TIDMOSB
LEI: 213800WTQKOQI8ELD692
OneSavings Bank plc
(the Company)
2017 Annual Report and Accounts
The following regulated information, disseminated pursuant to DTR6.3.5,
comprises the 2017 Annual Report and Accounts which was sent to
shareholders of the Company on 29 March 2018. A copy of the Annual
Report and Accounts is available at www.osb.co.uk.
Enquiries:
OneSavings Bank plc
Nickesha Graham Burrell
Deputy Company Secretary
t: 01634 835 796
Brunswick t: 020 7404 5959
Robin Wrench / Simone Selzer
Notes to Editors
About OneSavings Bank plc
OneSavings Bank plc began trading as a bank on 1 February 2011 and was
admitted to the main market of the London Stock Exchange in June 2014
(OSB.L). OSB joined the FTSE 250 index in June 2015. OSB is a specialist
lending and retail savings group authorised by the Prudential Regulation
Authority, part of the Bank of England, and regulated by the Financial
Conduct Authority and Prudential Regulation Authority.
OSB primarily targets market sub-sectors that offer high growth
potential and attractive risk-adjusted returns in which it can take a
leading position and where it has established expertise, platforms and
capabilities. These include private rented sector Buy-to-Let, commercial
and semi-commercial mortgages, residential development finance, bespoke
and specialist residential lending and secured funding lines. OSB
originates organically through specialist brokers and independent
financial advisers. It is differentiated through its use of high
skilled, bespoke underwriting and efficient operating model.
OSB is predominantly funded by retail savings originated through the
long established Kent Reliance name, which includes online and postal
channels, as well as a network of branches in the South East of England.
Diversification of funding is currently provided by access to a
securitisation programme and the Term Funding Scheme.
OneSavings Bank plc
ANNUAL REPORT AND ACCOUNTS 2017
OneSavings Bank
Annual Report and Accounts 2017
The experts in specialist lending
Highlights
Gross new lending
+14%
2017: GBP2.6bn
2016: GBP2.3bn
[Graphic appear here]
Net loan book
+23%
2017: GBP7.3bn
2016: GBP5.9bn
Net interest margin
Stable
2017: 316bps
2016: restated 316bps(2)
[Graphic appear here]
Cost to income ratio
Stable
2017: 27%
2016: 27%(2)
[Graphic appear here]
Profit before tax
+3%
2017: GBP167.7m
2016: GBP163.1m(1)
[Graphic appear here]
Underlying profit before tax
+21%
2017: GBP167.7m
2016: restated GBP138.2m(2)
[Graphic appear here]
Basic EPS
+3%
2017: 51.1p
2016: 49.4p
[Graphic appear here]
Underlying basic EPS
+23%
2017: 51.1p
2016: 41.7p
[Graphic appear here]
For more information and definitions,
see Key performance indicators on page 26
1. In 2016, profit before tax included net gain from exceptional
items of GBP24.9m.
2. Prior to 2017, OSB deducted coupons on equity Perpetual
Subordinated Bonds ('PSBs') accounted for as dividends from underlying
profit before and after tax, net interest margin and cost to income
ratio. Following a review of market practice in advance of the Bank's
AT1 issue in May 2017, OSB no longer deducts these coupons from the
calculation of these key performance indicators. The comparatives have
been restated accordingly. Interest payments on AT1 securities
classified as dividends are treated in the same way.
Who we are
Our specialist lending is supported by a stable retail savings franchise
with over 150 years of heritage.
Full year dividend per share
+22%
2017: 12.8p
2016: 10.5p
Fully-loaded common equity Tier 1 ratio
Strengthened
2017: 13.7%
2016: 13.3%
Customer satisfaction (NPS)
+3
2017: +62
2016: +59
Our investor site gives you direct access to a wide range of information
about OSB:
www.osb.co.uk
[Graphic appear here]
Strategic report
I am delighted to welcome you to OneSavings Bank's Annual Report for
2017.
As the new Chairman of the Board, I am delighted to introduce the Annual
Report for 2017, which has been an exceptional year of earnings and loan
book growth for OneSavings Bank.
In another year of regulatory and tax changes, our clear strategy to be
a leading specialist lender continues to be successful. The shift
towards professional landlords in the private rental sector plays to our
strengths and will continue to provide a solid foundation for our
Buy-to-Let business.
Additionally, we believe there to be opportunities in 2018 for the Bank
to grow in additional residential and commercial market sub-sectors
where we have established capabilities.
There has been significant change in our share register during 2017 and
I welcome new investors. I am pleased with the positive reaction of the
market and existing investors as the principal shareholder reduced its
holding from c.50% to c.10% of share capital.
We continue to generate sustainable returns for investors and develop a
healthy and strong business for all stakeholders.
David Weymouth
Non-Executive Chairman
Strategic report
Highlights IFC
Who we are 01
At a glance 02
Chief Executive Officer's statement 04
Market review 08
Our business model 10
Strategic framework 12
One specialist lender 14
One fair place to save 16
One unique operating model 18
Operating and financial review 20
Key performance indicators 26
Financial review 28
Risk review 32
Principal risks and uncertainties 39
Viability statement 49
Corporate responsibility report 50
Governance
Board of Directors (biographies) 60
Executive team 62
Corporate Governance Report 64
Nomination and Governance Committee Report 72
Audit Committee Report 74
Risk Committee Report 79
Directors' Remuneration Report 81
Directors' Report: Other Information 96
Statement of Directors' responsibilities 98
Financial statements
Independent auditor's report 99
Statement of Profit or Loss 107
Statement of Other Comprehensive Income 108
Statement of Financial Position 109
Statement of Changes in Equity 110
Statement of Cash Flows 111
Notes to the Financial Statements 112
Glossary 178
Company information 179
Key reads
Chief Executive Officer's statement
Continued strong performance
Page 4
Market review
Page 8
Our business model
Page 10
At a glance
Our business
Buy-to-Let and SME lending
2017 Buy-to-Let/SME
Net loans and advances Gross new lending Average book LTV at 31 December
GBP5.6bn GBP2.4bn 69%
2016: GBP4.1bn 2016: GBP1.9bn 2016: 69%
Buy-to-Let mortgages
We provide loans to limited companies and individuals, secured on
residential property held for investment purposes. Our target market is
experienced and professional landlords or high net worth individuals
with established and extensive property portfolios.
Commercial mortgages
We provide loans to limited companies and individuals, secured on
commercial and semi-commercial properties held for investment purposes
or for owner occupation.
Residential development
We provide development loans to small and medium sized developers of
residential property. Loans are staged, with monitoring surveyors
signing off each stage of the development before funds are released.
Funding lines
We provide funding lines (loans) to non-bank finance companies secured
against portfolios of financial assets, principally mortgages and
leases.
For more information go to the Operating and financial review on page 22
Residential mortgage lending
2017 Residential mortgages
Net loans and advances Gross new lending Average book LTV at 31 December
GBP1.7bn GBP0.2bn 56%
2016: GBP1.9bn 2016: GBP0.4bn 2016: 58%
First charge
We provide loans to individuals, secured by a first charge against their
residential home. Our target market includes high net worth and complex
income customers. We are also experts in shared ownership, lending to
first-time buyers and key workers buying a property in conjunction with
a housing association.
Second charge
We provide loans to individuals seeking to raise additional funds
secured by a second charge against their residential home. We
predominantly target good credit quality borrowers.
Funding lines
We provide funding lines to non-bank lenders who operate in high
yielding, specialist sub-segments such as residential bridge finance.
For more information go to the Operating and financial review on page 24
Retail savings
2017 balance by channel
Direct Online Branches
41% 36% 23%
2016: 37% 2016: 32% 2016: 31%
Online
We attract retail savings deposits via the internet.
Direct
The direct channel sources savings products via telephone and post.
High street branches
Our Kent Reliance branded network operates in the South East of England
and offers a variety of fixed, notice, easy access and regular savings
products, including ISAs.
For more information go to One fair place to save on page 16
Our trading brands
OneSavings Bank is made up of a family of specialist financial services
brands.
[Graphic appear here]
Largest lending business in the Group, offering Buy-to-Let and first
charge residential loans.
Kent Reliance is also an established, stable and award-winning savings
franchise. Its strong customer focus delivers high levels of customer
satisfaction, resulting in strong customer loyalty and retention.
[Graphic appear here]
Specialist semi-commercial and commercial mortgage lender providing
Buy-to-Let loans, alongside owner-occupied and investor commercial
mortgages throughout England and Wales (acquired in August 2012).
[Graphic appear here]
Experienced team providing specialist residential development finance to
small and medium sized developers with a proven track record (commenced
trading in January 2014).
[Graphic appear here]
Long-standing second charge lender, which offers an award-winning range
of specialist secured loans throughout England, Scotland and Wales
(acquired in September 2012).
[Graphic appear here]
Based in Bangalore, India, and a wholly-owned subsidiary of OneSavings
Bank, OSBI provides primary processing for our Kent Reliance, Jersey and
Guernsey brands.
You can find more about us by visiting our website www.osb.co.uk
[Graphic appear here]
Chief Executive Officer's statement
Continued strong performance
Underlying earnings per share
51.1p
+23%
2016: 41.7p
Dividend per share
12.8p
+22%
2016: 10.5p
[Graphic appear here]
I am delighted to report another excellent year for OneSavings Bank
('OSB'). The Group's clear strategy and unique business model have
proven robust as we successfully navigated significant regulatory and
tax changes during the year. Underlying basic earnings per share grew by
23% to 51.1 pence with underlying pre -tax profit up by 21% to
GBP167.7m. We finished the year with a strong balance sheet, a high
quality secured asset portfolio and an excellent reputation for customer
service. Our strategy continues to provide the platform for us to grow
and develop our business.
The Group grew its loan book by 23% to GBP7.3bn in 2017, whilst
maintaining its strong discipline on understanding and pricing for risk,
and delivering a stable net interest margin ('NIM') of 3.16% for the
year.
Balance sheet growth was achieved whilst delivering a best in class
return on equity of 28% and a low cost to income ratio of 27%. Our
Common Equity Tier 1 ('CET1') capital ratio increased to 13.7% from
13.3% in 2016, demonstrating the strength of our organic capital
generation capability to support significant growth through
profitability. I am very pleased that we further optimised our capital
structure through the issuance of GBP60m of Additional Tier 1 securities
('AT1 securities') in May 2017.
The Board is recommending a final dividend of 9.3 pence per share.
Together with the interim dividend of 3.5 pence this gives a total
dividend per share for the year of 12.8 pence, in line with our stated
dividend policy.
Best specialist lender
OneSavings Bank continued to grow its loan book through its specialist
lending brands, with total organic origination up by 14% in 2017 to
GBP2.6bn. Our core Buy-to-Let lending sub-segment grew by 39% to
GBP5.0bn, with our target audience of professional landlords continuing
to deliver strong application and completion volumes.
This performance has been achieved despite the overall Buy-to-Let market
shrinking in response to tax and regulatory changes. These changes have
reduced the attractiveness of the sector to amateur investors, whilst
largely maintaining the interest of professional landlords, and have
driven the reduction in gross advances from GBP40.6bn in 2016 to
GBP35.8bn1 in 2017. In this context, the Bank's performance demonstrates
the sustainable strength of our proposition targeted at professional
landlords, particularly our specialist, manual underwriting, and our
deep relationships with mortgage intermediaries.
New Buy-to-Let mortgage origination increased during 2017, reflecting
our specialism and expertise in lending to limited companies and large
portfolio landlords. Professional/ multi-property landlords accounted
for 80% of completions for OSB by value during 2017, up from 75% in
2016.
We have also seen significant growth in the commercial side of our
Buy-to- Let/SME segment. Organic origination grew to GBP176m, as we
focused on innovation and building scale in our established InterBay
Commercial business. In March, we successfully piloted an entry to the
bespoke bridging market, again leveraging the Bank's strengths in asset
risk assessment and manual underwriting.
We saw a reduction in originations in the residential segment in 2017.
This contributed to the first charge gross loan book reducing to
GBP1,241m from GBP1,322m in 2016, with new organic lending more than
offset by redemptions in the back book and acquired mortgages in
run-off. However, we see opportunities for growth in the residential
market in 2018 and beyond.
I am pleased that our more cyclical commercial businesses continued to
perform strongly. The Bank's Heritable Development Finance business
provides development finance to smaller residential developers, with a
preference for forging relationships with those active outside prime
central London. The business continued to grow in 2017, in spite of new
entrants to the market, as customers sought an experienced and pragmatic
lender.
In addition, we have also grown the provision of secured funding lines
to other lenders that operate in certain high yielding, specialist
sub-segments, such as residential bridge finance and asset finance.
Whilst we continue to carefully consider inorganic acquisition
opportunities, market pricing did not meet our high return targets
during the year.
Our broker net promoter score ('NPS') recovered from the short-term
negative NPS of -7 in the first half of the year, the result of a surge
in Buy-to-Let volumes. For the second half of the year, our NPS was +25.
We continue to deliver exceptional performance and reinforce our
position as a leading specialist lender, supported by our stable,
long-standing retail savings franchise and efficient, scalable back
office function.
We made significant investment in our sales capability and continued to
gain recognition from mortgage customers and intermediaries, winning
multiple awards during the year. I am particularly pleased that OSB won
the Mortgage Strategy Awards, Best Specialist Lender and The Mortgage
Introducer Awards, Specialist Lender of the Year in 2017.
To encourage greater levels of retention amongst borrowers reaching the
end of their initial product term, OSB offers a mortgage product
transfer scheme ('Choices'). Under this programme, borrowers are
encouraged to engage with their broker to receive advice and select from
a bespoke product set. Since the implementation of the scheme in
mid-2016, we have seen a consistently strong proportion of our borrowers
choose a new product within three months of their initial product ending,
at around 60% by December 2017. This is driven by success in switching
borrowers who were otherwise remaining on standard variable rate ('SVR')
and who, by definition, were therefore in the market for other lenders.
Sustainable funding model with award-winning savings
Our stable and award-winning retail funding franchise continues to
support lending growth, with retail deposits up 12% to GBP6.7bn during
the year. Over 27,000 new savings customers joined the Bank during 2017
and our successful programme of creating long-term savings relationships
by offering market competitive rates to all customers, including those
with maturing fixed rate bonds and ISAs, continued to deliver a very
strong 90% retention rate. The strength and fairness of our retail
savings proposition, coupled with excellent customer service and high
retention rates, continues to allow the Bank to raise significant funds
without needing to price at the very top of the best buy tables and
provides a consistent and stable source of liquidity.
I am delighted that Kent Reliance has been recognised by Moneyfacts in
2017 as the Best Cash ISA Provider for the fifth year running. The Bank
also received the ISA Provider of the Year Award from Consumer
Moneyfacts for the second consecutive year. These awards are a testament
to our savings proposition and to the outstanding customer service
delivered by our staff.
1. UK Finance, New and outstanding buy-to-let new mortgages, 2
Feb 2018.
We continue to gain recognition among customers and intermediaries,
winning multiple awards during the year.
The Bank remained predominantly retail funded during 2017, with a loan
to deposit ratio for the year of 92%2 delivering on our strategy to
primarily fund our loan book using retail deposits. We continued to make
judicious use of the Bank of England's Funding for Lending Scheme
('FLS') and the Term Funding Scheme ('TFS'), drawing down additional net
funding of GBP624m in the year. The Bank completed its planned
transition out of the FLS into the TFS by year end. As at 31 December
2017, TFS drawdowns stood at GBP1.25bn.
Leveraging our unique business model
As the Group has grown, costs and efficiency have remained a key focus
for the business, resulting in a stable cost to income ratio of 27%
(2016: 27% 3) despite significant investment during the year. We
continued to invest in our risk management and modelling capabilities in
preparation for IFRS 9 and our planned internal ratings-based ('IRB')
application. We also invested in technology to offer an automated
solution to brokers to help the Bank meet the PRA's new specialist
underwriting rules in an efficient way.
OSBIndia continues to undertake a range of primary processing services
at a significantly lower cost than an equivalent UK-based operation and
with very high quality levels. I am especially pleased that we achieved
this whilst maintaining our focus on customers, borne out by an increase
in customer NPS to an outstanding 62 (2016: 59).
We continue to differentiate ourselves from the competition by offering
well-defined propositions in high margin, underserved markets, where we
have the experience, as well as the internal and intermediary
infrastructure, to successfully develop and service those markets.
Building our business for the future
The Group continued to exercise strong diligence over loan and customer
assessment. The loan loss ratio fell to 7bps in the year to 31 December
2017 (2016: 16bps) mainly due to assumption updates that took place in
2016. We remain particularly pleased with the performance of the front
book of mortgages. From more than 38,500 loans totalling GBP8.3bn of new
organic originations since the Bank's creation in February 2011, we have
only 137 cases of arrears over three months in duration, with an
aggregate balance of GBP18.4m and an average loan to value ('LTV') of
63%, reflecting the continued strength of the Bank's underwriting and
lending criteria.
2. Excluding the impact of TFS/FLS drawdowns. The unadjusted
ratio was 109% as at 31 December 2017 (2016: 100%).
3. Prior to 2017, OSB deducted coupons on equity Perpetual
Subordinated Bonds ('PSBs') accounted for as dividends from underlying
profit before and after tax, net interest margin and cost to income
ratio. Following a review of market practice in advance of the Bank's
AT1 issue in May 2017, OSB no longer deducts these coupons from the
calculation of these key performance indicators. The comparatives have
been restated accordingly. Interest payments on AT1 securities
classified as dividends are treated in the same way.
The weighted average LTV of the overall mortgage book remained low at
64% at the end of 2017, with an average LTV of 69% on new origination
during the year.
In 2017 we saw the market adjusting to the new Buy-to-Let underwriting
standards, including ensuring that lenders reflect the changes to
personal tax on landlords within their affordability assessments. We
have seen a clear trend for borrowers to seek to mitigate this by opting
to borrow via a limited company during 2016 and 2017, with a continued
increase in the proportion of purchase applications via limited
companies for our main Buy-to-Let brand, Kent Reliance, to 69% in 2017.
The Group has always specialised in lending to limited companies, and
given market trends, this gives us a competitive advantage over those
lenders without such a capability.
From 1 January 2017, The Prudential Regulation Authority ('PRA')
required lenders to adopt more stringent affordability assessments. We
have always assessed affordability for borrowers through our specialist
underwriting model and applied stringent stress tests, so were
well-placed to benefit from these changes. This can be seen in our
weighted average interest coverage ratio ('ICR') for Buy-to-Let
origination during 2017, which increased to 185%, demonstrating our
cautious approach to the assessment of customer affordability.
Further market- wide measures to strengthen underwriting standards were
implemented from October 2017. We already substantively met the
regulatory requirements for assessment of landlords with four or more
mortgaged properties, and sought to enhance this proposition through the
use of technology, creating a simple and automated way of providing
comprehensive portfolio information. This has been embedded within our
underwriting process to create a strong proposition for brokers and
borrowers alike.
These measures, and an expectation of further interest rate rises, also
caused a shift in the demand amongst our professional landlords towards
five-year fixed rate products which accounted for c.43% of our
Buy-to-Let completions in 2017. Competition has increased in this area,
and the market has not yet fully repriced following the Bank of England
base rate rise in November 2017 or for subsequent widening of swap
spreads, putting pressure on margins.
Outlook
Trading conditions in our core markets are positive and current
application levels are strong. In line with UK Finance forecasts, the
overall Buy-to-Let market is expected to contract further in 2018,
however, we expect to continue to grow market share through the
relevance of our proposition to professional landlords.
The Group's IFRS 9 models and first generation IRB models were delivered
on schedule in late 2016 and we ran the models in parallel throughout
2017. We remain pleased with progress towards our IRB application and
also welcomed the recalibration of risk weights in the final revisions
to the Basel III reforms on standardised capital requirements published
in December 2017. We believe that these new calibrations combined with
the final IRB output floor will be beneficial to the Bank's capital
requirements, however we remain cautious until the final rules are
adopted.
The market sub-segments targeted by OSB, principally professional
landlords, including limited companies, have remained strong despite the
overall slowdown in the Buy-to-Let market in 2017. We remain confident
in the underlying strength of the Private Rented Sector and believe that
we are well-placed as the Buy-to-Let market continues to professionalise
in response to tax and regulatory changes. We will continue to
concentrate on what we have proven we do best: using our relationships,
manual underwriting expertise and secured lending strategy to lend
responsibly to our customers.
We see opportunities for growth in other segments of the lending market
where we already have expertise and a platform to build from. In
particular, we expect to grow commercial and bridge finance lending
through our InterBay Commercial brand and see further opportunities to
grow our residential lending franchise.
We will remain predominantly retail funded, aiming to fund our loan book
through our Kent Reliance savings brand. In addition, we intend to
invest in our online savings platform during 2018 to attract a broader
customer base and grow SME and other lower cost deposits in future
years. Our additional liquidity will continue to come from wholesale
funding, and we intend to return to the securitisation market during
2018 following the closure of the TFS in February. We drew down an
additional GBP250m in 2018 before the scheme closed, bringing the total
balance to GBP1.5bn. Over time we will use these different funding
sources to optimise our cost of funds.
The pipeline of regulatory change continues to grow, with GDPR and PSD 2
both going live in 2018 and work continuing on IRB and other smaller
regulatory projects. We expect to expense c.GBP7m on regulatory projects
in 2018, around double the total in 2017. In addition, we plan to
continue to invest in our technology infrastructure, mortgage
origination system and online savings platforms to support our future
growth strategy and enable us to broaden our reach into adjacent markets,
such as sub-segments of residential mortgages, where we see
opportunities, particularly once we transition to IRB. All of these
projects are expected to lead to a significant increase in operating
costs in 2018. However, we expect to offset this in part, by delivering
further efficiencies in the cost of running the Bank on a 'business as
usual' basis, by continuing to focus on cost discipline and leveraging
our unique operating platform in India.
We are now live with IFRS 9 after a successful parallel run throughout
2017. The day one impact of the implementation of IFRS 9 is an increase
in the provisions of c.GBP4m, representing 9bps on the Bank's CET1 ratio
as at 31 December 2017, on an end game basis, reflecting the strength of
security underpinning our loan book.
Our achievements in 2017 are a testament to the management and staff of
OSB and I would like to thank my colleagues for their hard work and
commitment throughout the year.
We are a responsible lender and will continue to manage the business
prudently.
Looking forward to 2018
Over the coming year, organic lending through the Buy-to-Let segment
will remain the key driver of loan book growth, but we expect to grow
our residential lending, and our commercial and bridge finance lending
through our InterBay Commercial brand.
We expect to deliver net loan book growth in the mid teens in 2018 and
NIM of c.3%, reflecting current asset pricing, in particular for
five-year fixed loans and an expectation of a rising cost of retail
funds after the end of TFS. We anticipate a cost to income ratio of
c.30%, reflecting the significant increase in the cost of regulation and
planned additional investment in the business.
We start 2018 with a fully loaded CET1 ratio of 13.7% and a proven
organic capital generation capability through profitability. We
anticipate maintaining a CET1 ratio at a minimum of 12% going forward.
Our dividend policy remains a payout ratio of at least 25% of underlying
profit after taxation attributable to ordinary shareholders.
Our primary growth strategy remains organic origination, but we continue
to look at inorganic opportunities, including portfolio purchases, where
they meet the Bank's return hurdles.
I believe that OneSavings Bank is well placed to take advantage of
opportunities that arise and we remain capable of generating attractive
returns for our shareholders.
Andy Golding
Chief Executive Officer
15 March 2018
Market review
Economic overview
UK Buy-to-Let gross advances
GBP35.8bn
[Graphic appear here]
Source: UK Finance
UK house price inflation
5.2%
[Graphic appear here]
Source: ONS, Survey of mortgage lenders
1
The housing market
The housing market in 2017 continued to reflect the uncertainties that
emerged in 2016 after the UK's vote to leave the EU. Transaction volumes
remained at much the same levels as they have since 2014(1) , reflecting
ongoing challenges posed by affordability driven by low wage growth and
higher house price inflation ('HPI')(2) . 2017 has seen HPI fall back,
particularly in London, and it is possible that we may see a return to a
moderate level of growth in transactions.
In February 2017, the government issued a long-awaited housing white
paper. This reflected a shift in sentiment towards a more holistic
approach to property tenure and away from an explicit focus on demand
side initiatives that promoted home ownership. The political instability
that followed the General Election has, however, left most of the
proposed measures untouched. With the housing market remaining in the
national spotlight, it is likely that the agenda set out in that white
paper will re-emerge.
The mortgage market
According to UK Finance, gross mortgage lending reached GBP257bn in
2017(3) , ahead of the expected figure of GBP248bn and 4.4% up on 2016,
driven largely by an increase in remortgage activity. The larger house
purchase market rose by 9% to GBP139bn.(4)
First time buyers continued to take advantage of Help to Buy, with
overall first time buyer lending up by 11% to GBP59.2bn (2016:
GBP53.5bn).(5) The effect of the Stamp Duty Land Tax ('SDLT') change for
first time buyers that was announced in the Budget came too late to have
any influence on the market in 2017; however, our view is that any
impact will be minimal.
OneSavings Bank's lending markets:
2
UK Buy-to-Let/specialist SME market
The Private Rented Sector ('PRS') accounts for approximately 5.5 million
households.(6) In the year to December 2017, it grew by 2.2%, a figure
less than a third of that for the same period in 2014 and less than half
of what it was in 2016.
This was, of course, a reaction to a series of regulatory and political
interventions aimed at cooling the rate of market growth and improving
levels of home ownership. In the year, new Buy-to-Let lending of GBP
35.8bn was down 12% on 2016 (GBP40.6bn).(7) This is, however, within the
context of a continuing shortage of housing supply and mortgage
regulation that keeps house prices relatively high and mortgage finance
beyond the reach of many, thus underpinning strong and sustained demand
for rental property.
The PRA changes to affordability assessment and to underwriting
standards for portfolio landlords have driven two significant shifts
within the Buy-to-Let market. First, we have seen growth in the
professional landlord community, at the expense of the amateur. Second,
we have seen these professional landlords increasingly prioritise yield,
resulting in an increase in Houses in Multiple Occupation ('HMO') and
student let lending, coupled with geographic diversification away from
the South East, where yields tend to be lower.
Furthermore, professional landlords continue to mitigate the impact of
tax changes by borrowing through limited companies. OSB is a respected
lender within the specialist Buy-to-Let sector with a strong reputation
for limited company lending and that has been beneficial to date and is
expected to continue to be so.
Commercial
The UK commercial property market saw investment demand continue to
increase during 2017, driven by overseas investors, who accounted for
60% of the whole market, up from around 50% in 2016.(8) Uncertainty
caused by Brexit continues to present risks, but there are strong
underlying factors which mean the UK, and particularly London, remains
attractive to investors. Demand has grown in all sectors except retail,
with strong growth in offices, and particularly the industrial sector,
which has benefited from the same types of shift - towards e-commerce -
that has damaged the retail sector.
Research from JLL shows commercial property investment recorded double
digit growth in 2017 to GBP60bn, although the share of that accounted
for by properties over GBP200m is more than twice as high as 2016, and
the proportion of smaller lot sizes has dropped.(9) However, yields in
cities across Europe came under more pressure in 2017 compared to London
and other regional UK cities, creating the possibility for more activity
in the UK during 2018, albeit with growth returning to more 'normal',
single digit levels.
The lending market is dominated by the high street banks. Opportunity
exists for specialist lenders whose manual underwriting approach, and
willingness to engage in a dialogue to ensure robust understanding of
customer requirements, can provide a service differential.
Residential development
The UK has experienced a long-term upward trend in real house prices,
creating affordability problems as demand for housing continues to
outstrip both supply and real wage growth. Furthermore, turnover in the
second-hand housing market is subdued.
The housing white paper published in February 2017 refers to a "broken
housing market" and identified that "not enough homes are being built"
and thus prioritised initiatives that will seek to address this. Notable
among the initiatives announced in the white paper were a raft of
measures to encourage smaller builders to build more homes, through an
improved planning framework. The government also expressed a desire that
lenders should "back developers. in building more homes". The white
paper represents a holistic assessment of the UK's housing needs, and it
is encouraging to note the emphasis placed on supporting the small and
medium sized developers who form our core audience for development
finance.
[Graphic appear here]
3
Specialist residential lending
OneSavings Bank's manual underwriting and individual case assessment
model provides a strong platform for specialist residential lending.
Customers with unusual asset and income structures, or complex credit
histories as well as those seeking shared ownership mortgages, are
ill-served by the commoditised and inflexible decision making processes
of mainstream lenders. We have identified strategic opportunities in
this market that we will pursue in 2018.
Second charge lending
The second charge market saw approximately GBP1bn(10) of gross new
lending in 2017 (2016: GBP874m). This market continues to adjust to the
changes in regulation that came into effect in March 2016 and the
short-term outlook is at best neutral; any significant increase in
market size is considered unlikely. In this context, we continue to
resist the market trend to aggressively chase business through
widespread price reductions or relaxation of credit standards, believing
the returns available to be insufficient reward for the risks involved.
Funding lines
There are a number of successful non-bank or alternative providers of
finance to retail and SME customers in the UK. These businesses are
funded through a variety of means including wholesale finance provided
by banks, high net worth investors and market based/peer-to-peer
finance. OSB is an active provider of secured funding lines to the non
-bank finance market, to date focusing on short-term real estate finance,
leasing and development finance. Through these activities the Bank has
achieved senior secured exposure at attractive returns to asset classes
that it knows well. This financing activity covers a broad range of
business sectors and its overall size is thus difficult to quantify. OSB
sees a regular flow of opportunities, adopts a very selective approach
and has a strong pipeline of new business.
1. UK Finance, Property sale transactions, UK countries, PT2, 21
Feb 2018.
2. UK Finance, House price changes, UK countries and regions,
HP14, 13 Feb 2018.
3. 4. UK Finance, New mortgages by purpose of loan, ML1, 1 Feb
2018.
5. UK Finance, First-time buyers, new mortgages and
affordability, UK countries and regions, ML2, 1 Feb 2018.
6. Kent Reliance Buy-To-Let Britain Report, edition 7, Dec 2017.
7. UK Finance, New and outstanding buy-to-let new mortgages, 2
Feb 2018.
8. 9. JLL, The UK Commercial Property Market, Jon Neale, Jan
2018.
10. FLA, Second charge mortgage new business volumes grow in 2017,
9 Feb 2018.
Our business model
The Group leverages our unique business model to differentiate ourselves
from the competition, offering well-defined propositions in our chosen
markets. We apply a specialist, personal and flexible approach to our
intermediary and customer relationships, focusing on delivering
long-term value.
1. Resources and relationships
Brands and heritage
We have a family of specialist lending brands supported by our savings
franchise with a 150-year heritage.
Employees
Our team of highly-skilled employees possess expertise and in-depth
knowledge of the property and savings markets.
Infrastructure
We benefit from cost advantages provided by our wholly-owned subsidiary
OSBIndia.
Relationships with intermediaries
We have strong and deep relationships with the mortgage intermediaries
who distribute our products.
Financial
We have a strong equity Tier 1 capital ratio which can support
significant loan book growth.
2. What we do
Attractive retail savings
We deliver straightforward products that meet customer needs for cash
savings. We offer good and consistent value to attract and retain a
loyal customer base, without having to price at the top of the best buy
tables.
Our proven retail savings performance provides a stable, long -term
funding platform to grow our loan book.
How we do it
Our channels:
Online
[Graphic appear here]
Direct
[Graphic appear here]
High street branches
[Graphic appear here]
Specialist lending business
We focus on specialist mortgage lending to consumers, entrepreneurs and
SMEs in sub-sectors of the UK market where we have identified
opportunities for high returns on a risk-adjusted basis and where we can
take a leading position.
We adopt an expertise-based, bespoke and manual approach to underwriting
in each market sub-sector, specifically geared to each individual
customer. We do not use automated or scorecard-based processes for
underwriting new loans.
How we do it
Our segments are:
Buy-to-Let/SME lending
77%
Residential lending
23%
Unique operating model
We capitalise on our cross-company expertise, operating under a common
operational framework that supports our key lending brands. Distribution,
sales, credit and risk processes operate under a simple, coordinated
management structure giving us the ability to present our multiple
lending brands with great efficiency.
We put customer needs first and drive continuous customer-focused
improvement through our flexible and cost-effective operating platform.
How we do it
Our customer service administrative functions are based in our
wholly-owned subsidiary OSBIndia.
Cost to income ratio
[Graphic appear here]
3. Outcomes and value creation
For shareholders
We aim for strong EPS growth and a dividend payout of at least 25% of
underlying earnings.
EPS
51.1p
DPS
12.8p
For employees
We invest in training and development and employee engagement activities
to make OSB the best workplace it can be.
Employees promoted in 2017
76
Employees who attended learning events in 2017
685
For customers
We provide a great customer experience and deliver high levels of
customer satisfaction.
Customer NPS
+62
Customer retention(2)
90%
For communities
We have well-established community services programmes in the UK and
India.
Sponsorship and donations
GBP209k
1. 25% of underlying profit after tax attributable to ordinary
shareholders.
2. Retention is defined as monthly average ratio of maturing
contractual retail deposits which withdraw their funds on maturity.
Strategic framework
Our strategic objective
To be a leading specialist lender in our chosen sub-sectors, supported
by a strong retail savings franchise.
Priorities Our goals 2017 progress Looking forward Key risks KPI
Be a leading specialist lender in our chosen markets Grow profitable loan origination in key markets - Buy-to-Let/SME origination up 23% to GBP2.4bn - Focus on organic growth in underserved sub-sectors - Market conditions affecting long-term demand Loan book GBP7.3bn
- Deliver strong end-to-end propositions in target - GBP176m originations in commercial lending through - Further develop commercial lending opportunities - Increased regulatory pressure +23%
markets our InterBay brand - Enhance proposition in residential lending in light - Continued political uncertainty [Graphic appear here]
- Deliver incremental, non-organic business - Received multiple awards including Best Specialist of progress to IRB - New specialist lenders entering the market
- Invest in highly responsive, customer-focused culture Lender (Mortgage Strategy Awards) and Best Specialist - Develop further opportunities in bridge finance
- Innovate to secure sustainable long-term market Lender of the Year (The Mortgage Introducer Awards) - Identify new market sub-sectors with high returns
leadership on a risk-adjusted basis
Retain focus on bespoke and responsive underwriting High quality decisions protecting the business - More than 38,500 loans totaling GBP8.3bn originated - Identify additional technology to support decision - Changing regulation for underwriting Loan loss ratio 7bps
- Skilled manual underwriting supported by clever since the Bank's creation in 2011 with only 137 cases making - More complex underwriting requirements improved by 9bps
technology of arrears over 3 months, with an aggregate balance - Continue training and coaching to further strengthen - Difficulty in recruiting experienced staff [Graphic appear here]
- Deliver a high quality, differentiated service supported of GBP18.4m and an average LTV of 63% the underwriting expertise of our team - Increasing intermediary demands
by highly responsive decision-making - New technology solution for assessing multi-property - Maintain focus on consistent decision making outcomes - Demands of ever-changing technology
- Clear decisions recognised by intermediaries for portfolios - Find ways to be even more responsive to intermediaries
their quality and fairness - a critical friend - Transactional Credit Committee met 103 times to and borrowers whilst remaining a critical friend
- Integrated underwriting across all brands assist with more complex or larger new mortgage applications
Further deepen relationships and reputation for delivery Increase partner reach in response to demand - Introduced high tech solution to ease the burden - Develop enhanced intermediary education programme - Loss of key broker relationships Gross new lending GBP2.6bn
with intermediaries - Provide access to specialist products developed for assessing multiproperty portfolios - Continue to deliver direct relationships with high - Competition reducing pricing below OSB's risk-adjusted +14%
by listening to intermediary partners - Success of Choices programme in increasing retention quality intermediaries return appetite [Graphic appear here]
- Be accessible and available to intermediaries rates in 2017 - Deliver deeper relationships with more of our target - More complex underwriting requirements slowing the
- One distribution model across all brands - Restructured relationship team to increase levels intermediaries process
- Gain intermediary recognition for delivering long-term of engagement - Deliver best in class service performance as we
sustainable proposition - Attended c.150 intermediary events across our target grow and enter new market sub-sectors
- Deliver bespoke solutions to meet intermediary and geographies
customer needs - Enhanced marketing and brand support for intermediaries
- Published periodic market leading 'Buy-to-Let Britain'
reports
Maintain and build upon over 150 years of heritage Stable, high quality funding platform - Gained c27,000 new savings customers - Enhance service proposition by investing in technology - Increased competition for retail funds Customer NPS +62
in savings - Be primarily funded through attracting and retaining - Achieved 90% customer retention for digital transformation - Potential NS&I/government intervention in the market +3
a loyal retail savings customer base - Received multiple awards for savings products including - Continue to invest in and diversify distribution - Increased customer expectation for technology compared [Graphic appear here]
- Provide access to our service for customers through ISA Provider of the Year and Best Cash ISA Provider channels from branches to digital to difficulty and cost of delivery
their channel of choice - Loan to deposit ratio of 92%(1) - Broaden savings propositions further to include - Increased burden of regulatory compliance - for
- Ensure liquidity requirements are met through the 1. Excluding impact of TFS/FLS drawdowns. wider savings needs example, Open Banking (which currently does not apply
economic cycle to OSB)
- Deliver a proposition offering transparent, straightforward
savings products, providing long-term value combined
with excellent service levels
Leverage unique and cost-efficient operating model Best in class customer service - Investments in training and process development - Extend measurement by benchmarking to best in class - Difficulty in continuous service improvement as Cost to income ratio 27%
- Put customer service at the heart of everything contributed to enhanced customer NPS of +62 - Introduce robotics technology and improve workflows OSB grows [Graphic appear here]
that we do - Increased OSBI headcount by 33% to 366 to further enhance service in primary servicing - Global economic uncertainty increasing costs in Stable despite increasing cost of regulation
- Extend activity in OSBIndia, developing high quality - Increase change capacity through enhanced end-to-end India
areas of excellence project management capability - Increasing complexity from compliance with changing
- Create structure-delivering solutions using cross-company regulation
expertise - Lack of operational resilience due to rapid growth
- Deliver cost efficiencies through excellent process
design and management
1. Prior to 2017, OSB deducted coupons on equity Perpetual
Subordinated Bonds ('PSBs') accounted for as dividends from underlying
profit before and after tax, net interest margin and cost to income
ratio. Following a review of market practice in advance of the Bank's
AT1 issue in May 2017, OSB no longer deducts these coupons from the
calculation of these key performance indicators. The comparatives have
been restated accordingly. Interest payments on AT1 securities
classified as dividends are treated in the same way.
In focus
One specialist lender
Gross new organic lending
+14%
2017: GBP2.6bn
2016: GBP2.3bn
[Graphic appear here]
We focus on specialist mortgage lending to consumers, entrepreneurs and
SMEs in sub-sectors of the UK market where we have identified
opportunities for high returns on a risk-adjusted basis and where we can
take a leading position.
Sub-sector market specialisation
The markets we focus on are:
- Buy-to-Let
- commercial and semi-commercial
- residential development
- bespoke specialist residential
- second charge residential
- shared ownership, and
- bridging and short-term loans.
OSB also provides funding lines to other lenders. The funding lines
business is secured against pools of loan collateral with indirect
access to certain high-yielding, specialist sub-segments, such as asset
finance and residential bridging finance.
Intermediary relationships
Access to our specialist products and multiple brands is via
intermediaries. Relationships are key and partnerships continue to
flourish with our panel of selected specialist mortgage intermediaries,
who are leaders in their sub-sectors.
We listen to and work with the intermediaries to develop new
opportunities and bespoke solutions for our clients. In the year, we
developed joint marketing and education campaigns and provided dedicated
marketing support.
Our sales team was awarded The Best Business Development Team in 2017 by
The Mortgage Strategy Awards.
Inorganic growth
The Group is focused on organic origination as its core growth strategy.
In addition, we continue to evaluate selective inorganic opportunities
that provide long-term value and meet our strategic objectives. In 2017,
the Group made no portfolio acquisitions as market pricing did not meet
the Group's stringent return conditions.
Bespoke underwriting
All of our loans are underwritten by experienced and skilled
underwriters. At OSB, we do not use automated or scorecard-based
processes. We take each loan on its own merits, responding quickly and
flexibly to offer the best solution for each of our customers. For this
bespoke approach, expertise and going out of our way for our clients, we
received the Best Specialist Lender award at The Mortgage Strategy
Awards and Specialist Lender of the Year from Mortgage Introducer
Awards.
To support this manual and bespoke approach, in 2017 we implemented new
technology to reduce administrative burdens on our underwriters and
mortgage intermediaries. This provides a simple and speedy solution to
enable landlords and brokers to meet the PRA's underwriting standards
for portfolio landlords. Implemented in October 2017, the system
provides valuations and verifications of entire portfolios in seconds,
giving our underwriters high levels of confidence in their valuations.
No case is too complex for us and for those borrowers with more tailored
or larger borrowing requirements our Transactional Credit Committee
meets twice a week - and in 2017 met 103 times - to demonstrate our
responsiveness to broker needs.
What we will do
We will continue to develop our sales and underwriting teams through
attracting the top talent and then nurturing it through training and
coaching programmes. We will also ensure that our relationships with
intermediaries continue to flourish and that we deliver a high quality,
differentiated service for our clients.
Our strategy in action
Be a leading specialist lender in our chosen markets
Further deepen relationships and reputation for delivery with
intermediaries
EMILY MACHIN
NATIONAL ACCOUNT MANAGER
Our support goes way beyond words
2017 was an important year for me in the newly established role of
National Account Manager. Our strategy is to continuously improve our
working relationships with our large corporate clients and in 2017 we
had a particular focus on the regulatory and market changes that brokers
are currently facing.
We were recognised by our intermediaries for being able to assist even
in the most complex of cases. One of the things that I am most proud of
is how we coordinate our efforts across different parts of the Bank,
including marketing and underwriting, to make sure that our support is
demonstrated through our service rather than just words.
Of course, this also meant demonstrating how Kent Reliance can help as
the Buy-to-Let market becomes more focused on professional landlords and
the different demands that this will bring.
[Graphic appear here]
In focus
One fair place to save
New savings customers in 2017:
over 27,000
[Graphic appear here]
We deliver straightforward products that meet customers' needs for cash
savings. We offer good and consistent value to attract and retain a
loyal customer base.
Stable funding platform
OSB's proposition for savers is simple; we offer consistently good value
savings products to attract and retain a loyal customer base, providing
a stable funding platform for the business to grow its loan book. Our
retail savings franchise has been a valued and recognised brand for over
150 years.
Transparent savings products
We deliver straightforward products that meet customer needs for cash
savings. We offer good and consistent value, without having to price at
the very top of the best buy tables. We do not offer 'new customer only'
products, and existing customers benefit from loyalty rates.
Our clients can access savings products directly via post, online and in
our nine branches. The products offered include fixed term bonds, ISAs,
easy access and regular savings accounts. We also offer a childrens'
account which supports one of our chosen charities, Demelza Hospice for
Children.
We attracted over 27,000 new savings customers during 2017, and retained
90% of maturing fixed term deposit balances, demonstrating the strength
of our long-term proposition.
The savings proposition to small and medium sized businesses, launched
in 2016, has been very well received and continues to grow, with an
average balance per account of nearly GBP78k.
In 2017, we were recognised by Consumer Moneyfacts as the ISA Provider
of the Year and by Moneyfacts as Best Cash ISA Provider for the fifth
year running.
Customer-focused philosophy
By maintaining our strong customer-centric approach we are rewarded with
a loyal customer base that recognises long-term good value.
We reward our people based on the quality of service they provide to
customers, further protecting our retail savings franchise. We measure
customer satisfaction and net promoter score ('NPS') through regular
customer surveys using independent experts. These measures are aligned
to our business strategy and the client NPS score increased to +62 for
the year, up from +59 in 2016.
We will continue to invest in enhancing our service in 2018, based on
using technology and modern practices to support the brand traits
customers have told us they prefer - heritage, trustworthy and
traditional. We will also use our real-time customer feedback capability
to identify and act on ideas for new products and service improvements.
Our strategy in action
Broaden savings propositions further
Provide access to customers through the channel of their choice
AMANDA LUDLOW
BRANCH NETWORK MANAGER
Our customers are voting with their feet, and visiting our branches in
ever-increasing numbers
Unlike most banks, we are seeing an increase in the number of customers
visiting our branches, meaning some are getting a bit crowded. In
Maidstone, we tackled this by moving into much larger premises,
regenerating a listed building in a popular location on the busy high
street.
We haven't just made it bigger though. Listening to our customers has
helped us deliver a much improved service, with additional counter space,
a larger team and more meeting rooms for private discussions and longer
enquiries.
To match the new space, we have employed more local people, further
adding to the community we serve. Results so far are positive. In the
first full month after opening, customer service ratings for the branch
shot up. And the best news is that we are going to do the same for our
Canterbury customers this year.
[Graphic appear here
In focus
One unique operating model
NPS +62
up 3
We work to an overarching risk appetite and single Group lending policy
spanning all our brands and deliver our services with the aim of
providing an excellent customer experience. We put customers' needs
first.
Integrated multi-brand approach
We capitalise on our cross- company expertise, operating under a common
operating framework that supports our key lending brands. Distribution,
sales and risk processes operate under a simple, coordinated management
structure giving us the ability to present our multiple lending brands
with great efficiency.
We work to an overarching risk appetite and a single Group lending
policy spanning all our brands, using our experience in specialist
lending to enhance policy. We ensure that risks are modelled and that
the comprehensive risk pricing model reflects latest market conditions
and forecasts. This modelling ensures all product pricing goes through
the same rigorous analysis, according to core principles set by our
Group Assets and Liabilities Committee, comprised of senior management.
Cost-efficient operations
Our administrative functions, based in our wholly-owned subsidiary
OSBIndia, support the strategic intent of delivering excellent customer
experience. We drive continuous customer-focused improvement through our
flexible and cost-effective operating platform, putting customer needs
first.
Real-time customer satisfaction surveys inform a programme of continuous
improvement.
We benchmark our processes against industry best practice, challenging
what we do and eliminating customer pain points as they arise. We
continue investing in developing skills that enable highly efficient
service management, matching those to business needs both in India and
the UK.
Investment in infrastructure and systems
We aim to deliver efficient, scalable and resilient infrastructure to
support our business strategy objectives. We invest in complementary
systems, both proprietary and industry standard, to deliver excellent
service (measured against peers by industry experts), outstanding
resilience and strong governance. OSB focuses on being a nimble bank
with very few legacy issues.
We continue to invest in IT security, supported by market leading data
security and resilience experts.
We will continue to leverage infrastructure investment across the Group
in 2018, maximising customer and efficiency benefits. We will also
ensure infrastructure and systems are regularly reviewed and tested,
focusing on their security and resilience in cooperation with industry
experts with particular focus on cyber security.
Our strategy in action
Put customer service at the heart of everything that we do
Extend activity in OSBI, developing high quality areas of excellence
NITIN JOSHI
HEAD OF OPERATIONS OSBI
Not resting on our laurels
We worked hard in 2017 to deliver great customer satisfaction as
evidenced in our NPS scores. However, we are not resting on our laurels.
We always want to improve customer satisfaction even further.
So we look at all areas of our business. For example, staff retention is
really important to us. We invest a lot in training both new staff
members and also longer-serving employees of OSBI, continually
refreshing and enhancing their knowledge, skills and capability.
[Graphic appear here]
Operating and financial review
OneSavings Bank
Group overview
OneSavings Bank delivered another year of strong performance in 2017
which reflects the continued successful delivery of our strategy to:
- be a leading specialist lender in our chosen sub-sectors
- retain our focus on bespoke underwriting
- further deepen our relationships and reputation for delivery
with the intermediaries who distribute our mortgage products
- leverage our efficient, scalable and cost-effective operating
model, and
- maintain and build on our stable retail savings franchise.
Business highlights
2017 was another year of exceptional performance underpinned by organic
originations of GBP2.6bn at attractive margins, strong risk management
and cost-efficiency and discipline.
Net loans and advances grew by 23% in 2017 to GBP7.3bn. The growth was
due primarily to an increase in new lending in the Buy-to-Let
sub-segment, as the market became increasingly focused on our core
audience of professional landlords. Regulatory change, introducing more
complex underwriting standards to the Buy-to- Let industry in 2017, has
driven additional business flow to specialist lenders resulting in
growth in our market share. This growth was achieved whilst improving
the Group's CET1 ratio to 13.7% from 13.3% in 2016, demonstrating the
strength of the capital generation capability of the business through
profitability. The Group's capital position was further strengthened in
May 2017 by the issuance of GBP60m of Additional Tier 1 capital
securities ('AT1 securities'), with the total capital ratio
strengthening to 16.9% from 15.1% in 2016 and the leverage ratio also
increasing to 6% from 5.5%. The successful issuance of AT1 securities
highlights OSB's strong balance sheet and attractive investment
proposition to debt investors.
The Group remains focused on organic origination as its core growth
strategy and gross new organic lending of GBP2.6bn in 2017 was up 14%
compared with GBP2.3bn in 2016. OSB continued to experience high demand
for its products during 2017, particularly in Buy-to-Let where the Group
targets professional landlords with larger portfolios. Buy-to-Let/SME is
the Group's largest segment comprising 77% of the gross loan book with
Residential Mortgages at 23% as at 31 December 2017. New organic
originations in our residential book decreased, which, combined with
redemptions in the back book and acquired mortgages in run- off
contributed to the first charge gross loan book reducing to GBP1,240.6m
from GBP1,322.1m in 2016.
The Bank made no portfolio acquisitions during 2017 (2016: portfolios of
first and second charge residential mortgages for GBP180.7m). However,
we continue to evaluate selective inorganic opportunities that provide
long -term value and meet our strategic objectives when they arise. The
Group conducts extensive due diligence when considering any portfolio
acquisitions and in 2017, market pricing for deals under consideration
did not meet the Group's stringent return conditions.
For all our lending segments, we manually underwrite all risks,
providing us with a competitive advantage over more automated lenders,
as we are able to identify and understand complex cases that others
cannot. The weighted average LTV of the mortgage book remained low at
64% at the end of 2017, with an average LTV of 69% on new origination
during the year, reflecting the strength of our balance sheet. Both the
loan loss ratio and portfolio arrears rate improved in the year to 7bps
and 1.2% respectively (2016: 16bps and 1.4% respectively), further
demonstrating our disciplined underwriting and lending criteria. We also
have limited exposure to high value properties, with only 4% of our
total loan book secured on properties valued at greater than GBP2m and
with an LTV above 65%.
The broker-led Choices mortgage product transfer scheme that we
introduced in 2016 has encouraged greater levels of retention among
those borrowers reaching the end of their initial product term. Since
the implementation of the scheme in mid-2016, we have seen a
consistently strong proportion of our borrowers choose a new product
within three months of their initial product ending, at around 60% by
December 2017. This is driven by success in switching borrowers who were
otherwise remaining on standard variable rate ('SVR') and who, by
definition, were therefore in the market for other lenders.
The Bank continued to offer secured funding lines to non-bank lenders,
however kept a cautious approach in light of macroeconomic uncertainty.
Total credit approved limits as at 31 December 2017 were GBP 336.6m with
total loans outstanding of GBP122.1m (31 December 2016: GBP330.2m and
GBP122.3m respectively). During the year, two new funding lines in the
Buy-to-Let/SME segment were extended.
The Group remained predominantly retail funded during the year with a
loan to deposit ratio of 92%(1) as at 31 December 2017 (2016: 90%(1) ).
Our customer-centric strategy of providing transparent savings products
which offer long -term value for money continued to deliver high levels
of customer satisfaction and loyalty during the year. Our customer NPS
increased to +62 for 2017 and the maturing fixed term bond and ISA
balance retention rate remained strong at 90% (2016: +59 and 87%
respectively). Retail deposits were up 12% to GBP6.7bn as at 31 December
2017.
The business savings account, which was introduced in 2016, had a
successful year with total deposits constituting just over 1% of the
entire savings book, or GBP69.5m as at 31 December 2017.
Whilst remaining committed to our retail savings franchise, throughout
2017 we complemented it as a funding source by taking advantage of the
government funding schemes: Term Funding Scheme ('TFS') and Funding for
Lending Scheme ('FLS'). By the end of 2017, the Bank had completed its
planned transition out of the FLS into the TFS and as at 31 December
2017, TFS drawdowns stood at GBP1,250.0m (31 December 2016: TFS at
GBP101.0m and FLS GBP524.6m). Total funding through the schemes
increased by GBP624.4m in the year.
Financial overview
The Group reported strong profit growth in 2017. Statutory profit before
taxation of GBP167.7m was 3% higher than in 2016 (2016: GBP163.1m)
despite the GBP24.9m net gain on exceptional items in the prior year. On
an underlying basis, profit before taxation increased by 21% to
GBP167.7m (2016: restated GBP138.2m(2) ). This significant improvement
in underlying profitability reflects the strength of our lending and
funding franchises and our efficient operating model. Statutory and
underlying basic earnings per share ('EPS') strengthened to 51.1p (2016:
49.4p and 41.7p respectively).
Our focus on cost discipline and efficiency continued throughout 2017,
helping to deliver a very strong cost to income ratio of 27% (2016:
27%(2) ) despite increased investment in the business and in meeting the
growing cost of regulation.
Return on equity remained strong at 28% (2016: 29%) despite our
strengthened capital position.
The Board is recommending a final dividend of 9.3 pence per share, which
together with the interim dividend of 3.5 pence per share, represents
25% of underlying profit after taxation attributable to ordinary
shareholders for the year, in line with the Bank's stated dividend
policy.
1. Excluding the impact of TFS/FLS drawdowns. The unadjusted
ratio was 109% as at 31 December 2017 (2016: 100%).
2. Prior to 2017, OSB deducted coupons on equity PSBs accounted
for as dividends from underlying profit before and after tax, net
interest margin and cost to income ratio. Following a review of market
practice in advance of the Bank's AT1 issue in May 2017, OSB no longer
deducts these coupons from the calculation of these key performance
indicators. The comparatives have been restated accordingly. Interest
payments on AT1 securities classified as dividends are treated in the
same way.
Buy-to-Let/SME
Gross loan book
GBP5,654.1m
+38%
2016: restated GBP4,104.3m(1)
[Graphic appear here]
Net interest income
GBP177.1m
+31%
2016: restated GBP135.2m(1)
[Graphic appear here]
Contribution to profit
GBP174.8m
+32%
2016: restated GBP132.9m(1)
This segment comprises Buy-to-Let mortgages secured on residential
property held for investment purposes by experienced and professional
landlords, commercial mortgages secured on commercial and
semi-commercial properties held for investment purposes or for owner
occupation, bridge finance, residential development finance to small and
medium sized developers and secured funding lines to other lenders.
Buy-to-Let/SME sub-segments: gross loans
Group Group
31-Dec-2017 31-Dec-2016
GBPm GBPm
Buy-to-Let 5,033.8 3,613.3
Commercial 370.8 268.3
Residential development 143.9 141.6
Funding lines 104.5 71.7
Personal loans(1) 1.1 9.4
Total 5,654.1 4,104.3
The Buy-to-Let market contracted during the year in response to tax and
regulatory changes, which led to increased withdrawal of the amateur
landlord from the private rented sector. According to UK Finance,
Buy-to-Let gross advances in 2017 fell by 12% to GBP35.8bn2 (2016:
GBP40.6bn) with the decrease also reflecting the spike in lending
recorded in March 2016 ahead of the Stamp Duty Land Tax ('SDLT') change.
Even though the overall Buy-to-Let market shrank in 2017, the demand
from professional landlords with larger portfolios continued its
momentum, leading to strong growth in our market share over the year
from c.4% of new Buy-to-Let mortgages in 2016 to c.6% in 2017.
Professional/multi-property landlords accounted for 80% of completions
for OSB by value during 2017, up from 75% in 2016.
The Group significantly increased its volume of new organic lending in
this segment in 2017 to GBP2.4bn, an increase of 23% on 2016 new organic
lending of GBP1.9bn. This included a significant increase in the
Buy-to-Let and Commercial sub-segments lending through the Kent Reliance
and InterBay brands. We continued to see strong growth opportunities,
particularly in Buy-to-Let with gross loans of GBP5,033.8m at 31
December 2017 (2016: GBP3,613.3m), weighted average LTV of 69% and
average loan size of c.GBP250,000.
A significant proportion of the Buy-to-Let market comes from
refinancing. OSB's Buy-to- Let refinancing percentage was 60% during
2017, up from 58% in 2016.
From 1 October 2017, more comprehensive underwriting rules, including
affordability assessment for multi-property landlords, came into effect.
We have always assessed affordability for borrowers through our
specialist underwriting model and apply stringent stress tests. Our
weighted average interest coverage ratio ('ICR') for Buy-to-Let
origination during 2017 increased to 185% (2016: 171%). The new
underwriting rules and an expectation of further interest rate rises
also caused a shift in the demand amongst our professional landlords
towards five-year fixed rate products, which accounted for c.43% of
Buy-to-Let completions in 2017.
In addition, to aid brokers in complying with the new underwriting rules,
OSB partnered with a technology provider to develop a bespoke tool for
assessing the health of a landlord's overall property portfolio, the
first of its kind in the market.
Recent tax changes also had an impact on how borrowers structure their
portfolios. In 2016, we saw a clear trend for borrowers to form limited
companies in order to mitigate reductions in yield resulting from
changes to personal taxation, and in 2017 OSB saw an increase in
applications from limited companies for our main Buy-to-Let brand Kent
Reliance, from 42% in 2016 to 69% in 2017.
We invested in sales capability across all of our lending brands and
attracted new talent from large lenders during the year.
Through the Kent Reliance and InterBay brands, the Bank distributes via
intermediaries throughout England and Wales with a bias towards
properties in London and the South East, where the demand-supply gap is
widest and most sustainable. We have further extended the geographical
coverage of our business through investment in the intermediary sales
team, ensuring we are seeing appropriate opportunities in other regions.
We have grown our commercial lending with a gross value of the portfolio
at GBP370.8m as at 31 December 2017 (2016: GBP268.3m), low weighted
average LTV of 63% and average loan size of GBP330,000. In March, we
successfully piloted an entry to the bespoke bridging market, again
leveraging the Bank's strengths in asset risk assessment and manual
underwriting.
The Bank's Heritable Development Finance business provides development
finance to smaller residential developers, with a preference for forging
relationships with those active outside prime central London. The
business continued to grow in spite of new entrants to the market, as
customers sought an experienced and cautious lender. However, in line
with our prudent approach given macroeconomic uncertainty, the number of
potential development schemes which have withstood the business'
stringent stress testing has reduced significantly. The residential
development funding gross loan book at the end of 2017 was GBP143.9m,
with a further GBP78.0m committed (31 December 2016: GBP141.6m and
GBP70.0m respectively). Gross advances during 2017 totalled GBP123.7m
(31 December 2016: GBP98.4m). Since inception the business has written
GBP479m of loans.
In addition, the Bank continued to grow the provision of secured funding
lines it provides to non-bank lenders which operate in certain
high-yielding, specialist sub-segments, such as bridging finance and
asset finance. Total credit approved limits as at 31 December 2017 were
GBP303.0m with total loans outstanding of GBP104.5m (31 December 2016:
GBP244.0m and GBP71.7m respectively). During 2017, two new funding lines
were added. The pipeline remains robust, however given the macroeconomic
uncertainties, the Bank continues to adopt a cautious approach.
OSB's combined Buy-to-Let/SME net loan book grew by 38% in 2017 to
GBP5,640.9m (2016: restated GBP4,087.1m(1) ) due to the gross new
lending in the year, partially offset by back book redemptions, and is
the Group's largest segment. Buy-to-Let/ SME made a contribution to
profit of GBP174.8m in 2017, up 32% compared to GBP132.9m1 in 2016,
reflecting the growth in the loan book, and low impairment losses of
GBP0.8m (2016: restated GBP1.8m(1) ).
The Group remains highly focused on the credit quality of new lending as
demonstrated by the average LTV in the Buy-to-Let/SME segment as at 31
December 2017 of 69% (31 December 2016: 69%) with only 0.7% of loans
exceeding 90% LTV (31 December 2016: 0.4%). The average LTV for new
Buy-to-Let/SME origination was 70% (2016: 70%).
1. The personal loan portfolio has largely completed its run-off
and is therefore no longer considered as a separate segment by the
Group. The remaining net loan book of GBP0.9m (31 December 2016:
GBP9.1m) and negative contribution to profit for the period of GBP0.8m
(2016: contribution to profit of GBP2.7m) have been reported in the
Buy-to-Let/SME segment with comparatives restated accordingly.
2. UK Finance, New and outstanding buy-to-let new mortgages, 2
Feb 2018.
Residential
BTL/SME mortgages Total
YEARED 31-DEC-2017 GBPm GBPm GBPm
BALANCES AT THE REPORTING DATE
Gross loans and advances to customers 5,654.1 1,673.5 7,327.6
Provision for impairment losses on loans
and advances (13.2) (8.4) (21.6)
Loans and advances to customers 5,640.9 1,665.1 7,306.0
Risk weighted assets 2,642.8 705.7 3,348.5
PROFIT OR LOSS FOR THE YEAR
Net interest income 177.1 68.3 245.4
Other income/(expense) (1.5) (5.8) (7.3)
Total income 175.6 62.5 238.1
Impairment (losses)/gains (0.8) (3.6) (4.4)
Contribution to profit 174.8 58.9 233.7
Restated(1) Residential
BTL/SME mortgages Total
YEARED 31-DEC-2016 GBPm GBPm GBPm
BALANCES AT THE REPORTING DATE
Gross loans and advances to customers 4,104.3 1,859.9 5,964.2
Provision for impairment losses on loans
and advances (17.2) (7.8) (25.0)
Loans and advances to customers 4,087.1 1,852.1 5,939.2
Risk weighted assets 1,944.3 798.7 2,743.0
PROFIT OR LOSS FOR THE YEAR
Net interest income 135.2 71.4 206.6
Other income / (expense) (0.5) (4.7) (5.2)
Total income 134.7 66.7 201.4
Impairment losses (1.8) (7.2) (9.0)
Contribution to profit 132.9 59.5 192.4
Residential mortgages
Gross loan book
GBP1,673.5m
-10%
2016: GBP1,859.9m
[Graphic appear here]
Net interest income
GBP68.3m
-4%
2016: GBP71.4m
[Graphic appear here]
Contribution to profit
GBP58.9m
-1%
2016: GBP59.5m
[Graphic appear here]
This segment comprises lending to owner occupiers, secured via either
first or second charges against the residential home. The Bank provides
funding lines to non-bank lenders who operate in high-yielding,
specialist sub-segments such as residential bridge finance.
Residential sub-segments: gross loans
Group Group
31-Dec-2017 31-Dec-2016
GBPm GBPm
First charge 1,240.6 1,322.1
Second charge 415.3 487.2
Funding lines 17.6 50.6
Total 1,673.5 1,859.9
During the year, the Group organically originated residential lending of
GBP243.9m (2016: GBP382.1m). We saw a significant reduction in
originations in the residential sector in 2017. This contributed to the
first charge gross loan book reducing to GBP1,240.6m from GBP1,322.1m in
2016, with new organic lending more than offset by redemptions in the
back book and acquired mortgages in run-off.
Organic lending remains the Group's core strategy, however we continue
to actively consider inorganic opportunities as they arise, particularly
where we have in-house servicing expertise. However, in 2017, the Group
made no acquisitions of portfolios due to market pricing not meeting our
return hurdles (2016: portfolios of first and second charge mortgages
for GBP180.7m).
Our Kent Reliance brand provides bespoke first charge mortgages,
typically to prime credit quality borrowers with more complex
circumstances, for example high net worth borrowers with multiple income
sources and self-employed borrowers. These circumstances often preclude
them from the mainstream market, where most lenders favour automated
decision making over manual underwriting.
Kent Reliance also operates in the shared ownership market, where
borrowers buy a property in conjunction with a housing association.
Our second charge mortgage brand, Prestige Finance, provides secured
finance to good credit quality borrowers who are seeking a loan to raise
funds rather than refinancing their first charge mortgage. Competitive
pressure in the second charge market caused price reductions and we
allowed our market share to fall to ensure we continue to appropriately
price for risk. The second charge residential loan book had a gross
value as at 31 December 2017 of GBP415.3m (2016: GBP487.2m).
OSB continued to provide secured funding lines to non-bank lenders which
operate in certain high-yielding, specialist sub-segments, such as
residential bridge finance. The Bank continued its cautious approach in
the more cyclical businesses given macroeconomic uncertainty. Total
credit approved limits at 31 December 2017 were GBP33.6m with total
loans outstanding of GBP17.6m (2016: GBP86.2m and GBP50.6m
respectively). During 2017, one facility of GBP34.4m matured.
Innovative solutions
As the Bank has grown, we have continued to seek innovative solutions to
help maintain our market leading efficiency. The finance team is a great
example. We provide a 'one finance team' approach across locations in
the UK and India, utilising the strengths that each site provides. We
have further realised opportunities with an increasing amount of the
financial reporting preparation work undertaken by OSBIndia.
We know that it is important for everyone to feel part of the team. So,
as well as regular calls and virtual meetings, members of the Bangalore
based team come to Chatham for specific projects such as the Annual
Report, to work directly with their colleagues in head office. It bonds
the finance team and helps build relationships with other functions
across the Group.
The understanding formed by these visits makes sure we have a joined up
team, and deliver the true efficiencies from working together.
PREETAM NANDA
FINANCIAL REPORTING ASSISTANT MANAGER
Market leading efficiency
OSB's total residential loan portfolio had a net carrying value of
GBP1,665.1m as at 31 December 2017 (2016: GBP1,852.1m). The average LTV
remained low at 56% (2016: 58%) with only 3% of loans by value with LTVs
exceeding 90% (2016: 3%). The average LTV of new residential origination
during 2017 was 65% (2016: 66%).
Residential mortgages made a contribution to Group profit of GBP58.9m in
2017, down 1% (2016: GBP59.5m), reflecting the fall in the loan book,
partially offset by the benefit of lower cost of funds and impairment
losses. Impairment losses in 2016 included the impact of additional
prudence in collectively assessed provision assumptions following the EU
referendum result.
Key performance indicators
KPI Definition 2017 performance
1. Gross new lending This is defined as gross new organic lending before Gross new lending in 2017 reflects growth in new origination,
Performance GBP2.6bn redemptions. primarily in the BTL/SME segment.
+14%
[Graphic appear here]
2. Net interest margin This is defined as net interest income as a percentage Net interest margin flat to prior year with lower
Performance 316bps of average interest bearing assets (cash, investment asset yields in line with the reduced cost of funds.
stable securities, loans and advances to customers and credit
[Graphic appear here] institutions), including off balance sheet FLS drawings.
It represents the margin earned on loans and advances
and liquid assets after swap expense /income and cost
of funds.
3. Cost to income ratio This is defined as administrative expenses including Cost to income ratio stable despite additional cost
Performance 27% depreciation and amortisation as a percentage of total of meeting regulatory requirements in 2017 and continues
Stable income. It is a measure of operational efficiency. to be market leading.
[Graphic appear here]
* Restated
4. Underlying profit before taxation This is defined as statutory profit before taxation The increase reflects strong balance sheet growth,
Performance GBP167.7m before exceptional items. See reconciliation of statutory stable net interest margin, continued focus on cost
+21% profit to underlying profit in Alternative performance discipline and efficiency and low loan losses.
[Graphic appear here] measures on page 29. Statutory profit before taxation of GBP167.7m in 2017
* Restated increased by 3% compared to GBP163.1m in 2016.
5. Underlying basic EPS This is defined as underlying profit attributable The strong growth is in line with the significant
Performance 51.1 pence per share to ordinary shareholders, which is profit after taxation increase in underlying profitability of the Bank.
+23% before exceptional items less after tax effect of On a statutory basis basic EPS increased to 51.1 pence
[Graphic appear here] coupons on equity PSBs and AT1 securities, divided per share in 2017 from 49.4 pence per share in 2016.
by the weighted average number of ordinary shares
in issue.
See reconciliation of statutory profit to underlying
profit in Alternative performance measures on page
29.
6. Return on equity This is defined as underlying profit after taxation Return on equity remained strong at 28% (2016: 29%)
Performance 28% and after deducting the after tax effect of coupons despite our strengthened capital position.
-1% on equity PSBs and AT1 securities as a percentage
[Graphic appear here] of average shareholders' equity (excluding equity
PSBs of GBP22m and GBP60m of AT1 securities).
For further information on underlying profit after
taxation, see reconciliation of statutory profit to
underlying profit in Alternative performance measures
on page 29.
7. Dividend per share This is defined as the sum of the recommended final The Board will recommend a final dividend of 9.3 pence
Performance 12.8 pence per share dividend for 2017 plus the interim dividend divided per share in respect of 2017 at the Bank's AGM on
+22% by the number of ordinary shares in issue at the year 10 May 2018. This, together with the interim dividend
[Graphic appear here] end. of 3.5 pence per share, represents 25% of underlying
profit after tax attributable to ordinary shareholders
(after deducting the after tax impact of coupons on
equity PSBs and AT1 securities) for 2017, in line
with the Bank's target dividend payout ratio.
8. CRD IV fully-loaded Common Equity Tier 1 capital This is defined as Common Equity Tier 1 capital as The capital ratio of 13.7% reflects the ability of
ratio a percentage of risk-weighted assets (calculated on the business to generate capital through profitability
Performance 13.7% a standardised basis) and is a measure of the capital to support significant loan book growth.
+0.4% points strength of the Bank.
[Graphic appear here]
9. Loan loss ratio This is defined as impairment losses expressed as The improved ratio of 7bps for 2017 (2016: 16bps)
Performance 7bps a percentage of average gross loans and advances. mainly reflects the assumption updates that took place
improved 9bps It is a measure of the credit performance of the loan in 2016. It also reflects the continued strong performance
[Graphic appear here] book. from the front book of loans, originated by the Bank
since its creation in 2011. From more than 38,500
loans totalling GBP8.3bn of new organic originations
since the Bank's creation in February 2011, we only
have 137 cases of arrears over three months in duration,
with an aggregate balance of GBP18.4m and average
LTV of 63%.
10. Customer satisfaction - net promoter score The net promoter score measures our customers' satisfaction The Bank's customer NPS across the year for 2017 improved
Performance +62 with our service and products. It is based on customer from +59 in 2016 to +62. This demonstrates that our
+3 responses to the question of whether they would recommend investment in customer service in the UK and India
[Graphic appear here] us to a friend. The question scale is 0 for absolutely and customer-centric strategy of providing transparent
not to 10 for definitely yes. Based on the score, savings products which offer long-term value for money
a customer is defined as a detractor between 0 and continues to deliver high levels of customer satisfaction.
6, a passive between 7 and 8 and a promoter between
9 and 10. Subtracting the percentage of detractors
from the percentage of promoters gives a net promoter
score of between -100 and +100.
1. Prior to 2017, OSB deducted coupons on equity Perpetual
Subordinated Bonds ('PSBs') accounted for as dividends from underlying
profit before and after tax, net interest margin and cost to income
ratio. Following a review of market practice in advance of the Bank's
AT1 issue in May 2017, OSB no longer deducts these coupons from the
calculation of these key performance indicators. The comparatives have
been restated accordingly. Interest payments on AT1 securities
classified as dividends are treated in the same way.
Financial review
Strong growth in gross new organic lending [Graphic appear here]
GBP2.6bn
+14%
2016: GBP2.3bn
Net loan book growth [Graphic appear here]
23%
2016: 16%
(20% excluding the impact of Rochester disposal
Cost to income ratio [Graphic appear here]
27% * Restated
Strong income growth and continued focus on cost discipline
and efficiency
2016: 27%(2)
Group Group
31-Dec-2017 31-Dec-2016
GBPm GBPm
SUMMARY PROFIT OR LOSS
Net interest income 245.4 206.6
Net losses on financial instruments (6.3) (4.3)
Net fees and commissions 0.5 1.7
External servicing fees (1.5) (2.6)
Administrative expenses(1) (65.1) (53.7)
FSCS and other regulatory provisions (0.9) (0.5)
Impairment losses (4.4) (9.0)
Exceptional items - 24.9
Profit before taxation 167.7 163.1
Profit after taxation 126.9 120.9
Underlying profit before taxation(3) 167.7 138.2(2)
Underlying profit after taxation(3) 126.9 102.4(2)
KEY RATIOS
Net interest margin(3) 316bps 316bps(2)
Cost to income ratio(3) 27% 27%2
Management expense ratio(4) 0.86% 0.86%
Loan loss ratio(3) 0.07% 0.16%
Basic EPS(3) , pence per share 51.1 49.4
Underlying basic EPS(3) , pence per share 51.1 41.7
Return on equity(3) 28% 29%
Dividend per share, pence per share 12.8 10.5
GBPm GBPm
EXTRACTS FROM THE STATEMENT
OF FINANCIAL POSITION
Loans and advances 7,306.0 5,939.2
Retail deposits 6,650.3 5,952.4
Total assets 8,589.1 6,580.9
KEY RATIOS
Liquidity ratio(5) 15.2% 17.9%
CET1 capital ratio(6) 13.7% 13.3%
Total capital ratio 16.9% 15.1%
Leverage ratio 6.0% 5.5%
1. Including depreciation and amortisation.
2. Prior to 2017, OSB deducted coupons on equity Perpetual
Subordinated Bonds ('PSBs') accounted for as dividends from underlying
profit before and after tax, net interest margin and cost to income
ratio. Following a review of market practice in advance of the Bank's
AT1 issue in May 2017, OSB no longer deducts these coupons from the
calculation of these key performance indicators. The comparatives have
been restated accordingly. Interest payments on AT1 securities
classified as dividends are treated in the same way.
3. See definition in Key performance indicators table on pages
26-27.
4. Administrative expenses including depreciation and
amortisation as a percentage of average total assets.
5. Liquid assets as a percentage of funding liabilities.
6. Fully-loaded under Basel III/CRD IV.
Alternative performance measures
OSB believes that the use of alternative performance measures ('APMs')
for profitability and earnings per share provides valuable information
to the readers of the financial statements and presents a more
consistent basis for comparing the Group's performance between financial
periods, by adjusting for exceptional non-recurring items. APMs also
reflect an important aspect of the way in which operating targets are
defined and performance is monitored by the Board. However, any APMs in
this document are not a substitute for IFRS measures and readers should
consider the IFRS measures as well.
Profit before taxation Profit after taxation
Group Restated Group Group Restated Group
Reconciliation of statutory profit to underlying 31-Dec-2017 31-Dec-2016 31-Dec-2017 31-Dec-2016
profit GBPm GBPm GBPm GBPm
Statutory profit 167.7 163.1 126.9 120.9
Gain on Rochester 1 disposal - (34.7) - (25.8)
Exceptional amortisation of fair value adjustments
on hedged assets - 9.8 - 7.3
Underlying profit 167.7 138.2 126.9 102.4
Statutory basic EPS of 51.1 pence per share (2016: 49.4 pence per share)
is calculated by dividing profit attributable to ordinary shareholders
of GBP124.2m (2016: GBP120.0m) which is profit after taxation of
GBP126.9m (2016: GBP120.9m) less coupons on equity PSBs, including the
tax effect of GBP0.7m (2016: GBP0.9m) and coupons on AT1 securities,
including the tax effect of GBP2.0m (2016: GBPnil) by the weighted
average number of ordinary shares in issue during the year of 243.2m
(2016: 243.1m).
Underlying basic EPS of 51.1 pence per share (2016: 41.7 pence per
share) is calculated by dividing underlying profit attributable to
ordinary shareholders of GBP124.2m (2016: GBP101.5m), which is
underlying profit after taxation of GBP126.9m (2016: restated GBP102.4m)
less coupons on equity PSBs, including the tax effect of GBP0.7m (2016:
GBP0.9m) and coupons on AT1 securities of GBP2.0m (2016: GBPnil) by the
weighted average number of ordinary shares in issue during the year of
243.2m (2016: 243.1m). Further information can be found in note 12 to
the financial statements.
Prior to 2017, OSB deducted coupons on equity PSBs accounted for as
dividends from underlying profit before and after tax. Following a
review of market practice in advance of the Bank's issuance of AT1
securities in May 2017, OSB no longer deducts these coupons and
underlying profit before and after tax for 2016 have been restated
throughout this document accordingly.
The table below illustrates the key ratios under previous and current
methods and the impact of the change in calculation methodology.
2017 2016
Change in key ratio calculation % %
Cost to income ratio
Previous method 27 27
Add back coupons on equity PSBs (0) (0)
Current method 27 27
Net interest margin
Previous method 3.15 3.14
Add back coupons on equity PSBs 0.01 0.02
Current method 3.16 3.16
2017 2016
GBPm GBPm
Underlying profit before tax
Previous method 166.7 137.0
Add back coupons on equity PSBs 1.0 1.2
Current method 167.7 138.2
Underlying profit after tax
Previous method 126.2 101.5
Add back coupons on equity PSBs 0.7 0.9
Current method 126.9 102.4
Strong profit growth
The Group reported profit growth of 3% in 2017 with profit before
taxation of GBP167.7m (2016: GBP163.1m including net gain from
exceptional items of GBP24.9m). On an underlying basis, the Bank
recorded a 21% increase in underlying profit before taxation to
GBP167.7m (2016: restated GBP138.2m(1) ) reflecting strong balance sheet
growth and a stable net interest margin combined with continued focus on
cost discipline and efficiency.
Profit after taxation in 2017 increased by 5% to GBP126.9m (2016:
GBP120.9m including the net gain after taxation from exceptional items
of GBP18.5m). On an underlying basis, profit after taxation increased by
24% to GBP126.9m (2016: restated GBP102.4m(1) ). The Group's effective
tax rate was 24.1%(2) in 2017 (2016: 25.6%), with a lower proportion of
the Group's profits subject to the Bank Corporation Tax Surcharge.
Net interest margin
The Group reported an increase in net interest income of 19% to
GBP245.4m in 2017 (2016: GBP206.6m) reflecting the growth in the loan
book and a stable NIM of 316bps (2016: restated 316bps(1) ). The stable
NIM in 2017 represents a reduction in asset yields in line with the
falling cost of funds.
The average cost of retail funds fell year on year, although market
rates started to rise again in 2017.
The Bank benefited from a higher average balance in the Bank of England
schemes in 2017 versus the prior year and the transition from FLS into
the cheaper TFS. As at December 2017, the TFS drawdowns stood at
GBP1,250.0m (2016: GBP101.0m) and FLS at GBPnil (2016: GBP524.6m).
Margins on the Bank's fixed rate mortgage products, particularly
five-year fixed rate Buy-to-Let, declined in the fourth quarter of 2017
as the market did not reprice these products following the Bank of
England base rate rise and subsequent widening of swap spreads in
anticipation of future increases in interest rates.
Losses on financial instruments
Fair value loss on financial instruments in 2017 of GBP6.3m (2016: loss
GBP4.9m) includes GBP7.3m amortisation of fair value adjustments on
hedged assets relating to cancelled swaps (2016: GBP4.9m). The
amortisation of fair value adjustments in both years includes the impact
of accelerating the amortisation in line with the run-off of the
underlying legacy long-term fixed rate mortgages due to faster than
expected prepayments.
In 2016, the Group also made a GBP0.6m gain on disposal of a portion of
non-performing personal loans with a gross value of GBP10.9m.
Net fees and commissions
Net fees and commission income of GBP0.5m (2016: GBP1.7m) comprises fees
and commission receivable of GBP1.5m (2016: GBP2.5m) partially offset by
commission expense of GBP1.0m (2016: GBP0.8m). Fees and commissions
receivable decreased in 2017 due primarily to lower arrangement fees on
funding lines.
External servicing fees
External servicing fees decreased to GBP1.5m in 2017 (2016: GBP2.6m) due
to the transfer of servicing for acquired first charge residential loan
book to the Bank's operation in India during the year and the further
run-off of the personal loans portfolio.
Efficient and scalable operating platform
Administrative expenses including depreciation were up 21% to GBP65.1m
in 2017 (2016: GBP53.7m), reflecting the growth in the business and the
increased demands of regulation, including projects relating to IFRS 9
and an internal ratings based approach to risk weights ('IRB').
The Group's cost to income ratio of 27% and the management expense ratio
of 0.86% remained stable (2016: 27%1 and 0.86% respectively) despite the
increased cost of regulation, reflecting the Bank's focus on efficiency
and use of its scalable low cost back office based in Bangalore, India.
FSCS and other regulatory provisions
Regulatory provisions expense of GBP0.9m (2016: GBP0.5m) includes levies
due to the Financial Services Compensation Scheme ('FSCS') which
continued to decrease (see note 31 to the financial statements for
further details) and other regulatory provisions.
Impairment losses
Impairment losses decreased to GBP4.4m in 2017 (2016: GBP9.0m)
representing 7bps on average gross loans and advances (2016: 16bps). The
decrease was primarily due to increased prudency in assumptions
introduced in 2016 following the UK referendum vote to leave the EU, as
well as lower underlying loan losses on acquired residential portfolios,
and the effect of increasing property values reducing potential loss.
The performance of the front book of mortgages remains strong,
reflecting the continued strength of the Bank's underwriting and lending
criteria. We kept tight control on credit quality, as seen in our
reportable arrears statistics. From more than 38,500 loans totalling
GBP8.3bn of new organic originations since the Bank's creation in
February 2011, there were only 137 cases of arrears over three months or
more as at 31 December 2017, with an aggregate value of just GBP18.4m
and average LTV of 63%.
IFRS 9
We had a successful parallel run of the IFRS 9 models throughout 2017
and were operating live under the new standard from 1 January 2018. The
day one impact of the implementation of IFRS 9 is an increase in the
provisions of c.GBP4m, representing 9bps on the Bank's CET1 ratio as at
31 December 2017 on an end game basis, reflecting the strength of
security underpinning our loan book. The Group continues to monitor the
performance of the underlying IFRS 9 models whilst assessing the ongoing
appropriateness of all key judgement and estimate areas ahead of the
full reporting of IFRS 9 impact later in 2018.
Exceptional items
There were no exceptional items in 2017.
Exceptional items in 2016 of GBP24.9m comprised the gain on disposal of
the Bank's entire economic interest in Rochester 1 of GBP34.7m and an
exceptional loss of GBP9.8m in respect of accelerated amortisation of
fair value adjustments on hedged assets relating to legacy back book
long- dated swap cancellations, in line with the underlying mortgage
asset run-off, due to faster than expected prepayments. The exceptional
loss represented the impact of accelerating the amortisation in prior
years from 2012 to 2015.
Dividend
The Board recommends a final dividend for 2017 of 9.3 pence per share.
Together with the 2017 interim dividend of 3.5 pence per share, this
represents 25% of underlying profit after taxation attributable to
ordinary shareholders for 2017 in line with the Bank's target dividend
payout ratio. The proposed final dividend will be paid on 16 May 2018,
subject to approval at the AGM on 10 May 2018, with an ex-dividend date
of 22 March 2018 and a record date of 23 March 2018.
Balance sheet growth
Net loans and advances grew by 23% in 2017 to GBP7,306.0m (31 December
2016: GBP5,939.2m) attributable primarily to an increase in new lending
in the Buy-to-Let/SME segment.
Retail deposits and total assets grew by 12% and 30% respectively in
2017 with additional funding of GBP624.4m supplied by the FLS and TFS
throughout the year. By the end of 2017, the Group had completed its
planned transition out of the FLS scheme (31 December 2016: GBP524.6m)
to the TFS with drawings under the scheme of GBP1,250.0m (31 December
2016: GBP101.0m).
The TFS drawdowns are offered in the form of collateralised cash loans.
The scheme closed to new drawings at the end of February 2018 and the
Group has four years from the date of each individual drawing to repay
the existing loans.
Liquidity
OneSavings Bank operates under the PRA's liquidity regime. The Bank
operates within a target liquidity runway in excess of the minimum
regulatory requirement. In addition, the Bank maintains a strong
retention track record on fixed term bond and ISA maturities. As at 31
December 2017, our liquidity coverage ratio of 250% (2016: 239%) was
significantly in excess of the 2017 regulatory minimum of 90%, including
drawings under the Bank of England FLS and TFS funding facilities. The
Group's liquidity ratio as at 31 December 2017 was 15.2% (31 December
2016: 17.9%).
Capital
The Bank's fully- loaded CET1 capital ratio under CRD IV strengthened to
13.7% as at 31 December 2017 (31 December 2016: 13.3%), demonstrating
the strong organic capital generation capability of the business to
support significant growth through profitability.
We further optimised our capital structure through the issuance of
GBP60m of AT1 securities in May 2017.
The Bank had a total capital ratio of 16.9% and a leverage ratio of 6.0%
as at 31 December 2017 (31 December 2016: 15.1% and 5.5% respectively).
The Bank had a Pillar 2a requirement of 1.1% of risk weighted assets as
at 31 December 2017 (31 December 2016: 1.2%).
Cash flow statement
In 2017, the Group replaced GBP524.6m of Bank of England FLS off balance
sheet securities with cash drawn down under the TFS. This led to cash
and cash equivalents increasing by GBP680.6m during the year to
GBP1,165.9m as at 31 December 2017 (2016: restated GBP485.3m(3) ).
The Group's loans and advances to customers grew by GBP1,371.2m during
the year, partially funded by an additional GBP697.9m of deposits from
retail customers which mainly contributed to GBP512.9m of cash used in
operating activities. The remaining funding came primarily from
additional drawdowns under the TFS, which in conjunction with replacing
the FLS securities, totalled GBP1,149.0m during the year. Together with
GBP59.4m of funding from the issuance of AT1 securities, this generated
GBP1,167.5m of cash from financing activities. Cash generated from
investing activities was GBP26.0m, primarily driven by the sale and
maturity of investment securities and the purchase of additional
equipment and intangible assets.
In 2016, the Group increased its loans and advances to customers by
GBP1,031.3m. This was partially funded by an additional GBP588.6m of
deposits from retail customers. Collectively, these were the main
drivers of the GBP323.8m (restated3) of cash used in operating
activities. The remaining funding came primarily from the Group
replacing its maturing on balance sheet available for sale investment
securities (GBP309.4m decrease, restated3) with off balance sheet
securities under the FLS (GBP363.9m increase) in its liquidity
portfolio. Together with GBP80.2m of cash received from the Rochester 1
disposal, this generated GBP381.9m (restated3) of cash inflows from
investing activities. In addition, the Group drew down GBP101.0m of cash
under the TFS which is reflected in the cash generated from financing
activities.
Further information can be found in the Statement of Cash Flows on page
111.
1. Prior to 2017, OSB deducted coupons on equity PSBs accounted
for as dividends from underlying profit before and after tax, net
interest margin and cost to income ratio. Following a review of market
practice in advance of the Bank's AT1 issue in May 2017, OSB no longer
deducts these coupons from the calculation of these key performance
indicators. The comparatives have been restated accordingly. Interest
payments on AT1 securities classified as dividends are treated in the
same way.
2. Effective tax rate excludes GBP0.4m of adjustments relating
to prior years.
3. The 2016 comparatives have been reclassified to include
investment securities with maturity less than three months and to
exclude encumbered loans and advances to credit institutions within cash
and cash equivalents.
Restated(3)
Group Group
31-Dec-2017 31-Dec-2016
SUMMARY CASH FLOW STATEMENT GBPm GBPm
Profit before tax 167.7 163.1
Net cash generated/(used in):
Operating activities (512.9) (323.8)
Investing activities 26.0 381.9
Financing activities 1,167.5 56.7
Net increase/(decrease) in cash and cash
equivalents 680.6 114.8
Cash and cash equivalents at the beginning of the
period 485.3 370.5
Cash and cash equivalents at the end of the period 1,165.9 485.3
Risk review
Executive summary
During the year, the Group maintained a low and stable risk profile in
line with the Board's risk management objectives. The Group continued to
invest in its risk management infrastructure and resources to support
the Group's growth objectives and to ensure ongoing compliance with the
emerging industry good practice and regulatory standards.
By effectively leveraging its risk management framework, the Group
actively managed its risk profile in accordance with the Board approved
risk appetite. Through continuous monitoring and assessment of the
underlying risk drivers, whilst actively engaging the Board and senior
management, the Group took appropriate and timely management actions in
the context of the changing economic, business and regulatory
environment.
Through taking judicious and considered investment decisions, the Group
improved its risk assessment and monitoring capabilities. In particular,
the Group focused its risk-based investment to enhance its data
governance and controls, upgrading its operational resilience assessment
and management framework and delivering improvements to its risk
analytical capabilities. The Group also expanded its risk management
capacity through the recruitment of specialist risk and compliance
resources within its UK and Indian operations.
The Group delivered strong and profitable growth whilst maintaining a
low and stable risk profile. The underlying asset quality profile has
continued to exhibit very strong performance and has continued to
maintain sizeable and high quality buffers against minimum prudential
solvency and liquidity requirements.
The underlying asset quality profile and the strength of its financial
position helped to position the Group favourably in the context of
uncertain economic, political and regulatory conditions. In particular,
the Group continues to be mindful of the uncertainty surrounding Brexit
negotiations and has leveraged its stress testing capabilities to
identify potential points of vulnerability.
The new regulatory standards relating to Buy-to-Let underwriting and
affordability testing represented an important area of focus for the
Risk and Compliance functions. The inherent strength of the Group's
underwriting procedures and its continued investment in customer data
management enabled the Group to respond effectively to the regulatory
changes. The Group also continued to improve its funding and liquidity
forecasting procedures and has credible plans for when the Bank of
England withdraws its Term Funding Scheme.
The other key regulatory developments to which the Group is responding
include the General Data Protection Regulation ('GDPR') and Payment
Services Directive ('PSD2'). Both these regulatory initiatives are
supported by dedicated resources, structured programmes and engagement
of external advisors to ensure that the Group complies effectively with
the emerging requirements.
The Group continued to maintain a robust and secure IT infrastructure
and remains acutely conscious that the level and sophistication of
cyber-risk continues to evolve. Dedicated resources, improved detection
capabilities and planning have helped the Group to minimise the risk of
cyber-attacks.
Key risk indicators Commentary
CET1 ratio The Group further strengthened its fully-loaded CET1
[Graphic appear here] ratio to 13.7% during 2017 (2016: 13.3%) demonstrating
the strong organic capital generation capability of
the business to support significant growth.
Total capital ration The Group's total capital ratio increased by 1.8%
[Graphic appear here] to 16.9% during 2017 driven by the strengthened CET1
ratio and the issuance of GBP60m of AT1 securities.
3+ months in arrears* There was a reduction in the percentage of loans more
[Graphic appear here] than three months in arrears during 2017 driven by
a strong performance across newly originated loans.
*Note: 3+ months in arrears ratio excludes legacy
problem loans.
Cost of risk Improved impairment performance was primarily driven
[Graphic appear here] by increased prudence in assumptions introduced in
2016 following the UK referendum vote to leave the
EU, as well as lower underlying loan losses on acquired
residential portfolios and the effect of increasing
property values.
Liquidity ratio The Group's liquidity ratio remained well above regulatory
[Graphic appear here] and risk appetite limits in 2017 finishing the year
at 15.2%.
The Group managed liquidity levels within its target
range in the year and its liquidity coverage ratio
was 225% against a regulatory minimum of 90%.
High level key risk indicators
The Group aligns its risk appetite to a select range of key performance
indicators that are used to assess the Group's success against strategic,
business, operational and regulatory objectives. Actual performance
against these indicators is continually assessed and reported. The table
above outlines the comparative analysis of the leading risk indicators
with supporting commentary.
Key achievements in 2017
The Group further enhanced and integrated its Strategic Risk Management
Framework ('SRMF') to inform, guide and support business and strategic
decision making. The Group generated shareholder value through the
optimisation of its risk and reward profile within the constraints of
its risk appetite.
The Group's approach to setting its risk appetite was enhanced through
the use of improved borrower and loan level risk assessment, greater
alignment with the financial planning process and the use of stress
testing. The Board actively guided the process of setting risk appetite,
ensuring that the risk appetite is fully reflective of the Board's
attitude and tolerance for risks to its objectives.
The IFRS 9 programme continued to progress according to plan with the
core processes being subject to a full parallel run throughout 2017. An
independent validation of all underlying models, implementation
standards and governance arrangements was performed. The Group was fully
prepared to begin reporting under the IFRS 9 regime on 1 January 2018,
the 'go-live' date.
The Group's secured business model, sensible loan to value profile and
strong arrears performance result in a manageable day one impact post
adoption of the IFRS 9 standard of c.GBP4m. For arrears balances
purchased via the portfolio acquisition process, the Group
conservatively assesses expected loss at the point of acquisition which
is offset against the modelled future cash flows to derive the effective
interest rate for the book. This incurred loss protection is therefore
recognised over the life of the book against the unwind of any purchase
discount or premium through interest income providing further
protection.
The Internal Ratings Based ('IRB') programme was formally established to
enable the Group to transition to the advanced approach to measuring its
credit risk-based capital requirements. The programme progressed in
accordance with the Board approved plan and the Group is well placed to
commence parallel running its IRB models and capital calculation engine.
The Group completed an internal self-assessment exercise against the
Capital Requirements Regulation ('CRR') to develop detailed plans and a
roadmap of key steps towards a formal regulatory application. The Group
will be engaging actively with the PRA and external subject matter
experts to ensure successful delivery of the programme.
As the Group increased the use of risk-based analytics and models, it
also improved model validation, monitoring and back-testing. Appropriate
controls were established to assess the ongoing robustness and usage of
all risk models. The Group established Board and senior management
oversight and governance procedures through a Board approved model risk
policy.
A Group-wide programme was established to enhance the Bank's approach to
data governance and controls in the context of industry good practice
and regulatory standards. The programme is overseen by a senior level
Steering Committee with cross-functional executive sponsorship. The
programme is designed to deliver improved data controls and models,
aggregation capabilities and end user reporting capabilities. The
programme will support other strategic and regulatory initiatives
including IRB, GDPR and securitisation.
To ensure a holistic and integrated approach to operational resilience,
the Group established an Operational Resilience Programme to align its
current approach to emerging industry good practice and regulatory
standards. The programme will help to deliver an integrated approach to
the ongoing assessment of critical operational functions and key
dependencies, assessment of potential points of vulnerability and
business continuity planning and crisis management.
The Group continued to enhance its Internal Capital Adequacy Assessment
Process ('ICAAP'), through improved risk-based capital assessments and
the use of stress testing. The Group worked with industry experts and
engaged with the PRA to ensure that its ICAAP adheres to regulatory
standards and represents an important mechanism by which the Board and
senior management assess the adequacy and effectiveness of the Group's
business and capital plans under normal and stressed operating
conditions. Fully integrated funding and liquidity planning and stress
testing analysis is used to support the Internal Liquidity Adequacy
Assessment Process ('ILAAP'). The Group also enhanced its Recovery Plan
through active assessment of risk drivers, identification of business
model vulnerabilities and development of credible and reliable business
recovery options.
Risk- based management information has been an important area of
continued improvement. Through the use of a broad range of early warning
indicators and risk drivers, a more forward-looking approach to risk
identification and management was established. In particular,
enhancements were made to the credit portfolio risk triggers by
leveraging credit bureau data to supplement internal risk assessments.
The Group is actively using its early warning risk indicators and risk
assessment capabilities to identify and analyse any emerging trends,
particularly during the current period of economic and market
uncertainty.
Improved Financial Crime and Compliance team structures were implemented
with continued investments made to materially build out specialist
capabilities in relation to monitoring, testing and assurance.
Priority areas for 2018
The priority for both the Risk and Compliance functions during 2018 is
to further embed the risk management frameworks into the culture and
decision making processes at all levels of the organisation. Both
functions intend to utilise the enhanced level of specialist risk and
compliance resources to deliver on a number of key initiatives
including:
- Delivery of an enhanced and integrated data governance and
controls framework. Improved data aggregation, analytics and
distribution channels to support ongoing business reporting requirements
as well as key strategic and regulatory initiatives
- Continued progress against the Group's IRB plan, with
particular focus on delivery of second generation credit risk models,
improved adherence to emerging regulatory requirements and meeting the
'use-test' requirements. Improved model governance and controls,
supported by an extensive training and awareness programme
- Continued improvements to the underlying risk forecasting and
stress testing capabilities which supporting the Group ICAAP and ILAAP,
including the roll-out of IRB and IFRS 9 compliant stress testing
capabilities
- The Group's operational resilience programmes to deliver an
integrated approach to operational resilience assessment and improved
aligned to Business Continuity Plan ('BCP') development and testing,
through the leveraging of an integrated system solution.
The Board and senior management are providing an appropriate level of
oversight across all key initiatives. The Group also engages external
subject matter experts and consults with supervisory authorities to
ensure appropriate levels of transparency and successful outcomes are
achieved.
Risk management
Approach to risk management
Ongoing risk identification, assessment, monitoring and reporting are
the primary risk disciplines underpinning the Group's growth strategy
and adherence to the prudential and conduct regulatory requirements. The
Group's approach to risk management is outlined within the SRMF.
The SRMF is the overarching framework which enables the Board and senior
management to actively manage and optimise the risk-reward profile
within the constraints of the Group risk appetite. Specifically, the
SRMF enables the Board and senior management to take informed decisions
by appropriately balancing the interests and expectations of the various
stakeholders and to manage potential trade-offs within the context of
the risk appetite.
The SRMF is a structured approach to aligning the Board's overarching
objectives against the risks assumed and the ongoing management of these
risks. The SRMF enables the Board to articulate its expectations and
tolerance in relation to the nature and level of risks it is willing to
assume in pursuit of its strategic and business agenda. The Board also
uses the SRMF to outline its expectations with respect to the
appropriate level of risk management capabilities and the sophistication
needed to actively manage the risk profile.
The modular construct of the SRMF provides for an agile approach to
responding effectively to the evolving nature of the business and
regulatory environment. The SRMF and its core modular components are
subject to periodic review and approval by the Board and its oversight
committees.
The following sections describe the key modules of the SRMF structure.
Key modular component 1: Risk principles and culture
The Board adopted a principle-based approach to articulating its
expectations and guidance relating to how the Group should frame its
risk management approach. The risk management principles are designed to
set a clear 'tone from the top' with respect to the Group's risk culture
and values. The risk principles also provide the background context in
which to articulate the Group's risk management objectives, strategy and
appetite.
The risk principles are:
- Customer outcomes: fair treatment and good customer outcomes
are core business values which cannot be put at risk
- Proportionate and scalable: the approach to risk management
needs to be commensurate with the complexity of the underlying risk
profile and appropriately agile to respond to changing business and
regulatory needs
Strategic Risk Management Framework (SRMF)
Key elements Risk principles and culture
Risk strategy and appetite
Risk governance and function organisation
Risk definitions and categorisation
Principal Financial risks Non-financial risks
risks
Credit risk Strategic and business risk Operational risk
Market risk Reputational risk Conduct risk
Liquidity risk Regulatory/compliance risk
Solvency risk
Capabilities Risk Risk data Risk analytics Risk MI
framework and IT
and
policies
Risk ICAAP ILAAP Recovery plan/ Resolution pack
regulatory
submissions
- Actively managed: the risk profile needs to be actively managed
within the Board approved risk appetite
- Comprehensive coverage: all risks and their underlying drivers
impacting the Group's strategic, business, operational and regulatory
objectives should be actively assessed, monitored and reported
- Segregation of duties: risk-taking, oversight and assurance
responsibility to be organised in adherence to the 'three lines of
defence' principle
- Integration and usage: risk assessment should be a critical
feature of decision making processes at all levels of the organisation
- Versatile and progressive: the approach to managing risks
should be subject to continuous review and challenge to keep pace with
emerging good practice and regulatory standards.
In adherence to the risk management principles, the Group Board and
senior management have cultivated a risk culture which encourages a
proactive, transparent and analytical approach to risk management. Risks
are assumed in a balanced and considered manner, taking into account
stakeholder expectations, good customer outcomes, risk management
capabilities and controls.
Key modular component 2: Risk strategy and appetite Risk strategy
OSB's risk strategy is to create value through informed risk-based
decisions and leveraging the Group's risk data and analytics in a timely
and accurate manner to optimise the risk-reward profile. Risks are only
to be assumed which can be effectively identified, assessed, measured
and controlled across all phases of the risk life cycle.
This risk strategy is based on three key components:
- Creating value through generating returns which sufficiently
exceed the cost of risk, funding costs and operating costs
- Risks are only to be assumed where they are subject to a
structured and disciplined approach to risk management
- Risk management capabilities are scalable and agile enough to
adequately address future evolution of the risk profile.
Risk appetite
The Group effectively aligned its strategic and business objectives with
its risk appetite, ensuring that the Board and senior management are
able to monitor the underlying risk profile relative to the overarching
risk principles, risk strategy and financial performance objectives of
the Group. The risk appetite is a critical mechanism though which the
Board and senior management are able to identify adverse trends and
respond to unexpected developments in a timely and considered manner.
The risk appetite is calibrated to reflect the Group's strategic
objectives, business operating plans, as well as external economic,
business and regulatory constraints. In particular, the risk appetite is
calibrated to ensure that the Bank continues to deliver against its
strategic objectives and operates with sufficient financial buffers even
when subjected to plausible but extreme stress scenarios. The objective
of the Board risk appetite is to ensure that the strategy and business
operating model is sufficiently resilient.
The risk appetite is calibrated using statistical analysis and stress
testing to inform the process by which the Board set management triggers
and limits against key risk indicators. The Board and senior management
actively monitor actual performance against Board approved management
triggers and limits to respond in a timely manner to adverse trends and
breaches.
Overarching risk appetite statement
The Bank has a prudent and proportionate approach to risk taking and
management, which is reflective of its straightforward business model.
The inherent resilience of the Group's business model is underpinned by
the fact that the Bank only lends on a secured basis, has established
robust underwriting practices and relies on intermediary based
distribution. The Group supports its lending activities by being
predominantly reliant on stable retail funding, supported by strong and
high quality financial buffers. The highly efficient business operating
model is an important source of competitive advantage. The Group also
places significant importance on its strong conduct and compliance
culture as an important driver of its overall success.
Information and reporting Business Business and risk strategy provide the context within
and risk which the Group outlines its business objectives and
strategy establishes its SRMF. The risk appetite seeks to articulate
the willingness of the Group to take risks in light
of its strategic and risk objectives.
Overarching The overarching risk appetite sets the tone for risk
appetite management. It provides a framework to develop and
statement cascade the Group's risk culture and to establish
risk policies, controls and limits in a consistent
manner.
Risk types The overarching risk appetite statement is supported
and by the individual, risk type level appetite statements
individual for all relevant risks.
risk level
appetite
statements
Risk Risk appetite statements are supported by a broad
Information and reporting metrics range of qualitative and quantitative metrics.
Key modular component 3: Risk governance and function organisation
Risk governance refers to the processes and structures established by
the Board to ensure that risks are assumed and managed within the Board
approved risk appetite, with clear delineation between risk-taking,
oversight and assurance responsibilities. The Group's risk governance
framework is structured to adhere to the 'three lines of defence' model.
All risk-taking, oversight and assurance functions are allocated to
accountable Executives.
The Group Board has the ultimate responsibility for the oversight of the
Group's risk profile and management framework and where it deems it
appropriate, it delegates its authority to its nominated Committees. The
Board and its Committees are provided with appropriate and timely
information relating to the nature and level of the risks to which the
Group is exposed and the adequacy of the risk controls and mitigants.
The Internal Audit function provides independent assurance to the Board
and its Committees as to the effectiveness of the systems and controls
and the level of adherence with internal policies and regulatory
requirements.
The Executive Committee has day-to-day responsibility for managing the
Group's risk profile within the parameters of the Board approved risk
appetite. The Executive Committee discharges its risk control and
oversight responsibilities through a number of management level risk
committees covering all principal risks.
The Chief Risk Officer ('CRO') is the accountable Executive responsible
for establishing an effective risk management framework supported by
appropriately organised Risk and Compliance functions. In discharging
his duties, the CRO has dual reporting lines into the Group CEO and the
Chair of the Risk Committee. The CRO ensures that the Risk function is
appropriately resourced and capable of identifying, assessing and
reporting all principal risks to which the Bank is exposed.
The various management level risk committees have been established to
ensure a more focused approach to monitoring and managing the specific
risks. Additional sub- committees and working groups have also been
established to focus on specific risk initiatives or projects.
The OSB risk governance structure is detailed below:
Risk Credit Market Liquidity Operational Regulatory Conduct
Board Board
governance
Risk Committee
Management Executive Committee
governance
Credit Committee Assets and Liabilities Committee Risk Management Committee Regulatory Governance Committee
Chief Risk Officer
Frameworks Strategic Risk Management Framework, Stress Testing
Framework
Key Credit Risk Management Framework, Lending Policy, Interest Market & Liquidity Risk Management Framework, Treasury Operational Risk Management Framework, Operational Compliance Risk Management Framework, Financial Crime Conduct
policies Arrears, Repossession and Forbearance policies Rate Risk Policy, Funding and Liquidity Risk Policy Resilience Policy, Vulnerable Customer and Suicide Risk Management Framework, Group Anti-Money Laundering Risk
and in the Awareness Policy and Counter Terrorist Financing Policy, SMR policies Management
documents Banking Framework,
Book Conduct
Policy Risk
Policy
Risk Appetite Statement, ICAAP, Recovery Plan, Resolution
pack
ILAAP
Management Credit MI pack ALCO MI pack Operational Compliance and Conduct risk
information risk MI pack Financial Crime MI pack
MI pack
The OSB risk organisational structure is detailed below:
Board Board of Directors
Committees
Remuneration Committee Nomination and Governance Committee Audit Committee Risk Committee
Executive Committee
Management Credit Committee Executive M&A Committee Operations Committee Risk Management Regulatory Executive Assets and
Committees Committee Governance Disclosure Liabilities
Committee Committee Committee
Transactional Credit Committee Project and Change Committee Vulnerable Customer
Committee
Heritable Transactional Credit Vendor Management Committee Data Governance Forum
Committee
Model Review Committee Product and Proposition
Management Forum
Business First line of defence Second line of defence Third line of defence
and
control
functions
Ensures that risks are identified, measured, monitored Provides an independent review and challenge to the Provides independent assurance on the effectiveness
and reported in line with policy in an effective manner. business and control functions to ensure that all of the SRMF, compliance with regulations, adherence
Key Brands aspects of the risk profile are managed in adherence to policies and effectiveness of controls.
Finance and HR to risk appetite and policies. Internal Audit
Operations Risk and Compliance
IT and Change Credit Strategy
Commercial
Sales and Marketing
Legal and Regulation
Executives Chief Executive Officer
Chief Financial Officer Chief Risk Officer Group Head of Internal Audit
Group Chief Operating Officer Group Chief Credit Officer
Chief Information Officer
Group General Counsel
and Company Secretary
Group Commercial Director
Sales & Marketing Director
Brand-Level Senior Management
Key modular component 4: Risk definitions and categorisation
The Group's business activities, business model and external operating
environment result in a unique risk profile. To ensure that the Bank is
actively monitoring and responding to the evolving nature of its risk
profile, it has established a broad range of early warning indicators
and maintains risk registers covering all principal risks. Outlined
below are the various financial and non-financial risks which constitute
the Group's risk profile.
Business model characteristics
- Specialist, and primarily secured lender to underserved - Desired levels of credit exposure to key segments - Also incurs exposure to potentially riskier sub-sectors - Manage infrastructure and operations to support - The Bank is subject to variations in the macroeconomic
sectors (Buy-to-Let/SME, residential) (second charge, bridging and development finance) its core business activities environment and movements in key variables (e.g. Gross
- Potential for concentrations - Perform activities to ensure regulatory compliance Domestic Product, unemployment, interest rates)
Risk profile
Financial risks Non-financial risks
Portfolio credit risk Strategic and business risk Reputational risk Operational risk
The risk of losses due to one or more borrowers failing The risk to the Bank's earnings and profitability Refers to the potential adverse effects that can arise Operational risk is the risk of loss resulting from
to meet all or part of their obligations towards the arising from its strategic decisions, change in the from the Bank's reputation being sullied due to factors inadequate or failed internal processes, people and
Bank. Credit risk also includes other elements such business conditions, improper implementation of decisions such as unethical practices, adverse regulatory actions, systems or from external events. It includes legal
as pre-settlement and settlement risk, residual risk or lack of responsiveness to industry changes. customer dissatisfaction and complaints or negative/adverse risk but excludes strategic and reputational risk.
of credit risk mitigation and concentration risk. publicity. Reputational risk can arise from a variety
Market risk (inc. IRRBB) of sources and is a second order risk - the crystallisation
The risk of losses in on and off-balance sheet positions of a credit risk or operational risk can lead to a
arising from adverse movements in market prices. reputational risk impact.
Conduct risk
Conduct risk is the risk that the firm's culture,
organisation, behaviours and actions result in poor
outcomes and detriment for customers and/or damage
to consumer trust and integrity in the markets in
which we operate.
Regulatory/compliance risk
The risk of failure due to non-adherence to provisions
of the PRA handbook and all relevant prudential and
conduct standards in the UK or non-compliance with
reporting requirements or submission of incorrect
information.
Solvency risk
The potential inability of the Bank to ensure that
it maintains sufficient capital levels for its business
strategy and risk profile under both the base and
stress case financial forecasts.
Liquidity and funding risk
The potential inability of the Bank to fund increases
in assets, manage unplanned changes to funding sources
and to meet obligations when required. It primarily
arises due to the maturity mismatch associated with
the Bank's assets and liabilities and the growth in
mortgage lending.
Principal risks and uncertainties
The Board has carried out a robust assessment of the principal risks and
uncertainties facing the Group, including those that could threaten its
strategic objectives, business operating model, future financial
performance and regulatory compliance commitments. The principal risks
and uncertainties are outlined in the table below:
Strategic and business risk
Definition - The risk to the Bank's earnings and profitability arising
from its strategic decisions, change in the business conditions,
improper implementation of decisions or lack of responsiveness to
industry changes.
Risk appetite statement Risk Mitigation Direction
The Group's strategic and business risk appetite states Performance against targets Performance against strategic Regular monitoring by the Board and the Executive Increased
that the Group does not intend to undertake any long and business targets does not meet stakeholder expectations. Committee of business and financial performance against The Group's strategic and business operating environments
to medium-term strategic actions that would put at This has the potential to damage the Group's franchise strategic agenda and risk appetite. The balanced business are subject to ongoing changes primarily driven by
risk its vision of being a leading specialist lender, value and reputation. scorecard is the primary mechanism to support the market competition, economic outlook and regulation.
backed by a strong and dependable saving franchise. Board and assesses management performance against
The Group adopts a long-term sustainable business key targets. Use of stress testing to flex core business
model planning assumptions to assess potential performance
which, while focused on niche sub-sectors, is capable under stressed operating conditions.
of adapting to growth objectives and external developments.
Regulatory and economic environment The Group's robust underwriting standards and its Increased
The regulatory and economic environment are important focus on professional landlords have helped mitigate The Group's strategic and business risk profile is
factors impacting the strategic and business risk the impact of the regulatory changes and enabled to impacted by the uncertainty surrounding Brexit negotiations
profile. In particular, the emerging regulatory underwriting Group to continue to grow its share of the sector. and potential future changes to regulatory standards.
standards and tax changes impacting the Buy-to-Let The Group has continued to utilise and enhance its
sector have resulted in a general slowdown in the stress testing capabilities to assess and minimise
sector. potential areas of macroeconomic vulnerabilities.
Term Funding Scheme withdrawal The Group's funding plan ensures a diverse funding Increased
The withdrawal of the Term Funding Scheme ('TFS') profile and initiatives have been put in place to The full impact of the TFS withdrawal remains uncertain.
could potentially increase competition for retail replace TFS with a comprehensive Retail Mortgage Backed
and wholesale savings resulting in increased funding Securities ('RMBS') programme.
costs. In particular, there is an increased level
of risk related to the refinancing of the TFS drawdowns
in 4 years time.
Regulatory requirements The Group continues to invest in its IT and data management Increased
The potential for emerging regulatory requirements capabilities to increase the ability to respond to Performance against strategic and business targets
to increase the demands on the Group's operational regulatory change. does not meet stakeholder expectations. This has the
capacity and increase the cost of compliance. A structured approach to change management and fully potential to damage the Group's franchise value and
leveraging internal and external expertise allows reputation.
the Group to respond effectively to regulatory change.
Reputational risk
Definition - The potential risk of adverse effects that can arise from
the Bank's reputation being sullied due to factors such as unethical
practices, adverse regulatory actions, customer dissatisfaction and
complaints or negative/adverse publicity. Reputational risk can arise
from a variety of sources and is a second order risk - the
crystallisation of a credit risk or operational risk can lead to a
reputational risk impact.
Risk appetite statement Risk Mitigation Direction
The Group does not knowingly conduct business or organise Potential loss of trust and confidence that our stakeholders Culture and commitment to treating customers fairly Unchanged
its operations to put its reputation and franchise place in us as a responsible and fair provider of and being open and transparent in communication with The Group has increased the size and capabilities
value at risk. financial services. key stakeholders. Established processes to proactively of its Risk and Compliance function to ensure appropriate
identify and manage potential sources of reputational oversight and challenge to how the Group discharges
risk. its responsibilities to the various stakeholders.
Credit risk
Definition - Potential for loss due to the failure of counterparty to
meet its contractual obligation to repay a debt in accordance with the
agreed terms.
Risk appetite statement Risk Mitigation Direction
The Group seeks to maintain a high quality lending Individual borrower defaults All loans are extended only after thorough bespoke Unchanged
portfolio that generates adequate returns, under normal Borrowers may encounter idiosyncratic problems in and expert underwriting to ensure ability and propensity The Group continues to observe strong and stable credit
and stressed periods. The portfolio is actively managed repaying their loans, for example loss of a job or of borrowers to repay and sufficient security in case profile performance.
to operate within set criteria and limits based on execution problems with a development project. While of default.
profit volatility, focusing on key sectors, recoverable most of the Bank's lending is secured, some borrowers Should there be problems with a loan, the collections
values, and affordability and exposure levels. The may fail to maintain the value of the security. and recoveries team works with customers unable to
Group aims to continue to generate sufficient income meet their loan service obligations to reach a satisfactory
and control credit losses to a level such that it conclusion while adhering to the principle of treating
remains profitable even when subjected to a credit customers fairly.
portfolio stress of a 1 in 20 intensity stress scenario. Our strategic focus on lending to professional landlords
means that properties are likely to be well managed,
with income from a diversified portfolio mitigating
the impact of rental voids or maintenance costs. Lending
to owner-occupiers is subject to a detailed affordability
assessment, including the borrower's ability to continue
payments if interest rates increase. Lending on commercial
property is more based on security, and is scrutinised
by the Group's independent Real Estate team as well
as by external valuers.
Development lending is extended only after a deep
investigation of the borrower's track record and stress
testing the economics of the specific project.
The Group's Transactional Credit Committee actively
reviews and approves larger or more complex mortgage
applications.
Macroeconomic downturn The Group works within portfolio limits on LTV, affordability, Unchanged
A broad deterioration in the economy would adversely name, sector and geographic concentration that are Although the UK economy has remained stable during
impact both the ability of borrowers to repay loans approved by the Risk Committee and the Board. These 2017, the economic outlook is uncertain with the final
and the value of the Group's security. Credit losses are reviewed on a semi-annual basis. In addition, terms of Brexit to be confirmed.
would impact across the lending portfolio, so even stress testing is performed to ensure that the Group
if individual impacts were to be small, the aggregate maintains sufficient capital to absorb losses in an
impact on the Group could be significant. economic downturn and continue to meet its regulatory
requirements.
Wholesale credit risk The Group transacts only with high quality wholesale Unchanged
The Bank has wholesale exposures both through call counterparties. Derivative exposures include collateral The Group continues to utilise a reserve account with
accounts used for transactional and liquidity purposes agreements to mitigate credit exposures. the Bank of England, enabling it to eliminate credit
and through derivative exposures used for hedging. risk on most of its liquidity portfolio.
Market risk
Definition - Potential loss due to changes in market prices or values.
Risk appetite statement Risk Mitigation Direction
The Group actively manages market risk arising from Interest rate risk The Group's Treasury department actively hedges to Unchanged
structural interest rate positions. The Group does An adverse movement in the overall level of interest match the timing of cash flows from assets and liabilities. The Group continues to assess interest on a monthly
not seek to take a significant interest rate position rates could lead to a loss in value due to mismatches basis ensuring that the interest rate risk exposure
or a directional view on rates and it limits its mismatched in the duration of assets and liabilities. is limited in the current economic environment.
and basis risk exposures.
Basis risk The Group strategically focuses on products linked Unchanged
A divergence in market rates could lead to a loss to administered rates to keep control of yield. Product design and hedging has enabled the Group to
in value, as assets and liabilities are linked to maintain the overall level of basis risk through the
different rates. year.
Liquidity and funding risk
Definition - The risk that the Group will be unable to meet its
financial obligations as they fall due.
Risk appetite statement Risk Mitigation Direction
The Group actively maintains stable and efficient Retail funding stress The Group's funding strategy is focused on a highly Increased
access to funding and liquidity to support its ongoing As the Group is primarily funded by retail deposits, stable retail deposit franchise. The large number The end of the Bank of England Term Funding Scheme
operations. It also maintains an appropriate level a retail run could put it in a position where it could of depositors provides diversification and a high ('TFS') may create increased competition for retail
and quality of liquid asset buffer so as to withstand not meet its financial obligations. proportion of balances are covered by the FSCS and and wholesale funding.
market and idiosyncratic liquidityrelated stresses. Increased competition for retail savings driving up so there is no material risk of a retail run.
funding costs, adversely impacting retention levels In addition, the Group performs in-depth liquidity
and wider damage to OSB franchise. stress testing and maintains a liquid asset portfolio
sufficient to meet obligations under stress. The Group
holds prudential liquidity buffers to manage funding
requirements under normal and stressed conditions.
The Group proactively manages its savings proposition
through both the Liquidity Working Group and the ALCO.
Finally, the Group has prepositioned mortgage collateral
with the Bank of England which allows it to consider
other alternative funding sources to ensure it is
not solely reliant on retail savings.
The Group's funding plan ensures a diverse funding
profile and initiatives have been put in place to
replace TFS with a comprehensive Retail Mortgage Backed
Securities ('RMBS') programme.
Term Funding Scheme withdrawal The potential impact The Group's funding plan ensures a diverse funding Increased
of the withdrawal of the TFS programme is uncertain. profile and initiatives have been put in place to The end of the Bank of England Term Funding Scheme
replace TFS with a comprehensive Retail Mortgage Backed ('TFS') may create increased competition for retail
Securities ('RMBS') programme. and wholesale funding.
Solvency risk
Definition - The potential inability of the Bank to ensure that it
maintains sufficient capital levels for its business strategy and risk
profile under both the base and stress case financial forecasts.
Risk appetite statement Risk Mitigation Direction
OSB seeks to ensure that it is able to meet its Board Key risks to solvency arise from balance sheet growth Currently the Bank operates from a strong capital Decreased
level capital buffer requirements under a 1 in 20 and unexpected losses which can result in the Bank's position and has a consistent record of strong profitability. The Group has improved both its CET1 capital and total
stress scenario. The Group's solvency risk appetite capital requirements increasing or capital resources The Bank actively monitors its capital requirements capital position increasing its resilience against
is constrained within the leverage ratio related requirements. being depleted such that it no longer meets the solvency and resources against financial forecasts and plans unexpected losses. In particular, the Group's capital
We manage our capital resources in a manner which ratios as mandated by the PRA and Board risk appetite. and undertakes stress testing analysis to subject position was strengthened in May 2017 by the issuance
avoids excessive leverage and allows us flexibility The regulatory capital regime is subject to change its solvency ratios to extreme but plausible scenarios. of GBP60m of Additional Tier 1 securities ('AT1 securities').
in raising capital. and could lead to increases in the level and quality The Bank also holds prudent levels of capital buffers
of capital that the Group needs to hold to meet regulatory based on CRD IV requirements and expected balance
requirements. sheet growth.
The Group engages actively with regulators, industry
bodies, and advisers to keep abreast of potential
changes and provide feedback through the consultation
process.
Operational risk
Definition - The risk of loss or negative impact to the Group resulting
from inadequate or failed internal processes, people, or systems or from
external events.
Risk appetite statement Risk Mitigation Direction
The Group's operational processes, systems and controls Cyber/data security risk A series of tools designed to identify and prevent Increased
are designed to minimise disruption to customers, The risk of a loss of customer or proprietary data network/system intrusions are deployed across the Whilst the Bank has made a series of enhancements
damage to the Bank's reputation and any detrimental as a result of theft or through ineffective data management. Group. to its defences with respect to IT security threats
impact on financial performance. The Bank actively The effectiveness of the controls is overseen by a during 2017, it recognises that the threats to the
promotes the continual evolution of its operating dedicated IT Security Governance Committee, with specialist industry continue to grow both in respect of the volume
environment through the identification, evaluation IT security staff employed by the Bank. and the level of sophistication.
and mitigation of risks, whilst recognising that the
complete elimination of operational risk is not possible.
Data risk The Bank continues to invest in and enhance its data Increased
The use of inaccurate, incomplete or outdated data management architecture, systems, governance and controls. The increase in data risk has been primarily driven
may result in a range of risks impacting risk management by the increased scale of operations and the multiple
and reporting services. sources from which data is derived.
Regulatory risk The Bank operates a series of controls to identify Increased
The operational risks arising from the management any relevant regulatory change at an early stage. The increase in regulatory change has to date been
of a significant volume of regulatory change. Regulatory related changes are appropriately prioritised offset by the increase in the Bank's change management
and resourced in order to ensure the timely implementation capacity. Regulatory change continues to be well managed
of any operational changes required. with the appropriate level of focus and oversight.
Operational and IT resilience Banks should have business The Bank has established an Operational Resilience Increased
resiliency, continuity monitoring and plans in place Programme that is delivering a Group-wide approach The increasing scale and globalisation of operations
to ensure an ability to operate on an ongoing basis in respect to planning and testing. In addition, the together with dependencies on a number of third party
and limit losses in the event of severe business disruption. programme is designed to highlight any areas of specific service and network providers. The sophistication
Technical failures (including bugs, network or data) vulnerability. of cyber-crime continues to evolve.
resulting in critical system outage. These would include A range of back-up technologies employed to provide
OSB's primary mortgage origination and servicing systems, real-time replication on various critical systems
savings processing system and core reporting and data while disaster recovery capabilities are tested annually.
management systems leading to loss of service, revenue, Real-time system performance monitoring established
business performance and potential customer detriment. and a dedicated testing team in place.
Operational execution and scalability In order to mitigate incidents materialising from Increased
The inability of the Bank to automate current operational manual processes an established two-tier (dependent The ongoing growth of the Bank has challenged its
processes at the speed the business requires in order and independent within the first line) risk-based automation programmes and resulted in an increase
to successfully meet future growth. quality control programme is in place. in the number of manual processes. Whilst key manual
processes are well managed and there is continuing
investment in automation, the challenges presented
by the pace of growth remain a key area of management
focus.
Conduct risk
Definition - The risk that the Group's behaviours or actions result in
customer detriment or negative impact on the integrity of the markets in
which it operates.
Risk appetite statement Risk Mitigation Direction
The Bank considers its culture and behaviours in ensuring Product suitability The Group has a strategic commitment to provide simple, Decreased
the fair treatment of customers and in maintaining Whilst the Group originates relatively simple products, customer-focused products. In addition, a Product Whilst this risk has further reduced in 2017 as a
the integrity of the markets in which it operates there remains a risk that (primarily legacy) products Governance framework is established to oversee both result of increased awareness and dedicated oversight,
a fundamental part of its strategy and a key driver may be deemed to be unfit for their original purpose the origination of new products and to revisit the the Bank remains aware of the changes to the regulatory
to sustainable profitability and growth. OSB does in line with the current regulatory definitions. ongoing suitability of the existing product suite. environment and their possible impact on product suitability.
not tolerate any systemic failure to deliver fair A dedicated Product Governance team - which is part
customer outcomes. On an isolated basis incidents of an independent Conduct Risk team - serves to effectively
can result in detriment owing to human and / or operational manage this risk.
failures. Where such incidents occur they are thoroughly
investigated, and the appropriate remedial actions
are taken to address any customer detriment and to
prevent recurrence.
Data protection In addition to a series of network/ system controls Unchanged
The risk that customer data is accessed inappropriately (documented within as part of the operational risks) Despite a number of additional controls being introduced
either as a consequence of network/system intrusion the Bank performs extensive root cause analysis of in 2017 the network/system threats continue to evolve
or through operational errors in the management of any data leaks in order to ensure that the appropriate in both volume and sophistication.
the data. mitigating actions are taken.
Compliance/regulatory risk
Definition - The risk that a change in legislation or regulation or an
interpretation that differs from the Group's will adversely impact the
Group.
Risk appetite statement Risk Mitigation Direction
The Group views ongoing conformance with regulatory Key compliance regulatory changes that impacted the The Bank has an effective horizon scanning process Increased
rules and standards across all the jurisdictions in Bank included PRA's Buy-to-Let underwriting standards, to identify regulatory change. The Bank has historically responded effectively to
which it operates as a critical facet of its risk certification regime under the SM&CR, PSD2, GDPR, All significant regulatory initiatives are managed regulatory changes however, the level and sophistication
culture. The Group does not knowingly accept compliance Criminal Finances Act, European Fourth Money Laundering by structured programmes overseen by the change management of emerging regulation continues to increase.
risk which could result in regulatory sanctions, financial Directive, FCA guidance on automatic capitalisation team and sponsored at Executive management level.
loss or damage to its reputation. The Group will not for residential mortgage customers. The Bank has proactively sought external expert opinions
tolerate any systemic failure to comply with applicable to support interpretation of the requirements and
laws, regulations or codes of conduct relevant given validation of its response.
its business operating model.
Conduct regulation The Group has a programme of regulatory horizon scanning Increased
Regulatory changes focused on the conduct of business linking into a formal regulatory change management The regulatory environment has tightened and this
could force changes in the way the Group carries out programme. In addition, the focus on simple products is likely to continue, exposing the Group to increased
business and impose substantial compliance costs. and customer oriented culture means that current practice risk.
For example, the Financial Policy Committee's increased may not have to change significantly to meet new conduct
focus on Buy-to-Let lending or tax changes such as regulations.
the Bank profits surcharge must be considered.
The Group proactively scans for emerging risks which may have an impact
on its ongoing operations and strategy. The Group considers its top
emerging risks to be:
Emerging Description Mitigation action
risks
Political and As a result of the UK government triggering Article The Group has implemented robust monitoring processes
macroeconomic 50 and the subsequent general election result, there and via various stress testing activity (i.e. ad hoc,
uncertainty is an increased likelihood of a period of macroeconomic risk appetite and ICAAP) understands how the Group
uncertainty. The Group's lending activity is solely performs over a variety of macroeconomic stress scenarios
focused in the United Kingdom and, as such, will be and has subsequently developed a suite of early warning
impacted by any risks emerging from changes in the indicators which are closely monitored to identify
macroeconomic environment. changes in the economic environment.
General data From 25 May 2018, the Group will comply with GDPR. The Group has mobilised a project (with dedicated
usage This will result in increased regulatory requirements resources) to implement the GDPR as required.
with respect to processing customer and employee personal
and other data in the course of day-to-day business
activities.
RISK PROFILE PERFORMANCE OVERVIEW
Credit risk
Credit profile performance
The Group's credit profile performed strongly in 2017, driven by deep
market knowledge of the specialist markets in which it operates, prudent
lending policies and sound credit risk management.
During the year, the Group's portfolio composition mix continued to
evolve with pre-2011 lending (prior to OneSavings Bank PLC being
established) continuing to run off. Legacy problem loans reduced further
in 2017 from GBP13.8m to GBP8.6m, following careful management by our
experienced collections team. The Group's acquired portfolios also
continued to perform in line with expectations in terms of run-off rates
and credit profile performance.
The Group's funding lines and development finance businesses delivered a
strong performance in 2017, with no impairment recognised across either
segment.
Strong Group originations performance was observed in 2017, driven by
performance across the Buy-to-Let/SME segment. Importantly, this lending
was underwritten at sensible LTV levels, where tightened underwriting
policy, following the United Kingdom's decision to leave the European
Union, resulted in a greater clustering of LTV levels against the
portfolio average. Post-2011 lending, incorporating enhanced lending
criteria, continued to make up an increasing proportion of the Group's
total loans and advances to customers, where 38,500 loans have been
underwritten with only 137 loans being greater than three months arrears
with aggregate loans totalling GBP18.4m with aggregate weighted average
LTV of 63%.
This portfolio mix shift, coupled with strong credit risk management and
continuing favourable economic conditions, supported the portfolio
arrears rate reducing to 1.2% as at 31 December 2017 excluding legacy
problem loans (31 December 2016: 1.4%).
Segment Measure 31-Dec-2017 31-Dec-2016 Variance Commentary
New lending
average LTV
remained
BTL/SME New origination average LTV 70% 70% - stable
Resulting
from a
tightening of
Weighted average Interest Coverage Ratio for new affordability
lending 185% 171% +14% rules
New lending
Residential average LTV
lending New origination average LTV 65% 66% -1% reduced
Increase in
Percentage of new residential lending with a loan cases with
to income (LTI) greater than 4.5 3.2% 2.6% +0.6% LTI > 4.5
Other key risk measures also performed strongly within the period:
- Gross exposure to semi-commercial/commercial lending remains
low at GBP370.8m with weighted average LTV of 63%
- Gross exposure to residential development finance remains low
at GBP143.8m with a further GBP78.0m committed with a weighted average
LTV of 37.7%
- The Group has limited exposure to high LTV loans on properties
worth more than GBP2m. In total only 4% of the Group's loan portfolio is
secured on properties valued at greater than GBP2m with a LTV greater
than 65%.
Forbearance
Where borrowers experience financial difficulties which impacts their
ability to service their financial commitments under the loan agreement,
forbearance may be used to achieve an outcome which is mutually
beneficial to both the borrower and the Bank.
By identifying borrowers who are experiencing financial difficulties
pre-arrears or in arrears, a consultative process is initiated to
ascertain the underlying reasons and to establish the best course of
action to enable the borrower to develop credible repayment plans and to
see them through the period of financial stress.
The specific tools available to assist customers vary by product and the
customers' status. The various treatments considered for customers are
as follows:
- Temporary switch to interest only: a temporary account change
to assist customers through periods of financial difficulty where
arrears do not accrue at the original contractual payment. Any arrears
existing at the commencement of the arrangement are retained.
- Interest rate reduction: the Group may, in certain
circumstances, where the borrower meets the required eligibility
criteria, transfer the mortgages to a lower contractual rate. Where this
is a formal contractual change the borrower will be requested to obtain
independent financial advice as part of the process.
- Loan term extension: a permanent account change for customers
in financial distress where the overall term of the mortgage is extended,
resulting in a lower contractual monthly payment.
- Payment holiday: a temporary account change to assist customers
through periods of financial difficulty where arrears accrue at the
original contractual payment. Any arrears existing at the commencement
of the arrangement are retained.
- Voluntary assisted sale: a period of time is given to allow
borrowers to sell the property and arrears accrue based on the
contractual payment.
- Reduced monthly payments: a temporary arrangement for customers
in financial distress. For example, a short-term arrangement to pay less
that the contractual payment. Arrears continue to accrue based on the
contractual payment.
- Capitalisation of interest: arrears are added to the loan
balance and are repaid over the remaining term of the facility or at
maturity for interest only products. A new payment is calculated which
will be higher than the previous payment.
- Full or partial debt forgiveness: where considered appropriate,
the Group will consider writing off part of the debt. This may occur
where the borrower has an agreed sale and there will be a shortfall in
the amount required to redeem the Group's charge, in which case
repayment of the shortfall may be agreed over a period of time subject
to an affordability assessment or where possession has been taken by the
Group, and on the subsequent sale where there has been a shortfall loss.
The Group aims to proactively identify and manage forborne accounts,
utilising external credit reference bureau information to analyse
probability of default and customer indebtedness trends over time,
feeding pre-arrears watch list reports. Watch list cases are in turn
carefully monitored and managed as appropriate.
Throughout 2017, the Group continued to observe low levels of accounts
in forbearance.
Analysis of forbearance measures undertaken in 2017 by forbearance type:
2017
Number year- 2016 year- '17 vs. '16 '17 vs. '16
of end Number of end balance variance variance of
accounts balance accounts GBPm number of balances
Forbearance type 2017 GBPm 2016 (restated) accounts GBPm
Interest only
switch 35 3.8 60 6.3 -25 -2.5
Interest rate
reduction - - 3 2.2 -3 -2.2
Term extension 29 4.9 31 5.9 -2 -1.0
Payment holiday 50 1.5 37 1.6 13 -0.1
Voluntary
assisted sale 2 0.7 - - 2 0.7
Payment
concession
(reduced monthly
payments) 42 0.8 58 3.5 -16 -2.7
Capitalisation - - 3 0.1 -3 -0.1
Total 158 11.7 192 19.6 -34 -7.9
Analysis of forbearance measures undertaken in 2017 by loan type:
2016 year- '17 vs. '16 '17 vs. '16
Number of 2017 year- Number of end balances variance variance of
accounts end balance accounts GBPm number of balances
Loan type 2017 GBPm 2016 (restated) accounts GBPm
First charge
owner-occupier 55 4.5 117 12.4 -62 -7.9
Second charge
owner-occupier 77 1.6 60 1.3 17 0.3
Buy-to-Let 26 5.6 14 5.5 12 0.1
Commercial - - 1 0.4 -1 -0.4
Total 158 11.7 192 19.6 -34 -7.9
Note: The 2016 year end forbearance balances have been restated for
second charge owner occupier to remove the related first charge balance,
to align to the enhanced approach adopted for 2017.
Fair value of collateral methodology
The Group ensures that security valuations are reviewed on an ongoing
basis for accuracy and appropriateness. Commercial properties are
subject to annual indexing, whereas residential properties are indexed
against monthly house price index ('HPI') data. Where the Group
identifies that an index is not representative, a formal review is
carried out by the Group Real Estate function to ensure that property
valuations remain appropriate.
The Group Real Estate function ensures that newly underwritten lending
cases are written to appropriate valuations, where an independent
assessment is carried out by an appointed, qualified surveyor accredited
by RICS.
Impairment performance
Low arrears, sensible loan to values and growth in loans and advances to
customers resulted in the Group observing a historically low impairment
performance with a loan loss ratio of 0.07% (31 December 2016: 0.16%).
Improved impairment performance was primarily driven by increased
prudence in assumptions introduced in 2016 following the UK referendum
vote to leave the EU, as well as lower underlying loan losses on
acquired residential portfolios and the effect of increasing property
values.
During the year, the Group made no changes to provisioning policy or
methodologies utilised, however a number of key inputs and estimates
used within the collectively assessed provisioning calculations were
refreshed utilising the most recently available data and as per the
standard governance process. This drove an increase in impairment
provision during the six months from 30 June 2017 to 31 December 2017 of
0.09%, versus the annualised loan loss reported for the period 30 June
2017 of 0.04%.
The Group continues to closely monitor impairment coverage levels:
31 December 31 December
Impairment coverage review 2017 2016
Gross loans and advances to customers GBPm 7,327.6 5,964.2
Provisions for impairment losses GBPm 21.6 25.0
Incurred loss remaining GBPm(1) 7.9 8.4
Coverage ratio versus loans and advances %(2) 0.40 0.56
Coverage ratio versus impaired balances %(3) 36.2 41.5
1. Incurred loss is the expected loss of the portfolio at the
point of acquisition and is offset against the modelled future cash
flows to derive the effective interest rate for the book. The incurred
loss protection is therefore recognised over the life of the book
against the unwind of any purchase discount or premium through interest
income. Incurred loss remaining is this protection reduced by the
cumulative losses observed since acquisition.
2. Coverage ratio versus loans and advances is the total
collective and specific provisions plus incurred losses remaining versus
gross loans and advances.
3. Coverage ratio versus impaired balances is the total
collective and specific provisions plus incurred losses remaining versus
impaired balances. Impaired balances are defined as loans where a
specific provision has been raised. Personal loans are not included in
impaired balances.
The coverage ratio with respect to loans and advances to customers
reduced to 0.40% from 0.56% as at 31 December 2016 driven by strong
loans and advances growth. Coverage versus impaired balances remained
strong at 36.2%. The reduction in provision balances was primarily
driven by the resolution of a number of individually assessed legacy
problem loans within the year.
Solvency risk
The Bank has maintained an appropriate level and quality of capital to
support its prudential requirements with sufficient contingency to
withstand a severe but plausible stress scenario. The solvency risk
appetite is based on a stacking approach, whereby the various capital
requirements (Pillar 1, ICG, CRD IV buffers and Board and management
buffers) are incrementally aggregated as a percentage of available
capital (CET1 and total capital).
Solvency risk is a function of balance sheet growth, profitability,
access to capital markets and regulatory changes. The Bank actively
monitors all key drivers of solvency risk and takes prompt action to
maintain its solvency ratios at acceptable levels. The Board and
management also assess solvency when reviewing the Bank's business plans
and inorganic growth opportunities.
In 2017, the Bank strengthened its CET1 ratio by 0.4% to 13.7% and total
capital ratio by 1.8% to 16.9% despite strong organic growth,
demonstrating both the strength of internal capital generation
capabilities through profitability and the ability to raise additional
capital in the market.
Liquidity and funding risk
The Bank has a prudent approach to liquidity management through
maintaining sufficient liquidity resources to cover cash flow imbalances
and fluctuations in funding under both normal and stressed conditions
arising from market-wide and Bank specific events. The Bank's liquidity
risk appetite has been calibrated to ensure that the Bank always
operates above the minimum prudential requirements with sufficient
contingency for unexpected stresses whilst actively minimising the risk
of holding excessive liquidity which would adversely impact the
financial efficiency of the business model.
The Bank has successfully utilised the Bank of England FLS and TFS
secured funding facilities to manage its liquidity throughout 2017, and
continues to attract new retail savers and retain existing customers
through loyalty-based product offerings.
In 2017 the Bank actively managed its liquidity and funding profile
within the confines of its risk appetite as set out in the ILAAP. Its
liquidity ratio at 15.2% and liquidity coverage ratio ('LCR') at 250%
remain well above risk appetite and regulatory minimums.
Market risk
The Bank proactively manages its risk profile in respect of adverse
movements in interest rates, foreign exchange rates and counterparty
exposures. The Bank accepts interest rate risk and basis risk as a
consequence of structural mismatches between fixed rate mortgage lending,
sight and fixed term savings and the maintenance of a portfolio of high
quality liquid assets. Interest rate exposure is mitigated on a
continuous basis through portfolio diversification, reserve allocation
and the use of financial derivatives within limits set by ALCO and
approved by the Board.
Interest rate risk
The Bank does not actively assume interest rate risk, does not execute
client or speculative securities transactions for its own account, and
does not seek to take a significant directional interest rate position.
Limits have been set to allow management to run occasional unhedged
positions in response to balance sheet dynamics and capital has been
allocated for this. Exposure limits are calibrated in accordance with a
statistically-derived risk appetite, and are calibrated in proportion to
available CET1 capital in order to accommodate balance sheet growth.
The Group sets limits on the tenor and rate reset mismatches between
fixed rate assets and liabilities, including derivatives hedges, with
exposure and risk appetite assessed with reference to historic and
potential stress scenarios cast at consistent levels of modelled
severity.
Throughout 2017 the Bank managed its interest rate risk exposure within
its risk appetite limits. The Bank has also made significant progress in
a project to replace its current interest rate risk management system
with a new system allowing greater functionality which will enhance the
management of interest rate risk. Implementation of the new system is
scheduled to be completed during the first half of 2018.
Basis risk
Basis risk arises from assets and liabilities repricing with reference
to different interest rate indices, including positions which reference
variable market, policy and managed rates. As with structural interest
rate risk, the Bank does not seek to take a significant basis risk
position, but maintains defined limits to allow operational flexibility.
As with structural interest rate risk, capital allocation has been set
in proportion to Common Equity Tier 1 capital, with exposure assessed
and monitored monthly across a range of 'business as usual' and stressed
scenarios.
Throughout 2017 the Bank managed its basis risk exposure within its risk
appetite limits.
Operational risk
OSB continues to adopt a proactive approach to the management of
operational risks. The operational risk management framework has been
designed to ensure a robust approach to the identification, measurement
and mitigation of operational risks, utilising a combination of both
qualitative and quantitative evaluations in order to promote an
environment of progressive operational risk management. The Group's
operational processes, systems and controls are designed to minimise
disruption to customers, damage to the Bank's reputation and any
detrimental impact on financial performance. The Bank actively promotes
the continual evolution of its operating environment through the
identification, evaluation and mitigation of risks, whilst recognising
that the complete elimination of operational risk is not possible.
Where risks continue to exist, there are established processes to
provide the appropriate levels of governance and oversight, together
with an alignment to the level of risk appetite stated by the OSB Board.
A strong culture of transparency and escalation has been cultivated
throughout the organisation, with the operational risk function having a
Group -wide remit, ensuring a risk management model that is well
embedded and consistently applied. In addition, a community of Risk
Champions representing each business line and location have been
identified. Operational Risk Champions ensure that the operational risk
identification and assessment processes are established across the Group
in a consistent manner. Risk Champions are provided with appropriate
support and training by the Operational Risk function.
Regulatory and compliance risk
The Bank is committed to the highest standards of regulatory conduct and
aims to minimise breaches, financial costs and reputational damage
associated with non-compliance. However, given the growing scale and
complexity of regulatory changes, it is acknowledged that there may be
isolated instances whereby the Bank's interpretation and response to new
regulatory requirements reflects the Bank's specific circumstances and
its desire to give the best customer outcomes.
The Bank has an established Compliance function which actively
identifies, assesses and monitors adherence with current regulation and
the impact of emerging regulation.
In order to minimise regulatory risk, OSB maintains a proactive
relationship with key regulators, engages with industry bodies such as
UK Finance, and seeks external advice from our auditors and/or other
third parties. The Group also assesses the impact of upstream regulation
on OSB and the wider market in which we operate, and undertakes robust
assurance assessments from within the Risk and Compliance functions.
Conduct risk
The Bank considers its culture and behaviour in ensuring the fair
treatment of customers and in maintaining the integrity of the markets
in which it operates to be a fundamental part of its strategy and a key
driver to sustainable profitability and growth. OSB does not tolerate
any systemic failure to deliver fair customer outcomes.
On an isolated basis, incidents can result in detriment owing to human
and/or operational failures. Where such incidents occur they are
thoroughly investigated, and the appropriate remedial actions are taken
to address any customer detriment and to prevent recurrence.
OSB considers effective conduct risk management to be a product of the
positive behaviour of all employees, influenced by the culture
throughout the organisation and therefore continues to promote a strong
sense of awareness and accountability.
Strategic and business risk
The Board has clearly articulated the Bank's strategic vision and
business objectives supported by performance targets. The Bank does not
intend to undertake any medium to long-term strategic actions which
would put at risk the Bank's vision of being a leading specialist lender
in its chosen markets and being backed by a strong and dependable saving
franchise.
To deliver against its strategic objectives and business plan, the Bank
has adopted a sustainable business model based on a focused approach to
core niche markets where its experience and capabilities give it a clear
competitive advantage.
The Bank remains highly focused on delivering against its core strategic
objectives and strengthening its market position further through strong
and sustainable financial performance.
Reputational risk
The Bank considers reputational risk to be a second order risk which is
likely to be the result of a failure related to one of its other
principal risks. The Bank monitors reputational risk through tracking
media coverage, customer satisfaction scores, the share price and net
promoter scores provided by brokers.
Viability statement
In accordance with provision C.2.2 of the UK Corporate Governance Code,
the Board of Directors have assessed the prospects and viability of the
Group over a three -year period by comprehensively assessing the
principal risks and uncertainties to which it is exposed and have
concluded that they have a reasonable expectation that the Group will be
able to continue to operate and meet its liabilities as they fall due
over that period.
The three -year time period was selected for the following reasons:
- The Group's operating and financial plan covers a three-year
period
- The three-year operating and financial plan considers, among
other matters: the Board's risk appetite; macro-economic outlook; market
opportunity; the competitive landscape; and sensitivity of the financial
plan to volumes, margin pressures and capital requirements
- The Board believes that there is sufficient visibility over the
economic and regulatory landscape and the market outlook offered by the
three-year time horizon to make a reasonable assessment of viability;
and
- Uncertainty in the UK economic outlook over the medium to long
term following the EU referendum outcome.
The Company is authorised by the PRA, and regulated by the FCA and PRA,
and undertakes regular analysis of its risk profile and assumptions. It
has a robust set of policies, procedures and systems to undertake a
comprehensive assessment of all the principal risks and uncertainties to
which it is exposed on a current and forward- looking basis (as
described in Principal risks and uncertainties on pages 39 to 44).
The Group manages and monitors its risk profile through its strategic
risk management framework, in particular through its risk appetite
statement and risk limits (as described in the Risk review on pages 32
to 38). Potential changes in its risk profile are assessed across the
business planning horizon by subjecting the operating and financial plan
to severe but plausible macroeconomic and idiosyncratic scenarios.
Stress testing is a vital discipline, which underpins the Group's ICAAP
and ILAAP. The Group has developed a bespoke macroeconomic model which
identifies the most predictive macroeconomic variables and their
relative relationship to arrears, collateral valuations and loan losses.
As a secured mortgage lender, the Group is most sensitive to changes in
house price movements, unemployment and Bank of England base rate
changes. The Group's stress testing capability then leverages the
developed macroeconomic variable relationships to conduct detailed
scenario analysis over a range of stress scenarios which feed key risk
processes such as the setting of risk appetite, loan loss forecasts and
ICAAP and ILAAP stress testing activity.
In addition, the Company identified a suite of credible management
actions that would mitigate the impact of the stress scenarios. The
Board and executive management use the outcome of the stress test
analysis to evaluate the Company's management options and adequacy of
the Company's capital and liquidity resources to withstand an extreme
but plausible stress scenario. The Company holds sufficient capital to
withstand such a stress scenario.
In addition, the Group identifies a range of catastrophic stress
scenarios, which could result in the failure of its current business
model. Business model failure scenarios (reverse stress tests) are
primarily used to inform the Board and executive management of the outer
limits of the Group's risk profile. Reverse stress tests play an
important role in helping the Board and its executives to identify
potential recovery options under a business model failure scenario, and
form an important aspect of the Company's recovery and resolution plans
prescribed by the regulator. During the year a number of reverse stress
test scenarios were analysed including an extreme macroeconomic downturn
(1 in 200 severity), a cyber-attack leading to a loss of customer data
which is used for fraudulent activities, extreme regulatory and taxation
changes impacting Buy-to-Let lending volumes and a liquidity crisis
caused by severe market conditions combined with idiosyncratic
consequences.
The ongoing monitoring of all principal risks and uncertainties that
could impact the operating and financial plan, together with the use of
stress testing to ensure that the Group could survive a severe but
plausible stress, enables the Board to reasonably assess the viability
of the business model over a three-year period.
Corporate responsibility report
Operating sustainably and responsibly is integral to our business model
and strategy, and builds on OneSavings Bank's long tradition of putting
the customer at the heart of everything we do.
Our Core Values: Specialist, Personal and Flexible reflect our
commitment to interact ethically, responsibly and with integrity with
all our stakeholders and the wider community in which we operate:
- We take a SPECIALIST approach to everything we do - we ensure
we understand our stakeholders' requirements and use our creativity,
skill and expertise to fulfil their requirements with honesty and
integrity
- We take a PERSONAL approach to everything we do - we treat
everyone with respect and take accountability for our actions
- We take a FLEXIBLE approach to everything we do - we ensure
that we work collaboratively with our colleagues, customers and other
stakeholders to achieve shared positive outcomes
What we achieved in 2017
In 2017, we successfully delivered on a number of initiatives across the
business aimed at improving our relationships with key stakeholders and
achieving strong results, including:
- Customers - consistently high consumer net promoter score, +62
- Employees - significantly improved employee engagement survey
results
- Communities - donated over GBP209,000 to community and
charitable causes
Focused on our customers
OneSavings Bank ('OSB') encourages a culture that aims to:
- Communicate and deal with each customer on an individual basis
- Act with consistency across all channels
- Be a confident, open and trustworthy workforce
- Offer simplicity and ease of business
- Offer long-term value for money, and
- Offer transparent products without the use of short-term bonus
rates, and to offer existing customers the benefit of loyalty rates.
Our customers are part of our success and we aim to become a financial
services provider of choice. To achieve that, the Group established a
governance framework for consistent best practice across the Group to
ensure there are robust policies and procedures to minimise the risk of
failure to deliver the service our customers have come to expect from
us.
The relevant policies include:
- Conduct Risk Policy, including treating customers fairly to
ensure the Group conducts its business fairly and without causing
customer detriment
- Responsible Lending Policy to ensure that the Group lends money
responsibly
- Complaints Handling Policy to ensure the Group responds to
complaints swiftly, fairly and consistently
- Vulnerable Customer and Suicide Awareness Policy to ensure that
employees can identify vulnerability and potential suicide risks in our
customers and put in place appropriate actions to deal with such issues
as effectively as possible
- Anti-Money Laundering and Counter Terrorist Financing Policy to
ensure the Group is not used to further criminal activities
- Anti-Bribery and Corruption Policy to ensure the Group carries
out its business honestly
- A Conflicts of Interest Policy to ensure the Group can identify
and, if possible, avoid conflicts, and where this is not possible to
manage conflicts fairly
- Data Protection and Retention Policies to ensure the Group
protects its customer data, manages and retains it fairly and
appropriately
- Whistleblowing Policy to ensure that any employee who raises
concerns around misconduct is protected
- Environmental Policy to conduct our business in an
environmentally aware manner, and
- Diversity and Equality Policy to promote diversity and equality
in our workforce.
Employees have mandatory training on all the key policies, with a
completion rate of 100% in 2017.
Customer engagement
We take a personal approach to our customers, treating each customer as
an individual and listening to their needs. Many of our customers are
also members of the Kent Reliance Provident Society, the Society that
took over the management of the membership of the former Kent Reliance
Building Society. The Bank and the Society have benefited from member
engagement through the online 'portal' launched late in 2015 enabling
input from a geographically broader range of members. Topics of
engagement have included key areas of customer literature, working with
saving and borrowing members helping the Bank to maximise clarity and
understanding, and product retention process enhancement. Each year we
hold an AGM at which members can engage with senior management and
discuss their ideas for improving our customer experience.
Our commitment to our customers is evidenced in the strong net promoter
score (a measure of how likely a customer is to recommend a business on
a scale of -100 to +100) we achieve across our lending and saving
franchises, which in 2017 has improved to +62. In addition, we won
numerous awards for being the best provider for a range of services from
cash ISAs to Buy-to-Let mortgages.
Customer complaints
Whilst we concentrate on providing an excellent service, when things
have gone wrong, we aim to put this right and learn from any mistakes
made. We have a comprehensive, Group-wide complaints handling system and
our staff complete rigorous training programmes to ensure a compliant
and fair process is followed.
Kent Reliance savings
WINNER
Best Cash ISA Provider
Moneyfacts Awards 2017 (for the fifth year running)
WINNER
ISA Provider of the Year
Consumer Moneyfacts 2017 (for the second year running)
[Graphic appear here]
Kent Reliance for intermediaries
WINNER
Best Specialist Lender
The Mortgage Strategy Awards 2017
WINNER
Best Business Development Managers Team
The Mortgage Strategy Awards 2017
WINNER
Specialist Lender of the Year
The Mortgage Introducer Awards 2017
[Graphic appear here]
Focused on our employees
Our employees are our key asset. Their skills, expertise and enthusiasm
are central to achieving our strategic goals, and we continue to invest
in their training, development and employee engagement activities to
make OSB the best work-place it can be.
In 2017, the Group established a Talent Acquisition team in order to
introduce an appropriate level of recruitment specialism within the HR
function to better support business growth and implement a formalised,
competency-based interview and selection process. Our recruitment
procedures are fair and inclusive, with shortlisting, interviewing and
selection always carried out without regard to gender reassignment,
sexual orientation, marital or civil partnership status, colour, race,
caste, nationality, ethnic or national origin, religion or belief, age,
pregnancy or maternity leave or trade union membership.
No candidate with a disability is excluded unless it is clear that the
candidate is unable to perform a duty that is intrinsic to the role,
having taken into account reasonable adjustments. Reasonable adjustments
to the recruitment process are made to ensure that no applicant is
disadvantaged because of their disability and questions asked during the
process are not in any way discriminatory or unnecessarily intrusive. To
that end, the Group achieved Disability Confident Committed (Level One)
status in 2017 (for more details, see below).
We welcomed 177 new employees in the UK and 173 new employees in India
in 2017, and in line with the continued growth of the business, OSB has
acquired a third office in Chatham to accommodate our expanding
workforce.
Training and development
We encourage employees to carry out their work to the best of their
ability and promote learning and development opportunities across the
organisation. Our newly created and consolidated People Development
function manages the allocation and completion of monthly mandatory
e-learning modules, the delivery of in- house workshops, programmes and
coaching in addition to coordinating employees attending external or
in-sourced training activities. In 2017, 685 employees attended 149
separate internal and external workshops or learning events. The
completion rate for our mandatory monthly online compliance training
throughout the year was 100%; demonstrating the importance we continue
to place on ensuring our employees are suitably aware of key
requirements.
The Group is also committed to supporting employees undertaking
professional development and in 2017, ten employees received financial
support in pursuit of their professional qualifications.
In 2018, the Group intends to extend its commitment to widening
accessibility of employment opportunities at the Bank by implementing an
Apprenticeship Scheme.
Talent management and leadership programmes
Following a robust talent mapping exercise, we have identified employees
who constitute our Primary Talent Group, based on their respective
performance and potential. Throughout 2017, a range of associated talent
management activities have been undertaken.
At the end of 2017, all members of the Primary Talent Group had been
retained, 60% were undertaking different or expanded roles and 27% had
been formally promoted.
We are constantly seeking to identify outstanding employees and in line
with this, talent mapping will be undertaken as an annual process in
order to support the progression of those who are identified as
potential senior leaders of the future.
While we are still a relatively small business in terms of employee
numbers, we advertise vacancies internally on a weekly basis in order to
provide career development opportunities for existing employees. In
2017, we filled 36% (84 of 233) of vacancies with internal candidates.
OSB has a genuine desire to retain, support and develop its employee
base. During 2017, 66 employees in the UK and ten employees in India
were formally promoted to a more senior grade. Our regretted attrition
rate for 2017 was 12% for UK employees and 18% for our employees in
India.
Remuneration and benefits
We believe in rewarding our employees fairly and transparently, enabling
them to share in the success of the business. Details of the Group's
remuneration policies can be found in the Remuneration Report on pages
81 to 95.
We offer our employees a comprehensive range of benefits, and continue
to review these to ensure they are in line with market practice.
Although the list is not exhaustive, our benefits include pension
contributions, medical insurance, life cover, a childcare voucher scheme,
interest free season ticket loan and a cycle purchase scheme. In 2017,
we introduced a casual dress code throughout our offices following an
employee vote.
We also encourage our employees to hold shares in the Bank for the long
term, via an annual Sharesave Scheme. The scheme is open to all UK-based
employees and allows them to save a fixed amount of between GBP5 and
GBP500 per month over either three or five years in order to use these
savings at the end of the qualifying period to buy the Company's shares
at a fixed price established when the scheme was announced. The Group
first launched its annual Sharesave Scheme in June 2014 and over 250
employees are members the scheme.
In 2017, 100 employees saw their 2014 Sharesave Scheme mature, with the
total value of their respective individual plans increasing by around
300%.
Employee engagement
In 2017, OSB participated in the 2018 Sunday Times Best Companies
Employee Engagement survey, with 83% of UK employees completing the
survey.
The survey results demonstrated an overall increase of 4.8% and the
achievement of a 1 Star Accreditation Rating, signifying very good
levels of workplace engagement and represented a significant improvement
when compared to the previous two annual surveys when the Bank achieved
a 'One to Watch' rating.
As part of the continuing commitment to employee engagement, OSB also
participated for the first time in the Banking Standards Board survey,
which aims to influence positive change throughout the banking sector.
The survey provided an insight into employees' perception of the
application of their company's values, potential barriers to challenge
and to speak up along with their observations of unethical or
inappropriate behaviour. The results from this survey will help to shape
the Group's agenda and commitment to a shared purpose and values for all
employees in 2018.
OSBIndia ('OSBI') takes part in its own survey, run by the Great Place
to Work Institute. In 2017, OSBI was officially certified as a 'Great
place to work', with a strong performance in all indicators, including
organisation trust, credibility of management, respect for people,
fairness at the workplace, camaraderie and culture. OSBI's overall Trust
index score improved significantly in 2017 to 75, up from 66 in 2016,
and it received the highest score in Pride, reflecting the strong brand
and culture that has been created.
Throughout 2018, OSB will be using the results of all of the surveys to
establish opportunities to deepen employee engagement on both Group-wide
and department levels. We will also be engaging with external
consultants in order to define our Vision, Mission and Values and
establish a range of related actions that will enable us to fully embed
these and proactively drive positive cultural change throughout the
business.
Employee recognition and awards
Through our Long Service Award programme, the significant tenure of 41
employees was recognised in 2017, each of whom reached a 5, 10, 15, 20
or 25 year milestone and one other employee who reached 30 years'
service.
Every quarter, all of our employees have an opportunity to nominate
their colleagues as part of OSB's Quarterly Employee Recognition
Programme. In 2017, 306 separate nominations were received and each
quarter, an Employee of the Quarter was selected along with two
runners-up. Over the year, 12 employees received an award.
Our employees are valued for their expertise, not only by the Bank, but
also by the wider industry. In 2017 Adrian Moloney, OSB's Sales Director
was recognised by The British Specialist Lending Awards in the category
Complex Buy-to-Let Lender.
Health and safety
We have a duty of care to all of our employees, and a safe and healthy
work environment is paramount to OneSavings Bank. We are committed to
fostering and maintaining a working environment in which our employees
can flourish, and our customers can safely transact with us.
We operate a Group Health and Safety Policy and we review our employee
and customer environment regularly.
Activities in 2017
- Undertaking mandatory Company-wide health and safety training
with 100% completion
- Undertaking a full review and continuing to make improvements
where necessary on recently acquired corporate real estate to ensure
statutory health and safety compliance for all sites
- As part of achieving Level 1 of Disability Confident Scheme we
have ensured that our office locations are accessible to disabled
employees.
Diversity and inclusion
At OSB, we recognise the benefits that diversity of our people brings to
the business and we actively promote and encourage a culture and
environment which values and celebrates our differences. In 2017 we
continued our journey to become a truly diverse and inclusive
organisation, which is committed to providing equal opportunities
through the recruitment, training and development of our employees. Some
of our achievements included:
- Formalising our Diversity and Inclusion Policy and establishing
a range of diversity initiatives including unconscious bias training for
the Board and Executive Committee
- Attaining Disability Confident Committed (Level One) status,
with an aim to achieve Level Two status in 2018. By becoming Disability
Confident, the Group is committed to employing, supporting and retaining
those with disabilities and health conditions and we will be partnering
with Kent Council's Employability Advisor to ensure a proactive approach
is taken in seeking to increase the current number of disabled staff who
are employed within the Group.
[Graphic appear here]
- Implementing the requirement to seek to interview equal numbers
of male and female candidates at the first round interview stage for
more senior roles
- Including a set of diversity specific questions in the exit
interview process to enable ongoing identification of potential issues
and opportunities for further enhancements, and
- Becoming a signatory to HM Treasury's Women in Finance Charter,
which is formally published on the Group's website and details our
commitment that by 2020, 30% of our senior management roles will be
undertaken by female employees. The Group has also implemented the
requirement to ensure that the pay of members of the Executive Committee
is linked to the delivery of the Group's gender diversity targets (see
the Remuneration Report on page 81).
We recently published our gender pay gap in line with new legislation
which requires UK companies with more than 250 employees to report their
gender pay gap - the difference between the average amount that women
and men are paid across the whole workforce. As at April 2017, the mean
pay gap at OSB was 47%. Gender pay is not the same as equal pay and we
are confident that we do not have any issue in respect of equal pay. Our
gender pay gap relates directly to the structure of our workforce and
reflects the fact that we have more men than women in senior roles.
We recognise that we need to focus on improving our gender balance and
have a number of initiatives in place to do so:
- Aside from our existing aim of seeking to interview equal
numbers of male and female candidates for roles at management level, we
will be implementing a requirement that with senior management vacancies,
a first round face to face interview with a female candidate must be
undertaken before the recruitment process can proceed, with all
exceptions to this requiring Executive approval. The same requirement
will apply to vacancies at clerical level in respect of male candidates.
- We are in the process of establishing a broader suite of gender
related management information. We will track monthly progress in
respect of gender diversity and gender pay gap initiatives and share
this openly and transparently with our employees.
- We have established a Women's Networking Forum to assist the
internal progression of our existing female employees. This provides a
forum for guest speakers and aims to provide practical development tips
and encouragement for career progression.
Our full gender pay gap report can be found on our website:
www.osb.co.uk.
Over 58% of our UK workforce is female, we have three female Directors
(33% of the Board) and two female members of the Executive Committee
(20%).
In our office in India, women constitute 36% of the total workforce.
Male Female
Number of Board Directors 7 3
Number of Directors of subsidiaries 13 1
Number of senior managers (not Directors) 58 17
All other employees(1) 318 517
1. Includes OSBIndia.
We already have 13% of our UK employees working under flexible working
arrangements, with the majority of these employees working part-time
hours and we will be seeking to further develop this by revising our
Flexible Working Policy to provide increased support to those employees
with parental and carer responsibilities.
Human rights
We want each member of our workforce and other stakeholders to be
treated with dignity and respect. OSB endorses the UN Declaration of
Human Rights and supports the UN Guiding Principles of Business and
Human Rights. The Group adheres to the International Labour Organisation
Fundamental Conventions. We seek to engage with stakeholders with
fairness, dignity and respect. The Company does not tolerate child
labour or forced labour. OSB respects freedom of association and the
rights of employees to be represented by trade unions or works councils.
The Group is a fair employer and does not discriminate on the basis of
gender, religion, age, caste, disability or ethnicity. Our policy
applies throughout the Group and is communicated to our employees during
induction training.
In 2015, the Modern Slavery Act came into force and it encompasses
slavery, human trafficking, forced labour and domestic servitude, and
applies not only to OSB as a Group but also to our supply chain. The
Group's Modern Slavery Statement was published on 30 June 2017. Coupled
with the statement, the completion rate for the mandatory monthly online
training on modern slavery was 100% with more focused training due to be
implemented in 2018. As part of the Bank's continuing commitment to
eliminating abuse and exploitation not just in our workplace but in that
of our suppliers, the Bank has produced and is implementing a Vendor
Code of Conduct by which all our suppliers will be expected to comply.
OSBIndia
OSBI is a wholly- owned subsidiary of the Group. OSBI operates from an
office in Bangalore and currently employs 366 people. OSBI supports the
Bank across various functions such as Customer Service, Operations, IT
and other support services. We actively promote integration between our
colleagues in the UK and India with frequent employee exchanges,
transfers, overseas training and management visits. The state-of-the-art
Bangalore office has been extended in the year to accommodate the
growing number of our Indian colleagues and a new business continuity
site in Hyderabad was opened. We have also completed ISO 9001 and 27001
certifications in 2017, a testament to the Group's commitment to
information security at the highest level.
As part of the Group, OSBI falls under the same Group policies that are
in force in the UK offices, most importantly, equal opportunities,
non-discrimination and harassment, whistleblowing, information security
and clear desk policies. There are only very slight differences in the
Group's main HR policies due to local legislation.
In compliance with the Modern Slavery Act, we do not support excessive
overtime and our employees in India are encouraged to work in accordance
with local legislation. Employees in our Bangalore office enjoy a range
of benefits which includes 21 days of annual leave, 10 days' sick leave
and cafeteria services.
Focused on the environment
This year, we continued to implement the objectives set out in our
Environmental Policy and as a result, the Bank has introduced many
initiatives to enhance our commitment to conducting our business in an
environmentally responsible way.
As an office-based financial services provider, we have a relatively low
impact on the environment. However, we aim to further promote awareness
of the environmental issues amongst our employees in order to reduce
consumption of resources and take measures to minimise our negative
impact on the environment in which we operate.
In 2017, we appointed an independent consultant to undertake an
environmental audit which, once complete, will highlight areas where we
can improve and assist us in setting more effective objectives for
becoming a greener organisation in 2018.
Activities in 2017
Some of the activities that we implemented during the year include:
- Pro-active energy management and measures undertaken across our
corporate real estate which resulted in a reduction of electricity and
gas consumption in 2017
- We now source all of our energy from green energy providers
- Installation of a charging point for electric vehicles in our
head office.
Greenhouse gas emissions
CO(2) e tonnes
Location- Market-
based based
Emission type method method
Scope 1: Operation of facilities 12 -
Scope 1: Combustion 101 -
TOTAL SCOPE 1 EMISSIONS 113 _
Scope 2: Purchased energy (UK) 458 264
Scope 2: Purchased energy
(rest of world) 452
TOTAL SCOPE 2 EMISSIONS 910 264
Total emissions 1,023 264
1. Location-based figure used where market-based not available.
Greenhouse gas emissions intensity ratio:
Total footprint (Scope 1 and Scope
2) - CO(2) e
Previous Current
year year Year on year
(2016) (2017) variance
Turnover (GBPm) 201.4 238.1 18%
Intensity ratio - Scope 2 location-based method (tCO(2)
e/GBP100,000) 0.004 0.004 -
Intensity ratio - Scope 2 market-based method (tCO(2)
e/GBP100,000) 0.003 0.003 -
Emissions breakdown by source (tCO(2) e)
[Graphic appear here]
Emissions breakdown by category (tCO(2) e)
[Graphic appear here]
Notes:
- Our methodology has been based on the principles of the
Greenhouse Gas Protocol, taking account of the 2015 amendment which sets
out a 'dual reporting' methodology for the reporting of Scope 2
emissions. This means that UK electricity is reported using two methods
- We have reported on all the measured emissions sources required
under The Companies Act 2006 (Strategic Report and Directors' Report)
Regulations 2013, except where stated
- The period of our report is 1 January 2017 to 31 December 2017
- This includes emissions under Scope 1 and 2, except where
stated, but excludes any emissions from Scope 3
- Conversion factors for UK electricity (location-based
methodology), gas and other emissions are those published by the
Department for Environment, Food and Rural Affairs for 2017/18
- Conversion factors for UK electricity (market-based
methodology) are published by electricityinfo.org
- The market-based methodology has only been applied to UK
electricity supplies
- Conversion factors for overseas electricity, gas and other
emissions are those published by the International Energy Agency for
2016
- Conversion factor used for R417A (F-Gas) is published by Linde
Gas
- Conversion factor used for R22 (F-Gas) is published by
Department for Environment, Food and Rural Affairs for 2016/17
- As the old office in India closed during the 2016 year, the
following site and associated emission IDs have been retired and are not
included within the 2017 report: India (Old Office)
- The following sites have been added to the portfolio during the
2017 year: India Disaster Recovery Site (Hyderabad) and The Observatory
- The addition of these two new sites into the portfolio has
resulted in an increase in electricity usage and the associated Scope 2
Purchased Energy carbon figures
- There has been a significant reduction in both diesel fuel
usage and F-Gas recharges between 2016 and 2017
- The reduction of reported diesel usage in 2017 is the result of
increased usage in 2016 at the new India site where fuel purchased by
OSB was used by contractors during the construction/refurbishment
process
- The reduction in F-Gas recharges is the result of no UK F-Gas
refills occurring during the 2017 year.
Statement of exclusions
- Global diesel/petrol use (for vehicles) has been excluded from
the report on the basis that it is not material to our carbon footprint
- It has been confirmed there is no LPG use within the estate
either in the UK or overseas
- It has been confirmed that there is no mains gas supply in
relation to the India operations
- Two UK sites: Heritable and InterBay, have been excluded from
reporting as it has been confirmed that these are managed rented
properties and are therefore considered to be Scope 3 emissions and are
not readily available. An additional managed rented site has been added
in the 2017 year - Newman Street. This has been treated as an exclusion
in order to be consistent with the methodology applied to the Heritage
and Interbay sites. We intend to collect data relating to managed rented
properties during the 2018 year so that they can be reported as Scope 3
emissions in the 2018 report.
Focused on our community
OSB has very strong links with the community in which it operates,
especially through its Kent Reliance brand which has been synonymous
with the county of Kent and has been a passionate supporter of its local
community for over 150 years.
As we are one of the largest employers in the region, many of our
employees live within the local community and therefore have a personal
affinity with local causes and projects. Employee feedback is vital in
helping to decide where support can be best placed within the community.
Our diverse community services programme includes being a major sponsor
of South-East-based 'Demelza Hospice Care for Children' and
staff-nominated national charity 'Winston's Wish'. We also donate to
local Kent-based charitable causes through our 'Kent Reliance Community
Fund' ('KRCF'). KRCF is the key sponsor of the 'Kent County Football
Association' (which includes 24 County Cup competitions and player
development centres for under-represented groups) and 'Kent County
Cricket Club', and provides sponsorship for the disability squads and
academy programme which helps to develop new talent. Our 'Project Kent'
and 'Make Someone's Christmas' campaigns are undertaken with a local
media partner to highlight and support local people and projects in
need. For the fifth year running, we have supported a key reading
initiative, called 'Buster's Book Club' at Medway primary schools, which
focuses on fun and innovative ways to help develop literacy levels.
In 2017, we refocused our community services programme to provide more
of a 'hands on' approach by encouraging our employees to take an active
role with all fundraising and volunteering opportunities. Each employee
is given one day's annual leave for volunteering which they can use to
actively support any registered charity of their choosing, or to support
the Bank's charity partnerships. Furthermore, if employees choose to
undertake additional fundraising activities then the Bank will match any
funds raised up to a specific amount. During the year, employees carried
out over 300 volunteering hours, which in monetary terms equates to
nearly GBP7,000.
Overall, the Bank has contributed a total of over GBP209,000 to
community and charitable causes in 2017 through sponsorship programmes,
activities and donations.
Demelza Hospice Care for Children
Demelza is a children's hospice charity in the South-East, providing
compassionate and expert care for babies, children, young people and
their families. As a registered charity, Demelza offers bespoke support,
free of charge, to families and is available 24 hours a day, 365 days a
year. In order to provide these vital services, it needs to raise over
GBP10m a year.
As a locally-based charity, employees from Kent Reliance are hugely
aware of and are keen supporters of Demelza. They participated in a
number of fundraising events throughout the year including being
headline sponsors and participants of the annual Kent Messenger Dragon
Boat Race, which helped raise over GBP150,000 in sponsorship for local
charities and good causes across the county in 2017. The event continues
to be one of the biggest charity fundraising events staged in Kent and
the Kent Reliance teams helped raise donations for Demelza through their
efforts on the day and subsequent promotion.
Kent Reliance also takes huge pride in raising money for Demelza through
a range of annual fundraising events involving quizzes and bake-off
challenges. Aside from straightforward fundraising, we also engage with
the local community by gifting our branch network as collection and
promotion outlets for the charity. Engagement with the charity doesn't
end with our sponsorship. Employees actively welcome opportunities to
get hands-on with Demelza, with many visiting the Hospice on volunteer
days to help clear and maintain the grounds, create a new sensory garden
for families and any other tasks that may arise during the year.
Winston's Wish
Throughout 2017, we continued to support our nominated corporate charity,
Winston's Wish, which was the first charity to establish child
bereavement support services across the UK. Winston's Wish provides
specialist support programmes for children affected by deaths related to
homicide and suicide, as well as military families who have been
bereaved.
The highlight of this year's fundraising activity took place in June as
eight intrepid employees from across the Group cycled a 270-mile route,
stopping at each of our UK branches and offices in three days.
Fortunately, the team was blessed with great weather, no major
mechanical incidents and only a few map reading glitches. 270 miles in
three days was an ambitious target but, ably supported by huge helpings
of food and encouragement at each of our branches and offices, the team
managed to raise a grand total of GBP11,155 for Winston's Wish, bringing
the total amount raised throughout 2017 to GBP17,700.
Project Kent
Project Kent was a new initiative that launched in 2017 in conjunction
with the KM Media Group, led by KMFM. This community initiative was
powered by nominations from local people who were asked to nominate a
local scheme they thought was of benefit to the local community.
Nominations received varied, including a community centre that had
fallen into disrepair, a neighbourhood group that needed equipment for
an afterschool club and a small local charity struggling to promote
their services.
Throughout the selection process, it was clear that there were two
schemes that fully deserved a helping hand as each presented a wonderful
asset to their local communities. Both Farthing Corner Community Centre
and Beltinge Nursery were integral assets within their community but due
to lack of funds they were unable to make vital repairs or make
improvements to their existing services.
The projects offered employees an opportunity to provide hands-on
support through internal decorating, grounds clearance and general
cleaning once building works had been carried out. Both projects have
benefitted greatly from the improvements and are now better equipped to
serve their local communities for many more years to come.
Kent County Football Association
The partnership between Kent FA and Kent Reliance has grown over the
last five years and now covers all 24 Kent County Cup competitions. Kent
Reliance is also a key sponsor of the Kent Girls and Disability Player
Development Centre, resulting in us being named Kent FA's first official
'Community Partner'.
The Kent Reliance Girls and Disability Player Development Centres
provide professional coaching to improve the standards of girls and
disability grassroots football in Kent. The support from Kent Reliance
will enable the transition of young players to elite football as well as
providing a community exit route for players leaving the elite talent
pathway.
Paul Dolan, Kent FA's Chief Executive, is delighted to have the
continued support from Kent Reliance,
"We are now in the fifth and final season of the partnership between
Kent Reliance and the Kent FA, which has always been about supporting
and promoting our local community. Both organisations are totally
committed to being inclusive and our innovative partnership has
reflected this by engaging, developing and rewarding all areas of our
diverse community.
The Kent Reliance Girls and Disability Player Development Centres have
provided a unique opportunity for talented players in Kent to gain
additional football coaching and the 24 Kent Reliance County Cup
competitions have catered for over 1,000 community-based teams each
season of all standards and ages to play competitive football. This
community-based partnership between Kent Reliance and the Kent FA has
been used as a model of best practice for other County Football
Associations across the country to emulate in order to further the
development of grassroots football."
This partnership also sees the continuation of the highly successful
#MagicOfTheCup competition which is run on a monthly basis during the
football season and encourages local teams to enter a submission which
illustrates sportsmanship, goodwill and skilled play. In return, the
winning team receives football equipment and is put forward to compete
as overall winner. Over 15 teams won football equipment during the
competition last season and this year the overall winner was Ramsgate
Football Club Senior Team. The team won 16 tickets for the England vs
Slovakia international match at Wembley on 4 September 2017.
Kent Charity Awards
The Kent Charity Awards ('KCA') showcase the hard work that charities
and voluntary groups from around the county undertake to make the lives
of others better. Celebrating and supporting the county at a grassroots
level is key to Kent Reliance's charitable endeavours and our
sponsorship of KCA reflects that.
Kent County Cricket Club
In 2017, Kent Reliance continued its partnership with KCCC, by
supporting the Club's community programme. As with our commitment to
Kent FA, this relationship is another opportunity to really support
grassroots activity within the county and encourage people of all
abilities to get involved and enjoy sport. Our sponsorship activity
provides for funding for the Disability Performance Squads who currently
operate two teams:
- The Kent Reliance Learning & Physically Disabled ('LDPD')
Performance Squad
- The Kent Reliance Visually Impaired ('VI') Performance Squad
- Both squads train during the winter months and represent Kent
in national competitions against other counties during the summer
months. This is the first step to representing the national team managed
by the England and Wales Cricket Board. The LDPD squad currently plays
in two formats of cricket, both softball, and for the more experienced
players, full cricket balls (hardball). The VI team play with size three
footballs which have been adapted to contain beads which rattle,
although the national team play with regular cricket ball size hardball,
again adapted to rattle and the squad trains throughout the year at a
number of venues around the county.
Jamie Clifford, CEO, KCCC, says "We have been delighted to once again
enjoy the support of Kent Reliance in 2017. With Kent Reliance we have
continued to develop the Academy programme. The partnership has enabled
us to bring in specialist coaches and further develop players' life
skills, which helps the preparation for a professional career. Our
disability cricket programmes have also been boosted by the support of
Kent Reliance which allows us to provide kit, coaching and facilities
for our players. Thank you Kent Reliance for the difference you make."
Make Someone's Christmas
The Make Someone's Christmas campaign encourages listeners and readers
of KMFM and KM Media Group and customers of Kent Reliance branches, to
nominate those people they feel deserve an extra special treat during
the festive season. Following the big success of the programme in
previous years, this year had a hard act to follow but achieved as many
nominations for the well-deserving and those in need. In 2017, we helped
ten special people in Kent with ten bespoke prizes that really helped
make their Christmas. Nominations were varied and included a father and
daughter that had lost their wife and mum just before Christmas, an
eight-year old boy who wanted to nominate his parents for their hard
work in the community and a woman who annually put her Christmas Day on
hold so that she could provide a Christmas lunch for the elderly. Each
winner was announced live on the radio during a two -week period and
received well-deserved prizes ranging from holiday vouchers to a spa
day.
Kent Literacy Scheme
In 2017, Kent Reliance continued to support this educational charity to
develop its new home reading initiative - Buster's Book Club - in ten
Medway schools. The scheme was extremely successful across the county
with more than 7.5 million minutes of reading achieved and making the
26,000 children involved official members of the Millionaire Reading
Club.
OSBI fundraising
Corporate social responsibility ('CSR') is extremely important to OSBI.
The concept of helping society is embedded in its corporate governance
structure through the CSR policy and also through employee engagement.
As part of the OSBI CSR policy, funds are kept aside each year to spend
on social causes. This is governed by a CSR Committee and implemented by
the Corporate and Social Responsibility Group.
The focus is to help and contribute in areas where there is critical
need and within the office locality so they are also able to contribute
their time.
In 2017, the CSR Group agreed to support the areas of child welfare,
education and healthcare.
Child welfare
OSBI has partnered with the SOS Children's Village, located in Bangalore,
to fund education, food, clothing and housing for 20 orphans. Working
together with SOS, OSBI employees helped to provide support for the
holistic development of orphans, women and children belonging to
vulnerable families. OSBI also hosted a couple of events at SOS for
their staff to engage with the children, which was highly appreciated by
both children and the employees.
Healthcare
OSBI is currently supporting affordable healthcare through a local
government-run hospital called CV Raman General Hospital. The hospital
provides subsidised medical facilities to the financially challenged
members of the community in and around east Bangalore. OSBI has
contributed various surgical and arthroscopy equipment that has enabled
the hospital to conduct complex surgeries at a fraction of the price
charged by private hospitals; for example, they are able to carry out
keyhole surgery for ligament tears at under GBP5!
OSBI are now working with the hospital administration to provide
employee volunteers to redo the gardens around the hospital which are
currently in a poor state. OSBI plans to complete landscaping work with
flowering trees and sprawling lawns along with a children's play area
and believes that this will aid in the emotional recovery of the
patients.
Portfolio landlord
We needed to verify the wider portfolio of a new customer to the Group
who was applying for a Buy-to-Let purchase.
The applicant completed the cash flow statement, business plan and asset
and liability statement, demonstrating their overall strategy, profit
position and ability to cover rental voids. We then validated the
existing portfolio via our new technology.
This showed up some anomalies so the underwriter reviewed the
applicant's wider portfolio, confirming that the existing mortgage loans
were on long-term fixed rates.
The underwriter re-verified the portfolio and the ICR threshold was met.
Due to an experienced manual underwriter adopting a flexible approach,
the case was approved quickly. Automated systems simply don't do this.
CRAIG RICHARDSON
HEAD OF UNDERWRITING
Automated systems just don't do this
[Graphic appear here]
Animal welfare
OSBI contributed to the movement and construction of a pet shelter run
by Compassion Unlimited Plus Action ('CUPA'). CUPA provides rescue and
relief to thousands of injured, ill and needy street animals in
Bangalore, Karnataka. Animals that come hurt, sick or abandoned are
given the care and treatment they need to recover and then are re-homed
or rehabilitated.
Looking forward to 2018
The activities undertaken in 2017 delivered a stronger emphasis on staff
engagement within the local community to deliver real, tangible benefits
and lasting value and we want to build on that in 2018.
As the sponsorship deals with Kent County Cricket Club and the Kent
County Football Association come to an end this year, there is an
opportunity to build on the community-based projects and initiatives
that have been trialled in 2017 including:
- Increased community involvement
- Greater staff engagement, and
- Activities that bring KR branches into the mix as 'community
hubs'.
The Strategic report is approved by the Board and signed on its behalf
by:
Jason Elphick
Group General Counsel and Company Secretary
15 March 2018
Directors' Report
Board of Directors (Biographies)
[Graphic appear here] [Graphic appear here] [Graphic appear here] [Graphic appear here] [Graphic appear here]
David Weymouth* Andy Golding April Talintyre Graham Allatt* Eric Anstee*
Non-Executive Chairman Chief Executive Officer Chief Financial Officer Non-Executive Director Non-Executive Director
Appointment Appointment Appointment Appointment Appointment
David was appointed to the Board in September 2017. Andy was appointed to the Board in December 2011. April joined the Bank in May 2012 and was appointed Graham was appointed to the Board in May 2014. Eric was appointed to the Board in December 2015.
to the Board in June 2012.
Committee membership Member of the Nomination and Committee membership Committee membership Committee membership Committee membership
Governance Committee. None. Member of the Risk Committee. Chair of the Risk Committee and member of the Audit Chair of the Audit Committee and member of the Risk
Committee. Committee.
Key skills Key skills Key skills Key skills Key skills
David has nearly 40 years' experience in the financial Andy has over 30 years' experience in financial services. April has broad financial services experience. She Graham has significant banking, credit risk experience Eric has extensive corporate finance and Mergers &
services industry and has a degree in modern languages has been a member of the Institute of Chartered Accountants and financial services experience. Acquisitions experience over a broad range of business
from University College London and an MBA from the in England and Wales since 1992. sectors.
University of Exeter. He is a member of the Takeover Panel Appeals Board
and Visiting Professor, London Metropolitan University
Business School.
Experience & qualifications Experience & qualifications Experience & qualifications Experience & qualifications Experience & qualifications
David was previously Chief Information Officer at Andy was previously CEO of Saffron Building Society, April was previously an Executive Director in the Graham was previously Acting Group Credit Director Eric was Chairman of CPP Group plc from 2014 to 2015.
Barclays Bank plc and Chief Risk Officer at RSA Insurance where he had been since 2004. Prior to that he held Rothesay Life pensions insurance business of Goldman at Lloyds TSB and Chief Credit Officer at Abbey National. Prior to this he was Chief Executive of the City of
Group plc. He sat on the Executive Committee of both senior positions at NatWest, John Charcol and Bradford Sachs and worked for Goldman Sachs International for Prior to this he spent 18 years in the NatWest Group London Group plc, the first Chief Executive of the
companies. His experience as an executive includes & Bingley. He was a Non- Executive Director of Kreditech over 16 years, including as an Executive Director culminating in the role of Managing Director, Credit Institute of Chartered Accountants in England and
a wide range of senior roles in operations, technology, until 1 November 2017. He currently holds a number in the Controllers division in London and New York. Risk at NatWest Markets. A Fellow of the Institute Wales and Group Finance Director of Old Mutual plc.
risk and leadership. David is also Chairman of Mizuho of posts with industry institutions including membership April began her career at KPMG in a general audit of Chartered Accountants, Graham is Deputy Chairman Eric was also Group Finance Director at The Energy
International Plc and his other current Non-Executive of the Council of Mortgage Lenders Executive Committee. department. of the Friends of the British Library and was involved Group plc and advisor to Lord Hanson on the demerger
directorships include Fidelity International Holdings He is also a Director of the Building Societies Trust in housing associations for nearly 30 years as Treasurer of Hanson plc. Prior to this Eric spent 17 years at
(UK) Limited and The Royal London Mutual Insurance and has also served as a Non-Executive Director for and Board member in the North of England and in London. Ernst & Young. Eric is also a Non-Executive Director
Society. He also served on the Board of the Bank of Northamptonshire NHS. of Sun Life Financial of Canada Limited and Insight
Ireland (UK) plc until November 2017. Asset Management Limited.
* Independent Non-Executive Director
[Graphic appear here] [Graphic appear here] [Graphic appear here] [Graphic appear here]
Andrew Doman* Rod Duke* Margaret Hassall* Mary McNamara*
Non-Executive Directora Senior Independent Non-Executive Director Non-Executive Director
Director
Appointment Appointment Appointment Appointment
Andrew was appointed to the Board in July 2016. Rod was appointed to the Board in July 2012 and was Margaret was appointed to the Board in July 2016. Mary was appointed to the Board in May 2014.
appointed Senior Independent Director in 2014.
Committee membership Committee membership Committee membership Member of Audit and Risk Committees. Committee membership
Member of Audit, Nomination and Governance, Remuneration Chair of the Nomination and Governance Committee and Chair of Remuneration and member of Risk and Nomination
and Risk Committees. member of the Remuneration Committee. and Governance Committees.
Key skills Key skills Key skills Key skills
Andrew is an experienced financial services executive. Rod has extensive experience in operations, investments, Margaret brings a broad range of experience developed Mary has broad senior management experience in the
risk management and corporate finance across retail across various industry sectors including manufacturing, banking and finance sectors.
and commercial banking. utilities and financial services.
Experience & qualifications Experience & qualifications Experience & qualifications Experience & qualifications
Andrew is currently Chairman at Castle Trust Capital Rod was previously Group General Manager, HSBC with Margaret spent seven years working for Deloitte and Mary is a Non-Executive Director of Dignity plc and
plc and was previously CEO of Premium Credit Limited responsibility for UK distribution - branches, call Touche as a consultant and led the financial services Motorpoint plc. She was previously CEO of the Commercial
and CEO, President and later Chairman of Frank Russell centres and internet banking - for both personal and consulting business for Charteris Plc. More latterly Division and Board Director of the Banking Division
Company. He was also a Senior Director of McKinsey commercial customers. Rod was with HSBC for 33 years. Margaret has been engaged as Chief Operations Officer at Close Brothers Group PLC. Prior to that, Mary was
& Company, management consultants, based in the London Previous directorships include VISA (UK), HFC Bank or Chief Information Officer for divisions within Chief Operating Officer of Skandia, the European arm
office. He focused on the financial services sector, plc and HSBC Life. He also served on the Board of some of the world's largest banks, namely Bank of of Old Mutual Group and prior to that, Mary spent
serving a number of leading banks, insurance companies Alliance & Leicester plc until its takeover by Santander. America Merrill Lynch, Barclays and RBS. Margaret 17 years at GE Capital, running a number of businesses
and asset managers across a wide range of topics including Rod is a Fellow of the Institute of Financial Services. is a Non-Executive Director for Ascension Trust (Scotland). including GE Fleet Services Europe and GE Equipment
strategy, performance improvement and risk. He was Finance.
formerly a Non-Executive Director of The Wesleyan.
Executive team
[Graphic appear here]
Top row from left to right: Jason Elphick; Jens Bech; Hasan Kazmi;
Richard Davis; John Eastgate.
Bottom row from left to right: Richard Wilson; Lisa Odendaal; Clive
Kornitzer.
[Graphic appear here]
Jason Elphick
Group General Counsel and Company Secretary
Experience & qualifications
Jason joined the Bank in June 2016. He has over 20 years of legal
private practice and in-house financial services experience.
Jason's private practice experience was primarily in Australia with King
& Wood Mallesons and in New York with Sidley Austin LLP and he has been
admitted to practice in Australia, New York and England and Wales.
Jason's in-house financial services experience was most recently as
Director and Head of Bank Legal at Santander in London. Prior to this
Jason held various roles at National Australia Bank, including General
Counsel Capital & Funding, Head of Governance, Company Secretary and
General Counsel Product, Regulation and Resolution.
John Eastgate
Sales and Marketing Director
Experience & qualifications
John joined the Bank in 2012. John has over 25 years' experience in
financial services and prior to joining the Bank he was Sales &
Marketing Director at Saffron Building Society from 2008 until 2012.
Between 2003 and 2008, John was Head of Banking, Head of Mortgages and
Group Account Director at Experian. He held the position of Practice
Manager (Financial Services) at BroadVision UK Limited from 2001 until
2002. Between 1999 and 2001, John was a Senior Manager at Barclays.
Jens Bech
Group Commercial Director
Experience & qualifications
Jens joined the Bank as Chief Risk Officer in 2012, before becoming
Group Commercial Director in 2014.
Jens joined the Bank from the Asset Protection Agency, an executive arm
of HM Treasury, where he held the position of Chief Risk Officer. Prior
to joining the Asset Protection Agency, Jens spent nearly a decade at
management consultancy Oliver Wyman where he advised a global portfolio
of financial services firms and supervisors on strategy and risk
management. Jens led Oliver Wyman's support of Iceland during the
financial crisis.
Richard Wilson
Group Chief Credit Officer
Experience & qualifications
Richard joined the Bank in 2013.
Prior to joining the Bank, Richard was head of the credit function for
Morgan Stanley's UK origination business and subsequently looked after
Credit and Collections strategy within their UK, Russian and Italian
businesses. Between 1988 and 2006, Richard held various roles at
Yorkshire Building Society, including the position of Mortgage
Application Centre Manager.
Hasan Kazmi
Chief Risk Officer
Experience & qualifications
Hasan joined the Bank in September 2015 as Chief Risk Officer.
Hasan has over 19 years of risk experience having worked at several
financial institutions, including Barclays Capital, Royal Bank of Canada
and Standard Chartered Bank. Prior to joining the Bank, Hasan was a
Senior Director at Deloitte within the Risk and Regulatory practice with
responsibility for leading the firm's enterprise risk; capital,
liquidity, recovery and resolution practices. Hasan graduated from the
London School of Economics with a MSc in Systems Design and Analysis and
a BSc in Management.
Lisa Odendaal
Group Head of Internal Audit
Experience & qualifications
Lisa joined the Bank in April 2016 as Group Head of Internal Audit.
Prior to joining the Bank Lisa worked for Grant Thornton where she was
an Associate Director within their Business Risk Services division.
Lisa has over 20 years of internal audit and operational experience
gained in the UK, UAE and Switzerland having worked at several financial
institutions, including PwC, Morgan Stanley, HSBC and Man Investments.
Richard Davis
Chief Information Officer
Experience & qualifications
Richard joined the Bank in 2013. Richard has worked for 20 years in
financial services rising to Chief Information Officer at GE Money UK in
2004.
He subsequently helped launch MoneyPartners (an Investec subsidiary), as
IT Director, through to the eventual sale to Goldman Sachs. Prior to
joining the Bank, Richard worked for four years at Morgan Stanley
covering IT, Projects and Transaction Management for the European
Residential business as an Interim Director.
Clive Kornitzer
Group Chief Operating Officer
Experience & qualifications
Clive joined the Bank in 2013. Clive has over 25 years of financial
services experience, having worked at several financial organisations
including Yorkshire Building Society, John Charcol and Bradford and
Bingley.
Prior to joining the Bank, Clive spent six years at Santander where he
was the Chief Operating Officer for the intermediary mortgage business.
Clive has also held positions at the European Financial Management
Association and has been the Chair of the FS Forums Retail Banking
Sub-Committee. Clive is a Fellow of the Chartered Institute of Bankers.
Corporate Governance Report
The statement of corporate governance practices, including the Reports
of Committees, set out on pages 64 to 98 and information incorporated by
reference, constitutes the Corporate Governance Report of OneSavings
Bank.
Uk Corporate Governance Code ('the Code') - Compliance Statement
During 2017, the Company applied all of the main principles of the Code
and has complied with all Code provisions. The Code is available at
www.frc.org.uk.
Dear Shareholder,
I am pleased to present to you the Company's Corporate Governance Report
for 2017, and to report our full compliance throughout the year with the
Code as updated in 2016.
This is my first report to you as Chairman of the Board and I am pleased
to report that the Board continues to be committed to the highest
standards of corporate governance and considers that good corporate
governance is essential to provide the executive team with the
environment and culture in which to drive the success of the business.
The Board and its Committees have undertaken a formal performance review
exercise during 2017, details of which are set out in the Report below.
The review highlighted that the Board and its Committees continue to
operate effectively.
Mike Fairey, Nathan Moss and Tim Hanford left the Board during 2017. I
would like to thank them for their enormous contribution towards the
success of the Bank over the years. I wish them well in all their future
ventures.
The Investor Relations function continues to assist the Board in
developing a programme of meetings and presentations to both
institutional and private shareholders, details of which are also set
out in the Report. We welcome shareholders to attend the AGM, which will
be held at the offices of Addleshaw Goddard LLP, 60 Chiswell Street,
London, EC1Y 4AG on 10 May 2018 at 11am.
David Weymouth
Non-Executive Chairman
15 March 2018
[Graphic appear here]
The role and structure of the Board
The Board of Directors (the 'Board') is responsible for the long-term
success of the Company and provides leadership to the Group. The Board
focuses on setting strategy and monitoring performance, and ensures that
the necessary financial and human resources are in place to enable the
Company to meet its objectives. In addition, it ensures appropriate
financial and business systems and controls are in place to safeguard
shareholders' interests and to maintain effective corporate governance.
The Board is also responsible for setting the tone from the top in
relation to conduct, culture and values, and for ensuring continuing
commitment to treating customers fairly, carrying out business honestly
and openly and preventing bribery, corruption, fraud or the facilitation
of tax evasion.
The Board operates in accordance with the Company's Articles of
Association (the 'Articles') and its own written terms of reference. The
Board has established a number of Committees as indicated in the chart
on page 37. Each Committee has its own terms of reference which are
reviewed at least annually. Details of each Committee's activities
during 2017 are shown in the Nomination and Governance, Audit, Risk and
Remuneration Committee reports on pages 72 to 95.
The Board retains specific powers in relation to the approval of the
Bank's strategic aims, policies and other matters, which must be
approved by it under legislation or the Articles. These powers are set
out in the Board's written 'Terms of Reference' and 'Matters Reserved to
the Board' which are reviewed at least annually. A summary of the
matters reserved for decision by the Board is set out below:
Strategy and management
- Overall strategy of the Group
- Approval of long-term objectives
- Approval of annual operating and capital expenditure budgets
- Review of performance against strategy and objectives
Structure and capital
- Changes to the Group's capital or corporate structure
- Changes to the Group's management and control structure
Risk management
- Overall risk appetite of the Group
- Approval of the strategic risk management framework
Financial reporting and controls
- Approval of financial statements
- Approval of dividend policy
- Approval of treasury policies
- Approval of significant changes in accounting policies
- Ensuring maintenance of a sound system of internal control and
risk management
Remuneration
- Determining the Remuneration Policy for the Directors, Company
Secretary and other senior executives
- Determining the remuneration of the Non-Executive Directors
- Introduction of new share incentive plans or major changes to
existing plans
Corporate governance
- Review of the Group's overall governance structure
- Determining the independence of Directors
Board members
- Changes to the structure, size and composition of the Board
- Appointment or removal of the Chairman, CEO, SID and Company
Secretary
Other
- The making of political donations
- Approval of the overall levels of insurance for the Group
Accountability
In line with the Code provisions, the Board ensures that a fair,
balanced and understandable assessment of the Group's position and
prospects is presented in all financial and business reporting. The
Board is responsible for determining the nature and extent of the
principal risks it is willing to take in achieving its strategic
objectives and maintains sound risk management and internal control
systems. The Board has established formal and transparent arrangements
for considering how they should apply the corporate reporting, risk
management and internal control principles and for maintaining an
appropriate relationship with the Group's auditors.
Financial and business reporting
The Board is committed to ensuring that all external financial reporting
presents a fair, balanced and understandable assessment of the Group's
position and prospects. To achieve this, the Board reviews each report
and considers the level of consistency throughout: whether there is a
balanced review of the competitive landscape; the use of sufficiently
simple language; the analysis of risks facing the business; and that
there is equal prominence given to statutory and underlying profit. The
Board has established an Audit Committee to assist in making its
assessment. The activities of the Audit Committee are set out on pages
74 to 78.
Risk management and internal control
The Board retains ultimate responsibility for setting the Group's risk
appetite and ensuring that there is an effective risk management
framework to maintain levels of risk within the risk appetite. The Board
regularly reviews its procedures for identifying, evaluating and
managing risk, acknowledging that a sound system of internal control
should be designed to manage rather than eliminate the risk of failure
to achieve business objectives.
The Board has carried out a robust assessment of the principal risks
facing the business, including those that would threaten its business
model, future performance, solvency or liquidity. Further details are
contained in the viability statement on page 49.
The Board has established a Risk Committee to which it has delegated
authority for oversight of the Group's risk appetite, risk monitoring
and capital management. The Risk Committee provides oversight and advice
to the Board on current risk exposures and future risk strategy, assists
the Board in fostering a culture within the Group which emphasises and
demonstrates the benefits of a risk-based approach to internal control
and management.
Further details of the Group's risk management approach, structure and
principal risks are set out in the Risk review on pages 32 to 48. The
Board has delegated to the Audit Committee authority for reviewing the
effectiveness of the Company's internal control systems. The Audit
Committee is supported by the internal audit function in discharging
this responsibility, and receives regular reports from internal audit as
to the overall effectiveness of the control system within the Group.
Details of the review of the effectiveness of the Company's internal
control systems are set out in the Audit Committee report on page 76.
Control environment
The Group is organised along the 'three lines of defence' model to
ensure at least three stages of independent oversight to protect the
customer and the Group from undue influence, conflict of interest and
poor controls.
The first line of defence is provided by the operational business lines
which measure, assess and control risks through the day-to-day
activities of the business within the frameworks set by the second line
of defence. The second line of defence is provided by the risk,
compliance and governance functions which include the Board and
Executive Committee. As noted above, the Board sets the Company's risk
appetite and is ultimately responsible for ensuring an effective risk
management framework is in place. The Compliance function maintains the
'key controls framework' which tracks and reports on key controls within
the business to ensure compliance with the main provisions of the
Financial Conduct Authority ('FCA') and the Prudential Regulation
Authority ('PRA') handbooks. Policy documents also include key controls
that map back to the key controls framework. The third line of defence
is the Internal Audit function.
The Board is committed to the consistent application of appropriate
ethical standards, and the conduct risk policy sets out the basic
principles to be followed to ensure ethical considerations are embedded
in all business processes and decision making forums. The Group also
maintains detailed policies and procedures in relation to the prevention
of bribery and corruption, and a whistleblowing policy.
Directors
The Directors who served during the year are listed in the table below.
Mike Fairey, Nathan Moss and Tim Hanford retired on 10 May, 31 May and
31 December 2017 respectively. The Board currently consists of nine
Directors, being the Chairman, two Executive Directors and six
independent Non-Executive Directors. The biographies of Directors can be
found on pages 60 to 61.
Board meetings and attendance
The Board met nine times during the year. The Board has a formal meeting
schedule with ad hoc meetings called as and when circumstances require.
This includes an annual calendar of agenda items to ensure that all
matters are given due consideration and are reviewed at the appropriate
point in the regulatory and financial cycle. The Board has established a
number of Committees as shown on the table below. The table below shows
each Director's attendance at the Board and Committee meetings they were
eligible to attend in 2017.
Nomination and
Audit Remuneration Governance Risk
Director Board Committee Committee Committee Committee
David Weymouth(1)
(Chairman) 3/3 n/a n/a 2/2 n/a
Mike Fairey(2) 3/5 n/a n/a 2/5 n/a
Graham Allatt 10/10 6/6 n/a n/a 7/7
Eric Anstee 10/10 6/6 n/a n/a 7/7
Andrew Doman 9/10 5/6 3/3 n/a 6/7
Rod Duke 10/10 n/a 7/7 8/9 n/a
Andy Golding 10/10 n/a n/a n/a n/a
Tim Hanford(3) 9/10 n/a n/a 6/9 n/a
Margaret Hassall 9/10 n/a n/a n/a 6/7
Mary McNamara 10/10 n/a 7/7 9/9 6/7
Nathan Moss(4) 5/5 4/4 3/3 3/6 n/a
April Talintyre 10/10 n/a n/a n/a 7/7
1. Joined the Board on 1 September 2017.
2. Retired from the Board on 10 May 2017.
3. Retired from the Board on 31 December 2017.
4. Retired from the Board on 31 May 2017.
In October 2017, the Board attended a strategy away day. All Directors
are expected to attend all meetings of the Board and any Committees of
which they are members, and to devote sufficient time to the Company's
affairs to fulfil their duties as Directors. Where Directors are unable
to attend a meeting, they are encouraged to submit any comments on the
meeting materials in advance to the Chairman, to ensure that their views
are recorded and taken into account during the meeting.
Key Board activities during the year included:
- Strategy
- Risk monitoring and review
- Governance and compliance
- External affairs and competitor analysis
- Talent review
- Annual, interim and quarterly reporting
- Customer/brand/product review
- Policy review and update
- Investment proposals
Role of the Chairman and Chief Executive Officer
The roles of Chairman and Chief Executive Officer ('CEO') are held by
different people. There is a clear division of responsibilities, which
has been agreed by the Board and is formalised in a schedule of
responsibilities for each.
As Chairman, David Weymouth is responsible for setting the 'tone at the
top' and ensuring that the Board has the right mix of skills, experience
and development so that it can focus on the key issues affecting the
business and for leading the Board and ensuring it acts effectively. Our
CEO, Andy Golding, has overall responsibility for managing the Group and
implementing the strategies and policies agreed by the Board. A summary
of the key areas of responsibility of the Chairman and CEO, and how
these have been discharged during the year, are set out below and
overleaf.
Chairman's responsibilities Activities carried out in 2017
Chairing the Board and general meetings of the Company. The Chairman chaired almost all of the Board meetings
held in 2017 and the 2017 AGM. The Senior Independent
Director assumed the role of Interim Chairman from
May to August 2017.
Setting Board agenda and ensuring that adequate time The Chairman, in liaison with the Company Secretary,
is available for discussion of all agenda items. sets the annual calendar of Board business and the
agendas for the individual meetings. Time is allocated
for each item of business at meetings.
Promoting the highest standards of integrity, probity The Board received regular updates from its Committees
and corporate governance throughout the Company. and reviewed its responsibilities and obligations
at its meeting in May.
Ensuring that the Board receives accurate, timely The Chairman, in liaison with the Company Secretary
and clear information in advance of meetings. and the CEO, agrees the information to be circulated
to the Board in advance of each meeting.
Promoting a culture of openness and debate by facilitating The Chairman runs the meetings in an open and constructive
the effective contribution of all Non-Executive Directors. way, encouraging contribution from all Directors.
He regularly meets with the Non-Executive Directors
without management present so that any concerns could
be expressed.
Ensuring constructive relations between Executive
and Non-Executive Directors and the CEO in particular.
Regularly considering succession planning and the The Board receives regular updates from the Nomination
composition of the Board. and Governance Committee. Details of the Committee's
activities are explained in the Nomination and Governance
Committee report on pages 72 and 73.
Ensuring training and development needs of all Directors The Chairman, in liaison with the Company Secretary,
are met, and that all new Directors receive a full has reviewed Directors training requirements. Details
induction. of induction and training held during the year are
given on page 70.
Ensuring effective communication with shareholders The Chairman, with the Board, assisted by the CEO,
and stakeholders. Chief Financial Officer and Investor Relations Manager,
agrees a programme of investor relations meetings.
Details of those carried out during the year are shown
on page 71.
Chief Executive Officer's responsibilities
Andy Golding's responsibilities as CEO are to ensure that the Company
operates effectively at strategic, operational and administrative
levels. He is responsible for all the Bank's activities: provides
leadership and direction to encourage others to effect strategies agreed
by the Board; channels expertise, energy and enthusiasm; builds
individuals' capabilities within the team; develops and encourages
talent within the business; identifies commercial and business
opportunities for the Group, building strengths in key areas; and is
responsible for all commercial activities of the Group, liaising with
regulatory authorities where appropriate. He is responsible for the
quality and financial wellbeing of the Group, represents the Group to
external organisations and builds awareness of the Group externally.
An experienced Executive team comprising of specialists in finance,
banking, risk, legal, and IT matters assist the CEO in carrying out his
responsibilities. The biographies for the Executive team are set out on
page 63.
Executive Committee
The CEO chairs the Executive Committee ('ExCo'), whose members also
include the Chief Financial Officer, the Group Chief Operating Officer,
Chief Risk Officer, Group General Counsel and Company Secretary
(advisory), Group Commercial Director, Chief Information Officer, Group
Chief Credit Officer, Sales and Marketing Director and Group Head of
Internal Audit (advisory). The ExCo is supported by Management
Committees.
The purpose of the ExCo is to assist the CEO in the performance of his
duties, including:
- The development and implementation of the strategic plan as
approved by the Board
- The development, implementation and oversight of a strong
operating model that supports the strategic plan
- The development and implementation of systems and controls to
support the strategic plan
- To review and oversee operational and financial performance
- To prioritise and allocate the Group's resources in accordance
with the strategic plan
- To oversee the development of a high performing senior
management team
- To oversee the customer proposition and experience consistent
with the Group's obligation to treat customers fairly
- To oversee the appropriate protection and control of private
and confidential data.
The ExCo's activities during the year included:
- Business review
- Capital and funding
- Human resources and succession planning
- Governance, control and risk environment - current and
forward-looking
- System transformation
- Monitoring target operating model progress.
Senior Independent Director
Rod Duke is the Senior Independent Director ('SID'). His role is to act
as a sounding board for the Chairman and to support him in the delivery
of his objectives. This includes ensuring that the views of all other
Directors are communicated to, and given due consideration by, the
Chairman. In addition, the SID is responsible for leading the annual
appraisal of the Chairman's performance.
The SID is also available to shareholders should they wish to discuss
concerns about the Company other than through the Chairman and CEO.
Company Secretary
The Company Secretary, Jason Elphick, plays a key role within the
Company, advising on good governance and assisting the Board to
discharge its responsibilities, acting with integrity and independence
to protect the interests of the Company, its shareholders and employees.
Jason advises the Company to ensure that it complies with all statutory
and regulatory requirements and he works closely with the Chairman, CEO
and Chairs of the Committees of the Board so that Board procedures
(including setting agendas and the timely distribution of papers) are
complied with, and that there is a good communication flow between the
Board, its Committees, senior management and Non-Executive Directors.
Jason also provides the Directors with advice and support, including
facilitating induction programmes and training in conjunction with the
Chairman.
Effectiveness
Balance and independence
The effectiveness of the Board and its Committees in discharging their
duties is essential for the success of the Company. In order to operate
effectively, the Board and its Committees comprise a balance of skills,
experience, independence and knowledge to encourage constructive debate
and challenge to the decision making process.
The Board comprises seven Non-Executive Directors including the Chairman
and two Executive Directors. All of the Non-Executive Directors
including the Chairman have been determined by the Board to be
independent in character and judgement and free from relationships or
circumstances which may affect, or could appear to affect, the relevant
individual's judgement. Andrew Doman is considered independent
notwithstanding that he is Chairman of Castle Trust Capital plc, an
unlisted company whose business is focused on first and second charge
Buy-to-Let mortgages, online and in-store credit and residential and
development finance. The independence of the Non-Executive Directors is
reviewed continually, including formal review annually.
The size and composition of the Board is kept under review by the
Nomination and Governance Committee and the Board to ensure an
appropriate balance of skills and experience is represented. The Board
is satisfied that its current composition allows it to operate
effectively and that all Directors are able to bring specific insights
and make valuable contributions to the Board due to their varied
commercial backgrounds. The Non-Executive Directors provide constructive
challenge to the Executives and the Chairman ensures that the views of
all Directors are taken into consideration in the Board's deliberations.
Directors' biographies can be found on pages 60 and 61.
Non-Executive Directors terms of appointment
Non-Executive Directors are appointed for terms of three years, subject
to annual re-election by shareholders. The initial term may be renewed
up to a maximum of three terms (nine years). The terms of appointment of
the Non-Executive Directors specify the amount of time they are expected
to devote to the business which is a minimum of two and half days per
month, calculated based on the time required to prepare for and attend
Board and Committee meetings, the AGM, meetings with shareholders and
training. Their commitment also extends to working such additional hours
as may be required in exceptional circumstances.
Non- Executive Directors are required to confirm annually that they
continue to have sufficient time to devote to the role.
Appointment, retirement and re-election of Directors
The Board may appoint a Director, either to fill a vacancy or as an
addition to the existing Board. The new Director must then retire at the
next AGM and is put forward for election by the shareholders. All other
Directors are put forward for re-election annually. In addition to any
power of removal conferred by the Companies Act, any Director may be
removed by special resolution, before the expiration of his or her
period of office and, subject to the Articles, another person who is
willing to act as a Director may be appointed by ordinary resolution in
his or her place.
Relationship Agreement
On admission of its shares to the London Stock Exchange following the
IPO in June 2014, the Company entered into a relationship agreement (the
'Relationship Agreement') with its then major shareholder OSB Holdco
Limited. Pursuant to the Relationship Agreement, OSB Holdco Limited has
been granted the right to appoint one Non- Executive Director to the
Board for so long as it holds at least 10% of the Company's ordinary
shares and a further Non-Executive Director for so long as it holds at
least 30% of ordinary shares. Following the resignation of Tim Hanford
on 31 December 2017, there are no representatives of OSB Holdco Limited
on the Board. The Directors believe that the terms of the Relationship
Agreement enable the Group to carry on its business independently of OSB
Holdco Limited and ensure that all agreements and transactions between
the Group, on the one hand, and OSB Holdco Limited and its associates
and/or persons acting in concert with OSB Holdco Limited or its
associates, on the other hand, are at arm's length and on a normal
commercial basis. So far as the Group is aware such terms have been
complied with throughout the year.
Conflicts of interest
The Company's Articles set out the policy for dealing with Directors'
conflicts of interest and are in line with the Companies Act 2006. The
Articles permit the Board to authorise conflicts and potential conflicts,
as long as the potentially conflicted Director is not counted in the
quorum and does not vote on the resolution to authorise the conflict.
Directors are required to complete an annual confirmation including a
fitness and propriety questionnaire, which requires declarations of
external interests and potential conflicts. In addition, all Directors
are required to declare their interests in the business to be discussed
at each Board meeting. The interests of new Directors are reviewed
during the recruitment process and authorised, if appropriate, by the
Board at the time of their appointment. The Nomination and Governance
Committee also annually reviews conflicts of interest relating to
Directors.
The Group has also adopted a conflicts of interest policy which includes
a procedure for identifying potential conflicts of interest within the
Group.
No Director has a material interest in any contract of significance in
relation to the Group's business at any time during the year or at the
date of this report.
Directors' indemnities
The Articles provide, subject to the provisions of UK legislation, an
indemnity for Directors and Officers of the Group in respect of
liabilities they may incur in the discharge of their duties or in the
exercise of their powers, including any liabilities relating to the
defence of any proceedings brought against them which relate to anything
done or omitted, or alleged to have been done or omitted, by them as
Officers or employees of the Group. Directors' and Officers' liability
insurance cover is in place in respect of all Directors.
Directors' powers
As set out in the Articles, the business of the Company is managed by
the Board who may exercise all the powers of the Company. In particular,
save as otherwise provided in company law or in the Articles, the
Directors may allot (with or without conferring a right of renunciation),
grant options over, offer, or otherwise deal with or dispose of shares
in the Company to such persons at such times and generally on such terms
and conditions as they may determine. The Directors may at any time
after the allotment of any share but before any person has been entered
in the Register as the holder, recognise a renunciation thereof by the
allottee in favour of some other person and may accord to any allottee
of a share a right to effect such renunciation upon and subject to such
terms and conditions as the Directors may think fit to impose. Subject
to the provisions of company law, the Company may purchase any of its
own shares (including any redeemable shares).
Training and development
The Chairman ensures that all Directors receive a tailored induction on
joining the Board, with the aim of providing a new Director with the
information required to allow him or her to contribute to the running of
the Group as soon as possible. The induction programme is facilitated
and monitored by the Company Secretary to ensure that all information
provided is fully understood by the new Director and that any queries
are dealt with. Typically, the induction programme will include a
combination of key documents and face-to-face sessions covering the
governance, regulatory and other arrangements of the Group.
As senior managers, under the Senior Managers Regime operated by the PRA
and FCA under the FSMA, all Directors have had to maintain the skills,
knowledge and expertise required to meet the demands of their positions
of 'significant influence' within the Bank. As part of the annual
fitness and propriety assessment, Directors are required to complete a
self-certification that they have undertaken sufficient training during
the year to maintain their skills, knowledge and expertise and to make
declarations as to their fitness and propriety. The Company Secretary
supports the Directors to identify relevant internal and external
courses to ensure Directors are kept up-to-date with key regulatory
changes, their responsibilities as senior managers and other matters
impacting on the business.
Information and support
The Company Secretary and the Chairman agree an annual calendar of
matters to be discussed at each Board meeting to ensure that all key
Board responsibilities are discharged over the year. Board agendas are
then circulated with accompanying detailed papers to the Board in
advance of each Board meeting. These include reports from Executive
Directors and other members of senior management, and all Directors have
direct access to senior management should they require additional
information on any of the items to be discussed. The Board and Audit
Committee also receive further regular and specific reports to allow the
monitoring of the adequacy of the Group's systems and controls.
The information supplied to the Board and its Committees is kept under
review and formally assessed on an annual basis as part of the Board
evaluation exercise to ensure it is fit for purpose and that it enables
sound decision making.
There is a formal procedure through which Directors may obtain
independent professional advice at the Group's expense. The Directors
also have access to the services of the Company Secretary as described
on page 68.
Performance evaluation
The Board undertakes an evaluation of its performance and that of its
Committees and individual Directors annually with an external review
every third year. The last externally - facilitated review was conducted
in 2016. In 2017, the internal review concluded that the Board,
including its Committees, discharges its duties effectively; and that
the current Directors have an appropriate range of knowledge and
experience giving rise to open and effective challenge, scrutiny and
debate and the structure of the governance arrangements works well. The
relationship between the Board and senior management is open and
transparent and is reflected in Board discussions. The Board were
satisfied that no individual or group of Directors dominated the
discussions or had undue influence in the decision making process. It
has been a particularly busy year for the Group and the focus in 2018
will be on continuing to enhance and embed the performance improvement
actions taken during 2017.
An update of the actions disclosed in our 2016 Annual Report is provided
below.
Theme Action taken
The frequency of meetings and the breadth and frequency The Board has reviewed the frequency of its meetings
of matters discussed and the timings of meetings of its Committees. A revised
calendar is now in place to enhance the flow of recommendations
from Committees to the Board.
Alignment of terms of reference All terms of reference relating to the Board and its
Committees were reviewed and substantially updated
in 2017.
The length and quality of papers A series of improvement initiatives was introduced
in 2017. Training has been provided to the preparers
of papers and a revised template is now used to assist
those preparers when drafting.
Treasury operations
The Board has approved a treasury policy setting out the Group's
approach to the management of risks from treasury operations. Day-to-day
responsibility for management of the Group's treasury function is
delegated to the Assets and Liabilities Committee ('ALCO') which reports
to the Risk Committee.
Whistleblowing
The Group has established procedures by which employees may, in
confidence, raise concerns relating to possible improprieties in matters
of financial reporting, financial control or any other matter. The
whistleblowing policy and procedure applies to all employees of the
Group. The Audit Committee is responsible for monitoring the Group's
whistleblowing arrangements and the policy. The Chair of the Audit
Committee has overall responsibility for whistleblowing arrangements.
The Group is confident that the arrangements are effective, facilitate
the proportionate and independent investigation of reported matters, and
allow appropriate follow up action to be taken.
Relations with shareholders
Dialogue with shareholders
The Company has a dedicated Investor Relations function to liaise with
institutional investors and analysts. Investor relations activity and a
review of the share register are regular items on the Board agenda.
There will be additional focus on investor relations during 2018 given
greater liquidity in OSB stock following the significant sales by JC
Flowers in 2017, and, as the impact on research availability caused by
the EU regulatory reforms known as MiFID II becomes apparent.
An ongoing dialogue with the key stakeholders continued throughout the
year with topics relating to the performance of the Group including
strategy and new developments. In 2017, the Company has engaged in
active discussion with shareholders and investors, both on an individual
basis and through attendance at investor conferences and events.
Following full year and interim results presentations, senior management
undertake results roadshows and meet with larger investors. The Investor
Relations team and management held a total of 136 meetings with existing
and potential investors during 2017.
A comprehensive plan of Investor Relations activity is in place for the
coming year. The Chairman, Senior Independent Director and other
Non-Executive Directors are available to discuss any matter stakeholders
might wish to raise and to attend meetings with investors and analysts.
In addition, shareholders are able to question the Company through the
Investor Relations function or the Company Secretariat.
The Group introduced a new OneSavings Bank website during 2017 which
provides relevant information to both institutional and private
shareholders, including performance updates and presentations made to
analysts and investors. The website is www.osb.co.uk.
Annual General Meeting
The AGM will be held at the offices of Addleshaw Goddard LLP, 60
Chiswell Street, London EC1Y 4AG on 10 May 2018 at 11am. The Chairs of
each of the Committees of the Board will be present to answer questions
put to them by shareholders. The Annual Report and Accounts and Notice
of the AGM will be sent to shareholders at least 20 working days prior
to the date of the meeting.
Shareholders are encouraged to participate in the AGM process, and all
resolutions will be proposed and voted on at the meeting on an
individual basis by shareholders or their proxies. Voting results will
be announced and made available on the Company's website www.osb.co.uk.
Shareholders may require the Directors to call a general meeting other
than an AGM as provided by the Companies Act 2006. Requests to call a
general meeting may be made by members representing at least 5% of the
paid-up capital of the Company as carries the right of voting at general
meetings of the Company (excluding any paid-up capital held as treasury
shares). A request must state the general nature of the business to be
dealt with at the meeting and may include the text of a resolution that
may properly be moved and is intended to be moved at the meeting. A
request may be in hard copy form or in electronic form and must be
authenticated by the person or persons making it. A request may be made
in writing to the Company Secretary to the registered office or by
sending an email to company. secretariat@osb.co.uk. At any general
meeting convened on such request no business shall be transacted except
that stated by the requisition or proposed by the Board.
Nomination and Governance Committee Report
Dear Shareholder,
I am pleased to present the report of the Nomination and Governance
Committee.
Membership and meetings
The Committee met nine times during 2017.
I would like to welcome David Weymouth, Chairman of the Board, who
became a member of this Committee on 1 September 2017. The other members
are myself (Rod Duke) and Mary McNamara. I would also like to thank Tim
Hanford, who retired from the Board on 31 December 2017, for his
contribution to this Committee.
Appointment of the Chairman
The previous Chairman, Mike Fairey, retired at the conclusion of the
2017 AGM. In anticipation of his retirement, the Committee had
instructed Per Ardua1 to conduct an extensive search for candidates with
strong financial services experience. The remit was to provide, where
possible, a 50/50 split of female and male candidates. The search was
thorough and refined by preliminary interviews, to a diverse shortlist
of high quality candidates. David Weymouth was selected on merit as our
preferred candidate following a number of interviews, meetings, mutual
due diligence and regulatory approval. David was appointed Chairman of
our Bank with effect from 1 September 2017. David's biography is
included on page 60, which demonstrates his extensive financial services
experience in top executive, and non -executive board roles. We are
satisfied that the composition of the Board is operating well, and we
will continue to monitor Board and Committee membership in 2018. Further
details on the composition and balance of the Board and its Committees
are provided below.
Rod Duke
Chair of the Nomination and Governance Committee and Senior Independent
Director
15 March 2018
[Graphic appear here]
Responsibilities
The specific responsibilities and duties of the Committee are set out in
its terms of reference which are available on our website www.osb.co.uk.
Composition of the Board and its Committees
The Committee conducted a review of the composition of the Audit,
Remuneration and Risk Committees; and its own composition during 2017,
carefully considering the skills of the existing members and looking at
any skills gaps applicable to each Committee. During the year, David
Weymouth was appointed Chairman of the Board and Margaret Hassall was
appointed as a member of the Audit Committee.
In addition, the Committee discussed and considered the size of the
Board and acknowledged the benefit of maintaining the Board at its
current size.
Succession planning
The Committee considered both Board and Executive level succession
planning during 2017. This included the progress of employees identified
as part of the talent development programme which was rolled out the
prior year. Executives are also regularly invited to attend Board and
Committee meetings as part of their development.
Diversity
Our Bank recognises and embraces the benefits of having a diverse Board
and workforce, and sees diversity at Board level as an essential element
in maintaining a competitive advantage. We believe that a truly diverse
Board and Company workforce will include and make good use of
differences in the skills, regional and industry experience, background,
race, gender and other distinctions between people. The Board recognises
for itself that diversity is the key to better decision making and
avoiding 'group think'.
These differences are considered in determining the optimum composition
of the Board and when possible will be balanced appropriately. All Board
appointments are made on merit, in the context of the skills, experience,
independence and knowledge which the Board as a whole requires to be
effective.
1. Does not have any other connection with the Company.
The Committee regularly reviews diversity initiatives including its
annual review of the Equality and Diversity policy. The Board remains
committed to the Women in Finance Charter and has introduced measurable
objectives with our aim continuing to be that 30% of senior management
positions within the Group's UK population will be undertaken by female
employees by the end of 2020. Currently, 33% of our Board are female.
Our Bank has also appointed a Diversity Champion to promote a series of
diversity initiatives such as our commitment to those with a disability,
mental health in the workplace and unconscious bias training.
Further details relating to diversity and inclusion are set out on page
53.
Governance
The Committee reviewed changes in the regulatory landscape, particularly
the proposals on Corporate Governance Reform, the government's nine
point action plan and the Company's approach to addressing them.
Activities during 2017
In last year's report the Committee identified six key priorities.
A summary of actions taken and outcomes are set out in the table below:
Objective Action taken
Review and embed Board effectiveness recommendations The recommendations from the Promontory Report(2)
from the Promontory Report(2) have been implemented and the Committee will continue
to monitor and ensure that they are embedded.
Chairman search The Committee spent a considerable amount of time
searching for a new Chairman. A new Chairman has been
appointed with effect from 1 September 2017.
Succession planning for senior executives The Committee considered succession planning of senior
executives.
Developing the talent pipeline The Committee considered reports on the talent pool
and the actions being taken to develop and retain
key talent.
Development of corporate purpose and sustainability The Group has enhanced its environmental policy. This
will continue to be an area of focus in 2018.
Oversee the successful implementation of diversity A number of diversity initiatives relating to disability,
initiatives mental health and unconscious bias were introduced
throughout the Group.
Focusing on the attainment of the Women in Finance With an Executive Committee and senior management
Charter target by 2020 team that to date have seen little attrition, we are
aware that this target is something that will take
time to achieve. To address our current position we
are introducing a range of initiatives, including
seeking to interview equal numbers of male and female
candidates at first round interview stage for all
vacant roles at management level and above.
2 Promontory Financial Group LLC, does not have any other
connection with the Company.
Priorities for 2018
The Committee's priorities for 2018 are:
- Continue to focus on fulfilling our commitment to the Women in
Finance Charter
- Oversee the development and implementation of our action plan
for Gender Pay Gap Reporting
- Oversee a revised approach to cultural engagement within the
Group
- Corporate governance reform
- Corporate purpose and sustainability
- Board and Committee succession planning
- Embedding diversity initiatives
- Board and Committee effectiveness
- Oversee development of the talent pipeline
Audit Committee Report
Dear Shareholder,
I am pleased to present the report of the Audit Committee for 2017.
During the year the Committee continued to focus on areas of significant
judgement in the financial statements as set out in the report below.
The Committee also closely monitored the Group's preparations for IFRS
9, including key areas of interpretation and assumption, the impact
analysis from the parallel run, the use of models and the governance and
control environment.
The Committee also commenced a competitive tender process for the
external audit of the Group from 2019, against the backdrop of the UK's
adoption of EU legislation to reform the statutory audit market, which
became effective for the Bank in 2017.
Membership and meetings
The Committee met six times in 2017, reflecting the workload of the
Committee during the year. All members of the Audit Committee are
independent Non-Executive Directors. The Chair of the Committee, Eric
Anstee, has a wealth of recent and relevant financial and accounting
experience in financial services. Taken as a whole, the Committee has an
appropriate balance of skills, including recent and relevant financial
experience. Standing invitations are extended to the Executive Directors,
Chief Risk Officer, Group Head of Internal Audit and Group Head of
Compliance, all of whom attend meetings as a matter of practice. Other
non-members may be invited to attend all or part of any meeting as and
when appropriate.
[Graphic appear here]
The Company Secretary acts as Secretary to the Committee. The Group Head
of Internal Audit and the external auditors attend all meetings and also
meet in private with the Committee; they also have regular contact with
the Chair throughout the year. The Chair also meets with the Chief
Financial Officer and Group Head of Internal Audit in advance of each
meeting to agree the agenda and receive a full briefing on the key
agenda items.
Nathan Moss served on the Committee from 7 February 2017 until 31 May
2017 when he resigned from the Board.
Further details on the activities of the Committee during the year and
how it discharged its responsibilities are also provided in the report
below.
Eric Anstee
Chair of the Audit Committee
15 March 2018
Responsibilities
The primary role of the Committee is to assist the Board in overseeing
the systems of internal control and external financial reporting across
the Group. The Committee's specific responsibilities are set out in its
terms of reference, which are reviewed at least annually. These are
available on the Company's website www.osb.co.uk and cover external and
internal audit, financial and narrative reporting, compliance,
whistleblowing, fraud and internal controls.
In addition, the Chair of the Audit Committee has informed management
that he is available to meet with the Company's investors on request, in
accordance with the Financial Reporting Council's Stewardship Code.
Activities during 2017
The principal activities undertaken by the Committee during the year are
described below.
Significant areas of judgement considered by the Committee
The following significant accounting judgements were considered by the
Committee in relation to the 2017 Annual Report and financial
statements. In its assessment, the Committee considered and challenged
reports from management prior to both the interim and full year results,
explaining each area of judgement and management's recommended approach.
The Committee also received reports from the external auditor setting
out its views on the accounting treatment and judgements underpinning
the financial statements.
Loan book impairments
Specific provision assessments for individually significant loans or
portfolios of loans involve significant judgement in relation to
estimating future cash flows, including the cost of obtaining and
selling collateral, the likely sale proceeds and any rental income prior
to sale.
All assets without a specific provision are assessed collectively.
Collective provisions are calculated using 12 month delinquency roll
rates and one year probability of default rates ('PD') on different
segments of the loan book. The PD calculations include assumptions for
emergence periods, cure rates and forbearance. Loss given default
('LGD') includes assumptions on forced sale discounts and the level of
house prices. Significant judgement needs to be exercised in deciding
how to apply historic experience to current market conditions in both
the PD and LGD calculations.
The Committee received and challenged reports from management prior to
each reporting date, explaining the approach taken to provisioning and
the resulting changes in provision levels during the period. The
Committee assessed the appropriateness of proposed enhancements to the
methodologies, judgements and estimates underpinning the collective
provision calculations. During the year the management did not make any
changes to collectively assessed impairment methodologies, however it
did assess the ongoing appropriateness of all judgements and estimates.
The Committee assessed and approved enhancements proposed by management
relating to forced sale discount and time to sale assumptions, which fed
LGD calculations.
The Committee reviewed additional information by loan book during the
year including provision coverage ratios, assumed probability of default,
loss given default and loan to value ratios for loans three months or
more in arrears and impaired balances to help with their assessment of
the reasonableness of provisions.
The Committee asked the Risk Committee to review and provide advice on
the collective provision methodologies and assumptions and to review the
'top 20' impaired loans for the half year and year end. At least two
members of the Committee were also members of the Risk Committee
throughout 2017 and as such received additional detailed credit
information on the loan book throughout the year.
The Committee is satisfied that the approach taken and judgements made
were reasonable.
The Committee also received regular reports from management on the
Group's preparations for and approach to IFRS 9: Financial Instruments,
which became effective from 1 January 2018. The reports covered the
classification and measurement of financial instruments and the
determination of impairment provisions and a hedging update. The key
focus was on IFRS 9 models, interpretation of results, key assumptions
and judgements, scenario and macroeconomic variables used within models,
the results of the 2017 parallel run and the proposed ongoing business
as usual as well as model governance, controls and procedures.
Loan book acquisition accounting and income recognition
Acquired loan books are initially recognised at cost. Significant
judgement is required in calculating their effective interest rate
('EIR'), using cash flow models which include assumptions on the likely
macroeconomic environment, including HPI, unemployment levels and
interest rates, as well as loan level and portfolio attributes and
history used to derive prepayment rates, the probability and timing of
defaults and the amount of incurred losses. The EIRs on loan books
purchased at significant discounts are particularly sensitive to the
prepayment and default rates derived as the purchase discount is
recognised over the expected life of the loan book through the EIR. New
defaults are modelled at zero loss (as losses will be recognised in
profit and loss as impairment losses and therefore have the same impact
on EIR as prepayments). Incurred losses at acquisition are calculated
using the Group's collective provision model. The Committee reviewed and
challenged reports from management before each reporting date on the
approach taken. Particular focus was given to loan books purchased at
significant discounts, including sensitivity analysis on the impact of
estimated future prepayment rates and other assumptions on carrying
value and the timing of the release of discounts to profit and loss. The
Committee reviewed a comparison of actual cash flows to those assumed in
the cash flow models by book to challenge management's assessment of the
need to update cash flow projections and adjust carrying values
accordingly. Based on this work, the Committee is satisfied that the
approach taken and judgements made were reasonable.
Effective interest rate
A number of assumptions are made when calculating the effective interest
rate for newly originated loan assets. These include their expected
lives, likely redemption profiles and the anticipated level of any early
redemption charges. Certain mortgage products offered by the Bank
include significant directly attributable net fee income, in particular
Buy-to-Let, and/or revert to the standard variable rate ('SVR') after an
initial discount or fixed period. Judgement is used in assessing the
expected rate of prepayment during the discounted or fixed period of
these mortgages and the expected life of those that prepay. The Group
uses historical experience in its assessment. Judgement is also used in
assessing whether and for how long mortgages that reach the end of the
product term stay on SVR. The most significant area of judgement is the
period spent on SVR. The Group prudently assumes no period on SVR before
the borrower refinances onto a new product or redeems, until a
consistent trend has emerged from the newly enhanced broker led
retention programme. The Committee reviewed and challenged the
assumptions used in EIR calculations, in particular the period over
which net fee income is spread, and also received sensitivity analysis
for different product lives including a period on the Company's SVR.
Based on this work, the Committee is satisfied that the approach taken
and judgements made were reasonable.
Further details of the above significant areas of judgement can be found
in note 2 to the financial statements.
In addition, the Committee reviewed the Group's approach to hedge
accounting and received reports on the effectiveness of the Group's
macro-hedging throughout the year.
The Committee also considered the results of management's regular
reviews of the amortisation profile of fair value adjustments on hedged
assets associated with cancelled swaps against the roll-off of the
underlying legacy back book of long-dated fixed rate mortgages.
Following the half year review, the Group accelerated the amortisation
of fair value adjustments on hedged assets in line with the mortgage
asset run-off, due to faster than expected prepayments.
Fair, balanced and understandable
The Committee considered on behalf of the Board whether the 2017 Annual
Report and financial statements taken as a whole are fair, balanced and
understandable, and whether the disclosures are appropriate. The
Committee reviewed the Group's procedures around the preparation, review
and challenge of the Report and the consistency of the narrative
sections with the financial statements and the use of alternative
performance measures and associated disclosures.
Following its review, the Committee is satisfied that the Annual Report
is fair, balanced and understandable, and provides the information
necessary for shareholders and other stakeholders to assess the Group's
position and performance, business model and strategy, and has advised
the Board accordingly.
Pillar 3 disclosures - The Committee approved the Group's Pillar 3
regulatory disclosures for publication on the Group's website, following
a review of the governance and control procedures around their
preparation.
Internal Audit
The Company continued to use in -house Internal Audit resource during
the year with the Group Head of Internal Audit and her team supported by
a panel of external accountancy firms who provided expert resource when
requested on specific internal audits, on a co-source basis.
The primary role of Internal Audit is to help the Board and executive
management to protect the Group's assets, reputation and sustainability.
It assists the Company in accomplishing its objectives by bringing a
systematic and disciplined approach to evaluate and improve the
effectiveness of the risk management, control and governance processes.
The Internal Audit Charter, which formally defines internal audit's
purpose, authority and responsibility, was approved by the Committee in
December 2017. The Committee also approved the annual Internal Audit
Plan, which was developed, based on a prioritisation of the audit
universe using a risk-based methodology, including input from senior
management and the Committee. A written report is prepared following the
conclusion of each internal audit engagement and distributed to the
Committee and senior management. Responsibility for ensuring appropriate
corrective action is taken lies with management. The Internal Audit
function follows up on engagement findings and recommendations until
remedial action has been completed.
The Committee carries out an annual review of the effectiveness of the
Internal Audit function. This was facilitated for 2017 by a survey
completed by Committee members, certain executives and the external
auditors who had interacted with the Internal Audit function during the
year. Following the review, the Committee was satisfied that the
Internal Audit function operated effectively during the year.
Systems of internal control and risk management
The Committee received regular reports from the Internal Audit function
during 2017, which included progress updates against the Internal Audit
Plan, the results of audits undertaken and any outstanding audit action
points. The Committee approved the annual review of the Compliance
Framework and Assurance Plan and received reports from the Group's
Compliance function and the Annual Statement of Compliance from the
Group Head of Compliance. The Committee used the Internal Audit and
Compliance Reports as the basis for its assessment of the effectiveness
of the Group's system of internal controls and risk management. The
Committee also received a report on the effectiveness of the Group's
system of controls from the CEO, which was based on a self-assessment
process completed by senior managers and executives in the Group.
The Committee received and reviewed reports from management on the
status of the substantiation of balance sheet general ledger accounts
prior to the reporting date.
The Committee reviewed and approved a number of policies following their
annual refresh, including: anti-bribery and corruption, data protection,
data retention and record management, fraud, sanctions and
whistleblowing and anti-money laundering and counter terrorist
financing. The Committee received reports on fraud prevention
arrangements and fraud incidents, whistleblowing and an annual report
from the Group's MLRO during the year.
The Committee also received regular updates on data governance and
controls as the Group enhances its data governance arrangements in
connection with its planned application for an Internal Ratings Based
('IRB') model for capital requirements.
External auditor
The Committee is responsible for overseeing the Group's relationship
with its external auditor, KPMG LLP ('KPMG'). This includes the ongoing
assessment of the auditor's independence and the effectiveness of the
external audit process, the results of which inform the Committee's
recommendation to the Board relating to the auditor's appointment
(subject to shareholder approval) or otherwise.
Appointment and tenure
KPMG was appointed as the first external auditor of the Group for the
period ended 31 December 2011. Prior to that date it fulfilled the
external audit function for Kent Reliance Building Society from the
period ended 31 December 2010. The current lead audit partner, Pamela
McIntyre, has been in role since the 2016 audit. The Audit Committee
confirms that the Group is in compliance with the Statutory Audit
Services for Large Companies Market Investigation (mandatory use of
competitive tender processes and Audit Committee Responsibilities) Order
2014 which requires FTSE 350 companies to put their statutory audit
services out to tender not less frequently than every ten years.
New EU legislation adopted by the UK in 2016 set a maximum audit tenure
of 20 years and also requires a tender at least every ten years. The new
legislation is effective for financial periods commencing on or after 17
June 2016. Against this backdrop, the Group has decided to put the
external audit contract out for tender for its 2019 financial year.
To that end, a formal tender process was launched in the fourth quarter
of 2017 with a desk top review of audit firms, focusing on expertise and
experience in FTSE 350 audits in financial services. A number of firms
were then invited to take part in a request for information ('RFI')
process in December, followed by face to face meetings between the
proposed lead audit partners and senior managers and a sub -set of the
Committee in early 2018. The Committee then selected a shortlist of two
firms in March 2018 to take through to a formal request for proposal
('RFP') process.
Effectiveness
The Committee assesses the effectiveness of the external audit function
on an annual basis. In 2017, the review was facilitated through a survey
completed by members of the Committee, certain Executive Directors and
other key employees who had significant interaction with the external
audit team during the year. The survey assessed the effectiveness of the
lead partner and audit team, the audit approach and execution, the role
of management in the audit process, communication, reporting and support
to the Committee as well as the independence and objectivity of the
external auditor. The assessment concluded that the external audit
process was effective.
The audit carried out by KPMG in respect of the Group's financial
statements for 2016 was the subject of an in-depth review during the
year by the Financial Reporting Council's (FRC) Audit Quality Review
Team. The Committee reviewed the findings and discussed them with KPMG
and the matters raised have been addressed in the planning and execution
for the audit for 2017. The Committee remains satisfied with the
efficiency and effectiveness of the audit.
Prohibited services Approved permitted services
Book-keeping and preparing accounting records and General accounting advice on the application of IFRS
financial statements and training support
Financial information systems design and implementation. Regulatory advice and reporting tools
Internal control or risk management procedures relating
to financial information design or implementation
Valuation services, including those in connection Comfort letters, accounting opinions as required by
with actuarial or litigation support services the regulator, FLS/TFS net lending assurance opinions,
agreed upon procedures in relation to securitisations
HR and payroll services Other audit-related services; interim profit verification;
half year review
Services linked to the financing, capital structure Such other activities as may be agreed by the Committee
and allocation and investment strategy of the Company from time to time
other than assurance services in relation to the financial
statements such as comfort letters
Promoting, dealing in or underwriting shares in the
Company
Legal services with respect to the provision of general
counsel, negotiating on behalf of the audit entity
and acting in an advocacy role in the resolution of
litigation
Internal audit services
HR and payroll services
Tax services, including tax compliance and advice
Services that play any part in the management or decision
making of the Company
Non-audit services
The engagement of the external auditor to provide non-audit services to
the Group could impact the assessment of its independence and
objectivity. The Group has therefore established a policy governing the
use of the external auditor for non-audit services. The policy specifies
prohibited and approved permitted services (as detailed in the table on
page 77 for 2017) and sets the framework within which permitted
non-audit services may be provided. Prohibited services comprise
activities that are generally perceived to involve the auditor making
judgements or decisions that are the responsibility of management.
The Group's policy governing the use of the external auditor for
non-audit services was updated in 2017 to comply with new EU statutory
audit market reform legislation adopted in the UK. Restrictions on the
nature of permissible non-audit services became effective for financial
periods commencing on or after 17 June 2016. These included certain
restrictions on the use of the statutory auditor for tax compliance and
advice. Accordingly, the Group ceased using KPMG for tax compliance or
advice after 31 December 2016.
The Group maintains active relationships with several other large firms
and any decision to appoint the external auditor is taken in the context
of whether their understanding of the Group places them in a better
position than other firms to undertake the work and includes an
assessment of the cost-effectiveness and practicality of using an
alternative firm.
The new EU statutory audit market reform legislation adopted in the UK
also applies a cap on permissible non- audit services of 70% of the
proceeding three-year average of audit fees. This is applicable for
financial periods commencing on or after 17 June 2019.
The Committee pre-approved a number of permitted services in 2017:
interim profit verifications and the half year review. The Committee
also pre-approved other permitted non-audit services subject to an
overall threshold of 50% of the final cost of the 2016 Group annual
audit services and subject to any single item above GBP100,000 being
pre-agreed with the Committee Chair. The Committee reviews a schedule of
year-to-date non-audit services at each meeting.
The fees paid to the external auditor in respect of non-audit services
during 2017 totalled GBP151,000 representing 19% of 2017 Group audit
services of GBP816,000 (2016: GBP250,000 representing 47% of 2016 Group
audit services of GBP535,000) and are detailed in the table below. The
2017 audit fee includes non-recurring fees of GBP207,000 in respect of
the audit of system migrations and the Group's adoption of IFRS 9.
The Committee's assessment of the external auditor's independence in
2017 took into account the non-audit services provided during the year,
and confirmations given by KPMG as to its continued independence at
various stages in the year.
2017 2016
Nature of service GBP'000 GBP'000
Audit-related assurance services
including half year review and interim
profit verifications 96 96
Tax compliance and advice - 70
Regulatory advice and support 8 36
Other(1) 47 48
Total non-audit services 151 250
1. Other non-audit services included AT1 issuance and hedge
accounting advice in 2017 and in 2016 related to agreed upon procedures
in respect of a new securitisation vehicle and assurance work in
relation to net lending for the Funding For Lending Scheme.
Training
The Committee undertook a significant amount of training during the year,
including making extensive use of the Audit Committee Institute and
training programmes run by the major accountancy firms. In addition,
Committee members attended a number of executive level Committee
meetings and met with key staff during the year to increase their
knowledge and understanding of the business.
Effectiveness
The Committee formally considers its effectiveness annually. The
assessment was facilitated for 2017 using a survey completed by members
of the Committee. The review concluded that the Committee operated
effectively throughout 2017 with no significant improvements required.
Risk Committee Report
Dear Shareholder,
I am pleased to present the report of the Risk Committee.
The Risk Committee meets at least six times a year, with additional
meetings scheduled as required depending on the activity of the Group.
Only members of the Committee are entitled to attend meetings, however
the Chief Risk Officer ('CRO'), Chief Executive Officer ('CEO') and
Group Chief Credit Officer ('CCO') have standing invitations to the
Committee, unless the Chairman of the Committee informs any that they
should not attend a particular meeting or discussion.
The Committee reviewed and commented on various reports, including the
Internal Capital Adequacy Assessment Process ('ICAAP'), Internal
Liquidity Adequacy Assessment Process ('ILAAP') and Recovery Plan,
before recommending the documents to the Board for approval or noting.
The Committee spent an appropriate proportion of its time reviewing a
number of inorganic transactions, as well as its other advisory and
oversight responsibilities.
Further information on the wide range of the role and activities of the
Committee is provided in the following Report.
Graham Allatt
Chair of Risk Committee
15 March 2018
[Graphic appear here]
Responsibilities
The primary objective of the Committee is to provide oversight and
advice to the Board on current risk exposures and future risk strategy,
and to assist the Board to foster a culture within the Group that
emphasises and demonstrates the benefits of a risk-based approach to
internal control and management of the Group.
The Committee's specific responsibilities are set out in its terms of
reference, which are available on the Company's website at
www.osb.co.uk.
Activity during 2017
In 2017, the Group continued to implement its enhanced strategic risk
management framework, which represents the overarching framework
established to manage its risk profile in line with its business
strategy and objectives. The strategic risk management framework of the
Group is set out in detail on pages 34 to 38.
In order to discharge its duties and responsibilities, the Committee
receives reports from those responsible for specific areas of risk
within that framework. Examples of how the Committee has discharged its
responsibilities during the year are set out below.
Credit risk
The Committee received and reviewed regular detailed credit reports
during the year, identifying large exposures, loan to values and arrears
within various categories (e.g. residential loans, Buy-to- Let). The
Committee also reviewed forward-looking credit risk data including debt
service coverage ratios for Buy-to-Let and external bureau data covering
credit quality and affordability levels. The reports also highlight
early warning indicators, which allow the Committee and the risk
function to address potential credit issues before they develop into
significant Risk areas.
The Committee reviewed and approved updates to policies including the
Group Lending Policy, the Arrears, Repossession and Forbearance Policies
and the Loan Loss Provisioning Policy. The Committee also reviewed model
governance updates from the Risk function.
During 2017, the Committee oversaw and was involved in the Group making
further developments to model governance, particularly in light of the
IFRS 9 and IRB programmes. The Committee reviewed and approved
methodologies underpinning impairment calculations on collectively
assessed accounts under IAS 39 and also reviewed and approved key
judgement and estimate assumptions which feed IFRS 9 expected loss
calculations. The Committee also assessed and approved the Group's
provision adequacy levels throughout the year.
Market risk and liquidity risk
Market risk and liquidity risk are continually monitored by the Assets
and Liabilities Committee ('ALCO') which reports to this Committee. The
Committee reviewed ALCO's regular assessments of the UK macroeconomic
environment and potential impacts on the Group's assets and liquidity.
The Committee also reviewed and commented on updates to the Funding Risk
Policy and the Interest Rate Risk in the Banking Book Policy prior to
submission to the Board for approval.
Operational risk
The Committee received reports on operational risks at each of its
meetings. The reports cover risk incidents that have arisen to allow the
Committee to assess management's response and remedial action proposed.
The reports also cover key risk indicators ('KRI'), which can be
quantitative or qualitative and provide insights regarding changes in
the Group's operational risk profile.
Although there were operational incidents during the course of 2017, the
Committee was satisfied that the action taken was appropriate and that
the control of operational incidents continued to improve.
The Committee reviewed and commented on the Group-wide risk and control
self-assessment exercise and an enhanced operational risk management
framework.
Compliance and regulatory risk
The Committee received reports covering compliance and financial crime
KRIs, which can be quantitative or qualitative and provide insights
regarding changes in the Group's compliance and regulatory risk profile.
The Committee also reviewed the Compliance and Financial Crime Target
Operating Model.
Conduct risk
The Committee reviewed the conduct risk profile against the conduct risk
appetite and approved the conduct risk framework.
ICAAP
The Committee was involved with the design and approval of appropriate
macroeconomic scenarios to be used in the Group's ICAAP. The ICAAP
demonstrates how the Group would manage its business and capital during
adverse macroeconomic and idiosyncratic stresses. The Committee reviewed
the results of all risk assessments and stress testing before finally
endorsing the full ICAAP document.
The Board is engaged in the preparation of the ICAAP and the ongoing
assessment of risks. Following the Committee's review and comment the
ICAAP was submitted to the Board for approval.
Recovery Plan
The Recovery Plan process is designed to ensure that in a time of stress
the Group has a credible recovery plan that can be implemented in a
timely manner. The Committee reviewed and commented on the proposed
Recovery Plan prior to its submission to the Board for approval.
Risk appetite
The Committee reviewed and commented on the Group's enhanced risk
appetite framework resulting in a number of refinements being made to
the process. The Committee also reviews the Group's position against
risk appetite across all principal risks at each meeting.
In addition to the specific examples given above, the Committee reviewed
various transaction proposals, assessing their potential impact on the
risk profile of the Group. It also approved the policy updates.
Risk Committee - Key Responsibilities
Risk appetite and assessment
- Advise the Board on overall risk appetite, tolerance and
strategy
- Review risk assessment processes that inform the Board's
decision making
- Review the Group's capability to identify and manage new risks
- Advise the Board on proposed strategic transactions, including
acquisitions or disposals, ensuring risk aspects and implications for
risk appetite and tolerance are considered
Risk monitoring and framework
- Review credit risk, interest rate risk, liquidity risk, market
risk, compliance and regulatory risks, solvency risk, conduct risk,
reputational risk and operational risk exposures by reference to risk
appetite
- Review strategic risk management framework
- Review the ICAAP framework
- Monitor actual and forecast risk and regulatory capital
positions
- Recommend changes to capital utilisation
- Review the ILAAP framework
- Monitor the actual and forecast liquidity position
- Review reports on material breaches of risk limits and the
adequacy of proposed actions
- Review the Recovery Plan framework
CRO and risk governance structure
- Consider and approve the remit of the risk management function
- Recommend to the Board the appointment and removal of the CRO
- Review promptly all reports of the CRO
- Review and monitor management's responsiveness to the findings
of the CRO
- Receive reports from the Assets and Liabilities and Risk
Management Committees
Directors' Remuneration Report
Annual Statement by the Chair of the Remuneration Committee
Dear Shareholder,
I am pleased to present the 2017 Directors' Remuneration Report which
sets out details of Directors' remuneration in respect of 2017, our new
2018 Directors' Remuneration Policy and how we intend to implement the
new Policy in 2018.
Overview of 2017 performance
In 2017, the Bank continued to perform strongly delivering financial
growth underpinned by an excellent reputation for customer service.
Underlying pre -tax profits grew by 21% to GBP167.7m and the loan book
grew by 23% to GBP7.3bn whilst maintaining a stable net interest margin
of 3.16%.
Customer NPS was an outstanding +62 and the Bank had a customer
retention rate of 90% in 2017. In addition, whilst the Bank's headcount
continues to grow with the business, the 2017 employee engagement survey
showed improvement in all categories.
Incentive outcomes for 2017
The 2017 Executive Bonus Scheme was based 75% on the Business Balanced
Scorecard, which measures corporate performance against Financial,
Customer, Quality and Staff metrics, and 25% on Personal objectives.
Targets for each measure were set at the start of the year and were
assessed by the Committee following year-end.
[Graphic appear here]
There was strong performance across the 2017 bonus scorecard with many
of the maximum targets being met including those for profit, customer
NPS, number of high severity operational incidents and employee
engagement. There was, however, room for improvement under the diversity
and broker NPS metrics with the threshold targets not being met.
Alongside the outstanding performance against individual targets, the
Committee determined that 85% and 84% of the bonus was earned by the
Chief Executive Officer (CEO) and Chief Financial Officer (CFO)
respectively. Full details are set out on pages 91 to 92. As in previous
years, 50% of this award will be deferred into shares for a three-year
period.
The first awards under the Performance Share Plan following the IPO were
made in March 2015 with a three-year performance period ending on 31
December 2017. Given the strong performance over this period, OSB has
met the relative TSR and EPS growth targets in full and as such the
awards vested to the participants in March 2018.
New Remuneration Policy and implementation in 2018
During 2017 the Committee reviewed the Directors' Remuneration Policy,
which having last been approved by shareholders at the 2015 AGM, is
required to be submitted to our shareholders for approval at the 2018
AGM.
Following extensive discussion and engagement with our main shareholders,
the Committee concluded that certain changes should be made to our
Remuneration Policy to support the continued long-term success of the
Bank and to ensure the structure remains in line with evolving
regulatory and investor guidelines.
The changes are summarised below.
Fixed pay
At the time of the IPO in 2014, the salary levels for the CEO and CFO
were consciously set below a level associated with the scope of the role,
with the intention that these would be increased over time if the
executives delivered the corporate strategy, individual performance was
strong and as they grew into their roles as directors of a listed
company. Based on these factors, over the last policy period (i.e. 2015
to 2017) we have therefore increased salaries, each year, above the
average for the wider employee population.
The Committee feels that the salaries, taken together with pension and
benefits, are now appropriately positioned. Going forward, subject to
performance, the Committee anticipates that salary increases will be in
line with the wider employee population for the life of the new policy,
unless there are exceptional circumstances such as a significant
increase in the scope of the role or complexity of the business. For
2018, the base salary increase for Executive Directors will be 3%,
slightly below the average increase for the workforce generally (3.9%).
We have also maintained the pension contribution at 13% of salary which
is in line with the policy for the wider senior management population.
Annual bonus plan and Performance Share Plan structure
Whilst we have taken steps to ensure that the fixed pay levels are now
positioned appropriately, in the view of the Committee, the current
incentive opportunity no longer rewards executives suitably for the
continued delivery of outstanding performance and building on the growth
in value to date.
Therefore, we propose to increase the annual bonus opportunity under the
policy from 100% to 150% of salary and set the bonus opportunity at this
policy level for the duration of the policy period. The maximum
Performance Share Plan (PSP) award under the policy will remain
unchanged at 200% of salary. However, within this unchanged policy
maximum, the 'usual' PSP award will be increased from 130% and 100% of
salary for the CEO and CFO respectively, to 150% of salary for both.
Awards above 150% of salary would only be made in exceptional
circumstances. If the Committee determines that the usual PSP award
should be increased above 150% of salary, this would only be done with
prior investor consultation.
We have a track record of setting stretching targets appropriate for the
growth prospects of the Company and taking account of risk, and the
increase to incentive opportunity ensures that any increase in
remuneration levels will only be made if superior performance continues
to be delivered. Furthermore, the increase in opportunity is part of a
package of structural proposals, as detailed below, which provides
greater alignment with the business strategy and our shareholders'
long-term interests.
Finally, increasing the incentive opportunity would lead to total
remuneration being broadly at a mid-market level.
Performance conditions attached to 2018 annual bonus and Performance
Share Plan
The annual bonus in 2017 was based 75% on the Business Balanced
Scorecard and 25% on Personal performance. We propose to reduce the
weighting on personal performance to 10%, with the 15% balance moved to
the financial element of the Business Balanced Scorecard for the
duration of the policy.
For the 2018 PSP award of 150% of salary, a new return measure (ROE)
will be introduced for 20% of the award, to drive and reward the
efficient use of capital. This new measure will be alongside the focus
on profitable growth (EPS, 40% of the award) and continued stock market
outperformance (relative TSR vs the FTSE 250 constituents, 40% of the
award). The addition of a third measure will mean the executives will
have to deliver performance across a higher number of metrics to receive
the increase in PSP quantum, making it harder to receive the higher
quantum.
In addition, in line with regulatory requirements and to strengthen the
alignment of performance and reward further, the discretionary
assessment on vesting of the PSP will also be strengthened. At the time
of vesting, the Committee will assess whether the formulaic vesting
outcome is aligned with the underlying performance of the Company, risk
appetite and individual conduct over the period.
Improving alignment of interest with shareholders
We are also introducing mechanisms to align further the executives'
interests with shareholders and the long-term success of the Company,
including the introduction of a two-year post- vesting holding period
for PSP awards made from 2018 and increasing the shareholding guidelines
for the CEO and CFO by 50% of salary (CEO: 250% of salary, CFO: 200% of
salary). The requirement to defer 50% of any bonus earned into shares
for three years will also continue to operate. We have also reviewed
malus and clawback provisions to ensure that these are readily
enforceable if required.
Concluding remarks
I would like to thank Nathan Moss who stepped down as a member of the
Committee when he left the Board in May 2017 and to welcome Andrew Doman,
who joined the Committee as a member in September 2017.
I hope you agree with the rationale for the proposed changes and will
support the resolutions to approve the Remuneration Policy and the
Remuneration Report at the 2018 AGM.
Mary McNamara
Chair of the Remuneration Committee
15 March 2018
Remuneration Policy
This section describes our Directors' Remuneration Policy (the
'Remuneration Policy') which is subject to shareholder approval at the
AGM on 10 May 2018 and, if approved, will be effective from this date.
Changes to the Policy
The following changes have been made to the previous Directors'
Remuneration Policy.
Annual bonus
The maximum opportunity has been increased to 150% of salary to provide
greater incentive for delivering the future growth of the Company.
The proportion of bonus based on the Business Balanced Scorecard and
personal performance has been changed from 75:25 to 90:10.
Performance Share Plan
A post-vesting holding period will be introduced on awards made from
2018. Any shares vesting may not be sold for two years (after selling
sufficient shares to pay tax). This provides greater alignment between
shareholders and executives and extends the time horizon of each grant
to five years.
In line with regulatory guidance, the performance underpin has been
strengthened such that the Committee will undertake a discretionary
assessment of the level of vesting to ensure it is in line with the
underlying performance of the Company, takes into account financial and
non-financial risk and the individual's conduct.
Share ownership guidelines
The share ownership guidelines have been increased by 50% of salary to
250% of salary for the CEO and 200% of salary for the CFO in order to
strengthen the alignment of interest with shareholders.
Other changes
The maximum pension contribution will remain at 13% of salary, however
the individual will not be required to make a contribution into the plan
to receive this. This is in line with the senior leadership population
and enables greater flexibility within HMRC pension limits.
The flexibility to change the benefits offered has been included should
the Company offer other market competitive benefits in the future.
Policy overview
This Policy has been prepared in accordance with the Large and
Medium-sized Companies and Groups (Accounts and Reports) Regulations
2008, as amended in 2013. The Policy has been developed taking into
account a number of regulatory and governance principles, including:
- The UK Corporate Governance Code 2016
- The regulatory framework applying to the Financial Services
Sector (including the Dual-regulated firms Remuneration Code and
provisions of CRD IV)
- The executive remuneration guidelines of the main institutional
investors and their representative bodies.
Objectives of the Remuneration Policy
The overarching principles of the Remuneration Policy are to:
- Promote the long-term success of the Company.
- Attract, motivate and retain high-performing employees.
- Adhere to and respond to the regulatory framework for the
financial services sector and UK listed companies more generally.
- Strike an appropriate balance between risk-taking and reward.
- Encourage and support a strong sales and service culture to
meet the needs of our customers.
- Reward the achievement of the overall business objectives of
the Group.
- Align employees' interests with those of shareholders and
customers.
- Be consistent with the Group's risk policies and systems to
guard against inappropriate risk-taking.
How the views of employees and shareholders are taken into account
The Committee does not formally consult directly with employees on
executive pay but receives periodic updates in relation to salary and
bonus reviews across the Company. As set out in the policy table
overleaf, in setting remuneration for the Executive Directors, the
Committee takes note of the overall approach to reward for employees in
the Company and salary increases will ordinarily be in line (in
percentage of salary terms) with those of the wider workforce. Thus, the
Committee is satisfied that the decisions made in relation to Executive
Directors' pay are made with an appropriate understanding of the wider
workforce. The Board has begun work to examine how it can engage more
widely with stakeholders, including employees. As part of this
initiative, the Committee will look into the best way to engage with
employees on how executive pay aligns with the pay of the wider
workforce.
The Committee will seek to engage with major shareholders and the main
shareholder representative bodies and proxy advisory firms when it is
proposed that any material changes are to be made to the Remuneration
Policy or its implementation. In addition, we will consider any
shareholder feedback received in relation to the AGM.
This, plus any additional feedback received from time to time, will be
considered as part of the Committee's annual review of the effectiveness
of the Remuneration Policy.
THE REMUNERATION POLICY FOR EXECUTIVE DIRECTORS
The table below and accompanying notes describe the Policy for Executive
Directors.
Element Purpose and link to strategy Operation and performance conditions Maximum
Salary To reward Executives for the role and duties required. Paid monthly. Increases will generally be broadly in line with the
Recognises individual's experience, responsibility Base salaries are usually reviewed annually, with average of the workforce. Higher increases may be
and performance. any changes usually effective from 1 April. awarded in exceptional circumstances such as a material
No performance conditions apply to the payment of increase in the scope of the role, following the appointment
salary. However, when setting salaries, account is of a new executive (which could also include internal
taken of an individual's specific role, duties, experience promotions) to bring an initially below-market package
and contribution to the organisation. in line with market over time or in response to market
As part of the salary review process, the Committee factors.
takes account of individual and corporate performance,
increases provided to the wider workforce and the
external market for UK listed companies both in the
financial services sector and across all sectors.
Benefits To provide market competitive benefits to ensure the The Company currently provides: There is no maximum cap on benefits, as the cost of
well-being of employees. - car allowance benefits may vary according to the external market.
- life assurance
- income protection
- private medical insurance, and
- may pay other benefits as appropriate for the role.
Pension To provide retirement planning to employees. Directors may participate in a defined contribution Up to 13% of salary.
plan, or, if they are in excess of the HMRC annual
or lifetime allowances for contributions, may elect
to receive cash in lieu of all or some of such benefit.
Annual To incentivise and reward individuals for the achievement The annual bonus targets will have a 90% weighting The maximum bonus opportunity is 150% of salary.
bonus of pre-defined, Committee approved, annual financial, based on performance under an agreed balanced scorecard The threshold level for payment is up to 25% for any
operational and individual objectives which are closely which includes an element of risk appraisal. Within measure.
linked to the corporate strategy. the scorecard at least 50% of the bonus will be based
on financial performance. 10% of bonus will be based
on personal performance targets.
The objectives in the scorecard, and the weightings
on each element will be set annually, and may be flexed
according to role. Each element will be assessed independently,
but with Committee discretion to flex the payout (including
to zero) to ensure there is a strong link between
payout and performance.
50% of any bonus earned will be deferred into an award
over shares. These deferred shares will normally vest
after three years provided that the executive remains
in employment at the end of the three-period.
Clawback/malus provisions apply, as described in note
1 below.
1. Clawback and malus provisions apply to both the annual bonus,
including amounts deferred into shares, and PSP. These provide for
incentive recovery in the event of (i) the discovery of a material
misstatement of results, (ii) an error which has resulted in higher
incentive payouts than would have otherwise been earned, (iii) a
significant failure of risk management, (iv) regulatory censure, (v) in
instances of individual gross misconduct discovered within five years of
the end of the performance period (vi) or any other exceptional
circumstance as determined by the Board. A further two years may be
applied following such a discovery, in order to allow for the
investigation of any such event. In order to effect any such clawback,
the Committee may use a variety of methods: withhold deferred bonus
shares, future PSP awards or cash bonuses, or seek to recoup cash
already paid.
Element Purpose and link to strategy Operation and performance conditions Maximum
Performance To incentivise and recognize execution of the business PSP awards will typically be made annually at the The maximum PSP grant limit is 200% of salary in respect
Share Plan strategy over the longer term. discretion of the Committee, usually following the of any financial year.
Rewards strong financial performance over a sustained announcement of full-year results. The threshold level for payment is 25% for any measure.
period. Normally, awards will be based on a mixture of internal For 2018, it is intended that awards of 150% of salary
financial performance targets and relative TSR. will be made to the CEO and CFO.
The performance targets will normally be measured
over three years.
Any vesting will be subject to an underpin, whereby
the Committee must be satisfied (i) that the vesting
reflects the underlying performance of the Company,
(ii) that the business has operated within the Board's
risk appetite framework and (iii) that individual
conduct has been satisfactory.
Awards granted after 1 January 2018 will include a
holding period whereby any shares earned at the end
of the performance period may not be sold for a further
two years, other than to pay tax.
Clawback and malus provisions apply as described in
note 1 below.
All-employee All employees including Executive Directors are encouraged Tax favoured plan under which regular monthly savings Maximum permitted savings based on HMRC limits.
share incentive to become shareholders through the operation of an may be made over a three or five-year period and can
plan (Sharesave allemployee share plan. be used to fund the exercise of an option, where the
Plan) exercise price is discounted by up to 20%.
Share ownership To increase alignment between executives and shareholders. Executive Directors are expected to build and maintain At least 250% of salary for the CEO and at least 200%
guidelines a minimum holding of shares. of salary for the CFO or such higher level as the
Executives must retain at least 50% of the shares Committee may determine from time to time.
acquired on vesting of any share awards (net of tax)
until the required holding is attained.
Choice of performance measures for Executive Directors' awards
The use of a balanced scorecard for the annual bonus reflects the
balance of financial and non-financial business drivers across the
Company. The combination of performance measures ties the bonus plan to
both the delivery of corporate targets and strategic/personal
objectives. This ensures there is an appropriate focus on the balance
between financial and non-financial targets, with the scorecard
composition being set by the Committee from year to year depending on
the corporate plan.
The PSP is based on a mixture of financial measures and relative TSR, in
line with our key objectives of sustained growth in earnings leading to
the creation of shareholder value over the long term. TSR provides a
close alignment between the relative returns experienced by our
shareholders and the rewards to executives.
There is an underpin in place on the PSP to ensure that the payouts are
aligned with underlying performance, financial and non-financial risk
and individual conduct.
In line with HMRC regulations for such schemes, the Sharesave Plan does
not operate performance conditions.
How the Remuneration Committee operates the variable pay policy
The Committee operates the share plans in accordance with their
respective rules, the Listing Rules and HMRC requirements where
relevant. The Committee, consistent with market practice, retains
discretion over a number of areas relating to the operation and
administration of certain plans, including:
- Who participates in the plans
- The form of the award (i.e. conditional share award or nil cost
option)
- When to make awards and payments, how to determine the size of
an award, a payment, or when and how much of an award should vest
- The testing of a performance condition over a shortened
performance period
- How to deal with a change of control or restructuring of the
Group
- Whether a participant is a good/bad leaver for incentive plan
purposes, what proportion of an award vests at the original vesting date
or whether and what proportion of an award may vest at the time of
leaving
- How and whether an award may be adjusted in certain
circumstances (e.g. for a rights issue, a corporate restructuring or for
special dividends)
- What the weighting, measures and targets should be for the
annual bonus plan and PSP from year to year.
The Committee also retains the discretion within the Policy to adjust
existing targets and/or set different measures for the annual bonus and
for the PSP if events happen that cause it to determine that the targets
are no longer appropriate and amendment is required so they can achieve
their original intended purpose and provided the new targets are not
materially less difficult to satisfy.
Any use of the above discretions would, where relevant, be explained in
the Annual Report on Remuneration and may, as appropriate, be the
subject of consultation with the Company's major shareholders.
OSB operates in a heavily regulated sector, the rules of which are
subject to frequent evolution. The Committee therefore also retains the
discretion to make adjustments to payments under this Policy as required
by financial services regulations. For example, this may include
increasing the proportion of bonus deferred or extending the time
horizons for variable pay.
Awards granted prior to the effective date
Any commitments entered into with Directors prior to the effective date
of this Policy will be honoured. Details of any such payments will be
set out in the Annual Report on Remuneration as they arise.
Remuneration Policy for other employees
The Committee has regard to pay structures across the wider Group when
setting the Remuneration Policy for Executive Directors and ensures that
Policies at and below the executive level form a coherent whole. There
are no significant differences in the overall remuneration philosophy,
although pay is generally more variable and linked more to the long term
for those at more senior levels. The Committee's primary reference point
for the salary reviews for the Executive Directors is the average salary
increase for the broader workforce.
A highly collegiate approach is followed in the assessment of annual
bonus, with our corporate scorecard being used to assess bonus outcomes
throughout the organisation, with measures weighted according to role,
where relevant.
Overall, the Remuneration Policy for the Executive Directors is more
heavily weighted towards performance-related pay than for other
employees. In particular, performance- related long-term incentives are
not provided outside of the most senior executive population as they are
reserved for those considered to have the greatest potential to
influence overall levels of performance.
Although PSP is awarded only to the most senior managers in the Group,
the Company is committed to widespread equity ownership. Accordingly, in
2014, our Sharesave Plan offer was launched for all employees. Executive
Directors are eligible to participate in this plan on the same basis as
other employees.
Illustrations of application of Remuneration Policy
The chart below illustrates how the composition of the Executive
Directors' remuneration packages, as it is intended the Policy will be
implemented in 2018, would vary under various performance scenarios.
[Graphic appear here]
1. Minimum performance assumes no award is earned under the
annual bonus plan and no vesting is achieved under the LTIP - thus only
fixed pay (salary, benefits and pension are payable)
2. At on-target, half of the annual bonus is earned (i.e. 75% of
salary) and 25% of maximum is achieved under the LTIP (i.e. 37.5% of
salary)
3. At maximum full vesting is achieved under both plans (i.e.
150% of salary).
Share price growth and all-employee share plan participation are not
considered in these scenarios.
Service contracts
The terms and provisions that relate to remuneration in the Executive
Directors' service agreements are set out below. Service contracts are
available for inspection at the Company's registered office.
Provision Policy
Notice period 12 months on either side.
Termination A payment in lieu of notice may be made on termination
payments to the value of their basic salary at the time of
termination. Such payments may be made in instalments
and in such circumstances can be reduced to the extent
that the Executive Directors mitigate their loss.
Rights to DSBP and PSP awards on termination are shown
below. The employment of each Executive Director is
terminable with immediate effect without notice in
certain circumstances, including gross misconduct,
fraud or financial dishonesty, bankruptcy or material
breach of obligations under their service agreements.
Remuneration Salary, pension and core benefits are specified in
the agreements. There is no contractual right to participate
in the annual bonus plan or to receive long-term incentive
awards.
Post-termination These include six-month post-termination restrictive
covenants against competing with the Company; nine-month
restrictive covenants against dealing with clients
or suppliers of the Company; and nine-month restrictive
covenants against soliciting clients, suppliers and
key employees.
Contract date Andy Golding 4 June 2014, April Talintyre 19 May 2014.
Unexpired term Rolling contracts.
Payments for loss of office
On termination, other than for gross misconduct, the executives will be
contractually entitled to salary, pension and contractual benefits (car
allowance, private medical cover, life assurance and income protection)
over their notice period. The Company may make a payment in lieu of
notice equivalent to the salary for the remaining notice period.
Payments in lieu of notice may be phased and subject to mitigation.
The Company may also pay reasonable legal costs in respect of any
compromise settlement.
Annual bonus on termination
There is no automatic/contractual right to bonus payments and the
default position is that the individual will not receive a payment. The
Committee may determine that an individual is a 'good leaver' and may
elect to pay a pro-rata bonus for the period of employment at its
discretion and based on full year performance.
DSBP awards on termination
Awards normally lapse on termination of employment. However, in certain
good leaver situations, awards may instead vest on the normal vesting
date (or on cessation of employment in exceptional circumstances). Good
leaver scenarios include (i) death; (ii) injury, ill-health or
disability; (iii) retirement with the agreement of the Company; (iv)
redundancy; (v) the employing company ceasing to be a member of the
Group; or (vi) any other circumstance the Committee determines good
leaver treatment is appropriate.
PSP awards on termination
Awards normally lapse on termination of employment. However, in certain
good leaver situations, awards may vest on the normal vesting date and
to the extent that the performance conditions are met. The Committee is,
however, permitted under the rules to allow early vesting of the award
to the extent it considers appropriate taking into account performance
to date. Unless the Committee determines otherwise, awards vesting in
good leaver situations will be pro-rated for time employed during the
performance period.
Approach to recruitment and promotions
The ongoing remuneration package for a new Director would be set in
accordance with the terms of the Company's approved Remuneration Policy.
On recruitment, the salary may (but need not necessarily) be set at a
lower rate, with phased increases (which may be above the average for
the wider employee population) as the executive gains experience. The
salary would in all cases be set to reflect the individual's experience
and skills and the scope of the role.
The Company may compensate for remuneration foregone upon leaving a
previous employer (using cash awards, the Company's share plans or
awards under Listing Rule 9.4.2 as may be required) taking into account:
the quantum foregone; the extent to which performance conditions apply;
form of award; and the time left to vesting. For all appointments, the
Committee may agree that the Company will meet certain appropriate
relocation costs.
For an internal appointment, including in the situation where a Director
is appointed following corporate activity, any variable pay element
awarded in respect of their prior role would be allowed to pay out
broadly according to its terms. Any other ongoing remuneration
obligations existing prior to appointment may continue, provided that
they are put to shareholders for approval at the earliest opportunity.
Should an individual be appointed to a role (executive or non-executive)
on an interim basis, the Company may provide additional remuneration, in
line with the Policy for the specific role, for the duration the
individual holds the interim role.
For the appointment of a new Chairman or Non-Executive Director, the fee
arrangement would be in accordance with the approved Remuneration Policy
in force at that time.
External appointments
Executive Directors may accept directorships of other quoted and
non-quoted companies with the consent of the Board, which will consider
the time commitment required. It is also at the discretion of the Board
as to whether the Executive Director will be able to retain any fees
from such an appointment.
THE REMUNERATION POLICY FOR THE CHAIRMAN AND NON-EXECUTIVE DIRECTORS
The table sets out the Policy for the Chairman and Non-Executive
Directors.
Element Purpose and link to strategy Operation Maximum opportunity
Fees To attract and retain a high-calibre Chairman and The Chairman and Non- Executive Directors are entitled There is no prescribed maximum annual increase. The
Non-Executive Directors by offering a market competitive to an annual fee, with supplementary fees payable Committee is guided by the general increase in the
fee level. for additional responsibilities including the Chair Non-Executive market but on occasions may need to
of the Audit, Remuneration, Nomination and Risk Committees recognise, for example, change in responsibility and/or
and for acting as the Senior Independent Director. time commitments.
Fees are reviewed periodically.
The Chairman and Non- Executive Directors are entitled
to reimbursement of travel and other reasonable expenses
incurred in the performance of their duties.
Letters of appointment
The Non-Executive Directors are appointed by letters of appointment that
set out their duties and responsibilities. The key terms are:
Provision Policy
Period of appointment Initial three-year term.
Notice periods Three months on either side.
The appointments are also terminable with immediate
effect and without compensation or payment in lieu
of notice if the Chairman or Non-Executive Director
is not re-elected to their position as a Director
of the Company by shareholders.
Payment in lieu of The Company is entitled to make a payment in lieu
notice of notice on termination.
Letters of appointment are available for inspection at the Company's
registered office.
2017 Annual Report on Remuneration
Introduction
This section sets out details of the remuneration received by Executive
and Non-Executive Directors (including the Chairman) in respect of the
financial year ended 31 December 2017. This Annual Report on
Remuneration will, in conjunction with the Annual Statement of the
Committee Chair on pages 81 to 82, be proposed for an advisory vote by
shareholders at the forthcoming AGM to be held on 10 May 2018. Where
required, data has been audited by KPMG LLP and this is indicated where
appropriate.
Membership
The Committee met seven times during the year. Mary McNamara (Chair),
Rod Duke and Andrew Doman are members. Nathan Moss ceased to be a
Director and member on 31 May 2017. The attendance of individual
Committee members, is set out in the Corporate Governance Report.
The Board considers each of the members of the Committee to be
independent in accordance with the UK Corporate Governance Code.
Responsibilities
The Committee's responsibilities are set out in its terms of reference
which are available on the Company's website. In summary, the
responsibilities of the Committee include:
- Pay for employees under the Committee's scope:
- Setting the Remuneration Policy
- Determine the total individual remuneration (including salary
increases, bonus opportunities and outcomes and LTIP awards)
- Ensure that contractual terms on termination, and any payments
made, are fair to the individual, and the Company, that failure is not
rewarded and that the duty to mitigate loss is fully recognised
- Approve the design of, and determine targets for, any
performance related pay schemes operated by the Company and approve
total payments made under such schemes.
Employees under the Committee's scope include Executive Directors, the
Chairman of the Board, the Company Secretary and all employees that are
identified as Code Staff for the purposes of the PRA and FCA's Dual
Regulated Remuneration Code ('Code Staff').
Key matters considered by the Committee
Key issues reviewed and discussed by the Committee during the year
included:
- A detailed review of the Executive Directors' Remuneration
Policy and investor consultation ahead of the new Policy being approved
at the 2018 AGM
- For employees under the Committee's scope:
- Review and approve salary increases
- Review and approve bonus awards
- Determine the grants under the Performance Share Plan
- Consider and approve the 2017 Directors' Remuneration Report
- Consider market trend and regulation updates.
Advisers to the Committee
Following a tender process in 2017, Korn Ferry was appointed as
independent adviser to the Committee and provided advice on all aspects
of executive remuneration including development of the new Remuneration
Policy. The total fees paid to Korn Ferry were GBP58,000.
Korn Ferry has no other connection with the Group and therefore the
Committee is satisfied that it provides objective and independent
advice. Korn Ferry is a member of the Remuneration Consultants Group and
abides by the voluntary code of conduct of that body, which is designed
to ensure objective and independent advice is given to remuneration
committees.
New Bridge Street were the Committee's adviser until April 2017 and were
paid fees of GBP52,000.
The Committee consults with the Chairman of the Board and/ or Chief
Executive Officer (CEO), as appropriate, and seeks input from the Risk
Committee to ensure that any remuneration or pay scheme reflect the
Company's risk appetite and profile and considers current and potential
future risks.
The Committee also takes input on senior executive remuneration from the
Chief Financial Officer (CFO) and Group Head of Human Resources. The
Group General Counsel and Company Secretary acts as Secretary to the
Committee and advises on regulatory and technical matters, ensuring that
the Committee fulfils its duties under its terms of reference. No
individual is present in discussions directly relating to their own pay.
DIRECTORS' PAY OUTCOMES FOR 2017
Remuneration and fees payable for 2017 - (audited information)
The table below sets out a single figure for the total remuneration
received by each Executive Director and Non-Executive Director for the
years ending 31 December 2017 and 31 December 2016.
Basic Annual Amount
Executive Salary Taxable Bonus bonus
Directors Year GBP000 benefits(1) Pension paid(2) deferred(2) LTIP Total
Andy
Golding 2017 480 19 62 208 208 682 1,659
2016 440 13 57 200 200 n/a 910
April
Talintyre 2017 324 14 42 138 138 482 1,138
2016 305 9 40 135 135 n/a 624
1. Taxable benefits received include car allowance (CEO
GBP18,000; CFO GBP13,000), private medical cover and life assurance.
2. 50% of bonus is payable in cash and 50% deferred in shares
for three years.
Total fees GBP000 2016 2017
Chairman
David Weymouth (from 1 September 2017) - 83
Mike Fairey (until 10 May 2017) 161 69
Non-Executive Directors
Graham Allatt 73 88
Eric Anstee 72 78
Andrew Doman 26 60
Rod Duke 77 138
Tim Hanford (paid to JC Flowers until 31 December
2017) 60 60
Margaret Hassall 26 60
Malcolm McCaig (until 31 December 2016) 60 -
Mary McNamara 70 70
Dr David Morgan (until 31 December 2016) 60 -
Nathan Moss (until 31 May 2017) 60 25
Stephan Wilcke (until 11 May 2016) 22 -
Total 767 731
Non-Executive Directors cannot participate in any of the Company's share
schemes and are not eligible to join the Company pension scheme.
Executive bonus scheme: 2017 performance against the Business Balanced
Scorecard (audited)
In 2017, the bonus plan was simplified to focus on a smaller number of
KPIs derived from our Business Balanced Scorecard.
Targets
Key
performance Threshold Budget Max Actual Outcome Outcome
Category indicator (25%) (50%) (100%) result CEO (%) CFO (%)
Financial
(35%) Underlying PBT GBP151m GBP155m GBP163m GBP167.7m 31.25 31.25
All-in ROE 25.1% 26.1% 28.1% 27.8%
Cost to income ratio 28.8% 27.8% 25.8% 27.3%
Net loan book growth 17.1% 18.1% 20.1% 23.0%
CET1 ratio(1) <12% 12% >13% 13.7%
Customer Customer
(15%) satisfaction 35 40 50 62 12 12
Broker satisfaction 37.5 40 45 6
Complaints 0.8% 0.5% 0.17% 0.07%
Deficient
Quality internal
(15%) audits 1 n/a 0 4 8.75 8.75
Arrears 1.25% 1% 0.50% 0.53%
IT system up-time 99% 99.5% 99.7% 99.9%
High severity incidents 8 6 2 2
Staff
(10%) Diversity(2) 26% 27% 29% 25% 8 7
Employee engagement(3) 3 4 6 8
Vary by
executive -
Personal see section
(25%) below 25 25
Total 85 84
1. CET1 - the calculation of the metric was changed during the
year to align it with the externally reported metric.
2. Diversity - based on the gender diversity of the senior
leadership team.
3. Employee engagement - the employee engagement represents the
number of categories which showed improvement versus the prior year.
2017 Personal performance
The Executive Directors were allocated up to a maximum of 25% of their
bonus based on their personal performance against agreed objectives.
The priorities for 2017 were identified in our 2016 Annual Report and
objectives built around these. Performance against the objectives for
both executives was outstanding as was their overall leadership of the
Bank.
The key achievements delivered by the CEO during 2017 were:
- Exceptional stakeholder management at all levels
- Driving the culture agenda evidenced by significant
improvements in employee engagement
- Successful issuance of GBP60m Additional Tier 1 capital
securities
- Oversight of delivery of 2017 risk management and modelling
projects including preparation for IFRS 9 implementation and planned IRB
application
- Delivery of improvements in IT systems including new technology
solution for assessing multi-property portfolios
- Excellent progress in relation to the development of the OSB
India business.
The key achievements delivered by the CFO during 2017 were:
- Successful issuance of GBP60m Additional Tier 1 capital
securities including interaction with investors on debt roadshow
- Oversaw significant improvements in the finance control
environment and HR operations
- Built strong relationships with key stakeholders including
shareholders, regulators and the Board
- Further improvement in reporting and forecasting internal
processes
- Excellent preparation for IFRS 9 implementation with parallel
reporting undertaken throughout 2017
- Oversaw significant recruitment activity for the Group and
their successful integration into the business.
Based on this performance, the Committee agreed that 100% of the
individual element of the bonus should be paid to the CEO and CFO.
Accordingly, 25% out of a possible 25% was awarded for this element.
Long-term incentive plan
The first LTIP award after the IPO was granted on 18 March 2015 and was
based on EPS and TSR performance conditions measured over the three
financial years to 31 December 2017.
Percentage
of that
part of the Vesting of TSR part
award EPS element (50% of EPS Vesting of TSR element (50% of TSR (50%of total
Performance level vesting total award) performance EPS part total award) performance award)
Below 'threshold' 0% Less than 12% CAGR
Threshold' 25% 12% CAGR Below median Median Above upper
'Stretch" 100% 18% CAGR >18% 100% Upper quartile quartile 100%
The 2015 PSP awards will therefore vest as follows:
Number of Number of
shares shares Total
Executive Directors awarded due to vest GBP000(1)
Andy Golding 171,233 171,233 682
April Talintyre 121,005 121,005 482
1 Value of shares based on a three-month average share price of
GBP3.985 on 31 December 2017.
EXECUTIVE PAY OUTCOMES IN CONTEXT
Percentage change in the remuneration of the Chief Executive Officer
The table below sets out the percentage change in base salary, value of
taxable benefits and bonus for the CEO compared with the average
percentage change for employees. For these purposes, UK employees who
have been employed for over a year (and therefore eligible for a salary
increase) have been used as a comparator group as they are the analogous
population (based on service and location).
Average percentage change 2016-2017
Salary Taxable benefits Annual bonus
CEO 9.1% 38.5% 4%
UK employees 7.9% 0% 4.48%
Comparison of Company performance and CEO remuneration
The following table summarises the CEO single figure for total
remuneration, annual bonus and LTIP pay-out as a percentage of maximum
opportunity in 2013-2017:
2013 2014 2015 2016 2017
Andy Golding
Annual bonus (as a percentage of maximum
opportunity) 92.5% 92.63% 93.00% 88.75% 85%
LTIP vesting (as a percentage of maximum
opportunity) - - - - 100%
CEO single figure of remuneration
(GBP'000) 518 777 848 910 1,659
Total shareholder return
The table below shows the total shareholder return (TSR) performance of
the Company over the period from listing to 31 December 2017 compared to
the performance of the FTSE All Share Index. This index is considered to
be the most appropriate index against which to measure performance as
the Company is a member of this index.
TOTAL SHAREHOLDER RETURN
Source: Datastream (Thomson Reuters)
[Graphic appear here]
Relative importance of the spend on pay
The table below shows the Company's total employee remuneration
(including the Directors) compared to distributions to shareholders and
operating profit before tax for the year under review and the prior
year. In order to provide context for these figures, underlying
operating profit as a key financial metric used for remuneration
purposes has been shown.
2016 2017
Total employee costs GBP29.5m GBP35.9m
Distributions to shareholders GBP25.5m GBP31.2m
Underlying profit before tax GBP163.1m GBP167.7m
Total employee costs v PBT 21.5% 21.4%
Average headcount 674 813
Average PBT per employee GBP203,264 GBP206,273
OTHER DISCLOSURE ON 2017 EXECUTIVE REMUNERATION
Scheme interests awarded during the financial year
The table below shows the conditional share awards made to Executive
Directors in 2017 under the Performance Share Plan and the performance
conditions attached to these awards:
Face value of
award End of
(percentage of Face value Percentage of awards released for achieving threshold performance Performance
Executive salary) of award targets period Conditions
Andy
Golding 130% GBP585,000 25% 31 December
April 100% GBP310,000 2019 EPS & TSR
Talintyre
1. The number of shares awarded was calculated using a share price
of GBP4.0754 (the average mid-market quotation for the preceding five
days before grant on 16 March 2017.
2. Performance conditions are (i) 50% TSR versus the FTSE 250
(25% vesting for median performance increasing to maximum vesting for
upper quartile performance); and (ii) 50% EPS (25% vesting for growth in
EPS of 6% per annum increasing to maximum vesting for 12% per annum).
All-employee share plans
The Executive Directors have the following interests under the scheme:
Exercise period Number of options
Date Beginning
of Exercise price Market price (31 December 2017) of End of
Executive grant GBP GBP Beginning End period Granted/exercised/forfeited/lapsed period
April
Talintyre 2014 1.34 4.1260 18-Jul-17 18-Jan-18 6,716 6,716 -
Statement of Directors' shareholdings and share interests (audited
information)
Total shares owned by Directors:
Interest in shares Interest in share awards Shareholding requirements
Without
performance Current
Beneficially Beneficially conditions Shareholding shareholding
owned at 1 owned at 31 at 31 requirement (percentage of
January December December Subject to performance conditions as at (percentage of basic
2017 2017 2017 31 December 2017 basic salary) salary)(2)
Executive
Andy
Golding(1) 1,650,000 1,100,000 203,661 476,832 250% 1,530% (Met)
April
Talintyre(1) 579,415 336,131 139,464 311,696 200% 1,003% (Met)
Non-Executive
Graham Allatt - -
Eric Anstee 4,960 4,960
Andrew Doman 100,499 102,437
Rod Duke 94,537 94,537
Margaret
Hassall - -
Mary McNamara 22,350 22,350
David Weymouth - 13,178
1. Includes shares in OSB Holdco Limited.
2. Shareholding based on the closing share price on 31 December
2017 - GBP4.1260 and year end salaries.
3. There were no changes to Directors' interests in the
Company's shares during the period 31 December 2017 to 15 March 2018.
External Board appointments
Andy Golding is a Director/trustee of Building Societies Trust Limited.
He receives no remuneration for this position.
Payments to departing Directors
During the year, the Company has not made any payments to past
Directors; neither has it made any payments to Directors for loss of
office.
HOW WE WILL IMPLEMENT THE REMUNERATION POLICY FOR DIRECTORS IN 2018
Base salary
The CEO and CFO's salary will be increased by 3% to GBP504,700 and
GBP338,460 respectively. Benefits and pension provision will remain
unchanged.
Annual bonus
The performance measures for the 2018 annual bonus have been set in line
with the business balanced scorecard. For 2018 we have reduced the
weighting on personal performance to 10%, with the 15% balance moved to
the financial element of the Business Balanced Scorecard. Accordingly,
the balance of the metrics are as follows:
Financial Customer Quality Staff Personal objectives
50% of bonus opportunity 15% of bonus 15% of 10% of 10% of bonus opportunity
opportunity bonus bonus
opportunity opportunity
Underlying PBT All-in ROE Cost to income ratio Net Customer Overdue Diversity Vary by executive Details of objectives (and performance
loan book growth CET1 ratio satisfaction management Employee against these) will be disclosed retrospectively in
Broker actions engagement next year's report
satisfaction Arrears
Complaints High
severity
incidents
Performance targets are considered to be commercially sensitive so will
not be published in advance. However, there will be full disclosure of
the targets set and the extent of their achievement in the 2018 Annual
Report on Remuneration.
Subject to approval of the new Policy the maximum opportunity will be
150% of salary. 50% of any bonus earned will be deferred in shares for
three years.
Performance Share Plan
PSP awards of 150% of salary will be made to the Executive Directors
following the 2018 AGM. The performance conditions will continue to be
partly driven by EPS (40% weighting), and TSR (40% weighting) and, for
the 2018 PSP award, a new return measure based on return on equity will
be introduced (20% weighting) to drive and reward the efficient use of
capital. This new measure will be alongside the focus on profitable
growth (EPS) and continued stock market outperformance (relative TSR vs
the FTSE 250 constituents).
At the time of vesting, the Committee will assess whether the formulaic
vesting outcome is aligned with the underlying performance, risk
appetite and individual conduct over the period.
Following vesting, shares must be held for a further two years (after
selling sufficient to pay tax). The performance targets are as follows:
Percentage
Return on of that
equity (20% part of
Performance EPS element TSR element of total the award
level (40% of total award) (40% of total award) award) vesting
Below
'threshold' Less than 6% CAGR Below median Below 20% 0%
'Threshold' 6% CAGR Median 20% 25%
'Stretch' 12% CAGR Upper quartile 25% 100%
Pro rata vesting in between the above points
Share ownership guidelines
The share ownership guidelines for the CEO and CFO have been increased
by 50% of salary in 2018. The CEO is required to accumulate and maintain
a holding in ordinary shares in the Company equivalent to no less than
250% of salary and 200% of salary for the CFO. 50% of any vested share
awards must be retained until the guideline is achieved.
Chairman and Non-Executive Director fees
The current Non-Executive Director fees are as follows:
Base fees GBP000
Chairman 250
Non-Executive Director 60
Additional fees
Senior Independent Director 10
Audit Committee Chair 20
Remuneration Committee Chair 10
Nomination Committee Chair 10
Risk Committee Chair 20
Statement of voting at Annual General Meeting
Shareholders were asked to approve the 2016 Annual Report on
Remuneration at the 2017 AGM and the Remuneration Policy was last
approved at the 2015 AGM. The votes received were:
% of % of
votes Votes votes Total votes Votes
Resolution Votes for cast against cast cast withheld
To approve
the
Remuneration
Report (2017
AGM) 193,983,897 89.65 22,383,343 10.35 216,367,240 1,256,531
To approve
the
Remuneration
Policy (2015
AGM) 216,736,072 97.21 6,231,805 2.79 222,967,877 492
Approval
This report was approved by the Board of Directors, on the
recommendation of the Remuneration Committee, on 15 March 2018 and
signed on its behalf by:
Mary McNamara
Chair of the Remuneration Committee
15 March 2018
Directors' Report: Other Information
Share capital and rights attaching to shares
The Company had 243,464,688 ordinary shares of GBP0.01 each in issue as
at 31 December 2017. 382,597 ordinary shares were issued during 2017,
379,624 at a price of GBP1.34 and 2,973 at a price of GBP2.27. Further
details relating to share capital can be found in note 40.
Without prejudice to any special rights previously conferred on the
holders of any existing shares or class of shares, any share in the
Company may be issued with such rights (including preferred, deferred or
other special rights) or such restrictions, whether in regard to
dividend, voting, return of capital or otherwise as the Company may from
time to time by ordinary resolution determine (or, in the absence of any
such determination, as the Directors may determine).
Authorities to allot and pre-emption rights
At the 2017 AGM, shareholders renewed the general authority for the
Directors to allot up to GBP810,274 of the nominal value of ordinary
shares of GBP0.01 each. In addition, shareholders gave authority for the
Directors to grant rights to subscribe for, or to convert any security
into regulatory capital convertible instruments up to GBP291,698 of the
nominal value of ordinary shares equivalent to 12% of issued share
capital.
Repurchase of shares
The Company has an unexpired authority to repurchase ordinary shares up
to a maximum of 24,308,209 ordinary shares. The Company did not
repurchase any of its ordinary shares during 2017 (2016: none).
Employee share schemes
The details of the Company's employee share schemes are set out on pages
84 to 85 in the Remuneration Report.
Results and dividends
The results for the year are set out in the Statement of Profit or Loss
on page 107. The Directors recommend the payment of a final dividend of
9.3 pence per share on 16 May 2018, subject to approval at the AGM on 10
May 2018, with an ex-dividend date of 22 March 2018 and a record date of
23 March 2018. This is in addition to the 2017 interim dividend of 3.5
pence per share paid during the year (2016: 10.5 pence total dividend).
Directors' interests
Directors' interests in the shares of the Company are set out on pages
91 and 94 in the Remuneration Report. None of the Directors had
interests in shares of the Company greater than 0.7% of the ordinary
shares in issue. There were no changes to Directors' interests in shares
since 31 December 2017.
Equal opportunities
The Group is committed to applying its equality and diversity policy at
all stages of recruitment and selection. Shortlisting, interviewing and
selection will always be carried out without regard to gender, gender
reassignment, sexual orientation, marital or civil partnership status,
colour, race, nationality, ethnic or national origins, religion or
belief, age, pregnancy or maternity leave or trade union membership. Any
candidate with a disability will not be excluded unless it is clear that
the candidate is unable to perform a duty that is intrinsic to the role,
having taken into account reasonable adjustments. Reasonable adjustments
to the recruitment process will be made to ensure that no applicant is
disadvantaged because of his/her disability. Line managers conducting
recruitment interviews will ensure that the questions that they ask job
applicants are not in any way discriminatory or unnecessarily intrusive.
This commitment also applies to existing employees.
Employee engagement
Employees are kept informed of developments within the business and in
respect of their employment through a variety of means, such as staff
meetings, briefings and the intranet. Employee involvement is encouraged
and views and suggestions are taken into account when planning new
products and projects. The Sharesave 'save as you earn' Scheme is an
all-employee share option scheme which is open to all UK-based
employees. The Sharesave Scheme allows employees to purchase options by
saving a fixed amount of between GBP5 and GBP500 per month over a period
of either three or five years at the end of which the options, subject
to leaver provisions, are usually exercisable. The Sharesave Scheme has
been in operation since June 2014 and is granted annually, with the
exercise price set at a 20% discount of the share price on the date of
grant.
Greenhouse gas emissions
Information relating to greenhouse gas emissions can be found on page 55
in the Strategic report.
Political donations
Shareholder authority to make aggregate political donations not
exceeding GBP50,000 was obtained at the 2017 AGM. Neither the Company
nor any of its subsidiaries made any political donations this year.
Notifiable interests in share capital
At 31 December 2017, the Company had received the following
notifications of major holdings of voting rights pursuant to the
requirements of Rule 5 of the Disclosure Guidance and Transparency
Rules:
No. of ordinary shares % of issued share capital
OSB Holdco Limited 52,447,557 21.54
Old Mutual plc 33,905,324 13.94
Aggregate of Standard Life
Aberdeen plc 13,974,322 5.74
JPMorgan 13,035,838 5.36
Norges Bank 7,267,358 2.99
Since 31 December 2017, the following notifications were received.
No. of ordinary shares % of issued share capital
Old Mutual plc* 36,560,557 15.02
OSB Holdco Limited 23,664,922 9.72
Norges Bank 7,732,546 3.18
* In addition, 133,665 financial instruments with similar
economic effect, representing 0.05%, were also disclosed.
Annual General Meeting
Accompanying this report is the Notice of the AGM which sets out the
resolutions to be proposed to the meeting, together with an explanation
of each. This year's AGM will be held at the offices of Addleshaw
Goddard, 60 Chiswell Street, London, EC1Y 4AG on 10 May 2018. The
meeting will start at 11am with registration from 10.30am.
Going concern statement
The Directors have undertaken a going concern assessment in accordance
with 'Guidance on Risk Management, Internal Control and Related
Financial and Business Reporting', published by the Financial Reporting
Council in September 2014.
As a result of this assessment, the Directors are satisfied that the
Group and the Company have adequate resources to continue to operate as
a going concern for a period in excess of 12 months from the date of
this report and have prepared the financial statements on that basis. In
assessing whether the going concern basis is appropriate, the Directors
have considered the information contained in the financial statements,
the latest business plan, profit forecasts and the latest working
capital forecasts.
These forecasts have been subject to sensitivity tests, and having
reviewed the ICAAP and ILAAP, the Directors are satisfied that the Group
and the Company have adequate resources to continue in operational
existence for a period in excess of 12 months.
Key information in respect of the Group's strategic risk management
framework, objectives and processes for mitigating risks including
liquidity risk are set out in detail on pages 34 to 48.
Jason Elphick
Group General Counsel and Company Secretary
OneSavings Bank plc
Registered number: 07312896
15 March 2018
Statement of Directors' responsibilities in respect of the Annual Report
and the financial statements
The Directors are responsible for preparing the Annual Report and the
Group and financial statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare financial statements for
each financial year. Under that law the Directors are required to
prepare the Group financial statements in accordance with International
Financial Reporting Standards (IFRS) as adopted by the EU and applicable
law and have elected to prepare the parent company financial statements
on the same basis.
Under company law, the Directors must not approve the accounts unless
they are satisfied that they give a true and fair view of the state of
affairs of the Group and parent company and of the profit or loss of the
Company for that period.
In preparing each of the Group and parent company financial statements,
the Directors are required to:
- select suitable accounting policies and then apply them
consistently
- make judgements and estimates that are reasonable, relevant and
reliable
- state whether they have been prepared in accordance with IFRS
as adopted by the EU
- assess the Group and parent Company's ability to continue as a
going concern, disclosing, as applicable, matters related to going
concern; and
- use the going concern basis of accounting unless they either
intend to liquidate the Group or the parent Company or to cease
operations, or have no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the parent company's
transactions and disclose with reasonable accuracy at any time the
financial position of the parent company, and enable them to ensure that
the financial statements comply with the Companies Act 2006. They are
responsible for such internal control as they determine is necessary to
enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error, and have general
responsibility for taking such steps as are reasonably open to them to
safeguard the assets of the Group and to prevent and detect fraud and
other irregularities.
Under applicable law and regulations, the Directors are also responsible
for preparing a Strategic Report, Directors' Report, Directors'
Remuneration Report and Corporate Governance Statement that complies
with that law and those regulations. The Directors are responsible for
the maintenance and integrity of the corporate and financial information
included on the Company's website. Legislation in the UK governing the
preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.
We confirm that to the best of our knowledge:
- the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the
Company and the undertakings included in the consolidation taken as a
whole; and
- the Strategic report includes a fair review of the development
and performance of the business and the position of the issuer and the
undertakings included in the consolidation taken as a whole, together
with a description of the principal risks and uncertainties that they
face.
We consider the Annual Report and Accounts, taken as a whole, are fair,
balanced and understandable and provide the information necessary for
shareholders to assess the Group's position and performance, business
model and strategy.
Each of the persons who is a Director at the date of approval of this
report confirms that:
- so far as the Director is aware, there is no relevant audit
information of which the Company's auditor is unaware.
- the Director has taken all the steps that he/she ought to have
taken as a Director in order to make himself/herself aware of any
relevant audit information and to establish that the Company's auditor
is aware of that information.
Other information
Likely future developments in the Company and its subsidiaries are
contained in the Strategic report on pages 1 to 59.
Information on financial instruments including financial risk management
objectives and policies including the policy for hedging the exposure of
the Company and its subsidiaries to price risk, credit risk, liquidity
risk and cash flow risk can be found in the Risk Review on pages 32 to
38.
Approved by the Board and signed on its behalf by:
Jason Elphick
Group General Counsel and Company Secretary
15 March 2018
[Graphic appear here]
Independent auditor's report
to the members of OneSavings Bank plc
1. Our opinion is unmodified
We have audited the financial statements of OneSavings Bank plc ('the
Bank') for the year ended 31 December 2017 which comprise the
Consolidated Statement of Profit or Loss, the Consolidated Statement of
Other Comprehensive Income, the Consolidated and Bank Statements of
Financial Position, the Consolidated and Bank Statements of Changes in
Equity, the Consolidated and Bank Statements of Cash Flows, and the
related notes, including the accounting policies in note 1.
In our opinion:
- the financial statements give a true and fair view of the state
of the Group's and of the parent Company's affairs as at 31 December
2017 and of the Group's profit for the year then ended;
- the Group financial statements have been properly prepared in
accordance with International Financial Reporting Standards as adopted
by the European Union (IFRSs as adopted by the EU);
- the parent Company financial statements have been properly
prepared in accordance with IFRSs as adopted by the EU and as applied in
accordance with the provisions of the Companies Act 2006; and
- the financial statements have been prepared in accordance with
the requirements of the Companies Act 2006 and, as regards the Group
financial statements, Article 4 of the IAS Regulation.
Basis for opinion
We conducted our audit in accordance with International Standards on
Auditing (UK) ('ISAs (UK)') and applicable law. Our responsibilities are
described below. We believe that the audit evidence we have obtained is
a sufficient and appropriate basis for our opinion. Our audit opinion is
consistent with our report to the Audit Committee.
We were appointed as auditor on 28 May 2010. The period of total
uninterrupted engagement is for the 8.25 financial years ended 31
December 2017. We have fulfilled our ethical responsibilities under, and
we remain independent of the Group in accordance with, UK ethical
requirements including the FRC Ethical Standard as applied to listed
public interest entities. No non-audit services prohibited by that
standard were provided.
Overview
Materiality: GBP6.4m (2016: GBP5.2m)
group financial 4% (2016: 4%) of group profit
statements as before tax
a whole
Coverage 100% (2016:100%) of group profit
before tax
Risks of material misstatement
vs 2016
Recurring risks
Recognition of revenue
on organic and acquired loans
Loan impairment
2. Key audit matters: our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgement,
were of most significance in the audit of the financial statements and
include the most significant assessed risks of material misstatement
(whether or not due to fraud) identified by us, including those which
had the greatest effect on: the overall audit strategy; the allocation
of resources in the audit; and directing the efforts of the engagement
team. We summarise on the following pages the key audit matters, in
decreasing order of audit significance, in arriving at our audit opinion
above, together with our key audit procedures to address those matters
and, as required for public interest entities, our results from those
procedures. These matters were addressed, and our results are based on
procedures undertaken, in the context of, and solely for the purpose of,
our audit of the financial statements as a whole, and in forming our
opinion thereon, and consequently are incidental to that opinion, and we
do not provide a separate opinion on these matters.
Our assessment of the Group's, and the Bank's, significant risks was the
starting point for our audit. This considered both internal and external
risks to the Group's business model and how these have been mitigated.
The internal factors considered were:
Control environment - we considered the Group's control environment and
in particular whether its systems were processing transactions
completely and faithfully, and included appropriate controls designed to
prevent fraud; and
Capital and liquidity - we considered the strength of the Group's
capital and liquidity position, the diversification of assets, the
flexibility and composition of its balance sheet and the management of
its cost base.
Business activity - we assessed the risk in relation to recognition of
revenue on acquired books to have decreased due to there being no new
loan books purchased in the year.
The external factors considered were:
Economic changes - we considered the audit risk in relation to loan
impairment to have been increased by the impact on the economy of the
results of the EU referendum, given the Group's exposure to properties
in London and the South East, and the recent Bank of England base rate
change, which introduces unpredictability of forecasting in comparison
to the previously benign market.
Political and regulatory changes - the regulatory and tax changes in the
buy-to-let market, together with the greater competition in this market,
have introduced greater uncertainty over the expected remaining lives of
current buy-to-let lending.
Market developments - increasing levels of competition in the market,
and the advancement of technological solutions and platformisation,
including the upcoming changes from Open Banking.
We first considered these in June 2017, and refreshed our assessments
through our half year review and year end audit. That consideration
includes conversations not only with the Group, and ongoing knowledge
gained through reading pertinent information, but also reflected the
views of the Prudential Regulatory Authority, market analysts,
specialists within our firm, and peer comparisons. The final result of
our risk consideration is shown in the table.
[Graphic appear here]
A Loan impairment including forborne loans
B Recognition of revenue on organic and acquired loans
C Management override of controls (risk required by ISAs)
D Valuation of treasury and hedge accounting
E Going concern risk and longer term viability
F Risk of fraudulent transactions
G Recoverability of deferred tax assets
H Accounting for executive compensation scheme
I Use of third parties for loan book servicing
J Valuation of investments in subsidiaries
K IT environment and effectiveness of general IT controls
L Legal, compliance and regulatory developments
M Financial reporting and robustness of reporting processes
N Disposal of Rochester securitisation vehicle (2016 only)
O Uncertain economic outlook
- Risks of greater significance - assessed below
- Other financial statement audit risks
- Significant risk as required by the International Standards on
Auditing
Consistent with 2016, we are of the view that the recognition of revenue
on organic and acquired loans and loan impairment carry the greatest
significance. As in the prior year, due to the similarity in the
underlying principles of revenue recognition on acquired loans, EIR on
organic loans and amortisation of the fair value hedge asset, we have
continued to assess these as one key audit matter below. As described on
pages 74 to 76 these are also areas that have been focused on by the
Group's Audit Committee.
Given the proportion of the Group that the Bank comprises, and the fact
that the Bank is the main trading entity of the Group, we have
considered the Bank and Group significant risk areas to be the same.
Recognition of revenue on organic and acquired loans
(GBP332.7 million; 2016: GBP309.5 million)
Refer to pages 75 and 76 (Audit Committee Report), page 113 (accounting
policy) and page 124 (financial disclosures).
The risk Our response
Group and Parent For organic loans our procedures included:
Subjective estimate: - Methodology implementation: We tested the consistency
The effective interest rate calculation, which uses of methodology and application across the loan portfolios
relevant interest rates, fees and transaction costs, owned by the Group;
incorporates assumptions around loan expected lives - Test of details: We tested the accuracy of data
(driven by estimations of loan repayment profiles). inputs from the mortgage systems into the effective
Forecast loan repayment profiles also underpin the interest rate models, including interest rates and
amortisation of the fair value hedge asset. In the product lives;
case of acquired credit impaired mortgages and loans, - We compared the observed repayment profiles of loans
additional variables such as the purchase price and originated by the Bank to the assumed repayment profiles
estimated recoverable values of the loans are also and assessed the quantitative impact of variations
used. noted;
Originated assets - Sensitivity analysis: We performed stress testing
The directors apply judgement in deciding and assessing analysis on the assumptions noted above;
the expected repayment profiles used to determine - Independent reperformance: We checked the mathematical
the EIR period. The most critical element of judgement accuracy of models through re-performance of the model
in this area is the estimation of the future redemption calculations, and tested that the effective interest
profiles of the loans, which is informed by product rates used within the monthly interest calculations
mix and past customer behaviour of when loans are agreed to the models; and
repaid. - Assessing transparency: We considered the adequacy
Due to the relatively low levels of historical organic of the Group's disclosures in respect of the degree
lending in comparison to the significant recent growth, of estimation involved in arriving at the revenue
the Group has limited information available from which recognised.
to assess trends in prepayment, redemption and product In addition, for acquired loans we also performed
transfers, resulting in increased subjectivity to the following:
these assumptions, as detailed patterns of customer - Historical comparisons: We performed regression
behaviour have not been clearly established from which testing to assess any significant deviations from
to estimate future customer behaviour and performance. the original forecast cash flows;
Acquired loan portfolios - Assessing forecasts: We considered whether any 'catch
For the Group's acquired debt portfolio, the risk up' adjustments were required on portfolios where
is that estimated future cash collections are not the repayment profile actual cash flow experience
reflected by actual cash receipts. Estimation of future had differed from that originally predicted. For those
cash collections requires significant judgement to loans where catch up adjustments have been recorded,
make assumptions about the value, probability and we assessed the appropriateness of the payment assumptions
timing of expected future cash flows for each type used in the forecast cash flow calculations, by comparing
of asset class within a portfolio. to payment rates previously experienced;
For acquired loan portfolios, any change in the repayment - Control operations: We visited each of the servicers
profile results in the discount received or premium for the mortgage books where these were not administered
paid on purchase of the portfolio to be adjusted through by the Group to test the relevant controls over the
a 'catch 'up' adjustment and spread over the revised recording of loan balances and interest at these entities;
expected life. and
As further portfolios are purchased by the Group, - Data capture: We performed sample testing to assess
there is a need to assess the consistency and accuracy the accuracy and consistency of the information provided
of the effective interest rate calculations across by the servicer companies to the Group and that this
the individual models. was appropriately captured in the models.
A number of the acquired portfolios are serviced by We tested the amortisation of the fair value hedge
third parties, leading to data inputs from a number asset through:
of sources. This increases the risk that the loan - Assessing forecasts: We considered whether any 'catch
and repayment data used in the model is inaccurate. up' adjustments were required to the amortisation
Fair value hedge asset where the actual cash flow experience had differed
The fair value hedge asset relating to the legacy from the repayment profile originally predicted and
back book mortgages matched to interest rate swaps determined whether the correct amounts had been recognised.
prior to their cancellation is being amortised in Our results
line with the estimated expected future cash flows As a result of our work we found the level of revenue
at the point of cancellation, driven by the assumed recognised to be acceptable (2016: acceptable)
future redemption profile of the mortgages. Where
this redemption profile subsequently differs from
the expectation at the time of cancellation there
is a risk that the amortisation profile may not be
correctly adjusted to reflect this change.
Loan impairment
(GBP21.6 million; 2016: GBP25.0 million)
Refer to pages 74 and 75 (Audit Committee Report), pages 115 and 116
(accounting policy) and pages 134 and 135 (financial disclosures).
The risk Our response
Group and Parent Our response
Subjective estimate: For loans assessed for specific impairment, our procedures
This is a key judgemental area due to the level of included:
subjectivity inherent in estimating the recoverability - Test of details: We tested the completeness of the
of loan balances, compounded by the fact that lower loans identified by the Group as high risk through
levels of lending historically have provided the Group a consideration of all loans for risk factors such
with limited historical experience to use in predicting as magnitude, arrears and previous loan restructures;
the likelihood of loans falling into arrears. - We agreed the key data inputs to third party documentation;
Individual impairment - the Group identifies individual namely projected selling price and costs to valuation
mortgage loan cases for a specific impairment assessment reports, rental income to tenancy agreements and discount
based on the current level of arrears and nature of rates to the interest rate of the loan;
the loan. The individual impairment requirement for - Sensitivity analysis: We stress tested the collateral
the loan is determined based on estimated future cash valuations, time to sale and discount rates to assess
flows discounted to present value at the rate inherent the sensitivity of the provision to these assumptions;
in the loan. This is a highly manual process, with and
a number of data inputs and assumptions including - Independent reperformance: We re-performed the impairment
the cost of obtaining and selling the repossessed provision calculation for a sample of loans, utilising
property, probable sale proceeds and any rental income the outcome of our testing of the data inputs and
prior to sale. assumptions.
Collective impairment - an assessment is performed For loans assessed collectively for impairment:
collectively on all other loans for impairment, with - Methodology choice: We assessed the methodology
the key assumptions being: used by the Group to calculate the propensity of accounts
- the probability of an account falling into arrears with different arrears profiles to fall into and out
and subsequently defaulting, of default, and considered the consistency of the
- the market valuations of any collateral provided, probabilities of default and the emergence periods
- the emergence period for losses, and with the limited historical internal data available;
- the estimated time and cost to sell any collateral - Test of detail: We agreed the data inputs in the
property repossessed by the Group. model to the mortgage data system and third party
The assumptions noted above differ across the Group's reports;
loan portfolios of residential lending (comprising - Our sector experience: We critically assessed the
first charge, second charge and shared ownership lending), assumptions inherent in the model against our understanding
Buy-To- Let and SME lending, development finance, of the different loan portfolios across the Group,
and personal loans, which reflects the diverse nature their recent performance and industry developments;
of lending performed by the Group and different characteristics - Independent reperformance: We recalculated the probability
of each book. of default rates based on the Group's actual historical
There is a risk that the overall provision is not experience. We also re-performed the collective impairment
reflective of the incurred losses at the end of the model calculations based on the outcome of the testing
period due to changes in customer credit quality resulting of key assumptions to assess the overall validity
in unrepresentative probabilities of default, the of the assumptions used in the collective impairment
period of time assumed that it takes for incurred assessment;
losses to emerge, or other market factors not sufficiently - Sensitivity analysis: We stress tested the collateral
incorporated into the model, such as house prices. valuations, forced sales discount, and time and costs
Given the relatively young nature of these loan books, to sell the collateral (being the expected recovery
which result in limited historical information, and on sale of the property) to assess the sensitivity
sensitivity of the impairment assessments to these of the impairment provision to these assumptions;
assumptions, there is increased risk that actual experience - Historical comparisons: We considered the accuracy
may differ from the Group's current expectations. of previous estimates of the collective provision
against the current book arrears profile and losses
incurred in the year;
Increased lending in recent years has been at a time For all loans:
of historically low interest rates, which may distort - Control operations: We tested the design, implementation
customer behaviour and loss experience data for use and operating effectiveness of key controls over the
in future assumptions, particularly if interest rates monitoring and reporting of loans and advances to
were to increase in coming years. customers;
The Group implements a number of forbearance procedures - Benchmarking assumptions: We compared the provision
on selected loans in arrears, such as restructuring coverage rates and the Group's assumptions such as
of a loan or capitalisation of arrears balances. As forced sale discounts, emergence period and costs
this is a manual process, there is the risk that these to sell collateral rates against other similar institutions
measures are not appropriately taken into consideration to assess both the level of the impairment provision
when calculating the required provisions, as the apparent in comparison to industry norms and the continuing
improvement in the arrears on the loans could result appropriateness of the assumptions used;
in a lower impairment provision if the loans are not - Assessing application: We monitored credit trends
identified as forborne. in the portfolio over the year, to assess whether
Data capture: emerging trends are reflected in the provision level;
The collective impairment model uses a combination - Methodology implementation: We checked that forbearance
of static (e.g. original collateral valuations) and activity is accurately reflected in the impairment
dynamic data (e.g. current balances and interest rates) provision calculation by checking that for each forborne
about the Group's loans as well as from external sources loan, the uplift to the propensity to default assumption
(e.g. house price index tables to derive indexed collateral in the collective impairment assessment was appropriately
valuations). applied;
Owing to the majority of the acquired portfolios being - Assessing transparency: We assessed the adequacy
serviced by third parties, the collective provision of the Group disclosures in relation to the degree
calculation requires data inputs from a number of of estimation involved in arriving at the provisions;
different sources, increasing the risk that data included - Data comparison: We checked a sample of the internal
in the models is inaccurate. data and the data totals used in the models back to
the Group's underlying source systems. We also checked
the external inputs used by the Group such as house
price indices to external sources;
- Control operations: We visited each of the servicers
for the mortgage books where these were not administered
by the Group to test the relevant controls over the
recording of loan balances and arrears status of loans
at these entities; and
- Data capture: We performed sample testing to assess
the accuracy and consistency of the information provided
by the servicer companies to the Group.
Our results
- We found the resulting estimate of the provision
for loan impairment to be acceptable (2016: acceptable).
3. Our application of materiality and an overview of the scope of our
audit
Materiality
Materiality for the group financial statements as a whole was set at
GBP6.4 million, determined with reference to a benchmark of group profit
before tax, of which it represents 4% (2016: 4% of profit before tax
adjusted to remove the exceptional profit on disposal of Rochester
Financing No1 plc).
Materiality for the parent company financial statements as a whole was
set at GBP4.8m, determined with reference to a benchmark of company
profit before tax, of which it represents 4%. This figure represents 3%
of Group profit before tax.
We agreed to report to the Audit Committee any corrected or uncorrected
identified misstatements exceeding GBP0.3m, in addition to other
identified misstatements that warranted reporting on qualitative
grounds.
Scope - Group
In 2017, as in 2016, the Group audit team performed the audit of the
Group as if it was a single aggregated set of financial information,
completing testing over the Interbay, Prestige and OSB India components,
and visiting the Prestige and Interbay client offices. The audit was
performed using the materiality level set out above and covered 100% of
total Group revenue, Group profit before tax, and total Group assets.
Scope - disclosure of IFRS 9 effect
The Group is adopting IFRS 9 Financial Instruments from 1 January 2018
and have included an estimate of the financial impact of the change in
accounting standard in accordance with IAS 8 Changes in Accounting
Estimates and Errors as set out in note 1. While further testing of the
financial impact will be performed as part of our 2018 year end audit,
we have performed sufficient audit procedures for the purposes of
assessing the disclosures made in accordance with IAS 8. We spent
considerable time assessing the key areas of judgement inherent in the
IFRS 9 transition which supports our assessment of the appropriateness
of the disclosure but also supports our 2018 year end audit.
Specifically we have:
- Considered the appropriateness of key technical decisions,
judgements, assumptions and elections made by management
- Considered key Classification and Measurement decisions,
including Business Model Assessments and Solely Payment of Principal and
Interest (SPPI) outcomes
- Risk rated key credit models to determine our level of work and
considered credit risk modelling decisions and macroeconomic variables,
including forward economic guidance and generation of multiple economic
scenarios
- Considered key data flows, transitional controls and governance
processes related to the approval of the estimated transitional impact.
Profit before tax
GBP159.0m (2016: GBP129.2m)
[Graphic appear here]
Group materiality
GBP6.4m (2016: GBP5.2m)
GBP6.4 million
Whole financial statements materiality (2016: GBP5.2m)
GBP4.1 million
Performance materiality to respond to aggregation risk (2016: GBP3.4m)
GBP0.3 million
Misstatements reported to the audit committee (2016: GBP0.3m)
4. We have nothing to report on going concern
We are required to report to you if:
- we have anything material to add or draw attention to in
relation to the Directors' statement in note 1 to the financial
statements on the use of the going concern basis of accounting with no
material uncertainties that may cast significant doubt over the Group
and Company's use of that basis for a period of at least 12 months from
the date of approval of the financial statements; or
- the related statement under the Listing Rules set out on page 97
is materially inconsistent with our audit knowledge.
We have nothing to report in these respects.
5. We have nothing to report on the other information in the Annual
Report
The directors are responsible for the other information presented in the
Annual Report together with the financial statements. Our opinion on the
financial statements does not cover the other information and,
accordingly, we do not express an audit opinion or, except as explicitly
stated below, any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so,
consider whether, based on our financial statements audit work, the
information therein is materially misstated or inconsistent with the
financial statements or our audit knowledge. Based solely on that work
we have not identified material misstatements in the other information.
Strategic report and Directors' report
Based solely on our work on the other information:
- We have not identified material misstatements in the strategic
report and the Directors' report;
- In our opinion, the information given in those reports for the
financial year is consistent with the financial statements; and
- In our opinion, those reports have been prepared in accordance
with the Companies Act 2006.
Directors' remuneration report
In our opinion, the part of the Remuneration Report to be audited has
been properly prepared in accordance with the Companies Act 2006.
Disclosures of principal risks and longer-term viability Based on the
knowledge we acquired during our financial statements audit, we have
nothing material to add or draw attention to in relation to:
- the Directors' confirmation within the viability statement on
page 49 that they have carried out a robust assessment of the principal
risks facing the Group, including those that would threaten its business
model, future performance, solvency and liquidity;
- the Principal Risks and Uncertainties disclosures describing
these risks and explaining how they are being managed and mitigated; and
- the Directors' explanation in the viability statement of how
they have assessed the prospects of the Group, over what period they
have done so and why they considered that period to be appropriate, and
their statement as to whether they have a reasonable expectation that
the Group will be able to continue in operation and meet its liabilities
as they fall due over the period of their assessment, including any
related disclosures drawing attention to any necessary qualifications or
assumptions.
Under the Listing Rules, we are required to review the viability
statement. We have nothing to report in this respect.
Corporate governance disclosures
We are required to report to you if:
- we have identified material inconsistencies between the
knowledge we acquired during our financial statements audit and the
Directors' statement that they consider that the Annual Report and
financial statements taken as a whole is fair, balanced and
understandable and provides the information necessary for shareholders
to assess the Group's position and performance, business model and
strategy; or
- the section of the Annual Report describing the work of the
Audit Committee does not appropriately address matters communicated by
us to the Audit Committee.
We are required to report to you if the Corporate Governance Report does
not properly disclose a departure from the 11 provisions of the UK
Corporate Governance Code specified by the Listing Rules for our review.
We have nothing to report in these respects.
6. We have nothing to report on the other matters on which we are
required to report by exception
Under the Companies Act 2006, we are required to report to you if, in
our opinion:
- adequate accounting records have not been kept by the parent
company, or returns adequate for our audit have not been received from
branches not visited by us; or
- the parent company financial statements and the part of the
remuneration report to be audited are not in agreement with the
accounting records and returns; or
- certain disclosures of Directors' remuneration specified by law
are not made; or
- we have not received all the information and explanations we
require for our audit.
We have nothing to report in these respects.
7. Respective responsibilities
Directors' responsibilities
As explained more fully in their statement set out on page 98, the
Directors are responsible for: the preparation of the financial
statements including being satisfied that they give a true and fair
view; such internal control as they determine is necessary to enable the
preparation of financial statements that are free from material
misstatement, whether due to fraud or error; assessing the Group and
parent Company's ability to continue as a going concern, disclosing, as
applicable, matters related to going concern; and using the going
concern basis of accounting unless they either intend to liquidate the
Group or the parent Company or to cease operations, or have no realistic
alternative but to do so.
Auditor's responsibilities
Our objectives are to obtain reasonable assurance about whether the
financial statements as a whole are free from material misstatement,
whether due to fraud, other irregularities, or error, and to issue our
opinion in an auditor's report. Reasonable assurance is a high level of
assurance, but does not guarantee that an audit conducted in accordance
with ISAs (UK) will always detect a material misstatement when it
exists. Misstatements can arise from fraud, other irregularities or
error and are considered material if, individually or in aggregate, they
could reasonably be expected to influence the economic decisions of
users taken on the basis of the financial statements. The risk of not
detecting a material misstatement resulting from fraud or other
irregularities is higher than for one resulting from error, as they may
involve collusion, forgery, intentional omissions, misrepresentations,
or the override of internal control and may involve any area of law and
regulation not just those directly affecting the financial statements.
A fuller description of our responsibilities is provided on the FRC's
website at www.frc.org.uk/auditorsresponsibilities
Irregularities - ability to detect
We identified areas of laws and regulations that could reasonably be
expected to have a material effect on the financial statements from our
sector experience, through discussion with the Directors and other
management (as required by auditing standards), and from inspection of
the Group's regulatory and legal correspondence.
We had regard to laws and regulations in areas that directly affect the
financial statements including financial reporting (including related
company legislation) and taxation legislation. We considered the extent
of compliance with those laws and regulations as part of our procedures
on the related annual accounts items.
In addition, we considered the impact of laws and regulations in the
specific areas of regulatory capital and liquidity and certain aspects
of company legislation recognising the financial and regulated nature of
the Group's activities and its legal form. With the exception of any
known or possible non-compliance, and as required by auditing standards,
our work in respect of these was limited to enquiry of the Directors and
other management and inspection of regulatory and legal correspondence.
We considered the effect of any known or possible non-compliance in
these areas as part of our procedures on the related annual accounts
items.
We communicated identified laws and regulations throughout our team and
remained alert to any indications of non-compliance throughout the
audit.
As with any audit, there remained a higher risk of non- detection of
irregularities, as these may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal controls.
8. The purpose of our audit work and to whom we owe our responsibilities
This report is made solely to the Company's members, as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the Company's
members those matters we are required to state to them in an auditor's
report and for no other purpose. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the
Company and the Company's members, as a body, for our audit work, for
this report, or for the opinions we have formed.
Pamela McIntyre (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London
E14 5GL
15 March 2018
Statement of Profit or Loss
For the year ended 31 December 2017
Group Group
Year ended Year ended
31-Dec-17 31-Dec-16
Notes GBPm GBPm
Interest receivable and similar income 3 332.7 309.5
Interest payable and similar charges 4 (87.3) (102.9)
Net interest income 245.4 206.6
Fair value losses on financial instruments 5 (6.3) (4.9)
Gains on sales of financial instruments 6 - 0.6
Fees and commissions receivable 1.5 2.5
Fees and commissions payable (1.0) (0.8)
External servicing fees (1.5) (2.6)
Total income 238.1 201.4
Administrative expenses 7 (61.6) (51.1)
Depreciation and amortisation 23,24 (3.5) (2.6)
Impairment losses 19 (4.4) (9.0)
FSCS and other regulatory provisions 31 (0.9) (0.5)
Exceptional gain on sale 10 - 34.7
Exceptional accelerated amortisation of fair value
adjustments on hedged assets 10 - (9.8)
Profit before taxation 167.7 163.1
Taxation 11 (40.8) (42.2)
Profit for the year 126.9 120.9
Dividend, pence per share 13 12.8 10.5
Earnings per share, pence per share
Basic 12 51.1 49.4
Diluted 12 50.7 49.0
The above results are derived wholly from continuing operations.
The notes on pages 112 to 177 form part of these accounts.
The financial statements on pages 107 to 177 were approved by the Board
of Directors on 15 March 2018.
Statement of Other Comprehensive Income
As at 31 December 2017
Group Group
Year ended Year ended
31-Dec-17 31-Dec-16
GBPm GBPm
Profit for the year 126.9 120.9
Other comprehensive income/(expense)
Items which may be reclassified to profit or loss:
Fair value changes on available-for-sale securities:
Arising in the year 0.1 0.1
Revaluation of foreign operations (0.3) 0.9
(0.2) 1.0
Total comprehensive income for the year 126.7 121.9
The notes on pages 112 to 177 form part of these accounts.
The financial statements on pages 107 to 177 were approved by the Board
of Directors on 15 March 2018.
Statement of Financial Position
As at 31 December 2017
Group Group Bank Bank
As at As at As at As at
31-Dec-17 31-Dec-16 31-Dec-17 31-Dec-16
Note GBPm GBPm GBPm GBPm
Assets
Cash in hand 0.5 0.4 0.5 0.4
Loans and advances to credit
institutions 15 1,187.2 417.8 1,179.3 413.5
Investment securities 16 19.1 141.7 19.1 141.7
Loans and advances to
customers 17 7,306.0 5,939.2 6,051.0 4,893.5
Derivative assets 20 6.1 1.8 6.1 1.8
Fair value adjustments on
hedged assets 21 31.9 46.9 31.9 46.9
Deferred taxation asset 25 5.1 3.4 2.5 0.8
Intangible assets 23 6.8 4.7 6.1 4.1
Property, plant and
equipment 24 21.5 13.1 15.4 9.9
Investments in subsidiaries
and intercompany loans 22 - - 1,194.3 984.0
Other assets 26 4.9 11.9 4.7 3.8
Total assets 8,589.1 6,580.9 8,510.9 6,500.4
Liabilities
Amounts owed to retail
depositors 27 6,650.3 5,952.4 6,650.3 5,952.4
Amounts owed to credit
institutions 28 1,250.3 101.7 1,250.3 101.7
Amounts owed to other
customers 29 25.7 4.0 25.7 4.0
Derivative liabilities 20 21.8 24.4 21.8 24.4
Fair value adjustments on
hedged liabilities 21 - 1.9 - 1.9
Current taxation liability 18.3 21.1 14.8 18.1
Intercompany loans 22 - - 31.2 1.9
Other liabilities 30 16.3 18.6 13.4 7.4
FSCS and other regulatory
provisions 31 1.4 1.5 1.4 1.5
Subordinated liabilities 32 10.9 21.6 10.9 21.6
Perpetual subordinated bonds 33 15.3 15.3 15.3 15.3
8,010.3 6,162.5 8,035.1 6,150.2
Equity
Share capital 34 2.4 2.4 2.4 2.4
Share premium 34 158.4 157.9 158.4 157.9
Retained earnings 337.5 240.7 237.1 175.3
Other reserves 35 80.5 17.4 77.9 14.6
578.8 418.4 475.8 350.2
Total equity and liabilities 8,589.1 6,580.9 8,510.9 6,500.4
The notes on pages 112 to 177 form part of these accounts.
The financial statements on pages 107 to 177 were approved by the Board
of Directors on 15 March 2018.
Andy Golding April Talintyre
Chief Executive Officer Chief Financial Officer
15 March 2018 15 March 2018
Company number: 07312896
Statement of Changes in Equity
For the year ended 31 December 2017
Share Capital Transfer
Share capital premium contribution reserve Foreign exchange reserve Available-for-sale reserve Share-based payment reserve Equity bonds(1) Total
Group GBPm GBPm GBPm GBPm GBPm GBPm GBPm Retained earnings GBPm GBPm GBPm
Balance at 1
January 2017 2.4 157.9 6.2 (12.8) 0.1 - 1.9 240.7 22.0 418.4
Profit for the
year - - - - - - - 126.9 - 126.9
Coupon paid on
equity
bonds(2) - - - - - - - (2.7) - (2.7)
Dividends paid - - - - - - - (27.0) - (27.0)
Other
comprehensive
income - - - - (0.3) 0.1 - - - (0.2)
Share-based
payments - 0.5 0.2 - - - 3.1 0.2 - 4.0
Additional
Tier 1
securities
issuance(3) - - - - - - - (0.6) 60.0 59.4
Balance at 31
December
2017 2.4 158.4 6.4 (12.8) (0.2) 0.1 5.0 337.5 82.0 578.8
Group
Balance at 1
January 2016 2.4 157.9 5.8 (12.8) (0.8) (0.1) 0.9 144.0 22.0 319.3
Profit for the
year - - - - - - - 120.9 - 120.9
Coupon paid on
equity
bonds(2) - - - - - - - (0.9) - (0.9)
Dividends paid - - - - - - - (23.3) - (23.3)
Other
comprehensive
income - - - - 0.9 0.1 - - - 1.0
Share-based
payments - - 0.4 - - - 1.0 - - 1.4
Balance at 31
December
2016 2.4 157.9 6.2 (12.8) 0.1 - 1.9 240.7 22.0 418.4
Bank
Balance at 1
January 2017 2.4 157.9 5.9 (15.2) - - 1.9 175.3 22.0 350.2
Profit for the
year - - - - - - - 91.9 - 91.9
Coupon paid on
equity bonds(2) - - - - - - - (2.7) - (2.7)
Dividends paid - - - - - - - (27.0) - (27.0)
Other
comprehensive
income - - - - -0.1 - - - 0.1
Share-based
payments - 0.5 0.2 - - - 3.0 0.2 - 3.9
Additional Tier 1
securities
issuance(3) - - - - - - - (0.6) 60.0 59.4
Balance at 31
December 2017 2.4 158.4 6.1 (15.2) -0.1 4.9 237.1 82.0 475.8
Bank
Balance at 1
January 2016 2.4 157.9 5.6 (15.2) -(0.1) 0.8 104.4 22.0 277.8
Profit for the
year - - - - - - - 95.1 - 95.1
Coupon paid on
equity
bonds(2) - - - - - - - (0.9) - (0.9)
Dividends paid - - - - - - - (23.3) - (23.3)
Other
comprehensive
income - - - - - 0.1 - - - 0.1
Share-based
payments - - 0.3 - - - 1.1 - - 1.4
Balance at 31
December 2016 2.4 157.9 5.9 (15.2) - - 1.9 175.3 22.0 350.2
1. Equity bonds comprise GBP22.0m of Perpetual Subordinated
Bonds and GBP60m of Additional Tier 1 securities ('AT1 securities').
2. Coupon paid on equity bonds is shown net of tax.
3. Additional Tier 1 securities issuance costs of GBP0.6m are
shown net of tax.
The reserves are further disclosed in note 35.
Statement of Cash Flows
For the year ended 31 December 2017
Restated(1) Restated(1)
Group Group Bank Bank
Year Year
ended Year ended ended Year ended
31-Dec-17 31-Dec-16 31-Dec-17 31-Dec-16
Note GBPm GBPm GBPm GBPm
Cash flows from operating activities
Profit before tax 167.7 163.1 124.0 130.8
Adjustments for non-cash items:
Depreciation and amortisation 3.5 2.6 3.0 2.2
Interest on subordinated liabilities 0.9 1.2 0.9 1.2
Interest on Perpetual subordinated bonds 0.9 0.9 0.9 0.9
Impairment charge on loans 4.4 9.0 2.0 6.9
Gain on sale of financial instruments - (0.6) - (0.6)
FSCS and other provisions 0.9 0.5 0.9 0.5
Fair value losses on financial instruments 6.3 4.9 6.3 4.9
Share-based payments 2.4 1.5 2.3 1.5
Exceptional items - (24.9) - (24.9)
Changes in operating assets and liabilities:
Increase in loans and advances to credit
institutions(1) (6.3) (5.9) (6.3) (5.9)
Increase in loans to customers (1,371.2) (1,031.3) (1,159.5) (951.7)
Increase in retail deposits 697.9 588.6 697.9 588.6
Increase in intercompany balances - - (181.0) (42.5)
Net decrease/(increase) in other assets 7.0 - (0.9) (14.7)
Net (increase)/decrease in derivatives and hedged
items (0.1) 0.9 (0.1) 0.9
Increase/(decrease) in credit institutions and other
customers deposits 21.3 (2.7) 21.3 (2.7)
Net (decrease)/increase in other liabilities (3.3) (1.4) 5.5 (3.2)
Exchange differences on working capital (0.3) 0.9 - -
Cash used in operating activities (468.0) (292.7) (482.8) (307.8)
Interest paid on bonds and subordinated debt (1.8) (2.1) (1.8) (2.1)
Sales of financial instruments - 1.9 - 1.9
FSCS and other provisions paid (1.0) (1.3) (1.0) (1.3)
Net tax paid (42.1) (29.6) (34.4) (24.3)
Net cash used in operating activities (512.9) (323.8) (520.0) (333.6)
Cash flows from investing activities
Maturity and sales of investment securities 40.0 712.2 40.0 712.2
Purchases of investment securities(1) - (402.8) - (402.8)
Proceeds from disposal of a subsidiary(2) - 80.2 - 99.0
Purchases of equipment and intangible assets (14.0) (7.7) (10.5) (6.5)
Cash generated from investing activities 26.0 381.9 29.5 401.9
Cash flows from financing activities
Bank of England TFS drawdowns 28 1,149.0 101.0 1,149.0 101.0
Coupon paid on equity bonds (3.7) (1.2) (3.7) (1.2)
Dividends paid 13 (27.0) (23.3) (27.0) (23.3)
AT1 securities issuance net of costs 35 59.4 - 59.4 -
Proceeds from issuance of shares under employee SAYE
schemes 34 0.5 - 0.5 -
Repayment of debt(3) 32 (10.7) (19.8) (10.7) (3.0)
Cash generated from financing activities 1,167.5 56.7 1,167.5 73.5
Net increase in cash and cash equivalents 680.6 114.8 677.0 141.8
Cash and cash equivalents at the beginning of the
year(1) 14 485.3 370.5 481.0 339.2
Cash and cash equivalents at the end of the year(1) 14 1,165.9 485.3 1,158.0 481.0
Movement in cash and cash equivalents 680.6 114.8 677.0 141.8
1. The 2016 comparatives have been restated to include
investment securities with maturity less than 3 months and to exclude
encumbered loans and advances to credit institutions (being the cash
ratio deposit and swap margin paid) within cash and cash equivalents.
This has no effect on the balance sheet.
2. Proceeds from a disposal of a subsidiary relate to the
Group's disposal of the entire economic interest in Rochester Financing
No.1 plc during 2016.
3. Repayment of debt comprises the 2017 LIBOR linked floating
rate subordinated liabilities of GBP5.7m and the 2017 average standard
mortgage rate linked floating subordinated liabilities of GBP5.0m.
Notes to the Financial Statements
For the year ended 31 December 2017
1. Accounting policies
The principal accounting policies applied in the preparation of the
financial statements for the Group and the Bank are set out below.
a) Basis of preparation
The financial statements have been prepared in accordance with
International Financial Reporting Standards ('IFRSs') as adopted by the
European Union ('EU') and interpretations issued by the International
Financial Reporting Interpretations Committee ('IFRIC').
The financial statements have been prepared on a historical cost basis,
as modified by the revaluation of available-for-sale ('AFS') financial
assets, derivative contracts and financial assets held at fair value
through profit or loss ('FVTPL').
As permitted by section 408 of the Companies Act 2006, no statement of
profit or loss is presented for the Bank.
b) Going concern
The Board undertakes regular rigorous assessments of whether the Group
is a going concern in the light of current economic conditions and all
available information about future risks and uncertainties.
Projections for the Group have been prepared, covering its future
performance, capital and liquidity for a period in excess of 12 months
from the date of approval of these financial statements including stress
scenarios. These projections show that the Group has sufficient capital
and liquidity to continue to meet its regulatory requirements as set out
by the Prudential Regulatory Authority ('PRA').
The Board has therefore concluded that the Group has sufficient
resources to continue in operational existence for a period in excess of
12 months and as a result it is appropriate to prepare these financial
statements on a going concern basis.
c) Basis of consolidation
The Group accounts include the results of the Bank and its subsidiary
undertakings. Subsidiaries are fully consolidated from the date on which
control is transferred to the Group and are deconsolidated from the date
that control ceases. Upon consolidation intercompany transactions,
balances and unrealised gains on transactions are eliminated. Unrealised
losses are also eliminated unless the transaction provides evidence of
impairment of the asset transferred. Accounting policies of subsidiaries
have been changed where necessary to ensure consistency with the
policies adopted by the Group.
In the Bank's financial statements investments in subsidiary
undertakings are stated at cost less provision for any impairment.
d) Foreign currency translation
The consolidated financial statements are presented in Pounds Sterling
which is the presentation currency of the Group. The financial
statements of each of the Bank's subsidiaries are measured using the
currency of the primary economic environment in which the subsidiary
operates (the 'functional currency'). Foreign currency transactions are
translated into the functional currencies using the exchange rates
prevailing at the date of the transactions. Monetary items denominated
in foreign currencies are retranslated at the rate prevailing at the
period end.
Foreign exchange gains and losses resulting from the retranslation and
settlement of these items are recognised in profit or loss. Non-monetary
items measured at cost in the foreign currency are translated using the
spot FX rate at the date of the transaction. Non-monetary items measured
at fair value in the foreign currency are translated into the functional
currency at the spot FX rate at the date of which the fair value is
determined.
The assets and liabilities of foreign operations with functional
currencies other than Pounds Sterling are translated into the
presentation currency at the exchange rate on the reporting date. The
income and expenses of foreign operations are translated at the rates on
the dates of transactions. Exchange differences on foreign operations
are recognised in other comprehensive income and accumulated in the
foreign exchange reserve within equity.
e) Segmental reporting
IFRS 8 requires operating segments to be identified on the basis of
internal reports and components of the Group which are regularly
reviewed by the chief operating decision maker to allocate resources to
segments and to assess their performance. For this purpose, the chief
operating decision maker of the Group is the Board of Directors.
The Group lends within the UK and the Channel Islands.
The Group segments its lending by product, focusing on the customer need
and reason for a loan. It operates under two segments: Buy-to-Let/SME
('BTL/SME') and Residential mortgages.
The personal loan portfolio has largely completed its run-off and is
therefore no longer considered as a separate segment by the Group. The
remaining net loan book and contribution to profit for the year have
been reported in the BTL/SME segment with comparatives reclassified
accordingly.
The comparatives have been reclassified in the following notes:
- note 3 - Interest receivable and similar income
- note 17 - Loans and advances to customers
- note 18 - Provisions for impairment losses on loans and
advances
- note 37 - Risk management
- note 41 - Operating segments.
f) Interest income and expense
Interest income and interest expense for all interest-bearing financial
instruments measured at amortised cost are recognised in profit or loss
using the effective interest rate ('EIR') method. The EIR is the rate
which discounts the expected future cash flows, over the expected life
of the financial instrument, to the net carrying value of the financial
asset or liability.
When calculating the EIR, the Group estimates cash flows considering all
contractual terms of the instrument and behavioural aspects (for example,
prepayment options) but not considering future credit losses. The
calculation of the EIR includes all transaction costs and fees paid or
received that are an integral part of the interest rate, together with
the discounts or premiums arising on the acquisition of loan portfolios.
Transaction costs include incremental costs that are directly
attributable to the acquisition or issue of a financial instrument.
The Group monitors the actual cash flows for each acquired book and
where they diverge significantly from expectation, the future cash flows
are reset (an AG8 adjustment). In assessing whether to adjust future
cash flows on an acquired portfolio, the Group considers the cash
variance on an absolute and percentage basis. The Group also considers
the total variance across all acquired portfolios. Where cash flows for
an acquired portfolio are reset, they are discounted at the EIR to
derive a new carrying value, with changes taken to profit or loss as
interest income. The EIR rate is adjusted for AG7 events where there is
a change to the reference interest rate (LIBOR or Base Rate) affecting
portfolios with a variable interest rate which will impact future cash
flows. The revised EIR is the rate which exactly discounts the revised
cash flows to the net carrying value of the loan portfolio.
Interest income on AFS investments is included in interest receivable
and similar income. Interest on derivatives is included in interest
receivable and similar income or interest expense and similar charges
following the underlying instrument it is hedging.
Interest paid on equity Perpetual Subordinated Bonds ('PSBs') and AT1
securities is recognised directly in equity as paid.
g) Fees and commissions
Fees and commissions which are an integral part of the EIR of a
financial instrument are recognised as an adjustment to the EIR and
recorded in interest income. Other fees and commissions are recognised
on the accruals basis as services are provided or on the performance of
a significant act, net of VAT and similar taxes.
h) Taxation
Income tax comprises current and deferred tax. It is recognised in
profit or loss, other comprehensive income or directly in equity,
consistently with the recognition of items it relates to.
Current tax is the expected tax charge or credit on the taxable income
or loss in the period and any adjustments in respect of previous years.
Deferred tax is the tax expected to be payable or recoverable in respect
of temporary differences between the carrying amounts of assets or
liabilities for accounting purposes and carrying amounts for tax
purposes.
Deferred tax assets are recognised only to the extent that it is
probable that future taxable profits will be available to utilise the
asset. The recognition of deferred tax is mainly dependent on the
projections of future taxable profits and future reversals of temporary
differences. The current Board's projections of future taxable income
assume that the Group will utilise its deferred tax asset within the
foreseeable future.
i) Dividends
Dividends are recognised in equity in the period in which they are paid
or, if earlier, approved by shareholders.
j) Cash and cash equivalents
Cash and cash equivalents comprise cash, non- restricted balances with
central banks and highly liquid financial assets with maturities of less
than three months subject to an insignificant risk of changes in their
fair value.
k) Intangible assets
Purchased software and costs directly associated with the development of
computer software are capitalised as intangible assets where the
software is a unique and identifiable asset controlled by the Group and
will generate future economic benefits.
Costs to establish technological feasibility or to maintain existing
levels of performance are recognised as an expense.
Software is amortised on a straight-line basis in profit or loss over
its estimated useful life, which is generally five years. Intangible
assets are reviewed for impairment on an annual basis.
l) Property, plant and equipment
Property, plant and equipment comprise freehold land and buildings,
major alterations to office premises, computer equipment and fixtures
measured at cost less accumulated depreciation. These assets are
reviewed for impairment annually, and if they are considered to be
impaired, are written down immediately to their recoverable amounts.
Gains and losses on disposals, calculated as the difference between the
net disposal proceeds with the carrying amount of the asset, are
included in profit or loss.
Items of property, plant and equipment are depreciated on a
straight-line basis over their estimated useful economic lives as
follows:
Buildings 50 years
Leasehold improvements 10 years
Equipment and fixtures 5 years
Land, deemed to be 25% of purchase price of buildings, is not
depreciated.
The cost of repairs and renewals is charged to profit or loss in the
period in which the expenditure is incurred.
m) Financial instruments
i. Recognition
The Group initially recognises loans and advances, deposits, debt
securities issued and subordinated liabilities on the date on which they
are originated. All other financial instruments are accounted for on the
trade date which is when the Group becomes a party to the contractual
provisions of the instrument.
The Group initially recognises financial assets and financial
liabilities at fair value plus, for instruments not at FVTPL,
transaction costs that are directly attributable to its acquisition or
issue. Transaction costs relating to the acquisition or issue of a
financial instrument at FVTPL are recognised in the profit or loss as
incurred.
ii. Classification
The Group classifies its financial instruments in accordance with IAS 39
and IAS 32, with financial assets being classified into the following
categories:
- Loans and receivables
- Available-for-sale
- At fair value through profit or loss
The Group classifies non-derivative financial liabilities as measured at
amortised cost.
The Group has no financial assets nor liabilities classified as held for
trading or held to maturity.
iii. Derecognition
Financial assets are derecognised when the contractual rights to receive
cash flows have expired and where substantially all the risks and
rewards of ownership have been transferred. Where contractual cash flows
are significantly modified (e.g. through the broker-led Choices
programme) the original financial asset is derecognised with a new
financial asset recognised for the modified cash flows.
Financial liabilities are derecognised only when the obligation is
discharged, cancelled or has expired.
iv. Offsetting
Financial assets and financial liabilities are offset and the net amount
presented in the statement of financial position when, and only when,
the Group currently has a legally enforceable right to offset the
amounts and it intends either to settle them on a net basis or to
realise the asset and settle the liability simultaneously in accordance
with the requirements of IAS 32.
The Group's derivatives are covered by industry standard master netting
agreements. Master netting agreements create a right of set-off that
becomes enforceable only following a specified event of default or in
other circumstances not expected to arise in the normal course of
business. These arrangements do not qualify for offsetting under IAS 32
and as such the Group reports derivatives on a gross basis.
Collateral in respect of derivatives is subject to the standard industry
terms of International Swaps and Derivatives Association ('ISDA') Credit
Support Annex. This means that the cash received or given as collateral
can be pledged or used during the term of the transaction but must be
returned on maturity of the transaction. The terms also give each
counterparty the right to terminate the related transactions upon the
counterparty's failure to post collateral. Collateral paid or received
does not qualify for offsetting under IAS 32, and is recognised in loans
and advances to credit institutions and amounts owed to credit
institutions respectively.
Income and expenses are presented on a net basis only when permitted
under IFRS, or for gains and losses arising from a group of similar
transactions.
v. Amortised cost measurement
The amortised cost of a financial asset or financial liability is the
amount at which the financial asset or financial liability is measured
at initial recognition, plus or minus the cumulative amortisation using
the EIR method of any difference between the initial amount recognised
and the maturity amount, minus any reduction for impairment.
vi. Fair value measurement
Fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants at the measurement date in the principal or, in its absence,
the most advantageous market to which the Group has access at that date.
When available, the Group measures the fair value of an instrument using
the quoted price in an active market for that instrument. A market is
regarded as active if transactions for the asset or liability take place
with sufficient frequency and volume to provide pricing information on
an ongoing basis. The Group measures the fair value of its investment
securities and PSBs using quoted market prices.
If there is no quoted price in an active market, then the Group uses
valuation techniques that maximise the use of relevant observable inputs
and minimise the use of unobservable inputs. The chosen valuation
technique is system generated and calculates fair value based on known
cash flow dates and interest rates and expected future interest rates
extrapolated from an input zero coupon 24 point yield curve.
The Group uses LIBOR curves to value its derivatives, however, using
overnight index swap ('OIS') curves would not materially change their
value. The fair value of the Group's derivative financial instruments
incorporates credit valuation adjustments ('CVA') and debit valuation
adjustments ('DVA'). The DVA and CVA take into account the respective
credit ratings of the Bank and counterparty and whether the derivative
is collateralised or not. In considering which similar instruments to
use, management takes into account the sensitivity of the instrument to
changes in market rates and the credit quality of the instrument.
Interest rate derivatives are valued using discounted cash flow models
and observable market data and will be sensitive to benchmark interest
rate curves.
vii. Identification and measurement of impairment
The Group regularly assesses its financial assets valued at amortised
cost for impairment. During the reporting period, the main category
within the scope was loans and advances to customers.
The Group individually assesses for impairment loans over GBP0.5m which
are more than three months in arrears, where LPA receivers are appointed,
the property is taken in possession or there are any other events that
suggest a high probability of credit loss. Loans are considered at a
connection level, i.e. including all loans belonging to and connected to
the customer.
The Group estimates cash flows from these loans, including expected
interest and principal payments, rental or sale proceeds, selling and
other costs. The Group obtains up-to-date independent valuations for
properties put up for sale.
The Group ensures that security valuations are reviewed on an ongoing
basis for appropriateness, with ongoing annual indexing of commercial
properties and residential properties indexed against monthly House
Price Index ('HPI') data. Where the Group identifies that a published
index is not representative, a formal review is carried out by the
Group's real estate function to assess valuations appropriately. The
Group's real estate function ensures that newly underwritten lending
cases are written to appropriate valuations, with assessment being
carried out by appointed, qualified chartered surveyors, accredited by
the Royal Institute of Chartered Surveyors. The Group has ensured that
the real estate function is placed within the Group's assurance team and
is therefore independent from all credit making decisions.
If the present value of estimated future cash flows discounted at the
original EIR is less than the carrying value of the loan, a specific
provision is recognised for the difference. Such loans are classified as
impaired. If the present value of the estimated future cash flows
exceeds the carrying value no specific provision is recognised.
All loans which have not been individually assessed are subsequently
assessed for impairment collectively with each loan being assigned a one
year probability of default ('PD') and a loss given default ('LGD')
generally consistent with the requirements of the internal ratings based
('IRB') approach, leading to the expected loss ('EL'). The provision is
the sum of all ELs. The calculation uses indexed valuations from ONS
statistics applied at a postcode level. All provisions on loans greater
than three months in arrears are treated as a specific provision as they
are considered to be impaired. Loans less than three months in arrears
are assigned a collective provision.
Different PDs are used for BTL/SME mortgages, Residential mortgages and
unsecured loans. Interest-only mortgages, which are predominantly within
the BTL/SME segment, are not differentiated further from capital
repayment mortgages. As PDs are generated from historic portfolio
performance using a mix of interest-only and repayment loans, they
capture the impact of interest only mortgages as long as the mix remains
similar.
The Group has been contacting owner-occupied residential customers with
upcoming interest-only loan maturities and tracking responses and
outcomes through specific campaigns since 2014. There is no provision
for the non-repayment risk of these loans.
Second charge mortgages are considered separately to first charge
residential mortgages in that separate PDs are calculated and used in
loss calculations based on previous experience of losses on second
charge loans. The LGD calculation on second charge mortgages considers
the fact that the holder of the first charge on collateral has first
claim on the proceeds of a sale.
Incurred but not reported losses ('IBNR'), where a loss trigger has
occurred but the borrower has not yet missed a payment, are captured
through the Group's collective provisioning process. PD rates are
calculated for loans that are not in arrears based on historic loss data
and a provision value is calculated for these accounts. The calculation
of PD rates incorporates assumptions for emergence periods ('EP'), cure
rates and forbearance. The Group conducts detailed analysis to calculate
the time taken for a customer to fall into arrears post a loss event
occurring (i.e. loss of employment). This EP is then considered within a
wider observation period utilised to model the time taken post loss
event for the customer to reach a default state.
Loans and the related provision are written off when the underlying
security is sold or an unsecured loan customer has not paid for 12
months. Subsequent recoveries of amounts previously written off are
taken through profit or loss.
The Group classifies a loan as forborne at the point a concession is
granted based on the deteriorated financial status of the borrower.
Accounts are classified as forborne only for the period of time which
the loan is known to be, or may still be, in financial difficulty. When
the borrower is no longer experiencing financial difficulties the loan
will revert to standard terms. If the forbearance eliminates the arrears,
the loan is no longer considered past due.
None of the currently used forbearance measures modify the overall cash
flows to an extent that requires derecognition of the existing and
recognition of a new loan under IAS 39.
Loans that have ever had forbearance applied are assigned a higher PD in
the collective provision calculation. Forborne accounts are not treated
differently in relation to impairments in any other way.
viii. Designation at fair value through the profit or loss account
The Group has not irrevocably designated any financial assets or
financial liabilities at FVTPL during the current and previous year.
n) Loans and receivables
Loans and receivables are predominantly mortgage loans and advances to
customers with fixed or determinable payments that are not quoted in an
active market and that the Group does not intend to sell in the near
term. They are initially recorded at fair value plus any directly
attributable transaction costs and are subsequently measured at
amortised cost using the EIR method, less impairment losses. Where
exposures are hedged by derivatives, designated and qualifying as fair
value hedges, the fair value adjustment for the hedged risk to the
carrying value of the hedged loans and advances is reported in fair
value adjustments for hedged assets.
Loans and advances over which the Group transfers its rights to the
collateral thereon to the Bank of England under the Funding for Lending
('FLS') and Term Funding Scheme ('TFS') are not derecognised from the
statement of financial position, as the Group retains substantially all
the risks and rewards of ownership, including all cash flows arising
from the loans and advances and exposure to credit risk. The Group
accounts for TFS and FLS under IAS 39 Financial Instruments.
o) Investment securities
Investment securities comprise securities held for liquidity purposes
(UK treasury bills and supranational bonds in the nature of investment
securities). These assets are non -derivatives that are designated as
AFS. These are held at fair value with movements being taken to other
comprehensive income and accumulate in the AFS reserve within equity,
except for impairment losses which are taken to profit or loss. When the
instrument is sold, the gain or loss accumulated in equity is
reclassified to profit or loss.
The treasury bills that the Group borrows against the transferred assets
under the FLS are not recognised in the statement of financial position.
p) Deposits, debt securities issued and subordinated liabilities
Deposits, debt securities issued and subordinated liabilities are the
Group's sources of debt funding. They comprise deposits from retail
customers and credit institutions, including collateralised loan
advances from the Bank of England under the TFS, issued debt securities
and subordinated liabilities. Subordinated liabilities include the
Sterling PSBs where the terms allow no discretion over the payment of
interest. These financial liabilities are initially measured at fair
value less direct transaction costs, and subsequently held at amortised
cost using the EIR method.
Cash received under the TFS is recorded in deposits from credit
institutions. Interest is accrued over the life of the agreements on an
EIR basis.
The Group classifies certain financial instruments as equity where they
meet the following conditions:
- the financial instrument includes no contractual obligation to
deliver cash or another financial asset on potentially unfavourable
conditions;
- the financial instrument is a non-derivative that includes no
contractual obligation for the issuer to deliver a variable number of
its own equity instruments; or
- the financial instrument is a derivative that will be settled
only by the issuer exchanging a fixed amount of cash or another
financial asset for a fixed number of its own equity instruments.
Equity financial instruments comprise own shares, equity PSBs and AT1
securities. Accordingly, the coupon paid on the equity PSBs and AT1
securities, and related tax effects, are recognised directly in retained
earnings when paid. See note 35 for additional details.
q) Sale and repurchase agreements
Financial assets sold subject to repurchase agreements ('repo') are
retained in the financial statements if they fail derecognition criteria
of IAS 39 described in paragraph m(iii) above. The financial assets that
are retained in the financial statements are reflected as loans or
investment securities and the counterparty liability is included in
amounts owed to depositors, credit institutions or other customers.
Financial assets purchased under agreements to resell at a
pre-determined price where the transaction is financing in nature
('reverse repo') are accounted for as loans and receivables. The
difference between the sale and repurchase price is treated as interest
and accrued over the lives of agreements using the EIR method.
r) Derivative financial instruments and hedge accounting
The Group uses derivative financial instruments (interest rate swaps)
for the purpose of reducing fair value interest rate risk to hedge its
exposure to the interest rate risk arising from financing and investment
activities. In accordance with its treasury policy, the Group does not
hold or issue derivative financial instruments for trading.
Derivative financial instruments are recognised at their fair value with
changes in their fair value taken to profit or loss. Fair values are
calculated by discounting cash flows at the prevailing interest rates.
All derivatives are carried as assets when their fair value is positive
and as liabilities when their fair value is negative. Derivatives
covered by master netting agreements are settled and therefore
recognised on a net basis.
In accordance with IAS 39, the Group adopts hedge accounting where the
criteria specified in IAS 39 (EU endorsed) are met. A hedged item is
defined as a recognised asset or liability which exposes the entity to
risk of changes in fair value or future cash flows, and is designated as
being hedged. The Group uses fair value hedge accounting for a portfolio
hedge of interest rate risk (IAS39 - AG 114). Portfolio hedge accounting
allows for hedge effectiveness testing and accounting over an entire
portfolio of derivatives.
Where there is an effective hedge relationship for fair value hedges,
the Group recognises the change in fair value of each hedged item in
profit or loss with the cumulative movement in their value being shown
separately in the statement of financial position as 'Fair value
adjustments on hedged assets and liabilities'. The fair value changes of
both the derivative and the hedge substantially offset each other to
reduce profit volatility. To qualify for hedge accounting at inception,
the hedge relationship is clearly documented and the derivative must be
expected to be highly effective in offsetting the hedged risk. In
addition, effectiveness must be tested throughout the life of the hedge
relationship.
The Group has derivatives in place against the pipeline, with loans
originating in subsequent months. The derivative is included within
hedge accounting once loans have originated. Fair value movements prior
to loans originating, when the derivative is against the pipeline, are
recognised in full in the period in profit or loss. These are
subsequently unwound over the remaining life of the derivative on a
straight-line basis from the period the derivative is hedge accounted
for against originated loans.
The Group discontinues hedge accounting when the derivative ceases
through expiry, when the derivative is cancelled or the underlying
hedged item matures, is sold or is repaid.
If a derivative is cancelled, it is derecognised from the statement of
financial position. If a derivative no longer meets the criteria for
hedge accounting or is cancelled whilst still effective, the fair value
adjustment relating to the hedged assets or liabilities within the hedge
relationship prior to the derivative becoming ineffective or being
cancelled remains on the statement of financial position and is
amortised over the remaining life of the hedged assets or liabilities.
The rate of amortisation over the remaining life is in-line with the
income or cost generated from the hedged assets or liabilities.
s) Debit and credit valuation adjustments
The DVA and CVA are included in the fair value of derivative financial
instruments. The DVA is based on the expected loss a counterparty faces
due to the risk of the Group's default. The CVA reflects the Group's
risk of the counterparty's default.
The methodology is based on a standard calculation, taking into account:
- the one year PD, updated on a regular basis;
- the expected exposure at default;
- the expected LGD; and
- the average maturity of the swaps.
t) Provisions and contingent liabilities
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
the amount can be estimated reliably.
Contingent liabilities are possible obligations arising from past events,
whose existence will be confirmed only by uncertain future events, or
present obligations arising from past events which are either not
probable or the amount of the obligation cannot be reliably measured.
Contingent liabilities are not recognised but disclosed unless their
probability is remote.
u) Employee benefits - defined contribution scheme
Obligations for contributions to defined contribution pension
arrangements are recognised as an expense in profit or loss as incurred.
v) Share-based payments
In accordance with IFRS 2 Share-based payments, options and awards
granted to employees over the Bank's shares under the Group's
share-based incentive schemes are measured at fair value at grant and
are charged on a straight- line basis to profit or loss (with a
corresponding increase in the share- based payment reserve within
equity) over the vesting period in which the employees become
unconditionally entitled to the awards. The cumulative expense within
the share-based payment reserve is reclassified to retained earnings
upon vesting.
The amount recognised as an expense is adjusted to reflect the actual
number of awards for which the related service and non -market vesting
conditions are expected to be met, such that the amount ultimately
recognised as an expense is based on the number of awards that do meet
the related conditions at the vesting date. The amount recognised as an
expense for awards subject to market conditions is based on the
proportion that is expected to meet the condition as assessed at the
grant date. No adjustment is made for the actual proportion that meets
the market condition at vesting. Share-based payments that vest on grant
are immediately expensed in full with a corresponding increase in
equity.
The grant date fair value of a nil price option over the Bank's shares
which vests at grant or which carries the right to dividends or dividend
equivalents during the vesting period (IPO share awards) is the share
price at the grant date. The grant date fair value of awards of the
Bank's shares that do not carry automatic rights to dividends or
dividend equivalents (the Deferred Share Bonus Plan ('DSBP')) is based
on the Bank's share price at the grant date adjusted for the impact of
the expected dividend yield. The fair value at grant date of awards made
under the Share Save Schemes is determined using a Black-Scholes Option
model.
The grant date fair value of awards that are subject to non-market
conditions and which do not carry automatic rights to dividends or
dividend equivalents (the earnings per share ('EPS') element of the
Performance Share Plan ('PSP')) is based on the share price at the grant
date adjusted for the impact of the expected dividend yield. An
assessment is made at each reporting date on the proportion of the
awards expected to meet the related non-market vesting conditions.
The fair value of an award that is subject to market conditions (the
relative share price element of the PSP) is determined at grant date
using a Monte Carlo model. No adjustment is made for the actual
proportion that meets the market condition at vesting.
Where the allowable cost of share-based awards for tax purposes is
greater than the cost determined in accordance with IFRS 2, the tax
effect of the excess is taken to the share-based payment reserve within
equity. The tax effect is reclassified to retained earnings upon
vesting.
Employer's national insurance is charged to profit or loss at the share
price at the reporting date on the same vesting schedule as the
underlying awards.
w) Exceptional items
Exceptional items are material income or expense items which are
non-recurring in nature. Exceptional items are reported separately in
profit or loss to highlight the underlying performance of the Group and
make it more relevant for comparison with other periods. There were no
exceptional items during 2017.
In 2016, the Group's exceptional items comprised the gain on disposal of
the entire economic interest in Rochester Financing No.1 plc ('Rochester
1') securitisation vehicle and a loss in respect of accelerated
amortisation of fair value adjustments on hedged assets relating to
prior years. Further details can be found in note 10.
x) Securitisation
The Group assesses whether it controls special purpose entities ('SPE')
and the requirement to consolidate them under the criteria of IFRS 10.
The criteria include the power to direct relevant activities, exposure
or rights to variable returns and the ability to use its power to affect
the amount of these returns.
The Group had no economic interest in SPEs at the 2017 and 2016
reporting dates.
y) Adoption of new standards
In 2017 the Group adopted amendments to existing standards that were
endorsed for adoption by the EU and mandatory for annual reporting
periods beginning on or after 1 January 2017.
In adopting the amendments to IAS 7: Statement of cash flows, a
reconciliation has been added to the Group's subordinated liabilities
(note 32) to enable the reconciliation of amounts included within
financing activities in the statement of cash flows.
There was no impact on these financial statements or accounting policies
applied in their preparation upon adopting the amendments to IAS 12
Income taxes in relation to the recognition of deferred tax assets for
unrealised losses.
Included below are standards and amendments which are being considered
for future reporting periods which have not been applied in preparing
these financial statements.
- IFRS 9 Financial Instruments, effective from 1 January 2018
i. Background
In July 2014 the International Accounting Standards Board ('IASB')
issued the finalised version of IFRS 9 Financial Instruments:
Recognition and Measurement, replacing the earlier accounting standard
for financial instruments IAS 39, responding to concerns raised during
the financial crisis about the timeliness of impairment recognition.
The new standard has three key areas of change relating to:
- Classification and measurement
- Hedge accounting
- Impairment
The recognition and measurement of impairment is intended to be more
forward looking than under IAS 39 and therefore the resulting impairment
charge may be more volatile. The day one adoption will drive a higher
Group provision requirement which is detailed in section (f) below.
ii. Classification and measurement
IFRS 9 requires classification of financial assets into one of three
measurement categories, based on the Group's business model and the
contractual cash flow characteristics of the financial instruments
including:
- Fair value through other comprehensive income ('FVOCI')
- Fair value through profit and loss, or
- Amortised cost.
The Group completed its assessment of solely payment of principal and
interest ('SPPI') compliance that reviews the cash flow characteristics
of financial assets to establish which business model they should be
held under.
Following the SPPI compliance review, the Group completed its
classification and measurement review of financial assets and
liabilities with no material impact to the current classification of
financial asset and liabilities. Current loans to customers that are
classified as loans and receivables and measured at amortised cost under
IAS 39 will continue to be measured at amortised cost under IFRS 9.
Securities held for liquidity purposes that are classified as AFS and
designated as FVOCI under IAS 39 will continue to be measured as FVOCI
under IFRS 9.
Under IFRS 9, the provision of forbearance measures is considered a
modification event. Forbearance measures reflect a change in credit risk
on existing contracts where the contractual cash flows are not wholly
different. Forbearance measures therefore do not give rise to a
derecognition event.
The IASB issued a modification to IFRS 9 in October 2017 dealing with
negative compensation for prepayments that will not affect the Group.
iii. Hedge accounting
The IASB is currently finalising its project to address macro hedge
accounting strategies. Until this is finalised IFRS 9 allows firms to
continue to apply IAS 39 fair value hedge accounting.
The Group has elected to continue with the IAS 39 hedge accounting
rules. The Group will implement the revised hedge accounting disclosure
requirements by the related amendments to IFRS 7 financial instruments
disclosure requirements from 2018.
iv. Impairment (Expected credit loss, 'ECL')
IFRS 9 replaces the IAS 39 'incurred loss' impairment recognition
framework with a three stage ECL approach. The IFRS 9 approach results
in an earlier recognition of potential future losses.
The three impairment stages are as follows:
- Stage 1 - entities are required to recognise a 12 month ECL
allowance on initial recognition.
- Stage 2 - a lifetime loss allowance is held for assets where a
significant increase in credit risk has been identified since initial
recognition. The assessment of whether credit risk has increased
significantly since initial recognition is performed for each reporting
period for the life of the loan.
- Stage 3 - requires objective evidence that an asset is credit
impaired at which point a lifetime ECL allowance is required.
Key accounting judgements and estimates
The IFRS 9 accounting standard requires significant levels of judgement
and estimates to be made by the Group, upon adoption which are discussed
below:
Measurement of ECL
The assessment of credit risk and the estimation of ECL must be unbiased
and probability weighted. ECL is measured on either a 12 month or
lifetime basis depending on whether a significant increase in credit
risk has occurred since initial recognition or where an account meets
the Group's definition of default.
The expected credit loss calculation is a product of an individual loans
PD, EAD and LGD discounted at the effective interest rate.
For stage 2 and 3, the Group applies lifetime PDs but uses 12 month PDs
for stage 1. The ECL drivers of PD, EAD and LGD are modelled at an
account level. The assessment of whether a significant increase in
credit risk has occurred is based on the lifetime PD estimate.
Key inputs into ECL calculations
The Group has developed a suite of bespoke PD, LGD and EAD models using
segmentation based on the underlying characteristics of the Group's loan
portfolios.
PD models - The Group developed a number of PD models to assess the
likelihood of default event occurring within the next 12 months,
utilising internal and external credit bureau information. Consequently
the Group also computes a lifetime PD estimate for each loan exposure
once recognised, underpinned by the 12 month PD estimate.
LGD model - The Group has developed a single LGD model, which includes a
number of judgement and estimate inputs including propensity to go to
possession given default ('PPD'), forced sale discount ('FSD'), time to
sale ('TTS') and sale cost estimates.
EAD model - The Group has developed a single EAD model to cover all
applicable exposures.
Significant increase in credit risk ('SICR') (movement to stage 2)
The Group's transfer criteria determines what constitutes a significant
increase in credit risk, which results in an exposure being moved from
stage 1 to stage 2.
At the point of recognition a loan is assigned a lifetime PD estimate,
for each monthly reporting date thereafter an updated lifetime PD
estimate is computed for the life of the loan. The Group's transfer
criteria analyses relative changes in lifetime PD versus the origination
lifetime PD, where if prescribed thresholds are met an account will be
transferred from stage 1 to stage 2.
The Group's risk function constantly monitors the ongoing
appropriateness of the transfer criteria, where any proposed amendments
will be reviewed and approved by the Group's management committees and
the Board Risk and Audit Committees at least semi-annually or more
frequently if required.
The IFRS 9 standard includes a rebuttable presumption that if an account
is 30 days past due it has experienced a significant increase in credit
risk. The Group considers 30 days past due to be an appropriate back
stop measure and therefore has not rebutted this presumption.
A borrower will move back into stage 1, where the SICR definition is no
longer satisfied.
Definition of default (movement to stage 3)
The Group has identified a number of quantitative and qualitative
criteria to determine whether an account meets the definition of default
and therefore moves to stage 3.
The criteria currently includes:
- The rebuttable assumption that 90 days past due is an indicator
of default. The Group has not rebutted this assumption and therefore
deems 90 days past due as an indicator of default. This also ensures
alignment between the Group's Internal Ratings Based Models and the
Basel/Regulatory definition of default.
- The Group has also deemed it appropriate to classify accounts
that have moved into forbearance or repossession as meeting the
definition of default.
A borrower will move out of stage 3 when their credit risk improves such
that they roll back to zero days past due and remain there for 12
consecutive months. The borrower will move to stage 1 or stage 2
dependent on whether the SICR applies.
Forward looking macroeconomic scenarios
The IFRS 9 standard requires firms to consider the risk of default and
impairment loss taking into account expectations of economic changes
that are reasonable.
The Group has developed a bespoke macroeconomic model to determine the
most significant factors which may influence the likelihood of an
exposure defaulting in the future. At present the most significant
macroeconomic factors relate to (1) HPI (2) unemployment and (3) the
Bank of England base rate.
The Group has consequently derived an approach for factoring probability
weighted macroeconomic forecasts into ECL calculations, adjusting PD and
LGD estimates. An accounts lifetime PD is impacted by the probability
weighted macroeconomic scenario and therefore impacts whether an account
meets the Group's significant increase in credit risk transfer criteria
moving the exposure between stage 1 and stage 2. Finally the
macroeconomic scenarios feed directly into the ECL calculation, as the
adjusted PD, lifetime PD and LGD estimates are used within the
individual account ECL allowance calculations.
The Group currently does not have an in-house economics function and
therefore sources economic forecasts from an appropriately qualified
third party. The Group will consider a minimum of three probability
weighted scenarios, including base, upside and downside scenarios.
However, the Group will constantly monitor the ongoing appropriateness
of its approach referencing industry best practise.
The base case is also utilised within the Group's impairment forecasting
process which in turn feeds the wider business planning processes. This
economic forecast is also used within analysis to set the Group's credit
risk appetite thresholds and limits.
Expected life
The IFRS 9 standard requires lifetime expected credit losses to be
measured over the expected life. Currently the Group considers the
loan's behavioural life is equal to the full mortgage term. This
approach will continue to be monitored and enhanced if and when deemed
appropriate.
Purchase or originated credit impaired ('POCI')
Under IFRS 9, acquired loans that meet a firms definition of default (90
days past due or forbearance) at acquisition are treated as a POCI
asset. These assets will attract a lifetime ECL allowance over the full
term of the loan, even when the loan asset does not meet the definition
of default post acquisition.
v. Implementation and programme governance
The Group delivered the requirements of IFRS 9 from 1 January 2018 after
completing the successful parallel testing phase of its IFRS 9 programme
throughout the full year to 31 December 2017. The IFRS 9 programme
included senior representatives from the finance and risk functions,
overseen by an IFRS 9 Executive Steering Committee which oversaw the
Group's implementation of the requirements ensuring compliance to the
standard.
The Group's Model Review Committee continues to oversee the ongoing
performance of the underlying IFRS 9 suite of models. During the period,
a number of independent model validation reports were received from
external third parties, covering the full spectrum of PD, lifetime PD,
LGD, EAD and macroeconomic models.
Existing committee structures will be utilised to oversee IFRS 9
impairment performance on an ongoing basis, including the Group's Credit
Committee which receives monthly impairment performance reports from the
risk function and the Group's Assets and Liabilities Committee ('ALCO')
which oversees and approves the use of macroeconomic scenarios.
The Board Risk and Audit Committees received regular updates from the
risk function and IFRS 9 programmes, ensuring Board level oversight,
review and challenge and ultimate approval of all key judgements and
estimates which underpin IFRS 9 impairment calculations. Going forward
the Risk and Audit Committees will continue to oversee the ongoing
implementation of IFRS 9.
The Group's external auditors have undertaken audit procedures covering
classification and measurement and expected credit loss calculations.
vi. Impact of transition to IFRS 9
Adoption of IFRS 9 will result in c. GBP4m (c.+19%) increase in total
Group impairment provision balances, reflecting the strength of security
underpinning the loan book, the ongoing strong credit profile
performance (driven by conservative LTV and low arrears levels) and the
incurred loss protection held against acquired portfolio assets.
Incurred loss protection is the simulated loss estimate of the portfolio
at the point of acquisition and is offset against modelled future cash
flows to derive the EIR for the book. The incurred loss protection is
therefore recognised over the life of the book through interest income.
Incurred loss remaining is the protection at acquisition reduced by the
cumulative losses observed since acquisition.
The only transitional accounting adjustments required by the Group on
the adoption of IFRS 9 will be in the area of impairment. The initial
impact of IFRS 9 will be shown in the opening reserves.
In terms of capital, the Group has advised the PRA that it is adopting
the transitional rules and will disclose its capital on a transitional
and end state in its annual accounts and Pillar 3 report from 2018
onwards. The end state capital impact of adopting IFRS 9 based on the
2017 year end position would be a 0.09% decrease in fully loaded Common
Equity Tier 1 ('CET 1') capital. The transitional period is from 2018 to
2022.
The Group continues to track the predictability of the models and make
changes where this falls below an acceptable threshold, whilst assessing
the ongoing appropriateness of all key judgement and estimate areas
ahead of the full reporting of IFRS 9 impacts later in 2018.
The Group's strategy is to continue to be a specialist lender of secured
loan products at sensible loan to value and development values. As such,
collateral valuations are a key driver of movements in the Group's
impairment allowance requirements, where a 10% reduction in house prices
would result in an approximate GBP9m (36%) increase in expected
impairment provision balances which are not individually assessed.
The Group remains cautious around the uncertainty that remains with
respect to the volatility which the IFRS 9 approach may bring in
response to changes in economic expectations and the speed of
recognition of loss in a downturn scenario.
The transition to the IFRS 9 approach has resulted in the development
and implementation of new processes and controls across both the risk
and finance functions. The Group is well prepared for the wider changes
required for other key risk management processes, including the
development of detailed management reporting (including Pillar 3
reporting and FINREP), development of enhanced stress testing
capabilities to support the setting of credit and solvency risk appetite
and the Group's ICAAP.
Capital planning and performance
The impact of IFRS 9 has been included within the Group's capital and
annual business planning processes. No changes were made to the Group's
strategic plan and the Group does not expect a change to the go forward
business model.
- IFRS 15 Revenue from Contracts with Customers, effective from 1
January 2018, replaces IAS 11 Construction contracts, IAS 18 Revenue and
several related interpretations. IFRS 15 introduces a single framework
for revenue recognition based on a five-step model to determine when to
recognise revenue and at what amount. The five steps of the model are:
identify the contract; identify performance obligations; determine the
transaction price; allocate the transaction price; and recognise
revenue. Depending on whether certain criteria are met, revenue is
recognised either over time, in a manner that depicts the entity's
performance, or at a point in time, when control of the goods or
services is transferred to the customer. The new standard is not
expected to have a significant impact on the financial statements.
- IFRS 16 Leases, effective from 1 January 2019, replaces IAS 17
Leases, IFRIC 4 Determining Whether an Arrangement Contains a Lease and
two related SIC interpretations. The new standard requires lessees to
recognise right-of-use assets and lease liabilities for most leases over
12 months long. Lessor accounting has largely remained unchanged.
Adoption of IFRS 16 in respect of rented properties is not expected to
have a material effect on the financial statements.
2. Judgements in applying accounting policies and critical accounting
estimates
In preparing these financial statements, the Group has made judgements,
estimates and assumptions which affect the reported amounts within the
current and next financial year. Actual results may differ from these
estimates.
Estimates and judgements are regularly reviewed based on past experience,
expectations of future events and other factors. The key areas where
estimates and judgements are made are as follows:
i. Loan book impairments: This section provides details of the critical
elements of judgement which underpin loan impairment calculations. Less
significant judgements are not disclosed.
Individual impairment
Assessments for individually significant loans involve significant
judgement to be made by management in relation to estimating future cash
flows, including the cost of obtaining and selling collateral, the
likely sale proceeds and any rental income prior to sale. The most
significant area of judgement is the likely sale proceeds. The
individually assessed provisioning process is therefore underpinned by
updated external valuations being obtained once a case is adopted by the
collections team. All assets which do not have an individually assessed
provision are assessed on a collective basis.
Collective impairment
Collective provision assessments are also subject to estimation
uncertainty, underpinned by a number of judgements and estimates being
made by management which are utilised within impairment calculations.
Key areas of judgement utilised within collective provisioning
calculations include PD, the LGD and the EP. Provisions on loans three
months plus in arrears are treated as specific provisions. Provisions on
loans less than three months in arrears are treated as collective
provisions.
Probability of default
To compute PD rates the Group analyses how accounts transition from
up-to-date and varying arrears severity positions to the default state
which is reached once an account is greater than six months in arrears.
Embedded within the PD calculation is a computed cure rate, which allows
the Group to model the probability of an account curing from each state.
A 10% relative worsening of the PD rate would increase total provisions
by GBP0.4m as at 31 December 2017 (2016: GBP0.3m). The increase year on
year is primarily driven by the increasing asset base.
Loss given default
The LGD model simulates the likely loss once a default event has
occurred. The key components of the LGD calculation relate to the
valuation of the underlying collateral, forced sale discount rates post
repossession and the costs to sell (variable and fixed). Therefore the
LGD is sensitive to the application of the HPI. As at 31 December 2017,
a 10% fall in house prices would result in an incremental GBP5.0m (2016:
GBP4.7m) of provision being required. The increase year on year is
primarily driven by the increasing asset base.
Emergence period
The current collective provision methodology does not utilise an
explicit EP within IBNR calculations, however the observation period
which is utilised within PD calculations includes an implied EP. During
2016, the Group conducted a detailed analysis to understand the time it
takes for a loss event (e.g. becoming unemployed) to be identified (i.e.
missed payment) using external and internal data sources. The outcome of
this review resulted in the observation period used within PD
calculations elongating due to a lengthening of the implied EP.
ii. Loan book acquisition accounting and income recognition: Acquired
loan books are initially recognised at fair value. Significant judgement
is exercised in calculating their EIR using cash flow models which
include assumptions on the likely macroeconomic environment, including
HPI, unemployment levels and interest rates, as well as loan level and
portfolio attributes and history used to derive prepayment rates, the
probability and timing of defaults and the amount of incurred losses.
The EIR on loan books purchased at significant discounts or premiums is
particularly sensitive to the prepayment ('CPR') and default ('CDR')
rates derived, as the purchase discount or premium is recognised over
the expected life of the loan book through the EIR. New defaults are
modelled at zero loss (as losses will be recognised in profit or loss as
impairment losses) and therefore have the same impact on the EIR as
prepayments.
Different assumptions to derive the CPR and CDR in the cash flow models
at acquisition will impact EIR rates. A 10% increase/ decrease in the
EIR% for each of the Bank's acquired mortgage books would
increase/decrease interest income by c. GBP3.5m in 2017 (2016: c.
GBP4.8m).
Incurred losses at acquisition are calculated using the Group's
collective provision model (see (i) Loan book impairments above for
further details).
The EIR calculated at acquisition is not changed for subsequent
variances in actual to expected cash flows. The Group monitors the
actual cash flows for each acquired book and where they diverge
significantly from expectation, the future cash flows are reset (an
'AG8' adjustment). In assessing whether to adjust future cash flows on
an acquired portfolio, the Group considers the cash variance on an
absolute and percentage basis. The Group also considers the total
variance across all acquired portfolios and the economic outlook. Where
cash flows for an acquired portfolio are reset, they are discounted at
the EIR to derive a new carrying value, with changes taken to profit or
loss as interest income. The Group recognised a loss of GBP0.3m in 2017
as a result of resetting cash flows on acquired mortgage books (2016:
gain of GBP1.4m).
iii. Effective interest rate: A number of assumptions are made when
calculating the EIR for newly originated loan assets. These include
their expected lives, likely redemption profiles and the anticipated
level of any early redemption charges.
Certain mortgage products offered by the Group include significant
directly attributable net fee income, in particular Buy-to-Let, and/or
revert to the standard variable rate ('SVR') after an initial discounted
or fixed period. Judgement is used in assessing the expected rate of
prepayment during the discounted or fixed period of these mortgages and
the expected life of those that prepay. The Group uses historical
experience in its assessment. Judgement is also used in assessing
whether and for how long mortgages that reach the end of the product
term stay on SVR. The most significant area of judgement is the period
spent on SVR.
A 10% increase/decrease in the rate of prepayments during the product
term for 2017 new originations would increase/ decrease interest income
for 2017 by c. GBP0.1m (2016: c. GBP0.1m). A three month shorter/longer
life for those prepaying mortgages would increase/decrease interest
income in 2017 by c. GBP0.4/GBP0.3m (2016: c. GBP0.4/GBP0.3m).
The Group prudently assumes no period on SVR before the borrower
refinances on to a new product or redeems as it waits for a stable trend
to emerge following the automation of the broker-led Choice programme in
late 2016. Since then, there has been a significant and consistent
decrease in the number of borrowers remaining on SVR for more than three
months, to around 20%.
The impact of a three month longer expected life on 2017 new origination,
that is expected to reach the end of the discounted or fixed period,
would be to recognise an additional GBP1.9m (2016: GBP0.8m) of interest
income, as the impact of spreading fee income over a longer period is
more than offset by the impact of a higher revert rate for the
additional period.
3. Interest receivable and similar income
Group Group
Year ended Year ended
31-Dec-17 31-Dec-16
GBPm GBPm
At amortised cost:
On BTL/SME mortgages 247.3 208.8
On Residential mortgages 91.8 107.1
On investment securities 0.1 1.2
On other liquid assets 2.0 1.6
At fair value through profit or loss:
Net expense on derivative financial instruments (8.5) (9.2)
332.7 309.5
Included within interest receivable is GBP1.3m (2016: GBP1.3m) in
respect of interest accrued on accounts with an individually assessed
specific provision.
4. Interest payable and similar charges
Group Group
Year ended Year ended
31-Dec-17 31-Dec-16
GBPm GBPm
On retail deposits 86.1 101.8
On Perpetual Subordinated Bonds 0.9 0.9
On subordinated liabilities 0.9 1.2
On wholesale borrowings 3.1 3.2
Net income on derivative financial instruments (3.7) (4.2)
87.3 102.9
5. Fair value gains and losses on financial instruments
Group Group
Year ended Year ended
31-Dec-17 31-Dec-16
GBPm GBPm
Fair value changes in hedged assets (8.7) 3.2
Hedging of assets 10.0 (3.0)
Fair value changes in hedged liabilities 2.9 (0.5)
Hedging of liabilities (3.1) 0.3
Ineffective portion of hedges(1) 1.1 -
Amortisation of fair value adjustments on hedged
assets (7.3) (4.9)
Net gain on unmatched swaps - 0.1
Debit and credit valuation adjustment (0.1) (0.1)
(6.3) (4.9)
1. Ineffective portion of hedges was less than GBP0.1m for 2016.
Amortisation of fair value adjustments on hedged assets relates to
hedged assets and liabilities where the hedges were terminated before
maturity and were effective at the point of termination.
The DVA adjustment is calculated on the Group's derivative liabilities
and represents exposure of their holders to the risk of the Group's
default. The CVA reflects the Group's risk of the counterparty's
default.
6. Gain on sales of financial instruments
The Bank routinely buys and sells liquidity assets in order to confirm
the ease with which cash can be realised and the robustness of the
valuations assigned to such assets. During the year, transactions in
liquid assets resulted in a gain of less than GBP0.1m (2016: less than
GBP0.1m).
During 2016, the Group sold GBP10.9m of non-performing loans from its
personal loan portfolio. These loans had a carrying value of GBP1.3m
after provisions of GBP5.6m and prior year write-offs of GBP4.0m. The
loans were sold for cash proceeds of GBP1.9m, creating a GBP0.6m gain on
sale.
7. Administrative expenses
Group Group
Year ended Year ended
31-Dec-17 31-Dec-16
GBPm GBPm
Staff costs 35.9 29.5
Facilities costs 2.4 2.4
Marketing costs 2.7 2.2
Support costs 8.4 6.2
Professional fees 5.0 5.6
Other costs(1) 7.2 5.2
61.6 51.1
1. Other costs mainly consist of irrecoverable VAT expense.
Included in professional fees are amounts paid to the auditors of the
Group, further analysed below:
Group Group
Year ended Year ended
31-Dec-17 31-Dec-16
GBP'000 GBP'000
Audit of the Bank and Group accounts 638 414
Audit of the Group's subsidiary undertakings pursuant
to legislation 178 121
Audit related assurance services 96 96
Tax compliance and advice - 70
Regulatory advice and support 8 36
All other non-audit services 47 48
967 785
Included within the audit of the Bank and Group accounts is GBP165k
(2016: GBPnil) relating to the audit of IFRS 9. Other non-audit services
in 2017 include support for the AT1 securities issuance and treasury
hedge accounting.
Staff numbers and costs
Staff costs comprise the following categories:
Group Group
Year ended Year ended
31-Dec-17 31-Dec-16
GBPm GBPm
Salaries, incentive pay and other benefits 28.9 24.4
Share-based payments 2.4 1.5
Social security costs 3.3 2.5
Other pension costs 1.3 1.1
35.9 29.5
The average number of people employed by the Group (including Executive
Directors) during the year was 813 (2016: 674), analysed below:
Group Group
2017 2016
Operations 442 315
Support functions 371 359
813 674
8. Directors' emoluments and transactions
Bank Bank
Year ended Year ended
31-Dec-17 31-Dec-16
GBP'000 GBP'000
Directors' emoluments(1) 1,912 1,869
Payments in respect of personal pension plans 104 97
Gains made on the exercise of share options(2) 17 -
2,033 1,966
1. Director's emoluments comprise salary costs, NED fees and
other short-term incentive benefits as disclosed in the Annual Report on
Remuneration.
2. Gains made on the exercise of share options relate to the
Sharesave Scheme, further discussed in note 9.
In addition to the total Directors' emoluments above, the Executive
Directors were granted a deferred bonus of GBP346k (2016: GBP335k) in
the form of shares deferred for three years under the DSBP. The DSBP
does not have any further performance conditions attached, however it is
subject to clawback and is forfeited if the Executive Director leaves
prior to vesting unless a good leaver reason applies such as redundancy,
retirement or ill health.
The Executive Directors received a further share award under the PSP
with a grant date face value of GBP895k (2016: GBP700k) using a share
price of GBP4.08 (2016: GBP2.53) (the average mid-market quotation for
the preceding five days before grant). These shares vest in three years
subject to performance conditions discussed in note 9 and the Annual
Report on Remuneration.
There was no compensation for loss of office during either 2017 or 2016.
There were no outstanding loans granted in the ordinary course of
business to Directors and their connected persons as at 31 December 2017
and 2016.
The Annual Report on Remuneration and note 9 Share-based payments
provide further details on Directors' emoluments.
9. Share-based payments
The Group operates the following share-based schemes:
IPO Share Awards
Certain Directors, senior managers and other employees of the Bank
received one-off share awards in the form of nil price options over
shares in the Bank on its admission to the London Stock Exchange in June
2014. A proportion of these awards vested on admission with the
remainder vesting over either a 12, 24 or 48 month period. The cost of
IPO Share Awards based on their fair value at grant date of 170 pence
per share (the IPO offer price) is recognised over the respective
vesting period (adjusted for expected attrition) with awards that vested
on admission being immediately expensed in full. The expense is reported
within administrative expenses in profit or loss and is offset fully by
an additional capital contribution as the awards were granted by OSB
Holdco Limited, the Bank's major shareholder at the time of the IPO.
Sharesave Scheme
The Save As You Earn ('SAYE') or Sharesave Scheme is an all-employee
share option scheme which is open to all UK-based employees. The
Sharesave Scheme allows employees to purchase options by saving a fixed
amount of between GBP5 and GBP500 per month over a period of either
three or five years at the end of which the options, subject to leaver
provisions, are usually exercisable. The Sharesave Scheme has been in
operation since 2014 and is granted annually, with the exercise price
set at a 20% discount of the share price on the date of grant.
Deferred Share Bonus Plan
The DSBP applies to Executive Directors and certain senior managers and
requires 50% of their performance bonuses to be deferred in shares for
three or five years. There are no further performance conditions
attached, but the share awards are subject to clawback provisions. The
DSBP is a share-based award and as such is expensed over its vesting
period. The first DSBP relating to 2014 bonuses was granted in March
2015.
Performance Share Plan
Executive Directors and certain senior managers are also eligible for a
PSP based on performance conditions linked to EPS and total shareholder
return ('TSR') over a three year vesting period. The first award was
issued in March 2015.
The performance conditions applying to PSP awards are based on a
combination of EPS and TSR equally weighted and assessed independently.
For the EPS element, growth targets are linked to the Company's three
year growth plan, measuring growth from the base figure for the prior
year. For the TSR element, OSB share's relative performance is measured
against the FTSE All Share index, excluding investment trusts.
The share-based expense for the year includes a charge in respect of the
remaining IPO awards with future vesting provisions, Sharesave scheme,
the DSBP and PSP. All charges are included in employee expenses within
note 7 Administrative expenses.
The share-based payment expense during the year comprised of the
following:
Group Group
Year ended Year ended
31-Dec-17 31-Dec-16
GBPm GBPm
IPO share award expensed in the year 0.3 0.4
Sharesave Scheme 0.2 0.1
Deferred Share Bonus Plan 0.9 0.5
Performance Share Plan 1.0 0.5
2.4 1.5
Movements in the number of share awards and their weighted average
exercise prices are presented below:
Deferred
IPO share Share Bonus Performance
awards Sharesave Scheme Plan Share Plan
Weighted
average
exercise
Number Number price, GBP Number Number
At 1 January
2017 652,198 818,253 1.78 758,381 1,080,991
Granted - 336,288 3.15 433,534 510,094
Exercised - (382,597) 1.35 - -
Forfeited - (39,603) 2.43 (5,153) (2,055)
At 31
December
2017 652,198 732,341 2.60 1,186,762 1,589,030
Exercisable
at
At 31 - - - - -
December
2017
Deferred
IPO share Share Bonus Performance
awards Sharesave Scheme Plan Share Plan
Weighted
average
exercise
Number Number price, GBP Number Number
At 1 January
2016 1,237,844 761,927 1.66 301,575 579,157
Granted - 149,675 2.40 456,806 519,757
Exercised (465,855) (2,126) 1.34 - -
Forfeited (119,791) (91,223) 1.83 - (17,923)
At 31
December
2016 652,198 818,253 1.78 758,381 1,080,991
Exercisable
at
At 31 - - - - -
December
2016
For the share-based awards granted during the year, the weighted average
grant date fair value was 383 pence (2016: 251 pence).
There were no IPO share awards exercised during 2017. The weighted
average market price at exercise for IPO share awards exercised during
2016 was 307 pence.
The range of exercise prices and weighted average remaining contractual
life of outstanding awards are as follows:
2017 2016
Weighted Weighted
average average
remaining remaining
contractual contractual
Exercise price Number life (years) Number life (years)
IPO share awards
Nil 652,198 0.4 652,198 1.4
Sharesave Scheme
134-315 pence 732,341 2.1 818,253 1.6
Deferred Share Bonus Plan
Nil 1,186,762 1.4 758,381 1.8
Performance Share Plan
Nil 1,589,030 1.2 1,080,991 1.7
4,160,331 1.3 3,309,823 1.6
The valuation of share awards is based on the following assumptions:
IPO Share Awards
The grant date fair value of the IPO share awards was the issue price of
170 pence as they are in the form of nil price options which carry
rights to dividends during the vesting period. The charge in respect of
awards with future vesting provisions assumed a weighted average
attrition of nil (2016: nil) per annum. This is lower than the overall
expected staff attrition rate as nil attrition was assumed for certain
senior managers who received larger awards.
Sharesave Scheme
The grant date fair values of awards under the Sharesave Scheme were
determined using a Black-Scholes model. This determined the fair value
of options over 1 ordinary share in the 2017 three and five year
Sharesave Scheme as 75 pence and 71 pence respectively (2016: 18 pence
and 20 pence), using the following input assumptions in the valuation
models:
2017 2016 2015 2014
Contractual life, years 3/5 years 3/5 years 3/5 years 3/5 years
Share price at issue, GBP 3.93 3.00 2.84 1.68
Exercise price, GBP 3.15 2.40 2.27 1.34
Expected volatility(1) 17.9% 18.7% 20.0% 20.0%
Attrition rate 11.8% 12.0% 9.6% 10.5%
Dividend yield 4.1% 4.6% 3.6% 3.0%
1. The volatility was based on a benchmark of the FTSE 350
diversified financials as insufficient history was available for the
Bank's shares.
Deferred Share Bonus Plan
The grant date fair value of awards under the DSBP of 361 (2016: 271)
pence per share for three year and 337 pence per share for five year
plans are based on the mid-market share price at the grant date of 404
(2016: 309) pence per share, adjusted for the impact of dividends, as
the awards do not carry automatic rights to dividends. A dividend yield
of 4.1% (2016: 4.6%) was used based on available analyst consensus. The
expense for 2017 assumes an attrition rate of 11.8% (2016: 12.0%).
Performance Share Plan
The grant date fair value of awards under the PSP of 361 (2016: 271)
pence per share is based on the mid-market share price at the grant date
of 404 (2016: 309) pence per share, adjusted for the impact of dividends,
as the awards do not carry automatic rights to dividends. A dividend
yield of 4.1% (2016: 4.6%) was assumed based on available analyst
consensus. The expense for 2017 assumes an attrition rate of 11.8%
(2016: 12.0%).
A vesting rate is incorporated into the EPS element of the PSP, based on
the expectation that the required target growth will be achieved over
the vesting period. A vesting rate is also calculated for the TSR
element of the PSP, based on a Monte Carlo model using historical share
price performance data for the target benchmark FTSE All Share Index
excluding investment trusts and the FTSE 350 Diversified Financials as a
proxy for the Company's shares as insufficient history was available.
10. Exceptional items
The Group had no exceptional items during 2017.
Exceptional items to December 2016 consist of the gain on disposal of
the Group's entire economic interest in Rochester 1 securitisation
vehicle and an exceptional loss of GBP9.8m in respect of accelerated
amortisation of fair value adjustments on hedged assets relating to
legacy back-book long-dated interest rate swap cancellations.
The Rochester 1 sale resulted in derecognition of securitised mortgage
assets from the Group's balance sheet and the deconsolidation of
Rochester 1. This removed a total of GBP239.8m of securitised mortgage
assets and cash reserves in the vehicle and GBP171.6m of debt securities
in issue from the Group's balance sheet.
The Group uses interest rate swaps to hedge fixed rate mortgages and
adopts fair value hedge accounting where the criteria specified in IAS39
(EU endorsed) are met. Under hedge accounting, the change in the fair
value of hedged mortgages for interest rate risk is recognised in profit
or loss, as an offset to fair value movements on the swaps, with the
cumulative movement reflected as fair value adjustments on hedged assets
in the statement of financial position. A number of long-dated legacy
swaps were cancelled in 2012 and 2013 whilst still effective. Following
the cancellations, the fair value adjustment on the legacy hedged
long-term fixed rate mortgages (c. 25 years at origination) remained in
the statement of financial position to be amortised over their remaining
lives. Both the cancelled swaps and hedged mortgages were inherited from
the Kent Reliance Building Society.
During 2016, the Group reviewed the roll-off of the legacy long-dated
fixed rate mortgages. Following this review, the Group accelerated the
amortisation of the associated fair value adjustments in line with the
mortgage asset run-off, due to faster than expected prepayments since
cancellation. The exceptional loss represents the impact of accelerating
the amortisation in prior years from 2012 to 2015, which was not
material in any individual year. It has been presented as an exceptional
item and excluded from 2016 underlying profit before tax to provide an
appropriate measure of the underlying performance of the Group in 2016.
Exceptional items are summarised in the table below:
Group Group
Year ended Year ended
31-Dec-17 31-Dec-16
GBPm GBPm
Gain on disposal of Rochester 1 - 34.7
Amortisation of fair value adjustments for hedged
assets - (9.8)
- 24.9
11. Taxation
Group Group
Year ended Year ended
31-Dec-17 31-Dec-16
GBPm GBPm
Corporation tax (41.5) (42.3)
Deferred taxation 0.7 0.1
Total taxation (40.8) (42.2)
The taxation on the Group's profit before taxation differs from the
theoretical amount that would arise using the weighted average taxation
rate applicable to profits of the Group as follows:
Year ended Year ended
31-Dec-17 31-Dec-16
GBPm GBPm
Profit before taxation 167.7 163.1
Profit multiplied by the weighted average rate of
corporation taxation in the UK during 2017 of 19.25%
(2016: 20.00%) (32.3) (32.6)
Bank surcharge (8.3) (8.6)
Taxation effects of:
Expenses not deductible for taxation purposes (0.2) (0.4)
Adjustments in respect of earlier years (0.4) (0.5)
Tax adjustments in respect of share-based payments 0.3 0.1
Impact of tax losses carried forward 0.2 0.1
Timing differences on capital items (0.1) (0.2)
Other - (0.1)
Total taxation charge (40.8) (42.2)
A reduction in the UK corporation tax rate from 20% to 19% (effective
from 1 April 2017) and a further reduction to 18% (effective from 1
April 2020) were substantively enacted on 26 October 2015. An additional
reduction to 17% (effective 1 April 2020) was substantively enacted on 6
September 2016. This will reduce the Group's future tax charge
accordingly.
12. Earnings per share
EPS are based on the profit for the period and the number of ordinary
shares in issue. Basic EPS are calculated by dividing profit
attributable to ordinary shareholders by the weighted average number of
ordinary shares in issue during the year. Diluted EPS take into account
share options and awards which can be converted to ordinary shares.
For the purpose of calculating EPS, profit attributable to ordinary
shareholders is arrived at by adjusting profit for the year for the
after-tax amounts of the coupon on PSBs and AT1 securities classified as
equity. The tax on coupons is based on the rate of taxation applicable
to the Bank, including the bank surcharge:
Group Group
Year ended Year ended
31-Dec-17 31-Dec-16
GBPm GBPm
Profit for the year 126.9 120.9
Adjustments:
Coupon on PSBs and AT1 securities classified as equity (3.7) (1.2)
Tax on coupons 1.0 0.3
Profit attributable to ordinary shareholders 124.2 120.0
Exceptional items:
Gain on disposal of Rochester 1 - (34.7)
Amortisation of fair value adjustments for hedged
assets - 9.8
Tax on above - 6.4
Underlying profit attributable to ordinary
shareholders 124.2 101.5
Group Group
Year ended Year ended
31-Dec-17 31-Dec-16
Weighted average number of shares, millions
Basic 243.2 243.1
Diluted 245.1 244.6
Earnings per share, pence per share
Basic 51.1 49.4
Diluted 50.7 49.0
Underlying earnings per share, pence per share
Basic 51.1 41.7
Diluted 50.7 41.5
13. Dividends
During the year, the Bank paid the following dividends:
Bank Bank
Year ended 31-Dec-17 Year ended 31-Dec-16
GBPm Pence per share GBPm Pence per share
Final dividend for the prior
year 18.5 7.6 16.3 6.7
Interim dividend for the
current year 8.5 3.5 7.0 2.9
27.0 23.3
A summary of the Bank's distributable reserves from which dividends can
be paid are shown below:
Bank
As at As at
31-Dec-17 31-Dec-16
GBPm GBPm
Net assets 475.8 350.2
Less:
- Share capital (2.4) (2.4)
- Share premium (158.4) (157.9)
- Other non-distributable reserves(1) (93.1) (29.8)
Distributable reserves 221.9 160.1
1. Other non-distributable reserves include the capital
contribution, equity bonds, foreign exchange reserve, AFS reserve and
share-based payment reserve.
The Directors propose a final dividend of 9.3 pence per share (2016: 7.6
pence) payable on 16 May 2018 with an ex-dividend date of 22 March 2018
and a record date of 23 March 2018. This dividend is not reflected in
these financial statements as it is subject to approval by shareholders
at the AGM on 10 May 2018. Together with the interim dividend of 3.5
pence (2016: 2.9 pence), it makes a total dividend for 2017 of 12.8
pence (2016: 10.5 pence) per share.
14. Cash and cash equivalents
RESTATED RESTATED
Group Group Bank Bank
As at As at As at As at
31-Dec-17 31-Dec-16 31-Dec-17 31-Dec-16
GBPm GBPm GBPm GBPm
Cash in hand 0.5 0.4 0.5 0.4
Unencumbered loans and advances to
credit institutions 1,165.4 402.3 1,157.5 398.0
Investment securities with
maturity less than 3 months - 82.6 - 82.6
1,165.9 485.3 1,158.0 481.0
The 2016 comparatives have been restated to include investment
securities with maturity less than three months and to exclude
encumbered loans and advances to credit institutions (being the cash
ratio deposit and swap margin paid) within cash and cash equivalents.
Unencumbered loans and advances to credit institutions excludes GBP10.0m
(2016: 9.1m) held in the cash ratio deposit with the Bank of England and
excludes GBP11.8m (2016: GBP6.4m) of encumbered assets in the form of
cash margin collateral paid in relation to the Group's derivatives.
15. Loans and advances to credit institutions
Loans and advances to credit institutions have remaining maturities as
follows:
Group Group Bank Bank
As at As at As at As at
31-Dec-17 31-Dec-16 31-Dec-17 31-Dec-16
GBPm GBPm GBPm GBPm
Repayable on demand 1,161.4 402.3 1,157.5 398.0
Less than three months 15.8 6.4 11.8 6.4
More than five years 10.0 9.1 10.0 9.1
1,187.2 417.8 1,179.3 413.5
Included within repayable on demand is GBP1,136.9m (2016: GBP391.9m) in
the Bank of England reserve account.
Included within less than three months is GBP11.8m (2016: GBP6.4m) of
loans and advances with other credit institutions in the form of margin
cash collateral paid in relation to the Group's derivatives which is
considered to be encumbered.
Included within more than five years is GBP10.0m (2016: GBP9.1m) held in
the cash ratio deposit with the Bank of England which is considered to
be encumbered.
16. Investment securities
Group and Group and
Bank Bank
As at As at
31-Dec-17 31-Dec-16
GBPm GBPm
Government investment securities 19.1 141.7
19.1 141.7
Investment securities have remaining maturities as
follows:
Less than three months - 82.6
Three months to one year - 40.0
One to five years 19.1 19.1
19.1 141.7
At 31 December 2017, the Group held GBPnil (2016: GBP524.6m) of treasury
bills received from the Bank of England under the FLS. These securities
are accounted for off balance sheet but included in liquid assets for
regulatory purposes. In exchange, the Group pledges with the Bank of
England either loans to customers or other investment securities. These
assets cannot be sold or pledged further under normal circumstances.
At the reporting date, the Group had no treasury assets (2016: GBPnil)
pledged with the Bank of England in exchange for the treasury bills. The
value of pledged loans to customers is disclosed in note 17.
The Group had no assets sold under repos at the 2017 and 2016 reporting
dates.
The Directors consider that the primary purpose of holding investment
securities is prudential. These securities are held as liquid assets
with the intention of use on a continuing basis in the Group's
activities and are classified as AFS.
Movements during the year of investment securities are analysed as
follows:
Group and Group and
Bank Bank
2017 2016
GBPm GBPm
At 1 January 141.7 393.4
Additions - 460.4
Disposals and maturities (122.7) (712.2)
Changes in fair value 0.1 0.1
At 31 December 19.1 141.7
17. Loans and advances to customers
Group Group Bank Bank
As at As at As at As at
31-Dec-17 31-Dec-16 31-Dec-17 31-Dec-16
GBPm GBPm GBPm GBPm
BTL/SME mortgages 5,654.1 4,104.3 4,588.7 3,299.5
Residential mortgages 1,673.5 1,859.9 1,477.8 1,613.1
7,327.6 5,964.2 6,066.5 4,912.6
Less: provision for impairment losses on loans and
advances (see note 18) (21.6) (25.0) (15.5) (19.1)
7,306.0 5,939.2 6,051.0 4,893.5
Maturity analysis
Loans and advances to customers are repayable from the reporting date as
follows:
Group Group Bank Bank
As at As at As at As at
31-Dec-17 31-Dec-16 31-Dec-17 31-Dec-16
GBPm GBPm GBPm GBPm
Less than three months 139.4 150.8 119.0 135.9
Three months to one year 224.9 162.9 158.8 123.3
One to five years 308.6 279.5 151.0 170.2
More than five years 6,654.7 5,371.0 5,637.7 4,483.2
7,327.6 5,964.2 6,066.5 4,912.6
Less: provision for impairment losses on loans and
advances (see note 18) (21.6) (25.0) (15.5) (19.1)
7,306.0 5,939.2 6,051.0 4,893.5
The above analysis is based on contractual maturity and may not reflect
actual experience of repayments, since many mortgage loans are repaid
early.
The Group purchased no mortgage books from other financial institutions
during 2017. During 2016, the Group purchased mortgage books with a
gross value of GBP205.2m for a total of GBP180.7m.
At 31 December 2017, mortgages with a carrying value of GBP2,303.2m
(2016: GBP1,413.9m) were pledged with the Bank of England under their
asset purchase facilities, FLS and TFS. The Group considers these loans
to be encumbered.
Included within loans and advances to customers are mortgages totalling
GBP28.9m (2016: GBP32.0m) retained by the Group, who act as master
servicer for securitisation vehicles, to comply with the EU risk
retention requirements. The Group considers these loans to be
encumbered.
18. Provision for impairment losses on loans and advances
Movement in provision for impairment losses on loans and advances to
customers is as follows:
2017
BTL/SME Residential mortgages Total
Specific GBPm GBPm GBPm
Group
At 1 January 2017 16.8 6.6 23.4
Write-offs in year (4.8) (3.0) (7.8)
Charge for the year net of recoveries 0.7 3.3 4.0
At 31 December 2017 12.7 6.9 19.6
Bank
At 1 January 2017 12.9 4.8 17.7
Write-offs in year (4.9) (0.8) (5.7)
Charge for the year net of recoveries 1.1 0.7 1.8
At 31 December 2017 9.1 4.7 13.8
Collective
Group
At 1 January 2017 0.4 1.2 1.6
Write-offs in year - - -
Charge for the year net of recoveries 0.1 0.3 0.4
At 31 December 2017 0.5 1.5 2.0
Bank
At 1 January 2017 0.2 1.2 1.4
Charge for the year net of recoveries 0.1 0.2 0.3
At 31 December 2017 0.3 1.4 1.7
Total
Group
At 1 January 2017 17.2 7.8 25.0
Write-offs in year (4.8) (3.0) (7.8)
Charge for the year net of recoveries 0.8 3.6 4.4
At 31 December 2017 13.2 8.4 21.6
Bank
At 1 January 2017 13.1 6.0 19.1
Write-offs in year (4.9) (0.8) (5.7)
Charge for the year net of recoveries 1.2 0.9 2.1
At 31 December 2017 9.4 6.1 15.5
2016 (Restated)
Residential
BTL/SME mortgages Total
Specific GBPm GBPm GBPm
Group
At 1 January 2016 17.3 0.9 18.2
Write-offs in year (2.9) (1.6) (4.5)
Transfer between reserves(1) 0.4 4.8 5.2
Charge for the year net of recoveries 2.0 2.5 4.5
At 31 December 2016 16.8 6.6 23.4
Bank
At 1 January 2016 14.5 - 14.5
Write-offs in year (3.0) (1.4) (4.4)
Transfer between reserves(1) 0.4 4.7 5.1
Charge for the year net of recoveries 1.0 1.5 2.5
At 31 December 2016 12.9 4.8 17.7
Collective
Group
At 1 January 2016 7.8 1.3 9.1
Write-offs in year (1.2) - (1.2)
Disposals(2) (5.6) - (5.6)
Transfer between reserves(1) (0.4) (4.8) (5.2)
(Credit)/charge for the year net of recoveries (0.2) 4.7 4.5
At 31 December 2016 0.4 1.2 1.6
Bank
At 1 January 2016 7.7 1.1 8.8
Write-offs in year (1.1) - (1.1)
Disposals(2) (5.6) - (5.6)
Transfer between reserves(1) (0.4) (4.7) (5.1)
(Credit)/charge for the year net of recoveries (0.4) 4.8 4.4
At 31 December 2016 0.2 1.2 1.4
Total
Group
At 1 January 2016 25.1 2.2 27.3
Write-offs in year (4.1) (1.6) (5.7)
Disposals(2) (5.6) - (5.6)
Charge for the year net of recoveries 1.8 7.2 9.0
At 31 December 2016 17.2 7.8 25.0
Bank
At 1 January 2016 22.2 1.1 23.3
Write-offs in year (4.1) (1.4) (5.5)
Disposals(2) (5.6) - (5.6)
Charge for the year net of recoveries 0.6 6.3 6.9
At 31 December 2016 13.1 6.0 19.1
1. In 2016, there was an update to the categorisation where all
loans greater than three months in arrears are treated as specific
provisions, in addition to loans that are individually assessed. This
resulted in an increase in specific provisions of GBP5.2m for the Group
and GBP5.1m for the Bank during 2016, with a corresponding decrease in
collective provisions.
2. During 2016, the Group sold a portion of non-performing loans
from its personal loan portfolio. See note 6 for further details.
19. Impairment losses
Group Group
Year ended Year ended
31-Dec-17 31-Dec-16
GBPm GBPm
Write-offs in the year 7.8 5.7
Disposals - 5.6
Decrease in provision (3.4) (2.3)
4.4 9.0
20. Derivatives
The table below reconciles the gross amount of derivative contracts to
the carrying balance shown in the statement of financial position:
Contracts
Net amounts of subject to
financial assets/ master netting Cash collateral
(liabilities) agreements paid/(received)
Gross amount presented in not offset in not offset in
of recognised the statement the statement the statement
financial assets/ of financial of financial of financial
Group and (liabilities) position position position Net amount
Bank GBPm GBPm GBPm GBPm GBPm
As at 31
December
2017
Derivative
assets 6.1 6.1 (5.9) (0.3) (0.1)
Derivatives
liabilities (21.8) (21.8) 5.9 11.8 (4.1)
As at 31
December
2016
Derivatives
assets 1.8 1.8 (1.5) (0.6) (0.3)
Derivative
liabilities (24.4) (24.4) 1.5 6.4 (16.5)
The effects of over collateralisation have not been taken into account
in the above table.
Included within derivative liabilities is GBP4.6m (2016: GBP16.0m) of
derivative contracts not covered by master netting agreements and
therefore no cash collateral has been paid.
The Group recognises cash collateral received within amounts owed to
credit institutions and cash collateral paid within loans and advances
to credit institutions.
21. Fair value adjustments on hedged items
Group and Group and
Bank Bank
As at As at
31-Dec-17 31-Dec-16
GBPm GBPm
Hedged assets
Current hedge relationships 15.9 23.6
Cancelled hedge relationships 16.0 23.3
31.9 46.9
Hedged liabilities
Current hedge relationships - (1.9)
The fair value adjustments on hedged assets in respect of cancelled
hedge relationships represent the fair value adjustment for interest
rate risk on legacy long-term fixed rate mortgages (c. 25 years at
origination) where the interest rate swap hedges were terminated before
maturity and were effective at the point of termination.
The movement in cancelled hedge relationships is as follows:
Group and Group and
Bank Bank
2017 2016
GBPm GBPm
Balance at 1 January 23.3 37.8
New cancellations - 0.2
Amortisation (see note 5) (7.3) (4.9)
Exceptional loss (see note 10) - (9.8)
Balance at 31 December 16.0 23.3
22. Investments in subsidiaries, intercompany loans and transactions
with related parties
The balances between the Bank and its subsidiaries at the reporting date
are summarised in the table below:
2017
Shares in Intercompany
subsidiary loans Intercompany
undertakings receivable loans payable Total
GBPm GBPm GBPm GBPm
At 1 January 1.8 982.2 (1.9) 982.1
Additions - 298.4 (29.4) 269.0
Repayments - (88.1) 0.1 (88.0)
At 31 December 1.8 1,192.5 (31.2) 1,163.1
2016
Shares in Intercompany
subsidiary loans Intercompany Deemed loan
undertakings receivable loans payable liability Total
GBPm GBPm GBPm GBPm GBPm
At 1 January 1.8 942.7 (4.9) (169.5) 770.1
Additions - 126.0 (0.6) - 125.4
Repayments - (86.5) 3.6 - (82.9)
Disposals - - - 169.5 169.5
At 31 December 1.8 982.2 (1.9) - 982.1
A list of the Bank's direct and indirect subsidiaries are below.
Subsidiaries have a registered office of Reliance House, Sun Pier,
Chatham, Kent, ME4 4ET ('Reliance House') unless otherwise stated.
2017
Charged
by/(to) Balance
the due
Bank to/(by)
during the
the
Class of year Bank
Direct Registered
investments shares Activity office Ownership GBPm GBPm
Easioption Holding Reliance
Limited Ordinary company House 100% - 0.5
Guernsey
Home Loans Mortgage Reliance
Limited Ordinary provider House 100% (0.3) 17.5
Guernsey 1st Floor,
Home Loans Mortgage Tudor
Limited Ordinary provider House, 100% (1.0) 46.6
Le Bordage,
St Peter
(Guernsey) Port,
Guernsey,
GY1 1DB
Heritable
Development Mortgage Reliance
Finance Ordinary originator House 85% 1.9 (0.9)
and
Limited(1) servicer
Interbay
Group
Holdings Holding Reliance
Limited Ordinary company House 100% - -
Jersey Home
Loans Mortgage Reliance
Limited Ordinary provider House 100% (0.1) 3.2
Jersey Home
Loans 26 New
Limited Mortgage Street, St
(Jersey) Ordinary provider Helier, 100% (4.3) 201.4
Jersey, JE2
3RA
OSB India Salarpuria
Private Back office Magnificia
Limited2 Ordinary processing , 100% 5.4 5.9
10th floor,
78 Old
Madras
Road,
Bangalore,
560016,
Karnataka,
India
Prestige
Finance Mortgage Reliance
Limited Ordinary originator House 100% 3.2 (1.3)
and
servicer
Reliance
Property
Loans Mortgage Reliance
Limited Ordinary provider House 100% (0.1) 4.1
Rochester
Mortgages Mortgage Reliance
Limited Ordinary provider House 100% - -
Indirect
investments
Inter Bay
Financial I Holding
Limited Ordinary company Reliance House 100% (0.3) 19.8
Inter Bay
Financial II Holding
Limited Ordinary company Reliance House 100% (0.2) 17.7
Interbay
Funding, Mortgage
Ltd Ordinary servicer Reliance House 100% - (28.9)
Interbay ML, Mortgage
Ltd Ordinary provider Reliance House 100% (10.2) 875.6
Interbay
Holdings Holding
Ltd Ordinary company Reliance House 100% - -
5D Finance Mortgage
Limited Ordinary servicer Reliance House 100% - 0.2
5D Lending Mortgage
Ltd Ordinary provider Reliance House 100% - (0.1)
(6.0) 1,161.3
1. Heritable Development Finance Limited is a business
development partnership with Heritable Capital Limited. The entity is
majority owned and controlled by the Bank. It has minimal retained
earnings and immaterial non-controlling interest which is not presented
separately in the Group reserves.
2. OSB India Private Limited is owned 70.28% by the Bank and
29.72% by Easioption Limited.
2016
Charged
by/
(to)
the Balance
Bank due
during to/(by)
the the
Class of year Bank
Direct Registered
investments shares Activity office Ownership GBPm GBPm
Easioption Holding Reliance
Limited Ordinary company House 100% - 0.5
Guernsey
Home Loans Mortgage Reliance
Limited Ordinary provider House 100% (0.5) 21.3
Guernsey 1st Floor,
Home Loans Mortgage Tudor
Limited Ordinary provider House,
Le Bordage,
St Peter
(Guernsey) Port,
Guernsey, GY1 1DB 100% (1.5) 64.1
Heritable
Development Mortgage Reliance
Finance Ordinary originator House
Limited and servicer 85% 2.1 (1.0)
Interbay
Group
Holdings Holding Reliance
Limited Ordinary company House 100% - -
Jersey Home
Loans Mortgage Reliance
Limited Ordinary provider House 100% (0.1) 4.5
Jersey Home
Loans 26 New
Limited Mortgage Street, St
(Jersey) Ordinary provider Helier,
Jersey, JE2 3RA 100% (6.1) 262.2
OSB India
Private Back office Salarpuria
Limited Ordinary processing Magnificia,
10th floor,
78 Old
Madras
Road,
Bangalore,
560016,
Karnataka, India 100% 3.7 0.5
Prestige
Finance Mortgage Reliance
Limited Ordinary originator House
and servicer 100% 3.0 (0.9)
Reliance
Property
Loans Mortgage Reliance
Limited Ordinary provider House 100% (0.1) 4.4
Rochester
Mortgages Mortgage Reliance
Limited Ordinary provider House 100% - -
Indirect
investments
Cavenham
Financial
Services Ordinary Dormant entity Reliance House 100% 0.1 -
Limited(1)
Inter Bay
Financial I Holding
Limited Ordinary company Reliance House 100% (0.4) 19.6
Inter Bay
Financial II Holding
Limited Ordinary company Reliance House 100% (0.4) 17.5
Interbay Mortgage
Funding, Ltd Ordinary servicer Reliance House 100% (0.1) 4.4
Interbay ML, Mortgage
Ltd Ordinary provider Reliance House 100% (12.0) 583.1
Interbay Holding
Holdings Ltd Ordinary company Reliance House 100% - -
5D Finance Mortgage
Limited Ordinary servicer Reliance House 100% - 0.2
Mortgage
5D Lending Ltd Ordinary provider Reliance House 100% - (0.1)
(12.3) 980.3
1. Cavenham Financial Services Limited was struck off on 17
January 2017.
All of the above investments are reviewed annually for impairment. All
of the subsidiaries are either actively trading or are fully funded by
the Bank. Based on management's assessment of the future cash flows of
each entity, no impairment has been recognised.
In addition to the above subsidiaries, the Bank has transactions with
Kent Reliance Provident Society ('KRPS'), one of its founding
shareholders. KRPS runs member engagement forums for the Bank. In
exchange, the Bank provides KRPS with various services, including IT,
finance and other support functions. During the year, the Bank covered
operating expenses of KRPS amounting to GBP0.3m (2016: GBP0.3m).
All related party transactions were made on terms equivalent to those
that prevail in arm's length transactions. During the year there were no
related party transactions between the key management personnel and the
Bank other than as described below.
Transactions with key management personnel
The Board considers the key management personnel to comprise Executive
and Non-Executive Directors. Directors' remuneration is disclosed in
note 8 and the Annual Report on Remuneration.
No loans were issued to related parties during 2017 (2016: GBPnil).
Key management personnel and connected persons held deposits with the
Group of GBP1.5m (2016: GBP1.4m).
23. Intangible assets
Group Group Bank Bank
2017 2016 2017 2016
GBPm GBPm GBPm GBPm
Cost
At 1 January 8.5 5.6 6.8 4.3
Additions 4.2 2.9 3.9 2.5
Disposals and write-offs (0.3) - (0.3) -
At 31 December 12.4 8.5 10.4 6.8
Amortisation
At 1 January 3.8 2.5 2.7 1.6
Charged in year 1.8 1.3 1.6 1.1
Disposals and write-offs - - - -
At 31 December 5.6 3.8 4.3 2.7
Net book value
At 31 December 6.8 4.7 6.1 4.1
Intangible assets consist of computer software. There were no
capitalised costs related to the internal development of software during
the period.
24. Property, plant and equipment
Freehold
land and Leasehold Equipment
buildings improvements and fixtures Total
Group 2017 GBPm GBPm GBPm GBPm
Cost
At 1 January 8.7 0.5 7.5 16.7
Additions 7.5 0.1 2.5 10.1
Disposals and write-offs - - (0.1) (0.1)
At 31 December 16.2 0.6 9.9 26.7
Depreciation
At 1 January 0.4 0.1 3.1 3.6
Charged in year 0.2 0.1 1.4 1.7
Disposals and write-offs - - (0.1) (0.1)
At 31 December 0.6 0.2 4.4 5.2
Net book value
At 31 December 15.6 0.4 5.5 21.5
Freehold
land and Leasehold Equipment
buildings improvements and fixtures Total
Group 2016 GBPm GBPm GBPm GBPm
Cost
At 1 January 5.9 0.4 5.8 12.1
Additions 2.8 0.1 1.9 4.8
Disposals and write-offs - - (0.3) (0.3)
Translation difference - - 0.1 0.1
At 31 December 8.7 0.5 7.5 16.7
Depreciation
At 1 January 0.3 - 2.2 2.5
Charged in year 0.1 0.1 1.1 1.3
Disposals and write-offs - - (0.3) (0.3)
Translation difference - - 0.1 0.1
At 31 December 0.4 0.1 3.1 3.6
Net book value
At 31 December 8.3 0.4 4.4 13.1
Freehold
land and Leasehold Equipment
Buildings improvements and fixtures Total
Bank 2017 GBPm GBPm GBPm GBPm
Cost
At 1 January 6.4 0.5 5.7 12.6
Additions 5.1 0.1 1.7 6.9
At 31 December 11.5 0.6 7.4 19.5
Depreciation
At 1 January 0.4 0.1 2.2 2.7
Charged in year 0.2 0.1 1.1 1.4
At 31 December 0.6 0.2 3.3 4.1
Net book value
At 31 December 10.9 0.4 4.1 15.4
Freehold
land and Leasehold Equipment
buildings improvements and fixtures Total
Bank 2016 GBPm GBPm GBPm GBPm
Cost
At 1 January 3.6 0.4 4.6 8.6
Additions 2.8 0.1 1.1 4.0
At 31 December 6.4 0.5 5.7 12.6
Depreciation
At 1 January 0.3 - 1.3 1.6
Charged in year 0.1 0.1 0.9 1.1
At 31 December 0.4 0.1 2.2 2.7
Net book value
At 31 December 6.0 0.4 3.5 9.9
25. Deferred taxation asset
Group Group Bank Bank
2017 2016 2017 2016
GBPm GBPm GBPm GBPm
At 1 January 3.4 3.4 0.8 0.7
Profit or loss credit 0.7 0.1 0.7 0.1
Tax taken directly to equity 1.0 (0.1) 1.0 -
At 31 December 5.1 3.4 2.5 0.8
Analysed as:
Losses carried forward 2.5 2.3 - -
Accelerated depreciation 0.1 0.1 - -
Share-based payments 2.5 1.0 2.5 0.8
5.1 3.4 2.5 0.8
The deferred tax has been calculated using the relevant rates for the
expected periods of utilisation.
As at 31 December 2017, the Group had GBP3.7m (2016: GBP5.1m) of losses
for which a deferred tax asset has not been recognised.
A reduction in the UK corporation tax rate from 20% to 19% (effective
from 1 April 2017) and a further reduction to 18% (effective from 1
April 2020) were substantively enacted on 26 October 2015. An additional
reduction to 17% (effective 1 April 2020) was substantively enacted on 6
September 2016.
26. Other assets
Group Group Bank Bank
As at As at As at As at
31-Dec-17 31-Dec-16 31-Dec-17 31-Dec-16
GBPm GBPm GBPm GBPm
Prepayments 1.9 1.4 1.7 1.3
Other assets(1) 3.0 10.5 3.0 2.5
4.9 11.9 4.7 3.8
1. During the year, the Group reclassified deferred broker fees
paid in the Interbay group of subsidiaries from other assets to loans
and advances to customers. The amount of deferred broker fees as at 31
December 2016 was GBP7.3m.
27. Amounts owed to retail depositors
Group and Group and
Bank Bank
As at As at
31-Dec-17 31-Dec-16
GBPm GBPm
Amounts owed to retail depositors 6,650.3 5,952.4
Repayable in the ordinary course of business as follows:
Group and Group and
Bank Bank
As at As at
31-Dec-17 31-Dec-16
GBPm GBPm
On demand 2,051.8 1,932.5
Less than three months 862.0 702.4
Three months to one year 2,590.7 1,977.2
One to five years 1,145.8 1,340.3
6,650.3 5,952.4
28. Amounts owed to credit institutions
Repayable in the ordinary course of business as follows:
Group and Group and
Bank Bank
As at As at
31-Dec-17 31-Dec-16
GBPm GBPm
Less than three months 0.3 0.7
Three months to one year - -
One to five years 1,250.0 101.0
1,250.3 101.7
As at 31 December 2017, amounts owed to credit institutions included
GBP1,250.0m (2016: GBP101.0m) owed to the Bank of England under the TFS.
In exchange, the Group pledges with the Bank of England either loans and
advances to customers or other investment securities. The value of
pledged loans and advances to customers is disclosed in note 17.
29. Amounts owed to other customers
Repayable in the ordinary course of business as follows:
Group and Group and
Bank Bank
As at As at
31-Dec-17 31-Dec-16
GBPm GBPm
Less than three months 0.5 4.0
Three months to one year 25.2 -
25.7 4.0
30. Other liabilities
Group Group Bank Bank
As at As at As at As at
31-Dec-17 31-Dec-16 31-Dec-17 31-Dec-16
GBPm GBPm GBPm GBPm
Falling due within one year:
Accruals and deferred income 11.8 7.6 9.8 6.0
Other creditors(1) 4.5 11.0 3.6 1.4
16.3 18.6 13.4 7.4
1. During the year, the Group reclassified accrued arrangement
fees received on the completion of new loans in the Interbay group of
subsidiaries from other liabilities to loans and advances to customers.
The amount of accrued arrangement fees as at 31 December 2016 was
GBP8.7m.
31. FSCS and other regulatory provisions
The Financial Services Compensation Scheme ('FSCS') provides protection
of deposits for the customers of authorised financial services firms,
should a firm collapse. FSCS protects retail deposits of up to GBP85,000
(2016: GBP75,000) for single account holders and GBP170,000 (2016:
GBP150,000) for joint holders.
The compensation paid out to consumers is initially funded through loans
from the Bank of England and HM Treasury. In order to repay the loans
and cover its costs, the FSCS charges levies on firms regulated by the
PRA and the Financial Conduct Authority ('FCA'). The Group is among
those firms and pays the FSCS a levy based on its share of total UK
deposits. In accordance with IFRIC 21 interpretation of IAS 37, the FSCS
liability for 2017 will be recognised in 2018. The FSCS balance at the
reporting date relates to the levy from previous years.
The Group has reviewed its current exposure to Plevin Payment Protection
Insurance claims and other FCA conduct rules exposures and has
recognised a provision of GBP0.9m (2016: GBP0.1m) to cover potential
future claims.
An analysis of the Group and Bank's FSCS and other provisions are
presented below:
Other Other
FSCS provisions Total FSCS provisions Total
2017 2017 2017 2016 2016 2016
Group and Bank GBPm GBPm GBPm GBPm GBPm GBPm
As at 1 January 1.4 0.1 1.5 2.2 0.1 2.3
Paid during the year (1.0) - (1.0) (1.3) - (1.3)
Charge 0.1 0.8 0.9 0.5 - 0.5
At 31 December 0.5 0.9 1.4 1.4 0.1 1.5
32. Subordinated liabilities
Group and Group and
Bank Bank
2017 2016
GBPm GBPm
At 1 January 21.6 24.6
Repayment of debt at maturity (10.7) (3.0)
As at 31 December 10.9 21.6
The Group's outstanding subordinated liabilities are summarised below:
Group and Group and
Bank Bank
As at As at
31-Dec-17 31-Dec-16
GBPm GBPm
Linked to LIBOR:
Floating rate subordinated liabilities 2017 (LIBOR
+ 1.5%) - 5.7
Floating rate subordinated loans 2022 (LIBOR + 5%) 0.3 0.3
Floating rate subordinated loans 2022 (LIBOR + 2%) 0.4 0.4
Linked to the average standard mortgage rate of the
five largest building societies:
Floating rate subordinated liabilities 2017 (+5.963%) - 5.0
Fixed rate:
Subordinated liabilities 2019 (7.45%)(1) 5.1 5.1
Subordinated liabilities 2024 (6.45%)(2) 5.1 5.1
10.9 21.6
1. On 27 September 2016, the Group decided not to call the
GBP5.0m first tranche of the subordinated debt with original maturity of
27 September 2024. As the debt was not called, the coupon rate reset to
7.45% until maturity.
2. The Group has the option to call the GBP5.0m second tranche
of the subordinated debt on 27 September 2019.
Subordinated liabilities are repayable at the dates stated or earlier at
the option of the Group with the prior consent of the PRA. All
subordinated liabilities are denominated in sterling and are unlisted.
The rights of repayment of the holders of these subordinated liabilities
are subordinated to the claims of all depositors and all creditors.
33. Perpetual Subordinated Bonds
Group and Group and
Bank Bank
As at As at
31-Dec-17 31-Dec-16
GBPm GBPm
Sterling Perpetual Subordinated Bonds 15.3 15.3
The bonds are listed on the London Stock Exchange. They were issued with
no discretion over the payment of interest and may not be settled in the
Group's own equity. They are therefore classified as financial
liabilities. The coupon rate is 5.9884%.
34. Share capital
Number of Nominal Premium
shares value (GBPm) (GBPm)
At 1 January 2017 243,082,091 2.4 157.9
Shares issued under OSB employee share
plan 382,597 - 0.5
At 31 December 2017 243,464,688 2.4 158.4
At 1 January 2016 243,079,965 2.4 157.9
Shares issued under OSB employee share
plan 2,126 - -
At 31 December 2016 243,082,091 2.4 157.9
35. Other reserves
Transfer reserve
The transfer reserve of GBP12.8m (Bank: GBP15.2m) represents the
difference between the value of net assets transferred to the Group from
Kent Reliance Building Society in 2011 and the value of shares issued to
the A ordinary shareholders.
AFS reserve
The AFS reserve of GBP0.1m (2016: GBPnil) represents the cumulative net
change in the fair value of investment securities measured at FVOCI.
Perpetual Subordinated Bonds
In addition to the PSBs in note 33, the Bank has issued GBP22.0m of PSBs
which are classified as equity in accordance with the conditions
contained in note 1(p). The classification of these PSBs means that any
coupon payments on them are treated within retained earnings rather than
through profit or loss. The coupon rate was 6.591% until the reset date
on 7 March 2016, after which it was reset to 4.5991% until the next
reset date on 7 March 2021.
AT1 securities
On 25 May 2017, OSB issued GBP60m of Fixed Rate Resetting Perpetual
Subordinated Contingent Convertible Securities ('AT1 securities') that
qualify as Additional Tier 1 capital under CRD IV. The securities will
be subject to full conversion into ordinary shares of OSB in the event
that its CET1 capital ratio falls below 7%. The AT1 securities will pay
interest at a rate of 9.125% per annum until the first reset date of 25
May 2022, with the reset interest rate equal to 835.9 basis points over
the five-year semi-annual mid- swap rate for such a period. Interest is
paid semi-annually on 25 May and 25 November. OSB may at any time cancel
any interest payment at its full discretion and must cancel interest
payments in certain circumstances specified in the terms and conditions
of the AT1 securities. The AT1 securities are perpetual with no fixed
redemption date. OSB may, in its discretion and subject to satisfying
certain conditions, redeem all (but not some) of the AT1 securities at
the principal amount outstanding plus any accrued but unpaid interest
from the first reset date and on any interest payment date thereafter.
Transaction costs directly related to the AT1 securities issuance have
been recognised directly in equity within retained earnings net of tax.
36. Financial commitments and guarantees
a) As at 31 December 2017, the Group's contracted or anticipated
capital expenditure commitments not provided for amounted to GBP0.3m
(2016: GBP1.1m). 2017 consists of branch refurbishment costs. 2016
consisted of branch refurbishment costs and UK head office improvements.
b) The Group's minimum lease commitments under operating leases are
summarised in the table below:
Group Bank Bank Group
As at As at As at As at
31-Dec-17 31-Dec-16 31-Dec-17 31-Dec-16
GBPm GBPm GBPm GBPm
Land and buildings: due within:
One year 0.5 0.4 0.3 0.4
Two to five years 1.0 0.9 0.8 0.8
1.5 1.3 1.1 1.2
c) Undrawn mortgage loan facilities:
Group Group Bank Bank
As at As at As at As at
31-Dec-17 31-Dec-16 31-Dec-17 31-Dec-16
GBPm GBPm GBPm GBPm
BTL/SME mortgages 485.9 188.5 390.5 120.3
Residential mortgages 44.3 176.9 44.3 176.9
530.2 365.4 434.8 297.2
Undrawn loan facilities are approved loan applications which have not
yet been exercised. They are payable on demand and are usually drawn
down or expire within three months.
d) The Group did not have any issued financial guarantees as at 31
December 2017 (2016: GBPnil).
37. Risk management
Overview
Financial instruments form the vast majority of the Group's and Bank's
assets and liabilities. The Group manages risk on a consolidated basis,
and risk disclosures are provided on this basis.
Types of financial instrument
Financial instruments are a broad definition which includes financial
assets, financial liabilities and equity instruments. The main financial
assets of the Group are loans to customers and liquid assets, which, in
turn, consist of cash in the Bank of England call account, call accounts
with other credit institutions and UK and EU sovereign debt. These are
funded by a combination of financial liabilities and equity instruments.
Financial liability funding comes predominantly from retail deposits and
drawdowns under the Bank of England TFS, supported by debt securities,
subordinated debt, wholesale and other funding. Equity instruments
include own shares, perpetual bonds and AT1 securities meeting the
equity classification criteria. The Group's main activity is mortgage
lending; it raises funds or invests in particular types of financial
assets primarily in order to satisfy banking industry regulations and
manage the risks arising from its operations. The Group does not trade
in financial instruments for speculative purposes.
The Group uses derivative instruments to manage its financial risks.
Derivative financial instruments ('derivatives') are financial
instruments whose value changes in response to changes in underlying
variables such as interest rates. Typically, the contract value of
derivatives is much smaller than that of the instruments they relate to,
which makes them a convenient tool for benefiting from value changes
without the need to buy or sell the whole underlying product. The most
common derivatives comprise futures, forwards and swaps. Among these,
the Group only uses swaps.
Derivatives are used by the Group solely to reduce ('hedge') the risk of
loss arising from changes in market factors. Derivatives are not used
for speculative purposes.
Types of derivatives and uses
The derivative instruments used by the Group in managing its risk
exposures are interest rate swaps. Interest rate swaps convert fixed
interest rates to floating or vice versa. As with other derivatives, the
underlying product is not sold and payments are based on notional
principal amounts.
Unhedged fixed rate liabilities create the risk of paying above
-the-market rate if interest rates subsequently decrease. Unhedged fixed
rate mortgages and liquid assets bear the opposite risk of earning
below-the-market income when rates go up. While fixed rate assets and
liabilities naturally hedge each other to a certain extent, this hedge
is usually never balanced.
The Group uses swaps to convert its instruments, such as mortgages,
deposits and liquid assets, from fixed or base rate-linked rates to
LIBOR-linked variable rates. This ensures a guaranteed margin between
the interest income and interest expense, regardless of changes in the
Risk review.
Types of risk
The principal financial risks to which the Group is exposed are credit,
liquidity and market risks, the latter comprising of interest and
exchange rate risk. In addition to financial risks, the Group is exposed
to various other risks, most notably operational, conduct and regulatory,
covered in the Risk review.
The financial risks are analysed below. Additional information is
contained within the Principal risks and uncertainties on pages 39 to
44.
Credit risk
Credit risk is the risk that unexpected losses may arise as a result of
the Group's borrowers or market counterparties failing to meet their
obligations to repay.
The Group has adopted the Standardised Approach for assessment of credit
risk capital requirements. This approach considers risk weightings as
defined under Basel II and Basel III principles.
The classes of financial instruments to which the Group is most exposed
are loans and advances to customers, loans and advances to credit
institutions, cash in the Bank of England call account, call and current
accounts with other credit institutions and investment securities. The
maximum credit risk exposure equals the total carrying amount of the
above categories plus off balance sheet undrawn mortgage facilities.
Credit risk - loans and advances to customers
Credit risk associated with mortgage lending is largely driven by the
housing market and level of unemployment. A recession and/or high
interest rates could cause pressure within the market, resulting in
rising levels of arrears and repossessions.
All loan applications are assessed with reference to the Group's lending
policy. Changes to the policy are approved by the Board, with mandates
set for the approval of loan applications.
The Credit Committee and the Assets and Liabilities Committee ('ALCO')
regularly monitor lending activity, taking appropriate actions to
reprice products and adjust lending criteria in order to control risk
and manage exposure. Where necessary and appropriate, changes to the
lending policy are recommended to the Risk Committee and the Board.
The following table shows an analysis of the lending portfolio by
borrower type at the reporting date:
Group Group
As at 31-Dec-17 As at 31-Dec-16
GBPm % GBPm %
BTL/SME mortgages 5,654.1 77 4,104.3 69
Residential mortgages 1,673.5 23 1,859.9 31
Total loans before provisions 7,327.6 100 5,964.2 100
Bank Bank
As at 31-Dec-17 As at 31-Dec-16
GBPm % GBPm %
BTL/SME mortgages 4,588.7 76 3,299.5 67
Residential mortgages 1,477.8 24 1,613.1 33
Total loans before provisions 6,066.5 100 4,912.6 100
Property values are updated to reflect changes in the HPI. A breakdown
of loans and advances to customers by indexed loan-to-value ('LTV') is
as follows:
LTV analysis by band for all loans:
As at 31-Dec-17
BTL/SME Residential Total
Group GBPm GBPm GBPm %
Band
0%-50% 747.6 808.3 1,555.9 21
50%-60% 960.5 260.6 1,221.1 16
60%-70% 1,606.8 228.3 1,835.1 25
70%-80% 1,939.4 184.5 2,123.9 29
80%-90% 359.1 138.2 497.3 7
90%-100% 15.1 31.6 46.7 1
>100% 24.5 22.0 46.5 1
Total mortgages before provisions 5,653.0 1,673.5 7,326.5 100
Personal loans 1.1 - 1.1 -
Total loans before provisions 5,654.1 1,673.5 7,327.6 100
As at 31-Dec-16
BTL/SME Residential Total
Group GBPm GBPm GBPm %
Band
0%-50% 755.9 761.7 1,517.6 25
50%-60% 859.6 278.7 1,138.3 19
60%-70% 1,202.4 282.7 1,485.1 25
70%-80% 1,041.2 257.1 1,298.3 22
80%-90% 194.8 196.9 391.7 7
90%-100% 5.0 48.0 53.0 1
>100% 36.0 34.8 70.8 1
Total mortgages before provisions 4,094.9 1,859.9 5,954.8 100
Personal loans 9.4 - 9.4 -
Total loans before provisions 4,104.3 1,859.9 5,964.2 100
As at 31-Dec-17
BTL/SME Residential Total
Bank GBPm GBPm GBPm %
Band
0%-50% 587.1 738.2 1,325.3 22
50%-60% 745.4 225.8 971.2 16
60%-70% 1,259.2 188.0 1,447.2 24
70%-80% 1,631.2 161.7 1,792.9 29
80%-90% 333.1 121.5 454.6 7
90%-100% 10.4 26.3 36.7 1
>100% 21.2 16.3 37.5 1
Total mortgages before provisions 4,587.6 1,477.8 6,065.4 100
Personal loans 1.1 - 1.1 -
Total loans before provisions 4,588.7 1,477.8 6,066.5 100
As at 31-Dec-16
BTL/SME Residential Total
Bank GBPm GBPm GBPm %
Band
0%-50% 613.0 714.8 1,327.8 27
50%-60% 663.7 251.1 914.8 19
60%-70% 940.0 249.7 1,189.7 24
70%-80% 892.5 206.8 1,099.3 22
80%-90% 157.8 129.5 287.3 6
90%-100% 1.1 38.4 39.5 1
>100% 22.0 22.8 44.8 1
Total mortgages before provisions 3,290.1 1,613.1 4,903.2 100
Personal loans 9.4 - 9.4 -
Total loans before provisions 3,299.5 1,613.1 4,912.6 100
LTV analysis by band for BTL/SME:
As at 31-Dec-17
Residential Funding
Buy-to-Let Commercial development lines Total
Group GBPm GBPm GBPm GBPm GBPm
Band
0%-50% 567.0 66.8 88.3 25.5 747.6
50%-60% 841.2 62.3 42.8 14.2 960.5
60%-70% 1,437.7 120.6 8.9 39.6 1,606.8
70%-80% 1,811.5 112.8 3.9 11.2 1,939.4
80%-90% 343.1 2.5 - 13.5 359.1
90%-100% 14.2 0.4 - 0.5 15.1
>100% 19.1 5.4 - - 24.5
Total mortgages before
provisions 5,033.8 370.8 143.9 104.5 5,653.0
Personal loans 1.1
Total loans before
provisions 5,654.1
As at 31-Dec-16
Residential
Buy-to-Let Commercial development Funding lines Total
Group GBPm GBPm GBPm GBPm GBPm
Band
0%-50% 534.1 85.2 104.7 31.9 755.9
50%-60% 750.4 67.1 23.5 18.6 859.6
60%-70% 1,096.8 71.0 13.4 21.2 1,202.4
70%-80% 1,006.2 35.0 - - 1,041.2
80%-90% 193.0 1.8 - - 194.8
90%-100% 5.0 - - - 5.0
>100% 27.8 8.2 - - 36.0
Total
mortgages
before
provisions 3,613.3 268.3 141.6 71.7 4,094.9
Personal
loans 9.4
Total loans
before
provisions 4,104.3
As at 31-Dec-17
Residential Funding
Buy-to-Let Commercial development lines Total
GBPm GBPm GBPm GBPm GBPm
Bank
Band
0%-50% 466.8 6.5 88.3 25.5 587.1
50%-60% 686.3 2.1 42.8 14.2 745.4
60%-70% 1,204.4 6.3 8.9 39.6 1,259.2
70%-80% 1,607.9 8.2 3.9 11.2 1,631.2
80%-90% 319.5 0.1 - 13.5 333.1
90%-100% 9.9 - - 0.5 10.4
>100% 17.0 4.2 - - 21.2
Total mortgages before
provisions 4,311.8 27.4 143.9 104.5 4,587.6
Personal loans 1.1
Total loans before
provisions 4,588.7
As at 31-Dec-16
Residential
Buy-to-Let Commercial development Funding lines Total
Bank GBPm GBPm GBPm GBPm GBPm
Band
0%-50% 458.6 17.8 104.7 31.9 613.0
50%-60% 613.2 8.4 23.5 18.6 663.7
60%-70% 905.1 0.3 13.4 21.2 940.0
70%-80% 891.2 1.3 - - 892.5
80%-90% 157.8 - - - 157.8
90%-100% 1.1 - - - 1.1
>100% 17.7 4.3 - - 22.0
Total
mortgages
before
provisions 3,044.7 32.1 141.6 71.7 3,290.1
Personal
loans 9.4
Total loans
before
provisions 3,299.5
LTV analysis by band for Residential mortgages:
As at 31-Dec-17
First Second Funding
charge charge lines Total
Group GBPm GBPm GBPm GBPm
Band
0%-50% 647.1 150.2 11.0 808.3
50%-60% 163.3 94.2 3.1 260.6
60%-70% 147.9 78.4 2.0 228.3
70%-80% 136.1 47.2 1.2 184.5
80%-90% 116.4 21.6 0.2 138.2
90%-100% 22.2 9.3 0.1 31.6
>100% 7.6 14.4 - 22.0
Total mortgages before provisions 1,240.6 415.3 17.6 1,673.5
As at 31-Dec-16
First Second Funding
charge charge lines Total
Group GBPm GBPm GBPm GBPm
Band
0%-50% 579.6 154.5 27.6 761.7
50%-60% 166.4 103.1 9.2 278.7
60%-70% 173.3 102.3 7.1 282.7
70%-80% 188.3 64.0 4.8 257.1
80%-90% 168.3 27.2 1.4 196.9
90%-100% 31.9 16.0 0.1 48.0
>100% 14.3 20.1 0.4 34.8
Total mortgages before provisions 1,322.1 487.2 50.6 1,859.9
As at 31-Dec-17
First Second Funding
charge charge lines Total
Bank GBPm GBPm GBPm GBPm
Band
0%-50% 577.0 150.2 11.0 738.2
50%-60% 128.5 94.2 3.1 225.8
60%-70% 107.6 78.4 2.0 188.0
70%-80% 113.3 47.2 1.2 161.7
80%-90% 99.7 21.6 0.2 121.5
90%-100% 16.9 9.3 0.1 26.3
>100% 1.9 14.4 - 16.3
Total mortgages before provisions 1,044.9 415.3 17.6 1,477.8
As at 31-Dec-16
First Second Funding
charge charge lines Total
Bank GBPm GBPm GBPm GBPm
Band
0%-50% 532.7 154.5 27.6 714.8
50%-60% 138.8 103.1 9.2 251.1
60%-70% 140.3 102.3 7.1 249.7
70%-80% 138.0 64.0 4.8 206.8
80%-90% 100.9 27.2 1.4 129.5
90%-100% 22.3 16.0 0.1 38.4
>100% 2.3 20.1 0.4 22.8
Total mortgages before provisions 1,075.3 487.2 50.6 1,613.1
Analysis of mortgage portfolio by arrears and collateral held
The tables below provide further information on collateral in the
mortgage portfolio by payment due status. Capped collateral only
recognises collateral to the value of each individual mortgage and does
not recognise over-collateralisation. The collateral position by LTV
bands is captured in the LTV analysis above.
In 2016, there was an update to the categorisation where collectively
assessed provisions on loans greater than three months in arrears are
now treated as specific provisions, in addition to those that are
individually assessed, as disclosed in note 18.
Below is a summary of capped collateral:
Group Group
As at 31-Dec-17 As at 31-Dec-16
Loan Capped Loan Capped
balance collateral balance collateral
GBPm GBPm GBPm GBPm
Not past due and not impaired 6,792.9 6,784.8 5,478.4 5,464.5
Past due but not impaired 452.2 452.1 395.9 395.8
Impaired 81.4 76.6 80.5 69.1
Total mortgages before provisions 7,326.5 7,313.5 5,954.8 5,929.4
Personal loans 1.1 9.4
Total loans before provisions 7,327.6 5,964.2
Bank Bank
As at 31-Dec-17 As at 31-Dec-16
Loan Capped Loan Capped
balance collateral balance collateral
GBPm GBPm GBPm GBPm
Not past due and not impaired 5,613.8 5,606.5 4,494.3 4,481.3
Past due but not impaired 394.4 394.2 349.1 349.0
Impaired 57.2 52.9 59.8 50.9
Total mortgages before provisions 6,065.4 6,053.6 4,903.2 4,881.2
Personal loans 1.1 9.4
Total loans before provisions 6,066.5 4,912.6
A breakdown of the table above by payment due status is as follows:
Group Group
As at 31-Dec-17 As at 31-Dec-16
Loan Capped Loan Capped
balance collateral balance collateral
GBPm GBPm GBPm GBPm
Not impaired:
Not past due 6,792.9 6,784.8 5,478.4 5,464.5
Past due < 1 month 307.1 307.1 183.5 183.5
Past due 1 to 3 months 102.0 101.9 168.2 168.2
Past due 3 to 6 months 20.9 20.9 24.4 24.3
Past due 6 to 12 months 14.1 14.1 12.8 12.8
Past due over 12 months 7.6 7.6 6.2 6.2
Possessions(1) 0.5 0.5 0.8 0.8
7,245.1 7,236.9 5,874.3 5,860.3
Impaired(2) :
Not past due 12.3 7.7 3.2 0.4
Past due < 1 month 0.8 0.8 1.0 1.0
Past due 1 to 3 months 2.2 2.1 1.2 1.2
Past due 3 to 6 months 23.7 23.7 14.8 14.8
Past due 6 to 12 months 16.3 16.3 16.3 16.2
Past due over 12 months 14.5 14.4 31.8 24.9
Possessions 11.6 11.6 12.2 10.6
81.4 76.6 80.5 69.1
Total mortgages before provisions 7,326.5 7,313.5 5,954.8 5,929.4
Personal loans 1.1 9.4
Total loans before provisions 7,327.6 5,964.2
Contractual maturity:
Past due but not impaired
Less than three months 9.3 5.0
Three months to one year 7.2 4.3
One to five years 27.7 22.4
More than five years 408.0 364.2
452.2 395.9
Impaired
Less than three months 11.2 17.0
Three months to one year 0.9 1.2
One to five years 5.9 2.5
More than five years 63.4 59.8
81.4 80.5
1. Mortgages with properties in possession are not considered
impaired if the fair value of collateral exceeds the value of debt.
2. Impaired is defined as loans with a specific provision
against them.
Bank Bank
As at 31-Dec-17 As at 31-Dec-16
Loan Capped Loan Capped
balance collateral balance collateral
GBPm GBPm GBPm GBPm
Not impaired:
Not past due 5,613.8 5,606.5 4,494.3 4,481.3
Past due < 1 month 267.7 267.6 162.2 162.2
Past due 1 to 3 months 87.2 87.1 146.8 146.7
Past due 3 to 6 months 19.8 19.8 21.5 21.5
Past due 6 to 12 months 12.9 12.9 12.1 12.1
Past due over 12 months 6.3 6.3 5.7 5.7
Possessions(1) 0.5 0.5 0.8 0.8
6,008.2 6,000.7 4,843.4 4,830.3
Impaired(2) :
Not past due 7.0 2.7 2.7 0.4
Past due < 1 month 0.5 0.5 0.5 0.5
Past due 1 to 3 months - - - -
Past due 3 to 6 months 20.8 20.8 12.5 12.5
Past due 6 to 12 months 12.4 12.4 12.9 12.9
Past due over 12 months 12.1 12.1 26.7 20.1
Possessions 4.4 4.4 4.5 4.5
57.2 52.9 59.8 50.9
Total mortgages before provisions 6,065.4 6,053.6 4,903.2 4,881.2
Personal loans 1.1 9.4
Total loans before provisions 6,066.5 4,912.6
Contractual maturity:
Past due but not impaired
Less than three months 7.6 3.0
Three months to one year 1.4 2.9
One to five years 21.1 15.8
More than five years 364.3 327.4
394.4 349.1
Impaired
Less than three months 7.1 16.0
Three months to one year 0.3 1.2
One to five years 5.4 2.5
More than five years 44.4 40.1
57.2 59.8
1. Mortgages with properties in possession are not considered
impaired if the fair value of collateral exceeds the value of debt.
2. Impaired is defined as loans with a specific provision
against them.
Analysis of mortgage portfolio by arrears for BTL/SME
As at 31-Dec-17
Residential
Buy-to-Let Commercial development Funding lines Total
Group GBPm GBPm GBPm GBPm GBPm
Not impaired:
Not past due 4,810.7 360.8 143.9 104.5 5,419.9
Past due < 1
month 160.4 2.8 - - 163.2
Past due 1 to
3 months 31.9 0.6 - - 32.5
Past due 3 to
6 months 2.7 - - - 2.7
Past due 6 to
12 months 0.7 - - - 0.7
Past due over
12 months 0.3 0.8 - - 1.1
Possessions - - - - -
5,006.7 365.0 143.9 104.5 5,620.1
Impaired:
Not past due 4.6 4.5 - - 9.1
Past due < 1
month - 0.1 - - 0.1
Past due 1 to
3 months - - - - -
Past due 3 to
6 months 9.1 - - - 9.1
Past due 6 to
12 months 4.0 0.4 - - 4.4
Past due over
12 months 1.6 0.1 - - 1.7
Possessions 7.8 0.7 - - 8.5
27.1 5.8 - - 32.9
Total
mortgages
before
provisions 5,033.8 370.8 143.9 104.5 5,653.0
Personal loans 1.1
Total loans
before
provisions 5,654.1
Contractual
maturity:
Past due but
not impaired
Less than
three months 5.8 - - - 5.8
Three months
to one year 5.6 - - - 5.6
One to five
years 5.1 0.8 - - 5.9
More than five
years 179.5 3.4 - - 182.9
196.0 4.2 - - 200.2
Impaired
Less than
three months 6.9 - - - 6.9
Three months
to one year 0.6 - - - 0.6
One to five
years 1.1 0.1 - - 1.2
More than five
years 18.5 5.7 - - 24.2
27.1 5.8 - - 32.9
As at 31-Dec-16
Residential
Buy-to-Let Commercial development Funding lines Total
Group GBPm GBPm GBPm GBPm GBPm
Not impaired:
Not past due 3,468.7 252.9 141.6 71.7 3,934.9
Past due < 1
month 62.5 3.3 - - 65.8
Past due 1 to
3 months 56.5 1.1 - - 57.6
Past due 3 to
6 months 2.0 0.3 - - 2.3
Past due 6 to
12 months 0.4 0.7 - - 1.1
Past due over
12 months - 0.3 - - 0.3
Possessions - - - - -
3,590.1 258.6 141.6 71.7 4,062.0
Impaired:
Not past due 2.5 0.1 - - 2.6
Past due < 1
month - 0.4 - - 0.4
Past due 1 to
3 months - 0.3 - - 0.3
Past due 3 to
6 months 1.1 0.2 - - 1.3
Past due 6 to
12 months 2.3 0.1 - - 2.4
Past due over
12 months 9.0 6.0 - - 15.0
Possessions 8.3 2.6 - - 10.9
23.2 9.7 - - 32.9
Total
mortgages
before
provisions 3,613.3 268.3 141.6 71.7 4,094.9
Personal loans 9.4
Total loans
before
provisions 4,104.3
Contractual
maturity:
Past due but
not impaired
Less than
three months 0.1 - - - 0.1
Three months
to one year 0.4 - - - 0.4
One to five
years 4.1 - - - 4.1
More than five
years 116.8 5.7 - - 122.5
121.4 5.7 - - 127.1
Impaired
Less than
three months 15.4 - - - 15.4
Three months
to one year - - - - -
One to five
years - - - - -
More than five
years 7.8 9.7 - - 17.5
23.2 9.7 - - 32.9
As at
31-Dec-17
Residential
Buy-to-Let Commercial development Funding lines Total
Bank GBPm GBPm GBPm GBPm GBPm
Not impaired:
Not past due 4,119.2 22.7 143.9 104.5 4,390.3
Past due < 1
month 145.7 0.5 - - 146.2
Past due 1 to
3 months 25.5 - - - 25.5
Past due 3 to
6 months 2.3 - - - 2.3
Past due 6 to
12 months 0.6 - - - 0.6
Past due over
12 months 0.3 - - - 0.3
Possessions - - - - -
4,293.6 23.2 143.9 104.5 4,565.2
Impaired:
Not past due 2.4 4.2 - - 6.6
Past due < 1
month - - - - -
Past due 1 to
3 months - - - - -
Past due 3 to
6 months 7.6 - - - 7.6
Past due 6 to
12 months 3.0 - - - 3.0
Past due over
12 months 0.9 - - - 0.9
Possessions 4.3 - - - 4.3
18.2 4.2 - - 22.4
Total
mortgages
before
provisions 4,311.8 27.4 143.9 104.5 4,587.6
Personal loans 1.1
Total loans
before
provisions 4,588.7
Contractual maturity:
Past due but not impaired
Less than
three months 4.4 - - - 4.4
Three months
to one year - - - - -
One to five
years 2.7 - - - 2.7
More than five
years 167.3 0.5 - - 167.8
174.4 0.5 - - 174.9
Impaired
Less than
three months 6.6 - - - 6.6
Three months
to one year - - - - -
One to five
years 0.8 - - - 0.8
More than five
years 10.8 4.2 - - 15.0
18.2 4.2 - - 22.4
As at
31-Dec-16
Residential
Buy-to-Let Commercial development Funding lines Total
Bank GBPm GBPm GBPm GBPm GBPm
Not
impaired:
Not past due 2,922.4 25.1 141.6 71.7 3,160.8
Past due < 1
month 53.6 1.4 - - 55.0
Past due 1
to 3
months 50.2 0.3 - - 50.5
Past due 3
to 6
months 0.6 - - - 0.6
Past due 6
to 12
months 0.4 - - - 0.4
Past due
over 12
months - 0.3 - - 0.3
Possessions - - - - -
3,027.2 27.1 141.6 71.7 3,267.6
Impaired:
Not past due 2.6 0.1 - - 2.7
Past due < 1
month - - - - -
Past due 1
to 3 months - - - - -
Past due 3
to 6
months 0.8 - - - 0.8
Past due 6
to 12
months 1.2 - - - 1.2
Past due
over 12
months 8.5 4.9 - - 13.4
Possessions 4.4 - - - 4.4
17.5 5.0 - - 22.5
Total
mortgages
before
provisions 3,044.7 32.1 141.6 71.7 3,290.1
Personal
loans 9.4
Total loans
before
provisions 3,299.5
Contractual maturity:
Past due but not impaired
Less than
three
months 0.1 - - - 0.1
Three months
to one year - - - - -
One to five
years 0.8 0.1 - - 0.9
More than
five years 103.9 1.9 - - 105.8
104.8 2.0 - - 106.8
Impaired
Less than
three
months 15.4 - - - 15.4
Three months
to one year - - - - -
One to five
years - - - - -
More than
five years 2.1 5.0 - - 7.1
17.5 5.0 - - 22.5
Analysis of mortgage portfolio by arrears for Residential mortgages
As at 31-Dec-17
First Second Funding
charge charge lines Total
Group GBPm GBPm GBPm GBPm
Not impaired:
Not past due 1,023.6 331.8 17.6 1,373.0
Past due < 1 month 123.1 20.8 - 143.9
Past due 1 to 3 months 46.4 23.1 - 69.5
Past due 3 to 6 months 10.5 7.7 - 18.2
Past due 6 to 12 months 8.1 5.3 - 13.4
Past due over 12 months 3.2 3.3 - 6.5
Possessions 0.5 - - 0.5
1,215.4 392.0 17.6 1,625.0
Impaired:
Not past due 2.9 0.3 - 3.2
Past due < 1 month 0.7 - - 0.7
Past due 1 to 3 months 2.2 - - 2.2
Past due 3 to 6 months 7.5 7.1 - 14.6
Past due 6 to 12 months 6.6 5.3 - 11.9
Past due over 12 months 2.2 10.6 - 12.8
Possessions 3.1 - - 3.1
25.2 23.3 - 48.5
Total mortgages before provisions 1,240.6 415.3 17.6 1,673.5
Contractual maturity:
Past due but not impaired
Less than three months 3.3 0.2 - 3.5
Three months to one year 1.0 0.6 - 1.6
One to five years 11.5 10.3 - 21.8
More than five years 176.0 49.1 - 225.1
191.8 60.2 - 252.0
Impaired
Less than three months 4.2 0.1 - 4.3
Three months to one year - 0.3 - 0.3
One to five years 0.8 3.9 - 4.7
More than five years 20.2 19.0 - 39.2
25.2 23.3 - 48.5
As at 31-Dec-16
First Second Funding
charge charge lines Total
Group GBPm GBPm GBPm GBPm
Not impaired:
Not past due 1,100.6 392.3 50.6 1,543.5
Past due < 1 month 99.8 17.9 - 117.7
Past due 1 to 3 months 80.2 30.4 - 110.6
Past due 3 to 6 months 12.8 9.3 - 22.1
Past due 6 to 12 months 5.0 6.7 - 11.7
Past due over 12 months 2.8 3.1 - 5.9
Possessions 0.8 - - 0.8
1,302.0 459.7 50.6 1,812.3
Impaired:
Not past due 0.6 - - 0.6
Past due < 1 month 0.6 - - 0.6
Past due 1 to 3 months 0.9 - - 0.9
Past due 3 to 6 months 6.0 7.5 - 13.5
Past due 6 to 12 months 5.8 8.1 - 13.9
Past due over 12 months 4.9 11.9 - 16.8
Possessions 1.3 - - 1.3
20.1 27.5 - 47.6
Total mortgages before provisions 1,322.1 487.2 50.6 1,859.9
Contractual maturity:
Past due but not impaired
Less than three months 4.3 0.6 - 4.9
Three months to one year 2.8 1.1 - 3.9
One to five years 9.1 9.2 - 18.3
More than five years 185.2 56.5 - 241.7
201.4 67.4 - 268.8
Impaired
Less than three months 1.3 0.3 - 1.6
Three months to one year 0.2 1.0 - 1.2
One to five years - 2.5 - 2.5
More than five years 18.6 23.7 - 42.3
20.1 27.5 - 47.6
As at 31-Dec-17
First Second Funding
charge charge lines Total
Bank GBPm GBPm GBPm GBPm
Not impaired:
Not past due 874.1 331.8 17.6 1,223.5
Past due < 1 month 100.7 20.8 - 121.5
Past due 1 to 3 months 38.6 23.1 - 61.7
Past due 3 to 6 months 9.8 7.7 - 17.5
Past due 6 to 12 months 7.0 5.3 - 12.3
Past due over 12 months 2.7 3.3 - 6.0
Possessions 0.5 - - 0.5
1,033.4 392.0 17.6 1,443.0
Impaired:
Not past due 0.1 0.3 - 0.4
Past due < 1 month 0.5 - - 0.5
Past due 1 to 3 months - - - -
Past due 3 to 6 months 6.1 7.1 - 13.2
Past due 6 to 12 months 4.1 5.3 - 9.4
Past due over 12 months 0.6 10.6 - 11.2
Possessions 0.1 - - 0.1
11.5 23.3 - 34.8
Total mortgages before
provisions 1,044.9 415.3 17.6 1,477.8
Contractual maturity:
Past due but not impaired
Less than three months 3.0 0.2 - 3.2
Three months to one year 0.8 0.6 - 1.4
One to five years 8.1 10.3 - 18.4
More than five years 147.4 49.1 - 196.5
159.3 60.2 - 219.5
Impaired
Less than three months 0.4 0.1 - 0.5
Three months to one year - 0.3 - 0.3
One to five years 0.7 3.9 - 4.6
More than five years 10.4 19.0 - 29.4
11.5 23.3 - 34.8
Total mortgages before
provisions 1,044.9 415.3 17.6 1,477.8
Contractual maturity:
Past due but not impaired
Less than three months 3.0 0.2 - 3.2
Three months to one year 0.8 0.6 - 1.4
One to five years 8.1 10.3 - 18.4
More than five years 147.4 49.1 - 196.5
159.3 60.2 - 219.5
Impaired
Less than three months 0.4 0.1 - 0.5
Three months to one year - 0.3 - 0.3
One to five years 0.7 3.9 - 4.6
More than five years 10.4 19.0 - 29.4
11.5 23.3 - 34.8
As at 31-Dec-16
First Second Funding
charge charge lines Total
Bank GBPm GBPm GBPm GBPm
Not impaired:
Not past due 890.6 392.3 50.6 1,333.5
Past due < 1 month 89.3 17.9 - 107.2
Past due 1 to 3 months 65.9 30.4 - 96.3
Past due 3 to 6 months 11.6 9.3 - 20.9
Past due 6 to 12 months 5.0 6.7 - 11.7
Past due over 12 months 2.3 3.1 - 5.4
Possessions 0.8 - - 0.8
1,065.5 459.7 50.6 1,575.8
Impaired:
Not past due - - - -
Past due < 1 month 0.5 - - 0.5
Past due 1 to 3 months - - - -
Past due 3 to 6 months 4.2 7.5 - 11.7
Past due 6 to 12 months 3.6 8.1 - 11.7
Past due over 12 months 1.4 11.9 - 13.3
Possessions 0.1 - - 0.1
9.8 27.5 - 37.3
Total mortgages before provisions 1,075.3 487.2 50.6 1,613.1
Contractual maturity:
Past due but not impaired
Less than three months 2.3 0.6 - 2.9
Three months to one year 1.8 1.1 - 2.9
One to five years 5.7 9.2 - 14.9
More than five years 165.1 56.5 - 221.6
174.9 67.4 - 242.3
Impaired
Less than three months 0.3 0.3 - 0.6
Three months to one year 0.2 1.0 - 1.2
One to five years - 2.5 - 2.5
More than five years 9.3 23.7 - 33.0
9.8 27.5 - 37.3
Geographical analysis by region
An analysis of loans by region is provided below:
Group Group
As at 31-Dec-17 As at 31-Dec-16
Region GBPm % GBPm %
East Anglia 236.4 3 182.23
East Midlands 249.6 4 204.53
Greater London 3,173.0 43 2,543.1 43
Guernsey 73.8 1 93.42
Jersey 225.1 3 282.05
North East 103.0 1 90.32
North West 347.9 5 273.25
Northern Ireland 16.9 - 16.8-
Scotland 51.1 1 56.11
South East 1,591.7 22 1,278.5 21
South West 522.3 7 380.66
Wales 142.9 2 114.72
West Midlands 425.4 6 308.65
Yorks and Humberside 167.4 2 130.82
Total mortgages before provisions 7,326.5 100 5,954.8 100
Personal loans 1.1 9.4
Total loans before provisions 7,327.6 5,964.2
Bank Bank
As at 31-Dec-17 As at 31-Dec-16
Region GBPm % GBPm%
East Anglia 212.4 4 159.73
East Midlands 203.8 3 164.83
Greater London 2,726.9 45 2,234.3 46
North East 86.3 1 74.62
North West 277.0 5 228.45
Northern Ireland 16.5 - 16.4-
Scotland 50.3 1 55.31
South East 1,426.6 24 1,161.7 24
South West 439.1 7 335.47
Wales 126.1 2 102.22
West Midlands 374.6 6 272.75
Yorks and Humberside 125.8 2 97.72
Total mortgages before provisions 6,065.4 100 4,903.2 100
Personal loans 1.1 9.4
Total loans before provisions 6,066.5 4,912.6
Credit risk - Loans and advances to credit institutions and investment
securities
The Group holds treasury instruments in order to meet liquidity
requirements and for general business purposes. The credit risk arising
from these investments is closely monitored and managed by the Group's
treasury department. In managing these assets, Group treasury operates
within guidelines laid down in the treasury policy approved by the Board
and performance is monitored and reported to ALCO monthly, including
through the use of an internally developed rating model based on
counterparty credit default swap spreads.
The Group has limited exposure to emerging markets (Indian operations)
and non-investment-grade debt. The ALCO is responsible for approving
treasury counterparties.
During the year, the average balance of cash in hand, loans and advances
to credit institutions and investment securities on a monthly basis was
GBP710.7m (2016: GBP678.8m).
The following table presents the credit quality of the Group's assets
exposed to credit risk. The Group mainly uses external credit ratings
provided by Fitch, Moody's or Standard & Poor's.
Group
Less than
AAA AA A+ A A rating Total
As at 31-Dec-17 GBPm GBPm GBPm GBPm GBPm GBPm
Bank of England(1) - 1,146.9 - - - 1,146.9
Call accounts - 0.2 - 11.0 29.1 40.3
Floating rate notes 19.1 - - - - 19.1
Total 19.1 1,147.1 - 11.0 29.1 1,206.3
As at 31-Dec-16
Bank of England(1) - 401.0 - - - 401.0
Call accounts - 1.5 0.5 4.4 10.4 16.8
Floating rate notes 29.1 - - - - 29.1
Treasury bills - 112.6 - - - 112.6
Total 29.1 515.1 0.5 4.4 10.4 559.5
Bank
Less than
AAA AA A+ A A rating Total
As at 31-Dec-17 GBPm GBPm GBPm GBPm GBPm GBPm
Bank of England(1) - 1,146.9 - - - 1,146.9
Call accounts - 0.2 - 11.0 21.2 32.4
Floating rate notes 19.1 - - - - 19.1
Total 19.1 1,147.1 - 11.0 21.2 1,198.4
As at 31-Dec-16
Bank of England(1) - 401.0 - - - 401.0
Call accounts - 1.5 0.5 4.4 6.1 12.5
Floating rate notes 29.1 - - - - 29.1
Treasury bills - 112.6 - - - 112.6
Total 29.1 515.1 0.5 4.4 6.1 555.2
The below tables show the industry sector and asset class of the Group's
loans and advances to credit institutions and investment securities:
Group Group
As at 31-Dec-17 As at 31-Dec-16
GBPm % GBPm %
Bank of England(1) 1,146.9 95 401.0 72
Other banks 40.3 3 16.83
Central government - - 112.6 20
Supranationals 19.1 2 29.15
Total 1,206.3 100 559.5 100
Bank Bank
As at 31-Dec-17 As at 31-Dec-16
GBPm % GBPm%
Bank of England(1) 1,146.9 96 401.0 73
Other banks 32.4 3 12.52
Central government - - 112.6 20
Supranationals 19.1 1 29.15
Total 1,198.4 100 555.2 100
1. Balances with the Bank of England include GBP10.0m (2016:
GBP9.1m) held in the cash ratio deposit.
The below tables show the geographical exposure of the Group's loans and
advances to credit institutions and investment securities:
Group Group
As at 31-Dec-17 As at 31-Dec-16
GBPm % GBPm %
United Kingdom 1,181.0 98 525.6 94
Rest of Europe 19.1 2 29.15
Canada 0.2 - 1.5-
India 6.0 - 3.31
Total 1,206.3 100 559.5 100
Bank Bank
As at 31-Dec-17 As at 31-Dec-16
GBPm % GBPm%
United Kingdom 1,179.1 98 524.6 95
Rest of Europe 19.1 2 29.15
Canada 0.2 - 1.5-
Total 1,198.4 100 555.2 100
The Group monitors exposure concentrations against a variety of criteria,
including asset class, sector and geography. To avoid refinancing risks
associated with any one counterparty, sector or geographical region, the
Board has set appropriate limits. These are contained in the treasury
policy.
Liquidity risk
Liquidity risk is the risk of having insufficient liquid assets to
fulfil obligations as they become due or the cost of raising liquid
funds becoming too expensive.
The Group's approach to managing liquidity risk is to maintain
sufficient liquid resources to cover cash flow imbalances and
fluctuations in funding in order to retain full public confidence in the
solvency of the Group and to enable the Group to meet its financial
obligations. This is achieved through maintaining a prudent level of
liquid assets and control of the growth of the business. The Group has
established a call account with the Bank of England and has access to
its contingent liquidity facilities.
Liquidity management is the responsibility of the ALCO, with day-to-day
management delegated to treasury as detailed in the treasury policy. The
ALCO is responsible for setting limits over the level and maturity
profile of wholesale funding and for monitoring the composition of the
Group financial position. For each material class of financial liability,
a contractual maturity analysis is provided in notes 27 to 33.
The Group also monitors a range of numeric triggers, defined in the
contingency funding plan and recovery and resolution plan, which are
designed to capture liquidity stresses in advance in order to allow
sufficient time for management action to take effect. These are
monitored daily by the risk team, with breaches immediately reported to
the CRO, CEO, CFO and Head of Treasury.
Liquidity risk - contractual cash flows
The following tables provide an analysis of the Group's gross
contractual cash flows, derived using interest rates and contractual
maturities at the reporting date and excluding impacts of early payments
or non-payments:
Gross
Carrying inflow/ Up to 3 3-12 More than
Group amount outflow months months 1-5 years 5 years
As at
31-Dec-17 GBPm GBPm GBPm GBPm GBPm GBPm
Financial
liability by
type
Amounts owed
to retail
depositors 6,650.3 6,877.4 2,927.1 2,723.0 1,227.3 -
Amounts owed
to credit
institutions
and other
customers 1,276.0 1,296.5 1.9 29.5 1,265.1 -
Derivative
liabilities 21.8 21.7 1.2 4.8 8.2 7.5
Subordinated
liabilities 10.9 13.9 0.2 0.5 7.5 5.7
Perpetual
Subordinated
Bonds 15.3 19.4 0.4 0.4 3.6 15.0
Total
liabilities 7,974.3 8,228.9 2,930.8 2,758.2 2,511.7 28.2
Off balance
sheet loan
commitments 530.2 530.2 530.2 - - -
Financial
asset by
type
Cash in hand 0.5 0.5 0.5 - - -
Loans and
advances to
credit
institutions 1,187.2 1,187.2 1,177.2 - - 10.0
Investment
securities 19.1 19.1 - 0.1 19.0 -
Loans and
advances to
customers 7,306.0 14,732.0 257.6 545.9 2,130.4 11,798.1
Derivative
assets 6.1 6.1 - (0.1) 6.2 -
Total assets 8,518.9 15,944.9 1,435.3 545.9 2,155.6 11,808.1
Gross
Carrying inflow/ Up to 3 3-12 More than 5
Group amount outflow months months 1-5 years years
As at
31-Dec-16 GBPm GBPm GBPm GBPm GBPm GBPm
Financial
liability by
type
Amounts owed
to retail
depositors 5,952.4 6,093.7 2,648.9 2,026.0 1,418.8 -
Amounts owed
to credit
institutions
and other
customers 105.7 106.6 4.6 0.2 101.8 -
Derivative
liabilities 24.4 25.6 1.3 4.9 9.9 9.5
Subordinated
liabilities 21.6 25.6 3.0 8.6 7.2 6.8
Perpetual
Subordinated
Bonds 15.3 19.4 0.4 0.4 3.6 15.0
Total
liabilities 6,119.4 6,270.9 2,658.2 2,040.1 1,541.3 31.3
Off balance
sheet loan
commitments 365.4 365.4 365.4 - - -
Financial
asset by
type
Cash in hand 0.4 0.4 0.4 - - -
Loans and
advances to
credit
institutions 417.8 417.8 408.7 - - 9.1
Investment
securities 141.7 142.0 82.7 40.1 19.2 -
Loans and
advances to
customers 5,939.2 11,173.8 127.4 602.0 1,686.1 8,758.3
Derivative
assets 1.8 2.0 0.6 1.0 0.4 -
Total assets 6,500.9 11,736.0 619.8 643.1 1,705.7 8,767.4
Gross
Carrying inflow/ Up to 3 3-12 More than
Bank amount outflow months months 1-5 years 5 years
As at 31-Dec-17 GBPm GBPm GBPm GBPm GBPm GBPm
Financial
liability by type
Amounts owed to
retail
depositors 6,650.3 6,877.4 2,927.1 2,723.0 1,227.3 -
Amounts owed to
credit
institutions and
other customers 1,276.0 1,296.5 1.9 29.5 1,265.1 -
Derivative
liabilities 21.8 21.7 1.2 4.8 8.2 7.5
Subordinated
liabilities 10.9 13.9 0.2 0.5 7.5 5.7
Perpetual
Subordinated
Bonds 15.3 19.4 0.4 0.4 3.6 15.0
Total liabilities 7,974.3 8,228.9 2,930.8 2,758.2 2,511.7 28.2
Off balance sheet
loan commitments 434.8 434.8 434.8 - - -
Financial asset by
type
Cash in hand 0.5 0.5 0.5 - - -
Loans and advances
to credit
institutions 1,179.3 1,179.3 1,169.3 - - 10.0
Investment
securities 19.1 19.1 - 0.1 19.0 -
Loans and advances
to customers 6,051.0 12,668.8 203.1 411.8 1,649.1 10,404.8
Derivative assets 6.1 6.1 - (0.1) 6.2 -
Total assets 7,256.0 13,873.8 1,372.9 411.8 1,674.3 10,414.8
Carrying Gross inflow/ Up to 3 3-12 More than
Bank amount outflow months months 1-5 years 5 years
As at
31-Dec-16 GBPm GBPm GBPm GBPm GBPm GBPm
Financial
liability by
type
Amounts owed
to retail
depositors 5,952.4 6,093.7 2,648.9 2,026.0 1,418.8 -
Amounts owed
to credit
institutions
and other
customers 105.7 106.6 4.6 0.2 101.8 -
Derivative
liabilities 24.4 25.6 1.3 4.9 9.9 9.5
Subordinated
liabilities 21.6 25.6 3.0 8.6 7.2 6.8
Perpetual
Subordinated
Bonds 15.3 19.4 0.4 0.4 3.6 15.0
Total
liabilities 6,119.4 6,270.9 2,658.2 2,040.1 1,541.3 31.3
Off balance
sheet loan
commitments 297.2 297.2 297.2 - - -
Financial
asset by
type
Cash in hand 0.4 0.4 0.4 - - -
Loans and
advances to
credit
institutions 413.5 413.5 404.4 - - 9.1
Investment
securities 141.7 142.0 82.7 40.1 19.2 -
Loans and
advances to
customers 4,893.5 9,439.1 93.1 505.7 1,295.9 7,544.4
Derivative
assets 1.8 2.0 0.6 1.0 0.4 -
Total assets 5,450.9 9,997.0 581.2 546.8 1,315.5 7,553.5
The actual repayment profile of retail deposits may differ from the
analysis above due to the option of early withdrawal with a penalty.
The actual repayment profile of loans and advances to customers may
differ from the analysis above since many mortgage loans are repaid
early.
Liquidity risk - asset encumbrance
Asset encumbrance levels are monitored monthly at ALCO. The following
tables provide an analysis of the Group's encumbered and unencumbered
assets:
Group
As at 31-Dec-17
Encumbered Unencumbered
Pledged as Available as
collateral Other(1) collateral Other(2) Total
GBPm GBPm GBPm GBPm GBPm
Cash in hand - - 0.5 - 0.5
Loans and advances to
credit institutions 11.8 10.0 1,136.9 28.5 1,187.2
Investment securities - - 19.1 - 19.1
Loans and advances to
customers 2,303.2 28.9 - 4,973.9 7,306.0
Derivative assets - - - 6.1 6.1
Non-financial assets - - - 70.2 70.2
2,315.0 38.9 1,156.5 5,078.7 8,589.1
Group
As at 31-Dec-16
Encumbered Unencumbered
Pledged as Available as
collateral Other(1) collateral Other(2) Total
GBPm GBPm GBPm GBPm GBPm
Cash in hand - - 0.4 - 0.4
Loans and advances to
credit institutions 6.4 9.1 391.9 10.4 417.8
Investment securities - - 141.7 - 141.7
Loans and advances to
customers 1,413.9 32.0 - 4,493.3 5,939.2
Derivative assets - - - 1.8 1.8
Non-financial assets - - - 80.0 80.0
1,420.3 41.1 534.0 4,585.5 6,580.9
Bank
As at 31-Dec-17
Encumbered Unencumbered
Pledged as Available as
collateral Other(1) collateral Other(2) Total
GBPm GBPm GBPm GBPm GBPm
Cash in hand - - 0.5 - 0.5
Loans and advances to
credit institutions 11.8 10.0 1,136.9 20.6 1,179.3
Investment securities - - 19.1 - 19.1
Loans and advances to
customers 2,303.2 28.9 - 3,718.9 6,051.0
Derivative assets - - - 6.1 6.1
Non-financial assets - - - 1,254.9 1,254.9
2,315.0 38.9 1,156.5 5,000.5 8,510.9
Bank
As at 31-Dec-16
Encumbered Unencumbered
Pledged as Available as
collateral Other(1) collateral Other(2) Total
GBPm GBPm GBPm GBPm GBPm
Cash in hand - - 0.4 - 0.4
Loans and advances to
credit institutions 6.4 9.1 391.8 6.2 413.5
Investment securities - - 141.7 - 141.7
Loans and advances to
customers 1,413.9 32.0 - 3,447.6 4,893.5
Derivative assets - - - 1.8 1.8
Non-financial assets - - - 1,049.5 1,049.5
1,420.3 41.1 533.9 4,505.1 6,500.4
1. Represents assets that are not pledged but that the Group
believes it is restricted from using to secure funding for legal or
other reasons.
2. Represents assets that are not restricted for use as
collateral, but the Group treats as available as collateral once they
are readily available to secure funding in the normal course of
business.
Liquidity risk - liquidity reserves
The following tables analyse the Group's liquidity reserves:
Group Group
As at 31-Dec-17 As at 31-Dec-16
Carrying Fair Carrying Fair
amount value amount value
GBPm GBPm GBPm GBPm
Unencumbered balances with central
banks 1,136.9 1,136.9 391.9 391.9
Unencumbered cash and balances with
other banks 28.5 28.5 10.4 10.4
Other cash and cash equivalents 0.5 0.5 0.4 0.4
Unencumbered investment securities 19.1 19.1 141.7 141.7
Off balance sheet securities under FLS - - 524.6 524.6
1,185.0 1,185.0 1,069.0 1,069.0
Bank Bank
As at 31-Dec-17 As at 31-Dec-16
Carrying Fair Carrying Fair
amount value amount value
GBPm GBPm GBPm GBPm
Unencumbered balances with central
banks 1,136.9 1,136.9 391.8 391.8
Unencumbered cash and balances with
other banks 20.6 20.6 6.2 6.2
Other cash and cash equivalents 0.4 0.4 0.4 0.4
Unencumbered investment securities 19.1 19.1 141.7 141.7
Off balance sheet securities under FLS - - 524.6 524.6
1,177.0 1,177.0 1,064.7 1,064.7
Market risk
Market risk is the risk of an adverse change in the Group's income or
the Group's net worth arising from movement in interest rates, exchange
rates or other market prices. Market risk exists, to some extent, in all
the Group's businesses. The Group recognises that the effective
management of market risk is essential to the maintenance of stable
earnings and preservation of shareholder value.
Interest rate risk
The primary market risk faced by the Group is interest rate risk.
Interest rate risk is the risk that the fair value or future cash flows
of a financial instrument will fluctuate because of changes in market
interest rates. It is most prevalent in mortgage lending where fixed
rate mortgages are not funded by fixed rate deposits of the same
duration, or where the fixed rate risk is not hedged by a fully matching
interest rate derivative.
The Group is exposed to movements in interest rates reflecting the
mismatch between the dates on which interest receivable on assets and
interest payable on liabilities are next reset to market rates or, if
earlier, the dates on which the instruments mature. Exposure is
mitigated on a continuous basis through the use of derivatives and
reserve allocations within limits set by the ALCO and the Board (1.5% of
CET1 as at 31 December 2017).
The Group measures interest rate risk using 14 different interest rate
curve shift scenarios designed to emulate a full range of market
movements. These 14 scenarios are defined by ALCO and are based on three
'shapes' of curve movement (shift, twist and flex) with movements in
rates scaled to approximate the potential move over one year at 99.9%
two-tailed confidence interval with interest rates floored to zero. In
addition, the regulatory scenario of an un-floored parallel shift of
200bps in both directions is applied. After taking into account the
derivatives entered into by the Group, the maximum loss under these
scenarios as at 31 December 2017 would have been GBP3.2m (2016: GBP1.9m)
and the maximum gain GBP1.2m (2016: GBP2.1m). Against a parallel
interest rate increase of 2%, the impact would have been a GBP2.8m loss
(2016: GBP3.9m gain) in profit or loss.
The interest rate sensitivity is impacted by behavioural assumptions
used by the Group, the most significant of which are prepayments and
reserve allocations. Expected prepayments are modelled based on
historical analysis and current market rates. The reserve allocation
strategy is approved by Risk Committee and set to reflect the current
balance sheet and future plans.
There is no material difference between the interest rate risk profile
for the Group and that for the Bank.
Foreign exchange rate risk
The Group has limited exposure to foreign exchange risk in respect of
its Indian operations. A 5% movement in exchange rates would result in
GBP0.1m (2016: GBP0.1m) effect in profit or loss and GBP0.3m (2016:
GBP0.2m) in equity.
The Bank is not exposed to foreign exchange risk since all its assets
and liabilities are denominated in Pounds Sterling.
Structured entities
The Group had no structured entities as at 31 December 2017 and as at 31
December 2016.
38. Financial instruments and fair values
i. Financial assets and financial liabilities
The following tables summarise the classification and carrying value of
the Group's financial assets and financial liabilities:
Group
As at
31-Dec-17
Fair
value
through Total
profit
or Available- Loans and Amortised carrying
loss for-sale receivables cost amount
Note GBPm GBPm GBPm GBPm GBPm
Assets
Cash in hand - - 0.5 - 0.5
Loans and
advances to
credit
institutions 15 - - 1,187.2 - 1,187.2
Investment
securities 16 - 19.1 - - 19.1
Loans and
advances to
customers 17 - - 7,306.0 - 7,306.0
Derivative
assets 20 6.1 - - - 6.1
6.1 19.1 8,493.7 - 8,518.9
Liabilities
Amounts owed
to retail
depositors 27 - - - 6,650.3 6,650.3
Amounts owed
to credit
institutions 28 - - - 1,250.3 1,250.3
Amounts owed
to other
customers 29 - - - 25.7 25.7
Derivative
liabilities 20 21.8 - - - 21.8
Subordinated
liabilities 32 - - - 10.9 10.9
Perpetual
Subordinated
Bonds 33 - - - 15.3 15.3
21.8 - - 7,952.5 7,974.3
Group
As at
31-Dec-16
Fair value Total
through Available- Loans and Amortised carrying
profit or
loss for-sale receivables cost amount
Note GBPm GBPm GBPm GBPm GBPm
Assets
Cash in hand - - 0.4 - 0.4
Loans and
advances to
credit
institutions 15 - - 417.8 - 417.8
Investment
securities 16 - 141.7 - - 141.7
Loans and
advances to
customers 17 - - 5,939.2 - 5,939.2
Derivative
assets 20 1.8 - - - 1.8
1.8 141.7 6,357.4 - 6,500.9
Liabilities
Amounts owed
to retail
depositors 27 - - - 5,952.4 5,952.4
Amounts owed
to credit
institutions 28 - - - 101.7 101.7
Amounts owed
to other
customers 29 - - - 4.0 4.0
Derivative
liabilities 20 24.4 - - - 24.4
Subordinated
liabilities 32 - - - 21.6 21.6
Perpetual
Subordinated
Bonds 33 - - - 15.3 15.3
24.4 - - 6,095.0 6,119.4
Bank
As at
31-Dec-17
Fair value
through Total
profit or Available- Loans and Amortised carrying
loss for-sale receivables cost amount
Note GBPm GBPm GBPm GBPm GBPm
Assets
Cash in hand - - 0.5 - 0.5
Loans and
advances to
credit
institutions 15 - - 1,179.3 - 1,179.3
Investment
securities 16 - 19.1 - - 19.1
Loans and
advances to
customers 17 - - 6,051.0 - 6,051.0
Derivative
assets 20 6.1 - - - 6.1
6.1 19.1 7,230.8 - 7,256.0
Liabilities
Amounts owed
to retail
depositors 27 - - - 6,650.3 6,650.3
Amounts owed
to credit
institutions 28 - - - 1,250.3 1,250.3
Amounts owed
to other
customers 29 - - - 25.7 25.7
Derivative
liabilities 20 21.8 - - - 21.8
Subordinated
liabilities 32 - - - 10.9 10.9
Perpetual
Subordinated
Bonds 33 - - - 15.3 15.3
21.8 - - 7,952.5 7,974.3
Bank
As at
31-Dec-16
Fair value Total
through Available- Loans and Amortised carrying
profit or
loss for-sale receivables cost amount
Note GBPm GBPm GBPm GBPm GBPm
Assets
Cash in hand - - 0.4 - 0.4
Loans and
advances to
credit
institutions 15 - - 413.5 - 413.5
Investment
securities 16 - 141.7 - - 141.7
Loans and
advances to
customers 17 - - 4,893.5 - 4,893.5
Derivative
assets 20 1.8 - - - 1.8
1.8 141.7 5,307.4 - 5,450.9
Liabilities
Amounts owed
to retail
depositors 27 - - - 5,952.4 5,952.4
Amounts owed
to credit
institutions 28 - - - 101.7 101.7
Amounts owed
to other
customers 29 - - - 4.0 4.0
Derivative
liabilities 20 24.4 - - - 24.4
Subordinated
liabilities 32 - - - 21.6 21.6
Perpetual
Subordinated
Bonds 33 - - - 15.3 15.3
24.4 - - 6,095.0 6,119.4
The Group has no financial assets nor financial liabilities classified
as held for trading or held to maturity.
ii. Fair values
The following tables summarise the carrying value and estimated fair
value of financial instruments not measured at fair value in the
statement of financial position:
Group Group
As at 31-Dec-17 As at 31-Dec-16
Carrying Estimated Carrying Estimated
value fair value value fair value
GBPm GBPm GBPm GBPm
Assets
Cash in hand 0.5 0.5 0.4 0.4
Loans and advances to credit
institutions 1,187.2 1,187.2 417.8 417.8
Loans and advances to customers 7,306.0 7,715.4 5,939.2 6,259.1
8,493.7 8,903.1 6,357.4 6,677.3
Liabilities
Amounts owed to retail depositors 6,650.3 6,684.0 5,952.4 5,992.4
Amounts owed to credit
institutions 1,250.3 1,250.3 101.7 101.7
Amounts owed to other customers 25.7 25.7 4.0 4.0
Subordinated liabilities 10.9 11.1 21.6 24.0
Perpetual Subordinated Bonds 15.3 15.3 15.3 14.4
7,952.5 7,986.4 6,095.0 6,136.5
Bank Bank
As at 31-Dec-17 As at 31-Dec-16
Carrying Estimated Carrying Estimated
value fair value value fair value
GBPm GBPm GBPm GBPm
Assets
Cash in hand 0.5 0.5 0.4 0.4
Loans and advances to credit
institutions 1,179.3 1,179.3 413.5 413.5
Loans and advances to customers 6,051.0 6,408.4 4,893.5 5,167.7
7,230.8 7,588.2 5,307.4 5,581.6
Liabilities
Amounts owed to retail depositors 6,650.3 6,684.0 5,952.4 5,992.4
Amounts owed to credit
institutions 1,250.3 1,250.3 101.7 101.7
Amounts owed to other customers 25.7 25.7 4.0 4.0
Subordinated liabilities 10.9 11.1 21.6 24.0
Perpetual Subordinated Bonds 15.3 15.3 15.3 14.4
7,952.5 7,986.4 6,095.0 6,136.5
The fair values in this table are estimated using the valuation
techniques below. The estimated fair value is stated as at 31 December
and may be significantly different from the amounts which will actually
be paid on the maturity or settlement dates of each financial
instrument.
Cash in hand
This represents physical cash across the Group's branch network where
fair value is considered to be equal to carrying value.
Loans and advances to credit institutions
This mainly represents the Group's working capital current accounts and
call accounts with central governments and other banks with an original
maturity of less than three months. Fair value is not considered to be
materially different to carrying value.
Loans and advances to customers
This mainly represents secured mortgage lending to customers. The fair
value of fixed rate and tracker mortgages have been estimated by using
system generated calculations based on known cash flow dates and
interest rates and expected future interest rates extrapolated from an
input zero coupon 24 point yield curve. The interest rate on variable
rate mortgages is considered to be equal to current market product rates
and as such fair value is estimated to be equal to carrying value.
Amounts owed to retail depositors
The fair value of fixed rate retail deposits has been estimated using
system generated calculations based on known cash flow dates and
interest rates and expected future interest rates extrapolated from a
input zero coupon 24 point yield curve. Retail deposits at variable
rates and deposits payable on demand are considered to be at current
market rates and as such fair value is estimated to be equal to carrying
value.
Amounts owed to credit institutions
This mainly represents amounts drawn down under the Bank of England TFS.
Fair value is considered to be equal to carrying value.
Amounts owed to other customers
This represents fixed rate saving products to corporations and local
authorities with original maturities greater than three months. The fair
value is estimated using system generated calculations based on known
cash flow dates and interest rates and expected future interest rates
extrapolated from an input zero coupon 24 point yield curve.
Subordinated liabilities and Perpetual Subordinated Bonds
The fair value of subordinated liabilities is estimated using system
generated calculations based on known cash flow dates and interest rates
and expected future interest rates extrapolated from an input zero
coupon 24 point yield curve. The PSBs are listed on the London Stock
Exchange with fair value being the quoted market price at the reporting
date.
iii. Fair value classification
The following tables provide an analysis of financial assets and
financial liabilities measured at fair value on the statement of
financial position grouped into Levels 1 to 3 based on the degree to
which the fair value is observable:
Carrying Principal
Group and Bank amount amount Level 1 Level 2 Level 3 Total
As at 31-Dec-17 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Investment securities 19.1 19.0 19.1 - - 19.1
Derivative assets 6.1 1,636.1 - 6.1 - 6.1
25.2 1,655.1 19.1 6.1 - 25.2
Financial liabilities
Derivative liabilities 21.8 (2,493.9) - 21.8 - 21.8
Carrying Principal
Group and Bank amount amount Level 1 Level 2 Level 3 Total
As at 31-Dec-16 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Investment securities 141.7 141.6 141.7 - - 141.7
Derivative assets 1.8 2,267.1 - 1.8 - 1.8
143.5 2,408.7 141.7 1.8 - 143.5
Financial liabilities
Derivative liabilities 24.4 (612.4) - 24.4 - 24.4
Level 1: Fair values that are based entirely on quoted market prices
(unadjusted) in an actively traded market for identical assets and
liabilities that the Group has the ability to access. Valuation
adjustments and block discounts are not applied to level 1 instruments.
Since valuations are based on readily available observable market prices,
this makes them most reliable, reduces the need for management judgement
and estimation and also reduces the uncertainty associated with
determining fair values.
Level 2: Fair values that are based on one or more quoted prices in
markets that are not active or for which all significant inputs are
taken from directly or indirectly observable market data. These include
valuation models used to calculate the present value of expected future
cash flows and may be employed either when no active market exists or
when there are quoted prices available for similar instruments in active
markets.
Level 3: Fair values for which any one or more significant input is not
based on observable market data and the unobservable inputs have a
significant effect on the instruments fair value. Valuation models that
employ significant unobservable inputs require a higher degree of
management judgement and estimation in determining the fair value.
Management judgement and estimation are usually required for the
selection of the appropriate valuation model to be used, determination
of expected future cash flows on the financial instruments being valued,
determination of the probability of counterparty default and prepayments,
determination of expected volatilities and correlations and the
selection of appropriate discount rates.
Investment securities
The fair values of UK treasury bills and supranational bonds are based
on quoted bid prices in active markets.
Derivatives
The Group uses LIBOR curves to value its derivatives; however, using OIS
curves would not materially change their value. The fair value of the
Group's derivative financial instruments incorporates CVA and DVA. The
DVA and CVA take into account the respective credit ratings of the Bank
and counterparty and whether the derivative is collateralised or not. In
considering which similar instruments to use, management takes into
account the sensitivity of the instrument to changes in market rates and
the credit quality of the instrument.
The following table provides an analysis of financial assets and
financial liabilities not measured at fair value on the statement of
financial position grouped into Levels 1 to 3 based on the degree to
which the fair value is observable:
Carrying Principal Estimated fair value
Group amount amount Level 1 Level 2 Level 3 Total
As at 31-Dec-17 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash in hand 0.5 0.5 - 0.5 - 0.5
Loans and advances to
credit institutions 1,187.2 1,187.2 - 1,187.2 - 1,187.2
Loans and advances to
customers 7,306.0 7,441.9 - 2,788.8 4,926.6 7,715.4
8,493.7 8,629.6 - 3,976.5 4,926.6 8,903.1
Financial liabilities
Amounts owed to
retail depositors 6,650.3 6,610.1 - 2,474.4 4,209.6 6,684.0
Amounts owed to
credit institutions 1,250.3 1,250.3 - 1,250.3 - 1,250.3
Amounts owed to other
customers 25.7 25.5 - - 25.7 25.7
Subordinated
liabilities 10.9 10.7 - 11.1 - 11.1
Perpetual
Subordinated Bonds 15.3 15.0 15.3 - - 15.3
7,952.5 7,911.6 15.3 3,735.8 4,235.3 7,986.4
Estimated fair value (Restated)
Carrying Principal
Group amount amount Level 1 Level 2 Level 3 Total
As at 31-Dec-16 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash in hand 0.4 0.4 - 0.4 - 0.4
Loans and advances
to credit
institutions 417.8 417.8 - 417.8 - 417.8
Loans and advances
to customers(1) 5,939.2 6,069.4 - 2,508.4 3,750.7 6,259.1
6,357.4 6,487.6 - 2,926.6 3,750.7 6,677.3
Financial
liabilities
Amounts owed to
retail
depositors(1) 5,952.4 5,906.5 - 2,275.9 3,716.5 5,992.4
Amounts owed to
credit
institutions 101.7 101.6 - 101.7 - 101.7
Amounts owed to
other
customers(1) 4.0 4.0 - - 4.0 4.0
Subordinated
liabilities 21.6 20.7 - 24.0 - 24.0
Perpetual
Subordinated
Bonds(2) 15.3 15.0 14.4 - - 14.4
6,095.0 6,047.8 14.4 2,401.6 3,720.5 6,136.5
1. The fair values for prior year comparatives have been
reclassified to disclose the different valuation techniques used when
assessing fair value is equal to carrying value (Level 2) and where
system generated calculations are used to estimate fair value (Level 3).
2. The fair value for prior year comparatives for PSBs has been
restated to use quoted market prices.
Carrying Principal Estimated fair value
Bank amount amount Level 1 Level 2 Level 3 Total
As at 31-Dec-17 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash in hand 0.5 0.5 - 0.5 - 0.5
Loans and advances to
credit institutions 1,179.3 1,179.3 - 1,179.3 - 1,179.3
Loans and advances to
customers 6,051.0 6,177.1 - 2,653.3 3,755.1 6,408.4
7,230.8 7,356.9 - 3,833.1 3,755.1 7,588.2
Financial liabilities
Amounts owed to
retail depositors 6,650.3 6,610.1 - 2,474.4 4,209.6 6,684.0
Amounts owed to
credit institutions 1,250.3 1,250.3 - 1,250.3 - 1,250.3
Amounts owed to other
customers 25.7 25.5 - - 25.7 25.7
Subordinated
liabilities 10.9 10.7 - 11.1 - 11.1
Perpetual
Subordinated Bonds 15.3 15.0 15.3 - - 15.3
7,952.5 7,911.6 15.3 3,735.8 4,235.3 7,986.4
Estimated fair value (Restated)
Carrying Principal
Bank amount amount Level 1 Level 2 Level 3 Total
As at 31-Dec-16 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash in hand 0.4 0.4 - 0.4 - 0.4
Loans and advances
to credit
institutions 413.5 413.5 - 413.5 - 413.5
Loans and advances
to customers(1) 4,893.5 5,015.0 - 2,370.8 2,796.9 5,167.7
5,307.4 5,428.9 - 2,784.7 2,796.9 5,581.6
Financial
liabilities
Amounts owed to
retail
depositors(1) 5,952.4 5,906.5 - 2,275.9 3,716.5 5,992.4
Amounts owed to
credit
institutions 101.7 101.6 - 101.7 - 101.7
Amounts owed to
other
customers(1) 4.0 4.0 - - 4.0 4.0
Subordinated
liabilities 21.6 20.7 - 24.0 - 24.0
Perpetual
Subordinated
Bonds(2) 15.3 15.0 14.4 - - 14.4
6,095.0 6,047.8 14.4 2,401.6 3,720.5 6,136.5
1. The fair values for prior year comparatives have been
reclassified to disclose the different valuation techniques used when
assessing fair value is equal to carrying value (Level 2) and where
system generated calculations are used to estimate fair value (Level 3).
2. The fair value for prior year comparatives for PSBs has been
restated to use quoted market prices.
39. Pension scheme
Defined contribution scheme
The amount charged to profit or loss in respect of contributions to the
Group's defined contribution and stakeholder pension arrangements is the
contribution payable in the period. The total pension cost in the year
amounted to GBP1.3m (2016: GBP1.1m).
Defined benefit scheme
Kent Reliance Building Society (the 'Society') operated a defined
benefit pension scheme (the 'Scheme') funded by the payment of
contributions to a separately administered fund for nine retired
members. The Society's Board decided to close the Scheme with effect
from 31 December 2001 and introduced a new defined contribution scheme
to cover service for Scheme members from 1 January 2002.
The Scheme Trustees, having taken actuarial advice, decided to wind up
the Scheme rather than continue to operate it on a 'paid up' basis. The
winding up is largely complete. As at 31 December 2017, the liability to
remaining members is GBP2k (31 December 2016: GBP2k) matched by Scheme
assets.
40. Capital management
The Group's prime objectives in relation to the management of capital
are to provide a sufficient capital base to cover business risks and
support future business development. The Group is compliant with the
requirements set out by the PRA, the Group's primary prudential
supervisor.
Capital management is based on the three 'pillars' of Basel II. Under
Pillar 1, the Group calculates its minimum capital requirements based on
8% of risk weighted assets. The PRA then applies a multiplier to this
amount to cover risks under Pillar 2 of Basel II and generates an
individual capital guidance ('ICG'). The Group manages and reports its
capital on a solo consolidated basis and hence the Bank's capital
position is not disclosed separately.
To comply with Pillar 2, the Group completes an annual self-assessment
of risks known as the internal capital adequacy assessment process
('ICAAP') reviewed by the PRA. Pillar 3 requires firms to publish a set
of disclosures which allow market participants to assess information on
that firm's capital, risk exposures and risk assessment process. The
Group's Pillar 3 disclosures can be found on the Group's website.
Basel III came into force through the Capital Requirements Directive and
Regulation ('CRD IV'). Basel III complements and enhances Basel I and II
with additional safety measures. Basel III changed definitions of
regulatory capital, introduced new capital buffers and liquidity ratios,
and modified the way regulatory capital is calculated.
The ultimate responsibility for capital adequacy rests with the Board of
Directors. The Group's ALCO, which consists of the CEO, CFO and other
senior executives, is responsible for the management of the capital
process, including approving policy, overseeing internal controls and
setting internal limits over capital ratios.
The Group actively manages its capital position and reports this on a
regular basis to senior management via the ALCO and other governance
committees. Capital requirements are included within budgets, forecasts
and strategic plans with initiatives being executed against this plan.
The Group's regulatory capital consists of the sum of the following
elements:
- Tier 1 capital comprises of CET1 capital and Additional Tier 1
('AT1') capital, calculated on a solo consolidation basis. The CET1
capital is made up of share capital, share premium, retained earnings
(net of foreseeable dividends), capital contribution reserve,
share-based payment reserve, transfer reserve, foreign exchange reserve
and AFS reserve. The AT1 capital is made up of issued AT1 securities.
Deductions from Tier 1 capital are intangible assets and deferred tax
assets subject to future profitability.
- Tier 2 capital comprises of PSBs, dated subordinated debt and
general credit risk adjustments. The dated subordinated debt is reduced
for amortisation when within five years of maturity or under the Capital
Requirements Regulation ('CRR') grandfathering rules.
The Group's Pillar 1 capital information is presented below:
As at As at
31-Dec-17 31-Dec-16
GBPm GBPm
Common equity tier 1 capital
Called up share capital 2.4 2.4
Share premium, capital contribution and share-based
payment reserve 169.8 166.0
Retained earnings 337.5 240.7
Transfer reserve (12.8) (12.8)
Other reserves (0.1) 0.1
Total equity excluding equity bonds 496.8 396.4
Foreseeable dividends (22.6) (18.5)
Solo consolidation adjustments(1) (4.8) (5.3)
Deductions from common equity tier 1 capital
Intangible assets (6.8) (4.7)
Deferred tax asset (2.5) (2.3)
Common equity tier 1 capital 460.1 365.6
Additional tier 1 capital
AT1 securities 60.0 -
Total tier 1 capital 520.1 365.6
Tier 2 capital
Subordinated debt and PSBs 47.7 48.5
Collective provisions 2.0 1.6
Deductions from tier 2 capital (2.5) (2.0)
Total tier 2 capital 47.2 48.1
Total regulatory capital 567.3 413.7
Risk weighted assets (unaudited) 3,348.5 2,743.0
1. The Bank has solo consolidation waivers for most of its
subsidiaries. The equity for unconsolidated entities has been removed
from CET1.
41. Operating segments
From 1 January 2017, the Group distinguishes two segments within its
operations (see note 1e for additional information):
1. BTL/SME; secured lending on property for investment and
commercial purposes, and
2. Residential mortgages; lending to customers who live in their
own homes, secured either via first or second charges against the
residential home.
The financial position and results of operations of the above segments
are summarised below:
Residential
BTL/SME mortgages Total
Year ended 31-Dec-17 GBPm GBPm GBPm
Balances at the reporting date
Gross loans and advances to customers 5,654.1 1,673.5 7,327.6
Provision for impairment losses on loans and
advances (13.2) (8.4) (21.6)
Loans and advances to customers 5,640.9 1,665.1 7,306.0
Capital expenditure 11.0 3.3 14.3
Profit or loss for the period
Net interest income 177.1 68.3 245.4
Other expense (1.5) (5.8) (7.3)
Total income 175.6 62.5 238.1
Impairment losses (0.8) (3.6) (4.4)
Contribution to profit 174.8 58.9 233.7
Operating expenses (65.1)
FSCS and other provisions (0.9)
Profit before taxation 167.7
Taxation (40.8)
Profit for the year 126.9
Residential
BTL/SME mortgages Total
Year ended 31-Dec-16 GBPm GBPm GBPm
Balances at the reporting date
Gross loans and advances to customers 4,104.3 1,859.9 5,964.2
Provision for impairment losses on loans and
advances (17.2) (7.8) (25.0)
Loans and advances to customers 4,087.1 1,852.1 5,939.2
Capital expenditure 5.3 2.4 7.7
Profit or loss for the period
Net interest income 135.2 71.4 206.6
Other expense (0.5) (4.7) (5.2)
Total income 134.7 66.7 201.4
Impairment losses (1.8) (7.2) (9.0)
Contribution to profit 132.9 59.5 192.4
Operating expenses (53.7)
FSCS and other provisions (0.5)
Exceptional items 24.9
Profit before taxation 163.1
Taxation (42.2)
Profit for the year 120.9
42. Country by country reporting
Country by Country Reporting ('CBCR') was introduced through Article 89
of CRD IV, aimed at the banking and capital markets industry.
From 1 January 2015, all institutions within the scope of CRD IV should
publish annually, on a consolidated basis, by country where they have an
establishment:
a) their name, nature of activities and geographic location;
b) number of employees;
c) their turnover;
d) pre-tax profit or loss;
e) corporation tax paid; and
f) any public subsidies received.
The ongoing reporting deadline is 31 December each year, starting from
31 December 2015, and disclosures should relate to the most recently
ended accounting period.
The name, nature of activities and geographic location of the Group's
companies are presented below:
Jurisdiction Country Name Activities
UK(1) England OneSavings Bank plc
Easioption Limited
Guernsey Home Loans Limited
Heritable Development Finance
Limited
Interbay Group Holdings
Limited
Jersey Home Loans Limited
Prestige Finance Limited
Reliance Property Loans
Limited
Rochester Mortgages Limited Commercial banking
5D Finance Limited
5D Lending Ltd
Interbay Funding, Ltd
Inter Bay Financial I Limited
Inter Bay Financial II Limited
Interbay Holdings Ltd
Interbay ML, Ltd
Guernsey Guernsey Home Loans Limited
Jersey Jersey Home Loans Limited
India India OSB India Private Limited Back office processing
1. Guernsey Home Loans Ltd (Guernsey) and Jersey Home Loans Ltd
(Jersey) are incorporated in Guernsey and Jersey respectively but are
considered to be located in the UK as they are managed and controlled in
the UK and have no permanent establishment in Guernsey or Jersey.
Other disclosures required by the CBCR directive are provided below:
2017 UK India Consolidation(2) Total
Average number of employees 483 330 - 813
Turnover(1) , GBPm 238.0 5.4 (5.3) 238.1
Profit/(loss) before tax, GBPm 167.5 1.0 (0.8) 167.7
Corporation tax paid, GBPm 41.8 0.3 - 42.1
2016 UK India Consolidation(2) Total
Average number of employees 431 243 - 674
Turnover(1) , GBPm 201.2 3.9 (3.7) 201.4
Profit/(loss) before tax, GBPm 162.9 1.0 (0.8) 163.1
Corporation tax paid, GBPm 29.4 0.2 - 29.6
1. Turnover represents total income before impairment losses,
regulatory provisions and operating costs, but after net interest, net
commissions and fees, gains and losses on financial instruments and
external servicing fees.
2. Relates to a management fee from Indian subsidiaries to
OneSavings Bank plc for providing back office processing.
The tables below reconcile tax charged and tax paid during the year.
UK India Total
2017 GBPm GBPm GBPm
Tax charge 40.5 0.3 40.8
Effects of:
Other timing differences 0.8 - 0.8
Tax outside of profit or loss (1.2) - (1.2)
Prior year tax paid during the year 22.3 - 22.3
Current year tax to be paid after the reporting date (20.6) - (20.6)
Tax paid 41.8 0.3 42.1
UK India Total
2016 GBPm GBPm GBPm
Tax charge 41.9 0.3 42.2
Effects of:
Other timing differences 0.2 - 0.2
Tax outside of profit or loss (0.3) - (0.3)
Prior year tax paid during the year 9.2 - 9.2
Current year tax to be paid after the reporting date (21.6) (0.1) (21.7)
Tax paid 29.4 0.2 29.6
43. Events after the reporting date
There are no material events after the reporting date.
44. Controlling party
As at 31 December 2017, there was no controlling party of OSB. During
2017, OSB Holdco Limited reduced its interest in the Company and as at
the balance sheet date no longer held a controlling interest. The
Company maintained the Relationship Agreement with OSB Holdco Limited
during 2017, as set out on page 69. OSB Holdco Limited is a company
controlled by funds advised by J.C. Flowers & Co. LLC.
Glossary
AGM Annual General Meeting
ALCO Assets and Liabilities Committee
AT1 Additional Tier 1 Capital
BoE Bank of England
CEO Chief Executive Officer
CFO Chief Financial Officer
CRD IV Capital Requirement Directive and Regulation
CRO Chief Risk Officer
DSBP Deferred Share Bonus Plan
EIR Effective Interest Rate
EPS Earnings Per Share
EU European Union
FCA Financial Conduct Authority
FLS Funding for Lending Scheme
FRC Financial Reporting Council
FSCS Financial Services Compensation Scheme
FTSE Financial Times Stock Exchange
HMRC Her Majesty Revenue and Customs
HPI House Price Inflation
HR Human Resources
IAS International Accounting Standards
ICAAP Internal Capital Adequacy Assessment Process ICR Interest
Coverage Ratio
IFRS International Financial Reporting Standards
ILAAP Individual Liquidity Adequacy Assessment Process IPO
Initial Public Offering
IRB Internal Ratings-Based Approach Bank
ISA Individual Savings Account
KRPS Kent Reliance Provident Society LCR Liquidity Coverage
Ratio
LIBOR London Inter Bank Offered Rate
LTIP Long-Term Incentive Plan
LTV Loan to value
MI Management Information NIM Net Interest Margin
NPS Net Promoter Score
ONS Office for National Statistics PRA Prudential Regulatory
Authority PRS Private Rented Sector
PSBs Perpetual Subordinated Bonds PSP Performance Share
Plan
RMBS Residential Mortgage Backed Securities RoE Return
on equity
RWA Risk weighted assets SAYE Save As You Earn SDLT Stamp
Duty Land Tax
SID Senior Independent Director SME Small Medium Enterprises
SRMF Strategic Risk Management Framework
TFS Term Funding Scheme
Company information
Registered office and head office
Reliance House
Sun Pier
Chatham
Kent
ME4 4ET
United Kingdom
Registered in England no: 07312896
www.osb.co.uk
Registrars
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex
BN99 8LU
United Kingdom
Telephone: 0371 384 2030
International: +44 121 415 7047
Investor relations
Email: osbrelations@osb.co.uk
Telephone: 01634 838973
Private shareholders are welcome to contact the Company Secretary if
they have any questions or concerns they wish to be raised with the
Board.
One Savings Bank
www.osb.co.uk
Reliance House, Sun Pier, Chatham, Kent ME4 4ET
T +44 (0) 1634 848944
This announcement is distributed by Nasdaq Corporate Solutions on behalf
of Nasdaq Corporate Solutions clients.
The issuer of this announcement warrants that they are solely
responsible for the content, accuracy and originality of the information
contained therein.
Source: OneSavings Bank plc via Globenewswire
http://www.osb.co.uk/
(END) Dow Jones Newswires
March 29, 2018 12:14 ET (16:14 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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