TIDMOSB
RNS Number : 8117S
OneSavings Bank PLC
14 March 2019
14 March 2019
OneSavings Bank plc
Preliminary results for the year ended 31 December 2018
Financial highlights
-- Underlying profit before tax(1) increased 15% to GBP193.6m (2017: GBP167.7m)
-- Loan book growth of 23% to GBP9.0bn (2017: GBP7.3bn) driven
by 15% growth in gross originations to GBP3.0bn (2017:
GBP2.6bn)
-- Strong income growth alongside continued focus on cost
discipline and efficiency delivered a strong cost to income
ratio(2) of 28% (2017: 27%) and a management expense ratio of 0.84%
(2017: 0.86%) despite planned investment in the business
-- Net interest margin ('NIM')(3) remains strong at 304bps (2017: 316bps)
-- Impairments remain low with a loan loss ratio(4) of 10bps
(2017: 7bps) despite the addition of a 'no-deal' Brexit scenario in
our IFRS 9 modelling
-- Return on equity ('RoE')(5) remained strong at 26% (2017:
28%), with a Common Equity Tier 1 ('CET1') capital ratio of 13.3%
(2017: 13.7%)
-- Underlying basic earnings per share(6) grew 14% to 58.5 pence (2017: 51.1 pence)
-- Recommended final dividend(7) of 10.3 pence per share giving
a full year dividend of 14.6 pence per share, in line with our
target dividend payout ratio
-- Exceptional cost of GBP9.8m in respect of option to acquire
the JV partners' interest in the Heritable residential development
finance business
Andy Golding, CEO of OneSavings Bank, said:
"I am delighted that OneSavings Bank delivered excellent
shareholder returns in 2018. Our core Buy-to-Let segment continued
to grow, attracting our target professional landlords, and our
commercial business is flourishing, reflected in strong new
business volumes in the year. The Group's organic originations grew
by 15%, supporting 15% growth in underlying profit before tax to
GBP193.6m and an attractive return on equity of 26%.
I am particularly proud of our lending growth in the Buy-to-Let
segment this year, which exceeded the overall market growth, due to
the strength of our proposition and focus on professional
landlords. Whilst the economic effect of Brexit may impact some
business opportunities, OneSavings Bank is positioned well, with a
strong balance sheet, an excellent track record in raising and
retaining retail funds and a high-quality secured asset
portfolio.
In 2019 the Bank took the opportunity to acquire our JV
partners' interest in the Heritable residential development finance
business, demonstrating our ability to deliver value through
growing successful new business areas organically. I am
particularly pleased that we were able to both retain the key
individuals in the business going forward, and continue to offer
them the opportunity to lend alongside the Bank.
Following the statement released on 9 March 2019 confirming that
Charter Court Financial Services and OneSavings Bank were in
advanced discussions regarding a possible all-share combination of
the two companies, we are today pleased to announce the recommended
all-share combination of the two organisations. As such, we are not
able to provide our usual detailed guidance for the financial year
ahead.
OSB entered 2019 with a strong pipeline and our core markets
remain highly attractive. The strength of our lending franchise,
driven by specialist underwriting, gives us confidence in
continuing to deliver sustainable growth in our net loan book.
Despite the uncertainty surrounding Brexit, based on application
levels seen so far this year, we would expect to deliver mid-teens
net loan book growth in 2019 at attractive margins, with NIM
marginally lower than 2018, reflecting current asset pricing and
the continued transition from back book to front. Whilst we will
continue to invest in the business for growth in 2019, as always,
we will maintain a strong focus on cost efficiency and control as
reflected in our cost to income and management expense ratios.
OneSavings Bank is exceptionally well placed to continue to
generate attractive returns for our shareholders regardless of
potential political scenarios that may take place and we look to
the future with confidence."
Key metrics
2018 2017
Loan loss ratio(4) (bps) 10 7
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Statutory profit before
tax (GBPm) 183.8 167.7
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Total assets (GBPbn) 10.5 8.6
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Statutory basic EPS(8)
(pence) 55.5 51.1
----------------- -----------------
Loan to deposit ratio(9)
(%) 93 92
----------------- -----------------
3 months + arrears(10)
(%) 1.5 1.2
----------------- -----------------
Customer net promoter
score +63 +62
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Enquiries:
OneSavings Bank plc: Alastair Pate t: 01634 835728
Brunswick Group: Robin Wrench / Simone Selzer t: 020 7404 5959
Analyst presentation
A presentation for analysts will be held at 9:30am on Thursday
14 March at The Lincoln Centre, 18 Lincoln's Inn Fields, WC2A 3ED.
The UK dial in number is +44 (0) 20 3003 2666 and the password is
OneSavings Bank 18. The presentation will be webcast and available
from 9:30am on the OneSavings Bank website at www.osb.co.uk in the
Investors section. Registration is open immediately.
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,
secured funding lines and asset finance. 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.
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1. Before exceptional items of GBP9.8m (2017: GBPnil, see
Alternative performance measures and Exceptional items in the
Financial review for further details).
2. Administrative expenses, including depreciation and
amortisation, as a percentage of total income.
3. Net interest income as a percentage of average interest bearing assets.
4. Impairment losses expressed as a percentage of average gross loans and advances.
5. Profit after tax excluding exceptional items after tax of
GBP7.2m in 2018 (2017: GBPnil, see Alternative performance measures
and Exceptional items in the Financial review for further details),
and after deducting coupons on equity PSBs, including the tax
effect of GBP0.7m (2017: GBP0.7m) and coupons on AT1 securities,
including the tax effect of GBP4.0m (2017: GBP2.0m), as a
percentage of average shareholders' equity (excluding equity PSBs
of GBP22m and AT1 securities of GBP60m) of GBP547.8m in 2018 and
GBP446.6m in 2017.
6. Underlying profit after taxation and after deducting coupons
on equity PSBs, including tax effect of GBP0.7m (2017: GBP0.7m) and
AT1 coupons, including tax effect of GBP4.0m (2017: GBP2.0m),
divided by the weighted average number of ordinary shares in
issue.
7. Representing 25% of underlying profit after tax attributable
to ordinary shareholders. To be paid on 15 May 2019, subject to
approval at the Annual General Meeting on 9 May 2019, with a record
date of 22 March 2019. For 2017, the dividend of 9.3p per share
represented a final two-thirds dividend.
8. Statutory profit after taxation divided by the weighted
average number of ordinary shares in issue.
9. Excluding the impact of TFS and ILTR drawdowns. The
unadjusted ratio was 111% as at 31 December 2018 (2017: 109%).
10. Portfolio arrears rate (excluding legacy problem loan book)
of accounts for which there are missed or overdue payments by more
than three months.
Non-IFRS performance measures
OneSavings Bank believes that the non-IFRS performance measures
included in this document provide valuable information to the
readers as they enable the reader to identify a more consistent
basis for comparing the business' performance between financial
periods, and provide more detail concerning the elements of
performance which the Group is most directly able to influence or
are relevant for an assessment of the Group. They also reflect an
important aspect of the way in which operating targets are defined
and performance is monitored by OneSavings Bank's Board. However,
any non-IFRS performance measures in this document are not a
substitute for IFRS measures and readers should consider the IFRS
measures as well. Refer to Alternative performance measures in the
Financial review for further details, reconciliations and
calculations of non-IFRS performance measures included throughout
this document, and the most directly comparable IFRS measures.
Important disclaimer
The financial information set out below does not constitute the
company's statutory accounts for the years ended 31 December 2018
or 2017 but is derived from those accounts. Statutory accounts for
2017 have been delivered to the registrar of companies, and those
for 2018 will be delivered in due course. The auditor has reported
on those accounts; their reports were (i) unqualified, (ii) did not
include a reference to any matters to which the auditor drew
attention by way of emphasis without qualifying their report and
(iii) did not contain a statement under section 498 (2) or (3) of
the Companies Act 2006.
This document should be read in conjunction with the documents
distributed by OneSavings Bank plc ('OSB') through the Regulatory
News Service ('RNS'). This document contains certain
forward-looking statements, beliefs or opinions, including
statements with respect to the business, strategy and plans of OSB
and its current goals and expectations relating to its future
financial condition, performance and results. Such forward-looking
statements include, without limitation, those preceded by, followed
by or that include the words 'targets', 'believes', 'estimates',
'expects', 'aims', 'intends', 'will', 'may', 'anticipates',
'projects', 'plans', 'forecasts', 'outlook', 'likely', 'guidance',
'trends', 'future', 'would', 'could', 'should' or similar
expressions or negatives thereof. Statements that are not
historical facts, including statements about OSB's, its directors'
and/or management's beliefs and expectations, are forward-looking
statements. By their nature, forward-looking statements involve
risk and uncertainty because they relate to events and depend upon
circumstances that may or may not occur in the future. Factors that
could cause actual business, strategy, plans and/or results
(including but not limited to the payment of dividends) to differ
materially from the plans, objectives, expectations, estimates and
intentions expressed in such forward-looking statements made by OSB
or on its behalf include, but are not limited to: general economic
and business conditions in the UK and internationally; market
related trends and developments; fluctuations in exchange rates,
stock markets, inflation, deflation, interest rates and currencies;
policies of the Bank of England, the European Central Bank and
other G8 central banks; the ability to access sufficient sources of
capital, liquidity and funding when required; changes to OSB's
credit ratings; the ability to derive cost savings; changing
demographic developments, and changing customer behaviour,
including consumer spending, saving and borrowing habits; changes
in customer preferences; changes to borrower or counterparty credit
quality; instability in the global financial markets, including
Eurozone instability, the potential for countries to exit the
European Union (the "EU") or the Eurozone, and the impact of any
sovereign credit rating downgrade or other sovereign financial
issues; technological changes and risks to cyber security; natural
and other disasters, adverse weather and similar contingencies
outside OSB's control; inadequate or failed internal or external
processes, people and systems; terrorist acts and other acts of war
or hostility and responses to those acts; geopolitical, pandemic or
other such events; changes in laws, regulations, taxation,
accounting standards or practices, including as a result of an exit
by the UK from the EU; regulatory capital or liquidity requirements
and similar contingencies outside OSB's control; the policies and
actions of governmental or regulatory authorities in the UK, the EU
or elsewhere including the implementation and interpretation of key
legislation and regulation; the ability to attract and retain
senior management and other employees; the extent of any future
impairment charges or write-downs caused by, but not limited to,
depressed asset valuations, market disruptions and illiquid
markets; market relating trends and developments; exposure to
regulatory scrutiny, legal proceedings, regulatory investigations
or complaints; changes in competition and pricing environments; the
inability to hedge certain risks economically; the adequacy of loss
reserves; the actions of competitors, including non-bank financial
services and lending companies; and the success of OSB in managing
the risks of the foregoing.
No representation, warranty or assurance is made that any of
these statements or forecasts will come to pass or that any
forecast results will be achieved. Any forward-looking statements
made in this document speak only as of the date they are made and
it should not be assumed that they have been revised or updated in
the light of new information of future events. Except as required
by the Prudential Regulation Authority, the Financial Conduct
Authority, the London Stock Exchange PLC or applicable law, OSB
expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements
contained in this document to reflect any change in OSB's
expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is
based.
The information, statements and opinions contained in this
document and subsequent discussion do not constitute a public offer
under any applicable law or an offer to sell any securities or
financial instruments or any advice or recommendation with respect
to such securities or financial instruments.
Chief Executive's Statement
I am delighted to report another excellent year for OneSavings
Bank ('OSB'). The Group achieved strong results as we worked
together to deliver our vision of being our customers' favourite
bank. Underlying basic earnings per share grew by 14% to 58.5 pence
with underlying pre-tax profit up 15% to GBP193.6m. Our strategy
continues to provide us with a platform to grow profitably and
develop the business whilst we are ever mindful of the uncertain
economic and political environment in which we are operating.
Our ability to raise and retain retail funds given the
long-standing heritage of the Kent Reliance brand, track record of
raising funds whenever needed and our leading retention rate of
95%, means we can safely and confidently fund the lending business
we wish to write. The strength of our proposition continues to
attract new customers. Our manual underwriting process, strong risk
management and enhanced stress testing, including numerous Brexit
scenarios, give us a deep understanding of the markets in which we
operate.
We flex our lending in different business areas according to the
opportunities present, always underpinned by appropriate prudence
given the current uncharted political and economic environment.
Whilst Brexit may impact certain business opportunities, our
balance sheet remains strong, our core markets remain extremely
attractive and we have a high-quality secured asset portfolio.
Combined with an excellent funding franchise and customer
proposition, this positions us well to continue to deliver value
for our shareholders regardless of the uncertain macroeconomic
backdrop.
Our customer franchises
An award winning secured lender
The Group grew its loan book by 23% to GBP9.0bn in 2018 and,
whilst maintaining its discipline on understanding and pricing for
risk, delivered a strong net interest margin ('NIM') of 3.04% for
the year. Our core Buy-to-Let business continues to grow as
professional landlords recognise the strength of our proposition
and enjoy the excellent levels of customer service that they
receive.
New Buy-to-Let/SME mortgage origination increased to GBP2.8bn
during 2018, reflecting our specialism and expertise in lending to
limited companies and large portfolio landlords. We are
particularly proud of our lending growth as it was achieved in the
context of industry-wide gross Buy-to-Let advances increasing by 4%
in the year to GBP37.1bn.(1) Our target market of
professional/multi-property landlords accounted for 81% of
completions for OSB by value during 2018, with a continued high
proportion of professional landlords choosing to remortgage with
us. This performance demonstrates the sustainable strength of our
proposition, in particular our specialist, manual underwriting, as
well as our deep and historic relationships with mortgage
intermediaries.
We have seen significant growth in the commercial side of our
Buy-to-Let/SME segment through the InterBay brand. We have used our
strong understanding of this market to invest in products, service
and innovation that have proved increasingly popular with
commercial borrowers. We developed the proposition further
following our successful entry into the bespoke bridging market and
in August 2018, we successfully launched InterBay Asset Finance,
with the first of its flexible asset finance deals funded in
October. I am pleased with the success our commercial business is
enjoying and the positive start for our asset finance business. As
with all new business segments that we enter, we do so cautiously
on a test, assess and grow basis.
Our more cyclical commercial businesses continued to perform
strongly throughout 2018. The Bank's Heritable Development Finance
business provides development finance to small and medium-sized
residential developers operating in areas of the UK where demand
for housing is consistently strong. We are delighted with the
performance of the Heritable joint venture ('the JV') since it
started lending in early 2014 demonstrating our ability to grow
successful businesses organically. We had the opportunity to
acquire the JV partners' interest in 2019 and in doing so
recognised an exceptional cost of GBP9.8m in 2018 in respect of
this option. We are particularly pleased that we were able to
retain the key individuals in the business going forward, whilst
continuing to offer them the opportunity to lend alongside the Bank
to align interests. We also saw controlled growth in 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.
As we flagged earlier in 2018, originations in the residential
segment increased in 2018 with attractive opportunities in more
complex prime and second charge markets. However new organic
lending was more than offset by redemptions in the back book and
acquired mortgages in run-off, contributing to the first charge
gross loan book reducing marginally to GBP1,224m from GBP1,241m at
the end of 2017. We piloted new specialist products in the
residential segment in 2018 and are seeing encouraging results.
Over the medium term, we see an opportunity to deliver attractive
risk-adjusted returns from this new product range, particularly
once we transition to IRB.
Our focus on new and existing customers means we are always
investing in and improving our sales capability across our brands.
We continued to gain recognition from mortgage customers and
intermediaries, winning multiple awards during the year. I am
particularly pleased that OSB won multiple awards including Best
BDM Team, Best Specialist Lender and Best Buy-to-Let Lender, all
from Mortgage Strategy Awards and Moneyfacts Best Specialist
Mortgage Provider in 2018. In addition our Sales Director, Adrian
Moloney, was awarded Business Leader: Complex Buy-to-Let Lender by
British Specialist Lending Awards.
Through the Bank's mortgage product transfer scheme, Choices, we
are consistently increasing the proportion of borrowers who choose
a new product within three months of their initial product ending
and this grew to around 69% by December 2018. This is driven by
success in highlighting opportunities available to borrowers who
might otherwise revert to standard variable rate ('SVR') and who
should ensure that they are actively choosing appropriate mortgage
pricing and features.
Sustainable funding with award winning savings
Our stable and award winning retail funding franchise continues
to support lending growth, with retail deposits up 21% to GBP8.1bn
during the year. Over 40,000 new savings customers joined the Bank
in 2018. Key to our vision is becoming our customers' favourite
bank and we put our customers at the heart of everything we do.
This is demonstrated by our market-leading 95% retention rate
amongst customers with maturing fixed rate bonds and ISAs. The
strength and fairness of our retail savings proposition, coupled
with excellent customer service and high retention rates, allow the
Bank to raise significant funds when required without needing to
price at the very top of the best buy tables and provides a
consistent and stable source of liquidity.
We continue to develop our savings proposition and following
investment in a new ISA transfer management system, we had a
particularly strong ISA season in 2018. We opened a record number
of accounts, raising a significant amount of fixed term savings at
a price below our target cost of funds, further demonstrating the
value of the Bank's strong retail presence.
I am delighted that Kent Reliance was recognised by winning the
Savings Account Provider of the Year from MoneyAge and was
commended for Best No Notice Account Provider by Moneyfacts Awards
in 2018. These awards are a testament to our savings proposition
and to the outstanding customer service delivered by our staff.
The Bank remained predominantly retail funded in 2018, with a
loan to deposit ratio for the year of 93%(2) delivering on our
strategy to primarily fund our loan book using retail deposits. At
the close of the Bank of England's Term Funding Scheme ('TFS') in
February 2018, the Bank had drawdowns of GBP1.5bn. The TFS funding
is repayable by the end of February 2022. Along with our proven
ability to raise retail funds, the Bank was ready to recommence its
RMBS programme in Q4 2018, but market conditions and pricing were
unattractive. In addition, the Bank participated in the Bank of
England's Indexed Long-Term Repo scheme ('ILTR') with a total of
GBP80m ILTR borrowings outstanding at the year end.
Leveraging and investing in our unique business model
The low cost to income ratio of 28% reflects our efficient and
scalable operating platform. Through 2018 we invested significantly
in future proofing the business by delivering regulatory projects,
principally General Data Protection Regulation ('GDPR'), the Second
Payment Services Directive ('PSD 2') and the ongoing project to
deliver IRB. We also started upgrading our IT infrastructure,
including customer platforms. We continued to focus on finding
efficiencies in the costs of running the Bank on a 'business as
usual basis', through maintaining disciplined cost management,
increased benefits of scale and leveraging our unique operating
platform in India ('OSBI'). I am particularly pleased that finding
these efficiencies reduced our management expense ratio to 0.84%
from 0.86% in the prior year.
The Group's first generation IRB models were delivered on
schedule in late 2016 and we ran them for the second year in 2018.
We remain pleased with progress towards our IRB application and
believe that the new calibrations, combined with the final IRB
output floors outlined in Basel III, will be beneficial to the
Bank's capital requirements.
OSBI undertakes a range of primary processing services at a
significantly lower cost than an equivalent UK-based operation,
whilst delivering consistently high quality service levels. I am
especially pleased that we continue to achieve this whilst
maintaining our focus on our customer-led vision, borne out by an
increase in customer NPS to an outstanding +63 (2017: +62).
A strong and sustainable business
The Group continued to exercise strong diligence over loan and
customer assessment. The loan loss ratio increased to 10bps in the
year to 31 December 2018 (2017: 7bps), largely as we modelled the
potential for a more severe impact from the outcome of the Brexit
negotiations in our economic scenarios. Removing the impact of this
additional scenario, the loan loss ratio was consistent with the
prior year as we saw no deterioration in the credit quality of the
book across our lending businesses. The modelling of more severe
economic scenarios surrounding Brexit increased our focus on the
resilience of our business model to House Price Index and
commercial real estate risk and we continue to assess our lending
appetites in relation to these risks.
Our front book of mortgages continues to demonstrate our
excellent credit management. From more than 48,500 loans totalling
GBP11bn of new organic originations since the Bank's creation in
February 2011, we have only 206 cases of arrears over three months
in duration, with an aggregate balance of GBP53.5m and an average
loan to value ('LTV') of just 62%, reflecting the continued
strength of the Bank's underwriting and lending criteria.
The weighted average LTV of the overall mortgage book remained
low at 66% at the end of 2018, with an average LTV of 69% on new
origination during the year.
The lower NIM of 3.04% (2017: 3.16%) reflects the changing mix
of the loan book, despite broadly stable asset pricing, and wider
average five year swap spreads, partially offset by a relatively
favourable cost of retail funds and additional benefit from the
Bank of England's Term Funding Scheme ('TFS'). The mix of the loan
book continues to change with new origination forming a growing
proportion of the total book, diluting the impact of loans
originated or acquired several years ago when yields were
exceptionally high. The favourable cost of retail funds was due
primarily to the retail savings market not pricing in the full
November 2017 and August 2018 Bank of England Base Rate rises. Five
year fixed rate mortgages accounted for c. 56% of Buy-to-Let
completions for our Kent Reliance brand in 2018, up from 43% in
2017.
Our achievements in 2018 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.
Looking forward to 2019
Despite the macroeconomic and political uncertainty surrounding
the outcome of the negotiations of the UK's departure from the EU,
trading conditions in our core markets remain positive and current
application levels in our Buy-to-Let and commercial businesses are
strong as we head into 2019 with a robust pipeline of new
business.
Whilst OSB may be less directly affected by Brexit than
companies which trade in the EU, we have considered and planned for
the potential implications carefully, both strategically and
operationally in expected and stressed conditions. The Board has
commissioned a number of reviews from external experts and economic
advisers to assist in this work. In our planning, we considered our
own particular circumstances, including our location, regulatory
environment, customer credit profiles, loan securities, location of
our stakeholders, including key customers and suppliers, as well as
our workforce. We have analysed the potential impact of a range of
scenarios such as the effect of a 'no-deal' Brexit, including
falling property prices, on loan loss provisions, including the
Group's IFRS 9 impairment process, which are covered in the Risk
review. We have also analysed the potential impact of various
Brexit scenarios on different portfolio segments with a view to
coordinating strategic actions across the credit risk lifecycle if
a deterioration in the macroeconomic outlook were to occur. This
same plan could be deployed should the Group observe credit profile
deterioration post a 'no-deal' Brexit.
Outside our core Buy-to-Let market, we also see good
opportunities in other segments of the lending market where we
already have expertise and a platform to build on. In particular,
we expect to grow further through our InterBay Commercial brand and
we see more opportunities to grow our residential lending franchise
in the medium to longer term. We will, however exercise caution and
grow sensibly into new markets as we adjust to a potentially new
economic outlook.
Following the statement released on 9 March 2019 confirming that
Charter Court Financial Services and OneSavings Bank were in
advanced discussions regarding a possible all-share combination of
the two companies, we are today pleased to announce the recommended
all-share combination of the two organisations. This statement and
any future public documents relating to the possible combination
will be placed on the Investors section of the OSB website at
www.osb.co.uk. As such, we are not able to provide our usual extent
of guidance for the financial year ahead.
We recognise the macroeconomic uncertainty caused by the Brexit
negotiations, however, based on what we are currently seeing in our
core markets and assuming current application levels continue, we
would expect to deliver mid-teens net loan book growth in 2019.
Based on current asset pricing, swap spreads, cost of funds and the
changing mix of the loan book, we would anticipate NIM for 2019 to
be marginally lower than in the prior year. Whilst we will continue
to invest in the business for growth in 2019, as always, we will
maintain a strong focus on cost efficiency and control as reflected
in our cost to income and management expense ratios.
We start 2019 with a fully loaded CET1 ratio of 13.3% and a
proven organic capital generation capability through profitability.
Our dividend policy remains a payout ratio of at least 25% of
underlying profit after taxation attributable to ordinary
shareholders.
I believe that OneSavings Bank's customer-focused business model
and the strength of both our lending and savings franchises, mean
we are exceptionally well-placed to continue to generate attractive
returns for our shareholders.
Andy Golding
Chief Executive Officer
14 March 2019
1. UK Finance, New and outstanding buy-to-let mortgages, 19 Feb
2019.
2. Excluding the impact of TFS and ILTR drawdowns. The
unadjusted ratio was 111% as at 31 December 2018 (2017: 109%).
Operating and financial review
Business highlights
2018 was a year of excellent performance for the Bank, further
building on our strengths and creating a business that can
withstand macroeconomic uncertainty and deliver value for all of
our stakeholders. The Group wrote GBP3.0bn of gross organic
originations in the year (2017: GBP2.6bn) at attractive margins
despite continuing competition, especially for five year fixed rate
Buy-to-Let products.
The strongest lending growth was achieved in our Buy-to-Let/SME
segment which caters for our core audience of large professional
landlords and also provides commercial, semi-commercial, bridging
and more complex Buy-to-Let products via our InterBay brand. In the
second half of 2018, the Group launched its InterBay Asset Finance
business, funding its first deals in October 2018 and exceeding our
lending targets. Overall, the Buy-to-Let/SME net loan book
increased by 31% to GBP7.4bn as at 31 December 2018.
Organic origination in our residential segment also increased in
the year to GBP0.3bn (2017: GBP0.2bn) as the specialist residential
products launched in the second half of 2018 received a positive
response from borrowers. However, the Residential net loan book
decreased to GBP1.6bn, down 4% compared with 2017 year end as
redemptions in the back book and acquired mortgages in run-off more
than offset new lending.
Overall, the Group's net loan book was up 23%, reaching GBP9.0bn
by the end of 2018, with Buy-to-Let/SME comprising 82% and
Residential 18% of the total net loan book.
The Group remained predominantly retail funded during the year,
with a loan to deposit ratio of 93%(1) as at 31 December 2018
(2017: 92%). Retail deposits were up 21% to GBP8.1bn for the year
as we welcomed over 40,000 new retail customers and had a
particularly successful ISA season. Our focus on providing fair and
transparent savings products and outstanding customer service was
reflected in a +63 customer net promoter score ('NPS') and
retention rate of 95% for maturing fixed term bond and ISA balances
in 2018 (2017: +62 and 90% respectively). Our business savings
accounts were also popular with SMEs, with total deposits
constituting just over 1% of the entire savings book, or GBP80m of
the total balance as at 31 December 2018.
The Bank's Heritable Development Finance business provides
development finance to small and medium-sized residential
developers operating in areas of the UK where demand for housing is
consistently strong. The business operates as a joint venture ('the
JV') between the Bank and certain senior members of the Heritable
team ('the JV partners'). In 2019 the Bank had the opportunity to
acquire the JV partners' interest and recognised an exceptional
cost of GBP9.8m in 2018 in respect of this option. The Bank was
able to retain the senior members of the team in the business going
forward, whilst continuing to offer them the opportunity to
continue to lend alongside the Bank. The new revenue sharing
arrangement is on more favourable terms for the Bank, reflecting
the maturity of the business.
In 2018, OSB used the Bank of England's Indexed Long-Term Repo
scheme for the first time, complementing retail and TFS funding
with GBP80.0m borrowing at base rate +15 bps which was 90 bps as at
31 December 2018. The borrowing is offered as a collateralised cash
loan repayable in six months.
Profitable lending in the year allowed us to achieve an
attractive return on equity of 26% for 2018 (2017: 28%).
The Group ended the year with a CET1 ratio of 13.3% (2017:
13.7%), demonstrating the strength of the capital generation
capability of the business to support significant growth through
profitability. The Group's total capital ratio of 15.8% and
leverage ratio of 5.9% remained strong (2017: 16.9% and 6.0%
respectively).
1. Excluding the impact of TFS and ILTR drawdowns. The
unadjusted ratio was 111% as at 31 December 2018 (2017: 109%).
Financial overview
The Group reported strong profit growth in 2018. Statutory
profit before taxation of GBP183.8m was 10% higher than in 2017
(2017: GBP167.7m). On an underlying basis, before the exceptional
cost of GBP9.8m due to the Heritable option, profit before taxation
increased by 15% to GBP193.6m (2017: GBP167.7m). This strong
underlying profitability reflects the continued attractiveness of
our lending and funding franchises and our efficient operating
model.
Statutory basic earnings per share ('EPS') was 55.5 pence, up 9%
from 51.1 pence in 2017 and underlying basic EPS strengthened to
58.5 pence (2017: 51.1p). Our focus on cost discipline and
efficiency continued throughout 2018, helping to deliver a very
strong cost to income ratio of 28% (2017: 27%) despite increased
investment in the business and in meeting the growing cost of
regulation.
The Board is recommending a final dividend of 10.3 pence per
share, which together with the interim dividend of 4.3 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.
Segmental review
The following tables show the Group's loans and advances, risk
weighted assets and contribution to profit by segment.
31 December 2018, GBPm BTL/SME Residential Total
Gross loans to customers 7,389.2 1,616.0 9,005.2
Provision for impairment
losses (11.0) (10.9) (21.9)
---------- -------------- --------
Net loans to customers 7,378.2 1,605.1 8,983.3
Risk weighted assets 3,453.8 758.0 4,211.8
Net interest income 220.0 67.3 287.3
Other expense (1.0) (4.2) (5.2)
---------- -------------- --------
Total income 219.0 63.1 282.1
Impairment losses (5.7) (2.4) (8.1)
---------- -------------- --------
Contribution to profit 213.3 60.7 274.0
31 December 2017, GBPm BTL/SME Residential Total
Gross loans to customers 5,654.1 1,673.5 7,327.6
Provision for impairment
losses (13.2) (8.4) (21.6)
---------- -------------- --------
Net loans to customers 5,640.9 1,665.1 7,306.0
Risk weighted assets 2,642.8 705.7 3,348.5
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
Buy-to-Let/SME
Buy-to-Let/SME sub-segment: gross loans
Group Group
31-Dec-2018 31-Dec-2017
GBPm GBPm
------------------------- ------------- -------------
Buy-to-Let 6,517.5 5,033.8
Commercial 547.8 370.8
Residential development 155.8 143.9
Funding lines 168.1 104.5
Personal loans(1) - 1.1
------------------------- ------------- -------------
Total 7,389.2 5,654.1
------------------------- ------------- -------------
1. The personal loan portfolio was disposed of in the year, for
more information see note 6 to the financial statements.
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, secured
funding lines to other lenders and asset finance.
In 2018, market-wide Buy-to-Let gross advances were GBP37.1bn,
up 4% compared to GBP35.8bn in 2017.(2) The Group's market share of
new Buy-to-Let mortgages remained flat in 2018 at approximately
6%.
It has been widely reported that a combination of tax and
regulatory changes impacted the Buy-to-Let market, reducing lending
levels from the post-crisis high of 2016. Whilst no further
interventions have been announced since changes to affordability
assessments were introduced in October 2017, the gradual reduction
in personal tax relief continues and, as a result, any growth in
overall lending levels is expected to be muted in the short term.
This downward trend in new lending masks, however, a more subtle
change, which has seen professional landlords persist, with the
reduction therefore attributable to smaller amateur landlords. OSB
has always targeted professional landlords, and it is the
sustainable demand from this audience that has underpinned our
continued growth when at face value, the Buy-to-Let market is
facing various challenges. The systemic issues in the UK housing
market remain largely untouched by the government, and it is
reasonable to expect demand from tenants to continue as they are
faced with ongoing challenges around house prices relative to
incomes, and mortgage regulation that constrains lending. The
opportunity for professional landlords is therefore expected to
remain resilient for at least the medium term.
The prospect of the UK's exit from the European Union creates
uncertainties for consumers. These uncertainties have led to some
short-term fluctuations in house prices, including falls in some
parts of London despite a national picture of price rises, albeit
modest in scale. Our target audience is, however, focused on the
long-term, and over this longer period, asset prices have
consistently risen. This long-term view, alongside continuing
tenant demand as referenced above, will maintain sector
attractiveness for the professional investor.
The volume of the Group's new organic lending in this segment
reached GBP2,769.7m in 2018, an increase of 15% from GBP2,413.7n in
2017. The segment gross loans were GBP7,389.2m, up 31% from
GBP5,654.1m in 2017. The Buy-to-Let/SME net loan book represented
82% of total OSB net loans as at 31 December 2018.
Gross loans in the Buy-to-Let sub-segment increased by 29% to
GBP6,517.5m (2017: GBP5,033.8m) in the year mostly due to continued
activity from professional, multi-property and incorporated
landlords and the withdrawal of amateur landlords. Professional
landlords accounted for 81% of completions by value for OSB in 2018
(2017: 80%). The share of purchase applications that came from
incorporated landlords continued to rise to 70% for our Kent
Reliance brand in the year (2017: 69%) as borrowers mitigated
reductions in yield resulting from recent changes to personal
taxation.
A large proportion of Buy-to-Let lending comes from refinancing
and in 2018, remortgages represented 58% of lending for our main
Kent Reliance brand. Around 69% of existing borrowers chose a new
product with the Group within three months of the original product
ending. Many of our borrowers also chose to lock in the attractive
mortgage rates for a longer period of time and five year fixed rate
products represented 56% of completions for the Kent Reliance brand
in 2018 (2017: 43%). The weighted average loan to value ('LTV') of
the Buy-to-Let book was 70% with an average loan size of
GBP260,000. The weighted average interest coverage ratio ('ICR')
for Buy-to-Let origination during 2018 reduced to 171% (2017:
185%).
The InterBay commercial business, which offers commercial,
semi-commercial, bridging and more complex Buy-to-Let mortgages had
a very successful year with the commercial and semi-commercial
gross loan book up 48% to GBP547.8m (2017: GBP370.8m). Initiatives
introduced in the first half of 2018 included the launch of our
bridging proposition and the expansion of our distribution network
to reach a wider broker audience. As ever, these were supported by
the Bank's core strengths in rapid and effective underwriting and
our ability to deal with large and complex cases. In the second
half of the year, InterBay Asset Finance was launched, funding its
first deals in October 2018 and exceeding our lending targets. The
weighted average LTV in this sub-segment remained low at 66% and
the average loan size was GBP360,000 in 2018.
Our Heritable Development Finance business, which was set up as
a joint venture with the Heritable team in late 2013, provides
development finance to small and medium-sized residential
developers operating in areas of the UK where demand for housing is
consistently strong. New applications come primarily from a mixture
of repeat business from the team's extensive existing relationships
and from referrals. The business continued to grow in spite of new
entrants to the market, as customers sought an experienced and
prudent lender. In light of macroeconomic uncertainty, many
experienced developers appear to have taken a cautious approach and
therefore the number of potential schemes that withstand the
business' stringent stress testing remains low.
The residential development funding gross loan book at the end
of 2018 was GBP155.8m, with a further GBP90.3m committed (31
December 2017: GBP143.9m and GBP78.0m respectively). Gross advances
during 2018 totalled GBP137.6m (2017: GBP123.7m).
In addition, the Bank continued to provide secured funding lines
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 2018 were
GBP385.0m with total loans outstanding of GBP168.1m (31 December
2017: GBP303.0m and GBP104.5m respectively). During 2018, one
facility was repaid and three new funding lines were added and
credit approved limits increased by a further GBP47.0m across four
existing funding lines. The pipeline remains robust, however, given
the macroeconomic uncertainty, the Bank continues to adopt a
cautious approach.
In the second half of 2018, the Group established its asset
finance business under the InterBay brand targeting underserved
markets where we can bring our expertise to the fore to generate
attractive returns on a risk-adjusted basis. The first deals were
funded in October, working with a small number of brokers and
targeting predominantly UK SMEs and small corporates for whom the
Group finances business-critical assets. The assets are mostly
plant and machinery, construction equipment and commercial
vehicles, all with an established inherent resale value. The gross
carrying amount under finance leases was GBP7.2m as at 31 December
2018.
OSB's combined Buy-to-Let/SME net loan book grew by 31% in 2018
to GBP7,378.2m (2017: GBP5,640.9m) due to gross new lending in the
year, partially offset by back book redemptions, and it is the
Group's largest segment. Buy-to-Let/SME made a contribution to
profit of GBP213.3m in 2018, up 22% compared to GBP174.8m in 2017,
primarily due to the growth in new lending, partially offset by
higher impairment losses of GBP5.7m (2017: GBP0.8m) due to the
addition of a 'no-deal' Brexit downside economic scenario in our
IFRS 9 modelling. Removing the impact of this additional scenario,
loan loss provisions remained broadly flat year on year.
The Group remains highly focused on the quality of new lending
as demonstrated by the average LTV in the Buy-to-Let/SME segment as
at 31 December 2018 of 70% (31 December 2017: 69%) with only 0.6%
of loans exceeding 90% LTV (31 December 2017: 0.7%). The average
LTV for new Buy-to-Let/SME origination was 70% (2017: 70%).
1. UK Finance, New and outstanding buy-to-let mortgages, 19 Feb
2019.
Residential mortgages
Residential sub-segment: gross loans
Group Group
31-Dec-2018 31-Dec-2017
GBPm GBPm
--------------- ------------- -------------
First charge 1,223.9 1,240.6
Second charge 368.0 415.3
Funding lines 24.1 17.6
--------------- ------------- -------------
Total 1,616.0 1,673.5
--------------- ------------- -------------
This segment comprises lending to owner occupiers, secured via
either first or second charges against the residential home. The
Bank also provides funding lines to non-bank lenders who operate in
high-yielding, specialist sub-segments such as residential bridge
finance.
As at 31 December 2018, the Residential gross loan book was
GBP1,616.0m, down 3% compared to the previous year (2017:
GBP1,673.5m) with GBP280.1m of organic originations in the segment,
up 15% from GBP243.9m in 2017.
The first charge gross loan book reduced to GBP1,223.9m from
GBP1,240.6m in 2017 as a result of new organic lending being more
than offset by redemptions in the back book and acquired mortgages
in run-off.
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 lenders, as most favour
automated decision-making over manual underwriting. In 2018, the
Group made a tactical entry into the near-prime residential market.
This market provides the Bank with a strategic opportunity as we
pursue our internal ratings-based approach to risk weighting. 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 to refinance their first charge
mortgage. Competitive pressure in the second charge market kept
pricing low and we continued to manage our market share to ensure
we appropriately price for risk. The second charge residential loan
book had a gross value as at 31 December 2018 of GBP368.0m (2017:
GBP415.3m).
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 to adopt a cautious approach in the more cyclical
businesses given macroeconomic uncertainty. Total credit approved
limits at 31 December 2018 were GBP51.8m with total loans
outstanding of GBP24.1m (2017: GBP33.6m and GBP17.6m respectively).
During 2018, the credit limit for one facility was increased by
GBP20.0m and its maturity date extended.
OSB's total residential loan portfolio had a net carrying value
of GBP1,605.1m as at 31 December 2018 (2017: GBP1,665.1m). The
average LTV remained low at 56% (2017: 56%) with only 3% of loans
by value with LTVs exceeding 90% (2017: 3%). The average LTV of new
residential origination during 2018 was 68% (2017: 65%).
Residential mortgages made a contribution to Group profit of
GBP60.7m in 2018, up 3% from GBP58.9m in 2017, reflecting slightly
lower net interest income, more than offset by lower third party
servicing fees, lower amortisation of the fair value adjustment on
hedged assets relating to cancelled swaps and lower loan
losses.
Financial review
Group Group
31/12/2018 31/12/2017
Summary Profit or Loss GBPm GBPm
Net interest income 287.3 245.4
Net losses on financial instruments (5.2) (6.3)
Net fees and commissions 0.6 0.5
External servicing fees (0.6) (1.5)
Administrative expenses(1) (79.6) (65.1)
FSCS and other regulatory provisions (0.8) (0.9)
Impairment losses (8.1) (4.4)
Exceptional cost - Heritable option (9.8) -
Profit before taxation 183.8 167.7
Profit after taxation 140.3 126.9
Underlying profit before taxation(2) 193.6 167.7
Underlying profit after taxation(2) 147.5 126.9
Key ratios
Net interest margin(2) 304bps 316bps
Cost to income ratio(2) 28% 27%
Management expense ratio(3) 0.84% 0.86%
Loan loss ratio(2) 0.10% 0.07%
Basic EPS(2) , pence per share 55.5 51.1
Underlying basic EPS(2) , pence per share 58.5 51.1
Return on equity(2) 26% 28%
Dividend per share, pence per share 14.6 12.8
Extracts from the Statement of Financial Position
GBPm GBPm
Loans and advances 8,983.3 7,306.0
Retail deposits 8,071.9 6,650.3
Total assets 10,460.2 8,589.1
Key ratios
Liquidity ratio(4) 14.5% 15.2%
Common equity tier 1 ratio(5) 13.3% 13.7%
Total capital ratio 15.8% 16.9%
Leverage ratio 5.9% 6.0%
1. Including depreciation and amortisation.
2. See definition in key performance indicators table on page
1.
3. Administrative expenses including depreciation and
amortisation as a percentage of average total assets.
4. Liquid assets as a percentage of funding liabilities.
5. 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.
Reconciliation of statutory profit to underlying profit
Profit before taxation Profit after taxation
------------------------------ ---------------------------- ----------------------------
Group Group Group Group
31-Dec-2018 31-Dec-2017 31-Dec-2018 31-Dec-2017
GBPm GBPm GBPm GBPm
------------------------------ ------------- ------------- ------------- -------------
Statutory profit 183.8 167.7 140.3 126.9
Exceptional cost - Heritable
option 9.8 - 7.2 -
Underlying profit 193.6 167.7 147.5 126.9
------------------------------ ------------- ------------- ------------- -------------
Statutory basic EPS of 55.5 pence per share (2017: 51.1 pence
per share) is calculated by dividing profit attributable to
ordinary shareholders of GBP135.6m (2017: GBP124.2m) which is
profit after tax of GBP140.3m (2017: GBP126.9m) less coupons on
equity PSBs, including the tax effect of GBP0.7m (2017: GBP0.7m)
and coupons on AT1 securities, including the tax effect of GBP4.0m
(2017: GBP2.0m) by the weighted average number of ordinary shares
in issue during the year of 244.2m (2017: 243.2m).
Underlying basic EPS of 58.5 pence per share (2017: 51.1 pence
per share) is calculated by dividing underlying profit attributable
to ordinary shareholders of GBP142.8m (2017: GBP124.2m), which is
underlying profit after tax of GBP147.5m (2017: GBP126.9m) less
coupons on equity PSBs, including the tax effect of GBP0.7m (2017:
GBP0.7m) and coupons on AT1 securities, including the tax effect of
GBP4.0m (2017: GBP2.0m) by the weighted average number of ordinary
shares in issue during the year of 244.2m (2017: 243.2m).
Strong profit growth
The Group reported profit growth of 10% in 2018 with statutory
profit before taxation of GBP183.8m (2017: GBP167.7m) including the
exceptional cost of GBP9.8m relating to the Heritable option. On an
underlying basis, before this exceptional item, the Bank recorded a
15% increase in underlying profit before taxation to GBP193.6m
(2017: GBP167.7m) reflecting strong balance sheet growth supported
by lending at attractive margins and our efficient cost base.
Profit after taxation in 2018 increased by 11% to GBP140.3m
(2017: GBP126.9m) including the after tax exceptional cost of
GBP7.2m for the Heritable option. On an underlying basis, profit
after taxation increased by 16% to GBP147.5m (2017: GBP126.9m). The
Group's effective tax rate was 23.7%(1) in 2018 (2017: 24.1%), 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 17% to
GBP287.3m in 2018 (2017: GBP245.4m) reflecting the strong growth in
the loan book and NIM of 304bps (2017: 316bps).
The lower NIM reflects the changing mix of the loan book,
despite broadly stable asset pricing, and wider average five year
swap spreads, partially offset by a relatively favourable cost of
retail funds and additional benefit from the Bank of England's Term
Funding Scheme ('TFS'). The mix of the loan book continues to
change with new origination forming a growing proportion of the
total book, diluting the impact of loans originated or acquired
several years ago when yields were exceptionally high. The
favourable cost of retail funds was due primarily to the retail
savings market not pricing in the full November 2017 and August
2018 Bank of England Base Rate rises.
Losses on financial instruments
The fair value loss on financial instruments in 2018 of GBP5.2m
(2017: GBP6.3m) includes a net loss of GBP0.3m from the Group's
hedging activities (2017: GBP1.1m gain) and GBP4.6m amortisation of
fair value adjustments on hedged assets relating to cancelled swaps
(2017: GBP7.3m). 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 2018, the Group also made a GBP0.1m loss on disposal of the
residual amount of the personal loan portfolio, for more detail,
see note 6 to the financial statements.
Net fees and commission
Net fees and commission income of GBP0.6m (2017: GBP0.5m)
comprises fees and commission receivable of GBP1.7m (2017: GBP1.5m)
partially offset by commission expense of GBP1.1m (2017:
GBP1.0m).
Fees and commissions receivable grew by GBP0.2m which is mostly
attributable to an increase in InterBay application fees resulting
from business growth.
Fees and commissions payable remained broadly flat in 2018 and
related to branch agency fees and commissions paid to the Kent
Reliance Provident Society for conducting member engagement
activities for the Bank.
External servicing fees
External servicing fees decreased to GBP0.6m in 2018 (2017:
GBP1.5m) due to the transfer of servicing for the majority of
acquired first charge residential loan books to the Bank's
operation in India during the year and the disposal of the
remaining personal loans portfolio.
Efficient and scalable operating platform
Administrative expenses, including depreciation and
amortisation, were up 22% to GBP79.6m in 2018 (2017: GBP65.1m),
reflecting the growth in the loan book and increased spend incurred
in delivering regulatory projects, principally General Data
Protection Regulation ('GDPR'), the Second Payment Services
Directive ('PSD 2') and the ongoing project to deliver IRB. In
addition, the Bank also commenced work on upgrading its customer
platforms and made significant improvements to the IT
infrastructure.
Despite the project spend, the Group's cost to income ratio of
28% and the management expense ratio of 0.84% remained strong
(2017: 27% and 0.86% respectively) reflecting continuous focus on
finding efficiencies in the costs of running the Bank on a
'business as usual basis' and use of its scalable low cost back
office based in Bangalore, India.
FSCS and other regulatory provisions
Regulatory provisions expense remained stable at GBP0.8m (2017:
GBP0.9m). This includes levies due to the Financial Services
Compensation Scheme ('FSCS') which continued to decrease in the
year and other regulatory provisions on acquired books.
Impairment losses
Since 1 January 2018 the Group has calculated expected credit
loss provisions under IFRS 9. Impairment losses increased to
GBP8.1m in 2018 (2017: GBP4.4m) representing 10bps on average gross
loans and advances (2017: 7bps).
On adoption of IFRS 9 the Group utilised three macroeconomic
scenarios (upside, base and downside) within expected credit loss
calculations. Due to ongoing uncertainty relating to the UK's exit
from the European Union, the Board deemed it appropriate to
implement a fourth scenario of a disorderly 'no-deal' Brexit, which
increased the Group's provision requirements.
Removing the impact of the additional Brexit scenario, the
Group's loan loss ratio would have been c. 6bps.
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 48,500 loans
totalling GBP11.0bn of new organic originations since the Bank's
creation in February 2011, there were only 206 cases of arrears
over three months or more as at 31 December 2018, with an aggregate
value of just GBP53.5m and average LTV of 62%.
IFRS 9
The Group successfully implemented IFRS 9 as at 1 January 2018.
The day 1 impact of implementation was an increase in impairment
provisions of GBP3.6m.
The stage 3 provisions increase relates to a higher balance of
loans which are in arrears greater than three months and the
Group's IFRS 9 methodology, which includes a probation period
before returning to a non-default status. Following a review, the
Group also made changes to the threshold criteria for
classification into stage 2 which resulted in an increased balance
of loans in stage 2.
Exceptional items
The Heritable Development Finance business, which started
lending in 2014, operates as a joint venture ('the JV') between the
Bank and certain senior members of the Heritable team ('the JV
partners'). Under the JV the parties agreed to co-operate in
developing the business and to lend alongside each other, sharing
revenues in accordance with a profit waterfall. The JV agreement
also included a put/call option ('the Heritable option') over the
JV partners' share of the business, exercisable from 2019, subject
to certain conditions. During 2018, the conditions of exercise were
met and an exceptional cost of GBP9.8m was recognised for the fair
value of the option.
In 2019, the Heritable option was surrendered for a one-off
payment of GBP9.8m and the Bank acquired the JV partners' interest
in the business. At the same time a new revenue sharing arrangement
was signed allowing the JV partners to continue to lend alongside
the Bank.
There were no exceptional items in 2017.
Dividend
The Board recommends a final dividend for 2018 of 10.3 pence per
share. Together with the 2018 interim dividend of 4.3 pence per
share, this represents 25% of underlying profit after taxation
attributable to ordinary shareholders for 2018, in line with the
Bank's target dividend payout ratio. The proposed final dividend
will be paid on 15 May 2019, subject to approval at the AGM on 9
May 2019, with an ex-dividend date of 21 March 2019 and a record
date of 22 March 2019.
Balance sheet growth
Net loans and advances grew by 23% in 2018 to GBP8,983.3m (31
December 2017: GBP7,306.0m) primarily due to an increase in new
lending in our Buy-to-Let and commercial sub-segments.
Retail deposits and total assets grew by 21% and 22%,
respectively in 2018 with the final drawings under the TFS funding
of GBP250.0m in the first quarter of 2018, taking the balance under
the scheme as at the year end to GBP1,502.9m (31 December 2017:
GBP1,250.0m).
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 the drawing to
repay the existing loans.
In 2018, the Group also took the opportunity to complement its
retail and TFS funding by borrowing GBP80.0m under the Bank of
England's Indexed Long-Term Repo scheme ('ILTR') at base rate +15
bps which was 90 bps as at 31 December 2018. The ILTR is an auction
and the borrowings are offered as a collateralised cash loan
repayable in six months.
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 2018, our liquidity coverage ratio of 224%
(2017: 250%) was significantly in excess of the 2018 regulatory
minimum of 100%, including drawings under the Bank of England TFS
funding facilities. The Group's liquidity ratio as at 31 December
2018 was 14.5% (31 December 2017: 15.2%).
The Bank's retail savings franchise continued to provide the
business with long-term sustainable funding for balance sheet
growth as evidenced by the retention rate for maturing deposits of
95% and an exceptional level of customer satisfaction with a Net
Promoter Score of +63.
Capital
The Bank's fully-loaded CET1 capital ratio under CRD IV remained
robust at 13.3% as at 31 December 2018 (31 December 2017: 13.7%),
demonstrating the strong organic capital generation capability of
the business to support significant growth through
profitability.
The Bank had a total capital ratio of 15.8% and a leverage ratio
of 5.9% as at 31 December 2018 (31 December 2017: 16.9% and 6.0%
respectively).
The Bank had a Pillar 2a requirement of 1.1% of risk weighted
assets as at 31 December 2018 (31 December 2017: 1.1%).
Cash flow statement
The Group's cash and cash equivalents increased by GBP158.3m
during the year to GBP1,324.2m as at 31 December 2018.
During the year, the increase in the Group's loans and advances
to customers of GBP1,689.5m was largely funded by GBP1,421.6m of
deposits from retail customers and contributed to GBP85.1m of cash
used in operating activities. The remaining funding came largely
from the final drawdown under the TFS of GBP250.0m and GBP80.0m of
funding under the Bank of England's Indexed Long-Term Repo scheme,
which generated GBP289.0m of cash from financing activities. Cash
used in investing activities was GBP45.6m, primarily driven by net
purchases and maturities of investment securities of GBP40.0m.
In 2017, the Group replaced GBP524.6m of the 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.
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
GBP511.1m 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 GBP1,165.7m 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.
Summary cash flow statement Group Group
31-Dec-2018 31-Dec-2017(2)
GBPm GBPm
-------------------------------------------- ------------- ----------------
Profit before tax 183.8 167.7
Net cash generated/(used in):
Operating activities (85.1) (511.1)
Investing activities (45.6) 26.0
Financing activities 289.0 1,165.7
Net increase/(decrease) in cash and
cash equivalents 158.3 680.6
-------------------------------------------- ------------- ----------------
Cash and cash equivalents at the beginning
of the period
Cash and cash equivalents at the end 1,165.9 485.3
of the period
1,324.2 1,165.9
1. Effective tax rate excludes GBP0.1m of adjustments relating
to prior years.
2. The comparative information has been reclassified to include
interest paid on bonds and subordinated debt, which was previously
shown within operating activities, within financing activities.
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 enhance its risk identification and management
capabilities to ensure ongoing compliance with emerging industry
and regulatory standards.
By 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, the Group took appropriate and timely
actions in response to the changing economic, business and
regulatory environment.
The Group has maintained its focus on risk-based investment to
enhance data governance and controls, and made good progress
towards building Internal Ratings-Based Approach ('IRB')
capabilities. The discipline associated with effective operational
resilience has continued to be an important area of enhanced risk
management. The Group has established effective and scalable
operating models across all risk functions, which include
leveraging its OSBI operations.
The Group delivered strong and profitable growth whilst
maintaining a low and stable risk profile. The loan assets have
continued to exhibit strong performance and the Group has
maintained high quality capital and liquidity buffers to meet its
current and future requirements.
Ongoing stress testing demonstrates that the Group is resilient
to extreme but plausible scenarios in the context of the ongoing
uncertainty surrounding the economic, political and regulatory
environment. In particular, the Group continues to actively monitor
the developments relating to Brexit negotiations.
The Group has successfully managed its funding and liquidity
profile post the withdrawal of the Term Funding Scheme by the Bank
of England in February 2018.
The other key regulatory developments to which the Group is
responding include the General Data Protection Regulation ('GDPR')
and the Second Payment Services Directive ('PSD2'). The Group has
appropriate systems and controls to comply with the requirements
and these continue to be enhanced as the Group improves its
capabilities.
High level key risk indicators
The Group aligns its risk appetite to a select range of key
performance indicators that are used to assess its 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 2018
The Group continued to improve its risk appetite and stress
testing procedures to identify, monitor and manage the risks
associated with Brexit. In particular, the Group has leveraged its
IRB and IFRS 9 models to assess capital and provision requirements
across a range of macroeconomic and business scenarios.
Liquidity and funding forecasting procedures have further
improved and the Group is fully prepared to access wholesale
funding through securitisation at a commercially opportune time.
The Group continues to make investment to further enhance its
retail and SME funding propositions.
Good progress continues to be made on delivering a robust and
compliant IRB programme. The IRB programme has been focused on the
delivery of second generation IRB models, further embedding model
governance and validation procedures and improved adherence to
regulatory requirements.
Improvements have been made to the Group's data management and
governance capabilities driven by the Group's strategic data
management objectives. This initiative is designed to deliver
integrated data controls, aggregation and reporting
capabilities.
The Group established the core components of an effective and
regulatory compliant operational resilience framework. The
operational resilience framework ensures that all critical services
and operations are supported by a resilient infrastructure of
systems and processes which are subject to ongoing monitoring and
testing. The Group has improved its procedures relating to business
continuity planning and disaster recovery.
The launch of our asset finance business was subject to
extensive review and development of appropriate policies, systems
and controls to ensure that the underlying risks were fully
understood and appropriately priced and managed.
The Group continued to make significant investment in people
across the Risk and Compliance functions, ensuring that there is
sufficient capacity and capability to ensure it is well positioned
to deliver against its growth strategy.
Risk-based management information has been an important area of
continued improvement across all risk types.
Priority areas for 2019
The Group has established a comprehensive and scalable risk
management framework covering current and forward-looking risks.
During 2019, the Group will further refine and embed its risk
management capabilities in the context of changing economic,
business and operating conditions. In particular, the Group has
identified the following key areas to further improve its risk and
compliance capabilities:
-- Delivery of an enhanced and integrated data governance and
controls framework which is integrated with the Group's risk,
financial and regulatory reporting procedures.
-- Integration of second generation IRB credit risk models with
credit portfolio monitoring, stress testing and capital planning,
risk appetite and risk-based pricing.
-- Development of IRB waiver documentation demonstrating
compliance with approval requirements.
The Board and senior management continue to provide appropriate
oversight and direction to all risk and compliance 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
The Group views its capabilities to effectively identify, assess
and manage its risk profile as critical to its growth strategy. The
Group's approach to risk management is outlined within the
Strategic Risk Management Framework ('SRMF').
The SRMF is the overarching framework which enables the Board
and senior management to actively manage and optimise the risk
profile within the constraints of the risk appetite. The SRMF also
enables informed decisions to be taken in a timely manner by
factoring the interests and expectations of key stakeholders.
The SRMF also provides a structured mechanism to align all
components of an effective approach to risk management. The SRMF
links overarching risk principles to day-to-day risk management
activities.
The modular construct of the SRMF provides for an agile approach
to keeping pace with the evolving nature of the risk profile and
underlying drivers. The SRMF and its core modular components are
subject to periodic review and approval by the Board and its
relevant committees.
The key modules of the SRMF structure are as follows:
1: Risk principles and culture
2: Risk strategy and appetite
3: Risk governance and function organisation
4: Risk definitions and categorisation
Further detail on these modules is set out in the Group's Pillar
3 Disclosures.
Risk appetite
The Group aligns its strategic and business objectives with its
risk appetite, enabling the Board and senior management to monitor
the risk profile relative to its strategic and business performance
objectives. Risk appetite is a critical mechanism through which the
Board and senior management are able to identify adverse trends and
respond to unexpected developments in a timely and considered
manner.
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, risk appetite
is calibrated to ensure that the Bank continues to deliver against
its strategic and business objectives and maintains sufficient
financial resource buffers to withstand plausible but extreme
stresses. The primary objective of the risk appetite is to ensure
that the Group's strategy and business operating model is
sufficiently resilient.
The risk appetite is calibrated using statistical analysis and
stress testing to inform the process for setting management
triggers and limits against key risk indicators. The calibration
process is designed to ensure that timely and appropriate actions
are taken to maintain the risk profile within approved thresholds.
The Board and senior management actively monitor actual performance
against approved management triggers and limits.
Risk appetite statements
Overarching risk appetite statement
The Group aims to ensure that it is able to withstand a severe
but plausible stress without breaching its key performance
indicators and underlying risk limits. In particular, it should
remain profitable and meet its prudential requirements under a 1 in
20 intensity stress (where applicable), by factoring for corrective
management actions.
The Group 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 Group 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, with 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.
Strategic and business risk appetite statement
The Group's strategic and business risk appetite states that the
Group does not intend to undertake any medium to long-term
strategic actions that would put at risk its vision of being a
leading specialist lender, backed by a strong and dependable
savings franchise.
The Group adopts a long-term sustainable business model which,
while focused on niche sub-sectors, is capable of adapting to
growth objectives and external developments.
Reputational risk appetite statement
The Group does not knowingly conduct business or organise its
operations to put its reputation and franchise value at risk.
Credit risk appetite statement
The Group seeks to maintain a high quality lending portfolio
that generates adequate returns, under normal and stressed periods.
The portfolio is actively managed to operate within set criteria
and limits based on profit volatility, focusing on key sectors,
recoverable values, and affordability and exposure levels. The
Group aims to continue to generate sufficient income and control
credit losses to a level such that it remains profitable even when
subjected to a credit portfolio stress of a 1 in 20 intensity
scenario.
Market risk appetite statement
The Group actively manages market risk arising from structural
interest rate positions. The Group does not seek to take a
significant interest rate position or a directional view on rates
and it limits its mismatched and basis risk exposures.
Liquidity and funding risk appetite statement
The Group actively maintains stable and efficient access to
liquidity and funding to support its ongoing operations. It also
maintains an appropriate level and quality of liquid asset buffer
so as to withstand market and idiosyncratic liquidity-related
stresses.
Solvency risk appetite statement
OSB seeks to ensure that it is able to meet its Board level
capital buffer requirements under a 1 in 20 stress scenario. The
Group's solvency risk appetite is constrained within leverage ratio
related requirements. We manage our capital resources in a manner
which avoids excessive leverage and allows us flexibility in
raising capital.
Operational risk appetite statement
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.
Conduct risk appetite statement
The Bank considers its culture and behaviours in ensuring the
fair treatment of customers and in maintaining the integrity of the
market segments in which it operates, 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.
Compliance and regulatory risk appetite statement
The Group views ongoing conformance with regulatory rules and
standards across all the jurisdictions in which it operates as a
critical facet of its risk culture. The Group does not knowingly
accept compliance risk, which could result in regulatory sanctions,
financial loss or damage to its reputation. The Group will not
tolerate any systemic failure to comply with applicable laws,
regulations or codes of conduct relevant to its business operating
model.
Risk profile performance overview
Credit risk
Credit profile performance
The Group's credit profile performed strongly in 2018, 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 loan portfolio composition
continued to evolve with pre-2011 lending (prior to OneSavings Bank
plc being established) continuing to run off. Legacy problem loans
reduced further in 2018 from GBP8.6m to GBP5.6m, 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 2018, with no impairment
recognised across either portfolio.
Strong Group originations performance was observed in 2018,
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 UK'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. From 48,500 loans which were
underwritten post 2011, 206 loans are greater than three months in
arrears, totalling GBP53.5m with a weighted average LTV of just
62%.
Strong credit risk management and continuing favourable economic
conditions, supported the portfolio arrears rate of 1.5% as at 31
December 2018 (31 December 2017: 1.2%).
Other key risk measures also performed strongly within the
period:
-- Gross exposure to commercial lending grew to GBP547.8m
through the year with a weighted average LTV of 66%.
-- Gross exposure to residential development finance remains low
at GBP155.8m with a further GBP90.3m committed with a weighted
average LTV of 35.2%.
-- The Group has limited exposure to high LTV loans on
properties worth more than GBP2m. In total only 6% 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 than 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.
Further information regarding forbearance can be found in note
39 to the financial statements.
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 low
impairment performance for the full year to 31 December 2018.
Since 1 January 2018, the Group has been calculating expected
credit loss provisions under an IFRS 9 approach, replacing the
previous IAS 39 accounting standard.
Impairment losses totalled GBP8.1m during the full year to 31
December 2018 (2017: GBP4.4m) representing a loan loss ratio of
10bps (2017: 7bps). During 2018, the Group made a number of
enhancements to its IFRS 9 impairment approach, including the
implementation of a new probability of default model, enhancements
to the Group's definition of default, cure criteria from stage 3
and the transfer criteria logic to move accounts from stage 1 to
2.
At the point of adoption of the IFRS 9 accounting standard the
Group utilised three macroeconomic scenarios (upside, base and
downside) within expected credit loss calculations. Due to ongoing
uncertainty relating to Brexit, the Board deemed it appropriate to
implement a fourth disorderly 'no-deal' Brexit scenario during
December 2018, which increased the Group's provision
requirements.
Removing the impact of this additional Brexit scenario, the loan
loss ratio would have been c. 6bps.
Loan losses across the Buy-to-Let/SME segment increased during
2018, predominantly driven by the increased provision required post
implementation of the Group's further downside disorderly 'no-deal'
Brexit scenario. In addition, individually assessed provisions
raised against a small number of high exposure new arrears cases
and legacy problem loans within the period prior to resolution also
contributed to the higher loan losses observed against this
segment.
Across the Residential segment the stable loan to value profile
and continued portfolio run down, predominantly driven by the run
off of acquired and second charge originated mortgage portfolios,
resulted in a lower loan loss ratio during the full year to 31
December 2018, versus the full year 2017.
The total coverage ratio with respect to loans and advances to
customers reduced to 0.33% from 0.40% as at 31 December 2017 (0.45%
post IFRS 9 transitional adjustment) driven by the resolution of a
number of significant individually assessed legacy problem loans.
As these loans move to write off, the provision against the loans
is released decreasing total book impairment.
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,
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.
The Bank's fully-loaded CET1 capital ratio under CRD IV remained
robust at 13.3% as at 31 December 2018 (31 December 2017: 13.7%),
demonstrating the strong organic capital generation capability of
the business to support significant growth through profitability.
The Bank had a total capital ratio of 15.8% and a leverage ratio of
5.9% as at 31 December 2018 (31 December 2017: 16.9% and 6.0%
respectively).
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 continues to attract new retail savers and retain
existing customers through loyalty-based product offerings.
In 2018, the Bank actively managed its liquidity and funding
profile within the confines of its risk appetite as set out in the
Internal Liquidity Adequacy Assessment Process ('ILAAP'). The
Group's liquidity coverage ratio ('LCR') at 224% remains 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.
Transition away from LIBOR
The PRA and FCA have continued to encourage banks to transition
away from using LIBOR as a benchmark in all operations before the
end of 2021. Throughout the UK banking sector LIBOR remains a key
benchmark and for each market impacted, solutions to this issue are
progressing through various industry bodies.
In 2018, OSB set up an internal working group comprised of all
of the key business lines that are involved with this change with
strong oversight from the compliance and risk departments. Risk
assessments are currently underway to ensure this process is
managed in a measured and controlled manner.
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 2018, the Bank managed its interest rate risk
exposure within its risk appetite limits.
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 CET 1 capital, with exposure assessed and
monitored monthly across a range of 'business as usual' and
stressed scenarios.
Throughout 2018, 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 get
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
market segments 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 'to become our
customers' favourite bank; one that delivers its very best,
challenges convention and opens doors that others can't.'
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 market segments 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 position further through
strong and sustainable financial performance.
Reputational risk
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.
The Bank monitors reputational risk through tracking media
coverage, customer satisfaction scores, the share price and net
promoter scores provided by brokers.
Principal risks and uncertainties
Strategic and business risk
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.
Performance against targets
Performance against strategic and business targets does not meet
stakeholder expectations. This has the potential to damage the
Group's franchise value and reputation.
Mitigation
Regular monitoring by the Board and the Executive Committee of
business and financial performance against its strategic agenda and
risk appetite. The Balanced Business Scorecard is the primary
mechanism to support the Board and assesses management performance
against key targets. Use of stress testing to flex core business
planning assumptions to assess potential performance under stressed
operating conditions.
Direction: increased
The Group's strategic and business operating environments are
subject to ongoing changes primarily driven by market competition,
economic outlook and regulation.
Regulatory and economic environment
The regulatory and economic environment are important factors
impacting the strategic and business risk profile. In particular,
the new regulatory underwriting standards and tax changes impacting
the Buy-to-Let sector have resulted in a general slowdown in the
sector.
Mitigation
The Group's robust underwriting standards and its focus on
professional landlords have helped mitigate the impact of the
regulatory changes and enabled the Group to continue to grow its
share of the sector.
The Group has continued to utilise and enhance its stress
testing capabilities to assess and minimise potential areas of
macroeconomic vulnerability.
Direction: increased
The Group's strategic and business risk profile is impacted by
the uncertainty surrounding Brexit negotiations and potential
future changes to regulatory standards.
Regulatory requirements
The potential for emerging regulatory requirements to increase
the demands on the Group's operational capacity and increase the
cost of compliance.
Mitigation
The Group continues to invest in its IT and data management
capabilities to increase the ability to respond to regulatory
change.
A structured approach to change management and fully leveraging
internal and external expertise allow the Group to respond
effectively to regulatory change.
Direction: increased
The level and sophistication of emerging regulatory requirements
place increasing demands on the Group's operational capacity.
Reputational risk
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.
Deterioration of reputation
Potential loss of trust and confidence that our stakeholders
place in us as a responsible and fair provider of financial
services.
Mitigation
Culture and commitment to treating customers fairly and being
open and transparent in communication with key stakeholders.
Established processes to proactively identify and manage potential
sources of reputational risk.
Direction: unchanged
The Group has increased the size and capabilities of its Risk
and Compliance function to ensure appropriate oversight and
challenge to how the Group discharges its responsibilities to the
various stakeholders.
Credit risk
Potential for loss due to the failure of a counterparty to meet
its contractual obligation to repay a debt in accordance with the
agreed terms.
Individual borrower defaults
Borrowers may encounter idiosyncratic problems in repaying their
loans, for example, loss of a job or execution problems with a
development project.
While in most cases the Bank's lending is secured, some
borrowers may fail to maintain the value of the security.
Mitigation
All loans are extended only after thorough bespoke and expert
underwriting to ensure ability and propensity of borrowers to repay
and sufficient security in case of default.
Should there be problems with a loan, the Collections and
Recoveries team works with customers unable to meet their loan
service obligations to reach a satisfactory conclusion while
adhering to the principle of treating customers fairly.
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
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.
Direction: unchanged
The Group continues to observe strong and stable credit profile
performance.
Macroeconomic downturn
A broad deterioration in the economy would adversely impact both
the ability of borrowers to repay loans and the value of the
Group's security. Credit losses would impact across the lending
portfolio, so even if individual impacts were to be small, the
aggregate impact on the Group could be significant.
Mitigation
The Group works within portfolio limits on LTV, affordability,
name, sector and geographic concentration that are approved by the
Risk Committee and the Board. These are reviewed on a semi-annual
basis. In addition, stress testing is performed to ensure that the
Group maintains sufficient capital to absorb losses in an economic
downturn and continue to meet its regulatory requirements.
Direction: increased
The economic outlook is uncertain with the final terms of Brexit
to be confirmed. The likelihood of a 'no-deal' Brexit has
increased.
Wholesale credit risk
The Bank has wholesale exposures both through call accounts used
for transactional and liquidity purposes and through derivative
exposures used for hedging.
Mitigation
The Group transacts only with high quality wholesale
counterparties. Derivative exposures include collateral agreements
to mitigate credit exposures.
Direction: unchanged
The Group continues to utilise a reserve account with the Bank
of England, enabling it to minimise credit risk on most of its
liquidity portfolio.
Market risk
Potential loss due to changes in market prices or values.
Interest rate risk
An adverse movement in the overall level of interest rates could
lead to a loss in value due to mismatches in the duration of assets
and liabilities.
Mitigation
The Group's Treasury department actively hedges to match the
timing of cash flows from assets and liabilities.
Direction: unchanged
The Group continues to assess interest rates on a monthly basis
ensuring that the interest rate risk exposure is limited in the
current economic environment.
Basis risk
A divergence in market rates could lead to a loss in value, as
assets and liabilities are linked to different rates.
Mitigation
The Group's Basis Risk exposure is measured on a monthly basis
against a range of stress scenarios.
Exposure is constrained by risk appetite with balance sheet
strategy and hedging used to minimise mismatches.
Direction: unchanged
Product design and balance sheet strategy has enabled the Group
to maintain the overall level of basis risk through the year.
Liquidity and funding risk
The risk that the Group will be unable to meet its financial
obligations as they fall due.
Retail funding stress
As the Group is primarily funded by retail deposits, a retail
run could put it in a position where it could not meet its
financial obligations.
Increased competition for retail savings driving up funding
costs, adversely impacting retention levels and wider damage to the
OSB franchise.
Mitigation
The Group's funding strategy is focused on a highly stable
retail deposit franchise. The large number of depositors and mix of
easy access, one and two year term products, provides
diversification, with a high proportion of balances covered by the
FSCS and so at no material risk of a retail run.
In addition, the Group performs in-depth liquidity 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 Assets and Liabilities
Committee (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.
Direction: unchanged
The Group's funding mix remained stable throughout the year.
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.
Deterioration of capital ratios
Key risks to solvency arise from balance sheet growth and
unexpected losses, which can result in the Bank's capital
requirements increasing or capital resources being depleted such
that it no longer meets the solvency ratios as mandated by the PRA
and Board risk appetite.
The regulatory capital regime is subject to change and could
lead to increases in the level and quality of capital that the
Group needs to hold to meet regulatory requirements.
Mitigation
Currently the Bank operates from a strong capital position and
has a consistent record of strong profitability.
The Bank actively monitors its capital requirements and
resources against financial forecasts and plans and undertakes
stress testing analysis to subject its solvency ratios to extreme
but plausible scenarios.
The Bank also holds prudent levels of capital buffers based on
CRD IV requirements and expected balance 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.
Direction: unchanged
The Group has maintained a prudent and stable CET1 capital and
total capital position providing resilience against unexpected
losses.
Operational risk
The risk of loss or negative impact to the Group resulting from
inadequate or failed internal processes, people, or systems or from
external events.
Cyber/data security risk
The risk of loss of customer or proprietary data as a result of
malicious activities or through ineffective data management.
Mitigation
A series of tools designed to identify and prevent
network/system intrusions are deployed across the Group.
The effectiveness of the controls is overseen by a dedicated IT
Security Governance Committee, with specialist IT security staff
employed by the Bank.
Direction: increased
Whilst the Bank continues to make enhancements to its defences
with respect to IT security threats, it recognises that the threats
to the industry continue to grow both in respect of volume and
level of sophistication.
Data risk
The use of inaccurate, incomplete or outdated data may result in
a range of risks impacting risk management and reporting
services.
The Bank continues to invest in and enhance its data management
architecture, systems, governance and controls.
Oversight is achieved via a Data Strategy programme, designed to
ensure a consistency of approach and implementation.
Direction: increased
The increase in data risk has been primarily driven by the
increased scale of operations and the multiple sources from which
data is derived.
Operational and IT resilience
The inability of the Bank to maintain the provision of its high
priority services in the event of a major incident impacting its IT
infrastructure, facilities, people or the third parties on which it
relies to provide those services.
Mitigation
The completion of all modules of the Operational Resilience
programme has delivered a Group-wide approach in respect to
planning and testing.
The Bank has developed a thorough testing schedule intended to
validate its response to a range of significant scenarios. In
addition, a series of training and awareness activities are
intended to increase the Bank's readiness to respond to an
incident.
A range of back-up technologies employed to provide real-time
replication of various critical systems while disaster recovery
capabilities are tested annually.
Real-time system performance monitoring established and a
dedicated testing team in place.
Direction: increased
The increased risk is primarily driven by the expanding scale of
the Bank's operations and the continued evolution of cyber-based
threats. However the Bank has invested significantly in its
operational resilience frameworks, capabilities and testing to
better address the emerging risks.
Operational execution and scalability
The inability of the Bank to automate current operational
processes at the speed the business requires in order to
successfully meet future growth.
Mitigation
Whilst the Bank adopts a risk-based approach to automation, it
recognises that a number of manual processes remain, which have a
proportionate level of controls associated with them.
Direction: unchanged
The ongoing growth of the Bank has challenged its automation
programmes and resulted in an increase 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
The risk that the Group's behaviours or actions result in
customer detriment or have a negative impact on the integrity of
the market segments in which it operates.
Product suitability
Whilst the Group originates relatively simple products, there
remains a risk that (primarily legacy) products may be deemed to be
unfit for their original purpose in line with the current
regulatory definitions.
Mitigation
The Group has a strategic commitment to provide simple,
customer-focused products. In addition, a Product Governance
framework is established to oversee both the origination of new
products and to revisit the ongoing suitability of the existing
product suite.
Direction: unchanged
Whilst this risk has remained low as a result of increased
awareness and dedicated oversight; the Bank remains aware of the
changes to the regulatory environment and their possible impact on
product suitability.
Data protection
The risk that customer data is accessed inappropriately either
as a consequence of network/system intrusion or through operational
errors in the management of the data.
Mitigation
In addition to a series of network/system controls, the Bank
performs extensive root cause analysis of any data leaks in order
to ensure that the appropriate mitigating actions are taken.
Direction: unchanged
Despite a number of additional controls being introduced in 2018
the network/system threats continue to increase in both volume and
sophistication.
Compliance and regulatory risk
The risk that a change in legislation or regulation or an
interpretation that differs from the Group's will adversely impact
the Group.
Regulation changes
Key compliance and regulatory changes that impacted the Bank
include changes in the standardised approach to capital rules,
implementation of an IRB floor and introduction of IFRS 9
accounting standard for computing impairment allowance
requirements.
Mitigation
The Bank has an effective horizon scanning process to identify
regulatory change.
All significant regulatory initiatives are managed by structured
programmes overseen by the Project and Change Management team and
sponsored at Executive level.
The Bank has proactively sought external expert opinions to
support interpretation of the requirements and validation of its
response, where required.
Direction : increased
The Bank has historically responded effectively to regulatory
changes, however, the level and sophistication of emerging
regulation continues to increase.
Conduct regulation
Regulatory changes focused on the conduct of business could
force changes in the way the Group carries out business and impose
substantial compliance costs. For example, the Financial Conduct
Authority's Discussion Paper on Price Discrimination in the Cash
Savings Market or HM Treasury's consultation on Breathing Space and
Statutory Debt Repayment Plan must be considered.
Mitigation
The Group has a programme of regulatory horizon scanning linking
into a formal regulatory change management programme. In addition,
the focus on simple products and customer-oriented culture means
that current practice may not have to change significantly to meet
new conduct regulations.
Direction: increased
The regulatory environment has tightened and this is likely to
continue, exposing the Group to increased risk.
Emerging risk
The Group proactively scans for emerging risks which may have an
impact on its ongoing operations and strategy. The Group considers
its top emerging risk to be:
Political and macroeconomic uncertainty
As the outcome of Brexit remains unclear, there is an increased
likelihood of a period of macroeconomic uncertainty. The Group's
lending activity is solely focused in the United Kingdom and, as
such, will be impacted by any risks emerging from changes in the
macroeconomic environment such as changes to house prices, interest
rates and unemployment rates.
Mitigation
The Group implemented robust monitoring processes and via
various stress testing activity (i.e. ad hoc, risk appetite and
ICAAP) understands how the Group performs over a variety of
macroeconomic stress scenarios and subsequently developed a suite
of early warning indicators which are closely monitored to identify
changes in the economic environment.
The Group has no European operations outside of the UK and has
minimal deposits from non-UK customers limiting its exposure to
Brexit-related operational risks.
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, macroeconomic outlook,
market opportunity, the competitive landscape, and sensitivity of
the financial plan to volumes, margin pressures and capital
requirements
-- The ongoing assessment of financial performance and
prudential requirements through the use of scenario and sensitivity
analysis covering this period, and
-- It incorporates a forward-looking time period which captures
business and economic uncertainty following the EU referendum
outcome.
The Company is authorised by the PRA, and regulated by the FCA
and the 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 above.
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
above). 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 an integral risk management discipline, used
to assess the financial and operational resilience of the Group.
The Group developed bespoke stress testing capabilities to assess
the impact of extreme but plausible scenarios in the context of its
principal risks impacting the primary strategic, financial and
regulatory objectives. Stress test scenarios are identified in the
context of the Bank's operating model, identified risks, business
and economic outlook. The Group actively engages external experts
to inform the process by which it develops business and economic
stress scenarios. A broad range of stress scenarios have been
analysed, including the economic impact of differing outcomes for
the UK leaving the European Union, regulatory changes relating to
lending into the UK housing sector, governmental housing policy
shifts and scenarios prescribed by the Bank of England.
Stresses are applied to lending volumes, capital requirements,
liquidity and funding mix, interest margins and credit and
operational losses. Stress testing also supports key regulatory
submissions such as the ICAAP, ILAAP and the Recovery Plan. The
Group's stress testing activities generally test the viability of
the Group over a five-year period.
The Group has identified a broad suite of credible management
actions which can be implemented to manage and mitigate the impact
of stress scenarios. These management actions are assessed under a
range of scenarios varying in severity and duration. Management
actions are evaluated based on speed of implementation, second
order consequences and dependency on market conditions and
counterparties. Management actions are used to inform capital,
liquidity and recovery planning under stress conditions.
In addition, the Group identifies a range of catastrophic
scenarios, which could result in the failure of its current
business model. Business model failure scenarios (Reverse Stress
Tests or 'RSTs') are primarily used to inform the Board and
executive management of the outer limits of the Group's risk
profile. RSTs play an important role in helping the Board and its
executives assess the available recovery options to revive a
failing business model. The RSTs exercise is based on analysing a
range of scenarios, 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 Group has established a comprehensive operational resilience
framework to actively assess the vulnerabilities and recoverability
of its critical services. The Group also conducts regular business
continuity and disaster recovery exercises.
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.
The UK's departure from the European Union without defined and
agreed terms could have a significant impact on the economic and
business outlook for the Group. To address this uncertainty the
Group has develop a range of Brexit-related scenarios of varying
severities and probabilities to inform its IFRS 9 and capital
planning processes.
Directors' responsibility statement
The Directors are responsible for preparing the Annual Report
and the Group and parent Company financial statements in accordance
with applicable law and regulations.
Company law requires the Directors to prepare Group and parent
Company financial statements for each financial year. Under that
law they are required to prepare the Group financial statements in
accordance with International Financial Reporting Standards as
adopted by the European Union (IFRSs as adopted by the EU) and
applicable law and have elected to prepare the parent Company
financial statements on the same basis.
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and parent Company and of
their profit or loss for that period. In preparing each of the
Group and parent Company financial statements, the Directors are
required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable, relevant and reliable;
-- state whether they have been prepared in accordance with IFRSs 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 its financial statements comply with the Companies
Act 2006. They are responsible for such internal control as they
determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to
fraud or error, and have general responsibility for taking such
steps as are reasonably open to them to safeguard the assets of the
Group and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the directors are also
responsible for preparing a Strategic Report, Directors' Report,
Directors' Remuneration Report and Corporate Governance Statement
that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in the UK governing the preparation
and dissemination of financial statements may differ from
legislation in other jurisdictions.
Responsibility statement of the directors in respect of the
annual financial report
-- 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/Directors' 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.
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; and
-- they have taken all the steps they ought to have taken as a
Director in order to make themselves aware of any relevant audit
information and to establish that the Company's auditors are aware
of that information.
Approved by the Board and signed on its behalf by:
Jason Elphick
Group General Counsel and Company Secretary
14 March 2019
Statement of Comprehensive Income
For the year ended 31 December 2018
Group Group
2018 2017
Notes GBPm GBPm
------------------------------------------------ ------ -------- -------
Interest receivable and similar income 3 407.9 332.7
Interest payable and similar charges 4 (120.6) (87.3)
------------------------------------------------ ------ -------- -------
Net interest income 287.3 245.4
Fair value losses on financial instruments 5 (5.1) (6.3)
Loss on sale of financial instruments 6 (0.1) -
Fees and commissions receivable 1.7 1.5
Fees and commissions payable (1.1) (1.0)
External servicing fees (0.6) (1.5)
------------------------------------------------ ------ -------- -------
Total income 282.1 238.1
Administrative expenses 7 (74.9) (61.6)
Depreciation and amortisation 25,26 (4.7) (3.5)
Impairment losses 21 (8.1) (4.4)
FSCS and other regulatory provisions 33 (0.8) (0.9)
Exceptional cost - Heritable option 10 (9.8) -
------------------------------------------------ ------ -------- -------
Profit before taxation 183.8 167.7
Taxation 11 (43.5) (40.8)
------------------------------------------------ ------ -------- -------
Profit for the year 140.3 126.9
------------------------------------------------ ------ -------- -------
Other comprehensive expense
Items which may be reclassified to profit
or loss:
Fair value changes on financial instruments
measured as FVOCI (2017: available-for-sale):
Arising in the year (0.2) 0.1
Revaluation of foreign operations (0.2) (0.3)
Other comprehensive expense (0.4) (0.2)
------------------------------------------------ ------ -------- -------
Total comprehensive income for the year 139.9 126.7
------------------------------------------------ ------ -------- -------
Dividend, pence per share 13 14.6 12.8
Earnings per share, pence per share
Basic 12 55.5 51.1
Diluted 12 55.0 50.7
------------------------------------------------ ------ -------- -------
The above results are derived wholly from continuing
operations.
The notes below form part of these accounts.
The financial statements were approved by the Board of Directors
on 14 March 2019.
Statement of Financial Position
As at 31 December 2018
Group Group Bank Bank
2018 2017 2018 2017
Note GBPm GBPm GBPm GBPm
------------------------------- ----- --------- -------- --------- --------
Assets
Cash in hand 0.4 0.5 0.4 0.5
Loans and advances to
credit institutions 15 1,347.3 1,187.2 1,340.0 1,179.3
Investment securities 16 58.9 19.1 58.9 19.1
Loans and advances to
customers 17 8,983.3 7,306.0 7,208.2 6,051.0
Derivative assets 22 11.7 6.1 11.7 6.1
Fair value adjustments
on hedged assets 23 19.8 31.9 19.8 31.9
Deferred taxation asset 27 3.5 5.1 1.6 2.5
Intangible assets 25 7.8 6.8 7.1 6.1
Property, plant and equipment 26 21.8 21.5 15.6 15.4
Investments in subsidiaries
and intercompany loans 24 - - 1,900.7 1,194.3
Other assets 28 5.7 4.9 5.5 4.7
------------------------------- -----
Total assets 10,460.2 8,589.1 10,569.5 8,510.9
------------------------------- ----- --------- -------- --------- --------
Liabilities
Amounts owed to retail
depositors 29 8,071.9 6,650.3 8,071.9 6,650.3
Amounts owed to credit
institutions 30 1,584.0 1,250.3 1,584.0 1,250.3
Amounts owed to other
customers 31 32.9 25.7 32.9 25.7
Derivative liabilities 22 24.9 21.8 24.9 21.8
Current taxation liability 19.2 18.3 15.0 14.8
Intercompany loans 24 - - 262.4 31.2
Other liabilities 32 18.7 16.3 14.7 13.4
FSCS and other regulatory
provisions 33 1.8 1.4 1.8 1.4
Subordinated liabilities 34 10.8 10.9 10.8 10.9
Perpetual subordinated
bonds 35 15.3 15.3 15.3 15.3
------------------------------- -----
9,779.5 8,010.3 10,033.7 8,035.1
Equity
Share capital 36 2.4 2.4 2.4 2.4
Share premium 36 158.8 158.4 158.8 158.4
Retained earnings 439.6 337.5 297.0 237.1
Other reserves 37 79.9 80.5 77.6 77.9
------------------------------- -----
680.7 578.8 535.8 475.8
Total equity and liabilities 10,460.2 8,589.1 10,569.5 8,510.9
------------------------------- ----- --------- -------- --------- --------
The profit after tax for the year ended 31 December 2018 of
OneSavings Bank plc as a Company was GBP96.2m (2017: GBP91.9m). As
permitted by section 408 of the Companies Act 2006, no separate
Statement of Comprehensive Income is presented in respect of the
Company.
The notes below form part of these accounts.
The financial statements were approved by the Board of Directors
on 14 March 2019.
Andy Golding April Talintyre
Chief Executive Officer Chief Financial Officer
Statement of Changes in Equity
For the year ended 31 December 2018
Foreign Share-based
Share Share Capital Transfer exchange FVOCI Available-for-sale payment Retained Equity
capital premium contribution reserve reserve reserve reserve reserve earnings bonds(1) Total
Group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
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 - - - - - - - - (3.7) - (3.7)
Dividends paid - - - - - - - - (27.0) - (27.0)
Other
comprehensive
income - - - - (0.3) - 0.1 - - - (0.2)
Share-based
payments - 0.5 0.2 - - - - 2.1 0.2 - 3.0
Additional
Tier 1
securities
issuance - - - - - - - - (0.8) 60.0 59.2
Tax recognised
in
equity - - - - - - - 1.0 1.2 - 2.2
-------- -------- ------------- --------- --------- -------- ------------------- ------------ --------- ---------
At 31 December
2017 2.4 158.4 6.4 (12.8) (0.2) - 0.1 5.0 337.5 82.0 578.8
IFRS 9
transitional
adjustment - - - - - 0.1 (0.1) - (3.6) - (3.6)
Tax on IFRS 9 - - - - - - - - 0.7 - 0.7
--------------- -------- -------- ------------- --------- --------- -------- ------------------- ------------ --------- --------- -------
Restated at 31
December
2017 2.4 158.4 6.4 (12.8) (0.2) 0.1 - 5.0 334.6 82.0 575.9
Profit for the
year - - - - - - - - 140.3 - 140.3
Coupon paid on
equity
bonds - - - - - - - - (6.5) - (6.5)
Dividends paid - - - - - - - - (33.2) - (33.2)
Other
comprehensive
income - - - - (0.2) (0.2) - - - - (0.4)
Share-based
payments - 0.4 0.1 - - - - (0.3) 2.6 - 2.8
Tax recognised
in
equity - - - - - - - - 1.8 - 1.8
At 31 December
2018 2.4 158.8 6.5 (12.8) (0.4) (0.1) - 4.7 439.6 82.0 680.7
--------------- -------- -------- ------------- --------- --------- -------- ------------------- ------------ --------- --------- -------
Statement of Changes in Equity continued
For the year ended 31 December 2018
Foreign Share-based
Share Share Capital Transfer exchange FVOCI Available-for-sale payment Retained Equity
capital premium contribution reserve reserve reserve reserve reserve earnings bonds(1) Total
Bank GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
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 - - - - - - - - (3.7) - (3.7)
Dividends paid - - - - - - - - (27.0) - (27.0)
Other
comprehensive
income - - - - - - 0.1 - - - 0.1
Share-based
payments - 0.5 0.2 - - - - 2.0 0.2 - 2.9
Additional
Tier 1
securities
issuance - - - - - - - - (0.8) 60.0 59.2
Tax recognised
in
equity - - - - - - - 1.0 1.2 - 2.2
-------- -------- ------------- --------- --------- -------- ------------------- ------------ --------- ---------
At 31 December
2017 2.4 158.4 6.1 (15.2) - - 0.1 4.9 237.1 82.0 475.8
IFRS 9
transitional
adjustment - - - - - 0.1 (0.1) - (1.3) - (1.3)
Tax on IFRS 9 - - - - - - - - 0.3 - 0.3
--------------- -------- -------- ------------- --------- --------- -------- ------------------- ------------ --------- --------- -------
Restated at 31
December
2017 2.4 158.4 6.1 (15.2) - 0.1 - 4.9 236.1 82.0 474.8
Profit for the
year - - - - - - - - 96.2 - 96.2
Coupon paid on
equity
bonds - - - - - - - - (6.5) - (6.5)
Dividends paid - - - - - - - - (33.2) - (33.2)
Other
comprehensive
income - - - - - (0.2) - - - - (0.2)
Share-based
payments - 0.4 0.1 - - - - (0.2) 2.6 - 2.9
Tax recognised
in
equity - - - - - - - - 1.8 - 1.8
At 31 December
2018 2.4 158.8 6.2 (15.2) - (0.1) - 4.7 297.0 82.0 535.8
--------------- -------- -------- ------------- --------- --------- -------- ------------------- ------------ --------- --------- -------
(1) Equity bonds comprise GBP22m of Perpetual Subordinated Bonds
and GBP60m of Additional Tier 1 securities ('AT1 securities').
The reserves are further disclosed in note 37
Statement of Cash Flows
For the year ended 31 December 2018
Group Group Bank Bank
2018 2017 2018 2017
Notes GBPm GBPm GBPm GBPm
----------------------------------------- ------ -------- -------- -------- --------
Cash flows from operating activities
Profit before taxation 183.8 167.7 129.6 124.0
Adjustments for non-cash items 45 32.7 19.3 31.1 16.3
Changes in operating assets and
liabilities 45 (262.1) (655.0) (215.3) (623.1)
----------------------------------------- ------ -------- -------- -------- --------
Cash used in operating activities (45.6) (468.0) (54.6) (482.8)
FSCS and other provisions paid (0.4) (1.0) (0.4) (1.0)
Net tax paid (39.1) (42.1) (30.3) (34.4)
----------------------------------------- ------ -------- -------- -------- --------
Net cash used in operating activities (85.1) (511.1) (85.3) (518.2)
Cash flows from investing activities
Maturity and sales of investment
securities 16 39.9 40.0 39.7 40.0
Purchases of investment securities 16 (79.9) - (79.7) -
Sales of financial instruments 6 0.4 - 0.4 -
Purchases of equipment and intangible
assets 25,26 (6.0) (14.0) (5.2) (10.5)
----------------------------------------- ------ -------- -------- -------- --------
Cash (used in)/generated from
investing activities (45.6) 26.0 (44.8) 29.5
Cash flows from financing activities
Bank of England TFS drawdowns 30 250.0 1,149.0 250.0 1,149.0
Bank of England ILTR received 30 80.0 - 80.0 -
Interest paid on bonds and subordinated
debt(1) (1.6) (1.8) (1.6) (1.8)
Coupon paid on equity bonds (6.5) (3.7) (6.5) (3.7)
Dividends paid 13 (33.2) (27.0) (33.2) (27.0)
AT1 securities issuance net of
costs 37 - 59.4 - 59.4
Proceeds from issuance of shares
under employee SAYE schemes 36 0.4 0.5 0.4 0.5
Repayment of debt(2) 34 (0.1) (10.7) (0.1) (10.7)
----------------------------------------- ------ -------- --------
Cash generated from financing
activities 289.0 1,165.7 289.0 1,165.7
----------------------------------------- ------ -------- -------- -------- --------
Net increase in cash and cash
equivalents 158.3 680.6 158.9 677.0
----------------------------------------- ------ -------- -------- -------- --------
Cash and cash equivalents at
the beginning of the year 14 1,165.9 485.3 1,158.0 481.0
Cash and cash equivalents at
the end of the year 14 1,324.2 1,165.9 1,316.9 1,158.0
----------------------------------------- ------
Movement in cash and cash equivalents 158.3 680.6 158.9 677.0
----------------------------------------- ------ -------- -------- -------- --------
(1) The comparative information has been reclassified to include
interest paid on bonds and subordinated debt, which was previously
shown within operating activities, within financing activities.
(2) Repayment of debt comprises GBP0.1m of the 2022 LIBOR + 2%
linked floating rate notes. 2017 comprised 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 2018
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 investment securities held
at fair value through other comprehensive income ('FVOCI') and
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 Comprehensive Income 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. The stress scenarios include Brexit and
Bank of England Term Funding Scheme ('TFS') repayments. 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 ('FX') 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')
-- Residential mortgages.
The Group includes asset finance leases (a new business lending
line developed internally with lending commencing in October 2018)
and personal loans (sold in June 2018) within the BTL/SME
segment.
The Group has applied the aggregation criteria of IFRS 8 for the
segmental reporting in note 43 but has disclosed the risk
management tables in note 39 at a sub-segment level to provide the
user with granular level analysis of the Group's core lending
business.
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. 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 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 FVOCI investment securities 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 in the period
in which they are 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. The Group includes early redemption
charges within the EIR.
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.
The Bank and its UK subsidiaries are in a group payment
arrangement for corporation tax and show a net corporation tax
liability and deferred tax asset accordingly.
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 original
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 5 years. The
Group reviews the amortisation period on an annual basis. If the
expected useful life of assets is different from previous
assessments, the amortisation period is changed accordingly.
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 financial instruments based on the business
model and the contractual cash flow characteristics of the
financial instruments. Under IFRS 9, the Group classifies financial
assets into one of three measurement categories:
-- Amortised cost - assets held in a business model to hold
financial assets in order to collect contractual cash flows, where
the contractual terms of the financial asset give rise on specified
dates to cash flows that are solely payments of principal and
interest ('SPPI') on the principal amount outstanding.
-- Fair value through other comprehensive income ('FVOCI') -
assets held in a business model which collects contractual cash
flows and sells financial assets where the contractual terms of the
financial assets give rise on specified dates to cash flows that
are SPPI on the principal amount outstanding. The Group only
measures investment securities under this category, which were
previously classified as available-for-sale under IAS 39.
-- Fair value through profit or loss ('FVTPL') - assets not
measured at amortised cost or FVOCI. The Group only measures
derivative assets under this category.
The 2017 comparatives are classified in accordance with IAS 39
and IAS 32 into the following categories:
-- Loans and receivables
-- Available-for-sale ('AFS')
-- 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.
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.
iii. Derecognition
The Group derecognises financial assets when the contractual
rights to the cash flows expire or the Group transfers
substantially all risks and rewards of ownership of the financial
asset. 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.
The forbearance measures offered by the Group are considered a
modification event as the contractual cash flows are renegotiated
or otherwise modified. The Group considers the renegotiated or
modified cash flows are not wholly different from the contractual
cash flows, and does not consider forbearance measures to give rise
to a derecognition event.
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.
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 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.
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
During 2018 the Group used the IFRS 9 three stage expected
credit loss ('ECL') approach for measuring impairment. The three
impairment stages under IFRS 9 are as follows:
-- Stage 1 - entities are required to recognise a 12 month ECL
allowance where there is no significant increase in credit risk
('SICR') since initial recognition.
-- Stage 2 - a lifetime loss allowance is held for assets where
a SICR is 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.
During 2017 the Group used IAS 39 specific and collective
provisioning basis for measuring impairment.
The Group measures impairment through the use of individual and
modelled assessments.
Individual assessment
The Group's provisioning process requires individual assessment
for loans over GBP0.5m which are more than three months in arrears,
have LPA receivers appointed, the property is taken into 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.
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.
The Group applies its IFRS 9 (2017: IAS 39) models to all loans
with no individually assessed provision.
2018 IFRS 9 modelled impairment
Measurement of ECL
The assessment of credit risk and the estimation of ECL are
unbiased and probability weighted. ECL is measured on either a 12
month (stage 1) or lifetime basis depending on whether a SICR has
occurred since initial recognition (stage 2) or where an account
meets the Group's definition of default (stage 3).
The ECL calculation is a product of an individual loan's
probability of default ('PD'), exposure at default ('EAD') and loss
given default ('LGD') discounted at the effective interest rate
('EIR'). 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.
Significant increase in credit risk (movement to stage 2)
The Group's transfer criteria determine what constitutes a SICR,
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.
IFRS 9 includes a rebuttable presumption that if an account is
more than 30 days past due it has experienced a SICR. The Group
considers more than 30 days past due to be an appropriate back stop
measure and therefore has not rebutted this presumption.
The Group's Risk function constantly monitors the ongoing
appropriateness of the transfer criteria, where any proposed
amendments are reviewed and approved by the Group's Management
Committees and the Risk and Audit Committees at least semi-annually
or more frequently if required.
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 uses 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 include:
-- The rebuttable presumption that more than 90 days past due is
an indicator of default. The Group has not rebutted this
presumption and therefore deems more than 90 days past due as an
indicator of default. This also ensures alignment between the
Group's Internal Ratings Based ('IRB') models and the
Basel/Regulatory definition of default.
-- The Group has also deemed it appropriate to classify accounts
that have moved into an unlikeliness to pay position, which
includes forbearance, repossession and interest-only term
expiry.
A borrower will move out of stage 3 when their credit risk
improves such that they no longer meet the 90 days past due and
unlikeliness to pay criteria and following this have completed an
internally approved probation period. The borrower will move to
stage 1 or stage 2 dependent on whether the SICR applies.
Forward-looking macroeconomic scenarios
IFRS 9 requires firms to consider the risk of default and
expected credit loss taking into consideration expectations of
economic changes that are deemed to be reasonably possible.
The Group uses a bespoke macroeconomic model to determine the
most significant factors which may influence the likelihood of an
exposure defaulting in the future. The macroeconomic factors relate
to the House Price Index ('HPI'), unemployment and the Bank of
England Base Rate.
The Group has derived an approach for factoring probability
weighted macroeconomic forecasts into ECL calculations, adjusting
PD and LGD estimates. An account's lifetime PD is impacted by the
probability weighted macroeconomic scenario and therefore impacts
whether an account meets the Group's SICR transfer criteria moving
the exposure between stage 1 and stage 2. 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. During 2018, a fourth scenario was introduced relating
specifically to a disorderly 'no-deal' Brexit outcome.
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 to set the Group's
credit risk appetite thresholds and limits.
Expected life
IFRS 9 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.
Purchased or originated credit impaired ('POCI')
Acquired loans that meet OSB's definition of default (90 days
past due or an unlikeliness to pay position) 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 no
longer meets the definition of default post acquisition. The Group
does not originate credit impaired loans.
2017 IAS 39 modelled impairment
All loans which have not been individually assessed are
subsequently assessed for impairment collectively, with each loan
being assigned a one year PD and a LGD generally consistent with
the requirements of the 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 (e.g.
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 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 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.
Loans and advances over which the Group transfers its rights to
the collateral thereon to the Bank of England under the TFS and
Indexed Long-Term Repo ('ILTR') 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 classifies TFS and ILTR as amortised cost under IFRS 9
Financial Instruments.
Loans and receivables also contain the Group's asset finance
lease lending. Finance leases are initially measured at an amount
equal to the net investment in the lease, using the interest rate
implicit in the finance lease. Initial direct costs are included in
the initial measurement of the net investment in the lease and
reduce the amount of income recognised over the lease term. Finance
income is recognised over the lease term, based on a pattern
reflecting a constant periodic rate of return on the net investment
in the lease.
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 FVOCI (2017: AFS). These are held at fair value
with movements taken to other comprehensive income and accumulated
in the FVOCI (2017: 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.
p) Deposits and subordinated liabilities
Deposits 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 and ILTR 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 and ILTR is recorded in amounts owed
to credit institutions. Interest is accrued over the life of the
agreements on an EIR basis.
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 IFRS 9 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 life
of the agreement using the EIR method.
r) Derivative financial instruments
The Group uses derivative financial instruments (interest rate
swaps) to manage its exposure to the interest rate risk. In
accordance with its treasury policy, the Group does not hold or
issue derivative financial instruments for proprietary 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 classified as assets
when their fair value is positive and as liabilities when their
fair value is negative. If a derivative is cancelled, it is
derecognised from the Statement of Financial Position.
The Group is party to a limited number of options and warrants.
These are recognised as a derivative financial instruments as
applicable where a trigger event takes place and the fair value of
the option or warrant can be reliably measured.
s) Hedge accounting
The Group has chosen to continue to apply the hedge accounting
requirements of IAS 39 instead of the requirements in Chapter 6 of
IFRS 9. The Group uses fair value hedge accounting for a portfolio
hedge of interest rate risk (IAS 39 - AG 114).
Portfolio hedge accounting allows for hedge effectiveness
testing and accounting over an entire portfolio of derivatives. 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 applies fair value portfolio hedge accounting to its
fixed rate portfolio of mortgages and saving accounts. The hedged
portfolio is analysed into repricing time periods based on expected
repricing dates, utilising the ALCO approved prepayment curve.
Interest rate swaps are designated against the repricing time
periods to establish the hedge relationship. Hedge effectiveness is
calculated as a percentage of the fair value movement of the
interest rate swap against the fair value movement of the hedged
item over the period tested.
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.
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. The accumulated amount in profit or loss is
subsequently amortised 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 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 expected income or cost generated from the hedged
assets or liabilities. Each reporting period the expectation is
compared to actual with an accelerated run off applied where the
two diverge by more than set parameters.
t) 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.
u) 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.
v) Employee benefits - defined contribution scheme
Obligations for contributions to defined contribution pension
arrangements are recognised as an expense in profit or loss as
incurred.
w) Share-based payments
In accordance with IFRS 2 Share-based payments, equity-settled
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.
1. Accounting policies (continued)
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 award 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 Sharesave
Schemes is determined using a Black-Scholes 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 options or 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 options and awards.
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 2018 and 2017
reporting dates.
y) Adoption of new standards
In 2018 the Group adopted the classification and measurement and
expected credit loss of financial instruments under IFRS 9 and
revenue recognition principles of IFRS 15, together with amendments
to existing standards that were endorsed for adoption by the EU and
mandatory for annual reporting periods beginning on or after 1
January 2018.
The Group has applied IFRS 15 retrospectively in accordance with
IFRS 15 C3(b). There were no cumulative effects of initially
applying IFRS 15 to be recognised as an adjustment to the opening
balance of retained earnings.
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 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. The adoption of IFRS 16 in respect
of rented properties is expected to have a c. GBP3.9m effect on the
Statement of Financial Position, as the Group recognises a
right-of-use asset and lease liability of this amount. The Group
will recognise the interest paid on the lease liability within the
financing activities section of the 2019 Statement of Cash Flows.
The Group will use its internal cost of funding excluding the
impact of TFS funding in discounting future cash flows to derive
the right-of-use assets. The adoption of IFRS 16 will have a
negligible impact on the Group's capital.
-- The Group will apply the changes to IAS 12 Income taxes from
Annual improvements to IFRS Standards 2015-2017 cycle effective
from 1 January 2019. The changes will require the Group to
recognise the tax consequences of payments on financial instruments
classified as equity in the Statement of Comprehensive Income. This
will result in c. GBP1.8m of tax on interest paid on equity PSBs
and AT1 securities which is currently recognised directly in equity
being recognised in profit or loss.
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.
Judgements
The Group has made the following judgments in applying the
accounting policies:
(i) Loan book impairments
Significant increase in credit risk for classification in 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. The 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. Setting the appropriate
thresholds to determine what is a 'significant' increase is a key
area of judgement.
Probation period for classification from Stage 3 into Stage 1 or
2
The Group has set a minimum probation period which an account
must undergo before returning to non-defaulted status. While
supported by analysis of re-default rates, the probation period is
set judgementally to ensure that only a limited number of accounts
default soon after returning to a non-defaulted status, whilst also
allowing permanent cures to return to non-default without excessive
delay.
(ii) IFRS 9 classification
The Group has applied judgement in determining whether the
contractual terms of a financial asset give rise on specified dates
to cash flows that are SPPI on the principal amount outstanding
when applying the classification criteria of IFRS 9. The main area
of judgement is over the Group's loans and advances to customers
which have been accounted for under amortised cost.
Estimates
The Group has made the following estimates in applying the
accounting policies:
(i) Loan book impairments
This section provides details of the critical accounting
estimates which underpin loan impairment calculations. Less
significant estimates are not disclosed.
Individual impairment
Assessments for individually significant loans involve
significant estimates 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 estimation 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 using the Group's IFRS 9 impairment models (2017: IAS 39
collective basis).
Modelled impairment
Modelled provision assessments are also subject to estimation
uncertainty, underpinned by a number of estimates being made by
management which are utilised within impairment calculations. Key
areas of estimation within modelled provisioning calculations
include those regarding the PD, the LGD and forward-looking
macroeconomic scenarios.
Probability of Default models
The Group developed a number of PD models to assess the
likelihood of a 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. A 10% relative worsening of modelled PDs (e.g. a 1.0% PD
increasing to 1.1% PD) would drive an increase in total provisions
by GBP0.7m as at 31 December 2018 under IFRS 9 approach (2017:
GBP0.4m under IAS 39 approach).
Loss Given Default model
The Group developed a single LGD model, which includes a number
of estimated inputs including propensity to go to possession given
default ('PPD'), forced sale discount ('FSD'), time to sale ('TTS')
and sale cost estimates. PPD and FSD parameters are segmented by
loan type, with the LGD further segmented by LTV. The LGD is
sensitive to the application of the HPI. As at 31 December 2018 a
10% fall in house prices would result in an incremental GBP11.0m
(2017: GBP5.0m) of provision being required. The sensitivity
increase year on year is primarily driven by the transition from
IAS 39 to IFRS 9.
Forward-looking macroeconomic scenarios
The forward-looking macroeconomic scenarios affect both the PD
and LGD estimates. Therefore the expected credit losses
calculations are sensitive to both the scenarios utilised and their
associated probability weightings.
As the Group does not have an in-house economics function it
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.
Due to the current uncertainty regarding Brexit negotiations the
choice of scenarios and weightings are subject to a significant
degree of estimation. To address the economic uncertainty, during
2018 a fourth scenario was introduced relating specifically to a
disorderly 'no-deal' Brexit outcome. As at 31 December 2018 an
additional 10% of weighting attributed to this fourth scenario
would result in an incremental GBP4.3m of provision being required.
If a 100% probability weighting was applied to the severe 'no-deal'
Brexit scenario, which was aligned to the Bank of England scenario
published on 28 November 2018, an incremental GBP40.9m of provision
would have been required as at 31 December 2018. This scenario
includes a peak 30% fall in HPI, unemployment rates rising to 7.5%
and base rates increasing to 5.25%.
IAS 39 Collective impairment
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.
(ii) Loan book acquisition accounting and income recognition
Acquired loan books are initially recognised at fair value.
Significant estimation 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 cumulative prepayment
rate ('CPR') and cumulative default rate ('CDR') 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.
Incurred losses at acquisition are calculated using the Group's
modelled provision assessment (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 updated
with a reset gain or loss taken. 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 calculated at acquisition to
derive a new carrying value, with changes taken to profit or loss
as interest income. The Group recognised a gain of GBP2.0m in 2018
as a result of resetting cash flows on acquired mortgage books
(2017: loss of GBP0.3m). A 10% increase/decrease in prepayment cash
flow performance to date across the acquired books would result in
a reset gain/loss of c. GBP0.7m in 2018 (2017: GBP0.8m).
(iii) Effective interest rate on organic lending
A number of estimates 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. The Group estimates
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.
A 10% increase/decrease in the rate of prepayments term for 2018
new originations would decrease/increase interest income for 2018
by c. GBP0.3m (2017: c. GBP0.1m).
Estimation 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.
Prior to 2018, the Group prudently assumed no period on SVR, before
borrowers refinance on to a new product or redeem, as it waited for
a stable trend to emerge following the automation of the broker-led
Choices programme in late 2016. Behavioural data on two year
products was available in 2018, and was used as the basis for
assuming a period on SVR for both 2018 and prior year origination.
Estimates were used to assess how further planned enhancements to
and automation of the Choices programme and the potential for
changes in regulation might impact future behaviour. No SVR period
is recognised on three and five year products.
A three month longer/shorter period on SVR reflected within the
EIR for 2018 originations would increase/decrease interest income
in 2018 by c. GBP0.1m (2017: c. GBP0.4/GBP0.3m). A three month
longer/shorter period on SVR for loans outstanding at the year end,
assessed by discounting back the additional future cash flows,
would increase/decrease interest income in 2018 by c.
GBP0.9m/GBP0.3m.
3. Interest receivable and similar income
Group Group
2018 2017
GBPm GBPm
------------------------------------------------- ------ ------
At amortised cost:
On BTL/SME mortgages(1) 318.3 245.4
On Residential mortgages(1) 89.8 93.7
On investment securities 0.3 0.1
On other liquid assets 7.6 2.0
At fair value through profit or loss:
Net expense on derivative financial instruments
- lending activities (8.1) (8.5)
------------------------------------------------- ------
407.9 332.7
------------------------------------------------- ------ ------
(1) The comparative information for Residential mortgages has
been reclassified following a change in allocation, with an
additional GBP1.9m of interest income disclosed compared to the
previously reported balance. This has decreased the BTL/SME
mortgages interest income by GBP1.9m.
4. Interest payable and similar charges
Group Group
2018 2017
GBPm GBPm
---------------------------------------------- ------ ------
On retail deposits 109.6 86.1
On Bank of England borrowings 8.7 2.9
On Perpetual Subordinated Bonds 0.9 0.9
On subordinated liabilities 0.7 0.9
On wholesale borrowings 0.4 0.2
Net expense/(income) on derivative financial
instruments - savings activities 0.3 (3.7)
120.6 87.3
---------------------------------------------- ------ ------
5. Fair value losses on financial instruments
Group Group
2018 2017
GBPm GBPm
------------------------------------------- ------- ------
Fair value changes in hedged assets 11.0 (8.7)
Hedging of assets (13.8) 10.0
Fair value changes in hedged liabilities (0.3) 2.9
Hedging of liabilities 0.4 (3.1)
------------------------------------------- ------- ------
Ineffective portion of hedges (2.7) 1.1
Net gains on unmatched swaps 2.4 -
Amortisation of fair value adjustments on
hedged assets (4.6) (7.3)
Debit and credit valuation adjustment (0.2) (0.1)
------------------------------------------- -------
(5.1) (6.3)
------------------------------------------- ------- ------
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
amortisation includes GBP3.0m (2017: GBP4.8m) of accelerated unwind
due to faster run-off on the long-dated fixed rate mortgages
compared to the run-off profile at cancellation date.
6. Loss on sales of financial instruments
During the year the Group disposed of its final portion of the
personal loan portfolio. The Group sold personal loans with a gross
value of GBP0.9m for proceeds of GBP0.4m. After removing loan loss
provisions of GBP0.3m and recovering servicing costs of GBP0.1m,
the Group made a GBP0.1m loss on disposal.
7. Administrative expenses
Group Group
2018 2017
GBPm GBPm
------------------- ------ ------
Staff costs 43.6 35.9
Facilities costs 3.3 2.4
Marketing costs 3.2 2.7
Support costs 9.2 8.4
Professional fees 7.7 5.0
Other costs(1) 7.9 7.2
74.9 61.6
------------------- ------ ------
(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
2018 2017
GBP'000 GBP'000
--------------------------------------------- -------- --------
Fees payable to the Company's auditor for
the audit of the Company's annual accounts 626 638
Fees payable to the Company's auditor and
its associates for other services:
Audit of the accounts of subsidiaries 188 178
Audit-related assurance services 95 96
Tax compliance services 9 8
Other assurance services 31 47
Included within the audit of the Bank and Group accounts is
GBP150k (2017: GBP165k) relating to the audit of IFRS 9. Other
assurance services in 2018 include a review of data submitted to
the Bank of England under the TFS and a review of the OSB India
Private Limited financial statements as required by Indian income
tax rules.
Staff costs comprise the following categories:
Group Group
2018 2017
GBPm GBPm
-------------------------------------------- ------ ------
Salaries, incentive pay and other benefits 36.0 28.9
Share-based payments 2.5 2.4
Social security costs 3.4 3.3
Other pension costs 1.7 1.3
--------------------------------------------
43.6 35.9
-------------------------------------------- ------ ------
The average number of people employed by the Group (including
Executive Directors) during the year was 989 (2017: 813), analysed
below:
Group Group
2018 2017
------------------- ------ ------
Operations 510 442
Support functions 479 371
989 813
------------------- ------ ------
8. Directors' emoluments and transactions
Bank Bank
2018 2017
GBP'000 GBP'000
------------------------------------------------ -------- --------
Directors' emoluments(1) 2,116 1,914
Payments in respect of personal pension plans 109 104
Gains made on the exercise of share options(2) - 17
2,225 2,035
------------------------------------------------ -------- --------
(1) Directors' emoluments comprise salary costs, Non-Executive
Directors' 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 GBP579k (2017:
GBP346k) 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 GBP1,265k (2017: GBP895k) using
a share price of GBP4.20 (2017: GBP4.08) (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 2018
or 2017.
There were no outstanding loans granted in the ordinary course
of business to Directors and their connected persons as at 31
December 2018 and 2017.
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 awards
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 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. The Group's IPO awards were fully vested by the end of
2018.
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, 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
2018 2017
GBPm GBPm
-------------------------------------- ------ ------
IPO Share Award expensed in the year 0.1 0.3
Sharesave Scheme 0.3 0.2
Deferred Share Bonus Plan 1.1 0.9
Performance Share Plan 1.0 1.0
2.5 2.4
-------------------------------------- ------ ------
Movements in the number of share awards and their weighted
average exercise prices are presented below:
Deferred
Share
IPO Share Bonus Performance
Awards Sharesave Scheme Plan Share Plan
---------- ---------------------- ---------- ------------
Weighted
average
exercise
price,
Number Number GBP Number Number
------------------- ---------- ---------- ---------- ---------- ------------
At 1 January 2018 652,198 732,341 2.60 1,186,762 1,589,030
Granted - 313,443 3.35 376,231 708,146
Exercised (652,198) (162,093) 2.25 (301,575) (559,179)
Forfeited - (42,062) 2.86 (2,706) -
----------
At 31 December
2018 - 841,629 2.93 1,258,712 1,737,997
------------------- ---------- ---------- ---------- ---------- ------------
Exercisable at:
------------------- ------------
31 December 2018 - 2,861 3.15 - -
------------------- ---------- ---------- ---------- ---------- ------------
Deferred
Share
IPO Share Bonus Performance
Awards Sharesave Scheme Plan Share Plan
---------- ---------------------- ---------- ------------
Weighted
average
exercise
price,
Number Number 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:
31 December 2017 - - - - -
------------------- ---------- ---------- ---------- ---------- ------------
For the share-based awards granted during the year, the weighted
average grant date fair value was 399 pence (2017: 383 pence).
The weighted average market price at exercise for IPO Share
Awards exercised in the year was 408 pence (2017: nil).
The range of exercise prices and weighted average remaining
contractual life of outstanding awards are as follows:
2018 2017
-------------------------- --------------------------
Weighted Weighted
average average
remaining remaining
contractual contractual
Exercise price Number life (years) Number life (years)
--------------------------- ---------- -------------- ---------- --------------
IPO share awards
Nil - - 652,198 0.4
Sharesave Scheme
134-335 pence 841,629 2.1 732,341 2.1
Deferred Share Bonus Plan
Nil 1,258,712 1.3 1,186,762 1.4
Performance Share Plan
Nil 1,737,997 1.4 1,589,030 1.2
3,838,338 1.5 4,160,331 1.3
--------------------------- ---------- -------------- ---------- --------------
The grant date fair values of options/awards under the Group's
share-based payment schemes are determined using a Black-Scholes
model. The share price at the grant date for all schemes is
adjusted for the impact of dividends as the options/awards do not
carry automatic rights to dividends. The valuation of share
options/awards is based on the following input assumptions:
-- Expected volatility - for Sharesave volatility is based on a
benchmark of the FTSE 350 diversified financials whilst for DSBP
and PSP plans volatility is based on the Bank's share price
volatility.
-- Attrition rate - based on the attrition rate of all UK
employees and updated annually for the DSBP and PSP awards.
-- Dividend yield - based on the average dividend yield across
external analysts' reports for the quarter prior to scheme grant
date.
Sharesave Scheme
2018 2017 2016 2015 2014
---------------------- ------------ ------------ ------------ ------------ ------------
Contractual life,
years 3 5 3 5 3 5 3 5 3 5
Share price at
issue, GBP 4.19 4.19 3.93 3.93 3.00 3.00 2.84 2.84 1.68 1.68
Exercise price,
GBP 3.35 3.35 3.15 3.15 2.40 2.40 2.27 2.27 1.34 1.34
Expected volatility,
% 16.1 16.5 18.0 17.3 18.4 20.1 16.6 19.4 20.0 20.0
Dividend yield,
% 4.4 4.4 4.1 4.1 4.6 4.6 3.6 3.6 3.0 3.0
Grant date fair
value, GBP 0.40 0.43 0.75 0.70 0.10 0.15 0.75 0.79 0.31 0.34
---------------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Deferred Share Bonus Plan
2018 2017 2016 2015
---------------------- ----- ------------ ----- -----
Contractual life,
years 3 3 5 3 3
Mid-market share
price, GBP 3.80 4.04 4.04 3.09 2.51
Expected volatility,
% 33.8 63.7 63.7 43.9 35.5
Attrition rate,
% 9.7 11.8 11.8 12.0 11.1
Dividend yield,
% 4.6 4.0 4.0 4.6 3.7
Grant date fair
value, GBP 3.34 3.61 3.37 2.71 2.26
---------------------- ----- ----- ----- ----- -----
Performance Share Plan
2018 2017 2016 2015
---------------------- ----- ----- ----- ------
Contractual life,
years 3 3 3 3
Mid-market share
price, GBP 4.11 4.04 3.09 2.51
Expected volatility,
% 29.1 63.7 43.9 35.5
Attrition rate,
% 9.7 11.8 12.0 11.1
Dividend yield,
% 4.6 4.0 4.6 3.7
Vesting rate -
growth, % 55.0 75.0 79.0 100.0
Vesting rate -
TSR, % 54.0 60.0 60.0 60.0
Grant date fair
value, GBP 3.61 3.61 2.71 2.26
---------------------- ----- ----- ----- ------
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.
IPO Share Awards
The grant date fair value of the IPO Share Awards was the issue
price of GBP1.70 as they are in the form of nil price awards 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 (2017: nil) per annum. This is lower than
the overall expected employee attrition rate as nil attrition was
assumed for certain Senior Managers who received larger awards. All
IPO Share Awards were fully vested at 31 December 2018.
10. Exceptional cost - Heritable option
The Heritable Development Finance business operates as a joint
venture ('JV') between the Bank and certain senior members of the
Heritable team ('the JV partners'). Under the JV the parties agreed
to co-operate in developing the business and lend alongside each
other, sharing revenues in accordance with a profit waterfall. The
JV agreement also includes a put/call option over the JV partners'
share of the business, exercisable from 2019, subject to certain
conditions. During 2018, the conditions of exercise were met and an
exceptional cost of GBP9.8m was recognised for the fair value of
the option.
Subsequent to the year end, the option was surrendered for a one
off payment of GBP9.8m and the Bank acquired the JV partners'
interest in the business. At the same time a new revenue sharing
arrangement was signed allowing the JV partners to continue to lend
alongside the Bank.
11. Taxation
Group Group
2018 2017
GBPm GBPm
---------------------- ------- -------
Corporation taxation (42.8) (41.5)
Deferred taxation (0.7) 0.7
-------
Total taxation (43.5) (40.8)
---------------------- ------- -------
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:
2018 2017
GBPm GBPm
------------------------------------------------ ------- -------
Profit before taxation 183.8 167.7
------------------------------------------------ ------- -------
Profit multiplied by the weighted average
rate of corporation taxation in the UK during
2018 of 19.00% (2017: 19.25%) (34.9) (32.3)
Bank surcharge (8.6) (8.3)
Taxation effects of:
Expenses not deductible for taxation purposes 0.1 (0.2)
Adjustments in respect of earlier years 0.1 (0.4)
Tax adjustments in respect of share-based
payments 0.2 0.3
Impact of tax losses carried forward - 0.2
Timing differences on capital items (0.4) (0.1)
-------
Total taxation charge (43.5) (40.8)
------------------------------------------------ ------- -------
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 coupons 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
2018 2017
GBPm GBPm
----------------------------------------------- ------ ------
Profit for the year 140.3 126.9
Adjustments:
Coupons on PSBs and AT1 securities classified
as equity (6.5) (3.7)
Tax on coupons 1.8 1.0
Profit attributable to ordinary shareholders 135.6 124.2
----------------------------------------------- ------ ------
Exceptional items:
Exceptional cost - Heritable option 9.8 -
Tax on above (2.6) -
Underlying profit attributable to ordinary
shareholders 142.8 124.2
----------------------------------------------- ------ ------
Group Group
2018 2017
--------------------------------------------- ------ ------
Weighted average number of shares, millions
Basic 244.2 243.2
Diluted 246.2 245.1
Earnings per share, pence per share
Basic 55.5 51.1
Diluted 55.0 50.7
Underlying earnings per share, pence per
share
Basic 58.5 51.1
Diluted 58.0 50.7
--------------------------------------------- ------ ------
13. Dividends
During the year, the Bank paid the following dividends:
Bank Bank
----------------- -----------------
2018 2017
Pence per Pence per
GBPm share GBPm share
------------------------------ ----- ---------- ----- ----------
Final dividend for the prior
year 22.7 9.3 18.5 7.6
Interim dividend for the
current year 10.5 4.3 8.5 3.5
----- ---------- ----- ----------
33.2 27.0
------------------------------ ----- ---------- ----- ----------
A summary of the Bank's distributable reserves from which
dividends can be paid are shown below:
Bank
------------------
2018 2017
GBPm GBPm
---------------------------- -------- --------
Net assets 535.8 475.8
Less:
- Share capital (2.4) (2.4)
- Share premium (158.8) (158.4)
- Other non-distributable
reserves(1) (88.1) (93.1)
- Unrealised gains(2) (19.8) (31.9)
Distributable reserves 266.7 190.0
------------------------------ -------- --------
(1) Other non-distributable reserves include the capital
contribution, equity bonds and FVOCI reserve.
(2) Unrealised gains relate to the Bank's fair value adjustments
on hedged assets.
The Directors propose a final dividend of 10.3 pence per share
(2017: 9.3 pence) payable on 15 May 2019 with an ex-dividend date
of 21 March 2019 and a record date of 22 March 2019. This dividend
is not reflected in these financial statements as it is subject to
approval by shareholders at the AGM on 9 May 2019. Together with
the interim dividend of 4.3 pence (2017: 3.5 pence), the total
dividend for 2018 is 14.6 pence (2017: 12.8 pence) per share.
14. Cash and cash equivalents
Group Group Bank Bank
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
--------------------------------- -------- -------- -------- --------
Cash in hand 0.4 0.5 0.4 0.5
Unencumbered loans and advances
to credit institutions 1,323.8 1,165.4 1,316.5 1,157.5
1,324.2 1,165.9 1,316.9 1,158.0
--------------------------------- -------- -------- -------- --------
15. Loans and advances to credit institutions
Group Group Bank Bank
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
------------------------------ -------- -------- -------- --------
Unencumbered:
Bank of England call account 1,295.2 1,136.9 1,295.2 1,136.9
Call accounts 28.6 24.5 21.3 20.6
Term deposits - 4.0 - -
Encumbered:
Bank of England cash ratio
deposit 20.0 10.0 20.0 10.0
Swap margin given 3.5 11.8 3.5 11.8
1,347.3 1,187.2 1,340.0 1,179.3
------------------------------ -------- -------- -------- --------
16. Investment securities
Group Group
and Bank and Bank
2018 2017
GBPm GBPm
-------------------------- ---------- ----------
UK and EU Sovereign debt 58.9 19.1
---------------------------- ---------- ----------
58.9 19.1
-------------------------- ---------- ----------
The Group had no investment securities sold under repos at the
2018 and 2017 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 FVOCI.
Movements during the year of investment securities are analysed
as follows:
Group Group
and Bank and Bank
2018 2017
GBPm GBPm
--------------------------- ---------- ----------
At 1 January 19.1 141.7
Additions 79.9 -
Disposals and maturities (39.9) (122.7)
Changes in fair value (0.2) 0.1
At 31 December 58.9 19.1
----------------------------- ---------- ----------
17. Loans and advances to customers
Group Group Bank Bank
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
----------------------------------- -------- -------- -------- --------
Loans and advances (see note 18) 8,998.0 7,327.6 7,224.3 6,066.5
Finance leases (see note 19) 7.2 - - -
----------------------------------- -------- -------- -------- --------
9,005.2 7,327.6 7,224.3 6,066.5
Less: Expected credit losses (see
note 20) (21.9) (21.6) (16.1) (15.5)
-----------------------------------
8,983.3 7,306.0 7,208.2 6,051.0
----------------------------------- -------- -------- -------- --------
18. Loans and advances
2018 2017
-------------------------------- --------------------------------
Group BTL/SME Residential Total BTL/SME Residential Total
GBPm GBPm GBPm GBPm GBPm GBPm
Gross carrying
amount
Stage 1 7,032.1 1,247.5 8,279.6 - - -
Stage 2 247.6 189.2 436.8 - - -
Stage 3 102.0 123.4 225.4 - - -
Stage 3 (POCI) 0.3 55.9 56.2 - - -
IAS 39 - - - 5,654.1 1,673.5 7,327.6
---------------- -------- -------- ------------ --------
7,382.0 1,616.0 8,998.0 5,654.1 1,673.5 7,327.6
---------------- -------- ------------ -------- -------- ------------ --------
Bank
Gross carrying
amount
Stage 1 5,528.8 1,128.2 6,657.0 - - -
Stage 2 166.6 180.0 346.6 - - -
Stage 3 70.6 94.2 164.8 - - -
Stage 3 (POCI) - 55.9 55.9 - - -
IAS 39 - - - 4,588.7 1,477.8 6,066.5
---------------- -------- ------------ -------- -------- ------------ --------
5,766.0 1,458.3 7,224.3 4,588.7 1,477.8 6,066.5
---------------- -------- ------------ -------- -------- ------------ --------
At 31 December 2018, mortgages with a carrying value of
GBP2,629.7m (2017: GBP2,303.2m) were pledged with the Bank of
England under the asset purchase facility, TFS. The Group considers
these loans to be encumbered.
At 31 December 2018, mortgages with a carrying value of
GBP216.3m (2017: nil) were pledged with the Bank of England under
the ILTR facility. The Group considers these loans to be
encumbered.
Included within loans and advances to customers are mortgages
totalling GBP16.0m (2017: GBP28.9m) retained by the Group, who acts
as master servicer for securitisation vehicles, to comply with the
EU risk retention requirements. The Group considers these loans to
be encumbered.
The tables below show the movement in loans and advances to
customers by IFRS 9 stage during the year, based on the following
assumptions:
Group Stage Stage Stage Stage
1 2 3 3 (POCI) IAS 39 Total
GBPm GBPm GBPm GBPm GBPm GBPm
At 31 December 2017 - - - - 7,327.6 7,327.6
IFRS 9 transitional
adjustment 6,782.5 292.4 183.0 69.7 (7,327.6) -
------------------------------ ---------- -------- ------- ---------- ---------- ----------
Restated at 31 December
2017 6,782.5 292.4 183.0 69.7 - 7,327.6
Originations(1) 3,043.4 - - - - 3,043.4
Repayments and write-offs(2) (1,265.3) (50.8) (43.4) (13.5) - (1,373.0)
Transfers:
- To Stage 1 170.5 (150.0) (20.5) - - -
- To Stage 2 (353.8) 375.1 (21.3) - - -
- To Stage 3 (97.7) (29.9) 127.6 - - -
------------------------------ ---------- -------- ------- ---------- ---------- ----------
At 31 December 2018 8,279.6 436.8 225.4 56.2 - 8,998.0
------------------------------ ---------- -------- ------- ---------- ---------- ----------
Bank Stage Stage Stage Stage
1 2 3 3 (POCI) IAS 39 Total
GBPm GBPm GBPm GBPm GBPm GBPm
At 31 December 2017 - - - - 6,065.5 6,065.5
IFRS 9 transitional
adjustment 5,679.0 185.8 131.6 69.1 (6,065.5) -
------------------------------ ---------- ------- ------- ---------- ---------- ----------
Restated at 31 December
2017 5,679.0 185.8 131.6 69.1 - 6,065.5
Originations(1) 2,276.2 - - - - 2,276.2
Repayments and write-offs(2) (1,049.4) (28.7) (26.1) (13.2) - (1,117.4)
Transfers:
- To Stage 1 101.0 (83.6) (17.4) - - -
- To Stage 2 (279.0) 297.5 (18.5) - - -
- To Stage 3 (70.8) (24.4) 95.2 - - -
---------- ------- -------
At 31 December 2018 6,657.0 346.6 164.8 55.9 - 7,224.3
------------------------------ ---------- ------- ------- ---------- ---------- ----------
(1) Originations include further advances and drawdowns on
existing commitments.
(2) Repayments and write-offs include customer redemptions.
The Group did not purchased any mortgage books during 2018
(2017: nil).
19. Finance leases
The Group commenced asset finance lending in October 2018
through an existing subsidiary in the Group, InterBay Asset Finance
Limited (formerly 5D Lending Ltd).
Group Group
2018 2017
GBPm GBPm
--------------------------------------------- ------ ------
Net investment in finance leases, receivable
Less than one year 2.2 -
Between one and five years 4.9 -
More than 5 years 0.1 -
--------------------------------------------- ------ ------
7.2 -
--------------------------------------------- ------ ------
The Group has recognised GBP0.1m of ECLs on finance leases as at
31 December 2018 (2017: nil). These are included within BTL/SME in
note 20.
20. Expected credit loss
The Group's ECL by segment and IFRS 9 stage is shown below:
2018 2017
------------------------------ ------------------------------
Group BTL/SME Residential Total BTL/SME Residential Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------- -------- ------------ ------ -------- ------------ ------
Stage 1 3.0 1.3 4.3 - - -
Stage 2 2.1 3.5 5.6 - - -
Stage 3 5.7 4.5 10.2 - - -
Stage 3 (POCI) - 1.6 1.6 - - -
Undrawn loan facilities 0.2 - 0.2 - - -
IAS 39 - - - 13.2 8.4 21.6
------------------------- -------- ------------
11.0 10.9 21.9 13.2 8.4 21.6
------------------------- -------- ------------ ------ -------- ------------ ------
Bank
Stage 1 2.3 1.1 3.4 - - -
Stage 2 1.3 3.4 4.7 - - -
Stage 3 3.8 2.4 6.2 - - -
Stage 3 (POCI) - 1.6 1.6 - - -
Undrawn loan facilities 0.2 - 0.2 - - -
IAS 39 - - - 9.4 6.1 15.5
------------------------- -------- ------------
7.6 8.5 16.1 9.4 6.1 15.5
------------------------- -------- ------------ ------ -------- ------------ ------
The tables below show the movement in the ECL by IFRS 9 stage
during the year. ECLs on originations reflect the IFRS 9 stage of
loans originated during the year as at 31 December and not the date
of origination. Remeasurement of loss allowance relates to existing
loans which did not redeem during the year and includes the impact
of loans moving between IFRS 9 stages.
Group Stage Stage Stage Stage
1 2 3 3 (POCI) IAS 39 Impairments Total
GBPm GBPm GBPm GBPm GBPm GBPm
At 31 December 2017 - - - - 21.6 21.6
IFRS 9 transitional
adjustment 7.8 2.3 13.3 1.8 (21.6) 3.6
--------------------------- ------ ------ ------ ---------- ------------------- ------
Restated at 31 December
2017 7.8 2.3 13.3 1.8 - 25.2
Originations 2.1 - - - - 2.1
Repayments and write-offs (0.3) (0.2) (7.0) (0.2) - (7.7)
Remeasurement of
loss allowance (6.1) 6.9 4.0 - - 4.8
Transfers:
- To Stage 1 1.4 (0.8) (0.6) - - -
- To Stage 2 (0.8) 1.3 (0.5) - - -
- To Stage 3 (5.8) (0.4) 6.2 - - -
- To Stage 3 (POCI) - - - - - -
Changes in assumptions
and model parameters 6.2 (3.5) (5.2) - - (2.5)
--------------------------- ------ ------ ------ ---------- ------------------- ------
At 31 December 2018 4.5 5.6 10.2 1.6 - 21.9
--------------------------- ------ ------ ------ ---------- ------------------- ------
Bank Stage Stage Stage Stage
1 2 3 3 (POCI) IAS 39 Impairments Total
GBPm GBPm GBPm GBPm GBPm GBPm
At 31 December 2017 - - - - 15.5 15.5
IFRS 9 transitional
adjustment 5.1 1.4 8.6 1.8 (15.5) 1.4
--------------------------- ------ ------ ------ ---------- ------------------- ------
Restated at 31 December
2017 5.1 1.4 8.6 1.8 - 16.9
Originations 1.8 - - - - 1.8
Repayments and write-offs (0.1) (0.1) (4.1) (0.2) - (4.5)
Remeasurement of
loss allowance (1.7) 6.8 1.6 - - 6.7
Transfers:
- To Stage 1 0.9 (0.4) (0.5) - - -
- To Stage 2 (0.6) 1.0 (0.4) - - -
- To Stage 3 (4.4) (0.3) 4.7 - - -
- To Stage 3 (POCI) - - - - - -
Changes in assumptions
and model parameters 2.6 (3.7) (3.7) - - (4.8)
------ ------ ------ ----------
At 31 December 2018 3.6 4.7 6.2 1.6 - 16.1
--------------------------- ------ ------ ------ ---------- ------------------- ------
The table below shows the movement in the 2017 impairment
provisions as measured under the IAS 39 model of specific and
collective provisions:
Group Bank
Specific GBPm GBPm
------------------------- ------ ------
At 1 January 2017 23.4 17.7
Write-offs in year (7.8) (5.7)
Charge for the year net
of recoveries 4.0 1.8
At 31 December 2017 19.6 13.8
----------------------------- ------ ------
Collective
------------------------- ------ ------
At 1 January 2017 1.6 1.4
Charge for the year net
of recoveries 0.4 0.3
At 31 December 2017 2.0 1.7
----------------------------- ------ ------
Total
------------------------- ------ ------
At 1 January 2017 25.0 19.1
Write-offs in year (7.8) (5.7)
Charge for the year net
of recoveries 4.4 2.1
At 31 December 2017 21.6 15.5
----------------------------- ------ ------
21. Impairment losses
Group Group
2018 2017
GBPm GBPm
----------------------- ------ ------
Write-offs in year 11.1 7.8
Disposals 0.3 -
Decrease in provision (3.3) (3.4)
8.1 4.4
----------------------- ------ ------
22. Derivatives
The table below reconciles the gross amount of derivative
contracts to the carrying balance shown in the Statement of
Financial Position:
Net amount Contracts
of financial subject to
Gross assets / master netting Cash collateral
amount (liabilities) agreements paid / (received)
of recognised presented not offset not offset
financial in the Statement in the Statement in the Statement
assets of Financial of Financial of Financial
/ (liabilities) Position Position Position Net amount
Group and Bank GBPm GBPm GBPm GBPm GBPm
------------------------- ----------------- ------------------ ------------------ ------------------- -----------
At 31 December
2018
Derivative assets:
Interest rate
risk hedging 11.7 11.7 (10.3) (1.0) 0.4
------------------------- ----------------- ------------------ ------------------ ------------------- -----------
Derivative liabilities:
Interest rate
risk hedging (15.1) (15.1) 10.3 3.5 (1.3)
Heritable option(1) (9.8) (9.8) - - (9.8)
------------------------- ----------------- ------------------ ------------------ ------------------- -----------
(24.9) (24.9) 10.3 3.5 (11.1)
------------------------- ----------------- ------------------ ------------------ ------------------- -----------
At 31 December
2017
Derivative assets:
Interest rate
risk hedging 6.1 6.1 (5.9) (0.2) -
------------------------- ----------------- ------------------ ------------------ ------------------- -----------
Derivative liabilities:
Interest rate
risk hedging (21.8) (21.8) 5.9 11.8 (4.1)
------------------------- ----------------- ------------------ ------------------ ------------------- -----------
(1) The Group has a put/call option over Heritable Capital
Limited ('HCL') as part of the development finance joint venture,
as further discussed in note 10.
Included within derivative liabilities is GBP3.0m (2017:
GBP4.6m) of derivative contracts not covered by master netting
agreements and therefore no cash collateral has been paid.
The table below profiles the timing of nominal amounts for
interest rate risk hedging derivatives based on contractual
maturity:
Total Less than 3 - 12 1 - 5 More than
Nominal 3 months months years 5 years
Group and Bank GBPm GBPm GBPm GBPm GBPm
------------------------ --------- ---------- --------- -------- ----------
At 31 December 2018
Derivative assets 1,999.0 106.0 330.0 1,563.0 -
Derivative liabilities 4,532.2 195.0 2,090.0 1,966.2 281.0
6,531.2 301.0 2,420.0 3,529.2 281.0
------------------------ --------- ---------- --------- -------- ----------
At 31 December 2017
Derivative assets 1,636.1 151.1 702.0 783.0 -
Derivative liabilities 2,493.9 129.0 1,359.7 871.2 134.0
4,130.0 280.1 2,061.7 1,654.2 134.0
------------------------ --------- ---------- --------- -------- ----------
The Group and Bank has 206 (2017: 169) derivative contracts with
an average fixed rate of 1.23% (2017: 1.20%).
23. Fair value adjustments on hedged items
Group Group
and Bank and Bank
2018 2017
GBPm GBPm
------------------------------- ---------- ----------
Hedged assets
Current hedge relationships 2.5 15.9
Cancelled hedge relationships 17.3 16.0
-------------------------------
19.8 31.9
------------------------------- ---------- ----------
Hedged liabilities
Current hedge relationships - -
------------------------------- ---------- ----------
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 Group
and Bank and Bank
2018 2017
GBPm GBPm
--------------------------- ---------- ----------
At 1 January 16.0 23.3
New cancellations(1) 5.9 -
Amortisation (see note 5) (4.6) (7.3)
---------------------------
At 31 December 17.3 16.0
--------------------------- ---------- ----------
(1) Following an update of the fixed prepayment curve
assumptions, a long dated swap effective prior to the update was
cancelled with the designated hedge moved to cancelled hedge
relationships to be amortised over the original life of the
swap.
24. 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:
Shares in
subsidiary Intercompany Intercompany
undertakings loans receivable loans payable Total
GBPm GBPm GBPm GBPm
--------------------- -------------- ------------------ --------------- --------
At 1 January 2017 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 2017 1.8 1,192.5 (31.2) 1,163.1
Additions - 782.4 (231.4) 551.0
Repayments - (76.0) 0.2 (75.8)
At 31 December 2018 1.8 1,898.9 (262.4) 1,638.3
--------------------- -------------- ------------------ --------------- --------
A list of the Bank's direct and indirect subsidiaries is shown
below:
Charged
by/(to)
the Bank Balance
during due to/(by)
2018 the year the Bank
Class
Direct investments of shares Activity Ownership GBPm GBPm
-------------------------- ------------ --------------------- ---------- ---------- -------------
Easioption Limited Ordinary Holding company 100% - 0.5
Guernsey Home Loans
Limited Ordinary Mortgage provider 100% (0.3) 13.0
Guernsey Home Loans
Limited (Guernsey) Ordinary Mortgage provider 100% (0.8) 36.8
Heritable Development Mortgage originator
Finance Limited(1) Ordinary and servicer 85% 1.5 (0.8)
Interbay Group Holdings Ordinary Holding company 100% - -
Limited
Jersey Home Loans
Limited Ordinary Mortgage provider 100% (0.1) 2.0
Jersey Home Loans
Limited (Jersey) Ordinary Mortgage provider 100% (3.3) 152.3
OSB India Private Back office
Limited(2) Ordinary processing 100% 6.8 5.7
Mortgage originator
Prestige Finance Limited Ordinary and servicer 100% 2.7 (1.2)
Reliance Property
Loans Limited Ordinary Mortgage provider 100% (0.1) 3.8
Rochester Mortgages Ordinary Mortgage provider 100% - -
Limited
-------------------------- ------------ --------------------- ---------- ---------- -------------
Indirect investments
-------------------------- ------------ --------------------- ---------- ---------- -------------
Inter Bay Financial
I Limited Ordinary Holding company 100% (0.3) 20.1
Inter Bay Financial
II Limited Ordinary Holding company 100% (0.2) 6.8
Interbay Funding,
Ltd Ordinary Mortgage servicer 100% 2.1 (260.3)
Interbay ML, Ltd Ordinary Mortgage provider 100% (19.3) 1,651.2
InterBay Holdings Ordinary Holding company 100% - -
Ltd
5D Finance Limited Ordinary Mortgage servicer 100% - 0.4
InterBay Asset Finance Asset finance
Limited (formerly: and mortgage
5D Lending Ltd)(3) Ordinary provider 100% (0.1) 6.2
-------------------------- ------------ --------------------- ---------- ---------- -------------
(11.4) 1,636.5
------------------------------------------------------------- ---------- ---------- -------------
(1) Heritable Development Finance Limited is a business
development partnership with HCL. 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,
29.72% by Easioption Limited and 0.001% by Reliance Property Loans
Limited.
(3) The Group launched its new asset finance business in 5D
Lending Ltd during 2018 and renamed the subsidiary to InterBay
Asset Finance Limited.
Charged
by/(to)
the Bank Balance
during due to/(by)
2017 the year the Bank
Class
Direct investments of shares Activity Ownership GBPm GBPm
-------------------------- ------------ --------------------- ---------- ---------- -------------
Easioption Limited Ordinary Holding company 100% - 0.5
Guernsey Home Loans
Limited Ordinary Mortgage provider 100% (0.3) 17.5
Guernsey Home Loans
Limited (Guernsey) Ordinary Mortgage provider 100% (1.0) 46.6
Heritable Development Mortgage originator
Finance Limited Ordinary and servicer 85% 1.9 (0.9)
Interbay Group Holdings Ordinary Holding company 100% - -
Limited
Jersey Home Loans
Limited Ordinary Mortgage provider 100% (0.1) 3.2
Jersey Home Loans
Limited (Jersey) Ordinary Mortgage provider 100% (4.3) 201.4
OSB India Private Back office
Limited Ordinary processing 100% 5.4 5.9
Mortgage originator
Prestige Finance Limited Ordinary and servicer 100% 3.2 (1.3)
Reliance Property
Loans Limited Ordinary Mortgage provider 100% (0.1) 4.1
Rochester Mortgages Ordinary Mortgage provider 100% - -
Limited
-------------------------- ------------ --------------------- ---------- ---------- -------------
Indirect investments
-------------------------- ------------ --------------------- ---------- ---------- -------------
Inter Bay Financial
I Limited Ordinary Holding company 100% (0.3) 19.8
Inter Bay Financial
II Limited Ordinary Holding company 100% (0.2) 17.7
Interbay Funding,
Ltd Ordinary Mortgage servicer 100% - (28.9)
Interbay ML, Ltd Ordinary Mortgage provider 100% (10.2) 875.6
InterBay Holdings Ordinary Holding company 100% - -
Ltd
5D Finance Limited Ordinary Mortgage servicer 100% - 0.2
5D Lending Ltd Ordinary Mortgage provider 100% - (0.1)
-------------------------- ------------ --------------------- ---------- ---------- -------------
(6.0) 1,161.3
------------------------------------------------------------- ---------- ---------- -------------
All entities have the same registered address as the Company,
except the following:
-- Guernsey Home Loans Limited (Guernsey) - 1st floor, Tudor
House, Le Bordage, St Peter Port, Guernsey, GY1 1DB.
-- Jersey Home Loans Limited (Jersey) - 26 New Street, St
Helier, Jersey, JE2 3RA.
-- OSB India Private Limited - Salarpuria Magnificia, 9th &
10th floor, 78 Old Madras Road, Bangalore, India, 560016.
All of the above investments are reviewed annually for
impairment. Based on management's assessment of the future cash
flows of each entity and the support of the Bank, 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
was charged for services provided by KRPS amounting to GBP0.2m
(2017: GBP0.3m).
All related party transactions were made on terms equivalent to
those that prevail in arms 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 the
Directors. Directors' remuneration is disclosed in note 8 and in
the Annual Report on Remuneration.
No loans were issued to related parties during 2018 (2017:
GBPnil).
Key management personnel and connected persons held deposits
with the Group of GBP1.7m (2017: GBP1.5m).
25. Intangible assets
Intangible assets consist of computer software. There were no
capitalised costs related to the internal development of software
during the period.
Group Bank
GBPm GBPm
----------------------------- ------ ------
Cost
At 1 January 2017 8.5 6.8
Additions 4.2 3.9
Disposals and write-offs (0.3) (0.3)
----------------------------- ------ ------
At 31 December 2017 12.4 10.4
Additions 3.5 3.2
Disposals and write-offs(1) (2.3) (1.5)
At 31 December 2018 13.6 12.1
----------------------------- ------ ------
Amortisation
At 1 January 2017 3.8 2.7
Charged in year 1.8 1.6
At 31 December 2017 5.6 4.3
Charged in year 2.5 2.2
Disposals and write-offs(1) (2.3) (1.5)
At 31 December 2018 5.8 5.0
----------------------------- ------ ------
Net book value
----------------------------- ------ ------
At 31 December 2018 7.8 7.1
----------------------------- ------ ------
At 31 December 2017 6.8 6.1
----------------------------- ------ ------
(1) During the year the Group and Bank wrote-off fully
depreciated assets.
26. Property, plant and equipment
Freehold
land and Leasehold Equipment
Group buildings improvements and fixtures Total
GBPm GBPm GBPm GBPm
----------------------------- ----------- -------------- -------------- ------
Cost
At 1 January 2017 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 2017 16.2 0.6 9.9 26.7
Additions - 0.3 2.5 2.8
Disposals and write-offs(1) - - (1.3) (1.3)
Foreign exchange difference (0.2) - (0.1) (0.3)
At 31 December 2018 16.0 0.9 11.0 27.9
----------------------------- ----------- -------------- -------------- ------
Depreciation
At 1 January 2017 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 2017 0.6 0.2 4.4 5.2
Charged in year 0.2 0.1 1.9 2.2
Disposals and write-offs(1) - - (1.3) (1.3)
At 31 December 2018 0.8 0.3 5.0 6.1
----------------------------- ----------- -------------- -------------- ------
Net book value
At 31 December 2018 15.2 0.6 6.0 21.8
----------------------------- ----------- -------------- -------------- ------
At 31 December 2017 15.6 0.4 5.5 21.5
----------------------------- ----------- -------------- -------------- ------
(1) During the year the Group wrote-off fully depreciated
assets.
Freehold
land and Leasehold Equipment
Bank buildings improvements and fixtures Total
GBPm GBPm GBPm GBPm
----------------------------- ----------- -------------- -------------- ------
Cost
At 1 January 2017 6.4 0.5 5.7 12.6
Additions 5.1 0.1 1.7 6.9
At 31 December 2017 11.5 0.6 7.4 19.5
Additions - 0.1 1.8 1.9
Disposals and write-offs(1) - - (1.0) (1.0)
At 31 December 2018 11.5 0.7 8.2 20.4
----------------------------- ----------- -------------- -------------- ------
Depreciation
At 1 January 2017 0.4 0.1 2.2 2.7
Charged in year 0.2 0.1 1.1 1.4
At 31 December 2017 0.6 0.2 3.3 4.1
Charged in year 0.1 0.1 1.5 1.7
Disposals and write-offs(1) - - (1.0) (1.0)
At 31 December 2018 0.7 0.3 3.8 4.8
----------------------------- ----------- -------------- -------------- ------
Net book value
At 31 December 2018 10.8 0.4 4.4 15.6
----------------------------- ----------- -------------- -------------- ------
At 31 December 2017 10.9 0.4 4.1 15.4
----------------------------- ----------- -------------- -------------- ------
(1) During the year the Bank wrote-off fully depreciated
assets.
27. Deferred taxation asset
Group
---------------------------------------------------------------
Losses IFRS 9
carried Accelerated Share-based transitional
forward depreciation payments adjustments Total
GBPm GBPm GBPm GBPm GBPm
---------------------------- --------- -------------- ------------ -------------- ------
At 1 January 2017 2.3 0.1 1.0 - 3.4
Profit or loss credit 0.2 - 0.5 - 0.7
Tax taken directly to
equity - - 1.0 - 1.0
At 31 December 2017 2.5 0.1 2.5 - 5.1
IFRS 9 transitional
adjustments - - - 0.7 0.7
Restated at 31 December
2017 2.5 0.1 2.5 0.7 5.8
Profit or loss credit (1.1) (0.2) 0.6 - (0.7)
Transferred to corporation
tax liability - - (1.6) - (1.6)
At 31 December 2018 1.4 (0.1) 1.5 0.7 3.5
---------------------------- --------- -------------- ------------ -------------- ------
Bank
----------------------------------------------------------------
Losses IFRS 9
carried Accelerated Share-based transitional
forward depreciation payments adjustments Total
GBPm GBPm GBPm GBPm GBPm
---------------------------- ---------- -------------- ------------ -------------- ------
At 1 January 2017 - - 0.8 - 0.8
Profit or loss credit - - 0.7 - 0.7
Tax taken directly to
equity - - 1.0 - 1.0
At 31 December 2017 - - 2.5 - 2.5
IFRS 9 transitional
adjustments - - - 0.3 0.3
---------------------------- ---------- -------------- ------------ -------------- ------
Restated at 31 December
2017 - - 2.5 0.3 2.8
Profit or loss credit - (0.2) 0.6 - 0.4
Transferred to corporation
tax liability - - (1.6) - (1.6)
At 31 December 2018 - (0.2) 1.5 0.3 1.6
---------------------------- ---------- -------------- ------------ -------------- ------
The deferred tax has been calculated using the relevant rates
for the expected periods of utilisation.
As at 31 December 2018, the Group had GBP3.5m (2017: GBP3.5m) 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.
28. Other assets
Group Group Bank Bank
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
-------------- ------ ------ ----- -----
Prepayments 2.3 1.9 2.1 1.7
Other assets 3.4 3.0 3.4 3.0
5.7 4.9 5.5 4.7
-------------- ------ ------ ----- -----
29. Amounts owed to retail depositors
Group Group
and Bank and Bank
2018 2017
GBPm GBPm
------------------------ ---------- ----------
Fixed rate deposits 5,155.5 4,305.6
Variable rate deposits 2,916.4 2,344.7
8,071.9 6,650.3
------------------------ ---------- ----------
30. Amounts owed to credit institutions
Group Group
and Bank and Bank
2018 2017
GBPm GBPm
---------------------- ---------- ----------
Bank of England TFS 1,502.9 1,250.0
Bank of England ILTR 80.1 -
Swap margin received 1.0 0.3
1,584.0 1,250.3
---------------------- ---------- ----------
Bank of England TFS includes GBP250.0m of cash movement and
GBP2.9m of non-cash accrued interest.
Bank of England ILTR includes GBP80.0m of cash movement and
GBP0.1m of non-cash accrued interest.
31. Amounts owed to other customers
Group Group
and Bank and Bank
2018 2017
GBPm GBPm
--------------------- ---------- ----------
Fixed rate deposits 32.9 25.7
----------------------- ---------- ----------
32. Other liabilities
Group Group Bank Bank
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
------------------------------ ------ ------ ----- -----
Falling due within one year:
Accruals 11.0 10.9 9.5 9.0
Deferred income 2.0 0.9 0.9 0.8
Other creditors 5.7 4.5 4.3 3.6
18.7 16.3 14.7 13.4
------------------------------ ------ ------ ----- -----
33. 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 for single account holders and
GBP170,000 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 2018 will be
recognised in 2019. The FSCS balance at the reporting date relates
to the levy from previous years.
The Group has reviewed its current exposure to Payment
Protection Insurance ('PPI') claims and has maintained a provision
of GBP0.4m as at 31 December 2018 (2017: GBP0.4m). The Group will
reassess the provision once the FCA deadline for PPI claims of 29
August 2019 has passed. The Group has increased its provision for
FCA conduct rules exposures and has recognised a provision of
GBP1.3m (2017: GBP0.5m) to cover potential future claims.
An analysis of the Group and Bank's FSCS and other provisions is
presented below:
Other Other
regulatory regulatory
Group and Bank FSCS provisions Total FSCS provisions Total
2018 2018 2018 2017 2017 2017
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- ------ ------------ ------ ------ ------------ ------
At 1 January 0.5 0.9 1.4 1.4 0.1 1.5
Paid during the year (0.3) (0.1) (0.4) (1.0) - (1.0)
(Credit)/Charge (0.1) 0.9 0.8 0.1 0.8 0.9
At 31 December 0.1 1.7 1.8 0.5 0.9 1.4
---------------------- ------ ------------ ------ ------ ------------ ------
34. Subordinated liabilities
Group Group
and Bank and Bank
2018 2017
GBPm GBPm
------------------------------- ---------- ----------
At 1 January 10.9 21.6
Repayment of debt at maturity (0.1) (10.7)
At 31 December 10.8 10.9
--------------------------------- ---------- ----------
The Group's outstanding subordinated liabilities are summarised
below:
Group Group
and Bank and Bank
2018 2017
GBPm GBPm
----------------------------------- ---------- ----------
Linked to LIBOR:
Floating rate subordinated loans
2022 (LIBOR + 5%) 0.3 0.3
Floating rate subordinated loans
2022 (LIBOR + 2%) 0.3 0.4
Fixed rate:
Subordinated liabilities
2024 (6.45%)(1) 5.1 5.1
Subordinated liabilities
2024 (7.45%) 5.1 5.1
10.8 10.9
----------------------------------- ---------- ----------
(1) The Group has the option to call the GBP5.0m second tranche
of the subordinated debt on 27 September 2019.
The fixed rate subordinated liabilities are repayable at the
dates stated or earlier, in full, at the option of the Group with
the prior consent of the PRA. All subordinated liabilities are
denominated in Pounds 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.
35. Perpetual Subordinated Bonds
Group Group
and Bank and Bank
2018 2017
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% until the next
reset date on 27 August 2019.
36. Share capital
Nominal
Number value Premium
of shares GBPm GBPm
---------------------------------- ------------ -------- --------
At 1 January 2017 243,082,091 2.4 157.9
Shares issued under OSB employee
share plans 382,597 - 0.5
---------------------------------- ------------ -------- --------
At 31 December 2017 243,464,688 2.4 158.4
Shares issued under OSB employee
share plans 1,022,849 - 0.4
At 31 December 2018 244,487,537 2.4 158.8
---------------------------------- ------------ -------- --------
37. 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.
FVOCI reserve (2017: AFS reserve)
The FVOCI reserve debit of GBP0.1m (2017: credit of GBP0.1m)
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 35, 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 is
4.5991% until the next reset date on 7 March 2021.
AT1 securities
On 25 May 2017 OSB issued GBP60.0m of Fixed Rate Resetting
Perpetual Subordinated Contingent Convertible Securities ('AT1
securities') that qualify as Additional Tier 1 capital under the
Capital Requirements Directive and Regulation ('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 related to the AT1 securities issuance are
recognised directly in equity within retained earnings together
with the related tax.
38. Financial commitments and guarantees
a) As at 31 December 2018, the Group's contracted or anticipated
capital expenditure commitments not provided for amounted to
GBP0.2m (2017: GBP0.3m). 2018 consists of refurbishment and fixture
costs for the relocation of the Interbay office. 2017 consisted of
branch refurbishment costs.
b) The Group's minimum lease commitments under operating leases
are summarised in the table below:
Group Group Bank Bank
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
--------------------------------- ------ ------ ----- -----
Land and buildings: due within:
One year 0.7 0.5 0.5 0.3
Two to five years 2.3 1.0 1.5 0.8
More than five years 1.5 - 0.5 -
4.5 1.5 2.5 1.1
--------------------------------- ------ ------ ----- -----
c) Undrawn loan facilities:
Group Group Bank Bank
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
----------------------- ------ ------ ------ ------
BTL/SME mortgages 622.8 485.9 406.0 390.5
Residential mortgages 81.8 44.3 81.8 44.3
Asset Finance 6.1 - - -
710.7 530.2 487.8 434.8
----------------------- ------ ------ ------ ------
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 2018 (2017: nil).
39. 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 market rates.
The PRA and FCA have continued to encourage banks to transition
away from using LIBOR as a benchmark in all operations before the
end of 2021. Throughout the UK banking sector LIBOR remains a key
benchmark and for each market impacted solutions to this issue are
progressing through various industry bodies.
In 2018 the Group set up an internal working group comprised of
all of the key business lines that are involved with this change
with strong oversight from the compliance and risk departments.
Risk assessments are currently underway to ensure this process is
managed in a measured and controlled fashion.
Types of risk
The principal financial risks to which the Group is exposed are
credit, liquidity and market risks, the latter comprising interest
and exchange rate risk. In addition to financial risks, the Group
is exposed to various other risks, most notably operational,
conduct and regulatory, which are covered in the Risk review.
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 tables show the Group's maximum exposure to credit
risk and the impact of collateral held as security, capped at the
gross exposure amount, by impairment stage. Capped collateral
excludes the impact of forced sale discounts and costs to sell.
Group Group
2018 2017
------------------------ ------------------------
Gross Capped Gross Capped
carrying collateral carrying collateral
amount held amount held
GBPm GBPm GBPm GBPm
---------------- ---------- ------------ ---------- ------------
Stage 1 8,286.8 8,274.5 - -
Stage 2 436.8 436.8 - -
Stage 3 225.4 224.2 - -
Stage 3 (POCI) 56.2 56.1 - -
IAS 39 - - 7,327.6 7,313.5
9,005.2 8,991.6 7,327.6 7,313.5
---------------- ---------- ------------ ---------- ------------
Bank Bank
2018 2017
------------------------ ------------------------
Gross Capped Gross Capped
carrying collateral carrying collateral
amount held amount held
GBPm GBPm GBPm GBPm
---------------- ---------- ------------ ---------- ------------
Stage 1 6,657.0 6,653.2 - -
Stage 2 346.6 346.5 - -
Stage 3 164.8 164.7 - -
Stage 3 (POCI) 55.9 55.8 - -
IAS 39 - - 6,065.4 6,053.6
7,224.3 7,220.2 6,065.4 6,053.6
---------------- ---------- ------------ ---------- ------------
The Group's collateral held in relation to BTL/SME and
Residential first and second charge mortgage loans is property,
based in the UK and the Channel Islands. The Group's collateral
held in relation to funding lines is predominantly property. The
Group's personal loan portfolio, which was sold in June 2018, was
unsecured.
The Group uses indexed loan-to-value ('LTV') ratios to assess
the quality of the uncapped collateral held. Property values are
updated to reflect changes in the HPI. A breakdown of loans and
advances to customers by indexed LTV is as follows:
LTV analysis by band for all loans:
2018
--------------------------------------
BTL/SME Residential Total
Group GBPm GBPm GBPm %
---------------------------------- -------- ------------ -------- ----
Band
0% - 50% 935.8 784.4 1,720.2 19
50% - 60% 1,105.9 249.7 1,355.6 15
60% - 70% 2,021.4 194.1 2,215.5 25
70% - 80% 2,864.5 177.3 3,041.8 34
80% - 90% 414.1 162.2 576.3 6
90% - 100% 32.9 32.3 65.2 1
>100% 14.6 16.0 30.6 -
Total mortgages before provisions 7,389.2 1,616.0 9,005.2 100
---------------------------------- -------- ------------ -------- ----
2017
--------------------------------------
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
---------------------------------- -------- ------------ -------- ----
2018
--------------------------------------
BTL/SME Residential Total
Bank GBPm GBPm GBPm %
---------------------------------- -------- ------------ -------- ----
Band
0% - 50% 738.6 717.6 1,456.2 20
50% - 60% 882.4 219.5 1,101.9 15
60% - 70% 1,547.3 168.3 1,715.6 24
70% - 80% 2,201.9 158.3 2,360.2 33
80% - 90% 368.1 156.5 524.6 7
90% - 100% 27.7 26.9 54.6 1
>100% - 11.2 11.2 -
Total mortgages before provisions 5,766.0 1,458.3 7,224.3 100
---------------------------------- -------- ------------ -------- ----
2017
--------------------------------------
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
---------------------------------- -------- ------------ -------- ----
LTV analysis by band for BTL/SME:
2018
-----------------------------------------------------------
Residential Funding
Buy-to-Let Commercial development lines Total
Group GBPm GBPm GBPm GBPm GBPm
----------------------- ----------- ----------- ------------- -------- --------
Band
0% - 50% 663.9 71.2 108.7 92.0 935.8
50% - 60% 964.8 72.2 38.8 30.1 1,105.9
60% - 70% 1,843.9 163.1 7.3 7.1 2,021.4
70% - 80% 2,617.1 233.5 - 13.9 2,864.5
80% - 90% 408.3 4.8 1.0 - 414.1
90% - 100% 7.5 0.4 - 25.0 32.9
>100% 12.0 2.6 - - 14.6
Total mortgages before
provisions 6,517.5 547.8 155.8 168.1 7,389.2
----------------------- ----------- ----------- ------------- --------
2017
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
2018
-----------------------------------------------------------
Residential Funding
Buy-to-Let Commercial development lines Total
Bank GBPm GBPm GBPm GBPm GBPm
----------------------- ----------- ----------- ------------- -------- --------
Band
0% - 50% 532.5 5.4 108.7 92.0 738.6
50% - 60% 810.9 2.6 38.8 30.1 882.4
60% - 70% 1,527.0 5.9 7.3 7.1 1,547.3
70% - 80% 2,180.6 7.4 - 13.9 2,201.9
80% - 90% 367.0 0.1 1.0 - 368.1
90% - 100% 2.7 - - 25.0 27.7
>100% - - - - -
Total mortgages before
provisions 5,420.7 21.4 155.8 168.1 5,766.0
----------------------- ----------- ----------- ------------- --------
2017
Residential Funding
Buy-to-Let Commercial development lines Total
Bank GBPm GBPm GBPm GBPm GBPm
------------------------------
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
------------------------------
LTV analysis by band for Residential mortgages:
2018
First Second Funding
charge charge lines Total
Group GBPm GBPm GBPm GBPm
----------------------------------
Band
0% - 50% 651.9 123.2 9.3 784.4
50% - 60% 160.9 81.8 7.0 249.7
60% - 70% 117.2 74.3 2.6 194.1
70% - 80% 125.2 48.3 3.8 177.3
80% - 90% 137.1 24.4 0.7 162.2
90% - 100% 25.1 6.8 0.4 32.3
>100% 6.5 9.2 0.3 16.0
Total mortgages before provisions 1,223.9 368.0 24.1 1,616.0
----------------------------------
2017
-----------------------------------
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
---------------------------------- --------
2018
First Second Funding
charge charge lines Total
Bank GBPm GBPm GBPm GBPm
----------------------------------
Band
0% - 50% 585.1 123.2 9.3 717.6
50% - 60% 130.7 81.8 7.0 219.5
60% - 70% 91.4 74.3 2.6 168.3
70% - 80% 106.2 48.3 3.8 158.3
80% - 90% 131.4 24.4 0.7 156.5
90% - 100% 19.7 6.8 0.4 26.9
>100% 1.7 9.2 0.3 11.2
Total mortgages before provisions 1,066.2 368.0 24.1 1,458.3
----------------------------------
2017
-----------------------------------
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
---------------------------------- --------
Analysis of mortgage portfolio by arrears and collateral
held
The tables below provide further information on collateral,
capped at the value of each individual mortgage, over the mortgage
portfolio by payment due status and IFRS 9 stage. The 2017
comparatives are disclosed by IAS 39 impairment stage, where
impaired is defined as loans with a specific provision against
them.
Group Bank
2018 2018
Capped Capped
Loan balance collateral Loan balance collateral
GBPm GBPm GBPm GBPm
-------------------------------
Stage 1
Not past due 8,225.3 8,213.3 6,603.2 6,599.4
Past due < 1 month 61.5 61.2 53.8 53.8
8,286.8 8,274.5 6,657.0 6,653.2
Stage 2
Not past due 241.9 241.9 162.6 162.5
Past due < 1 month 124.9 124.9 117.9 117.9
Past due 1 to 3 months 70.0 70.0 66.1 66.1
436.8 436.8 346.6 346.5
Stage 3
Not past due 67.8 67.2 32.2 32.1
Past due < 1 month 16.2 16.2 11.4 11.4
Past due 1 to 3 months 30.4 30.4 27.2 27.2
Past due 3 to 6 months 57.2 57.2 54.7 54.7
Past due 6 to 12 months 32.0 31.9 24.7 24.7
Past due over 12 months 13.9 13.6 9.4 9.4
Possessions 7.9 7.7 5.2 5.2
225.4 224.2 164.8 164.7
Stage 3 (POCI)
Not past due 18.6 18.6 18.5 18.5
Past due < 1 month 6.7 6.6 6.5 6.4
Past due 1 to 3 months 6.6 6.6 6.6 6.6
Past due 3 to 6 months 7.4 7.4 7.4 7.4
Past due 6 to 12 months 7.7 7.7 7.7 7.7
Past due over 12 months 9.2 9.2 9.2 9.2
56.2 56.1 55.9 55.8
Total loans before provisions 9,005.2 8,991.6 7,224.3 7,220.2
-------------------------------
Group Bank
2017 2017
Capped Capped
Loan balance collateral Loan balance collateral
GBPm GBPm GBPm GBPm
-----------------------------------
Not impaired:
Not past due 6,792.9 6,784.8 5,613.8 5,606.5
Past due < 1 month 307.1 307.1 267.7 267.6
Past due 1 to 3 months 102.0 101.9 87.2 87.1
Past due 3 to 6 months 20.9 20.9 19.8 19.8
Past due 6 to 12 months 14.1 14.1 12.9 12.9
Past due over 12 months 7.6 7.6 6.3 6.3
Possessions(1) 0.5 0.5 0.5 0.5
7,245.1 7,236.9 6,008.2 6,000.7
-----------------------------------
Impaired(2:)
Not past due 12.3 7.7 7.0 2.7
Past due < 1 month 0.8 0.8 0.5 0.5
Past due 1 to 3 months 2.2 2.1 - -
Past due 3 to 6 months 23.7 23.7 20.8 20.8
Past due 6 to 12 months 16.3 16.3 12.4 12.4
Past due over 12 months 14.5 14.4 12.1 12.1
Possessions 11.6 11.6 4.4 4.4
-----------------------------------
81.4 76.6 57.2 52.9
-----------------------------------
Total mortgages before provisions 7,326.5 7,313.5 6,065.4 6,053.6
Personal loans 1.1 1.1
-----------------------------------
Total loans before provisions 7,327.6 6,066.5
-----------------------------------
(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.
Analysis of mortgage portfolio by arrears for BTL/SME
2018
Residential Funding
Buy-to-Let Commercial development lines Total
Group GBPm GBPm GBPm GBPm GBPm
------------------------------
Stage 1
Not past due 6,193.4 501.7 155.8 168.1 7,019.0
Past due < 1 month 18.5 1.8 - - 20.3
6,211.9 503.5 155.8 168.1 7,039.3
Stage 2
Not past due 102.8 39.1 - - 141.9
Past due < 1 month 74.7 1.0 - - 75.7
Past due 1 to 3 months 29.3 0.7 - - 30.0
206.8 40.8 - - 247.6
Stage 3
Not past due 40.6 2.5 - - 43.1
Past due < 1 month 3.3 0.4 - - 3.7
Past due 1 to 3 months 12.0 0.1 - - 12.1
Past due 3 to 6 months 24.5 0.1 - - 24.6
Past due 6 to 12 months 10.9 0.1 - - 11.0
Past due over 12 months 3.1 - - - 3.1
Possessions 4.4 - - - 4.4
98.8 3.2 - - 102.0
Stage 3 (POCI)
Not past due - 0.1 - - 0.1
Past due < 1 month - 0.2 - - 0.2
- 0.3 - - 0.3
Total loans before provisions 6,517.5 547.8 155.8 168.1 7,389.2
2017
Residential Funding
Buy-to-Let Commercial development 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
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
2018
Residential Funding
Buy-to-Let Commercial development lines Total
Bank GBPm GBPm GBPm GBPm GBPm
------------------------------
Stage 1
Not past due 5,170.6 17.8 155.8 168.1 5,512.3
Past due < 1 month 16.2 0.3 - - 16.5
5,186.8 18.1 155.8 168.1 5,528.8
Stage 2
Not past due 63.3 1.7 - - 65.0
Past due < 1 month 71.3 1.0 - - 72.3
Past due 1 to 3 months 29.3 - - - 29.3
163.9 2.7 - - 166.6
Stage 3
Not past due 17.9 0.4 - - 18.3
Past due < 1 month 2.6 - - - 2.6
Past due 1 to 3 months 11.0 0.1 - - 11.1
Past due 3 to 6 months 24.4 0.1 - - 24.5
Past due 6 to 12 months 7.4 - - - 7.4
Past due over 12 months 2.3 - - - 2.3
Possessions 4.4 - - - 4.4
70.0 0.6 - - 70.6
Total loans before provisions 5,420.7 21.4 155.8 168.1 5,766.0
2017
Residential Funding
Buy-to-Let Commercial development 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
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
Analysis of mortgage portfolio by arrears for Residential
mortgages
2018
First Second Funding
charge charge lines Total
Group GBPm GBPm GBPm GBPm
-------------------------------
Stage 1
Not past due 906.6 275.6 24.1 1,206.3
Past due < 1 month 32.5 8.7 - 41.2
939.1 284.3 24.1 1,247.5
Stage 2
Not past due 80.8 19.2 - 100.0
Past due < 1 month 43.2 6.0 - 49.2
Past due 1 to 3 months 32.7 7.3 - 40.0
156.7 32.5 - 189.2
Stage 3
Not past due 22.2 2.5 - 24.7
Past due < 1 month 10.2 2.3 - 12.5
Past due 1 to 3 months 13.0 5.3 - 18.3
Past due 3 to 6 months 23.8 8.8 - 32.6
Past due 6 to 12 months 16.9 4.1 - 21.0
Past due over 12 months 8.8 2.0 - 10.8
Possessions 3.5 - - 3.5
98.4 25.0 - 123.4
Stage 3 (POCI)
Not past due 12.1 6.4 - 18.5
Past due < 1 month 4.4 2.1 - 6.5
Past due 1 to 3 months 4.1 2.5 - 6.6
Past due 3 to 6 months 3.5 3.9 - 7.4
Past due 6 to 12 months 3.4 4.3 - 7.7
Past due over 12 months 2.2 7.0 - 9.2
29.7 26.2 - 55.9
Total loans before provisions 1,223.9 368.0 24.1 1,616.0
-------------------------------
2017
-------------------------------------------------------------------
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(1) 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
-----------------------------------
(1) Mortgages with properties in possession are not considered
impaired if the fair value of collateral exceeds the value of
debt.
First Second Funding
charge charge lines Total
Bank GBPm GBPm GBPm GBPm
------------------------------- ------- --------
Stage 1
Not past due 791.2 275.6 24.1 1,090.9
Past due < 1 month 28.6 8.7 - 37.3
819.8 284.3 24.1 1,128.2
Stage 2
Not past due 78.4 19.2 - 97.6
Past due < 1 month 39.6 6.0 - 45.6
Past due 1 to 3 months 29.5 7.3 - 36.8
147.5 32.5 - 180.0
Stage 3
Not past due 11.4 2.5 - 13.9
Past due < 1 month 6.5 2.3 - 8.8
Past due 1 to 3 months 10.8 5.3 - 16.1
Past due 3 to 6 months 21.4 8.8 - 30.2
Past due 6 to 12 months 13.2 4.1 - 17.3
Past due over 12 months 5.1 2.0 - 7.1
Possessions 0.8 - - 0.8
69.2 25.0 - 94.2
Stage 3 (POCI)
Not past due 12.1 6.4 - 18.5
Past due < 1 month 4.4 2.1 - 6.5
Past due 1 to 3 months 4.1 2.5 - 6.6
Past due 3 to 6 months 3.5 3.9 - 7.4
Past due 6 to 12 months 3.4 4.3 - 7.7
Past due over 12 months 2.2 7.0 - 9.2
29.7 26.2 - 55.9
Total loans before provisions 1,066.2 368.0 24.1 1,458.3
-------------------------------
2017
-------------------------------------------------------------------
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(1) 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
----------------------------------- --------------- --------------- ---------------- ---------------
(1) Mortgages with properties in possession are not considered
impaired if the fair value of collateral exceeds the value of
debt.
Forbearance measures undertaken
The Group has a range of options available where borrowers
experience financial difficulties which impact their ability to
service their financial commitments under the loan agreement. These
are explained in the Principal risks and uncertainties.
A summary of the forbearance measures undertaken during the year
is shown below:
At 31 At 31
Number December Number December
of accounts 2018 of accounts 2017
Forbearance type 2018 GBPm 2017 GBPm
------------- --------- ------------- ---------
Interest-only switch 26 3.7 35 3.8
Interest rate reduction 5 0.8 - -
Term extension 33 3.5 29 4.9
Payment holiday 31 0.6 50 1.5
Voluntary assisted sale 4 0.1 2 0.7
Payment concession (reduced
monthly payments) 75 3.5 42 0.8
Total 174 12.2 158 11.7
------------- ---------
At 31 At 31
Number December Number December
of accounts 2018 of accounts 2017
Loan type 2018 GBPm 2017 GBPm
------------- --------- ------------- ---------
First charge owner occupier 40 3.4 55 4.5
Second charge owner occupier 106 2.9 77 1.6
Buy-to-Let 28 5.9 26 5.6
Total 174 12.2 158 11.7
------------- --------- ------------- ---------
Geographical analysis by region
An analysis of loans by region is provided below:
Group Group
2018 2017
------------
Region GBPm % GBPm %
---------------- ----
East Anglia 316.4 4 236.4 3
East Midlands 325.4 4 249.6 4
Greater London 3,965.5 43 3,173.0 43
Guernsey 61.7 1 73.8 1
Jersey 176.0 2 225.1 3
North East 115.6 1 103.0 1
North West 447.6 5 347.9 5
Northern Ireland 14.6 - 16.9 -
Scotland 45.2 1 51.1 1
South East 1,955.1 22 1,591.7 22
South West 634.2 7 522.3 7
Wales 187.1 2 142.9 2
West Midlands 557.5 6 425.4 6
Yorks and Humberside 203.3 2 167.4 2
Total mortgages before provisions 9,005.2 100 7,326.5 100
----------------------------------- ---------------- ----
Personal loans - 1.1
----------------------------------- ---------------- ----
Total loans before provisions 9,005.2 7,327.6
----------------------------------- ---------------- ----
Bank Bank
2018 2017
Region GBPm % GBPm %
East Anglia 267.3 4 212.4 4
East Midlands 245.5 3 203.8 3
Greater London 3,270.7 45 2,726.9 45
North East 94.7 1 86.3 1
North West 346.9 5 277.0 5
Northern Ireland 14.4 - 16.5 -
Scotland 44.0 1 50.3 1
South East 1,667.9 24 1,426.6 24
South West 515.5 7 439.1 7
Wales 151.3 2 126.1 2
West Midlands 454.9 6 374.6 6
Yorks and Humberside 151.2 2 125.8 2
Total mortgages before provisions 7,224.3 100 6,065.4 100
-----------------------------------
Personal loans - 1.1
Total loans before provisions 7,224.3 6,066.5
-----------------------------------
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. 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 GBP1,296.1m (2017: GBP710.7m).
The following table presents the credit quality of 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
2018 GBPm GBPm GBPm GBPm GBPm GBPm
Bank of England(1) - 1,315.2 - - - 1,315.2
Call accounts - - 0.7 24.7 6.7 32.1
Floating rate notes 19.1 - - - - 19.1
Treasury bills - 39.8 - - - 39.8
Total 19.1 1,355.0 0.7 24.7 6.7 1,406.2
2017
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
Bank
Less than
AAA AA A+ A A rating Total
2018 GBPm GBPm GBPm GBPm GBPm GBPm
Bank of England(1) - 1,315.2 - - - 1,315.2
Call accounts - - 0.7 24.1 - 24.8
Floating rate notes 19.1 - - - - 19.1
Treasury bills - 39.8 - - - 39.8
Total 19.1 1,355.0 0.7 24.1 - 1,398.9
2017
--------------------
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
(1) Balances with the Bank of England include GBP20.0m (2017:
GBP10.0m) held in the cash ratio deposit.
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
2018 2017
GBPm % GBPm %
Bank of England(1) 1,315.2 94 1,146.9 95
Other banks 32.1 2 40.3 3
Central government 39.8 3 - -
Supranationals 19.1 1 19.1 2
Total 1,406.2 100 1,206.3 100
Bank Bank
2018 2017
GBPm % GBPm %
Bank of England(1) 1,315.2 94 1,146.9 96
Other banks 24.8 2 32.4 3
Central government 39.8 3 - -
Supranationals 19.1 1 19.1 1
Total 1,398.9 100 1,198.4 100
(1) Balances with the Bank of England include GBP20.0m (2017:
GBP10.0m) 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
2018 2017
GBPm % GBPm %
United Kingdom 1,380.5 98 1,181.0 98
Rest of Europe 19.1 2 19.1 2
Canada - - 0.2 -
India 6.6 - 6.0 -
Total 1,406.2 100 1,206.3 100
Bank Bank
2018 2017
GBPm % GBPm %
United Kingdom 1,379.8 99 1,179.1 98
Rest of Europe 19.1 1 19.1 2
Canada - - 0.2 -
Total 1,398.9 100 1,198.4 100
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 ALCO, with
day-to-day management delegated to treasury as detailed in the
treasury policy. 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 below.
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 the Head of
Treasury.
The tables below provide a contractual maturity analysis of the
Group's financial assets and liabilities:
Less More
Carrying than 3 - 1 - than
Group amount On demand 3 months 12 months 5 years 5 years
2018 GBPm GBPm GBPm GBPm GBPm GBPm
--------- --------- --------- ----------- --------- --------
Financial liability
by type
Amounts owed to retail
depositors 8,071.9 2,538.2 880.6 3,008.3 1,644.8 -
Amounts owed to credit
institutions 1,584.0 1.0 40.1 40.0 1,502.9 -
Amounts owed to other
customers 32.9 - 10.5 22.4 - -
Derivative liabilities 24.9 - 0.1 11.3 7.0 6.5
Subordinated liabilities 10.8 - 0.2 0.1 0.5 10.0
Perpetual Subordinated
Bonds 15.3 - 0.3 - - 15.0
Total liabilities 9,739.8 2,539.2 931.8 3,082.1 3,155.2 31.5
--------- --------- --------- ----------- --------- --------
Financial asset by
type
Cash in hand 0.4 0.4 - - - -
Loans and advances
to credit institutions 1,347.3 1,327.3 - - - 20.0
Investment securities 58.9 - - 58.9 - -
Loans and advances
to customers 8,983.3 - 176.0 270.4 522.9 8,014.0
Derivative assets 11.7 - - - 11.7 -
Total assets 10,401.6 1,327.7 176.0 329.3 534.6 8,034.0
--------- --------- --------- ----------- --------- --------
Less More
Carrying than 3 - 1 - than
Group amount On demand 3 months 12 months 5 years 5 years
2017 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 6,650.3 2,051.8 862.0 2,590.7 1,145.8 -
Amounts owed to credit
institutions 1,250.3 0.3 - - 1,250.0 -
Amounts owed to other
customers 25.7 - 0.5 25.2 - -
Derivative liabilities 21.8 - 0.1 1.6 4.7 15.4
Subordinated liabilities 10.9 - 0.2 0.1 0.6 10.0
Perpetual Subordinated
Bonds 15.3 - 0.3 - - 15.0
Total liabilities 7,974.3 2,052.1 863.1 2,617.6 2,401.1 40.4
Financial asset by
type
Cash in hand 0.5 0.5 - - - -
Loans and advances
to credit institutions 1,187.2 1,177.2 - - - 10.0
Investment securities 19.1 - - - 19.1 -
Loans and advances
to customers 7,306.0 - 139.0 224.2 307.7 6,635.1
Derivative assets 6.1 - - 0.2 5.9 -
Total assets 8,518.9 1,177.7 139.0 224.4 332.7 6,645.1
Less More
Carrying than 3 - 1 - than
Bank amount On demand 3 months 12 months 5 years 5 years
2018 GBPm GBPm GBPm GBPm GBPm GBPm
-------- --------- --------- ----------- --------- --------
Financial liability
by type
Amounts owed to retail
depositors 8,071.9 2,538.2 880.6 3,008.3 1,644.8 -
Amounts owed to credit
institutions 1,584.0 1.0 40.1 40.0 1,502.9 -
Amounts owed to other
customers 32.9 - 10.5 22.4 - -
Derivative liabilities 24.9 - 0.1 11.3 7.0 6.5
Subordinated liabilities 10.8 - 0.2 0.1 0.5 10.0
Perpetual Subordinated
Bonds 15.3 - 0.3 - - 15.0
Total liabilities 9,739.8 2,539.2 931.8 3,082.1 3,155.2 31.5
-------- --------- --------- ----------- --------- --------
Financial asset by
type
Cash in hand 0.4 0.4 - - - -
Loans and advances
to credit institutions 1,340.0 1,320.0 - - - 20.0
Investment securities 58.9 - - 58.9 - -
Loans and advances
to customers 7,208.2 - 131.8 165.1 232.4 6,678.9
Derivative assets 11.7 - - - 11.7 -
Total assets 8,619.2 1,320.4 131.8 224.0 244.1 6,698.9
-------- --------- --------- ----------- --------- --------
Less More
Carrying than 3 - 1 - than
Bank amount On demand 3 months 12 months 5 years 5 years
2017 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 6,650.3 2,051.8 862.0 2,590.7 1,145.8 -
Amounts owed to credit
institutions 1,250.3 0.3 - - 1,250.0 -
Amounts owed to other
customers 25.7 - 0.5 25.2 - -
Derivative liabilities 21.8 - 0.1 1.6 4.7 15.4
Subordinated liabilities 10.9 - 0.2 0.1 0.6 10.0
Perpetual Subordinated
Bonds 15.3 - 0.3 - - 15.0
Total liabilities 7,974.3 2,052.1 863.1 2,617.6 2,401.1 40.4
Financial asset by
type
Cash in hand 0.5 0.5 - - - -
Loans and advances
to credit institutions 1,179.3 1,169.3 - - - 10.0
Investment securities 19.1 - - - 19.1 -
Loans and advances
to customers 6,051.0 - 118.7 158.4 150.6 5,623.3
Derivative assets 6.1 - - 0.2 5.9 -
Total assets 7,256.0 1,169.8 118.7 158.6 175.6 5,633.3
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 More
Carrying inflow Up to 3 - 1 - than
Group amount / outflow 3 months 12 months 5 years 5 years
2018 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------- --------- ---------- ---------- ----------- ---------- ---------
Financial liability
by type
Amounts owed to retail
depositors 8,071.9 8,479.5 3,433.0 3,236.7 1,809.8 -
Amounts owed to credit
institutions and other
customers 1,616.9 1,646.2 54.5 71.2 1,520.5 -
Derivative liabilities 24.9 27.1 3.3 15.6 5.0 3.2
Subordinated liabilities 10.8 15.0 0.3 0.4 3.6 10.7
Perpetual Subordinated
Bonds 15.3 19.4 0.4 0.4 3.6 15.0
Total liabilities 9,739.8 10,187.2 3,491.5 3,324.3 3,342.5 28.9
--------- ---------- ---------- ----------- ---------- ---------
Off balance sheet
loan commitments 710.7 710.7 710.7 - - -
Financial asset by
type
Cash in hand 0.4 0.4 0.4 - - -
Loans and advances
to credit institutions 1,347.3 1,347.3 1,327.3 - - 20.0
Investment securities 58.9 59.0 - 59.0 - -
Loans and advances
to customers 8,983.3 18,311.2 183.6 841.5 2,649.6 14,636.5
Derivative assets 11.7 12.2 0.4 1.0 10.8 -
Total assets 10,401.6 19,730.1 1,511.7 901.5 2,660.4 14,656.5
--------- ---------- ---------- ----------- ---------- ---------
Cumulative liquidity
gap (1,979.8) (4,402.6) (5,084.7) 9,542.9
--------- ---------- ----------- ---------- ---------
Gross More
Carrying inflow Up to 3 - 1 - than
Group amount / outflow 3 months 12 months 5 years 5 years
2017 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
----------- ------------ ------------
Cumulative liquidity
gap (1,495.5) (3,707.8) (4,063.9) 7,716.0
Gross More
Carrying inflow Up to 3 - 1 - than
Bank amount / outflow 3 months 12 months 5 years 5 years
2018 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------- --------- ---------- ---------- ----------- ---------- ---------
Financial liability
by type
Amounts owed to retail
depositors 8,071.9 8,479.5 3,433.0 3,236.7 1,809.8 -
Amounts owed to credit
institutions and other
customers 1,616.9 1,646.2 54.5 71.2 1,520.5 -
Derivative liabilities 24.9 27.1 3.3 15.6 5.0 3.2
Subordinated liabilities 10.8 15.0 0.3 0.4 3.6 10.7
Perpetual Subordinated
Bonds 15.3 19.4 0.4 0.4 3.6 15.0
Total liabilities 9,739.8 10,187.2 3,491.5 3,324.3 3,342.5 28.9
--------- ---------- ---------- ----------- ---------- ---------
Off balance sheet
loan commitments 487.8 487.8 487.8 - - -
Financial asset by
type
Cash in hand 0.4 0.4 0.4 - - -
Loans and advances
to credit institutions 1,340.0 1,340.1 1,320.1 - - 20.0
Investment securities 58.9 59.0 - 59.0 - -
Loans and advances
to customers 7,208.2 15,496.7 107.3 647.8 1,931.3 12,810.3
Derivative assets 11.7 12.2 0.4 1.0 10.8 -
Total assets 8,619.2 16,908.4 1,428.2 707.8 1,942.1 12,830.3
--------- ---------- ---------- ----------- ---------- ---------
Cumulative liquidity
gap (2,063.3) (4,679.8) (6,080.2) 6,721.2
--------- ---------- ----------- ---------- ---------
Gross More
Carrying inflow Up to 3 - 1 - than
Bank amount / outflow 3 months 12 months 5 years 5 years
2017 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
------------------------- ----------- ------------ ------------
Cumulative liquidity
gap (1,557.9) (3,904.3) (4,741.7) 5,644.9
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 prior to the contractual end date.
Liquidity risk - asset encumbrance
Asset encumbrance levels are monitored by ALCO. The following
tables provide an analysis of the Group's encumbered and
unencumbered assets:
Group
2018
Encumbered Unencumbered
Pledged Available
as collateral Other(1) as collateral Other(2) Total
GBPm GBPm GBPm GBPm GBPm
----------------------- --------------- --------------- ---------
Cash in hand - - 0.4 - 0.4
Loans and advances to
credit institutions 3.5 20.0 1,295.2 28.6 1,347.3
Investment securities - - 58.9 - 58.9
Loans and advances to
customers 2,846.0 16.0 - 6,121.3 8,983.3
Derivative assets - - - 11.7 11.7
Non-financial assets - - - 58.6 58.6
2,849.5 36.0 1,354.5 6,220.2 10,460.2
--------------- --------------- ---------
Group
2017
Encumbered Unencumbered
Pledged Available
as collateral Other(1) as 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
-----------
(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.
Bank
2018
Encumbered Unencumbered
Pledged Available
as collateral Other(1) as collateral Other(2) Total
GBPm GBPm GBPm GBPm GBPm
----------------------- --------------- --------------- ---------
Cash in hand - - 0.4 - 0.4
Loans and advances to
credit institutions 3.5 20.0 1,295.2 21.3 1,340.0
Investment securities - - 58.9 - 58.9
Loans and advances to
customers 2,846.0 16.0 - 4,346.2 7,208.2
Derivative assets - - - 11.7 11.7
Non-financial assets - - - 1,950.3 1,950.3
2,849.5 36.0 1,354.5 6,329.5 10,569.5
--------------- --------------- ---------
2017
Encumbered Unencumbered
Pledged Available
as collateral Other(1) as 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
-------------- -----------
(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 tables below analyse the Group's liquidity reserves, where
carrying value is considered to be equal to fair value:
Group Group
2018 2017
GBPm GBPm
--------
Unencumbered balances with central banks 1,295.2 1,136.9
Unencumbered cash and balances with other banks 28.6 28.5
Other cash and cash equivalents 0.4 0.5
Unencumbered investment securities 58.9 19.1
1,383.1 1,185.0
--------
Bank Bank
2018 2017
GBPm GBPm
--------
Unencumbered balances with central banks 1,295.2 1,136.9
Unencumbered cash and balances with other banks 21.3 20.6
Other cash and cash equivalents 0.4 0.4
Unencumbered investment securities 58.9 19.1
1,375.8 1,177.0
--------
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 of loss from adverse movement
in the overall level of interest rates. It arises from mismatches
in the timing of repricing of assets and liabilities, both on and
off balance sheet. 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. Exposure is mitigated on a
continuous basis through the use of derivatives and reserve
allocations.
The Group measures interest rate risk using the impact of 14
different interest rate curve shift scenarios on the Group's
economic value of equity. These 14 scenarios are defined by ALCO
and are based on three 'shapes' of curve movement (shift, twist and
flex). Historical data is used to calibrate the severity of the
scenarios to the Group's risk appetite. The Board has set a limit
on interest risk exposure of 2.25% of CET1 as at 31 December 2018
(2017: 1.5%). In addition, the regulatory scenario of an unfloored
parallel shift of 200bps in both directions is applied. After
taking into account the derivatives entered into by the Group, the
maximum decrease under these scenarios as at 31 December 2018 would
have been GBP5.6m (2017: GBP3.2m) and the maximum increase GBP1.8m
(2017: GBP1.2m). Against a parallel interest rate increase of 2%,
the impact would have been a decrease of GBP9.3m (2017: GBP2.8m
decrease). In Q1 2019 the scenarios have been updated to fully
incorporate the EBA guidance on the management of interest rate
risk published in July 2018.
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 ALCO 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.
The Group is also exposed to basis risk. Basis risk is the risk
of loss from an adverse divergence in interest rates. It arises
where assets and liabilities reprice from different variable rate
indices. These indices may be market rates (e.g. Bank Base Rate or
LIBOR) or administered (e.g. the Group's SVR, other discretionary
variable rates, or that received on call accounts with other
banks).
The Group measures basis risk using the impact of five scenarios
on net interest income over a one year period including movements
such as diverging Base and LIBOR rates. Historical data is used to
calibrate the severity of the scenarios to the Group's risk
appetite. The Board has set a limit on basis risk exposure of 2.25%
of CET1 as at 31 December 2018. As at 31 December 2018 the Group's
assets and liabilities were broadly matched under the basis risk
scenarios and comfortably within limits.
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 GBP0.3m (2017: GBP0.2m) effect in profit or loss
and GBP0.3m (2017: GBP0.3m) 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 2018 and
as at 31 December 2017.
40. 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:
2018
Fair value
through Total
profit Amortised carrying
or loss FVOCI cost amount
Group Note GBPm GBPm GBPm GBPm
Assets
Cash in hand - - 0.4 0.4
Loans and advances to
credit institutions 15 - - 1,347.3 1,347.3
Investment securities 16 - 58.9 - 58.9
Loans and advances to
customers 17 - - 8,983.3 8,983.3
Derivative assets 22 11.7 - - 11.7
11.7 58.9 10,331.0 10,401.6
Liabilities
Amounts owed to retail
depositors 29 - - 8,071.9 8,071.9
Amounts owed to credit
institutions 30 - - 1,584.0 1,584.0
Amounts owed to other
customers 31 - - 32.9 32.9
Derivative liabilities 22 24.9 - - 24.9
Subordinated liabilities 34 - - 10.8 10.8
Perpetual Subordinated
Bonds 35 - - 15.3 15.3
24.9 - 9,714.9 9,739.8
2017
Fair value
through Total
profit Loans Amortised carrying
or loss Available-for-sale and receivables cost amount
Group 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 22 6.1 - - - 6.1
6.1 19.1 8,493.7 - 8,518.9
Liabilities
Amounts owed to retail
depositors 29 - - - 6,650.3 6,650.3
Amounts owed to credit
institutions 30 - - - 1,250.3 1,250.3
Amounts owed to other
customers 31 - - - 25.7 25.7
Derivative liabilities 22 21.8 - - - 21.8
Subordinated liabilities 34 - - - 10.9 10.9
Perpetual Subordinated
Bonds 35 - - - 15.3 15.3
21.8 - - 7,952.5 7,974.3
2018
Fair value
through Total
profit Amortised carrying
or loss FVOCI cost amount
Bank Note GBPm GBPm GBPm GBPm
Assets
Cash in hand - - 0.4 0.4
Loans and advances to
credit institutions 15 - - 1,340.0 1,340.0
Investment securities 16 - 58.9 - 58.9
Loans and advances to
customers 17 - - 7,208.2 7,208.2
Derivative assets 22 11.7 - - 11.7
11.7 58.9 8,548.6 8,619.2
Liabilities
Amounts owed to retail
depositors 29 - - 8,071.9 8,071.9
Amounts owed to credit
institutions 30 - - 1,584.0 1,584.0
Amounts owed to other
customers 31 - - 32.9 32.9
Derivative liabilities 22 24.9 - - 24.9
Subordinated liabilities 34 - - 10.8 10.8
Perpetual Subordinated
Bonds 35 - - 15.3 15.3
24.9 - 9,714.9 9,739.8
2017
Fair value
through Total
profit Loans Amortised carrying
or loss Available-for-sale and receivables cost amount
Bank 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 22 6.1 - - - 6.1
6.1 19.1 7,230.8 - 7,256.0
Liabilities
Amounts owed to retail
depositors 29 - - - 6,650.3 6,650.3
Amounts owed to credit
institutions 30 - - - 1,250.3 1,250.3
Amounts owed to other
customers 31 - - - 25.7 25.7
Derivative liabilities 22 21.8 - - - 21.8
Subordinated liabilities 34 - - - 10.9 10.9
Perpetual Subordinated
Bonds 35 - - - 15.3 15.3
21.8 - - 7,952.5 7,974.3
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
2018 2017
Carrying Estimated Carrying Estimated
value fair value value fair value
GBPm GBPm GBPm GBPm
-------------------------------------
Assets
Cash in hand 0.4 0.4 0.5 0.5
Loans and advances to credit
institutions 1,347.3 1,347.3 1,187.2 1,187.2
Loans and advances to customers 8,983.3 9,151.1 7,306.0 7,715.4
10,331.0 10,498.8 8,493.7 8,903.1
-------------------------------------
Liabilities
Amounts owed to retail depositors 8,071.9 8,097.5 6,650.3 6,684.0
Amounts owed to credit institutions 1,584.0 1,584.0 1,250.3 1,250.3
Amounts owed to other customers 32.9 32.9 25.7 25.7
Subordinated liabilities 10.8 10.8 10.9 11.1
Perpetual Subordinated Bonds 15.3 14.3 15.3 15.3
9,714.9 9,739.5 7,952.5 7,986.4
-------------------------------------
Bank Bank
2018 2017
Carrying Estimated Carrying Estimated
value fair value value fair value
GBPm GBPm GBPm GBPm
------------------------------------- -------- --------------
Assets
Cash in hand 0.4 0.4 0.5 0.5
Loans and advances to credit
institutions 1,340.0 1,340.0 1,179.3 1,179.3
Loans and advances to customers 7,208.2 7,340.1 6,051.0 6,408.4
8,548.6 8,680.5 7,230.8 7,588.2
------------------------------------- -------- --------------
Liabilities
Amounts owed to retail depositors 8,071.9 8,097.5 6,650.3 6,684.0
Amounts owed to credit institutions 1,584.0 1,584.0 1,250.3 1,250.3
Amounts owed to other customers 32.9 32.9 25.7 25.7
Subordinated liabilities 10.8 10.8 10.9 11.1
Perpetual Subordinated Bonds 15.3 14.3 15.3 15.3
9,714.9 9,739.5 7,952.5 7,986.4
------------------------------------- -------- --------------
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 mortgages has been estimated by
discounting future cash flows at current market rates of interest.
Future cash flows include the impact of expected credit losses. 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
by discounting future cash flows at current market rates of
interest. 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 by discounting future cash
flows at current market rates of interest.
Subordinated liabilities and Perpetual Subordinated Bonds
The fair value of subordinated liabilities is estimated by
discounting future cash flows at current market rates of interest.
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 in the Statement of
Financial Position grouped into Levels 1 to 3 based on the degree
to which the fair value is observable:
Carrying Principal Level Level Level
Group and Bank amount amount 1 2 3 Total
2018 GBPm GBPm GBPm GBPm GBPm GBPm
----------
Financial assets
Investment securities 58.9 59.0 58.9 - - 58.9
Derivative assets 11.7 1,999.0 - 11.7 - 11.7
70.6 2,058.0 58.9 11.7 - 70.6
----------
Financial liabilities
Derivative liabilities 24.9 (4,532.2) - 24.9 - 24.9
----------
Group and Bank
2017
-----------
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
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 no 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.
The following table provides an analysis of financial assets and
financial liabilities not measured at fair value in the Statement
of Financial Position grouped into Levels 1 to 3 based on the
degree to which the fair value is observable:
Estimated fair value
Carrying Principal Level Level Level
Group amount amount 1 2 3 Total
2018 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 1,347.3 1,346.9 - 1,347.3 - 1,347.3
Loans and advances to
customers 8,983.3 9,121.4 - 4,195.3 4,955.8 9,151.1
10,331.0 10,468.7 - 5,543.0 4,955.8 10,498.8
Financial liabilities
Amounts owed to retail
depositors 8,071.9 8,019.7 - 2,916.4 5,181.1 8,097.5
Amounts owed to credit
institutions 1,584.0 1,581.0 - 1,584.0 - 1,584.0
Amounts owed to other
customers 32.9 32.8 - - 32.9 32.9
Subordinated liabilities 10.8 10.6 - 10.8 - 10.8
Perpetual Subordinated
Bonds 15.3 15.0 14.3 - - 14.3
9,714.9 9,659.1 14.3 4,511.2 5,214.0 9,739.5
2017
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
Carrying Principal Level Level Level
Bank amount amount 1 2 3 Total
2018 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 1,340.0 1,339.7 - 1,340.0 - 1,340.0
Loans and advances to
customers 7,208.2 7,337.6 - 3,123.7 4,216.4 7,340.1
8,548.6 8,677.7 - 4,464.1 4,216.4 8,680.5
Financial liabilities
Amounts owed to retail
depositors 8,071.9 8,019.7 - 2,916.4 5,181.1 8,097.5
Amounts owed to credit
institutions 1,584.0 1,581.0 - 1,584.0 - 1,584.0
Amounts owed to other
customers 32.9 32.8 - - 32.9 32.9
Subordinated liabilities 10.8 10.6 - 10.8 - 10.8
Perpetual Subordinated
Bonds 15.3 15.0 14.3 - - 14.3
9,714.9 9,659.1 14.3 4,511.2 5,214.0 9,739.5
2017
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
41. 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 GBP1.7m (2017: GBP1.3m).
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
2018 the liability to remaining members is GBP2k (31 December 2017:
GBP2k) matched by Scheme assets.
42. 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 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 Pillar 1 capital information is presented below:
(Unaudited) (Unaudited)
2018 2017
GBPm GBPm
Common Equity Tier 1 capital
Called up share capital 2.4 2.4
Share premium, capital contribution and share-based
payment reserve 170.0 169.8
Retained earnings 439.6 337.5
Transfer reserve (12.8) (12.8)
Other reserves (0.5) (0.1)
Total equity excluding equity bonds 598.7 496.8
Foreseeable dividends (25.2) (22.6)
Solo consolidation adjustments(1) (5.4) (4.8)
IFRS 9 transitional adjustment(2) 2.7 -
Deductions from Common Equity Tier 1 capital
Prudent valuation adjustment(3) (0.1) -
Intangible assets (7.7) (6.8)
Deferred tax asset (1.4) (2.5)
Common Equity Tier 1 capital 561.6 460.1
Additional tier 1 capital
AT1 securities 60.0 60.0
Total tier 1 capital 621.6 520.1
Tier 2 capital
Subordinated debt and PSBs 47.4 47.7
Collective provisions - 2.0
Deductions from tier 2 capital (3.3) (2.5)
Total tier 2 capital 44.1 47.2
Total regulatory capital 665.7 567.3
Risk weighted assets (unaudited) 4,211.8 3,348.5
(1) The Bank has solo consolidation waivers for most of its
subsidiaries. The equity for unconsolidated entities has been
removed from CET1.
(2) The regulatory capital includes a GBP2.7m add-back under
IFRS 9 transitional arrangements. This represents 95% of the IFRS 9
transitional adjustment booked directly to retained earnings of
GBP2.9m. The full impact of IFRS 9, if applied, would reduce total
regulatory capital to GBP663.0m.
(3) The Group has adopted the simplified approach under the
Prudent Valuation rules, recognising a deduction equal to 0.1% of
fair value assets and liabilities.
The movement in CET1 during the year was as follows:
(Unaudited) (Unaudited)
2018 2017
GBPm GBPm
At 1 January 460.1 365.6
Movement in retained earnings 102.1 96.8
Share premium from Sharesave Scheme vesting 0.4 0.5
Movement in other reserves (0.6) 3.1
Movement in foreseeable dividends (2.6) (4.1)
Movement in solo consolidation adjustment (0.6) 0.5
IFRS 9 transitional adjustment 2.7 -
Movement in prudent valuation adjustment (0.1) -
Net increase in intangible assets (0.9) (2.1)
Movement in deferred tax asset for carried
forward losses 1.1 (0.2)
At 31 December 561.6 460.1
43. Operating segments
The Group distinguishes two segments within its operations.
1. BTL/SME; secured lending on property for investment and
commercial purposes. This segment also includes the Group's new
asset finance business and personal loan portfolio (disposed of
during 2018), 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
2018 GBPm GBPm GBPm
---------------------------------------
Balances at the reporting date
Gross loans and advances to customers 7,389.2 1,616.0 9,005.2
Provision for impairment losses
on loans and advances (11.0) (10.9) (21.9)
---------------------------------------
Loans and advances to customers 7,378.2 1,605.1 8,983.3
Capital expenditure 5.2 1.1 6.3
Profit or loss for the year
Net interest income 220.0 67.3 287.3
Other expense (1.0) (4.2) (5.2)
---------------------------------------
Total income 219.0 63.1 282.1
Impairment losses (5.7) (2.4) (8.1)
---------------------------------------
Contribution to profit 213.3 60.7 274.0
Operating expenses (79.6)
FSCS and other provisions (0.8)
Exceptional cost - Heritable option (9.8)
---------------------------------------
Profit before taxation 183.8
Taxation (43.5)
---------------------------------------
Profit for the year 140.3
Residential
BTL/SME mortgages Total
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
Capital expenditure 11.0 3.3 14.3
Profit or loss for the year
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
-----------
44. 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 Commercial banking
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
5D Finance Limited
InterBay Asset Finance Limited
(formerly: 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 Limited (Guernsey) and Jersey Home Loans
Limited (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 with no permanent establishments
in Guernsey or Jersey.
Other disclosures required by the CBCR directive are provided
below:
2018 UK India Consolidation(2) Total
Average number of
employees 588 401 - 989
Turnover(1) , GBPm 281.7 7.2 (6.8) 282.1
Profit / (loss) before
tax, GBPm 183.4 1.1 (0.7) 183.8
Corporation tax paid,
GBPm 38.9 0.2 - 39.1
------ ----- ------
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
(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
2018 GBPm GBPm GBPm
----------------------------------
Tax charge 43.3 0.2 43.5
Effects of:
Other timing differences (0.8) - (0.8)
Tax outside of profit
or loss (3.4) - (3.4)
Prior year tax paid during
the year 19.5 - 19.5
Current year tax to be paid after
the reporting date (19.7) - (19.7)
Tax paid 38.9 0.2 39.1
------------------------------------
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
------------------------------------
45. Adjustments for non-cash items and changes in operating
assets and liabilities
Group Group Bank Bank
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
---------- ----------
Adjustments for non-cash items:
Depreciation and amortisation 4.7 3.5 4.0 3.0
Interest on subordinated liabilities 0.7 0.9 0.7 0.9
Interest on Perpetual Subordinated
Bonds 0.9 0.9 0.9 0.9
Impairment charge on loans 8.1 4.4 7.1 2.0
Loss on sale of financial instruments 0.1 - 0.1 -
FSCS and other regulatory provisions 0.8 0.9 0.8 0.9
Fair value losses on financial
instruments 5.1 6.3 5.1 6.3
Share-based payments 2.5 2.4 2.6 2.3
Exceptional cost - Heritable option 9.8 - 9.8 -
Total adjustments for non-cash
items 32.7 19.3 31.1 16.3
---------- ---------- ---------- ----------
Changes in operating assets and
liabilities:
Increase in loans and advances
to credit institutions (1.7) (6.3) (1.7) (6.3)
Increase in loans to customers (1,689.5) (1,371.2) (1,166.1) (1,159.5)
Increase in intercompany balances - - (475.2) (181.0)
Increase in retail deposits 1,421.6 697.9 1,421.6 697.9
Net (increase)/decrease in other
assets (0.8) 7.0 (0.8) (0.9)
Net decrease in derivatives and
hedged items (5.3) (0.1) (5.3) (0.1)
Net increase in credit institutions
and other customers' deposits 10.9 21.3 10.9 21.3
Net increase/(decrease) in other
liabilities 2.9 (3.3) 1.3 5.5
Exchange differences on working
capital (0.2) (0.3) - -
Total changes in operating assets
and liabilities (262.1) (655.0) (215.3) (623.1)
---------- ---------- ---------- ----------
46. Events after the reporting date
On 9 March 2019, a statement was released confirming that
Charter Court Financial Services and OneSavings Bank are in
advanced discussions regarding a possible all-share combination of
the two companies. This statement and any future public documents
relating to the possible combination will be placed on the Investor
Relations section of the OSB website at www.osb.co.uk.
In 2019, the Heritable option was surrendered for a one-off
payment of GBP9.8m and the Bank acquired the JV partners' interest
in the business. At the same time a new revenue sharing arrangement
was signed allowing the JV partner to continue to lend alongside
the Bank.
47. Controlling party
As at 31 December 2018 there was no controlling party of
OSB.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR JJMBTMBTBTJL
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