TIDMOSB
LEI: 213800ZBKL9BHSL2K459
8 April 2021
OSB GROUP PLC
Preliminary results for the year ended 31 December 2020
This press release includes results on a statutory and an underlying
basis for 2020, and a statutory and pro forma underlying basis for 2019.
Underlying results for 2020 exclude exceptional items, integration costs
and other acquisition-related items. Pro forma underlying results for
2019 assume that the combination with CCFS occurred on 1 January 2019
and include 12 months of results from CCFS. They also exclude
exceptional items, integration costs and other acquisition-related
items.
Financial and operational highlights
-- Statutory profit before tax increased by 25% to GBP260.4m (2019:
GBP209.1m). Underlying profit before tax decreased by 9% to GBP346.2m
(2019: pro forma underlying GBP381.1m)
-- Net loan book grew 4% to GBP19.2bn (2019: GBP18.4bn) on a statutory basis
and 5% to GBP19.0bn on an underlying basis (2019: pro forma underlying
GBP18.2bn), or 9% excluding the impact of structured asset sales.
Statutory gross originations fell by 9% to GBP3.8bn (2019: GBP4.1bn) and
by 42% on an underlying basis to GBP3.8bn (2019: GBP6.5bn) reflecting the
impact of COVID-19
-- On a statutory basis, the cost to income ratio improved to 31% from 32%
in 2019 and on an underlying basis, it improved to 27% (2019: pro forma
underlying 29%) benefitting from delivery of synergies, lower
discretionary spend during lockdowns and continued focus on cost
discipline and efficiency
-- Net interest margin was 216bps on a statutory basis (2019: 243bps) and
247bps on an underlying basis (2019: pro forma underlying 266bps) due
primarily to a delay in passing on the base rate cuts in full to retail
savers, which was completed by the end of the third quarter
-- Statutory and underlying loan loss ratios increased to 38bps (2019: 13bps
statutory and 10bps pro forma underlying) due primarily to the impact of
adopting COVID-19 forward-looking assumptions in our IFRS 9 models and an
impairment provision of GBP20m (11bps of the loan loss ratio) in relation
to potential fraudulent activity by a third party on a secured funding
line provided by the Group
-- Strong credit performance, with balances greater than three months in
arrears stable at 0.9% at the end of 2020 (2019: 0.9%) and the majority
of customers granted COVID-19 payment deferrals having resumed payment.
Active deferrals only 1.3% of the Group's loan book by value at 31
December 2020
-- Statutory return on equity (RoE) of 13% and underlying RoE of 19% were
delivered despite significantly higher expected credit losses under IFRS
9 and a strengthened equity position (2019: 18% statutory and 25% pro
forma underlying)
-- Statutory basic earnings per share (EPS) fell 19% to 42.8 pence (2019:
52.6 pence) and underlying basic EPS decreased by 10% to 58.1 pence
(2019: pro forma underlying 64.9 pence)
-- Statutory Common Equity Tier 1 capital ratio strengthened to 18.3% (2019:
16.0%)
-- Integration progressing well, with run rate savings of GBP15m delivered
by the first anniversary of the Combination, significantly ahead of
schedule
-- Recommended final dividend of 14.5 pence per share, representing 25% of
full year underlying earnings attributable to ordinary shareholders, in
line with our stated dividend policy
Andy Golding, CEO of OSB Group, said:
"I am extremely proud of the Group's performance in a very challenging
year. Our business model proved its resilience in 2020 and we produced
another year of strong returns despite the impact of the pandemic. We
have a positive culture and our customers, clients, colleagues and
communities were always at the forefront of mind as we supported all
stakeholders to the best of our ability, whether that was by providing
mortgage payment deferrals, supporting colleagues' well-being or
continuing to allow our customers to access financial services in the
easiest and safest way. I commend all my colleagues for their excellent
response to the challenges that the pandemic has presented.
We entered 2020 in a position of strength, with an attractive pipeline,
growing opportunities and robust capital position. Lockdowns inevitably
impacted our business and we reacted by tightening our risk appetite to
protect margin and credit quality over growth. I am pleased that
applications have now recovered to near pre-COVID levels in our core
Buy-to-Let and Residential sub-segments on tighter criteria and we have
a strong pipeline of new business. We continue to control volumes in our
more cyclical product lines, reflecting the economic outlook and our
prudent approach to risk management.
We celebrated the milestone of being a combined Group for a year in
October 2020, and the progress in aligning OneSavings Bank (OSB) and
Charter Court Financial Services Group (CCFS) continued at pace. We have
delivered synergies earlier than anticipated, and by the end of the
first year we had achieved more than 65% of our end of year three
synergy target and expect to marginally exceed our run-rate pledge for
the third anniversary of the Combination.
Further to our trading update on 17 March, the Group has recognised an
impairment provision of GBP20m in 2020 in relation to potential
fraudulent activity by a third party on a funding line of GBP28.6m
provided by the Group, secured against lease receivables and the
underlying hard assets. We believe that this is an isolated incident.
Based on our pipeline and current application levels and risk appetite,
we currently expect to deliver underlying net loan book growth for 2021
of c.10%, although we remain cognisant of continued uncertainty in the
economic outlook. Based on current pricing and cost of funds, we expect
underlying NIM for 2021 to return to 2019 levels. We expect the
underlying cost to income ratio to be marginally higher in 2021, as the
ratio in 2020 benefitted from higher income from gains on structured
asset sales and lower discretionary spending in lockdowns.
After a year of unprecedented uncertainty, it seems there is finally
reason for some cautious optimism and we hope the country will begin to
return to some sense of normality. However, many businesses, families
and individuals are currently receiving support from government
initiatives and there is ongoing uncertainty over the true impact of the
pandemic on the economy, our customers and the Group's business when
that support ends.
In 2020, we have proven the resilience and flexibility of our business
model and looking forward we will continue to be there for our customers,
supporting them in the best way that we can. The foundations of our
business remain extremely robust, with a very strong capital position
and a resilient business model, all of which position us well to respond
to the challenges and opportunities ahead and to deploy our resources to
deliver attractive, sustainable returns to our shareholders over the
long-term. Our confidence in the strength of OSB Group is reflected in
the Board's decision to recommend a dividend of 14.5 pence per share for
2020, representing 25% of full year underlying earnings attributable to
ordinary shareholders, in line with our stated dividend policy."
Enquiries:
OSB GROUP PLC: Alastair Pate t: 01634
835728
Brunswick Group: Robin Wrench / Simone
Selzer t: 020 7404 5959
Analyst presentation
A webcast presentation for analysts will be held at 9:30am on Thursday 8
April.
The presentation will be webcast or call only and available on the OSB
Group website at www.osb.co.uk/investors/results-reports-presentations.
The UK dial in number is 020 3936 2999 and the password is 810296.
Registration is open immediately.
About OSB GROUP PLC
OSB began trading as a bank on 1 February 2011 and was admitted to the
main market of the London Stock Exchange in June 2014 (OSB.L). OSB
joined the FTSE 250 index in June 2015. On 4 October 2019, OSB acquired
Charter Court Financial Services Group plc (CCFS) and its subsidiary
businesses. On 30 November 2020, OSB GROUP PLC became the listed entity
and holding company for the OSB Group. The Group provides specialist
lending and retail savings and is authorised by the Prudential
Regulation Authority, part of the Bank of England, and regulated by the
Financial Conduct Authority and Prudential Regulation Authority. The
Group reports under two segments, OneSavings Bank and Charter Court
Financial Services.
OneSavings Bank
OSB primarily targets market sub-sectors that offer high growth
potential and attractive risk-adjusted returns in which it can take a
leading position and where it has established expertise, platforms and
capabilities. These include private rented sector Buy-to-Let, commercial
and semi-commercial mortgages, residential development finance, bespoke
and specialist residential lending, secured funding lines and asset
finance.
OSB originates mortgages organically via specialist brokers and
independent financial advisers through its specialist brands including
Kent Reliance for Intermediaries and InterBay Commercial. It is
differentiated through its use of highly skilled, bespoke underwriting
and efficient operating model.
OSB is predominantly funded by retail savings originated through the
long-established Kent Reliance name, which includes online and postal
channels as well as a network of branches in the South East of England.
Diversification of funding is currently provided by securitisation
programmes and the Bank of England funding schemes including, the Term
Funding Scheme and the Term Funding Scheme for SMEs.
Charter Court Financial Services Group
CCFS focuses on providing Buy-to-Let and specialist residential
mortgages, mortgage servicing, administration and retail savings
products. It operates through its brands: Precise Mortgages and Charter
Savings Bank.
It is differentiated through risk management expertise and best-of-breed
automated technology and systems, ensuring efficient processing, strong
credit and collateral risk control and speed of product development and
innovation. These factors have enabled strong balance sheet growth
whilst maintaining high credit quality mortgage assets.
CCFS is predominantly funded by retail savings originated through its
Charter Savings Bank brand. Diversification of funding is currently
provided by securitisation programmes and the Bank of England funding
schemes including, the Term Funding Scheme and the Term Funding Scheme
for SMEs.
Important disclaimer
This document should be read in conjunction with the documents
distributed by OSB GROUP PLC (OSBG) through the Regulatory News Service
(RNS). This document is not audited and contains certain forward-looking
statements, beliefs or opinions, including statements with respect to
the business, strategy and plans of OSBG and its current goals and
expectations relating to its future financial condition, performance and
results. Such forward-looking statements include, without limitation,
those preceded by, followed by or that include the words 'targets',
'believes', 'estimates', 'expects', 'aims', 'intends', 'will', 'may',
'anticipates', 'projects', 'plans', 'forecasts', 'outlook', 'likely',
'guidance', 'trends', 'future', 'would', 'could', 'should' or similar
expressions or negatives thereof. Statements that are not historical
facts, including statements about OSBG's, its directors' and/or
management's beliefs and expectations, are forward-looking statements.
By their nature, forward-looking statements involve risk and uncertainty
because they relate to events and depend upon circumstances that may or
may not occur in the future. Factors that could cause actual business,
strategy, plans and/or results (including but not limited to the payment
of dividends) to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in such forward-looking
statements made by OSBG or on its behalf include, but are not limited
to: general economic and business conditions in the UK and
internationally; market related trends and developments; fluctuations in
exchange rates, stock markets, inflation, deflation, interest rates and
currencies; policies of the Bank of England, the European Central Bank
and other G8 central banks; the ability to access sufficient sources of
capital, liquidity and funding when required; changes to OSBG's credit
ratings; the ability to derive cost savings; changing demographic
developments, and changing customer behaviour, including consumer
spending, saving and borrowing habits; changes in customer preferences;
changes to borrower or counterparty credit quality; instability in the
global financial markets, including Eurozone instability, the potential
for countries to exit the European Union (the EU) or the Eurozone, and
the impact of any sovereign credit rating downgrade or other sovereign
financial issues; technological changes and risks to cyber security;
natural and other disasters, adverse weather and similar contingencies
outside OSBG's control; inadequate or failed internal or external
processes, people and systems; terrorist acts and other acts of war or
hostility and responses to those acts; geopolitical, pandemic or other
such events; changes in laws, regulations, taxation, accounting
standards or practices, including as a result of an exit by the UK from
the EU; regulatory capital or liquidity requirements and similar
contingencies outside OSBG's control; the policies and actions of
governmental or regulatory authorities in the UK, the EU or elsewhere
including the implementation and interpretation of key legislation and
regulation; the ability to attract and retain senior management and
other employees; the extent of any future impairment charges or
write-downs caused by, but not limited to, depressed asset valuations,
market disruptions and illiquid markets; market relating trends and
developments; exposure to regulatory scrutiny, legal proceedings,
regulatory investigations or complaints; changes in competition and
pricing environments; the inability to hedge certain risks economically;
the adequacy of loss reserves; the actions of competitors, including
non-bank financial services and lending companies; and the success of
OSBG in managing the risks of the foregoing.
Accordingly, no reliance may be placed on any forward-looking statement
and no representation, warranty or assurance is made that any of these
statements or forecasts will come to pass or that any forecast results
will be achieved. Any forward-looking statements made in this document
speak only as of the date they are made and it should not be assumed
that they have been revised or updated in the light of new information
of future events. Except as required by the Prudential Regulation
Authority, the Financial Conduct Authority, the London Stock Exchange
PLC or applicable law, OSBG expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any
forward-looking statements contained in this document to reflect any
change in OSBG's expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is
based. For additional information on possible risks to OSBG's business,
please see the Risk review in the OSBG 2020 Annual Report and Accounts.
Copies of this are available at www.osb.co.uk and on request from OSBG.
Nothing in this document and any subsequent discussion constitutes or
forms part of a public offer under any applicable law or an offer to
purchase or sell any securities or financial instruments. Nor does it
constitute advice or a recommendation with respect to such securities or
financial instruments, or any invitation or inducement to engage in
investment activity under section 21 of the Financial Services and
Markets Act 2000. Past performance cannot be relied on as a guide to
future performance. Nothing in this document is intended to be, or
should be construed as, a profit forecast or estimate for any period.
Liability arising from anything in this document shall be governed by
English law, and neither the Company nor any of its affiliates, advisors
or representatives shall have any liability whatsoever (in negligence or
otherwise) for any loss howsoever arising from any use of this document
or its contents or otherwise arising in connection with this document.
Nothing in this document shall exclude any liability under applicable
laws that cannot be excluded in accordance with such laws.
Certain figures contained in this document, including financial
information, may have been subject to rounding adjustments and foreign
exchange conversions. Accordingly, in certain instances, the sum or
percentage change of the numbers contained in this document may not
conform exactly to the total figure given.
Non-IFRS performance measures
OSB GROUP PLC believes that the non-IFRS performance measures included
in this document provide valuable information to the readers as they
enable the reader to identify a more consistent basis for comparing the
business' performance between financial periods, and provide more detail
concerning the elements of performance which the Group is most directly
able to influence or are relevant for an assessment of the Group. They
also reflect an important aspect of the way in which operating targets
are defined and performance is monitored by the Board. However, any
non-IFRS performance measures in this document are not a substitute for
IFRS measures and readers should consider the IFRS measures as well.
Refer to Alternative performance measures in the Financial review for
further details, reconciliations and calculations of non-IFRS
performance measures included throughout this document, and the most
directly comparable IFRS measures.
Chief Executive's Statement
2020 was an extremely challenging year, with the impact of COVID-19 felt
by all businesses, the wider economy and society as a whole. I am
incredibly proud of how the Group responded to this unprecedented event
and the proven operational and financial resilience of our business. Our
track record in generating attractive and sustainable returns continued
and we delivered strong financial results amidst the turmoil, whilst
ensuring we protected our colleagues, customers and other stakeholders.
We achieved this whilst positioning the Group well for further
challenges or new opportunities in the future, with a strong balance
sheet, prudent underwriting and a tested, resilient business model.
As the year evolved, we continued to adapt all areas of the business, to
ensure our colleagues could safely and confidently deliver the service
our customers have come to expect. Quick and clear decision making at
the start of the pandemic positioned us well to manage subsequent
lockdowns. I am particularly pleased that we continue to deliver a
class-leading return on equity despite taking significant impairment
charges in the year under IFRS 9, with an underlying return on equity of
19% and 13% on a statutory basis (2019: 25% and 18% respectively).
I am delighted that we continued to successfully deliver against our
integration plans, with colleagues across the Group pulling together
under a common purpose and culture.
The Board considered it prudent to preserve the Group's capital when we
made the difficult and cautious decision, at the start of the pandemic,
not to pay the 2019 final dividend given the unprecedented level of
economic uncertainty at that time. However, the income needs of our
shareholders are important to us and given our strong performance in
2020 and record CET1 ratio, I am pleased that the Board is recommending
the payment of a dividend of 14.5 pence per share for 2020, representing
25% of full year underlying earnings attributable to ordinary
shareholders, in line with our stated dividend policy.
Financial performance
Our financial performance in 2020 was resilient, but clearly impacted by
the pandemic and the ensuing deterioration in the outlook for the
economy, which led to a significant increase in expected credit losses
despite broadly stable arrears. Expected credit losses also included an
impairment provision of GBP20m in relation to potential fraudulent
activity by a third party on a secured funding line provided by the
Group. However, I am very pleased that we demonstrated our ability to
continue to generate strong profit and, on an underlying basis, pre-tax
profit was GBP346.2m, equating to underlying basic earnings per share of
58.1 pence (2019: GBP381.1m and 64.9 pence respectively). Statutory
pre-tax profit was GBP260.4m and statutory basic earnings per share
decreased by 19% to 42.8 pence (2019: GBP209.1m and 52.6 pence
respectively).
We continued to grow our business and the underlying net loan book
increased in line with management expectations by 9%, excluding the
impact of structured asset sales in January. This growth was achieved
despite the second lockdown towards the end of the last quarter of 2020.
The statutory net loan book increased by 4%.
The underlying net interest margin for the year of 247bps (2019: 266bps)
was broadly flat to the first half. The NIM run rate in the fourth
quarter improved significantly as the base rate cuts were passed on to
retail savers in full by the end of the third quarter and we maintained
our discipline and control over mortgage pricing. The statutory NIM was
216bps for 2020 (2019: 243bps).
The Group maintained its strong focus on cost discipline and efficiency
and benefitted from the delivery of synergies and lower discretionary
spending such as reduced travel, entertainment and marketing expense
during lockdowns. This resulted in an underlying cost to income ratio of
27% and 31% on a statutory basis for the year (2019: 29% and 32%
respectively).
We have not yet seen any significant deterioration in customers' credit
performance or arrears; however, we retain our conservative view on the
macroeconomic outlook whilst UK Government support remains in place,
with the full impact of the pandemic yet to be felt.
Adapting to COVID-19
More than in any other year in our history, it was essential that we
were there for our stakeholders throughout 2020.
I continue to be very grateful to each and every colleague for the
effort, perseverance and dedication that they have shown throughout this
difficult time, displaying excellent adaptability as government rules
changed in line with fluctuating infection rates. To enable our
colleagues to assist our customers to the best of their ability, it was
important to ensure that they were supported and kept safe, which we
managed whilst everyone did a fantastic job of keeping operations
running effectively. I am particularly pleased with the operational
performance and resilience shown by our wholly-owned subsidiary OSB
India. The majority of our colleagues, both in the UK and India, are
currently working from home and we are responsibly helping those who are
unable to work from home by operating under appropriate protocols in our
offices. We recognise the additional strains that the changed
circumstances can cause and made emotional well-being support available
for all our colleagues. The Group did not participate in any of the
government COVID-related business support schemes nor did we place any
of our employees on the furlough scheme.
Across the Group, resources were redeployed quickly to assist borrowers
who may have been in financial difficulty. Payment deferrals peaked in
the second quarter at 26,000 accounts, representing 28% of the loan book
by value. However, active deferral requests reduced to only 1.3% of the
Group's loan book by value by year end and we experienced low levels of
new arrears on accounts exiting payment deferrals. At the same time, we
continued processing existing mortgage applications.
Mortgage intermediaries continued to be supported and our frequent
interactions were maintained, as video and telephone calls became the
norm. We were proactive in understanding the communication channels that
brokers would prefer us to use and communicated clearly and effectively
the changes we had to make as the impact of the pandemic unfolded. I am
delighted that, for the first time, both Kent Reliance and Precise
Mortgages were awarded a five star rating at the Financial Adviser
Services Awards 2020, highlighting the Group's unwavering dedication to
serving our clients through the pandemic.
We supported our savings customers by enhancing our online services and
our small branch network remained open and was quickly adapted to be a
safe environment for our customers and colleagues. Our strong savings
proposition also helped the Group maintain strengthened levels of
liquidity.
The Group maintained a prudent appetite to risk in light of the
unprecedented macroeconomic uncertainty and continues to control growth
through pricing and lending criteria, especially in our more cyclical
sub-segments. The strong demand for our core Buy-to-Let and Residential
mortgages still enabled us to grow our overall net loan book in a
controlled manner and we continued to concentrate on our high
underwriting standards and protecting the credit quality of our book.
These deliberate actions demonstrate our approach to maintaining
profitability, protecting our balance sheet and generating strong
returns for shareholders.
Lending through the pandemic
We entered 2020 with a robust pipeline of new mortgages and originated
GBP3.8bn of new business in the year (2019: GBP4.1bn statutory, GBP6.5bn
pro forma underlying). Application levels in our core businesses were
strong prior to COVID-19, but the initial lockdown inevitably impacted
application and completion volumes in the second and third quarters,
mirroring the overall mortgage market. As restrictions eased in the
middle of the year, we chose to increase lending in our core Buy-to-Let
and Residential businesses at higher pricing, albeit with reduced
maximum LTVs and loan size. We remained vigilant regarding market
uncertainty and managed our risk appetite accordingly to maintain strong
credit quality. However, I am pleased that new business volumes have now
recovered to near pre-COVID levels in these sub-segments, with a strong
pipeline of new business.
Net loan book growth was impacted by our sensible, clear decisions to
reduce lending in our more cyclical market sub-segments. We continue to
control new lending in our commercial, bridging, development finance,
funding lines and second charge residential businesses. In addition, we
have seen strong early repayments from our residential development
finance customers, demonstrating the strength of this proposition.
The Group recognised an impairment provision of GBP20m in 2020 in
relation to potential fraudulent activity by a third party on a funding
line of GBP28.6m provided by the Group, secured against lease
receivables and the underlying hard assets. The Group's funding line
business is primarily secured against property-related mortgages(1) and
the Board believes that this is an isolated incident. The Board has
commissioned an external review of processes and controls in relation to
the funding lines business and will make enhancements based on
recommendations received.
InterBay Asset Finance saw increased levels of new business as we
entered the fourth quarter of the year and in October launched products
under the Coronavirus Business Interruption Loan Scheme. This enabled us
to finance new deals for SME customers who had been affected by
COVID-19.
Sophisticated funding model
The Group remained predominantly retail funded in 2020 and our strong
savings propositions, through Kent Reliance and Charter Savings Bank,
continued to attract increased customer numbers. This allowed us to fund
the business at an increasingly favourable cost as base rate cuts were
passed on to retail savers in full by the end of the third quarter. The
Group had GBP16.6bn of statutory retail deposits as at 31 December, up
2% on the prior year (2019: GBP16.3bn).
Customer satisfaction, measured through the Net Promoter Score, remained
high at +67 and +72 for Kent Reliance and Charter Savings Bank,
respectively. I am very pleased that retention rates for savers
continued to be exceptionally high, reaching 93% amongst Kent Reliance
customers and 77% for Charter Savings Bank. I am also delighted that our
savings brands received recognition with Charter Savings Bank awarded
Best Bank Savings Provider in the Moneyfacts Awards and Best Savings
Provider in the Savings Champion Awards. Kent Reliance won Best Easy
Access Savings provider in the Moneynet awards. These awards demonstrate
our dedication to delivering excellent customer service, supported by
the outstanding skills and adaptability of the dedicated people in our
operations in India and the UK.
We continued to complement our retail savings franchises by utilising
our capabilities in the wholesale funding market, demonstrating one of
the strengths of our successful Combination with CCFS. In 2020, the
Group completed three securitisation transactions with a combined value
of GBP2.8bn across the Canterbury Finance and Precise Mortgage Funding
programmes. We were also successful in generating gains through the sale
of residual positions and in 2020 we recorded a gain of GBP33m on an
underlying basis, or GBP20m on a statutory basis, while derecognising
GBP0.8bn of securitised mortgages from the Group's balance sheet.
We were also accepted to the Term Funding Scheme with additional
incentives for SMEs (TFSME) in 2020 with borrowings of GBP1bn at the end
of the year. We intend to use the TFSME funding to refinance and extend
the duration of the remaining GBP2.6bn of drawings under the TFS scheme.
TFSME drawings may also be used to fund additional growth opportunities
subject to our encumbrance policy.
Building our business
The integration of OSB and CCFS has progressed very well, with the
synergies set out for the first year of the Combination achieved earlier
than anticipated, and by the end of the first year we had achieved more
than 65% of our end of year three synergy target. We are currently ahead
of schedule towards delivering our year two synergy target and expect to
marginally exceed our run-rate pledge by the end of the final year. We
streamlined the Board and de-duplicated a significant proportion of
senior management roles early and also achieved efficiencies from
combining various central and support functions. Our costs to date are
lower than originally expected. Operational resilience has had an
increased focus in light of the pandemic and the Board is taking the
opportunity to review whether some planned consolidation of locations
and suppliers is still the best way forward. Any decision is not
expected to have a material impact on the quantum of synergies.
I am delighted that colleagues across the Group worked well together,
ensuring that we offered excellent service to customers across our
franchises. We have taken two great cultures and combined them as one
under a common purpose, to help our customers, colleagues and
communities prosper. Our values are also combined and we have added more
emphasis on stewardship. This will ensure we act positively with
conscience and have environmental, social and governance factors front
of mind when making decisions.
Sustainability is important to us and the Group operates under the
highest governance and ethical standards. We are focused on reducing our
impact on the environment and are cognisant of the impact of social and
environmental change on our business and stakeholders. We regularly
review our policies, activities and outcomes and I am looking forward to
reporting further on ESG matters as we progress.
In July 2020, the Group received its Annual Resolution Letter from the
Bank of England setting out its preferred resolution strategy. As
anticipated, the Group is subject to a single point of entry bail-in
requirement which, from July 2023, is expected to be equal to 18% of
risk-weighted assets, rising to a final requirement of two times Pillar
1 and Pillar 2a from July 2025. The Group intends to fulfil its minimum
requirement for own funds and eligible liabilities through senior debt
issued by OSB GROUP PLC, which became the Group's holding company in
November 2020, with the first anticipated debt issue during the first
half of 2022, subject to market conditions.
We continued to make good progress towards IRB during the year, albeit
some elements of the project were inevitably delayed by the impact of
COVID-19, which created the need to deploy significant resources to
support additional stress testing and expected credit loss modelling and
also restricted the ability of external advisers to access our premises
and systems. Nevertheless, we are still aiming to submit our module 1
application by the end of the year. In the meantime the Group continues
to benefit from the enhanced risk models and assessment in its
decision-making.
Looking forward to 2021
After a year of unprecedented uncertainty, it seems there is finally
reason for some cautious optimism. Vaccinations are being rolled out at
an impressive pace and we hope the country will begin to return to some
sense of normality. There is positive news in the fact that a Brexit
deal was agreed, reducing some uncertainty, although there may be
further twists and turns as the UK builds its relationships with the EU
and other trading partners. However, we remain cognisant of the many
businesses, families and individuals currently receiving support from
government initiatives and the ongoing uncertainty about the true impact
of the pandemic on the economy, our customers and the Group's business
when the support ends.
We have demonstrated that OSB Group is a strong and resilient business
in the face of economic slowdown and uncertainty and that we do not seek
growth at the expense of quality. We have continued to generate very
attractive returns, despite taking significant impairment charges under
COVID-19 forward-looking assumptions. Whilst we continue to control
lending in our more cyclical businesses, applications remain strong in
our Buy-to-Let and Residential sub-segments, at higher pricing and lower
LTVs than pre-COVID and we have a strong pipeline. The Group is
well-placed to accelerate lending when the macroeconomic outlook becomes
clearer, with a very strong capital position, secured loan book and
strong risk management capabilities.
Based on our pipeline and current application levels and risk appetite,
we currently expect to deliver underlying net loan book growth for 2021
of c. 10%, although we remain cognisant of continued uncertainty in the
economic outlook. Based on current pricing and cost of funds, we expect
underlying NIM for 2021 to return to 2019 levels. We expect the
underlying cost to income ratio to be marginally higher in 2021, as the
ratio in 2020 benefitted from higher income from gains on structured
asset sales and lower discretionary spending in lockdowns.
Andy Golding
Chief Executive Officer
8 April 2021
(1. The Group's gross loans to customers include GBP175.7m in relation
to funding lines of which 66% is secured on property-related mortgages.)
Segment review
Coronavirus impact on the Group's lending segments
The Group's segment results reflect the impact of the pandemic on its
lending activities throughout 2020. The reduction in new business
volumes reflects multiple dynamics which developed over the course of
the year as the pandemic evolved.
The Group attracted strong levels of applications and completions for
nearly all of the first quarter of 2020 across all of its lending
brands. In late March, as the lockdown and social distancing measures
were imposed by the government, the Group took the decision to
temporarily suspend new business activity across its lending
sub-segments. This decision was largely due to the ban on home visits
making physical property valuations, a critical component of the Group's
bespoke underwriting process, all but impossible. As a result, the Group
concentrated on progressing the pipeline of applications with existing
physical valuations, whilst ensuring resources were deployed to
prioritise the needs of customers, including those who wished to request
a mortgage payment deferral.
Self-certified mortgage payment deferrals were announced by the
government in March 2020. Payment deferrals peaked in the second quarter
at 26,000 accounts, representing 28% of the Group's mortgage book by
value. Anecdotal evidence suggested that many people who requested a
payment deferral were doing so to prudently safeguard their cash flow,
rather than as a necessity, and the underlying performance of the
Group's loan book seemed to confirm it: arrears remained broadly stable
throughout the year and as at 31 December 2020 the percentage of loans
and advances in three months plus arrears remained broadly stable at
1.3% for OSB (2019: 1.3%) and 0.5% for CCFS (2019: 0.3%). Volumes of
mortgage payment deferrals reduced significantly and as at 31 December
2020 active payment deferrals represented only 1.3% of the Group's loan
book by value.
As the restrictions on physical valuations began to ease in the middle
of May, the Group took the opportunity to undertake a controlled
increase of business volumes in its core Buy-to-Let and residential
sub-segments, although with a limited suite of products, tighter lending
criteria and higher headline rates. Gradually, additional products were
introduced and criteria expanded, however certain products in more
cyclical business lines including commercial, residential development
finance, funding lines and second charge residential were greatly
reduced with tightly controlled and limited product sets introduced
later in the year.
The second national lockdown, imposed in early November, did not
significantly impact lending volumes since new processes, policies and
procedures agreed during the first lockdown were already in place and
market disruption was limited as physical valuations continued to be
carried out. The Group maintained its prudent risk assessment and a
controlled approach to its lending proposition for the remainder of the
year.
Segment review
Following the Combination, the Group segmented its lending business into
two segments: OSB and CCFS.
OneSavings Bank segment
The following tables show the OSB segment's statutory loans and advances
and contribution to profit:
BTL/SME Residential Total
GBPm GBPm GBPm
Year ended 31-Dec-2020
Gross loans and advances
to customers 9,164.6 1,966.8 11,131.4
Expected credit losses (67.0) (16.6) (83.6)
Net loans and advances to
customers 9,097.6 1,950.2 11,047.8
Risk-weighted assets 4,282.9 874.4 5,157.3
Profit or loss for the year
Net interest income 264.7 68.1 332.8
Gain on sale of loans 18.0 - 18.0
Other income 0.2 0.6 0.8
Total income 282.9 68.7 351.6
Impairment of financial
assets (47.0) (3.7) (50.7)
Contribution to profit 235.9 65.0 300.9
BTL/SME Residential Total
GBPm GBPm GBPm
Year ended 31-Dec-2019
Gross loans and advances
to customers 8,983.2 1,837.4 10,820.6
Expected credit losses (21.6) (14.0) (35.6)
Net loans and advances to
customers 8,961.6 1,823.4 10,785.0
Risk-weighted assets 4,244.0 846.0 5,090.0
Profit or loss for the year
Net interest income 253.5 62.7 316.2
Other expense (8.0) (4.9) (12.9)
Total income 245.5 57.8 303.3
Impairment of financial
assets (13.8) 1.9 (11.9)
Contribution to profit 231.7 59.7 291.4
OSB - Buy-to-Let/SME
Buy-to-Let/SME sub-segment: gross loans
Group Group
31-Dec-2020 31-Dec-2019
GBPm GBPm
------------------------- ------------ ------------
Buy-to-Let 8,044.6 7,727.0
Commercial 821.9 888.0
Residential development 133.1 146.1
Funding lines 165.0 222.1
Gross loans to customers 9,164.6 8,983.2
Expected credit losses (67.0) (21.6)
Net loans to customers 9,097.6 8,961.6
This sub-segment comprises Buy-to-Let mortgages secured on residential
property held for investment purposes by experienced and professional
landlords, commercial mortgages secured on commercial and
semi-commercial properties held for investment purposes or for
owner-occupation, bridge finance, residential development finance to
small and medium-sized developers, secured funding lines to other
lenders and asset finance.
The Buy-to-Let/SME net loan book was GBP9,097.6m, up 2% from GBP8,961.6m
in 2019, or 7% excluding structured assets sales in the year. Organic
originations in this sub-segment decreased 46% versus 2019 to
GBP1,542.5m (2019: GBP2,847.2m), reflecting reduced activity from late
March, before a controlled return to the market in the second half of
the year.
The gross loan book in the Buy-to-Let sub-segment increased 4% to
GBP8,044.6m (2019: GBP7,727.0m) or 10% excluding structured asset sales
in the year. The Group restricted its product range and tightened
criteria, including property types, customer credit history and reduced
maximum loan to values (LTVs) upon market re-entry, when physical
valuations resumed. At the same time, the Group took the opportunity to
increase interest rates marginally. A controlled increase in lending
activity commenced in the second half of the year and was mostly
dominated by professional, multi-property landlords who represented 84%
of completions by value for the Kent Reliance brand, whilst the
proportion of mortgage applications from landlords borrowing via a
limited company remained unchanged at 75% (2019: 81% and 75%,
respectively).
Refinancing levels were broadly stable and represented 58% of Kent
Reliance Buy-to-Let completions and the percentage of completions for
five-year fixed rate products was flat to the prior year at 52% (2019:
60% and 52%, respectively). OSB's retention programme, Choices,
continued to be popular with borrowers, with 75% (2019: 69%) of existing
borrowers choosing a new product with the Bank within three months of
their original product term ending.
The weighted average LTV of the Buy-to-Let book as at 31 December 2020
was 67% with an average loan size of GBP260,000 (2019: restated 68%(1)
and GBP260,000). The weighted average interest coverage ratio for
Buy-to-Let origination during 2020 was 201% (2019: restated 199%(2) ).
Through its InterBay brand, OSB lends to borrowers investing in
commercial and semi-commercial property, reported in the Commercial
total, and more complex Buy-to-Let properties, reported in the
Buy-to-Let total. The commercial sub-segment gross loan book reduced by
7% to GBP821.9m (2019: GBP888.0m) as the Group paused new lending
activity in late March and returned to the market with a much reduced
product suite in May, offering semi-commercial loans only to a maximum
LTV of 60%. As the commercial market is traditionally more sensitive to
economic downturns, the Group reduced its appetite for lending and new
loans were underwritten with tightened criteria. The InterBay
proposition began to be extended in November when the maximum LTV limit
for semi-commercial loans was lifted to 70% and standard commercial
lending was relaunched to a maximum LTV of 65%. The weighted average LTV
of the commercial book was 71% and the average loan size was GBP385,000
in 2020 (2019: 67% and GBP375,000, respectively).
InterBay Asset Finance, which predominantly targets UK SMEs and small
corporates financing business-critical assets, had a good start to the
year. As the pandemic progressed, there was a significant reduction in
new business volumes from April and the primary focus was on supporting
customers with payment deferral requests. The launch of the Group's
products under the Coronavirus Business Interruption Loan Scheme in
October coincided with a general recovery in business activity in the
asset finance market in the final quarter of the year. The gross
carrying amount under finance leases increased to GBP65.5m as at 31
December 2020 (31 December 2019: GBP47.7m).
The Heritable residential development business provides development
finance to small and medium-sized residential developers. Our preference
is to fund house builders who operate outside central London and provide
relatively affordable family housing, as opposed to complex city centre
schemes, where affordability and construction cost control can be more
challenging. New applications come primarily from a mixture of repeat
business from the team's extensive existing relationships and referrals.
The residential development funding gross loan book at the end of 2020
was GBP133.1m, with a further GBP145.6m committed (31 December 2019:
GBP146.1m and GBP115.1m, respectively). In late March 2020, government
guidance on closing development sites meant that construction projects
were deferred and advances reduced. When restrictions were relaxed in
May, our developer customers experienced rapidly increasing rates of
sale which continued to the year end. Consequently, loan repayments were
higher than in any previous year.
Since inception in 2014, Heritable has written GBP1,231m of loans, of
which GBP703m had been repaid by the end of 2020. The Group continues to
be cautious on approving new developments given current macroeconomic
uncertainty and remains focused on the cash flow requirements of our
developer customers. As at the end of December 2020, the business had
commitments to finance the development of 1,882 residential units, the
majority of which are houses located outside central London.
In 2020, the Group continued to provide secured funding lines to
non-bank lenders which operate in certain high-yielding, specialist
sub-segments, primarily secured against property-related mortgages.
Total credit approved limits as at 31 December 2020 were GBP520.0m, with
85% in respect of property-related funding lines and gross loans
outstanding were GBP165.0m, with 64% secured against property-related
mortgages (31 December 2019: GBP540.0m and GBP222.1m, respectively).
Given macroeconomic uncertainties, a cautious risk approach was adopted
and no new secured funding line facilities were added during the year,
as the Group chose to focus on servicing existing borrowers and applying
amended, restricted lending criteria. The Group recognised an impairment
provision of GBP20.0m in relation to potential fraudulent activity by a
third party on a funding line provided by the Group, secured against
lease receivables and the underlying hard assets. The Group had an
outstanding receivable on this funding line of GBP28.6m as at 31
December 2020.
Net interest income in the Buy-to-Let/SME sub-segment increased 4% to
GBP264.7m from GBP253.5m as a result of the loan book growth, partially
offset by a delay in passing on the base rate cuts to depositors in
full. The Buy-to-Let/SME sub-segment also benefitted from the gain on
structured asset sales of GBP18.0m which was offset by impairment losses
of GBP47.0m (2019: GBP13.8m). Impairment losses increased due primarily
to the impact of adopting COVID-19 forward-looking assumptions in the
Group's IFRS 9 models and an impairment provision of GBP20m in relation
to potential fraudulent activity by a third-party on a secured funding
line provided by the Group. Overall, the Buy-to-Let/SME sub-segment made
a contribution to profit of GBP235.9m in 2020, up 2% compared with
GBP231.7m in 2019.
The Group remains highly focused on the risk assessment of new lending,
as demonstrated by the average book LTV in the Buy-to-Let/SME
sub-segment(3) as at 31 December 2020 of 67% (31 December 2019: restated
68%(1) ) with only 2.9% of loans exceeding 90% LTV (31 December 2019:
1.8%). The average LTV for new Buy-to-Let/SME origination(3) remained
stable at 71% (2019: restated 71%(1) ).
1. The Group restated the comparative LTVs due to a change in
aggregation methodology.
2. Interest coverage ratio for 2019 was restated due to an improvement
in calculation methodology.
3. Buy-to-Let/SME sub-segment average weighted LTVs include KR and
Interbay Buy-to-Let, semi-commercial and commercial lending.
OSB - Residential mortgages
Residential sub-segment: gross loans
Group Group
31-Dec-2020 31-Dec-2019
GBPm GBPm
------------------------- ------------ ------------
First charge 1,660.7 1,466.6
Second charge 295.4 358.6
Funding lines 10.7 12.2
Gross loans to customers 1,966.8 1,837.4
Expected credit losses (16.6) (14.0)
Net loans to customers 1,950.2 1,823.4
This sub-segment comprises lending to owner occupiers, secured via
either first or second charge against their residential home. The Group
also provides funding lines to non-bank lenders which operate in
high-yielding, specialist sub-segments such as residential bridge
finance.
The residential net loan book was GBP1,950.2m as at 31 December 2020, up
7% compared with GBP1,823.4m in 2019 with organic originations of
GBP354.2m during the year (2019: GBP540.5m).
OSB's first charge residential gross loan book grew in the year to
GBP1,660.7m, 13% up from GBP1,466.6m in 2019 with the strong performance
largely due to the success of the Group's shared ownership proposition,
which has proven extremely popular since it was relaunched in June.
First charge lending to high net worth individuals or borrowers in more
complex income circumstances was restricted following the March lockdown,
in line with the Group's controlled approach to market re-entry in light
of the uncertain macroeconomic outlook.
Prestige Finance, OSB's second charge mortgage brand, no longer offers
new mortgages to borrowers and its loan book is in run-off and managed
by Precise Mortgages. Second charge mortgages are currently offered by
the Group under the Precise Mortgages brand as a sub-segment of CCFS.
The OSB second charge residential loan book had a gross value of
GBP295.4m at the end of 2020 (31 December 2019: GBP358.6m).
OSB continued to provide secured funding lines to non-bank lenders which
operate in certain high-yielding, specialist sub-segments, such as
residential first and second charge finance. The Bank continued to adopt
a cautious approach to these more cyclical businesses given
macroeconomic uncertainty. Total credit approved limits as at 31
December 2020 were GBP29.2m with total loans outstanding of GBP10.7m
(2019: GBP31.0m and GBP12.2m, respectively).
Residential mortgages made a contribution to profit of GBP65.0m in 2020,
up 9% compared with GBP59.7m in 2019 and in line with the growth in net
interest income to GBP68.1m from GBP62.7m in 2019. The growth in net
interest income was due primarily to growth in the first charge loan
book, partially offset by a delay in passing on the base rate cuts in
full to savers. Impairment losses increased due primarily to the impact
of adopting COVID-19 forward-looking assumptions in the Group's IFRS 9
models.
The average book LTV(1) remained low at 54% (2019: restated 57%(2) )
with only 1.6% of loans by value with LTVs exceeding 90% (2019: 3.3%).
The average LTV of new residential origination(1) during 2020 reduced to
61% (2019: restated 70%(2) ) primarily as a result of growth in shared
ownership originations which complete at much lower LTVs.
1. Residential sub-segment average weighted LTVs include first and
second charge lending.
2. The Group restated the comparative LTVs due to a change in
aggregation methodology.
Segment review -- Charter Court Financial Services
The tables below present underlying results for the CCFS segment for
2020 and 2019 and a reconciliation to the statutory results.
The 2020 table is presented on an underlying basis, which excludes
acquisition-related items. The 2019 table is presented on a pro forma
underlying basis, which assumes that the Combination with CCFS occurred
on 1 January 2019 and includes 12 months of results from CCFS. It also
excludes acquisition-related items
Buy-to- Total Total
Year ended Let Residential Bridging Second charge Other(1) underlying Acquisition- related statutory
31-Dec-2020 GBPm GBPm GBPm GBPm GBPm GBPm Items(2) GBPm GBPm
Gross loans and
advances to
customers 5,292.0 2,386.1 106.1 197.9 19.1 8,001.2 209.1 8,210.3
Expected credit
losses (18.1) (7.5) (1.9) (0.7) - (28.2) 0.8 (27.4)
Loans and
advances to
customers 5,273.9 2,378.6 104.2 197.2 19.1 7,973.0 209.9 8,182.9
Risk-weighted
assets 2,163.8 1,001.5 59.6 82.9 7.0 3,314.8 93.6 3,408.4
Profit or loss account
Net interest
income 114.8 67.8 11.8 7.4 (0.6) 201.2 (61.8) 139.4
Gain on sale of
loans - - - - 15.1 15.1 (13.1) 2.0
Other income 0.3 0.3 - - 1.7 2.3 13.3 15.6
Total income 115.1 68.1 11.8 7.4 16.2 218.6 (61.6) 157.0
Impairment of
financial
assets (14.9) (4.0) (1.3) (0.3) - (20.5) 0.2 (20.3)
Contribution to
profit 100.2 64.1 10.5 7.1 16.2 198.1 (61.4) 136.7
1. Other relates to acquired loan portfolios and related net interest
income as well as gains on structured asset sales and fee income from
third party mortgage servicing.
2. For more details on acquisition-related adjustments, see
Reconciliation of statutory to underlying and pro forma underlying
results in the Financial review.
Buy-to- Total pro forma Total
Year ended Let Residential Bridging Second charge Other(1) underlying Pre-acquisition profits Acquisition- related statutory
31-Dec-2019 GBPm GBPm GBPm GBPm GBPm GBPm GBPm Items(2) GBPm GBPm
Gross loans and
advances to
customers 4,748.5 2,170.8 214.4 218.6 22.1 7,374.4 - 294.7 7,669.1
Expected credit
losses (3.5) (3.6) (0.5) (0.4) - (8.0) - 0.7 (7.3)
Loans and
advances to
customers 4,745.0 2,167.2 213.9 218.2 22.1 7,366.4 - 295.4 7,661.8
Risk-weighted
assets 2,002.4 934.0 127.9 95.4 8.4 3,168.1 - 124.9 3,293.0
Profit or loss account
Net interest
income 114.3 63.6 15.5 7.1 1.7 202.2 (152.1) (21.6) 28.5
Gain on sale of
loans - - - - 58.7 58.7 (58.7) - -
Other income 0.1 0.2 0.1 - (2.1) (1.7) 10.0 3.3 11.6
Total income 114.4 63.8 15.6 7.1 58.3 259.2 (200.8) (18.3) 40.1
Impairment of
financial
assets (2.1) (1.7) (0.5) (0.1) - (4.4) 4.3 (3.6) (3.7)
Contribution to
profit 112.3 62.1 15.1 7.0 58.3 254.8 (196.5) (21.9) 36.4
1. Other relates to acquired loan portfolios and related net interest
income as well as gains on structured asset sales and fee income from
third party mortgage servicing.
2. For more details on acquisition-related adjustments, see
Reconciliation of statutory to underlying and pro forma underlying
results in the Financial review.
Charter Court Financial Services segment
CCFS gross loans
Group Group
31-Dec-2020 31-Dec-2019
GBPm GBPm
------------------------- ------------ ------------
Buy-to-Let 5,292.0 4,748.5
Residential 2,386.1 2,170.8
Bridging 106.1 214.4
Second charge 197.9 218.6
Other(1) 19.1 22.1
Gross loans to customers 8,001.2 7,374.4
Expected credit losses (28.2) (8.0)
Net loans to customers 7,973.0 7,366.4
1. Other relates to acquired loan portfolios.
Charter Court Financial Services targets specialist mortgage market
segments with a focus on specialist Buy-to-Let, residential, bridging
and second charge lending.
The CCFS underlying net loan book grew 8% to GBP7,973.0m at the end of
2020 (2019: GBP7,366.4m) supported by organic originations of
GBP1,870.2m at attractive margins (2019: GBP3,108.2m). Excluding
structured asset sales in the year, the net loan book grew 13%.
Buy-to-Let sub-segment
During 2020, CCFS' organic originations in the Buy-to-Let sub-segment
were GBP1,122.6m (2019: GBP1,895.2m), a decrease of 41% directly
attributable to the impact of the coronavirus pandemic. As at 31
December 2020, the underlying gross loan book in this sub-segment
increased 11% to GBP5,292.0m (2019: GBP4,748.5m), or 19% excluding
structured asset sales.
CCFS' Buy-to-Let products saw increasing application levels in the
second half of the year, despite the introduction of tighter
underwriting criteria and increased headline interest rates after the
March lockdown. Demand was especially strong from those borrowing via a
limited company structure, which represented 56% of Buy-to-Let
completions for the Precise brand in 2020, up from 50% in 2019. The
remortgage levels remained largely unchanged at 57% of completions for
Precise Mortgages Buy-to-Let (2019: 60%). Loans for specialist property
types remained relatively resilient, despite the Group choosing to limit
its risk appetite, achieved in part through earlier policy restrictions
on the maximum number of bedrooms and units for houses in multiple
occupation and multi-unit properties respectively, while lending on
holiday lets was suspended. These property types made up 30% of
Buy-to-Let completions for Precise Mortgages in 2020 and in 2019.
Precise mortgages continued to rank highly, according to research by BVA
BDRC, as the specialist lender mortgage intermediaries are most likely
to recommend to portfolio landlords.
Net interest income in this sub-segment remained broadly flat compared
with the prior year at GBP114.8m (2019: GBP114.3m) as it was impacted by
index repricing and a delay in passing on the base rate cuts to savers
in full. On an underlying basis, Buy-to-Let made a contribution to
profit of GBP100.2m in 2020, down 11% compared with GBP112.3m in 2019 as
GBP14.9m of impairment losses were recognised in the year (2019:
GBP2.1m) reflecting primarily the impact of adopting COVID-19
forward-looking assumptions in the Group's IFRS 9 models. On a statutory
basis, the Buy-to-Let sub-segment made a contribution to profit of
GBP71.5m.
Average loan to value for new lending in this segment was 74% with an
average loan size of GBP170,000 (2019: 73% and GBP183,000). The book
loan to value was 69% as at 31 December 2020 (2019: 71%). The weighted
average interest coverage ratio for Buy-to-Let origination during 2020
was 193% (2019: restated 187%(1) ).
Residential sub-segment
The underlying gross loan book in CCFS' residential sub-segment was 10%
up in the year to GBP2,386.1m (2019: GBP2,170.8).
Even though organic originations reduced 28% in the year, they remained
strong, reaching GBP573.9m in 2020 (2019: GBP797.2m). Throughout the
year, the Group saw robust demand for Precise Mortgages' residential
products despite a shift in focus towards prime borrowers. Lending under
the government's Help to Buy scheme performed exceptionally well in the
year as applications increased compared with 2019. The scheme helps
first time buyers to take their first step onto the property ladder as
the number of mortgage products available for borrowers with small
deposits reduced significantly due to the effects of the coronavirus
pandemic.
The CCFS residential sub-segment made a contribution to profit of
GBP64.1m on an underlying basis, up 3% compared with GBP62.1m in 2019.
The net interest income increased by 7% to GBP67.8m from GBP63.6m in
2019 due to the growth in the Residential loan book partially offset by
a delay in passing on the base rate cuts to savers in full. Impairment
losses increased to GBP4.0m from GBP1.7m in 2019 due to the impact of
adopting COVID-19 forward-looking assumptions in the Group's IFRS 9
models. On a statutory basis, the residential sub-segment made a
contribution to profit of GBP45.4m.
The average loan size for the residential sub-segment was GBP160,000
(2019: restated GBP150,000) with average LTV for new lending of 67%
(2019: restated 68%(2) ) and book LTV of 62% (2019: restated 65%(2) ) as
at 31 December 2020.
Bridging sub-segment
Short-term bridging originations decreased to GBP141.8m in 2020 and
gross underlying loans in this sub-segment were GBP106.1m at the end of
2020. In late March, the Group paused lending in this sub-segment and
returned with a much reduced suite of products and highly restricted
underwriting criteria in the second half of the year, with a focus on
high-quality lending in the regulated sector of the market.
On an underlying basis, the contribution to profit from the bridging
sub-segment reduced to GBP10.5m in 2020 (2019: GBP15.1m) due to lower
net interest income of GBP11.8m as the loan book reduced (2019:
GBP15.5m) and higher impairment losses of GBP1.3m (2019: GBP0.5m). On a
statutory basis, the bridging sub-segment made a contribution to profit
of GBP9.7m.
Second charge sub-segment
The second charge underlying gross loan book reduced to GBP197.9m at the
end of 2020 (2019: GBP218.6m) with a reduction in originations to
GBP31.9m from GBP82.2 in 2019. Second charge products were withdrawn
from the market in late March and once the Group returned to lending,
risk criteria were tightened with a focus on prime borrowers, offering a
maximum LTV of 50% and a maximum loan size of GBP200,000, demonstrating
control over new business written whilst the outlook remains uncertain.
The second charge sub-segment made a contribution to profit of GBP7.1m
on an underlying basis, broadly flat compared with GBP7.0m in 2019 and
GBP6.6m on a statutory basis. Net interest income in this sub-segment
remained broadly flat at GBP7.4m versus GBP7.1m in 2019.
1. Interest coverage ratio for 2019 was restated due to alignment of the
calculation across both Banks.
2. The Group restated the comparative LTVs due to a change in
calculation methodology.
Wholesale funding overview
Securitisation is central to the Group's liability management strategy,
as well as a key funding source, with c. GBP8bn of issuance since
December 2013 across the CCFS and OSB trading entities. In addition to
providing cost efficient funding, the Group utilises securitisations to
accelerate organic capital generation through the sale of residual
positions, as well as to provide efficient access to commercial and
central bank repo facilities.
The Group's strategy is to be fleet-of-foot and dynamic rather than
deterministic with its securitisation issuance plans, enabling it to
maximise the opportunity of a strong market with repeat issuances and
utilise other options when the market is poor.
2020 exemplified the strength of this approach. The Group was able to
complete the majority of its intended capital markets transactions early
in the year whilst markets were strong. It then utilised central bank
repo facilities for its wholesale funding needs through the rest of the
period at a time during which the capital markets were exceptionally
volatile.
Included within this early activity were a number of strategically
important transactions. In particular, the Group completed its first
Simple, Transparent, and Standardised eligible prime residential
mortgage-backed securities (RMBS) transaction, CMF 2020-1, which priced
at SONIA +60 basis points (S+60bps) on the senior notes and S+66bps
across the GBP330m of mortgage collateralised bonds placed into the
market. The CMF series continues to provide the Group with a source of
attractively priced funding: the near GBP1bn of mortgage collateralised
bonds placed through the series to date have been sold at a combined day
one spread over SONIA/LIBOR of 62bps.
Meanwhile, the first two months of the year also saw the Group structure
and sell its economic interest in the Precise Mortgage Funding (PMF)
2020-1B transaction, as well as the A2 notes and residual certificates
in the Canterbury No. 1 transaction.
The sale of the residual interest in these two deals was completed
through an auction process and generated a statutory gain on sale of
GBP19.9m (GBP33.0m on an underlying basis). As well as generating a
significant gain on sale, the trade released GBP287m of risk-weighted
assets, providing a substantial increase in Group and bank entity
capital headroom ahead of a period of protracted market uncertainty.
In addition to the placement of around GBP1.1bn RMBS bonds into the
market during the period, the Group also completed two significant
retained RMBS transactions, Canterbury No.2, which closed in March and
Canterbury No.3 which closed in September. These transactions, totalling
more than GBP2bn in issuance, provide the Group with a substantial
portfolio of AAA rated senior bonds which can be sold into the market at
short notice for liquidity purposes, as well as being eligible for
commercial and central bank funding repo facilities. The trade forms
part of a broader strategy to increase the Group's wholesale funding
options and, in particular, to increase its encumbrance efficiency;
meaning that it can access more wholesale funding for each pound of
assets encumbered and thus utilise wholesale funding to a greater degree
than would otherwise be possible.
This is particularly pertinent given the Group's access to the Term
Funding Scheme for SMEs, which provides four-year funding at an
anticipated cost of Bank Base Rate flat. The Group's combined initial
allowance through the scheme is GBP2.0bn, with a further GBP5.1bn of
additional allowance due to subsequent net loan book growth through to
31 December 2020. The Group intends to utilise the scheme to repay all
outstanding balances under the original TFS scheme. In addition, there
should be an opportunity to utilise the scheme further to help fund net
loan book growth through to 31 October 2021, when it closes to new
drawdowns, subject to collateral availability and encumbrance
constraints. By improving the encumbrance efficiency of the Group's
collateral used for drawing down against the TFSME, it is likely that
the Group will be able to take greater advantage of this allowance, in
conjunction with other Bank of England repo facilities.
Retained RMBS deals also provide the Group with the flexibility to
subsequently place bonds into the market at short notice, should an
attractive economic opportunity present itself.
Financial review
Summary statutory results for 2020 and 2019
Group Group
31 Dec 2020 31 Dec 2019
Summary Profit or Loss GBPm GBPm
Net interest income 472.2 344.7
Net fair value gain/(loss) on
financial instruments 7.4 (3.3)
Gain/(loss) on sale of financial
instruments 20.0 (0.1)
Other operating income 9.0 2.1
Administrative expenses (157.0) (108.7)
Provisions (0.1) -
Impairment of financial assets (71.0) (15.6)
Impairment of intangible assets (7.0) -
Gain on Combination with CCFS - 10.8
Integration costs (9.8) (5.2)
Exceptional items (3.3) (15.6)
Profit before taxation 260.4 209.1
Profit after taxation 196.3 158.8
Key ratios(1)
Net interest margin 216bps 243bps
Cost to income ratio 31% 32%
Management expense ratio 71bps 76bps
Loan loss ratio 38bps 13bps
Basic EPS, pence per share 42.8 52.6
Return on equity 13% 18%
Dividend per share, pence per share 14.5 4.9
Extracts from the Statement of Financial Position
GBPm GBPm
Loans and advances to customers 19,230.7 18,446.8
Retail deposits 16,603.1 16,255.0
Total assets 22,654.5 21,417.1
Key ratios
Common equity tier 1 ratio 18.3% 16.0%
Total capital ratio 18.3% 17.3%
Leverage ratio 6.9% 6.5%
1. For more detail on the calculation of key ratios, see the Appendix
Insertion of a new ultimate holding company
A new ultimate holding company, OSB GROUP PLC (OSBG), was inserted in
November 2020 as part of the Group's integration strategy following the
Combination with Charter Court Financial Services Group (CCFS). OSBG
became the new ultimate holding company and listed entity of the Group.
The new structure will allow the Group to fulfil its MREL requirements
more efficiently through senior debt issuance via OSBG. The Bank of
England has given the Group a transitional period of three years to 13
July 2023 to meet its new interim MREL requirement of 18% of
risk-weighted assets and five years to 13 July 2025 to meet its new
end-state MREL requirement of two times Pillar 1 and Pillar 2A.
Upon insertion of OSBG, each OSB share was cancelled and replaced with
one OSBG share with no change to voting rights or ranking.
The insertion of OSBG is treated as a business combination under common
control. OSBG has adopted the predecessor value method, with an
investment in subsidiary in OSBG being the book value of the balance
sheet of OSB at the date of insertion and the financial statements
prepared predominantly as if OSBG had been inserted as the new ultimate
parent company on 1 January 2019.
Statutory profit before and after tax
The Group reported 25% growth in statutory profit before taxation to
GBP260.4m (2019: GBP209.1m) after exceptional items, integration costs
and other acquisition-related items of GBP85.8m(1) (2019: GBP33.2m(2) )
primarily due to the inclusion of a full year of profits from CCFS
following the Combination in October 2019, which more than offset the
impact of higher impairment charges as the Group adopted more adverse
COVID-19 related forward-looking assumptions in its IFRS 9 models and
recognised an impairment provision in relation to potential fraudulent
activity by a third party on a secured funding line provided by the
Group.
Statutory profit after taxation in 2020 increased by 24% to GBP196.3m
(2019: GBP158.8m) including the after-tax exceptional items, integration
costs and other acquisition-related items of GBP68.6m(1) (2019:
GBP27.4m(2) ), broadly in line with the increase in profit before tax.
The Group's effective tax rate increased to 23.1%(3) in 2020 (2019:
22.8%), primarily due to the impact of the government's cancellation of
planned corporation tax rate reductions on 19 March 2020 on the deferred
tax liability in relation to the Combination and a larger portion of the
profit being subject to the Bank Corporation Tax Surcharge from the
inclusion of a full year of profits from CCFS.
Statutory return on equity for 2020 fell to 13% (2019: 18%), primarily
due to a full year of amortisation of the net fair value uplift to CCFS'
net assets on Combination, higher impairment charges and a strengthened
equity position, which benefitted from the cancellation of the 2019
final dividend and strong capital generation from profitability.
Statutory basic earnings per share fell by 19% to 42.8 pence per share
(2019: 52.6 pence per share) as the increase in profit after taxation
was more than offset by the impact of the additional shares issued for
the all-share Combination with CCFS.
Net interest margin (NIM)
The Group reported an increase in statutory net interest income of 37%
to GBP472.2m in 2020 (2019: GBP344.7m), reflecting the inclusion of a
full year of net interest income from CCFS, which more than offset the
impact of higher amortisation of the net fair value uplift to CCFS' net
assets on Combination.
Statutory NIM for 2020 reduced to 216bps (2019: 243bps), primarily due
to the dilutive impact of including CCFS' results post Combination as
well as the dilutive impact of a delay in passing on the base rate cuts
in full to retail savers.
The CCFS business has a lower NIM than the OSB business and statutory
NIM in 2020 was also adversely impacted by a full year of amortisation
of the fair value uplift on acquisition of CCFS' net assets.
Net fair value gain/(loss) on financial instruments
The statutory net fair value gain on financial instruments of GBP7.4m in
2020 (2019: GBP3.3m loss) included a GBP13.0m gain (2019: GBPnil) from
the amortisation of hedge accounting inception adjustments, a GBP17.0m
gain from the unwind of acquisition-related inception adjustments (2019:
GBP3.3m) and a GBP2.2m gain (2019: GBP5.3m loss) from other items
including the amortisation of the fair value relating to de-designated
hedge relationships due to ineffectiveness, offset by a net loss of
GBP6.8m (2019: GBP4.8m loss) in respect of the ineffective portion of
hedges and an GBP18.0m net loss on unmatched swaps (2019: GBP3.5m net
gain).
The net loss on unmatched swaps primarily related to fair value
movements on mortgage pipeline swaps, prior to them being matched
against completed mortgages and was caused by a fall in outlook on the
LIBOR and SONIA yield curves. The Group economically hedges its
committed pipeline of mortgages and this unrealised loss unwinds over
the life of the swaps through hedge accounting inception adjustments.
The amortisation of fair value relating to de-designated hedge
relationships occurs when hedge relationships are cancelled due to
ineffectiveness.
Gain on sale of financial instruments
The gain on sale of financial instruments of GBP20.0m in 2020 on a
statutory basis, comprised a gain of GBP19.9m on disposal of the
remaining notes under the Canterbury No.1 and PMF 2020-1B
securitisations in January and a gain of GBP0.1m on the sale of
GBP150.0m of AAA notes from the Canterbury No. 3 securitisation in
September.
In 2019 the Group identified that an additional GBP0.1m of customer
receipts was due to the purchaser of the personal loan portfolio,
recognising an additional loss on sale of GBP0.1m.
Other operating income
Statutory other operating income of GBP9.0m (2019: GBP2.1m) largely
related to fees and commissions receivable, and the increase was due to
the inclusion of a full year of CCFS fees and commissions and servicing
fees, including those relating to securitised loans which have been
deconsolidated from the Group's balance sheet.
Administrative expenses
Statutory administrative expenses increased 44% to GBP157.0m in 2020
(2019: GBP108.7m) primarily due to the inclusion of CCFS' administrative
expenses for the full year, which more than offset the impact of the
delivery of synergies and lower discretionary spending during lockdowns.
The Group's statutory cost to income ratio of 31% (2019: 32%) improved
with the delivery of synergies and the benefit of lower discretionary
spend during lockdowns, which more than offset the impact of lower
income due to a full year of acquisition-related adjustments (including
the amortisation of the fair value uplift on CCFS' net assets),
partially offset by gains on structured asset sales in the year.
The statutory management expense ratio improved to 71bps (2019: 76bps)
reflecting the delivery of synergies and lower discretionary spend
during lockdown.
Impairment of financial assets
Statutory impairment losses increased to GBP71.0m in 2020 (2019:
GBP15.6m) representing 38bps of average gross loans and advances (2019:
13bps).
Impairment losses in 2020 increased primarily due to the impact of
adopting more adverse forward-looking macroeconomic scenarios as the
coronavirus pandemic changed the outlook for the UK economy, changes to
the Group's staging criteria in line with PRA guidance, which moved
certain higher risk accounts with payment deferrals to stage 2, and
COVID-related enhancements to the Group's models. For more detail see
the Risk review. The Group also recognised an impairment provision of
GBP20.0m in relation to potential fraudulent activity by a third party
on a funding line provided by the Group, secured against lease
receivables and the underlying hard assets.
Impairment of intangible assets
The impairment of intangible assets of GBP7.0m related to the intangible
assets recognised on the acquisition of CCFS and the impact of lower
actual and expected lending volumes in CCFS due to COVID-19 on the
recoverable amount of the broker relationship intangible.
Integration
Progress towards achieving the synergies from the Combination has been
strong. By the first anniversary of the Combination, we had delivered
run rate savings of over GBP15m, well ahead of our GBP6.6m target and
representing more than 65% of our end of year three target run rate.
This was achieved primarily by streamlining the Board and senior
management team earlier than planned and through efficiencies from
combining various central and support functions. The synergies realised
during 2020 from these efficiencies were equivalent to a c.2% points
improvement in the Group's underlying cost to income ratio. We continue
to find additional synergies and are ahead of schedule towards realising
the planned run rate savings for the end of year two, with a projected
end of year three run rate marginally in excess of the GBP22m target.
The Board is taking the opportunity to review whether some planned
consolidation of locations and suppliers should take place, based on a
heightened focus on operational resilience. In light of additional
opportunities found, any decision is not expected to have a material
impact on the overall quantum of run-rate synergies targeted by the end
of year three. No material dis-synergies have been identified to date.
In the first year following the Combination, costs to achieve the
synergies were GBP10m against an expectation of GBP13m. However, some
costs were delayed into the second year meaning that we anticipate being
closer to plan at the end of year two. Final costs are expected to be
marginally below the target of GBP39m by the end of year three.
Integration costs
The Group recorded GBP9.8m (2019: GBP5.2m) of integration costs largely
related to staff costs for key personnel retained to assist in the
integration for a fixed period and fees incurred for external advice on
the Group's future operating structure.
Exceptional items
Statutory exceptional items of GBP3.3m in 2020 related to the insertion
of OSB GROUP PLC as the new holding company and listed entity of the
Group.
The exceptional items of GBP15.6m in 2019 comprised transaction costs
incurred by OSB in relation to the Combination with CCFS.
Dividend
The Board has recommended a final dividend for 2020 of 14.5 pence per
share, representing 25% of full year underlying profit attributable to
ordinary shareholders, as no interim dividend which is normally one
third of the prior year total dividend, was paid in the year. See the
Appendix for the calculation.
The recommended final dividend will be paid on 2 June 2021, subject to
approval at the AGM on 27 May 2021, with an ex-dividend date of 15 April
2021 and a record date of 16 April 2021.
Balance sheet growth
Net loans and advances to customers increased by 4% in 2020 to
GBP19,230.7m (31 December 2019: GBP18,446.8m) on a statutory basis,
reflecting subdued originations due to the pandemic as well as
structured asset sales in the year. Excluding the impact of structured
asset sales, the statutory net loan book increased by 9%.
On a statutory basis, retail deposits increased by 2% to GBP16,603.1m
from GBP16,255.0m, which the Group supplemented by participating in the
Bank of England's funding schemes.
As at 31 December 2020, the Group's drawings under the Term Funding
Scheme (TFS) remained at GBP2.6bn (2019: GBP2.6bn) with a repayment of
GBP60.0m during the year. In the first half of 2020, the Group was
accepted to participate in the Term Funding Scheme for SMEs (TFSME) with
drawings of GBP1.0bn as at the end of 2020, which were used to replace
Indexed Long-Term Repo (ILTR) funding and support net loan book growth.
All of the Group's borrowings under the ILTR scheme were repaid during
the year (2019: GBP290m).
The TFS drawdowns are offered in the form of collateralised cash loans.
The scheme closed to new drawings at the end of February 2018 and the
Group has four years from the date of drawing to repay the existing
loans. TFSME drawdowns are also offered in the form of collateralised
cash loans. The scheme commenced in March 2020 and offers four-year
funding of at least 10% of participants' stock of real economy lending
at interest rates at, or very close to, Bank base rate. Additional
funding is available for banks that increase lending, especially to
small and medium-sized enterprises. The TFSME is available for new
funding until 31 October 2021.
The Group had up to GBP350m (2019: GBP600m) of contingent wholesale
funding capacity available to it through the CCFS warehouse facilities,
none of which was utilised at the year end.
The Group also utilises sophisticated securitisation platforms to
complement its retail funding requirements and to optimise its
collateral for commercial and central bank funding. For further details
of securitisation activity in 2020, see the Wholesale funding overview.
Total assets grew by 6% to GBP22,654.5m (31 December 2019: GBP21,417.1m)
primarily reflecting the growth in loans and advances and liquid assets.
Liquidity
Both OSB and CCFS operate under the Prudential Regulation Authority's
liquidity regime and are managed separately for liquidity risk. Both
Banks hold their own significant liquidity buffer of liquidity coverage
ratio (LCR) eligible high-quality liquid assets (HQLA).
As at 31 December 2020, OSB had GBP1,366.7m (2019: GBP1,231.8m) and CCFS
had GBP1,069.1m (2019: GBP1,077.3m) of HQLA LCR eligible assets. Both
Banks also held a significant portfolio of unencumbered prepositioned
Bank of England level C eligible collateral in the Bank of England
Single Collateral Pool.
Both Banks operate within a target liquidity runway in excess of the
minimum LCR regulatory requirement, which is based on internal stress
testing. Both Banks have a range of contingent liquidity and funding
options available for possible stress periods.
As at 31 December 2020, OSB had a liquidity coverage ratio of 254%
(2019: 199%) and CCFS 146% (2019: 145%), and the Group LCR was 198%, all
significantly in excess of the 2020 regulatory minimum of 100%.
The Group maintained prudent levels of liquidity as at 31 December 2020
in light of the continued uncertainty due to COVID-19.
Capital
The Group's capital position remained exceptionally strong with
fully-loaded CET1 capital and total capital ratios of 18.3% as at 31
December 2020 (31 December 2019: 16.0% and 17.3% respectively). The
total capital ratio was the same as the CET1 ratio following the
insertion of OSBG as the ultimate holding company, as non-controlling
interest securities (previously AT1 securities), subordinated debt and
PSBs issued by OSB no longer qualify as regulatory capital at the Group
level.
The capital ratios as at 31 December 2020 benefitted from the cancelled
final dividend for 2019, the application of the Capital Requirements
Regulation 'Quick Fix' package and strong capital generation from
profitability.
The Group had a leverage ratio of 6.9% as at 31 December 2020 (31
December 2019: 6.5%).
The combined Group had a Pillar 2a requirement of 1.18% of risk-weighted
assets (excluding a static integration add-on of GBP19.5m) as at 31
December 2020 (31 December 2019: 1.67% excluding the static integration
add-on). The reduction in the Pillar 2a requirement was notified by the
PRA in anticipation of the Counter Cyclical Buffer (CCyB) being
increased to 2%. Until such time as the CCyB is increased, it is offset
by a PRA buffer such as to have a neutral effect on the Group's minimum
CET1 requirement.
Summary cash flow statement
Group Group
31-Dec-2020 31-Dec-2019
GBPm GBPm
------------------------------------------- ------------- -------------
Profit before tax 260.4 209.1
Net cash generated/(used in):
Operating activities (1,326.3) (536.1)
Investing activities 755.8 826.6
Financing activities 838.3 488.1
Net increase in cash and cash equivalents 267.8 778.6
Cash and cash equivalents at the beginning
of the period 2,102.8 1,324.2
Cash and cash equivalents at the end 2,370.6 2,102.8
of the period
Cash flow statement
The Group's cash and cash equivalents increased by GBP267.8m during the
year to GBP2,370.6m as at 31 December 2020.
Loans and advances to customers increased by GBP1,705.0m during the year,
partially funded by GBP348.1m of deposits from retail customers offset
by an increase in loans and advances to credit institutions (primarily
the Bank of England call account) of GBP154.0m. Additional funding was
provided by cash generated from financing activities of GBP838.3m and
included GBP935.9m of net drawings under the Bank of England's TFS and
TFSME schemes and GBP381.6m of net proceeds from securitisation of
mortgages, partially offset by the repayment of warehouse funding, ILTR
and commercial repos during the year. Cash generated from investing
activities was GBP755.8m, mainly from the sale of RMBS securities and
derecognition of securitisations.
In 2019, the increase in the Group's loans and advances to customers of
GBP2,230.8m was partially funded by GBP1,637.8m of deposits from retail
customers. Additional funding was provided by cash generated from
financing activities of GBP488.1m and included GBP170.0m of net drawings
under the Indexed Long-Term Repo scheme, GBP220.4m of proceeds from
securitisation of mortgages, warehouse funding of GBP93.5m and GBP41.3m
from commercial repos offset by a dividend payment of GBP37.3m. Cash
generated from investing activities was GBP826.6m, largely as a result
of GBP870.4m of cash and cash equivalents acquired on the Combination
with CCFS.
1. As shown in the reconciliation of statutory to underlying results in
Financial review.
2. In 2019, this comprised GBP48.9m (GBP42.9m after tax) of
acquisition-related items as shown in the reconciliation of statutory to
pro forma underlying results in Financial review, less CCFS'
pre-acquisition transaction costs of GBP15.7m (GBP15.5m after tax).
3. Effective tax rate excludes a GBP4.4m charge for the impact of the
deferred tax rate change and a benefit of GBP0.4m in respect of earlier
years.
Summary of underlying results for 2020 and results on a pro forma
underlying basis for 2019
Group Group
31 Dec 2020 31 Dec 2019
Summary Profit or Loss GBPm GBPm
Net interest income 534.0 518.4
Net fair value loss on financial instruments (5.9)
(20.3)
Gain on sale of financial instruments 33.1 58.6
Other operating income 9.0 5.8
Administrative expenses (152.7) (165.1)
Provisions (0.1) -
Impairment of financial assets (71.2) (16.3)
Profit before taxation 346.2 381.1
Profit after taxation 264.9 294.2
Key ratios(1)
Net interest margin 247bps 266bps
Cost to income ratio 27% 29%
Management expense ratio 70bps 84bps
Loan loss ratio 38bps 10bps
Basic EPS, pence per share 58.1 64.9
Return on equity 19% 25%
Extracts from the Statement of Financial Position
GBPm GBPm
Loans and advances 19,020.8 18,151.4
Retail deposits 16,600.0 16,248.6
Total assets 22,472.2 21,166.5
1. For more detail on the calculation of key ratios, see the Appendix
Alternative performance measures
The Group presents alternative performance measures (APMs) as management
believe they provide a more consistent basis for comparing the Group's
performance between financial periods. Underlying results for 2020
exclude exceptional items, integration costs and other
acquisition-related items. Pro forma underlying results for 2019 assume
that the Combination occurred on 1 January 2019 and include 12 months of
results from CCFS. They also exclude exceptional items, integration
costs and other acquisition-related items.
APMs reflect an important aspect of the way in which operating targets
are defined and performance is monitored by the Board. However, any APMs
in this document are not a substitute for IFRS measures and readers
should consider the IFRS measures as well.
For more information on the APMs and the reconciliation between APMs and
the statutory equivalents, see the Appendix.
Underlying profit before and after tax
Underlying profit before taxation was GBP346.2m for the year, down 9%
from pro forma underlying profit before taxation of GBP381.1m in 2019,
primarily due to higher impairment losses as the Group adopted more
adverse COVID-19 related forward-looking assumptions in its IFRS 9
models and recognised an impairment provision of GBP20.0m in relation to
potential fraudulent activity by a third party on a funding line
provided by the Group, secured against lease receivables and the
underlying hard assets, which more than offset the benefit from balance
sheet growth.
Underlying profit after taxation was GBP264.9m in 2020, down 10% from
pro forma underlying profit after taxation of GBP294.2m in 2019, in line
with the decrease in profit before tax and a higher effective tax rate.
On an underlying basis, the Group's effective tax rate was 23.5% in 2020
(2019: 22.8%) as a larger portion of the Group's profit was subject to
the Bank Corporation Tax Surcharge.
Underlying return on equity for 2020 remained strong at 19%, although it
was lower than 25% in 2019, due primarily to the higher impairment
charges and a strengthened equity position, which benefitted from the
cancellation of the 2019 final dividend and strong capital generation
from profitability.
Underlying basic earnings per share decreased to 58.1 pence per share
(2019: 64.9 pence per share) due to the reduction in profit after
taxation.
Net interest margin
On an underlying basis, net interest income increased 3% in 2020 to
GBP534.0m from GBP518.4m in 2019 and underlying net interest margin
(NIM) was 247bps (2019: 266bps).
The reduction in underlying NIM to 247bps from 266bps in 2019, primarily
reflects the dilutive impact of a delay in passing on the base rate cuts
in full to retail savers. The full impact of the base rate cuts was
passed on to savers by the end of the third quarter of 2020.
Net fair value loss on financial instruments
The underlying net fair value loss on financial instruments decreased to
GBP5.9m from a pro forma underlying loss of GBP20.3m in 2019.
The loss for 2020 included a loss of GBP6.8m (2019: GBP4.8m loss) from
hedge ineffectiveness, a loss on unmatched swaps of GBP18.0m (2019:
GBP13.3m loss) and a GBP16.7m gain (2019: GBP1.7m) relating to the
amortisation of hedging adjustments arising when hedge accounting
commences on derivative instruments previously taken out against the
mortgage pipeline and other hedge accounting inception adjustments.
Other hedging and fair value movements amounted to a gain of GBP2.2m
(2019: GBP3.9m loss).
The net loss on unmatched swaps primarily relates to fair value
movements on mortgage pipeline swaps, prior to them being matched
against completed mortgages and due to a fall in outlook on the LIBOR
and SONIA yield curves. The Group economically hedges its committed
pipeline of mortgages and this unrealised loss unwinds over the life of
the swaps through hedge accounting inception adjustments.
Gain on sale of financial instruments
The underlying gain on structured asset sales of GBP33.1m in the year
(2019: GBP58.6m) related to a gain of GBP33.0m on disposal of the
remaining notes under the Canterbury No.1 and PMF 2020-1B
securitisations in January 2020. In September, the Group sold GBP150.0m
of notes from the Canterbury No. 3 securitisation generating a gain of
GBP0.1m.
In 2019, the gain on sale of loans consisted of a gain of GBP58.7m from
sales of residual interests in three CCFS securitisations to third party
investors prior to the Combination and a GBP0.1m loss from customer
receipts due to the purchaser of the personal loan portfolio.
Other operating income
Other operating income of GBP9.0m (2019: GBP5.8m) primarily related to
CCFS' fees for servicing third party mortgage portfolios and servicing
fees for derecognised securitised mortgages, where the Group continued
to service the loans.
Administrative expenses
Underlying administrative expenses were GBP152.7m in 2020, a decrease of
8% from GBP165.1m in 2019, as the synergies from the integration of OSB
and CCFS continued to be delivered and the Group benefitted from lower
discretionary spend in lockdowns, including those relating to travel,
accommodation and marketing, as employees continued to follow COVID-19
restrictions in the UK and India.
The underlying cost to income and underlying management expense ratios
improved to 27% and 70bps respectively (2019: 29% and 84bps
respectively) reflecting the delivery of synergies and lower
discretionary spend during lockdowns.
Impairment of financial assets
Impairment losses on an underlying basis increased to GBP71.2m in 2020
(2019: GBP16.3m) representing 38bps of average gross loans and advances
(2019: pro forma underlying 10bps).
Impairment losses in 2020 increased primarily due to the impact of
adopting more adverse forward-looking macroeconomic scenarios as the
onset of the coronavirus pandemic changed the outlook for the UK economy,
changes to the Group's staging criteria in line with PRA guidance, which
moved certain higher risk accounts with payment deferrals to stage 2,
and COVID-related enhancements to the Group's models. For more detail,
see the Risk review. The Group also recognised an impairment provision
of GBP20.0m in relation to potential fraudulent activity by a third
party on a funding line provided by the Group, secured against lease
receivables and the underlying hard assets.
Balance sheet
On an underlying basis, the loan book increased 5% to GBP19,020.8m
(2019: GBP18,151.4m) reflecting reduced originations due to the pandemic
as well as structured asset sales at the start of the year. Excluding
the impact of the structured asset sales, the underlying net loan book
growth would have been 9%.
Underlying retail deposits increased by 2% during 2020 to GBP16,600.0m
(2019: GBP16,248.6m) as both Banks continued to attract new savers by
offering attractively priced savings products and outstanding customer
service. The balance of the Group's funding requirement was provided by
the Bank of England's funding schemes and RMBS which provided GBP935.9m
and GBP381.6m of net new funding respectively. For further details of
the Group's securitisation activity in 2020, see the Wholesale funding
overview.
The Group's total underlying assets increased in the year by 6% to
GBP22,472.2m from GBP21,166.5m in 2019, primarily reflecting the growth
in loans and advances and liquid assets.
Reconciliation of statutory to underlying and pro forma underlying
results
2020 2019
CCFS
Statutory Reverse pre-acquisition Reverse
results acquisition- related and exceptional items Underlying results Statutory results results acquisition-related items Pro forma underlying results
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------
Net interest income 472.2 61.8(1) 534.0 344.7 152.1 21.6 518.4
Net fair value
gain/(loss) on
financial
instruments 7.4 (13.3)(2) (5.9) (3.3) (13.7) (3.3) (20.3)
Gain/(loss) on sale
of loans 20.0 13.1(3) 33.1 (0.1) 58.7 - 58.6
Other operating
income 9.0 - 9.0 2.1 3.7 -- 5.8
Total income 508.6 61.6 570.2 343.4 200.8 18.3 562.5
Administrative
expenses (157.0) 4.3(4) (152.7) (108.7) (57.7) 1.3 (165.1)
Provisions (0.1) - (0.1) - -- -- -
Impairment of
financial assets (71.0) (0.2)(5) (71.2) (15.6) (4.3) 3.6 (16.3)
Impairment of
intangible assets (7.0) 7.0(6) - - - - -
Gain on Combination
with CCFS - - - 10.8 - (10.8) --
Integration costs (9.8) 9.8(7) - (5.2) -- 5.2 --
Exceptional costs (3.3) 3.3(8) - (15.6) (15.7) 31.3 --
Profit before tax 260.4 85.8 346.2 209.1 123.1 48.9 381.1
Profit after tax 196.3 68.6 264.9 158.8 92.5 42.9 294.2
Summary Balance Sheet
Loans and
advances to
customers 19,230.7 (209.9)(9) 19,020.8 18,446.8 - (295.4) 18,151.4
Other financial
assets 3,341.8 36.8(10) 3,378.6 2,878.2 - 63.2 2,941.4
Other non-financial
assets 82.0 (9.2)(11) 72.8 92.1 - (18.4) 73.7
Total assets 22,654.5 (182.3) 22,472.2 21,417.1 - (250.6) 21,166.5
Amounts owed to
retail depositors 16,603.1 (3.1)(12) 16,600.0 16,255.0 - (6.4) 16,248.6
Other financial
liabilities 4,296.6 4.4(13) 4,301.0 3,544.0 - 10.0 3,554.0
Other non-financial
liabilities 77.9 (61.4)(14) 16.5 141.1 - (63.1) 78.0
Total liabilities 20,977.6 (60.1) 20,917.5 19,940.1 - (59.5) 19,880.6
Net assets 1,676.9 (122.2) 1,554.7 1,477.0 (191.1) 1,285.9
1. Amortisation of the net fair value uplift to CCFS' mortgage loans and
retail deposits on Combination.
2. Reversal of GBP17m of acquisition-related inception adjustments and
the recognition of GBP3.7m of inception adjustments under CCFS' entity
level hedge accounting.
3. Recognition of additional gain on sale of securitised loans.
4. Amortisation of intangible assets recognised on Combination.
5. Adjustment to expected credit losses on CCFS loans on Combination.
6. Impairment of intangible asset post Combination.
7. Costs of integration of the two Banks post Combination.
8. Reversal of exceptional costs incurred during the year.
9. Recognition of a fair value uplift to CCFS' loan book less
accumulated amortisation of the fair value uplift and a movement on
credit provisions.
10. Fair value adjustment to hedged assets.
11. Adjustment to current tax asset and recognition of acquired
intangibles on Combination.
12. Fair value adjustment to CCFS' retail deposits less accumulated
amortisation.
13. Fair value adjustment to hedged liabilities.
14. Adjustment to deferred tax liability and other acquisition-related
adjustments.
Risk review
Executive summary
During the year, the Group primarily focused on developing a considered
and measured response to the global pandemic based on its strategic
objectives, risk appetite and risk management capabilities. In
particular, the Board and senior management ensured that the Group
continued to operate with sufficient financial buffers and operational
capacity to withstand any future extreme but plausible economic shocks.
The Group leveraged the underlying risk management frameworks to assess,
monitor and respond to the emerging economic, business and operational
challenges arising from the pandemic. The Group's response was subject
to extensive planning, coordination and implementation oversight by the
Board and senior management through both formal Committee meetings and
ad hoc engagement sessions. The Group benefitted greatly from the
extensive and diverse risk management experience of the Board and senior
management during all phases of the pandemic.
The Group's response to the pandemic has been centrally coordinated
whilst being cognisant of the specific business and operational
characteristics of the individual banking entities. The Board and senior
management responded quickly to assess the potential implications and
impacts of the emerging pandemic across all identified principal risks,
with a particular focus on credit, capital, liquidity and operational
risks.
Well established stress testing and analytical capabilities were
leveraged to identify the risks and vulnerabilities to the business, and
economic and operational drivers which may be impacted by the pandemic.
This analysis highlighted the potential implications of the pandemic on
the Group's assets, liabilities, funding and solvency positions,
operational capacity and customers. Continued and progressive
enhancements were made to the risk assessment approaches to ensure that
the Group's response was aligned to the evolving nature of the pandemic.
The Board and senior management maintained an open and active dialogue
with primary stakeholders including employees, customers and regulatory
authorities throughout 2020.
At the onset of the pandemic, the Group took appropriate actions to
ensure full compliance with social distancing and lockdown guidelines,
utilising its business continuity and operational resilience frameworks.
As the majority of the Group's workforce transitioned to working from
home, the Group took appropriate actions to ensure operational risks
were subject to active identification, assessment and monitoring.
As payment deferral guidelines were introduced, the Group took timely
actions to ensure effective compliance with the emerging regulatory
guidelines, swiftly updating its risk modelling and provisioning
approaches, whilst modifying its operational procedures to ensure an
effective response to customers requesting payment deferrals.
The Group updated its IFRS 9 provisioning approach to reflect the
emerging pandemic-based economic scenarios, including the varied
permutations of how the UK economy may be impacted. Appropriate
adjustments were also applied to the underlying model-based judgements
and estimates. The Group continuously monitored and updated its credit
provisioning approach. The Group remains mindful of the potential for
future risks which may manifest themselves post the removal of the
government support schemes, particularly the furlough scheme, and is
confident that its provisioning approach is sufficiently agile and
responsive to emerging trends and issues.
To ensure that the quantum of model-based provisions remained
appropriate, a top-down triangulation exercise was commissioned by the
Board. The top-down assessment benchmarked IFRS 9 provisions to
historical stresses, peer assessment and look through assessments of
Buy-to-Let (BTL), residential and commercial portfolios, to underlying
borrower and tenant characteristics. The IFRS 9 based provisions were
supported by the independent top-down triangulation exercise.
The Group also adjusted its risk appetite, primarily through tightening
its lending criteria to effectively manage the risk of lending in a
highly disrupted and economically uncertain market. The actions taken
were framed to ensure that the Group maintained its asset quality
profile whilst sustaining its core lending brands and delivering
appropriate levels of balance sheet growth.
Following extensive review, the Board approved actions to strengthen the
liquidity positions across both banking entities through drawdowns under
the Bank of England Indexed Long-Term Repo facility, which were later
replaced with drawings from the new Term Funding Scheme for SMEs
(TFSME). Both bank entities continued to retain prudent levels of
liquidity, considering the uncertain economic outlook. The Group's
capital position strengthened throughout the year, supported by actions
taken such as the cancellation of the 2019 final dividend, tightened
lending criteria and the impact of regulatory capital preservation rule
changes as outlined within the PRA's 'Quick Fix' package, which included
revisions to the IFRS 9 transitional arrangements for the capital impact
of IFRS 9 expected credit losses and revisions to the small and
medium-sized enterprises support factor.
The Risk and Compliance function provided extensive oversight and
advisory support to customer-facing functions enabling the Group to
respond effectively to customer expectations, regulatory guidelines and
the conduct and compliance-based risk appetite. The Group ensured that
customers' account performance was reported to credit reference agencies,
in accordance with regulatory guidance.
To enable the Board and senior management to remain fully abreast of the
evolving impact of the pandemic, the level and frequency of risk-based
analysis and management information were increased. Information provided
was used to monitor customer behaviours and outcomes, whilst also
detailing sensitivity and stress test analysis on capital, IFRS 9
provision levels and funding metrics. Reverse stress test and recovery
option analysis was also performed to inform the going concern
assessment of the Group and its banking entities. Operational capacity
thresholds were actively monitored and reported to ensure timely action
was taken to enable continuity of all key services.
Despite the highly disruptive and uncertain business, economic and
operating environment, the Group continued to operate within the defined
risk appetite levels. Some risk metrics have operated outside acceptable
thresholds, such as expected credit losses, however, the underlying
performance of the loan portfolios remained broadly stable with respect
to borrower credit profiles, arrears and loan to value (LTV) levels,
notwithstanding the potential fraud by a third-party on a funding line
provided by the Group, secured against lease receivables and the
underlying hard assets. The number of customers who requested payment
deferrals reduced progressively throughout 2020 to only 1.3% of the
Group's loan book by value as at year end.
We continued to make good progress towards IRB during the year, albeit
some elements of the project were inevitably delayed by the impact of
COVID-19, which created the need to deploy significant resources to
support additional stress testing and expected credit loss modelling and
also restricted the ability of external advisers to access our premises
and systems. Nevertheless, we are still aiming to submit our module 1
application by the end of 2021. In the meantime, the Group continues to
benefit from the enhanced risk models and assessment in its decision
making.
The Group maintained prudent levels of contingent financial resources to
sustain its business operations and to withstand an extreme but
plausible stress. Operational resilience was also demonstrated by the
fact that, during lockdowns, a fundamental change to the Group's
operating model did not result in a material operational risk incident
or an increase in realised operational risk losses.
The Board and senior management remain mindful of the continuously
evolving nature of the pandemic and are fully engaged to ensure that
appropriate and timely actions continue to be taken, such that the Group
continues to operate within its specific risk appetite levels and
delivers against its stated strategic objectives.
Key achievements in 2020
During the year, the Group sustained momentum on strategically important
risk and compliance initiatives. In particular, the Board and senior
management were mindful of ensuring that the pandemic did not impact
continued progress and investment in the following initiatives:
-- Design and implementation of a comprehensive framework to assess and
report on pandemic-based risks, leveraging enhanced risk data and
analytical capabilities.
-- The development and implementation of key Group level frameworks and
policies. In particular, a transitional overarching Group Risk Management
Framework was developed, including Group risk appetite statements and
limits.
-- Though the Group continues to maintain two independently regulated
banking entities, the Risk and Compliance functions have been
transitioned to a shared service operating model, whereby the individual
functions and teams are Group based, providing necessary supporting
services to the entity specific Boards and wider business functions.
-- Completion of Group and banking entity Internal Capital Adequacy
Assessment Processes (ICAAPs), including risk and capital-based
assessments which were consistent in approach but reflect the individual
banking entity risk profiles. Climate change risks, including physical
risks and transitional risks, associated with transitioning to a low
carbon economy, were also assessed as part of the ICAAP development
process.
-- Delivery of aligned liquidity and funding risk assessment and monitoring
capabilities, which will support the Group and solo banks Internal
Liquidity Adequacy Assessment Processes (ILAAPs).
-- Continued progress against the Group IRB programme agenda, including
development of next generation models, enhanced model performance
monitoring, governance and integration of IRB-based outputs within wider
business and decision-making processes.
-- Integration risk was also identified as a principal risk and is subject
to the necessary disciplines as articulated in the Group Risk Management
Framework. Integration risk is identified as a risk to and from the
integration programme which is subject to review, monitoring and
reporting against an integration risk appetite. Key integration
activities are subject to second and third line oversight and assurance
activity.
-- Operational resilience assessment and management has progressively been
aligned across the two banking entities, and was subject to a review
against emerging regulatory expectations. The Group's operational
resilience capabilities helped to guide the response to the operational
disruptions resulting from the pandemic.
-- Continued improvement and alignment of vulnerable customer identification
and management procedures. During the period, the Group performed a
number of internal thematic reviews to ensure that account management
procedures resulted in fair customer outcomes and any learning from these
reviews were used to further enhance customer management strategies.
Priority areas for 2021
The ongoing COVID-19 pandemic continues to contribute to significant
uncertainty around the macroeconomic outlook and operating environment
for 2021. Therefore, continued close monitoring of the Group's risk
profile and operating effectiveness remains a key priority.
Further development and embedding of the overarching Group risk
management framework also remains a key priority, including:
-- Continued integration of the Risk and Compliance functions in accordance
with the target end state, reflecting industry best practice and
regulatory expectations.
-- Development and embedding of Group-level recovery and resolution plans.
The Risk function is also committed to ensuring effective and timely
compliance with the requirements of the Resolution Assessment Framework
over the coming two years, whilst providing oversight and advisory
support with respect to the Group's minimum requirement for own funds and
eligible liabilities (MREL) strategy and planning.
-- Delivering further enhancements to the Group and individual entity ILAAPs
and related liquidity risk management arrangements.
-- Further embedding of the Group's IRB risk measurement capabilities
including the monitoring and management of the credit risk profile
utilising enhanced analytics, to ensure improved credit decisioning,
pricing and risk management. Continued progression of the Group's IRB
programme in accordance with defined timelines also remains a key area of
focus.
-- Alignment of operational risk management systems and operational risk
frameworks across the Group.
-- Implementation of recommendations from the independent review of controls
and processes in the funding lines business.
-- Continued close monitoring, scenario analysis and stress testing of the
Group's capital and liquidity projections.
-- Delivery of a climate change risk management framework covering both
physical and transitional risks.
The Board and senior management are fully committed to achieving the
objectives above through continued investment in people, systems, data
and processes.
Risk management
Approach to risk management
The Group views its capabilities to effectively identify, assess and
manage its risk profile as critical to its growth strategy. The Group
has developed a transitional overarching Risk Management Framework (RMF)
to drive a consistent approach to risk identification and assessment
across both licensed bank entities. This framework will continue to
evolve and be updated as integration activity continues prior to the
Group reaching its target end state.
The RMF is the overarching framework which enables the Board and senior
management to actively manage and optimise the risk profile within the
constraints of the risk appetite. The RMF also enables informed
risk-based decisions to be taken in a timely manner, ensuring the
interests and expectations of key stakeholders can be met.
The RMF also provides a structured mechanism to align critical
components of an effective approach to risk management. The RMF links
overarching risk principles to day-to-day risk monitoring and management
activities.
The modular construct of the RMF provides an agile approach to keeping
pace with the evolving nature of the risk profile and underlying
drivers. The RMF and its core modular components are subject to periodic
review and approval by the Board and its relevant Committees. The key
modules of the RMF structure are as follows:
1. Risk principles and culture - the Group has established a set of risk
principles which inform and guide all risk management activities and it
has a strong, proactive and transparent 'risk culture' where all
employees across the Group are aware of their responsibilities in
relation to risk management.
2. Risk strategy and appetite -- the Group has a clear business purpose,
vision and values strategy which is supported by an articulated risk
vision and underlying principles. The Group calibrates its risk appetite
to reflect the Group's strategic objectives and business operating plans,
as well as external economic, business and regulatory constraints.
3. Risk assessment and control -- the Group's business model and
strategy exposes it to a defined risk profile and the risk governance
structure is informed by this risk profile such that the Group can
identify and manage its risks in an effective and efficient manner.
4. Risk definitions and categorisation -- the Group sets out its
principal risks which represent the primary risks to which the Group is
exposed.
5. Risk analytics (including stress testing and scenario analysis) --
the Group uses quantitative analysis and statistical modelling to help
improve its business decisions.
6. Risk data and Information Technology -- the maintenance of high
quality risk information, along with the Group's data enrichment and
aggregation capabilities, are central to the Risk function's objectives
being achieved.
7. Risk frameworks, policies and procedures -- risk frameworks, policies
and supporting documentation outline the process by which risk is
effectively managed and governed within the Group.
8. Risk management information (MI) and reporting -- the Group has
established a comprehensive suite of risk MI and reports covering all
principal risk types.
9. Risk governance and function organisation -- risk governance refers
to the processes and structures established by the Board to ensure that
risks are assumed and managed within the Board-approved risk appetite,
with clear delineation between risk taking, oversight and assurance
responsibilities. The Group's risk governance framework is structured to
adhere to the 'three lines of defence' model.
Further detail on these modules is set out in the Group's Pillar 3
disclosures.
Risk appetite
The Group aligns its strategic and business objectives with its risk
appetite, enabling the Board and senior management to monitor the risk
profile relative to its strategic and business performance objectives.
Risk appetite is a critical mechanism through which the Board and senior
management are able to identify adverse trends and respond to unexpected
developments in a timely and considered manner.
The Group risk appetite is articulated by means of a series of
statements which outline the level and nature of risks that the Group is
able and willing to assume in pursuit of its strategic and business
objectives. These statements are further supported by a suite of risk
thresholds which ensure that the Group's risk profile is monitored and
controlled within defined parameters and that appetite breaches are
subject to appropriate management and Board oversight. The Risk Appetite
Framework also helps to outline roles and responsibilities relating to
all aspects of the risk appetite, based on a defined structure,
processes, procedures and governance.
Risk appetite is calibrated to reflect the Group's strategic objectives,
business operating plans, as well as external economic, business and
regulatory constraints. In particular, risk appetite is calibrated to
ensure that the Group continues to deliver against its strategic and
business objectives and maintains sufficient financial resource buffers
to withstand plausible but extreme stresses. The primary objective of
the risk appetite is to ensure that the Group's strategy and business
operating model is sufficiently resilient.
The Group's risk appetite is calibrated using statistical analysis and
stress testing to inform the process for setting management triggers and
limits against key risk indicators. The calibration process is designed
to ensure that timely and appropriate actions are taken to maintain the
risk profile within approved thresholds. The Board and senior management
actively monitor actual performance against approved management triggers
and limits. Currently, whilst there are two regulated banking entities
within the Group, risk appetite metrics and thresholds are set at both
individual entity and Group levels.
The Group's risk appetite is subject to a full refresh annually across
all principal risk types and an additional mid-year review where any
metrics can be assessed and updated as appropriate. The assessment of
the Group's risk profile against its strategy and risk appetite has been
enhanced to ensure early detection and response to adverse trends.
Approach to managing climate change risk
Climate change and society's response to it, may result in a number of
financial risks materialising. Supervisory statement 3/19 was published
in April 2019 and it sets out the PRA's expectations concerning
financial services firms developing their approaches to identifying,
monitoring and controlling climate change risk relevant to their
specific business.
The PRA published a 'Dear CEO' letter in July 2020 emphasising its
expectations for firms to have fully embedded their approaches to
managing climate-related financial risk by the end of 2021.
The Group is exposed to physical, transitional and reputational risks
relating to climate change:
-- Physical risks and the risks associated with a transition to a low carbon
economy, arise from a number of factors, and relate to specific weather
events (such as heatwaves, floods, wildfires and storms) and longer-term
shifts in the climate (such as changes in precipitation, extreme weather
variability, rising sea level risk and rising mean temperatures). These
risks could include adverse movements in the value of certain properties
that are in coastal or low lying areas, or located in areas prone to
increased levels of subsidence and heave.
-- Transitional risks may arise from the process of adjustment towards a
low-carbon economy which may lead to changes in policy, regulation, the
emergence of disruptive technology or business models shifting sentiment,
and societal preferences, or evolving evidence, frameworks and legal
interpretations. These risks include a potential adverse impact in the
value of properties that require substantial updates to meet future
energy performance requirements.
-- Reputational risk arising from a failure to meet changing societal,
investor or regulatory demands.
How the Group identifies and assesses climate change risk
Within the Group's 2020 ICAAP, a number of financial and transitional
climate change risks were identified, and a series of detailed financial
risk assessments (IFRS 9 impairment and capital) were conducted over a
range of scenarios to quantify the potential impact on the Group, should
any of the scenarios materialise. This process was supported by the
acquisition of data from an external third party.
The key conclusion from this analysis was that the Group is currently
exposed to a low level of climate change risk, when assessing the
potential impairment and capital impacts over a range of physical perils
such as flooding, subsidence and coastal erosion across the Group's loan
book. The Risk function also analysed the energy performance certificate
(EPC) profile of the Buy-to-Let loan book and the risks relating to
landlords having extensive remediation activity to ensure an appropriate
EPC rating is in place. Again, this analysis indicated that the Group's
EPC profile is strong and the modelled impact of remediation remains
low.
The ongoing provision of this data will allow the Group to monitor how
its climate change risk profile evolves over time, and consequently take
action if required to ensure that the risk of climate change remains at
an acceptable level.
Processes in place to manage climate change risk
Climate change risk impacts a number of the Group's other principal risk
types, therefore work is ongoing to assess the wider consequences across
the Group. This will involve the management of climate change risk being
overseen by a number of the Group's Risk Committees.
How the management of climate change risk is integrated within the
Group's wider risk management approaches
The Board has overseen the Group's plans to comply with the PRA's
expectations and emerging industry best practice around climate change
risk management, with progress made across the following areas during
2020:
-- The overarching Risk Management Framework was updated to articulate the
Group's approach to climate change risk management.
-- A dedicated working group was established to oversee and manage the
Group's response to climate change risk.
-- A detailed financial risk assessment of the Group's exposure to climate
change risk was conducted as part of the 2020 ICAAP.
-- The Chief Risk Officers of the two banks have designated senior
management function (SMF) responsibility for the management of climate
change risk.
During 2021 the Group plans to further enhance and embed its approaches
to identifying, monitoring and managing climate change risk, including
the development of a dedicated Climate Change Risk Management Framework,
coupled with further enhancements to climate change risk profile
monitoring, whilst conducting further sensitivity analysis. The
development of formal climate change risk appetite statements and limits,
together with a full suite of key risk and performance indicators, is
also planned. Plans will be developed in the first half of 2021 to
ensure that the Group complies with the recommendations set out by the
Task Force on Climate-related Financial Disclosures, which have been
introduced into UK listing requirements on or after 1 January 2021.
These will be overseen by a specified Board member and the member of the
senior management team responsible for ESG.
Risk appetite statements
Strategic and business risk appetite statement
The Group's strategic and business risk appetite states that the Group
does not intend to undertake any medium to long-term strategic actions
that would put at risk its vision of being a leading specialist lender,
backed by a strong and dependable saving franchise.
The Group adopts a long-term sustainable business model which, while
focused on niche sub-sectors, is capable of adapting to growth
objectives and external developments.
Reputational risk appetite statement
The Group does not knowingly conduct business or organise its operations
to put its reputation and franchise value at risk.
Credit risk appetite statement
The Group seeks to maintain a high quality lending portfolio that
generates adequate returns, under normal and stressed conditions. The
portfolio is actively managed to operate within set criteria and limits
based on profit volatility, focusing on key sectors, recoverable values,
and affordability and exposure levels. The Group aims to continue to
generate sufficient income and control credit losses to a level such
that it remains profitable even when subjected to a credit portfolio
stress of a 1 in 20 intensity stress scenario.
Market risk appetite statement
The Group actively manages market risk arising from structural interest
rate positions. The Group does not seek to take a significant interest
rate position or a directional view on interest rates and it limits its
mismatched and basis risk exposures.
Liquidity and funding risk appetite statement
The Group will maintain sufficient liquidity to meet its liabilities as
they fall due under normal and stressed business conditions; this will
be achieved by maintaining a strong retail savings franchise, supported
by a high quality liquid asset portfolio comprised of cash and
readily-monetisable assets, and through access to pre-arranged secured
funding facilities. The Board requirement to maintain balance sheet
resources sufficient to survive a range of severe but plausible stress
scenarios is interpreted in terms of the liquidity coverage ratio and
the ILAAP stress scenarios.
Solvency risk appetite statement
The Group seeks to ensure that it is able to meet its Board-level
capital buffer requirements under a severe but plausible stress
scenario. The solvency risk appetite is informed by the Group's
prudential requirements and strategic and financial objectives. We
manage our capital resources in a manner which avoids excessive leverage
and allows us flexibility in raising capital.
Operational risk appetite statement
The Group's operational processes, systems and controls are designed to
minimise disruption to customers, damage to the Group's reputation and
any detrimental impact on financial performance. The Group actively
promotes the continual evolution of its operating environment through
the identification, evaluation and mitigation of risks, whilst
recognising that the complete elimination of operational risk is not
possible.
Conduct risk appetite statement
The Group aims to operate and conduct its business to the highest
standards which ensure integrity and trust with respect to how the Group
operates and manages its relationships with key stakeholders. In this
regard, the Group has no appetite to knowingly assume risks which may
result in an unfair outcome for customers and/or cause disruptions in
the market segments in which it operates. However, where the Group
identifies potential conduct risks it will proactively intervene by
managing, escalating and mitigating them promptly to ensure a fair
outcome is achieved.
Compliance / regulatory risk appetite statement
The Group views ongoing conformity with regulatory rules and standards
across all the jurisdictions in which it operates as a critical
component of its risk culture. The Group does not knowingly accept
compliance risk which could result in regulatory sanctions, financial
loss or damage to its reputation. The Group will not tolerate any
systemic failure to comply with applicable laws, regulations or codes of
conduct relevant given its business operating model.
Integration risk appetite statement
The Combination of OSB and CCFS is intended to enhance scale, bringing
together resources and capabilities, and to explore further growth
opportunities which deliver attractive long-term returns. The delivery
against the integration strategy is framed within the Group's purpose,
vision and values and the broader risk appetite. The integration is
deemed to be inherently low risk owing to the retention of core
operating brands, similarities of business models, no large-scale IT
integration or substantial migration of customer accounts. Accordingly,
the Board has a low risk appetite for adverse integration activity
outcomes, which put the strategic rationale of the merger, the Group's
purpose, vision and values or broader risk appetite at risk. In the
event that integration work streams are subject to delay or
reprioritisation, the Board expects the rationale to be clearly
understood and justified, with defined mitigation actions implemented,
overseen by robust levels of governance.
Risk profile performance overview
Credit risk
The Group's fully secured loan portfolios performed robustly throughout
2020, with the credit profile remaining broadly stable, post careful
monitoring and management of both the OSB and CCFS lending portfolios.
The Group's credit risk appetite approach ensured that the loan
portfolios were positioned to perform well in both benign and stressed
macroeconomic environments. Prudent management actions taken shortly
after the onset of the COVID-19 pandemic, such as tightening loan to
values (LTVs) and other credit policy criteria across all loan types,
ensured that new lending performed well and was positioned to withstand
future stress.
Cautious underlying net loan book growth of 5%, or 9% excluding the
impact of structured asset sales in the year, was delivered via
controlled new lending in the Group's core Buy-to-Let and residential
owner-occupier segments, which more than offset reductions in bridging
and second charge outstanding balances. The Group also tightened
criteria in its more cyclical product lines. Mortgage lending balances
against semi-commercial and commercial lending also reduced, as did the
Group's development finance and funding lines sub-segments due to
tighter lending criteria and strong repayment inflows.
Sensible new lending LTV criteria and favourable property price indexing
resulted in the average weighted stock LTV for OSB(1) and CCFS reducing
during 2020 to 64% and 67% respectively as at 31 December 2020 (31
December 2019: restated(2) OSB 65% and CCFS 69%), which resulted in a
prudent average weighted LTV profile of 65% at the Group level.
A low level of arrears continued to be observed during 2020, with just
0.9% of net loan balances greater than three months in arrears, which
was in line with the position as at 31 December 2019. These stable
metrics are in part supported by accounts being offered COVID-19 payment
deferrals, which will have stopped accounts missing payments during the
eligible period.
Group and solo banks interest coverage ratios for new lending improved
during 2020 to 201% for OSB and 193% for CCFS (2019: restated(3) 199%
OSB and 187% CCFS).
During 2020 forward-looking external credit bureau probability of
default and customer indebtedness scores improved across the Group's
core lending segments.
To support our customers during the COVID-19 pandemic the Group granted
payment deferrals to c. 26k accounts representing 28% of the loan book
by value during the peak at the end of June 2020. As at 31 December 2020
active COVID-19 payment deferrals represented only 1.3% of the Group's
loan book by value. Low levels of arrears have been observed from the
payment holiday cohort to date.
1. Average weighted LTV for OSB includes KR and Interbay Buy-to-Let,
semi-commercial and commercial, first and second charge residential
lending.
2. The Group restated the comparative LTVs due to a change in
calculation methodology.
3. Interest coverage ratios for 2019 were restated due to an improvement
in calculation methodology.
Expected Credit Losses (ECL)
Full year statutory impairment losses totalled GBP71.0m versus GBP15.6m
for 2019, with the increase being driven by the potential impact of the
COVID-19 pandemic on the UK economy and resulting changes in customer
behaviour and property valuations. The Group also recorded an impairment
provision of GBP20m in relation to potential fraudulent activity by a
third party on a secured funding line provided by the Group.
Detailed below are a number of the COVID-19 related factors and other
material items which drove the elevated impairment charge for the year:
a) Macroeconomic scenarios -- during 2020 the Group adopted a suite of
more adverse economic scenarios, which reflected the potential impact of
the COVID-19 pandemic across the UK economy. Rising unemployment levels
may result in increasing levels of customers falling into arrears and
defaulting on loan payments, whilst falling house prices may result in
lower levels of equity and therefore potential future losses post sale.
Downside scenarios also included the impact of economic disruption
caused from the United Kingdom's exit from the European Union.
Throughout the year these scenarios were updated as the pandemic
progressed and government support measures were introduced. The
introduction and consequent updates made to forward-looking
macroeconomic scenarios drove GBP21.2m of the total impairment charge
during 2020 or 11bps of the annualised loan loss ratio.
b) Staging criteria -- the Group ensured it complied with industry best
practice and regulatory guidance with respect to payment deferrals and
their treatment in IFRS 9 staging criteria, which included payment
deferrals on their own not being treated as a significant increase in
credit risk. During 2020, the Group made iterative enhancements to
staging criteria, leveraging both internal and external information to
identify performing higher risk cohorts across the entire customer base,
but also including the payment deferral population, moving eligible
exposures into stage 2 where a lifetime loss allowance was held. In 2020
the impact from these staging enhancements was GBP4.8m of the annual
impairment charge or 3bps of the annualised loan loss ratio.
c) COVID-19 post model adjustments -- the Group implemented a number of
post model adjustments to ensure that modelled estimates remained
appropriate, considering the impact that government support measures
such as the repossession moratorium and payment deferrals had on credit
bureau files and on loss given default and probability of default
estimates. The quantum of these post model adjustments was impacted by
the interaction with the severe forward-looking macroeconomic scenarios,
during the impairment calculation process. The combined impact of these
COVID-19 related post model adjustments contributed GBP10.4m of the
total 2020 impairment charge which equated to c. 5bps of the annualised
loan loss ratio.
d) Model enhancements - post Combination, the Group continued to make
enhancements across the full suite of IFRS 9 impairment models, aligning
modelling approaches and definitions where appropriate. An example of
this was the implementation of an aligned definition of default across
the Group. In line with the normal course of business a number of model
recalibrations were made during the year, to ensure that modelled
estimates continued to align to actually observed performance. The
cumulative impact of these modelling enhancements contributed GBP10.7m
of the total loan loss charge during 2020, which contributed 6bps to the
loan loss ratio. The interaction of the severe forward-looking
macroeconomic scenarios within IFRS 9 impairment calculations elevated
the impact of these modelling enhancements.
e) Funding line impairment - the Group recognised an impairment
provision of GBP20m, which represented 11bps of the annualised loan loss
ratio, in relation to potential fraudulent activity by a third-party on
a funding line of GBP28.6m provided by the Group, secured against lease
receivables and the underlying hard assets. The Group's funding line
business is primarily secured against property-related mortgages(1) and
we believe that this is an isolated incident. The outstanding funding
line exposure was classified as in default (not past due) and therefore
transferred to stage 3, with a consequent specific provision raised.
(1 The Group's gross loans to customers include GBP175.7m in relation to
funding lines of which 66% is secured on property-related mortgages.)
Macroeconomic scenarios
The measurement of ECL under the IFRS 9 approach is complex and requires
a high level of judgement. The approach includes the estimation of
probability of default (PD), loss given default (LGD) and likely
exposure at default (EAD). An assessment of the maximum contractual
period with which the Group is exposed to the credit risk of the asset
is also undertaken.
IFRS 9 requires firms to calculate ECL allowances simulating the effect
of a range of possible economic outcomes, calculated on a probability
weighted basis. This requires firms to formulate forward-looking
macroeconomic forecasts and incorporate them in ECL calculations.
i. How macroeconomic variables and scenarios are selected
During the IFRS 9 modelling process, the relationship between
macroeconomic drivers and arrears, default rates and collateral values
is established. For example, if unemployment levels increase, the Group
would observe an increasing number of accounts moving into arrears. If
residential or commercial property prices fall, the risk of losses being
realised on the sale of a property would increase.
The Group has adopted an approach which utilises four macroeconomic
scenarios. These scenarios are provided by an industry leading economics
advisory firm, that provide management and the Board with advice on
which scenarios to utilise and the probability weightings to attach to
each scenario.
A base case forecast is provided, along with a plausible upside
scenario. Two downside scenarios are also provided (downside and a
severe downside).
ii. How macroeconomic scenarios are utilised within ECL calculations
Probability of default estimates are either scaled up or down based on
the macroeconomic scenarios utilised.
Loss given default estimates are impacted by property price forecasts
which are utilised within loss estimates should an account be possessed
and sold.
Exposure at default estimates are not impacted by the macroeconomic
scenarios utilised.
Each of the above components are then directly utilised within the ECL
calculation process.
iii. Macroeconomic scenario governance
The Group has a robust governance process to oversee macroeconomic
scenarios and probability weightings used within ECL calculations.
Updated scenarios are provided on a monthly basis where an assessment is
carried out by the Group's Risk function to determine whether an update
is required.
On a periodic basis, the Group's Risk function and economic adviser
provide the Group Risk and Audit Committees with an overview of recent
economic performance, along with updated base, upside and two downside
scenarios. The Risk function conducts a review of the scenarios
comparing them to other economic forecasts, which results in a proposed
course of action, which once approved is implemented.
iv. Changes made during 2020
a. Macroeconomic scenario
Post the onset of the COVID-19 pandemic, the Group implemented a suite
of adverse economic scenarios, which incorporated the potential impact
of the lockdown periods on economic activity, resulting in rising
forecasted unemployment levels and falling property prices. The Group
continued to utilise four scenarios including base and upside scenarios
and two downside scenarios. The downside scenarios also include
potential future economic disruption, resulting from the United Kingdom
leaving the European Union.
Throughout 2020, the scenario suite was monitored and updated as
government measures were updated and the impact of the pandemic evolved.
b. Significant increase in credit risk rules
The Group's Significant Increase in Credit Risk (SICR) rules, prior to
the COVID-19 pandemic, considered changes in default risk, internal
impairment measures, changes in customer credit bureau files, or whether
forbearance measures had been applied.
The Group took steps to adjust the SICR criteria through the pandemic to
account for the changes in risk profile and specifically for payment
deferrals granted, noting that not all of the instances of a payment
deferral would be a significant increase in credit risk. Payment
deferrals granted due to COVID-19 alone were not automatically
considered as a SICR event in line with issued guidance, and adjustments
to the rules were as follows:
-- Payment deferrals considered as a SICR event where other significant high
risk factors are identified on customer's credit files;
-- Payment deferrals considered as a SICR event where an account also had
recent arrears; and
-- Customers with stress to their income considered as a SICR event.
Forecast macroeconomic variables over a five-year period (includes
average over five years and the peak to trough projections)
Scenario %
--------- ----------- ----------------------- ----------------------------------
Scenario Probability Economic measure 5 year average Cumulative
weighting (yearly growth growth/(fall)
(%) %) to peak/(trough)
(%)
--------- ----------- ----------------------- --------------- -----------------
Base case 40 GDP 3.2 (5.8)
House Price Index 2.1 (8.5)
Bank Base Rate 0.5 1.4
Unemployment rate 6.9 3.7
Commercial Real Estate 2.1 (8.5)
Index
--------- ----------- ----------------------- --------------- -----------------
Upside 30 GDP 3.6 (5.6)
House Price Index 3.6 (6.3)
Bank Base Rate 0.8 1.7
Unemployment rate 6.1 3.1
Commercial Real Estate 3.6 (6.3)
Index
--------- ----------- ----------------------- --------------- -----------------
Downside 23 GDP 2.6 (6.7)
House Price Index (0.4) (18.9)
Bank Base Rate 0.1 0.0
Unemployment rate 8.8 5.8
Commercial Real Estate (0.4) (18.9)
Index
--------- ----------- ----------------------- --------------- -----------------
Severe 7 GDP 2.2 (8.0)
downside House Price Index (2.2) (26.4)
Bank Base Rate 0.1 0.0
Unemployment rate 9.6 6.5
Commercial Real Estate (5.5) (40.0)
Index
--------- ----------- ----------------------- --------------- -----------------
Forbearance
Where borrowers experience financial difficulty, which impacts their
ability to service their financial commitments under the loan agreement,
forbearance may be used to achieve an outcome which is mutually
beneficial to both the borrower and the Group.
By identifying borrowers who are experiencing financial difficulties
pre-arrears or in arrears, a consultative process is initiated to
ascertain the underlying reasons and to establish the best course of
action to enable the borrower to develop credible repayment plans and to
see them through the period of financial stress.
The specific tools available to assist customers vary by product and the
customers' status. The various treatments considered for customers are
as follows:
-- Temporary switch to interest only: a temporary account change to assist
customers through periods of financial difficulty where arrears do not
accrue at the original contractual payment. Any arrears existing at the
commencement of the arrangement are retained.
-- Interest rate reduction: the Group may, in certain circumstances, where
the borrower meets the required eligibility criteria, transfer the
mortgages to a lower contractual rate. Where this is a formal contractual
change, the borrower will be requested to obtain independent financial
advice as part of the process.
-- Loan term extension: a permanent account change for customers in
financial distress where the overall term of the mortgage is extended,
resulting in a lower contractual monthly payment.
-- Payment holiday: a temporary account change to assist customers through
periods of financial difficulty where arrears accrue at the original
contractual payment. Any arrears existing at the commencement of the
arrangement are retained.
-- Voluntary-assisted sale: a period of time is given to allow borrowers to
sell the property and arrears accrue based on the contractual payment.
-- Reduced monthly payments: a temporary arrangement for customers in
financial distress. For example, a short-term arrangement to pay less
than the contractual payment. Arrears continue to accrue based on the
contractual payment.
-- Capitalisation of interest: arrears are added to the loan balance and are
repaid over the remaining term of the facility or at maturity for
interest only products. A new payment is calculated, which will be higher
than the previous payment.
-- Full or partial debt forgiveness: where considered appropriate, the Group
will consider writing off part of the debt. This may occur where the
borrower has an agreed sale and there will be a shortfall in the amount
required to redeem the Group's charge, in which case repayment of the
shortfall may be agreed over a period of time, subject to an
affordability assessment or where possession has been taken by the Group;
and on the subsequent sale where there has been a shortfall loss.
-- Arrangement to pay: where an arrangement is made with the borrower to
repay an amount above the contractual monthly instalment, which will
repay arrears over a period of time.
-- Promise to pay: where an arrangement is made with the borrower to defer
payment or pay a lump sum at a later date.
-- Bridging loans more than 30 days past due: bridging loans which are more
than 30 days past their maturity date. Repayment is rescheduled to
receive a balloon or bullet payment at the end of the term extension
where the institution can duly demonstrate future cash flow availability.
The Group aims to proactively identify and manage forborne accounts,
utilising external credit reference bureau information to analyse
probability of default and customer indebtedness trends over time,
feeding pre-arrears watch list reports. Watch list cases are in turn
carefully monitored and managed as appropriate.
Fair value of collateral methodology
The Group ensures that security valuations are reviewed on an ongoing
basis for accuracy and appropriateness. Commercial properties are
subject to annual indexing, whereas residential properties are indexed
against monthly House Price Index data.
Solvency risk
The Group maintains an appropriate level and quality of capital to
support its prudential requirements with sufficient contingency to
withstand a severe but plausible stress scenario. The solvency risk
appetite is based on a stacking approach, whereby the various capital
requirements (Pillar 1, ICG, CRD IV buffers, Board and management
buffers) are incrementally aggregated as a percentage of available
capital (CET1 and total capital).
Solvency risk is a function of balance sheet growth, profitability,
access to capital markets and regulatory changes. The Group actively
monitors all key drivers of solvency risk and takes prompt action to
maintain its solvency ratios at acceptable levels. The Board and
management also assess solvency when reviewing the Group's business
plans and inorganic growth opportunities.
During 2020, the Group proactively managed the balance sheet, whilst the
PRA introduced capital support measures detailed within the CRR 'Quick
Fix' package which resulted in capital ratios strengthening. The
counter-cyclical buffer was also cut from 1% to 0% during the period as
a regulatory response to COVID-19.
The Group's fully-loaded CET1 and total capital ratios under CRD IV
increased to 18.3% as at 31 December 2020 (31 December 2019: 16.0% and
17.3% respectively) demonstrating the strong organic capital generation
capability of the business, the impact of the regulatory support
measures and prudent management of the credit risk profile. The Group's
leverage ratio was 6.9% as at 31 December 2020 (31 December 2019: 6.5%).
The total capital ratio is the same as the CET1 ratio following the
insertion of OSB Group as the ultimate holding company, as
non-controlling interest securities, subordinated debt and PSBs issued
by OSB no longer qualify as regulatory capital at the Group level.
Liquidity and funding risk
The Group has a prudent approach to liquidity management through
maintaining sufficient liquidity resources to cover cash flow imbalances
and fluctuations in funding under both normal and stressed conditions,
arising from market-wide and Bank-specific events. OSB's and CCFS'
liquidity risk appetites have been calibrated to ensure that both Banks
always operate above the minimum prudential requirements with sufficient
contingency for unexpected stresses, whilst actively minimising the risk
of holding excessive liquidity which would adversely impact the
financial efficiency of the business model.
The Group continues to attract new retail savers and has high retention
levels with existing customers. In addition, the Combination allowed the
Group a wider range of wholesale funding options, including
securitisation issuances and use of retained notes from both Banks.
In 2020, both Banks actively managed their respective liquidity and
funding profiles within the confines of their risk appetites as set out
in each Bank's ILAAP.
Each Bank's risk appetite is based on internal stress tests that cover a
range of scenarios and time periods and therefore are a more severe
measure of resilience to a liquidity event than the standalone liquidity
coverage ratio (LCR). As at 31 December 2020, OSB had a liquidity
coverage ratio of 254% (2019: 199%) and CCFS 146% (2019: 145%), and the
Group LCR was 198%, all significantly above the 2020 regulatory
requirement of 100%.
Market risk
The Group proactively manages its risk profile in respect of adverse
movements in interest rates, foreign exchange rates and counterparty
exposures.
The Group accepts interest rate risk and basis risk as a consequence of
structural mismatches between fixed rate mortgage lending, sight and
fixed term savings and the maintenance of a portfolio of high quality
liquid assets. Interest rate exposure is mitigated on a continuous basis
through portfolio diversification, reserve allocation and the use of
financial derivatives within limits set by the Group ALCO and approved
by the Board.
The Group's balance sheet is completely GBP denominated. The Group has
some minor foreign exchange risk from funding the OSBI business. This is
minimised by pre-funding a number of months in advance and regularly
monitoring GBP/INR rates. Wholesale counterparty risk is measured on a
daily basis and constrained by counterparty risk limits.
Transition away from LIBOR
The PRA and FCA have continued to encourage banks to transition away
from using LIBOR as a benchmark in all operations before the end of
2021. Throughout the UK banking sector LIBOR remains a key benchmark and,
for each market impacted, solutions to this issue are progressing
through various industry bodies.
An internal working group has been established with strong oversight
from the Compliance and Risk functions. Risk assessments have been
completed to ensure this process is managed in a measured and controlled
manner. The Group no longer writes any LIBOR-linked business and is
transitioning new and back book swaps from a LIBOR to a SONIA basis.
Interest rate risk
The Group does not actively assume interest rate risk, does not execute
client or speculative securities transactions for its own account, and
does not seek to take a significant directional interest rate position.
Limits have been set to allow management to run occasional unhedged
positions in response to balance sheet dynamics and capital has been
allocated for this. Exposure limits are calibrated in proportion to
available CET1 capital and estimated annual net interest income to cover
capital and profit and loss risks.
The Group sets limits on the tenor and rate reset mismatches between
fixed rate assets and liabilities, including derivatives hedges, with
exposure and risk appetite assessed by reference to historical and
potential stress scenarios at consistent levels of modelled severity.
Throughout 2020, both Banks managed their interest rate risk exposures
within risk appetite limits.
Basis risk
Basis risk arises from assets and liabilities repricing with reference
to different interest rate indices, including positions which reference
variable market and managed rates. As with structural interest rate risk,
the Group does not seek to take a significant basis risk position, but
maintains defined limits to allow operational flexibility.
For both OSB and CCFS, exposure is assessed and monitored regularly
across a range of 'business as usual' and stressed scenarios.
Throughout 2020, both Banks managed their basis risk exposure within
their risk appetite limits.
Operational risk
The Group continues to adopt a proactive approach to the management of
operational risks. The operational risk management framework has been
designed to ensure a robust approach to the identification, measurement
and mitigation of operational risks, utilising a combination of both
qualitative and quantitative evaluations. The Group's operational
processes, systems and controls are designed to minimise disruption to
customers, damage to the Group's reputation and any detrimental impact
on financial performance. The Group actively promotes the continual
evolution of its operating environment.
Where risks continue to exist, there are established processes to
provide the appropriate levels of governance and oversight, together
with an alignment to the level of risk appetite stated by the Board.
A strong culture of transparency and escalation has been cultivated
throughout the organisation, with the Operational Risk function having a
Group-wide remit, ensuring a risk management model that is well embedded
and consistently applied. In addition, a community of Risk Champions
representing each business line and location has been identified.
Operational Risk Champions ensure that the operational risk
identification and assessment processes are established across the Group
in a consistent manner. Risk Champions are provided with appropriate
support and training by the Operational Risk function.
Due to the COVID-19 pandemic and the resulting high number of employees
working and accessing systems from home, the risk of a cyber attack has
heightened. Whilst IT security risks continue to evolve, the level of
maturity of the Group's controls and defences has significantly
increased, supported by dedicated IT security experts. The Group's
ongoing penetration testing continues to drive enhancements by
identifying potential areas of risk.
Regulatory and compliance risk
The Group is committed to the highest standards of regulatory conduct
and aims to minimise breaches, financial costs and reputational damage
associated with non-compliance.
The Group has an established Compliance function which actively
identifies, assesses and monitors adherence with current regulation and
the impact of emerging regulation.
In order to minimise regulatory risk, the Group maintains a proactive
relationship with key regulators, engages with industry bodies such as
UK Finance, and seeks external expert advice. The Group also assesses
the impact of upstream regulation on itself and the wider market in
which it operates, and undertakes robust assurance assessments from
within the Risk and Compliance functions.
Conduct risk
The Group considers its culture and behaviour in ensuring the fair
treatment of customers and in maintaining the integrity of the market
segments in which it operates to be a fundamental part of its strategy
and a key driver to sustainable profitability and growth. The Group does
not tolerate any systemic failure to deliver fair customer outcomes.
On an isolated basis, incidents can result in detriment owing to human
and/or operational failures. Where such incidents occur they are
thoroughly investigated and the appropriate remedial actions are taken
to address any customer detriment and to prevent recurrence.
The Group considers effective conduct risk management to be a product of
the positive behaviour of all employees, influenced by the culture
throughout the organisation and therefore continues to promote a strong
sense of awareness and accountability.
Strategic and business risk
The Board has clearly articulated the Group's strategic vision and
business objectives supported by performance targets. The Group does not
intend to undertake any medium to long-term strategic actions, which
would put the Group's strategic or financial objectives at risk.
To deliver against its strategic objectives and business plan, the Group
has adopted a sustainable business model based on a focused approach to
core niche market segments where its experience and capabilities give it
a clear competitive advantage.
The Group remains highly focused on delivering against its core
strategic objectives and strengthening its position further through
strong and sustainable financial performance.
Reputational risk
Reputational risk can arise from a variety of sources and is a second
order risk -- the crystallisation of a credit risk or operational risk
can lead to a reputational risk impact.
The Group monitors reputational risk through tracking media coverage,
customer satisfaction scores, the share price and Net Promoter Scores
provided by brokers.
Integration risk
At the point of the Combination, integration risk was identified as a
principal risk for the duration of the integration programme, though the
integration of the two entities was deemed inherently low risk owing to
the similarity of the two business models, with the programme involving
no material system or data migrations. The Board took the view that it
has limited appetite for integration related risks and deemed it
appropriate to identify, assess and manage integration risks in full
compliance with the wider risk management framework and governance
disciplines of the Group.
Integration risk relates to any risk which may result in the
non-delivery of planned integration objectives with respect to desired
strategic outcomes and costs and synergies performance targets.
Additionally, integration risk is also assessed with respect to the
other principal risks which may be adversely impacted as a consequence
of the integration activities.
The Board exercises oversight of the integration programme through the
Board Integration Committee based on defined critical success factors
and an integration risk appetite. The integration programme is supported
by an Integration Management Office, with clearly defined plans,
established roles and responsibilities, necessary financial discipline
and governance arrangements. The integration programme is subject to
second line oversight and third line assurance to enable the Board and
senior management to monitor progress against plan and performance
against integration risk appetite.
The integration programme and the underlying risk profile continued to
perform in line with expectations during 2020, where no material risk
incidents or trends where identified during the year. The integration
programme did experience some level of disruption owing to the pandemic,
but overall the programme has continued to progress as planned.
Principal risks and uncertainties
Strategic and business risk
The risk to the Group's earnings and profitability arising from its
strategic decisions, change in business conditions, improper
implementation of decisions or lack of responsiveness to industry
changes.
Performance against targets
Performance against strategic and business targets does not meet
stakeholder expectations. This has the potential to damage the Group's
franchise value and reputation.
Mitigation
Regular monitoring by the Board and the Group Executive Committee of
business and financial performance against strategic agenda and risk
appetite. The financial plan is subject to regular reforecasts. The
balanced business scorecard is the primary mechanism to support the
Board and assesses management performance against key targets. Use of
stress testing to flex core business planning assumptions to assess
potential performance under stressed operating conditions.
Direction: increased
The COVID-19 pandemic has adversely impacted the Group meeting its
strategic and business targets.
Opportunities remain, including the Group realising integration benefits
as planned, which will support the Group in any future macroeconomic
stress, whilst managing challenges posed by increasing levels of
competition in our key market segments.
Economic environment
The economic environment is an important factor impacting the strategic
and business risk profile. A macroeconomic downturn may impact the
credit quality of the Group's existing loan portfolio and may influence
future business strategy as the Group's new business proposition becomes
less attractive due to lower returns.
Mitigation
The Group continued to utilise and enhance its stress testing
capabilities to assess and minimise potential areas of macroeconomic
vulnerabilities.
Direction: increased
Economic risks remain elevated due to the ongoing COVID-19 pandemic and
risks surrounding the removal of government support measures.
The risk relating to a no trade deal Brexit subsided following an
agreement being reached, however the full implications of the deal
arrangements being operationalised are yet to be observed.
Regulatory requirements
The potential for emerging regulatory requirements to increase the
demands on the Group's operational capacity and increase the cost of
compliance.
Mitigation
The Group continues to invest in its IT and data management capabilities
to increase the ability to respond to regulatory change.
A structured approach to change management and fully leveraging internal
and external expertise allows the Group to respond effectively to
regulatory change.
Direction: increased
Increased levels of regulatory scrutiny and increased regulatory
expectations are driven by the increased size of the Group
post-Combination.
Competition risk
The risk that new bank entrants and existing peer banks shift focus to
the Group's market segments, which increases the level of competition.
Mitigation
The Group continues to develop products and services which meet the
requirements of the markets in which it operates.
Post the Combination, the Group has an enlarged suite of products and
capabilities to utilise, along with increased scale and financial
resources to support a response to changes in competition.
Direction: unchanged
The Group responded well to all competition and market changes
throughout 2020 and is well positioned to respond to changes in
competition in 2021.
Reputational risk
The potential risk of adverse effects that can arise from the Group's
reputation being affected due to factors such as unethical practices,
adverse regulatory actions, customer dissatisfaction and complaints or
negative/adverse publicity.
Reputational risk can arise from a variety of sources and is a second
order risk -- the crystallisation of a credit risk or operational risk
can lead to a reputational risk impact.
Deterioration of reputation
Potential loss of trust and confidence that our stakeholders place in us
as a responsible and fair provider of financial services.
Mitigation
Culture and commitment to treating customers fairly and being open and
transparent in communication with key stakeholders. Established
processes to proactively identify and manage potential sources of
reputational risk.
Direction: unchanged
Expectations remain high to deliver the integration in a timely and
effective manner while achieving strategic objectives. Expectations have
been raised across all stakeholders, including employees, customers,
regulators and shareholders.
Credit risk
Potential for loss due to the failure of a counterparty to meet its
contractual obligation to repay a debt in accordance with the agreed
terms.
Individual borrower defaults
Borrowers may encounter idiosyncratic problems in repaying their loans,
for example loss of a job or execution problems with a development
project.
While in most of cases of default the Group's lending is secured, some
borrowers may fail to maintain the value of the security.
Mitigation
Across both OSB and CCFS a robust underwriting assessment is undertaken
to ensure that a customer has the ability and propensity to repay and
sufficient security is available to support the new loan requested. At
CCFS an automated scorecard approach is taken, whilst OSB utilises a
bespoke manual underwriting approach.
Should there be problems with a loan, the Collections and Recoveries
team works with customers who are unable to meet their loan service
obligations to reach a satisfactory conclusion while adhering to the
principle of treating customers fairly.
Our strategic focus on lending to professional landlords means that
properties are likely to be well-managed, with income from a diversified
portfolio mitigating the impact of rental voids or maintenance costs.
Lending to owner-occupiers is subject to a detailed affordability
assessment, including the borrower's ability to continue payments if
interest rates increase. Lending on commercial property is based more on
security, and is scrutinised by the Group's independent Real Estate team
as well as by external valuers.
Development lending is extended only after a deep investigation of the
borrower's track record and stress testing the economics of the specific
project.
Direction: increased
The impact of COVID-19 on the UK economy is uncertain and could result
in a material increase in unemployment levels and decreases in property
prices, which could drive higher impairment levels.
The impact of the government support measures ending remains unknown and
the knock-on impact into borrower defaults thereafter.
Macroeconomic downturn
A broad deterioration in the economy would adversely impact both the
ability of borrowers to repay loans and the value of the Group's
security. Credit losses would impact across the lending portfolio, so
even if individual impacts were to be small, the aggregate impact on the
Group could be significant.
Mitigation
The Group works within portfolio limits on LTV, affordability, name,
sector and geographic concentration that are approved by the Group Risk
Committee and the Board. These are reviewed on a semi-annual basis. In
addition, stress testing is performed to ensure that the Group maintains
sufficient capital to absorb losses in an economic downturn and continue
to meet its regulatory requirements.
Direction: increased
The economic outlook is uncertain, driven by the potential range of
outcomes resulting from COVID-19 and the end of government support
measures.
Wholesale credit risk
The Group has wholesale exposures both through call accounts used for
transactional and liquidity purposes and through derivative exposures
used for hedging.
Mitigation
The Group transacts only with high quality wholesale counterparties.
Derivative exposures include collateral agreements to mitigate credit
exposures.
Direction: unchanged
The Group's wholesale credit risk exposure remains limited to high
quality counterparties, overnight exposures to clearing bank and swap
counterparties.
Market risk
Potential loss due to changes in market prices or values.
Interest rate risk
The risk of loss from adverse movement in the overall level of interest
rates. It arises from mismatches in the timing of repricing of assets
and liabilities, both on and off balance sheet. It includes the risks
arising from imperfect hedging of exposures and the risk of customer
behaviour driven by interest rates, e.g. early redemption.
Mitigation
The Group's Treasury function actively hedges to match the timing of
cash flows from assets and liabilities.
Direction: unchanged
The Group continues to assess interest on a regular basis ensuring that
interest rate risk exposure is limited.
Basis risk
The risk of loss from an adverse divergence in interest rates. It arises
where assets and liabilities reprice from different variable rate
indices. These indices may be market rates (e.g. Bank Base Rate,
Sterling Overnight Index Average (SONIA), or the London Interbank
Offered Rate (LIBOR)) or administered (e.g. the Bank's Standard Variable
Rate (SVR), other discretionary variable rates, or that received on call
accounts with other banks).
Mitigation
Due to the Group balance sheet structure, no active management of basis
risk was required by OSB Group during 2020.
Key mitigants include new swaps being linked to SONIA and existing LIBOR
linked swaps being transitioned to SONIA. LIBOR linked mortgages will
also be transitioned to referencing either the Bank of England base rate
or SONIA.
Direction: unchanged
Product design, balance sheet structure and replacing LIBOR swaps with
SONIA swaps enabled the Group to maintain the overall level of basis
risk across both Banks through the year.
The basis risk position will reduce over 2021 as CCFS and OSB fully
transition from LIBOR.
Liquidity and funding risk
The risk that the Group, although solvent, does not have sufficient
financial resources to enable it to meet its obligations as they fall
due.
Retail funding stress
As the Group is primarily funded by retail deposits, a retail run could
put it in a position where it could not meet its financial obligations.
Increased competition for retail savings driving up funding costs,
adversely impacting retention levels and profitability.
Mitigation
The Group's funding strategy is focused on a highly stable retail
deposit franchise. The large number of depositors provides
diversification and a high proportion of balances are covered by the
FSCS and so there is no material risk of a retail run.
In addition, the Group performs in-depth liquidity stress testing and
maintains a liquid asset portfolio sufficient to meet obligations under
stress. The Group holds prudential liquidity buffers to manage funding
requirements under normal and stressed conditions.
The Group has further diversified its retail channels by expanding the
range of pooled deposit providers used.
The Group proactively manages its savings proposition through both the
Liquidity Working Group and the Group Assets and Liabilities Committee.
Finally, the Group has prepositioned mortgage collateral with the Bank
of England which allows it to consider other alternative funding sources
to ensure it is not solely reliant on retail savings. The Group also has
a mature RMBS programme and access to warehouse facilities.
Direction: unchanged
The Group's funding levels and mix remained strong throughout the year.
During the year, OSB and CCFS were both able to attract significant
flows of new deposits and depositors when required.
Wholesale funding stress
A market-wide stress could close securitisation markets or make issuance
costs unattractive for the Group.
Mitigation
The Group continuously monitors wholesale funding markets, and is
experienced in taking proactive management actions where required.
The Group has issued a number of securitisations during 2020 where both
CCFS and OSB saw strong market demand for secured wholesale issuance
Direction: unchanged
The Group's range of wholesale funding options available, including repo
or sale of retained notes, collateral upgrade trades and warehouse
facilities, remains broadly unchanged.
Refinancing of Term Funding Scheme (TFS) and TFSME
The Group has drawn a total of GBP2.6bn funding under the TFS and
GBP1.0bn under the TFSME creating a refinancing concentration around the
maturity of the schemes.
Mitigation
The Group has fully factored in repayment of TFS into the funding plans
of both Banks, with planned repayment prior to the contractual date to
minimise timing and concentration risk. The Group has a wider range of
funding options to manage this process.
The Group has a TFSME allowance significantly above its wholesale
funding requirements which allows the TFS scheme to be fully refinanced
by TFSME.
Direction: decreased
The TFSME scheme will allow the Group to significantly extend the
maturities of its Bank of England based funding.
Solvency risk
The potential inability of the Group to ensure that it maintains
sufficient capital levels for its business strategy and risk profile
under both the base and stress case financial forecasts.
Deterioration of capital ratios
Key risks to solvency arise from balance sheet growth and unexpected
losses which can result in the Group's capital requirements increasing
or capital resources being depleted such that it no longer meets the
solvency ratios as mandated by the PRA and Board risk appetite.
The regulatory capital regime is subject to change and could lead to
increases in the level and quality of capital that the Group needs to
hold to meet regulatory requirements.
Mitigation
Currently the Group operates from a strong capital position and has a
consistent record of strong profitability.
The Group actively monitors its capital requirements and resources
against financial forecasts and plans and undertakes stress testing
analysis to subject its solvency ratios to extreme but plausible
scenarios.
The Group also holds prudent levels of capital buffers based on CRD IV
requirements and expected balance sheet growth.
The Group engages actively with regulators, industry bodies and advisers
to keep abreast of potential changes and provides feedback through the
consultation process.
Direction: unchanged
Proactive management of the Group's balance sheet and support measures
provided by the PRA via the CRR 'Quick Fix' package which included a
reset of the IFRS 9 capital transitional relief and the extension of the
SME support factor, together with ongoing profitability, resulted in the
Group's capital ratios strengthening.
Risks remain around adverse credit profile performance, resulting from
the ongoing COVID-19 pandemic and the removal of government support
measures.
Operational risk
The risk of loss or negative impact to the Group resulting from
inadequate or failed internal processes, people, or systems or from
external events.
IT Security (including cyber risk)
The risks resulting from a failure to protect the Group's systems and
the data within them. This includes both internal and external threats.
Mitigation
The Group invested significantly in enhancing its protection against IT
security threats, deploying a series of tools designed to identify and
prevent network/system intrusions. This is further supported by
documented and tested procedures intended to ensure the effective
response to a security breach.
Direction: increased
Due to the COVID-19 pandemic and the resulting high number of employees
working and accessing systems from home, the risk of a cyber-attack was
heightened.
Whilst IT security risks continue to evolve, the level of maturity of
the Group's controls and defences has significantly increased, supported
by dedicated IT security experts.
The Group's ongoing penetration testing continues to drive enhancements
by identifying potential areas of risk.
Data quality and completeness
The risks resulting from data being either inaccurate or incomplete.
Mitigation
The Group established a dedicated Data Strategy Programme, designed to
ensure a consistent approach to the maintenance and use of data. This
includes both documented procedures and frameworks and also tools
intended to improve the consistency of data use.
Direction: unchanged
Further progress was made during 2020 in embedding Group-wide governance
frameworks, standards and controls. Further work is planned in 2021, to
move closer to the Group's target end state.
Change management
The risks resulting from unsuccessful change management implementations,
including the failure to respond effectively to release-related
incidents.
Mitigation
The Group recognises that implementing change introduces significant
operational risk and has therefore implemented a series of control
gateways designed to ensure that each stage of the change management
process has the necessary level of oversight.
Direction: increased
The Group continues to adopt an ambitious change agenda, driven by the
integration programme. During 2020 this risk was monitored and managed
well, however further change is planned in 2021, against the backdrop of
the ongoing COVID-19 pandemic and likely periods of employees working
from home.
IT Failure
The risks resulting from a major IT application or infrastructure
failure impacting access to the Group's IT systems.
Mitigation
The Group continues to invest in improving the resilience of its core
infrastructure. It has identified its prioritised business services and
the infrastructure that is required to support them. Tests are performed
regularly to validate its ability to recover from an incident.
Direction: unchanged
Whilst progress was made in reducing both the likelihood and impact of
an IT failure, the risks remain, in particular due to the new operating
environment. Further work is planned during 2021.
Organisational change and integration
The risks resulting from the Group's ongoing integration activities,
including systems, people and infrastructure.
Mitigation
There is a low risk integration project plan (e.g. no large-scale
integration-related IT project change planned). Experienced and capable
project management office, with close oversight and direction provided
by the Group Executive and Board Integration Committees.
Direction: unchanged
To date, organisational change resulting from the integration project
has been managed well, with no material risks emerging during 2020.
Further work is required to reach the target end state and carefully
considered plans, strong risk identification and monitoring and
management capabilities remain in place.
Conduct risk
The risk that the Group's behaviours or actions result in customer
detriment or negative impact on the integrity of the markets in which it
operates.
Product suitability
Whilst the Group originates relatively simple products, there remains a
risk that products (primarily legacy) may be deemed to be unfit for
their original purpose in line with current regulatory definitions.
Mitigation
The Group has a strategic commitment to provide simple, customer-focused
products. In addition, a Product Governance framework is established to
oversee both the origination of new products and to revisit the ongoing
suitability of the existing product suite.
Direction: unchanged
Whilst this risk remained low as a result of increased awareness and
dedicated oversight, the Group remains aware of the changes to the
regulatory environment and their possible impact on product suitability.
Data protection
The risk that customer data is accessed inappropriately, either as a
consequence of network/ system intrusion or through operational errors
in the management of the data.
Mitigation
In addition to a series of network/system controls the Group performs
extensive root cause analysis of any data leaks in order to ensure that
the appropriate mitigating actions are taken.
Direction: unchanged
Despite a number of additional controls being introduced in 2020, the
network/system threats continue to evolve in both volume and
sophistication.
Integration risk
The risk that the integration programme directly or indirectly causes
poor outcomes for customers and the market.
Mitigation
During the integration process, the Group is committed to adopting a
low-risk approach with a view to taking reasonable steps to avoid
causing poor outcomes for its customers and the market. The Group will
conduct detailed analysis of potential customer harm associated with
particular integration steps.
Direction: unchanged
No material issues have been identified to date and controls are in
place to ensure that the integration programme does not result in poor
customer outcomes.
Compliance and regulatory risk
The risk that a change in legislation or regulation or an interpretation
that differs from the Group's will adversely impact the Group.
Prudential regulatory changes
The Group continues to see a high volume of key compliance regulatory
changes that impact its business activities. These include: change in
Standardised Approach capital rules and implementation of an IRB floor,
implementation of the European Standardised Information Sheet, extending
the Senior Managers and Certification Regime to all FCA regulated firms
and introduction of Strong Customer Authentication requirements.
The focus on external wall cladding for high-rise buildings was extended
to smaller buildings in February 2021, and the value of properties
supporting the Group's loan portfolios could be impacted, or customer
behaviour could change if significant remediation activity is required
to ensure building safety regulations are met.
Mitigation
The Group has an effective horizon scanning process to identify
regulatory change.
All significant regulatory initiatives are managed by structured
programmes overseen by the Project Management team and sponsored at
Executive level.
The Group has proactively sought external expert opinions to support
interpretation of the requirements and validation of its response, where
required.
The Group has initiated a study into external wall cladding and is
reviewing its own property portfolio along with the collateral
supporting lending portfolios. The Group also notes the recent support
measures announced by the government to help individuals to ensure
compliance with building safety standards, including the removal of
defective cladding.
Direction: unchanged
The Group continues to have a high level of interaction with the UK
regulators and continues to respond effectively to all regulatory
changes.
Conduct regulation
Regulatory changes focused on the conduct of business could force
changes in the way the Group carries out business and impose substantial
compliance costs.
Product design, underwriting, arrears and forbearance policies are
misaligned to regulatory expectations, which result in customers not
being treated fairly, particularly those experiencing financial hardship
or vulnerable customers, with the potential for reputational damage,
redress and other regulatory actions.
Mitigation
The Group has a programme of regulatory horizon scanning linking into a
formal regulatory change management programme. In addition, the focus on
simple products and customer oriented culture means that current
practice may not have to change significantly to meet new conduct
regulations.
All Group entities utilise underwriting, arrears, repossession,
forbearance and vulnerable customer policies which are designed to
comply with regulatory rules and expectations. These policies articulate
the Group's commitment to ensuring that all customers, including those
who are vulnerable or experiencing financial hardship, are treated
fairly, consistently and in a way that considers their individual needs
and circumstances.
The Group does not tolerate any systematic failure to deliver fair
customer outcomes. On an isolated basis, incidents can result in
detriment due to human and/ or operational failures. Where such
incidents occur, they are thoroughly investigated, and the appropriate
remedial actions are taken to address any customer detriment and prevent
recurrence.
Direction: unchanged
The level of regulatory change continues to be high, but the Group has
sufficient resources and capabilities to respond to any changes in an
effective and efficient manner.
During the year, the Group took part in a number of FCA thematic reviews,
including reviews on long-term forbearance in the second charge market
and a Business model drivers and unaffordable lending review.
Integration risk
The risks resulting from the Group's ongoing integration activities,
including business operational and financial performance, systems,
people and infrastructure.
Risk
A reduction in the oversight of business as usual operational
performance, increased risk to operational resilience via the change
process, unintended staff attrition or infrastructure failure, which in
turn adversely impact operating and financial performance.
Mitigation
The Board is maintaining oversight of the integration process through
the Board Integration Committee. A dedicated Integration Management
Office has been established to drive the integration process forward.
Independent assessment, monitoring and reporting is being undertaken by
the Risk and Internal Audit functions.
Direction: unchanged
To date the integration project has progressed as planned, and the
governance, project management and control structures have operated
effectively, with no material risks crystallising.
Emerging risks
The Group proactively scans for emerging risks which may have an impact
on its ongoing operations and strategy. The Group considers its top
emerging risks to be:
Political and macroeconomic uncertainty
The impact of COVID-19 and the removal of government support measures
remains uncertain. The Group's lending activity is predominantly focused
in the United Kingdom (with a legacy back book of mortgages in the
Channel Islands) and, as such, will be impacted by any risks emerging
from changes in the macroeconomic environment. Risks also remain around
the disruption that the UK's exit from the European Union, will have on
the economy.
Mitigation
The Group implemented robust monitoring processes and via various stress
testing activity (i.e. ad hoc, risk appetite and ICAAP) understands how
the Group performs over a variety of macroeconomic stress scenarios and
has developed a suite of early warning indicators, which are closely
monitored to identify changes in the economic environment. The Board and
management review detailed portfolio reports to identify any changes in
the Group's risk profile.
Climate change
As the worldwide focus on climate change intensifies, both the physical
risks and the transitional risks associated with climate change continue
to grow. Climate change risks include:
Physical risks can relate to specific weather events, such as storms and
flooding, or to longer-term shifts in the climate, such as rising sea
levels. These risks could include adverse movements in the value of
certain properties that are in coastal and low lying areas, or located
in areas prone to increased subsidence and heave.
Transitional risks may arise from the adjustment towards a low-carbon
economy, such as tightening energy efficiency standards for domestic and
commercial buildings. These risks could include a potential adverse
movement in the value of properties requiring substantial updates to
meet future energy performance requirements.
Reputational risk arising from a failure to meet changing societal,
investor or regulatory demands.
Mitigation
The Group developed an approach to assessing and managing the risks
relating to climate change within its Risk Management Framework. This
includes scenario analysis, development of key risk indicators and
inclusion of climate risks within operational resilience activities.
A cross-functional working group is overseeing the Group's response to
climate change, in line with industry best practice and regulatory
guidelines.
As part of the Group's ICAAP a detailed analysis was conducted using
third party data to conduct an initial assessment of the financial risk
that climate change could pose to the Group. This analysis will be
developed further during 2021 and will be aligned with activity to
develop an integrated ESG plan during the first half of 2021.
The Group's Chief Risk Officers have designated senior management
responsibility for the management of climate change risk; during 2021 a
Board member will be specified to ensure that the Group meets regulatory
and wider stakeholder expectations.
Model risk
The risk of financial loss, adverse regulatory outcomes, reputational
damage or customer detriment resulting from deficiencies in the
development, application or ongoing operation of models and ratings
systems.
Post the completion of the Combination with CCFS, the Group notes the
increasing usage of models to conduct financial assessments whilst
informing business decisions. The Group also notes changes in industry
best practice with respect to managing model risk.
Mitigation
During 2020, Board and Executive level model oversight Committees and a
suite of Group level policies were introduced.
Further enhancements are planned during 2021 to ensure that the model
governance arrangements meet regulatory expectations and model risk is
managed effectively.
LIBOR reform
The LIBOR benchmark may cease to be set after the end of 2021 due to the
low level of supporting unsecured loans in the wholesale interbank loan
market. The Group has exposure to the LIBOR benchmark within some of its
customer lending products and wholesale derivative hedging transactions.
If the benchmark were to cease or become unreliable, these loans and
derivatives may reflect rates that do not accurately represent
short-term funding costs, therefore having an adverse effect on returns.
Mitigation
The Group ALCO has set up a dedicated working group to focus on this
risk and transition away from the LIBOR benchmark. Key mitigating
actions include new swaps being linked to SONIA and existing LIBOR
linked swaps being transitioned to SONIA. LIBOR linked mortgages will
also be transitioned to referencing either the Bank of England base rate
or SONIA.
Coronavirus
The COVID-19 pandemic has had a material impact on individuals and
businesses where the Group has operations, including the UK and India.
The lockdown measures introduced to stem the spread of the virus have
had a profound effect on how businesses operate and individuals work,
which may have a materially adverse impact on the Group's profitability,
capital and liquidity positions.
It is unclear how the COVID-19 pandemic will evolve during 2021 and the
impact that the roll-out of vaccines will have and whether any new
strains emerge. A further risk relates to the impact once government
support measures are withdrawn during 2021 and the resultant impact on
business failures, unemployment levels and house prices.
Mitigation
The Group has taken a considered approach to minimising and managing the
impact of a coronavirus-related global pandemic. The Group approach
represents a comprehensive response strategy covering both severity and
consequences of a global pandemic. The Group's response strategy covers
key aspects of an effective pandemic response approach, including
prevention, continuity, impact assessment and stress testing. Supporting
the Group's response strategy are established underlying capabilities to
facilitate operational and financial resilience testing and planning,
active monitoring and reporting procedures, and active communications
with all employees (UK and India) and supervisory authorities.
Negative interest rates
To support economic performance, resulting from the impact of the
pandemic, the Bank of England may consider reducing the Bank of England
base rate below 0%. The Group would be impacted across its lending
portfolios with adverse movements in interest income, offset by
reductions in interest payable on savings accounts.
A further risk relates to increased operational and conduct risks
arising from system and process changes required to accommodate negative
interest rates.
Negative interest rates may also impact customer behaviour, with changes
in the demand for lending and savings products potentially impacting the
Group's loan book growth plans and liquidity coverage levels.
Mitigation
The Group has reviewed readiness for negative interest rates and
presented findings to the Board. The review covered the terms and
conditions of the Group's financial contracts and any systems
limitations. Some key servicing systems have been identified as
requiring further development to allow negative rates and in particular
negative pay rates. Given a mixture of floors in terms and conditions
for certain products and the Group's margins, negative interest rates
would be unlikely to cause an issue until the Bank of England base rate
reaches a rate of -75bps or below. A working group is currently
examining further system development to manage significant negative
rates.
Viability statement
In accordance with Provision 31 of the 2018 UK Corporate Governance Code,
the Board is required to assess the viability of the Group over a stated
time horizon with a supporting statement in the Annual Report.
The viability statement is required to include an explanation of how the
prospects of the Group have been assessed, the time horizon over which
the assessment has been performed and why the assessment period is
deemed appropriate. The viability statement needs to be supported by an
assessment of the principal risks and uncertainties to which the Group
is exposed and based on reasonable expectations to conclude that the
Group will be able to continue to operate and meet its liabilities as
they fall due over that period.
The Group uses a five-year time frame in its business and financial
planning and for internal stress test scenarios. The long-term direction
is informed by business and strategic plans which are reviewed on, at
least, an annual basis and which include multi-year financial
statements. The operating and financial plans consider, among other
matters, the Board's risk appetite, macroeconomic outlook, market
opportunity, the competitive landscape, and sensitivity of the financial
plans to volumes, margin pressures and capital requirements.
While a five-year time frame is used internally, levels of uncertainty
increase as the planning horizon extends and the Group's operating and
financial plans focus more closely on the next three years. The Board
therefore considers a period of three years to be an appropriate period
for the assessment to be made.
The Banks within the Group are authorised by the PRA, and regulated by
the FCA and the PRA, and the Group undertakes regular analysis of its
risk profile and assumptions. It has a robust set of policies,
procedures and systems to undertake a comprehensive assessment of all
the principal risks and uncertainties to which it is exposed on a
current and forward-looking basis (as described in Principal risks and
uncertainties).
The Group identifies, assesses, manages and monitors its risk profile
based on the disciplines outlined within the Risk Management Framework,
in particular through leveraging its risk appetite framework (as
described in the Risk review). Potential changes in the aggregated risk
profile are assessed across the business planning horizon by subjecting
the operating and financial plans to severe but plausible macroeconomic
and idiosyncratic stress scenarios.
The viability of the Group is assessed at both the Group and the
underlying regulated Bank levels, through leveraging the risk management
frameworks and stress testing capabilities of both regulated banks. Post
Combination, the risk assessment and stress testing capabilities of OSB
and CCFS have been progressively aligned; however, the strength of the
capital and funding profiles of both Banks provides an appropriate level
of assurance that the Group and its entities can withstand a severe but
plausible stress scenario.
Stress testing is an integral risk management discipline, used to assess
the financial and operational resilience of the Group. The Group
developed bespoke stress testing capabilities to assess the impact of
extreme but plausible scenarios in the context of its principal risks
impacting the primary strategic, financial and regulatory objectives.
Stress test scenarios are identified in the context of the Group's
operating model, identified risks, business and economic outlook. The
Group actively engages external experts to inform the process by which
it develops business and economic stress scenarios.
A broad range of stress scenarios are analysed, including the economic
impact of COVID-19 forecasting the potential impacts to HPI,
unemployment and interest rates. Stress testing has played a critical
role in framing the Group's response to the pandemic in relation to risk
appetite, capital, liquidity levels and credit provisioning.
Stresses are applied to lending volumes, capital requirements, liquidity
and funding mix, interest margins and credit and operational losses.
Stress testing also supports key regulatory submissions such as the
ICAAP, ILAAP and the Recovery Plan. ICAAP stress testing assesses
capital resources and requirements over a five-year period.
The Group has identified a broad suite of credible management actions
which can be implemented to manage and mitigate the impact of stress
scenarios. These management actions are assessed under a range of
scenarios varying in severity and duration. Management actions are
evaluated based on speed of implementation, second order consequences
and dependency on market conditions and counterparties. Management
actions are used to inform capital, liquidity and recovery planning
under stress conditions.
In addition, the Group identifies a range of catastrophic scenarios,
which could result in the failure of its current business model.
Business model failure scenarios (Reverse Stress Tests or RSTs) are
primarily used to inform the Board of the outer limits of the Group's
risk profile. RSTs play an important role in helping the Board and
Executives to assess the available recovery options to revive a failing
business model. The RST exercise is based on analysing a range of
scenarios, including an extreme macroeconomic downturn, a cyberattack
leading to a loss of customer data which is used for fraudulent
activities, extreme regulatory and taxation changes impacting Buy-to-Let
lending volumes and a liquidity crisis caused by severe market
conditions combined with idiosyncratic consequences.
The Group has established a comprehensive operational resilience
framework to actively assess the vulnerabilities and recoverability of
its critical services. The Group also conducts regular business
continuity and disaster recovery exercises.
The ongoing monitoring of all principal risks and uncertainties that
could impact the operating and financial plan, together with the use of
stress testing to ensure that the Group could survive a severe but
plausible stress, enables the Board to reasonably assess the viability
of the business model over a three-year period.
The pandemic has had a disruptive impact on the Group's business growth
objectives and the changing characteristics of the underlying risk
profiles, particularly in relation to credit and operational risks. The
Group has enhanced its risk assessment, monitoring and reporting
procedures to ensure that these risks are effectively managed and has
accordingly adjusted its risk appetite.
The Group has also maintained strong capital and funding profiles with a
view to ensuring continued financial resilience. However, the Group
remains fully cognisant of the evolving nature of the pandemic crisis,
particularly the potential risks which may be realised as government
support schemes start to wind down.
The Board has also considered the potential implications of the pandemic
in its assessment of the financial and operational viability of the
Group and has a reasonable belief that the Group retains adequate levels
of financial resources (capital and liquidity) and operational
contingency. In assessing the viability of the Group, the Board has
considered the potential impact and risks facing the Group with respect
to the pandemic as set out in the Risk review and the Principal risks
and uncertainties.
The Group has recently undertaken a comparative review of the
macroeconomic stress scenarios used to assess the Group's ongoing
viability relative to the pandemic scenarios, as obtained from the
Group's third-party economic advisers. Given the evolving nature of the
pandemic crisis, the Group will continue to refine and update the
scenarios in consultation with its economic advisers.
This exercise was undertaken to ensure that the shape and severity of
the scenarios used to assess the Group's financial viability are
sufficiently severe to accommodate for the latest assessment of the
potential economic impact of the pandemic.
The pandemic scenarios take into consideration the following drivers and
implications relevant to a pandemic crisis:
-- Government guidance and policy response to the crisis
-- Impact of customers subject to payment deferrals and thereafter requiring
forbearance
-- Impact on employment levels, regional house price and commercial property
price changes and interest rates. These macroeconomic drivers are
subsequently reflected in stressed credit risk parameters in probability
of default and loss given default estimates
-- Implication for consumer spending and business investment
The pandemic scenarios are designed to be severe, but plausible, based
on the assumption that the impact on the UK economy is immediate and
quickly feeds through into rising unemployment rates, declining
residential and commercial property prices and a rapid slowdown in
lending volumes. The Treasury and Bank of England take proactive fiscal
and monetary stimulatory actions, but given the invasive nature of the
pandemic, the UK economy does not show signs of recovery until 2022.
The potential impact of the pandemic on the economy and the Group's
operations is subject to continuous monitoring through the Group's
Management Committees, capital and liquidity, operational resilience and
business continuity planning working groups, with appropriate escalation
to the Board and supervisory authorities.
The Group has progressively enhanced its approach to assessing the
viability of its strategy and business operating model, in particular
the Group has enhanced its capabilities by
-- Enhancing stress testing capabilities through more focused assessment of
more vulnerable cohorts of its lending portfolio supported by increased
granularity of monitoring and risk reporting
-- Increasing the diversification of its funding profile, supported by
enhanced assessment of funding and liquidity risk profiles
-- Continued improvements to the risk and control self-assessment procedures
across key areas of operational risk, including operations and technology
-- Enhancing the assessment of operational resilience through the ongoing
review of priority business functions, including supporting
infrastructure and dependencies through a simulated business continuity
exercise
The current financial forecasts, risk profile characteristics and stress
test analysis, the Group's capital, funding and operational capabilities
support the Directors' assessment that they have a reasonable
expectation that the Group will remain viable over the three-year
horizon.
Statement of Directors' responsibilities
The Directors are responsible for preparing the Annual Report and the
Group and parent Company financial statements in accordance with
applicable law and regulations.
Company law requires the Directors to prepare Group and parent Company
financial statements for each financial year. Under that law they are
required to prepare the Group financial statements in accordance with
International Financial Reporting Standards as adopted by the European
Union (IFRSs as adopted by the EU) and applicable law and have elected
to prepare the parent Company financial statements on the same basis.
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair view
of the state of affairs of the Group and parent Company and of their
profit or loss for the year. In preparing each of the Group and parent
Company financial statements, the Directors are required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable, relevant and reliable;
-- state whether they have been prepared in accordance with IFRSs as adopted
by the EU;
-- assess the Group and parent Company's ability to continue as a going
concern, disclosing, as applicable, matters related to going concern; and
-- use the going concern basis of accounting unless they either intend to
liquidate the Group or the parent Company or to cease operations, or have
no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the parent Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the parent Company and the Group enabling them to
ensure that the financial statements comply with the Companies Act 2006.
They are responsible for such internal control as they determine is
necessary to enable the preparation of financial statements that are
free from material misstatement, whether due to fraud or error and, have
general responsibility for taking such steps as are reasonably open to
them to safeguard the assets of the Group and to prevent and detect
fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible
for preparing a Strategic Report, Directors' Report, Directors'
Remuneration Report and Corporate Governance Statement that complies
with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website.
Legislation in the UK governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
Responsibility statement of the directors in respect of the annual
financial report
Each of the persons who is a Director at the date of approval of this
report confirms, to the best of their knowledge, that:
-- the financial statements, prepared in accordance with the applicable set
of accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company and the
undertakings included in the consolidation taken as a whole; and
-- the Strategic Report/Directors' Report includes a fair review of the
development and performance of the business and the position of the
Company and the undertakings included in the consolidation taken as a
whole, together with a description of the principal risks and
uncertainties that they face.
Each of the persons who is a Director at the date of approval of this
report confirms that:
-- so far as the Director is aware, there is no relevant audit information
of which the Company's auditor is unaware; and
-- they have taken all the steps they ought to have taken as a Director in
order to make themselves aware of any relevant audit information and to
establish that the Company's auditors are aware of that information.
Approved by the Board and signed on its behalf by:
Jason Elphick
Group General Counsel and Company Secretary
8 April 2021
2020 2019
Note GBPm GBPm
Interest receivable and similar income 4 711.9 539.9
Interest payable and similar charges 5 (239.7) (195.2)
Net interest income 472.2 344.7
Fair value gains/(losses) on financial
instruments 6 7.4 (3.3)
Gain/(loss) on sale of financial instruments 7 20.0 (0.1)
Other operating income 8 9.0 2.1
Total income 508.6 343.4
Administrative expenses 9 (157.0) (108.7)
Provisions 39 (0.1) -
Impairment of financial assets 25 (71.0) (15.6)
Impairment of intangible assets 10 (7.0) -
Gain on Combination with CCFS - 10.8
Integration costs 13 (9.8) (5.2)
Exceptional items 14 (3.3) (15.6)
Profit before taxation 260.4 209.1
Taxation 15 (64.1) (50.3)
Profit for the year 196.3 158.8
-------
Other comprehensive income
Items which may be reclassified to profit
or loss:
Fair value changes on financial instruments
measured as Fair Value through Other Comprehensive
Income:
Arising in the year 1.0 0.8
Revaluation of foreign operations - (0.6)
Tax on items in other comprehensive income (0.5) (0.2)
Other comprehensive income 0.5 -
---------------------------------------------------- ---- -------
Total comprehensive income for the year 196.8 158.8
-------
Attributable to:
Equity shareholders of the company 191.3 153.3
Non-controlling interest 5.5 5.5
196.8 158.8
Dividend, pence per share 17 - 16.1
Earnings per share, pence per share
Basic 16 42.8 52.6
Diluted 16 42.4 52.2
The above results are derived wholly from continuing operations.
The notes below form part of these accounts.
The financial statements were approved by the Board of Directors on 8
April 2021.
2020 2019
Note GBPm GBPm
Assets
Cash in hand 0.5 0.4
Loans and advances to credit institutions 19 2,676.2 2,204.6
Investment securities 20 471.2 635.3
Loans and advances to customers 21 19,230.7 18,446.8
Fair value adjustments on hedged assets 27 181.6 16.8
Derivative assets 26 12.3 21.1
Other assets 28 9.1 14.3
Current taxation asset 8.4 -
Deferred taxation asset 29 4.7 4.8
Property, plant and equipment 31 39.2 41.6
Intangible assets 32 20.6 31.4
Total assets 22,654.5 21,417.1
--------------------------------------------- ---- --------- --------
Liabilities
Amounts owed to credit institutions 33 3,570.2 3,068.8
Amounts owed to retail depositors 34 16,603.1 16,255.0
Fair value adjustments on hedged liabilities 27 8.2 (5.1)
Amounts owed to other customers 35 72.9 29.7
Debt securities in issue 36 421.9 296.3
Derivative liabilities 26 163.6 92.8
Lease liabilities 37 11.7 13.3
Other liabilities 38 27.8 34.9
Provisions 39 1.8 1.6
Current taxation liability - 41.5
Deferred taxation liability 30 48.3 63.1
Subordinated liabilities 40 10.5 10.6
Perpetual subordinated bonds 41 37.6 37.6
20,977.6 19,940.1
Equity
Share capital 43 1,359.8 4.5
Share premium 43 - 864.2
Retained earnings 1,608.6 553.2
Other reserves 44 (1,351.5) (4.9)
Shareholders' funds 1,616.9 1,417.0
Non-controlling interest 60.0 60.0
Total equity and liabilities 22,654.5 21,417.1
--------------------------------------------- ---- --------- --------
The notes below form part of these accounts. The financial statements
were approved by the Board of Directors on 8 April 2021 and signed on
its behalf by
Andy Golding April Talintyre
Chief Executive Officer Chief Financial Officer
Company number: 11976839
Foreign Share-based Non-controlling
Share Share Capital Transfer Own exchange FVOCI payment Retained interest
capital premium contribution reserve shares(1) reserve reserve reserve earnings securities Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 31 December 2018 2.4 158.8 6.5 (12.8) - (0.4) (0.1) 4.7 439.3 60.0 658.4
Profit for the year - - - - - - - - 158.8 - 158.8
Shares issued as consideration
for CCFS Combination 2.0 705.1 - - - - - - (6.4) - 700.7
Own shares(1) - - - - (3.7) - - - - - (3.7)
Coupon paid on non-controlling
interest securities - - - - - - - - (5.5) - (5.5)
Dividends paid - - - - - - - - (37.3) - (37.3)
Other comprehensive
income - - - - - (0.6) 0.8 - - - 0.2
Share-based payments 0.1 0.3 - - - - - (0.2) 4.3 - 4.5
Tax recognised in
equity - - - - - - (0.2) 1.1 - - 0.9
At 31 December 2019 4.5 864.2 6.5 (12.8) (3.7) (1.0) 0.5 5.6 553.2 60.0 1,477.0
Profit for the year - - - - - - - - 196.3 - 196.3
Coupon paid on non-controlling
interest securities - - - - - - - - (5.5) - (5.5)
Other comprehensive
income - - - - - - 1.0 - - - 1.0
Share-based payments - 2.6 - - - - - 2.4 3.2 - 8.2
Tax recognised in
equity - - - - - - (0.5) (0.2) 0.5 - (0.2)
Transfer between reserves - - (6.5) 12.8 - - - - (6.3) - -
Own shares(1) - - - - (0.3) - - - 0.4 - 0.1
Cancellation of OneSavings
Bank plc share capital
and share premium (4.5) (866.8) - - - - - - 866.8 - (4.5)
Issuance of OSB GROUP
PLC share capital 1,359.8 - - (1,355.3) - - - - - - 4.5
At 31 December 2020 1,359.8 - - (1,355.3) (4.0) (1.0) 1.0 7.8 1,608.6 60.0 1,676.9
------------------------------- -------- -------- ------------- --------- --------- --------- -------------- ----------- --------- --------------- -------
(1) The Group has adopted look-through accounting (see note 2) and
recognised the Employee Benefit Trusts within OSB GROUP PLC (2019:
OneSavings Bank plc).
The reserves are further disclosed in note 44.
2020 2019
Note GBPm GBPm
Cash flows from operating activities
Profit before taxation 260.4 209.1
Expenses recognised in equity - (6.4)
Adjustments for non-cash items 51 79.2 26.2
Changes in operating assets and liabilities 51 (1,537.2) (711.8)
Cash used in operating activities (1,197.6) (482.9)
Provisions refunded/(paid) 39 0.1 (0.2)
Net tax paid (128.8) (53.0)
Net cash used in operating activities (1,326.3) (536.1)
Cash flows from investing activities
Unencumbered cash acquired on CCFS Combination - 870.4
Maturity and sales of investment securities 20 407.3 357.7
Purchases of investment securities 20 (190.9) (389.9)
Interest received on investment securities 7.0 -
Sales of financial instruments 7 539.9 -
Purchases of equipment and intangible
assets 32,31 (7.5) (11.6)
Cash generated from investing activities 755.8 826.6
Cash flows from financing activities
Financing received(1) 42 1,991.2 872.7
Financing repaid(1) 42 (1,103.6) (338.5)
Cash held in deconsolidated special purpose
vehicles (23.0) -
Interest paid on financing (21.4) (2.6)
Coupon paid on non-controlling interest
securities (5.5) (5.5)
Dividends paid 17 - (37.3)
Proceeds from issuance of shares under
employee SAYE schemes 43 2.6 0.4
Cash payments on lease liabilities 37 (2.0) (1.1)
Cash generated from financing activities 838.3 488.1
Net increase in cash and cash
equivalents 267.8 778.6
Cash and cash equivalents at the beginning
of the year 18 2,102.8 1,324.2
Cash and cash equivalents at the end of
the year 18 2,370.6 2,102.8
Movement in cash and cash equivalents 267.8 778.6
--------- -------
1. Insertion of OSB GROUP PLC
As part of the Group's integration strategy, following the Combination
with CCFS, a new holding company, OSB GROUP PLC (OSBG), was inserted as
the new ultimate holding company and listed entity of the Group.
OneSavings Bank plc (OSB) was both a banking entity and the ultimate
parent company of the Group until 27 November 2020, at which point it
became a 100% subsidiary of the new ultimate parent company, OSBG.
As part of the insertion of OSBG, the existing listed share capital and
share premium of OSB was cancelled on 27 November 2020 and the share
capital and share premium amounts of OSB transferred to retained
earnings. OSB subsequently issued the same number of new unlisted
GBP0.01 ordinary shares from retained earnings to OSBG. Each cancelled
GBP0.01 OSB share was replaced with one OSBG share with a nominal value
of GBP3.04 each. The difference in the value of share capital in issue
of the OSBG shares compared to the cancelled OSB shares is recognised in
the transfer reserve within equity.
The insertion of OSBG has been treated as a business combination under
common control, with the Group controlled by the same parties both
before and after the insertion. Combinations under common control are
outside the scope of IFRS 3 Business Combinations and accordingly, the
insertion has not been recognised at fair value and no goodwill or fair
value acquisition adjustments have been recognised. The Group's
consolidated financial statements have been presented to include OSB's
consolidated assets, liabilities, income and expenses prospectively from
the date of the insertion without restating pre-combination information,
as if OSBG had been the parent company throughout the current and prior
years.
2. Accounting policies
a) Basis of preparation
The financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRSs) as adopted by the
European Union (EU) and interpretations issued by the International
Financial Reporting Interpretations Committee (IFRIC).
The financial statements have been prepared on a historical cost basis,
as modified by the revaluation of investment securities held at fair
value through other comprehensive income (FVOCI) and derivative
contracts and other financial assets held at fair value through profit
or loss (FVTPL) (see note p(vi)).
As permitted by section 408 of the Companies Act 2006, no Statement of
Comprehensive Income is presented for the Company.
b) Going concern
The Board undertakes regular rigorous assessments of whether the Group
is a going concern in light of current economic conditions and all
available information about future risks and uncertainties.
In assessing whether the going concern basis is appropriate, projections
for the Group have been prepared, covering its future performance,
capital and liquidity for a period in excess of 12 months from the date
of approval of these Financial Statements. These forecasts have been
subject to sensitivity tests, including stress scenarios, which have
been compared to the latest Brexit and COVID-19 pandemic economic
scenarios provided by the Group's external economic advisors, as well as
reverse stress tests.
2. Accounting policies (continued)
The assessments were significantly influenced by COVID-19 implications,
covering the Group's capital, liquidity and operational resilience,
including the following:
-- Financial and capital forecasts were prepared under stress scenarios
which were assessed against the latest COVID-19 related economic
forecasts provided by the Group's external economic advisors. Reverse
stress tests were also run, to assess what combinations of House Price
Index and unemployment variables would result in the Group utilising its
regulatory capital buffers in full and breaching the Group's minimum
prudential requirements along with analysis and insight from the Group's
Internal Capital Adequacy Assessment Process (ICAAP). The Directors
assessed the likelihood of those reverse stress scenarios occurring
within the next 12 months and concluded that the likelihood is remote.
-- The latest liquidity and contingent liquidity positions and forecasts
were assessed against the ILAAP stress scenarios, which were reviewed for
suitability in the context of COVID-19 related stresses.
-- The Group continues to assess the resilience of its business operating
model and supporting infrastructure in the context of the emerging
economic, business and regulatory environment. The key areas of focus
continue to be on the provision of critical services to customers,
employee health and safety and the evolving governmental policies and
guidelines. The Group has assessed and enhanced its information
technology platforms to support its employees with flexible working and
homeworking across all locations, ensuring stable access to core systems,
data and communication devices. The response to the pandemic demonstrates
the inherent resilience of the Group's critical processes and
infrastructure. It also reflects the necessary agility in responding to
future operational demands. The operational dependencies on third-party
vendors and outsourcing arrangements continue to be an important area of
focus.
The Group's financial projections, supported by the COVID-19 assessments,
demonstrate that the Group has sufficient capital and liquidity to
continue to meet its regulatory capital requirements as set out by the
PRA.
The Board has therefore concluded that the Group has sufficient
resources to continue in operational existence for a period in excess of
12 months and as a result, it is appropriate to prepare these Financial
Statements on a going concern basis.
c) Basis of consolidation
The Group's consolidated financial statements have been presented to
include OSB's consolidated assets, liabilities, income and expenses
prospectively from the date of the insertion of OSBG without restating
pre-insertion information, as if OSBG had been the parent company
throughout the current and prior years.
The Group accounts include the results of the Company and its subsidiary
undertakings. Subsidiaries are fully consolidated from the date on which
control is transferred to the Group and are deconsolidated from the date
that control ceases. Upon consolidation, intercompany transactions,
balances and unrealised gains on transactions are eliminated. Unrealised
losses are also eliminated unless the transaction provides evidence of
impairment of the asset transferred. Accounting policies of subsidiaries
have been changed where necessary to ensure consistency, so far as is
possible, with the policies adopted by the Group.
2. Accounting policies (continued)
Subsidiaries are those entities, including structured entities, over
which the Group has control. The Group controls an entity when it is
exposed, or has rights, to variable returns from its involvement with
the entity and has the ability to affect those returns through its power
over the investee. The Group has power over an entity when it has
existing rights that give it the current ability to direct the
activities that most significantly affect the entity's returns. Power
may be determined on the basis of voting rights or, in the case of
structured entities, other contractual arrangements.
Where the Group does not retain a direct ownership interest in a
securitisation entity, but the Directors have determined that the Group
controls those entities, they are treated as subsidiaries and are
consolidated. Control is determined to exist if the Group has the power
to direct the activities of each entity (for example, managing the
performance of the underlying mortgage assets and raising debt on those
mortgage assets which is used to fund the Group) and, in addition to
this, control is exposed to a variable return (for example, retaining
the residual risk on the mortgage assets). Securitisation structures
that do not meet these criteria are not treated as subsidiaries and are
excluded from the consolidated accounts. The Company applies the net
approach in accounting for securitisation structures where it retains an
interest in the securitisation, netting the loan notes held against the
deemed loan balance.
The Group's Employee Benefit Trust (EBT) is controlled and recognised by
the Company using the look-through approach, i.e. as if the EBT is
included within the accounts of the Company.
The Group is not deemed to control an entity when it exercises power
over an entity in an agency capacity. In determining whether the Group
is acting as an agent, the Directors consider the overall relationship
between the Group, the investee and other parties to the arrangement
with respect to the following factors: (i) the scope of the Group's
decision-making power; (ii) the rights held by other parties; (iii) the
remuneration to which the Group is entitled; and (iv) the Group's
exposure to variability of returns. The determination of control is
based on the current facts and circumstances and is continuously
assessed. In some circumstances, different factors and conditions may
indicate that different parties control an entity depending on whether
those factors and conditions are assessed in isolation or in totality.
Judgement is applied in assessing the relevant factors and conditions in
totality when determining whether the Group controls an entity.
Specifically, judgement is applied in assessing whether the Group has
substantive decision-making rights over the relevant activities and
whether it is exercising power as a principal or an agent.
d) Business combinations
The Group uses the acquisition method to account for business
combinations, other than business combinations under common control (see
note 1). The Group recognises the identifiable assets acquired and
liabilities assumed at their acquisition date fair values. The Group
recognises deferred tax on the difference between fair value and the
acquisition date carrying value in accordance with International
Accounting Standard (IAS) 12. The consideration transferred for each
business combination is measured at fair value and, comprises the sum of
equity interest issued by the Group. Acquisition-related costs are
recognised as exceptional items within profit or loss.
The Group recognises goodwill on business combinations when the fair
value of consideration transferred exceeds the fair value of
identifiable assets acquired less the fair value of liabilities assumed.
The Group recognises a gain within profit or loss when the fair value of
consideration transferred is less than the fair value of identifiable
assets acquired less the fair value of liabilities assumed.
2. Accounting policies (continued)
The Group reports provisional amounts for business combinations when the
accounting is incomplete at the reporting date following the
combination. During the measurement period, the Group adjusts
provisional amounts recognised at the acquisition date to reflect new
information obtained that existed as of the acquisition date and would
have affected the measurement of the amounts recognised as at that date.
The Group also recognises additional assets or liabilities during the
reporting period if new information is obtained that existed as of the
acquisition date and would have resulted in the recognition of those
assets or liabilities as at that date. The Group adjusts the gain taken
to profit or loss where there is negative goodwill, or adjusts goodwill
recognised on the balance sheet, when provisional amounts are finalised
or additional assets and liabilities are recognised during the
measurement period. The measurement period shall not exceed one year
from the acquisition date.
The Group finalised the acquisition date fair values of assets acquired
and liabilities assumed in the Combination with CCFS prior to 3 October
2020. There were no changes to the provisional fair values recognised on
the assets or liabilities.
e) Foreign currency translation
The consolidated financial statements are presented in Pounds Sterling
which is the presentation currency of the Group. The financial
statements of each of the Company's subsidiaries are measured using the
currency of the primary economic environment in which the subsidiary
operates (the functional currency). Foreign currency transactions are
translated into the functional currencies using the exchange rates
prevailing at the date of the transactions. Monetary items denominated
in foreign currencies are retranslated at the rate prevailing at the
period end.
Foreign exchange (FX) gains and losses resulting from the retranslation
and settlement of these items are recognised in profit or loss.
Non-monetary items measured at cost in the foreign currency are
translated using the spot FX rate at the date of the transaction.
The assets and liabilities of foreign operations with functional
currencies other than Pounds Sterling are translated into the
presentation currency at the exchange rate on the reporting date. The
income and expenses of foreign operations are translated at the rates on
the dates of transactions. Exchange differences on foreign operations
are recognised in other comprehensive income and accumulated in the
foreign exchange reserve within equity.
f) Segmental reporting
IFRS 8 requires operating segments to be identified on the basis of
internal reports and components of the Group which are regularly
reviewed by the chief operating decision maker to allocate resources to
segments and to assess their performance. For this purpose, the chief
operating decision maker of the Group is the Board of Directors.
The Group provides loans and asset finance within the UK and the Channel
Islands only.
The Group segments its lending business and operates under two segments:
-- OneSavings Bank (OSB)
-- Charter Court Financial Services (CCFS)
The Group has disclosed the risk management tables in note 46 at a
sub-segment level to provide detailed analysis of the Group's core
lending business.
1. Accounting policies (continued)
2. Interest income and expense
Interest income and interest expense for all interest-bearing financial
instruments measured at amortised cost are recognised in profit or loss
using the effective interest rate (EIR) method. The EIR is the rate
which discounts the expected future cash flows, over the expected life
of the financial instrument, to the net carrying value of the financial
asset or liability.
When calculating the EIR, the Group estimates cash flows considering all
contractual terms of the instrument and behavioural aspects (for example,
prepayment options) but not considering future credit losses. The
calculation of the EIR includes transaction costs and fees paid or
received that are an integral part of the interest rate, together with
the discounts or premiums arising on the acquisition of loan portfolios.
Transaction costs include incremental costs that are directly
attributable to the acquisition or issue of a financial instrument.
The Group monitors the actual cash flows for each acquired book and
where they diverge significantly from expectation, the future cash flows
are reset. In assessing whether to adjust future cash flows on an
acquired portfolio, the Group considers the cash variance on an absolute
and percentage basis. The Group also considers the total variance across
all acquired portfolios. Where cash flows for an acquired portfolio are
reset, they are discounted at the EIR to derive a new carrying value,
with changes taken to profit or loss as interest income.
The EIR is adjusted where there is a change to the reference interest
rate (LIBOR or base rate) affecting portfolios with a variable interest
rate which will impact future cash flows. The revised EIR is the rate
which exactly discounts the revised cash flows to the net carrying value
of the loan portfolio.
Interest income on investment securities is included in interest
receivable and similar income. Interest on derivatives is included in
interest receivable and similar income or interest expense and similar
charges following the underlying instrument it is hedging.
Coupons paid on non-controlling interest securities are recognised
directly in equity in the period in which they are paid.
h) Fees and commissions
Fees and commissions which are an integral part of the EIR of a
financial instrument are recognised as an adjustment to the EIR and
recorded in interest income. The Group includes early redemption charges
within the EIR.
Fees received on mortgage administration services and mortgage
origination activities which are not an integral part of the EIR are
accounted for in accordance with IFRS 15 Revenue from Contracts with
Customers, with income recognised when the services are delivered and
the benefits are transferred to clients and customers.
Other fees and commissions are recognised on the accruals basis as
services are provided or on the performance of a significant act, net of
VAT and similar taxes.
i) Integration costs and exceptional items
Integration costs and exceptional items are those items of income or
expenses that do not relate to the Group's core operating activities,
are not expected to recur and are material in the context of the Group's
performance. These items are disclosed separately within the Statement
of Comprehensive Income and the Notes to the Financial Statements.
1. Accounting policies (continued)
2. Taxation
Income tax comprises current and deferred tax. It is recognised in
profit or loss, other comprehensive income or directly in equity,
consistent with the recognition of items it relates to. The Group
recognises tax on the non-controlling interest securities directly in
profit or loss.
Current tax is the expected tax charge on the taxable income for the
year and any adjustments in respect of previous years.
Deferred tax is the tax expected to be payable or recoverable in respect
of temporary differences between the carrying amounts of assets or
liabilities for accounting purposes and carrying amounts for tax
purposes.
Deferred tax assets are recognised only to the extent that it is
probable that future taxable profits will be available to utilise the
asset. The recognition of deferred tax is mainly dependent on the
projections of future taxable profits and future reversals of temporary
differences. The current projections of future taxable income indicate
that the Group will be able to utilise its deferred tax asset within the
foreseeable future.
The Company's subsidiaries are in a group payment arrangement for
corporation tax and show a net corporation tax liability and deferred
tax asset accordingly. In 2019, the Group's CCFS subsidiaries were not
part of the group payment arrangement and the corporation tax liability
and deferred tax asset were not netted.
k) Dividends
Dividends are recognised in equity in the period in which they are paid
or, if earlier, approved by shareholders.
l) Cash and cash equivalents
For the purposes of the Consolidated Statement of Cash Flows, cash and
cash equivalents comprise cash, non-restricted balances with central
banks and highly liquid financial assets with original maturities of
less than three months subject to an insignificant risk of changes in
their fair value.
m) Intangible assets
Purchased software and costs directly associated with the development of
computer software are capitalised as intangible assets where the
software is a unique and identifiable asset controlled by the Group and
will generate future economic benefits. Costs to establish technological
feasibility or to maintain existing levels of performance are recognised
as an expense. The Group only recognises internally-generated intangible
assets if all of the following conditions are met:
-- an asset is being created that can be identified after establishing the
technical and commercial feasibility of the resulting product;
-- it is probable that the asset created will generate future economic
benefits; and
-- the development cost of the asset can be measured reliably.
Subsequent expenditure on an internally generated intangible asset,
after its purchase or completion, is recognised as an expense in the
period in which it is incurred. Where no internally generated intangible
asset can be recognised, development expenditure is recognised as an
expense in the period in which it is incurred.
2. Accounting policies (continued)
Intangible assets are reviewed for impairment annually, and if they are
considered to be impaired, are written down immediately to their
recoverable amounts.
Intangible assets are amortised in profit or loss over their estimated
useful lives as follows:
Software and internally generated assets 5 year straight line
Development costs, brand and technology 4 year straight line
Broker relationships 5 year profile
Bank licence 3 year straight line
The Group reviews the amortisation period on an annual basis. If the
expected useful life of assets is different from previous assessments,
the amortisation period is changed accordingly.
n) Property, plant and equipment
Property, plant and equipment comprise freehold land and buildings,
major alterations to office premises, computer equipment and fixtures
measured at cost less accumulated depreciation. These assets are
reviewed for impairment annually, and if they are considered to be
impaired, are written down immediately to their recoverable amounts.
Items of property, plant and equipment are depreciated on a
straight-line basis over their estimated useful economic lives as
follows:
Buildings 50 years
Leasehold improvements 10 years
Equipment and fixtures 5 years
Land, deemed to be 25% of purchase price of buildings, is not
depreciated.
The cost of repairs and renewals is charged to profit or loss in the
period in which the expenditure is incurred.
o) Investment in subsidiaries
In the Company's financial statements, investments in subsidiary
undertakings are stated at cost less provision for any impairment. A
full list of the Company's subsidiaries which are included in the
Group's consolidated financial statements can be found in note 2 to the
Company's financial statements.
The Company performs an annual impairment assessment of its investment
in subsidiary undertakings, assessing the carrying value of the
investment in each subsidiary against the subsidiaries' net asset values
at the reporting date for indication of impairment. Where there is
indication of impairment, the Company estimates the subsidiaries value
in use by estimating future profitability and the impact on the net
assets of the subsidiary. The Company recognises an impairment directly
in profit or loss when the recoverable amount, which is the greater of
the value in use or the fair value less costs to sell, is less than the
carrying value of the investment. Impairments are subsequently reversed
if the recoverable amount exceeds the carrying value.
1. Accounting policies (continued)
2. Financial instruments
3. Classification
The Group classifies financial instruments based on the business model
and the contractual cash flow characteristics of the financial
instruments. Under IFRS 9, the Group classifies financial assets into
one of three measurement categories:
-- Amortised cost -- assets in a business model to hold financial assets in
order to collect contractual cash flows, where the contractual terms of
the financial asset give rise on specified dates to cash flows that are
solely payments of principal and interest (SPPI) on the principal amount
outstanding.
-- Fair value through other comprehensive income (FVOCI) -- assets held in a
business model which collects contractual cash flows and sells financial
assets where the contractual terms of the financial assets give rise on
specified dates to cash flows that are SPPI on the principal amount
outstanding.
-- Fair value through profit or loss (FVTPL) -- assets not measured at
amortised cost or FVOCI. The Group measures derivatives and an acquired
mortgage portfolio under this category.
The Group classifies non-derivative financial liabilities as measured at
amortised cost.
The Group has no financial assets and liabilities classified as held for
trading.
The Group reassesses its business models each reporting period.
The Group classifies certain financial instruments as equity where they
meet the following conditions:
-- the financial instrument includes no contractual obligation to deliver
cash or another financial asset on potentially unfavourable conditions;
-- the financial instrument is a non-derivative that includes no contractual
obligation for the issuer to deliver a variable number of its own equity
instruments; or
-- the financial instrument is a derivative that will be settled only by the
issuer exchanging a fixed amount of cash or another financial asset for a
fixed number of its own equity instruments.
Equity financial instruments comprise own shares and non-controlling
interest securities. Accordingly, the coupon paid on the non-controlling
interest securities is recognised directly in retained earnings when
paid.
ii. Recognition
The Group initially recognises loans and advances, deposits, debt
securities issued and subordinated liabilities on the date on which they
are originated or acquired. All other financial instruments are
accounted for on the trade date which is when the Group becomes a party
to the contractual provisions of the instrument.
For financial instruments classified as amortised cost, the Group
initially recognises financial assets and financial liabilities at fair
value plus transaction income or costs that are directly attributable to
its origination, acquisition or issue. These financial instruments are
subsequently measured at amortised cost using the effective interest
rate.
Transaction costs relating to the acquisition or issue of a financial
instrument at FVOCI and FVTPL are recognised in the profit or loss as
incurred.
1. Accounting policies (continued)
2. Derecognition
The Group derecognises financial assets when the contractual rights to
the cash flows expire or the Group transfers substantially all risks and
rewards of ownership of the financial asset. In assessing the Group's
retention programmes the principles of IFRS 9 and relevant guidance in
IAS 8 in respect of debt issuance, results in the original mortgage
asset being derecognised with a new financial asset recognised.
The forbearance measures offered by the Group are considered a
modification event as the contractual cash flows are renegotiated or
otherwise modified. The Group considers the renegotiated or modified
cash flows are not wholly different from the contractual cash flows and
does not consider that forbearance measures give rise to a derecognition
event.
Financial liabilities are derecognised only when the obligation is
discharged, cancelled or has expired.
iv. Offsetting
Financial assets and financial liabilities are offset and the net amount
presented in the Consolidated Statement of Financial Position when, and
only when, the Group currently has a legally enforceable right to offset
the amounts and it intends either to settle them on a net basis or to
realise the asset and settle the liability simultaneously.
The Group's derivatives are covered by industry standard master netting
agreements. Master netting agreements create a right of set-off that
becomes enforceable only following a specified event of default or in
other circumstances not expected to arise in the normal course of
business. These arrangements do not qualify for offsetting and as such
the Group reports derivatives on a gross basis.
Collateral in respect of derivatives is subject to the standard industry
terms of International Swaps and Derivatives Association (ISDA) Credit
Support Annex. This means that the cash received or given as collateral
can be pledged or used during the term of the transaction but must be
returned on maturity of the transaction. The terms also give each
counterparty the right to terminate the related transactions upon the
counterparty's failure to post collateral. Collateral paid or received
does not qualify for offsetting and is recognised in loans and advances
to credit institutions and amounts owed to credit institutions
respectively.
v. Amortised cost measurement
The amortised cost of a financial asset or financial liability is the
amount at which the financial asset or financial liability is measured
at initial recognition, plus or minus the cumulative amortisation using
the EIR method of any difference between the initial amount recognised
and the maturity amount, minus any reduction for impairment.
vi. Fair value measurement
Fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants at the measurement date in the principal or, in its absence,
the most advantageous market to which the Group has access at that date.
When available, the Group measures the fair value of an instrument using
the quoted price in an active market for that instrument. A market is
regarded as active if transactions for the asset or liability take place
with sufficient frequency and volume to provide pricing information on
an ongoing basis. The Group measures the fair value of its investment
securities and Perpetual Subordinated Bonds (PSBs) using quoted market
prices.
2. Accounting policies (continued)
If there is no quoted price in an active market, then the Group uses
valuation techniques that maximise the use of relevant observable inputs
and minimise the use of unobservable inputs.
The Group uses a combination of LIBOR and SONIA curves to value its
derivatives however, using overnight index swap (OIS) curves would not
materially change their value. The fair value of the Group's derivative
financial instruments incorporates credit valuation adjustments (CVA)
and debit valuation adjustments (DVA). The DVA and CVA take into account
the respective credit ratings of the Bank and counterparty and whether
the derivative is collateralised or not. Derivatives are valued using
discounted cash flow models and observable market data and are sensitive
to benchmark interest and basis rate curves.
vii. Identification and measurement of impairment of financial assets
The Group assesses all financial assets for impairment.
Loans and advances to customers
The Group uses the IFRS 9 three-stage expected credit loss (ECL)
approach for measuring impairment. The three impairment stages are as
follows:
-- Stage 1 -- a 12-month ECL allowance is recognised where there is no
significant increase in credit risk (SICR) since initial recognition.
-- Stage 2 -- a lifetime loss allowance is held for assets where a SICR is
identified since initial recognition. The assessment of whether credit
risk has increased significantly since initial recognition is performed
for each reporting period for the life of the loan.
-- Stage 3 -- requires objective evidence that an asset is credit impaired,
at which point a lifetime ECL allowance is recognised.
The Group measures impairment through the use of individual and modelled
assessments.
Individual assessment
The Group's provisioning process requires individual assessment for high
exposure or higher risk loans, where Law of Property Act (LPA) receivers
have been appointed, the property is taken into possession or there are
other events that suggest a high probability of credit loss. Loans are
considered at a connection level, i.e. including all loans connected to
the customer.
The Group estimates cash flows from these loans, including expected
interest and principal payments, rental or sale proceeds, selling and
other costs. The Group obtains up-to-date independent valuations for
properties put up for sale.
If the present value of estimated future cash flows discounted at the
original EIR is less than the carrying value of the loan, a provision is
recognised for the difference. Such loans are classified as impaired. If
the present value of the estimated future cash flows exceeds the
carrying value, no provision is recognised.
The Group applies a modelled assessment to all loans with no
individually-assessed provision.
2. Accounting policies (continued)
IFRS 9 modelled impairment
Measurement of ECL
The assessment of credit risk and the estimation of ECL are unbiased and
probability weighted. ECL is measured on either a 12 month (stage 1) or
lifetime basis depending on whether a SICR has occurred since initial
recognition (stage 2) or where an account meets the Group's definition
of default (stage 3).
The ECL calculation is a product of an individual loan's probability of
default (PD), exposure at default (EAD) and loss given default (LGD)
discounted at the EIR. The ECL drivers of PD, EAD and LGD are modelled
at an account level. The assessment of whether a significant increase in
credit risk has occurred is based on quantitative relative PD thresholds
and a suite of qualitative triggers.
In accordance with PRA COVID-19 guidance, the Group does not
automatically consider the take up of customer payment deferrals during
the pandemic to be an indication of a SICR and, in the absence of other
indicators such as previous arrears, low credit score or high other
indebtedness, the staging of these loans remains unchanged in its ECL
calculations.
Significant increase in credit risk (movement to stage 2)
The Group's transfer criteria determine what constitutes a SICR, which
results in an exposure being moved from stage 1 to stage 2.
At the point of initial recognition, a loan is assigned a PD estimate.
For each monthly reporting date thereafter, an updated PD estimate is
computed. The Group's transfer criteria analyses relative changes in PD
versus the PD assigned at the point of origination, together with
qualitative triggers using both internal indicators and external credit
bureau information to assess for SICR. In the event that given early
warning triggers have not already identified SICR, an account more than
30 days past due has experienced a SICR.
A borrower will move back into stage 1 only if the SICR definition is no
longer triggered.
Definition of default (movement to stage 3)
The Group uses a number of quantitative and qualitative criteria to
determine whether an account meets the definition of default and
therefore moves to stage 3. The criteria currently include:
-- If an account is more than 90 days past due.
-- Accounts that have moved into an unlikely to pay position, which includes
forbearance, bankruptcy, repossession and interest-only term expiry.
A borrower will move out of stage 3 when its credit risk improves such
that it no longer meets the 90 days past due and unlikeliness to pay
criteria and following this has completed an internally-approved
probation period. The borrower will move to stage 1 or stage 2 dependent
on whether the SICR applies.
Forward-looking macroeconomic scenarios
The risk of default and expected credit loss assessments take into
consideration expectations of economic changes that are deemed to be
reasonably possible.
The Group conducts analysis to determine the most significant factors
which may influence the likelihood of an exposure defaulting in the
future. The macroeconomic factors relate to the House Price Index (HPI),
unemployment rate (UR), Gross domestic product (GDP), Commercial Real
Estate Index (CRE) and the
2. Accounting policies (continued)
BoE Base Rate (BBR).
The Group has derived an approach for factoring probability-weighted
macroeconomic forecasts into ECL calculations, adjusting PD and LGD
estimates. The macroeconomic scenarios feed directly into the ECL
calculation, as the adjusted PD, lifetime PD and LGD estimates are used
within the individual account ECL allowance calculations.
The Group currently does not have an in-house economics function and
therefore sources economic forecasts from an appropriately qualified
third party. The Group considers four probability-weighted scenarios,
base, upside, downside and severe downside scenarios.
The base case is also utilised within the Group's impairment forecasting
process which in turn feeds the wider business planning processes. The
ECL models are also used to set the Group's credit risk appetite
thresholds and limits.
Period over which ECL is measured
Expected credit loss is measured from the initial recognition of the
asset which is the date at which the loan is originated or the date a
loan is purchased and at each balance sheet date thereafter. The maximum
period considered when measuring ECL (either 12 months or lifetime ECL)
is the maximum contractual period over which the Group is exposed to the
credit risk of the asset. For modelling purposes, the Group considers
the contractual maturity of the loan product and then considers the
behavioural trends of the asset.
Purchased or originated credit impaired (POCI)
Acquired loans that meet the Group's definition of default (90 days past
due or an unlikeliness to pay position) at acquisition are treated as a
POCI asset. These assets attract a lifetime ECL allowance over the full
term of the loan, even when the loan no longer meets the definition of
default post acquisition. The Group does not originate credit-impaired
loans.
Intercompany loans
Intercompany receivables in the Company financial statements are
assessed for ECL based on an assessment of the PD and LGD, discounted to
a net present value.
Other financial assets
Other financial assets comprise cash balances with the BoE and other
credit institutions and high grade investment securities. The Group
deems the likelihood of default across these counterparties as low and,
hence does not recognise a provision against the carrying balances.
q) Loans and receivables
Loans and receivables are predominantly mortgage loans and advances to
customers with fixed or determinable payments that are not quoted in an
active market and that the Group does not intend to sell in the near
term. They are initially recorded at fair value plus any directly
attributable transaction costs and are subsequently measured at
amortised cost using the EIR method, less impairment losses. Where
exposures are hedged by derivatives, designated and qualifying as fair
value hedges, the fair value adjustment for the hedged risk to the
carrying value of the hedged loans and advances is reported in fair
value adjustments for hedged assets.
Loans and the related provision are written off when the underlying
security is sold. Subsequent recoveries of amounts previously written
off are taken through profit or loss.
2. Accounting policies (continued)
Loans and advances over which the Group transfers its rights to the
collateral thereon to the BoE under the TFS, TFSME and Indexed Long-Term
Repo (ILTR) schemes are not derecognised from the Statement of Financial
Position, as the Group retains substantially all the risks and rewards
of ownership, including all cash flows arising from the loans and
advances and exposure to credit risk. The Group classifies TFS, TFSME
and ILTR as amortised cost under IFRS 9 Financial Instruments.
Loans and advances include a small acquired mortgage portfolio where the
contractual cash flows include payments that are not solely payments of
principal and interest and as such are measured at fair value through
profit or loss. The Group initially recognises these loans at fair value,
with direct and incremental costs of acquisition recognised directly in
profit or loss and, subsequently measures them at fair value.
Loans and receivables contain the Group's asset finance lease lending.
Finance leases are initially measured at an amount equal to the net
investment in the lease, using the interest rate implicit in the finance
lease. Direct costs are included in the initial measurement of the net
investment in the lease and reduce the amount of income recognised over
the lease term. Finance income is recognised over the lease term, based
on a pattern reflecting a constant periodic rate of return on the net
investment in the lease.
r) Investment securities
Investment securities comprise securities held for liquidity purposes
(UK treasury bills and Residential Mortgage-Backed Securities (RMBS)).
These assets are non-derivatives that are designated as FVOCI or
classified as amortised cost.
Assets classified as amortised cost are originally recognised at fair
value and subsequently measured at amortised cost using the EIR method,
less impairment losses.
Assets held at FVOCI are measured at fair value with movements taken to
other comprehensive income and accumulated in the FVOCI reserve within
equity, except for impairment losses which are taken to profit or loss.
When the instrument is sold, the gain or loss accumulated in equity is
reclassified to profit or loss.
s) Deposits, debt securities in issue and subordinated liabilities
Deposits, debt securities in issue and subordinated liabilities are the
Group's sources of debt funding. They comprise deposits from retail
customers and credit institutions, including collateralised loan
advances from the BoE under the TFS, TFSME and ILTR, asset-backed loan
notes issued through the Group's securitisation programmes and
subordinated liabilities. Subordinated liabilities include the Sterling
PSBs where the terms allow no absolute discretion over the payment of
interest. These financial liabilities are initially measured at fair
value less direct transaction costs, and subsequently held at amortised
cost using the EIR method.
Cash received under the TFS, TFSME and ILTR is recorded in amounts owed
to credit institutions. Interest is accrued over the life of the
agreements on an EIR basis.
t) Sale and repurchase agreements
Financial assets sold subject to repurchase agreements (repo) are
retained in the financial statements if they fail derecognition criteria
of IFRS 9 described in paragraph p (iii) above. The financial assets
that are retained in the financial statements are reflected as loans and
advances to customers or investment securities and the counterparty
liability is included in amounts owed to credit institutions or other
2. Accounting policies (continued)
customers. Financial assets purchased under agreements to resell at a
predetermined price where the transaction is financing in nature
(reverse repo) are accounted for as loans and advances to credit
institutions. The difference between the sale and repurchase price is
treated as interest and accrued over the life of the agreement using the
EIR method.
u) Derivative financial instruments
The Group uses derivative financial instruments (interest rate swaps and
basis swaps) to manage its exposure to interest rate risk. In accordance
with its Treasury Policy, the Group does not hold or issue derivative
financial instruments for proprietary trading.
Derivative financial instruments are recognised at their fair value with
changes in their fair value taken to profit or loss. Fair values are
calculated by discounting cash flows at the prevailing interest rates.
All derivatives are classified as assets when their fair value is
positive and as liabilities when their fair value is negative. If a
derivative is cancelled, it is derecognised from the Statement of
Financial Position.
The Group also uses derivatives to hedge the interest rate risk inherent
in irrevocable offers to lend. This exposes the Group to movements in
the fair value of derivatives until the loan is drawn. The changes to
fair value are recognised in profit or loss in the period.
The Group is party to a limited number of options and warrants. These
are recognised as a derivative financial instruments as applicable where
a trigger event takes place and the fair value of the option or warrant
can be reliably measured.
v) Hedge accounting
The Group has chosen to continue to apply the hedge accounting
requirements of IAS 39 instead of the requirements in Chapter 6 of IFRS
9. The Group uses fair value hedge accounting for a portfolio hedge of
interest rate risk.
Portfolio hedge accounting allows for hedge effectiveness testing and
accounting over an entire portfolio of financial assets or liabilities.
To qualify for hedge accounting at inception, the hedge relationship is
clearly documented and the derivative must be expected to be highly
effective in offsetting the hedged risk. In addition, effectiveness must
be tested throughout the life of the hedge relationship.
The Group applies fair value portfolio hedge accounting to its fixed
rate portfolio of mortgages and saving accounts. The hedged portfolio is
analysed into repricing time periods based on expected repricing dates,
utilising the Group Assets and Liabilities Committee (ALCO) approved
prepayment curve. Interest rate swaps are designated against the
repricing time periods to establish the hedge relationship. Hedge
effectiveness is calculated as a percentage of the fair value movement
of the interest rate swap against the fair value movement of the hedged
item over the period tested.
The Group considers the following as key sources of hedge
ineffectiveness:
1. the mismatch in maturity date of the swap and hedged item, as swaps with
a given maturity date cover a portfolio of hedged items which may mature
throughout the month;
2. the actual behaviour of the hedged item differing from expectations, such
as early repayments or withdrawals and arrears;
3. minimal movements in the yield curve leading to ineffectiveness where
hedge relationships are sensitive to small value changes; and
4. the transition relating to LIBOR reforms whereby some hedged instruments
and hedged items are based on different benchmark rates.
5. Accounting policies (continued)
Where there is an effective hedge relationship for fair value hedges,
the Group recognises the change in fair value of each hedged item in
profit or loss with the cumulative movement in their value being shown
separately in the Statement of Financial Position as fair value
adjustments on hedged assets and liabilities. The fair value changes of
both the derivative and the hedge substantially offset each other to
reduce profit volatility.
The Group discontinues hedge accounting when the derivative ceases
through expiry, when the derivative is cancelled or the underlying
hedged item matures, is sold or is repaid.
If a derivative no longer meets the criteria for hedge accounting or is
cancelled whilst still effective, the fair value adjustment relating to
the hedged assets or liabilities within the hedge relationship prior to
the derivative becoming ineffective or being cancelled remains on the
Statement of Financial Position and is amortised over the remaining life
of the hedged assets or liabilities. The rate of amortisation over the
remaining life is in line with expected income or cost generated from
the hedged assets or liabilities. Each reporting period, the expectation
is compared to actual with an accelerated run-off applied where the two
diverge by more than set parameters.
w) Debit and credit valuation adjustments
The DVA and CVA are included in the fair value of derivative financial
instruments. The DVA is based on the expected loss a counterparty faces
due to the risk of the Group's default. The CVA reflects the Group's
risk of the counterparty's default.
The methodology is based on a standard calculation, taking into account:
1. the one-year PD, updated on a regular basis;
2. the expected exposure at default;
3. the expected LGD; and
4. the average maturity of the swaps.
5. Provisions and contingent liabilities
A provision is recognised when there is a present obligation as a result
of a past event, it is probable that the obligation will be settled and
the amount can be estimated reliably.
Provisions include ECLs on the Group's undrawn loan commitments.
Contingent liabilities are possible obligations arising from past events,
whose existence will be confirmed only by uncertain future events, or
present obligations arising from past events which are either not
probable or the amount of the obligation cannot be reliably measured.
Contingent liabilities are not recognised but disclosed unless they are
not material or their probability is remote.
y) Employee benefits -- defined contribution scheme
The Group contributes to defined contribution personal pension plans or
defined contribution retirement benefit schemes for all qualifying
employees who subscribe to the terms and conditions of the schemes'
policies.
Obligations for contributions to defined contribution pension
arrangements are recognised as an expense in profit or loss as incurred.
1. Accounting policies (continued)
2. Share-based payments
Equity-settled share-based payments to employees providing services are
measured at the fair value of the equity instruments at the grant date
in accordance with IFRS 2. The fair value excludes the effect of
non-market-based vesting conditions.
The cost of the awards are charged on a straight-line basis to profit or
loss (with a corresponding increase in the share-based payment reserve
within equity) over the vesting period in which the employees become
unconditionally entitled to the awards. The cumulative expense within
the share-based payment reserve is reclassified to retained earnings
upon exercise.
The amount recognised as an expense for non-market conditions and
related service conditions is adjusted each reporting period to reflect
the actual number of awards expected to be met. The amount recognised as
an expense for awards subject to market conditions is based on the
proportion that is expected to meet the condition as assessed at the
grant date. No adjustment is made to the fair value of each award
calculated at grant date.
Share-based payments that are not subject to further vesting conditions
(i.e. the Deferred Share Bonus Plan (DSBP) for senior managers) are
expensed in the year services are received with a corresponding increase
in equity. Awards granted to Executive Directors in March 2020 are
subject to service conditions through to vesting and are expensed over
the vesting period. Awards granted to Executive Directors in March 2021
are not subject to future service conditions and are expensed in 2020
where the service is deemed to have been provided.
Where the allowable cost of share-based options or awards for tax
purposes is greater than the cost determined in accordance with IFRS 2,
the tax effect of the excess is taken to the share-based payment reserve
within equity. The tax effect is reclassified to retained earnings upon
vesting.
Employer's national insurance is charged to profit or loss at the share
price at the reporting date on the same service or vesting schedules as
the underlying options and awards.
Own shares are recorded at cost and deducted from equity and represent
shares of OSBG that are held by the Employee Benefit Trust.
aa) Leases
The Group recognises right-of-use assets and lease liabilities for
leases over 12 months long. Right-of-use assets and lease liabilities
are initially recognised at the net present value of future lease
payments, discounted at the rate implicit in the lease or, where not
available, the Group's incremental borrowing cost. Subsequent to initial
recognition, the right-of-use asset is depreciated on a straight-line
basis over the term of the lease. Future rental payments are deducted
from the lease liability, with interest charged on the lease liability
using the incremental borrowing cost at the time of initial recognition.
The Group recognises lease liability payments within financing
activities in the Consolidated Statement of Cash Flows.
The Group assesses the likely impact of early terminations in
recognising the right-of-use asset and lease liability where an option
to terminate early exists.
Leases with low future payments or terms less than 12 months are
recognised on an accruals basis directly in profit or loss.
1. Accounting policies (continued)
2. Adoption of new standards
International financial reporting standards issued and adopted for the
first time in the year ended 31 December 2020
The following financial reporting standard amendments and
interpretations were in issue and have been applied in the financial
statements from 1 January 2020.
-- Amendments to the Conceptual Framework for Financial reporting, including
amendments to references to the Conceptual Framework in IFRS Standards.
-- Amendments to IFRS 3 -- Definition of a business.
-- Amendments to IAS 1 and IAS 8 -- Definition of material.
There has been no material impact on the financial statements of the
Group from the adoption of these financial reporting standard amendments
and interpretations.
International financial reporting standards issued but not yet adopted
which are applicable to the Group
The following financial reporting standards were in issue but have not
been applied in the financial statements, as they were yet effective on
31 December 2020.
Effective for accounting periods beginning on or after 1 June 2020:
--Amendments to IFRS 16 -- COVID-19 related rent concessions
Effective for accounting periods beginning on or after 1 January 2021:
-- Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 Interest Rate
Benchmark Reform -- Phase 2
-- Amendments to IAS 1 -- Classification of liabilities as current or
non-current.
-- Annual improvements to IFRS Standards 2018-2020 -- Minor amendments to
IFRS 1, IFRS 9 and IFRS 16.
The Group does not expect that the adoption of the financial reporting
standards listed above will have a material impact on the financial
statements of the Group in future periods.
3. Judgements in applying accounting policies and critical
accounting estimates
In preparing these financial statements, the Group has made judgements,
estimates and assumptions which affect the reported amounts within the
current and next financial year. Actual results may differ from these
estimates.
Estimates and judgements are regularly reviewed based on past experience,
expectations of future events and other factors.
Judgements
The Group has made the following key judgements in applying the
accounting policies:
1. Judgements in applying accounting policies and critical accounting
estimates (continued)
2. Loan book impairments
Significant increase in credit risk for classification in stage 2
The Group's Significant Increase in Credit Risk (SICR) rules, prior to
the COVID-19 pandemic, considered changes in default risk, internal
impairment measures, changes in customer credit bureau files, or whether
forbearance measures had been applied. The Group took steps to adjust
the SICR criteria through the pandemic to account for the changes in
risk profile and specifically for payment deferrals granted, noting that
not all of the instances of a payment deferral would be a significant
increase in credit risk. Payment deferrals granted due to COVID-19 alone
were not automatically considered as a SICR event in line with issued
guidance, and adjustments to the rules were as follows:
1. Payment deferrals considered as a SICR event where other significant high
risk factors are identified on customer's credit files;
2. Payment deferrals considered as a SICR event where an account also had
recent arrears; and
3. Customers with stress to their income considered as a SICR event.
4. IFRS 9 classification
The Group has applied judgement in determining whether the contractual
terms of a financial asset give rise on specified dates to cash flows
that are solely payments of principal or interest (SPPI) on the
principal amount outstanding when applying the classification criteria
of IFRS 9. The main area of judgement is over the Group's loans and
advances to customers which have been accounted for under amortised cost
with the exception of one acquired mortgage book of GBP19.1m (2019:
GBP22.1m) that is recognised at FVTPL.
Estimates
The Group has made the following estimates in the application of the
accounting policies that have a significant risk of material adjustment
to the carrying amount of assets and liabilities within the next
financial year:
(i) Loan book impairments
Set out below are details of the critical accounting estimates which
underpin loan impairment calculations. Less significant estimates are
not discussed as they do not have a material effect. The Group has
recognised total impairments of GBP111.0m (2019: GBP42.9m) at the
reporting date as disclosed in note 24.
Modelled impairment
Modelled provision assessments are also subject to estimation
uncertainty, underpinned by a number of estimates being made by
management which are utilised within impairment calculations. Key areas
of estimation within modelled provisioning calculations include those
regarding the PD, the LGD and forward-looking macroeconomic scenarios.
Loss given default model
The Group has a number of LGD models, which include a number of
estimated inputs including propensity to go to possession given default
(PPD), forced sale discount (FSD), time to sale (TTS) and sale cost
estimates. The LGD is sensitive to the application of the HPI. For the
OSB segment at 31 December 2020 a 10% fall in house prices would result
in an incremental GBP25.6m (2019: GBP13.6m) of provision being required.
For the CCFS segment at 31 December 2020 a 10% fall in house prices
would result in an incremental GBP13.9m (2019: GBP3.8m) of provision
being required. The combined impact across both OSB and CCFS businesses
of a 10% fall in house prices would result in an increase in total
provisions of GBP39.5m (2019: GBP17.4m) as at 31 December 2020.
3. Judgements in applying accounting policies and critical
accounting estimates (continued)
Forward-looking macroeconomic scenarios
The forward-looking macroeconomic scenarios affect both the PD and LGD
estimates. Therefore the expected credit losses calculations are
sensitive to both the scenarios utilised and their associated
probability weightings.
The Group sources economic forecasts from an appropriately qualified,
independent third party. The Group considers four probability-weighted
scenarios: base, upside, downside and severe downside scenarios. Due to
the current uncertainty in relation to the ongoing COVID-19 global
pandemic and the recently agreed Brexit trade agreement the choice of
scenarios and weightings are subject to a significant degree of
estimation. The Group's macroeconomic scenarios can be found in the
Credit risk section of the Risk profile performance overview.
The following tables detail the ECL scenario sensitivity analysis with
each scenario weighted at 100% probability. The purpose of using
multiple economic scenarios is to model the non-linear impact of
assumptions surrounding macroeconomic factors and ECL calculated:
100% Severe
As at 100% Base 100% Upside 100% Downside downside
31-Dec-20 Weighted case scenario scenario scenario scenario
Total loans before provisions,
GBPm 19,322.6 19,322.6 19,322.6 19,322.6 19,322.6
Modelled ECL, GBPm 71.6 54.6 40.1 113.5 166.7
Non-modelled ECL, GBPm 39.4 39.4 39.4 39.4 39.4
Total ECL, GBPm 111.0 94.0 79.5 152.9 206.1
ECL Coverage, % 0.57 0.49 0.41 0.79 1.07
As at
31-Dec-19
Total loans before provisions,
GBPm 18,467.6 18,467.6 18,467.6 18,467.6 18,467.6
Modelled ECL, GBPm 37.4 24.4 14.6 48.1 62.5
Non-modelled ECL, GBPm 5.5 5.5 5.5 5.5 5.5
Total ECL, GBPm 42.9 29.9 20.1 53.6 68.0
-------- -------- -------- -------- --------
ECL Coverage, % 0.23 0.16 0.11 0.29 0.37
(ii) Loan book acquisition accounting and income recognition
Acquired loan books are initially recognised at fair value. Significant
estimation is required in calculating their EIR using cash flow models
which include assumptions on the likely macroeconomic environment,
including HPI, unemployment levels and interest rates, as well as loan
level and portfolio attributes and history used to derive prepayment
rates and the amount of incurred losses.
Through the Combination in 2019, the Precise Mortgages book is treated
as an acquired book with a fair value uplift to book value, at the point
of initial recognition, of GBP301.0m, reflecting a premium applied to
the book. Fair value sensitivities have been completed on the Precise
Mortgages book, including the market rate applied to the discounted cash
flows, being one month LIBOR plus a margin (margin blended average used
2.91%). Where the margin applied is increased/decreased by 25bps the
initial premium recognised on the book increases/decreases by
GBP66.0m/GBP67.0m.
The EIR on loan books purchased at significant discounts or premiums is
particularly sensitive to the weighted average life of the loan book
through the constant prepayment rate (CPR) and the constant default rate
(CDR) estimates assumed, as the purchase discount or premium is
recognised over the expected life of the loan book through the EIR. New
defaults are modelled at zero loss (as losses will be
Judgements in applying accounting policies and critical accounting
estimates (continued)
recognised in profit or loss as impairment losses) and therefore have
the same impact on the EIR as prepayments.
Incurred losses at acquisition are calculated using the Group's modelled
provision assessment (see (i) Loan book impairments above for further
details).
The EIR calculated at acquisition is not changed for subsequent
variances in actual to expected cash flows, unless the variance is due
to changes in expectations of market rates of interest. The Group
monitors the actual cash flows for each acquired book, and where they
diverge significantly from expectation, the revised future cash flows
are discounted at the original EIR, with any resulting change in carry
value creating a corresponding gain or loss in the Statement of
Comprehensive Income as Interest Income. In assessing whether to adjust
future cash flows on an acquired portfolio, the Group considers the cash
variance on an absolute and percentage basis. The Group also considers
the total variance across all acquired portfolios and the economic
outlook. The Group recognised a GBP3.5m loss in 2020 as a result of
resetting cash flows on acquired books (2019: gain of GBP0.5m). The
largest acquired book is Precise with sensitivities completed on
increasing/reducing the life of the book by six months which results in
a reset gain/loss of c. GBP33m/GBP37m (2019: c.GBP48m/GBP50m).
(iii) Effective interest rate on organic lending
Estimates are made when calculating the EIR for newly-originated loan
assets. These include the likely customer redemption profiles.
Mortgage products offered by the Group include directly attributable net
fee income and a period on reversion rates after the fixed/discount
period. Products revert to the standard variable rate (SVR) or Base plus
a margin for the Kent Reliance brand or a LIBOR/Base plus a margin for
the Precise brand. The Group uses historical customer behaviours,
expected take-up rate of retention products and macroeconomic forecasts
in its assessment of prepayment rates. Customer prepayments in a fixed
rate or incentive period can give rise to Early Repayment Charge (ERC)
income.
Estimation is used in assessing whether and for how long mortgages that
reach the end of the initial product term stay on reversion rates, and
to the quantum and timing of prepayments that incur ERCs. The estimate
of customer weighted average life will determine the period over which
net fee income and expected reversionary income is recognised.
Sensitivities have been applied to the Precise and Kent Reliance loan
books, to illustrate the impact on interest income of a change in the
expected weighted average lives of the loan books. An extension of the
expected life will typically result in increased expectations of post
reversionary income, less ERCs and a recognition of net fee income over
a longer period. A shortening of the expected life will lead to reduced
post reversionary income, more ERCs and a recognition of net fees over a
shorter period.
The potential duration of a change in customer behaviour as a result of
COVID-19 remains uncertain. However, a period of six months' variance in
the weighted average lives of the loan books was selected for this
sensitivity, given the initial quick recovery in the property and
mortgage markets post national lockdown experienced in 2020. This
recovery was due, in part, to government stimulus in the form of a
temporary reduction in stamp duty and the provision of cheaper funding
to banks, in the form of the Bank of England's Term Funding Scheme for
SMEs.
Applying a six month extension in the expected weighted average life of
the organic loan books, would result in a gain of c. GBP22.6m (2019:
GBP23.6m) recognised in Net Interest Income. It includes a c. GBP13.8m
(2019: GBP19.5m) gain in relation to the Kent Reliance loan book, where
the impact of the proactive Choices programme, which offers borrowers a
new product as an alternative to paying the Bank's higher Standard
Variable Rate (SVR), may significantly reduce the likelihood of
borrowers extending the period of time paying SVR and reduce the amount
of the potential reset gain.
Applying a six month reduction in the expected weighted average life of
the loan books, would result in a reset loss of c. GBP6.9m (2019:
GBP4.6m) recognised in Net Interest Income. This includes c. GBP2.0m
(2019: GBP0.4m) gain in relation to the Kent Reliance loan book.
4. Interest receivable and similar income
2020 2019
GBPm GBPm
At amortised cost:
On OSB mortgages 500.6 480.5
On CCFS mortgages 331.9 80.2
On investment securities 2.5 0.6
On other liquid assets 5.3 12.2
Amortisation of fair value adjustments on
CCFS Combination(1) (67.8) (22.6)
Amortisation of fair value adjustments on
hedged assets(2) (17.9) -
At fair value through profit or loss:
Net expense on derivative financial instruments
- lending activities (47.7) (14.0)
On CCFS mortgages - 0.3
At FVOCI:
On investment securities 5.0 2.7
711.9 539.9
------------------------------------------------ ------ ------
(1) Amortisation of fair value adjustments on CCFS loan book at
Combination.
(2) The amortisation relates to hedged assets where the hedges were
terminated before maturity and were effective at the point of
termination.
5. Interest payable and similar charges
2020 2019
GBPm GBPm
On retail deposits 245.5 177.3
On BoE borrowings 8.4 13.3
On perpetual subordinated bonds 1.7 1.8
On subordinated liabilities 0.8 0.7
On wholesale borrowings 1.3 1.9
On debt securities in issue 3.4 3.7
On lease liabilities 0.3 0.1
Amortisation of fair value adjustments on
CCFS Combination(1) (3.3) (1.0)
Net income on derivative financial instruments
- savings activities (18.4) (2.6)
239.7 195.2
----------------------------------------------- ------ -----
(1) Amortisation of fair value adjustments on CCFS customer deposits at
Combination.
6. Fair value gains/(losses) on financial instruments
2020 2019
GBPm GBPm
Fair value changes in hedged assets 107.3 70.1
Hedging of assets (116.8) (75.1)
Fair value changes in hedged liabilities (4.1) (4.6)
Hedging of liabilities 6.8 4.8
Ineffective portion of hedges (6.8) (4.8)
Net (losses)/gains on unmatched swaps (18.0) 3.5
Amortisation of inception adjustments 13.0 -
Amortisation of acquisition related inception
adjustments 17.0 3.3
Amortisation of de-designated hedge relationships 2.4 -
Fair value movements on mortgages at FVTPL (0.2) -
Amortisation of fair value adjustments on
hedged assets - (5.5)
Debit and credit valuation adjustment - 0.2
7.4 (3.3)
Amortisation of inception adjustments relates in part to hedged assets
and liabilities recognised on the Combination where pre-existing hedge
relationships ceased on the date of Combination. The inception
adjustment is being amortised over the life of the derivative
instruments acquired on Combination and recognises an offsetting asset
or liability to the fair value of the derivative instruments on the date
of Combination. The remainder of the amortisation of inception
adjustment relates to the amortisation of the hedging adjustments
arising when hedge accounting commences, primarily on derivative
instruments previously taken out against the mortgage pipeline and also
on derivative instruments previously taken out against new retail
deposits.
7. Gain/loss on sales of financial instruments
On 17 January 2020, the Group sold the Canterbury A2 note for proceeds
of GBP225.4m. After incurring costs of GBP0.2m, a gain on sale of
GBP1.9m was recognised.
On 23 January 2020, the Group sold the F note and residual certificates
of the Canterbury securitisation for proceeds of GBP23.6m. Following the
sale the Group had no remaining interest in the Canterbury
securitisation. As a result, consolidation of Canterbury into the Group
ceased on disposal. The Group recognised a gain on sale of GBP16.0m upon
deconsolidation.
On 23 January 2020, the Group securitised GBP375.5m of mortgage loans
through Precise Mortgage Funding 2020-1B plc (PMF 2020-1B), issuing
GBP388.9m of Sterling floating rate notes. The Group retained the class
A2 notes, with all other note classes and the residual certificates
being sold to the external market. As such, the Group has not
consolidated PMF 2020-1B as substantially all of the risks and rewards
have been transferred. The Group recognised a gain on sale of GBP2.0m on
disposal. Excluding the impact of the fair value adjustment on the
mortgages on Combination with OSB of GBP13.1m, the underlying gain on
sale was GBP15.1m.
On 14 September 2020, the Group sold GBP150.0m of Canterbury 3 A2 notes
for GBP150.1m, resulting in a gain on sale of GBP0.1m.
In 2019, the Group identified an additional GBP0.1m of customer receipts
due to the purchaser of the personal loan portfolio in the prior year,
recognising an additional loss on sale of GBP0.1m.
8. Other income
2020 2019
GBPm GBPm
Interest received on mortgages held at FVTPL(1) 0.6 -
Fees and commissions receivable 8.4 3.4
Other operating costs(2) - (1.3)
9.0 2.1
------------------------------------------------ ---- -----
(1) In 2019, GBP0.3m interest received on mortgages held at FVTPL was
included in interest receivable and similar income (see note 4.).
(2) Other operating costs includes commission expense incurred on retail
savings generated from the branch network which is included in
administration expenses from 2020.
9. Administrative expenses
2020 2019
GBPm GBPm
Staff costs 86.0 60.5
Facilities costs 5.7 3.6
Marketing costs 5.1 4.0
Support costs 18.4 12.7
Professional fees 22.3 10.4
Other costs(1) 5.7 9.3
Depreciation (see note 31) 5.6 3.9
Amortisation (see note 32) 8.2 4.3
157.0 108.7
--------------------------- ----- -----
(1) In 2019, other costs mainly comprised irrecoverable VAT. In 2020,
the Group included irrecoverable VAT within the underlying expense.
9. Administrative expenses (continued)
Included in professional fees are amounts paid to the Company's auditor
as follows:
2020 2019
GBP'000 GBP'000
Fees payable to the Company's auditor for
the audit of the Company's annual accounts 65 1,269
Fees payable to the Company's auditor for
the audit of the accounts of subsidiaries 2,198 846
Total audit fees 2,263 2,115
Audit-related assurance services(1) 217 187
Other assurance services(2) 45 142
Other non-audit services(3) 101 -
Total non-audit fees 363 329
-------------------------------------------- ------- -------
Total fees payable to the Company's auditor 2,626 2,444
(1) Includes review of interim financial information and profit
verifications
(2) 2020 costs comprise an assurance review of APMs, 2019 costs related
to the Combination and agreed upon procedures in respect of
securitisations
(3) Primarily comprises work related to the insertion of a new holding
company.
Staff costs comprise the following:
2020 2019
GBPm GBPm
Salaries, incentive pay and other benefits 68.5 49.1
Share-based payments 5.1 4.0
Social security costs 8.1 4.4
Other pension costs 4.3 3.0
86.0 60.5
---- ----
The average number of people employed by the Group (including Executive
Directors) during the year is analysed below. For 2019, the average for
CCFS is based on the post Combination period.
2020 2019
OSB
Operations 835 812
Support functions 297 286
CCFS
Operations 579 530
Support functions 105 161
1,816 1,789
------------------ ----- -----
10. Impairment of intangible assets
Assets arising on the Combination with CCFS in 2019 included a broker
relationships intangible asset with a fair value of GBP17.1m on
Combination. A key input to the calculation of the fair value was CCFS
anticipated lending volumes over three years post combination which have
been revised due to COVID-19 impacts, with an impairment of GBP7.0m
recognised. The remaining carrying value of the broker relationships
intangible asset at 31 December 2020 is GBP5.8m (2019: GBP16.1m).
11. Directors' emoluments and transactions
2020 2019
GBP'000 GBP'000
Short-term employee benefits(1) 2,675 2,334
Post-employment benefits 99 112
Share-based payments(2) 425 632
3,199 3,078
-------------------------------- ------- -------
(1) Short-term employee benefits comprise Directors' salary costs,
Non-Executive Directors' fees and other short-term incentive benefits,
which are disclosed in the Annual Report on Remuneration.
(2) Share-based payments represent the amounts received by Directors for
schemes that vested during the year.
In addition to the total Directors' emoluments above, the Executive
Directors were granted deferred bonuses of GBP495k (2019: GBP511k) in
the form of shares. The DSBP awards that will be granted in March 2021
will have a holding period of three years with no further conditions
attached other than standard clawback situations. In March 2020 and
prior, the DSBP awards were subject to either a three or five year
vesting period with conditions attached, notably if the Director leaves
prior to vesting, the award is forfeited unless a good leaver reason
applies such as redundancy, retirement or ill health.
The Executive Directors received a further share award under the PSP
with a grant date fair value of GBP1,359k (2019: GBP1,305k) using a
share price of GBP2.58 (2019: GBP3.90) (the average mid-market quotation
for the preceding five days before grant). These shares vest annually
from year three in tranches of 20 per cent, subject to performance
conditions discussed in note 12 and the Annual Report on Remuneration.
The Directors of the Company are employed and compensated by OneSavings
Bank plc.
Some Non-Executive Directors who left office during the year, received a
payment equal to three months' fee in lieu of the unexpired period of
notice, totalling GBP59k. There was no compensation for loss of office
during 2019.
There were no outstanding loans granted in the ordinary course of
business to Directors and their connected persons as at 31 December 2020
and 2019.
The Annual Report on Remuneration and note 12 Share-based payments
provide further details on Directors' emoluments.
12. Share-based payments
Following the insertion of OSB GROUP PLC as the holding company on 27
November 2020, the share awards and options over OneSavings Bank plc
shares were automatically transferred to OSB GROUP PLC shares.
The Group operates the following share-based schemes:
Sharesave Scheme
The Save As You Earn (SAYE) or Sharesave Scheme is a share option scheme
which is available to all UK-based employees. The Sharesave Scheme
allows employees to purchase options by saving a fixed amount of between
GBP5 and GBP500 per month over a period of either three or five years at
the end of which the options, subject to leaver provisions, are usually
exercisable. If not exercised, the amount saved is returned to the
employee. The Sharesave Scheme has been in operation since 2014 and an
invitation to join the scheme is usually extended annually, with the
option price calculated using the mid-market price of an OSB GROUP PLC
ordinary share over the three dealing days prior to the Invitation Date
and applying a discount of 20%.
Deferred Share Bonus Plan (DSBP)
The DSBP applies to Executive Directors and certain senior managers with
50% of their performance bonuses to be deferred in shares for three
years for Executive Directors and one or five years for senior managers.
There are no further performance or vesting conditions attached to
deferred awards for senior managers, which also applies to Executive
Directors for awards granted from March 2021; the share awards are
subject to clawback provisions. The DSBP awards are expensed in the year
services are received with a corresponding increase in equity. Awards
granted to Executive Directors in March 2020 and prior, are subject to
vesting conditions and are expensed over the vesting period.
DSBP awards for senior managers carry entitlements to dividend
equivalents, which are paid when the awards vest. DSBP awards granted
from March 2021 to Executive Directors are entitled to dividend
equivalents; awards granted in prior years were not entitled to dividend
equivalents.
Performance Share Plan (PSP)
Executive Directors and certain senior managers are also eligible for a
PSP award based on performance conditions and vest in tranches over
three to seven years.
The performance conditions that apply to PSP awards from 2020 are based
on a combination of earnings per share (EPS) weighting of 35%, total
shareholder return (TSR) 35%, risk-based 15% and return on equity (ROE)
15%. Prior to 2020, PSP awards were based on a combination of EPS
weighting of 40%, TSR 40% and ROE 20%. The PSP conditions are assessed
independently. For the EPS element, growth targets are linked to the
Company's three-year growth plan, measuring growth from the base figure
for the prior year. For the TSR element, the Company's ordinary shares
relative performance is measured against the FTSE 250 (excluding
investment trusts). The risk-based measure is assessed against the risk
management performance with regard to all relevant risks including, but
not limited to, an assessment of regulatory risk, operational risk,
conduct risk, liquidity risk, funding risk, marketing risk and credit
risk. For the ROE element, growth rates are assessed against OSB GROUP
PLC's underlying profit after taxation as a percentage of average
shareholders' equity.
As part of the Combination, the Group granted mirror PSP awards for the
2018 and 2019 CCFS schemes that terminated upon the Combination. The
mirror PSP schemes follow the same performance conditions as the Group's
2018 and 2019 PSP awards.
The share-based expense for the year includes a charge in respect of the
Sharesave Scheme, DSBP and PSP. All charges are included in employee
expenses within note 9 Administrative expenses.
12. Share-based payments (continued)
The share-based payment expense during the year comprised the following:
2020 2019
GBPm GBPm
Sharesave Scheme 0.5 0.2
Deferred Share Bonus Plan 3.9 1.3
Performance Share Plan 0.7 2.5
5.1 4.0
-------------------------- ---- ----
Movements in the number of share awards and their weighted average
exercise prices are set out below:
Deferred
Share Bonus Performance
Sharesave Scheme Plan Share Plan
Weighted
average
exercise
Number price, GBP Number Number
At 1 January 2020 2,869,146 2.63 738,473 3,096,371
Granted 1,483,202 2.29 839,735 2,756,176
Exercised/Vested (1,080,430) 2.32 (449,608) (383,205)
Forfeited (526,586) 2.79 (8,843) (482,815)
At 31 December 2020 2,745,332 2.53 1,119,757 4,986,527
------------------- ----------- ----------- ------------ -----------
Exercisable at:
31 December 2020 118,402 2.89 - -
----------- ----------- ------------
At 1 January 2019 841,629 2.93 1,258,712 1,737,997
Granted 1,261,307 2.65 476,933 1,079,392
CCFS mirror/roll over schemes 1,183,475 2.42 - 931,853
Exercised/Vested (154,963) 1.96 (920,891) (235,241)
Forfeited (262,302) 3.23 (76,281) (417,630)
At 31 December 2019 2,869,146 2.63 738,473 3,096,371
------------------------------- ---- --------- ---------
Exercisable at:
31 December 2019 - - - -
--------- ---- ---------
For the share-based awards granted during the year, the weighted average
grant date fair value was 188 pence (2019: 208 pence).
12. Share-based payments (continued)
The range of exercise prices and weighted average remaining contractual
life of outstanding awards are as follows:
2020 2019
Weighted Weighted
average average
remaining remaining
contractual contractual
Exercise price Number life (years) Number life (years)
Sharesave Scheme
227-335 pence (2019: 134 - 335
pence) 2,745,332 2.5 2,869,146 2.0
Deferred Share Bonus Plan
Nil 1,119,757 0.7 738,473 0.6
Performance Share Plan
Nil 4,986,527 2.5 3,096,371 1.7
8,851,616 2.3 6,703,990 1.7
------------------------------- --------- ------------- --------- -------------
Sharesave Scheme
2020 2019 2018 2017 2016
Contractual life,
years 3 5 3 5 3 5 3 5 3 5
Share price at issue,
GBP 2.86 2.86 3.32 3.32 4.19 4.19 3.93 3.93 3.00 3.00
Exercise price,
GBP 2.29 2.29 2.65 2.65 3.35 3.35 3.15 3.15 2.40 2.40
Expected volatility,
% 57.6 57.6 31.9 31.9 16.1 16.5 18.0 17.3 18.4 20.1
Dividend yield,
% 3.3 3.3 4.8 4.8 4.4 4.4 4.1 4.1 4.6 4.6
Grant date fair
value, GBP 1.22 1.34 0.90 0.91 0.40 0.43 0.75 0.70 0.10 0.15
---------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
The share save schemes are not entitled to dividends between the option
and exercise date. A Black Scholes model is used to determine the grant
date fair value with two inputs:
-- Expected volatility - from 2019, the expected volatility is based
on the Company's share price. Prior to this the Group used the FTSE 350
diversified financials volatility as insufficient history was available
for the Company's share price.
-- Dividend -- based on the average dividend yield across external
analyst reports for the quarter prior to scheme grant date.
Deferred Share Bonus Plan
2020 2019 2018 2017
Contractual life,
years 3 3 3 3 5
Mid-market share
price, GBP 2.58 3.96 3.80 4.04 4.04
Attrition rate,
% - 8.4 9.7 11.8 11.8
Dividend yield,
% 5.6 4.7 4.6 4.0 4.0
Grant date fair
value, GBP 2.21 3.47 3.34 3.61 3.37
------------------ ---- ---- ---- ---- ----
12. Share-based payments (continued)
For DSBP awards where conditions exist, an attrition rate is applied as
an estimate of the actual number of awards that will meet the related
conditions at the vesting date. These schemes carry no rights to
dividend equivalents and a Black Scholes model is used to determine the
grant date fair value with a dividend yield input applied -- based on
the average dividend yield across external analyst reports for the
quarter prior to scheme grant date.
Performance Share Plan
Performance awards are typically made annually at the discretion of the
Remuneration Committee. Awards are based on a mixture of internal
financial performance targets, risk-based measures and relative TSR.
Performance conditions exist for the scheme notably that you are
employed by the Company at the vesting date, with good leaver exceptions,
and an attrition rate is applied as an estimate of the actual number of
awards that will meet the related conditions at the vesting date.
The awards are not entitled to a dividend equivalent between grant date
and vesting and a Black Scholes model is used to determine the grant
date fair value with a dividend yield input applied -- based on the
average dividend yield across external analyst reports for the quarter
prior to scheme grant date.
The fair value of an option that is subject to market conditions (the
relative share price element of the Performance Share Plan) is
determined at grant date using a Monte Carlo model at the time of grant.
The inputs into the models are as follows:
2020 2019 2018 2017
Contractual life,
years 3-7 3 3 3
Mid-market share
price, GBP 2.58 3.96 4.11 4.04
Attrition rate,
% 7.3 8.4 9.7 11.8
Expected volatility,
% 43.9 26.8 29.1 63.7
Dividend yield,
% 5.6 4.7 4.6 4.0
Vesting rate - TSR
% 27.8 44.9 54.0 60.0
Grant date fair
value, GBP 2.06 3.47 3.61 3.61
--------------------- ---- ---- ---- ----
CCFS PSP Mirror Schemes
2019 2018
Contractual life,
years 3 2
Mid-market share
price, GBP 3.54 3.54
Expected volatility,
% 28.6 28.6
Attrition rate,
% - -
Dividend yield,
% 4.8 4.8
Vesting rate - TSR,
% 37.4 37.4
Grant date fair
value, GBP 3.29 3.17
--------------------- ---- ----
13. Integration costs
2020 2019
GBPm GBPm
Consultant fees 1.7 3.0
Staff costs 8.1 2.2
9.8 5.2
---------------- ----
Consultant fees relate to advice on the Group's future operating
structure.
Staff costs relate to key personnel who will leave the Group under the
new operating model, but have been retained to assist in the integration
for a fixed period.
14. Exceptional items
2020 2019
GBPm GBPm
Consultant fees 2.0 4.0
Legal and professional fees 1.3 4.6
Success fees - 7.0
3.3 15.6
---------------------------- ---- ---------------
Exceptional items for 2020 relate to the insertion of OSB GROUP PLC as
the new holding company and listed entity of the Group. 2019 expenses
relate to the all-share Combination with CCFS.
15. Taxation
The Group publishes its tax strategy on its corporate website. The table
below shows the components of the Group's tax charge for the year:
2020 2019
GBPm GBPm
Corporation taxation (79.7) (57.1)
Deferred taxation 0.8 (0.2)
Release of deferred taxation on CCFS Combination(1) 14.8 7.0
Total taxation (64.1) (50.3)
---------------------------------------------------- ------ ----------------
(1) Release of deferred taxation on CCFS Combination relates to the fair
value unwind of the CCFS assets and liabilities at the acquisition date.
15. Taxation (continued)
The charge for taxation on the Group's profit before taxation differs
from the charge based on the standard rate of UK Corporation Tax of 19%
(2019: 19%) as follows:
2020 2019
GBPm GBPm
Profit before taxation 260.4 209.1
Profit multiplied by the standard rate of
UK Corporation Tax (19%) (49.5) (39.7)
Bank surcharge(1) (11.0) (8.5)
Taxation effects of:
Expenses not deductible for taxation purposes (1.6) (3.0)
Impact of deferred tax rate change (4.4) -
Negative goodwill on acquisition not taxable - 2.0
Adjustments in respect of earlier years 0.4 (2.7)
Tax adjustments in respect of share-based
payments (0.8) (0.7)
Impact of tax losses carried forward - 0.5
Tax on coupons paid on non-controlling interest
securities 1.5 1.0
Timing differences on capital items 1.3 0.2
Other - 0.6
Total taxation charge (64.1) (50.3)
------------------------------------------------ ------ ----------------
(1) Tax charge for the two banking entities of GBP18.4m offset by the
tax impact of unwinding CCFS Combination items of GBP5.8m (2019: Tax
charge for the two banking entities of GBP10.4m offset by the tax impact
of unwinding CCFS Combination items of GBP1.9m).
Factors affecting tax charge for the year
The effective tax rate for the year ended 31 December 2020, excluding
the impact of the deferred tax rate change and adjustments in respect of
earlier years, was 23.1% (2019: 22.8%).
The GBP(4.4)m impact of the deferred tax rate change relates
predominantly to the deferred tax liability from the CCFS combination
(see note 30).
During the year a tax charge of GBP0.3m (2019: tax charge of GBP1.1m) of
tax has been recognised directly within equity relating to the Group's
share-based payment schemes.
During the year a tax credit of GBP0.5m (2019: tax credit of GBP0.2m)
has been recognised within other comprehensive income relating to
investment securities classified as FVOCI.
15. Taxation (continued)
Factors that may affect future tax charges
In the March 2020 Budget, it was announced that the cuts in corporation
tax rate to 18% and then to 17% previously enacted would not occur with
the corporation tax rate held at 19%. As a result, closing deferred tax
balances are calculated at 19% with the impact of the increase from
17%/18% to 19% reflected in the period.
On 3 March 2021, the government announced that the corporation tax rate
will increase from 19% to 25% from 1 April 2023. This rate change was
not substantively enacted at the balance sheet date and so has not been
reflected in these financial statements. The government has also
acknowledged that this increase in the main rate will result in an
uncompetitive position for UK banks which also currently pay the 8% Bank
Surcharge, and so has also announced a review of the Bank Surcharge will
take place in Autumn 2021. Given that the majority of the Group's
deferred tax is recognised at the combined corporation tax and Bank
Surcharge rate, we are not yet able to estimate the impact of the
combined rate changes on our deferred tax balances. We have assessed the
impact of the increase of the corporation tax rate in isolation and
concluded that it will not have a material impact on the Group's
deferred tax balances.
16. Earnings per share
Earnings per share (EPS) are based on the profit for the year and the
weighted average number of ordinary shares in issue. Basic EPS are
calculated by dividing profit attributable to ordinary shareholders by
the weighted average number of ordinary shares in issue during the year.
Diluted EPS take into account share options and awards which can be
converted to ordinary shares.
For the purpose of calculating EPS, profit attributable to ordinary
shareholders is arrived at by adjusting profit for the year for the
coupons on non-controlling interest securities classified as equity:
2020 2019
GBPm GBPm
Statutory profit after tax 196.3 158.8
Less: Coupon on non-controlling interest securities
classified as equity (5.5) (5.5)
Statutory profit attributable to ordinary
shareholders 190.8 153.3
---------------------------------------------------- ----- -----
2020 2019
Weighted average number of shares, millions
Basic 446.2 291.6
Dilutive impact of share-based payment schemes 4.0 1.8
Diluted 450.2 293.4
Earnings per share, pence per share
Basic 42.8 52.6
Diluted 42.4 52.2
17. Dividends
On 27 November 2020, OSB GROUP PLC became the ultimate parent company,
and soon after the listed entity of Group, replacing OneSavings Bank plc
which is now a 100% subsidiary of OSB GROUP PLC. There were no dividends
paid in the period since the ultimate parent company was inserted.
OSB GROUP PLC &
OneSavings Bank OneSavings Bank
plc plc
2020 2019
GBPm Pence per share GBPm Pence per share
Final dividend for the prior
year - - 25.3 10.3
Interim dividend for the current
year - - 12.0 4.9
- 37.3
---------------------------------
The Directors recommend a final dividend of GBP64.9m, 14.5 pence per
share (2019: nil, nil) payable on 2 June 2021 with an ex-dividend date
of 15 April 2021 and a record date of 16 April 2021. This dividend is
not reflected in these financial statements as it is subject to approval
by shareholders at the AGM on 27 May 2021. This will make up the total
dividend for 2020 of GBP64.9m, 14.5 pence per share (2019: GBP12.0m, 4.9
pence per share).
As at 31 December 2020 OSB GROUP PLC had no distributable reserves
(2019: nil). The Company reduced the nominal value of OSB GROUP PLC
shares from 304 pence each to 1 penny each on 26 February 2021 (see note
52). The recommended dividend of GBP64.9m will be made out of the
distributable reserve position following this capital reduction
exercise.
18. Cash and cash equivalents
The following table analyses the cash and cash equivalents disclosed in
the Consolidated Statement of Cash Flows:
2020 2019
GBPm GBPm
Cash in hand 0.5 0.4
Unencumbered loans and advances to credit
institutions 2,370.1 2,052.5
Investment securities with original maturity
less than 3 months - 49.9
2,370.6 2,102.8
--------------------------------------------- ------- -------
19. Loans and advances to credit institutions
2020 2019
GBPm GBPm
Unencumbered:
BoE call account 2,256.5 1,916.2
Call accounts 55.6 81.7
Cash held in special purpose vehicles(1) 51.0 44.0
Term deposits 7.0 10.6
Encumbered:
BoE cash ratio deposit 52.3 41.7
Cash held in special purpose vehicles(1) 42.7 -
Cash margin given 211.1 110.4
2,676.2 2,204.6
----------------------------------------- ------- -------
(1) Cash held in special purpose vehicles is ring-fenced for the use in
managing the Group's securitised debt facilities under the terms of
securitisation agreements.
20. Investment securities
2020 2019
GBPm GBPm
Held at FVOCI:
UK and EU Sovereign debt - 149.8
RMBS loan notes 285.0 358.9
285.0 508.7
Held at amortised cost:
RMBS loan notes 186.2 126.6
186.2 126.6
Less: Expected credit losses - -
186.2 126.6
471.2 635.3
At 31 December 2020 the Group had GBP147.1m (2019: GBP173.0m) of FVOCI
RMBS and GBP13.7m (2019: nil) of amortised cost RMBS loan notes sold
under repos.
The Directors consider that the primary purpose of holding investment
securities is prudential. These securities are held as liquid assets
with the intention of use on a continuing basis in the Group's
activities and are classified as FVOCI and amortised cost in accordance
with the Group's business model for each security.
20. Investment securities (continued)
Movements during the year of investment securities held by the Group are
analysed as follows:
2020 2019
GBPm GBPm
At 1 January 635.3 58.9
Additions(1) 291.6 439.8
CCFS Combination - 493.5
Disposals and maturities(2) (457.2) (357.7)
Movement in accrued interest 0.5 -
Changes in fair value 1.0 0.8
At 31 December 471.2 635.3
------- -------
(1) Additions include GBP100.7m of retained RMBS loan notes following
the deconsolidation of PMF 2020-1B.
(2) Disposals and maturities include GBP49.9m of UK Sovereign debt which
had an original maturity of less than three months.
At 31 December 2020, investment securities included investments in
unconsolidated structured entities (note 46) of GBP100.7m (2019: nil)
notes in PMF 2020-1B and GBP285.0m (2019: GBP358.9m) notes in PMF
2019-1B. The investments represent the maximum exposure to loss from
unconsolidated structured entities.
21. Loans and advances to customers
2020 2019
GBPm GBPm
Held at amortised cost:
Loans and advances (see note 22) 19,257.1 18,419.9
Finance leases (see note 23) 65.5 47.7
19,322.6 18,467.6
Less: Expected credit losses (see note 24) (111.0) (42.9)
19,211.6 18,424.7
Residential mortgages held at fair value 19.1 22.1
19,230.7 18,446.8
------------------------------------------- --------
22. Loans and advances
2020 2019
OSB CCFS Total OSB CCFS Total
GBPm GBPm GBPm GBPm GBPm GBPm
Gross carrying
amount
Stage 1 9,310.8 6,749.5 16,060.3 9,999.2 7,240.0 17,239.2
Stage 2 1,362.0 1,327.6 2,689.6 442.4 307.1 749.5
Stage 3 344.5 48.1 392.6 277.7 16.7 294.4
Stage 3 (POCI) 48.6 66.0 114.6 53.6 83.2 136.8
11,065.9 8,191.2 19,257.1 10,772.9 7,647.0 18,419.9
--------------- -------- ------- -------- -------- ------- --------
22. Loans and advances (continued)
The mortgage loan balances pledged as collateral for liabilities are:
2020 2019
GBPm GBPm
BoE under TFS, TFSME and ILTR 5,203.2 4,458.3
Securitisation 435.4 366.7
Warehouse funding - 97.4
Master servicer for securitisation vehicle - 40.4
5,638.6 4,962.8
------------------------------------------- ------- -------
The Group's securitisation programmes, use of TFS, TFSME and ILTR and
Warehouse funding arrangements result in certain assets being encumbered
as collateral against such funding. As at 31 December 2020, the
percentage of the Group's gross customer loans and receivables that are
encumbered was 29% (2019: 27%).
At 31 December 2019, GBP40.4m of retention loans (i.e. loans in
securitisation portfolios that are retained by the originator) were
treated as encumbered. For 2020, the Group has treated these as
unencumbered as they are available to use to raise collateral as long as
the risk and rewards of the loans remain with the Group.
The tables below show the movement in loans and advances to customers by
IFRS 9 stage during the year, based on the following assumptions:
Stage 3
Stage 1 Stage 2 Stage 3 (POCI) Total
GBPm GBPm GBPm GBPm GBPm
At 31 December 2018 8,279.6 436.8 225.4 56.2 8,998.0
Originations(1) 4,098.6 - - - 4,098.6
CCFS Combination(3) 7,091.1 43.5 - 94.4 7,229.0
Repayments and write-offs(2) (1,825.2) (21.6) (47.5) (17.3) (1,911.6)
Transfers:
- To Stage 1 176.9 (162.7) (14.2) - -
- To Stage 2 (495.9) 517.7 (21.8) - -
- To Stage 3 (86.1) (64.5) 150.6 - -
Incurred loss protection 0.2 0.3 1.9 3.5 5.9
At 31 December 2019 17,239.2 749.5 294.4 136.8 18,419.9
Originations(1) 3,767.0 - - - 3,767.0
Acquisitions 60.8 - - 1.5 62.3
Disposals (787.3) (16.1) (1.0) - (804.4)
Repayments and write-offs(2) (2,119.1) (3.9) (41.0) (23.7) (2,187.7)
Transfers:
- To Stage 1 324.8 (293.5) (31.3) - -
- To Stage 2(4) (2,300.3) 2,344.5 (44.2) - -
- To Stage 3 (124.8) (90.9) 215.7 - -
At 31 December 2020 16,060.3 2,689.6 392.6 114.6 19,257.1
--------- ------- ------- ------- ---------
(1) Originations include further advances and drawdowns on existing
commitments.
(2) Repayments and write-offs include customer redemptions.
(3) The mortgages acquired in the all-share Combination with CCFS are
shown at the acquisition date fair value.
22. Loans and advances (continued)
(4) Increase from previous year due to the additional qualitative and
quantitative tests applied in 2020 for loans with payment deferrals.
Payment deferrals increased in 2020 notably through COVID-19 initiatives
and impacts.
During the year the Group purchased one external mortgage book at par.
The Group did not purchase any external mortgage books during 2019 other
than those acquired in the Combination.
23. Finance leases
The Group provides asset finance lending through InterBay Asset Finance
Limited.
2020 2019
GBPm GBPm
Gross investment in finance leases, receivable
Less than one year 21.9 14.1
Between one and five years 50.4 38.5
More than 5 years 1.3 1.2
73.6 53.8
Unearned finance income (8.1) (6.1)
Net investment in finance leases 65.5 47.7
----------------------------------------------- ----- -----
Net investment in finance leases, receivable
Less than one year 18.6 11.5
Between one and five years 45.7 35.0
More than five years 1.2 1.2
65.5 47.7
-----
The Group has recognised GBP2.6m of ECLs on finance leases as at 31
December 2020 (2019: GBP0.3m).
24. Expected credit loss
The ECL has been calculated based on various scenarios as set out below:
ECL Weighted ECL Weighted
provision Weighting ECL provision provision Weighting ECL provision
2020 2020 2020 2019 2019 2019
At 31 December 2020 GBPm % GBPm GBPm % GBPm
Scenarios
Upside 40.1 30 12.0 14.6 10 1.5
Base case 54.6 40 21.8 24.4 40 9.7
Downside scenario 113.5 23 26.1 48.1 35 16.8
Severe downside
scenario 166.7 7 11.7 62.5 15 9.4
Total weighted
provisions 71.6 37.4
Non-modelled
provisions:
Individually-assessed
provisions - - 29.0 - - 4.2
Post model
adjustments(1) - - 10.4 - - 1.3
Total provision 111.0 42.9
---------------------- --------- --------- -------------- --------- --------- --------------
1. COVID-19 post model adjustments -- the Group implemented a number of
post model adjustments to ensure that modelled estimates remained
appropriate, in light of the impact that COVID-19 support measures, such
as the repossession moratorium and the impact of payment deferrals on
the credit bureau files, had on probability of default and loss given
default estimates. In addition updated model estimates were also aligned
to recently observed actual performance. Additional information can be
found in the Credit risk section of the Risk profile performance
overview.
The Group's ECL by segment and IFRS 9 stage is shown below:
2020 2019
OSB CCFS Total OSB CCFS Total
GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1 12.3 8.9 21.2 3.5 2.1 5.6
Stage 2 17.9 13.1 31.0 3.6 2.0 5.6
Stage 3 49.4 2.3 51.7 23.4 0.4 23.8
Stage 3 (POCI) 4.0 3.1 7.1 5.1 2.8 7.9
83.6 27.4 111.0 35.6 7.3 42.9
--------------- ---- ---- ----- ---- ---- -----
24. Expected credit loss (continued)
The tables below show the movement in the ECL by IFRS 9 stage during the
year. ECLs on originations reflect the IFRS 9 stage of loans originated
during the year as at 31 December and not the date of origination.
Remeasurement of loss allowance relates to existing loans which did not
redeem during the year and includes the impact of loans moving between
IFRS 9 stages.
Stage
Stage 1 Stage 2 Stage 3 3 (POCI) Total
GBPm GBPm GBPm GBPm GBPm
At 31 December 2018 4.5 5.6 10.2 1.6 21.9
Originations 1.9 - - - 1.9
CCFS Combination - - - 3.6 3.6
Repayments and write-offs (0.6) (0.4) (4.3) (0.2) (5.5)
Remeasurement of loss allowance (3.4) (0.5) 18.8 (0.6) 14.3
Transfers:
- To Stage 1 1.9 (1.6) (0.3) - -
- To Stage 2 (0.2) 0.6 (0.4) - -
- To Stage 3 (0.1) (1.0) 1.1 - -
Changes in assumptions
and model parameters 1.4 2.6 (3.2) - 0.8
Incurred loss protection 0.2 0.3 1.9 3.5 5.9
At 31 December 2019 5.6 5.6 23.8 7.9 42.9
Originations 6.3 - - - 6.3
Acquisitions - - 0.1 - 0.1
Disposals (0.1) (0.2) (0.1) - (0.4)
Repayments and write-offs (0.7) (0.3) (4.1) (1.1) (6.2)
Remeasurement of loss allowance 6.3 7.7 29.0 (0.2) 42.8
Transfers:
- To Stage 1 2.0 (1.4) (0.6) - -
- To Stage 2 (1.0) 2.8 (1.8) - -
- To Stage 3 (0.1) (1.2) 1.3 - -
Changes in assumptions
and model parameters 2.9 18.0 4.1 0.5 25.5
At 31 December 2020 21.2 31.0 51.7 7.1 111.0
24. Expected credit loss (continued)
The table below shows the stage 2 ECL balances by transfer criteria:
Carrying Carrying
value ECL Coverage value ECL Coverage
2020 2020 2020 2019 2019 2019
GBPm GBPm % GBPm GBPm %
Criteria:
Relative PD movement 946.9 17.0 1.80 588.2 4.8 0.82
Qualitative measures 1,680.7 12.7 0.76 79.8 0.4 0.44
30 days past due
backstop 63.4 1.3 2.05 81.5 0.4 0.54
Total 2,691.0 31.0 1.15 749.5 5.6 0.75
--------------------- -------- ---- -------- -------- ---- --------
The Group has a number of qualitative measures to determine whether a
SICR has taken place. These triggers utilise both internal performance
information, to analyse whether an account is in distress but not yet in
arrears, and external credit bureau information, to determine whether
the customer is experiencing financial difficulty with an external
credit obligation.
25. Impairment of financial assets
The charge for impairment of financial assets in the Consolidated
Statement of Comprehensive Income comprises:
2020 2019
GBPm GBPm
Write-offs in year 1.9 4.1
Disposals 0.4 -
CCFS Combination - 3.6
Increase in ECL provision 68.7 7.9
71.0 15.6
-------------------------- ---- ----
The CCFS Combination losses relate to the initial ECL recognised on the
CCFS loan book following the Combination in October 2019.
26. Derivatives
The table below reconciles the gross amount of derivative contracts to
the carrying balance shown in the Consolidated Statement of Financial
Position:
Contracts
Net amount subject
of financial to master Cash collateral
assets netting paid /
/ (liabilities) agreements (received)
presented not offset not offset
Gross amount in the in the in the
of recognised Consolidated Consolidated Consolidated
financial Statement Statement Statement
assets of Financial of Financial of Financial Net
/ (liabilities) Position Position Position amount
GBPm GBPm GBPm GBPm GBPm
At 31
December
2020
Derivative
assets:
Interest
rate risk
hedging 12.3 12.3 (11.8) - 0.5
12.3 12.3 (11.8) - 0.5
Derivative
liabilities:
Interest
rate risk
hedging (163.6) (163.6) 11.8 210.5 58.7
(163.6) (163.6) 11.8 210.5 58.7
---------------- ---------------- ------------- --------------- ------
At 31
December
2019
Derivative
assets:
Interest
rate risk
hedging 21.1 21.1 (9.8) (8.0) 3.3
21.1 21.1 (9.8) (8.0) 3.3
------------- ---------------- ---------------- ------------- --------------- ------
Derivative
liabilities:
Interest
rate risk
hedging (92.8) (92.8) 9.8 110.4 27.4
(92.8) (92.8) 9.8 110.4 27.4
------------- ---------------- ---------------- ------------- --------------- ------
Included within the Group's derivative liabilities is GBP0.1m (2019:
GBP3.4m) relating to derivative contracts not covered by master netting
agreements and therefore no cash collateral has been paid.
26. Derivatives (continued)
The table below profiles the timing of nominal amounts for interest rate
risk hedging derivatives based on contractual maturity:
Less than 3 - 12 More than
Total nominal 3 months months 1 - 5 years 5 years
GBPm GBPm GBPm GBPm GBPm
At 31 December
2020
Derivative assets 8,687.8 1,450.7 3,407.8 3,808.3 21.0
Derivative
liabilities 10,392.4 148.0 1,868.0 8,065.9 310.5
19,080.2 1,598.7 5,275.8 11,874.2 331.5
----------------- ------------- --------- -------- ------------ ---------
At 31 December
2019
Derivative assets 7,795.4 1,110.8 2,608.2 3,760.9 315.5
Derivative
liabilities 9,982.4 144.3 2,528.6 7,155.5 154.0
17,777.8 1,255.1 5,136.8 10,916.4 469.5
----------------- ------------- --------- -------- ------------ ---------
The Group has 925 (2019: 1,175) derivative contracts with an average
fixed rate of 0.47% (2019: 0.91%).
27. Hedge accounting
2020 2019
GBPm GBPm
Hedged assets
Current hedge relationships 197.5 64.2
Swap inception adjustment (100.5) (67.8)
Cancelled hedge relationships 84.6 20.4
Fair value adjustments on hedged assets 181.6 16.8
------- ------
Hedged liabilities
Current hedge relationships (11.8) (2.9)
Swap inception adjustment 6.2 8.0
De-designated hedge relationships (2.6) -
Fair value adjustments on hedged liabilities (8.2) 5.1
--------------------------------------------- ------- ------
The swap inception adjustment relates in part to hedged assets and
liabilities recognised on the Combination where pre-existing hedge
relationships ceased on the date of Combination. The swap inception
adjustment is being amortised over the life of the derivative
instruments acquired on Combination and recognises an offsetting asset
or liability to the fair value of the derivative instruments on the date
of Combination. The remainder of the swap inception adjustment relates
to the hedging adjustments arising when hedge accounting commences,
primarily on derivative instruments previously taken out against the
mortgage pipeline and also on derivative instruments previously taken
out against new retail deposits.
Cancelled hedge relationships predominantly represent the unamortised
fair value adjustment for interest rate risk hedges that have been
cancelled and replaced due to IBOR transition, securitisation activities
and legacy long-term fixed rate mortgages (c. 25 years at origination).
27. Hedge accounting (continued)
The tables below analyse the Group's portfolio hedge accounting for
fixed rate loans and advances to customers:
2020 2019
Hedged Hedging Hedged Hedging
item instrument item instrument
Loans and advances to customers GBPm GBPm GBPm GBPm
Carrying amount of hedged item/nominal
value of hedging instrument 11,282.4 11,159.7 10,312.5 10,248.3
Cumulative fair value adjustments 197.5 (156.9) 64.2 (75.6)
Fair value adjustments for the
period 107.3 (117.4) 70.1 (75.1)
Cumulative fair value on cancelled
hedge relationships 84.6 - 20.4 -
The cumulative fair value adjustments of the hedging instrument comprise
GBP0.7m (2019: GBP13.2m) recognised within derivative assets and
GBP157.6m (2019: GBP88.8m) recognised within derivative liabilities.
The movement in cancelled hedge relationships is as follows:
2020 2019
GBPm GBPm
At 1 January 20.4 17.3
New cancellations(1) 86.1 8.6
Amortisation (17.9) (5.5)
Derecognition of hedged item (4.0) -
At 31 December 84.6 20.4
----------------------------- ------ -----
(1) Following the securitisation of mortgages during the year and LIBOR
swaps transferred to SONIA swaps through the IBOR transition, the Group
cancelled swaps which were effective prior to the event, with the
designated hedge moved to cancelled hedge relationships to be amortised
over the original life of the swap.
The tables below analyse the Group's portfolio hedge accounting for
fixed rate amounts owed to retail depositors:
2020 2019
Hedged Hedging Hedged Hedging
item instrument item instrument
Customer deposits GBPm GBPm GBPm GBPm
Carrying amount of hedged item/nominal
value of hedging instrument 6,849.9 6,858.0 6,684.6 6,687.5
Cumulative fair value adjustments (11.8) 9.2 (2.9) 3.5
Fair value adjustments for the
period (4.1) 6.8 (4.6) 4.8
The cumulative fair value adjustments of the hedging instrument comprise
GBP9.4m (2019: GBP5.9m) recognised within derivative assets and GBP0.2m
(2019: GBP2.4m) recognised within derivative liabilities.
28. Other assets
2020 2019
GBPm GBPm
Prepayments 7.3 9.3
Other assets 1.8 5.0
9.1 14.3
------------- ---- ----
29. Deferred taxation asset
Losses
carried Accelerated Share-based IFRS 9 transitional
forward depreciation payments adjustments Others(1) Total
GBPm GBPm GBPm GBPm GBPm GBPm
At 31 December 2018 1.4 (0.1) 1.5 0.7 - 3.5
Profit or loss
(charge)/credit (0.5) 0.3 0.8 (0.1) (0.7) (0.2)
CCFS Combination - (0.1) 0.5 0.1 1.4 1.9
Transferred to corporation
tax liability - - (1.3) - - (1.3)
Tax taken directly
to OCI - - - - (0.2) (0.2)
Tax taken directly
to equity - - 1.1 - - 1.1
At 31 December 2019 0.9 0.1 2.6 0.7 0.5 4.8
Profit or loss
credit/(charge) - 0.3 0.9 - (0.4) 0.8
Transferred to corporation
tax liability - - (0.6) - - (0.6)
Tax taken directly
to OCI - - - - (0.5) (0.5)
Tax taken directly
to equity - - 0.2 - - 0.2
At 31 December 2020 0.9 0.4 3.1 0.7 (0.4) 4.7
--------------------------- -------- ------------- ----------- ------------------- --------- -----
(1) Others include deferred taxation assets recognised on financial
assets classified as FVOCI, derivatives and short-term timing
differences.
In 2020, the profit or loss credit/(charge) includes GBP(0.3)m impact of
the deferred tax rate change (2019: nil).
As at 31 December 2020, the Group had GBP3.5m (2019: GBP3.5m) of losses
for which a deferred tax asset has not been recognised as the Group does
not expect sufficient future profits to be available to utilise the
losses.
30. Deferred taxation liability
The deferred tax liability recognised on the Combination relates to the
timing differences of the recognition of assets and liabilities at fair
value, where the fair values will unwind in future periods in line with
the underlying asset or liability. The deferred tax liability has been
measured using the relevant rates for the expected periods of
utilisation.
CCFS Combination
GBPm
At 31 December 2018 -
CCFS Combination 70.1
Profit or loss credit (7.0)
At 31 December 2019 63.1
Profit or loss credit (14.8)
At 31 December 2020 48.3
--------------------------
In 2020, the profit or loss credit includes GBP4.7m impact of the
deferred tax rate change (2019: nil).
31. Property, plant and equipment
Right of use
assets
Freehold
land and Leasehold Equipment Property Other
buildings improvements and fixtures leases leases Total
GBPm GBPm GBPm GBPm GBPm GBPm
Cost
At 1 January 2019 16.0 0.9 11.0 3.8 - 31.7
Additions 3.1 1.5 2.4 2.5 0.1 9.6
CCFS Combination - 0.3 2.1 6.4 1.2 10.0
Disposals and
write-offs(1) - - (1.2) - - (1.2)
Foreign exchange
difference 0.2 - 0.1 - - 0.3
At 31 December
2019 19.3 2.7 14.4 12.7 1.3 50.4
Additions - 0.3 2.5 0.6 - 3.4
Disposals and
write-offs(1) - - (3.0) (0.2) - (3.2)
Foreign exchange
difference (0.1) - (0.1) - - (0.2)
At 31 December
2020 19.2 3.0 13.8 13.1 1.3 50.4
----------------- ---------- ------------- ------------- -------- ------- -----
Depreciation
At 1 January 2019 0.8 0.3 5.0 - - 6.1
Charged in year 0.3 0.2 2.3 1.0 0.1 3.9
CCFS Combination - - - - - -
Disposals and
write-offs - - (1.2) - - (1.2)
At 31 December
2019 1.1 0.5 6.1 1.0 0.1 8.8
Charged in year 0.3 0.4 2.9 1.8 0.2 5.6
Disposals and
write-offs(1) - - (3.0) (0.2) - (3.2)
At 31 December
2020 1.4 0.9 6.0 2.6 0.3 11.2
----------------- ---------- ------------- ------------- -------- ------- -----
Net book value
At 31 December
2020 17.8 2.1 7.8 10.5 1.0 39.2
----------------- ---------- ------------- ------------- -------- ------- -----
At 31 December
2019 18.2 2.2 8.3 11.7 1.2 41.6
(1) During the year the Group wrote off fully depreciated assets.
32. Intangible assets
Computer
software
Development and Assets arising
costs licences on consolidation(2) Total
GBPm GBPm GBPm GBPm
Cost
At 1 January 2019 - 13.6 - 13.6
Additions 0.5 3.8 - 4.3
CCFS Combination - - 23.6 23.6
Disposals and
write-offs(1) - (2.0) - (2.0)
At 31 December 2019 0.5 15.4 23.6 39.5
Additions 1.8 2.6 - 4.4
Disposals and
write-offs(1) - (1.3) - (1.3)
At 31 December 2020 2.3 16.7 23.6 42.6
------------------------- ----------- --------- -------------------- -----
Amortisation
At 1 January 2019 - 5.8 - 5.8
CCFS Combination - - - -
Charged in year - 3.0 1.3 4.3
Disposals and
write-offs(1) - (2.0) - (2.0)
At 31 December 2019 - 6.8 1.3 8.1
Charged in year 0.1 3.6 4.5 8.2
Impairment in the year - - 7.0 7.0
Disposals and
write-offs(1) - (1.3) - (1.3)
At 31 December 2020 0.1 9.1 12.8 22.0
------------------------- ----------- --------- -------------------- -----
Net book value
At 31 December 2020 2.2 7.6 10.8 20.6
At 31 December 2019 0.5 8.6 22.3 31.4
(1) During the year the Group wrote off fully amortised assets.
(2) Assets arising on consolidation comprise broker relationships of
GBP5.8m (2019: GBP16.1m), technology of GBP2.9m (2019: GBP3.2m), brand
name of GBP1.2m (2019: GBP1.6m) and banking licence of GBP0.9m (2019:
GBP1.4m). The carrying value of the intangible assets are reviewed each
reporting period with a GBP7.0m impairment recognised in relation to
broker relationships due to impacts of the COVID-19 pandemic.
33. Amounts owed to credit institutions
2020 2019
GBPm GBPm
BoE TFS 2,568.6 2,632.8
BoE TFSME 1,000.1 -
BoE ILTR - 290.6
Warehouse funding - 93.6
Commercial repo 0.1 41.4
Cash margin received - 8.0
Loans from credit institutions 1.4 2.4
3,570.2 3,068.8
------------------------------- ------- -------
34. Amounts owed to retail depositors
OSB CCFS Total OSB CCFS Total
2020 2020 2020 2019 2019 2019
GBPm GBPm GBPm GBPm GBPm GBPm
Fixed rate deposits 6,275.6 4,781.4 11,057.0 5,617.9 4,907.6 10,525.5
Variable rate deposits 3,429.7 2,116.4 5,546.1 3,817.9 1,911.6 5,729.5
9,705.3 6,897.8 16,603.1 9,435.8 6,819.2 16,255.0
---------------------- ------- ------- -------- ------- ------- --------
35. Amounts owed to other customers
2020 2019
GBPm GBPm
Fixed rate deposits 46.0 26.0
Variable rate deposits 26.9 3.7
72.9 29.7
----
36. Debt securities in issue
2020 2019
GBPm GBPm
Asset backed loan notes at
amortised cost 421.9 296.3
Amount due for settlement within 12
months - 40.1
Amount due for settlement after 12
months 421.9 256.2
421.9 296.3
------------------------------------ --------------- -----
The asset-backed loan notes are secured on fixed and variable rate
mortgages and are redeemable in part from time to time, but such
redemptions are limited to the net principal received from borrowers in
respect of underlying mortgage assets. The maturity date of the funds
matches the contractual maturity date of the underlying mortgage assets.
It is likely that a large proportion of the underlying mortgage assets
and, therefore these notes, will be repaid within five years.
Asset-backed loan notes may all be repurchased by the Group at any
interest payment date on or after the call dates, or at any interest
payment date when the current balance of the mortgages outstanding is
less than or equal to 10% of the principal amount outstanding on the
loan notes on the date they were issued.
Interest is payable at fixed margins above LIBOR or SONIA.
As at 31 December 2020, notes were issued through the following funding
vehicles:
2020 2019
GBPm GBPm
CMF 2020-1 plc 288.6 -
Canterbury Finance No.3 plc 133.3 -
Canterbury Finance No.1 plc - 256.2
Precise Mortgage Funding 2015-1
plc - 40.1
421.9 296.3
-------------------------------- --------------- ---------------
37. Lease liabilities
2020 2019
GBPm GBPm
At 1 January 13.3 3.8
CCFS Combination - 7.7
New leases 0.1 3.6
Lease terminated - (0.8)
Lease repayments (2.0) (1.1)
Interest accruals 0.3 0.1
At 31 December 11.7 13.3
------------------ -----
During the year, the Group incurred expenses of GBP0.7m (2019: GBP0.7m)
in relation to short-term leases and nil (2019: GBP0.1m) in relation to
low-value assets.
38. Other liabilities
2020 2019
GBPm GBPm
Falling due within one year:
Accruals 19.7 23.1
Deferred income 0.6 1.1
Other creditors 7.5 10.7
27.8 34.9
----------------------------- ---- ----
39. Provisions and contingent liabilities
The Financial Services Compensation Scheme (FSCS) provides protection of
deposits for the customers of authorised financial services firms,
should a firm collapse. FSCS protects retail deposits of up to GBP85k
for single account holders and GBP170k for joint holders. As OSB and
CCFS both hold banking licences, the full FSCS protection is available
to customers of each bank.
The compensation paid out to consumers is initially funded through loans
from the BoE and HM Treasury. In order to repay the loans and cover its
costs, the FSCS charges levies on firms regulated by the PRA and the
FCA. The Group is among those firms and pays the FSCS a levy based on
its share of total UK deposits.
The Group has reviewed its current exposure to Payment Protection
Insurance (PPI) claims, following the FCA deadline for PPI claims on 29
August 2019 and has recognised a provision of GBP0.3m as at 31 December
2020 (2019: GBP0.3m). The Group has maintained its provision for FCA
conduct rules exposures of GBP1.2m (2019: GBP1.3m) to cover potential
future claims.
39. Provisions and contingent liabilities (continued)
An analysis of the Group's FSCS and other provisions is presented below:
2020 2019
ECL on ECL on
Other regulatory undrawn Other regulatory undrawn
FSCS provisions loan facilities Total FSCS provisions loan facilities Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January (0.2) 1.6 0.2 1.6 0.1 1.7 - 1.8
Refund/(paid)
during the year 0.3 (0.2) - 0.1 (0.1) (0.1) - (0.2)
Charge/(credit) - 0.1 - 0.1 (0.2) - 0.2 -
At 31 December 0.1 1.5 0.2 1.8 (0.2) 1.6 0.2 1.6
----------------- ----- ---------------- ---------------- ----- ----- ---------------- ---------------- -----
In January 2020, the Group was contacted by the FCA in connection with a
multi-firm thematic review into forbearance measures adopted by lenders
in respect of a portion of the mortgage market. The Group is responding
to information requests from the FCA. It is not possible to reliably
predict or estimate the outcome of the review, if any, on the Group and
is a contingent liability.
40. Subordinated liabilities
2020 2019
GBPm GBPm
At 1 January 10.6 10.8
Repayment of debt at maturity (0.1) (0.2)
At 31 December 10.5 10.6
-------------------------------- ----- -----
The Group's outstanding subordinated liabilities are summarised below:
2020 2019
GBPm GBPm
Linked to LIBOR:
Floating rate subordinated loans 2022
(LIBOR +5%) 0.1 0.2
Floating rate subordinated loans 2022
(LIBOR +2%) 0.2 0.2
Fixed rate:
Subordinated liabilities 2024
(7.45%) 10.2 10.2
10.5 10.6
--------------------------------------- ---- ----
The fixed rate subordinated liabilities are repayable at the dates
stated or earlier, in full, at the option of the Group with the prior
consent of the PRA. All subordinated liabilities are denominated in
Pounds Sterling and are unlisted.
The rights of repayment of the holders of these subordinated liabilities
are subordinated to the claims of all depositors and all other
creditors.
41. Perpetual Subordinated Bonds
2020 2019
GBPm GBPm
Sterling Perpetual Subordinated Bonds
(4.5991%) 22.3 22.3
Sterling Perpetual Subordinated Bonds
(4.6007%) 15.3 15.3
37.6 37.6
----
The bonds are listed on the London Stock Exchange.
The 4.5991% bonds were issued with discretion over the payment of
interest which is conditional, they are therefore classified as
financial liabilities. The coupon rate is 4.5991% until the next reset
date on 7 March 2021.
The 4.6007% bonds were issued with no discretion over the payment of
interest and may not be settled in the Group's own equity. They are
therefore classified as financial liabilities. The coupon rate is
4.6007% until the next reset date on 27 August 2024.
42. Reconciliation of cash flows for financing activities
The tables below show a reconciliation of the Group's liabilities
classified as financing activities within the Consolidated Statement of
Cash Flows:
Amounts owed
to credit Debt securities Subordinated
institutions in issue liabilities
(see note (see note (see note PSBs (see
33) 36) 40) note 41) Total
GBPm GBPm GBPm GBPm GBPm
At 31 December 2018 1,584.0 - 10.8 37.6 1,632.4
Cash movements:
Principal drawdowns 587.7 285.0 - - 872.7
Principal repayments (273.7) (64.6) (0.2) - (338.5)
Non-cash movements:
CCFS Combination 1,168.4 75.1 - - 1,243.5
Accrued interest movement 2.4 0.8 - - 3.2
At 31 December 2019 3,068.8 296.3 10.6 37.6 3,413.3
Cash movements:
Principal drawdowns 1,505.0 486.2 - - 1,991.2
Principal repayments (998.9) (104.6) (0.1) - (1,103.6)
Deconsolidation of
special purpose vehicles - (256.2) - - (256.2)
Non-cash movements:
Accrued interest movement (4.7) 0.2 - - (4.5)
At 31 December 2020 3,570.2 421.9 10.5 37.6 4,040.2
-------------------------- ------------- --------------- ------------ --------- ---------
43. Share capital
Number of shares Nominal
authorised value Premium
Ordinary shares and fully paid GBPm GBPm
At 1 January 2019 244,487,537 2.4 158.8
Shares issued under OSB employee share
plans 1,312,862 0.1 0.3
CCFS Combination 199,643,055 2.0 705.1
At 31 December 2019 445,443,454 4.5 864.2
Shares issued under OSB employee share
plans 1,860,744 - 2.6
Cancellation of OneSavings Bank plc
GBP0.01 share capital and share premium (447,304,198) (4.5) (866.8)
Issuance of OSB GROUP PLC GBP3.04
share capital 447,304,198 1,359.8 -
Shares issued under OSBG employee
share plans 8,582 - -
At 31 December 2020 447,312,780 1,359.8 -
----------------------------------------- ---------------- ------- -------
The holders of ordinary shares are entitled to receive dividends as
declared from time to time, and are entitled to one vote per share at
meetings of the Company. All ordinary shares rank equally with regard to
the Company's residual assets.
All ordinary shares issued in the current and prior year were fully
paid.
44. Other reserves
The Group's other reserves are as follows:
2020 2019
GBPm GBPm
Share-based payment 7.8 5.6
Capital contribution - 6.5
Transfer (1,355.3) (12.8)
Own shares (4.0) (3.7)
FVOCI 1.0 0.5
Foreign exchange (1.0) (1.0)
Non-controlling interest securities 60.0 60.0
(1,291.5) 55.1
------------------------------------ --------- ------
Capital contribution
The capital contribution reserve relates to one-off nil price share
awards of shares in OSB granted to certain senior managers on OSB's
admission to the London Stock Exchange in June 2014. The awards were
granted by OSB's major shareholder at the time of the IPO. The reserve
was transferred to retained earnings during the year following
distribution of all the awards.
Transfer reserve
The transfer reserve in 2019 represented the difference between the
value of net assets transferred to the Group from Kent Reliance Building
Society in 2011 and the value of shares issued to the A ordinary
shareholders. The net assets transferred were predominantly savings and
mortgages that have now either been replaced by new products, which is a
derecognition event of the initial net asset, or are no longer with the
Group. The balance was therefore transferred to retained earnings in
2020.
44. Other reserves (continued)
On 27 November 2020, a new ultimate parent company was inserted into the
Group, being OSBG. The share capital generated from issuing 447,304,198
nominal shares at GBP3.04 per share, replacing the nominal shares of
GBP0.01 in OSB previously recognised in share capital at the
consolidation level, created a transfer reserve of GBP1,355.3m.
Own shares
The Company has adopted the look-through approach for the EBT, including
the EBT within the Company. As at 31 December 2020, the EBT held
1,001,238 OSBG shares (2019: 1,045,155 OSB shares). The Group and
Company show these shares as a deduction from equity, being the cost at
which the shares were acquired of GBP4.0m (2019: GBP3.7m).
FVOCI reserve
The FVOCI reserve represents the cumulative net change in the fair value
of investment securities measured at FVOCI.
Foreign exchange
The foreign exchange reserve relates to the revaluation of the Group's
Indian subsidiary, OSB India Private Limited.
Non-controlling interest securities
Non-controlling interest securities comprise GBP60.0m of Fixed Rate
Resetting Perpetual Subordinated Contingent Convertible Securities
issued by OSB. The securities previously qualified as Additional Tier 1
capital under the Capital Requirements Directive and Regulation (CRD IV)
for OSB; however, they do not qualify for OSBG under the CRD IV with the
application of article 85 -- 87 requirements where there is an article 9
permission. The securities will be subject to full conversion into
ordinary shares of OSB in the event that its CET1 capital ratio falls
below 7%. The securities will pay interest at a rate of 9.125% per annum
until the first reset date of 25 May 2022, with the reset interest rate
equal to 835.9 basis points over the five-year semi-annual mid-swap rate
for such a period. Interest is paid semi-annually on 25 May and 25
November. OSB may, at any time, cancel any interest payment at its full
discretion and must cancel interest payments in certain circumstances
specified in the terms and conditions of the securities. The securities
are perpetual with no fixed redemption date. OSB may, in its discretion
and subject to satisfying certain conditions, redeem all (but not some)
of the securities at the principal amount outstanding plus any accrued
but unpaid interest from the first reset date and on any interest
payment date thereafter.
1. Financial commitments and guarantees
1. The Group did not have any contracted or anticipated capital
expenditure commitments not provided for as at 31 December
2020(2019: nil).
2. The Group's minimum lease commitments under operating leases not
subject to IFRS 16 are summarised in the table below:
2020 2019
GBPm GBPm
Land and buildings: due within:
One year 0.1 0.6
0.1 0.6
-------------------------------- ---- ----
1. Financial commitments and guarantees (continued)
1. Undrawn loan facilities:
2020 2019
GBPm GBPm
OSB mortgages 547.2 639.2
CCFS mortgages 420.8 568.1
Asset Finance 11.5 3.6
979.5 1,210.9
--------------- ----- -------
Undrawn loan facilities are approved loan applications which have not
yet been exercised. They are payable on demand and are usually drawn
down or expire within three months.
1. The Group did not have any issued financial guarantees as at 31 December
2020 (2019: nil).
2. Risk management
Overview
Financial instruments form the vast majority of the Group's assets and
liabilities. The Group manages risk on a consolidated basis and risk
disclosures that follow are provided on this basis.
Types of financial instrument
Financial instruments are a broad definition which includes financial
assets, financial liabilities and equity instruments. The main financial
assets of the Group are loans to customers and liquid assets, which in
turn consist of cash in the BoE call accounts, call accounts with other
credit institutions and UK and EU sovereign debt. These are funded by a
combination of financial liabilities and equity instruments. Financial
liability funding comes predominantly from retail deposits and drawdowns
under the BoE TFS, TFSME and ILTR, supported by debt securities,
subordinated debt, wholesale and other funding. Equity instruments
include own shares and non-controlling interest securities meeting the
equity classification criteria. The Group's main activity is mortgage
lending; it raises funds or invests in particular types of financial
assets to meet customer demand and manage the risks arising from its
operations. The Group does not trade in financial instruments for
speculative purposes.
The Group uses derivative instruments to manage its financial risks.
Derivative financial instruments (derivatives) are financial instruments
whose value changes in response to changes in underlying variables such
as interest rates. The most common derivatives are futures, forwards and
swaps. Of these, the Group only uses swaps.
Derivatives are used by the Group solely to reduce (hedge) the risk of
loss arising from changes in market rates. Derivatives are not used for
speculative purposes.
Types of derivatives and uses
The derivative instruments used by the Group in managing its risk
exposures are interest rate swaps. Interest rate swaps convert fixed
interest rates to floating or vice versa. As with other derivatives, the
underlying product is not sold and payments are based on notional
principal amounts.
Unhedged fixed rate liabilities create the risk of paying
above-the-market rate if interest rates subsequently decrease. Unhedged
fixed rate mortgages and liquid assets bear the opposite risk of income
below-the-market rate when rates go up. While fixed rate assets and
liabilities naturally hedge
46. Risk management (continued)
each other to a certain extent, this hedge is usually never perfect
because of maturity mismatches and principal amounts.
The Group uses swaps to convert its instruments, such as mortgages,
deposits and liquid assets, from fixed or base rate-linked rates to
reference linked variable rates. This ensures a guaranteed margin
between the interest income and interest expense, regardless of changes
in the market rates.
Transition away from LIBOR
The PRA and FCA have continued to encourage banks to transition away
from using LIBOR as a benchmark in all operations before the end of
2021. Throughout the UK banking sector, LIBOR remains a key benchmark
and, for each market impacted, solutions to this issue are progressing
through various industry bodies. The Group has closely monitored the
market and the output from the various industry working groups managing
the transition to new benchmark interest rates. This includes
announcements made by LIBOR regulators (including the FCA) regarding the
transition from GBP LIBOR to SONIA. The FCA has made clear that, at the
end of 2021, it will no longer seek to persuade, or compel, banks to
submit to LIBOR.
In 2018, the Group set up an internal working group, comprising all of
the key business lines that are involved with this change, including
work streams covering risk management, contracts, systems and conduct
risk considerations, with strong oversight from the Compliance and Risk
functions. The programme is overseen by the LIBOR Transition Working
Group which reports into ALCO. Risk assessments have been completed to
ensure this process is managed in a measured and controlled manner.
The Group no longer offers any LIBOR-linked loans and is transitioning
new and back book swaps from a GBP LIBOR to a SONIA basis. The Group has
no exposure to existing IBORs, other than to GBP LIBOR.
The Group adopted the Phase 1 amendments 'Interest Rate Benchmark
reform: Amendments to IFRS 9/IAS 39 and IFRS 7'. These amendments
modified specific hedge accounting requirements to allow hedge
accounting to continue for affected hedges during the period of
uncertainty before the hedged items or hedging instruments are amended
as a result of the interest rate benchmark reform. The Group has not
early adopted 'Interest Rate Benchmark Reform -- Phase 2: Amendments to
IFRS 9 Financial Instruments, IAS 39 Financial Instruments: Recognition
and Measurement, IFRS 7 Financial Instruments: Disclosures, IFRS 4
Insurance Contracts and IFRS 16 Leases' which was issued in August 2020.
These amendments will become mandatory for annual reporting periods
beginning on or after 1 January 2021. Adopting these amendments will
enable the Group to reflect the effects of transitioning from IBOR to
alternative benchmark interest rates (also referred to as 'risk free
rates' or RFRs) without giving rise to accounting impacts that would not
provide useful information to users of financial statements.
The application of the Phase 1 amendments impacts the Group's accounting
in the following ways. Hedge accounting relationships will continue even
when, for IBOR fair value hedges, the benchmark interest rate component
may not be separately identifiable.
The Group will not discontinue portfolio hedge accounting should the
retrospective assessment of hedge effectiveness for a hedging
relationship, that is subject to the interest rate benchmark reform,
fall outside the 80-125 per cent range. For portfolio hedging
relationships that are not subject to the interest rate benchmark reform
the entity continues to cease hedge accounting if retrospective
effectiveness is outside the 80-125 per cent range.
The Group will continue to apply the Phase 1 amendments to IFRS 9/IAS 39
until the uncertainty arising from the interest rate benchmark reform,
with respect to the timing and the amount of the underlying cash flows
to which the Group is exposed, ends. The Group expects this uncertainty
will continue until the Group's contracts that reference IBORs are
amended to specify the date on which the interest rate
46. Risk management (continued)
benchmark will be replaced and the basis for the cash flows of the
alternative benchmark rate are determined, including any fixed spread.
The phase 1 relief does not extend to the requirement that the
designated interest rate risk component continues to be reliably
measurable and if the risk component is no longer reliably measurable,
the hedging relationship is discontinued. The Group has determined that
GBP LIBOR interest rate risk components continue to be reliably
measurable.
Mortgages
New loan product transition was completed for CCFS in 2019 and OSB
launched new BBR-linked products during 2020 to replace loans with a
LIBOR component.
At 31 December 2020, the Group had GBP8,001.7m of GBP LIBOR-linked
lending, including funding lines and mortgages that will revert to LIBOR
in the future, out of a total mortgage balance of GBP19,257.1m. The
Group continues to work through the back book transition for existing
loans which is planned to be completed before the end of 2021.
Investment securities
At 31 December 2020, the Group had GBP118.7m of GBP LIBOR-linked
investment securities, comprising RMBS loan notes and the Group is
monitoring the issuers' intentions in respect of IBOR transition with
GBP40.0m transferred to SONIA coupons after the year end.
Retail savings
None of the OSB or CCFS current or back book retail savings products
have a GBP LIBOR component within the product.
Non-controlling interest securities
The GBP60.0m non-controlling interest securities pay interest at a rate
of 9.125% per annum until the first reset date on 25 May 2022. In
advance of the reset date, the Group will agree the benchmark rate to be
adopted.
Derivatives
As at 31 December 2020, the derivatives in the CCFS segment have all
transitioned across to a SONIA basis with the OSB segment yet to
complete. The total nominal amount of the Group's derivatives was
GBP19,080.2m, of which the Group had GBP LIBOR-linked swaps with a
nominal value of GBP8,020.0m and a fair value liability of GBP89.1m
hedging assets and liabilities. It is planned that existing derivatives
will be actively transitioned onto alternative benchmarks before the end
of 2021.
Types of risk
The principal financial risks to which the Group is exposed are credit,
liquidity and market risks, the latter comprising interest and exchange
rate risk. In addition to financial risks, the Group is exposed to
various other risks, most notably operational, conduct and regulatory,
which are covered in the Risk review.
Credit risk
Credit risk is the risk that losses may arise as a result of the Group's
borrowers or market counterparties failing to meet their obligations to
repay.
The Group has adopted the Standardised Approach for assessment of credit
risk regulatory capital requirements. This approach considers risk
weightings as defined under Basel II and Basel III principles.
46. Risk management (continued)
The classes of financial instruments to which the Group is most exposed
are loans and advances to customers, loans and advances to credit
institutions, cash in the BoE call account, call and current accounts
with other credit institutions and investment securities. The maximum
credit risk exposure equals the total carrying amount of the above
categories plus off-balance sheet undrawn committed mortgage facilities.
Credit risk - loans and advances to customers
Credit risk associated with mortgage lending is largely driven by the
housing market and level of unemployment. A recession and/or high
interest rates could cause pressure within the market, resulting in
rising levels of arrears and repossessions.
All loan applications are assessed with reference to the Group's Lending
Policy. Changes to the policy are approved by the Group Risk Committee,
with mandates set for the approval of loan applications.
The Group Credit Committee and the ALCO regularly monitor lending
activity, taking appropriate actions to reprice products and adjust
lending criteria in order to control risk and manage exposure. Where
necessary and appropriate, changes to the Lending Policy are recommended
to the Group Risk Committee.
The following tables show the Group's maximum exposure to credit risk
and the impact of collateral held as security, capped at the gross
exposure amount, by impairment stage. Capped collateral excludes the
impact of forced sale discounts and costs to sell.
2020
OSB CCFS Total
Capped Capped Capped
Gross carrying collateral Gross carrying collateral Gross carrying collateral
amount held amount held amount held
GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1 9,366.8 9,303.4 6,749.5 6,747.9 16,116.3 16,051.3
Stage 2 1,363.4 1,359.8 1,327.6 1,327.6 2,691.0 2,687.4
Stage 3 352.6 323.3 48.1 48.1 400.7 371.4
Stage 3
(POCI) 48.6 48.4 66.0 66.0 114.6 114.4
11,131.4 11,034.9 8,191.2 8,189.6 19,322.6 19,224.5
------- -------------- ----------- -------------- ----------- -------------- -----------
2019
OSB CCFS Total
Capped Capped Capped
Gross carrying collateral Gross carrying collateral Gross carrying collateral
amount held amount held amount held
GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1 10,046.9 9,987.1 7,240.0 7,239.5 17,286.9 17,226.6
Stage 2 442.4 441.8 307.1 307.0 749.5 748.8
Stage 3 277.7 275.2 16.7 16.7 294.4 291.9
Stage 3
(POCI) 53.6 50.1 83.2 83.1 136.8 133.2
10,820.6 10,754.2 7,647.0 7,646.3 18,467.6 18,400.5
------- -------------- ----------- -------------- ----------- -------------- -----------
The Group's main form of collateral held is property, based in the UK
and the Channel Islands.
46. Risk management (continued)
The Group uses indexed loan to value (LTV) ratios to assess the quality
of the uncapped collateral held. Property values are updated to reflect
changes in the HPI. A breakdown of loans and advances to customers by
indexed LTV is as follows:
2020 2019
OSB CCFS Total OSB CCFS Total
GBPm GBPm GBPm % GBPm GBPm GBPm %
Band
0% - 50% 1,740.3 419.3 2,159.6 11 1,732.6 567.8 2,300.4 12
50% - 60% 1,462.0 483.3 1,945.3 10 1,301.8 612.3 1,914.1 10
60% - 70% 2,813.4 1,109.3 3,922.7 20 2,435.7 1,588.5 4,024.2 22
70% - 80% 3,942.9 5,144.3 9,087.2 47 4,182.1 4,236.3 8,418.4 46
80% - 90% 879.1 1,033.7 1,912.8 10 946.0 641.5 1,587.5 9
90% - 100% 105.8 1.3 107.1 1 91.1 0.6 91.7 -
>100% 187.9 - 187.9 1 131.3 - 131.3 1
Total loans
before provisions 11,131.4 8,191.2 19,322.6 100 10,820.6 7,647.0 18,467.6 100
------------------ -------- ------- -------- --- -------- ------- -------- ---
The table below shows the LTV banding for the OSB segments' two major
lending streams:
2020 2019
BTL/SME Residential Total % BTL/SME Residential Total %
OSB GBPm GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 795.7 944.6 1,740.3 16 905.9 826.7 1,732.6 16
50% - 60% 1,228.1 233.9 1,462.0 13 1,062.8 239.0 1,301.8 12
60% - 70% 2,602.1 211.3 2,813.4 25 2,240.2 195.5 2,435.7 23
70% - 80% 3,693.4 249.5 3,942.9 35 3,993.5 188.6 4,182.1 38
80% - 90% 584.5 294.6 879.1 8 621.4 324.6 946.0 9
90% - 100% 89.4 16.4 105.8 1 45.1 46.0 91.1 1
>100% 171.4 16.5 187.9 2 114.3 17.0 131.3 1
Total loans
before provisions 9,164.6 1,966.8 11,131.4 100 8,983.2 1,837.4 10,820.6 100
------------------ ------- ----------- -------- --- ------- ----------- -------- ---
46. Risk management (continued)
The tables below show the sub-segment LTV analysis of the OSB BTL/SME
lending stream:
2020
Residential Funding
Buy-to-Let Commercial development lines Total
OSB GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 643.3 80.6 12.5 59.3 795.7
50% - 60% 1,040.1 84.3 64.2 39.5 1,228.1
60% - 70% 2,407.4 132.0 56.4 6.3 2,602.1
70% - 80% 3,411.7 251.3 - 30.4 3,693.4
80% - 90% 370.1 214.4 - - 584.5
90% - 100% 54.1 35.3 - - 89.4
>100% 117.9 24.0 - 29.5 171.4
Total loans before
provisions 8,044.6 821.9 133.1 165.0 9,164.6
---------------------- ---------- ---------- ------------ ------- -------
2019
Residential Funding
Buy-to-Let Commercial development lines Total
OSB GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 579.9 96.5 125.7 103.8 905.9
50% - 60% 894.3 119.8 5.0 43.7 1,062.8
60% - 70% 1,994.1 210.2 5.0 30.9 2,240.2
70% - 80% 3,514.5 445.7 - 33.3 3,993.5
80% - 90% 603.3 7.7 10.4 - 621.4
90% - 100% 38.9 1.4 - 4.8 45.1
>100% 102.0 6.7 - 5.6 114.3
Total loans before
provisions 7,727.0 888.0 146.1 222.1 8,983.2
---------------------- ---------- ---------- ------------ ------- -------
The tables below show the sub-segment LTV analysis of the OSB
Residential lending stream:
2020 2019
First Second Funding First Second Funding
charge charge lines Total charge charge lines Total
OSB GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 835.8 105.1 3.7 944.6 708.0 115.4 3.3 826.7
50% - 60% 167.2 64.5 2.2 233.9 158.1 77.5 3.4 239.0
60% - 70% 151.7 58.1 1.5 211.3 122.3 70.9 2.3 195.5
70% - 80% 208.1 39.9 1.5 249.5 137.0 49.5 2.1 188.6
80% - 90% 274.8 19.3 0.5 294.6 291.7 32.3 0.6 324.6
90% - 100% 12.4 3.6 0.4 16.4 40.0 5.7 0.3 46.0
>100% 10.7 4.9 0.9 16.5 9.5 7.3 0.2 17.0
Total loans
before provisions 1,660.7 295.4 10.7 1,966.8 1,466.6 358.6 12.2 1,837.4
------------------ ------- ------- ------- ------- ------- ------- ------- -------
46. Risk management (continued)
The table below shows the LTV banding for the CCFS segments' four major
lending streams:
2020
Second
charge
Buy-to-Let Residential Bridging lending Total
CCFS GBPm GBPm GBPm GBPm GBPm %
Band
0% - 50% 92.7 242.1 50.4 34.1 419.3 5
50% - 60% 196.0 233.9 17.9 35.5 483.3 6
60% - 70% 632.9 400.2 16.8 59.4 1,109.3 14
70% - 80% 3,916.2 1,155.7 21.1 51.3 5,144.3 62
80% - 90% 600.7 410.8 - 22.2 1,033.7 13
90% - 100% 0.5 0.8 - - 1.3 -
Total loans before
provisions 5,439.0 2,443.5 106.2 202.5 8,191.2 100
------------------- ---------- ----------- -------- -------- ------- ---
2019
Second
charge
Buy-to-Let Residential Bridging lending Total
CCFS GBPm GBPm GBPm GBPm GBPm %
Band
0% - 50% 144.7 261.8 121.1 40.2 567.8 7
50% - 60% 283.9 253.1 29.4 45.9 612.3 8
60% - 70% 957.0 538.6 26.6 66.3 1,588.5 21
70% - 80% 3,246.6 897.7 37.5 54.5 4,236.3 56
80% - 90% 321.5 301.4 1.2 17.4 641.5 8
90% - 100% 0.2 0.4 - - 0.6 -
Total loans before
provisions 4,953.9 2,253.0 215.8 224.3 7,647.0 100
------------------- ---------- ----------- -------- -------- ------- ---
46. Risk management (continued)
Analysis of mortgage portfolio by arrears and collateral held
The tables below provide further information on collateral, capped at
the value of each individual mortgage, over the mortgage portfolio by
payment due status and IFRS 9 stage.
2020
OSB CCFS Total
Loan Capped Loan Capped Loan Capped
balance collateral balance collateral balance collateral
GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1
Not past due 9,322.8 9,259.7 6,744.8 6,743.2 16,067.6 16,002.9
Past due <1 month 44.0 43.7 4.7 4.7 48.7 48.4
9,366.8 9,303.4 6,749.5 6,747.9 16,116.3 16,051.3
------------------- -------- ----------- ------- ----------- -------- -----------
Stage 2
Not past due 1,126.4 1,123.0 1,249.6 1,249.6 2,376.0 2,372.6
Past due <1 month 177.6 177.5 55.9 55.9 233.5 233.4
Past due 1 to 3
months 59.4 59.3 22.1 22.1 81.5 81.4
1,363.4 1,359.8 1,327.6 1,327.6 2,691.0 2,687.4
------------------- -------- ----------- ------- ----------- -------- -----------
Stage 3
Not past due 130.1 100.9 15.3 15.3 145.4 116.2
Past due <1 month 16.9 16.9 4.0 4.0 20.9 20.9
Past due 1 to 3
months 56.9 56.8 9.1 9.1 66.0 65.9
Past due 3 to 6
months 51.0 51.0 9.0 9.0 60.0 60.0
Past due 6 to 12
months 33.9 33.9 3.9 3.9 37.8 37.8
Past due over 12
months 23.5 23.5 1.4 1.4 24.9 24.9
Possessions 40.3 40.3 5.4 5.4 45.7 45.7
352.6 323.3 48.1 48.1 400.7 371.4
------------------- -------- ----------- ------- ----------- -------- -----------
Stage 3 (POCI)
Not past due 22.5 22.3 31.9 31.9 54.4 54.2
Past due <1 month 4.0 4.0 6.0 6.0 10.0 10.0
Past due 1 to 3
months 5.7 5.7 9.4 9.4 15.1 15.1
Past due 3 to 6
months 3.4 3.4 5.6 5.6 9.0 9.0
Past due 6 to 12
months 6.0 6.0 4.2 4.2 10.2 10.2
Past due over 12
months 7.0 7.0 2.4 2.4 9.4 9.4
Possessions - - 6.5 6.5 6.5 6.5
48.6 48.4 66.0 66.0 114.6 114.4
------------------- -------- ----------- ------- ----------- -------- -----------
Total loans before
provisions 11,131.4 11,034.9 8,191.2 8,189.6 19,322.6 19,224.5
46. Risk management (continued)
2019
OSB CCFS Total
Loan Capped Loan Capped Loan Capped
balance collateral balance collateral balance collateral
GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1
Not past due 9,964.3 9,904.5 7,236.2 7,235.7 17,200.5 17,140.2
Past due <1 month 82.6 82.6 3.8 3.8 86.4 86.4
10,046.9 9,987.1 7,240.0 7,239.5 17,286.9 17,226.6
------------------- -------- ----------- ------- ----------- -------- -----------
Stage 2
Not past due 261.0 260.7 239.1 239.0 500.1 499.7
Past due <1 month 118.9 118.9 38.1 38.1 157.0 157.0
Past due 1 to 3
months 62.5 62.2 29.9 29.9 92.4 92.1
442.4 441.8 307.1 307.0 749.5 748.8
------------------- -------- ----------- ------- ----------- -------- -----------
Stage 3
Not past due 71.3 71.0 4.8 4.8 76.1 75.8
Past due <1 month 36.3 36.1 1.4 1.4 37.7 37.5
Past due 1 to 3
months 28.8 28.5 6.0 6.0 34.8 34.5
Past due 3 to 6
months 45.9 45.3 4.5 4.5 50.4 49.8
Past due 6 to 12
months 27.4 27.2 - - 27.4 27.2
Past due over 12
months 25.3 24.7 - - 25.3 24.7
Possessions 42.7 42.4 - - 42.7 42.4
277.7 275.2 16.7 16.7 294.4 291.9
------------------- -------- ----------- ------- ----------- -------- -----------
Stage 3 (POCI)
Not past due 20.8 20.2 30.6 30.5 51.4 50.7
Past due <1 month 6.1 5.9 8.5 8.5 14.6 14.4
Past due 1 to 3
months 4.9 4.6 21.9 21.9 26.8 26.5
Past due 3 to 6
months 6.5 6.1 10.5 10.5 17.0 16.6
Past due 6 to 12
months 5.7 5.3 5.5 5.5 11.2 10.8
Past due over 12
months 8.3 7.2 1.2 1.2 9.5 8.4
Possessions 1.3 0.8 5.0 5.0 6.3 5.8
53.6 50.1 83.2 83.1 136.8 133.2
------------------- -------- ----------- ------- ----------- -------- -----------
Total loans before
provisions 10,820.6 10,754.2 7,647.0 7,646.3 18,467.6 18,400.5
46. Risk management (continued)
The table below shows the analysis of mortgage portfolio by arrears for
the OSB segments' two major lending streams:
2020 2019
BTL/SME Residential Total BTL/SME Residential Total
OSB GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1
Not past due 7,873.4 1,449.4 9,322.8 8,514.9 1,449.4 9,964.3
Past due <1 month 20.8 23.2 44.0 48.7 33.9 82.6
7,894.2 1,472.6 9,366.8 8,563.6 1,483.3 10,046.9
------------------- ------- ----------- -------- ------- ----------- --------
Stage 2
Not past due 893.0 233.4 1,126.4 156.9 104.1 261.0
Past due <1 month 116.0 61.6 177.6 80.0 38.9 118.9
Past due 1 to 3
months 29.7 29.7 59.4 32.3 30.2 62.5
1,038.7 324.7 1,363.4 269.2 173.2 442.4
------------------- ------- ----------- -------- ------- ----------- --------
Stage 3
Not past due 98.9 31.2 130.1 39.6 31.7 71.3
Past due <1 month 9.0 7.9 16.9 22.5 13.8 36.3
Past due 1 to 3
months 36.7 20.2 56.9 9.8 19.0 28.8
Past due 3 to 6
months 26.5 24.5 51.0 17.0 28.9 45.9
Past due 6 to 12
months 15.8 18.1 33.9 9.1 18.3 27.4
Past due over 12
months 6.9 16.6 23.5 13.5 11.8 25.3
Possessions 37.7 2.6 40.3 38.7 4.0 42.7
231.5 121.1 352.6 150.2 127.5 277.7
------------------- ------- ----------- -------- ------- ----------- --------
Stage 3 (POCI)
Not past due 0.2 22.3 22.5 0.2 20.6 20.8
Past due <1 month - 4.0 4.0 - 6.1 6.1
Past due 1 to 3
months - 5.7 5.7 - 4.9 4.9
Past due 3 to 6
months - 3.4 3.4 - 6.5 6.5
Past due 6 to 12
months - 6.0 6.0 - 5.7 5.7
Past due over 12
months - 7.0 7.0 - 8.3 8.3
Possessions - - - - 1.3 1.3
0.2 48.4 48.6 0.2 53.4 53.6
Total loans before
provisions 9,164.6 1,966.8 11,131.4 8,983.2 1,837.4 10,820.6
------------------- ------- ----------- -------- ------- ----------- --------
46. Risk management (continued)
The tables below show the sub-segment analysis of mortgage portfolio by
arrears of the OSB BTL/SME lending stream:
2020
Residential Funding
Buy-to-Let Commercial development lines Total
OSB GBPm GBPm GBPm GBPm GBPm
Stage 1
Not past due 6,847.1 756.8 133.1 136.4 7,873.4
Past due <1 month 13.4 7.4 - - 20.8
6,860.5 764.2 133.1 136.4 7,894.2
---------------------- ---------- ---------- ------------ ------- -------
Stage 2
Not past due 864.7 28.3 - - 893.0
Past due <1 month 114.5 1.5 - - 116.0
Past due 1 to 3 months 26.8 2.9 - - 29.7
1,006.0 32.7 - - 1,038.7
---------------------- ---------- ---------- ------------ ------- -------
Stage 3
Not past due 54.3 16.0 - 28.6 98.9
Past due <1 month 8.5 0.5 - - 9.0
Past due 1 to 3 months 34.7 2.0 - - 36.7
Past due 3 to 6 months 25.4 1.1 - - 26.5
Past due 6 to 12
months 13.8 2.0 - - 15.8
Past due over 12
months 6.4 0.5 - - 6.9
Possessions 35.0 2.7 - - 37.7
178.1 24.8 - 28.6 231.5
---------------------- ---------- ---------- ------------ ------- -------
Stage 3 (POCI)
Not past due - 0.2 - - 0.2
- 0.2 - - 0.2
---------------------- ---------- ---------- ------------ ------- -------
Total loans before
provisions 8,044.6 821.9 133.1 165.0 9,164.6
46. Risk management (continued)
2019
Residential Funding
Buy-to-Let Commercial development lines Total
OSB GBPm GBPm GBPm GBPm GBPm
Stage 1
Not past due 7,317.3 829.4 146.1 222.1 8,514.9
Past due <1 month 32.8 15.9 - - 48.7
7,350.1 845.3 146.1 222.1 8,563.6
---------------------- ---------- ---------- ------------ ------- -------
Stage 2
Not past due 128.6 28.3 - - 156.9
Past due <1 month 78.5 1.5 - - 80.0
Past due 1 to 3 months 29.2 3.1 - - 32.3
236.3 32.9 - - 269.2
---------------------- ---------- ---------- ------------ ------- -------
Stage 3
Not past due 37.1 2.5 - - 39.6
Past due <1 month 21.0 1.5 - - 22.5
Past due 1 to 3 months 9.8 - - - 9.8
Past due 3 to 6 months 16.1 0.9 - - 17.0
Past due 6 to 12
months 8.0 1.1 - - 9.1
Past due over 12
months 13.1 0.4 - - 13.5
Possessions 35.5 3.2 - - 38.7
140.6 9.6 - - 150.2
---------------------- ---------- ---------- ------------ ------- -------
Stage 3 (POCI)
Not past due - 0.2 - - 0.2
- 0.2 - - 0.2
---------------------- ---------- ---------- ------------ ------- -------
Total loans before
provisions 7,727.0 888.0 146.1 222.1 8,983.2
46. Risk management (continued)
The tables below show the sub-segment analysis of mortgage portfolio by
arrears of the OSB Residential mortgages lending stream:
2020
Funding
First charge Second charge lines Total
OSB GBPm GBPm GBPm GBPm
Stage 1
Not past due 1,226.5 212.2 10.7 1,449.4
Past due <1 month 19.4 3.8 - 23.2
1,245.9 216.0 10.7 1,472.6
------------------------------ ------------ ------------- ------- -------
Stage 2
Not past due 207.2 26.2 - 233.4
Past due <1 month 56.0 5.6 - 61.6
Past due 1 to 3 months 24.6 5.1 - 29.7
287.8 36.9 - 324.7
------------------------------ ------------ ------------- ------- -------
Stage 3
Not past due 26.4 4.8 - 31.2
Past due <1 month 6.8 1.1 - 7.9
Past due 1 to 3 months 15.8 4.4 - 20.2
Past due 3 to 6 months 19.1 5.4 - 24.5
Past due 6 to 12 months 13.1 5.0 - 18.1
Past due over 12 months 13.8 2.8 - 16.6
Possessions 2.6 - - 2.6
97.6 23.5 - 121.1
------------------------------ ------------ ------------- ------- -------
Stage 3 (POCI)
Not past due 15.5 6.8 - 22.3
Past due <1 month 2.8 1.2 - 4.0
Past due 1 to 3 months 3.3 2.4 - 5.7
Past due 3 to 6 months 2.0 1.4 - 3.4
Past due 6 to 12 months 3.4 2.6 - 6.0
Past due over 12 months 2.4 4.6 - 7.0
29.4 19.0 - 48.4
------------ ------------- ------- -------
Total loans before provisions 1,660.7 295.4 10.7 1,966.8
------------------------------
46. Risk management (continued)
2019
Funding
First charge Second charge lines Total
OSB GBPm GBPm GBPm GBPm
Stage 1
Not past due 1,164.8 272.4 12.2 1,449.4
Past due <1 month 27.7 6.2 - 33.9
1,192.5 278.6 12.2 1,483.3
------------------------------ ------------ ------------- ------- -------
Stage 2
Not past due 86.1 18.0 - 104.1
Past due <1 month 34.4 4.5 - 38.9
Past due 1 to 3 months 24.4 5.8 - 30.2
144.9 28.3 - 173.2
------------------------------ ------------ ------------- ------- -------
Stage 3
Not past due 28.1 3.6 - 31.7
Past due <1 month 11.2 2.6 - 13.8
Past due 1 to 3 months 13.8 5.2 - 19.0
Past due 3 to 6 months 20.7 8.2 - 28.9
Past due 6 to 12 months 14.5 3.8 - 18.3
Past due over 12 months 9.8 2.0 - 11.8
Possessions 3.3 0.7 - 4.0
101.4 26.1 - 127.5
------------------------------ ------------ ------------- ------- -------
Stage 3 (POCI)
Not past due 13.4 7.2 - 20.6
Past due <1 month 4.2 1.9 - 6.1
Past due 1 to 3 months 2.0 2.9 - 4.9
Past due 3 to 6 months 3.2 3.3 - 6.5
Past due 6 to 12 months 2.6 3.1 - 5.7
Past due over 12 months 2.3 6.0 - 8.3
Possessions 0.1 1.2 - 1.3
27.8 25.6 - 53.4
------------ ------------- ------- -------
Total loans before provisions 1,466.6 358.6 12.2 1,837.4
------------------------------
46. Risk management (continued)
The table below shows the analysis of mortgage portfolio by arrears for
the CCFS segments' four major lending streams:
2020
Second
charge
Buy-to-Let Residential Bridging lending Total
CCFS GBPm GBPm GBPm GBPm GBPm
Stage 1
Not past due 4,652.5 1,846.4 72.6 173.3 6,744.8
Past due <1 month 2.1 1.9 - 0.7 4.7
4,654.6 1,848.3 72.6 174.0 6,749.5
------------------------ ---------- ----------- -------- -------- -------
Stage 2
Not past due 727.6 469.6 30.0 22.4 1,249.6
Past due <1 month 13.3 39.6 1.7 1.3 55.9
Past due 1 to 3 months 7.9 12.8 0.2 1.2 22.1
748.8 522.0 31.9 24.9 1,327.6
------------------------ ---------- ----------- -------- -------- -------
Stage 3
Not past due 6.7 7.9 0.2 0.5 15.3
Past due <1 month 1.3 2.7 - - 4.0
Past due 1 to 3 months 1.0 7.9 - 0.2 9.1
Past due 3 to 6 months 2.3 6.3 0.3 0.1 9.0
Past due 6 to 12 months 1.0 2.7 - 0.2 3.9
Past due over 12 months 0.8 0.5 - 0.1 1.4
Possessions 4.3 1.1 - - 5.4
17.4 29.1 0.5 1.1 48.1
------------------------ ---------- ----------- -------- -------- -------
Stage 3 (POCI)
Not past due 8.8 21.0 0.3 1.8 31.9
Past due <1 month 1.2 4.7 - 0.1 6.0
Past due 1 to 3 months 2.0 7.1 - 0.3 9.4
Past due 3 to 6 months 0.1 5.3 - 0.2 5.6
Past due 6 to 12 months 0.1 3.7 0.4 - 4.2
Past due over 12 months 0.6 1.4 0.4 - 2.4
Possessions 5.4 0.9 0.1 0.1 6.5
18.2 44.1 1.2 2.5 66.0
------------------------ ---------- ----------- -------- -------- -------
Total loans before
provisions 5,439.0 2,443.5 106.2 202.5 8,191.2
46. Risk management (continued)
2019
Second
charge
Buy-to-Let Residential Bridging lending Total
CCFS GBPm GBPm GBPm GBPm GBPm
Stage 1
Not past due 4,767.9 2,056.4 195.5 216.4 7,236.2
Past due <1 month 0.5 1.1 - 2.2 3.8
4,768.4 2,057.5 195.5 218.6 7,240.0
------------------------ ---------- ----------- -------- -------- -------
Stage 2
Not past due 139.6 83.6 14.6 1.3 239.1
Past due <1 month 10.1 27.1 0.8 0.1 38.1
Past due 1 to 3 months 6.3 22.4 0.3 0.9 29.9
156.0 133.1 15.7 2.3 307.1
------------------------ ---------- ----------- -------- -------- -------
Stage 3
Not past due 1.1 3.2 0.2 0.3 4.8
Past due <1 month 0.5 0.9 - - 1.4
Past due 1 to 3 months 1.6 4.4 - - 6.0
Past due 3 to 6 months 3.2 1.2 0.1 - 4.5
6.4 9.7 0.3 0.3 16.7
------------------------ ---------- ----------- -------- -------- -------
Stage 3 (POCI)
Not past due 10.9 16.6 1.7 1.4 30.6
Past due <1 month 2.5 5.4 0.4 0.2 8.5
Past due 1 to 3 months 2.6 16.8 1.8 0.7 21.9
Past due 3 to 6 months 1.3 8.8 - 0.4 10.5
Past due 6 to 12 months 1.0 3.9 0.2 0.4 5.5
Past due over 12 months 0.9 0.3 - - 1.2
Possessions 3.9 0.9 0.2 - 5.0
23.1 52.7 4.3 3.1 83.2
------------------------ ---------- ----------- -------- -------- -------
Total loans before
provisions 4,953.9 2,253.0 215.8 224.3 7,647.0
46. Risk management (continued)
Forbearance measures undertaken
The Group has a range of options available where borrowers experience
financial difficulties which impact their ability to service their
financial commitments under the loan agreement. These are explained in
the Principal risks and uncertainties.
A summary of the forbearance measures undertaken (excluding COVID-19
related payment deferrals) during the year is shown below. The balances
disclosed reflect the year end balance of the accounts where a
forbearance measure was undertaken during the year.
Number At 31 December Number At 31 December
of accounts 2020 of accounts(1) 2019(1)
Forbearance type 2020 GBPm 2019 GBPm
Interest-only switch 108 14.1 59 8.4
Interest rate reduction 22 2.2 35 1.6
Term extension 430 27.0 30 6.6
Payment deferral 447 38.7 87 4.1
Voluntary-assisted sale 2 0.1 26 1.0
Payment concession (reduced monthly
payments) 34 1.7 73 3.6
Capitalisation of interest 2 0.1 - -
Full or partial debt forgiveness 11 0.2 6 -
Total 1,056 84.1 316 25.3
------------------------------------ ------------- -------------- --------------- --------------
Loan type
First charge owner-occupier 570 54.0 85 10.5
Second charge owner-occupier 372 15.0 198 7.4
Buy-to-Let 113 14.9 32 7.4
Commercial 1 0.2 1 -
Total 1,056 84.1 316 25.3
------------------------------------ ------------- -------------- --------------- --------------
1. CCFS forbearance is included post Combination.
As at 31 December 2020, active COVID-19 payment deferrals represented
only 1.3% of the Group's loan book by value.
46. Risk management (continued)
Geographical analysis by region
An analysis of loans by region is provided below:
Group Group
2020 2019
OSB CCFS Total OSB CCFS Total
Region GBPm GBPm GBPm % GBPm GBPm GBPm %
-------- -------- -------- ------ --------- --------- --------- ------
East Anglia 407.6 866.2 1,273.8 7 391.9 810.9 1,202.8 7
East Midlands 455.5 463.4 918.9 5 415.2 410.3 825.5 4
Greater London 4,851.9 2,837.4 7,689.3 40 4,738.7 2,713.7 7,452.4 41
Guernsey 35.8 - 35.8 - 45.3 - 45.3 -
Jersey 122.9 - 122.9 1 141.4 - 141.4 1
North East 140.1 208.4 348.5 2 136.7 179.5 316.2 2
North West 635.4 674.8 1,310.2 7 587.3 605.4 1,192.7 6
Northern Ireland 12.9 - 12.9 - 14.2 - 14.2 -
Scotland 47.0 214.2 261.2 1 48.5 190.9 239.4 1
South East 2,419.8 1,316.7 3,736.5 19 2,375.2 1,209.6 3,584.8 20
South West 757.0 478.5 1,235.5 6 747.5 466.0 1,213.5 7
Wales 249.2 209.9 459.1 2 239.3 202.6 441.9 2
West Midlands 744.5 529.2 1,273.7 7 702.2 496.0 1,198.2 6
Yorks and
Humberside 251.8 392.5 644.3 3 237.2 362.1 599.3 3
Total loans before
provisions 11,131.4 8,191.2 19,322.6 100 10,820.6 7,647.0 18,467.6 100
------------------- -------- -------- -------- ------ --------- --------- --------- ------
46. Risk management (continued)
Approach to measurement of credit quality
The Group categorises the credit quality of loans and advances to
customers into internal risk grades based on the 12 month PD calculated
at the reporting date. The PDs include a combination of internal
behavioural and credit bureau characteristics. The risk grades are
further grouped into the following credit quality segments:
-- Excellent quality - where there is a very high likelihood the asset will
be recovered in full with a negligible or very low risk of default.
-- Good quality - where there is a high likelihood the asset will be
recovered in full with a low risk of default.
-- Satisfactory quality -- where the assets demonstrate a moderate default
risk.
-- Lower quality - where the assets require closer monitoring and the risk
of default is of greater concern.
The credit grade for the Group's investment securities and loans and
advances to credit institutions is based on the external credit rating
of the counterparty.
The following tables disclose the credit risk quality ratings of loans
and advances to customers by IFRS 9 stage:
Stage 3
Stage 1 Stage 2 Stage 3 (POCI) Total
2020 GBPm GBPm GBPm GBPm GBPm
OSB
Excellent 4,689.6 295.4 - - 4,985.0
Good 4,564.9 756.4 - - 5,321.3
Satisfactory 106.7 242.8 - - 349.5
Lower 5.6 68.8 - - 74.4
Impaired - - 352.6 - 352.6
POCI - - - 48.6 48.6
CCFS
Excellent 4,352.8 398.8 - - 4,751.6
Good 2,338.8 667.2 - - 3,006.0
Satisfactory 55.3 140.2 - - 195.5
Lower 2.6 121.4 - - 124.0
Impaired - - 48.1 - 48.1
POCI - - - 66.0 66.0
16,116.3 2,691.0 400.7 114.6 19,322.6
------------- -------- ------- ------- ------- --------
46. Risk management (continued)
Stage 3
Stage 1 Stage 2 Stage 3 (POCI) Total
2019 GBPm GBPm GBPm GBPm GBPm
OSB(1)
Excellent 5,033.6 11.0 - - 5,044.6
Good 4,859.3 200.5 - - 5,059.8
Satisfactory 147.3 154.8 - - 302.1
Lower 6.7 76.1 - - 82.8
Impaired - - 277.7 - 277.7
POCI - - - 53.6 53.6
CCFS
Excellent 3,632.7 20.5 - - 3,653.2
Good 3,359.7 93.7 - - 3,453.4
Satisfactory 222.8 39.1 - - 261.9
Lower 24.8 153.8 - - 178.6
Impaired - - 16.7 - 16.7
POCI - - - 83.2 83.2
17,286.9 749.5 294.4 136.8 18,467.6
------------- -------- ------- ------- ------- --------
(1) The Group has restated the prior year comparatives for OSB to
include finance lease assets.
The tables below show the Group's other financial assets by credit risk
rating grade:
Excellent Good Satisfactory Total
Group 2020 GBPm GBPm GBPm GBPm
Investment securities 471.2 - - 471.2
Loans and advances to credit
institutions 2,432.9 233.4 9.9 2,676.2
Derivative assets 6.5 5.8 - 12.3
2,910.6 239.2 9.9 3,159.7
----------------------------- --------- ----- ------------ -------
Group 2019
Investment securities 635.3 - - 635.3
Loans and advances to credit
institutions 2,047.8 146.1 10.7 2,204.6
Derivative assets 11.6 9.5 - 21.1
2,694.7 155.6 10.7 2,861.0
----------------------------- ------- ----- ---- -------
Credit risk - loans and advances to credit institutions and investment
securities
The Group holds treasury instruments in order to meet liquidity
requirements and for general business purposes. The credit risk arising
from these investments is closely monitored and managed by the Group's
Treasury function. In managing these assets, Group Treasury operates
within guidelines laid down in the Treasury Policy approved by ALCO and
performance is monitored and reported to ALCO monthly, including through
the use of an internally developed rating model based on counterparty
credit default swap spreads.
The Group has limited exposure to emerging markets (Indian operations)
and non-investment grade debt. ALCO is responsible for approving
treasury counterparties.
46. Risk management (continued)
During the year, the average balance of cash in hand, loans and advances
to credit institutions and investment securities on a monthly basis was
GBP3,196.0m (2019: GBP2,016.2m).
The tables below show the industry sector of the Group's loans and
advances to credit institutions and investment securities:
2020 2019
GBPm % GBPm %
BoE(1) 2,308.8 73 1,957.9 69
Other banks 367.4 12 246.7 9
Central government - - 149.8 5
Securitisation 471.2 15 - -
Supranationals - - 485.5 17
Total 3,147.4 100 2,839.9 100
---------------------- ------- --- ---------- -----------
(1) Balances with the BoE include GBP52.3m (2019: GBP41.7m) held in the
cash ratio deposit.
The tables below show the geographical exposure of the Group's loans and
advances to credit institutions and investment securities:
2020 2019
GBPm % GBPm %
United Kingdom 3,137.5 100 2,829.2 100
India 9.9 - 10.7 -
Total 3,147.4 100 2,839.9 100
------------------ ------- --- ---------- ---
The Group monitors exposure concentrations against a variety of criteria,
including asset class, sector and geography. To avoid refinancing risks
associated with any one counterparty, sector or geographical region, the
Board has set appropriate limits.
Liquidity risk
Liquidity risk is the risk of having insufficient liquid assets to
fulfil obligations as they become due or the cost of raising liquid
funds becoming too expensive.
The Group's approach to managing liquidity risk is to maintain
sufficient liquid resources to cover cash flow imbalances and
fluctuations in funding in order to retain full public confidence in the
solvency of the Group and to enable the Group to meet its financial
obligations as they fall due. This is achieved through maintaining a
prudent level of liquid assets and control of the growth of the
business. The Group has established a call account with the BoE and has
access to its contingent liquidity facilities.
Liquidity management is the responsibility of ALCO, with day-to-day
management delegated to Treasury as detailed in the Treasury Policy.
ALCO is responsible for setting limits over the level and maturity
profile of wholesale funding and for monitoring the composition of the
Group financial position. For each material class of financial liability
a contractual maturity analysis is provided below.
The Group also monitors a range of triggers, defined in the contingency
funding plan and recovery and resolution plan, which are designed to
capture liquidity stresses in advance in order to allow sufficient time
for management action to take effect. These are monitored daily by the
Risk team, with breaches immediately reported to the CRO, CEO, CFO and
the Group Treasurer.
46. Risk management (continued)
The tables below provide a contractual maturity analysis of the Group's
financial assets and liabilities:
Carrying Less than 3 - 12 1 - 5 More than
amount On demand 3 months months years 5 years
2020 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 16,603.1 3,810.7 2,733.5 6,517.5 3,541.4 -
Amounts owed to credit
institutions 3,570.2 0.4 85.0 1,035.3 2,449.5 -
Amounts owed to other
customers 72.9 26.9 7.5 38.5 - -
Derivative liabilities 163.6 - 0.2 4.5 153.9 5.0
Debt securities in
issue 421.9 - - - 421.9 -
Lease liabilities 11.7 - 0.2 0.7 3.6 7.2
Subordinated liabilities 10.5 - 0.2 0.1 10.2 -
Perpetual Subordinated
Bonds 37.6 - 0.6 - - 37.0
Total liabilities 20,891.5 3,838.0 2,827.2 7,596.6 6,580.5 49.2
------------------------ -------- --------- --------- ---------- ---------- ---------
Financial asset by
type
Cash in hand 0.5 0.5 - - - -
Loans and advances
to credit institutions 2,676.2 2,512.8 111.1 18.3 - 34.0
Investment securities 471.2 - 0.3 - 470.9 -
Loans and advances
to customers 19,230.7 4.1 316.7 266.4 1,239.7 17,403.8
Derivative assets 12.3 - 1.3 3.7 7.1 0.2
Total assets 22,390.9 2,517.4 429.4 288.4 1,717.7 17,438.0
------------------------ -------- --------- --------- ---------- ---------- ---------
Cumulative liquidity
gap (1,320.6) (3,718.4) (11,026.6) (15,889.4) 1,499.4
46. Risk management (continued)
Carrying Less than 3 - 12 1 - 5 More than
amount On demand 3 months months years 5 years
2019 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 16,255.0 4,050.7 2,411.9 6,579.3 3,213.1 -
Amounts owed to credit
institutions 3,068.8 10.2 232.0 193.5 2,633.1 -
Amounts owed to other
customers 29.7 3.7 2.8 23.1 0.1 -
Derivative liabilities 92.8 - - 2.3 83.4 7.1
Debt securities in
issue 296.3 - - 40.1 256.2 -
Lease liabilities 13.3 - 0.3 1.0 3.8 8.2
Subordinated liabilities 10.6 - 0.2 0.1 10.3 -
Perpetual Subordinated
Bonds 37.6 - 0.6 - - 37.0
Total liabilities 19,804.1 4,064.6 2,647.8 6,839.4 6,200.0 52.3
------------------------ -------- --------- --------- ---------- ---------- ---------
Financial asset by
type
Cash in hand 0.4 0.4 - - - -
Loans and advances
to credit institutions 2,204.6 2,077.1 85.8 - - 41.7
Investment securities 635.3 - 49.9 116.4 469.0 -
Loans and advances
to customers 18,446.8 4.5 290.7 524.1 1,174.8 16,452.7
Derivative assets 21.1 - 0.3 3.0 16.0 1.8
Total assets 21,308.2 2,082.0 426.7 643.5 1,659.8 16,496.2
------------------------ -------- --------- --------- ---------- ---------- ---------
Cumulative liquidity
gap (1,982.6) (4,203.7) (10,399.6) (14,939.8) 1,504.1
46. Risk management (continued)
Liquidity risk -- contractual cash flows
The following tables provide an analysis of the Group's gross
contractual cash flows, derived using interest rates and contractual
maturities at the reporting date and excluding impacts of early payments
or non-payments:
Carrying Gross inflow/ Up to 3 - 12 1 - 5 More than
amount outflow 3 months months years 5 years
2020 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 16,603.1 16,644.9 7,302.6 3,610.5 4,121.0 1,610.8
Amounts owed to credit
institutions and other
customers 3,643.1 3,658.8 113.4 1,048.9 826.6 1,669.9
Derivative liabilities 163.6 157.7 11.0 41.4 103.8 1.5
Debt securities in
issue 421.9 426.4 17.3 52.0 67.3 289.8
Lease liabilities 11.7 13.2 0.5 1.2 6.4 5.1
Subordinated liabilities 10.5 13.1 0.4 0.5 12.2 -
Perpetual Subordinated
Bonds 37.6 39.8 0.7 0.3 1.8 37.0
Total liabilities 20,891.5 20,953.9 7,445.9 4,754.8 5,139.1 3,614.1
------------------------ -------- ------------- --------- -------- ------- ---------
Off-balance sheet loan
commitments 979.5 979.5 979.5 - - -
Financial asset by
type
Cash in hand 0.5 0.5 0.5 - - -
Loans and advances
to credit institutions 2,676.2 2,676.2 2,623.9 18.3 - 34.0
Investment securities 471.2 494.9 1.2 4.0 483.8 5.9
Loans and advances
to customers 19,230.7 36,156.7 373.4 1,132.4 4,960.5 29,690.4
Derivative assets 12.3 12.1 3.2 4.6 4.3 -
Total assets 22,390.9 39,340.4 3,002.2 1,159.3 5,448.6 29,730.3
------------------------ -------- ------------- --------- -------- ------- ---------
46. Risk management (continued)
Carrying Gross inflow/ Up to 3 - 12 1 - 5 More than
amount outflow 3 months months years 5 years
2019 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 16,255.0 16,407.3 5,532.0 4,309.7 4,911.8 1,653.8
Amounts owed to credit
institutions and other
customers 3,098.5 3,133.3 255.1 229.5 2,648.7 -
Derivative liabilities 92.8 91.4 5.6 20.7 61.4 3.7
Debt securities in
issue 296.3 315.3 14.4 82.9 218.0 -
Lease liabilities 13.3 22.4 0.7 1.4 17.1 3.2
Subordinated liabilities 10.6 14.2 0.4 0.5 13.3 -
Perpetual Subordinated
Bonds 37.6 45.5 0.4 1.3 6.8 37.0
Total liabilities 19,804.1 20,029.4 5,808.6 4,646.0 7,877.1 1,697.7
------------------------ -------- ------------- --------- -------- ------- ---------
Off-balance sheet loan
commitments 1,210.9 1,210.9 1,210.9 - - -
Financial asset by
type
Cash in hand 0.4 0.4 0.4 - - -
Loans and advances
to credit institutions 2,204.6 2,204.6 2,162.9 - - 41.7
Investment securities 635.3 672.4 52.1 123.2 497.1 -
Loans and advances
to customers 18,446.8 37,024.4 371.6 1,423.6 5,032.4 30,196.8
Derivative assets 21.1 23.4 2.4 5.7 15.1 0.2
Total assets 21,308.2 39,925.2 2,589.4 1,552.5 5,544.6 30,238.7
------------------------ -------- ------------- --------- -------- ------- ---------
The actual repayment profile of retail deposits may differ from the
analysis above due to the option of early withdrawal with a penalty.
Perpetual Subordinated Bonds have been shown to the next interest rate
reset date.
The actual repayment profile of loans and advances to customers may
differ from the analysis above since many mortgage loans are repaid
prior to the contractual end date.
46. Risk management (continued)
Liquidity risk -- asset encumbrance
Asset encumbrance levels are monitored by ALCO. The following tables
provide an analysis of the Group's encumbered and unencumbered assets:
2020
Encumbered Unencumbered
------------------------
Pledged Available
as collateral Other(1) as collateral Other(2) Total
GBPm GBPm GBPm GBPm GBPm
Cash in hand - - 0.5 - 0.5
Loans and advances to credit
institutions 211.1 95.0 2,256.5 113.6 2,676.2
Investment securities 161.0 - 310.2 - 471.2
Loans and advances to
customers 5,638.6 - 2,752.0 10,840.1 19,230.7
Derivative assets - - - 12.3 12.3
Non-financial assets - - - 263.6 263.6
6,010.7 95.0 5,319.2 11,229.6 22,654.5
----------------------------- -------------- -------- -------------- -------- --------
2019
Encumbered Unencumbered
-------------------------
Pledged Available
as collateral Other(1) as collateral Other(2) Total
GBPm GBPm GBPm GBPm GBPm
Cash in hand - - 0.4 - 0.4
Loans and advances to credit
institutions 110.4 41.7 1,916.2 136.3 2,204.6
Investment securities 173.0 - 462.3 - 635.3
Loans and advances to
customers 4,922.4 40.4 1,939.6 11,544.4 18,446.8
Derivative assets - - - 21.1 21.1
Non-financial assets - - - 108.9 108.9
5,205.8 82.1 4,318.5 11,810.7 21,417.1
----------------------------- -------------- --------- -------------- --------- ---------
(1) Represents assets that are not pledged but that the Group believes
it is restricted from using to secure funding for legal or other
reasons.
(2) Represents assets that are not restricted for use as collateral, but
the Group treats as available as collateral once they are readily
available to secure funding in the normal course of business.
46. Risk management (continued)
Liquidity risk -- liquidity reserves
The tables below analyse the Group's liquidity reserves, where carrying
value is considered to be equal to fair value:
2020 2019
GBPm GBPm
Unencumbered balances with central banks 2,256.5 1,916.2
Unencumbered cash and balances with other
banks 113.6 136.3
Other cash and cash equivalents 0.5 0.4
Unencumbered investment securities 310.2 462.3
2,680.8 2,515.2
------------------------------------------ ------- -------
Market risk
Market risk is the risk of an adverse change in the Group's income or
the Group's net worth arising from movement in interest rates, exchange
rates or other market prices. Market risk exists, to some extent, in all
the Group's businesses. The Group recognises that the effective
management of market risk is essential to the maintenance of stable
earnings and preservation of shareholder value.
Interest rate risk
The primary market risk faced by the Group is interest rate risk.
Interest rate risk is the risk of loss from adverse movement in the
overall level of interest rates. It arises from mismatches in the timing
of repricing of assets and liabilities, both on and off-balance sheet.
The Group does not run a trading book or take speculative interest rate
positions and therefore all interest rate risk resides in the banking
book (interest rate risk in the banking book (IRRBB)). IRRBB is most
prevalent in mortgage lending where fixed rate mortgages are not funded
by fixed rate deposits of the same duration, or where the fixed rate
risk is not hedged by a fully matching interest rate derivative.
Exposure is mitigated on a continuous basis through the use of
derivatives and reserve allocations.
Currently interest rate risk is managed separately for OSB and CCFS due
to the use of different treasury management and asset and liability
management (ALM) systems. However, the methodology applied to the
setting of risk appetites was aligned across the Group in 2020. Both
Banks apply an economic value at risk approach as well as an earnings at
risk approach for interest rate risk and basis risk. The interest rate
sensitivity is impacted by behavioural assumptions used by the Group;
the most significant of which are prepayments and reserve allocations.
Expected prepayments are modelled based on historical analysis and
current market rates. The reserve allocation strategy is approved by
ALCO and set to reflect the current balance sheet and future plans.
46. Risk management (continued)
Economic value at risk is measured using the impact of six different
internally derived interest rate scenarios. The internal scenarios are
defined by ALCO and are based on three 'shapes' of curve movement (shift,
twist and flex). Historical data is used to calibrate the severity of
the scenarios to the Group's risk appetite. The Board has set limits on
interest rate risk exposure of 2.25% and 1% of CET1 for OSB and CCFS,
respectively. The table below shows the maximum decreases to net
interest income under these scenarios after taking into account the
derivatives:
2020 2019
GBPm GBPm
OSB 5.6 4.3
CCFS 0.7 3.7
Group 6.3 8.0
Exposure for earnings at risk is measured by the impact of a +/-50bps
parallel shift in interest rates on the expected profitability of the
Group in the next 12 months. The risk appetite limit is 2% of full year
net interest income (NII). The table below shows the maximum decreases
after taking into account the derivatives:
2020 2019
GBPm GBPm
OSB(1) (0.1) 2.5
CCFS 2.2 0.6
Group 2.1 3.1
(1) Due to product floors earnings increases in both the +50bps and
-50bps scenarios.
The Group is also exposed to basis risk. Basis risk is the risk of loss
from an adverse divergence in interest rates. It arises where assets and
liabilities reprice from different variable rate indices. These indices
may be market rates (e.g. bank base rate, LIBOR or SONIA) or
administered (e.g. the Group's SVR, other discretionary variable rates,
or that received on call accounts with other banks).
The Group measures basis risk using the impact of five scenarios on net
interest income over a one-year period including movements such as
diverging base, LIBOR and SONIA rates. Historical data is used to
calibrate the severity of the scenarios to the Group's risk appetite.
The Board has set a limit on basis risk exposure of 4% of full year net
interest income. The table below shows the maximum decreases to net
interest income at 31 December 2020 and 2019:
2020 2019
GBPm GBPm
OSB 5.4 9.3
CCFS 8.0 9.7
Group 13.4 19.0
Foreign exchange rate risk
The Group has limited exposure to foreign exchange risk in respect of
its Indian operations. A 5% increase in exchange rates would result in a
GBP0.4m (2019: GBP0.4m) effect in profit or loss and GBP0.5m (2019:
GBP0.4m) in equity.
46. Risk management (continued)
Structured entities
The structured entities consolidated within the Group at 31 December
2020 were Canterbury Finance No.2 plc, Canterbury Finance No.3 plc and
CMF 2020-1 plc. These entities hold legal title to a pool of mortgages
which are used as a security for issued debt. The transfer of mortgages
fails derecognition criteria because the Group retained the subordinated
notes and residual certificates issued and as such did not transfer
substantially the risks and rewards of ownership of the securitised
mortgages. Therefore, the Group is exposed to credit, interest rate and
other risks on the securitised mortgages.
Cash flows generated from the structured entities are ring-fenced and
are used to pay interest and principal of the issued debt securities in
a waterfall order according to the seniority of the bonds. The
structured entities are self-funded and the Group is not contractually
or constructively obliged to provide further liquidity or financial
support.
The structured entities consolidated within the Group at 31 December
2019 were Canterbury Finance No.1 plc and Precise Mortgage Funding
2015-1 plc.
Unconsolidated structured entities
Structured entities, which were sponsored by the Group include Precise
Mortgage Funding 2015-2B plc, Precise Mortgage Funding 2017-1B plc,
Charter Mortgage Funding 2017-1 plc, Precise Mortgage Funding 2018-1B
plc, Charter Mortgage Funding 2018-1 plc, Precise Mortgage Funding
2019-1B plc, Canterbury Finance No.1 plc and Precise Mortgage Funding
2020-1B plc.
These structured entities are not consolidated by the Group, as the
Group does not control the entities and is not exposed to the risks and
rewards of ownership from the securitised mortgages. The Group has no
contractual arrangements with the unconsolidated structured entities
other than the investments disclosed in note 20 and servicing the
structured entities' mortgage portfolios.
The Group has not provided any support to the unconsolidated structured
entities listed and has no obligation or intention to do so.
During 2020 the Group received GBP5.0m interest income (2019: GBP2.7m)
and GBP4.6m servicing income (2019: GBP1.1m) from unconsolidated
structured entities.
1. Financial instruments and fair values
2. Financial assets and financial liabilities
The following tables summarise the classification and carrying value of
the Group's financial assets and financial liabilities:
2020
Fair value
through
profit or Amortised Total carrying
loss FVOCI cost amount
Note GBPm GBPm GBPm GBPm
Assets
Cash in hand - - 0.5 0.5
Loans and advances to credit
institutions 19 - - 2,676.2 2,676.2
Investment securities 20 - 285.0 186.2 471.2
Loans and advances to
customers 21 19.1 - 19,211.6 19,230.7
Derivative assets 26 12.3 - - 12.3
31.4 285.0 22,074.5 22,390.9
----------------------------- ---- ---------- ----- --------- --------------
Liabilities
Amounts owed to retail
depositors 34 - - 16,603.1 16,603.1
Amounts owed to credit
institutions 33 - - 3,570.2 3,570.2
Amounts owed to other
customers 35 - - 72.9 72.9
Debt securities in issue 36 - - 421.9 421.9
Derivative liabilities 26 163.6 - - 163.6
Subordinated liabilities 40 - - 10.5 10.5
Perpetual Subordinated Bonds 41 - - 37.6 37.6
163.6 - 20,716.2 20,879.8
----------------------------- ---- ---------- ----- --------- --------------
47. Financial instruments and fair values (continued)
2019
Fair value
through
profit or Amortised Total carrying
loss FVOCI cost amount
Note GBPm GBPm GBPm GBPm
Assets
Cash in hand - - 0.4 0.4
Loans and advances to credit
institutions 19 - - 2,204.6 2,204.6
Investment securities 20 - 508.7 126.6 635.3
Loans and advances to
customers 21 22.1 - 18,424.7 18,446.8
Derivative assets 26 21.1 - - 21.1
43.2 508.7 20,756.3 21,308.2
----------------------------- ---- ---------- ----- --------- --------------
Liabilities
Amounts owed to retail
depositors 34 - - 16,255.0 16,255.0
Amounts owed to credit
institutions 33 - - 3,068.8 3,068.8
Amounts owed to other
customers 35 - - 29.7 29.7
Debt securities in issue 36 - - 296.3 296.3
Derivative liabilities 26 92.8 - - 92.8
Subordinated liabilities 40 - - 10.6 10.6
Perpetual Subordinated Bonds 41 - - 37.6 37.6
92.8 - 19,698.0 19,790.8
----------------------------- ---- ---------- ----- --------- --------------
47. Financial instruments and fair values (continued)
The Group has no financial assets nor financial liabilities classified
as held for trading.
ii. Fair values
The following tables summarise the carrying value and estimated fair
value of financial instruments not measured at fair value in the
Statement of Financial Position:
2020 2019
Carrying Estimated Carrying Estimated
value fair value value fair value
GBPm GBPm GBPm GBPm
Assets
Cash in hand 0.5 0.5 0.4 0.4
Loans and advances to credit
institutions 2,676.2 2,676.2 2,204.6 2,204.6
Investment securities 186.2 186.6 126.6 126.6
Loans and advances to
customers 19,211.6 19,352.0 18,424.7 18,654.2
22,074.5 22,215.3 20,756.3 20,985.8
----------------------------- -------- ----------- ------------ ------------
Liabilities
Amounts owed to retail
depositors 16,603.1 16,666.1 16,255.0 16,259.7
Amounts owed to credit
institutions 3,570.2 3,570.2 3,068.8 3,068.8
Amounts owed to other
customers 72.9 72.9 29.7 29.7
Debt securities in issue 421.9 421.9 296.3 296.3
Subordinated liabilities 10.5 10.7 10.6 10.7
Perpetual Subordinated Bonds 37.6 32.3 37.6 33.2
20,716.2 20,774.1 19,698.0 19,698.4
----------------------------- -------- ----------- ------------ ------------
The fair values in these tables are estimated using the valuation
techniques below. The estimated fair value is stated as at 31 December
and may be significantly different from the amounts which will actually
be paid on the maturity or settlement dates of each financial
instrument.
Cash in hand
This represents physical cash across the Group's branch network where
fair value is considered to be equal to carrying value.
Loans and advances to credit institutions
This mainly represents the Group's working capital current accounts and
call accounts with central governments and other banks with an original
maturity of less than three months. Fair value is not considered to be
materially different to carrying value.
Loans and advances to customers
This mainly represents secured mortgage lending to customers. The fair
value of fixed rate mortgages has been estimated by discounting future
cash flows at current market rates of interest. Future cash flows
include the impact of expected credit losses. The interest rate on
variable rate mortgages is considered to be equal to current market
product rates and as such fair value is estimated to be equal to
carrying value.
Amounts owed to retail depositors
The fair value of fixed rate retail deposits has been estimated by
discounting future cash flows at current market rates of interest.
Retail deposits at variable rates and deposits payable on demand are
considered to be at current market rates and as such fair value is
estimated to be equal to carrying value.
47. Financial instruments and fair values (continued)
Amounts owed to credit institutions
This mainly represents amounts drawn down under the BoE TFS, TFSME and
ILTR, warehouse funding and commercial repos. Fair value is considered
to be equal to carrying value.
Amounts owed to other customers
This represents fixed rate saving products to corporations and local
authorities with original maturities greater than three months. The fair
value is estimated by discounting future cash flows at current market
rates of interest.
Debt securities in issue
While the Group's debt securities in issue are listed, the quoted prices
for an individual note may not be indicative of the fair value of the
issue as a whole, due to the specialised nature of the market in such
instruments and the limited number of investors participating in it.
Fair value is not considered to be materially different to carrying
value.
Subordinated liabilities and Perpetual Subordinated Bonds
The fair value of subordinated liabilities is estimated by using quoted
market prices of similar instruments at the reporting date. The PSBs are
listed on the London Stock Exchange with fair value being the quoted
market price at the reporting date.
iii. Fair value classification
The following tables provide an analysis of financial assets and
financial liabilities measured at fair value in the Statement of
Financial Position grouped into Levels 1 to 3 based on the degree to
which the fair value is observable:
Carrying Principal Level Level Level
amount amount 1 2 3 Total
2020 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Investment securities 285.0 284.7 - 285.0 - 285.0
Loans and advances to
customers 19.1 21.8 - - 19.1 19.1
Derivative assets 12.3 8,687.8 - 12.3 - 12.3
316.4 8,994.3 - 297.3 19.1 316.4
Financial liabilities
Derivative liabilities 163.6 10,392.4 - 163.6 - 163.6
Carrying Principal Level Level Level
amount amount 1 2 3 Total
2019 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Investment securities 508.7 509.5 149.8 358.9 - 508.7
Loans and advances to
customers 22.1 24.8 - - 22.1 22.1
Derivative assets 21.1 7,795.4 - 21.0 0.1 21.1
551.9 8,329.7 149.8 379.9 22.2 551.9
-----------------------
Financial liabilities
Derivative liabilities 92.8 9,982.4 - 92.8 - 92.8
47. Financial instruments and fair values (continued)
Level 1: Fair values that are based entirely on quoted market prices
(unadjusted) in an actively traded market for identical assets and
liabilities that the Group has the ability to access. Valuation
adjustments and block discounts are not applied to Level 1 instruments.
Since valuations are based on readily available observable market prices,
this makes them most reliable, reduces the need for management judgement
and estimation and also reduces the uncertainty associated with
determining fair values.
Level 2: Fair values that are based on one or more quoted prices in
markets that are not active or for which all significant inputs are
taken from directly or indirectly observable market data. These include
valuation models used to calculate the present value of expected future
cash flows and may be employed either when no active market exists or
when there are no quoted prices available for similar instruments in
active markets.
Level 3: Fair values for which any one or more significant input is not
based on observable market data and the unobservable inputs have a
significant effect on the instrument's fair value. Valuation models that
employ significant unobservable inputs require a higher degree of
management judgement and estimation in determining the fair value.
Management judgement and estimation are usually required for the
selection of the appropriate valuation model to be used, determination
of expected future cash flows on the financial instruments being valued,
determination of the probability of counterparty default and prepayments,
determination of expected volatilities and correlations and the
selection of appropriate discount rates.
The following table provides an analysis of financial assets and
financial liabilities not measured at fair value in the Statement of
Financial Position grouped into Levels 1 to 3 based on the degree to
which the fair value is observable:
Estimated fair value
Carrying Principal Level Level Level
amount amount 1 2 3 Total
2020 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash in hand 0.5 0.5 - 0.5 - 0.5
Loans and advances to
credit institutions 2,676.2 2,676.1 - 2,676.2 - 2,676.2
Investment securities 186.2 186.2 - 186.6 - 186.6
Loans and advances to
customers 19,211.6 19,200.1 - 3,314.5 16,037.5 19,352.0
22,074.5 22,062.9 - 6,177.8 16,037.5 22,215.3
----------------------- -------- --------- ----- ------- -------- --------
Financial liabilities
Amounts owed to retail
depositors 16,603.1 16,507.3 - 5,546.1 11,120.0 16,666.1
Amounts owed to credit
institutions 3,570.2 3,569.3 - 3,570.2 - 3,570.2
Amounts owed to other
customers 72.9 72.7 - - 72.9 72.9
Debt securities in
issue 421.9 421.8 - 421.9 - 421.9
Subordinated
liabilities 10.5 10.3 - - 10.7 10.7
Perpetual Subordinated
Bonds 37.6 37.0 32.3 - - 32.3
20,716.2 20,618.4 32.3 9,538.2 11,203.6 20,774.1
----------------------- -------- --------- ----- ------- -------- --------
47. Financial instruments and fair values (continued)
Carrying Principal Level Level
amount amount 1 2 Level 3 Total
2019 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash in hand 0.4 0.4 - 0.4 - 0.4
Loans and advances to
credit institutions 2,204.6 2,204.3 - 2,204.6 - 2,204.6
Investment securities 126.6 126.4 126.6 - - 126.6
Loans and advances to
customers 18,424.7 18,281.3 - 3,409.1 15,245.1 18,654.2
20,756.3 20,612.4 126.6 5,614.1 15,245.1 20,985.8
----------------------- -------- --------- ----- ------- -------- --------
Financial liabilities
Amounts owed to retail
depositors 16,255.0 16,133.5 - 3,817.8 12,441.9 16,259.7
Amounts owed to credit
institutions 3,068.8 3,063.3 - 3,068.8 - 3,068.8
Amounts owed to other
customers 29.7 29.5 - - 29.7 29.7
Debt securities in
issue 296.3 295.5 - 296.3 - 296.3
Subordinated
liabilities 10.6 10.4 - - 10.7 10.7
Perpetual Subordinated
Bonds 37.6 37.0 33.2 - - 33.2
19,698.0 19,569.2 33.2 7,182.9 12,482.3 19,698.4
----------------------- -------- --------- ----- ------- -------- --------
48. Pension scheme
Defined contribution scheme
The amount charged to profit or loss in respect of contributions to the
Group's defined contribution and stakeholder pension arrangements is the
contribution payable in the period. The total pension cost in the year
amounted to GBP4.3m (2019: GBP3.0m).
49. Operating segments
The Group segments its lending business and operates under two segments
in line with internal reporting to the Board:
-- OSB
-- CCFS
The Group separately discloses the impact of Combination accounting but
does not consider this a business segment.
The financial position and results of operations of the above segments
are summarised below:
OSB CCFS Combination Total
2020 GBPm GBPm GBPm GBPm
Balances at the reporting date
Gross loans and advances to
customers 11,131.4 8,001.2 209.1 19,341.7
Expected credit losses (83.6) (28.2) 0.8 (111.0)
Loans and advances to customers 11,047.8 7,973.0 209.9 19,230.7
Capital expenditure 5.3 2.4 - 7.7
Depreciation and amortisation 7.1 2.4 4.3 13.8
Profit or loss for the year
Net interest income/(expense) 332.8 201.2 (61.8) 472.2
Other income 18.8 17.4 0.2 36.4
Total income/(expense) 351.6 218.6 (61.6) 508.6
Administrative expenses (95.2) (57.5) (4.3) (157.0)
Provisions - (0.1) - (0.1)
Impairment of financial assets (50.7) (20.5) 0.2 (71.0)
Impairment of intangible assets - - (7.0) (7.0)
Integration costs (7.5) (2.3) - (9.8)
Exceptional items (3.3) - - (3.3)
Profit/(loss) before taxation 194.9 138.2 (72.7) 260.4
Taxation (46.9) (32.0) 14.8 (64.1)
Profit/(loss) for the year 148.0 106.2 (57.9) 196.3
--------
49. Operating segments (continued)
OSB CCFS Combination Total
2019 GBPm GBPm GBPm GBPm
Balances at the reporting date
Gross loans and advances to
customers 10,820.6 7,374.4 294.7 18,489.7
Expected credit losses (35.6) (8.0) 0.7 (42.9)
Loans and advances to customers 10,785.0 7,366.4 295.4 18,446.8
Capital expenditure 10.2 1.1 - 11.3
Depreciation and amortisation 6.3 1.3 0.6 8.2
Profit or loss for the year
Net interest income/(expense) 316.2 50.1 (21.6) 344.7
Other (expense)/income (12.9) 8.3 3.3 (1.3)
Total income/(expense) 303.3 58.4 (18.3) 343.4
Administrative expenses (92.3) (15.1) (1.3) (108.7)
Provisions 0.1 (0.1) - -
Impairment of financial assets (11.9) (0.1) (3.6) (15.6)
Gain on Combination with CCFS - - 10.8 10.8
Integration costs (2.5) (2.7) - (5.2)
Exceptional items (15.6) - - (15.6)
Profit/(loss) before taxation 181.1 40.4 (12.4) 209.1
Taxation (47.1) (10.2) 7.0 (50.3)
Profit/(loss) for the year 134.0 30.2 (5.4) 158.8
-------------------------------- -------- ------- ----------- --------
50. Country by country reporting
Country by Country Reporting (CBCR) was introduced through Article 89 of
CRD IV, aimed at the banking and capital markets industry.
The name, nature of activities and geographic location of the Group's
companies are presented below:
Jurisdiction Country Name Activities
UK(1) England OSB GROUP PLC Commercial
banking
OneSavings Bank plc
5D Finance Limited
Broadlands Finance Limited
Charter Court Financial Services
Group Plc
Charter Court Financial Services
Limited
Charter Mortgages Limited
Easioption Limited
Exact Mortgage Experts Limited
Guernsey Home Loans Limited
Heritable Development Finance Limited
Inter Bay Financial I Limited
Inter Bay Financial II Limited
Interbay Asset Finance Limited
Interbay Funding, Ltd
Interbay Group Holdings Limited
InterBay Holdings Ltd
Interbay ML, Ltd
Jersey Home Loans Limited
Prestige Finance Limited
Reliance Property Loans Limited
Rochester Mortgages Limited
Guernsey Guernsey Home Loans Limited
Jersey Jersey Home Loans Limited
(1) Guernsey Home Loans Limited (Guernsey) and Jersey Home Loans Limited
(Jersey) are incorporated in Guernsey and Jersey respectively but are
considered to be located in the UK as they are managed and controlled in
the UK with no permanent establishments in Guernsey or Jersey.
50. Country by country reporting (continued)
Jurisdiction Country Name Activities
UK England Canterbury Finance No. 2 plc Special purpose
vehicle
Canterbury Finance No. 3 plc
CMF 2020-1 plc
CML Warehouse Number 1 Limited
CML Warehouse Number 2 Limited
Precise Mortgage Funding 2014-1
plc
Precise Mortgage Funding 2014-2
plc
Precise Mortgage Funding 2015-1
plc
Precise Mortgage Funding 2015-3R
plc
India India OSB India Private Limited Back office
processing
------------ ------- --------------------------------
Other disclosures required by the CBCR directive are provided below:
2020 UK India Consolidation(2) Total
Average number of
employees 1,330 486 - 1,816
Turnover(1) , GBPm 508.3 9.4 (9.1) 508.6
Profit/(loss) before
tax, GBPm 260.1 1.3 (1.0) 260.4
Corporation tax paid,
GBPm 128.6 0.2 - 128.8
2019 UK India Consolidation(2) Total
Average number of
employees 1,335 454 - 1,789
Turnover(1) , GBPm 343.1 8.9 (8.6) 343.4
Profit/(loss) before
tax, GBPm 208.8 1.6 (1.3) 209.1
Corporation tax paid,
GBPm 52.6 0.4 - 53.0
(1) Turnover represents total income before impairment losses,
regulatory provisions and operating costs, but after net interest, net
commissions and fees, gains and losses on financial instruments and
external servicing fees.
(2) Relates to a management fee from Indian subsidiaries to OneSavings
Bank plc for providing back office processing.
50. Country by country reporting (continued)
The tables below reconcile tax charged and tax paid during the year.
UK India Total
2020 GBPm GBPm GBPm
Tax charge 63.8 0.3 64.1
Effects of:
Other timing differences 15.7 (0.1) 15.6
Tax outside of profit
or loss 0.2 - 0.2
Prior year tax paid during
the year 41.8 - 41.8
Tax in relation to future periods
prepaid 7.1 - 7.1
Tax paid 128.6 0.2 128.8
------------------------------------ ----- ----- -----
UK India Total
2019 GBPm GBPm GBPm
Tax charge 49.8 0.5 50.3
Effects of:
Other timing differences 4.3 (0.1) 4.2
Tax outside of profit
or loss (0.9) - (0.9)
Prior year tax paid during
the year 22.1 - 22.1
Current year tax to be paid after
the reporting date (22.7) - (22.7)
Tax paid 52.6 0.4 53.0
------------------------------------ ------ ----- ------
51. Adjustments for non-cash items and changes in operating assets and
liabilities
2020 2019
GBPm GBPm
Adjustments for non-cash items:
Depreciation and amortisation 13.8 8.2
Interest on investment securities (7.5) -
Interest on subordinated liabilities 0.8 0.7
Interest on Perpetual Subordinated Bonds 1.7 1.8
Interest on securitised debt 3.4 0.8
Interest on financing debt 10.9 2.4
Impairment charge on loans 71.0 15.6
Impairment on intangible assets acquired on Combination 7.0 -
(Gains)/losses on sale of financial instruments (20.0) 0.1
Provisions 0.1 -
Interest on lease liabilities 0.3 0.1
Fair value (gains)/losses on financial instruments (7.4) 3.3
Share-based payments 5.1 4.0
Gain on Combination with CCFS - (10.8)
Total adjustments for non-cash items 79.2 26.2
-------------------------------------------------------- --------- ---------
Increase in loans and advances to credit institutions (154.0) (36.8)
Increase in loans to customers (1,705.0) (2,230.8)
Increase in retail deposits 348.1 1,637.8
Net decrease/(increase) in other assets 1.3 (4.8)
Net decrease in derivatives and hedged items (64.3) (20.1)
Net increase/(decrease) in other customers deposits 43.2 (19.2)
Net decrease in other liabilities (6.5) (37.3)
Exchange differences on working capital - (0.6)
Total changes in operating assets and liabilities (1,537.2) (711.8)
-------------------------------------------------------- --------- ---------
52. Events after the reporting date
On 11 January 2021, OSB GROUP PLC published a Circular in relation to
the Capital Reduction, which subject to shareholder approval as well as
certain other conditions set out in the Circular, was undertaken to
create the required distributable reserves to enable the Company to pay
dividends and other distributions to shareholders in the future. The
Circular stated that there would be no change to the total number of
shares or the total capital in the Company or the Group's capital ratios
as a result of the Capital Reduction. On 26 February 2021, the Capital
reduction became effective with OSB GROUP PLC reducing the nominal value
of 447,312,780 shares from three hundred and four (304) pence each to
one (1) penny each. Interim accounts as at 28 February 2021 have been
prepared and delivered to Companies House as a requirement to support
the recommended distribution of a dividend of GBP64.9m on 2 June 2021 by
OSB GROUP PLC.
On 26 February 2021, the Group completed the purchase of a c. GBP55m
portfolio of UK residential mortgages from a third party. The portfolio
was acquired at a discount to current balances and will continue to be
serviced by Exact, the Group's in-house servicer.
On 17 March 2021, the Group issued a trading update stating that it had
become aware of potential fraudulent activity by a third party in
relation to one of the funding lines provided by the Group, secured
against lease receivables and the underlying hard assets. The Group had
an outstanding receivable
against this funding line of GBP28.6m as at 31 December 2020. Following
an initial report from the Administrator to the third-party company,
appointed by the Group, the Group concluded that conditions existed as
at the end of the reporting period which make this an adjusting post
balance sheet event, with an impairment of GBP20m recognised in 2020.
53. Controlling party
As at 31 December 2020 there was no controlling party of OSB GROUP PLC.
54. Capital management
The Group's capital management approach is to provide a sufficient
capital base to cover business risks and support future business
development. The Group remained, throughout the year, compliant with its
capital requirements as set out by the PRA, the Group's primary
prudential supervisor.
The Group manages and reports its capital at a number of levels
including Group level and for the two regulated banking entities within
the Group, on an individual consolidation and on an individual basis.
The capital position of the two regulated banking entities are not
separately disclosed.
The Group's capital management is based on the three 'pillars' of Basel
II.
Under Pillar 1, the Group calculates its minimum capital requirements
based on 8% of risk-weighted assets.
Under Pillar 2, the Group, and its regulated entities, complete an
annual self-assessment of risks known as the Internal Capital Adequacy
Assessment Process (ICAAP). The PRA applies additional requirements to
this assessment amount to cover risks under Pillar 2 to generate a Total
Capital Requirement. Further, the PRA sets capital buffers and the Group
applies for imposition of the requirements and modification of rules
incorporating the capital buffers and Pillar 2 pursuant to the Financial
Services and Markets Act 2000.
Pillar 3 requires firms to publish a set of disclosures which allow
market participants to assess information on the Group's capital, risk
exposures and risk assessment process. The Group's Pillar 3 disclosures
can be found on the Group's website.
Basel III came into force through CRD IV. Basel III complements and
enhances Basel I and II with additional safety measures. Basel III
changed definitions of regulatory capital, introduced new capital
buffers, a non-risk adjusted leverage ratio, liquidity ratios and
modified the way regulatory capital is calculated.
The ultimate responsibility for capital adequacy rests with the Board of
Directors. The Group's ALCO is responsible for the management of the
capital process within the risk appetite defined by the Board, including
approving policy, overseeing internal controls and setting internal
limits over capital ratios.
The Group actively manages its capital position and reports this on a
regular basis to the Board and senior management via the ALCO and other
governance committees. Capital requirements are included within budgets,
forecasts and strategic plans with initiatives being executed against
this plan.
54. Capital management (continued)
The Group's Pillar 1 capital information is presented below:
(Unaudited) (Unaudited)
2020 2019
GBPm GBPm
Common Equity Tier 1 capital
Called up share capital 1,359.8 4.5
Share premium, capital contribution and share-based
payment reserve 7.8 876.3
Retained earnings 1,608.6 553.2
Transfer reserve (1,355.3) (12.8)
Other reserves (4.0) (4.2)
Total equity attributable to ordinary shareholders 1,616.9 1,417.0
Foreseeable dividends (64.9) (49.9)
IFRS 9 transitional adjustment(1) 4.9 5.3
COVID-19 ECL transitional adjustment(2) 31.0 -
Deductions from Common Equity Tier 1 capital
Prudent valuation adjustment(3) (0.4) (0.5)
Intangible assets(4) (20.6) (31.4)
Deferred tax asset (0.9) (0.9)
Common Equity Tier 1 capital 1,566.0 1,339.6
----------- -----------
Additional Tier 1 capital
Non-controlling interest securities(5) - 60.0
Total Tier 1 capital 1,566.0 1,399.6
----------- -----------
Tier 2 capital
Subordinated debt and PSBs(5) - 47.4
Deductions from Tier 2 capital(5) - (0.7)
Total Tier 2 capital - 46.7
Total regulatory capital 1,566.0 1,446.3
Risk-weighted assets (unaudited) 8,565.7 8,383.0
(1) The regulatory capital includes a GBP4.9m add-back under IFRS 9
transitional arrangements. This represents 75% of the IFRS 9
transitional adjustment booked directly to retained earnings of GBP6.5m.
The full impact of IFRS 9, if applied, would reduce total regulatory
capital to GBP1,561.1m.
(2) The COVID-19 ECL transitional adjustment relates to the Group's
increase in Stage 1 and Stage 2 ECL following the impacts of COVID-19
and for which transitional rules are being adopted for regulatory
capital purposes.
(3) The Group has adopted the simplified approach under the Prudent
Valuation rules, recognising a deduction equal to 0.1% of fair value
assets and liabilities after adjusting for hedge accounting.
(4) All software assets continue to be fully deducted from capital in
light of the pending intention of the PRA to consult on the CRR 'Quick
Fix' package in this area.
(5) Non-controlling interest securities, subordinated debt and PSBs that
qualified as regulatory capital in prior years no longer do so at the
Group level since the insertion of the holding company, OSB GROUP PLC.
54. Capital management (continued)
The movement in CET1 during the year was as follows:
(Unaudited) (Unaudited)
2020 2019
GBPm GBPm
At 1 January 1,339.6 561.6
Movement in retained earnings 1,055.4 113.6
Share premium from Sharesave Scheme vesting 2.6 0.3
Shares issued on Combination with CCFS - 707.1
Movement in other reserves (858.1) (2.7)
Movement in foreseeable dividends (15.0) (24.7)
Movement in solo consolidation adjustment - 5.4
IFRS 9 transitional adjustment (0.4) 2.6
COVID-19 ECL transitional adjustment 31.0 -
Movement in prudent valuation adjustment 0.1 (0.4)
Net decrease/(increase) in intangible assets 10.8 (23.7)
Movement in deferred tax asset for carried
forward losses - 0.5
At 31 December 1,566.0 1,339.6
--------------------------------------------- ----------- -----------
2020 2019
Note GBPm GBPm
Assets
Investments in subsidiaries and intercompany
loans 2 1,425.9 -
Total assets 1,425.9 -
--------------------------------------------- ---- ------- ----
Equity
Share capital 3 1,359.8 -
Retained earnings 4.0 -
Other reserves 62.1 -
1,425.9 -
Total equity 1,425.9 -
--------------------------------------------- ---- ------- ----
The profit after tax for the year ended 31 December 2020 of OSB GROUP
PLC was GBP0.1m (2019: GBPnil). As permitted by section 408 of the
Companies Act 2006, no separate Statement of Comprehensive Income is
presented in respect of the Company.
The Company statement of financial position as at 31 December 2019
comprised Debtors GBP12,501, Called-up share capital not paid GBP37,499,
2 Ordinary shares of GBP1.00 each and Redeemable preference shares of
GBP1.00 each GBP49,998.
The notes below form an integral part of the Company financial
statements.
The financial statements were approved by the Board of Directors on 8
April 2021 and were signed on its behalf by:
Andy Golding April Talintyre
Chief Executive Officer Chief Financial Officer
Company number: 11976839
Share-based
Share Transfer Own payment Retained
capital reserve shares reserve earnings Total
GBPm GBPm GBPm GBPm GBPm GBPm
Company incorporation
on 22nd May 2019 - - - - - -
Result for the period - - - - - -
At 31 December 2019 - - - - - -
Profit for the year - - - - 0.1 0.1
Share-based payments - - - 0.4 - 0.4
Own shares(1) - - (4.0) - 3.9 (0.1)
Shares issued on 27
November 2020 1,359.8 65.7 - - - 1,425.5
At 31 December 2020 1,359.8 65.7 (4.0) 0.4 4.0 1,425.9
---------------------- -------- -------- ------ ----------- --------- -------
(1) The Company has adopted look-through accounting and consolidated the
Employee Benefit Trust effective from 27 November 2020. The Company
initially recognised GBP6.1m of own shares, with GBP3.9m recognised in
retained earnings relating to gifts made to the EBT, and GBP2.2m in
intercompany loans, relating to a loan from OSB to the EBT which funded
the acquisition of shares prior to 27 November 2020. As at 31 December
2020, the EBT had GBP0.1m of outstanding intercompany borrowing.
2020 2019
Note GBPm GBPm
Cash flows from operating activities
Profit before taxation 0.1 -
Change in intercompany loans (2.2) -
Cash used in operating activities (2.1) -
Cash flows from financing activities
Proceeds from issuance of shares under employee 2.1 -
SAYE scheme
Cash generated from financing activities 2.1 -
------------------------------------------- ----
Net increase in cash and cash - -
equivalents
Cash and cash equivalents at the beginning - -
of the year
Cash and cash equivalents at the end - -
of the year
Movement in cash and cash equivalents - -
1. Basis of preparation
The separate financial statements of the Company are presented as
required by the Companies Act 2006. As permitted by that Act, the
separate financial statements have been prepared in accordance with
International Financial Reporting Standards as adopted by the European
Union (EU), and are presented in pounds sterling.
The financial statements have been prepared on the historical cost
basis. The principal accounting policies adopted are the same as those
set out in note 2 to the Consolidated financial statements.
The Company has adopted the predecessor value method with an investment
in subsidiary of OSBG being the book value of the balance sheet in OSB
at the date of insertion.
There are no critical judgements and estimates that apply to the
Company.
2. Investment in subsidiary
The Company has one direct subsidiary, OneSavings Bank plc (OSB), which
is carried at the net book value on the date the Company was inserted as
the holding company of the Group.
Shares in subsidiary Intercompany
undertakings loans payable
GBPm GBPm
At 1 January 2020 - -
Net book value of OSB on 27 November
2020 1,425.5 -
Additions 0.4 (2.2)
Repayments - 2.2
At 31 December 2020 1,425.9 -
------------------------------------- -------------------- --------------
The Company holds ordinary shares in its direct subsidiary.
2. Investment in subsidiary (continued)
A list of the Company's direct and indirect subsidiaries as at 31
December 2020 is shown below:
Registered
Direct investments Activity office Ownership
Mortgage lending Reliance
OneSavings Bank plc and deposit taking House 100%
Registered
Indirect investments Activity office Ownership
Reliance
5D Finance Limited Mortgage servicer House 100%
Mortgage administration Charter
Broadlands Finance Limited services Court 100%
Canterbury Finance No.2 Special purpose Churchill
plc vehicle Place -
Canterbury Finance No.3 Special purpose Churchill
plc vehicle Place -
Charter Court Financial Charter
Services Group Plc Holding company Court 100%
Charter Court Financial Mortgage lending Charter
Services Limited and deposit taking Court 100%
Mortgage administration
and analytical Charter
Charter Mortgages Limited services Court 100%
Special purpose Churchill
CMF 2020-1 plc vehicle Place -
CML Warehouse Number Special purpose
1 Limited vehicle Bartholomew -
CML Warehouse Number Special purpose Churchill
2 Limited vehicle Place -
Reliance
Easioption Limited Holding company House 100%
Exact Mortgage Experts Group service Charter
Limited company Court 100%
Reliance
Guernsey Home Loans Limited Mortgage provider House 100%
Guernsey Home Loans Limited
(Guernsey) Mortgage provider Guernsey 100%
Heritable Development Mortgage originator Reliance
Finance Limited and servicer House 100%
Inter Bay Financial I Reliance
Limited Holding company House 100%
Inter Bay Financial II Reliance
Limited Holding company House 100%
InterBay Asset Finance Asset finance Reliance
Limited and mortgage provider House 100%
Reliance
Interbay Funding, Ltd Mortgage servicer House 100%
Interbay Group Holdings Reliance
Limited Holding company House 100%
Reliance
Interbay Holdings Ltd Holding company House 100%
Reliance
Interbay ML, Ltd Mortgage provider House 100%
Reliance
Jersey Home Loans Limited Mortgage provider House 100%
Jersey Home Loans Limited
(Jersey) Mortgage provider Jersey 100%
OSB India Private Limited Back office processing India 100%
Precise Mortgage Funding Special purpose Great St.
2014-1 plc vehicle Helen's -
Precise Mortgage Funding Special purpose Great St.
2014-2 plc vehicle Helen's -
Precise Mortgage Funding Special purpose Great St.
2015-1 plc vehicle Helen's -
Precise Mortgage Funding Special purpose Great St.
2015-3R plc vehicle Helen's -
Mortgage originator Reliance
Prestige Finance Limited and servicer House 100%
Reliance Property Loans Reliance
Limited Mortgage provider House 100%
Reliance
Rochester Mortgages Limited Mortgage provider House 100%
All investments are in the ordinary share capital of each subsidiary.
2. Investment in subsidiary (continued)
OSB India Private Limited is owned 70.28% by OneSavings Bank plc, 29.72%
by Easioption Limited and 0.001% by Reliance Property Loans Limited.
Special purpose vehicles which the Group controls are treated as
subsidiaries for accounting purposes.
All of the entities listed above have been consolidated into the Group's
consolidated financial statements.
The investment is reviewed annually for indicators of impairment. If
impairment indicators are identified an impairment review of the
investment is conducted which will quantify if the carry value is in
excess of the recoverable amount or an impairment has occurred. In
determining recoverable amount the fair value less costs to sell and the
value in use are assessed, with the value in use being an estimate of
the present value of future cashflows generated by the investment.
The following are the registered offices of the subsidiaries:
Bartholomew - 1 Bartholomew Lane, London, England, EC2N 2AX
Charter Court - 2 Charter Court, Broadlands, Wolverhampton, WV10 6TD
Churchill Place -- 5 Churchill Place, 10(th) Floor, London, E14 5HU
Great St. Helen's - 35 Great St. Helen's, London, EC3A 6AP
Guernsey -- 1(st) Floor, Tudor House, Le Bordage, St Peter Port,
Guernsey, GY1 1DB
India - Salarpuria Magnificia No. 78, 9(th) & 10(th) floor, Old Madras
Road, Bangalore, India, 560016.
Jersey - 26 New Street, St Helier, Jersey, JE2 3RA
Reliance House -- Reliance House, Sun Pier, Chatham, Kent, ME4 4ET
During the year the Company received a gift of GBP0.1m from OSB.
3. Share capital
Ordinary Nominal
shares, value
number GBPm
Incorporation on 2 May 2019, GBP1 nominal
value shares 2 -
At 31 December 2019 2 -
Conversion of GBP1 ordinary shares to GBP0.01
ordinary shares 198 -
Issuance of 408 GBP0.01 ordinary shares 408 -
Conversion of GBP0.01 ordinary shares to
GBP3.04 ordinary shares (606) -
Redemption of preference shares - -
Issuance of new GBP3.04 ordinary share on
Insertion 447,304,196 1,359.8
Shares issued under employee share plans 8,582 -
At 31 December 2020 447,312,780 1,359.8
---------------------------------------------- ----------- -------
All ordinary shares issued in the current and prior year were fully
paid.
4. Directors and employees
The Company has no employees. OneSavings Bank plc, provides the Company
with employee services and bears the costs associated with the Directors
of the Company. These costs are not recharged to the Company. The
Company will continue to have no employees.
Alternative performance measures
The Group used alternative performance measures (APMs) when presenting
underlying results in 2020 and pro forma underlying results in 2019 as
Management believe they provide a more consistent basis for comparing
the Group's performance between financial periods. Underlying results
exclude exceptional items, integration costs and other
acquisition-related items. Pro forma underlying results assume that the
Combination with CCFS occurred on 1 January 2019 and include 12 months
of results from CCFS. They also exclude exceptional items, integration
costs and other acquisition-related items.
APMs reflect an important aspect of the way in which operating targets
are defined and performance is monitored by the Board. However, APMs are
not a substitute for IFRS measures and readers should consider the IFRS
measures as well.
Below we provide definitions and the calculation methodology of ratios
used both on a statutory basis for 2020 and 2019 and underlying basis
for 2020 and pro forma underlying basis for 2019.
Key performance indicators
Gross new lending
Gross new lending is defined as gross new organic lending before
redemptions.
2020 2019
GBPm GBPm
Gross new lending - statutory 3,767.0 4,141.0
Gross new lending - CCFS 2019 pre-acquisition - 2,355.0
Gross new lending - underlying and pro forma
underlying 3,767.0 6,496.0
Net interest margin (NIM)
NIM is defined as net interest income as a percentage of a 13 point
average(1) of interest earning assets (cash, investment securities,
loans and advances to customers and credit institutions). It represents
the margin earned on loans and advances and liquid assets after swap
expense/income and cost of funds.
2020 2019
GBPm GBPm
Net interest income -- statutory A 472.2 344.7
CCFS 2019 pre-acquisition results - 152.1
Add back: acquisition-related items(2) 61.8 21.6
Net interest income -- underlying and pro forma
underlying B 534.0 518.4
13 point average of interest earning assets --
statutory C 21,883.4 14,163.5
13 point average of interest earning assets --
underlying and
pro forma underlying D 21,663.2 19,484.3
NIM statutory equals A/C 2.16% 2.43%
NIM underlying and pro forma underlying equals
B/D 2.47% 2.66%
Cost to income ratio
The cost to income ratio is defined as administrative expenses as a
percentage of total income. It is a measure of operational efficiency.
2020 2019
GBPm GBPm
Administrative expenses -- statutory A 157.0 108.7
CCFS 2019 pre-acquisition results - 57.7
Add back: acquisition-related items(2) (4.3) (1.3)
Administrative expenses -- underlying and pro
forma underlying B 152.7 165.1
Total income -- statutory C 508.6 343.4
CCFS 2019 pre-acquisition results - 200.8
Add back: acquisition-related items(2) 61.6 18.3
Total income - underlying and pro forma underlying
D 570.2 562.5
Cost to income statutory equals A/C 31% 32%
Cost to income underlying and pro forma underlying equals B/D
27% 29%
Management expense ratio
The management expense ratio is defined as administrative expenses as a
percentage of a 13 point average(1) of total assets.
2020 2019
GBPm GBPm
Administrative expenses -- statutory (as in cost
to income 157.0 108.7
ratio above) A
Administrative expenses -- underlying and pro
forma 152.7 165.1
underlying (as in cost to income ratio above)
B
13 point average of total assets -- statutory 22,140.1 14,298.0
C
13 point average of total assets -- underlying
and 21,931.8 19,752.6
pro forma underlying D 0.71% 0.76%
Management expense ratio statutory equals A/C 0.70% 0.84%
Management expense ratio underlying and pro forma
underlying equals B/D
Loan loss ratio
The loan loss ratio is defined as impairment of financial assets as a
percentage of a 13 point average(1) of gross loans and advances. It is a
measure of the credit performance of the loan book.
2020 2019
GBPm GBPm
Impairment of financial assets -- statutory A 71.0 15.6
CCFS 2019 pre-acquisition results - 4.3
Add back: acquisition-related items(2) 0.2 (3.6)
Impairment of financial assets -- underlying
and pro forma underlying B 71.2 16.3
13 point average of gross loans -- statutory 18,739.0 12,171.5
C 18,508.5 16,684.6
13 point average of gross loans -- underlying 0.38% 0.13%
and pro 0.38% 0.10%
forma underlying D
Loan loss ratio statutory equals A/C
Loan loss ratio underlying and pro forma underlying
equals B/D
Return on equity (RoE)
RoE is defined as profit attributable to ordinary shareholders, which is
profit after tax and after deducting coupons on non-controlling interest
securities, as a percentage of a 13 point average(1) of shareholders'
equity (excluding GBP60m of non-controlling interest securities).
2020 2019
GBPm GBPm
Profit after tax - statutory 196.3 158.8
Coupons on non-controlling interest securities (5.5) (5.5)
Profit attributable to ordinary shareholders
-- statutory A 190.8 153.3
CCFS 2019 pre-acquisition results - 92.5
Add back: acquisition-related items(2) 68.6 42.9
Profit attributable to ordinary shareholders
-- underlying and 259.4 288.7
pro forma underlying B
13 point average of shareholders' equity (excluding non-controlling
interest securities) -- statutory C 1,514.2 866.6
13 point average of shareholders' equity (excluding non-controlling
interest securities) -- underlying and pro forma underlying D
1,363.8 1,147.1
Return on equity statutory equals A/C 13% 18%
Return on equity underlying and pro forma underlying
equals B/D 19% 25%
Basic earnings per share
Basic earnings per share is defined as profit attributable to ordinary
shareholders, which is profit after tax and after deducting coupons on
non-controlling interest securities, gross of tax, divided by the
weighted average number of ordinary shares in issue.
2020 2019
GBPm GBPm
Profit attributable to ordinary shareholders --
statutory 190.8 153.3
(as in RoE ratio above) A
Profit attributable to ordinary shareholders --
underlying and pro 259.4 288.7
forma underlying (as in RoE ratio above) B
Weighted average number of ordinary shares in 446.2 291.6
issue -- statutory C
Weighted average number of ordinary shares in issue -- underlying
and pro forma underlying D 446.2 444.8
Basic earnings per share statutory equals A/C 42.8 52.6
Basic earnings per share underlying and pro forma
underlying equals B/D 58.1 64.9
1. 13 point average is calculated as an average of opening balance and
closing balances for 12 months of the financial year.
2. The acquisition-related items are detailed in the reconciliation of
statutory to underlying and pro forma underlying results in the
Financial review
Calculation of 2020 final dividend
The table below shows the basis of calculation of the Bank's recommended
final dividend for 2020:
2020 2019
GBPm GBPm
Statutory profit after tax 196.3 158.8
Less: coupons on non-controlling interest
securities classified as equity (5.5) (5.5)
Statutory profit attributable to ordinary
shareholders 190.8 153.3
Add back: Group's integration costs 9.8 -
Tax on Group's integration costs (2.4) -
Add back: Group's exceptional items 3.3 15.6
Add back: amortisation of fair value adjustment 64.5 21.6
Add back: amortisation of inception adjustment (13.3) (3.3)
Add back: amortisation of cancelled swaps (2.7) -
Add back: amortisation of intangible assets
acquired 11.3 1.3
Release of deferred taxation on the above
amortisation adjustments (14.8) (7.0)
Gain on sale of financial assets 13.1 -
Less: gain on Combination - (10.8)
Add back: ECL on Combination (0.2) 3.6
Add: CCFS pre-acquisition profits - 92.5
Add back: CCFS pre-acquisition exceptional
items - 15.7
Add back: CCFS pre-acquisition integration
costs - 5.2
Tax on CCFS pre-acquisition integration costs - (1.6)
Add back: Tax on Heritable option - 2.6
Underlying and pro forma underlying profit
attributable
to ordinary shareholders 259.4 288.7
Total dividend: 25% of underlying and pro
forma underlying profit attributable to ordinary
shareholders 64.9 72.2
Less interim dividends paid:
CCFS (pre-acquisition) - (10.3)
OSB - (12.0)
Recommended final dividend 64.9 49.9
Number of ordinary shares in issue 447,312,780 445,443,454
Recommended final dividend per share 14.5 11.2
Company information
Registered office and head office
OSB House
Quayside
Chatham Maritime
Chatham
Kent ME4 4QZ
United Kingdom
Registered in England no: 11976839
https://www.globenewswire.com/Tracker?data=NBw5YfwHbbUlY2lEIrqMDisnxU2rO1HIPM-2Ta7PF9pXYxl6Ew0ljp3CeCKmo-Ay_oPTwxuYU-VIxW1m2WDDSw==
www.osb.co.uk
Registrars
Equiniti Limited
Aspect House
Spencer Road Lancing
West Sussex BN99 8LU
United Kingdom
Telephone: 0371 384 2030
International: +44 121 415 7047
Investor relations
Email:
https://www.globenewswire.com/Tracker?data=hQyxFnAD4MBnfuOGoHMa5k5iRdrNBcRd5Y_nNzcWuM4WuFV4Eq-L3VHqObMPPuEUQw8qGOplyrm9GTl6JjyIbGE0edbKa_dnShkom3378Xo=
osbrelations@osb.co.uk Telephone: 01634 838973
Private shareholders are welcome to contact the Company Secretary if
they have any questions or concerns they wish to be raised with the
Board.
(END) Dow Jones Newswires
April 08, 2021 02:00 ET (06:00 GMT)
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