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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 TIDMTTM
RNS Number : 3702V
Tesco Personal Finance Group PLC
14 April 2021
Tesco Personal Finance Group plc
Publication of Annual Report and Financial Statements for the year ended 28 February 2021
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: https://bank.tescoplc.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 2021.
Enquiries:
Investors Chris Griffith (Tesco PLC) 01707 940 900 Media Simon Rew (Tesco PLC) 0330 678 0639 Barry Cameron (Tesco Bank) 07841 192 899
14 April 2021
TESCO PERSONAL FINANCE GROUP PLC
ANNUAL REPORT AND FINANCIAL STATEMENTS
FOR THE YEARED 28 FEBRUARY 2021
Company Number SC173198
Contents
Directors and Advisers 1 Strategic Report 2 Directors Report 29 Consolidated Income Statement 40 Consolidated Statement of Comprehensive Income 41 Consolidated and Company Statements of Financial Position 42 Consolidated Statement of Changes in Equity 43 Company Statement of Changes in Equity 44 Consolidated and Company Cash Flow Statements 45 Notes to the Financial Statements 46 Independent Auditor's Report 157 Abbreviations 172 Glossary of Terms 173
Directors and Advisers
Hot Features
Premium
Directors: Sir John Kingman Non-Executive Chairman
Julie Currie Independent Non-Executive Director
Robert Endersby Independent Non-Executive Director
Jacqueline Ferguson Independent Non-Executive Director
Richard Henderson Chief Risk Officer
Declan Hourican Chief Financial Officer
Simon Machell Independent Non-Executive Director
Gerard Mallon Chief Executive
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
1 City Square
Leeds
LS1 2AL
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
Strategic Report
The Directors present their Strategic Report for the year ended 28 February 2021.
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.
TPFG is a wholly owned subsidiary of Tesco PLC (Tesco). Tesco results can be found on the Tesco internet page https://www.tescoplc.com.
Business Model
The core objective of the Board is to create and deliver the long-term sustainable success of the Group, generating value for the Group's shareholder and contributing to wider society. The Board 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 (TPF), 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
During the year, significant economic and social disruption has arisen from the Covid--19 pandemic. The Group's priority throughout the year has been helping customers and colleagues through the many challenges created by the Covid--19 pandemic. The Group invoked crisis management plans as it sought to serve and support its customers while maintaining the safety and well--being of colleagues but has since transitioned new working practices to business-as-usual, with ongoing, stable operational performance.
The crisis management response included a focus on operational resilience. The actions taken included enhancing home working capability for colleagues and self-serve capability for customers. Close monitoring remains in place to ensure that the Group's critical functions continue to be resilient. The Group continues to engage with suppliers to ensure that service levels can continue to be maintained throughout a prolonged Covid--19 pandemic. Regulators have been consistently updated with progress through regular and ad--hoc management information and relationship meetings.
The Group reviewed its stress testing scenarios to ensure it has sufficient capital and liquidity to trade through a plausible range of economic outcomes.
The Board has received frequent operational, financial and colleague updates from the Executive team throughout the crisis and provided challenge and support. There has also been a focus on both conduct and prudential impacts and close tracking of all government and regulator correspondence to gauge the potential impact on the Group, now and in the future.
The Group is providing support to those customers who have advised the Group that they are experiencing financial difficulty as a result of the Covid--19 pandemic. During the year, the Group granted temporary payment holidays of GBP762.0m to 139,673 Credit Card and Personal Loan customers who have advised the Group that they are experiencing financial difficulty as a result of the Covid-19 pandemic. These were for an initial period of up to three months and have in some cases been extended by a further three months. Of the payment holidays granted at 28 February 2021, 126,012 have ended, with 85.8% of customers returning to normal payment schedules.
The following table shows the outstanding balances at 28 February 2021 of all accounts where a payment holiday was granted during the year, including their IFRS 9 'Financial Instruments' staging and the percentage of the overall lending portfolio these balances represent:
Gross balances at 28 Volume Stage 1 Stage 2 Stage 3 % Gross balance
February 2021
GBPm GBPm GBPm
Total 13,661 62.7 40.6 1.3 1.5%
Since 28 February 2021, the Group has granted further payment holidays of GBP13.2m to 1,656 Credit Card and Personal Loan customers.
2
Covid-19 (continued)
As a result of the Covid-19 pandemic, customer lending balances have reduced due to lower overall consumer spending and new business volumes in the year. Refer to page 4 for further details of the impact of the Covid-19 pandemic on the Group's income for the year.
There has also been a significant impact on expected credit losses (ECLs) for potential bad debts in the year, with the Group recognising a charge for the year of GBP359.5m (2020: GBP178.6m).
The extension of government support measures such as furlough has been unprecedented and this, coupled with the granting of payment holidays by the Group, has broken the historically observed relationship between unemployment and default. Although projected levels of unemployment remain high, the Group is yet to see significant defaults emerge in its lending portfolio and, as such, Management has applied Covid-19 specific adjustments to the Group's modelled ECL provision to capture the estimated impact of the stress within the Group's ECL provision. Further information in respect of these adjustments is set out at note 38.
The impact of the Covid-19 pandemic on income and ECLs has resulted in a loss for the Group in the year ended 28 February 2021. Notwithstanding this, the Group's capital and liquidity ratios, which are set out on page 8, are expected to remain above regulatory requirements over the periods used by Management to monitor these ratios. The impact of the current economic outlook on ECLs is set out at note 38.
The Board considered in depth the impact of the Covid-19 pandemic on the Group's going concern status. The relevant disclosures are set out on pages 24 to 25 and 29 to 30.
In response to the Covid-19 pandemic and lockdown conditions, the Group introduced a number of benefits to help Tesco customers manage their money a little better every day. These include an increase in the contactless limit from GBP30 to GBP45; the removal of insurance policy change fees, providing customers with flexibility to make changes to their policies; the suspension of overdraft interest on arranged overdrawn Personal Current Account balances up to GBP500 from April until 31 October 2020; and utilising Tesco gift cards to provide school lunches across the UK. Additionally, the Group launched e-gift cards during the year, which allowed friends or relatives to assist vulnerable customers with their shopping.
Acquisition of Tesco Underwriting Limited
During the year, the Group reached an agreement with Ageas (UK) Limited (Ageas UK) to acquire its stake in the Group's joint venture, TU, which will become a 100%-owned subsidiary of the Group. The deal is expected to complete in May 2021, following regulatory approval received in March 2021.
The acquisition is in line with the Group's strategy of focusing on propositions which better meet the needs of Tesco shoppers. The investment will significantly enhance the Group's insurance capability and enable the Group to create an insurance business that is uniquely positioned to help Tesco shoppers manage their money a little better every day.
The Group, TU and Ageas UK are working closely together to ensure a smooth transition as the Group works towards the formal change of ownership.
3
Sale of the Group's Mortgage Business
The Group completed the sale of the majority of its Mortgage business on 27 September 2019 for a cash consideration of GBP3,694.6m. 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 additional cash consideration of GBP53.8m in respect of these accounts. 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 in the current and prior year Consolidated Income Statement.
Further information on the Group's discontinued operations is set out at note 14.
Headlines
Income Statement
-- Loss before tax from continuing operations is GBP154.9m (2020: profit of GBP79.2m).
-- Underlying loss before tax from continuing operations, which excludes items which are not reflective of ongoing trading performance, is GBP152.4m (2020: profit of GBP227.9m). A reconciliation of statutory to underlying (loss)/profit for the current and prior year is set out at note 4.
-- Profit after tax from discontinued operations is GBP0.2m (2020: GBP56.7m). -- Loss before tax from continuing operations
The key drivers of the loss before tax from continuing operations are:
o a 12.4% decrease in net interest income to GBP453.5m (2020: GBP517.5m), reflecting lower interest earnings on the reduced customer lending balances. Net interest margin has increased to 5.2% (2020: 4.4%), predominantly reflecting an improved Credit Card margin and lower funding costs following the sale of the Group's Mortgage business. In the prior year, interest expense of GBP37.5m in respect of the Group's cost of funding the Mortgage business continued to be presented within net interest income of continuing operations. Since this cost could not be directly attributed to liabilities of the Group entered into specifically to fund the Group's Mortgage business, as required by IFRS 5, it was not possible to present this cost within statutory profit for the year after tax from discontinued operations for the prior year. There was no such charge in the current year;
o a 43.1% decrease in net fees and commission income to GBP176.1m (2020: GBP309.7m). Fee and commission income has reduced significantly in the year due to reduced activity as a result of the Covid-19 pandemic. Credit Card fees have been impacted by a large reduction in Credit Card transactions by customers during the lockdown period. Income from the Group's Travel Money service has fallen as this is currently only available online, reflecting the unprecedented fall in demand for Travel Money. ATM income has also decreased as a result of significantly reduced volumes. Insurance income has fallen due to a reduction in premiums in a highly competitive market;
o a loss on financial instruments at FVPL of GBP2.5m (2020: GBP4.1m);
o a loss on disposal of investment securities of GBPnil (2020: GBP0.2m);
o a decrease of 23.7% in operating expenses to GBP438.7m (2020: GBP575.3m). This includes, in the prior year, an additional payment protection insurance charge of GBP45.0m and restructuring charges of GBP65.8m, comprising accelerated amortisation of GBP55.0m and other restructuring costs of GBP10.3m. There were no such charges in the current year. Operating expenses also reflect an overall reduction in activity due to the Covid-19 pandemic;
4
-- Loss before tax from continuing operations (continued)
o a 101.3% increase in charges for ECLs on financial assets to GBP359.5m (2020: GBP178.6m). Although projected levels of unemployment remain high, the Group is yet to see significant defaults emerge in its lending portfolio and, as such, Management has applied Covid-19 specific adjustments to the Group's modelled ECL provision to capture the estimated impact of the stress within the Group's ECL provision. Further information in respect of these adjustments is set out at note 38. The bad debt:asset ratio in respect of continuing operations increased to 4.6% (2020: 1.6%); and
o a 58.8% increase in the Group's share of profit from its joint venture, TU, to GBP16.2m (2020: GBP10.2m). This includes, in the prior year, a credit of GBP3.7m, representing the Group's share of credits recognised by TU during the prior 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. There was no such credit in the current year. The increase in profit is predominantly driven by a reduction in motor insurance claims as a result of the Covid-19 pandemic.
-- Income tax credit on loss from continuing operations
Income tax on the Group's loss from continuing operations for the year is a credit of GBP51.2m (2020: charge of GBP32.7m). This predominantly reflects the impact of the Covid-19 pandemic on the Group's results for the year and the expected relief of the loss for the year against prior year profits.
-- Profit after tax from discontinued operations
The reduction in profit after tax from discontinued operations to GBP0.2m (2020: GBP56.7m) predominantly reflects the impact of the sale of the Group's Mortgage business, the majority of which completed in September 2019. The key components are net interest income of GBPnil (2020: GBP41.3m), other income of GBP(0.6)m (2020: GBP(6.6)m), a reduction in operating expenses to a credit of GBP0.4m (2020: expense of GBP17.0m), a post-tax gain on sale of GBP0.4m (2020: GBP43.0m) and a reduction in tax to a credit of GBPnil (2020: charge of GBP5.1m). As the remaining Mortgage business was migrated to the purchaser on 30 March 2020, the current year profit after tax from discontinued operations reflects only one month of trading and the sale of the remaining element of the Mortgage business which continued to be recognised at 29 February 2020.
Balance Sheet
-- Loans and advances to customers have decreased by 24.2% to GBP6.4bn (2020: GBP8.5bn). Credit Card balances have reduced by 29.1% due to lower overall consumer spend in the year, while Personal Loans have reduced by 20.1%, reflecting lower new business volumes during the year.
-- Customer deposits, which continue to be the Group's main source of funding, have decreased by 25.5% to GBP5.7bn (2020: GBP7.7bn) as the Group has continued to reduce its Savings balances in response to the reduced activity in loans and advances to customers as a result of the Covid-19 pandemic and the reduction in funding requirements following the sale of the Mortgage business. At the year end, the Group had accessed GBP500.0m of funds from the Bank of England's (BoE) Term Funding Scheme (TFS) (2020: GBP500.0m) and GBP100.0m (2020: GBPnil) under the BoE's TFS with incentives for Small and Medium Sized Entities.
-- The balance sheet remains well positioned to support future lending growth from both a liquidity and capital standpoint. At 28 February 2021, the total capital ratio was 28.4% (2020: 23.3%) and the net stable funding ratio (NSFR) was 127.6% (2020: 129.3%).
5
Regulatory Developments
The Group continues to monitor and prepare for a number of regulatory changes taking effect over the next few years.
Onshoring of European Union (EU) Regulations After Brexit
Following the UK's withdrawal from the EU and the ending of the transition period, any reference to EU regulations and directives (including technical standards) should be read as a reference to the UK's version of such regulation or directive, as onshored into UK law under the European Union (Withdrawal) Act 2018, as amended.
Open Banking
Open Banking, which is supported by a secure technology standard, is designed to give customers more control over their financial data and money. Customers can more easily compare accounts from different providers, understand features, service quality and pricing, and select which offers best value. Using Open Banking, the Group's customers can choose to connect their Credit Cards, Instant Access Savings Accounts, Internet Saver accounts or Personal Current Accounts to third-party providers (TPPs), which provide a range of different Apps and websites offering new ways for customers to manage money and make payments.
During the year, the Group enabled Credit Card customers to more easily manage and pay their balances, launching a 'Pay by Bank' facility, which is a market leading Open Banking feature. This facility enables Mobile and Online Credit Card customers to make payments directly from their personal current account via electronic payment devices. In doing so, the Group became the first UK bank to introduce this functionality.
Capital Requirements Regulation
Amendments to the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD) were published in the Official Journal of the European Union on 7 June 2019, including amendments due in June 2021. However, in a joint statement, published on 16 November 2020, HM Treasury, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) confirmed an implementation date of 1 January 2022 for those Basel III reforms which make up the UK equivalent to the outstanding elements of the EU's second CRR. The Group of Central Bank Governors and Heads of Supervision announced in March 2020 that the implementation of the Basel III standards would be delayed by one year to 1 January 2023.
Minimum Requirements for Own Funds and Eligible Liabilities
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 applicable from 1 January 2023. The interim target remains at 18% of risk-weighted assets until 31 December 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 TPF via an intercompany subordinated loan. Further issuances may be required to support end-state requirements. Refer to page 8 for details of the Group's compliance with MREL requirements as at 28 February 2021.
Upon full implementation, MREL targets will 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 would be likely to need post-resolution.
Countercyclical Capital Buffer
The Financial Policy Committee of the BoE is responsible for setting the UK countercyclical capital buffer (CCyB), being the rate that applies to UK exposures of banks, building societies and large investment firms incorporated in the UK. In response to the economic shock from the Covid-19 pandemic, the Financial Policy Committee reduced the UK CCyB from 1.0% to 0.0% on 11 March 2020, to support further the ability of banks to supply the credit needed to bridge a potentially challenging period. Following its meeting in December 2020, the Financial Policy Committee confirmed that it expects the 0% rate to remain until at least Q4 of 2021. Due to the usual 12 month implementation lag, any subsequent increase in the CCyB requirement is not expected to take effect until Q4 2022 at the earliest.
6
Regulatory Developments (continued)
Climate Change
The Group has identified climate change as a risk on which there is growing focus. During the year, the 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 defined its strategy and approach for managing climate change risk, which was reviewed and approved by the Board in September 2020. This strategy commits the Group to have net zero carbon emissions from its own operations by 2035, with a series of carbon reduction targets currently under development. The strategy also sets out the Group's approach to dealing with the physical and transition risks associated with climate change as well as the opportunities that climate change may present. Management continues to engage regularly with Tesco to ensure that the Group remains aligned in its approach to managing climate change risk and that best practices are shared between these businesses.
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). As part of the plan to tackle climate change, a Climate Change Steering Group has been established, with Senior Executive attendance from across the Group. Steering Group members have ownership and oversight of the work being undertaken to address climate change. The Board Risk Committee (BRC) and Board review the plan and progress on at least an annual basis.
The identification and management of climate-related risks follow the Group's established risk management process. A number of enhancements have been made to the Bank's risk management framework over the past 12 months to support the effective management of climate change risk, including amendments to the new product approval and change processes.
The Group has also analysed two climate-related scenarios considering the potential impacts to the Group's customers and business arising from both a transition and physical risk scenario over the period to 2030. The scenarios have not identified any material threats to the Group's current business model arising from climate change. Further climate-related scenario analysis is planned for the upcoming financial year.
The Group has engaged with an environmental consultancy to perform an assessment of its carbon footprint arising from its operations. This assessment will be used to set targets, which will be subject to Board approval, for reducing the Group's environmental impact in order to achieve its strategy of being net zero from its own operations by 2035. The Group is working towards disclosure, by 28 February 2022, of its carbon footprint and relevant environmental targets, in line with the Science Based Targets initiative and Task Force on Climate-related Financial Disclosures principles.
IBOR Reform
The Group has transitioned the majority of its London Interbank Offered Rate (LIBOR) exposures to Sterling Overnight Index Average (SONIA). The only remaining LIBOR exposure relates to the Group's investment in subordinated debt issued by TU, which the Group expects to transition to SONIA by 31 December 2021.
7
Key Performance Indicators
The Directors consider the following to be Key Performance Indicators for the Consolidated Income Statement:
2021 2020
Underlying net interest margin 5.2% 4.1%
Net interest margin 5.2% 4.4%
Underlying cost:income ratio 69.7% 53.7%
Cost:income ratio 70.0% 69.9%
Bad debt:asset ratio 4.6% 1.6%
Capital and Liquidity Ratios
The Directors consider the following to be Key Performance Indicators for capital and liquidity reporting:
2021 2020
Common equity tier 1 ratio 25.3% 20.7%
Total capital ratio 28.4% 23.3%
MREL ratio 31.9% 26.1%
Net stable funding ratio 127.6% 129.3%
Underlying loan to deposit ratio 111.6% 110.2%
Loan to deposit ratio 111.6% 109.7%
The Group's total capital ratio remains above internal targets and regulatory requirements at 28.4% (2020: 23.3%) 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. On 27 June 2020, the CRR was further amended to accelerate specific CRR2 measures and implement a new IFRS 9 transitional relief calculation which applies additional relief to increases in ECL provisions arising as a result of the Covid-19 pandemic. The Group's total capital ratio remains above regulatory requirements at 28.4% (2020: 23.3%) on a transitional basis. On an end-point basis, the Group's total capital ratio is 25.1% (2020: 21.7%), which is also above regulatory requirements. Refer to note 42 for full details of the impact of these amendments on the Group.
An interim MREL ratio requirement of 18% of risk-weighted assets has been set from 1 January 2020 to 31 December 2022. At 28 February 2021 the ratio was 31.9% (2020: 26.1%).
The NSFR, a measure of the Group's liquidity position, is within appetite at 127.6% as at 28 February 2021 (2020: 129.3%). The Group maintains a liquid asset portfolio of high quality securities of GBP1.7bn (2020: GBP2.5bn).
8
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 17 to 24.
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.
9
Principal risks and uncertainties Key controls and mitigating factors
Covid-19 The principal risk categories impacted
During the current financial by the Covid-19 pandemic were credit
year the Covid-19 pandemic and operational risk. Further information
has caused significant economic on the impact on the Group of the
and social disruption. The Covid-19 pandemic in respect to
Group has been impacted by these risks and the Group's response
higher ECLs arising from the are set out under the relevant sections
economic downturn and lower below.
revenues as a result of lower Regulators have been consistently
consumer spending and borrowing. updated with progress through regular
The Group's future performance and ad--hoc management information
is sensitive to the speed of and relationship meetings.
the economic recovery. The Board has received frequent
operational, financial and colleague
updates from the Executive team
throughout the crisis and provided
challenge and support. There has
also been a focus on both conduct
and prudential impacts and close
tracking of all government and regulator
correspondence to gauge the potential
impact on the Group, now and in
the future.
Credit risk All lending is subject to underwriting
The risk that a borrower will processes and the performance of
default on a debt or obligation all exposures is monitored closely.
by failing to make contractually Regular management reports are submitted
obligated payments, or that to the Board and appropriate Committees.
the Group will incur losses The macro-economic outlook deteriorated
due to any other counterparty significantly due to the Covid-19
failing to meet their financial pandemic. This resulted in a significant
obligations increase in credit risk provisions
to account for the future rise in
expected defaults and the potential
for reduced recoverability relating
to customers in arrears. Planning
for the timing of these defaults
through the Covid-19 pandemic stress
has proven difficult due to the
various customer, regulatory and
Government support measures that
are in place. These measures have
reduced the overall impact of the
stress but have meant that, although
projected levels of unemployment
remain high, the Group is yet to
see significant defaults emerge
in its lending portfolio.
The Group has improved its IFRS
9 models that are used to evaluate
the impact of various macro-economic
scenarios and has regularly benchmarked
its macro-economic outlook against
other external forecasts to ensure
its ECL provisions remain at appropriate
levels.
Prior to the start of the Covid-19
pandemic, the Group already had
a suite of early warning indicators
in place, together with playbooks
for a range of economic scenarios.
These playbooks were deployed in
response to the Covid-19 pandemic
recession, resulting in a range
of actions to tighten credit underwriting
criteria. The Group's risk appetite
framework was also enhanced to limit
exposure to certain higher risk
segments.
10
Credit risk (continued) The performance of the credit portfolios
is actively monitored and, during
the Covid-19 pandemic stress, this
has included evaluating the credit
quality of customers accessing payment
holiday support and their subsequent
performance at the end of the payment
holiday period. Analysis was also
undertaken to understand which customers
will be more or less impacted by
the Covid-19 pandemic. These activities
help ensure that the Group's underwriting
controls remain appropriate for
the latest macro-economic outlook.
Management has applied specific
adjustments to the Group's modelled
ECL provision to capture the estimated
Operational risk impact of the stress within the
The risk of loss resulting Group's ECL provision. Further information
from inadequate or failed internal in respect of these adjustments
processes, people and systems is set out at note 38.
or from external events. The Group reviewed its stress testing
scenarios to ensure it has sufficient
capital and liquidity to trade through
a plausible range of economic outcomes.
The Group aims to manage operational
risks within defined Risk Appetite
limits.
Business units and functions assess
operational risks on an ongoing
basis via a prescribed Risk and
Control Self Assessment (RCSA) process
and operational risk scenario analysis.
The RCSA process is reviewed and
updated on a timely basis by first
line business areas to reflect the
risk and control environment and
any changes 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
The Group's priority throughout
the year has been helping customers
and colleagues through the many
challenges created by the Covid--19
pandemic. The Covid-19 pandemic
posed a number of operational risks
to the Group, including a high proportion
of colleagues changing to work from
home at short notice and for extended
periods; the need to implement social
distancing measures across the Group's
premises for colleagues unable to
work from home; introducing new
operational processes quickly such
as those related to customer payment
holidays; the potential for the
Group's suppliers to be impacted
by the Covid-19 pandemic; and increased
operational volumes such as those
related to refunds associated with
holiday cancellations.
11
Operational risk (continued) The Group invoked crisis management
plans as it sought to serve and
support its customers throughout
the early stages of the Covid-19
pandemic while maintaining the safety
and well--being of colleagues but
has since transitioned new working
practices to business-as-usual,
with ongoing, stable operational
performance. The crisis management
response included a focus on operational
resilience. The actions taken included
enhancing home working capability
for colleagues and self-serve capability
for customers. Close monitoring
remains in place to ensure that
the Group's critical functions continue
to be resilient.
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 procurement
and the 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.
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.
12
Operational risk (continued) 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 Asset and Liability Management
its obligations as they fall Committee (ALCo), BRC and the Board.
due. This includes the risk that The Group maintains a liquidity position
a given security cannot be traded in excess of internal and regulatory
quickly enough in the market requirements. The Treasury function
to prevent a loss if a credit ensures all liquidity and funding
rating falls. measures are managed within policy
Funding risk is the risk that and Risk Appetite on a daily basis.
the Group does not have sufficiently The key liquidity and funding measures
stable and diverse sources of monitored on a daily basis are set
funding. out on page 122. The Group measures
and manages liquidity adequacy in
line with these 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.
Liquidity and funding risk is assessed
through the internal liquidity adequacy
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 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.
13
Market risk
The risk that movements in market Control of market risk is governed
prices (such as interest rates, by the ALCo and Treasury Committee
foreign exchange rates and the (TCo). These bodies provide oversight
market value of financial instruments) of the Group's market risk position
lead to a reduction in either at a detailed level, providing regular
the Group's earnings or capital. reports and recommendations 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 comply
liability or material loss from with the relevant rules, regulations
failure to comply with the requirements and data protection legislation.
of the financial services regulators As part of the Group's Policy Framework,
or related codes of best practice a dedicated Compliance team is responsible
applicable to the business areas for the Compliance and Conduct Risk
within which the Group operates. 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.
14
Regulatory risk (continued) The risk that regulatory changes
such as Open Banking, the Second
Payment Services Directive (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 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, 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.
15
Brexit
The Brexit transition period The most significant potential impact
ended on 31 December 2020, with arises in respect of credit risk relating
the UK agreeing a trade deal to the performance of the Group's
with the European Union. In preparation portfolio of loans and advances to
for Brexit, the Group actively customers. Their performance and the
considered the potential risks associated ECLs required will be influenced
associated with the UK's exit by the macro-economic outcomes of
from the EU and their impact Brexit. Assessment of the ECL allowance
on both the UK financial services under IFRS 9 has considered a range
market and the Group itself. of macro-economic scenarios.
The Group also continues to monitor In addition, the Group's ILAAP and
related developments to the UK's ICAAP are designed to ensure that
exit from the EU, including the the Group has sufficient capital resources
possibility of a second Scottish to allow it to cope with a severe
independence vote. economic stress and maintain sufficient
liquidity above required limits throughout
the going concern forecast period.
The Group also established a Brexit
working group with the remit to ensure
operational readiness, focussing on
the impacts relating to customers,
colleagues and suppliers. The working
group undertook a significant amount
of planning and assessment work, readying
solutions for known impacts and potential
trade deal scenarios. As a UK retail
bank, the impacts were assessed as
being limited and as a result of the
trade deal being reached, heightened
operational readiness activities were
stood down and returned to business-as-usual
activity.
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 III Disclosure Statements of TPFG for the year ended 28 February 2021. These disclosures will be published in the Financial Information section of the Group's corporate website in due course.
16
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. The governance structure set out in these disclosures describes the structure that was in place as at 28 February 2021.
The Board
Chair Executive Directors Non-Executive Directors
Sir John Kingman Richard Henderson Julie Currie
Declan Hourican Robert Endersby
Gerard Mallon Jacqueline Ferguson
Simon Machell
Amanda Rendle
Alan Stewart
James Willens
On 17 April 2020, Graham Pimlott retired from his position as the Independent Non--Executive Chair. James Willens was appointed to the role on an interim basis, assuming responsibility for the role during the period until Sir John Kingman was permanently appointed to the position on 7 July 2020. James Willens re--assumed his role as Senior Independent Non--Executive Director on 7 July 2020. During the year, James McConville resigned from his role on the Board and was replaced by Julie Currie, who was also appointed as Chair of the Board Audit Committee (BAC).
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.
17
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
Board Audit Board Risk Board Remuneration Board Disclosure Board 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. The Group 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://bank.tescoplc.com/.
In February 2021, the Group provided an update on progress against gender pay gap targets that showed it had not met its objectives for the year. Whilst the Group is ahead of the financial services industry average, it remains short of the UK-wide average. The Group remains committed to improving the gender balance across the business.
The Group appointed an Executive Sponsor for Inclusion who is also accountable for progress towards the Women in Finance Charter targets. Gerry Mallon 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 (NomCo) in reviewing the diversity of the Board, and the Group's Senior Management, is set out on page 21.
18
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 Remuneration Board Disclosure Board Nomination
Board Risk Board Audit Committee Committee Committee
Board Committee Committee
Sir John Kingman 21/21 6/6 - 7/7 - 6/6
Richard Henderson 21/21 - - - 4/4 -
Declan Hourican 21/21 - - - 4/4 -
Gerard Mallon 21/21 - - - - -
Julie Currie(2) - - 1/1 - - -
Robert Endersby(3) 21/21 6/6 9/9 7/7 4/4 2/2
Jacqueline Ferguson(4) 17/21 5/6 9/9 - - 1/2
Simon Machell 21/21 - 9/9 - - 6/6
James McConville(5) 19/21 5/5 8/8 - 4/4 2/2
Amanda Rendle 20/21 6/6 - 7/7 - 6/6
Alan Stewart(6) 19/21 5/6 - - - 2/2
James Willens 21/21 6/6 - 7/7 4/4 6/6
Graham Pimlott(7) 6/6 1/1 - 3/3 2/2 1/1
(1) Attendance recorded is of Committee members only and does not reflect Directors' attendance as observers.
(2) Julie Currie was appointed to the Board on 1 February 2021.
(3) Robert Endersby was appointed to the Nomination Committee on 1 December 2020.
(4) Jacqueline Ferguson was appointed to the Nomination Committee on 1 December 2020.
(5) James McConville was appointed to the Nomination Committee on 1 December 2020 and resigned from the Board on 1 February 2021.
(6) Alan Stewart was appointed to the Nomination Committee on 1 December 2020.
(7) Graham Pimlott resigned from the Board on 17 April 2020.
19
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 2020/21, an internal Board evaluation has been carried out in order to assess the Board's and Directors' collective progress against the Group's objectives. The evaluation was carried out in accordance with the FRC guidance on board effectiveness. Interviews were held with each Board member, members of the Group's Executive Committee and a selection of senior management. The conclusion of the evaluation was that the Board remains effective, with some minor areas to support continuous improvement. These improvements included identifying opportunities to support more colleague engagement, additional Board training sessions and further consideration of a longer term view on certain Board topics.
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:
-- Board Audit Committee (BAC)
The BAC comprises Julie Currie (Chair), Robert Endersby, Jacqueline Ferguson and Simon Machell.
The role of the BAC 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 BAC is included within the BAC section of the Directors' Report.
-- Board Risk Committee (BRC)
The BRC comprises Robert Endersby (Chair), Jacqueline Ferguson, Sir John Kingman, Amanda Rendle, Alan Stewart and James Willens.
The role of the BRC is to oversee that a culture is appropriately embedded which recognises risk and encourages all colleagues 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.
20
The Board (continued)
-- Board Remuneration Committee (RemCo)
The RemCo comprises Amanda Rendle (Chair), Robert Endersby, Sir John Kingman, Simon Machell and James Willens.
The role of the RemCo is to monitor compliance with regulatory requirements relating to remuneration, specifically the approval and identification of Material Risk Takers (MRTs) and overseeing the establishment and implementation of a Remuneration Policy for all colleagues within the Group (including specific arrangements for MRTs). The RemCo also provides performance and risk assessment in the determination of pay outcomes including the oversight of pay outcomes for MRT colleagues. The RemCo seeks to ensure that the levels and structure of remuneration are designed to attract, retain, and motivate the 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.
-- Board Disclosure Committee (DisCo)
The DisCo comprises James Willens (Chair), Julie Currie, Robert Endersby, Richard Henderson and Declan Hourican.
The DisCo 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.
-- Board Nomination Committee (NomCo)
The NomCo comprises Sir John Kingman (Chair), Julie Currie, Robert Endersby, Jacqueline Ferguson, Simon Machell, Amanda Rendle, Alan Stewart and James Willens.
The NomCo 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 NomCo is responsible for the evaluation of Board members' performance and appointment of new Board members. The NomCo 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 and Carlyle Associates 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 NomCo. The Group's Diversity and Gender Balance Policy is discussed in further detail on page 18.
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 support delivery against the 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, challenging 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.
21
Executive Committee (ExCo) (continued)
In addition, in order to support its 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.
-- Asset and Liability 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 BRC 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 six sub-committees: Operational Risk Committee; Executive Credit Committee; Models and Ratings Systems Oversight Committee; Financial Crime Committee; the Compliance and Conduct Risk Committee; and the Third Party Governance Committee.
-- Investment Review Committee (IRC)
The IRC has been established to support the Chief Executive 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.
-- Operating Executive Committee (OEC)
The OEC has been established to support the Chief Customer Officer, Chief Operating Officer, Colleague Experience Director 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); trade performance (including pricing plans and customer impact of pricing decisions); operational matters; change initiatives; risk management; and certain colleague related matters. The OEC minutes are circulated to the ExCo, with any material matters being escalated, as appropriate.
22
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 BAC 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.
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 BAC 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 BAC in relation to internal audit matters; and providing input to the Tesco IA department's reporting to the Tesco Audit Committee.
23
Three Lines of Defence (continued)
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.
-- 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 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 38 and its capital position is set out at note 42.
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Viability Statement (continued)
-- 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 10 to 16.
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.
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 as income and charges for ECLs continue to be affected by the Covid-19 pandemic. As part of this, the Board considered the latest macro-economic scenarios which were received from the Group's third-party supplier. These are discussed in note 38;
-- The sufficiency of the Group's capital base throughout the Covid-19 pandemic. The revised macro-economic scenarios received were significantly less severe than those used in the ICAAP reverse stress test. The Group reviewed its stress testing scenarios to ensure it has sufficient capital and liquidity to trade through a plausible range of economic outcomes;
-- 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.
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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.
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 30 to 32.
The Board has made some key strategic decisions during the year ended 28 February 2021 where due consideration was given to the Group's key stakeholders, including:
Covid-19 pandemic response
During the year, significant economic and social disruption has arisen from the Covid--19 pandemic. The Group's priority throughout the year has been helping customers and colleagues through the many challenges created by the Covid--19 pandemic. The Group invoked crisis management plans as it sought to serve and support its customers throughout the early stages of the pandemic while maintaining the safety and well--being of colleagues but has since transitioned new working practices to business-as-usual, with ongoing, stable operational performance. The crisis management response included a focus on operational resilience. The actions taken included enhancing home working capability for colleagues and self-serve capability for customers. Close monitoring remains in place to ensure that the Group's critical functions continue to be resilient.
Regulators have been consistently updated with progress through regular and ad--hoc management information and relationship meetings.
The Group reviewed its stress testing scenarios to ensure it has sufficient capital and liquidity to trade through a plausible range of economic outcomes.
The Board has received frequent operational, financial and colleague updates from the Executive team throughout the crisis and provided challenge and support. There has also been a focus on both conduct and prudential impacts and close tracking of all government and regulator correspondence to gauge the potential impact on the Group, now and in the future.
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Covid-19 pandemic response (continued)
The Group maintained full alignment with the industry approach to offering customers payment holidays for Credit Cards and Loans, and interest-free overdrafts (up to the industry's GBP500 limit) for Personal Current Accounts. As the impact of the Covid-19 pandemic grew, and furlough was extended, the period for which customers were able to take payment holidays was increased from three to six months, with 31 July 2021 being the last date for an extension to complete. Customer research has also helped identify the best solutions for those customers in financial difficulties. New forbearance treatments were launched in response to this work, combined with the payment holidays and fee amendments, which have helped prevent over 100,000 customers from going into arrears.
The Board continually seeks to strike the right balance between tightening credit criteria as a result of the recession and uncertain economic outlook and supporting customers and lending responsibly.
FCA guidance set out measures the FCA expected firms to follow to support customers with insurance and premium finance products and this resulted in the Group providing enhanced communications to customers, proactively contacting customers where financial distress was indicated, allowing customers to defer payments without any missed payments being reported as arrears and giving due consideration to alternative repayment options. The Group therefore implemented a range of options including reduced payments, rescheduling the repayment term, waiving fees and amending repayment dates. These changes were made to better support customers where their circumstances were impacted.
The Covid-19 pandemic had, and is having, a significant impact on many of the Group's customers, particularly the elderly and vulnerable. In collaboration with the Group's partners, customers were provided with the ability to access cash safely at stores through implementing social distancing and hourly cleaning of the ATMs. In May 2020, the Tesco volunteer e-gift card was launched, allowing customers to stay at home while volunteers shopped on their behalf using the gift card to pay securely. Other actions included increasing the contactless payment limit (from GBP30 to GBP45) and introducing a cash delivery service for the Group's Personal Current Account customers.
The Covid-19 pandemic drove a nationwide shift towards digital adoption and, consequentially, the decision was taken to accelerate investment in the Group's digital transformation strategy, delivering a two-year plan in one year. This included the launch of the new Group website, significantly improving the design and navigation of the website, thereby improving accessibility and the customer experience. 'Pay by Bank', a market leading Open Banking feature, which allows Mobile and Online Credit Card customers to make payments directly from a personal current account via electronic payment devices. In doing so, TPF became the first UK bank to introduce this functionality. The Group's digital adoption has also increased, not only improving the customer experience, but also reducing the cost to the business to serve customers. IT resilience continues to be a key consideration for the Group as part of all business-as-usual activities and project implementation.
The Group's response to the Covid-19 pandemic included some key decisions taken to consider colleagues. The Government's furlough scheme was not utilised. A decision was taken to award a bonus to those frontline colleagues who were required to be in the office to serve customers. This bonus mirrored that awarded to Tesco Stores' frontline colleagues. This recognised the key role that these colleagues played, working tirelessly to help and serve customers at such a challenging time. The Group now has the technical capabilities in place to support 60% of its frontline colleagues and all office function colleagues working from home. The sudden shift to remote working surfaced a need to support colleagues in setting up an effective workspace at home, and therefore a home working allowance was paid to colleagues. Whilst the Group follows the government guidance to ensure colleagues can work from home, there remains an opportunity for certain colleagues to work from the office if this suits their individual preference and supports their wellbeing. The Group's three offices have remained open throughout the Covid-19 pandemic, albeit at different occupancy levels, with work being undertaken to evaluate how the offices may function in the future. This work has included seeking feedback from colleagues and the introduction of some pilot work to help support the decisions that will require to be made, shifting the focus from full office building occupancy to hubs that can be used to support a collaborative approach to working.
The Group's colleague leadership and capability programmes were refocused on leading and managing teams in remote environments. Health and wellbeing initiatives, borne out of feedback and colleague sentiment from continuous listening throughout the year, were developed and delivered. This included supporting colleagues with a Tesco gift card at Christmas. In addition, several minor changes to policies, to support colleague wellbeing, were made during the year, recognising the impact on colleagues' work life balance.
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Optimising the Group's Insurance business
Following a strategic review, the Board recognised the continued importance of insurance to Tesco shoppers. The opportunity to increase profitability and better serve Tesco customers through enhanced product offerings and an optimised operating model was identified. End-to-end control of the Group's insurance offering, from sales and service to claims, was identified as the optimal model to allow the Group to become a market-leading insurer and to achieve its strategic objectives for insurance. As a result, in October 2020 the Group announced its intention to acquire Ageas (UK)'s 50.1% share of TU, giving the Group full control, in a deal due to complete in May 2021, following regulatory approval received in March 2021.
In January 2021, the Group also announced its intention to exit the panel for Home and Motor insurance, leaving TU as the sole underwriter for these products. Work is progressing to ensure engagement with, and consideration of, the colleagues and suppliers involved in delivering the Group's insurance offering. Simultaneously, the Group is investing in its insurance propositions to broaden its offering through new products and changes to its existing products to ensure that these continue to meet the needs of Tesco customers. The cumulative effect of these changes will allow customers to benefit from a streamlined insurance purchase and renewal journey and experience a service and claims proposition aligned with the Tesco brand values.
Colleagues in TU will transition across to the Group following completion of the acquisition with harmonised terms and conditions to maintain alignment of colleagues across the Group. Consultation with impacted colleagues has been undertaken.
The benefits for the Group include an improved insurance proposition that deepens Tesco's relationship with its existing shoppers. It is also a proposition that can attract customers to Tesco and introduce them to other Group banking products. This will generate a stable income from a business that can grow quickly and be relatively predictable as well as generating healthy profitability and supporting the delivery of good customer outcomes. Implementation of fair pricing remedies, together with the opportunities available through alignment with Tesco's strong brand, customer franchise and loyalty, will help the Group to deliver on its strategic ambitions for insurance.
The Group engaged with the FCA and PRA on the proposed changes at an early stage and active dialogue has continued as these have progressed.
The Strategic Report was approved by the Board of Directors and signed by order of the Board.
Michael Mustard
Company Secretary
12 April 2021
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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 28 February 2021.
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 Remuneration Committee 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 8.
Risk Management
The Group's risk management disclosures are set out in the Strategic Report on pages 9 to 16.
Financial Instruments
The Group's policies for hedging each major type of transaction are discussed in notes 1 and 18 to the Financial Statements.
Capital Structure
The Group's capital structure is discussed in note 42 to the Financial Statements.
Events after the Reporting Date
Details of events occurring after the reporting date are discussed in note 47 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.
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Going Concern (continued )
As part of this assessment the Board considered:
-- The impact on the Group's profits as income and charges for ECLs continue to be affected by the Covid-19 pandemic. As part of this, the Board considered the latest macro-economic scenarios which were received from the Group's third-party supplier. These are discussed in note 38;
-- The sufficiency of the Group's capital base throughout the Covid-19 pandemic. The revised macro-economic scenarios received were significantly less severe than those used in the ICAAP reverse stress test. The Group reviewed its stress testing scenarios to ensure it has sufficient capital and liquidity to trade through a plausible range of economic outcomes;
-- 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 Covid-19 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.
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 28 February 2021 can be found in the Strategic Report on pages 26 to 28.
-- Our Customers
The Group is here to help Tesco shoppers manage their money a little better every day. Developing customer-centric insights is key to how the Group designs new services and improves existing services for Customers, bringing the best of Tesco to help shoppers with their money needs.
The Group has typically interacted with customers in a variety of ways, including face-to-face, in stores, through surveys and remotely via telephone and online, all with the common goal to deepen the Group's understanding of its customers, learn from them and understand their financial needs. The Covid-19 pandemic has meant that the Group has had to amend the ways in which it interacts with customers. Face-to-face interactions have temporarily stopped but that has not prevented the Group from connecting with customers on a regular basis. The Group has quickly changed the way in which it interacts with its customers by using a series of digital tools to ensure customers can provide timely and relevant feedback.
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Our Customers (Continued)
The Group continues to invest and look at ways to connect Tesco shoppers to the right banking and insurance products for their needs. Investment continues in technology, data, design and personalised marketing. This connection ensures the Group develops its relationship with its customers to serve more of their money needs, gaining trust and loyalty in return.
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 3,700 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, 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, 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, Workplace Options, 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.
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-- Our Colleagues (continued)
The Colleague Contribution Panel (CCP) is a panel of elected colleagues from all across the Tesco group who 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 Colleague Experience Director provides feedback from the CCP to the Group's Executive Management team and works directly with the Tesco Board to respond to CCP outputs relevant to the Group. A CCP meeting was held in November 2020, with outputs shared with the Tesco Executive team and the Tesco Board in February 2021. There were no specific actions for the Group to address following this meeting. In addition, the Board has designated Amanda Rendle as the non-executive director to support some colleague engagement activity across 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 provides colleagues with the ability to raise any 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).
-- 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 28 February 2021 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 procurement and the management of suppliers to ensure that it can effectively engage, manage and terminate, where appropriate, supplier relationships. To support regulatory reporting requirements, the Group 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. The Group's CEO, Gerry Mallon, is a member of the Tesco Executive Committee.
-- Our Community
Despite many of the Group's colleagues working from home during the year, teams have remained committed to supporting the Group's local charity partners. Charitable support has been impacted by lockdown but, through a variety of virtual fundraising challenges, colleagues have raised over GBP23k for local charitable causes.
Dividends
An interim dividend of GBP13.0m (2020: GBP50.0m) in respect of ordinary share capital was paid to Tesco PLC on 24 February 2021.
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.
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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 2020 to date the following changes have taken place:
Appointed Resigned
1 February
Julie Currie 2021
1 February
James McConville 2021
Graham Pimlott 17 April 2020
-- Audit Committee (BAC)
Introduction from the BAC Chair
The Group operates in a demanding environment, particularly with regard to economic, reputational, political and regulatory factors. The role of the BAC 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 BAC 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.
BAC composition, skills and experience
The BAC 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 BAC comprises four Independent Non-Executive Directors.
Julie Currie is a Chartered Accountant and has over 25 years experience in the financial services sector, the majority of which was spent at Lloyds Banking Group. This experience enables her to fulfil the role as BAC Chair.
Julie's previous appointments included Chief Operating Officer for the Turnaround Division of Lloyds Banking Group and Chief Financial and Operating Officer for the Lloyds Bank Foundation for England and Wales, the largest corporate foundation in the UK. Julie holds a Non-Executive role with Scotiabank Europe, where she has chaired the Audit Committee since 2018.
Robert Endersby has spent over 35 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, Denmark's largest financial enterprise. Robert was also an independent non-executive director and chair of the board risk committees of Credit Suisse International and Credit Suisse Securities (Europe) Limited.
Previously, Robert has also held senior risk management positions in Barclays, The Royal Bank of Scotland and ING Group and has a broad international experience of the sector including assignments based in Denmark, the Netherlands and France.
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.
Simon Machell has worked in financial services for over 30 years and has deep 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.
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BAC composition, skills and experience (continued)
The Chair, Chief Executive Officer, 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.
BAC responsibilities
The key responsibilities of the BAC are set out in the Strategic Report on page 20.
During the year, the BAC 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 BAC 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 BAC 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 28 February 2021, the BAC considered the following matters:
-- The methods used to account for significant transactions
The BAC reviewed and supported proposals from Management on the accounting for the redemption of debt securities in issue in relation to securitisation transactions and retail bonds.
-- Going concern assessment
The BAC 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 2022, 12 months subsequent to signing the Annual Report and Financial Statements for the year ended 28 February 2021. 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 24 to 25 and 29 to 30.
The BAC 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 BAC 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.
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BAC responsibilities (continued)
-- Appropriate critical accounting estimates and judgements
The BAC 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 28 February 2021 are:
o Expected credit loss provision (ECL) (Refer to note 38)
The BAC 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 BAC 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 30)
The Group has a provision for potential customer redress in relation to PPI.
The BAC 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 BAC 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 2)
IFRS 9 requires the Group to measure the interest earned on its Credit Cards portfolio by applying the effective interest rate methodology.
The BAC 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 BAC is satisfied that the carrying value of the assets and the associated income recognition is appropriate.
o Investment in joint venture (Refer to note 23)
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 Company and Consolidated Statements of Financial Position.
The BAC reviewed the key judgements and estimates made by TU in determining the level of reserves held at the reporting date.
The BAC 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 BAC 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 BAC will receive further reports on the effectiveness of access controls during the next financial year.
35
Performance and Effectiveness of IA
The IA function supports the BAC 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 BAC 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 BAC assessed the effectiveness of the IA function with the results of the annual assessment for 2020/21 being positive.
Performance and Effectiveness of the BAC
The BAC 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 BAC 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 BAC was reviewed as part of the wider Board effectiveness review which included interviews with all BAC members. It was concluded that the BAC continued to be effective.
36
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 22.
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 BAC. The independence of the external auditor in relation to the Group is considered annually by the BAC.
The Group has a Non-audit Services Policy for work carried out by its external auditor. This is split into two categories as follows:
1. Work for which BAC approval is specifically required - transaction work and corporate tax services, and certain advisory services; and
2. Work from which the external auditor is prohibited.
The BAC 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 BAC 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 9 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.
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 10 to 16.
37
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 167.
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 International Accounting Standards (IASs) in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB).
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 IASs in conformity with the requirements of the Companies Act 2006 and IFRSs as issued by the IASB, give a true and fair view of the assets, liabilities, financial position and loss 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 the 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 shareholder to assess the Group's and Company's position, performance, business model and strategy.
38
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 28 February 2021 was Peter Birch who has assumed the role for the first time in the current year. 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
12 April 2021
39
CONSOLIDATED INCOME STATEMENT
For the year ended 28 February 2021
2021 2020
Note GBPm GBPm
Continuing operations
-------- --------
Interest and similar income 5 562.4 698.4
Interest expense and similar charges 5 (108.9) (180.9)
-------- --------
Net interest income 453.5 517.5
Fees and commissions income 6 208.8 341.0
Fees and commissions expense 6 (32.7) (31.3)
-------- --------
Net fees and commissions income 176.1 309.7
Net loss on financial instruments at fair value through profit or loss (FVPL) 7 (2.5) (4.1)
Net loss on investment securities 8 -- (0.2)
-------- --------
Net other income (2.5) (4.3)
Total income 627.1 822.9
-------- --------
Administrative expenses 9 (382.0) (398.4)
Depreciation and amortisation 25, 26 (56.7) (131.9)
Provision for customer redress 30 -- (45.0)
-------- --------
Operating expenses (438.7) (575.3)
Expected credit loss on financial assets 10 (359.5) (178.6)
-------- --------
Operating (loss)/profit (171.1) 69.0
Share of profit of joint venture 23 16.2 10.2
-------- --------
(Loss)/profit before tax (154.9) 79.2
Analysed as:
------------------------------------------------------------------------------- ------- -------- --------
Underlying (loss)/profit before tax (152.4) 227.9
Non-underlying items (2.5) (148.7)
------------------------------------------------------------------------------- ------- -------- --------
(154.9) 79.2
Income tax credit/(charge) 12 51.2 (32.7)
(Loss)/profit for the year from continuing operations (103.7) 46.5
Discontinued operations
Profit after tax from discontinued operations 14 0.2 56.7
(Loss)/profit for the year attributable to owners of the parent (103.5) 103.2
-------- --------
40
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the Year Ended 28 February 2021
2021 2020
Note GBPm GBPm
(Loss)/profit for the year (103.5) 103.2
Items that may be reclassified subsequently to the Income Statement
Debt securities at fair value through other comprehensive income (FVOCI)(1)
Fair value movements 12 (3.2) 2.3
Net losses transferred to the Income Statement on disposal 12 -- 0.2
Expected credit loss transferred to the Income Statement -- 0.4
Taxation 12 0.8 (0.7)
-------- ------
(2.4) 2.2
-------- ------
Cash flow hedges
Fair value movements 12 (0.5) 1.0
Taxation 12 0.2 (0.3)
-------- ------
(0.3) 0.7
-------- ------
Currency basis reserve
Foreign currency movements 12 0.1 0.2
-------- ------
0.1 0.2
-------- ------
Share of other comprehensive (expense)/income of joint venture 23 (1.9) 5.0
-------- ------
(1.9) 5.0
-------- ------
Items that will not be reclassified subsequently to the Income Statement
Equity securities at FVOCI
Fair value movements 12 1.9 0.7
Taxation 12 (0.6) (0.2)
-------- ------
1.3 0.5
-------- ------
Other comprehensive (expense)/income for the year, net of tax (3.2) 8.6
-------- ------
Total comprehensive (expense)/income for the year (106.7) 111.8
-------- ------
Total comprehensive (expense)/income for the year attributable to owners of the parent
Continuing operations (106.9) 55.1
Discontinued operations 0.2 56.7
(1) On 1 March 2020 the Group's portfolio of debt investment securities held at FVOCI was reclassified to amortised cost following a change in business model.
41
CONSOLIDATED AND COMPANY STATEMENT OF FINANCIAL POSITION
For the Year Ended 28 February 2021
Company number SC173198
Group Company
2021 2020 2021 2020
Note GBPm GBPm GBPm GBPm
Cash and balances with central banks 15 804.2 1,395.6 14.8 12.7
Loans and advances to customers 16 6,402.2 8,451.3 -- --
Loans and advances to subsidiary companies 17 -- -- 483.5 483.2
Derivative financial instruments 18 6.1 5.7 -- --
Investment securities 19 953.5 1,081.6 -- --
Prepayments and accrued income 20 41.6 55.6 1.3 1.6
Other assets 21 211.2 243.3 -- --
Current income tax asset 36.1 -- -- --
Investment in group undertaking 22 -- -- 1,219.9 1,219.9
Deferred income tax asset 24 67.3 69.4 -- --
Investment in joint venture 23 92.8 86.0 -- --
Intangible assets 25 130.9 138.2 -- --
Property, plant and equipment 26 77.5 73.4 -- --
Assets of the disposal group 14 -- 45.1 -- --
------------------------------------------------------ ----- -------- --------- ---------- ----------
Total assets 8,823.4 11,645.2 1,719.5 1,717.4
------------------------------------------------------ ----- -------- --------- ---------- ----------
Liabilities
Deposits from banks 27 600.0 500.0 -- --
Deposits from customers 28 5,738.0 7,707.0 -- --
Debt securities in issue 29 251.0 1,024.0 249.4 249.2
Derivative financial instruments 18 47.5 50.7 -- --
Provisions for liabilities and charges 30 60.1 58.7 -- --
Accruals and deferred income 31 86.1 100.1 1.3 1.6
Current income tax liability -- 26.3 -- --
Other liabilities 32 184.2 199.0 -- --
Subordinated liabilities and notes 33 235.0 235.0 235.0 235.0
------------------------------------------------------ ----- -------- --------- ---------- ----------
Total liabilities 7,201.9 9,900.8 485.7 485.8
------------------------------------------------------ ----- -------- --------- ---------- ----------
Equity and reserves attributable to owners of parent
Share capital 34 122.0 122.0 122.0 122.0
Share premium account 34 1,098.2 1,098.2 1,098.2 1,098.2
Retained earnings 370.7 487.2 13.6 11.4
Other reserves 35 30.6 37.0 -- --
------------------------------------------------------ ----- -------- --------- ---------- ----------
Total equity 1,621.5 1,744.4 1,233.8 1,231.6
------------------------------------------------------ ----- -------- --------- ---------- ----------
Total liabilities and equity 8,823.4 11,645.2 1,719.5 1,717.4
------------------------------------------------------ ----- -------- --------- ---------- ----------
Profit for the year of GBP15.2m (2020: GBP49.3m) is attributable to the Company.
The Consolidated and Company Financial Statements on pages 40 to 45 were approved by the Board of Directors and authorised for issue on 12 April 2021 and were signed on its behalf by:
Declan Hourican
Director
42
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the Year Ended 28 February 2021
Share
Cash flow Currency based
Share Share Retained FV/AFS hedge Basis payment Total
capital premium earnings reserve(1) reserve Reserve reserve equity
Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------- ----------- ---------- ----------- ---------- ----------- ---------- --------
Balance at 1
March 2020 122.0 1,098.2 487.2 12.3 (0.3) (0.1) 25.1 1,744.4
Comprehensive
income
Loss for the
year - - (103.5) - - - - (103.5)
Net fair value
movement on
investment
securities
at FVOCI 12 - - - (1.1) - - - (1.1)
Net movement
on cash flow
hedges 12 - - - - (0.3) 0.1 - (0.2)
Share of other
comprehensive
expense of
joint
venture 23 - - - (1.9) - - - (1.9)
--------- ----------- ---------- ----------- ---------- ----------- ---------- --------
Total
comprehensive
income - - (103.5) (3.0) (0.3) 0.1 - (106.7)
--------- ----------- ---------- ----------- ---------- ----------- ---------- --------
Transactions
with owners
Dividends to
ordinary
shareholders 13 - - (13.0) - - - - (13.0)
Share based
payments 45 - - - - - - (3.2) (3.2)
Total
transactions
with owners - - (13.0) - - - (3.2) (16.2)
--------- ----------- ---------- ----------- ---------- ----------- ---------- --------
Balance at 28
February 2021 122.0 1,098.2 370.7 9.3 (0.6) -- 21.9 1,621.5
--------- ----------- ---------- ----------- ---------- ----------- ---------- --------
Cash Share
flow Currency based
Share Share Retained FV/AFS hedge basis payment Total
capital premium earnings reserve(1) reserve reserve reserve equity
Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm
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 12 -- -- -- 2.7 -- -- -- 2.7
Net movements on
cash
flow hedges 12 -- -- -- 0.7 0.2 -- 0.9
Share of other
comprehensive
income of joint
venture 23 -- -- -- 5.0 -- -- -- 5.0
Total comprehensive
income -- -- 103.2 7.7 0.7 0.2 -- 111.8
--------- --------- ---------- ------------ --------- --------- --------- --------
Transactions with
owners
Dividends to
ordinary
shareholders 13 -- -- (50.0) -- -- -- -- (50.0)
Share based
payments 45 -- -- -- -- -- -- 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) Available-for-sale (AFS)
43
COMPANY STATEMENT OF CHANGES IN EQUITY
For the Year Ended 28 February 2021
Share Total
capital Share premium Retained earnings equity
Note GBPm GBPm GBPm GBPm
Balance at 1 March 2020 122.0 1,098.2 11.4 1,231.6
Comprehensive income
Profit for the year - - 15.2 15.2
--------- -------------- ------------------ --------
Total comprehensive income - - 15.2 15.2
--------- -------------- ------------------ --------
Transactions with owners
Dividends to ordinary shareholders 13 - - (13.0) (13.0)
Total transactions with owners - - (13.0) (13.0)
--------- -------------- ------------------ --------
Balance at 28 February 2021 122.0 1,098.2 13.6 1,233.8
--------- -------------- ------------------ --------
Share Share Retained Total
capital premium earnings equity
Note GBPm GBPm GBPm GBPm
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 13 -- -- (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
--------- --------- ---------- --------
44
CONSOLIDATED AND COMPANY CASH FLOW STATEMENTS
For the Year Ended 28 February 2021
Group Company
2021 2020 2021 2020
Note GBPm GBPm GBPm GBPm
Operating activities
(Loss)/profit before tax from continuing operations (154.9) 79.2 15.2 49.6
Profit before tax from discontinued operations 0.4 77.7 -- --
-------- -------- ------- --------
Total (loss)/profit before tax (154.5) 156.9 15.2 49.6
Adjusted for:
Non-cash items included in operating profit before taxation and other
adjustments 40 438.5 351.5 12.2 10.9
Changes in operating assets and liabilities 40 (103.7) 163.5 0.3 (0.9)
Income taxes paid (9.1) (68.3) -- --
-------- -------- ------- --------
Cash flows generated from operating
activities 171.2 603.6 27.7 59.6
-------- -------- ------- --------
Investing Activities
Purchase of intangible assets and property, plant and equipment (59.2) (44.7) -- --
Purchase of debt investment securities 38 (84.4) (778.6) -- --
Sale of debt investment securities 201.8 774.3 -- --
Redemption of subordinated debt issued by joint venture 38 -- 7.8 -- --
Dividends received from joint venture 23 7.5 -- -- --
Capital distribution received from joint venture 23 -- 15.6 -- --
-------- -------- ------- --------
Cash flows generated from/(used in)
investing activities 65.7 (25.6) -- --
-------- -------- ------- --------
Financing Activities
Net proceeds received in association with issuance of debt securities -- 249.1 -- 249.1
Principal repayments on debt securities in issue 29 (772.2) (410.0) -- --
Dividends paid to ordinary shareholders 13 (13.0) (50.0) (13.0) (50.0)
Interest paid on debt securities in issue (23.0) (24.3) (8.8) (4.4)
Interest paid on assets held to hedge debt securities in issue (3.9) (13.0) -- --
Subordinated loan to subsidiary company 17 -- -- -- (250.0)
Interest paid on subordinated liabilities and notes (3.8) (5.0) (3.8) (5.0)
Principal repayments on lease liabilities 36 (1.9) (1.8) -- --
Interest paid on lease liabilities 36 (3.6) (2.4) -- --
-------- -------- ------- --------
Cash flows used in from financing
activities (821.4) (257.4) (25.6) (60.3)
-------- -------- ------- --------
Net (decrease)/increase in cash and cash equivalents (584.5) 320.6 2.1 (0.7)
Cash and cash equivalents(1) at beginning of year 1,364.0 1,043.4 12.7 13.4
Cash and cash equivalents(1) at end of year 15 779.5 1,364.0 14.8 12.7
-------- -------- ------- --------
(1) Cash and cash equivalents comprise cash and balances with central
banks, excluding mandatory reserve deposits of GBP24.7m (2020: GBP31.6m)
(refer to note 15).
45
1 . Accounting Policies
Basis of Preparation
The Financial Statements have been prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards (IFRSs) and interpretations issued by the International Financial Reporting Interpretations Committee of the International Accounting Standards Board (IASB) 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 22 and 23. 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, equity 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.
Onshoring of European Union (EU) Regulations After Brexit
Following the UK's withdrawal from the EU and the ending of the transition period, any reference to EU regulations and directives (including technical standards) should be read as a reference to the UK's version of such regulation or directive, as onshored into UK law under the European Union (Withdrawal) Act 2018, as amended.
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 as income and charges for expected credit losses (ECLs) continue to be affected by the Covid-19 pandemic. As part of this, the Board considered the latest macro-economic scenarios which were received from the Group's third-party supplier. These are discussed in note 38;
-- The sufficiency of the Group's capital base throughout the Covid-19 pandemic The revised macro--economic scenarios received were significantly less severe than those used in the ICAAP reverse stress test. The Group reviewed its stress testing scenarios to ensure it has sufficient capital and liquidity to trade through a plausible range of economic outcomes;
-- 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;
46
1. Accounting Policies (continued)
Going Concern (continued)
-- 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 Consolidated Statement of Financial Position;
-- The impact of the Covid-19 pandemic on Tesco Underwriting Limited (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 Individual Capital Adequacy Assessment Process (ICAAP) and Individual Liquidity Adequacy Assessment Process (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 Consolidated Financial Statements.
Change in classification
On 1 March 2020, the Group's portfolio of debt investment securities measured at fair value through other comprehensive income (FVOCI) was reclassified to amortised cost, measured using the effective interest rate (EIR) method less allowance for ECLs. This was following a change in business model resulting from the sale of the Group's Mortgage business which increased Management's expectation that these debt investments would be held for the collection of contractual cash flows only. In the prior year, gains and losses arising from changes in fair value were recognised directly in other comprehensive income, except for impairment gains or losses, interest income and foreign exchange gains and losses, which were recognised in the Consolidated Income Statement.
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 28 February 2021.
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.
47
1. Accounting Policies (continued)
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.
(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 ECLs.
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 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.
48
1. Accounting Policies (continued)
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.
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 and those of selected partners. 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.
49
1. Accounting Policies (continued)
(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.
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.
50
1. Accounting Policies (continued)
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.
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. In the prior year, the Group held investments in debt securities which were classified as FVOCI. Movements in the carrying amount of debt securities classified as FVOCI were 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 were recognised through the Consolidated Income Statement. In the current year, debt securities are held at amortised cost.
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 were in fair value hedge relationships, the element of the fair value movement which related to the hedged risk was 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 38 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).
51
1. Accounting Policies (continued)
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.
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 'Financial Instruments' 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 foreign currency risk on certain foreign currency invoices. Hedge relationships were also classified as cash flow hedges where the derivative financial instruments hedged interest rate risk and foreign currency risk on US Dollar notes issued by one of the Group's securitisation entities which were 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.
52
1. Accounting Policies (continued)
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.
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.
53
1. Accounting Policies (continued)
(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.
(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.
54
1. Accounting Policies (continued)
(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.
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.
55
1. Accounting Policies (continued)
(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.
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.
56
1. Accounting Policies (continued)
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 Performance 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.
Details of the Group's APMs are set out at note 4 and in the glossary of terms on pages 173 to 178.
57
2. 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. 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 38.
Effective interest rate (EIR)
IFRS 9 requires the Group to measure the interest earned on its Credit Card 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 GBP4.2m and a corresponding reduction of the pay rates assumption will increase the asset value by GBP4.8m.
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 30.
58
3 . 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.
The Group's two operating segments are as follows:
-- Banking - incorporating Credit Cards, Personal Loans, Savings, Personal Current Accounts, ATMs and Travel Money; 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
2021 Banking Insurance Costs Total Consolidated
GBPm GBPm GBPm GBPm GBPm GBPm
Interest and similar income 538.4 24.0 -- 562.4 -- 562.4
Interest expense and similar charges (108.9) -- -- (108.9) -- (108.9)
Net interest income 429.5 24.0 -- 453.5 -- 453.5
Fees and commissions income 156.4 52.4 -- 208.8 -- 208.8
Fees and commissions expense (32.7) -- -- (32.7) -- (32.7)
Net fees and commissions income 123.7 52.4 -- 176.1 -- 176.1
Net loss on financial instruments
at FVPL (2.5) -- -- (2.5) -- (2.5)
Net other income (2.5) -- -- (2.5) -- (2.5)
Total income 550.7 76.4 -- 627.1 -- 627.1
------- --------- ------- ---------------- ------------- ------------------
Administrative expenses(1) (53.2) (31.2) (297.6) (382.0) -- (382.0)
Depreciation and amortisation -- -- (56.7) (56.7) -- (56.7)
Operating expenses (53.2) (31.2) (354.3) (438.7) -- (438.7)
Expected credit loss on financial
assets (357.2) (2.3) -- (359.5) -- (359.5)
Operating profit/(loss) 140.3 42.9 (354.3) (171.1) -- (171.1)
Share of profit of joint venture -- 16.2 -- 16.2 -- 16.2
Profit/(loss) before tax from
continuing
operations 140.3 59.1 (354.3) (154.9) -- (154.9)
------- --------- ------- ---------------- ------------- ------------------
Total assets(2,3) 8,609.0 111.0 -- 8,720.0 103.4 8,823.4
------- --------- ------- ---------------- ------------- ------------------
Total liabilities 7,183.3 18.6 -- 7,201.9 -- 7,201.9
------- --------- ------- ---------------- ------------- ------------------
(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 GBP92.8m in TU, a joint venture company accounted for using the equity method, is shown within the total assets of the Insurance segment.
59
3. Segmental Reporting (continued)
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.
60
4 . Underlying (Loss)/Profit
The Group's financial performance is presented in the Consolidated Income Statement on page 40. 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 rate Financial Underlying
basis activity(1) redress(2) changes(3) instruments(4) basis
GBPm GBPm GBPm GBPm GBPm GBPm
Continuing operations
Year ended 28 February
2021
Net interest income 453.5 -- -- -- -- 453.5
Other income 173.6 -- -- -- 2.5 176.1
--------- ------------- ----------- ----------- --------------- ----------
Total income 627.1 -- -- -- 2.5 629.6
--------- ------------- ----------- ----------- --------------- ----------
Total operating expenses (438.7) -- -- -- -- (438.7)
Expected credit loss
on financial assets (359.5) -- -- -- -- (359.5)
--------- ------------- ----------- ----------- --------------- ----------
Operating loss (171.1) -- -- -- 2.5 (168.6)
--------- ------------- ----------- ----------- --------------- ----------
Share of profit of joint
venture 16.2 -- -- -- -- 16.2
--------- ------------- ----------- ----------- --------------- ----------
Loss before tax (154.9) -- -- -- 2.5 (152.4)
--------- ------------- ----------- ----------- --------------- ----------
Ogden
Statutory Restructuring Customer rate Financial Underlying
basis activity(1) redress(2) changes(3) instruments(4) basis
GBPm GBPm GBPm GBPm GBPm GBPm
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
--------- ------------- ----------- ----------- --------------- ----------
(1) Comprising:
* in the prior year, interest expense of GBP37.5m in
respect of the discontinued operations' cost of
funding, presented within net interest income on page
40. Since this cost could not be directly attributed
to liabilities of the Group entered into specifically
to fund the Group's Mortgage business, as required by
IFRS 5, it was not possible to present this cost
within statutory profit for the year after tax from
discontinued operations for the prior year. These
costs were in respect of business restructuring and
are considered part of the Mortgage business' results
on a managed basis. There was no such charge in the
current year; and
* in the prior year, a restructuring charge of GBP65.8m
in respect of costs related to the Group's strategic
review, presented within administrative expenses on
page 40. These charges were in respect of business
restructuring and are not considered part of the
Group's underlying results. There was no such charge
in the current year.
(2) Comprising:
* in the prior year, a payment protection insurance
(PPI) provision charge of GBP45.0m presented within
operating expenses on page 40. These costs relate to
historic sales of PPI and are not reflective of the
Group's underlying trading performance. There was no
such charge in the current year.
(3) Comprising:
* in the prior year, a credit of GBP3.7m 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 40. 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 prior 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. There was no such credit in the current year.
(4) Comprising:
* Losses on financial instruments at FVPL of GBP2.5m
(2020: GBP4.1m) presented within total income on page
40. 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.
61
5 . Net Interest Income
2021 2020
GBPm GBPm
Continuing operations
Interest and similar income
On financial assets measured at amortised cost
Loans and advances to customers 543.3 668.5
Cash and balances with central banks 1.5 9.5
Investment securities(1) 14.3 1.0
-------- --------
559.1 679.0
-------- --------
On financial assets measured at fair value
Investment securities(1) -- 12.2
Derivative financial instruments - FVPL 3.3 7.2
-------- --------
3.3 19.4
-------- --------
Total interest and similar income 562.4 698.4
-------- --------
Interest expense and similar charges
On financial liabilities measured at amortised
cost
Deposits from customers (64.7) (128.6)
Deposits from banks (1.2) (12.4)
Debt securities in issue (20.1) (28.5)
Lease liabilities (2.3) (2.5)
Subordinated liabilities and notes (3.5) (5.3)
-------- --------
(91.8) (177.3)
-------- --------
On financial liabilities measured at fair value
Derivative financial liabilities - FVPL (17.1) (3.6)
-------- --------
(17.1) (3.6)
-------- --------
Total interest expense and similar charges (108.9) (180.9)
-------- --------
Net interest income 453.5 517.5
-------- --------
(1) On 1 March 2020 the Group's portfolio of debt investment securities measured at FVOCI was reclassified to amortised cost following a change in business model.
62
6 . Net Fees and Commissions Income
2021 2020
GBPm GBPm
Continuing operations
Fees and commissions income
Banking revenue from contracts with customers 155.2 240.6
Insurance revenue from contracts with customers 52.4 75.4
Other revenue from contracts with customers 1.2 25.0
------- -------
Total fees and commissions income 208.8 341.0
------- -------
Fees and commissions expense
Banking expense (32.7) (31.3)
------- -------
Total fees and commissions expense (32.7) (31.3)
------- -------
Net fees and commissions income 176.1 309.7
------- -------
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.
7 . Net Loss on Financial Instruments at FVPL
2021 2020
GBPm GBPm
Continuing operations
Foreign exchange loss on financial assets (0.2) --
Net gain/(loss) arising on derivatives not designated as hedging instruments 0.3 (1.2)
Fair value hedge ineffectiveness (refer note 18) (2.5) (3.2)
Cash flow hedge ineffectiveness (refer note 18) (0.1) 0.3
------ ------
Net loss on financial instruments at FVPL (2.5) (4.1)
------ ------
8 . Net Loss on Investment Securities
2021 2020
GBPm GBPm
Continuing operations
Net loss on disposal of investment securities at FVOCI -- (0.2)
------ ------
Net loss on investment securities -- (0.2)
------ ------
63
9 . Administrative Expenses
2021 2020
GBPm GBPm
Continuing operations
Staff costs
Wages and salaries 114.9 103.8
Social security costs 10.8 9.7
Other pension costs 6.6 5.9
Share based payments 3.1 7.9
Other costs including temporary staff 41.3 44.1
------ ------
Total staff costs 176.7 171.4
------ ------
Non-staff costs
Premises and equipment 75.2 72.5
Marketing 35.1 39.8
Auditor's remuneration (refer below) 0.9 0.9
Outsourcing and professional fees 63.6 66.9
Other administrative expenses 30.5 36.6
Restructuring costs(1) -- 10.3
------ ------
Total non-staff costs 205.3 227.0
------ ------
Total administrative expenses 382.0 398.4
------ ------
(1) In the prior year, the Group recognised organisational restructuring charges within administrative expenses amounting to GBP10.3m related to a strategic review of the Group's operations. There was no such charge in the current year.
2021 2020
GBP'000 GBP'000
Audit services
Audit of the Company and Consolidated Financial Statements 55 54
Audit of the Company's subsidiaries 753 768(2)
-------- --------
Total audit services 808 822
-------- --------
Non-audit services
Audit related assurance services 47 45
Other non-audit services not covered above 46 58
-------- --------
Total non-audit services 93 103
-------- --------
Total auditor's remuneration 901 925
-------- --------
The average monthly number of persons (including Executive Directors) employed by the Group split by employee function during the year, was:
2021 2020
Number Number
Continuing operations
Head office and administration 1,487 1,361
Operations 2,215 2,226
------- -------
Total average employees 3,702 3,587
------- -------
(2) The audit fee for the year ended 29 February 2020 has been restated to present this inclusive of GBP70,000 of additional fees relating to the audit of the impact on the Group of the Covid-19 pandemic which were billed in the current year.
64
10 . Expected Credit Loss on Financial Assets
2021 2020
GBPm GBPm
Continuing operations
Expected credit loss on loans and advances to customers(1) 359.7 177.9
Expected credit loss on investment securities at amortised cost(2) (0.2) --
Expected credit loss on investment securities at FVOCI(2) -- 0.7
------ ------
Total expected credit loss on financial assets 359.5 178.6
------ ------
(1) Included within the expected credit loss on loans and advances to customers is a credit of GBP0.5m (2020: credit of GBP30.5m) received through the sale of non-performing debt to third parties.
(2) On 1 March 2020 the Group's portfolio of debt investment securities measured at FVOCI was reclassified to amortised cost following a change in business model.
11 . Directors' Emoluments
The remuneration of the Directors paid by the Group during the year was as follows:
2021 2020
GBPm GBPm
Continuing operations
Aggregate emoluments 2.6 4.1
Aggregate amounts receivable under long-term incentive schemes 2.1 2.9
Loss of office - 0.5
Share based payments - 0.5
----- -----
Total Directors' emoluments 4.7 8.0
----- -----
2021 2020
Number Number
Continuing operations
Number of Directors to whom retirement benefits are accruing under defined benefit or defined
contribution schemes 3 3
Number of Directors in respect of whose qualifying services shares were received or receivable
under long-term incentive schemes 3 4
The total emoluments of the highest paid Director were GBP1.9m (2020: GBP2.1m). During the year the highest paid Director did not exercise any share options (2020: GBPnil).
At 28 February 2021 the accrued pension and lump sum under a defined benefit scheme for the highest paid Director was GBPnil (2020: GBPnil).
During the year to 28 February 2021 two Directors (2020: three Directors) left the Company.
65
12 . Income Tax
Income tax (credit)/charge
2021 2020
GBPm GBPm
Continuing operations
Current tax (credit)/charge for the year (51.4) 46.3
Adjustments in respect of prior years (1.7) (4.6)
Total current tax (credit)/charge for the
year (53.1) 41.7
------- -------
Deferred tax charge/(credit) for the year 6.2 (15.8)
Tax rate change (5.5) 1.8
Adjustments in respect of prior years 1.2 5.0
Total deferred tax charge/(credit) for the
year 1.9 (9.0)
------- -------
Total income tax (credit)/charge (51.2) 32.7
------- -------
The standard rate of corporation tax in the UK was changed from 20% to 19% with effect from 1 April 2017. The March 2016 Budget Statement included an announcement that the standard rate of corporation tax in the UK would be further 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%. The cancellation of the rate reduction resulted in the Group's deferred tax asset increasing by GBP5.5m during the year.
The Group's blended corporation tax rate is 19.0% (2020: 19.0%). In addition, a banking surcharge of 8.0% (2020: 8.0%) is applied to the Group's results.
In the current year, the tax credit assessed was higher than that calculated using the overall blended corporation tax rate for the Group. The tax charge assessed for the prior year was higher than the overall blended corporation tax rate for the Group. The differences are explained below:
2021 2020
GBPm GBPm
Continuing operations
(Loss)/profit before taxation from continuing operations (154.9) 79.2
-------- ------
(Loss)/profit on ordinary activities multiplied by blended rate in the UK of
19.0% (2020: 19.0%) (29.5) 15.1
Factors affecting (credit)/charge for the year:
Difference between local and group tax rate (13.1) 3.5
Expenses not deductible for tax purposes(1) 0.7 13.7
Adjustment in respect of prior years - current tax (1.7) (4.6)
Adjustment in respect of prior years - deferred tax 1.2 5.0
Share based payments (0.2) 0.3
Other tax adjustments -- (0.2)
Tax rate change (5.5) 1.8
Share of profit of joint venture (3.1) (1.9)
Total income tax (credit)/charge from continuing operations (51.2) 32.7
-------- ------
(1) The majority of the adjustment in the prior year relates to the tax impact of the non-deductibility of an additional PPI provision of GBP45.0m recognised in the prior year. There was no such charge in the current year.
66
12. Income Tax (continued)
In the March 2021 Budget Statement, the Chancellor announced that the standard rate of corporation tax in the UK will increase from 19% to 25% from 1 April 2023.
However, at the reporting date, the 19% 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.
It was also announced that the level of banking surcharge may be reduced from 1 April 2023, although the extent of any such reduction is not expected to be known until late 2021 or early 2022. Further information in respect of the impact of the Group of this increase in tax rate and potential reduction in the level of banking surcharge are set out at note 47.
Income tax relating to components of other comprehensive income
Before tax Net of tax
amount Tax credit/(charge) amount
Continuing operations GBPm GBPm GBPm
2021
Items that may be reclassified to the
income statement
Net losses on debt securities at FVOCI (3.2) 0.8 (2.4)
Net losses on cash flow hedges (0.5) 0.2 (0.3)
Net gains on currency interest rate swaps 0.1 -- 0.1
Items that will not be reclassified to
the income statement
Net gains on equity securities designated
at FVOCI 1.9 (0.6) 1.3
----------- -------------------- -----------
Total income tax relating to components
of other comprehensive income (1.7) 0.4 (1.3)
----------- -------------------- -----------
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(1) 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
----------- ----------- -----------
(1) On 1 March 2020 the Group's portfolio of debt investment securities measured at FVOCI was reclassified to amortised cost following a change in business model.
67
12. 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
2021
Net losses on share based payments reserve (2.5) (0.7) (3.2)
----------- ----------- -----------
(2.5) (0.7) (3.2)
----------- ----------- -----------
Before tax Net of tax
amount Tax charge amount
Continuing operations
2020 GBPm GBPm GBPm
Net gains on share based payments reserve 1.4 (0.4) 1.0
----------- ----------- -----------
1.4 (0.4) 1.0
----------- ----------- -----------
13 . Distributions to Equity Holders
2021 2020
GBPm GBPm
Continuing operations
Ordinary dividend paid 13.0 50.0
----- -----
13.0 50.0
----- -----
On 24 February 2021, an interim dividend of GBP13.0m (GBP0.0107 per ordinary share) was paid. In the prior year, an interim dividend of GBP50.0m (GBP0.0410 per ordinary share) was paid on 24 February 2020.
68
14 . Assets of the Disposal Group and Discontinued Operations
Assets of the disposal group
2021 2020
Group GBPm GBPm
Assets of the disposal group
Secured Mortgage lending - gross -- 44.7
Less: allowance for impairment -- --
----- ----
Secured Mortgage lending - net -- 44.7
Other assets -- 0.4
Assets of the disposal group -- 45.1
----- ----
During the prior year, secured Mortgage lending balances were reclassified from loans and advances to customers set out at note 16 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 as these balances related to amounts to be applied to Mortgage accounts and therefore formed part of the Mortgage business being sold. The remaining secured Mortgage lending balances included in the above table at 29 February 2020 related to a small element of the Mortgage business, representing new advances to existing Mortgage customers, which continued to be recognised by the Group until the completion of the migration of all Mortgage accounts to the purchaser, which took place on 30 March 2020.
At 29 February 2020, the Group had contractual lending commitments of GBP17.3m in respect of the assets of the disposal group. There were no such contractual lending commitments at 28 February 2021.
69
14. 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 28 February 2021
Other income (0.6) -- (0.6)
--------- --------- -------
Total income (0.6) -- (0.6)
Total operating expenses 0.4 -- 0.4
Expected credit loss on financial assets -- -- --
--------- --------- -------
Loss before tax (0.2) -- (0.2)
Income tax credit -- -- --
Loss after tax of discontinued operations (0.2) -- (0.2)
--------- --------- -------
Gain on sale of discontinued operations after
tax (see below) 0.4 -- 0.4
Profit after tax for the year attributable
to owners of the parent arising from discontinued
operations 0.2 -- 0.2
--------- --------- -------
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 from 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
--------- --------- -------
(1) Comprising:
* in the prior year, interest expense of GBP37.5m in
respect of the discontinued operations' cost of
funding, presented within net interest income on page
40. Since this cost could not be directly attributed
to liabilities of the Group entered into specifically
to fund the Group's Mortgage business, as required by
IFRS 5, it was not possible to present this cost
within statutory profit for the year after tax from
discontinued operations for the prior year. These
costs were in respect of business restructuring and
are considered part of the Mortgage business' results
on a managed basis. There was no such charge in the
current year.
70
14. Assets of the Disposal Group and Discontinued Operations (continued)
Discontinued operations - details of the sale of Mortgage business
2021 2020
GBPm GBPm
Total cash consideration received 53.8 3,694.6
Carrying amount of net assets sold (53.2) (3,635.7)
Gain on sale before income tax 0.6 58.9
------ ---------
Income tax charge on gain (0.2) (15.9)
Gain on sale after income tax 0.4 43.0
------ ---------
Comprising:
Fair value gain following change in business
model -- 16.7
Gain on disposal 0.4 26.3
------ ---------
Gain on sale after income tax 0.4 43.0
------ ---------
Discontinued operations - statement of cash flows
Group 2021 2020
Statement of Cash Flows GBPm GBPm
Net cash flows from operating activities 44.8 3,764.9
Net cash flows from investing activities -- --
Net cash flows from financing activities -- --
Net cash flows from discontinued operations 44.8 3,764.9
---- -------
15. Cash and Balances with Central Banks
Group Company
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
Cash at bank 106.5 129.9 1.7 1.7
Cash deposits held with Tesco Personal
Finance plc (TPF) -- -- 13.1 11.0
Balances held with the Bank of England
(BoE) other than mandatory reserve
deposits 673.0 1,234.1 -- --
------ -------- ----- -----
Included in cash and cash equivalents 779.5 1,364.0 14.8 12.7
------ -------- ----- -----
Mandatory reserves deposits held
with the BoE 24.7 31.6 -- --
------ -------- ----- -----
Total cash and balances with central
banks 804.2 1,395.6 14.8 12.7
------ -------- ----- -----
Mandatory reserve deposits held with the BoE of GBP24.7m (2020: GBP31.6m) 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.
71
16 . Loans and Advances to Customers
Group 2021 2020
GBPm GBPm
Unsecured lending 7,020.1 8,930.0
-------- --------
Total secured and unsecured lending 7,020.1 8,930.0
-------- --------
Fair value hedge adjustment 6.7 9.7
-------- --------
Gross loans and advances to customers 7,026.8 8,939.7
-------- --------
Less: ECL allowance (refer to note 38) (624.6) (488.4)
Net loans and advances to customers 6,402.2 8,451.3
-------- --------
Current 3,093.3 4,280.5
Non-current 3,308.9 4,170.8
Contractual lending commitments and ECL provision
At 28 February 2021, the Group had contractual lending commitments of GBP12,668.0m (2020: GBP11,872.0m). An additional ECL provision of GBP28.3m was also recognised at 28 February 2021 (2020: GBP7.7m). This represents the excess of total ECLs for both drawn and undrawn balances over the gross carrying balances as above. Refer to note 30 for further details.
Fair value hedge adjustments
Fair value hedge adjustments amounting to GBP6.7m (2020: GBP9.7m) are in respect of fixed rate Loans. 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.
17 . Loans and Advances to Subsidiary Companies
Company 2021 2020
GBPm GBPm
Fixed rate subordinated loan 249.8 249.8
Floating rate subordinated loan 190.0 190.0
Undated floating rate note 45.0 45.0
----- -----
484.8 484.8
----- -----
Less: ECL allowance (See note 38) (1.3) (1.6)
----- -----
Net loans and advances to subsidiary companies 483.5 483.2
----- -----
Current -- --
Non current 483.5 483.2
The investments are in subordinated loans and notes issued by TPF. Interest receivable on the GBP250.0m notional (2020: GBP250.0m notional) fixed rate subordinated loan is 3.5%.
Interest receivable on the floating rate subordinated loans and notes is based on three month SONIA plus a margin of 67 to 227 basis points (2020: three month LIBOR plus a spread ranging from 67 to 227 basis points).
72
18 . 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 2021 2020
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 3,227.1 5.8 (46.4) 3,004.3 4.2 (50.6)
Derivatives designated as cash flow
hedges
Forward foreign exchange contracts 10.0 -- (0.8) 9.6 - -
Cross currency interest rate swaps -- -- -- 272.2 1.5 -
--------- ------- ------------ --------- ------- ------------
Total derivatives in hedge accounting
relationships 3,237.1 5.8 (47.2) 3,286.1 5.7 (50.6)
--------- ------- ------------ --------- ------- ------------
Derivatives not in hedge accounting
relationships
Interest rate derivatives
Interest rate swaps 114.2 0.2 (0.1) 48.1 - (0.1)
Currency derivatives
Forward foreign exchange contracts 4.3 0.1 (0.2) - - -
--------- ------- ------------ --------- ------- ------------
Total derivatives not in hedge accounting
relationships 118.5 0.3 (0.3) 48.1 - (0.1)
--------- ------- ------------ --------- ------- ------------
Total 3,355.6 6.1 (47.5) 3,334.2 5.7 (50.7)
--------- ------- ------------ --------- ------- ------------
73
18. 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 2021 2020
Assets Liabilities Assets Liabilities
GBPm GBPm GBPm GBPm
Current 0.2 (4.0) 4.2 (0.1)
Non-current 5.9 (43.5) 1.5 (50.6)
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, 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 held 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 occurred over the term to maturity in November 2020. 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.
74
18. 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 28 February 2021 the Group transitioned the majority of its exposures from the London Interbank Offered Rate (LIBOR) to the Sterling Overnight Index Average (SONIA). At 28 February 2021, the Group had a remaining LIBOR interest rate exposure of GBP21.1m relating to its investment in subordinated notes issued by TU, which the Group expects to transition to SONIA by 31 December 2021.
At 29 February 2020, the Group had remaining hedging exposures to LIBOR impacted by the reform of GBP519.0m designated in fair value hedge accounting relationships and GBP272.2m designated in a cash flow hedge relationship.
None of the remaining LIBOR interest rate exposure at 28 February 2021 is in a hedge relationship.
Maturity of Derivatives in Hedge Accounting Relationships
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
2021 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 -- 83.0 1,302.0 1,690.5 151.6 3,227.1
- Average interest
rate - 1.01% 0.28% 1.22% 1.67% -
Cash flow hedges
Foreign currency
Forward foreign
exchange contracts
- Notional amount 0.6 2.2 7.2 -- -- 10.0
- Average exchange
rate 1.29 1.25 1.30 - - -
75
18. Derivative Financial Instruments (continued)
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 LIBOR rate: pay leg - - - + 0.84% - - - Average interest rate: receive USD LIBOR leg - - - + 0.7% - -
76
18. 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
2021 Notional Assets Liabilities hedge ineffectiveness
GBPm GBPm GBPm GBPm
Fair value hedges
Interest rate
Interest rate swaps 3,227.1 5.8 (46.4) 7.2
Cash flow hedges
Foreign currency
Forward foreign exchange
contracts 10.0 -- (0.8) (0.8)
Total 3,237.1 5.8 (47.2) 6.4
--------- ------- ------------ -----------------------
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
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)
--------- ------- ------------ -----------------------
All of the above amounts are included within the Statement of Financial Position line item Derivative financial instruments.
77
18. 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
2021 Assets Liabilities Assets Liabilities
GBPm GBPm GBPm GBPm GBPm
Fair value hedges
Interest rate
- Fixed rate Loans(1) 3,652.9 -- 6.7 -- (3.0)
- Fixed rate investment
securities(2) 500.4 - 10.4 - 8.1
- Fixed rate Savings(3) - (1,865.7) - (0.4) 0.3
- Fixed rate retail
bond(4) -- (251.0) -- (2.8) 1.5
-------- ------------ ---------- ----------------- -----------------
Total fair value hedges 4,153.3 (2,116.7) 17.1 (3.2) 6.9
-------- ------------ ---------- ----------------- -----------------
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) - (451.7) - (4.1) (1.0)
-------- ------------ ---------- ----------------- -----------------
Total fair value hedges 5,065.9 (3,454.8) 12.0 (4.8) 18.0
-------- ------------ ---------- ----------------- -----------------
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 GBP2.4m (2020: GBP5.5m 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.
78
18. Derivative Financial Instruments (continued)
Cash flow hedge
Group reserve
Change in value
of hedged item
used for calculating
2021 hedge ineffectiveness Continuing hedges
GBPm GBPm
Cash flow hedges
Foreign currency
- Accounts payable(1) (0.8) (0.8)
Interest rate/foreign currency
- Securitisation bond(2) (1.5) -
----------------------- ------------------
Total cash flow hedges (2.3) (0.8)
----------------------- ------------------
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(2) (12.7) -
Foreign currency
- Accounts payable(1) 0.2 -
Interest rate/foreign currency
- Securitisation bond(2) 10.2 (0.3)
----------------------- ------------------
Total cash flow hedges (2.3) (0.3)
----------------------- ------------------
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 Other liabilities.
(2) Included within Statement of Financial Position line item Debt securities in issue.
79
18. 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
2021 GBPm
Fair value hedges
Interest rate
- Interest rate swaps (2.5)
-------------------------
Total fair values hedges (2.5)
-------------------------
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 is included in the Income Statement line Net gain/(loss) on financial instruments at FVPL.
Cumulative
Cumulative amount reclassified
hedging gains from cash
and (losses) Hedge ineffectiveness flow hedge
recognised recognised reserve to
Group in other comprehensive in profit profit or
2021 income or loss loss
GBPm GBPm GBPm
Cash flow hedges
Interest rate/foreign currency
- Forward foreign exchange contracts (0.8) -- --
- Cross currency interest rate swaps
(GBP:USD) -- (0.1) --
------------------------ ---------------------- ---------------------
Total cash flow hedges (0.8) (0.1) --
------------------------ ---------------------- ---------------------
80
18. Derivative Financial Instruments (continued)
Cumulative
Cumulative amount reclassified
hedging gains from cash
and (losses) Hedge ineffectiveness flow hedge
recognised recognised reserve to
Group 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 -
------------------------ ---------------------- ---------------------
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:
2021 2020
Group GBPm GBPm
Hedging gains and losses recognised in other comprehensive
income (0.8) (10.3)
Amount reclassified from cash flow hedge reserve
to profit or loss -- 10.0
Tax 0.2 -
----- ------
Cash flow hedge reserve (0.6) (0.3)
----- ------
81
18. 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
2021 2020
Group GBPm GBPm
Balance at beginning of year (0.3) (1.0)
Interest rate swaps
- Effective portion of changes in fair value -- (12.5)
- Amount reclassified to profit or loss in the year -- 12.9
- Tax -- (0.2)
Cashflow hedge - foreign exchange risk
- Effective portion of changes in fair value (0.8) 0.3
Cross currency interest rate swaps
- Effective portion of changes in fair value (1.4) 10.2
- Amount reclassified to profit or loss in the year 1.9 (10.0)
Balance at end of year (0.6) (0.3)
------------ ------------
82
19. Investment Securities
Group 2021 2020
GBPm GBPm
Investment securities measured at FVOCI - debt(1) -- 1,057.4
Investment securities designated at FVOCI - equity 5.1 3.2
Investment securities measured at amortised cost 948.4 21.0
------ --------
Total investment securities 953.5 1,081.6
------ --------
Debt investment securities measured at FVOCI(1)
Group 2021 2020
GBPm GBPm
Government backed investment securities -- 315.9
Gilts -- 40.7
Supranational investment securities -- 393.9
Other investment securities -- 306.9
------ --------
Total debt securities measured at FVOCI -- 1,057.4
------ --------
On 1 March 2020, the Group's portfolio of debt investment securities measured at FVOCI was reclassified to amortised cost following a change in business model. A GBP3.2m cumulative loss relating to these assets, previously recognised in other comprehensive income, was adjusted against the carrying value of the assets. A fair value gain of GBP4.9m would have been recognised in other comprehensive income in the current year had the financial assets not been reclassified.
Included in investment securities at 29 February 2020 were fixed-interest investment securities totalling GBP651.8m, and variable-interest investment securities amounting to GBP405.6m.
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.
During the year, a proportion of these shares converted to ordinary shares, resulting in an unrealised gain of GBP1.7m which was recognised in the fair value reserve. The remaining stock may be convertible into Class A Common Stock of VISA Inc. at certain future dates, the earliest point at which is June 2021. Conversion is contingent upon future events, principally related to the outcome of interchange litigation against VISA Europe Limited. As such, the valuation of GBP5.1m (2020: GBP3.2m) 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.
(1) On 1 March 2020 the Group's portfolio of debt investment securities measured at FVOCI was reclassified to amortised cost following a change in business model.
83
19. Investment Securities (continued)
Investment securities measured at amortised cost
2021 2020
Group GBPm GBPm
Government backed investment securities 126.9 --
Gilts 39.2 --
Supranational investment securities 438.4 --
Other investment securities 323.6 --
Investment in subordinated debt issued by TU 21.1 21.1
------ ------
Gross investment securities measured at amortised cost 949.2 21.1
------ ------
Less: allowance for ECLs (refer note 38) (0.8) (0.1)
Net investment securities measured at amortised cost 948.4 21.0
------ ------
On 1 March 2020, the Group's portfolio of debt investment securities measured at FVOCI was reclassified to amortised cost following a change in business model.
Included in investment securities at 28 February 2021 were fixed-interest investment securities totalling GBP502.5m, and variable-interest investment securities amounting to GBP424.8m.
The investment in subordinated notes issued by TU relates to subordinated notes with a gross carrying value of GBP21.1m (2020: GBP21.1m). Interest receivable on these notes is based on a rate of three month LIBOR plus a spread ranging from 350-450 basis points (2020: LIBOR plus a spread ranging from 350-450 basis points).
20. Prepayments and Accrued Income
Group Company
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
Prepayments 14.0 11.1 - -
Accrued income 27.6 44.5 - -
Amounts accrued from Tesco
Personal Finance plc - - 1.3 1.6
----- ----- ----- -----
Total prepayments and accrued
income 41.6 55.6 1.3 1.6
----- ----- ----- -----
All amounts are classified as current at the year end.
84
21. Other Assets
Group 2021 2020
GBPm GBPm
Amount due from insurance commissions receivable 13.2 13.8
Contract asset - insurance renewal income 30.4 37.6
Accounts receivable and sundry debtors 166.9 191.4
Amounts due from Tesco Group subsidiaries 0.7 0.5
------ ------
Total other assets 211.2 243.3
------ ------
All amounts are classified as current at the year end, with the exception of GBP22.4m (2020: GBP32.3m) 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, GBP14.6m has been reclassified in the year as commissions receivable (2020: GBP10.4m has been reclassified in the prior year relating to the contract asset balance at 28 February 2019) as insurance policies have been renewed and commission due to the Group has become payable. The remainder of the movement in the balance relates to accelerated income of GBP7.4m (2020: GBP19.9m) 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
22. Investment in Group Undertakings
The Company's investment in group undertakings in the year was as follows:
Name of company Nature of business Place of incorporation Ownership interest Registered address
Tesco Personal Banking and UK 100% 2 South Gyle Crescent,
Finance plc general insurance Edinburgh, EH12 9FQ
services
The Company's Investment in Group undertaking amounts to GBP1,219.9m (2020: 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 6th Floor, 125 London
Limited entity Wall,
London, England, EC2Y
5AS
Delamare Cards MTN Issuer Securitisation UK 6th Floor, 125 London
plc entity Wall,
London, England, EC2Y
5AS
Delamare Cards Receivables Securitisation UK 6th Floor, 125 London
Trustee Limited entity Wall,
London, England, EC2Y
5AS
Delamare Cards Funding Securitisation UK 6th Floor, 125 London
1 Limited entity Wall,
London, England, EC2Y
5AS
Delamare Cards Funding Securitisation UK 6th Floor, 125 London
2 Limited entity Wall,
London, England, EC2Y
5AS
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 28 February 2021 within these Consolidated Financial Statements.
86
23. Investment in Joint Venture
The following table shows the aggregate movement in the Group's investment in its joint venture in the year:
Group 2021 2020
GBPm GBPm
At beginning of year 86.0 86.4
Dividends received (7.5) -
Capital distribution received - (15.6)
Share of profit of joint venture 16.2 10.2
Share of other comprehensive (expense)/income of joint venture (1.9) 5.0
------ -------
At end of year 92.8 86.0
------ -------
Details of the Group's joint venture
Ownership interest
Nature Place of
Name of company Registered address of business Incorporation 2021 2020
------------------- -------------------------- ------------- --------------- --------------- -------------
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 28 February 2021 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.
Following completion of the Group's acquisition of TU, which is expected to take place in May 2021, following regulatory approval received in March 2021, this exemption will no longer be available to the Group and IFRS 9 will be applied to TU's in-scope balances in the Group's consolidated results.
87
23. 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):
2021 2020
GBPm GBPm
Non-current assets 771.4 799.3
Current assets 219.7 152.7
Current liabilities (674.0) (693.1)
Non-current liabilities (136.9) (92.3)
-------- --------
Net assets 180.2 166.6
-------- --------
Cash and cash equivalents 73.9 49.4
Current financial liabilities (excluding trade
and other payables and provisions) (18.5) (17.8)
Non-current financial liabilities (excluding
trade and other payables and provisions) (136.9) (92.3)
2021 2020
GBPm GBPm
Income Statement
Revenue 187.4 253.6
Expenses including claims costs (155.0) (233.1)
-------- --------
Profit for the year 32.4 20.5
-------- --------
Other comprehensive (expense)/income (3.8) 10.1
Total comprehensive income 28.6 30.6
-------- --------
The above profit includes the following:
Depreciation and amortisation (1.7) (2.1)
Interest income 12.2 13.1
Interest expense (1.8) (2.0)
Income tax charge (6.9) (6.9)
88
23. 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 2021 2020
GBPm GBPm
Net assets of the joint venture 180.2 166.6
------ ------
Group share at 49.9% 90.0 83.2
Capitalised legal costs included in investment
carrying value 2.8 2.8
Carrying value of investment in joint venture
at end of year 92.8 86.0
------ ------
Fair value disclosures
The following table provides information on the fair value of TU's financial assets at 28 February 2021:
2021 Change in
fair value
Fair value during year
GBPm GBPm
Financial assets that give rise to solely
payments of principal and interest 677.7 4.0
Other financial assets 18.4 (1.1)
696.1 2.9
----------- -------------
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)
----------- -------------
Credit risk disclosures
The following table provides information regarding the credit risk exposures of TU at 28 February 2021 by classifying financial assets according to the credit ratings of counterparties:
2021 AAA AA A BBB Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
Investments 81.1 129.5 270.3 122.9 18.4 622.2
Cash and cash equivalents 25.4 48.5 -- -- -- 73.9
Insurance and other receivables 1.5 1.1 3.8 2.4 13.8 22.6
108.0 179.1 274.1 125.3 32.2 718.7
------ ------ ------ ------ ------ ------
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
------ ------ ------ ------ ------ ------
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.
89
24. Deferred Income Tax Asset/(Liability)
The net deferred income tax asset/(liability) can be analysed as follows:
2021 Accelerated Share
capital Financial based
allowances instruments payments Other Total
Group GBPm GBPm GBPm
At beginning of year 23.0 43.1 3.2 0.1 69.4
Credited/(charged) to the Consolidated
Income Statement in the current
year 0.2 (6.0) (0.4) -- (6.2)
(Charged)/credited to the Consolidated
Income Statement for prior years (1.3) -- -- 0.1 (1.2)
Credited/(charged) to equity -- 0.5 (0.7) -- (0.2)
Change in tax rate 1.8 3.5 0.2 -- 5.5
------------ ------------- ---------- ------ ------
At end of year 23.7 41.1 2.3 0.2 67.3
------------ ------------- ---------- ------ ------
Deferred tax asset to be recovered
within one year 57.6
Deferred tax asset to be recovered
after more than one year 11.1
------
Total deferred income tax asset 68.7
------
Deferred tax liability to be
recovered within one year (0.5)
Deferred tax liability to be
recovered after more than one
year (0.9)
------
Total deferred income tax liability (1.4)
------
Deferred tax assets (net) 67.3
------
2020 Accelerated Share
capital Financial based
allowances instruments payments Other Total
Group GBPm GBPm GBPm
At beginning of year 3.4 50.9 3.3 2.0 59.6
Credited/(charged) to the Consolidated
Income Statement in the current
year 21.5 (5.9) 0.3 (0.1) 15.8
Charged to the Consolidated
Income Statement for prior years (2.5) (0.7) -- (1.8) (5.0)
Charged to equity -- (1.0) (0.4) -- (1.4)
Change in tax rate (1.6) (0.2) -- -- (1.8)
Discontinued operations 2.2 -- -- -- 2.2
------------ ------------- ---------- ------ ------
At end of year 23.0 43.1 3.2 0.1 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
------
90
25. Intangible Assets
Computer
Group Work-in-Progress Software Total
GBPm GBPm GBPm
Cost
At 1 March 2020 27.8 722.4 750.2
Additions 33.5 6.8 40.3
Transfers (16.3) 16.1 (0.2)
Disposals (0.6) (27.7) (28.3)
----------------- ---------- --------
At 28 February 2021 44.4 717.6 762.0
----------------- ---------- --------
Accumulated amortisation
At 1 March 2020 -- (612.0) (612.0)
Charge for the year -- (45.8) (45.8)
Disposals -- 26.7 26.7
----------------- ---------- --------
At 28 February 2021 -- (631.1) (631.1)
----------------- ---------- --------
Net carrying value
At 28 February 2021 44.4 86.5 130.9
----------------- ---------- --------
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
------- -------- --------
Work-in-progress relates primarily to the internal development of IT software assets. Intangible asset balances are non-current.
91
25. Intangible Assets (continued)
In the prior 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 reflected 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 was 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:
2021 2020
GBPm GBPm
Continuing operations 45.8 120.9
Discontinued operations -- 9.0
Total amortisation charge 45.8 129.9
----- ------
92
26. Property, Plant and Equipment
Plant Right
Work-in- and Fixtures Computer Freehold Leasehold of Use
Group Progress Equipment and Fittings Hardware Buildings Improvements Assets Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Cost
At 1 March
2020 9.1 3.0 19.4 124.6 32.4 20.2 29.4 238.1
Additions 12.3 -- 1.1 1.5 -- -- -- 14.9
Transfers (3.0) -- 1.2 2.0 -- -- -- 0.2
Disposals -- -- -- (1.8) -- -- -- (1.8)
---------- ------------- -------------- ---------- ----------- -------------- -------- --------
At 28
February
2021 18.4 3.0 21.7 126.3 32.4 20.2 29.4 251.4
---------- ------------- -------------- ---------- ----------- -------------- -------- --------
Accumulated
depreciation
At 1 March
2020 -- (3.0) (13.9) (112.3) (7.3) (12.5) (15.7) (164.7)
Charge for
the
year -- -- (2.0) (5.3) (0.8) (1.3) (1.5) (10.9)
Disposals -- -- -- 1.7 -- -- -- 1.7
---------- ------------- -------------- ---------- ----------- -------------- -------- --------
At 28
February
2021 -- (3.0) (15.9) (115.9) (8.1) (13.8) (17.2) (173.9)
---------- ------------- -------------- ---------- ----------- -------------- -------- --------
Net carrying
value
At 28
February
2021 18.4 -- 5.8 10.4 24.3 6.4 12.2 77.5
---------- ------------- -------------- ---------- ----------- -------------- -------- --------
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
------ ------ ------- -------- ------ ------- ------- --------
Work-in-progress at 28 February 2021 relates predominantly to the development of IT assets. Property, plant and equipment balances are non-current.
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27. Deposits from Banks
Group 2021 2020
GBPm GBPm
Deposits from banks 600.0 500.0
------ ------
600.0 500.0
------ ------
Current 500.0 -
Non-current 100.0 500.0
Deposits from banks include balances of GBP500.0m (2020: GBP500.0m) drawn under the BoE's Term Funding Scheme (TFS) and GBP100.0m (2020: GBPnil) drawn under the BoE's TFS with incentives for Small and Medium Sized Entities (TFSME).
28. Deposits from Customers
Group 2021 2020
GBPm GBPm
Retail deposits 5,737.6 7,706.3
Fair value hedge adjustment 0.4 0.7
-------- --------
5,738.0 7,707.0
-------- --------
Current 4,821.0 6,377.2
Non-current 917.0 1,329.8
Fair value hedge adjustments
Fair value hedge adjustments amounting to GBP0.4m (2020: 0.7m) 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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29. Debt Securities in Issue
Interest rate Par value Term Maturity 2021 2020
Group GBPm (years) date GBPm GBPm
Fixed rate retail bond(1) 5.0% 200.0 8.5 2020 -- 201.8
1M GBP LIBOR
Floating rate AAA bond (A1)(2) + 0.53% 300.0 5 2022 -- 299.2
1M USD LIBOR
Floating rate AAA Bond (A1)(3) + 0.836% 272.2 2 2025 -- 273.1
MREL(4) 3.50% 250.0 6 2025 251.0 249.9
Total debt securities in
issue 251.0 1,024.0
----- -------
Company
MREL(4,5) 249.4 249.2
----- -------
Total debt securities in
issue 249.4 249.2
----- -------
(1) This bond was issued on 21 May 2012 and redeemed on its scheduled redemption date in November 2020.
(2) This Bond was issued on 7 November 2017 and redeemed on its scheduled redemption date in October 2020.
(3) This Bond was issued on 27 November 2018 and redeemed on its scheduled redemption date in November 2020.
(4) This bond was issued on 26 July 2019. The scheduled redemption date is July 2024.
(5) On a Company basis, GBP0.6m (2020: GBP0.7m) of issue costs absorbed by TPF are excluded.
All Floating Rate Bonds were issued by Delamare Cards MTN Issuer plc and were listed on the Irish Stock Exchange. The retail bond was listed on the London Stock Exchange. All balances were classified as current at the prior year end.
The Company undertook an initial issuance of MREL-compliant debt of GBP250.0m in July 2019 and subsequently invested the proceeds in TPF via an intercompany subordinated loan maturing in 2025.
95
30. Provisions for Liabilities and Charges
Customer
Redress Restructuring Expected Credit Other
Group Provision Provision Loss Provision Provisions Total
2021 GBPm GBPm GBPm GBPm GBPm
At beginning of
year 41.6 1.2 7.7 8.2 58.7
Provided during
the year 0.5 -- -- 3.6 4.1
Utilised during
the year (19.2) (0.4) -- (2.7) (22.3)
Transfer from
loans and advances
ECL allowance - - 20.6 -- 20.6
Released during
the year (0.5) - -- (0.5) (1.0)
----------- -------------- ---------------- ------------ -------
At end of year 22.4 0.8 28.3 8.6 60.1
----------- -------------- ---------------- ------------ -------
Customer redress provision - Payment protection insurance (PPI)
Of the total customer redress provision balance at 28 February 2021, GBP22.4m (2020: GBP41.1m) has been provided for customer redress in respect of potential customer complaints arising from historic sales of PPI.
In March 2017, the 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 general claims deadline passed on 29 August 2019, albeit legal claims continue to be received. In response to the high level of claims received by the Group during the prior year in advance of the PPI complaint deadline, the Group increased its PPI provision by GBP45.0m during the year ended 29 February 2020 to reflect an updated assessment of the 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 finalises its assessment of the significant level of claims received in advance of the claims deadline, ongoing legal claims and levels of redress thereon.
96
30. Provisions for Liabilities and Charges (continued)
Customer redress provision - Payment protection insurance (continued)
The table below details, for each key assumption, actual data to 28 February 2021 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
------------ ------------------------------------------
Cumulative Outstanding Change in Consequential
Assumption actual claims assumption change in provision
GBPm
Valid general PPI claims +/- 100 successful
settled 168,488 3,900 claims 0.2
Average redress per valid
general PPI claim GBP1,780 GBP1,659 +/- GBP100 0.4
+/- 100 successful
Valid legal PPI claims settled 187 2,746 claims 0.2
Average redress per valid
legal PPI claim GBP2,173 GBP2,173 +/- GBP100 0.3
Customer redress provision - Consumer credit act (CCA)
In the prior year, the Group held a provision of 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. The redress programme was concluded during the year ended 28 February 2021.
Restructuring provision
The restructuring provision is in respect of costs related to the Group's strategic review.
Expected credit loss 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 38.
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.
31. Accruals and Deferred Income
Group Company
2021 2020 2021 2020
GBPm GBPm
Amounts accrued to Tesco Group
subsidiaries 18.0 11.8 - -
Amounts accrued to Tesco PLC 0.5 0.8 0.5 0.8
Other accruals 52.6 74.7 0.8 0.8
Deferred income 15.0 12.8 - -
----- ------ ----- -----
Total accruals and deferred
income 86.1 100.1 1.3 1.6
----- ------ ----- -----
All amounts are classified as current at the year end.
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32. Other Liabilities
2021 2020
Group GBPm GBPm
Accounts payable and sundry creditors 122.6 134.2
Insurance creditor 14.6 13.2
Taxation and social security payable 2.7 5.7
Contract liabilities - insurance refunds 1.5 2.0
Lease liabilities (refer note 36) 29.6 32.8
Amounts owed to Tesco Group subsidiaries 13.2 11.1
------ ------
Total other liabilities 184.2 199.0
------ ------
All amounts are classified as current at the year end, with the exception of GBP26.1m (2020: GBP29.6m) 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 (2020: GBP0.2m).
33. Subordinated Liabilities and Notes
Group and Company 2021 2020
GBPm GBPm
Amortised cost:
Floating 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 GBP190.0m (2020: GBP190.0m) of subordinated loans maturing in 2030 and GBP45.0m (2020: 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 floating rate subordinated loans and notes is based on three month SONIA plus a margin of 67 to 227 basis points (2020: three month LIBOR plus a spread ranging from 67 to 227 basis points).
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34. Share Capital and Share Premium Account
Group and Company 2021 2021 2020 2020
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 - -
-------------- -------- -------------- --------
1,220,179,001 122.0 1,220,179,001 122.0
-------------- -------- -------------- --------
2021 2020
GBPm GBPm
Share premium reserve 1,098.2 1,098.2
-------- --------
1,098.2 1,098.2
-------- --------
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35. Other Reserves
Group
2021 2020
GBPm GBPm
AFS - share of joint venture 5.6 7.5
Fair value reserve 3.7 4.8
------ ------
Total AFS/FV reserves 9.3 12.3
------ ------
Cash flow hedge reserve (0.6) (0.3)
Currency basis reserve -- (0.1)
Share based payment reserve 21.9 25.1
------ ------
Total reserves 30.6 37.0
------ ------
AFS reserve
The consolidated AFS reserve includes the Group's share of the AFS reserve of its joint venture, TU. As described in note 23, 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 equity investment securities measured at FVOCI is included in the fair value reserve, less the impairment allowance recognised in the Consolidated Income Statement.
On 1 March 2020 the Group's portfolio of debt investment securities held at FVOCI was reclassified to amortised cost following a change in business model. This resulted in the full amount previously recognised in the fair value reserve in respect of these debt securities being reclassified against the amortised cost carrying amount of these assets. The remaining balance in the fair value reserve relates to the Group's equity investment securities which continue to be held at FVOCI.
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.
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36 . 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:
2021 2020
GBPm GBPm
Group
Depreciation charge on right-of-use assets(1) 1.5 1.5
Interest expense on lease liabilities(2) 2.3 2.5
Total 3.8 4.0
---- ----
Consolidated Statement of Financial Position Amounts Relating to Leases
The Consolidated Statement of Financial Position includes the following amounts relating to leases:
2021 2020
GBPm GBPm
Group
Right-of-use assets(3)
Office buildings 12.2 13.7
Total right-of-use assets 12.2 13.7
---- ----
Lease liabilities(4)
Current 3.5 3.2
Non-current 26.1 29.6
Total lease liabilities 29.6 32.8
---- ----
Consolidated Cash Flow Statement amounts relating to leases
The Consolidated Cash Flow Statement includes the following amounts relating to leases:
2021 2020
GBPm GBPm
Group
Interest paid on lease liabilities 3.6 2.4
Principal payments on lease liabilities 1.9 1.8
Total cash outflow for lease liabilities 5.5 4.2
---- ----
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 (2020: GBP64.4m).
(1) Included in total depreciation and amortisation charge in the Consolidated Income Statement (refer to note 9).
(2) Included in Net interest income in the Consolidated Income Statement (refer to note 5).
(3) Included in Property, plant and equipment in the Consolidated Statement of Financial Position (refer to note 26).
(4) Included in Other liabilities in the Consolidated Statement of Financial Position (refer to note 32).
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37. 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.
Following the sale by Tesco of its operations in Thailand and Malaysia, Tesco has contributed 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 PLC 2021 Financial Statements.
38. 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 17 to 24 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. The Group is following FCA guidance, recently updated due to the Covid-19 pandemic, in relation to those Credit Card 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
38. 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 cash flows. Such transactions relate to contracts for derivative financial instruments, securities financing transactions 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 28 February 2021, no additional credit risk mitigation was deemed necessary.
103
38. 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 28 February 2021 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.
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38. 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.
At 29 February 2020, the Group used five economic scenarios. These included a Base scenario, an Upside scenario and three Downside scenarios. Downside 1 was an unfavourable European Union (EU) trade deal, Downside 2 was a more severe recession and in addition, to reflect the increased risk at that date of an adverse economic impact from the Covid-19 pandemic, a fifth scenario which used Downside 2 as a proxy was introduced. The scenarios were assigned weightings of 40%, 20%, 30%, 5% and 5% respectively.
105
38. Risk Management (continued)
At 28 February 2021, the Group commissioned four scenarios from its third-party provider, all of which were based on an economic outlook that sought to take account of the potential ramifications of the current COVID-19 pandemic. These scenarios include a Base scenario, an Upside scenario and two different Downside scenarios. These scenarios have been assigned weightings of 40%, 30%, 25% and 5% respectively. As the economic outlook remains uncertain, the Group's scenarios are based on the success of the Covid-19 vaccine roll out against emerging strains of the virus and, as the restrictions are lifted, the speed at which consumer and business confidence will support the recovery in GDP and the labour market:
The Base scenario anticipates GDP in Q4 2021 will be 3.7% lower than Q4 2019 and it takes until Q3 2023 to recover the loss of output. Unemployment is expected to peak in Q3 2021 at 8.0%.
The Upside scenario involves a sharper economic recovery with the loss of output due to the Covid-19 pandemic fully recovered by Q4 2021. Unemployment is expected to peak in Q2 2021 at 6.7%.
Downside 1 scenario assumes a longer delay, with GDP not expected to recover from its pre-Covid-19 pandemic level until Q3 2024. Unemployment is expected to peak in Q4 2021 at 9.6%.
Downside 2 scenario assumes an even longer recovery, with pre-Covid-19 pandemic output only recovered by Q3 2025. Unemployment is expected to peak in Q4 2021 at 10.8%.
These scenarios are also reviewed to ensure an unbiased estimate of ECL by ensuring the credit loss distribution under a larger number of scenarios is adequately captured using these four scenarios and their respective weightings.
106
38. Risk Management (continued)
The table below shows the key macro-economic variables in each scenario, averaged over a five-year period.
The economic scenarios used include the following ranges of key indicators:
2021
Scenario Weighting Sensitivity Economic measure 2021 2022 2023 2024 2025
(100% weighted)(3)
GBPm % % % % %
Bank of England base
Base 40% (1.1) rate(1) 0.1 0.1 0.1 0.1 0.2
Gross domestic product(2) 4.7 3.2 1.8 1.6 1.6
Unemployment rate 7.7 6.4 4.9 4.3 4.1
Unemployment rate
peak in year 8.0 7.2 5.3 4.5 4.1
Bank of England base
Upside 30% (65.8) rate(1) 0.1 0.1 0.1 0.2 0.4
Gross domestic product(2) 9.5 2.6 1.6 1.8 1.8
Unemployment rate 6.4 4.7 4.2 4.1 4.0
Unemployment rate
peak in year 6.7 5.2 4.2 4.1 4.1
Downside Bank of England base
1 25% 56.8 rate(1) -- -- 0.1 0.1 0.1
Gross domestic product(2) 2.0 3.5 1.9 1.8 1.8
Unemployment rate 8.6 8.6 6.8 5.3 4.4
Unemployment rate
peak in year 9.6 9.3 7.5 5.8 4.7
Downside Bank of England base
2 5% 116.8 rate(1) -- (0.1) 0.1 0.1 0.1
Gross domestic product(2) (1.0) 4.4 2.2 1.8 1.8
Unemployment rate 9.4 10.4 9.3 7.8 6.2
Unemployment rate
peak in year 10.8 10.7 9.7 8.4 6.8
Bank of England base
Weighted scenarios rate(1) 0.1 0.1 0.1 0.1 0.3
Gross domestic product 5.2 3.2 1.8 1.7 1.7
Unemployment rate 7.6 6.6 5.4 4.7 4.3
Unemployment rate
peak in year 8.2 7.3 5.7 4.9 4.4
(1) Simple average.
(2) Annual growth rates.
(3) Represents the impact on ECL provision if 100% weighting applied to each macro-economic scenario.
107
38. Risk Management (continued)
2020
Scenario Weighting Sensitivity Economic measure 2020 2021 2022 2023 2024
(100% weighted)(3)
GBPm % % % % %
Bank of England base
Base 40% (27.7) rate(1) 0.5 0.5 0.6 0.7 0.7
Gross domestic product(2) 1.3 1.7 1.8 1.8 1.8
Unemployment rate 3.9 3.9 3.9 3.8 3.8
Unemployment rate
peak in year 4.0 4.0 3.9 3.8 3.8
Bank of England base
Upside 20% (41.1) rate(1) 0.2 0.2 0.2 0.3 0.3
Gross domestic product(2) 1.7 2.1 2.2 2.2 2.2
Unemployment rate 3.9 3.9 3.8 3.8 3.8
Unemployment rate
peak in year 4.0 3.9 3.8 3.8 3.8
Downside Bank of England base
1 30% 39.6 rate(1) 0.5 0.6 1.4 2.2 2.3
Gross domestic product(2) 1.3 0.5 1.0 1.1 1.2
Unemployment rate 4.0 4.5 5.8 5.9 5.8
Unemployment rate
peak in year 4.1 4.9 6.0 6.0 5.8
Downside Bank of England base
2 5% 102.9 rate(1) 0.5 1.5 2.9 3.0 3.0
Gross domestic product(2) (0.5) (0.9) 1.7 1.7 1.7
Unemployment rate 4.0 5.5 6.9 6.8 6.5
Unemployment rate
peak in year 4.2 6.4 7.0 6.9 6.7
Bank of England base
Covid-19 5% 102.9 rate(1) 0.5 1.5 2.9 3.0 3.0
Gross domestic product(2) (0.5) (0.9) 1.7 1.7 1.7
Unemployment rate 4.0 5.5 6.9 6.8 6.5
Unemployment rate
peak in year 4.2 6.4 7.0 6.9 6.7
Bank of England base
Weighted scenarios rate(1) 0.4 0.6 1.0 1.3 1.3
Gross domestic product 1.2 1.2 1.6 1.6 1.7
Unemployment rate 4.0 4.3 4.7 4.7 4.7
Unemployment rate
peak in year 4.0 4.5 4.8 4.8 4.7
(1) Simple average.
(2) Annual growth rates.
(3) Represents the impact on ECL provision if 100% weighting applied to each macro-economic scenario.
108
38. 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 28 February 2021 are set out in the table below.
Impact on loss
allowance
2021 2020
GBPm GBPm
Closing ECL allowance 624.6 488.4
Macro-economic (100% weighted) Upside (65.8) (41.1)
Base (1.1) (27.7)
Downside 1 56.8 39.6
Downside 2 116.8 102.9
Increase of
PD 2.5% 7.5 11.1
Decrease of
2.5% (7.5) (10.9)
Increase of
LGD 2.5% 10.3 12.1
Decrease of
2.5% (10.4) (12.3)
Increase of
Staging - change in threshold 20% (7.4) (17.3)
Decrease of
20% 10.6 21.4
Increase of
Expected lifetime (revolving credit facilities) 1 year 9.3 2.1
Decrease of
1 year (8.7) (2.1)
109
38. Risk Management (continued)
Management Overlays
The Covid-19 pandemic has had a significant impact on the global economy and there remains a large degree of uncertainty around the scale and stress of the peak of the economic downturn and the speed and shape of any subsequent recovery. The extension of government support measures such as furlough has been unprecedented and this, coupled with the granting of payment holidays by the Group, has broken the historically observed relationship between unemployment and default.
Although projected levels of unemployment remain high, the Group is yet to see significant defaults emerge in its lending portfolio and, as such, Covid-19 specific adjustments to the Group's modelled ECL provision to capture the estimated impact of the stress within the Group's ECL provision have been recognised as follows:
Management has assessed that the beneficial impact of lower consumer spending through the Covid-19 pandemic, which has resulted in an improvement in credit scores, as well as other inputs to ECL such as lower EADs on the credit cards portfolio, will have suppressed ECLs. A post-model adjustment (PMA) of GBP129.5m is held in this respect, calculated from pre-Covid-19 pandemic coverage rates and based upon credit limits but reduced in line with the reduction in portfolio utilisation observed during the year. An increase or decrease of 10% on the adjustment for lower drawn balances would increase or decrease this overlay by GBP11m. This PMA reflects Management's belief that the level of risk prior to the emergence of Covid-19 is more reflective of future ECLs.
Management has assessed that the impact of government support measures such as furlough and the various temporary customer support measures the Group has put in place has suppressed arrears and defaults during the year. Management has judged this to be temporary in nature and a PMA of GBP63.6m is held to recognise the expected emergence of defaults once support measures are removed. The maximum suppressed defaults have been estimated at GBP82.2m.
A review of arrears emergence from those customers who sought an extension to their initial payment holiday has suggested there has been an increase in credit risk in respect of these customers and, as such, these accounts have been moved to Stage 2 with a PMA of GBP21.1m held to reflect the estimated increase in ECLs for these customers.
110
38. 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 Statement of Financial Position. For loan commitments, the amounts in the table represent the amounts for which the Group is contractually committed.
Stage Stage
1 Stage 2 3 Total
<30 days >30 days
Not past past past
2021 due due due Total
Group(1) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Gross Exposure
Loans and advances
to customers 5,748.5 980.5 24.9 24.6 1,030.0 241.6 7,020.1
Investment securities
at FVOCI(2) 5.1 -- -- -- -- -- 5.1
Investment securities
at amortised cost 949.2 -- -- -- -- -- 949.2
Loan commitments -
Loans and advances
to customers(3) 12,378.9 282.9 2.3 0.3 285.5 3.6 12,668.0
Total gross exposure 19,081.7 1,263.4 27.2 24.9 1,315.5 245.2 20,642.4
-------- -------- -------- -------- ------- ----- --------
Loss allowance
Loans and advances
to customers(3) 132.3 312.5 11.1 15.7 339.3 153.0 624.6
Investment securities
at FVOCI -- -- -- -- -- -- --
Investment securities
at amortised cost 0.8 -- -- -- -- -- 0.8
Total loss allowance 133.1 312.5 11.1 15.7 339.3 153.0 625.4
-------- -------- -------- -------- ------- ----- --------
Net Exposure
Loans and advances
to customers 5,616.2 668.0 13.8 8.9 690.7 88.6 6,395.5
Investment securities
at FVOCI 5.1 -- -- -- -- -- 5.1
Investment securities
at amortised cost 948.4 -- -- -- -- -- 948.4
Total net exposure 6,569.7 668.0 13.8 8.9 690.7 88.6 7,349.0
-------- -------- -------- -------- ------- ----- --------
Coverage
Loans and advances
to customers 2.3% 31.9% 44.6% 63.8% 32.9% 63.3% 8.9%
-------- -------- -------- -------
(1) On a Company basis, loans and advances to subsidiary companies of GBP484.8m are considered to be low risk and stage 1. The related loss allowance of GBP1.3m is also considered to be stage 1.
(2) On 1 March 2020 the Group's portfolio of debt investment securities measured at FVOCI was reclassified to amortised cost following a change in business model.
(3) 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 30.
111
38. Risk Management (continued)
2020 Stage 1 Stage 2 Stage 3 Total
Not past due <30 days past due >30 days past 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 GBP484.8m are considered to be low risk and stage 1. The related loss allowance of GBP1.6m 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 30.
(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.
112
38. 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
2021 2020
GBPm GBPm
Derivative financial assets 6.1 5.7
Assets of the disposal group -- 45.1
Cash and balances with central banks 13.2 26.3
Total 19.3 77.1
------------- -------------
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) 2021
Stage 1 Stage 2 Stage 3 Total
GBPm GBPm GBPm GBPm
Loans and advances to customers
High quality 5,312.9 443.4 -- 5,756.3
Satisfactory quality 392.3 389.4 -- 781.7
Low quality and below standard 43.3 197.2 -- 240.5
Credit impaired -- -- 241.6 241.6
Total 5,748.5 1,030.0 241.6 7,020.1
-------- ------- ------- --------
Loan Commitments
High quality 12,263.1 198.5 -- 12,461.6
Satisfactory quality 90.1 65.7 -- 155.8
Low quality and below standard 25.7 21.3 -- 47.0
Credit impaired -- -- 3.6 3.6
Total 12,378.9 285.5 3.6 12,668.0
-------- ------- ------- --------
Total exposure 18,127.4 1,315.5 245.2 19,688.1
-------- ------- ------- --------
(1) On a Company basis, loans and advances to subsidiary companies of GBP484.8m are considered to be low risk, high quality and stage 1.
113
38. Risk Management (continued)
Credit quality of loans and advances to customers (continued)
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 GBP484.8m are considered to be low risk, high quality and stage 1.
Counterparty credit rating
2021 2020
Long-term Rating GBPm GBPm
Investment securities at amortised
cost AAA to BBB 927.3 -
Investment securities at FVOCI AAA to BBB 5.1 1,060.6
932.4 1,060.6
----- -------
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 e.g. a disproportionate level of high value unsecured Personal Loans. 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. An assessment of credit concentration is also undertaken as part of the ICAAP. The Group does not consider itself to be overly concentrated, other than its geographic concentration as a UK business.
Concentration profiles
The following tables provide concentration profiles in terms of the geographic distribution of the Group's exposures and analysis of material asset class by industry type.
114
38. Risk Management (continued)
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.
2021 2020
Group GBPm GBPm
UK 20,430.1 22,534.1
Europe (excluding UK) 149.1 303.3
Other 466.2 274.6
-------- --------
Total 21,045.4 23,112.0
-------- --------
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.
2021 2020
Group GBPm GBPm
Financial institutions 1,112.1 1,170.5
Government 840.8 1,540.7
Individuals 19,083.1 20,397.7
Wholesale and retail trade 9.4 3.1
-------- --------
Total 21,045.4 23,112.0
-------- --------
Credit risk: Collateral held
During the year the Group pledged collateral in respect of repurchase liabilities.
115
38. Risk Management (continued)
Credit risk: Loss allowance
The following table provides a reconciliation of the movements in the loss allowance in the year:
2021 Stage 1 Stage 2 Stage 3 Total
Group(1) GBPm GBPm GBPm GBPm
Loans and advances to customers
At 1 March 2020 84.1 218.6 185.7 488.4
Transfers (2,4)
Transfers from stage 1 to stage
2 (20.0) 20.0 - --
Transfers from stage 2 to stage
1 8.5 (8.5) - -
Transfers to stage 3 (2.4) (42.1) 44.5 --
Transfers from stage 3 1.6 2.0 (3.6) --
Income statement charge
Net remeasurement(3) following
transfer of stage(4) (5.9) 34.9 71.6 100.6
New financial assets originated(5) 25.4 4.7 1.7 31.8
Financial assets derecognised
during year (7.2) (9.3) (3.1) (19.6)
Changes in risk parameters and
other movements(6) 56.5 133.6 83.5 273.6
Other movements
Write-offs and asset disposals(7) -- (2.3) (227.3) (229.6)
Transfer to provisions for liabilities
and charges(8) (8.3) (12.3) -- (20.6)
-------- -------- -------- --------
ECL allowance at 28 February 2021 132.3 339.3 153.0 624.6
-------- -------- -------- --------
Investment securities at FVOCI
At 1 March 2020 0.9 - - 0.9
Other movements
Transfer to investment securities
at amortised cost(9) (0.9) - - (0.9)
-------- -------- -------- --------
ECL allowance at 28 February 2021 -- - - --
-------- -------- -------- --------
Investment securities at amortised
cost
At 1 March 2020 0.1 - - 0.1
Income statement charge
New financial assets originated(5) 0.1 - - 0.1
Financial assets derecognised
during the year (0.1) - - (0.1)
Changes in risk parameters and
other movements(6) (0.2) - - (0.2)
Other movements
Transfer from investment securities
at FVOCI 0.9 - - 0.9
ECL allowance at 28 February 2021 0.8 - - 0.8
-------- -------- -------- --------
Reconciliation to income statement
Net expected credit loss charge 68.6 163.9 153.7 386.2
Recoveries and write-offs -- -- (26.7) (26.7)
-------- -------- -------- --------
Total income statement charge 68.6 163.9 127.0 359.5
-------- -------- -------- --------
(1) On a Company basis, the movements in loss allowance for the year ended 28 February 2021 of GBP0.3m relating to loans and advances to subsidiary companies arise 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 charge in stages 1 and 2 ECL of GBP194.1m 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 2021.
(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) On 1 March 2020 the Group's portfolio of debt investment securities measured at FVOCI was reclassified to amortised cost following a change in business model.
116
38. Risk Management (continued)
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 year (8.7) (12.1) (3.4) (24.2)
Changes in risk parameters and
other movements(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)
-------- -------- -------- --------
ECL allowance 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 year (0.7) - - (0.7)
Changes in risk parameters and
other movements(6) 1.0 - - 1.0
-------- -------- -------- --------
ECL allowance 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) - - - -
-------- -------- --------
ECL allowance 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.
(1) Transfers - The opening loss allowance on financial assets which transferred stage during the year.
(2) Net remeasurement - The increase/(decrease) in the opening loss allowance as a result of a stage transfer.
(3) Includes a release in stages 1 and 2 ECL of GBP8.0m due to a change in the macro-economic scenarios assumptions.
(4) 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.
(5) 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.
(6) 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.
(7) Transfer from provisions for liabilities and charges - The movement in loss allowance which exceeds the gross carrying amount of the financial asset.
(8) During the prior year, the Group classified its Mortgage Business as a disposal group.
117
38. 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:
2021 Stage 1 Stage 2 Stage 3 Total
Group(1) GBPm GBPm GBPm GBPm
Loans and advances to customers
Gross carrying amount
At 1 March 2020 7,687.9 953.3 288.8 8,930.0
Transfers (2)
Transfers from stage 1 to stage
2 (555.6) 555.6 - --
Transfers from stage 2 to stage
1 46.3 (46.3) - --
Transfers to stage 3 (90.0) (122.3) 212.3 --
Transfers from stage 3 3.8 5.0 (8.8) --
Other movements
New financial assets originated(3) 1,212.0 16.9 2.4 1,231.3
Net decrease in lending(4) (2,540.5) (328.8) (22.5) (2,891.8)
Write-offs and asset disposals(5) -- (2.3) (237.6) (239.9)
Changes in interest accrual and
other movements (15.4) (1.1) 7.0 (9.5)
At 28 February 2021 5,748.5 1,030.0 241.6 7,020.1
---------
Investment securities at FVOCI
Gross carrying amount
At 1 March 2020 1,060.6 - - 1,060.6
Transfer to investment securities
at amortised cost(6) (1,057.4) - - (1,057.4)
Other movements 1.9 - - 1.9
At 28 February 2021 5.1 - - 5.1
---------
Investment securities at amortised
cost
Gross carrying amount
At 1 March 2020 21.1 - - 21.1
Transfer from investment securities
at FVOCI(6) 1,057.4 - - 1,057.4
New financial assets originated(3) 84.4 - - 84.4
Financial assets derecognised
during the year (201.8) - - (201.8)
Other movements (11.9) - - (11.9)
At 28 February 2021 949.2 - - 949.2
---------
(1) On a Company basis, loans and advances to subsidiary companies of GBP484.8m are considered to be low risk and stage 1.
(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 28 February 2021.
(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) On 1 March 2020 the Group's portfolio of debt investment securities measured at FVOCI was reclassified to amortised cost following a change in business model.
118
38. Risk Management (continued) 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 year (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 year (7.8) - - (7.8) At 29 February 2020 21.1 - - 21.1
(1) On a Company basis, loans and advances to subsidiary companies of GBP484.8m 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) In the prior year, the Group classified its Mortgage Business as a disposal group.
119
38. 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 28 February 2021 was GBP154.1m (2020: GBP140.0m). 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 subject Forbearance programmes as a Proportion of forbearance
to forbearance programmes proportion of total loans and programmes covered by impairment
advances by category provision
Group 2021 2020 2021 2020 2021 2020
GBPm GBPm % % % %
Credit Cards UK 118.8 107.6 3.7 2.5 50.2 49.7
Credit Cards
commercial 0.1 0.1 4.9 4.7 96.0 94.1
Loans 48.0 48.9 1.3 1.1 56.0 41.1
120
38. 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 Head of Operational Risk, 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.
121
38. Risk Management (continued)
Controls and risk mitigants
Liquidity and funding risk is assessed through the 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 daily basis are:
-- the internal liquidity requirement; -- the individual liquidity guidance; -- 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 and TFSME) 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 Treasury Committee (TCo) and Asset and Liability Management Committee (ALCo) on a regular basis to provide evidence that sufficient liquidity is held to meet financial obligations in a stress.
122
38. 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:
2021 2020
Group GBPm GBPm
On balance sheet
Deposits from banks 600.0 500.0
Deposits from customers 5,738.0 7,707.0
Subordinated liabilities and notes 235.0 235.0
Debt securities in issue 251.0 1,024.0
------- -------
Total on balance sheet funding 6,824.0 9,466.0
------- -------
123
38. 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
2021 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 804.3 -- -- -- -- -- 804.3
Loans and advances
to customers 4,643.7 1,099.4 807.7 483.8 224.5 168.8 7,427.9
Investment securities
- FVOCI 5.8 -- -- -- -- -- 5.8
- Amortised cost 310.9 281.1 377.2 76.4 139.5 161.4 1,346.5
Other assets 211.2 -- -- -- -- -- 211.2
Total financial
assets 5,975.9 1,380.5 1,184.9 560.2 364.0 330.2 9,795.7
Financial liabilities:
Deposits from banks 500.5 0.2 100.1 -- -- -- 600.8
Deposits from customers 4,884.4 488.4 253.0 113.6 24.0 0.2 5,763.6
Debt securities
in issue 8.8 8.8 8.8 254.4 -- -- 280.8
Derivatives settled
on a net basis
- Derivatives in
economic but not
accounting hedges 0.9 -- -- -- -- -- 0.9
- Derivatives in
accounting hedge
relationships 14.8 10.6 6.5 4.0 4.4 2.6 42.9
Other liabilities
- Lease liabilities 3.5 3.8 4.1 3.9 2.8 11.6 29.7
- Other liabilities
excluding lease
liabilities 154.6 -- -- -- -- -- 154.6
Subordinated liabilities 4.6 5.0 4.7 5.1 5.2 262.3 286.9
Total financial
liabilities 5,572.1 516.8 377.2 381.0 36.4 276.7 7,160.2
Off balance sheet
Contractual lending
commitments 12,668.0 -- -- -- -- -- 12,668.0
Total off balance
sheet 12,668.0 -- -- -- -- -- 12,668.0
124
38. Risk Management (continued)
Company Within Between Between Between Between
2021 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 14.8 -- -- -- -- -- 14.8
Other assets 1.3 -- -- -- -- -- 1.3
Loans and advances
to subsidiary companies 13.4 13.8 13.5 259.5 5.2 262.3 567.7
Total financial
assets 29.5 13.8 13.5 259.5 5.2 262.3 583.8
Financial liabilities:
Debt securities
in issue 8.8 8.8 8.8 254.4 -- -- 280.8
Other liabilities 1.3 -- -- -- -- -- 1.3
Subordinated liabilities 4.6 5.0 4.7 5.1 5.2 262.3 286.9
Total financial
liabilities 14.7 13.8 13.5 259.5 5.2 262.3 569.0
125
38. Risk Management (continued)
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
126
38. 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
127
38. 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
2021 GBPm GBPm GBPm
Encumbered asset summary
Investment securities - FVOCI -- 5.1 5.1
Investment securities - amortised cost 61.2 887.2 948.4
Loans and advances to customers 862.4 5,539.8 6,402.2
Other assets 83.1 128.1 211.2
---------- ------------ -------
1,006.7 6,560.2 7,566.9
---------- ------------ -------
Encumbered investment securities -
amortised cost
Debt securities at amortised cost(1) 61.2
----------
61.2
----------
Encumbered loans and advances to customers
Personal Loans 862.4
----------
862.4
----------
Encumbered other assets
Cash ratio deposit 24.7
Initial margin held at Clearing Houses 15.7
Variation margin held at Clearing Houses 41.8
Collateral held at counterparties 0.9
----------
83.1
----------
(1) On 1 March 2020 the Group's portfolio of debt investment securities measured at FVOCI was reclassified to amortised cost following a change in business model.
128
38. Risk Management (continued)
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
----------
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
129
38. Risk Management (continued)
Loans and advances assigned for use as collateral in securitisation transactions
At 28 February 2021, GBP2,959.5m (2020: GBP3,462.7m) 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 GBPnil (2020: GBP788.9m).
At 28 February 2021, Delamare Cards MTN Issuer plc had GBP1,840.0m (2020: GBP2,012.2m) notes in issue in relation to securitisation transactions, of which GBPnil (2020: GBP572.2m) related to the par value of externally issued notes (refer to note 29). At 28 February 2021 the Group owned GBP1,840.0m (2020: GBP1,440.0m) of class A and class D Credit Card backed notes issued by Delamare Cards MTN Issuer plc.
All of the GBP1,550.0m (2020: GBP1,150.0m) class A retained Credit Card backed notes are held within their single collateral pool.
Loans and advances prepositioned with the BoE
Group 2021 2020
GBPm GBPm
Credit Card backed notes(1) 1,550.0 1,150.0
Unsecured personal Loans 2,243.2 2,484.2
-------- --------
Total assets prepositioned as collateral with the BoE 3,793.2 3,634.2
-------- --------
Collateralised TFS drawings 500.0 500.0
Collateralised TFSME drawings 100.0 --
-------- --------
Total 600.0 500.0
-------- --------
(1) Issued by Delamare Cards MTN Issuer plc.
Undrawn Committed Facilities
The Group has the following undrawn committed facilities:
2021 2020
Group GBPm GBPm
Expiring in less than one year -- --
Expiring between one and two years -- 200.0
Expiring in more than two years 200.0 --
Total 200.0 200.0
-----
The undrawn committed facilities includes a GBP200.0m (2020: GBP200.0m) committed repurchase facility. All facilities incur commitment fees at market rates and would provide funding at floating rates. There were no withdrawals from the facilities during the year.
130
38. Risk Management (continued)
(d) Market risk
Market risk is the risk that movements in market prices (such as interest rates, foreign exchange rates and the market value of financial instruments) lead to a reduction in either the Bank's earnings or capital.
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 TCo. 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.
131
38. 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 28 February 2021 the Group was exposed to net residual risk via an upward rate scenario (2020: downward rate scenario).
2021 2020
Upward rate Downward rate
Group scenario scenario
Capital at Risk Sensitivity GBPm GBPm
Repricing risk (13.6) (21.3)
Pipeline risk (0.2) (0.1)
Prepayment risk (6.7) (0.7)
CSRBB -- (8.6)
Total (20.5) (30.7)
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 (2020: +/- 0.25%, 0.50%, 0.75%, 1%). The most adverse scenario is measured against Risk Appetite. At 28 February 2021, the most adverse scenario was a downward rate shock, with an impact of 1.71% (29 February 2020: (1.17%) with an upward rate shock). Any adverse effects of the current macro-economic 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.
132
38. 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.
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 28 February 2021 was GBP6.7m (2020: GBP(274.8)m), representing the Group's net assets (2020: 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 37).
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 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.
133
38. 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.
(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.
At the prior year end the Group had debt and equity investment securities which were held at fair value in the Consolidated Statement of Financial Position. On 1 March 2020 the Group's portfolio of debt investment securities held at FVOCI was reclassified to amortised cost following a change in business model. Equity investment securities continue to be held at fair value as set out at note 19.
Controls and risk mitigants
The Group has established appropriate hedging strategies to mitigate 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 10%
shock shock
2021 2020 2021 2020 2021 2020
Group GBPm GBPm GBPm GBPm GBPm GBPm
Government-backed investment
securities -- 315.9 -- (31.6) -- 284.3
Gilts -- 40.7 -- (4.1) -- 36.6
Supranational investment
securities -- 393.9 -- (39.4) -- 354.5
Other investment securities -- 306.9 -- (30.7) -- 276.2
Equity securities 5.1 3.2 (0.5) (0.3) 4.6 2.9
5.1 1,060.6 (0.5) (106.1) 4.6 954.5
(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.
134
38. 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.
135
39. 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.
Amortised Designated FVOCI -
Group(1) cost as at FVPL equity instruments Total
2021 GBPm GBPm GBPm GBPm
Financial assets
Cash and balances with central
banks 791.1 13.2 -- 804.3
Loans and advances to customers 6,402.2 -- -- 6,402.2
Derivative financial instruments -- 6.1 -- 6.1
Investment securities(2) :
- FVOCI -- -- 5.1 5.1
- Amortised cost 948.4 -- -- 948.4
Other assets 211.2 -- -- 211.2
Total financial assets 8,352.9 19.3 5.1 8,377.3
Financial liabilities
Deposits from banks 600.0 -- -- 600.0
Deposits from customers 5,738.0 -- -- 5,738.0
Debt securities in issue 251.0 -- -- 251.0
Derivative financial instruments -- 47.5 -- 47.5
Other liabilities 184.2 -- -- 184.2
Subordinated liabilities 235.0 -- -- 235.0
Total financial liabilities 7,008.2 47.5 -- 7,055.7
(1) On a Company basis, cash and balances with central banks is GBP14.8m and loans and advances to subsidiary companies is GBP483.5m, both of which are held at amortised cost.
(2) On 1 March 2020 the Group's portfolio of debt investment securities measured at FVOCI was reclassified to amortised cost following a change in business model.
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.
136
39. Financial Instruments (continued)
Amortised Designated FVOCI - FVOCI -
Group(1) cost as at FVPL debt instruments equity 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.
137
39. 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
2021 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 6.1 (6.1) -- --
------------
Total financial assets 6.1 (6.1) -- --
------------
Financial liabilities
Derivative financial instruments (47.5) 6.1 42.7 1.3
------------
Total financial liabilities (47.5) 6.1 42.7 1.3
------------
Group Related amounts
not offset
2020 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 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)
------------
138
39. 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.
Group(1,2) 2021 2020
Carrying Fair Carrying Fair
value Value value value
GBPm GBPm GBPm GBPm
Financial assets
Loans and advances to customers 6,402.2 6,617.6 8,451.3 8,626.9
Investment securities - amortised
cost(3) 948.4 959.1 21.0 27.6
7,350.6 7,576.7 8,472.3 8,654.5
Financial liabilities
Deposits from customers 5,738.0 5,744.4 7,707.0 7,710.7
Debt securities in issue 251.0 263.7 1,024.0 1,040.2
Subordinated liabilities 235.0 215.9 235.0 214.5
6,224.0 6,224.0 8,966.0 8,965.4
(1) On a Company basis, loans and advances to subsidiary companies have a carrying value of GBP483.5m (2020: GBP483.2m), with a fair value of GBP458.3m (2020: GBP449.5m). On a Company basis, subordinated liabilities and debt securities in issue have the same carrying value and fair value as set out in the Group table above.
(2) Fair value disclosures are not required for lease liabilities.
(3) On 1 March 2020 the Group's portfolio of debt investment securities measured at FVOCI was reclassified to amortised cost following a change in business model
139
39. Financial Instruments (continued)
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 equity investment securities and derivative financial instruments. At the prior year end the Group also held debt securities at FVOCI. These were reclassified to amortised cost on 1 March 2020 following a change in business model. 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.
140
39. 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 2021 GBPm GBPm GBPm GBPm Financial assets carried at fair value Cash and balances with central banks -- 13.2 -- 13.2 Investment securities - FVOCI(1) -- 3.4 1.7 5.1 Derivative financial instruments: - Interest rate swaps -- 6.0 -- 6.0 - Forward foreign currency contracts -- 0.1 -- 0.1 Financial assets carried at amortised cost Loans and advances to customers -- -- 6,617.6 6,617.6 Investment securities - amortised cost(2) 932.3 26.8 -- 959.1 Total 932.3 49.5 6,619.3 7,601.1 Financial liabilities carried at fair value Derivative financial instruments: - Interest rate swaps -- 46.5 -- 46.5 - Forward foreign currency contracts 1.0 1.0 Financial liabilities carried at amortised cost Deposits from customers -- -- 5,744.4 5,744.4 Debt securities in issue 263.7 -- -- 263.7 Subordinated liabilities -- 215.9 -- 215.9 Total 263.7 263.4 5,744.4 6,271.5
(1) On a Company basis, loans and advances to subsidiary companies of GBP458.3m, are categorised as level 2. On a Company basis, subordinated liabilities and debt securities in issue have the same fair value and categorisation as set out in the Group table above.
(2) On 1 March 2020 the Group's portfolio of debt investment securities measured at FVOCI was reclassified to amortised cost following a change in business model.
141
39. Financial Instruments (continued) 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 - Forward foreign currency contracts -- -- -- -- Assets of the disposal group -- -- 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 GBP449.5m, are categorised as level 2. On a Company basis, subordinated liabilities and debt securities in issue have the same fair value and categorisation as set out in the Group table above.
142
39. Financial Instruments (continued)
There are three levels to the hierarchy as follows:
Level 1
Fair values of debt investment securities classified as amortised cost are based on quoted prices.
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 in subordinated debt classified as amortised cost are 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.
143
39. 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.
At the prior year end the fair value of assets of the disposal group was 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 19.
Transfers
There were no transfers between Levels 1 and Level 2 in the year to 28 February 2021 (2020: no transfers).
There were no transfers between Level 2 and Level 3 in the year to 28 February 2021 (2020: no transfers).
144
40. Cash Flows from Operating Activities
Group Company
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
Non cash and other items included in operating
profit before taxation
Expected credit loss on loans and advances
(refer notes 10 & 38) 359.7 178.0 (0.3) 0.5
Expected credit loss on investment securities
at amortised cost (0.2) -- -- --
Depreciation and amortisation (refer notes
25 & 26) 56.7 140.9 -- --
Loss on disposal of investment securities
(refer note 8) -- 0.2 -- --
Loss on disposal of non-current assets
(refer notes 25 & 26) 1.7 -- -- --
Gain on disposal of assets of the disposal
group (refer note 14) (0.4) (43.0) -- --
Provisions for liabilities and charges
(refer note 30) 3.1 50.5 -- --
Share of profit of joint venture (refer
note 23) (16.2) (10.2) -- --
Equity settled share based payments (refer
note 12) (2.5) 1.4 -- --
Interest paid on debt securities in issue 20.1 28.5 9.0 5.1
Interest paid on assets held to hedge debt
securities in issue 3.3 9.5 -- --
Interest on subordinated liabilities 3.5 5.3 3.5 5.3
Interest on lease liabilities (refer note
36) 2.3 2.5 -- --
Research and development tax claim (0.5) (0.3) -- --
Fair value movements 7.9 (11.8) -- --
---------- ---------- ----- ------
Total 438.5 351.5 12.2 10.9
---------- ---------- ----- ------
Changes in operating assets and liabilities
Net movement in mandatory balances with
central banks 6.9 (2.9) -- --
Net movement in loans and advances to banks -- 324.2 -- --
Net movement in loans and advances to customers 1,707.0 3,808.0 -- --
Net movement in prepayments and accrued
income 14.0 (6.1) 0.3 (0.9)
Net movement in other assets 32.1 (7.1) -- --
Net movement in assets of the disposal
group 44.9 4.4 -- --
Net movement in deposits from banks 100.0 (1,163.2) -- --
Net movement in deposits from customers (1,968.4) (2,759.1) -- --
Net movement in accruals and deferred income (6.2) (3.6) -- --
Provisions utilised (22.3) (46.0) -- --
Net movement in other liabilities (11.7) 14.9 -- --
---------- ---------- ----- ------
Total (103.7) 163.5 0.3 (0.9)
---------- ---------- ----- ------
145
41. Reconciliation of Liabilities Relating to Financing Activities
Non-cash movements
Group At 1 March Financing Fair value Accrued Other At 28 February
2020 Cash flows change Interest 2021
GBPm GBPm GBPm GBPm GBPm GBPm
Debt securities in issue (1,024.0) 772.2 3.2 (0.2) (2.2) (251.0)
Subordinated liabilities
and notes (235.0) -- -- -- -- (235.0)
Interest payable (4.7) 26.8 -- (23.2) -- (1.1)
Assets held to hedge fixed
rate bonds(1) 4.1 3.9 (5.4) (0.6) -- 2.0
Lease liabilities (2) (32.8) 5.5 -- (2.3) -- (29.6)
Total liabilities from
financing activities (1,292.4) 808.4 (2.2) (26.3) (2.2) (514.7)
Non-cash movements
Company At 1 March Financing Fair value Accrued Other At 28 February
2020 Cash flows change Interest 2021
GBPm GBPm GBPm GBPm GBPm GBPm
Debt securities in issue (249.2) -- -- (0.2) -- (249.4)
Subordinated liabilities
and notes (235.0) -- -- -- -- (235.0)
Interest payable (1.6) 12.6 -- (12.3) -- (1.3)
Total liabilities from
financing activities (485.8) 12.6 -- (12.5) -- (485.7)
Non-cash movements
Group At 1 March Financing Fair value Accrued Other At 29 February
2019 Cash flows change Interest 2020
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(2) (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 value Accrued Other At 29 February
2019 Cash flows change Interest 2020
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)
Total liabilities from
financing activities (235.7) (239.7) -- (10.5) -- (485.9)
(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 42.
(2) Lease liabilities are included within total other liabilities in the Consolidated Statement of Financial Position on page 42.
146
42. Capital Resources
IFRS 9 'Financial Instruments' became effective for annual periods beginning on or after 1 January 2018 and is reflected in the Group disclosures. The Group has elected to use the transitional arrangements available under Article 473a of the Capital Requirements Regulations (CRR). These arrangements allow the IFRS 9 impact on capital to be phased in over a period of 5 years. On 27 June 2020, the CRR was further amended to accelerate specific CRR2 measures and implement a new IFRS 9 transitional relief calculation which applies additional relief to increases in ECL provisions arising as a result of the Covid-19 pandemic. As a result, the IFRS 9 transitional arrangements have been extended by two years and a new modified calculation has been introduced. Full relief will be applied to increases in stage 1 and stage 2 provisions from 1 January 2020 throughout 2020 and 2021, reducing to 75% in 2022, 50% in 2023 and 25% in 2024, with no relief applied from 2025. The phasing out of transitional relief on the 'day 1' impact of IFRS 9 as well as increases in stage 1 and stage 2 provisions between 1 March 2018 and 31 December 2019 under the modified calculation remain unchanged and continue to be subject to 70% transitional relief throughout 2020, 50% relief for 2021 and 25% for 2022, with no relief applied from 2023.
The following tables analyse the regulatory capital resources of the Group 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
2021 2021 2020
GBPm GBPm GBPm
Common equity tier 1
Shareholders' equity (accounting capital) 1,589.1 1,589.1 1,719.0
Regulatory adjustments
Unrealised losses on cash flow hedge reserve 0.6 0.6 0.3
Adjustment to own credit/additional value
adjustments -- -- (1.1)
Intangible assets (130.9) (130.9) (138.2)
IFRS 9 transitional add back 262.9 -- 141.6
Common equity tier 1 capital 1,721.7 1,458.8 1,721.6
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 (21.1) (21.1) (21.0)
Total regulatory adjustments to tier 2 capital
(instruments and provisions) (21.1) (21.1) (21.0)
Total tier 2 capital (instruments and provisions) 213.9 213.9 214.0
Total capital 1,935.6 1,672.7 1,935.6
Total risk-weighted assets (unaudited) 6,805.0 6,675.1 8,310.1
Common equity tier 1 ratio (unaudited) 25.3% 21.9% 20.7%
Tier 1 ratio (unaudited) 25.3% 21.9% 20.7%
Total capital ratio (unaudited) 28.4% 25.1% 23.3%
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 28 February 2021 is 11.59% plus GBP52m as a static add-on for pension obligation risk.
147
42. Capital Resources (continued)
The table below reconciles shareholders' equity of the Group to shareholders' equity of the Company for regulatory purposes:
2021 2020
GBPm GBPm
Tesco Personal Finance Group plc (Group) shareholders'
equity 1,621.5 1,744.4
Share of joint venture's retained earnings (26.6) (17.9)
Subsidiaries' retained earnings (0.2) --
Share of joint venture's AFS reserve (5.6) (7.5)
--------
Tesco Personal Finance Group plc shareholders'
equity for regulatory purposes 1,589.1 1,719.0
--------
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 Regulatory 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
2021 2021 2020
GBPm GBPm
Total balance sheet exposures 8,823.4 8,823.4 11,645.2
Adjustments for entities which are consolidated
for accounting purposes but outside scope
of regulatory consolidation (32.6) (32.6) (25.4)
Removal of accounting value of derivatives
and SFTs (6.1) (6.1) (5.7)
Exposure value for derivatives and SFTs 4.4 4.4 9.3
Off balance sheet: unconditionally cancellable
(10%) 1,266.8 1,266.8 1,187.2
Off balance sheet: other (20%) -- -- --
Regulatory adjustment - intangible assets (130.9) (130.9) (138.2)
Regulatory adjustment - other, including
IFRS 9 212.9 (50.0) 89.2
Total 10,137.9 9,875.0 12,761.6
Common equity tier 1 1,721.7 1,458.8 1,721.6
Leverage ratio 17.0% 14.8% 13.5%
148
42. 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 TCo.
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 of GBP50 billion or more. In December 2017, the BCBS finalised Basel III reforms for the leverage ratio. The final Basel III reforms will be implemented in January 2023.
The Group is subject to reporting and disclosure requirements under the CRR and is not currently subject to temporary modifications of the UK LFR.
149
42. Capital Resources (continued)
The European Commission's minimum requirements for own funds and eligible liabilities (MREL)
Upon full implementation, MREL targets will 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 would be likely to need post-resolution.
The Group became subject to MREL on an interim basis from 1 January 2020, with full implementation applicable from 1 January 2023. The interim target remains at 18% of risk-weighted assets until 31 December 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 TPF via an intercompany subordinated loan. Further issuances may be required to support end-state requirements.
At 28 February 2021, the MREL ratio was 31.9% (2020: 26.1%).
43. 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 comprises 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 ultimate parent undertaking.
Group 2021 2020
GBPm GBPm
Loans and advances to customers(1)
At the beginning of the year -- 0.3
Loan repayments during the year -- (0.1)
Loans outstanding at the end of the year -- 0.2
Interest income earned -- --
Deposits from customers(1)
Deposits at the beginning of the year 0.1 0.2
Deposits received during the year -- 1.2
Deposits repaid during the year (0.1) (0.5)
Deposits at the end of the year -- 0.9
Interest expense on deposits -- --
In line with the requirements of IFRS 9, an ECL allowance amounting to 0.0% of the loans outstanding was recognised at 29 February 2020. There was no such allowance at 28 February 2021.
(1) The opening and closing balances reported are in respect of related parties of the Group during and at the reporting date in each year.
150
43. 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 11.
Group 2021 2020
GBPm
Short-term employee benefits 2.6 4.1
Termination benefits -- 0.5
Other long-term benefits 2.1 2.9
Share based payments -- 0.5
Total emoluments 4.7 8.0
Trading transactions
Group 2021 2021 2021 2020 2020 2020
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 -- 3.8 28.2 -- 20.8 32.6
Dividend income -- -- 7.5 -- -- 15.6
Interest paid (3.5) -- -- (5.3) -- --
Provision of services -- (47.6) 3.0 -- (76.6) 3.7
Company 2021 2021 2021 2020 2020 2020
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 -- 12.3 -- -- 10.5 --
Dividend income -- 15.0 -- -- 50.0 --
Interest paid (3.5) -- -- (5.3) -- --
Provision of services -- -- -- -- -- --
Balances owing to/from related parties are identified in notes 21, 23, 31, 32, 33, 34 and 35.
For the year ended 28 February 2021 the Group generated 44% (2020: 45%) 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 23.
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.
151
44. 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 38.
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 28 February 2021 the Group had capital commitments related to property, plant and equipment of GBP0.5m (2020: GBP1.2m) and intangible assets of GBP2.1m (2020: GBP5.7m). This is in respect of IT software development and IT hardware. The Group's Management is confident that future net revenues and funding will be sufficient to cover these commitments.
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45. Share Based Payments
The Group charge for the year recognised in respect of share based payments is GBP3.1m (2020: GBP7.9m), which is made up of share option schemes and share bonus payments. Of this amount, GBP3.1m (2020: GBP7.0m) will be equity-settled and GBPnil (2020: GBP0.9m) 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 Group Bonus Plan permitted the grant of options in respect of ordinary shares to selected senior executives as a proportion of annual bonus following the completion of a required service period and is dependent on the achievement of corporate performance and individual targets. Options are normally exercisable between three and 10 years from the date of grant for nil consideration. No further options will be 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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45. 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 2020 3,453,607 182.00 - - - -
Granted 1,423,533 198.00 - - - -
Forfeited (244,248) 201.05 - - - -
Exercised (773,252) 152.75 - - - -
Outstanding at 28
February 2021 3,859,640 192.89 - - - -
Exercisable at 28
February 2021 55,142 152.33 - - - -
Exercise price range
(pence) - 152.33 - - - -
Weighted average
remaining contractual
life (years) - 0.40 - - - -
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 - - - -
Share options were exercised on a regular basis throughout the financial year. The average Tesco share price during the year ended 28 February 2021 was 227.07p (2020: 237.69p).
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45. Share Based Payments (continued)
The fair value of savings related share options schemes are 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 2021 2020
Savings Savings
- related - related
share options share options
schemes schemes
Expected dividend yield (%) 4.9% - 5.1% 3.7% - 4.3%
Expected volatility (%) 23% - 26% 23% - 28%
Risk free interest rate (%) 0.2% - 0.3% 0.81% -0.83%
Expected life of option (years) 3 or 5 3 or 5
Weighted average fair value (WAFV) of options 35.68 to
granted (pence) 27.13 43.57
Probability of forfeiture (%) 6% - 10% 7% - 10%
Share price (pence) 217.80 243.00
WAEP (pence) 198.00 219.00
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:
2021 2021 2020 2020
WAFV WAFV
Shares (number) (pence) Shares (number) (pence)
Group Bonus Plan 1,103,685 246.70 1,207,697 237.80
Performance Share Plan 2,401,609 222.02 3,408,234 237.47
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46. Adoption of New and Amended International Financial Reporting Standards
Standards, amendments and interpretations issued which became effective in the current year
During the year the Group did not adopt any new accounting standards or amendments to standards which became effective in the current year which had any impact on the Group.
Early adoption of new standards
During the year the Group has early adopted the following amendments to standards:
Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 'IBOR reform - Phase 2'
These amendments add to the phase 1 amendments issued in 2019 and address the effects on the financial statements when changes are made to contractual cash flows and hedging relationships as a result of the reform. They 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.
Additional disclosures required from these amendments on the impact of IBOR reform are included in note 18.
Standards, amendments and interpretations issued but not yet effective
Standards, amendments and interpretations issued and effective on or after 1 January 2021 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.
47. Events After the Reporting Date
Change in Corporation Tax Rate
In the March 2021 Budget Statement, the Chancellor announced that the standard rate of corporation tax in the UK will increase from 19% to 25% from 1 April 2023. This increase in the corporation tax rate would result in the Group's deferred tax asset increasing by GBP15m.
However, at the reporting date, the 19% 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.
It was also announced that the level of banking surcharge may be reduced from 1 April 2023, although the extent of any such reduction is not expected to be known until late 2021 or early 2022. For every 1% decrease in the level of banking surcharge, the Group's deferred tax asset would reduce by GBP2.5m.
Tesco Underwriting
During the year, the Group reached an agreement with Ageas (UK) Limited to acquire its stake in TU, which will become a 100%--owned subsidiary of the Group. The deal is expected to complete in May 2021, following regulatory approval received in March 2021.
TU paid TPF a dividend of GBP10.0m on 31 March 2021. The consolidated carrying value of the Group's investment in TU reduced by an equivalent amount. There was no impact on the Company's carrying value of its investment in TU as a result of this dividend.
Payment Holidays
Since 28 February 2021, the Group has granted further payment holidays of GBP13.2m to 1,656 Credit Card and Personal Loan customers.
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INDEPENT AUDITORS REPORT TO THE MEMBER OF TESCO PERSONAL FINANCE GROUP PLC
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 28 February 2021 and of the Group's loss for the year then ended;
-- the Group Financial Statements have been properly prepared in accordance with International Accounting Standards (IASs) in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB); and
-- the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
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 47.
The financial reporting framework that has been applied in their preparation is applicable law and IASs in conformity with the requirements of the Companies Act 2006 and IFRSs as issued by the IASB. The financial reporting framework that has been applied in the preparation of the parent Company Financial Statements is applicable law and IASs in conformity with the requirements 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's) Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We confirm that the non-audit services prohibited by the FRC's Ethical Standard were not provided to the Group or the parent Company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
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3. Summary of our audit approach
Key audit matters The key audit matters that we identified in the current year were:
* expected credit loss (ECL) provisions;
* 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 GBP9m, which represents 0.6% of
net assets.
Scoping Our audit scoping provides full scope audit coverage of 100% of revenue, loss before tax and net
assets. There is one component, TU, which is a joint
venture with Ageas (UK) Limited (Ageas (UK)), and is audited by another audit firm.
Significant In the prior year, in response to the rapid spread of Covid-19, we identified a new key audit
changes in our matter relating to the parent Company's and Group's ability
approach to continue to adopt the going concern basis over a period of at least twelve months from the date
of approval of the Financial Statements, and over
the disclosure of post balance sheet events. As at the date of approval of the current period
Financial Statements, the level of uncertainty relating
to the Covid-19 pandemic has diminished and as such we no longer consider this to be a key audit
matter.
In the current year materiality has been determined using a net assets benchmark balance. In 2020
materiality was based on 5% of profit before tax,
we revised our benchmark in the period due to the Group being loss making for the year.
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4. Conclusions relating to going concern
In auditing the Financial Statements, we have concluded that the Directors' use of the going concern basis of accounting in the preparation of the Financial Statements is appropriate.
Our evaluation of the Directors' assessment of the Group's and Company's ability to continue to adopt the going concern basis of accounting included:
-- Obtaining an understanding of the relevant controls around Management's going concern assessment;
-- Assessing Management's considerations regarding whether they consider it appropriate to adopt the going concern basis of accounting;
-- Assessing the Group's and parent Company's compliance with regulation including capital and liquidity requirements;
-- Assessing the assumptions, such as cash flows, capital and liquidity, used in the forecasts prepared by Management;
-- Assessing historical accuracy of forecasts prepared by Management;
-- Involving prudential risk specialists in assessing the information supporting the liquidity and capital forecasts; and
-- Assessing the appropriateness of the going concern disclosures.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Group's and parent Company's ability to continue as a going concern for a period of at least twelve months from the date of the approval of the Financial Statements.
In relation to the reporting on how the Group has applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the Directors' statement in the Financial Statements about whether the Directors considered it appropriate to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the Directors with respect to going concern are described in the relevant sections of this report.
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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.
5.1 Expected credit loss provisions
Key audit matter As disclosed in note 10 (Expected Credit Loss on Financial Assets) and note 16 (Loans and Advances
description to Customers), the Group held an ECL provision of
GBP624.6m at 28 February 2021 (29 February 2020: GBP488.4m). The ECL on loans and advances to
customers was GBP359.7m in the year to 28 February 2021
(29 February 2020: GBP177.9m). The increase in provision compared to the prior year is primarily due
to the deterioration in the macro-economic outlook.
Loan impairment remains one of the most significant judgements made by Management, particularly in
light of the continued uncertain economic outlook
in the UK as a result of the Covid-19 pandemic and the United Kingdom's withdrawal from the European
Union.
We consider the most significant areas of judgement within the Group's collective provisioning
methodologies, and therefore the key audit matters within
loan impairment, to be:
* Macro-economic scenarios - ECL provisions are
required to be calculated on a forward-looking basis
under IFRS 9. Management apply significant judgement
in determining the forecast macro-economic scenarios
and the probability-weighting of each scenario that
are incorporated into the ECL model. Management also
applied a number of methodology refinements in the
current period to optimise model performance during
this period of economic stress.
* Post-model adjustments (PMAs) - Management has
included a number of PMAs to capture the potential
downside risks and model limitations arising as a
result of the continued macro-economic uncertainty.
This includes PMAs to address the uncertainty
associated with the future behaviour of customers who
have been granted payment holidays and the impact of
government support schemes on arrears and behavioural
scores.
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 and exposure at default, the identification of loss events
and the determination of loss given default.
Given the material impact of the significant judgements taken by Management in the measurement of
the ECL provision, we also consider there is an inherent
risk of fraud through manipulation of this balance.
Management's associated accounting policies are detailed in note 1 with detail about the judgements
in applying accounting policies and critical accounting
estimates in note 2 .
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5.1 Loan impairment provisions (continued)
How the scope Our audit procedures included obtaining an understanding of relevant controls which relate to the
of our audit determination of ECL provisions.
responded to We have obtained an understanding of, and assessed, the relevant controls including model governance
the key audit forums, model monitoring and calibrations including
matter the determination of PMAs, 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 of the model to the general ledger.
Our audit work to address the key audit matter included the procedures noted below.
Macro-economic scenarios and related model refinements
With support from internal economic modelling specialists, we challenged the macro-economic scenario
forecasts that were incorporated into the ECL model,
including Management's selection of the relevant macro-economic variables. We assessed Management's
forecasts and their probability against external
sources to assess their reasonableness, considering the forecasts in light of any contradictory
information.
We also assessed the competence, capabilities and objectivity of Management's expert, who supplies
the macro-economic forecasts to Management and considered
whether the methodology adopted by the expert was reasonable.
With regards to the related model refinements, with support from internal credit risk modelling
experts, we assessed the changes against the requirements
of IFRS 9, tested the completeness and accuracy of the data which support Management's conclusions
regarding the appropriateness of the changes and
tested that the methodology changes had been appropriately reflected in the models through review of
the underlying computer code.
We also evaluated whether there was adequate disclosure regarding the macro-economic scenarios
selected by Management, their probability-weighting,
and the related sensitivities.
Post-model adjustments (PMAs)
With support from internal credit risk specialists, we challenged the appropriateness of each
significant PMA recorded by Management as well as the
completeness of PMAs with reference to our observations in the broader market and understanding of
the risk profile of the portfolio.
We evaluated the accuracy of the calculation of the PMAs, which included an assessment of the
completeness and accuracy of the underlying data used
by Management in their calculation.
We also evaluated whether there was adequate disclosure regarding the significant PMAs including how
they were determined and the range of possible
outcomes.
Key observations Based on our audit procedures above, we concluded that Management's ECL provision is reasonably
stated, and is supported by a methodology that is consistently
applied and compliant with IFRS 9.
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5.2 The valuation of the payment protection insurance (PPI) provision
Key audit matter The high level of public and regulatory scrutiny of banks continues, as does the magnitude of legal
description and regulatory claims. The most significant conduct
issue relates to Payment Protection Insurance (PPI) for which a provision of GBP22.4m was recorded
as at 28 February 2021 (29 February 2020: GBP41.1m).
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 focussed our testing to the
material judgements around forecast average redress
of claims remaining to be paid out. We also consider the anticipated impact of any litigation claims
received or expected to be received, this includes
the forecast volumes and forecast average redress.
Further details are included within the critical accounting estimates and judgements in note 2 and
note 30 to the Financial Statements.
How the scope We have obtained an understanding of, and assessed, the relevant controls relating to the valuation
of our audit of the PPI provision, specifically the internal
responded to review and challenge of Management's valuation assumptions.
the key audit We challenged the adequacy of the provision recognised by assessing the key assumptions used in the
matter model, such as those relating to forecast 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. In order to assess
the methodology around calculating the provision
for litigation claims, we inquired with internal legal counsel and reviewed the results of PPI
litigation cases to date. We also tested the arithmetical
accuracy of the PPI model.
We also tested the completeness and accuracy of the underlying data that supports Management's
assumptions and the current year utilisation of the provision
and assessed the appropriateness of disclosures.
Key observations Based on the procedures performed, we concur with Management that the provision as at 28 February
2021 of GBP22.4m represents a reasonable best estimate
of the probable economic outflow.
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5.3 Insurance reserving in Tesco Underwriting Limited (TU)
Key audit matter The Group is indirectly affected by the risks in insurance reserving through its 49.9% investment in
description the TU joint venture with Ageas UK. 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 in the Consolidated Statement of Financial Position, which
has a carrying value of GBP92.8m as at 28 February
2021 (29 February 2020: GBP86.0m). 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 48.
How the scope We have obtained an understanding of, and assessed, the relevant controls within the process to
of our audit determine insurance contract liabilities.
responded to Meetings were held with senior Management involved in the reserving process to discuss the reserving
the key audit methodology, changes in assumptions from the previous
matter 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.
Key observations Based on the procedures performed we concluded that the valuation of TU's insurance contract
reserves are reasonably stated.
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5.4 Recognition of revenue
Key audit matter In accordance with IFRS 9, the revenue streams from financial products that are considered 'integral
description 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 GBP28.9m
at 28 February 2021 (GBP42.3m at 29 February 2020).
Given the material impact of the significant judgements taken by Management in calculating the EIR
asset, we consider that there is an inherent risk
of fraud through manipulation of this balance.
Management's associated accounting policies are detailed on page 48 with detail about the judgements
in applying accounting policies and critical accounting
estimates, including sensitivities to the pay rates assumptions, in note 2.
How the scope We have obtained an understanding of, and assessed, relevant controls that the Group has established
of our audit in relation to recognition of revenue using EIR.
responded to We reviewed the underlying code used to calculate the repayment rate assumptions that drive the
the key audit expected lives used in the model to ensure that it is
matter consistent with the methodology adopted by Management in order to assess the expected lives. 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 consider Management's assumptions reasonable and supportable in the
Credit Cards' revenue recognition model, including
those relating to the repayment rates assumptions of Credit Cards. We are satisfied that
Management's methodology and model is appropriate and that
it supports the EIR asset.
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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 GBP9.0m (2020: GBP11.0m) GBP8.9m (2020: GBP10.9m)
Basis for determining Materiality has been determined Parent Company materiality
materiality as 0.6% of net assets has been determined as
(2020: 5% of underlying 0.6% of net assets (2020:
profit before tax). 5% of underlying profit
before tax), which is
capped at 99% of Group
materiality.
Rationale for We believe that the use We believe that the use
the benchmark of net assets is appropriate of net assets is appropriate
applied given the overall capital given the overall capital
base is a key focus area base is a key focus area
for the stakeholders and for the stakeholders and
regulators. Therefore, regulators. Therefore,
net assets has been considered net assets has been considered
the most appropriate base the most appropriate base
on which to determine on which to determine
materiality in the current materiality in the current
year due to the loss in year due to the loss in
the year. the year.
http://www.rns-pdf.londonstockexchange.com/rns/3702V_1-2021-4-13.pdf
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 2021 audit (2020: 70%). In determining performance materiality, we considered the following factors:
The impact of Covid-19 on the control environment;
The quality of the control environment and that we 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 Board Audit Committee (BAC) that we would report to the Committee all audit differences in excess of GBP0.45m (2020: GBP0.5m), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the BAC on disclosure matters that we identified when assessing the overall presentation of the Financial Statements.
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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 Group engagement team. Our audit scoping provides full scope audit coverage of 100% of the Group's revenue, loss before tax and net assets.
7.2 Our consideration of the control environment
We obtained an understanding and tested the relevant controls on the following areas: Credit Cards, Savings, Loans, Insurance and the common operations processes (products, payments and reconciliations).
We involved our IT specialists in the testing of the IT systems surrounding the above core banking products.
7.3 Working with other auditors
Work on TU, the Group's joint venture with Ageas (UK), was performed by component auditors. The timing of our 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 detailed 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 GBP3.6m (2020: GBP4.4m).
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8. Other information
The other information comprises the information included in the Annual Report, other than the Financial Statements and our auditor's report thereon. The Directors are responsible for the other information contained within the Annual Report.
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.
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 course of 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 this gives rise to a material misstatement in the Financial Statements themselves. 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.
We have nothing to report in this regard.
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.
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.
167
11. Extent to which the audit was considered capable of detecting irregularities including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below.
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 BAC 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:
o identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance;
o detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud;
o 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.
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: ECL 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, UK Pensions 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.
168
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 BAC, 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.
169
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 the 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.
13. Corporate Governance Statement
The Listing Rules require us to review the directors' statement in relation to going concern, longer-term viability and that part of the Corporate Governance Statement relating to the group's compliance with the provisions of the UK Corporate Governance Code specified for our review.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance Statement is materially consistent with the financial statements and our knowledge obtained during the audit:
-- the Directors' statement with regards to the appropriateness of adopting the going concern basis of accounting and any material uncertainties identified set out on pages 29 and 30;
-- the Directors' explanation as to its assessment of the Group's prospects, the period this assessment covers and why the period is appropriate set out on pages 29 to 30;
-- the Directors' statement on fair, balanced and understandable set out on page 38;
-- the Board's confirmation that it has carried out a robust assessment of the emerging and principal risks, set out on page 29;
-- the section of the Annual Report that describes the review of effectiveness of risk management and internal control systems set out on pages 17 to 24; and
-- the section describing the work of the BAC set out on pages 33 to 35.
14. Matters on which we are required to report by exception
14.1 Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
-- we have not received all the information and explanations we require for our audit; or
-- adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or
-- the parent Company Financial Statements are not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
14.2 Directors' remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of Directors' remuneration have not been made.
We have nothing to report in respect of these matters.
15. Other matters
15.1 Auditor tenure
Following the recommendation of the BAC, 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 six years, covering the years ending 29 February 2016 to 28 February 2021.
170
15.2 Consistency of the audit report with the additional report to the BAC
Our audit opinion is consistent with the additional report to the BAC we are required to provide in accordance with ISAs (UK).
16. Use of our report
This report is made solely to the Company's member, 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 member 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 member as a body, for our audit work, for this report, or for the opinions we have formed.
Peter Birch ACA (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
Leeds, United Kingdom
12 April 2021
171
ABBREVIATIONS
AFS Available-for-sale
AGEAS
UK AGEAS (UK) Limited ALCo Asset and Liability Management Committee APM Alternative Performance Measure BAC Board Audit Committee BCBS Basel Committee on Banking Supervision 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 DisCo 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 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 5 IFRS 5 'Non-current assets held for sale and discontinued operations' 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 MLR Market and Liquidity Risk MREL Minimum requirements for own funds and eligible liabilities MRT Material Risk Taker
NomCo 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 PMA Post-model adjustment PPI Payment protection insurance PRA Prudential Regulation Authority PSD2 Second Payment Services Directive RAM Risk Appetite measure RemCo 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 TFSME TFS for small and medium sized entities TPF Tesco Personal Finance plc 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
172
GLOSSARY OF TERMS
A
Alternative In the reporting of financial information, the Directors
performance have adopted various Alternative performance measures
measure (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 Changes in interest rates affect the Bank's earnings by
at risk 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 The annual wholesale refinancing amount is the value of
refinancing funds requiring to be refinanced in a rolling 12 month
amount period end.
Asset encumbrance A claim to an asset by another party. Encumbrance usually
impacts the transferability of the asset and can restrict
its free use until the encumbrance is removed.
B
Basel II Basel II is a set of international banking regulations
put forth by the Basel Committee on Bank Supervision,
which levelled the international regulation field with
uniform rules and guidelines. 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 The bad debt:asset ratio is calculated by dividing the
ratio 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 A financial model used to price options.
model
Brexit The process by which the United Kingdom (UK) left the
European Union (EU).
C
Capital at Capital at risk is an economic-value measure and assesses
risk 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 A capital buffer designed to ensure that banks are able
buffer to build up capital buffers outside of periods of stress
which can then be drawn upon as losses are incurred.
Capital Requirements The Capital Requirements Directive IV (CRD IV) is an EU
Directive 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 The Capital Requirements Regulation (EU) No. 575/2013
Regulation (CRR) 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.
173
C (continued)
Common equity The highest form of regulatory capital under CRR, comprising
tier 1 capital common shares issued, related share premium, retained
earnings and other reserves less regulatory adjustments
Common equity The common equity tier 1 ratio is calculated by dividing
tier 1 ratio 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 plc.
Concentration The risk of losses arising as a result of concentrations
risk of exposures to a specific counterparty, economic sector,
segment or geographical region.
Cost:income The cost:income ratio is calculated by dividing operating
ratio expenses by total income.
Countercyclical A capital buffer which aims to ensure that capital requirements
capital buffer 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
countercyclical capital buffer should be released to help
avoid a credit crunch.
Covid-19 An infectious disease, caused by a newly discovered coronavirus.
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 Prudential
Regulatory Authority (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 Techniques (such as collateral agreements) used to reduce
mitigation the credit risk associated with an exposure.
Credit spread The risk of adverse effects resulting from a change in
risk 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 The encumbrance ratio is calculated as (total encumbered
ratio 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 The amount expected to be outstanding after any credit
default or risk mitigation, if and when the counterparty defaults.
exposure value Exposure at default reflects both drawn down balances
as well as an allowance for undrawn commitments and contingent
exposures.
External Credit These include external credit rating agencies such as
Assessment Standard & Poor's, Moody's and Fitch.
Institutions
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 The statutory body responsible for conduct of business
Authority regulation and supervision of UK authorised firms from
1 April 2013. The Financial Conduct Authority 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
174
F (continued)
Foreign exchange The risk that the value of transactions in currencies
risk 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.
G
General Data The General Data Protection Regulation 2016/679 is a regulation
Protection in EU law on data protection and privacy for all individuals
Regulation 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 Provisions held on the balance sheet as a result of the
charge and raising of an impairment charge against profit for the
impairment incurred loss inherent in the lending book. Impairment
provisions provisions may be individual or collective.
Impairment The reduction in value that arises following an impairment
losses 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 The risk arising from the different repricing characteristics
risk of the Group's non-trading assets and liabilities.
Internal capital The Group's own assessment of the level of capital needed
adequacy assessment in respect of its regulatory capital requirements (for
process credit, market and operational risks) and for other risks
including stress events.
Internal liquidity An ongoing exercise as part of the PRA's regulatory framework
adequacy assessment to ensure that the Group maintains adequate liquid assets
process to survive a defined stress scenario for a sufficient
period as defined by Risk Appetite.
Internal liquidity In place to ensure that the Group maintains adequate liquid
requirement assets to survive a defined stress scenario for a sufficient
period as defined by Risk Appetite.
International A standardised contract developed by the International
Swaps and Derivatives Swaps and Derivatives Association which is used as an
Association umbrella contract for bilateral derivative contracts.
master agreement
L
Leverage ratio Tier 1 capital divided by total exposure.
Liquidity coverage Liquidity buffer divided by net liquidity outflows over
ratio 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 The loan to deposit ratio is calculated by dividing loans
ratio and advances to customers by deposits from customers.
Loss given Represents the Group's expectation of the extent of the
default loss if there is a default. The loss given default (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 The method used to calculate exposure values for Counterparty
approach Credit risk. The method adjusts daily to account for profits
and losses in the value of related assets and liabilities.
175
M (Continued)
Market risk The risk that movements in market prices (such as interest
rates, foreign exchange rates and the market value of
financial instruments) lead to a reduction in either the
Bank's earnings or capital.
Minimum capital The minimum regulatory capital that must be held in accordance
requirement with Pillar 1 requirements for credit, market and operational
risk. This is currently 8%.
Minimum requirements A requirement for minimum loss-absorbing capacity institutions
for own funds must hold.
and eligible
liabilities
MREL ratio The MREL ratio is calculated by dividing total capital
plus MREL debt by risk-weighted assets.
N
Net interest Net interest margin is calculated by dividing net interest
margin income from continuing operations by average interest
bearing assets, excluding assets held for sale.
Net stable The net stable funding ratio is calculated under the CRD
funding ratio 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 The risk of loss resulting from inadequate or failed internal
risk 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 probability of default (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 The risk to the Group caused by contractual or other liabilities
risk 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 (8%) 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.
Post-model Post--model adjustments reflect the use of Management
adjustment judgment to address perceived limitations in models or
data.
Prepayment Prepayment risk is the risk associated with the early
risk unscheduled return of principal on a fixed-income security.
Probability Represents the likelihood a customer will default over
of default the relevant period, being either 12 months or the expected
lifetime.
Prudential The statutory body responsible for the prudential regulation
Regulation and supervision of banks, building societies, credit unions,
Authority insurers and major investment firms in the UK.
Second Payment The Second Payment Services Directive (PSD2) is an EU
Services Directive Directive that regulates payment services and payment
service providers throughout the European Union and European
Economic Area. PSD2 updates and replaces the Payment Services
Directive 2008.
176
R
Recovery plan The framework and recovery options which could be deployed
in a severe stress event impacting capital or liquidity
positions.
Regulatory The capital that a bank holds, determined in accordance
capital with the relevant regulation arising from Basel III.
Regulatory The risk of reputational damage, liability or material
risk 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.
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 The risk that the fair value of a financial instrument
risk and its associated hedge will fluctuate because of changes
in market prices, for reasons other than interest rate
or credit risk.
Retail credit Retail credit risk is the risk that a borrower, who is
risk 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 designed to monitor the Group's exposure to certain
Measures risks to ensure that exposure stays within approved Risk
Appetite.
Risk-weighted Calculated by assigning a degree of risk expressed as
assets a percentage (risk-weight) to an exposure value in accordance
with the applicable Standardised Approach (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 The act of lending, or borrowing, a stock, derivative,
financing transactions or other security to or from an investor or firm. For
the Group, this represents market repo transactions and
does not represent securities financing for clients.
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 A corporation, trust, or other non-bank entity, established
structured for the purpose of carrying on securitisation activities.
entity Structured entities are designed to isolate their obligations
from those of the originator and the holder of the beneficial
interests in the securitisation.
Standardised In relation to credit risk, the method for calculating
approach 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 which, in the event of insolvency or liquidation
liabilities of the issuer, are subordinated to the claims of depositors
and other creditors of the issuer.
T
Temporary payment Temporary deferral of contractual repayments due from
holiday customers in respect of lending balances.
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 The total capital ratio is calculated by dividing total
ratio regulatory capital by total risk-weighted assets.
Total capital The amount and quality of capital the Bank must maintain
requirement to comply with the CRR Pillar 1 and the 2A capital requirements.
U
UK Leverage The UK leverage ratio framework currently applies to firms
Framework regime with retail deposits equal to or greater than GBP50 billion
on an individual or consolidated basis
177
U (continued)
Underlying The underlying cost:income ratio, which is an APM, is
cost:income calculated by dividing underlying operating expenses by
ratio total underlying income.
Underlying The underlying loan to deposit ratio, which is an APM,
loan:deposit is calculated by dividing loans and advances to customers,
ratio including assets of the disposal group, by deposits from
customers.
Underlying Underlying net interest margin, which is an APM, is calculated
net interest by dividing net interest income from continuing and discontinued
margin operations by average interest bearing assets.
Unencumbered The minimum unencumbered assets to retail liabilities
assets to retail ratio is the surplus of unencumbered assets relative to
liabilities the total amount of retail liabilities.
ratio
W
Wholesale credit Wholesale credit risk is the risk that the counterparty
risk to a transaction will default before the final settlement
of the transaction cash flows. Such transactions relate
to contracts for derivative financial instruments, securities
financing transactions and long dated settlement transactions.
Wholesale funding The wholesale funding ratio is calculated by dividing
ratio total wholesale funding by total funding.
178
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