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| Name | Symbol | Market | Type |
|---|---|---|---|
| Tesco Pfg 25 | LSE:71XN | London | Medium Term Loan |
| Price Change | % Change | Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 0 | - |
From Jan 2020 to Jan 2025
TIDM71XN
RNS Number : 1388J
Tesco Personal Finance Group PLC
08 April 2020
Tesco Personal Finance Group plc
Publication of Annual Report and Financial Statements for the year ended 29 February 2020
In accordance with Listing Rule 17.3.1, a copy of the above document for Tesco Personal Finance Group plc has been submitted to the UKLA document viewing facility and will shortly be available for inspection at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
The document is also available on the Company's website at: www.corporate.tescobank.com
This announcement also contains additional information for the purposes of compliance with the Disclosure and Transparency Rules, including principal risks and uncertainties, details of related party transactions and a responsibility statement.
Reference to pages and numbers refer to page numbers and notes to the annual accounts in the Annual Report and Financial Statements 2020.
The PDF attachment is relevant on page 164 of this document.
http://www.rns-pdf.londonstockexchange.com/rns/1388J_1-2020-4-7.pdf
Enquiries:
Investors Chris Griffith (Tesco Plc) 01707 912 900 Media Simon Rew (Tesco Plc) 01707 918 701 Barry Cameron (Tesco Bank) 07841 192 899
08 April 2020
TESCO PERSONAL FINANCE GROUP PLC
ANNUAL REPORT AND FINANCIAL STATEMENTS
FOR THE YEARED 29 FEBRUARY 2020
Company Number SC173198
TESCO PERSONAL FINANCE GROUP PLC
CONTENTS
Hot Features
Premium
Directors and Advisers 1
Strategic Report 2
Directors' Report 26
Consolidated Income Statement 36
Consolidated Statement of Comprehensive Income 37
Consolidated and Company Statements of Financial Position 38
Consolidated Statement of Changes in Equity 39
Company Statement of Changes in Equity 41
Consolidated and Company Cash Flow Statements 43
Notes to the Financial Statements 44
Independent Auditor's Report 154
Abbreviations 169
Glossary of Terms 170
TESCO PERSONAL FINANCE
GROUP PLC
DIRECTORS AND ADVISERS
Directors: Graham Pimlott Independent Non-Executive
Chair
Robert Endersby Independent Non-Executive
Director
Jacqueline Ferguson Independent Non-Executive
Director
Richard Henderson Chief Risk Officer
Declan Hourican Chief Financial Officer
Sir John Kingman Independent Non-Executive
Director
Simon Machell Independent Non-Executive
Director
Gerard Mallon Chief Executive
James McConville Independent Non-Executive
Director
Amanda Rendle Independent Non-Executive
Director
Alan Stewart Non-Executive Director
James Willens Senior Independent Non-Executive
Director
Company Secretary: Michael Mustard
Registered Office: 2 South Gyle Crescent
Edinburgh
EH12 9FQ
Independent Auditor: Deloitte LLP
20 Castle Terrace
Edinburgh
EH1 2DB
Bankers: The Royal Bank of Scotland plc
36 St Andrew Square
Edinburgh
EH2 2YB
HSBC Bank plc
8 Canada Square
London
E14 5HQ
Bank of New York Mellon, London Branch
1 Canada Square
London
E14 5AL
Elavon Financial Services DAC UK
5th Floor
125 Old Broad
Street
London
EC2N 1AR 1
TESCO PERSONAL FINANCE GROUP PLC
STRATEGIC REPORT
The Directors present their Strategic Report for the year ended 29 February 2020.
The Annual Report and Financial Statements comprises the Strategic Report, the Directors' Report and the Company and Consolidated Financial Statements and accompanying notes. In the Annual Report and Financial Statements, unless specified otherwise, the 'Company' means Tesco Personal Finance Group PLC (TPFG) and the 'Group' means the Company and its subsidiaries and joint venture included in the Consolidated Financial Statements. The Group operates using the trading name of Tesco Bank.
Business Model
The core objective of the Board is to create and deliver the long-term sustainable success of the Company, generating value for the Group's shareholder and contributing to wider society. It sets the Group's purpose, strategy and values and is accountable to the Group's shareholder for ensuring that the Group is appropriately managed and achieves its objectives in a way that is supported by the right culture and behaviours.
The Group provides financial services and products to personal customers in the United Kingdom (UK). The Company is incorporated and registered in Scotland. The Company owns the entire issued share capital of Tesco Personal Finance Plc, which is engaged in the provision of banking and general insurance services. The Group owns 49.9% of Tesco Underwriting Limited (TU), an authorised insurance company. TU is accounted for as a joint venture of the Group.
Covid-19
Since the year end significant economic and social disruption has arisen from the Covid-19 pandemic. The Group has invoked business continuity plans, as it seeks to serve and support its customers throughout the pandemic while maintaining the safety and well-being of staff. The Group is providing support to those customers who are experiencing financial difficulty as a result of Covid-19, for example by offering to delay borrowing repayments and waiving certain fees. It is also closely monitoring that critical functions remain resilient and as part of this is engaging with suppliers to ensure that service levels can continue to be maintained throughout a prolonged pandemic.
As a result of the pandemic, the Group is expected to be impacted in the year ahead by a reduction in income from all activities, including Credit Cards, Loans and Travel Money. This, together with increased expected credit losses (ECLs) for potential bad debts, is likely to result in a loss for the Group in the yeaFr ending 28 February 2021. Notwithstanding this, the Group's capital and liquidity ratios, which are set out on page 7, are expected to remain strong. As the situation rapidly evolved since the reporting date, the Group sourced revised economic forecasts from its third party supplier, reflecting current economic developments as at the date of signing these Financial Statements. The estimate of ECLs at 29 February 2020 was based on the Group's conclusion that the significant socioeconomic disruption, the necessity for large scale Government interventions and the related impact on the wider economy as a result of Covid-19 had a low probability of crystallising at 29 February 2020 based on the reasonable and supportable information available at that date. The impact of the current economic outlook on ECLs is set out at note 49.
The Board considered in depth the impact of Covid-19 on the Group's viability and going concern status. The relevant disclosures are set out on pages 21 to 23 and 26 to 27.
Sale of the Group's Mortgage Business
In accordance with the requirements of International Financial Reporting Standard (IFRS) 5 'Non-current assets held for sale and discontinued operations', the Group has classified its Mortgage business as a discontinued operation at 29 February 2020.
Amounts recognised in the Consolidated Income Statement in respect of the Mortgage business are presented as a single line item after profit after tax from continuing operations. The prior year has been restated to present this on a consistent basis with the current year. Interest expense of GBP37.5m (2019: GBP52.1m) in respect of the Group's cost of funding the Mortgage business continues to be presented within net interest income of continuing operations. As this cost cannot be directly attributed to liabilities of the Group entered into specifically to fund the Group's Mortgage business, as required by IFRS 5, it has not been possible to present this cost within statutory profit for the year after tax from discontinued operations for the current or prior year. Assets and liabilities of the disposal group representing the Mortgage business are presented separately in the current year Consolidated Statement of Financial Position, with no requirement to restate the prior year.
2
TESCO PERSONAL FINANCE GROUP PLC
STRATEGIC REPORT (continued)
Sale of the mortgage business (continued)
Following the Group's decision to sell its Mortgage business, with effect from 1 September 2019 the Group's business model under IFRS 9 'Financial instruments' in respect of its Mortgage business changed from being solely to collect contractual cash flows from the Mortgage business to being to collect cash flows arising from the sale of the Mortgage business. As a result, the Group has accounted for its Mortgage business at fair value through profit or loss (FVPL) from that date. The Mortgage business was previously accounted for at amortised cost. The Group recognised a fair value measurement gain after tax of GBP16.7m at 1 September 2019 following this change in business model.
The Group completed the sale of the majority of its Mortgage business to Bank of Scotland PLC (part of the Lloyds Banking Group) on 27 September 2019 for cash consideration of GBP3,694.6m. After settling transaction and other costs associated directly with the sale amounting to GBP4.5m, the Group's after-tax gain on sale was GBP20.7m. Immediately following derecognition of the majority of the Group's Mortgage business, the Group entered into a series of receive-fixed interest rates swaps to economically neutralise the effect of its existing pay-fixed interest rate swaps used to hedge the interest rate risk inherent in the Mortgage business. The inception value of these swaps was an after-tax gain of GBP5.0m.
As is customary in such a transaction, the Group continued to recognise a small element of the Mortgage business, representing new advances to existing Mortgage customers, until migration of all Mortgage accounts to the purchaser, which took place on 30 March 2020. The Group received cash consideration of GBP53.8m in respect of this element of the Mortgage business, resulting in an after-tax gain on sale of GBP0.4m.
Further information on the Group's discontinued operations is set out at notes 2, 5, 15 and 49.
Impact of Adoption of New Accounting Standards
The Group adopted IFRS 16 'Leases' with effect from 1 March 2019. This was adopted fully retrospectively and prior years have been restated.
The adoption of IFRS 16 resulted in the recognition of right-of-use assets with a net book value of GBP16.7m at 1 March 2018. The net impact on lease liabilities, after the release of a previously held operating lease accrual, was to increase lease liabilities by GBP22.8m. The overall impact on equity, net of a deferred tax asset of GBP1.6m, was a decrease of GBP4.5m at 1 March 2018.
Further details of the transitional impact of the adoption of IFRS 16 are set out at note 2.
Headlines
Income Statement
-- Profit before tax from continuing operations is 43.7% lower at GBP79.2m (2019: GBP140.7m)(1,2) .
-- Underlying profit before tax from continuing operations, which excludes items which are not reflective of ongoing trading performance, is 1.4% higher at GBP227.9m (2019: GBP224.8m)(1,2) . A reconciliation of statutory to underlying profit for the current and prior year is set out at note 5.
-- Profit after tax from discontinued operations has increased by 34.4% to GBP56.7m (2019: GBP42.2m).
-- Profit before tax from continuing operations
The key drivers of the decrease in profit before tax from continuing operations are:
o a 10.1% increase in net interest income to GBP517.5m (2019: GBP470.0m)(1,2) , reflecting an improved net interest margin of 4.4% (2019: 4.3%)(1,2) . Net interest income includes interest expense of GBP37.5m (2019: GBP52.1m) in respect of the Group's cost of funding its Mortgage business. As this cost cannot be directly attributed to liabilities of the Group entered into specifically to fund the Group's Mortgage business, as required by IFRS 5, it has not been possible to present this cost within profit after tax from discontinued operations.;
(1) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.
(2) The prior year has been restated following the classification of the Mortgage business as a discontinued operation. Refer to notes 2 and 15 for further details.
3
-- Profit before tax from continuing operations (continued)
o a 6.4% decrease in net fees and commission income to GBP309.7m (2019: GBP331.0m)(2) . Within this, a focus on retention led to a reduction in Motor and Home insurance commissions in the year while lower ATM income reflected the continued gradual decline in cash usage. Offsetting these was an increase in Travel Money and a credit of GBP9.5m (2019: credit of GBP13.2m) in relation to Pet insurance commissions under IFRS 15 'Revenue from contracts with customers'; a loss on financial instruments at FVPL of GBP4.1m (2019: loss of GBP1.2m)(2) ;
o a loss on financial instruments at FVPL of GBP4.1m (2019: loss of GBP1.2m)(2) ;
o a loss on disposal of investment securities of GBP0.2m (2019: gain of GBP8.4m);
o an increase of 12.5% in operating expenses to GBP575.3m (2019: GBP511.5m)(1,2) . This includes an additional payment protection insurance (PPI) charge of GBP45.0m (2019: GBP16.0m) recognised during the year, further detail on the drivers of which is set out in note 32, and a restructuring charge of GBP65.8m, comprising accelerated amortisation of GBP55.0m and other restructuring costs of GBP10.3m, relating to the Group's strategic review (2019: credit of GBP1.6m relating to the early exit from the Group's offices in central Edinburgh). The prior year also includes a regulatory charge of GBP16.4m relating to the November 2016 fraud incident. There was no such charge in the current year. Cost control remains a key focus of the Group and is reflected in the GBP16.2m decrease in underlying costs to GBP464.5m (2019: GBP480.7m)(1,2) ;
o a 9.0% increase in ECL charges to GBP178.6m (2019: GBP163.9m). The impact of the Financial Conduct Authority's (FCA) Persistent Debt rules has been a significant contributor to the increased charge across the Group's Credit Cards and Loans products. The bad debt:asset ratio (BDAR) in respect of continuing operations increased to 1.6% (2019: 1.3%)(2) , predominantly reflecting the impact on the BDAR of the sale of the Group's Mortgage business in September 2019, resulting in a significant reduction in the Group's average balances used in the BDAR calculation over the course of the year ended 29 February 2020; and
o a 29.1% increase in the Group's share of profit from its joint venture, TU to GBP10.2m (2019: GBP7.9m). This includes a credit of GBP3.7m (2019: GBPnil), representing the Group's share of credits recognised by TU during the year relating to the impact on TU's insurance reserves of a change to the Ogden tables, which are used to calculate future losses in personal injury and fatal accident cases.
-- Income tax charge on profit from continuing operations
Income tax on the Group's profit from continuing operations for the year is a charge of GBP32.7m (2019: GBP40.0m)(1,2) . The Group's current year effective tax rate is higher than the statutory rate principally due to the non-deductibility of the additional PPI charge recognised during the year.
-- Profit after tax from discontinued operations
The increase in profit after tax from discontinued operations predominantly reflects the overall gain on sale of disposal of GBP43.0m. Excluding this gain, the profit after tax from discontinued operations decreased by 67.5% to GBP13.7m (2019: GBP42.2m). This largely reflects a decrease in net interest income to GBP41.3m (2019: GBP76.3m), reflecting a reduction in interest income following the sale of the majority of the Group's Mortgage business in September 2019; an increase in losses on financial instruments held at FVPL to GBP6.6m (2019: GBP3.0m); and an accelerated amortisation charge of GBP6.6m (2019: GBPnil) recognised during the year.
Following the classification during the year of the Group's Mortgage business as a discontinued operation, the Group has reassessed the useful life of certain of its intangible fixed assets, reducing the expected life to a maximum of one year and resulting in the accelerated amortisation charge of GBP6.6m referred to above. As this represents a change in accounting estimate, no prior year adjustment is required.
(1) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.
(2) The prior year has been restated following the classification of the Mortgage business as a discontinued operation. Refer to notes 2 and 15 for further details.
4
-- Profit after tax from discontinued operations (continued)
In arriving at the profit after tax from discontinued operations for the current and prior year, it has not been possible under IFRS 5 to allocate any of the Group's cost of funding the Mortgage business to discontinued operations as the related liabilities were not entered into specifically to fund the Group's Mortgage business. After including the Group's notional cost of funding of GBP37.5m (2019: GBP52.1m) in respect of the Mortgage business, the loss after tax from discontinued operations was GBP13.7m (2019: profit of GBP4.2m). The loss for the year ended 29 February reflects the fact that the Mortgage business only generated income for the Group until the majority of the business was sold in September 2019 while the Group continued to incur interest expense in respect of the excess funding position following the sale of the Mortgage book. In the prior year, the profit reflects a full year of income generation from the Mortgage business, offset by the Group's cost of funding that business.
Balance Sheet
-- Loans and advances to customers have decreased by 32.0% to GBP8.5bn (2019: GBP12.4bn). This reflects the sale during the year of the Group's GBP3.7bn (2019: GBP3.8bn) Mortgage business. Reflecting the impact of this sale on the prior year, loans and advances to customers have reduced slightly to GBP8.5bn (2019: GBP8.7bn). Credit Card balances have reduced by 6.3%, while Personal Loans have grown by 1.8%.
-- Customer deposits, which continue to be the Group's main source of funding, have decreased by 26.4% to GBP7.7bn (2019: GBP10.5bn) as the Group reduced its Savings balances in response to the sale of its Mortgage business. Deposits from banks at 29 February 2020 totalled GBP500.0m (2019: GBP1,663.2m). At the year end, the Group had entered into repurchase transactions of GBPnil (2019: GBP324.2m) and accessed GBP500.0m of funds from the Bank of England's (BoE) Term Funding Scheme (TFS) (2019: GBP1,339.0m), with GBP839.0m (2019: GBPnil) of TFS borrowings being repaid following the sale of the Mortgage business.
-- The balance sheet remains well positioned to support future lending growth from both a liquidity and capital standpoint. At 29 February 2020, the total capital ratio was 23.3% (2019: 18.4%)(1) and net stable funding ratio (NSFR) was 129.3% (2019: 123.3%)(1) . The increase in the NSFR over the year reflects a greater proportion of the Group's assets being held as cash, instead of Loans and Advances to Customers, following the sale of its Mortgage business.
Customer Developments
Given the unprecedented fall in demand for Travel Money, the Group suspended its in-store and online Travel Money service from 24 March 2020. The Group will continue to monitor Covid-19 developments in order to reinstate this service to its customers as soon as possible. The IT systems of Travelex, the Group's Travel Money provider, were recently compromised by ransomware meaning that Travelex had to suspend the services offered through its online channel. Throughout the incident, the Group provided assistance to customers on its website and via a dedicated telephone number at Travelex. The Group's network of in-store bureaux remained open throughout the incident. The Group is closely monitoring developments around the Travelex business.
The Group's commitment to offering attractive products and good service for customers has been rewarded with recognition as 'Best Card Provider (Standard Rate)' and 'Best Card Provider (Balance Transfer Rate)' at the 2019 Moneyfacts Awards and 'Best Travel Money Provider' at the 2019/20 Money Pages Personal Finance Awards.
In November 2019 Tesco launched Clubcard Plus, a brand-new innovative subscription service bringing together Tesco Bank, Tesco Stores and Tesco Mobile, enabling customers and colleagues to get even more value from Tesco for only GBP7.99 a month. From January 2020, Clubcard Plus subscribers have been able to apply for a new Clubcard Plus Credit Card, benefitting from no foreign exchange fees wherever customers spend, no over limit fees if the Credit Card limit is accidentally exceeded, no late payments fees if customers forget to make a payment on time and no returned item fees.
(1) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.
5
Regulatory Developments
The Group continues to monitor and prepare for a number of regulatory changes taking effect over the next few years.
The Second Payment Services Directive (PSD2), the first phase of which took effect from 13 January 2018, together with Open Banking, allows customers to choose to share data relating to their banking products with third-party providers (TPPs) and bring together all of their financial relationships and data in one place, potentially leading to a fundamental change in how customers manage both their money and data over the longer term. The aim of these changes is to promote competition and enhance customer choice. They provide opportunities for the Group to attract new customers, as well as potentially increasing competition from traditional banking businesses and new providers of financial services, including technology companies. The Group continues to monitor and review the opportunities and risks associated with the introduction of PSD2, including the need to ensure that there is appropriate control and ownership of sensitive and confidential customer data as the use of TPPs becomes more widespread.
The second phase of PSD2 was launched during the year. Open Banking, which is supported by a secure technology standard, is a change for the whole UK banking sector and is designed to give customers more control over their financial data and money. Customers will also be able to more easily compare accounts from different providers, understand features, service quality and pricing, and be able to select which offers best value. Using Open Banking, the Group's customers can choose to connect their Personal Current Accounts, Credit Cards, Instant Access Savings Accounts or Internet Saver accounts to TPPs. TPPs will provide a range of different applications and websites offering new ways for customers to manage money and make payments.
Amendments to the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD) were published in the Official Journal of the European Union (EU) on 7 June 2019. The majority of the CRR amendments will apply from 28 June 2021 and the CRD amendments from 28 December 2020. The impact of these amendments continues to be assessed. Uncertainty remains around the implementation and impact of further regulatory developments arising from the finalisation of Basel III, which will be subject to EU and UK implementation. It was announced in March 2020 that the implementation date of Basel III has been delayed by one year to 1 January 2023.
In addition, the Group became subject to the minimum requirements for own funds and eligible liabilities (MREL) on an interim basis from 1 January 2020, with full implementation from 1 January 2022. The requirements are factored into the Group's funding and capital plans. The Company undertook an initial GBP250.0m issuance of MREL-compliant debt in July 2019 in support of the interim requirements and subsequently invested the proceeds in Tesco Personal Finance Plc via an intercompany subordinated loan. Further issuances may be required to support end-state requirements.
MREL will, on full implementation, be set on a bank-specific basis and calculated as the sum of two components: a loss absorption amount, being the amount needed to absorb losses up to and in resolution; and a recapitalisation amount, which reflects the capital that a firm is likely to need post-resolution.
The Group has identified climate change as a risk on which there is growing regulatory focus. During the year, the Prudential Regulation Authority (PRA) issued a Supervisory Statement which set out its expectations in relation to how banks should manage the financial risks of climate change.
The Group has designated the Chief Risk Officer (CRO) as the Senior Management Function holder responsible for embedding climate change risk into the Group's Risk Management Framework (RMF) and a plan to achieve this has been initiated. The Group has conducted a review of its exposure to climate change risk and a number of enhancements have been made to support the identification and impact assessment of climate change risk across the organisation. Climate change risk is subject to at least annual review by the Group's Board Risk Committee (BRC).
6
Key Performance Indicators
The Directors consider the following to be Key Performance Indicators for the Consolidated Income Statement:
2020 2019
Restated(1,2)
Underlying net interest margin(1,2) 4.1% 3.8%
Net interest margin(1,2) 4.4% 4.3%
Underlying cost:income ratio(1,2) 53.7% 55.8%
Cost:income ratio(1,2) 69.9% 63.3%
Bad debt:asset ratio(2) 1.6% 1.3%
Capital and Liquidity Ratios
The Directors consider the following to be Key Performance Indicators for capital and liquidity reporting:
2020 2019
Restated(1)
Common equity tier 1 ratio(1) 20.7% 16.3%
Total capital ratio(1) 23.3% 18.4%
MREL ratio 26.3% n/a
Net stable funding ratio(1) 129.3% 123.3%
Underlying loan to deposit ratio 110.1% n/a
Loan to deposit ratio 109.7% 118.6%
The Group's total capital ratio remains above internal targets and regulatory requirements at 23.3% (2019: 18.4%)(1) and leaves the Group well placed to support future growth.
On 1 March 2018, IFRS 9 came into force and a transitional period was introduced, allowing the Group to phase in the IFRS 9 impact on capital over a period of 5 years.
Under the transitional provisions, the impact as at 29 February 2020 on common equity tier 1 is GBP22.8m (2019: GBP7.8m). Common equity tier 1 is expected to reduce from inception to end point by approximately 164 basis points (unaudited). The Group's common equity tier 1 capital is disclosed in note 44.
An interim MREL ratio requirement of 18% of risk-weighted assets has been set from 1 January 2020 to 31 December 2021. At 29 February 2020, the ratio was 26.3%.
The NSFR, a measure of the Group's liquidity position, is within appetite at 129.3% as at 29 February 2020 (2019: 123.3%)(1) . The Group maintains a liquid asset portfolio of high quality securities of GBP2.5bn (2019: GBP2.1bn).
(1) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.
(2) The prior year has been restated following the classification of the Mortgage business as a discontinued operation. Refer to notes 2 and 15 for further details.
7
Risk Management
Risk Management Approach
The Board of Directors has overall responsibility for determining the Group's strategy and related Risk Appetite. The Board's Risk Appetite comprises a suite of Risk Appetite statements, underpinned by corresponding measures with agreed triggers and limits. The Risk Appetite framework defines the type and amount of risk that the Group is prepared to accept to achieve its objectives and forms a key link between the day-to-day risk management of the business, its strategic objectives, long-term plan, capital plan and stress testing. The Risk Appetite is formally reviewed by the Board on at least an annual basis.
The Board is also responsible for overall corporate governance, which includes overseeing an effective system of risk management and that the level of capital and liquidity held is adequate and consistent with the risk profile of the business. To support this, a RMF has been embedded across the Group, creating an integrated approach to managing risk. The RMF brings together governance, Risk Appetite, the three lines of defence, the Policy Framework and risk management tools to support the business in managing risk as part of day-to-day activity, and is underpinned by governance, controls, processes, systems and policies within the first line business areas and those of the second line Risk Management Function (RMFu). Further information on the Group's RMF is set out on pages 14 to 21.
The CRO performs a strategic risk management role and is responsible for managing and enhancing the RMF. The CRO is independent from any commercial function, reports directly to the Chief Executive Officer (CEO) and can only be removed from his position with the approval of the Board.
The Group is exposed to a variety of risks through its day-to-day operations. The Board undertakes a robust review of principal risks and areas of emerging risks at least annually. The following table sets out the principal risks and uncertainties and how they are managed within the RMF. These risks do not comprise all of the risks associated with the business and are not set out in priority order. Additional risks not presently known to Management, or currently deemed to be less material, may also have an adverse effect on the business. All business areas and functions in the Group are required to maintain and actively manage a risk register. In addition, the BRC oversees a Strategic and Horizon Risks process which focuses on emerging risks.
8
Principal risks and uncertainties Key controls and mitigating factors
Credit risk
The risk that a borrower will All lending is subject to underwriting
default on a debt or obligation processes and the performance of
by failing to make contractually all exposures is monitored closely.
obligated payments, or that Regular management reports are submitted
the Group will incur losses to the Board and appropriate Committees.
due to any other counterparty The Group aims to manage operational
failing to meet their financial risks within defined Risk Appetite
obligations. limits.
Operational risk Business units and functions assess
The risk of loss resulting from operational risks on an ongoing
inadequate or failed internal basis via a prescribed Risk and
processes, people and systems Control Self Assessment (RCSA) process
or from external events. and operational risk scenario analysis.
The RCSA process is reviewed and
updated on a timely basis by first
line business areas to reflect changes
to the risk and control environment
arising from changes in products,
processes and systems.
The outputs are reported to relevant
governance bodies, including the
BRC. This is supplemented further
by an event management process and
regular reporting of the operational
risk profile to the Executive Risk
Committee (ERC) which provides oversight
of the Group's operational risk
profile.
A significant number of services
and processes are provided by third-party
service providers and a key operational
risk is the failure of an outsourced
service provider.
The Procurement and Supplier Management
Framework provides an appropriate
and consistent approach to the procurement
and management of suppliers to ensure
the Group is able to effectively
engage, manage and terminate supplier
relationships.
The Framework supports the relevant
Group policies applicable to procurement
and supplier management and enables
the Group to meet its regulatory
requirements, understand and manage
supplier and service risk effectively,
and take a consistent approach to
supplier relationships.
Increased market demand for specialist
personnel could result in increased
costs of recruitment and retention
or reduced organisational effectiveness
if a sufficient number of skilled
staff cannot be employed or retained.
The Executive Committee (ExCo) oversees
key aspects of people risk, including
talent management, performance management,
retention and succession planning.
9
Operational risk (continued) Financial crime and fraud are significant
drivers of operational risk and the
external threat continues to be a
high priority area of risk management
across the Financial Services industry.
The Group has a suite of policies
that provide clear standards for
the management of financial crime
risks. The Group has a dedicated
Financial Crime team and continually
monitors emerging risks and threats
and engages with industry experts
to identify and manage the risks.
Regular updates are provided to Executive
and Board level committees.
The financial services industry remains
under significant threat from cyber-attacks.
This includes various organised groups
targeting institutions through phishing,
malware, denial of service and other
sophisticated methods.
The Group manages cyber security
risks through its Information Security
team. The Group continually monitors
emerging risks and threats. Regular
reporting is provided to the ERC
and the BRC.
As primarily a digital bank, technology
is a key element in providing services
to the Group's customers in a consistent
and secure manner. Causes of technology
outages across the industry include
failed change, third-party failures
or security events.
The Group manages technology and
technology risk through its Information
Technology team and has aligned key
processes and controls with industry
recognised standards such as the
Information Technology Infrastructure
Library and those set out by the
National Institute of Standards and
Technology. Regular reporting on
technology services and technology
risk are provided to the Group's
ExCo, ERC, BRC and the Board.
Liquidity and funding risk
Liquidity risk is the risk that Liquidity risk is governed through
the Group is not able to meet the Treasury Committee (TCo), BRC
its obligations as they fall and the Board. The Group maintains
due. This includes the risk that a liquidity position in excess of
a given security cannot be traded internal and regulatory requirements.
quickly enough in the market The Treasury function ensures all
to prevent a loss if a credit liquidity and funding measures are
rating falls. managed within policy and Risk Appetite
Funding risk is the risk that on a daily basis.
the Group does not have sufficiently Liquidity and funding risk is assessed
stable and diverse sources of through the internal liquidity adequacy
funding. assessment process (ILAAP) on at
least an annual basis. Stress testing
of current and forecast financial
positions is conducted to inform
the Group of required liquidity resources.
Reverse stress testing is conducted
to inform the Group of the circumstances
that would result in liquidity resources
being exhausted. Liquidity stress
tests are presented to the TCo and
the Assets and Liabilities Management
Committee (ALCo) on a regular basis
to provide evidence that sufficient
liquidity is held to meet financial
obligations in a stress.
The Group is predominantly funded
by its retail deposit base, which
reduces reliance on wholesale funding
and, in particular, results in minimal
short-term wholesale funding.
10
Market risk
The risk that movements in market Control of market risk is governed
prices (such as interest rates, by the ALCo and the TCo. These bodies
foreign exchange rates and the provide oversight of the Group's market
market value of financial instruments) risk position at a detailed level,
lead to a reduction in either providing regular reports and recommendations
the Group's earnings or capital. to the BRC and the Board.
Market and Liquidity Risk, as part
of the RMFu, also review and challenge
policies and procedures relating to
market risk and provide oversight
for the Balance Sheet Management and
Transaction Management teams within
the Treasury function.
Insurance risk
The risks accepted through the The Group's aim is to actively manage
provision of insurance products insurance risk exposure, with particular
in return for a premium. These focus on those risks that impact profit
risks may or may not occur as volatility. The Group has no direct
expected and the amount and timing underwriting risk. However, the Group
of these risks are uncertain and is exposed to underwriting risk through
determined by events outside of its joint venture, TU. TU is a separately
the Group's control. regulated entity and is capitalised
accordingly.
TU operates a risk management framework
designed to identify and manage risks
to which it is exposed. This includes
the use of reinsurance to limit risk
exposure above certain levels and
the engagement of external independent
actuaries to provide assurance over
the valuation of insurance liabilities.
Risk Appetite and a suite of risk
policies are in place to manage risk
in TU.
Regulatory risk
The risk of reputational damage, The Group's risk appetite is to
liability or material loss from comply with the relevant rules,
failure to comply with the requirements regulations and data protection
of the financial services regulators legislation. As part of the Group's
or related codes of best practice Policy Framework, a dedicated Compliance
applicable to the business areas team is responsible for the Compliance
within which the Group operates. and Conduct Risk Policy which is
approved by the Board, as well as
for monitoring, challenge and oversight
of regulatory risk and compliance
across the business. Where breaches
occur, the Group will take appropriate
rectifying action. The Group seeks
to deliver fair outcomes for customers.
The risk of business conduct leading
to poor outcomes can arise as a
result of an over-aggressive sales
strategy, poor management of sales
processes, credit assessments and
processes or failure to comply with
other regulatory requirements.
Business areas manage conduct risk
and use a range of management information
to monitor the fair treatment of
customers. A framework of product-led
conduct management
information has been developed
and is reviewed by Senior Management
in the business lines. Customer
outcomes are also assessed as part
of the development and design of
new products and through annual
product reviews of existing products.
The ERC and the Board review and
challenge delivery of fair outcomes
for customers.
11
Regulatory risk (continued) The risk that regulatory changes
such as Open Banking, PSD2 and the
General Data Protection Regulation
will have an impact on how customers
manage both their money and data
over the longer term, with the potential
for such regulatory changes to fundamentally
alter the nature of competition
in UK retail banking and have an
impact on the Group's activities.
These changes also create opportunities
for traditional competitors as well
as non-banking firms, particularly
digitally focused technology companies
who have the ability to move at
pace.
The volume and pace of regulatory
change remain high. The Group actively
engages in relevant industry consultation
and closely monitors potential changes
to regulatory requirements to allow
it to address possible opportunities
while recognising potential competitive
risks. The Group has unique opportunities
arising from these regulatory changes
to create additional benefits for
customers due to its position within
the wider Tesco group.
Capital risk
The risk that the Group holds The Group undertakes close monitoring
regulatory capital which is of of capital ratios to ensure it complies
insufficient quality and quantity with current regulatory capital requirements
to enable it to absorb losses. and is well positioned to meet any
anticipated future requirement. Management
of capital is governed through the
ALCo, the BRC and the Board.
The Group undertakes an Internal
Capital Adequacy Assessment Process
(ICAAP). Material risks to the Group
are reviewed through stress testing
to support an internal assessment
of the level of capital that the
Group should maintain.
Where capital is not considered to
be an appropriate mitigant for a
particular risk, alternative management
actions are identified.
The stress testing scenarios and
final ICAAP results are presented
to the BRC for challenge and to the
Board for approval. The ICAAP is
submitted to the regulator on a regular
basis and forms the basis of the
total capital requirement
(TCR) given to the Group.
The prudential regulation of banks
continues to develop, with a number
of topics currently under consultation
in both
the EU and the UK. The impact of
future changes to capital and funding
regulation may have an impact on
the Group's activities.
The Group actively engages in relevant
industry consultation and closely
monitors potential changes to regulatory
requirements.
Covid-19 The Group has invoked business continuity
The Covid-19 pandemic is a new plans, as it seeks to serve and support
emerging risk. Since the year its customers throughout the pandemic
end, there has been significant while maintaining the safety and
economic and social disruption. well-being of staff. The Group is
The Group could be materially engaging with suppliers to ensure
impacted by higher ECLs and lower that service levels can be maintained
revenues as a result of an economic through a prolonged pandemic. The
downturn. Group has also revisited its stress
scenarios to ensure it has sufficient
capital and liquidity to trade through
a plausible range of economic outcomes.
12
Brexit
On 31 January 2020 the UK ceased There remains economic uncertainty
to be a member of the EU and while the terms of the UK's future
entered into an 11 month transition relationship with the EU are negotiated.
period with the EU while the The Group has actively considered
future trading relationship is the potential risks associated with
negotiated. As a result, there the UK's exit from the EU and their
remains economic uncertainty impact on both the UK financial services
in the UK and Europe in relation market and the Group itself. The
to Brexit. The Group will continue most significant impact arises in
to monitor the wider economic respect of credit risk relating to
environment, particularly to the performance of the Group's portfolio
assess the impact on credit risk of loans and advances to customers.
to the Group. The largest impact Assessment of the ECL allowance under
on the Group relates to the economic IFRS 9 has taken into account a range
impact on the Group's ECL provision, of macro-economic scenarios, one
sensitivities in respect of which of which reflects a poor trade deal
are set out at note 40. outcome.
In addition, the Group's internal
liquidity and capital adequacy assessments
are designed to ensure that the Group
has sufficient capital resources
to allow it to cope with a severe
economic stress and maintain sufficient
liquidity above required limits throughout
the going concern forecast period.
The Group has also undertaken a series
of activities to prepare for Brexit.
As a UK retail bank, the Group does
not anticipate any significant operational
disruption as a result of Brexit.
However, the Group has taken steps
to confirm that suppliers based in
both the EU and UK do not foresee
any disruption to service (including
any issues with the transfer of data
to the Group) post-Brexit.
The Group will continue to monitor
the wider economic environment, particularly
to assess the impact on credit risk
to the Group. The Group also continues
to monitor related developments to
the UK's exit from the EU, including
the possibility of a second Scottish
independence vote.
LIBOR rate replacement
On 27 July 2017 the FCA announced The Group has identified and considered
that the London Interbank Offered the risks associated with moving to
Rate (LIBOR) would be phased out the Sterling Overnight Index Average
and replaced with an alternative (SONIA) as the reference rate and
reference rate by the end of 2021. has developed a plan to mitigate these
risks. Actions are being taken to
implement the plan. Further information
on the Group's transition to SONIA
is set out on page 75. The Group also
continues to monitor industry developments.
The following pages provide a more granular overview of the operational control processes and risk mitigants adopted by the Group.
A fuller description of these risks and controls can also be found in the Pillar 3 Disclosure Statements of the Group for the year ended 29 February 2020. These disclosures will be published in the Financial Information section of the Group's corporate website in due course.
13
Risk Management Framework (RMF)
The Group has a formal structure for reporting, monitoring and managing risks. This comprises, at its highest level, the Group's Risk Appetite, approved by the Board, which is supported by the RMF.
The key components of the RMF are as follows:
Governance Structure
The Group has established a governance structure which is appropriate for the business in terms of its level of complexity and risk profile. This structure is reviewed periodically so that it remains suitable to support the business. During the year, a review of the governance structure in place was carried out. As a result, the number of sub-committees reporting to the ExCo has been rationalised to provide clear alignment between the Senior Executives and their Senior Manager Regime responsibilities. The governance structure set out in these disclosures describes the structure that was in place as at 29 February 2020.
The Board
Chair Executive Directors Non-Executive Directors
Graham Pimlott Richard Henderson Robert Endersby
Declan Hourican Jacqueline Ferguson
Gerard Mallon Simon Machell
James McConville
Amanda Rendle
Alan Stewart
James Willens
Sir John Kingman
The Board is the key governance body and is responsible for overall strategy, performance of the business and ensuring appropriate and effective risk management, in line with the approved Risk Appetite.
The Board approves the Group's business plans, budget, long-term plan, ICAAP, ILAAP and any material changes to product lines in line with the approved Risk Appetite. The Board also monitors the Group's risk profile and capital adequacy position. The Group employs hedging and mitigation techniques defined within the Group's policies to ensure risks are managed within Risk Appetite.
14
The Board (continued)
The Board has delegated responsibility for the day-to-day running of the business to the Chief Executive who has in turn established the ExCo to assist in the management of the business and to deliver the strategy in an effective and controlled way. The Board has established Board committees and the executive has established Senior Management committees to:
-- oversee the RMF;
-- identify the key risks facing the Group; and
-- assess the effectiveness of the risk management actions.
Tesco Personal
Finance Group Board
Audit Board Risk Remuneration Disclosure Nomination
Committee Committee Committee Committee Committee
------------- ---------------------- ------------ ------------
The Board has overall responsibility for the management of the business and acts as the main decision-making forum. It sets the Risk Appetite and strategic aims for the business, in some circumstances subject to shareholder approval, within a control framework which is designed to enable risk to be assessed and managed. The Board satisfies itself that financial controls and systems of risk management are appropriate through the reporting provided to it and provides feedback where necessary to ensure that reporting remains fit for purpose.
Gender Diversity at Board Level
The Group has a formal, Board approved Policy on Diversity and Inclusion and is fully committed to creating an inclusive culture where everyone is made to feel truly welcome regardless of age; disability; gender; gender reassignment; marital and civil partnership status; pregnancy and maternity; race; religion or belief, or absence of religion or belief; sexual orientation or trade union affiliation. The overall objective of the Policy is to ensure that there is a fair process to attract, develop and retain talent and ensure that all colleagues are afforded equal opportunities regardless of protected characteristics or background, creating a diverse and inclusive workplace that reflects the customers the Group serves.
The Group is a Women in Finance Charter signatory, supporting the progression of women into senior roles in the financial services sector, championing the benefits of greater diversity within businesses through setting a variety of targets regarding female representation. Signatories are required to publicly report on progress to deliver against these internal targets in support of the accountability and transparency needed to drive change. In the last year, the Group made positive progress in improving female representation and is focused on building a sustainable talent pipeline to ensure that it continues to develop diverse talent throughout all levels of the organisation. Details of the Group's targets and progress can be found at https://corporate.tescobank.com/.
The Group appointed an Executive Sponsor for Inclusion who is also accountable for progress towards the Women in Finance Charter targets. Sandy Begbie, who has a CBE for services to business and social inclusion, leads the Inclusion agenda for the Group and chairs the Inclusion Network, which consists of Sponsors and Chairs of colleague networks, the Director of Colleague Experience and the Inclusion Team.
Further information on the role of the Group's Nomination Committee (NC) in reviewing the diversity of the Board, and the Group's Senior Management, is set out on page 18.
15
The Board (continued)
Board and Committee Attendance
The Board and its Committees held regular meetings throughout the year, excluding meetings held to consider matters of a time-sensitive or ad-hoc nature. Directors are expected to attend all Board and relevant Committee meetings. The table below shows the attendance at the scheduled Board and Committee meetings(1) :
Board Board Risk Audit Committee Remuneration Disclosure Nomination
Committee Committee Committee Committee
Graham Pimlott 13/13 5/5 -- 6/6 5/5 2/2
Richard Henderson 12/13 -- -- -- 5/5 --
Declan Hourican 13/13 -- -- -- 5/5 --
Gerard Mallon 12/13 -- -- -- -- --
Robert Endersby 12/13 5/5 7/7 6/6 5/5 --
Jacqueline Ferguson 12/13 4/5 7/7 -- -- --
Simon Machell 12/13 -- 7/7 -- -- 2/2
James McConville 11/13 5/5 7/7 -- 5/5 --
Amanda Rendle 13/13 5/5 -- 6/6 -- 2/2
Alan Stewart 12/13 4/5 -- -- -- --
James Willens 12/13 4/5 -- 6/6 1/5 2/2
Sir John Kingman(2) 1/13 1/5 1/7 2/6 -- 1/2
(1) Attendance recorded is of Committee members only and does not reflect Directors' attendance as observers.
(2) Sir John Kingman was appointed to the Board on 1 November 2019.
16
The Board (continued)
Board Evaluation
In accordance with the requirements of the Corporate Governance code, the Board carries out a review of the effectiveness of its performance and that of its Committees and Directors every year and the evaluation is facilitated externally every third year.
An externally facilitated review was carried out and presented in 2018/19, with facilitation provided by Boardroom Dialogue. The review concluded that the performance of the Board, its Committees and each of the Directors continues to be effective. No conflicts of interest exist between Boardroom Dialogue and any members of the Board.
The evaluation highlighted a number of strengths, including a breadth of skills across the Board, a clear focus on strategy and an effective definition of roles across various Committees.
Whilst no fundamental changes were proposed in the evaluation, it also highlighted a number of opportunities for improvement, including changes to the number of Board meetings and further progress to be made on gender and ethnic diversity.
In 2019/20, an internal evaluation has been carried out in order to assess the Board's and Directors' collective progress against the Group's objectives. The output of the evaluation identified opportunities to further improve the Board and its Committees' effectiveness.
Sub-committees
In order to support effective governance and management of the wide range of responsibilities, the Board has established the following five sub-committees:
-- Audit Committee (AC)
The AC comprises James McConville (Chair), Robert Endersby, Simon Machell and Jacqueline Ferguson.
The role of the AC is to review the Financial Statements; review accounting policies and practices for compliance with relevant standards; examine the arrangements made by Management regarding compliance with regulations and standards; review the scope and results of the annual external audit; oversee the process for selecting the external auditor and make recommendations to the Board in relation to the appointment, re-appointment and removal of the external auditor; consider the effectiveness of the external auditor and their independence; review reports covering anti-money laundering and compliance, in particular the Money Laundering Reporting Officer annual report and Risk Assurance Report; maintain a professional relationship with the external auditor; oversee the Internal Audit (IA) function and review the IA programme; work closely with the BRC to avoid as far as possible any overlap or gap in the overall risk and assurance activities of the two committees; carry out such investigations or reviews as shall be referred to it by the Board; review the Group's plans for business continuity; approve the annual plan of Risk Assurance activity within the Group; receive and review reports, findings and recommendations from Risk; review and consider the adequacy of any follow up action, and any relevant investigation work, carried out by or on behalf of Risk; review and monitor Management's response to findings and recommendations following investigations carried out by Risk; and review the findings of external assurance reports provided by outsourced providers.
Further detail on the AC is included within the AC section of the Directors' Report.
-- Board Risk Committee (BRC)
The BRC comprises Robert Endersby (Chair), James McConville, Graham Pimlott, Amanda Rendle, Alan Stewart, James Willens, Jacqueline Ferguson and Sir John Kingman.
The role of the BRC is to oversee that a culture is appropriately embedded which recognises risk and encourages all employees to be alert to the wider impact on the whole organisation of their actions and decisions; take a forward-looking view of possible economic trends and risks, informed by analysis of appropriate information, and consider their potential impact on the business; consider, and recommend to the Board the Group's Risk Appetite and seek to ensure that overall business strategy is informed by and remains aligned with it; and review and challenge all major risks, controls, actions and events in the business, alerting the Board to any areas of concern.
17
The Board (continued)
-- Remuneration Committee (RC)
The RC comprises Amanda Rendle (Chair), Graham Pimlott, James Willens, Robert Endersby and Sir John Kingman.
The role of the RC is to monitor compliance with regulatory requirements relating to remuneration, specifically the approval and identification of Material Risk Takers (MRTs); oversee the establishment and implementation of a remuneration policy for all colleagues within the Group (including specific arrangements for MRTs); provide performance and risk assessment in the determination of pay outcomes, including the oversight of pay outcomes for MRT colleagues; and ensure that the levels and structure of remuneration are designed to attract, retain and motivate the management talent needed to run the business in a way which is consistent with the Risk Appetite and ongoing sustainability of the business and is compliant with all applicable legislation, regulation and guidelines.
-- Disclosure Committee (DC)
The DC comprises Graham Pimlott (Chair), Robert Endersby, Richard Henderson, Declan Hourican, James McConville and James Willens.
The DC reviews, on behalf of the Board, formal company documents which are either destined for publication or which, due to their size or complexity, are better reviewed in detail in a smaller group, to ensure the Group's compliance with relevant statutory and regulatory obligations.
-- Nomination Committee (NC)
The NC comprises Graham Pimlott (Chair), Simon Machell, James Willens, Amanda Rendle and Sir John Kingman.
The NC has responsibility for reviewing the structure, size and composition (including the skills, knowledge, experience and diversity) of the Board and making recommendations with regard to any changes required, including the nomination of candidates to fill Board vacancies as and when they arise; considering succession planning for Directors and other senior executives, taking into account the challenges and opportunities facing the Group, and the skills and expertise needed in the future; and keeping under review the leadership needs of the organisation, both executive and non-executive, with a view to safeguarding the continued ability of the organisation to compete effectively in the marketplace by keeping up-to-date and fully informed about strategic issues and commercial changes affecting the Group and the market in which it operates.
Additionally, the NC is responsible for the evaluation of Board members' performance and appointment of new Board members. The NC establishes the requirements and profile of the candidate required and then engages with third-party recruitment firms to find the appropriate individual. During the year, Korn Ferry Hay Group, Ridgeway Partners and Lygon Group were engaged to support recruitment to the Board. No conflict of interest exists between these firms and any members of the Board.
The Group is committed to promoting a diverse and inclusive workplace, which is reflected in the work of the NC. The Group's diversity policy is discussed in further detail on page 15.
The gender balance of the Group's Board of Directors is disclosed on page 15.
Executive Committee (ExCo)
The Group's Board has delegated the day-to-day running of the business to the CEO. The CEO has established the ExCo to provide oversight and challenge in the management of the business, to deliver against strategy in an effective and controlled way and to set out a framework of reporting to the Board that is sufficient to enable the Board to fulfil its responsibilities. The ExCo supports the CEO, who has responsibility for the executive management of the business, by reviewing and overseeing the performance of the business and critical developing matters in the areas of responsibility of each member. Each ExCo member is accountable to the CEO and to the Board for managing performance in line with the Group's Risk Appetite, long-term plan, strategy and annual budget. To support this, the ExCo receives and considers customer matters, where these are deemed material to the Group; provides review and challenge that delivers good customer outcomes across the business activities the Group undertakes; oversees and monitors trade and financial performance; reviews the ongoing material operations of the Group; reviews the overall management and monitoring of risk; reviews colleague experience, performance, development and succession planning of Senior Management; considers the colleague experience agenda; and reviews the organisational design of the Group.
18
Executive Committee (ExCo) (continued)
The ExCo has established four sub-committees to support the relevant ExCo members and receives reports on any material matters and minutes from those sub-committees to monitor key activities.
In addition, in order to support their own decision-making, the ExCo has established four sub-committees which report directly to it. The ExCo receives and considers regular reports from each sub-committee on delegated matters and receives the minutes from those sub-committees to monitor key activities.
-- Assets and Liabilities Management Committee (ALCo)
The ALCo has been established to support the Chief Financial Officer by providing oversight and challenge in relation to the optimisation of the Group's balance sheet structure, within Board approved risk appetite for liquidity, capital and market risk. This includes defining strategic balance sheet structural objectives for liquidity, funding and capital which align with the Board's stated Risk Appetite, the regulatory obligations of the Group and the commercial and business objectives set out in the Long Term Plan as approved by the Board; recommending to the Board any changes to the amount or composition of the Group's capital base; providing oversight of the Group's continuous compliance with all internal and regulatory limits relating to liquidity, capital and market risk; and undertaking periodic reviews of Treasury policies and key regulatory documents for approval by the Board. The ALCo minutes are circulated to the ExCo, with any material matters being escalated as appropriate.
The ALCo has one sub-committee: the Treasury Committee.
-- Executive Risk Committee (ERC)
The ERC has been established to support the CRO by providing oversight and challenge in relation to the effective implementation of the RMF across the Group's business. This includes overseeing that the Three Lines of Defence model is operating effectively; the appropriateness of, and adherence to, the Risk Appetite; providing oversight of material risks facing the Group; and assessing whether appropriate arrangements are in place to manage and mitigate those risks effectively. In addition, the ERC supports the monitoring of the status of regulatory compliance; considers the impact of regulatory initiatives and upstream regulatory risk on the current and future state of compliance; and provides oversight and challenge on conduct risks and customer outcomes. The ERC reviews key policies and provides agreement for onward submission to the Board for final approval. The ERC minutes are circulated to the ExCo, with any material matters being escalated as appropriate.
The ERC has five sub-committees: Operational Risk Committee; Executive Credit Committee; Models and Ratings Systems Oversight Committee; Financial Crime Committee; and the Compliance and Conduct Risk Committee.
-- Investment Review Committee (IRC)
The IRC has been established to support the Chief Transformation Officer by providing oversight and challenge of the effective delivery of the Group's change portfolio. This includes the planning, objectives and strategy of the change portfolio in relation to customer outcomes, business and financial performance, operational matters, risk management and resourcing. The IRC minutes are circulated to the ExCo, with any material matters being escalated as appropriate.
19
Executive Committee (ExCo) (continued)
-- Operating Executive Committee (OEC)
The OEC has been established to support the Chief Customer Officer, Chief Operating Officer and the Insurance Director, providing oversight and challenge in relation to the effective running of the Banking and Insurance businesses by supporting and enabling an end-to-end operating model across the Group. This includes reviewing customer-related activities (including customer outcomes); business and financial performance (including pricing plans and customer impact of pricing decisions); operational matters; change initiatives; risk management; and colleague experience. The OEC minutes are circulated to the ExCo, with any material matters being escalated, as appropriate.
Three Lines of Defence
The Three Lines of Defence model is a widely recognised, best practice approach to ensuring that the risks within a financial institution are appropriately managed and are subject to effective oversight and challenge. Clearly defined roles and responsibilities help to drive effective risk management.
-- First Line of Defence
Senior Management within each business area is responsible for managing the risks that arise from the activities in which it is engaged in accordance with the Group's RMF and policies. The role of the first line of defence is to adhere to the Group's RMF, policies, standards and processes; identify, assess, own and manage risks that arise from the activities in which it is engaged; design, implement, own, check and operate management controls; identify and manage risk events, including the delivery of remedial actions and performance of root cause analysis; operate within Risk Appetite and any and all related limits which the second line establish; comply with risk reporting standards established by the second line; perform risk aggregation, analysis and reporting within their business line; maintain appropriate awareness of external and future risk to support effective management; and ensure compliance with all relevant regulation and codes.
-- Second Line of Defence
The RMFu operates under the leadership of the CRO. Risk teams reporting to the CRO are the second line of defence and are resourced by people with expertise in each of the principal risks faced by the Group. This enables appropriate analysis, challenge, understanding, oversight and assurance of each of the principal risks.
The role of the second line of defence is to own, develop, communicate and provide advice on the Group's RMF and policies; provide risk-based oversight and assurance of the first line's implementation of, and adherence to, the RMF and policies; provide risk-based oversight and assurance of first line risk management and control, including challenging the completeness of risk identification and assessment, which can take a variety of forms including active involvement in committees and meetings, analysis of Management information and data and providing an independent perspective on topics of significant interest; own the Risk Appetite framework on behalf of the Board and oversee implementation of Risk Appetite in the first line of defence; design and deliver standards for risk reporting and escalation; perform Group-wide risk aggregation and analysis; and deliver and co-ordinate specific regulatory returns.
-- Third Line of Defence
This comprises the IA function, which is responsible for providing independent assurance to the Board and Senior Management on the adequacy of the design and operational effectiveness of internal control systems and measures across the business. The IA function has an independent reporting line to the Chair of the AC and is resourced by individuals with relevant experience and professional qualifications. In addition, IA resources are supplemented across a range of audits by external support to provide additional subject matter expertise when required.
Independent assessment is provided through the execution of an agreed plan of audits, through attendance at relevant governance committees and through stakeholder management meetings.
20
Three Lines of Defence (continued)
The primary role of IA is to provide independent assurance on the effectiveness of governance, risk management and control across the first and second lines. The IA function achieves this through its core responsibilities, which include proposing an annual audit plan based on its assessment (after discussion with Management) of the significant potential risks to which the organisation could be exposed; carrying out audits of functions and processes in accordance with the annual audit plan and any additional special investigations requested by Management, the Board, the AC or the regulators; assessing the adequacy and effectiveness of the controls in the functions and processes audited, and issuing recommendations where improvement is required based on the results of work carried out; verifying compliance with those recommendations; reporting to the AC in relation to internal audit matters; and providing input to the Tesco IA department's reporting to the Tesco AC.
Group Policies
The Group has a framework of key policies in place which are approved at Board and Executive level committees. Each policy is owned by a specific individual who is responsible for developing and maintaining the policy, including gaining approval for the policy at the requisite level; communicating the policy, ensuring it is embedded so that those affected by it have sufficient information/understanding to comply; undertaking suitable assurance work to monitor compliance across the business; and reviewing non-compliance/policy waiver requests and agreeing suitable actions.
Each policy must be reviewed on at least a bi-annual basis, or earlier if there is a trigger for policy review such as a regulatory change, to ensure its continued effectiveness and applicability in line with changing risks. The RMFu provides tracking and oversight of the Policy Framework and is responsible for undertaking assurance and providing reports to the Board on its effectiveness.
-- Stress Testing
Stress testing is the process by which the Group's business plans are regularly subjected to severe but plausible scenarios to assess the potential impact on the business, including projected capital and liquidity positions. The scenarios adopted are subject to a rigorous selection process and include hypothetical operational failures, macro-economic stress events and customer behaviour impacts. The results, along with proposed actions, are reported to the ALCo, BRC and the Board. These are captured in both the ILAAP and the ICAAP.
-- Monitoring and Reporting
The Group monitors and tracks current exposures against limits defined in the agreed Risk Appetite and by the regulators. Exceptions are reported on a monthly basis to the ALCo and ERC and to each meeting of the BRC. Adherence to these limits is independently monitored, measured and reported using a suite of key indicators defined by each risk team responsible for managing the major specific risk categories faced by the Group. Decisions made at subordinate risk committees and forums are reported to senior committees as appropriate.
Viability Statement
-- Assessing the Group's Longer-Term Prospects and Viability
The Directors have based their assessment of viability on the Group's current strategic plan, which is updated and approved annually by the Board and sets out how the Group will achieve its purpose of 'helping Tesco customers manage their money a little better every day'.
To be a viable business, there should be a high level of confidence that both solvency and liquidity risks can be managed effectively, meaning that the Group must successfully fund its balance sheet and hold adequate capital and liquidity over the entire period covered by its Viability Statement.
The Group's Viability Statement is considered over a three-year period, as this horizon most appropriately reflects the environment in which the Group operates.
21
Viability Statement (continued)
-- Current Position
The Group is subject to regulatory requirements in respect of the amount of capital it holds and the quality of that capital. The capital the Group is required to hold comprises a TCR of which at least 75% must be held as common equity tier 1, a capital conservation buffer (CCB) and a countercyclical capital buffer (CCyB). The CCB and CCyB are designed to ensure the Group meets its TCR at all points in the economic cycle. A bank may utilise its CCB in times of stress and the BoE's Financial Policy Committee may reduce the CCyB buffer to zero.
The TCR is the key capital requirement for the Group and it is the Group's intention to maintain a surplus over its TCR for the foreseeable future. Based upon the latest Capital Plan, the Group is projected to have capital headroom over the assessment period.
The Group's liquidity position is described in note 40 and its capital position is set out at note 44.
-- Longer-term Prospects
The following factors are considered both in the formulation of the Group's Strategic Plan, and in the longer-term assessment of the Group's prospects:
-- The principal risks and uncertainties faced by the Group, as well as emerging risks as they are identified, and how these can be addressed;
-- The prevailing economic climate and global economy, competitor activity, market dynamics and changing customer behaviours; and
-- The potential short and longer-term economic impact of Brexit and the Covid-19 pandemic.
The Group's principal risks and policies and processes for managing those risks are set out on pages 9 to 13.
-- Assessing the Group's Viability
The viability of the Group has been assessed, taking into account the Group's current financial position, including external funding in place over the assessment period, and after modelling the impact of certain scenarios arising from the principal risks which have the greatest potential impact on viability in that period. Certain scenarios, considered severe but plausible, have been modelled which encompass these identified risks. Stress testing has been performed for each principal risk.
The assessment reflected the additional liquidity being held by the Group as a result of the sale of its Mortgage business, which also had a positive impact on capital from the resulting reduction in risk-weighted assets.
22
Viability Statement (continued)
An additional key assessment was the Group's viability through the Covid-19 pandemic. As part of this assessment the Board considered:
-- The impact on the Group's profits from an expected reduction in income on Credit Cards, Loans and Travel Money, combined with increased ECL charges. As part of this, the Board considered revised macro-economic scenarios which were received from the Group's third-party supplier. These are discussed in note 49;
-- The sufficiency of the Group's capital base throughout the pandemic. The revised macro-economic scenarios received were significantly less severe than those used in the ICAAP reverse stress test;
-- The adequacy of the Group's liquidity as the Group supports customers through a period of financial stress;
-- The operational resilience of the Group's critical functions including call centres, mobile and online channels and the Group's ability to provide continuity of service to its customers throughout a prolonged stress;
-- The resilience of the Group's IT systems;
-- A detailed assessment of the Group's supplier base, considering any single points of failure and focussing on suppliers experiencing financial stress. This included consideration of contingency plans should suppliers be deemed at risk;
-- The regulatory and legal environment and any potential conduct risks which could arise;
-- Any potential valuation concerns in respect of the Group's assets as set out in the Company and Consolidated Statements of Financial Position;
-- The impact of the pandemic on TU, the Group's joint venture insurance company; and -- The structural protections of the Group's securitisation vehicles.
The Board also considered the results of stress testing which is performed as an integral part of both the ICAAP and ILAAP, with the Group having sufficient capital and liquidity to fund the balance sheet in each scenario.
Viability Statement
Based on these scenarios, the Directors have a reasonable expectation that the Group will continue in operation and meet its liabilities as they fall due over the three-year period considered.
S172 Statement by the Directors
S172 Companies Act 2006 requires a director of a company to act in the way he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. In doing so, s172 requires a director to have regard, amongst other matters, to the:
-- likely consequences of any decisions in the long-term; -- interests of the company's employees; -- need to foster the company's business relationships with suppliers, customers and others; -- impact of the company's operations on the community and environment;
-- desirability of the company maintaining a reputation for high standards of business conduct; and
-- need to act fairly between members of the company.
In discharging its s172 duties, the Board has regard to the factors set out above. The Board also has regard to other factors which it considers relevant to the decisions it makes. The Board acknowledges that not every decision it makes will necessarily result in a positive outcome for all of the Group's stakeholders. By considering the Group's purpose, vision and values together with its strategic priorities and having a process in place for decision-making, the Board does, however, aim to make sure that its decisions are consistent.
23
S172 Statement by the Directors (continued)
The Board delegates authority for the day-to-day running of the business to the CEO, and through him, to Senior Management to set, approve and oversee execution of the Group's strategy and related policies. The Board reviews matters relating to financial and operational performance; business strategy; key risks; stakeholder-related matters; compliance; and legal and regulatory matters, over the course of the financial year. This is supported through the consideration of reports and presentations provided at Board meetings and reviewing aspects of the Group's strategy at least twice a year.
Engaging with the Group's stakeholders is key to the way the Group runs its business and is an important consideration for the Directors when making relevant decisions. Details of how the Directors engage with colleagues and have regard to the need to foster relationships with suppliers, customers and other key stakeholders can be found in the Directors' Report on pages 27 to 29.
The Board has made some key strategic decisions during the year ended 29 February 2020 where due consideration was given to the Group's key stakeholders, including:
-- Organisational design changes and implementation of the Group's transformation programme
Following the conclusion of a strategic review carried out during the year ended 28 February 2019, it was identified that there was a need for the Group to change its culture and business priorities to become a truly customer-centric business, and to operate more closely with Tesco to better provide Tesco customers with financial services and products.
The organisational design changes involved implementing a new operating model and structure to remove duplication, increase efficiency and enable clear lines of accountability aligned with commercial, customer and colleague objectives. The Board was committed to being open and transparent about the timings of the process, with relevant consultation taking place with workforce unions. As a result of these changes, a number of roles were made redundant. However, there was commitment to ensure those colleagues impacted were treated fairly and were provided with the necessary support.
The transformation programme is a significant multi-year programme with changes continuing to be made to product propositions; overall customer experience and product journeys; the Group's business operating model; and data and information technology enabling projects, to bring closer alignment to Tesco, engaging with the Group's colleagues and putting the needs of Tesco shoppers at the forefront of everything the Group does. This investment will ultimately result in products and propositions which are better tailored to the needs of Tesco customers.
-- Taking the decision to sell the Group's Mortgage business
The Board decided there was limited future potential to achieve sufficient scale in its Mortgage business and, reflecting intensifying competition in the marketplace for residential mortgages, that the Group was unlikely to be able to compete profitably in that marketplace given its funding costs. The Group therefore announced in May 2019 that it had ceased new Mortgage lending and was actively exploring options to sell its existing Mortgage business, including the complete transfer of related balances and ongoing administration of all accounts.
The Group's priority throughout the sale was to select a purchaser who would continue to serve the Group's customers well, whilst achieving a commercially acceptable transaction. The existing outsourced provider, who was providing the Mortgage business service to customers on behalf of the Group, was fully engaged in the discussions and opportunities of employment within the Group were offered to colleagues employed to support the Mortgage business. Bank of Scotland PLC (part of the Lloyds Banking Group) was selected as the purchaser after full consideration by the Board and taking into account the interests of customers. Customers' Mortgage terms and conditions are unaffected by the sale of the Mortgage business. As a gesture of goodwill, the Board agreed to make a one-off award of Clubcard points to eligible customers.
Further information on the sale of the Group's Mortgage business is set out on pages 2 to 3.
24
S172 Statement by the Directors (continued)
-- Closing the Group's Personal Current Account (PCA) product to new customers
The Group's PCA product was not attracting the level of customer demand that the Board had predicted and, as a result, the Group took the strategic decision to focus on products that will help Tesco shoppers manage their money a little better every day. By removing the Group's PCA product from sale, the Board will ensure that the Group's resources are concentrated on new developments which are better aligned to the Group's vision and purpose. The Group's existing PCA customers are unaffected and will continue to be able to use their accounts as normal. There was limited impact on existing colleagues, who were informed of the plan to remove the product from sale, as a result of this decision.
-- Taking the opportunity to participate in the new Clubcard Plus product, introduced by Tesco PLC during the year
This allowed the Group to participate in a proposition which offers a series of services from across the Tesco Group, designed to help customers to get more value from their shopping. Additional information on the Clubcard Plus product is set out on page 5.
The Strategic Report was approved by the Board of Directors and signed by order of the Board.
Michael Mustard
Company Secretary
7 April 2020
25
TESCO PERSONAL FINANCE GROUP PLC
DIRECTORS' REPORT
The Directors present their Annual Report, together with the Company and Consolidated Financial Statements and Independent Auditor's Report, for the year ended 29 February 2020.
Compliance with the UK Corporate Governance Code
The Group applied the main principles and complied with the relevant provisions set out in the UK Corporate Governance Code 2018 (2018 Code) throughout the year under review, with the exception of provision 41. Provision 41 relates to disclosures in respect of the RC and how it conducts its business in line with the 2018 Code. The Group has not included a full Remuneration Report within the Annual Report as it does not have listed equity and, as such, is not required to comply with this provision.
Information demonstrating how the main principles and relevant provisions of the 2018 Code have been applied can be found throughout the Directors' Report and the Strategic Report.
The primary responsibility of the Board in complying with the 2018 Code is to provide effective leadership to ensure that it promotes the long-term success of the Group for the benefit of its members as a whole.
Monitoring compliance with the 2018 Code is the responsibility of the Board.
The Financial Reporting Council (FRC) is responsible for the publication and periodic review of the UK Corporate Governance Code and this can be found on the FRC website http://www.frc.org.uk.
Business Review and Future Developments
The Group's business review and future developments are set out in the Strategic Report on pages 2 to 6.
Risk Management
The Group's risk management disclosures are set out in the Strategic Report on pages 8 to 21.
Financial Instruments
The Group's policies for hedging each major type of transaction are discussed in notes 1 and 20 to the Financial Statements.
Capital Structure
The Group's capital structure is discussed in notes 36 and 44 to the Financial Statements.
Events after the Reporting Date
Details of events occurring after the reporting date are discussed in note 49 to the Financial Statements.
Going Concern
The Directors have made an assessment of going concern, taking into account both current performance and the Group's outlook, which considered the impact of the Covid-19 pandemic, and including consideration of projections incorporating the impact of the Covid-19 pandemic for the Group's capital and funding position.
26
TESCO PERSONAL FINANCE GROUP PLC
DIRECTORS' REPORT (continued)
Going Concern (continued )
As part of this assessment the Board considered:
-- The impact on the Group's profits from an expected reduction in income on Credit Cards, Loans and Travel Money combined with increased ECL charges. As part of this, the Board considered revised macro-economic scenarios which were received from the Group's third-party supplier. These are discussed in note 49;
-- The sufficiency of the Group's capital base throughout the pandemic. The revised macro-economic scenarios received were significantly less severe than those used in the ICAAP reverse stress test;
-- The adequacy of the Group's liquidity as the Group supports customers through a period of financial stress;
-- The operational resilience of the Group's critical functions including call centres, mobile and online channels and the Group's ability to provide continuity of service to its customers throughout a prolonged stress;
-- The resilience of the Group's IT systems;
-- A detailed assessment of the Group's supplier base, considering any single points of failure and focussing on suppliers experiencing financial stress. This included consideration of contingency plans should suppliers be deemed at risk;
-- The regulatory and legal environment and any potential conduct risks which could arise;
-- Any potential valuation concerns in respect of the Group's assets as set out in the Company and Consolidated Statements of Financial Position;
-- The impact of the pandemic on TU, the Group's joint venture insurance company; and -- The structural protections of the Group's securitisation vehicles.
The Board also considered the results of stress testing which is performed as an integral part of both the ICAAP and ILAAP, with the Group having sufficient capital and liquidity to fund the balance sheet in each scenario.
As a result of this assessment, the Directors consider that it is appropriate to adopt the going concern basis of accounting in preparing the Company and Consolidated Financial Statements. Further information on the sensitivity of the Group's ECL allowance to reasonably possible changes in these assumptions over the next 12 months as at 29 February 2020 and at 7 April 2020 are set out at notes 40 and 49 respectively.
Engaging with stakeholders
The Group has a number of key stakeholder groups with whom it actively engages. Listening to, understanding and engaging with these stakeholder groups is an important role for the Board in setting strategy and decision-making. The Group recognises its obligations and requirements to be a well-controlled financial services business, compliant with regulation and delivering good customer outcomes. The Regulators are consulted and kept closely informed in relation to key decisions made by the Board, as appropriate.
Details of some of the key strategic decisions made during the year ended 29 February 2020 can be found in the Strategic Report on pages 24 to 25.
-- Our Customers
As a customer-centric business and in line with the Tesco purpose to serve shoppers a little better every day, the Group's vision is to help Tesco shoppers manage their money a little better every day.
The Group interacts with its customers across a wide variety of contact channels. The Group uses a range of methods to involve and engage with customers, which includes inviting customers into its offices, with project teams spending time with them to explore something they are working on. Doing this regularly, and in conjunction with other activities, helps to deepen the understanding of customer needs. In addition, to allow the Group to understand its customers' needs and develop insights, its teams spend time with customers, observing them in their homes, whilst they shop and when they are weighing up money decisions. The Board values feedback from customers to ensure the Group is providing them with what they want and need. A variety of customer surveys are also carried out on a regular basis to gather feedback from
customers when they have an interaction with the Group. Bespoke research is undertaken, as required, to help the Board understand customers and their needs.
27
-- Our Customers (continued)
The Group continues to seek opportunities to make it easier for Tesco customers to bank with and insure through the Group through targeted investment in technology and data, making life simpler for both customers and colleagues and driving efficiency gains that can be reinvested in the customer offer. The Group's strategy is to bring the best of Tesco to financial services, offering customers great value across the range of products and earning customer trust through the Group's actions.
Consideration of the Group's vulnerable customers is important and, working with the Money Advice Trust, the Group's Vulnerable Customers programme aims to identify vulnerable customers and enhance support for them. Support is given to colleagues to identify and record customers with vulnerabilities and to equip them to have more personalised and consistent support conversations with vulnerable customers, focusing on those who are impacted by life events, addictions or ill health.
-- Our Colleagues
The Group has over 3,500 colleagues and is committed to promoting a diverse and inclusive workplace, reflective of the communities in which it does business. It approaches diversity in the broadest sense, recognising that successful businesses flourish through embracing diversity into their business strategy and developing talent at every level in the organisation.
The Group's selection, training, development and promotion policies are designed to provide equality of opportunity for all colleagues, regardless of age; disability; gender; gender reassignment; marital and civil partnership status; pregnancy and maternity; race; religion or belief, or absence of religion or belief; sexual orientation or trade union affiliation. Decisions are based on merit.
The Group works with colleagues, including those with disabilities, to adapt work practices where necessary in order to help them work effectively within the business.
The Group is committed to developing the skills and knowledge and supporting the wellbeing of its colleagues in order to help achieve its objectives and create a great place to work. It ensures that the Tesco Values are reflected within its employment policies and practices to encourage engagement, enabling colleagues to be their best and able to contribute to the delivery of the Group's core purpose.
The Group's Code of Business Conduct, which defines the standards and behaviours expected of colleagues, supports its core values. The Code of Business Conduct is supported by Group policies and mandatory training which includes anti-bribery and corruption, competition law, data protection and whistleblowing. Colleagues are required to complete mandatory training to reinforce the importance of these standards. For new colleagues, there is a requirement to complete the suite of mandatory training within 30 days of joining the Group. Refresher training is required on an annual basis. The Board and Senior Management are responsible for ensuring that their activities reflect the culture they wish to instil in the Group's colleagues and other stakeholders and drive the right behaviours. They have a responsibility to ensure that the Group's colleagues do the right things in the right way by setting the tone from the top and leading by example.
Working closely with Tesco, the Group is committed to actively supporting its colleagues to live healthier lives and make healthier choices around their physical and emotional wellbeing. Through its health and wellness strategy, which has recently moved to a more cyclical and always-on approach, the Group aims to help colleagues be at their best both at work and at home. The Group's colleagues have the support of a diverse community of Mental Health First Aiders, located across its offices, who play a key role at the point of colleague need and help signpost the most suitable or relevant services for ongoing support. Through the Group's Employee Assistance Programme, Health Assured, colleagues also have access to online content, webinars and over the phone support. This is an independent and unlimited 24/7 telephone support line should colleagues be feeling anxious, concerned or in need of some extra support or guidance.
There are processes in place for understanding and responding to colleagues' needs through surveys and regular performance and development reviews. Business developments are communicated frequently to keep colleagues well
informed about the progress of the Group. Ongoing training programmes also seek to ensure that colleagues understand the Group's objectives and the regulatory environment in which it operates.
28
-- Our Colleagues (continued)
In September 2019, the Group's colleagues elected a representative from the workforce to be part of the Tesco Colleague Contribution Panel (CCP). The CCP is a panel of elected colleagues from all across the Tesco group who will meet with a Non-Executive Director (NED) from Tesco twice a year to discuss experiences of working at Tesco and give the NED an opportunity to inform the activities of the Group's Board and its Committees. This will enable the Tesco Board to hear views of colleagues from across the business. The Group's Director of Colleague Experience provides feedback from the CCP to the ExCo and works directly with the Tesco Board to respond to CCP outputs relevant to the Group. The Board is responsible for reviewing the annual report on whistleblowing, in compliance with the Whistleblowing Policy. The Group's independent and confidential whistleblowing service, 'Protector Line', provides colleagues with the ability to raise concerns regarding misconduct and breach of the Code for Business Conduct.
Colleagues are encouraged to become involved in the financial performance of the wider Tesco Group through a variety of schemes, principally the Tesco savings related share option scheme (Save As You Earn) and the partnership share plan (Buy As You Earn).
-- Our Suppliers
The Group engages with around 900 active suppliers, who play an important role in the operation of the Group's business to enable the delivery of an effective and efficient business model. During the year ended 29 February 2020 several material contracts were presented to the Board for approval, covering both new relationships and contract renewals. In approving these contracts, the Board considered the strategic value of the relationships as well as looking at the customer impacts, risk exposure, legal and compliance considerations and financial implications. The Group has a framework in place which provides a consistent and proportionate approach to the procurement and management of suppliers to ensure that it can effectively engage, manage and terminate, where appropriate, supplier relationships. To support regulatory reporting requirements, the Board expects its suppliers to monitor their own supply chain and be able to provide the Board with appropriate evidence and assurance of compliance, as required.
-- Our Shareholder
As the Group's only shareholder, the Board relies on its relationship with Tesco and the differentiating factors of having rich customer data, a strong brand and a Clubcard loyalty programme to better serve customers. The Group has a strong relationship with Tesco, with regular updates and meetings taking place in relation to performance and strategy.
-- Our Community
Alongside its commercial activities, the Group has a focus on the wider community, supporting Tesco's chosen charity partners and events. In addition, the Group's three office sites raise funds for local charity partners selected by colleagues at each site. During the year, colleagues raised over GBP88,000 for the Group's charity partners. Additionally, colleagues made use of volunteering days to provide help to the Group's charity partners and wider community. In May 2019, the Group marked its second 'Tesco Bank Turns Pink' event, showing the Group's commitment and support to Cancer Research UK's Race for Life.
-- Climate Change
The Board is aware of the potential impacts of climate change risk, recognising its importance, and supporting the CRO in discharging his responsibilities for ensuring the risk framework considers the risks associated with climate change, and has agreed to undertake an annual assessment of climate change risk and its impact.
Dividends
An interim dividend of GBP50.0m (2019: GBP50.0m) in respect of ordinary share capital was paid to Tesco PLC on 24 February 2020.
29
Treating Customers Fairly
Treating Customers Fairly is central to the FCA's principles for businesses and remains central to the Tesco Values which sit at the heart of the business. These Values are designed to ensure that customer outcomes match their understanding and expectations.
Directors
The present Directors and Company Secretary, who have served throughout the year and up to the date of signing the Financial Statements, except where noted below, are listed on page 1.
Since 1 March 2019 to date the following changes have taken place:
Appointed Resigned
1 November
Sir John Kingman 2019
30 September
John Castagno 2019
Karl Bedlow 20 June 2019
David McCreadie 20 June 2019
-- Audit Committee (AC)
Introduction from the AC Chair
The Group operates in a demanding environment, particularly with regard to economic, reputational, political and regulatory factors. The role of the AC is critical in reviewing the effectiveness of the Group's internal control framework and assurance processes and in assessing and acting upon findings from both external and internal audit. The AC keeps the current internal control framework and assurance processes under review to ensure that they adapt to the changing environment and remain appropriate for the Group.
AC composition, skills and experience
The AC acts independently of Management. This ensures that the interests of shareholders are properly protected in relation to financial reporting and internal control.
As detailed in the section of the Strategic Report on the Board, the AC comprises four Independent Non-Executive Directors.
James McConville is a Chartered Accountant and has significant financial and banking experience gained from over 30 years in the financial services sector, thus enabling him to fulfil the role as AC Chair.
James is currently Group Finance Director at Phoenix Group Holdings PLC, with responsibility for Finance, Treasury and Investor Relations. James is due to retire from Phoenix Group Holdings PLC during May 2020. Previous appointments include Chief Financial Officer of Northern Rock plc and a variety of senior finance and strategy related roles for Lloyds Banking Group plc, including Finance Director of the Scottish Widows Group.
Robert Endersby has spent over 30 years working in the financial services sector, both within the UK and internationally and is an Associate of the London Institute of Banking and Finance.
Robert's previous key appointments included Chief Risk Officer and member of the Executive Board of Danske Bank A/S, Vice Chair of Danske Bank Oyj and senior risk management positions in Barclays, The Royal Bank of Scotland and ING Group.
Simon Machell has worked in financial services for over 30 years and has experience in both general and life insurance in the UK, Europe and Asia. The majority of Simon's experience was gained from a range of roles with Aviva, including Chief Executive of the RAC, Chief Executive of the general insurance business in the UK and running the insurance businesses in 14 markets across Eastern Europe and Asia. Simon holds Non-Executive roles with Pacific Life Re, Prudential Corporation (Asia), Suncorp Group and TU.
30
AC composition, skills and experience (continued)
Jacqueline Ferguson is an experienced Chief Executive from the technology industry. Jacqueline is the former Chief Executive of Hewlett Packard Enterprise Services UK, Ireland, Middle East, Mediterranean and Africa and has extensive global experience including living and working in Silicon Valley, California for 3 years with Hewlett Packard. Prior to Hewlett Packard Jacqueline worked for Electronic Data Systems and KPMG.
Jacqueline is also a Non-Executive Director of Wood PLC and Croda PLC, a Trustee of Engineering UK and a member of the Scottish First Minister's Advisory Board for Women and Girls, aimed at tackling Gender Inequality. Jacqueline chaired the public services strategy board for the Confederation of Business and Industry and was a member of the Tech Partnership, the industry body aimed at UK technology skills.
The Chair, Chief Executive, Chief Financial Officer, Chief Risk Officer, Internal Audit Director, Director of Financial Control and Tesco Internal Audit Director attend committee meetings. The external auditor also attends.
AC responsibilities
The key responsibilities of the AC are set out in the Strategic Report on page 17.
During the year, the AC received reports from a number of business areas including Finance in relation to financial reporting and Risk in relation to regulatory compliance, fraud, bribery and corruption and integrated assurance. The AC also considered a variety of matters including the internal financial control framework, data leakage prevention, supplier assurance and business continuity arrangements.
Financial Statements and related financial reporting
In relation to the Financial Statements, the AC reviewed and recommended approval of the half-yearly results and annual Financial Statements and provided oversight of the statutory audit process.
During the year ended 29 February 2020, the AC considered the following matters:
-- Consistency and appropriateness of, and any changes to, significant accounting policies
The AC considered and accepted Management's review of the Group's accounting policies. In particular, the AC has received reports from Management on the Group's transition to IFRS 16, which came into force for annual periods beginning on or after 1 January 2019.
-- The methods used to account for significant transactions
The AC reviewed and supported proposals from Management on the accounting for the sale of the Group's Mortgage business, the redemption of debt securities in issue in relation to securitisation transactions and retail bond issuance, the issuance by the Company of MREL-compliant debt and the acceleration of amortisation in respect of the Group's PCA intangible fixed assets following the Group's announcement in January 2020 that it had closed its PCA offering to new customers.
-- Going concern assessment
The AC considered Management's approach to, and the conclusions of, the assessment of the Group's ability to continue as a going concern.
The going concern assessment period covers the period to April 2021, 12 months subsequent to signing the Annual Report and Financial Statements for the year ended 29 February 2020. The assessment considered the current capital position of the Group and liquidity requirements covering the going concern assessment period, including consideration of the impact of the Covid-19 pandemic. These were then subject to stress testing based on various scenarios, including scenarios incorporating the impact of the Covid-19 pandemic. The detailed considerations taken by the Board in arriving at its going concern assessment are set out on pages 26 to 27.
The AC recommended that the Board supported the conclusion that it remained appropriate to adopt the going concern basis in preparing the Financial Statements.
-- Review of Financial Statements
The AC considered Management's approach to, and governance arrangements over, the preparation of the half-yearly results and annual Financial Statements and recommended to the Board that these should be approved.
31
AC responsibilities (continued)
-- Appropriate critical accounting estimates and judgements
The AC reviewed the nature, basis for and the appropriateness of the estimates and judgements proposed by Management in the Financial Statements.
The key estimates and judgements reflected in the Group's Financial Statements for the year ended 29 February 2020 are:
o Expected credit loss provision (ECL) (Refer to note 18)
At 29 February 2020, the Group's ECL provision was GBP488.4m.
The AC received regular reports from Management on provisioning, which assessed the adequacy of provisioning based on a number of factors. These included levels of arrears, collateral, past loss experience, defaults based on portfolio trends, and expected loss rates.
The AC concluded that an appropriate governance framework existed to monitor provision adequacy and that the assumptions and judgements applied by Management were appropriate.
o Provision for customer redress (Refer to note 32)
The Group has a provision for potential customer redress in relation to PPI.
The AC reviewed the key assumptions made in arriving at each element of the provision, with particular focus given to claims settled and the average amount of redress per claim.
The AC is satisfied that the provisions and related disclosures in the Financial Statements in respect of PPI and other customer redress provisions are appropriate.
o Effective interest rate (Refer to note 6)
IFRS 9 requires the Group to measure the interest earned on its Credit Cards portfolio by applying the EIR methodology.
The AC received regular reports from Management summarising its approach, with particular focus given to reviewing the expected attrition rate of balances drawn, including the pay rates assumption used by Management.
The AC is satisfied that the carrying value of the assets and the associated income recognition is appropriate.
o Investment in joint venture (Refer to note 25)
The Group holds an investment in a joint venture, TU, an authorised insurance company, and recognises the carrying value of its investment and the Group's share of TU's results using the equity method of accounting.
TU's results are sensitive to changes in the insurance reserves it recognises in respect of insurance policies written, net of reinsurance. Consequently, material increases in these reserves could have an impact on the carrying value of the investment in the Consolidated Statement of Financial Position.
The AC reviewed the key judgements and estimates made by TU in determining the level of reserves held at the reporting date.
The AC is satisfied that the carrying amount of the Group's investment in TU is appropriate.
-- IT controls
The Group utilises a range of information systems to support its ongoing operations and financial reporting.
During the year, the AC received a number of reports on the Group's information systems, including the effectiveness of access rights to certain operating systems and applications used in the financial reporting process.
While improvements to access controls have been made, it remains an area of ongoing focus and the AC will receive further reports on the effectiveness of access controls during the next financial year.
32
Performance and Effectiveness of IA
The IA function supports the AC in providing an independent assessment of the adequacy and effectiveness of internal controls and the system of risk management. The function has the necessary resources and access to information to enable it to fulfil its mandate, and is equipped to perform in accordance with the Institute of Internal Auditors' International Standards of the Professional Practice of Internal Auditing.
It is essential for the AC to be able to have an honest and open relationship with both its external and internal auditors. This relationship is developed and maintained through private meetings with both Deloitte and the IA Director.
In compliance with the above standards, the AC assessed the effectiveness of the IA function with the results of the annual assessment for 2019 assessment being positive.
Performance and Effectiveness of AC
The AC assesses the need for training on an ongoing basis and the annual agenda provides time for technical updates, which are provided by both internal and external experts. During the year, the AC received specific training on accounting and reporting developments. Training is also provided on an ongoing basis to meet the specific needs of individual committee members.
The effectiveness of the AC was reviewed as part of the wider Board effectiveness review which included interviews with all AC members. It was concluded that the AC continued to be effective.
Risk Management and Internal Controls
The Board and its committees are responsible for ensuring the effective implementation and ongoing monitoring of the RMF. A detailed overview of the responsibilities of the ERC is set out on page 19.
Key controls are recorded within an internal database and regular controls testing takes place to ensure they remain effective. Additionally, the ERC regularly reviews the RMF to ensure it remains relevant and appropriate to the risk profile of the Group.
No material deficiencies in internal controls have been identified in the year.
Non-audit Fees
Deloitte contributes an independent perspective, arising from its work, on certain aspects of the Group's internal financial control systems, and reports to the AC. The independence of the external auditor in relation to the Group is considered annually by the AC.
The Group has a non-audit services policy for work carried out by its external auditor. This is split into three categories as follows:
1. Pre-approved for the external auditor - audit-related in nature;
2. Work for which AC approval is specifically required - transaction work and corporate tax services, and certain advisory services; and
3. Work from which the external auditor is prohibited.
The AC concluded that it was in the best interests of the Group for the external auditor to provide a limited number of non-audit services during the year due to their experience, expertise and knowledge of the Group's operations. Auditor objectivity and independence was considered for each engagement and the AC was satisfied that audit independence was not, at any point, compromised.
Deloitte follows its own ethical guidelines and continually reviews its audit team to ensure its independence is not compromised. The fees paid to the external auditor in the year are disclosed in note 10 to the Financial Statements.
Directors' Indemnities
In terms of Section 236 of the Companies Act 2006, all Executive and Non-Executive Directors have been issued a Qualifying Third Party Indemnity Provision by the Company. All Qualifying Third Party Indemnities were in force at the date of approval of the Financial Statements and shall remain in force without any limit in time. This will not be affected by the expiration or termination of a Director's appointment, however it may arise.
33
Cautionary Statement Regarding Forward-looking Information
Where this document contains forward-looking statements, these are made by the Directors in good faith based on the information available to them at the time of their approval of this report. These statements should be treated with caution due to the inherent risks and uncertainties underlying any such forward-looking information. The Group cautions users of these Financial Statements that a number of factors, including matters referred to in this document, could cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to, those discussed under 'Principal risks and uncertainties' on pages 9 to 13.
Statement of Directors' Responsibilities
The following should be read in conjunction with the responsibilities of the independent auditor set out in their report on page 164.
The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare such financial statements for each financial year. Under that law the Directors have prepared the Group and Company Financial Statements in accordance with IFRSs as adopted by the EU. 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 the Company and of the profit or loss of the Group for that year. In preparing these Financial Statements, the Directors are required to:
-- properly select and apply accounting policies;
-- present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
-- provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group's and Company's financial position and financial performance; and
-- make an assessment of the Group's and Company's ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Company and enable them to ensure that the Financial Statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the Group's website. Legislation in the UK governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions.
Each of the Directors, whose names are listed on page 1 of the Annual Report and Financial Statements, confirms that to the best of their knowledge:
-- the Financial Statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group;
-- the Strategic Report contained in the Annual Report includes a fair review of the development and performance of the business and the position of Group, together with a description of the principal risks and uncertainties that it faces; and
-- the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for the Company's shareholders to assess the Group's and Company's position, performance, business model and strategy.
34
Disclosure in Respect of the Independent Auditor
So far as each Director is aware at the date of approving this report, there is no relevant audit information, being information needed by the auditor in connection with preparing this report, of which the auditor is unaware. All of the Directors have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information.
External Audit Partner
The external audit partner for the year to 29 February 2020 was Stephen Williams ACA who has fulfilled this role since Deloitte LLP's appointment as external auditor on 30 June 2015. The audit tender process is conducted by Tesco on behalf of the entire Tesco group.
Approved by the Board of Directors and signed by order of the Board.
Michael Mustard
Company Secretary
7 April 2020
35
TESCO PERSONAL FINANCE GROUP PLC
CONSOLIDATED INCOME STATEMENT
For the Year Ended 29 February 2020 2020 2019
Note GBPm GBPm
Restated(1,2)
Interest and similar income 6 698.4 652.3
Interest expense and similar charges 6 (180.9) (182.3)
-------- --------------
Net interest income 517.5 470.0
Fees and commissions income 7 341.0 363.6
Fees and commissions expense 7 (31.3) (32.6)
-------- --------------
Net fees and commissions income 309.7 331.0
Net loss on financial instruments at fair
value through profit or loss (FVPL) 8 (4.1) (1.2)
Net (loss)/gain on investment securities 9 (0.2) 8.4
-------- --------------
Net other income (4.3) 7.2
Total income 822.9 808.2
-------- --------------
Administrative expenses 10 (398.4) (397.4)
27,
Depreciation and amortisation 28 (131.9) (81.7)
Provision for customer redress 32 (45.0) (16.0)
Regulatory charge 5 -- (16.4)
-------- --------------
Operating expenses (575.3) (511.5)
Expected credit loss on financial assets 11 (178.6) (163.9)
-------- --------------
Operating profit 69.0 132.8
Share of profit of joint venture 25 10.2 7.9
-------- --------------
Profit before tax 79.2 140.7
Analysed as:
------------------------------------------------ ----- -------- --------------
Underlying profit before tax 5 227.9 224.8
Non-underlying items 5 (148.7) (84.1)
------------------------------------------------ ----- -------- --------------
79.2 140.7
Income tax charge 13 (32.7) (40.0)
Profit for the year from continuing operations 46.5 100.7
Discontinued operations
Profit after tax from discontinued operations 15 56.7 42.2
Profit for the year attributable to owners
of the parent 103.2 142.9
-------- --------------
(1) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.
(2) The prior year has been restated following the classification of the Mortgage business as a discontinued operation. Refer to notes 2 and 15 for further details.
36
TESCO PERSONAL FINANCE GROUP PLC
CONSOLIDATED STATEMENT OF COMPREHENSIVE
INCOME
For the Year Ended 29 February 2020 2020 2019
Note GBPm GBPm
Restated(1)
Profit for the year 103.2 142.9
Items that may be reclassified subsequently
to the income statement
Debt securities at fair value through other
comprehensive income (FVOCI)
Fair value movements 13 2.3 (1.7)
Net (losses)/gains transferred to the income
statement on disposal 13 0.2 (8.4)
Expected credit loss transferred to the
income statement 0.4 0.4
Taxation 13 (0.7) 2.6
------ ------------
2.2 (7.1)
------ ------------
Cash flow hedges
Fair value movements 13 1.0 (0.8)
Taxation 13 (0.3) 0.1
------ ------------
0.7 (0.7)
------ ------------
Currency basis reserve
Foreign currency movements 13 0.2 (0.3)
------ ------------
0.2 (0.3)
------ ------------
Share of other comprehensive income/(expense)
of joint venture 25 5.0 (1.2)
------ ------------
5.0 (1.2)
------ ------------
Items that will not be reclassified subsequently
to the income statement
Equity securities at FVOCI
Fair value movements 13 0.7 0.5
Taxation 13 (0.2) (0.1)
0.5 0.4
------ ------------
Other comprehensive income/(expense) for
the year, net of tax 8.6 (8.9)
------ ------------
Total comprehensive income for the year 111.8 134.0
------ ------------
Total comprehensive income for the year
attributable to owners
of the parent
Continuing operations 55.1 91.8
Discontinued operations 56.7 42.2
(1) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.
37
TESCO PERSONAL FINANCE
GROUP PLC
CONSOLIDATED AND COMPANY
STATEMENTS OF FINANCIAL
POSITION
For the Year Ended 29
February 2020 Company number SC173198
Group Company
2020 2019 2018 2020 2019
Note GBPm GBPm GBPm GBPm GBPm
Assets Restated(1) Restated(1) Restated(1)
Cash and balances with
central banks 16 1,395.6 1,072.1 1,318.6 12.7 13.4
Loans and advances to
banks 17 -- 324.2 -- -- --
Loans and advances to
customers 18 8,451.3 12,425.7 11,522.4 -- --
Loans and advances to
subsidiary companies 19 -- -- -- 483.2 233.7
Derivative financial
instruments 20 5.7 31.3 46.1 -- --
Investment securities 21 1,081.6 1,071.5 959.5 -- --
Prepayments and accrued
income 22 55.6 49.4 49.3 1.6 0.8
Other assets 23 243.3 236.6 280.6 -- --
Deferred income tax asset 26 69.4 59.6 -- -- 0.3
Investment in group undertaking 24 -- -- -- 1,219.9 1,219.9
Investment in joint venture 25 86.0 86.4 90.0 -- --
Intangible assets 27 138.2 224.2 271.1 -- --
Property, plant and equipment 28 73.4 76.8 84.7 -- --
Assets of the disposal
group 15 45.1 -- -- -- --
---------------------------------- ----- --------- ------------ ------------ -------- ------------
Total assets 11,645.2 15,657.8 14,622.3 1,717.4 1,468.1
---------------------------------- ----- --------- ------------ ------------ -------- ------------
Liabilities
Deposits from banks 29 500.0 1,663.2 1,539.0 -- --
Deposits from customers 30 7,707.0 10,465.2 9,244.6 -- --
Debt securities in issue 31 1,024.0 1,185.5 1,347.6 249.2 --
Derivative financial
instruments 20 50.7 60.2 88.4 -- --
Provisions for liabilities
and charges 32 58.7 55.0 76.0 -- --
Accruals and deferred
income 33 100.1 95.3 96.2 1.6 0.8
Current income tax liability 26.3 31.1 34.9 -- --
Other liabilities 34 199.0 185.7 183.4 -- --
Deferred income tax liability -- -- 6.0 -- --
Subordinated liabilities
and notes 35 235.0 235.0 235.0 235.0 235.0
---------------------------------- ----- --------- ------------ ------------ -------- ------------
Total liabilities 9,900.8 13,976.2 12,851.1 485.8 235.8
---------------------------------- ----- --------- ------------ ------------ -------- ------------
Equity and reserves attributable
to owners of parent
Share capital 36 122.0 122.0 122.0 122.0 122.0
Share premium account 36 1,098.2 1,098.2 1,098.2 1,098.2 1,098.2
Retained earnings 487.2 434.0 506.8 11.4 12.1
Other reserves 37 37.0 27.4 44.2 -- --
Total equity 1,744.4 1,681.6 1,771.2 1,231.6 1,232.3
---------------------------------- ----- --------- ------------ ------------ -------- ------------
Total liabilities and
equity 11,645.2 15,657.8 14,622.3 1,717.4 1,468.1
---------------------------------- ----- --------- ------------ ------------ -------- ------------
Profit for the year of GBP49.3m (2019: GBP59.8m)(1) is attributable to the Company.
The Consolidated and Company Financial Statements on pages 36 to 153 were approved by the Board of Directors and authorised for issue on 7 April 2020 and were signed on its behalf by:
Declan Hourican
Director
(1) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.
38
TESCO PERSONAL
FINANCE
GROUP PLC
CONSOLIDATED
STATEMENT
OF CHANGES IN
EQUITY Cash Share
For the Year flow Currency based
Ended Share Share Retained FV/AFS hedge Basis payment Total
29 February 2020 capital premium earnings reserve reserve Reserve reserve equity
Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Restated(1) Restated(1)
--------- --------- ------------ --------- --------- --------- --------- ------------
Balance at 1
March
2019 122.0 1,098.2 434.0 4.6 (1.0) (0.3) 24.1 1,681.6
Comprehensive
income
Profit for the
year - - 103.2 - - - - 103.2
Net fair value
movement
on investment
securities
at FVOCI 13 - - - 2.7 - - - 2.7
Net movement on
cash
flow hedges 13 - - - - 0.7 0.2 - 0.9
Share of other
comprehensive
income of joint
venture 25 - - - 5.0 - - - 5.0
--------- --------- ------------ --------- --------- --------- --------- ------------
Total
comprehensive
income - - 103.2 7.7 0.7 0.2 - 111.8
--------- --------- ------------ --------- --------- --------- --------- ------------
Transactions
with
owners
Dividends to
ordinary
shareholders 14 - - (50.0) - - - - (50.0)
Share based
payments 47 - - - - - - 1.0 1.0
Total
transactions
with owners - - (50.0) - - - 1.0 (49.0)
--------- --------- ------------ --------- --------- --------- --------- ------------
Balance at 29
February
2020 122.0 1,098.2 487.2 12.3 (0.3) (0.1) 25.1 1,744.4
--------- --------- ------------ --------- --------- --------- --------- ------------
(1) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.
39
Cash Share
flow Currency based
Share Share Retained FV/AFS hedge basis payment Total
capital premium earnings reserve reserve reserve reserve equity
Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Restated(1) Restated(1)
--------- --------- ------------ --------- --------- --------- --------- ------------
Balance at 1
March
2018 122.0 1,098.2 506.8 13.0 (0.3) -- 31.5 1,771.2
Impact of
initial
application of
IFRS 9
'Financial
instruments' -- -- (165.7) (0.5) -- -- -- (166.2)
Balance at 1
March
2018 after
adopting
IFRS 9 122.0 1,098.2 341.1 12.5 (0.3) -- 31.5 1,605.0
Comprehensive
income
Profit for the
year -- -- 142.9 -- -- -- -- 142.9
Net fair value
movement on
investment
securities at
FVOCI 13 -- -- -- (6.7) -- -- -- (6.7)
Net movements on
cash flow
hedges 13 -- -- -- (0.7) (0.3) -- (1.0)
Share of other
comprehensive
expense
of joint
venture 25 -- -- -- (1.2) -- -- -- (1.2)
Total
comprehensive
income -- -- 142.9 (7.9) (0.7) (0.3) -- 134.0
--------- --------- ------------ --------- --------- --------- --------- ------------
Transactions
with
owners
Dividends to
ordinary
shareholders 14 -- -- (50.0) -- -- -- -- (50.0)
Share based
payments 47 -- -- -- -- -- -- (7.4) (7.4)
--------- --------- ------------ --------- --------- --------- --------- ------------
Total
transactions
with owners -- -- (50.0) -- -- -- (7.4) (57.4)
--------- --------- ------------ --------- --------- --------- --------- ------------
Balance at 28
February
2019 122.0 1,098.2 434.0 4.6 (1.0) (0.3) 24.1 1,681.6
--------- --------- ------------ --------- --------- --------- --------- ------------
(1) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.
40
TESCO PERSONAL FINANCE GROUP PLC
COMPANY STATEMENT OF CHANGES IN
EQUITY
For the Year Ended 29 February Share Share Retained Total
2020 capital premium earnings equity
Note GBPm GBPm GBPm GBPm
Restated(1) Restated(1)
Balance at 1 March 2019 122.0 1,098.2 12.1 1,232.3
Comprehensive income
Profit for the year - - 49.3 49.3
--------- --------- ------------ ------------
Total comprehensive income - - 49.3 49.3
--------- --------- ------------ ------------
Transactions with owners
Dividends to ordinary shareholders 14 - - (50.0) (50.0)
--------- --------- ------------ ------------
Total transactions with owners - - (50.0) (50.0)
--------- --------- ------------ ------------
Balance at 29 February 2020 122.0 1,098.2 11.4 1,231.6
--------- --------- ------------ ------------
(1) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.
41
Share Share Retained Total
capital premium earnings equity
Note GBPm GBPm GBPm GBPm
Restated(1) Restated(1)
--------- --------- ------------ ------------
Balance at 1 March 2018 122.0 1,098.2 3.1 1,223.2
Impact of initial application
of IFRS 9 'Financial instruments' -- -- (0.8) (0.8)
Balance at 1 March 2018 after
adopting IFRS 9 122.0 1,098.2 2.3 1,222.5
Comprehensive income
Profit for the year -- -- 59.8 59.8
--------- --------- ------------ ------------
Total comprehensive income -- -- 59.8 59.8
--------- --------- ------------ ------------
Transactions with owners
Dividends to ordinary shareholders 14 -- -- (50.0) (50.0)
--------- --------- ------------ ------------
Total transactions with owners -- -- (50.0) (50.0)
--------- --------- ------------ ------------
Balance at 28 February 2019 122.0 1,098.2 12.1 1,232.3
--------- --------- ------------ ------------
(1) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.
42
TESCO PERSONAL FINANCE GROUP PLC
CONSOLIDATED AND COMPANY CASH
FLOW STATEMENTS
For the Year Ended 29 February
2020 Group Company
2020 2019 2020 2019
Note GBPm GBPm GBPm GBPm
Operating Activities Restated(1) Restated(1)
Profit before tax from continuing
operations 79.2 140.7(2) 49.6 59.8
Profit before tax from discontinued
operations 77.7 57.7 -- --
Total profit before tax 156.9 198.4 49.6 59.8
Adjusted for:
Non-cash items included in operating
profit before taxation and other
adjustments 42 351.5 271.0 10.9 4.9
Changes in operating assets and
liabilities 42 163.5 (287.6) (0.9) --
Income taxes paid (68.3) (68.2) -- --
-------- ------------ -------- ------------
Cash flows generated from operating
activities 603.6 113.6 59.6 64.7
-------- ------------ -------- ------------
Investing Activities
Purchase of intangible assets
and property, plant and equipment (44.7) (30.2) -- --
Purchase of investment securities
classified as FVOCI 40 (778.6) (713.0) -- --
Sale of investment securities
classified as FVOCI 774.3 590.5 -- --
Redemption of subordinated debt
issued by joint venture 21 7.8 5.2 -- --
Dividends received from joint
venture 25 15.6 10.3 -- --
-------- ------------ -------- ------------
Cash flows used in investing activities (25.6) (137.2) -- --
-------- ------------ -------- ------------
Financing Activities
Net proceeds received in association
with issuance of debt securities 31 249.1 270.7 249.1 --
Principal repayments on debt securities
in issue 31 (410.0) (425.0) -- --
Dividends paid to ordinary shareholders 14 (50.0) (50.0) (50.0) (50.0)
Interest paid on debt securities
in issue (24.3) (23.4) (4.4) --
Interest paid on assets held to
hedge debt securities in issue (13.0) (0.4) -- --
Subordinated loan to subsidiary
company -- -- (250.0) --
Interest paid on subordinated
liabilities and notes (5.0) (4.7) (5.0) (4.7)
Principal repayments on lease
liabilities 38 (1.8) (1.6) -- --
Interest paid on lease liabilities 38 (2.4) (2.1) -- --
-------- ------------ -------- ------------
Cash flows used in financing activities (257.4) (236.5) (60.3) (54.7)
-------- ------------ -------- ------------
Net increase/(decrease) in cash
and cash equivalents 320.6 (260.1) (0.7) (10.0)
Cash and cash equivalents(3) at
beginning of year 1,043.4 1,303.5 13.4 3.4
Cash and cash equivalents(3) at
end of year 16 1,364.0 1,043.4 12.7 13.4
-------- ------------ -------- ------------
(1) The prior year has been restated following the retrospective
adoption of IFRS 16 in the current year. Refer to note 2 for further
details.
(2) The prior year has been restated following the classification
of the Mortgage business as a discontinued operation. Refer to
notes 2 and 15 for further details.
(3) Cash and cash equivalents comprise cash and balances with
central banks, excluding mandatory reserve deposits of GBP31.6m
(2019: GBP28.7m) (refer to note 16).
43
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS
1. Accounting Policies
Basis of Preparation
The Company and Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and interpretations issued by the International Financial Reporting Interpretations Committee of the International Accounting Standards Board (IASB) as endorsed by the European Union (EU), and those parts of the Companies Act 2006 applicable to companies reporting under IFRSs.
In these Financial Statements the 'Company' means Tesco Personal Finance Group PLC and the 'Group' means the Company and its subsidiaries and joint venture. Details of these subsidiaries and joint venture are provided in notes 24 and 25. These Consolidated Financial Statements comprise the Financial Statements of the Group. The Company has elected to take the exemption under section 408 of the Companies Act 2006 not to present the Income Statement and Statement of Comprehensive Income of the Company.
The Company and Consolidated Financial Statements have been prepared under the historical cost convention as modified by the revaluation of derivative financial instruments, investment securities and assets of the disposal group held at fair value.
The Company and Consolidated Financial Statements are presented in Sterling, which is the functional currency of the Group. The figures shown in the Financial Statements are rounded to the nearest GBP0.1 million unless otherwise stated.
New and amended accounting standards adopted by the Group in the year are detailed in notes 2 and 49.
Going concern
The Directors have made an assessment of going concern, taking into account both current performance and the Group's outlook, which considered the impact of the Covid-19 pandemic, and including consideration of projections incorporating the impact of the Covid-19 pandemic for the Group's capital and funding position. As part of this assessment the Board considered:
-- The impact on the Group's profits from an expected reduction in income on Credit Cards, Loans and Travel Money combined with increased ECL charges. As part of this, the Board considered revised macro-economic scenarios which were received from the Group's third-party supplier. These are discussed in note 49;
-- The sufficiency of the Group's capital base throughout the pandemic. The revised macro-economic scenarios were significantly less severe than those used in the ICAAP reverse stress test;
-- The adequacy of the Group's liquidity as the Group supports customers through a period of financial stress;
-- The operational resilience of the Group's critical functions including call centres, mobile and online channels and the Group's ability to provide continuity of service to its customers throughout a prolonged stress;
-- The resilience of the Group's IT systems;
-- A detailed assessment of the Group's supplier base, considering any single points of failure and focussing on suppliers experiencing financial stress. This included consideration of contingency plans should suppliers be deemed at risk;
-- The regulatory and legal environment and any potential conduct risks which could arise;
-- Any potential valuation concerns in respect of the Group's assets as set out in the Company and Consolidated Statements of Financial Position;
-- The impact of the pandemic on TU, the Group's joint venture insurance company; and -- The structural protections of the Group's securitisation vehicles.
The Board also considered the results of stress testing which is performed as an integral part of both the ICAAP and ILAAP, with the Group having sufficient capital and liquidity to fund the balance sheet in each scenario.
As a result of this assessment, the Directors consider that it is appropriate to adopt the going concern basis of accounting in preparing the Company and Consolidated Financial Statements. Further information on the sensitivity of the Group's ECL allowance to reasonably possible changes in these assumptions over the next 12 months at 29 February 2020 and at 7 April 2020 are set out at notes 40 and 49 respectively.
44
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
1. Accounting Policies (continued)
Principal accounting policies
A summary of the Group's accounting policies is set out below. These policies have been consistently applied to all of the years presented, unless otherwise stated.
(a) Basis of consolidation
The Consolidated Financial Statements of the Group comprise the Financial Statements of the Company and all consolidated subsidiaries, including certain securitisation structured entities, and the Group's share of its interest in a joint venture, as at 29 February 2020.
Investment in Group undertakings
Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The results of subsidiaries are included in the Consolidated Financial Statements from the date that control commences until the date that control ceases. The Company's investments in its subsidiaries are stated at cost less any impairment.
Intragroup balances, and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the Consolidated Financial Statements.
Securitisation structured entities
The Group enters into securitisation transactions in which it assigns Credit Card receivables to a securitisation structured entity which supports the issuance of securities backed by the cash flows from the securitised Credit Card receivables. Although none of the equity of the securitisation structured entities is owned by the Group, the nature of these entities means that the Group has the rights to variable returns from its involvement with these securitisation structured entities and has the ability to affect those returns through its power over them. As such they are effectively controlled by the Group and are consolidated on a line by line basis in the Consolidated Financial Statements.
Investment in joint venture
A joint arrangement is an arrangement over which the Group has joint control. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. A joint venture is a joint arrangement whereby the Group has rights to a share of the net assets of the joint arrangement.
The Group's share of the results of a joint venture is included in the Consolidated Income Statement using the equity method of accounting. The Group's investment in a joint venture is carried in the Consolidated Statement of Financial Position at cost plus post-acquisition changes in the Group's share of the net assets of the entity, less any impairment.
If the Group's share of losses in a joint venture equals or exceeds its investment in the joint venture, the Group does not recognise further losses, unless it has incurred obligations to do so or made payments on behalf of the joint venture.
45
1. Accounting Policies (continued)
(b) Revenue recognition
Net interest income recognition
Interest income and expense for all financial instruments measured at amortised cost are recognised using the effective interest rate (EIR) method.
The EIR method is a method of calculating the amortised cost of a financial asset or financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the expected life of the financial asset or financial liability. The EIR is the rate that exactly discounts estimated future cash flows to the instrument's initial carrying amount.
Calculation of the EIR takes into account fees receivable that are an integral part of the instrument's yield, premiums or discounts on acquisition or issue, early redemption fees and transaction costs. All contractual and behavioural terms of a financial instrument are considered when estimating future cash flows.
Interest income is calculated on the gross carrying amount of a financial asset unless the financial asset is impaired, in which case interest income is calculated on the net carrying amount, after allowance for ECL.
Net fees and commissions income recognition
The Group generates fees from banking services, primarily Credit Card interchange fees. Fees in respect of banking services are recognised in line with the satisfaction of performance obligations. This can be either at a point in time or over time, in line with the provision of the service to the customer.
The majority of banking services are performed at a point in time and payment is due from a customer at the time a transaction takes place. For services performed over time, payment is generally due monthly in line with the satisfaction of performance obligations.
The costs of providing these banking services are incurred as the services are rendered. The price is usually fixed and always determinable.
The Group also generates commission from the sale and service of Motor and Home insurance policies underwritten by Tesco Underwriting Limited (TU) or, in a minority of cases, by a third-party underwriter. This is based on commission rates which are independent of the profitability of underlying insurance policies. Similar commission income is also generated from the sale of white label insurance products underwritten by other third-party providers. This commission income is recognised on a net basis as such policies are sold, in line with the satisfaction of performance obligations to customers.
In the case of certain commission income on insurance policies managed and underwritten by a third-party, the Group recognises commission income from policy renewals as such policies are sold. This is when the Group has satisfied all of its performance obligations in relation to the policy sold and it is considered highly probable that a significant reversal in the amount of revenue recognised will not occur in future periods. This calculation takes into account both estimates of future renewal volumes and renewal commission rates. A contract asset is recognised in relation to this revenue. This is unwound over the remainder of the contract with the customer, the customer in this case being the third-party insurance provider.
The end policyholders have the right to cancel an insurance policy at any time. Therefore, a contract liability is recognised for the amount of any expected refunds due and the revenue recognised in relation to these sales is reduced accordingly. This contract refund liability is estimated using prior experience of customer refunds. The appropriateness of the assumptions used in this calculation is reassessed at each reporting date.
46
1. Accounting Policies (continued)
Customer loyalty programmes
The Group participates in the customer loyalty programme operated by Tesco Stores Limited (TSL). The programme operates by allowing customers to accumulate Clubcard points on purchases for future redemption against a range of Tesco products. Revenue in respect of these points is recognised at the time of the customer transaction as the Group has no obligation to customers in respect of Clubcard points once the points are allocated to a customer account. The revenue is recognised net of the cost of providing Clubcard points to customers, which is recharged by TSL to the Group.
Dividend income
Dividends are recognised in the Consolidated Income Statement when the entity's right to receive payment is established.
(c) Taxation
The tax charge or credit included in the Consolidated Income Statement consists of current and deferred tax. Tax is recognised in the Consolidated Income Statement except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case it is recognised in other comprehensive income or equity, respectively.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted by the reporting date.
Deferred tax is provided using the liability method on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Company and Consolidated Financial Statements. Deferred tax is calculated at the tax rates that have been enacted or substantively enacted by the reporting date.
Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which deductible temporary differences can be utilised.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be realised.
Deferred tax assets and liabilities are offset against each other when there is a legally enforceable right to set-off current tax assets against current tax liabilities and it is Management's intention to settle these on a net basis.
(d) Foreign currency translation
Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of the transaction.
Monetary items denominated in foreign currency are translated at the closing rate as at the reporting date.
Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Consolidated Income Statement, except when deferred in equity as gains or losses from qualifying cash flow hedging instruments. All foreign exchange gains and losses recognised in the Consolidated Income Statement are presented net in the Consolidated Income Statement within the corresponding item. Foreign exchange gains and losses on other comprehensive income items are presented in other comprehensive income within the corresponding item.
47
1. Accounting Policies (continued)
In the case of changes in the fair value of monetary assets denominated in foreign currency classified at FVOCI, a distinction is made between translation differences resulting from changes in the amortised cost of the security and other changes in the carrying amount of the security. Translation differences related to the changes in the amortised cost are recognised in the Consolidated Income Statement, and other changes in the carrying amount, except impairment, are recognised in equity.
(e) Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and demand deposits with banks together with short-term highly liquid investments with short-term maturities.
(f) Financial instruments
The Group classifies a financial instrument as a financial asset, financial liability or an equity instrument in accordance with the substance of the contractual arrangement. An instrument is classified as a liability if it creates a contractual obligation to deliver cash or another financial asset, or to exchange financial assets or financial liabilities on potentially unfavourable terms. An instrument is classified as equity if it evidences a residual interest in the assets of the Group after the deduction of liabilities.
Financial assets
Classification and measurement
The Group classifies its financial assets in the following categories:
-- Fair value through profit or loss (FVPL); -- Fair value through other comprehensive income (FVOCI); and -- Amortised cost.
Management determines the classification of the Group's financial assets at initial recognition. Purchases and sales of financial assets are recognised on the trade date - the date on which the Group commits to purchase or sell the asset.
All financial assets are measured at initial recognition at fair value, plus transaction costs for those classified as FVOCI and amortised cost. Transaction costs on financial assets classified as FVPL are recognised in the Consolidated Income Statement at the time of initial recognition.
Classification and subsequent measurement of financial assets depend on:
-- The Group's business model for managing the financial asset; and -- The cash flow characteristics of the financial asset.
The business model reflects how the Group manages its financial assets in order to generate cash flows and is determined by whether the Group's objective is solely to collect contractual cash flows from the assets or to collect both contractual cash flows and cash flows arising from the sale of assets. If neither of these models applies, the financial assets are classified as FVPL.
In determining the business model, the Group considers past experience in collecting cash flows, how the performance of these financial assets is evaluated and reported to Management and how risks are assessed.
Where the business model is to hold financial assets to collect contractual cash flows or to collect contractual cash flows and sell the assets, the Group assesses whether the financial asset's cash flows represent solely payments of principal and interest (the SPPI test). When making this assessment, the Group considers whether the contractual cash flows are consistent with a basic lending arrangement.
48
1. Accounting Policies (continued)
Financial assets at amortised cost
Financial assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest, and that are not designated as FVPL, are classified and subsequently measured at amortised cost. The carrying value of these financial assets is adjusted by any ECL allowance recognised and measured as described below.
Financial assets at FVOCI
Financial assets that are held for collection of contractual cash flows and for selling the assets, where those cash flows represent solely payments of principal and interest, and that are not designated as FVPL, are classified and subsequently measured at FVOCI. The Group holds investments in debt securities which are classified as FVOCI. Movements in the carrying amount of debt securities classified as FVOCI are taken through other comprehensive income, except the recognition of impairment gains or losses, interest revenue using the EIR method and foreign exchange gains and losses, which are recognised through the Consolidated Income Statement.
The Group also holds an investment in equity securities which has been irrevocably designated by Management as FVOCI at original recognition. Movements in the carrying amount of these equity securities are taken through other comprehensive income and are not subsequently reclassified to the Consolidated Income Statement, including on disposal. Expected credit losses on these securities are not recognised separately from other changes in fair value.
For financial assets at FVOCI which are in fair value hedge relationships, the element of the fair value movement which relates to the hedged risk is recycled to the Consolidated Income Statement.
Financial assets at FVPL
Financial assets that do not meet the criteria for recognition at amortised cost or at FVOCI are measured at FVPL.
Impairment
The Group assesses on a forward-looking basis the ECLs associated with its financial assets carried at amortised cost and FVOCI, and with the exposure arising from loan commitments. The Group recognises a loss allowance for such losses at each reporting date. The measurement of ECLs reflects:
-- An unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes;
-- The time value of money; and
-- Reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions.
Refer to note 40 for further details on the calculation of the allowance for ECLs.
Financial liabilities
Classification and measurement
All of the financial liabilities held by the Group, other than derivative financial liabilities, are classified and measured at amortised cost using the EIR method, after initial recognition at fair value. Fair value is calculated as the issue proceeds, net of premiums, discounts and transaction costs incurred. For financial liabilities in fair value hedge relationships, the carrying value is adjusted by the hedged item (the fair value of the underlying hedged risk) through the Consolidated Income Statement.
Derivative financial liabilities are classified and measured at FVPL. Further information on the classification and measurement of derivative financial instruments is set out at policy 1(g).
Derecognition
Financial assets are derecognised when the contractual rights to receive cash flows have expired or where substantially all of the risks and rewards of ownership have been transferred and the transfer qualifies for derecognition. Financial liabilities are derecognised when they have been redeemed or otherwise extinguished.
49
1. Accounting Policies (continued)
Collateral furnished by the Group under standard repurchase agreements is not derecognised because the Group retains substantially all the risks and rewards of ownership on the basis of the predetermined repurchase price, therefore the criteria for derecognition are not met. Credit Card receivables assigned by the Group to a securitisation structured entity do not qualify for derecognition as the Group retains substantially all the risks and rewards of ownership of the securitised Credit Card receivables.
Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount reported in the Company and Consolidated Statements of Financial Position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise an asset and settle a liability simultaneously.
Loan commitments
All loan commitments provided by the Group are as part of contracts that include both a loan and an undrawn commitment. As the Group cannot separately identify the ECLs on the undrawn commitment component from those on the loan component, the ECLs on the undrawn commitment are recognised together with the loss allowance for the loan. Any excess of the ECLs over the gross carrying amount of the loan is recognised as a separate provision within provisions for liabilities and charges.
(g) Derivative financial instruments and hedge accounting
The Group uses derivative financial instruments for the purpose of providing an economic hedge to its exposures to interest rate and foreign exchange risks as they arise from operating, financing and investing activities. The Group does not hold or issue derivative financial instruments for trading purposes. Derivative financial instruments are initially recognised at fair value on the contract date and are remeasured at fair value at subsequent reporting dates.
Hedge accounting
The Group designates certain hedging instruments as either fair value hedges or cash flow hedges, where it is efficient to do so and the relevant criteria are met. The Group has implemented IFRS 9 hedge accounting requirements in respect of its fair value hedges of the Group's investment securities and its cash flow hedges. As permitted under IFRS 9, the Group has elected to continue to apply the existing hedge accounting requirements of International Accounting Standard (IAS) 39 'Financial instruments: Recognition and measurement' for its portfolio hedge accounting until the new macro hedge accounting standard is implemented.
The Group applies hedge accounting as follows:
-- Hedge relationships are classified as fair value hedges where the derivative financial instruments hedge the change in the fair value of fixed rate financial assets or financial liabilities due to movements in interest rates.
-- Hedge relationships are classified as cash flow hedges where the derivative financial instruments hedge the interest rate risk and foreign currency risk on US Dollar notes issued by one of the Group's securitisation entities or the foreign currency risk on certain foreign currency invoices. Hedge relationships were also classified as cash flow hedges where the derivative financial instruments hedged the cash flows associated with inflation risk on an index linked issued bond which was redeemed during the year.
To qualify for hedge accounting, the Group documents, at the inception of the hedge: the hedging risk management strategy; the relationship between the hedging instrument and the hedged item or transaction; and the nature of the risks being hedged. The Group also documents the assessment of the effectiveness of the hedging relationship, to show that the hedge has been, and will be, highly effective on an ongoing basis.
Fair value hedges
Changes in the fair value of derivative financial instruments that are designated as fair value hedges are recognised in the Consolidated Income Statement. The hedged item is also adjusted for changes in fair value attributable to the hedged risk, with the corresponding adjustment made in the Consolidated Income Statement.
If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item is amortised to the Consolidated Income Statement over the remaining period to maturity.
50
1. Accounting Policies (continued)
Cash flow hedges
Changes in the fair value of the derivative financial instruments that are designated as hedges of future cash flows are recognised directly in other comprehensive income and accumulated in the cash flow hedge reserve and the ineffective portion is recognised immediately in the Consolidated Income Statement. Amounts recognised in other comprehensive income are recycled to the Consolidated Income Statement when equivalent amounts of the hedged item are recognised in the Consolidated Income Statement. Any costs of hedging, such as the change in fair value related to currency basis adjustment, is separately accumulated in the currency basis reserve.
When the hedging instrument expires or is sold, terminated or exercised, hedge accounting is discontinued. Any cumulative gain or loss existing in the cash flow hedge reserve and/or currency basis reserve at that time remains until the forecast transaction occurs or the original hedged item affects the Consolidated Income Statement. At that point, the cumulative gain or loss is also recognised in the Consolidated Income Statement. If a forecast hedged transaction is no longer expected to occur, the cumulative gain or loss in the cash flow hedge reserve or currency basis reserve is reclassified to the Consolidated Income Statement.
(h) Derivative financial instruments not in hedge accounting relationships
Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the Consolidated Income Statement as they arise.
(i) Impairment of non-financial assets
Non-financial assets are reviewed for impairment when there are indications that the carrying value may not be recoverable. In the event that an asset's carrying amount is determined to be greater than its recoverable amount, an impairment loss is recognised immediately in the Consolidated Income Statement and the carrying value of the asset is written down by the amount of the loss. The recoverable amount is the higher of the asset's fair value less costs to sell and its value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets for which an impairment loss has been recognised are reviewed for possible reversal of the impairment at each reporting date.
(j) Property, plant and equipment
Items of property, plant and equipment are stated at historical cost less accumulated depreciation and any impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent expenditure is included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group. All other repairs and maintenance costs are charged to the Consolidated Income Statement in the period in which they are incurred.
Depreciation is charged to the Consolidated Income Statement on a straight-line basis so as to allocate the costs less residual values over the lower of the useful life of the related asset and, for leasehold improvements, the expected lease term. Depreciation commences on the date that the assets are brought into use. Work-in-progress assets are not depreciated until they are brought into use and transferred to the appropriate category of property, plant and equipment.
Estimated useful lives are:
-- Plant and equipment 2 to 8 years -- Fixtures and fittings 4 to 10 years -- Computer hardware 3 to 10 years -- Freehold buildings 40 years -- Leasehold improvements 15 to 20 years -- Right-of-use assets 15 to 20 years
The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in administrative expenses in the Consolidated Income Statement.
51
1. Accounting Policies (continued)
(k) Intangible assets
Acquired intangible assets
Intangible assets that are acquired by the Group are stated at historical cost less accumulated amortisation and any impairment losses. Amortisation is charged to the Consolidated Income Statement on a straight-line basis over the estimated useful lives. The Group's intangible assets are computer software, for which the estimated useful lives are 3 to 10 years.
Internally generated intangible assets - research and development expenditure
Research costs are expensed in the Consolidated Income Statement as incurred.
Development expenditure incurred on an individual project is capitalised only if all of the following criteria are demonstrated:
-- an asset is created that can be identified (such as software); -- it is probable that the asset created will generate future economic benefits; and -- the development cost of the asset can be measured reliably.
Following the initial recognition of development expenditure, the cost is amortised over the estimated useful life of the asset created. Amortisation commences on the date that the asset is brought into use. Work-in-progress assets are not amortised until they are brought into use and transferred to the appropriate category of intangible assets.
During the year, the Group reassessed the useful life of certain of its intangible fixed assets, reducing the expected life to end by 29 February 2020. Refer to note 27 for further detail.
(l) Leases
The Group has entered into leases for office buildings.
Leases are recognised as a right-of-use asset and corresponding lease liability at the date on which the leased asset becomes available for use by the Group.
Right-of-use assets are included within property, plant and equipment in the Company and Consolidated Statements of Financial Position.
Right-of-use assets are measured at cost, which comprises:
-- the amount of the initial lease liability; -- any lease payments made at or before the commencement date; -- any initial direct costs; and -- restoration costs.
Right-of-use assets are depreciated over the lease term on a straight-line basis.
Lease liabilities are initially calculated as the net present value of expected lease payments, less any lease incentives receivable. The lease payments are discounted using the interest rate implicit in the lease, if that rate can be determined, or the Group's incremental borrowing rate.
Following initial recognition, lease payments are allocated between the outstanding lease liability and interest expense. The interest expense is charged to the Consolidated Income Statement over the lease period through interest expense and similar charges so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
(m) Employee benefits
The Group accounts for pension costs on a contributions basis in line with the requirements of IAS 19 'Employee Benefits'. The Group made contributions in the year to a funded defined benefit scheme and a funded defined contribution scheme. Both of these schemes are operated by TSL.
52
1. Accounting Policies (continued)
IAS 19 requires that, where there is no policy or agreement for sharing the cost of a defined benefit scheme across the subsidiaries, the Sponsoring employer recognises the net defined benefit cost of a defined benefit scheme. The Sponsoring employer of the funded defined benefit scheme is TSL and the principal pension plan is the Tesco PLC (Tesco) pension scheme. TSL has recognised the appropriate net liability of the Tesco pension scheme in accordance with IAS 19.
(n) Share based payments
Employees of the Group receive part of their remuneration in the form of share based payment transactions, whereby employees render services in exchange for Tesco shares or rights over shares (equity-settled transactions) or in exchange for entitlements to cash based payments based on the value of the shares (cash-settled transactions).
The fair value of employee share option plans is calculated at the grant date using the Black-Scholes model. The resulting cost is recognised in the Consolidated Income Statement over the vesting period. The value of the charge is adjusted to reflect expected and actual levels of vesting.
The grant by Tesco of options over its equity instruments to the employees of the Group is treated as a capital contribution in equity. The social security contribution payable in connection with the grant of the share options is considered an integral part of the grant itself, and the charge is treated as a cash-settled transaction.
(o) Provisions for liabilities and charges and contingent liabilities
A provision is recognised where there is a present legal or constructive obligation as a result of a past event; it is more likely than not that an outflow of economic resources will be required to settle the obligation; and the amount can be reliably estimated.
Provisions are measured at the present value of the expenditure expected to be required to settle the obligation.
A contingent liability is a possible obligation which is dependent on the outcome of uncertain future events not wholly within the control of the Group, or a present obligation where an outflow of economic resources is not likely or the amount cannot be reliably measured.
Contingent liabilities are not recognised in the Company or Consolidated Statements of Financial Position but are disclosed in the notes to the Financial Statements unless the possibility of an outflow of economic resources is remote.
(p) Dividends paid
Dividends are recognised in equity in the period they are approved by the Group's Board.
(q) Segmental reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker is the person or group that allocates resources to and assesses the performance of the operating segments of an entity. The Group has determined the Board of Directors as its chief operating decision-maker.
(r) Sale and repurchase agreements
Investment securities sold subject to a commitment to repurchase them at a predetermined price are retained on the Company and Consolidated Statements of Financial Position when substantially all of the risk and rewards of ownership remain with the Group. The counterparty liability is included in deposits from banks. Conversely, securities purchased under agreements to resell (reverse repos), where the Group does not acquire substantially all of the risks and rewards of ownership, are recorded as loans and advances from banks.
(s) Encumbered assets
The Group's methodology used to identify encumbered assets is aligned to definitions used in calculating the Group's Pillar 3 encumbrance disclosures.
(t) Non-current assets of the disposal group and discontinued operations
Under IFRS 5 'Non-current assets held for sale and discontinued operations', the Group classifies non-current assets or liabilities (or disposal groups) as assets held for sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable, with the asset available for immediate sale in its present condition.
53
1. Accounting Policies (continued)
Non-current assets (or disposal groups) classified as held for sale are measured under IFRS 5 at the lower of their carrying amount and fair value less costs to sell, with the exception of deferred tax balances and financial assets falling within the scope of IFRS 9. These balances are initially measured in line with their respective accounting policies and subsequently remeasured as part of the overall disposal group, in accordance with the requirements of IFRS 5.
Balances in respect of disposal groups held for sale are presented separately in the Company and Consolidated Statements of Financial Position for the current year, with no requirement to restate the prior year.
The net results of discontinued operations are presented separately in the Consolidated Income Statement where an entity or component of an entity of the Group has been disposed of or is classified as held for sale and:
(a) Represents a separate major line of business or geographical area of operations; or
(b) Is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations.
A component of an entity of the Group comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the Group's operations and cash flows. If an entity or a component of an entity of the Group is classified as a discontinued operation, prior years in the Consolidated Income Statement are restated to present these on a consistent basis with the current year presentation of discontinued operations.
(u) Alternative Profit Measures (APMs)
In the reporting of financial information, the Directors have adopted various APMs. These measures are not defined by IFRSs and therefore may not be directly comparable with other companies' APMs, including those in the Group's industry. APMs should be considered in addition to, and are not intended to be a substitute for, or superior to, IFRS measurements.
The Directors believe that these APMs assist in providing additional useful information on the underlying trends, performance and position of the Group. APMs are also used to enhance the comparability of information between reporting periods by adjusting for items which are not reflective of the Group's underlying results or trading performance and which affect IFRS measures, to aid users in understanding the Group's performance.
54
2. Transition to IFRS 16 and Prior Year Restatements
IFRS 16 'Leases'
The Group adopted IFRS 16 on 1 March 2019. IFRS 16 is a replacement for IAS 17 'Leases'. IFRS 16 removes the distinction between finance and operating leases and instead provides a single lessee accounting model. As a result, the Group has recognised right-of-use assets on its balance sheet at the adoption date in respect of property assets previously accounted for as operating leases. A corresponding lease liability has also been recognised, representing the future payments to be made under these leases, discounted at the Group's incremental borrowing rate at lease inception. This replaces a previous operating lease accrual held under IAS 17. A deferred tax asset was also recognised at the adoption date.
The Group has not taken advantage of the practical expedient in IFRS 16 in relation to lease identification and carried out a review of potential leases on transition to the new standard. As a result of this review, the only leases identified as in the scope of IFRS 16 were those previously accounted for as operating leases under IAS 17.
The Group has exercised judgement on transition to IFRS 16 to determine both the lease term and the discount rate used to calculate the lease liability. The Group's property leases contain extension options which, at the commencement of the lease, are not typically considered reasonably certain to be exercised. In the absence of a readily determined interest rate implicit in the lease, the discount rate is taken to be the Group's incremental borrowing rate. The incremental borrowing rate is determined based on a series of inputs appropriate for the related right-of-use assets, including observable market rates and entity specific adjustments.
The Income Statement recognition pattern for the Group's leases has changed from the previous pattern for operating leases, with interest on the liabilities and depreciation expense on the right-of-use assets now recognised separately. In the Cash Flow Statement, lease payments for both interest and principal repayments are categorised within financing activities rather than operating activities.
In accordance with the transitional provisions of IFRS 16, the Group has applied the new requirements fully retrospectively and comparatives for the 2019 financial year have been restated.
The impact of these changes on the relevant Financial Statement lines is as set out below.
IFRS 16 also specifies a comprehensive set of disclosure requirements. These applicable disclosures are included throughout these financial statements, primarily in note 38.
Discontinued operations
Following the Group's announcement during the year of its decision to sell its Mortgage business, the Group has classified transactions in the Consolidated Income Statement relating to its Mortgage business as discontinued operations. Refer to note 15 for further details.
The prior year Consolidated Income Statement has been restated in line with the current year presentation of the Mortgage business.
In arriving at the profit after tax from discontinued operations for the current and prior years, it has not been possible under IFRS 5 to allocate any of the Group's cost of funding the Mortgage business to discontinued operations as the related liabilities were not entered into specifically to fund the Group's Mortgage business. Refer to notes 5 and 15 for further details.
Assets of the disposal group representing the Mortgage business are presented separately in the current year Company and Consolidated Statements of Financial Position, with no requirement to restate prior years.
55
2. Transition to IFRS 16 and Prior Year Restatements (continued)
Impact of restatements
The impact of these changes on the relevant Financial Statement lines is as follows:
As previously IFRS 16 Discontinued Restated
reported adjustments operations
Group GBPm GBPm GBPm GBPm
At 1 March 2018(1)
Statement of Financial
Position
Property, plant and equipment 68.0 16.7 -- 84.7
Deferred income tax asset 57.0 1.6 -- 58.6
Accruals and deferred
income (109.0) 12.8 -- (96.2)
Other liabilities (147.8) (35.6) -- (183.4)
Retained earnings (345.6) 4.5 -- (341.1)
At 28 February 2019
Statement of Financial
Position
Property, plant and equipment 61.6 15.2 -- 76.8
Deferred income tax asset 57.9 1.7 -- 59.6
Accruals and deferred
income (108.0) 12.7 -- (95.3)
Other liabilities (151.2) (34.5) -- (185.7)
Retained earnings (438.9) 4.9 -- (434.0)
Income Statement
Interest and similar
income 728.6 -- (76.3) 652.3
Interest expense and
similar charges (179.7) (2.6) -- (182.3)
Fee and commissions income 365.8 -- (2.2) 363.6
Net loss on financial
instruments at FVPL (4.2) -- 3.0 (1.2)
Administrative expenses (415.6) 3.6 14.6 (397.4)
Depreciation and amortisation (83.2) (1.5) 3.0 (81.7)
Expected credit loss
on financial assets (164.1) -- 0.2 (163.9)
Income tax charge (55.6) 0.1 15.5 (40.0)
Statement of Cash Flows
Non cash items included
in operating profit before
taxation 262.8 4.1 -- 266.9
Changes in operating
assets and liabilities (287.8) 0.1 -- (287.7)
Principal repayments
on lease liabilities -- (1.6) -- (1.6)
Interest paid on lease
liabilities -- (2.1) -- (2.1)
(1) These balances as previously reported include the impact of transition to IFRS 9 and IFRS 15 on 1 March 2018.
56
3. Critical Accounting Estimates and Judgements in Applying Accounting Policies
In the course of preparing the Financial Statements, no judgements have been made in the process of applying the Group's accounting policies, other than those using estimations (which are presented separately below), that have had a significant effect on the amounts recognised in the Financial Statements.
The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its Financial Statements. The Group's principal accounting policies are set out in note 1. United Kingdom (UK) company law and IFRSs require the Directors, in preparing the Group's Financial Statements, to select suitable accounting policies, apply them consistently and make judgements and estimates that are reasonable and prudent. Where accounting standards are not specific and Management has to choose a policy, IAS 8, 'Accounting Policies, Changes in Accounting Estimates and Errors', requires Management to adopt policies that will result in relevant and reliable information in the light of the requirements and guidance in IFRSs dealing with similar and related issues and the IASB Framework for the Preparation and Presentation of Financial Statements.
The judgements and estimates involved in the Group's accounting policies that are considered to be the most important to the portrayal of its financial condition are discussed below. The use of estimates, assumptions or models that differ from those adopted by the Group would affect its reported results.
Impairment of financial assets
The measurement of ECLs for financial assets measured at amortised cost and FVOCI is an area that requires the use of complex models and significant assumptions about future economic conditions and credit behaviour, such as the likelihood of customers defaulting and the resulting losses. Further explanation of the inputs, assumptions and estimation techniques used at the reporting date in measuring ECLs, as well as the key sensitivities of ECLs to change in these elements, are set out at note 40.
Since the year end significant economic and social disruption has arisen from the Covid-19 pandemic. The Group considered this to be a non-adjusting event after the reporting date. Further information on the impact of the Covid-19 pandemic on the Group is set out at note 49.
Effective interest rate (EIR)
IFRS 9 requires the Group to measure the interest earned on its Credit Cards portfolio by applying the EIR methodology. The main area of estimation uncertainty in measuring the EIR on the Group's Credit Card portfolio is the expected attrition of the balances drawn at the reporting date.
Management uses a pay rates assumption to determine the expected repayment profile of the balances drawn as at the reporting date to the expected remaining term (capped at a maximum of 5 years from origination).
An increase of the pay rates assumption by 10% will reduce the asset value by GBP5.5m and a corresponding reduction of the pay rates assumption will increase the asset value by GBP6.4m.
Provision for customer redress
The Group has a provision for potential customer redress in relation to payment protection insurance (PPI). For further details, including the key assumptions made in arriving at each element of this provision and a sensitivity analysis of key assumptions in the PPI model, refer to note 32.
57
4. Segmental Reporting
Following the measurement approach of IFRS 8, 'Operating segments', the Group's operating segments are reported in accordance with the internal reporting provided to the Board of Directors, which is responsible for allocating resources to the operating segments and assessing their performance.
As the result of restructuring undertaken during the year, in line with the definition of a reportable segment under IFRS 8, the Group's reportable segments at 29 February 2020 have increased from one to two, being Banking and Insurance. This reflects changes made to the reporting of business results to the Board of Directors, as chief operating decision-maker. Prior year disclosures in this note have been restated accordingly. The Group is primarily focused on providing financial services and products to personal customers in the UK therefore no geographical analysis is presented.
The Group's two operating segments are as follows:
-- Banking - incorporating Credit Cards, Personal Loans, Savings, Personal Current Accounts, ATMs and Money Services; and
-- Insurance - incorporating Motor, Home and Pet Insurance
There are no transactions between operating segments.
Segmental assets and liabilities comprise operating assets and liabilities, being the majority of the Consolidated Statement of Financial Position, but exclude unallocated reconciling items such as taxation.
Segmental results of continuing operations and a reconciliation of segmental results of continuing operations to the total results of continuing operations are presented below.
Continuing operations Total Management Consolidation
reporting and other
adjustments
Group Central
2020 Banking Insurance Costs Total Consolidated
GBPm GBPm GBPm GBPm GBPm GBPm
Interest and similar
income 673.0 25.4 -- 698.4 -- 698.4
Interest expense and
similar charges (180.9) -- -- (180.9) -- (180.9)
Net interest income 492.1 25.4 -- 517.5 -- 517.5
Fees and commissions
income 265.6 75.4 -- 341.0 -- 341.0
Fees and commissions
expense (31.3) -- -- (31.3) -- (31.3)
Net fees and commissions
income 234.3 75.4 -- 309.7 -- 309.7
Net loss on financial
instruments at FVPL (4.1) -- -- (4.1) -- (4.1)
Net loss on investment
securities (0.2) -- -- (0.2) -- (0.2)
Net other income (4.3) -- -- (4.3) -- (4.3)
Total income 722.1 100.8 -- 822.9 -- 822.9
--------- ---------- ---------- ----------------- -------------- -------------------
Administrative expenses(1) (165.3) (24.4) (208.7) (398.4) -- (398.4)
Depreciation and
amortisation -- -- (131.9) (131.9) -- (131.9)
Provision for customer
redress (45.0) -- -- (45.0) -- (45.0)
Operating expenses (210.3) (24.4) (340.6) (575.3) -- (575.3)
Expected credit loss
on financial assets (175.9) (2.7) -- (178.6) -- (178.6)
Operating profit/(loss) 335.9 73.7 (340.6) 69.0 -- 69.0
Share of profit of
joint venture -- 10.2 -- 10.2 -- 10.2
Profit/(loss) before
tax from continuing
operations 335.9 83.9 (340.6) 79.2 -- 79.2
--------- ---------- ---------- ----------------- -------------- -------------------
Total assets(2,3) 11,412.2 163.6 -- 11,575.8 69.4 11,645.2
--------- ---------- ---------- ----------------- -------------- -------------------
Total liabilities 9,854.3 20.2 -- 9,874.5 26.3 9,900.8
--------- ---------- ---------- ----------------- -------------- -------------------
(1) The Banking and Insurance segments include only directly attributable administrative costs such as marketing and operational costs. Central overhead costs, which reflect the overhead of operating both the Insurance and Banking businesses, are not allocated against an operating segment for internal reporting purposes.
(2) The investment of GBP86.0m in TU, a joint venture company accounted for using the equity method, is shown within the total assets of the Insurance segment.
(3) Assets and liabilities of the disposal group in respect of the Group's Mortgage business are included within the Banking segment
58
4. Segmental Reporting (continue d)
Continuing operations Total Management Consolidation
reporting and other
adjustments
Group Central
2019(1,2) Banking Insurance Costs Total Consolidated
GBPm GBPm GBPm GBPm GBPm GBPm
Interest and similar
income 624.7 27.6 -- 652.3 -- 652.3
Interest expense and
similar charges (182.3) -- -- (182.3) -- (182.3)
Net interest income 442.4 27.6 -- 470.0 -- 470.0
Fees and commissions
income 265.0 98.6 -- 363.6 -- 363.6
Fees and commissions
expense (32.6) -- -- (32.6) -- (32.6)
Net fees and commissions
income 232.4 98.6 -- 331.0 -- 331.0
Net loss on financial
instruments at FVPL (1.2) -- -- (1.2) -- (1.2)
Net gain on investment
securities 8.4 -- -- 8.4 -- 8.4
Net other income 7.2 -- -- 7.2 -- 7.2
Total income 681.2 127.0 -- 808.2 -- 808.2
--------- ---------- ---------- ----------------- -------------- -------------------
Administrative expenses(3) (114.7) (22.1) (260.6) (397.4) -- (397.4)
Depreciation and
amortisation -- -- (81.7) (81.7) -- (81.7)
Provision for customer
redress (16.0) -- -- (16.0) -- (16.0)
Regulatory charge (16.4) -- -- (16.4) -- (16.4)
Operating expenses (147.1) (22.1) (342.3) (511.5) -- (511.5)
Expected credit loss
on financial assets (164.0) 0.1 -- (163.9) -- (163.9)
Operating profit/(loss) 370.1 105.0 (342.3) 132.8 -- 132.8
Share of profit of
joint venture -- 7.9 -- 7.9 -- 7.9
Profit/(loss) before
tax from continuing
operations 370.1 112.9 (342.3) 140.7 -- 140.7
--------- ---------- ---------- ----------------- -------------- -------------------
Total assets(4) 15,428.8 169.4 -- 15,598.2 59.6 15,657.8
--------- ---------- ---------- ----------------- -------------- -------------------
Total liabilities 13,924.6 20.5 -- 13,945.1 31.1 13,976.2
--------- ---------- ---------- ----------------- -------------- -------------------
(1) The prior year has been restated following the classification of the Group's Mortgage business as a discontinued operation. Refer to notes 2 and 15 for further details.
(2) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.
(3) The Banking and Insurance segments include only directly attributable administrative costs such as marketing and operational costs. Central overhead costs, which reflect the overhead of operating both the Insurance and Banking businesses, are not allocated against an operating segment for internal reporting purposes.
(4) The investment of GBP86.4m in TU, a joint venture company accounted for using the equity method, is shown within the total assets of the Insurance segment.
59
5. Underlying Profit
The Group's financial performance is presented in the Consolidated Income Statement on page 36. A summary of the Group's financial performance in respect of its continuing operations on an underlying basis, excluding items which are not reflective of ongoing trading performance, is presented below.
Ogden
Statutory Restructuring Customer Regulatory rate Financial Underlying
basis activity(1) redress(2) charge(3) changes(4) instruments(5) basis
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Continuing
operations
Year ended
29 February
2020
Net
interest
income 517.5 37.5 -- -- -- -- 555.0
Other
income 305.4 -- -- -- -- 4.1 309.5
-------------- -------------- ------------ ----------- ------------ --------------- --------------
Total
income 822.9 37.5 -- -- -- 4.1 864.5
-------------- -------------- ------------ ----------- ------------ --------------- --------------
Total
operating
expenses (575.3) 65.8 45.0 -- -- -- (464.5)
Expected
credit
loss
on
financial
assets (178.6) -- -- -- -- -- (178.6)
-------------- -------------- ------------ ----------- ------------ --------------- --------------
Operating
profit 69.0 103.3 45.0 -- -- 4.1 221.4
-------------- -------------- ------------ ----------- ------------ --------------- --------------
Share of
profit of
joint
venture 10.2 -- -- -- (3.7) -- 6.5
-------------- -------------- ------------ ----------- ------------ --------------- --------------
Profit
before tax 79.2 103.3 45.0 -- (3.7) 4.1 227.9
-------------- -------------- ------------ ----------- ------------ --------------- --------------
Ogden
Statutory Restructuring Customer Regulatory rate Financial Underlying
basis activity(1) redress(2) charge(3) changes(4) instruments(5) basis
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Continuing
operations Restated(6,7) Restated(6,7)
Year ended
28 February
2019
Net
interest
income 470.0 52.1 -- -- -- -- 522.1
Other
income 338.2 -- -- -- -- 1.2 339.4
-------------- -------------- ------------ ----------- ------------ --------------- --------------
Total
income 808.2 52.1 -- -- -- 1.2 861.5
-------------- -------------- ------------ ----------- ------------ --------------- --------------
Total
operating
expenses (511.5) (1.6) 16.0 16.4 -- -- (480.7)
Expected
credit
loss
on
financial
assets (163.9) -- -- -- -- -- (163.9)
-------------- -------------- ------------ ----------- ------------ --------------- --------------
Operating
profit 132.8 50.5 16.0 16.4 -- 1.2 216.9
-------------- -------------- ------------ ----------- ------------ --------------- --------------
Share of
profit of
joint
venture 7.9 -- -- -- -- -- 7.9
-------------- -------------- ------------ ----------- ------------ --------------- --------------
Profit
before tax 140.7 50.5 16.0 16.4 -- 1.2 224.8
-------------- -------------- ------------ ----------- ------------ --------------- --------------
(1) Comprising:
* interest expense of GBP37.5m (2019: GBP52.1m) in
respect of the discontinued operations' cost of
funding, presented within net interest income on page
36. As this cost cannot be directly attributed to
liabilities of the Group entered into specifically to
fund the Group's Mortgage business, as required by
IFRS 5, it has not been possible to present this cost
within statutory profit after tax from discontinued
operations for the current or prior year. These costs
are in respect of business restructuring and are
considered part of the Mortgage business' results on
a managed basis. These costs are expected to reduce,
reflecting actions taken by Management to reduce the
Group's deposits from customers in response to the
Group's reduced funding requirement post-sale of its
Mortgage business; and
* a restructuring charge of GBP65.8m in respect of
costs related to the Group's strategic review (2019:
credit of GBP1.6m reflecting a reduction in
dilapidations and onerous lease provisions),
including GBP55.5m of accelerated amortisation
relating to intangible assets, presented within
depreciation and amortisation on page 36. The current
year charge and prior year credit are in respect of
business restructuring and not considered part of the
Group's underlying results.
(2) Comprising:
* a PPI provision charge of GBP45.0m (2019: GBP16.0m)
presented within provision for customer redress on
page 36. These costs relate to historic sales of PPI
and are not reflective of the Group's underlying
trading performance.
(3) Comprising:
* in the prior year, a charge of GBP16.4m in respect of
the November 2016 fraud incident, presented within
regulatory charge on page 36. This charge relates to
the financial penalty imposed by the Financial
Conduct Authority in relation to this incident and is
not reflective of the Group's underlying trading
performance. There was no such charge in the current
year.
(4) Comprising:
* a credit of GBP3.7m (2019: GBPnil) representing the
Group's share of credits recognised by TU relating to
the impact on TU's insurance reserves of a change in
the Ogden tables, presented within share of profit of
joint venture on page 36. The Ogden tables were last
changed in March 2017, when the discount rate was
changed from 2.5% to -0.75%, resulting in the Group
recognising a charge of GBP22.8m for the year ended
28 February 2017 in respect of this rate change,
which was excluded from underlying profit at that
date. The credit recognised in the current year
reflects the change to the current discount rate of
-0.25%. This rate change was implemented following
Government consultation and is not reflective of the
ongoing underlying performance of TU.
(5) Comprising:
* Losses on financial instruments at FVPL of GBP4.1m
(2019: GBP1.2m)(7) presented within total income on
page 36. Fair value movements on financial
instruments reflect hedge ineffectiveness arising
from hedge accounting and fair value movements on
derivatives in economic hedges that do not meet the
criteria for hedge accounting. Where these
derivatives are held to maturity, fair value
movements represent timing differences that will
reverse over the life of the derivatives. Therefore,
excluding these movements from underlying profit more
accurately represents the underlying performance of
the Group. Where derivatives are terminated prior to
maturity, this may give rise to fair value movements
that do not reverse.
(6) The prior year has been restated following the retrospective adoption
of IFRS 16 in the current year. Refer to note 2 for further details.
(7) The prior year has been restated following the classification
of the Mortgage business as a discontinued operation. Refer to notes
2 and 15 for further details.
60
6. Net Interest Income
2020 2019
GBPm GBPm
Continuing operations Restated(1,2)
Interest and similar income
On financial assets measured at amortised cost
Loans and advances to customers 668.5 634.5
Cash and balances with central banks 9.5 7.5
Investment securities 1.0 1.3
-------- --------------
679.0 643.3
-------- --------------
On financial assets measured at fair value
Investment securities 12.2 7.2
Derivative financial instruments - FVPL 7.2 1.8
-------- --------------
19.4 9.0
-------- --------------
Total interest and similar income 698.4 652.3
-------- --------------
Interest expense and similar charges
On financial liabilities measured at amortised
cost
Deposits from customers (128.6) (139.6)
Deposits from banks (12.4) (11.7)
Debt securities in issue (28.5) (23.5)
Lease liabilities (2.5) (2.6)
Subordinated liabilities and notes (5.3) (4.9)
-------- --------------
(177.3) (182.3)
-------- --------------
On financial liabilities measured at fair value
Derivative financial liabilities - FVPL (3.6) -
-------- --------------
(3.6) -
-------- --------------
Total interest expense and similar charges (180.9) (182.3)
-------- --------------
Net interest income 517.5 470.0
-------- --------------
(1) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.
(2) The prior year has been restated following the classification of the Mortgage business as a discontinued operation. Refer to notes 2 and 15 for further details.
61
7. Net Fees and Commissions Income
2020 2019
GBPm GBPm
Continuing operations Restated(1)
Fees and commissions income
Banking revenue from contracts with customers 240.6 241.6
Insurance revenue from contracts with customers 75.4 98.6
Other revenue from contracts with customers 25.0 23.4
------- ------------
Total fees and commissions income 341.0 363.6
------- ------------
Fees and commissions expense
Banking expense (31.3) (32.6)
------- ------------
Total fees and commissions expense (31.3) (32.6)
------- ------------
Net fees and commissions income 309.7 331.0
------- ------------
With the exception of other revenue from contracts with customers, all of the above fees and commissions relate to financial assets and financial liabilities measured at amortised cost. These figures exclude amounts incorporated in determining the EIR on such financial assets and financial liabilities.
(1) The prior year has been restated following the classification of the Mortgage business as a discontinued operation. Refer to notes 2 and 15 for further details.
8. Net Loss on Financial Instruments at FVPL
2020 2019
GBPm GBPm
Restated(1)
Continuing operations
Foreign exchange loss on financial assets -- (0.2)
Net loss arising on derivatives not designated as hedging
instruments (1.2) (1.1)
Fair value hedge ineffectiveness (refer note 20) (3.2) 0.4
Cash flow hedge ineffectiveness (refer note 20) 0.3 (0.3)
------ ------------
Net loss on financial instruments at FVPL (4.1) (1.2)
------ ------------
(1) The prior year has been restated following the classification of the Mortgage business as a discontinued operation. Refer to notes 2 and 15 for further details.
9. Net (Loss)/Gain on Investment Securities
2020 2019
GBPm GBPm
Continuing operations
Net (loss)/gain on disposal of investment securities
at FVOCI (0.2) 8.4
------ -----
Net (loss)/gain on investment securities (0.2) 8.4
------ -----
62
10. Administrative Expenses
2020 2019
GBPm GBPm
Continuing operations Restated(1,2)
Staff costs
Wages and salaries 103.8 109.7
Social security costs 9.7 11.0
Other pension costs 5.9 5.3
Share based payments 7.9 4.4
Other costs including temporary staff 44.1 38.9
------ --------------
Total staff costs 171.4 169.3
------ --------------
Non-staff costs
Premises and equipment 72.5 76.7
Marketing 39.8 49.3
Auditor's remuneration (refer below) 0.8 0.7
Outsourcing and professional fees 66.9 61.1
Other administrative expenses 36.7 41.9
Restructuring costs(3) 10.3 (1.6)
------ --------------
Total non-staff costs 227.0 228.1
------ --------------
Total administrative expenses 398.4 397.4
------ --------------
(1) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.
(2) The prior year has been restated following the classification of the Mortgage business as a discontinued operation. Refer to notes 2 and 15 for further details.
(3) During the year, the Group recognised organisational restructuring charges within administrative expenses amounting to GBP10.3m related to a strategic review of the Group's operations (2019: credit of GBP1.6m related to property operating lease exit costs).
2020 2019
GBP'000 GBP'000
Audit services
Audit of the Company and Consolidated Financial Statements 54 87
Audit of the Company's subsidiaries 698 633
-------- --------
Total audit services 752 720
-------- --------
Non-audit services
Audit related assurance services 45 92
Other non-audit services not covered above 58 26
-------- --------
Total non-audit services 103 118
-------- --------
Total auditor's remuneration 855 838
-------- --------
The average monthly number of persons (including Executive Directors) employed by the Group split by employee function during the year, was:
2020 2019
Number Number
Continuing operations
Head office and administration 1,361 1,340
Operations 2,226 2,344
------- -------
Total average employees 3,587 3,684
------- -------
63
11 . Expected Credit Loss on Financial Assets
2020 2019
GBPm GBPm
Restated(1)
Continuing operations
Expected credit loss on loans and advances to customers(2) 177.9 163.3
Expected credit loss on investment securities at FVOCI 0.7 0.7
Reversal of expected credit loss on investment securities at amortised cost -- (0.1)
------ ------------
Total expected credit loss on financial assets 178.6 163.9
------ ------------
(1) The prior year has been restated following the classification of the Mortgage business as a discontinued operation. Refer to notes 2 and 15 for further details.
(2) Included within the expected credit loss on loans and advances to customers is a credit of GBP30.5m (2019: credit of GBP32.7m) received through the sale of non-performing debt to third parties.
12. Directors' Emoluments
The remuneration of the Directors paid by the Group during the year was as follows:
2020 2019
GBPm GBPm
Continuing operations
Aggregate emoluments 4.9 4.5
Aggregate amounts receivable under long-term incentive schemes 2.2 3.0
Loss of office 0.5 --
Share based payments 0.8 0.8
----- -----
Total Directors' emoluments 8.4 8.3
----- -----
2020 2019
Number Number
Continuing operations
Number of Directors to whom retirement benefits are accruing under defined benefit or defined
contribution schemes 4 3
Number of Directors in respect of whose qualifying services shares were received or receivable
under long-term incentive schemes 4 6
The total emoluments of the highest paid Director were GBP1.5m (2019: GBP1.6m). During the year the highest paid Director did not exercise any share options (2019: GBPnil).
At 29 February 2020 the accrued pension and lump sum under a defined benefit scheme for the highest paid Director was GBPnil (2019: GBPnil).
During the year to 29 February 2020 three Directors (2019: one Director) left the Company. During the current year, one Director was paid a sum of GBP0.5m upon leaving, in line with contractual terms and conditions. There were no such payments in the prior year.
64
13 . Income Tax
Income tax charge
2020 2019
GBPm GBPm
Restated(1,2)
Continuing operations
Current tax charge for the year 46.3 48.8
Adjustments in respect of prior years (4.6) (0.8)
Total current tax charge for the year 41.7 48.0
------- --------------
Deferred tax credit for the year (15.8) (8.5)
Tax rate change 1.8 0.7
Adjustments in respect of prior years 5.0 (0.2)
Total deferred tax credit for the year (9.0) (8.0)
------- --------------
Total income tax charge 32.7 40.0
------- --------------
The standard rate of corporation tax in the UK was changed from 20% to 19% with effect from 1 April 2017. This gives a blended corporation tax rate for the Group for the full year of 19.0% (2019: 19.0%). In addition, a banking surcharge of 8.0% (2019: 8.0%) is applied to the Group's results.
The tax charge assessed for the full year is higher (2019: higher) than that calculated using the overall blended corporation tax rate for the Group. The differences are explained below:
2020 2019
GBPm GBPm
Continuing operations Restated(1,2)
Profit before taxation from continuing operations 79.2 140.7
------ --------------
Profit on ordinary activities multiplied by blended rate in the UK of
19.0% (2019: 19.0%) 15.1 26.7
Factors affecting charge for the year:
Difference between local and group tax rate 3.5 13.3
Expenses not deductible for tax purposes(3) 13.7 4.5
Adjustment in respect of prior years - current tax (4.6) (0.8)
Adjustment in respect of prior years - deferred tax 5.0 (0.2)
Share based payments 0.3 (2.9)
Other tax adjustments (0.2) 0.2
Tax rate change 1.8 0.7
Share of profit of joint venture (1.9) (1.5)
Total income tax charge from continuing operations 32.7 40.0
------ --------------
(1) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.
(2) The prior year has been restated following the classification of the Mortgage business as a discontinued operation. Refer to notes 2 and 15 for further details.
(3) The majority of the adjustment relates to the tax impact of the non-deductibility of an additional PPI provision of GBP45.0m (2019: GBP16.0m) recognised in the year. The prior year also reflects the non-deductibility of a regulatory charge of GBP16.4m. There was no such charge in the current year.
65
13. Income Tax (continued)
The March 2016 Budget Statement included an announcement that the standard rate of corporation tax in the UK would be reduced to 17% from 1 April 2020. Subsequently, at the March 2020 Budget Statement, it was announced that this reduction to 17% would no longer take place, with the standard rate of corporation tax instead being maintained at 19%.
However, at the reporting date, the 17% rate continued to be the substantively enacted rate and is therefore the rate of mainstream corporation tax reflected in these Financial Statements.
Income tax relating to components of other comprehensive income
Before tax Net of tax
amount Tax charge amount
Continuing operations GBPm GBPm GBPm
2020
Items that may be reclassified to the
income statement
Net gains on debt securities at FVOCI 2.9 (0.7) 2.2
Net gains on cash flow hedges 0.9 (0.2) 0.7
Net gains on cross currency interest rate
swaps 0.2 -- 0.2
Items that will not be reclassified to
the income statement
Net gains on equity securities designated
at FVOCI 0.7 (0.2) 0.5
----------- ----------- -----------
Total income tax relating to components
of other comprehensive income 4.7 (1.1) 3.6
----------- ----------- -----------
Before tax Net of tax
amount Tax (charge)/credit amount
Continuing operations GBPm GBPm GBPm
2019
Items that may be reclassified to the
income statement
Net losses on debt securities at FVOCI (1.6) 0.4 (1.2)
Net gains on debt securities reclassified
to the income statement on disposal (8.1) 2.2 (5.9)
Net losses on cash flow hedges (0.8) 0.1 (0.7)
Net losses on cross currency interest
rate swaps (0.3) - (0.3)
Items that will not be reclassified to
the income statement
Net gains on equity securities designated
at FVOCI 0.5 (0.1) 0.4
----------- -------------------- -----------
Total income tax relating to components
of other comprehensive income (10.3) 2.6 (7.7)
----------- -------------------- -----------
66
13. Income Tax (continued)
Deferred tax charged directly to the Statement of Changes in Equity
Before tax Net of tax
amount Tax charge amount
Continuing operations GBPm GBPm GBPm
2020
Net gains on share based payments reserve 1.4 (0.4) 1.0
----------- ----------- -----------
1.4 (0.4) 1.0
----------- ----------- -----------
Before tax Net of tax
amount Tax charge amount
Continuing operations
2019 GBPm GBPm GBPm
Net losses on share based payments reserve (4.8) (2.6) (7.4)
----------- ----------- -----------
(4.8) (2.6) (7.4)
----------- ----------- -----------
14. Distributions to Equity Holders
2020 2019
GBPm GBPm
Continuing operations
Ordinary dividend paid 50.0 50.0
----- -----
50.0 50.0
----- -----
On 24 February 2020, an interim dividend of GBP50.0m (GBP0.0410 per ordinary share) was paid. In the prior year, an interim dividend of GBP50.0m (GBP0.0410 per ordinary share) was paid on 21 February 2019.
67
15 . Assets of the Disposal Group and Discontinued Operations
Assets of the disposal group
2020
Group GBPm
Assets of the disposal group
Secured Mortgage lending - gross 44.7
Less: ECL allowance --
----
Secured Mortgage lending - net 44.7
Other assets 0.4
Assets of the disposal group 45.1
----
During the first half of the year, secured Mortgage lending balances were reclassified from loans and advances to customers set out at note 18 to assets of the disposal group following the Group's decision to sell its Mortgage business. Cash in transit balances in relation to Mortgages were also reclassified from other assets to assets of the disposal group respectively as these balances related to amounts to be applied to Mortgage accounts and therefore formed part of the Mortgage business being sold. The Group agreed the sale of its Mortgage business on 3 September 2019 and completed the sale of the majority of its Mortgage business on 27 September 2019. The remaining secured Mortgage lending balances included in the above table relate to a small element of the Mortgage business, representing new advances to existing Mortgage customers, which continued to be recognised by the Group at the reporting date, pending migration of all Mortgage accounts to the purchaser, which took place on 30 March 2020. Further information in respect of this disposal is set out at note 49.
At 29 February 2020, the Group had contractual lending commitments of GBP17.3m in respect of the assets of the disposal group.
68
15. Assets of the Disposal Group and Discontinued Operations (continued)
Discontinued operations - income statement
The table below shows the results of discontinued operations in relation to the Group's Mortgage business which are included in the Consolidated Financial Statements for the year.
Statutory Funding Managed
basis costs(1) basis
GBPm GBPm GBPm
---------- ---------- --------
Year ended 29 February 2020
Net interest income 41.3 (37.5) 3.8
Net fees and commissions income 1.2 -- 1.2
Other income (6.6) -- (6.6)
---------- ---------- --------
Total income 35.9 (37.5) (1.6)
Total operating expenses (17.0) -- (17.0)
Expected credit loss on financial assets (0.1) -- (0.1)
---------- ---------- --------
Profit/(loss) before tax 18.8 (37.5) (18.7)
Income tax (charge)/credit (5.1) 10.1 5.0
Profit/(loss) after tax of discontinued operations 13.7 (27.4) (13.7)
---------- ---------- --------
Gain on sale of discontinued operations after
tax (see below) 43.0 -- 43.0
---------- ---------- --------
Profit/(loss) after tax for the year attributable
to owners of the parent arising from discontinued
operations 56.7 (27.4) 29.3
---------- ---------- --------
Statutory Funding Managed
basis costs(1) basis
GBPm GBPm GBPm
---------- ---------- --------
Year ended 28 February 2019
Net interest income 76.3 (52.1) 24.2
Net fees and commissions income 2.2 -- 2.2
Other income (3.0) -- (3.0)
---------- ---------- --------
Total income 75.5 (52.1) 23.4
Total operating expenses (17.6) -- (17.6)
Expected credit loss on financial assets (0.2) -- (0.2)
---------- ---------- --------
Profit/(loss) before tax 57.7 (52.1) 5.6
---------- ---------- --------
Income tax (charge)/credit (15.5) 14.1 (1.4)
Profit/(loss) after tax for the year attributable
to owners of the parent arising from discontinued
operations 42.2 (38.0) 4.2
---------- ---------- --------
(1) Comprising:
* interest expense of GBP37.5m (2019: GBP52.1m) in
respect of the discontinued operation's cost of
funding, presented within net interest income on page
36. As this cost cannot be directly attributed to
liabilities of the Group entered into specifically to
fund the Group's Mortgage business, as required by
IFRS 5, it has not been possible to present this cost
within statutory profit after tax from discontinued
operations for the current or prior year. These costs
are in respect of business restructuring and are
considered part of the Mortgage business' underlying
results on a managed basis. These costs are expected
to reduce, reflecting actions taken by Management to
reduce the Group's deposits from customers in
response to the Group's reduced funding requirement
post-sale of its Mortgage business.
69
15. Assets of the Disposal Group and Discontinued Operations (continued)
Discontinued operations - details of the sale of Mortgage business
2020
GBPm
Total cash consideration received 3,694.6
Carrying amount of net assets sold (3,635.7)
Gain on sale before income tax 58.9
----------
Income tax charge on gain (15.9)
Gain on sale after income tax 43.0
----------
Comprising:
Fair value gain following change in business model 16.7
Gain on disposal 26.3
----------
Gain on sale after income tax 43.0
----------
Discontinued operations - statement of cash flows
Group and Company 2020 2019
Statement of Cash Flows GBPm GBPm
Net cash flows from operating activities 3,764.9 (704.3)
Net cash flows from investing activities -- --
Net cash flows from financing activities -- --
Net cash flows from discontinued operations 3,764.9 (704.3)
------- -------
16. Cash and Balances with Central Banks
Group Company
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
Cash at bank 129.9 374.1 1.7 --
Cash deposits held with Tesco Personal
Finance Plc (TPF) -- -- 11.0 13.4
Balances held with the Bank of England
(BoE) other than mandatory reserve
deposits 1,234.1 669.3 -- --
-------- -------- ----- -----
Included in cash and cash equivalents 1,364.0 1,043.4 12.7 13.4
-------- -------- ----- -----
Mandatory reserves deposits held
with the BoE 31.6 28.7 -- --
-------- -------- ----- -----
Total cash and balances with central
banks 1,395.6 1,072.1 12.7 13.4
-------- -------- ----- -----
Mandatory reserve deposits held with the BoE of GBP31.6m (2019: GBP28.7m) are not included within cash and cash equivalents for the purposes of the cash flow statement as these do not have short-term maturities. These balances are not available in the Group's day-to-day operations and are non-interest bearing. Other balances are subject to variable interest rates based on the BoE base rate.
17. Loans and Advances to Banks
Group 2020 2019
GBPm GBPm
Loans and advances to banks -- 324.2
------ ------
-- 324.2
------------------------------------ ------
All of the above balances are current.
Loans and advances to banks include balances of GBPnil (2019: GBP324.2m) which have been purchased under sale and repurchase agreements.
70
18. Loans and Advances to Customers
Group 2020 2019
GBPm GBPm
Secured Mortgage lending -- 3,767.4
Unsecured lending 8,930.0 9,146.2
-------- ---------
Total secured and unsecured lending 8,930.0 12,913.6
-------- ---------
Fair value hedge adjustment 9.7 (2.7)
-------- ---------
Gross loans and advances to customers 8,939.7 12,910.9
-------- ---------
Less: ECL allowance (refer to note 40) (488.4) (485.2)
Net loans and advances to customers 8,451.3 12,425.7
-------- ---------
Current 4,280.5 4,557.5
Non-current 4,170.8 7,868.2
Contractual lending commitments and ECL provision
At 29 February 2020, the Group had contractual lending commitments of GBP11,872.0m (2019: GBP12,226.2m). An additional ECL provision of GBP7.7m was also recognised at 29 February 2020 (2019: GBP8.5m). This represents the excess of total ECLs for both drawn and undrawn balances over the gross carrying balances as above. Refer to note 32 for further details.
Secured Mortgage lending
During the year, the secured Mortgage lending balances and related fair value hedge adjustments were reclassified from loans and advances to customers to assets of the disposal group. Refer to note 15 for further details.
Fair value hedge adjustments
Fair value hedge adjustments amounting to GBP9.7m (2019: GBP(2.7)m) are in respect of fixed rate Loans (2019 balance also included fixed rate Mortgages). These adjustments are largely offset by derivatives, which are used to manage interest rate risk and are designated as fair value hedges within loans and advances to customers.
71
19 . Loans and Advances to Subsidiary Companies
Company 2020 2019
GBPm GBPm
Fixed rate subordinated loan 249.8 --
Fixed rate subordinated loan 190.0 190.0
Undated Floating rate note 45.0 45.0
------ ------
484.8 235.0
------ ------
Less: ECL allowance (See note 40) (1.6) (1.3)
------ ------
Net loans and advances to subsidiary companies 483.2 233.7
------ ------
Current -- --
Non current 483.2 233.7
Subordinated liabilities and notes comprise loan capital issued to Tesco Personal Finance Group PLC (TPFG). This includes GBP250.0m notional (2019: GBPnil) of subordinated loans maturing in 2025, GBP190.0m (2019: GBP190.0m) of subordinated loans maturing in 2030 and GBP45.0m (2019: GBP45.0m) of undated notes with no fixed maturity date. All balances are classified as non-current at the year end.
TPFG undertook an initial issuance of MREL-compliant debt(1) of GBP250.0m in July 2019 and subsequently invested the proceeds in the Company via an intercompany subordinated loan maturing in 2025.
Interest payable on the fixed rate intercompany subordinated loan is 3.5%. Interest payable on the floating rate subordinated liabilities and notes is based on three month SONIA plus a margin of 67 to 227 basis points (2019: three month LIBOR plus a spread ranging from 60 to 220 basis points).
(1) The Group is subject to the minimum requirements for own funds and eligible liabilities (MREL) on an interim basis from 1 January 2020, with full implementation applicable from 1 January 2022. The requirements are factored into the Group's funding and capital plans.
72
20. Derivative Financial Instruments
Strategy in using derivative financial instruments
The objective when using a derivative financial instrument is to ensure that the risk to reward profile of a transaction is optimised, allowing the Group to manage its exposure to interest rate and foreign exchange rate risk. The intention is to only use derivatives to create economically effective hedges. There are specific requirements stipulated under IFRS 9/IAS 39 which must be met for a derivative to qualify for hedge accounting. As a result, not all derivatives can be designated as being in an accounting hedge relationship, either because natural accounting offsets are expected or because obtaining hedge accounting would be especially onerous.
For those derivatives where hedge accounting is applied, gains and losses are offset by hedge adjustments in the Consolidated Income Statement. For those derivatives held for economic hedging purposes which cannot be designated as being in an accounting hedge relationship, the gains and losses are recognised in the Consolidated Income Statement. In the Company and Consolidated Statements of Financial Position there is no distinction between derivatives where hedge accounting is applied and derivatives which cannot be designated as being in an accounting hedge relationship.
The following table analyses derivatives held for risk management purposes by type of instrument and splits derivatives between those classified in hedge accounting relationships and those not in hedge accounting relationships.
Group 2020 2019
Notional Notional
amount Assets Liabilities amount Assets Liabilities
GBPm GBPm GBPm GBPm GBPm GBPm
Derivatives in hedge accounting relationships
Derivatives designated as fair value
hedges
Interest rate swaps 3,004.3 4.2 (50.6) 5,829.2 17.8 (49.5)
Derivatives designated as cash flow
hedges
Interest rate swaps -- -- -- 60.0 -- (0.3)
RPI basis swaps -- -- -- 60.0 12.5 --
Forward foreign exchange contracts 9.6 -- -- 8.2 - (0.2)
Cross currency interest rate swaps 272.2 1.5 -- 272.2 - (9.1)
--------- ------- ------------ --------- ------- ------------
Total derivatives in hedge accounting
relationships 3,286.1 5.7 (50.6) 6,229.6 30.3 (59.1)
--------- ------- ------------ --------- ------- ------------
Derivatives not in hedge accounting
relationships
Interest rate derivatives
Interest rate swaps 48.1 -- (0.1) 675.8 1.0 (1.1)
--------- ------- ------------ --------- ------- ------------
Total derivatives not in hedge accounting
relationships 48.1 -- (0.1) 675.8 1.0 (1.1)
--------- ------- ------------ --------- ------- ------------
Total 3,334.2 5.7 (50.7) 6,905.4 31.3 (60.2)
--------- ------- ------------ --------- ------- ------------
73
20. Derivative Financial Instruments (continued)
Derivatives, whether designated in hedge accounting relationships or not, are regarded as current where they are expected to mature within one year. All other derivatives are regarded as non-current.
Group 2020 2019
Assets Liabilities Assets Liabilities
GBPm GBPm GBPm GBPm
Current 4.2 0.1 13.8 (2.8)
Non-current 1.5 50.6 17.5 (57.4)
Hedge accounting
The following disclosures relate to derivatives in hedge accounting relationships only. The Group applies hedge accounting in the following hedging strategies:
-- Fair value hedges of interest rate risk
The Group's risk management objective of creating economically effective hedges is achieved by the use of interest rate contracts to swap fixed rate exposures back to a benchmark floating rate where no existing offset is available. This includes the hedging of fixed rate investment securities and issuances of fixed rate debt, which protects the Group against the fair value volatility of these financial assets and financial liabilities due to movements in interest rates. Each swap is defined as hedging one or more fixed rate assets or liabilities. The Group applies IFRS 9 hedge accounting in respect of these hedging instruments.
Sources of hedge ineffectiveness relate to differences in timing and repricing between execution of the hedging instrument and hedged item.
-- Portfolio fair value hedges of interest rate risk
The Group's risk management objective of creating economically effective hedges is achieved by the use of interest rate contracts to swap fixed rate exposures back to a benchmark floating rate where no existing offset is available. This includes the hedging of portfolios of fixed rate Loans and Savings products (and Mortgages products until the sale of the majority of the Group's Mortgage business in September 2019), which protects the Group against the fair value volatility of these financial assets and financial liabilities due to movements in interest rates. The Group applies IAS 39 portfolio hedge accounting in respect of these hedging instruments.
Sources of hedge ineffectiveness include, but are not limited to, differences in timing and repricing between execution of the hedging instrument and hedged item, differences between actual and expected prepayment rates of the underlying hedged item and repricing differences between the portfolio of hedged items and the associated hedging instruments.
-- Cash flow hedges of debt securities issued
The Group held inflation and interest rate swaps as cash flow hedges to mitigate the variability in cash flows associated with an inflation-linked debt security issued by the Group. The cash flows occurred over the term to maturity in December 2019. The Group applied IFRS 9 hedge accounting in respect of these hedging instruments.
Sources of hedge ineffectiveness primarily related to differences in timing and repricing between execution of the hedging instrument and hedged item.
The Group also holds cross currency interest rate swaps as cash flow hedges to mitigate the variability in cash flows associated with the foreign currency debt securities issued. The cash flows are expected to occur over the term to maturity in November 2020. The Group applies IFRS 9 hedge accounting in respect of these hedging instruments.
Sources of hedge ineffectiveness are primarily due to differences in timing and repricing between execution of the hedging instrument and hedged item.
74
20. Derivative Financial Instruments (continued) -- Cash flow hedges of expected foreign currency payments
The Group holds forward foreign currency contracts as cash flow hedges to mitigate the variability in cash flows associated with expected (and highly probable) foreign currency payments. The payments, associated cash flows and the forward contracts are expected to occur and mature over the following 15 months. The Group applies IFRS 9 hedge accounting in respect of these hedging instruments.
Sources of hedge ineffectiveness relate to differences between expected and actual cash flows.
Uncertainty arising from IBOR reform
During the year to 29 February 2020, the Group transitioned a number of its interest rate exposures from the London Interbank Offered Rate (LIBOR) to the Sterling Overnight Index Average (SONIA). At 29 February 2020 the Group had remaining hedging exposures to LIBOR impacted by the reform with a notional amount of GBP791.2m, of which GBP519.0m is designated in fair value hedge accounting relationships and GBP272.2m is designated in a cash flow hedge relationship. The Group expects to transition GBP319.0m of these to SONIA in the next financial year, with the remaining GBP472.2m due to mature in November 2020.
The following tables set out the maturity profile and average interest rate of the hedging instruments used in the Group's hedging strategies:
Group Maturity
One year
Up to One to Three months to five More than
2020 one month three months to one year years five years Total
GBPm GBPm GBPm GBPm GBPm
Fair value hedges
Interest rate
Interest rate swaps
- Notional amount 10.0 292.6 650.0 1,845.0 206.7 3,004.3
- Average interest
rate 0.63% 0.71% 1.92% 0.75% 3.30% --
Cash flow hedges
Foreign currency
Forward foreign
exchange contracts
- Notional amount -- 1.4 7.3 0.9 -- 9.6
- Average exchange
rate -- 1.28 1.29 1.29 -- --
Interest rate/Foreign
currency
Cross currency interest
rate swaps (GBP:USD)
- Notional amount
(GBPm) -- -- 272.2 -- -- 272.2
- Average exchange
rate -- -- 1.29 -- -- --
- Average interest
rate: pay leg -- -- LIBOR + 0.84% -- -- --
- Average interest USD LIBOR +
rate: receive leg -- -- 0.7% -- -- --
75
20. Derivative Financial Instruments (continued)
Group Maturity
One year
Up to One to Three months to five More than
2019 one month three months to one year years five years Total
GBPm GBPm GBPm GBPm GBPm
Fair value hedges
Interest rate
Interest rate swaps
- Notional amount 70.2 122.3 1,191.3 4,285.7 159.7 5,829.2
- Average interest
rate 1.16% 0.92% 1.03% 1.21% 4.12% --
Cash flow hedges
Interest rate
RPI basis swaps
- Notional amount -- -- 60.0 -- -- 60.0
- Average interest LIBOR + 2.17%
rate -- -- / 1.00% + UKRPI -- -- --
Interest rate swaps
- Notional amount -- -- 60.0 -- -- 60.0
- Average interest
rate -- -- 1.57% -- -- --
Foreign currency
Forward foreign
exchange contracts
- Notional amount 0.6 1.7 5.9 -- -- 8.2
- Average exchange
rate 1.30 1.30 1.31 -- -- --
Interest rate/Foreign
currency
Cross currency interest
rate swaps (GBP:USD)
- Notional amount
(GBPm) -- -- -- 272.2 -- 272.2
- Average exchange
rate -- -- -- 1.29 -- --
- Average interest LIBOR
rate: pay leg -- -- -- + 0.84% -- --
- Average interest USD LIBOR
rate: receive leg -- -- -- + 0.70% -- --
76
20. Derivative Financial Instruments (continued)
The following tables set out details of the hedging instruments used in the Group's hedging strategies:
Group Carrying amount
Changes in fair value
used for calculating
2020 Notional Assets Liabilities hedge ineffectiveness
GBPm GBPm GBPm GBPm
Fair value hedges
Interest rate
Interest rate swaps 3,004.3 4.2 (50.6) (47.2)
Cash flow hedges
Interest rate
RPI basis swaps -- -- -- --
Interest rate swaps -- -- -- --
Foreign currency
Forward foreign exchange
contracts 9.6 -- -- 0.2
Interest rate/foreign
currency
Cross currency interest
rate swaps (GBP:USD) 272.2 1.5 -- 10.6
--------- ------- ------------ -----------------------
Total 3,286.1 5.7 (50.6) (36.4)
--------- ------- ------------ -----------------------
Group Carrying amount
Changes in fair value
used for calculating
2019 Notional Assets Liabilities hedge ineffectiveness
GBPm GBPm GBPm GBPm
Fair value hedges
Interest rate
Interest rate swaps 5,829.2 17.8 (49.5) (10.4)
Cash flow hedges
Interest rate
RPI basis swaps 60.0 12.5 -- 1.1
Interest rate swaps 60.0 -- (0.3) 0.4
Foreign currency
Forward foreign exchange
contracts 8.2 -- (0.2) (0.1)
Interest rate/foreign
currency
Cross currency interest
rate swaps (GBP:USD) 272.2 -- (9.1) 8.6
--------- ------- ------------ -----------------------
Total 6,229.6 30.3 (59.1) (0.4)
--------- ------- ------------ -----------------------
All of the above amounts are included within the Statement of Financial Position line item Derivative financial instruments.
77
20. Derivative Financial Instruments (continued)
The following tables set out details of the hedged exposures covered by the Group's hedging strategies:
Accumulated amounts Changes in value
of fair value adjustments for calculating
Group Carrying amount on the hedged item ineffectiveness
2020 Assets Liabilities Assets Liabilities
GBPm GBPm GBPm GBPm GBPm
Fair value hedges
Interest rate
- Fixed rate Loans(1) 4,416.4 -- 9.7 -- 12.4
- Fixed rate investment
securities(2) 649.5 -- 2.3 -- 7.4
- Fixed rate Savings(3) -- 3,003.1 -- (0.7) (0.8)
- Fixed rate retail
bond(4) -- (201.8) -- (2.0) 1.3
- Fixed rate subordinated
liabilities(5) -- (250.6) -- (2.1) (2.1)
-------- ------------ ---------- ----------------- -----------------
Total fair value hedges 5,065.9 2,550.7 12.0 (4.8) 18.2
-------- ------------ ---------- ----------------- -----------------
Accumulated amounts Changes in value
of fair value adjustments for calculating
Group Carrying amount on the hedged item ineffectiveness
2019 Assets Liabilities Assets Liabilities
GBPm GBPm GBPm GBPm GBPm
Fair value hedges
Interest rate
- Fixed rate Loans and
Mortgages(1) 7,973.8 -- (2.7) -- 13.7
- Fixed rate Savings(5) -- (3,691.2) -- 0.2 (0.8)
- Fixed rate investment
securities(2) 472.8 -- (5.1) -- (3.2)
- Fixed rate retail
bond(3) -- (202.9) -- (3.2) 1.1
-------- ------------ ---------- ----------------- -----------------
Total fair value hedges 8,446.6 (3,894.1) (7.8) (3.0) 10.8
-------- ------------ ---------- ----------------- -----------------
The accumulated amount of fair value hedge adjustments remaining in the Statement of Financial Position for hedged items that have ceased to be adjusted for hedging gains and losses is an asset of GBP5.5m (2019: GBP0.9m asset).
(1) Included within Statement of Financial Position line item Loans and advances to customers.
(2) Included within Statement of Financial Position line item Investment securities.
(3) Included within Statement of Financial Position line item Deposits from customers.
(4) Included within Statement of Financial Position line item Debt securities in issue.
(5) Included within Statement of Financial Position line item Subordinated liabilities.
78
20. Derivative Financial Instruments (continued)
Cash flow hedge
Group reserve
Change in value
of hedged item
used for calculating
2020 hedge ineffectiveness Continuing hedges
GBPm GBPm
Cash flow hedges
Interest rate
- RPI bond(1) (12.7) --
Foreign currency
- Accounts payable(2) 0.2 --
Interest rate/foreign currency
- Securitisation bond(2) 10.2 (0.3)
----------------------- ------------------
Total cash flow hedges (2.3) (0.3)
----------------------- ------------------
Cash flow hedge
Group reserve
Change in value
of hedged item
used for calculating
2019 hedge ineffectiveness Continuing hedges
GBPm GBPm
Cash flow hedges
Interest rate
- RPI bond(1) (1.4) (0.4)
Foreign currency
- Accounts payable(2) (0.3) (0.1)
Interest rate/foreign currency
- Securitisation bond(2) (8.6) (0.5)
----------------------- ------------------
Total cash flow hedges (10.3) (1.0)
----------------------- ------------------
There are no amounts remaining in the cash flow hedge reserve for which hedge accounting is no longer applied.
(1) Included within Statement of Financial Position line item Debt securities in issue.
(2) Included within Statement of Financial Position line item Other liabilities.
79
20. Derivative Financial Instruments (continued)
The following tables set out information regarding the effectiveness of the hedging relationships designated by the Group, as well as the impacts on profit or loss and other comprehensive income:
Hedge ineffectiveness
recognised in profit or
Group loss
2020 GBPm
Fair value hedges
Interest rate
- Interest rate swaps (3.2)
-------------------------
Total fair values hedges (3.2)
-------------------------
Hedge ineffectiveness
recognised in profit or
Group loss
2019 GBPm
Fair value hedges
Interest rate
- Interest rate swaps 0.4
-------------------------
Total fair values hedges 0.4
-------------------------
Hedge ineffectiveness is included in the Income Statement line Net gain/(loss) on financial instruments at FVPL.
Cumulative
Group Cumulative amount reclassified
hedging gains from cash
and (losses) Hedge ineffectiveness flow hedge
recognised recognised reserve to
in other comprehensive in profit profit or
2020 income or loss loss
GBPm GBPm GBPm
Cash flow hedges
Interest rate/foreign currency
- Cross currency interest rate swaps
(GBP:USD) (0.5) 0.3 --
------------------------ ---------------------- ---------------------
Total cash flow hedges (0.5) 0.3 --
------------------------ ---------------------- ---------------------
80
20. Derivative Financial Instruments (continued)
Cumulative
Group Cumulative amount reclassified
hedging gains from cash
and (losses) Hedge ineffectiveness flow hedge
recognised recognised reserve to
in other comprehensive in profit profit or
2019 income or loss loss
GBPm GBPm GBPm
Cash flow hedges
Interest rate
- RPI basis and interest rate swaps 12.5 -- (12.9)
Foreign currency
- Forward foreign exchange contracts (0.2) -- --
Interest rate/foreign currency
- Cross currency interest rate swaps
(GBP:USD) (8.6) (0.3) 8.1
------------------------ ---------------------- ---------------------
Total cash flow hedges 3.7 (0.3) (4.8)
------------------------ ---------------------- ---------------------
Hedge ineffectiveness is included in the income statement line Net gain/(loss) on financial instruments at FVPL.
The following table sets out further details of the cumulative cash flow hedge reserve:
2020 2019
Group GBPm GBPm
Hedging gains and losses recognised in other comprehensive
income (0.3) 3.7
Amount reclassified from cash flow hedge reserve
to profit or loss (10.0) (4.8)
Tax -- 0.1
------- ------
Cash flow hedge reserve (10.3) (1.0)
------- ------
81
20. Derivative Financial Instruments (continued)
The following table presents a reconciliation by risk category of the cash flow hedge reserve and an analysis of other comprehensive income in relation to hedge accounting:
Cash flow hedge reserve
2020 2019
Group GBPm GBPm
Balance at 1 March 2019 (1.0) (0.3)
Interest rate swaps
- Effective portion of changes in fair value (12.5) 1.4
- Amount reclassified to profit or loss in the year 12.9 (1.4)
- Tax (0.2) 0.1
Cashflow hedge - foreign exchange risk
- Effective portion of changes in fair value 0.3 (0.3)
Cross currency interest rate swaps
- Effective portion of changes in fair value 10.2 (8.6)
- Amount reclassified to profit or loss in the year (10.0) 8.1
Balance at 29 February 2020 (0.3) (1.0)
------------- -----------
82
21. Investment Securities
Group 2020 2019
GBPm GBPm
Investment securities measured at FVOCI - debt 1,057.4 1,040.2
Investment securities designated at FVOCI - equity 3.2 2.5
Investment securities measured at amortised cost 21.0 28.8
-------- ---------
Total investment securities 1,081.6 1,071.5
-------- ---------
Debt investment securities measured at FVOCI
Group 2020 2019
GBPm GBPm
Government backed investment securities 315.9 185.5
Gilts 40.7 55.1
Supranational investment securities 393.9 406.1
Other investment securities 306.9 393.5
-------- --------
Total debt securities measured at FVOCI 1,057.4 1,040.2
-------- --------
Included in investment securities are fixed-interest investment securities totalling GBP651.8m (2019: GBP472.8m), and variable-interest investment securities amounting to GBP405.6m (2019: GBP567.4m).
Equity investment securities designated at FVOCI
The Group has elected to designate equity instruments held in VISA Inc. at FVOCI as permitted by IFRS 9.
The preferred stock may be convertible into Class A Common Stock of VISA Inc. at certain future dates, the earliest point being June 2020. Conversion is contingent upon future events, principally related to the outcome of interchange litigation against VISA Europe Limited. As such, the valuation of GBP3.2m (2019: GBP2.5m) reflects both an illiquidity discount and the risk of a reduction in the conversion rate to VISA Inc. common stock. The reduction in the conversion rate is the most significant unobservable input to the valuation.
83
21. Investment Securities (continued)
Investment securities measured at amortised cost
2020 2019
GBPm GBPm
Investment in subordinated debt issued by TU 21.1 28.9
------ ------
Gross investment securities measured at amortised cost 21.1 28.9
------ ------
Less: allowance for ECLs (refer note 40) (0.1) (0.1)
Net investment securities measured at amortised cost 21.0 28.8
------ ------
The investment in subordinated notes issued by TU relates to subordinated notes with a gross carrying value of GBP21.1m (2019: GBP28.9m). Interest receivable on these notes is based on a rate of three month LIBOR plus a spread ranging from 350 - 450 basis points.
22. Prepayments and Accrued Income
Group Company
2020 2019 2020 2019
GBPm GBPm
Prepayments 11.1 10.8 -- --
Accrued income 44.5 38.6 -- --
Amounts accrued from Tesco Personal
Finance Plc -- -- 1.6 0.8
----- ----- ----- -----
Total prepayments and accrued income 55.6 49.4 1.6 0.8
----- ----- ----- -----
All amounts are classified as current at the year end.
84
23. Other Assets
Group 2020 2019
GBPm GBPm
Amount due from insurance commissions receivable 13.8 16.6
Contract asset - insurance renewal income 37.6 28.1
Accounts receivable and sundry debtors 191.4 191.5
Amounts due from Tesco Group subsidiaries 0.5 0.4
------ ------
Total other assets 243.3 236.6
------ ------
All amounts are classified as current at the year end, with the exception of GBP32.3m (2019: GBP17.7m) of the contract asset, which is expected to be received after more than one year.
Contract asset - insurance renewal income
Of the prior year contract asset balance, GBP10.4m has been reclassified in the year as commissions receivable (2019: GBP9.3m has been reclassified in the prior year relating to the contract asset balance at 28 February 2018) as insurance policies have been renewed and commission due to the Group has become payable. In the year ended 28 February 2019, an amount of GBP5.6m was unwound on renewal of the contract to which the insurance renewal income relates. There was no such renewal in the current year. Following contract renewal in respect of certain insurance policies, the remainder of the movement in the balance relates to accelerated income of GBP19.9m (2019: GBP28.1m) in respect of certain insurance renewal commission income where the Group has satisfied all of its performance obligations in relation to the policies sold and it is considered highly probable that a significant reversal in the amount of revenue recognised will not occur in future periods.
85
24 . Investment in Group Undertaking
The Company's investment in Group undertakings in the year was as follows:
Place Ownership Registered
Name of company Nature of business of incorporation interest address
---------------- -------------------- ------------------ ---------- ----------------------
2 South Gyle
Tesco Personal Banking and general Crescent, Edinburgh,
Finance Plc insurance services UK 100% EH12 9FQ
---------------- -------------------- ------------------ ---------- ----------------------
The company's Investment in Group undertaking amount to GBP1,219.9m (2019: GBP1,219.9m)
The following companies are accounted for as subsidiaries of the Group. These are securitisation structured entities established in connection with the Group's Credit Card securitisation transactions. Although none of the equity of the securitisation structured entities is owned by the Group, the nature of these entities means that the Group has the rights to variable returns from its involvement with these securitisation structured entities and has the ability to affect those returns through its power over them. As such they are effectively controlled by the Group.
Nature of Place
Name of company business of incorporation Registered address
--------------------------- --------------- ------------------ ---------------------------
Delamare Cards Holdco Securitisation UK Asticus Building, 2nd
Limited entity floor,
21 Palmer Street, London,
SW1H 0AD
Delamare Cards MTN Issuer Securitisation UK Asticus Building, 2nd
plc entity floor,
21 Palmer Street, London,
SW1H 0AD
Delamare Cards Receivables Securitisation UK Asticus Building, 2nd
Trustee Limited entity floor,
21 Palmer Street, London,
SW1H 0AD
Delamare Cards Funding Securitisation UK Asticus Building, 2nd
1 Limited entity floor,
21 Palmer Street, London,
SW1H 0AD
Delamare Cards Funding Securitisation UK Asticus Building, 2nd
2 Limited entity floor,
21 Palmer Street, London,
SW1H 0AD
All of the above companies have a financial year end of 31 December. The management accounts of these entities are used to consolidate the results to 29 February 2020 within these Consolidated Financial Statements.
86
25. Investment in Joint Venture
The following table shows the aggregate movement in the Group's investment in its joint venture in the year:
Group 2020 2019
GBPm GBPm
At beginning of year 86.4 90.0
Dividends received (15.6) (10.3)
Share of profit of joint venture 10.2 7.9
Share of other comprehensive income/(expense) of joint venture 5.0 (1.2)
------- -------
At end of year 86.0 86.4
------- -------
Details of the Group's joint venture
Ownership interest
Nature Place of
Name of company Registered address of business Incorporation 2020 2019
------------------- -------------------------- ------------- --------------- --------------- -------------
Tesco Underwriting Ageas House, Hampshire Insurance England 49.9% of 49.9%
Limited Corporate Park, Ordinary of Ordinary
Templars Way, Eastleigh, Share Capital Share
Hampshire, SO53 Capital
3YA
TU is an authorised insurance company which provides the insurance underwriting service for a number of the Group's general insurance products. TU is a private company and there is no quoted market price available for its shares.
The Group uses the equity method of accounting for its investment in TU, which has a financial year end of 31 December. The accounting year end date for TU differs from that of the Group as it is in line with the other joint venture partner. The management accounts of TU are used to consolidate the results to 29 February 2020 within these Consolidated Financial Statements.
TU has taken advantage of the optional temporary exemption from applying IFRS 9 for entities whose predominant activity is issuing contracts within the scope of IFRS 4 'Insurance contracts' (the 'deferral approach'). This will remove the impact of potential temporary volatility in reported results for TU until the date of adoption of the new insurance standard IFRS 17 'Insurance contracts' on 1 January 2023.
The Group has similarly elected to take a temporary exemption available from the requirements of IAS 28 'Investments in associates and joint ventures' regarding the use of uniform accounting policies in equity accounting for a joint venture. This exemption allows the Group to equity account for the results of TU without any adjustments to reflect the impact of IFRS 9 within these Consolidated Financial Statements. The additional disclosures required as a result of taking this temporary exemption are included within the following sections.
87
25. Investment in Joint Venture (continued)
Summarised financial information for the joint venture
This information reflects the amounts presented in the management accounts of the joint venture (and not the Group's share of those amounts):
2020 2019
GBPm GBPm
Non-current assets 799.3 768.2
Current assets 152.7 198.4
Current liabilities (693.1) (741.1)
Non-current liabilities (92.3) (58.0)
-------- --------
Net assets 166.6 167.5
-------- --------
Cash and cash equivalents 49.4 72.9
Current financial liabilities (excluding trade
and other payables and provisions) (17.8) (15.0)
Non-current financial liabilities (excluding
trade and other payables and provisions) (92.3) (58.0)
2020 2019
GBPm GBPm
Income Statement
Revenue 253.6 297.7
Expenses including claims costs (233.1) (281.9)
-------- --------
Profit for the year 20.5 15.8
-------- --------
Other comprehensive income/(expense) 10.1 (2.5)
Total comprehensive income 30.6 13.3
-------- --------
The above profit includes the following:
Depreciation and amortisation (2.1) (2.5)
Interest income 13.1 13.5
Interest expense (2.0) (2.7)
Income tax charge (6.9) (4.2)
88
25. Investment in Joint Venture (continued)
Reconciliation of the summarised financial position
A reconciliation of the summarised financial information presented to the carrying amount of the investment in joint venture is as follows:
Group 2020 2019
GBPm GBPm
Net assets of the joint venture 166.6 167.5
------ ------
Group share at 49.9% 83.2 83.6
Capitalised legal costs included in investment
carrying value 2.8 2.8
Carrying value of investment in joint venture
at end of year 86.0 86.4
------ ------
Fair value disclosures
The following table provides information on the fair value of TU's financial assets at 29 February 2020:
2020 Change in
fair value
Fair value during year
GBPm GBPm
Financial assets that give rise to solely
payments of principal and interest 674.2 (67.2)
Other financial assets 19.0 0.8
693.2 (66.4)
----------- -------------
2019 Change in
fair value
Fair value during year
GBPm GBPm
Financial assets that give rise to solely
payments of principal and interest 741.4 (72.7)
Other financial assets 18.2 18.2
759.6 (54.5)
----------- -------------
Credit risk disclosures
The following table provides information regarding the credit risk exposures of TU at 29 February 2020 by classifying financial assets according to the credit ratings of counterparties:
2020 AAA AA A BBB Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
Investments 112.0 131.1 257.8 124.0 19.0 643.9
Cash and cash equivalents 25.3 24.0 -- -- -- 49.3
Insurance and other receivables 1.5 1.2 3.4 3.1 10.8 20.0
138.8 156.3 261.2 127.1 29.8 713.2
------ ------ ------ ------ ------ ------
2019 AAA AA A BBB Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
Investments 123.8 132.9 276.2 135.5 18.2 686.6
Cash and cash equivalents 25.1 47.8 -- -- -- 72.9
Insurance and other receivables 1.1 1.2 3.7 3.6 13.7 23.3
150.0 181.9 279.9 139.1 31.9 782.8
------ ------ ------ ------ ------ ------
Other information
The Group has no contingent liabilities or commitments in respect of the joint venture. The investment in the joint venture is classified as non-current.
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26 . Deferred Income Tax Asset/(Liability)
The net deferred income tax asset/(liability) can be analysed as follows:
2020 Accelerated
capital
allowances Other Total
Group GBPm GBPm GBPm
At beginning of year (restated)(1) 3.4 56.2 59.6
Credited/(charged) to the Consolidated Income
Statement in the current year 21.5 (5.7) 15.8
Charged to the Consolidated Income Statement
for prior years (2.5) (2.5) (5.0)
Charged to equity -- (1.4) (1.4)
Change in tax rate (1.6) (0.2) (1.8)
Discontinued operations 2.2 -- 2.2
------------ ------ ------
At end of year 23.0 46.4 69.4
------------ ------ ------
Deferred tax asset to be recovered within one
year 60.8
Deferred tax asset to be recovered after more
than one year 10.2
------
Total deferred income tax asset 71.0
------
Deferred tax liability to be recovered within
one year (1.6)
------
Total deferred income tax liability (1.6)
------
Deferred tax assets (net) 69.4
------
On a Company basis, deferred tax of GBPnil (2019: GBP0.3m) was credited to equity during the year.
2019 Accelerated
capital
allowances Other Total
Restated(1)
Group GBPm GBPm GBPm
At beginning of year (restated)(1) (5.3) (0.7) (6.0)
Credited/(Charged) to the Consolidated Income
Statement in the current year (restated)(1) 8.8 (0.3) 8.5
(Charged)/Credited to the Consolidated Income
Statement for prior years (0.2) 0.4 0.2
Credited to equity -- 56.8 56.8
Change in tax rate (0.7) -- (0.7)
Discontinued operations 0.8 -- 0.8
------------ ------ ------------
At end of year (restated)(1) 3.4 56.2 59.6
------------ ------ ------------
Deferred tax asset to be recovered within one
year (restated)(1) 52.1
Deferred tax asset to be recovered after more
than one year (restated)(1) 8.2
------------
Total deferred income tax asset 60.3
------------
Deferred tax liability to be recovered within
one year (0.7)
------------
Total deferred income tax liability (0.7)
------------
Deferred tax assets (net) 59.6
------------
(1) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.
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27. Intangible Assets
Computer
Group Work-in-Progress Software Total
GBPm GBPm GBPm
Cost
At 1 March 2019 24.6 685.4 710.0
Additions 41.0 2.9 43.9
Transfers (37.8) 37.8 --
Disposals -- (3.7) (3.7)
----------------- ---------- --------
At 29 February 2020 27.8 722.4 750.2
----------------- ---------- --------
Accumulated amortisation
At 1 March 2019 -- (485.8) (485.8)
Charge for the year -- (129.9) (129.9)
Disposals -- 3.7 3.7
----------------- ---------- --------
At 29 February 2020 -- (612.0) (612.0)
----------------- ---------- --------
Net carrying value
At 29 February 2020 27.8 110.4 138.2
----------------- ---------- --------
Cost
At 1 March 2018 27.5 656.7 684.2
Additions 24.8 2.6 27.4
Transfers (27.1) 27.1 --
Disposals (0.6) (1.0) (1.6)
------- -------- --------
At 28 February 2019 24.6 685.4 710.0
------- -------- --------
Accumulated amortisation
At 1 March 2018 -- (413.1) (413.1)
Charge for the year -- (73.5) (73.5)
107
Disposals -- 0.8 0.8
------- -------- --------
At 28 February 2019 -- (485.8) (485.8)
------- -------- --------
Net carrying value
At 28 February 2019 24.6 199.6 224.2
------- -------- --------
Work-in-progress relates primarily to the internal development of IT software assets. Intangible asset balances are non-current.
91
27. Intangible Assets (continued)
During the year, the Group reassessed the useful life of certain of its intangible fixed assets, reducing the expected life to end by 29 February 2020. This reduction in useful life reflects the impact of the sale of the majority of the Group's Mortgage business in September 2019 and closure of the Group's Personal Current Account offering to new customers in January 2020. The impact of this change has been to increase the amortisation charge by GBP55.5m to fully amortise these intangible fixed assets by 29 February 2020.
The amortisation and impairment charge is analysed as follows:
2020 2019
GBPm GBPm
Continuing operations 120.9 70.5
Discontinued operations 9.0 3.0
Total amortisation charge 129.9 73.5
------ -----
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28. Property, Plant and Equipment
Right
Plant of
Work-in- and Fixtures Computer Freehold Leasehold Use
Group Progress Equipment and Fittings Hardware Buildings Improvements Assets Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Cost
At 1 March
2019 4.1 3.0 18.2 123.5 32.3 20.0 29.4 230.5
Additions 5.4 -- 1.2 0.7 0.1 0.2 -- 7.6
Transfers (0.4) -- -- 0.4 -- -- -- --
---------- ------------- -------------- ---------- ----------- -------------- -------- --------
At 29
February
2020 9.1 3.0 19.4 124.6 32.4 20.2 29.4 238.1
---------- ------------- -------------- ---------- ----------- -------------- -------- --------
Accumulated
depreciation
At 1 March
2019 -- (3.0) (12.2) (106.6) (6.5) (11.2) (14.2) (153.7)
Charge for
the
year -- -- (1.7) (5.7) (0.8) (1.3) (1.5) (11.0)
---------- ------------- -------------- ---------- ----------- -------------- -------- --------
At 29
February
2020 -- (3.0) (13.9) (112.3) (7.3) (12.5) (15.7) (164.7)
---------- ------------- -------------- ---------- ----------- -------------- -------- --------
Net carrying
value
At 29
February
2020 9.1 -- 5.5 12.3 25.1 7.7 13.7 73.4
---------- ------------- -------------- ---------- ----------- -------------- -------- --------
Cost
At 1 March 2018
(restated)(1) 2.8 3.0 16.8 124.7 32.3 24.8 29.4 233.8
Additions 2.0 -- 1.4 0.5 -- -- -- 3.9
Transfers (0.1) -- -- 0.1 -- -- -- --
Disposals (0.6) -- -- (1.8) -- (4.8) -- (7.2)
------ ------ ------- -------- ------ ------- ------- --------
At 28 February
2019 (restated)(1) 4.1 3.0 18.2 123.5 32.3 20.0 29.4 230.5
------ ------ ------- -------- ------ ------- ------- --------
Accumulated depreciation
At 1 March 2018
(restated)(1) -- (3.0) (11.0) (102.0) (5.7) (14.7) (12.7) (149.1)
Charge for the
year (restated)(1) -- -- (1.2) (6.4) (0.8) (1.3) (1.5) (11.2)
Transfers
Disposals -- -- -- 1.8 -- 4.8 -- 6.6
------ ------ ------- -------- ------ ------- ------- --------
At 28 February
2019 (restated)(1) -- (3.0) (12.2) (106.6) (6.5) (11.2) (14.2) (153.7)
------ ------ ------- -------- ------ ------- ------- --------
Net carrying value
At 28 February
2019 (restated)(1) 4.1 -- 6.0 16.9 25.8 8.8 15.2 76.8
------ ------ ------- -------- ------ ------- ------- --------
Work-in-progress at 29 February 2020 relates predominantly to the development of IT assets. Property, plant and equipment balances are non-current.
(1) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.
93
29. Deposits from Banks
Group 2020 2019
GBPm GBPm
Deposits from banks 500.0 1,663.2
------ --------
500.0 1,663.2
------ --------
Current -- 324.2
Non-current 500.0 1,339.0
Deposits from banks include balances of GBPnil (2019: GBP324.2m) in respect of securities sold under sale and repurchase agreements and balances of GBP500.0m (2019: GBP1,339.0m) drawn under the BoE's Term Funding Scheme (TFS). The underlying securities sold under agreements to repurchase had a carrying value of GBPnil (2019: GBP358.5m).
30. Deposits from Customers
Group 2020 2019
GBPm GBPm
Retail deposits 7,706.3 10,465.4
Fair value hedge adjustment 0.7 (0.2)
-------- ---------
7,707.0 10,465.2
-------- ---------
Current 6,377.2 8,508.7
Non-current 1,329.8 1,956.5
Fair value hedge adjustments
Fair value hedge adjustments amounting to GBP0.7m (2019: (GBP0.2)m) are in respect of fixed rate Savings products. These adjustments are largely offset by derivatives, which are used to manage interest rate risk and are designated as fair value hedges within deposits from customers.
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31 . Debt Securities in Issue
Interest rate Par value Term Maturity 2020 2019
Group GBPm (years) date GBPm GBPm
RPI bond(1) 1.0% 72.3 8 2019 -- 72.3
Fixed rate retail bond(2) 5.0% 200.0 8.5 2020 201.8 202.9
1M GBP LIBOR
Floating rate AAA bond (A2)(3) + 0.65% 350.0 7 2021 -- 349.9
1M GBP LIBOR
Floating rate AAA bond (A1)(4) + 0.53% 300.0 5 2022 299.2 298.7
1M USD LIBOR
Floating rate AAA Bond (A1)(5) + 0.836% 272.2 2 2020 273.1 261.7
MREL(6) 3.50% 250.0 6 2025 249.9 --
------- -------
Total debt securities in
issue 1,024.0 1,185.5
------- -------
Company
MREL(6,7) 3.50% 250.0 6 2025 249.2 --
------- -------
Total debt securities in
issue 249.2 --
------- -------
(1) This bond was issued on 16 December 2011 and redeemed on its scheduled redemption date in December 2019.
(2) This bond was issued on 21 May 2012.
(3) This Bond was issued on 6 June 2014 and redeemed on its scheduled redemption date in May 2019.
(4) This Bond was issued on 7 November 2017. The scheduled redemption date of this Bond is October 2020.
(5) This Bond was issued on 27 November 2018. The scheduled redemption date of this Bond is November 2020.
(6) This bond was issued on 26 July 2019. The scheduled redemption date is July 2024.
(7) On a Company basis, GBP0.7m of issue costs absorbed by TPF are excluded.
All Floating Rate Bonds were issued by Delamare Cards MTN Issuer plc and are listed on the Irish Stock Exchange. All retail bonds are listed on the London Stock Exchange. All balances are classified as current at the year end.
TPFG undertook an initial issuance of MREL-compliant debt(1) of GBP250.0m in July 2019 and subsequently invested the proceeds in the Company via an intercompany subordinated loan maturing in 2025.
In the prior year, all balances were classified as non-current at the year end with the exception of GBP350.0m of the floating rate AAA bond, which was redeemed on its scheduled redemption date in May 2019 and the RPI bond issued in December 2011 (GBP72.3m), which was redeemed on its scheduled redemption date in December 2019.
95
32 . Provisions for Liabilities and Charges
Customer Restructuring Expected Credit Other
Group Redress Provision Provision Loss Provision Provisions Total
2020 GBPm GBPm GBPm GBPm GBPm
At beginning of
year 34.7 -- 8.5 11.8 55.0
Provided during
the year 45.0 6.3 -- 1.5 52.8
Utilised during
the year (38.1) (5.1) -- (2.8) (46.0)
Transfer to loans
and advances ECL
allowance -- -- (0.8) -- (0.8)
Released during
the year -- -- -- (2.3) (2.3)
------------------- -------------- ---------------- ------------ -------
At end of year 41.6 1.2 7.7 8.2 58.7
------------------- -------------- ---------------- ------------ -------
Customer redress provision - Payment protection insurance (PPI)
Of the total customer redress provision balance at 29 February 2020, GBP41.1m (2019: GBP34.2m) has been provided for customer redress in respect of potential customer complaints arising from historic sales of PPI.
In March 2017, the Financial Conduct Authority (FCA) issued a Policy Statement (PS17/3, 'Payment protection insurance complaints: feedback on CP16/20 and final rules and guidance') which confirmed a deadline for PPI claims of August 2019, supported by an FCA led communications campaign.
The policy statement also set out rules and guidance on the handling of PPI claims in light of the Supreme Court's decision in Plevin v Paragon Personal Finance Limited (Plevin), confirming that both up-front commission arrangements and profit share arrangements should also be considered in the calculation of total commission for Plevin claims.
The claims deadline passed on 29 August 2019. In response to the high level of claims received by the Group during the year in advance of the PPI compliant deadline, the Group increased its PPI provision by GBP45.0m (2019: GBP16.0m) during the year to reflect an updated assessment of the current claim rate and average redress.
Although a significant degree of uncertainty remains with regard to the ultimate cost of settling PPI claims, the provision balance represents Management's best estimate at the reporting date of that cost and is based on historical uphold rates, average redress and the associated administrative expenses. The PPI provision and the impact of regulatory changes will continue to be monitored as Management complete their assessment of the significant level of claims received in advance of the claims deadline and levels of redress.
The table below details for each key assumption, actual data to 29 February 2020, forecast assumptions used in assessing the PPI provision adequacy and a sensitivity assessment demonstrating the impact on the provision of a variation in the key assumptions. The key sensitivity in relation to PPI claims received is the conversion rate into an upheld complaint.
Sensitivity
Consequential
Cumulative Outstanding change in
Assumption actual claims Change in assumption provision
GBPm
Valid claims settled 163,609 8,571 +/- 1,000 claims +/- 2.1
Average redress per valid
claim GBP1,743 GBP2,080 +/- GBP100 +/- 0.9
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32. Provisions for Liabilities and Charges (continued)
Customer redress provision - Consumer credit act (CCA)
The Group holds a provision of GBP0.5m (2019: GBP0.5m) in respect of customer redress relating to instances where certain requirements of the CCA for post-contract documentation were not fully complied with.
In arriving at the provision required, the Group has considered the legal and regulatory position with respect to these matters and has sought legal advice which it took into account when making its judgement. The provision represents Management's best estimate at the reporting date of the cost of concluding the redress programme for Loan and Credit Card customers, and in making the estimate Management has exercised judgement as to both the timescale for completing the redress campaign and the final scope of any amounts payable.
Restructuring provision
The restructuring provision is in respect of costs related to the Group's strategic review.
Expected credit loss (ECL) provision
The ECL provision represents the amount of ECL allowance recognised under IFRS 9 which exceeds the gross carrying amount of the financial asset as set out at note 18.
Other provisions
Other provisions predominantly reflect:
-- a dilapidations provision related to the anticipated costs of restoring leased assets to their original condition. Management expects that the provision will be utilised at the end of the lease terms, the longest of which is due to end in 2029;
-- a warranty provision in respect of debt sales. This represents post-determination date customer receipts payable to debt purchasers and provision for any accounts which may need to be bought back under the terms of the debt sale agreements. This balance is classified as current at the year end; and
-- a provision in respect of the potential cost of refunding fees to customers. This balance is classified as current at the year end.
33. Accruals and Deferred Income
Group Company
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
Restated(1)
Amounts accrued to Tesco Group
subsidiaries 11.8 11.7 -- --
Amounts accrued to Tesco plc 0.8 0.8 0.8 0.8
Other accruals 74.7 74.2 0.8 --
Deferred income 12.8 8.6 -- --
------ ------------ ----- -----
Total accruals and deferred income 100.1 95.3 1.6 0.8
------ ------------ ----- -----
All amounts are classified as current at the year end.
(1) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details
97
34. Other Liabilities
Group 2020 2019
GBPm GBPm
Restated(1)
Accounts payable and sundry creditors 134.2 118.0
Insurance creditor 13.2 12.8
Taxation and social security payable 5.7 6.3
Contract liabilities - insurance refunds 2.0 2.0
Lease liabilities (refer note 38) 32.8 34.5
Amounts owed to Tesco Group subsidiaries 11.1 12.1
------ ------------
Total other liabilities 199.0 185.7
------ ------------
(1) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.
All amounts are classified as current at the year end, with the exception of GBP29.6m (2019: GBP32.8m) of the lease liabilities which are due after more than one year.
Contract liabilities - insurance refunds
Revenue recognised in the year in respect of the opening contract liability balance was GBP0.2m (2019: GBP0.1m).
35. Subordinated Liabilities and Notes
Group and Company 2020 2019
GBPm GBPm
Amortised cost:
Fixed rate subordinated loans 190.0 190.0
Undated floating rate notes 45.0 45.0
------ ------
Total subordinated liabilities and notes 235.0 235.0
------ ------
Subordinated liabilities and notes comprise loan capital issued to Tesco PLC. This includes GBP250.0m notional (2019: GBPnil) of subordinated loans maturing in 2025, GBP190.0m (2019: GBP190.0m) of subordinated loans maturing in 2030 and GBP45.0m (2019: GBP45.0m) of undated notes with no fixed maturity date. All balances are classified as non-current at the year end.
Interest payable on the fixed rate intercompany subordinated loan is 3.5%. Interest payable on the floating rate notes is based on three month SONIA plus a margin of 67 to 227 basis points (2019: three month LIBOR plus a spread ranging from 60 to 220 basis points).
98
36. Share Capital and Share Premium Account
Group and Company 2020 2020 2019 2019
Number GBPm Number GBPm
Authorised
A Ordinary shares of 10p each Unlimited Unlimited
B Ordinary shares of 10p each Unlimited Unlimited
C Ordinary shares of 10p each 1 1
Allotted, called up and fully paid
A Ordinary shares of 10p each 991,090,000 99.1 991,090,000 99.1
B Ordinary shares of 10p each 229,089,000 22.9 229,089,000 22.9
C Ordinary shares of 10p each 1 -- 1 --
-------------- -------- -------------- --------
1,220,179,001 122.0 1,220,179,001 122.0
-------------- -------- -------------- --------
2020 2019
GBPm GBPm
Share premium reserve 1,098.2 1,098.2
-------- --------
1,098.2 1,098.2
-------- --------
99
37. Other Reserves
Group
2020 2019
GBPm GBPm
AFS - share of joint venture 7.5 2.5
Fair value reserve 4.8 2.1
------ ------
Total AFS/FV reserves 12.3 4.6
------ ------
Cash flow hedge reserve (0.3) (1.0)
Currency basis reserve (0.1) (0.3)
Share based payment reserve 25.1 24.1
------ ------
Total reserves 37.0 27.4
------ ------
AFS reserve
The consolidated AFS reserve includes the Group's share of the AFS reserve of its joint venture, TU. As described in note 25, TU has taken an exemption to defer the adoption of IFRS 9 until the financial year beginning on 1 January 2023.
Fair value reserve
The cumulative net change in the fair value of investment securities measured at FVOCI is included in the fair value reserve, less the impairment allowance recognised in the Consolidated Income Statement.
Cash flow hedge reserve
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are included in the cash flow hedge reserve. The gain or loss relating to the ineffective portion is recognised immediately in the Consolidated Income Statement.
Currency basis reserve
Cash flow hedge accounting allows all fair value movements on the hedging instrument (the derivative) to be charged or credited to the cash flow hedge reserve in respect of the designated risk. The non-designated portion of the hedging instrument, being the element related to the foreign currency basis, is recognised separately in the currency basis reserve.
Share based payment reserve
The fair value of Tesco equity-settled share options granted to employees of the Group is included in the share based payment reserve.
100
38 . Leases
Leasing activities
The Group has entered into leases for office buildings. These lease contracts contain a wide range of terms and conditions, including extension options. These options are exercisable only by the Group and not by the respective Lessor.
Consolidated Income Statement Amounts Relating to Leases
The Consolidated Income Statement includes the following amounts relating to releases:
2020 2019
GBPm GBPm
Group Restated(1)
Depreciation charge on right-of-use assets(2) 1.5 1.5
Interest expense on lease liabilities(3) 2.5 2.6
Total 4.0 4.1
----- ------------
Consolidated Statement of Financial Position Amounts Relating to Leases
The Consolidated Statement of Financial Position includes the following amounts relating to leases:
2020 2019
GBPm GBPm
Group Restated(1)
Right-of-use assets(4)
Office buildings 13.7 15.2
Total right-of-use assets 13.7 15.2
----- ------------
Lease liabilities(5)
Current 3.2 1.7
Non-current 29.6 32.8
Total lease liabilities 32.8 34.5
----- ------------
Consolidated Cash Flow Statement amounts relating to leases
The Consolidated Cash Flow Statement includes the following amounts relating to leases:
2020 2019
GBPm GBPm
Group Restated(1)
Interest paid on lease liabilities 2.4 2.1
Principal payments on lease liabilities 1.8 1.6
Total cash outflow for lease liabilities 4.2 3.7
----- ------------
Possible future cash outflows not included in lease liability
Potential future lease payments (undiscounted) in relation to extension options not included in the reasonably certain lease term, and hence not included in lease liabilities, total GBP64.4m (2019: GBP64.4m).
(1) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.
(2) Included in total depreciation and amortisation charge in the Consolidated Income Statement (refer to note 28).
(3) Included in Net interest income in the Consolidated Income Statement (refer to note 6).
(4) Included in Property, plant and equipment in the Consolidated Statement of Financial Position (refer to note 28).
(5) Included in Other liabilities in the Consolidated Statement of Financial Position (refer to note 34).
101
39 . Employee Benefit Liability
Defined benefit plans
The Group made contributions in the year to a closed funded defined benefit scheme operated by TSL. The principal pension plan is the Tesco pension scheme, a funded defined benefit pension scheme in the UK, the assets of which are held as a segregated fund and administered by the Trustee. TSL has recognised the appropriate net liability of the Tesco pension scheme in accordance with IAS 19.
Subject to the sale by Tesco of its operations in Thailand and Malaysia, Tesco has agreed with the Trustee of the Tesco pension scheme to contribute GBP2.5bn to the Tesco pension scheme to eliminate the current funding deficit and significantly reduce the prospect of having to make further pension deficit contributions in the future.
Defined contribution plans
A defined contribution scheme operated by TSL is open to all Group employees in the UK.
Detailed disclosures, in line with the requirements of IAS 19, are included in the Tesco 2020 Financial Statements.
40. Risk Management
There are no differences in the manner in which risks are managed and measured between the Group and the Company. Therefore, the explanations of the management, the control responsibilities and the measurement of risk described in this section are those for the Group. The amounts included in this note are those for the Group unless otherwise stated.
Through its normal operations, the Group is exposed to a number of risks, the most significant of which are credit risk, operational risk, liquidity and funding risk, market risk, insurance risk, residual price risk and legal and regulatory compliance risk. The key risk management processes and tools are described in detail on pages 8 to 21 within the Strategic Report.
(a) Credit Risk
Types of credit risk
Retail credit risk
Retail credit risk is the risk that a borrower, who is a personal customer, will default on a debt or obligation by failing to make contractually obligated payments. Regular management reports are submitted to the Board and appropriate Committees. The Group is following FCA guidance, recently updated due to the Covid-19 pandemic, in relation to those customers defined as being in Persistent Debt.
Controls and risk mitigants
To minimise the potential for the Group to be exposed to levels of bad debt that are outside Risk Appetite, processes, systems and limits have been established that cover the end to end retail credit risk customer life cycle, the key components of which are outlined below:
Credit scoring: The quality of new lending is controlled using appropriate credit scoring and associated rules. Judgemental analysis is used for more complex cases.
Affordability: The Group aims to be a responsible lender and accordingly employs affordability models, including minimum free income thresholds based on customers' income and outgoings, to confirm that they have the ability to repay the advances they are seeking.
Credit policies and guides: A suite of retail credit risk policies and supporting guides are maintained by the Credit Risk function. These policies define the minimum requirements for the management of credit activities across the credit life cycle. The guides also comprise specific product and customer related thresholds that in turn seek to ensure that the Group is operating within agreed retail credit Risk Appetite parameters.
102
40. Risk Management (continued)
Controls and risk mitigants (continued)
Monitoring and reporting: Management information is produced covering all lending portfolios which is tailored to meet the requirements of different audiences within the overall governance framework. Risk Appetite Measures (RAMs) with supporting limits and tolerances allow the Group to track performance against Risk Appetite and identify any emerging trends that could act as an early warning that performance could move outside approved Risk Appetite thresholds, thereby allowing mitigating actions to be taken to address such trends.
Wholesale credit risk
Wholesale credit risk is the risk that the counterparty to a transaction will default before the final settlement of the transaction's cash flows. Such transactions relate to contracts for derivative financial instruments, securities financing transactions (SFTs) and long-dated settlement transactions.
The Group does not operate in the mainstream commercial or corporate lending market. However, the Group is exposed to wholesale credit risk primarily through Treasury activities, as a result of cash management, liquidity and market risk management, with the inherent risk that these counterparties could fail to meet their obligations.
Controls and risk mitigants
Daily monitoring of exposures is undertaken, with oversight from the Market and Liquidity Risk (MLR) team. Monthly reporting of RAMs is provided to the Executive Risk Committee (ERC). Escalation processes are in place for the reporting of any breached limits directly to the ERC.
The RAM limits are set out in the Wholesale Credit Risk Policy which is approved by the Financial and Credit Risk Director as Policy owner. The limits contained in the Policy are approved by the ERC or Board as appropriate. The Treasury Director is responsible for ensuring that Treasury complies with counterparty credit risk limits. The MLR team reports to the Financial and Credit Risk Director, providing independent oversight that these limits are adhered to.
The Group's approach to investing funds focuses on counterparties with strong capacity to meet financial commitments and requires approved counterparties to have investment grade ratings. Counterparty types include financial institutions, sovereigns and supranationals, with approved instrument types including cash, certificates of deposit, bonds, treasury bills, gilts, repurchase agreements and interest rate and foreign exchange derivatives. Ratings issued by external credit assessment institutions are taken into account as part of the process to set limits.
Wholesale Credit Risk Limits restrict the amounts that can be invested based on counterparty credit-worthiness by country, instrument type and remaining tenor. As part of the credit assessment process for wholesale credit risk exposures, the Group uses the external credit ratings issued by Fitch (as the nominated external credit assessment institution) to help determine the appropriate risk-weighting to apply under the Standardised Approach (SA) to credit risk exposures. The Wholesale Credit Risk Policy is set by the Board and any new counterparty limits Policy exceptions or overrides must follow agreed delegated authorities that require as a minimum explicit sign-off by the Chief Financial Officer and Chief Risk Officer (CRO).
The Wholesale Credit Risk Policy also provides that credit risk mitigation techniques are applied to reduce wholesale credit risk exposures. International Swaps Derivatives Association (ISDA) master agreements are in place with all derivative counterparties, Global Master Repurchase Agreements are in place for all repurchase counterparties and ISDA Credit Support Annexes have been executed with all of the Group's derivative counterparties. The Group uses central counterparties in order to clear specified derivative transactions (predominantly interest rate swaps) thereby mitigating counterparty risk. Positions are continuously marked-to-market and margin in the form of collateral is exchanged on at least a daily basis. As at 29 February 2020, no additional credit risk mitigation was deemed necessary.
103
40. Risk Management (continued)
Credit risk: ECL measurement
The Group assesses, on a forward-looking basis, the ECLs associated with its financial assets carried at amortised cost and FVOCI, and with the exposure arising from loan commitments. The Group has not recognised an ECL allowance for cash or other financial assets balances at 29 February 2020 due to the short-term nature of these balances, the frequency of origination and settlement of balances and taking account of collateral held.
ECLs are calculated in line with the requirements of IFRS 9 using the three stage model for impairment:
Stage 1 Financial asset is not credit impaired and has not had a significant increase in credit risk since initial recognition
Stage 2 Financial asset is not credit impaired but has had a significant increase in credit risk since initial recognition
Stage 3 Financial asset is credit impaired
The measurement of ECLs is dependent on the classification stage of the financial asset. For financial assets in Stage 1, loss allowances are calculated based on ECLs arising from default events that are possible within 12 months from the reporting date. For financial assets in Stages 2 and 3, loss allowances are calculated based on lifetime ECLs.
The measurement of ECLs for financial assets measured at amortised cost or FVOCI is an area that requires the use of complex models and significant assumptions about future economic conditions and credit behaviour. A number of significant judgements are also required in applying the accounting requirements for measuring ECLs.
The sections below provide further explanations of the factors taken into account in the measurement of ECLs.
Significant increase in credit risk
At each reporting date, the change in credit risk of the financial asset is observed using a set of quantitative and qualitative criteria, together with a backstop based on arrears status.
Quantitative criteria:
For each financial asset, the Group compares the lifetime probability of default (PD) at the reporting date with the lifetime PD that was expected at the reporting date at initial recognition (PD thresholds). The Group has established PD thresholds for each type of product which vary depending on initial term and term remaining.
Qualitative criteria:
A number of qualitative criteria are in place such as:
Forbearance offered to customers in financial difficulty;
Risk-based pricing post-origination;
Credit indebtedness;
Credit limit decrease; and
Pre-delinquency information.
Backstop
As a backstop, the Group considers that if an account's contractual payments are more than 30 days past due then a significant increase in credit risk has taken place.
The Group has used the low credit risk exemption in respect of its portfolio of investment securities in both the current and prior year.
Definition of default
An account is deemed to have defaulted when the Group considers that a customer is in significant financial difficulty and that the customer meets certain quantitative and qualitative criteria regarding their ability to make contractual payments when due.
104
40. Risk Management (continued)
This includes instances where:
the customer makes a declaration of significant financial difficulty;
the customer or third-party agency communicates that it is probable that the customer will enter bankruptcy or another form of financial restructuring such as insolvency or repossession;
the account has been transferred to recoveries and the relationship is terminated;
an account's contractual payments are more than 90 days past due; or
where the customer is deceased.
An account is considered to no longer be in default when it no longer meets any of the default criteria and has remained up-to-date on its contractual payments for a period of at least three months.
Inputs, assumptions and techniques used for estimating impairment
The ECL is determined by multiplying together the PD, exposure at default (EAD) and loss given default (LGD) for the relevant time period and for each collective segment and by discounting back to the balance sheet date. Each of these inputs is explained further below.
Probability of default: Represents the likelihood a customer will default over the relevant period, being either 12 months or the expected lifetime.
Exposure at default: Represents the expected amount due from the customer at the point of default. The Group derives the EAD from the current exposure to the counterparty and future changes to that exposure to the point of default.
Loss given default: Represents the Group's expectation of the extent of the loss if there is a default. The LGD assumes that once an account has defaulted, the portion of the defaulted balance will be recovered over a maximum period of 60 months from the point of default. LGD models take into account, when relevant, the valuation of collateral, collection strategies and receipts from debt sales.
These inputs are adjusted to reflect forward-looking information as described below.
Expected lifetime
The expected lifetime of a financial asset is generally the contractual term. In the case of Loans, the expected lifetime is the behavioural life. In the case of revolving products, the Group measures credit losses over the period that it will be exposed to credit risk. This is estimated using historic customer data. The current expected lifetime of the Group's credit card portfolio is 6 years.
Incorporation of forward-looking information
The ECL calculation and the measurement of significant deterioration in credit risk both incorporate forward-looking information using a range of macro-economic scenarios. The key economic variables are based on historical patterns observed over a range of economic cycles.
The Group has engaged a third-party supplier to provide relevant economic data for this purpose which, prior to incorporation into the ECL calculation, is subject to internal review and challenge with reference to other publicly available market data and benchmarks.
During the prior year the Group used three macro-economic scenarios to measure the impact of macro-economic uncertainty on the ECL calculation. During the current year a five-scenario model was adopted to more accurately reflect the current economic climate. These scenarios include a Base scenario, an Upside scenario and three different Downside scenarios.
105
40. Risk Management (continued)
The Base scenario is considered the most likely economic outcome, while the Upside scenario represents a more optimistic outcome. Downside scenario 1 reflects an economic downside caused by the UK being unable to secure a favourable trade deal with the EU, while Downside scenario 2 represents a more severe recession. As a result of Covid-19 developments at the reporting date, a fifth scenario was introduced which used Downside 2 as a proxy, to reflect the increased risk of an adverse impact on the economy from the Covid-19 pandemic. The scenarios have been assigned weightings of 40%, 20%, 30%, 5% and 5% respectively.
The estimate of expected credit losses at 29 February 2020 was based on the Group's conclusion that the significant socioeconomic disruption, the necessity for large scale Government interventions and the related impact on the wider economy as a result of Covid-19 had a low probability of crystallising at 29 February 2020 based on the reasonable and supportable information available at that date. Further information on the impact of the Covid-19 pandemic on the Group is set out at note 49.
The table below shows the key macro-economic variables in each scenario, averaged over a five-year period. Following the sale of the Group's Mortgage portfolio during the current year, house price index is no longer considered a key variable for the Group and has therefore been excluded from the current year table.
The economic scenarios used include the following ranges of key indicators:
As at 29 February 2020 Base Upside Downside Downside Covid-19
(5 year average) 1 2
40% 20% 30% 5% 5%
BoE base rate(1) 0.59% 0.25% 1.46% 2.31% 2.31%
Unemployment rate(1) 3.87% 3.85% 5.28% 6.08% 6.08%
Gross domestic product(2) 1.58% 1.96% 0.97% 0.66% 0.66%
As at 28 February 2019 Base Upside Downside Downside Covid-19
(5 year average) 1 2
45% 25% 35% n/a n/a
BoE base rate(1) 0.98% 0.70% 2.05% n/a n/a
Unemployment rate(1) 4.10% 4.05% 5.78% n/a n/a
House price index(2) 3.79% 5.37% 0.90% n/a n/a
Gross domestic product(2) 1.64% 2.03% 0.97% n/a n/a
(1) Simple average
(2) Annual growth rates
106
40. Risk Management (continued)
Sensitivity analysis
As the calculation of ECLs is complex and involves use of judgement, sensitivity analysis has been performed to illustrate the impact on ECLs of any changes to the main components of the calculation. The effect of applying a 100% weighting to each of the macro-economic scenarios, as well as the impact on ECLs as a result of changes in LGD, staging, PD and expected lifetime, have been assessed.
Most of the sensitivities have been calculated as single-factor sensitivities and any impact on ECL reflects the sensitivity of the estimate to each key component in isolation. However, the PD and macro-economic sensitivities also include a rebasing of the staging allocation and thresholds. The impact of these is therefore incorporated within the impact disclosed for these sensitivities.
The most significant assumptions affecting the ECL calculation are as follows:
PD;
LGD;
Macro-economic scenarios;
PD threshold (staging); and
Expected lifetime of revolving credit facilities
Changes in the ECL allowance that would arise from reasonably possible changes in these assumptions over the next 12 months from those used in the Group's calculations at 29 February 2020 are set out in the table below.
Further Information on the sensitivity of the Group's ECL allowance to reasonably possible changes in these assumptions over the next financial year are set out at note 49.
Impact on loss
allowance
2020 2019
GBPm GBPm
Closing ECL allowance 488.4 485.2
Increase of
PD 2.5% 11.1 9.4
Decrease of
2.5% (10.9) (9.4)
Increase of
LGD 2.5% 12.1 12.0
Decrease of
2.5% (12.3) (12.2)
Macro-economic scenarios (100% weighted) Upside (41.1) (32.9)
Base (27.7) (20.9)
Downside
1 39.6 67.2
Downside 2 102.9 n/a
Covid-19 102.9 n/a
Increase of
Staging - change in threshold 20% (17.3) (14.3)
Decrease of
20% 21.4 10.4
Increase of
Expected lifetime (revolving credit facilities) 1 year 2.1 3.1
Decrease of
1 year (2.1) (3.0)
107
40. Risk Management (continued)
Grouping of instruments for losses measured on a collective basis
For ECL provisions modelled on a collective basis, a grouping of exposures is performed on the basis of shared credit risk characteristics that include instrument type and credit risk gradings. The groupings are subject to regular review to ensure that these remain appropriate.
Credit risk: Credit risk exposure
Maximum exposure to credit risk
The table below represents the Group's maximum exposure to credit risk, by IFRS 9 stages at the reporting date, in respect of financial assets held.
For financial assets, the balances are based on gross carrying amounts as reported in the Consolidated Statements of Financial Position. For loan commitments, the amounts in the table represent the amounts for which the Group is contractually committed.
Stage 1 Stage 2 Stage 3 Total
<30 days past >30 days past
2020 Not past due due due Total
Group(1) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Gross Exposure
Loans and advances to
customers 7,687.9 869.4 51.8 32.1 953.3 288.8 8,930.0
Investment securities at
FVOCI 1,060.6 -- -- -- -- -- 1,060.6
Investment securities at
amortised cost 21.1 -- -- -- -- -- 21.1
Loan commitments - Loans and
advances to
customers(2) 11,754.7 116.3 -- -- 116.3 1.0 11,872.0
Total gross exposure 20,524.3 985.7 51.8 32.1 1,069.6 289.8 21,883.7
--------- ------------- -------------- -------------- -------- -------- ---------
Loss allowance
Loans and advances to
customers(2) 84.1 177.5 21.5 19.6 218.6 185.7 488.4
Investment securities at
FVOCI(3) 0.9 -- -- -- -- -- 0.9
Investment securities at
amortised cost 0.1 -- -- -- -- -- 0.1
Total loss allowance 85.1 177.5 21.5 19.6 218.6 185.7 489.4
--------- ------------- -------------- -------------- -------- -------- ---------
Net Exposure
Loans and advances to
customers 7,603.8 691.9 30.3 12.5 734.7 103.1 8,441.6
Investment securities at
FVOCI 1,059.7 -- -- -- -- -- 1,059.7
Investment securities at
amortised cost 21.0 -- -- -- -- -- 21.0
Total net exposure 8,684.5 691.9 30.3 12.5 734.7 103.1 9,522.3
--------- ------------- -------------- -------------- -------- -------- ---------
Coverage
Loans and advances to
customers 1.1% 20.4% 41.5% 61.1% 22.9% 64.3% 5.5%
------------- -------------- -------------- --------
(1) On a Company basis, loans and advances to subsidiary companies of GBP485.0m are considered to be low risk and stage 1. The related loss allowance of GBP1.0m is also considered to be stage 1.
(2) The loss allowance in respect of loan commitments is included within the total loss allowance for loans and advances to customers as above to the extent that it is below the gross carrying amount of loans and advances to customers. Where the loss allowance exceeds the gross carrying amount, any excess is included within provisions as set out at note 32.
(3) The loss allowance for investment securities at FVOCI is not recognised in the carrying amount of investment securities as the carrying amount is their fair value.
108
40. Risk Management (continued)
Stage Stage
1 Stage 2 3 Total
<30 days >30 days
Not past past past
2019 due due due Total
Group(1) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Gross Exposure
Loans and advances
to customers 11,463.6 1,090.5 53.5 35.1 1,179.1 270.9 12,913.6
Investment securities
at FVOCI 1,042.7 -- -- -- -- -- 1,042.7
Investment securities
at amortised cost 28.9 -- -- -- -- -- 28.9
Loan commitments
- Loans and advances
to customers(2) 12,115.1 109.6 -- -- 109.6 1.5 12,226.2
Total gross exposure 24,650.3 1,200.1 53.5 35.1 1,288.7 272.4 26,211.4
--------- --------- --------- --------- -------- ------ ---------
Loss allowance
Loans and advances
to customers(2) 84.6 185.3 22.6 20.8 228.7 171.9 485.2
Investment securities
at FVOCI(3) 0.2 -- -- -- -- -- 0.2
Investment securities
at amortised cost 0.1 -- -- -- -- -- 0.1
Total loss allowance 84.9 185.3 22.6 20.8 228.7 171.9 485.5
--------- --------- --------- --------- -------- ------ ---------
Net Exposure
Loans and advances
to customers 11,379.0 905.2 30.9 14.3 950.4 99.0 12,428.4
Investment securities
at FVOCI 1,042.5 -- -- -- -- -- 1,042.5
Investment securities
at amortised cost 28.8 -- -- -- -- -- 28.8
Total net exposure 12,450.3 905.2 30.9 14.3 950.4 99.0 13,499.7
--------- --------- --------- --------- -------- ------ ---------
Coverage
Loans and advances
to customers 0.7% 17.0% 42.2% 59.3% 19.4% 63.5% 3.8%
--------- --------- --------- --------
(1) On a Company basis, loans and advances to subsidiary companies of GBP235.0m are considered to be low risk and stage 1. The related loss allowance of GBP1.3m is also considered to be stage 1.
(2) The loss allowance in respect of loan commitments is included within the total loss allowance for loans and advances to customers as above to the extent that it is below the gross carrying amount of loans and advances to customers. Where the loss allowance exceeds the gross carrying amount, any excess is included within provisions as set out at note 32.
(3) The loss allowance for investment securities at FVOCI is not recognised in the carrying amount of investment securities as the carrying amount is their fair value.
109
40. Risk Management (continued)
The table below provides details of financial assets held at FVPL which are not subject to impairment.
Group Maximum exposure to credit
risk
2020 2019
GBPm GBPm
Derivative financial assets 5.7 31.3
Assets of the disposal group 45.1 --
Cash and balances with central banks 26.3 30.5
Total 77.1 61.8
-------------- -------------
Credit quality of loans and advances to customers
The table below provides details of the credit quality of loans and advances to customers and loan commitments for which an ECL allowance is recognised.
The Group defines four classifications of credit quality for all credit exposures; High, Satisfactory, Low and Below Standard. Credit exposures are segmented according to the IFRS 9 12 month PD, with credit impaired reflecting a PD of 100%. The classifications are the same for the current and prior year.
IFRS 9
12 Month PD
(%)
High quality <=3.02%
Satisfactory quality >3.03% - 11.10%
Low quality and below => 11.11%
standard
Credit impaired 100%
Group(1) 2020
Stage 1 Stage 2 Stage 3 Total
GBPm GBPm GBPm GBPm
Loans and advances to customers
High quality 6,608.9 37.4 -- 6,646.3
Satisfactory quality 1,036.9 485.4 -- 1,522.3
Low quality and below standard 42.1 430.5 -- 472.6
Credit impaired -- -- 288.8 288.8
--------- -------- -------- ---------
Total 7,687.9 953.3 288.8 8,930.0
--------- -------- -------- ---------
Loan Commitments
High quality 11,544.2 1.9 -- 11,546.1
Satisfactory quality 206.3 86.0 -- 292.3
Low quality and below standard 4.2 28.4 -- 32.6
Credit impaired -- -- 1.0 1.0
--------- -------- -------- ---------
Total 11,754.7 116.3 1.0 11,872.0
--------- -------- -------- ---------
Total exposure 19,442.6 1,069.6 289.8 20,802.0
--------- -------- -------- ---------
(1) On a Company basis, loans and advances to subsidiary companies of GBP485.0m are considered to be low risk, high quality and stage 1.
110
40. Risk Management (continued)
Credit quality of loans and advances to customers (Continued)
Group(1) 2019
Stage 1 Stage 2 Stage 3 Total
GBPm GBPm GBPm GBPm
Loans and advances to customers
High quality 10,537.8 201.6 -- 10,739.4
Satisfactory quality 893.8 563.1 -- 1,456.9
Low quality and below standard 32.0 414.4 -- 446.4
Credit impaired -- -- 270.9 270.9
--------- -------- -------- ---------
Total 11,463.6 1,179.1 270.9 12,913.6
--------- -------- -------- ---------
Loan Commitments
High quality 11,938.1 3.4 -- 11,941.5
Satisfactory quality 173.9 78.1 -- 252.0
Low quality and below standard 3.1 28.1 -- 31.2
Credit impaired -- -- 1.5 1.5
--------- -------- -------- ---------
Total 12,115.1 109.6 1.5 12,226.2
--------- -------- -------- ---------
Total exposure 23,578.7 1,288.7 272.4 25,139.8
--------- -------- -------- ---------
(1) On a Company basis, loans and advances to subsidiary companies of GBP235.0m are considered to be low risk, high quality and stage 1.
Concentration risk
Concentration risk is the risk of losses arising as a result of concentrations of exposures to a specific counterparty, economic sector, segment or geographical region.
The Group could become exposed to this risk were it to become concentrated in certain geographic areas or product profiles. Such concentrations could produce unacceptable bad debts in some adverse but plausible situations.
Controls and risk mitigants
The Group mitigates these potential concentration risks by establishing appropriate limits and trigger thresholds that are regularly monitored and reported to the appropriate Senior Management team and risk committees. The Group does not consider itself to be overly concentrated.
Concentration profiles
The following tables provide concentration profiles in terms of the geographic distribution of the Group's exposures; analysis of material asset class by industry type; and, in the prior year, the loan-to-value (LTV) profile for the Group's Mortgage portfolio.
111
40. Risk Management (continued)
Mortgage portfolio - LTV distribution profile
Loans were originated on an income verified basis over a range of fixed rate and tracker products. All loans were repaid on a capital and interest basis, where the loan was repaid over the agreed term of the loan.
The table below provides the LTV distribution profile for the Group's Mortgage portfolio by weighted average balance.
The overall average LTV for the portfolio was 53.7% which was well within agreed Risk Appetite parameters. The Group sold the majority of its Mortgage business during the year ended 29 February 2020 therefore LTV information for the current year has not been provided.
2019
GBPm
Less than 50% 1,062.8
50% to 60% 495.0
60% to 70% 479.1
70% to 80% 741.2
80% to 90% 688.5
90% to 100% 281.0
Greater than 100% 5.6
--------
Total 3,753.2
--------
Geographical distribution profile
The Group is primarily focused on providing financial services and products to UK personal customers.
The table below provides the geographical distribution of the Group's total credit risk exposures. For on balance sheet assets, the balances set out below are based on net carrying amounts as reported in the Consolidated Statement of Financial Position.
2020 2019
GBPm GBPm
UK 22,534.1 26,790.7
Europe (excluding UK) 303.3 333.2
Other 274.6 264.0
--------- ---------
Total 23,112.0 27,387.9
--------- ---------
112
40. Risk Management (continued)
Concentration risk (continued)
Industry type profile
The table below represents the distribution of exposures by industry type. The Group is primarily focused on providing financial services and products to personal customers in the UK, although it also has exposure to wholesale counterparties as detailed below. For on balance sheet assets, the balances set out below are based on net carrying amounts as reported in the Consolidated Statement of Financial Position.
2020 2019
GBPm GBPm
Financial institutions 1,170.5 1,750.7
Government 1,540.7 958.9
Individuals 20,397.7 24,661.6
Wholesale and retail trade 3.1 16.7
--------- ---------
Total 23,112.0 27,387.9
--------- ---------
Credit risk: Collateral held
During the year the Group received financial instruments as collateral for reverse repurchase agreements. In addition, the Group pledged collateral in respect of repurchase liabilities.
113
40. Risk Management (continued)
Credit risk: Loss allowance
The following table provides a reconciliation of the movements in the loss allowance in the year:
2020 Stage 1 Stage 2 Stage 3 Total
Group (1) GBPm GBPm GBPm GBPm
Loans and advances to customers
At 1 March 2019 84.6 228.6 172.0 485.2
Transfers (2)
Transfers from stage 1 to stage
2 (10.5) 10.5 -- --
Transfers from stage 2 to stage
1 63.5 (63.5) -- --
Transfers to stage 3 (3.1) (49.9) 53.0 --
Transfers from stage 3 1.9 2.2 (4.1) --
Income statement charge
Net remeasurement(3) following
transfer of stage(4) (37.9) 23.3 92.7 78.1
New financial assets originated(5) 27.0 20.8 10.2 58.0
Financial assets derecognised
during period (8.7) (12.1) (3.4) (24.2)
Changes in risk parameters
and other movements(4,6) (31.6) 63.2 59.9 91.5
Other movements
Write-offs and asset disposals(7) -- (3.3) (194.5) (197.8)
Transfer from provisions for
liabilities and charges(8) 0.4 0.4 -- 0.8
Reclassification of Assets
of the disposal group(9) (1.5) (1.6) (0.1) (3.2)
-------- -------- -------- --------
At 29 February 2020 84.1 218.6 185.7 488.4
-------- -------- -------- --------
Investment securities at FVOCI
At 1 March 2019 0.2 -- -- 0.2
Income statement charge
New financial assets purchased(5) 0.4 -- -- 0.4
Financial assets derecognised
during the period (0.7) -- -- (0.7)
Changes in risk parameters
and other movements(6) 1.0 -- -- 1.0
-------- -------- -------- --------
At 29 February 2020 0.9 -- -- 0.9
-------- -------- -------- --------
Investment securities at amortised
cost
At 1 March 2019 0.1 -- -- 0.1
Income statement release
Changes in risk parameters
and other movements(6) -- -- -- --
-------- -------- -------- --------
At 29 February 2020 0.1 -- -- 0.1
-------- -------- -------- --------
Reconciliation to income statement
Net expected credit loss (release)/charge (50.5) 95.2 159.4 204.1
Recoveries and write offs -- -- (25.4) (25.4)
-------- -------- -------- --------
Total income statement (release)/charge (50.5) 95.2 134.0 178.7
-------- -------- -------- --------
Comprising
- In respect of continuing
operations (50.0) 94.6 134.0 178.6
- In respect of discontinued
operations (0.5) 0.6 -- 0.1
-------- -------- -------- --------
Total income statement (release)/charge (50.5) 95.2 134.0 178.7
-------- -------- -------- --------
(1) On a Company basis, the movements in loss allowance for the year ended 29 February 2020 of GBP0.3m relating to loans and advances to subsidiary companies arise entirely due to changes in risks parameters of (GBP0.6m) and new financial assets purchased of GBP0.9m and is considered to be stage 1.
(2) Transfers - The opening loss allowance on financial assets which transferred stage during the year.
(3) Net remeasurement - The increase/(decrease) in the opening loss allowance as a result of a stage transfer.
(4) Includes a release in stages 1 and 2 ECL of GBP8m due to a change in the macro-economic scenarios assumptions.
(5) New financial assets originated or purchased - The loss allowance on new financial assets originated or purchased during the year, representing their stage at 29 February 2020.
(6) Changes in risk parameters and other movements - The change in loss allowance due to changes in macro-economic scenarios, PD, LGD and EAD during the year.
(7) Write-offs and asset disposals - The release of the loss allowance following the write off and/or disposal of a financial asset during the year.
(8) Transfer from provisions for liabilities and charges - The movement in loss allowance which exceeds the gross carrying amount of the financial asset.
(9) During the year, the Group classified its Mortgage business as a disposal group. Refer to notes 2 and 15 for further details.
114
40. Risk Management (continued)
2019 Stage 1 Stage 2 Stage 3 Total
Group(1) GBPm GBPm GBPm GBPm
Loans and advances to customers
At 1 March 2018(9) 94.9 210.9 151.1 456.9
Transfers (2)
Transfers from stage 1 to stage
2 (11.1) 11.1 -- --
Transfers from stage 2 to stage
1 46.3 (46.3) -- --
Transfers to stage 3 (2.9) (41.0) 43.9 --
Transfers from stage 3 1.5 1.5 (3.0) --
Income statement charge
Net remeasurement(3) following
transfer of stage(4) (25.5) 18.8 89.7 83.0
New financial assets originated(5) 27.6 35.6 11.4 74.6
Changes in risk parameters
and other movements(4,6) (45.7) 40.2 36.3 30.8
Other movements
Write-offs and asset disposals(7) (2.3) (1.2) (157.4) (160.9)
Transfer from provisions for
liabilities and charges(8) 1.8 (1.0) -- 0.8
-------- -------- -------- --------
At 28 February 2019 84.6 228.6 172.0 485.2
-------- -------- -------- --------
Investment securities at FVOCI
At 1 March 2018 (0.5) -- -- (0.5)
Income statement charge
New financial assets purchased(5) 0.1 -- -- 0.1
Financial assets derecognised
during the period 0.4 -- -- 0.4
Changes in risk parameters
and other movements(6) 0.2 -- -- 0.2
-------- -------- -------- --------
At 28 February 2019 0.2 -- -- 0.2
-------- -------- -------- --------
Investment securities at amortised
cost
At 1 March 2019 0.2 -- -- 0.2
Income statement release
Changes in risk parameters
and other movements(6) (0.1) -- -- (0.1)
-------- -------- -------- --------
At 28 February 2019 0.1 -- -- 0.1
-------- -------- -------- --------
Reconciliation to income statement
Net expected credit loss (release)/charge (43.0) 94.6 137.4 189.0
Recoveries and write offs -- -- (24.9) (24.9)
-------- -------- -------- --------
Total income statement (release)/charge (43.0) 94.6 112.5 164.1
-------- -------- -------- --------
Comprising:
- In respect of continuing
operations (42.0) 93.4 112.5 163.9
- In respect of discontinued
operations (1.0) 1.2 -- 0.2
-------- -------- -------- --------
Total income statement (release)/charge (43.0) 94.6 112.5 164.1
-------- -------- -------- --------
(1) On a Company basis, the movement in loss allowance for the year ended 28 February 2019 of GBP0.2m relating to loans and advances to subsidiary companies arises entirely due to changes in risks parameters and is considered to be stage 1.
(2) Transfers - The opening loss allowance on financial assets which transferred stage during the year.
(3) Net remeasurement - The increase/(decrease) in the opening loss allowance as a result of a stage transfer.
(4) Includes a release in stages 1 and 2 ECL of GBP21.0m due to a change in the macro-economic scenarios assumptions.
(5) New financial assets originated or purchased - The loss allowance on new financial assets originated or purchased during the year, representing their stage at 28 February 2019.
(6) Changes in risk parameters and other movements - The change in loss allowance due to changes in macro-economic scenarios, PD, LGD and EAD during the year.
(7) Write-offs and asset disposals - The release of the loss allowance following the write off and/or disposal of a financial asset during the year.
(8) Transfer from provisions for liabilities and charges - The movement in loss allowance which exceeds the gross carrying amount of the financial asset.
(9) This balance includes the impact of transition to IFRS 9 on 1 March 2018.
115
40. Risk Management (continued)
The following table provides a reconciliation of the movements in the gross carrying amounts of financial instruments to help explain their significance to the changes in the loss allowance during the year as set out in the above table:
2020 Stage 1 Stage 2 Stage 3 Total
Group(1) GBPm GBPm GBPm GBPm
Loans and advances to customers
Gross carrying amount
At 1 March 2019 11,463.6 1,179.1 270.9 12,913.6
Transfers (2)
Transfers from stage 1 to stage 2 (523.3) 523.3 -- --
Transfers from stage 2 to stage 1 431.3 (431.3) -- --
Transfers to stage 3 (110.2) (154.8) 265.0 --
Transfers from stage 3 4.6 5.0 (9.6) --
Other movements
New financial assets originated(3) 2,611.0 106.9 13.9 2,731.8
Net decrease in lending(4) (2,652.9) (146.9) (11.4) (2,811.2)
Write-offs and asset disposals(5) -- (3.3) (242.4) (245.7)
Changes in interest accrual and other movements (0.8) (0.6) 3.4 2.0
Reclassification of Assets of the disposal group(6) (3,535.3) (124.1) (1.1) (3,660.5)
At 29 February 2020 7,688.0 953.3 288.7 8,930.0
---------- -------- -------- ----------
Investment securities at FVOCI
Gross carrying amount
At 1 March 2019 1,042.7 -- -- 1,042.7
New financial assets purchased 778.6 -- -- 778.6
Financial assets derecognised during the period (774.5) -- -- (774.5)
Other movements 13.8 -- -- 13.8
At 29 February 2020 1,060.6 -- -- 1,060.6
---------- -------- -------- ----------
Investment securities at amortised cost
Gross carrying amount
At 1 March 2019 28.9 -- -- 28.9
Financial assets derecognised during the period (7.8) -- -- (7.8)
At 29 February 2020 21.1 -- -- 21.1
---------- -------- -------- ----------
(1) On a Company basis, loans and advances to subsidiary companies of GBP485.0m are considered to be low risk and stage 1. GBP250.0m of new financial assets were recognised in the year.
(2) Transfers - The opening gross carrying amount of financial assets held which transferred stage as at year end.
(3) New financial assets originated or purchased - The gross carrying amount of financial assets originated or purchased during the year, representing their stage as at 29 February 2020.
(4) Net decrease in lending - The changes in gross carrying amount of financial assets after taking account of additional borrowing and/or payments received from customers.
(5) Write-offs and asset disposals - The write-off of the gross carrying amount when a financial asset is deemed uncollectible and/or has been disposed of.
(6) During the year, the Group classified its Mortgage business as a disposal group. Refer to notes 2 and 15 for further details.
116
40. Risk Management (continued) 2019 Stage 1 Stage 2 Stage 3 Total Group(1) GBPm GBPm GBPm GBPm Loans and advances to customers Gross carrying amount At 1 March 2018(2) 10,619.1 932.2 230.4 11,781.7 Transfers (3) Transfers from stage 1 to stage 2 (592.6) 592.6 -- -- Transfers from stage 2 to stage 1 411.5 (411.5) -- -- Transfers to stage 3 (113.1) (131.7) 244.8 -- Transfers from stage 3 4.7 4.0 (8.7) -- Other movements New financial assets originated(4) 3,704.4 237.8 17.2 3,959.4 Net decrease in lending(5) (2,545.4) (39.4) (2.7) (2,587.5) Write-offs and asset disposals(6) (33.6) (5.1) (211.7) (250.4) Changes in interest accrual and other movements 8.6 0.2 1.6 10.4
At 28 February 2019 11,463.6 1,179.1 270.9 12,913.6
---------- -------- -------- ----------
Investment securities at FVOCI
Gross carrying amount
At 1 March 2018 925.4 -- -- 925.4
New financial assets purchased 713.0 -- -- 713.0
Financial assets derecognised during the period (582.1) -- -- (582.1)
Other movements (13.6) -- -- (13.6)
At 28 February 2019 1,042.7 -- -- 1,042.7
---------- -------- -------- ----------
Investment securities at amortised cost
Gross carrying amount
At 1 March 2018 34.1 -- -- 34.1
Financial assets derecognised during the period (5.2) -- -- (5.2)
At 28 February 2019 28.9 -- -- 28.9
---------- -------- -------- ----------
(1) On a Company basis, loans and advances to subsidiary companies of GBP235.0m are considered to be low risk and stage 1.
(2) The gross carrying amount as at 1 March 2018 includes the remeasurement of the recoverable asset balance of GBP4.8m on transition to IFRS 9. Refer to note 2 for further details.
(3) Transfers - The opening gross carrying amount of financial assets held which transferred stage as at year end.
(4) New financial assets originated or purchased - The gross carrying amount of financial assets originated or purchased during the year, representing their stage as at 28 February 2019.
(5) Net decrease in lending - The changes in gross carrying amount of financial assets after taking account of additional borrowing and/or payments received from customers.
(6) Write-offs and asset disposals - The write-off of the gross carrying amount when a financial asset is deemed uncollectible and/or has been disposed of.
117
40. Risk Management (continued)
Credit risk: Write off policy
When a loan is deemed uncollectable it is written off against the related provision after all of the necessary procedures have been completed and the amount of the loss has been determined.
The Group may write off loans that are still subject to enforcement activity. The outstanding contractual amount of such assets written off during the year ended 29 February 2020 was GBP140.0m (2019: GBP100.5m). Expected recoveries from written off financial assets subject to enforcement activity are recognised in the Consolidated Statement of Financial Position.
Credit risk: Forbearance
The Group provides support to customers who are experiencing financial difficulties. Forbearance is relief granted by a lender to assist customers in financial difficulty, through arrangements which temporarily allow the customer to pay an amount other than the contractual amounts due. These temporary arrangements may be initiated by the customer or the Group where financial difficulty would prevent repayment within the original terms and conditions of the contract. The main aim of forbearance is to support customers in returning to a position where they are able to meet their contractual obligations.
The Group has adopted the definition of forbearance as published in Regulation EU 2015/227. The Group reports all accounts meeting this definition, providing for them appropriately.
Controls and risk mitigants
The Group has well defined forbearance policies and processes. A number of forbearance options are made available to customers by the Group. These routinely, but not exclusively, include the following:
Arrangements to repay arrears over a period of time, by making payments above the contractual amount, that ensure the loan is repaid within the original repayment term.
Short-term concessions, where the borrower is allowed to make reduced repayments (or in exceptional circumstances, no repayments) on a temporary basis to assist with short-term financial hardship.
The table below details the values of secured and unsecured advances that are subject to forbearance programmes, in accordance with the European Banking Authority (EBA) definition.
Gross loans and advances Forbearance programmes as a Proportion of forbearance
subject to forbearance proportion of total loans and programmes covered by
programmes advances by category impairment provision
2020 2019 2020 2019 2020 2019
GBPm GBPm % % % %
Credit Cards UK 107.6 92.8 2.5 2.0 49.7 53.3
Credit Cards
Europe -- -- -- -- -- --
Credit Cards
commercial 0.1 0.1 4.7 4.8 94.1 90.8
Loans 48.9 48.4 1.1 1.1 41.1 48.0
Mortgages -- 6.0 -- 0.2 -- 1.2
118
40. Risk Management (continued)
(b) Operational risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The Group is subject to the SA method to calculate Pillar 1 operational risk capital, as outlined in the Capital Requirements Regulation (CRR).
Financial crime and fraud are significant drivers of operational risk and the external threat continues to grow across the Financial Services industry. The industry remains under significant threat from cyber attacks. This includes various organised groups targeting institutions through phishing, malware, denial of service and other sophisticated methods. The Group has an appropriate risk framework and continually monitors emerging risks and threats.
Controls and risk mitigants
The Group's risks are assessed utilising a risk management framework methodology which is aligned to the Three Lines of Defence model.
The CRO and the Operational Risk Director, together with a dedicated Operational Risk team, are responsible for:
developing and maintaining the operational risk framework;
working with relevant business areas to make sure that first line responsibilities are understood and that those responsibilities should be executed within the framework;
supporting relevant business areas to embed policies and frameworks and instil a positive risk management culture; and
independently monitoring, assessing and reporting on operational risk profiles and losses.
The Operational Risk function maintains policies defining the minimum requirements for the management of operational risk and financial crime.
Business units and functions assess their operational risks on an ongoing basis via a prescribed Risk and Control Self-Assessment (RCSA) process and Operational Risk Scenario Analysis (ORSA). The RCSA analysis is reviewed and updated on a timely basis by first line business areas to reflect changes to the risk and control environment arising from changes in products, processes and systems. The RCSA outputs are reported to relevant governance bodies. This is supplemented further by an event management process and regular reporting of the Operational Risk profile to the ERC. The ORSA builds on RCSA and event management to identify the forward-looking risk profile and the results are used to inform the Board's decision on any additional requirement for operational risk capital under Pillar II.
The ERC provides oversight of the Group's operational risk profile and provides regular reports and recommendations to the Board Risk Committee (BRC) and the Board.
(c) Liquidity and funding risk
Liquidity risk is the risk that the Group is not able to meet its obligations as they fall due. This includes the risk that a given security cannot be traded quickly enough in the market to prevent a loss if a credit rating falls. Funding risk is the risk that the Group does not have sufficiently stable and diverse sources of funding.
The Group operates within a Liquidity Risk Management Framework (LRMF) to ensure that sufficient funds are available at all times to meet demands from depositors; to fund agreed advances; to meet other commitments as they fall due; and to ensure the Board's Risk Appetite is met.
119
40. Risk Management (continued)
Controls and risk mitigants
Liquidity and funding risk is assessed through the Internal Liquidity Adequacy Assessment Process (ILAAP) on at least an annual basis. The ILAAP process involves detailed internal consideration of the following:
identification of sources of liquidity risk;
quantification of those risks through stress testing;
consideration of management processes and controls to manage the risk;
assessment of the type and quality of liquid asset holdings to mitigate the risk; and
consideration of the levels of contingent funding required to mitigate the risk.
The Group sets formal limits within the LRMF to maintain liquidity risk exposures within the liquidity Risk Appetite set by the Board. The key liquidity and funding measures monitored on a regular basis are:
the internal liquidity requirement;
the liquidity coverage ratio;
the net stable funding ratio;
the loan to deposit ratio;
the encumbrance ratio;
the wholesale funding ratio;
the annual wholesale refinancing amount; and
the unencumbered assets to retail liabilities ratio.
The Group measures and manages liquidity adequacy in line with the above metrics and maintains a liquidity and funding profile to enable it to meet its financial obligations under normal, and stressed, market conditions.
The Group monitors and reports on the composition of its funding base against defined thresholds to avoid funding source and maturity concentration risks.
The Group prepares both short-term and long-term forecasts to assess liquidity requirements and takes into account factors such as Credit Card payment cycles, expected utilisation of undrawn credit limits, investment maturities, customer deposit patterns, and wholesale funding (including TFS) maturities. These reports support daily liquidity management and are reviewed daily by Senior Management along with early warning indicators.
Stress testing of current and forecast financial positions is conducted to inform the Group of required liquidity resources. Reverse stress testing is conducted to inform the Group of the circumstances that would result in liquidity resources being exhausted. Liquidity stress tests are presented to the Liquidity Management Forum and Assets and Liabilities Management Committee (ALCo) on a regular basis to provide evidence that sufficient liquidity is held to meet financial obligations in a stress.
120
40. Risk Management (continued)
The Treasury Director is responsible for formulating, and obtaining Board approval for, an annual funding plan as part of the overall business planning process. The Group is predominantly funded by its retail deposit base which reduces reliance on wholesale funding and, in particular, results in minimal short-term wholesale funding.
A significant part of these retail deposits are repayable on demand on a contractual basis. The Group continuously monitors retail deposit activity so that it can reasonably predict expected maturity flows. These instruments form a stable funding base for the Group's operations because of the broad customer base and the historical behaviours exhibited.
The table below shows the Group's primary funding sources:
2020 2019
GBPm GBPm
On balance sheet
Deposits from banks 500.0 1,663.2
Deposits from customers 7,707.0 10,465.2
Subordinated liabilities and notes 235.0 235.0
Debt securities in issue 1,024.0 1,185.5
-------- ---------
Total on balance sheet funding 9,466.0 13,548.9
-------- ---------
121
40. Risk Management (continued)
The tables below show cash flows payable up to a period of 20 years on an undiscounted basis. These differ from the Statement of Financial Position values due to the effects of discounting on certain Statement of Financial Position items and due to the inclusion of contractual future interest flows.
Derivatives designated in a hedging relationship are included according to their contractual maturity.
Group Within Between Between Between Between
2020 1 1 and 2 and 3 and 4 and Beyond
year 2 years 3 years 4 years 5 years 5 years Total
On balance sheet GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets:
Cash and balances
at
central banks 1,396.1 -- -- -- -- -- 1,396.1
Loans and advances
to customers 5,911.3 1,253.4 992.9 678.3 355.8 280.9 9,472.6
Investment securities
- FVOCI 217.0 187.7 86.3 308.4 77.9 201.3 1,078.6
- Amortised cost 0.9 0.9 1.0 0.9 1.0 27.1 31.8
Other assets 205.7 -- -- -- -- -- 205.7
Assets of the disposal
group 45.1 -- -- -- -- -- 45.1
--------- --------- --------- --------- --------- --------- ---------
Total financial
assets 7,776.1 1,442.0 1,080.2 987.6 434.7 509.3 12,229.9
--------- --------- --------- --------- --------- --------- ---------
Financial liabilities:
Deposits from banks 2.7 1.4 501.1 -- -- -- 505.2
Deposits from customers 6,426.1 797.1 232.8 186.9 115.1 0.4 7,758.4
Debt securities
in issue 795.0 8.8 8.8 8.8 254.4 -- 1,075.8
Derivatives settled
on a net basis
- Derivatives in
accounting hedge
relationships 6.7 11.2 9.1 7.1 5.3 9.1 48.5
Derivatives settled
on a gross basis
- outflows (276.3) -- -- -- -- -- (276.3)
- inflows 274.9 -- -- -- -- -- 274.9
Other liabilities
- Lease liabilities 5.5 5.5 5.5 5.5 5.5 16.8 44.3
- Other liabilities
excluding lease
liabilities 164.2 -- -- -- -- -- 164.2
Subordinated liabilities 4.8 4.6 5.0 4.7 5.1 267.5 291.7
--------- --------- --------- --------- --------- --------- ---------
Total financial
liabilities 7,403.6 828.6 762.3 213.0 385.4 293.8 9,886.7
--------- --------- --------- --------- --------- --------- ---------
Off balance sheet
Contractual lending
commitments 11,872.0 -- -- -- -- -- 11,872.0
--------- --------- --------- --------- --------- --------- ---------
Total off balance
sheet 11,872.0 -- -- -- -- -- 11,872.0
--------- --------- --------- --------- --------- --------- ---------
122
40. Risk Management (continued)
Company Within Between Between Between Between
2020 1 1 and 2 and 3 and 4 and Beyond
year 2 years 3 years 4 years 5 years 5 years Total
On balance sheet GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets:
Cash and balances
at central banks 12.7 -- -- -- -- -- 12.7
Loans and advances
to subsidiary companies 13.5 13.4 13.8 13.5 259.4 267.5 581.1
Other assets 1.7 -- -- -- -- -- 1.7
------- --------- --------- --------- --------- --------- ------
Total financial
assets 27.9 13.4 13.8 13.5 259.4 267.5 595.5
------- --------- --------- --------- --------- --------- ------
Financial liabilities:
Debt securities
in issue 8.8 8.8 8.8 8.8 254.4 -- 289.6
Other liabilities 1.7 -- -- -- -- -- 1.7
Subordinated liabilities 4.8 4.6 5.0 4.7 5.1 267.5 291.7
------- --------- --------- --------- --------- --------- ------
Total financial
liabilities 15.3 13.4 13.8 13.5 259.5 267.5 583.0
------- --------- --------- --------- --------- --------- ------
123
40. Risk Management (continued)
Group(1) Within
1
2019 Between Between Between Between
1 and 2 and 3 and 4 and Beyond
year 2 years 3 years 4 years 5 years 5 years Total
On balance sheet GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets:
Cash and balances
at central banks 1,072.4 -- -- -- -- -- 1,072.4
Loans and advances
to banks 324.2 -- -- -- -- -- 324.2
Loans and advances
to customers 6,361.3 1,429.4 1,191.5 919.6 628.3 3,893.2 14,423.3
Investment securities
- FVOCI 96.6 60.9 279.2 167.5 382.0 111.6 1,097.8
- Amortised cost 1.4 1.4 1.4 1.5 1.5 53.8 61.0
Other assets 208.5 -- -- -- -- -- 208.5
--------- --------- --------- --------- --------- --------- ---------
Total financial
assets 8,064.4 1,491.7 1,472.1 1,088.6 1,011.8 4,058.6 17,187.2
--------- --------- --------- --------- --------- --------- ---------
Financial liabilities:
Deposits from banks 337.1 409.7 945.0 -- -- -- 1,691.8
Deposits from customers 8,582.4 1,348.3 335.6 107.8 185.7 0.5 10,560.3
Debt securities
in issue 448.8 783.4 -- -- -- -- 1,232.2
Derivatives settled
on a net basis
- Derivatives in
economic but not
accounting hedges 0.1 -- -- -- -- -- 0.1
- Derivatives in
accounting hedge
relationships (2.7) 3.2 2.3 2.9 3.9 10.9 20.5
Derivatives settled
on a gross basis
- outflows 4.5 276.0 -- -- -- -- 280.5
- inflows (8.5) (270.0) -- -- -- -- (278.5)
Other liabilities
- Lease liabilities 4.2 5.5 5.5 5.5 5.5 22.0 48.2
- Other liabilities
excluding lease
liabilities 149.2 -- -- -- -- -- 149.2
Subordinated liabilities 5.2 5.7 6.1 6.3 6.5 295.0 324.8
--------- --------- --------- --------- --------- --------- ---------
Total financial
liabilities 9,520.3 2,561.8 1,294.5 122.5 201.6 328.4 14,029.1
--------- --------- --------- --------- --------- --------- ---------
Off balance sheet
Contractual lending
commitments 12,226.2 -- -- -- -- -- 12,226.2
--------- --------- --------- --------- --------- --------- ---------
Total off balance
sheet 12,226.2 -- -- -- -- -- 12,226.2
--------- --------- --------- --------- --------- --------- ---------
(1) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details
124
40. Risk Management (continued)
Company Within Between Between Between Between
2019 1 1 and 2 and 3 and 4 and Beyond
year 2 years 3 years 4 years 5 years 5 years Total
On balance sheet GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets:
Cash and balances
at central banks 13.4 -- -- -- -- -- 13.4
Loans and advances
to subsidiary companies 5.2 5.7 6.1 6.3 6.5 295.0 324.8
------- --------- --------- --------- --------- --------- ------
Total financial
assets 18.6 5.7 6.1 6.3 6.5 295.0 338.2
------- --------- --------- --------- --------- --------- ------
Financial liabilities:
Subordinated liabilities 5.2 5.7 6.1 6.3 6.5 295.0 324.8
------- --------- --------- --------- --------- --------- ------
Total financial
liabilities 5.2 5.7 6.1 6.3 6.5 295.0 324.8
------- --------- --------- --------- --------- --------- ------
125
40. Risk Management (continued)
The table below summarises the Group's assets which are available to support future funding and collateral needs and shows the extent to which these assets are currently pledged for this purpose.
The Group has adopted the definition of encumbered and unencumbered in the EBA's final guidelines on disclosure of June 2014. Asset encumbrance represents a claim to an asset by another party usually in the form of a security interest such as a pledge. Encumbrance reduces the assets available in the event of default by a bank and therefore the recovery rate of its depositors and other unsecured bank creditors.
Group Encumbered Unencumbered Total
2020 GBPm GBPm GBPm
Encumbered asset summary
Investment securities - FVOCI 62.0 998.6 1,060.6
Loans and advances to customers 1,492.9 6,958.4 8,451.3
Other assets 96.8 146.5 243.3
----------- ------------- ------------
1,651.7 8,103.5 9,755.2
----------- ------------- ------------
Encumbered investment securities -
FVOCI
-----------
Debt securities at FVOCI 62.0
-----------
Encumbered loans and advances to customers
Securitisation - Delamare Master Trust 788.9
Personal Loans 704.0
-----------
1,492.9
-----------
Encumbered other assets
Cash Ratio Deposit 31.6
Initial margin held at Clearing Houses 20.0
Variation margin held at Clearing Houses 45.1
Collateral held at counterparties 0.1
-----------
96.8
-----------
Group Encumbered Unencumbered Total
2019 GBPm GBPm GBPm
Restated(1)
Encumbered asset summary
Investment securities - FVOCI 59.7 983.0 1,042.7
Loans and advances to customers 3,730.0 8,695.7 12,425.7
Other assets 111.4 125.2 236.6
----------- ------------- ------------
3,901.1 9,803.9 13,705.0
----------- ------------- ------------
Encumbered investment securities -
FVOCI
-----------
Debt securities at FVOCI 59.7
-----------
Encumbered loans and advances to customers
Securitisation - Delamare Master Trust 2,269.1
Personal Loans 667.2
Mortgages 793.7
-----------
3,730.0
-----------
Encumbered other assets
Cash ratio deposit 28.7
Initial margin held at Clearing Houses 46.8
Variation margin held at Clearing Houses 32.4
Collateral held at counterparties 3.5
-----------
111.4
-----------
126
40. Risk Management (continued)
Loans and advances assigned for use as collateral in securitisation transactions
At 29 February 2020, GBP3,462.7m (2019: GBP3,182.2m) of the Credit Card portfolio had its beneficial interest assigned to a securitisation special purpose entity, Delamare Cards Receivables Trustee Limited, for use as collateral in securitisation transactions. The total encumbered portion of this portfolio is GBP788.9m (2019: GBP2,269.1m).
At 29 February 2020, Delamare Cards MTN Issuer plc had GBP2,012.2m (2019: GBP2,362.2m) notes in issue in relation to securitisation transactions, of which GBP572.2m (2019: GBP922.2m) related to the par value of externally issued notes (refer to note 31). At 29 February 2020 the Group owned GBP1,440.0m (2019: GBP1,440.0m) of class A and class D Credit Card backed notes issued by Delamare Cards MTN Issuer plc.
Of the total GBP1,150.0m (2019: GBP1,150.0m) class A retained Credit Card backed notes, GBPnil (2019: GBP450.0m) is held in a distinct pool for the purposes of collateralising the TFS drawings. All other prepositioned assets with the BoE are held within their single collateral pool.
Loans and advances prepositioned with the BoE
Group 2020 2019
GBPm GBPm
Credit Card backed notes(1) 1,150.0 786.0
Mortgages - 793.7
Unsecured personal Loans 2,484.2 2,365.1
-------- --------
Total assets prepositioned as collateral with the BoE 3,634.2 3,944.8
-------- --------
Collateralised TFS drawings 500.0 1,339.0
-------- --------
(1) Issued by Delamare Cards MTN Issuer plc.
(d) Market risk
Market risk is the risk that the value of earnings or capital is altered through the movement of market rates. This includes interest rates, foreign exchange rates, credit spreads and equities. The Group has no trading book exposures.
Market risk arises in the following ways in the Group:
Interest rate risk is the risk to earnings and economic value from movements in interest rates, hereafter referred to as Interest Rate Risk in the Banking Book (IRRBB);
Credit spread risk is the risk to the value of treasury assets driven by changes in the market perception about the price of credit risk, liquidity premium and other components not explained by IRRBB; hereafter referred to as Credit Spread Risk in the Banking Book (CSRBB);
Foreign exchange risk arises from non-domestic currency investments, non-domestic currency loans, deposits, income and other non-domestic currency contracts;
Interest rate risk associated with TU's investment portfolio; and
Pension obligation risk.
Control and risk mitigants
With the exception of portfolio management in respect of TU, which is undertaken by the TU Investment Committee, with oversight and challenge provided by the Group's Finance function, control of market risk exposure is managed by the ALCo and the Treasury Committee. These bodies provide oversight of the Group's market risk position at a detailed level, providing regular reports and recommendations to the BRC and the Board.
127
40. Risk Management (continued)
Interest rate risk in the Banking Book
IRRBB is the risk of value changes to both earnings and capital arising from timing differences in the re-pricing of the Group's balance sheet and unexpected changes to the level and/or shape of the yield curve.
The Group offers lending and savings products with varying interest rate features and maturities which create re-pricing mismatches and therefore potential interest rate risk exposures. The Group is therefore exposed to interest rate risk through its dealings with retail banking products as well as through its limited wholesale market activities.
IRRBB is the main market risk that could affect the Group's net interest income.
Control and risk mitigants
The Group has established limits for its Risk Appetite in this area and stress tests are performed using sensitivity to fluctuations in underlying interest rates in order to monitor this risk.
The Group has established a specific Risk Appetite for IRRBB which is implemented via the Market Risk Policy, a range of specific risk limits and market risk controls. The Treasury function is responsible for regular stress testing of risk positions against multiple interest rate scenarios to determine the sensitivity of earnings and capital valuations to ensure compliance with Board Risk Appetite and limits.
IRRBB management information is produced by the Balance Sheet Management team and is reviewed by the ALCo at each of its monthly meetings. IRRBB primarily arises from the retail lending portfolios and retail deposits. The Balance Sheet Management team is responsible for ensuring hedging strategies are implemented as required to ensure that the Group remains within its stated Risk Appetite and limits.
The main hedging instruments used are interest rate swaps and the residual exposure against the two Board Risk Appetite metrics is reported monthly to the ALCo and Board.
Capital at Risk (CaR): The CaR approach assesses the sensitivity of the Group's capital to movements in interest rates. The scenarios considered include both parallel and non-parallel movements of the yield curve and have been designed to assess impacts across a suitable range of severe but plausible movements in interest rates. The CaR measure is an aggregate measure of three separate risk components, each being a distinct form of interest rate risk - repricing risk (including basis risk), pipeline risk and prepayment risk. A fourth risk, CSRBB, has been added to the CaR measure in preparation for the EBA guidelines on the management of interest rate risk arising from non-trading book activities.
The table below shows the Group's CaR. At 29 February 2020 the Group was exposed to net residual risk via a downward rate scenario (2019: downward rate scenario).
2020 2019
Downward rate Downward rate
scenario scenario
Capital at Risk Sensitivity GBPm GBPm
Repricing risk (21.3) (9.8)
Pipeline risk (0.1) (0.2)
Prepayment risk (0.7) 0.4
CSRBB (8.6) (9.3)
-------------- --------------
Total (30.7) (18.9)
-------------- --------------
Annual Earnings at Risk Sensitivity: This measures the sensitivity of the Group's earnings to movements in interest rates over the next 12 months based on expected cash flows. The Group assesses the impact of a +/- 0.25%, 0.50%, 0.75%, 1% shock in rates versus the base case scenario (2019: +/- 0.25%, 0.50%, 0.75%, 1%). The most adverse scenario is measured against Risk Appetite. At 29 February 2020, the most adverse scenario was a upward rate shock, with an impact of (1.17%) (28 February 2019: (1.10%) with a downward rate shock). Any adverse effects of the current macroeconomic environment on IRRBB metrics will be mitigated with hedging to limit the Group's exposure to movements in interest rates and to ensure compliance with Board Risk Appetite and limits.
128
40. Risk Management (continued)
(e) Foreign exchange risk
Foreign exchange risk is the risk that the value of transactions in currencies other than Sterling is altered by the movement of exchange rates.
The Group's Risk Appetite permits investment in non-sterling denominated bonds and the Group may raise funding from the wholesale markets in currencies other than sterling. Foreign exchange exposure arises if these are not hedged. Foreign exchange exposure may also arise through the Group's 'Click and Collect' Travel Money provision and invoices received which are denominated in foreign currencies.
The Group issued Asset Backed Floating Rate Notes in US dollars during the prior year. At the time of the issuance, the value of the notes were effectively hedged through a cross currency interest rate swap arrangement.
Control and risk mitigants
Substantially all non-domestic currency exposure is hedged to reduce exposure to a minimum level, within Board-approved limits. The residual exposure is not material and, as such, no sensitivity analysis is disclosed.
The Group's maximum exposure to foreign exchange risk at 29 February 2020 was GBP(274.8)m (2019: GBP(261.7)m), representing the Group's net liabilities (2019: net liabilities) denominated in foreign currencies.
(f) TU investment portfolio
The TU insurance portfolio assets are invested with a number of counterparties. These investments are predominantly comprised of government securities, corporate bonds and short-term cash investments.
The main risks relate to changes in:
interest rates affecting fair values as a proportion of the bonds are fixed rate in nature; and
credit quality, as the range of assets held are issued by a variety of institutions with different credit characteristics.
Controls and risk mitigants
Portfolio management is undertaken by the TU investment committee. The Group's Finance function provides oversight and challenge.
(g) Pension obligation risk
Pension obligation risk is the risk to a company caused by its contractual or other liabilities to or with respect to a pension scheme (whether established for its employees or those of a related company or otherwise). The Group is a participating employer in the Tesco Pension Scheme (operated by TSL) and is exposed to pension risk through its obligation to the scheme. TSL has recognised the appropriate net liability of the Tesco pension scheme in accordance with IAS 19 (refer to note 39).
Controls and risk mitigants
The Group undertakes an assessment of the impact of its share of the pension scheme under a stress as part of its annual Internal Capital Adequacy Assessment Process (ICAAP).
(h) Insurance risk
The Group is exposed to insurance risk through its 49.9% ownership of TU, an authorised insurance company.
The Group defines insurance risk as the risks accepted through the provision of insurance products in return for a premium. These risks may or may not occur as expected and the amount and timing of these risks are uncertain and determined by events outside of the Group's control (e.g. flood or vehicular accident). The Group's aim is to actively manage insurance risk exposure, with particular focus on those risks that impact profit volatility.
Insurance risk is typically categorised in the following way:
Underwriting risk - Related to the selection and pricing (or quantification) of the risk currently being transferred from customers to an insurer; and
Reserving risk - Related to valuation and management of financial resources sufficient to pay claims for the risk already transferred from customers to an insurer.
129
40. Risk Management (continued)
Controls and risk mitigants
The Group's oversight of TU is primarily provided by its representation on the TU Board. TU operates a separate risk framework with dedicated risk and compliance teams and a suite of TU risk policies to ensure that the TU insurance portfolio is operating within agreed Risk Appetite. Performance of the portfolio is monitored and reported to the ERC on a monthly basis against specific key performance indicator thresholds and limits.
(i) Residual price risk
Residual price risk is the risk that the fair value of a financial instrument and its associated hedge will fluctuate because of changes in market prices, for reasons other than interest rate or credit risk. The Group has debt and equity investment securities that are held at fair value in the Consolidated Statement of Financial Position.
Controls and risk mitigants
The Group has established appropriate hedging strategies to mitigate the interest rate and foreign exchange risks. Residual price risk remains.
The table below demonstrates the Group's exposure to residual price risk at the year end. Included in the table is the expected impact of a 10% shock in market prices on the Group's FVOCI investment securities. The figures shown are prior to hedging activities which mitigate the interest rate and foreign exchange risks.
Fair value Impact of 10% Value after
shock 10% shock
2020 2019 2020 2019 2020 2019
GBPm GBPm GBPm GBPm GBPm GBPm
Government-backed investment
securities 315.9 185.5 (31.6) (18.6) 284.3 166.9
Gilts 40.7 55.1 (4.1) (5.5) 36.6 49.6
Supranational investment
securities 393.9 406.1 (39.4) (40.6) 354.5 365.5
Other investment securities 306.9 393.5 (30.7) (39.4) 276.2 354.1
Equity securities 3.2 2.5 (0.3) (0.3) 2.9 2.2
-------- -------- -------- -------- ------ ------
1,060.6 1,042.7 (106.1) (104.4) 954.5 938.3
-------- -------- -------- -------- ------ ------
(j) Legal and regulatory compliance
Regulatory risk is the risk of reputational damage, liability or material loss from failure to comply with the requirements of the financial services regulators or related codes of best practice applicable to the business areas within which the Group operates. The risk of business conduct leading to poor outcomes can arise as a result of an over-aggressive sales strategy; poor management of sales processes, credit assessments and credit processes; or failure to comply with other regulatory requirements. The Group's Risk Appetite is to comply with the relevant rules, regulations and data protection legislation. Where breaches occur, the Group will take appropriate rectifying action. The Group seeks to deliver fair outcomes for customers.
Controls and risk mitigants
As part of the Group's Policy Framework, a dedicated Compliance Advisory (CA) team is responsible for the Compliance Policy which is approved by the Group's Board, as well as for monitoring, challenge and oversight of regulatory risk and compliance across the Group's business. Guidance and advice to enable the business to operate in a compliant manner is provided by the CA team and the Legal team.
The CA team is also responsible for the detailed regulatory policies which underpin the Compliance Policy. These are further supported by Operational and Product Guides that provide relevant practical guidance to business and operational areas to enable them to comply with the regulatory policies.
The Group has also established the Regulatory Change Forum which is responsible for the oversight of communications from all external regulators and monitoring regulatory change, including impact analysis and action tracking.
130
40. Risk Management (continued)
The Group's Legal function has responsibility for commercial legal work, regulatory legal compliance, litigation/dispute resolution matters, advising on competition law and supporting the Group's Treasury activity. The Legal team also comprises the Company Secretarial function which, in addition to its role supporting the Board and maintaining statutory books, ensures the Group complies with all applicable governance codes.
Business areas manage conduct risk and use a range of management information to monitor the fair treatment of customers. A framework of product-led conduct management information has been developed and is reviewed by Senior Management in the business lines. Customer outcomes are also assessed as part of the development and design of new products and through annual product reviews of existing products. The ERC and the Board review and challenge delivery of fair outcomes for customers.
41. Financial Instruments
Classification of financial assets and liabilities
The following tables analyse the financial assets and financial liabilities in accordance with the categories of financial instruments in IFRS 9.
FVOCI -
Amortised Designated FVOCI - equity
Group(1) cost as at FVPL debt instruments instruments Total
2020 GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash and balances with
central banks 1,369.3 26.3 -- -- 1,395.6
Loans and advances to
customers 8,451.3 -- -- -- 8,451.3
Derivative financial
instruments -- 5.7 -- -- 5.7
Investment securities:
- FVOCI -- -- 1,057.4 3.2 1,060.6
- Amortised cost 21.0 -- -- -- 21.0
Other assets 243.3 -- -- -- 243.3
Assets of the disposal
group -- 45.1 -- -- 45.1
Total financial assets 10,084.9 77.1 1,057.4 3.2 11,222.6
Financial liabilities
Deposits from banks (500.0) -- -- -- (500.0)
Deposits from customers (7,707.0) -- -- -- (7,707.0)
Debt securities in issue (1,024.0) -- -- -- (1,024.0)
Derivative financial
instruments -- (50.7) -- -- (50.7)
Other liabilities (199.0) -- -- -- (199.0)
Subordinated liabilities (235.0) -- -- -- (235.0)
Total financial liabilities (9,665.0) (50.7) -- -- (9,715.7)
(1) On a Company basis, cash and balances with central banks is GBP12.7m and loans and advances to subsidiary companies is GBP483.2m, both of which are held at amortised cost.
All derivative financial instruments are held for economic hedging purposes, although not all derivatives are designated as hedging instruments under the terms of IFRS 9.
131
41. Financial Instruments (continued)
FVOCI -
Amortised Designated FVOCI - equity
Group(1) cost as at FVPL(3) debt instruments instruments Total
2019 GBPm GBPm GBPm GBPm GBPm
Restated(2)
Financial assets
Cash and balances with
central banks 1,041.6 30.5 -- -- 1,072.1
Loans and advances to
banks 324.2 -- -- -- 324.2
Loans and advances to
customers 12,425.7 -- -- -- 12,425.7
Derivative financial
instruments -- 31.3 -- -- 31.3
Investment securities:
- FVOCI -- -- 1,040.2 2.5 1,042.7
- Amortised cost 28.8 -- -- -- 28.8
Other assets 236.6 -- -- -- 236.6
Total financial assets 14,056.9 61.8 1,040.2 2.5 15,161.4
Financial liabilities
Deposits from banks (1,663.2) -- -- -- (1,663.2)
Deposits from customers (10,465.2) -- -- -- (10,465.2)
Debt securities in issue (1,185.5) -- -- -- (1,185.5)
Derivative financial
instruments -- (60.2) -- -- (60.2)
Other liabilities (185.7) -- -- -- (185.7)
Subordinated liabilities (235.0) -- -- -- (235.0)
Total financial liabilities (13,734.6) (60.2) -- -- (13,794.8)
(1) On a Company basis, cash and balances with central banks is GBP13.4m and loans and advances to subsidiary companies is GBP235.0m, both of which are held at amortised cost.
(2) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.
(3) All of the Group's financial assets and financial liabilities designated at FVPL were designated as such on the later of 1 March 2018 or origination.
132
41. Financial Instruments (continued)
Offsetting
The following tables show those financial assets and liabilities subject to offsetting, enforceable master netting arrangements and similar agreements.
Group Related amounts
not offset
2020 Gross and net Financial Collateral Net amounts
amounts instruments pledged
presented in
Statement
of Financial
Position
GBPm GBPm GBPm GBPm
Financial assets
Derivative financial instruments 5.7 (4.3) -- 1.4
------------
Total financial assets 5.7 (4.3) -- 1.4
Financial liabilities
Derivative financial instruments (50.7) 4.3 45.2 (1.2)
------------
Total financial liabilities (50.7) 4.3 45.2 (1.2)
Group Related amounts
not offset
2019 Gross and net Financial Collateral Net
amounts instruments pledged amounts
presented in
Statement
of Financial
Position
GBPm GBPm GBPm GBPm
Financial assets
Derivative financial instruments 31.3 (22.0) (12.5) (3.2)
Reverse repurchase agreements 324.2 (324.2) 3.0 3.0
------------
Total financial assets 355.5 (346.2) (9.5) (0.2)
Financial liabilities
Derivative financial instruments (60.2) 22.0 32.9 (5.3)
Repurchases, securities lending
and similar agreements(1) (324.2) 324.2 -- --
------------
Total financial liabilities (384.4) 346.2 32.9 (5.3)
(1) In the prior year, repurchases, securities lending and similar agreements are included within the Deposits from Banks balance of GBP1,663.2m in the Consolidated Statements of Financial Position. There were no such agreements at 29 February 2020.
133
41. Financial Instruments (continued)
For the financial assets and financial liabilities subject to enforceable master netting arrangements above, each agreement between the Group and the counterparty allows for net settlement of the relevant financial assets and financial liabilities when both elect to settle on a net basis. In the absence of such an election, financial assets and financial liabilities will be settled on a gross basis. However, each party to the master netting agreement or similar agreement will have the option to settle all such amounts on a net basis in the event of default of the other party.
Fair values of financial assets and financial liabilities
Except as detailed in the following table, the Directors consider that the carrying value amounts of financial assets and financial liabilities recorded on the Statement of Financial Position are approximately equal to their fair values(1) .
Group(2) 2020 2019
Carrying Fair Carrying Fair
value Value value value
GBPm GBPm GBPm GBPm
Financial assets
Loans and advances to customers(3) 8,451.3 8,626.9 12,425.7 12,607.3
Investment securities - amortised
cost 21.0 27.6 28.8 28.2
8,472.3 8,654.5 12,454.5 12,635.5
Financial liabilities
Deposits from customers 7,707.0 7,710.7 10,465.2 10,427.1
Debt securities in issue 1,024.0 1,040.2 1,185.5 1,189.5
Subordinated liabilities 235.0 214.5 235.0 182.2
8,966.0 8,965.4 11,885.7 11,798.8
The only financial assets and financial liabilities which are carried at fair value in the Consolidated Statement of Financial Position at year end are cash balances relating to the Group's Travel Money offering, FVOCI investment securities, assets of the disposal group and derivative financial instruments. The valuation techniques and inputs used to derive fair values at the year end are described below.
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. Where an active market is considered to exist, fair values are based on quoted prices. For instruments which do not have active markets, fair value is calculated using present value models, which take individual cash flows together with assumptions based on market conditions and credit spreads, and are consistent with accepted economic methodologies for pricing financial instruments.
In each case the fair value is calculated by discounting future cash flows using benchmark, observable market interest rates.
(1) Fair value disclosures are not required for lease liabilities.
(2) On a Company basis, loans and advances to subsidiary companies is GBP483.2m (2019: GBP235.0m), with a fair value of GBP463.6m (2019: GBP182.2m). On a Company basis, subordinated liabilities have the same carrying value and fair value as set out in the Group table above.
(3) During the year, secured Mortgage lending balances have been reclassified from loans and advances to customers to assets of the disposal group and are now measured at FVPL following the change in the Group's business model in respect of these balances with effect from 1 September 2019 resulting from the Group's decision to sell its Mortgage business.
134
41. Financial Instruments (continued)
The table below categorises all financial instruments held at fair value (recurring measurement) and the fair value of financial instruments held at amortised cost according to the method used to establish the fair value disclosed.
Group(1) Level 1 Level 2 Level 3 Total 2020 GBPm GBPm GBPm GBPm Financial assets carried at fair value Cash and balances with central banks -- 26.3 -- 26.3 Investment securities - FVOCI 1,057.4 -- 3.2 1,060.6 Derivative financial instruments: - Interest rate swaps -- 5.7 -- 5.7 Assets of the disposal group(2) -- -- 45.1 45.1 Financial assets carried at amortised cost Loans and advances to customers -- -- 8,626.9 8,626.9 Investment securities - amortised cost -- 27.6 -- 27.6 Total 1,057.4 59.6 8,675.2 9,792.2 Financial liabilities carried at fair value Derivative financial instruments: - Interest rate swaps -- 50.7 -- 50.7 Financial liabilities carried at amortised cost Deposits from customers -- -- 7,710.7 7,710.7 Debt securities in issue 1,040.2 -- -- 1,040.2 Subordinated liabilities -- 214.5 -- 214.5 Total 1,040.2 265.2 7,710.7 9,016.1
(1) On a company basis, loans and advances to subsidiary companies of GBP463.6m, are categorised as level 2. On a company basis, subordinated liabilities have the same fair value and categorisation as set out in the Group table above.
(2) During the year, secured Mortgage lending balances have been reclassified from loans and advances to customers to assets of the disposal group and are now measured at FVPL following the change in the Group's business model in respect of these balances with effect from 1 September 2019 resulting from the Group's decision to sell its Mortgage business.
135
41. Financial Instruments (continued) Group Level 1 Level 2 Level 3 Total 2019 GBPm GBPm GBPm GBPm Financial assets carried at fair value Cash and balances with central banks -- 30.5 -- 30.5 Investment securities - FVOCI 1,040.2 -- 2.5 1,042.7 Derivative financial instruments: - Interest rate swaps -- 31.3 -- 31.3 - Forward foreign currency contracts -- -- -- -- Financial assets carried at amortised cost Loans and advances to customers -- -- 12,607.3 12,607.3 Investment securities - amortised cost -- 28.2 -- 28.2 Total 1,040.2 90.0 12,609.8 13,740.0 Financial liabilities carried at fair value Derivative financial instruments: - Interest rate swaps -- 50.9 -- 50.9 - Forward foreign currency contracts -- 0.2 -- 0.2 - Cross currency interest rate swaps -- 9.1 -- 9.1 Financial liabilities carried at amortised cost Deposits from customers -- -- 10,427.1 10,427.1
Debt securities in issue 1,189.5 -- -- 1,189.5 Subordinated liabilities -- 182.2 -- 182.2 Total 1,189.5 242.4 10,427.1 11,859.0
(1) On a company basis, loans and advances to subsidiary companies of GBP182.2m, are categorised as level 2. On a company basis, subordinated liabilities have the same fair value and categorisation as set out in the Group table above.
136
41. Financial Instruments (continued)
There are three levels to the hierarchy as follows:
Level 1
Quoted prices (unadjusted) 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 (for example, as prices) or indirectly (for example, derived from prices).
Fair values of cash balances relating to the Group's Travel Money offering are considered to equate to their carrying value as they are short-term in nature.
Derivative financial instruments which are categorised as Level 2 are those which either:
Have future cash flows which are on known dates and for which the cash flow amounts are known or calculable by reference to observable interest and foreign exchange rates; or
Have future cash flows which are not pre-defined, but for which the fair value of the instrument has very low sensitivity to changes in estimate of future cash flows.
In each case the fair value is calculated by discounting future cash flows using benchmark, observable market interest rates.
Fair values of investment securities classified as amortised cost are based on quoted prices, where available, or calculated using discounted cash flows applying market rates.
The estimated fair value of subordinated liabilities is calculated using a discounted cash flow model based on a current yield curve appropriate for the remaining term to maturity.
137
41. Financial Instruments (continued)
Level 3
Inputs for the asset or liability are not based on observable market data (unobservable inputs).
Loans and advances to customers are net of charges for impairment. The estimated fair value of loans and advances represents the discounted amount of estimated future cash flows expected to be received. Expected cash flows are discounted at current market rates to determine fair value.
The fair value of assets of the disposal group is based on the contract price agreed in respect of the sale of the Group's Mortgage business.
The estimated fair value of deposits from customers represents the discounted amount of estimated future cash flows expected to be paid. Expected cash flows are discounted at current market rates to determine fair value.
The estimated fair value of financial assets classified as FVOCI, being the Group's interest in VISA Inc., is described in note 21.
Transfers
There were no transfers between Levels 1 and Level 2 in the year to 29 February 2020 (2019: no transfers).
There were no transfers between Level 2 and Level 3 in the year to 29 February 2020 (2019: no transfers).
138
42. Cash Flows from Operating Activities
Group Company
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
Non cash and other items included Restated(1) Restated(1)
in operating
profit before taxation
Expected credit loss on loans and
advances (refer notes 11 & 15) 178.0 163.5 0.5 --
Reversal of expected credit loss
on investment securities (refer note
11) -- (0.1) -- --
Depreciation and amortisation (refer
notes 27 & 28) 140.9 84.7 -- --
Loss/(gain) on disposal of investment
securities (refer note 9) 0.2 (8.4) -- --
Disposal of non-current assets (refer
notes 27 & 28) -- 1.4 -- --
Gain on disposal of assets of the
disposal group (refer note 15) (43.0) -- -- --
Provision for liabilities and charges
(refer note 32) 50.5 41.7 -- --
Share of profit of joint venture
(refer note 25) (10.2) (7.9) -- --
Equity settled share based payments
(refer note 13) 1.4 (4.8) -- --
Interest paid on debt securities
in issue (refer note 6) 28.5 23.4 5.1 --
Interest received on assets held
to hedge debt securities in issue 9.5 0.4 -- --
Interest on subordinated liabilities
(refer note 6) 5.3 4.9 5.3 4.9
Interest on lease liabilities (refer
note 6) 2.5 2.6 -- --
Research and development tax claim (0.3) -- -- --
Fair value movements (11.8) (30.4) -- --
----------
Total 351.5 271.0 10.9 4.9
----------
Changes in operating assets and liabilities
Net movement in mandatory balances
with central banks (2.9) (13.6) -- --
Net movement in loans and advances
to banks 324.2 (324.2) -- --
Net movement in loans and advances
to customers 3,808.0 (1,268.0) -- --
Net movement in prepayments and accrued
income (6.1) (0.1) (0.9) (0.1)
Net movement in other assets (7.1) 44.0 -- --
Net movement in assets of the disposal
group 4.4 -- -- --
Net movement in deposits from banks (1,163.2) 124.2 -- --
Net movement in deposits from customers (2,759.1) 1,219.7 -- --
Net movement in accruals and deferred
income (3.6) (2.1) -- 0.1
Provisions utilised (46.0) (71.2) -- --
Net movement in other liabilities 14.9 3.7 -- --
----------
Total 163.5 (287.6) (0.9) --
----------
(1) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.
139
43. Reconciliation of Liabilities Relating to Financing Activities
Non-cash movements
Group At 1 March Financing Fair Accrued Other At 29 February
2019 Cash flows value Interest 2020
change
GBPm GBPm GBPm GBPm GBPm GBPm
Debt securities in issue (1,185.5) 160.9 1.3 (0.1) (0.6) (1,024.0)
Subordinated liabilities
and notes (235.0) -- -- -- -- (235.0)
Interest payable (4.0) 29.3 -- (30.0) -- (4.7)
Assets held to hedge fixed
rate bonds(1) 16.4 13.0 (25.5) 0.2 -- 4.1
Lease liabilities (34.5) 4.2 -- (2.5) -- (32.8)
Total liabilities from
financing activities (1,442.6) 207.4 (24.2) (32.4) (0.6) (1,292.4)
Non-cash movements
Company At 1 March Financing Fair Accrued Other At 29 February
2019 Cash flows value Interest 2020
change
GBPm GBPm GBPm GBPm GBPm GBPm
Debt securities in issue -- (249.1) -- (0.1) -- (249.2)
Subordinated liabilities
and notes (235.0) -- -- -- -- (235.0)
Interest payable (0.7) 9.4 -- (10.4) -- (1.7)
Assets held to hedge fixed -- -- -- -- -- --
rate bonds(1)
Total liabilities from
financing activities (235.7) (239.7) -- (10.5) -- (485.9)
Non-cash movements
Group At 1 March Financing Fair Accrued Other At 28 February
2018 Cash flows value Interest 2019
change
Restated(2) GBPm GBPm GBPm GBPm GBPm GBPm
Debt securities in issue (1,347.6) 154.1 2.4 (2.3) 7.9 (1,185.5)
Subordinated liabilities
and notes (235.0) -- -- -- -- (235.0)
Interest payable (3.9) 28.2 -- (28.3) -- (4.0)
Assets held to hedge fixed
rate bonds(1) 17.9 (0.8) (0.7) -- -- 16.4
Lease liabilities(3) (35.6) 3.7 -- (2.6) -- (34.5)
Total liabilities from
financing activities (1,604.2) 185.2 1.7 (33.2) 7.9 (1,442.6)
Non-cash movements
Company At 1 March Financing Fair Accrued Other At 28 February
2018 Cash flows value Interest 2019
change
Restated(2) GBPm GBPm GBPm GBPm GBPm GBPm
Subordinated liabilities
and notes (235.0) -- -- -- -- (235.0)
Interest payable (0.7) 4.7 -- (4.8) -- (0.8)
Total liabilities from
financing activities (235.7) 4.7 -- (4.8) -- (235.8)
(1) Assets held to hedge fixed rate bonds and securitisation bonds are included within derivative financial instruments in the Consolidated Statement of Financial Position on page 38.
(2) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.
(3) Lease liabilities are included within total other liabilities in the Consolidated Statement of Financial Position on page 38.
140
44 . Capital Resources
On 1 March 2018, IFRS 9 came into force and a transitional period was introduced, allowing the Company (being the regulated entity) to phase in the IFRS 9 impact on capital over a period of 5 years.
Under the transitional provisions, the impact as at 29 February 2020 on common equity tier 1 is GBP22.8m (February 2019: GBP7.8m). Common equity tier 1 is expected to reduce from inception to end point by approximately 164 basis points (unaudited).
The following tables analyse the regulatory capital resources of the Company applicable as at the year end on a 'transitional' and 'end point' position for the current year as related to the IFRS 9 transitional period:
Transitional End Point Transitional
2020 2020 2019
GBPm GBPm GBPm
Restated(1)
Movement in common equity tier 1 capital:
At the beginning of the year 1,611.5 1,447.1 1,501.0
Impact of initial application of IFRS 9 - - (166.0)
Profit attributable to shareholders 92.8 92.8 135.1
Gains and losses on liabilities arising from own credit 0.1 0.1 -
Other reserves 4.0 4.0 (14.9)
Ordinary dividends (50.0) (50.0) (50.0)
IFRS 9 transitional add back (22.8) - 164.4
Movement in intangible assets 86.0 86.0 46.9
Deferred tax liabilities related to intangible assets -- - (5.0)
At the end of the year 1,721.6 1,580.0 1,611.5
(1) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.
141
44. Capital Resources (continued)
Transitional End Point Transitional
2020 2020 2019
GBPm GBPm GBPm
Restated(1)
Common equity tier 1
Shareholders' equity (accounting capital) 1,719.0 1,719.0 1,671.4
Regulatory adjustments
Unrealised losses on cash flow hedge reserve 0.3 0.3 1.0
Adjustment to own credit/additional value
adjustments (1.1) (1.1) (1.1)
Intangible assets (138.2) (138.2) (224.2)
IFRS 9 transitional add back 141.6 -- 164.4
Common equity tier 1 capital 1,721.6 1,580.0 1,611.5
Tier 2 capital (instruments and provisions)
Undated subordinated notes 45.0 45.0 45.0
Dated subordinated notes net of regulatory
amortisation 190.0 190.0 190.0
Tier 2 capital (instruments and provisions)
before regulatory adjustments 235.0 235.0 235.0
Regulatory adjustments
Material holdings in financial sector entities (21.0) (21.0) (28.8)
Total regulatory adjustments to tier 2 capital
(instruments and provisions) (21.0) (21.0) (28.8)
Total tier 2 capital (instruments and provisions) 214.0 214.0 206.2
Total capital 1,935.6 1,794.0 1,817.7
Total risk-weighted assets (unaudited) 8,310.1 8,274.8 9,860.1
Common equity tier 1 ratio (unaudited) 20.7% 19.1% 16.3%
Tier 1 ratio (unaudited) 20.7% 19.1% 16.3%
Total capital ratio (unaudited) 23.3% 21.7% 18.4%
Total capital requirement (TCR) refers to the amount and quality of capital the Group must maintain to comply with the CRR Pillar 1 and 2A capital requirements. The TCR for TPFG as at 29 February 2020 is 12.32% plus GBP52.0m as a static add-on for pension obligation risk.
(1) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.
142
44. Capital Resources (continued)
The table below reconciles shareholders' equity of the Group to shareholders' equity of the Company:
2020 2019
GBPm GBPm
Restated(1)
Tesco Personal Finance Group PLC (Group) shareholders' equity 1,744.4 1,681.6
Share of joint venture's retained earnings (17.9) (7.7)
Share of joint venture's AFS reserve (7.5) (2.5)
Tesco Personal Finance Plc (Company) shareholders' equity 1,719.0 1,671.4
(1) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.
It is the Group's policy to maintain a strong capital base, to expand it as appropriate and to utilise it efficiently throughout its activities to optimise the return to shareholders while maintaining a prudent relationship between the capital base and the underlying risks of the business. In carrying out this policy, the Group has regard to the supervisory requirements of the Prudential Regulation Authority (PRA).
The Group is required to submit ICAAP reports to the PRA which set out future business plans, the impact on capital availability, capital requirements and the risk to capital adequacy under stress scenarios.
The Group also maintains a Recovery Plan that provides the framework and a series of recovery options which could be deployed in a severe stress event impacting capital or liquidity positions. The Recovery Plan is reviewed and approved by the Board on at least an annual basis.
The Group has met all relevant capital requirements throughout the year.
Leverage ratio (unaudited)
The Basel III reforms include the introduction of a capital leverage measure as defined as the ratio of tier 1 capital to total exposure. This is intended to reinforce the risk-based capital requirements with a simple, non-risk based 'backstop' measure.
The Group has published the leverage ratio on a Capital Requirements Directive IV basis using the existing exposure approach:
Exposures for leverage ratio (unaudited) Transitional End point Transitional
2020 2020 2019
Restated(1)
GBPm GBPm
Total balance sheet exposures 11,645.2 11,645.2 15,657.8
Adjustments for entities which are consolidated
for accounting purposes but outside scope of
regulatory consolidation (25.4) (25.4) (10.2)
Removal of accounting value of derivatives and
SFTs (5.7) (5.7) (355.5)
Exposure value for derivatives and SFTs 9.3 9.3 45.5
Off balance sheet: unconditionally cancellable
(10%) 1,187.2 1,187.2 1,208.6
Off balance sheet: other (20%) -- -- 28.3
Regulatory adjustment - intangible assets (138.2) (138.2) (224.2)
Regulatory adjustment - other, including IFRS
9 89.2 (52.4) 124.5 Total 12,761.6 12,620.0 16,474.8 Common equity tier 1 1,721.6 1,580.0 1,611.5 Leverage ratio 13.5% 12.5% 9.8%
(1) The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.
143
44. Capital Resources (continued)
Capital Management
The Group operates an integrated risk management process to identify, quantify and manage risk in the Group. The quantification of risk includes the use of both stress and scenario testing. Where capital is considered to be an appropriate mitigant for a given risk, this is identified and reflected in the Group's internal capital assessment. The capital resources of the Group are regularly monitored against the higher of this internal assessment and regulatory requirements. Capital adequacy and performance against the Group's capital plan is monitored daily, with monthly reporting provided to the Board, ALCo and Capital Management Forum.
Pillar 2 capital methodologies
The PRA updated its Pillar 2 capital methodologies in July 2016 following the publication of prudential requirements for implementation of ring-fencing and issued a policy statement in October 2017 refining the Pillar 2A framework.
These proposals are aimed at promoting the safety and soundness of PRA-regulated firms, to facilitate a more effective banking sector and to make the PRA's Pillar 2A capital assessment more proportionate by addressing some of the concerns over the differences between SA and internal ratings-based risk weights. This will continue to be managed as part of the Group's ICAAP in line with the PRA policy statement issued in October 2017. The PRA general safety and soundness objectives in relation to continuity of core services in the UK and ring-fencing of banking activities where core deposits are in excess of GBP25bn came into effect from 1 January 2019. The Group has not exceeded this threshold and was not therefore automatically required to ring-fence the Group's core activities by the 2019 implementation date.
Credit Risk
In December 2017 the Basel Committee on Banking Supervision (BCBS) finalised Basel III reforms for credit risk, including revisions to the calculation of risk-weighted assets and enhancements to the risk-sensitivity of the SAs to credit risk, constraining the use of internal model approaches by placing limits on certain inputs and replacing the existing Basel II output floors with a risk-sensitive floor based on the Committee's Basel III standardised approaches. The final Basel III reforms will be implemented in January 2023.
Operational risk
In December 2017, the BCBS finalised Basel III reforms for operational risk by replacing all existing approaches in the Basel II framework with a single risk-sensitive SA to be used by all banks. The new SA increases the sensitivity by combining a refined measure of gross income with the bank's internal historical losses. The final Basel III reforms will be implemented in January 2023.
Leverage
At present the Group has no minimum UK leverage requirement as it is currently exempt from the UK Leverage Framework Regime (LFR), which only applies to institutions with retail deposits over GBP50 billion. In December 2017, the BCBS finalised Basel III reforms for the leverage ratio. The final Basel III reforms will be implemented in January 2023. In June 2019, the EU published updates to the CRR which will result in a minimum leverage requirement of 3% from June 2021.
The Group is subject to reporting and disclosure requirements under the CRR and is not currently subject to temporary modifications of the UK LFR.
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44. Capital Resources (continued)
The European Commission's minimum requirements for own funds and eligible liabilities (MREL)
MREL requires banks to maintain at all times a sufficient aggregate amount of own funds and eligible liabilities (that may be bailed-in if required). MREL will, on full implementation, be set on a firm-specific basis and calculated as the sum of two components: a loss absorption amount, being the amount needed to absorb losses up to and in resolution; and a recapitalisation amount which reflects the capital that a firm is likely to need post resolution.
In addition, the Group became subject to MREL on an interim basis from 1 January 2020, with full implementation from 1 January 2022. The requirements are factored into the Group's funding and capital plans. TPFG undertook an initial GBP250.0m issuance of MREL-compliant debt in July 2019 in support of the interim requirements and subsequently invested the proceeds in the Company via an intercompany subordinated loan. Further issuances may be required to support end-state requirements.
MREL is expected to be set annually over the transitional period until 1 January 2022. An interim MREL requirement of 18% of risk-weighted assets from 1 January 2020 until 31 December 2021 has been set. At 29 February 2020, the MREL ratio was 26.3%.
45. Related Party Transactions
During the year the Group had the following transactions with related parties:
Transactions involving Directors and other key connected persons
For the purposes of IAS 24, 'Related Party Disclosures', the Group's key Management personnel comprise Directors of the Group. The captions in the Group's primary Financial Statements include the following amounts attributable, in aggregate, to key connected persons of both the Group and Tesco, the Company's parent undertaking.
Group 2020 2019
GBPm GBPm
Loans and advances to customers(1)
At the beginning of the year 0.3 0.3
Loans issued during the year -- 0.3
Loan repayments during the year (0.1) (0.3)
Loans outstanding at the end of the year 0.2 0.3
Interest income earned -- --
Deposits from customers(1)
Deposits at the beginning of the year 0.2 0.2
Deposits received during the year 1.2 0.6
Deposits repaid during the year (0.5) (0.7)
Deposits at the end of the year 0.9 0.1
Interest expense on deposits -- --
In line with the requirements of IFRS 9, an ECL allowance has been recognised amounting to 0.0% (2019: 0.3%) of the loans outstanding at the end of the year.
(1) The opening and closing balances reported are in respect of related parties of the Group at the reporting date in each year.
145
45. Related Party Transactions (continued)
Remuneration of key Management personnel
The amount of remuneration incurred by the Group in relation to the Directors is set out below in aggregate. Further information about the remuneration of Directors is provided in note 12.
Group and Company 2020 2019
GBPm GBPm
Short-term employee benefits 4.9 4.5
Termination benefits 0.5 --
Post-employment benefits -- --
Other long-term benefits 2.2 3.0
Share based payments 0.8 0.8
Total emoluments 8.4 8.3
Trading transactions
Group 2020 2020 2020 2019 2019 2019
Tesco Tesco
Tesco Tesco Underwriting Tesco Tesco Underwriting
PLC subsidiaries Limited PLC subsidiaries Limited
GBPm GBPm GBPm GBPm GBPm GBPm
Interest received
and other income -- 20.8 32.6 -- 20.9 47.1
Dividend income -- -- 15.6 -- -- 10.3
Interest paid (5.3) -- -- -- (4.9) --
Provision of services -- (76.6) (2.9) -- (82.0) (3.0)
Company 2020 2020 2020 2019 2019 2019
Tesco Tesco
Tesco Tesco Underwriting Tesco Tesco Underwriting
PLC subsidiaries Limited PLC subsidiaries Limited
GBPm GBPm GBPm GBPm GBPm GBPm
Interest received
and other income -- 10.5 -- -- 4.8 --
Dividend income -- 50.0 -- -- 60.0 --
Interest paid (5.3) -- -- -- (4.8) --
Provision of services -- -- -- -- -- --
Balances owing to/from related parties are identified in notes 21, 23, 30, 31, 33, 34 and 35.
For the year ended 29 February 2020 the Group generated 45% (2019: 52%) of its insurance commission from the sale and service of Motor and Home insurance policies underwritten by TU, a joint venture company and therefore a related party. Customer premiums on such sales are collected directly by the Group and the net premium is remitted to TU. Investment transactions with TU are identified in note 25.
Ultimate parent undertaking
The Company's parent undertaking and controlling party is Tesco PLC which is incorporated in England. The Financial Statements for Tesco PLC can be obtained from its registered office at Tesco House, Shire Park, Kestrel Way, Welwyn Garden City, AL7 1GA.
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46 . Contingent Liabilities and Commitments
Contingent liabilities
Contingent liabilities are possible obligations arising from past events, whose existence will be confirmed only by uncertain future events, or present obligations arising from past events that are not recognised because either it is not probable that an outflow of economic benefits will be required or the amount of the obligation cannot be reliably estimated.
Contingent liabilities are not recognised but information about them is disclosed unless the possibility of any outflow of economic benefits is remote. There are a number of contingent liabilities that arise in the normal course of business which, if realised, are not expected to result in a material liability to the Group.
Lending commitments
Under an undrawn Credit Card commitment, the Group agrees to make funds available to a customer in the future. Undrawn Credit Card commitments may be unconditionally cancelled or may continue, providing all facility conditions are satisfied or waived.
Under a Personal Current Account overdraft commitment, the Group agrees to make funds available to a customer in the future. Personal Current Account overdraft commitments are usually for a specified term and may be unconditionally cancelled or may continue, providing all facility conditions are satisfied or waived.
Further detail on undrawn lending commitments is included in the liquidity and funding risk disclosure in note 40.
The contractual amounts do not represent the amounts at risk at the reporting date but the amounts that would be at risk should the available facilities be fully drawn upon.
Capital commitments
At 29 February 2020 the Group had capital commitments related to property, plant and equipment of GBP1.2m (2019: GBPnil) and intangible assets of GBP5.7m (2019: GBP0.8m). This is in respect of IT software development and IT hardware. In addition, TU has a commitment of GBPnil (2019: GBP1.2m) to subscribe to the Tritax Property Income Fund Unit Trust as part of its investment portfolio. The Group's Management is confident that future net revenues and funding will be sufficient to cover this commitment.
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47 . Share Based Payments
The Group charge for the year recognised in respect of share based payments is GBP7.9m (2019: GBP4.4m), which is made up of share option schemes and share bonus payments. Of this amount, GBP7.0m (2019: GBP3.7m) will be equity-settled and GBP0.9m (2019: GBP0.7m) cash-settled.
Share option schemes
The Group had three share option schemes in operation during the year, all of which are equity-settled schemes using Tesco shares:
The Savings-related Share Option Scheme (1981) permits the grant to colleagues of options in respect of ordinary shares linked to a building society/bank save-as-you-earn contract for a term of three or five years with contributions from colleagues of an amount between GBP5 and GBP500 per four-weekly period. Options are capable of being exercised at the end of the three or five-year period at a subscription price of not less than 80% of the average of the middle-market quotations of an ordinary share over the three dealing days immediately preceding the offer date.
The Discretionary Share Option Plan (2004) permitted the grant of approved, unapproved and international options in respect of ordinary shares to selected executives. Options are normally exercisable between three and ten years from the date of grant at a price not less than the middle-market quotation or average middle-market quotations of an ordinary share for the dealing day or three dealing days preceding the date of grant. The vesting of options will normally be conditional upon the achievement of a specified performance target related to the annual percentage growth in earnings per share over a three-year period. There were no discounted options granted under this scheme.
The Performance Share Plan (2011) permits the grant of options in respect of ordinary shares to selected executives. Options are normally exercisable between the vesting date(s) set at grant and ten years from the date of grant for GBPnil consideration. The exercise of options will normally be conditional upon the achievement of specified performance targets over a three-year period and/or continuous employment.
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47. Share Based Payments (continued)
The following table reconciles the total number of share options outstanding under each share option scheme and the weighted average exercise price (WAEP):
Savings- Savings-
related related Approved Approved
share share share share Unapproved Unapproved
option option option option share options share options
scheme scheme scheme scheme scheme scheme
Options WAEP (pence) Options WAEP (pence) Options WAEP (pence)
Outstanding at 1
March 2019 3,583,962 172.10 87,911 338.40 82,647 338.40
Granted 845,599 219.00 - - - -
Forfeited (489,563) 185.80 (87,911) 338.40 (82,647) 338.40
Exercised (486,391) 166.81 - - - -
Outstanding at 29
February 2020 3,453,607 182.39 - - - -
Exercisable at 29
February 2020 43,559 190.00 - - - -
Exercise price range
(pence) - 190.00 - - - -
---------
Weighted average
remaining contractual
life (years) - 0.42 - - - -
---------
Savings- Savings-
related related Approved Approved
share share share share Unapproved Unapproved
option option option option share options share options
scheme scheme scheme scheme scheme scheme
Options WAEP (pence) Options WAEP (pence) Options WAEP (pence)
Outstanding at 1
March 2018 4,058,091 160.43 94,936 344.96 122,460 367.20
Granted 1,219,261 188.00 - - - -
Forfeited (328,524) 177.46 (7,025) 427.00 (39,813) 427.00
Exercised (1,365,136) 150.31 - - - -
Outstanding at 28
February 2019 3,583,692 172.10 87,911 338.40 82,647 338.40
Exercisable at 28
February 2019 124,802 179.37 87,911 338.40 82,647 338.40
Exercise price range
(pence) - 179.37 - 338.40 - 338.40
-----------
Weighted average
remaining contractual
life (years) - 0.42 - 0.68 - 0.18
-----------
Share options were exercised on a regular basis throughout the financial year. The average Tesco share price during the year ended 29 February 2020 was 237.69p (2019: 228.55p).
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47. Share Based Payments (continued)
The fair value of share options is estimated at the date of grant using the Black-Scholes option pricing model. The following table gives the assumptions applied to the options granted in the respective periods shown. No assumption has been made to incorporate the effects of expected early exercise.
Group 2020 2019
Savings Savings
- related - related
share options share options
schemes schemes
Expected dividend yield (%) 3.7% - 4.3% 3.3% - 4.2%
Expected volatility (%) 23% - 28% 29%
0.81% - 0.78% -1.10
Risk free interest rate (%) 0.83% %
Expected life of option (years) 3 or 5 3 or 5
Weighted average fair value (WAFV) of options 35.68 to 41.58 to
granted (pence) 43.57 42.24
Probability of forfeiture (%) 7% - 10% 7% - 11%
Share price (pence) 243.00 212.40
WAEP (pence) 219.00 188.00
Volatility is a measure of the amount by which a price is expected to fluctuate in the period. The measure of volatility used in Tesco's option pricing models is the annualised standard deviation of the continuously compounded rates of return on the share over a period of time. In estimating the future volatility of Tesco's share price, the Tesco Board considers the historical volatility of the share price over the most recent period that is generally commensurate with the expected term of the option, taking into account the remaining contractual life of the option.
Share Bonus Schemes
Selected executives participate in the Group Bonus Plan, a performance-related bonus scheme. The amount paid to colleagues is based on a percentage of salary and is paid partly in cash and partly in shares. Bonuses are awarded to selected executives who have completed a required service period and depend on the achievement of corporate and individual performance targets.
Selected executives participate in the Performance Share Plan (2011). Awards made under this plan will normally vest on the vesting date(s) set on the date of the award for nil consideration. Vesting will normally be conditional on the achievement of specified performance targets over a three-year performance period and/or continuous employment.
The fair value of shares awarded under these schemes is their market value on the date of the award. Expected dividends are not incorporated into the fair value.
The number of Tesco shares and WAFV of share bonuses awarded during the year were:
2020 2020 2019 2019
WAFV WAFV
Shares (number) (pence) Shares (number) (pence)
Group Bonus Plan 1,207,697 237.80 1,547,112 241.80
Performance Share Plan 3,408,234 237.47 2,746,888 256.49
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48. Adoption of New and Amended International Financial Reporting Standards
Standards, amendments and interpretations issued which became effective in the current year
The impact on the Group of the adoption of IFRS 16 during the year to 29 February 2020 is included in note 2.
Standards, amendments and interpretations issued but not yet effective
Standards, amendments and interpretations issued and effective on or after 1 January 2020 that are expected to have an impact on the Group are as follows:
IFRS 17 'Insurance contracts'
IFRS 17 is effective for annual periods beginning on or after 1 January 2023, subject to endorsement. Early adoption is permitted provided IFRS 9 and IFRS 15 are also applied.
IFRS 17 is a replacement for IFRS 4. IFRS 17 requires insurance liabilities to be measured at a current fulfilment value and provides a more uniform measurement and presentation approach for all insurance contracts.
IFRS 17 is relevant to the Group's joint venture, TU, which provides the insurance underwriting service for a number of the Group's general insurance products. The full impact on the Group is currently being assessed.
Early adoption of new standards
During the year the Group has early adopted the following amendments to standards:
Amendments to IFRS 9, IAS 39 and IFRS 7 'IBOR reform'
These amendments permit entities to continue to apply the hedge accounting requirements in IAS 39 and IFRS 9 to all hedging relationships directly affected by interest rate benchmark reform.
Therefore the Group has not recognised any change to hedge accounting as a result of uncertainty over future cash flows related to the move from IBOR. Additional disclosures required from these amendments on the impact of IBOR reform are included in note 20.
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49. Events After the Reporting Date
Covid-19
Since the year end significant economic and social disruption has arisen from the Covid-19 pandemic. The Group has invoked business continuity plans, as it seeks to serve and support its customers throughout the pandemic while maintaining the safety and well-being of staff. The Group is engaging with suppliers to help ensure that service levels can be maintained through a prolonged pandemic.
As a result of the pandemic, the Group is expected to be impacted in the year ahead by a reduction in income from all activities, including Credit Cards, Loans and Travel Money, together with increased ECLs for potential bad debts. The Group considered the impact of the pandemic on the carrying values of assets and liabilities in the Company and Consolidated Statements of Financial Position. The overall financial impact of Covid-19 cannot be reliably estimated at this time, however the Group assessed that its key sensitivity was in relation to ECLs on customer lending. The estimate of expected credit losses at 29 February 2020 was based on the Group's conclusion that the significant socioeconomic disruption, the necessity for large scale Government interventions and the related impact on the wider economy as a result of Covid-19 had a low probability of crystallising at 29 February 2020 based on the reasonable and supportable information available at that date. The ECL sensitivity to reasonably possible changes in those assumptions over the 12 months from 29 February 2020 is set out at note 40.
The Group sourced revised economic forecasts from its third-party supplier, reflecting economic developments since the reporting date. These scenarios reflect the support measures that have been put in place by the Government and BoE.
The Group sourced four economic scenarios as follows:
A Base Plus scenario, which assumes social distancing measures unwind in Q2 2020 with a swift 'V' shaped recovery;
A Base scenario, which assumes a delayed 'V' shaped recovery in Q3 2020;
A Downside scenario, which is a 'U' shaped recovery, with a significantly longer period until the economy returns to pre-Covid-19 levels; and
A Severe Downside scenario, where the economy enters an extended period of stagnation following the virus' containment.
The Group has placed most reliance on the base scenario, which is in line with BoE guidance that there will be significant economic disruption while social distancing measures are in place, followed by an expected sharp recovery when these are lifted. The sensitivities to this scenario are shown below:
Scenario GDP (5 years average) +1.2% GDP (Q2 2020) -12.0% Unemployment (5 years average) 4.8% Unemployment peak (Q3 2020) 6.2% Base Rate (5 years average) 0.1% Increase in ECL - 100% weighted GBP116m Increase in ECL - 100% weighted, net GBP78m of mitigation
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49. Events After the Reporting Date (continued)
Covid-19 (continued)
The estimated impact of the mitigation, which is the support the Group is offering those customers who are experiencing financial difficulty as a result of the pandemic, has not been subject to audit as the impact cannot be objectively verified. It relates to the number of customers who will request such measures and the effectiveness of these at reducing customer defaults. The final impact of these measures is uncertain and could be significantly higher or lower than anticipated. The Group's assessment of its status as a going concern detailed on pages 26 to 27 does not rely upon the impact of this mitigation.
The sensitivity of ECLs to increases in unemployment between the reporting date and 31 December 2020 across each scenario is approximately GBP60m for each 1% increase in unemployment.
The impact of the revised economic outlook has been considered in the viability assessment on pages 21 to 23 and going concern assessment on pages 26 to 27.
Tesco Underwriting
Volatility across global markets has been impacting the TU investment portfolio since the outbreak of the Covid-19 pandemic and TU has been monitoring its investment portfolio closely. Taking into account market conditions, TU has agreed with the Group and its other joint venture partner to cancel a dividend payment of GBP15m previously expected to be paid in April 2020. The Group assessed the carrying value of its investment in TU as at 29 February 2020. Cancellation of the planned dividend has had no impact on the Group's assessment of the carrying value of its investment in TU as reported in the Consolidated Statement of Financial Position.
Sale of the Mortgage business
The Group completed the sale of its remaining Mortgage business to Bank of Scotland PLC on 30 March 2020. The Group received cash consideration of GBP53.8m in respect of this element of the Mortgage business, resulting in an after-tax gain on sale of GBP0.4m. This is incremental to the GBP20.7m gain recognised on the sale of the majority of the Mortgage business on 27 September 2019.
Travel Money
Given the unprecedented fall in demand for Travel Money, the Group suspended its in-store and online Travel Money service from 24 March 2020. The Group will continue to monitor Covid-19 developments in order to reinstate this service to its customers as soon as possible.
Change in corporation tax rate
The March 2016 Budget Statement included an announcement that the standard rate of corporation tax in the UK would be reduced to 17% from 1 April 2020. Subsequently, at the March 2020 Budget Statement, the Chancellor announced that this reduction to 17% would no longer take place, with the standard rate of corporation tax instead being maintained at 19%.
However, at the reporting date the 17% rate continued to be the substantively enacted rate and is therefore the standard rate of corporation tax applied in calculating the deferred taxation balances reflected in these Financial Statements. The cancellation of the rate reduction resulted in the Group's deferred tax asset increasing by GBP5.5m in March 2020.
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TESCO PERSONAL FINANCE GROUP PLC
INDEPENT AUDITOR'S REPORT TO THE MEMBERS OF TESCO PERSONAL FINANCE GROUP PLC
Report on the audit of the Financial Statements
1. Opinion
In our opinion:
the Financial Statements of Tesco Personal Finance Group PLC (the 'parent Company') and its subsidiaries (the 'Group') give a true and fair view of the state of the Group's and of the parent Company's affairs as at 29 February 2020 and of the Group's profit for the year then ended;
the Group Financial Statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU);
the parent Company Financial Statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and
the Financial Statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group Financial Statements, article 4 of the IAS Regulation.
We have audited the Financial Statements, which comprise:
the Consolidated Income Statement;
the Consolidated Statement of Comprehensive Income;
the Consolidated and Company Statements of Financial Position;
the Consolidated and Company Statements of Changes in Equity;
the Consolidated and Company Cash Flow Statements; and
the related Notes 1 to 49 of the Financial Statements.
The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the EU and, as regards the parent Company Financial Statements, as applied in accordance with the provisions of the Companies Act 2006.
2. Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the auditor's responsibilities for the audit of the Financial Statements section of our report.
We are independent of the Group and the parent Company in accordance with the ethical requirements that are relevant to our audit of the Financial Statements in the United Kingdom (UK), including the Financial Reporting Council's (FRC) Ethical Standard (ES) as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We confirm that the non-audit services prohibited by the FRC's ES were not provided to the Group or the parent Company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
154
TESCO PERSONAL FINANCE GROUP PLC
INDEPENT AUDITOR'S REPORT TO THE MEMBERS OF TESCO PERSONAL FINANCE GROUP PLC (continued)
3. Summary of our audit approach
Key audit matters The key audit matters that we identified in the current
year were:
loan impairment provisions;
going concern assessment and post balance sheet event
disclosure;
the valuation of the payment protection insurance (PPI)
provision;
insurance reserving in Tesco Underwriting Limited (TU);
and
recognition of revenue.
Within this report, key audit matters are identified
as follows:
Newly identified
Increased level of risk
Similar level of risk
Decreased level of risk
Materiality The materiality that we used for the Group Financial
Statements was GBP11.1m, which represents 5% of underlying
profit before tax.
Scoping Our audit scoping provides full scope audit coverage
of 100% of revenue, profit before tax and net assets.
There is one component, TU, which is a joint venture
with Ageas, and is audited by another audit firm.
Significant changes Given the rapid spread of Covid-19 and the ongoing
in our approach uncertainty surrounding its impact, we have enhanced
our risk assessment, and focused a greater degree of
audit effort on the Directors' judgements. This was
both in determining the Company's and the Group's ability
to continue to adopt the going concern basis over a
period of at least 12 months from the date of approval
of the Financial Statements, and over the disclosure
of post balance sheet events. In accordance with this
greater level of audit effort, we have identified a
new key audit matter in the period relating to the
going concern assessment and post balance sheet event
related disclosures.
In addition, given the added reporting requirements
and assessment in relation to the impact of Covid-19
on expected credit loss (ECL) modelling as at the balance
sheet date and subsequently, we have noted an increased
level of risk in the current period relating to the
loan impairment provisions key audit matter.
4. Conclusions relating to going concern, principal risks and viability statement
4.1 Going concern
We have reviewed the Directors' statement Going concern is the basis
on pages 26, 27 and 31 to the Financial of preparation of the Financial
Statements about whether they considered Statements that assumes
it appropriate to adopt the going concern an entity will remain in
basis of accounting in preparing them and operation for a period of
their identification of any material uncertainties at least 12 months from
to the Group's and Company's ability to the date of approval of
continue to do so over a period of at least the Financial Statements.
12 months from the date of approval of We confirm that we have
the Financial Statements. nothing material to report,
We considered as part of our risk assessment add or draw attention to
the nature of Tesco Personal Finance Group in respect of these matters.
Plc, its business model and related risks
including, where relevant, the impact of
the Covid-19 pandemic and Brexit, and the
associated significant economic disruption,
the requirements of the applicable financial
reporting framework and the system of internal
control.
We evaluated the Directors' assessment
of the Group's ability to continue as a
going concern, including challenging the
underlying data and key assumptions used
to make the assessment, and evaluated the
Directors' plans for future actions in
relation to their going concern assessment.
Our challenge of the Directors' going concern
assessment and related disclosures have
been identified as a key audit matter,
which is discussed below in section 5.2.
155
4.2 Principal risks and viability statement
Based solely on reading the Directors' Viability means the ability
statements and considering whether they of the Group to continue
were consistent with the knowledge we obtained over the time horizon considered
in the course of the audit, including the appropriate by the Directors.
knowledge obtained in the evaluation of We confirm that we have
the Directors' assessment of the Group's nothing material to report,
and the Company's ability to continue as add or drawn attention to
a going concern, we are required to state in respect of these matters.
whether we have anything material to add
or draw attention to in relation to:
the disclosures on pages 9 to 13 that describe
the principal risks, procedures to identify
emerging risks, and an explanation of how
these are being managed or mitigated;
the Director's confirmation on page 23
that they have carried out a robust assessment
of the principal and emerging risks facing
the Group, including those that would threaten
its business model, future performance,
solvency or liquidity; and
the Directors' explanation on pages 21
to 23 as to how they have assessed the
prospects of the Group, over what period
they have done so and why they consider
that period to be appropriate, and their
statement as to whether they have a reasonable
expectation that the Group will be able
to continue in operation and meet its liabilities
as they fall due over the period of their
assessment, including any related disclosures
drawing attention to any necessary qualifications
or assumptions.
5. Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the Financial Statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
156
5.1 Loan impairment provisions
Key audit matter As disclosed in note 11 (Expected Credit Loss on
description Financial Assets) and note 18 (Loans and Advances
to Customers), the Group held a loan impairment
provision of GBP488.4m at 29 February 2020 (28
February 2019: GBP485.2m). The expected credit
loss on loans and advances to customers was GBP177.9m
in the year to 29 February 2020 (28 February 2019:
GBP163.3m). The impact of further deterioration
in the economic outlook on expected credit losses
("ECLs") after the reporting date is discussed
in note 49.
Loan impairment remains one of the most significant
judgements made by Management, particularly in
light of the uncertain economic outlook in the
UK and, at the reporting date, the potential impact
of the global Covid-19 pandemic.
We have considered the most significant areas of
judgement within the Group's collective provisioning
methodologies to be:
Macro-economic scenarios - ECLs are required to
be calculated on a forward-looking basis under
IFRS 9. In determining the economic scenarios,
as well as the probability-weighting of each scenario
to be incorporated into the ECL model, significant
judgement is applied by Management. In particular,
Management's assessment of ECLs at 29 February
2020 was based on their conclusion that the significant
socioeconomic disruption, the necessity for large
scale Government interventions and the related
impact on the wider economy as a result of Covid-19
had a low probability of crystallising at 29 February
2020 based on the reasonable and supportable information
available at that date.
Loss given default (LGD) - Management must apply
significant judgement in determining an appropriate
methodology for the determination of the LGD parameter.
During the year Management have applied certain
refinements to their Credit Card and unsecured
personal Loan models in respect to LGD.
Other material judgements include the determination
of the expected life of exposures, the definition
of a significant increase in credit risk, the determination
of probability of default (PD) and exposure at
default (EAD), the identification of loss events
and the appropriateness and completeness of Management
overlays.
Given the material impact of the significant judgements
taken by Management in the measurement of the provision,
we consider there is an inherent risk of fraud
through manipulation of this balance.
Management's associated accounting policies are
detailed on pages 48 to 50 with detail about the
judgements in applying accounting policies and
critical accounting estimates on page 57.
How the scope Our audit procedures included obtaining an understanding
of our audit of, and assessing, relevant controls around the
responded to impairment review processes and the determination
the key audit of the judgements within the model.
matter Key controls we have obtained an understanding
of, and assessed, included model governance forums,
model monitoring and calibrations, the review and
approval of macro-economic scenarios, the flow
of data from the Group's information systems into
the model, and the flow of the output from the
model to the general ledger.
Our audit work to address the risks noted within
the loan impairment process included the procedures
noted below
Use of economic modelling experts
With support from internal economic modelling experts,
we challenged the macro-economic scenario forecasts
that were incorporated into the ECL model. Management's
forecasts and their probability-weighting were
assessed against external sources to assess their
reasonableness, considering the forecasts in light
of any contradictory information.
157
We challenged how Management had assessed the impact
of Covid-19 within the ECL model to assess whether
it was appropriately considered in the measurement
of ECLs. In particular, we challenged Management's
How the scope assessment of the likelihood of a severe economic
of our audit downturn caused by Covid-19 at the reporting date
responded to with reference to the reasonable and supportable
the key audit information available to Management at that date.
matter (continued) This information included:
The number of reported Covid-19 cases in the UK
at the reporting date, and comparative data from
other countries, which could indicate how the number
of cases may grow over time;
For countries with a higher number of infections
than the UK at the reporting date, the actions
taken by those countries to limit the spread of
the virus and the potential impact on the macro-economic
outlook;
The performance of global equity markets, commodity
prices and foreign exchange markets up to the reporting
date; and
Leading indicators of macro-economic performance
available at the reporting date, such as the Purchasing
Managers Index (taking into account that such information
may be a lagging indicator).
We also considered whether events arising after
the reporting date, such as the declaration of
the outbreak as a global pandemic by the World
Health Organisation on 11 March 2020, nationwide
lockdowns, and the fiscal and monetary policy responses
to combat the economic effects of Covid-19, provided
evidence that such events were possible future
events which Management could assign an appropriate
probability to at the reporting date, based on
reasonable and supportable information available
to Management at that date.
Further, we challenged whether Management's severe
downside macro-economic scenario adequately captured
the potential macro-economic downside risks arising
as a result of the Covid-19 pandemic, based on
reasonable and supportable information available
to management at the reporting date.
Assessment of the ECL model
We assessed Management's methodology, including
the refinements made, against the requirements
of IFRS 9 with input from our internal credit risk-
modelling specialists and we tested the application
of that methodology within the impairment models.
This comprised a specific assessment of the methodology
adopted by Management to determine the LGD parameter,
including Management's analysis of historic cash
recovery and forecast benefit of future debt sales.
We challenged the quantitative and qualitative
triggers used to identify significant increases
in credit risk to assess whether they were consistently
applied and based on reasonable information indicative
of a significant increased risk of default since
initial
recognition.
Data testing
We substantively tested the data provided by Management
How the scope that supported each material judgement for completeness
of our audit and accuracy, including the determination of PD
responded to and EAD, the identification of loss events and
the key audit the appropriateness and completeness of Management
matter (continued) overlays. This included specific testing of the
historic cash recovery data for defaulted exposures
which supports the calibration of LGD.
We We substantively tested the underlying system
data which feeds the model for completeness and
accuracy.
158
Disclosures testing
We assessed whether the disclosure of significant
judgements and areas of estimation uncertainty
gave sufficient transparency over the uncertainty
surrounding measurement of ECLs, particularly in
light of the changes in the macro-economic environment
subsequent to the reporting date as a result of
the Covid-19 pandemic; and
We tested the completeness and accuracy of the
related credit risk disclosures and sensitivities
with reference to the applicable standards.
Key observations Based on our audit procedures above, we concluded
that Management's provision is reasonably stated,
and is supported by a methodology that is consistently
applied and compliant with IFRS 9.
5.2 Going concern assessment and related disclosures
Key audit matter The rapid spread and ongoing uncertainty surrounding
description the impact of Covid-19 has increased complexity
associated with the Directors' assessment of the
Group's and Company's ability to continue as a
going concern over a period of at least 12 months
from the date of approval of the Financial Statements.
In addition, there is an increased risk associated
with the adequacy of disclosures over the going
concern assessment and events after the reporting
date, particularly given Management have concluded
that the majority of economic deterioration in
relation to Covid-19 has occurred subsequent to
the balance sheet date.
In making their assessment, the Directors consider
that the going concern basis of accounting is appropriate
and that there is no material uncertainty related
to going concern. The Directors have disclosed
their explanations and conclusions on going concern
basis and the key matters considered, including
judgements in relation to (i) the ongoing confidence
in the Company's and Group's capital solvency and
liquidity positions, including those of Tesco Personal
Finance Plc (the Bank) particularly remodelling
the likely ECL outcomes under this new stress,
as well as (ii) the capability of the operational
resilience framework in place, including supplier
viability, over the assessment period. Management's
associated consideration of the impact of Covid-19
on the Company's and Group's ability to continue
as a going concern is detailed on 26 to 27 within
the Directors' Report and note 1.Detail of the
impact of events after the reporting date are presented
in note 49.
How the scope In response to the significant economic disruption
of our audit associated with the Covid-19 pandemic we performed
responded to enhanced risk assessment procedures, and increased
the key audit audit effort to challenge whether there was a material
matter uncertainty over the Company's and Bank's ability
to continue as a going concern over a period of
at least twelve months
from the date of approval of the Financial Statements.
We engaged Deloitte's prudential, regulatory and
economic experts to appropriately challenge and
assess Management's evaluation of its profitability,
solvency, liquidity and funding forecast position.
Sensitivity Analysis and Stress Testing
We reviewed and challenged:
the scenarios adopted by the Directors to capture
potential downside risks, including the associated
macro-economic assumptions; and
the subsequent stress testing output, with a particular
focus on the headroom available against minimum
regulatory requirements, under severe but plausible
scenarios.
159
Capital Resources and Requirements
With specific reference to the Bank's Internal
Capital Adequacy Assessment Process, and subsequent
developments within the stress testing assumptions,
How the scope we reviewed and challenged:
of our audit the interplay between the IFRS 9 provisions and
responded to capital in stress taking account of Bank of England
the key audit guidance; provisions and capital in stress taking
matter (continued) account of Bank of England guidance, including
the guidance issued on 26 March 2020;
forecast assumptions of the Bank's and Group's
capital plan, given current market conditions;
whether the change in resources and requirements
over the assessment horizon was considered to be
credible;
the risks associated with asset quality and associated
availability of data; and
the assumptions around newly issued guarantees
and lending requirements, including increased forbearance
requirements.
Liquidity and Funding
With specific reference to the Group's Internal
Liquidity Adequacy Assessment Process, we reviewed
and challenged:
the forecast changes to the Bank's and Group's
liquidity and funding plan, which is required to
be produced for all regulated banks, with reference
to the Group's internal risk appetite and regulatory
minimum requirements, given current market conditions;
the credibility, risks and costs associated with
deposit retention and eligible collateral to access
central bank liquidity and funding facilities;
severity of internal stress testing assumptions
and ability to meet the overall liquidity adequacy
rule;
impact of changes to key risk drivers including
retail outflow rates, Credit Card utilisation rates,
wholesale funding rollover rates, intra-day liquidity
risk, impact of increased margin calls and downgrade
implications; and
any structural liquidity and funding mismatches.
Operational Resilience and Supplier Viability
We reviewed and challenged:
Management's business continuity plans and subsequent
changes to those plans as a consequence of a prolonged
impact from the Covid-19 pandemic.
whether the recovery options that are included
in the Group's Recovery and Resolution Plans, that
are required to be produced for all regulated banks,
had been properly considered;
where key operational services have been outsourced
to third parties, Management's assessment of those
service providers' operational and financial resilience,
or where necessary, the contingency plans in place
where a supplier has been deemed at risk.
In addition to the above noted procedures, we held
meetings with Senior Management
to discuss the Directors' assessment of going
concern and to challenge matters arising from the
review of Management's going concern viability
paper. As part of our assessment, we reviewed the
minutes of relevant Board meetings and relevant
Executive Committees to corroborate Management's
How the scope responses and the information provided.
of our audit 160
responded to Events after the reporting date
the key audit In order to assess whether the post balance sheet
matter (continued) event disclosures in note 48 were appropriate we
have:
reviewed the most recent Board minutes and regulatory
correspondence to identify items of interest;
evaluated Management's assessment of the impact
of the significant business developments that occurred
after the year end, including the spread of Covid-19
and the resulting actions taken by the UK Government;
assessed the impact of recent developments on loan
impairment provisions (see section 5.1 for specific
details); and
challenged Management's assessment of the impact
of recent events on the carrying value of the Group's
assets and liabilities.
Disclosures
We have reviewed the disclosures made by Management
in relation to events after the reporting date
and going concern, to assess whether they adequately
reflect the deterioration in economic outlook since
29 February 2020 and the impact on the Group, and
checked the consistency of the disclosures with
our knowledge of the Group based on our audit.
Key observations Based on the work performed, having taken account
of the assumptions and other matters disclosed
in the going concern statement made by the Directors
and elsewhere in the Financial Statements, we concurred
with the Directors' conclusion that the significant
economic disruption associated with the Covid-19
pandemic does not give rise to a material uncertainty
over the Company's and Group's ability to continue
as a going concern over a period of at least 12
months from the date of approval of the Financial
Statements.
We also concluded that the disclosures in relation
to going concern and events after the reporting
date are appropriate.
161
5.3 The valuation of the payment protection insurance (PPI) provision
Key audit matter The high level of public and regulatory scrutiny
description of banks continues, as does the magnitude of legal
and regulatory claims. The most significant conduct
issue relates to PPI for which a provision of GBP41.1m
was recorded as at 29 February 2020 (28 February
2019: GBP34.2m). The amount at the balance sheet
date includes an additional provision of GBP45.0m,
which was recognised during the first six months
of the year as a result of the significant increase
in claims volumes during the lead up to the August
2019 time-bar deadline.
Given the material impact of the significant judgements
taken by Management in the measurement of the provision,
we considered that there was an inherent risk of
fraud through manipulation of this balance. We
have specifically pinpointed our testing to the
material judgements around average redress and
forecast successful claims volumes. Further details
are included within the Strategic Report on page
4, critical accounting estimates and judgements
on page 57 and in note 32 to the Financial Statements.
How the scope We have obtained an understanding of, and assessed,
of our audit the relevant controls relating to the valuation
responded to of the PPI provision, specifically the internal
the key audit review and challenge of Management's valuation
matter assumptions.
As well as testing the arithmetical accuracy of
the PPI model, we challenged the
adequacy of the provision recognised by critically
assessing the key assumptions used in the model,
such as those relating to forecast successful claims
volumes and average redress, by comparing the assumptions
to available peer data, referring to the guidance
published by the Financial Conduct Authority (FCA)
assessing historical redress experience as well
as Management's past forecasting accuracy. We also
tested the completeness and accuracy of the underlying
data that supports Management's assumptions and
the current year utilisation of the provision.
Key observations Based on the procedures performed, we concur with
Management that the provision as at 29 February
2020 of GBP41.1m represents a reasonable best estimate
of the probable economic outflow.
5.4 Insurance reserving in Tesco Underwriting (TU)
Key audit matter The Group is indirectly affected by the risks in
description insurance reserving through its 49.9% investment
in the TU joint venture with Ageas. The Group accounts
for its investment in TU as a joint venture and
therefore recognises a share of TU's profit/loss
in its Consolidated Income Statement, with a corresponding
movement in the value of the investment on the
balance sheet, which has a carrying value of GBP86.0m
as at 29 February 2020 (28 February 2019: GBP86.4m).
TU's results are sensitive to changes in the insurance
reserves it recognises in respect of insurance
policies written, net of reinsurance. Consequently,
material increases in these reserves could have
an impact on the carrying value of the investment
in the Consolidated Statement of Financial Position.
Given the material impact of the significant judgements
taken by Management in the measurement of TU's
reserves, we considered there was an inherent risk
of fraud through manipulation of this balance.
Management's associated accounting policies are
detailed on page 45.
How the scope We have obtained an understanding of, and assessed,
of our audit the relevant controls within the process to determine
responded to insurance contract liabilities.
the key audit Meetings were held with Senior Management involved
matter in the reserving process to discuss the reserving
methodology, changes in assumptions from the previous
year-end, and questions arising from the review
of internal and external reserving reports.
With support from actuarial specialists we challenged
the actuarial assumptions used and performed projections
on selected classes of business. Classes selected
included Motor BI Capped and Motor third-party
property damage. For these classes of business,
the projected claims liabilities were compared
to those projected by management and any significant
differences were investigated. For the remaining
classes of business, the methodology and assumptions
selected by management were evaluated.
162
Key observations Based on the procedures performed we concluded
that the valuation of TU's insurance contract reserves
are reasonably stated.
5.5 Recognition of revenue
Key audit matter In accordance with IFRS 9, the revenue streams
description from financial products that are considered 'integral
to the yield' must be recognised using the effective
interest rate method (EIR) over the behavioural
life of the financial products.
The judgements taken in estimating the cash flows
which drive the expected lives used in the calculation
of the EIR can be sensitive to change, and could
significantly impact the income recognised in any
financial period, particularly in relation to introductory
rate offers and similar structures. Accordingly,
we have identified the judgement on expected lives
of Credit Cards, specifically the repayment assumptions,
to be the key audit matter over revenue recognition.
In this respect, the most significant model relates
to the Credit Card portfolio, which supports an
EIR asset of GBP42.3m at 29 February 2020 (GBP35.6m
at 28 February 2019).
Given the material impact of the significant judgements
taken by Management in calculating the EIR asset,
we are required to consider whether there is an
inherent risk of fraud through manipulation of
this balance.
Management's associated accounting policies are
detailed on pages 46 to 47 with detail about the
judgements in applying accounting policies and
critical accounting estimates, including sensitivities
to the pay rates assumptions on page 57.
How the scope We have obtained a detailed understanding of, and
of our audit assessed, relevant controls that the Group has
responded to established in relation to recognition of revenue
the key audit using EIR.
matter In order to assess the expected lives, we reviewed
the underlying code used to calculate the repayment
rate assumptions that drive the expected lives
used in the model to ensure that it is consistent
with the methodology adopted by Management. The
methodology was also reviewed to ensure that it
is in compliance with the requirements of IFRS
9. We then assessed Management's assessment of
whether any overlays were required to historic
payment rates to reflect regulatory headwinds and
macro-economic factors.
We performed substantive testing over the completeness
and accuracy of the underlying data inputs into
the model that is used to support the repayment
rate assumptions and we reviewed the arithmetic
accuracy of the EIR model.
Key observations Based on the work performed, we concur with Management's
assumptions used in the Credit Cards' revenue recognition
model, including those relating to the behavioural
lives of Credit Cards. We are satisfied that Management's
methodology and model is appropriate and that it
supports the EIR asset.
163
6. Our application of materiality
6.1 Materiality
We define materiality as the magnitude of misstatement in the Financial Statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.
Based on our professional judgement, we determined materiality for the Financial Statements as a whole as follows:
Group Financial Statements Parent Company Financial
Statements
Group materiality GBP11.0m (2019: GBP11.1m) GBP9.3m (2019: GBP9.4m)
Basis for determining Materiality has been determined Parent Company materiality
materiality as 5% of underlying profit has been determined based
before tax. on net assets, which is
capped at 99% of Group
materiality.
Rationale for In our professional judgement, In our professional judgement,
the benchmark we believe that the use we believe that the use
applied of profit before tax is of net assets is appropriate
appropriate as the purpose as the purpose of the
of the Group is to generate Company is a holding company.
a return to Tesco PLC The materiality selected
through the generation represents 0.8% of the
of profits. Company's net assets.
The materiality selected
represents 0.6% of the
Group's net assets.
6.2 Performance materiality
We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected misstatements exceed the materiality for the Financial Statements as a whole. Group performance materiality was set at 70% of Group materiality for the 2020 audit (2019: 70%). In determining performance materiality, we considered the following factors:
our assessment of the control environment and that were able to rely on controls for a number of business cycles; and
the low number of corrected and uncorrected misstatements identified in previous audits.
6.3 Error reporting threshold
We agreed with the Audit Committee that we would report to them all audit differences in excess of GBP0.5m (2019: GBP0.5m) for the Group and parent Company, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the Financial Statements.
164
7. An overview of the scope of our audit
7.1 Identification and scoping of components
Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the risks of material misstatement at the Group level. Audit work to respond to the risks of material misstatement was performed by the audit engagement team. Our audit scoping provides full scope audit coverage of 100% of the Group's revenue, profit before tax and net assets.
7.2 Our consideration of the control environment
A controls reliance strategy over the banking product cycles was planned and taken. We evaluated the design and implementation and tested the operating effectiveness of controls within the following cycles: cycles: Credit Cards, Savings, Loans, insurance and the common operations processes (products, payments and reconciliations). In order to test the operating effectiveness of each control, a combination of re-performance, inquiry, observation or inspection was performed on a sample basis, tailored to the nature and timing of each control. The IT systems surrounding the above core banking products were in scope for our control reliance approach.
7.3 Working with other auditors
Work on TU, the Group's joint venture with Ageas, was performed by component auditors. The timing of our audit engagement with the component auditors was planned to enable us to be involved during the planning and risk assessment process in addition to the execution of audit procedures. We attended key meetings with TU Management and the component auditor, visited the component auditor, and reviewed the audit files of the component auditor to understand the audit approach adopted, with specific focus over the claims reserves recognised. We also had a dedicated senior member of the audit team focussed on overseeing the role of the component auditors. The materiality level applied by the component auditor of TU was GBP4.4m (2019: GBP4.4m).
8. Other information
The Directors are responsible for the other information. The other information comprises the information included in the Annual Report, other than the Financial Statements and our auditor's report thereon.
Our opinion on the Financial Statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the Financial Statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the Financial Statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the Financial Statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.
In this context, matters that we are specifically required to report to you as uncorrected material misstatements of the other information include where we conclude that:
Fair, balanced and understandable - the statement given by the Directors that they consider the annual report and Financial Statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's position and performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or
Audit Committee reporting - the section describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee.
We have nothing to report in respect of these matters.
165
9. Responsibilities of Directors
As explained more fully in the Directors' responsibilities statement, the Directors are responsible for the preparation of the Financial Statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of Financial Statements that are free from material misstatement, whether due to fraud or error.
In preparing the Financial Statements, the Directors are responsible for assessing the Group's and the parent Company's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so.
10. Auditor's responsibilities for the audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the Financial Statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these Financial Statements.
Details of the extent to which the audit was considered capable of detecting irregularities, including fraud are set out below.
A further description of our responsibilities for the audit of the Financial Statements is located on the FRC's website at: http://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.
11. Extent to which the audit was considered capable of detecting irregularities including fraud
We identify and assess the risks of material misstatement of the Financial Statements, whether due to fraud or error, and then design and perform audit procedures responsive to those risks, including obtaining audit evidence that is sufficient and appropriate to provide a basis for our opinion.
11.1 Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws and regulations, we considered the following:
the nature of the industry and sector, control environment and business performance including the design of the Group's remuneration policies, key drivers for Directors' remuneration, bonus levels and performance targets;
results of our enquiries of Management, internal audit, and the AC about their own identification and assessment of the risks of irregularities;
any matters we identified having obtained and reviewed the Group's documentation of their policies and procedures relating to:
identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance;
detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud;
the internal controls established to mitigate risks of fraud or non-compliance with laws and regulations;
the matters discussed among the audit engagement team and involving relevant internal specialists, including tax, IT, and industry specialists regarding how and where fraud might occur in the Financial Statements and any potential indicators of fraud.
166
11.1 Identifying and assessing potential risks related to irregularities (continued)
As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for fraud and identified the greatest potential for fraud in the following areas: loan impairment provisions, the valuation of the PPI provision, insurance reserving in TU and recognition of revenue. In common with all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of management override.
We also obtained an understanding of the legal and regulatory frameworks that the group operates in, focusing on provisions of those laws and regulations that had a direct effect on the determination of material amounts and disclosures in the financial statements. The key laws and regulations we considered in this context included the UK Companies Act and the HM Revenue and Customs (HMRC) Tax Legislation.
In addition, we considered provisions of other laws and regulations that do not have a direct effect on the financial statements but compliance with which may be fundamental to the group's ability to operate or to avoid a material penalty. These included the requirements of the United Kingdom's Prudential Regulation Authority (PRA) and FCA.
11.2 Audit response to risks identified
As a result of performing the above, we identified ECL provisions, the valuation of the PPI provision, insurance reserving in TU and recognition of revenue as key audit matters related to the potential risk of fraud. The key audit matters section of our report explains the matters in more detail and also describes the specific procedures we performed in response to those key audit matters.
In addition to the above, our procedures to respond to risks identified included the following:
reviewing the Financial Statement disclosures and testing to supporting documentation to assess compliance with provisions of relevant laws and regulations described as having a direct effect on the Financial Statements;
enquiring of Management, the Audit Committee, in-house and external legal counsel concerning actual and potential litigation and claims;
performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due to fraud;
reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence with HMRC, the PRA and the FCA; and
in addressing the risk of fraud through Management override of controls, testing the appropriateness of journal entries and other adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business.
We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including internal specialists, and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit.
Report on other legal and regulatory requirements
12. Opinions and other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of the audit:
the information given in the Strategic Report and the Directors' Report for the financial year for which the Financial Statements are prepared is consistent with the Financial Statements; and
the Strategic Report and the Directors' Report have been prepared in accordance with applicable legal requirements.
In light of the knowledge and understanding of the Group and the parent Company and their environment obtained in the course of the audit, we have not identified any material misstatements in the Strategic Report or the Directors' Report.
167
13. Matters on which we are required to report by exception
13.1 Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
we have not received all the information and explanations we require for our audit; or
adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or
the parent Company Financial Statements are not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
13.2 Directors' remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of Directors' remuneration have not been made.
We have nothing to report in respect of these matters.
14. Other matters
14.1 Auditor tenure
Following the recommendation of the Audit Committee, we were appointed by the Board of Directors on 30 June 2015 to audit the Financial Statements for the year ending 29 February 2016 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments of the firm is four years, covering the years ending 29 February 2016 to 28 February 2019.
14.2 Consistency of the audit report with the additional report to the Audit Committee
Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in accordance with ISAs (UK).
15. Use of our report
This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an Auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed.
Stephen Williams ACA (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Statutory Auditor
Edinburgh, United Kingdom
7 April 2020
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TESCO PERSONAL FINANCE PLC
ABBREVIATIONS
AC Audit Committee AFS Available-for-sale ALCo Assets and Liabilities Management Committee APM Alternative Profit Measure BCBS Basel Committee on Banking Supervision BDAR Bad debt:asset ratio BoE Bank of England BRC Board Risk Committee CA Compliance Advisory CaR Capital at risk CCA Consumer Credit Act CCB Capital conservation buffer CCP Colleague Contribution Panel CCyB Countercyclical capital buffer CEO Chief executive officer CRD Capital Requirements Directive CRO Chief Risk Officer CRR Capital Requirements Regulation CSRBB Credit spread risk in the Banking Book DC Disclosure Committee EAD Exposure at default EBA European Banking Authority ECLs Expected credit losses EEA European Economic Area EIR Effective interest rate ERC Executive Risk Committee ES Ethical Standard EU European Union ExCo Executive Committee FCA Financial Conduct Authority FRC Financial Reporting Council FVOCI Fair value through other comprehensive income FVPL Fair value through profit or loss HMRC HM Revenue and Customs IA Internal Audit IAS International Accounting Standard IAS 17 IAS 17 'Leases' IAS 19 IAS 19 'Employee Benefits' IAS 39 IAS 39 'Financial instruments: Recognition and measurement' IASB International Accounting Standards Board ICAAP Internal capital adequacy assessment process IFRS International Financial Reporting Standard IFRS 4 IFRS 4 'Insurance contracts' IFRS 9 IFRS 9 'Financial instruments'
IFRS 15 IFRS 15 'Revenue from contracts with customers'
IFRS 16 IFRS 16 'Leases'
IFRS 17 IFRS 17 'Insurance contracts'
ILAAP Internal liquidity adequacy assessment process IRC Investment Review Committee IRRBB Interest rate risk in the Banking Book
ISAs (UK) International Standards on Auditing (UK)
ISDA International Swaps Derivatives Association LFR Leverage Framework Regime LGD Loss given default LIBOR London Interbank Offered Rate LRMF Liquidity Risk Management Framework LTV Loan-to-value MLR Market and Liquidity Risk MREL Minimum requirements for own funds and eligible liabilities MRT Material Risk Taker NC Nomination Committee NED Non-Executive Director NSFR Net stable funding ratio OEC Operating Executive Committee ORSA Operational risk scenario analysis PCA Personal Current Account PD Probability of default Plevin Plevin v Paragon Personal Finance Limited PPI Payment protection insurance PRA Prudential Regulation Authority PSD2 Second Payment Services Directive RAM Risk appetite measure RC Remuneration Committee RCSA Risk and control self-assessment RMF Risk management framework RMFu Risk Management Function SA Standardised approach SFTs Securities financing transactions SONIA Sterling Overnight Index Average TCo Treasury Committee TCR Total capital requirement Tesco Tesco PLC TFS Term Funding Scheme TPFG Tesco Personal Finance Group PLC TPP Third-party provider TSL Tesco Stores Limited TU Tesco Underwriting Limited UK United Kingdom WAEP Weighted average exercise price WAFV Weighted average fair value 2018 UK Corporate Governance Code Code 2018
169
TESCO PERSONAL
FINANCE
GROUP PLC
GLOSSARY OF
TERMS
A
Alternative profit measures In the reporting of financial information,
the Directors have adopted various APMs. These
measures are not defined by IFRSs and therefore
may not be directly comparable with other companies'
APMs, including those in the Group's industry.
APMs should be considered in addition to, and
are not intended to be a substitute for, or
superior to, IFRS measurements.
Amortised cost The amount at which the financial asset or
financial liability is measured at initial
recognition minus principal repayments, plus
or minus the cumulative amortisation using
the EIR method of any difference between the
initial amount and the maturity amount and
minus any reduction (directly or through the
use of an allowance account) for impairment
or uncollectability.
Annual earnings at risk Changes in interest rates affect the Bank's
earnings by altering interest rate-sensitive
income and expenses. Excessive interest income
sensitivity can pose a threat to the Bank's
current capital base and/or future earnings.
The Annual Earnings at Risk model measures
the sensitivity of the Bank's earnings to movements
in interest rates over the next 12 months based
on expected cashflows. The Bank assesses the
impact of a +/- 0.25%, 0.50%, 0.75%, 1% shock
in rates versus the base case scenario (2018:
+1.0%; -0.75%). The most adverse scenario is
measured against Risk Appetite.
Annual wholesale refinancing The annual wholesale funding amount is the
amount value of funds requiring to be refinanced in
a rolling 12 month period end.
Asset encumbrance A claim to an asset by another party usually
in the form of a security interest such as
a pledge. Encumbrance reduces the assets available
in the event of default by a bank and therefore,
the recovery rate of its depositors and other
unsecured bank creditors.
B
Basel II Basel II is a set of international banking
regulations put forth by the BCBS. Basel II
expanded rules for minimum capital requirements
established under Basel I and provided the
framework for regulatory review, as well as
set disclosure requirements for assessment
of capital adequacy of banks.
Basel III Basel III is an international regulatory accord
that introduced a set of reforms designed to
improve the regulation, supervision and risk
management within the banking sector.
Bad debt:asset ratio The bad debt:asset ratio is calculated by dividing
the impairment loss by the average balance
of loans and advances to customers.
Basis risk Basis risk is the financial risk that offsetting
investments in a hedging strategy will not
experience price changes in entirely opposite
directions from each other.
Black-Scholes model A financial model used to price options.
Brexit The process by which the UK will leave the
EU.
C
Capital at risk Capital at risk is an economic-value measure
and assesses sensitivity to a reduction in
the Group's capital to movements in interest
rates. When interest rates change, the present
value and timing of future cash flows change.
This changes the underlying value of a bank's
assets, liabilities and off-balance sheet items
and its economic value which in turn poses
a threat to the capital base.
Capital conservation buffer A capital buffer designed to ensure that banks
are able to build up capital buffers outside
of periods of stress which can then be drawn
upon as losses are incurred.
Capital Requirements Directive The Capital Requirements Directive IV (CRD
IV) is an EU legislative package that contains
prudential rules for banks, building societies
and investment firms. Most of the rules in
the legislation have applied since 1 January
2014.
Capital Requirements Regulation The Capital Requirements Regulation (EU) No.
575/2013 is an EU law that aims to decrease
the likelihood that banks become insolvent,
reflecting Basel III rules on capital measurement
and capital standards.
Capital resources Eligible capital held in order to satisfy capital
requirements.
Capital risk The risk that the Group holds regulatory capital
which is of insufficient quality and quantity
to enable it to absorb losses.
Common equity tier 1 capital The highest form of regulatory capital under
CRR, comprising common shares issued, related
share premium, retained earnings and other
reserves less regulatory adjustments.
170
Common equity tier 1 The common equity tier 1 ratio is calculated
ratio by dividing total tier 1 capital at the end
of the year by total risk-weighted assets and
is calculated in line with the CRR.
Company Tesco Personal Finance Group Plc
Concentration risk The risk of losses arising as a result of concentrations
of exposures to a specific counterparty, economic
sector, segment or geographical region.
Cost:income ratio The cost:income ratio is calculated by dividing
operating expenses by total income.
Countercyclical capital A capital buffer which aims to ensure that
buffer capital requirements take account of the macro-economic
financial environment in which banks operate.
This aims to provide the banking sector with
additional capital to protect it from potential
future losses. In times of adverse financial
or economic circumstances, when losses tend
to deplete capital and banks are likely to
restrict the supply of credit, the CCyB should
be released to help avoid a credit crunch.
Covid-19 A new illness, caused by a virus called coronavirus,
that can affect an individual's lungs and airways.
CRD IV Legislation published in June 2013 (in force
from 1 January 2014) by the European Commission,
comprising the CRD and CRR and together forming
the CRD IV package.
Implements the Basel III proposals in addition
to new proposals on sanctions for non-compliance
with regulatory rules, corporate governance
and remuneration.
The rules have been implemented in the UK via
PRA policy statement PS7/13, with some elements
subject to transitional phase-in.
Credit risk Credit risk is the risk that a borrower will
default on a debt or obligation by failing
to make contractually obligated payments, or
that the Group will incur losses due to any
other counterparty failing to meet their financial
obligations.
Credit risk mitigation Techniques (such as collateral agreements)
used to reduce the credit risk associated with
an exposure.
Credit spread risk The risk of adverse effects resulting from
a change in credit spreads, arising from a
bank's non-trading assets and liabilities.
D
Derivatives Financial instruments whose value is based
on the performance of one or more underlying
assets.
E
Encumbrance ratio The encumbrance ratio is calculated as (total
encumbered assets + total collateral received
which has been re-used for financing transactions)
divided by (total assets + total collateral
received which is available for encumbrance).
Equity method A method of accounting whereby the investment
is initially recognised at cost and adjusted
thereafter for the post-acquisition change
in the investor's share of the investee's net
assets. The investor's profit or loss includes
its share of the investee's profit or loss
and the investor's other comprehensive income
includes its share of the investee's other
comprehensive income.
Exposure A claim, contingent claim or position which
carries a risk of financial loss.
Exposure at default or The amount expected to be outstanding after
exposure value any credit risk mitigation, if and when the
counterparty defaults. EAD reflects both drawn
down balances as well as an allowance for undrawn
commitments and contingent exposures.
External Credit Assessment These include external credit rating agencies
Institutions such as Standard & Poor's, Moody's and Fitch.
F
Fair value 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.
Financial Conduct Authority The statutory body responsible for conduct
of business regulation and supervision of UK
authorised firms from 1 April 2013. The FCA
also has responsibility for the prudential
regulation of firms that do not fall within
the PRA's scope.
Forbearance A temporary postponement or alteration of contractual
repayment terms in response to a counterparty's
financial difficulties
Foreign exchange risk The risk that the value of transactions in
currencies other than Sterling is altered by
the movement of exchange rates.
Funding risk The risk that the Group does not have sufficiently
stable and diverse sources of funding.
171
G
General Data Protection The General Data Protection Regulation 2016/679
Regulation is a regulation in EU law on data protection
and privacy for all individuals within the
EU and the European Economic Area (EEA). It
also addresses the export of personal data
outside the EU and EEA areas.
Group The Company and its subsidiaries and joint
venture.
I
Impairment charge and Provisions held on the balance sheet as a result
impairment provisions of the raising of an impairment charge against
profit for the incurred loss inherent in the
lending book. Impairment provisions may be
individual or collective.
Impairment losses The reduction in value that arises following
an impairment review of an asset which has
determined that the asset's value is lower
than its carrying value. For impaired financial
assets measured at amortised cost, impairment
losses are the difference between the carrying
value and the present value of estimated future
cash flows, discounted at the asset's original
effective interest rate.
Insurance risk The risks accepted through the provision of
insurance products in return for a premium.
These risks may or may not occur as expected
and the amount and timing of these risks are
uncertain and determined by events outside
of the Group's control.
Interest rate risk The risk arising from the different repricing
characteristics of the Group's non-trading
assets and liabilities.
Internal capital adequacy The Group's own assessment of the level of
assessment process capital needed in respect of its regulatory
capital requirements (for credit, market and
operational risks) and for other risks including
stress events.
Internal liquidity adequacy An ongoing exercise as part of the PRA's regulatory
assessment process framework to ensure that the Group maintains
adequate liquid assets to survive a defined
stress scenario for a sufficient period as
defined by Risk Appetite.
Internal liquidity requirement In place to ensure that the Group maintains
adequate liquid assets to survive a defined
stress scenario for a sufficient period as
defined by Risk Appetite.
International Swaps and A standardised contract developed by the ISDA
Derivatives Association which is used as an umbrella contract for bilateral
master agreement derivative contracts.
L
Leverage ratio Tier 1 capital divided by total exposure.
Liquidity coverage ratio Liquidity buffer divided by net liquidity outflows
over a 30 day calendar day stress period.
Liquidity risk Liquidity risk is the risk that the Group is
not able to meet its obligations as they fall
due. This includes the risk that a given security
cannot be traded quickly enough in the market
to prevent a loss if a credit rating falls.
Loan to deposit ratio The loan to deposit ratio is calculated by
dividing loans and advances to customers by
deposits from customers.
Loss given default Represents the Group's expectation of the extent
of the loss if there is a default. The LGD
assumes that once an account has defaulted,
the portion of the defaulted balance will be
recovered over a maximum period of 60 months
from the point of default. LGD models take
into account, when relevant, the valuation
of collateral, collection strategies and receipts
from debt sales.
M
Mark-to-market approach One of three methods available to calculate
exposure values for counterparty credit risk.
The method adjusts daily to account for profits
and losses in the value of related assets and
liabilities.
Market risk The risk that the value of earnings or capital
is altered through the movement of market rates.
This includes interest rates, foreign exchange
rates, credit spreads and equities.
Minimum capital requirement The minimum regulatory capital that must be
held in accordance with Pillar 1 requirements
for credit, market and operational risk.
172
MREL ratio The MREL ratio is calculated by dividing total
capital plus MREL debt by risk-weighted assets.
N
Net interest margin Net interest margin is calculated by dividing
net interest income by average interest bearing
assets.
Net stable funding ratio The net stable funding ratio is calculated
under the CRD IV methodology.
O
Ogden tables Tables which are used to calculate the cost
of any claim that involves compensation for
loss of future benefits. The tables provide
an estimate of the return to be expected from
the investment of a lump sum damages award.
Operational risk The risk of loss resulting from inadequate
or failed internal processes, people and systems
or from external events.
P
Past due loans Loans are past due when a counterparty has
failed to make a payment in line with their
contractual obligations.
PD threshold The maximum lifetime PD for each financial
asset that was expected at the reporting date
at initial recognition before a significant
increase in credit risk is deemed to have occurred.
Pension obligation risk The risk to the Group caused by contractual
or other liabilities to or with respect to
a pension scheme.
Pillar 1 The first pillar of the Basel II framework
sets out the minimum regulatory capital requirements
for credit, market and operational risks.
Pillar 2 The second Pillar of the Basel II framework,
known as the Supervisory Review Process, sets
out the review process for a bank's capital
adequacy; the process under which supervisors
evaluate how well banks are assessing their
risks and the actions taken as a result of
these assessments.
Pillar 2A Pillar 2A addresses risks to an individual
firm which are either not captured, or not
fully captured, under the Pillar 1 capital
requirements applicable to all banks.
Pillar 3 The third pillar of the Basel II framework
aims to encourage market discipline by setting
out disclosure requirements for banks on their
capital, risk exposures and risk assessment
processes. These disclosures are aimed at improving
the information made available to the market.
Pipeline risk The lender's risk that, between the time a
lock commitment is given to the borrower and
the time the loan is closed, interest rates
will rise and the lender will take a loss on
selling the loan.
Prepayment risk Prepayment risk is the risk associated with
the early unscheduled return of principal on
a fixed-income security.
Probability of default Represents the likelihood a customer will default
over the relevant period, being either 12 months
or the expected lifetime.
Prudential Regulation The statutory body responsible for the prudential
Authority regulation and supervision of banks, building
societies, credit unions, insurers and major
investment firms in the UK.
Second Payment Services PSD2 is an EU Directive regulates payment services
Directive and payment service providers throughout the
European Union and European Economic Area.
PSD2 updates and replaces the Payment Services
Directive 2008.
R
Recovery plan The framework and recovery options which could
be deployed in a severe stress event impacting
capital or liquidity positions.
Regulatory capital The capital that a bank holds, determined in
accordance with the relevant regulation arising
from Basel III.
Regulatory risk The risk of reputational damage, liability
or material loss from failure to comply with
the requirements of the financial services
regulators or related codes of best practice
applicable to the business areas within which
the Group operates.
173
Repricing risk Repricing risk is the risk of changes in interest
rate charged (earned) at the time a financial
contract's rate is reset. It emerges if interest
rates are settled on liabilities for periods
which differ from those on offsetting assets.
Residual price risk The risk that the fair value of a financial
instrument and its associated hedge will fluctuate
because of changes in market prices, for reasons
other than interest rate or credit risk.
Retail credit risk Retail credit risk is the risk that a borrower,
who is a personal customer, will default on
a debt or obligation by failing to make contractually
obligated payments.
Risk Appetite The level and types of risk that the Group
is willing to assume to achieve its strategic
objectives.
Risk Appetite Measures Measures designed to monitor the Group's exposure
to certain risks to ensure that exposure stays
within approved Risk Appetite.
Risk-weighted assets Calculated by assigning a degree of risk expressed
as a percentage (risk-weight) to an exposure
value in accordance with the applicable SA
rules.
S
Securitisation A securitisation is defined as a transaction
where the payments are dependent upon the performance
of a single exposure or pool of exposures,
where the subordination of tranches determines
the distribution of losses during the life
of the transaction.
Securities financing The act of lending, or borrowing, a stock,
transactions derivative, or other security to or from an
investor or firm.
Stress testing The term used to describe techniques where
plausible events are considered as vulnerabilities
to ascertain how this will impact the capital
resources which are required to be held by
the Group.
Securitisation structured A corporation, trust, or other non-bank entity,
entity established for the purpose of carrying on
securitisation activities. Structured entities
are designed to isolate their obligations from
those of the originator and the holder of the
beneficial interests in the securitisation.
Standardised approach In relation to credit risk, the method for
calculating credit risk capital requirements
using risk-weightings that are prescribed by
the regulator. SAs following prescribed methodologies
also exist for calculating market and operational
risk capital requirements.
Subordinated liabilities Liabilities which, in the event of insolvency
or liquidation of the issuer, are subordinated
to the claims of depositors and other creditors
of the issuer.
T
Tier 1 capital A component of regulatory capital, comprising
common equity tier 1 capital and other tier
1 capital. Other tier 1 capital includes qualifying
capital instruments such as non-cumulative
perpetual preference shares and other tier
1 capital securities.
Tier 2 capital A component of regulatory capital, comprising
qualifying subordinated loan capital and related
non-controlling interests.
Total capital ratio The total capital ratio is calculated by dividing
total regulatory capital by total risk-weighted
assets.
Total capital requirement The amount and quality of capital the Bank
must maintain to comply with the CRR Pillar
1 and the 2A capital requirements.
U
UK Leverage Framework The UK leverage ratio framework currently applies
regime to firms with retail deposits equal to or greater
than GBP50 billion on an individual or consolidated
basis
Underlying cost:income The underlying cost:income ratio is calculated
ratio by dividing underlying operating expenses by
total underlying income.
Unencumbered assets to The minimum unencumbered assets to retail liabilities
retail liabilities ratio ratio is the surplus of unencumbered assets
relative to the total amount of retail liabilities.
W
Wholesale credit risk The risk that the counterparty to a transaction
will default before the final settlement of
the transaction's cash flows. Such transactions
relate to contracts for derivative financial
instruments, securities financing transactions
and long-dated settlement transactions.
174
Wholesale funding ratio The wholesale funding ratio is calculated by
dividing total wholesale funding by total funding.
175
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
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