TIDMCYBG
RNS Number : 0947Z
CYBG PLC
24 May 2016
CYBG PLC
INTERIM RESULTS 2016
SIX MONTHS TO 31 MARCH 2016
(Formerly known as Pianodove PLC)
Interim financial report
For the six months ended 31 March 2016
Contents
Highlights
Business and financial review
Statement of Directors' responsibilities
Independent review report to the members of CYBG PLC
Interim condensed consolidated financial statements
Other information
Officers and professional advisers
Overview
CYBG PLC (the "Company"), together with its subsidiary
undertakings (which together comprise the "Group"), operate under
both the Clydesdale Bank and Yorkshire Bank brands. It offers a
range of banking services for both personal and SME customers
through retail branches, Business Banking centres, direct and
online banking and brokers.
Certain figures contained in this document, including financial
information, may have been subject to rounding adjustments and
foreign exchange conversions. Accordingly, in certain instances,
the sum or percentage change of the numbers contained in this
document may not conform exactly to the total figure given.
The forward looking statements disclaimer can be found on page
84.
Well positioned to deliver enhanced returns as an independent
company
Highlights
-- Successfully completed demerger and Initial Public Offering
("IPO"). On 8 February 2016 CYBG PLC ("CYBG") became an independent
company listed on the London Stock Exchange ("LSE") and the
Australian Securities Exchange ("ASX")
-- Leadership team complete with recruitment of Mark
Thundercliffe as Chief Risk Officer(1) and Board strengthened with
Clive Adamson and Paul Coby appointed as independent Non-Executive
Directors
-- Delivering on key metrics
o Net Interest Margin ("NIM") in line with guidance at 225 bps,
2 bps increase vs FY 2015
o 9.8% annualised growth in mortgages
o SME core book stable. Over GBP1 billion of new loans and
facilities in H1, an increase of 10%
o CET1 ratio remains strong at 13.2%
-- Progress on cost reduction - full year expectation now GBP730
million down from GBP762 million
-- Simplifying and streamlining the business
-- Building a high performing, customer centric organisation
-- Launched omnichannel strategy
(1) Subject to regulatory approval
Jim Pettigrew, Chairman, commented:
"I'm delighted to deliver our first set of results as an
independent company after our demerger and IPO in February this
year and I would like to thank everyone at CYBG for their hard work
in delivering a successful outcome. We have a strong international
shareholder base who have shown great support for our business, a
high calibre leadership team which is now complete and we have
refreshed and strengthened the Board with new Non-Executive
Director appointments.
We're focussed on building a high performing, customer centric
organisation with strong productivity and efficiency. Becoming an
independent PLC has been a catalyst for our ongoing cultural
transformation.
In the first half we have demonstrated good progress in
delivering on our strategy. Going forward we believe sustainable
growth, lower costs and capital efficiency will drive improved
performance and enhanced returns for shareholders."
David Duffy, Chief Executive, commented:
"I am very pleased to report good progress on all fronts in our
first set of results as we execute our strategy as an independent
company.
We have a strong momentum in our business, continuing to grow
ahead of the market in mortgages and over GBP1 billion of SME loans
and facilities were made available in the first half.
We have also seen encouraging growth in current accounts, with a
number of our new products leading the field and making it quicker,
simpler and more convenient for customers to access our services.
Online account opening can now be completed in under 15 minutes,
and we were excited to launch our B digital proposition, including
current account, savings account and debit card to help customers
with budgeting, saving and tracking how they spend their money. In
the coming months we will add further functionality including
"financial projections" and mortgages.
We are also progressing with our plans to become a more
efficient, responsive and productive business, and now expect our
costs for the year to be GBP730million, materially below our
previous guidance as we begin to see the benefits of actions we
have taken to lower the cost base and standalone and separation
costs which were lower than expected.
Across CYBG we are focusing on the future now with confidence.
Delivering great service to our customers is at the heart of our
bank and over the next six months I am confident we will show
continued progress against our targets and delivery of commitments
for our customers, our people and our shareholders.
Enquiries:
Investors and Analysts
John Crosse 07917 172535
Head of Investor Relations john.crosse@cybg.com
Media
Barry Gardner 0800 066 5998
Media Relations Director barry.gardner@cybg.com
CYBG will be hosting a presentation for analysts and investors
on the interim results for the 6 months ended 31 March 2016 at its
offices at 15 Floor, 122 Leadenhall Street, London EC3V 4AB,
starting at 08:30 BST today (17:30 AEST). The meeting will be
webcast live and along with a copy of the presentation will be
available at www.cybg.com. Webcast participants will be able to
send questions into the meeting. Alternatively there is a
conference call facility to listen to the meeting. Dial in
details:
UK Freefone: 0800 6781161
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UK Direct: +44 (0) 1296 311600
Australia toll free: 18 0003 5387
Australia local: +61 (0) 2 8223 9237
USA toll free: 1866 804 8688
USA local: +1 718 354 1175
---------------------- --------------------
Passcode: 459 905
Please dial in approximately 10 minutes before the start
time.
For a full list of access numbers please go to:
www.btconferencing.com/globalaccess/?bid=54_attended
A recording of the webcast and conference call will be made
available on the website www.cybg.com shortly after the
meeting.
Business and financial review
Key performance indicators
6 months 6 months 12 months
to to to
31 Mar 31 Mar 30 Sep
2016 2015* 2015*
------------------------------------ --------- --------- ----------
Profitability:
NIM (1) 2.25% 2.25% 2.23%
Underlying return on tangible
equity ("ROTE") (2) (3) 4.5% 7.8% 5.1%
Underlying cost to income ratio
(4) 72% 71% 75%
Underlying return on assets
(5) 0.45% 0.47% 0.35%
Underlying basic earnings per
share (6) 7.2p 11.2p 14.3p
------------------------------------ --------- --------- ----------
Statutory ROTE (7) 0.9% 11.8% (10.3)%
Statutory cost to income ratio
(8) 82% 66% 120%
Statutory return on assets
(9) 0.19% 0.71% (0.59)%
Statutory basic earnings per
share (10) 1.4p 16.9p (28.7)p
31 Mar 31 Mar 30 Sep
As at: 2016 2015 2015
------------------------------------ --------- --------- ----------
Asset Quality:
Bad and doubtful debt charge
to average customer loans (11) 0.19% 0.16% 0.21%
90+ days past due ("DPD") to
customer loans (12) 0.50% 0.61% 0.50%
Gross impaired assets to customer
loans (13) 0.93% 0.99% 0.91%
Specific provision to gross
impaired assets (14) 36.9% 36.6% 39.2%
Total provision to customer
loans (15) 0.90% 0.97% 0.93%
Indexed loan-to-value ("LTV")
of mortgage portfolio (16) 55.9% 58.3% 55.3%
------------------------------------ --------- --------- ----------
Regulatory Capital:
CET1 ratio (17) (24) 13.2% 12.1% 13.2%
Tier 1 ratio (18) (24) 15.6% 14.6% 15.7%
Total capital ratio (19) (24) 19.0% 17.8% 18.9%
Leverage ratio (20) (24) 7.1% 6.5% 7.1%
------------------------------------ --------- --------- ----------
Funding and Liquidity:
Loan to deposit ratio ("LDR")
(21) 113% 112% 109%
Liquidity coverage ratio ("LCR")
(22) 112% 135% 131%
Net stable funding ratio ("NSFR")
(23) 117% 113% 120%
------------------------------------ --------- --------- ----------
* As explained further in note 1: Basis of preparation, the
results shown for the six months ended 31 March 2016 comprise the
results of CYBG PLC consolidated with those of its subsidiaries.
The comparative figures provided are those of the CYB Investments
Limited Group ("CYBI").
Business and financial review (continued)
Key performance indicators (continued)
(1) NIM is defined as net interest income divided by average
interest earning assets for a given period (excluding short term
repos used for liquidity management purposes, amounts received
under the conduct indemnity and not yet utilised, and any
associated income). Comparative disclosures (previously 31 March
2015: 2.21% and 30 September 2015: 2.20%) have been amended to
conform with the current period's presentation. As a result of the
change in approach, average interest earning assets used as the
denominator have reduced by GBP618m (6 months to 31 March 2015:
GBP599m; 12 months to 30 September 2015: GBP464m) and the net
interest income numerator by GBP1.3m (6 months to 31 March 2015:
increased by GBP0.1m; 12 months to 30 September 2015: reduced by
GBP0.2m).
(2) Underlying ROTE is defined as underlying profit after tax
(as defined in footnote 3) less preference share and other
distributions as a percentage of average tangible equity (total
equity less intangible assets excluding minorities, Additional Tier
1 securities ("AT1") and preference shares) for a given period.
(3) Underlying profit after tax is defined as underlying profit
before tax less tax charge (or plus tax credit, as the case may
be), less dividends and distributions and was equal to GBP63m (31
March 2015: GBP91m and 30 September 2015: GBP121m). The underlying
tax credit/(charge) is calculated by applying the statutory tax
rate for the relevant period to the taxable items adjusted on the
underlying basis. Average tangible equity has been calculated using
the tangible equity spot balances at each of the month ends of the
applicable period.
(4) Underlying cost to income ratio is defined as underlying
total operating expenses as a percentage of underlying total
operating income for a given period.
(5) Underlying return on assets is defined as underlying profit
after tax (as defined in footnote 3) as a percentage of average
assets for a given period. Average assets have been calculated
using the asset spot balances at each of the month ends in the
applicable period.
(6) Underlying basic earnings per share is defined as the
underlying profit/(loss) attributable to ordinary equity
shareholders including tax relief on any distributions made to
other equity holders divided by the weighted average number of
ordinary shares in issue for a given period.
(7) Statutory ROTE is defined as profit/(loss) after tax less
preference share and non-controlling interest distributions as a
percentage of average tangible equity (total equity less intangible
assets excluding minorities, AT1 and preference shares) for a given
period. Average tangible equity has been calculated using tangible
equity spot balances at each of the month ends of the applicable
period.
(8) Statutory cost to income ratio is defined as total operating
expenses as a percentage of total operating income for a given
period.
(9) Statutory return on assets is defined as profit/(loss) after
tax as a percentage of average assets for a given period.
(10) Statutory basic earnings per share is defined as the
statutory profit/(loss) attributable to ordinary equity
shareholders including tax relief on any distributions made to
other equity holders divided by the weighted average number of
ordinary shares in issue for a given period.
(11) Bad and doubtful debt charge to average customer loans
(defined as loans and advances to customers, other financial assets
at fair value and due from customers on acceptances) is defined as
impairment losses on credit exposures plus credit risk adjustment
on fair value loans to average customer loans.
(12) 90+ DPD to customer loans is defined as customer loans that
are more than 90 days overdue as a percentage of total customer
loans at a given date.
(13) Gross impaired assets to customer loans is defined as gross
impaired assets as a percentage of total customer loans at a given
date.
(14) Specific provision to gross impaired assets is defined as
the specific impairment provision on credit exposures as a
percentage of gross impaired assets at a given date.
(15) Total provision to customer loans is defined as total
impairment provision on credit exposures as a percentage of total
customer loans at a given date.
(16) Indexed LTV of the mortgage portfolio is defined as
mortgage portfolio weighted by balance and indexed using the
Halifax house price index at a given date.
(17) CET1 ratio is defined as CET1 capital divided by
risk-weighted assets at a given date.
(18) Tier 1 ratio is defined as Tier 1 capital resources divided
by risk-weighted assets at a given date.
(19) Total capital ratio is defined as total capital resources
divided by risk-weighted assets at a given date.
(20) Leverage ratio is defined as Tier 1 capital divided by the
total on and off balance sheet exposures expressed as a percentage.
The Basel Committee proposed to test a minimum requirement of 3%
for the leverage ratio during a parallel run period from 1 January
2013 to 1 January 2017, with a view to migrating to a Pillar 1
treatment on 1 January 2018 based on appropriate review and
calibration.
(21) LDR is defined as customer loans as a percentage of
customer deposits at a given date.
(22) The Group monitors the LCR based on its own interpretations
of current guidance available for CRD IV LCR reporting. Therefore,
the reported LCR may change over time with regulatory developments.
Due to possible differences in interpretation of the rules, the
Group's ratio may not be directly comparable with those of other
financial institutions. This excludes Pillar 2 add-ons.
(23) The Group monitors the NSFR based on its own
interpretations of current guidance available for CRD IV NSFR
reporting. Therefore, the reported NSFR may change over time with
regulatory developments. Due to possible differences in
interpretation of the rules, the Group's ratio may not be directly
comparable with those of other financial institutions.
(24) The capital ratios include unverified profits. Comparative
disclosures have been amended to conform with the current period's
presentation.
Business and financial review (continued)
Overview
The Group operates a full service UK-focused retail and
commercial banking business under the brand names "Clydesdale Bank"
and "Yorkshire Bank", in Scotland, the North of England and
selected other sites. The Group delivers these services through a
network of 274 retail branches, 40 Business Banking centres, direct
and online banking and broker channels and employs 7,268 staff. The
Group is an "authorised person" under the Financial Services and
Markets Act 2000 and is regulated by the PRA and the Financial
Conduct Authority ("FCA").
On 8 February, CYBG PLC became an independent company listed on
the London Stock Exchange and the ASX in Australia. As a result
Clydesdale and Yorkshire Banks are independent for the first time
since 1920.
Chief Executive's Review
Delivering on Strategic Objectives
During the demerger and IPO transaction earlier in the year we
set out our strategy as an independent business. - to leverage our
capabilities in our existing core markets, continue our successful
national growth strategy in selected products, deliver a superior
performance for customers by moving to an omni-channel model, and
deliver enhanced shareholder returns. This will be underpinned by a
cultural transformation of our business, and the simplification and
streamlining of operations and processes to enhance productivity.
We have already identified 22 key process or customer journeys
where we see great opportunity to simplify, introduce more
automation and digitise.
In the first half we have demonstrated good progress in
delivering this strategy, with 9.8% annualised growth in mortgages,
stabilisation of our core SME book, over GBP1 billion of new loans
and facilities for SMEs made available and continued growth in
current accounts. We have also delivered on key financial metrics
with a stable net interest margin and costs running below
expectations.
We have begun the process of adapting and streamlining our
operational model, while continuing to invest to deliver a better
service to customers. We launched a number of new products during
the period, culminating with the launch of B in early May, our new
digital platform. We are moving the business towards being more
focused on customers, being more commercial and more
accountable.
Going forward sustainable growth, lower costs and capital
efficiency will drive improved performance and enhanced returns for
our shareholders.
Focused on our customers
We remain focused on sustainable, prudent growth and are well
positioned in both the retail and SME banking segments in which we
operate. During the first six months we have maintained our
momentum in the mortgage sector, with above market growth.
Reflecting our strength in offering attractive packages for
first time buyers, we were "Best First Time Buyer Mortgage
Provider" at the Moneynet awards for 2016, with Yorkshire Bank
awarded Best Regional Lender at the Your Mortgage Awards for 2015.
Building on that strength and working closely with our selected
broker panel, we have implemented a tracking capability providing
regular electronic updates through the application process to keep
customers informed of progress.
We have continued to invest in our omni-channel customer
strategy. We launched online account opening in November 2015, an
industry leading offering which allows customers to open one of our
range of current accounts in less than 15 minutes, with a positive
demographic mix for customers acquired with this service -21% are
within our target higher value customer segments.
Business and financial review (continued)
Focused on our customers (continued)
We were excited to launch B, our new digital platform, initially
offering a current and savings account, and a debit card. We
developed B in response to direct feedback from our customers, so
it has intuitive and intelligent features, such as "savings pots",
"accounts sweeps" and a unique timeline of transactions on all
accounts to help customers in budgeting, saving and spending their
money wisely. B will further develop its functionality with the
addition of a mortgage product later this year, and we are in the
early stages of development of a B for Business proposition to help
small businesses manage their finances.
Digital channels now represent 24% of total sales (31% excluding
savings) and are approximately double what they were in 2013.
Monthly mobile banking log-ins have increased by c.60% year on year
and are currently averaging 8 million customer log-ins per month.
Following the launch of the digital next best action platform in
May 2015, 100 million messages have been displayed to customers
through internet banking. Our branch network remains a key element
of our omni channel approach, and in April we announced changes to
the network reflecting the evolving patterns in customer usage. A
significant number of branches will extend their opening hours,
opening on Saturdays, ensuring investment is diverted to the areas
where demand is growing. A programme of refurbishments,
relocations, co-locations, concept branches and digital development
is ongoing, and 26 branches will close over the next six
months.
Lower costs
We are making good progress in further refining our cost plans
for this year and for the medium term out to 2020 which we
presented during our recent IPO. In the first half underlying costs
were GBP353 million, which puts us on track to deliver full year
costs well below the GBP762 million we have guided to for 2016, as
a result of a number of measures to reduce the cost base, including
reduced standalone costs, and a reduction in core FTEs. Our
expectation is that underlying operating and administrative
expenses will now be GBP730 million for FY2016. In addition to the
changes to our branch network announced in April, we implemented a
voluntary severance scheme for senior grade staff. As a result c150
staff will exit the business in the second half of the year, with
the vast majority expected to leave by mid July. We will continue
to review our operating costs in the second half, generating
further efficiency initiatives. We are focusing on four areas where
we believe we can have a material impact; the distribution network;
process improvement; organisational efficiency; and central cost
management and procurement. We have identified 22 key processes
that we can simplify, automate and then digitise, making it easier
for customers to interact and do business with us, and also reduce
our costs. We will provide an update on our revised medium term
plans later this year in September.
Financial performance
We have delivered on our key financial metrics in the first
half. Underlying profitability increased to GBP107 million from
GBP48 million in the 6 months to September 2015, driven by an
increase in operating income, lower costs and reduced charges for
bad debts. Compared to the 6 months to 31 March 2015, underlying
profitability was lower by GBP4 million, with higher operating
income offset by higher costs incurred from being a standalone
business.
Customer loans grew by just under 3%. Asset quality remains
strong. The impairment charge to gross average balances was 19 bps,
with categorised SME loans continuing to fall compared to September
2015 and 78% of front book mortgage origination at LTV's below
80%.
We saw a change in mortgage origination mix, as expected, with a
higher proportion of owner occupied mortgages compared to
buy-to-let ("BTL"), despite very strong BTL volumes at the end of
the period in advance of the changes to stamp duty. Going forward
we will continue to re-balance growth towards Owner Occupied.
We continue to see the majority of our business written at fixed
rates and we were very pleased that Clydesdale and Yorkshire Banks
were rated outstanding by Moneyfacts in September 2015 for our
3.39% five year fixed rate mortgage and 2.39% two year fixed rate
product - the highest rating the Group has ever received.
Business and financial review (continued)
Financial performance (continued)
In SME, building on our strong origination performance last year
we have continued to see a stabilisation of our core SME book,
which was GBP6,002 million at 31 March, a small increase on
September 2015. We continue to run-off lower yielding assets, with
our non core book reducing by GBP170 million in the period. New
loans and facilities totaled GBP1,031 million in the first six
months of the year, an increase of 10% compared to the prior
period
We have continued to see growth in both business and personal
current accounts in the period with a gross 58,000 accounts opened.
We saw increased momentum in business current accounts, with
acquisition levels in the first half rising to 2,200 accounts per
month, an 83% increase over the prior period. There was continued
underlying growth in our retail and SME deposits during the period,
which was offset by management actions to optimise the mix, pricing
and liquidity value of the deposit base, which included the run off
of large highly liquid corporate deposits. We also re-priced our
ISA offering towards the end of the period, while still remaining
competitive in the market. This helped reduce our overall cost of
deposits to 74 bps from 78 bps in FY15
NIM was 225 bps, an increase of 2 basis points compared with FY
2015 and in line with our guidance of broadly stable. Pressure on
asset yields was offset by balance sheet action on liabilities,
including re-pricing of savings products and run off of
non-relationship corporate deposits with low liquidity value.
Capital and funding
Whilst risk weighted assets increased by GBP223 million, driven
by growth in mortgages, underlying capital generation of 22 bps in
the half, before reflecting the net impact of the Group's
proportion of the conduct provision charges, ensured the Group's
CET1 ratio remained stable and robust at 13.2%.
The Group continues to have a strong funding and liquidity
position and seeks to achieve an appropriate balance between
profitability and liquidity risk. Our funding position remains
strong. The loan to deposit ratio (LDR) increased from 109% to 113%
due to growth in customer lending combined with a managed reduction
in short term corporate deposits.
Economic and regulatory environment
As a full service, retail focused UK bank, we are well
positioned to benefit from a sustainable recovery in the UK
economy. While the current prolonged period of low interest rates
has created challenges, the underlying economic market backdrop
continues to be supportive, with GDP of 2.3 in 2015, and estimated
growth for 2016 of 2.0%. Unemployment continues to fall, with
current levels well below the long term average, along with levels
of household indebtedness, and continued real earnings growth in
our core regions.
As all of CYBG's operations are in the UK and all of its loans
and advances are to customers in the UK, the impact of the
referendum on EU membership on our business, financial condition
and operational performance will be from any consequential change
to macroeconomic conditions in the UK. The regulatory environment
continues to evolve, with consultations emerging from the Basel
Committee, as well as the PRA and FCA.
We are committed to pursuing an IRB Approach and have begun
discussions with the PRA, and look forward to further updates being
provided later this year.
We welcome the recent Financial Policy Committee consultation on
the BTL market - we believe that BTL will continue to be an
important part of the housing market in the UK. We compare
favorably with the proposed underwriting criteria, stress testing
affordability of mortgages to 7.45% compared to the PRA's proposal
of a current minimum of 5.5%.
We continue to make progress on resolving legacy conduct issues.
We have reassessed the level of provision that is considered
appropriate to meet current and future expectations of costs in
relation to PPI and concluded that a further charge of GBP450
million is required, incorporating the Group's estimate of the
impact of CP 15/39 and an expected time bar for complaints in
Summer 2018. It also incorporates a reassessment of the costs of
processing cases and the impact of experiential adjustments. Only
9.7% of the charge impacts the Group's income statement (GBP44m) as
a result of the conduct indemnity provided by National Australia
Bank ("NAB"). We consider that, based on our updated assumptions,
the total cover remaining of GBP1.8 billion is sufficient to cover
the costs of dealing with legacy conduct matters.
Business and financial review (continued)
Economic and regulatory environment (continued)
We welcome the decision of the FCA to consult on a deadline for
PPI complaints and the certainty that brings for both customers and
shareholders, despite the need to raise further provisions to
account for the estimated impact of the change.
People
Following the arrival of Gavin Opperman as Customer Banking
Director in December, Fergus Murphy as Products Director and Kate
Guthrie as Human Resources Director in January, the Executive
Leadership team is now complete with the recent appointment of Mark
Thundercliffe as our new Chief Risk Officer. Mark will joins us
towards the end of the financial year.
On 20 May 2016 we announced that Paul Coby and Clive Adamson had
been appointed independent Non-Executive Directors on the CYBG
Board, further strengthening and complementing the Board's
expertise and governance oversight. Paul will join on 1 June 2016
and Clive on 1 July 2016.
Becoming an independent PLC has been a catalyst for our cultural
transformation, as we aim to create a high performing, customer
centric organisation and drive accountability and responsibility,
alongside appropriate reward structures. Key to our progress is the
engagement and commitment of all of our people. To support this we
have introduced an integrated communications strategy which puts
our people leaders at the centre of building engagement through
face to face communications with employees to help them engage in
the delivery of our key strategic areas; commercial viability,
customer focus and accountability. This is supported by a full
suite of multi media communications through a number of different
channels.
We are also undertaking a comprehensive review of reward to
ensure all aspects, particularly incentives, are closely linked to
the delivery of our strategy. Having the right reward framework
will be key to ensuring we can attract and retain great talent,
whilst also ensuring that we achieve value for money. We will
simplify our performance management approach to ensure it fully
aligns our colleagues' individual objectives with the Board's
strategic plan. Key to success will be the continued development in
the strength and capability of our leadership population.
We want to be an employer of choice, engaging and inspiring our
employees to build a bank of which they can be proud. We are
building on our existing strengths and capabilities by hiring the
very best talent. We are developing our cultural framework to
ensure that we have a clear vision and values which form the
foundation of our performance management framework with clear links
to reward and with diversity and respect for difference built
in.
We have a long tradition of supporting local communities. So far
we have raised GBP5 million for our chosen charity, Hospice UK, and
have relationships with a number of local organisations such as
Scotland's Charity Air Ambulance, Edinburgh Royal Zoological
Society and Cycle Yorkshire. Through our Spirit of the Community
Awards, now in their 4th Year, we will donate GBP150,000 to 30
charities this year and we have an active volunteering programme.
We encourage every employee to take two days paid leave for
volunteering and provide Employee Volunteer Grants for those who
volunteer in their own time. A fifth of our people donate to
charity via Payroll Giving.
Business and financial review (continued)
Outlook
For the current financial year we expect underlying costs will
now be GBP730 million, while the remainder of our guidance remains
unchanged. We continue to expect NIM to be broadly flat vs. FY15,
and growth in our loan book to be in line with our current medium
term targets. We expect our loan to deposit ratio to remain under
115% and CET1 to be in the 12% - 13% range.
We will release our Q3 trading update on Thursday 28 July,
followed by a Capital Markets Day on 13 September this year. This
will be a deep dive on our future strategy, focused on growth,
costs, investment and capital, to update the market on our
refreshed plans and improved targets.
Looking further ahead, customers increasingly expect a full
range of services from their bank, and to be able to interact
across multiple touch points - mobile, online, in branch etc. -
with consistency and continuity of experience. We are proud to
offer a full suite of products to both retail and SME customers,
unencumbered by other activities such as investment banking, and
with the launch of B and execution of our omni-channel approach, we
believe we will be able to deliver a high level of service to all
our customers. Our flexible approach to pricing and product mix
will help us compete successfully in the market and grow our
mortgage book well above the market rate, as we have done in the
past, while maintaining asset quality, and a move to IRB will help
us compete more effectively across a wider range of products, for
example lower LTV mortgages. In an environment where the
expectation for interest rates is to be lower for longer, we will
drive harder on costs to maintain our commitment to improve
returns, while adjusting our pricing of deposits and driving
current account growth to lower our cost of funds. Finally our
conservative approach to underwriting, diversified loan book, and
robust asset quality makes us well placed to deal with capital and
other requirements in a developing regulatory framework, as does
our simple, straightforward retail banking model.
Across CYBG we are focusing on the future with confidence.
Delivering brilliantly simple service to our customers is at the
heart of our bank and over the next six months we are confident we
will show continued progress against our targets and delivery of
commitments for our customers, our people and our shareholders.
Business and financial review (continued)
Financial analysis
Consolidated income statement - underlying basis
6 months to
-------------------------
31 Mar 31 Mar 30 Sep
2016 2015 2015
-------- -------
Mar Mar
16 vs 16 vs
Mar Sep
GBPm GBPm GBPm 15 % 15 %
------------------------- ------- ------- ------- -------- -------
Net interest income 400 390 397 2.5% 0.7%
Non-interest income 91 95 82 (3.9%) 11.4%
------------------------- ------- ------- ------- -------- -------
Total operating
income 491 485 479 1.3% 2.6%
Total operating
and administrative
expenses (353) (346) (381) (2.2%) 7.4%
------------------------- ------- ------- ------- -------- -------
Operating profit
before impairment
losses 138 139 98 (1.0%) 41.5%
Impairment losses
on credit exposures
(1) (31) (28) (50) (10.7%) 39.0%
------------------------- ------- ------- ------- -------- -------
Underlying profit
on ordinary activities
before tax 107 111 48 (4.2%) Large
------------------------- ------- ------- ------- -------- -------
Conduct charges (46) (21) (465)
Restructuring expense - (12) (5)
Separation costs (4) - (10)
Net gain on capital
and debt restructuring
(2) 1 59 2
Pension increase
exchange gain - 18 -
Loss on impairment
of intangible assets - - (10)
-------
Statutory profit/(loss)
on ordinary activities
before tax 58 155 (440)
Tax (expense)/credit (22) (18) 74
------------------------- ------- ------- -------
Statutory profit/(loss)
attributable to
equity holders 36 137 (366)
========================= ======= ======= =======
(1) Impairment losses on credit exposures relate solely to loans
and advances to customers (refer to notes 11 and 12 to the interim
financial statements) and exclude the credit risk adjustments on
loans at fair value through profit or loss which are incorporated
in the movement in other assets and liabilities at fair value
within non-interest income (refer to note 4 to the interim
financial statements).
(2) Includes a GBP1m gain (6 months to 31 March 2015: GBPNil,
and 6 months to 30 September 2015: GBP2m) on debt restructuring.
The comparative periods include gains (6 months to 31 March 2015:
GBP61m, and 6 months to 30 September 2015: GBPNil) and losses (6
months to 31 March 2015: GBP2m, and 6 months to 30 September 2015:
GBPNil), in relation to capital restructuring (refer to notes 4, 5
and 8 to the interim financial statements).
The Group's underlying profit before tax decreased by GBP4m to
GBP107m compared to the period to 31 March 2015, primarily due to a
modest increase in operating and administrative expenses and
impairment losses, partially offset by an increase in operating
income.
Net interest income increased by GBP10m (2.5%). This was driven
by higher income from mortgage lending growth and lower term
deposit and wholesale funding costs. These were partially offset by
lower SME lending income driven by a reduction in non core SME
lending balances reflecting the managed run-off of lower yielding
assets, and higher savings costs due to the growth in the Cash ISA
book in FY15.
The NIM is in line with the six months ending 31 March 2015 at
2.25%. This was driven by benefits from continued balance sheet
action on liabilities, including run off of low yielding corporate
deposits, which subsequently led to a reduction in liquid assets
and interest costs. This was offset by the impact of growth in
mortgages which generally have a lower net interest margin than the
overall lending book.
Non-interest income decreased by GBP4m (3.9%). The key drivers
of this decrease were lower fees and commissions, a reduction in
fair value movements, and a reduction in the credit risk release on
loans accounted for at fair value.
Business and financial review (continued)
Financial analysis (continued)
Consolidated income statement - underlying basis (continued)
Operating and administrative expenses increased by GBP7m (2.2%).
This was driven by costs of GBP14m supporting the stand alone
operation of the Group as a PLC offset by cost reductions in other
areas.
Impairment losses on credit exposures increased by GBP3m
(10.7%). This was primarily driven by an increase in collective
provisions related to exposures in the oil and gas dependent
sectors, while overall asset quality continued to be strong and
stable.
Balance sheet (average balances)
As at
-------------------------
31 Mar 30 Sep 31 Mar Mar Mar
2016 2015 2015 16 vs 16 vs
Sep Mar
GBPbn GBPbn GBPbn 15 % 15 %
---------------------- ------- ------- ------- ------- -------
Total assets (GBPbn) 38.6 38.7 38.4 (0.6) 0.5
Interest earning
assets (GBPbn) 36.0 35.8 35.3 0.6 1.8
Customer loans
(GBPbn) (1) 29.0 28.2 28.0 2.8 3.8
Customer deposits
(GBPbn) (2) 26.3 25.1 24.2 4.6 8.0
---------------------- ------- ------- ------- ------- -------
(1) Customer loans include gross loans and advances to
customers, loans designated at fair value through profit or loss
and amounts due from customers on acceptances.
(2) Customer deposits include both interest and non-interest
bearing accounts and deposits.
Average customer loans, which include loans accounted for at
fair value, increased by GBP0.8bn (2.8%) to GBP29.0bn. Mortgage
growth was GBP1.3bn or 6.6%. This was partially offset by a
reduction in SME lending balances of GBP0.5bn or 6.2%, due to the
managed run-off of lower yielding assets. Average customer deposits
increased by GBP1.2bn (4.6%) to GBP26.3bn compared to a GBP0.2m
decrease in the spot balance. The average balance benefitted from
strong growth throughout the period in personal and SME current
account and savings balances. This was partially diluted by the
targeted reduction of highly liquid corporate deposits and more
expensive term deposits. The targeted reduction in corporate
deposits, which is now complete, outstripped the growth in the book
on a spot basis, however, underlying of this impact the book has
continued to grow.
Business and financial review (continued)
Financial analysis (continued)
Net interest margin 6 months ended 6 months ended
analysis 31 March 2016 31 March 2015
------------------------------ ------------------------------
Average Average
Interest yield/ Interest yield/
Average income/ rate Average income/ rate
balance expense (1) balance expense (1)
GBPm GBPm % GBPm GBPm %
Interest earning
assets:
Mortgages 20,868 335 3.22 19,012 315 3.33
SME lending (2) 6,883 131 3.82 7,606 143 3.78
Unsecured personal
lending 1,230 61 9.97 1,291 72 11.16
Liquid assets 6,136 17 0.55 6,474 17 0.53
Due from other banks 486 1 0.27 22 - 0.24
Due from related
entities (3) 391 1 0.37 939 2 0.35
Swap income - 4 n/a - 5 n/a
Total average interest-earning
assets 35,994 550 3.06 35,344 554 3.15
-------------------------------- --------- --------- -------- --------- --------- --------
Total average non
interest-earning
assets 2,588 n/a n/a 3,053 n/a n/a
-------------------------------- --------- --------- -------- --------- --------- --------
Interest bearing
liabilities:
Current accounts 10,733 (6) (0.11) 10,223 (6) (0.11)
Savings accounts 7,943 (32) (0.82) 6,615 (22) (0.67)
Term deposits 5,439 (59) (2.16) 5,469 (68) (2.49)
Other wholesale deposits 95 - (0.94) 104 - (0.79)
Debt securities in
issue 3,887 (40) (2.08) 3,894 (43) (2.17)
Due to other banks 646 (2) (0.59) 1,023 (4) (0.85)
Due to related entities
(3) 607 (11) (3.48) 2,281 (21) (1.92)
Total average interest-bearing
liabilities 29,350 (150) (1.03) 29,609 (164) (1.12)
-------------------------------- --------- --------- -------- --------- --------- --------
Total average non
interest-bearing
liabilities 6,187 n/a n/a 6,226 n/a n/a
-------------------------------- --------- --------- -------- --------- --------- --------
Total average equity
attributable to ordinary
equity holders 3,045 2,562
-------------------------------- --------- --------- -------- --------- --------- --------
Net interest margin 2.25% 2.25%
-------------------------------- --------- --------- -------- --------- --------- --------
(1) Average yield is calculated by annualising the interest
income/expense for the period.
(2) Includes deferred fee income.
(3) The average for the six months includes the related party
balances with NAB for the four months to January 2016. Effective
from 8 February 2016 these have moved to the relevant third party
lines.
Customer loans (1) As at
--------------------------
31 Mar 30 Sep 31 Mar
2016 2015 2015
GBPm GBPm GBPm
Mortgages 21,513 20,504 19,642
SME lending
* Core 6,002 5,992 6,035
* Non-core 900 1,070 1,360
Unsecured personal lending 1,207 1,218 1,255
----------------------------------- ------- -------- -------
Total customer loans 29,622 28,784 28,292
=================================== ======= ======== =======
Loans and advances to customers 28,725 27,687 26,952
Other financial assets at fair
value 894 1,093 1,335
Due from customers on acceptances 3 4 5
----------------------------------- ------- -------- -------
Total customer loans 29,622 28,784 28,292
=================================== ======= ======== =======
(1) Spot balances excluding accrued interest receivable.
Business and financial review (continued)
Financial analysis (continued)
Customer loans increased by GBP838m (2.9%) from GBP28,784m at 30
September 2015 to GBP29,622m at 31 March 2016, with growth in
mortgages partially offset by a reduction in non-core SME
lending.
Mortgages
Mortgages comprise the Group's largest asset portfolio and have
a significant impact on its overall financial performance. The
mortgage portfolio increased by 4.9% from GBP20,504m at 30
September 2015 to GBP21,513m at 31 March 2016. While the Group is
focused on growing its mortgage portfolio through all distribution
channels, this increase was primarily driven by an increase in
mortgage lending via intermediaries. The balance of mortgage
lending through the intermediary channel increased by GBP1,082m to
GBP11,992m at 31 March 2016, enabling the Group to access customers
across the UK including regions where the Group does not have a
large branch network.
The variable rate mortgage portfolio decreased by GBP416m (8.0%)
to GBP4,753m in March 2016, with the SVR element declining by
GBP284m (9.0%) to GBP2,878m. This was driven by customer preference
for securing low fixed rates in a macroeconomic environment where
base rates are expected to increase over time. The tracker book
continued to run off (to GBP2,486m), as a result of being withdrawn
from sale to the general public in 2008. The attrition on the
variable rate book has been more than offset by growth in the fixed
rate book of GBP1,564m (12.3%) to GBP14,274m driven by customers
switching from variable to fixed rate mortgages and growth in the
buy to let book as a result of the tax changes taking effect from
April 2016.
SME lending
SME lending comprises term business loans, overdrafts and other
lending - predominantly asset and invoice finance. The Core
portfolio has increased by 0.2% from GBP5,992m at 30 September 2015
to GBP6,002m at 31 March 2016 reflecting the stabilisation of the
book through the first half and a return to growth in targeted
segments. This was primarily driven by growth in the Commercial and
Structured Asset Finance books. The lower yielding non-core
portfolio declined by GBP170m (15.9%) to GBP900m in line with
expectations as its managed run-off continued.
Unsecured personal lending
The Group's unsecured personal lending portfolio comprises
credit cards, personal loans and overdrafts originated through
branches or by way of digital or other direct channels. Unsecured
personal lending balances decreased by 0.9% from GBP1,218m at 30
September 2015 to GBP1,207m at 31 March 2016. This was primarily
due to a managed reduction in personal loan volumes via the
web-based digital platform, after competitive pressures reduced
margins to unattractive levels over much of the period. This impact
offset an increase in origination via the branch network and direct
(telephone) channel in the period and growth in credit card lending
as a result of the interest free promotional campaign.
Customer deposits (1) As at
--------------------------
31 Mar 30 Sep 31 Mar
2016 2015 2015
GBPm GBPm GBPm
Current accounts 12,871 12,982 12,473
Variable rate savings accounts 7,880 7,790 7,258
Fixed rate term deposits 5,344 5,483 5,389
Other wholesale deposits 72 94 89
-------------------------------- ------- -------- -------
Total customer deposits 26,167 26,349 25,209
================================ ======= ======== =======
Due to customers 26,114 26,282 25,133
Other financial liabilities
at fair value 53 67 76
-------------------------------- ------- -------- -------
Total customer deposits 26,167 26,349 25,209
================================ ======= ======== =======
(1) Spot balances excluding accrued interest payable.
Customer deposits decreased by GBP182m (0.7%), from GBP26,349m
at 30 September 2015 to GBP26,167m at 31 March 2016. The core
deposit book has continued to grow driven by Personal and SME
current account balances and variable rate savings.
Business and financial review (continued)
Financial analysis (continued)
The overall movement was largely driven by a managed reduction
in the level of short term Corporate Deposits resulting in outflows
of GBP740m.
The Group's LDR has increased to 113% in March 2016 from 109% in
September 2015, reflecting growth in personal and core SME lending
and active management of customer deposits. This has delivered an
improved funding mix at lower cost, with the Group successfully
increasing the balance of its current accounts and savings
accounts, while reducing the balance of more expensive on demand
corporate deposits and other wholesale deposits.
Current accounts
Funding provided by current accounts decreased by GBP111m (0.9%)
from GBP12,982m at September 2015 to GBP12,871m at March 2016,
largely due to the targeted run-off of GBP740m of corporate
deposits, offset by ongoing growth in personal current accounts and
non-interest bearing Business accounts.
Savings accounts
Variable rate savings account balances increased by GBP90m
(1.1%) in the same period, which included a substantial increase in
instant access savings balances, and cash ISAs.
Fixed rate term deposits
Fixed rate term deposits decreased by GBP139m (2.5%) in the
period, in line with the Bank's ongoing strategy to proactively
run-off higher rate deposits.
Debt securities in issue (1) As at
----------------------------------- -------------------------
31 Mar 30 Sep 31 Mar
2016 2015 2015
GBPm GBPm GBPm
----------------------------------- ------- ------- -------
Retail mortgage backed securities
("RMBS") 3,024 3,031 2,940
Covered bonds 750 721 1,125
Subordinated debt 477 - -
Related party (2) - 382 396
----------------------------------- ------- ------- -------
Total debt securities in issue 4,251 4,134 4,461
=================================== ======= ======= =======
(1) Spot balances excluding accrued interest payable.
(2) Lannraig note issuance to NAB are now included in RMBS as
they have moved from related to third party following the demerger
and IPO.
Debt securities in issue increased by GBP117m (2.8%) from
GBP4,134m at 30 September 2015 to GBP4,251m at 31 March 2016. In
the period, the USD800m Lanark 2012-2 1A note was redeemed (on 22
February 2016) in line with the scheduled programme terms.
Business and financial review (continued)
Asset quality
As at
-------------------------
Provisions for credit exposures 31 Mar 30 Sep 31 Mar
(GBPm) 2016 2015 2015
---------------------------------------- ------- ------- -------
Specific provision for doubtful
debts 90 92 85
Collective provision for doubtful
debts 144 138 131
---------------------------------------- ------- ------- -------
Credit risk adjustments on
loans at fair value (GBPm)
---------------------------------------- ------- ------- -------
Individually assessed credit
risk adjustments on loans at
fair value 12 11 17
Collectively assessed credit
risk adjustments on loans at
fair value 20 27 41
---------------------------------------- ------- ------- -------
Past due and impaired assets
(GBPm)
---------------------------------------- ------- ------- -------
90+ Days Past Due ("DPD") assets 148 143 173
Gross impaired assets (1) 277 263 280
---------------------------------------- ------- ------- -------
Asset quality measures (%)
---------------------------------------- ------- ------- -------
90+ DPD plus gross impaired
assets to gross loans and acceptances
(1) 1.43% 1.41% 1.60%
Specific provision to gross
impaired assets (1) 36.9% 39.2% 36.6%
Net write-offs to gross loans
and acceptances 0.18% 0.35% 0.45%
Total provision to gross loans
and acceptances (2) 0.90% 0.93% 0.97%
Impairment losses on credit
exposures to credit risk-weighted
assets (3) 0.38% 0.48% 0.35%
---------------------------------------- ------- ------- -------
Impairment provisions on credit
exposures (GBPm)
---------------------------------------- ------- ------- -------
SME lending (including lease
finance) 172 168 165
Retail lending 62 62 51
---------------------------------------- ------- ------- -------
234 230 216
======================================== ======= ======= =======
6 months to
-------------------------
31 Mar 30 Sep 31 Mar
Impairment losses on credit 2016 2015 2015
exposures GBPm GBPm GBPm
------------------------------ ------- ------- -------
SME lending (including lease
finance) 20 25 20
Retail lending 11 25 8
------------------------------ ------- ------- -------
31 50 28
============================== ======= ======= =======
Of which:
Specific 25 41 32
Collective 6 9 (4)
------------- --- --- ----
31 50 28
============= === === ====
(1) Gross impaired assets for March 2016, September 2015 and
March 2015 include GBP34m, GBP25m and GBP36m gross impaired fair
value assets respectively.
(2) Total provision to gross loans and acceptances includes the
credit risk adjustments on loans at fair value through profit or
loss.
(3) Impairment losses on credit exposures to credit
risk-weighted assets excludes credit risk adjustments on loans at
fair value.
Business and financial review (continued)
Asset quality (continued)
Asset quality has remained stable over the 6 month period to 31
March 2016.
Retail asset quality remains strong with continued low default
rates observed across unsecured lending. The level of impaired
mortgage lending remains modest against a growing portfolio. This
is reflective of the high asset quality of the portfolio supported
by the prolonged period of low interest rates and improving
residential house prices. The level of 90+ DPD has remained stable
for both the secured and unsecured portfolios.
SME asset quality metrics remain stable. This reflects the
diversified nature of the portfolio and the continued improvement
in the economic environment. Nevertheless there remains sensitivity
within the portfolio to changes in UK economic conditions and
challenges emerging in specific sectors, such as those dependent on
oil and gas with a collective provision allowance being made in the
first half to respond to the risk in this sector.
Impairment losses in the period to 31 March 2016 decreased to
GBP31m, compared with GBP50m for the 6 month period to 30 September
2015. This was primarily due to the lower level of defaults across
the mortgage and SME portfolios.
The ratio of total provisions to customer loans decreased by 3
basis points to 0.90% at 31 March 2016. The movement in the ratio
is reflective of the lower risk profile of the book due to the
growth of the mortgage portfolio which has a lower provisioning
requirement.
Reflecting, the ongoing growth in mortgages which increased by
4.9% during the period, the impairment losses decreased reflecting
the secured nature of mortgage lending and with the low levels of
credit losses, provision coverage has remained stable period on
period.
Capital requirements and MREL
The Group's capital requirements are set by the PRA, consisting
of an Individual Capital Guidance plus Capital Buffer Requirements
and the Group had a surplus to these requirements at 31 March 2016.
This included a Pillar 2A requirement set at 5.8% of Risk Weighted
Assets, 3.3% of which must be met by CET1 capital. The Capital
Buffer Requirements include a Capital Conservation Buffer,
Counter-cyclical Buffer and PRA Buffer. In March 2016 The Bank of
England (BoE) Financial Policy Committee announced that from 29
March 2017 the Counter-cyclical Buffer will be set at 0.5% in the
UK from 0% currently, and the PRA confirmed a one-off adjustment to
the PRA Buffer to offset the impact, for no overall increase to the
Group's capital requirements arising from this change. In addition,
in December 2015 the BoE announced that banks with less than GBP175
billion of assets will not be subject to Systemic Risk Buffer
requirements.
In response to the European Recovery and Resolution Directive,
the BoE launched a consultation on setting the Minimum Requirement
for Own Funds and Eligible Liabilities (MREL), which completed on
11 March 2016. A Policy Statement is expected later in 2016. The
BoE proposes that MREL will be calculated as the "loss absorption
amount" plus the "recapitalisation amount", with the latter
calculated dependent on the agreed resolution strategy for the
Group. The MREL is expected to be implemented from 1 January 2020.
As they stand the proposals will lead to a requirement for
increased qualifying debt issuance by CYBG, and the UK banking
industry as a whole.
In March 2016 the BoE announced details of its 2016 stress test
to assess the resilience of major UK banks. This included a
revision to the stress test hurdle framework so that each bank will
now be expected to meet its minimum Pillar 1 and Pillar 2A CET1
capital requirements after the stress, which for the Group is 7.8%
as at 31 March 2016.
Capital position
Total risk-weighted assets increased by GBP223m, driven by
growth in mortgages. Underlying capital generation of 22 basis
points in the half (before reflecting the net impact of the Group's
proportion of the conduct provision charges), ensured the Group's
CET1 ratio remained stable and robust at 13.2%.
Business and financial review (continued)
Capital position (continued)
In February 2016, concurrently with the demerger and IPO of the
Group, a capital restructure was completed to simplify the Group's
capital base and ensure that CYBG is the "single point of entry"
for the purposes of Recovery and Resolution planning and MREL
requirements. The Group repurchased GBP450m of existing AT1 and
GBP475m of existing Tier 2 capital, and replaced this with new CRD
IV compliant issuance of GBP450m AT1 (including an equity
conversion mechanism) and GBP475m Tier 2 issued by CYBG. CYBG
simultaneously downstreamed the proceeds in the same form to
Clydesdale Bank PLC, with the only material difference being the
loss absorption mechanism for Clydesdale Bank PLC which is a
Permanent Write Down of the instrument not equity conversion. The
repurchase took place at market value and this resulted in a net
gain of GBP1m which was realised within the Group.
The Group's capital position at 31 March 2016 is summarised
below.
31 Mar 30 Sep 31 Mar
Regulatory capital (1) 2016 2015 2015
CET1 capital GBPm GBPm GBPm
----------------------------------- ------- ------- -------
Capital Instruments 88 223 2,232
Share premium account - 670 -
Retained earnings and
other reserves (2) 2,987 2,097 489
Regulatory adjustments
and deductions:
Prudent valuation adjustment
(3) (7) (5) (2)
Intangible assets (4) (285) (265) (237)
Deferred tax asset ("DTA")
relying on future profitability
(5) (246) (273) (210)
Defined benefit pension
fund assets (net of deferred
tax liabilities) (6) (101) (42) (73)
2,436 2,405 2,199
----------------------------------- ------- ------- -------
Tier 1 capital
----------------------------------- ------- ------- -------
Additional Tier 1 ("AT1")
capital instruments 450 450 450
Total Tier 1 capital 2,886 2,855 2,649
----------------------------------- ------- ------- -------
Tier 2 capital
-------------------------- ------ ------ ------
Subordinated debt 475 460 475
Credit risk adjustments 144 138 128
Excess Tier 2 capital
(7) - - (5)
------------------------- ------ ------ ------
619 598 598
------------------------- ------ ------ ------
Total capital 3,505 3,453 3,247
========================== ====== ====== ======
(1) This table shows the capital position on a CRD IV
"transitional" basis. As at 30 September 2015 this included
grandfathered legacy Tier 2 instruments under the transitional
rules implemented by the PRA. These instruments were replaced and
are fully compliant with CRD IV at 31 March 2016, accordingly the
31 March 2016 capital also reflects the CRD IV "fully loaded"
basis.
(2) Retained earnings in the table above include unverified
interim profits. Comparative disclosures and associated ratios have
been amended to conform with the current period's presentation.
(3) A prudent valuation adjustment is applied in respect of fair
valued instruments as required under regulatory capital rules.
(4) Intangible assets do not qualify as capital for regulatory
purposes.
(5) Under CRD IV, deferred tax assets that rely on future
profitability are deducted from CET1 capital.
(6) Under CRD IV, defined benefit pension fund assets shall be
deducted from CET1 capital (net of deferred tax liability).
(7) Under PRA requirements, institutions must meet Pillar 1 and
Pillar 2A with at most 25% T2 capital. Accordingly excess Tier 2
capital is deducted.
Business and financial review (continued)
Capital position (continued)
Risk-weighted assets (1) 31 Mar 30 Sep 31 Mar
2016 2015 2015
GBPm GBPm GBPm
------------------------------ ------- ------- -------
Retail mortgages 7,946 7,526 7,264
SME lending 6,900 7,044 7,387
Other retail lending 953 951 976
Other lending 91 113 86
Other (2) 568 660 633
----------------------------- ------- ------- -------
Credit risk 16,458 16,294 16,346
Credit valuation adjustment 223 206 137
Operational risk 1,589 1,589 1,565
Counterparty risk 180 138 152
----------------------------- ------- ------- -------
Total risk-weighted assets 18,450 18,227 18,200
============================== ======= ======= =======
Capital ratios
------------------------------ ------- ------- -------
CET1 ratio (3) 13.2% 13.2% 12.1%
Tier 1 ratio 15.6% 15.7% 14.6%
Total capital ratio 19.0% 18.9% 17.8%
------------------------------ ------- ------- -------
(1) Risk-weighted assets ("RWAs") are calculated under the
standardised approach.
(2) The items included in the "other" exposure class that
attract a capital charge include items in the course of collection,
cash in hand, fixed assets and deferred tax assets that rely on
future profitability.
(3) CET1 capital is comprised of shares issued and related share
premium, retained earnings and other reserves less specified
regulatory adjustments.
Reconciliation of statutory 31 Mar 30 Sep 31 Mar
total equity to regulatory 2016 2015 2015
capital GBPm GBPm GBPm
------------------------------------- ------- ------- -------
Statutory total equity 3,531 3,443 3,174
Pension regulatory adjustments (101) (42) (73)
Deductions from capital (292) (270) (239)
Equity-based compensation
reserve (6) (3) (3)
DTA relying on future profitability (246) (273) (210)
Regulatory Tier 1 capital 2,886 2,855 2,649
===================================== ======= ======= =======
Business and financial review (continued)
Capital position (continued)
Minimum Pillar 1 capital 31 Mar 30 Sep
requirements 2016 2015
GBPm GBPm
----------------------------- ------- -------
Credit risk 1,317 1,304
Operational risk 127 127
Counterparty risk 14 11
Credit valuation adjustment 18 16
Tier 1 regulatory capital
requirements 1,476 1,458
============================== ======= =======
Regulatory capital flow of 31 Mar 30 Sep
funds 2016 2015
GBPm GBPm
--------------------------------------- ------- --------
CET1 capital
CET1 capital at 1 October 2,405 1,747
Share capital: ordinary share
new issuance - 350
Share for share exchange and (135)
nominal reduction -
Share premium (670) 670
Retained earnings and other
reserves (including structured
entities) 890 1,755
Prudent valuation adjustment (2) (3)
Intangible assets (20) (52)
DTA relying on future profitability 27 (50)
Defined benefit pension fund
assets (59) (3)
Share capital reduction - (2,009)
Pension fund deficit adjustment - -
--------------------------------------- ------- --------
2,436 2,405
--------------------------------------- ------- --------
Tier 1 capital
Tier 1 capital at 1 October 450 300
Capital instruments repurchased: (450)
Perpetual Capital Notes -
Capital instruments issued: Perpetual 450
Subordinated Contingent Convertible
Notes -
Capital instruments issued:
AT1 Perpetual Capital Notes - 150
---------------------------------------- ------- --------
450 450
--------------------------------------- ------- --------
Total Tier 1 capital
--------------------------------------- ------- --------
2,886 2,855
--------------------------------------- ------- --------
Tier 2 capital
Tier 2 capital at 1 October 598 1,260
Credit risk adjustments 6 3
Subordinated debt redemption - (665)
Capital instruments repurchased: (475)
Subordinated Debt -
Capital instruments issued: 475
Subordinated Debt -
Removal of minority interest 15
deduction on Subordinated
Debt -
--------------------------------------- ------- --------
619 598
--------------------------------------- ------- --------
Total capital 3,505 3,453
======================================== ======= ========
Risk-weighted asset flow statement GBPm
-------------------------------------------- -------
Risk-weighted assets at 1 October 2015 18,227
Book size growth / (reduction) 243
Book quality (improvement) / deterioration (20)
Methodology and policy -
Risk-weighted assets at 31 March 2016 18,450
============================================ =======
Business and financial review (continued)
Capital position (continued)
At 30 September
At 31 March 2016 2015
------------------------------ ---------------------------------
Capital requirements Capital Capital Exposure
for calculating RWAs required RWA Exposure required RWA (restated)
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------- ---------- ------- --------- ---------- ------- ------------
Central Governments
or Central Banks - - 6,240 - - 6,477
Regional Governments
or Local Authorities 2 22 225 2 22 222
Public Sector Entities - 3 3 - 3 3
Multilateral development
banks - - 199 - - 100
Financial institutions 15 180 1,236 18 222 818
Corporates 254 3,179 3,520 262 3,264 3,621
Retail 75 932 1,243 74 930 1,240
Secured by mortgages
on immovable property 893 11,167 26,260 869 10,862 25,241
Exposures in default 38 472 389 34 427 356
Collective investments
undertakings (CIU) - 3 3 - 3 3
Equity exposures 1 16 14 1 16 10
Items associated
with particularly
high risk 1 10 7 - - -
Other items 38 474 2,049 44 545 1,905
Total credit risk 1,317 16,458 41,388 1,304 16,294 39,996
========================== ========== ======= ========= ========== ======= ============
Operational risk 127 1,589 127 1,589
Counterparty risk 14 180 11 138
Credit valuation
adjustment 18 223 16 206
---------- -------
1,476 18,450 1,458 18,227
========================== ========== ======= ========== =======
The "Exposure" amounts disclosed above are post Credit
Conversion Factors and pre Credit Risk Mitigation. Comparative
disclosures have been restated to conform with the current period's
presentation.
Leverage ratio 31 Mar 30 Sep
2016 2015
GBPm GBPm
-------------------------------- -------- -------
Total Tier 1 capital for the
leverage ratio
Total CET1 capital 2,436 2,405
AT1 capital 450 450
--------------------------------- -------- -------
Total Tier 1 2,886 2,855
--------------------------------- -------- -------
Exposures for the leverage
ratio
Total assets as per published
financial statements 38,723 38,705
Adjustment for off-balance
sheet items 1,983 1,998
Adjustment for derivative
financial instruments 38 19
Adjustment for securities 557
financing transactions (SFTs) -
Other adjustments (639) (585)
Leverage ratio exposure 40,662 40,137
--------------------------------- -------- -------
Leverage ratio 7.1% 7.1%
--------------------------------- -------- -------
Business and financial review (continued)
Credit ratings
The Group (then CYBI) was rated by Standard & Poor's
(S&P) and Fitch for the first time in 2015. Upon demerger from
NAB the ratings for CYBI were withdrawn and new ratings were
published for CYBG. S&P assigned a long-term credit rating of
"BBB-" to the Group, two notches below that of Clydesdale Bank PLC,
reflecting their non-operating holding company methodology. Fitch
assigned an issuer default rating of "BBB+", in line with that of
Clydesdale Bank PLC again reflecting their holding company
methodology. The outlook for both ratings is stable.
The lower ratings than those assigned to CYBI at the full year
reflect the absence of any parental support uplift in rating.
The Group's long-term credit ratings are summarised below:
Outlook as
at As at
--------------------------
31 Mar 30 Sep 31 Mar
23 May 2016(1) 2016 2015 2015
------------------ --------------- -------- ------- -------
Fitch Stable BBB+ A(2) n/a
Standard & Poor's Stable BBB- BBB(2) n/a
------------------ --------------- -------- ------- -------
(1) For detailed background on the latest credit opinions,
including commentary on the impact of the demerger and IPO, by
S&P and Fitch, please refer to the respective rating agency
websites.
(2) CYBI.
Funding and liquidity
The Group continues to have a strong funding and liquidity
position and seeks to achieve an appropriate balance between
profitability and liquidity risk. Funding is predominantly provided
by Retail and SME customers and this is supported by medium term
secured funding issuance from the Group's Lanark and Lannraig
securitisation programmes and its Regulated Covered Bond platform.
These funding programmes are a source of strength for the Group and
leverage the Group's high quality mortgage book. The Group ensures
that funding is in place before lending to customers.
The LDR increased from 109% to 113% due to growth in customer
lending combined with a managed reduction in short-term corporate
deposits which provided little liquidity benefit to the Group.
The Group's liquid assets are calibrated to the Board's view of
liquidity risk appetite and remain at a prudent level above PRA
requirements. The portfolio is managed by diversifying the mix of
assets held to reduce basis risk and optimise the yield. Core
liquidity is held predominantly in deposits with central banks and
UK Government Gilts. Total unencumbered liquid assets were managed
lower from GBP5,542m to GBP3,864m. This is primarily due to a lower
balance with the BoE as a result of the lending growth and deposit
actions described above. The Group was compliant with all internal
and regulatory liquidity metrics at 31 March 2016.
Liquid asset reserve 31 Mar 30 Sep
2016 2015
GBPm GBPm
------------------------------------------ -------- --------
Cash and balances with central banks 4,974 6,431
Encumbered cash balances (2,398) (2,301)
------------------------------------------ -------- --------
2,576 4,130
------------------------------------------ -------- --------
Financial assets available for sale 1,478 1,462
Encumbered available for sale securities (190) (50)
------------------------------------------ -------- --------
1,288 1,412
Total unencumbered liquid assets 3,864 5,542
========================================== ======== ========
In addition to the above, as at 31 March 2016, the Group had
GBP3.5bn (30 September 2015: GBP3.9bn) of gross eligible collateral
pre-positioned with the BoE for potential use in its liquidity
facilities.
Business and financial review (continued)
Funding and liquidity (continued)
30 September
31 March 2016 2015
----------------------------------- -------------------------- -------
Encumbered Unencumbered Total Encumbered Unencumbered Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------- ----------- ------------- ------- ----------- ------------- -------
Cash and balances
with central
banks 2,398 2,576 4,974 2,301 4,130 6,431
Due from related
entities - - - 624 162 786
Due from other
banks 612 654 1,266 3 125 128
Financial assets
available for
sale 190 1,288 1,478 50 1,412 1,462
Loans and advances
to customers 6,699 21,817 28,516 7,398 20,084 27,482
------------------------- ----------- ------------- ------- ----------- ------------- -------
9,899 26,335 36,234 10,376 25,913 36,289
========================= =========== ============= ======= =========== ============= =======
Encumbered cash and balances
with central banks
Note cover 2,131 2,033
Cash ratio deposit 45 44
EU payment system
pre-funding 3 5
UK payment system
collateral 219 219
------------------------- ----------- -----------
2,398 2,301
========================= =========== ===========
Encumbered balances due from
related entities
Structured funding
- GIC account
balances - 380
Cash collateral
supporting derivatives
transactions - 244
------------------------- ----------- -----------
- 624
========================= =========== ===========
Encumbered balances due from
other banks
Structured funding
- GIC accounts 328
Cash collateral
supporting derivative
transactions 282 1
Cash margin
supporting repurchase
("repo") transactions 2 2
------------------------- ----------- -----------
612 3
========================= ===========
Encumbered investments -
financial assets available
for sale
Payment system
collateral (1) 74 50
Repurchase ("repo")
transaction -
collateral (1) 116
------------------------- ----------- -----------
190 50
========================= =========== ===========
Encumbered loans and
advances to customers
Structured Programme
collateral -
Lanark Master
Trust 3,849 4,275
Structured Programme
collateral -
Regulated Covered
Bond 1,357 1,475
Structured Programme
collateral -
Lannraig Master
Trust 1,493 1,648
------------------------- ----------- -----------
6,699 7,398
========================= =========== ===========
(1) Market value of securities posted as collateral.
Liquid assets 31 Mar 30 Sep 31 Mar
2016 2015 2015
GBPbn GBPbn GBPbn
------------------------------- ------- ------- -------
UK Government Treasury Bills
and Gilts 1.3 1.3 1.1
Cash and cash at central bank 2.9 4.4 5.1
Note cover (1) 2.1 2.0 2.0
Other debt securities 0.2 0.1 0.2
6.5 7.8 8.4
=============================== ======= ======= =======
(1) Note cover is excluded from PRA regulatory liquidity.
Business and financial review (continued)
Principal Risks and Uncertainties
The following section summarises the principal risks and
uncertainties to which the Group is exposed, along with the Group's
approach to mitigating these risks.
The principal areas of risk to the Group's business model are
outlined below.
Principal risks Key mitigating actions
-------------------------------- -------------------------------------------------------------
Credit risk: is the risk
that a counterparty, customer * Significant Credit Risk strategies and Credit Risk
or obligor will fail to Appetite are approved and reviewed by the Board and
meet its obligations to Board's Risk Committee where CYBG's tolerance for
CYBG in accordance with Credit Risk is agreed.
agreed terms and arises
from the Bank's lending
activities in addition * Strategies employed to mitigate credit risk include
to markets and trading imposing standard underwriting policies, taking
activities. collateral over property, forbearance, where there is
a realistic prospect of being repaid, and entering
into derivative and master netting agreements.
* The Credit Portfolio is closely monitored including
risk sensitivity analysis and review of asset quality
metrics with actions initiated where required.
-------------------------------- -------------------------------------------------------------
Operational risk (excluding
conduct risk) is the risk * CYBG has an established Operational Risk Framework to
of loss resulting from enable identification, management and mitigation of
inadequate or failed internal operational risks.
processes, people and
systems or from external
events. It includes supplier * Risk categories, aligned to Basel II, are used to
relationships and legal categorise and facilitate the consistent
risk, but excludes strategic identification, assessment, mitigation, monitoring
and reputation risks. and reporting of risks and events.
Impacts from Operational
Risks arise from the day
to day activities of the * Supplier relationships are categorised based on
Group, which may result criticality of the support provided. Contingency
in direct or indirect planning focuses on alternative options and
losses and could adversely management approaches in the event of an outage with
impact the Group's financial regular scenario tests performed.
performance and position.
-------------------------------- -------------------------------------------------------------
Regulatory risk is the
risk of failing to identify, * CYBG continues to proactively assess the impacts from
monitor, shape and implement legal and regulatory developments and participates
changes and developments with the various regulatory bodies and industry
in the regulatory environment, forums to ensure that it is able to identify and
and the risk of damaging respond to proposed regulatory changes and mitigate
CYBG's relationship with risks to CYBG and its stakeholders.
regulators and other external
authorities.
* CYBG has a Regulatory Engagement Policy designed to
ensure an open and cooperative relationship is
maintained with CYBG's Regulators at all times.
* Continued and significant senior management focus and
levels of business resource are directed towards
maintaining full regulatory compliance.
* The Risk Committee approves all material changes to
regulatory policy and protocols. CYBG's governing
principles include the management and maintenance of
regulatory policies and regulatory engagement.
-------------------------------- -------------------------------------------------------------
Business and financial review (continued)
Principal risks (continued) Key mitigating actions
---------------------------------- -------------------------------------------------------------
Compliance risk is the
risk of failing to understand * The CRO and Risk Leadership Team consider compliance
and comply with relevant risk topics when setting Risk Appetite and through
laws, regulations, licence ongoing risk assessment, profiling and reporting.
conditions, supervisory
requirements, self-regulatory
industry codes of conduct * A Risk Management Oversight and Compliance Monitoring
and voluntary initiatives, Plan is approved by CYBG's Board's Risk Committee on
internal policies, standards, an annual basis which independently assesses the
procedures and frameworks. Control Framework underpinning compliance with laws
and regulations.
* All CYBG employees are required to achieve mandated
standards to meet their 'Compliance Gateway'
obligations.
---------------------------------- -------------------------------------------------------------
Conduct risk: is the risk
that CYBG's operating * CYBG has a Conduct Framework, with supporting target
model, culture or actions outcomes and operating principles to ensure its
result in unfair outcomes business model and supporting business practices
to customers. achieve fair customer outcomes.
* Products are designed and sold to meet customer needs
and expectations with governance processes embedded
to ensure those objectives are met.
* As part of the demerger, NAB and CYBG have entered
into a Conduct Indemnity Deed where NAB has agreed to
provide CYBG with an indemnity in respect of certain
historic liabilities relating to conduct in the
period prior to the demerger date.
---------------------------------- -------------------------------------------------------------
Balance sheet and liquidity
risk is the risk of being * Liquidity is managed in accordance with standards
unable to meet current that are approved by the Board as part of the ILAAP.
and future financial obligations Liquidity is managed on a daily basis, ensuring
as they fall due at acceptable compliance with the Group's OLAR, LCR and that normal
cost, including the obligation daily cash requirements are met and adequate sources
to repay deposits on demand of liquidity are available to support unforeseen cash
or at their contractual outflows.
maturity dates, repay
borrowings and loan capital
as they mature, pay operating * CYBG has a designated Prudential Risk team who
expenses and tax, pay independently monitor, oversee and challenge Balance
dividends, and the ability Sheet and Liquidity risks.
to fund new and existing
loan commitments.
* CYBG has a detailed annual funding plan intended to
ensure diversification of funding sources.
* CYBG has a contingency funding plan, which is used to
detail actions to be taken in the event of an
escalated liquidity requirement.
* CYBG completes a formal annual assessment of
Liquidity Adequacy which is shared with the PRA. This
is prepared in conjunction with key stakeholders
across CYBG, and includes analysis of key risks with
consideration of stress scenarios.
---------------------------------- -------------------------------------------------------------
Market risk is the risk
associated with adverse * Interest rate risk management is overseen by the
changes in the fair value Asset and Liability Committee with delegation for day
of positions held by CYBG to day management given to CYBG's treasury division,
as a result of movements principally through the use of interest rate swaps
in market factors such and by cash flow netting from its assets and
as interest rates, foreign liabilities.
exchange rates, volatility
and credit spreads.
* Basis risk is managed through a combination of
wholesale market basis risk management products,
pricing strategies and product innovation.
* To inform the impact of interest rate risk on future
net interest income, value at risk and earnings at
risk measures are used, complemented by sensitivity
and scenario analysis.
---------------------------------- -------------------------------------------------------------
Business and financial review (continued)
Principal risks (continued) Key mitigating actions
--------------------------------- -------------------------------------------------------------
Strategic risk is the
risk of significant loss * The CYBG Board is ultimately responsible for
or damage arising from overseeing the execution of the strategic plan and
business decisions that associated strategic risk, and on the recommendation
impact the long-term interests of the CEO and executive management, the Board
of stakeholders or from approves CYBG's strategic and operational plans.
an inability to adapt
to external developments.
* CYBG considers strategic risk as part of the Board's
risk profile.
* A consolidated report outlining the triggers and
exposure to strategic risk is independently prepared
and presented to the Board's Risk Committee by the
CRO.
--------------------------------- -------------------------------------------------------------
Financial crime risk:
Financial crime risk is * CYBG has an established Financial Crime Framework
the risk of failing to supporting ongoing management, monitoring and
understand and comply mitigation of Financial Crime Risk.
with relevant laws, regulations
and supervisory requirements
relating to money laundering, * CYBG maintains processes aimed at minimising the risk
terrorism financing, bribery of financial crime through ongoing risk assessment,
and corruption and sanctions monitoring and reporting, appropriate KYC and the
and embargoes. It also development and implementation of an anti-money
includes risks associated laundering programme.
with external or internal
acts intended to defraud,
misappropriate, and circumvent; * CYBG operates zero tolerance for internal fraud and
policy, funds, information, has a control framework in place to mitigate against
regulations and property. this risk.
--------------------------------- -------------------------------------------------------------
Further details of these risks and the Company's risk management
framework and policies are provided in the prospectus relating to
the admission of the Company's ordinary shares to the Official List
of the Financial Conduct Authority and to trading on the London
Stock Exchange. Copies of the prospectus are available at
http://www.cybg.com/investor-centre/cybg-demerger/
The Group monitors the environment in which it operates to
identify emerging risks that may have an impact on its operations,
the Group currently considers its top emerging risks to be:
Emerging risks Key mitigating actions
----------------------------------- ------------------------------------------------------------
Risks relating to the
Macro-economic environment: * The CYBG credit portfolio continues to be monitored
While CYBG's Customer closely with appetite adjusted where appropriate and
base is, and is expected risk sensitivity analysis is conducted on an ongoing
to remain, predominantly basis in higher risk areas such as Oil & Gas
UK based, its' business dependent sectors.
will be subject to inherent
risks arising from macro-economic
conditions in the UK and * CYBG has applied a severe stress scenario to the
geo-political uncertainty; Funding Plan to demonstrate the potential impact of
such as the Referendum severe market disruption with regard to possible
on the UK's membership 'Brexit' and appropriate alternative actions are
of the EU. The impact agreed to prevent breaches of Risk Appetite.
of the sustained low interest
rate environment with
delays in expected increases * Regular reviews are undertaken to assess strategic
in the Bank of England implications with adjustments made to minimise and
base rate and depressed negate potential impacts.
oil prices may impact
economic growth and have
implications relative
to the Group's strategic
objectives. These and
other global events also
have the potential to
trigger changes in market
risk pricing which could
lead to rising funding
costs.
----------------------------------- ------------------------------------------------------------
Business and financial review (continued)
Emerging risks (continued) Key mitigating actions
---------------------------------- -------------------------------------------------------------
Reliance on previous parent:
There is a risk that the * Transitional Services Agreements (TSAs) are in place
functions and processes with NAB to provide ongoing support for a small
developed and restructured number of functions and processes.
as part of the separation
from NAB may not operate
as intended or have not * Formal TSA exit plans are in place supported by
been properly created appropriate governance, resource and expertise to
or completed which could ensure TSA exit milestones are achieved.
result in operational
difficulties.
* Other functions and processes already transitioned
were tested for readiness and are now subject to
oversight through the Group's Risk Management
Framework.
---------------------------------- -------------------------------------------------------------
BTL lending: Falling or
flat rental rates and * CYBG's has a balanced portfolio with growth through a
decreasing capital values, number of channels and products.
whether coupled with higher
mortgage interest rates
or not, could reduce the * CYBG focusses on customer affordability and conducts
potential returns from full BTL credit assessments based on the customer's
BTL mortgages. Regulatory net income and expenditure, as opposed to solely on
changes such as the Finance rental yields.
(No 2) Act 2015 proposing
limits to the income tax
relief on mortgage interest * Customer affordability is also subject to an interest
expense available from rate stress at the time of application which exceeds
6 April 2016 and additional the rate proposed in the PRA's BTL Consultation
3% on stamp duty on the Paper.
purchase of a second or
subsequent residential
property from 1 April * The CYBG's credit portfolio is subject to regular
2016 may result in lower monitoring and stress testing which includes scenario
yields on BTL property analysis on BTL lending.
investments and may negatively
affect mortgage supply
and demand. * Risk Appetite includes a number of relevant BTL
measures which are continually reviewed and, where
required, adjusted.
---------------------------------- -------------------------------------------------------------
Cybercrime and IT: There
is a risk that CYBG may * CYBG continues to invest and enhance information
not appropriately respond security defences in response to emerging and known
to the increased threat threats.
of cybercrime associated
with digital expansion
and the industry wide * CYBG has procedures to ensure compliance with data
risk of traditional banking protection regulations by its employees and
information technology third-party service providers, and implements
infrastructure and digital security measures to help prevent cyber-theft.
technologies becoming
obsolete. An inability
to keep pace with industry
trends and customer expectations
may materially affect
CYBG's financial and operational
performance.
---------------------------------- -------------------------------------------------------------
Regulatory capital requirements:
CYBG may be impacted by * CYBG is required to maintain minimum levels of
certain revisions in the capital and reserves relative to the balance sheet
methodology for calculating size and risk profile of its operations.
regulatory capital which
may include, amongst others,
changes to the approach * CYBG assesses the impact of changes to prudential
for calculating the standardised requirements and, when appropriate, will seek to
approaches for credit mitigate the impact of changes by applying changes to
risk and operational risk, business processes.
on which the Basel Committee
on Banking Supervision
is consulting. Other revisions * CYBG has announced its intention to implement an
may include the regulatory Internal Ratings Based approach to managing
capital treatment of interest Regulatory Capital.
rate risk in the banking
book.
---------------------------------- -------------------------------------------------------------
Business and financial review (continued)
Emerging risks (continued) Key mitigating actions
--------------------------------- --------------------------------------------------------------
Banking reform, ring fencing
and resolution: The relevant * The majority of CYBG's activities are expected to be
regulatory authorities permitted activities for ring-fenced banks under the
in the UK and Europe have proposed rules. To the extent that the final rules
proposed reforms to a apply, CYBG does not expect to make changes to its
number of aspects of the current legal structure and it is the intention of
banking sector, including, the Group that activities which do not comply with
among others, institutional the final rules for a ring-fenced bank will be
structure, resolution discontinued. Based on current proposals this is not
procedures, payment services expected to have a material impact on CYBG's
and deposit guarantees. operations.
While the impact of these
regulatory developments
remains uncertain, CYBG * CYBG assesses each publication and appropriate action
expects that the evolution is taken where required. A refresh of the Recovery
of these and future initiatives and Resolution Plan is ongoing and will take account
could impact on CYBG's of the new rules, including incoming proposals.
business, financial conditions
and results of operations.
--------------------------------- --------------------------------------------------------------
Minimum Requirement for
own funds and Eligible * CYBG has responded to the PRA Consultation Paper,
Liabilities (MREL): While issued by the regulator in December 2015, and the
not applicable until 2020, MREL is expected to be advised to CYBG in 2016. MREL
MREL has the potential will take effect from 2020. The impact on CYBG may
to increase funding costs involve issuing forms of debt that can be bailed-in
due to the need to hold which would be expected to raise the overall cost of
a greater value of debt funds of CYBG.
that can be subject to
a bail in. The requirements
remain subject to Regulatory
interpretation and CYBG
expects - the evolution
of this could raise further
potential risk.
--------------------------------- --------------------------------------------------------------
Potential changes to UK
corporation tax: The UK * CYBG's Tax team reviews emerging legislation,
tax environment for Banking assesses its likely impact, advises management and,
Groups is unsettled. Recent if considered appropriate, recommends mitigating
legislative changes have actions.
reduced the rate at which
historic tax losses may
be used to offset profits. * CYBG is an active participant in industry bodies
A further reduction (from debating proposed changes. Further, CYBG responds,
50% to 25%) was announced both through relevant industry bodies and directly,
in the March 2016 budget, to significant published consultations. This direct
though details, including engagement minimises the risk of legislation being
the start date and interaction developed without proper regard to practical
with other proposed tax circumstances that may impact CYBG and other tax
changes, are not yet available. payers.
This change, if enacted
alongside further reduction * CYBG maintains ongoing relationships with
in the mainstream rate professional accounting and legal advisors to ensure
of tax, will require a it is appraised of technical developments and their
reassessment of the carrying potential implications.
value of deferred tax
assets. This may result
in a significant adverse
impact on the total value
of deferred tax assets
recognised on the balance
sheet. Other changes announced
but not yet enacted include
a proposed restriction
on the tax deductibility
of interest and interest-like
amounts. Any restriction
in interest expense could
increase the tax charge.
The application of this
proposed change to Financial
Services businesses is
under consultation between
the industry and HM Treasury.
--------------------------------- --------------------------------------------------------------
Use of data: The EU Commissions
General Data Protection * CYBG has policies and controls in place for use of
Regulation is to be introduced data relative to employees and any third-party
from 25 May 2018 meaning service providers.
that CYBG will be subject
to increased regulatory
burden when processing * Technological efficiency and automation are widely
personal Customer, employee used in CYBG's business to process high volumes of
and other data in the transactions enabling centralised control.
conduct of its business
and may be subject to
increased sanctions for * Process improvements and enhancements have been
breach. Changes to legislation implemented to enhance data capture, data management
may also inhibit CYBG's and validation.
ability to use data to
carry out its business
objectives. * CYBG continues to monitor legal and regulatory
developments to ensure the Group remains compliant.
--------------------------------- --------------------------------------------------------------
Statement of Directors' responsibilities
The Directors confirm that to the best of their knowledge these
interim condensed consolidated financial statements have been
prepared in accordance with International Accounting Standard 34,
"Interim Financial Reporting" ("IAS 34") as adopted by the European
Union and that the interim management report includes a fair review
of the information required by DTR 4.2.7R and DTR 4.2.8R,
namely:
a) an indication of important events that have occurred during
the six months ended 31 March 2016 and their impact on the
condensed consolidated interim financial statements and a
description of the principal risks and uncertainties for the
remaining six months of the financial year; and
b) material related party transactions in the six months ended
31 March 2016 and any material changes in the related party
transactions described in the last annual report of CYBI
Limited.
Signed by order of the Board
David Duffy
Chief Executive Officer
23 May 2016
Independent review report to the members of CYBG PLC
Introduction
We have been engaged by CYBG PLC to review the condensed set of
financial statements in the half-yearly financial report for the
six months ended 31 March 2016 which comprises the interim
condensed consolidated income statement, interim condensed
consolidated statement of comprehensive income, interim condensed
consolidated balance sheet, interim condensed consolidated
statement of changes in equity, interim condensed consolidated
statement of cash flows and the related explanatory notes 1 to 23.
We have read the other information contained in the half-yearly
financial report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the condensed set of financial statements.
This report is made solely to the Company in accordance with
guidance contained in International Standard on Review Engagements
2410 (UK and Ireland) "Review of Interim Financial Information
Performed by the Independent Auditor of the Entity" issued by the
Auditing Practices Board. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the
Company, for our work, for this report, or for the conclusions we
have formed.
Directors' Responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the Directors. The Directors are responsible
for preparing the half-yearly financial report in accordance with
International Accounting Standard 34, "Interim Financial
Reporting," as adopted by the European Union and the Disclosure and
Transparency Rules of the United Kingdom's Financial Conduct
Authority.
As disclosed in note 1, the annual financial statements of the
Group are prepared in accordance with International Financial
Reporting Standards as adopted by the European Union. The condensed
set of financial statements included in this half-yearly financial
report has been prepared in accordance with International
Accounting Standard 34, "Interim Financial Reporting", as adopted
by the European Union.
Our Responsibility
Our responsibility is to express to CYBG PLC a conclusion on the
condensed set of financial statements in the half-yearly financial
report based on our review.
Scope of Review
We conducted our review in accordance with International
Standard on Review Engagements 2410 (UK and Ireland), "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK and Ireland) and consequently does not enable us to
obtain assurance that we would become aware of all significant
matters that might be identified in an audit. Accordingly, we do
not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 31
March 2016 is not prepared, in all material respects, in accordance
with International Accounting Standard 34 as adopted by the
European Union and the Disclosure and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
Ernst & Young LLP
London
23 May 2016
Interim condensed consolidated financial statements
Contents
Interim condensed consolidated income statement
Interim condensed consolidated statement of comprehensive
income
Interim condensed consolidated balance sheet
Interim condensed consolidated statement of changes in
equity
Interim condensed consolidated statement of cash flows
1. Basis of preparation and accounting policies
2. Segment information 39
3. Net interest income 41
4. Non-interest income 42
5. Operating and administrative expenses
6. Taxation
7. Earnings per share 45
8. Related party transactions
9. Other financial assets and liabilities at fair value
10. Derivative financial instruments
11. Loans and advances to customers
12. Impairment provisions on credit exposures
13. Deferred tax
14. Provisions for liabilities and charges
15. Debt securities in issue
16. Retirement benefit obligations
17. Called up share capital
18. Total equity
19. Contingent liabilities and commitments
20. Fair value of financial instruments
21. Financial risk management
22. Capital management overview
23. Events after the balance sheet date
Interim condensed consolidated income statement
for the six months ended 31 March 2016
6 months 6 months 12 months
to to to 30
Sep 2015
(audited)
31 Mar 31 Mar GBPm
2016 2015
(unaudited) (unaudited)
Note GBPm GBPm
Interest income and
similar income 550 554 1,110
Interest expense and
similar charges (150) (164) (323)
------------- ------------- -----------
Net interest income 3 400 390 787
Gains less losses on
financial instruments
at fair value 3 6 2
Other operating income 89 150 238
------------- ------------- -----------
Non-interest income 4 92 156 240
Total operating income 492 546 1,027
Personnel expenses (137) (120) (266)
Restructuring expenses - (12) (17)
Depreciation and amortisation
expense (41) (40) (83)
Other operating and
administrative expenses (225) (191) (868)
Total operating and
administrative expenses
before impairment losses 5 (403) (363) (1,234)
Operating profit/(loss)
before impairment losses 89 183 (207)
Impairment losses on
credit exposures 12 (31) (28) (78)
Profit/(loss) on ordinary
activities before tax 58 155 (285)
Tax (expense)/credit 6 (22) (18) 56
Profit/(loss) for the
period 36 137 (229)
============= ============= ===========
Profit/(loss) attributable
to ordinary shareholders 6 137 (247)
Profit attributable
to other equity holders 30 - 18
------------- ------------- -----------
Profit/(loss) for the
period attributable
to equity holders 36 137 (229)
============= ============= ===========
Basic and diluted earnings
per share (pence) 7 1.4 16.9 (28.7)
Comparative disclosures have been amended to conform with the
current period's presentation as detailed in note 1.
All material items dealt with in arriving at the profit/(loss)
before tax for the above periods relate to continuing
activities.
The notes on pages 36 to 81 form an integral part of these
interim condensed consolidated financial statements.
Interim condensed consolidated statement of comprehensive
income
for the six months ended 31 March 2016
6 months 6 months
to to
31 Mar 31 Mar
2016 2015
12 months
to 30
Sep 2015
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
Profit/(loss) for the
period 36 137 (229)
------------- ------------- -----------
Items that may be reclassified
to the income statement
Change in cash flow hedge
reserve
Gains during the period 34 8 21
Transfers to the income
statement (1) (11) (18)
Taxation thereon (8) - -
------------- ------------- -----------
25 (3) 3
Change in available for
sale reserve
Gains during the period 3 9 5
Transfers to the income
statement (1) - -
Taxation thereon (1) (2) (1)
------------- ------------- -----------
1 7 4
Total items that may be
reclassified to the income
statement 26 4 7
------------- ------------- -----------
Items that will not be reclassified
to the income statement
Remeasurement of defined
benefit pension plans 58 (6) (36)
Taxation thereon (15) 1 7
------------- ------------- -----------
43 (5) (29)
Change in asset revaluation
reserve
Transfer to retained profits (1) (1) -
Taxation thereon - - -
(1) (1) -
Total items that will
not be reclassified to
the income statement 42 (6) (29)
------------- ------------- -----------
Other comprehensive income/(losses)
net of tax 68 (2) (22)
Total comprehensive income/(losses)
for the period net of
tax 104 135 (251)
============= ============= ===========
Total comprehensive income/(losses)
attributable to ordinary
shareholders 74 135 (269)
Total comprehensive income
attributable to other
equity holders 30 - 18
------------- ------------- -----------
Total comprehensive income/(losses)
attributable to equity
holders 104 135 (251)
Comparative disclosures have been amended to conform with the
current period's presentation as detailed in note 1.
The notes on pages 36 to 81 form an integral part of these
interim condensed consolidated financial statements.
Interim condensed consolidated balance sheet
as at 31 March 2016
31 Mar 30 Sep
2016 2015
31 Mar
(unaudited) 2015 (unaudited) (audited)
Note GBPm GBPm GBPm
Assets
Cash and balances with
central banks 4,974 7,084 6,431
Due from related entities 8 - 883 786
Due from other banks 1,266 227 128
Financial assets available
for sale 1,478 1,197 1,462
Other financial assets
at fair value 9 898 1,347 1,097
Derivative financial
instruments 10 396 385 285
Loans and advances to
customers 11 28,516 26,763 27,482
Due from customers on
acceptances 3 5 4
Current tax assets - 5 4
Property, plant and
equipment 101 111 109
Investment properties 27 38 32
Property inventory - 2 -
Investments in controlled
entities and associates - 2 2
Intangible assets 285 237 265
Deferred tax assets 13 381 316 389
Defined benefit pension
assets 16 135 91 52
Other assets 263 232 177
Total assets 38,723 38,925 38,705
============= ================== ===========
Liabilities
Due to other banks 783 1,032 393
Other financial liabilities
at fair value 9 53 79 67
Derivative financial
instruments 10 522 620 534
Due to customers 26,237 25,251 26,407
Liabilities on acceptances 3 5 4
Current tax liabilities 2 - -
Provisions for liabilities
and charges 14 1,141 756 1,006
Due to related entities 8 - 1,792 998
Debt securities in issue 15 4,285 4,096 3,766
Retirement benefit obligations 16 4 4 4
Deferred tax liabilities 13 41 18 10
Other liabilities 2,121 2,098 2,073
Total liabilities 35,192 35,751 35,262
------------- ------------------ -----------
Equity
Share capital 17 88 2,232 223
Other equity instruments 18 450 450 450
Share premium 18 - - 670
Capital reorganisation
reserve 18 (839) - -
Merger reserve 18 633 - -
Other reserves 18 32 - 4
Retained earnings 18 3,167 492 2,096
------------- ------------------ -----------
Total equity 3,531 3,174 3,443
Total liabilities and
equity 38,723 38,925 38,705
============= ================== ===========
The notes on pages 36 to 81 form an integral part of these
interim condensed consolidated financial statements.
These interim condensed consolidated financial statements were
approved by the Board of Directors on 23 May 2016 and were signed
on its behalf by:
David Duffy Ian Smith
Chief Executive Officer Chief Financial Officer
Company name: CYBG PLC, Company number: 09595911
Interim condensed consolidated statement of changes in
equity
for the six months ended 31 March 2016
Capital Cash
Share Capital reorganisation Merger Other Equity-based Asset Available flow
Share premium redemption reserve reserve equity compensation revaluation for sale hedge Retained Total
capital account reserve GBPm GBPm instruments reserve reserve reserve reserve earnings equity
Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 October
2014 (audited) 1,882 - 100 - - 300 2 2 8 (16) 260 2,538
Profit for the
period - - - - - - - - - - 137 137
Other
comprehensive
income/(losses) - - - - - - - (1) 7 (3) (5) (2)
------- ------- ---------- -------------- -------- ----------- ------------ ----------- --------- ------- -------- ------
Total comprehensive
income/(losses) for
the period - - - - - - - (1) 7 (3) 132 135
Capital note
issued - - - - - 150 - - - - - 150
Shares issued 350 - - - - - - - - - - 350
Equity-based
compensation
expensed - - - - - - 4 - - - - 4
Transfer from capital
redemption reserve - - (100) - - - - - - - 100 -
Equity-based
compensation
settled - - - - - - (3) - - - - (3)
------- ------- ---------- -------------- -------- ----------- ------------ ----------- --------- ------- -------- ------
As at 31 March
2015
(unaudited) 17,18 2,232 - - - - 450 3 1 15 (19) 492 3,174
Loss for the
period - - - - - - - - - - (366) (366)
Other
comprehensive
income/(losses) - - - - - - - 1 (3) 6 (24) (20)
------- ------- ---------- -------------- -------- ----------- ------------ ----------- --------- ------- -------- ------
Total comprehensive
income/(losses) for
the period - - - - - - - 1 (3) 6 (390) (386)
AT1 distribution
paid (net of
tax) - - - - - - - - - - (14) (14)
Share capital
reduction (2,009) - - - - - - - - - 2,009 -
Shares issued - 670 - - - - - - - - - 670
Transfer to
equity-based
compensation reserve - - - - - - 1 - - - (1) -
Equity-based
compensation
expensed - - - - - - 3 - - - - 3
Equity-based
compensation
settled - - - - - - (4) - - - - (4)
------- ------- ---------- -------------- -------- ----------- ------------ ----------- --------- ------- -------- ------
As at 30 September 2015
(audited) (1) 17,18 223 670 - - - 450 3 2 12 (13) 2,096 3,443
Profit for the period - - - - - - - - - - 36 36
Other comprehensive
income/(losses) - - - - - - - (1) 1 25 43 68
------- ------- ---------- -------------- -------- ----------- ------------ ----------- --------- ------- -------- ------
Total comprehensive
income/(losses) for
the period - - - - - - - (1) 1 25 79 104
AT1 distribution paid
(net of tax) - - - - - - - - - - (18) (18)
Insertion of new parent
company (223) (670) - 893 - - - - - - - -
Share for share
exchange 1,099 - - (1,732) 633 - - - - - - -
Share capital reduction (1,011) - - - - - - - - - 1,011 -
Capital note repurchase
(net of tax) - - - - - (450) - - - - (5) (455)
Capital note issued - - - - - 450 - - - - - 450
Transfer from
equity-based
compensation reserve - - - - - - (4) - - - 4 -
Equity-based
compensation expensed - - - - - - 5 - - - - 5
Equity-based
compensation settled - - - - - - 2 - - - - 2
------- ------- ---------- -------------- -------- ----------- ------------ ----------- --------- ------- -------- ------
As at 31 March 2016
(unaudited) 17,18 88 - - (839) 633 450 6 1 13 12 3,167 3,531
======= ======= ========== ============== ======== =========== ============ =========== ========= ======= ======== ======
(1) The closing balances as at 30 September 2015 have been
audited; however, the movements in the individual six month periods
to 31 March and 30 September 2015 are unaudited.
Comparative disclosures have been amended to conform with the
current period's presentation as detailed in note 1.
The notes on pages 36 to 81 form an integral part of these
interim condensed consolidated financial statements.
Interim condensed consolidated statement of cash flows
for the six months ended 31 March 2016
6 months
6 months to 12 months
to 31 31 Mar to 30
Mar 2016 2015 Sep 2015
(unaudited) (unaudited) (audited)
Note GBPm GBPm GBPm
Operating activities
Profit/(loss) on ordinary
activities before tax 58 155 (285)
Adjustments for:
Non-cash or non-operating
items included in profit/(loss)
before tax (327) (386) (679)
Changes in operating
assets (1,990) (1,024) (1,494)
Changes in operating
liabilities 343 1,237 1,983
Interest received 534 577 1,257
Interest paid (98) (203) (418)
Tax repayment received - - 5
Tax received/(paid) -
group relief 5 (13) (20)
------------- ------------- -----------
Net cash (used in)/provided
by operating activities (1,475) 343 349
------------- ------------- -----------
Cash flows from investing
activities
Interest received 7 4 8
Proceeds from sale or
maturity of investments 101 - -
Proceeds from sale of
tangible fixed assets
(1) 8 8 17
Purchase of tangible
fixed assets (1) (7) (5) (19)
Purchase of investments (100) - (269)
Purchase and development
of intangible assets (49) (51) (119)
Net cash used in investing
activities (40) (44) (382)
------------- ------------- -----------
Cash flows from financing
activities
Interest received 1 2 3
Interest paid (51) (64) (122)
Proceeds from ordinary
shares issued 17 - 350 1,020
Proceeds from other equity
instruments issued 18 450 150 150
Repurchase of other equity
instruments 18 (457) - -
Redemption of medium-term
notes - - (427)
Repurchase of subordinated
debt 8 (474) (591) (591)
Redemption, principal
repayment and other movements
on residential mortgage
backed securities and
covered bonds (435) (123) (921)
Issuance of residential
mortgage backed securities
and covered bonds - 709 1,207
Issuance of subordinated
debt 15 475 - -
Net decrease in amounts
due from related entities 786 588 686
Net decrease in amounts
due to related entities (115) (143) (512)
AT1 distributions (23) - (18)
Net cash provided by financing
activities 157 878 475
------------- ------------- -----------
Net (decrease)/increase in
cash and cash equivalents (1,358) 1,177 442
Cash and cash equivalents
at the beginning of the period 6,337 5,895 5,895
Cash and cash equivalents
at the end of the period
(2) 4,979 7,072 6,337
============= ============= ===========
(1) Tangible fixed assets include property, plant and equipment,
investment properties and property inventory.
(2) Cash and cash equivalents is cash and balances with central
banks less mandatory deposits plus cash equivalents within other
assets, less due to other banks, due to related entities and other
liabilities.
The notes on pages 36 to 81 form an integral part of these
interim condensed consolidated financial statements.
1. Basis of preparation and accounting policies
On 8 February 2016, CYBG PLC became the new holding company for
the CYBI Group by way of a share for share exchange and was
unconditionally listed on the London Stock Exchange. On the basis
that the transaction was effected by creating a new parent that is
itself not a business, the transaction is considered to be outside
the scope of IFRS 3 Business Combinations. It has therefore been
accounted for using the pooling of interest method as a
continuation of the existing Group. The condensed consolidated
interim financial statements of CYBG PLC Group ("the Group") for
the six months ended 31 March 2016 comprise the results of CYBG PLC
consolidated with those of its subsidiaries, including CYBI. The
comparative figures provided are those of the CYBI Group.
These interim condensed consolidated financial statements for
the six months ended 31 March 2016 have been prepared in accordance
with IAS 34 "Interim Financial Reporting" as adopted by the
European Union ("EU"). They do not include all the information
required by International Financial Reporting Standards ("IFRS") in
full annual financial statements and should be read in conjunction
with the annual report and consolidated financial statements of
CYBI for the year ended 30 September 2015, which were prepared in
accordance with IFRS as adopted by the EU. Copies of the CYBI 2015
annual report and consolidated financial statements are available
upon request from Investor Relations, CYBG PLC, 20 Merrion Way,
Leeds, Yorkshire, LS2 8NZ.
The information in these interim condensed consolidated
financial statements is unaudited and does not constitute annual
accounts within the meaning of Section 434 of the Companies Act
2006 ("the Act"). Statutory accounts for the period ended 30
September 2015 have been delivered to the Registrar of Companies
and contained an unqualified audit report under Section 495 of the
Act, which did not draw attention to any matters by way of emphasis
and they did not contain any statements under Section 498 of the
Act.
Going concern
The Group's business activities, together with the factors
likely to affect its future development, performance and position
are set out in the business and financial review section of these
interim condensed consolidated financial statements. This should be
read in conjunction with the comments in the strategic report which
can be found in the annual report and consolidated financial
statements of CYBI Group for the year ended 30 September 2015. In
addition, note 40 to those financial statements includes the
Group's risk management objectives and note 22 of this Interim
financial report highlights the Group's objectives, policies and
processes for managing its capital.
The Directors have a reasonable expectation that the Group has
adequate resources to continue in operational existence for the
foreseeable future and therefore believe that the Group is well
placed to manage its business risks successfully. Accordingly, they
continue to adopt the going concern basis in preparing these
interim condensed consolidated financial statements.
Accounting policies
The accounting policies adopted in the preparation of these
interim condensed consolidated financial statements are consistent
with, and are a continuation of, those policies followed in the
preparation of the CYBI annual report and consolidated financial
statements for the year ended 30 September 2015. Reflecting the
changes in the Group resulting from its demerger and IPO, newly
applicable accounting policies in relation to earnings per share,
updates to the Group's policies on share based payments, the
equity-based compensation reserve and the presentation of tax on
AT1 distributions are detailed below:
Earnings per share
Basic earnings per share is calculated by taking the profit
attributable to ordinary shareholders of the parent company and
dividing this by the weighted-average number of ordinary shares
outstanding during the period. Any own shares held in employee
benefit trusts are excluded from this calculation.
Diluted earnings per share requires that the weighted average
number of ordinary shares in issue is adjusted to assume conversion
of all dilutive potential ordinary shares. These arise from awards
made under share-based incentive schemes. Share awards with
performance conditions attaching to them are not considered to be
dilutive unless these conditions have been met at the reporting
date.
1. Basis of preparation and accounting policies (continued)
Equity based compensation
The Group engages in share-based payment transactions in respect
of services received from certain of its employees and to provide
long term incentives. The fair value of the services received is
recognised as an expense. The total amount to be expensed is
measured by reference to the fair value of the CYBG shares,
performance options or performance rights granted, including, where
relevant, any market performance conditions and any non-vesting
conditions.
The impact of any service and non-market performance vesting
conditions are not included in the fair value and instead are
included in estimating the number of awards or options that are
expected to vest.
The total expense is recognised over the vesting period, which
is the period over which all of the specified vesting conditions
are to be satisfied. A corresponding credit is recognised in the
equity-based compensation reserve. In some circumstances employees
may provide services in advance of the grant date and therefore the
grant date fair value is estimated for the purposes of recognising
the expense during the period between start of the service period
and grant date.
At the end of each reporting period, the Group revises its
estimates of the number of shares, performance options and
performance rights that are expected to vest based on the
non-market and service vesting conditions. The impact of the
revision to original estimates, if any, is recognised in the income
statement, with a corresponding adjustment to the equity-based
compensation reserve.
Equity-based compensation reserve
The Group's equity-based compensation reserve records the value
of equity-settled share based payment benefits provided to the
Group's employees as part of their remuneration that has been
charged through the income statement adjusted for deferred tax.
In comparative periods the equity-based compensation reserve
represented the outstanding fair value amount in respect of share
based payment expense recharged by the Group's former ultimate
parent, NAB, which had been charged through the income statement
and adjusted for deferred tax.
At the date of the demerger, current and former employees of the
Group held awards granted in previous periods for which vesting is
subject to continuing employment, and in some instances specified
performance criteria being met. Following the demerger, existing
unvested awards remain in place. NAB will settle the awards granted
to Group employees in previous periods in accordance with the
original terms of the grant. The Group will compensate NAB for the
cost of the awards provided to the Group's employee. Subsequent to
the demerger, the amounts payable to NAB in respect of such awards
no longer meet the definition of share based payments under IFRS 2:
Share based payment. Consequently, amounts within the equity-based
compensation reserve relating to outstanding NAB awards were
reclassified to Due to other banks in the consolidated balance
sheet immediately following the demerger.
Conduct Indemnity
As part of the demerger, NAB and the Company have entered into a
Conduct Indemnity Deed. The accounting for this matter is discussed
in note 14.
Presentation of tax on AT1 distributions
In comparative periods, the tax deduction associated with AT1
distributions was recognised in the income statement rather than
directly in equity. Whilst this approach is permitted under IFRS,
it is not aligned with other UK banks. Accordingly, the accounting
policy has been revised to require recognition of the AT1
distributions directly in equity, net of any tax relief. This has
resulted in a restatement of comparative amounts as described
below.
1. Basis of preparation and accounting policies (continued)
Restatement of comparative amounts
The change in the accounting policy in relation to AT1
distributions has resulted in the tax credit associated with the
distributions now being recognised directly in equity rather than
in the income statement. The profit after tax attributable to other
equity holders of GBP30m (31 March 2015: GBPNil and 30 September
2015: GBP18m) is partly offset in reserves by a tax credit
attributable to ordinary shareholders of GBP5m on AT1 dividends (31
March 2015: GBPNil and 30 September 2015: GBP4m) and a GBP1m tax
credit attributable to ordinary shareholders on the refinancing of
the AT1 debt (31 March 2015: GBPNil and 30 September 2015:
GBPNil).
The impact on the Group's result for the year ended 30 September
2015 was a decrease in the Tax credit by GBP4m from GBP60m to
GBP56m, increasing the loss for the year from GBP225m to GBP229m.
There was a corresponding decrease in the amounts taken to Retained
earnings in relation to AT1 distributions by GBP4m from GBP18m to
GBP14m. In addition, note 6 'Taxation' has been impacted by the
restatement. There has been no impact on the Group's total assets,
net assets or closing reserves as a result of the change.
Accounting developments
No new IASB pronouncements have been adopted in the period.
An overview of pronouncements that will be relevant to the Group
in future periods (including IFRS 9) is provided on pages 41 to 43
of CYBI's annual report and consolidated financial statements for
the year ended 30 September 2015. An update on the Group's
implementation of IFRS 9 is also provided below.
The IASB has subsequently issued the following further
pronouncements relevant to the Group. The impact of these
pronouncements is being assessed by the Group.
-- IFRS 16 "Leases", issued January 2016 and effective for
financial years beginning on or after 1 January 2019. The new
standard requires lessees to recognise a right of use asset and a
liability for future payments arising from a lease contract. Lessor
accounting requirements remain aligned to the current approach
under IAS 17.
-- Amendments to IAS 12: Recognition of deferred tax on
unrealised losses, issued January 2016 and effective for financial
years beginning on or after 1 January 2017. The amendments clarify
the requirements on the recognition of deferred tax assets for
unrealised losses.
-- Amendments to IAS 7: Statement of cash flows, issued January
2016 and effective for financial years beginning on or after 1
January 2017. The amendments are part of the IASB's "disclosures
initiative" and require additional disclosure about an entity's
financing activities.
-- Clarifications to IFRS 15: Revenue from Contracts with
Customers, issued in April 2016 and effective for financial years
beginning on or after 1 January 2018 (the same effective date as
IFRS 15 itself). The amendments clarify certain underlying
principles of IFRS 15 and provide additional transitional relief
options.
Update on the implementation of IFRS 9
The Group has mobilised an IFRS 9 project to ensure
implementation in line with the effective date within the standard
and, where applicable to the scope, scale and nature of the Group's
objectives, other regulatory guidance. The primary objectives of
the project include defining accounting policies and approaches,
ensuring risk models meet the required specifications; delivery of
data and system changes; and updating the operating model and
overall governance framework.
The project has representation from both the Finance and Risk
functions with a steering committee and a formal project control
board in place to provide the necessary oversight.
The project is in the process of defining and confirming
appropriate methodologies with the intention of building a number
of risk models during 2016/17 in order to allow sufficient time to
perform detailed testing during 2017. This will be followed by a
parallel run ahead of our adoption date on 1 October 2018 (assuming
the standard has been endorsed for adoption in the EU prior to that
date).
1. Basis of preparation and accounting policies (continued)
Critical accounting estimates and judgements
The preparation of financial statements requires the use of
certain critical accounting estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses
and the disclosed amount of contingent liabilities. Assumptions
made at each balance sheet date are based on best estimates at that
date. Although the Group has internal control systems in place to
ensure that estimates can be reliably measured, actual amounts may
differ from those estimated.
The only significant change to the bases upon which estimates
have been determined, compared to those applied at 30 September
2015, relates to retirement benefit obligations. The actuarial
assumptions used in the valuation of the Group's defined benefit
plan have been updated to reflect market conditions at 31 March
2016. The scheme assets and defined benefit obligation are
disclosed in note 16 of this report
Conduct risk provisions are discussed in note 14, deferred tax
assets are discussed in note 13, further information on fair value
of financial instruments is disclosed in note 20 and the pension
assets and defined benefit obligation is disclosed in note 16 of
this report.
2. Segment information
The Group's operating segments are operating units engaged in
providing different products or services and whose operating
results and overall performance are regularly reviewed by the
entity's Chief Operating Decision Maker, the Chief Executive
Officer.
The Group's business is organised into two principal operating
segments: SME Banking and Retail Banking. The Central Functions of
the Group consist of: Customer Trust & Confidence, Finance,
Risk, Operations & IT, Legal & Governance, CEO Office
Support, Customer Experience, Products & Marketing, Strategy
& Transformation, Treasury and People & Communications.
"Other" (which in previous periods was incorporated into Central
Functions) reflects certain elements of expenditure that are not
recharged to the Group's two principal operating segments such as
conduct related provisions and restructuring costs.
SME Banking
The Group's established regional SME franchise offers a full
range of business banking products and services to meet customers'
banking needs across its Business Direct, small business,
commercial and specialist and acquisition finance segments.
The Group's SME franchise is comprised of micro businesses
(which the Group defines as businesses with no lending outstanding
and turnover of less than GBP120,000), Business Direct (which the
Group defines as businesses with outstanding lending of less than
GBP0.1m and turnover of less than GBP750,000), small businesses
(which the Group defines as businesses with lending of GBP0.1m to
GBP0.25m and greater than GBP750,000 but less than GBP2.0m in
turnover) and commercial businesses (which the Group defines as
businesses with lending of higher that GBP0.25m and greater than
GBP2.0m in turnover). Across all business segments, the Group
provides working capital solutions through asset finance, invoice
finance, international trade, merchant acquiring and treasury
services.
The Group offers a full range of lending products and services
across a portfolio consisting of term lending, overdrafts and
working capital solutions through its SME franchise:
-- Term lending: the Group offers a wide variety of term loans,
both secured and unsecured, and offers customers a range of
repayment and interest rate options. The majority of the Group's
business term lending is LIBOR based.
-- Overdrafts: business overdrafts are the primary type of
revolving variable rate credit facility offered by the Group to
business customers.
-- Invoice finance: the Group advances funds against the customer's trade receivables.
-- Asset finance: these products provide a method of financing capital equipment purchases.
2. Segment information (continued)
-- International trade services: these products facilitate
transactions between a buyer and seller located in different
countries. The Group offers import loans, export loans, documentary
collections and currency guarantees, together with letters of
credit for securing trade.
-- Private banking: a fee based service targeted at higher net
worth customers, primarily business owners, providing tailored
solutions to meet their financial requirements.
Retail Banking
The Group has a comprehensive regional and national retail
banking product proposition with a personal deposit portfolio
comprising of PCAs, savings accounts and term deposits. The Group's
retail loan portfolio comprises of mortgages, personal loans,
credit cards and overdrafts:
-- PCA: a stable source of funding with a large number of PCA
customers having a tenure with the Group of more than ten
years.
-- Savings accounts: the Group offers a variety of savings
accounts that pay a variable rate of interest. It also offers cash
ISAs with competitive rates that offer depositors tax free
returns.
-- Term deposits (sometimes referred to as "fixed rate savings
accounts" or "time deposits"): offer a fixed interest rate for a
fixed term.
-- Mortgages: the Group provides mortgage loans on a capital
repayment basis, where the loan is required to be repaid during its
life, and on an interest-only basis, where the customer pays
interest during the term of the mortgage loan with the principal
balance required to be repaid in full at maturity. The Group offers
both owner-occupied mortgage loans (pursuant to which the borrower
is the owner and occupier of the mortgaged property) and BTL loans
(pursuant to which the borrower intends to let the mortgaged
property).
-- Personal loans: the Group provides unsecured personal loans
through its branch network to retail and private banking customers
and through its digital and telephone distribution channels.
-- Credit cards: the Group currently offers three credit card
products, Private MasterCard, Business MasterCard and Gold
MasterCard.
-- Overdrafts: the Group provides overdraft lending across a
variety of PCA products, subject to the account holder's status.
Overdrafts comprise both planned and unplanned borrowing.
Major customers
Revenues from no one single customer amount to greater than 10%
of the Group's revenues.
Geographical areas
The Group has no operations outside the UK and therefore no
secondary geographical area information is presented.
Operating segments SME Retail Central
6 months ended 31 Mar 2016 (unaudited) Banking Banking Functions Other Total
GBPm GBPm GBPm GBPm GBPm
Net interest income 139 234 27 - 400
Non-interest income 39 42 10 1 92
--------- --------- ----------- ------ -------
Operating income 178 276 37 1 492
Operating and administrative expenses (36) (59) (258) (50) (403)
Impairment losses on credit exposures (1) (20) (11) - - (31)
--------- --------- ----------- ------ -------
Segment operating profit/(loss) before tax 122 206 (221) (49) 58
Average interest-earning assets 10,430 18,653 6,911 - 35,994
========= ========= =========== ====== =======
2. Segment information (continued)
Operating segments SME Retail Central
6 months ended 31 Mar 2015 (unaudited) Banking Banking Functions Other Total
GBPm GBPm GBPm GBPm GBPm
Net interest income 141 230 19 - 390
Non-interest income 36 46 13 61 156
--------- --------- ----------- ------ -------
Operating income 177 276 32 61 546
Operating and administrative expenses (41) (58) (246) (18) (363)
Impairment losses on credit exposures (1) (20) (8) - - (28)
--------- --------- ----------- ------ -------
Segment operating profit/(loss) before tax 116 210 (214) 43 155
Average interest-earning assets 11,333 16,849 7,162 - 35,344
========= ========= =========== ====== =======
Operating segments SME Retail Central
12 months ended 30 Sept 2015 (audited) Banking Banking Functions Other Total
GBPm GBPm GBPm GBPm GBPm
Net interest income 274 461 52 - 787
Non-interest income 77 94 6 63 240
--------- --------- ----------- ------ --------
Operating income 351 555 58 63 1,027
Operating and administrative expenses (82) (116) (529) (507) (1,234)
Impairment losses on credit exposures (1) (45) (33) - - (78)
--------- --------- ----------- ------ --------
Segment operating profit/(loss) before tax 224 406 (471) (444) (285)
Average interest-earning assets 10,908 17,400 7,472 - 35,780
========= ========= =========== ====== ========
(1) The impairment losses on Retail Banking credit exposures of
GBP11m (31 March 2015: GBP8m and 30 September 2015: GBP33m)
includes losses on certain retail products attributable to SME
(private banking) customers.
3. Net interest income
6 months 6 months 12 months
to to to 30
31 Mar 31 Mar Sep 2015
2016 (unaudited) 2015 (unaudited) (audited)
GBPm GBPm GBPm
Interest income and similar
income
Loans and advances to other
banks 12 13 28
Financial assets available
for sale 5 4 8
Loans and advances to customers 516 514 1,033
Financial assets at fair
value through profit or
loss 15 20 37
Due from related entities
(note 8) 1 2 3
Other interest income 1 1 1
------------------ ------------------ -----------
Total interest income and
similar income 550 554 1,110
Less: Interest expense and
similar charges
Due to other banks 2 4 5
Financial liabilities at
fair value through profit
or loss - - 1
Due to customers 97 96 195
Debt securities in issue 40 42 82
Due to related entities
(note 8) 11 22 40
Total interest expense and
similar charges 150 164 323
Net interest income 400 390 787
================== ================== ===========
4. Non-interest income
6 months 6 months 12 months
to to to 30
31 Mar 31 Mar Sep 2015
2016 (unaudited) 2015 (unaudited) (audited)
GBPm GBPm GBPm
Gains less losses on financial
instruments at fair value
Interest rate derivatives 6 (7) 29
Other assets and liabilities
at fair value (2) 3 (29)
Ineffectiveness arising
from fair value hedges (1) 8 1
Ineffectiveness arising
from cash flow hedges - 2 1
------------------ ------------------ ---------------
3 6 2
Other operating income
Fees and commission 77 72 144
Margin on foreign exchange
derivative brokerage 10 11 19
Net fair value movement
on investment properties - - (1)
Other income 2 67 76
89 150 238
Total non-interest income 92 156 240
================== ================== ===============
The movement in fair value of assets incorporates valuation
movements for certain financial assets which are designated at
inception as fair value through profit or loss. These assets are
predominantly fixed interest rate loans which are measured at fair
value. The movements in fair value are recognised in the income
statement as part of non-interest income. The fair value of these
loans is derived from the future loan cash flows using appropriate
discount rates and includes adjustments for credit risk and credit
losses. In general, as interest rates fall, the carrying value of
the loan portfolio increases. Conversely, as interest rates rise,
the carrying value of the loan portfolio decreases. Similarly, if
credit spreads widen, the fair value of these loans will decrease,
and vice versa. A credit risk gain associated with fair value loans
of GBP5m has been recognised in the current period (31 March 2015:
GBP6m and 30 September 2015: GBP24m). The valuation technique used
is reflective of current market practice.
In the period ended 31 March 2016 other income includes a gain
of GBP1m (31 March 2015: GBPNil and 30 September 2015: GBP2m) on
early repurchase of medium term subordinated debt (notes 8 and 15)
and a gain of GBPNil (31 March 2015: GBP61m and 30 September 2015:
GBP61m) arising on capital restructures. A loss of GBPNil arising
on a capital restructure is included in related entity charges
(notes 5 and 8) (31 March 2015: GBP2m and 30 September 2015:
GBP2m).
In December 2014, GBP650m of Tier 2 subordinated debt issued was
redeemed. These instruments would have become progressively
ineligible for Tier 2 treatment under CRD IV's transitional rules
from 1 January 2015 as well as being impacted by the introduction
of a 25% capital limit under Pillar 2A. These instruments were
replaced by an issue of GBP350m of ordinary shares and an issue of
AT1 capital instruments of GBP150m to NAB. As a result of the
redemptions, the prior year results include gains of GBP61m in
other income arising on capital restructures and a further gain of
GBP2m on early redemption of medium term funding on 30 September
2015, resulting in total gains in the year to 30 September 2015 of
GBP63m.
On 8 February 2016, the Group's existing AT1 and Tier 2
Subordinated Debt were repurchased and replaced with the issuance
of GBP450m AT1 Capital and GBP475m Tier 2 Subordinated Debt issued
by CYBG PLC.
5. Operating and administrative expenses
6 months 6 months 12 months
to to to 30
31 Mar 31 Mar Sep 2015
2016 (unaudited) 2015 (unaudited) (audited)
GBPm GBPm GBPm
Personnel expenses
Salaries, wages and non-cash
benefits 89 82 175
Related personnel expenses 12 10 22
Defined contribution pension
expense 9 8 16
Defined benefit pension
expense/(credit) 15 (3) 11
Equity based compensation 5 4 7
Other personnel expenses 7 19 35
------------------ ------------------ -----------
137 120 266
Restructuring expenses
Restructuring expenses (note
14) - 12 17
Depreciation and amortisation
expense
Depreciation of property,
plant and equipment 13 13 26
Amortisation of intangible
assets 28 27 57
------------------ ------------------ -----------
41 40 83
Other operating and administrative
expenses
Operating lease rental 15 14 32
Other occupancy charges 19 20 38
Related entity charges (note
8) 4 9 20
Impairment losses on software - - 10
Payment Protection Insurance
redress expense (note 14) 44 - 390
Other conduct expenses (note
14) 2 - 75
Other operating and administrative
expenses 141 148 303
225 191 868
Total operating and administrative
expenses 403 363 1,234
================== ================== ===========
Other operating expenses includes the FSCS levy charge of GBPNil
(31 March 2015: GBPNil and 30 September 2015:
GBP14m). The FSCS levy is recognised in April each year in accordance with IFRIC 21.
Related entity charges include a loss on capital restructuring
of GBPNil (31 March 2015: GBP2m and 30 September 2015: GBP2m)
(notes 4 and 8).
6. Taxation
The tax assessed for the period differs from the standard rate
of Corporation Tax in the UK (20%). A reconciliation from the
expense implied by the standard rate to the actual tax expense is
as follows:
6 months 6 months 12 months
to to to 30
31 Mar 31 Mar Sep 2015
2016 (unaudited) 2015 (unaudited) (audited)
GBPm GBPm GBPm
Profit/(loss) on ordinary
activities before tax 58 155 (285)
================== ================== ===========
Tax expense/(credit) based
on the standard rate of
Corporation Tax in the UK
of 20% (March and September
2015: 20.5%) 12 32 (58)
Effects of:
Impact of Corporation Tax
rate change 5 (1) 1
Disallowable expenses 5 1 8
Conduct indemnity adjustment (4) - -
Regulatory capital and debt
restructure - (12) (12)
Deferred tax on losses not
recognised 2 - 16
Non-deductible FCA fine - 4 4
Adjustments in respect of
prior years 2 (6) (15)
Tax expense/(credit) for
the period 22 18 (56)
================== ================== ===========
Comparative disclosures have been amended to conform with the
current period's presentation as detailed in note 1.
Finance Act (No2) 2015 introduced the Bank Surcharge for the
banking entity within the Group from 1 January 2016, being an 8%
charge on taxable profits above GBP25m before the offset of brought
forward losses or group relief. There are no taxable profits in the
underlying banking entity and accordingly no surcharge liability
arises.
The 'Conduct indemnity adjustment' represents the receipt from
the Group's former parent less refunds attributable in accordance
with the indemnity agreement (note 14).
The impact of the corporation tax rate change is discussed in
note 13 Deferred Tax.
7. Earnings per share
The Group presents basic and diluted earnings per share (EPS)
data in relation to the ordinary shares of CYBG PLC.
31 Mar 31 Mar 30 Sep
2016 (unaudited) 2015 (unaudited) 2015 (unaudited)
GBPm GBPm GBPm
Profit/(loss) attributable
to ordinary shareholders 6 137 (247)
Tax relief on AT1 distribution
attributable to ordinary
equity holders (note 1) 5 - 4
Tax relief on loss on repurchase
of CYBI AT1 issued to NAB 1 - -
------------------ ------------------ ------------------
Profit/(loss) attributable
to ordinary equity holders
for the purposes of basic
and diluted EPS 12 137 (243)
------------------ ------------------ ------------------
31 Mar 31 Mar 30 Sep
2016 (unaudited) 2015 (unaudited) 2015 (unaudited)
Number Number Number
of shares of shares of shares
(million) (million) (million)
Weighted-average number
of ordinary shares in issue
* Basic 880 812 846
* Diluted 880 812 846
Basic earnings per share
(pence) 1.4 16.9 (28.7)
================== ================== ==================
Diluted earnings per share
(pence) 1.4 16.9 (28.7)
================== ================== ==================
The numbers of shares used for calculating the earnings per
share are those of CYBG PLC. The number of CYBI shares in the
comparative periods have been converted into the equivalent number
of CYBG PLC shares to reflect the corporate reorganisation on 8
February 2016 (note 1).
8. Related party transactions
As explained in note 1, on 8 February 2016, CYBG PLC became the
new holding company for the CYBI Group by way of a share for share
exchange and was listed on the London Stock Exchange. Following the
demerger and completion of the IPO, NAB no longer controls, jointly
controls or has significant influence over the Company or its
subsidiaries. Consequently, there is no related party relationship
between NAB and the Company or its subsidiaries following the
demerger date. As a result, amounts due to and due from NAB and its
controlled entities have been reclassified from 8 February 2016, as
explained below.
As the related party relationship ceased between the Group and
NAB at the date of the demerger, only those transactions with NAB
taking place up to the demerger date are reportable as related
party transactions. The comparative financial information has not
been restated.
During the period there have been transactions between the
Group, NAB, controlled entities of NAB, controlled entities of the
Group, and other related parties.
The Group provides a range of services to NAB and controlled
entities of NAB, including the provision of banking facilities,
granting loans and accepting deposits.
The Group receives a range of services from NAB and its related
parties, including loans and deposits, foreign exchange and various
technical and administrative services.
Subsequent to the date of the demerger, these are governed by
Transitional Service Arrangements and Reverse Transitional Service
Arrangements.
8. Related party transactions (continued)
31 Mar 31 Mar 30 Sep
2016 (unaudited) 2015 (unaudited) 2015 (audited)
GBPm GBPm GBPm
Amounts due from NAB Group
Loans - 675 673
Other receivables - 208 113
- 883 786
==================== ================== ================
The interest income on the amounts due from NAB was GBP1m to 8
February 2016 (31 March 2015: GBP2m and 30 September 2015: GBP3m)
(note 3).
31 Mar 31 Mar 30 Sep
2016 (unaudited) 2015 (unaudited) 2015 (audited)
GBPm GBPm GBPm
Amounts due to NAB Group
Deposits - 898 125
Residential mortgage backed
securities - 396 382
Subordinated debt - 478 478
Other payables - 20 13
- 1,792 998
==================== ================== ================
The interest expense on the amounts due to NAB was GBP11m to 8
February 2016 (31 March 2015: GBP22m and 30 September 2015: GBP40m)
(note 3).
On 30 September 2015, the Company redeemed GBP429m of medium
term notes with NAB early, resulting in a gain of GBP2m. The gain
was included within other income along with other capital
restructuring gains of GBP61m.
On 8 February 2016, amounts due from NAB were reclassified as
amounts due from other banks. Deposits and Other payables
previously classified within Amounts due to NAB were reclassified
as amounts due to other banks. The comparative financial
information has not been restated.
Subordinated debt
Subordinated debt comprises dated loan capital which is
currently owned by NAB. Prior to the demerger, the subordinated
debt was included within amounts due to related entities on the
balance sheet. Subordinated debt outstanding at 31 March 2016 is
included in debt securities in issue (note 15). The comparative
financial information has not been restated.
Interest on the debt is payable at fixed rates, is subordinated
to the claims of other creditors and is unsecured. The debt is
employed in the general business of the Group.
On 8 February 2016, the Group repurchased GBP475m of
subordinated debt from NAB at a market value of GBP474m, resulting
in a gain on capital restructure of GBP1m included within other
income (note 4). The replacement notes issued on 8 February 2016
are disclosed in note 15.
The rates of interest stated
below applied to the Notes 31 Mar 31 Mar 30 Sep
prior to their repayment 2016 (unaudited) 2015 (unaudited) 2015 (audited)
on 8 February 2016: GBPm GBPm GBPm
10 year, non-call with a
final maturity of 20 December
2023 - LIBOR +3.41% - 300 300
10 year, non-call with a
final maturity of 25 January
2021 - LIBOR + 4.42% - 175 175
- 475 475
Other subordinated notes - - -
Accrued interest payable - 3 3
-------------------- ------------------ ----------------
Total subordinated debt - 478 478
==================== ================== ================
8. Related party transactions (continued)
On 29 December 2014, the Group repaid GBP232m of subordinated
debt to NAB at a market value of GBP206m, resulting in a gain on
capital restructure of GBP26m included within other income. A
further GBP343m was repaid to National Equities Limited at a market
value of GBP308m, resulting in a gain of GBP35m. The combined gain
on capital restructures of GBP61m is reflected in note 4. The Group
also repaid GBP75m subordinated debt to NAB at a market value
GBP77m, resulting in a loss on capital restructure of GBP2m
included within other operating and administrative expenses (note
5).
Securitisation
The Group has securitised part of its residential mortgage
portfolio and the cash raised from the issue of residential
mortgage backed securities ("RMBS") through structured entities
forms part of the Group's medium term funding. A portfolio of BTL
mortgages has been securitised through the Lannraig Master Trust
Issuer programme and a total of GBP366m (31 March 2015: GBP396m and
30 September 2015: GBP382m) of the securities issued are held by
NAB. Following the demerger, these notes are included within debt
securities in issue (note 15). The comparative financial
information has not been restated.
Derivatives
The following derivative positions were held with NAB:
31 Mar 31 Mar 30 Sep
2016 (unaudited) 2015 (unaudited) 2015 (audited)
GBPm GBPm GBPm
Derivative financial assets
Designated as hedging instruments - 126 86
Designated as held for trading - 101 60
-------------------- ------------------ ----------------
- 227 146
==================== ================== ================
Derivative financial liabilities
Designated as hedging instrument - 242 173
Designated as held for trading - 343 263
-------------------- ------------------ ----------------
- 585 436
==================== ================== ================
On 8 February 2016, derivative positions held with NAB were
reclassified as derivatives with third parties (note 10).
Other transactions with 6 months 6 months 12 months
NAB Group to to to 30
31 Mar 31 Mar Sep 2015
2016 (unaudited) 2015 (unaudited) (audited)
GBPm GBPm GBPm
Gain on repurchase of subordinated
debt 1 61 63
------------------ ------------------ -----------
Non-interest income received - 2 10
------------------ ------------------ -----------
Other operating and administrative
expenses (note 5) 4 9 20
------------------ ------------------ -----------
9. Other financial assets and liabilities at fair value
Financial assets 31 Mar
31 Mar 2015 30 Sep
2016 (unaudited) (unaudited) 2015 (audited)
GBPm GBPm GBPm
Other financial assets at
fair value through profit
or loss
Loans and advances 898 1,347 1,097
================== ============= ================
Other financial liabilities
at fair value through profit
or loss
Due to customers - term
deposits 53 79 67
================== ============= ================
Derivatives which do not meet the requirements for hedge
accounting and that are related to loans held at fair value through
profit or loss are accounted for as held for trading derivative
financial instruments (note 10).
Loans and advances
Included in other financial assets at fair value is a portfolio
of loans. Interest rate risk associated with these loans is managed
using interest rate derivative contracts and the loans are recorded
at fair value to avoid an accounting mismatch. The maximum credit
exposure of the loans is GBP898m (31 March 2015: GBP1,347m and 30
September 2015: GBP1,097m). The cumulative loss in the fair value
of the loans attributable to changes in credit risk amounts to
GBP32m (31 March 2015: GBP58m and 30 September 2015: GBP38m) and
the change for the current period is a reduction of GBP6m (31 March
2015: reduction of GBP16m and 30 September 2015: reduction of
GBP36m).
The Group ceased further sales of this suite of loan products
with effect from 30 April 2012 with the loans classified as Level 3
in the fair value hierarchy (note 20).
Due to customers - term deposits
Included in other financial liabilities at fair value are fixed
rate deposits, the interest rate risk on which is hedged using
interest rate derivative contracts. The deposits are recorded at
fair value to avoid an accounting mismatch.
The change in fair value attributable to changes in the Group
credit risk is GBPNil (31 March 2015: GBPNil and 30 September 2015:
GBPNil). The Group is contractually obligated to pay GBP3m (31
March 2015: GBP5m and 30 September 2015: GBP4m) less than the
carrying amount at maturity to the deposit holder.
10. Derivative financial instruments
The Group uses derivatives for risk mitigation purposes and does
not have a trading book. However, derivatives that do not meet the
hedging criteria within IAS 39, or those for which hedge accounting
is not appropriate, are accounted for as held for trading (although
they are used for risk mitigation purposes). The tables below
analyse derivatives between those designated as hedging instruments
and those classified as held for trading.
31 Mar 31 Mar 30 Sep
2016 (unaudited) 2015 (unaudited) 2015 (audited)
GBPm GBPm GBPm
Fair value of derivative
financial assets
Designated as hedging instruments 193 126 103
Designated as held for trading 203 259 182
------------------ ------------------ ----------------
396 385 285
================== ================== ================
Fair value of derivative
financial liabilities
Designated as hedging instruments 213 242 244
Designated as held for trading 309 378 290
------------------ ------------------ ----------------
522 620 534
================== ================== ================
10. Derivative financial instruments (continued)
The derivative financial instruments held by the Group are
further analysed below with the notional contract amount being the
amount from which the cash flows are derived and is not an
indication of the amounts at risk relating to these contracts.
Total derivative contracts Notional Fair Fair
as at 31 March 2016 (unaudited) contract value value
amount of assets of liabilities
GBPm GBPm GBPm
Derivatives designated as
hedging instruments
Cash flow hedges
Interest rate swaps 15,550 77 51
Cross currency swaps 783 27 11
FX forward contracts 5 - -
---------- ----------- ----------------
16,338 104 62
Fair value hedges
Interest rate swaps 1,453 77 151
Cross currency swaps 154 12 -
---------- ----------- ----------------
1,607 89 151
Derivatives designated as
held for trading
Foreign exchange rate related
contracts
Spot and forward contracts 2,217 57 54
Cross currency swaps 150 6 9
Options 319 6 6
---------- ----------- ----------------
2,686 69 69
Interest rate related contracts
Swaps 1,820 107 211
Swaptions 54 - -
Options 584 2 4
---------- ----------- ----------------
2,458 109 215
Commodity related contracts 154 25 25
Total derivative contracts 23,243 396 522
========== =========== ================
Total derivative contracts Notional Fair Fair
as at 31 March 2015 (unaudited) contract value value
amount of assets of liabilities
GBPm GBPm GBPm
Derivatives designated as
hedging instruments
Cash flow hedges
Interest rate swaps 13,580 35 64
Cross currency swaps 683 - 67
---------- ----------- ----------------
14,263 35 131
Fair value hedges
Interest rate swaps 1,253 61 69
Cross currency swaps 876 30 42
---------- ----------- ----------------
2,129 91 111
Derivatives designated as
held for trading
Foreign exchange rate related
contracts
Spot and forward contracts 1,931 71 62
Cross currency swaps 454 32 6
Options 325 7 7
---------- ----------- ----------------
2,710 110 75
Interest rate related contracts
Swaps 2,630 128 274
Swaptions 76 - 1
Options 407 3 10
---------- ----------- ----------------
3,113 131 285
Commodity related contracts 167 18 18
Total derivative contracts 22,382 385 620
========== =========== ================
10. Derivative financial instruments (continued)
Total derivative contracts Notional Fair Fair
as at 30 September 2015 contract value value
(audited) amount of assets of liabilities
GBPm GBPm GBPm
Derivatives designated as
hedging instruments
Cash flow hedges
Interest rate swaps 16,655 46 76
Cross currency swaps 843 8 53
---------- ----------- ----------------
17,498 54 129
Fair value hedges
Interest rate swaps 1,452 35 115
Foreign exchange rate swaps 499 14 -
---------- ----------- ----------------
1,951 49 115
Derivatives designated as
held for trading
Foreign exchange rate related
contracts
Spot and forward and futures
contracts 1,990 47 38
Cross currency swaps 150 5 5
Options 273 2 2
---------- ----------- ----------------
2,413 54 45
Interest rate related contracts
Swaps 2,084 105 217
Swaptions 67 - 1
Options 706 1 5
---------- ----------- ----------------
2,857 106 223
Commodity related contracts 160 22 22
Total derivative contracts 24,879 285 534
========== =========== ================
Certain derivative financial assets and liabilities have been
booked in consolidated structured entities.
The Group hedges the foreign currency exposure on material
non-GBP denominated assets and macro hedges its interest rate
exposure using cash flow hedges. The Group hedging positions also
include those designated as foreign currency and interest rate
hedges of debt issued from the Group's securitisation and covered
bond programmes respectively. The carrying value of the currency
assets and liabilities within the Group fluctuates as a result of
foreign exchange movements. There is a corresponding (and
offsetting) movement in the value of the hedging derivatives.
11. Loans and advances to customers
31 Mar 31 Mar 30 Sep
2016 (unaudited) 2015 (unaudited) 2015 (audited)
GBPm GBPm GBPm
Overdrafts 1,544 1,662 1,563
Credit cards 386 363 376
Lease finance 457 407 426
Mortgages 21,513 19,642 20,504
Other term lending - SME 4,056 4,035 4,025
Other term lending - retail 746 806 763
Other lending 23 37 30
------------------ ------------------ ----------------
Gross loans and advances
to customers 28,725 26,952 27,687
Accrued interest receivable 78 76 75
Unearned income (26) (26) (26)
Deferred and unamortised
fee income (27) (23) (24)
Impairment provisions on
credit exposures (note 12) (234) (216) (230)
28,516 26,763 27,482
================== ================== ================
The Group has transferred GBP5,342m (31 March 2015: GBP5,916m
and 30 September 2015: GBP5,923m) of mortgages through
securitisation arrangements that do not qualify for derecognition
from the balance sheet. The mortgages do not qualify for
derecognition because the Group remains exposed to the risks and
rewards of ownership on an ongoing basis. Prior to any relevant
hedging arrangements, the Group continues to be exposed primarily
to the credit risk, liquidity risk and interest rate risk of the
mortgages. The Group is also exposed to the residual rewards of the
mortgages as a result of its ability to benefit from the future
performance of the mortgages through the receipt of deferred
consideration. The carrying amount of the associated liability
before transactional costs is GBP3,023m (31 March 2015: GBP3,335m
and 30 September 2015: GBP3,413m).
Included within loans and advances to customers are GBP1,357m
(31 March 2015: GBP2,253m and 30 September 2015: GBP1,475m) of
mortgages assigned to a bankruptcy remote special purpose entity,
Clydesdale Covered Bonds LLP No 2. These loans provide security for
issues of covered bonds made by the Group. These transactions do
not qualify for derecognition from the balance sheet. At 31 March
2016 there were GBP750m (31 March 2015: GBP1,125m and 30 September
2015: GBP721m) of covered bonds in issue under the programme.
The Group also has a portfolio of fair valued loans and advances
(note 9). Combined with the above this is equivalent to net loans
and advances of GBP29,414m (31 March 2015: GBP28,110m and 30
September 2015: GBP28,579m).
11. Loans and advances to customers (continued)
Maximum exposure to credit risk
The maximum exposure to credit risk is disclosed in note 21.
Distribution of loans and advances by credit quality
As at 31 March Retail Credit Lease
2016 overdrafts cards finance Total
(unaudited) SME Other
lending retail
Mortgages (1) lending
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Gross loans and
advances:
Neither past due
nor impaired 65 374 448 21,179 5,297 657 28,020
Past due but not
impaired 9 12 7 266 153 15 462
Impaired - - 2 68 173 - 243
----------- ------ -------- --------- -------- -------- ------
74 386 457 21,513 5,623 672 28,725
=========== ====== ======== ========= ======== ======== ======
As at 31 March
2015 Other
(unaudited) Retail Credit Lease retail
overdrafts cards finance lending Total
SME
lending
Mortgages (1)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Gross loans and
advances:
Neither past due
nor impaired 78 350 399 19,298 5,419 705 26,249
Past due but not
impaired 7 13 3 289 131 16 459
Impaired - - 5 55 184 - 244
----------- ------ -------- --------- -------- --------- ------
85 363 407 19,642 5,734 721 26,952
=========== ====== ======== ========= ======== ========= ======
As at 30 September
2015 Other
(audited) Retail Credit Lease retail
overdrafts cards finance lending Total
SME
lending
Mortgages (1)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Gross loans and
advances:
Neither past due
nor impaired 70 363 418 20,170 5,277 668 26,966
Past due but not
impaired 9 13 6 268 172 15 483
Impaired - - 2 66 170 - 238
----------- ------ -------- --------- -------- --------- ------
79 376 426 20,504 5,619 683 27,687
=========== ====== ======== ========= ======== ========= ======
(1) SME lending includes business overdrafts.
Credit quality of loans and advances
The Group has an internally developed credit rating system that
uses data drawn from a number of sources to assess the potential
risk in lending to the Group's customers. This system assigns an
indication of the probability of default ("PD") for each customer
and can be broadly mapped to external agencies rating scales.
Impaired assets consist of SME lending and secured personal lending
where current circumstances indicate that losses of loan principal
and/or interest may be incurred.
11. Loans and advances to customers (continued)
Distribution of loans and advances neither past due nor
impaired
The credit quality of the portfolio of loans and advances that
were neither past due nor impaired can be assessed by reference to
the Group's standard credit rating system. The credit rating system
is supported by a variety of financial analytics, combined with
processed market information to provide the main inputs for the
measurement of counterparty risk. All internal risk ratings are
tailored to the various categories and are derived in accordance
with the Group's rating policy.
The table below presents the analysis of SME lending credit
quality of loans and advances that are neither past due nor
impaired:
31 Mar
31 Mar 2015 30 Sep
2016 (unaudited) (unaudited) 2015 (audited)
GBPm GBPm GBPm
Senior investment grade 1,133 1,136 1,174
Investment grade 1,581 1,626 1,615
Sub-investment grade 3,031 3,056 2,906
------------------ ------------- ----------------
5,745 5,818 5,695
================== ============= ================
For the SME lending analysis, investment grades are determined
by the Customer Rating System ("eCRS") as defined under the Group's
Credit Risk Management policy:
Description eCRS PD
Senior investment grade 1 to 5 0 < 0.11
0.11 <
Investment grade 6 to 11 0.55
0.55 <
Sub-investment grade 12 to 23 99.99
The loan-to-value ratio of retail mortgage lending, coupled with
the relationship of the debt to customers' income, is key to the
credit quality of these loans. The table below sets out the indexed
loan-to-value analysis of the Group's retail mortgages:
31 Mar 31 Mar 30 Sep
2016 (unaudited) 2015 (unaudited) 2015 (audited)
% % %
Less than 50% 34 29 34
50% to 75% 48 49 51
76% to 80% 6 7 5
81% to 85% 4 5 4
86% to 90% 3 3 2
91% to 95% 1 2 1
96% to 100% - 1 -
Greater than 100% - - -
Unknown 4 4 3
------------------ ------------------ ----------------
100 100 100
================== ================== ================
11. Loans and advances to customers (continued)
Loans and advances which were past due but not impaired
Loans and advances that are past due but not impaired are
classified as such for secured lending where the net current market
value of supporting security is sufficient to cover all principal,
interest and other amounts (including legal, enforcement,
realisation costs etc.) due on the facility. The distribution of
loans and advances that are past due but not impaired is analysed
below:
As at 31 March SME Other
2016 (unaudited) Retail Credit Lease lending retail
overdrafts cards finance Mortgages (1) lending Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
1 to 29 days past
due 8 6 7 77 79 5 182
30 to 59 days
past due 1 2 - 61 19 3 86
60 to 89 days
past due - 1 - 27 16 2 46
Past due 90 days
and over - 3 - 101 39 5 148
----------- ------ -------- --------- -------- -------- -----
9 12 7 266 153 15 462
=========== ====== ======== ========= ======== ======== =====
As at 31 March SME Other
2015 (unaudited) Retail Credit Lease lending retail
overdrafts cards finance Mortgages (1) lending Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
1 to 29 days
past due 6 6 3 83 62 5 165
30 to 59 days
past due - 2 - 84 11 3 100
60 to 89 days
past due - 1 - 15 3 2 21
Past due 90 days
and over 1 4 - 107 55 6 173
----------- ------ -------- --------- -------- -------- -----
7 13 3 289 131 16 459
=========== ====== ======== ========= ======== ======== =====
As at 30 September SME Other
2015 (audited) Retail Credit Lease lending retail
overdrafts cards finance Mortgages (1) lending Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
1 to 29 days
past due 8 6 6 77 110 5 212
30 to 59 days
past due - 2 - 57 17 3 79
60 to 89 days
past due - 2 - 36 9 2 49
Past due 90 days
and over 1 3 - 98 36 5 143
----------- ------ -------- --------- -------- -------- -----
9 13 6 268 172 15 483
=========== ====== ======== ========= ======== ======== =====
(1) SME lending includes business overdrafts.
12. Impairment provisions on credit exposures
Other
As at 31 March Retail Credit Lease retail
2016 overdrafts cards finance lending Total
SME
lending
Mortgages (1)
(unaudited) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Opening balance 5 7 2 39 166 11 230
Charge for the
period - 3 - 3 20 5 31
Amounts written
off (4) (4) - (1) (16) (6) (31)
Recoveries of
amounts written
off in previous
years 2 1 - - 1 1 5
Other (2) - - - - (1) - (1)
Closing balance 3 7 2 41 170 11 234
=========== ====== ======== ========= ======== ======== =====
Specific - - 1 22 67 - 90
Collective 3 7 1 19 103 11 144
----------- ------ -------- --------- -------- -------- -----
3 7 2 41 170 11 234
=========== ====== ======== ========= ======== ======== =====
Other
As at 31 March Retail Credit Lease retail
2015 overdrafts cards finance lending Total
SME
lending
Mortgages (1)
(unaudited) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Opening balance 8 10 2 27 185 13 245
Charge for the
period (1) 2 1 1 19 6 28
Amounts written
off (3) (5) (1) (3) (43) (8) (63)
Recoveries of
amounts written
off in previous
years 2 1 - - 4 1 8
Other (2) - - - - (2) - (2)
Closing balance 6 8 2 25 163 12 216
=========== ====== ======== ========= ======== ======== =====
Specific - - 1 15 69 - 85
Collective 6 8 1 10 94 12 131
----------- ------ -------- --------- -------- -------- -----
6 8 2 25 163 12 216
=========== ====== ======== ========= ======== ======== =====
Other
As at 30 September Retail Credit Lease retail
2015 overdrafts cards finance lending Total
SME
lending
Mortgages (1)
(audited) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Opening balance 8 10 2 27 185 13 245
Charge for the
year (2) 5 1 18 44 12 78
Amounts written
off (4) (10) (1) (6) (63) (16) (100)
Recoveries of
amounts written
off in previous
years 3 2 - - 5 2 12
Other (2) - - - - (5) - (5)
Closing balance 5 7 2 39 166 11 230
=========== ====== ======== ========= ======== ======== =====
Specific - - 1 22 69 - 92
Collective 5 7 1 17 97 11 138
----------- ------ -------- --------- -------- -------- -----
5 7 2 39 166 11 230
=========== ====== ======== ========= ======== ======== =====
(1) SME lending includes business overdrafts.
(2) Other includes the unwind of net present value elements of
specific provisions and other minor movements.
12. Impairment provisions (continued)
31 Mar 31 Mar 30 Sep
2016 (unaudited) 2015 (unaudited) 2015 (audited)
GBPm GBPm GBPm
Amounts included in
Loans and advances to customers
(note 11) 234 216 230
================== ================== ================
Non-accrual loans
Loans and advances to customers 243 244 238
Specific provisions (90) (85) (92)
153 159 146
================== ================== ================
13. Deferred tax
The Group recognises deferred tax attributable to the following
items:
31 Mar 31 Mar 30 Sep
2016 (unaudited) 2015 (unaudited) 2015 (audited)
GBPm GBPm GBPm
Deferred tax assets
Impairment provision on
credit exposures 2 6 3
Employee equity based compensation 1 1 1
Tax losses carried forward 246 210 273
Provisions - 13 -
Accelerated capital allowances 130 81 108
Cash flow hedge reserve 1 5 4
Other 1 - -
------------------ ------------------ ----------------
381 316 389
================== ================== ================
Deferred tax liabilities
Defined benefit pension
surplus 34 18 10
Cash flow hedge reserve 5 - -
Gains less losses on financial
instruments at fair value 2 - -
------------------ ------------------ ----------------
41 18 10
================== ================== ================
Net deferred tax asset 340 298 379
================== ================== ================
The Group had an unrecognised deferred tax asset of GBP2m (31
March 2015 GBPNil and 30 September 2015 GBP16m) representing
trading losses with a gross value of GBP8m (31 March 2015 GBPNil
and 30 September 2015 GBP80m) at the balance sheet date. A deferred
tax asset has not been recognised in respect of these losses as the
Directors have insufficient certainty over their recoverability in
the foreseeable future.
The statutory rate of UK corporation tax reduced to 20% on 1
April 2015 (Finance Act 2013). A reduction in mainstream UK rate of
corporation tax was also introduced in Finance Act (No 2) 2015,
lowering the rate from 20% to 19% on 1 April 2017 and to 18% on 1
April 2020. Finance Act (No 2) 2015 was substantively enacted on 26
October 2015.
Under IAS 12, deferred tax assets and liabilities are measured
at the tax rates that are expected to apply to the period when the
asset is realised or the liability is settled, based on tax rates
(and tax laws) that have been enacted or substantively enacted by
the balance sheet date. Accordingly, the deferred tax balances at
31 March 2016 have been reflected at the tax rates at which they
are expected to be realised or settled. On 31 March 2016 the
Group's structure was rationalised by transferring the trade and
assets of CYB Services Limited to Clydesdale Bank PLC. Deferred tax
assets have been valued reflecting the new structure.
Measures were announced in the Budget of 16 March 2016, which if
enacted, will reduce the UK corporation tax rate to 17% on 1 April
2020, further restrict the use of losses for banking entities to
25% of taxable profits for accounting periods beginning on or after
1 April 2016 and introduce a new restriction for all companies from
1 April 2017 where only 50% of taxable profits may be relieved with
brought forward losses. Details of the legislation or its enactment
date are not yet available and accordingly its impact is unknown
and is not reflected in these financial statements.
14. Provisions for liabilities and charges
31 Mar 31 Mar 30 Sep
2016 (unaudited) 2015 (unaudited) 2015 (audited)
GBPm GBPm GBPm
PPI redress provision
Opening balance 774 515 515
Charge to the income statement
(note 5) 44 - 390
Charge reimbursed under
Conduct Indemnity 406 - -
Utilised (248) (34) (131)
------------------ ------------------ ----------------
Closing balance 976 481 774
------------------ ------------------ ----------------
Other customer redress provisions
Opening balance 214 413 413
Charge to the income statement
(note 5) 2 - 76
Charge reimbursed under
Conduct Indemnity 19 - -
Utilised (80) (167) (275)
------------------ ------------------ ----------------
Closing balance 155 246 214
------------------ ------------------ ----------------
Restructuring provisions
(1)
Opening balance 18 24 24
Charge to the income statement
(note 5) - 12 17
Utilised (8) (7) (23)
Closing balance 10 29 18
Total provisions for liabilities
and charges 1,141 756 1,006
================== ================== ================
(1) Restructuring provision includes surplus lease space
provision.
A provision is recognised when there is a present obligation as
a result of a past event, it is probable that the obligation will
be settled and it can be reliably estimated. The most significant
of the provisions held at 31 March 2016 are in relation to conduct
risk related liabilities. The Group's economic exposure to the
impact of historic conduct related liabilities is mitigated by the
Capped Indemnity from NAB (see below).
The Group has provided its best estimate of conduct risk related
liabilities at 31 March 2016 which have arisen as a result of its
historical products and past sales practices.
To arrive at best estimates, management have exercised
significant judgement around the key assumptions that underpin the
estimates and used estimation techniques to quantify them. Ongoing
regulatory review and input, as well as rulings from the Financial
Ombudsman Service ("FOS") over time, and the Group's internal
reviews and assessments of customer complaints will continue to
impact upon the nature and extent of conduct related customer
redress and associated costs for which the Group may ultimately
become liable in future periods. Accordingly the total cost
associated with such conduct related matters remains inherently
uncertain.
Payment Protection Insurance ("PPI") redress
The Group has reassessed the level of provision that is
considered appropriate to meet current and future expectations in
relation to the mis-selling of PPI policies and has concluded that
a further charge of GBP450m is required incorporating the Group's
estimate of the impact of CP 15/39 and a proposed time bar for
complaints in summer 2018. It also incorporates a reassessment of
the costs of processing cases and the impact of experience
adjustments. Only 9.7% of the charge impacts the Group's income
statement (GBP44m) as a result of the conduct indemnity. The total
provision raised to date in respect of PPI is GBP1,646m (30
September 2015: GBP1,196m); with GBP976m of this remaining as at 31
March 2016 (30 September 2015: GBP774m) comprising GBP372m for
customer initiated complaints and proactive customer contact (30
September 2015: GBP301m); GBP301m for the remediation of complaints
closed prior to August 2014 (30 September 2015: GBP270m); and
GBP303m for costs of administering the redress programme (30
September 2015: GBP203m).
In common with the wider UK retail banking sector, the Group
continues to deal with complaints and redress issues arising out of
historic sales of PPI. To 31 March 2016, the Group has received
253,000 complaints and has allowed for 87,000 further walk in
complaints.
14. Provisions for liabilities and charges (continued)
PPI redress (continued)
The Group implemented a comprehensive new PPI complaint handling
process from August 2014 which involved making a number of
significant changes to the PPI operations, which resulted in an
increase in operational and administrative costs, in addition to
committing to undertake a full review of PPI complaints that were
closed prior to August 2014 (approximately 180,000). The Group has
begun to reopen these complaints and review the original decision
reached in light of the new PPI complaint handling processes. The
provision at 31 March 2016 includes a redress provision of GBP301m
for this review.
In addition to the remediation activity described above, the
Group is undertaking a past business review ("PBR") of certain PPI
sales to determine if there was actual or potential customer
detriment in the sales process leading to a risk of mis-sale and
the potential for proactive redress. The provision increase
incorporates a revised estimate of the cost of contacting and
redressing, where appropriate, customers who have faced actual
detriment or may have experienced potential detriment but who have
not actually raised a claim. Proactive customer mailings commenced
in March 2016 and will be complete by the end of the calendar year.
Key inputs to the calculation of the costs estimate such as the
level of customer response to mailings are not currently known but
have been based on relevant historical experience and related
industry data.
The increase in provision takes into account all of the above
factors as well as a revision in the Group's expectation of new
customer initiated complaints in light of current experience and CP
15/39 with the overall provision based on a number of assumptions
derived from a combination of past experience, estimated future
experience, industry comparison and the exercise of judgement in
the key areas identified. There remain risks and uncertainties in
relation to these assumptions and consequently in relation to the
ultimate costs of redress and related costs, including: (i) the
number of PPI claims (and the extent to which this is influenced by
the activity of claims management companies, the proposed
application of a time bar, Plevin, and FCA advertising); (ii) the
number of those claims that ultimately will be upheld; (iii) the
amount that will be paid in respect of those claims; (iv) any
additional amounts that may need to be paid in respect to
previously handled claims; (v) the response rates to the proactive
customer contact; and (vi) the costs of administering the
remediation programme.
As such, the factors discussed above mean there is a risk that
existing provisions for PPI customer redress may not cover all
potential costs. In light of this, the eventual costs of PPI
redress and complaint handling may therefore differ materially from
that estimated and further provision could be required.
Accordingly, the final amount required to settle the Group's
potential PPI liabilities remains uncertain.
The table below sets out the key assumptions and the effect on
the provision at 31 March 2016 of future, potential, changes in key
assumptions:
Assumptions Change in Sensitivity
assumption (1)
Number of expected future
customer initiated complaints +/-10% GBP24m
Uphold rates:
Future complaints +/-1% GBP4m
Pre August 2014 complaints
review +/-1% GBP8m
Customer contact response
rate
PBR customer contact response
rate (2) +/-1% GBP5m
Average redress costs (3) +/-1% GBP9m
(1) There are inter-dependencies between several of the key
assumptions which add to the complexity of the judgements the Group
has to make. This means that no single factor is likely to move
independently of others, however, the sensitivities disclosed above
assume all other assumptions remain unchanged. The sensitivities
disclosed do not incorporate the impact, if any, on the
administrative cost element of the provision.
(2) The Group's current estimate includes an expected customer
response rate of 40%. Approximately 87,000 proactive customer
mailings will be sent.
(3) Sensitivity to a change in average redress across customer
initiated complaints, pre August 2014 complaints review and PBR
customer populations.
14. Provisions for liabilities and charges (continued)
PPI redress (continued)
The number of complaints received is monitored against past
experience and future expectations and the Group will continue to
reassess the adequacy of the provision for this matter and the
assumptions underlying the provision calculation based upon
experience and other relevant factors as matters develop.
Other customer redress provisions
A provision for customer redress is held in those instances
where the Group expects to make payments to customers whether on an
ex-gratia or compensatory basis. Provisions can arise as a result
of legal or regulatory action and can incorporate the costs of
skilled persons, independent reviewers, and where appropriate other
elements of administration. The most significant of these relates
to the Group's IRHPs.
In 2012 the FSA announced that it had reached agreement with a
number of UK banks, including the Group, in relation to a review
and redress exercise on sales of certain interest rate hedging
products to small and medium sized businesses. The Group
implemented a programme to identify small and medium sized
customers that may have been affected and where due, pay financial
redress. On 31 March 2015 the FCA confirmed the closure of the
formal industry wide redress programme to new entrants.
The Group also undertook a secondary review of all past FRTBL
complaints not in scope of the formal review. Where the secondary
complaint assessment identified a different outcome, the customer
has been contacted and, if appropriate, redress offered. The Group
is also dealing with a number of new complaints from customers in
relation to FRTBLs.
The Group has reassessed the level of provision considered
necessary in light of the current and future expected claims for
all of these matters and concluded that no changes to the level of
provision held are required, reflecting the continued wind down of
the formal programmes, which are expected to have completed by the
end of the year, and the current level of complaints received.
Other provisions include amounts in respect of a number of
individually less significant conduct related matters, legal
proceedings, and claims arising in the ordinary course of the
Group's business. The ultimate cost to the Group of other customer
redress matters is driven by a number of factors relating to offers
of redress, compensation, offers of alternative products,
consequential loss claims and administrative costs. These factors
could result in the total cost of review and redress varying
materially from the Group's estimate. The final amount required to
settle the Group's potential liabilities in these matters is
therefore uncertain and further provision could be required.
Conduct Indemnity
The Company and NAB have entered into an agreement under which
NAB has provided the Company with a Capped Indemnity to meet the
costs of dealing with conduct matters in the period prior to the
demerger date (the "Conduct Indemnity Deed"). The legacy conduct
matters covered by the Capped Indemnity are referred to as
"Relevant Conduct Matters". The Capped Indemnity provides the CYBG
Group with economic protection against certain costs and
liabilities (including financial penalties imposed by a regulator)
resulting from conduct issues relating to:
a) Payment protection insurance, standalone interest rate
hedging products, voluntary scope tailored business loans and fixed
rate tailored business loans; and
b) Other conduct matters, subject to certain limitations and minimum financial thresholds.
Amounts payable under the Capped Indemnity include, subject to
certain limitations, payments to customers to satisfy, settle or
discharge a Relevant Conduct Matter and the direct costs and
expenses of satisfying, settling, discharging or administering such
Relevant Conduct Matter.
It has been agreed that NAB will meet 90.3% of Qualifying
Conduct Costs claimed by the Company, up to the amount of the
Capped Indemnity.
14. Provisions for liabilities and charges (continued)
Conduct Indemnity (continued)
Claims under the Capped Indemnity are recognised in the
consolidated income statement simultaneously with the charge for
Relevant Conduct Matters. The conduct expense and associated
reimbursement income are presented net within "Other operating and
administrative expenses". A reimbursement receivable is recognised
on the consolidated balance sheet within Due from Other Banks, this
receivable is periodically settled by NAB. The reimbursement
receivable is not offset against the provision amount on the
Group's consolidated balance sheet. The provision expense and
reimbursement income are disclosed above.
No reimbursement income or receivable is recognised on the
consolidated balance sheet in relation to contingent liabilities
for Relevant Conduct Matters. Any possible future reimbursement
income linked to contingent liabilities in respect of Relevant
Conduct Matters is not disclosed as a contingent asset as the
amounts cannot be reliably estimated and are not virtually certain
to be received.
To the extent that it is no longer probable that provisions for
a Relevant Conduct Matter previously raised will be required to
settle conduct obligations and a provision for a Relevant Conduct
Matter is released as unutilised, the related Capped Indemnity
amounts received will become repayable to NAB.
To the extent that tax relief is expected in relation to
provisions for which reimbursement income is applicable, amounts
may become repayable to NAB. In the consolidated financial
statements, deferred tax assets are only recognised in respect of
the Loss share proportion (9.7%) of unused tax losses on Relevant
Conduct Matters, on the basis that the Group does not obtain the
economic benefit of the future tax relief which is repayable to
NAB.
The utilisation and undrawn balance of the Capped Indemnity is
set out below:
Conduct
protection
(unaudited)
GBPm
Conduct protection provided
by NAB 1,700
Capital injected into CYBI
prior to demerger(1) (120)
Drawn in period to 30 September
2015(2) (465)
-------------
Undrawn Conduct Indemnity
as at 30 September 2015 1,115
Drawn in the period to 31
March 2016 (425)
Undrawn balance as at 31
March 2016 690
-------------
(1) GBP120m of the GBP670m of capital injected in CYBI on 24
September 2015 was related to the Conduct Indemnity Deed.
(2) GBP465m represents the Pre-Covered provision amount.
Restructuring provision
Restructuring of the business is currently ongoing and a
provision is held to cover redundancy payments, property vacation
costs and associated enablement costs. In the period to 31 March
2016 GBP8m was utilised. Subsequent to the period end the Group
announced the outcome of a voluntary severance programme and a
number of adjustments to its branch network (note 23).
Included within the restructuring provision is an amount for
committed rental expense on surplus lease space consistent with the
expected years' exposure on individual leases where the property is
unoccupied. This element of the provision will be utilised over the
remaining life of the leases or until the leases are assigned and
is measured at present values by discounting anticipated future
cash flows.
15. Debt securities in issue
31 Mar 31 Mar 30 Sep
2016 (unaudited) 2015 (unaudited) 2015 (audited)
GBPm GBPm GBPm
Residential mortgage backed
securities 3,012 2,953 3,017
Covered bonds 698 1,097 697
Subordinated debt 477 - -
------------------ ------------------ ----------------
4,187 4,050 3,714
Fair value hedge adjustments 64 15 38
------------------ ------------------ ----------------
Total securitised notes
and covered bonds 4,251 4,065 3,752
Accrued interest payable 34 31 14
4,285 4,096 3,766
================== ================== ================
There have been no new issuances of securitised debt or covered
bonds during the period ended 31 March 2016. On 8 February 2016,
the Lannraig RMBS held by NAB, were reclassified from due to
related entities (note 8) to debt securities in issue. Comparative
financial information has not been restated.
On 22 February 2016 the USD 800m Lanark 2012-2 1A note was
redeemed in line with the scheduled programme terms.
On 8 February 2016, the Group repurchased GBP475m of
subordinated debt from NAB at a market value of GBP474m, resulting
in a gain on debt restructure of GBP1m included within other income
(note 4). On the same day the Group issued GBP475m of subordinated
debt to NAB. Following the demerger from NAB on 8 February 2016,
subordinated debt and securitised debt issued to NAB, previously
included within amounts due to related entities (note 8), are
included within debt securities in issue. Comparative financial
information has not been restated.
Details of subordinated debt in excess of 10% of the total
balance of the subordinated debt are disclosed below:
31 Mar 31 Mar 30 Sep
2016 (unaudited) 2015 (unaudited) 2015 (audited)
GBPm GBPm GBPm
10-year, call five years
with a final maturity of
9 February 2026 - Fixed
5% 477 - -
Accrued interest payable 3 - -
------------------ ------------------ ----------------
Total subordinated debt 480 - -
================== ================== ================
16. Retirement benefit obligations
The Group operates both defined benefit and defined contribution
arrangements. Clydesdale Bank PLC is the sponsoring employer in one
funded defined benefit pension scheme, the Yorkshire and Clydesdale
Bank Pension Scheme ("the Scheme"). The Scheme was established
under trust on 30 September 2009 as the result of the merger of the
Clydesdale Bank Pension Scheme and the Yorkshire Bank Pension Fund.
The assets of the Scheme are held in a trustee administered fund,
the trustee is responsible for the operation and governance of the
Scheme, including making decisions regarding the Scheme's funding
and investment strategy.
The Scheme is subject to the funding legislation outlined in the
Pensions Act 2004 which came into force on 30 December 2005. This,
together with documents issued by the Pensions Regulator, sets out
the framework for funding defined benefit occupational pension
plans in the UK.
The Group also provides post-retirement health care under a
defined benefit scheme for pensioners and their dependent relatives
for which provision has been made. This is a closed scheme and the
provision will be utilised over the life of the remaining scheme
members.
16. Retirement benefit obligations (continued)
The following table provides a summary of the present value of
the defined benefit obligation and fair value of plan assets for
the Scheme:
31 Mar 31 Mar 30 Sep
2016 (unaudited) 2015 (unaudited) 2015 (audited)
GBPm GBPm GBPm
Active members defined benefit
obligation (970) (917) (891)
Deferred members defined
benefit obligation (1,403) (1,355) (1,299)
Pensioner and dependent
members defined benefit
obligation (1,334) (1,388) (1,323)
------------------ ------------------ ----------------
Total defined benefit obligation (3,707) (3,660) (3,513)
Fair value of scheme assets 3,842 3,751 3,565
------------------ ------------------ ----------------
Net defined benefit pension
asset 135 91 52
================== ================== ================
Post-retirement medical
benefits obligations (4) (4) (4)
================== ================== ================
17. Called up share capital
Allotted, called 31 Mar 30 Sep
up and fully paid 2016 2015
(unaudited) 30 Sep
31 Mar 2015
(audited) 2016 (unaudited) (audited)
Number Number
of Shares of Shares GBPm GBPm
Ordinary shares
Opening ordinary
share capital 2,232,012,512 1,882,012,500 223 1,882
Issued during the
period - 350,000,012 - 350
Share for share
exchange (1,352,697,256) - 876 -
Share capital reduction - - (1,011) (2,009)
Issued under employee
share schemes 1,966,592 - - -
---------------- -------------- ------------------ -----------
Closing ordinary
share capital 881,281,848 2,232,012,512 88 223
================ ============== ================== ===========
On 18 May 2015, the Company was incorporated as a public limited
company with 1 ordinary GBP1 share. On 11 September 2015, 49,999
ordinary shares of GBP1 were issued.
On 20 November 2015, the 50,000 ordinary shares were
consolidated into 1 ordinary share of GBP50,000 and then
immediately divided into ordinary shares with a nominal value of
GBP1.25 each in the capital of the Company on the basis of 40,000
divided ordinary shares for every 1 consolidated ordinary
share.
Listing on the London Stock Exchange and Australian Securities
Exchange
On 3 February 2016 CYBG PLC obtained a Premium listing on the
London Stock Exchange and listed on the Australian Securities
Exchange with effect from 4 February 2016.
On 8 February 2016, CYBG PLC became the new holding company for
the CYBI Group by way of a share for share exchange with its then
sole shareholder, NAB, and became unconditionally listed on the
London Stock Exchange. As a consequence of the insertion of the new
holding company, share capital, share premium and the capital
reorganisation reserve in the current period reflect CYBG PLC. The
comparative reflects CYBI. During the period 1,966,592 ordinary
shares were issued under employee share schemes with a nominal
value of GBP0.2m.
17. Called up share capital (continued)
Share for share exchange
On 8 February 2016, CYBG PLC issued 879,275,256 GBP1.25 ordinary
shares in exchange for the acquisition of the entire share capital
of CYBI which comprised of 2,232,012,512 GBP0.10 ordinary shares.
The consideration for the issuance of CYBG PLC shares was
determined by applying the 5-day volume weighted average price
(VWAP) of CYBG shares and CYBG Chess Depositary Instruments (CDI's)
over the first 5 trading days from 3 February 2016, giving a value
of GBP1,732m. The nominal value of the shares issued was GBP1,099m
and the balance of GBP633m was transferred to a Merger Reserve in
accordance with Section 612 of the Companies Act.
Share capital reduction
Following court approval, on 10 February 2016, the nominal share
capital of the Company was reduced to GBP0.10 per share by the
cancellation of GBP1.15 from the nominal value of each ordinary
share. Following the capital reduction GBP1,011m was transferred to
retained earnings.
18. Total equity
As a consequence of the insertion of the new holding
company, share capital, share premium and the capital
reorganisation reserve in the current period reflect
CYBG PLC. The comparative reflects CYBI.
31 Mar 31 Mar 30 Sep
2016 (unaudited) 2015 (unaudited) 2015 (audited)
GBPm GBPm GBPm
Share capital (note 17) 88 2,232 223
Share premium account - - 670
------------------ ------------------ ----------------
Total share capital and
share premium 88 2,232 893
------------------ ------------------ ----------------
Other equity instruments 450 450 450
Capital reorganisation reserve (839) - -
Merger reserve 633 - -
Equity-based compensation
reserve 6 3 3
Asset revaluation reserve 1 1 2
Available for sale reserve 13 15 12
Cash flow hedge reserve 12 (19) (13)
------------------ ------------------ ----------------
Total other reserves 32 - 4
------------------ ------------------ ----------------
Retained earnings 3,167 492 2,096
Total equity 3,531 3,174 3,443
================== ================== ================
Share premium account
On 19 June 2015, 1 ordinary share was issued by CYBI to National
Equities Limited for a nominal value of GBP0.10 and a premium of
GBP49,999,999.90. On 24 September 2015, one ordinary share was
issued by CYBI to National Equities Limited for a nominal value of
GBP0.10 and a premium of GBP619,999,999.90.
There is no share premium held within CYBG PLC.
18. Total equity (continued)
Other equity instruments
Other equity instruments represent AT1 notes. On 20 December
2013, Perpetual Capital Notes (6m LIBOR + 763bps) were issued with
a principal amount of GBP300m to NAB. These were perpetual
securities with no fixed maturity or redemption date and are
structured to qualify as AT1 instruments under CRD IV. A further
GBP150m Perpetual Capital Notes (6m LIBOR + 690bps) were issued to
NAB on 29 December 2014. AT1 distributions of GBP18m were paid in
June 2015 (being GBP14m net of tax). These AT1 notes were
repurchased by CYBI on 8 February 2016 for GBP457m. The resulting
loss of GBP7m (GBP5m net of tax) was recognised directly within
retained earnings.
AT1 distributions of GBP23m were paid in the current period
(being GBP18m net of tax).
In addition, on 8 February 2016, the Company issued Perpetual
Contingent Convertible Notes (fixed 8%) with a principal amount of
GBP450m to NAB with an optional redemption on 8 December 2022.
Capital reorganisation reserve
The capital reorganisation reserve was recognised on the
issuance of CYBG PLC ordinary shares in exchange for the
acquisition of the entire share capital of CYBI. The reserve
reflects the difference between the consideration for the issuance
of CYBG PLC shares and CYBI's share capital and share premium.
Merger reserve
As described in note 17, a merger reserve was recognised on the
issuance of CYBG PLC ordinary shares in exchange for the
acquisition of the entire share capital of CYBI. The merger reserve
reflects the difference between the consideration for the issuance
of CYBG PLC shares and the nominal value of the shares issued.
Equity-based compensation reserve
The Group's equity-based compensation reserve records the value
of equity-settled share based payment benefits provided to the
Group's employees as part of their remuneration that has been
charged through the income statement and adjusted for deferred
tax.
In comparative periods the equity-based compensation reserve
represents the outstanding fair value amount in respect of share
based payment expense recharged by the Group's former ultimate
parent, NAB, which has been charged through the income statement
and adjusted for deferred tax.
Asset revaluation reserve
The asset revaluation reserve includes the gross revaluation
increments and decrements arising from the revaluation of land and
buildings.
Available for sale reserve
The available for sale investments reserve records the gains and
losses arising from changes in the fair value of available for sale
financial assets.
Cash flow hedge reserve
The cash flow hedge reserve records fair value revaluations of
derivatives designated as cash flow hedging instruments to the
extent that they are effective.
As at 31 March 2016, the cash flow hedge reserve comprised
crystallised fair value losses arising from de-designated and
matured cash flow hedges of GBP7m (31 March 2015: GBP6m gain and 30
September 2015: GBP2m loss) offset by deferred gains on derivatives
in ongoing cash flow hedges of GBP23m (31 March 2015: GBP29m loss
and 30 September 2015: GBP15m loss). The balance on the cash flow
hedge reserve within the consolidated statement of changes in
equity is net of tax.
A GBP0.5m gain (31 March 2015: GBP9m gain and 30 September 2015:
GBP17m gain) was recycled into the income statement in relation to
de-designated and matured hedges in the period. GBP0.1m (31 March
2015: GBP2m and 30 September 2015: GBP1m) was transferred to the
income statement due to ineffectiveness arising from cash flow
hedges.
19. Contingent liabilities and commitments
The table below sets out the contractual amounts of contingent
liabilities and commitments which are not recorded on the balance
sheet. Contingent liabilities and commitments are credit-related
instruments which include acceptances, letters of credit,
guarantees and commitments to extend credit. The contractual
amounts do not represent the amounts at risk at the balance sheet
date but the amounts that would be at risk should the contracts be
fully drawn upon and the client default. Since a significant
portion of guarantees and commitments are expected to expire
without being drawn upon, the total of the contract amounts is not
representative of future liquidity requirements.
31 Mar 31 Mar 30 Sep
2016 (unaudited) 2015 (unaudited) 2015 (audited)
GBPm GBPm GBPm
Contingent liabilities
Guarantees and assets pledged
as collateral security:
At call - - -
Due in less than 3 months 15 23 25
Due between 3 months and
1 year 32 30 13
Due between 1 year and
3 years 9 7 9
Due between 3 years and
5 years 2 3 2
Due after 5 years 45 56 52
No specified maturity 4 7 8
------------------ ------------------ ----------------
107 126 109
================== ================== ================
Other commitments:
Undrawn formal standby
facilities, credit lines
and other commitments to
lend at call 7,790 8,052 7,801
================== ================== ================
Other contingent liabilities
Financial Services Compensation Scheme
The FSCS provides compensation to depositors in the event that a
financial institution is unable to repay amounts due. Following the
failure of a number of financial institutions, claims were
triggered against the FSCS, initially to pay interest on borrowings
which the FSCS has raised from the UK Government to support the
protected deposits. During 2015, the FSCS levy was also invoiced to
institutions for the third of three annual levies to cover capital
repayments to the UK Government. The principal of these borrowings,
which remains after the three annual levies have been paid, is
anticipated to be repaid from the realisation of the assets of the
defaulted institutions. The FSCS has however confirmed that the
size of the future levies will be kept under review in light of
developments from the insolvent estates.
The FSCS has estimated levies due to 31 March 2016 and an
accrual of GBP9m (31 March 2015: GBP7m and 30 September 2015:
GBP9m) is held for the Group's calculated liability to that date.
The ultimate FSCS levy as a result of the failures is
uncertain.
Conduct risk related matters
There continues to be a great deal of uncertainty and
significant judgement is required in determining the quantum of
conduct risk related liabilities with note 14 reflecting the
Group's current position in relation to redress provisions for PPI
and IRHPs. The final amount required to settle the Group's
potential liabilities for these matters is materially uncertain.
The Group will continue to reassess the adequacy of provisions for
these matters and the assumptions underlying the calculations at
each reporting date based upon experience and other relevant
factors at that time.
Legal claims
The Group is named in and is defending a number of legal claims
arising in the ordinary course of business. No material adverse
impact on the financial position of the Group is expected to arise
from the ultimate resolution of these legal actions.
20. Fair value of financial instruments
(a) Fair value of financial instruments carried at amortised cost
The tables below show a comparison of the carrying amounts of
financial assets and liabilities measured at amortised cost, as
reported on the balance sheet, and their fair values where these
are not approximately equal.
Analysis of the fair value disclosures uses a hierarchy that
reflects the significance of inputs used in measuring fair value.
The level in the fair value hierarchy within which a fair value
measurement is categorised is determined on the basis of the lowest
level input that is significant to the fair value measurement in
its entirety. The fair value hierarchy is as follows:
-- Level 1 fair value measurements - quoted prices (unadjusted)
in active markets for an identical financial asset or
liability.
-- Level 2 fair value measurements - inputs other than quoted
prices within Level 1 that are observable for the financial asset
or liability, either directly (as prices) or indirectly (derived
from prices).
-- Level 3 fair value measurements - inputs for the financial
asset or liability that are not based on observable market data
(unobservable inputs).
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The estimated fair
values are based on relevant information available at the reporting
date and involve judgement. Transfers between levels are deemed to
have occurred at the end of the year in which the instruments were
transferred. The methodologies and assumptions used in the fair
value estimates remain unaltered from those used at 30 September
2015.
There are various limitations inherent in this fair value
disclosure particularly where prices may not represent the
underlying value due to dislocation in the market. Not all of the
Group's financial instruments can be exchanged in an active trading
market. The Group obtains the fair values for investment securities
from quoted market prices where available. Where securities are
unlisted and quoted market prices are not available, the Group
obtains the fair value by means of discounted cash flows and other
valuation techniques that are commonly used by market participants.
These techniques address factors such as interest rates, credit
risk and liquidity. The difference between carrying value and fair
value is relevant in a trading environment, but is not relevant to
assets held to maturity and loans and advances.
31 March 31 March 30 September
2016 2015 2015
------------------ ------------------ -------------------
Carrying Fair Carrying Fair Carrying Fair
value value value value value value
GBPm GBPm GBPm GBPm GBPm GBPm
--------- ------- --------- ------- --------- --------
Financial assets
Loans and advances
to customers 28,516 29,098 26,763 26,963 27,482 27,537
Financial liabilities
Due to customers 26,237 26,155 25,251 25,163 26,407 26,423
Due to related
entities - - 1,792 1,827 998 1,017
Debt securities
in issue 4,285 4,313 4,096 4,220 3,766 3,869
20. Fair value of financial instruments (continued)
(b) Fair value of financial instruments recognised on the balance sheet at fair value
The following tables provide an analysis of financial
instruments that are measured at fair value, subsequent to initial
recognition, using the fair value hierarchy described in note 20(a)
above.
Fair value measurement Fair value measurement
as at as at
31 March 2016 30 September 2015
------------------------------ ---------------------------------
Level Level Level Level Level Level
1 2 3 Total 1 2 3 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------ ------ ------ ------ ------- ------ ------- -------
Financial assets
Derivative financial
assets - 396 - 396 - 285 - 285
AFS investments
- listed 1,457 - - 1,457 1,447 - - 1,447
AFS investments
- unlisted - - 14 14 - - 8 8
AFS - other - - 7 7 - - 7 7
Other financial
assets at fair
value - - 898 898 - - 1,097 1,097
------ ------ ------ ------ ------- ------ ------- -------
Total financial
assets at fair
value 1,457 396 919 2,772 1,447 285 1,112 2,844
====== ====== ====== ====== ======= ====== ======= =======
Financial liabilities
Derivative financial
liabilities - 522 - 522 - 534 - 534
Other financial
liabilities at
fair value - - 53 53 - - 67 67
------ ------ ------ ------ ------- ------ ------- -------
Total financial
liabilities at
fair value - 522 53 575 - 534 67 601
====== ====== ====== ====== ======= ====== ======= =======
There were no transfers between Level 1 and 2 in the current or
prior period.
Assets and liabilities measured at fair value based on valuation
techniques for which any significant input is not based on
observable market data (Level 3):
Level 3 movements
analysis
Investments Other financial Other financial
- available assets at liabilities
for sale fair value at fair value
GBPm GBPm GBPm
At 1 October 2014 7 1,583 (91)
Unrealised gains/(losses)
(1)
In profit or loss - 14 -
Settlements (2) - (250) 12
At 31 March 2015 7 1,347 (79)
Unrealised gains/(losses)
(1)
In profit or loss - (12) 2
Purchases 8 - -
Settlements (2) - (238) 10
At 30 September 2015 15 1,097 (67)
Unrealised gains/(losses)
(1)
In profit or loss - (2) 1
In available for
sale reserve 7 - -
Settlements (2) (1) (197) 13
At 31 March 2016 21 898 (53)
============= ================ ================
(1) Net gains or losses were recorded in non interest income,
interest income or expense and impairment losses or within the
Available for Sale Reserve as appropriate.
(2) Settlements for the period ended 31 March 2016 include a
realised loss of GBP1m (6 months to 31 March 2015: loss of GBP11m
and 12 months to 30 September 2015: loss of GBP33m) relating to
financial assets that are measured at fair value at the end of each
reporting period, and GBP1m gain (6 months to 31 March 2015: loss
of GBPNil and 12 months to 30 September 2015: loss of GBPNil)
relating to investments - available for sale. Such fair value gains
or losses are included in non-interest income (note 4).
There were no transfers into or out of Level 3 in the period
ended 31 March 2016 (31 March 2015: GBPNil and 30 September 2015:
GBPNil).
20. Fair value of financial instruments (continued)
Quantitative information about significant unobservable inputs
in Level 3 valuations
The table below lists key unobservable inputs to Level 3
financial instruments, and provides the range of those inputs as at
31 March 2016.
Group Fair Valuation Unobservable Low High
value technique inputs range range
GBPm
Financial assets
Available for sale 14 Discounted Price Nil Market
- investments - cash-flow/net value
unlisted asset value on disposal
Customer
Available for sale Discounted attrition
- other 7 cash-flow rate 10% 30%
Portfolio
Other financial lifetime
assets at fair Discounted probability
value 898 cash-flow of default 4.40% 11.30%
The unlisted available for sale investments primarily relate
to:
1) The Group's holding of shares in Vocalink Limited, an
unquoted company registered in England and Wales which operates the
BACS and direct debits schemes in the UK as well as connecting ATMs
using the LINK network. This represents the Group's percentage
holding in this entity (3.24%). The valuation is based on the net
asset value in the most recent set of publically available
financial statements for the company.
2) The Group's holding of a share in Visa Europe Limited. On 2nd
November 2015, Visa Inc. and Visa Europe Limited announced an
agreement for Visa Inc. to acquire Visa Europe Limited, creating a
single global company. The Group currently holds one share in Visa
Europe Limited which entitles it to receive a proportion of the
sale proceeds. The consideration being offered by Visa Inc.
incorporates both cash and preferred stock. Management has revalued
the existing share to GBP7m (31 March 2015: GBPNil and 30 September
2015: GBPNil).
The other available for sale financial asset represents deferred
consideration receivable following the purchase of CYB
Intermediaries Holdings Limited from NAB on 30 September 2015 and
consists of the rights to future commissions. The valuation is
determined from a discounted cash flow model incorporating
estimated attrition rates and investment growth rates appropriate
to the underlying funds under management.
The Group has GBP53m of financial liabilities at fair value
classed as Level 3 which represent a portfolio of term deposits
that are directly linked to the customer loans, which are also held
at fair value and classed as Level 3. Their relationship to the
fair value assets is such that should the liability be settled, the
amount payable would be net of the fair value asset.
Sensitivity of Level 3 fair value measurements to reasonably
possible alternative assumptions
Where valuation techniques use non-observable inputs that are
significant to a fair value measurement in its entirety, changing
these inputs will change the resultant fair value measurement.
The most significant exposure to Level 3 fair value measurements
is in respect of the Group's fair value loan portfolio.
The most significant inputs impacting the carrying value of the
loans other than interest rates are future expectations of credit
losses. If lifetime expected losses were 20% greater than
predicted, the carrying value of the loans would decrease by GBP6 m
and vice versa. The most significant input impacting the carrying
value of the available for sale - other asset is the Funds Under
Management Attrition rate. If this rate was 30% the carrying value
would reduce by GBP3m, if it was 10% the carrying value would
increase by GBP2m. The Group currently assumes a 15% attrition
rate.
Other than these significant Level 3 measurements, the Group has
a limited remaining exposure to Level 3 fair value measurements,
and changing one or more of the inputs for fair value measurements
in Level 3 to reasonable alternative assumptions would not change
the fair value significantly with respect to profit or loss, total
assets, total liabilities or equity on these remaining Level 3
measurements.
21. Financial risk management
Strategy in using financial instruments
By their nature, the Group's activities are principally related
to the use of financial instruments including derivatives. The
Group accepts deposits from customers at both fixed and floating
rates for various periods, and seeks to earn interest margins by
investing these funds in assets. The Group seeks to improve these
margins by consolidating short-term funds and lending for longer
periods at higher rates, while maintaining sufficient liquidity to
meet all claims that might fall due.
Fair value hedges
The Group hedges part of its existing interest rate and foreign
currency risk, resulting from potential movements in the fair value
of fixed rate assets and liabilities, attributable to both interest
rate and foreign currency risk using interest rate and cross
currency swaps. The fair value of these swaps is disclosed in note
10. There were no transactions for which fair value hedge
accounting had to be discontinued in the period.
Cash flow hedges
The Group hedges a portion of the variability in future cash
flows attributable to interest rate and foreign currency risk. The
interest and foreign currency risk arise from variable interest
rate assets and liabilities which are hedged using cross currency
and interest rate swaps, and material non-GBP denominated assets
which are hedged using FX forward contracts. There were no
transactions for which cash flow hedge accounting had to be
discontinued in the period as a result of the highly probable cash
flows no longer being expected to occur. The fair value of
derivatives is disclosed in note 10.
Credit risk
Credit risk is inherent within any transaction that creates an
actual or potential obligation for a borrower to pay the Group.
The Group structures the levels of credit risk it undertakes by
placing limits on the amount of risk accepted in relation to one
borrower, or groups of borrowers, and to geographical and industry
segments. Such risks are monitored on a revolving basis and subject
to an annual or more frequent review.
Exposure to credit risk is managed through regular analysis of
the ability of borrowers and potential borrowers to meet interest
and capital repayment obligations and by changing these lending
limits where appropriate. Exposure to credit risk is also managed
in part by obtaining collateral, corporate, and personal guarantees
where appropriate.
Derivatives
The Group maintains control limits on net open derivative
positions. At any one time, the amount subject to credit risk is
limited to the current fair value of instruments that are
favourable to the Group (i.e. assets where their fair value is
positive), which in relation to derivatives is only a small
fraction of the contract, or notional values used to express the
volume of instruments outstanding. This credit risk exposure is
managed as part of the overall lending limits with customers,
together with potential exposures from market movements.
Master netting agreements
The Group further restricts its exposure to credit losses by
entering into master netting arrangements with counterparties with
which it undertakes a significant volume of transactions. Master
netting arrangements do not generally result in an offset of
balance sheet assets and liabilities, as transactions are usually
settled on a gross basis. However, the credit risk associated with
the favourable contracts is reduced by a master netting arrangement
to the extent that if a counterparty failed to meet its obligations
in accordance with the agreed terms, all amounts with the
counterparty are terminated and settled on a net basis. Derivative
financial instrument contracts are typically subject to
International Swaps and Derivatives Association ("ISDA") master
netting agreements, as well as Credit Support Annexes ("CSA"),
where relevant, around collateral arrangements attached to those
ISDA agreements, or derivative exchange or clearing counterparty
agreements if contracts are settled via an exchange or clearing
house.
21. Financial risk management (continued)
Credit risk (continued)
Credit-related commitments
Credit-related commitments are facilities where the Group is
under a legal obligation to extend credit unless some event occurs,
which gives the Group the right, in terms of the commitment letter
of offer or other documentation, to withdraw or suspend the
facilities. The primary purpose of these instruments is to ensure
that funds are available to a customer as required. Guarantees and
standby letters of credit, which represent irrevocable assurances
that the Group will make payments in the event that a customer
cannot meet its obligations to third parties, carry similar credit
risk to loans.
Commitments to extend credit represent unused portions of
authorisations to extend credit in the form of loans, guarantees or
letters of credit. With respect to credit risk on commitments to
extend credit, the Group is potentially exposed to loss of an
amount equal to the total unused commitments. However, the likely
amount of loss is less than the total unused commitments, as most
commitments to extend credit are contingent upon customers
maintaining specific credit standards. In the event of a
deterioration of a customer's circumstances lending can often be
withdrawn. The Group monitors the term to maturity of credit
commitments because longer-term commitments generally have a
greater degree of credit risk than shorter-term commitments.
Forbearance
Identification and classification
Forbearance is considered to take place when the Group grants
concessions to assist customers who are experiencing, or who are
about to experience, difficulties in meeting their financial
commitments to the Group.
A concession refers to either of the following actions:
-- a modification of the previous terms and conditions of a debt; and/or
-- a total or partial refinancing of a contract.
Typically, concessions will include the granting of more
favourable terms and conditions than those provided either at
drawdown of the facility or which would not ordinarily be available
to others with a similar risk profile. Loans that have been
renegotiated and/or restructured for solely commercial reasons,
where there is no financial difficulty are not treated as
forborne.
The Group recognises that forbearance alone is not necessarily
an indicator of impaired status but is a trigger for the review of
the customer's risk profile. The Group grants forbearance when it
believes that there is a realistic prospect of the customer
continuing to be able to repay all facilities in full. If there is
any concern over future cash flows and the Group incurring a loss,
then forborne loans will also be classified as impaired in
accordance with the Group's impairment policy.
Depending on circumstances and when operated within robust
parameters and controls, the Group believes forbearance can help
support the customer in the short to medium-term.
A range of parameters are considered when the Group looks to
identify those customers to whom forbearance would be applicable
and these parameters are regularly reviewed and refined as
necessary to ensure they are consistent with the latest industry
guidance and prevailing practice as well as ensuring that they
adequately capture and reflect the most recent customer behaviours
and market conditions. The Group continues to make every effort to
follow its principles of treating customers fairly and aligns its
forbearance practices to those principles.
The Group operates a range of forbearance measures depending on
the type of customer and exercises forbearance in two distinct
areas: retail and non-retail.
Exit from forbearance
Exposures classified as forborne and performing at the date
forbearance measures are granted, continue to be reported as
subject to forbearance for a minimum period of two years from that
date (the "probation period").
21. Financial risk management (continued)
Credit risk (continued)
Forbearance (continued)
Exit from forbearance (continued)
In addition, each of the following requirements need to be met
at the end of the two year probation period referred to above for
the exposure to exit from being classified as forborne:
-- none of the exposures to the customer are more than 30 days
past due at the end of the probation period; and
-- regular payments of more than an insignificant aggregate
amount of principal or interest have been made during at least half
of the probation period. This assessment is based on the
forbearance terms for repayment.
When the conditions are not met at the end of the probation
period, the exposure shall continue to be identified as a
performing forborne exposure until all of the conditions are
met.
Exposures classified as forborne and which are non-performing
cannot exit non-performing status for a minimum of twelve months
and cannot exit forbearance status for a further two years from the
date of returning to performing status (three years in total).
Retail forbearance
Forbearance is exercised on retail customers in a number of
different ways and is specific to the individual customer and their
circumstances.
The Group classifies the forbearance measures offered to retail
customers into the following categories:
-- Formal arrangements - A permanent change which could include
capitalisation of arrears, or arrangement with the customer to
repay arrears over a shorter period than capitalisation would
involve.
-- Temporary arrangements - Short term measures that allow a
period of relief for customers in financial difficulty, these can
include short-term payment holidays.
-- Interest only conversion - A permanent or temporary
conversion to interest only repayments, allowing the customer to
maintain payments with the intention that the capital balance
outstanding would be recovered at the end of the term.
-- Term extension - A permanent change to the loan term allowing
the customer to make lower repayments whilst still repaying the
outstanding balance in full, over a longer period.
-- Other - A segment of forbearance exposures which includes product switches.
-- Legal - Court mandated forbearance exposures.
Where the Group has made a demand for repayment, the customer's
facilities have been withdrawn or where a debt repayment process
has been initiated, the exposure is classified as forborne if the
debt is subject to any of the forbearance concessions above.
21. Financial risk management (continued)
Credit risk (continued)
Forbearance (continued)
Retail forbearance - Mortgage lending
The tables below summarise the number of arrangements in place
and the loan balances and impairment provisions associated with
those arrangements. The Group reports retail forbearance at the
exposure level. Where a customer is subject to more than one
forbearance measure, they have been categorised into the primary
method of forbearance:
As at 31 March Impairment allowance
2016 on loans and
Total loans and advances advances subject
subject to to forbearance
forbearance measures measures
----------------------------------- -----------------------
Number Gross
of loans carrying % of total Impairment
amount portfolio allowance Coverage
GBPm GBPm %
Formal arrangements 1,878 164 0.76 4.6 2.79
Temporary arrangements 1,317 136 0.63 2.4 1.74
Interest only
conversion 129 19 0.09 - 0.22
Term extension 124 12 0.05 0.1 0.81
Other 16 1 0.01 - 1.08
Legal 211 22 0.10 1.3 5.64
---------- ---------- ----------- ------------ ---------
3,675 354 1.64 8.4 2.36
========== ========== =========== ============ =========
As at 30 September Impairment allowance
2015 on loans and
Total loans and advances advances subject
subject to to forbearance
forbearance measures measures
----------------------------------- -----------------------
Number Gross
of loans carrying % of total Impairment
amount portfolio allowance Coverage
GBPm GBPm %
Formal arrangements 2,115 179 0.87 4.0 2.22
Temporary arrangements 985 99 0.48 1.5 1.57
Interest only
conversion 88 12 0.06 - 0.15
Term extension 131 11 0.06 0.1 0.84
Other 11 1 0.01 - 0.39
Legal 216 23 0.11 1.5 6.56
---------- ---------- ----------- ------------ ---------
3,546 325 1.59 7.1 2.19
========== ========== =========== ============ =========
The Group also has a number of customers with interest only
mortgages past maturity, not subject to forbearance. The Group has
formal processes embedded to pro-actively track and facilitate
pre-maturity customer engagement to bring the cases to a formal
conclusion which is generally aimed to be achieved within six
months after the loan has reached maturity. Complex cases can take
longer than this to reach conclusion. At 31 March 2016, the Group
had 106 (30 September 2015: 116) customers with interest only
mortgages not subject to forbearance and which were post six month
maturity with a total value of GBP11m (30 September 2015:
GBP12m).
A further forbearance reserve of GBP4m (30 September 2015:
GBP4m) is presently held within the overall collective provision.
The effect of this on the above tables would be to increase the
impairment allowance noted above to GBP12m (30 September 2015:
GBP11m) and to increase overall coverage to 3.45% (30 September
2015: 3.42%).
When all other avenues of resolution including forbearance have
been explored the Group will take steps to repossess and sell
underlying collateral. In the period to 31 March 2016, there were
42 repossessions of which 16 were voluntary.
21. Financial risk management (continued)
Credit risk (continued)
Forbearance (continued)
Retail forbearance - consumer credit
The Group currently exercises limited forbearance strategies in
relation to other types of consumer credit, including money
transmission accounts, unsecured loans and credit cards.
Forbearance strategies implemented on consumer credit are of low
financial significance in the context of the Group's overall
lending operations. The Group reports consumer credit forbearance
at the exposure level.
The Group has assessed the total loan balances subject to
forbearance on other types of consumer credit to be GBP17m at 31
March 2016 (30 September 2015: GBP18m), representing 1.48% of the
total portfolio (30 September 2015: 1.62%). Impairment provisions
on forborne balances totalled GBP5m at 31 March 2016 (30 September
2015: GBP6m), providing overall coverage of 29.05% (30 September
2015: 29.90%).
Non-retail forbearance
The Group reports non-retail forbearance at a customer level,
with customers that have forbearance granted on one or more
facilities recorded as a single customer, but at a value which
incorporates all facilities and the related impairment allowance
irrespective of whether each individual facility is subject to
forbearance. Where a customer is part of a larger group,
forbearance is exercised and reported across the group at the
individual entity level. Forbearance is considered to exist where
one or more of the following occurs, on a non-commercial basis, for
reasons relating to the actual or apparent stress of a
customer:
-- Term extension - Extending of loan facility payment term or
the term of an overdraft which is not fluctuating (e.g. where a
Term Loan has matured and the balance passed to an overdraft which
is then extended on a non-commercial basis, then forbearance is
considered to exist).
-- Deferral of contracted capital repayments - Includes capital
repayment holiday, conversion to interest only for an extended
period, or rescheduling, but still repaying within the remaining
contracted term.
-- Reduction in the contracted interest rate - Includes a
reduction in the level of accrued interest or amendment to original
fee structure.
-- Alternative forms of payment - Including debt for equity,
asset transfer and repayment made by taking possession of
collateral.
-- Debt forgiveness - Total or partial debt forgiveness by write-off of the debt.
-- Refinancing - A complete or partial repayment of a loan with
a new contract granted on or up to 3 months after the day when the
original contract expires. In the case of partial repayment both
the original and new loans shall be classified as forborne.
-- Covenant breach/waiver/reset - Financial or non-financial
covenant breach (whether waived or rights reserved) and financial
covenant resets.
Where the Group has made a demand for repayment, where the
customer's facilities have been withdrawn or where a debt repayment
process has been initiated this will be classified as forbearance
if the debt is subject to any of the forbearance concessions
above.
Where modification of the terms and conditions of an exposure
meeting the criteria for classification as forbearance results in
derecognition of loans and advances from the balance sheet and the
recognition of a new exposure, the new exposure shall be treated as
forborne.
21. Financial risk management (continued)
Credit risk (continued)
Forbearance (continued)
Non-retail forbearance (continued)
The Group has identified a number of situations that in
isolation are not considered to be forbearance:
-- Facilities that have been temporarily extended pending review
and no concession has been granted for reasons relating to the
actual or apparent financial stress of a customer.
-- A reduction in asset quality to a level where actual, or
apparent, financial stress is not evident.
-- Where changes are made to the terms of a borrower's interest
structure or repayment arrangement on a commercial basis.
-- Late provision of financial information, in the absence of
other indicators of financial difficulty, is not in all cases
considered a "non-commercial" breach of non-financial
covenants.
The tables below summarise the total number of arrangements in
place and the loan balances and impairment provisions associated
with those arrangements. Where a customer is subject to more than
one forbearance measure, they have been categorised into the
primary method of forbearance:
As at 31 March 2016
Impairment
allowance
on loans and
Total loans and advances subject
advances subject to forbearance
to forbearance measures measures
------------------------------------ ----------------------
Gross % of
Number carrying total Impairment
of loans amount portfolio allowance Coverage
GBPm GBPm %
Term extension 424 360 5.16 35.8 9.95
Deferral of contracted
capital repayments 147 159 2.27 18.4 11.59
Reduction in contracted
interest rate 10 13 0.19 3.8 29.09
Alternative forms
of payment 5 23 0.34 4.9 20.92
Debt forgiveness 21 52 0.75 12.7 24.12
Refinancing 25 57 0.82 5.8 10.24
Covenant breach/reset/waiver 69 237 3.39 9.5 4.02
----------- ---------- ----------- ----------- ---------
701 901 12.92 90.9 10.09
=========== ========== =========== =========== =========
As at 30 September 2015
Impairment
allowance
Total loans and on loans and
advances subject advances subject
to to forbearance
forbearance measures measures
------------------------------------ ----------------------
Gross % of
Number carrying total Impairment
of loans amount portfolio allowance Coverage
GBPm GBPm %
Term extension 491 429 6.00 42.9 10.02
Deferral of contracted
capital repayments 166 152 2.12 18.6 12.23
Reduction in contracted
interest rate 17 29 0.40 6.8 23.64
Alternative forms
of payment 3 16 0.22 4.5 28.76
Debt forgiveness 24 55 0.78 14.2 25.61
Refinancing 33 61 0.86 4.7 7.56
Covenant breach/reset/waiver 62 166 2.32 6.0 3.64
----------- ---------- ----------- ----------- ---------
796 908 12.70 97.7 10.77
=========== ========== =========== =========== =========
21. Financial risk management (continued)
Credit risk (continued)
Forbearance (continued)
Non-Retail forbearance (continued)
Included in other financial assets at fair value is a portfolio
of loans which are included in the above table. The value of fair
value loans subject to forbearance at 31 March 2016 is GBP132m (30
September 2015: GBP162m), representing 1.90% of the total
non-retail portfolio (30 September 2015: 2.27%). Impairment
allowances on these amounts totalled GBP15m (30 September 2015:
GBP14m), a coverage of 11.65% (30 September 2015: 8.68%).
Maximum exposure to credit risk
The Group has comprehensive credit risk management policies that
restrict the level of exposure to any one borrower or group of
borrowers, industries and countries. Unless otherwise noted, the
amount that best represents the maximum credit exposure at the
reporting date is the carrying value of the financial asset.
The table below shows the maximum exposure to credit risk for
the components of the balance sheet, including derivatives. The
maximum exposure is shown gross, before the effect of mitigation
through use of master netting and collateral agreements. The table
also shows the maximum amount of commitments from its banking
operations.
31 Mar 31 Mar 30 Sep
2016 (unaudited) 2015 (unaudited) 2015 (audited)
GBPm GBPm GBPm
Cash and balances with central
banks 4,974 7,084 6,431
Due from related entities
(note 8) - 883 786
Due from other banks 1,266 227 128
Financial assets available
for sale 1,478 1,197 1,462
Other financial assets at
fair value (note 9) 898 1,347 1,097
Derivative financial assets
(note 10) 396 385 285
Loans and advances to customers
(note 11) 28,516 26,763 27,482
Due from customers on acceptances 3 5 4
37,531 37,891 37,675
Contingent liabilities (note
19) 107 126 109
Other credit commitments
(note 19) 7,790 8,052 7,801
Maximum credit risk exposure 45,428 46,069 45,585
================== ================== ================
Credit quality of investments
The credit quality of the Group's AFS investments, which are
neither past due nor impaired, is as follows:
31 Mar 31 Mar 30 Sep
2016 (unaudited) 2015 (unaudited) 2015 (audited)
GBPm GBPm GBPm
Senior investment grade 1,457 1,190 1,447
Other 21 7 15
1,478 1,197 1,462
================== ================== ================
Included in the AFS listed securities at 31 March 2016 are
GBP1.3bn (31 March 2015: GBP1.1bn and 30 September 2015: GBP1.3bn)
investments in UK Government Gilts and GBP0.2bn (31 March 2015
GBP0.1bn and 30 September 2015: GBP0.1bn) in other banks' debt
securities.
21. Financial risk management (continued)
Credit risk (continued)
Collateral held as security and other credit enhancements
The Group evaluates each customer's creditworthiness on a case
by case basis. The amount of collateral obtained, if deemed
necessary by the Group upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held
varies, but may include:
-- specific charges over defined assets of the counterparty;
-- a floating charge over all assets and undertakings of an
entity, including uncalled capital and called but unpaid
capital;
-- specific or interlocking guarantees; and
-- loan agreements which include affirmative and negative
covenants and in some instances guarantees of counterparty
obligations.
Generally, the Group does not take possession of collateral it
holds as security or call on other credit enhancements that would
result in recognition of an asset on its balance sheet.
It is the Group's policy to dispose of repossessed properties in
an orderly fashion. The proceeds are used to reduce or repay the
outstanding claim. In general, the Group does not occupy
repossessed properties for its own business use.
Risk concentration
Concentration of risk is managed by client/counterparty, by
product, by geographical region and by industry sector. In
addition, single name exposure limits exist to limit exposure to a
single entity/counterparty.
Eurozone risk
The Group has no operations outside the UK and no direct
sovereign exposure to any Eurozone countries (31 March 2015: GBPNil
and 30 September 2015: GBPNil). The Group has an exposure to the
European Investment Bank of GBP199m at 31 March 2016 (31 March
2015: GBP100m and 30 September 2015: GBP100m).
21. Financial risk management (continued)
Credit risk (continued)
Industry concentration of assets
The following tables show the levels of industry concentration
of the Group's assets:
Gross loans and advances
to customers including loans 31 Mar 31 Mar 30 Sep
designated at fair value 2016 (unaudited) 2015 (unaudited) 2015 (audited)
through profit or loss (1) GBPm GBPm GBPm
Government and public authorities 41 36 27
Agriculture, forestry, fishing
and mining 1,467 1,590 1,515
Financial, investment and
insurance 720 445 659
Property - construction 230 351 260
Manufacturing 538 666 576
Instalment loans to individuals
and other personal lending
(including credit cards) 1,409 1,652 1,477
Property - mortgage 21,513 19,642 20,504
Asset and lease financing 457 407 426
Other commercial and industrial 3,247 3,503 3,340
------------------ ------------------ ----------------
29,622 28,292 28,784
================== ================== ================
(1) Includes balance due from customers on acceptances and
excludes accrued interest.
Comparative disclosures for the period to 31 March 2015 have
been amended to conform with the current period's presentation.
Contingent liabilities and 31 Mar 31 Mar 30 Sep
credit related commitments 2016 (unaudited) 2015 (unaudited) 2015 (audited)
GBPm GBPm GBPm
Government - 2 -
Agriculture, forestry, fishing
and mining 1,016 999 985
Financial, investment and
insurance 494 26 405
Property - construction - 65 44
Manufacturing 152 179 146
Instalment loans to individuals
and other personal lending
(including credit cards) 3,333 3,677 3,410
Property - mortgage 1,757 1,997 1,814
Other commercial and industrial 1,145 1,233 1,106
------------------ ------------------ ----------------
7,897 8,178 7,910
================== ================== ================
Financial assets available 31 Mar 31 Mar 30 Sep
for sale and held to maturity 2016 (unaudited) 2015 (unaudited) 2015 (audited)
GBPm GBPm GBPm
Government and public authorities 1,457 1,190 1,447
Financial, investment and
insurance 21 7 15
------------------ ------------------ ----------------
1,478 1,197 1,462
================== ================== ================
21. Financial risk management (continued)
Credit risk (continued)
Maturity analysis of assets and liabilities
The following tables represent a breakdown of the Group's
balance sheet according to the assets and liabilities contractual
maturity. Many of the longer-term monetary assets are variable rate
products, with behavioural maturities shorter than the contractual
terms. Accordingly, this information is not relied upon by the
Group in its management of interest rate risk.
The Group has disclosed certain term facilities with a revolving
element at the maturity of the facility as this best reflects their
contractual maturity.
31 March 2016 No
(unaudited) 3 to
3 months 12 1 to Over specified
Call or less months 5 years 5 years maturity Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Assets
Cash and balances
with central banks 3,656 - - - - 1,318 4,974
Due from other
banks 781 485 - - - - 1,266
Financial assets
available for sale - - 7 832 639 - 1,478
Other financial
assets at fair
value - 43 122 326 407 - 898
Derivative financial
instruments 2 37 70 91 196 - 396
Loans and advances
to customers 2,142 233 600 3,938 21,217 386 28,516
Due from customers
on acceptances - 3 - - - - 3
All other assets 119 96 42 - - 935 1,192
------- --------- -------- --------- --------- ----------- -------
Total assets 6,700 897 841 5,187 22,459 2,639 38,723
======= ========= ======== ========= ========= =========== =======
Liabilities
Due to other banks 783 - - - - - 783
Other financial
liabilities at
fair value - 1 10 42 - - 53
Derivative financial
instruments 2 41 63 123 293 - 522
Due to customers 20,424 1,619 1,997 2,197 - - 26,237
Liabilities on
acceptances - 3 - - - - 3
Bond and notes - 43 418 2,852 972 - 4,285
All other liabilities 1,911 71 126 - - 1,201 3,309
------- --------- -------- --------- --------- ----------- -------
Total liabilities 23,120 1,778 2,614 5,214 1,265 1,201 35,192
======= ========= ======== ========= ========= =========== =======
Off balance sheet
items
Contingent liabilities - 15 32 11 45 4 107
Other credit commitments 7,790 - - - - - 7,790
------- --------- -------- --------- --------- ----------- -------
Total off balance
sheet items 7,790 15 32 11 45 4 7,897
======= ========= ======== ========= ========= =========== =======
21. Financial risk management (continued)
Maturity analysis of assets and liabilities (continued)
31 March 2015 No
(unaudited) 3 to
3 months 12 1 to Over specified
Call or less months 5 years 5 years maturity Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Assets
Cash and balances
with central banks 5,768 - - - - 1,316 7,084
Due from related
entities 870 - - 13 - - 883
Due from other banks 124 103 - - - - 227
Financial assets
available for sale - 102 - 791 298 6 1,197
Other financial assets
at fair value 1 17 72 894 363 - 1,347
Derivative financial
instruments 2 47 117 84 135 - 385
Loans and advances
to customers 2,272 290 726 3,882 19,230 363 26,763
Due from customers
on acceptances - 5 - - - - 5
All other assets 119 92 43 - - 780 1,034
------- --------- -------- --------- --------- ----------- -------
Total assets 9,156 656 958 5,664 20,026 2,465 38,925
======= ========= ======== ========= ========= =========== =======
Liabilities
Due to other banks - 632 400 - - - 1,032
Other financial liabilities
at fair value - 7 1 70 1 - 79
Derivative financial
instruments 2 86 50 233 249 - 620
Due to customers 19,417 1,778 1,911 2,145 - - 25,251
Liabilities on acceptances - 5 - - - - 5
Due to related entities 140 16 338 823 475 - 1,792
Debt securities in
issue - 709 465 2,196 726 - 4,096
All other liabilities 1,894 111 75 - - 796 2,876
------- --------- -------- --------- --------- ----------- -------
Total liabilities 21,453 3,344 3,240 5,467 1,451 796 35,751
======= ========= ======== ========= ========= =========== =======
Off balance sheet
items
Contingent liabilities - 23 30 10 56 7 126
Other credit commitments 8,052 - - - - - 8,052
------- --------- -------- --------- --------- ----------- -------
Total off balance
sheet items 8,052 23 30 10 56 7 8,178
======= ========= ======== ========= ========= =========== =======
21. Financial risk management (continued)
Maturity analysis of assets and liabilities (continued)
30 September 2015 No
(audited) 3 to
3 months 12 1 to Over specified
Call or less months 5 years 5 years maturity Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Assets
Cash and balances
with central banks 4,978 - - - - 1,453 6,431
Due from related
entities 772 - - - 14 - 786
Due from other banks 36 92 - - - - 128
Financial assets
available for sale - - 100 782 565 15 1,462
Other financial assets
at fair value 1 11 78 731 276 - 1,097
Derivative financial
instruments 3 27 48 70 137 - 285
Loans and advances
to customers 2,221 203 701 3,844 20,137 376 27,482
Due from customers
on acceptances - 4 - - - - 4
All other assets 86 58 47 - - 839 1,030
Total assets 8,097 395 974 5,427 21,129 2,683 38,705
======= ========= ======== ========= ========= =========== =======
Liabilities
Due to other banks - 390 3 - - - 393
Other financial liabilities
at fair value - 1 1 65 - - 67
Derivative financial
instruments 3 28 41 248 214 - 534
Due to customers 20,370 1,505 2,045 2,487 - - 26,407
Liabilities on acceptances - 4 - - - - 4
Due to related entities 135 8 - 380 475 - 998
Debt securities in
issue - 14 852 1,973 927 - 3,766
All other liabilities 1,825 114 114 - - 1,040 3,093
------- --------- -------- --------- --------- ----------- -------
Total liabilities 22,333 2,064 3,056 5,153 1,616 1,040 35,262
======= ========= ======== ========= ========= =========== =======
Off balance sheet
items
Contingent liabilities - 25 13 11 52 8 109
Other credit commitments 7,801 - - - - - 7,801
------- --------- -------- --------- --------- ----------- -------
Total off balance
sheet items 7,801 25 13 11 52 8 7,910
======= ========= ======== ========= ========= =========== =======
22. Capital management overview
Capital is held by the Group to protect its depositors, to cover
inherent risks in a normal and stressed operating environment and
to support its business strategy against losses, inherent risks and
stress events. In assessing the adequacy of its capital resources,
the Group considers its risk appetite, the material risks to which
it is exposed and the appropriate strategies required to manage
those risks. The Group is committed to maintaining a strong capital
base.
The Group is currently governed by its Capital Risk Standard.
The objectives of the policy are to efficiently manage the capital
base to optimise shareholder returns whilst maintaining robust
capital adequacy, meeting Regulators' requirements, managing the
ratings agencies assessment of the Group and ensuring that
excessive leverage is not taken.
The Capital Plan is approved by the Board on an annual basis.
The Asset and Liability Committee monitors the capital plan and
forecast positions on a monthly basis. This ensures that in the
event that further capital is deemed necessary to meet regulatory
requirements or support future strategy, the issue is proactively
escalated to senior management and the Board to determine the most
appropriate strategy for the Group to achieve the desired capital
outcome.
The Group manages capital in accordance with prudential rules
issued by the PRA and FCA, which implemented CRD IV legislation
with effect from 1 January 2014.
CRD IV also provides for new regulatory capital buffers
including a Capital Conservation Buffer ("CCB") and
Counter-Cyclical Buffer ("CCyB") to replace the existing Capital
Planning Buffer ("CPB"). The CCB will, when fully adopted in 2019,
equate to 2.5% of RWAs, whilst the level of the CCyB is dependent
upon the authorities' view of credit conditions in the economy.
With effect from May 2014, the Financial Policy Committee ("FPC")
at the BoE assumed formal responsibility for setting the CCyB each
quarter. At its March 2016 meeting, the FPC increased the CCyB rate
for UK exposures to 0.5% with effect from 29 March 2017. Further
detail on the Group's regulatory capital is included on pages 16 to
20 of the Business and Financial Review.
23. Events after the balance sheet date
On 13 April the Group announced changes to its branch network
reflecting the evolving patterns in customer usage. A significant
number of branches will extend their opening hours, opening on
Saturdays, ensuring investment is diverted to the areas where
demand is growing. A programme of refurbishments, relocations,
co-locations, concept branches and digital development is ongoing.
The closure of 26 branches over the next six months was announced.
On the same day, the outcome of a voluntary severance programme
applicable to senior staff was communicated to the individual
applicants and this will see 155 staff leave in the second half of
the year. The branch closures and voluntary severance programme
will give rise to an income statement charge for restructuring
costs of GBP19m.
Other information
Glossary
For a glossary of terms used within this report refer to pages
143 to 149 of the annual report and consolidated financial
statements of CYBI for the year ended 30 September 2015.
For terms not previously included within the Glossary, refer
below:
Capped Indemnity - The indemnity from NAB in favour of CYBG PLC
in respect of certain qualifying conduct costs incurred by CYBG
Group, which is capped at the Capped Indemnity Amount, subject to
the Loss Sharing Arrangement, under the terms of the Conduct
Indemnity Deed.
Capped Indemnity Amount - An amount equal to GBP1.58 billion
less any Pre-Covered provision amount. Fixed at GBP1.115 billion at
the demerger date.
Conduct Indemnity Deed - The deed between NAB and CYBG PLC
setting out the terms of:
-- The Capped Indemnity; and
-- Certain arrangements for the treatment and management of certain Conduct Matters
Conduct Matters - Conduct issues relating to PPI, standalone
IRHP, voluntary scope TBL's and FRTBL's and other conduct matters
in the period prior to the demerger date whether or not known at
the demerger date.
Demerger - The demerger of CYBG Group from NAB pursuant to which
all of the issued share capital of CYBI Limited was transferred to
CYBG PLC by NAB in consideration for the issue and transfer of CYBG
shares to NAB in part for the benefit of NAB (which NAB
subsequently sold pursuant to the IPO) and in part for the benefit
of NAB shareholders under a scheme of arrangement.
Demerger date - 8 February 2016
Loss sharing arrangement - The arrangement relating to the
Capped Indemnity pursuant to which CYBG PLC will be responsible for
the Loss Share.
Loss share - The percentage of a provision raised or an increase
in a provision which under the Conduct Indemnity Deed CYBG PLC will
be responsible for. Fixed at 9.7% at the demerger date.
OLAR - The overall liquidity access rule. This is reviewed on an
annual basis and is considered as part of the Group's Risk Appetite
and will be subject to approval by the Board as part of the
ILAAP.
Pre Covered provision amount - The amount of any provision(s)
relating to Conduct Matters raised or increased by CYBG Group
between 31 March 2015 and the demerger date in respect of which NAB
has provided specific support at any time after 31 March 2015 but
before the demerger date. At the demerger date the pre-covered
provision amount was GBP465m.
Officers and professional advisers
Directors David Philip Allvey (resigned 31
March 2016)
David Jonathan Bennett (appointed
22 October 2015) (1) (2) (3) (4)
David Alan Browne (1) (2) (3)
Debbie Crosbie
David Joseph Duffy
Adrian Thomas Grace (1)
Richard John Gregory (2 ) (3) (4)
James Neilson Pettigrew (1) (4)
*
Barbara Ann Ridpath (resigned 20
May 2016)
Richard James Sawers (resigned
2 February 2016)
Dr Teresa Robson-Capps (2)
Alexander John Shapland (resigned
20 May 2016)
Ian Stuart Smith
Secretary Lorna Forsyth McMillan
James Richard Peirson
Registered 20 Merrion Way
office
Leeds
Yorkshire
LS2 8NZ
Independent Ernst & Young LLP
auditors
25 Churchill Place
London
E14 5EY
(1) Member of the Boards' Remuneration
Committee
(2) Member of the Boards' Audit Committee
(3) Member of the Boards' Risk Committee
(4) Member of the Boards' Governance and
Nomination Committee
* Mr Pettigrew was appointed Chairman
of the Governance and Nomination Committee
on 29 April 2016 subject to regulatory
approval.
Forward looking statements
The information in this document may include forward looking
statements, which are based on assumptions, expectations,
valuations, targets, estimates, forecasts and projections about
future events. These can be identified by the use of words such as
'expects', 'aims', 'targets', 'seeks', 'anticipates', 'plans',
'intends', 'believes', 'estimates', 'potential', 'possible', and
similar words or phrases. These forward-looking statements, as well
as those included in any other material discussed at any
presentation, are subject to risks, uncertainties and assumptions
about the CYBG Group and its securities, investments and the
environment in which it operates, including, among other things,
the development of its business and strategy, trends in its
operating industry, changes to customer behaviours and covenant,
macroeconomic and/ or geopolitical factors, changes to law and/ or
the policies and practices of the Bank of England, the Financial
Conduct Authority and/ or other regulatory bodies, inflation,
deflation, interest rates, exchange rates, changes in the
liquidity, asset position and/ or credit ratings of the CYBG Group,
the status of the UK's membership of the European Union, and future
capital expenditures and acquisitions.
In light of these risks, uncertainties and assumptions, the
events in the forward-looking statements may not occur.
Forward-looking statements involve inherent risks and
uncertainties. Other events not taken into account may occur and
may significantly affect the analysis of the forward-looking
statements. There can be no assurance that any such projections or
estimates will be realised or that actual returns or other results
will not be materially lower than those set out in this document
and/ or discussed at any presentation. All forward-looking
statements should be viewed as hypothetical. No representation or
warranty is made that any forward-looking statement will come to
pass. None of the Company, its subsidiaries subsidiary
undertakings, holding companies, subsidiaries, subsidiary
undertakings of its holding companies, associated entities or
businesses, or their respective directors, officers, employees,
agents, advisers or affiliates, undertakes to publicly update or
revise any such forward-looking statement nor accepts any
responsibility, liability or duty of care whatsoever for (whether
in contract, tort or otherwise) or makes any representation or
warranty, express or implied, as to the truth, fullness, fairness,
merchantability, accuracy, sufficiency or completeness of, the
information in this document.
The information, statements and opinions contained in this
document do not constitute a public offer under any applicable
legislation or an offer to sell or solicitation of any offer to buy
any securities or financial instruments or any advice or
recommendation with respect to such securities or other financial
instruments.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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