22.1
Past due 6 to 12 months 10.9 3.0 0.5 14.4
Past due over 12 months 13.8 2.0 0.7 16.5
Possessions 4.6 - - 4.6
101.0 26.4 1.6 129.0
------------------------------ ------- ------------- ------- -------
Stage 3 (POCI)
Not past due 16.1 8.3 - 24.4
Past due < 1 month 1.9 1.0 - 2.9
Past due 1 to 3 months 5.8 5.3 - 11.1
Past due 3 to 6 months 2.4 2.7 - 5.1
Past due 6 to 12 months 2.5 2.0 - 4.5
Past due over 12 months 1.7 3.8 - 5.5
30.4 23.1 - 53.5
------------------------------ ------- ------------- ------- -------
Total loans before provisions 1,602.0 335.7 13.1 1,950.8
30. Risk management (continued)
As at 31-Dec-19 (Audited)
First Funding
charge Second charge lines Total
OSB GBPm GBPm GBPm GBPm
Stage 1
Not past due 1,164.8 272.4 12.2 1,449.4
Past due < 1 month 27.7 6.2 - 33.9
1,192.5 278.6 12.2 1,483.3
------------- ------- -------
Stage 2
Not past due 86.1 18.0 - 104.1
Past due < 1 month 34.4 4.5 - 38.9
Past due 1 to 3 months 24.4 5.8 - 30.2
144.9 28.3 - 173.2
------------- ------- -------
Stage 3
Not past due 28.1 3.6 - 31.7
Past due < 1 month 11.2 2.6 - 13.8
Past due 1 to 3 months 13.8 5.2 - 19.0
Past due 3 to 6 months 20.7 8.2 - 28.9
Past due 6 to 12 months 14.5 3.8 - 18.3
Past due over 12 months 9.8 2.0 - 11.8
Possessions 3.3 0.7 - 4.0
101.4 26.1 - 127.5
Stage 3 (POCI)
Not past due 13.4 7.2 - 20.6
Past due < 1 month 4.2 1.9 - 6.1
Past due 1 to 3 months 2.0 2.9 - 4.9
Past due 3 to 6 months 3.2 3.3 - 6.5
Past due 6 to 12 months 2.6 3.1 - 5.7
Past due over 12 months 2.3 6.0 - 8.3
27.8 25.6 - 53.4
------- ------------- ------- -------
Total loans before provisions 1,466.6 358.6 12.2 1,837.4
30. Risk management (continued)
Arrears analysis for CCFS:
As at 30-Jun-20 (Unaudited)
Second
Buy-to-let Residential Bridging charge Total
CCFS GBPm GBPm GBPm GBPm GBPm
Stage 1
Not past due 4,686.9 1,803.9 173.2 201.3 6,865.2
Past due < 1 month 5.4 8.3 - 1.0 14.7
4,692.3 1,812.2 173.2 202.3 6,879.9
------------------------- ---------- ----------- -------- ------- -------
Stage 2
Not past due 295.9 287.4 20.2 13.2 616.7
Past due < 1 month 119.6 124.8 3.8 3.7 251.9
Past due 1 to 3 months 9.7 18.9 0.2 1.2 30.0
425.2 431.1 24.2 18.1 898.6
------------------------- ---------- ----------- -------- ------- -------
Stage 3
Not past due 6.1 8.0 0.2 0.8 15.1
Past due < 1 month 0.8 3.9 - 0.1 4.8
Past due 1 to 3 months 1.1 4.9 - 0.4 6.4
Past due 3 to 6 months 3.2 8.8 0.3 0.1 12.4
Past due 6 to 12 months 1.1 1.5 - 0.2 2.8
Possessions 3.3 0.1 0.3 - 3.7
15.6 27.2 0.8 1.6 45.2
------------------------- ---------- ----------- -------- ------- -------
Stage 3 (POCI)
Not past due 9.5 17.5 0.3 1.5 28.8
Past due < 1 month 2.2 7.8 0.2 0.6 10.8
Past due 1 to 3 months 2.7 8.2 0.1 0.5 11.5
Past due 3 to 6 months 0.6 7.6 - 0.1 8.3
Past due 6 to 12 months 0.1 4.0 0.8 - 4.9
Past due over 12 months 1.1 1.2 - 0.2 2.5
Possessions 3.8 1.8 0.3 0.1 6.0
20.0 48.1 1.7 3.0 72.8
------------------------- ---------- ----------- -------- ------- -------
Total loans before
provisions 5,153.1 2,318.6 199.9 225.0 7,896.5
30. Risk management (continued)
As at 31-Dec-19 (Audited)
Second
Buy-to-let Residential Bridging charge Total
CCFS GBPm GBPm GBPm GBPm GBPm
Stage 1
Not past due 4,767.9 2,056.4 195.5 216.4 7,236.2
Past due < 1 month 0.5 1.1 - 2.2 3.8
4,768.4 2,057.5 195.5 218.6 7,240.0
------------------------- ---------- ----------- -------- ------- -------
Stage 2
Not past due 139.6 83.6 14.6 1.3 239.1
Past due < 1 month 10.1 27.1 0.8 0.1 38.1
Past due 1 to 3 months 6.3 22.4 0.3 0.9 29.9
156.0 133.1 15.7 2.3 307.1
------------------------- ---------- ----------- -------- ------- -------
Stage 3
Not past due 1.1 3.2 0.2 0.3 4.8
Past due < 1 month 0.5 0.9 - - 1.4
Past due 1 to 3 months 1.6 4.4 - - 6.0
Past due 3 to 6 months 3.2 1.2 0.1 - 4.5
Past due 6 to 12 months - - - - -
Possessions - - - - -
6.4 9.7 0.3 0.3 16.7
------------------------- ---------- ----------- -------- ------- -------
Stage 3 (POCI)
Not past due 10.9 16.6 1.7 1.4 30.6
Past due < 1 month 2.5 5.4 0.4 0.2 8.5
Past due 1 to 3 months 2.6 16.8 1.8 0.7 21.9
Past due 3 to 6 months 1.3 8.8 - 0.4 10.5
Past due 6 to 12 months 1.0 3.9 0.2 0.4 5.5
Past due over 12 months 0.9 0.3 - - 1.2
Possessions 3.9 0.9 0.2 - 5.0
23.1 52.7 4.3 3.1 83.2
------------------------- ---------- ----------- -------- ------- -------
Total loans before
provisions 4,953.9 2,253.0 215.8 224.3 7,647.0
30. Risk management (continued)
Forbearance measures undertaken
The Group has a range of options available where borrowers experience
financial difficulties which impact their ability to service their
financial commitments under the loan agreement. These are explained on
page 70 of the 2019 Annual Report and Accounts.
A summary of the forbearance measures undertaken (excluding COVID-19
related payment holidays) during the period under review is below:
As at 30-Jun-20 As at 31-Dec-19
(Unaudited) (Audited)
Number Number
of accounts GBPm of accounts GBPm
Forbearance type:
Interest-only switch 37 5.2 59 8.4
Interest rate reduction 20 1.0 35 1.6
Term extension 139 36.0 30 6.6
Payment holiday 39 3.6 87 4.1
Voluntary assisted sale 1 - 26 1.0
Payment concession (reduced monthly
payments) 18 2.1 73 3.6
Full or partial debt forgiveness 1 - 6 -
Total 255 47.9 316 25.3
------------------------------------ ------------ ------------- ------------ ----
Loan type:
First charge owner-occupier 49 5.9 85 10.5
Second charge owner-occupier 79 5.5 198 7.4
Buy-to-Let 18 4.7 32 7.4
Commercial 109 31.8 1 -
Total 255 47.9 316 25.3
------------------------------------ ------------ ------------- ------------ ----
As at 30 June 2020, the Group granted payment holidays to c. 26k
accounts, equivalent to 28% of the Group's loans and advances by value.
30. Risk management (continued)
Geographical analysis by region
An analysis of loans by region is provided below:
As at 30-Jun-20 (Unaudited)
OSB CCFS Total
Region GBPm GBPm GBPm %
East Anglia 402.8 835.8 1,238.6 7
East Midlands 432.2 431.2 863.4 5
Greater London 4,820.6 2,791.9 7,612.5 41
Guernsey 41.6 - 41.6 -
Jersey 135.9 - 135.9 1
North East 136.4 189.7 326.1 2
North West 598.9 630.6 1,229.5 7
Northern Ireland 13.5 - 13.5 -
Scotland 49.8 204.0 253.8 1
South East 2,360.0 1,278.9 3,638.9 19
South West 736.7 463.6 1,200.3 6
Wales 254.2 199.8 454.0 2
West Midlands 710.2 500.2 1,210.4 6
Yorks & Humberside 244.4 370.8 615.2 3
Total loans before provisions 10,937.2 7,896.5 18,833.7 100
------------------------------ --------- ------- -------- ---
As at 31-Dec-19 (Audited)
OSB CCFS Total
Region GBPm GBPm GBPm %
East Anglia 391.9 810.9 1,202.8 7
East Midlands 415.2 410.3 825.5 4
Greater London 4,738.7 2,713.7 7,452.4 41
Guernsey 45.3 - 45.3 -
Jersey 141.4 - 141.4 1
North East 136.7 179.5 316.2 2
North West 587.3 605.4 1,192.7 6
Northern Ireland 14.2 - 14.2 -
Scotland 48.5 190.9 239.4 1
South East 2,375.2 1,209.6 3,584.8 20
South West 747.5 466.0 1,213.5 7
Wales 239.3 202.6 441.9 2
West Midlands 702.2 496.0 1,198.2 6
Yorks & Humberside 237.2 362.1 599.3 3
Total loans before provisions 10,820.6 7,647.0 18,467.6 100
------------------------------ -------- ------- -------- ---
30. Risk management (continued)
Approach to measurement of credit quality
The Group categorises the credit quality of loans and advances to
customers into internal risk grades based on the 12-month probability of
default ('PD') calculated at the reporting date. The PDs include a
combination of internal behavioural and credit bureau characteristics.
The risk grades are further grouped into the following credit quality
segments:
-- Excellent quality - where there is a very high likelihood the asset will
be recovered in full with a negligible or very low risk of default.
-- Good quality - where there is a high likelihood the asset will be
recovered in full with a low risk of default.
-- Satisfactory quality -- where the assets demonstrate a moderate default
risk.
-- Lower quality - where the assets require closer monitoring and the risk
of default is of greater concern.
The credit grade for the Group's investment securities and loans and
advances to credit institutions is based on the external credit rating
of the counterparty.
As at 30-Jun-20 (Unaudited)
Stage
Stage Stage 3
Stage 1 2 3 (POCI) Total
Loans and advances to customers GBPm GBPm GBPm GBPm GBPm
OSB
Excellent 5,025.8 92.1 - - 5,117.9
Good 4,329.2 559.0 - - 4,888.2
Satisfactory 188.4 293.8 - - 482.2
Lower 4.7 98.1 - - 102.8
Impaired - - 292.6 - 292.6
POCI - - - 53.5 53.5
CCFS
Excellent 4,141.6 178.1 - - 4,319.7
Good 2,638.0 461.0 - - 3,099.0
Satisfactory 95.9 119.1 - - 215.0
Lower 4.4 140.4 - - 144.8
Impaired - - 45.2 - 45.2
POCI - - - 72.8 72.8
16,428.0 1,941.6 337.8 126.3 18,833.7
-------------------------------- -------- ------- ----- ------- --------
30. Risk management (continued)
As at 31-Dec-19 (Audited)
Stage
Stage Stage 3
Stage 1 2 3 (POCI) Total
Loans and advances to customers GBPm GBPm GBPm GBPm GBPm
OSB(1)
Excellent 5,033.6 11.0 - - 5,044.6
Good 4,859.3 200.5 - - 5,059.8
Satisfactory 147.3 154.8 - - 302.1
Lower 6.7 76.1 - - 82.8
Impaired - - 277.7 - 277.7
POCI - - - 53.6 53.6
CCFS
Excellent 3,632.7 20.5 - - 3,653.2
Good 3,359.7 93.7 - - 3,453.4
Satisfactory 222.8 39.1 - - 261.9
Lower 24.8 153.8 - - 178.6
Impaired - - 16.7 - 16.7
POCI - - - 83.2 83.2
17,286.9 749.5 294.4 136.8 18,467.6
-------------------------------- -------- --------
(1) The Group has restated the prior year comparatives for OSB to
include finance lease assets.
The tables below show the Group's other financial assets by credit risk
rating grade:
As at 30-Jun-20 (Unaudited)
Excellent Good Satisfactory Total
GBPm GBPm GBPm GBPm
Investment securities 755.1 - - 755.1
Loans and advances to credit
institutions 2,363.7 227.5 6.4 2,597.6
3,118.8 227.5 6.4 3,352.7
----------------------------- --------- ----- ------------ -------
As at 31-Dec-19 (Audited)
Excellent Good Satisfactory Total
GBPm GBPm GBPm GBPm
Investment securities 635.3 - - 635.3
Loans and advances to credit
institutions 2,047.8 146.1 10.7 2,204.6
2,683.1 146.1 10.7 2,839.9
----------------------------- --------- ----- ------------ -------
31. Financial instruments and fair values
The following tables provide an analysis of financial assets and
financial liabilities measured at fair value on the Statement of
Financial Position grouped into levels 1 to 3 based on the degree to
which the fair value is observable:
Carrying Principal Level Level
amount amount Level 1 2 3 Total
As at 30-Jun-20 (Unaudited) GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Investment securities 549.3 550.5 191.0 358.3 - 549.3
Loans and advances to
customers(1) 19.9 23.5 - - 19.9 19.9
Derivative assets 21.8 7,116.0 - 21.8 - 21.8
591.0 7,690.0 191.0 380.1 19.9 591.0
Financial liabilities
Derivative liabilities 221.5 9,798.6 - 221.5 - 221.5
Carrying Principal Level Level
amount amount Level 1 2 3 Total
As at 31-Dec-19 (Audited) GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Investment securities 508.7 509.5 149.8 358.9 - 508.7
Loans and advances to
customers(1) 22.1 24.8 - - 22.1 22.1
Derivative assets 21.1 7,795.4 - 21.0 0.1 21.1
551.9 8,329.7 149.8 379.9 22.2 551.9
--------------------------
Financial liabilities
Derivative liabilities 92.8 9,982.4 - 92.8 - 92.8
(1) The residential mortgage portfolio held at fair value is categorised
as level 3. The fair value is based on expected future cash
flows using an assumed amortisation profile of the pool of mortgages.
The cash flows are discounted to present value using a
risk adjusted rates.
Level 1: Fair values that are based entirely on quoted market prices
(unadjusted) in an actively traded market for identical assets and
liabilities that the Group has the ability to access. Valuation
adjustments and block discounts are not applied to Level 1 instruments.
Since valuations are based on readily available observable market prices,
this makes them most reliable, reduces the need for management judgement
and estimation and also reduces the uncertainty associated with
determining fair values.
Level 2: Fair values that are based on one or more quoted prices in
markets that are not active or for which all significant inputs are
taken from directly or indirectly observable market data. These include
valuation models used to calculate the present value of expected future
cash flows and may be employed either when no active market exists or
when there are no quoted prices available for similar instruments in
active markets.
Level 3: Fair values for which any one or more significant input is not
based on observable market data and the unobservable inputs have a
significant effect on the instrument's fair value. Valuation models that
employ significant unobservable inputs require a higher degree of
management judgement and estimation in determining the fair value.
Management judgement and estimation are usually required for the
selection of the appropriate valuation model to be used, determination
of expected future cash flows on the financial instruments being valued,
determination of the probability of counterparty default and prepayments,
determination of expected volatilities and correlations and the
selection of appropriate discount rates.
31. Financial instruments and fair values (continued)
The following tables provide an analysis of financial assets and
financial liabilities not measured at fair value on the Statement of
Financial Position grouped into levels 1 to 3 based on the degree to
which the fair value is observable:
Estimated fair value
Carrying Principal Level Level Level
amount amount 1 2 3 Total
As at 30-Jun-20
(Unaudited) GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash in hand 0.5 0.5 - 0.5 - 0.5
Loans and advances to
credit institutions 2,597.6 2,597.6 - 2,597.6 - 2,597.6
Investment securities 205.8 205.7 205.3 - - 205.3
Loans and advances to
customers 18,757.2 18,685.1 - 3,242.1 15,585.5 18,827.6
Other assets 10.8 10.8 - 10.8 - 10.8
21,571.9 21,499.7 205.3 5,851.0 15,585.5 21,641.8
----------------------- -------- --------- ----- ------- -------- --------
Financial liabilities
Amounts owed to retail
depositors 16,697.3 16,617.3 - 3,743.1 13,015.2 16,758.3
Amounts owed to credit
institutions 3,426.8 3,425.0 - 3,426.8 - 3,426.8
Amounts owed to other
customers 28.4 28.3 - - 28.4 28.4
Debt securities in
issue 325.7 325.6 - 325.7 - 325.7
Subordinated
liabilities 10.6 10.4 - - 10.6 10.6
Perpetual subordinated
bonds 37.6 37.0 31.8 - - 31.8
Other liabilities 21.5 21.5 - 21.5 - 21.5
20,547.9 20,465.1 31.8 7,517.1 13,054.2 20,603.1
----------------------- -------- --------- ----- ------- -------- --------
Estimated fair value
Carrying Principal Level Level
amount amount 1 2 Level 3 Total
As at 31-Dec-19
(Audited) GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash in hand 0.4 0.4 - 0.4 - 0.4
Loans and advances to
credit institutions 2,204.6 2,204.3 - 2,204.6 - 2,204.6
Investment securities 126.6 126.4 126.6 - - 126.6
Loans and advances to
customers 18,424.7 18,281.3 - 3,409.1 15,245.1 18,654.2
Other assets 14.3 14.3 - 14.3 - 14.3
20,770.6 20,626.7 126.6 5,628.4 15,245.1 21,000.1
----------------------- -------- --------- ----- ------- -------- --------
Financial liabilities
Amounts owed to retail
depositors 16,255.0 16,133.5 - 3,817.8 12,441.9 16,259.7
Amounts owed to credit
institutions 3,068.8 3,063.3 - 3,068.8 - 3,068.8
Amounts owed to other
customers 29.7 29.5 - - 29.7 29.7
Debt securities in
issue 296.3 295.5 - 296.3 - 296.3
Subordinated
liabilities 10.6 10.4 - - 10.7 10.7
Perpetual subordinated
bonds 37.6 37.0 33.2 - - 33.2
Other liabilities 34.9 34.9 - 34.9 - 34.9
19,732.9 19,604.1 33.2 7,217.8 12,482.3 19,733.3
----------------------- -------- --------- ----- ------- -------- --------
32. Operating segments
Following the Combination, the Group segments its lending business and
operates under two segments in-line with internal reporting to the
Board:
-- OSB
-- CCFS
Prior to the Combination, the Group operated under two segments: BTL/SME
and Residential mortgages. The Group separately discloses the impact of
Combination accounting but does not consider this a business segment.
The financial position and results of operations of the above segments
are summarised below:
OSB CCFS Combination Total
GBPm GBPm GBPm GBPm
Balances as at 30 June 2020
(Unaudited)
Gross loans and advances to
customers 10,937.2 7,674.3 242.1 18,853.6
Expected credit losses (71.0) (26.1) 0.7 (96.4)
Loans and advances to customers 10,866.2 7,648.2 242.8 18,757.2
Capital expenditure 2.7 1.1 - 3.8
Depreciation and amortisation 3.6 1.3 (1.2.6 7.5
Profit for six months ended 30
June 2020 (Unaudited)
Interest receivable 244.4 162.0 (34.9) 371.5
Interest payable (80.9) (58.7) 1.9 (137.7)
Net interest income 163.5 103.3 (33.0) 233.8
Other income 11.0 7.1 (6.6) 11.5
Total income 174.5 110.4 (39.6) 245.3
Administrative expenses (44.9) (29.2) (2.6) (76.7)
Provisions - (0.1) - (0.1)
Impairment of financial assets (35.9) (18.5) 0.2 (54.2)
Impairment of intangible assets - - (7.0) (7.0)
Integration costs (4.9) (1.4) - (6.3)
Exceptional items (1.7) - - (1.7)
Profit before taxation 87.2 61.2 (49.0) 99.3
Taxation(1) (20.8) (14.6) 8.1 (27.3)
Profit for the period 66.4 46.6 (40.9) 72.0
------------------------------------
(1) The taxation on Combination credit of GBP8.1m includes a GBP4.6m
charge due to a 2% increase in the rate for the deferred tax liability
following the Government cancellation of the corporation tax rate
reduction on the 19th March 2020.
32. Operating segments (continued)
OSB CCFS Combination Total
GBPm GBPm GBPm GBPm
Balances as at 31 December 2019
(Audited)
Gross loans and advances to
customers 10,820.6 7,963.6 (294.5) 18,489.7
Expected credit losses (35.6) (6.5) (0.8) (42.9)
Loans and advances to customers 10,785.0 7,957.1 (295.3) 18,446.8
Capital expenditure 10.2 1.1 - 11.3
Depreciation and amortisation 6.3 1.3 0.6 8.2
Restated profit for six months
ended
30 June 2019 (Unaudited)(1)
Net interest income 150.5 - - 150.5
Other expense (7.2) - - (7.2)
Total income 143.3 - - 143.3
Administrative expenses (40.9) - - (40.9)
Provisions (0.1) - - (0.1)
Impairment of financial assets (5.9) - - (5.9)
Exceptional items (5.9) - - (5.9)
Profit before taxation 90.5 - 90.5
Taxation (25.2) - (25.2)
Profit for the period 65.3 - - 65.3
------------------------------------ ------- -----------
(1) Consistent with the restatement in the 2019 Annual Report and
Accounts, the Group has restated the net interest income prior period
comparatives for the interest expense on the GBP22.0m PSBs previously
classified as equity (see note 1).
33. Adjustments for non-cash items and changes in operating assets
and liabilities
Restated(1)
Six months Six months
ended ended
30-Jun-20 30-Jun-19
(Unaudited) (Unaudited)
GBPm GBPm
Adjustments for non-cash items:
Depreciation and amortisation 7.5 3.0
Interest on subordinated liabilities 0.4 0.4
Interest on perpetual subordinated bonds 0.8 0.9
Interest on financing debt (4.0) -
Impairment charge on loans 54.2 5.9
Impairment on intangible assets acquired on
Combination 7.0 -
Gain on sale of financial instruments (19.9) -
Provisions 0.1 0.1
Interest on lease liabilities 0.2 -
Fair value losses on financial instruments 12.1 7.4
Share-based payments 2.3 1.4
Total adjustments for non-cash items 60.0 19.1
---------------------------------------------------- ----------- -----------
Changes in operating assets and liabilities:
Increase in loans and advances to credit
institutions (129.5) (54.3)
Increase in loans to customers (1,214.5) (884.6)
Increase in retail deposits 442.3 1,103.1
Net increase in other assets (0.4) (6.7)
Net decrease in derivatives and hedged items (41.5) (9.9)
Net decrease in other customers deposits(2) (1.3) (24.1)
Net (decrease)/increase in other liabilities (13.0) 0.3
Exchange differences on working capital 0.1 0.1
Total changes in operating assets and liabilities (957.8) 123.9
---------------------------------------------------- ----------- -----------
(1) Consistent with the restatement in the 2019 Annual Report and
Accounts, the Group has restated the interest on perpetual subordinated
bonds prior period comparatives for the interest expense on the GBP22.0m
PSBs 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.
34. Capital management
The Group's individual regulated entities and the Group as a whole
complied with all of the capital requirements, which they were subject
to, for the periods presented.
The regulatory capital of the Group is presented below:
As at As at
30-Jun-20 31-Dec-19
(Unaudited) (Unaudited)
GBPm GBPm
Common equity tier 1 capital
Called up share capital 4.5 4.5
Share premium, capital contribution and share-based
payment reserve 875.3 876.3
Retained earnings 625.1 553.2
Transfer reserve (12.8) (12.8)
Other reserves (4.3) (4.2)
Total equity excluding equity bonds 1,487.8 1,417.0
Foreseeable dividends (29.1) (49.9)
IFRS 9 transitional adjustment(1) 4.9 5.3
COVID-19 ECL transitional adjustment(2) 31.6 -
Deductions from common equity tier 1 capital
Prudent valuation adjustment(3) (0.6) (0.5)
Intangible assets (22.0) (31.4)
Deferred tax asset (0.9) (0.9)
Common equity tier 1 capital 1,471.7 1,339.6
---------------------------------------------------- ----------- -----------
Additional tier 1 capital
AT1 Securities 60.0 60.0
Total tier 1 capital 1,531.7 1,399.6
---------------------------------------------------- ----------- -----------
Tier 2 capital
Subordinated debt and PSBs 47.4 47.4
Deductions from tier 2 capital (1.7) (0.7)
Total tier 2 capital 45.7 46.7
---------------------------------------------------- ----------- -----------
Total regulatory capital 1,577.4 1,446.3
Risk weighted assets (unaudited) 8,476.6 8,383.0
(1) The regulatory capital includes a GBP4.9m add-back under IFRS 9
transitional arrangements. This represents 70.0% of the IFRS 9
transitional adjustment booked directly to retained earnings of GBP6.5m.
(2) The COVID-19 ECL transitional adjustment relates to the Group's
increase in Stage 1 and Stage 2 ECL following the impacts of COVID-19
and for which transitional rules are being adopted for regulatory
capital purposes.
(3) The Group has adopted the simplified approach under the Prudent
Valuation rules, recognising a deduction equal to 1.0% of fair value
assets and liabilities.
35. Related parties
The Group had no related party transactions during the six months to 30
June 2020 that would materially affect the position or performance of
the Group. Details of transactions for the year ended 31 December 2019
can be found in the 2019 Annual Report and Accounts on pages 205 to 208.
Transactions with Key Management Personnel
During the period, the Group granted 467,408 (2019: 292,205) awards
under the Deferred Share Bonus Plan and 1,601,990 (2019: 729,505) awards
under the Performance Share Plan to 13 (2019: 9) key management
personnel. The awards were granted on 19 March 2020 with a grant price
of GBP2.5836. Details of these plans can be found in note 11 of the 2019
Annual Report and Accounts on pages 186 to 190.
36. Events after the reporting date
There have been no material events after the reporting date.
Key performance indicators
Underlying results for the six months to 30 June 2020 reflect results
for the combined Group, excluding exceptional items, integration costs
and other acquisition-related items.
Pro forma underlying results for the six months to 30 June 2019 assume
that the Combination occurred on 1 January 2019 and include six months
of results from OSB and CCFS, excluding exceptional items, integration
costs and other acquisition-related items.
Net interest margin ('NIM')
For the period of six months NIM is calculated as net interest income
annualised on an actual days basis, as a percentage of a 7 point
average(1) of interest earning assets (cash, investment securities,
loans and advances to customers and credit institutions). It represents
the margin earned on loans and advances and liquid assets after swap
expense/income and cost of funds.
HY 2020 HY 2019
GBPm GBPm
Net interest income -- statutory 233.8 150.5(2)
CCFS HY 2019 results - 100.1
Adjust presentation - (0.1)
Add back: acquisition-related items(3) 33.0 -
Net interest income -- underlying and pro forma
underlying 266.8 250.5
Net interest income annualised on an actual days
basis:
Net interest income -- statutory A 470.2 303.5
Net interest income -- underlying and pro forma
underlying B 536.5 505.2
7 point average of interest earning assets --
statutory C 21,654.9 10,936.1
7 point average of interest earning assets --
underlying
and pro forma underlying D 21,434.4 18,706.6
NIM statutory equals A/C 2.17% 2.78%
NIM underlying and pro forma underlying equals
B/D 2.50% 2.70%
Cost to income ratio
The cost to income ratio is defined as administrative expenses as a
percentage of total income. It is a measure of operational efficiency.
HY 2020 HY 2019
GBPm GBPm
Administrative expenses -- statutory A 76.7 40.9
CCFS HY 2019 results 35.9
Add back: acquisition-related items(3) (2.6) -
Administrative expenses -- underlying and pro
forma underlying B 74.1 76.8
Total income -- statutory C 245.3 143.3
CCFS HY 2019 results - 125.0
Add back: acquisition-related items(3) 39.6 -
Total income underlying and pro forma underlying
D 284.9 268.3
Cost to income statutory equals A/C 31% 29%
Cost to incomes pro forma underlying equals B/D 26% 29%
Management expense ratio
For the period of six months the management expense ratio is defined as
administrative expenses annualised on a simple basis as a percentage of
a 7 point average(1) of total assets.
HY 2020 HY 2019
GBPm GBPm
Administrative expenses -- statutory (as in cost
to income ratio above) A 76.7 40.9
Administrative expenses -- underlying and pro
forma underlying
(as in cost to income ratio above) B 74.1 76.8
7 point average of total assets -- statutory C 21,924.8 11,024.2
7 point average of total assets -- underlying
and pro forma 21,697.4 18,857.7
underlying D 0.70% 0.74%
Management expense ratio statutory equals A/C 0.68% 0.81%
on an annualised basis
Management expense ratio underlying and pro forma
underlying
equals B/D on an annualised basis
Loan loss ratio
For the period of six months, the loan loss ratio is defined as
impairment losses annualised on a simple basis as a percentage of a 7
point average(1) of gross loans and advances. It is a measure of the
credit performance of the loan book.
HY 2020 HY 2019
GBPm GBPm
Impairment losses -- statutory A 54.2 5.9
CCFS HY 2019 results - 2.7
Add back: acquisition-related items(3) 0.2 -
Impairment losses -- underlying and pro forma
underlying B 54.4 8.6
7 point average of gross loans -- statutory C 18,433.5 9,442.9
7 point average of gross loans -- underlying 18,202.5 16,078.3
and pro forma 0.59% 0.12%
underlying D 0.60% 0.11%
Loan loss ratio statutory equals A/C on an annualised
basis
Loan loss ratio underlying and pro forma underlying
equals B/D
on an annualised basis
Return on equity ('RoE')
RoE is defined as profit attributable to ordinary shareholders, which is
profit after tax and after deducting coupons on AT1 securities,
annualised on a simple basis, as a percentage of a 7 point average(1) of
shareholders' equity (excluding GBP60m of AT1 securities).
HY 2020 HY 2019
GBPm GBPm
Profit after tax - statutory 72.0 65.3(2)
Coupons on AT1 securities (2.7) (2.8)
Profit attributable to ordinary shareholders 69.3 62.5
-- statutory A - 9.7
Add back: HY 2019 exceptional items - 62.3
CCFS HY 2019 results 47.2 -
Add back: acquisition related items(3)
--------------------------------------------- ------- -----------
Profit attributable to ordinary shareholders
-- underlying and pro forma underlying B 116.5 134.5
7 point average of shareholders' equity (excluding AT1 securities) --
statutory C 1,473.5 626.9
7 point average of shareholders' equity (excluding AT1 securities) --
underlying and pro forma underlying D 1,297.6 1,111.7
Return on equity statutory equals A/C on an annualised basis
9% 20%
Return on equity underlying and pro forma underlying equals B/D
on an annualised basis 18% 24%
Basic earnings per share
Basic earnings per share is defined as profit attributable to ordinary
shareholders, which is profit after tax and after deducting coupons on
AT1 securities, gross of tax, divided by the weighted average number of
ordinary shares in issue.
HY 2020 HY 2019
GBPm GBPm
Profit attributable to ordinary shareholders --
statutory (as in RoE ratio above) A 69.3 62.5
Profit attributable to ordinary shareholders --
underlying and pro forma underlying (as in RoE 116.5 134.5
ratio above) B
Weighted average number of ordinary shares in 445.9 244.9
issue -- statutory C
Weighted average number of ordinary shares in issue --
underlying and pro forma underlying D 445.9 444.4
Basic earnings per share statutory equals A/C 15.5 25.5
Basic earnings per share underlying and pro forma underlying
equals B/D 26.1 30.3
1. 7 point average is calculated as an average of opening balance and
closing balances for 6 months to 30 June.
2. In 2019, the Group restated the prior year comparatives to recognise
interest expense on the GBP22m Perpetual Subordinated Bonds previously
classified as equity, see note 1 to the financial statements.
3. The acquisition-related items are detailed in the reconciliation of
statutory to pro forma underlying results in Financial review.
Registered office
Reliance House
Sun Pier
Chatham
Kent, ME4 4ET
Company number
07312896
Internet
www.osb.co.uk
Auditor
Deloitte LLP
Statutory Auditor
1 New Street Square
London
EC4A 3HQ
Registrar
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex, BN99 6DA
Brokers
Barclays Bank PLC
5 The North Colonnade
London, E14 4BB
RBC Europe Limited (trading as RBC Capital Markets)
Riverbank House
2 Swan Lane
London, EC4R 3BF
Media and Public Relations
Brunswick Group LLP
16 Lincoln's Inn Fields
London, WC2A 3ED
(END) Dow Jones Newswires
August 27, 2020 02:00 ET (06:00 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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