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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Secure Trust Bank Plc | LSE:STB | London | Ordinary Share | GB00B6TKHP66 | ORD 40P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| -2.00 | -0.29% | 686.00 | 684.00 | 694.00 | 702.00 | 684.00 | 702.00 | 7,938 | 16:35:27 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Commercial Banks, Nec | 185.5M | 24.3M | 1.2796 | 5.35 | 129.89M |
From Apr 2019 to Apr 2024
TIDMSTB
RNS Number : 5039I
Secure Trust Bank PLC
22 March 2018
PRESS RELEASE
Thursday 22 March 2018
For immediate release
SECURE TRUST BANK PLC
Audited Final Results for the year to 31 December 2017
Increased profits in a year of strategic repositioning
Secure Trust Bank PLC ("STB", the "Bank" or the "Group") is pleased to announce a Group profit before tax on continuing operations of GBP25.0m for the year to 31 December 2017 which is a 28.9% increase on the prior year. The Group's strategic repositioning was completed in 2017 and it is now focused on further developing its SME, Retail Finance and Motor lending activities. Further diversification was achieved last year following the controlled launch of STB Mortgages and a new online Deposit platform which helped customer lending balances to grow by 27.3%. The 2017 results reflect this strategic repositioning with the benefits of this strategy expected to become more visible in 2018 and beyond. The Group finished 2017 with strong capital and funding positions and its largest ever pipeline of new business in its chosen markets. This gives the Group confidence for the period ahead.
FINANCIAL HIGHLIGHTS
-- Underlying profit before tax including PLD of GBP31.3m (2016: GBP27.3m) up 14.7%, in line with market expectations
-- Profit before tax from continuing operations up 28.9% to GBP25.0m (2016: GBP19.4m) -- Common equity tier 1 ratio of 16.5% (2016: 18.0%) -- Operating income GBP129.5m (2016: GBP107.0m) up 21.0% -- Basic earnings per share 107.7p (2016: 77.9p) up 38.3% -- Underlying earnings per share 116.4p (2016: 113.0p) up 3.0%
-- Proposed final dividend of 61p per share (2016: 58p per share), to be paid in May 2018 representing a total dividend of 79p per share (2016: 75p per share, excluding a special dividend of 165p per share paid following completion of sale of ELG)
-- Total assets GBP1.89bn (2016: GBP1.44bn) up 31.3%
Note: Underlying profit and underlying earnings per share relates to the Group's normal recurring business activities and comparative figures for 2016 are reported on a continuing operations basis.
OPERATIONAL HIGHLIGHTS
-- Total customer numbers increased by 33.2% to 989,528 -- Customer deposits increased to GBP1,483.2m (2016: GBP1,151.8m) up 28.8% -- New deposits platform launched in Q4 2017
-- Overall loan book increased to GBP1,598.3m (2016: GBP1,255.5m - continuing operations) up 27.3%
-- Total annual new business lending volumes exceeded GBP1 billion for the first time -- Real Estate Finance lending balances up 28.8% year-on-year to GBP580.8m -- Invoice Finance business has funded over GBP1bn of customer invoices since inception in 2014 -- Retail finance lending balances increased by 38.8% year on year -- Continuing high levels of customer satisfaction as measured by FEEFO
Lord Forsyth, Chairman, said:
"2017 was Secure Trust Bank's 65th year of operations, during which we have been able to increase profits on our continuing operations whilst successfully executing a very significant strategic repositioning of the Group's activities. The Group enters 2018 well positioned to deliver substantial progress in the periods ahead."
Paul Lynam, Chief Executive, said:
"During 2017 Secure Trust Bank increased its continuing profits before tax by 29%, its customer lending by 27% and its customer numbers by 33%. The refocusing of the Group's lending activities has materially reduced our exposure to higher risk consumer credit, enabling us to allocate more capital to lower risk lending. I am confident that the benefits of this strategic repositioning will become increasingly visible as 2018 progresses, not least as we started this year with our largest ever pipeline of new business opportunities."
This announcement together with the associated investors' presentation are available on:
www.securetrustbank.com/results-reports/results-reports-presentations
Enquiries:
Secure Trust Bank PLC
Paul Lynam, Chief Executive Officer
Neeraj Kapur, Chief Financial Officer
Tel: 0121 693 9100
Stifel Nicolaus Europe Limited (Joint Broker)
Robin Mann
Gareth Hunt
Stewart Wallace
Tel: 020 7710 7600
Canaccord Genuity Limited (Joint Broker)
Andrew Buchanan
Sunil Duggal
Tel: 020 7523 8000
Tulchan Communications
Tom Murray
David Ison
Tel: 020 7353 4200
Forward looking statements
This document contains forward looking statements with respect to the business, strategy and plans of Secure Trust Bank PLC and its current goals and expectations relating to its future financial condition and performance. Statements that are not historical facts, including statements about Secure Trust Bank PLC's 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 on circumstances that will occur in the future. Secure Trust Bank PLC's actual future results may differ materially from the results expressed or implied in these forward looking statements as a result of a variety of factors. These include UK domestic and global economic and business conditions, risks concerning borrower credit quality, market related risks including interest rate risk, inherent risks regarding market conditions and similar contingencies outside Secure Trust Bank PLC's control, any adverse experience in inherent operational risks, any unexpected developments in regulation or regulatory and other factors. The forward looking statements contained in this document are made as of the date hereof, and Secure Trust Bank PLC undertakes no obligation to update any of its forward looking statements.
Strategic report
Chairman's statement
Last year was the 65(th) anniversary of the foundation in 1952 of the Secure Trust Group. It has been a year of significant change and the Group enters 2018 well positioned to deliver substantial progress.
Throughout 2017 there has been a considerable repositioning of our balance sheet. The Group ceased originating sub-prime motor finance and medium term unsecured personal loans and in December we sold the legacy unsecured personal loan portfolio. This year we will continue to run down the legacy sub-prime motor book.
2018 begins with a lower risk balance sheet and our largest ever pipeline in real estate and commercial finance. Since being acquired by the Group five years ago our retail finance company, V12, has grown strongly and is expected to continue to do so. The investment in our invoice finance business is also expected to make an important contribution. A new and highly experienced leadership team is tasked with growing and diversifying our motor lending operation and our nascent mortgage operation is fully operational and writing business.
2017 was also the first full year in which the Group was listed on the main market of the London Stock Exchange. The new enlarged board is working well and we will continue to strengthen our governance and respond to the changes proposed to the UK Corporate Governance Code. I am grateful for the extensive work which has been undertaken by the chairs of all our Board committees. During 2017 the remuneration committee implemented the remuneration policy approved at the 2017 Annual General Meeting.
Last year we launched our first ever all employee share save scheme and over 41% of eligible staff subscribed. I was delighted and encouraged by such a high level of participation. I am impressed too with our colleagues who have given their support to local and national charities. STB has a matching funding scheme which the Board agreed to enhance in 2017 and the busy charity committee has coordinated more than 900 hours of volunteering. It was a great privilege to visit the St Mary's Hospice in Birmingham to see for myself the work and care which has been enthusiastically supported by so many of our staff.
Our business is heavily regulated and we continue to invest in the resources required to satisfy the requirements of the FCA and PRA.
The Board is proposing a final dividend of 61 pence per share. This, when added to the interim dividend of 18 pence, would mean a full year dividend of 79 pence per share. If approved, the final dividend will be paid on 25 May 2018 to shareholders on the register as at 27 April 2018.
Finally, the members of the Board would like to express their thanks to all of our colleagues across the Group for their continued dedication and commitment.
I look forward with confidence to another year of growth building on the hard work done in 2017.
Lord Forsyth
Chairman
21 March 2018
Chief Executive's statement
I am pleased to be able to report that on a continuing operations basis Secure Trust Bank ('STB') increased statutory profit before tax in 2017 by 28.9% to GBP25.0m (2016: GBP19.4m) with the Group delivering further loan book growth of 27% to c.GBP1.6 billion (2016: GBP1.3 billion). Underlying profit before tax on a continuing basis was GBP27.0 million (2016: GBP27.3 million). Inclusive of continuing and discontinued operations statutory profit before tax increased by 6.5% to GBP29.3 million (2016: GBP27.5 million) and underlying profits on this basis were GBP31.3m (2016: GBP32.9 million). This profit growth was achieved notwithstanding the very significant strategic repositioning of the bank's balance sheet away from higher margin / higher risk, consumer unsecured and sub-prime motor lending and a substantial investment in launching a new mortgage division and a new deposit IT platform.
All of this took place whilst continuing to deliver positive outcomes for customers and sustaining very high levels of customer satisfaction.
Having largely completed the majority of the bank's balance sheet repositioning, the Group entered 2018 with robust capital and liquidity positions, no direct or indirect exposures to sub-prime unsecured personal lending and a reducing exposure to sub-prime motor finance. With new business pipelines in our SME operations at record highs and continued good momentum in the consumer business lines, we are well positioned in a number of attractive lending classes and expect good progress to be made in meeting our goals over the coming periods.
Profitable growth on a rebalanced loan book
The sale of the unsecured loan portfolio in December requires the accounts to be presented to take account of continuing and discontinued activities. Comparisons with 2016 are complicated by the substantial one off profit generated by the disposal of Everyday Loans in 2016.
Continuing operations generated statutory pre-tax profits for 2017 of GBP25.0 million which are 29% higher than the prior year of GBP19.4 million. This growth has been achieved notwithstanding the rundown of the higher risk consumer portfolios, the growth in lower margin / lower risk new business, and the ongoing investment in the business model, especially in the mortgage operations and the new customer deposit platform.
Excluding discontinued operations, the Group's operating income grew by 21% to a record level of GBP129.5 million (2016: GBP107.0 million) whilst operating costs rose 10.9% to GBP71.3 million from GBP64.3 million in 2016.
Excluding discontinued operations, loan impairments of GBP33.5 million (2016: GBP23.3 million) rose by 43.8% reflecting growth in the continuing loan portfolios, an increase in the levels of provisions held against the sub-prime motor book that is in run off, and an increase in the levels of interest bearing balances written in Retail Finance.
Despite substantial investment to support future growth, costs continue to be robustly managed as reflected in the cost to income ratio of 55.1% (2016: 60.1%).
Prudent balance sheet and risk management
Our ongoing priority is to safeguard the reputation and sustainability of STB through prudent balance sheet management, investment for long-term sustainable growth and robust risk and operational controls.
Over the last couple of years we have been investing in a new deposit platform which went live in the final quarter of 2017. This was a major IT programme which, as previously disclosed, is expected to confer several benefits for the Group, enhancing the offering, providing internet banking, and improving efficiency and risk controls while providing flexibility to introduce new products. The new technology is also enhancing our customer service proposition whilst providing much greater scalability than the previous platform.
STB seeks to limit exposure to short term wholesale funding and interbank markets and broadly match fixed term fixed rate customer lending with customer deposits of the same tenor and interest rate basis. This helps us to minimise maturity transformation and interest rate basis risk. The new deposit platform will allow us to fund our very short term lending activities, such as Invoice Finance and some Retail Finance, with lower cost shorter duration deposit products thereby enhancing our competitive positioning without diverging from our historic approach of matching assets and liabilities.
Our year end loan to deposit ratio was 107.8% (2016: 109.0%). Customer demand for our deposit products remains very strong, and I am pleased to note that the majority of customers with maturing medium term savings bonds chose to reinvest their funds into deposit products with us.
Usage of the Bank of England's (BoE) Funding for Lending and Term Funding Schemes remains a nominal 7% of total lending balances and as a result we will not have big refinancing risks to manage as these schemes are repaid over the next four years. I expect that the closure of the schemes will alter competitive dynamics in the market. The implication for STB is that market pricing, particularly in mortgages, should move closer to where we have priced lending without the benefit of the cheap BoE money and thus our competitive position should strengthen. We have already seen some specialist mortgage lenders increasing their pricing albeit I expect it will take a number of months for the effects of the closure of the schemes to work through in terms of market dynamics.
Strong capital ratios and modest leverage
Our year end CET1 capital levels are robust with a CET1 ratio of 16.5% comparing to the 2016 year end position of 18.0%. The total capital ratio was 16.8% and STB's leverage ratio was 12.3% (2016: 14.5%) as at 31 December 2017. This ratio is comfortably ahead of minimum requirements and demonstrates capacity to continue growing customer lending balances in 2018. The year on year movement is a function of the investment of capital to support the strong growth in the loan portfolios and an increase in the buffers all banks are being required to hold by regulation.
Throughout 2017, the Bank of England has, via the Financial Policy Committee and the PRA, expressed concerns about the UK Consumer Credit market. The Financial Conduct Authority (FCA) has echoed many of these. Both regulators have subsequently taken steps to address their concerns and it seems increasingly possible that the FCA will intervene in some lending markets. Our assessment is that Secure Trust Bank continues to operate in line with regulatory expectations and as a result we would not expect to be negatively impacted by any regulatory changes with regard to product or conduct.
In the recent past I have highlighted my views that risk is being mispriced in a number of lending markets in the UK. Our early recognition of what we regard as unsustainable market dynamics and assessment of the economic outlook has informed the strategic repositioning of the Group's business model over the last two years which culminated in the sale of the legacy unsecured personal loans portfolio in December 2017. In an understandable move to cool over exuberant consumer lending the Bank of England decided to increase the UK countercyclical capital buffer rate to 0.5% (of risk weighted assets) from 0%. This is scheduled to increase further to 1% in November 2018. It is very frustrating that this buffer applies to all banks and does not distinguish between those like Secure Trust Bank, which have exited overheating parts of the consumer credit markets, and others.
Customer lending activities
Strong double digit percentage growth was achieved across the Group's loan portfolio in 2017 notwithstanding the increasingly cautious stance taken as the year progressed, the decisions to cease new business origination in unsecured personal lending and sub-prime motor in the first quarter and the repayment of the vendor loan provided to Non Standard Finance PLC in connection with their purchase of Everyday Loans.
Total annual new business lending volumes exceeded the GBP1 billion mark for the first time and grew 16.4% to GBP1,077.1 million (2016: GBP925.3 million) which translated to an increase of 27.3% in overall balance sheet lending assets to GBP1,598.3 million (2016: GBP1,255.5 million for continuing operations).
Consumer Finance
Total consumer lending in 2017 increased 29% to GBP726.9 million (2016: GBP562.1 million). Our consumer finance lending strategy during 2017 was centred on running off higher margin / higher risk unsecured personal loan and sub-prime motor portfolios, which have been historically profitable, and allocating capital to support the continued growth in Retail Finance, which is shorter term in duration and prime in nature, and higher quality new business in Motor Finance. As noted, we ceased originating new sub-prime motor finance and unsecured personal loans in Q1 2017. Given the ongoing regulatory focus in the unsecured personal loan and high cost credit markets, I feel our retrenchment from these markets was well timed even if the repositioning has created a drag on profit growth.
The Retail Finance point of sale business, net of provisions, grew strongly as intended, with balances at 31 December 2017 increasing 38.8% to GBP452.3 million (2016: GBP325.9 million). Our Retail Finance business has continued to evolve as we have grown into one of the largest participants in this market. We are writing a broader spectrum of business including increased levels of interest bearing lending. This lending has higher levels of impairments compared to interest free finance and this is factored into our pricing to ensure we achieve our targeted risk adjusted return. The impairments and risk adjusted returns in 2017 have been in line with our expectations.
We made significant progress in repositioning the motor book. During 2017 all lenders operating in the sub-prime market reported a trend of increasing impairments. These trends would appear to vindicate our decision to exit sub-prime motor finance after we identified warning signs in this part of the market during the second half of 2016. Notwithstanding the cessation of new sub-prime loan origination, STB has been able to achieve strong lending with lending balances, net of provisions, growing 16.3% to GBP274.6 million at 31 December 2017 (2016: GBP236.2 million). The vast majority of motor finance business now being written is in our two highest quality categories and is performing in line with our expectations. The proportion of lending written in these categories in the final quarter of 2017 was almost double that in the same period in 2016. The average loan to value of this lending is materially lower than has historically been the case. This change in the new business mix is driving a significant shift in the quality of the overall portfolio which should over time drive higher returns. Recognising the run off nature of the sub prime motor book we have increased the level of provision coverage held which has driven an increase in impairments in this portfolio.
As previously announced, the unsecured personal loan (UPL) portfolio was sold in December 2017. STB has a large amount of experience in the UPL market, having been active in that market since STB's formation in 1952, but at times has elected to reduce its exposure, for instance substantially reducing our UPL activity in 2006-08, in response to an unattractive competitor pricing environment at the time. We intend to re-enter the UPL market once the risk adjusted yields available become more attractive.
Business Finance
The Group's SME lending operations have grown strongly, as targeted, and I expect further positive progress in 2018 given we started the year with a new business pipeline which is higher than it has ever been. Total business lending in 2017 increased 31% to GBP824.0 million (2016: GBP631.0 million). Real Estate Finance lending balances increased by 28.8% to GBP580.8 million as at 31 December 2017 (2016: GBP451.0 million). The bias of this portfolio is 70% weighted in favour of residential investment finance. We have continued to adopt a cautious stance towards Central London house building finance. Outside of Central London demand for property development finance has remained robust and the units we have financed have continued to sell well, in a number of cases faster and for higher values than originally expected. The average LTV across the whole portfolio remains less than 60%.
Secure Trust Bank Commercial Finance, the invoice finance division of the Bank, has had a good year and has now funded over GBP1 billion of customers' invoices. Excluding the systemic banks, by size we are now the 5th largest operator in the invoice finance market but given the fragmented nature of the market we have substantial opportunities to continue to grow very strongly in this sector. This is evidenced by customer lending balances, which net of provisions grew 101% to GBP126.5 million at 31 December 2017 (2016: GBP62.8 million). I continue to believe we have one of the most capable teams of invoice financiers in the UK, supported by a scalable modern IT platform. This, coupled with Group management's experience in SME and corporate lending, gives STB a distinct advantage when it comes to structuring transactions and responding rapidly to opportunities.
In Asset Finance we continued to enjoy a good strategic partnership with Haydock Finance during 2017. I disclosed within the CEO's statement in the 2017 interim accounts that we had adopted a more cautious risk appetite in Asset Finance. Customer lending balances, originated by Haydock Finance Limited but written by STB and fully conforming to STB's credit policies have remained flat over the last year at GBP116.7 million compared to GBP117.2 million a year ago. In December 2017 it was announced that manager owners of Haydock had sold a controlling stake to funds managed by Apollo Global Management. This transaction completed in January 2018. We are in discussion with Haydock about the effect of the change of control on our relationship.
Customer base continues to increase and customer satisfaction levels remain very positive
Across our chosen markets we are serving a record number of customers (989,528), an increase of 33% on the total customer base of 742,974 as at 31 December 2016, excluding discontinued operations.
Customer satisfaction is measured in a number of ways. It is reassuring, that 2017 has once again seen us consistently achieve customer satisfaction ratings in excess of 90% across all of our products as measured by FEEFO. We also use Net Promoter Scores to assess our customer service and these scores exhibit similar positive trends to those derived from FEEFO.
I am delighted to confirm that for the fifth year running we have retained the Customer Service Excellence standard. This standard was introduced by the Cabinet Office in 2010 to replace the Kite Mark. This indicates our customer service has been judged to meet Government standards of excellence which are benchmarked against high-performing organisations. The final report made particular reference to the professionalism of our staff, commenting on their openness and positivity about working for STB, as well as citing the work we do for our vulnerable customers and the initiatives we have implemented during 2017 to improve our customer experience. I heartily congratulate my colleagues on this fantastic achievement and echo the Chairman in thanking all of our colleagues for their customer focus and professionalism during a year of very significant change.
Fee based accounts
As expected, the legacy OneBill product which closed for new business in 2009, continues to see customer numbers decline over time. Customer numbers fell to 18,963 by 31 December 2017 compared to 19,995 a year earlier.
Debt Managers Services ('DMS')
The markets for those debt collection agencies fully authorised by the Financial Conduct Authority improved further in 2017 as more operators exited the market or were consolidated within larger entities. These attributes translated into more opportunities for DMS in the third party debt collection and portfolio acquisition spaces during 2017. Overall, the profit before tax of GBP0.6 million in 2017 was well above the GBP0.2 million recorded for the prior year.
Competitive and regulatory environment
In my annual statement last year I was optimistic about the potential that action by regulators could help to improve the competitive positioning of smaller banks in the UK. I am therefore pleased to say that the changes to the capital regulations announced by the Basel Committee on Banking Supervision in December 2017 are welcomed by the Group. The primary changes relate to a) the introduction of more risk sensitivity into the risk weights used in the standardised approach (the approach usually adopted by smaller banks) and b) the imposition of a capital floor whereby the outputs generated by larger banks using the Internal Ratings Board approach will be floored at 72.5% of the risk weights used under the standardised approach.
To put the scale of these changes into context, I should note that as matters currently stand the differing capital approaches allow IRB banks to hold significantly less capital than a smaller competitor for taking the exact same risks. These differences can be 500%+ and are most pronounced in the residential mortgage market and to a lesser extent the Buy to Let (BTL) market. It is evident that the revisions announced, once fully implemented will largely remove the substantial capital advantages enjoyed by the systemic banks in certain lending classes. This is especially so in the mortgage markets referred to above.
At the macro level it is apparent that the regulatory direction of travel is to reduce the capital differentials between the systemic and non-systemic firms which should ultimately bode well for smaller banks. It should also benefit consumers and SMEs by fostering competition thereby creating more innovation and choice and reducing the risks that the taxpayer will need to fund the bail out of failed banks in the future.
Strategic priorities
The benefits of the Group's three strategic priorities of: (i) organic growth, (ii) diversification and (iii) M&A activity were very clear last year. The broad based diversification in the lending portfolios ensured that we were able to undertake a significant strategic repositioning of our risk profile while increasing the overall customer lending balances year on year by 21% and growing statutory pre-tax profits by 32% (on a continuing basis).
The focus for 2018 is on
1. Organic growth in responsible lending across a diverse portfolio of attractive segments
2. Continued investment in broadening our product offerings to customers
3. Pursuing M&A activity on an opportunistic basis
4. Optimising our capital and liquidity strategies
5. Continuing to target delivering profit growth in the medium term to create shareholder value
Our long-term ambition remains to grow a broad based portfolio, balanced across consumer finance, SME finance and residential mortgage lending.
We will continue to grow our Retail Point of Sale (V12) and Motor propositions in the Consumer Finance sector. V12 has delivered five years of record balance sheet and profit growth since being acquired in January 2013. Whilst now a top five player it has a modest market share and considerable potential to continue growing our lending balances which are relatively short term in duration and prime in nature. In addition to writing loans on our own account, V12 will extend the number of retailer relationships benefitting from the dual lending panel scheme which was initially launched with AO.com in Q3 2017.
The market for Motor Finance in the UK is nearly GBP20 billion. This is a highly fragmented and competitive space where we have a GBP0.25 billion share predominantly in non-prime lending. This is an important and profitable line of business for us. We see opportunities to continue to grow our non-prime lending. However we also wish to extend our proposition to target the prime section of the market served by other specialist lenders which we estimate is several GBPbn in scale. It is readily apparent that the lenders in this space enjoy attractive returns on equity. In January 2018 the new Managing Director and Finance Director for our motor finance business commenced their roles and they have been tasked with improving the profitability of the near prime motor business whilst developing our strategy to enter the prime market and grow a sizable business in this space over the next 3-5 years.
We remain committed to supporting the Government policy of building more new homes. Our activities in this space in 2017 were negatively impacted by the 50% increase in the risk weights applied to the capital requirements imposed on all small banks in December 2016. The need to increase lending margins to offset the higher capital costs dampened borrower demand for our development finance loans in 2017. We are exploring ways to address these dynamics. Our Loan to Gross Development Value limits will remain modest to ensure that the borrower has hard equity in any deal and to provide a buffer lest market values fall.
The UK invoice finance and asset finance markets are large, fragmented and growing markets of around GBP20 billion each. We are pleased with the progress made by STB Commercial Finance. We see significant future growth potential and would be interested in acquiring businesses in these spaces if the risk profile and economics of any transaction are attractive.
The mortgage market is exhibiting greater pricing pressures at the moment which I attribute to many lenders seeking to maximise utilisation of the TFS scheme prior to its closure for new lending in February 2018. As we progress through 2018 I expect pricing pressures will ease which will allow us to compete more effectively. As previously disclosed the creation of this new business operation involves up-front investment and attractive returns on equity will take time to materialise whilst we work through the front book: back book dynamic that is a prominent feature of mortgage lending. The Basel Committee changes referred to above should, in time, have a positive effect on returns for lower LTV lending undertaken by smaller banks.
We are seeking to negate the 'J' curve effect via acquisition of existing mortgage lenders and/or portfolios which offer acceptable risk and economic profiles. During 2017 we engaged in a number of discussions relating to inorganic business opportunities but these did not progress to a conclusion that was acceptable to us. Our previous M&A activities have generated considerable shareholder value due in part to the discipline that we apply. We will continue to be disciplined in our approach to opportunities. It is noteworthy that many of the portfolios currently available relate to second charge lending. This is an area where some market practices have drawn regulatory focus and is not a part of the market we wish to operate in.
The Board reviews the Group's capital structure on an ongoing basis and will explore options to optimise the capital base, which could include the raising of Alternative Tier 1 or Tier 2 capital, subject to market conditions and the Board determining that it is advantageous to do so. The Group's ongoing strategy is to significantly grow its lending operations.
Current trading and outlook
We are pleased with the new business momentum which has continued to build as the first quarter progressed and there has been no material change to the underlying performance of the business in the early months of 2018. All of the leading indicators suggest the changes made during 2017 in respect of motor finance credit underwriting and policy will deliver the expected improvements in impairments going forward. As such, we continue to see potential to grow our lending portfolio in line with our ambition.
I am pleased with the revisions made by the Basel Committee in respect of the capital requirements of smaller lenders relative to the systemic firms. Whilst it will take time for the benefits for these changes to be realised, it bodes well for smaller firms.
On one hand the UK faces a period of heightened economic uncertainty with weak consumer confidence and reduced levels of business investment. On the other hand current UK economic fundamentals are solid and the economy is benefiting from the rising tide being created by stronger growth in the US, Asia and Europe. With record employment levels and the prospect of inflation levels subsiding as the effects of the recent appreciation of sterling against the dollar begin to flow through, there are certainly grounds for optimism. It seems likely that the catalyst for a rebound in consumer and business confidence which will drive higher GDP growth will be a positive outcome in the negotiations for the UK's exit from the EU.
Our approach to the market reflects evolving economic conditions and our credit appetite will be kept under review. The benefits of our strategic repositioning should be more visible as we progress through 2018 as the drag effects of the run off sub-prime motor book and the investment in new business operations such as mortgages and the deposit platform ease whilst the SME activities continue to grow.
Our long term strategic objective is to be active in Consumer Credit, SME Finance and Mortgage Lending. This enables flexibility to restrict lending in areas which may be overheating as demonstrated in 2017 and instead allocate capital for more sustainable risk adjusted returns. Notwithstanding the current uncertain economic outlook, I believe there remains considerable scope to pursue our strategic priorities by developing the business model organically and pursuing attractive acquisition opportunities.
Paul Lynam
Chief Executive Officer
21 March 2018
Financial review
Hot Features
Premium
2017 2017 2017 2016 2016 2016
Continuing Discontinued Continuing Discontinued
operations operations Total operations operations Total
Underlying profit
reconciliation GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Interest, fee and
commission income 157.3 8.0 165.3 135.1 22.4 157.5
Interest, fee and
commission expense (27.8) - (27.8) (28.1) (0.1) (28.2)
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Operating income 129.5 8.0 137.5 107.0 22.3 129.3
Impairment losses (33.5) (3.4) (36.9) (23.3) (7.0) (30.3)
Operating expenses (71.3) (0.3) (71.6) (64.3) (7.2) (71.5)
Profit on sale of
NSF shares 0.3 - 0.3 - - -
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Profit before tax 25.0 4.3 29.3 19.4 8.1 27.5
Underlying adjustments
to profit (see below) 2.0 - 2.0 7.9 (2.5) 5.4
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Underlying profit
before tax (including
PLD) 27.0 4.3 31.3 27.3 5.6 32.9
Discontinued operations
- PLD - (4.3) (4.3) - (5.6) (5.6)
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Total underlying
adjustments to profit 2.0 (4.3) (2.3) 7.9 (8.1) (0.2)
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Underlying profit
before tax 27.0 - 27.0 27.3 - 27.3
Underlying tax (5.5) - (5.5) (6.7) - (6.7)
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Underlying profit
after tax 21.5 - 21.5 20.6 - 20.6
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Underlying basic
earnings per share
(pence) 116.4 - 116.4 113.0 - 113.0
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Statutory results
Profit before tax 25.0 4.3 29.3 19.4 8.1 27.5
Tax (5.1) (0.8) (5.9) (5.2) (1.6) (6.8)
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Profit after tax 19.9 3.5 23.4 14.2 6.5 20.7
Gain recognised on
disposal after tax - 0.4 0.4 - 116.8 116.8
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Profit for the period 19.9 3.9 23.8 14.2 123.3 137.5
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Basic earnings per
share (pence) 107.7 21.1 128.8 77.9 676.2 754.1
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Underlying adjustments
to profit
Fair value amortisation 0.9 - 0.9 0.9 - 0.9
Share based incentive
scheme - - - (0.7) - (0.7) Net Arbuthnot Banking Group management recharges - - - 0.2 - 0.2 Transformation costs 0.8 - 0.8 3.4 - 3.4 Costs of moving to Main Market - - - 1.4 - 1.4 Bonus payments made in respect of ELG sale - - - 3.5 - 3.5 Other bonus payments 0.6 - 0.6 - - - Other items relating to ELG sale - - - (0.8) - (0.8) Profit on sale of NSF plc shares (0.3) - (0.3) - - - Discontinued operations - ELG - - - - (2.5) (2.5) -------------------------- ------------ ------------- ----------- ------------ ------------- ----------- Underlying adjustments to profit 2.0 - 2.0 7.9 (2.5) 5.4 -------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Basis of preparation
The Group uses underlying profit for planning and reporting purposes, as it improves the comparability of information between reporting periods. The underlying adjustments to profit relate to non-controllable items or other items that fall outside of the Group's core business activities, as explained further below:
Fair value amortisation relates to the acquisition of V12 Finance Group. The acquisition accounting required identifiable assets and liabilities to be adjusted to their fair value, and these adjustments are subject to amortisation.
The share based incentive scheme movements have been driven primarily by market conditions, specifically the volatility of UK share prices, rather than factors controllable by the Group. In prior years, this charge related primarily to directors and was not considered to be part of the Group's core business activities. Since the launch of a number of new share schemes during 2017, these are now more widely spread across the employees of the Group, and therefore are now considered to be part of core business activities, and therefore are not adjusted for in underlying profit. The adjustment in 2017 in respect of other bonus payments relates to a long term incentive plan that was set up for a small number of employees on the creation of the Commercial Finance business. The scheme is based on profits earned by that business up to the end of 2019, and is payable in 2020.
Arbuthnot Banking Group management charges will no longer be levied following the sale of their controlling interest in the Group, so the adjustment of these items from underlying profit aids comparability.
Transformation costs comprise the costs of setting up the Group's Consumer mortgage operation and of closing the current account and unsecured personal lending products.
The move to the Main Market, bonus payments, profit on sale of Non-Standard Finance plc (NSF) shares and discontinued activities also represent non-core activities, which have therefore been adjusted for to derive underlying profit.
Discontinued operations
On 13 April 2016 the Group completed the sale of its branch based non-standard consumer lending business, the EveryDay Loans Group (ELG), to NSF generating a gain on disposal of GBP116.8 million. Results relating to ELG have therefore been analysed as discontinued operations throughout these Annual Report and Accounts.
On 21 December 2017 the Group sold a portfolio of legacy unsecured personal loans (PLD) to Alpha Credit Solutions 8 S.à.r.l., a company owned by AnaCap Credit Opportunities III LP. Results relating to the portfolio of unsecured personal loans have therefore been analysed as discontinued operations throughout these Annual Report and Accounts. The profit before tax relating to the unsecured personal loan portfolio announced shortly after its sale for the year ended 31 December 2016 and six months ended 30 June 2017, together with its results for the year ended 31 December 2017 on a similar basis, has been adjusted for statutory purposes as follows:
Internal Internal
Profit Non-core cost attributable Statutory Statutory
before items of funds costs profit profit
tax added added added before after
as announced back back back tax Tax tax
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------ -------------- ----------- ----------- -------------- ----------- ----------- -----------
Year ended 31
December 2017 2.4 - 1.5 0.4 4.3 (0.8) 3.5
Six months ended
30 June 2017 1.3 - 0.8 0.3 2.4 (0.5) 1.9
Year ended 31
December 2016 2.1 (0.3) 2.2 1.6 5.6 (1.1) 4.5
------------------ -------------- ----------- ----------- -------------- ----------- ----------- -----------
Unless otherwise stated, the analyses that follow relate to continuing operations, which represents all of the Group's divisions, excluding ELG and PLD.
Key performance indicators (KPIs)
A summary of the KPIs is set out on page 17 of this Financial Review. Definitions of the KPIs, their calculation and the reasons for their use can be found in the Appendix to the Annual report on page 189.
For this reporting period, underlying profit before tax (including PLD) is also presented as, since PLD was disposed of close to the 2017 year end, this aids comparability with the prior year.
Interest, fee and commission income
Interest, fee and commission income is made up of interest receivable, which is predominantly earned on loans and advances to customers, and fee and commission income, which consists principally of weekly and monthly fees from the OneBill, Commercial Finance and Retail Finance products, and commissions earned on debt collection activities in DMS.
Interest receivable from continuing operations was GBP141.3 million for 2017, increasing by GBP22.5 million (18.9%) on 2016, which was driven by the growth of the Group's loan books over the year.
Fee and commission income from continuing operations was GBP16.0 million for 2017, reducing by GBP0.3 million (1.8%) on 2016. The fee income relating to OneBill has continued to decrease year on year, and no fees were earned on the current account product during 2017, as these products have been closed to new business; OneBill in 2009 and current account in 2015. This income has been replaced by increasing levels of fees earned on Commercial Finance and Retail Finance lending, as these books continue to grow.
Interest, fee and commission expense
Interest, fee and commission expenses is made up of interest expense in respect of deposits from customers, and fee and commission expense, comprising mainly fees and commissions on the Commercial Finance and Motor products, and commissions paid on debt collection activities in DMS.
Interest expense was GBP26.7 million for 2017, increasing by GBP0.4 million (1.5%) on 2016. The cost of funding reduced from 2.5% for 2016 to 1.9% for 2017. This reflects the market for funding, in which the Group has continued to be able to replace maturing term deposits with new deposits of the same tenor, but at a lower rate. In addition a greater proportion of new fixed bonds have a lower tenor and this has resulted in the reduction in interest rates of fixed rate products in the deposit book.
The Group's net interest margin reduced from 8.7% in 2016 to 8.1% in 2017 as a result of the repositioning to lower risk lower return lending, partially offset by the reduction achieved in funding costs.
Fee and commission expense has fallen by GBP0.7 million (38.9%). In 2016, this consisted primarily of fees and commissions relating to the current account product, which have ceased following the closure of this product.
Operating income
Operating income increased by 21% to GBP129.5 million.
The net revenue margin for 2017 was 9.1% compared with 10.0% for 2016. The gross revenue margin for 2017 was 11.1% compared with 12.7% for 2016. The reductions in these margins are due to the factors referred to above.
Impairment losses
Impairment losses during the year were GBP33.5 million (2016: GBP23.3 million). This increase is due to the growth of the business and consequent increase in the size of loans and advances to customers, and additional impairment provision in respect of the performance of certain elements of the Motor Finance back book. This performance is expected to improve in future years as better quality assets replace these elements.
The cost of risk for 2017 was 2.4%, compared with 2.2% for 2016. Further analysis of the Group's loan book and its credit risk exposures is provided in Notes 10, 12 and 29.
Operating expenses
Operating expenses from continuing operations have increased, reflecting the investments made in the infrastructure and staff resources of the Group to achieve growth targets, from GBP64.3 million in 2016 to GBP71.3 million in 2017. The Group's cost to income ratio reduced to 55.1% from 60.1% for 2016.
Underlying profit
On a continuing operations basis, underlying profit before tax was GBP27.0 million (2016: GBP27.3 million). When results for PLD are included, underlying profit before tax is down 4.9% to GBP31.3 million (2016: GBP32.9 million).
Taxation
The effective underlying tax rate has fallen to 20.4% (2016: 24.5%). The effective rate in 2016 was impacted by a prior period adjustment of GBP1.8 million. The new Bank Corporation tax surcharge of 8%, which is effective from 1 January 2016, would apply to any future taxable profits of Secure Trust Bank Plc company that were in excess of GBP25.0 million.
Distributions to shareholders
The directors recommend the payment of a final dividend of 61 pence per share which, together with the interim dividend of 18 pence per share paid on 29 September 2017, represents a total dividend for the year of 79 pence per share (2016: 75 pence per share, excluding a special dividend of 165 pence per share paid following completion of the sale of ELG).
Earnings per share
Detailed disclosures of earnings per ordinary share are shown in Note 8 to the financial statements. Basic earnings per share increased by 38.3% to 107.7 pence per share (2016: 77.9 pence), as a result of the increase in profit after tax. The underlying basic earnings per share increased by 3.0% to 116.4 pence per share (2016: 113.0 pence per share).
Summarised balance sheet
2017 2016
GBPmillion GBPmillion
---------------------------------- ----------- -----------
Assets
Cash and balances at central
banks 226.1 112.0
Debt securities held-to-maturity 5.0 20.0
Loans and advances to banks 34.3 18.2
Loans and advances to customers 1,598.3 1,321.0
Other assets 27.9 38.8
------------------------------------ ----------- -----------
1,891.6 1,510.0
---------------------------------- ----------- -----------
Liabilities
Due to banks 113.0 70.0
Deposits from customers 1,483.2 1,151.8
Other liabilities 46.3 52.2
------------------------------------ ----------- -----------
1,642.5 1,274.0
---------------------------------- ----------- -----------
The assets of the Group increased by 25.3% to GBP1,891.6 million, primarily driven by the growth in the Group's loan portfolios and overall cash balances.
The Group measures returns against average assets, average equity and required equity as set out in the KPIs table on page 17. These ratios have all fallen in comparison to the prior year, This is as expected as the Group continues to reposition its lending towards lower risk segments.
The liabilities of the Group increased by 28.9% to GBP1,642.5 million, primarily driven by the increase in deposits from customers, providing funding for the Group's lending activities.
Loans and advances to customers
Loans and advances to customers include secured and unsecured loans and finance lease receivables. After excluding the PLD loan book from the prior year balance sheet, the composition of the 2017 loan book remains broadly consistent with 2016, with the Consumer Finance book being approximately 46% of total lending, and the Business Finance book being approximately 52%. The nascent Consumer Mortgage business currently accounts for 1% of total lending.
Loan originations in the year, being the total of new loans and advances to customers entered into during the year, increased by 16.4% to GBP1,077.1 million (2016: GBP925.3 million). Almost half of the new business volume (GBP520.0 million) was generated by the Retail Finance business. This business has a shorter term on average than the rest of the book, so this new business resulted in a year end increase in the Retail Finance book of GBP126.4 million (38.8%).
Further analyses of loans and advances to customers, including a breakdown of the arrears profile of the Group's loan books, is provided in Notes 10, 11 and 12.
Deposits from customers
Customer deposits include term, notice and sight deposits, as well as the Group's current account and OneBill products. Customer deposits grew by 28.8% during the year to close at GBP1,483.2 million, to fund the increased lending balances. The Group also held GBP113.0 million of borrowings under Bank of England funding schemes at the year-end, being drawn down under the Term Funding Scheme.
Debt Managers (Services) Limited
Debt Managers (Services) Limited (DMS) is the Bank's debt collection business. DMS collects debt on behalf of a range of clients as well as for group companies. It also selectively invests in purchased debt portfolios from fellow subsidiary undertakings and external third parties. DMS was purchased by the Bank is January 2013, since when it has grown its number of debts under management to over 300,000.
In 2017 DMS performed well with revenue increasing by 24% from GBP4.6 million to GBP5.7 million and profit before tax increasing significantly from GBP0.2 million to GBP0.6 million. This was achieved through the development of relationships with new and existing clients and a broadening of service offerings.
Key performance indicators
The following key performance indicators, stated for continuing operations, are the primary measures used by management to assess the performance of the Group:
2017 2016
------------------------------------------------ --------- ---------
Financial KPIs:
------------------------------------------------ --------- ---------
Margin ratios
Net interest margin 8.1% 8.7%
Net revenue margin 9.1% 10.0%
Gross revenue margin 11.1% 12.7%
Cost ratios
Cost of risk 2.4% 2.2%
Cost of funds 1.9% 2.5%
Cost to income ratio 55.1% 60.1%
Underlying profit
GBP27.0 GBP27.3
Underlying profit before tax million million
GBP31.3 GBP32.9
Underlying profit (including PLD) million million
Return ratios
Underlying return on average assets 1.3% 1.6%
Underlying return on average equity 8.9% 9.8%
Underlying return on required equity 13.5% 17.1%
Funding ratios
Loan to deposit ratio 107.8% 109.0%
Total funding ratio 115.5% 110.4%
Non-financial KPIs:
Customer FEEFO ratings (mark out of 5 based
on star rating from 608 reviews (2016:
400 reviews)) 4.7 4.5
Employee survey engagement score (based
on 2017 all staff survey) 78% 85%
Environmental intensity indicator (tonnes
carbon dioxide per GBP1 million group income) 4.2 5.4
------------------------------------------------ --------- ---------
The Remuneration Report, starting on page 84, sets out how executive pay is linked to the assessment of key financial and non-financial performance metrics.
Capital, leverage and liquidity
Capital
The Group's capital management policy is focused on optimising shareholder value over the long-term. Capital is allocated to achieve targeted risk adjusted returns whilst ensuring appropriate surpluses are held above the minimum regulatory requirements. The Board reviews the capital position at every Board meeting.
The Group's regulatory capital is divided into:
-- CET1 which comprises shareholders' funds, after deducting intangible assets and deferred tax assets which have arisen due to losses.
-- Tier 2 capital which comprises the collective allowance for impairment. Under IFRS 9, there is no longer a collective allowance, and therefore at 1 January 2018 the Group will not hold any Tier 2 capital.
The Group's Individual Capital Adequacy Assessment Process ("ICAAP") includes a summary of the capital required to mitigate the identified risks in its regulated entities and the amount of capital that the Group has available. All regulated entities within the Group have complied during the financial year with all of the externally imposed capital requirements to which they are subject.
The Group operates the standardised approach to credit risk, whereby risk weightings are applied to the Group's on and off balance sheet exposures. The weightings applied are those stipulated in the Capital Requirements Regulation.
2017 2016
GBPmillion GBPmillion
----------------------------------- ----------- -----------
Capital
CET1 capital 238.9 227.4
Total Tier 2 capital 4.4 5.3
----------------------------------- ----------- -----------
Total capital 243.3 232.7
----------------------------------- ----------- -----------
Total Risk Exposure 1,446.1 1,264.0
----------------------------------- ----------- -----------
2017 2016
% %
----------------------------------- ----------- -----------
CRD IV ratios
CET1 capital (group consolidated) 16.5 18.0
Leverage ratio 12.3 14.5
----------------------------------- ----------- -----------
An analysis of CET1 capital can be found in Note 32 to the financial statements.
Total Risk Exposure has increased by 14.4% to GBP1,446.1 million reflecting the significant growth in both Business Finance and Consumer Finance Lending, and the increase in the risk weights applied to residential development lending activities from 100% to 150% as advised by the Bank of England in December 2016.
The CET1 capital ratio is the ratio of CET1 capital divided by the Total Risk Exposure. The Group has maintained a robust CET1 capital ratio and this provides a significant capital buffer for continued growth.
Leverage
The Basel III framework introduced a relatively simple, transparent, non-risk based leverage ratio to act as a supplementary measure to the risk-based capital requirements. The leverage ratio is intended to restrict the build-up of leverage in the banking sector to avoid destabilising deleveraging processes that can damage the broader financial system and the economy, whilst reinforcing the risk-based requirements with a complementary simple, non-risk based 'backstop' measure.
The Basel III leverage ratio is defined by the Capital Requirements Regulation as Tier 1 capital divided by on and off balance sheet asset exposure values, expressed as a percentage. The UK leverage ratio framework sets a minimum ratio of 3.0%, which increased to 3.25% on 1 January 2018.
As shown in the table above, the Bank has a leverage ratio at 31 December 2017 of 12.3% (31 December 2016: 14.5%), comfortably ahead of the minimum requirement.
Liquidity
The Group continues to manage its liquidity on a conservative basis by holding High Quality Liquid Assets and utilising predominantly retail funding from customer deposits. In December 2012, Secure Trust Bank was admitted as a participant in the Bank of England's Sterling Money Market Operations under the Sterling Monetary Framework, to participate in the Discount Window Facility. From July 2013, the Group was permitted to draw down facilities under the Funding for Lending Scheme. Funding for Lending Scheme monies were maintained as a liquidity buffer, above that required to support lending. During 2017, these borrowings were repaid by the Group, and exposure to the Funding for Lending Scheme ended. Subsequently, funds were redrawn for a similar purpose under the new less expensive Term Funding Scheme.
At 31 December 2017 and throughout the year, the Group had significant surplus liquidity over the minimum requirements due to its stock of High Quality Liquid Assets, in the form of the Bank of England Reserve Account and UK Treasury Bills. As shown in the table below, total liquid assets increased by 77% from GBP150.2 million to GBP265.4 million, with the High Quality Liquid Assets balance being GBP231.1 million.
2017 2016
GBPmillion GBPmillion
--------------------- ----------- -----------
Liquid assets
Aaa - Aa3 231.1 132.0
A1 - A3 29.3 13.2
Unrated 5.0 5.0
--------------------- ----------- -----------
Liquidity exposures 265.4 150.2
--------------------- ----------- -----------
The Group has no liquid asset exposures outside of the United Kingdom and no amounts that are either past due or impaired.
The Group's Liquidity Coverage Ratio ("LCR"), and other measures used by management to manage liquidity risk, are described in the Principal Risks and Uncertainties section of the Strategic Report.
Business review: Business Finance
Real Estate Finance
Real Estate Finance was formed as a division within the Group in 2013. The division supports SMEs in providing finance principally for residential development and residential investment.
What we do
Residential Development
The Group lends to enable the development of new build property, commercial to residential conversions (including those with permitted development rights) and refurbishment projects.
Residential Investment
The Group lends on portfolios of residential property where the rental income will repay the underlying borrowing over a term period. This excludes the regulated buy to let mortgage sector.
Other lending
The Group has limited appetite for commercial lending (either development or investment) and has limited exposure to mixed development schemes.
How we do it
Financing is typically provided over a term of up to five years with prudent loan to value targets, with a 60% Loan to Gross Development Value to residential house builders. More restrictive policies are implemented from time to time as required; for instance the Group reduced its financing of residential developments in Central London in 2015. The Group's Loan to Gross Development Value / Loan to Value ("LTV") ratios average 58% across all lending areas.
The Real Estate Finance team is staffed by experienced bankers with proven property lending expertise. The team provides full support to customers and introducers over the life of the products.
Revenue and lending performance vs prior years
2017 2016 2015
GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- -----------
Lending revenue 32.3 28.4 20.3
Lending balance 580.8 451.0 368.0
Impairment (gains)/losses (0.2) 0.1 -
--------------------------- ----------- ----------- -----------
2017 performance
The Group has continued to grow its Real Estate Finance business during 2017, with balances up 29% in the year. Growth has continued to be concentrated on Investment business, which grew by 47%, whilst Development lending fell by 2% in the year. This reflected repayments on a number of high-value developments in London, all of which repaid in full, and the impact of higher capital requirements on Development lending, which has limited the amount of new lending the Group was prepared to write. The lower yielding Investment book now represents 72% of the overall portfolio, and this change in product mix explains the lower level of growth in lending revenues in the year compared to balance growth. The increase in balances has not been at the expense of credit quality, with the overall LTV ratio reducing by 1% in the year. No specific losses have occurred, enabling the Group to reduce the overall level of provisions by GBP0.2 million compared to 2016.
Looking forward
The business remains committed to growing the book further in 2018, but remains cautious around credit policy, especially in the light of more uncertain market conditions. Appetite for Development business remains and opportunities to mitigate the capital impact are being investigated, whilst the business will continue to seek to diversify its geographic and product mix to bring further balance to the book.
Asset Finance
Asset Finance was formed as a division within the Group in December 2014.
What we do
The Asset Finance business provides funding to support SME businesses in acquiring commercial assets, such as building equipment, commercial vehicles and manufacturing equipment.
How we do it
The Asset Finance business is operated via a strategic partnership with Haydock, a well-established asset finance company operating across the UK. Haydock provides a full business process outsourcing service to the Group and also assists the Group in sourcing new business and providing support to the Group's clients on an ongoing basis. All of the lending written fully conforms to the Group's credit policies, risk appetite or other specific authorisations.
The current route to market is via introducers. The Group offers hire purchase and finance lease arrangements with terms of up to five years.
Revenue and lending performance vs prior years
2017 2016 2015
GBPmillion GBPmillion GBPmillion
------------------- ----------- ----------- -----------
Lending revenue 8.5 7.8 2.4
Lending balance 116.7 117.2 70.7
Impairment losses 1.0 0.6 -
------------------- ----------- ----------- -----------
2017 performance
The business took the decision in the second half of 2016 to limit its exposure to some SME markets. Accordingly, the level of new business written in 2017 was lower than in 2016, with the overall lending ending broadly flat against the prior year. Income was 9% higher reflecting higher average balances over the year. The business saw lower overall yields in 2017, reflecting the impact of market conditions.
Impairment losses increased by GBP0.4 million in the year. The overall book quality remained strong, with arrears balances reducing to 2.5% of the book at 31 December 2017 compared to 4.3% at the 31 December 2016.
Looking forward
The asset finance division has operated through a partnership with Haydock Finance to date. With the sale of the Haydock business confirmed on 31st January 2018, the business is currently assessing future options.
Commercial Finance
Commercial Finance was formed as a division within the Group in 2014.
What we do
The division specialises in providing a full range of invoice financing solutions to UK businesses including invoice discounting and factoring.
Invoice discounting services provide access to funding and release typically up to 90% of the value of qualifying invoices, in confidence and allowing clients to stay in control of sales ledger management.
Factoring services, where the sales ledger management is passed onto the Group, may also provide access to funding of typically up to 90% of the value of qualifying invoices and often results in the Group managing credit control, cash allocation, statement and reminder letter distribution.
Other assets can also be funded either long or short term and for a range of loan to value ratios alongside other facilities.
How we do it
Commercial Finance complements the broader SME lending proposition which has been developed by the Group. The business also provides SME commercial owner occupiers with finance to buy the property they trade from in conjunction with other financing facilities.
The division has built a strong team of proven business development, credit and operational professionals who have delivered a robust and compliant operational model.
Revenue and lending performance vs prior years
2017 2016 2015
GBPmillion GBPmillion GBPmillion
------------------- ----------- ----------- -----------
Lending revenue 7.2 4.6 1.6
Lending balance 126.5 62.8 29.3
Impairment losses 0.1 0.2 0.3
------------------- ----------- ----------- -----------
2017 performance
The Commercial Finance business continued to drive strong growth, with lending balances more than doubling in the year. Income also grew strongly against a marginal increase in costs. Impairment losses continue to be minimal.
Alongside this excellent performance, the business has continued to focus on its infrastructure. The recruitment of a number of high calibre people has led to a significant strengthening of the team.
Looking forward
The team has built a reputation for high quality service, particularly within the market sectors that the Group is focusing on. As a result, the prospects for future growth are encouraging. To augment this, Commercial Finance is intending to develop a regional footprint which will provide the Group with a more scalable business model.
Business review: Consumer Finance
Retail Finance
Retail Finance includes lending products for in-store and online retailers to enable consumer purchases.
What we do
The Bank's Retail Finance business provides unsecured, prime lending products to the UK customers of its retail partners to facilitate the purchase of a wide range of consumer products across in-store, mail order and online channels. This business is now driven by V12 Retail Finance, which was acquired in 2013 and has provided finance in cooperation with its retail partners for more than 20 years. The V12 point of sale system is used by the Group's retail partners and Retail Finance is administered in V12 Retail Finance's offices in Cardiff.
Retail Finance products are unsecured, fixed rate and fixed term loans of up to 84 months in duration with a standard maximum loan size of GBP25,000. The average new loan is for GBP1,000 over a 24 month term. Lending is restricted to UK residents who have a good credit history and can demonstrate that they can afford to repay the loan.
The finance products are either interest bearing or have promotional credit subsidised by retailers, allowing customers to spread the cost of purchases into more affordable monthly payments.
How we do it
The Group operates an online eCommerce service to retailers, providing finance to customers through an online paperless processing system. This includes allowing customers to digitally sign their credit agreements, thereby speeding up the pay-out process, and removing the need to handle and copy sensitive personal documents through electronic identity verification.
The Group serves retailers across a broad range of retail sectors including cycle, music, furniture, outdoor/leisure, electronics, dental, jewellery, home improvements and football season tickets.
The Group provides finance to customers of a large number of retailers including household names such as Evans Cycles, AO.com, Jessops, Halfords, DFS, Sofology and Watchfinder.
Revenue and lending performance vs prior years
2017 2016 2015
GBPmillion GBPmillion GBPmillion
------------------- ----------- ----------- -----------
Lending revenue 50.7 36.7 24.2
Lending balance 452.3 325.9 220.4
Impairment losses 13.8 9.5 5.2
------------------- ----------- ----------- -----------
2017 performance
The Retail Finance business has continued to grow strongly, with new gross lending volumes increasing to GBP520.0 million (an increase of 31% on the previous year). This has driven a further significant increase in lending assets, which during the year rose to GBP452.3 million (December 2016: GBP325.9 million).
Each of the three largest sub-markets for the business (sports and leisure, furniture and consumer electronics) have contributed to this growth, which as in previous years has been achieved through a combination of gaining increased market share and sector growth. In addition, Furniture and Jewellery finance have seen positive new business levels influenced by the introduction of new retailers into the Retail Finance portfolio.
Lending revenue increased by 38% to GBP50.7 million (2016: GBP36.7 million). Impairment losses were well controlled at GBP13.8 million (2016: GBP9.5 million).
Looking forward
The Group plans continued growth in Retail Finance during 2018 with the focus on acquiring increased market share across its target markets including cycle, music, furniture, outdoor/leisure, electronics, dental, jewellery, home improvements and football season tickets.
To underpin the continued growth, the Group continues to invest in initiatives to further enhance its systems capabilities, to ensure that quality of service to both retailers and customers is maintained or improved. This includes the continued expansion of its Retail Finance workforce.
Motor Finance
Finance is arranged through motor dealerships and brokers and involves fixed rate, fixed term hire purchase arrangements, predominantly on used cars.
What we do
The Group's Motor Finance business began lending in 2008 under the Moneyway brand and provides hire purchase lending products to a wide range of customers including those who might otherwise be declined by other finance companies. This helps the Group's customers to gain the freedom and flexibility that motoring gives to their lives as well as helping introducers to sell more cars.
Motor Finance agreements are secured against the vehicle being financed.
As the Group is lending into the near-prime market the majority of vehicles financed are predominantly volume franchise used cars.
How we do it
The Bank distributes its Motor Finance products via UK motor dealers, brokers and internet introducers. New dealer relationships are established and managed by our UK-wide Motor Finance sales team with all introducers subject to a strict vetting policy, which is reviewed on a regular basis.
The technology platform used allows Moneyway to receive applications online from its introducers, to provide an automated decision, document production through to pay-out to dealer and ongoing in-life management.
Motor lending is administered in the Group head office in Solihull; however the UK motor dealers and brokers are UK-wide.
Lending performance v prior years
2017 2016 2015
GBPmillion GBPmillion GBPmillion
------------------- ----------- ----------- -----------
Lending revenue 47.1 40.5 33.3
Lending balance 274.6 236.2 165.7
Impairment losses 20.8 14.6 7.3
------------------- ----------- ----------- -----------
2017 performance
The Motor Finance business saw a reduction in new business volume from GBP146.8 million in 2016 to GBP142.8 million in 2017. The business narrowed its credit parameters during 2017 in order to reduce potential future impairment losses. During the period the business stopped offering a product in the prime market sector; however the business is examining ways of repositioning a prime offer in the future.
Impairment losses for the year increased from GBP14.6 million to GBP20.8 million reflecting the performance of the sub-prime motor lending discontinued during 2017. The Motor Finance leadership has increased levels of resource and delivered process improvement throughout 2017 within the Collections and Recoveries teams.
Lending assets to customers increased by 16% during the year and lending revenue grew by 16% to GBP47.1 million.
Looking Forward
The Motor Finance business is developing initiatives to enhance system capabilities and to deliver a broader range of products. This is expected to improve the credit quality of the portfolio and drive business growth.
Alongside these initiatives, the business will continue to focus on the non-prime market sector through its existing introducer channel. Following the narrowing of its credit parameters in 2017 the shift in business mix towards lower risk lending is expected to continue driving improvements in overall portfolio quality.
To further support strategic development, the business has made some key appointments to the Motor management team and will continue to strengthen the depth and experience of the team as the business expands.
Personal Lending
Personal unsecured loans are fixed rate, fixed term products with payments received monthly in arrears. Loan terms are between 12 months and 60 months with advances varying from GBP1,000 to GBP15,000. Loans were provided to customers for a variety of purposes including home improvements, personal debt consolidation and for the purchase of vehicles.
In January 2017, the Group announced its intention to cease originating new personal loans and this segment closed to new business. On 21 December 2017, the Group sold the remaining loan portfolio to Alpha Credit Solutions.
Revenue and lending performance vs prior years
2017 2016 2015
GBPmillion GBPmillion GBPmillion
------------------- ----------- ----------- -----------
Lending revenue 8.0 11.2 17.2
Lending balance - 65.5 74.3
Impairment losses 3.4 4.4 4.8
------------------- ----------- ----------- -----------
2017 performance
Lending revenue declined as expected given the run-off of the book. A profit before tax of GBP0.5 million was generated on the sale of the portfolio.
Looking forward
The Group continued to administer the portfolio in the early part of 2018, until the completion of the migration of the portfolio to a third party administrator appointed by the purchaser. The market will continue to be monitored and the Group will consider re-entering it once returns are better aligned with risk.
Business review: Consumer Mortgages
Consumer Mortgages was launched on the 20th March 2017. The division supports residential customers who are underserved by the traditional high street lenders.
What we do
The Group lends to individuals who wish to purchase a property or remortgage their current property.
How we do it
The UK has approximately 4.6 million self-employed and contract workers. In addition, there is a growing population of individuals with complex income and recently restored credit history. These potential customers have been underserved by traditional high street lenders whose operating models are based on high volumes of simple, straight forward cases. Consumer Mortgages provide, through intermediaries, competitive fixed rate mortgage products to people whose personal circumstances do not fit the norm but are still credit worthy individuals with good affordability.
Financing is typically provided over a term of up to 35 years with fixed interest rate periods of 2, 3 and 5 years. The Group's purchase and remortgage products currently have a maximum loan to value of 85% and a maximum loan size of GBP2 million.
The Consumer Mortgage team is staffed by experienced mortgage and banking individuals with proven property lending expertise and underwriting skills. The team provides full support to customers and introducers over the life of the products.
Revenue and lending performance vs prior years
2017 2016 2015
GBPmillion GBPmillion GBPmillion
------------------ ----------- ----------- -----------
Lending revenue 0.1 - -
Lending balance 16.5 - -
Impairment losses - - -
------------------ ----------- ----------- -----------
2017 performance
Since launch the business has grown steadily whilst testing systems and processes to ensure they are resilient. The 2017 emphasis on building a compliant scalable business with excellent customer service has put the Group in a good position to grow the business in 2018.
Looking forward
Consumer Mortgages has steadily built out its distribution partners and the plan is to continue to expand through 2018; in January 2018 the business launched with Legal and General, the largest mortgage club in the UK. Additionally the Group is looking to extend its product range and proposition to customers that are underserved and who are aligned to STB's target market.
Business review: Savings
The Group undertakes its funding primarily via retail savings; attracting balances with competitive rates of interest advertised on best buy tables and applied for and serviced online with UK based telephone support.
What we do
The Group's retail savings consist primarily of notice accounts and fixed term savings, with a small proportion of instant access accounts, available to individuals as well as private businesses. Individuals and business accounts are separately priced to reflect differences in the operational risks and costs.
Accounts are simple in design with savings covered by the UK Financial Services Compensation Scheme up to the specified limits.
The key terms of accounts that are usually offered from time to time are summarised below:
-- Mixture of products ranging from 90 to 180 day notice periods and one to five year fixed term savings.
-- Minimum balance of GBP1,000.
-- Maximum balance of GBP1 million for sole account holders and GBP2 million for business and joint accounts.
-- Annual interest on fixed term accounts, quarterly on notice accounts, with the option to capitalise onto the existing account or pay away for income.
The OneBill account had been in operation for many years and was designed to aid customers with their household budgeting and payments process. Customers provided the Group with details of their annual bills (including rent, utility bills, insurance and telephone line rental) which the Group aggregated and then calculated a fixed weekly or monthly payment schedule to ensure the bills were paid on time. This enabled customers to spread the cost of their bills throughout the year in addition to receiving direct debit discounts and all supplier contact being handled by the Group. The Group charges a monthly fee for this service. The product was closed to new customers in 2009.
How we do it
By virtue of the absence of a branch network, a policy of not cross-subsidising loss making products with profitable ones and an operational model based on digital self-service, the Group is able to offer competitive rates and has been successful in attracting high volumes of deposits, particularly in short timescales, from a wide range of customers. This provides a funding profile which gives additional financial security to the business.
The Group enters the market for deposits as and when it is necessary and maintains a funding strategy of broadly matching the term and tenor of its customer savings to the desired maturity profiles of the Group which are primarily determined by the interest rates and terms offered on loans and advances to customers. This strategy seeks to help mitigate maturity transformation and interest basis risks.
The marketing methods employed include providing information about the savings accounts offered on price comparison websites (for example Moneysupermarket), newspaper best buy tables and articles and via online endorsement (for example Money Saving Expert). In addition to attraction based on interest rate, customers choose Secure Trust Bank based on its financial standing, UK based operation and high standards of cyber and operational security.
The Group is able to adjust the mix of interest rate offered and term or notice period in a manner that allows it to raise funding quickly. As part of this funding strategy, the Group may only offer savings accounts for limited periods of time and, from time to time, may not offer new products to customers at all. The Group will cease offering products when the Group's need for funding at that time has been satisfied.
Savings balances vs prior years
2017 2016 2015
GBPmillion GBPmillion GBPmillion
---------------------- ----------- ----------- -----------
Notice deposits 455.3 373.8 404.9
Fixed Term Savings 1,013.4 762.8 588.7
Sight/Instant Access 14.5 15.2 39.5
---------------------- ----------- ----------- -----------
Total Balances 1,483.2 1,151.8 1,033.1
---------------------- ----------- ----------- -----------
2017 performance
2017 saw the Group further grow its savings balances by GBP331.4 million, 28.8%, through a period of strong demand for its competitive notice and bond products available to new customers and retention offers to existing customers whose loyalty it intends to continue to reward with long term competitive rates.
In October 2017, the Group successfully implemented a new IT platform onto which all existing savings customers were migrated. This new platform enables the Group to further diversify its product range with the future development of ISAs and limited access products, offer customers the ability to self-service their accounts via online banking with the associated cost and efficiency savings and enhance its risk control framework against broader cyber and financial crime risks. At the point of publishing, the Group has already raised over GBP67 million on this new platform.
Looking forward
The Group expects competition for savings balances to heighten through 2018 and into 2019 with the end of the Bank of England's Term Funding Scheme, with those institutions that have relied on this source of funds as a primary method of funding growth in recent years re-entering the market for retail funding and increasing the cost of funds. As such, the Group is continuing to invest in diversification and development of its savings function.
With the successful delivery of the new savings IT platform, the Group is now undertaking a period of gradual development with new capability being rolled out in a controlled manner. This has commenced with the launch of new product options such as capitalised interest and internet banking for new customers.
The next steps will be to further roll out the capability of the new platform to respond to customer feedback and demand. In particular, internet banking will be made available to existing customers and the ability to self-serve accounts introduced. This will include applying for new accounts and providing maturity instructions online, and contacting the Group's UK based customer service team by secure messaging.
The Group's also intends to widen its product range, including the launch of Cash ISAs and limited access accounts. These products will lower the Group's interest expense over time as volumes grow.
Principal risks and uncertainties
Risk overview
On an ongoing basis, the Directors carry out a robust assessment of the principal risks facing the group, including those that would threaten its business model, future performance, solvency or liquidity. The following are considered to be the principal risks facing the Group:
Risk Description
----------------- ------------------------------------
Credit Risk The risk that a counterparty
will be unable to pay amounts
in full when due
----------------- ------------------------------------
Liquidity Risk The risk that the Group will
encounter difficulty in meeting
obligations associated with
its financial liabilities
that are settled by delivering
cash or another financial
asset
----------------- ------------------------------------
Operational Risk The risk of direct or indirect
loss arising from a wide
variety of causes associated
with the Group's processes,
personnel, technology and
infrastructure, and from
external factors other than
the risks identified above
----------------- ------------------------------------
Capital Risk The risk that the Group will
have insufficient capital
resources to support the
business
----------------- ------------------------------------
Market Risk The risk that the value of,
or revenue generated from,
the Group's assets and liabilities
is impacted as a result of
market movements, predominantly
interest rates
----------------- ------------------------------------
Conduct Risk The potential for customers
(and the business) to suffer
financial loss or other detriment
through the actions and decisions
made by the business and
its staff
----------------- ------------------------------------
Regulatory Risk The risk that the Group fails
to be compliant with all
relevant regulatory requirements
----------------- ------------------------------------
Notes 28 to 32 to the financial statements provide further analysis of certain financial risks.
Further details of the principal risks, the changes in risk profile during the 2017 financial year and the Group's risk management framework are given below:
Credit risk
Description Mitigation
-------------------------------------- -------------------------------------
Credit risk is the risk that The Group manages credit
a counterparty will be unable risk through internal controls
to satisfy their debt servicing and through a three lines
commitments when due. Counterparties of defence model. The first
include the consumers to line is the business operation
whom the Group lends on an team with the credit risk
unsecured basis and the SMEs team being second line and
to whom the Group lends on internal audit being the
a secured basis as well as third line. The Board Risk
the market counterparties Committee oversees the Consumer
with whom the Group deals. Credit Risk Committee and
SME Credit Committee, which
are the monitoring committees
for credit risk. The Board
Risk Committee also approves
lending authorities in respect
of SME lending.
Each consumer lending product
has a credit risk committee
which reviews business performance
from new application metrics
through to loss performance
by business type and introducer.
Policy and scorecard changes
are approved at this committee.
The Group has pre-determined
limits laid down by the Board
Risk Committee that reflect
the Bank's appetite for volume
and quality of business by
sector and introducer.
For Real Estate Finance and
Commercial Finance, lending
decisions are made on an
individual transaction basis,
using expert judgement and
assessment against criteria
set out in the lending policies.
Asset Finance lending is
outsourced to Haydock, who
operate in line with the
Group's credit policies and
risk appetite. The Group's
employees based in Haydock's
premises assess this lending
for compliance with policy.
Exposure to credit risk is
also managed in part by obtaining
security. Motor Finance loans
are secured against motor
vehicles. Mortgages are secured
against land/property and
Real Estate Finance and Asset
Finance loans are secured
against property and tangible
assets respectively. Commercial
Finance advances are secured
against a debtor book, inventory
or property if a commercial
mortgage is provided.
Management monitors the ratings
of the counterparties in
relation to the Group's loans
and advances to banks. There
is no direct exposure to
the Eurozone and peripheral
Eurozone countries.
Forbearance
The Group does not routinely
reschedule contractual arrangements
where customers default on
their repayments. It may
offer the customer the option
to reduce or defer payments
for a short period, in which
cases the loan will retain
the normal contractual payment
due dates and will be treated
the same as any other defaulting
cases for impairment purposes.
-------------------------------------- -------------------------------------
Change - Improved
Consumer Finance credit risk
The Group ceased making unsecured personal loans to consumers in January 2017, as a result of the competitive landscape and concerns over general over-indebtedness in the market place. The remaining portfolio was sold in December 2017, as set out in Note 37.
The Group continues to grow its Retail Finance lending book through interest free, interest bearing and Buy Now Pay Later propositions. Pricing for each of these product types is set to ensure that the expected return for each product is achieved. Pricing meetings are held monthly to review performance against pricing expectations for the top 30 introducers. Application trends, arrears and loss trends are monitored monthly by the Credit Risk Team. A new scorecard, built by industry risk modelling experts, was implemented in December 2017 and is expected to ensure further measured growth and improved loss performance in 2018.
The Group's Motor Finance business has continued to grow in 2017. The last two years have seen increased competition in the motor finance arena with several companies competing in the same segments of the market. This resulted in the Group receiving poorer quality customers and higher than expected impairments last year.
The Group is expecting 2018 to be challenging for Motor Finance consumers as the UK witnesses historic high levels of consumer credit for individuals. Secure Trust Bank has taken the decision to de-risk its business and has stopped lending in the three highest risk tiers of business. The Group has implemented a new scorecard which is providing the expected improvement in bad debt rates and an improved distribution of customer quality across lower risk tiers of business. Further improved performance is expected in 2018 as the business written on the higher risk tiers runs off replaced with better quality higher scoring business.
The Group is strengthening the experience of the Motor management team, including the appointment of a new Managing Director and Finance Director. The business is developing its system capabilities and product set, in order to improve the credit quality of the portfolio and drive business growth.
Secure Trust Bank entered the Consumer Mortgage market in 2017. The Group offers basic fixed term mortgage and re-mortgage products for those good quality customers with non-straightforward circumstances that struggle to meet the requirements of high street lenders. All loans are secured on the applicant's property. The Group is making a cautious entry into the market, with lending balances of GBP16.5 million at 31 December 2017.
Business Finance credit risk
Lending to this sector has continued to grow, with continued application of robust risk governance, credit appetite and lending policies, alongside the significant experience within the lending teams. This has served the Group well to date as it continues to assess the potential impacts of the UK's decision to leave the European Union, particularly in the Central London Real Estate Market, where risk appetite remains substantially reduced and lending has been pared back.
A programme to develop probability of default modelling for each of the Business Finance portfolios commenced in 2015 and now following successful testing and calibration has been adopted in full from December 2017.
Business Finance impairments and arrears have remained minimal to date. Management continues to closely monitor the portfolios and the external events and environment that could impact on each of them.
Concentration risk
Management assesses the potential concentration risk from geographic, product and individual loan concentration. Due to the well diversified nature of its lending operations, the Group does not consider there to be a material exposure arising from concentration risk.
Liquidity risk
Description Mitigation
------------------------------------------------------------- --------------------------------------
Governance of liquidity risk
management
Risk tolerance The liquidity requirements
The Group's Board has agreed of the Group are mainly met
a liquidity risk appetite by maintaining funds in its
to ensure that adequate liquidity Bank of England reserve account
resources are held to meet to cover any short-term net
its Overall Liquidity Adequacy outflow requirements. Longer
Rule (OLAR) and to meet the term funding is also in place
minimum Liquidity Coverage for structural liquidity
Ratio (LCR). and funding requirements.
The Group assesses and formally The Group is required to
demonstrates the adequacy meet daily cash flow requirements
of its liquidity through arising from maturing deposits
the Internal Liquidity Adequacy and loan draw-downs, and
Assessment Process (ILAAP). maintains significant cash
As part of the ILAAP, the resources to meet all of
Group conducts regular and these needs as they fall
comprehensive liquidity stress due.
testing to ensure compliance
with OLAR.
------------------------------------------------------------- --------------------------------------
Structure and responsibilities
for liquidity risk management
The Group has a formal governance The Risk Function is responsible
structure in place to manage for ensuring that appropriate
and mitigate liquidity risk risk management processes
on a day to day basis. The and controls are in place,
Board sets and approves the and that they are sufficiently
Group's liquidity risk management robust, so as to ensure that
strategy. The ALCO, comprising key risks are identified,
senior management and executives assessed, monitored and mitigated.
of the Group, meets monthly
to review liquidity risk
against set thresholds and
risk indicators including
early warning indicators,
liquidity risk tolerance
levels and ILAAP metrics.
These metrics are managed
on a day-to-day basis by
the Group's treasury function.
------------------------------------------------------------- --------------------------------------
Internal liquidity reporting
Liquidity metrics are monitored The primary measure used
daily through daily liquidity by management to assess the
reporting and monthly through adequacy of liquidity is
ALCO. Metrics are also included the Overall Liquidity Adequacy
in the Monthly Information Rule (OLAR), which is the
pack tabled at the Group's Board's own view of the Group's
Executive Committee (Exco), liquidity needs as set out
Board Risk Committee and in the Board approved ILAAP.
the Board.
------------------------------------------------------------- --------------------------------------
Communication of liquidity
risk strategy, policies and
practices across business The Group's approach to managing
lines and with the Board liquidity is to ensure, as
The Group's ALCO is responsible far as possible, that it
for implementing and controlling will always have sufficient
the liquidity risk appetite liquidity to meet its liabilities
established by the Board. when due, under both normal
ALCO monitors compliance and stressed conditions,
with the Group's policies and can fund its assets at
and oversees the overall reasonable cost and without
strategy, guidelines and incurring unacceptable losses
limits so that the Group's or risking damage to the
future plans and strategy Group's reputation through
can be achieved within risk a failure to meet its obligations.
appetite.
------------------------------------------------------------- --------------------------------------
Funding strategy
The Group's funding risk The Group maintains at all
appetite is to ensure that times liquidity resources
the Group has access to stable which are adequate, both
funding markets and is not as to amount and quality,
reliant on any single source to ensure that there is no
of funding. The Group is significant risk that its
mainly funded by capital liabilities cannot be met
and customer deposits. The as they fall due. The Group
Group also has limited borrowings maintains a buffer of unencumbered
under Bank of England funding High Quality Liquid Assets
schemes but does not have (HQLA) that is available
other direct exposures to to meet its liquidity requirements.
wholesale markets. Funding
strategy is managed centrally.
------------------------------------------------------------- --------------------------------------
Liquidity risk mitigation
techniques The Group's liquidity risk
The Group seeks to mitigate appetite is to ensure that
liquidity risk through a adequate liquidity resources
number of strategies and are held to withstand all
processes: known reasonable combinations
* The diversification of its deposit and loan products; of idiosyncratic and market
risks for up to 60 days.
* Offering depositors competitive interest rates to The aim is not to measure
reduce churn and volatility; liquidity with a single metric
but rather a range of principles
and metrics which, when taken
* Contractual repayment term matching of a monitored together, helps ensure that
proportion of its loan and deposit book; the Company's liquidity risk
is maintained at an acceptable
level.
* Acquiring funding through lower value, higher volume
deposits;
* Monthly ALCO meetings reviewing early warning
indicators and tolerances of all relevant balance
sheet items;
* Access to Bank of England liquidity schemes;
* Holding adequate levels of High Quality Liquid Assets
with a high proportion of cash in the Group's Bank of
England Reserve Account.
------------------------------------------------------------- --------------------------------------
Stress testing
The key risk drivers identified An integral component of
in the Group's Individual the approach to liquidity
Liquidity Adequacy Process risk management is stress
as being applicable to the testing, some of which is
Group are: prescriptive using very detailed
* Retail Funding: the responsiveness of customer rules and guidance issued
deposits to changes in a bank's credit worthiness; within prudential regulations
and reported within regulatory
returns.
* Intraday Liquidity Risk: changes in liquidity
intraday, for which additional liquidity is held;
* Pipeline Risk: exposure to undrawn loan commitments. In addition to the regulatory
prescribed stress testing,
the Group undertakes its
own stress tests. The Board
The Group uses various short approves limits against both
and medium term forecasts regulatory and internal stress
to monitor future liquidity testing requirements.
requirements and these include An integral component of
stress testing assumptions the approach to liquidity
to identify the required risk management is stress
levels of liquidity. Stress testing, some of which is
testing is typically performed prescriptive using very detailed
on a daily basis and levels rules and guidance issued
of liquidity under stress within prudential regulations
are forecast regularly and and reported within regulatory
monitored by ALCO. returns.
------------------------------------------------------------- --------------------------------------
Contingency funding plans
If for reasons which may The Liquidity Contingency
be beyond the business' control, Plan (LCP) forms part of
the Group were to encounter the Group's risk management
a significant and sustained framework, linking the Group's
outflow of deposits or other Internal Liquidity Adequacy
stress on the Group's liquidity Assessment Process (ILAAP)
resource, a Liquidity Contingency to the Recovery Plan and
Plan (LCP) is maintained Resolution Plan on a consistent
to ensure the Group is able basis.
to maintain sufficient liquidity
to remain a viable independent The integration of the LCP
financial institution following to the Recovery Plan, Resolution
a severe liquidity stress Plan, ILAAP and ICAAP is
event. achieved through the use
of consistent early warning
indicators and invocation
trigger points that are regularly
monitored and reported against.
------------------------------------------------------------- --------------------------------------
Change - STABLE
The Group has continued to attract new fixed and variable rate deposits to broadly match the term lending by the Group. Continuity of funding was not impacted by the transition to the new deposits platform, which is now in place and will broaden the funding options available.
The Group held liquidity which allowed it to exceed its OLAR and LCR requirements throughout the year. The Funding to Loans ratio at 31 December 2017 was 115.5% (2016: 110.4%).
Operational risk
Description Mitigation
---------------------------------------- -------------------------------------
Operational Risk is the risk The Group has adopted an
that the Group may be exposed Operational Risk Policy and
to direct or indirect loss Framework designed in accordance
arising from inadequate or with the 'Principles for
failed internal processes, the Sound Management of Operational
personnel, technology/ infrastructure, Risk' issued by the Basel
or from external factors. Committee on Banking Supervision.
The scope of Operational The approach ensures appropriate
Risk is broad and includes governance is in place to
Business Process, Business provide adequate and effective
Continuity, Third Party, oversight of the Group's
Financial Crime, Change, operational risk. The governance
Human Resources, Information framework includes the Board
Security and IT Risk, including Risk Committee and Group
Cyber Risk. Operational Risk Committee.
The Group has a defined set
of qualitative and quantitative
operational risk appetite
measures. Quantitative measures
cover operational losses,
complaints, key operational
risks, systems availability
and information security.
The appetite measures are
reported and monitored on
a monthly basis.
---------------------------------------- -------------------------------------
Change - IMPROVED
The improvement of the status of this risk is driven by the Group's continued investment in resource, expertise and systems to support the Operational Risk Framework and Policy. This Framework defines and facilitates the following activities:
-- A biannual Risk and Control Self Assessments process to identify, assess and mitigate risks across all business units through improvements to the control environment.
-- The Governance arrangements for managing and reporting these risks. -- All risk appetite measures and associated thresholds and metrics.
-- An incident management process that defines how incidents should be managed and associated remediation, reporting and root-cause analysis.
Key Risk themes of Operational Risk focus in 2017 include:
-- Supplier management - The Group uses a number of third parties to support its IT and operational processes. The Group recognises that it is important to effectively manage these suppliers and has throughout 2017 introduced a suite of standard controls for all its material suppliers to reduce the risk of operational impacts on these critical services.
-- IT resilience - Having adequate and effective servers, networks and storage systems. The Group tested its disaster recovery and business continuity processes in 2017 and further improved the processes of identifying, assessing and managing its critical IT assets and processes.
-- Information security and cyber risk - The Group has maintained focus on ensuring the effective management of risks arising from a failure or breach of its information technology systems that could result in customer exposure, business disruption, financial losses, or reputational damage.
Cyber risk continues to evolve and is covered in more detail in the 'Strategic and emerging risks' section below.
Capital risk
Description Mitigation
-------------------------------- -------------------------------------
Capital risk is the risk The Group's capital management
that the Group will have policy is focused on optimising
insufficient capital resources shareholder value, in a safe
to meet minimum regulatory and sustainable manner. The
requirements and to support Board regularly reviews the
the business. The Group adopts current and forecast capital
a conservative approach to position to ensure capital
managing its capital and resources are sufficient
at least annually assesses to support planned levels
the robustness of the capital of growth.
requirements as part of the
Group's Internal Capital In accordance with the EU's
Adequacy Assessment Process Capital Requirements Directive
('ICAAP'). IV ('CRD IV') and the required
parameters set out in the
EU's Capital Requirement
Regulation, the Group maintains
an ICAAP which is updated
at least annually. The ICAAP
is a process that brings
together the management framework
(i.e. the policies, procedures,
strategies and systems that
the Group has implemented
to identify, manage and mitigate
its risks) and the financial
disciplines of business planning
and capital management.
Not all material risks can
be mitigated by capital,
but where capital is appropriate
the Board has adopted an
approach to determine the
level of capital the Group
needs to hold. This method
takes the Pillar 1 capital
formula calculations (standardised
approach for credit, market
and operational risk) as
a starting point, and then
considers whether each of
the calculations delivers
a sufficient capital sum
adequately to cover management's
assessment of anticipated
risks. Where it is considered
that the Pillar 1 calculations
do not reflect the risk,
an additional capital add-on
in Pillar 2 is applied, as
per the Individual Capital
Guidance issued by the PRA.
A complete assessment of
the Group's capital requirement
is contained in its Pillar
3 disclosures. Pillar 3 disclosures
for the Group for the year
ended 31 December 2017 are
published as a separate document
on the Group's website.
-------------------------------- -------------------------------------
Change - STABLE
Stringent stress tests are performed to ensure that capital resources are adequate over a future three year horizon. At 31 December 2017, the CET1 Ratio was 16.5% (2016: 18.0%) and the Leverage Ratio was 12.3% (2016: 14.5%) on a group consolidated basis.
Both ratios are significantly better than regulatory requirements. The Group capital resources increased during the year to GBP243.3 million as at 31 December 2017 (31 December 2016: GBP232.7 million) on a group consolidated basis.
The basis of consolidation has been updated from a solo-consolidated basis to a Group consolidated basis following the Arbuthnot Banking Group shareholding in Secure Trust Bank Group reducing to 18% in June 2016. As a result, all subsidiaries of Secure Trust Bank PLC are now included in the Group's capital resources and requirements, whereas previously the V12 and DMS legal entities were excluded. The 2016 comparative ratios above have been updated accordingly.
The Group has elected to adopt transitional provisions in respect of the implementation of IFRS 9, as set out by the European Banking Authority. These provisions allow the capital impact of the standard to be phased in over a five year period. Further details are provided in Note 29.
Market risk
Description Mitigation
---------------------------------- ----------------------------------
For the Group, market risk The Group's risk management
is primarily limited to interest framework, policies and
rate risk, being the potential procedures are regularly
adverse impact on the Group's reviewed and updated to ensure
future cash flows from changes that they accurately identify
in interest rates arising the risks that the Group
from the differing interest faces in its business activities
rate risk characteristics and are appropriate for the
of the Group's assets and nature, scale and complexity
liabilities. When interest of the Group's business.
rates change, the present
value and timing of future Market risk is managed by
cash flows change. This in the Company's Treasury function
turn changes the underlying and is overseen by the Assets
value of the Group's assets, and Liabilities Committee
liabilities and off-balance ('ALCO'). The Group does
sheet instruments and hence not take significant unmatched
its economic value. Changes positions and does not operate
in interest rates also affect a trading book.
the Group's earnings by altering
interest-sensitive income The key measure the Group
and expenses, affecting its uses to monitor the risk
net interest income. is an Interest Rate Sensitivity
Gap analysis which informs
The principal currency in the Group of mismatched interest
which the Group operates rate risk positions.
is Sterling, although a small
number of transactions are The Group monitors the interest
completed in US dollars, rate mismatch on a monthly
Euros and other currencies basis. The main test employed
in the Commercial Finance is a 200bps interest rate
business. All currency exposures shock across all interest
are swapped to Sterling. indices on a parallel basis.
The Group has no significant The Group maintains such
exposures to foreign currencies exposures within the risk
and therefore there is no appetite set by the Board.
significant currency risk.
---------------------------------- ----------------------------------
Change - STABLE
The mismatch in terms of interest rate repricing characteristics of the Bank's assets and liabilities creates exposure to interest rate risk that requires management and measurement within risk limits.
An effective risk management process that maintains interest rate risk within prudent levels is therefore essential to the safety and soundness of the Bank.
The Group measures Earnings at Risk (EaR) and Value at Risk (VaR), predominantly by monitoring the Interest Rate Sensitivity Gap. Interest rate risks inherent in new products or through changes to the terms and conditions of existing products were assessed over the course of the year. The Group remained within risk appetite in respect of interest rate risk throughout the year.
Conduct risk
Description Mitigation
--------------------------------- ------------------------------------
The Group defines conduct The Group takes a principles
risk as the risk that the based approach and includes
Group's products and services, retail and commercial customers
and the way they are delivered, in its definition of 'customer',
result in poor outcomes for which covers all business
customers, or harm to the units and both regulated
Group. This could be as a and unregulated activities.
direct result of poor or
inappropriate execution of Across the Group, conduct
the Group's business activities risk exposure is managed
or staff behaviour. via monthly review and challenge
of key risk indicators ('KRIs')
at the Customer Focus Committee,
which oversees complaints,
FEEFO and Customer Service
Excellence as well as conduct
risk. Conduct risk management
information is also reviewed
at Executive Committee meetings
at product level.
The Key Risk Indicators vary
across the business units
to reflect the relevant conduct
risks; the business units'
key risk indicators are aggregated
for measurement against the
Group's risk appetite, which
is reported to the Group
Executive Committee and the
Board.
--------------------------------- ------------------------------------
Change - STABLE
Review of conduct risk and controls with the business units is managed through the regular cycle of risk and control self-assessments, in line with other operational risk categories.
Monthly review and challenge of Key Risk Indicators in the Customer Focus Committee provides oversight of the first line activities to assure senior management that the first line are identifying conduct risks when they arise and taking appropriate actions to mitigate them.
Training on conduct risk continues to be delivered to new starters, with an eLearning module completed by all staff during the year.
Regulatory risk
Description Mitigation
------------------------------------- ----------------------------------
Regulatory risk is the risk The Group seeks to manage
that the Group fails to be regulatory risks through
compliant with all relevant the Group wide risk management
regulatory requirements. framework. The Group Compliance
This could occur if the Group and Regulatory Risk Committee
failed to interpret, implement is responsible for reviewing
and embed processes and systems and monitoring regulatory
to address regulatory requirements, changes, and ensuring that
emerging risks, key focus appropriate actions are taken,
areas and initiatives or and also reviewing and approving
deal properly with new laws the compliance risk management
and regulations. framework. Further details
are given on page 61.
------------------------------------- ----------------------------------
Change - STABLE
In the year ended 31 December 2017, the Group has delivered changes to address new and revised regulations and legislation that have come into force, including changes to Regulatory References requirements, conduct rules for Non-Executive Directors, change to the FSCS Depositor Protection Limits and completion of the amendments necessary for the revised Payment Services Directive 2.
A number of formal projects and initiatives are in place to address forthcoming regulatory changes in 2018 including extending the Senior Managers and Certification Regime; Insurance Distribution Directive; General Data Protection Regulation; and PRA/FCA ring fencing.
Strategic and emerging risks
In addition to the principal risks above, the Board considers strategic and emerging risks, including key factors, trends and uncertainties which can influence the results of the Group. These risks include the following:
Macroeconomic environment and market conditions
The Group operates exclusively within the UK and its performance is influenced by the macroeconomic environment in the UK. The economy affects demand for the Group's products, margins that can be earned on lending assets and the levels of loan impairment.
Growth in the UK economy slowed in 2017, largely due to economic uncertainty. This uncertainty is affecting business investment, export growth and causing a moderation in UK household spending. However, current UK economic fundamentals remain strong and employment levels are at a record level. The longer term effects of the vote will become clearer once the nature of the UK's exit from the European Union has been clarified.
The availability of liquidity from the BOE's Funding for Lending and Term Funding Schemes have also impacted on lending markets, driving aggressive pricing from some lenders who have used this funding to build scale. The closure of these schemes in February 2018 will push up funding costs. The Group has not excessively used these schemes, and expects market pricing to return over time to levels where the Group has been operating, therefore strengthening the Group's competitive position.
The Financial Policy Committee, PRA and FCA have all expressed concerns over 2017, regarding the UK consumer credit market. The Group shares these concerns, perceiving there to be a mispricing of risk, and has reacted accordingly by exiting markets most affected. As a consequence, the Group is not exposed to the majority of the issues highlighted by the regulators.
The repositioning of the Group's lending books, towards lower risk areas, leaves it well placed to navigate this period of uncertainty. The Group will continue to review its credit risk appetite as economic and market conditions evolve.
On 1 November 2017, the Monetary Policy Committee announced a base rate rise, for the first time in a decade, to 0.5%, in order to head off rising inflation. The overshoot of the inflation target reflects the effects on import prices of the referendum-related fall in sterling. Rising interest rates may expose borrowers to difficulties making interest payments, however the continuing low base rate position has a mitigating effect on credit risk. The Group is less exposed to the credit risk related impact of interest rate changes than the systemically important banks and building societies, through its fixed rates on both its assets and liabilities.
House prices have continued to rise in 2017; however confidence in the housing market is now reducing largely due to the uncertainty described above and concerns from new buyers over job security and the ability to raise deposits. The UK housing stock remains in short supply. The Group will continue to monitor the mortgage market in connection with its Consumer mortgage product.
Regulatory and Capital position
The Group continues to monitor regulatory developments in respect of capital requirements for banks. There has been acknowledgement that the current approach, whereby standardised risk weights under Pillar 1 are assessed separately to and then combined with Pillar 2 add ons, can lead to excessive capital requirements. The impact of a more judgemental approach should become clearer in 2018.
The Bank of England has announced an increase in the UK countercyclical buffer, from zero to 0.5% of risk weighted assets from June 2018 with a further increase to 1% following in November 2018. The capital conservation buffer also increases over the Group's forecast period. These increases in buffers are factored into the Group's capital planning.
Information Security and Cyber Risk
The Group has continued to maintain focus on managing risks arising from a failure or breach of its information technology systems or via our supply chain.
The Group recognises that financial services organisations face an increasing number and variety of cyber-attacks that could result in customer exposure, business disruption, financial losses, legal penalties or reputational damage.
Continuously improving resilience against emerging cyber threats requires an understanding of the tactics and motivations of potential attackers. The Group adopts strategies and comprehensive technical and organisational measures to keep abreast of these tactics and to prevent, detect, disrupt and facilitate rapid recovery from attacks.
Model Risk and the impact of IFRS 9
The Group has significantly enhanced its modelling capability in response to the introduction of IFRS 9. From 1 January 2018 onwards, the Group's impairment provisions will be estimated using a suite of models that use historical and forward looking data, with associated judgements and assumptions, to derive the probability of default (PD), loss given default (LGD) and exposure at default (EAD). In addition, the models used to derive the effective interest rate of the Group's lending portfolios, and hence drive the release of income, are being upgraded.
Material elements of the Group's financial statements will therefore increasingly be impacted by these models. The Group has taken steps to mitigate the associated model risk: the risk that a financial model fails to perform effectively and produces an inaccurate result. A Model Governance Committee has been established, comprising members from the Finance and Risk teams, to ensure the Group's models are being developed and maintained subject to adequate controls, including validation of model outputs. This committee has approved the usage of the Group's IFRS 9 models.
The introduction of IFRS 9 also brings an element of uncertainty into banks' reporting. This is a complex accounting standard which has required all banks to develop new models. This increases the risk that firms will account for impairments using a wide variety of assumptions and model methodologies, with consequent inconsistency in the reported results that could take a number of years to align. Significant disclosure is required in order to assist the understanding of IFRS 9 results, and the Group is well progressed in developing this disclosure for use in its 2018 interim report.
Going concern and viability
Going concern
In assessing the Group as a going concern, the directors have given consideration to the factors likely to affect its future performance and development, the Group's financial position and the principal risks and uncertainties facing the Group, as set out in the Strategic Report. The Group uses various short and medium term forecasts to monitor future capital and liquidity requirements and these include stress testing assumptions to identify the headroom on regulatory compliance measures.
The directors are satisfied that the Company and the Group have adequate resources to continue to operate for the foreseeable future as going concerns. For this reason they continue to adopt the going concern basis in preparing these financial statements.
Business viability
In accordance with provision C2.2 of the UK Corporate Governance Code, the directors confirm that there is a reasonable expectation that the Company and the Group will be able to continue in operation and meet their liabilities as they fall due, for the period up to 31 December 2020. The assessment of ongoing viability covers this period as it is the Group's planning horizon and the period covered by the Group's stress testing.
Given the Group's strong capital and liquidity position at 31 December 2017, reduction in exposure to higher risk lending, continuing growth in profit and positive trading outlook, the directors are confident of the Group's viability over the longer term. However, the inherent uncertainties regarding the economic, regulatory and market environment that the Group operates in may compromise the reliability of longer range forecasts.
The directors have based the assessment on:
-- The latest annual budget, which contains information on the expected financial position and performance for the period to 31 December 2020 and by considering the potential impact of the principal risks facing the Group, as set out on pages 32 to 42.
-- The analysis of key sensitivities, undertaken as part of the budget process, which could impact on profitability for the forthcoming financial year. Assumptions made to calculate risk weighted assets and capital requirements are clearly stated and additional scenarios are modelled to demonstrate the potential impact of risks and uncertainties on capital.
-- The Group's ILAAP, which uses stress scenarios to assess the adequacy of liquidity resources.
-- The Group's ICAAP, which considers a macroeconomic stress and a severe shock scenario in order to assess the adequacy of capital resources.
-- Consideration of the other principal risks as set out on pages 40 to 42, to identify any other severe but plausible scenarios that could threaten the Group's business model, future performance, solvency or liquidity.
In making this statement, the Board has sought input from the Audit Committee and the Risk Committee.
Corporate responsibility
The Group has a clearly defined commitment within the corporate strategy 'To make this a great Bank for customers and colleagues'.
The Group strategy is underpinned by six core values that reflect the behaviours required to deliver the Group's promise to deliver straightforward and transparent banking. Exceeding customer expectations and living the Group's values are at the heart of the Group culture and as such it rewards innovative and inspiring behaviours and sets clear expectations around staff being trustworthy, compliant and safe. The Group also always seeks to act as a responsible business. Further details on how the Group meets its commitments are set out below.
Responsible business
The Group takes its commitment to operate as a responsible business very seriously and recognises that this goes far beyond the adherence to legal requirements and best practice. Measures are in place to assess the impact of the Group's business model and the delivery of its services on its customers, and the organisation strives to make a positive contribution to the wider community in which it operates. The Board does not consider there to be any environmental social or governance matters that are significant to the business of the Group.
The Group sees its ability to have a positive effect on social and community issues as an extension of its customer centric culture and colleagues are encouraged to make a positive contribution through a number of community focused schemes. Last year the Group supported 32 charities through activities run by its Charity Committees. The Charity Committees empower colleagues from different business areas to drive forward a wide range of successful charitable activities. This year the Group also doubled the available funding for its pound for pound matching scheme which allows colleagues to increase the money they raise for charity. The enthusiasm of colleagues to help good causes resulted in a wide range of fundraising activities which generated over GBP50,000 for charities in 2017.
Following the launch of a community volunteering scheme in 2016 which allows employees to take one day paid leave to make a difference to charities or community groups in their area, nearly a thousand hours were donated to worthy causes during the 2017. Group staff have taken part in a wide range of activities and made a positive contribution to many charities and community projects.
Greenhouse Gas emissions from our operations
As a financial services provider, the Group's operations do not have a significant impact on the environment. The Group reports on its greenhouse gas emissions and, to ensure its environmental impact remains low, has included it as a key performance indicator. The key performance indicators are shown on page 17.
The Group's report on all of the emission sources required under the Companies Act 2006 (Strategic Report and Directors' Report) Regulation 2013 is set out below. This is the second Greenhouse Gas report that the Group has issued under the above Regulation and only emission sources where accurate and consistent data is available for the complete reporting period have been included.
Scope 1 emissions resulting from the combustion of natural gas for heating buildings and Scope 2 and 3 emissions associated with the consumption of purchased electricity are included within the GHG report. Scope 1 emissions resulting from the use of company owned/leased vehicles have been excluded. All Scope 3 sources, except for purchased electricity transmission, distribution emissions and grey fleet have also been excluded from this report. Systematic procedures have also been established to collect accurate data for Scope 1 company vehicle and fugitive refrigerant emissions with effect from 1st January 2017. The Group has set 2017 as the GHG baseline year and reports from 2018 will show emissions for the current year and for each subsequent year following the baseline year.
In compiling this GHG report, the GHG Protocol Corporate Accounting and Reporting Standard (revised edition) and energy supplier invoice data have been used. Greenhouse gas emissions are reported as a single total, by converting them to the equivalent amount of CO2 using emission factors from the UK Government's GHG Conversion Factors for Company Reporting 2017.
The Group's Greenhouse Gas emissions are shown below.
2017 2016
Carbon Carbon
dioxide dioxide
(tonnes) (tonnes)
--------------------------------------------------- ---------- ----------
Scope 1 - direct emissions from combustion
of fuel 26.7 93.0
Scope 2 - indirect emissions from electricity
purchased 501.7 555.6
Scope 3 - other indirect emissions from purchased
electricity transmission and distribution 152.7 50.3
--------------------------------------------------- ---------- ----------
Total scope 1 to 3 emissions 681.1 698.9
--------------------------------------------------- ---------- ----------
Environmental intensity indicator (tonnes
carbon dioxide per GBP1 million group income) 4.2 5.4
--------------------------------------------------- ---------- ----------
Human rights and tackling modern slavery
The Group is subject to the European Convention on Human Rights and the UK Human Rights Act 1998. The fair treatment of customers is central to the Group's strategy and values, and the Group opposes all forms of discrimination.
The Group is committed to tackling modern slavery and human trafficking and has taken steps to ensure it is considered and addressed in its business and throughout its supply chain, consistent with its obligations under the Modern Slavery Act 2015. The full Board statement on Slavery and Human Trafficking can be found on the Group's website:
www.securetrustbank.co.uk
Employees
Investors in People
Secure Trust Bank Group currently holds the highly coveted Investors in People Gold Accreditation, which the Group is extremely proud of. This internationally recognised accreditation is held by over 10,000 organisations worldwide and defines what it takes to lead, support and manage people well for sustainable results.
The Investors in People Standard is underpinned by a rigorous assessment methodology and a framework which reflects the very latest workplace trends, essential skills and effective structures required to outperform in any industry.
The Investors in People review process is one of a number of methods used to gain the views and opinions of employees to inform the Group's People Strategy and is a key element of the Group's open and transparent culture.
Employee Voice
In addition to gaining feedback through Investors in People the Group conducts regular employee opinion 'Your Voice' surveys.
Towards the end of 2017, the Group again engaged an independent specialist to run the annual Your Voice employee engagement survey, and 81% of employees participated (2016: 84%). Although the results showed a small decline in the employee engagement score (78% versus 85% from the previous year), across the majority of key survey areas the scores were significantly higher than the external benchmark, which is drawn from other similar sized companies in the Group's sector. Of particular note were the following results:
-- 95% of employees understand the Secure Trust Bank values.
-- 83% of employees stated that they believe they can make a valuable contribution to the Group.
-- 85% of employees consider customers to be central to the Group's strategy.
The presentation of this year's survey results to employees sets out the progress made in addressing issues raised in the previous survey. Actions plans will be developed during 2018 to address areas of improvement identified from this year's survey.
The Bank also operates an Employee Council which has department representatives elected by their colleagues. The Council meets on a regular basis and encourages a two way process of communication between employees and senior managers. The aim of the Employee Council is to further promote employee engagement and provide a structured forum for teams to shares their views.
Various initiatives have been implemented following feedback from this group. Most notably in 2017 were the enhancements to the relaunch of 'Boost' which is the Group Employee benefit and discount platform.
Employee Development
Continued investment in employee development remains a priority with over 70 external qualifications recognised in 2017. In addition to the qualifications completed the Group had another record number of employees sign up to study towards an external Banking Qualification as part of their career development. The Banking Qualifications are delivered by the London Institute of Banking & Finance (previously the IFS) and are available to all employees.
Banking Qualifications are just one of number of opportunities created to study towards a range of professional qualifications which range from Apprenticeships to MBAs. In Partnership with the National Skills Academy for Financial Services the Group commenced a development programme for Operational Team Leaders that enables them to achieve the Institute of Leadership and Management Level 3 qualification. This programme is designed to provide additional skills in core leadership disciplines for these critical customer facing roles.
Secure Trust Bank Group has been awarded Platinum Approved Status for both professional and trainee development by the Association of Chartered Certified Accountants, one of the world's leading professional accountancy bodies. The accreditation joins the Chartered Institute of Management Accountants Premier Partner status which is already held by STB Group and demonstrates the high industry standards of both accountancy training schemes, and continuing professional development programmes, offered by the Group.
External development and wider career skills development is supported by a comprehensive in-house learning and development programme and induction process. To encourage teams to learn new skills and embrace learning opportunities the Group continues to participate in National Learning at Work Week where employees showcase their wider talents or participate in workshops on a wide range of engaging topics. In 2017 the Group also launched the Connect & Learn scheme as a result of feedback from the Your Voice employee survey. This scheme allows colleagues to draw on the expertise in other areas of the Group by setting up structured sessions with other teams. The focus on employee development has helped result in a record 90 employees promoted or moved in to new roles during the year.
The Group continues to take steps to address the wider needs and concerns of its staff. Existing employee support services have been supplemented by new initiatives, including further 'Wellbeing at Work' activities which provide a focus on employees' mental and physical health. A number of People Managers attended training in partnership with Mind and Samaritans, and Mental Health Awareness training now forms an integral part of the core development programme for all People Leaders.
Employee engagement and recognition
Research has consistently shown a clear link between enhanced levels of performance and teams that are fully engaged and share the values of the organisation that they work for. The positive performance of Secure Trust Bank Group is a result of the efforts of employees and to ensure that colleagues are recognised for this contribution there are a number of schemes in place to celebrate exceptional performance and behaviours.
These schemes together with the Group's annual incentive programme continue to help embed excellence within the culture.
These schemes include:
e thank you cards and Be valued awards: Being thanked is something that everyone appreciates and it makes individuals feel valued and helps create job satisfaction. For those occasions when colleagues deserve a thank you and behaviours are observed that truly reflected one of the Company values, colleagues can recognise each other by sending an e card thank you card. Where behaviour has been exceptional, line managers have the opportunity to reward team members with a Be Valued award which includes a gift and certificate. Colleagues can nominate their peers whenever and as often as they like and in 2017 over 1,200 e cards were sent.
Customer Service Excellence Awards: colleagues who go the extra mile when it comes to exceptional internal and external customer service are recognised at monthly Customer Service Excellence Award.
Outstanding achievers: these are given to colleagues who stand out for their fantastic contribution to the business. Winners are nominated by their peers and then selected by a panel of judges.
Incentive programme: the Group's incentive scheme links tangible performance targets which are based on the Group's strategy and values, to the outcomes of the scheme.
Long Service awards: to recognise loyalty and commitment to the Group, long service is awarded at key milestones from 5 years of service. Colleagues are rewarded with a cash payment, engraved pen, bottle of champagne, certificate and are also invited to lunch with the head of their business area. In 2017 590 years of long service were recognised.
Gender diversity
At the year end, the split by gender of the Group's employees was as follows:
Male Female
----------------- ----- -------
Directors 75% 25%
Senior managers 80% 20%
Other employees 44% 56%
All employees 47% 53%
----------------- ----- -------
The Group is committed to diversity in the workplace at all levels. During the early months of 2018, the Group is supporting a range of initiatives to demonstrate this commitment. The first is the launch, on International Women's Day, of an exciting partnership with everywoman which gives all colleagues, regardless of gender, access to the everywomanNetwork, a highly acclaimed, online development tool, with a particular focus on empowering women to take control of their career development.
Customers first
With today's customer now having wider choice and access to more information than ever before the quality of the customer experience has never been more important and this is ingrained in the Group's values and mission to provide straightforward and transparent banking. The focus on creating a culture where every interaction is seen as an opportunity to exceed our customers' expectations is driven through specific initiatives and lived through day-to-day processes and interactions. This culture is reinforced through recognition and reward structures and a series of independent monitoring tools which facilitate a continuous process of customer service review and improvement.
The Group has used FEEFO, an independent global ratings and reviews provider used by the world's most trusted brands for the last four years to collect customer feedback. Customer comments and ratings are published in real time on the Group's website and used to monitor and maintain service levels. The Group's average FEEFO rating for the year based on over 1,200 reviews stood at 4.7 out of 5 in December 2017 and all poor ratings are followed up by attempting to resolve the issue with the customer.
This year the Group was also delighted to be awarded three FEEFO Gold Trusted Service awards. This is an independent seal of excellence that recognises businesses for delivering exceptional experiences, rated by real customers. They are based purely on customer feedback and awarded on performance. The Group received the gold accolade for products offered under its Secure Trust Bank, V12 and Moneyway brands.
FEEFO ratings and comments are available on the Group's websites:
www.securetrustbank.co.uk
www.moneyway.co.uk
Having been the first bank to be awarded the Customer Service Excellence Award, this year the Group was pleased to announce that it had retained the standard for the fifth year running. This Government backed accolade tests in great depth those areas that research has indicated are a priority for customers, with particular focus on delivery, timeliness, information, professionalism and staff attitude. There is also emphasis placed on developing customer insight, understanding the user's experience and robust measurement of service satisfaction. The assessment report noted that "it was evident when speaking to leaders and front line staff within STB Group that they are highly motivated to achieve the best possible service for their customers."
In addition to independent assessments of customer service levels, the Group's internal recognition schemes are all built around reinforcing the Group's values and culture and the Group's Team Recognition Award clearly demonstrates how effective these are in driving the right behaviours. Focussing on customer service, this award ran throughout 2017 with 18 teams taking part across the Group, and resulted in the clear delivery of tangible improvements in customer service.
By order of the Board
Neeraj Kapur
Chief Financial Officer
21 March 2018
Directors' responsibility statement
The directors are responsible for preparing the Annual Report and the Group and parent company financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare group and parent company financial statements for each financial year. As required by the Listing Rules they are required to prepare the group financial statements in accordance with IFRS as adopted by the EU and applicable law and have elected to prepare the parent company financial statements on the same basis.
Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and parent company and of their profit or loss for that period. In preparing each of the group and parent company financial statements, the directors are required to:
-- select suitable accounting policies and then apply them consistently; -- make judgements and estimates that are reasonable and prudent; -- state whether they have been prepared in accordance with IFRS as adopted by the EU; and
-- assess the Group and parent Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
-- use the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent Company's transactions and disclose with reasonable accuracy at any time the financial position of the parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.
The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
We confirm that to the best of our knowledge:
-- The financial statements, prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;
-- The strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and
-- The Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.
This responsibility statement was approved by the Board of directors on 21 March 2018 and is signed on their behalf by:
Paul Lynam Neeraj Kapur Chief Executive Officer Chief Financial Officer
Consolidated statement of comprehensive income
2017 2017 2017 2016 2016 2016
Continuing Discontinued Total Continuing Discontinued Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Income statement
Interest receivable
and similar income 141.3 8.0 149.3 118.8 22.3 141.1
Interest expense
and similar charges (26.7) - (26.7) (26.3) - (26.3)
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Net interest income 4 114.6 8.0 122.6 92.5 22.3 114.8
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Fee and commission
income 16.0 - 16.0 16.3 0.1 16.4
Fee and commission
expense (1.1) - (1.1) (1.8) (0.1) (1.9)
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Net fee and commission
income 4 14.9 - 14.9 14.5 - 14.5
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Operating income 129.5 8.0 137.5 107.0 22.3 129.3
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Net impairment
losses on loans
and advances to
customers 12 (33.5) (3.4) (36.9) (23.3) (7.0) (30.3)
Operating expenses 5 (71.3) (0.3) (71.6) (64.3) (7.2) (71.5)
Profit on sale
of equity instruments
available-for-sale 0.3 - 0.3 - - -
Profit before income
tax 25.0 4.3 29.3 19.4 8.1 27.5
Income tax expense 7 (5.1) (0.8) (5.9) (5.2) (1.6) (6.8)
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Profit after income
tax 19.9 3.5 23.4 14.2 6.5 20.7
Gain recognised
on disposal after
tax 37 - 0.4 0.4 - 116.8 116.8
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Profit for the
period 19.9 3.9 23.8 14.2 123.3 137.5
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Other comprehensive
income
Items that will
not be reclassified
to the income statement
Revaluation reserve 0.1 - 0.1 1.2 - 1.2
Taxation - - - (0.2) - (0.2)
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
0.1 - 0.1 1.0 - 1.0
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Items that may
subsequently be
reclassified to
the income statement
Available-for-sale
reserve 2.8 - 2.8 (2.8) - (2.8)
Taxation - - - - - -
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
2.8 - 2.8 (2.8) - (2.8)
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Other comprehensive
income for the
period, net of
income tax 2.9 - 2.9 (1.8) - (1.8)
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Total comprehensive
income for the
period 22.8 3.9 26.7 12.4 123.3 135.7
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Profit attributable
to:
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Equity holders
of the Company 19.9 3.9 23.8 14.2 123.3 137.5
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Total comprehensive
income attributable
to:
------------------------- --- ----------- ------------- ----------- ----------- ------------- ----------- Equity holders of the Company 22.8 3.9 26.7 12.4 123.3 135.7 ------------------------- --- ----------- ------------- ----------- ----------- ------------- ----------- Earnings per share for profit attributable to the equity holders of the Company during the period (pence per share) Basic earnings per share 8 107.7 21.1 128.8 77.9 676.2 754.1 ------------------------- --- ----------- ------------- ----------- ----------- ------------- ----------- Diluted earnings per share 8 106.4 20.9 127.3 77.3 671.4 748.7 ------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Consolidated statement of financial position
At 31 December
2017 2016
Note GBPmillion GBPmillion
---------------------------------------- ----- ----------- -----------
ASSETS
Cash and balances at central banks 226.1 112.0
Loans and advances to banks 9 34.3 18.2
Loans and advances to customers 10 1,598.3 1,321.0
Debt securities held-to-maturity 13 5.0 20.0
Equity instruments available-for-sale 14 - 13.5
Property, plant and equipment 15 11.5 11.4
Intangible assets 16 10.4 9.0
Deferred tax assets 18 0.6 -
Other assets 19 5.4 4.9
Total assets 1,891.6 1,510.0
---------------------------------------- ----- ----------- -----------
LIABILITIES AND EQUITY
Liabilities
Due to banks 20 113.0 70.0
Deposits from customers 21 1,483.2 1,151.8
Current tax liabilities 3.0 1.7
Deferred tax liabilities 18 - 0.2
Other liabilities 22 41.9 49.0
Provisions for liabilities and charges 23 1.4 1.3
Total liabilities 1,642.5 1,274.0
---------------------------------------- ----- ----------- -----------
Equity attributable to owners of the
parent
Share capital 25 7.4 7.4
Share premium 81.2 81.2
Revaluation reserve 1.3 1.2
Available-for-sale reserve 14 - (2.8)
Retained earnings 159.2 149.0
---------------------------------------- ----- ----------- -----------
Total equity 249.1 236.0
---------------------------------------- ----- ----------- -----------
Total liabilities and equity 1,891.6 1,510.0
---------------------------------------- ----- ----------- -----------
The financial statements on pages 117 to 187 were approved
by the Board of Directors on 21 March 2018 and were
signed on its behalf by:
Paul Lynam
Chief Executive Officer
Neeraj Kapur
Chief Financial Officer
Company statement of financial position
At 31 December
2017 2016
Note GBPmillion GBPmillion
---------------------------------------- ----- ----------- -----------
ASSETS
Cash and balances at central banks 226.1 112.0
Loans and advances to banks 9 32.3 16.5
Loans and advances to customers 10 1,565.5 1,289.2
Debt securities held-to-maturity 13 5.0 20.0
Equity instruments available-for-sale 14 - 13.5
Property, plant and equipment 15 6.1 6.2
Intangible assets 16 8.5 6.2
Investments 17 3.7 3.7
Deferred tax assets 18 0.6 0.1
Other assets 19 33.2 35.3
---------------------------------------- ----- ----------- -----------
Total assets 1,881.0 1,502.7
---------------------------------------- ----- ----------- -----------
LIABILITIES AND EQUITY
Liabilities
Due to banks 20 113.0 70.0
Deposits from customers 21 1,483.2 1,151.8
Current tax liabilities 1.9 0.8
Other liabilities 22 44.4 57.0
Provisions for liabilities and charges 23 1.4 1.3
---------------------------------------- ----- ----------- -----------
Total liabilities 1,643.9 1,280.9
---------------------------------------- ----- ----------- -----------
Equity attributable to owners of the
parent
Share capital 25 7.4 7.4
Share premium 81.2 81.2
Revaluation reserve 0.5 0.5
Available-for-sale reserve 14 - (2.8)
Retained earnings 148.0 135.5
Total equity 237.1 221.8
---------------------------------------- ----- ----------- -----------
Total liabilities and equity 1,881.0 1,502.7
---------------------------------------- ----- ----------- -----------
The Company has elected to take the exemption under
section 408 of the Companies Act 2006 not to present
the parent company income statement. The profit for
the parent company for the year is presented in the
Company statement of changes in equity.
The financial statements on pages 117 to 187 were approved
by the Board of Directors on 21 March 2018 and were
signed on its behalf by:
Paul Lynam
Chief Executive Officer
Neeraj Kapur
Chief Financial Officer
Registered number: 00541132
Consolidated statement of changes in equity
Share Share Revaluation Available-for-sale Retained
capital premium reserve reserve earnings Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 1 January
2016 7.3 79.3 0.2 - 54.4 141.2
Total comprehensive
income for the period
Profit for 2016 - - - - 137.5 137.5
Other comprehensive
income, net of income
tax
Revaluation reserve - - 1.0 - - 1.0
Available-for-sale
reserve - - - (2.8) - (2.8)
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total other comprehensive
income - - 1.0 (2.8) - (1.8)
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total comprehensive
income for the period - - 1.0 (2.8) 137.5 135.7
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Transactions with
owners, recorded
directly in equity
Contributions by
and distributions
to owners
Issue of shares
under a share option
scheme 0.1 1.9 - - - 2.0
Dividends - - - - (43.1) (43.1)
Charge for share
based payments - - - - 0.2 0.2
Total contributions
by and distributions
to owners 0.1 1.9 - - (42.9) (40.9)
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 31 December
2016 7.4 81.2 1.2 (2.8) 149.0 236.0
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total comprehensive
income for the period
Profit for 2017 - - - - 23.8 23.8
Other comprehensive
income, net of income
tax
Revaluation reserve - - 0.1 - - 0.1 Available-for-sale reserve - - - 2.8 - 2.8 --------------------------- ----------- ----------- ------------ ------------------- ----------- ----------- Total other comprehensive income - - 0.1 2.8 - 2.9 --------------------------- ----------- ----------- ------------ ------------------- ----------- ----------- Total comprehensive income for the period - - 0.1 2.8 23.8 26.7 --------------------------- ----------- ----------- ------------ ------------------- ----------- ----------- Transactions with owners, recorded directly in equity Contributions by and distributions to owners Dividends - - - - (14.0) (14.0) Tax on share based payments - - - - 0.4 0.4 Total contributions by and distributions to owners - - - - (13.6) (13.6) --------------------------- ----------- ----------- ------------ ------------------- ----------- ----------- Balance at 31 December 2017 7.4 81.2 1.3 - 159.2 249.1 --------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Company statement of changes in equity
Share Share Revaluation Available-for-sale Retained
capital premium reserve reserve earnings Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 1 January
2016 7.3 79.3 - - 48.6 135.2
Total comprehensive
income for the period
Profit for 2016 - - - - 129.8 129.8
Other comprehensive
income, net of income
tax
Revaluation reserve - - 0.5 - - 0.5
Available-for-sale
reserve - - - (2.8) - (2.8)
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total other comprehensive
income - - 0.5 (2.8) - (2.3)
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total comprehensive
income for the period - - 0.5 (2.8) 129.8 127.5
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Transactions with
owners, recorded
directly in equity
Contributions by
and distributions
to owners
Issue of shares
under a share option
scheme 0.1 1.9 - - - 2.0
Dividends - - - - (43.1) (43.1)
Charge for share
based payments - - - - 0.2 0.2
Total contributions
by and distributions
to owners 0.1 1.9 - - (42.9) (40.9)
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 31 December
2016 7.4 81.2 0.5 (2.8) 135.5 221.8
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total comprehensive
income for the period
Profit for 2017 - - - - 26.1 26.1
Other comprehensive
income, net of income
tax
Available-for-sale
reserve - - - 2.8 - 2.8
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total other comprehensive
income - - - 2.8 - 2.8
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total comprehensive
income for the period - - - 2.8 26.1 28.9
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Transactions with
owners, recorded
directly in equity
Contributions by
and distributions
to owners
Dividends - - - - (14.0) (14.0)
Tax on share based
payments - - - - 0.4 0.4
Total contributions
by and distributions
to owners - - - - (13.6) (13.6)
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 31 December
2017 7.4 81.2 0.5 - 148.0 237.1
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Consolidated statement of cash flows
Year Year
ended ended
31 December 31 December
2017 2016
Note GBPmillion GBPmillion
---------------------------------------------- ----- ------------- -------------
Cash flows from operating activities
- Continuing operations
Profit for the year 19.9 14.2
Adjustments for:
Income tax expense 7 5.1 5.2
Depreciation of property, plant and
equipment 15 0.8 0.6
Loss on sale of property, plant and
equipment - 0.2
Amortisation of intangible assets 16 2.0 1.6
Impairment losses on loans and advances
to customers 33.5 23.3
Share based compensation - 0.2
Profit on sale of equity instruments
available-for-sale (0.3) -
---------------------------------------------- ----- ------------- -------------
Cash flows from operating profits
before changes in operating assets
and liabilities 61.0 45.3
Changes in operating assets and liabilities:
- net decrease/(increase) in debt
securities held-to-maturity 15.0 (16.2)
- net increase in loans and advances
to customers (378.3) (396.9)
- net (increase)/decrease in other
assets (1.0) 2.2
- net increase in amounts due to
banks 43.0 35.0
- net increase in deposits from
customers 331.4 118.7
- net (decrease)/increase in other
liabilities (7.0) 22.9
Income tax paid (5.1) (6.3)
Proceeds from sale of equity instruments
available-for-sale 16.6 -
---------------------------------------------- ----- ------------- -------------
Net cash inflow/(outflow) from operating
activities - Continuing operations 75.6 (195.3)
---------------------------------------------- ----- ------------- -------------
Cash flows from investing activities
Sale of subsidiary undertakings 37 - 209.9
Sale of discontinued operation 37 37.1 -
Purchase of property, plant and equipment 15 (0.8) (2.5)
Purchase of computer software and
other intangible assets 16 (3.4) (3.6)
Net cash inflow from investing activities
- Continuing operations 32.9 203.8
---------------------------------------------- ----- ------------- -------------
Cash flows from financing activities
Shares issued - 2.0 Dividends paid (14.0) (43.1) ---------------------------------------------- ----- ------------- ------------- Net cash outflow from financing activities - Continuing operations (14.0) (41.1) ---------------------------------------------- ----- ------------- ------------- Net increase/(decrease) in cash and cash equivalents - Continuing operations 94.5 (32.6) Net increase in cash and cash equivalents - Discontinued operations 37 35.7 19.5 Cash and cash equivalents at 1 January 130.2 143.3 ---------------------------------------------- ----- ------------- ------------- Cash and cash equivalents at 31 December 27 260.4 130.2 ---------------------------------------------- ----- ------------- -------------
Company statement of cash flows
Year Year
ended ended
31 December 31 December
2017 2016
Note GBPmillion GBPmillion
---------------------------------------------- ----- ------------- -------------
Cash flows from operating activities
- Continuing operations
Profit for the year 22.2 125.3
Adjustments for:
Income tax expense 2.7 3.3
Depreciation of property, plant and
equipment 15 0.4 0.4
Loss on sale of property, plant and
equipment - 0.2
Profit on sale of subsidiary undertakings - (120.5)
Amortisation of intangible assets 16 1.0 0.5
Impairment losses on loans and advances
to customers 35.1 24.2
Share based compensation - 0.2
Profit on sale of equity instruments
available-for-sale (0.3) -
---------------------------------------------- ----- ------------- -------------
Cash flows from operating profits
before changes in operating assets
and liabilities 61.1 33.6
Changes in operating assets and liabilities:
- net decrease/(increase) in debt
securities held-to-maturity 15.0 (16.2)
- net increase in loans and advances
to customers (378.9) (393.9)
- net decrease in other assets 0.6 2.6
- net increase in amounts due to
banks 43.0 33.6
- net increase in deposits from
customers 331.4 118.7
- net (decrease)/increase in other
liabilities (11.5) 28.1
Income tax paid (2.6) (3.5)
Proceeds from sale of equity instruments
available-for-sale 16.6 -
---------------------------------------------- ----- ------------- -------------
Net cash inflow/(outflow) from operating
activities - Continuing operations 74.7 (197.0)
---------------------------------------------- ----- ------------- -------------
Cash flows from investing activities
Sale of subsidiary undertakings 37 - 212.3
Sale of discontinued operation 37 37.1 -
Purchase of property, plant and equipment 15 (0.3) (2.0)
Purchase of computer software 16 (3.3) (3.5)
Net cash inflow from investing activities
- Continuing operations 33.5 206.8
---------------------------------------------- ----- ------------- -------------
Cash flows from financing activities
Issue of shares - 2.0
Dividends paid (14.0) (43.1)
---------------------------------------------- ----- ------------- -------------
Net cash outflow from financing activities
- Continuing operations (14.0) (41.1)
---------------------------------------------- ----- ------------- -------------
Net increase/(decrease) in cash and
cash equivalents 94.2 (31.3)
Net increase in cash and cash equivalents
- Discontinued operations 35.7 18.8
Cash and cash equivalents at 1 January 128.5 141.0
---------------------------------------------- ----- ------------- -------------
Cash and cash equivalents at 31 December 27 258.4 128.5
---------------------------------------------- ----- ------------- -------------
Notes to the consolidated financial statement
1. Accounting policies
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
1.1. Reporting entity
Secure Trust Bank PLC is a company incorporated in the United Kingdom (referred to as 'the Company'). The Company is registered in England and Wales and has the registered number 00541132. The registered address of the Company is One Arleston Way, Solihull, West Midlands, B90 4LH. The consolidated financial statements of the Company as at and for the year ended 31 December 2017 comprise Secure Trust Bank PLC and its subsidiaries (together referred to as 'the Group' and individually as 'subsidiaries'). The Group is primarily involved in banking and financial services.
1.2. Basis of presentation
The Group's consolidated financial statements and the Company's financial statements have been prepared in accordance with International Financial Reporting Standards, as adopted by the Group and endorsed by the EU and the Companies Act 2006 applicable to companies reporting under IFRS. They have been prepared under the historical cost convention, as modified by the revaluation of equity instruments available-for-sale and land and buildings and financial instruments at fair value through profit or loss. The consolidated financial statements are presented in pounds sterling, which is the functional and presentational currency of the entities within the Group.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 2.
The directors have assessed, in the light of current and anticipated economic conditions, the Group's ability to continue as a going concern. The directors confirm they are satisfied that the Company and the Group have adequate resources to continue in business for the foreseeable future. For this reason, they continue to adopt the 'going concern' basis for preparing accounts, as set out in the going concern and viability section of the Strategic Report starting on page 2.
The consolidated financial statements were authorised for issue by the Board of Directors on 21 March 2018.
The following International Financial Reporting Standards, which have been endorsed by the EU, have been issued but are not yet effective and have not been adopted early:
-- IFRS 9 'Financial Instruments' (effective for annual periods beginning after 1 January 2018). This is the International Accounting Standards Board's replacement of IAS 39 'Financial Instruments: Recognition and Measurement'. Based on assessments undertaken to date, the estimated adjustment (net of tax) of the adoption of IFRS 9 on the opening balance of the Group's equity at 1 January 2018 is expected to be a reduction in the range of GBP22 million to GBP27 million. This represents:
- GBPnil related to the classification requirements (refer to Note 29 for further information);
- An expected reduction in the range of GBP28 million to GBP34 million related to the impairment requirements (refer to Note 29 for further information). This reduction is primarily attributable to Consumer Finance. The Business Finance portfolio is not expected to drive a material reduction; and
- An increase in the range of GBP6 million to GBP7 million related to associated deferred tax impacts.
The above are estimates and will not be finalised until all transition work has been completed. The actual impact of adopting IFRS 9 may change as the Group continues to refine and finalise its models for the expected credit loss (ECL) calculations following validations undertaken both internally and by the Group's incoming external auditors. The new accounting policies, assumptions, judgements and estimation techniques are subject also to change until the Group finalises its interim report for the six months ended 30 June 2018.
-- IFRS 15 'Revenue from contracts with customers' (effective for annual periods beginning after 1 January 2018). This standard replaces a number of existing standards and interpretations and applies to contracts with customers, but does not apply to insurance contracts, financial instruments or lease contracts, which are in the scope of other IFRS. It also does not apply if two companies in the same line of business exchange non-monetary assets to facilitate sales to other parties. The standard specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide users of financial statements with more informative relevant disclosures. It introduces a new revenue recognition model that recognises revenue either at a point in time or over time. The model features a principles-based five-step model to be applied to all contracts with customers. Following consideration of the Group's operating model, it has been concluded that this standard will not have a material impact on the Group.
-- IFRS 16 'Leases' (effective for annual periods beginning after 1 January 2019). The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract i.e. the customer ('lessee') and the supplier ('lessor'). IFRS 16 replaces the previous leases standard, IAS 17 'Leases', and related interpretations. IFRS 16 eliminates the classification of leases as either operating leases or finance leases for a lessee. Instead all leases, except short term and low value leases, are treated in a similar way to finance leases applying IAS 17. Leases are 'capitalised' by recognising the present value of the lease payments and showing them either as lease assets (right-of-use assets) or together with property, plant and equipment. If lease payments are made over time, a company also recognises a financial liability representing its obligation to make future lease payments. The most significant effect of the new requirements in IFRS 16 will be an increase in lease assets and financial liabilities. The effect of this standard is currently being assessed, but it is unlikely to be substantial. Lessor accounting remains unchanged from IAS 17.
1.3. Change in accounting policy
Charge-off of debt sold by Secure Trust Bank Plc to Debt Managers (Services) Limited
Previously, when debt was sold by Secure Trust Bank Plc to its subsidiary Debt Managers (Services) Limited, the debt was 'charged off', i.e. the gross receivable and associated impairment provision were written off, when Debt Managers (Services) Limited considered that the remaining debt was unlikely to be recovered. The Group considers that it better reflects the economic reality to charge off the debt at the point of its sale to Debt Managers (Services) Limited.
This has resulted in a reduction of both gross receivables and impairment provision of GBP32.1 million at 31 December 2016. There is no impact on net receivables or the Income statement. Further information is provided in Note 10.
1.4. Consolidation
Subsidiaries
Subsidiaries are all investees controlled by the Group. The Group controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Subsidiaries are fully consolidated from the date on which control is transferred to the Group.
The acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement.
The parent company's investments in subsidiaries are recorded at cost less, where appropriate, provision for impairment in value.
Inter-company transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.
Discontinued operations
Subsidiaries are de-consolidated from the date that control ceases. Discontinued operations are a component of an entity that has been disposed of, and represents a major line of business and is part of a single co-ordinated disposal plan.
1.5. Interest income and expense
Interest income and expense are recognised in the income statement for all instruments measured at amortised cost using the effective interest method.
The effective interest method calculates the amortised cost of a financial asset or a financial liability and allocates the interest income or interest expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group takes into account all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.
Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.
1.6. Net fee and commission income
Fees and commissions which are not considered integral to the effective interest rate are generally recognised on an accruals basis when the service has been provided.
1.7. Financial assets and financial liabilities
The Group classifies its financial assets as fair value through profit or loss, loans and receivables, held-to-maturity or available-for-sale and classifies its financial liabilities as other financial liabilities. Management determines the classification of its investments at initial recognition. A financial asset or financial liability is measured initially at fair value plus, for an item not at fair value through profit or loss, transaction costs that are directly attributable to its acquisition or issue.
(a) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable. Loans are recognised when the funds are advanced to customers. Loans and receivables are carried at amortised cost using the effective interest method (see below).
(b) Held-to-maturity
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group's management has the positive intention and ability to hold to maturity. Held-to-maturity investments are carried at amortised cost using the effective interest method.
(c) Available-for-sale
Available-for-sale ('AFS') investments are those not classified as another category of financial assets. These comprised equity investments in a quoted company. They may be sold in response to liquidity requirements or equity price movements. AFS investments are initially recognised at cost, which is considered as the fair value of the investment including any acquisition costs. AFS investments are subsequently measured at fair value in the statement of financial position. Fair value changes on the AFS securities are recognised in the statement of other comprehensive income and in equity (AFS reserve), until the investment is sold or impaired. Once sold or impaired, the cumulative gains or losses previously recognised in the AFS reserve are recycled to the income statement.
(d) Other financial liabilities
Other financial liabilities are non-derivative financial liabilities with fixed or determinable payments. Other financial liabilities are recognised when cash is received from the depositors. Other financial liabilities are carried at amortised cost using the effective interest method. The fair value of other liabilities repayable on demand is assumed to be the amount payable on demand at the statement of financial position date.
Derecognition
Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all of the risks and rewards of ownership. There have not been any instances where assets have only been partially derecognised. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expire.
Amortised cost measurement
The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition, minus principal payments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment.
Fair value measurement
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of assets and liabilities traded in active markets are based on current bid and offer prices respectively. If the market for a financial instrument is not active the Group establishes a fair value by using an appropriate valuation technique. These include the use of recent arm's length transactions, reference to other instruments that are substantially the same for which market observable prices exist, net present value and discounted cash flow analysis.
1.8. Foreign currencies
Transactions in foreign currencies are initially recorded at the rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated into the Company's functional currency at the rates prevailing on the balance sheet date. Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in the income statement for the period.
1.9. Impairment of financial assets
Assets carried at amortised cost
On an ongoing basis the Group assesses whether there is objective evidence that a financial asset or group of financial assets is impaired. Objective evidence is the occurrence of a loss event, after the initial recognition of the asset, that impacts on the estimated future cash flows of the financial asset or group of financial assets, and can be reliably estimated.
The criteria that the Group uses to determine that there is objective evidence of an impairment loss include, but are not limited to, the following:
-- Delinquency in contractual payments of principal or interest; -- Breach of financial covenants or contractual obligations; -- Cash flow difficulties experienced by the borrower; and -- Initiation of bankruptcy proceedings.
If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.
The Group considers evidence of impairment for loans and advances at both an individual asset and collective level. All individually significant loans and advances are assessed for specific impairment. Those found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. In assessing collective impairment the Group uses historical trends of the probability of default, emergence period, the timing of recoveries and the amount of loss incurred, adjusted for management's judgement as to whether current economic and credit conditions are such that the actual losses are likely to be significantly different to historic trends.
When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the income statement.
Business finance
In assessing objective evidence of a loss event for business loans, the following factors are considered:
-- If any contractual repayment date has been missed; -- Covenant breaches; and
-- In Commercial Finance, a loan may be considered for potential impairment if the financial prospects of the borrower's customers deteriorates.
Consumer finance
For Consumer loans, cash flows are estimated based on past experience combined with the Group's view of the future considering the following factors:
-- Our exposure to the customer;
-- Based on the number of days in arrears at the statement of financial position date, the likelihood that a loan will progress through the various stages of delinquency and ultimately be written off; and
-- The amount and timing of expected receipts and recoveries.
Modification of loans
A customer's account may be modified to assist customers who are in or have recently overcome financial difficulties and have demonstrated both the ability and willingness to meet the current or modified loan contractual payments. Loans that have renegotiated or deferred terms, resulting in a substantial modification to the cash flows, are no longer considered to be past due but are treated as new loans recognised at fair value, provided the customers comply with the renegotiated or deferred terms.
1.10. Intangible assets (a) Goodwill
Goodwill represents the excess of the cost of the acquisition over the fair value of the Group's share of the net identifiable assets acquired at the date of acquisition. Goodwill is held at cost less accumulated impairment losses and is deemed to have an infinite life.
The Group reviews the goodwill for impairment at least annually or when events or changes in economic circumstances indicate that impairment may have taken place. Impairment losses are recognised in the income statement if the carrying amount exceeds the recoverable amounts.
(b) Computer software
Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software.
Costs associated with developing or maintaining computer software programs are recognised as an expense as incurred unless the technical feasibility of the development has been demonstrated, and it is probable that the expenditure will enable the asset to generate future economic benefits in excess of its originally assessed standard of performance, in which case they are capitalised.
These costs are amortised on the basis of the expected useful lives, which are between three to ten years.
(c) Other intangibles
The acquisition of subsidiaries was accounted for in accordance with IFRS 3 'Business Combinations', which requires the recognition of the identifiable assets acquired and liabilities assumed at their acquisition date fair values. As part of this process, it was necessary to recognise certain intangible assets which are separately identifiable and which are not included on the acquiree's balance sheet, which are amortised over their expected useful lives, as set out in Note 16.
1.11. Property, plant and equipment
Property is held at its revalued amount, being its fair value at the date of valuation less any subsequent accumulated depreciation. Revaluations are carried out annually at the reporting date, and movements are recognised in Other Comprehensive Income, net of any applicable deferred tax.
Plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Pre-installed computer software licences are capitalised as part of the computer hardware it is installed on. Depreciation is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, which are subject to regular review:
Land not depreciated Freehold buildings 50 years Leasehold improvements shorter of life of lease or 7 years Computer equipment 3 to 5 years Other equipment 5 to 10 years
Gains and losses on disposals are determined by comparing proceeds with carrying amounts. These are included in the income statement.
1.12. Leases (a) As a lessor
Assets leased to customers under agreements which transfer substantially all the risks and rewards of ownership, with or without ultimate legal title, are classified as finance leases. When assets are held subject to finance leases, the present value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the net investment method, which reflects a constant periodic rate of return.
(b) As a lessee
Rentals made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease.
1.13. Cash and cash equivalents
For the purposes of the statement of cash flows, cash and cash equivalents comprise cash in hand and demand deposits, and cash equivalents comprise highly liquid investments which are convertible into cash with an insignificant risk of changes in value with a maturity of three months or less at the date of acquisition, including certain loans and advances to banks and short-term highly liquid debt securities.
1.14. Equity instruments
Equity instruments issued by the Company are recorded at the proceeds received, net of direct issuance costs. Any amounts received over nominal value are recorded in the share premium account, net of direct issuance costs. Costs associated with the listing of shares are expensed immediately.
1.15. Employee benefits (a) Post-retirement obligations
The Group contributes to defined contribution schemes for the benefit of certain employees. The schemes are funded through payments to insurance companies or trustee-administered funds at the contribution rates agreed with individual employees. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as an employee benefit expense when they are due. There are no post-retirement benefits other than pensions.
(b) Share-based compensation
The fair value of equity settled share-based payment awards are calculated at grant date and recognised over the period in which the employees become unconditionally entitled to the awards (the vesting period). The amount is recognised as personnel expenses in the income statement, with a corresponding increase in equity. Further details of the valuation methodology is set out in Note 26.
The fair value of cash settled share-based payments is recognised as personnel expenses in the income statement with a corresponding increase in liabilities over the vesting period. The liability is remeasured at each reporting date and at settlement date based on the fair value of the options granted, with a corresponding adjustment to personnel expenses.
1.16. Taxation
Current income tax which is payable on taxable profits is recognised as an expense in the period in which the profits arise.
Deferred tax is provided in full on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the statement of financial position date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax assets and liabilities, and they relate to taxes levied by the same tax authority on the same taxable entity, or on different tax entities, when they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.
Deferred tax assets are recognised where it is probable that future taxable profits will be available against which the temporary differences can be utilised.
1.17. Dividends
Dividends on ordinary shares are recognised in equity in the period in which they are approved by Shareholders.
1.18. Funding for Lending Scheme and Term Funding Scheme
Under the applicable International Accounting Standard, IAS 39, if a security is lent under an agreement to return it to the transferor, as is the case for eligible securities lent by institutions to the Bank of England under the Funding for Lending Scheme, then the security is not derecognised because the transferor retains all the risks and rewards of ownership. The UK Treasury Bills borrowed from the Bank of England under the Funding for Lending Scheme are not recognised on the statement of financial position of the institution until such time as they are subject to a repurchase agreement with a third party, as they will not meet the criteria for derecognition by the Bank of England. When the UK Treasury Bills are pledged as part of a sale and repurchase agreement with a third party, amounts borrowed from the third party are recognised in the statement of financial position.
Under the new Term Funding Scheme, the Bank borrows cash and this is recognised in the consolidated statement of financial position within cash and cash equivalents, with the corresponding loan being recognised in liabilities to banks.
2. Critical judgements and estimates
Judgements
In the course of preparing the financial statements, no significant judgements have been made in applying the Group's accounting policies, other than those involving estimations, that have had a significant effect on the amounts recognised in the financial statements.
Estimates
The Group makes certain estimates which affect the reported amounts of assets and liabilities. The following areas are those where assumptions and estimates at the end of the current reporting period have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year:
2.1. Impairment losses on loans and advances to customers
Where financial assets are individually evaluated for impairment, management uses their best estimates in calculating the net present value of future cash flows. Management has to make estimates on the financial position of the counterparty and the net realisable value of collateral (where held), in determining the expected future cash flows.
In assessing collective impairment the Group uses historical trends of the probability of default, the timing of recoveries and the amount of loss incurred, adjusted for management's estimate as to whether current economic and credit conditions are such that the actual losses are likely to be significantly different to historic trends.
Consumer Finance
The Group reviews its Consumer Finance loan portfolios to assess impairment at least on a half-yearly basis. The basis for evaluating impairment losses is described in accounting policy 1.9. In determining whether an impairment loss should be recorded in the income statement, the Group makes estimates as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from financial assets, or a group of financial assets.
This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Loans and advances are identified as impaired by taking account of the age of the debt's delinquency and the product type. The impairment provision is calculated by applying a percentage rate to the balance of different ages and categories of impaired debt. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and recent actual loss experience.
The key estimates made in calculating the Consumer individual provisions are the probability of default rates and the loss given default. Uplifting the probability of each by 10% would result in an estimated increase in the Consumer Finance individual provisions as follows:
2017 2017 2016 2016
10% 10% 10% 10%
increase increase increase increase
in probability in loss in probability in loss
of default given of default given
rates default rates default
GBPmillion GBPmillion GBPmillion GBPmillion
------------------ ---------------- ----------- ---------------- -----------
Personal Lending N/A N/A 0.2 0.3
Motor Finance 0.3 2.3 0.3 1.6
Retail Finance 0.3 0.6 0.1 0.4
------------------ ---------------- ----------- ---------------- -----------
0.6 2.9 0.6 2.3
------------------ ---------------- ----------- ---------------- -----------
Of the GBP2.3 million (2016: GBP1.6 million) sensitivity to loss given default in Motor Finance above, an estimated GBP0.9 million (2016: GBP0.8 million) relates to the expected loss on the sale of repossessed vehicles.
The collective provision for the consumer portfolio assumes an emergence period of 2 months for the Motor Finance and Personal Loan portfolios and 1 month for the Retail Finance portfolio. Increasing this assumption by 1 month would result in an estimated increase in the collective impairment allowance as follows:
2017 2016
GBPmillion GBPmillion
------------------ ----------- -----------
Personal Lending N/A 0.5
Motor Finance 1.0 0.8
Retail Finance 1.1 0.9
------------------ ----------- -----------
2.1 2.2
------------------ ----------- -----------
Business Finance
Within the Real Estate Finance and Asset Finance businesses, accounts which are impaired are assessed against the discounted cash flows expected to arise in order to identify any impairment provisions. Collective provisions are assessed only to the extent that there is sufficient data to justify an inherent level of losses within the current portfolios.
For specific Commercial Finance clients assessment is made as to the collectability of outstanding invoices in relation to the amounts lent against them. If there is a deficit against outstanding invoices then other security is considered in terms of value and collectability. If there is an overall shortfall then the unsecured amount is assessed as to whether a provision is required. For collective provisions a view of the overall level of non-collectability in the portfolio is taken. The level of provision required is under review as the product is yet to mature, and therefore data is developing, so the Group has estimated a level appropriate based on other data available in the industry.
The Business Finance portfolio is largely assessed on an individual basis with minimal losses experienced to date. The decision on whether or not an impairment trigger has occurred for Real Estate Finance loans is made based on the Group's knowledge of the counterparty and assessment of their ability to repay their loan balance. The Real Estate Finance portfolio is exposed to deteriorations in property prices, in the event of borrower default. However, given the low loan to value ratios of loans held within the portfolio, this exposure is not considered significant.
The collective provision for the Asset Finance portfolio assumes an emergence period of 3 months. The collective provision for the Commercial Finance and Real Estate Finance portfolios are based on peer group experience of comparable groups of financial assets and determined as 0.15% and 0.1% of gross balances net of specific provisions respectively.
2.2. Average life of lending
IAS 39 requires interest earned from lending to be measured under the effective interest rate method. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset.
Management must therefore use estimates to estimate the expected life of each instrument and hence the expected cash flows relating to it. The accuracy of these estimates would therefore be affected by unexpected market movements resulting in altered customer behaviour, inaccuracies in the models used compared to actual outcomes and incorrect assumptions. The Group also needs to identify which cash flows relating to each instrument should be subject to the effective interest rate method.
A one month increase in the assumed behavioural life would change the income received in the year as follows:
2017 2016
GBPmillion GBPmillion
------------------ ----------- -----------
Personal Lending N/A -
Motor Finance 0.2 0.1
Retail Finance 0.4 (0.6)
------------------ ----------- -----------
0.6 (0.5)
------------------ ----------- -----------
2.3. Reassessment of critical estimates
During the year, Management reassessed the critical estimates and resolved that the assumptions used to estimate acquisition accounting and share option scheme valuations were not sensitive enough to change the balances materially, and therefore were no longer considered critical.
3. Operating segments
The Group is organised into seven operating segments, which consist of the different products available, disclosed below:
Business finance
1) Real Estate Finance: residential and commercial investment and development loans secured by UK real estate.
2) Asset Finance: loans to small and medium sized enterprises to acquire commercial assets.
3) Commercial Finance: invoice discounting and invoice factoring.
Consumer finance
4) Personal Lending: Unsecured consumer loans sold to customers via broker aggregators and business partners.
5) Motor Finance: Hire purchase agreements secured against the vehicle being financed.
6) Retail Finance: Point of sale unsecured finance for in-store and online retailers.
Consumer mortgages
7) Residential mortgages for the self-employed, contract workers, those with complex income and those with a recently restored credit history, sold via select mortgage intermediaries.
Other
Other includes OneBill, current accounts, STB Leasing Limited, debt collection and a GBP30 million loan to Non-Standard Finance plc (NSF) as part of their purchase of ELG, which was repaid during the year. All current accounts were closed by the end of 2016, and OneBill has been closed to new customers since 2009.
Management review these segments by looking at the income, size and growth rate of the loan books, impairments and customer numbers. Except for these items no costs or balance sheet items are allocated to the segments.
Net
impairment
Interest losses
receivable Fee Revenue on loans Loans
and and from and and
similar commission external advances advances
income income customers to customers to customers
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------- ------------ ------------ ----------- -------------- --------------
Year ended 31 December
2017
Business finance
Real Estate Finance 32.1 0.2 32.3 (0.2) 580.8
Asset Finance 8.5 - 8.5 1.0 116.7
Commercial Finance 2.5 4.7 7.2 0.1 126.5
Consumer finance
Motor Finance 46.2 0.9 47.1 20.8 274.6
Retail Finance 47.5 3.2 50.7 13.8 452.3
Consumer Mortgages 0.1 - 0.1 - 16.5
Other 4.4 7.0 11.4 (2.0) 30.9
-------------------------- ------------ ------------ ----------- -------------- --------------
Continuing operations 141.3 16.0 157.3 33.5 1,598.3
Discontinued operations
Personal Lending 8.0 - 8.0 3.4 -
-------------------------- ------------ ------------ ----------- -------------- --------------
149.3 16.0 165.3 36.9 1,598.3
------------------------- ------------ ------------ ----------- -------------- --------------
Net
impairment
Interest losses
receivable Fee Revenue on loans Loans
and and from and and
similar commission external advances advances
income income customers to customers to customers
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------- ------------ ------------ ----------- -------------- --------------
Year ended 31 December
2016
Business finance
Real Estate Finance 28.3 0.1 28.4 0.1 451.0
Asset Finance 7.8 - 7.8 0.6 117.2
Commercial Finance 1.5 3.1 4.6 0.2 62.8
Consumer finance
Motor Finance 39.6 0.9 40.5 14.6 236.2
Retail Finance 34.3 2.4 36.7 9.5 325.9
Other 7.3 9.8 17.1 (1.7) 62.4
-------------------------- ------------ ------------ ----------- -------------- --------------
Continuing operations 118.8 16.3 135.1 23.3 1,255.5
Discontinued operations
Personal Lending 22.3 0.1 22.4 7.0 65.5
-------------------------- ------------ ------------ ----------- -------------- --------------
141.1 16.4 157.5 30.3 1,321.0
------------------------- ------------ ------------ ----------- -------------- --------------
The 'other' segment above includes products which are individually below the quantitative threshold for separate disclosure and fulfils the requirement of IFRS 8.28 by reconciling operating segments to the amounts reported in the financial statements. Currently, the Consumer Mortgages segment also falls below this threshold, but the directors consider that this segment represents a key part of the future strategy of the Group, and therefore merits separate disclosure.
Funding costs and operating expenses are not aligned to operating segments for day to day management of the business, so they cannot be allocated on a reliable basis. Accordingly, profit by operating segment has not been disclosed.
All of the Group's operations are conducted wholly within the United Kingdom and geographical information is therefore not presented.
4. Operating income
a) Net interest income
2017 2016
GBPmillion GBPmillion
---------------------------------------- ----------- -----------
Cash and balances at central banks 0.4 0.6
Loans and advances to banks 0.2 -
Loans and advances to customers 140.7 118.2
Interest receivable and similar income 141.3 118.8
---------------------------------------- ----------- -----------
Deposits from customers (26.7) (26.3)
---------------------------------------- ----------- -----------
Interest expense and similar charges (26.7) (26.3)
---------------------------------------- ----------- -----------
Net interest income 114.6 92.5
---------------------------------------- ----------- -----------
The net interest income shown above excludes GBP8.0 million (2016: GBP22.3 million) of interest on loans and advances to customers in respect of discontinued operations, as shown in the income statement as set out on page 117.
b) Net fee and commission income
2017 2016
GBPmillion GBPmillion
------------------------------- ----------- -----------
Fee and disbursement income 12.4 12.3
Commission income 2.7 3.6
Other income 0.9 0.4
Fee and commission income 16.0 16.3
------------------------------- ----------- -----------
Other expenses (1.1) (1.8)
------------------------------- ----------- -----------
Fee and commission expense (1.1) (1.8)
------------------------------- ----------- -----------
Net fee and commission income 14.9 14.5
------------------------------- ----------- -----------
Fees and commissions income consists principally of the following:
-- weekly and monthly fees from the OneBill product -- associated insurance commissions and commissions earned on debt collection activities in DMS -- discounting, service and arrangement fees in Commercial Finance, and -- account management and administration fees from retailers in Retail Finance.
Fee and commission expenses consist primarily of fees payable in respect of Motor Finance.
5. Operating expenses
Continuing Discontinued Total Continuing Discontinued Total
2017 2017 2017 2016 2016 2016
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------ ----------- ------------- ----------- ----------- ------------- -----------
Staff costs, including
those of directors:
Wages and salaries 33.8 0.3 34.1 31.5 3.5 35.0
Social security
costs 4.2 - 4.2 3.1 0.3 3.4
Pension costs 1.2 - 1.2 0.9 0.2 1.1
Share based payment
transactions (0.2) - (0.2) (0.5) - (0.5)
Depreciation of
property, plant
and equipment (Note
15) 0.8 - 0.8 0.6 - 0.6
Amortisation of
intangible assets
(Note 16) 2.0 - 2.0 1.6 - 1.6
Operating lease
rentals 1.5 - 1.5 1.6 0.3 1.9
Other administrative
expenses 28.0 - 28.0 25.5 2.9 28.4
------------------------ ----------- ------------- ----------- ----------- ------------- -----------
Total operating
expenses 71.3 0.3 71.6 64.3 7.2 71.5
------------------------ ----------- ------------- ----------- ----------- ------------- -----------
As described in Note 3, operating expenses are not aligned to operating segments for day to day management of the business, so they cannot be allocated on a reliable basis. Accordingly, discontinued operating expenses above relates only to those costs that are directly attributable to the discontinued business.
Remuneration of the auditor and its associates, excluding VAT, was as follows:
2017 2016
GBP'000 GBP'000
------------------------------------------ -------- --------
Fees payable to the Company's auditor
for the audit of the Company's annual
accounts 270 149
Fees payable to the Company's auditor
for other services:
The audit of the Company's subsidiaries,
pursuant to legislation 68 63
Audit related assurance services 100 13
Other assurance services 62 521
All other non-audit services 39 15
------------------------------------------ -------- --------
539 761
------------------------------------------ -------- --------
Other assurance services related to the half year review (2016: related to reporting accountant work in respect of the Main Market listing).
All other non-audit services related to profit certification, work relating to entry into the Term Funding Scheme and advice on a potential corporate acquisition (2016: related to profit certification and work relating to entry into the Funding for Lending Scheme).
6. Average number of employees
2017 2016
Number Number
---------------- ------- -------
Directors 8 6
Management 116 101
Administration 610 590
---------------- ------- -------
734 697
---------------- ------- -------
The prior year figures above include employees of ELG for the period of ownership by the Group.
7. Income tax expense
Continuing Discontinued Continuing Discontinued
operations operations Total operations operations Total
2017 2017 2017 2016 2016 2016
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Current taxation
Corporation tax charge
- current year 5.5 0.8 6.3 3.1 1.7 4.8
Corporation tax charge
- adjustments in
respect of prior
years - - - 1.8 - 1.8
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
5.5 0.8 6.3 4.9 1.7 6.6
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Deferred taxation
Deferred tax charge
- current year (0.5) - (0.5) - (0.1) (0.1)
Deferred tax charge
- adjustments in
respect of prior
years 0.1 - 0.1 0.3 - 0.3
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
(0.4) - (0.4) 0.3 (0.1) 0.2
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Income tax expense 5.1 0.8 5.9 5.2 1.6 6.8
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Tax reconciliation
Profit before tax 25.0 4.3 29.3 19.4 8.1 27.5
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Tax at 19.25% (2016:
20.0%) 4.8 0.8 5.6 3.9 1.6 5.5
Permanent differences 0.2 - 0.2 (0.8) - (0.8)
Prior period adjustments 0.1 - 0.1 2.1 - 2.1
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Income tax expense
for the year 5.1 0.8 5.9 5.2 1.6 6.8
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
On 26 October 2015, the Government substantively enacted a reduction in the main rate of UK corporation tax from 20% to 19% (effective from 1 April 2017). Subsequently, a further reduction to 17% (effective 1 April 2020) was also substantively enacted on 6 September 2016. This will reduce the Company's future current tax charge accordingly.
8. Earnings per ordinary share
Basic
Basic earnings per ordinary share are calculated by dividing the profit attributable to equity holders of the parent by the weighted average number of ordinary shares as follows:
2017 2016
Profit attributable to equity
holders of the parent (GBP
millions)
Continuing operations 19.9 14.2
Discontinued operations 3.9 123.3
--------------------------------- ----------- -----------
23.8 137.5
------------------------------- ----------- -----------
Weighted average number of
ordinary shares (number) 18,475,229 18,234,588
--------------------------------- ----------- -----------
Diluted
Diluted earnings per ordinary share are calculated by dividing the profit attributable to equity holders of the parent by the weighted average number of ordinary shares in issue during the year, as noted above, as well as the number of dilutive share options in issue during the year, as follows:
2017 2016
--------------------------------- ----------- -----------
Weighted average number of
ordinary shares 18,475,229 18,234,588
Number of dilutive shares in
issue at the year end 219,007 130,200
----------------------------------- ----------- -----------
Fully diluted weighted average
number of ordinary shares 18,694,236 18,364,788
----------------------------------- ----------- -----------
Dilutive shares being based
on:
Number of options outstanding
at the year end 368,063 177,084
Weighted average exercise price
(pence) 799 720
Average share price during
the period (pence) 1,974 2,720
----------------------------------- ----------- -----------
9. Loans and advances to banks
Group Group Company Company
2017 2016 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------- ----------- ----------- ----------- -----------
Placements with banks included
in cash and cash equivalents
(Note 27) 34.3 18.2 32.3 16.5
-------------------------------- ----------- ----------- ----------- -----------
Included within loans and advances to banks are amounts placed with Arbuthnot Latham & Co., Limited, a related company prior to the sale of its controlling stake in the Group, of GBP5.0 million (31 December 2016: GBP5.0 million).
Moody's long-term ratings are as follows:
Group Group Company Company
2017 2016 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------- ----------- ----------- ----------- -----------
A1 6.1 4.6 6.0 4.6
A3 23.2 8.6 21.3 6.9
Arbuthnot Latham & Co., Limited
- No rating 5.0 5.0 5.0 5.0
--------------------------------- ----------- ----------- ----------- -----------
34.3 18.2 32.3 16.5
--------------------------------- ----------- ----------- ----------- -----------
None of the loans and advances to banks are either past due or impaired.
10. Loans and advances to customers
Group Group Company Company
2017 2016 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------- ----------- ----------- ----------- -----------
Gross loans and advances 1,638.2 1,349.4 1,605.4 1,316.9
Less: allowances for impairment
on loans and advances (Note
12) (39.9) (28.4) (39.9) (27.7)
--------------------------------- ----------- ----------- ----------- -----------
1,598.3 1,321.0 1,565.5 1,289.2
--------------------------------- ----------- ----------- ----------- -----------
The Group has changed its policy on the charge-off of debt sold by Secure Trust Bank Plc to Debt Managers (Services) Limited. A description of this change in accounting policy is set out in Note 1.3, the effect of which is set out below:
31 December 31 December
2016 2015
GBPmillion GBPmillion
------------------------------ ------------ ------------
Gross loans and advances
As originally stated 1,381.5 994.9
Restatement (32.1) (10.9)
-------------------------------- ------------ ------------
As restated 1,349.4 984.0
-------------------------------- ------------ ------------
Allowances for impairment on
loans and advances
As originally stated (60.5) (34.3)
Restatement 32.1 10.9
-------------------------------- ------------ ------------
As restated (28.4) (23.4)
-------------------------------- ------------ ------------
The fair value of loans and advances to customers is shown in Note 34. For a maturity profile of loans and advances to customers, refer to Note 31.
Group and Company
At 31 December 2017 loans and advances to customers of GBP200.7 million were pre-positioned under the Bank of England's Term Funding Scheme, which replaced the Funding For Lending Scheme during the year (see below), and were available for use as collateral within the scheme. At 31 December 2016 loans and advances to customers of GBP180.6 million were pre-positioned under the Bank of England's Funding for Lending Scheme and were available for use as collateral within the scheme.
At 31 December 2016, GBP86.0 million of UK Treasury Bills were drawn under the Funding for Lending Scheme. During the period, these Treasury Bills were pledged as part of a sale and repurchase agreement with an original maturity period of six months. Monies arising as a result are disclosed in Note 20.
GBP597.3 million (2016: GBP451.0 million) of the loans are secured upon residential or commercial property and these are neither past due nor impaired. All portfolios of loans secured are at an initial loan to value ratio of less than 85%. All property valuations at loan inception, and the majority of development stage valuations, are performed by independent Chartered Surveyors, who perform their work in accordance with the Royal Institution of Chartered Surveyors Valuation - Professional Standards.
Group
GBP2.5 million (2016: GBP2.9 million) of collateral is held from RentSmart, against loans of GBP17.2 million (2016: GBP18.7 million). This collateral is included in trade payables at 31 December 2017. This is based upon the balance of customer receivables and expected new agreements during the following month.
11. Finance lease receivables
Loans and advances to customers include finance lease receivables as follows:
Group Group Company Company
2017 2016 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------- ----------- ----------- ----------- -----------
Gross investment in finance
lease receivables:
- No later than 1 year 189.9 163.5 180.7 151.7
- Later than 1 year and no
later than 5 years 374.2 347.0 367.7 338.9
- Later than 5 years 1.2 1.5 1.2 1.5
------------------------------------- ----------- ----------- ----------- -----------
565.3 512.0 549.6 492.1
Unearned future finance income
on finance leases (162.5) (151.2) (158.4) (146.2)
------------------------------------- ----------- ----------- ----------- -----------
Net investment in finance leases 402.8 360.8 391.2 345.9
------------------------------------- ----------- ----------- ----------- -----------
The net investment in finance
leases may be analysed as follows:
- No later than 1 year 117.5 98.0 111.3 89.9
- Later than 1 year and no
later than 5 years 284.2 261.5 278.8 254.7
- Later than 5 years 1.1 1.3 1.1 1.3
------------------------------------- ----------- ----------- ----------- -----------
402.8 360.8 391.2 345.9
------------------------------------- ----------- ----------- ----------- ----------- 12. Allowances for impairment of loans and advances
Group
Gross
loans
Individual Collective Total and Provision
provision provision provision receivables cover
GBPmillion GBPmillion GBPmillion GBPmillion %
---------------------------- ----------- ----------- ----------- ------------- ----------
Year ended 31 December
2017
Business finance
Real Estate Finance - 0.3 0.3 581.1 0.1%
Asset Finance 1.0 0.2 1.2 117.9 1.0%
Commercial Finance 0.4 0.2 0.6 127.1 0.5%
Consumer finance
Motor Finance
---------------------------- ----------- ----------- ----------- ------------- ----------
Voluntary termination
provision 1.0 - 1.0
Other impairment 23.3 2.6 25.9
---------------------------- ----------- ----------- ----------- ------------- ----------
24.3 2.6 26.9 301.5 8.9%
Retail Finance 6.5 1.1 7.6 459.9 1.7%
Consumer mortgages - - - 16.5 0.0%
Other 3.3 - 3.3 34.2 9.6%
---------------------------- ----------- ----------- ----------- ------------- ----------
35.5 4.4 39.9 1,638.2 2.4%
---------------------------- ----------- ----------- ----------- ------------- ----------
Gross
loans
Individual Collective Total and Provision
provision provision provision receivables cover
GBPmillion GBPmillion GBPmillion GBPmillion %
---------------------------- ----------- ----------- ----------- ------------- ----------
Year ended 31 December
2016
Business finance
Real Estate Finance - 0.5 0.5 451.5 0.1%
Asset Finance 0.4 0.1 0.5 117.7 0.4%
Commercial Finance 0.4 0.1 0.5 63.3 0.8%
Consumer finance
Personal Lending 3.5 0.7 4.2 69.7 6.0%
Motor Finance
---------------------------- ----------- ----------- ----------- ------------- ----------
Voluntary termination
provision 0.6 - 0.6
Other impairment 10.0 3.0 13.0
---------------------------- ----------- ----------- ----------- ------------- ----------
10.6 3.0 13.6 249.8 5.4%
Retail Finance 4.0 0.9 4.9 330.8 1.5%
Other 4.2 - 4.2 66.6 6.3%
---------------------------- ----------- ----------- ----------- ------------- ----------
23.1 5.3 28.4 1,349.4 2.1%
---------------------------- ----------- ----------- ----------- ------------- ----------
Provisions included in 'Other' are in respect of various legacy products. This segment also includes loans of GBP17.2 million (2016: GBP18.7 million) held in STB Leasing Limited. The credit risk associated with those loans is retained by its partner, RentSmart. Accordingly, no provision is held against the RentSmart loans.
The Group net impairment losses disclosed in the income statement can be analysed as follows:
2017 2016
GBPmillion GBPmillion
----------------------------------- ----------- -----------
Individual provision: charge
for impairment losses 36.4 25.1
Collective provision: charge
for impairment losses (0.4) 3.3
Loans written off, net of amounts
utilised 1.4 1.2
Recoveries of loans written
off (0.5) (1.9)
------------------------------------- ----------- -----------
36.9 27.7
Less personal lending (3.4) (4.4)
33.5 23.3
----------------------------------- ----------- -----------
A reconciliation of the allowance accounts for losses on loans and advances is as follows:
2017 2016
GBPmillion GBPmillion
-------------------------------------------- ----------- -----------
Individual allowances for impairment
At 1 January 23.1 21.4
Charge for impairment losses 36.4 25.1
Amounts utilised (13.5) (10.7)
Changes to presentation in respect of debt
sales (3.6) (12.7)
Sale of personal lending (6.9) -
At 31 December 35.5 23.1
-------------------------------------------- ----------- -----------
Collective allowances for impairment
At 1 January 5.3 2.0
Charge for impairment losses (0.4) 3.3
Sale of personal lending (0.5) -
At 31 December 4.4 5.3
-------------------------------------------- ----------- -----------
Total allowances for impairment 39.9 28.4
-------------------------------------------- ----------- -----------
Loans and advances to customers can be further summarised as follows:
2017 2017 2016 2016
GBPmillion % GBPmillion %
-------------------------------- ----------- ------- ----------- -------
Neither past due nor impaired 1,545.6 94.3% 1,268.7 94.1%
Not past due but impaired 5.4 0.3% 0.6 0.0%
Past due but not impaired 0.3 0.0% 12.4 0.9%
Past due up to 90 days and
impaired 37.8 2.3% 37.4 2.8%
Past due after 90 days and
impaired 49.1 3.0% 30.3 2.2%
-------------------------------- ----------- ------- ----------- -------
Gross 1,638.2 100.0% 1,349.4 100.0%
Less: allowance for impairment (39.9) (28.4)
-------------------------------- ----------- ------- ----------- -------
Net 1,598.3 1,321.0
-------------------------------- ----------- ------- ----------- -------
Gross amounts of loans and advances to customers that were past due up to 90 days and impaired were as follows:
2017 2016
GBPmillion GBPmillion
------------------------ ----------- -----------
Past due up to 30 days 24.5 24.4
Past due 30 - 60 days 8.6 7.9
Past due 60 - 90 days 4.7 5.1
Total 37.8 37.4
-------------------------- ----------- -----------
During the period, the methodology used to derive the above analyses of loans and advances to customers, categorising them into past due banding, was enhanced. Accordingly, the comparatives as at 31 December 2016 have been re-presented on this basis.
Gross amounts of loans and advances to customers that were past due but not impaired were as follows:
2017 2016
GBPmillion GBPmillion
------------------------ ----------- -----------
Past due up to 30 days 0.2 4.6
Past due 30 - 60 days 0.1 7.8
Total 0.3 12.4
-------------------------- ----------- -----------
Company
Gross
loans
Individual Collective Total and Provision
provision provision provision receivables cover
GBPmillion GBPmillion GBPmillion GBPmillion %
---------------------------- ----------- ----------- ----------- ------------- ----------
Year ended 31 December
2017
Business finance
Real Estate Finance - 0.3 0.3 581.1 0.1%
Asset Finance 1.0 0.2 1.2 117.9 1.0%
Commercial Finance 0.4 0.2 0.6 124.8 0.5%
Consumer finance
Motor Finance
---------------------------- ----------- ----------- ----------- ------------- ----------
Voluntary termination
provision 1.0 - 1.0
Other impairment 23.3 2.6 25.9
---------------------------- ----------- ----------- ----------- ------------- ----------
24.3 2.6 26.9 301.5 8.9%
Retail Finance 6.5 1.1 7.6 459.9 1.7%
Consumer mortgages - - - 16.5 0.0%
Other 3.3 - 3.3 3.7 89.2%
---------------------------- ----------- ----------- ----------- ------------- ----------
35.5 4.4 39.9 1,605.4 2.5%
---------------------------- ----------- ----------- ----------- ------------- ----------
Gross
loans
Individual Collective Total and Provision
provision provision provision receivables cover
GBPmillion GBPmillion GBPmillion GBPmillion %
---------------------------- ----------- ----------- ----------- ------------- ----------
Year ended 31 December
2016
Business finance
Real Estate Finance - 0.5 0.5 451.5 0.1%
Asset Finance 0.4 0.1 0.5 117.7 0.4%
Commercial Finance 0.4 0.1 0.5 63.3 0.8%
Consumer finance
Personal Lending 3.5 0.7 4.2 69.7 6.0%
Motor Finance
---------------------------- ----------- ----------- ----------- ------------- ----------
Voluntary termination
provision 0.6 - 0.6
Other impairment 10.0 1.6 11.6
---------------------------- ----------- ----------- ----------- ------------- ----------
10.6 1.6 12.2 248.4 4.9%
Retail Finance 4.0 0.9 4.9 330.8 1.5%
Other 3.5 1.4 4.9 35.5 13.8%
---------------------------- ----------- ----------- ----------- ------------- ----------
22.4 5.3 27.7 1,316.9 2.1%
---------------------------- ----------- ----------- ----------- ------------- ----------
The Company net impairment losses included in the income statement can be analysed as follows:
2017 2016
GBPmillion GBPmillion
----------------------------------- ----------- -----------
Individual provision: Charge
for impairment losses 38.8 21.4
Collective provision: Charge
for impairment losses (0.4) 3.2
Loans written off, net of amounts
utilised 1.4 0.9
Recoveries of loans written
off (0.5) (0.3)
Profit on sale of debt (0.3) (1.0)
------------------------------------- ----------- -----------
39.0 24.2
Less personal lending (3.4) (4.4)
35.6 19.8
----------------------------------- ----------- -----------
A reconciliation of the allowance accounts for losses on loans and advances is as follows:
2017 2016
GBPmillion GBPmillion
---------------------------------------- ----------- -----------
Individual allowances for impairment
At 1 January 22.4 18.5
Charge for impairment losses 38.8 25.8
Utilised (13.5) (8.5)
Release of allowance for impairment on
the sale of debt (5.3) (13.4)
Sale of personal lending (6.9) -
At 31 December 35.5 22.4
---------------------------------------- ----------- -----------
Collective allowances for impairment
At 1 January 5.3 2.0
Charge for impairment losses (0.4) 3.3
Sale of personal lending (0.5) -
At 31 December 4.4 5.3
---------------------------------------- ----------- -----------
Total allowances for impairment 39.9 27.7
---------------------------------------- ----------- -----------
Loans and advances to customers can be further summarised as follows:
2017 2017 2016 2016
GBPmillion % GBPmillion %
-------------------------------- ----------- ------- ----------- -------
Neither past due nor impaired 1,529.0 95.3% 1,250.2 95.0%
Not past due but impaired 5.4 0.3% 0.6 0.0%
Past due but not impaired - 0.0% 12.4 0.9%
Past due up to 90 days and
impaired 37.5 2.3% 37.2 2.8%
Past due after 90 days and
impaired 33.5 2.1% 16.5 1.3%
-------------------------------- ----------- ------- ----------- -------
Gross 1,605.4 100.0% 1,316.9 100.0%
Less: allowance for impairment (39.9) (27.7)
-------------------------------- ----------- ------- ----------- -------
Net 1,565.5 1,289.2
-------------------------------- ----------- ------- ----------- -------
Gross amounts of loans and advances to customers that were past due up to 90 days and impaired were as follows:
2017 2016
GBPmillion GBPmillion
------------------------ ----------- -----------
Past due up to 30 days 24.4 24.2
Past due 30 - 60 days 8.5 7.9
Past due 60 - 90 days 4.6 5.1
Total 37.5 37.2
-------------------------- ----------- -----------
During the period, the methodology used to derive the above analyses of loans and advances to customers, categorising them into past due banding, was enhanced. Accordingly, the comparatives as at 31 December 2016 have been re-presented on this basis.
Gross amounts of loans and advances to customers that were past due but not impaired were as follows:
2017 2016
GBPmillion GBPmillion
------------------------ ------------ -----------
Past due up to 30 days - 4.6
Past due 30 - 60 days - 7.8
Total - 12.4
-------------------------- ---------- -----------
The impairment provision calculation is based on the individual past-due status of each loan.
Group and Company
Interest income on loans classified as impaired totalled GBP2.6 million (2016: GBP6.4 million).
13. Debt securities held-to-maturity
Debt securities of GBP5.0 million (2016: GBP20.0 million) represent UK Treasury Bills. The Company's intention is to hold them to maturity and, therefore, they are stated in the statement of financial position at amortised cost.
All of the debt securities held-to-maturity had a rating agency designation at 31 December 2017, based on Moody's long-term ratings of Aa2 (2016: Aa1. Moody's downgraded the UK credit rating in September 2017). None of the debt securities held-to-maturity are either past due or impaired.
14. Equity instruments available-for-sale
On 13 April 2016, as part of the sale of ELG to NSF, the Group acquired 23,529,412 shares in NSF at a cost of 69.25 pence per share. This equity instrument was considered to be available-for-sale, and therefore fair value changes on the Available-For-Sale securities were recognised directly in other comprehensive income and equity ('AFS' reserve).
In May 2017, the shares were sold at an average price of 71 pence, realizing a profit of GBP343,000. The AFS reserve balance of GBP2.8 million, which had arisen due to previous movements in the NSF share price, was reclassified from Other Comprehensive Income to the income statement.
15. Property, plant and equipment
Group
Computer
Freehold and
land other
and buildings equipment Total
GBPmillion GBPmillion GBPmillion
-------------------------- --------------- ----------- -----------
Cost or valuation
At 1 January 2016 7.1 10.1 17.2
Additions 1.4 1.1 2.5
Disposals - (0.3) (0.3)
Revaluation 0.5 - 0.5
At 31 December 2016 9.0 10.9 19.9
--------------------------- --------------- ----------- -----------
Additions - 0.8 0.8
At 31 December 2017 9.0 11.7 20.7
--------------------------- --------------- ----------- -----------
Accumulated depreciation
At 1 January 2016 (0.6) (8.1) (8.7)
Depreciation charge (0.1) (0.5) (0.6)
Disposals - 0.1 0.1
Revaluation 0.7 - 0.7
--------------------------- --------------- ----------- -----------
At 31 December 2016 - (8.5) (8.5)
--------------------------- --------------- ----------- -----------
Depreciation charge (0.1) (0.7) (0.8)
Revaluation 0.1 - 0.1
--------------------------- --------------- ----------- -----------
At 31 December 2017 - (9.2) (9.2)
--------------------------- --------------- ----------- -----------
Net book amount
-------------------------- --------------- ----------- -----------
At 31 December 2016 9.0 2.4 11.4
--------------------------- --------------- ----------- -----------
At 31 December 2017 9.0 2.5 11.5
--------------------------- --------------- ----------- -----------
Company
Computer
and
Freehold other
property equipment Total
GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- -----------
Cost or valuation
At 1 January 2016 2.7 9.5 12.2
Additions 1.4 0.6 2.0
Disposals - (0.3) (0.3)
Revaluation 0.5 - 0.5
At 31 December 2016 4.6 9.8 14.4
-------------------------- ----------- ----------- -----------
Additions - 0.3 0.3
At 31 December 2017 4.6 10.1 14.7
-------------------------- ----------- ----------- -----------
Accumulated depreciation
At 1 January 2016 - (8.0) (8.0)
Depreciation charge (0.1) (0.3) (0.4)
Disposals - 0.1 0.1
Revaluation 0.1 - 0.1
At 31 December 2016 - (8.2) (8.2)
-------------------------- ----------- ----------- -----------
Depreciation charge - (0.4) (0.4)
At 31 December 2017 (8.6) (8.6)
-------------------------- ----------- ----------- -----------
Net book amount
-------------------------- ----------- ----------- -----------
At 31 December 2016 4.6 1.6 6.2
-------------------------- ----------- ----------- -----------
At 31 December 2017 4.6 1.5 6.1
-------------------------- ----------- ----------- -----------
The Group's freehold properties comprise:
-- the Registered Office of the Company, which is fully utilised for the Group's own purposes.
-- Secure Trust House, Boston Drive, Bourne End, SL8 5YS, the majority of which up to the sale of ELG, was also used for the Group's own purposes. Since the sale, it is only partially used for the Group's own purposes.
-- 25 and 26 Neptune Court, Vanguard Way, Cardiff, CF24 5PJ, the majority of which is used for the Group's own purposes.
The directors have assessed the value of the Group's freehold property at the year end through comparison to current rental yields on similar properties in the same area and an increase in the fair value of freehold property has been recognised and its carrying value has been adjusted accordingly. Changes in the fair value of freehold property are recognized in other comprehensive income, to the extent that any reductions do not exceed the initial increase.
The carrying value of freehold land which is included in the total carrying value of freehold land and buildings and which is not depreciated is GBP1.9 million (2016: GBP1.9 million).
The historical cost of freehold property included at valuation is as follows:
Group Group Company Company
2017 2016 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- ----------- -----------
Cost 7.9 7.9 4.1 4.1
Accumulated depreciation (1.5) (1.4) (0.1) (0.1)
6.4 6.5 4.0 4.0
-------------------------- ----------- ----------- ----------- -----------
16. Intangible assets
Group
Other
Computer intangible
Goodwill software assets Total
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- ------------ -----------
Cost or valuation
At 1 January 2016 1.0 9.3 2.2 12.5
Additions - 3.6 - 3.6
At 31 December 2016 1.0 12.9 2.2 16.1
-------------------------- ----------- ----------- ------------ -----------
Additions - 3.3 0.1 3.4
At 31 December 2017 1.0 16.2 2.3 19.5
-------------------------- ----------- ----------- ------------ -----------
Accumulated amortisation
At 1 January 2016 - (4.8) (0.7) (5.5)
Amortisation charge - (1.3) (0.3) (1.6)
At 31 December 2016 - (6.1) (1.0) (7.1)
-------------------------- ----------- ----------- ------------ -----------
Amortisation charge - (1.8) (0.2) (2.0)
At 31 December 2017 - (7.9) (1.2) (9.1)
-------------------------- ----------- ----------- ------------ -----------
Net book amount
-------------------------- ----------- ----------- ------------ -----------
At 31 December 2016 1.0 6.8 1.2 9.0
-------------------------- ----------- ----------- ------------ -----------
At 31 December 2017 1.0 8.3 1.1 10.4
-------------------------- ----------- ----------- ------------ -----------
Goodwill above relates to the following cash generating units, which are part of the Retail Finance operating segment:
2017 2016
GBPmillion GBPmillion
---------------- ----------- -----------
Music business 0.3 0.3
V12 0.7 0.7
----------------- ----------- -----------
Total 1.0 1.0
----------------- ----------- -----------
The recoverable amount of these cash generating units are determined on a value in use calculation which uses cash flow projections based on financial forecasts covering a three year period, and a discount rate of 8%. Cash flow projections during the forecast period are based on the expected rate of new business. A zero growth based scenario is also considered. The directors believe that any reasonably possible change in the key assumptions on which recoverable amount is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the cash-generating unit.
Other intangible assets were recognised as part of the V12 Finance Group acquisition. These were recorded at fair value, and are being amortised as follows:
Years
---------------------- ------
IT system 5
Distribution channel 10
Brand name 5
------------------------ ------
Company
Computer
Goodwill software Total
GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- -----------
Cost or valuation
At 1 January 2016 0.3 5.5 5.8
Additions - 3.5 3.5
At 31 December 2016 0.3 9.0 9.3
--------------------------- ----------- ----------- -----------
Additions - 3.3 3.3
At 31 December 2017 0.3 12.3 12.6
--------------------------- ----------- ----------- -----------
Accumulated amortisation
At 1 January 2016 - (2.6) (2.6)
Amortisation charge - (0.5) (0.5)
At 31 December 2016 - (3.1) (3.1)
--------------------------- ----------- ----------- -----------
Amortisation charge - (1.0) (1.0)
At 31 December 2017 - (4.1) (4.1)
--------------------------- ----------- ----------- -----------
Net book amount
-------------------------- ----------- ----------- -----------
At 31 December 2016 0.3 5.9 6.2
--------------------------- ----------- ----------- -----------
At 31 December 2017 0.3 8.2 8.5
--------------------------- ----------- ----------- -----------
Goodwill above relates to the music business cash generating unit, which is part of the Retail Finance operating segment. The recoverable amount is determined on the same basis as for the Group.
17. Investments
Company
Shares Impairment Net
at cost provisions investments
GBPmillion GBPmillion GBPmillion
------------------------------------- ----------- ------------ -------------
At 31 December 2016, 1 January 2017
and 31 December 2017 3.7 - 3.7
------------------------------------- ----------- ------------ -------------
Shares in subsidiary undertakings of Secure Trust Bank PLC at 31 December 2017 are stated at cost less any provision for impairment. All subsidiary undertakings are unlisted and none are banking institutions. The subsidiary undertakings were all incorporated in the UK and wholly owned via ordinary shares. All subsidiary undertakings are included in the consolidated financial statements and have an accounting reference date of 31 December.
Details are as follows:
Principal activity
---------------------------------- --------------------------
Owned directly
Debt Managers (Services)
Limited Debt collection company
Secure Homes Services
Limited Property rental
STB Leasing Limited Leasing
V12 Finance Group Limited Holding company
Owned indirectly via intermediate
holding companies
V12 Personal Finance Limited Dormant
Sourcing and servicing of
V12 Retail Finance Limited unsecured loans
---------------------------------- --------------------------
The registered office of the Company, and all subsidiary undertakings, is One Arleston Way, Shirley, Solihull, West Midlands, B90 4LH.
The following subsidiaries were sold to NSF on 13 April 2016:
Principal activity
---------------------------------- -----------------------------
Owned directly
Everyday Loans Holdings
Limited Holding company
Owned indirectly via intermediate
holding companies
Sourcing and servicing of
Everyday Loans Limited unsecured and secured loans
Provider of unsecured and
Everyday Lending Limited secured loans
---------------------------------- -----------------------------
18. Deferred taxation
Group Group Company Company
2017 2016 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------- ----------- ----------- ----------- -----------
Deferred tax liabilities:
Unrealised surplus on revaluation
of freehold property (0.2) (0.2) - -
Other short term timing differences 0.2 - - -
------------------------------------- ----------- ----------- ----------- -----------
Deferred tax liabilities - (0.2) - -
------------------------------------- ----------- ----------- ----------- -----------
Deferred tax assets:
Other short term timing differences 0.6 - 0.6 0.1
Deferred tax assets 0.6 - 0.6 0.1
------------------------------------- ----------- ----------- ----------- -----------
Deferred tax liabilities:
At 1 January (0.2) - - -
Income statement 0.2 - - -
Other comprehensive income - (0.2) - -
------------------------------------- ----------- ----------- ----------- -----------
At 31 December - (0.2) - -
------------------------------------- ----------- ----------- ----------- -----------
Deferred tax assets:
At 1 January - 0.3 0.1 0.6
Income statement 0.2 (0.3) 0.1 (0.4)
Other comprehensive income 0.4 - 0.4 (0.1)
At 31 December 0.6 - 0.6 0.1
------------------------------------- ----------- ----------- ----------- -----------
On 26 October 2015, the Government substantively enacted a reduction in the main rate of UK corporation tax from 20% to 19% (effective from 1 April 2017). Subsequently, a further reduction to 17% (effective 1 April 2020) was also substantively enacted on 6 September 2016. This will reduce the Company's future current tax charge accordingly. Deferred tax has been calculated based on the enacted rates to the extent that the related temporary or timing differences are expected to reverse in the future periods.
19. Other assets
Group Group Company Company
2017 2016 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------ ----------- ----------- ----------- -----------
Other receivables 1.2 0.7 1.0 0.6
Amounts due from related companies - - 29.7 31.2
Prepayments and accrued income 4.2 4.2 2.5 3.5
5.4 4.9 33.2 35.3
------------------------------------ ----------- ----------- ----------- -----------
20. Due to banks
Group Group Company Company
2017 2016 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------- ----------- ----------- ----------- -----------
Amounts due to other credit
institutions 113.0 70.0 113.0 70.0
----------------------------- ----------- ----------- ----------- -----------
Amounts due to banks for the current year represent monies arising from drawings under the Term Funding Scheme. These are due for repayment between May 2021 and November 2021.
Amounts due to banks in the prior year represented monies arising from the sale and repurchase of drawings under the Funding for Lending Scheme, which were repaid during 2017.
21. Deposits from customers
Group and Company
2017 2016
GBPmillion GBPmillion
------------------------- ----------- -----------
Current/demand accounts 14.5 15.2
Term deposits 1,468.7 1,136.6
------------------------- ----------- -----------
1,483.2 1,151.8
------------------------- ----------- -----------
For a maturity profile of deposits from customers, refer to Notes 30 and 32.
22. Other liabilities
Group Group Company Company
2017 2016 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------- ----------- ----------- ----------- -----------
Other payables 29.5 21.2 24.5 17.5
Amounts due to related companies - - 9.7 13.2
Accruals and deferred income 12.4 27.8 10.2 26.3
41.9 49.0 44.4 57.0
---------------------------------- ----------- ----------- ----------- -----------
Financial Services Compensation Scheme Levy
The liability for the Financial Services Compensation Scheme levy is included in accruals and deferred income of both Group and Company.
In common with all regulated UK deposit takers, the Company pays a levy to the Financial Services Compensation Scheme to enable it to meet claims against it. The levy consists of a compensation levy which covers the amount of compensation and a management expenses levy, which covers the costs of running the scheme and interest associated with compensation which the scheme pays.
The Company's Financial Services Compensation Scheme provision reflects market participation up to the reporting date and the accrual of GBP0.2 million (2016: GBP0.3 million) relates to the levy for the scheme year 2017/18 which is payable in September 2018. This amount was calculated on the basis of the Company's share of protected deposits and the Financial Services Compensation Scheme's estimate of total interest levies payable for each scheme year.
23. Provisions for liabilities and charges
2017 2017 2017 2016
Customer Customer
redress Fraud Total redress
GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------- ----------- ----------- ----------- -----------
Balance at 1 January 1.3 - 1.3 2.0
Charged to income statement 0.4 0.2 0.6 0.4
Utilised (0.5) - (0.5) (1.1)
Balance at 31 December 1.2 0.2 1.4 1.3
----------------------------- ----------- ----------- ----------- -----------
Customer redress provision
The Group provides for its best estimate of redress payable in respect of historical sales of accident, sickness and unemployment insurance, by considering the likely future uphold rate for claims, in the context of confirmed issues and historical experience. The likelihood of potential new claims is projected forward to 2019, as management believe this to be an appropriate time horizon, recognising the significant decline in recent claims experience and the increasing subjectivity beyond that. The accuracy of these estimates would be affected, were there to be a significant change in either the number of future claims or, the incidence of claims upheld by the Financial Ombudsman Service.
The Financial Conduct Authority has announced a deadline for making these customer redress claims, which would give consumers until 29 August 2019 to make a claim.
Fraud
The fraud provision relates to cases where the Bank has reasonable evidence of suspected fraud, but further investigation is required before the cases can be dealt with appropriately.
24. Contingent liabilities and commitments
Contingent liabilities
As a financial services business, the Group must comply with numerous laws and regulations, which significantly affect the way it does business. Whilst the Group believes there are no material unidentified areas of failure to comply with these laws and regulations, there can be no guarantee that all issues have been identified.
Capital commitments
At 31 December 2017, the Group had no capital commitments (2016: GBPnil).
The Company had no capital commitments (2016: GBPnil).
Credit commitments
See Note 29 for details of the Group and Company commitments to extend credit to customers.
Operating lease commitments
The future aggregate lease payments for non-cancellable operating leases are as follows:
2017 2016
Land Land
and and
buildings Other buildings Other
Group GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------- ----------- ----------- ----------- -----------
Within 1 year 0.3 0.1 0.3 0.4
Between 1 year and 5 years 0.8 0.1 0.9 0.1
Over 5 years - - 0.1 -
---------------------------- ----------- ----------- ----------- -----------
1.1 0.2 1.3 0.5
---------------------------- ----------- ----------- ----------- -----------
2017 2016
Land Land
and and
buildings Other buildings Other
Company GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------- ----------- ----------- ----------- -----------
Within 1 year 0.1 0.1 0.1 0.3
Between 1 year and 5 years 0.4 - 0.4 0.1
Over 5 years - - 0.1 -
---------------------------- ----------- ----------- ----------- -----------
0.5 0.1 0.6 0.4
---------------------------- ----------- ----------- ----------- -----------
There are 2 leases classified as land and buildings in the Group (2016: 4). Other leases include motor vehicles and computer hardware.
25. Share capital
2017 2017 2016 2016
Number Ordinary Number Ordinary
of shares shares of shares shares
GBPmillion GBPmillion
------------------------------- ----------- ----------- ----------- -----------
At start of year 18,475,229 7.4 18,191,894 7.3
Shares issued during the year - - 283,335 0.1
------------------------------- ----------- ----------- ----------- -----------
At end of year 18,475,229 7.4 18,475,229 7.4
------------------------------- ----------- ----------- ----------- -----------
Share capital comprises ordinary shares with a par value of 40 pence each.
26. Share based payments
At 31 December 2017, the Group had four share based payment schemes in operation:
-- Share Option Scheme -- 2017 long term incentive plan -- 2017 sharesave scheme -- 'Phantom' share option scheme
In addition, the 2017 deferred bonus plan has been approved by shareholders but has not yet been launched.
A summary of the key details of each scheme is set out below:
Outstanding Forfeited Outstanding
at the Granted during at the
start during the end Vested
of the the year of the and Exercise
year year year exercisable Vesting price
Number Number Number Number Number Date GBP
----------------- ------------ -------- ---------- ------------ ------------- ----------- ---------
Equity settled
Share option 2 November
scheme 177,084 - - 177,084 177,084 2016 7.20
2017 Long Term 1 June
Incentive plan - 67,992 - 67,992 - 2020 0.40
2017 Sharesave 1 November
Plan - 125,987 (40) 125,947 - 2020 13.19
177,084 193,979 (40) 371,023 177,084
----------------- ------------ -------- ---------- ------------ ------------- ----------- ---------
Cash settled
'Phantom' share 16 March
option scheme 312,917 - - 312,917 - 2019 25.00
----------------- ------------ -------- ---------- ------------ ------------- ----------- ---------
The Group and Company incurred an expense in relation to share based payments of GBP0.2 million (2016: credit of GBP0.5 million), as disclosed in Note 5.
Share option scheme
On 17 October 2011, the Group established the Share Option Scheme entitling three directors and certain senior employees to purchase shares in the Company.
On 2 November 2011, 934,998 share options were granted at an exercise price of GBP7.20 per share. Approximately half of the share options vested and were exercised on 2 November 2014, with the remainder vesting and becoming exercisable on 2 November 2016. The bulk of the remainder were exercised on 7 November 2016, leaving 177,084 share options of 2 directors unexercised at 31 December 2016. Vested options are exercisable for a period of 10 years from the date of grant.
The number of unexercised share options as at 31 December 2017 remains unchanged from the position as at 31 December 2016. The intrinsic value of unexercised options is GBP1.8 million (2016: GBP2.5 million).
2017 long term incentive plan
On 3 May 2017, the Group established the 2017 Long Term Incentive Plan Scheme entitling two directors and certain other key senior employees to purchase shares in the Company.
The awards are subject to three performance conditions, which are based on:
-- Annual compound growth in Earnings per share ('EPS') over the performance period.
-- Rank of the total shareholder return ('TSR') over the performance period against the TSR of the comparator group of peer group companies.
-- Maintaining appropriate risk practices over the performance period reflecting the longer term strategic risk management of the Group.
The awards will vest on the date on which the board determines that these conditions have been met.
The awards have a performance term of 3 years. Those awards granted to the Executive Directors are subject to a holding period of 2 years following the vesting date. Those awards not subject to a holding period will be released to the participants on the vesting date. Vested options are exercisable for a period of 10 years from the date of grant.
On 1 June 2017, 67,992 share options were granted at an exercise price of 40 pence per share. 33,467 share options are subject to a holding period of 2 years, whilst the remaining 34,525 share options are not subject to a holding period.
The original grant date valuation was determined to be GBP12.19 for those awards that are subject to a holding period, and GBP14.82 for those awards not subject to a holding period, using a Black-Scholes model for the EPS and risk management tranches, and a Monte Carlo model for the TSR tranche, and these valuations have been used in the calculation. Measurement inputs and assumptions used were as follows:
At grant
date
------------------------------------- --- --- ---------
Share price at grant date GBP22.45
Expected dividend yield 3.80%
Awards subject to a holding
period
Expected stock price volatility 24.6%
Risk free interest rate 0.42%
Average expected life (years) 5.00
Discount for lack of marketability
during holding period 10.00%
Awards not subject to a holding
period
Expected stock price volatility 25.1%
Risk free interest rate 0.19%
Average expected life (years) 3.00
Assumptions applicable to TSR
tranche only
Expected stock price volatility 25.50%
Grant date TSR performance of
the Company compared to comparator Below
group median
Correlation 37%
------------------------------------------------ ---------
2017 Sharesave plan
On 3 May 2017, the Group established the 2017 Sharesave Plan, entitling all eligible employees to purchase shares in the Company.
The 2017 Sharesave Plan allows employees with more than 12 months service to save for three years, subject to a maximum monthly amount of GBP500, with the option to buy shares in Secure Trust Bank PLC when the plan matures. Participants can not change the amount that they have agreed to save each month but they can suspend payments for up to six months. Participants can withdraw their savings at any time but, if they do this before the completion date, they lose the option to buy shares at the Option Price, and if participants cease to hold plan-related employment before the third anniversary of the grant date, then the options are also lost.
On 20 September 2017, 229 employees were granted 125,987 share options, at an exercise price of GBP13.19. The options will ordinarily vest on 1 November 2020 and be exercisable for a period of six months. At 31 December 2017, 228 employees with 125,947 share options remained in the 2017 Sharesave Plan.
The original grant date valuation was determined to be GBP3.53 per option, using a Black Scholes model, and this valuation has been used in the calculation. Measurement inputs and assumptions used were as follows:
At grant
date
--------------------------------- ---------
Share price at grant date GBP17.51
Expected stock price volatility 25.55%
Expected dividend yield 4.34%
Risk free interest rate 0.58%
Average expected life (years) 3.36
Expected cancellation rate 8.00%
------------------------------------ ---------
Cash settled share based payments
On 16 March 2015, a four year 'phantom' share option scheme was established in order to provide effective long-term incentive to senior management of the Group. Under the scheme, no actual shares would be issued by the Company, but those granted awards under the scheme would be entitled to a cash payment. The amount of the award is calculated by reference to the increase in the value of an ordinary share in the Company over an initial value set at GBP25 per ordinary share, being the price at which the shares resulting from the exercise of the first tranche of share options under the Share Option Scheme were sold in November 2014.
As at 31 December 2017, 312,917 (2016: 312,917) share options remained outstanding. The options will vest on 16 March 2019, and be exercisable for a period of 10 years after grant date.
As at 31 December 2017, the estimated fair value has been prepared using the Black-Scholes model. Measurement inputs and assumptions used were as follows:
2017 2016
--------------------------------- --------- ---------
Share price at reporting date GBP17.97 GBP21.51
Expected stock price volatility 24.49% 40.00%
Expected dividend yield 4.45% 3.40%
Risk free interest rate 0.59% 0.06%
Average expected life (years) 4.03 1.84
Fair value GBP0.79 GBP2.80
----------------------------------- --------- ---------
This resulted in the following being recognised in the financial statements:
2017 2016
GBPmillion GBPmillion
-------------------------- ----------- -----------
Liability at 1 January 0.6 1.2
Credit for the year (0.4) (0.6)
---------------------------- ----------- -----------
Liability at 31 December 0.2 0.6
---------------------------- ----------- -----------
27. Cash and cash equivalents
For the purposes of the statement of cash flows, cash and cash equivalents comprise the following balances with less than three months' maturity from the date of acquisition.
Group Group Company Company
2017 2016 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------ ----------- ----------- ----------- -----------
Cash and balances at central
banks 226.1 112.0 226.1 112.0
Loans and advances to banks
(Note 9) 34.3 18.2 32.3 16.5
------------------------------ ----------- ----------- ----------- -----------
260.4 130.2 258.4 128.5
------------------------------ ----------- ----------- ----------- -----------
28. Financial risk management strategy
By their nature, the Group's activities are principally related to the use of financial instruments. The directors and senior management of the Group have formally adopted a Group risk appetite statement which sets out the Board's attitude to risk and internal controls. Key risks identified by the directors are formally reviewed and assessed at least once a year by the Board, in addition to which key business risks are identified, evaluated and managed by operating management on an ongoing basis by means of procedures such as physical controls, credit and other authorisation limits and segregation of duties. The Board also receives regular reports on any risk matters that need to be brought to its attention. Significant risks identified in connection with the development of new activities are subject to consideration by the Board. There are budgeting procedures in place and reports are presented regularly to the Board detailing the results of each principal business unit, variances against budget and prior year, and other performance data.
A more detailed description of the risk governance structure is contained in the Strategic Report beginning on page 2.
The principal financial risks inherent in the Group's business are credit risk (Note 29), market risk (Note 30), liquidity risk (Note 31), and capital risk (Note 32).
29. Credit risk
The Company and Group take on exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. A formal Credit Risk Policy has been agreed by the Board whilst credit risk is monitored on a monthly basis by the Credit Risk Committees which review performance of key portfolios including new business volumes, collections performance, provisioning levels and provisioning methodology. A credit risk department within the Group monitors adherence to the Credit Risk Policy, implements risk tools to manage credit risk and evaluates business opportunities and the risks and opportunities they present to the Group whilst ensuring the performance of the Group's existing portfolios is in line with expectations.
The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to individual borrowers or groups of borrowers. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. The limits on the level of credit risk are approved periodically by the Board of Directors and actual exposures against limits monitored daily.
Impairment provisions are provided for losses that have been incurred at the statement of financial position date. Significant changes in the economy could result in losses that are different from those provided for at the statement of financial position date. Management therefore carefully manages its exposures to credit risk as they consider this to be the most significant risk to the business.
Exposure to Consumer Finance credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral, principally motor vehicles on Motor loans and a credit support balance provided by RentSmart. The assets undergo a scoring process to mitigate risk and are monitored by the Board.
For Real Estate Finance and Commercial Finance, lending decisions are made on an individual transaction basis, using expert judgement and assessment against criteria set out in the lending policies. Asset Finance lending is outsourced to Haydock, who operate in line with the Group's credit policies and risk appetite. The loans are secured against the assets lent against (real estate, trade receivables and commercial plant and equipment, respectively). Disclosures relating to collateral and arrears on loans and advances to customers are disclosed in Notes 10 and 12 respectively.
The Board monitors the ratings of the counterparties in relation to the Group's loans and advances to banks. Disclosures of these at the year end are contained in Note 9. There is no direct exposure to the Eurozone and peripheral Eurozone countries.
The maximum exposure to credit risk for the Company and the Group was as follows:
Group Group Company Company
2017 2016 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------- ----------- ----------- ----------- -----------
Cash and balances at central
banks 226.1 112.0 226.1 112.0
Loans and advances to banks 34.3 18.2 32.3 16.5
Loan and advances to customers 1,598.3 1,321.0 1,565.5 1,289.2
Debt securities held-to-maturity 5.0 20.0 5.0 20.0
Other receivables 1.2 0.7 1.0 0.6
Amounts due from related parties - - 29.7 31.2
Credit risk exposures relating
to off-balance sheet assets
are as follows:
Loan commitments 178.6 178.0 178.5 177.8
---------------------------------- ----------- ----------- ----------- -----------
At 31 December 2,043.5 1,649.9 2,038.1 1,647.3
---------------------------------- ----------- ----------- ----------- -----------
The above table represents the maximum credit risk exposure (net of impairment) to the Company and Group at 31 December 2017 and 2016 without taking account of any collateral held or other credit enhancements attached. For on-balance sheet assets, the exposures are based on the net carrying amounts as reported in the statement of financial position.
Concentration risk
Management assesses the potential concentration risk from geographic, product and individual loan concentration. Due to the well diversified nature of the Group's lending operations the directors do not consider there to be a material exposure arising from concentration risk. The increase in lending balances and loan commitments in the London region is principally due to the increase in Real Estate Finance activities during the year. The concentration by product and location of the Group and Company's lending to customers and loan commitments are detailed below:
Group
Loans and
advances to
customers Loan commitments
2017 2016 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------ ----------- ----------- ----------- -----------
Concentration by
product
Business Finance:
Real Estate Finance 580.8 451.0 98.6 99.4
Asset Finance 116.7 117.2 15.5 19.5
Commercial Finance 126.5 62.8 35.5 28.9
Consumer Finance:
Personal Lending - 65.5 - -
Motor 274.6 236.2 0.6 0.6
Retail 452.3 325.9 20.1 28.6
Consumer mortgages 16.5 - 7.7 -
Other 30.9 62.4 0.6 1.0
-------------------------- ----------- ----------- ----------- -----------
At 31 December 1,598.3 1,321.0 178.6 178.0
-------------------------- ----------- ----------- ----------- -----------
Concentration by
region:
East Anglia 142.0 113.1 25.4 19.7
East Midlands 61.5 52.3 4.0 3.0
London 528.0 415.3 76.6 61.3
North East 44.5 37.4 1.0 2.2
North West 152.0 120.8 25.4 17.0
Northern Ireland 16.8 12.5 0.5 0.4
Scotland 93.0 90.3 3.7 10.6
South East 231.2 205.0 14.3 35.0
South West 74.0 62.6 8.1 12.1
Wales 53.5 46.8 1.8 4.2
West Midlands 93.1 80.5 6.1 5.5
Yorkshire and the
Humber 88.1 69.1 4.5 3.9
Overseas 20.6 15.3 7.2 3.1
-------------------------- ----------- ----------- ----------- -----------
At 31 December 1,598.3 1,321.0 178.6 178.0
-------------------------- ----------- ----------- ----------- -----------
The above table relates to the location of the borrower. The majority of the overseas borrowers are Real Estate Finance clients. All of the property secured against Real Estate Finance loans is based in the United Kingdom.
Company
Loans and
advances to
customers Loan commitments
2017 2016 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- ----------- -----------
Concentration by product:
Business Finance:
Real Estate Finance 580.8 451.0 98.6 99.4
Asset Finance 116.7 117.2 15.5 19.5
Commercial Finance 124.2 62.8 35.5 28.9
Consumer Finance:
Personal Lending - 65.5 - -
Motor 274.6 236.2 0.6 0.6
Retail 452.3 325.9 20.1 28.6
Consumer mortgages 16.5 - 7.7 -
Other 0.4 30.6 0.5 0.8
--------------------------- ----------- ----------- ----------- -----------
At 31 December 1,565.5 1,289.2 178.5 177.8
--------------------------- ----------- ----------- ----------- -----------
Concentration by region:
East Anglia 139.3 110.4 25.4 19.7
East Midlands 59.6 50.1 4.0 3.0
London 523.8 411.2 76.6 61.1
North East 43.0 35.9 1.0 2.2
North West 146.1 117.1 25.4 17.0 Northern Ireland 16.2 11.9 0.5 0.4 Scotland 90.1 87.1 3.7 10.6 South East 227.1 200.6 14.3 35.0 South West 71.8 60.3 8.1 12.1 Wales 51.9 45.1 1.8 4.2 West Midlands 90.4 77.8 6.0 5.5 Yorkshire and the Humber 85.6 66.4 4.5 3.9 Overseas 20.6 15.3 7.2 3.1 --------------------------- ----------- ----------- ----------- ----------- At 31 December 1,565.5 1,289.2 178.5 177.8 --------------------------- ----------- ----------- ----------- -----------
The above table relates to the location of the borrower. The majority of the overseas borrowers are Real Estate Finance clients. All of the property secured against Real Estate Finance loans is based in the United Kingdom.
Forbearance
At year end, all customers within the Group's Consumer Mortgage business were up to date with their monthly payments. Should customers face financial difficulties, the Group may, depending on individual circumstances, offer customers one of a number of forbearance options. The types of forbearance the Group may be prepared to offer include the following:
-- Temporary interest only concessions are offered to customers in financial difficulty on a temporary basis with formal periodic review. The concession allows the customer to reduce monthly payments to cover interest only, and if made, the arrears status will not increase.
-- Arrangement payment plans are agreed to enable customers to reduce their arrears balances by an agreed amount per month which is paid in addition to their standard monthly repayment.
-- Payment concessions can be agreed on a temporary basis whereby the customer may pay less than the contractual monthly payment, in line with their individual affordability. If a customer is within this type of concession, their arrears position will increase.
-- In exceptional circumstances, capitalisations of arrears may occur or an interest rate adjustment may be applied. These are used under strict controls, explicitly where the customer circumstances offer no other option.
All forbearance arrangements are formally discussed and agreed with the customer. By offering customers in financial difficulty the option of forbearance the Group potentially exposes itself to an increased level of risk through prolonging the period of non-contractual payment and/or potentially placing the customer into a detrimental position at the end of the forbearance period.
All forbearance arrangements are reviewed and monitored regularly to assess the ongoing potential risk, suitability and sustainability to the Group.
Where forbearance measures are not possible or are considered not to be in the customer's best interests, or where such measures have been tried and the customer has not adhered to the forbearance terms that have been agreed, the Bank will consider realising its security and taking possession of the property in order to sell it and clear the outstanding debt.
Other than Consumer Mortgages, the Group does not routinely reschedule contractual arrangements where customers default on their repayments. It may offer the customer the option to reduce or defer payments for a short period, in which cases the loan will retain the normal contractual payment due dates and will be treated the same as any other defaulting cases for impairment purposes. Arrears tracking will continue on the account with any impairment charge being based on the original contractual due dates for all products.
Implementation of IFRS 9
As detailed in note 1.2 the estimated adjustment (net of tax) of the adoption of IFRS 9 on the opening balance of the Group's equity at 1 January 2018 is expected to be a reduction in the range of GBP22 million to GBP27 million. This represents:
-- GBPnil related to the classification requirements (refer to (a) below for further information);
-- An expected reduction in the range of GBP28 million to GBP34 million related to the impairment requirements (refer to (b) below for further information). This reduction is primarily attributable to Consumer Finance. The Business Finance portfolio is not expected to drive a material reduction; and
-- An increase in the range of GBP6 million to GBP7 million related to associated deferred tax impacts.
The above are estimates and will not be finalised until all transition work has been completed.
a) Classification of financial instruments
IFRS 9 contains three primary measurement categories for financial assets; 'amortised cost', 'fair value through other comprehensive income (FVOCI)' and 'fair value through profit and loss (FVTPL)'. The IAS 39 categories 'held to maturity', 'available for sale' and 'loans and receivables' will be eliminated. A financial asset will be measured at amortised cost if both the following conditions are met and it has not been designated as at FVTPL:
-- the asset is held within a business model whose objective is to hold the asset to collect its contractual cash flows; and
-- the contractual terms of the financial asset give rise to cash flows on specified dates that represent payments of solely principal and interest on the outstanding principal amount.
A debt instrument would be measured at FVOCI only if both the below conditions are met and it has not been designated as FVTPL:
-- the asset is held within a business model whose objective is achieved by both collecting its contractual cash flows and selling the financial asset; and
-- the contractual terms of the financial asset give rise to cash flows on specified dates that represent payments of solely principal and interest on the outstanding principal amount.
On initial recognition of an equity investment that is not held for trading, the Group may irrevocably elect to present subsequent changes in fair value in OCI. This election will be made on an investment by investment basis.
All other assets will be classified as FVTPL.
Impact assessment
As detailed below IFRS 9 will have minimal impact on the classification of financial assets held as at 1 January 2018:
-- The Group's cash and balances at central banks, loans and advances to banks and customers, debt securities held to maturity and other financial assets will be classified as amortised cost. This is consistent with their current IAS 39 classification.
-- The Group held no financial instruments that would be classified as FVOCI or FVTPL at 1 January 2018.
b) Impairment of financial assets and loan commitments
IFRS 9 replaces the incurred loss impairment model within IAS 39 with a forward looking expected loss model. The Group will recognise loss allowances for expected credit losses on all financial assets carried at amortised cost, including lease receivables and loan commitments.
Credit loss allowances will be measured as an amount equal to lifetime ECL, except for the following, for which they will be measured as 12 month ECL:
-- Financial assets determined to have low credit risk at the reporting date;
-- Financial assets which have not experienced a significant increase in credit risk since their initial recognition; and
-- Financial assets which have experienced a significant increase in credit risk since their initial recognition but have subsequently met the Group's cure policy, as set out below.
A financial asset will be considered to have low credit risk when its credit risk rating is equivalent to the widely understood definition of 'investment grade' assets. The Group expects all its debt securities, which represent UK Treasury bills, and loans held in STB Leasing Limited, for which credit risk is retained by its partner RentSmart, to be low credit risk.
Lifetime ECL is the ECL that results from all possible default events over the expected life of a financial asset. Further detail regarding the measurement of ECL is set out below.
12 month ECL is the portion of lifetime ECL that results from default events on a financial asset that are expected within 12 months after the reporting date.
Measurement of ECL
ECL's are probability weighted estimates of credit losses which will be measured as the present value of all cash shortfalls. Specifically, this is the difference between the contractual cash flows due and the cash flows expected to be received, discounted at the original effective interest rate (or for portfolios purchased outside of the Group by Debt Managers (Services) Limited the credit adjusted effective interest rate). For undrawn loan commitments ECL will be measured as the difference between the contractual cash flows due if the commitment is drawn and the cash flows expected to be received.
Significant increase in credit risk
For Consumer Finance, the credit risk of a financial asset will be considered to have experienced a significant increase in credit risk since initial recognition where there has been a significant increase in the remaining lifetime probability of default of the asset. The Group may also use its expert credit judgement and where possible relevant historical and current performance data, including bureau data to determine that an exposure has undergone a significant increase in credit risk.
For Business Finance, the credit risk of a financial asset will be considered to have experienced a significant increase in credit risk where certain early warning indicators apply (e.g. cost over runs, timing delays, notification of county court judgements etc.).
As a backstop, the Group will consider that a significant increase in credit risk occurs no later than when an asset is more than 30 days past due for all portfolios.
The credit risk of a financial asset may improve such that it is no longer considered to have experienced a significant increase in credit risk if it meets the Group's cure policy.
Cure policy
The Group's cure policy will require sufficient payments to be made to bring an account back within less than 30 days past due and for such payments to be maintained for six consecutive months. For the Real Estate Finance portfolio payments would need to be maintained for twelve consecutive months.
Definition of default/Credit impaired financial assets
At each reporting date, the Group will assess whether financial assets carried at amortised cost are credit impaired. A financial asset will be considered to be credit impaired when an event(s) that has a detrimental impact on estimated future cash flows have occurred. Evidence that a financial asset is credit impaired includes the following observable data:
-- Initiation of bankruptcy proceedings; -- Notification of bereavement; -- Identification of loan meeting debt sale criteria; or -- Initiation of repossession proceedings.
In addition, a loan that is 90 days or more past due will be considered credit impaired for all portfolios. The credit risk of financial assets that become credit impaired are not expected to improve such that they are no longer considered credit impaired.
Modified financial assets
A customer's account may be modified to assist customers who are in or have recently overcome financial difficulties and have demonstrated both the ability and willingness to meet the current or modified loan contractual payments. Where the terms of a financial asset have been modified and the modification has not resulted in derecognition, the expected cash flows arising from the modified financial asset are included in calculating any cash shortfalls from the existing asset.
Inputs in to measurement of ECL
The key inputs in to the measurement of expected credit loss will be:
-- Probability of default (PD); -- Exposure at default (EAD); and -- Loss given default (LGD).
These variables will be derived from internally developed statistical models and historical data, adjusted to reflect forward looking information.
Probability of default (PD) and credit risk grades
Credit risk grades will be a primary input into the determination of the PD for exposures. The Group will allocate each exposure to a credit risk grade at origination and at each reporting period to predict the risk of default. Credit risk grades will be determined using qualitative and quantitative factors that are indicative of the risk of default e.g. arrears status and loan applications scores. These factors will vary for each loan portfolio. Exposures will be subject to ongoing monitoring, which may result in an exposure being moved to a different credit risk grade. In monitoring exposures information such as payment records, request for forbearance strategies and forecast changes in economic conditions will be considered for the Consumer Finance portfolio. Additionally for the Business Finance portfolio information obtained during periodic reviews, for example audited financial statements, management accounts, budgets and projections will be considered, with particular focus on key ratios, compliance with covenants and changes in senior management teams.
Exogenous, Maturity, Vintage (EMV) modelling will be used in the production of forward looking lifetime PDs. This method will entail modelling the effects of external (exogenous) factors against cohorts of lending and their time on the books creating a clean relationship to best demonstrate the movement in default rates as macroeconomic variables are changed. These models will be extrapolated to provide PD estimates for the future, based on forecasted economic scenarios.
As the Group's performance data does not go back far enough to capture a full economic cycle, the proxy series of the quarterly rates of write offs for UK unsecured lending data will be used to build an economic response model (ERM) to incorporate the effects of recession.
The portfolios for which external benchmark information represents a significant input into the measurement of ECL are as follows:
External benchmarks used
Exposure LGD PD
(GBPm)
-------------------- --------- ------------------ --------------------
Real Estate Finance GBP581.0 CML Repossessions The benchmarks
and Default below relate
Rates to all three
portfolios:
S&P Ratings;
BOE UK Possessions
as proxy data
for ERM
-------------------- --------- ------------------ --------------------
Asset Finance GBP117.9 N/A
-------------------- --------- ------------------ --------------------
Commercial Finance GBP127.1 N/A
-------------------- --------- ------------------ --------------------
Exposure at default (EAD)
EAD represents the expected exposure in the event of a default. EAD will be derived from the current exposure and potential changes to the current amount allowed under the terms of the contract, including amortisation overpayments and early terminations. The EAD of a financial asset is its gross carrying amount. For loan commitments the EAD includes the amount drawn as well as potential future amounts that may be drawn under the terms of the contract, estimated based on historical observations and forward looking forecasts.
For Commercial Finance facilities that have no specific term an assumption will be made that accounts close 36 months after the reporting date. This assumption is based on industry experience of average client life. The Group therefore measures the lifetime ECL for these assets over an assumed 36 month period.
These facilities do not have a fixed term or repayment structure but are revolving and increase or decrease to reflect the value of the collateral i.e. receivables or inventory. The Group can cancel them with immediate effect but this contractual right is not enforced in the normal day to day management of the facility. Typically, demand would only be made on failure of a client business or in the event of a material event of default, such as a fraud. In the normal course of events, the Group's exposure is recovered through receipt of remittances from the client's debtors rather than from the client itself. The ECL for such facilities will be estimated taking into account the credit risk management actions that the Group expects to take to mitigate against such losses. These include a reduction in advance rate and facility limits or application of reserves against a facility so as to improve the likelihood of full recovery of exposure from the debtors. Alternative recovery routes mitigating ECL would include refinance by another funding provider, taking security over other asset classes or secured personal guarantees from the client's principals.
Loss given default (LGD)
LGD is the magnitude of the likely loss in the event of default. This will take into account recoveries either through curing or, where applicable, through auction sale of repossessed collateral and debt sale of the residual shortfall amount. For loans secured by retail property loan to value (LTV) ratios are key parameters in determining LGD. LGD's will be calculated on a discounted cash flow basis using the financial instrument's origination effective interest rate as the discount factor.
Incorporation of forward looking data
The Group will incorporate forward looking information into both its assessment of whether the credit risk of a financial asset has increased significantly since initial recognition and its measurement of expected credit loss. This will be achieved by developing a number of potential economic scenarios and modelling expected credit losses for each scenario. The outputs from each scenario will be combined, using the estimated likelihood of each scenario occurring to derive a probability weighted expected credit loss. The scenarios adopted and probability weighting applied will both be approved by the Assumptions Committee.
The scenarios expected to be adopted at 1 January 2018 were as follows:
Scenario Derivation Weighting
--------------- ------------------------------------------------ ----------
Derived from external consensus
forecasts, primarily from the
Bank of England, and used in
the Group's strategic planning
Base case and budgeting processes. 80%
Assumes that the expected credit
loss models are unaffected by
Benign case changing macroeconomic variables. 5%
Management's assessment, based
on historic data, of an adverse
scenario that could occur once
Stressed case every 7 to 8 years. 10%
Based on the scenario used by
the PRA for the H1 2017 ICAAP.
This can be found on the Bank
Deeper stress of England's website: www.bankofengland.co.uk 5%
--------------- ------------------------------------------------ ----------
The key drivers of credit risk and credit losses included in the above scenarios have been identified as annual unemployment rate growth, changes to the consumer price index and annual house price index growth.
c) Classification of financial liabilities
The treatment of financial liabilities is carried forward to IFRS 9 essentially unchanged from IAS 39. The only aspect to change is the treatment of financial liabilities that an entity elects to measure at fair value. The Group does not elect to measure any of its liabilities at fair value and therefore expects no impact to arise from adopting these new requirements.
d) Disclosures
IFRS 9 will require extensive new disclosures regarding credit risk and ECL's.
e) Impact on capital planning
The European Banking Authority has issued guidance on the transition requirements for the implementation of IFRS 9. The guidelines allow a choice of two approaches to recognise the impact of implementing IFRS 9 on regulatory capital:
-- Phase in the impact over a five year period (applying add back factors of 95%, 85%, 70%, 50% and 25% for years one to five respectively); or
-- Recognise the impact in full on transition to IFRS 9.
The Group has agreed to adopt the first approach. It is expected that implementation of IFRS 9 will result in a decrease in the Group's CET 1 ratio in the range of 8 to 10 basis points.
f) Transition
Changes in accounting policies resulting from adoption of IFRS 9 will be applied retrospectively, except as noted below:
-- Comparative periods will not be restated. Differences in the carrying amount of financial instruments resulting from adoption of IFRS 9 will be recognised in retained earnings and reserves as at 1 January 2018.
-- The determination of the business model within which a financial asset is held will be made based on the facts and circumstances that existed at the date of initial application.
-- If a debt security was deemed to have low credit risk at the date of initial application, then the Group will assume that the credit risk of the asset had not increased significantly since its initial recognition. A financial asset is considered to have low credit risk when its credit risk rating is equivalent to the widely understood definition of investment grade.
30. Market risk
Market risks arise from open positions in interest rate and currency products, all of which are exposed to general and specific market movements. The Group and Company have no significant exposures to foreign currencies and therefore there is no significant currency risk.
Interest rate risk
Interest rate risk is the potential adverse impact on the Company and Group's future cash flows from changes in interest rates and arises from the differing interest rate risk characteristics of the Company and Group's assets and liabilities. In particular, fixed rate savings and borrowing products expose the Group to the risk that a change in interest rates could cause either a reduction in interest income or an increase in interest expense relative to variable rate interest flows. The Group seeks to 'match' interest rate risk on either side of the statement of financial position. However, this is not a perfect match and interest rate risk is present on money market deposits of a fixed rate nature, fixed rate loans and fixed rate savings products. The Group monitors the interest rate mismatch on a monthly basis.
The interest rate mismatch is monitored, throughout the maturity bandings of the book on a parallel scenario for 100 and 200 basis points movements. The Group considers the 100 and 200 basis points movement to be appropriate for scenario testing given the current economic outlook and industry expectations. This typically results in a pre-tax mismatch of GBP0.7 million or less (2016: GBP0.7 million or less) for the Company and Group, with the same impact to equity pre-tax.
Interest rate sensitivity gap
The following tables summarise the re-pricing periods for the assets and liabilities in the Company and Group. Items are allocated to time bands by reference to the earlier of the next contractual interest rate re-price and the maturity date.
Group
More More More
than than than
3 months 6 months 1 year
but but but
less less less More Non
Within than than than than interest
3 months 6 months 1 year 5 years 5 years bearing Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
As at 31 December
2017
ASSETS
Cash and balances
at central banks 226.1 - - - - - 226.1
Loans and advances
to banks 34.3 - - - - - 34.3
Debt securities
held-to-maturity 5.0 - - - - - 5.0
Loans and advances
to customers 581.2 121.3 181.9 696.0 2.3 15.6 1,598.3
Other assets - - - - - 27.9 27.9
Total assets 846.6 121.3 181.9 696.0 2.3 43.5 1,891.6
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
LIABILITIES AND
EQUITY
Due to banks 113.0 - - - - - 113.0
Deposits from customers 577.2 28.2 269.9 581.4 6.5 20.0 1,483.2
Other liabilities - - - - - 46.3 46.3
Equity - - - - - 249.1 249.1
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total liabilities
and equity 690.2 28.2 269.9 581.4 6.5 315.4 1,891.6
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Interest rate sensitivity
gap 156.4 93.1 (88.0) 114.6 (4.2) (271.9)
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Cumulative gap 156.4 249.5 161.5 276.1 271.9 -
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
More More More
than than than
3 months 6 months 1 year
but but but
less less less More Non
Within than than than than interest
3 months 6 months 1 year 5 years 5 years bearing Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
As at 31 December
2016
ASSETS
Cash and balances
at central banks 112.0 - - - - - 112.0
Loans and advances
to banks 18.2 - - - - - 18.2
Debt securities
held-to-maturity 20.0 - - - - - 20.0
Loans and advances
to customers 378.7 119.7 164.8 644.6 - 13.2 1,321.0
Other assets - - - - - 38.8 38.8
Total assets 528.9 119.7 164.8 644.6 - 52.0 1,510.0
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
LIABILITIES AND
EQUITY
Due to banks 30.0 40.0 - - - - 70.0
Deposits from customers 462.4 66.7 63.8 535.9 23.0 - 1,151.8
Other liabilities - - - - - 52.2 52.2
Equity - - - - - 236.0 236.0
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total liabilities
and equity 492.4 106.7 63.8 535.9 23.0 288.2 1,510.0
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Interest rate sensitivity gap 36.5 13.0 101.0 108.7 (23.0) (236.2) --------------------------- ----------- ----------- ----------- ----------- ----------- ----------- Cumulative gap 36.5 49.5 150.5 259.2 236.2 - --------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Company
More More More
than than than
3 months 6 months 1 year
but but but
less less less More Non
Within than than than than interest
3 months 6 months 1 year 5 years 5 years bearing Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
As at 31 December
2017
ASSETS
Cash and balances
at central banks 226.1 - - - - - 226.1
Loans and advances
to banks 32.3 - - - - - 32.3
Debt securities
held-to-maturity 5.0 - - - - - 5.0
Loans and advances
to customers 576.6 119.2 178.3 689.1 2.3 - 1,565.5
Other assets - - - - - 52.1 52.1
Total assets 840.0 119.2 178.3 689.1 2.3 52.1 1,881.0
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
LIABILITIES AND
EQUITY
Due to banks 113.0 - - - - - 113.0
Deposits from customers 577.2 28.2 269.9 581.4 6.5 20.0 1,483.2
Other liabilities - - - - - 47.7 47.7
Equity - - - - - 237.1 237.1
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total liabilities
and equity 690.2 28.2 269.9 581.4 6.5 304.8 1,881.0
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Interest rate sensitivity
gap 149.8 91.0 (91.6) 107.7 (4.2) (252.7)
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Cumulative gap 149.8 240.8 149.2 256.9 252.7 -
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
More More More
than than than
3 months 6 months 1 year
but but but
less less less More Non
Within than than than than interest
3 months 6 months 1 year 5 years 5 years bearing Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
As at 31 December
2016
ASSETS
Cash and balances
at central banks 112.0 - - - - - 112.0
Loans and advances
to banks 16.5 - - - - - 16.5
Debt securities
held-to-maturity 20.0 - - - - - 20.0
Loans and advances
to customers 378.6 119.1 162.3 629.2 - - 1,289.2
Other assets - - - - - 65.0 65.0
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total assets 527.1 119.1 162.3 629.2 - 65.0 1,502.7
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
LIABILITIES AND
EQUITY
Due to banks 30.0 40.0 - - - - 70.0
Deposits from customers 462.4 66.7 63.8 535.9 23.0 - 1,151.8
Other liabilities - - - - - 59.1 59.1
Equity - - - - - 221.8 221.8
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total liabilities
and equity 492.4 106.7 63.8 535.9 23.0 280.9 1,502.7
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Interest rate sensitivity
gap 34.7 12.4 98.5 93.3 (23.0) (215.9)
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Cumulative gap 34.7 47.1 145.6 238.9 215.9 -
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
31. Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivering cash or another financial asset.
The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation. The liquidity requirements of the Group are met through withdrawing funds from its Bank of England Reserve Account to cover any short-term fluctuations and, longer term funding to address any structural liquidity requirements.
The Company has a formal governance structure in place to manage and mitigate liquidity risk on a day to day basis. The Board sets and approves the Company's liquidity risk management strategy. The ALCO, comprising senior executives of the Company, monitors liquidity risk. Key liquidity risk management information is reported by the Treasury function and monitored by the Chief Executive Officer and Chief Financial Officer on a daily basis. The ALCO meets monthly to review liquidity risk against set thresholds and risk indicators including early warning indicators, liquidity risk tolerance levels and ILAAP metrics.
The Company issued fixed rate deposit bonds to customers during the year as set out below:
2017 2016
------- --------- ---------
GBP347.9 GBP299.0
Amount million million
1 to 1 to
Term 5 years 7 years
------- --------- ---------
These were issued to broadly match the term lending by the Company.
The PRA requires a firm to maintain at all times liquidity resources which are adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due. There is also a requirement that a firm ensures its liquidity resources contain an adequate buffer of high quality, unencumbered assets (i.e. Government Securities in the liquidity asset buffer); and it maintains a prudent funding profile. The liquidity assets buffer is a pool of highly liquid assets that can be called upon to create sufficient liquidity to meet liabilities on demand, particularly in a period of liquidity stress. The liquidity resources outside the buffer must either be marketable assets with a demonstrable secondary market that the firm can access, or a credit facility that can be activated in times of stress.
The Group has a Board approved ILAAP. The ILAAP rules require STB to identify, measure, manage and monitor liquidity and funding risks across different time horizons and stress scenarios, consistent with STB's risk appetite as established by the STB Board. The ILAAP seeks to document STB's approach to liquidity and funding, and demonstrate that it complies with the Overall Liquidity Adequacy Rule. The PRA's approach to liquidity supervision is based on the principle that a firm must have adequate levels of liquidity resources and a prudent funding profile, and that it comprehensively manages and controls liquidity and funding risks. The liquidity buffer required by the ILAAP has been put in place and maintained since that time. Liquidity resources outside of the buffer are made up of deposits placed at the Bank of England. The ILAAP is updated annually.
The primary measures used by management to assess the adequacy of liquidity is the Overall Liquidity Adequacy Rule, which is the Board's own view of the Group's liquidity needs as set out in the Board approved ILAAP. The Group maintained liquidity in excess of the Overall Liquidity Adequacy Rule throughout the year ended 31 December 2017.
The LCR regime has applied to the Group from 1 October 2016, requiring management of net 30 day cash outflows as a proportion of High Quality Liquid Assets. STB has set a more prudent internal limit. The actual LCR has significantly exceeded both limits throughout the year.
The Group is exposed to daily calls on its available cash resources from current accounts, maturing deposits and loan draw-downs. The Group maintains significant cash resources to meet all of these needs as they fall due.
The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Group. It is unusual for banks to be completely matched, as transacted business is often of uncertain term and of different types.
The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest bearing liabilities as they mature are important factors in assessing the liquidity of the Group and its exposure to changes in interest rates.
The tables below analyse the contractual undiscounted cash flows for the financial liabilities and assets into relevant maturity groupings:
Group
More More
than than
3 months 1 year
Gross Not but but
nominal more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
At 31 December 2017
Non-derivative financial
liabilities
Due to banks 113.0 (115.1) (0.1) (0.4) (114.6) -
Deposits from customers 1,483.2 (1,517.2) (580.8) (318.6) (611.1) (6.7)
Other financial
liabilities 29.5 (29.5) (29.5) - - -
1,625.7 (1,661.8) (610.4) (319.0) (725.7) (6.7)
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Non-derivative financial
assets
Cash and balances
at central banks 226.1 226.1 226.1 - - -
Loans and advances
to banks 34.3 34.3 34.3 - - -
Debt securities
held-to-maturity 5.0 5.0 5.0 - - -
Loans and advances
to customers 1,598.3 2,054.4 667.8 420.8 965.3 0.5
Other financial
assets 1.2 1.2 1.2 - - -
1,864.9 2,321.0 934.4 420.8 965.3 0.5
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Liquidity mismatch 239.2 659.2 324.0 101.8 239.6 (6.2)
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
More More
than than
3 months 1 year
Gross Not but but
nominal more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
At 31 December 2016
Non-derivative financial
liabilities
Due to banks 70.0 (70.0) (30.0) (40.0) - -
Deposits from customers 1,151.8 (1,202.9) (461.6) (147.9) (569.5) (23.9)
Other financial
liabilities 18.3 (18.3) (18.3) - - -
1,240.1 (1,291.2) (509.9) (187.9) (569.5) (23.9)
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Non-derivative financial
assets
Cash and balances
at central banks 112.0 112.0 112.0 - - -
Loans and advances
to banks 18.2 18.2 18.2 - - -
Debt securities
held-to-maturity 20.0 20.0 20.0 - - -
Loans and advances
to customers 1,321.0 1,955.5 349.1 413.9 1,192.2 0.3
Other financial
assets 0.9 0.9 0.9 - - -
1,472.1 2,106.6 500.2 413.9 1,192.2 0.3
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Liquidity mismatch 232.0 815.4 (9.7) 226.0 622.7 (23.6)
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Company
More More
than than
3 months 1 year
Gross Not but but
nominal more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
At 31 December 2017
Non-derivative financial
liabilities
Due to banks 113.0 (115.1) (0.1) (0.4) (114.6) -
Deposits from customers 1,483.2 (1,517.2) (580.8) (318.6) (611.1) (6.7)
Other financial
liabilities 34.2 (34.2) (34.2) - - -
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
1,630.4 (1,666.5) (615.1) (319.0) (725.7) (6.7)
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Non-derivative financial
assets
Cash and balances
at central banks 226.1 226.1 226.1 - - -
Loans and advances
to banks 32.3 32.3 32.3 - - -
Debt securities
held-to-maturity 5.0 5.0 5.0 - - -
Loans and advances
to customers 1,565.5 2,017.5 646.6 413.1 957.3 0.5
Other financial
assets 30.7 30.7 30.7 - - -
1,859.6 2,311.6 940.7 413.1 957.3 0.5
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Liquidity mismatch 229.2 645.1 325.6 94.1 231.6 (6.2)
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
More More
than than
3 months 1 year
Gross Not but but
nominal more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
At 31 December 2016
Non-derivative financial
liabilities
Due to banks 70.0 (70.0) (30.0) (40.0) - -
Deposits from customers 1,151.8 (1,202.9) (461.6) (147.9) (569.5) (23.9)
Other financial
liabilities 30.7 (30.7) (30.7) - - -
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
1,252.5 (1,303.6) (522.3) (187.9) (569.5) (23.9)
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Non-derivative financial
assets
Cash and balances
at central banks 112.0 112.0 112.0 - - -
Loans and advances
to banks 16.5 16.5 16.5 - - -
Debt securities
held-to-maturity 20.0 20.0 20.0 - - -
Loans and advances
to customers 1,289.2 1,921.5 345.7 397.6 1,177.9 0.3
Other financial
assets 33.0 33.0 33.0 - - -
1,470.7 2,103.0 527.2 397.6 1,177.9 0.3
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Liquidity mismatch 218.2 799.4 4.9 209.7 608.4 (23.6)
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest bearing financial liabilities as they mature are important factors in assessing the liquidity of the Company and Group and its exposure to changes in interest rates and exchange rates.
Other financial liabilities, as shown above, do not include non-interest accruals as these are not classed as financial liabilities.
32. Capital risk
The Group's capital management policy is focused on optimising shareholder value, in a safe and sustainable manner. There is a clear focus on delivering organic growth and ensuring capital resources are sufficient to support planned levels of growth. The Board regularly reviews the capital position.
In accordance with CRD IV and the required parameters set out in the Capital Requirements Regulation, the Group's ICAAP is embedded in the risk management framework of the Group and is subject to ongoing updates and revisions when necessary. However, at a minimum, the ICAAP is updated annually as part of the business planning process. The ICAAP is a process that brings together the management framework (i.e. the policies, procedures, strategies, and systems that the Group has implemented to identify, manage and mitigate its risks) and the financial disciplines of business planning and capital management. Prior to the sale of Arbuthnot's controlling stake in the Group, the Group's ICAAP was aggregated into the Arbuthnot Banking Group's ICAAP.
Not all material risks can be mitigated by capital, but where capital is appropriate the Board has adopted a 'Pillar 1 plus' approach to determine the level of capital the Group needs to hold. This method takes the Pillar 1 capital formula calculations (standardised approach for credit, market and operational risk) as a starting point, and then considers whether each of the calculations delivers a sufficient capital sum adequate to cover management's anticipated risks. Where it is considered that the Pillar 1 calculations do not reflect the risk, an additional capital add-on in Pillar 2 should be applied, as per the Individual Capital Guidance issued by the PRA.
Pillar 3 complements the minimum capital requirements (Pillar 1) and the supervisory review process (Pillar 2). Its aim is to encourage market discipline by developing a set of disclosure requirements which would allow market participants to assess key pieces of information on a firm's capital, risk exposures and risk assessment processes. Pillar 3 disclosures for the Group for the year ended 31 December 2017 are published as a separate document on the Group's website.
The following table shows the regulatory capital resources for the Group. Following the sale of its majority holding in the Group by Arbuthnot Banking Group plc in 2016, the regulatory capital of the Group is now managed on a group consolidated basis. Therefore, the prior year figures in the table below have been restated from a solo-consolidated basis to a group consolidated basis, and the CET 1 capital ratio restated accordingly:
2017 2016
GBPmillion GBPmillion
------------------------------------------------ ----------- -----------
Tier 1
Share capital 7.4 7.4
Share premium 81.2 81.2
Retained earnings 159.2 149.0
Revaluation reserve 1.3 1.2
Available-for-sale reserve - (2.8)
Goodwill (1.0) (1.0)
Intangible assets net of attributable deferred
tax (9.2) (7.6)
CET1 capital 238.9 227.4
------------------------------------------------ ----------- -----------
Tier 2
Collective allowance for impairment of
loans and advances 4.4 5.3
------------------------------------------------ ----------- -----------
Total Tier 2 capital 4.4 5.3
------------------------------------------------ ----------- -----------
Own Funds 243.3 232.7
------------------------------------------------ ----------- -----------
Reconciliation to total equity:
Goodwill and other intangible assets net
of attributable deferred tax 10.2 8.6
Collective allowance for impairment of
loans and advances (4.4) (5.3)
Total equity 249.1 236.0
------------------------------------------------ ----------- -----------
The Group ICAAP includes a summary of the capital required to mitigate the identified risks in its regulated entities and the amount of capital that the Group has available. The PRA sets Individual Capital Guidance for each UK bank calibrated by reference to its Capital Resources Requirement, broadly equivalent to 8% of risk weighted assets and thus representing the capital required under Pillar 1 of the Basel III framework. The ICAAP is a key input into the PRA's Individual Capital Guidance setting process, which addresses the requirements of Pillar 2 of the Basel II framework. The PRA's approach is to monitor the available capital resources in relation to the Individual Capital Guidance requirement. The Group maintains an extra internal buffer and capital ratios are reviewed on a monthly basis to ensure that external and internal requirements are adhered to.
The Group is also subject to further capital requirements imposed by the PRA on all financial services firms. During the periods, the Group complied with these requirements.
33. Maturity analysis of consolidated assets and liabilities
Group
Due
after
Due more
within than
one one No contractual
year year maturity Total
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------- ----------- ----------- --------------- -----------
Contractual maturity analysis
at 31 December 2017
ASSETS
Cash and balances at central
banks 226.1 - - 226.1
Loans and advances to banks 34.3 - - 34.3
Loans and advances to customers 884.4 698.3 15.6 1,598.3
Debt securities held-to-maturity 5.0 - - 5.0
Property, plant and equipment - - 11.5 11.5
Intangible assets - - 10.4 10.4
Deferred tax assets - - 0.6 0.6
Other assets - - 5.4 5.4
Total assets 1,149.8 698.3 43.5 1,891.6
---------------------------------- ----------- ----------- --------------- -----------
LIABILITIES
Due to banks 113.0 - - 113.0
Deposits from customers 875.3 587.9 20.0 1,483.2
Current tax liabilities 3.0 - - 3.0
Other liabilities - - 41.9 41.9
Provisions for liabilities
and charges - - 1.4 1.4
Total liabilities 991.3 587.9 63.3 1,642.5
---------------------------------- ----------- ----------- --------------- -----------
Due
after
Due more
within than
one one No contractual
year year maturity Total
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------------- ----------- ----------- --------------- -----------
Contractual maturity analysis
at 31 December 2016
ASSETS
Cash and balances at central
banks 112.0 - - 112.0
Loans and advances to banks 18.2 - - 18.2
Loans and advances to customers 663.2 657.8 - 1,321.0
Debt securities held-to-maturity 20.0 - - 20.0
Equity instruments available-for-sale - - 13.5 13.5
Property, plant and equipment - - 11.4 11.4
Intangible assets - - 9.0 9.0
Other assets 4.9 - - 4.9
--------------------------------------- ----------- ----------- --------------- -----------
Total assets 818.3 657.8 33.9 1,510.0
--------------------------------------- ----------- ----------- --------------- -----------
LIABILITIES
Due to banks 70.0 - - 70.0
Deposits from customers 592.9 558.9 - 1,151.8
Current tax liabilities 1.7 - - 1.7
Deferred tax liabilities - 0.2 - 0.2
Other liabilities 47.4 2.9 - 50.3
--------------------------------------- ----------- ----------- --------------- -----------
Total liabilities 712.0 562.0 - 1,274.0
--------------------------------------- ----------- ----------- --------------- -----------
The directors have reviewed behavioural maturity of the loan book and have concluded that it would not significantly affect the analysis above.
Company
Due
after
Due more
within than
one one No contractual
year year maturity Total
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------- ----------- ----------- --------------- -----------
Contractual maturity analysis
at 31 December 2017
ASSETS
Cash and balances at central
banks 226.1 - - 226.1
Loans and advances to banks 32.3 - - 32.3
Loans and advances to customers 874.1 691.4 - 1,565.5
Debt securities held-to-maturity 5.0 - - 5.0
Property, plant and equipment - - 6.1 6.1
Intangible assets - - 8.5 8.5
Investments - - 3.7 3.7
Deferred tax assets - - 0.6 0.6
Other assets - - 33.2 33.2
---------------------------------- ----------- ----------- --------------- -----------
Total assets 1,137.5 691.4 52.1 1,881.0
---------------------------------- ----------- ----------- --------------- -----------
LIABILITIES
Due to banks 113.0 - - 113.0
Deposits from customers 875.3 587.9 20.0 1,483.2
Current tax liabilities 1.9 - - 1.9
Other liabilities - - 44.4 44.4
Provisions for liabilities
and charges - - 1.4 1.4
Total liabilities 990.2 587.9 65.8 1,643.9
---------------------------------- ----------- ----------- --------------- -----------
Due
after
Due more
within than
one one No contractual
year year maturity Total
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------------- ----------- ----------- --------------- -----------
Contractual maturity analysis
at 31 December 2016
ASSETS
Cash and balances at central
banks 112.0 - - 112.0
Loans and advances to banks 16.5 - - 16.5
Loans and advances to customers 660.0 629.2 - 1,289.2
Debt securities held-to-maturity 20.0 - - 20.0
Equity instruments available-for-sale 13.5 - - 13.5
Property, plant and equipment - - 6.2 6.2
Intangible assets - - 6.2 6.2
Investments - - 3.7 3.7
Deferred tax assets - 0.1 - 0.1
Other assets 35.3 - - 35.3
--------------------------------------- ----------- ----------- --------------- -----------
Total assets 857.3 629.3 16.1 1,502.7
--------------------------------------- ----------- ----------- --------------- -----------
LIABILITIES
Due to banks 70.0 - - 70.0
Deposits from customers 592.9 558.9 - 1,151.8
Current tax liabilities 0.8 - - 0.8
Other liabilities 58.3 - - 58.3
Total liabilities 722.0 558.9 - 1,280.9
--------------------------------------- ----------- ----------- --------------- -----------
The directors have reviewed behavioural maturity of the loan book and have concluded that it would not significantly affect the analysis above.
34. Classification of financial assets and liabilities
Group
Other
financial
Loans assets Total
and and carrying Fair
Held-to-maturity receivables liabilities amount value
-----------
Fair
value
hierarchy
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion level
------------------------- ----------------- ------------- ------------- ----------- ----------- -----------
At 31 December 2017
Cash and balances Level
at central banks - 226.1 - 226.1 226.1 1
Loans and advances Level
to banks - 34.3 - 34.3 34.3 2
Loans and advances Level
to customers - 1,598.3 - 1,598.3 1,641.1 3
Debt securities Level
held-to-maturity 5.0 - - 5.0 5.0 1
Other financial Level
assets - - 1.2 1.2 1.2 3
5.0 1,858.7 1.2 1,864.9 1,907.7
------------------------- ----------------- ------------- ------------- ----------- -----------
Level
Due to banks - - 113.0 113.0 113.0 2
Level
Deposits from customers - - 1,483.2 1,483.2 1,481.6 3
Other financial Level
liabilities - - 29.5 29.5 29.5 3
- - 1,625.7 1,625.7 1,624.1
------------------------- ----------------- ------------- ------------- ----------- -----------
Other
financial
Loans assets Total
and and carrying Fair
Available-for-sale Held-to-maturity receivables liabilities amount value
----------
Fair
value
hierarchy
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion level
-------------------- ------------------- ----------------- ------------ ------------ ----------- ----------- ----------
At 31 December
2016
Cash and balances
at central Level
banks - - 112.0 - 112.0 112.0 1
Loans and
advances to Level
banks - - 18.2 - 18.2 18.2 2
Loans and
advances to Level
customers - - 1,321.0 - 1,321.0 1,399.8 3
Debt securities Level
held-to-maturity - 20.0 - - 20.0 20.0 1
Equity instruments Level
available-for-sale 13.5 - - - 13.5 13.5 1
Other financial Level
assets - - - 0.9 0.9 0.9 3
13.5 20.0 1,451.2 0.9 1,485.6 1,564.4
-------------------- ------------------- ----------------- ------------ ------------ ----------- -----------
Level
Due to banks - - - 70.0 70.0 70.0 2
Deposits from Level
customers - - - 1,151.8 1,151.8 1,160.9 3
Other financial Level
liabilities - - - 18.3 18.3 18.3 3
- - - 1,240.1 1,240.1 1,249.2
-------------------- ------------------- ----------------- ------------ ------------ ----------- -----------
Equity investments held-for-sale are carried at fair value. All other assets and liabilities are carried at amortised cost. Therefore for these assets and liabilities, the fair value hierarchy noted above relates to the disclosure in this note only.
During the period, the underlying methodology used to calculate the fair values of loans and advances to customers has been enhanced to calculate fair values on an individual business segment basis. Accordingly the comparatives as at 31 December 2016 have been re-presented on this basis.
Company
Other
financial
Loans assets Total
and and carrying Fair
Held-to-maturity receivables liabilities amount value
-----------
Fair
value
hierarchy
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion level
------------------------- ----------------- ------------- ------------- ----------- ----------- -----------
At 31 December 2017
Cash and balances Level
at central banks - 226.1 - 226.1 226.1 1
Loans and advances Level
to banks - 32.3 - 32.3 32.3 2
Loans and advances Level
to customers - 1,565.5 - 1,565.5 1,608.3 3
Debt securities Level
held-to-maturity 5.0 - - 5.0 5.0 1
Other financial Level
assets - - 30.7 30.7 30.7 3
------------------------- ----------------- ------------- ------------- ----------- -----------
5.0 1,823.9 30.7 1,859.6 1,902.4
------------------------- ----------------- ------------- ------------- ----------- -----------
Level
Due to banks - - 113.0 113.0 113.0 2
Level
Deposits from customers - - 1,483.2 1,483.2 1,481.6 3
Other financial Level
liabilities - - 34.2 34.2 34.2 3
------------------------- ----------------- ------------- ------------- ----------- -----------
- - 1,630.4 1,630.4 1,628.8
------------------------- ----------------- ------------- ------------- ----------- -----------
Other
financial
Loans assets Total
and and carrying Fair
Available-for-sale Held-to-maturity receivables liabilities amount value
----------
Fair
value
hierarchy
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion level
-------------------- ------------------- ----------------- ------------ ------------ ----------- ----------- ----------
At 31 December
2016
Cash and balances
at central Level
banks - - 112.0 - 112.0 112.0 1
Loans and
advances to Level
banks - - 16.5 - 16.5 16.5 2
Loans and
advances to Level
customers - - 1,289.2 - 1,289.2 1,591.1 3
Debt securities Level
held-to-maturity - 20.0 - - 20.0 20.0 1
Equity instruments Level
available-for-sale 13.5 - - - 13.5 13.5 1
Other financial Level
assets - - - 33.0 33.0 33.0 3
-------------------- ------------------- ----------------- ------------ ------------ ----------- -----------
13.5 20.0 1,417.7 33.0 1,484.2 1,786.1
-------------------- ------------------- ----------------- ------------ ------------ ----------- -----------
Level
Due to banks - - - 70.0 70.0 70.0 2
Deposits from Level
customers - - - 1,151.8 1,151.8 1,173.2 3
Other financial Level
liabilities - - - 30.7 30.7 30.7 3
-------------------- ------------------- ----------------- ------------ ------------ ----------- -----------
- - - 1,252.5 1,252.5 1,273.9
-------------------- ------------------- ----------------- ------------ ------------ ----------- -----------
Equity investments available-for-sale are carried at fair value. All other assets and liabilities are carried at amortised cost. Therefore for these assets, the fair value hierarchy noted above relates to the disclosure in this note only.
Fair value classification
The tables above include the fair values and fair value hierarchies of the Group and Company's financial assets and liabilities. The Group measures fair value using the following fair value hierarchy that reflects the significance of the inputs used in making measurements:
-- Level 1: Quoted prices in active markets for identical assets or liabilities.
-- Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
-- Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Cash and balances at central banks
The fair value of cash and balances at central banks was calculated based upon the present value of the expected future principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date.
At the end of each year, the fair value of cash and balances at central banks was calculated to be equivalent to their carrying value.
Loans and advances to banks
The fair value of loans and advances to banks was calculated based upon the present value of the expected future principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date.
Loans and advances to customers
The fair value of loans and advances to customers was calculated based upon the present value of the expected future principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date, and the same assumptions regarding the risk of default were applied as those used to derive the carrying value.
Debt securities held-to-maturity and equity instruments available-for-sale
The fair value of debt securities held-to-maturity and equity instruments available-for-sale is based on the quoted mid-market share price.
At the end of December 2017 the fair value of debt securities held-to-maturity was calculated to be equivalent to their carrying value.
Due to banks
The fair value of amounts due to banks was calculated based upon the present value of the expected future principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date.
At the end of each year, the fair value of amounts due to banks was calculated to be equivalent to their carrying value due to the short maturity term of the amounts due.
Deposits from customers
The fair value of deposits from customers was calculated based upon the present value of the expected future principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date for the notice deposits and deposit bonds. The fair value of instant access deposits is equal to book value as they are repayable on demand.
Dividends and other financial liabilities
The fair value of dividends and other financial liabilities was calculated based upon the present value of the expected future principal cash flows.
At the end of each year, the fair value of dividends and other financial liabilities was calculated to be equivalent to their carrying value due to their short maturity. The other financial liabilities include all other liabilities other than non-interest accruals.
35. Related party transactions
Related parties of the Company and Group include subsidiaries, Key Management Personnel, close family members of Key Management Personnel and entities which are controlled, jointly controlled or significantly influenced, or for which significant voting power is held, by Key Management Personnel or their close family members.
A number of banking transactions are entered into with related parties in the normal course of business on normal commercial terms. These include loans and deposits as set out below. Except for the directors' disclosures, there were no other Key Management Personnel disclosures, therefore the tables below relate to directors and close members of their family only.
Directors
2017 2016
GBPmillion GBPmillion
------------------------------------------ ----------- -----------
Loans
Loans outstanding at 1 January 3.2 0.2
Loans advanced 0.4 3.4
Repayments - (0.5)
Interest applied 0.1 0.1
Loans outstanding at 31 December 3.7 3.2
------------------------------------------ ----------- -----------
Deposits
Deposits outstanding at 1 January 0.3 0.5
Additional deposits made during the year 0.1 -
Withdrawals during the year - (0.1)
Director retired - (0.1)
------------------------------------------ ----------- -----------
Deposits outstanding at 31 December 0.4 0.3
------------------------------------------ ----------- -----------
The loans outstanding above comprise the following:
-- A GBP0.4 million advance (2016: GBP0.4 million) as part of a GBP2.5 million facility agreed with a company in which a director holds 50% of the voting shares, which is secured by property and personal guarantees.
-- A GBP3.3 million advance (2016: GBP2.8 million) as part of a GBP4.4 million facility agreed with a director, which is secured by property and certain other undertakings.
Both of these transactions were agreed by the Group's Real Estate Finance business and arose during the normal course of business. Both loans were subject to the usual Board governance and Credit Committee approval procedures and are on substantially the same terms as for comparable transactions with third parties.
The Company undertook the following transactions with other companies in the Secure Trust Bank Group:
2017 2016
GBPmillion GBPmillion
----------------------------------------------- ----------- -----------
Debt Managers (Services) Limited - income
from sale of debt portfolio (0.3) (2.9)
Debt Managers (Services) Limited - debt
collection services 0.2 -
Secure Homes Services Limited - building
rental paid 0.4 0.4
V12 Finance Group Limited - dividend received (13.9) -
V12 Retail Finance Limited - financial
intermediary charges - applications proposed 5.1 4.5
V12 Retail Finance Limited - financial
intermediary charges - applications accepted 2.3 2.2
V12 Retail Finance Limited - financial
intermediary charges - loan set-up and
processing 4.5 4.4
V12 Retail Finance Limited - loan book
management and servicing fees 8.9 7.1
----------------------------------------------- ----------- -----------
7.2 15.7
----------------------------------------------- ----------- -----------
No longer related parties
Arbuthnot Banking Group PLC - group recharges - 0.2
Everyday Lending Limited - interest income
on loan receivable - 1.9
- 2.1
----------------------------------------------- ----------- -----------
7.2 17.8
----------------------------------------------- ----------- -----------
The loans and advances with, and amounts receivable and payable to, related companies are noted below:
Company Company
2017 2016
GBPmillion GBPmillion
---------------------------------------- ----------- -----------
Amounts receivable from subsidiary
undertakings 29.7 31.2
Amounts due to subsidiary undertakings (9.7) (13.2)
20.0 18.0
---------------------------------------- ----------- -----------
Directors' remuneration
The directors' emoluments (including pension contributions and benefits in kind) for the year are disclosed in the Remuneration Report beginning on page 84.
At the year end the ordinary shares held by the directors are disclosed in the Directors' Report beginning on page 100. Details of the directors' holdings of share options, as well as details of those share options exercised during the year, are also disclosed in the Directors' Report.
The interests of any directors who hold shares in the ultimate parent company, Arbuthnot Banking Group PLC, which was the ultimate parent company until the sale of its controlling stake, are shown in the Directors' Report of that company.
36. Immediate and ultimate parent company
Prior to the sale of its controlling interest on 15 June 2016, the Company regarded Arbuthnot Banking Group PLC, a company registered in England and Wales, as the immediate and ultimate parent company. At that time, Sir Henry Angest, the Group Chairman and Chief Executive of Arbuthnot Banking Group, had a beneficial interest in 53.7% of the issued share capital of Arbuthnot Banking Group and was regarded by the Company as the ultimate controlling party. A copy of the consolidated financial statements of Arbuthnot Banking Group may be obtained from the Company Secretary, Arbuthnot Banking Group, Arbuthnot House, 7 Wilson Street, London, EC2M 2SN.
Since 15 June 2016, the Company has had no ultimate controlling party.
37. Discontinued operations a) Sale of unsecured personal loan portfolio
On 21 December 2017, the Bank agreed to sell its remaining portfolio of unsecured personal loans to Alpha Credit Solutions 8 S.à.r.l., a company owned by AnaCap Credit Opportunities III LP. As previously highlighted, the Group made the decision to withdraw from the unsecured personal loan market in 2016, and the sale of this portfolio represents a full exit by the Group from this market.
The net proceeds of sale, after transaction costs, amounted to GBP36.6 million, which will be used for general corporate purposes including other forms of lending. The cash purchase consideration for the portfolio was calculated based on an agreed price for the portfolio as at 30 June 2017, adjusted for cash receipts the Group has already received from the portfolio during the period up to the date of completion.
The effect of the transaction is to accelerate capital realisation to reinvest into the Group's core business while removing any future credit risk associated with the portfolio. The profit arising on sale of the portfolio was GBP0.5 million before tax. The Group continued to administer the portfolio until the completion of a migration of the portfolio to a third party administrator appointed by the purchaser, which is due to be completed in the first half of 2018.
Details of the income statement, net assets disposed of and consequential gain recognised on disposal, and cash flow of the discontinued operation are set out below:
2017 2016
Income statement GBPmillion GBPmillion
---------------------------------- ----------- -----------
Interest receivable
and similar income 8.0 11.2
Interest expense
and similar charges - -
---------------------------------- ----------- -----------
Net interest income 8.0 11.2
--------------------------------------- ----------- -----------
Fee and commission
income - -
Fee and commission
expense - -
---------------------------------- ----------- -----------
Net fee and commission
income - -
---------------------------------- ----------- -----------
Operating income 8.0 11.2
--------------------------------------- ----------- -----------
Net impairment losses on
loans and advances to customers (3.4) (4.4)
Operating expenses (0.3) (1.2)
--------------------------------------- ----------- -----------
Profit before income
tax 4.3 5.6
Income tax expense (0.8) (1.1)
--------------------------------------- ----------- -----------
Profit after income
tax 3.5 4.5
Gain recognized on disposal
after tax (see below) 0.4 -
------------------------------------ ----------- -----------
Profit for the period 3.9 4.5
------------------------------------ ----------- -----------
As described in Note 3, funding costs and operating expenses are not aligned to operating segments for day to day management of the business, so they cannot be allocated on a reliable basis. Accordingly, funding costs are not included above, and operating expenses above relates only to those costs that are directly attributable to the discontinued business.
Assets
sold
on 21
December
2017
Net assets disposed and gain recognised
on disposal GBPmillion
----------------------------------------- -----------
ASSETS
Loans and advances to customers 36.1
Consideration
Cash 37.1
Less selling costs (0.5)
------------------------------------------ -----------
36.6
----------------------------------------- -----------
Gain recognised on disposal before tax 0.5
Tax (0.1)
------------------------------------------ -----------
Gain recognised on disposal after tax 0.4
------------------------------------------ -----------
Year Year
ended ended
31 December 31 December
2017 2016
Cash flow statement GBPmillion GBPmillion
------------------------------------------------ ------------- -------------
Cash flows from discontinued operations
Cash flows from operating activities
Profit for the year 3.5 4.5
Adjustments for:
Income tax expense 0.8 1.1
Impairment losses on loans and advances
to customers 3.4 4.4
------------------------------------------------ ------------- -------------
Cash flows from operating profits before
changes in operating assets and liabilities 7.7 10.0
Changes in operating assets and liabilities:
- net decrease in loans and advances to
customers 28.0 8.8
Net cash inflow from operating activities
and net increase in cash and cash equivalents 35.7 18.8
------------------------------------------------ ------------- -------------
b) Sale of non-standard consumer lending business ELG
On 4 December 2015, the Bank agreed to the conditional sale of its non-standard consumer lending business, ELG, which comprises Everyday Loans Holdings Limited and subsidiary companies Everyday Lending Limited and Everyday Loans Limited, to NSF. Consideration received on completion comprised GBP106.9 million in cash and GBP16.3 million in NSF ordinary shares. The disposal completed on 13 April 2016, and on completion NSF paid GBP215.0 million to the Group, being the GBP106.9 million cash consideration plus repayment of intercompany debt of GBP108.1 million. Subsequently, NSF took a GBP30.0 million three year loan from STB, which was repaid in full during 2017. After selling costs of GBP2.7 million, this resulted in a gain recognised on disposal in 2016 of GBP116.8 million. In addition, staff costs of GBP3.5 million were incurred in respect of the sale, which are included in 2016 operating expenses.
Details of the income statement, net assets disposed of and consequential gain recognised on disposal, assets and liabilities held-for-sale at 31 December 2015 and cash flow of discontinued operations are set out below.
2017 2016
Income statement GBPmillion GBPmillion
---------------------------------- ------------ -----------
Interest receivable
and similar income - 11.1
Interest expense
and similar charges - -
---------------------------------- ------------ -----------
Net interest income - 11.1
--------------------------------------- ------- -----------
Fee and commission
income - 0.1
Fee and commission
expense - (0.1)
--------------------------------------- ------- -----------
Net fee and commission
income - -
---------------------------------- ------------ -----------
Operating income - 11.1
--------------------------------------- ------- -----------
Net impairment losses on
loans and advances to customers - (2.6)
Operating expenses - (6.0)
--------------------------------------- ------- -----------
Profit before income
tax - 2.5
Income tax expense - (0.5)
--------------------------------------- ------- -----------
Profit after income
tax - 2.0
Gain recognised
on disposal (see
below) - 116.8
--------------------------------------- ------- -----------
Profit for the
period - 118.8
--------------------------------------- ------- -----------
Assets
and
liabilities
sold
on 13
April
2016
Net assets disposed and gain recognised
on disposal GBPmillion
------------------------------------------------- --------------
ASSETS
Loans and advances to banks 2.4
Loans and advances to customers 117.9
Property, plant and equipment 0.5
Intangible assets 1.2
Deferred tax assets 0.4
Other assets 0.8
-------------------------------------------------- --------------
Total assets 123.2
-------------------------------------------------- --------------
LIABILITIES
Current tax liabilities 4.0
Other liabilities 7.4
-------------------------------------------------- --------------
Total liabilities 11.4
-------------------------------------------------- --------------
Net assets disposed of 111.8
-------------------------------------------------- --------------
Consideration
Cash (including the settlement of inter-company
debt) 215.0
NSF shares 16.3
-------------------------------------------------- --------------
231.3
Selling costs (2.7)
Net assets disposed of (111.8)
-------------------------------------------------- --------------
Gain recognised on disposal 116.8
-------------------------------------------------- --------------
The cash flow from the sale of subsidiary undertakings can be analysed as follows:
Group Company
GBPmillion GBPmillion
---------------------------------------------- ----------- -----------
Cash consideration (including the settlement
of inter-company debt) 215.0 215.0
Selling costs (2.7) (2.7)
Cash disposed of as part of sale (2.4) -
---------------------------------------------- ----------- -----------
209.9 212.3
---------------------------------------------- ----------- -----------
Company
Assets held-for-sale comprised investment in subsidiary undertaking totaling GBP1.
Year Year
ended ended
31 December 31 December
2017 2016
Cash flow statement GBPmillion GBPmillion
---------------------------------------------- -------------- -------------
Cash flows from discontinued operations
Cash flows from operating activities
Profit for the year - 2.0
Adjustments for:
Income tax expense - 0.5
Impairment losses on loans and advances
to customers - 2.6
---------------------------------------------- -------------- -------------
Cash flows from operating profits before
changes in operating assets and liabilities - 5.1
Changes in operating assets and liabilities:
- net increase in loans and advances to
customers - (6.2)
- net increase in other assets - (0.3)
- net increase in other liabilities - 2.1
Net cash inflow from operating activities - 0.7
---------------------------------------------- -------------- -------------
Net increase in cash and cash equivalents - 0.7
Cash and cash equivalents at 1 January - 1.7
---------------------------------------------- -------------- -------------
Cash and cash equivalents disposed of /
at 31 December - 2.4
---------------------------------------------- -------------- -------------
38. Country by Country reporting
The Capital Requirements (Country-by-Country Reporting) Regulations 2013 introduced reporting obligations for institutions within the scope of CRD IV. The requirements aim to give increased transparency regarding the activities of institutions.
The Country-by-Country Information is set out below:
Profit Tax
Number before paid
Turnover of FTE tax on profit
Nature
Name of activity Location GBPmillion employees GBPmillion GBPmillion
------------------ -------------- ---------- ----------- ---------- ----------- -----------
31 December 2017
Secure Trust Banking
Bank plc services UK 165.3 734 29.3 6.0
------------------ -------------- ---------- ----------- ---------- ----------- -----------
Profit Tax
Number before paid
Turnover of FTE tax on profit
Nature
Name of activity Location GBPmillion employees GBPmillion GBPmillion
------------------ -------------- ---------- ----------- ---------- ----------- -----------
31 December 2016
Secure Trust Banking
Bank plc services UK 157.5 697 27.5 6.8
------------------ -------------- ---------- ----------- ---------- ----------- -----------
39. Audited financial statements
The above announcement, from Group strategy and business model to note 38 above, has been extracted from the audited financial statements of Secure Trust Bank PLC for the year ended 31 December 2017. The audit opinion on those financial statements was unmodified. The full audited financial statements, together with this announcement and the associated investors' presentation are available on: www.securetrustbank.com/results-reports/results-reports-presentations.
Five year summary
2017 2016 2015 2014 2013
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------- ----------- ----------- ----------- ----------- -----------
Profit for the year
Interest and similar
income 149.3 141.1 139.7 93.6 73.8
Interest expense and
similar charges (26.7) (26.3) (21.6) (14.2) (12.9)
---------------------------------- ----------- ----------- ----------- ----------- -----------
Net interest income 122.6 114.8 118.1 79.4 60.9
---------------------------------- ----------- ----------- ----------- ----------- -----------
Net fee and commission
income 14.9 14.5 14.4 18.5 18.1
---------------------------------- ----------- ----------- ----------- ----------- -----------
Operating income 137.5 129.3 132.5 97.9 79.0
---------------------------------- ----------- ----------- ----------- ----------- -----------
Impairment losses on
loans and advances (36.9) (30.3) (24.3) (15.3) (15.6)
Gain from a bargain purchase - - - - 0.4
Exceptional costs - - - - (0.9)
Arbuthnot Banking Group
recharges - - (0.8) (0.2) (0.1)
Operating expenses (71.6) (71.5) (70.9) (56.3) (45.7)
Profit on sale of equity
instruments available-for-sale 0.3 - - - -
---------------------------------- ----------- ----------- ----------- ----------- -----------
Profit before income
tax 29.3 27.5 36.5 26.1 17.1
---------------------------------- ----------- ----------- ----------- ----------- -----------
2017 2016 2015 2014 2013
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------- ----------- ----------- ----------- ----------- -----------
Earnings per share for profit attributable
to the equity holders of the Group during
the year
(expressed in pence per
share)
- basic 128.8 754.1 157.8 122.3 78.3
---------------------------------- ----------- ----------- ----------- ----------- -----------
2017 2016 2015 2014 2013
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------- ----------- ----------- ----------- ----------- -----------
Financial position
Cash and balances at
central banks 226.1 112.0 131.8 81.2 -
Loans and advances to
banks 34.3 18.2 11.5 39.8 110.0
Loans and advances to
customers 1,598.3 1,321.0 1,074.9 622.5 391.0
Debt securities held-to-maturity 5.0 20.0 3.8 16.3 -
Other assets 27.9 38.8 25.4 22.5 24.9
---------------------------------- ----------- ----------- ----------- ----------- -----------
Total assets 1,891.6 1,510.0 1,247.4 782.3 525.9
---------------------------------- ----------- ----------- ----------- ----------- -----------
Due to banks 113.0 70.0 35.0 15.9 0.1
Deposits from customers 1,483.2 1,151.8 1,033.1 608.4 436.6
Other liabilities 46.3 52.2 38.1 33.1 27.6
Total shareholders' equity 249.7 236.0 141.2 124.9 61.6
---------------------------------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity 1,892.2 1,510.0 1,247.4 782.3 525.9
---------------------------------- ----------- ----------- ----------- ----------- -----------
This information is provided by RNS
The company news service from the London Stock Exchange
END
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March 22, 2018 03:00 ET (07:00 GMT)
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