TIDMYBSC
RNS Number : 3237H
Yorkshire Building Society
27 July 2023
Yorkshire Building Society
Half-Yearly Financial Report 30 June 2023
Interim Management Report
Introduction from the Chief Executive
I am pleased to introduce Yorkshire Building Society's financial
report for the six months to June 2023. Having joined the Society
as Chief Executive in March this year, I feel privileged to be
leading an organisation so clearly aligned to delivering against
its purpose: to provide Real Help with Real Life. Even though my
time at the Society so far has been relatively brief, I have
already been able to draw inspiration from the culture I have
experienced - one that constantly reaches for better for our
members and customers.
Our purpose is at the heart of all that we do, and the first
half of 2023 has been no different. We embrace the fact that the
products and services we offer can make a genuine difference as
people pursue their financial goals, whether saving for a life
event or looking to secure a mortgage for a home. It is not
difficult to see how essential, everyday goals like these could
have been undermined in recent times. The cost-of-living and the
rate of inflation, both of which climbed sharply in the last few
years, remain prominent concerns for people, for markets, and for
governments, despite the series of monetary policy interventions
made.
Within this context, the issue of resilience in personal
finances has become more critical. This has long been an area of
focus for us at the Society, with Financial Wellbeing standing
beside Place to Call Home and Member Value as our three core
purpose priorities. We recognise the difficulties some people are
facing, and we have established new processes to make sure our
customers receive the level of support appropriate to their
circumstances. In June, the Society became a signatory to a
government charter to support mortgage borrowers which aims to
provide a range of proactive options for managing their monthly
obligations without detriment to borrowers' credit records.
At YBS, we want to see the benefits of financial resilience
extend to an audience wider than our membership alone. This is
reflected in the community outreach and charitable activities we
undertake. Our Money Minds and Career Minds sessions continue to
help young people of school age equip themselves with the financial
and workplace skills to succeed. After seeing the positive impact
that our partnership with Citizens Advice has brought to local
communities, we are expanding the programme to reach more people.
Another example is our two-and-a-half-year partnership with Age UK,
the leading charity for older people, which comes to an end in
November this year. I am delighted to be able to say that, through
donations and the fundraising efforts of our colleagues, we
successfully exceeded our target to raise GBP1 million for Age UK's
Building Better Lives programme. In the first six months of the
year we have supported over 148,000 people (2022 H1: 104,000)
toward building their financial resilience through our instant
access savings accounts and community activities.
Our ambitions under our Place to Call Home priority are met
through lending to our mortgage customers. Our strategy in this
area is unchanged, with our core lending business supporting our
more targeted products which seek to address real problems
including helping people take their first step on the property
ladder. The mortgage market in the first half of 2023 has been
impacted by a number of factors, including affordability pressures,
which led to periods of market volatility and an overall reduction
in the level of activity compared to last year. Against the
backdrop of this downward trend in market activity, the Society
achieved gross lending of GBP4.2 billion in the six months to June
2023 (2022 H1: GBP5.3 billion), and supported 23,000 people to have
a place they can call home (2022 H1: 28,000). We expect conditions
in our core markets, particularly that for mortgages, to remain
challenging for the foreseeable future. This is set in the context
of a likely reduction in market size compared to recent years as
well as the broader economic impacts of the rising interest rate
environment.
The principal reason that we exist as an organisation is to
deliver long-term value to our membership. The Society's members
continue to benefit from rewarding rates, as shown by the marked
increase in the differential between the savings rates we offer and
the average rate offered by the rest of the market. Over 2023 so
far, we delivered rates that were on average 1.04 percentage points
higher than the market average(1) 0.56 percentage points higher
over 2022). We continue to develop our member loyalty programme,
releasing a Loyalty ISA in March which saw members who have been
with us for 12 months or longer be rewarded with a preferential
rate. All of this purposeful activity in our savings business has
supported the GBP3.6 billion in balance growth since the close of
2022 (2022 H1: GBP2.2 billion).
1 YBS Group average savings rate compared to rest of market
average rates. Data source: CACI's Current Account and Savings
Database (CSDB), Stock. Data period: January - May 2023 (latest
data available). Comparative period: January - December 2022.
Our prioritisation of Member Value also encompasses the steps we
are taking to ensure that we are in a position to meet the evolving
needs and expectations of our customers over the long term. We have
experienced some challenges this year in the servicing of our
customers, in particular some of our complaints handling outcomes
have fallen short of our internal expectations. To address this, we
have invested in improved monitoring and oversight, and systems
enhancements are planned later this year to further improve
customer outcomes.
Our Strategic Blueprint and Transformation Roadmap set out our
ambitious journey to transform the products and services we offer
and the ways in which we offer them. It has now been three years
since the launch of the Blueprint, and we can be proud of what has
been achieved to date. We successfully reinvigorated our savings
business; made considerable advancements in our digital and online
capabilities; and invested in our operational security and
resilience. Alongside this, progress is being made in our
Environmental, Social, and Governance (ESG) strategy, including how
we can support the management of climate change risks and the path
to net zero. Our 2022 ESG report is available on our website, and
progress on all of our Responsible Business Priorities and the
future of our Blueprint continues to be made. A detailed update on
our progress will be provided as part of our annual report.
Given the fast-changing landscape in which we operate, there
will always be more change ahead. The remainder of 2023 and beyond
will see us build upon our accomplishments as we continue
transforming our business to give our customers even greater choice
and control, and make our service as simple, swift, and supportive
as we can.
Our chosen measure of customer advocacy is Net Promoter Score
(NPS) - a measure of how likely customers would be to recommend us
based on their experience. Our investment in transforming our
online capabilities continues to be reflected in our improving
digital NPS results, and supports our overall score. Our latest
overall NPS for 2023 stands at +62, which is an increase of +8 this
year, and is currently tracking ahead of our year-end target.
Alongside the feedback relating to our products, the high standard
of service delivered by our colleagues is a consistent source of
praise. I am firm in my belief that our colleagues are absolutely
integral to our success, and we are unwavering in our commitment to
investing in our people and to fostering a working environment
where everyone can thrive. All that we have achieved so far, and
all that we aspire to in the years that come, would not be possible
were it not for the enthusiasm, talent, and dedication of our
colleagues.
All of this has translated into the Society delivering another
strong set of financial results in the first half of 2023. Despite
having significantly widened our savings differential, and
increased our costs to accommodate both inflationary pressures and
our investment in transformation, we have continued to drive
improved income and profitability. Statutory profit before tax for
the period was GBP180.6 million (2022 H1: GBP243.4 million) and
core operating profit was GBP246.4 million (2022 H1: GBP192.5
million). Our profits are reinvested into the Society and, combined
with the robust levels of capital and liquidity held, will improve
our resilience and flexibility as we navigate the periods of
uncertainty that lie ahead.
Whilst I have no doubt that the months and years that follow
will bring new and different challenges, we can be secure in the
knowledge that our business model is resilient, our risk management
capabilities are robust, and our strategic direction is clear. The
Yorkshire Building Society stands for something worthwhile, and I
greatly look forward to working together with the executive team,
our colleagues, and partners in the service of our membership.
Susan Allen, OBE
Chief Executive Officer
Performance at a glance
Place to call home
Gross lending Gross mortgage Growth in mortgage New residential
lending market balances(2) mortgages provided
share(1)
GBP4.2bn 3.5% 1.5% 21,000
GBP5.3bn 30 3.1% 31 December 4.9% 30 June 25,000 30 June
June 2022 2022 2022 2022
This represents This represents This represents The number of
the amount we our share of the growth in new residential
have provided all mortgage our overall mortgage mortgage advances
to customers lending in the balance over in the period,
to help finance UK housing market. the period. helping our customers
properties over to have a place
the period. to call home.
----------------------- ------------------------- --------------------------
Financial wellbeing
Savings accounts Savings market Growth in shares Average savings
opened share(3) balances rate paid
320,000 2.3% 8.6% 2.96%
171,000 30 June 2.2% 31 December 6.3% 30 June 1.2% over 2022
2022 2022 2022
The number of This shows the This shows the
accounts opened This reflects total deposits benefit we are
by new and existing our share of we use to fund giving back to
members over the UK savings the mortgages our members.
the period, helping market. we offer to our
them save for customers.
the future.
----------------------- ----------------------- ----------------------
Member value
Statutory profit Core Operating Cost to core Average savings
before tax Profit(4) income ratio differential
to the market(5)
GBP180.6m GBP246.4m 39.0% 1.04 pp higher
than the market
GBP243.4m 30 GBP192.5m 30 42.3% 30 June 0.56pp higher
June 2022 June 2022 2022 over 2022
This is the profit This is the profit This ratio measures This shows how
we earned from we earned, excluding how efficiently much higher the
our ongoing business taxes, fair value we run our Society rates we paid
operations, excluding volatility and by showing how our customers
taxes. one-time charges. much we are spending were compared
to generate every to the rest of
pound of our market average.
income.
------------------------ ----------------------- -------------------------
Common Equity Liquidity ratio UK Leverage Net Promoter
Tier 1 ratio ratio Score (NPS(R))(6)
16.6% 26.4% 6.3% +62
16.8% 31 December 23.3% 31 December 6.2% 31 December +54 in 2022
2022 2022 2022
Maintaining this This ratio measures This ratio highlights This measures
ratio above a our ability to the capital we how willing our
certain minimum lend to borrowers, hold compared customers are
helps to protect give money back to our assets, to recommend
ourselves against to savers when showing our ability us to others.
unexpected losses. they want it, to cope with
and pay our bills. unexpected events.
------------------------ ----------------------- -------------------------
More detail on business performance can be found in the Business
Highlights below.
1. Based on Bank of England total industry gross lending. Data
period January - May 2023.
2. Growth in mortgage balances excludes fair value adjustments
for hedged risk on loans and advances to customers. Prior year
comparative restated on a consistent basis.
3. Based on analysis of BSA deposits Held by Households. Data
period: May 2023.
4. Definitions of alternative performance measures are provided
on pages 237 to 239 of the 2022 Annual Report and Accounts.
5. YBS Group average savings rate compared to rest of market
average rates. Data source: CACI's Current Account and Savings
Database (CSDB), Stock. Data period: January - May 2023 (latest
data available). Comparative period: January - December 2022.
6. Net Promoter Score and NPS are trademarks of Bain &
Company, Inc., Fred Reichheld and Satmetrix Systems, Inc.
Business highlights
This section provides an overview of the environments within
which YBS operates, as well as summarising the key activities in
the first half of 2023.
Our community programmes and partnerships
The strong sense of social purpose we hold at YBS means that we
seek to positively contribute to the communities within which we
operate. Our programmes and partnerships reflect our commitment to
supporting financial wellbeing across society, through a range of
different initiatives targeted toward people at different stages of
their lives.
As a financial services organisation we feel we have an
opportunity to support young people as they equip themselves with
the skills and education necessary to prosper in the future. The
Society has continued to invest in and expand our Money Minds and
Career Minds programmes, delivering over 650 so far this year, and
our Money Minds online resources provide access to interactive,
flexible learning.
We have also built upon our successful initiative in
collaboration with Citizens Advice. Funding from the Society allows
Citizens Advice to provide free, face-to-face, independent advice
and support across a wide range of issues, including Financial
Wellbeing. The service operates from a number of our branch
locations, and in March this year we increased the number of
appointments available. In the second half of 2023 we plan to
expand the number of participating locations across the UK to 46
from the 18 which offer the service at present.
Since 2020, the Society has been in proud partnership with Age
UK. Age UK's services and advisers are there for older people when
they need it the most, and the money the Society raises helps the
charity to support financial resilience across the country. Over
the course of this partnership, our colleagues and members have
raised GBP1,013,577, which includes GBP634,143 in donations from
the Society, exceeding our GBP1 million target.
The process for selecting our next official charity partner is
underway, with the partnership due to commence in November of this
year.
Mortgages
Changes in the external environment continue to have a
significant bearing on the UK mortgages market. New business
mortgage customer rates began the year on a downward trend as the
impacts of the market-wide disruption in the latter months of 2022
eased. However further periods of volatility meant this trajectory
was not sustained. The most significant shift in the rate
environment came in the second quarter of the year, where
inflationary pressures demonstrated more persistence than forecasts
had anticipated, and the expectations for the future path of Bank
Rate elevated sharply.
This continual volatility in interest rate expectations led to a
dynamic competitive landscape, with tightening margins and mortgage
product ranges being withdrawn, repriced, and relaunched
frequently. Steeper borrowing costs also served to constrain the
level of activity in the market. The interest rate at which new
mortgages can be taken out directly influences the appetite to move
or buy as many find themselves less able to raise housing deposits
or meet affordability criteria. Responding to the lessening demand,
growth in house price indices has slowed over 2023; data released
by the Office of National Statistics shows the 12-month growth rate
has declined from 5.7% growth in January, to 1.9% growth in
May.
Within this context, the volume of applications the Society
received has remained high in H1, though not as high as the same
period in 2022. This demonstrates the strength of our product
propositions - including the buy-to-let (BTL) arm of our
intermediary lender, Accord Mortgages Limited, which achieved a
greater than typical share of the market. The Society entered 2023
with lower net lending expectations than the two preceding years,
owing to the disruption to the wider lending market in Q4 2022,
combined with a higher volume of maturities from our lending book.
In the first six months of the year total gross lending was GBP4.2
billion (2022 H1: GBP5.3 billion), and net lending was at GBP0.7
billion (2022 H1: GBP2.1 billion).
We continue to seek to add purpose-aligned products to our range
of mortgages, just as we did last year with our Cascade Score and
Boost LTI (loan to income) products, which continue to provide us
greater flexibility in our lending decisions. This development work
is ongoing by nature, and earlier this year we launched our first
mortgage-related loyalty proposition. This allows existing YBS
members to claim extra cashback when they take a qualifying
mortgage product with us, and if they do not need it themselves,
they can pass this offer on to family or friends.
Savings
Greater returns on savings balances can go some way toward
supporting consumers in an environment where financial challenges
are so prevalent. Rising interest rates have continued to influence
the returns available to savers this year, though the degree to
which banks and building societies have increased variable customer
rates differs institution by institution. Since the start of the
year, the Society's strategy has seen our variable back book rates
increase three times to the end of June, and our instant access
rates were on average 1.48 percentage points higher than the market
average (2) (0.77 percentage points higher over 2022).
Within the savings market, the level of competition for
acquiring savings balances intensified as 2023 progressed, with the
market for fixed-rate products in particular driving more
attractive customer rates. Individual Savings Accounts (ISAs) also
increased in popularity this year, owing both to pricing as well as
to their tax advantages as Personal Savings Allowances are
exhausted at a faster rate than before.
The Society achieved strong levels of growth in the first six
months of 2023; shares balances increased by GBP3.6 billion to
GBP45.6 billion in the period. The market disruption precipitated
by the failure of a number of non-UK banking institutions had a
minimal effect on our monthly savings flows. Our balance growth was
supported by the performance of our ISA range, including the latest
in our member loyalty programme: a Loyalty ISA, which offered a
premium rate for our longer standing members. Our transformation
investment also delivered behind-the-scenes efficiency improvements
to customer journeys for ISA applications and transfers in the
year.
Back in 2020 when we launched our Blueprint, one of our four key
strategic priorities was Savings Rebooted. In the two years that
followed, the progress we made in this area led to a higher NPS and
a higher rate of growth. Our new priority, Savings Supercharged,
represents how we will take our savings business to the next level
as we continue to focus on enhancing what we offer to our
members.
2. YBS Group average instant access savings rate compared to
rest of market average instant access rates. Data source: CACI's
Current Account and Savings Database (CSDB), Stock. Data period:
January - May 2023 (latest data available). Comparative period:
January - December 2022.
Outlook
The economic and political environments continue to exhibit
heightened levels of uncertainty. Growth in UK Gross Domestic
Product (GDP), though limited in 2023, has so far avoided entering
a technical recession - which was viewed as a potential threat as
2022 ended. Pay growth has provided some compensation for
consumers, however, after adjusting for inflation, real pay is
still falling. The rate of unemployment has remained relatively
stable for the past year; the latest official estimate (as at May
2023) was 4.0%, though there remain risks of this worsening should
the economy slow from its current state.
Facing stubborn inflationary pressures, the Bank of England has
increased the benchmark interest rate four times since December
2022, with Bank Rate standing at 5.0% in June 2023. Much depends on
the speed and efficacy of the monetary policy tightening in
returning the rate of inflation back toward the Bank of England's
target of 2.0%. Broader downside risks also exist in the
geopolitical environment, including any developments in the ongoing
military conflict in Ukraine.
With regard to the savings market, it appears that the increased
level of competition for retail savings balances which
characterised the recent months of this year is likely to be
sustained. A factor contributing to this will be the need for many
financial institutions to refinance drawings from Bank of England
funding schemes as its contractual maturity draws closer. Outside
of the competitive environment, some savings providers may face
pressure from government or regulators as to whether the interest
rate rises are benefitting variable rate savers to an appropriate
degree.
The current outlook for the mortgages market appears
particularly challenging, with some of the headwinds facing this
market having already made themselves known to an extent. A range
of potential difficulties are faced by both existing and
prospective borrowers, stemming from the cost-of-living pressures
and inflationary environment.
How much of a constraint issues like affordability criteria pose
to the size of the mortgage market remains to be seen, but their
impacts have the potential to be material. Different segments of
the lending market may also experience more acute impacts, for
example increases in borrowing costs may have a greater bearing on
the BTL market. Factors like these can cause shifts in the supply
and demand dynamics and carry ramifications for house price
growth.
The consequences of higher interest rates for existing mortgage
customers are a concern for the Government and for regulators. With
many borrowers facing a significant increase in their monthly
payment obligations at the end of their current fixed terms, in
June 2023 the Chancellor met with the UK's principal mortgage
lenders and the Financial Conduct Authority (FCA) to agree support
measures to protect customers. YBS is a signatory to this charter,
which offers a range of options for mortgage holders that aim to
alleviate some of the pressures they currently face.
Emerging challenges and threats, of natures both economic and
operational, are and will continue to be monitored on a regular
basis, to ensure that the Society takes appropriate action where
necessary to remain in a position of strength to continue to serve
our members.
Our financial performance
The following summary sets out the key drivers of our financial
results over the first half of the year, and the impact they have
on the condensed interim financial statements.
The table below presents the results of Yorkshire Building
Society ('YBS' or 'the Society') and its controlled entities
(collectively 'the Group' or 'YBS Group') for the half-year ended
30 June 2023. See note 1 to the condensed interim financial
statements for more information on the basis of preparation.
Income statement
Income performance and profitability for the first six months of
2023 remain strong, supported by the rising interest rate
environment and continued growth of our balance sheet, particularly
within our savings book. A year-on-year increase in our costs
reflects the impact of inflationary pressures, but also additional
purposeful investment in our Transformation programme.
Our financial performance is monitored by our Board who, in
addition to looking at statutory profit before tax, look at core
operating profit. Core operating profit excludes items such as fair
value volatility and one-time charges that are either temporary in
nature or reverse over time and so do not reflect the Group's
day-to-day activities. In this reporting period, core operating
profit for the period was GBP246.4 million, an increase of GBP53.9
million on the equivalent period last year (30 June 2022: GBP192.5
million).
The following table shows the items removed from statutory
profit before tax to arrive at core operating profit.
Half-year ended Half-year ended Year ended
30 June 2023 30 June 2022 31 December
2022
Statutory Remove Core Statutory Remove Core Statutory Remove Core
non-core non-core non-core
items items items
Notes GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- --------- --------- ------- --------- --------- ------- --------- --------- -------
Net interest
income i 417.2 (1.4) 415.8 334.2 (1.3) 332.9 724.1 (2.4) 721.7
Other income 1.8 1.8 3.6 - 3.6 8.8 0.3 9.1
Fair value gains
and losses ii (71.3) 67.4 (3.9) 50.2 (49.8) 0.4 75.6 (74.9) 0.7
Net realised
gains 1.5 1.5 2.4 - 2.4 2.9 - 2.9
----------------- ---- --------- --------- ------- --------- --------- ------- --------- --------- -------
Total income/core
income 349.2 66.0 415.2 390.4 (51.1) 339.3 811.4 (77.0) 734.4
Management expenses (161.9) (161.9) (143.6) - (143.6) (298.7) - (298.7)
Impairment of financial
assets (7.5) (7.5) (0.7) - (0.7) (6.0) - (6.0)
Movement in
provisions iii 0.8 (0.2) 0.6 (2.7) 0.2 (2.5) (4.2) 0.1 (4.1)
---------------- ----- --------- --------- ------- --------- --------- ------- --------- --------- -------
Profit before tax/core
operating profit 180.6 65.8 246.4 243.4 (50.9) 192.5 502.5 (76.9) 425.6
----------------------- --------- --------- ------- --------- --------- ------- --------- --------- -------
The notes below explain the adjustments made to statutory profit
to arrive at the core operating profit figure:
i. Historical fair value credit adjustments on acquired loans.
ii. Removed fair value volatility i.e. gains and losses on
derivatives not qualifying for hedge accounting, and on non-core
equity investments. See note 5 to the condensed interim financial
statements for more information.
iii. Non-core elements of the restructuring provision - see note
7 to the condensed interim financial statements for more
information.
The following are the main items in the income statement that
contribute to core operating profit:
-- Net interest income for the year to June is GBP417.2 million
(2022 H1: GBP334.2 million), representing a net interest margin of
1.38%, an increase of 0.16 percentage points compared to the
equivalent period last year.
-- Other income of GBP1.8 million relates to fees, commissions,
and other operating income (2022 H1: GBP3.6 million).
-- Net realised profits of GBP1.5 million relate to profits from
the sale of liquid asset investments (2022 H1: GBP2.4 million).
-- Management expenses were GBP161.9 million, an increase of
GBP18.3 million against the same period in 2022. A significant
proportion of this increase relates to a rise in people costs,
reflecting a pay award that was significantly higher than the
historical average. We have also accelerated investment in our
Transformation programme, with the aim of delivering customer
benefits earlier than previously anticipated.
-- An impairment charge of GBP7.5 million has been recorded in
the period (2022 H1: GBP0.7 million). This reflects changes to
year-to-date changes in HPI as well as broader updates to the
economic scenarios used in the modelling. See note 9 to the
condensed interim financial statements for more information on
expected credit losses, including the economic scenarios used.
As a mutual we do not pay dividends to external shareholders;
our profit requirements are driven solely by our need for ongoing
capital to support our activities. Profit remains sufficient to
provide capital for our growth aspirations and ensure we are
resilient to severe economic stresses.
The Group's business activities are focused within the UK and
predominantly relate to mortgage lending which is funded primarily
through domestic deposits. We continue to have a cautious approach
to liquidity management and as at 30 June 2023, the majority of our
liquidity portfolio consisted of exposures to the Bank of England
and the UK Government.
Balance Sheet
Half-year Half-year Year ended
ended ended 31 December
30 June 2023 30 June 2022 2022
GBPbn GBPbn GBPbn
--------------------------------- --------------------- --------------------- ---------------------
Liquid assets 14.9 11.4 12.5
--------------------- --------------------- ---------------------
Loan and advances to customers 45.9 44.2 45.2
--------------------- --------------------- ---------------------
Fair value adjustment for hedged
risk on loans and advances to
customers (1.8) (0.9) (1.5)
--------------------- --------------------- ---------------------
Other Assets 3.2 1.7 2.6
--------------------------------- --------------------- --------------------- ---------------------
Total assets 62.2 56.4 58.8
--------------------------------- --------------------- --------------------- ---------------------
Shares - retail savings 45.6 37.7 42.0
--------------------- --------------------- ---------------------
Wholesale funding and other
deposits 10.8 13.7 11.6
Subordinated liabilities 1.2 1.1 1.0
Other liabilities 1.1 0.6 0.8
--------------------------------- --------------------- --------------------- ---------------------
Total liabilities 58.7 53.1 55.4
--------------------- --------------------- ---------------------
Members' interest and equity 3.5 3.3 3.4
--------------------------------- --------------------- --------------------- ---------------------
Total members' interest, equity
and liabilities 62.2 56.4 58.8
--------------------------------- --------------------- --------------------- ---------------------
Overall balance sheet growth achieved in the year to June stands
at 5.8% (2022 H1: 7.0%), with more asymmetric growth across
mortgages and savings having been achieved than the previous
year.
Net lending performance was lower in the first half of this year
at GBP0.7 billion (2022 H1: GBP2.1 billion). Disruption to mortgage
market in the Autumn of last year resulted in a smaller pipeline of
new lending being carried forward into the current year. As a
result, lower volumes of new mortgages completed in January and
February than we would typically expect. Completion volumes
increased markedly over the period of March to June.
Net savings flows continued to perform strongly; balance growth
was GBP3.6 billion in the period (2022 H1: GBP2.2 billion). This
growth has been supported by the strength of our propositions,
further increases to our back-book rates, and the widening of our
rate differential to the market. In line with this, our overall
liquidity position has further improved, standing at 26.4% (2022:
23.3%). Sufficient headroom to regulatory requirements has been
maintained and we continue to diversify our high-quality liquid
asset portfolio.
Our key capital ratios continue to demonstrate stability in our
capital position. Our Common Equity Tier 1 ratio, which represents
the relationship between the strongest form of capital
(predominantly retained profits) and risk-weighted assets, is 16.6%
(2022: 16.8%). And our UK leverage ratio, which compares Tier 1
capital with total assets, stands at 6.3% (2022: 6.2%).
In the first half of 2023, the Society successfully issued a
Residential Mortgage Backed Security, a Sterling denominated
Covered Bond, and a Senior Non-Preferred (SNP) Note, with the
latter also accompanied by a liability management exercise to
repurchase a proportion of an existing issuance. Additionally, in
June we made a further repayment, of GBP1.0 billion, in respect of
our drawings from the Bank of England's TFSME scheme, significantly
ahead of its contractual maturity.
The asset quality of our loan book remains high. The value of
loans more than three months in arrears represents 0.32% of our
mortgage book at 30 June 2023 (31 December 2022: 0.31%). The number
of accounts which are more than three months in arrears (including
possessions) is 0.44% at 30 June 2023 (31 December 2022: 0.44%),
which remains significantly better than the industry average (3) ,
the latest data for which is 0.74% (31 December 2022: 0.73%). A
number of indicators are used in assessing the credit quality of
our loan book, which are continually monitored. We also continue to
consider our lending criteria carefully.
3. Industry average sourced from UK Finance: Retail, 3m+ in
arrears. Latest data available is as at March 2023.
Principal risks and uncertainties
The environment within which we operate and the nature of the
threats that we face are continually evolving. The sources of
uncertainty, both nationally and internationally, are many; they
include the inflationary macroeconomic environment, the consequent
cost-of-living challenges and geopolitical instability.
A description of the principal risks and uncertainties to which
we are exposed is included in the table below, followed by further
commentary on how these risks have evolved. We have performed
stress tests to assess the impact of a range of risk scenarios and
it is our assessment that, while they each of the scenarios bring
their individual challenges, we are well placed to manage them.
We continue to invest in our risk management capability to
ensure that emerging and evolving risks are closely monitored, and
that timely and appropriate action is taken to protect the
interests of Yorkshire Building Society and its controlled entities
(the Group), and its members and customers. Significant emerging
risks are regularly reviewed through the senior Risk Committees and
are considered as part of our planning process.
We have a robust risk management framework, strong capital
position, diverse funding sources and high liquidity levels; and we
remain confident in the financial resilience, operational
resilience, and the sustainability of the Group.
Risk Description Principal mitigation
------------------------------------- -------------------------------
Strategic The risk to the Society's earnings We mitigate risks relating
risk or sustainability which arises to the business environment
from changes in the business and our strategic choices
environment (Political, Economic, through horizon scanning,
Social and Technological), corporate planning, scenario
or from the effectiveness of analysis and stress testing,
decisions and actions relating and ongoing monitoring
to our strategic response to and reporting activity.
those changes.
--------------- ------------------------------------- -------------------------------
Retail The risk to the Group of credit We set a stress-tested
and commercial losses as a result of failure risk appetite for retail
credit to design, implement and monitor and commercial lending
risk an appropriate credit risk activities which manages
appetite. exposure to higher risk
lending areas, and monitors
adherence to this.
--------------- ------------------------------------- -------------------------------
Treasury The risk of losses following We set a stress-tested
risk default on exposures arising risk appetite for treasury
from balances with other financial risk and monitor adherence
institutions, liquid asset to this. We adopt a low-risk
holdings and from derivative approach to our treasury
instruments used to manage activities, investing
interest rate and foreign exchange most of its liquidity
risk. in the highest quality
assets.
--------------- ------------------------------------- -------------------------------
Funding The risk of the Group having We set a stress-tested
and liquidity inadequate cash flow to meet risk appetite and monitor
risk current or future requirements our positions against
and expectations. this. We operate a diversified
funding base, primarily
through retail savings,
supported by a strong
wholesale funding franchise.
--------------- ------------------------------------- -------------------------------
Market The risk to the Group's earnings We adopt a low-risk approach
risk or the value of its assets to market risk, and stress
and liabilities due to changes test all positions against
in external market rates. a range of scenarios.
--------------- ------------------------------------- -------------------------------
Capital The risk that the Group is We maintain a stress-tested
risk not able to meet regulatory capital risk appetite
capital requirements or deliver and regularly stress test
on its strategic plans due its positions against
to insufficient capital resources. severe scenarios.
--------------- ------------------------------------- -------------------------------
Model risk The risk that the Group's models We operate a Model Risk
used to manage the business Management Maturity framework
are inaccurate, perform inadequately which includes monitoring
or are incorrectly used. of model suitability and
performance within agreed
risk appetite.
--------------- ------------------------------------- -------------------------------
Operational The risk of direct or indirect We operate an internal
risk loss resulting from inadequate control framework in line
or failed internal processes, with the Board risk appetite
people and systems, or from and monitor adherence
external events. Operational through our three lines
risk includes cyber, people of defence model.
and third-party risk.
--------------- ------------------------------------- -------------------------------
Compliance The risk of direct or indirect We operate an internal
and conduct loss as a result of a failure control framework in line
risk to comply with regulations with the Board risk appetite
(such as money laundering) and monitor adherence
or to ensure fair customer through our three lines
outcomes. Compliance and conduct of defence model.
risk includes financial crime
risk.
--------------- ------------------------------------- -------------------------------
Evolution of Principal Risk Exposures
The principal risks and uncertainties continue to evolve. The
key areas of focus during the first half of 2023 were rising
inflation and interest rates, creating greater cost-of-living
concerns for our customers, members and colleagues; a slow-down in
the housing market; periods of turbulence in financial markets; and
labour shortages, arising from increased demand for skills such as
digital.
Economic, Social, and Political Uncertainties (Retail &
Commercial Credit and Market Risks)
Pressure on mortgage affordability remains prevalent, with a
range of contributing economic, social, and political factors.
Inflation has continued to rise during the first half of this year,
and in response, interest rates have risen further. Together, these
place affordability stresses on mortgage borrowers, as well as
tenants of buy-to-let and commercial landlords.
These affordability stresses are likely to continue for the
foreseeable future. Affordability for new lending or where there is
a material change in circumstances is assessed using a
sophisticated model, which currently incorporates a stressed
interest rate, and is reviewed every six months (as a minimum) to
ensure it remains an appropriate level of stress. Changes have been
made to this model to ensure that various cost-of-living factors
are accounted for, including the impact of inflation on monthly
expenditure. Equally, comprehensive activity has taken place to
understand the impact of, and mitigate where appropriate, the
higher cost-of-living on our new and existing portfolio.
The consequent market volatility has also continued during the
first half of the year. This has required disciplined hedging and
ensuring our products are carefully priced so that our risk
appetites are not exceeded.
We continue to consider lending criteria carefully using an
approach that is intended to balance the level of risk we take
against our purpose of providing Real Help with Real Life. At all
times we focus on our lending being responsible to protect
customers and to minimise arrears.
Attracting & Retaining Skills and Talent in High Demand
Areas (Operational Risk)
We increasingly recognise that social changes brought about by
the COVID-19 pandemic, such as removal of geographical barriers,
have accelerated changes in employee expectations. These are
resulting in increased competition in the recruitment and retention
of colleagues across all areas of the business, but particularly
those areas with high demand skills such as change, digital,
technology and data and analytical functions.
We continue to review our value proposition in relation to
talent acquisition and retention and undertake continual monitoring
of the recruitment market. We do not expect candidate expectations
around flexible working to return to pre-pandemic norms and so we
continually review how we attract, retain and support new and
existing colleagues to work flexibly. We expect the recruitment
market to remain candidate-driven over the rest of the year and
will therefore continue to leverage our refreshed Employee Value
Proposition and proactively source talent to fulfil business
requirements. Effective resource planning and forecasting is a
priority, and our resourcing practices are regularly reviewed to
ensure we proactively manage associated risks to deliver our
Strategic Blueprint.
Model Risk
We continue to monitor and address, via the Society's Model Risk
Committee, the risks associated with the use of models and,
specifically, the use of models that rely on historical data being
applied to future scenarios. We continue to adapt and develop our
approach to model risk management and the underlying models
themselves in line with industry good practice and regulatory
guidance.
Regulation and Fair Outcome (Compliance & Conduct Risk)
Compliance and conduct are central to our values and behaviours,
with an internal control framework that operates in line with the
Board risk appetite, and which monitors adherence. However, ongoing
focus and robust challenge is required to keep pace with the
rapidly changing legal and regulatory environment. This is also
vitally important as we continue with our ambitious transformation
programme which explores new initiatives, customer journeys and
ways of working.
Dialogue with our regulators continues to be open and
constructive, and we continue to work with regulators and industry
bodies to contribute to the developing regulatory agenda. This
includes matters such as the FCA's introduction of new Consumer
Duty regulation which sets higher expectations for the standard of
care that firms provide to consumers. As a mutual organisation,
fair customer treatment is intrinsic to everything we do and is
aligned to our purpose to provide Real Help with Real Life.
Climate Change Risk (Credit and Operational Risk)
We recognise that climate change is one of the most critical
issues facing the UK and global economy. The main climate-change
risks impacting us are how physical risks such as flooding,
subsidence and coastal erosion affect our customers' homes.
Additionally, we recognise the risks posed by the transition to a
low-carbon economy such as energy efficiency regulation and any
exposure to sectors most affected by this change.
We continue to develop our environmental and climate change risk
management capabilities to integrate these within our risk
management framework, ensure that we align with best practice, and
can meet reporting and disclosure requirements.
Increased Competition and New Technology (Operational Risk)
Our digitalisation programme continues to develop wider access
to our products and services through expanded digital channels.
Challenger banks, FinTech firms and the digital transformation of
direct competitors continue to heighten the need to remain
competitive in these areas.
We continue to successfully deliver the first phase of our
programme and have maintained strong governance and extensive
oversight of the management of associated risks. There is, however,
a residual risk that securing the resource to deliver the change
necessary for some customer groups to keep pace with rapidly
changing technology may also prove unsustainable, and require
investment choices which may not fully meet customer
expectations.
We are also modernising our IT infrastructure to improve
resilience and reduce risk. As IT components age, their fit and
value often deteriorate, while cost and risk often conversely grow.
We have embedded an approach to managing and mitigating our legacy
IT risks, including those relating to third parties, and progress
is reported to the Board at least annually.
Further phases of our digitalisation and technology
modernisation programmes will create additional risks, and we will
continue to identify, assess, and manage these as appropriate.
Financial Crime Threats (Compliance and Conduct Risk)
We operate in a hostile and constantly evolving financial crime
environment, including phishing and spam attempts that seek to take
advantage of customers.
We have noticed an uptick in financial crime incidents during
the first half of the year and therefore remain on high alert. Our
continued focus on our financial crime capability remains paramount
to keep these evolving financial crime exposures within our risk
appetite. The Society continues to invest to deliver and implement
proportionate and effective monitoring, enhance our ability to
identify threats and invest in financial crime controls.
New and Evolving Cyber Security Threats (Operational Risk)
The increasing use of technology, and the pace of technological
change, exposes the UK financial services sector to ever-increasing
and evolving cyber security risks. Geopolitical threats such as the
war in Ukraine have elevated the threat landscape, with ransomware
a continued threat. Resilience to such threats and an ability to
effectively respond in the event of an attack remains essential to
protect the Society, maintain the trust of customers and the
confidence of regulators. Good progress has been made in improving
the Society's security monitoring capabilities.
Continued Risk Management Effectiveness
We continue to invest in this area to ensure that our key
controls are appropriately maintained. Good progress has been made
during the first half of 2023 with the continued embedding of our
risk management framework across the business, evidenced by our
ability to continue to adapt and respond to rapid change in our
operating environment.
To further support our Strategic Blueprint, we defined a set of
risk management priorities. These priorities set out the role that
risk management plays to deliver the Strategic Blueprint and, in
turn, long-term sustainability for the benefit of our customers and
colleagues. Priorities include, but are not limited to: ensuring
operational resilience vulnerabilities are identified and
evaluated; improving our cyber security capabilities; building on
existing capabilities to enhance understanding of risks arising
from climate change; and delivering robust financial crime
identification, prevention, mitigation, and reporting that will
protect the Society and its customers.
Regulatory Environment
Relevant updates with respect to the regulatory environment
include:
Consumer Duty
The FCA's Consumer Duty comes into force for open-book products
on 31 July 2023. This new fundamental principle sets higher
standards, moving beyond consumer protection to require firms to
'deliver good outcomes for retail customers'.
The impact of the Duty is being seen not only in the new rules
and principles specifically drafted for the Duty, but also in other
work the FCA is delivering such as their consultation into
Strengthening Protections for Borrowers in Financial Difficulty. We
expect to see this kind of focus to continue.
The FCA expect Boards of Directors to take the Duty to their
heart. A Consumer Duty champion has been appointed, and the Board
has been regularly engaged as to YBS's progress towards meeting the
requirements. YBS is assessing it's final position of readiness
ahead of 31 July 2023, with the expectation that the majority of
requirements will be met, with only modest gaps remaining which are
captured within a post 31 July delivery plan. The FCA have already
been using industry insight to provide guidance on the Duty and it
is likely that they will use these Board-level assessments to
identify areas of potential harm to retail customers.
The Edinburgh Reforms
In a statement on 9 December 2022, the UK Government announced a
package of over 30 measures to reform UK financial services
regulation. Collectively known as the 'Edinburgh Reforms', these
are intended to deliver the next chapter of the Government's vision
for UK financial services and are divided into four categories: a
competitive marketplace promoting effective use of capital;
sustainable finance; technology and innovation; and consumers and
business. The Government explained that it will deliver the reforms
through two tranches, and they expect to make significant progress
on both by the end of 2023.
UK Fraud Strategy
On the 3 May 2023, the Government published its updated Fraud
Strategy. The strategy sets out the Government's plans to deliver a
ten-percent reduction in fraud by the end of December 2024.
Historically the main form of fraud was 'unauthorised fraud',
which is predominantly bank and credit card related, where money is
taken without authorisation or without the victim's knowledge.
Technology and processes have since become more effective in
preventing this type of fraud, which has unfortunately given rise
to an increase in 'authorised fraud', where victims are persuaded
to authorise a payment themselves. This can take many forms, but
common examples include retail scams, romance, and investment
fraud. The key objectives of the strategy are:
-- To pursue fraudsters, disrupting their activities and
bringing them to justice more often and quicker.
-- To block frauds at source by dramatically reducing the number
of fraud and scam communications getting through to the public.
-- To empower the British people to recognise, avoid, and report
frauds and equip them to easily and appropriately deal with those
frauds that do get through.
Separately, the Payment Systems Regulator (PSR) issued a policy
statement relating to Authorised Push Payment (APP) fraud. The PSR
is introducing a reimbursement requirement which will establish
consistent minimum standards to reimburse victims of APP fraud.
Essentially it will:
-- Require payment firms to reimburse all in-scope customers who
fall victim to APP fraud in most cases. The reimbursement
requirement will not apply to civil disputes, where payments have
been made for unlawful purposes or where the customer has acted
with gross negligence.
-- Share the cost of reimbursing victims 50:50 between sending and receiving payment firms.
-- Provide additional protections for vulnerable customers.
The new reimbursement requirement, which is expected to come
into force in 2024, will apply to all payment services providers,
including building societies.
Confirmation of Payee (CoP)
This is a service that allows the customer to check the name of
a destination bank account matches the name they have entered. In
August 2019 the Payment Services Regulator (PSR) required the UK's
six largest banking groups to introduce CoP, which resulted in 33
firms adopting the service. Subsequently, in October 2022 the PSR
directed around 400 Payment Services Providers to implement a
system that provided the CoP service that will increase the
transaction coverage to around 99%. This implementation date for
YBS will be October 2023.
Environmental, Social, and Governance Strategy (ESG)
The FCA's Environmental, Social, and Governance (ESG) Strategy
sets out their target outcomes and the actions expected in order to
deliver them. The aim is to support the financial sector in driving
positive change, including the transition to net zero.
Financial services providers have become increasingly reliant on
third-party ESG data services, as well as ratings, as they
integrate ESG into their activities. It is therefore increasingly
important that these services are delivered in a fair, effective,
and transparent way. Further to this, in December 2022 the
Government announced that it would consult on bringing ESG data and
ratings providers into the FCA's regulatory perimeter.
Changes to the Board
A complete list of the board of directors can be found in the
2022 Annual Report and Accounts and on our website at
www.ybs.co.uk.
As reported in the 2022 Annual Report and Accounts, we were
pleased to announce in August 2022 that the Society had appointed
Susan Allen OBE as our new Chief Executive Officer. Susan
officially joined the Society on 2 March 2023 bringing more than 25
years of experience in financial services.
Following the recruitment processes commenced in 2022 as part of
our succession plans, which were set out in the Annual Report and
Accounts 2022, we announced in July 2023 that after nine years as
Chair, John Heaps will be succeeded by Annemarie Durbin who will
join the Board as Chair Designate by the end of the year. We were
also pleased to welcome Debra Davies to our Board from 26 July 2023
as a Non-Executive Director and future Chair of the Remuneration
Committee, subject to regulatory approval.
Signed on behalf of the Board by
Susan Allen, OBE
Chief Executive Officer
Alasdair Lenman
Chief Finance Officer
Condensed Interim Financial Statements
Consolidated Income Statement
Half-year Half-year Year to
to to 31
30 June 30 June December
2023 2022 2022
(unaudited) (unaudited) (audited)
Notes GBPm GBPm GBPm
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Interest
revenue
calculated
using the
effective
interest
method 3 874.3 534.5 1,202.6
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Other interest
revenue 3 467.8 39.1 234.4
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Interest
revenue 3 1,342.1 573.6 1,437.0
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Interest
expense 4 (924.9) (239.4) (712.9)
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Net interest
income 417.2 334.2 724.1
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Fee and
commission
revenue 9.6 11.5 21.6
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Fee and
commission
expense (8.1) (8.5) (16.3)
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Net fee and
commission
income 1.5 3.0 5.3
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
(Losses)/gains
from financial
instruments
held at fair
value 5 (71.3) 50.2 75.6
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Income from
investments - - 0.1
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Net realised
gains on
disposal
of financial
instruments 1.5 2.4 2.9
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Other operating
income 0.3 0.6 3.4
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Total income 349.2 390.4 811.4
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Administrative
expenses (152.2) (132.7) (276.9)
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Depreciation
and
amortisation (9.7) (10.9) (21.8)
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Impairment of
financial
assets 6 (7.5) (0.7) (6.0)
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Movement in
provisions 7 0.8 (2.7) (4.2)
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Profit before
tax 180.6 243.4 502.5
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Tax expense 8 (47.7) (57.2) (123.2)
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Profit for the
period 132.9 186.2 379.3
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Consolidated Statement of Comprehensive Income
Half-year Half-year Year to
to to 31
30 June 30 June December
2023 2022 2022
(Unaudited) (unaudited) (audited)
GBPm GBPm GBPm
------------------------------ --------------------------- --------------------------- -------------------------
Profit for the
period 132.9 186.2 379.3
------------------------------- --------------------------- --------------------------- -------------------------
Items that may be subsequently reclassified through profit
or loss
Cash flow
hedges:
------------------------------ --------------------------- --------------------------- -------------------------
Fair value movements taken
to equity (6.5) 18.6 26.1
------------------------------- --------------------------- --------------------------- -------------------------
Amounts transferred to the
income statement (7.5) (3.9) (28.1)
------------------------------- --------------------------- --------------------------- -------------------------
Tax on amounts recognised
in equity 3.9 (4.2) 0.5
------------------------------- --------------------------- --------------------------- -------------------------
Effect of change in
corporation
tax rate - 0.8 0.8
------------------------------- --------------------------- --------------------------- -------------------------
Financial
assets
measured
through other
comprehensive
income:
------------------------------ --------------------------- --------------------------- -------------------------
Fair value movements taken
to equity 1.8 (3.3) (27.0)
------------------------------- --------------------------- --------------------------- -------------------------
Amounts transferred to the
income statement - 0.8 (1.9)
------------------------------- --------------------------- --------------------------- -------------------------
Tax on amounts recognised
in equity (0.5) 0.6 7.8
------------------------------- --------------------------- --------------------------- -------------------------
Effect of change in
corporation
tax rate - 1.6 1.9
------------------------------- --------------------------- --------------------------- -------------------------
Items that
will not be
reclassified
through profit
or loss
------------------------------ --------------------------- --------------------------- -------------------------
Remeasurement
of retirement
benefit
obligations (12.1) (30.5) (80.0)
------------------------------- --------------------------- --------------------------- -------------------------
Tax on
remeasurement
of retirement
benefit
obligations 3.4 8.4 21.6
------------------------------- --------------------------- --------------------------- -------------------------
Effect of
change in
corporation
tax rate - 6.0 6.9
------------------------------- --------------------------- --------------------------- -------------------------
Total other
comprehensive
income (17.5) (5.1) (71.4)
------------------------------- --------------------------- --------------------------- -------------------------
Total
comprehensive
income
for the period 115.4 181.1 307.9
------------------------------- --------------------------- --------------------------- -------------------------
Consolidated Balance Sheet
30 June 30 June 31 December
2023 (unaudited) 2022 (unaudited) 2022 (audited)
Note GBPm GBPm GBPm
------------------------------------- ----- ------------------ ------------------ ----------------
Assets
Cash and balances with the Bank
of England 7,563.7 5,526.9 5,982.8
Loans and advances to credit
institutions 450.5 617.8 814.7
Debt securities 6,887.0 5,210.4 5,684.8
Loans and advances to customers 9 45,868.1 44,218.3 45,203.7
Fair value adjustment for hedged
risk on loans and advances to
customers (1,792.1) (906.0) (1,508.3)
Derivative financial instruments 2,983.9 1,461.9 2,356.5
Investments 3.0 5.2 2.8
Intangible assets 16.5 20.7 20.2
Investment properties 15.9 14.4 16.0
Property held for sale 0.9 0.3 0.9
Property, plant and equipment 97.7 119.0 101.1
Current tax assets 22.7 - -
Retirement benefit surplus 10 36.5 90.9 48.8
Other assets 27.0 30.5 30.1
Total assets 62,181.3 56,410.3 58,754.1
------------------------------------- ----- ------------------ ------------------ ----------------
Liabilities
Shares 45,632.8 37,739.0 42,008.2
Amounts owed to credit institutions 4,375.8 6,569.6 5,160.9
Other deposits 1,027.3 1,123.3 1,138.1
Debt securities in issue 5,409.8 6,008.9 5,259.3
Derivative financial instruments 908.6 467.3 666.3
Current tax liabilities - 9.4 0.7
Deferred tax liabilities 17.7 37.7 11.9
Other liabilities 64.4 75.9 64.0
Pension liability 10 7.2 - 7.4
Provisions 4.0 6.6 5.7
Subordinated liabilities 1,221.8 1,102.9 1,035.1
Total Liabilities 58,669.4 53,140.6 55,357.6
Members' interests and equity 3,511.9 3,269.7 3,396.5
------------------------------------- ----- ------------------ ------------------ ----------------
Total members' interest, equity
and liabilities 62,181.3 56,410.3 58,754.1
------------------------------------- ----- ------------------ ------------------ ----------------
Consolidated Statement of Changes in Members' Interest and
Equity
General Cash Fair value Total
reserve flow through
hedge other
reserve comprehensive
income
GBPm GBPm GBPm GBPm
------------------------------ ----------------------- ----------------------- ----------------------------- -----------------------
Half-year to
30 June 2023
------------------------------ ----------------------- ----------------------- ----------------------------- -----------------------
At 1 January
2023 (audited) 3,384.7 9.9 1.9 3,396.5
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Profit for the
period 132.9 - - 132.9
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Net
remeasurement
of defined
benefit
obligations (8.7) - - (8.7)
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Net movement in
cash flow
hedges - (10.1) - (10.1)
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Net movement in
fair value
through other
comprehensive
income - - 1.3 1.3
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Total
comprehensive
income 124.2 (10.1) 1.3 115.4
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
At 30 June 2023
(unaudited) 3,508.9 (0.2) 3.2 3,511.9
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Half-year to
30 June 2022
------------------------------ ----------------------- ----------------------- ----------------------------- -----------------------
At 1 January
2022 (audited) 3,056.9 10.6 21.1 3,088.6
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Profit for the
period 186.2 - - 186.2
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Net
remeasurement
of defined
benefit
obligations (16.1) - - (16.1)
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Net movement in
cash flow
hedges - 11.3 - 11.3
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Net movement in
fair value
through other
comprehensive
income - - (0.3) (0.3)
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Total
comprehensive
income 170.1 11.3 (0.3) 181.1
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
At 30 June 2022
(unaudited) 3,227.0 21.9 20.8 3,269.7
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Year to 31
December 2022
------------------------------ ----------------------- ----------------------- ----------------------------- -----------------------
At 1 January
2022 (audited) 3,056.9 10.6 21.1 3,088.6
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Profit for the
period 379.3 - - 379.3
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Net
remeasurement
of defined
benefit
obligations (51.5) - - (51.5)
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Net movement in
cash flow
hedges - (0.7) - (0.7)
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Net movement in
fair value
through other
comprehensive
income - - (19.2) (19.2)
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Total
comprehensive
income 327.8 (0.7) (19.2) 307.9
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
At 31 December
2022 (audited) 3,384.7 9.9 1.9 3,396.5
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Consolidated Statement of Cash Flows
Half-year Half-year Year to
to to 31
30 June 30 June December
2023 2022 2022
(unaudited) (unaudited) (audited)
Notes GBPm GBPm GBPm
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Cash flows
from
operating
activities
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Profit before
tax 180.6 243.4 502.5
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Non-cash
items
included in
profit
before tax 12 282.4 621.3 1,186.2
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Net change in
operating
assets 12 (1,313.5) (3,014.5) (4,914.1)
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Net change in
operating
liabilities 12 2,912.5 3,057.3 6,113.2
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Tax paid (58.5) (51.3) (125.5)
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Net cash flow
from
operating
activities 2,003.5 856.2 2,762.3
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Cash flows
from
investing
activities
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Purchase of
property,
plant
and
equipment,
and
intangible
assets (2.4) (5.2) (12.8)
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Proceeds from
sale of
property,
plant and
equipment - 0.2 0.8
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Purchase of
debt
securities (2,035.1) (1,737.7) (2,952.2)
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Redemption
and other
movements
of debt
securities 836.2 602.7 1,316.9
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Net cash flow
from
investing
activities (1,201.3) (1,140.0) (1,647.3)
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Cash flows
from
financing
activities
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Redemption of
debt
securities
in issue 12 (796.3) (417.5) (1,225.2)
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Issue of debt
securities 12 1,005.3 635.0 711.5
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Redemption of
subordinated
liabilities 12 (136.4) - -
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Issue of
subordinated
liabilities 12 350.0 300.0 300.0
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Interest paid
on
subordinated
liabilities (17.2) (15.3) (33.7)
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Interest paid
on lease
liabilities (0.3) (0.4) (0.7)
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Capital
repayments
on lease
liabilities (1.6) (2.8) (2.3)
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Net cash flow
from
financing
activities 403.5 499.0 (250.4)
Net change in
cash and
cash
equivalents 1,205.7 215.2 864.6
Opening
balance 6,630.3 5,765.7 5,765.7
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Closing cash
and liquid
cash
equivalents 7,836.0 5,980.9 6,630.3
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Cash and
liquid cash
equivalents
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Cash and cash
equivalents 7,563.7 5,526.9 5,982.8
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Less Bank of
England cash
ratio
deposit (178.2) (163.8) (167.2)
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Loans and
advances to
credit
institutions 450.5 617.8 814.7
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Closing cash
and liquid
cash
equivalents 7,836.0 5,980.9 6,630.3
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Notes to the Interim Financial Statements
1. Basis of Preparation
These condensed interim financial statements present the results
of Yorkshire Building Society ('YBS') and its controlled entities
(collectively 'the Group' or 'YBS Group') for the half-year ended
30 June 2023.
The accounting policies, presentation and measurement applied
during the period are consistent with those applied by the Group in
the 31 December 2022 audited annual financial statements being
International Accounting Standards (IAS), International Financial
Reporting Standards (IFRS) and interpretations (IFRICs) issued by
the International Accounting Standards Board (IASB) endorsed by the
UK Endorsement Board (UKEB) and effective as at 1 January 2023. The
presentation applied in the period is consistent with the
presentation applied in the 31 December audited annual financial
statements with an exception for a change in presentation as
discussed below.
The Group is required under the Building Societies Act 1986 to
apply 'UK-adopted international accounting standards' as endorsed
by the UKEB. The condensed interim financial statements have
therefore been prepared in accordance with UK-adopted IAS 34
Interim Financial Reporting and the Disclosure Guidance and
Transparency Rules of the United Kingdom's Financial Conduct
Authority.
Pounds sterling is both the functional currency of the YBS Group
and the presentation currency applied to these financial
statements. Except where otherwise stated, all figures in the
financial statements are presented in round hundreds of thousands
of pounds sterling (GBP0.0 million).
During the half-year to 30 June 2023 there have been no changes
to the composition of the Group. The condensed interim financial
statements have been subject to a review and have not been
audited.
Accounting developments
The information on future accounting developments and their
potential effect on the financial statements are provided on page
147 of the 2022 Annual Report and Accounts.
Going concern
The YBS Board of Directors undertake regular assessments of
whether the Group is a going concern in light of changing economic
and market conditions, using all available information about future
risks and uncertainties. Details of the review undertaken to
support the 31 December 2022 financial statements are given on page
129 of the 2022 Annual Report and Accounts.
The directors confirm that, based on the latest formal review
undertaken in July 2023, and stress tests performed throughout the
period, they consider the Group has adequate resources to continue
in existence for the foreseeable future. Accordingly, they continue
to adopt the going concern basis in preparing these condensed
interim financial statements.
Change in presentation
A balance sheet line item has been created in these financial
statements to present Fair value adjustment for hedged risk on
loans and advances to customers as a separate item on the balance
sheet. The balance of Fair value adjustment for hedged risk on
loans and advances to customers was previously reported within the
loans and advances to customers balance. Notes to the financial
statements have been updated to reflect this change in presentation
(note 9, note 12 and note 13).
2. Critical accounting judgements and key sources of estimation uncertainty
In applying its accounting policies, the Group makes judgements
that have a significant impact on the amounts recognised in the
condensed interim financial statements.
In addition, estimates and assumptions are used which could
affect the reported amounts of assets and liabilities. The
estimates and underlying assumptions are reviewed on an ongoing
basis.
Other than the specific changes highlighted below, the key
sources of estimation uncertainty remain unchanged since those
disclosed on pages 153 to 154 of the 2022 Annual Report and
Accounts.
Impairment of loans and advances to customers
The impairment calculation of expected credit losses (ECL) for a
portfolio of mortgage loans is inherently uncertain. ECL are
calculated using historical default and loss experience but require
judgement to be applied in predicting future economic conditions
(e.g. interest rates and house prices) and customer behaviour (e.g.
default rates). The most critical judgements that lead to
estimation uncertainty are as follows.
Economic scenario and weightings
The UK Economy is expected to avoid a recession, which was
widely predicted throughout 2022, as a result of reducing energy
prices, a more resilient global environment and continued tightness
in the labour market. Growth will likely remain weak by historical
standards and there remains more downside risk than upside.
Household spending is the greatest headwind in 2023 with higher
prices continuing to drag on real incomes as well as the persistent
increase in interest rates reducing disposable income and raising
the risk of borrowers failing to meet their contractual
repayments.
Management evaluated these uncertainties, with the economic
assumptions applied to the ECL model adjusted to reflect any
material changes in view of the macro-economic environment. A post
model adjustment was raised in 2022 and has been updated to reflect
the risks relating to affordability and the impact of
cost-of-living increases on our mortgage customers (see note 9 for
more details).
The provision is calculated by applying a range of economic
scenarios that are probability-weighted.
The Society continue to apply four economic scenarios, all of
which have become less pessimistic in 2023. There is now closer
alignment between the core and downturn scenarios than there was
previously and it has been concluded that amending the combined
weighting of the downside scenarios from 45% to 55% was
appropriate.
UK CPI remained much stronger than expected with domestic price
pressure easing slower than anticipated. This has led to changes in
market expectations of Bank Rate peak, as rates are expected to
rise further in an attempt to return inflation back towards its 2%
target. As mortgage payments rise as a consequence of the
increasing rate environment the likelihood of customers entering
into financial difficulties grows, this could also lead to
declining house prices and more adverse economic conditions than
those set out in the Society's core scenario.
The Group considered alternative sets of weightings. The most
severe shifted a further 5.0% from core and downside to severe
downturn resulting in a GBP4.1 million increase in ECL. The least
severe applied weightings as at year end whereby 5.0% from downside
and severe downturn was shifted back to core resulting in a GBP3.9
million decrease in ECL. These changes in weightings have been
fully modelled and been allowed to impact staging.
The key in-year impact of changes to economic variables came
from applying quarterly Office of National Statistics (ONS) HPI
updates, which accounted for GBP3.2 million of impairment charge in
the first half of 2023 (2022: GBP12.5 million release).
In terms of sensitivity to key changes in economic variables
within the model, the HPI forecast within the core scenario was
replaced with the respective forecast from the downturn scenario,
increasing ECL by GBP1.5m. Below is the percentage change in HPI
forecast for the downturn scenario for the next 5 years in relation
to the core scenario.
2023 Scenario (% change)
-------------------------
2023 2024 2025 2026 2027
------------------------- ---------------------- ---------------------- -------------------- ---------------------- ----------------------
HPI
---------------------- ---------------------- -------------------- ---------------------- ----------------------
Downturn (4.2) (2.1) - (0.3) (0.1)
------------------------- ---------------------- ---------------------- -------------------- ---------------------- ----------------------
3. Interest revenue
Half-year Half-year Year to
to to 31 December
30 June 2023 30 June 2022 2022
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
---------------------------- ---------------------------- ---------------------------- ----------------------------
Calculated
using the
effective
interest
rate method:
---------------------------- ---------------------------- ---------------------------- ----------------------------
Loans secured on
residential
property 616.8 482.3 1,027.3
---------------------------- ---------------------------- ----------------------------
Other loans 20.8 11.1 26.7
---------------------------- ---------------------------- ----------------------------
Liquid assets 142.3 19.3 77.5
---------------------------- ---------------------------- ----------------------------
On debt securities 94.4 21.8 71.1
---------------------------- ---------------------------- ---------------------------- ----------------------------
Interest
revenue
calculated
using
the
effective
interest
rate method 874.3 534.5 1,202.6
---------------------------- ---------------------------- ----------------------------
Other:
---------------------------- ---------------------------- ---------------------------- ----------------------------
Derivatives in hedge
relationships 434.8 34.6 212.2
---------------------------- ---------------------------- ----------------------------
Derivatives not included
in hedge
relationships 32.2 4.5 20.4
---------------------------- ---------------------------- ----------------------------
Investments held at fair
value 0.8 - 1.8
---------------------------- ---------------------------- ---------------------------- ----------------------------
Other
interest
revenue 467.8 39.1 234.4
---------------------------- ---------------------------- ---------------------------- ----------------------------
Total
interest
revenue 1,342.1 573.6 1,437.0
---------------------------- ---------------------------- ---------------------------- ----------------------------
4. Interest expense
Half-year Half-year Year to
to to 31 December
30 June 30 June 2022 2022
2023 (unaudited) (audited)
(unaudited)
GBPm GBPm GBPm
------------------------------ --------------------------- ---------------------------- ---------------------------
Shares held by
individuals 627.5 135.7 442.7
--------------------------- ---------------------------- ---------------------------
Deposits from
banks 72.2 19.9 76.1
--------------------------- ---------------------------- ---------------------------
Other deposits 11.8 2.1 9.3
--------------------------- ---------------------------- ---------------------------
Debt
securities in
issue 71.0 29.9 75.5
--------------------------- ---------------------------- ---------------------------
Subordinated
liabilities 17.2 15.3 33.7
--------------------------- ---------------------------- ---------------------------
Other interest
payable 0.1 - 0.1
--------------------------- ---------------------------- ---------------------------
Derivatives in
hedge
relationships 62.0 31.5 38.7
--------------------------- ---------------------------- ---------------------------
Derivatives
not included
in hedge
relationships 62.8 4.6 36.1
--------------------------- ---------------------------- ---------------------------
Interest
expense for
leasing
arrangements 0.3 0.4 0.7
------------------------------ --------------------------- ---------------------------- ---------------------------
Total interest
expense 924.9 239.4 712.9
------------------------------ --------------------------- ---------------------------- ---------------------------
5. (Losses)/gains from financial instruments held at fair value
Half-year Half-year Year to
to to 31
30 June 30 June December
2023 2022 2022
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
-------------------------------- --------------------------- --------------------------- --------------------------
Derivatives and
debt securities
not included in
hedge
relationships (55.5) 60.3 106.6
--------------------------- --------------------------- --------------------------
Hedge accounting
ineffectiveness (16.0) (9.9) (32.4)
--------------------------- --------------------------- --------------------------
Equity
investments
held at fair
value 0.2 (0.2) 1.4
-------------------------------- --------------------------- --------------------------- --------------------------
Total net
(losses)/gains
from
financial
instruments
held at
fair value (71.3) 50.2 75.6
-------------------------------- --------------------------- --------------------------- --------------------------
Derivatives and hedging
The Society transacts interest rate swaps to hedge their
exposure to movements in interest rates. Whilst all interest rate
swaps have been entered into for hedging purposes, only certain
arrangements meet the conditions necessary to be designated as such
for accounting purposes. Where the conditions have not been met for
hedge accounting to be applied the changes in the fair value of
those derivatives is recognised directly in the income statement
and included within derivatives and debt securities not included in
hedge relationships. This portfolio of derivatives is made up of a
split of swaps that receive a fixed interest cash flow ('receive
fix') and swaps that pay a fixed interest cash flow ('pay fix'). In
2022, as a result of the rising rate environment, the pay fix swaps
generated fair value gains which were partially offset by fair
value losses from the receive fix swaps. However, in the past year
the volume of receive fix swaps has grown significantly due to the
increase in retail deposits generating an overall fair value loss
year to date as a result of the rising rate environment we are
still experiencing.
Hedge accounting ineffectiveness includes the portion of fair
value offset between the derivatives and corresponding hedge items
which is meeting the effectiveness test but is not fully effective,
amortisation of initial fair value adjustments recognised for the
hedged items. Termination of ineffective hedges are also included
here.
Investments held at fair value include the fair value gains and
losses on equity shares investment.
6. Impairment of financial assets
The following table splits the income statement impairment of
financial assets into those elements impacting the ECL and other
items.
Half-year Half-year Year to
to to 31 December
30 June 30 June 2022
2023 2022 (audited)
(unaudited) (unaudited)
GBPm GBPm GBPm
----------------------------- --------------------------- ---------------------------- ----------------------------
Impairment charge on loans
and
advances to customers 7.6 0.5 7.0
--------------------------- ---------------------------- ----------------------------
Recoveries relating to loans
and advances previously
written
off (0.4) 0.2 (0.9)
--------------------------- ---------------------------- ----------------------------
Impairment of other financial
assets 0.3 - (0.1)
----------------------------- --------------------------- ---------------------------- ----------------------------
Impairment charge 7.5 0.7 6.0
----------------------------- --------------------------- ---------------------------- ----------------------------
7. Movement in provisions
The provisions (release)/charge for the period is outlined
below:
Half-year Half-year Year to
to to 31
30 June 30 June December
2023 2022 2022
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
--------------------------------- --------------------------- --------------------------- -------------------------
Restructuring (0.2) 0.5 0.9
--------------------------- --------------------------- -------------------------
Property related
provision (0.6) 2.2 3.3
--------------------------------- --------------------------- --------------------------- -------------------------
Total provisions
(release)/charge (0.8) 2.7 4.2
--------------------------------- --------------------------- --------------------------- -------------------------
During the course of its business, the Society receives
complaints in relation to past sales or ongoing administration, as
well as being subject to enquiries from and discussions with its
regulators and governmental and other public bodies, on a range of
matters. The Society may also identify compliance matters through
the course of business operation and monitoring. No provision is
made where it is concluded that it is not probable that a reliably
quantifiable payment will be made; this will include circumstances
where the facts are unclear or further time or information is
required to reasonably quantify the expected payment.
A contingent liability exists relating to a potential regulatory
conduct matter. It is too early to determine the extent of any
customer, financial and/or regulatory impact, if any.
8. Tax expense
On 1 April 2023 the UK corporation tax rate increased from 19%
to 25%. This measure was substantively enacted on 24 May 2021 and
deferred tax assets and liabilities at 30 June 2023, at 31 December
2022 and at 30 June 2022 have all been calculated based on the 25%
rate.
On 1 April 2023 the banking surcharge decreased from 8% (on
taxable profits in excess of GBP25 million) to 3% (on taxable
profits in excess of GBP100 million). This change was substantively
enacted on 2 February 2022. Deferred tax assets and liabilities at
30 June 2023, at 31 December 2022 and at 30 June 2022 have all been
calculated based on the 3% rate.
The Group has an effective tax rate of 26.4%, which is higher
than the average UK statutory corporation tax rate of 23.5% for the
year. This is mainly due to the effects of the banking surcharge on
the taxable profits of the Society.
9. Credit risk on loans and advances to customers
Gross contractual exposure
The table below splits the loans and advances to customers
balance per the Consolidated Balance Sheet into its constituent
parts and reconciles to the gross exposures used in the Expected
Credit Losses (ECL) model. Effective Interest Rate (EIR)
adjustments have been excluded from the ECL model as these do not
form part of the contractual cash flows from the assets.
EIR is the measurement method used for financial assets held at
amortised cost, including loans and advances to customers, which
spreads income and fees over the life of the asset. See note 1 for
more details. The fair value rate adjustment reflects the market
value adjustment on acquired portfolios of mortgage assets in
respect of interest rates on the underlying products. This is
amortised over the expected life of the acquired portfolio. The
fair value credit adjustment is the fair value discount applied on
purchased or originated credit impaired (POCI) mortgage assets
acquired as part of the Norwich & Peterborough Building Society
(N&P) and Chelsea Building Society (CBS) acquisitions.
Impairment represents the difference between the total ECL and the
fair value credit adjustment.
ECL are calculated using models that take historical default and
loss experience and apply predictions of future economic conditions
(e.g. unemployment and house prices) and customer behaviour (e.g.
default rates). In certain circumstances, the core models may not
accurately reflect factors that are considered to result in a
change in credit risk. When this happens, post model adjustments
(PMA) are overlaid to reflect the impact on ECL. The economic
scenarios and the PMAs applied at 30 June 2023 are described
below.
30 June 30 June 31 December
2023 (unaudited) 2022 (unaudited) 2022 (audited)
GBPm GBPm GBPm
-------------------------------- ----------------- ----------------- ---------------
Gross contractual exposures 45,923.8 44,265.9 45,252.1
----------------- ----------------- ---------------
EIR and other adjustments 43.7 49.9 49.7
----------------- ----------------- ---------------
Fair value rate adjustment (35.0) (43.8) (39.7)
-------------------------------- ----------------- ----------------- ---------------
Gross loans and advances to
customers 45,932.5 44,272.0 45,262.1
----------------- ----------------- ---------------
Impairment (40.7) (26.7) (33.1)
----------------- ----------------- ---------------
Fair value credit adjustment (23.7) (27.0) (25.3)
-------------------------------- ----------------- ----------------- ---------------
ECL (64.4) (53.7) (58.4)
-------------------------------- ----------------- ----------------- ---------------
Loans and advances to customers 45,868.1 44,218.3 45,203.7
-------------------------------- ----------------- ----------------- ---------------
Analysis of changes in ECL
The following tables analyse the changes in ECL, split by
impairment and fair value credit adjustments.
Half-year Half-year Year to
to to 31 December
30 June 30 June 2022
2023 2022 (audited)
(unaudited) (unaudited)
GBPm GBPm GBPm
---------------------------- ---------------------------- ---------------------------- ----------------------------
Opening Impairment 33.1 26.1 26.1
---------------------------- ---------------------------- ----------------------------
Amounts written off in the
period (0.7) (0.4) (1.0)
---------------------------- ---------------------------- ----------------------------
Discounting recognised in
net
interest income 0.7 0.5 1.0
---------------------------- ---------------------------- ----------------------------
Charge for the period
recognised
in the income statement 7.6 0.5 7.0
---------------------------- ---------------------------- ---------------------------- ----------------------------
Impairment 40.7 26.7 33.1
---------------------------- ---------------------------- ---------------------------- ----------------------------
Half-year Half-year Year to
to to 31 December
30 June 30 June 2022
2023 2022 (audited)
(unaudited) (unaudited)
GBPm GBPm GBPm
---------------------------- ---------------------------- ---------------------------- ----------------------------
Opening fair value credit
adjustment 25.3 28.4 28.4
---------------------------- ---------------------------- ----------------------------
Release recognised in the
income
statement through net
interest (1.5) (1.3) (2.4)
---------------------------- ---------------------------- ----------------------------
Write-offs (0.1) (0.1) (0.7)
---------------------------- ---------------------------- ---------------------------- ----------------------------
Fair value credit adjustment 23.7 27.0 25.3
---------------------------- ---------------------------- ---------------------------- ----------------------------
ECL
Economic Scenarios
Accounting standards require ECL to be calculated by applying
multiple economic scenarios. Each economic scenario is provided a
weighting, and these are combined to arrive at the total ECL.
These scenarios are generated internally using external data,
statistical methodologies, and management judgement, to span a
range of plausible economic conditions. The Group continues to use
four scenarios: an upside scenario that assumes more benign
economic conditions; our core or central best estimate scenario; a
downturn scenario that assumes more adverse economic conditions;
and a more severe downturn scenario. The downturn scenario replaced
the stagflation downturn scenario from 2022 Year end.
Scenarios are projected over a 5 year window, reverting to
long-term averages past that point. The Group allows all
macro-economic scenarios to impact staging.
Current Macroeconomic Conditions
The UK Economy is expected to avoid a recession, which was
widely predicted throughout 2022, as a result of reducing energy
prices, a more resilient global environment and continued tightness
in the labour market. Growth will likely remain weak by historical
standards and there remains more downside risk than upside.
Inflation is falling from its peak, albeit slower than
anticipated given movements in energy prices. Services pricing and
pay growth signals continued underlying price pressure elevating
core inflation.
The Bank of England responded to rising inflation with a
succession of rate rises, with the last one in June taking the
interest rate to 5.0%. Further increases are anticipated before the
end of the year.
Upside
This assumes measures to reduce inflation succeed sooner than
anticipated and GDP reverts to pre-pandemic levels during 2023.
Unemployment remains lows and house prices grow at a moderate
rate.
Core
The core scenario is the Group's best estimate of how the UK
economy will evolve and is aligned with the central scenario used
in the Group's financial planning processes.
It assumes a reduction in consumer spending, falling energy
prices and base rate effects will lower inflation to 4.3% by the
end of 2023. Continued Bank Rate rises during 2023 result in a peak
of 5.8%.
GDP retracts by 0.7% in 2023 with this slowdown being driven by
the fall in real household disposable income and rising interest
rates exacerbated by the sustained rise in Consumer Price inflation
(CPI). Unemployment increases as a result and house prices reduce
further. This downturn is short lived as lower borrowing costs
bring back activity with price growth returning to 3.0% by
2027.
Downturn
The consecutive Bank of England base rate increases work to
bring inflation under control by the end of 2023 and below 2.0% by
2027. Bank rates reduce to 2.0% by the end of 2024 and decrease to
1.5% in 2027.
Although inflation and bank rates start to ease up, house prices
continue to fall, unemployment rises and real earnings growth
remains negative.
Severe Downturn
The recession in the UK deepens as the economy contracts by over
4.0% in 2023. This is driven by the current monetary tightening
cycle becoming more severe, low consumer confidence, sharp fall in
business investment, government austerity measures and a global
economic downturn.
Without government support measures unemployment peaks at 8.8%
in 2024 which in turn drives house prices down by 34.0% (peak to
trough).
Macroeconomic variables
The following table shows the values of the key variables used
by each economic scenario for the period until December 2027. The
table includes the three key parameters used to predict probability
of default (PD) - unemployment, HPI and Bank of England base rate.
GDP is also presented as it is the key input for determining the
economic parameters used and provides context to the nature of the
overall scenario.
Household disposable income is forecast to decrease in our
economic scenarios as a result of sharply rising inflation and
increases in the cost-of-living, combined with higher interest
rates and the downward movement in house prices in the short term.
This is assumed to lead to affordability pressures which are
expected to impact on customers' ability to meet mortgage
repayments. This risk is not directly captured in our models. See
the Affordability post model adjustment below for details on how
this risk has been assessed and incorporated into ECL.
June 2023 Scenario (unaudited) December 2022 Scenario
(audited)
--------------------------------------
2023 2024 2025 2026 2027 2023 2024 2025 2026 2027
---------------- -------- -------- ------ ---- ---- ------ ------ ----- ---- ----
HPI
-------- -------- ------ ---- ---- ------ ------ ----- ---- ----
Upside 1.3 2.2 3.2 3.2 3.2 - 1.5 2.2 3.2 3.2
-------- -------- ------ ---- ---- ------ ------ ----- ---- ----
Core (6.0) (2.0) 1.5 2.5 3.0 (6.0) (2.0) 1.3 2.0 2.0
-------- -------- ------ ---- ---- ------ ------ ----- ---- ----
Downturn (10.2) (4.1) 1.5 2.2 2.9 (12.7) (5.0) - 1.5 1.7
-------- -------- ------ ---- ---- ------ ------ ----- ---- ----
Severe Downturn (14.5) (11.8) (6.8) - 0.5 (13.5) (11.8) (6.8) - 0.5
---------------- -------- -------- ------ ---- ---- ------ ------ ----- ---- ----
GDP
-------- -------- ------ ---- ---- ------ ------ ----- ---- ----
Upside 0.5 2.0 2.1 2.0 2.0 1.5 2.0 2.1 2.0 2.0
-------- -------- ------ ---- ---- ------ ------ ----- ---- ----
Core (0.7) 1.1 1.6 1.8 1.7 (1.5) 0.8 1.6 1.8 1.8
-------- -------- ------ ---- ---- ------ ------ ----- ---- ----
Downturn (2.5) 0.3 0.4 1.2 1.8 (6.3) (5.3) 0.4 0.6 1.0
-------- -------- ------ ---- ---- ------ ------ ----- ---- ----
Severe Downturn (4.2) (3.0) (1.1) 0.1 0.5 (7.4) (5.3) (1.2) - 0.2
---------------- -------- -------- ------ ---- ---- ------ ------ ----- ---- ----
Unemployment
-------- -------- ------ ---- ---- ------ ------ ----- ---- ----
Upside 3.9 4.0 4.0 4.1 4.1 3.5 3.6 3.6 3.8 3.8
-------- -------- ------ ---- ---- ------ ------ ----- ---- ----
Core 4.4 4.6 4.6 4.6 4.7 4.9 5.5 5.2 4.8 4.5
-------- -------- ------ ---- ---- ------ ------ ----- ---- ----
Downturn 5.5 6.5 6.5 6.0 5.5 6.5 7.0 6.7 6.5 6.0
-------- -------- ------ ---- ---- ------ ------ ----- ---- ----
Severe Downturn 7.1 8.8 8.4 6.5 5.7 7.1 8.8 8.4 8.0 7.5
---------------- -------- -------- ------ ---- ---- ------ ------ ----- ---- ----
Bank Rate
-------- -------- ------ ---- ---- ------ ------ ----- ---- ----
Upside 4.0 3.8 3.5 3.3 3.0 2.0 2.0 1.5 1.5 1.5
-------- -------- ------ ---- ---- ------ ------ ----- ---- ----
Core 5.8 5.3 4.8 4.3 4.0 4.8 4.3 4.0 3.8 3.5
-------- -------- ------ ---- ---- ------ ------ ----- ---- ----
Downturn 2.0 1.5 1.5 1.5 1.5 6.3 5.5 5.0 4.8 4.5
-------- -------- ------ ---- ---- ------ ------ ----- ---- ----
Severe Downturn 2.0 - - - - 2.0 - - - -
---------------- -------- -------- ------ ---- ---- ------ ------ ----- ---- ----
Weightings
The following table shows the expected credit loss under each of
our four economic scenarios along with the weightings that have
been applied to arrive at the weighted average ECL. PMAs are
calculated using the weighted scenario results and so their
sensitivity in each of the individual scenarios cannot be
accurately determined. For completeness they have been included as
a uniform adjustment across each scenario.
30 June 2023 (unaudited) 31 December 2022
(audited)
Weighted ECL Weighted ECL
--------------- --------- ----------- -----
Scenario % GBPm % GBPm
------------------------- --------------- --------- ----------- -----
Upside Scenario 5 36.8 5 37.6
Core Scenario 40 41.1 50 40.7
--------------- --------- ----------- -----
Downturn Scenario 35 66.6 30 73.5
--------------- --------- ----------- -----
Severe Downturn Scenario 20 114.0 15 94.2
------------------------- --------------- --------- ----------- -----
Probability weighted ECL 100 64.4 100 58.4
------------------------- --------------- --------- ----------- -----
Probability weightings have been reviewed during the period and
updated to reflect economic conditions.
The Core scenario weighting has decreased and the Downturn and
Severe Downturn scenario weightings have increased to reflect
increased risks associated with inflation remaining higher for
longer, mortgage affordability pressure due to the increases in
Bank Rate to date and the ongoing economic consequences of the
conflict in Ukraine.
SME judgment is applied in the final assessment of weights,
informed both by an assessment of external data and statistical
model results.
Post Model Adjustments
Post model adjustments (PMA) are applied when a change in credit
risk is identified that is not effectively captured in the core
expected credit loss models.
PMAs are reviewed throughout the year to determine whether the
identified risks are still applicable.
The PMAs applied at 30 June 2023 are as follows:
30 June 31 December
2023 (unaudited) 2022 (audited)
GBPm GBPm
-------------------- -------------------- --------------------
Affordability 16.9 10.8
-------------------- --------------------
Uncertainty 2.8 7.1
-------------------- --------------------
Methodology changes - 5.5
-------------------- --------------------
Model recalibration - 1.1
-------------------- -------------------- --------------------
Total PMA 19.7 24.5
-------------------- -------------------- --------------------
Affordability
The affordability PMA reflects the risks of rising inflation,
and its impact on customers' ability to meet repayments on their
mortgage, not captured in the underlying ECL models.
Inflation is not a direct input into the models and, as such,
does not have a direct influence on the output. Secondary impacts
on other measures such as house prices will eventually feed into
the model but there is an element of short-term insensitivity,
particularly in a period of high inflation.
Although the lending undertaken by the Society is risk-averse,
with a significant amount of affordability assessment undertaken as
part of the decision to advance mortgage loans, there are several
segments of the mortgage book that are likely to be at greater risk
of affordability stresses due to the cost-of-living pressures.
The PMA applies a stress to the monthly expenditure amounts in
the mortgage book affordability calculation. With affordability
only measured at application stage, additional considerations were
applied to earnings indexed using UK wage growth since completion.
Further stress is applied to the book to reflect external pressures
such as increase in outgoings, interest rate changes,
cost-of-living challenges and income decreases. To estimate this
impact, external credit data was sourced for a sample of the book
using a series of affordability scenarios and this was then
extrapolated for the remainder of the book.
The PMA has moved significantly since year end as a result of an
increased exposure at default (EAD), largely as a result of HPI
decreases and an update to the expenditure assumptions within the
Society's affordability model, resulting in a greater proportion of
accounts being identified as higher risk.
Further consideration has been given to the BTL book where the
Society has assessed whether the coverage is sufficient to cover
the increased risk to the book given the current macro-economic
climate. Relative insensitivity to the stresses provided above was
found and so an additional provision has been raised to cover this
underestimation by applying an appropriate uplift factor based on
the behaviour of a similar cohort of mortgages.
Uncertainty
Whilst we incorporate a range of economic assumptions in the
scenarios and probability weightings used to calculate ECL, this
approach still has certain limitations, particularly given the
current volatility in market conditions. The resulting unusual and
largely unforeseen impacts on the credit risks faced by the Society
have given rise to several assumption uncertainties and a PMA has
been established to aim to correct for these.
The key risks that this PMA provides an estimate for are
provided below.
House Price Volatility
This PMA had been developed in response to extraordinary growth
in house prices since the easing of the first COVID-19 lockdown and
at year-end formed a significant proportion of the total
uncertainty PMA (GBP5.7 million).
The initial part of this PMA aims to correct for the changes in
HPI at a regional level that are not evenly distributed and the ECL
impact of changes in collateral values are therefore not linear.
This PMA is to correct for the standard deviation from the regional
type mean, it is not an attempt to correct for any perceived
current market wide over-valuation. A third party analysed the YBS
portfolio using automated valuation models (AVM) for risk of over
or under indexation, with a specific focus on geographical
location, management have used this evaluation as support for this
GBP1.0 million PMA recognised in relation to this risk.
The latter part of the PMA relates to the risk that the ONS
(Office for National Statistics) indexation data that is
incorporated into the ECL model on a quarterly basis is not a true
representative of the market conditions as at 30 June 2023. The
latest indexation from ONS was for data collected in Q1 of 2023.
This PMA aims to correct for the update in market conditions by
using an average of Nationwide and Halifax more recent indexations
for Q2 of 2023.
At year-end there were sizeable reductions observed in Q4 within
Halifax and Nationwide's HPI outputs which generated more risk to
ECLs and a charge was recognised as a result. However the results
for Q2 2023 have been marginally positive leading to a release of
GBP0.1 million. The total House Price Volatility PMA for half year
is GBP0.9 million (December 2022: GBP5.7 million).
Climate risk
We have assessed the risks associated with climate change, both
physical and transitional, in the context of ECL and concluded that
the majority of these risks do not meet the requirements for
recognition as:
-- There have been no observed climate related defaults and
therefore no identifiable significant increase in credit risk
(SICR); and
-- The material transition risks identified are expected to
occur over a timescale in excess of the current behavioural life of
our portfolio (i.e. the average term before a customer either moves
onto an alternative deal or transfers to another provider) and, as
such, any potential impact would be against loans yet to be
underwritten.
A PMA of GBP1.0 million had previously been established due to
the potential impact on our current loan book from properties
subject to significant flood risk. The society have reviewed the
PMA and given greater consideration to the impact of transitional
risks rather than physical risks of the type previously
considered.
The most immediate transitional risk is considered to relate to
BTL accounts where the UK Government has proposed that all rental
properties will need an Energy Performance Certificate (EPC) rating
of 'C' or above by 2028.
Each residential property on the portfolio has a current and
potential EPC grade and different treatments have been established
based on these levels to either reduce the valuation of the
property to land value in line with the treatment within the
Society's Climate Risk models or to incorporate the costs
associated with upgrading the property to these minimum levels. A
PMA of GBP1.5 million has been recognised to reflect this.
The regulation will come into force in December 2028, meaning
that any required improvements to properties can be phased in
between now and then. Given this, it was not believed to be
appropriate to realise the full impacts of the improvement
costs/reductions to land value immediately and a means of phasing
the impacts based on the proximity to the regulations being adopted
has been incorporated for specific EPC grades.
Standard Variable Rate (SVR)
The Bank of England has continued to increase the bank base rate
during the first half of 2023 to help bring inflation under control
with the base rate increasing from 3.5% at the beginning of the
year to 5.0% as of June. The latest BoE Base Rate increase has not
been incorporated into the Society's variable rates yet and so this
PMA aims to estimate this impact on ECL. The payment amount at
account level is recalculated annually to reflect the change in SVR
rate, therefore it is not reflected in the ECL model until the
annual recalculation takes place. This PMA was originally raised at
year end to estimate the impact of the December bank base rate
increase which has since been applied at account level. This PMA
has been maintained at GBP0.4 million (December 2022: GBP0.4
million) and will be released when the updated SVR rate is
applied.
Methodology Changes and Model Recalibration
All iterations of IFRS 9 models developed and implemented within
the Society have sought to align to the IRB models within the
business where appropriate with the definition of default
(DoD)/definition of impairment a key area of focus. A PMA was
established at 30 June 2021 to provide a high-level overlay to
reflect the impacts of moving to the Society's fourth generation
IRB models with this primarily covering:
-- Additional accounts that would be classified as being Stage 3
due to meeting the additional default criteria.
-- Accounts that would more likely be classified as Stage 2 due
to an increase in risk, either by their transition to a higher
rating grade, or to a higher risk PD model.
-- Reflected changes to the eligibility of accounts meeting the
definition of a significant increase in credit risk. The changes
use initial recognition PD as a comparison point for SICR rather
than lifetime PD.
In addition to this a PMA was also held in relation to impacts
from a recalibration to the third generation IRB PD rating scale
model.
There was a known misalignment between the initial recognition
PDs and the current PDs compared within staging transfer criteria
for accounts that originated prior to the implementation of the
third generation model recalibration. The enhancements that have
been made within the fourth generation development to correct this
resulted in considerable reductions to stage 2 volumes.
Establishing transfer criteria on a consistent basis for the full
core population has resulted in more intuitive movements in the
risk profile of the different stages.
Fourth generation IFRS 9 models and impacts were presented to
the Society's Model Risk Committee in 2023 and approved for use.
These have been used as the basis for generating Core model ECLs
for this reporting period. Both the Methodology Changes and Model
Recalibration PMAs have been released as they are no longer
required and the reduction in ECL associated with the stage 2
movement noted above has outweighed other aspects of the migration
to the fourth generation models that would have increased ECLs,
leading to an overall release on initial implementation.
Staging and POCI
The tables below shows the staging of loans and advances plus
assets considered to be purchased or originated credit impaired
('POCI') recognised as part of the acquisitions of Norwich &
Peterborough Building Society ('N&P') and Chelsea Building
Society ('CBS'). The discount on acquisition is recognised as the
fair value credit adjustment.
Details of the movements in staging are explained in the
Movement Analysis section of this note.
30 June 2023 31 December 2022
(unaudited) (audited)
GBPm % GBPm %
----------------------------- --------- ------ ----------- ------
Gross exposures by stage
Stage 1 42,962.8 93.5 40,251.1 88.9
Stage 2 2,230.1 4.9 4,277.3 9.5
Stage 3 363.5 0.8 338.3 0.7
POCI 367.4 0.8 385.4 0.9
----------------------------- --------- ------ ----------- ------
Total gross exposures 45,923.8 100.0 45,252.1 100.0
----------------------------- --------- ------ ----------- ------
Problem loans (stage 3 plus
non-performing POCI) 406.5 0.9 384.7 0.9
ECL and coverage ratio by
stage
Stage 1 23.5 0.1 7.5 -
Stage 2 15.3 0.7 26.3 0.6
Stage 3 11.7 3.2 11.3 3.3
POCI 13.9 3.8 13.3 3.5
Total ECL 64.4 0.1 58.4 0.1
----------------------------- --------- ------ ----------- ------
The Group has GBP367.4 million of POCI loans. Of these, 88% are
now considered performing loans but are not permitted to be
reclassified to stage 1 or 2. Problem loans represent the total of
the Group's stage 3 balances and the non-performing portion of our
POCI loans.
The following table shows the staging split by days overdue.
Gross exposure ECL
30 June 31 December 30 June 31 December
2023 (unaudited) 2022 (audited) 2023 (unaudited) 2022 (audited)
------------------ ---------------- ------------------ ----------------
GBPm GBPm GBPm GBPm
------------------------- ------------------ ---------------- ------------------ ----------------
Stage 1 42,962.8 40,251.1 23.5 7.5
------------------------- ------------------ ---------------- ------------------ ----------------
Stage 2: 2,230.1 4,277.3 15.3 26.3
Less than 30 days past
due 2,100.8 4,156.1 12.7 24.7
More than 30 days past
due 129.3 121.2 2.6 1.6
------------------------- ------------------ ---------------- ------------------ ----------------
Stage 3: 363.5 338.3 11.7 11.3
Less than 30 days past
due 166.7 155.6 3.3 3.7
30-90 days past due 74.0 64.9 1.4 1.4
More than 90 days past
due 122.8 117.8 7.0 6.2
------------------------- ------------------ ---------------- ------------------ ----------------
POCI: 367.4 385.4 13.9 13.3
Less than 30 days past
due 327.7 346.7 11.4 10.9
30-90 days past due 28.1 20.8 1.6 0.8
More than 90 days past
due 11.6 17.9 0.9 1.6
------------------------- ------------------ ---------------- ------------------ ----------------
Total 45,923.8 45,252.1 64.4 58.4
------------------------- ------------------ ---------------- ------------------ ----------------
All accounts in stage 1 are less than 30 days past due.
Risk Assessment
The following tables are included to give an overview of the
Group's credit risk.
Lending by Risk Grade
The risk models cover the majority of loans underwritten by the
Group, with exceptions for portfolios subject to bespoke modelling
requirements including Accord buy-to-let, commercial lending and
POCI accounts. The Accord BTL population currently has very strict
underwriting criteria and limited behavioural history, with only a
single possession to date. Commercial lending has significantly
different behavioural characteristics to the retail mortgages.
Gross exposures in the table below are presented pre PMAs being
applied.
30 June 2023 (unaudited) 31 December
2022 (audited)
Gross exposure ECL Gross ECL
exposure
----------------------------------------- ---- ----------- ----
Stage Stage Stage POCI Total
1 2 3
-------- ------- ----- ----- -------- ---- ----------- ----
Probability of GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
default range
------------------ -------- ------- ----- ----- -------- ---- ----------- ----
0.00%-<0.15% 31,109.1 619.1 - - 31,728.2 1.7 32,792.6 1.7
-------- ------- ----- ----- -------- ---- ----------- ----
0.15%-<0.25% 2,278.0 265.1 - - 2,543.1 1.3 1,888.6 0.7
-------- ------- ----- ----- -------- ---- ----------- ----
0.25%-<0.50% 613.0 135.3 - - 748.3 0.8 484.6 0.3
-------- ------- ----- ----- -------- ---- ----------- ----
0.50%-<0.75% 389.6 204.2 - - 593.8 0.6 583.6 0.7
-------- ------- ----- ----- -------- ---- ----------- ----
0.75%-<1.00% 215.2 152.2 - - 367.4 0.6 334.1 0.8
-------- ------- ----- ----- -------- ---- ----------- ----
1.00%-<2.50% 302.6 414.6 - - 717.2 2.5 698.2 3.4
-------- ------- ----- ----- -------- ---- ----------- ----
2.50%-<10.0% 62.8 168.3 - - 231.1 2.2 205.1 2.5
-------- ------- ----- ----- -------- ---- ----------- ----
10.0%-<100% 7.6 134.8 - - 142.4 2.4 116.4 2.3
-------- ------- ----- ----- -------- ---- ----------- ----
Default - - 355.7 31.4 387.1 12.4 366.6 11.8
-------- ------- ----- ----- -------- ---- ----------- ----
Accord buy-to-let 6,204.0 71.8 5.6 - 6,281.4 2.1 5,905.6 6.3
-------- ------- ----- ----- -------- ---- ----------- ----
Commercial 1,593.5 38.1 2.2 11.6 1,645.4 7.1 1,510.6 3.7
-------- ------- ----- ----- -------- ---- ----------- ----
Other* 187.4 26.6 - 324.4 538.4 11.0 366.1 24.9
PMAs - - - - - 19.7 - -
------------------ -------- ------- ----- ----- -------- ---- ----------- ----
Total 42,962.8 2,230.1 363.5 367.4 45,923.8 64.4 45,252.1 58.4
------------------ -------- ------- ----- ----- -------- ---- ----------- ----
* Other includes Registered Social Landlords and POCI
accounts.
Lending by origination year
30 June 2023 (unaudited) 31 December
2022 (audited)
Gross exposure ECL Gross ECL
exposure
----------------------------------------- ---- ----------- ----
Stage Stage Stage POCI Total
1 2 3
-------- ------- ----- ----- -------- ---- ----------- ----
Origination year GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------- -------- ------- ----- ----- -------- ---- ----------- ----
2023 3,645.1 38.3 3.9 - 3,687.3 3.4 - -
-------- ------- ----- ----- -------- ---- ----------- ----
2022 9,671.1 151.9 25.0 - 9,848.0 8.6 10,184.5 7.6
-------- ------- ----- ----- -------- ---- ----------- ----
2021 8,315.5 251.5 31.4 - 8,598.4 7.3 9,260.3 6.3
-------- ------- ----- ----- -------- ---- ----------- ----
2020 4,391.3 208.3 22.9 - 4,622.5 3.6 4,914.3 3.6
-------- ------- ----- ----- -------- ---- ----------- ----
2019 4,257.3 194.4 29.7 - 4,481.4 3.3 4,720.2 3.3
-------- ------- ----- ----- -------- ---- ----------- ----
2013 - 2018 10,057.0 430.4 74.2 - 10,561.6 10.4 11,732.6 8.6
-------- ------- ----- ----- -------- ---- ----------- ----
2009 - 2012 907.5 57.2 7.4 - 972.1 0.6 1,056.3 0.6
-------- ------- ----- ----- -------- ---- ----------- ----
Pre-2009 771.0 593.9 106.2 - 1,471.1 6.6 1,560.7 6.4
-------- ------- ----- ----- -------- ---- ----------- ----
Acquired loans 947.0 304.2 62.8 367.4 1,681.4 20.6 1,823.2 22.0
----------------- -------- ------- ----- ----- -------- ---- ----------- ----
Total 42,962.8 2,230.1 363.5 367.4 45,923.8 64.4 45,252.1 58.4
----------------- -------- ------- ----- ----- -------- ---- ----------- ----
Lending by Loan to Value
30 June 2023 (unaudited) 31 December
2022 (audited)
Gross exposure Gross exposure
----------------------------------------- ---------------
Stage Stage Stage POCI Total
1 2 3
-------- ------- ----- ----- -------- ---------------
Loan-to-value GBPm GBPm GBPm GBPm GBPm GBPm
--------------- -------- ------- ----- ----- -------- ---------------
Less than 60% 21,109.3 1,535.2 237.4 312.6 23,194.5 24,364.8
60% to 75% 14,252.3 474.6 101.3 43.8 14,872.0 15,198.8
-------- ------- ----- ----- -------- ---------------
75% to 90% 6,935.8 205.3 22.2 6.3 7,169.6 5,550.6
-------- ------- ----- ----- -------- ---------------
90% or greater 665.4 15.0 2.6 4.7 687.7 137.9
--------------- -------- ------- ----- ----- -------- ---------------
Total 42,962.8 2,230.1 363.5 367.4 45,923.8 42,211.5
--------------- -------- ------- ----- ----- -------- ---------------
Average LTV (%) 49.7 35.1 41.6 41.0 48.4 46.8
--------------- -------- ------- ----- ----- -------- ---------------
Movement Analysis
The following tables detail the movement in the gross exposures
and ECL from the beginning to the end of the reporting period split
by stage.
The Society has updated the definition of default and the
probability of default rating scale on the back of a comprehensive
review as part of the transition to the fourth generation internal
ratings based (Gen 4 IRB) method of calculating regulatory capital.
These model updates were approved for use in the core underlying
models in the first half of this year and all ECL outputs have been
updated to reflect these changes.
There was a known misalignment between the initial recognition
PDs and the current PDs compared within staging transfer criteria
for accounts that originated prior to the implementation of the
third generation model recalibration which took place in 2018.
Enhancements have been made within the fourth-generation
developments to correct this, resulting in a large reduction of
stage 2 volumes and associated ECLs. This can be seen on the
Transfers from stage 2 to 1 line of the Gross Exposures movement
table below.
Separate to the fourth generation model update, we have
reconsidered the affordability PMA disclosure. All balances in
relation to the affordability PMA are recognised in stage 1 and
have been recognised here due to the accounts identified through
the PMA not moving into arrears or meeting any of the quantitative
(i.e. SICR thresholds) or qualitative criteria for being assigned
to stage 2. Of the GBP43.0 billion balances in Stage 1, GBP15.3
billion are captured by this PMA representing 35.6% of stage 1
balances that are deemed to be at risk of an increase in credit
risk as a result of affordability pressures. The PMA movement from
stage 2 to stage 1 can be seen on the PMA line of the ECL movement
table below. We continue to monitor the risks in ECL and the stage
criteria.
Stage Stage Stage
1 2 3 POCI Total
GBPm GBPm GBPm GBPm GBPm
------------------------------ --------- --------- ------ ------ ---------
Gross exposure at 31
December 2022 40,251.1 4,277.3 338.3 385.4 45,252.1
--------- --------- ------ ------ ---------
Transfers from stage
1 to 2 (823.9) 823.9 - - -
--------- --------- ------ ------ ---------
Transfers from stage
1 to 3 (25.2) - 25.2 - -
--------- --------- ------ ------ ---------
Transfers from stage
2 to 1 2,615.4 (2,615.4) - - -
--------- --------- ------ ------ ---------
Transfers from stage
2 to 3 - (51.2) 51.2 - -
--------- --------- ------ ------ ---------
Transfers from stage
3 to 1 8.1 - (8.1) - -
--------- --------- ------ ------ ---------
Transfers from stage
3 to 2 - 23.0 (23.0) - -
Changes to carrying value (652.8) (43.9) (0.6) (4.2) (701.5)
New financial assets
originated or purchased 3,499.3 - - - 3,499.3
--------- --------- ------ ------ ---------
Financial assets derecognised
during the period (1,909.2) (183.6) (17.8) (13.0) (2,123.6)
--------- --------- ------ ------ ---------
Write-offs - - (1.7) (0.8) (2.5)
------------------------------ --------- --------- ------ ------ ---------
Gross exposure at 30
June 2023 42,962.8 2,230.1 363.5 367.4 45,923.8
------------------------------ --------- --------- ------ ------ ---------
ECL at 31 December 2022 7.5 26.3 11.3 13.3 58.4
--------- --------- ------ ------ ---------
Transfers from stage
1 to 2 (0.1) 5.1 - - 5.0
--------- --------- ------ ------ ---------
Transfers from stage
1 to 3 - - 1.0 - 1.0
--------- --------- ------ ------ ---------
Transfers from stage
2 to 1 0.4 (4.6) - - (4.2)
--------- --------- ------ ------ ---------
Transfers from stage
2 to 3 - (0.7) 1.9 - 1.2
--------- --------- ------ ------ ---------
Transfers from stage
3 to 1 - - (0.2) - (0.2)
--------- --------- ------ ------ ---------
Transfers from stage
3 to 2 - 0.3 (0.4) - (0.1)
--------- --------- ------ ------ ---------
Changes in PDs/LGDs/EADs (2.0) 6.1 0.2 1.1 5.4
--------- --------- ------ ------ ---------
New financial assets
originated or purchased 2.0 - - - 2.0
--------- --------- ------ ------ ---------
Changes to model assumptions
and methodologies 0.5 1.0 1.6 0.3 3.4
--------- --------- ------ ------ ---------
Unwind of discount - - 0.3 0.4 0.7
--------- --------- ------ ------ ---------
Financial assets derecognised
during the period (0.1) (0.8) (0.6) (0.7) (2.2)
--------- --------- ------ ------ ---------
Write-offs - - (0.8) (0.5) (1.3)
--------- --------- ------ ------ ---------
PMA 15.3 (17.4) (2.6) - (4.7)
------------------------------ --------- --------- ------ ------ ---------
ECL at 30 June 2023 23.5 15.3 11.7 13.9 64.4
------------------------------ --------- --------- ------ ------ ---------
Loans Purchased or Originated Credit Impaired (POCI)
The table below shows the status of the Group's POCI loans. A
substantial proportion of POCI balances, were they not required to
be classified as stage 3 by accounting standards, would transfer to
other stages. The table below shows that 71.0% (Dec 2022: 71.9%) of
balances have been fully up to date for the last 24 months and only
11.7% (Dec 2022: 12.0%) of balances would be classified as in
default.
Up to date for the last 24 Some arrears in the last Meets definition of Total
months 24 months default
GBPm GBPm GBPm GBPm
--------------------------- -------------------------- ------------------------- -------------------------- ------
At 30 June 2023 (unaudited)
--------------------------- -------------------------- ------------------------- -------------------------- ------
Gross exposure 260.9 63.5 43.0 367.4
-------------------------- ------------------------- -------------------------- ------
ECL 8.1 3.4 2.4 13.9
--------------------------- -------------------------- ------------------------- -------------------------- ------
At 31 December 2022
(audited)
--------------------------- -------------------------- ------------------------- -------------------------- ------
Gross exposure 277.1 61.9 46.4 385.4
-------------------------- ------------------------- -------------------------- ------
ECL 7.6 3.3 2.4 13.3
--------------------------- -------------------------- ------------------------- -------------------------- ------
10. Retirement benefit obligations
Reconciliation of funded status
Half-year Half-year Year to
to to 31 December
30 June 30 June 2022
2023 2022 (audited)
(unaudited) (unaudited)
GBPm GBPm GBPm
----------------------------- --------------------------- ---------------------------- ----------------------------
Present value of defined
benefit
retirement obligation (574.0) (696.4) (593.4)
--------------------------- ---------------------------- ----------------------------
Assets at fair value 610.5 787.3 642.2
----------------------------- --------------------------- ---------------------------- ----------------------------
Funded status/defined benefit
asset 36.5 90.9 48.8
----------------------------- --------------------------- ---------------------------- ----------------------------
Unfunded defined benefit scheme
Half-year Half-year Year to
to to 31 December
30 June 30 June 2022
2023 2022 (audited)
(unaudited) (unaudited)
GBPm GBPm GBPm
---------------------------- ---------------------------- ---------------------------- ----------------------------
Present value of unfunded
defined
benefit scheme (7.2) n/a* (7.4)
---------------------------- ---------------------------- ---------------------------- ----------------------------
* As at 30 June 2022, the unfunded DB scheme liabilities were
reported within the funded DB scheme liabilities balance.
The present value at 30 June 2023 of the unfunded defined
benefit scheme was GBP7.2 million (30 June 2022: GBP8.9 million)
and the relevant disclosures have been separated from those of the
main employee benefits scheme where appropriate.
The present value of the defined benefit obligation as at 30
June 2023 has been calculated using assumptions that are derived
consistently with those used for the 31 December 2022 year end,
allowing for updated market conditions.
Liabilities have reduced overall, mainly driven by the increase
in the discount rate given high Government Bond yields as a result
of the rising interest rate environment. This has been partially
offset by actual inflation being higher than that expected per the
pension accounting assumptions. Future long-term expectations of
inflation have also increased slightly.
Asset returns over the first half of the year have been less
than the discount rate. While this has been partially offset by the
decrease in liabilities over the half year, the overall result is a
reduction of the Surplus by GBP12.1m.
11. Related parties
There have been no material changes to related parties and the
associated related party transactions since the year end. For
further information on these see pages 222 to 224 of the 2022
Annual Report and Accounts.
12. Notes to the consolidated statement of cash flows
Half-year Half-year Year to
to to 31
30 June 30 June December
2023 2022 2022
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
------------------------------------ --------------------------- --------------------------- -------------------------
Depreciation and
amortisation 9.7 10.9 21.8
--------------------------- --------------------------- -------------------------
Loss/(profit) on sale of assets - - (2.4)
--------------------------- --------------------------- -------------------------
Interest on subordinated liabilities 17.2 15.3 33.7
--------------------------- --------------------------- -------------------------
Impairment
charge/(release)
for
the year 7.5 0.7 6.0
--------------------------- --------------------------- -------------------------
Provisions
(release)/charge (0.8) 2.7 4.2
--------------------------- --------------------------- -------------------------
Non-cash movement in subordinated
liabilities (26.9) (54.8) (122.6)
--------------------------- --------------------------- -------------------------
(Gain)/loss on realisation of debt
securities (1.5) (2.4) (2.9)
--------------------------- --------------------------- -------------------------
(Increase)/decrease in cash ratio
deposit, other assets and non-OCI
element of retirement benefit
surplus (8.1) (12.2) (3.2)
--------------------------- --------------------------- -------------------------
Cash movements in other liabilities
and provisions 1.5 (6.7) (18.5)
--------------------------- --------------------------- -------------------------
Movement in fair
value adjustment
for hedged risk on
loans and advances
to customers 283.8 667.8 1,270.1
------------------------------------ --------------------------- --------------------------- -------------------------
Non-cash items
included in profit
before tax 282.4 621.3 1,186.2
------------------------------------ --------------------------- --------------------------- -------------------------
(Increase)/decrease
in operating
assets
------------------------------------ --------------------------- --------------------------- -------------------------
Non-impairment change in loans
and advances to customers (671.9) (2,058.4) (3,049.1)
--------------------------- --------------------------- -------------------------
Investments (0.2) 0.2 2.6
--------------------------- --------------------------- -------------------------
Non-OCI elements of
derivative
financial assets (641.4) (956.3) (1,867.6)
------------------------------------ --------------------------- --------------------------- -------------------------
Net change in
operating assets (1,313.5) (3,014.5) (4,914.1)
------------------------------------ --------------------------- --------------------------- -------------------------
Increase/(decrease)
in operating
liabilities
------------------------------------ --------------------------- --------------------------- -------------------------
Shares 3,624.6 2,232.6 6,501.8
--------------------------- --------------------------- -------------------------
Amounts owed to credit institutions (785.1) 479.8 (928.9)
--------------------------- --------------------------- -------------------------
Non-cash movements on debt
securities
in issue (58.5) (99.5) (117.9)
--------------------------- --------------------------- -------------------------
Other deposits (110.8) 249.8 264.6
--------------------------- --------------------------- -------------------------
Derivative financial
liabilities 242.3 194.6 393.6
------------------------------------ --------------------------- --------------------------- -------------------------
Net change in
operating
liabilities 2,912.5 3,057.3 6,113.2
------------------------------------ --------------------------- --------------------------- -------------------------
The following tables reconcile liabilities arising from
financing activities.
Liabilities Brought Cash flows Non-cash Carried
from forward forward
financing (audited) (unaudited)
activities
Redemption Issue Foreign Accrued Fair value
exchange interest adjustments
-------------------------- ----------------------- ------------------------ ------------------------ ---------------------------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- ------------------------- -------------------------- ----------------------- ------------------------ ------------------------ --------------------------- ---------------------------
Period to 30
June 2023
------------------------- -------------------------- ----------------------- ------------------------ ------------------------ --------------------------- ---------------------------
Debt
securities
in issue 5,259.3 (796.3) 1,005.3 (86.0) - 27.5 5,409.8
------------------------- -------------------------- ----------------------- ------------------------ ------------------------ --------------------------- ---------------------------
Subordinated
liabilities 1,035.1 (136.4) 350.0 - 9.8 (36.7) 1,221.8
---------------------------- ------------------------- -------------------------- ----------------------- ------------------------ ------------------------ --------------------------- ---------------------------
Total 6,294.4 (932.7) 1,355.3 (86.0) 9.8 (9.2) 6,631.6
---------------------------- ------------------------- -------------------------- ----------------------- ------------------------ ------------------------ --------------------------- ---------------------------
Period to 30 June 2022
Debt
securities
in issue 5,890.9 (417.5) 635.0 102.9 (3.1) (199.3) 6,008.9
------------------------- -------------------------- ----------------------- ------------------------ ------------------------ --------------------------- ---------------------------
Subordinated
liabilities 857.7 - 300.0 - 4.8 (59.6) 1,102.9
---------------------------- ------------------------- -------------------------- ----------------------- ------------------------ ------------------------ --------------------------- ---------------------------
Total 6,748.6 (417.5) 935.0 102.9 1.7 (258.9) 7,111.8
---------------------------- ------------------------- -------------------------- ----------------------- ------------------------ ------------------------ --------------------------- ---------------------------
Year to 31 December 2022
Debt
securities
in issue 5,890.9 (1,225.2) 711.5 198.6 6.9 (323.4) 5,259.3
------------------------- -------------------------- ----------------------- ------------------------ ------------------------ --------------------------- ---------------------------
Subordinated
liabilities 857.7 - 300.0 - 2.3 (124.9) 1,035.1
---------------------------- ------------------------- -------------------------- ----------------------- ------------------------ ------------------------ --------------------------- ---------------------------
Total 6,748.6 (1,225.2) 1,011.5 198.6 9.2 (448.3) 6,294.4
---------------------------- ------------------------- -------------------------- ----------------------- ------------------------ ------------------------ --------------------------- ---------------------------
Cash and balances with central banks
Cash and cash equivalents excludes cash ratio deposits of
GBP178.2 million (30 June 2022: GBP163.8 million) held with the
Bank of England, which are not available for use in the Group's
day-to-day operations.
13. Fair values
Fair value is the price that would be received to sell an asset
or the price paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Where external
market prices are available they have been used to determine fair
value. Otherwise, internal pricing models using external market
data have been used. The Group measures fair value using the
following fair value hierarchy:
-- Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.
-- Level 2: Inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either
directly (i.e. as prices) or indirectly (i.e. derived from
prices).
-- Level 3: Inputs for the asset or liability that are not based
on observable market data (unobservable inputs).
The table below summarises the carrying value and fair value of
financial assets and liabilities measured at amortised cost as at
the balance sheet date.
Held at Carrying Fair values Total
amortised value fair
cost value
Level Level Level 3
1 2
----------------------- ------------------------ ------------------------
30 June 2023 GBPm GBPm GBPm GBPm GBPm
(unaudited)
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Assets
------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Loans and advances to
credit institutions 450.5 - 450.5 - 450.5
------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Loans and advances to
customers 45,868.1 - - 43,031.2 43,031.2
------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Debt securities - amortised
cost 2,119.9 2,103.7 - - 2,103.7
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Liabilities
------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Shares 45,632.8 - 45,341.2 - 45,341.2
------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Amounts owed to credit
institutions 4,375.8 - 4,375.8 - 4,375.8
------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Other deposits 1,027.3 - 1,027.3 - 1,027.3
------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Debt securities in issue 5,409.8 5,810.0 817.8 - 6,627.8
------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Subordinated liabilities 1,221.8 1,169.2 33.8 - 1,203.0
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
30 June 2022
(unaudited)
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Assets
Loans and advances to
credit institutions 617.8 - 617.8 - 617.8
------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Loans and advances to
customers 44,218.3 - - 43,891.9 43,891.9
------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Debt securities - amortised
cost 980.0 949.8 - - 949.8
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Liabilities
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Shares 37,739.0 - 37,662.4 - 37,662.4
------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Amounts owed to credit
institutions 6,569.6 - 6,569.6 - 6,569.6
------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Other deposits 1,123.3 - 1,123.3 - 1,123.3
------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Debt securities in issue 6,008.9 6,428.7 783.8 - 7,212.5
------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Subordinated liabilities 1,102.9 1,029.8 35.9 - 1,065.7
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
31 December
2022
(audited)
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Assets
Loans and advances to
credit institutions 814.7 - 814.7 - 814.7
------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Loans and advances to
customers 45,203.7 - - 43,002.8 43,002.8
------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Debt securities - amortised
cost 1,366.6 1,352.3 - - 1,352.3
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Liabilities
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Shares 42,008.2 - 41,835.3 - 41,835.3
------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Amounts owed to credit
institutions 5,160.9 - 5,160.9 - 5,160.9
------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Other deposits 1,138.1 - 1,138.1 - 1,138.1
------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Debt securities in issue 5,259.3 4,807.9 453.8 - 5,261.7
------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Subordinated liabilities 1,035.1 975.7 34.0 - 1,009.7
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
The table below classifies all financial instruments held at
fair value according to the method used to establish the fair
value.
Held at fair Fair values Total
value fair
value
Level Level 2 Level
1 3
----------------------- ----------------------- ----------------------
30 June 2023
(unaudited) GBPm GBPm GBPm GBPm
---------------------------- ----------------------- ----------------------- ---------------------- -----------------------
Debt securities - fair value
through income statement 25.6 - - 25.6
----------------------- ----------------------- ---------------------- -----------------------
Debt securities - fair value
through other comprehensive
income 4,741.5 - - 4,741.5
----------------------- ----------------------- ---------------------- -----------------------
Derivative financial assets - 2,980.5 3.4 2,983.9
----------------------- ----------------------- ---------------------- -----------------------
Investments - - 3.0 3.0
----------------------- ----------------------- ---------------------- -----------------------
Derivative financial
liabilities - 908.2 0.4 908.6
---------------------------- ----------------------- ----------------------- ---------------------- -----------------------
30 June 2022
(unaudited)
---------------------------- ----------------------- ----------------------- ---------------------- -----------------------
Debt securities - fair value
through income statement 26.3 - - 26.3
----------------------- ----------------------- ---------------------- -----------------------
Debt securities - fair value
through other comprehensive
income 4,204.1 - - 4,204.1
----------------------- ----------------------- ---------------------- -----------------------
Derivative financial assets - 1,444.6 17.3 1,461.9
----------------------- ----------------------- ---------------------- -----------------------
Investments - - 5.2 5.2
----------------------- ----------------------- ---------------------- -----------------------
Derivative financial
liabilities - 467.0 0.3 467.3
---------------------------- ----------------------- ----------------------- ---------------------- -----------------------
31 December
2022
(audited)
---------------------------- ----------------------- ----------------------- ---------------------- -----------------------
Debt securities - fair value
through income statement 25.5 - - 25.5
----------------------- ----------------------- ---------------------- -----------------------
Debt securities - fair value
through other comprehensive
income 4,292.7 - - 4,292.7
----------------------- ----------------------- ---------------------- -----------------------
Derivative financial assets - 2,344.0 12.5 2,356.5
----------------------- ----------------------- ---------------------- -----------------------
Investments - - 2.8 2.8
----------------------- ----------------------- ---------------------- -----------------------
Derivative financial
liabilities 666.3 - 666.3
---------------------------- ----------------------- ----------------------- ---------------------- -----------------------
The Group's Level 1 portfolio of available for sale debt
securities comprises liquid securities for which traded prices are
readily available.
Some derivative financial instruments are also included within
Level 2 as fair values are derived from discounted cash flow models
using yield curves based on observable market data.
Level 3 instruments
Derivative financial instruments within Level 3 are interest
rate swaps held in the SPVs. These are valued using similar
valuation technique as Level 2 derivatives, namely present value
calculations using interest rate curves, but these are not based on
market observable data.
The interest rate swaps are balance tracking and the swap
notional is projected, and changes over time to match the balance
of the underlying mortgage portfolio. The changes in the fair value
of these instruments from movements in Level 3 parameters related
to prepayment risk will largely offset across the interest rate
swaps as the Group is hedged across these positions. Sensitivity
analysis to the individual Level 3 parameters has not been
disclosed on the basis that the Group does not have a significant
exposure to these.
Investments classified in Level 3 relate to the Group's holding
in equity preference shares. These shares are convertible into
common equity shares at various intervals during the life of the
instrument, based on a conversion factor set by the issuer. The
valuation method therefore uses the quoted share price of the
unrestricted stock as a base, applies the current estimated
conversion factor as advised by the issuer and applies a
discount.
This discount reflects the current illiquidity of the instrument
and the risks to changes in the conversion factor between the
balance sheet date and the next conversion date. Whilst the
valuation is primarily based on an observable market price, the
level and significance of the unobservable input relating to the
calculation of the discount moves this asset into Level 3.
Changes in the carrying value of Level 3 financial instruments
in the period all relate to changes in fair value. There have been
no changes in methodology, redemption, additions or transfers in or
out of Level 3 in the year.
Details of valuation techniques are disclosed on pages 220 to
221 of the 2022 Annual Report and Accounts.
14. Events occurring after the end the reporting period
There have been no material post balance sheet events between 30
June 2023 and the approval of the condensed interim financial
statements.
Responsibility Statements
We confirm that to the best of our knowledge:
-- the condensed set of financial statements has been prepared
in accordance with UK-adopted International Accounting Standard 34
Interim Financial Reporting; and
-- the interim management report includes a fair review of the
information required by DTR 4.2.7R (indication of important events
during the first six months and description of principal risks and
uncertainties for the remaining six months of the year).
By order of the Board
Susan Allen, OBE Alasdair Lenman
Chief Executive Officer Chief Finance Officer
26 July 2023
Independent review report to Yorkshire Building Society
Report on the condensed consolidated interim financial
statements
Our conclusion
We have reviewed Yorkshire Building Society's condensed
consolidated interim financial statements (the "interim financial
statements") in the Half-Yearly Financial Report of Yorkshire
Building Society for the 6 month period ended 30 June 2023 (the
"period").
Based on our review, nothing has come to our attention that
causes us to believe that the interim financial statements are not
prepared, in all material respects, in accordance with UK adopted
International Accounting Standard 34, 'Interim Financial Reporting'
and the Disclosure Guidance and Transparency Rules sourcebook of
the United Kingdom's Financial Conduct Authority.
The interim financial statements comprise:
-- the Consolidated Balance Sheet as at 30 June 2023;
-- the Consolidated Income Statement and Consolidated Statement
of Comprehensive Income for the period then ended;
-- the Consolidated Statement of Cash Flows for the period then ended;
-- the Consolidated Statement of Changes in Members' Interest
and Equity for the period then ended; and
-- the explanatory notes to the interim financial statements.
The interim financial statements included in the Half-Yearly
Financial Report of Yorkshire Building Society have been prepared
in accordance with UK adopted International Accounting Standard 34,
'Interim Financial Reporting' and the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority.
Basis for conclusion
We conducted our review in accordance with International
Standard on Review Engagements (UK) 2410, 'Review of Interim
Financial Information Performed by the Independent Auditor of the
Entity' issued by the Financial Reporting Council for use in the
United Kingdom ("ISRE (UK) 2410"). A review of interim financial
information consists of making enquiries, primarily of persons
responsible for financial and accounting matters, and applying
analytical and other review procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and,
consequently, does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the Half-Yearly
Financial Report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the interim financial statements.
Conclusions relating to going concern
Based on our review procedures, which are less extensive than
those performed in an audit as described in the Basis for
conclusion section of this report, nothing has come to our
attention to suggest that the directors have inappropriately
adopted the going concern basis of accounting or that the directors
have identified material uncertainties relating to going concern
that are not appropriately disclosed. This conclusion is based on
the review procedures performed in accordance with ISRE (UK) 2410.
However, future events or conditions may cause the group to cease
to continue as a going concern.
Responsibilities for the interim financial statements and the
review
Our responsibilities and those of the directors
The Half-Yearly Financial Report, including the interim
financial statements, is the responsibility of, and has been
approved by the directors. The directors are responsible for
preparing the Half-Yearly Financial Report in accordance with the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority. In preparing the Half-Yearly
Financial Report, including the interim financial statements, the
directors are responsible for assessing the group's ability to
continue as a going concern, disclosing, as applicable, matters
related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the
group or to cease operations, or have no realistic alternative but
to do so.
Our responsibility is to express a conclusion on the interim
financial statements in the Half-Yearly Financial Report based on
our review. Our conclusion, including our Conclusions relating to
going concern, is based on procedures that are less extensive than
audit procedures, as described in the Basis for conclusion
paragraph of this report. This report, including the conclusion,
has been prepared for and only for the company for the purpose of
complying with the Disclosure Guidance and Transparency Rules
sourcebook of the United Kingdom's Financial Conduct Authority and
for no other purpose. We do not, in giving this conclusion, accept
or assume responsibility for any other purpose or to any other
person to whom this report is shown or into whose hands it may come
save where expressly agreed by our prior consent in writing.
PricewaterhouseCoopers LLP
Chartered Accountants
Leeds
26 July 2023
Other information
The information set out in this document is unaudited and does
not constitute accounts within the meaning of section 73 of the
Building Societies Act 1986. The financial information for the year
ended 31 December 2022 has been extracted from the Annual Accounts
for that year. The Annual Accounts for the year ended 31 December
2022 have been filed with the Financial Conduct Authority.
The Auditor's report on the Annual Accounts was unqualified and
did not include any matters to which the Auditor drew attention by
way of emphasis without qualifying their report.
A copy of the Half-Yearly Financial Report is placed on
Yorkshire Building Society's website. The directors are responsible
for the maintenance and integrity of the information on the
website. Information published on the internet is accessible in
many countries with different legal requirements. Legislation in
the UK governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
References to 'YBS Group' or 'Yorkshire Group' refer to
Yorkshire Building Society, the trading names under which it
operates (Chelsea Building Society, the Chelsea, Norwich &
Peterborough Building Society, N&P and Egg) and its subsidiary
companies and where appropriate, its controlled entities. Egg is a
registered trademark of Yorkshire Building Society. Accord
Mortgages Limited is authorised and regulated by the Financial
Conduct Authority.
Accord Mortgages Limited is entered in the Financial Services
Register under registration number 305936. Buy to Let mortgages for
business purposes are not regulated by the Financial Conduct
Authority. Accord Mortgages Limited is registered In England No:
02139881. Registered Office: Yorkshire House, Yorkshire Drive,
Bradford BD5 8LJ. Accord Mortgages is a registered Trade Mark of
Accord Mortgages Limited
Yorkshire Building Society is a member of the Building Societies
Association and is authorised by the Prudential Regulation
Authority and regulated by the Financial Conduct Authority and the
Prudential Regulation Authority. Yorkshire Building Society is
entered in the Financial Services Register and its registration
number is 106085. Head Office: Yorkshire House, Yorkshire Drive,
Bradford BD5 8LJ. ybs.co.uk
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