TIDMOSB
LEI: 213800ZBKL9BHSL2K459
17 March 2022
OSB GROUP PLC
Preliminary results for the year ended 31 December 2021
Following the Combination with Charter Court Financial Services
Group plc (CCFS) on 4 October 2019, this press release includes
results on an underlying basis, in addition to the statutory basis,
which Management believe provide a more consistent basis for
comparing the Group's results between financial periods. Underlying
results exclude exceptional items, integration costs and other
acquisition-related items (see the reconciliation in the Financial
review).
OSB GROUP PLC (OSBG or the Group), the specialist lending and
retail savings group, announces today its results for the year
ended 31 December 2021.
Financial and operational highlights
-- Underlying profit before tax increased by 51% to a record GBP522.2m
(2020: GBP346.2m) and statutory profit before tax increased by 78% to
GBP464.6m (2020: GBP260.4m) primarily due to a lower cost of retail funds
and an impairment credit for the year
-- Underlying and statutory net loan book increased by 10% to GBP20.9bn and
GBP21.1bn, respectively (2020: GBP19.0bn and GBP19.2bn) supported by
organic originations of GBP4.5bn, up 20% from GBP3.8bn in 2020
-- Underlying net interest margin (NIM) of 282bps (2020: 247bps) and
statutory NIM of 253bps (2020: 216bps) improved, primarily due to the
lower cost of retail funds
-- Underlying cost to income ratio improved to 24% (2020: 27%) and 26% on a
statutory basis (2020: 31%) due to growth in income
-- Underlying and statutory loan loss ratios of -2bps (2020: 38bps)
reflecting an improved outlook. Arrears remained broadly stable
with balances greater than three months at 1.4% and 0.7% for OSB
and CCFS respectively (31 December 2020: 1.3% and 0.5%)
-- Underlying return on equity increased to 24% (2020: 19%) and statutory
return on equity increased to 20% (2020: 13%)
-- Underlying basic earnings per share (EPS) of 86.7 pence (2020: 58.1
pence) and statutory basic EPS of 76.0 pence (2020: 42.8 pence)
-- Fully-loaded Common Equity Tier 1 capital ratio strengthened to 19.6%
(2020: 18.3%) and total capital ratio strengthened to 21.2% (2020: 18.3%)
as GBP150m of AT1 securities were issued out of the holding company
-- Share repurchase programme of GBP100m to commence on 18 March 2022
-- Recommended final dividend of 21.1 pence per share, which together
with the 2021 interim dividend of 4.9 pence per share, represents
an increase in the payout ratio to 30% of underlying earnings
attributable to ordinary shareholders
Andy Golding, CEO of OSB Group, said:
"I am extremely proud of the operational and financial
performance of OSB Group in 2021, delivering record profits, whilst
proving once again the resilience of our strategy and business
model against the backdrop of the pandemic.
The financial results for 2021 were outstanding as the Group
delivered record underlying profit before tax of GBP522m up 51% on
2020 (GBP346m) primarily due to a lower cost of retail funds and an
impairment credit for the year. Our costs continued to be managed
efficiently, with our underlying management expense ratio remaining
flat to the previous year. I am particularly pleased that we
delivered strong net loan book growth of 10%, supported by organic
originations of GBP4.5bn at attractive margins, up 20% from 2020.
Once again for 2021, we achieved a class-leading return on equity
of 24% on an underlying basis and 20% on a statutory basis (2020:
19% and 13% respectively).
The Group has a very strong capital position and proven capital
generation capability through profitability, with the fully-loaded
CET1 ratio improving further to 19.6% as at 31 December 2021 (31
December 2020: 18.3%). This has enabled the Board to support strong
growth and shareholder returns, and announce a GBP100m share
buyback programme to commence on 18 March 2022. Additionally, the
Board is recommending an increase in the full year 2021 ordinary
dividend payout ratio to 30%. The Board remains committed to
returning any additional excess capital to shareholders and intends
to update the market on its capital management framework once
greater clarity is obtained on the impact of Basel 3.1 and its
timing versus the Group attaining IRB accreditation.
As a specialist lender, we have long been aware of our
responsibilities and the positive impact we can have on society. I
am delighted that following our decision to become carbon neutral
for our direct emissions in 2021 we have joined the Net Zero
Banking Alliance, and committed to assist with industry's efforts
to achieve its decarbonisation goals and to achieve net zero
greenhouse gas emissions by 2050.
Our people are our key asset and we continued to work hard to
keep them safe and supported, in the UK and India, throughout 2021.
I would like to take this opportunity to thank all of our
colleagues for their continued dedication, flexibility, strong team
spirit and camaraderie throughout 2021.
Based on current new business volumes and our focus on
retention, we expect to deliver underlying net loan book growth of
c.10% in 2022. The pricing and funding costs we are currently
seeing are expected to deliver an underlying NIM for 2022 broadly
flat to 2021. We expect the underlying cost to income ratio to
increase marginally, with potential for additional inflationary
headwinds. The cost to income ratio in 2021 benefitted from fair
value gains from hedging activities and reduced expenditure during
the pandemic.
Recent geopolitical events, driving further inflationary
pressure, do create additional uncertainty over the macroeconomic
outlook. The Group has a proven track record of delivering strong
results as a listed business and we have consistently demonstrated
our resilience. The solid foundations of our business allow us face
the future with optimism."
This announcement contains inside information as stipulated
under the Market Abuse Regulation no 596/2014, as it forms part of
the domestic law of the United Kingdom by virtue of the European
(withdrawal) Act 2018, as amended. on publication of this
announcement via a regulatory information service, this information
is considered to be in the public domain.
Not for release, publication or distribution or whole or in
part, directly or indirectly in, into or from any jurisdiction
where to do so would constitute a violation of the relevant laws of
such jurisdiction.
Enquiries:
OSB GROUP PLC: Alastair Pate t: 01634 838973
Brunswick Group: Robin Wrench / Simone Selzer t: 020 7404 5959
Analyst presentation
A webcast presentation for analysts will be held at 9:30am on
Thursday 17 March.
The presentation will be webcast or call only and available on
the OSB Group website at
www.osb.co.uk/investors/results-reports-presentations.
The UK dial in number is 020 3936 2999 and the password is
663429. Registration is open immediately.
About OSB GROUP PLC
OSB 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. On 4 October
2019, OSB acquired Charter Court Financial Services Group plc
(CCFS) and its subsidiary businesses. On 30 November 2020, OSB
GROUP PLC became the listed entity and holding company for the OSB
Group. The Group provides specialist lending and retail savings and
is authorised by the Prudential Regulation Authority, part of the
Bank of England, and regulated by the Financial Conduct Authority
and Prudential Regulation Authority. The Group reports under two
segments, OneSavings Bank and Charter Court Financial Services.
OneSavings Bank
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 mortgages organically via specialist brokers and
independent financial advisers through its specialist brands
including Kent Reliance for Intermediaries and InterBay Commercial.
It is differentiated through its use of highly 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
securitisation programmes and the Bank of England's Term Funding
Scheme with additional incentives for SMEs.
Charter Court Financial Services Group
CCFS focuses on providing Buy-to-Let and specialist residential
mortgages, mortgage servicing, administration and retail savings
products. It operates through its brands: Precise Mortgages and
Charter Savings Bank.
It is differentiated through risk management expertise and
best-of-breed automated technology and systems, ensuring efficient
processing, strong credit and collateral risk control and speed of
product development and innovation. These factors have enabled
strong balance sheet growth whilst maintaining high credit quality
mortgage assets.
CCFS is predominantly funded by retail savings originated
through its Charter Savings Bank brand. Diversification of funding
is currently provided by securitisation programmes and the Bank of
England's Term Funding Scheme with additional incentives for
SMEs.
Important disclaimer
This document should be read in conjunction with the documents
distributed by OSB GROUP PLC (OSBG) through the Regulatory News
Service (RNS). This document is not audited and contains certain
forward-looking statements, beliefs or opinions, including
statements with respect to the business, strategy and plans of OSBG
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 OSBG'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
OSBG 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
OSBG'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 OSBG'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 OSBG'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 OSBG in managing
the risks of the foregoing.
Accordingly, no reliance may be placed on any forward-looking
statement and 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, OSBG
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 OSBG's
expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based.
For additional information on possible risks to OSBG's business,
please see the Risk review in the OSBG 2021 Annual Report and
Accounts. Copies of this are available at www.osb.co.uk and on
request from OSBG.
Nothing in this document and any subsequent discussion
constitutes or forms part of a public offer under any applicable
law or an offer to purchase or sell any securities or financial
instruments. Nor does it constitute advice or a recommendation with
respect to such securities or financial instruments, or any
invitation or inducement to engage in investment activity under
section 21 of the Financial Services and Markets Act 2000. Past
performance cannot be relied on as a guide to future performance.
Nothing in this document is intended to be, or should be construed
as, a profit forecast or estimate for any period.
Liability arising from anything in this document shall be
governed by English law, and neither the Company nor any of its
affiliates, advisors or representatives shall have any liability
whatsoever (in negligence or otherwise) for any loss howsoever
arising from any use of this document or its contents or otherwise
arising in connection with this document. Nothing in this document
shall exclude any liability under applicable laws that cannot be
excluded in accordance with such laws.
Certain figures contained in this document, including financial
information, may have been subject to rounding adjustments and
foreign exchange conversions. Accordingly, in certain instances,
the sum or percentage change of the numbers contained in this
document may not conform exactly to the total figure given.
Non-IFRS performance measures
OSB GROUP PLC 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 the 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.
Chief Executive's Statement
Looking back on 2021, I am incredibly proud of the operational
and financial performance of OSB Group, and our delivery of record
profits, whilst proving once again the resilience of our strategy
and business model against the backdrop of the pandemic.
In 2021, we made significant progress on important projects
including our approach to climate change and sustainability. More
importantly, the Board has committed to be carbon neutral for our
direct emissions in 2021 through reduction initiatives and
emissions removal credits. In addition, we have set a significant
target of achieving Net Zero greenhouse gas emissions by 2050 and
we are developing detailed plans to achieve this ambitious goal for
the Group and our stakeholders. We fully recognise that no business
can achieve net zero on their own and collaborative support from
industry and policy makers will be required.
We continued to build our business and delivered underlying and
statutory net loan book growth of 10%, supported by GBP4.5bn of new
lending at attractive margins. This was delivered as the Group
successfully met the challenges from ongoing uncertainty caused by
the pandemic. Once again for 2021, we achieved a class-leading
return on equity of 24% on an underlying basis and 20% on a
statutory basis (2020: 19% and 13% respectively).
The Group has a very strong capital position and proven capital
generation capability through profitability, with the fully-loaded
CET1 ratio improving further to 19.6% as at 31 December 2021 (31
December 2020: 18.3%). This has enabled the Board to support strong
growth and shareholder returns, and announce a GBP100m share
buyback programme to commence on 18 March 2022. Additionally, the
Board is recommending an increase in the full year 2021 ordinary
dividend payout ratio to 30%. The Board remains committed to
returning any additional excess capital to shareholders and intends
to update the market on its capital management framework once
greater clarity is obtained on the impact of Basel 3.1 and its
timing versus the Group attaining IRB accreditation.
Financial performance
I am delighted that the Group continued to generate a high level
of profitability during 2021, with record underlying pre-tax profit
of GBP522.2m, up 51% on the prior year, and underlying basic
earnings per share of 86.7 pence, up 49% (2020: GBP346.2m and 58.1
pence, respectively). On a statutory basis, profit before tax
increased to GBP464.6m (2020: GBP260.4m) and basic earnings per
share was 76.0 pence (2020: 42.8 pence).
The underlying net interest margin for the year improved to
282bps (2020: 247bps) due to a lower cost of retail funds and
one-off underlying net effective interest rate gains of GBP18.6m
which contributed 8bps to NIM in the year. The statutory NIM was
253bps for 2021 (2020: 216bps).
The Group maintained its strong focus on cost discipline and
efficiency and the underlying management expense ratio remained
broadly stable at 70bps in 2021. The underlying cost to income
ratio which benefitted from stronger net interest income, and fair
value gains on hedging activity, further improved to 24% from 27%
in 2020. The statutory management expense ratio and cost to income
ratio were 71bps and 26%, respectively (2020: 70bps and 31%).
The management expense and cost to income ratios in both 2021
and 2020 also benefitted from cost synergies and lower spending as
a result of lockdowns, the working from home guidance and some
hiring delays in an increasingly competitive labour market.
Our strong lending franchise
Demand for mortgages remained strong in 2021 and the Group
remained a lender of choice in our core Buy-to-Let and Residential
market sub-segments, with total organic originations of GBP4.5bn,
up 20% from GBP3.8bn in 2020. This was achieved with restricted
lending across the Group's sub-segments during the first half of
the year. In July 2021, more positive economic indicators enabled
us to introduce new products at pre-pandemic criteria in our core
Buy-to-Let and Residential sub-segments at attractive margins,
however we continued to control lending in our more cyclical
sub-segments; commercial, bridging, development finance, funding
lines and second charge residential. I am pleased that at the
beginning of 2022, we have also returned to the market with
products at pre- pandemic criteria in our commercial,
semi-commercial and bridging sub- segments and we entered 2022 with
a robust pipeline of new business.
The property purchase market was particularly active for the
Group during 2021, with strong demand stimulated by the temporary
reduction in stamp duty, which also brought forward completions to
the first half as borrowers rushed to complete mortgages prior to
the cut-off deadlines. The Group saw especially strong demand for
its products from landlords buying via a limited company structure
and those buying specialist property types such as houses in
multiple occupation and multi-unit properties, areas where we have
long-standing expertise.
Landlords are demonstrating high levels of confidence and we
continue to support them as they decide to add to their portfolios,
remortgage properties within their existing portfolios or
incorporate their business, selecting to do so with the Group given
our expertise and multi-brand mortgage propositions.
The Group continued to receive recognition from mortgage
customers and intermediaries in the year and Precise Mortgages was
recognised by Mortgage Introducer Awards 2021 as Specialist Lender
of the Year and by L&G Mortgage Club Awards 2021 as Best Lender
for partnership with the club. Kent Reliance received the Best
Specialist Lender award from the Mortgage Strategy Awards.
Proven strong credit and risk management
The high quality of the Group's loan book was reflected in the
strong credit performance during the year, with balances over three
months in arrears remaining broadly stable at just 1.4% and 0.7% of
the loan book at the end of December for OSB and CCFS respectively
(31 December 2020: 1.3% and 0.5%). The weighted average LTV of the
Group's loan book reduced to 62% as at 31 December 2021 from 65% in
2020 supported by house price appreciation. The weighted average
LTV of new business written by the Group fell to 69% from 70%
during the year as the Group controlled its lending criteria.
The concerns for the economy identified at the beginning of the
pandemic have not generally materialised, and the macroeconomic
outlook improved over the course of 2021, albeit with the more
recent concerns over rising cost of living moderating the outlook
somewhat. The Group reflected this in its IFRS 9 models and
recorded an impairment credit of GBP4.9m on an underlying basis for
the year (statutory impairment credit of GBP4.4m), representing an
underlying and statutory loan loss ratios of -2bps, compared with
38bps for underlying and statutory loan loss ratios in 2020.
The Group's Internal Ratings-Based (IRB) programme made tangible
progress against plan during the year. The IRB capabilities
developed by the Group continue to be integrated into key risk and
capital management processes, and are already informing strategic
decision making and business planning activities. The anticipated
delay in Basel 3.1 implementation and extension to the Group's MREL
deadlines, provided the Group with the opportunity to enhance our
level of end state compliance prior to submitting our module 1
application. We continue to engage with the PRA to agree a
submission date.
The integration of OSB and CCFS has continued to progress well
during the year and it remains ahead of schedule. By 31 December
2021, we had delivered annualised run rate savings of c. GBP24m and
we expect to marginally exceed our run-rate pledge by the end of
the third anniversary of the Combination. Integration costs to date
are also lower than originally expected at GBP20m.
Multi-channel funding model
Retail deposits remained the primary source of funding for the
Group in the year, reaching GBP17.5bn as at 31 December 2021. Our
competitive retail savings propositions, through the Kent Reliance
and Charter Savings Bank brands, allowed the Group to raise the
funds needed to support loan growth at attractive rates as we
opened over 44,000 new savings accounts in the year.
The retention rate for savers remained high, achieving 90% for
maturing fixed rate bonds and ISAs at Kent Reliance and 85% for
Charter Savings Bank. Our efforts to provide excellent customer
service and transparent and fair savings products were reflected in
the strong Net Promoter Scores of +70 for Kent Reliance and +71 for
Charter Savings Bank. I am delighted that Charter Savings Bank won
ISA Provider of the Year and Online Savings Provider of the Year
from Moneyfacts Consumer awards. These awards demonstrate the
dedication to delivering excellent customer service across the
Group both in India and in the UK.
We continued to complement our retail savings franchises by
utilising our capabilities in the wholesale funding market. In
2021, we completed securitisations with a value of GBP1.9bn which
were largely retained and significantly increased the contingent
wholesale funding options available to the Group.
Securitisation also provided an opportunity to increase
efficiency in our drawings from the Bank of England funding schemes
through the use of retained AAA bonds. In 2021, the drawings under
the Term Funding Scheme were fully repaid and drawings under the
Term Funding Scheme for SMEs increased to GBP4.2bn (31 December
2020: GBP2.6bn and GBP1bn, respectively).
ESG
Our Purpose is to help our customers, colleagues and communities
prosper. To achieve it, we operate in a sustainable way with
relevant ESG matters at the heart of our business.
Strong governance is fundamental to delivering the Group's
strategy and we have a long tradition of looking after our
stakeholders and involvement in the communities in which we
operate. The environment is no less important to us. As a
specialist lender, we have long been aware of our responsibilities
and the positive impact we can have on society by responding to the
challenges and opportunities that ESG matters present and which
have become an integral part of the Group's strategy.
We have created a new ESG governance structure and a dedicated
team responsible for managing the Group's ESG strategy and
coordinating its implementation and delivery. I am delighted that
following our decision to become carbon neutral for our direct
emissions in 2021 and to demonstrate our continued and long-term
dedication to climate change, we have joined the Net Zero Banking
Alliance. We have also committed to assist with industry's efforts
to achieve its decarbonisation goals and to achieve net zero
greenhouse gas emissions by 2050.
Our people are our key asset and we continued to work hard to
keep them safe and supported, in the UK and India throughout 2021.
I would like to take this opportunity to thank all of our
colleagues for their continued dedication, flexibility, strong team
spirit and camaraderie throughout 2021.
Our customers continued to receive the support that they are
accustomed to, delivered by our resilient and effective operations.
We were also active in supporting our communities through a range
of community and fundraising initiatives, donating nearly GBP395k
to charitable causes in 2021.
Looking forward
The UK economy showed determined strength during 2021, which
included strong employment growth and house price inflation.
However, recent geopolitical events driving further inflationary
pressure, do create additional uncertainty over the macroeconomic
outlook. OSB Group has a proven track record of delivering strong
results as a listed business and we have consistently demonstrated
our resilience. The solid foundations of our business allow us face
the future with optimism.
The Group has a healthy pipeline of new business and we are
successfully leveraging our unique multi-brand structure to drive
strong current application volumes. We are seeing strong demand for
our products in our core markets and landlord confidence in BTL
remains positive. Our own research confirmed that tenant demand is
good and trending upward.
Based on current new business volumes and our focus on
retention, we expect to deliver underlying net loan book growth of
c. 10% in 2022. The pricing and funding costs we are currently
seeing are expected to deliver an underlying NIM for 2022 broadly
flat to 2021. We expect the underlying cost to income ratio to
increase marginally, with potential for additional inflationary
headwinds. The cost to income ratio in 2021 benefitted from fair
value gains from hedging activities and reduced expenditure during
the pandemic.
Andy Golding
Chief Executive Officer
17 March 2022
Segment review
Lending in 2021
The Group's lending performance in 2021 reflected not only the
dynamics present in the wider mortgage market, but also the Group's
discipline in its lending decisions.
Even though the third national lockdown marked the first quarter
of the year, it did not bring severe disruption as the Group's
lending brands demonstrated their flexibility and resilience, and
adapted their processes and practices.
The Group saw strong levels of applications and completions in
its Residential sub-segments, with prospective borrowers seeking to
complete property purchases while the stamp duty holiday was still
in effect, bringing some activity forward to the first half of the
year. The Group was also active in the popular Help to Buy scheme
in the year. The new rules that came into force in April 2021,
restricted new completions from the scheme to first-time buyers
only and introduced regional price caps, which led to a spike in
completions at the end of March 2021. Through its Kent Reliance
brand, the Group also offers mortgages under the shared ownership
scheme, which saw strong applications and completions during the
year.
In its Buy-to-Let sub-segments, the Group also saw increased
completion activity as the stamp duty holiday was phased out,
despite the additional surcharge for second homes continuing to
apply. The Group saw particularly strong demand for its products
from landlords buying via a limited company structure and those
buying specialist property types, such as houses in multiple
occupation and multi-unit properties. Throughout the first half of
2021, the Group continued to apply restricted lending criteria in
terms of maximum loan to value and loan sizes in its core
sub-segments, as well as higher pricing initially introduced as a
response to the pandemic.
In July 2021, as the economy and the outlook improved, new
products were introduced in both the Buy-to-Let and Residential
sub-segments at pre-pandemic criteria including maximum loan to
values of 85% and products for customers with a less-than-perfect
credit history. This resulted in stronger new applications in the
second half of the year.
Throughout 2021, lending in the Group's more cyclical business
lines, including commercial, residential development finance,
funding lines and second charge residential, remained constrained
as measures introduced in response to the pandemic prevailed. This
led to a lower
volume of business in these sub-segments during the year. The
restrictive measures remained under constant review and were
gradually relaxed, as we saw evidence of improving macroeconomic
conditions, for example, loan to value criteria in the bridging
sub-segment were returned to pre-pandemic levels in October.
The Group's arrears remained broadly stable throughout the year
and, as at 31 December 2021, the percentage of loans and advances
in three months plus arrears was 1.4% for OSB (2020: 1.3%) and 0.7%
for CCFS (2020: 0.5%).
Segment review
The Group reports its lending business under two segments:
OneSavings Banks and Charter Court Financial Services.
OneSavings Bank (OSB) segment
The following tables show the OSB's loans and advances to
customers and contribution to profit on a statutory basis:
BTL/SME Residential Total
GBPm GBPm GBPm
Year ended 31-Dec-2021
Gross loans and advances
to customers 9,936.1 2,121.2 12,057.3
Expected credit losses (72.0) (10.2) (82.2)
Net loans and advances to
customers 9,864.1 2,111.0 11,975.1
Risk-weighted assets 4,614.1 957.6 5,571.7
Profit or loss for the year
Net interest income 340.5 74.3 414.8
Other income 7.2 1.5 8.7
Total income 347.7 75.8 423.5
Impairment of financial
assets (6.2) 2.7 (3.5)
Contribution to profit 341.5 78.5 420.0
BTL/SME Residential Total
GBPm GBPm GBPm
Year ended 31-Dec-2020
Gross loans and advances
to customers 9,164.6 1,966.8 11,131.4
Expected credit losses (67.0) (16.6) (83.6)
Net loans and advances to
customers 9,097.6 1,950.2 11,047.8
Risk-weighted assets 4,282.9 874.4 5,157.3
Profit or loss for the year
Net interest income 264.7 68.1 332.8
Gain on sale of loans 18.0 - 18.0
Other expense 0.2 0.6 0.8
Total income 282.9 68.7 351.6
Impairment of financial
assets (47.0) (3.7) (50.7)
Contribution to profit 235.9 65.0 300.9
OSB - Buy-to-Let/SME
Buy-to-Let/SME sub-segment: gross loans
Group Group
31-Dec-2021 31-Dec-2020
GBPm GBPm
------------------------- ------------ ------------
Buy-to-Let 8,867.7 8,044.6
Commercial 794.4 821.9
Residential development 120.7 133.1
Funding lines 153.3 165.0
Gross loans to customers 9,936.1 9,164.6
Expected credit losses (72.0) (67.0)
Net loans to customers 9,864.1 9,097.6
------------------------- ------------ ------------
This sub-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, residential development finance
to small and medium-sized developers, secured funding lines to
other lenders and asset finance.
The Buy-to-Let/SME net loan book increased by 8% to GBP9,864.1m
in 2021, supported by organic originations of GBP1,804.7m, which
were 17% higher than GBP1,542.5m in 2020.
Buy-to-Let/SME net interest income increased by 29% to GBP340.5m
from GBP264.7m in 2020, reflecting growth in the loan book, a lower
cost of retail funds and an effective interest rate reset gain of
GBP24.9m, due to updated prepayment assumptions based on observed
customer behaviour. This segment also benefitted from GBP7.2m of
other income relating to gains on the Group's hedging activities,
principally fair value gains on mortgage pipeline swaps (2020:
GBP0.2m), offset by an impairment loss of GBP6.2m (2020: GBP47.0m
loss). The impairment loss was largely due to individually assessed
provisions raised against two commercial counterparties, individual
assessment methodology enhancements and changes in the credit
profile of the BTL/SME loan book, including portfolio size and
staging mix, which more than offset provision releases as the
macroeconomic outlook improved. In addition the positive impact of
house price appreciation in the year was partially offset by falls
in commercial property values. Overall, the Buy-to-Let/SME segment
made a contribution to profit of GBP341.5m, up 45% compared with
GBP235.9m in 2020.
The average book loan to value (LTV)(1) in the Buy-to-Let/SME
segment reduced to 65% as at 31 December 2021 benefitting from
house price appreciation in the year (31 December 2020: 67%), with
only 2.5% of loans exceeding 90% LTV (31 December 2020: 2.9%). The
average LTV for new Buy-to-Let/SME origination(1) was 73% (2020:
71%).
Buy-to-Let
Buy-to-Let gross loans increased by 10% to GBP8,867.7m from
GBP8,044.6m at the end of 2020. The Group gradually relaxed its
underwriting criteria in this segment and reintroduced products
with pre-pandemic criteria in July, stimulating demand, and the
organic originations increased by 33% in the year to GBP1,477.7m
(2020: GBP1,114.4m).
Professional and multi-property landlords continued to represent
the majority of borrowers in this sub-segment reaching 82% of
completions by value for the Kent Reliance brand.
Many landlords continued the trend of incorporating their
businesses to optimise their tax position and 73% of Buy-to-Let
mortgage applications in Kent Reliance came from landlords
borrowing via a limited company (2020: 75%). Research conducted on
behalf of the Group by
BVA BDRC shows that this segment of the market continues to
expand, with limited company ownership remaining the most popular
option amongst landlords intending to purchase new properties in
the next 12 months.
As at 31 December 2021, the proportion of Kent Reliance
Buy-to-Let completions represented by refinancing reduced slightly
to 54% (2020: 58%) as more landlords took the opportunity to add to
their portfolios while the SDLT holiday on purchases was in place.
Landlords continued to favour mortgages with longer initial terms
as mortgage rates became more attractive during 2021, and five-year
fixed rate mortgages represented 62% of Kent Reliance completions
(2020: 52%). In addition, OSB's retention programme, Choices, was
successful in retaining customers, with 71% of existing borrowers
choosing a new product with us within three months of their
original product ending (2020: 75%).
The weighted average LTV of the Buy-to-Let book reduced to 64%
as at 31 December 2021, benefitting from house price appreciation
and the average loan size was GBP250k (31 December 2020: 67% and
GBP260k). The weighted average interest coverage ratio for
Buy-to-Let originations during 2021 was 199% (2020: 201%).
Commercial
Through its InterBay brand, the Group lends to borrowers
investing in commercial and semi-commercial property, reported in
the Commercial total, and more complex Buy-to-Let properties,
reported in the Buy-to-Let total. The gross loan book in the
commercial business reduced 3% to
GBP794.4m (31 December 2020: GBP821.9m) as the Group retained
its prudent lending criteria introduced as a response to the
pandemic throughout the year.
The Group launched a holiday let proposition in 2021 under its
InterBay brand to assist landlords wishing to diversify their
portfolios.
The weighted average LTV of the commercial book remained low at
69% and the average loan size was GBP380k in 2021 (31 December
2020: 71% and GBP385k).
InterBay Asset Finance, which predominantly targets UK SMEs and
small corporates financing business-critical assets, had a
successful year achieving record volumes. Demand for lending under
the Coronavirus Business Interruption Loan Scheme (CBILS) continued
to be strong, although it ended for new applications in March, with
all deals required to be funded by the end
of November. InterBay Asset Finance was also approved for the
CBILS successor scheme, the Recovery Loan Scheme, which expires at
the end of June 2022.
The gross carrying amount under finance leases was GBP116.2m as
at 31 December 2021 (31 December 2020: GBP65.5m).
Residential development
The Heritable residential development finance business provides
development finance to small and medium-sized residential
developers. The preference is to fund house builders which operate
outside central London and provide relatively affordable family
housing, as opposed to complex city centre schemes where
affordability and construction cost control can be more
challenging. New applications come primarily from a mixture of
repeat business from the team's extensive existing relationships
and referrals.
The residential development finance gross loan book at the end
of 2021 was GBP120.7m (31 December 2020: GBP133.1m), with a further
GBP188.0m committed (31 December 2020: GBP145.6m). Total
commitments were GBP500.3m including all approved limits that are
subject to continued performance (31 December 2020: GBP502.7m). The
increased rates of sale experienced by Heritable's developer
customers continued in 2021, leading to high levels of loan
repayments in the year.
Heritable has written GBP1,436m of loans since inception through
to the end of 2021, of which GBP792m have been repaid. In addition,
as at the end of 2021, the business had commitments to finance the
development of 2,239 residential units, the majority of which are
houses located outside central London. The business continued to
take an exacting approach to approving funding for new customers in
2021 given the macroeconomic uncertainty.
Funding lines
The Group continued to provide secured funding lines to non-bank
lenders which operate in certain high-yielding, specialist
sub-segments, primarily secured against property-related mortgages.
Total credit approved limits as at 31 December 2021 were GBP450.0m,
with total loans outstanding of GBP153.3m (31 December 2020:
GBP520.0m and GBP165.0m, respectively). During the year, the Group
adopted a cautious risk approach and did not consider any new
secured funding line facilities, choosing to focus on servicing the
existing borrowers and continuing to apply restricted lending
criteria.
1. Buy-to-Let/SME sub-segment average weighted LTVs include KR
and InterBay Buy-to-Let, semi-commercial and commercial
lending.
OSB - Residential mortgages
Residential sub-segment: gross loans
Group Group
31-Dec-2021 31-Dec-2020
GBPm GBPm
------------------------- ------------ ------------
First charge 1,895.9 1,660.7
Second charge 224.7 295.4
Funding lines 0.6 10.7
Gross loans to customers 2,121.2 1,966.8
Expected credit losses (10.2) (16.6)
Net loans to customers 2,111.0 1,950.2
------------------------- ------------ ------------
This sub-segment comprises lending to owner occupiers, secured
via first charge against a residential home and under the shared
ownership scheme, as well as funding lines to non-bank lenders that
operate in high-yielding, specialist sub-segments such as
residential bridge finance.
The Residential sub-segment net loan book grew 8% to GBP2,111.0m
as at 31 December 2021 (31 December 2020: GBP1,950.2m) with organic
originations of GBP558.6m during the year (2020: GBP354.2m).
Net interest income in the Residential sub-segment increased by
9% to GBP74.3m (2020: GBP68.1m) due to the growth in the loan book,
the benefit of a lower cost of retail funds and a GBP7.5m effective
interest rate gain due to cash outperformance versus modelled
assumptions on the second charge acquired books. This segment also
benefitted from an impairment credit of GBP2.7m (2020: GBP3.7m
loss), due to less severe forward-looking macroeconomic scenarios
adopted by the Group and strong house price performance, partially
offset by post model adjustments applied during the year. Overall,
contribution to profit from this segment increased by 21% to
GBP78.5m compared with GBP65.0m in 2020.
The average book LTV(1) reduced to 48% (31 December 2020: 54%)
with only 0.8% of loans by value with LTVs exceeding 90% (31
December 2020: 1.6%). The average LTV of new residential
origination(1) during 2021 reduced to 50% (2020: 61%) as a result
of growth in shared ownership originations, which complete at much
lower LTVs.
First charge
First charge mortgages are provided under the Kent Reliance
brand, which largely serves prime credit quality borrowers with
more complex circumstances. This includes high net worth borrowers
with multiple income sources and self-employed borrowers, as well
as those buying a property in conjunction with a housing
association under a shared ownership scheme.
The first charge gross loan book increased by 14% in the year to
GBP1,895.9m from GBP1,660.7m at the end of 2020, as the Group
retained its strong presence in the shared ownership sub-segment,
achieving record levels of first charge residential originations of
GBP558.2m (2020: GBP338.7m) in the year. The Group expanded its
residential product offering from July, increasing the maximum LTV
to pre-pandemic levels and re-launching products to assist
customers with a less-than-perfect credit history, contributing to
strong originations in this sub-segment.
Second charge
The OSB second charge mortgage brand, Prestige Finance, no
longer offers new mortgages to borrowers, with its loan book in
run-off and managed by Precise Mortgages. Second charge mortgages
are currently offered under the Precise Mortgages brand as part of
the CCFS segment. The Prestige Finance second charge residential
loan book had a gross value of GBP224.7m at the end of 2021 (31
December 2020: GBP295.4m).
Funding lines
The Group continued to provide secured funding lines to non-bank
lenders which operate in certain high-yielding, specialist
sub-segments, such as residential first and second charge finance.
The Group continued to adopt a cautious approach to these more
cyclical businesses given macroeconomic uncertainty. Total credit
approved limits as at 31 December 2021 reduced to GBP20.0m with
total loans outstanding of GBP0.6m secured against property-related
mortgages
(31 December 2020: GBP29.2m and GBP10.7m, respectively).
.
1. Residential sub-segment average weighted LTVs include first
and second charge lending.
Segment review -- Charter Court Financial Services (CCFS)
segment
The tables below present the CCFS' loans and advances to
customers and contribution to profit on an underlying basis,
excluding acquisition-related items and a reconciliation to the
statutory results.
Buy-to- Total Total
Year ended Let Residential Bridging Second charge Other(1) underlying Acquisition- related statutory
31-Dec-2021 GBPm GBPm GBPm GBPm GBPm GBPm items(2) GBPm GBPm
Gross loans and
advances to
customers 6,301.9 2,451.8 56.3 153.7 17.7 8,981.4 143.1 9,124.5
Expected credit
losses (13.9) (5.1) (0.3) (0.3) - (19.6) 0.3 (19.3)
Loans and
advances to
customers 6,288.0 2,446.7 56.0 153.4 17.7 8.961.8 143.4 9,105.2
Risk-weighted
assets 2,352.1 1,011.1 29.3 62.2 6.5 3,461.2 68.7 3,529.9
Profit or loss account
Net interest
income 151.0 81.3 5.2 6.7 (8.5) 235.7 (62.9) 172.8
Other income - - - - 20.0 20.0 12.7 32.7
Total income 151.0 81.3 5.2 6.7 11.5 255.7 (50.2) 205.5
Impairment of
financial
assets 4.3 2.3 1.4 0.4 - 8.4 (0.5) 7.9
Contribution to
profit 155.3 83.6 6.6 7.1 11.5 264.1 (50.7) 213.4
--------------- -------- ----------- -------- ------------- -------- ----------- -------------------- ----------
1. Other relates to acquired loan portfolios and related net
interest income as well as gains on structured asset sales and fee
income from third party mortgage servicing.
2. For more details on acquisition-related adjustments, see
Reconciliation of statutory to underlying results in the Financial
review.
Buy-to- Total
Year ended Let Residential Bridging Second charge Other(1) underlying Acquisition- related Total statutory
31-Dec-2020 GBPm GBPm GBPm GBPm GBPm GBPm items(2) GBPm GBPm
Gross loans and
advances to
customers 5,292.0 2,386.1 106.1 197.9 19.1 8,001.2 209.1 8,210.3
Expected credit
losses (18.1) (7.5) (1.9) (0.7) - (28.2) 0.8 (27.4)
Loans and
advances to
customers 5,273.9 2,378.6 104.2 197.2 19.1 7,973.0 209.9 8,182.9
Risk-weighted
assets 2,163.8 1,001.5 59.6 82.9 7.0 3,314.8 93.6 3,408.4
Profit or loss account
Net interest
income 114.8 67.8 11.8 7.4 (0.6) 201.2 (61.8) 139.4
Gain on sale of
loans - - - - 15.1 15.1 (13.1) 2.0
Other income 0.3 0.3 - - 1.7 2.3 13.3 15.6
Total income 115.1 68.1 11.8 7.4 16.2 218.6 (61.6) 157.0
Impairment of
financial
assets (14.9) (4.0) (1.3) (0.3) - (20.5) 0.2 (20.3)
Contribution to
profit 100.2 64.1 10.5 7.1 16.2 198.1 (61.4) 136.7
--------------- -------- ----------- -------- ------------- -------- ----------- ------ --------------------
1. Other relates to acquired loan portfolios and related net
interest income as well as gains on structured asset sales and fee
income from third party mortgage servicing.
2. For more details on acquisition-related adjustments, see
Reconciliation of statutory to underlying results in the Financial
review.
Charter Court Financial Services (CCFS) segment
CCFS gross loans
Group Group
31-Dec-2021 31-Dec-2020
GBPm GBPm
------------------------- ------------ ------------
Buy-to-Let 6,301.9 5,292.0
Residential 2,451.8 2,386.1
Bridging 56.3 106.1
Second charge 153.7 197.9
Other(1) 17.7 19.1
Gross loans to customers 8,981.4 8,001.2
Expected credit losses (19.6) (28.2)
Net loans to customers 8,961.8 7,973.0
------------------------- ------------ ------------
1. Other relates to acquired loan portfolios.
CCFS targets specialist mortgage market sub-segments with a
focus on specialist Buy-to-Let mortgages secured on residential
property held for investment purposes by both non-professional and
professional landlords. It also provides specialist residential
mortgages to owner-occupiers, secured via either first or second
charge against prime and complex prime residential property and
under the Help to Buy scheme. In addition, it provides short-term
bridging, secured against residential property in both the
regulated and unregulated sectors of the market and second charge
lending.
The CCFS underlying net loan book grew by 12% to GBP8,961.8m at
the end of 2021 (31 December 2020: GBP7,973.0m) supported by
organic originations of GBP2,160.2m, which increased by 16% from
GBP1,870.2m of new business written in 2020.
Buy-to-Let sub-segment
During 2021, CCFS' organic originations in the Buy-to-Let
sub-segment through the Precise Mortgages brand increased by 32% to
GBP1,482.3m (2020: GBP1,122.6m) as the Group benefitted from strong
demand for new purchases driven by the stamp duty holiday and the
gradual return to pre-pandemic lending criteria. The new business
supported a 19% increase in the underlying gross Buy-to-Let loan
book to GBP6,301.9m from GBP5,292.0m at the end of 2020.
The demand for CCFS' Buy-to-Let products was particularly strong
amongst landlords borrowing through a limited company, which
represented 69% of Buy-to-Let completions for the Precise Mortgages
brand in 2021 (2020: 56%) and loans for specialist property types,
including houses of multiple occupation and multi-unit properties
represented 26% of completions in this sub-segment (2020: 30%).
Landlords also took the opportunity to add to their portfolios
while the SDLT holiday was available and purchases increased to 61%
of completions for Precise Mortgages (2020: 43%). Five-year fixed
rate mortgages were popular as well at 64% of completions, up from
61% in 2020.
The weighted average LTV of the loan book in this sub-segment
was 68% at the end of 2021 (31 December 2020: 69%). The new lending
average LTV was 74% with an average loan size of GBP192k (2020: 74%
and GBP170k, respectively). The weighted average interest coverage
ratio for Buy-to-Let origination was 188% during 2021 (2020:
193%).
Underlying net interest income in this sub-segment increased by
32% to GBP151.0m, compared with GBP114.8m in 2020, due primarily to
growth in the loan book and a lower cost of retail funds, partially
offset by an underlying effective interest rate reset loss of
GBP14.7m to reflect customers choosing a new product at the end of
their fixed rate period earlier, and spending less time
on the higher revert rate. This segment also benefitted from an
impairment credit of GBP4.3m (2020: GBP14.9m loss) due to less
severe forward-looking macroeconomic scenarios adopted by the Group
and strong house price performance, partially offset by model
enhancements applied during the year. On an underlying basis,
Buy-to-Let made a contribution to profit of GBP155.3m in 2021, up
55% compared to the prior year (2020: GBP100.2m).
On a statutory basis, the Buy-to-Let sub-segment made a
contribution to profit of GBP109.5m (2020: GBP71.5m).
Residential sub-segment
The underlying gross loan book in CCFS' Residential sub-segment
reached GBP2,451.8m in 2021, an increase of 3% from GBP2,386.1m as
at 31 December 2020. Organic originations were GBP558.0m in 2021
(2020: GBP573.9m) with restricted criteria in place until July
2021. As the macroeconomic indicators improved, the Group made a
decision to relax some of the criteria to pre-pandemic levels, in
particular the maximum loan to value limits.
The Group continued to benefit from CCFS' expertise, with a
particularly strong focus on first-time buyers and those purchasing
new build properties under the popular Help to Buy scheme.
As new restrictions to the scheme were introduced at the end of
March 2021, there was a spike in completions as borrowers sought to
finalise their purchases ahead of the new rules coming into force.
Strong activity under the Help to Buy scheme was further boosted by
the stamp duty holiday with purchases representing 86% of
completions in this sub-segment in the period (2020: 79%).
The average loan size in this sub-segment was GBP136k (31
December 2020: GBP160k) with an average LTV for new lending of 66%
(2020: 67%) and the book LTV reduced to 59% as at 31 December 2021
benefitting from house price appreciation in the year (31 December
2020: 62%).
Underlying net interest income grew to GBP81.3m (2020: GBP67.8m)
reflecting the growth in the loan book and a lower cost of retail
funds. The Residential sub-segment recorded an impairment credit of
GBP2.3m (2020: GBP4.0m loss) due to less severe forward-looking
macroeconomic scenarios adopted by the Group and strong house price
performance, partially offset by post model adjustments. Overall,
on an underlying basis, the Residential sub-segment made a
contribution to profit of GBP83.6m, up by 30% compared with
GBP64.1m in 2020.
On a statutory basis, the Residential sub-segment made a
contribution to profit of GBP67.1m (2020: GBP45.4m).
Bridging sub-segment
The Group continued to control volumes in its high-quality
regulated bridging sub-segment, by continuing to limit the number
of products available and applying restricted lending criteria for
much of the year. Some relaxation of these restrictions commenced
in October 2021, with the maximum loan to value for standard and
light refurbishment products increasing to 75% in line with
pre-pandemic criteria. Short-term bridging originations were lower
at GBP109.1m in 2021 compared with GBP141.8m in 2020, and as a
result the gross underlying loan book in this sub-segment reduced
to GBP56.3m as at 31 December 2021(31 December 2020:
GBP106.1m).
Underlying net interest income reduced to GBP5.2m from GBP11.8m
in 2020, primarily reflecting the decrease in the loan book. The
bridging sub-segment made a contribution to profit of GBP6.6m in
2021 on an underlying basis, compared with GBP10.5m in 2020,
reflecting the reduction in the underlying net interest income,
partially offset by an impairment credit of GBP1.4m (2020: GBP1.3m
loss). The impairment credit was due to less severe forward-looking
macroeconomic scenarios adopted by the Group, strong house price
performance and the reduction in the loan book in this
sub-segment.
On a statutory basis, the bridging sub-segment made a
contribution to profit of GBP6.4m (2020: GBP9.7m).
Second charge sub-segment
The second charge gross underlying loan book reduced to
GBP153.7m compared with GBP197.9m as at 31 December 2020, due to
lower organic originations of GBP10.8m in the year (2020:
GBP31.9m). Throughout 2021, the Group applied significant lending
policy restrictions, with the controlled increase in the maximum
loan to value from 50% to 65% in March being the only relaxation of
criteria. The Group also continued to focus on prime borrowers.
Underlying net interest income in the second charge sub-segment
reduced to GBP6.7m (2020: GBP7.4m) due to the lower lending and the
contribution to profit remained flat for the year at GBP7.1m. An
impairment credit of GBP0.4m (2020: GBP0.3m loss) was due to less
severe forward-looking macroeconomic scenarios adopted by the Group
and strong house price performance, partially offset by post model
adjustments.
On a statutory basis, the contribution to profit from the second
charge sub-segment was GBP5.7m (2020: GBP6.6m).
Wholesale funding overview
Securitisation is central to the Group's liability management
strategy, as well as a key funding source, with c. GBP10bn of
issuance since December 2013 across CCFS and OSB.
In addition to providing cost efficient funding, the Group uses
securitisations to provide efficient access to commercial and
central bank repo facilities.
The Group's strategy is to be fleet-of-foot and dynamic rather
than deterministic with its securitisation issuance plans, enabling
it to maximise the opportunity of a strong market with repeat
issuances and use other options when the market is poor.
2021 exemplified the strength of this approach. The Group issued
its largest ever securitisation transaction, Canterbury No. 4, in
July 2021. This transaction securitised c. GBP1.7bn of mortgage
loans and provided the Group with c. GBP1.4bn of AAA rated senior
bonds which can be used as collateral in commercial and central
bank repo facilities, or be sold into the market at short notice
for liquidity purposes. In the year, the Group sold GBP200m of the
AAA- rated Canterbury No. 4 bonds post completion to satisfy short
term funding needs.
The Canterbury No. 4 transaction also forms part of a broader
strategy to increase the Group's wholesale funding options and, in
particular, to increase its encumbrance efficiency. The Group can
access more wholesale funding for each pound of assets encumbered
and thus use wholesale funding to a greater degree than would
otherwise be possible.
A combination of balance sheet growth and the increased use of
securitised collateral enabled the Group to expand its total
borrowings from the Bank of England in 2021. Before the closure of
the Term Funding Scheme in October 2021, the Group repaid its
drawings under this scheme and replaced them with drawings under
the Term Funding for SMEs, which at the end of 2021 totalled
GBP4.2bn. These borrowings provide four-year funding at a cost of
Bank Base Rate.
During 2021, the Group also arranged Rochester Financing No.3,
which involved the re-financing of the Rochester Financing No.2
transaction issued in 2016, which securitised a portfolio of
acquired third party originated UK mortgages.
In 2021, CCFS also had access to a warehouse funding facility
from a Tier 1 investment bank. This facility was available as a
bridge to RMBS funding, helping the Group to maximise the
efficiency of its liquidity position through the transition from
retail deposit to securitisation funding. This warehouse facility
was closed in December 2021.
Financial review
Summary statutory results for 2021 and 2020
Group Group
31 Dec 2021 31 Dec 2020
Summary Profit or Loss GBPm GBPm
Net interest income 587.6 472.2
Net fair value gain on financial
instruments 29.5 7.4
Gain on sale of financial instruments 4.0 20.0
Other operating income 7.9 9.0
Administrative expenses (166.5) (157.0)
Provisions (0.2) (0.1)
Impairment of financial assets 4.4 (71.0)
Impairment of intangible assets 3.1 (7.0)
Integration costs (5.0) (9.8)
Exceptional items (0.2) (3.3)
Profit before taxation 464.6 260.4
Profit after taxation 345.3 196.3
Key ratios(1)
Net interest margin 253bps 216bps
Cost to income ratio 26% 31%
Management expense ratio 71bps 71bps
Loan loss ratio (2)bps 38bps
Return on equity 20% 13%
Basic EPS, pence per share 76.0 42.8
Dividend per share, pence per
share 26.0 14.5
Extracts from the Statement of Financial Position
GBPm GBPm
Loans and advances to customers 21,080.3 19,230.7
Retail deposits 17,526.4 16,603.1
Total assets 24,531.9 22,654.5
Key ratios
Common equity tier 1 ratio 19.6% 18.3%
Total capital ratio 21.2% 18.3%
Leverage ratio 7.9% 6.9%
1. For more detail on the calculation of key ratios, see the
Appendix
Statutory profit
The Group's statutory profit before tax increased by 78% to
GBP464.6m (2020: GBP260.4m) after exceptional items, integration
costs and other acquisition-related items of GBP57.6m(1) (2020:
GBP85.8m). The increase was primarily due to growth in the loan
book, a lower cost of retail funds and an impairment credit. The
Group adopted adverse Covid-19 related forward-looking assumptions
in its IFRS 9 models in 2020 which resulted in a substantial
impairment charge in the prior year. The Group also benefitted from
fair value gains on the Group's hedging activities which more than
offset lower gains on sale of financial instruments.
Statutory profit after tax was GBP345.3m in 2021, an increase of
76% from GBP196.3m in the prior year, due to the increase in profit
before tax partially offset by a higher effective tax rate. It
included after-tax exceptional items, integration costs and other
acquisition-related items of GBP47.8m(1) (2020: GBP68.6m).
The Group's effective tax rate increased to 25.7% in 2021 (2020:
23.1%) primarily due to a larger proportion of the profits being
subject to the Bank Corporation Tax Surcharge.
Statutory return on equity for 2021 improved to 20% (2020: 13%)
reflecting the increase in profitability in the year. Statutory
basic earnings per share increased to 76.0 pence (2020: 42.8
pence), in line with the increase in profit after taxation.
Net interest income
Statutory net interest income increased by 24% in 2021 to
GBP587.6m (2020: GBP472.2m) largely reflecting growth in the loan
book and a lower cost of retail funds. It also included net
effective interest rate (EIR) reset gains of GBP11.5m (2020:
GBP6.0m loss) to reflect updated prepayment assumptions based on
customer behaviour.
Statutory net interest margin (NIM) was 253bps compared to
216bps in the prior year, due primarily to a lower cost of retail
funds and the EIR reset gains, which contributed 5bps. In 2020,
statutory NIM was impacted by a delay in passing on the base rate
cuts in full to retail savers.
Net fair value gain on financial instruments
The statutory net fair value gain on financial instruments of
GBP29.5m in 2021 (2020: GBP7.4m) included a GBP10.3m net gain on
unmatched swaps (2020: GBP18.0m net loss) and a net gain of GBP2.4m
(2020: GBP6.8m loss) in respect of the ineffective portion of
hedges.
The Group also recorded a GBP3.0m gain (2020: GBP13.0m gain)
from the amortisation of hedge accounting inception adjustments, a
GBP13.4m gain from the unwind of acquisition-related inception
adjustments (2020: GBP17.0m gain) and a GBP0.2m gain (2020: GBP2.4m
gain) from amortisation of the fair value relating to de-designated
hedge relationships. Other items amounted to a gain of GBP0.2m
(2020: GBP0.2m loss).
The net gain on unmatched swaps primarily related to fair value
movements on mortgage pipeline swaps, prior to them being matched
against completed mortgages and was caused by an increase in the
interest rate outlook on the LIBOR and SONIA yield curves. The
Group economically hedges its committed pipeline of mortgages and
this unrealised gain unwinds over the life of the swaps through
hedge accounting inception adjustments.
The amortisation of fair value relating to de-designated hedge
relationships occurs when hedge relationships are cancelled due to
ineffectiveness.
Gain on sale of financial instruments
The gain on sale of financial instruments of GBP4.0m in 2021,
related to the disposal of A2 notes in the PMF 2019-1B
securitisation in February 2021.
In 2020, the Group made a gain of GBP20.0m on a statutory basis,
which related to the disposal of the remaining notes under the
Canterbury No.1 and PMF 2020-1B securitisations in January 2020 and
a sale of AAA notes from the Canterbury No. 3 securitisation.
Other operating income
Statutory other operating income of GBP7.9m (2020: GBP9.0m)
mainly comprised CCFS' commissions and servicing fees, including
those relating to securitised loans which have been derecognised
from the Group's balance sheet.
Administrative expenses
Statutory administrative expenses increased 6% to GBP166.5m in
2021 (2020: GBP157.0m) largely due to higher employee costs.
The Group's statutory cost to income ratio improved to 26%
(2020: 31%) as a result of the increase in total income, primarily
due to higher net interest income and gains from the Group's
hedging activities, which more than offset lower gains on sale of
financial instruments.
The statutory management expense ratio remained at 71bps in 2021
(2020: 71bps) as the Group maintained its strong focus on cost
discipline and efficiency.
The management expense and cost to income ratios in 2021 and
2020 also benefitted from lower spending as a result of lockdowns,
the working from home guidance and some hiring delays in an
increasingly competitive labour market.
The Group continued to make strong progress towards achieving
target synergies from the Combination. As at 31 December 2021, the
Group had delivered run rate savings of c. GBP24m and we expect to
marginally exceed our run-rate pledge by the end of the third
anniversary of the Combination. Integration costs to achieve these
synergies were c. GBP20m with final integration costs expected to
be below the target of GBP39m.
Impairment of financial assets
The Group recorded an impairment credit of GBP4.4m in 2021
(2020: GBP71.0m loss) and the statutory loan loss ratio improved to
-2bps compared to 38bps in 2020.
As the outlook improved, the Group used less severe
forward-looking macroeconomic scenarios in its IFRS 9 models,
albeit with an additional 10% weighting to the downside scenarios,
to reflect future risks from an increase in the cost of living and
affordability pressures from further rises in interest rates. This,
together with the strong house price performance, led to a release
of provisions of GBP24.9m. This release was partially offset by
IFRS 9 model enhancements of GBP4.3m, post model adjustments of
GBP6.8m and other charges of GBP9.4m. Further detail is provided in
the Risk review section.
In 2020, impairment losses were largely due to adverse pandemic
related forward-looking macroeconomic scenarios adopted by the
Group, changes to staging criteria in line with the PRA guidance,
pandemic-related enhancements to the Group's models and fraudulent
activity by a third party on a funding line provided by the
Group.
Impairment of intangible assets
The impairment credit of intangible assets of GBP3.1m related to
a partial reversal of the impairment of the broker relationships
intangible of GBP7.0m recorded in 2020, as lending volumes in 2021
were higher than previously anticipated.
Integration costs
The Group recorded GBP5.0m of integration costs in 2021 (2020:
GBP9.8m) which largely related to redundancy costs and professional
fees for external advice on the Group's future operating
structure.
Exceptional items
Exceptional costs of GBP0.2m in 2021 and GBP3.3m in 2020 related
to the insertion of OSB GROUP PLC as the new holding company and
listed entity of the Group.
Dividend
The Board has recommended a final dividend of 21.1 pence per
share for 2021, which together with the 2021 interim dividend of
4.9 pence per share, represents 30% of underlying profit
attributable to ordinary shareholders. See the Appendix for the
calculation of the 2021 final dividend.
The recommended dividend will be paid on 18 May 2022, subject to
approval at the AGM on 12 May 2022, with an ex-dividend date of 24
March 2022 and a record date of 25 March 2022.
Balance sheet growth
On a statutory basis, net loans and advances to customers grew
by 10% to GBP21,080.3m in 2021 (31 December 2020: GBP19,230.7m),
reflecting originations of GBP4.5bn in the year.
Total assets grew by 8% to GBP24,531.9m (31 December 2020:
GBP22,654.5m), primarily reflecting the growth in loans and
advances, partially offset by acquisition-related adjustments.
On a statutory basis, retail deposits increased by 6% to
GBP17,526.4m from GBP16,603.1m as at 31 December 2020, as the Group
continued to attract new savers. The Group complemented its retail
deposits funding with drawings under the Bank of England's schemes.
In the year, the drawings under the Term Funding Scheme were fully
repaid (31 December 2020: GBP2.6bn) and drawings under the TFSME
increased to GBP4.2bn as at 31 December 2021 from GBP1.0bn at the
end of the prior year.
The CCFS warehouse facility was closed in December 2021.
Liquidity
Both OSB and CCFS operate under the Prudential Regulation
Authority's liquidity regime and are managed separately for
liquidity risk. Both Banks hold their own significant liquidity
buffer of liquidity coverage ratio (LCR) eligible high-quality
liquid assets (HQLA).
Both Banks operate within a target liquidity runway in excess of
the minimum LCR regulatory requirement, which is based on internal
stress testing. Both Banks have a range of contingent liquidity and
funding options available for possible stress periods.
As at 31 December 2021, OSB had GBP1,322.8m and CCFS had
GBP1,318.0m of HQLA LCR eligible assets (31 December 2020:
GBP1,366.7m and GBP1,069.1m, respectively). OSB also held a
significant portfolio of unencumbered prepositioned Bank of England
level C eligible collateral in the Bank of England Single
Collateral Pool. CCFS's portfolio of level C eligible collateral
met the majority of Bank of England drawings (with the remainder
collateralised by UK Government debt) but at year end CCFS did not
have significant levels of available prepositioned unencumbered
collateral, due to the 100% haircuts applied to LIBOR based assets
from 31 December 2021. LIBOR transition plans for the Group have
been submitted to the Bank of England for review, and when
approved, the 100% haircuts will be removed releasing significant
level C eligible collateral for future use in Bank of England
facilities and contingent liquidity.
As at 31 December 2021, OSB had a liquidity coverage ratio of
240% and CCFS 158% (31 December 2020: 254% and 146%, respectively)
and the Group LCR was 196% (31 December 2020: 198%), all
significantly in excess of the 2021 regulatory minimum of 100% plus
Individual Liquidity Guidance.
Capital
The Group's capital position remained exceptionally strong, with
a fully-loaded CET1 ratio of 19.6% and a total capital ratio of
21.2% as at the end of 2021 (31 December 2020: 18.3% and 18.3%,
respectively), with the improvement in both ratios largely due to
capital generation from profitability in the year. In addition, the
total capital ratio benefitted from the issue of GBP150.0m of
Additional Tier 1 securities from the Group's holding company.
The Group had a leverage ratio of 7.9% as at 31 December 2021
(31 December 2020: 6.9%).
The combined Group had a Pillar 2a requirement of 1.27% (2020:
1.18%) of risk-weighted assets (excluding a static integration
add-on of GBP19.5m) as at 31 December 2021.
Summary cash flow statement
Group Group
31-Dec-2021 31-Dec-2020
GBPm GBPm
------------------------------------------- ------------ ------------
Profit before tax 464.6 260.4
Net cash generated/(used in):
Operating activities (461.7) (1,326.3)
Investing activities 80.6 755.8
Financing activities 747.2 838.3
Net increase in cash and cash equivalents 366.1 267.8
Cash and cash equivalents at the beginning
of the period 2,370.6 2,102.8
Cash and cash equivalents at the end 2,736.7 2,370.6
of the period
Cash flow statement
The Group's cash and cash equivalents increased by GBP366.1m
during the year to GBP2,736.7m as at 31 December 2021.
Loans and advances to customers increased by GBP1,844.0m during
the year, partially funded by GBP923.3m of deposits from retail
customers and a decrease in loans and advances to credit
institutions (primarily the Bank of England call account) of
GBP167.4m. Additional funding was provided by cash generated from
financing activities of GBP747.2m and included GBP634.4m of net
drawings under the Bank of England's TFS and TFSME schemes and
GBP36.1m of net proceeds from securitisation of mortgages during
the year. Cash generated from investing activities was
GBP80.6m.
In 2020, loans and advances to customers increased by
GBP1,705.0m during the year, partially funded by GBP348.1m of
deposits from retail customers offset by an increase in loans and
advances to credit institutions (primarily the Bank of England call
account) of GBP154.0m. Additional funding was provided by cash
generated from financing activities of GBP838.3m and included
GBP935.9m of net drawings under the Bank of England's TFS and TFSME
schemes and GBP381.6m of net proceeds from securitisation of
mortgages, partially offset by the repayment of warehouse funding,
ILTR and commercial repos during the year. Cash generated from
investing activities was GBP755.8m, mainly from the sale of RMBS
securities and derecognition of securitisations.
1. See the reconciliation of statutory to underlying results
below.
Summary of underlying results for 2021 and 2020
Group Group
31 Dec 2021 31 Dec 2020
GBPm GBPm
Summary Profit or Loss
Net interest income 650.5 534.0
Net fair value gain/(loss) on
financial instruments 18.5 (5.9)
Gain on sale of financial instruments 2.3 33.1
Other operating income 7.9 9.0
Administrative expenses (161.7) (152.7)
Provisions (0.2) (0.1)
Impairment of financial assets 4.9 (71.2)
Profit before taxation 522.2 346.2
Profit after taxation 393.1 264.9
Key ratios(1)
Net interest margin 282bps 247bps
Cost to income ratio 24% 27%
Management expense ratio 70bps 70bps
Loan loss ratio (2)bps 38bps
Return on equity 24% 19%
Basic EPS, pence per share 86.7 58.1
Extracts from the Statement of Financial Position
GBPm GBPm
Loans and advances to customers 20,936.9 19,020.8
Retail deposits 17,524.8 16,600.0
Total assets 24,403.6 22,472.2
1. For more detail on the calculation of key ratios, see the
Appendix.
Alternative performance measures
The Group presents alternative performance measures (APMs) in
this Strategic report as Management believe they provide a more
consistent basis for comparing the Group's performance between
financial periods.
Underlying results for 2021 and 2020 exclude exceptional items,
integration costs and other acquisition-related items.
APMs 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.
For more information on APMs and the reconciliation between APMs
and the statutory equivalents, see the Appendix.
Underlying profit
The Group's underlying profit before tax was GBP522.2m for the
year, an increase of 51% compared with GBP346.2m in 2020, primarily
due to growth in the loan book, a lower cost of retail funds and an
impairment credit. The Group adopted adverse Covid-19 related
forward-looking assumptions in its IFRS 9 models in 2020 which
resulted in a substantial impairment charge in the prior year. The
Group also benefitted from fair value gains on the Group's hedging
activities in 2021, which partially offset lower gains on the sale
of financial instruments.
Underlying profit after tax was GBP393.1m, up 48% (2020:
GBP264.9m) due to the increase in profit before tax, partially
offset by an increase in the effective tax rate.
The Group's effective tax rate on an underlying basis increased
to 24.7% for 2021 (2020: 23.5%), due to a larger proportion of the
profits being subject to the Bank Corporation Tax Surcharge.
On an underlying basis, return on equity for 2021 improved to
24% (2020: 19%) reflecting higher profitability in the year, and
underlying basic earnings per share increased to 86.7 pence (2020:
58.1 pence), due to the increase in profit after tax.
Net interest income
Underlying net interest income increased by 22% to GBP650.5m in
2021 (2020: GBP534.0m) due primarily to growth in the loan book and
a lower cost of retail funds. It also included net effective
interest rate reset gains of GBP18.6m (2020: GBP2.1m loss) to
reflect updated prepayment assumptions based on customer
behaviour.
The underlying net interest margin increased to 282bps from
247bps in 2020 primarily reflecting a lower cost of retail funds
and EIR reset gains which contributed 8bps. In 2020, underlying NIM
was impacted by a delay in passing on the base rate cuts in full to
retail savers.
Net fair value gain on financial instruments
The underlying net fair value gain on financial instruments was
GBP18.5m in 2021 compared to a loss of GBP5.9m in 2020.
The gain for 2021 included a gain on unmatched swaps of GBP10.3m
(2020: GBP18.0m loss), a gain of GBP2.4m (2020: GBP6.8m loss) from
hedge ineffectiveness and a GBP5.4m gain from amortisation of
inception adjustments (2020: GBP16.7m gain). Other hedging and fair
value movements amounted to a net gain of GBP0.4m (2020: GBP2.2m
gain).
The net gain on unmatched swaps primarily relates to fair value
movements on mortgage pipeline swaps, prior to them being matched
against completed mortgages and was due to an increase in outlook
on the LIBOR and SONIA yield curves. The Group economically hedges
its committed pipeline of mortgages and this unrealised gain
unwinds over the life of the swaps through hedge accounting
inception adjustments.
Gain on sale of financial instruments
The underlying gain of GBP2.3m in 2021 related to the disposal
of A2 notes in the PMF 2019-1B securitisation in February 2021.
In 2020, the underlying gain of GBP33.1m related to the disposal
of the remaining notes under the Canterbury No.1 and PMF 2020-1B
securitisations in January 2020 and a sale of notes from the
Canterbury No.3 securitisation.
Other operating income
On an underlying basis, other operating income was GBP7.9m in
2021 (2020: GBP9.0m) and mainly comprised CCFS' commissions and
servicing fees, including those relating to securitised loans which
have been deconsolidated from the Group's balance sheet.
Administrative expenses
Underlying administrative expenses were up 6% to GBP161.7m in
2021 (2020: GBP152.7m) due primarily to increased employee
costs.
The underlying cost to income ratio improved to 24% (2020: 27%)
as a result of higher total income, primarily due to an increase in
net interest income in the year and gains from the Group's hedging
activities, partially offset by lower gains on sale of financial
instruments.
The underlying management expense ratio remained stable at 70bps
for 2021 (2020: 70bps) as the Group maintained its strong focus on
cost discipline and efficiency.
The management expense and cost to income ratios in 2021 and
2020 also benefitted from lower spending as a result of lockdowns,
the working from home guidance and some hiring delays in an
increasingly competitive labour market.
Impairment of financial assets
The Group recorded an underlying impairment credit of GBP4.9m in
2021 (2020: GBP71.2m loss) representing an underlying loan loss
ratio of -2bps (2020: 38bps).
As the outlook improved, the Group used less severe
forward-looking macroeconomic scenarios in its IFRS 9 models,
albeit with an additional 10% weighting to the downside scenarios,
to reflect future risks from an increase in the cost of living and
affordability pressures from further rises in interest rates. This,
together with the strong house price performance, led to a release
of provisions of GBP24.9m. This release was partially offset by
IFRS 9 model enhancements of GBP4.3m, post model adjustments of
GBP6.8m and other charges of GBP8.9m. Further detail is provided in
the Risk review section.
In 2020, impairment losses were largely due to adverse
pandemic-related forward-looking macroeconomic scenarios adopted by
the Group, changes to staging criteria in line with the PRA
guidance, pandemic-related enhancements to the Group's models and
fraudulent activity by a third party on a funding line provided by
the Group.
Balance sheet growth
On an underlying basis, net loans and advances to customers were
GBP20,936.9m (31 December 2020: GBP19,020.8m) an increase of 10%,
reflecting gross originations of GBP4.5bn in the year.
Total underlying assets grew by 9% to GBP24,403.6m (31 December
2020: GBP22,472.2m), primarily reflecting the growth in loans and
advances.
Retail deposits increased by 6% to GBP17,524.8m (31 December
2020: GBP16,600.0m) as both Banks continued to attract new savers
by offering attractively priced savings products and outstanding
customer service. The balance of the Group's funding requirement
was provided by the Bank of England's TFSME drawings, which as at
31 December 2021 increased to GBP4.2bn from GBP1.0bn at the end of
2020 as the TFS drawings were fully repaid (31 December 2020:
GBP2.6bn).
Reconciliation of statutory to underlying results
2021 2020
Statutory Reverse Reverse
results acquisition- related and exceptional items Underlying results Statutory results acquisition-related and exceptional items Underlying results
GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ----------------- ------------------------------------------ ---------------------
Net interest
income 587.6 62.9(1) 650.5 472.2 61.8 534.0
Net fair value
gain/(loss) on
financial
instruments 29.5 (11.0)(2) 18.5 7.4 (13.3) (5.9)
Gain on sale of
financial
instruments 4.0 (1.7)(3) 2.3 20.0 13.1 33.1
Other operating
income 7.9 - 7.9 9.0 - 9.0
Total income 629.0 50.2 679.2 508.6 61.6 570.2
Administrative
expenses (166.5) 4.8(4) (161.7) (157.0) 4.3 (152.7)
Provisions (0.2) - (0.2) (0.1) - (0.1)
Impairment of
financial
assets 4.4 0.5(5) 4.9 (71.0) (0.2) (71.2)
Impairment of
intangible
assets 3.1 (3.1) - (7.0) 7.0 -
Integration
costs (5.0) 5.0(6) - (9.8) 9.8 -
Exceptional
items (0.2) 0.2(7) - (3.3) 3.3 -
Profit before
tax 464.6 57.6 522.2 260.4 85.8 346.2
Profit after tax 345.3 47.8 393.1 196.3 68.6 264.9
Summary Balance Sheet
Loans and
advances to
customers 21,080.3 (143.4)(8) 20,936.9 19,230.7 (209.9) 19,020.8
Other financial
assets 3,382.3 22.0(9) 3,404.3 3,341.8 36.8 3,378.6
Other
non-financial
assets 69.3 (6.9)(10) 62.4 82.0 (9.2) 72.8
Total assets 24,531.9 (128.3) 24,403.6 22,654.5 (182.3) 22,472.2
Amounts owed to
retail
depositors 17,526.4 (1.6)(11) 17,524.8 16,603.1 (3.1) 16,600.0
Other financial
liabilities 4,908.7 2.3(12) 4,911.0 4296.6 4.4 4,301.0
Other
non-financial
liabilities 72.4 (45.0)(13) 27.4 77.9 (61.4) 16.5
Total
liabilities 22,507.5 (44.3) 22,463.2 20,977.6 (60.1) 20,917.5
Net assets 2,024.4 (84.0) 1,940.4 1,676.9 (122.2) 1,554.7
1. Amortisation of the net fair value uplift to CCFS' mortgage
loans and retail deposits on Combination
2. Inception adjustment on CCFS' derivative assets and
liabilities on Combination
3. Recognition of a loss on sale of securitisation notes
4. Amortisation of intangible assets recognised on
Combination
5. Adjustment to expected credit losses on CCFS loans on
Combination
6. Integration costs related to the Combination, see note 13 to
the accounts
7. Reversal of exceptional items, see note 14 to the
accounts
8. Recognition of a fair value uplift to CCFS' loan book less
accumulated amortisation of the fair value uplift and a movement on
credit provisions
9. Fair value adjustment to hedged assets
10. Recognition of acquired intangibles on Combination
11. Fair value adjustment to CCFS' retail deposits less
accumulated amortisation
12. Fair value adjustment to hedged liabilities
13. Adjustment to deferred tax liability and other
acquisition-related adjustments
Risk review
Executive summary
Continued progress was made in 2021 against the Group's
strategic risk management objectives for the year, including the
priority areas set out in the Annual Report and Accounts for the
year ended 31 December 2020.
The Group delivered strong operating and financial performance
against the backdrop of an improving economic outlook. However, the
Group remains cognisant of the continued risks which could emerge
from pandemic related disruption, future economic shocks and a
deteriorating geopolitical situation in Europe. Prolonged
inflationary pressure coupled with monetary policy tightening could
feed through into consumer affordability and confidence.
It is important to note that the strong performance was
delivered within the confines of a prudent risk appetite. The Group
operated within the boundaries of its risk appetite limits during
2021. The Group's overall asset quality remained stable with
respect to customer behaviour and affordability levels, whilst
collateral values improved during the year. Arrears levels remained
broadly stable, although certain portfolio segments experienced
increases as the impact of the pandemic took effect, which were
offset by improvements in other segments.
Group risk appetite statements and limits were designed and
implemented, based on aligned approaches calibrated for anticipated
financial forecasts and stress test analysis. Risk appetite is
monitored and managed at the Group and at the solo Bank levels.
All risk management activities were considered within the
confines of the Board approved risk appetite supported by a set of
comprehensive frameworks, policies, systems and controls.
Established procedures ensured that all risks were subject to the
three lines of defence governance and oversight principles. The
Group operated with defined roles and responsibilities for risk
management, with oversight at the Board and executive level with
independent assurance provided by the Group's Internal Audit
function. The Group's risk management and governance arrangements
were leveraged effectively to guide and support decision making
during periods of heightened uncertainty and change.
Active monitoring and assessment of the Group's credit risk
portfolio drivers is a critical risk management discipline. This
was achieved through the active monitoring of credit portfolio
performance indicators, sensitivity and stress test analysis and
thematic deep dives. Cross-functional expertise was leveraged to
review emerging trends and take pre-emptive actions in accordance
with the defined risk appetite and governance standards. The
Group's investment in advanced credit analytics greatly enhanced
monitoring capabilities, improved forward-looking assessments and
supported stress testing and capacity planning analysis. This in
turn allowed the Board to make more informed decisions in uncertain
macroeconomic and political environments.
Ensuring that the Group continued to maintain expected credit
loss provisions based on its underlying prudent risk appetite, was
an important consideration of the Board and senior management.
Expected credit loss provisions were assessed leveraging the
Group's IFRS 9 approved methodologies, individually assessed
provisioning approaches and portfolio segment based stress and
sensitivity analysis. Benchmarking analysis was provided to the
Board and Senior Management, enabling review and challenge of
provision coverage levels and underlying macroeconomic
scenarios.
The Group also maintained strong levels of capital and funding
throughout 2021, being mindful of the heightened levels of future
uncertainty. Capital and funding levels were assessed against the
impacts of extreme but plausible economic, business and operational
shocks and reflected in the Group's solvency and liquidity risk
appetite.
The Group's Risk and Compliance functions made good progress
against planned strategic risk and compliance objectives including
further embedding the Group Strategic Risk Management Framework and
enhancing underlying systems and controls. The Group continued to
invest in people and technology with key hires made to focus on
operational continuity in resolution, model development and
governance, data governance and controls, solvency and operational
risk management. The Group's second line functions continued to
operate effectively using a shared service operating model and
delivered all key objectives during the pandemic.
The Group's capital management framework was further enhanced
during the year, whilst considerable time was spent on running a
number of capital planning scenarios and sensitivities across a
range of potential Basel 3.1 outcomes. The Group's Internal
Adequacy Assessment Process (ICAAP) was further enhanced during the
year and subjected to a supervisory review and evaluation process
(CSREP) by the Prudential Regulation Authority (PRA). A number of
reverse stress tests were performed to provide visibility to the
Group and entity Boards with respect to the severity of the
macroeconomic scenario which could result in the Group and its
entities breaching minimum regulatory requirements, which were
utilised in the going concern and viability assessments.
Both the regulated Bank entities continued to retain prudent
levels of liquidity in the context of the uncertain economic and
business outlook. Particular attention was directed to the
monitoring of the entity level liquidity positions, focusing on
retail savings customer behaviour, competitor actions and product
changes within the wider savings market. Given the increasing
prominence of securitisation as a wholesale funding source, the
Group undertook a review to identify further areas of enhancement
with respect to systems and controls. This review was completed and
the implementation of identified enhancements is underway.
The Group engaged in a number of Financial Conduct Authority
thematic reviews and continued to invest in the level of subject
matter compliance experts, to facilitate good customer outcomes and
treat customers fairly and be well-positioned to respond to changes
in regulatory expectations and industry best practices.
Progress was made in developing and embedding policies,
processes and controls to ensure compliance with the Bank of
England's Resolvability Assessment Framework (RAF), including
meeting the requirements for operational continuity in resolution.
The Group also made significant progress in establishing the
required infrastructure to meet its future Minimum Requirements for
own Funds and Eligible Liabilities (MREL).
The Group is committed to reviewing its risk and controls
framework considering the operating environment, business operating
model and any learnings from recent risk incidents. Future pandemic
related disruptions, ongoing integration activity and regulatory
initiatives could result in an increase in the number of
operational risk incidents observed. The Group continuously
leverages its operational risk management and governance frameworks
to identify, assess and appropriately manage all operational
incidents. Reflecting on the risk events realised within the year,
resulted in additional focus and resources being assigned to
migrating the Group onto a single operational risk system, whilst
increasing capacity to continuously review, assess and test all key
risks and controls.
The Group leveraged its operational resilience capabilities and
framework to effectively manage any disruption caused by the
pandemic. The Group continued to review and enhance its operational
resilience capabilities and framework in the context of emerging
best practice standards, regulatory expectations and the changing
nature of its operating model.
The Group views fair customer outcomes and provision of timely
and effective support to customers in distress as a central pillar
supporting its mission, vision and values. The Group has customer
centric policies and procedures in place which are subject to
ongoing reviews and benchmarking. The Group kept its customers
front and centre during all phases of the pandemic ensuring
customers continue to be treated fairly and in line with regulatory
guidelines. The Group was also appropriately attuned to the
emerging industry and regulatory focus on customer vulnerability
acknowledging planned changes in consumer duty regulation.
The Group's Internal Ratings Based (IRB) Programme made tangible
progress against plan during the year. The Group's end state IRB
models are passing through the final stages of governance, whilst
an extensive self-assessment against IRB requirements has been
completed and the required application documents have been drafted
and are going through our governance process. The IRB capabilities
developed by the Group continue to be integrated into key risk and
capital management processes, and are already informing strategic
decision making and business planning activities. The anticipated
delay in Basel 3.1 implementation and the one year extension to the
Group's MREL deadlines, provided the Group with the opportunity to
enhance our level of end state compliance prior to submitting our
module 1 application. We continue to engage with the PRA to agree a
submission date.
During the year, progress was made in implementing further
enhancements across the Group's strategy, governance, risk
management arrangements and disclosures relating to climate change
risk, to facilitate compliance with recommendations set out in the
Prudential Regulation Authority supervisory statement SS3/19.
Climate risk was captured within the Group's enterprise risk
register and a specific climate risk management framework was
developed which is a sub- framework of the overarching Group
Strategic Risk Management Framework. A dedicated Climate Risk
Committee was established to ensure enhancements continued to be
delivered as required. The Group refreshed and enhanced analysis
identifying and quantifying the risks relating to climate change in
relation to the Group's loan portfolios. Impairment and capital
considerations were assessed via the ICAAP. For further detail
please see the TCFD report.
The Group was subjected to a fraud which it became aware of in
early 2021, in one of its third party funding lines which upon
detailed investigation was deemed an isolated incident. A provision
was raised in the 2020 annual accounts and adjusted during 2021 as
required. The impact of this incident was appropriately reflected
in the Groups risk appetite and was subject to appropriate
oversight and review by the Board and senior management.
Priority areas for 2022
A significant level of uncertainty remains around the UK
economic outlook and operating environment for 2022 and beyond.
Therefore, continued close monitoring of the Group's risk profile
and operating effectiveness remains a key priority. Other
priorities include:
-- Continue to leverage the Group's Strategic Risk Management Framework to
actively identify, assess and manage risks in line with approved risk
appetite.
-- Fully integrate the Group's Risk and Control Self-Assessment (RCSA)
processes into a Group wide risk system which will ensure more dynamic
and continuous assessment, adherence to common standards, an improved
user interface and increased review and challenge.
-- Leverage enhancements made across the Group's portfolio analytical
capabilities to improve risk-based pricing, balance sheet management,
capital planning and stress testing.
-- Focus on the delivery of all required capabilities to ensure compliance
with the Bank of England's Resolvability Assessment Framework (RAF) and
Operational Continuity in Resolution (OCIR).
-- Further enhance management information to facilitate a more informed
oversight of the Group's risk profile.
-- Make continued progress in obtaining IRB accreditation and further
leverage capabilities within wider risk management disciplines such as
IFRS 9 ECL calculations, underwriting, existing customer management and
collections to drive portfolio performance benefits and improvements in
shareholder returns.
Strategic Risk Management Framework
The Strategic Risk Management Framework (SRMF) sets out the
principles and approach with respect to the management of the
Group's risk profile in order to successfully fulfil its business
strategy and objectives, including compliance with all conduct and
prudential regulatory objectives.
Post Combination, the Group implemented a transitional Group
risk management framework to drive a consistent approach to risk
identification and assessment across both regulated banking
entities. During 2021, sufficient progress was made in implementing
a Group approach across all key principal risks, which resulted in
the framework no longer being transitional in nature. Over time
further enhancements will be made as required.
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 risk-based decisions to be taken in a timely
manner, ensuring the interests and expectations of key stakeholders
can be met.
The SRMF also provides a structured mechanism to align critical
components of an effective approach to risk management. The SRMF
links overarching risk principles to day-to-day risk monitoring and
management activities.
The modular construct of the SRMF provides 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 -- the Group established a set of
risk management and oversight principles which inform and guide all
underlying risk management and assessment activities. These
principles are informed by the Group's Purpose, Vision and
Values.
2. Risk strategy and appetite -- the Group established a clear
business vision and strategy which is supported by an articulated
risk vision and underlying principles. The Board is accountable for
ensuring that the Group's SRMF is structured against the strategic
vision and is delivered within agreed risk appetite thresholds.
3. Risk assessment and control -- the Group is committed to
building a safe and secure banking operation via an integrated and
effective enterprise strategic risk management framework.
4. Risk definitions and categorisation -- the Group sets out its
principal risks which represent the primary risks to which the
Group is exposed.
5. Risk analytics -- the Group uses quantitative analysis and
statistical modelling to help improve its business decisions.
6. Stress testing and scenario development -- stress testing is
an important risk management tool which is used to evaluate the
potential effects of a specific event and or movement in a set of
variables to understand the impact on the Group's financial and
operating performance. The Group has a dedicated stress testing
framework which sets out the Group's approach to stress
testing.
7. Securitisation framework -- the Group developed a
securitisation framework which articulates the key components of a
securitisation issuance that are relevant to the Group. This
sub-framework is now reflected within the wider SRMF. As
enhancement areas are identified and implemented, the framework
will be updated as required.
8. Risk data and information technology -- the maintenance of
high-quality risk information, along with the Group's data
enrichment and aggregation capabilities, are central to the Risk
function's objectives being achieved.
9. Risk Management Framework's policies and procedures -- risk
frameworks, policies and supporting documentation outline the
process by which risk is effectively managed and governed within
the Group.
10. Risk management information and reporting -- the Group
established a comprehensive suite of risk MI and reports covering
all principal risk types.
11. Risk governance and function organisation -- risk governance
refers to the processes and structures established by the Board to
ensure that risks are assumed and managed within the Board-approved
risk appetite, with clear delineation between risk taking,
oversight and assurance responsibilities. The Group's risk
governance framework is structured to adhere to the 'three lines of
defence' model.
Group organisational structure
The Board has ultimate responsibility for the oversight of the
Group's risk profile and risk management framework and where it
deems it appropriate, it delegates its authority to relevant
Committees. The Board and its Committees are provided with
appropriate and timely information relating to the nature and level
of the risks to which the Group is exposed and the adequacy of the
risk controls and mitigants.
The Internal Audit function provides independent assurance to
the Board and its Committees as to the effectiveness of the systems
and controls and the level of adherence with internal policies and
regulatory requirements. The Board also commissions third party
subject matter expert reviews and reports in relation to issues and
areas requiring deeper technical assessment and guidance.
Risk appetite
The Group aligns its strategic and business objectives with its
risk appetite which defines the level of risk which the Group is
willing to accept, 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.
The risk appetite is calibrated to reflect the Group's strategic
objectives, business operating plans, as well as external economic,
business and regulatory constraints. In particular, the risk
appetite is calibrated to ensure that the Group continues to
deliver against its strategic objectives and operates with
sufficient financial buffers even when subjected to plausible but
extreme stress scenarios. The objective of the Board risk appetite
is to ensure that the strategy and business operating model is
sufficiently resilient.
The Group's 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. Currently, there are two regulated banking entities within
the Group, risk appetite metrics and thresholds are set at both
individual entity and Group levels.
The Group's risk appetite is subject to a full refresh annually
across all principal risk types and a mid-year review where any
metrics can be assessed and updated as appropriate.
Management of climate change risk
During 2021 further progress was made in developing and
embedding the Group's climate risk management approach within the
Group's wider risk management arrangements. This included the
development of a specific Climate Risk Management Framework,
implementation of an ESG Committee and a dedicated Climate Risk
Committee and ESG steering group.
The Group is exposed to the following climate related risks:
-- Physical risk -- relates to climate or weather-related events such as
heatwaves, droughts, floods, storms, rising sea levels, coastal erosion
and subsidence. These risks could result in financial losses with respect
to the Group's own real estate and customer loan portfolios.
-- Transition risk -- arising from the effect of adjusting to a low-carbon
economy and changes to appetite, strategy, policy or technology. These
changes could result in a reassessment of asset values and increased
credit exposures for banks and other lenders as the costs and
opportunities arising from climate change become apparent. Reputational
risk arises from a failure to meet changing and more demanding societal,
investor and regulatory expectations.
Approach to analysing climate risk
As part of the ICAAP, the Risk function engaged with a third
party to provide detailed climate change assessments at a
collateral level for the Group's loan portfolios. The data was in
turn utilised to conduct profiling and financial risk
assessments.
a) Climate scenarios considered
The standard metric for assessing climate change risk is the
global greenhouse gas concentration as measured by Representative
Concentration Pathway (RCP) levels. The four levels adopted by the
Intergovernmental Panel for Climate Change for its fifth assessment
report (AR5) in 2014 are:
Emissions scenario
Scenario Change in temperature
(degC) by 2100
-------- ---------------------
RCP 2.6 1.6 (0.9 -- 2.3)
-------- ---------------------
RCP 4.5 2.4 (1.7 -- 3.2)
-------- ---------------------
RCP 6.0 2.8 (2.0 -- 3.7)
-------- ---------------------
RCP 8.5 4.3 (3.2 -- 5.4)
-------- ---------------------
Note: figures within the brackets above detail the range in
temperatures. Single figures outside the brackets indicate the
averages.
b) Climate risk perils considered
The following three physical perils of climate change were
assessed:
-- Flood - wetter winters and more concentrated rainfall events will
increase flooding.
-- Subsidence - drier summers will increase subsidence via the shrink or
swell of clay.
-- Coastal erosion - increased storm surge and rising sea levels will
increase the rate of erosion.
For each of the physical perils and climate scenarios detailed
above, a decade by decade prediction, from the current year to 2100
on the likelihood of each was provided.
For flood and subsidence, the likelihood took the form of a
probability that a flood or subsidence event would occur over the
next ten years. For coastal erosion the distance of the property to
the coast line is provided by scenario and decade.
All peril impacts are calculated at the property level to a one
metre accuracy. This resolution is essential because flood and
subsidence risk factors can vary considerably between neighbouring
properties.
In addition to the physical perils, the current Energy
Performance Certificate (EPC) of each property was considered to
allow for an assessment of transitional risk due to policy
change.
Both the OSB and CCFS portfolios were profiled against each of
the perils detailed under the best (RCP 2.6) and worst (RCP 8.5)
climate scenarios during the 2020's. The Risk function focused on
performance over the next ten years, considering the average
expected life of a mortgage.
-- Flood risk
By the 2030's, at the Group level, the percentage of properties
predicted to experience a flood is expected to increase from 0.48%
in the least severe scenario to 0.50% in the most severe scenario.
Both scenarios represent a low proportion of the Group's loan
portfolios.
-- Subsidence
In the 2030's, at the Group level the percentage of properties
predicted to experience subsidence is expected to increase from
0.41% in the least severe scenario to 0.43% in the most severe
scenario. The outcome of both scenarios represents a low proportion
of the Group's loan portfolios.
-- Coastal erosion
There are two elements to coastal erosion risk. The first
relates to the proximity of the property to the coast. The second
depends on whether the area in which the property is located is
likely to experience coastal erosion in the future.
Both Banks have over 93% of their portfolios more than 1000
metres from the coastline, indicating a very low coastal erosion
risk across the Group.
The CCFS bank entity has only twelve properties within 100m of
the coastline, whilst the OSB bank entity has only nine.
c) Energy Performance Certificate profile
The EPC profile of both bank entities follows a similar trend to
the national average. At the Group level 35% of properties have an
EPC of C or better, 48% have an EPC of D, with 15% in E and
negligible percentages in F or G. 90% of the properties supporting
the Group's loan portfolios have the potential to have at least an
EPC rating of C.
Value at Risk assessment
The Value at Risk to the bank, measured through change to
Expected Credit Loss (ECL) and Standardised and IRB Risk Weighted
Assets (RWAs), is assessed through the application of stress to
collateral valuations as per the methodology outlined below.
Impacts are assessed against the latest year end position.
Climate change scenarios
To get the full range of impacts, the most and least severe
climate change stress scenarios were considered.
The most severe, RCP 8.5, assumes there will be no concerted
effort at a global level to reduce greenhouse gas emissions. Under
this scenario, the predicted increase in global temperature is 3.2
- 5.4degC by 2100.
The least severe scenario, RCP 2.6, assumes early action is
taken to limit future greenhouse gas emissions. Under this
scenario, the predicted increase in global temperature is
0.9-2.3degC by 2100.
Methodology -- physical risks
For the physical risks, updated valuations are produced to
reflect the impact of a flood, subsidence and coastal erosion
risk.
The ECL and RWAs are then recalculated taking these reduced
valuations as inputs. These reduced valuations directly impact the
loan to values (LTVs), and hence loss given default (LGD).
Methodology -- transitional risks
OSB Group's expectation is that, under the early action scenario
(RCP 2.6), the government will require all properties to achieve
EPC A, B and C grades where possible. We considered this risk for
Buy-to-Let accounts only.
If a property is already efficient (i.e. EPC grade of C, B or A)
then the potential transitional risk is assumed to be zero as they
already meet the requirements.
If a property's potential EPC grade is less than C (which is the
minimum government target) then the property is given a target
energy efficiency equal to that of its maximum potential energy
efficiency. The difference between the property's target and
current energy efficiencies dictate
the costs of the renovations required to meet the
regulation.
Once the cost of renovation has been estimated the LGD (to
reflect valuation impacts) and the probability of default (PD) (to
reflect affordability impacts) are stressed to recalculate the
ECL.
The valuation impacts are also used to recalculate risk weighted
asset values (RWAs).
To apply the LGD stress, a relationship between LGD and LTV was
derived. The LTV was stressed by subtracting the costs of
renovations from the property value. This stressed LTV was then
mapped back to a stressed LGD.
The stressed PD or LGD is then used to derive a stressed
ECL.
When it comes to calculating RWAs, the costs of meeting the EPC
guidelines are subtracted from the property valuations. This causes
a change in the loan to value level which leads to an increase in
RWAs.
d) Analysis outcome
The Group is exposed to a non-material EPC or capital risk,
based on the collateral and EPC profile of the Group's loan
portfolios.
e) Planned enhancements during 2022
In the future, the Group's climate risk data and scenario
analysis capabilities will be enhanced in line with industry best
practices.
During 2022 key areas of enhancement include:
-- Further embedding of the Climate Risk Management Framework.
-- Development of climate risk appetite statements and limits.
-- Further enhancements to the climate risk scenario analysis.
-- Embedding climate risk within the risk and control assessment (RCSA)
process across the Group.
Principal risks and uncertainties
1. Strategic and business risk
The risk to the Group's earnings and profitability arising from
its strategic decisions, change in business conditions, improper
implementation of decisions or lack of responsiveness to industry
changes.
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 strong and
dependable savings franchises. 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.
1.1 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 Group Executive
Committee of business and financial performance against the
strategic agenda and risk appetite. The financial plan is subject
to regular reforecasts. The balanced business scorecard is the
primary mechanism to support how the Board 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 delivered strong performance against targets during
2021 despite the continued impact of the pandemic. Future
improvements in unemployment levels and house prices, are somewhat
offset by the risks relating to rising inflation and future
interest rate rises.
Competition has increased across both the lending and savings
markets, however the Group has strong operational capabilities and
financial resources to continue to compete effectively.
1.2 Economic environment
The economic environment in the UK is an important factor
impacting the strategic and business risk profile.
A macroeconomic downturn may impact the credit quality of the
Group's existing loan portfolios and may influence future business
strategy as the Group's new business proposition becomes less
attractive due to lower returns.
Mitigation
The Group's business model as a secured lender helps limit
potential credit risk losses and supports performance through the
economic cycle. The Group continues to utilise and enhance its
stress testing capabilities to assess and minimise potential areas
of macroeconomic vulnerability.
Direction: unchanged
Economic risks during 2021 related to pressure on economic
growth due to the impact of pandemic restrictions resulting in
rising unemployment and falling house prices. During the year these
risks migrated to risks relating to rising inflation levels and
interest rates, which are in part mitigated by low unemployment
levels and stable house prices.
1.3 Competition risk
The risk that new bank entrants and existing peer banks shift
focus to the Group's market sub-segments, increasing the level of
competition.
Mitigation
The Group continues to develop products and services which meet
the requirements of the markets in which it operates. The Group has
a diversified suite of products and capabilities to utilise, along
with significant financial resources to support a response to
changes in competition.
Direction: increased
Competition risk progressively intensified across core lending
sectors in 2021, as competitors' lending appetites increased with
the improvement in the economic outlook.
2. Reputational risk
The potential risk of adverse effects that can arise from the
Group's reputation being affected due to factors such as unethical
practices, adverse regulatory actions, customer dissatisfaction and
complaints or negative/adverse publicity.
Reputational risk can arise from a variety of sources and is a
second order risk -- the crystallisation of a credit risk or
operational risk can lead to a reputational risk impact.
Risk appetite statement: The Group does not knowingly conduct
business or organise its operations to put its reputation and
franchise value at risk.
2. 1 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 in place to proactively identify and manage
potential sources of reputational risk.
Direction: decreased
The Group delivered strong performance across all core targets,
despite the disruptions caused by the pandemic.
3. 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.
Risk appetite statement: The Group seeks to maintain a
high-quality lending portfolio that generates adequate returns,
under normal and stressed conditions. 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 stress scenario.
3.1 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 of default the Group's lending is secured,
some borrowers may fail to maintain the value of the security,
which may result in a loss being incurred.
Mitigation
Across both OSB and CCFS, a robust underwriting assessment is
undertaken to ensure that a customer has the ability and propensity
to repay and sufficient security is available to support the new
loan requested. At CCFS, an automated scorecard approach is taken,
whilst OSB utilises a bespoke manual underwriting approach,
supplemented by bespoke application scorecards to inform the
lending decision.
Should there be problems with a loan, the Collections and
Recoveries team works with customers who are 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 based more on security, and is scrutinised
by the Group's independent Real Estate team as well as by external
valuers.
Development finance lending is extended only after a deep
investigation of the borrower's track record and stress testing the
economics of the specific project.
Direction: unchanged
The drivers of borrower default risk have shifted from the risk
around rising unemployment and declining house prices, to rising
inflation and consequent increases in interest rates impacting
affordability for accounts which revert onto higher interest rates
and an increasing risk of borrower default.
3.2 Macroeconomic downturn
A broad deterioration in the UK economy would adversely impact
both the ability of borrowers to repay loans and the value of the
Group's security. Credit losses would impact the Group's lending
portfolios, 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
Group 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 continues to meet its regulatory
requirements.
Direction: Unchanged
The economic outlook is uncertain although it improved in 2021,
future risks remain related to further COVID-19 variants, rising
inflation and resultant increases in interest rates driving higher
levels of customer defaults, falling collateral values and rising
impairment levels.
3.3 Wholesale credit risk
The Group 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's wholesale credit risk exposure remains limited to
high-quality counterparties, overnight exposures to clearing banks
and swap counterparties.
4. Market risk
Potential loss due to changes in market prices or values.
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 interest rates and it limits its
mismatched and basis risk exposures.
4.1 Interest rate risk
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 includes the risks arising from imperfect hedging of exposures
and the risk of customer behaviour driven by interest rates, e.g.
early redemption.
Mitigation
The Group's Treasury function actively hedges to match the
timing of cash flows from assets and liabilities.
Direction: unchanged
The Group's simple asset and liability structure and ongoing
careful management resulted in the level of interest rate risk
remaining unchanged in 2021.
4.2 Basis risk
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, administered,
other discretionary variable rates, or that received on call
accounts with other banks.
Mitigation
Due to the Group balance sheet structure, no active management
of basis risk was required by OSB Group in 2021.
Direction: unchanged
Product design and balance sheet structure enabled the Group to
maintain the overall level of basis risk across both Banks
throughout the year.
5. Liquidity and funding risk
The risk that the Group, although solvent, does not have
sufficient financial resources to enable it to meet its obligations
as they fall due.
Risk appetite statement: The Group will maintain sufficient
liquidity to meet its liabilities as they fall due under normal and
stressed business conditions; this will be achieved by maintaining
strong retail savings franchises, supported by high-quality liquid
asset portfolios comprised of cash and readily-monetisable assets,
and through access to pre-arranged secured funding facilities. The
Board requirement to maintain balance sheet resources sufficient to
survive a range of severe but plausible stress scenarios is
interpreted in terms of the liquidity coverage ratio and the ILAAP
stress scenarios.
5.1 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 profitability.
Mitigation
The Group's funding strategy is focused on a highly stable
retail deposit franchise. The Group's large number of depositors
provides diversification, where a high proportion of balances are
covered by the FSCS protection scheme, largely mitigating the 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 has further diversified its retail channels by
expanding the range of pooled deposit providers used.
The Group proactively manages its savings proposition through
both the Liquidity Working Group and the Group Assets and
Liabilities Committee. Finally, the Group has prepositioned
mortgage collateral and securitised notes with the Bank of England
which allows it to consider alternative funding sources to ensure
it is not solely reliant on retail savings. The Group also has a
mature RMBS programme.
Direction: unchanged
The Group's funding levels and mix remained strong throughout
the year.
During the year, OSB and CCFS were both able to attract
significant flows of new deposits and depositors when required.
5.2 Wholesale funding stress
A market-wide stress could close securitisation markets or make
issuance costs unattractive for the Group.
Mitigation
The Group continuously monitors wholesale funding markets and is
experienced in taking proactive management actions where
required.
The Group issued two securitisations in 2021 and the Group saw
strong demand for secured funding issuance.
Direction: unchanged
The Group's range of wholesale funding options available,
including repo or sale of retained notes, collateral upgrade trades
remained broadly unchanged.
5. 3 Refinancing of TFSME
In the year, the Group repaid its TFS drawings in full and drew
a total of GBP4.2bn under the TFSME creating a refinancing
concentration around the maturity of the scheme.
Mitigation
The Group has a TFSME allowance significantly above its
wholesale funding requirements which allowed the TFS scheme to be
fully refinanced by TFSME.
Direction: decreased
Drawings made across the TFSME scheme, repaying TFS borrowings
during the year, extended the repayment profile of wholesale
funding. This coupled with the fact that the Group has a
well-established retail deposit franchises and established
securitisation capability resulted in this risk decreasing in the
year.
6. Solvency risk
The potential inability of the Group to ensure that it maintains
sufficient capital levels for its business strategy and risk
profile under both the base and stress case financial
forecasts.
Risk appetite statement: the Group seeks to ensure that it is
able to meet its Board-level capital buffer requirements under a
severe but plausible stress scenario. The solvency risk appetite is
informed by the Group's prudential requirements and strategic and
financial objectives.
We manage our capital resources in a manner which avoids
excessive leverage and allows us flexibility in raising
capital.
6.1 Deterioration of capital ratios
Key risks to solvency arise from balance sheet growth and
unexpected losses which can result in the Group'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 Group operates from a strong capital position and
has a consistent record of strong profitability.
The Group 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 Group 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 provides feedback
through the consultation process.
Direction: decreased
The Group's stable credit profile and ongoing profitability,
coupled with capital structure optimisation during 2021 via the
issuance of AT1 securities, means the Group's capital resources
have improved.
The Group has been provided with an extra year to meet its
interim and end state MREL requirements, which helps mitigate the
risks around markets not being supportive of issue and the
resulting cost.
Risks remain around adverse credit profile performance,
resulting from further COVID-19 variants, rising inflation and
interest rates.
Uncertainty remains as to the impact of Basel 3.1, with the
implementation date likely to be beyond the initially planned 1 Jan
2023 date moving out to potentially 2025.
7. Operational risk
The risk of loss or a negative impact on the Group resulting
from inadequate or failed internal processes, people or systems, or
from external events.
Risk appetite statement: The Group's operational processes,
systems and controls are designed to minimise disruption to
customers, damage to the Group's reputation and any detrimental
impact on financial performance. The Group actively promotes the
continuous 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.
7.1 IT security (including cyber risk)
The risks resulting from a failure to protect the Group's
systems and the data within them. This includes both internal and
external threats.
Mitigation
The Group invested significantly in enhancing its protection
against IT security threats, deploying a series of tools designed
to identify and prevent network/system intrusions. This is further
supported by documented and tested procedures intended to ensure
the effective response to a security breach.
Direction: unchanged
The Group has well-established processes to allow it to operate
effectively when employees work from home and the cyber risks
related to working remotely.
Whilst IT security risks continue to evolve, the level of
maturity of the Group's controls and defences has significantly
increased, supported by dedicated IT security experts.
The Group's ongoing penetration testing continues to drive
enhancements by identifying potential areas of risk.
7. 2 Data quality and completeness
The risks resulting from data being either inaccurate or
incomplete.
Mitigation
The Group established a dedicated Data Strategy Programme,
designed to ensure a consistent approach to the maintenance and use
of data. This includes both documented procedures and frameworks
and also tools intended to improve the consistency of data use.
Direction: unchanged
Progress was made in 2021 to embed Group-wide governance
frameworks in part driven by the Group's IRB project. Further work
is planned for 2022, to move closer to the Group's target end
state.
7.3 Change management
The risks resulting from unsuccessful change management
implementations, including the failure to respond effectively to
release-related incidents.
Mitigation
The Group recognises that implementing change introduces
significant operational risk and has therefore implemented a series
of control gateways designed to ensure that each stage of the
change management process has the necessary level of oversight.
Direction: increased
The Group continued to adopt an ambitious change agenda,
although core planned integration activity is largely complete. In
2021 this risk was monitored and managed well, however further
change is planned in 2022, against the challenging operating
environment resulting from the risk of new COVID-19 variants and
ongoing macroeconomic uncertainty.
7.4 IT failure
The risks resulting from a major IT application or
infrastructure failure impacting access to the Group's IT
systems.
Mitigation
The Group continues to invest in improving the resilience of its
core infrastructure. It has identified its prioritised business
services and the infrastructure that is required to support them.
Tests are performed regularly to validate its ability to recover
from an incident.
Direction: unchanged
Whilst progress was made in reducing both the likelihood and
impact of an IT failure, the risks remain, in particular due to new
hybrid working arrangement. Further work is planned during
2022.
7.5 Organisational change and integration
The risks resulting from the Group's ongoing integration
activities, including systems, people and infrastructure.
Mitigation
There is a low risk integration project plan (e.g. no
large-scale integration-related IT project change planned). The
Group has an experienced and capable project management office,
with close oversight and direction provided by the Group
Executive.
Direction: unchanged
To date, organisational change resulting from the integration
project has been managed well and is largely complete. Further work
is required to reach the target end state and carefully considered
plans, strong risk identification, monitoring and management
capabilities remain in place.
8. Conduct risk
The risk that the Group's behaviours or actions result in
customer detriment or negatively impact the integrity of the
markets in which it operates.
Risk appetite statement: The Group aims to operate and conduct
its business to the highest standards which ensure integrity and
trust with respect to how the Group operates and manages its
relationships with key stakeholders. In this regard, the Group has
no appetite to knowingly assume risks which may result in an unfair
outcome for customers and/or cause disruptions in the market
sub-segments in which it operates. However, where the Group
identifies potential conduct risks it will proactively intervene by
managing, escalating and mitigating them promptly to ensure a fair
outcome is achieved.
8.1 Product suitability
Whilst the Group originates relatively simple products, there
remains a risk that products (primarily legacy) may be deemed to be
unfit for their original purpose in line with 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 remained low as a result of increased awareness
and dedicated oversight, the Group remains aware of the changes to
the regulatory environment and their possible impact on product
suitability.
8.2 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.
Non-compliance with GDPR regulations.
Mitigation
In addition to a series of network/system controls, the Group
performs extensive root cause analysis of any data leaks in order
to ensure that the appropriate mitigating actions are taken.
The Group has a dedicated project to drive compliance with GDPR
regulation.
Direction: unchanged
Further controls were introduced during 2021, although
network/system threats continue to evolve in both volume and
sophistication.
Good progress was made across key GDPR project work streams.
8.3 Integration risk
The risk that the integration programme directly or indirectly
causes poor outcomes for customers and the market.
Mitigation
During the integration process, the Group is committed to
adopting a low-risk approach with a view to taking reasonable steps
to avoid causing poor outcomes for its customers and the market.
The Group will conduct detailed analysis of potential customer harm
associated with particular integration steps.
Direction: decreased
Integration activity is largely complete with no material issues
being identified to date. Controls are in place to ensure that the
integration programme does not result in poor customer
outcomes.
9. Compliance/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.
Risk appetite statement: The Group views ongoing conformity with
regulatory rules and standards across all the jurisdictions in
which it operates as a critical component 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 given its business operating model.
9.1 Prudential regulatory changes
The Group continues to see a high volume of key compliance
regulatory changes that impact its business activities. These
include the implementation of Basel 3.1 capital rules and increased
Resolvability Assessment Framework requirements, including updated
minimum requirements for own funds and eligible liabilities
('MREL').
Mitigation
The Group has an effective horizon scanning process to identify
regulatory change.
All significant regulatory initiatives are managed by structured
programmes overseen by the Project Management team and sponsored at
Executive level.
The Group has proactively sought external expert opinions to
support interpretation of the requirements and validation of its
response, where required.
Direction: unchanged
The Group continues to have a high level of interaction with UK
regulators and continues to identify and respond effectively to all
regulatory changes.
9.2 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.
Product design, underwriting, arrears and forbearance policies
are misaligned to regulatory expectations which result in customers
not being treated fairly, particularly those experiencing financial
hardship or vulnerable customers, with the potential for
reputational damage, redress and other regulatory actions.
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.
All Group entities utilise underwriting, arrears, repossession,
forbearance and vulnerable customer policies which are designed to
comply with regulatory rules and expectations. These policies
articulate the Group's commitment to ensuring that all customers,
including those who are vulnerable or experiencing financial
hardship, are treated fairly, consistently and in a way that
considers their individual needs and circumstances.
The Group does not tolerate any systematic failure to deliver
fair customer outcomes. On an isolated basis, incidents can result
in detriment due 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 prevent recurrence.
Direction: increased
The level of regulatory change continues to be high, but the
Group has sufficient resources and capabilities to respond to any
changes in an effective and efficient manner.
The Group continues to interact with regulatory bodies to take
part in thematic reviews as required.
Identifying, monitoring and supporting vulnerable customers
continues to be a key area of focus.
Ongoing reviews of long term arrears and forbearance customers,
continues to ensure that payment terms still remain
appropriate.
New consumer duty regulation will require dedicated resources to
be deployed to ensure the Group continues to comply with emerging
regulatory requirements.
10. Integration risk
The risks resulting from the Group's ongoing integration
activities, including business, operational and financial
performance, systems, people and infrastructure.
Risk appetite statement: The Combination of OSB and CCFS is
intended to enhance scale, bringing together resources and
capabilities, and to explore further growth opportunities which
deliver attractive long-term returns. The delivery against the
integration strategy is framed within the Group's Purpose, Vision
and Values and the broader risk appetite. The integration is deemed
to be inherently low risk owing to the retention of core operating
brands, similarities of business models, no large-scale IT
integration or substantial migration of customer accounts.
Accordingly, the Board has a low risk appetite for adverse
integration activity outcomes, which put the strategic rationale of
the merger, the Group's Purpose, Vision and Values or broader risk
appetite at risk. In the event that integration work streams are
subject to delay or reprioritisation, the Board expects the
rationale to be clearly understood and justified, with defined
mitigating actions implemented, overseen by robust levels of
governance.
A reduction in the oversight of business as usual operational
performance, increased risk to operational resilience via the
change process, unintended staff attrition or infrastructure
failure, which in turn adversely impacts operating and financial
performance.
Mitigation
Well established change and project management capabilities,
coupled with continued close oversight from the Executive and Board
Committees ensures risks continue to be mitigated effectively.
Independent assessment, monitoring and reporting is being
undertaken by the Risk and Internal Audit functions.
Direction: decreased
This risk has decreased with key planned integration activity
largely complete. To date the integration project has progressed as
planned, and the governance, project management and control
structures have operated effectively, with no material risks
crystallising.
Emerging risks
The Group proactively scans for emerging risks which may have an
impact on its ongoing operations and strategy and considers its top
emerging risks to be:
Political and macroeconomic uncertainty
The impact of new COVID-19 variants remains unknown. The Group's
lending activity is predominantly focused in the United Kingdom
(with a legacy back book of mortgages in the Channel Islands) and,
as such, will be impacted by any risks emerging from changes in the
macroeconomic environment. Rising inflation and interest rates pose
risks to the Group's loan portfolio performance.
Mitigation
The Group has mature and 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 has developed a suite of early
warning indicators, which are closely monitored to identify changes
in the economic environment. The Board and management review
detailed portfolio reports to identify any changes in the Group's
risk profile.
Climate change
As the worldwide focus on climate change intensifies, both the
physical risks and the transitional risks associated with climate
change continue to grow. Climate change risks include:
-- Physical risks which relate to specific weather events, such as storms
and flooding, or to longer-term shifts in the climate, such as rising sea
levels. These risks could include adverse movements in the value of
certain properties that are in coastal and low lying areas, or located in
areas prone to increased subsidence and heave.
-- Transitional risks may arise from the adjustment towards a low-carbon
economy, such as tightening energy efficiency standards for domestic and
commercial buildings. These risks could include a potential adverse
movement in the value of properties requiring substantial updates to meet
future energy performance requirements.
-- Reputational risk arising from a failure to meet changing societal,
investor or regulatory demands.
Mitigation
During 2021 further progress was made in developing and
embedding the Group's climate risk management approach within the
Group's wider risk management arrangements. This included the
development of a specific Climate Risk Management Framework,
implementation of an ESG Committee and a dedicated Climate Risk
Committee and ESG steering group.
Updated financial impact analysis was conducted as part of the
ICAAP.
The Group invested a significant amount of time in developing
its ESG and climate risk strategy and on development of its Task
Force on Climate-Related Financial Disclosures (TCFD).
The Group's Chief Risk Officers have designated senior
management responsibility for the management of climate change
risk.
Model risk
The risk of financial loss, adverse regulatory outcomes,
reputational damage or customer detriment resulting from
deficiencies in the development, application or ongoing operation
of models and ratings systems.
The Group also notes changes in industry best practice with
respect to model risk management.
Mitigation
The Group has well-established model risk governance
arrangements in place, with Board and Executive Committees in place
to ensure robust oversight of the Group's model risk profile.
Dedicated resources are in place to ensure model governance
arrangements continue to meet any changes in industry and
regulatory expectations.
Regulatory change
The Group remains subject to high levels of regulatory oversight
and an extensive and broad ranging regulatory change agenda,
including meeting the requirements of the Resolvability Assessment
Framework and Operational Continuity in Resolution. The Group is
therefore required to respond to prudential and conduct related
regulatory changes, taking part in thematic reviews as required.
There is also uncertainty in relation to the regulatory landscape
post the United Kingdom's exit from the European Union.
Mitigation
The Group has established horizon scanning capabilities, coupled
with dedicated prudential and conduct regulatory experts in place
to ensure the Group manages future regulatory changes
effectively.
The Group also has strong relationships with regulatory bodies,
and via membership of UK Finance inputs into upcoming regulatory
consultations.
Evolving working practices
The COVID-19 pandemic has resulted in new ways of working which
are impacting employee collaboration, the embedding of the Group's
purpose, vision and values and labour market dynamics, which are
making it more challenging to recruit and retain talent across
certain positions.
Mitigation
The Group operated effectively during the COVID-19 lockdown
periods, with the majority of staff working from home. A hybrid
working model has been established which continues to work
well.
Risk profile performance overview
Credit risk
The Group's loan portfolios performed robustly during 2021.
Prudent criteria for new originations delivered strong new business
quality, whilst the back book also outperformed forecasted
expectations. In particular, the Group saw lower than forecasted
arrears levels and better than expected house price inflation.
The Group's prudent credit risk appetite ensures that loan
portfolios are positioned to perform well in both benign and stress
macroeconomic environments. This approach continued to serve the
Group well during the ongoing uncertainty surrounding the potential
impact that new variants of the COVID-19 virus can have on the UK's
macroeconomic outlook.
Net loan book growth of 10% was delivered through controlled new
lending in the Group's core Buy-to-Let and residential
owner-occupier sub-segments, which more than offset reductions in
bridging and second charge loan books. The Group also maintained
tightened criteria in its more cyclical product lines. Mortgage
lending balances against semi-commercial and commercial lending
also reduced, as did the Group's development finance and funding
lines sub-segments due to the tighter criteria deployed and strong
repayment inflows.
Sensible new lending LTV criteria and favourable property price
indexing resulted in the average weighted stock LTV for OSB and
CCFS reducing during 2021 to 60% and 65%, respectively as at 31
December 2021 (31 December 2020: OSB 64% and CCFS 67%), which
resulted in a prudent average weighted LTV profile of 62% for the
Group.
A low level of arrears continued to be observed during 2021,
with just 1.1% of net loan balances being greater than three months
in arrears, which was broadly in line with 0.9% as at 31 December
2020. Increasing arrears levels were observed across a small number
of portfolios as payment holidays expired, however these increases
were partially offset by improving performance across other loan
portfolios.
Group and solo bank interest coverage ratios remained strong
during 2021 at 199% for OSB and 188% for CCFS (2020: 201% OSB and
193% CCFS).
During 2021, forward-looking external credit bureau probability
of default and customer indebtedness scores remained strong, with
some reversion back to pre-pandemic levels as customers returned to
spending, once lockdown restrictions were relaxed.
Expected Credit Losses (ECL)
Balance sheet expected credit losses reduced from GBP111.0m to
GBP101.5m during the year, a reduction of GBP9.5m. Balances written
off and other non-material items partially offset this movement to
result in a full year statutory impairment credit of GBP4.4m
representing a loan loss ratio of -2bps (2020: GBP71.0m charge,
38bps, respectively), with the provision release in 2021 primarily
driven by forecasted improvements in the forward-looking
macroeconomic outlook, and positive house price movements observed
during the year.
A summary of the key impairment drivers during 2021
included:
a. Macroeconomic outlook -- improvements in the economic outlook
resulted in a GBP24.9m net release in provision levels. This net
release resulted from a GBP12.3m provisions release resulting from
positive residential house price growth, whilst a further GBP22.2m
of provision was released through less severe forward looking
macroeconomic scenarios being implemented. These positive movements
were partially offset by a further 10% weighting being applied to
the downside macroeconomic scenarios in Q4 2021, to reflect
potential go forward risks surrounding rises in the cost of living
due to rising inflation and interest rate levels, which increased
provision levels by GBP9.6m.
b. Model enhancements -- enhancements were made to the Group's
underlying models to ensure estimates continued to reflect actual
credit profile performance. The cumulative impact of these
enhancements contributed GBP4.3m to the total loan loss charge for
2021.
c. COVID-19 post model adjustments -- during the pandemic the
Group implemented a number of post model adjustments to ensure that
idiosyncratic risks which were not captured by the IFRS 9 suite of
models, were reflected in provision levels. An example of this was
adjustments made to time to sale estimates to reflect the elongated
legal process due to backlogs resulting from the COVID-19
possession moratorium. The cumulative impact of post model
adjustments made during the year totalled GBP6.8m.
d. Credit profile provision charges - impairment charges driven
by changes in the credit profile such as portfolio size, portfolio
mix and changes in staging mix totalled GBP4.3m.
e. Other impairment charges incurred during the year related to
balance sheet write offs and other immaterial combination related
charges which cumulatively resulted in a GBP5.1m charge.
The Group continued to closely monitor impairment coverage
levels in the year.
Impairment coverage levels remained above pre-pandemic levels,
reflecting the continued uncertainty surrounding the macroeconomic
outlook. The Group's Risk function conducted top down analysis,
assessing portfolio specific risks relating to rising cost of
living and further interest rate rises, which confirmed the
appropriateness of modelled provision levels including any post
model adjustments.
Coverage ratios table
Gross carrying Expected credit
As at 31 December amount losses
2021 GBPm GBPm Coverage ratio
Stage 1 18,188.4 12.1 0.07%
Stage 2 2,413.6 25.0 1.04%
Stage 3 (+ POCI) 562.1 64.4 11.46%
Total 21,164.1 101.5 0.48%
As at 31 December
2020
Stage 1 16,116.3 21.2 0.13%
Stage 2 2,691.0 31.0 1.15%
Stage 3 (+ POCI) 515.3 58.8 11.41%
Total 19,322.6 111.0 0.57%
Macroeconomic scenarios
The measurement of ECL under the IFRS 9 approach is complex and
requires a high level of judgement. The approach includes the
estimation of probability of default (PD), loss given default (LGD)
and likely exposure at default (EAD). An assessment of the maximum
contractual period with which the Group is exposed to the credit
risk of the asset is also undertaken.
IFRS 9 requires firms to calculate ECL allowances simulating the
effect of a range of possible economic outcomes, calculated on a
probability weighted basis. This requires firms to formulate
forward-looking macroeconomic forecasts and incorporate them in ECL
calculations.
i. How macroeconomic variables and scenarios are selected
During the IFRS 9 modelling process, the relationship between
macroeconomic drivers and arrears, default rates and collateral
values is established. For example, if unemployment levels
increase, the Group would observe an increasing number of accounts
moving into arrears. If residential or commercial property prices
fall, the risk of losses being realised on the sale of a property
would increase.
The Group adopted an approach which utilises four macroeconomic
scenarios. These scenarios are provided by an industry leading
economics advisory firm, that provide management and the Board with
advice on which scenarios to utilise and the probability weightings
to attach to each scenario.
A base case forecast is provided, along with a plausible upside
scenario. Two downside scenarios are also provided (downside and a
severe downside).
ii. How macroeconomic scenarios are utilised within ECL
calculations
Probability of default estimates are either scaled up or down
based on the macroeconomic scenarios utilised.
Loss given default estimates are impacted by property price
forecasts which are utilised within loss estimates should an
account be possessed and sold.
Exposure at default estimates are not impacted by the
macroeconomic scenarios utilised.
Each of the above components are then directly utilised within
the ECL calculation process.
iii. Macroeconomic scenario governance
The Group has a robust governance process to oversee
macroeconomic scenarios and probability weightings used within ECL
calculations. Updated scenarios are provided on a quarterly basis
where an assessment is carried out by the Group's Risk function to
determine whether an update is required.
On a periodic basis, the Group's Risk function and economic
adviser provide the Group Risk and Audit Committees with an
overview of recent economic performance, along with updated base,
upside and two downside scenarios. The Risk function conducts a
review of the scenarios comparing them to other economic forecasts,
which results in a proposed course of action, which once approved
is implemented.
iv. Changes made during 2021
Throughout 2021, the scenario suite was monitored and updated as
government measures were updated and the impact of the pandemic
evolved.
As the macroeconomic outlook improved during 2021, the Group's
Risk and Audit Committees focused on assessing whether specific
risks had been captured within externally provided forward-looking
forecasts. Of particular focus were the risks relating to rising
costs of living and subsequent rising interest rates to control
inflation levels. The Board consequently decided to shift a 10%
weighting from the upside scenario, to the downside and severe
downside scenarios (5% applied to each) to acknowledge the
increasing risks relating to the rising cost of living and
potential impacts of rising interest rates not captured within the
scenarios at the year end.
Details relating to the scenarios utilised to set the 31
December 2021 IFRS 9 provision levels are provided in the table
below.
Forecast macroeconomic variables over a five-year period
(includes average over five years and the peak to trough
projections)
Scenario %
--------- ----------- ----------------------- ----------------------------------
Scenario Probability Economic measure 5 year average Cumulative
weighting (yearly growth growth/(fall)
(%) %) to peak/(trough)
(%)
--------- ----------- ----------------------- --------------- -----------------
Base case 40 GDP 3.3 14.5
House Price Index 1.9 (3.5)
Bank Base Rate 0.3 0.7
Unemployment rate 4.2 0.1
Commercial Real Estate 1.9 (3.5)
Index
--------- ----------- ----------------------- --------------- -----------------
Upside 20 GDP 4.0 18.5
House Price Index 4.5 (1.0)
Bank Base Rate 1.1 1.7
Unemployment rate 3.7 (1.2)
Commercial Real Estate 4.5 (1.0)
Index
--------- ----------- ----------------------- --------------- -----------------
Downside 28 GDP 2.3 1.2
House Price Index (2.9) (22.2)
Bank Base Rate (0.1) (0.4)
Unemployment rate 6.1 1.8
Commercial Real Estate (2.9) (22.2)
Index
--------- ----------- ----------------------- --------------- -----------------
Severe 12 GDP 1.7 (0.4)
downside House Price Index (5.8) (33.9)
Bank Base Rate (0.3) (0.6)
Unemployment rate 6.5 2.1
Commercial Real Estate (5.8) (33.9)
Index
--------- ----------- ----------------------- --------------- -----------------
Forbearance
Where a borrower experiences financial difficulty, 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 Group.
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 to see them through the period of financial
stress.
The specific tools available to assist customers vary by product
and the customers' circumstances. The various options 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
mortgage 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.
-- Arrangement to pay: where an arrangement is made with the borrower to
repay an amount above the contractual monthly instalment, which will
repay arrears over a period of time.
-- Promise to pay: where an arrangement is made with the borrower to defer
payment or pay a lump sum at a later date.
-- Bridging loans which are more than 30 days past their maturity date.
Repayment is rescheduled to receive a balloon or bullet payment at the
end of the term extension where the institution can duly demonstrate
future cash flow availability.
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.
During 2021, the Group conducted a review of long term arrears
cases with a particular focus on acquired second charge portfolios.
This review resulted in the Group entering into forbearance
arrangements with customers to ensure future repayment terms
remained sustainable. As a result, the Group saw an increase in new
forbearance measures granted within the year. Removing the impact
of this review, forbearance levels remained broadly stable year on
year.
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 quarterly indexing, whereas residential
properties are indexed against monthly House Price Index data.
Solvency risk
The Group maintains 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, 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 Group 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 Group's business plans and inorganic growth
opportunities.
During 2021, the Group proactively managed the balance sheet,
whilst the PRA retained capital support measures detailed within
the CRR 'Quick Fix' package implemented in 2020 which continued to
support capital ratios. The counter-cyclical buffer remained at 0%,
with the PRA signalling that it would increase to 1% from 13
December 2022 in line with the usual 12-month implementation
period. If the UK economic recovery proceeds broadly in line with
the PRA's projections and a material change in the macroeconomic
outlook does not occur, the PRA expects to increase the rate to 2%
in the second quarter of 2022, which would also be expected to take
effect after the usual 12 month implementation period.
The Group's fully-loaded CET1 and total capital ratios under CRD
IV increased to 19.6% and 21.2%, respectively as at 31 December
2021 (31 December 2020: 18.3% and 18.3%, respectively)
demonstrating the strong organic capital generation capability of
the business, the impact of the regulatory support measures and
prudent management of the credit risk profile. Capital structure
optimisation including the issuance of AT1 securities contributed
to the Group's strong capital ratios. The Group's leverage ratio
was 7.9% as at 31 December 2021 (31 December 2020: 6.9%).
Liquidity and funding risk
The Group 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. OSB's and CCFS' liquidity risk appetites have been
calibrated to ensure that both Banks always operate 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 Group continues to attract new retail savers and has high
retention levels with existing customers. In addition, the
Combination allowed the Group a wider range of wholesale funding
options, including securitisation issuances and use of retained
notes from both Banks.
In 2021, both Banks actively managed their respective liquidity
and funding profiles within the confines of their risk appetites as
set out in each Bank's ILAAP.
Funding and liquidity risk remained broadly stable throughout
the year. Retail funding was generally raised at a low cost of
funds due to increased available funds in the market. There was a
short period in the late third quarter where retail funding was
volatile as the Group funded the additional lending brought about
by the stamp duty land tax changes. The Group refinanced TFS
funding into TFSME and drew down further funds elongating the
funding profile by a further four years ahead of the scheme's
closure in October 2021.
Each Bank's risk appetite is based on internal stress tests that
cover a range of scenarios and time periods and therefore are a
more severe measure of resilience to a liquidity event than the
standalone liquidity coverage ratio (LCR). As at 31 December 2021,
OSB had a liquidity coverage ratio of 240% (2020: 254%) and CCFS
158% (2020: 146%), and the Group LCR was 198%, all significantly
above regulatory requirements.
Market risk
The Group proactively manages its risk profile in respect of
adverse movements in interest rates, foreign exchange rates and
counterparty exposures.
The Group 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 the Group ALCO and approved by the Board.
The Group's balance sheet is predominantly GBP denominated. The
Group has some minor foreign exchange risk from funding the OSBI
business. This is minimised by pre-funding a number of months in
advance and regularly monitoring GBP/INR rates. Wholesale
counterparty risk is measured on a daily basis and constrained by
counterparty risk limits.
Operational risk
The Group 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. The Group's operational processes, systems and
controls are designed to minimise disruption to customers, damage
to the Group's reputation and any detrimental impact on financial
performance. The Group actively promotes the continual evolution of
its operating environment.
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 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 has 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.
Due to the COVID-19 pandemic and the resulting high number of
employees working and accessing systems from home, the risk of a
cyber-attack has heightened. Whilst IT security risks continue to
evolve, the level of maturity of the Group's controls and defences
has significantly increased, supported by dedicated IT security
experts. The Group's ongoing penetration testing continues to drive
enhancements by identifying potential areas of risk.
Regulatory and compliance risk
The Group is committed to the highest standards of regulatory
conduct and aims to minimise breaches, financial costs and
reputational damage associated with non-compliance.
The Group 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, the Group maintains a
proactive relationship with key regulators, engages with industry
bodies such as UK Finance and seeks external expert advice. The
Group also assesses the impact of incoming regulation on itself and
the wider market in which it operates, and undertakes robust
assurance assessments from within the Risk and Compliance
functions.
Conduct risk
The Group considers its culture and behaviour in ensuring the
fair treatment of customers and in maintaining the integrity of the
market sub-segments in which it operates to be a fundamental part
of its strategy and a key driver to sustainable profitability and
growth. The Group 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.
The Group 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 Group's strategic vision
and business objectives supported by performance targets. The Group
does not intend to undertake any medium to long-term strategic
actions, which would put the Group's strategic or financial
objectives at risk.
To deliver against its strategic objectives and business plan,
the Group has adopted a sustainable business model based on a
focused approach to core niche market sub-segments where its
experience and capabilities give it a clear competitive
advantage.
The Group remains highly focused on delivering against its core
strategic and financial objectives, against a highly competitive
and uncertain backdrop.
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 Group monitors reputational risk through tracking media
coverage, customer satisfaction scores, the share price and Net
Promoter Scores provided by brokers.
Integration risk
Integration risk was identified as a principal risk for the
duration of the integration programme, though the integration of
the two entities was deemed inherently low risk owing to the
similarity of the two business models, with the programme involving
no material system or data migrations. The Board took the view that
it has limited appetite for integration related risks and deemed it
appropriate to identify, assess and manage integration risks in
full compliance with the wider risk management framework and
governance disciplines of the Group.
Integration risk relates to any risk which may result in the
non-delivery of planned integration objectives with respect to
desired strategic outcomes and costs and synergy performance
targets. Additionally, integration risk is also assessed with
respect to the other principal risks which may be adversely
impacted as a consequence of the integration activities.
The integration programme and the underlying risk profile
continued to perform in line with expectations with no material
risk incidents or trends identified during the year. The
integration programme did experience some level of disruption owing
to the pandemic, but overall the programme has continued to
progress as planned.
Viability statement
In accordance with Provision 31 of the 2018 UK Corporate
Governance Code, the Board is required to assess the viability of
the Group over a stated time horizon with a supporting statement in
the Annual Report.
The viability statement is required to include an explanation of
how the prospects of the Group have been assessed, the time horizon
over which the assessment has been performed and why the assessment
period is deemed appropriate. The viability statement needs to be
supported by an assessment of the principal risks and uncertainties
to which the Group is exposed and based on reasonable expectations
to conclude that the Group will be able to continue to operate and
meet its liabilities as they fall due over that period.
The Group uses a five-year time frame in its business and
financial planning and for internal stress test scenarios. The
long-term direction is informed by business and strategic plans
which are set on an annual basis and are reviewed and refreshed
quarterly. The operating and financial plans consider, among other
matters, the Board's risk appetite, macroeconomic outlook, market
opportunity, the competitive landscape, and sensitivity of the
financial plans to volumes, margin pressures and any changes in
capital requirements.
In making the assessment the Board has considered all principal
and emerging risks including climate risk, where the risk is likely
to emerge outside of the viability assessment horizon. The impacts
of climate risk have been assessed as part of the Internal Capital
Adequacy Assessment Process (ICAAP), which concluded that at
present the associated financial risks are not material for the
Group.
While a five-year time frame is used internally, levels of
uncertainty increase as the planning horizon extends and the
Group's operating and financial plans focus more closely on the
next three years. The Board therefore considers a period of three
years to be an appropriate period for the viability assessment to
be made.
The Banks within the Group are authorised by the PRA, and
regulated by the FCA and the PRA, and the Group 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
the Principal risks and uncertainties section).
The Group identifies, assesses, manages and monitors its risk
profile based on the disciplines outlined within the Group Risk
Management Framework, in particular through leveraging its risk
appetite framework (as described in the Risk review). Potential
changes in the aggregated risk profile are assessed across the
business planning horizon by subjecting the operating and financial
plans to severe but plausible macroeconomic and idiosyncratic
stress scenarios.
The viability of the Group is assessed at both the Group and the
underlying regulated Bank levels, through leveraging the risk
management frameworks and stress testing capabilities of both
regulated banks. Post Combination, the risk assessment and stress
testing capabilities of OSB and CCFS have been progressively
aligned; however, the strength of the capital and funding profiles
of both Banks provides an appropriate level of assurance that the
Group and its entities can withstand a severe but plausible stress
scenario.
Stress testing is an integral risk management discipline, used
to assess the financial and operational resilience of the Group.
The Group has 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 Group'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 are analysed considering the
potential impacts to changes in HPI, unemployment and interest
rates over a range of severity scenarios. The Group's capabilities
are well established and continue to support proactive management
of the Group's risk profile, ongoing operational resilience and
liquidity and capital positions.
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. ICAAP
stress testing assesses capital resources and requirements 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 counter
parties. 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 of the outer
limits of the Group's risk profile. RSTs play an important role in
helping the Board and Executives to assess the available recovery
options to revive a failing business model.
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 pandemic has had a disruptive impact on the Group's business
growth objectives and the changing characteristics of the
underlying risk profiles, particularly in relation to credit and
operational risks. The Group has enhanced its risk assessment,
monitoring and reporting procedures to ensure that these risks are
effectively managed and has accordingly adjusted its risk
appetite.
The Group has also maintained strong capital and funding
profiles with a view to ensuring continued financial resilience.
However, the Group remains fully cognisant of the evolving nature
of the pandemic crisis with respect to the potential impact of new
variants.
The Board has also considered the potential implications of the
pandemic in its assessment of the financial and operational
viability of the Group and has a reasonable belief that the Group
retains adequate levels of financial resources (capital and
liquidity) and operational contingency. In assessing the viability
of the Group, the Board considered the potential impact and risks
facing the Group with respect to the pandemic as set out in the
Risk review and Principal risks and uncertainties.
In line with prior years, in the viability assessment process
the Board considered the latest macroeconomic forward-looking
scenarios utilised for business planning and the Group's IFRS 9
calculations which consider the ongoing risks relating to new
COVID-19 variants and other macroeconomic risks such as rising
inflation and interest rate rises. Utilising analysis which
identifies scenarios which would result in the Group becoming
unviable, the Board considered the plausibility of these scenarios
materialising, whilst considering the likely impact of new COVID-19
variants. Forecasts and capital stress tests considered the impact
of the countercyclical buffer being progressively phased back in,
IFRS9 transitional arrangements unwinding, the Group's go forward
Minimum Requirements for Own Funds and Liabilities (MREL) phasing
in and a range of Basel 3.1 outcomes.
The potential impact of the pandemic on the economy and the
Group's operations is subject to continuous monitoring through the
Group's Management Committees, capital and liquidity, operational
resilience and business continuity planning working groups, with
appropriate escalation to the Board and supervisory
authorities.
The Group has progressively enhanced its approach to assessing
the viability of its strategy and business operating model, in
particular the Group has enhanced its capabilities by:
-- Enhancing stress testing capabilities through more focused assessment of
more vulnerable cohorts of its lending portfolio supported by increased
granularity of monitoring and risk reporting.
-- Increasing the diversification of its funding profile, supported by
enhanced assessment of funding and liquidity risk profiles.
-- Enhancing the assessment of operational resilience through the ongoing
review of priority business functions, including supporting
infrastructure and dependencies through a simulated business continuity
exercise.
The current financial forecasts, risk profile characteristics
and stress test analysis, the Group's capital, funding and
operational capabilities support the Directors' assessment that
they have a reasonable expectation that the Group will remain
viable over the three-year horizon.
Statement of Directors' responsibilities
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 the year. 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 the Group
enabling them to ensure that the financial statements comply with
the Companies Act 2006. They are responsible for such internal
control as they determine is necessary to enable the preparation of
financial statements that are free from material misstatement,
whether due to fraud or error, and have general responsibility for
taking such steps as are reasonably open to them to safeguard the
assets of the Group and to prevent and detect fraud and other
irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report, Directors' Report,
Directors' Remuneration Report and Corporate Governance Statement
that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in the UK governing the preparation
and dissemination of financial statements may differ from
legislation in other jurisdictions.
Responsibility statement of the Directors in respect of the
annual financial report
Each of the persons who is a Director at the date of approval of
this report confirms, to the best of their knowledge, that:
-- 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 Company 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
17 March 2022
2021 2020
Note GBPm GBPm
Interest receivable and similar income 4 746.8 711.9
Interest payable and similar charges 5 (159.2) (239.7)
Net interest income 587.6 472.2
Fair value gains on financial instruments 6 29.5 7.4
Gain on sale of financial instruments 7 4.0 20.0
Other operating income 8 7.9 9.0
Total income 629.0 508.6
Administrative expenses 9 (166.5) (157.0)
Provisions 38 (0.2) (0.1)
Impairment of financial assets 25 4.4 (71.0)
Impairment of intangible assets 10 3.1 (7.0)
Integration costs 13 (5.0) (9.8)
Exceptional items 14 (0.2) (3.3)
Profit before taxation 464.6 260.4
Taxation 15 (119.3) (64.1)
Profit for the year 345.3 196.3
-------
Other comprehensive (expense)/income
Items which may be reclassified to profit
or loss:
Fair value changes on financial instruments
measured as fair value through other comprehensive
income (FVOCI):
Arising in the year 20 1.1 1.0
Amounts reclassified to profit or loss
for investment
securities at FVOCI (2.0) -
Tax on items in other comprehensive (expense)/income 0.5 (0.5)
Revaluation of foreign operations (0.1) -
Other comprehensive (expense)/income (0.5) 0.5
----------------------------------------------------- ---- -------
Total comprehensive income for the year 344.8 196.8
-------
Attributable to:
Equity shareholders of the Company 340.1 191.3
Non-controlling interest 4.7 5.5
344.8 196.8
Dividend, pence per share 17 26.0 14.5
Earnings per share, pence per share
Basic 16 76.0 42.8
Diluted 16 75.2 42.4
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 17 March 2022.
2021 2020
Note GBPm GBPm
Assets
Cash in hand 0.5 0.5
Loans and advances to credit institutions 19 2,843.6 2,676.2
Investment securities 20 491.4 471.2
Loans and advances to customers 21 21,080.3 19,230.7
Fair value adjustments on hedged assets 27 (138.9) 181.6
Derivative assets 26 185.7 12.3
Other assets 28 10.2 9.1
Current taxation asset - 8.4
Deferred taxation asset 29 5.6 4.7
Property, plant and equipment 30 35.1 39.2
Intangible assets 31 18.4 20.6
Total assets 24,531.9 22,654.5
--------------------------------------------- ---- --------- ---------
Liabilities
Amounts owed to credit institutions 32 4,319.6 3,570.2
Amounts owed to retail depositors 33 17,526.4 16,603.1
Fair value adjustments on hedged liabilities 27 (19.7) 8.2
Amounts owed to other customers 34 92.6 72.9
Debt securities in issue 35 460.3 421.9
Derivative liabilities 26 19.7 163.6
Lease liabilities 36 10.7 11.7
Other liabilities 37 29.6 27.8
Provisions 38 2.0 1.8
Current taxation liability 1.0 -
Deferred taxation liability 39 39.8 48.3
Subordinated liabilities 40 10.3 10.5
Perpetual Subordinated Bonds 41 15.2 37.6
22,507.5 20,977.6
Equity
Share capital 43 4.5 1,359.8
Share premium 43 0.7 -
Retained earnings 3,215.1 1,608.6
Other reserves 44 (1,195.9) (1,351.5)
Shareholders' funds 2,024.4 1,616.9
Non-controlling interest 44 - 60.0
Total equity and liabilities 24,531.9 22,654.5
--------------------------------------------- ---- --------- ---------
The notes below form part of these accounts. The financial
statements were approved by the Board of Directors on 17 March 2022
and signed on its behalf by
Andy Golding April Talintyre
Chief Executive Officer Chief Financial Officer
Company number: 11976839
Foreign Share-based Additional Non-controlling
Share Share Capital Transfer Own exchange FVOCI payment Retained Tier 1 interest
capital(1) premium contribution reserve shares(2) reserve reserve reserve earnings securities securities Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2020 4.5 864.2 6.5 (12.8) (3.7) (1.0) 0.5 5.6 553.2 - 60.0 1,477.0
Profit for the year - - - - - - - - 196.3 - - 196.3
Other comprehensive income - - - - - - 1.0 - - - - 1.0
Tax on items in other comprehensive
income - - - - - - (0.5) - - - - (0.5)
Total comprehensive income - - - - - - 0.5 - 196.3 - - 196.8
Coupon paid on non-controlling
interest securities - - - - - - - - (5.5) - - (5.5)
Share-based payments - 2.6 - - - - - 2.4 3.2 - - 8.2
Tax recognised in equity - - - - - - - (0.2) 0.5 - - 0.3
Transfer between reserves - - (6.5) 12.8 - - - - (6.3) - - -
Own shares(2) - - - - (0.3) - - - 0.4 - - 0.1
Cancellation of OneSavings
Bank plc share capital
and share premium (4.5) (866.8) - - - - - - 866.8 - - (4.5)
Issuance of OSB GROUP PLC
share capital 1,359.8 - - (1,355.3) - - - - - - - 4.5
At 31 December 2020 1,359.8 - - (1,355.3) (4.0) (1.0) 1.0 7.8 1,608.6 - 60.0 1,676.9
Profit for the year - - - - - - - - 345.3 - - 345.3
Other comprehensive expense - - - - - (0.1) (0.9) - - - - (1.0)
Tax on items in other comprehensive
expense - - - - - - 0.5 - - - - 0.5
Total comprehensive income - - - - - (0.1) (0.4) - 345.3 - - 344.8
Coupon paid on non-controlling
interest securities - - - - - - - - (4.7) - - (4.7)
Dividends paid - - - - - - - - (86.7) - - (86.7)
Share-based payments - 0.7 - - - - - 4.0 2.9 - - 7.6
Own shares(2) - - - - 0.5 - - - (0.5) - - -
Capital reduction of OSB
GROUP PLC share capital(1) (1,355.3) - - - - - - - 1,355.3 - - -
Redemption of non-controlling
interest securities - - - - - - - - - - (60.0) (60.0)
Transactions costs on redemption
of non-controlling interest
securities - - - - - - - - (3.5) - - (3.5)
Issuance of Additional
Tier 1 securities - - - - - - - - - 150.0 - 150.0
Transactions costs on issuance
of Additional Tier 1 securities - - - - - - - - (1.6) - - (1.6)
Tax recognised in equity - - - - - - - 1.6 - - - 1.6
At 31 December 2021 4.5 0.7 - (1,355.3) (3.5) (1.1) 0.6 13.4 3,215.1 150.0 - 2,024.4
------------------------------------ ----------- -------- ------------- --------- ---------- --------- -------- ----------- --------- ----------- --------------- -------
(1) On 26 February 2021, OSB GROUP PLC reduced the nominal value
of 447,312,780 shares from three hundred and four (304) pence each
to one (1) penny each, see note 1 for further details.
(2) The Group has adopted look-through accounting (see note 2
c)) and recognised the Employee Benefit Trusts within OSB GROUP
PLC.
Share capital and premium is disclosed in note 43 and the
reserves are further disclosed in note 44.
2021 2020
Note GBPm GBPm
Cash flows from operating activities
Profit before taxation 464.6 260.4
Adjustments for non-cash items 51 (10.0) 79.2
Changes in operating assets and liabilities 51 (799.0) (1,537.2)
Cash used in operating activities (344.4) (1,197.6)
Provisions refunded 38 - 0.1
Net tax paid (117.3) (128.8)
Net cash used in operating activities (461.7) (1,326.3)
Cash flows from investing activities
Maturity and sales of investment securities 547.7 407.3
Purchases of investment securities (468.2) (190.9)
Interest received on investment securities 1.9 7.0
Sales of financial instruments 7 4.0 539.9
Proceeds from sale of property, plant
and equipment 30 2.0 -
Purchases of property, plant and equipment
and intangible assets 30,31 (6.8) (7.5)
Cash generated from investing activities 80.6 755.8
Cash flows from financing activities
Financing received 42 5,058.6 1,991.2
Financing repaid 42 (4,295.4) (1,103.6)
Cash held in deconsolidated special purpose
vehicles - (23.0)
Interest paid on financing (8.4) (21.4)
Coupon paid on non-controlling interest
securities (4.7) (5.5)
Dividends paid 17 (86.7) -
Redemption of non-controlling interest
securities (63.5) -
Issuance of Additional Tier 1 securities 148.4 -
Proceeds from issuance of shares under
employee SAYE schemes 0.8 2.6
Cash payments on lease liabilities 36 (1.9) (2.0)
Cash generated from financing activities 747.2 838.3
---------
Net increase in cash and cash
equivalents 366.1 267.8
Cash and cash equivalents at the beginning
of the year 18 2,370.6 2,102.8
Cash and cash equivalents at the end of
the year 18 2,736.7 2,370.6
Movement in cash and cash equivalents 366.1 267.8
--------- ---------
1. Capital reduction
On 11 January 2021, the parent company OSB GROUP PLC (the
Company) published a Circular in relation to the Capital reduction,
which subject to shareholder approval as well as certain other
conditions set out in the Circular, was undertaken to create the
required distributable reserves to enable the Company to pay
dividends and other distributions to shareholders in the future.
The Circular stated that there would be no change to the total
number of shares or the total capital in the Company, or in the
Company and its subsidiaries' (the Group) capital ratios as a
result of the Capital reduction. On 26 February 2021, the Capital
reduction became effective with the Company reducing the nominal
value of 447,312,780 shares from three hundred and four (304) pence
each to one (1) penny each. This generated GBP1.4bn of
distributable reserves following interim accounts as at 28 February
2021 being prepared and delivered to Companies House, supporting
the dividend distribution of GBP64.8m on 2 June 2021 by the
Company.
1. Accounting policies
a) Basis of preparation
The financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRSs) as adopted by
the United Kingdom (UK) 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 FVOCI and derivative contracts and other financial assets held
at fair value through profit or loss (FVTPL) (see note 2 o)
vi.).
The financial statements are presented in Pounds Sterling. All
amounts in the financial statements have been rounded to the
nearest GBP0.1m (GBPm). The functional currency of the Group is
Pounds Sterling, which is the currency of the primary economic
environment in which the Group operates.
The figures shown for the year ended 31 December 2021 are not
statutory accounts within the meaning of section 435 of the
Companies Act 2006. The statutory accounts for the year ended 31
December 2021 on which the auditors have given an unqualified audit
report and did not contain an adverse statement under section
498(2) or 498(3) of the Companies Act 2006 will be delivered to the
Registrar of Companies after the Annual General Meeting. The
figures shown for the year ended 31 December 2020 are not statutory
accounts. A copy of the statutory accounts has been delivered to
the Registrar of Companies, contained an unqualified audit report
and did not contain an adverse statement under section 498(2) or
498(3) of the Companies Act 2006. This announcement has been agreed
with the Company's auditors for release.
b) Going concern
The Board undertakes regular rigorous assessments of whether the
Group is a going concern in light of current economic conditions
and all available information about future risks and
uncertainties.
In assessing whether the going concern basis is appropriate,
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.
These forecasts have been subject to sensitivity tests, including
stress scenarios, which have been compared to the latest economic
scenarios provided by the Group's external economic advisors, as
well as reverse stress tests. In making the assessment the Board
has considered all principal and emerging risks including climate
risk where the risk is likely to emerge outside of the going
concern assessment horizon.
The assessments include the following:
-- Financial and capital forecasts were prepared under stress
scenarios which were assessed against the latest economic forecasts
provided by the Group's external economic advisors. Reverse stress
tests were also run, to assess what combinations of House Price
Index (HPI) and unemployment variables would result in the Group
utilising its regulatory capital buffers in full and breaching the
Group's minimum prudential requirements, along with analysis and
insight from the Group's Internal Capital Adequacy Assessment
Process (ICAAP). The Directors assessed the likelihood of those
reverse stress scenarios occurring within the next 12 months and
concluded that the likelihood is remote.
-- The latest liquidity and contingent liquidity positions and
forecasts were assessed against the Internal Liquidity Adequacy
Assessment Process (ILAAP) stress scenarios.
-- The Group continues to assess the resilience of its business
operating model and supporting infrastructure in the context of the
emerging economic, business and regulatory environment. The key
areas of focus continue to be on the provision of critical services
to customers, employee health and safety and evolving governmental
policies and guidelines. The Group continues to invest in its
information technology platforms to support its employees with
flexible working from office or homeworking across all locations
within a hybrid working model. The Group's response to the COVID-19
pandemic demonstrated the inherent resilience of the Group's
critical processes and infrastructure. It also demonstrated the
necessary agility in responding to changing operational demands.
The operational dependencies on third party vendors and outsourcing
arrangements continue to be an important area of focus.
The Group's financial projections demonstrate that the Group has
sufficient capital and liquidity to continue to meet its regulatory
requirements as set out by the Prudential Regulation 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 Company 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, so far as is
possible, with the policies adopted by the Group.
Subsidiaries are those entities, including structured entities,
over which the Group has control. The Group controls an entity when
it is exposed, or has rights, to variable returns from its
involvement with the entity and has the ability to affect those
returns through its power over the investee. The Group has power
over an entity when it has existing rights that give it the current
ability to direct the activities that most significantly affect the
entity's returns. Power may be determined on the basis of voting
rights or, in the case of structured entities, other contractual
arrangements.
1. Accounting policies (continued)
Where the Group does not retain a direct ownership interest in a
securitisation entity, but the Directors have determined that the
Group controls those entities, they are treated as subsidiaries and
are consolidated. Control is determined to exist if the Group has
the power to direct the activities of each entity (for example,
managing the performance of the underlying mortgage assets and
raising debt on those mortgage assets which is used to fund the
Group) and, in addition to this, control is exposed to a variable
return (for example, retaining the residual risk on the mortgage
assets). Securitisation structures that do not meet these criteria
are not treated as subsidiaries and are excluded from the
consolidated accounts. The Company applies the net approach in
accounting for securitisation structures where it retains an
interest in the securitisation, netting the loan notes held against
the deemed loan balance.
The Group's Employee Benefit Trust (EBT) is controlled and
recognised by the Company using the look-through approach, i.e. as
if the EBT is included within the accounts of the Company.
The Group is not deemed to control an entity when it exercises
power over an entity in an agency capacity. In determining whether
the Group is acting as an agent, the Directors consider the overall
relationship between the Group, the investee and other parties to
the arrangement with respect to the following factors: (i) the
scope of the Group's decision-making power; (ii) the rights held by
other parties; (iii) the remuneration to which the Group is
entitled; and (iv) the Group's exposure to variability of returns.
The determination of control is based on the current facts and
circumstances and is continuously assessed. In some circumstances,
different factors and conditions may indicate that different
parties control an entity depending on whether those factors and
conditions are assessed in isolation or in totality. Judgement is
applied in assessing the relevant factors and conditions in
totality when determining whether the Group controls an entity.
Specifically, judgement is applied in assessing whether the Group
has substantive decision-making rights over the relevant activities
and whether it is exercising power as a principal or an agent.
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 Company'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.
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 (OCI) and
accumulated in the foreign exchange reserve within equity.
1. Accounting policies (continued)
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 provides loans and asset finance within the UK and the
Channel Islands only.
The Group segments its lending business and operates under two
segments:
-- OneSavings Bank (OSB)
-- Charter Court Financial Services (CCFS)
The Group has disclosed relevant risk management tables in note
46 at a sub-segment level to provide detailed 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 and FVOCI 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.
Interest income on financial assets categorised as stage 1 or 2
are recognised on a gross basis, with interest income on stage 3
assets recognised net of expected credit losses (ECL). See note 2
o) for further information on IFRS 9 stage classifications.
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
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 book and
resets cash flows on a monthly basis, discounted at the EIR to
derive a new carrying value, with changes taken to profit or loss
as interest income.
The EIR is adjusted where there is a movement in the reference
interest rate (LIBOR, SONIA 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.
1. Accounting policies (continued)
When the contractual terms of non-derivative financial
instruments have been amended as a direct consequence of IBOR
reform and the new basis for determining the contractual cash flows
is economically equivalent to the previous basis, the Group changes
the basis for determining the contractual cash flows prospectively
by revising the EIR.
Interest income on 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.
Coupons paid on non-controlling interest securities and
Additional Tier 1 (AT1) securities are 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.
Fees received on mortgage administration services and mortgage
origination activities, which are not an integral part of the EIR,
are recorded in other operating income and accounted for in
accordance with IFRS 15 Revenue from Contracts with Customers, with
income recognised when the services are delivered and the benefits
are transferred to clients and customers.
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) Integration costs and exceptional items
Integration costs and exceptional items are those items of
income or expense that do not relate to the Group's core operating
activities, are not expected to recur and are material in the
context of the Group's performance. These items are disclosed
separately within the Consolidated Statement of Comprehensive
Income and the Notes to the Consolidated Financial Statements.
i) Taxation
Income tax comprises current and deferred tax. It is recognised
in profit or loss, other comprehensive income or directly in
equity, consistent with the recognition of items it relates to. The
Group recognises tax on coupons paid on non-controlling interest
securities and AT1 securities directly in profit or loss.
Current tax is the expected tax charge on the taxable income for
the year 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 projections of future taxable
income indicate that the Group will be able to utilise its deferred
tax asset within the foreseeable future.
Deferred tax liabilities are recognised for all taxable
temporary differences to the extent that it is probable that
taxable profits will be available against which deductible
temporary differences can be utilised.
The Company and its UK subsidiaries are in a group payment
arrangement for corporation tax and show a net corporation tax
liability and deferred tax liability accordingly.
The Company and its UK subsidiaries are in the same VAT
group.
j) Dividends
Dividends are recognised in equity in the period in which they
are paid or, if earlier, approved by shareholders.
k) Cash and cash equivalents
For the purposes of the Consolidated Statement of Cash Flows,
cash and cash equivalents comprise cash, non-restricted balances
with credit institutions and highly liquid financial assets with
maturities of less than three months from date of acquisition and
subject to an insignificant risk of changes in their fair
value.
l) 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. The
Group only recognises internally generated intangible assets if all
of the following conditions are met:
-- an asset is being created that can be identified after establishing the
technical and commercial feasibility of the resulting product;
-- it is probable that the asset created will generate future economic
benefits; and
-- the development cost of the asset can be measured reliably.
Subsequent expenditure on an internally generated intangible
asset, after its purchase or completion, is recognised as an
expense in the period in which it is incurred. Where no internally
generated intangible asset can be recognised, development
expenditure is recognised as an expense in the period in which it
is incurred.
Software-as-a-service (SaaS), is an arrangement that provides
the customer with the right to receive access to the supplier's
application software in the future which is treated as a service
contract, rather than a software lease or the acquisition of a
software intangible asset.
An intangible asset is only recognised if:
-- The customer has the contractual right to take possession of the software
during the hosting period without significant penalty.
-- It is feasible for the customer to run the software on its own hardware
or contract with a party unrelated to the supplier to host the software.
The costs of configuring or customising supplier application
software in a SaaS arrangement that is determined to be a service
contract is recognised as an expense or prepayment. Where the
configuration and customisation services are not distinct from the
right to receive access to the software, then the costs are
recognised as an expense over the term of the arrangement.
Intangible assets are reviewed for impairment semi-annually, and
if they are considered to be impaired, are written down immediately
to their recoverable amounts. Impairment losses previously
recognised for intangible assets, other than goodwill, are reversed
when there has been a change in the estimates used to determine the
asset's recoverable amount. An impairment loss reversal is
recognised in the Consolidated Statement of Comprehensive Income
and the carrying amount of the asset is increased to its
recoverable amount.
Intangible assets are amortised in profit or loss over their
estimated useful lives as follows:
Software and internally generated assets 5 year straight line
Development costs, brand and technology 4 year straight line
Broker relationships 5 year profile
Bank licence 3 year straight line
For development costs that are under construction, no
amortisation will be applied until the asset is available for use
and is calculated using a full month when available for use.
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.
m) 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.
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.
n) Investment in subsidiaries
In the Company's financial statements, investments in subsidiary
undertakings are stated at cost less provision for any impairment.
A full list of the Company's subsidiaries which are included in the
Group's consolidated financial statements can be found in note 2 to
the Company's financial statements.
The Company performs an annual impairment assessment of its
investment in subsidiary undertakings, assessing the carrying value
of the investment in each subsidiary against the subsidiary's net
asset values at the reporting date for indication of impairment.
Where there is indication of impairment, the Company estimates the
subsidiary's value in use by estimating future profitability and
the impact on the net assets of the subsidiary. The Company
recognises an impairment directly in profit or loss when the
recoverable amount, which is the greater of the value in use or the
fair value less costs to sell, is less than the carrying value of
the investment. Impairments are subsequently reversed if the
recoverable amount exceeds the carrying value.
o) Financial instruments
i. 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 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.
-- 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.
-- FVTPL -- assets not measured at amortised cost or FVOCI. The Group
measures derivatives, an acquired mortgage portfolio and an investment
security under this category.
The Group classifies non-derivative financial liabilities as
measured at amortised cost.
The Group has no financial assets and liabilities classified as
held for trading.
The Group reassesses its business models each reporting
period.
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.
During the year equity financial instruments comprised own
shares, non-controlling interest securities and AT1 securities.
Accordingly, the coupons paid on the non-controlling interest
securities and AT1 securities are recognised directly in retained
earnings when paid.
ii. Recognition
The Group initially recognises loans and advances, deposits,
debt securities issued and subordinated liabilities on the date on
which they are originated or acquired. 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.
For financial instruments classified as amortised cost, the
Group initially recognises financial assets and financial
liabilities at fair value plus transaction income or costs that are
directly attributable to its origination, acquisition or issue.
These financial instruments are subsequently measured at amortised
cost using the effective interest rate.
Transaction costs relating to the acquisition or issue of a
financial instrument at FVOCI and FVTPL are recognised in the
profit or loss as incurred.
AT1 securities are designated as equity instruments and
recognised at fair value on the date of issuance in equity along
with incremental costs directly attributable to the issuance of
equity instruments.
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.
The Group offers refinancing options to customers which have
been assessed within the principles of IFRS 9 and relevant guidance
including a read across in respect of debt issuance. The assessment
concludes the original mortgage asset is derecognised at the
refinancing point with a new financial asset recognised.
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 a substantial modification from the
contractual cash flows and does not consider that forbearance
measures 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 Consolidated 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.
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 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 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, less principal payments or
receipts, 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 of
assets.
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 its investment securities and Perpetual Subordinated Bonds
(PSBs) at fair value using quoted market prices where
available.
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 SONIA curves to value its derivatives, previously
a combination of LIBOR and SONIA curves (for further information on
Interbank Offered Rate (IBOR) transition, see note 46). 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 Group's two banking entities and counterparty and
whether the derivative is collateralised or not. Derivatives are
valued using discounted cash flow models and observable market data
and are sensitive to benchmark interest and basis rate curves.
The fair value of investment securities held at FVTPL is
measured using a discounted cash flow model.
1. Identification and measurement of impairment of financial assets
The Group assesses all financial assets for impairment.
Loans and advances to customers
The Group uses the IFRS 9 three-stage ECL approach for measuring
impairment. The three impairment stages are as follows:
-- Stage 1 -- a 12 month ECL allowance is recognised where there is no
significant increase in credit risk (SICR) since initial recognition.
-- Stage 2 -- a lifetime ECL 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 recognised.
The Group measures impairment through the use of individual and
modelled assessments.
Individual assessment
The Group's provisioning process requires individual assessment
for high exposure or higher risk loans, where Law of Property Act
(LPA) receivers have been appointed, the property is taken into
possession or there are other events that suggest a high
probability of credit loss. Loans are considered at a connection
level, i.e. including all loans 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.
For all individually assessed loans with a confirmed sale,
should the present value of estimated future cash flows discounted
at the original EIR be less than the carrying value of the loan, a
provision is recognised for the difference with such loans being
classified as impaired. However, should the present value of the
estimated future cash flows exceed the carrying value, no provision
is recognised. For all remaining individually assessed loans,
should a full loss be expected the provision is set to the carrying
value, with all other individually assessed loans applying the
greater of either the modelled or individual assessment.
The Group applies a modelled assessment to all loans with no
individually assessed provision.
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 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 quantitative relative PD thresholds and a suite of qualitative
triggers.
In accordance with PRA COVID-19 guidance, the Group does not
automatically consider the take-up of customer payment deferrals
during the pandemic to be an indication of a SICR and, in the
absence of other indicators such as previous arrears, low credit
score or high other indebtedness, the staging of these loans
remains unchanged in its ECL calculations.
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 initial recognition, a loan is assigned a PD
estimate. For each monthly reporting date thereafter, an updated PD
estimate is computed. The Group's transfer criteria analyses
relative changes in PD versus the PD assigned at the point of
origination, together with qualitative triggers using both internal
indicators, such as forbearance, and external information, such as
changes in income and adverse credit information to assess for
SICR. In the event that given early warning triggers have not
already identified SICR, an account more than 30 days past due has
experienced a SICR.
A borrower will move back into stage 1 only if the SICR
definition is no longer triggered.
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:
-- If an account is more than 90 days past due.
-- Accounts that have moved into an unlikely to pay position, which includes
forbearance, bankruptcy, repossession and interest-only term expiry.
A borrower will move out of stage 3 when its credit risk
improves such that it no longer meets the 90 days past due and
unlikeliness to pay criteria and following this has 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
The risk of default and expected credit loss assessments take
into consideration expectations of economic changes that are deemed
to be reasonably possible.
The Group conducts analysis to determine the most significant
factors which may influence the likelihood of an exposure
defaulting in the future. The macroeconomic factors relate to the
HPI, unemployment rate (UR), Gross domestic product (GDP),
Commercial Real Estate Index (CRE) and the Bank of England Base
Rate (BBR).
The Group has derived an approach for factoring
probability-weighted macroeconomic forecasts into ECL calculations,
adjusting PD and LGD estimates. 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 sources economic forecast information from an
appropriately qualified third party when determining scenarios. The
Group considers four probability-weighted scenarios, base, upside,
downside and severe downside scenarios.
The base case is also utilised within the Group's impairment
forecasting process which in turn feeds the wider business planning
processes. The ECL models are also used to set the Group's credit
risk appetite thresholds and limits.
Period over which ECL is measured
Expected credit loss is measured from the initial recognition of
the asset which is the date at which the loan is originated or the
date a loan is purchased and at each balance sheet date thereafter.
The maximum period considered when measuring ECL (either 12 months
or lifetime ECL) is the maximum contractual period over which the
Group is exposed to the credit risk of the asset. For modelling
purposes, the Group considers the contractual maturity of the loan
product and then considers the behavioural trends of the asset.
Purchased or originated credit impaired (POCI)
Acquired loans that meet the Group's definition of default (90
days past due or an unlikeliness to pay position) at acquisition
are treated as POCI assets. These assets attract a lifetime ECL
allowance over the full term of the loan, even when these loans no
longer meet the definition of default post acquisition. The Group
does not originate credit-impaired loans.
Intercompany loans
Intercompany receivables in the Company financial statements are
assessed for ECL based on an assessment of the PD and LGD,
discounted to a net present value.
Other financial assets
Other financial assets comprise cash balances with the Bank of
England (BoE) and other credit institutions and high grade
investment securities. The Group deems the likelihood of default
across these counterparties as low and does not recognise a
provision against the carrying balances.
p) 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. 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 BoE under the Term Funding Scheme
(TFS) and Term Funding Scheme with additional incentives for
SMEs
(TFSME) are not derecognised from the Consolidated 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 TFSME as amortised cost under IFRS 9 Financial
Instruments.
Loans and advances include a small acquired mortgage portfolio
where the contractual cash flows include payments that are not
solely payments of principal and interest and as such are measured
at FVTPL. The Group initially recognises these loans at fair value,
with direct and incremental costs of acquisition recognised
directly in profit or loss and, subsequently measures them at fair
value.
Loans and receivables 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. 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.
q) Investment securities
Investment securities include securities held for liquidity
purposes (UK treasury bills, UK Gilts and Residential
Mortgage-Backed Securities (RMBS)). These assets are
non-derivatives that are designated as FVOCI or amortised cost.
Assets classified as amortised cost are originally recognised at
fair value and subsequently measured at amortised cost using the
EIR method, less impairment losses.
Assets held at FVOCI are measured at fair value with movements
taken to OCI and accumulated in the FVOCI reserve within equity,
except for impairment losses which are taken to profit or loss.
Where the instrument is sold, the gain or loss accumulated in
equity is reclassified to profit or loss.
Assets held at FVTPL are measured at fair value with movements
taken to the Consolidated Statement of Comprehensive Income.
r) Deposits, debt securities in issue and subordinated liabilities
Deposits, debt securities in issue 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 BoE under the TFS and TFSME,
asset-backed loan notes issued through the Group's securitisation
programmes and subordinated liabilities. Subordinated liabilities
include the Sterling PSBs where the terms allow no absolute
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 TFSME is recorded in amounts
owed to credit institutions. Interest is accrued over the life of
the agreements on an EIR basis.
s) 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 p (iii) above. The
financial assets that are retained in the financial statements are
reflected as loans and advances to customers or investment
securities and the counterparty liability is included in amounts
owed to credit institutions or other customers. Financial assets
purchased under agreements to resell at a predetermined price where
the transaction is financing in nature (reverse repo) are accounted
for as loans and advances to credit
institutions. The difference between the sale and repurchase
price is treated as interest and accrued over the life of the
agreement using the EIR method.
t) Derivative financial instruments
The Group uses derivative financial instruments (interest rate
swaps) to manage its exposure to interest rate risk. In accordance
with the Group Market and Liquidity Risk 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 Consolidated Statement of Financial
Position.
The Group also uses derivatives to hedge the interest rate risk
inherent in irrevocable offers to lend. This exposes the Group to
movements in the fair value of derivatives until the loan is drawn.
The changes to fair value are recognised in profit or loss in the
period.
The Group is party to a limited number of warrants. These are
recognised as derivative financial instruments as applicable where
a trigger event takes place and the fair value of the option or
warrant can be reliably measured.
u) 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.
Portfolio hedge accounting allows for hedge effectiveness
testing and accounting over an entire portfolio of financial assets
or liabilities. To qualify for hedge accounting at inception, hedge
relationships are clearly documented and derivatives must be
expected to be highly effective in offsetting the hedged risks. In
addition, effectiveness must be tested throughout the life of the
hedge relationship. This applies to all derivatives including
SONIA-linked derivatives entered into to replace LIBOR-linked
derivatives, as a result of IBOR reforms (see note 2 aa)).
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 Group Assets and Liabilities
Committee (ALCO) approved prepayment curve. During 2021 all
remaining LIBOR-linked derivatives with a maturity date post Q1
2022 were cancelled and new SONIA-linked derivatives entered into.
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.
The Group considers the following as key sources of hedge
ineffectiveness:
-- the mismatch in maturity date of the swap and hedged item, as swaps with
a given maturity date cover a portfolio of hedged items which may mature
throughout the month;
-- the actual behaviour of the hedged item differing from expectations, such
as early repayments or withdrawals and arrears;
-- minimal movements in the yield curve leading to ineffectiveness where
hedge relationships are sensitive to small value changes; and
-- the transition relating to LIBOR reforms whereby some hedged instruments
and hedged items are based on different benchmark rates.
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 Consolidated 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 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, including
LIBOR-linked derivatives cancelled as a result of IBOR reforms, 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 Consolidated
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.
v) 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 two banking
entities defaulting. 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;
-- the expected exposure at default;
-- the expected LGD; and
-- the average maturity of the swaps.
w) 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.
Provisions include ECLs on the Group's undrawn loan
commitments.
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 they are not material or their
probability is remote.
x) Employee benefits -- defined contribution scheme
The Group contributes to defined contribution personal pension
plans or defined contribution retirement benefit schemes for all
qualifying employees who subscribe to the terms and conditions of
the schemes' policies.
Obligations for contributions to defined contribution pension
arrangements are recognised as an expense in profit or loss as
incurred.
y) Share-based payments
Equity-settled share-based payments to employees providing
services are measured at the fair value of the equity instruments
at the grant date in accordance with IFRS 2. The fair value
excludes the effect of non-market-based vesting conditions.
The cost of the awards 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
increase within the share-based payment reserve is reclassified to
retained earnings upon exercise.
The amount recognised as an expense for non-market conditions
and related service conditions is adjusted each reporting period to
reflect the actual number of awards expected to be met. 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 to the fair value
of each award calculated at grant date.
Share-based payments that are not subject to further vesting
conditions (i.e. the Deferred Share Bonus Plan (DSBP) for senior
managers) are expensed in the year services are received with a
corresponding increase in equity. Awards granted to Executive
Directors in March 2020 are subject to service conditions through
to vesting and are expensed over the vesting period. Awards granted
to Executive Directors from April 2021 are not subject to future
service conditions and are expensed in the year where the service
is deemed to have been provided.
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 service or
vesting schedules as the underlying options and awards.
Own shares are recorded at cost and deducted from equity and
represent shares of OSBG that are held by the Employee Benefit
Trust.
z) Leases
The Group's leases are predominantly for offices and Kent
Reliance branches. The Group recognises right-of-use assets and
lease liabilities for leases over 12 months long. Right-of-use
assets and lease liabilities are initially recognised at the net
present value of future lease payments, discounted at the rate
implicit in the lease or, where not available, the Group's
incremental borrowing cost. Subsequent to initial recognition, the
right-of-use asset is depreciated on a straight-line basis over the
term of the lease. Future rental payments are deducted from the
lease liability, with interest charged on the lease liability using
the incremental borrowing cost at the time of initial recognition.
Lease liability payments are recognised within financing activities
in the Consolidated Statement of Cash Flows.
The Group assesses the likely impact of early terminations in
recognising the right-of-use asset and lease liability where an
option to terminate early exists.
For modifications that increase the length of a lease; the
modified lease term is determined and the lease liability
remeasured by discounting the revised lease payments using a
revised discount rate, at the effective date of the lease
modification; a corresponding adjustment is made to the
right-of-use asset. Where modifications decrease the length of a
lease, the lease liability and right-of-use asset are reduced in
proportion to the reduction in the lease term, with any gain or
loss recognised in the profit or loss.
Leases with low future payments or terms less than 12 months are
recognised on an accruals basis directly in profit or loss.
1) Adoption of new standards
International financial reporting standards issued and adopted
for the first time in the year ended 31 December 2021
The following financial reporting standard amendments and
interpretations were in issue and have been applied in the
financial statements from 1 January 2021.
-- Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 Interest Rate
Benchmark Reform -- Phase 2
The Group has adopted 'Interest Rate Benchmark Reform -- Phase 2
(Amendments to IFRS 9 Financial Instruments, IAS 39 Financial
Instruments: Recognition and Measurement, IFRS 7 Financial
Instruments: Disclosures, IFRS 4 Insurance Contracts and IFRS 16
Leases'), which was issued in August 2020 and became mandatory for
annual reporting periods beginning on or after 1 January 2021.
Adopting these amendments has enabled the Group to reflect the
effects of transitioning from IBOR to alternative benchmark
interest rates (also referred to as 'risk free rates' or RFRs)
without giving rise to accounting impacts that would not provide
useful information to users of financial statements. See the IBOR
transition section in note 46 Risk Management for further details.
The Group continues to apply the Phase 1 amendments 'Interest Rate
Benchmark reform: Amendments to IFRS 9/IAS 39 and IFRS 7' where
relevant.
The IFRS Interpretations Committee published an agenda decision
in April 2021 addressing how a customer should account for the
costs of configuring or customising a supplier's application
software in a SaaS arrangement that is determined to be a service
contract. This has accounting implications for any cloud-based
applications that may be held as an intangible asset as the new
guidance requires the majority of these costs should not be
recognised as an intangible asset except in a few limited
circumstances. See note 2 l) for further details.
There has been no material impact on the financial statements of
the Group from the adoption of these financial reporting standard
amendments and interpretations.
International financial reporting standards issued but not yet
effective which are applicable to the Group
There are a number of minor amendments to financial reporting
standards that were in issue but have not been applied in the
financial statements, as they were not yet effective on 31 December
2021. The adoption of these amendments will not have a material
impact on the financial statements of the Group in future
periods.
1. 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 future financial years. Actual
results may differ from these estimates.
As set out in the Task Force on Climate-related Financial
Disclosures (TCFD) report, climate change is a global challenge and
an emerging risk to businesses, people and the environment.
Therefore, in preparing the financial statements, the Group has
considered the impact of climate-related risks on its financial
position and performance, including the impact on expected credit
losses and redemption profiles included in EIR. While the effects
of climate change represent a source of uncertainty, the Group does
not consider there to be a material impact on its judgements and
estimates from the physical or transition risks in the short to
medium term.
Estimates and judgements are regularly reviewed based on past
experience, expectations of future events and other factors.
Judgements
The Group has made the following key judgements in applying the
accounting policies:
(i) Loan book impairments
Significant increase in credit risk for classification in stage
2
The Group's SICR rules, prior to the COVID-19 pandemic,
considered changes in default risk, internal impairment measures,
changes in customer credit bureau files, or whether forbearance
measures had been applied. The Group took steps to adjust the SICR
criteria through the pandemic to account for the changes in risk
profile and specifically for payment deferrals granted, noting that
not all of the instances of a payment deferral would be a
significant increase in credit risk.
As the COVID-19 payment deferrals initiative has ceased, newly
granted payment holidays are considered a SICR event, aligned to
the pre-COVID-19 SICR approach. Other adjustments made during the
pandemic to account for high risk accounts and those with income
stress are still considered in the SICR criteria.
(ii) IFRS 9 classification
Application of the 'business model' requirements under IFRS 9
requires the Group to conclude on the business models that it
operates and is a fundamental aspect in determining the
classification of the Group's financial assets.
Management concluded that the Group's business model is a 'held
to collect' business model with the majority of the Group's assets
being loans and advances held at amortised cost. This conclusion
was reached on the basis that the Group originates and purchases
loans and advances in order to collect contractual cash flows over
the life of the originated or purchased financial instrument.
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 with the
exception of one acquired mortgage book of GBP17.7m (2020:
GBP19.1m) that is recognised at FVTPL.
1. Judgements in applying accounting policies and critical accounting
estimates (continued)
Estimates
The Group has made the following estimates in the application of
the accounting policies that have a significant risk of material
adjustment to the carrying amount of assets and liabilities within
the next financial year:
(i) Loan book impairments
Set out below are details of the critical accounting estimates
which underpin loan impairment calculations. Less significant
estimates are not discussed as they do not have a material effect.
The Group has recognised total impairments of GBP101.5m (2020:
GBP111.0m) at the reporting date as disclosed in note 24.
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 LGD and forward-looking macroeconomic
scenarios.
Loss given default model
The Group has a number of LGD models, which include a number of
estimated inputs including propensity to go to possession given
default (PPD), forced sale discount, time to sale and sale cost
estimates. The LGD is sensitive to the application of the HPI. For
the OSB segment at 31 December 2021 a 10% fall in house prices
would result in an incremental GBP22.7m (2020: GBP25.6m) of
provision being required. For the CCFS segment at 31 December 2021
a 10% fall in house prices would result in an incremental GBP8.3m
(2020: GBP13.9m) of provision being required. The combined impact
across both OSB and CCFS businesses of a 10% fall in house prices
would result in an increase in total provisions of GBP31.0m (2020:
GBP39.5m) as at 31 December 2021.
The Group's forecasts of HPI movements used in the impairment
models are disclosed in the Risk profile performance review.
Forward-looking macroeconomic scenarios
The forward-looking macroeconomic scenarios affect LGD
estimates. Therefore the ECL calculations are sensitive to both the
scenarios utilised and their associated probability weightings.
The Group sources economic forecasts from an appropriately
qualified, independent third party. The Group considers four
probability-weighted scenarios: base, upside, downside and severe
downside scenarios. There still remains some uncertainty around the
pandemic, with the unknown economic impact of removing COVID-19
support measures in 2021 and the ongoing risk of further COVID-19
variants. There is also emerging uncertainty over the cost of
living, with high inflation and base rate increases forecast in the
near to medium term, therefore the management and Board deemed it
prudent to adjust the probability weightings as at 31 December 2021
to increase the contribution from the downside scenarios and
account for the increased economic uncertainty. The Group's
macroeconomic scenarios can be found in the Credit Risk section of
the Risk profile performance overview.
The following tables detail the ECL scenario sensitivity
analysis with each scenario weighted at 100% probability. The
purpose of using multiple economic scenarios is to model the
non-linear impact of assumptions surrounding macroeconomic factors
and ECL calculated:
1. Judgements in applying accounting policies and critical accounting
estimates (continued)
Weighted 100% Severe
(see note 100% Base 100% Upside 100% Downside downside
As at 31-Dec-21 24) case scenario scenario scenario scenario
Total loans before provisions,
GBPm 21,164.1 21,164.1 21,164.1 21,164.1 21,164.1
Modelled ECL, GBPm 48.3 26.5 13.1 74.0 120.3
Non-modelled ECL, GBPm 53.2 53.2 53.2 53.2 53.2
Total ECL, GBPm 101.5 79.7 66.3 127.2 173.5
ECL Coverage, % 0.48 0.38 0.31 0.60 0.82
As at 31-Dec-20
Total loans before provisions,
GBPm 19,322.6 19,322.6 19,322.6 19,322.6 19,322.6
Modelled ECL, GBPm 71.6 54.6 40.1 113.5 166.7
Non-modelled ECL, GBPm 39.4 39.4 39.4 39.4 39.4
Total ECL, GBPm 111.0 94.0 79.5 152.9 206.1
-------- -------- -------- -------- --------
ECL Coverage, % 0.57 0.49 0.41 0.79 1.07
(ii) Loan book acquisition accounting and income recognition
Acquired loan books are initially recognised at fair value.
Significant estimation is required 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 and the amount of incurred
losses.
The EIR on loan books purchased at significant discounts or
premiums is particularly sensitive to the weighted average life of
the loan book through the constant prepayment rate (CPR) and the
constant default rate (CDR) estimates assumed, 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, unless the variance is
due to changes in expectations of market rates of interest. The
Group monitors the actual cash flows for each acquired book, and
where they diverge significantly from expectation, the revised
future cash flows are discounted at the original EIR, with any
resulting change in carry value creating a corresponding gain or
loss in the Consolidated Statement of Comprehensive Income as
interest income. The Group also considers the total variance across
all acquired portfolios and the economic outlook.
The Group recognised a GBP7.5m loss in 2021 as a result of
resetting cash flows on acquired books (2020: loss of GBP3.5m). The
largest acquired book is Precise with sensitivities completed on
increasing/reducing the life of the book by six months which
results in a reset gain/loss of c. GBP27m/GBP31m (2020: c.
GBP33m/GBP37m).
It is reasonably possible, on the basis of existing knowledge,
that a change in estimated cash recoveries of principal and
interest which are past due at loan maturity could result in a
material increase in the value of the acquired second charge loan
portfolios with a corresponding increase in net interest income. It
is currently impracticable to estimate reliably the possible
effects of a change in cash flow recoveries as
they are subject to application of the Group's forbearance and
collections policies, following further engagement with borrowers
and regulatory guidance.
(iii) Effective interest rate on organic lending
Estimates are made when calculating the EIR for newly originated
loan assets. These include the likely customer redemption
profiles.
Mortgage products offered by the Group include directly
attributable net fee income and a period on reversion rates after
the fixed/discount period. Products revert to the standard variable
rate (SVR) or Base plus a margin for the Kent Reliance brand or a
SONIA/Base plus a margin for the Precise brand. The Group uses
historical customer behaviours, expected take-up rate of retention
products and macroeconomic forecasts in its assessment of
prepayment rates. Customer prepayments in a fixed rate or incentive
period can give rise to Early Repayment Charge (ERC) income.
Estimation is used in assessing whether and for how long
mortgages that reach the end of the initial product term stay on
reversion rates, and to the quantum and timing of prepayments that
incur ERCs. The estimate of customer weighted average life will
determine the period over which net fee income and expected
reversionary income is recognised. Estimates are reviewed regularly
and, as a consequence of the reviews, adjustments of GBP19.0m were
made in 2021, increasing net interest income and customer loans and
receivables.
Sensitivities have been applied to the Precise and Kent Reliance
loan books, to illustrate the impact on interest income of a change
in the expected weighted average lives of the loan books. An
extension of the expected life will typically result in increased
expectations of post reversionary income, less ERCs and a
recognition of net fee income over a longer period. A shortening of
the expected life will lead to reduced post reversionary income,
more ERCs and a recognition of net fees over a shorter period.
The potential duration of a change in customer behaviour as a
result of COVID-19, changes in lifestyle including working
patterns, higher cost of living and the macroeconomic outlook
remains uncertain. A period of six months' variance in the weighted
average lives of the loan books was selected to show this
sensitivity.
Applying a six month extension in the expected weighted average
life of the organic loan books would result in a gain of c.
GBP22.7m (2020: c. GBP22.6m) recognised in net interest income.
Applying a six month reduction in the expected weighted average
life of the loan book would result in a reset loss of c. GBP14.9m
(2020: c. GBP6.9m).
1. Interest receivable and similar income
2021 2020
GBPm GBPm
At amortised cost:
On OSB mortgages 541.3 496.8
On CCFS mortgages 342.9 331.9
On finance leases 6.3 3.8
On investment securities 2.1 2.5
On other liquid assets 2.7 5.3
Amortisation of fair value adjustments on
CCFS Combination(1) (66.1) (67.8)
Amortisation of fair value adjustments on
hedged assets(2) (39.9) (17.9)
789.3 754.6
At FVTPL:
Net expense on derivative financial instruments
- lending activities (42.9) (47.7)
At FVOCI:
On investment securities 0.4 5.0
746.8 711.9
------------------------------------------------ ------ ------
(1) Amortisation of fair value adjustments on CCFS loan book at
Combination.
(2) The amortisation relates to hedged assets where the hedges
were terminated before maturity and were effective at the point of
termination.
1. Interest payable and similar charges
2021 2020
GBPm GBPm
At amortised cost:
On retail deposits 156.7 245.5
On BoE borrowings 4.5 8.4
On PSBs 1.2 1.7
On subordinated liabilities 0.8 0.8
On wholesale borrowings 0.8 1.3
On debt securities in issue 3.9 3.4
On lease liabilities 0.3 0.3
Amortisation of fair value adjustments on
CCFS Combination(1) (1.5) (3.3)
Amortisation of fair value adjustments on
hedged liabilities(2) (1.1) -
165.6 258.1
At FVTPL:
Net income on derivative financial instruments
- savings activities (6.4) (18.4)
159.2 239.7
----------------------------------------------- ----- ------
(1) Amortisation of fair value adjustments on CCFS customer
deposits at Combination.
(2) The amortisation relates to hedged liabilities where the
hedges were terminated before maturity and were effective at the
point of termination.
1. Fair value gains on financial instruments
2021 2020
GBPm GBPm
Fair value changes in hedged assets (297.8) 107.3
Hedging of assets 298.9 (116.8)
Fair value changes in hedged liabilities 27.4 (4.1)
Hedging of liabilities (26.1) 6.8
Ineffective portion of hedges 2.4 (6.8)
Net gains/(losses) on unmatched swaps 10.3 (18.0)
Amortisation of inception adjustments(1) 3.0 13.0
Amortisation of acquisition-related inception
adjustments(2) 13.4 17.0
Amortisation of de-designated hedge relationships(3) 0.2 2.4
Fair value movements on mortgages at FVTPL 1.2 (0.2)
Debit and credit valuation adjustment (1.0) -
29.5 7.4
(1) The amortisation of inception adjustment relates to the
amortisation of the hedging adjustments arising when hedge
accounting commences, primarily on derivative instruments
previously taken out against the mortgage pipeline and also on
derivative instruments previously taken out against new retail
deposits.
(2) Relates to hedge accounting assets and liabilities
recognised on the Combination. The inception adjustments are being
amortised over the life of the derivative instruments acquired on
Combination subsequently designated in hedging relationships.
(3) Relates to the amortisation of hedged items where hedge
accounting has been discontinued due to ineffectiveness.
1. Gain on sales of financial instruments
On 10 February 2021, the Group sold the Precise Mortgage Funding
2019-1B plc A2 notes for GBP287.0m, generating a gain on sale of
GBP4.0m. Excluding the impact of the fair value adjustment on
Combination of GBP1.7m, the underlying gain on sale was
GBP2.3m.
On 17 January 2020, the Group sold the Canterbury Finance No.1
plc (Canterbury 1) A2 note for proceeds of GBP225.4m. After
incurring costs of GBP0.2m, a gain on sale of GBP1.9m was
recognised.
On 23 January 2020, the Group sold the F note and residual
certificates of Canterbury 1 for proceeds of GBP23.6m. Following
the sale the Group had no remaining interest in the Canterbury
securitisation. As a result, consolidation of Canterbury 1 into the
Group ceased on disposal. The Group recognised a gain on sale of
GBP16.0m upon deconsolidation.
1. Gain on sales of financial instruments (continued)
On 23 January 2020, the Group securitised mortgage loans with a
par value of GBP375.5m through Precise Mortgage Funding 2020-1B plc
(PMF 2020-1B), issuing GBP388.9m of Sterling floating rate notes.
The Group retained the GBP100.7m class A2 notes, with all other
note classes and the residual certificates being sold to the
external market. As such, the Group has not consolidated PMF
2020-1B as the risks and rewards have been transferred. The Group
recognised a gain on sale of GBP2.0m upon deconsolidation.
Excluding the impact of the fair value adjustment on the mortgages
on Combination with OSB of GBP13.1m, the underlying gain on sale
was GBP15.1m.
On 14 September 2020, the Group sold GBP150.0m of Canterbury
Finance No.3 plc A2 notes for GBP150.1m, resulting in a gain on
sale of GBP0.1m.
1. Other operating income
2021 2020
GBPm GBPm
Interest received on mortgages held at FVTPL 0.5 0.6
Fees and commissions receivable 7.4 8.4
7.9 9.0
--------------------------------------------- ---- ----
1. Administrative expenses
2021 2020
GBPm GBPm
Staff costs 92.5 86.0
Facilities costs 6.0 5.7
Marketing costs 4.0 5.1
Support costs(1) 25.3 18.4
Professional fees 16.9 22.3
Other costs 7.3 5.7
Depreciation (see note 30) 5.0 5.6
Amortisation (see note 31) 9.5 8.2
166.5 157.0
--------------------------- ----- -----
(1) External servicing costs of GBP6.1m are now categorised as
support costs in 2021 (2020: GBP6.0m categorised in professional
fees).
1. Administrative expenses (continued)
Included in professional fees are amounts paid to the Company's
auditor as follows:
2021 2020
GBP'000 GBP'000
Fees payable to the Company's auditor for
the audit of the Company's annual accounts 68 65
Fees payable to the Company's auditor for
the audit of the accounts of subsidiaries 2,330 2,198
Total audit fees 2,398 2,263
-------
Audit-related assurance services(1) 258 217
Other assurance services(2) 121 45
Other non-audit services(3) 240 101
Total non-audit fees 619 363
-------------------------------------------- ------- -------
Total fees payable to the Company's auditor 3,017 2,626
(1) Includes review of interim financial information and profit
verifications.
(2) 2021 costs comprise assurance reviews of Alternative
performance measures (APMs), integration costs and European Single
Electronic Format tagging. 2020 costs related to assurance review
of APMs and integration costs.
(3) 2021 costs comprise work related to the AT1 securities
issuance, a gap analysis in relation to TCFD and the European
Medium Term Note programme. 2020 primarily comprises work related
to the insertion of a new holding company.
Staff costs comprise the following:
2021 2020
GBPm GBPm
Salaries, incentive pay and other benefits 72.9 68.5
Share-based payments 6.7 5.1
Social security costs 7.7 8.1
Other pension costs 5.2 4.3
92.5 86.0
---- ----
The average number of people employed by the Group (including
Executive Directors) during the year is analysed below.
2021 2020
UK 1,220 1,330
India 535 486
1,755 1,816
------ ----- -----
1. Impairment of intangible assets
Assets arising on the Combination with CCFS in 2019 included a
broker relationships intangible asset with a fair value of GBP17.1m
on Combination. During 2020 an impairment of GBP7.0m was recognised
arising from changes to CCFS anticipated lending volumes over three
years post combination, which are a key input to the calculation of
the fair value, and which were revised due to COVID-19 impacts.
During 2021 an impairment assessment was performed and as actual
lending volumes were higher than anticipated the Group has
recognised an impairment reversal of GBP3.1m. The remaining
carrying value of the broker relationships intangible asset at 31
December 2021 is GBP5.0m (2020: GBP5.8m).
1. Directors' emoluments and transactions
2021 2020
GBP'000 GBP'000
Short-term employee benefits(1) 2,825 2,675
Post-employment benefits 106 99
Share-based payments(2) 1,267 425
4,198 3,199
-------------------------------- ------- -------
(1) Short-term employee benefits comprise Directors' salary
costs, Non-Executive Directors' fees and other short-term incentive
benefits, which are disclosed in the Annual Report on
Remuneration.
(2) Share-based payments represent the amounts received by
Directors for schemes that vested during the year.
In addition to the total Directors' emoluments above, the
Executive Directors were granted deferred bonuses of GBP633k (2020:
GBP495k) in the form of shares. Deferred Share Bonus Plan (DSBP)
awards granted from April 2021 have a holding period of three years
with no further conditions attached other than standard clawback
situations. In March 2020 and prior years, the DSBP awards were
subject to either a three or five year vesting period with
conditions attached, notably if the Director leaves prior to
vesting, the award is forfeited unless a good leaver reason applies
such as redundancy, retirement or ill-health.
The Executive Directors received a further share award under the
Performance Share Plan (PSP) with a grant date fair value of
GBP1,458k (2020: GBP1,359k) using a share price of GBP4.94 (2020:
GBP2.58) (the mid-market quotation on the day preceding the date of
grant). These shares vest annually from year three in tranches of
20 per cent, subject to performance conditions discussed in note 12
and the Annual Report on Remuneration.
The Directors of the Company are employed and compensated by
OneSavings Bank plc.
No compensation was paid for loss of office during 2021. The
compensation for loss of office during 2020 was GBP59k.
There were no outstanding loans granted in the ordinary course
of business to Directors and their connected persons as at 31
December 2021 and 2020.
The Annual Report on Remuneration and note 12 Share-based
payments provide further details on Directors' emoluments.
1. Share-based payments
Following the insertion of OSB GROUP PLC as the holding company
on 27 November 2020, the share awards and options over OneSavings
Bank plc shares were automatically transferred to OSB GROUP PLC
shares.
The Group operates the following share-based schemes:
Sharesave Scheme
The Save As You Earn (SAYE) or Sharesave Scheme is a share
option scheme which is available 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. If not exercised,
the amount saved is returned to the employee. The Sharesave Scheme
has been in operation since 2014 and an invitation to join the
scheme is usually extended annually, with the option price
calculated using the mid-market price of an OSB GROUP PLC ordinary
share over the three dealing days prior to the Invitation Date and
applying a discount of 20%.
Deferred Share Bonus Plan
The DSBP applies to Executive Directors and certain senior
managers with 50% of their performance bonuses to be deferred in
shares for three years for Executive Directors and one or five
years for senior managers. There are no further performance or
vesting conditions attached to deferred awards for senior managers,
which also applies to Executive Directors for awards granted from
April 2021; the share awards are subject to clawback provisions.
The DSBP awards are expensed in the year services are received with
a corresponding increase in equity. Awards granted to Executive
Directors in March 2020 and prior, are subject to vesting
conditions and are expensed over the vesting period.
DSBP awards for senior managers carry entitlements to dividend
equivalents, which are paid when the awards vest. DSBP awards
granted from April 2021 to Executive Directors are entitled to
dividend equivalents; awards granted in prior years were not
entitled to dividend equivalents.
Performance Share Plan
Executive Directors and certain senior managers are also
eligible for a PSP award based on performance conditions which vest
in tranches over three to seven years.
The performance conditions that apply to PSP awards from 2020
are based on a combination of earnings per share (EPS) weighting of
35%, total shareholder return (TSR) 35%, risk-based 15% and return
on equity (ROE) 15%. Prior to 2020, PSP awards were based on a
combination of EPS weighting of 40%, TSR 40% and ROE 20%. The PSP
conditions are assessed independently. The EPS element assesses the
compound annual growth rate over the performance period, that is,
the annualised growth from a base year 0 to final year 3. For
example, the 2022 Award will measure the EPS growth from 1 January
2021 to 31 December 2024. For the TSR element, the Company's
ordinary shares relative performance is measured against the FTSE
250 (excluding investment trusts). The risk-based measure is
assessed against the risk management performance with regard to all
relevant risks including, but not limited to, an assessment of
regulatory risk, operational risk, conduct risk, liquidity risk,
funding risk, marketing risk and credit risk. For the ROE element,
growth rates are assessed against the Group's underlying profit
after taxation as a percentage of average shareholders' equity.
As part of the Combination, mirror PSP awards were granted to
replace the 2018 and 2019 CCFS schemes that terminated upon the
Combination. The mirror PSP schemes follow the same performance
conditions as the Group's 2018 and 2019 PSP awards.
The share-based expense for the year includes a charge in
respect of the Sharesave Scheme, DSBP and PSP. All charges are
included in employee expenses within note 9 Administrative
expenses.
1. Share-based payments (continued)
The share-based payment expense during the year comprised the
following:
2021 2020
GBPm GBPm
Sharesave Scheme 0.7 0.5
Deferred Share Bonus Plan 3.8 3.9
Performance Share Plan 2.2 0.7
6.7 5.1
-------------------------- ---- ----
Movements in the number of share awards and their weighted
average exercise prices are set out below:
Deferred Share Performance
Sharesave Scheme Bonus Plan Share Plan
Weighted average
exercise price,
Number GBP Number Number
At 1 January 2021 2,745,332 2.53 1,119,757 4,986,527
Granted 339,097 3.96 363,624 1,477,111
Exercised/Vested (270,709) 3.10 (683,456) (513,927)
Forfeited (392,460) 2.63 (2,809) (724,631)
At 31 December
2021 2,421,260 2.65 797,116 5,225,080
----------------- --------- ---------------- -------------- -----------
Exercisable at:
31 December 2021 8,480 3.37 - -
--------- ---------------- --------------
At 1 January 2020 2,869,146 2.63 738,473 3,096,371
Granted 1,483,202 2.29 839,735 2,756,176
Exercised/Vested (1,080,430) 2.32 (449,608) (383,205)
Forfeited (526,586) 2.79 (8,843) (482,815)
At 31 December 2020 2,745,332 2.53 1,119,757 4,986,527
-------------------- ---- --------- ---------
Exercisable at:
31 December 2020 118,402 2.89 - -
----------- ---- ---------
For the share-based awards granted during the year, the weighted
average grant date fair value was 286 pence (2020: 188 pence).
1. Share-based payments (continued)
The range of exercise prices and weighted average remaining
contractual life of outstanding awards are as follows:
2021 2020
Weighted Weighted
average average
remaining remaining
contractual contractual
Exercise price Number life (years) Number life (years)
Sharesave Scheme
227 - 335 pence (2020: 227 -
335 pence) 2,421,260 2.0 2,745,332 2.5
Deferred Share Bonus Plan
Nil 797,116 0.7 1,119,757 0.7
Performance Share Plan
Nil 5,225,080 2.4 4,986,527 2.5
8,443,456 2.1 8,851,616 2.3
----------------------------- --------- ------------- --------- -------------
Sharesave Scheme
2021 2020 2019 2018 2017
Contractual life,
years 3 3 5 3 5 3 5 3 5
Share price at issue,
GBP 5.13 2.86 2.86 3.32 3.32 4.19 4.19 3.93 3.93
Exercise price,
GBP 3.96 2.29 2.29 2.65 2.65 3.35 3.35 3.15 3.15
Expected volatility,
% 37.9 57.6 57.6 31.9 31.9 16.1 16.5 18.0 17.3
Dividend yield,
% 4.5 3.3 3.3 4.8 4.8 4.4 4.4 4.1 4.1
Grant date fair
value, GBP 1.46 1.22 1.34 0.90 0.91 0.40 0.43 0.75 0.70
---------------------- ---- ---- ---- ---- ---- ---- ---- ---- ----
The sharesave schemes are not entitled to dividends between the
option and exercise date. A Black Scholes model is used to
determine the grant date fair value with two inputs:
-- Expected volatility - from 2019, the expected volatility is based on the
Company's share price. Prior to this the Group used the FTSE 350
diversified financials volatility as insufficient history was available
for the Company's share price.
-- Dividend -- based on the average dividend yield across external analyst
reports for the quarter prior to scheme grant date.
Deferred Share Bonus Plan
2020 2019 2018 2017
Contractual life,
years 3 3 3 5
Mid-market share
price, GBP 2.58 3.96 3.80 4.04
Attrition rate,
% - 8.4 9.7 11.8
Dividend yield,
% 5.6 4.7 4.6 4.0
Grant date fair
value, GBP 2.21 3.47 3.34 3.37
------------------ ---- ---- ---- ----
For awards granted from April 2021 there are no further
performance or vesting conditions attached to deferred awards, for
further details see DSBP above.
1. Share-based payments (continued)
For DSBP awards where conditions exist, these schemes carry no
rights to dividend equivalents and a Black Scholes model is used to
determine the grant date fair value with a dividend yield input
applied -- based on the average dividend yield across external
analyst reports for the quarter prior to scheme grant date.
Performance Share Plan
Performance awards are typically made annually at the discretion
of the Group Remuneration Committee. Awards are based on a mixture
of internal financial performance targets, risk-based measures and
relative TSR.
Non-market performance conditions exist for the scheme notably
that you are employed by the Company at the vesting date with good
leaver exceptions, and an attrition rate is applied as an estimate
of the actual number of awards that will meet the related
conditions at the vesting date.
The awards are not entitled to a dividend equivalent between
grant date and vesting and a Black Scholes model is used to
determine the grant date fair value with a dividend yield input
applied -- based on the average dividend yield across external
analyst reports for the quarter prior to scheme grant date.
The fair value of an option that is subject to market conditions
(the relative share price element of the Performance Share Plan) is
determined at grant date using a Monte Carlo model at the time of
grant.
The inputs into the models are as follows:
2021 2020 2019 2018
Contractual life,
years 3-7 3-7 3 3
Mid-market share
price, GBP 4.94 2.58 3.96 4.11
Attrition rate,
% 12.8 7.3 8.4 9.7
Expected volatility,
% 59.5 43.9 26.8 29.1
Dividend yield,
% 3.8 5.6 4.7 4.6
Vesting rate - TSR
% 40.8 27.8 44.9 54.0
Grant date fair
value, GBP 4.26 2.06 3.47 3.61
--------------------- ---- ---- ---- ----
CCFS PSP Mirror Schemes
2019 2018
Contractual life,
years 3 2
Mid-market share
price, GBP 3.54 3.54
Expected volatility,
% 28.6 28.6
Attrition rate,
% - -
Dividend yield,
% 4.8 4.8
Vesting rate - TSR,
% 37.4 37.4
Grant date fair
value, GBP 3.29 3.17
----------------------- ---- ----
1. Integration costs
2021 2020
GBPm GBPm
Consultant fees 2.2 1.7
Staff costs 2.2 8.1
Impairment 0.6 -
5.0 9.8
---------------- ---- ----
Consultant fees relate to advice on the Group's future operating
structure.
Staff costs relate to personnel who will leave or have left the
Group through the transition of operations to the new operating
model.
Impairment relates to a property sold during the year.
1. Exceptional items
2021 2020
GBPm GBPm
Consultant fees - 2.0
Legal and professional fees 0.2 1.3
0.2 3.3
---------------------------- ---- ----
Exceptional items relate to the insertion of OSB GROUP PLC as
the new holding company and listed entity of the Group.
1. Taxation
The Group publishes its tax strategy on its corporate website.
The table below shows the components of the Group's tax charge for
the year:
2021 2020
GBPm GBPm
Corporation taxation 128.0 79.7
Deferred taxation (0.2) (0.8)
Release of deferred taxation on CCFS Combination(1) (8.5) (14.8)
Total taxation 119.3 64.1
---------------------------------------------------- ----- ------
(1) Release of deferred taxation on CCFS Combination relates to
the unwind of the deferred tax liabilities recognised on the fair
value adjustments of the CCFS assets and liabilities at the
acquisition date (GBP14.1m) (2020: GBP19.6m) and the impact of the
corporation tax rate increase on these deferred tax liabilities
(GBP5.6m) (2020: GBP4.8m).
1. Taxation (continued)
The charge for taxation on the Group's profit before taxation
differs from the charge based on the standard rate of UK
Corporation Tax of 19% (2020: 19%) as follows:
2021 2020
GBPm GBPm
Profit before taxation 464.6 260.4
Profit multiplied by the standard rate of
UK Corporation Tax (19%) 88.3 49.5
Bank surcharge(1) 27.7 11.0
Taxation effects of:
Expenses not deductible for taxation purposes 0.7 1.6
Impact of deferred tax rate change(2) 5.2 4.4
Adjustments in respect of earlier years - (0.4)
Tax adjustments in respect of share-based
payments 1.2 0.8
Tax on coupon paid on non-controlling interest
securities (2.5) (1.5)
Timing differences (1.3) (1.3)
Total taxation charge 119.3 64.1
----------------------------------------------- ----- -----
(1) Tax charge for the two banking entities of GBP31.9m (2020:
GBP16.8m) offset by the tax impact of unwinding CCFS Combination
items of GBP4.2m (2020: GBP5.8m).
(2) Due to change in corporation tax rate from 19% to 25% on 1
April 2023 (2020: due to cancelled rate reductions from 19% to 17%
on 1 April 2020).
Factors affecting tax charge for the year
On 24 May 2021, the Government substantively enacted legislation
to increase the corporation tax rate from 19% to 25% from 1 April
2023. This has increased the deferred tax charge in the year by
GBP5.2m.
The effective tax rate for the year ended 31 December 2021,
excluding the impact of adjustments in respect of earlier years and
the deferred tax rate change, was 24.6% (2020: 23.1%).
The GBP5.2m (2020: GBP4.4m) impact of the deferred tax rate
change relates predominantly to the deferred tax liability from the
CCFS combination (see note 29 and 39).
During the year a tax credit of GBP1.6m (2020: credit of
GBP0.3m) of tax has been recognised directly within equity relating
to the Group's share-based payment schemes.
During the year a tax credit of GBP0.5m (2020: charge of
GBP0.5m) has been recognised within OCI relating to investment
securities classified as FVOCI.
1. Taxation (continued)
Factors that may affect future tax charges
In November 2021, the government announced that the bank
surcharge would reduce from 8% to 3% from 1 April 2023, together
with an increase in the surcharge annual allowance from GBP25m to
GBP100m. These changes were not substantively enacted into
legislation at the balance sheet date and so have not been
reflected in these financial statements. We have assessed the
impact of these changes and concluded that they will not have a
material impact on the Group's deferred tax balances.
1. Earnings per share
Earnings per share (EPS) is based on the profit for the year and
the weighted average 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 coupon on non-controlling interest securities
classified as equity:
2021 2020
GBPm GBPm
Statutory profit after tax 345.3 196.3
Less: Coupon on non-controlling interest securities
classified as equity (4.7) (5.5)
Statutory profit attributable to ordinary
shareholders 340.6 190.8
---------------------------------------------------- ----- -----
2021 2020
Weighted average number of shares, millions
Basic 448.1 446.2
Dilutive impact of share-based payment schemes 4.6 4.0
Diluted 452.7 450.2
Earnings per share, pence per share
Basic 76.0 42.8
Diluted 75.2 42.4
1. Dividends
On 27 November 2020, OSB GROUP PLC became the ultimate parent
company, and soon after the listed entity of Group, replacing
OneSavings Bank plc which is now a 100% subsidiary of OSB GROUP
PLC.
2021 2020
Pence per
GBPm share GBPm Pence per share
Final dividend for the prior
year 64.8 14.5 - -
Interim dividend for the current
year 21.9 4.9 - -
86.7 -
---------------------------------
The Directors recommend a final dividend of GBP94.7m, 21.1 pence
per share (2020: GBP64.8m, 14.5 pence per share) payable on 18 May
2022 with an ex-dividend date of 24 March 2022 and a record date of
25 March 2022. This dividend is not reflected in these financial
statements as it is subject to approval by shareholders at the AGM
on 12 May 2022. This will make up the total dividend for 2021 of
GBP116.6m, 26.0 pence per share (2020: GBP64.8m, 14.5 pence per
share).
A summary of the Company's distributable reserves is shown
below:
2021 2020
GBPm GBPm
Retained earnings 1,358.4 -
Other distributable reserves(1) (3.5) -
Distributable reserves 1,354.9 -
---------------------------------- ------- ----
(1) Other distributable reserves comprises own shares held in
the Group's EBT of GBP3.5m which are recognised within OSBG under
look-through accounting.
Further additional distributable reserves are expected to be
realised over time from dividend receipts from profits generated
from the subsidiaries including two regulated banks within the
Group.
As at 31 December 2020 OSB GROUP PLC had no distributable
reserves. The Company reduced the nominal value of OSB GROUP PLC
shares from 304 pence each to 1 penny each on 26 February 2021 (see
note 1). The dividend of GBP64.8m was paid on 2 June 2021 out of
the distributable reserves following this capital reduction
exercise.
1. Cash and cash equivalents
The following table analyses the cash and cash equivalents
disclosed in the Consolidated Statement of Cash Flows:
2021 2020
GBPm GBPm
Cash in hand 0.5 0.5
Unencumbered loans and advances to credit
institutions 2,636.2 2,370.1
Investment securities 100.0 -
2,736.7 2,370.6
------------------------------------------ ------- -------
1. Loans and advances to credit institutions
2021 2020
GBPm GBPm
Unencumbered:
BoE call account 2,496.4 2,256.5
Call accounts 43.3 55.6
Cash held in special purpose vehicles(1) 89.6 51.0
Term deposits 6.9 7.0
Encumbered:
BoE cash ratio deposit 59.5 52.3
Cash held in special purpose vehicles(1) 48.0 42.7
Cash margin given 99.9 211.1
2,843.6 2,676.2
----------------------------------------- ------- -------
(1) Cash held in special purpose vehicles (SPVs) is ring-fenced
for use in managing the Group's securitised debt facilities under
the terms of securitisation agreements. Cash held in internal SPVs
is treated as unencumbered in proportion to the retained interest
in the SPV based on the nominal value of the bonds held in the
Group to total bonds in the securitisation, and included in cash
and cash equivalents. Cash retained in SPVs designated as cash
reserve credit enhancement is treated as encumbered in proportion
to the external holdings in the SPV and excluded from cash and cash
equivalents.
1. Investment securities
2021 2020
GBPm GBPm
Held at FVTPL:
RMBS loan notes 0.7 -
0.7 -
Held at FVOCI:
UK Sovereign debt 152.1 -
RMBS loan notes 15.5 285.0
167.6 285.0
Held at amortised cost:
UK Sovereign debt 100.0 -
RMBS loan notes 223.1 186.2
323.1 186.2
Less: Expected credit losses - -
323.1 186.2
491.4 471.2
At 31 December 2021, the Group had no RMBS held at FVOCI (2020:
GBP147.1m) and GBP119.5m of RMBS held at amortised cost (2020:
GBP13.7m) sold under repos.
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 FVTPL, FVOCI and
amortised cost in accordance with the Group's business model for
each security.
1. Investment securities (continued)
Movements during the year in investment securities held by the
Group are analysed as follows:
2021 2020
GBPm GBPm
At 1 January 471.2 635.3
Additions(1,2) 568.2 291.6
Disposals and maturities(3) (549.7) (457.2)
Movement in accrued interest 0.6 0.5
Changes in fair value 1.1 1.0
At 31 December 491.4 471.2
------- -------
(1) Additions includes GBP100.0m of UK Treasury bills which had
a maturity of less than three months from date of acquisition
(2020: nil).
(2) The prior year additions included GBP100.7m of retained RMBS
loan notes following the deconsolidation of PMF 2020-1B.
(3) The prior year disposals and maturities included GBP49.9m of
UK Sovereign debt which had a maturity of less than three months
from date of acquisition.
At 31 December 2021, investment securities included investments
in unconsolidated structured entities (note 46) of GBP100.7m notes
in PMF 2020-1B and GBP21.0m notes in PMF 2017-1B (2020: GBP100.7m
notes in PMF 2020-1B, and GBP285.0m notes in PMF 2019-1B). The
investments represent the maximum exposure to loss from
unconsolidated structured entities.
1. Loans and advances to customers
2021 2020
GBPm GBPm
Held at amortised cost:
Loans and advances (see note 22) 21,047.9 19,257.1
Finance leases (see note 23) 116.2 65.5
21,164.1 19,322.6
Less: Expected credit losses (see note 24) (101.5) (111.0)
21,062.6 19,211.6
Residential mortgages held at FVTPL 17.7 19.1
21,080.3 19,230.7
------------------------------------------- --------
1. Loans and advances
2021 2020
OSB CCFS Total OSB CCFS Total
GBPm GBPm GBPm GBPm GBPm GBPm
Gross carrying
amount
Stage 1 10,393.2 7,685.7 18,078.9 9,310.8 6,749.5 16,060.3
Stage 2 1,142.3 1,269.8 2,412.1 1,362.0 1,327.6 2,689.6
Stage 3 360.4 99.1 459.5 344.5 48.1 392.6
Stage 3 (POCI) 45.2 52.2 97.4 48.6 66.0 114.6
11,941.1 9,106.8 21,047.9 11,065.9 8,191.2 19,257.1
-------------------- -------- ------- -------- -------- ------- --------
1. Loans and advances (continued)
The mortgage loan balances pledged as collateral for liabilities
are:
2021 2020
GBPm GBPm
BoE under TFS and TFSME 5,887.2 5,203.2
Securitisation 486.5 435.4
6,373.7 5,638.6
------------------------ ------- -------
The Group's securitisation programmes, use of TFS and TFSME
result in certain assets being encumbered as collateral against
such funding. As at 31 December 2021, the percentage of the Group's
gross customer loans and receivables that are encumbered was 30%
(2020: 29%).
The tables below show the movement in loans and advances to
customers by IFRS 9 stage during the year:
Stage 3
Stage 1 Stage 2 Stage 3 (POCI) Total
GBPm GBPm GBPm GBPm GBPm
At 1 January 2020 17,239.2 749.5 294.4 136.8 18,419.9
Originations(1) 3,767.0 - - - 3,767.0
Acquisitions 60.8 - - 1.5 62.3
Disposals (787.3) (16.1) (1.0) - (804.4)
Repayments and
write-offs(2) (2,119.1) (3.9) (41.0) (23.7) (2,187.7)
Transfers:
- To Stage 1 324.8 (293.5) (31.3) - -
- To Stage 2 (2,300.3) 2,344.5 (44.2) - -
- To Stage 3 (124.8) (90.9) 215.7 - -
At 31 December 2020 16,060.3 2,689.6 392.6 114.6 19,257.1
Originations(1) 4,523.4 - - - 4,523.4
Acquisitions(3) 277.7 - - 2.7 280.4
Disposals(3) (214.4) - - - (214.4)
Repayments and
write-offs(2) (2,539.8) (160.3) (78.6) (19.9) (2,798.6)
Transfers:
- To Stage 1 1,401.0 (1,370.2) (30.8) - -
- To Stage 2 (1,339.7) 1,384.1 (44.4) - -
- To Stage 3 (89.6) (131.1) 220.7 - -
At 31 December 2021 18,078.9 2,412.1 459.5 97.4 21,047.9
--------- --------- ------- ------- ---------
(1) Originations include further advances and drawdowns on
existing commitments.
(2) Repayments and write-offs include customer redemptions.
(3) The Group acted as co-arranger in the re-securitisation of
GBP229.6m of third party mortgages from the Rochester Financing
No.2 PLC securitisation to the new Rochester Financing No.3 PLC
securitisation on 15 June 2021. Neither securitisation is a
subsidiary of the Group. Under the terms of the mortgage sale
agreements, the Group recognised the mortgages as a purchase from
Rochester Financing No.2 PLC and immediately derecognised them as a
sale to Rochester Financing No.3 PLC. OneSavings Bank plc is the
master servicer of the mortgages, and has retained 5% of these
mortgages, as required under the retention rules. In addition to
the Group acting as co-arranger for the re-securitisation of
Rochester Financing No.2 PLC, the Group purchased an external
mortgage book, a c. GBP55m portfolio of UK residential mortgages,
at a discount to current balances (prior year one external mortgage
book purchased at par).
1. Finance leases
The Group provides asset finance lending through InterBay Asset
Finance Limited.
2021 2020
GBPm GBPm
Gross investment in finance leases, receivable
Less than one year 39.7 21.9
Between one and five years 87.0 50.4
More than five years 0.9 1.3
127.6 73.6
Unearned finance income (11.4) (8.1)
Net investment in finance leases 116.2 65.5
----------------------------------------------- ------ -----
Net investment in finance leases, receivable
Less than one year 34.7 18.6
Between one and five years 80.6 45.7
More than five years 0.9 1.2
116.2 65.5
------
The Group has recognised GBP4.3m of ECLs on finance leases as at
31 December 2021 (2020: GBP2.6m).
1. Expected credit losses
The ECL has been calculated based on various scenarios as set
out below:
2021 2020
ECL Weighted ECL Weighted
provision Weighting ECL provision provision Weighting ECL provision
GBPm % GBPm GBPm % GBPm
Scenarios
Upside 13.1 20 2.6 40.1 30 12.0
Base case 26.5 40 10.6 54.6 40 21.8
Downside scenario 74.0 28 20.7 113.5 23 26.1
Severe downside
scenario 120.3 12 14.4 166.7 7 11.7
Total weighted
provisions 48.3 71.6
Non-modelled
provisions:
Individually assessed
provisions 40.4 29.0
Post model
adjustments(1) 12.8 10.4
Total provision 101.5 111.0
---------------------- --------- --------- -------------- --------- --------- --------------
(1) To ensure that provision coverage levels remain appropriate,
management and the Board hold a number of post model adjustments,
to capture any specific risks not captured within the models and
economic forecasts as highlighted by the Group's risk functions
top-down lending segment analysis or adjustments that still remain
relevant from those introduced due to COVID-19 observations,
restrictions and economic support measures. Additional information
can be found in the Credit risk section of the Risk profile
performance review.
The Group's ECL by segment and IFRS 9 stage is shown below:
2021 2020
OSB CCFS Total OSB CCFS Total
GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1 9.3 2.8 12.1 12.3 8.9 21.2
Stage 2 14.2 10.8 25.0 17.9 13.1 31.0
Stage 3 56.6 3.8 60.4 49.4 2.3 51.7
Stage 3 (POCI) 2.1 1.9 4.0 4.0 3.1 7.1
82.2 19.3 101.5 83.6 27.4 111.0
--------------- ---- ---- ----- ---- ---- -----
1. Expected credit losses (continued)
The tables below show the movement in the ECL by IFRS 9 stage
during the year. ECLs on originations and acquisitions reflect the
IFRS 9 stage of loans originated or acquired during the year as at
31 December and not the date of origination. Re-measurement 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.
Stage
Stage 1 Stage 2 Stage 3 3 (POCI) Total
GBPm GBPm GBPm GBPm GBPm
At 1 January 2020 5.6 5.6 23.8 7.9 42.9
Originations 6.3 - - - 6.3
Acquisitions - - 0.1 - 0.1
Disposals (0.1) (0.2) (0.1) - (0.4)
Repayments and write-offs (0.7) (0.3) (4.1) (1.1) (6.2)
Re-measurement of loss
allowance 6.3 7.7 29.0 (0.2) 42.8
Transfers:
- To Stage 1 2.0 (1.4) (0.6) - -
- To Stage 2 (1.0) 2.8 (1.8) - -
- To Stage 3 (0.1) (1.2) 1.3 - -
Changes in assumptions
and model parameters 2.9 18.0 4.1 0.5 25.5
At 31 December 2020 21.2 31.0 51.7 7.1 111.0
Originations 5.7 - - - 5.7
Acquisitions 0.1 - - 0.1 0.2
Repayments and write-offs (2.8) (3.3) (7.4) (1.1) (14.6)
Re-measurement of loss
allowance (21.8) (0.8) 12.8 (2.1) (11.9)
Transfers:
- To Stage 1 11.3 (10.5) (0.8) - -
- To Stage 2 (2.3) 5.1 (2.8) - -
- To Stage 3 (0.3) (3.1) 3.4 - -
Changes in assumptions
and model parameters 1.0 6.6 3.5 - 11.1
At 31 December 2021 12.1 25.0 60.4 4.0 101.5
1. Expected credit losses (continued)
The table below shows the stage 2 ECL balances by transfer
criteria:
2021 2020
Carrying Carrying
value ECL Coverage value ECL Coverage
GBPm GBPm % GBPm GBPm %
Criteria:
Relative PD movement 1,251.6 17.1 1.37 946.9 17.0 1.80
Qualitative measures 1,125.0 7.4 0.66 1,680.7 12.7 0.76
30 days past due
backstop 37.0 0.5 1.35 63.4 1.3 2.05
Total 2,413.6 25.0 1.04 2,691.0 31.0 1.15
--------------------- -------- ---- -------- ---- --------
The Group has a number of qualitative measures to determine
whether a SICR has taken place. These triggers utilise both
internal performance information, to analyse whether an account is
in distress but not yet in arrears, and external credit bureau
information, to determine whether the customer is experiencing
financial difficulty with an external credit obligation.
1. Impairment of financial assets
The (credit)/charge for impairment of financial assets in the
Consolidated Statement of Comprehensive Income comprises:
2021 2020
GBPm GBPm
Write-offs in year 6.7 1.9
Disposals - 0.4
(Decrease)/increase in ECL provision (11.1) 68.7
(4.4) 71.0
------------------------------------- ------ ----
1. Derivatives
The table below reconciles the gross amount of derivative
contracts to the carrying balance shown in the Consolidated
Statement of Financial Position:
Contracts
Net amount subject
of financial to master Cash collateral
assets netting paid /
/ (liabilities) agreements (received)
presented not offset not offset
Gross amount in the in the in the
of recognised Consolidated Consolidated Consolidated
financial Statement Statement Statement
assets of Financial of Financial of Financial Net
/ (liabilities) Position Position Position amount
GBPm GBPm GBPm GBPm GBPm
At 31
December
2021
Derivative
assets:
Interest rate
risk
hedging 185.7 185.7 (16.9) (115.3) 53.5
185.7 185.7 (16.9) (115.3) 53.5
Derivative
liabilities:
Interest rate
risk
hedging (19.7) (19.7) 16.9 98.3 95.5
(19.7) (19.7) 16.9 98.3 95.5
---------------- ---------------- ------------- --------------- ------
At 31 December 2020
Derivative assets:
Interest rate risk hedging 12.3 12.3 (11.8) - 0.5
12.3 12.3 (11.8) - 0.5
--------------------------- ------- ------- ------ ----- ----
Derivative liabilities:
Interest rate risk hedging (163.6) (163.6) 11.8 210.5 58.7
(163.6) (163.6) 11.8 210.5 58.7
--------------------------- ------- ------- ------ ----- ----
Included within the Group's derivative assets is GBP48.7m (2020:
in derivative liabilities GBP(11.7)m) relating to derivative
contracts not covered by master netting agreements on which no cash
collateral has been paid.
1. Derivatives (continued)
The table below profiles the timing of nominal amounts for
interest rate risk hedging derivatives based on contractual
maturity:
Less than 3 - 12 More than
Total nominal 3 months months 1 - 5 years 5 years
GBPm GBPm GBPm GBPm GBPm
At 31 December 2021
Derivative assets 12,968.3 245.2 2,345.4 10,235.7 142.0
Derivative
liabilities 7,378.0 1,361.0 4,747.0 1,150.0 120.0
20,346.3 1,606.2 7,092.4 11,385.7 262.0
------------------- ------------- --------- ------- ----------- ---------
At 31 December 2020
Derivative assets 8,687.8 1,450.7 3,407.8 3,808.3 21.0
Derivative
liabilities 10,392.4 148.0 1,868.0 8,065.9 310.5
19,080.2 1,598.7 5,275.8 11,874.2 331.5
------------------- ------------- --------- ------- ----------- ---------
The Group has 841 (2020: 925) derivative contracts with an
average fixed rate of 0.34% (2020: 0.47%).
1. Hedge accounting
2021 2020
GBPm GBPm
Hedged assets
Current hedge relationships (190.9) 197.5
Swap inception adjustment (26.2) (100.5)
Cancelled hedge relationships 78.2 84.6
Fair value adjustments on hedged assets (138.9) 181.6
--------------------------------------------- ------- -------
Hedged liabilities
Current hedge relationships 19.6 (11.8)
Swap inception adjustment 3.3 6.2
Cancelled hedge relationships (1.4) -
De-designated hedge relationships (1.8) (2.6)
Fair value adjustments on hedged liabilities 19.7 (8.2)
--------------------------------------------- ------- -------
The swap inception adjustment relates to hedge accounting
adjustments arising when hedge accounting commences, primarily on
derivative instruments previously taken out against the mortgage
pipeline and on derivative instruments previously taken out against
new retail deposits.
De-designated hedge relationships relates to hedge accounting
adjustments on failed hedge accounting relationships. These
adjustments are amortised over the remaining lives of the original
hedged items.
Cancelled hedge relationships predominantly represent the
unamortised fair value adjustment for interest rate risk hedges
that have been cancelled and replaced due to IBOR transition,
securitisation activities and legacy long-term fixed rate mortgages
(c. 25 years at origination).
1. Hedge accounting (continued)
The tables below analyse the Group's portfolio hedge accounting
for fixed rate loans and advances to customers:
2021 2020
Hedged Hedging Hedged Hedging
item instrument item instrument
Loans and advances to customers GBPm GBPm GBPm GBPm
Carrying amount of hedged item/nominal
value of hedging instrument 12,364.3 12,550.2 11,282.4 11,159.7
Cumulative fair value adjustments (190.9) 187.4 197.5 (156.9)
Fair value adjustments for the
period (297.8) 298.9 107.3 (117.4)
Cumulative fair value on cancelled
hedge relationships 78.2 - 84.6 -
The cumulative fair value adjustments of the hedging instrument
comprise GBP187.7m (2020: GBP0.7m) recognised within derivative
assets and GBP0.3m (2020: GBP157.6m) recognised within derivative
liabilities.
The movement in cancelled hedge relationships is as follows:
2021 2020
Hedged assets GBPm GBPm
At 1 January 84.6 20.4
New cancellations(1) 33.5 86.1
Amortisation (39.9) (17.9)
Derecognition of hedged item - (4.0)
At 31 December 78.2 84.6
------------------------------- ------ ------
(1) Following the securitisation of mortgages during the year
and LIBOR swaps transferred to SONIA swaps through the IBOR
transition, the Group cancelled swaps which were effective prior to
the event, with the designated hedge moved to cancelled hedge
relationships to be amortised over the original life of the
swap.
The tables below analyse the Group's portfolio hedge accounting
for fixed rate amounts owed to retail depositors:
2021 2020
Hedged Hedging Hedged Hedging
item instrument item instrument
Customer deposits GBPm GBPm GBPm GBPm
Carrying amount of hedged item/nominal
value of hedging instrument 6,386.0 6,390.0 6,849.9 6,858.0
Cumulative fair value adjustments 19.6 (18.5) (11.8) 9.2
Fair value adjustments for the
period 27.4 (26.1) (4.1) 6.8
The cumulative fair value adjustments of the hedging instrument
comprise GBP0.3m (2020: GBP9.4m) recognised within derivative
assets and GBP18.8m (2020: GBP0.2m) recognised within derivative
liabilities.
1. Other assets
2021 2020
GBPm GBPm
Prepayments 9.3 7.3
Other assets 0.9 1.8
10.2 9.1
------------- ---- ----
1. Deferred taxation asset
Losses
carried Accelerated Share-based IFRS 9 transitional
forward depreciation payments adjustments Others(1) Total
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2020 0.9 0.1 2.6 0.7 0.5 4.8
Profit or loss
credit/(charge) - 0.3 0.9 - (0.4) 0.8
Transferred to corporation
tax liability - - (0.6) - - (0.6)
Tax taken directly
to OCI - - - - (0.5) (0.5)
Tax taken directly
to equity - - 0.2 - - 0.2
At 31 December 2020 0.9 0.4 3.1 0.7 (0.4) 4.7
Profit or loss
(charge)/credit (0.4) 0.1 1.7 - (1.2) 0.2
Transferred to corporation
tax liability - - (1.4) - - (1.4)
Tax taken directly
to OCI - - - - 0.5 0.5
Tax taken directly
to equity - - 1.6 - - 1.6
At 31 December 2021 0.5 0.5 5.0 0.7 (1.1) 5.6
--------------------------- -------- ------------- ----------- ------------------- --------- -----
(1) Others includes deferred taxation assets recognised on
financial assets classified as FVOCI, derivatives and short-term
timing differences.
In 2021, the profit or loss (charge)/credit includes a credit of
GBP0.4m from the deferred tax rate change (2020: charge of
GBP0.3m).
As at 31 December 2021, the Group had GBP3.5m (2020: GBP3.5m) of
losses for which a deferred tax asset has not been recognised as
the Group does not expect sufficient future profits to be available
to utilise the losses.
1. Property, plant and equipment
Right of use
assets
Freehold
land and Leasehold Equipment Property Other
buildings improvements and fixtures leases leases Total
GBPm GBPm GBPm GBPm GBPm GBPm
Cost
At 1 January 2020 19.3 2.7 14.4 12.7 1.3 50.4
Additions(1) - 0.3 2.5 0.6 - 3.4
Disposals and
write-offs(2) - - (3.0) (0.2) - (3.2)
Foreign exchange
difference (0.1) - (0.1) - - (0.2)
At 31 December
2020 19.2 3.0 13.8 13.1 1.3 50.4
Additions(1) - - 2.6 0.6 0.1 3.3
Disposals and
write-offs(2) (2.8) (0.1) (1.3) (0.5) (0.2) (4.9)
Foreign exchange
difference 0.1 - 0.1 - - 0.2
At 31 December
2021 16.5 2.9 15.2 13.2 1.2 49.0
----------------- ---------- ------------- ------------- -------- ------- -----
Depreciation
At 1 January 2020 1.1 0.5 6.1 1.0 0.1 8.8
Charged in year 0.3 0.4 2.9 1.8 0.2 5.6
Disposals and
write-offs(2) - - (3.0) (0.2) - (3.2)
At 31 December
2020 1.4 0.9 6.0 2.6 0.3 11.2
Charged in
year(3) 0.9 0.2 2.9 1.5 0.1 5.6
Disposals and
write-offs(2) (0.8) (0.1) (1.3) (0.5) (0.2) (2.9)
At 31 December
2021 1.5 1.0 7.6 3.6 0.2 13.9
----------------- ---------- ------------- ------------- -------- ------- -----
Net book value
At 31 December
2021 15.0 1.9 7.6 9.6 1.0 35.1
----------------- ---------- ------------- ------------- -------- ------- -----
At 31 December
2020 17.8 2.1 7.8 10.5 1.0 39.2
(1) Additions include modifications of GBP0.4m (2020: nil) of
right of use assets.
(2) During 2021 the Group disposed of a property for proceeds of
GBP2.0m and wrote off fully depreciated assets of GBP2.9m. In 2020,
the Group wrote off fully depreciated assets of GBP3.2m.
(3) Includes GBP0.6m of impairment on property sold during the
year which is included in note 13 integration cost (2020: nil).
1. Intangible assets
Computer
software
Development and Assets arising
costs licences on Combination(2) Total
GBPm GBPm GBPm GBPm
Cost
At 1 January 2020 0.5 15.4 23.6 39.5
Additions 1.8 2.6 - 4.4
Disposals and write-offs(1) - (1.3) - (1.3)
At 31 December 2020 2.3 16.7 23.6 42.6
Additions 1.4 2.8 - 4.2
Disposals and write-offs(1) - (3.5) (0.2) (3.7)
At 31 December 2021 3.7 16.0 23.4 43.1
--------------------------- ----------- --------- ------------------ -----
Amortisation
At 1 January 2020 - 6.8 1.3 8.1
Charged in year 0.1 3.6 4.5 8.2
Impairment in the year - - 7.0 7.0
Disposals and write-offs(1) - (1.3) - (1.3)
At 31 December 2020 0.1 9.1 12.8 22.0
Charged in year 0.5 3.2 5.8 9.5
Impairment reversal in
the year - - (3.1) (3.1)
Disposals and write-offs(1) - (3.5) (0.2) (3.7)
At 31 December 2021 0.6 8.8 15.3 24.7
--------------------------- ----------- --------- ------------------ -----
Net book value
At 31 December 2021 3.1 7.2 8.1 18.4
At 31 December 2020 2.2 7.6 10.8 20.6
---------------------------
(1) During the year the Group wrote off fully amortised
assets.
(2) Assets arising on Combination comprise broker relationships
of GBP5.0m (2020: GBP5.8m), technology of GBP1.9m (2020: GBP2.9m),
brand name of GBP0.8m (2020: GBP1.2m) and banking licence of
GBP0.4m (2020: GBP0.9m). The carrying value of the intangible
assets are reviewed each reporting period, a GBP3.1m impairment
reversal (2020: GBP7.0m impairment charge) was recognised in
relation to broker relationships due to less severe impacts of the
COVID-19 pandemic than originally estimated.
The Directors have considered the carrying value of intangible
assets and determined that there are no indications of impairment
at the year end.
1. Amounts owed to credit institutions
2021 2020
GBPm GBPm
BoE TFS - 2,568.6
BoE TFSME 4,203.1 1,000.1
Commercial repo 0.5 0.1
Loans from credit institutions 0.6 1.4
Cash collateral and margin received 115.4 -
4,319.6 3,570.2
------------------------------------ ------- -------
1. Amounts owed to retail depositors
2021 2020
OSB CCFS Total OSB CCFS Total
GBPm GBPm GBPm GBPm GBPm GBPm
Fixed rate deposits 6,221.7 4,703.4 10,925.1 6,275.6 4,781.4 11,057.0
Variable rate deposits 3,517.7 3,083.6 6,601.3 3,429.7 2,116.4 5,546.1
9,739.4 7,787.0 17,526.4 9,705.3 6,897.8 16,603.1
---------------------- ------- ------- -------- ------- ------- --------
1. Amounts owed to other customers
2021 2020
GBPm GBPm
Fixed rate deposits 50.3 46.0
Variable rate deposits 42.3 26.9
92.6 72.9
----
1. Debt securities in issue
2021 2020
GBPm GBPm
Asset-backed loan notes at amortised cost 460.3 421.9
Amount due for settlement after 12 months 460.3 421.9
460.3 421.9
----- -----
The asset-backed loan notes are secured on fixed and variable
rate mortgages and are redeemable in part from time to time, but
such redemptions are limited to the net principal received from
borrowers in respect of underlying mortgage assets. The maturity
date of the funds matches the contractual maturity date of the
underlying mortgage assets. The Group expects that a large
proportion of the underlying mortgage assets, and therefore these
notes, will be repaid within five years.
Asset-backed loan notes may all be repurchased by the Group at
any interest payment date on or after the call dates, or at any
interest payment date when the current balance of the mortgages
outstanding is less than or equal to 10% of the principal amount
outstanding on the loan notes on the date they were issued.
Interest is payable at fixed margins above SONIA.
As at 31 December 2021, notes were issued through the following
funding vehicles:
2021 2020
GBPm GBPm
CMF 2020-1 plc 199.8 288.6
Canterbury Finance No.3 plc 76.9 133.3
Canterbury Finance No.4 plc 183.6 -
460.3 421.9
---------------------------- ----- -----
1. Lease liabilities
2021 2020
GBPm GBPm
At 1 January 11.7 13.3
New leases 0.7 0.1
Lease terminated (0.1) -
Lease repayments (1.9) (2.0)
Interest accruals 0.3 0.3
At 31 December 10.7 11.7
------------------ -----
During the year, the Group incurred expenses of GBP0.2m (2020:
GBP0.7m) in relation to short-term leases and nil (2020: nil) in
relation to low-value assets.
1. Other liabilities
2021 2020
GBPm GBPm
Falling due within one year:
Accruals 23.2 19.7
Deferred income 0.9 0.6
Other creditors 5.5 7.5
29.6 27.8
----------------------------- ---- ----
1. Provisions and contingent liabilities
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 GBP85k for single account holders and GBP170k for
joint holders. As OSB and CCFS both hold banking licences, the full
FSCS protection is available to customers of each Bank.
The compensation paid out to consumers is initially funded
through loans from the BoE 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.
The Group has reviewed its current exposure to Payment
Protection Insurance (PPI) claims, following the FCA deadline for
PPI claims on 29 August 2019 and has recognised a provision of
GBP0.3m as at 31 December 2021 (2020: GBP0.3m). The Group has
maintained its provision for FCA conduct rules exposures of GBP1.2m
(2020: GBP1.2m) to cover potential future claims.
An analysis of the Group's FSCS and other provisions is
presented below:
2021 2020
ECL on ECL on
Other regulatory undrawn Other regulatory undrawn
FSCS provisions loan facilities Total FSCS provisions loan facilities Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 0.1 1.5 0.2 1.8 (0.2) 1.6 0.2 1.6
Refund/(paid)
during the year - - - - 0.3 (0.2) - 0.1
Charge - - 0.2 0.2 - 0.1 - 0.1
At 31 December 0.1 1.5 0.4 2.0 0.1 1.5 0.2 1.8
----------------- ---- ---------------- ---------------- ----- ----- ---------------- ---------------- -----
In January 2020, the Group was contacted by the FCA in
connection with a multi-firm thematic review into forbearance
measures adopted by lenders in respect of a portion of the mortgage
market. The Group has responded to information requests from the
FCA. It is not possible to reliably predict or estimate the outcome
of the review and therefore its financial effect, if any, on the
Group.
1. Deferred taxation liability
The deferred tax liability recognised on the Combination relates
to the timing differences of the recognition of assets and
liabilities at fair value, where the fair values will unwind in
future periods in line with the underlying asset or liability. The
deferred tax liability has been measured using the relevant rates
for the expected periods of utilisation.
CCFS Combination
GBPm
At 1 January 2020 63.1
Profit or loss credit (14.8)
At 31 December 2020 48.3
Profit or loss credit (8.5)
At 31 December 2021 39.8
-------------------------- ----------------
In 2021, the profit or loss credit includes a debit of GBP5.6m
impact of the deferred tax rate change (2020: a debit of
GBP4.7m).
1. Subordinated liabilities
2021 2020
GBPm GBPm
At 1 January 10.5 10.6
Repayment of debt at maturity (0.2) (0.1)
At 31 December 10.3 10.5
-------------------------------- ----- -----
The Group's outstanding subordinated liabilities are summarised
below:
2021 2020
GBPm GBPm
Linked to LIBOR:
Floating rate subordinated loans 2022
(LIBOR +5%) - 0.1
Floating rate subordinated loans 2022
(LIBOR +2%) 0.1 0.2
Fixed rate:
Subordinated liabilities 2024
(7.45%) 10.2 10.2
10.3 10.5
-------------------------------------- ---- ----
The LIBOR-linked subordinated liabilities had a rate reset in
September 2021 before the cessation of LIBOR, these subordinated
liabilities are due to mature in September 2022.
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 other creditors.
1. Perpetual Subordinated Bonds
2021 2020
GBPm GBPm
Sterling PSBs (4.5991%) - 22.3
Sterling PSBs (4.6007%) 15.2 15.3
15.2 37.6
----
The bonds are listed on the London Stock Exchange.
The GBP22.0m PSBs were redeemed on 7 September 2021 following
permission from the PRA and approval by the OneSavings Bank plc
Board.
The 4.6007% bonds 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 4.6007% until the next reset date on 27 August
2024.
1. Reconciliation of cash flows for financing activities
The tables below show a reconciliation of the Group's
liabilities classified as financing activities within the
Consolidated Statement of Cash Flows:
Amounts owed
to credit Debt securities Subordinated
institutions in issue liabilities
(see note (see note (see note PSBs (see
32) 35) 40) note 41) Total
GBPm GBPm GBPm GBPm GBPm
At 1 January 2020 3,068.8 296.3 10.6 37.6 3,413.3
Cash movements:
Principal drawdowns 1,505.0 486.2 - - 1,991.2
Principal repayments (998.9) (104.6) (0.1) - (1,103.6)
Deconsolidation of
special purpose vehicles - (256.2) - - (256.2)
Non-cash movements:
Accrued interest movement (4.7) 0.2 - - (4.5)
At 31 December 2020 3,570.2 421.9 10.5 37.6 4,040.2
Cash movements:
Principal drawdowns 4,863.0 195.6 - - 5,058.6
Principal repayments (4,113.7) (159.5) (0.2) (22.0) (4,295.4)
Non-cash movements:
Accrued interest movement 0.1 2.3 - (0.4) 2.0
At 31 December 2021 4,319.6 460.3 10.3 15.2 4,805.4
-------------------------- ------------- --------------- ------------ --------- ---------
1. Share capital
Number of shares Nominal
issued and value Premium
Ordinary shares fully paid GBPm GBPm
At 1 January 2020 445,443,454 4.5 864.2
Shares issued under OSB employee share
plans 1,860,744 - 2.6
Cancellation of OneSavings Bank plc
GBP0.01 share capital and share premium (447,304,198) (4.5) (866.8)
Issuance of OSB GROUP PLC GBP3.04
share capital 447,304,198 1,359.8 -
Shares issued under OSBG employee
share plans 8,582 - -
At 31 December 2020 447,312,780 1,359.8 -
Capital reduction of GBP3.04 nominal
value shares to GBP0.01 nominal value
shares - (1,355.3) -
Shares issued under OSBG employee
share plans 1,315,075 - 0.7
At 31 December 2021 448,627,855 4.5 0.7
----------------------------------------- ---------------- --------- -------
The holders of ordinary shares are entitled to receive dividends
as declared from time to time, and are entitled to one vote per
share at meetings of the Company. All ordinary shares rank equally
with regard to the Company's residual assets.
All ordinary shares issued in the current and prior year were
fully paid.
1. Other reserves
The Group's other reserves are as follows:
2021 2020
GBPm GBPm
Share-based payment 13.4 7.8
Transfer (1,355.3) (1,355.3)
Own shares (3.5) (4.0)
FVOCI 0.6 1.0
Foreign exchange (1.1) (1.0)
Non-controlling interest securities - 60.0
AT1 securities 150.0 -
(1,195.9) (1,291.5)
------------------------------------ --------- ---------
1. Other reserves (continued)
Transfer reserve
On 27 November 2020, a new ultimate parent company was inserted
into the Group, being OSBG. The share capital generated from
issuing 447,304,198 nominal shares at GBP3.04 per share, replacing
the nominal shares of GBP0.01 in OSB previously recognised in share
capital at the consolidation level, created a transfer reserve of
GBP1,355.3m.
Own shares
The Company has adopted the look-through approach for the EBT,
including the EBT within the Company. As at 31 December 2021, the
EBT held 848,221 OSBG shares (2020: 1,001,238 OSBG shares). The
Group and Company show these shares as a deduction from equity,
being the cost at which the shares were acquired of GBP3.5m (2020:
GBP4.0m).
FVOCI reserve
The FVOCI reserve represents the cumulative net change in the
fair value of investment securities measured at FVOCI.
Foreign exchange reserve
The foreign exchange reserve relates to the revaluation of the
Group's Indian subsidiary, OSB India Private Limited.
Non-controlling interest securities
Non-controlling interest securities comprised GBP60.0m of Fixed
Rate Resetting Perpetual Subordinated Contingent Convertible
Securities issued by OSB. The securities previously qualified as
AT1 capital under the Capital Requirements Directive and Regulation
(CRD IV) for OSB; however, they do not qualify for OSBG under the
CRD IV with the application of article 85--87 requirements where
there is an article 9 permission. The securities will be subject to
full conversion into ordinary shares of OSB in the event that its
Common Equity Tier 1 (CET1) capital ratio falls below 7%. The
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
securities. The 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 securities at the
principal amount outstanding plus any accrued but unpaid interest
from the first reset date and on any interest payment date
thereafter. These were redeemed on 7
October 2021 at a premium, with the premium of GBP3.5m
recognised directly in equity.
AT1 Securities
On 5 October 2021, OSBG issued AT1 securities. AT1 securities
comprise GBP150.0m of Fixed Rate Resetting Perpetual Subordinated
Contingent Convertible Securities that qualify as AT1 capital under
CRD IV. The securities will be subject to full conversion into
ordinary shares of OSBG in the event that the Group's CET1 capital
ratio falls below 7%. The securities will pay interest at a rate of
6% per annum until the first reset date of 7 April 2027, with the
reset interest rate equal to 539.3 basis points over the 5-year
Gilt Rate (benchmark gilt) for such a period. Interest is paid
semi-annually in April and October. OSBG 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 securities. The securities are perpetual with
no fixed redemption date. OSBG 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.
1. Financial commitments and guarantees
a) The Group did not have any contracted or anticipated capital expenditure commitments not provided for as at 31 December 2021 (2020: nil).
b) The Group's minimum lease commitments under operating leases not subject to IFRS 16 are summarised in the table below:
2021 2020
GBPm GBPm
Land and buildings: due within:
One year - 0.1
- 0.1
-------------------------------- ---- ----
c) Undrawn loan facilities:
2021 2020
GBPm GBPm
OSB mortgages 706.4 547.2
CCFS mortgages 434.5 420.8
Asset finance 14.4 11.5
1,155.3 979.5
--------------- ------- -----
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 2021 (2020: nil).
1. Risk management
Overview
Financial instruments form the vast majority of the Group's
assets and liabilities. The Group manages risk on a consolidated
basis and risk disclosures that follow 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 BoE call
accounts, call accounts with other credit institutions, RMBS and UK
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
BoE TFS and TFSME, supported by debt securities, subordinated debt,
wholesale and other funding. Equity instruments include own shares
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 to meet customer
demand 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. The most common
derivatives are futures, forwards and swaps. Of these, the Group
only uses swaps.
1. Risk management (continued)
Derivatives are used by the Group solely to reduce (hedge) the
risk of loss arising from changes in market rates. 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 income below-the-market rate when rates go up. While fixed
rate assets and liabilities naturally hedge each other to a certain
extent, this hedge is usually never perfect because of maturity
mismatches and principal amounts.
The Group uses swaps to convert its instruments, such as
mortgages, deposits and liquid assets, from fixed or base
rate-linked rates to reference linked variable rates. This ensures
a guaranteed margin between the interest income and interest
expense, regardless of changes in the market rates.
IBOR transition
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. During 2021 the FCA confirmed that LIBOR would be
discontinued on 31 December 2021. This is included as an emerging
risk within the Risk review.
In 2018, the Group set up an internal working group, comprising
all of the key business areas that are involved with this change,
including workstreams covering risk management, contracts, systems
and conduct risk considerations, with strong oversight from the
Compliance and Risk functions. The programme is overseen by the
LIBOR Transition Working Group which reports into the Group Assets
and Liabilities Committee. Risk assessments have been completed to
ensure this process is managed in a measured and controlled
manner.
The Group has no exposure to existing IBORs, other than to GBP
LIBOR. The Group no longer offers any LIBOR-linked loans and during
2021 all remaining LIBOR-linked derivatives with a maturity date
post Q1 2022 were cancelled and new SONIA-linked derivatives
entered into.
The Group adopted the Phase 1 amendments 'Interest Rate
Benchmark reform: Amendments to IFRS 9/IAS 39 and IFRS 7' in 2020.
These amendments modified specific hedge accounting requirements to
allow hedge accounting to continue for affected hedges during the
period of uncertainty before the hedged items or hedging
instruments are amended as a result of the interest rate benchmark
reform. The application of the Phase 1 amendments impacts the
Group's accounting in the following ways. Hedge accounting
relationships will continue even when, for IBOR fair value hedges,
the benchmark interest rate component may not be separately
identifiable.
The Group will not discontinue portfolio hedge accounting should
the retrospective assessment of hedge effectiveness for a hedging
relationship that is subject to the interest rate benchmark reform
fall outside the 80-125 per cent range. For portfolio hedging
relationships that are not subject to the interest rate benchmark
reform the entity continues to cease hedge accounting if
retrospective effectiveness is outside the 80-125 per cent
range.
1. Risk management (continued)
The Group has adopted 'Interest Rate Benchmark Reform -- Phase
2: Amendments to IFRS 9 Financial Instruments, IAS 39 Financial
Instruments: Recognition and Measurement, IFRS 7 Financial
Instruments: Disclosures, IFRS 4 Insurance Contracts and IFRS 16
Leases' which was issued in August 2020 and became mandatory for
annual reporting periods beginning on or after 1 January 2021 (see
note 2 aa)), enabling the Group to reflect the effects of
transitioning from IBOR to alternative benchmark interest rates
(also referred to as 'risk free rates' or RFRs) without giving rise
to accounting impacts that would not provide useful information to
users of financial statements. The Group, in regards to hedge
accounting has cancelled the LIBOR hedges to initiate new SONIA
hedges.
Mortgages
At 31 December 2021, the Group had GBP6,293.0m (31 December
2020: GBP8,001.7m) of LIBOR-linked lending, including floating-rate
mortgages on LIBOR-linked rates and fixed-rate mortgages that would
have reverted to LIBOR-linked rates in the future, out of total
mortgages balances of GBP21,047.9m (31 December 2020:
GBP19,257.1m).
The Group has worked through the back book transition for
existing loans. Direct communication with impacted customers
regarding the cessation of LIBOR and its implications commenced
during the first half of 2021 and is now complete. All necessary
systemic changes including IT system modifications are complete and
the remaining LIBOR-linked mortgage balances will transition to a
LIBOR replacement rate, defined as the 3-month SONIA benchmark rate
plus the ISDA fixed adjustment spread of 0.1193%, at their first
rate resets in or after Q1 2022.
Investment securities
At 31 December 2021, the Group had GBP34.8m (2020: GBP118.7m) of
GBP LIBOR-linked investment securities, comprising RMBS loan notes,
which will either mature or transfer to SONIA coupons during Q1
2022.
Where LIBOR-linked investment securities do not transfer to
adopting SONIA as a reference rate, a synthetic LIBOR rate is
temporarily available for issuers to adopt. There are no concerns
on the performance of these investments. The Group will only
purchase SONIA-linked investment securities in future.
The FCA has confirmed it will allow the temporary use of a
synthetic LIBOR rate in all legacy LIBOR contracts, other than
cleared derivatives, that have not been changed by 31 December
2021. Synthetic LIBOR will be calculated in a way that does not
rely on submissions from panel banks, and is instead based on RFRs.
The availability of synthetic LIBOR is not guaranteed beyond the
end of 2022.
Retail savings
None of the OSB or CCFS current or back book retail savings
products have a GBP LIBOR component within the product.
Non-controlling interest securities
The GBP60.0m non-controlling interest securities, which were
paying interest at a rate of 9.125% per annum until their first
reset date on 25 May 2022 when they would have reverted to a LIBOR
swap rate, were redeemed during October 2021.
Derivatives
As at 31 December 2021, the total nominal amount of the Group's
derivatives was GBP20,346.3m (31 December 2020: GBP19,080.2m), of
which the Group had LIBOR-linked swaps with a nominal value of
GBP436.0m (31 December 2020: GBP8,020.0m) and a fair value of
GBP(0.2)m (31 December 2020: GBP89.1m) hedging assets and
liabilities.
The remaining LIBOR-linked swaps at 31 December 2021 will mature
during Q1 2022.
1. Risk management (continued)
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 compliance/regulatory, which are covered in the Risk
review.
Credit risk
Credit risk is the risk that 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 regulatory 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 BoE 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 committed
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 Group
Risk Committee, with mandates set for the approval of loan
applications.
The Group Credit Committee and 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 Group Risk Committee.
1. Risk management (continued)
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.
2021
OSB CCFS Total
Capped Capped Capped
Gross carrying collateral Gross carrying collateral Gross carrying collateral
amount held amount held amount held
GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1 10,502.7 10,478.1 7,685.7 7,684.6 18,188.4 18,162.7
Stage 2 1,143.8 1,141.9 1,269.8 1,269.7 2,413.6 2,411.6
Stage 3 365.6 337.9 99.1 99.1 464.7 437.0
Stage 3
(POCI) 45.2 43.6 52.2 52.2 97.4 95.8
12,057.3 12,001.5 9,106.8 9,105.6 21,164.1 21,107.1
------- -------------- ----------- -------------- ----------- -------------- -----------
2020
OSB CCFS Total
Capped Capped Capped
Gross carrying collateral Gross carrying collateral Gross carrying collateral
amount held amount held amount held
GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1 9,366.8 9,303.4 6,749.5 6,747.9 16,116.3 16,051.3
Stage 2 1,363.4 1,359.8 1,327.6 1,327.6 2,691.0 2,687.4
Stage 3 352.6 323.3 48.1 48.1 400.7 371.4
Stage 3
(POCI) 48.6 48.4 66.0 66.0 114.6 114.4
11,131.4 11,034.9 8,191.2 8,189.6 19,322.6 19,224.5
------- -------------- ----------- -------------- ----------- -------------- -----------
The Group's main form of collateral held is property, based in
the UK and the Channel Islands.
46. Risk management (continued)
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:
2021 2020
OSB CCFS Total OSB CCFS Total
GBPm GBPm GBPm % GBPm GBPm GBPm %
Band
0% - 50% 2,293.3 428.2 2,721.5 13 1,740.3 419.3 2,159.6 11
50% - 60% 1,935.3 490.1 2,425.4 11 1,462.0 483.3 1,945.3 10
60% - 70% 4,179.0 1,241.9 5,420.9 26 2,813.4 1,109.3 3,922.7 20
70% - 80% 2,887.7 6,100.7 8,988.4 43 3,942.9 5,144.3 9,087.2 47
80% - 90% 513.2 844.4 1,357.6 6 879.1 1,033.7 1,912.8 10
90% - 100% 77.8 1.5 79.3 - 105.8 1.3 107.1 1
>100% 171.0 - 171.0 1 187.9 - 187.9 1
Total loans
before provisions 12,057.3 9,106.8 21,164.1 100 11,131.4 8,191.2 19,322.6 100
------------------ -------- ------- -------- --- -------- ------- -------- ---
The table below shows the LTV banding for the OSB segments' two
major lending streams:
2021 2020
BTL/SME Residential Total BTL/SME Residential Total
OSB GBPm GBPm GBPm % GBPm GBPm GBPm %
Band
0% - 50% 1,007.6 1,285.7 2,293.3 19 795.7 944.6 1,740.3 16
50% - 60% 1,693.7 241.6 1,935.3 16 1,228.1 233.9 1,462.0 13
60% - 70% 3,903.0 276.0 4,179.0 35 2,602.1 211.3 2,813.4 25
70% - 80% 2,647.7 240.0 2,887.7 24 3,693.4 249.5 3,942.9 35
80% - 90% 452.8 60.4 513.2 4 584.5 294.6 879.1 8
90% - 100% 66.2 11.6 77.8 1 89.4 16.4 105.8 1
>100% 165.1 5.9 171.0 1 171.4 16.5 187.9 2
Total loans
before provisions 9,936.1 2,121.2 12,057.3 100 9,164.6 1,966.8 11,131.4 100
------------------ ------- ----------- -------- --- ------- ----------- -------- ---
1. Risk management (continued)
The tables below show the LTV analysis of the OSB BTL/SME
sub-segment:
2021
Residential Funding
Buy-to-Let Commercial development lines Total
OSB GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 804.0 118.9 19.0 65.7 1,007.6
50% - 60% 1,532.0 105.1 40.1 16.5 1,693.7
60% - 70% 3,708.1 130.1 61.6 3.2 3,903.0
70% - 80% 2,423.7 224.0 - - 2,647.7
80% - 90% 249.5 165.9 - 37.4 452.8
90% - 100% 46.4 19.8 - - 66.2
>100% 104.0 30.6 - 30.5 165.1
Total loans before
provisions 8,867.7 794.4 120.7 153.3 9,936.1
---------------------- ---------- ---------- ------------ ------- -------
2020
Residential Funding
Buy-to-Let Commercial development lines Total
OSB GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 643.3 80.6 12.5 59.3 795.7
50% - 60% 1,040.1 84.3 64.2 39.5 1,228.1
60% - 70% 2,407.4 132.0 56.4 6.3 2,602.1
70% - 80% 3,411.7 251.3 - 30.4 3,693.4
80% - 90% 370.1 214.4 - - 584.5
90% - 100% 54.1 35.3 - - 89.4
>100% 117.9 24.0 - 29.5 171.4
Total loans before
provisions 8,044.6 821.9 133.1 165.0 9,164.6
---------------------- ---------- ---------- ------------ ------- -------
The tables below show the LTV analysis of the OSB Residential
sub-segment:
2021 2020
First Second Funding First Second Funding
charge charge lines Total charge charge lines Total
OSB GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 1,173.3 111.8 0.6 1,285.7 835.8 105.1 3.7 944.6
50% - 60% 189.8 51.8 - 241.6 167.2 64.5 2.2 233.9
60% - 70% 240.2 35.8 - 276.0 151.7 58.1 1.5 211.3
70% - 80% 221.3 18.7 - 240.0 208.1 39.9 1.5 249.5
80% - 90% 56.5 3.9 - 60.4 274.8 19.3 0.5 294.6
90% - 100% 10.3 1.3 - 11.6 12.4 3.6 0.4 16.4
>100% 4.5 1.4 - 5.9 10.7 4.9 0.9 16.5
Total loans
before provisions 1,895.9 224.7 0.6 2,121.2 1,660.7 295.4 10.7 1,966.8
------------------ ------- ------- ------- ------- ------- ------- ------- -------
1. Risk management (continued)
The table below shows the LTV analysis of the four CCFS
sub-segment:
2021
Second
charge
Buy-to-Let Residential Bridging lending Total
CCFS GBPm GBPm GBPm GBPm GBPm %
Band
0% - 50% 104.8 261.0 30.2 32.2 428.2 5
50% - 60% 205.4 246.8 9.3 28.6 490.1 5
60% - 70% 702.4 480.1 14.9 44.5 1,241.9 14
70% - 80% 4,827.7 1,234.5 1.4 37.1 6,100.7 67
80% - 90% 560.5 268.9 0.5 14.5 844.4 9
90% - 100% 0.1 1.4 - - 1.5 -
Total loans before
provisions 6,400.9 2,492.7 56.3 156.9 9,106.8 100
------------------- ---------- ----------- -------- -------- ------- ---
2020
Second
charge
Buy-to-Let Residential Bridging lending Total
CCFS GBPm GBPm GBPm GBPm GBPm %
Band
0% - 50% 92.7 242.1 50.4 34.1 419.3 5
50% - 60% 196.0 233.9 17.9 35.5 483.3 6
60% - 70% 632.9 400.2 16.8 59.4 1,109.3 14
70% - 80% 3,916.2 1,155.7 21.1 51.3 5,144.3 62
80% - 90% 600.7 410.8 - 22.2 1,033.7 13
90% - 100% 0.5 0.8 - - 1.3 -
Total loans before
provisions 5,439.0 2,443.5 106.2 202.5 8,191.2 100
------------------- ---------- ----------- -------- -------- ------- ---
1. Risk management (continued)
Forbearance measures undertaken
The Group has a range of options available where borrowers
experience financial difficulties that impact their ability to
service their financial commitments under the loan agreement. These
options are explained in the Principal risks and uncertainties.
A summary of the forbearance measures undertaken (excluding
COVID-19 related payment deferrals) during the year is shown below.
The balances disclosed reflect the year end balance of the accounts
where a forbearance measure was undertaken during the year.
Number At 31 December Number At 31 December
of accounts 2021 of accounts 2020
Forbearance type 2021 GBPm 2020 GBPm
Interest-only switch 159 18.6 108 14.5
Interest rate reduction 437 8.1 21 2.2
Term extension 271 16.6 431 27.1
Payment deferral 499 43.0 447 39.3
Voluntary-assisted sale 7 0.8 2 0.1
Payment concession (reduced monthly
payments) 51 12.1 34 2.1
Capitalisation of interest 65 1.1 2 0.1
Full or partial debt forgiveness 1,078 22.6 11 0.2
Total 2,567 122.9 1,056 85.6
------------------------------------ ------------ -------------- ------------ --------------
Loan type
First charge owner-occupier 424 34.8 176 27.1
Second charge owner-occupier(1) 1,931 38.7 665 22.7
Buy-to-Let 160 34.6 49 8.9
Commercial 52 14.8 166 26.9
Total 2,567 122.9 1,056 85.6
------------------------------------ ------------ -------------- ------------ --------------
The 2020 comparatives have been amended due to a revision to the
calculation methodology.
(1) Through 2021 the Group undertook an exercise and provided a
series of forbearance solutions and options to long-term arrears
customers on our Second charge portfolio to support and remedy the
accrued delinquency.
The COVID-19 payment deferrals scheme ended during 2021. At 31
December 2020 this represented only 1.3% of the Group's loan book
by value. For further information on forbearance see the Risk
review.
1. Risk management (continued)
Geographical analysis by region
An analysis of loans, excluding asset finance leases, by region
is provided below:
Group Group
2021 2020(1)
OSB CCFS Total OSB CCFS Total
Region GBPm GBPm GBPm % GBPm GBPm GBPm %
-------- ------- -------- --- -------- ------- -------- ---
East Anglia 361.8 967.1 1,328.9 6 406.1 866.2 1,272.3 7
East Midlands 543.8 555.8 1,099.6 5 452.6 463.4 916.0 5
Greater London 4,983.7 3,052.6 8,036.3 39 4,842.0 2,837.4 7,679.4 40
Guernsey 26.3 - 26.3 - 35.8 - 35.8 -
Jersey 99.3 - 99.3 - 122.9 - 122.9 1
North East 153.9 244.4 398.3 2 139.0 208.4 347.4 2
North West 762.3 755.0 1,517.3 7 623.7 674.8 1,298.5 7
Northern Ireland 10.9 - 10.9 - 12.9 - 12.9 -
Scotland 35.2 226.0 261.2 1 41.3 214.2 255.5 1
South East 2,792.6 1,452.4 4,245.0 20 2,401.2 1,316.7 3,717.9 19
South West 825.5 544.3 1,369.8 7 752.7 478.5 1,231.2 6
Wales 272.1 240.6 512.7 2 246.8 209.9 456.7 2
West Midlands 706.9 629.8 1,336.7 7 738.5 529.2 1,267.7 7
Yorks and
Humberside 366.8 438.8 805.6 4 250.4 392.5 642.9 3
Total loans before
provisions 11,941.1 9,106.8 21,047.9 100 11,065.9 8,191.2 19,257.1 100
------------------- -------- ------- -------- --- -------- ------- -------- ---
(1) The prior period comparative has been amended to exclude
asset finance leases as geography is not a key risk for leased
assets.
1. Risk management (continued)
Approach to measurement of credit quality
The Group categorises the credit quality of loans and advances
to customers into internal risk grades based on the 12 month PD
calculated at the reporting date. The PDs include a combination of
internal behavioural and credit bureau characteristics. The risk
grades are further grouped into the following credit quality
segments:
-- Excellent quality -- where there is a very high likelihood the asset will
be recovered in full with a negligible or very low risk of default.
-- Good quality -- where there is a high likelihood the asset will be
recovered in full with a low risk of default.
-- Satisfactory quality -- where the assets demonstrate a moderate default
risk.
-- Lower quality -- where the assets require closer monitoring and the risk
of default is of greater concern.
The credit grade for the Group's investment securities and loans
and advances to credit institutions is based on the external credit
rating of the counterparty.
The following tables disclose the credit risk quality ratings of
loans and advances to customers by IFRS 9 stage:
Stage 3
Stage 1 Stage 2 Stage 3 (POCI) Total
2021 GBPm GBPm GBPm GBPm GBPm
OSB
Excellent 5,305.7 148.4 - - 5,454.1
Good 5,079.2 687.1 - - 5,766.3
Satisfactory 113.5 232.4 - - 345.9
Lower 4.3 75.9 - - 80.2
Impaired - - 365.6 - 365.6
POCI - - - 45.2 45.2
CCFS
Excellent 5,126.6 319.1 - - 5,445.7
Good 2,519.6 693.9 - - 3,213.5
Satisfactory 35.0 147.7 - - 182.7
Lower 4.5 109.1 - - 113.6
Impaired - - 99.1 - 99.1
POCI - - - 52.2 52.2
18,188.4 2,413.6 464.7 97.4 21,164.1
------------- -------- ------- ------- ------- --------
1. Risk management (continued)
Stage 3
Stage 1 Stage 2 Stage 3 (POCI) Total
2020 GBPm GBPm GBPm GBPm GBPm
OSB
Excellent 4,689.6 295.4 - - 4,985.0
Good 4,564.9 756.4 - - 5,321.3
Satisfactory 106.7 242.8 - - 349.5
Lower 5.6 68.8 - - 74.4
Impaired - - 352.6 - 352.6
POCI - - - 48.6 48.6
CCFS
Excellent 4,352.8 398.8 - - 4,751.6
Good 2,338.8 667.2 - - 3,006.0
Satisfactory 55.3 140.2 - - 195.5
Lower 2.6 121.4 - - 124.0
Impaired - - 48.1 - 48.1
POCI - - - 66.0 66.0
16,116.3 2,691.0 400.7 114.6 19,322.6
------------- -------- ------- ------- ------- --------
The tables below show the Group's other financial assets by
credit risk rating grade:
Excellent Good Satisfactory Total
Group 2021 GBPm GBPm GBPm GBPm
Investment securities 491.4 - - 491.4
Loans and advances to credit
institutions 2,688.9 151.8 2.9 2,843.6
Derivative assets 43.0 142.7 - 185.7
3,223.3 294.5 2.9 3,520.7
----------------------------- --------- ----- ------------ -------
Excellent Good Satisfactory Total
Group 2020 GBPm GBPm GBPm GBPm
Investment securities 471.2 - - 471.2
Loans and advances to credit
institutions 2,432.9 233.4 9.9 2,676.2
Derivative assets 6.5 5.8 - 12.3
2,910.6 239.2 9.9 3,159.7
----------------------------- --------- ----- ------------ -------
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 function. In managing these assets, Group
Treasury operates within guidelines laid down in the Group Market
and Liquidity Risk Policy approved by ALCO 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.
1. Risk management (continued)
During the year, the average balance of cash in hand, loans and
advances to credit institutions and investment securities on a
monthly basis was GBP2,926.0m (2020: GBP3,196.0m).
The tables below show the industry sector of the Group's loans
and advances to credit institutions and investment securities:
2021 2020
GBPm % GBPm %
BoE(1) 2,555.9 76 2,308.8 73
Other banks 287.7 9 367.4 12
Central government 252.1 8 - -
Securitisation 239.3 7 471.2 15
Total 3,335.0 100 3,147.4 100
---------------------- ------- --- ------- ---
(1) Balances with the BoE include GBP59.5m (2020: GBP52.3m) held
in the cash ratio deposit.
The tables below show the geographical exposure of the Group's
loans and advances to credit institutions and investment
securities:
2021 2020
GBPm % GBPm %
United Kingdom 3,328.0 100 3,137.5 100
India 7.0 - 9.9 -
Total 3,335.0 100 3,147.4 100
------------------ ------- --- ------- ---
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.
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 as they fall due. 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 BoE and has access to its contingent liquidity
facilities.
The Board has delegated the responsibility for liquidity
management to the Chief Executive Officer, assisted by ALCO, with
day-to-day management delegated to Treasury as detailed in the
Group Market and Liquidity Risk Policy. The Board is responsible
for setting risk appetite limits over the level and maturity
profile of 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 triggers, defined in the
recovery 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 Group Chief Risk Officer,
Chief Executive Officer, Chief Financial Officer and the Group
Treasurer.
1. Risk management (continued)
The tables below provide a contractual maturity analysis of the
Group's financial assets and liabilities:
Carrying Less than 3 - 12 1 - 5 More than
amount On demand 3 months months years 5 years
2021 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 17,526.4 5,004.6 2,350.3 7,458.5 2,713.0 -
Amounts owed to credit
institutions 4,319.6 42.1 1.0 - 4,203.2 73.3
Amounts owed to other
customers 92.6 14.8 8.1 45.0 24.7 -
Derivative liabilities 19.7 - 0.7 10.4 8.6 -
Debt securities in
issue 460.3 - - - 460.3 -
Lease liabilities 10.7 - 0.3 0.6 3.7 6.1
Subordinated liabilities 10.3 - - 0.1 10.2 -
PSBs 15.2 - - - 15.2 -
Total liabilities 22,454.8 5,061.5 2,360.4 7,514.6 7,438.9 79.4
------------------------ -------- --------- --------- ---------- ---------- ---------
Financial asset by
type
Cash in hand 0.5 0.5 - - - -
Loans and advances
to credit institutions 2,843.6 2,667.8 52.0 10.1 - 113.7
Investment securities 491.4 - 172.7 6.1 312.6 -
Loans and advances
to customers 21,080.3 3.3 163.8 383.5 1,327.4 19,202.3
Derivative assets 185.7 - 0.1 5.4 179.9 0.3
Total assets 24,601.5 2,671.6 388.6 405.1 1,819.9 19,316.3
------------------------ -------- --------- --------- ---------- ---------- ---------
Cumulative liquidity
gap (2,389.9) (4,361.7) (11,471.2) (17,090.2) 2,146.7
------------------------ -------- --------- --------- ---------- ---------- ---------
1. Risk management (continued)
Carrying Less than 3 - 12 1 - 5 More than
amount On demand 3 months months years 5 years
2020 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 16,603.1 3,810.7 2,733.5 6,517.5 3,541.4 -
Amounts owed to credit
institutions 3,570.2 0.4 85.0 1,035.3 2,449.5 -
Amounts owed to other
customers 72.9 26.9 7.5 38.5 - -
Derivative liabilities 163.6 - 0.2 4.5 153.9 5.0
Debt securities in
issue 421.9 - - - 421.9 -
Lease liabilities 11.7 - 0.2 0.7 3.6 7.2
Subordinated liabilities 10.5 - 0.2 0.1 10.2 -
PSBs 37.6 - 0.6 - - 37.0
Total liabilities 20,891.5 3,838.0 2,827.2 7,596.6 6,580.5 49.2
------------------------ -------- --------- --------- ---------- ---------- ---------
Financial asset by
type
Cash in hand 0.5 0.5 - - - -
Loans and advances
to credit institutions 2,676.2 2,512.8 111.1 18.3 - 34.0
Investment securities 471.2 - 0.3 - 470.9 -
Loans and advances
to customers 19,230.7 4.1 316.7 266.4 1,239.7 17,403.8
Derivative assets 12.3 - 1.3 3.7 7.1 0.2
Total assets 22,390.9 2,517.4 429.4 288.4 1,717.7 17,438.0
------------------------ -------- --------- --------- ---------- ---------- ---------
Cumulative liquidity
gap (1,320.6) (3,718.4) (11,026.6) (15,889.4) 1,499.4
------------------------ -------- --------- --------- ---------- ---------- ---------
1. Risk management (continued)
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:
Carrying Gross inflow/ Up to 3 - 12 1 - 5 More than
amount outflow 3 months months years 5 years
2021 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 17,526.4 17,554.7 9,305.7 5,883.7 2,365.3 -
Amounts owed to credit
institutions 4,319.6 4,359.8 45.2 5.2 4,236.1 73.3
Amounts owed to other
customers 92.6 92.6 22.9 45.0 24.7 -
Derivative liabilities 19.7 6.0 (0.4) 5.1 1.2 0.1
Debt securities in
issue 460.3 473.2 25.1 75.0 373.1 -
Lease liabilities 10.7 13.1 0.6 1.6 7.7 3.2
Subordinated liabilities 10.3 12.2 0.2 0.7 11.3 -
PSBs 15.2 16.8 0.2 0.5 16.1 -
Total liabilities 22,454.8 22,528.4 9,399.5 6,016.8 7,035.5 76.6
------------------------ -------- ------------- --------- ------- ------- ---------
Off-balance sheet loan
commitments 1,155.3 1,155.3 1,155.3 - - -
Financial asset by
type
Cash in hand 0.5 0.5 0.5 - - -
Loans and advances
to credit institutions 2,843.6 2,843.6 2,756.3 10.1 - 77.2
Investment securities 491.4 497.0 172.6 108.8 215.6 -
Loans and advances
to customers 21,080.3 41,290.2 374.4 1,331.0 5,711.9 33,872.9
Derivative assets 185.7 75.8 (1.4) 11.2 66.0 -
Total assets 24,601.5 44,707.1 3,302.4 1,461.1 5,993.5 33,950.1
------------------------ -------- ------------- --------- ------- ------- ---------
1. Risk management (continued)
Carrying Gross inflow/ Up to 3 - 12 1 - 5 More than
amount outflow 3 months months years 5 years
2020 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors(1) 16,603.1 16,644.9 8,712.7 5,325.8 2,606.4 -
Amounts owed to credit
institutions(1) 3,570.2 3,585.8 86.0 1,037.7 2,462.1 -
Amounts owed to other
customers(1) 72.9 73.0 34.4 38.6 - -
Derivative liabilities 163.6 157.7 11.0 41.4 103.8 1.5
Debt securities in
issue(1) 421.9 426.4 17.8 53.1 355.5 -
Lease liabilities 11.7 13.2 0.5 1.2 6.4 5.1
Subordinated liabilities 10.5 13.1 0.4 0.5 12.2 -
PSBs 37.6 39.8 0.7 0.3 1.8 37.0
Total liabilities 20,891.5 20,953.9 8,863.5 6,498.6 5,548.2 43.6
------------------------ -------- ------------- --------- ------- ------- ---------
Off-balance sheet loan
commitments 979.5 979.5 979.5 - - -
Financial asset by
type
Cash in hand 0.5 0.5 0.5 - - -
Loans and advances
to credit institutions 2,676.2 2,676.2 2,623.9 18.3 - 34.0
Investment securities 471.2 494.9 1.2 4.0 483.8 5.9
Loans and advances
to customers 19,230.7 36,156.7 373.4 1,132.4 4,960.5 29,690.4
Derivative assets 12.3 12.1 3.2 4.6 4.3 -
Total assets 22,390.9 39,340.4 3,002.2 1,159.3 5,448.6 29,730.3
------------------------ -------- ------------- --------- ------- ------- ---------
(1) The 2020 comparatives have been restated following a
misallocation of cash flows between time buckets in the prior
year.
The actual repayment profile of retail deposits may differ from
the analysis above due to the option of early withdrawal with a
penalty.
Cash flows on PSBs are disclosed up to the next interest rate
reset date.
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.
1. Risk management (continued)
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:
2021
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 99.9 107.5 2,496.4 139.8 2,843.6
Investment securities 121.8 - 369.6 - 491.4
Loans and advances to
customers 6,373.7 - 2,746.3 11,960.3 21,080.3
Derivative assets - - - 185.7 185.7
Non-financial assets - - - (69.6) (69.6)
6,595.4 107.5 5,612.8 12,216.2 24,531.9
----------------------------- -------------- -------- -------------- -------- --------
2020
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 211.1 95.0 2,256.5 113.6 2,676.2
Investment securities 161.0 - 310.2 - 471.2
Loans and advances to
customers 5,638.6 - 2,752.0 10,840.1 19,230.7
Derivative assets - - - 12.3 12.3
Non-financial assets - - - 263.6 263.6
6,010.7 95.0 5,319.2 11,229.6 22,654.5
----------------------------- -------------- -------- -------------- -------- --------
(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.
1. Risk management (continued)
Liquidity risk -- liquidity reserves
The tables below analyse the Group's liquidity reserves, where
carrying value is considered to be equal to fair value:
2021 2020
GBPm GBPm
Unencumbered balances with central banks 2,496.4 2,256.5
Unencumbered cash and balances with other
banks 139.8 113.6
Other cash and cash equivalents 0.5 0.5
Unencumbered investment securities 369.6 310.2
3,006.3 2,680.8
------------------------------------------ ------- -------
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. The Group does not run a trading book or take
speculative interest rate positions and therefore all interest rate
risk resides in the banking book (interest rate risk in the banking
book (IRRBB)). IRRBB 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.
Currently interest rate risk is managed separately for OSB and
CCFS due to the use of different treasury management and asset and
liability management (ALM) systems. However, the methodology
applied to the setting of risk appetites was aligned across the
Group in 2020. Both Banks apply an economic value at risk approach
as well as an earnings at risk approach for interest rate risk and
basis risk. 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.
1. Risk management (continued)
Economic value at risk is measured using the impact of six
different internally derived interest rate scenarios. The internal
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 limits on interest rate risk exposure
of 2.25% and 1% of CET1 for OSB and CCFS, respectively. The table
below shows the maximum decreases to net interest income under
these scenarios after taking into account the derivatives:
2021 2020
GBPm GBPm
OSB 9.9 5.6
CCFS 1.1 0.7
11.0 6.3
Exposure for earnings at risk is measured by the impact of a
+/-50bps parallel shift in interest rates on the expected
profitability of the Group in the next 12 months. The risk appetite
limit is 2% of full year net interest income. The table below shows
the maximum decreases after taking into account the
derivatives:
2021 2020
GBPm GBPm
OSB(1) 0.5 (0.1)
CCFS(1) (0.4) 2.2
0.1 2.1
(1) Increases for OSB 2020 and CCFS 2021 due to product floors
earnings increases in both the +50bps and -50bps scenarios.
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,
LIBOR or SONIA) 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, LIBOR and SONIA 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 4% of
full year net interest income. The table below shows the maximum
decreases to net interest income at 31 December 2021 and 2020:
2021 2020
GBPm GBPm
OSB 3.2 5.4
CCFS 3.8 8.0
7.0 13.4
Foreign exchange rate risk
The Group has limited exposure to foreign exchange risk in
respect of its Indian operations. A 5% increase in exchange rates
would result in a GBP0.4m (2020: GBP0.4m) effect in profit or loss
and GBP0.5m (2020: GBP0.5m) in equity.
1. Risk management (continued)
Structured entities
The structured entities consolidated within the Group at 31
December 2021 were Canterbury Finance No.2 plc, Canterbury Finance
No.3 plc, Canterbury Finance No.4 plc and CMF 2020-1 plc. These
entities hold legal title to a pool of mortgages which are used as
a security for issued debt. The transfer of mortgages fails
derecognition criteria because the Group retained the subordinated
notes and residual certificates issued and as such did not transfer
substantially the risks and rewards of ownership of the securitised
mortgages. Therefore, the Group is exposed to credit, interest rate
and other risks on the securitised mortgages.
Cash flows generated from the structured entities are
ring-fenced and are used to pay interest and principal of the
issued debt securities in a waterfall order according to the
seniority of the bonds. The structured entities are self-funded and
the Group is not contractually or constructively obliged to provide
further liquidity or financial support.
The structured entities consolidated within the Group at 31
December 2020 were Canterbury Finance No.2 plc, Canterbury Finance
No.3 plc and CMF 2020-1 plc.
Unconsolidated structured entities
Structured entities, which were sponsored by the Group include
Precise Mortgage Funding 2017-1B plc, Charter Mortgage Funding
2017-1 plc, Precise Mortgage Funding 2018-1B plc, Charter Mortgage
Funding 2018-1 plc, Precise Mortgage Funding 2019-1B plc,
Canterbury Finance No.1 plc and Precise Mortgage Funding 2020-1B
plc.
These structured entities are not consolidated by the Group, as
the Group does not control the entities and is not exposed to the
risks and rewards of ownership from the securitised mortgages. The
Group has no contractual arrangements with the unconsolidated
structured entities other than the investments disclosed in note 20
and servicing the structured entities' mortgage portfolios.
The Group has not provided any support to the unconsolidated
structured entities listed and has no obligation or intention to do
so.
During 2021 the Group received GBP1.8m interest income (2020:
GBP5.0m) and GBP4.4m servicing income (2020: GBP4.6m) from
unconsolidated structured entities.
1. Financial assets and financial liabilities
The following tables summarise the classification and carrying
value of the Group's financial assets and financial
liabilities:
2021
Designated Mandatorily Amortised Total carrying
FVTPL FVTPL FVOCI cost amount
Note GBPm GBPm GBPm GBPm GBPm
Assets
Cash in hand - - - 0.5 0.5
Loans and advances to
credit institutions 19 - - - 2,843.6 2,843.6
Investment securities 20 0.7 - 167.6 323.1 491.4
Loans and advances to
customers 21 17.7 - - 21,062.6 21,080.3
Derivative assets 26 - 185.7 - - 185.7
18.4 185.7 167.6 24,229.8 24,601.5
----------------------- ---- ---------- ----------- ----- --------- --------------
Liabilities
Amounts owed to retail
depositors 33 - - - 17,526.4 17,526.4
Amounts owed to credit
institutions 32 - - - 4,319.6 4,319.6
Amounts owed to other
customers 34 - - - 92.6 92.6
Debt securities in
issue 35 - - - 460.3 460.3
Derivative liabilities 26 - 19.7 - - 19.7
Subordinated
liabilities 40 - - - 10.3 10.3
PSBs 41 - - - 15.2 15.2
- 19.7 - 22,424.4 22,444.1
----------------------- ---- ---------- ----------- ----- --------- --------------
1. Financial instruments and fair values (continued)
2020
Designated Mandatorily Amortised Total carrying
FVTPL FVTPL FVOCI cost amount
Note GBPm GBPm GBPm GBPm GBPm
Assets
Cash in hand - - - 0.5 0.5
Loans and advances to
credit institutions 19 - - - 2,676.2 2,676.2
Investment securities 20 - - 285.0 186.2 471.2
Loans and advances to
customers 21 19.1 - - 19,211.6 19,230.7
Derivative assets 26 - 12.3 - - 12.3
19.1 12.3 285.0 22,074.5 22,390.9
----------------------- ---- ---------- ----------- ----- --------- --------------
Liabilities
Amounts owed to retail
depositors 33 - - - 16,603.1 16,603.1
Amounts owed to credit
institutions 32 - - - 3,570.2 3,570.2
Amounts owed to other
customers 34 - - - 72.9 72.9
Debt securities in
issue 35 - - - 421.9 421.9
Derivative liabilities 26 - 163.6 - - 163.6
Subordinated
liabilities 40 - - - 10.5 10.5
PSBs 41 - - - 37.6 37.6
- 163.6 - 20,716.2 20,879.8
----------------------- ---- ---------- ----------- ----- --------- --------------
The Group has no financial assets or financial liabilities
classified as held for trading.
1. Financial instruments and fair values (continued)
1. Fair values
The following tables summarise the carrying value and estimated
fair value of financial instruments not measured at fair value in
the Consolidated Statement of Financial Position:
2021 2020
Carrying Estimated Carrying Estimated
value fair value value fair value
GBPm GBPm GBPm GBPm
Assets
Cash in hand 0.5 0.5 0.5 0.5
Loans and advances to credit
institutions 2,843.6 2,843.6 2,676.2 2,676.2
Investment securities 323.1 323.8 186.2 186.6
Loans and advances to customers 21,062.6 21,079.5 19,211.6 19,352.0
24,229.8 24,247.4 22,074.5 22,215.3
-------------------------------- -------- ----------- -------- -----------
Liabilities
Amounts owed to retail
depositors 17,526.4 17,524.9 16,603.1 16,666.1
Amounts owed to credit
institutions 4,319.6 4,319.6 3,570.2 3,570.2
Amounts owed to other customers 92.6 92.6 72.9 72.9
Debt securities in issue 460.3 460.3 421.9 421.9
Subordinated liabilities 10.3 10.6 10.5 10.7
PSBs 15.2 14.7 37.6 32.3
22,424.4 22,422.7 20,716.2 20,774.1
-------------------------------- -------- ----------- -------- -----------
The fair values in these tables 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.
Investment securities
Investment securities' fair values are provided by a third party
and are based on the market values of similar financial
instruments. The fair value of investment securities held at FVTPL
is measured using a discounted cash flow model.
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.
1. Financial instruments and fair values (continued)
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 BoE TFS and
TFSME and commercial repos. Fair value is considered to be equal to
carrying value.
Amounts owed to other customers
This represents saving products to corporations and local
authorities. The fair value of fixed rate deposits is estimated by
discounting future cash flows at current market rates of interest.
Deposits at variable rates are considered to be at current market
rates and the fair value is estimated to be equal to carrying
value.
Debt securities in issue
While the Group's debt securities in issue are listed, the
quoted prices for an individual note may not be indicative of the
fair value of the issue as a whole, due to the specialised nature
of the market in such instruments and the limited number of
investors participating in it. Fair value is not considered to be
materially different to carrying value.
Subordinated liabilities and PSBs
The fair value of subordinated liabilities is estimated by using
quoted market prices of similar instruments at the reporting date.
The PSBs are listed on the London Stock Exchange with fair value
being the quoted market price at the reporting date.
1. Fair value classification
The following tables provide an analysis of financial assets and
financial liabilities measured at fair value in the Consolidated
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
amount amount 1 2 3 Total
2021 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Investment securities 168.3 166.2 152.1 15.5 0.7 168.3
Loans and advances to
customers 17.7 19.7 - - 17.7 17.7
Derivative assets 185.7 12,968.3 - 185.7 - 185.7
371.7 13,154.2 152.1 201.2 18.4 371.7
Financial liabilities
Derivative liabilities 19.7 7,378.0 - 19.7 - 19.7
1. Financial instruments and fair values (continued)
Carrying Principal Level Level Level
amount amount 1 2 3 Total
2020 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Investment securities 285.0 284.7 - 285.0 - 285.0
Loans and advances to
customers 19.1 21.8 - - 19.1 19.1
Derivative assets 12.3 8,687.8 - 12.3 - 12.3
316.4 8,994.3 - 297.3 19.1 316.4
-----------------------------
Financial liabilities
Derivative liabilities 163.6 10,392.4 - 163.6 - 163.6
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 instrument's 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.
1. Financial instruments and fair values (continued)
The following table provides an analysis of financial assets and
financial liabilities not measured at fair value in the
Consolidated 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
amount amount 1 2 3 Total
2021 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash in hand 0.5 0.5 - 0.5 - 0.5
Loans and advances to credit
institutions 2,843.6 2,843.6 - 2,843.6 - 2,843.6
Investment securities 323.1 322.9 - 323.8 - 323.8
Loans and advances to
customers 21,062.6 21,076.7 - 3,323.0 17,756.5 21,079.5
24,229.8 24,243.7 - 6,490.9 17,756.5 24,247.4
----------------------------- -------- --------- ----- -------- -------- --------
Financial liabilities
Amounts owed to retail
depositors 17,526.4 17,469.0 - 6,601.3 10,923.6 17,524.9
Amounts owed to credit
institutions 4,319.6 4,318.5 - 4,319.6 - 4,319.6
Amounts owed to other
customers 92.6 92.5 - - 92.6 92.6
Debt securities in issue 460.3 460.2 - 460.3 - 460.3
Subordinated liabilities 10.3 10.1 - - 10.6 10.6
PSBs 15.2 15.0 14.7 - - 14.7
22,424.4 22,365.3 14.7 11,381.2 11,026.8 22,422.7
----------------------------- -------- --------- ----- -------- -------- --------
1. Financial instruments and fair values (continued)
Estimated fair value
Carrying Principal Level Level Level
amount amount 1 2 3 Total
2020 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash in hand 0.5 0.5 - 0.5 - 0.5
Loans and advances to
credit institutions 2,676.2 2,676.1 - 2,676.2 - 2,676.2
Investment securities 186.2 186.2 - 186.6 - 186.6
Loans and advances to
customers 19,211.6 19,200.1 - 3,314.5 16,037.5 19,352.0
22,074.5 22,062.9 - 6,177.8 16,037.5 22,215.3
----------------------- -------- --------- ----- ------- -------- --------
Financial liabilities
Amounts owed to retail
depositors 16,603.1 16,507.3 - 5,546.1 11,120.0 16,666.1
Amounts owed to credit
institutions 3,570.2 3,569.3 - 3,570.2 - 3,570.2
Amounts owed to other
customers 72.9 72.7 - - 72.9 72.9
Debt securities in
issue 421.9 421.8 - 421.9 - 421.9
Subordinated
liabilities 10.5 10.3 - - 10.7 10.7
PSBs 37.6 37.0 32.3 - - 32.3
20,716.2 20,618.4 32.3 9,538.2 11,203.6 20,774.1
----------------------- -------- --------- ----- ------- -------- --------
1. 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 GBP5.2m (2020: GBP4.3m).
1. Operating segments
The Group segments its lending business and operates under two
segments in line with internal reporting to the Board:
-- OSB
-- CCFS
The Group separately discloses the impact of Combination
accounting but does not consider this a business segment.
The financial position and results of operations of the above
segments are summarised below:
OSB CCFS Combination Total
2021 GBPm GBPm GBPm GBPm
Balances at the reporting date
Gross loans and advances to
customers 12,057.3 8,981.4 143.1 21,181.8
Expected credit losses (82.2) (19.6) 0.3 (101.5)
Loans and advances to customers 11,975.1 8,961.8 143.4 21,080.3
Capital expenditure 5.0 1.8 - 6.8
Depreciation and amortisation 6.5 3.2 4.8 14.5
Profit or loss for the year
Net interest income/(expense) 414.8 235.7 (62.9) 587.6
Other income 8.7 20.0 12.7 41.4
Total income/(expense) 423.5 255.7 (50.2) 629.0
Administrative expenses (97.9) (63.8) (4.8) (166.5)
Provisions (0.3) 0.1 - (0.2)
Impairment of financial assets (3.5) 8.4 (0.5) 4.4
Impairment of intangible assets - - 3.1 3.1
Integration costs (4.0) (1.0) - (5.0)
Exceptional items (0.2) - - (0.2)
Profit/(loss) before taxation 317.6 199.4 (52.4) 464.6
Taxation(1) (76.0) (51.8) 8.5 (119.3)
Profit/(loss) for the year 241.6 147.6 (43.9) 345.3
-------------------------------- --------
(1) The taxation on Combination credit includes a credit of
GBP14.1m relating to the unwind of the deferred tax liabilities
recognised on the fair value adjustments of the CCFS assets and
liabilities at the acquisition date, offset by a GBP5.6m deferred
tax charge due to the 6% increase in the main rate of the
corporation tax liability from 1 April 2023.
1. Operating segments (continued)
OSB CCFS Combination Total
2020 GBPm GBPm GBPm GBPm
Balances at the reporting date
Gross loans and advances to
customers 11,131.4 8,001.2 209.1 19,341.7
Expected credit losses (83.6) (28.2) 0.8 (111.0)
Loans and advances to customers 11,047.8 7,973.0 209.9 19,230.7
Capital expenditure 5.3 2.4 - 7.7
Depreciation and amortisation 7.1 2.4 4.3 13.8
Profit or loss for the year
Net interest income/(expense) 332.8 201.2 (61.8) 472.2
Other income 18.8 17.4 0.2 36.4
Total income/(expense) 351.6 218.6 (61.6) 508.6
Administrative expenses (95.2) (57.5) (4.3) (157.0)
Provisions - (0.1) - (0.1)
Impairment of financial assets (50.7) (20.5) 0.2 (71.0)
Impairment of intangible assets - - (7.0) (7.0)
Integration costs (7.5) (2.3) - (9.8)
Exceptional items (3.3) - - (3.3)
Profit/(loss) before taxation 194.9 138.2 (72.7) 260.4
Taxation(1) (46.9) (32.0) 14.8 (64.1)
Profit/(loss) for the year 148.0 106.2 (57.9) 196.3
-------------------------------- -------- ------- ----------- --------
(1) The taxation on Combination credit of GBP14.8m includes a
GBP4.8m charge due to a 2% increase in the rate for the deferred
tax liability following the Government cancellation of the
corporation tax rate reduction on 19 March 2020.
1. 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.
The name, nature of activities and geographic location of the
Group's companies are presented below:
Jurisdiction Country Name Activities
UK(1) England OSB GROUP PLC Commercial banking
OneSavings Bank plc
5D Finance Limited
Broadlands Finance Limited
Charter Court Financial Services
Group Plc
Charter Court Financial Services
Limited
Charter Mortgages Limited
Easioption Limited
Exact Mortgage Experts Limited
Guernsey Home Loans Limited
Heritable Development Finance
Limited
Inter Bay Financial I Limited
Inter Bay Financial II Limited
InterBay Asset Finance Limited
Interbay Funding, Ltd
Interbay Group Holdings Limited
Interbay Holdings Ltd
Interbay ML, Ltd
Jersey Home Loans Limited
Prestige Finance Limited
Reliance Property Loans Limited
Rochester Mortgages Limited
Guernsey Guernsey Home Loans Limited
Jersey Jersey Home Loans Limited
UK England Canterbury Finance No. 2 plc Special purpose
vehicle
Canterbury Finance No. 3 plc
Canterbury Finance No. 4 plc
CMF 2020-1 plc
CML Warehouse Number 2 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.
1. Country by country reporting (continued)
Other disclosures required by the CBCR directive are provided
below:
2021 UK India Consolidation(2) Total
Average number of employees 1,220 535 - 1,755
Turnover(1) , GBPm 628.9 9.6 (9.5) 629.0
Profit/(loss) before tax,
GBPm 464.4 1.2 (1.0) 464.6
Corporation tax paid, GBPm 117.0 0.3 - 117.3
2020 UK India Consolidation(2) Total
Average number of employees 1,330 486 - 1,816
Turnover(1) , GBPm 508.3 9.4 (9.1) 508.6
Profit/(loss) before tax,
GBPm 260.1 1.3 (1.0) 260.4
Corporation tax paid, GBPm 128.6 0.2 - 128.8
(1) Turnover represents total income before impairment of
financial and intangible assets, regulatory provisions and
operating costs, but after net interest income, gains and losses on
financial instruments and other operating income.
(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
2021 GBPm GBPm GBPm
Tax charge 118.9 0.4 119.3
Effects of:
Other timing differences 9.6 (0.1) 9.5
Tax outside of profit or loss (1.3) - (1.3)
Current period tax paid in prior
years (9.1) - (9.1)
Tax in relation to future periods
prepaid (1.1) - (1.1)
Tax paid 117.0 0.3 117.3
----- ----- -----
UK India Total
2020 GBPm GBPm GBPm
Tax charge 63.8 0.3 64.1
Effects of:
Other timing differences 15.7 (0.1) 15.6
Tax outside of profit or
loss 0.2 - 0.2
Prior year tax paid during
the year 41.8 - 41.8
Tax in relation to future periods
prepaid 7.1 - 7.1
Tax paid 128.6 0.2 128.8
----- ----- -----
1. Adjustments for non-cash items and changes in operating assets and
liabilities
2021 2020
GBPm GBPm
Adjustments for non-cash items:
Depreciation and amortisation 14.5 13.8
Interest on investment securities (2.5) (7.5)
Integration cost 0.6 -
Interest on subordinated liabilities 0.8 0.8
Interest on PSBs 1.2 1.7
Interest on securitised debt 3.9 3.4
Interest on financing debt 5.3 10.9
Impairment (credit)/charge on loans (4.4) 71.0
Impairment (credit)/charge on intangible assets
acquired on Combination (3.1) 7.0
Gains on sale of financial instruments (4.0) (20.0)
Provisions 0.2 0.1
Interest on lease liabilities 0.3 0.3
Fair value gains on financial instruments (29.5) (7.4)
Share-based payments 6.7 5.1
Total adjustments for non-cash items (10.0) 79.2
-------------------------------------------------- --------- ---------
Changes in operating assets and liabilities:
Decrease/(increase) in loans and advances to
credit institutions 98.7 (154.0)
Increase in loans and advances to customers (1,844.0) (1,705.0)
Increase in amounts owed to retail depositors 923.3 348.1
Net (increase)/decrease in other assets (1.1) 1.3
Net increase/(decrease) in derivatives and hedged
items 3.6 (64.3)
Net increase in amounts owed to other customers 18.9 43.2
Net increase/(decrease) in other liabilities 1.7 (6.5)
Exchange differences on working capital (0.1) -
Total changes in operating assets and liabilities (799.0) (1,537.2)
-------------------------------------------------- --------- ---------
1. Events after the reporting date
On 17 January 2022, the Group announced that the FCA had
approved the base prospectus (dated 14 January 2022) in relation to
the establishment of the Group's GBP3.0bn Euro Medium Term Note
Programme. Under the programme, the Company, subject to compliance
with all relevant laws, regulations and directives, may from time
to time issue notes. The aggregate principal amount of notes issued
by the Company outstanding under the programme will not at any time
exceed GBP3.0bn. Additional information can be found on the Group's
website.
The Board has authorised a share repurchase of up to GBP100m of
shares in the market from 18 March 2022. The Company has authority
to make such purchases under a resolution approved by shareholders
at the AGM on 27 May 2021. Any purchases made under this programme
will be announced to the market each day in line with regulatory
requirements.
1. Controlling party
As at 31 December 2021 there was no controlling party of the
ultimate parent company of the Group, OSB GROUP PLC.
1. Transactions with key management personnel
All related party transactions were made on terms equivalent to
those that prevail in arm's length transactions. During the year
there were no related party transactions between the key management
personnel and the Group other than as described below.
Directors' remuneration is disclosed in note 11 and in the
Directors' Remuneration Report. The Executive team are all
employees of OSB, the table below shows their aggregate
remuneration:
2021 2020
GBP'000 GBP'000
Short-term employee benefits 5,144 3,743
Post-employment benefits 44 49
Share-based payments 2,414 501
7,602 4,293
----------------------------- ------- -------
Key management personnel and connected persons held deposits
with the Group of GBP0.9m (2020: GBP1.4m).
1. Capital management
The Group's capital management approach is to provide a
sufficient capital base to cover business risks and support future
business development. The Group remained, throughout the year,
compliant with its capital requirements as set out by the PRA, the
Group's primary prudential supervisor.
The Group manages and reports its capital at a number of levels
including Group level and for the two regulated banking entities
within the Group, on an individual consolidation and on an
individual basis. The capital position of the two regulated banking
entities are not separately disclosed.
The Group's 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.
Under Pillar 2, the Group, and its regulated entities, complete
an annual self-assessment of risks known as the ICAAP. The PRA
applies additional requirements to this assessment amount to cover
risks under Pillar 2 to generate a Total Capital Requirement.
Further, the PRA sets capital buffers and the Group applies for
imposition of the requirements and modification of rules
incorporating the capital buffers and Pillar 2 pursuant to the
Financial Services and Markets Act 2000.
Pillar 3 requires firms to publish a set of disclosures which
allow market participants to assess information on the Group'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, a non-risk adjusted leverage ratio, 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 is responsible for the
management of the capital process within the risk appetite defined
by the Board, 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 the Board and 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)
2021 2020
GBPm GBPm
CET1 capital
Called up share capital 4.5 1,359.8
Share premium, capital contribution and share-based
payment reserve 14.1 7.8
Retained earnings 3,215.1 1,608.6
Transfer reserve (1,355.3) (1,355.3)
Other reserves (4.0) (4.0)
Total equity attributable to ordinary shareholders 1,874.4 1,616.9
Foreseeable dividends (94.7) (64.9)
IFRS 9 transitional adjustment(1) 2.9 4.9
COVID-19 ECL transitional adjustment(2) 19.0 31.0
Deductions from CET1 capital
Prudent valuation adjustment(3) (1.0) (0.4)
Intangible assets(4) (18.4) (20.6)
Deferred tax asset (0.5) (0.9)
CET1 capital 1,781.7 1,566.0
----------- -----------
AT1 capital
AT1 securities 150.0 -
Total Tier 1 capital 1,931.7 1,566.0
----------- -----------
Total regulatory capital 1,931.7 1,566.0
Risk-weighted assets (unaudited) 9,101.6 8,565.7
(1) The regulatory capital includes a GBP2.9m add-back under
IFRS 9 transitional arrangements. This represents 50.0% of the IFRS
9 transitional adjustment booked directly to retained earnings of
GBP5.9m.
(2) The COVID-19 ECL transitional adjustment relates to the
Group's increase in stage 1 and stage 2 ECL following the impacts
of COVID-19 and for which transitional rules are being adopted for
regulatory capital purposes.
(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 after adjusting for hedge
accounting.
(4) All software assets continue to be fully deducted from
capital in light of the pending intention of the PRA to consult on
the CRR 'Quick Fix' package in this area.
1. Capital management (continued)
The movement in CET1 during the year was as follows:
(Unaudited) (Unaudited)
2021 2020
GBPm GBPm
At 1 January 1,566.0 1,339.6
Movement in retained earnings 1,606.5 1,055.4
Share premium from Sharesave Scheme vesting 0.7 2.6
Movement in other reserves (1,349.7) (858.1)
Movement in foreseeable dividends (29.8) (15.0)
IFRS 9 transitional adjustment (2.0) (0.4)
COVID-19 ECL transitional adjustment (12.0) 31.0
Movement in prudent valuation adjustment (0.6) 0.1
Net decrease in intangible assets 2.2 10.8
Movement in deferred tax asset for carried
forward losses 0.4 -
At 31 December 1,781.7 1,566.0
-------------------------------------------- ----------- -----------
2021 2020
Note GBPm GBPm
Assets
Investments in subsidiaries and intercompany
loans 2 1,582.6 1,425.9
Current taxation asset 0.3 -
Total assets 1,582.9 1,425.9
--------------------------------------------- ----
Liabilities
Intercompany loans 2 0.6 -
Other liabilities 0.2 -
0.8 -
--------------------------------------------- ----
Equity
Share capital 3 4.5 1,359.8
Share premium 3 0.7 -
Retained earnings 1,358.4 4.0
Other reserves 4 218.5 62.1
1,582.1 1,425.9
Total equity and liabilities 1,582.9 1,425.9
--------------------------------------------- ---- ------- -------
The profit after tax for the year ended 31 December 2021 of OSB
GROUP PLC was GBP87.0m (2020: GBP0.1m). 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 an integral part of the Company financial
statements.
The financial statements were approved by the Board of Directors
on 17 March 2022 and were signed on its behalf by:
Andy Golding April Talintyre
Chief Executive Officer Chief Financial Officer
Company number: 11976839
Share-based Additional
Share Share Transfer Own payment Tier 1 Retained
capital premium reserve shares(1) reserve securities earnings Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2020 - - - - - - - -
Profit for the year - - - - - - 0.1 0.1
Share-based payments - - - - 0.4 - - 0.4
Own shares(1) - - - (4.0) - - 3.9 (0.1)
Shares issued on 27 November
2020 1,359.8 - 65.7 - - - - 1,425.5
At 31 December 2020 1,359.8 - 65.7 (4.0) 0.4 - 4.0 1,425.9
Profit for the year - - - - - - 87.0 87.0
Dividend paid - - - - - - (86.7) (86.7)
Share-based payments - 0.7 - - 5.9 - 0.9 7.5
Issuance of Additional Tier
1 securities - - - - - 150.0 - 150.0
Transactions costs on issuance
of Additional Tier 1 securities - - - - - - (1.6) (1.6)
Own shares(1) - - - 0.5 - - (0.5) -
Capital reduction (1,355.3) - - - - - 1,355.3 -
At 31 December 2021 4.5 0.7 65.7 (3.5) 6.3 150.0 1,358.4 1,582.1
--------------------------------- --------- ------- -------- --------- ----------- ----------- --------- -------
(1) The Company has adopted look-through accounting and
consolidated the EBT effective from 27 November 2020. The Company
initially recognised GBP6.1m of own shares, with GBP3.9m recognised
in retained earnings relating to gifts made to the EBT, and GBP2.2m
in intercompany loans, relating to a loan from OSB to the EBT which
funded the acquisition of shares prior to 27 November 2020. As at
31 December 2021, the EBT had no outstanding intercompany borrowing
(2020: GBP0.1m).
2021 2020
GBPm GBPm
Cash flows from operating activities
Profit before taxation 86.7 0.1
Changes in operating assets and liabilities:
Net increase in other liabilities 0.2 -
Change in intercompany loans 0.6 (2.2)
Cash generated/(used) in operating activities 87.5 (2.1)
Cash flows from investing activities
Change in investments in subsidiaries (150.0) -
Cash used in investing activities (150.0) -
Cash flows from financing activities
Dividend paid (86.7) -
Issuance of Additional Tier 1 securities 148.4 -
Proceeds from issuance of shares under employee
SAYE scheme 0.8 2.1
Cash generated from financing activities 62.5 2.1
------------------------------------------------- -------
Net increase in cash and cash - -
equivalents
Cash and cash equivalents at the beginning - -
of the year
Cash and cash equivalents at the end - -
of the year
Movement in cash and cash equivalents - -
1. Basis of preparation
The separate financial statements of the Company are presented
as required by the Companies Act 2006. As permitted by that Act,
the separate financial statements have been prepared in accordance
with International Financial Reporting Standards as adopted by the
United Kingdom (UK), and are presented in Pounds Sterling.
The financial statements have been prepared on the historical
cost basis. The financial statements are presented in Pounds
Sterling. All amounts in the financial statements have been rounded
to the nearest GBP0.1m (GBPm). The functional currency of the
Company is Pounds Sterling, which is the currency of the primary
economic environment in which the Company operates.
The principal accounting policies adopted are the same as those
set out in note 2 to the Group's consolidated financial statements,
aside from accounting policy 2 y), Share-based payments. For the
Company, the cost of the awards are charged on a straight-line
basis to investment in subsidiaries (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 Company has adopted the predecessor value method with an
investment in subsidiary of OSBG being the book value of the
balance sheet in OSB at the date of insertion.
There are no critical judgements and estimates that apply to the
Company.
1. Investments in subsidiaries and intercompany loans
The Company holds an investment in ordinary shares of
GBP1,432.6m (2020: GBP1,425.9m) and in AT1 securities of GBP90.0m
(2020: nil) in its direct subsidiary, OneSavings Bank plc (OSB).
The Company also holds an investment in AT1 securities of GBP60.0m
(2020: nil) in an indirect subsidiary, Charter Court Financial
Services Limited.
Investment Intercompany
in subsidiaries loans payable
GBPm GBPm
At 1 January 2020 - -
Net book value of OSB on 27 November
2020 1,425.5 -
Additions 0.4 (2.2)
Repayments - 2.2
At 31 December 2020 1,425.9 -
Additions(1) 156.7 (1.4)
Repayments - 0.8
At 31 December 2021 1,582.6 (0.6)
------------------------------------- ---------------- --------------
(1) Additions include purchase of AT1 securities of GBP90.0m
issued by OSB and GBP60.0m issued by Charter Court Financial
Services Limited; and GBP6.7m relating to share-based payments.
The transactions with OSB during the year comprise GBP1.4m
transaction costs for the issuance of AT1 securities funded by OSB
partially offset by GBP0.8m cash received in OSB on the Company's
share issues.
Investments in subsidiaries are financial assets and
intercompany loans are financial liabilities, all carried at
amortised cost. Intercompany loans are payable on demand and no
interest is charged on these loans.
1. Investments in subsidiaries and intercompany loans (continued)
A list of the Company's direct and indirect subsidiaries as at
31 December 2021 is shown below:
Registered
Direct investments Activity office Ownership
Mortgage lending and deposit Reliance
OneSavings Bank plc taking House 100%
Registered
Indirect investments Activity office Ownership
Reliance
5D Finance Limited Mortgage servicer House 100%
Broadlands Finance Mortgage administration Charter
Limited services Court 100%
Canterbury Finance Churchill
No.2 plc Special purpose vehicle Place -
Canterbury Finance Churchill
No.3 plc Special purpose vehicle Place -
Canterbury Finance Churchill
No.4 plc Special purpose vehicle Place -
Charter Court Financial Charter
Services Group Plc Holding company Court 100%
Charter Court Financial Mortgage lending and deposit Charter
Services Limited taking Court 100%
Charter Mortgages Mortgage administration Charter
Limited and analytical services Court 100%
Churchill
CMF 2020-1 plc Special purpose vehicle Place -
CML Warehouse Number Churchill
2 Limited Special purpose vehicle Place -
Reliance
Easioption Limited Holding company House 100%
Exact Mortgage Experts Charter
Limited Group service company Court 100%
Guernsey Home Loans Reliance
Limited Mortgage provider House 100%
Guernsey Home Loans
Limited (Guernsey) Mortgage provider Guernsey 100%
Heritable Development Mortgage originator and Reliance
Finance Limited servicer House 100%
Inter Bay Financial Reliance
I Limited Holding company House 100%
Inter Bay Financial Reliance
II Limited Holding company House 100%
InterBay Asset Finance Asset finance and mortgage Reliance
Limited provider House 100%
Interbay Funding, Reliance
Ltd Mortgage servicer House 100%
Interbay Group Holdings Reliance
Limited Holding company House 100%
Interbay Holdings Reliance
Ltd Holding company House 100%
Reliance
Interbay ML, Ltd Mortgage provider House 100%
Jersey Home Loans Reliance
Limited Mortgage provider House 100%
Jersey Home Loans
Limited (Jersey) Mortgage provider Jersey 100%
OSB India Private
Limited Back office processing India 100%
Prestige Finance Mortgage originator and Reliance
Limited servicer House 100%
Reliance Property Reliance
Loans Limited Mortgage provider House 100%
Rochester Mortgages Reliance
Limited Mortgage provider House 100%
1. Investments in subsidiaries and intercompany loans (continued)
A list of the Company's direct and indirect subsidiaries as at
31 December 2020 is shown below:
Registered
Direct investments Activity office Ownership
OneSavings Bank Mortgage lending and deposit Reliance
plc taking House 100%
Registered
Indirect investments Activity office Ownership
Reliance
5D Finance Limited Mortgage servicer House 100%
Broadlands Finance Mortgage administration Charter
Limited services Court 100%
Canterbury Finance Churchill
No.2 plc Special purpose vehicle Place -
Canterbury Finance Churchill
No.3 plc Special purpose vehicle Place -
Charter Court Financial Charter
Services Group Plc Holding company Court 100%
Charter Court Financial Mortgage lending and deposit Charter
Services Limited taking Court 100%
Charter Mortgages Mortgage administration Charter
Limited and analytical services Court 100%
Churchill
CMF 2020-1 plc Special purpose vehicle Place -
CML Warehouse Number
1 Limited Special purpose vehicle Bartholomew -
CML Warehouse Number Churchill
2 Limited Special purpose vehicle Place -
Reliance
Easioption Limited Holding company House 100%
Exact Mortgage Experts Charter
Limited Group service company Court 100%
Guernsey Home Loans Reliance
Limited Mortgage provider House 100%
Guernsey Home Loans
Limited (Guernsey) Mortgage provider Guernsey 100%
Heritable Development Mortgage originator and Reliance
Finance Limited servicer House 100%
Inter Bay Financial Reliance
I Limited Holding company House 100%
Inter Bay Financial Reliance
II Limited Holding company House 100%
InterBay Asset Finance Asset finance and mortgage Reliance
Limited provider House 100%
Interbay Funding, Reliance
Ltd Mortgage servicer House 100%
Interbay Group Holdings Reliance
Limited Holding company House 100%
Interbay Holdings Reliance
Ltd Holding company House 100%
Reliance
Interbay ML, Ltd Mortgage provider House 100%
Jersey Home Loans Reliance
Limited Mortgage provider House 100%
Jersey Home Loans
Limited (Jersey) Mortgage provider Jersey 100%
OSB India Private
Limited Back office processing India 100%
Precise Mortgage Great St.
Funding 2014-1 plc Special purpose vehicle Helen's -
Precise Mortgage Great St.
Funding 2014-2 plc Special purpose vehicle Helen's -
Precise Mortgage Great St.
Funding 2015-1 plc Special purpose vehicle Helen's -
Precise Mortgage
Funding 2015-3R Great St.
plc Special purpose vehicle Helen's -
Prestige Finance Mortgage originator and Reliance
Limited servicer House 100%
Reliance Property Reliance
Loans Limited Mortgage provider House 100%
Rochester Mortgages Reliance
Limited Mortgage provider House 100%
All investments are in the ordinary share capital of each
subsidiary.
1. Investments in subsidiaries and intercompany loans (continued)
OSB India Private Limited is owned 70.28% by OneSavings Bank
plc, 29.72% by Easioption Limited and 0.001% by Reliance Property
Loans Limited.
Special purpose vehicles which the Group controls are treated as
subsidiaries for accounting purposes.
All of the entities listed above have been consolidated into the
Group's consolidated financial statements. The location of the
entities listed above are disclosed in note 50 to the Group's
consolidated financial statements.
The investment is reviewed annually for indicators of
impairment. If impairment indicators are identified an impairment
review of the investment is conducted which will quantify if the
carry value is in excess of the recoverable amount or an impairment
has occurred. In determining recoverable amount the fair value less
costs to sell and the value in use are assessed, with the value in
use being an estimate of the present value of future cash flows
generated by the investment.
The following are the registered offices of the
subsidiaries:
Bartholomew -- 1 Bartholomew Lane, London, England, EC2N 2AX
Charter Court -- 2 Charter Court, Broadlands, Wolverhampton,
WV10 6TD
Churchill Place -- 5 Churchill Place, 10(th) Floor, London, E14
5HU
Great St. Helen's -- 35 Great St. Helen's, London, EC3A 6AP
Guernsey -- 1(st) Floor, Tudor House, Le Bordage, St Peter Port,
Guernsey, GY1 1DB
India -- Salarpuria Magnificia No. 78, 9(th) & 10(th) floor,
Old Madras Road, Bangalore, India, 560016
Jersey -- 26 New Street, St Helier, Jersey, JE2 3RA
Reliance House -- Reliance House, Sun Pier, Chatham, Kent, ME4
4ET
The Company received no gifts during the year (2020: GBP0.1m
from OSB).
1. Share capital
Number of shares Nominal
issued and value Premium
fully paid GBPm GBPm
At 1 January 2020 2 - -
Conversion of GBP1 ordinary shares
to GBP0.01 ordinary shares 198 - -
Issuance of 408 GBP0.01 ordinary shares 408 - -
Conversion of GBP0.01 ordinary shares
to GBP3.04 ordinary shares (606) - -
Issuance of new GBP3.04 ordinary share
on Insertion 447,304,196 1,359.8 -
Shares issued under employee share
plans 8,582 - -
At 31 December 2020 447,312,780 1,359.8 -
Capital reduction of GBP3.04 nominal
value shares to GBP0.01 nominal value
shares - (1,355.3) -
Shares issued under employee share
plans 1,315,075 - 0.7
At 31 December 2021 448,627,855 4.5 0.7
---------------------------------------- ---------------- --------- -------
The holders of ordinary shares are entitled to receive dividends
as declared from time to time, and are entitled to one vote per
share at meetings of the Company. All ordinary shares rank equally
with regard to the Company's residual assets.
All ordinary shares issued in the current and prior year were
fully paid.
1. Other reserves
The Company's other reserves are as follows:
2021 2020
GBPm GBPm
Share-based payment 6.3 0.4
Transfer 65.7 65.7
Own shares (3.5) (4.0)
AT1 securities 150.0 -
218.5 62.1
-------------------- ----- -----
Transfer reserve
The transfer reserve represents the difference between the net
assets of the Group at the point of insertion of OSBG as the listed
holding company and the fair value of the newly issued share
capital of OSBG.
For own shares and AT1 securities see note 44 of the Group's
consolidated financial statements.
1. Directors and employees
The Company has no employees. OneSavings Bank plc provides the
Company with employee services and bears the costs associated with
the Directors of the Company. These costs are not recharged to the
Company.
1. Controlling party
As at 31 December 2021 there was no controlling party of OSB
GROUP PLC.
1. Independent assurance statement by Deloitte LLP to OSB GROUP
PLC on selected Alternative Performance Measures
Opinion
We have performed an independent reasonable assurance engagement
on the Alternative Performance Measures (collectively, the APMs)
set out below for the financial year ended 31 December 2021. The
assured APMs are highlighted with the symbol throughout the OSB
GROUP PLC (OSB Group) 2021
Annual Report and Accounts (ARA). The definition and the basis
of preparation for each of the assured APMs is described in the
Appendix to the 2021 ARA (OSB Group's APM Definitions and Basis of
Preparation).
Statutory basis Underlying basis
-- Net interest margin
-- Gross new lending
-- Cost to income
-- Net interest margin
-- Management expense ratio
-- Cost to income
-- Loan loss ratio
-- Management expense ratio
-- Basic earnings per share
-- Loan loss ratio
-- Return on equity
-- Dividend per share
-- Basic earnings per share
-- Return on equity
In our opinion the assured APMs for the financial year ended 31
December 2021, have been prepared, in all material respects, in
accordance with OSB Group's APM Definitions and Basis of
Preparation.
Directors' responsibilities
The directors of OSB Group are responsible for:
-- selecting APMs with which to describe the entity's performance and
appropriate criteria (as set out in the Group's APM Definitions and Basis
of Preparation) to measure them;
-- designing, implementing and maintaining internal controls relevant to the
preparation and presentation of the assured APMs that are free from
material misstatement, whether due to fraud or error; and
-- preparing and presenting the APMs.
Our responsibilities
Our responsibility is to express an opinion on the assured APMs,
based on our assurance work. We performed a reasonable assurance
engagement in accordance with International Standard on Assurance
Engagements (ISAE) 3000 (Revised), Assurance Engagements other than
Audits or Reviews of Historical Financial Information.
We are required to plan and perform our procedures in order to
obtain reasonable assurance as to whether the assured APMs have
been prepared, in all material respects, in accordance with OSB
Group's APM Definitions and Basis of Preparation.
The nature, timing and extent of the assurance procedures
selected depended on our judgment, including the assessment of the
risks of material misstatement, whether due to fraud or error, of
the assured APMs. In making those risk assessments, we considered
internal controls relevant to the preparation of the assured
APMs.
Based on that assessment we carried out testing which
included:
-- Agreeing amounts used in the calculation of APMs which are derived or
extracted from the audited financial statements of OSB Group for the year
ended 31 December 2021 to the financial statements.
-- For amounts used in the calculation of APMs which were not derived or
extracted from the financial statements of OSB Group for the year ended
31 December 2021 testing, on a sample basis, the underlying data used in
determining the assured APMs.
-- Checking the mathematical accuracy of the calculations used to prepare
the assured APMs and testing whether they were prepared in accordance
with OSB Group's APM Definitions and Basis of Preparation;
-- Reading the 2021 ARA and assessing whether the assured APMs were
presented and described consistently.
We were not asked to give, and therefore have not given any
assurance over (i) any APMs other than the assured APMs or (ii)
other data in the ARA as part of this engagement.
We believe that the evidence obtained is sufficient and
appropriate to provide a basis for our opinion.
Our independence and quality control
We have complied with the independence and other ethical
requirements of the FRC Ethical Standard and the Code of Ethics for
Professional Accountants issued by the International Ethics
Standards Board for Accountants, which is founded on fundamental
principles of integrity, objectivity, professional competence and
due care, confidentiality and professional behaviour.
We apply International Standard on Quality Control 1.
Accordingly, we maintain a comprehensive system of quality control
including documented policies and procedures regarding compliance
with ethical requirements, professional standards and applicable
legal and regulatory requirements.
Use of our report
This assurance report is made solely to OSB GROUP PLC in
accordance with the terms of the engagement letter between us. Our
work has been undertaken so that we might state to OSB GROUP PLC
those matters we are required to state to them in an independent
reasonable assurance report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than OSB GROUP PLC for our assurance
work, for this assurance report or for the opinions we have
formed.
Deloitte LLP, London
17 March 2022
2. Alternative performance measures
In these Preliminary results, the Group used alternative
performance measures (APMs) when presenting underlying results in
2021 and 2020 as Management believe they provide a more consistent
basis for comparing the Group's performance between financial
periods. Underlying results exclude exceptional items, integration
costs and other acquisition-related items.
APMs reflect an important aspect of the way in which operating
targets are defined and performance is monitored by the Board.
However, APMs in these Preliminary results are not a substitute for
IFRS measures and readers should consider the IFRS measures as
well.
Below we provide definitions and the calculation of APMs used
throughout these Preliminary results both on a statutory basis and
underlying basis for 2021 and 2020.
Net interest margin (NIM)
NIM is defined as net interest income as a percentage of a
13-point average1 of interest earning assets (cash, investment
securities, loans and advances to customers and credit
institutions). It represents the margin earned on loans and
advances and liquid assets after swap expense/income and cost of
funds.
2021 2020
GBPm GBPm
Net interest income -- statutory A 587.6 472.2
Add back: acquisition-related items2 62.9 61.8
Net interest income -- underlying B 650.5 534.0
13 point average of interest earning assets -- statutory
C 23,207.7 21,883.4
13 point average of interest earning assets -- underlying
D 23,033.7 21,663.2
NIM statutory equals A/C 2.53% 2.16%
NIM underlying equals B/D 2.82% 2.47%
Cost to income ratio
The cost to income ratio is defined as administrative expenses
as a percentage of total income. It is a measure of operational
efficiency.
2021 2020
GBPm GBPm
Administrative expenses -- statutory A 166.5 157.0
Add back: acquisition-related items2 (4.8) (4.3)
Administrative expenses -- underlying B 161.7 152.7
Total income -- statutory C 629.0 508.6
Add back: acquisition-related items2 50.2 61.6
Total income -- underlying D 679.2 570.2
Cost to income statutory equals A/C 26% 31%
Cost to income underlying equals B/D 24% 27%
Management expense ratio
The management expense ratio is defined as administrative
expenses as a percentage of a 13-point average1 of total
assets.
2021 2020
GBPm GBPm
Administrative expenses -- statutory (as in cost
to income ratio above) A 166.5 157.0
Administrative expenses -- underlying (as in cost
to income ratio above) B 161.7 152.7
13 point average of total assets -- statutory C 23,382.6 22,140.1
13 point average of total assets -- underlying D 23,231.5 21,931.8
Management expense ratio statutory equals A/C 0.71% 0.71%
Management expense ratio underlying equals B/D 0.70% 0.70%
Loan loss ratio
The loan loss ratio is defined as impairment of financial assets
as a percentage of a 13-point average1 of gross loans and advances.
It is a measure of the credit performance of the loan book.
2021 2020
GBPm GBPm
Impairment of financial assets -- statutory A (4.4) 71.0
Add back: acquisition-related items2 (0.5) 0.2
Impairment of financial assets -- underlying B (4.9) 71.2
13 point average of gross loans -- statutory C 20,327.5 18,739.0
13 point average of gross loans -- underlying D 20,164.3 18,508.5
Loan loss ratio statutory equals A/C (0.02)% 0.38%
Loan loss ratio underlying equals B/D (0.02)% 0.38%
Return on equity (ROE)
ROE is defined as profit attributable to ordinary shareholders,
which is profit after tax and after deducting coupons on
non-controlling interest securities, as a percentage of a 13-point
average1 of shareholders' equity (excluding GBP60m of
non-controlling interest securities up to September 2021 and
GBP150m of AT1 securities from October 2021).
2021 2020
GBPm GBPm
Profit after tax -- statutory 345.3 196.3
Coupons on AT1 securities (4.7) (5.5)
Profit attributable to ordinary shareholders -- statutory
A 340.6 190.8
Add back: acquisition-related items2 47.8 68.6
Profit attributable to ordinary shareholders -- underlying
B 388.4 259.4
13 point average of shareholders' equity (excluding AT1 securities)
-- statutory C 1,741.1 1,514.2
13 point average of shareholders' equity (excluding AT1 securities)
-- underlying D 1,632.4 1,363.8
Return on equity statutory equals A/C 20% 13%
Return on equity underlying equals B/D 24% 19%
Basic earnings per share
Basic earnings per share is defined as profit attributable to
ordinary shareholders, which is profit after tax and after
deducting coupons on non-controlling interest securities, gross of
tax, divided by the weighted average number of ordinary shares in
issue.
2021 2020
GBPm GBPm
Profit attributable to ordinary shareholders -- statutory
(as in RoE ratio above) A 340.6 190.8
Profit attributable to ordinary shareholders -- underlying
(as in RoE ratio above) B 388.4 259.4
Weighted average number of ordinary shares in issue -- statutory
C 448.1 446.2
Weighted average number of ordinary shares in issue -- underlying
D 448.1 446.2
Basic earnings per share statutory equals A/C 76.0 42.8
Basic earnings per share underlying equals B/D 86.7 58.1
1. 13-point average is calculated as an average of opening
balance and closing balances for 12 months of the financial
year.
2. The acquisition-related items are detailed in the
reconciliation of statutory to underlying results in the Financial
review.
Calculation of 2021 final dividend
The table below shows the basis of calculation of the Company's
recommended final dividend for 2021:
2021 2020
GBPm GBPm
Statutory profit after tax 345.3 196.3
Less: coupons on non-controlling interest securities
classified as equity (4.7) (5.5)
Statutory profit attributable to ordinary shareholders 340.6 190.8
Add back: Group's integration costs 5.0 9.8
Tax on Group's integration costs (1.3) (2.4)
Add back: Group's exceptional items 0.2 3.3
Add back: amortisation of fair value adjustment 64.5 64.5
Add back: amortisation of inception adjustment (11.0) (13.3)
Add back: amortisation of cancelled swaps (1.6) (2.7)
Add back: amortisation of intangible assets
acquired 4.8 11.3
Less: Impairment reversal of intangible assets
recognised on Combination (3.1) -
Release of deferred taxation on the above amortisation
adjustments (8.5) (14.8)
Gain on sale of financial assets (1.7) 13.1
Add back: ECL on Combination 0.5 (0.2)
Underlying profit attributable to ordinary shareholders 388.4 259.4
Total dividend: 30% (2020: 25%) of underlying
profit attributable to ordinary shareholders 116.6 64.9
Less: interim dividends paid (21.9) -
Recommended final dividend 94.7 64.9
Number of ordinary shares in issue 448,627,855 447,312,780
Recommended final dividend per share (pence) 21.1 14.5
(END) Dow Jones Newswires
March 17, 2022 03:00 ET (07:00 GMT)
Copyright (c) 2022 Dow Jones & Company, Inc.
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