TIDMSTB
RNS Number : 5039I
Secure Trust Bank PLC
22 March 2018
PRESS RELEASE
Thursday 22 March 2018
For immediate release
SECURE TRUST BANK PLC
Audited Final Results for the year to 31 December 2017
Increased profits in a year of strategic repositioning
Secure Trust Bank PLC ("STB", the "Bank" or the "Group") is
pleased to announce a Group profit before tax on continuing
operations of GBP25.0m for the year to 31 December 2017 which is a
28.9% increase on the prior year. The Group's strategic
repositioning was completed in 2017 and it is now focused on
further developing its SME, Retail Finance and Motor lending
activities. Further diversification was achieved last year
following the controlled launch of STB Mortgages and a new online
Deposit platform which helped customer lending balances to grow by
27.3%. The 2017 results reflect this strategic repositioning with
the benefits of this strategy expected to become more visible in
2018 and beyond. The Group finished 2017 with strong capital and
funding positions and its largest ever pipeline of new business in
its chosen markets. This gives the Group confidence for the period
ahead.
FINANCIAL HIGHLIGHTS
-- Underlying profit before tax including PLD of GBP31.3m (2016:
GBP27.3m) up 14.7%, in line with market expectations
-- Profit before tax from continuing operations up 28.9% to GBP25.0m (2016: GBP19.4m)
-- Common equity tier 1 ratio of 16.5% (2016: 18.0%)
-- Operating income GBP129.5m (2016: GBP107.0m) up 21.0%
-- Basic earnings per share 107.7p (2016: 77.9p) up 38.3%
-- Underlying earnings per share 116.4p (2016: 113.0p) up 3.0%
-- Proposed final dividend of 61p per share (2016: 58p per
share), to be paid in May 2018 representing a total dividend of 79p
per share (2016: 75p per share, excluding a special dividend of
165p per share paid following completion of sale of ELG)
-- Total assets GBP1.89bn (2016: GBP1.44bn) up 31.3%
Note: Underlying profit and underlying earnings per share
relates to the Group's normal recurring business activities and
comparative figures for 2016 are reported on a continuing
operations basis.
OPERATIONAL HIGHLIGHTS
-- Total customer numbers increased by 33.2% to 989,528
-- Customer deposits increased to GBP1,483.2m (2016: GBP1,151.8m) up 28.8%
-- New deposits platform launched in Q4 2017
-- Overall loan book increased to GBP1,598.3m (2016: GBP1,255.5m
- continuing operations) up 27.3%
-- Total annual new business lending volumes exceeded GBP1 billion for the first time
-- Real Estate Finance lending balances up 28.8% year-on-year to GBP580.8m
-- Invoice Finance business has funded over GBP1bn of customer invoices since inception in 2014
-- Retail finance lending balances increased by 38.8% year on year
-- Continuing high levels of customer satisfaction as measured by FEEFO
Lord Forsyth, Chairman, said:
"2017 was Secure Trust Bank's 65th year of operations, during
which we have been able to increase profits on our continuing
operations whilst successfully executing a very significant
strategic repositioning of the Group's activities. The Group enters
2018 well positioned to deliver substantial progress in the periods
ahead."
Paul Lynam, Chief Executive, said:
"During 2017 Secure Trust Bank increased its continuing profits
before tax by 29%, its customer lending by 27% and its customer
numbers by 33%. The refocusing of the Group's lending activities
has materially reduced our exposure to higher risk consumer credit,
enabling us to allocate more capital to lower risk lending. I am
confident that the benefits of this strategic repositioning will
become increasingly visible as 2018 progresses, not least as we
started this year with our largest ever pipeline of new business
opportunities."
This announcement together with the associated investors'
presentation are available on:
www.securetrustbank.com/results-reports/results-reports-presentations
Enquiries:
Secure Trust Bank PLC
Paul Lynam, Chief Executive Officer
Neeraj Kapur, Chief Financial Officer
Tel: 0121 693 9100
Stifel Nicolaus Europe Limited (Joint Broker)
Robin Mann
Gareth Hunt
Stewart Wallace
Tel: 020 7710 7600
Canaccord Genuity Limited (Joint Broker)
Andrew Buchanan
Sunil Duggal
Tel: 020 7523 8000
Tulchan Communications
Tom Murray
David Ison
Tel: 020 7353 4200
Forward looking statements
This document contains forward looking statements with respect
to the business, strategy and plans of Secure Trust Bank PLC and
its current goals and expectations relating to its future financial
condition and performance. Statements that are not historical
facts, including statements about Secure Trust Bank PLC's 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 on
circumstances that will occur in the future. Secure Trust Bank
PLC's actual future results may differ materially from the results
expressed or implied in these forward looking statements as a
result of a variety of factors. These include UK domestic and
global economic and business conditions, risks concerning borrower
credit quality, market related risks including interest rate risk,
inherent risks regarding market conditions and similar
contingencies outside Secure Trust Bank PLC's control, any adverse
experience in inherent operational risks, any unexpected
developments in regulation or regulatory and other factors. The
forward looking statements contained in this document are made as
of the date hereof, and Secure Trust Bank PLC undertakes no
obligation to update any of its forward looking statements.
Strategic report
Chairman's statement
Last year was the 65(th) anniversary of the foundation in 1952
of the Secure Trust Group. It has been a year of significant change
and the Group enters 2018 well positioned to deliver substantial
progress.
Throughout 2017 there has been a considerable repositioning of
our balance sheet. The Group ceased originating sub-prime motor
finance and medium term unsecured personal loans and in December we
sold the legacy unsecured personal loan portfolio. This year we
will continue to run down the legacy sub-prime motor book.
2018 begins with a lower risk balance sheet and our largest ever
pipeline in real estate and commercial finance. Since being
acquired by the Group five years ago our retail finance company,
V12, has grown strongly and is expected to continue to do so. The
investment in our invoice finance business is also expected to make
an important contribution. A new and highly experienced leadership
team is tasked with growing and diversifying our motor lending
operation and our nascent mortgage operation is fully operational
and writing business.
2017 was also the first full year in which the Group was listed
on the main market of the London Stock Exchange. The new enlarged
board is working well and we will continue to strengthen our
governance and respond to the changes proposed to the UK Corporate
Governance Code. I am grateful for the extensive work which has
been undertaken by the chairs of all our Board committees. During
2017 the remuneration committee implemented the remuneration policy
approved at the 2017 Annual General Meeting.
Last year we launched our first ever all employee share save
scheme and over 41% of eligible staff subscribed. I was delighted
and encouraged by such a high level of participation. I am
impressed too with our colleagues who have given their support to
local and national charities. STB has a matching funding scheme
which the Board agreed to enhance in 2017 and the busy charity
committee has coordinated more than 900 hours of volunteering. It
was a great privilege to visit the St Mary's Hospice in Birmingham
to see for myself the work and care which has been enthusiastically
supported by so many of our staff.
Our business is heavily regulated and we continue to invest in
the resources required to satisfy the requirements of the FCA and
PRA.
The Board is proposing a final dividend of 61 pence per share.
This, when added to the interim dividend of 18 pence, would mean a
full year dividend of 79 pence per share. If approved, the final
dividend will be paid on 25 May 2018 to shareholders on the
register as at 27 April 2018.
Finally, the members of the Board would like to express their
thanks to all of our colleagues across the Group for their
continued dedication and commitment.
I look forward with confidence to another year of growth
building on the hard work done in 2017.
Lord Forsyth
Chairman
21 March 2018
Chief Executive's statement
I am pleased to be able to report that on a continuing
operations basis Secure Trust Bank ('STB') increased statutory
profit before tax in 2017 by 28.9% to GBP25.0m (2016: GBP19.4m)
with the Group delivering further loan book growth of 27% to
c.GBP1.6 billion (2016: GBP1.3 billion). Underlying profit before
tax on a continuing basis was GBP27.0 million (2016: GBP27.3
million). Inclusive of continuing and discontinued operations
statutory profit before tax increased by 6.5% to GBP29.3 million
(2016: GBP27.5 million) and underlying profits on this basis were
GBP31.3m (2016: GBP32.9 million). This profit growth was achieved
notwithstanding the very significant strategic repositioning of the
bank's balance sheet away from higher margin / higher risk,
consumer unsecured and sub-prime motor lending and a substantial
investment in launching a new mortgage division and a new deposit
IT platform.
All of this took place whilst continuing to deliver positive
outcomes for customers and sustaining very high levels of customer
satisfaction.
Having largely completed the majority of the bank's balance
sheet repositioning, the Group entered 2018 with robust capital and
liquidity positions, no direct or indirect exposures to sub-prime
unsecured personal lending and a reducing exposure to sub-prime
motor finance. With new business pipelines in our SME operations at
record highs and continued good momentum in the consumer business
lines, we are well positioned in a number of attractive lending
classes and expect good progress to be made in meeting our goals
over the coming periods.
Profitable growth on a rebalanced loan book
The sale of the unsecured loan portfolio in December requires
the accounts to be presented to take account of continuing and
discontinued activities. Comparisons with 2016 are complicated by
the substantial one off profit generated by the disposal of
Everyday Loans in 2016.
Continuing operations generated statutory pre-tax profits for
2017 of GBP25.0 million which are 29% higher than the prior year of
GBP19.4 million. This growth has been achieved notwithstanding the
rundown of the higher risk consumer portfolios, the growth in lower
margin / lower risk new business, and the ongoing investment in the
business model, especially in the mortgage operations and the new
customer deposit platform.
Excluding discontinued operations, the Group's operating income
grew by 21% to a record level of GBP129.5 million (2016: GBP107.0
million) whilst operating costs rose 10.9% to GBP71.3 million from
GBP64.3 million in 2016.
Excluding discontinued operations, loan impairments of GBP33.5
million (2016: GBP23.3 million) rose by 43.8% reflecting growth in
the continuing loan portfolios, an increase in the levels of
provisions held against the sub-prime motor book that is in run
off, and an increase in the levels of interest bearing balances
written in Retail Finance.
Despite substantial investment to support future growth, costs
continue to be robustly managed as reflected in the cost to income
ratio of 55.1% (2016: 60.1%).
Prudent balance sheet and risk management
Our ongoing priority is to safeguard the reputation and
sustainability of STB through prudent balance sheet management,
investment for long-term sustainable growth and robust risk and
operational controls.
Over the last couple of years we have been investing in a new
deposit platform which went live in the final quarter of 2017. This
was a major IT programme which, as previously disclosed, is
expected to confer several benefits for the Group, enhancing the
offering, providing internet banking, and improving efficiency and
risk controls while providing flexibility to introduce new
products. The new technology is also enhancing our customer service
proposition whilst providing much greater scalability than the
previous platform.
STB seeks to limit exposure to short term wholesale funding and
interbank markets and broadly match fixed term fixed rate customer
lending with customer deposits of the same tenor and interest rate
basis. This helps us to minimise maturity transformation and
interest rate basis risk. The new deposit platform will allow us to
fund our very short term lending activities, such as Invoice
Finance and some Retail Finance, with lower cost shorter duration
deposit products thereby enhancing our competitive positioning
without diverging from our historic approach of matching assets and
liabilities.
Our year end loan to deposit ratio was 107.8% (2016: 109.0%).
Customer demand for our deposit products remains very strong, and I
am pleased to note that the majority of customers with maturing
medium term savings bonds chose to reinvest their funds into
deposit products with us.
Usage of the Bank of England's (BoE) Funding for Lending and
Term Funding Schemes remains a nominal 7% of total lending balances
and as a result we will not have big refinancing risks to manage as
these schemes are repaid over the next four years. I expect that
the closure of the schemes will alter competitive dynamics in the
market. The implication for STB is that market pricing,
particularly in mortgages, should move closer to where we have
priced lending without the benefit of the cheap BoE money and thus
our competitive position should strengthen. We have already seen
some specialist mortgage lenders increasing their pricing albeit I
expect it will take a number of months for the effects of the
closure of the schemes to work through in terms of market
dynamics.
Strong capital ratios and modest leverage
Our year end CET1 capital levels are robust with a CET1 ratio of
16.5% comparing to the 2016 year end position of 18.0%. The total
capital ratio was 16.8% and STB's leverage ratio was 12.3% (2016:
14.5%) as at 31 December 2017. This ratio is comfortably ahead of
minimum requirements and demonstrates capacity to continue growing
customer lending balances in 2018. The year on year movement is a
function of the investment of capital to support the strong growth
in the loan portfolios and an increase in the buffers all banks are
being required to hold by regulation.
Throughout 2017, the Bank of England has, via the Financial
Policy Committee and the PRA, expressed concerns about the UK
Consumer Credit market. The Financial Conduct Authority (FCA) has
echoed many of these. Both regulators have subsequently taken steps
to address their concerns and it seems increasingly possible that
the FCA will intervene in some lending markets. Our assessment is
that Secure Trust Bank continues to operate in line with regulatory
expectations and as a result we would not expect to be negatively
impacted by any regulatory changes with regard to product or
conduct.
In the recent past I have highlighted my views that risk is
being mispriced in a number of lending markets in the UK. Our early
recognition of what we regard as unsustainable market dynamics and
assessment of the economic outlook has informed the strategic
repositioning of the Group's business model over the last two years
which culminated in the sale of the legacy unsecured personal loans
portfolio in December 2017. In an understandable move to cool over
exuberant consumer lending the Bank of England decided to increase
the UK countercyclical capital buffer rate to 0.5% (of risk
weighted assets) from 0%. This is scheduled to increase further to
1% in November 2018. It is very frustrating that this buffer
applies to all banks and does not distinguish between those like
Secure Trust Bank, which have exited overheating parts of the
consumer credit markets, and others.
Customer lending activities
Strong double digit percentage growth was achieved across the
Group's loan portfolio in 2017 notwithstanding the increasingly
cautious stance taken as the year progressed, the decisions to
cease new business origination in unsecured personal lending and
sub-prime motor in the first quarter and the repayment of the
vendor loan provided to Non Standard Finance PLC in connection with
their purchase of Everyday Loans.
Total annual new business lending volumes exceeded the GBP1
billion mark for the first time and grew 16.4% to GBP1,077.1
million (2016: GBP925.3 million) which translated to an increase of
27.3% in overall balance sheet lending assets to GBP1,598.3 million
(2016: GBP1,255.5 million for continuing operations).
Consumer Finance
Total consumer lending in 2017 increased 29% to GBP726.9 million
(2016: GBP562.1 million). Our consumer finance lending strategy
during 2017 was centred on running off higher margin / higher risk
unsecured personal loan and sub-prime motor portfolios, which have
been historically profitable, and allocating capital to support the
continued growth in Retail Finance, which is shorter term in
duration and prime in nature, and higher quality new business in
Motor Finance. As noted, we ceased originating new sub-prime motor
finance and unsecured personal loans in Q1 2017. Given the ongoing
regulatory focus in the unsecured personal loan and high cost
credit markets, I feel our retrenchment from these markets was well
timed even if the repositioning has created a drag on profit
growth.
The Retail Finance point of sale business, net of provisions,
grew strongly as intended, with balances at 31 December 2017
increasing 38.8% to GBP452.3 million (2016: GBP325.9 million). Our
Retail Finance business has continued to evolve as we have grown
into one of the largest participants in this market. We are writing
a broader spectrum of business including increased levels of
interest bearing lending. This lending has higher levels of
impairments compared to interest free finance and this is factored
into our pricing to ensure we achieve our targeted risk adjusted
return. The impairments and risk adjusted returns in 2017 have been
in line with our expectations.
We made significant progress in repositioning the motor book.
During 2017 all lenders operating in the sub-prime market reported
a trend of increasing impairments. These trends would appear to
vindicate our decision to exit sub-prime motor finance after we
identified warning signs in this part of the market during the
second half of 2016. Notwithstanding the cessation of new sub-prime
loan origination, STB has been able to achieve strong lending with
lending balances, net of provisions, growing 16.3% to GBP274.6
million at 31 December 2017 (2016: GBP236.2 million). The vast
majority of motor finance business now being written is in our two
highest quality categories and is performing in line with our
expectations. The proportion of lending written in these categories
in the final quarter of 2017 was almost double that in the same
period in 2016. The average loan to value of this lending is
materially lower than has historically been the case. This change
in the new business mix is driving a significant shift in the
quality of the overall portfolio which should over time drive
higher returns. Recognising the run off nature of the sub prime
motor book we have increased the level of provision coverage held
which has driven an increase in impairments in this portfolio.
As previously announced, the unsecured personal loan (UPL)
portfolio was sold in December 2017. STB has a large amount of
experience in the UPL market, having been active in that market
since STB's formation in 1952, but at times has elected to reduce
its exposure, for instance substantially reducing our UPL activity
in 2006-08, in response to an unattractive competitor pricing
environment at the time. We intend to re-enter the UPL market once
the risk adjusted yields available become more attractive.
Business Finance
The Group's SME lending operations have grown strongly, as
targeted, and I expect further positive progress in 2018 given we
started the year with a new business pipeline which is higher than
it has ever been. Total business lending in 2017 increased 31% to
GBP824.0 million (2016: GBP631.0 million). Real Estate Finance
lending balances increased by 28.8% to GBP580.8 million as at 31
December 2017 (2016: GBP451.0 million). The bias of this portfolio
is 70% weighted in favour of residential investment finance. We
have continued to adopt a cautious stance towards Central London
house building finance. Outside of Central London demand for
property development finance has remained robust and the units we
have financed have continued to sell well, in a number of cases
faster and for higher values than originally expected. The average
LTV across the whole portfolio remains less than 60%.
Secure Trust Bank Commercial Finance, the invoice finance
division of the Bank, has had a good year and has now funded over
GBP1 billion of customers' invoices. Excluding the systemic banks,
by size we are now the 5th largest operator in the invoice finance
market but given the fragmented nature of the market we have
substantial opportunities to continue to grow very strongly in this
sector. This is evidenced by customer lending balances, which net
of provisions grew 101% to GBP126.5 million at 31 December 2017
(2016: GBP62.8 million). I continue to believe we have one of the
most capable teams of invoice financiers in the UK, supported by a
scalable modern IT platform. This, coupled with Group management's
experience in SME and corporate lending, gives STB a distinct
advantage when it comes to structuring transactions and responding
rapidly to opportunities.
In Asset Finance we continued to enjoy a good strategic
partnership with Haydock Finance during 2017. I disclosed within
the CEO's statement in the 2017 interim accounts that we had
adopted a more cautious risk appetite in Asset Finance. Customer
lending balances, originated by Haydock Finance Limited but written
by STB and fully conforming to STB's credit policies have remained
flat over the last year at GBP116.7 million compared to GBP117.2
million a year ago. In December 2017 it was announced that manager
owners of Haydock had sold a controlling stake to funds managed by
Apollo Global Management. This transaction completed in January
2018. We are in discussion with Haydock about the effect of the
change of control on our relationship.
Customer base continues to increase and customer satisfaction
levels remain very positive
Across our chosen markets we are serving a record number of
customers (989,528), an increase of 33% on the total customer base
of 742,974 as at 31 December 2016, excluding discontinued
operations.
Customer satisfaction is measured in a number of ways. It is
reassuring, that 2017 has once again seen us consistently achieve
customer satisfaction ratings in excess of 90% across all of our
products as measured by FEEFO. We also use Net Promoter Scores to
assess our customer service and these scores exhibit similar
positive trends to those derived from FEEFO.
I am delighted to confirm that for the fifth year running we
have retained the Customer Service Excellence standard. This
standard was introduced by the Cabinet Office in 2010 to replace
the Kite Mark. This indicates our customer service has been judged
to meet Government standards of excellence which are benchmarked
against high-performing organisations. The final report made
particular reference to the professionalism of our staff,
commenting on their openness and positivity about working for STB,
as well as citing the work we do for our vulnerable customers and
the initiatives we have implemented during 2017 to improve our
customer experience. I heartily congratulate my colleagues on this
fantastic achievement and echo the Chairman in thanking all of our
colleagues for their customer focus and professionalism during a
year of very significant change.
Fee based accounts
As expected, the legacy OneBill product which closed for new
business in 2009, continues to see customer numbers decline over
time. Customer numbers fell to 18,963 by 31 December 2017 compared
to 19,995 a year earlier.
Debt Managers Services ('DMS')
The markets for those debt collection agencies fully authorised
by the Financial Conduct Authority improved further in 2017 as more
operators exited the market or were consolidated within larger
entities. These attributes translated into more opportunities for
DMS in the third party debt collection and portfolio acquisition
spaces during 2017. Overall, the profit before tax of GBP0.6
million in 2017 was well above the GBP0.2 million recorded for the
prior year.
Competitive and regulatory environment
In my annual statement last year I was optimistic about the
potential that action by regulators could help to improve the
competitive positioning of smaller banks in the UK. I am therefore
pleased to say that the changes to the capital regulations
announced by the Basel Committee on Banking Supervision in December
2017 are welcomed by the Group. The primary changes relate to a)
the introduction of more risk sensitivity into the risk weights
used in the standardised approach (the approach usually adopted by
smaller banks) and b) the imposition of a capital floor whereby the
outputs generated by larger banks using the Internal Ratings Board
approach will be floored at 72.5% of the risk weights used under
the standardised approach.
To put the scale of these changes into context, I should note
that as matters currently stand the differing capital approaches
allow IRB banks to hold significantly less capital than a smaller
competitor for taking the exact same risks. These differences can
be 500%+ and are most pronounced in the residential mortgage market
and to a lesser extent the Buy to Let (BTL) market. It is evident
that the revisions announced, once fully implemented will largely
remove the substantial capital advantages enjoyed by the systemic
banks in certain lending classes. This is especially so in the
mortgage markets referred to above.
At the macro level it is apparent that the regulatory direction
of travel is to reduce the capital differentials between the
systemic and non-systemic firms which should ultimately bode well
for smaller banks. It should also benefit consumers and SMEs by
fostering competition thereby creating more innovation and choice
and reducing the risks that the taxpayer will need to fund the bail
out of failed banks in the future.
Strategic priorities
The benefits of the Group's three strategic priorities of: (i)
organic growth, (ii) diversification and (iii) M&A activity
were very clear last year. The broad based diversification in the
lending portfolios ensured that we were able to undertake a
significant strategic repositioning of our risk profile while
increasing the overall customer lending balances year on year by
21% and growing statutory pre-tax profits by 32% (on a continuing
basis).
The focus for 2018 is on
1. Organic growth in responsible lending across a diverse
portfolio of attractive segments
2. Continued investment in broadening our product offerings to
customers
3. Pursuing M&A activity on an opportunistic basis
4. Optimising our capital and liquidity strategies
5. Continuing to target delivering profit growth in the medium
term to create shareholder value
Our long-term ambition remains to grow a broad based portfolio,
balanced across consumer finance, SME finance and residential
mortgage lending.
We will continue to grow our Retail Point of Sale (V12) and
Motor propositions in the Consumer Finance sector. V12 has
delivered five years of record balance sheet and profit growth
since being acquired in January 2013. Whilst now a top five player
it has a modest market share and considerable potential to continue
growing our lending balances which are relatively short term in
duration and prime in nature. In addition to writing loans on our
own account, V12 will extend the number of retailer relationships
benefitting from the dual lending panel scheme which was initially
launched with AO.com in Q3 2017.
The market for Motor Finance in the UK is nearly GBP20 billion.
This is a highly fragmented and competitive space where we have a
GBP0.25 billion share predominantly in non-prime lending. This is
an important and profitable line of business for us. We see
opportunities to continue to grow our non-prime lending. However we
also wish to extend our proposition to target the prime section of
the market served by other specialist lenders which we estimate is
several GBPbn in scale. It is readily apparent that the lenders in
this space enjoy attractive returns on equity. In January 2018 the
new Managing Director and Finance Director for our motor finance
business commenced their roles and they have been tasked with
improving the profitability of the near prime motor business whilst
developing our strategy to enter the prime market and grow a
sizable business in this space over the next 3-5 years.
We remain committed to supporting the Government policy of
building more new homes. Our activities in this space in 2017 were
negatively impacted by the 50% increase in the risk weights applied
to the capital requirements imposed on all small banks in December
2016. The need to increase lending margins to offset the higher
capital costs dampened borrower demand for our development finance
loans in 2017. We are exploring ways to address these dynamics. Our
Loan to Gross Development Value limits will remain modest to ensure
that the borrower has hard equity in any deal and to provide a
buffer lest market values fall.
The UK invoice finance and asset finance markets are large,
fragmented and growing markets of around GBP20 billion each. We are
pleased with the progress made by STB Commercial Finance. We see
significant future growth potential and would be interested in
acquiring businesses in these spaces if the risk profile and
economics of any transaction are attractive.
The mortgage market is exhibiting greater pricing pressures at
the moment which I attribute to many lenders seeking to maximise
utilisation of the TFS scheme prior to its closure for new lending
in February 2018. As we progress through 2018 I expect pricing
pressures will ease which will allow us to compete more
effectively. As previously disclosed the creation of this new
business operation involves up-front investment and attractive
returns on equity will take time to materialise whilst we work
through the front book: back book dynamic that is a prominent
feature of mortgage lending. The Basel Committee changes referred
to above should, in time, have a positive effect on returns for
lower LTV lending undertaken by smaller banks.
We are seeking to negate the 'J' curve effect via acquisition of
existing mortgage lenders and/or portfolios which offer acceptable
risk and economic profiles. During 2017 we engaged in a number of
discussions relating to inorganic business opportunities but these
did not progress to a conclusion that was acceptable to us. Our
previous M&A activities have generated considerable shareholder
value due in part to the discipline that we apply. We will continue
to be disciplined in our approach to opportunities. It is
noteworthy that many of the portfolios currently available relate
to second charge lending. This is an area where some market
practices have drawn regulatory focus and is not a part of the
market we wish to operate in.
The Board reviews the Group's capital structure on an ongoing
basis and will explore options to optimise the capital base, which
could include the raising of Alternative Tier 1 or Tier 2 capital,
subject to market conditions and the Board determining that it is
advantageous to do so. The Group's ongoing strategy is to
significantly grow its lending operations.
Current trading and outlook
We are pleased with the new business momentum which has
continued to build as the first quarter progressed and there has
been no material change to the underlying performance of the
business in the early months of 2018. All of the leading indicators
suggest the changes made during 2017 in respect of motor finance
credit underwriting and policy will deliver the expected
improvements in impairments going forward. As such, we continue to
see potential to grow our lending portfolio in line with our
ambition.
I am pleased with the revisions made by the Basel Committee in
respect of the capital requirements of smaller lenders relative to
the systemic firms. Whilst it will take time for the benefits for
these changes to be realised, it bodes well for smaller firms.
On one hand the UK faces a period of heightened economic
uncertainty with weak consumer confidence and reduced levels of
business investment. On the other hand current UK economic
fundamentals are solid and the economy is benefiting from the
rising tide being created by stronger growth in the US, Asia and
Europe. With record employment levels and the prospect of inflation
levels subsiding as the effects of the recent appreciation of
sterling against the dollar begin to flow through, there are
certainly grounds for optimism. It seems likely that the catalyst
for a rebound in consumer and business confidence which will drive
higher GDP growth will be a positive outcome in the negotiations
for the UK's exit from the EU.
Our approach to the market reflects evolving economic conditions
and our credit appetite will be kept under review. The benefits of
our strategic repositioning should be more visible as we progress
through 2018 as the drag effects of the run off sub-prime motor
book and the investment in new business operations such as
mortgages and the deposit platform ease whilst the SME activities
continue to grow.
Our long term strategic objective is to be active in Consumer
Credit, SME Finance and Mortgage Lending. This enables flexibility
to restrict lending in areas which may be overheating as
demonstrated in 2017 and instead allocate capital for more
sustainable risk adjusted returns. Notwithstanding the current
uncertain economic outlook, I believe there remains considerable
scope to pursue our strategic priorities by developing the business
model organically and pursuing attractive acquisition
opportunities.
Paul Lynam
Chief Executive Officer
21 March 2018
Financial review
2017 2017 2017 2016 2016 2016
Continuing Discontinued Continuing Discontinued
operations operations Total operations operations Total
Underlying profit
reconciliation GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Interest, fee and
commission income 157.3 8.0 165.3 135.1 22.4 157.5
Interest, fee and
commission expense (27.8) - (27.8) (28.1) (0.1) (28.2)
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Operating income 129.5 8.0 137.5 107.0 22.3 129.3
Impairment losses (33.5) (3.4) (36.9) (23.3) (7.0) (30.3)
Operating expenses (71.3) (0.3) (71.6) (64.3) (7.2) (71.5)
Profit on sale of
NSF shares 0.3 - 0.3 - - -
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Profit before tax 25.0 4.3 29.3 19.4 8.1 27.5
Underlying adjustments
to profit (see below) 2.0 - 2.0 7.9 (2.5) 5.4
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Underlying profit
before tax (including
PLD) 27.0 4.3 31.3 27.3 5.6 32.9
Discontinued operations
- PLD - (4.3) (4.3) - (5.6) (5.6)
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Total underlying
adjustments to profit 2.0 (4.3) (2.3) 7.9 (8.1) (0.2)
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Underlying profit
before tax 27.0 - 27.0 27.3 - 27.3
Underlying tax (5.5) - (5.5) (6.7) - (6.7)
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Underlying profit
after tax 21.5 - 21.5 20.6 - 20.6
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Underlying basic
earnings per share
(pence) 116.4 - 116.4 113.0 - 113.0
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Statutory results
Profit before tax 25.0 4.3 29.3 19.4 8.1 27.5
Tax (5.1) (0.8) (5.9) (5.2) (1.6) (6.8)
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Profit after tax 19.9 3.5 23.4 14.2 6.5 20.7
Gain recognised on
disposal after tax - 0.4 0.4 - 116.8 116.8
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Profit for the period 19.9 3.9 23.8 14.2 123.3 137.5
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Basic earnings per
share (pence) 107.7 21.1 128.8 77.9 676.2 754.1
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Underlying adjustments
to profit
Fair value amortisation 0.9 - 0.9 0.9 - 0.9
Share based incentive
scheme - - - (0.7) - (0.7)
Net Arbuthnot Banking
Group management
recharges - - - 0.2 - 0.2
Transformation costs 0.8 - 0.8 3.4 - 3.4
Costs of moving to
Main Market - - - 1.4 - 1.4
Bonus payments made
in respect of ELG
sale - - - 3.5 - 3.5
Other bonus payments 0.6 - 0.6 - - -
Other items relating
to ELG sale - - - (0.8) - (0.8)
Profit on sale of
NSF plc shares (0.3) - (0.3) - - -
Discontinued operations
- ELG - - - - (2.5) (2.5)
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Underlying adjustments
to profit 2.0 - 2.0 7.9 (2.5) 5.4
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Basis of preparation
The Group uses underlying profit for planning and reporting
purposes, as it improves the comparability of information between
reporting periods. The underlying adjustments to profit relate to
non-controllable items or other items that fall outside of the
Group's core business activities, as explained further below:
Fair value amortisation relates to the acquisition of V12
Finance Group. The acquisition accounting required identifiable
assets and liabilities to be adjusted to their fair value, and
these adjustments are subject to amortisation.
The share based incentive scheme movements have been driven
primarily by market conditions, specifically the volatility of UK
share prices, rather than factors controllable by the Group. In
prior years, this charge related primarily to directors and was not
considered to be part of the Group's core business activities.
Since the launch of a number of new share schemes during 2017,
these are now more widely spread across the employees of the Group,
and therefore are now considered to be part of core business
activities, and therefore are not adjusted for in underlying
profit. The adjustment in 2017 in respect of other bonus payments
relates to a long term incentive plan that was set up for a small
number of employees on the creation of the Commercial Finance
business. The scheme is based on profits earned by that business up
to the end of 2019, and is payable in 2020.
Arbuthnot Banking Group management charges will no longer be
levied following the sale of their controlling interest in the
Group, so the adjustment of these items from underlying profit aids
comparability.
Transformation costs comprise the costs of setting up the
Group's Consumer mortgage operation and of closing the current
account and unsecured personal lending products.
The move to the Main Market, bonus payments, profit on sale of
Non-Standard Finance plc (NSF) shares and discontinued activities
also represent non-core activities, which have therefore been
adjusted for to derive underlying profit.
Discontinued operations
On 13 April 2016 the Group completed the sale of its branch
based non-standard consumer lending business, the EveryDay Loans
Group (ELG), to NSF generating a gain on disposal of GBP116.8
million. Results relating to ELG have therefore been analysed as
discontinued operations throughout these Annual Report and
Accounts.
On 21 December 2017 the Group sold a portfolio of legacy
unsecured personal loans (PLD) to Alpha Credit Solutions 8
S.à.r.l., a company owned by AnaCap Credit Opportunities III LP.
Results relating to the portfolio of unsecured personal loans have
therefore been analysed as discontinued operations throughout these
Annual Report and Accounts. The profit before tax relating to the
unsecured personal loan portfolio announced shortly after its sale
for the year ended 31 December 2016 and six months ended 30 June
2017, together with its results for the year ended 31 December 2017
on a similar basis, has been adjusted for statutory purposes as
follows:
Internal Internal
Profit Non-core cost attributable Statutory Statutory
before items of funds costs profit profit
tax added added added before after
as announced back back back tax Tax tax
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------ -------------- ----------- ----------- -------------- ----------- ----------- -----------
Year ended 31
December 2017 2.4 - 1.5 0.4 4.3 (0.8) 3.5
Six months ended
30 June 2017 1.3 - 0.8 0.3 2.4 (0.5) 1.9
Year ended 31
December 2016 2.1 (0.3) 2.2 1.6 5.6 (1.1) 4.5
------------------ -------------- ----------- ----------- -------------- ----------- ----------- -----------
Unless otherwise stated, the analyses that follow relate to
continuing operations, which represents all of the Group's
divisions, excluding ELG and PLD.
Key performance indicators (KPIs)
A summary of the KPIs is set out on page 17 of this Financial
Review. Definitions of the KPIs, their calculation and the reasons
for their use can be found in the Appendix to the Annual report on
page 189.
For this reporting period, underlying profit before tax
(including PLD) is also presented as, since PLD was disposed of
close to the 2017 year end, this aids comparability with the prior
year.
Interest, fee and commission income
Interest, fee and commission income is made up of interest
receivable, which is predominantly earned on loans and advances to
customers, and fee and commission income, which consists
principally of weekly and monthly fees from the OneBill, Commercial
Finance and Retail Finance products, and commissions earned on debt
collection activities in DMS.
Interest receivable from continuing operations was GBP141.3
million for 2017, increasing by GBP22.5 million (18.9%) on 2016,
which was driven by the growth of the Group's loan books over the
year.
Fee and commission income from continuing operations was GBP16.0
million for 2017, reducing by GBP0.3 million (1.8%) on 2016. The
fee income relating to OneBill has continued to decrease year on
year, and no fees were earned on the current account product during
2017, as these products have been closed to new business; OneBill
in 2009 and current account in 2015. This income has been replaced
by increasing levels of fees earned on Commercial Finance and
Retail Finance lending, as these books continue to grow.
Interest, fee and commission expense
Interest, fee and commission expenses is made up of interest
expense in respect of deposits from customers, and fee and
commission expense, comprising mainly fees and commissions on the
Commercial Finance and Motor products, and commissions paid on debt
collection activities in DMS.
Interest expense was GBP26.7 million for 2017, increasing by
GBP0.4 million (1.5%) on 2016. The cost of funding reduced from
2.5% for 2016 to 1.9% for 2017. This reflects the market for
funding, in which the Group has continued to be able to replace
maturing term deposits with new deposits of the same tenor, but at
a lower rate. In addition a greater proportion of new fixed bonds
have a lower tenor and this has resulted in the reduction in
interest rates of fixed rate products in the deposit book.
The Group's net interest margin reduced from 8.7% in 2016 to
8.1% in 2017 as a result of the repositioning to lower risk lower
return lending, partially offset by the reduction achieved in
funding costs.
Fee and commission expense has fallen by GBP0.7 million (38.9%).
In 2016, this consisted primarily of fees and commissions relating
to the current account product, which have ceased following the
closure of this product.
Operating income
Operating income increased by 21% to GBP129.5 million.
The net revenue margin for 2017 was 9.1% compared with 10.0% for
2016. The gross revenue margin for 2017 was 11.1% compared with
12.7% for 2016. The reductions in these margins are due to the
factors referred to above.
Impairment losses
Impairment losses during the year were GBP33.5 million (2016:
GBP23.3 million). This increase is due to the growth of the
business and consequent increase in the size of loans and advances
to customers, and additional impairment provision in respect of the
performance of certain elements of the Motor Finance back book.
This performance is expected to improve in future years as better
quality assets replace these elements.
The cost of risk for 2017 was 2.4%, compared with 2.2% for 2016.
Further analysis of the Group's loan book and its credit risk
exposures is provided in Notes 10, 12 and 29.
Operating expenses
Operating expenses from continuing operations have increased,
reflecting the investments made in the infrastructure and staff
resources of the Group to achieve growth targets, from GBP64.3
million in 2016 to GBP71.3 million in 2017. The Group's cost to
income ratio reduced to 55.1% from 60.1% for 2016.
Underlying profit
On a continuing operations basis, underlying profit before tax
was GBP27.0 million (2016: GBP27.3 million). When results for PLD
are included, underlying profit before tax is down 4.9% to GBP31.3
million (2016: GBP32.9 million).
Taxation
The effective underlying tax rate has fallen to 20.4% (2016:
24.5%). The effective rate in 2016 was impacted by a prior period
adjustment of GBP1.8 million. The new Bank Corporation tax
surcharge of 8%, which is effective from 1 January 2016, would
apply to any future taxable profits of Secure Trust Bank Plc
company that were in excess of GBP25.0 million.
Distributions to shareholders
The directors recommend the payment of a final dividend of 61
pence per share which, together with the interim dividend of 18
pence per share paid on 29 September 2017, represents a total
dividend for the year of 79 pence per share (2016: 75 pence per
share, excluding a special dividend of 165 pence per share paid
following completion of the sale of ELG).
Earnings per share
Detailed disclosures of earnings per ordinary share are shown in
Note 8 to the financial statements. Basic earnings per share
increased by 38.3% to 107.7 pence per share (2016: 77.9 pence), as
a result of the increase in profit after tax. The underlying basic
earnings per share increased by 3.0% to 116.4 pence per share
(2016: 113.0 pence per share).
Summarised balance sheet
2017 2016
GBPmillion GBPmillion
---------------------------------- ----------- -----------
Assets
Cash and balances at central
banks 226.1 112.0
Debt securities held-to-maturity 5.0 20.0
Loans and advances to banks 34.3 18.2
Loans and advances to customers 1,598.3 1,321.0
Other assets 27.9 38.8
------------------------------------ ----------- -----------
1,891.6 1,510.0
---------------------------------- ----------- -----------
Liabilities
Due to banks 113.0 70.0
Deposits from customers 1,483.2 1,151.8
Other liabilities 46.3 52.2
------------------------------------ ----------- -----------
1,642.5 1,274.0
---------------------------------- ----------- -----------
The assets of the Group increased by 25.3% to GBP1,891.6
million, primarily driven by the growth in the Group's loan
portfolios and overall cash balances.
The Group measures returns against average assets, average
equity and required equity as set out in the KPIs table on page 17.
These ratios have all fallen in comparison to the prior year, This
is as expected as the Group continues to reposition its lending
towards lower risk segments.
The liabilities of the Group increased by 28.9% to GBP1,642.5
million, primarily driven by the increase in deposits from
customers, providing funding for the Group's lending
activities.
Loans and advances to customers
Loans and advances to customers include secured and unsecured
loans and finance lease receivables. After excluding the PLD loan
book from the prior year balance sheet, the composition of the 2017
loan book remains broadly consistent with 2016, with the Consumer
Finance book being approximately 46% of total lending, and the
Business Finance book being approximately 52%. The nascent Consumer
Mortgage business currently accounts for 1% of total lending.
Loan originations in the year, being the total of new loans and
advances to customers entered into during the year, increased by
16.4% to GBP1,077.1 million (2016: GBP925.3 million). Almost half
of the new business volume (GBP520.0 million) was generated by the
Retail Finance business. This business has a shorter term on
average than the rest of the book, so this new business resulted in
a year end increase in the Retail Finance book of GBP126.4 million
(38.8%).
Further analyses of loans and advances to customers, including a
breakdown of the arrears profile of the Group's loan books, is
provided in Notes 10, 11 and 12.
Deposits from customers
Customer deposits include term, notice and sight deposits, as
well as the Group's current account and OneBill products. Customer
deposits grew by 28.8% during the year to close at GBP1,483.2
million, to fund the increased lending balances. The Group also
held GBP113.0 million of borrowings under Bank of England funding
schemes at the year-end, being drawn down under the Term Funding
Scheme.
Debt Managers (Services) Limited
Debt Managers (Services) Limited (DMS) is the Bank's debt
collection business. DMS collects debt on behalf of a range of
clients as well as for group companies. It also selectively invests
in purchased debt portfolios from fellow subsidiary undertakings
and external third parties. DMS was purchased by the Bank is
January 2013, since when it has grown its number of debts under
management to over 300,000.
In 2017 DMS performed well with revenue increasing by 24% from
GBP4.6 million to GBP5.7 million and profit before tax increasing
significantly from GBP0.2 million to GBP0.6 million. This was
achieved through the development of relationships with new and
existing clients and a broadening of service offerings.
Key performance indicators
The following key performance indicators, stated for continuing
operations, are the primary measures used by management to assess
the performance of the Group:
2017 2016
------------------------------------------------ --------- ---------
Financial KPIs:
------------------------------------------------ --------- ---------
Margin ratios
Net interest margin 8.1% 8.7%
Net revenue margin 9.1% 10.0%
Gross revenue margin 11.1% 12.7%
Cost ratios
Cost of risk 2.4% 2.2%
Cost of funds 1.9% 2.5%
Cost to income ratio 55.1% 60.1%
Underlying profit
GBP27.0 GBP27.3
Underlying profit before tax million million
GBP31.3 GBP32.9
Underlying profit (including PLD) million million
Return ratios
Underlying return on average assets 1.3% 1.6%
Underlying return on average equity 8.9% 9.8%
Underlying return on required equity 13.5% 17.1%
Funding ratios
Loan to deposit ratio 107.8% 109.0%
Total funding ratio 115.5% 110.4%
Non-financial KPIs:
Customer FEEFO ratings (mark out of 5 based
on star rating from 608 reviews (2016:
400 reviews)) 4.7 4.5
Employee survey engagement score (based
on 2017 all staff survey) 78% 85%
Environmental intensity indicator (tonnes
carbon dioxide per GBP1 million group income) 4.2 5.4
------------------------------------------------ --------- ---------
The Remuneration Report, starting on page 84, sets out how
executive pay is linked to the assessment of key financial and
non-financial performance metrics.
Capital, leverage and liquidity
Capital
The Group's capital management policy is focused on optimising
shareholder value over the long-term. Capital is allocated to
achieve targeted risk adjusted returns whilst ensuring appropriate
surpluses are held above the minimum regulatory requirements. The
Board reviews the capital position at every Board meeting.
The Group's regulatory capital is divided into:
-- CET1 which comprises shareholders' funds, after deducting
intangible assets and deferred tax assets which have arisen due to
losses.
-- Tier 2 capital which comprises the collective allowance for
impairment. Under IFRS 9, there is no longer a collective
allowance, and therefore at 1 January 2018 the Group will not hold
any Tier 2 capital.
The Group's Individual Capital Adequacy Assessment Process
("ICAAP") includes a summary of the capital required to mitigate
the identified risks in its regulated entities and the amount of
capital that the Group has available. All regulated entities within
the Group have complied during the financial year with all of the
externally imposed capital requirements to which they are
subject.
The Group operates the standardised approach to credit risk,
whereby risk weightings are applied to the Group's on and off
balance sheet exposures. The weightings applied are those
stipulated in the Capital Requirements Regulation.
2017 2016
GBPmillion GBPmillion
----------------------------------- ----------- -----------
Capital
CET1 capital 238.9 227.4
Total Tier 2 capital 4.4 5.3
----------------------------------- ----------- -----------
Total capital 243.3 232.7
----------------------------------- ----------- -----------
Total Risk Exposure 1,446.1 1,264.0
----------------------------------- ----------- -----------
2017 2016
% %
----------------------------------- ----------- -----------
CRD IV ratios
CET1 capital (group consolidated) 16.5 18.0
Leverage ratio 12.3 14.5
----------------------------------- ----------- -----------
An analysis of CET1 capital can be found in Note 32 to the
financial statements.
Total Risk Exposure has increased by 14.4% to GBP1,446.1 million
reflecting the significant growth in both Business Finance and
Consumer Finance Lending, and the increase in the risk weights
applied to residential development lending activities from 100% to
150% as advised by the Bank of England in December 2016.
The CET1 capital ratio is the ratio of CET1 capital divided by
the Total Risk Exposure. The Group has maintained a robust CET1
capital ratio and this provides a significant capital buffer for
continued growth.
Leverage
The Basel III framework introduced a relatively simple,
transparent, non-risk based leverage ratio to act as a
supplementary measure to the risk-based capital requirements. The
leverage ratio is intended to restrict the build-up of leverage in
the banking sector to avoid destabilising deleveraging processes
that can damage the broader financial system and the economy,
whilst reinforcing the risk-based requirements with a complementary
simple, non-risk based 'backstop' measure.
The Basel III leverage ratio is defined by the Capital
Requirements Regulation as Tier 1 capital divided by on and off
balance sheet asset exposure values, expressed as a percentage. The
UK leverage ratio framework sets a minimum ratio of 3.0%, which
increased to 3.25% on 1 January 2018.
As shown in the table above, the Bank has a leverage ratio at 31
December 2017 of 12.3% (31 December 2016: 14.5%), comfortably ahead
of the minimum requirement.
Liquidity
The Group continues to manage its liquidity on a conservative
basis by holding High Quality Liquid Assets and utilising
predominantly retail funding from customer deposits. In December
2012, Secure Trust Bank was admitted as a participant in the Bank
of England's Sterling Money Market Operations under the Sterling
Monetary Framework, to participate in the Discount Window Facility.
From July 2013, the Group was permitted to draw down facilities
under the Funding for Lending Scheme. Funding for Lending Scheme
monies were maintained as a liquidity buffer, above that required
to support lending. During 2017, these borrowings were repaid by
the Group, and exposure to the Funding for Lending Scheme ended.
Subsequently, funds were redrawn for a similar purpose under the
new less expensive Term Funding Scheme.
At 31 December 2017 and throughout the year, the Group had
significant surplus liquidity over the minimum requirements due to
its stock of High Quality Liquid Assets, in the form of the Bank of
England Reserve Account and UK Treasury Bills. As shown in the
table below, total liquid assets increased by 77% from GBP150.2
million to GBP265.4 million, with the High Quality Liquid Assets
balance being GBP231.1 million.
2017 2016
GBPmillion GBPmillion
--------------------- ----------- -----------
Liquid assets
Aaa - Aa3 231.1 132.0
A1 - A3 29.3 13.2
Unrated 5.0 5.0
--------------------- ----------- -----------
Liquidity exposures 265.4 150.2
--------------------- ----------- -----------
The Group has no liquid asset exposures outside of the United
Kingdom and no amounts that are either past due or impaired.
The Group's Liquidity Coverage Ratio ("LCR"), and other measures
used by management to manage liquidity risk, are described in the
Principal Risks and Uncertainties section of the Strategic
Report.
Business review: Business Finance
Real Estate Finance
Real Estate Finance was formed as a division within the Group in
2013. The division supports SMEs in providing finance principally
for residential development and residential investment.
What we do
Residential Development
The Group lends to enable the development of new build property,
commercial to residential conversions (including those with
permitted development rights) and refurbishment projects.
Residential Investment
The Group lends on portfolios of residential property where the
rental income will repay the underlying borrowing over a term
period. This excludes the regulated buy to let mortgage sector.
Other lending
The Group has limited appetite for commercial lending (either
development or investment) and has limited exposure to mixed
development schemes.
How we do it
Financing is typically provided over a term of up to five years
with prudent loan to value targets, with a 60% Loan to Gross
Development Value to residential house builders. More restrictive
policies are implemented from time to time as required; for
instance the Group reduced its financing of residential
developments in Central London in 2015. The Group's Loan to Gross
Development Value / Loan to Value ("LTV") ratios average 58% across
all lending areas.
The Real Estate Finance team is staffed by experienced bankers
with proven property lending expertise. The team provides full
support to customers and introducers over the life of the
products.
Revenue and lending performance vs prior years
2017 2016 2015
GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- -----------
Lending revenue 32.3 28.4 20.3
Lending balance 580.8 451.0 368.0
Impairment (gains)/losses (0.2) 0.1 -
--------------------------- ----------- ----------- -----------
2017 performance
The Group has continued to grow its Real Estate Finance business
during 2017, with balances up 29% in the year. Growth has continued
to be concentrated on Investment business, which grew by 47%,
whilst Development lending fell by 2% in the year. This reflected
repayments on a number of high-value developments in London, all of
which repaid in full, and the impact of higher capital requirements
on Development lending, which has limited the amount of new lending
the Group was prepared to write. The lower yielding Investment book
now represents 72% of the overall portfolio, and this change in
product mix explains the lower level of growth in lending revenues
in the year compared to balance growth. The increase in balances
has not been at the expense of credit quality, with the overall LTV
ratio reducing by 1% in the year. No specific losses have occurred,
enabling the Group to reduce the overall level of provisions by
GBP0.2 million compared to 2016.
Looking forward
The business remains committed to growing the book further in
2018, but remains cautious around credit policy, especially in the
light of more uncertain market conditions. Appetite for Development
business remains and opportunities to mitigate the capital impact
are being investigated, whilst the business will continue to seek
to diversify its geographic and product mix to bring further
balance to the book.
Asset Finance
Asset Finance was formed as a division within the Group in
December 2014.
What we do
The Asset Finance business provides funding to support SME
businesses in acquiring commercial assets, such as building
equipment, commercial vehicles and manufacturing equipment.
How we do it
The Asset Finance business is operated via a strategic
partnership with Haydock, a well-established asset finance company
operating across the UK. Haydock provides a full business process
outsourcing service to the Group and also assists the Group in
sourcing new business and providing support to the Group's clients
on an ongoing basis. All of the lending written fully conforms to
the Group's credit policies, risk appetite or other specific
authorisations.
The current route to market is via introducers. The Group offers
hire purchase and finance lease arrangements with terms of up to
five years.
Revenue and lending performance vs prior years
2017 2016 2015
GBPmillion GBPmillion GBPmillion
------------------- ----------- ----------- -----------
Lending revenue 8.5 7.8 2.4
Lending balance 116.7 117.2 70.7
Impairment losses 1.0 0.6 -
------------------- ----------- ----------- -----------
2017 performance
The business took the decision in the second half of 2016 to
limit its exposure to some SME markets. Accordingly, the level of
new business written in 2017 was lower than in 2016, with the
overall lending ending broadly flat against the prior year. Income
was 9% higher reflecting higher average balances over the year. The
business saw lower overall yields in 2017, reflecting the impact of
market conditions.
Impairment losses increased by GBP0.4 million in the year. The
overall book quality remained strong, with arrears balances
reducing to 2.5% of the book at 31 December 2017 compared to 4.3%
at the 31 December 2016.
Looking forward
The asset finance division has operated through a partnership
with Haydock Finance to date. With the sale of the Haydock business
confirmed on 31st January 2018, the business is currently assessing
future options.
Commercial Finance
Commercial Finance was formed as a division within the Group in
2014.
What we do
The division specialises in providing a full range of invoice
financing solutions to UK businesses including invoice discounting
and factoring.
Invoice discounting services provide access to funding and
release typically up to 90% of the value of qualifying invoices, in
confidence and allowing clients to stay in control of sales ledger
management.
Factoring services, where the sales ledger management is passed
onto the Group, may also provide access to funding of typically up
to 90% of the value of qualifying invoices and often results in the
Group managing credit control, cash allocation, statement and
reminder letter distribution.
Other assets can also be funded either long or short term and
for a range of loan to value ratios alongside other facilities.
How we do it
Commercial Finance complements the broader SME lending
proposition which has been developed by the Group. The business
also provides SME commercial owner occupiers with finance to buy
the property they trade from in conjunction with other financing
facilities.
The division has built a strong team of proven business
development, credit and operational professionals who have
delivered a robust and compliant operational model.
Revenue and lending performance vs prior years
2017 2016 2015
GBPmillion GBPmillion GBPmillion
------------------- ----------- ----------- -----------
Lending revenue 7.2 4.6 1.6
Lending balance 126.5 62.8 29.3
Impairment losses 0.1 0.2 0.3
------------------- ----------- ----------- -----------
2017 performance
The Commercial Finance business continued to drive strong
growth, with lending balances more than doubling in the year.
Income also grew strongly against a marginal increase in costs.
Impairment losses continue to be minimal.
Alongside this excellent performance, the business has continued
to focus on its infrastructure. The recruitment of a number of high
calibre people has led to a significant strengthening of the
team.
Looking forward
The team has built a reputation for high quality service,
particularly within the market sectors that the Group is focusing
on. As a result, the prospects for future growth are encouraging.
To augment this, Commercial Finance is intending to develop a
regional footprint which will provide the Group with a more
scalable business model.
Business review: Consumer Finance
Retail Finance
Retail Finance includes lending products for in-store and online
retailers to enable consumer purchases.
What we do
The Bank's Retail Finance business provides unsecured, prime
lending products to the UK customers of its retail partners to
facilitate the purchase of a wide range of consumer products across
in-store, mail order and online channels. This business is now
driven by V12 Retail Finance, which was acquired in 2013 and has
provided finance in cooperation with its retail partners for more
than 20 years. The V12 point of sale system is used by the Group's
retail partners and Retail Finance is administered in V12 Retail
Finance's offices in Cardiff.
Retail Finance products are unsecured, fixed rate and fixed term
loans of up to 84 months in duration with a standard maximum loan
size of GBP25,000. The average new loan is for GBP1,000 over a 24
month term. Lending is restricted to UK residents who have a good
credit history and can demonstrate that they can afford to repay
the loan.
The finance products are either interest bearing or have
promotional credit subsidised by retailers, allowing customers to
spread the cost of purchases into more affordable monthly
payments.
How we do it
The Group operates an online eCommerce service to retailers,
providing finance to customers through an online paperless
processing system. This includes allowing customers to digitally
sign their credit agreements, thereby speeding up the pay-out
process, and removing the need to handle and copy sensitive
personal documents through electronic identity verification.
The Group serves retailers across a broad range of retail
sectors including cycle, music, furniture, outdoor/leisure,
electronics, dental, jewellery, home improvements and football
season tickets.
The Group provides finance to customers of a large number of
retailers including household names such as Evans Cycles, AO.com,
Jessops, Halfords, DFS, Sofology and Watchfinder.
Revenue and lending performance vs prior years
2017 2016 2015
GBPmillion GBPmillion GBPmillion
------------------- ----------- ----------- -----------
Lending revenue 50.7 36.7 24.2
Lending balance 452.3 325.9 220.4
Impairment losses 13.8 9.5 5.2
------------------- ----------- ----------- -----------
2017 performance
The Retail Finance business has continued to grow strongly, with
new gross lending volumes increasing to GBP520.0 million (an
increase of 31% on the previous year). This has driven a further
significant increase in lending assets, which during the year rose
to GBP452.3 million (December 2016: GBP325.9 million).
Each of the three largest sub-markets for the business (sports
and leisure, furniture and consumer electronics) have contributed
to this growth, which as in previous years has been achieved
through a combination of gaining increased market share and sector
growth. In addition, Furniture and Jewellery finance have seen
positive new business levels influenced by the introduction of new
retailers into the Retail Finance portfolio.
Lending revenue increased by 38% to GBP50.7 million (2016:
GBP36.7 million). Impairment losses were well controlled at GBP13.8
million (2016: GBP9.5 million).
Looking forward
The Group plans continued growth in Retail Finance during 2018
with the focus on acquiring increased market share across its
target markets including cycle, music, furniture, outdoor/leisure,
electronics, dental, jewellery, home improvements and football
season tickets.
To underpin the continued growth, the Group continues to invest
in initiatives to further enhance its systems capabilities, to
ensure that quality of service to both retailers and customers is
maintained or improved. This includes the continued expansion of
its Retail Finance workforce.
Motor Finance
Finance is arranged through motor dealerships and brokers and
involves fixed rate, fixed term hire purchase arrangements,
predominantly on used cars.
What we do
The Group's Motor Finance business began lending in 2008 under
the Moneyway brand and provides hire purchase lending products to a
wide range of customers including those who might otherwise be
declined by other finance companies. This helps the Group's
customers to gain the freedom and flexibility that motoring gives
to their lives as well as helping introducers to sell more
cars.
Motor Finance agreements are secured against the vehicle being
financed.
As the Group is lending into the near-prime market the majority
of vehicles financed are predominantly volume franchise used
cars.
How we do it
The Bank distributes its Motor Finance products via UK motor
dealers, brokers and internet introducers. New dealer relationships
are established and managed by our UK-wide Motor Finance sales team
with all introducers subject to a strict vetting policy, which is
reviewed on a regular basis.
The technology platform used allows Moneyway to receive
applications online from its introducers, to provide an automated
decision, document production through to pay-out to dealer and
ongoing in-life management.
Motor lending is administered in the Group head office in
Solihull; however the UK motor dealers and brokers are UK-wide.
Lending performance v prior years
2017 2016 2015
GBPmillion GBPmillion GBPmillion
------------------- ----------- ----------- -----------
Lending revenue 47.1 40.5 33.3
Lending balance 274.6 236.2 165.7
Impairment losses 20.8 14.6 7.3
------------------- ----------- ----------- -----------
2017 performance
The Motor Finance business saw a reduction in new business
volume from GBP146.8 million in 2016 to GBP142.8 million in 2017.
The business narrowed its credit parameters during 2017 in order to
reduce potential future impairment losses. During the period the
business stopped offering a product in the prime market sector;
however the business is examining ways of repositioning a prime
offer in the future.
Impairment losses for the year increased from GBP14.6 million to
GBP20.8 million reflecting the performance of the sub-prime motor
lending discontinued during 2017. The Motor Finance leadership has
increased levels of resource and delivered process improvement
throughout 2017 within the Collections and Recoveries teams.
Lending assets to customers increased by 16% during the year and
lending revenue grew by 16% to GBP47.1 million.
Looking Forward
The Motor Finance business is developing initiatives to enhance
system capabilities and to deliver a broader range of products.
This is expected to improve the credit quality of the portfolio and
drive business growth.
Alongside these initiatives, the business will continue to focus
on the non-prime market sector through its existing introducer
channel. Following the narrowing of its credit parameters in 2017
the shift in business mix towards lower risk lending is expected to
continue driving improvements in overall portfolio quality.
To further support strategic development, the business has made
some key appointments to the Motor management team and will
continue to strengthen the depth and experience of the team as the
business expands.
Personal Lending
Personal unsecured loans are fixed rate, fixed term products
with payments received monthly in arrears. Loan terms are between
12 months and 60 months with advances varying from GBP1,000 to
GBP15,000. Loans were provided to customers for a variety of
purposes including home improvements, personal debt consolidation
and for the purchase of vehicles.
In January 2017, the Group announced its intention to cease
originating new personal loans and this segment closed to new
business. On 21 December 2017, the Group sold the remaining loan
portfolio to Alpha Credit Solutions.
Revenue and lending performance vs prior years
2017 2016 2015
GBPmillion GBPmillion GBPmillion
------------------- ----------- ----------- -----------
Lending revenue 8.0 11.2 17.2
Lending balance - 65.5 74.3
Impairment losses 3.4 4.4 4.8
------------------- ----------- ----------- -----------
2017 performance
Lending revenue declined as expected given the run-off of the
book. A profit before tax of GBP0.5 million was generated on the
sale of the portfolio.
Looking forward
The Group continued to administer the portfolio in the early
part of 2018, until the completion of the migration of the
portfolio to a third party administrator appointed by the
purchaser. The market will continue to be monitored and the Group
will consider re-entering it once returns are better aligned with
risk.
Business review: Consumer Mortgages
Consumer Mortgages was launched on the 20th March 2017. The
division supports residential customers who are underserved by the
traditional high street lenders.
What we do
The Group lends to individuals who wish to purchase a property
or remortgage their current property.
How we do it
The UK has approximately 4.6 million self-employed and contract
workers. In addition, there is a growing population of individuals
with complex income and recently restored credit history. These
potential customers have been underserved by traditional high
street lenders whose operating models are based on high volumes of
simple, straight forward cases. Consumer Mortgages provide, through
intermediaries, competitive fixed rate mortgage products to people
whose personal circumstances do not fit the norm but are still
credit worthy individuals with good affordability.
Financing is typically provided over a term of up to 35 years
with fixed interest rate periods of 2, 3 and 5 years. The Group's
purchase and remortgage products currently have a maximum loan to
value of 85% and a maximum loan size of GBP2 million.
The Consumer Mortgage team is staffed by experienced mortgage
and banking individuals with proven property lending expertise and
underwriting skills. The team provides full support to customers
and introducers over the life of the products.
Revenue and lending performance vs prior years
2017 2016 2015
GBPmillion GBPmillion GBPmillion
------------------ ----------- ----------- -----------
Lending revenue 0.1 - -
Lending balance 16.5 - -
Impairment losses - - -
------------------ ----------- ----------- -----------
2017 performance
Since launch the business has grown steadily whilst testing
systems and processes to ensure they are resilient. The 2017
emphasis on building a compliant scalable business with excellent
customer service has put the Group in a good position to grow the
business in 2018.
Looking forward
Consumer Mortgages has steadily built out its distribution
partners and the plan is to continue to expand through 2018; in
January 2018 the business launched with Legal and General, the
largest mortgage club in the UK. Additionally the Group is looking
to extend its product range and proposition to customers that are
underserved and who are aligned to STB's target market.
Business review: Savings
The Group undertakes its funding primarily via retail savings;
attracting balances with competitive rates of interest advertised
on best buy tables and applied for and serviced online with UK
based telephone support.
What we do
The Group's retail savings consist primarily of notice accounts
and fixed term savings, with a small proportion of instant access
accounts, available to individuals as well as private businesses.
Individuals and business accounts are separately priced to reflect
differences in the operational risks and costs.
Accounts are simple in design with savings covered by the UK
Financial Services Compensation Scheme up to the specified
limits.
The key terms of accounts that are usually offered from time to
time are summarised below:
-- Mixture of products ranging from 90 to 180 day notice periods
and one to five year fixed term savings.
-- Minimum balance of GBP1,000.
-- Maximum balance of GBP1 million for sole account holders and
GBP2 million for business and joint accounts.
-- Annual interest on fixed term accounts, quarterly on notice
accounts, with the option to capitalise onto the existing account
or pay away for income.
The OneBill account had been in operation for many years and was
designed to aid customers with their household budgeting and
payments process. Customers provided the Group with details of
their annual bills (including rent, utility bills, insurance and
telephone line rental) which the Group aggregated and then
calculated a fixed weekly or monthly payment schedule to ensure the
bills were paid on time. This enabled customers to spread the cost
of their bills throughout the year in addition to receiving direct
debit discounts and all supplier contact being handled by the
Group. The Group charges a monthly fee for this service. The
product was closed to new customers in 2009.
How we do it
By virtue of the absence of a branch network, a policy of not
cross-subsidising loss making products with profitable ones and an
operational model based on digital self-service, the Group is able
to offer competitive rates and has been successful in attracting
high volumes of deposits, particularly in short timescales, from a
wide range of customers. This provides a funding profile which
gives additional financial security to the business.
The Group enters the market for deposits as and when it is
necessary and maintains a funding strategy of broadly matching the
term and tenor of its customer savings to the desired maturity
profiles of the Group which are primarily determined by the
interest rates and terms offered on loans and advances to
customers. This strategy seeks to help mitigate maturity
transformation and interest basis risks.
The marketing methods employed include providing information
about the savings accounts offered on price comparison websites
(for example Moneysupermarket), newspaper best buy tables and
articles and via online endorsement (for example Money Saving
Expert). In addition to attraction based on interest rate,
customers choose Secure Trust Bank based on its financial standing,
UK based operation and high standards of cyber and operational
security.
The Group is able to adjust the mix of interest rate offered and
term or notice period in a manner that allows it to raise funding
quickly. As part of this funding strategy, the Group may only offer
savings accounts for limited periods of time and, from time to
time, may not offer new products to customers at all. The Group
will cease offering products when the Group's need for funding at
that time has been satisfied.
Savings balances vs prior years
2017 2016 2015
GBPmillion GBPmillion GBPmillion
---------------------- ----------- ----------- -----------
Notice deposits 455.3 373.8 404.9
Fixed Term Savings 1,013.4 762.8 588.7
Sight/Instant Access 14.5 15.2 39.5
---------------------- ----------- ----------- -----------
Total Balances 1,483.2 1,151.8 1,033.1
---------------------- ----------- ----------- -----------
2017 performance
2017 saw the Group further grow its savings balances by GBP331.4
million, 28.8%, through a period of strong demand for its
competitive notice and bond products available to new customers and
retention offers to existing customers whose loyalty it intends to
continue to reward with long term competitive rates.
In October 2017, the Group successfully implemented a new IT
platform onto which all existing savings customers were migrated.
This new platform enables the Group to further diversify its
product range with the future development of ISAs and limited
access products, offer customers the ability to self-service their
accounts via online banking with the associated cost and efficiency
savings and enhance its risk control framework against broader
cyber and financial crime risks. At the point of publishing, the
Group has already raised over GBP67 million on this new
platform.
Looking forward
The Group expects competition for savings balances to heighten
through 2018 and into 2019 with the end of the Bank of England's
Term Funding Scheme, with those institutions that have relied on
this source of funds as a primary method of funding growth in
recent years re-entering the market for retail funding and
increasing the cost of funds. As such, the Group is continuing to
invest in diversification and development of its savings
function.
With the successful delivery of the new savings IT platform, the
Group is now undertaking a period of gradual development with new
capability being rolled out in a controlled manner. This has
commenced with the launch of new product options such as
capitalised interest and internet banking for new customers.
The next steps will be to further roll out the capability of the
new platform to respond to customer feedback and demand. In
particular, internet banking will be made available to existing
customers and the ability to self-serve accounts introduced. This
will include applying for new accounts and providing maturity
instructions online, and contacting the Group's UK based customer
service team by secure messaging.
The Group's also intends to widen its product range, including
the launch of Cash ISAs and limited access accounts. These products
will lower the Group's interest expense over time as volumes
grow.
Principal risks and uncertainties
Risk overview
On an ongoing basis, the Directors carry out a robust assessment
of the principal risks facing the group, including those that would
threaten its business model, future performance, solvency or
liquidity. The following are considered to be the principal risks
facing the Group:
Risk Description
----------------- ------------------------------------
Credit Risk The risk that a counterparty
will be unable to pay amounts
in full when due
----------------- ------------------------------------
Liquidity Risk The risk that the Group will
encounter difficulty in meeting
obligations associated with
its financial liabilities
that are settled by delivering
cash or another financial
asset
----------------- ------------------------------------
Operational Risk The risk of direct or indirect
loss arising from a wide
variety of causes associated
with the Group's processes,
personnel, technology and
infrastructure, and from
external factors other than
the risks identified above
----------------- ------------------------------------
Capital Risk The risk that the Group will
have insufficient capital
resources to support the
business
----------------- ------------------------------------
Market Risk The risk that the value of,
or revenue generated from,
the Group's assets and liabilities
is impacted as a result of
market movements, predominantly
interest rates
----------------- ------------------------------------
Conduct Risk The potential for customers
(and the business) to suffer
financial loss or other detriment
through the actions and decisions
made by the business and
its staff
----------------- ------------------------------------
Regulatory Risk The risk that the Group fails
to be compliant with all
relevant regulatory requirements
----------------- ------------------------------------
Notes 28 to 32 to the financial statements provide further
analysis of certain financial risks.
Further details of the principal risks, the changes in risk
profile during the 2017 financial year and the Group's risk
management framework are given below:
Credit risk
Description Mitigation
-------------------------------------- -------------------------------------
Credit risk is the risk that The Group manages credit
a counterparty will be unable risk through internal controls
to satisfy their debt servicing and through a three lines
commitments when due. Counterparties of defence model. The first
include the consumers to line is the business operation
whom the Group lends on an team with the credit risk
unsecured basis and the SMEs team being second line and
to whom the Group lends on internal audit being the
a secured basis as well as third line. The Board Risk
the market counterparties Committee oversees the Consumer
with whom the Group deals. Credit Risk Committee and
SME Credit Committee, which
are the monitoring committees
for credit risk. The Board
Risk Committee also approves
lending authorities in respect
of SME lending.
Each consumer lending product
has a credit risk committee
which reviews business performance
from new application metrics
through to loss performance
by business type and introducer.
Policy and scorecard changes
are approved at this committee.
The Group has pre-determined
limits laid down by the Board
Risk Committee that reflect
the Bank's appetite for volume
and quality of business by
sector and introducer.
For Real Estate Finance and
Commercial Finance, lending
decisions are made on an
individual transaction basis,
using expert judgement and
assessment against criteria
set out in the lending policies.
Asset Finance lending is
outsourced to Haydock, who
operate in line with the
Group's credit policies and
risk appetite. The Group's
employees based in Haydock's
premises assess this lending
for compliance with policy.
Exposure to credit risk is
also managed in part by obtaining
security. Motor Finance loans
are secured against motor
vehicles. Mortgages are secured
against land/property and
Real Estate Finance and Asset
Finance loans are secured
against property and tangible
assets respectively. Commercial
Finance advances are secured
against a debtor book, inventory
or property if a commercial
mortgage is provided.
Management monitors the ratings
of the counterparties in
relation to the Group's loans
and advances to banks. There
is no direct exposure to
the Eurozone and peripheral
Eurozone countries.
Forbearance
The Group does not routinely
reschedule contractual arrangements
where customers default on
their repayments. It may
offer the customer the option
to reduce or defer payments
for a short period, in which
cases the loan will retain
the normal contractual payment
due dates and will be treated
the same as any other defaulting
cases for impairment purposes.
-------------------------------------- -------------------------------------
Change - Improved
Consumer Finance credit risk
The Group ceased making unsecured personal loans to consumers in
January 2017, as a result of the competitive landscape and concerns
over general over-indebtedness in the market place. The remaining
portfolio was sold in December 2017, as set out in Note 37.
The Group continues to grow its Retail Finance lending book
through interest free, interest bearing and Buy Now Pay Later
propositions. Pricing for each of these product types is set to
ensure that the expected return for each product is achieved.
Pricing meetings are held monthly to review performance against
pricing expectations for the top 30 introducers. Application
trends, arrears and loss trends are monitored monthly by the Credit
Risk Team. A new scorecard, built by industry risk modelling
experts, was implemented in December 2017 and is expected to ensure
further measured growth and improved loss performance in 2018.
The Group's Motor Finance business has continued to grow in
2017. The last two years have seen increased competition in the
motor finance arena with several companies competing in the same
segments of the market. This resulted in the Group receiving poorer
quality customers and higher than expected impairments last
year.
The Group is expecting 2018 to be challenging for Motor Finance
consumers as the UK witnesses historic high levels of consumer
credit for individuals. Secure Trust Bank has taken the decision to
de-risk its business and has stopped lending in the three highest
risk tiers of business. The Group has implemented a new scorecard
which is providing the expected improvement in bad debt rates and
an improved distribution of customer quality across lower risk
tiers of business. Further improved performance is expected in 2018
as the business written on the higher risk tiers runs off replaced
with better quality higher scoring business.
The Group is strengthening the experience of the Motor
management team, including the appointment of a new Managing
Director and Finance Director. The business is developing its
system capabilities and product set, in order to improve the credit
quality of the portfolio and drive business growth.
Secure Trust Bank entered the Consumer Mortgage market in 2017.
The Group offers basic fixed term mortgage and re-mortgage products
for those good quality customers with non-straightforward
circumstances that struggle to meet the requirements of high street
lenders. All loans are secured on the applicant's property. The
Group is making a cautious entry into the market, with lending
balances of GBP16.5 million at 31 December 2017.
Business Finance credit risk
Lending to this sector has continued to grow, with continued
application of robust risk governance, credit appetite and lending
policies, alongside the significant experience within the lending
teams. This has served the Group well to date as it continues to
assess the potential impacts of the UK's decision to leave the
European Union, particularly in the Central London Real Estate
Market, where risk appetite remains substantially reduced and
lending has been pared back.
A programme to develop probability of default modelling for each
of the Business Finance portfolios commenced in 2015 and now
following successful testing and calibration has been adopted in
full from December 2017.
Business Finance impairments and arrears have remained minimal
to date. Management continues to closely monitor the portfolios and
the external events and environment that could impact on each of
them.
Concentration risk
Management assesses the potential concentration risk from
geographic, product and individual loan concentration. Due to the
well diversified nature of its lending operations, the Group does
not consider there to be a material exposure arising from
concentration risk.
Liquidity risk
Description Mitigation
------------------------------------------------------------- --------------------------------------
Governance of liquidity risk
management
Risk tolerance The liquidity requirements
The Group's Board has agreed of the Group are mainly met
a liquidity risk appetite by maintaining funds in its
to ensure that adequate liquidity Bank of England reserve account
resources are held to meet to cover any short-term net
its Overall Liquidity Adequacy outflow requirements. Longer
Rule (OLAR) and to meet the term funding is also in place
minimum Liquidity Coverage for structural liquidity
Ratio (LCR). and funding requirements.
The Group assesses and formally The Group is required to
demonstrates the adequacy meet daily cash flow requirements
of its liquidity through arising from maturing deposits
the Internal Liquidity Adequacy and loan draw-downs, and
Assessment Process (ILAAP). maintains significant cash
As part of the ILAAP, the resources to meet all of
Group conducts regular and these needs as they fall
comprehensive liquidity stress due.
testing to ensure compliance
with OLAR.
------------------------------------------------------------- --------------------------------------
Structure and responsibilities
for liquidity risk management
The Group has a formal governance The Risk Function is responsible
structure in place to manage for ensuring that appropriate
and mitigate liquidity risk risk management processes
on a day to day basis. The and controls are in place,
Board sets and approves the and that they are sufficiently
Group's liquidity risk management robust, so as to ensure that
strategy. The ALCO, comprising key risks are identified,
senior management and executives assessed, monitored and mitigated.
of the Group, meets monthly
to review liquidity risk
against set thresholds and
risk indicators including
early warning indicators,
liquidity risk tolerance
levels and ILAAP metrics.
These metrics are managed
on a day-to-day basis by
the Group's treasury function.
------------------------------------------------------------- --------------------------------------
Internal liquidity reporting
Liquidity metrics are monitored The primary measure used
daily through daily liquidity by management to assess the
reporting and monthly through adequacy of liquidity is
ALCO. Metrics are also included the Overall Liquidity Adequacy
in the Monthly Information Rule (OLAR), which is the
pack tabled at the Group's Board's own view of the Group's
Executive Committee (Exco), liquidity needs as set out
Board Risk Committee and in the Board approved ILAAP.
the Board.
------------------------------------------------------------- --------------------------------------
Communication of liquidity
risk strategy, policies and
practices across business The Group's approach to managing
lines and with the Board liquidity is to ensure, as
The Group's ALCO is responsible far as possible, that it
for implementing and controlling will always have sufficient
the liquidity risk appetite liquidity to meet its liabilities
established by the Board. when due, under both normal
ALCO monitors compliance and stressed conditions,
with the Group's policies and can fund its assets at
and oversees the overall reasonable cost and without
strategy, guidelines and incurring unacceptable losses
limits so that the Group's or risking damage to the
future plans and strategy Group's reputation through
can be achieved within risk a failure to meet its obligations.
appetite.
------------------------------------------------------------- --------------------------------------
Funding strategy
The Group's funding risk The Group maintains at all
appetite is to ensure that times liquidity resources
the Group has access to stable which are adequate, both
funding markets and is not as to amount and quality,
reliant on any single source to ensure that there is no
of funding. The Group is significant risk that its
mainly funded by capital liabilities cannot be met
and customer deposits. The as they fall due. The Group
Group also has limited borrowings maintains a buffer of unencumbered
under Bank of England funding High Quality Liquid Assets
schemes but does not have (HQLA) that is available
other direct exposures to to meet its liquidity requirements.
wholesale markets. Funding
strategy is managed centrally.
------------------------------------------------------------- --------------------------------------
Liquidity risk mitigation
techniques The Group's liquidity risk
The Group seeks to mitigate appetite is to ensure that
liquidity risk through a adequate liquidity resources
number of strategies and are held to withstand all
processes: known reasonable combinations
* The diversification of its deposit and loan products; of idiosyncratic and market
risks for up to 60 days.
* Offering depositors competitive interest rates to The aim is not to measure
reduce churn and volatility; liquidity with a single metric
but rather a range of principles
and metrics which, when taken
* Contractual repayment term matching of a monitored together, helps ensure that
proportion of its loan and deposit book; the Company's liquidity risk
is maintained at an acceptable
level.
* Acquiring funding through lower value, higher volume
deposits;
* Monthly ALCO meetings reviewing early warning
indicators and tolerances of all relevant balance
sheet items;
* Access to Bank of England liquidity schemes;
* Holding adequate levels of High Quality Liquid Assets
with a high proportion of cash in the Group's Bank of
England Reserve Account.
------------------------------------------------------------- --------------------------------------
Stress testing
The key risk drivers identified An integral component of
in the Group's Individual the approach to liquidity
Liquidity Adequacy Process risk management is stress
as being applicable to the testing, some of which is
Group are: prescriptive using very detailed
* Retail Funding: the responsiveness of customer rules and guidance issued
deposits to changes in a bank's credit worthiness; within prudential regulations
and reported within regulatory
returns.
* Intraday Liquidity Risk: changes in liquidity
intraday, for which additional liquidity is held;
* Pipeline Risk: exposure to undrawn loan commitments. In addition to the regulatory
prescribed stress testing,
the Group undertakes its
own stress tests. The Board
The Group uses various short approves limits against both
and medium term forecasts regulatory and internal stress
to monitor future liquidity testing requirements.
requirements and these include An integral component of
stress testing assumptions the approach to liquidity
to identify the required risk management is stress
levels of liquidity. Stress testing, some of which is
testing is typically performed prescriptive using very detailed
on a daily basis and levels rules and guidance issued
of liquidity under stress within prudential regulations
are forecast regularly and and reported within regulatory
monitored by ALCO. returns.
------------------------------------------------------------- --------------------------------------
Contingency funding plans
If for reasons which may The Liquidity Contingency
be beyond the business' control, Plan (LCP) forms part of
the Group were to encounter the Group's risk management
a significant and sustained framework, linking the Group's
outflow of deposits or other Internal Liquidity Adequacy
stress on the Group's liquidity Assessment Process (ILAAP)
resource, a Liquidity Contingency to the Recovery Plan and
Plan (LCP) is maintained Resolution Plan on a consistent
to ensure the Group is able basis.
to maintain sufficient liquidity
to remain a viable independent The integration of the LCP
financial institution following to the Recovery Plan, Resolution
a severe liquidity stress Plan, ILAAP and ICAAP is
event. achieved through the use
of consistent early warning
indicators and invocation
trigger points that are regularly
monitored and reported against.
------------------------------------------------------------- --------------------------------------
Change - STABLE
The Group has continued to attract new fixed and variable rate
deposits to broadly match the term lending by the Group. Continuity
of funding was not impacted by the transition to the new deposits
platform, which is now in place and will broaden the funding
options available.
The Group held liquidity which allowed it to exceed its OLAR and
LCR requirements throughout the year. The Funding to Loans ratio at
31 December 2017 was 115.5% (2016: 110.4%).
Operational risk
Description Mitigation
---------------------------------------- -------------------------------------
Operational Risk is the risk The Group has adopted an
that the Group may be exposed Operational Risk Policy and
to direct or indirect loss Framework designed in accordance
arising from inadequate or with the 'Principles for
failed internal processes, the Sound Management of Operational
personnel, technology/ infrastructure, Risk' issued by the Basel
or from external factors. Committee on Banking Supervision.
The scope of Operational The approach ensures appropriate
Risk is broad and includes governance is in place to
Business Process, Business provide adequate and effective
Continuity, Third Party, oversight of the Group's
Financial Crime, Change, operational risk. The governance
Human Resources, Information framework includes the Board
Security and IT Risk, including Risk Committee and Group
Cyber Risk. Operational Risk Committee.
The Group has a defined set
of qualitative and quantitative
operational risk appetite
measures. Quantitative measures
cover operational losses,
complaints, key operational
risks, systems availability
and information security.
The appetite measures are
reported and monitored on
a monthly basis.
---------------------------------------- -------------------------------------
Change - IMPROVED
The improvement of the status of this risk is driven by the
Group's continued investment in resource, expertise and systems to
support the Operational Risk Framework and Policy. This Framework
defines and facilitates the following activities:
-- A biannual Risk and Control Self Assessments process to
identify, assess and mitigate risks across all business units
through improvements to the control environment.
-- The Governance arrangements for managing and reporting these risks.
-- All risk appetite measures and associated thresholds and metrics.
-- An incident management process that defines how incidents
should be managed and associated remediation, reporting and
root-cause analysis.
Key Risk themes of Operational Risk focus in 2017 include:
-- Supplier management - The Group uses a number of third
parties to support its IT and operational processes. The Group
recognises that it is important to effectively manage these
suppliers and has throughout 2017 introduced a suite of standard
controls for all its material suppliers to reduce the risk of
operational impacts on these critical services.
-- IT resilience - Having adequate and effective servers,
networks and storage systems. The Group tested its disaster
recovery and business continuity processes in 2017 and further
improved the processes of identifying, assessing and managing its
critical IT assets and processes.
-- Information security and cyber risk - The Group has
maintained focus on ensuring the effective management of risks
arising from a failure or breach of its information technology
systems that could result in customer exposure, business
disruption, financial losses, or reputational damage.
Cyber risk continues to evolve and is covered in more detail in
the 'Strategic and emerging risks' section below.
Capital risk
Description Mitigation
-------------------------------- -------------------------------------
Capital risk is the risk The Group's capital management
that the Group will have policy is focused on optimising
insufficient capital resources shareholder value, in a safe
to meet minimum regulatory and sustainable manner. The
requirements and to support Board regularly reviews the
the business. The Group adopts current and forecast capital
a conservative approach to position to ensure capital
managing its capital and resources are sufficient
at least annually assesses to support planned levels
the robustness of the capital of growth.
requirements as part of the
Group's Internal Capital In accordance with the EU's
Adequacy Assessment Process Capital Requirements Directive
('ICAAP'). IV ('CRD IV') and the required
parameters set out in the
EU's Capital Requirement
Regulation, the Group maintains
an ICAAP which is updated
at least annually. The ICAAP
is a process that brings
together the management framework
(i.e. the policies, procedures,
strategies and systems that
the Group has implemented
to identify, manage and mitigate
its risks) and the financial
disciplines of business planning
and capital management.
Not all material risks can
be mitigated by capital,
but where capital is appropriate
the Board has adopted an
approach to determine the
level of capital the Group
needs to hold. This method
takes the Pillar 1 capital
formula calculations (standardised
approach for credit, market
and operational risk) as
a starting point, and then
considers whether each of
the calculations delivers
a sufficient capital sum
adequately to cover management's
assessment of anticipated
risks. Where it is considered
that the Pillar 1 calculations
do not reflect the risk,
an additional capital add-on
in Pillar 2 is applied, as
per the Individual Capital
Guidance issued by the PRA.
A complete assessment of
the Group's capital requirement
is contained in its Pillar
3 disclosures. Pillar 3 disclosures
for the Group for the year
ended 31 December 2017 are
published as a separate document
on the Group's website.
-------------------------------- -------------------------------------
Change - STABLE
Stringent stress tests are performed to ensure that capital
resources are adequate over a future three year horizon. At 31
December 2017, the CET1 Ratio was 16.5% (2016: 18.0%) and the
Leverage Ratio was 12.3% (2016: 14.5%) on a group consolidated
basis.
Both ratios are significantly better than regulatory
requirements. The Group capital resources increased during the year
to GBP243.3 million as at 31 December 2017 (31 December 2016:
GBP232.7 million) on a group consolidated basis.
The basis of consolidation has been updated from a
solo-consolidated basis to a Group consolidated basis following the
Arbuthnot Banking Group shareholding in Secure Trust Bank Group
reducing to 18% in June 2016. As a result, all subsidiaries of
Secure Trust Bank PLC are now included in the Group's capital
resources and requirements, whereas previously the V12 and DMS
legal entities were excluded. The 2016 comparative ratios above
have been updated accordingly.
The Group has elected to adopt transitional provisions in
respect of the implementation of IFRS 9, as set out by the European
Banking Authority. These provisions allow the capital impact of the
standard to be phased in over a five year period. Further details
are provided in Note 29.
Market risk
Description Mitigation
---------------------------------- ----------------------------------
For the Group, market risk The Group's risk management
is primarily limited to interest framework, policies and
rate risk, being the potential procedures are regularly
adverse impact on the Group's reviewed and updated to ensure
future cash flows from changes that they accurately identify
in interest rates arising the risks that the Group
from the differing interest faces in its business activities
rate risk characteristics and are appropriate for the
of the Group's assets and nature, scale and complexity
liabilities. When interest of the Group's business.
rates change, the present
value and timing of future Market risk is managed by
cash flows change. This in the Company's Treasury function
turn changes the underlying and is overseen by the Assets
value of the Group's assets, and Liabilities Committee
liabilities and off-balance ('ALCO'). The Group does
sheet instruments and hence not take significant unmatched
its economic value. Changes positions and does not operate
in interest rates also affect a trading book.
the Group's earnings by altering
interest-sensitive income The key measure the Group
and expenses, affecting its uses to monitor the risk
net interest income. is an Interest Rate Sensitivity
Gap analysis which informs
The principal currency in the Group of mismatched interest
which the Group operates rate risk positions.
is Sterling, although a small
number of transactions are The Group monitors the interest
completed in US dollars, rate mismatch on a monthly
Euros and other currencies basis. The main test employed
in the Commercial Finance is a 200bps interest rate
business. All currency exposures shock across all interest
are swapped to Sterling. indices on a parallel basis.
The Group has no significant The Group maintains such
exposures to foreign currencies exposures within the risk
and therefore there is no appetite set by the Board.
significant currency risk.
---------------------------------- ----------------------------------
Change - STABLE
The mismatch in terms of interest rate repricing characteristics
of the Bank's assets and liabilities creates exposure to interest
rate risk that requires management and measurement within risk
limits.
An effective risk management process that maintains interest
rate risk within prudent levels is therefore essential to the
safety and soundness of the Bank.
The Group measures Earnings at Risk (EaR) and Value at Risk
(VaR), predominantly by monitoring the Interest Rate Sensitivity
Gap. Interest rate risks inherent in new products or through
changes to the terms and conditions of existing products were
assessed over the course of the year. The Group remained within
risk appetite in respect of interest rate risk throughout the
year.
Conduct risk
Description Mitigation
--------------------------------- ------------------------------------
The Group defines conduct The Group takes a principles
risk as the risk that the based approach and includes
Group's products and services, retail and commercial customers
and the way they are delivered, in its definition of 'customer',
result in poor outcomes for which covers all business
customers, or harm to the units and both regulated
Group. This could be as a and unregulated activities.
direct result of poor or
inappropriate execution of Across the Group, conduct
the Group's business activities risk exposure is managed
or staff behaviour. via monthly review and challenge
of key risk indicators ('KRIs')
at the Customer Focus Committee,
which oversees complaints,
FEEFO and Customer Service
Excellence as well as conduct
risk. Conduct risk management
information is also reviewed
at Executive Committee meetings
at product level.
The Key Risk Indicators vary
across the business units
to reflect the relevant conduct
risks; the business units'
key risk indicators are aggregated
for measurement against the
Group's risk appetite, which
is reported to the Group
Executive Committee and the
Board.
--------------------------------- ------------------------------------
Change - STABLE
Review of conduct risk and controls with the business units is
managed through the regular cycle of risk and control
self-assessments, in line with other operational risk
categories.
Monthly review and challenge of Key Risk Indicators in the
Customer Focus Committee provides oversight of the first line
activities to assure senior management that the first line are
identifying conduct risks when they arise and taking appropriate
actions to mitigate them.
Training on conduct risk continues to be delivered to new
starters, with an eLearning module completed by all staff during
the year.
Regulatory risk
Description Mitigation
------------------------------------- ----------------------------------
Regulatory risk is the risk The Group seeks to manage
that the Group fails to be regulatory risks through
compliant with all relevant the Group wide risk management
regulatory requirements. framework. The Group Compliance
This could occur if the Group and Regulatory Risk Committee
failed to interpret, implement is responsible for reviewing
and embed processes and systems and monitoring regulatory
to address regulatory requirements, changes, and ensuring that
emerging risks, key focus appropriate actions are taken,
areas and initiatives or and also reviewing and approving
deal properly with new laws the compliance risk management
and regulations. framework. Further details
are given on page 61.
------------------------------------- ----------------------------------
Change - STABLE
In the year ended 31 December 2017, the Group has delivered
changes to address new and revised regulations and legislation that
have come into force, including changes to Regulatory References
requirements, conduct rules for Non-Executive Directors, change to
the FSCS Depositor Protection Limits and completion of the
amendments necessary for the revised Payment Services Directive
2.
A number of formal projects and initiatives are in place to
address forthcoming regulatory changes in 2018 including extending
the Senior Managers and Certification Regime; Insurance
Distribution Directive; General Data Protection Regulation; and
PRA/FCA ring fencing.
Strategic and emerging risks
In addition to the principal risks above, the Board considers
strategic and emerging risks, including key factors, trends and
uncertainties which can influence the results of the Group. These
risks include the following:
Macroeconomic environment and market conditions
The Group operates exclusively within the UK and its performance
is influenced by the macroeconomic environment in the UK. The
economy affects demand for the Group's products, margins that can
be earned on lending assets and the levels of loan impairment.
Growth in the UK economy slowed in 2017, largely due to economic
uncertainty. This uncertainty is affecting business investment,
export growth and causing a moderation in UK household spending.
However, current UK economic fundamentals remain strong and
employment levels are at a record level. The longer term effects of
the vote will become clearer once the nature of the UK's exit from
the European Union has been clarified.
The availability of liquidity from the BOE's Funding for Lending
and Term Funding Schemes have also impacted on lending markets,
driving aggressive pricing from some lenders who have used this
funding to build scale. The closure of these schemes in February
2018 will push up funding costs. The Group has not excessively used
these schemes, and expects market pricing to return over time to
levels where the Group has been operating, therefore strengthening
the Group's competitive position.
The Financial Policy Committee, PRA and FCA have all expressed
concerns over 2017, regarding the UK consumer credit market. The
Group shares these concerns, perceiving there to be a mispricing of
risk, and has reacted accordingly by exiting markets most affected.
As a consequence, the Group is not exposed to the majority of the
issues highlighted by the regulators.
The repositioning of the Group's lending books, towards lower
risk areas, leaves it well placed to navigate this period of
uncertainty. The Group will continue to review its credit risk
appetite as economic and market conditions evolve.
On 1 November 2017, the Monetary Policy Committee announced a
base rate rise, for the first time in a decade, to 0.5%, in order
to head off rising inflation. The overshoot of the inflation target
reflects the effects on import prices of the referendum-related
fall in sterling. Rising interest rates may expose borrowers to
difficulties making interest payments, however the continuing low
base rate position has a mitigating effect on credit risk. The
Group is less exposed to the credit risk related impact of interest
rate changes than the systemically important banks and building
societies, through its fixed rates on both its assets and
liabilities.
House prices have continued to rise in 2017; however confidence
in the housing market is now reducing largely due to the
uncertainty described above and concerns from new buyers over job
security and the ability to raise deposits. The UK housing stock
remains in short supply. The Group will continue to monitor the
mortgage market in connection with its Consumer mortgage
product.
Regulatory and Capital position
The Group continues to monitor regulatory developments in
respect of capital requirements for banks. There has been
acknowledgement that the current approach, whereby standardised
risk weights under Pillar 1 are assessed separately to and then
combined with Pillar 2 add ons, can lead to excessive capital
requirements. The impact of a more judgemental approach should
become clearer in 2018.
The Bank of England has announced an increase in the UK
countercyclical buffer, from zero to 0.5% of risk weighted assets
from June 2018 with a further increase to 1% following in November
2018. The capital conservation buffer also increases over the
Group's forecast period. These increases in buffers are factored
into the Group's capital planning.
Information Security and Cyber Risk
The Group has continued to maintain focus on managing risks
arising from a failure or breach of its information technology
systems or via our supply chain.
The Group recognises that financial services organisations face
an increasing number and variety of cyber-attacks that could result
in customer exposure, business disruption, financial losses, legal
penalties or reputational damage.
Continuously improving resilience against emerging cyber threats
requires an understanding of the tactics and motivations of
potential attackers. The Group adopts strategies and comprehensive
technical and organisational measures to keep abreast of these
tactics and to prevent, detect, disrupt and facilitate rapid
recovery from attacks.
Model Risk and the impact of IFRS 9
The Group has significantly enhanced its modelling capability in
response to the introduction of IFRS 9. From 1 January 2018
onwards, the Group's impairment provisions will be estimated using
a suite of models that use historical and forward looking data,
with associated judgements and assumptions, to derive the
probability of default (PD), loss given default (LGD) and exposure
at default (EAD). In addition, the models used to derive the
effective interest rate of the Group's lending portfolios, and
hence drive the release of income, are being upgraded.
Material elements of the Group's financial statements will
therefore increasingly be impacted by these models. The Group has
taken steps to mitigate the associated model risk: the risk that a
financial model fails to perform effectively and produces an
inaccurate result. A Model Governance Committee has been
established, comprising members from the Finance and Risk teams, to
ensure the Group's models are being developed and maintained
subject to adequate controls, including validation of model
outputs. This committee has approved the usage of the Group's IFRS
9 models.
The introduction of IFRS 9 also brings an element of uncertainty
into banks' reporting. This is a complex accounting standard which
has required all banks to develop new models. This increases the
risk that firms will account for impairments using a wide variety
of assumptions and model methodologies, with consequent
inconsistency in the reported results that could take a number of
years to align. Significant disclosure is required in order to
assist the understanding of IFRS 9 results, and the Group is well
progressed in developing this disclosure for use in its 2018
interim report.
Going concern and viability
Going concern
In assessing the Group as a going concern, the directors have
given consideration to the factors likely to affect its future
performance and development, the Group's financial position and the
principal risks and uncertainties facing the Group, as set out in
the Strategic Report. The Group uses various short and medium term
forecasts to monitor future capital and liquidity requirements and
these include stress testing assumptions to identify the headroom
on regulatory compliance measures.
The directors are satisfied that the Company and the Group have
adequate resources to continue to operate for the foreseeable
future as going concerns. For this reason they continue to adopt
the going concern basis in preparing these financial
statements.
Business viability
In accordance with provision C2.2 of the UK Corporate Governance
Code, the directors confirm that there is a reasonable expectation
that the Company and the Group will be able to continue in
operation and meet their liabilities as they fall due, for the
period up to 31 December 2020. The assessment of ongoing viability
covers this period as it is the Group's planning horizon and the
period covered by the Group's stress testing.
Given the Group's strong capital and liquidity position at 31
December 2017, reduction in exposure to higher risk lending,
continuing growth in profit and positive trading outlook, the
directors are confident of the Group's viability over the longer
term. However, the inherent uncertainties regarding the economic,
regulatory and market environment that the Group operates in may
compromise the reliability of longer range forecasts.
The directors have based the assessment on:
-- The latest annual budget, which contains information on the
expected financial position and performance for the period to 31
December 2020 and by considering the potential impact of the
principal risks facing the Group, as set out on pages 32 to 42.
-- The analysis of key sensitivities, undertaken as part of the
budget process, which could impact on profitability for the
forthcoming financial year. Assumptions made to calculate risk
weighted assets and capital requirements are clearly stated and
additional scenarios are modelled to demonstrate the potential
impact of risks and uncertainties on capital.
-- The Group's ILAAP, which uses stress scenarios to assess the
adequacy of liquidity resources.
-- The Group's ICAAP, which considers a macroeconomic stress and
a severe shock scenario in order to assess the adequacy of capital
resources.
-- Consideration of the other principal risks as set out on
pages 40 to 42, to identify any other severe but plausible
scenarios that could threaten the Group's business model, future
performance, solvency or liquidity.
In making this statement, the Board has sought input from the
Audit Committee and the Risk Committee.
Corporate responsibility
The Group has a clearly defined commitment within the corporate
strategy 'To make this a great Bank for customers and
colleagues'.
The Group strategy is underpinned by six core values that
reflect the behaviours required to deliver the Group's promise to
deliver straightforward and transparent banking. Exceeding customer
expectations and living the Group's values are at the heart of the
Group culture and as such it rewards innovative and inspiring
behaviours and sets clear expectations around staff being
trustworthy, compliant and safe. The Group also always seeks to act
as a responsible business. Further details on how the Group meets
its commitments are set out below.
Responsible business
The Group takes its commitment to operate as a responsible
business very seriously and recognises that this goes far beyond
the adherence to legal requirements and best practice. Measures are
in place to assess the impact of the Group's business model and the
delivery of its services on its customers, and the organisation
strives to make a positive contribution to the wider community in
which it operates. The Board does not consider there to be any
environmental social or governance matters that are significant to
the business of the Group.
The Group sees its ability to have a positive effect on social
and community issues as an extension of its customer centric
culture and colleagues are encouraged to make a positive
contribution through a number of community focused schemes. Last
year the Group supported 32 charities through activities run by its
Charity Committees. The Charity Committees empower colleagues from
different business areas to drive forward a wide range of
successful charitable activities. This year the Group also doubled
the available funding for its pound for pound matching scheme which
allows colleagues to increase the money they raise for charity. The
enthusiasm of colleagues to help good causes resulted in a wide
range of fundraising activities which generated over GBP50,000 for
charities in 2017.
Following the launch of a community volunteering scheme in 2016
which allows employees to take one day paid leave to make a
difference to charities or community groups in their area, nearly a
thousand hours were donated to worthy causes during the 2017. Group
staff have taken part in a wide range of activities and made a
positive contribution to many charities and community projects.
Greenhouse Gas emissions from our operations
As a financial services provider, the Group's operations do not
have a significant impact on the environment. The Group reports on
its greenhouse gas emissions and, to ensure its environmental
impact remains low, has included it as a key performance indicator.
The key performance indicators are shown on page 17.
The Group's report on all of the emission sources required under
the Companies Act 2006 (Strategic Report and Directors' Report)
Regulation 2013 is set out below. This is the second Greenhouse Gas
report that the Group has issued under the above Regulation and
only emission sources where accurate and consistent data is
available for the complete reporting period have been included.
Scope 1 emissions resulting from the combustion of natural gas
for heating buildings and Scope 2 and 3 emissions associated with
the consumption of purchased electricity are included within the
GHG report. Scope 1 emissions resulting from the use of company
owned/leased vehicles have been excluded. All Scope 3 sources,
except for purchased electricity transmission, distribution
emissions and grey fleet have also been excluded from this report.
Systematic procedures have also been established to collect
accurate data for Scope 1 company vehicle and fugitive refrigerant
emissions with effect from 1st January 2017. The Group has set 2017
as the GHG baseline year and reports from 2018 will show emissions
for the current year and for each subsequent year following the
baseline year.
In compiling this GHG report, the GHG Protocol Corporate
Accounting and Reporting Standard (revised edition) and energy
supplier invoice data have been used. Greenhouse gas emissions are
reported as a single total, by converting them to the equivalent
amount of CO2 using emission factors from the UK Government's GHG
Conversion Factors for Company Reporting 2017.
The Group's Greenhouse Gas emissions are shown below.
2017 2016
Carbon Carbon
dioxide dioxide
(tonnes) (tonnes)
--------------------------------------------------- ---------- ----------
Scope 1 - direct emissions from combustion
of fuel 26.7 93.0
Scope 2 - indirect emissions from electricity
purchased 501.7 555.6
Scope 3 - other indirect emissions from purchased
electricity transmission and distribution 152.7 50.3
--------------------------------------------------- ---------- ----------
Total scope 1 to 3 emissions 681.1 698.9
--------------------------------------------------- ---------- ----------
Environmental intensity indicator (tonnes
carbon dioxide per GBP1 million group income) 4.2 5.4
--------------------------------------------------- ---------- ----------
Human rights and tackling modern slavery
The Group is subject to the European Convention on Human Rights
and the UK Human Rights Act 1998. The fair treatment of customers
is central to the Group's strategy and values, and the Group
opposes all forms of discrimination.
The Group is committed to tackling modern slavery and human
trafficking and has taken steps to ensure it is considered and
addressed in its business and throughout its supply chain,
consistent with its obligations under the Modern Slavery Act 2015.
The full Board statement on Slavery and Human Trafficking can be
found on the Group's website:
www.securetrustbank.co.uk
Employees
Investors in People
Secure Trust Bank Group currently holds the highly coveted
Investors in People Gold Accreditation, which the Group is
extremely proud of. This internationally recognised accreditation
is held by over 10,000 organisations worldwide and defines what it
takes to lead, support and manage people well for sustainable
results.
The Investors in People Standard is underpinned by a rigorous
assessment methodology and a framework which reflects the very
latest workplace trends, essential skills and effective structures
required to outperform in any industry.
The Investors in People review process is one of a number of
methods used to gain the views and opinions of employees to inform
the Group's People Strategy and is a key element of the Group's
open and transparent culture.
Employee Voice
In addition to gaining feedback through Investors in People the
Group conducts regular employee opinion 'Your Voice' surveys.
Towards the end of 2017, the Group again engaged an independent
specialist to run the annual Your Voice employee engagement survey,
and 81% of employees participated (2016: 84%). Although the results
showed a small decline in the employee engagement score (78% versus
85% from the previous year), across the majority of key survey
areas the scores were significantly higher than the external
benchmark, which is drawn from other similar sized companies in the
Group's sector. Of particular note were the following results:
-- 95% of employees understand the Secure Trust Bank values.
-- 83% of employees stated that they believe they can make a
valuable contribution to the Group.
-- 85% of employees consider customers to be central to the Group's strategy.
The presentation of this year's survey results to employees sets
out the progress made in addressing issues raised in the previous
survey. Actions plans will be developed during 2018 to address
areas of improvement identified from this year's survey.
The Bank also operates an Employee Council which has department
representatives elected by their colleagues. The Council meets on a
regular basis and encourages a two way process of communication
between employees and senior managers. The aim of the Employee
Council is to further promote employee engagement and provide a
structured forum for teams to shares their views.
Various initiatives have been implemented following feedback
from this group. Most notably in 2017 were the enhancements to the
relaunch of 'Boost' which is the Group Employee benefit and
discount platform.
Employee Development
Continued investment in employee development remains a priority
with over 70 external qualifications recognised in 2017. In
addition to the qualifications completed the Group had another
record number of employees sign up to study towards an external
Banking Qualification as part of their career development. The
Banking Qualifications are delivered by the London Institute of
Banking & Finance (previously the IFS) and are available to all
employees.
Banking Qualifications are just one of number of opportunities
created to study towards a range of professional qualifications
which range from Apprenticeships to MBAs. In Partnership with the
National Skills Academy for Financial Services the Group commenced
a development programme for Operational Team Leaders that enables
them to achieve the Institute of Leadership and Management Level 3
qualification. This programme is designed to provide additional
skills in core leadership disciplines for these critical customer
facing roles.
Secure Trust Bank Group has been awarded Platinum Approved
Status for both professional and trainee development by the
Association of Chartered Certified Accountants, one of the world's
leading professional accountancy bodies. The accreditation joins
the Chartered Institute of Management Accountants Premier Partner
status which is already held by STB Group and demonstrates the high
industry standards of both accountancy training schemes, and
continuing professional development programmes, offered by the
Group.
External development and wider career skills development is
supported by a comprehensive in-house learning and development
programme and induction process. To encourage teams to learn new
skills and embrace learning opportunities the Group continues to
participate in National Learning at Work Week where employees
showcase their wider talents or participate in workshops on a wide
range of engaging topics. In 2017 the Group also launched the
Connect & Learn scheme as a result of feedback from the Your
Voice employee survey. This scheme allows colleagues to draw on the
expertise in other areas of the Group by setting up structured
sessions with other teams. The focus on employee development has
helped result in a record 90 employees promoted or moved in to new
roles during the year.
The Group continues to take steps to address the wider needs and
concerns of its staff. Existing employee support services have been
supplemented by new initiatives, including further 'Wellbeing at
Work' activities which provide a focus on employees' mental and
physical health. A number of People Managers attended training in
partnership with Mind and Samaritans, and Mental Health Awareness
training now forms an integral part of the core development
programme for all People Leaders.
Employee engagement and recognition
Research has consistently shown a clear link between enhanced
levels of performance and teams that are fully engaged and share
the values of the organisation that they work for. The positive
performance of Secure Trust Bank Group is a result of the efforts
of employees and to ensure that colleagues are recognised for this
contribution there are a number of schemes in place to celebrate
exceptional performance and behaviours.
These schemes together with the Group's annual incentive
programme continue to help embed excellence within the culture.
These schemes include:
e thank you cards and Be valued awards: Being thanked is
something that everyone appreciates and it makes individuals feel
valued and helps create job satisfaction. For those occasions when
colleagues deserve a thank you and behaviours are observed that
truly reflected one of the Company values, colleagues can recognise
each other by sending an e card thank you card. Where behaviour has
been exceptional, line managers have the opportunity to reward team
members with a Be Valued award which includes a gift and
certificate. Colleagues can nominate their peers whenever and as
often as they like and in 2017 over 1,200 e cards were sent.
Customer Service Excellence Awards: colleagues who go the extra
mile when it comes to exceptional internal and external customer
service are recognised at monthly Customer Service Excellence
Award.
Outstanding achievers: these are given to colleagues who stand
out for their fantastic contribution to the business. Winners are
nominated by their peers and then selected by a panel of
judges.
Incentive programme: the Group's incentive scheme links tangible
performance targets which are based on the Group's strategy and
values, to the outcomes of the scheme.
Long Service awards: to recognise loyalty and commitment to the
Group, long service is awarded at key milestones from 5 years of
service. Colleagues are rewarded with a cash payment, engraved pen,
bottle of champagne, certificate and are also invited to lunch with
the head of their business area. In 2017 590 years of long service
were recognised.
Gender diversity
At the year end, the split by gender of the Group's employees
was as follows:
Male Female
----------------- ----- -------
Directors 75% 25%
Senior managers 80% 20%
Other employees 44% 56%
All employees 47% 53%
----------------- ----- -------
The Group is committed to diversity in the workplace at all
levels. During the early months of 2018, the Group is supporting a
range of initiatives to demonstrate this commitment. The first is
the launch, on International Women's Day, of an exciting
partnership with everywoman which gives all colleagues, regardless
of gender, access to the everywomanNetwork, a highly acclaimed,
online development tool, with a particular focus on empowering
women to take control of their career development.
Customers first
With today's customer now having wider choice and access to more
information than ever before the quality of the customer experience
has never been more important and this is ingrained in the Group's
values and mission to provide straightforward and transparent
banking. The focus on creating a culture where every interaction is
seen as an opportunity to exceed our customers' expectations is
driven through specific initiatives and lived through day-to-day
processes and interactions. This culture is reinforced through
recognition and reward structures and a series of independent
monitoring tools which facilitate a continuous process of customer
service review and improvement.
The Group has used FEEFO, an independent global ratings and
reviews provider used by the world's most trusted brands for the
last four years to collect customer feedback. Customer comments and
ratings are published in real time on the Group's website and used
to monitor and maintain service levels. The Group's average FEEFO
rating for the year based on over 1,200 reviews stood at 4.7 out of
5 in December 2017 and all poor ratings are followed up by
attempting to resolve the issue with the customer.
This year the Group was also delighted to be awarded three FEEFO
Gold Trusted Service awards. This is an independent seal of
excellence that recognises businesses for delivering exceptional
experiences, rated by real customers. They are based purely on
customer feedback and awarded on performance. The Group received
the gold accolade for products offered under its Secure Trust Bank,
V12 and Moneyway brands.
FEEFO ratings and comments are available on the Group's
websites:
www.securetrustbank.co.uk
www.moneyway.co.uk
Having been the first bank to be awarded the Customer Service
Excellence Award, this year the Group was pleased to announce that
it had retained the standard for the fifth year running. This
Government backed accolade tests in great depth those areas that
research has indicated are a priority for customers, with
particular focus on delivery, timeliness, information,
professionalism and staff attitude. There is also emphasis placed
on developing customer insight, understanding the user's experience
and robust measurement of service satisfaction. The assessment
report noted that "it was evident when speaking to leaders and
front line staff within STB Group that they are highly motivated to
achieve the best possible service for their customers."
In addition to independent assessments of customer service
levels, the Group's internal recognition schemes are all built
around reinforcing the Group's values and culture and the Group's
Team Recognition Award clearly demonstrates how effective these are
in driving the right behaviours. Focussing on customer service,
this award ran throughout 2017 with 18 teams taking part across the
Group, and resulted in the clear delivery of tangible improvements
in customer service.
By order of the Board
Neeraj Kapur
Chief Financial Officer
21 March 2018
Directors' responsibility statement
The directors are responsible for preparing the Annual Report
and the Group and parent company financial statements in accordance
with applicable law and regulations.
Company law requires the directors to prepare group and parent
company financial statements for each financial year. As required
by the Listing Rules they are required to prepare the group
financial statements in accordance with IFRS as adopted by the EU
and applicable law and have elected to prepare the parent company
financial statements on the same basis.
Under company law the directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the group and parent company and of
their profit or loss for that period. In preparing each of the
group and parent company financial statements, the directors are
required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable and prudent;
-- state whether they have been prepared in accordance with IFRS as adopted by the EU; and
-- assess the Group and parent Company's ability to continue as
a going concern, disclosing, as applicable, matters related to
going concern; and
-- use the going concern basis of accounting unless they either
intend to liquidate the Group or the parent Company or to cease
operations, or have no realistic alternative but to do so.
The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the parent
Company's transactions and disclose with reasonable accuracy at any
time the financial position of the parent Company and enable them
to ensure that its financial statements comply with the Companies
Act 2006. They are responsible for such internal control as they
determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to
fraud or error, and have general responsibility for taking such
steps as are reasonably open to them to safeguard the assets of the
Group and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the directors are also
responsible for preparing a Strategic Report, Directors' Report,
Directors' Remuneration Report and Corporate Governance Statement
that complies with that law and those regulations.
The directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in the UK governing the preparation
and dissemination of financial statements may differ from
legislation in other jurisdictions.
We confirm that to the best of our knowledge:
-- The financial statements, prepared in accordance with IFRS as
adopted by the European Union, 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;
-- The strategic 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; and
-- The Annual Report and financial statements, taken as a whole,
are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company's performance,
business model and strategy.
This responsibility statement was approved by the Board of
directors on 21 March 2018 and is signed on their behalf by:
Paul Lynam Neeraj Kapur
Chief Executive Officer Chief Financial Officer
Consolidated statement of comprehensive income
2017 2017 2017 2016 2016 2016
Continuing Discontinued Total Continuing Discontinued Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Income statement
Interest receivable
and similar income 141.3 8.0 149.3 118.8 22.3 141.1
Interest expense
and similar charges (26.7) - (26.7) (26.3) - (26.3)
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Net interest income 4 114.6 8.0 122.6 92.5 22.3 114.8
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Fee and commission
income 16.0 - 16.0 16.3 0.1 16.4
Fee and commission
expense (1.1) - (1.1) (1.8) (0.1) (1.9)
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Net fee and commission
income 4 14.9 - 14.9 14.5 - 14.5
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Operating income 129.5 8.0 137.5 107.0 22.3 129.3
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Net impairment
losses on loans
and advances to
customers 12 (33.5) (3.4) (36.9) (23.3) (7.0) (30.3)
Operating expenses 5 (71.3) (0.3) (71.6) (64.3) (7.2) (71.5)
Profit on sale
of equity instruments
available-for-sale 0.3 - 0.3 - - -
Profit before income
tax 25.0 4.3 29.3 19.4 8.1 27.5
Income tax expense 7 (5.1) (0.8) (5.9) (5.2) (1.6) (6.8)
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Profit after income
tax 19.9 3.5 23.4 14.2 6.5 20.7
Gain recognised
on disposal after
tax 37 - 0.4 0.4 - 116.8 116.8
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Profit for the
period 19.9 3.9 23.8 14.2 123.3 137.5
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Other comprehensive
income
Items that will
not be reclassified
to the income statement
Revaluation reserve 0.1 - 0.1 1.2 - 1.2
Taxation - - - (0.2) - (0.2)
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
0.1 - 0.1 1.0 - 1.0
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Items that may
subsequently be
reclassified to
the income statement
Available-for-sale
reserve 2.8 - 2.8 (2.8) - (2.8)
Taxation - - - - - -
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
2.8 - 2.8 (2.8) - (2.8)
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Other comprehensive
income for the
period, net of
income tax 2.9 - 2.9 (1.8) - (1.8)
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Total comprehensive
income for the
period 22.8 3.9 26.7 12.4 123.3 135.7
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Profit attributable
to:
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Equity holders
of the Company 19.9 3.9 23.8 14.2 123.3 137.5
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Total comprehensive
income attributable
to:
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Equity holders
of the Company 22.8 3.9 26.7 12.4 123.3 135.7
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Earnings per share
for profit attributable
to the equity holders
of the Company
during the period
(pence per share)
Basic earnings
per share 8 107.7 21.1 128.8 77.9 676.2 754.1
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Diluted earnings
per share 8 106.4 20.9 127.3 77.3 671.4 748.7
------------------------- --- ----------- ------------- ----------- ----------- ------------- -----------
Consolidated statement of financial position
At 31 December
2017 2016
Note GBPmillion GBPmillion
---------------------------------------- ----- ----------- -----------
ASSETS
Cash and balances at central banks 226.1 112.0
Loans and advances to banks 9 34.3 18.2
Loans and advances to customers 10 1,598.3 1,321.0
Debt securities held-to-maturity 13 5.0 20.0
Equity instruments available-for-sale 14 - 13.5
Property, plant and equipment 15 11.5 11.4
Intangible assets 16 10.4 9.0
Deferred tax assets 18 0.6 -
Other assets 19 5.4 4.9
Total assets 1,891.6 1,510.0
---------------------------------------- ----- ----------- -----------
LIABILITIES AND EQUITY
Liabilities
Due to banks 20 113.0 70.0
Deposits from customers 21 1,483.2 1,151.8
Current tax liabilities 3.0 1.7
Deferred tax liabilities 18 - 0.2
Other liabilities 22 41.9 49.0
Provisions for liabilities and charges 23 1.4 1.3
Total liabilities 1,642.5 1,274.0
---------------------------------------- ----- ----------- -----------
Equity attributable to owners of the
parent
Share capital 25 7.4 7.4
Share premium 81.2 81.2
Revaluation reserve 1.3 1.2
Available-for-sale reserve 14 - (2.8)
Retained earnings 159.2 149.0
---------------------------------------- ----- ----------- -----------
Total equity 249.1 236.0
---------------------------------------- ----- ----------- -----------
Total liabilities and equity 1,891.6 1,510.0
---------------------------------------- ----- ----------- -----------
The financial statements on pages 117 to 187 were approved
by the Board of Directors on 21 March 2018 and were
signed on its behalf by:
Paul Lynam
Chief Executive Officer
Neeraj Kapur
Chief Financial Officer
Company statement of financial position
At 31 December
2017 2016
Note GBPmillion GBPmillion
---------------------------------------- ----- ----------- -----------
ASSETS
Cash and balances at central banks 226.1 112.0
Loans and advances to banks 9 32.3 16.5
Loans and advances to customers 10 1,565.5 1,289.2
Debt securities held-to-maturity 13 5.0 20.0
Equity instruments available-for-sale 14 - 13.5
Property, plant and equipment 15 6.1 6.2
Intangible assets 16 8.5 6.2
Investments 17 3.7 3.7
Deferred tax assets 18 0.6 0.1
Other assets 19 33.2 35.3
---------------------------------------- ----- ----------- -----------
Total assets 1,881.0 1,502.7
---------------------------------------- ----- ----------- -----------
LIABILITIES AND EQUITY
Liabilities
Due to banks 20 113.0 70.0
Deposits from customers 21 1,483.2 1,151.8
Current tax liabilities 1.9 0.8
Other liabilities 22 44.4 57.0
Provisions for liabilities and charges 23 1.4 1.3
---------------------------------------- ----- ----------- -----------
Total liabilities 1,643.9 1,280.9
---------------------------------------- ----- ----------- -----------
Equity attributable to owners of the
parent
Share capital 25 7.4 7.4
Share premium 81.2 81.2
Revaluation reserve 0.5 0.5
Available-for-sale reserve 14 - (2.8)
Retained earnings 148.0 135.5
Total equity 237.1 221.8
---------------------------------------- ----- ----------- -----------
Total liabilities and equity 1,881.0 1,502.7
---------------------------------------- ----- ----------- -----------
The Company has elected to take the exemption under
section 408 of the Companies Act 2006 not to present
the parent company income statement. The profit for
the parent company for the year is presented in the
Company statement of changes in equity.
The financial statements on pages 117 to 187 were approved
by the Board of Directors on 21 March 2018 and were
signed on its behalf by:
Paul Lynam
Chief Executive Officer
Neeraj Kapur
Chief Financial Officer
Registered number: 00541132
Consolidated statement of changes in equity
Share Share Revaluation Available-for-sale Retained
capital premium reserve reserve earnings Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 1 January
2016 7.3 79.3 0.2 - 54.4 141.2
Total comprehensive
income for the period
Profit for 2016 - - - - 137.5 137.5
Other comprehensive
income, net of income
tax
Revaluation reserve - - 1.0 - - 1.0
Available-for-sale
reserve - - - (2.8) - (2.8)
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total other comprehensive
income - - 1.0 (2.8) - (1.8)
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total comprehensive
income for the period - - 1.0 (2.8) 137.5 135.7
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Transactions with
owners, recorded
directly in equity
Contributions by
and distributions
to owners
Issue of shares
under a share option
scheme 0.1 1.9 - - - 2.0
Dividends - - - - (43.1) (43.1)
Charge for share
based payments - - - - 0.2 0.2
Total contributions
by and distributions
to owners 0.1 1.9 - - (42.9) (40.9)
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 31 December
2016 7.4 81.2 1.2 (2.8) 149.0 236.0
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total comprehensive
income for the period
Profit for 2017 - - - - 23.8 23.8
Other comprehensive
income, net of income
tax
Revaluation reserve - - 0.1 - - 0.1
Available-for-sale
reserve - - - 2.8 - 2.8
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total other comprehensive
income - - 0.1 2.8 - 2.9
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total comprehensive
income for the period - - 0.1 2.8 23.8 26.7
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Transactions with
owners, recorded
directly in equity
Contributions by
and distributions
to owners
Dividends - - - - (14.0) (14.0)
Tax on share based
payments - - - - 0.4 0.4
Total contributions
by and distributions
to owners - - - - (13.6) (13.6)
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 31 December
2017 7.4 81.2 1.3 - 159.2 249.1
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Company statement of changes in equity
Share Share Revaluation Available-for-sale Retained
capital premium reserve reserve earnings Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 1 January
2016 7.3 79.3 - - 48.6 135.2
Total comprehensive
income for the period
Profit for 2016 - - - - 129.8 129.8
Other comprehensive
income, net of income
tax
Revaluation reserve - - 0.5 - - 0.5
Available-for-sale
reserve - - - (2.8) - (2.8)
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total other comprehensive
income - - 0.5 (2.8) - (2.3)
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total comprehensive
income for the period - - 0.5 (2.8) 129.8 127.5
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Transactions with
owners, recorded
directly in equity
Contributions by
and distributions
to owners
Issue of shares
under a share option
scheme 0.1 1.9 - - - 2.0
Dividends - - - - (43.1) (43.1)
Charge for share
based payments - - - - 0.2 0.2
Total contributions
by and distributions
to owners 0.1 1.9 - - (42.9) (40.9)
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 31 December
2016 7.4 81.2 0.5 (2.8) 135.5 221.8
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total comprehensive
income for the period
Profit for 2017 - - - - 26.1 26.1
Other comprehensive
income, net of income
tax
Available-for-sale
reserve - - - 2.8 - 2.8
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total other comprehensive
income - - - 2.8 - 2.8
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total comprehensive
income for the period - - - 2.8 26.1 28.9
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Transactions with
owners, recorded
directly in equity
Contributions by
and distributions
to owners
Dividends - - - - (14.0) (14.0)
Tax on share based
payments - - - - 0.4 0.4
Total contributions
by and distributions
to owners - - - - (13.6) (13.6)
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 31 December
2017 7.4 81.2 0.5 - 148.0 237.1
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Consolidated statement of cash flows
Year Year
ended ended
31 December 31 December
2017 2016
Note GBPmillion GBPmillion
---------------------------------------------- ----- ------------- -------------
Cash flows from operating activities
- Continuing operations
Profit for the year 19.9 14.2
Adjustments for:
Income tax expense 7 5.1 5.2
Depreciation of property, plant and
equipment 15 0.8 0.6
Loss on sale of property, plant and
equipment - 0.2
Amortisation of intangible assets 16 2.0 1.6
Impairment losses on loans and advances
to customers 33.5 23.3
Share based compensation - 0.2
Profit on sale of equity instruments
available-for-sale (0.3) -
---------------------------------------------- ----- ------------- -------------
Cash flows from operating profits
before changes in operating assets
and liabilities 61.0 45.3
Changes in operating assets and liabilities:
- net decrease/(increase) in debt
securities held-to-maturity 15.0 (16.2)
- net increase in loans and advances
to customers (378.3) (396.9)
- net (increase)/decrease in other
assets (1.0) 2.2
- net increase in amounts due to
banks 43.0 35.0
- net increase in deposits from
customers 331.4 118.7
- net (decrease)/increase in other
liabilities (7.0) 22.9
Income tax paid (5.1) (6.3)
Proceeds from sale of equity instruments
available-for-sale 16.6 -
---------------------------------------------- ----- ------------- -------------
Net cash inflow/(outflow) from operating
activities - Continuing operations 75.6 (195.3)
---------------------------------------------- ----- ------------- -------------
Cash flows from investing activities
Sale of subsidiary undertakings 37 - 209.9
Sale of discontinued operation 37 37.1 -
Purchase of property, plant and equipment 15 (0.8) (2.5)
Purchase of computer software and
other intangible assets 16 (3.4) (3.6)
Net cash inflow from investing activities
- Continuing operations 32.9 203.8
---------------------------------------------- ----- ------------- -------------
Cash flows from financing activities
Shares issued - 2.0
Dividends paid (14.0) (43.1)
---------------------------------------------- ----- ------------- -------------
Net cash outflow from financing activities
- Continuing operations (14.0) (41.1)
---------------------------------------------- ----- ------------- -------------
Net increase/(decrease) in cash and
cash equivalents - Continuing operations 94.5 (32.6)
Net increase in cash and cash equivalents
- Discontinued operations 37 35.7 19.5
Cash and cash equivalents at 1 January 130.2 143.3
---------------------------------------------- ----- ------------- -------------
Cash and cash equivalents at 31 December 27 260.4 130.2
---------------------------------------------- ----- ------------- -------------
Company statement of cash flows
Year Year
ended ended
31 December 31 December
2017 2016
Note GBPmillion GBPmillion
---------------------------------------------- ----- ------------- -------------
Cash flows from operating activities
- Continuing operations
Profit for the year 22.2 125.3
Adjustments for:
Income tax expense 2.7 3.3
Depreciation of property, plant and
equipment 15 0.4 0.4
Loss on sale of property, plant and
equipment - 0.2
Profit on sale of subsidiary undertakings - (120.5)
Amortisation of intangible assets 16 1.0 0.5
Impairment losses on loans and advances
to customers 35.1 24.2
Share based compensation - 0.2
Profit on sale of equity instruments
available-for-sale (0.3) -
---------------------------------------------- ----- ------------- -------------
Cash flows from operating profits
before changes in operating assets
and liabilities 61.1 33.6
Changes in operating assets and liabilities:
- net decrease/(increase) in debt
securities held-to-maturity 15.0 (16.2)
- net increase in loans and advances
to customers (378.9) (393.9)
- net decrease in other assets 0.6 2.6
- net increase in amounts due to
banks 43.0 33.6
- net increase in deposits from
customers 331.4 118.7
- net (decrease)/increase in other
liabilities (11.5) 28.1
Income tax paid (2.6) (3.5)
Proceeds from sale of equity instruments
available-for-sale 16.6 -
---------------------------------------------- ----- ------------- -------------
Net cash inflow/(outflow) from operating
activities - Continuing operations 74.7 (197.0)
---------------------------------------------- ----- ------------- -------------
Cash flows from investing activities
Sale of subsidiary undertakings 37 - 212.3
Sale of discontinued operation 37 37.1 -
Purchase of property, plant and equipment 15 (0.3) (2.0)
Purchase of computer software 16 (3.3) (3.5)
Net cash inflow from investing activities
- Continuing operations 33.5 206.8
---------------------------------------------- ----- ------------- -------------
Cash flows from financing activities
Issue of shares - 2.0
Dividends paid (14.0) (43.1)
---------------------------------------------- ----- ------------- -------------
Net cash outflow from financing activities
- Continuing operations (14.0) (41.1)
---------------------------------------------- ----- ------------- -------------
Net increase/(decrease) in cash and
cash equivalents 94.2 (31.3)
Net increase in cash and cash equivalents
- Discontinued operations 35.7 18.8
Cash and cash equivalents at 1 January 128.5 141.0
---------------------------------------------- ----- ------------- -------------
Cash and cash equivalents at 31 December 27 258.4 128.5
---------------------------------------------- ----- ------------- -------------
Notes to the consolidated financial statement
1. Accounting policies
The principal accounting policies applied in the preparation of
these consolidated financial statements are set out below. These
policies have been consistently applied to all the years presented,
unless otherwise stated.
1.1. Reporting entity
Secure Trust Bank PLC is a company incorporated in the United
Kingdom (referred to as 'the Company'). The Company is registered
in England and Wales and has the registered number 00541132. The
registered address of the Company is One Arleston Way, Solihull,
West Midlands, B90 4LH. The consolidated financial statements of
the Company as at and for the year ended 31 December 2017 comprise
Secure Trust Bank PLC and its subsidiaries (together referred to as
'the Group' and individually as 'subsidiaries'). The Group is
primarily involved in banking and financial services.
1.2. Basis of presentation
The Group's consolidated financial statements and the Company's
financial statements have been prepared in accordance with
International Financial Reporting Standards, as adopted by the
Group and endorsed by the EU and the Companies Act 2006 applicable
to companies reporting under IFRS. They have been prepared under
the historical cost convention, as modified by the revaluation of
equity instruments available-for-sale and land and buildings and
financial instruments at fair value through profit or loss. The
consolidated financial statements are presented in pounds sterling,
which is the functional and presentational currency of the entities
within the Group.
The preparation of financial statements in conformity with IFRS
requires the use of certain critical accounting estimates. It also
requires management to exercise its judgement in the process of
applying the Group's accounting policies. The areas involving a
higher degree of judgement or complexity or areas where assumptions
and estimates are significant to the consolidated financial
statements are disclosed in Note 2.
The directors have assessed, in the light of current and
anticipated economic conditions, the Group's ability to continue as
a going concern. The directors confirm they are satisfied that the
Company and the Group have adequate resources to continue in
business for the foreseeable future. For this reason, they continue
to adopt the 'going concern' basis for preparing accounts, as set
out in the going concern and viability section of the Strategic
Report starting on page 2.
The consolidated financial statements were authorised for issue
by the Board of Directors on 21 March 2018.
The following International Financial Reporting Standards, which
have been endorsed by the EU, have been issued but are not yet
effective and have not been adopted early:
-- IFRS 9 'Financial Instruments' (effective for annual periods
beginning after 1 January 2018). This is the International
Accounting Standards Board's replacement of IAS 39 'Financial
Instruments: Recognition and Measurement'. Based on assessments
undertaken to date, the estimated adjustment (net of tax) of the
adoption of IFRS 9 on the opening balance of the Group's equity at
1 January 2018 is expected to be a reduction in the range of GBP22
million to GBP27 million. This represents:
- GBPnil related to the classification requirements (refer to
Note 29 for further information);
- An expected reduction in the range of GBP28 million to GBP34
million related to the impairment requirements (refer to Note 29
for further information). This reduction is primarily attributable
to Consumer Finance. The Business Finance portfolio is not expected
to drive a material reduction; and
- An increase in the range of GBP6 million to GBP7 million
related to associated deferred tax impacts.
The above are estimates and will not be finalised until all
transition work has been completed. The actual impact of adopting
IFRS 9 may change as the Group continues to refine and finalise its
models for the expected credit loss (ECL) calculations following
validations undertaken both internally and by the Group's incoming
external auditors. The new accounting policies, assumptions,
judgements and estimation techniques are subject also to change
until the Group finalises its interim report for the six months
ended 30 June 2018.
-- IFRS 15 'Revenue from contracts with customers' (effective
for annual periods beginning after 1 January 2018). This standard
replaces a number of existing standards and interpretations and
applies to contracts with customers, but does not apply to
insurance contracts, financial instruments or lease contracts,
which are in the scope of other IFRS. It also does not apply if two
companies in the same line of business exchange non-monetary assets
to facilitate sales to other parties. The standard specifies how
and when an IFRS reporter will recognise revenue as well as
requiring such entities to provide users of financial statements
with more informative relevant disclosures. It introduces a new
revenue recognition model that recognises revenue either at a point
in time or over time. The model features a principles-based
five-step model to be applied to all contracts with customers.
Following consideration of the Group's operating model, it has been
concluded that this standard will not have a material impact on the
Group.
-- IFRS 16 'Leases' (effective for annual periods beginning
after 1 January 2019). The standard sets out the principles for the
recognition, measurement, presentation and disclosure of leases for
both parties to a contract i.e. the customer ('lessee') and the
supplier ('lessor'). IFRS 16 replaces the previous leases standard,
IAS 17 'Leases', and related interpretations. IFRS 16 eliminates
the classification of leases as either operating leases or finance
leases for a lessee. Instead all leases, except short term and low
value leases, are treated in a similar way to finance leases
applying IAS 17. Leases are 'capitalised' by recognising the
present value of the lease payments and showing them either as
lease assets (right-of-use assets) or together with property, plant
and equipment. If lease payments are made over time, a company also
recognises a financial liability representing its obligation to
make future lease payments. The most significant effect of the new
requirements in IFRS 16 will be an increase in lease assets and
financial liabilities. The effect of this standard is currently
being assessed, but it is unlikely to be substantial. Lessor
accounting remains unchanged from IAS 17.
1.3. Change in accounting policy
Charge-off of debt sold by Secure Trust Bank Plc to Debt
Managers (Services) Limited
Previously, when debt was sold by Secure Trust Bank Plc to its
subsidiary Debt Managers (Services) Limited, the debt was 'charged
off', i.e. the gross receivable and associated impairment provision
were written off, when Debt Managers (Services) Limited considered
that the remaining debt was unlikely to be recovered. The Group
considers that it better reflects the economic reality to charge
off the debt at the point of its sale to Debt Managers (Services)
Limited.
This has resulted in a reduction of both gross receivables and
impairment provision of GBP32.1 million at 31 December 2016. There
is no impact on net receivables or the Income statement. Further
information is provided in Note 10.
1.4. Consolidation
Subsidiaries
Subsidiaries are all investees controlled by the Group. The
Group controls an investee when it is exposed, or has rights, to
variable returns from its involvement with the investee and has the
ability to affect those returns through its power over the
investee. Subsidiaries are fully consolidated from the date on
which control is transferred to the Group.
The acquisition method of accounting is used to account for the
acquisition of subsidiaries by the Group. The cost of an
acquisition is measured as the fair value of the assets given,
equity instruments issued and liabilities incurred or assumed at
the date of exchange plus costs directly attributable to the
acquisition. Identifiable assets acquired and liabilities and
contingent liabilities assumed in a business combination are
measured initially at their fair values at the acquisition date,
irrespective of the extent of any non-controlling interest. The
excess of the cost of acquisition over the fair value of the
Group's share of the identifiable net assets acquired is recorded
as goodwill. If the cost of acquisition is less than the fair value
of the net assets of the subsidiary acquired, the difference is
recognised directly in the income statement.
The parent company's investments in subsidiaries are recorded at
cost less, where appropriate, provision for impairment in
value.
Inter-company transactions, balances and unrealised gains and
losses on transactions between Group companies are eliminated.
Accounting policies of subsidiaries have been changed where
necessary to ensure consistency with the policies adopted by the
Group.
Discontinued operations
Subsidiaries are de-consolidated from the date that control
ceases. Discontinued operations are a component of an entity that
has been disposed of, and represents a major line of business and
is part of a single co-ordinated disposal plan.
1.5. Interest income and expense
Interest income and expense are recognised in the income
statement for all instruments measured at amortised cost using the
effective interest method.
The effective interest method calculates the amortised cost of a
financial asset or a financial liability and allocates the interest
income or interest expense over the relevant period. The effective
interest rate is the rate that discounts estimated future cash
payments or receipts through the expected life of the financial
instrument or, when appropriate, a shorter period to the net
carrying amount of the financial asset or financial liability. When
calculating the effective interest rate, the Group takes into
account all contractual terms of the financial instrument but does
not consider future credit losses. The calculation includes all
fees paid or received between parties to the contract that are an
integral part of the effective interest rate, transaction costs and
all other premiums or discounts.
Once a financial asset or a group of similar financial assets
has been written down as a result of an impairment loss, interest
income is recognised using the rate of interest used to discount
the future cash flows for the purpose of measuring the impairment
loss.
1.6. Net fee and commission income
Fees and commissions which are not considered integral to the
effective interest rate are generally recognised on an accruals
basis when the service has been provided.
1.7. Financial assets and financial liabilities
The Group classifies its financial assets as fair value through
profit or loss, loans and receivables, held-to-maturity or
available-for-sale and classifies its financial liabilities as
other financial liabilities. Management determines the
classification of its investments at initial recognition. A
financial asset or financial liability is measured initially at
fair value plus, for an item not at fair value through profit or
loss, transaction costs that are directly attributable to its
acquisition or issue.
(a) Loans and receivables
Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market. They arise when the Group provides money, goods or services
directly to a debtor with no intention of trading the receivable.
Loans are recognised when the funds are advanced to customers.
Loans and receivables are carried at amortised cost using the
effective interest method (see below).
(b) Held-to-maturity
Held-to-maturity investments are non-derivative financial assets
with fixed or determinable payments and fixed maturities that the
Group's management has the positive intention and ability to hold
to maturity. Held-to-maturity investments are carried at amortised
cost using the effective interest method.
(c) Available-for-sale
Available-for-sale ('AFS') investments are those not classified
as another category of financial assets. These comprised equity
investments in a quoted company. They may be sold in response to
liquidity requirements or equity price movements. AFS investments
are initially recognised at cost, which is considered as the fair
value of the investment including any acquisition costs. AFS
investments are subsequently measured at fair value in the
statement of financial position. Fair value changes on the AFS
securities are recognised in the statement of other comprehensive
income and in equity (AFS reserve), until the investment is sold or
impaired. Once sold or impaired, the cumulative gains or losses
previously recognised in the AFS reserve are recycled to the income
statement.
(d) Other financial liabilities
Other financial liabilities are non-derivative financial
liabilities with fixed or determinable payments. Other financial
liabilities are recognised when cash is received from the
depositors. Other financial liabilities are carried at amortised
cost using the effective interest method. The fair value of other
liabilities repayable on demand is assumed to be the amount payable
on demand at the statement of financial position date.
Derecognition
Financial assets are derecognised when the rights to receive
cash flows from the financial assets have expired or where the
Group has transferred substantially all of the risks and rewards of
ownership. There have not been any instances where assets have only
been partially derecognised. The Group derecognises a financial
liability when its contractual obligations are discharged,
cancelled or expire.
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, minus principal payments, plus
or minus the cumulative amortisation using the effective interest
method of any difference between the initial amount recognised and
the maturity amount, minus any reduction for impairment.
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. The fair value of
assets and liabilities traded in active markets are based on
current bid and offer prices respectively. If the market for a
financial instrument is not active the Group establishes a fair
value by using an appropriate valuation technique. These include
the use of recent arm's length transactions, reference to other
instruments that are substantially the same for which market
observable prices exist, net present value and discounted cash flow
analysis.
1.8. Foreign currencies
Transactions in foreign currencies are initially recorded at the
rates of exchange prevailing on the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies
are retranslated into the Company's functional currency at the
rates prevailing on the balance sheet date. Exchange differences
arising on the settlement of monetary items, and on the
retranslation of monetary items, are included in the income
statement for the period.
1.9. Impairment of financial assets
Assets carried at amortised cost
On an ongoing basis the Group assesses whether there is
objective evidence that a financial asset or group of financial
assets is impaired. Objective evidence is the occurrence of a loss
event, after the initial recognition of the asset, that impacts on
the estimated future cash flows of the financial asset or group of
financial assets, and can be reliably estimated.
The criteria that the Group uses to determine that there is
objective evidence of an impairment loss include, but are not
limited to, the following:
-- Delinquency in contractual payments of principal or interest;
-- Breach of financial covenants or contractual obligations;
-- Cash flow difficulties experienced by the borrower; and
-- Initiation of bankruptcy proceedings.
If there is objective evidence that an impairment loss on loans
and receivables or held-to-maturity investments carried at
amortised cost has been incurred, the amount of the loss is
measured as the difference between the asset's carrying amount and
the present value of estimated future cash flows discounted at the
financial asset's original effective interest rate. The carrying
amount of the asset is reduced through the use of an allowance
account and the amount of the loss is recognised in the income
statement. If a loan or held-to-maturity investment has a variable
interest rate, the discount rate for measuring any impairment loss
is the current effective interest rate determined under the
contract.
The Group considers evidence of impairment for loans and
advances at both an individual asset and collective level. All
individually significant loans and advances are assessed for
specific impairment. Those found not to be specifically impaired
are then collectively assessed for any impairment that has been
incurred but not yet identified. In assessing collective impairment
the Group uses historical trends of the probability of default,
emergence period, the timing of recoveries and the amount of loss
incurred, adjusted for management's judgement as to whether current
economic and credit conditions are such that the actual losses are
likely to be significantly different to historic trends.
When a loan is uncollectible, it is written off against the
related provision for loan impairment. Such loans are written off
after all the necessary procedures have been completed and the
amount of the loss has been determined. Subsequent recoveries of
amounts previously written off decrease the amount of the provision
for loan impairment in the income statement.
Business finance
In assessing objective evidence of a loss event for business
loans, the following factors are considered:
-- If any contractual repayment date has been missed;
-- Covenant breaches; and
-- In Commercial Finance, a loan may be considered for potential
impairment if the financial prospects of the borrower's customers
deteriorates.
Consumer finance
For Consumer loans, cash flows are estimated based on past
experience combined with the Group's view of the future considering
the following factors:
-- Our exposure to the customer;
-- Based on the number of days in arrears at the statement of
financial position date, the likelihood that a loan will progress
through the various stages of delinquency and ultimately be written
off; and
-- The amount and timing of expected receipts and recoveries.
Modification of loans
A customer's account may be modified to assist customers who are
in or have recently overcome financial difficulties and have
demonstrated both the ability and willingness to meet the current
or modified loan contractual payments. Loans that have renegotiated
or deferred terms, resulting in a substantial modification to the
cash flows, are no longer considered to be past due but are treated
as new loans recognised at fair value, provided the customers
comply with the renegotiated or deferred terms.
1.10. Intangible assets
(a) Goodwill
Goodwill represents the excess of the cost of the acquisition
over the fair value of the Group's share of the net identifiable
assets acquired at the date of acquisition. Goodwill is held at
cost less accumulated impairment losses and is deemed to have an
infinite life.
The Group reviews the goodwill for impairment at least annually
or when events or changes in economic circumstances indicate that
impairment may have taken place. Impairment losses are recognised
in the income statement if the carrying amount exceeds the
recoverable amounts.
(b) Computer software
Acquired computer software licences are capitalised on the basis
of the costs incurred to acquire and bring to use the specific
software.
Costs associated with developing or maintaining computer
software programs are recognised as an expense as incurred unless
the technical feasibility of the development has been demonstrated,
and it is probable that the expenditure will enable the asset to
generate future economic benefits in excess of its originally
assessed standard of performance, in which case they are
capitalised.
These costs are amortised on the basis of the expected useful
lives, which are between three to ten years.
(c) Other intangibles
The acquisition of subsidiaries was accounted for in accordance
with IFRS 3 'Business Combinations', which requires the recognition
of the identifiable assets acquired and liabilities assumed at
their acquisition date fair values. As part of this process, it was
necessary to recognise certain intangible assets which are
separately identifiable and which are not included on the
acquiree's balance sheet, which are amortised over their expected
useful lives, as set out in Note 16.
1.11. Property, plant and equipment
Property is held at its revalued amount, being its fair value at
the date of valuation less any subsequent accumulated depreciation.
Revaluations are carried out annually at the reporting date, and
movements are recognised in Other Comprehensive Income, net of any
applicable deferred tax.
Plant and equipment is stated at historical cost less
depreciation. Historical cost includes expenditure that is directly
attributable to the acquisition of the items. Pre-installed
computer software licences are capitalised as part of the computer
hardware it is installed on. Depreciation is calculated using the
straight-line method to allocate their cost to their residual
values over their estimated useful lives, which are subject to
regular review:
Land not depreciated
Freehold buildings 50 years
Leasehold improvements shorter of life of lease or 7 years
Computer equipment 3 to 5 years
Other equipment 5 to 10 years
Gains and losses on disposals are determined by comparing
proceeds with carrying amounts. These are included in the income
statement.
1.12. Leases
(a) As a lessor
Assets leased to customers under agreements which transfer
substantially all the risks and rewards of ownership, with or
without ultimate legal title, are classified as finance leases.
When assets are held subject to finance leases, the present value
of the lease payments is recognised as a receivable. The difference
between the gross receivable and the present value of the
receivable is recognised as unearned finance income. Lease income
is recognised over the term of the lease using the net investment
method, which reflects a constant periodic rate of return.
(b) As a lessee
Rentals made under operating leases are recognised in the income
statement on a straight-line basis over the term of the lease.
1.13. Cash and cash equivalents
For the purposes of the statement of cash flows, cash and cash
equivalents comprise cash in hand and demand deposits, and cash
equivalents comprise highly liquid investments which are
convertible into cash with an insignificant risk of changes in
value with a maturity of three months or less at the date of
acquisition, including certain loans and advances to banks and
short-term highly liquid debt securities.
1.14. Equity instruments
Equity instruments issued by the Company are recorded at the
proceeds received, net of direct issuance costs. Any amounts
received over nominal value are recorded in the share premium
account, net of direct issuance costs. Costs associated with the
listing of shares are expensed immediately.
1.15. Employee benefits
(a) Post-retirement obligations
The Group contributes to defined contribution schemes for the
benefit of certain employees. The schemes are funded through
payments to insurance companies or trustee-administered funds at
the contribution rates agreed with individual employees. The Group
has no further payment obligations once the contributions have been
paid. The contributions are recognised as an employee benefit
expense when they are due. There are no post-retirement benefits
other than pensions.
(b) Share-based compensation
The fair value of equity settled share-based payment awards are
calculated at grant date and recognised over the period in which
the employees become unconditionally entitled to the awards (the
vesting period). The amount is recognised as personnel expenses in
the income statement, with a corresponding increase in equity.
Further details of the valuation methodology is set out in Note
26.
The fair value of cash settled share-based payments is
recognised as personnel expenses in the income statement with a
corresponding increase in liabilities over the vesting period. The
liability is remeasured at each reporting date and at settlement
date based on the fair value of the options granted, with a
corresponding adjustment to personnel expenses.
1.16. Taxation
Current income tax which is payable on taxable profits is
recognised as an expense in the period in which the profits
arise.
Deferred tax is provided in full on temporary differences
arising between the tax bases of assets and liabilities and their
carrying amounts in the consolidated financial statements. Deferred
tax is determined using tax rates (and laws) that have been enacted
or substantially enacted by the statement of financial position
date and are expected to apply when the related deferred tax asset
is realised or the deferred tax liability is settled.
Deferred tax assets and liabilities are offset if there is a
legally enforceable right to offset current tax assets and
liabilities, and they relate to taxes levied by the same tax
authority on the same taxable entity, or on different tax entities,
when they intend to settle current tax liabilities and assets on a
net basis or their tax assets and liabilities will be realised
simultaneously.
Deferred tax assets are recognised where it is probable that
future taxable profits will be available against which the
temporary differences can be utilised.
1.17. Dividends
Dividends on ordinary shares are recognised in equity in the
period in which they are approved by Shareholders.
1.18. Funding for Lending Scheme and Term Funding Scheme
Under the applicable International Accounting Standard, IAS 39,
if a security is lent under an agreement to return it to the
transferor, as is the case for eligible securities lent by
institutions to the Bank of England under the Funding for Lending
Scheme, then the security is not derecognised because the
transferor retains all the risks and rewards of ownership. The UK
Treasury Bills borrowed from the Bank of England under the Funding
for Lending Scheme are not recognised on the statement of financial
position of the institution until such time as they are subject to
a repurchase agreement with a third party, as they will not meet
the criteria for derecognition by the Bank of England. When the UK
Treasury Bills are pledged as part of a sale and repurchase
agreement with a third party, amounts borrowed from the third party
are recognised in the statement of financial position.
Under the new Term Funding Scheme, the Bank borrows cash and
this is recognised in the consolidated statement of financial
position within cash and cash equivalents, with the corresponding
loan being recognised in liabilities to banks.
2. Critical judgements and estimates
Judgements
In the course of preparing the financial statements, no
significant judgements have been made in applying the Group's
accounting policies, other than those involving estimations, that
have had a significant effect on the amounts recognised in the
financial statements.
Estimates
The Group makes certain estimates which affect the reported
amounts of assets and liabilities. The following areas are those
where assumptions and estimates at the end of the current reporting
period have a significant risk of resulting in a material
adjustment to the carrying amounts of assets and liabilities within
the next financial year:
2.1. Impairment losses on loans and advances to customers
Where financial assets are individually evaluated for
impairment, management uses their best estimates in calculating the
net present value of future cash flows. Management has to make
estimates on the financial position of the counterparty and the net
realisable value of collateral (where held), in determining the
expected future cash flows.
In assessing collective impairment the Group uses historical
trends of the probability of default, the timing of recoveries and
the amount of loss incurred, adjusted for management's estimate as
to whether current economic and credit conditions are such that the
actual losses are likely to be significantly different to historic
trends.
Consumer Finance
The Group reviews its Consumer Finance loan portfolios to assess
impairment at least on a half-yearly basis. The basis for
evaluating impairment losses is described in accounting policy 1.9.
In determining whether an impairment loss should be recorded in the
income statement, the Group makes estimates as to whether there is
any observable data indicating that there is a measurable decrease
in the estimated future cash flows from financial assets, or a
group of financial assets.
This evidence may include observable data indicating that there
has been an adverse change in the payment status of borrowers in a
group, or national or local economic conditions that correlate with
defaults on assets in the group. Loans and advances are identified
as impaired by taking account of the age of the debt's delinquency
and the product type. The impairment provision is calculated by
applying a percentage rate to the balance of different ages and
categories of impaired debt. The methodology and assumptions used
for estimating both the amount and timing of future cash flows are
reviewed regularly to reduce any differences between loss estimates
and recent actual loss experience.
The key estimates made in calculating the Consumer individual
provisions are the probability of default rates and the loss given
default. Uplifting the probability of each by 10% would result in
an estimated increase in the Consumer Finance individual provisions
as follows:
2017 2017 2016 2016
10% 10% 10% 10%
increase increase increase increase
in probability in loss in probability in loss
of default given of default given
rates default rates default
GBPmillion GBPmillion GBPmillion GBPmillion
------------------ ---------------- ----------- ---------------- -----------
Personal Lending N/A N/A 0.2 0.3
Motor Finance 0.3 2.3 0.3 1.6
Retail Finance 0.3 0.6 0.1 0.4
------------------ ---------------- ----------- ---------------- -----------
0.6 2.9 0.6 2.3
------------------ ---------------- ----------- ---------------- -----------
Of the GBP2.3 million (2016: GBP1.6 million) sensitivity to loss
given default in Motor Finance above, an estimated GBP0.9 million
(2016: GBP0.8 million) relates to the expected loss on the sale of
repossessed vehicles.
The collective provision for the consumer portfolio assumes an
emergence period of 2 months for the Motor Finance and Personal
Loan portfolios and 1 month for the Retail Finance portfolio.
Increasing this assumption by 1 month would result in an estimated
increase in the collective impairment allowance as follows:
2017 2016
GBPmillion GBPmillion
------------------ ----------- -----------
Personal Lending N/A 0.5
Motor Finance 1.0 0.8
Retail Finance 1.1 0.9
------------------ ----------- -----------
2.1 2.2
------------------ ----------- -----------
Business Finance
Within the Real Estate Finance and Asset Finance businesses,
accounts which are impaired are assessed against the discounted
cash flows expected to arise in order to identify any impairment
provisions. Collective provisions are assessed only to the extent
that there is sufficient data to justify an inherent level of
losses within the current portfolios.
For specific Commercial Finance clients assessment is made as to
the collectability of outstanding invoices in relation to the
amounts lent against them. If there is a deficit against
outstanding invoices then other security is considered in terms of
value and collectability. If there is an overall shortfall then the
unsecured amount is assessed as to whether a provision is required.
For collective provisions a view of the overall level of
non-collectability in the portfolio is taken. The level of
provision required is under review as the product is yet to mature,
and therefore data is developing, so the Group has estimated a
level appropriate based on other data available in the
industry.
The Business Finance portfolio is largely assessed on an
individual basis with minimal losses experienced to date. The
decision on whether or not an impairment trigger has occurred for
Real Estate Finance loans is made based on the Group's knowledge of
the counterparty and assessment of their ability to repay their
loan balance. The Real Estate Finance portfolio is exposed to
deteriorations in property prices, in the event of borrower
default. However, given the low loan to value ratios of loans held
within the portfolio, this exposure is not considered
significant.
The collective provision for the Asset Finance portfolio assumes
an emergence period of 3 months. The collective provision for the
Commercial Finance and Real Estate Finance portfolios are based on
peer group experience of comparable groups of financial assets and
determined as 0.15% and 0.1% of gross balances net of specific
provisions respectively.
2.2. Average life of lending
IAS 39 requires interest earned from lending to be measured
under the effective interest rate method. The effective interest
rate is the rate that exactly discounts estimated future cash
receipts or payments through the expected life of the financial
instrument or, when appropriate, a shorter period to the net
carrying amount of the financial asset.
Management must therefore use estimates to estimate the expected
life of each instrument and hence the expected cash flows relating
to it. The accuracy of these estimates would therefore be affected
by unexpected market movements resulting in altered customer
behaviour, inaccuracies in the models used compared to actual
outcomes and incorrect assumptions. The Group also needs to
identify which cash flows relating to each instrument should be
subject to the effective interest rate method.
A one month increase in the assumed behavioural life would
change the income received in the year as follows:
2017 2016
GBPmillion GBPmillion
------------------ ----------- -----------
Personal Lending N/A -
Motor Finance 0.2 0.1
Retail Finance 0.4 (0.6)
------------------ ----------- -----------
0.6 (0.5)
------------------ ----------- -----------
2.3. Reassessment of critical estimates
During the year, Management reassessed the critical estimates
and resolved that the assumptions used to estimate acquisition
accounting and share option scheme valuations were not sensitive
enough to change the balances materially, and therefore were no
longer considered critical.
3. Operating segments
The Group is organised into seven operating segments, which
consist of the different products available, disclosed below:
Business finance
1) Real Estate Finance: residential and commercial investment
and development loans secured by UK real estate.
2) Asset Finance: loans to small and medium sized enterprises to
acquire commercial assets.
3) Commercial Finance: invoice discounting and invoice
factoring.
Consumer finance
4) Personal Lending: Unsecured consumer loans sold to customers
via broker aggregators and business partners.
5) Motor Finance: Hire purchase agreements secured against the
vehicle being financed.
6) Retail Finance: Point of sale unsecured finance for in-store
and online retailers.
Consumer mortgages
7) Residential mortgages for the self-employed, contract
workers, those with complex income and those with a recently
restored credit history, sold via select mortgage
intermediaries.
Other
Other includes OneBill, current accounts, STB Leasing Limited,
debt collection and a GBP30 million loan to Non-Standard Finance
plc (NSF) as part of their purchase of ELG, which was repaid during
the year. All current accounts were closed by the end of 2016, and
OneBill has been closed to new customers since 2009.
Management review these segments by looking at the income, size
and growth rate of the loan books, impairments and customer
numbers. Except for these items no costs or balance sheet items are
allocated to the segments.
Net
impairment
Interest losses
receivable Fee Revenue on loans Loans
and and from and and
similar commission external advances advances
income income customers to customers to customers
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------- ------------ ------------ ----------- -------------- --------------
Year ended 31 December
2017
Business finance
Real Estate Finance 32.1 0.2 32.3 (0.2) 580.8
Asset Finance 8.5 - 8.5 1.0 116.7
Commercial Finance 2.5 4.7 7.2 0.1 126.5
Consumer finance
Motor Finance 46.2 0.9 47.1 20.8 274.6
Retail Finance 47.5 3.2 50.7 13.8 452.3
Consumer Mortgages 0.1 - 0.1 - 16.5
Other 4.4 7.0 11.4 (2.0) 30.9
-------------------------- ------------ ------------ ----------- -------------- --------------
Continuing operations 141.3 16.0 157.3 33.5 1,598.3
Discontinued operations
Personal Lending 8.0 - 8.0 3.4 -
-------------------------- ------------ ------------ ----------- -------------- --------------
149.3 16.0 165.3 36.9 1,598.3
------------------------- ------------ ------------ ----------- -------------- --------------
Net
impairment
Interest losses
receivable Fee Revenue on loans Loans
and and from and and
similar commission external advances advances
income income customers to customers to customers
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------- ------------ ------------ ----------- -------------- --------------
Year ended 31 December
2016
Business finance
Real Estate Finance 28.3 0.1 28.4 0.1 451.0
Asset Finance 7.8 - 7.8 0.6 117.2
Commercial Finance 1.5 3.1 4.6 0.2 62.8
Consumer finance
Motor Finance 39.6 0.9 40.5 14.6 236.2
Retail Finance 34.3 2.4 36.7 9.5 325.9
Other 7.3 9.8 17.1 (1.7) 62.4
-------------------------- ------------ ------------ ----------- -------------- --------------
Continuing operations 118.8 16.3 135.1 23.3 1,255.5
Discontinued operations
Personal Lending 22.3 0.1 22.4 7.0 65.5
-------------------------- ------------ ------------ ----------- -------------- --------------
141.1 16.4 157.5 30.3 1,321.0
------------------------- ------------ ------------ ----------- -------------- --------------
The 'other' segment above includes products which are
individually below the quantitative threshold for separate
disclosure and fulfils the requirement of IFRS 8.28 by reconciling
operating segments to the amounts reported in the financial
statements. Currently, the Consumer Mortgages segment also falls
below this threshold, but the directors consider that this segment
represents a key part of the future strategy of the Group, and
therefore merits separate disclosure.
Funding costs and operating expenses are not aligned to
operating segments for day to day management of the business, so
they cannot be allocated on a reliable basis. Accordingly, profit
by operating segment has not been disclosed.
All of the Group's operations are conducted wholly within the
United Kingdom and geographical information is therefore not
presented.
4. Operating income
a) Net interest income
2017 2016
GBPmillion GBPmillion
---------------------------------------- ----------- -----------
Cash and balances at central banks 0.4 0.6
Loans and advances to banks 0.2 -
Loans and advances to customers 140.7 118.2
Interest receivable and similar income 141.3 118.8
---------------------------------------- ----------- -----------
Deposits from customers (26.7) (26.3)
---------------------------------------- ----------- -----------
Interest expense and similar charges (26.7) (26.3)
---------------------------------------- ----------- -----------
Net interest income 114.6 92.5
---------------------------------------- ----------- -----------
The net interest income shown above excludes GBP8.0 million
(2016: GBP22.3 million) of interest on loans and advances to
customers in respect of discontinued operations, as shown in the
income statement as set out on page 117.
b) Net fee and commission income
2017 2016
GBPmillion GBPmillion
------------------------------- ----------- -----------
Fee and disbursement income 12.4 12.3
Commission income 2.7 3.6
Other income 0.9 0.4
Fee and commission income 16.0 16.3
------------------------------- ----------- -----------
Other expenses (1.1) (1.8)
------------------------------- ----------- -----------
Fee and commission expense (1.1) (1.8)
------------------------------- ----------- -----------
Net fee and commission income 14.9 14.5
------------------------------- ----------- -----------
Fees and commissions income consists principally of the
following:
-- weekly and monthly fees from the OneBill product
-- associated insurance commissions and commissions earned on debt collection activities in DMS
-- discounting, service and arrangement fees in Commercial Finance, and
-- account management and administration fees from retailers in Retail Finance.
Fee and commission expenses consist primarily of fees payable in
respect of Motor Finance.
5. Operating expenses
Continuing Discontinued Total Continuing Discontinued Total
2017 2017 2017 2016 2016 2016
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------ ----------- ------------- ----------- ----------- ------------- -----------
Staff costs, including
those of directors:
Wages and salaries 33.8 0.3 34.1 31.5 3.5 35.0
Social security
costs 4.2 - 4.2 3.1 0.3 3.4
Pension costs 1.2 - 1.2 0.9 0.2 1.1
Share based payment
transactions (0.2) - (0.2) (0.5) - (0.5)
Depreciation of
property, plant
and equipment (Note
15) 0.8 - 0.8 0.6 - 0.6
Amortisation of
intangible assets
(Note 16) 2.0 - 2.0 1.6 - 1.6
Operating lease
rentals 1.5 - 1.5 1.6 0.3 1.9
Other administrative
expenses 28.0 - 28.0 25.5 2.9 28.4
------------------------ ----------- ------------- ----------- ----------- ------------- -----------
Total operating
expenses 71.3 0.3 71.6 64.3 7.2 71.5
------------------------ ----------- ------------- ----------- ----------- ------------- -----------
As described in Note 3, operating expenses are not aligned to
operating segments for day to day management of the business, so
they cannot be allocated on a reliable basis. Accordingly,
discontinued operating expenses above relates only to those costs
that are directly attributable to the discontinued business.
Remuneration of the auditor and its associates, excluding VAT,
was as follows:
2017 2016
GBP'000 GBP'000
------------------------------------------ -------- --------
Fees payable to the Company's auditor
for the audit of the Company's annual
accounts 270 149
Fees payable to the Company's auditor
for other services:
The audit of the Company's subsidiaries,
pursuant to legislation 68 63
Audit related assurance services 100 13
Other assurance services 62 521
All other non-audit services 39 15
------------------------------------------ -------- --------
539 761
------------------------------------------ -------- --------
Other assurance services related to the half year review (2016:
related to reporting accountant work in respect of the Main Market
listing).
All other non-audit services related to profit certification,
work relating to entry into the Term Funding Scheme and advice on a
potential corporate acquisition (2016: related to profit
certification and work relating to entry into the Funding for
Lending Scheme).
6. Average number of employees
2017 2016
Number Number
---------------- ------- -------
Directors 8 6
Management 116 101
Administration 610 590
---------------- ------- -------
734 697
---------------- ------- -------
The prior year figures above include employees of ELG for the
period of ownership by the Group.
7. Income tax expense
Continuing Discontinued Continuing Discontinued
operations operations Total operations operations Total
2017 2017 2017 2016 2016 2016
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Current taxation
Corporation tax charge
- current year 5.5 0.8 6.3 3.1 1.7 4.8
Corporation tax charge
- adjustments in
respect of prior
years - - - 1.8 - 1.8
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
5.5 0.8 6.3 4.9 1.7 6.6
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Deferred taxation
Deferred tax charge
- current year (0.5) - (0.5) - (0.1) (0.1)
Deferred tax charge
- adjustments in
respect of prior
years 0.1 - 0.1 0.3 - 0.3
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
(0.4) - (0.4) 0.3 (0.1) 0.2
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Income tax expense 5.1 0.8 5.9 5.2 1.6 6.8
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Tax reconciliation
Profit before tax 25.0 4.3 29.3 19.4 8.1 27.5
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Tax at 19.25% (2016:
20.0%) 4.8 0.8 5.6 3.9 1.6 5.5
Permanent differences 0.2 - 0.2 (0.8) - (0.8)
Prior period adjustments 0.1 - 0.1 2.1 - 2.1
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Income tax expense
for the year 5.1 0.8 5.9 5.2 1.6 6.8
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
On 26 October 2015, the Government substantively enacted a
reduction in the main rate of UK corporation tax from 20% to 19%
(effective from 1 April 2017). Subsequently, a further reduction to
17% (effective 1 April 2020) was also substantively enacted on 6
September 2016. This will reduce the Company's future current tax
charge accordingly.
8. Earnings per ordinary share
Basic
Basic earnings per ordinary share are calculated by dividing the
profit attributable to equity holders of the parent by the weighted
average number of ordinary shares as follows:
2017 2016
Profit attributable to equity
holders of the parent (GBP
millions)
Continuing operations 19.9 14.2
Discontinued operations 3.9 123.3
--------------------------------- ----------- -----------
23.8 137.5
------------------------------- ----------- -----------
Weighted average number of
ordinary shares (number) 18,475,229 18,234,588
--------------------------------- ----------- -----------
Diluted
Diluted earnings per ordinary share are calculated by dividing
the profit attributable to equity holders of the parent by the
weighted average number of ordinary shares in issue during the
year, as noted above, as well as the number of dilutive share
options in issue during the year, as follows:
2017 2016
--------------------------------- ----------- -----------
Weighted average number of
ordinary shares 18,475,229 18,234,588
Number of dilutive shares in
issue at the year end 219,007 130,200
----------------------------------- ----------- -----------
Fully diluted weighted average
number of ordinary shares 18,694,236 18,364,788
----------------------------------- ----------- -----------
Dilutive shares being based
on:
Number of options outstanding
at the year end 368,063 177,084
Weighted average exercise price
(pence) 799 720
Average share price during
the period (pence) 1,974 2,720
----------------------------------- ----------- -----------
9. Loans and advances to banks
Group Group Company Company
2017 2016 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------- ----------- ----------- ----------- -----------
Placements with banks included
in cash and cash equivalents
(Note 27) 34.3 18.2 32.3 16.5
-------------------------------- ----------- ----------- ----------- -----------
Included within loans and advances to banks are amounts placed
with Arbuthnot Latham & Co., Limited, a related company prior
to the sale of its controlling stake in the Group, of GBP5.0
million (31 December 2016: GBP5.0 million).
Moody's long-term ratings are as follows:
Group Group Company Company
2017 2016 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------- ----------- ----------- ----------- -----------
A1 6.1 4.6 6.0 4.6
A3 23.2 8.6 21.3 6.9
Arbuthnot Latham & Co., Limited
- No rating 5.0 5.0 5.0 5.0
--------------------------------- ----------- ----------- ----------- -----------
34.3 18.2 32.3 16.5
--------------------------------- ----------- ----------- ----------- -----------
None of the loans and advances to banks are either past due or
impaired.
10. Loans and advances to customers
Group Group Company Company
2017 2016 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------- ----------- ----------- ----------- -----------
Gross loans and advances 1,638.2 1,349.4 1,605.4 1,316.9
Less: allowances for impairment
on loans and advances (Note
12) (39.9) (28.4) (39.9) (27.7)
--------------------------------- ----------- ----------- ----------- -----------
1,598.3 1,321.0 1,565.5 1,289.2
--------------------------------- ----------- ----------- ----------- -----------
The Group has changed its policy on the charge-off of debt sold
by Secure Trust Bank Plc to Debt Managers (Services) Limited. A
description of this change in accounting policy is set out in Note
1.3, the effect of which is set out below:
31 December 31 December
2016 2015
GBPmillion GBPmillion
------------------------------ ------------ ------------
Gross loans and advances
As originally stated 1,381.5 994.9
Restatement (32.1) (10.9)
-------------------------------- ------------ ------------
As restated 1,349.4 984.0
-------------------------------- ------------ ------------
Allowances for impairment on
loans and advances
As originally stated (60.5) (34.3)
Restatement 32.1 10.9
-------------------------------- ------------ ------------
As restated (28.4) (23.4)
-------------------------------- ------------ ------------
The fair value of loans and advances to customers is shown in
Note 34. For a maturity profile of loans and advances to customers,
refer to Note 31.
Group and Company
At 31 December 2017 loans and advances to customers of GBP200.7
million were pre-positioned under the Bank of England's Term
Funding Scheme, which replaced the Funding For Lending Scheme
during the year (see below), and were available for use as
collateral within the scheme. At 31 December 2016 loans and
advances to customers of GBP180.6 million were pre-positioned under
the Bank of England's Funding for Lending Scheme and were available
for use as collateral within the scheme.
At 31 December 2016, GBP86.0 million of UK Treasury Bills were
drawn under the Funding for Lending Scheme. During the period,
these Treasury Bills were pledged as part of a sale and repurchase
agreement with an original maturity period of six months. Monies
arising as a result are disclosed in Note 20.
GBP597.3 million (2016: GBP451.0 million) of the loans are
secured upon residential or commercial property and these are
neither past due nor impaired. All portfolios of loans secured are
at an initial loan to value ratio of less than 85%. All property
valuations at loan inception, and the majority of development stage
valuations, are performed by independent Chartered Surveyors, who
perform their work in accordance with the Royal Institution of
Chartered Surveyors Valuation - Professional Standards.
Group
GBP2.5 million (2016: GBP2.9 million) of collateral is held from
RentSmart, against loans of GBP17.2 million (2016: GBP18.7
million). This collateral is included in trade payables at 31
December 2017. This is based upon the balance of customer
receivables and expected new agreements during the following
month.
11. Finance lease receivables
Loans and advances to customers include finance lease
receivables as follows:
Group Group Company Company
2017 2016 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------- ----------- ----------- ----------- -----------
Gross investment in finance
lease receivables:
- No later than 1 year 189.9 163.5 180.7 151.7
- Later than 1 year and no
later than 5 years 374.2 347.0 367.7 338.9
- Later than 5 years 1.2 1.5 1.2 1.5
------------------------------------- ----------- ----------- ----------- -----------
565.3 512.0 549.6 492.1
Unearned future finance income
on finance leases (162.5) (151.2) (158.4) (146.2)
------------------------------------- ----------- ----------- ----------- -----------
Net investment in finance leases 402.8 360.8 391.2 345.9
------------------------------------- ----------- ----------- ----------- -----------
The net investment in finance
leases may be analysed as follows:
- No later than 1 year 117.5 98.0 111.3 89.9
- Later than 1 year and no
later than 5 years 284.2 261.5 278.8 254.7
- Later than 5 years 1.1 1.3 1.1 1.3
------------------------------------- ----------- ----------- ----------- -----------
402.8 360.8 391.2 345.9
------------------------------------- ----------- ----------- ----------- -----------
12. Allowances for impairment of loans and advances
Group
Gross
loans
Individual Collective Total and Provision
provision provision provision receivables cover
GBPmillion GBPmillion GBPmillion GBPmillion %
---------------------------- ----------- ----------- ----------- ------------- ----------
Year ended 31 December
2017
Business finance
Real Estate Finance - 0.3 0.3 581.1 0.1%
Asset Finance 1.0 0.2 1.2 117.9 1.0%
Commercial Finance 0.4 0.2 0.6 127.1 0.5%
Consumer finance
Motor Finance
---------------------------- ----------- ----------- ----------- ------------- ----------
Voluntary termination
provision 1.0 - 1.0
Other impairment 23.3 2.6 25.9
---------------------------- ----------- ----------- ----------- ------------- ----------
24.3 2.6 26.9 301.5 8.9%
Retail Finance 6.5 1.1 7.6 459.9 1.7%
Consumer mortgages - - - 16.5 0.0%
Other 3.3 - 3.3 34.2 9.6%
---------------------------- ----------- ----------- ----------- ------------- ----------
35.5 4.4 39.9 1,638.2 2.4%
---------------------------- ----------- ----------- ----------- ------------- ----------
Gross
loans
Individual Collective Total and Provision
provision provision provision receivables cover
GBPmillion GBPmillion GBPmillion GBPmillion %
---------------------------- ----------- ----------- ----------- ------------- ----------
Year ended 31 December
2016
Business finance
Real Estate Finance - 0.5 0.5 451.5 0.1%
Asset Finance 0.4 0.1 0.5 117.7 0.4%
Commercial Finance 0.4 0.1 0.5 63.3 0.8%
Consumer finance
Personal Lending 3.5 0.7 4.2 69.7 6.0%
Motor Finance
---------------------------- ----------- ----------- ----------- ------------- ----------
Voluntary termination
provision 0.6 - 0.6
Other impairment 10.0 3.0 13.0
---------------------------- ----------- ----------- ----------- ------------- ----------
10.6 3.0 13.6 249.8 5.4%
Retail Finance 4.0 0.9 4.9 330.8 1.5%
Other 4.2 - 4.2 66.6 6.3%
---------------------------- ----------- ----------- ----------- ------------- ----------
23.1 5.3 28.4 1,349.4 2.1%
---------------------------- ----------- ----------- ----------- ------------- ----------
Provisions included in 'Other' are in respect of various legacy
products. This segment also includes loans of GBP17.2 million
(2016: GBP18.7 million) held in STB Leasing Limited. The credit
risk associated with those loans is retained by its partner,
RentSmart. Accordingly, no provision is held against the RentSmart
loans.
The Group net impairment losses disclosed in the income
statement can be analysed as follows:
2017 2016
GBPmillion GBPmillion
----------------------------------- ----------- -----------
Individual provision: charge
for impairment losses 36.4 25.1
Collective provision: charge
for impairment losses (0.4) 3.3
Loans written off, net of amounts
utilised 1.4 1.2
Recoveries of loans written
off (0.5) (1.9)
------------------------------------- ----------- -----------
36.9 27.7
Less personal lending (3.4) (4.4)
33.5 23.3
----------------------------------- ----------- -----------
A reconciliation of the allowance accounts for losses on loans
and advances is as follows:
2017 2016
GBPmillion GBPmillion
-------------------------------------------- ----------- -----------
Individual allowances for impairment
At 1 January 23.1 21.4
Charge for impairment losses 36.4 25.1
Amounts utilised (13.5) (10.7)
Changes to presentation in respect of debt
sales (3.6) (12.7)
Sale of personal lending (6.9) -
At 31 December 35.5 23.1
-------------------------------------------- ----------- -----------
Collective allowances for impairment
At 1 January 5.3 2.0
Charge for impairment losses (0.4) 3.3
Sale of personal lending (0.5) -
At 31 December 4.4 5.3
-------------------------------------------- ----------- -----------
Total allowances for impairment 39.9 28.4
-------------------------------------------- ----------- -----------
Loans and advances to customers can be further summarised as
follows:
2017 2017 2016 2016
GBPmillion % GBPmillion %
-------------------------------- ----------- ------- ----------- -------
Neither past due nor impaired 1,545.6 94.3% 1,268.7 94.1%
Not past due but impaired 5.4 0.3% 0.6 0.0%
Past due but not impaired 0.3 0.0% 12.4 0.9%
Past due up to 90 days and
impaired 37.8 2.3% 37.4 2.8%
Past due after 90 days and
impaired 49.1 3.0% 30.3 2.2%
-------------------------------- ----------- ------- ----------- -------
Gross 1,638.2 100.0% 1,349.4 100.0%
Less: allowance for impairment (39.9) (28.4)
-------------------------------- ----------- ------- ----------- -------
Net 1,598.3 1,321.0
-------------------------------- ----------- ------- ----------- -------
Gross amounts of loans and advances to customers that were past
due up to 90 days and impaired were as follows:
2017 2016
GBPmillion GBPmillion
------------------------ ----------- -----------
Past due up to 30 days 24.5 24.4
Past due 30 - 60 days 8.6 7.9
Past due 60 - 90 days 4.7 5.1
Total 37.8 37.4
-------------------------- ----------- -----------
During the period, the methodology used to derive the above
analyses of loans and advances to customers, categorising them into
past due banding, was enhanced. Accordingly, the comparatives as at
31 December 2016 have been re-presented on this basis.
Gross amounts of loans and advances to customers that were past
due but not impaired were as follows:
2017 2016
GBPmillion GBPmillion
------------------------ ----------- -----------
Past due up to 30 days 0.2 4.6
Past due 30 - 60 days 0.1 7.8
Total 0.3 12.4
-------------------------- ----------- -----------
Company
Gross
loans
Individual Collective Total and Provision
provision provision provision receivables cover
GBPmillion GBPmillion GBPmillion GBPmillion %
---------------------------- ----------- ----------- ----------- ------------- ----------
Year ended 31 December
2017
Business finance
Real Estate Finance - 0.3 0.3 581.1 0.1%
Asset Finance 1.0 0.2 1.2 117.9 1.0%
Commercial Finance 0.4 0.2 0.6 124.8 0.5%
Consumer finance
Motor Finance
---------------------------- ----------- ----------- ----------- ------------- ----------
Voluntary termination
provision 1.0 - 1.0
Other impairment 23.3 2.6 25.9
---------------------------- ----------- ----------- ----------- ------------- ----------
24.3 2.6 26.9 301.5 8.9%
Retail Finance 6.5 1.1 7.6 459.9 1.7%
Consumer mortgages - - - 16.5 0.0%
Other 3.3 - 3.3 3.7 89.2%
---------------------------- ----------- ----------- ----------- ------------- ----------
35.5 4.4 39.9 1,605.4 2.5%
---------------------------- ----------- ----------- ----------- ------------- ----------
Gross
loans
Individual Collective Total and Provision
provision provision provision receivables cover
GBPmillion GBPmillion GBPmillion GBPmillion %
---------------------------- ----------- ----------- ----------- ------------- ----------
Year ended 31 December
2016
Business finance
Real Estate Finance - 0.5 0.5 451.5 0.1%
Asset Finance 0.4 0.1 0.5 117.7 0.4%
Commercial Finance 0.4 0.1 0.5 63.3 0.8%
Consumer finance
Personal Lending 3.5 0.7 4.2 69.7 6.0%
Motor Finance
---------------------------- ----------- ----------- ----------- ------------- ----------
Voluntary termination
provision 0.6 - 0.6
Other impairment 10.0 1.6 11.6
---------------------------- ----------- ----------- ----------- ------------- ----------
10.6 1.6 12.2 248.4 4.9%
Retail Finance 4.0 0.9 4.9 330.8 1.5%
Other 3.5 1.4 4.9 35.5 13.8%
---------------------------- ----------- ----------- ----------- ------------- ----------
22.4 5.3 27.7 1,316.9 2.1%
---------------------------- ----------- ----------- ----------- ------------- ----------
The Company net impairment losses included in the income
statement can be analysed as follows:
2017 2016
GBPmillion GBPmillion
----------------------------------- ----------- -----------
Individual provision: Charge
for impairment losses 38.8 21.4
Collective provision: Charge
for impairment losses (0.4) 3.2
Loans written off, net of amounts
utilised 1.4 0.9
Recoveries of loans written
off (0.5) (0.3)
Profit on sale of debt (0.3) (1.0)
------------------------------------- ----------- -----------
39.0 24.2
Less personal lending (3.4) (4.4)
35.6 19.8
----------------------------------- ----------- -----------
A reconciliation of the allowance accounts for losses on loans
and advances is as follows:
2017 2016
GBPmillion GBPmillion
---------------------------------------- ----------- -----------
Individual allowances for impairment
At 1 January 22.4 18.5
Charge for impairment losses 38.8 25.8
Utilised (13.5) (8.5)
Release of allowance for impairment on
the sale of debt (5.3) (13.4)
Sale of personal lending (6.9) -
At 31 December 35.5 22.4
---------------------------------------- ----------- -----------
Collective allowances for impairment
At 1 January 5.3 2.0
Charge for impairment losses (0.4) 3.3
Sale of personal lending (0.5) -
At 31 December 4.4 5.3
---------------------------------------- ----------- -----------
Total allowances for impairment 39.9 27.7
---------------------------------------- ----------- -----------
Loans and advances to customers can be further summarised as
follows:
2017 2017 2016 2016
GBPmillion % GBPmillion %
-------------------------------- ----------- ------- ----------- -------
Neither past due nor impaired 1,529.0 95.3% 1,250.2 95.0%
Not past due but impaired 5.4 0.3% 0.6 0.0%
Past due but not impaired - 0.0% 12.4 0.9%
Past due up to 90 days and
impaired 37.5 2.3% 37.2 2.8%
Past due after 90 days and
impaired 33.5 2.1% 16.5 1.3%
-------------------------------- ----------- ------- ----------- -------
Gross 1,605.4 100.0% 1,316.9 100.0%
Less: allowance for impairment (39.9) (27.7)
-------------------------------- ----------- ------- ----------- -------
Net 1,565.5 1,289.2
-------------------------------- ----------- ------- ----------- -------
Gross amounts of loans and advances to customers that were past
due up to 90 days and impaired were as follows:
2017 2016
GBPmillion GBPmillion
------------------------ ----------- -----------
Past due up to 30 days 24.4 24.2
Past due 30 - 60 days 8.5 7.9
Past due 60 - 90 days 4.6 5.1
Total 37.5 37.2
-------------------------- ----------- -----------
During the period, the methodology used to derive the above
analyses of loans and advances to customers, categorising them into
past due banding, was enhanced. Accordingly, the comparatives as at
31 December 2016 have been re-presented on this basis.
Gross amounts of loans and advances to customers that were past
due but not impaired were as follows:
2017 2016
GBPmillion GBPmillion
------------------------ ------------ -----------
Past due up to 30 days - 4.6
Past due 30 - 60 days - 7.8
Total - 12.4
-------------------------- ---------- -----------
The impairment provision calculation is based on the individual
past-due status of each loan.
Group and Company
Interest income on loans classified as impaired totalled GBP2.6
million (2016: GBP6.4 million).
13. Debt securities held-to-maturity
Debt securities of GBP5.0 million (2016: GBP20.0 million)
represent UK Treasury Bills. The Company's intention is to hold
them to maturity and, therefore, they are stated in the statement
of financial position at amortised cost.
All of the debt securities held-to-maturity had a rating agency
designation at 31 December 2017, based on Moody's long-term ratings
of Aa2 (2016: Aa1. Moody's downgraded the UK credit rating in
September 2017). None of the debt securities held-to-maturity are
either past due or impaired.
14. Equity instruments available-for-sale
On 13 April 2016, as part of the sale of ELG to NSF, the Group
acquired 23,529,412 shares in NSF at a cost of 69.25 pence per
share. This equity instrument was considered to be
available-for-sale, and therefore fair value changes on the
Available-For-Sale securities were recognised directly in other
comprehensive income and equity ('AFS' reserve).
In May 2017, the shares were sold at an average price of 71
pence, realizing a profit of GBP343,000. The AFS reserve balance of
GBP2.8 million, which had arisen due to previous movements in the
NSF share price, was reclassified from Other Comprehensive Income
to the income statement.
15. Property, plant and equipment
Group
Computer
Freehold and
land other
and buildings equipment Total
GBPmillion GBPmillion GBPmillion
-------------------------- --------------- ----------- -----------
Cost or valuation
At 1 January 2016 7.1 10.1 17.2
Additions 1.4 1.1 2.5
Disposals - (0.3) (0.3)
Revaluation 0.5 - 0.5
At 31 December 2016 9.0 10.9 19.9
--------------------------- --------------- ----------- -----------
Additions - 0.8 0.8
At 31 December 2017 9.0 11.7 20.7
--------------------------- --------------- ----------- -----------
Accumulated depreciation
At 1 January 2016 (0.6) (8.1) (8.7)
Depreciation charge (0.1) (0.5) (0.6)
Disposals - 0.1 0.1
Revaluation 0.7 - 0.7
--------------------------- --------------- ----------- -----------
At 31 December 2016 - (8.5) (8.5)
--------------------------- --------------- ----------- -----------
Depreciation charge (0.1) (0.7) (0.8)
Revaluation 0.1 - 0.1
--------------------------- --------------- ----------- -----------
At 31 December 2017 - (9.2) (9.2)
--------------------------- --------------- ----------- -----------
Net book amount
-------------------------- --------------- ----------- -----------
At 31 December 2016 9.0 2.4 11.4
--------------------------- --------------- ----------- -----------
At 31 December 2017 9.0 2.5 11.5
--------------------------- --------------- ----------- -----------
Company
Computer
and
Freehold other
property equipment Total
GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- -----------
Cost or valuation
At 1 January 2016 2.7 9.5 12.2
Additions 1.4 0.6 2.0
Disposals - (0.3) (0.3)
Revaluation 0.5 - 0.5
At 31 December 2016 4.6 9.8 14.4
-------------------------- ----------- ----------- -----------
Additions - 0.3 0.3
At 31 December 2017 4.6 10.1 14.7
-------------------------- ----------- ----------- -----------
Accumulated depreciation
At 1 January 2016 - (8.0) (8.0)
Depreciation charge (0.1) (0.3) (0.4)
Disposals - 0.1 0.1
Revaluation 0.1 - 0.1
At 31 December 2016 - (8.2) (8.2)
-------------------------- ----------- ----------- -----------
Depreciation charge - (0.4) (0.4)
At 31 December 2017 (8.6) (8.6)
-------------------------- ----------- ----------- -----------
Net book amount
-------------------------- ----------- ----------- -----------
At 31 December 2016 4.6 1.6 6.2
-------------------------- ----------- ----------- -----------
At 31 December 2017 4.6 1.5 6.1
-------------------------- ----------- ----------- -----------
The Group's freehold properties comprise:
-- the Registered Office of the Company, which is fully utilised for the Group's own purposes.
-- Secure Trust House, Boston Drive, Bourne End, SL8 5YS, the
majority of which up to the sale of ELG, was also used for the
Group's own purposes. Since the sale, it is only partially used for
the Group's own purposes.
-- 25 and 26 Neptune Court, Vanguard Way, Cardiff, CF24 5PJ, the
majority of which is used for the Group's own purposes.
The directors have assessed the value of the Group's freehold
property at the year end through comparison to current rental
yields on similar properties in the same area and an increase in
the fair value of freehold property has been recognised and its
carrying value has been adjusted accordingly. Changes in the fair
value of freehold property are recognized in other comprehensive
income, to the extent that any reductions do not exceed the initial
increase.
The carrying value of freehold land which is included in the
total carrying value of freehold land and buildings and which is
not depreciated is GBP1.9 million (2016: GBP1.9 million).
The historical cost of freehold property included at valuation
is as follows:
Group Group Company Company
2017 2016 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- ----------- -----------
Cost 7.9 7.9 4.1 4.1
Accumulated depreciation (1.5) (1.4) (0.1) (0.1)
6.4 6.5 4.0 4.0
-------------------------- ----------- ----------- ----------- -----------
16. Intangible assets
Group
Other
Computer intangible
Goodwill software assets Total
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- ------------ -----------
Cost or valuation
At 1 January 2016 1.0 9.3 2.2 12.5
Additions - 3.6 - 3.6
At 31 December 2016 1.0 12.9 2.2 16.1
-------------------------- ----------- ----------- ------------ -----------
Additions - 3.3 0.1 3.4
At 31 December 2017 1.0 16.2 2.3 19.5
-------------------------- ----------- ----------- ------------ -----------
Accumulated amortisation
At 1 January 2016 - (4.8) (0.7) (5.5)
Amortisation charge - (1.3) (0.3) (1.6)
At 31 December 2016 - (6.1) (1.0) (7.1)
-------------------------- ----------- ----------- ------------ -----------
Amortisation charge - (1.8) (0.2) (2.0)
At 31 December 2017 - (7.9) (1.2) (9.1)
-------------------------- ----------- ----------- ------------ -----------
Net book amount
-------------------------- ----------- ----------- ------------ -----------
At 31 December 2016 1.0 6.8 1.2 9.0
-------------------------- ----------- ----------- ------------ -----------
At 31 December 2017 1.0 8.3 1.1 10.4
-------------------------- ----------- ----------- ------------ -----------
Goodwill above relates to the following cash generating units,
which are part of the Retail Finance operating segment:
2017 2016
GBPmillion GBPmillion
---------------- ----------- -----------
Music business 0.3 0.3
V12 0.7 0.7
----------------- ----------- -----------
Total 1.0 1.0
----------------- ----------- -----------
The recoverable amount of these cash generating units are
determined on a value in use calculation which uses cash flow
projections based on financial forecasts covering a three year
period, and a discount rate of 8%. Cash flow projections during the
forecast period are based on the expected rate of new business. A
zero growth based scenario is also considered. The directors
believe that any reasonably possible change in the key assumptions
on which recoverable amount is based would not cause the aggregate
carrying amount to exceed the aggregate recoverable amount of the
cash-generating unit.
Other intangible assets were recognised as part of the V12
Finance Group acquisition. These were recorded at fair value, and
are being amortised as follows:
Years
---------------------- ------
IT system 5
Distribution channel 10
Brand name 5
------------------------ ------
Company
Computer
Goodwill software Total
GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- -----------
Cost or valuation
At 1 January 2016 0.3 5.5 5.8
Additions - 3.5 3.5
At 31 December 2016 0.3 9.0 9.3
--------------------------- ----------- ----------- -----------
Additions - 3.3 3.3
At 31 December 2017 0.3 12.3 12.6
--------------------------- ----------- ----------- -----------
Accumulated amortisation
At 1 January 2016 - (2.6) (2.6)
Amortisation charge - (0.5) (0.5)
At 31 December 2016 - (3.1) (3.1)
--------------------------- ----------- ----------- -----------
Amortisation charge - (1.0) (1.0)
At 31 December 2017 - (4.1) (4.1)
--------------------------- ----------- ----------- -----------
Net book amount
-------------------------- ----------- ----------- -----------
At 31 December 2016 0.3 5.9 6.2
--------------------------- ----------- ----------- -----------
At 31 December 2017 0.3 8.2 8.5
--------------------------- ----------- ----------- -----------
Goodwill above relates to the music business cash generating
unit, which is part of the Retail Finance operating segment. The
recoverable amount is determined on the same basis as for the
Group.
17. Investments
Company
Shares Impairment Net
at cost provisions investments
GBPmillion GBPmillion GBPmillion
------------------------------------- ----------- ------------ -------------
At 31 December 2016, 1 January 2017
and 31 December 2017 3.7 - 3.7
------------------------------------- ----------- ------------ -------------
Shares in subsidiary undertakings of Secure Trust Bank PLC at 31
December 2017 are stated at cost less any provision for impairment.
All subsidiary undertakings are unlisted and none are banking
institutions. The subsidiary undertakings were all incorporated in
the UK and wholly owned via ordinary shares. All subsidiary
undertakings are included in the consolidated financial statements
and have an accounting reference date of 31 December.
Details are as follows:
Principal activity
---------------------------------- --------------------------
Owned directly
Debt Managers (Services)
Limited Debt collection company
Secure Homes Services
Limited Property rental
STB Leasing Limited Leasing
V12 Finance Group Limited Holding company
Owned indirectly via intermediate
holding companies
V12 Personal Finance Limited Dormant
Sourcing and servicing of
V12 Retail Finance Limited unsecured loans
---------------------------------- --------------------------
The registered office of the Company, and all subsidiary
undertakings, is One Arleston Way, Shirley, Solihull, West
Midlands, B90 4LH.
The following subsidiaries were sold to NSF on 13 April
2016:
Principal activity
---------------------------------- -----------------------------
Owned directly
Everyday Loans Holdings
Limited Holding company
Owned indirectly via intermediate
holding companies
Sourcing and servicing of
Everyday Loans Limited unsecured and secured loans
Provider of unsecured and
Everyday Lending Limited secured loans
---------------------------------- -----------------------------
18. Deferred taxation
Group Group Company Company
2017 2016 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------- ----------- ----------- ----------- -----------
Deferred tax liabilities:
Unrealised surplus on revaluation
of freehold property (0.2) (0.2) - -
Other short term timing differences 0.2 - - -
------------------------------------- ----------- ----------- ----------- -----------
Deferred tax liabilities - (0.2) - -
------------------------------------- ----------- ----------- ----------- -----------
Deferred tax assets:
Other short term timing differences 0.6 - 0.6 0.1
Deferred tax assets 0.6 - 0.6 0.1
------------------------------------- ----------- ----------- ----------- -----------
Deferred tax liabilities:
At 1 January (0.2) - - -
Income statement 0.2 - - -
Other comprehensive income - (0.2) - -
------------------------------------- ----------- ----------- ----------- -----------
At 31 December - (0.2) - -
------------------------------------- ----------- ----------- ----------- -----------
Deferred tax assets:
At 1 January - 0.3 0.1 0.6
Income statement 0.2 (0.3) 0.1 (0.4)
Other comprehensive income 0.4 - 0.4 (0.1)
At 31 December 0.6 - 0.6 0.1
------------------------------------- ----------- ----------- ----------- -----------
On 26 October 2015, the Government substantively enacted a
reduction in the main rate of UK corporation tax from 20% to 19%
(effective from 1 April 2017). Subsequently, a further reduction to
17% (effective 1 April 2020) was also substantively enacted on 6
September 2016. This will reduce the Company's future current tax
charge accordingly. Deferred tax has been calculated based on the
enacted rates to the extent that the related temporary or timing
differences are expected to reverse in the future periods.
19. Other assets
Group Group Company Company
2017 2016 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------ ----------- ----------- ----------- -----------
Other receivables 1.2 0.7 1.0 0.6
Amounts due from related companies - - 29.7 31.2
Prepayments and accrued income 4.2 4.2 2.5 3.5
5.4 4.9 33.2 35.3
------------------------------------ ----------- ----------- ----------- -----------
20. Due to banks
Group Group Company Company
2017 2016 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------- ----------- ----------- ----------- -----------
Amounts due to other credit
institutions 113.0 70.0 113.0 70.0
----------------------------- ----------- ----------- ----------- -----------
Amounts due to banks for the current year represent monies
arising from drawings under the Term Funding Scheme. These are due
for repayment between May 2021 and November 2021.
Amounts due to banks in the prior year represented monies
arising from the sale and repurchase of drawings under the Funding
for Lending Scheme, which were repaid during 2017.
21. Deposits from customers
Group and Company
2017 2016
GBPmillion GBPmillion
------------------------- ----------- -----------
Current/demand accounts 14.5 15.2
Term deposits 1,468.7 1,136.6
------------------------- ----------- -----------
1,483.2 1,151.8
------------------------- ----------- -----------
For a maturity profile of deposits from customers, refer to
Notes 30 and 32.
22. Other liabilities
Group Group Company Company
2017 2016 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------- ----------- ----------- ----------- -----------
Other payables 29.5 21.2 24.5 17.5
Amounts due to related companies - - 9.7 13.2
Accruals and deferred income 12.4 27.8 10.2 26.3
41.9 49.0 44.4 57.0
---------------------------------- ----------- ----------- ----------- -----------
Financial Services Compensation Scheme Levy
The liability for the Financial Services Compensation Scheme
levy is included in accruals and deferred income of both Group and
Company.
In common with all regulated UK deposit takers, the Company pays
a levy to the Financial Services Compensation Scheme to enable it
to meet claims against it. The levy consists of a compensation levy
which covers the amount of compensation and a management expenses
levy, which covers the costs of running the scheme and interest
associated with compensation which the scheme pays.
The Company's Financial Services Compensation Scheme provision
reflects market participation up to the reporting date and the
accrual of GBP0.2 million (2016: GBP0.3 million) relates to the
levy for the scheme year 2017/18 which is payable in September
2018. This amount was calculated on the basis of the Company's
share of protected deposits and the Financial Services Compensation
Scheme's estimate of total interest levies payable for each scheme
year.
23. Provisions for liabilities and charges
2017 2017 2017 2016
Customer Customer
redress Fraud Total redress
GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------- ----------- ----------- ----------- -----------
Balance at 1 January 1.3 - 1.3 2.0
Charged to income statement 0.4 0.2 0.6 0.4
Utilised (0.5) - (0.5) (1.1)
Balance at 31 December 1.2 0.2 1.4 1.3
----------------------------- ----------- ----------- ----------- -----------
Customer redress provision
The Group provides for its best estimate of redress payable in
respect of historical sales of accident, sickness and unemployment
insurance, by considering the likely future uphold rate for claims,
in the context of confirmed issues and historical experience. The
likelihood of potential new claims is projected forward to 2019, as
management believe this to be an appropriate time horizon,
recognising the significant decline in recent claims experience and
the increasing subjectivity beyond that. The accuracy of these
estimates would be affected, were there to be a significant change
in either the number of future claims or, the incidence of claims
upheld by the Financial Ombudsman Service.
The Financial Conduct Authority has announced a deadline for
making these customer redress claims, which would give consumers
until 29 August 2019 to make a claim.
Fraud
The fraud provision relates to cases where the Bank has
reasonable evidence of suspected fraud, but further investigation
is required before the cases can be dealt with appropriately.
24. Contingent liabilities and commitments
Contingent liabilities
As a financial services business, the Group must comply with
numerous laws and regulations, which significantly affect the way
it does business. Whilst the Group believes there are no material
unidentified areas of failure to comply with these laws and
regulations, there can be no guarantee that all issues have been
identified.
Capital commitments
At 31 December 2017, the Group had no capital commitments (2016:
GBPnil).
The Company had no capital commitments (2016: GBPnil).
Credit commitments
See Note 29 for details of the Group and Company commitments to
extend credit to customers.
Operating lease commitments
The future aggregate lease payments for non-cancellable
operating leases are as follows:
2017 2016
Land Land
and and
buildings Other buildings Other
Group GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------- ----------- ----------- ----------- -----------
Within 1 year 0.3 0.1 0.3 0.4
Between 1 year and 5 years 0.8 0.1 0.9 0.1
Over 5 years - - 0.1 -
---------------------------- ----------- ----------- ----------- -----------
1.1 0.2 1.3 0.5
---------------------------- ----------- ----------- ----------- -----------
2017 2016
Land Land
and and
buildings Other buildings Other
Company GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------- ----------- ----------- ----------- -----------
Within 1 year 0.1 0.1 0.1 0.3
Between 1 year and 5 years 0.4 - 0.4 0.1
Over 5 years - - 0.1 -
---------------------------- ----------- ----------- ----------- -----------
0.5 0.1 0.6 0.4
---------------------------- ----------- ----------- ----------- -----------
There are 2 leases classified as land and buildings in the Group
(2016: 4). Other leases include motor vehicles and computer
hardware.
25. Share capital
2017 2017 2016 2016
Number Ordinary Number Ordinary
of shares shares of shares shares
GBPmillion GBPmillion
------------------------------- ----------- ----------- ----------- -----------
At start of year 18,475,229 7.4 18,191,894 7.3
Shares issued during the year - - 283,335 0.1
------------------------------- ----------- ----------- ----------- -----------
At end of year 18,475,229 7.4 18,475,229 7.4
------------------------------- ----------- ----------- ----------- -----------
Share capital comprises ordinary shares with a par value of 40
pence each.
26. Share based payments
At 31 December 2017, the Group had four share based payment
schemes in operation:
-- Share Option Scheme
-- 2017 long term incentive plan
-- 2017 sharesave scheme
-- 'Phantom' share option scheme
In addition, the 2017 deferred bonus plan has been approved by
shareholders but has not yet been launched.
A summary of the key details of each scheme is set out
below:
Outstanding Forfeited Outstanding
at the Granted during at the
start during the end Vested
of the the year of the and Exercise
year year year exercisable Vesting price
Number Number Number Number Number Date GBP
----------------- ------------ -------- ---------- ------------ ------------- ----------- ---------
Equity settled
Share option 2 November
scheme 177,084 - - 177,084 177,084 2016 7.20
2017 Long Term 1 June
Incentive plan - 67,992 - 67,992 - 2020 0.40
2017 Sharesave 1 November
Plan - 125,987 (40) 125,947 - 2020 13.19
177,084 193,979 (40) 371,023 177,084
----------------- ------------ -------- ---------- ------------ ------------- ----------- ---------
Cash settled
'Phantom' share 16 March
option scheme 312,917 - - 312,917 - 2019 25.00
----------------- ------------ -------- ---------- ------------ ------------- ----------- ---------
The Group and Company incurred an expense in relation to share
based payments of GBP0.2 million (2016: credit of GBP0.5 million),
as disclosed in Note 5.
Share option scheme
On 17 October 2011, the Group established the Share Option
Scheme entitling three directors and certain senior employees to
purchase shares in the Company.
On 2 November 2011, 934,998 share options were granted at an
exercise price of GBP7.20 per share. Approximately half of the
share options vested and were exercised on 2 November 2014, with
the remainder vesting and becoming exercisable on 2 November 2016.
The bulk of the remainder were exercised on 7 November 2016,
leaving 177,084 share options of 2 directors unexercised at 31
December 2016. Vested options are exercisable for a period of 10
years from the date of grant.
The number of unexercised share options as at 31 December 2017
remains unchanged from the position as at 31 December 2016. The
intrinsic value of unexercised options is GBP1.8 million (2016:
GBP2.5 million).
2017 long term incentive plan
On 3 May 2017, the Group established the 2017 Long Term
Incentive Plan Scheme entitling two directors and certain other key
senior employees to purchase shares in the Company.
The awards are subject to three performance conditions, which
are based on:
-- Annual compound growth in Earnings per share ('EPS') over the performance period.
-- Rank of the total shareholder return ('TSR') over the
performance period against the TSR of the comparator group of peer
group companies.
-- Maintaining appropriate risk practices over the performance
period reflecting the longer term strategic risk management of the
Group.
The awards will vest on the date on which the board determines
that these conditions have been met.
The awards have a performance term of 3 years. Those awards
granted to the Executive Directors are subject to a holding period
of 2 years following the vesting date. Those awards not subject to
a holding period will be released to the participants on the
vesting date. Vested options are exercisable for a period of 10
years from the date of grant.
On 1 June 2017, 67,992 share options were granted at an exercise
price of 40 pence per share. 33,467 share options are subject to a
holding period of 2 years, whilst the remaining 34,525 share
options are not subject to a holding period.
The original grant date valuation was determined to be GBP12.19
for those awards that are subject to a holding period, and GBP14.82
for those awards not subject to a holding period, using a
Black-Scholes model for the EPS and risk management tranches, and a
Monte Carlo model for the TSR tranche, and these valuations have
been used in the calculation. Measurement inputs and assumptions
used were as follows:
At grant
date
------------------------------------- --- --- ---------
Share price at grant date GBP22.45
Expected dividend yield 3.80%
Awards subject to a holding
period
Expected stock price volatility 24.6%
Risk free interest rate 0.42%
Average expected life (years) 5.00
Discount for lack of marketability
during holding period 10.00%
Awards not subject to a holding
period
Expected stock price volatility 25.1%
Risk free interest rate 0.19%
Average expected life (years) 3.00
Assumptions applicable to TSR
tranche only
Expected stock price volatility 25.50%
Grant date TSR performance of
the Company compared to comparator Below
group median
Correlation 37%
------------------------------------------------ ---------
2017 Sharesave plan
On 3 May 2017, the Group established the 2017 Sharesave Plan,
entitling all eligible employees to purchase shares in the
Company.
The 2017 Sharesave Plan allows employees with more than 12
months service to save for three years, subject to a maximum
monthly amount of GBP500, with the option to buy shares in Secure
Trust Bank PLC when the plan matures. Participants can not change
the amount that they have agreed to save each month but they can
suspend payments for up to six months. Participants can withdraw
their savings at any time but, if they do this before the
completion date, they lose the option to buy shares at the Option
Price, and if participants cease to hold plan-related employment
before the third anniversary of the grant date, then the options
are also lost.
On 20 September 2017, 229 employees were granted 125,987 share
options, at an exercise price of GBP13.19. The options will
ordinarily vest on 1 November 2020 and be exercisable for a period
of six months. At 31 December 2017, 228 employees with 125,947
share options remained in the 2017 Sharesave Plan.
The original grant date valuation was determined to be GBP3.53
per option, using a Black Scholes model, and this valuation has
been used in the calculation. Measurement inputs and assumptions
used were as follows:
At grant
date
--------------------------------- ---------
Share price at grant date GBP17.51
Expected stock price volatility 25.55%
Expected dividend yield 4.34%
Risk free interest rate 0.58%
Average expected life (years) 3.36
Expected cancellation rate 8.00%
------------------------------------ ---------
Cash settled share based payments
On 16 March 2015, a four year 'phantom' share option scheme was
established in order to provide effective long-term incentive to
senior management of the Group. Under the scheme, no actual shares
would be issued by the Company, but those granted awards under the
scheme would be entitled to a cash payment. The amount of the award
is calculated by reference to the increase in the value of an
ordinary share in the Company over an initial value set at GBP25
per ordinary share, being the price at which the shares resulting
from the exercise of the first tranche of share options under the
Share Option Scheme were sold in November 2014.
As at 31 December 2017, 312,917 (2016: 312,917) share options
remained outstanding. The options will vest on 16 March 2019, and
be exercisable for a period of 10 years after grant date.
As at 31 December 2017, the estimated fair value has been
prepared using the Black-Scholes model. Measurement inputs and
assumptions used were as follows:
2017 2016
--------------------------------- --------- ---------
Share price at reporting date GBP17.97 GBP21.51
Expected stock price volatility 24.49% 40.00%
Expected dividend yield 4.45% 3.40%
Risk free interest rate 0.59% 0.06%
Average expected life (years) 4.03 1.84
Fair value GBP0.79 GBP2.80
----------------------------------- --------- ---------
This resulted in the following being recognised in the financial
statements:
2017 2016
GBPmillion GBPmillion
-------------------------- ----------- -----------
Liability at 1 January 0.6 1.2
Credit for the year (0.4) (0.6)
---------------------------- ----------- -----------
Liability at 31 December 0.2 0.6
---------------------------- ----------- -----------
27. Cash and cash equivalents
For the purposes of the statement of cash flows, cash and cash
equivalents comprise the following balances with less than three
months' maturity from the date of acquisition.
Group Group Company Company
2017 2016 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------ ----------- ----------- ----------- -----------
Cash and balances at central
banks 226.1 112.0 226.1 112.0
Loans and advances to banks
(Note 9) 34.3 18.2 32.3 16.5
------------------------------ ----------- ----------- ----------- -----------
260.4 130.2 258.4 128.5
------------------------------ ----------- ----------- ----------- -----------
28. Financial risk management strategy
By their nature, the Group's activities are principally related
to the use of financial instruments. The directors and senior
management of the Group have formally adopted a Group risk appetite
statement which sets out the Board's attitude to risk and internal
controls. Key risks identified by the directors are formally
reviewed and assessed at least once a year by the Board, in
addition to which key business risks are identified, evaluated and
managed by operating management on an ongoing basis by means of
procedures such as physical controls, credit and other
authorisation limits and segregation of duties. The Board also
receives regular reports on any risk matters that need to be
brought to its attention. Significant risks identified in
connection with the development of new activities are subject to
consideration by the Board. There are budgeting procedures in place
and reports are presented regularly to the Board detailing the
results of each principal business unit, variances against budget
and prior year, and other performance data.
A more detailed description of the risk governance structure is
contained in the Strategic Report beginning on page 2.
The principal financial risks inherent in the Group's business
are credit risk (Note 29), market risk (Note 30), liquidity risk
(Note 31), and capital risk (Note 32).
29. Credit risk
The Company and Group take on exposure to credit risk, which is
the risk that a counterparty will be unable to pay amounts in full
when due. A formal Credit Risk Policy has been agreed by the Board
whilst credit risk is monitored on a monthly basis by the Credit
Risk Committees which review performance of key portfolios
including new business volumes, collections performance,
provisioning levels and provisioning methodology. A credit risk
department within the Group monitors adherence to the Credit Risk
Policy, implements risk tools to manage credit risk and evaluates
business opportunities and the risks and opportunities they present
to the Group whilst ensuring the performance of the Group's
existing portfolios is in line with expectations.
The Group structures the levels of credit risk it undertakes by
placing limits on the amount of risk accepted in relation to
individual borrowers or groups of borrowers. Such risks are
monitored on a revolving basis and subject to an annual or more
frequent review. The limits on the level of credit risk are
approved periodically by the Board of Directors and actual
exposures against limits monitored daily.
Impairment provisions are provided for losses that have been
incurred at the statement of financial position date. Significant
changes in the economy could result in losses that are different
from those provided for at the statement of financial position
date. Management therefore carefully manages its exposures to
credit risk as they consider this to be the most significant risk
to the business.
Exposure to Consumer Finance credit risk is managed through
regular analysis of the ability of borrowers and potential
borrowers to meet interest and capital repayment obligations and by
changing these lending limits where appropriate. Exposure to credit
risk is also managed in part by obtaining collateral, principally
motor vehicles on Motor loans and a credit support balance provided
by RentSmart. The assets undergo a scoring process to mitigate risk
and are monitored by the Board.
For Real Estate Finance and Commercial Finance, lending
decisions are made on an individual transaction basis, using expert
judgement and assessment against criteria set out in the lending
policies. Asset Finance lending is outsourced to Haydock, who
operate in line with the Group's credit policies and risk appetite.
The loans are secured against the assets lent against (real estate,
trade receivables and commercial plant and equipment,
respectively). Disclosures relating to collateral and arrears on
loans and advances to customers are disclosed in Notes 10 and 12
respectively.
The Board monitors the ratings of the counterparties in relation
to the Group's loans and advances to banks. Disclosures of these at
the year end are contained in Note 9. There is no direct exposure
to the Eurozone and peripheral Eurozone countries.
The maximum exposure to credit risk for the Company and the
Group was as follows:
Group Group Company Company
2017 2016 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------- ----------- ----------- ----------- -----------
Cash and balances at central
banks 226.1 112.0 226.1 112.0
Loans and advances to banks 34.3 18.2 32.3 16.5
Loan and advances to customers 1,598.3 1,321.0 1,565.5 1,289.2
Debt securities held-to-maturity 5.0 20.0 5.0 20.0
Other receivables 1.2 0.7 1.0 0.6
Amounts due from related parties - - 29.7 31.2
Credit risk exposures relating
to off-balance sheet assets
are as follows:
Loan commitments 178.6 178.0 178.5 177.8
---------------------------------- ----------- ----------- ----------- -----------
At 31 December 2,043.5 1,649.9 2,038.1 1,647.3
---------------------------------- ----------- ----------- ----------- -----------
The above table represents the maximum credit risk exposure (net
of impairment) to the Company and Group at 31 December 2017 and
2016 without taking account of any collateral held or other credit
enhancements attached. For on-balance sheet assets, the exposures
are based on the net carrying amounts as reported in the statement
of financial position.
Concentration risk
Management assesses the potential concentration risk from
geographic, product and individual loan concentration. Due to the
well diversified nature of the Group's lending operations the
directors do not consider there to be a material exposure arising
from concentration risk. The increase in lending balances and loan
commitments in the London region is principally due to the increase
in Real Estate Finance activities during the year. The
concentration by product and location of the Group and Company's
lending to customers and loan commitments are detailed below:
Group
Loans and
advances to
customers Loan commitments
2017 2016 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------ ----------- ----------- ----------- -----------
Concentration by
product
Business Finance:
Real Estate Finance 580.8 451.0 98.6 99.4
Asset Finance 116.7 117.2 15.5 19.5
Commercial Finance 126.5 62.8 35.5 28.9
Consumer Finance:
Personal Lending - 65.5 - -
Motor 274.6 236.2 0.6 0.6
Retail 452.3 325.9 20.1 28.6
Consumer mortgages 16.5 - 7.7 -
Other 30.9 62.4 0.6 1.0
-------------------------- ----------- ----------- ----------- -----------
At 31 December 1,598.3 1,321.0 178.6 178.0
-------------------------- ----------- ----------- ----------- -----------
Concentration by
region:
East Anglia 142.0 113.1 25.4 19.7
East Midlands 61.5 52.3 4.0 3.0
London 528.0 415.3 76.6 61.3
North East 44.5 37.4 1.0 2.2
North West 152.0 120.8 25.4 17.0
Northern Ireland 16.8 12.5 0.5 0.4
Scotland 93.0 90.3 3.7 10.6
South East 231.2 205.0 14.3 35.0
South West 74.0 62.6 8.1 12.1
Wales 53.5 46.8 1.8 4.2
West Midlands 93.1 80.5 6.1 5.5
Yorkshire and the
Humber 88.1 69.1 4.5 3.9
Overseas 20.6 15.3 7.2 3.1
-------------------------- ----------- ----------- ----------- -----------
At 31 December 1,598.3 1,321.0 178.6 178.0
-------------------------- ----------- ----------- ----------- -----------
The above table relates to the location of the borrower. The
majority of the overseas borrowers are Real Estate Finance clients.
All of the property secured against Real Estate Finance loans is
based in the United Kingdom.
Company
Loans and
advances to
customers Loan commitments
2017 2016 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- ----------- -----------
Concentration by product:
Business Finance:
Real Estate Finance 580.8 451.0 98.6 99.4
Asset Finance 116.7 117.2 15.5 19.5
Commercial Finance 124.2 62.8 35.5 28.9
Consumer Finance:
Personal Lending - 65.5 - -
Motor 274.6 236.2 0.6 0.6
Retail 452.3 325.9 20.1 28.6
Consumer mortgages 16.5 - 7.7 -
Other 0.4 30.6 0.5 0.8
--------------------------- ----------- ----------- ----------- -----------
At 31 December 1,565.5 1,289.2 178.5 177.8
--------------------------- ----------- ----------- ----------- -----------
Concentration by region:
East Anglia 139.3 110.4 25.4 19.7
East Midlands 59.6 50.1 4.0 3.0
London 523.8 411.2 76.6 61.1
North East 43.0 35.9 1.0 2.2
North West 146.1 117.1 25.4 17.0
Northern Ireland 16.2 11.9 0.5 0.4
Scotland 90.1 87.1 3.7 10.6
South East 227.1 200.6 14.3 35.0
South West 71.8 60.3 8.1 12.1
Wales 51.9 45.1 1.8 4.2
West Midlands 90.4 77.8 6.0 5.5
Yorkshire and the Humber 85.6 66.4 4.5 3.9
Overseas 20.6 15.3 7.2 3.1
--------------------------- ----------- ----------- ----------- -----------
At 31 December 1,565.5 1,289.2 178.5 177.8
--------------------------- ----------- ----------- ----------- -----------
The above table relates to the location of the borrower. The
majority of the overseas borrowers are Real Estate Finance clients.
All of the property secured against Real Estate Finance loans is
based in the United Kingdom.
Forbearance
At year end, all customers within the Group's Consumer Mortgage
business were up to date with their monthly payments. Should
customers face financial difficulties, the Group may, depending on
individual circumstances, offer customers one of a number of
forbearance options. The types of forbearance the Group may be
prepared to offer include the following:
-- Temporary interest only concessions are offered to customers
in financial difficulty on a temporary basis with formal periodic
review. The concession allows the customer to reduce monthly
payments to cover interest only, and if made, the arrears status
will not increase.
-- Arrangement payment plans are agreed to enable customers to
reduce their arrears balances by an agreed amount per month which
is paid in addition to their standard monthly repayment.
-- Payment concessions can be agreed on a temporary basis
whereby the customer may pay less than the contractual monthly
payment, in line with their individual affordability. If a customer
is within this type of concession, their arrears position will
increase.
-- In exceptional circumstances, capitalisations of arrears may
occur or an interest rate adjustment may be applied. These are used
under strict controls, explicitly where the customer circumstances
offer no other option.
All forbearance arrangements are formally discussed and agreed
with the customer. By offering customers in financial difficulty
the option of forbearance the Group potentially exposes itself to
an increased level of risk through prolonging the period of
non-contractual payment and/or potentially placing the customer
into a detrimental position at the end of the forbearance
period.
All forbearance arrangements are reviewed and monitored
regularly to assess the ongoing potential risk, suitability and
sustainability to the Group.
Where forbearance measures are not possible or are considered
not to be in the customer's best interests, or where such measures
have been tried and the customer has not adhered to the forbearance
terms that have been agreed, the Bank will consider realising its
security and taking possession of the property in order to sell it
and clear the outstanding debt.
Other than Consumer Mortgages, the Group does not routinely
reschedule contractual arrangements where customers default on
their repayments. It may offer the customer the option to reduce or
defer payments for a short period, in which cases the loan will
retain the normal contractual payment due dates and will be treated
the same as any other defaulting cases for impairment purposes.
Arrears tracking will continue on the account with any impairment
charge being based on the original contractual due dates for all
products.
Implementation of IFRS 9
As detailed in note 1.2 the estimated adjustment (net of tax) of
the adoption of IFRS 9 on the opening balance of the Group's equity
at 1 January 2018 is expected to be a reduction in the range of
GBP22 million to GBP27 million. This represents:
-- GBPnil related to the classification requirements (refer to
(a) below for further information);
-- An expected reduction in the range of GBP28 million to GBP34
million related to the impairment requirements (refer to (b) below
for further information). This reduction is primarily attributable
to Consumer Finance. The Business Finance portfolio is not expected
to drive a material reduction; and
-- An increase in the range of GBP6 million to GBP7 million
related to associated deferred tax impacts.
The above are estimates and will not be finalised until all
transition work has been completed.
a) Classification of financial instruments
IFRS 9 contains three primary measurement categories for
financial assets; 'amortised cost', 'fair value through other
comprehensive income (FVOCI)' and 'fair value through profit and
loss (FVTPL)'. The IAS 39 categories 'held to maturity', 'available
for sale' and 'loans and receivables' will be eliminated. A
financial asset will be measured at amortised cost if both the
following conditions are met and it has not been designated as at
FVTPL:
-- the asset is held within a business model whose objective is
to hold the asset to collect its contractual cash flows; and
-- the contractual terms of the financial asset give rise to
cash flows on specified dates that represent payments of solely
principal and interest on the outstanding principal amount.
A debt instrument would be measured at FVOCI only if both the
below conditions are met and it has not been designated as
FVTPL:
-- the asset is held within a business model whose objective is
achieved by both collecting its contractual cash flows and selling
the financial asset; and
-- the contractual terms of the financial asset give rise to
cash flows on specified dates that represent payments of solely
principal and interest on the outstanding principal amount.
On initial recognition of an equity investment that is not held
for trading, the Group may irrevocably elect to present subsequent
changes in fair value in OCI. This election will be made on an
investment by investment basis.
All other assets will be classified as FVTPL.
Impact assessment
As detailed below IFRS 9 will have minimal impact on the
classification of financial assets held as at 1 January 2018:
-- The Group's cash and balances at central banks, loans and
advances to banks and customers, debt securities held to maturity
and other financial assets will be classified as amortised cost.
This is consistent with their current IAS 39 classification.
-- The Group held no financial instruments that would be
classified as FVOCI or FVTPL at 1 January 2018.
b) Impairment of financial assets and loan commitments
IFRS 9 replaces the incurred loss impairment model within IAS 39
with a forward looking expected loss model. The Group will
recognise loss allowances for expected credit losses on all
financial assets carried at amortised cost, including lease
receivables and loan commitments.
Credit loss allowances will be measured as an amount equal to
lifetime ECL, except for the following, for which they will be
measured as 12 month ECL:
-- Financial assets determined to have low credit risk at the reporting date;
-- Financial assets which have not experienced a significant
increase in credit risk since their initial recognition; and
-- Financial assets which have experienced a significant
increase in credit risk since their initial recognition but have
subsequently met the Group's cure policy, as set out below.
A financial asset will be considered to have low credit risk
when its credit risk rating is equivalent to the widely understood
definition of 'investment grade' assets. The Group expects all its
debt securities, which represent UK Treasury bills, and loans held
in STB Leasing Limited, for which credit risk is retained by its
partner RentSmart, to be low credit risk.
Lifetime ECL is the ECL that results from all possible default
events over the expected life of a financial asset. Further detail
regarding the measurement of ECL is set out below.
12 month ECL is the portion of lifetime ECL that results from
default events on a financial asset that are expected within 12
months after the reporting date.
Measurement of ECL
ECL's are probability weighted estimates of credit losses which
will be measured as the present value of all cash shortfalls.
Specifically, this is the difference between the contractual cash
flows due and the cash flows expected to be received, discounted at
the original effective interest rate (or for portfolios purchased
outside of the Group by Debt Managers (Services) Limited the credit
adjusted effective interest rate). For undrawn loan commitments ECL
will be measured as the difference between the contractual cash
flows due if the commitment is drawn and the cash flows expected to
be received.
Significant increase in credit risk
For Consumer Finance, the credit risk of a financial asset will
be considered to have experienced a significant increase in credit
risk since initial recognition where there has been a significant
increase in the remaining lifetime probability of default of the
asset. The Group may also use its expert credit judgement and where
possible relevant historical and current performance data,
including bureau data to determine that an exposure has undergone a
significant increase in credit risk.
For Business Finance, the credit risk of a financial asset will
be considered to have experienced a significant increase in credit
risk where certain early warning indicators apply (e.g. cost over
runs, timing delays, notification of county court judgements
etc.).
As a backstop, the Group will consider that a significant
increase in credit risk occurs no later than when an asset is more
than 30 days past due for all portfolios.
The credit risk of a financial asset may improve such that it is
no longer considered to have experienced a significant increase in
credit risk if it meets the Group's cure policy.
Cure policy
The Group's cure policy will require sufficient payments to be
made to bring an account back within less than 30 days past due and
for such payments to be maintained for six consecutive months. For
the Real Estate Finance portfolio payments would need to be
maintained for twelve consecutive months.
Definition of default/Credit impaired financial assets
At each reporting date, the Group will assess whether financial
assets carried at amortised cost are credit impaired. A financial
asset will be considered to be credit impaired when an event(s)
that has a detrimental impact on estimated future cash flows have
occurred. Evidence that a financial asset is credit impaired
includes the following observable data:
-- Initiation of bankruptcy proceedings;
-- Notification of bereavement;
-- Identification of loan meeting debt sale criteria; or
-- Initiation of repossession proceedings.
In addition, a loan that is 90 days or more past due will be
considered credit impaired for all portfolios. The credit risk of
financial assets that become credit impaired are not expected to
improve such that they are no longer considered credit
impaired.
Modified financial assets
A customer's account may be modified to assist customers who are
in or have recently overcome financial difficulties and have
demonstrated both the ability and willingness to meet the current
or modified loan contractual payments. Where the terms of a
financial asset have been modified and the modification has not
resulted in derecognition, the expected cash flows arising from the
modified financial asset are included in calculating any cash
shortfalls from the existing asset.
Inputs in to measurement of ECL
The key inputs in to the measurement of expected credit loss
will be:
-- Probability of default (PD);
-- Exposure at default (EAD); and
-- Loss given default (LGD).
These variables will be derived from internally developed
statistical models and historical data, adjusted to reflect forward
looking information.
Probability of default (PD) and credit risk grades
Credit risk grades will be a primary input into the
determination of the PD for exposures. The Group will allocate each
exposure to a credit risk grade at origination and at each
reporting period to predict the risk of default. Credit risk grades
will be determined using qualitative and quantitative factors that
are indicative of the risk of default e.g. arrears status and loan
applications scores. These factors will vary for each loan
portfolio. Exposures will be subject to ongoing monitoring, which
may result in an exposure being moved to a different credit risk
grade. In monitoring exposures information such as payment records,
request for forbearance strategies and forecast changes in economic
conditions will be considered for the Consumer Finance portfolio.
Additionally for the Business Finance portfolio information
obtained during periodic reviews, for example audited financial
statements, management accounts, budgets and projections will be
considered, with particular focus on key ratios, compliance with
covenants and changes in senior management teams.
Exogenous, Maturity, Vintage (EMV) modelling will be used in the
production of forward looking lifetime PDs. This method will entail
modelling the effects of external (exogenous) factors against
cohorts of lending and their time on the books creating a clean
relationship to best demonstrate the movement in default rates as
macroeconomic variables are changed. These models will be
extrapolated to provide PD estimates for the future, based on
forecasted economic scenarios.
As the Group's performance data does not go back far enough to
capture a full economic cycle, the proxy series of the quarterly
rates of write offs for UK unsecured lending data will be used to
build an economic response model (ERM) to incorporate the effects
of recession.
The portfolios for which external benchmark information
represents a significant input into the measurement of ECL are as
follows:
External benchmarks used
Exposure LGD PD
(GBPm)
-------------------- --------- ------------------ --------------------
Real Estate Finance GBP581.0 CML Repossessions The benchmarks
and Default below relate
Rates to all three
portfolios:
S&P Ratings;
BOE UK Possessions
as proxy data
for ERM
-------------------- --------- ------------------ --------------------
Asset Finance GBP117.9 N/A
-------------------- --------- ------------------ --------------------
Commercial Finance GBP127.1 N/A
-------------------- --------- ------------------ --------------------
Exposure at default (EAD)
EAD represents the expected exposure in the event of a default.
EAD will be derived from the current exposure and potential changes
to the current amount allowed under the terms of the contract,
including amortisation overpayments and early terminations. The EAD
of a financial asset is its gross carrying amount. For loan
commitments the EAD includes the amount drawn as well as potential
future amounts that may be drawn under the terms of the contract,
estimated based on historical observations and forward looking
forecasts.
For Commercial Finance facilities that have no specific term an
assumption will be made that accounts close 36 months after the
reporting date. This assumption is based on industry experience of
average client life. The Group therefore measures the lifetime ECL
for these assets over an assumed 36 month period.
These facilities do not have a fixed term or repayment structure
but are revolving and increase or decrease to reflect the value of
the collateral i.e. receivables or inventory. The Group can cancel
them with immediate effect but this contractual right is not
enforced in the normal day to day management of the facility.
Typically, demand would only be made on failure of a client
business or in the event of a material event of default, such as a
fraud. In the normal course of events, the Group's exposure is
recovered through receipt of remittances from the client's debtors
rather than from the client itself. The ECL for such facilities
will be estimated taking into account the credit risk management
actions that the Group expects to take to mitigate against such
losses. These include a reduction in advance rate and facility
limits or application of reserves against a facility so as to
improve the likelihood of full recovery of exposure from the
debtors. Alternative recovery routes mitigating ECL would include
refinance by another funding provider, taking security over other
asset classes or secured personal guarantees from the client's
principals.
Loss given default (LGD)
LGD is the magnitude of the likely loss in the event of default.
This will take into account recoveries either through curing or,
where applicable, through auction sale of repossessed collateral
and debt sale of the residual shortfall amount. For loans secured
by retail property loan to value (LTV) ratios are key parameters in
determining LGD. LGD's will be calculated on a discounted cash flow
basis using the financial instrument's origination effective
interest rate as the discount factor.
Incorporation of forward looking data
The Group will incorporate forward looking information into both
its assessment of whether the credit risk of a financial asset has
increased significantly since initial recognition and its
measurement of expected credit loss. This will be achieved by
developing a number of potential economic scenarios and modelling
expected credit losses for each scenario. The outputs from each
scenario will be combined, using the estimated likelihood of each
scenario occurring to derive a probability weighted expected credit
loss. The scenarios adopted and probability weighting applied will
both be approved by the Assumptions Committee.
The scenarios expected to be adopted at 1 January 2018 were as
follows:
Scenario Derivation Weighting
--------------- ------------------------------------------------ ----------
Derived from external consensus
forecasts, primarily from the
Bank of England, and used in
the Group's strategic planning
Base case and budgeting processes. 80%
Assumes that the expected credit
loss models are unaffected by
Benign case changing macroeconomic variables. 5%
Management's assessment, based
on historic data, of an adverse
scenario that could occur once
Stressed case every 7 to 8 years. 10%
Based on the scenario used by
the PRA for the H1 2017 ICAAP.
This can be found on the Bank
Deeper stress of England's website: www.bankofengland.co.uk 5%
--------------- ------------------------------------------------ ----------
The key drivers of credit risk and credit losses included in the
above scenarios have been identified as annual unemployment rate
growth, changes to the consumer price index and annual house price
index growth.
c) Classification of financial liabilities
The treatment of financial liabilities is carried forward to
IFRS 9 essentially unchanged from IAS 39. The only aspect to change
is the treatment of financial liabilities that an entity elects to
measure at fair value. The Group does not elect to measure any of
its liabilities at fair value and therefore expects no impact to
arise from adopting these new requirements.
d) Disclosures
IFRS 9 will require extensive new disclosures regarding credit
risk and ECL's.
e) Impact on capital planning
The European Banking Authority has issued guidance on the
transition requirements for the implementation of IFRS 9. The
guidelines allow a choice of two approaches to recognise the impact
of implementing IFRS 9 on regulatory capital:
-- Phase in the impact over a five year period (applying add
back factors of 95%, 85%, 70%, 50% and 25% for years one to five
respectively); or
-- Recognise the impact in full on transition to IFRS 9.
The Group has agreed to adopt the first approach. It is expected
that implementation of IFRS 9 will result in a decrease in the
Group's CET 1 ratio in the range of 8 to 10 basis points.
f) Transition
Changes in accounting policies resulting from adoption of IFRS 9
will be applied retrospectively, except as noted below:
-- Comparative periods will not be restated. Differences in the
carrying amount of financial instruments resulting from adoption of
IFRS 9 will be recognised in retained earnings and reserves as at 1
January 2018.
-- The determination of the business model within which a
financial asset is held will be made based on the facts and
circumstances that existed at the date of initial application.
-- If a debt security was deemed to have low credit risk at the
date of initial application, then the Group will assume that the
credit risk of the asset had not increased significantly since its
initial recognition. A financial asset is considered to have low
credit risk when its credit risk rating is equivalent to the widely
understood definition of investment grade.
30. Market risk
Market risks arise from open positions in interest rate and
currency products, all of which are exposed to general and specific
market movements. The Group and Company have no significant
exposures to foreign currencies and therefore there is no
significant currency risk.
Interest rate risk
Interest rate risk is the potential adverse impact on the
Company and Group's future cash flows from changes in interest
rates and arises from the differing interest rate risk
characteristics of the Company and Group's assets and liabilities.
In particular, fixed rate savings and borrowing products expose the
Group to the risk that a change in interest rates could cause
either a reduction in interest income or an increase in interest
expense relative to variable rate interest flows. The Group seeks
to 'match' interest rate risk on either side of the statement of
financial position. However, this is not a perfect match and
interest rate risk is present on money market deposits of a fixed
rate nature, fixed rate loans and fixed rate savings products. The
Group monitors the interest rate mismatch on a monthly basis.
The interest rate mismatch is monitored, throughout the maturity
bandings of the book on a parallel scenario for 100 and 200 basis
points movements. The Group considers the 100 and 200 basis points
movement to be appropriate for scenario testing given the current
economic outlook and industry expectations. This typically results
in a pre-tax mismatch of GBP0.7 million or less (2016: GBP0.7
million or less) for the Company and Group, with the same impact to
equity pre-tax.
Interest rate sensitivity gap
The following tables summarise the re-pricing periods for the
assets and liabilities in the Company and Group. Items are
allocated to time bands by reference to the earlier of the next
contractual interest rate re-price and the maturity date.
Group
More More More
than than than
3 months 6 months 1 year
but but but
less less less More Non
Within than than than than interest
3 months 6 months 1 year 5 years 5 years bearing Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
As at 31 December
2017
ASSETS
Cash and balances
at central banks 226.1 - - - - - 226.1
Loans and advances
to banks 34.3 - - - - - 34.3
Debt securities
held-to-maturity 5.0 - - - - - 5.0
Loans and advances
to customers 581.2 121.3 181.9 696.0 2.3 15.6 1,598.3
Other assets - - - - - 27.9 27.9
Total assets 846.6 121.3 181.9 696.0 2.3 43.5 1,891.6
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
LIABILITIES AND
EQUITY
Due to banks 113.0 - - - - - 113.0
Deposits from customers 577.2 28.2 269.9 581.4 6.5 20.0 1,483.2
Other liabilities - - - - - 46.3 46.3
Equity - - - - - 249.1 249.1
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total liabilities
and equity 690.2 28.2 269.9 581.4 6.5 315.4 1,891.6
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Interest rate sensitivity
gap 156.4 93.1 (88.0) 114.6 (4.2) (271.9)
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Cumulative gap 156.4 249.5 161.5 276.1 271.9 -
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
More More More
than than than
3 months 6 months 1 year
but but but
less less less More Non
Within than than than than interest
3 months 6 months 1 year 5 years 5 years bearing Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
As at 31 December
2016
ASSETS
Cash and balances
at central banks 112.0 - - - - - 112.0
Loans and advances
to banks 18.2 - - - - - 18.2
Debt securities
held-to-maturity 20.0 - - - - - 20.0
Loans and advances
to customers 378.7 119.7 164.8 644.6 - 13.2 1,321.0
Other assets - - - - - 38.8 38.8
Total assets 528.9 119.7 164.8 644.6 - 52.0 1,510.0
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
LIABILITIES AND
EQUITY
Due to banks 30.0 40.0 - - - - 70.0
Deposits from customers 462.4 66.7 63.8 535.9 23.0 - 1,151.8
Other liabilities - - - - - 52.2 52.2
Equity - - - - - 236.0 236.0
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total liabilities
and equity 492.4 106.7 63.8 535.9 23.0 288.2 1,510.0
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Interest rate sensitivity
gap 36.5 13.0 101.0 108.7 (23.0) (236.2)
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Cumulative gap 36.5 49.5 150.5 259.2 236.2 -
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Company
More More More
than than than
3 months 6 months 1 year
but but but
less less less More Non
Within than than than than interest
3 months 6 months 1 year 5 years 5 years bearing Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
As at 31 December
2017
ASSETS
Cash and balances
at central banks 226.1 - - - - - 226.1
Loans and advances
to banks 32.3 - - - - - 32.3
Debt securities
held-to-maturity 5.0 - - - - - 5.0
Loans and advances
to customers 576.6 119.2 178.3 689.1 2.3 - 1,565.5
Other assets - - - - - 52.1 52.1
Total assets 840.0 119.2 178.3 689.1 2.3 52.1 1,881.0
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
LIABILITIES AND
EQUITY
Due to banks 113.0 - - - - - 113.0
Deposits from customers 577.2 28.2 269.9 581.4 6.5 20.0 1,483.2
Other liabilities - - - - - 47.7 47.7
Equity - - - - - 237.1 237.1
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total liabilities
and equity 690.2 28.2 269.9 581.4 6.5 304.8 1,881.0
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Interest rate sensitivity
gap 149.8 91.0 (91.6) 107.7 (4.2) (252.7)
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Cumulative gap 149.8 240.8 149.2 256.9 252.7 -
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
More More More
than than than
3 months 6 months 1 year
but but but
less less less More Non
Within than than than than interest
3 months 6 months 1 year 5 years 5 years bearing Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
As at 31 December
2016
ASSETS
Cash and balances
at central banks 112.0 - - - - - 112.0
Loans and advances
to banks 16.5 - - - - - 16.5
Debt securities
held-to-maturity 20.0 - - - - - 20.0
Loans and advances
to customers 378.6 119.1 162.3 629.2 - - 1,289.2
Other assets - - - - - 65.0 65.0
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total assets 527.1 119.1 162.3 629.2 - 65.0 1,502.7
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
LIABILITIES AND
EQUITY
Due to banks 30.0 40.0 - - - - 70.0
Deposits from customers 462.4 66.7 63.8 535.9 23.0 - 1,151.8
Other liabilities - - - - - 59.1 59.1
Equity - - - - - 221.8 221.8
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total liabilities
and equity 492.4 106.7 63.8 535.9 23.0 280.9 1,502.7
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Interest rate sensitivity
gap 34.7 12.4 98.5 93.3 (23.0) (215.9)
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Cumulative gap 34.7 47.1 145.6 238.9 215.9 -
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
31. Liquidity risk
Liquidity risk is the risk that the Group will encounter
difficulty in meeting obligations associated with its financial
liabilities that are settled by delivering cash or another
financial asset.
The Group's approach to managing liquidity is to ensure, as far
as possible, that it will always have sufficient liquidity to meet
its liabilities when due, under both normal and stressed
conditions, without incurring unacceptable losses or risking damage
to the Group's reputation. The liquidity requirements of the Group
are met through withdrawing funds from its Bank of England Reserve
Account to cover any short-term fluctuations and, longer term
funding to address any structural liquidity requirements.
The Company has a formal governance structure in place to manage
and mitigate liquidity risk on a day to day basis. The Board sets
and approves the Company's liquidity risk management strategy. The
ALCO, comprising senior executives of the Company, monitors
liquidity risk. Key liquidity risk management information is
reported by the Treasury function and monitored by the Chief
Executive Officer and Chief Financial Officer on a daily basis. The
ALCO meets monthly to review liquidity risk against set thresholds
and risk indicators including early warning indicators, liquidity
risk tolerance levels and ILAAP metrics.
The Company issued fixed rate deposit bonds to customers during
the year as set out below:
2017 2016
------- --------- ---------
GBP347.9 GBP299.0
Amount million million
1 to 1 to
Term 5 years 7 years
------- --------- ---------
These were issued to broadly match the term lending by the
Company.
The PRA requires a firm to maintain at all times liquidity
resources which are adequate, both as to amount and quality, to
ensure that there is no significant risk that its liabilities
cannot be met as they fall due. There is also a requirement that a
firm ensures its liquidity resources contain an adequate buffer of
high quality, unencumbered assets (i.e. Government Securities in
the liquidity asset buffer); and it maintains a prudent funding
profile. The liquidity assets buffer is a pool of highly liquid
assets that can be called upon to create sufficient liquidity to
meet liabilities on demand, particularly in a period of liquidity
stress. The liquidity resources outside the buffer must either be
marketable assets with a demonstrable secondary market that the
firm can access, or a credit facility that can be activated in
times of stress.
The Group has a Board approved ILAAP. The ILAAP rules require
STB to identify, measure, manage and monitor liquidity and funding
risks across different time horizons and stress scenarios,
consistent with STB's risk appetite as established by the STB
Board. The ILAAP seeks to document STB's approach to liquidity and
funding, and demonstrate that it complies with the Overall
Liquidity Adequacy Rule. The PRA's approach to liquidity
supervision is based on the principle that a firm must have
adequate levels of liquidity resources and a prudent funding
profile, and that it comprehensively manages and controls liquidity
and funding risks. The liquidity buffer required by the ILAAP has
been put in place and maintained since that time. Liquidity
resources outside of the buffer are made up of deposits placed at
the Bank of England. The ILAAP is updated annually.
The primary measures used by management to assess the adequacy
of liquidity is the Overall Liquidity Adequacy Rule, which is the
Board's own view of the Group's liquidity needs as set out in the
Board approved ILAAP. The Group maintained liquidity in excess of
the Overall Liquidity Adequacy Rule throughout the year ended 31
December 2017.
The LCR regime has applied to the Group from 1 October 2016,
requiring management of net 30 day cash outflows as a proportion of
High Quality Liquid Assets. STB has set a more prudent internal
limit. The actual LCR has significantly exceeded both limits
throughout the year.
The Group is exposed to daily calls on its available cash
resources from current accounts, maturing deposits and loan
draw-downs. The Group maintains significant cash resources to meet
all of these needs as they fall due.
The matching and controlled mismatching of the maturities and
interest rates of assets and liabilities is fundamental to the
management of the Group. It is unusual for banks to be completely
matched, as transacted business is often of uncertain term and of
different types.
The maturities of assets and liabilities and the ability to
replace, at an acceptable cost, interest bearing liabilities as
they mature are important factors in assessing the liquidity of the
Group and its exposure to changes in interest rates.
The tables below analyse the contractual undiscounted cash flows
for the financial liabilities and assets into relevant maturity
groupings:
Group
More More
than than
3 months 1 year
Gross Not but but
nominal more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
At 31 December 2017
Non-derivative financial
liabilities
Due to banks 113.0 (115.1) (0.1) (0.4) (114.6) -
Deposits from customers 1,483.2 (1,517.2) (580.8) (318.6) (611.1) (6.7)
Other financial
liabilities 29.5 (29.5) (29.5) - - -
1,625.7 (1,661.8) (610.4) (319.0) (725.7) (6.7)
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Non-derivative financial
assets
Cash and balances
at central banks 226.1 226.1 226.1 - - -
Loans and advances
to banks 34.3 34.3 34.3 - - -
Debt securities
held-to-maturity 5.0 5.0 5.0 - - -
Loans and advances
to customers 1,598.3 2,054.4 667.8 420.8 965.3 0.5
Other financial
assets 1.2 1.2 1.2 - - -
1,864.9 2,321.0 934.4 420.8 965.3 0.5
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Liquidity mismatch 239.2 659.2 324.0 101.8 239.6 (6.2)
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
More More
than than
3 months 1 year
Gross Not but but
nominal more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
At 31 December 2016
Non-derivative financial
liabilities
Due to banks 70.0 (70.0) (30.0) (40.0) - -
Deposits from customers 1,151.8 (1,202.9) (461.6) (147.9) (569.5) (23.9)
Other financial
liabilities 18.3 (18.3) (18.3) - - -
1,240.1 (1,291.2) (509.9) (187.9) (569.5) (23.9)
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Non-derivative financial
assets
Cash and balances
at central banks 112.0 112.0 112.0 - - -
Loans and advances
to banks 18.2 18.2 18.2 - - -
Debt securities
held-to-maturity 20.0 20.0 20.0 - - -
Loans and advances
to customers 1,321.0 1,955.5 349.1 413.9 1,192.2 0.3
Other financial
assets 0.9 0.9 0.9 - - -
1,472.1 2,106.6 500.2 413.9 1,192.2 0.3
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Liquidity mismatch 232.0 815.4 (9.7) 226.0 622.7 (23.6)
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Company
More More
than than
3 months 1 year
Gross Not but but
nominal more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
At 31 December 2017
Non-derivative financial
liabilities
Due to banks 113.0 (115.1) (0.1) (0.4) (114.6) -
Deposits from customers 1,483.2 (1,517.2) (580.8) (318.6) (611.1) (6.7)
Other financial
liabilities 34.2 (34.2) (34.2) - - -
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
1,630.4 (1,666.5) (615.1) (319.0) (725.7) (6.7)
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Non-derivative financial
assets
Cash and balances
at central banks 226.1 226.1 226.1 - - -
Loans and advances
to banks 32.3 32.3 32.3 - - -
Debt securities
held-to-maturity 5.0 5.0 5.0 - - -
Loans and advances
to customers 1,565.5 2,017.5 646.6 413.1 957.3 0.5
Other financial
assets 30.7 30.7 30.7 - - -
1,859.6 2,311.6 940.7 413.1 957.3 0.5
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Liquidity mismatch 229.2 645.1 325.6 94.1 231.6 (6.2)
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
More More
than than
3 months 1 year
Gross Not but but
nominal more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
At 31 December 2016
Non-derivative financial
liabilities
Due to banks 70.0 (70.0) (30.0) (40.0) - -
Deposits from customers 1,151.8 (1,202.9) (461.6) (147.9) (569.5) (23.9)
Other financial
liabilities 30.7 (30.7) (30.7) - - -
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
1,252.5 (1,303.6) (522.3) (187.9) (569.5) (23.9)
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Non-derivative financial
assets
Cash and balances
at central banks 112.0 112.0 112.0 - - -
Loans and advances
to banks 16.5 16.5 16.5 - - -
Debt securities
held-to-maturity 20.0 20.0 20.0 - - -
Loans and advances
to customers 1,289.2 1,921.5 345.7 397.6 1,177.9 0.3
Other financial
assets 33.0 33.0 33.0 - - -
1,470.7 2,103.0 527.2 397.6 1,177.9 0.3
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Liquidity mismatch 218.2 799.4 4.9 209.7 608.4 (23.6)
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
The maturities of assets and liabilities and the ability to
replace, at an acceptable cost, interest bearing financial
liabilities as they mature are important factors in assessing the
liquidity of the Company and Group and its exposure to changes in
interest rates and exchange rates.
Other financial liabilities, as shown above, do not include
non-interest accruals as these are not classed as financial
liabilities.
32. Capital risk
The Group's capital management policy is focused on optimising
shareholder value, in a safe and sustainable manner. There is a
clear focus on delivering organic growth and ensuring capital
resources are sufficient to support planned levels of growth. The
Board regularly reviews the capital position.
In accordance with CRD IV and the required parameters set out in
the Capital Requirements Regulation, the Group's ICAAP is embedded
in the risk management framework of the Group and is subject to
ongoing updates and revisions when necessary. However, at a
minimum, the ICAAP is updated annually as part of the business
planning process. The ICAAP is a process that brings together the
management framework (i.e. the policies, procedures, strategies,
and systems that the Group has implemented to identify, manage and
mitigate its risks) and the financial disciplines of business
planning and capital management. Prior to the sale of Arbuthnot's
controlling stake in the Group, the Group's ICAAP was aggregated
into the Arbuthnot Banking Group's ICAAP.
Not all material risks can be mitigated by capital, but where
capital is appropriate the Board has adopted a 'Pillar 1 plus'
approach to determine the level of capital the Group needs to hold.
This method takes the Pillar 1 capital formula calculations
(standardised approach for credit, market and operational risk) as
a starting point, and then considers whether each of the
calculations delivers a sufficient capital sum adequate to cover
management's anticipated risks. Where it is considered that the
Pillar 1 calculations do not reflect the risk, an additional
capital add-on in Pillar 2 should be applied, as per the Individual
Capital Guidance issued by the PRA.
Pillar 3 complements the minimum capital requirements (Pillar 1)
and the supervisory review process (Pillar 2). Its aim is to
encourage market discipline by developing a set of disclosure
requirements which would allow market participants to assess key
pieces of information on a firm's capital, risk exposures and risk
assessment processes. Pillar 3 disclosures for the Group for the
year ended 31 December 2017 are published as a separate document on
the Group's website.
The following table shows the regulatory capital resources for
the Group. Following the sale of its majority holding in the Group
by Arbuthnot Banking Group plc in 2016, the regulatory capital of
the Group is now managed on a group consolidated basis. Therefore,
the prior year figures in the table below have been restated from a
solo-consolidated basis to a group consolidated basis, and the CET
1 capital ratio restated accordingly:
2017 2016
GBPmillion GBPmillion
------------------------------------------------ ----------- -----------
Tier 1
Share capital 7.4 7.4
Share premium 81.2 81.2
Retained earnings 159.2 149.0
Revaluation reserve 1.3 1.2
Available-for-sale reserve - (2.8)
Goodwill (1.0) (1.0)
Intangible assets net of attributable deferred
tax (9.2) (7.6)
CET1 capital 238.9 227.4
------------------------------------------------ ----------- -----------
Tier 2
Collective allowance for impairment of
loans and advances 4.4 5.3
------------------------------------------------ ----------- -----------
Total Tier 2 capital 4.4 5.3
------------------------------------------------ ----------- -----------
Own Funds 243.3 232.7
------------------------------------------------ ----------- -----------
Reconciliation to total equity:
Goodwill and other intangible assets net
of attributable deferred tax 10.2 8.6
Collective allowance for impairment of
loans and advances (4.4) (5.3)
Total equity 249.1 236.0
------------------------------------------------ ----------- -----------
The Group ICAAP includes a summary of the capital required to
mitigate the identified risks in its regulated entities and the
amount of capital that the Group has available. The PRA sets
Individual Capital Guidance for each UK bank calibrated by
reference to its Capital Resources Requirement, broadly equivalent
to 8% of risk weighted assets and thus representing the capital
required under Pillar 1 of the Basel III framework. The ICAAP is a
key input into the PRA's Individual Capital Guidance setting
process, which addresses the requirements of Pillar 2 of the Basel
II framework. The PRA's approach is to monitor the available
capital resources in relation to the Individual Capital Guidance
requirement. The Group maintains an extra internal buffer and
capital ratios are reviewed on a monthly basis to ensure that
external and internal requirements are adhered to.
The Group is also subject to further capital requirements
imposed by the PRA on all financial services firms. During the
periods, the Group complied with these requirements.
33. Maturity analysis of consolidated assets and liabilities
Group
Due
after
Due more
within than
one one No contractual
year year maturity Total
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------- ----------- ----------- --------------- -----------
Contractual maturity analysis
at 31 December 2017
ASSETS
Cash and balances at central
banks 226.1 - - 226.1
Loans and advances to banks 34.3 - - 34.3
Loans and advances to customers 884.4 698.3 15.6 1,598.3
Debt securities held-to-maturity 5.0 - - 5.0
Property, plant and equipment - - 11.5 11.5
Intangible assets - - 10.4 10.4
Deferred tax assets - - 0.6 0.6
Other assets - - 5.4 5.4
Total assets 1,149.8 698.3 43.5 1,891.6
---------------------------------- ----------- ----------- --------------- -----------
LIABILITIES
Due to banks 113.0 - - 113.0
Deposits from customers 875.3 587.9 20.0 1,483.2
Current tax liabilities 3.0 - - 3.0
Other liabilities - - 41.9 41.9
Provisions for liabilities
and charges - - 1.4 1.4
Total liabilities 991.3 587.9 63.3 1,642.5
---------------------------------- ----------- ----------- --------------- -----------
Due
after
Due more
within than
one one No contractual
year year maturity Total
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------------- ----------- ----------- --------------- -----------
Contractual maturity analysis
at 31 December 2016
ASSETS
Cash and balances at central
banks 112.0 - - 112.0
Loans and advances to banks 18.2 - - 18.2
Loans and advances to customers 663.2 657.8 - 1,321.0
Debt securities held-to-maturity 20.0 - - 20.0
Equity instruments available-for-sale - - 13.5 13.5
Property, plant and equipment - - 11.4 11.4
Intangible assets - - 9.0 9.0
Other assets 4.9 - - 4.9
--------------------------------------- ----------- ----------- --------------- -----------
Total assets 818.3 657.8 33.9 1,510.0
--------------------------------------- ----------- ----------- --------------- -----------
LIABILITIES
Due to banks 70.0 - - 70.0
Deposits from customers 592.9 558.9 - 1,151.8
Current tax liabilities 1.7 - - 1.7
Deferred tax liabilities - 0.2 - 0.2
Other liabilities 47.4 2.9 - 50.3
--------------------------------------- ----------- ----------- --------------- -----------
Total liabilities 712.0 562.0 - 1,274.0
--------------------------------------- ----------- ----------- --------------- -----------
The directors have reviewed behavioural maturity of the loan
book and have concluded that it would not significantly affect the
analysis above.
Company
Due
after
Due more
within than
one one No contractual
year year maturity Total
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------- ----------- ----------- --------------- -----------
Contractual maturity analysis
at 31 December 2017
ASSETS
Cash and balances at central
banks 226.1 - - 226.1
Loans and advances to banks 32.3 - - 32.3
Loans and advances to customers 874.1 691.4 - 1,565.5
Debt securities held-to-maturity 5.0 - - 5.0
Property, plant and equipment - - 6.1 6.1
Intangible assets - - 8.5 8.5
Investments - - 3.7 3.7
Deferred tax assets - - 0.6 0.6
Other assets - - 33.2 33.2
---------------------------------- ----------- ----------- --------------- -----------
Total assets 1,137.5 691.4 52.1 1,881.0
---------------------------------- ----------- ----------- --------------- -----------
LIABILITIES
Due to banks 113.0 - - 113.0
Deposits from customers 875.3 587.9 20.0 1,483.2
Current tax liabilities 1.9 - - 1.9
Other liabilities - - 44.4 44.4
Provisions for liabilities
and charges - - 1.4 1.4
Total liabilities 990.2 587.9 65.8 1,643.9
---------------------------------- ----------- ----------- --------------- -----------
Due
after
Due more
within than
one one No contractual
year year maturity Total
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------------- ----------- ----------- --------------- -----------
Contractual maturity analysis
at 31 December 2016
ASSETS
Cash and balances at central
banks 112.0 - - 112.0
Loans and advances to banks 16.5 - - 16.5
Loans and advances to customers 660.0 629.2 - 1,289.2
Debt securities held-to-maturity 20.0 - - 20.0
Equity instruments available-for-sale 13.5 - - 13.5
Property, plant and equipment - - 6.2 6.2
Intangible assets - - 6.2 6.2
Investments - - 3.7 3.7
Deferred tax assets - 0.1 - 0.1
Other assets 35.3 - - 35.3
--------------------------------------- ----------- ----------- --------------- -----------
Total assets 857.3 629.3 16.1 1,502.7
--------------------------------------- ----------- ----------- --------------- -----------
LIABILITIES
Due to banks 70.0 - - 70.0
Deposits from customers 592.9 558.9 - 1,151.8
Current tax liabilities 0.8 - - 0.8
Other liabilities 58.3 - - 58.3
Total liabilities 722.0 558.9 - 1,280.9
--------------------------------------- ----------- ----------- --------------- -----------
The directors have reviewed behavioural maturity of the loan
book and have concluded that it would not significantly affect the
analysis above.
34. Classification of financial assets and liabilities
Group
Other
financial
Loans assets Total
and and carrying Fair
Held-to-maturity receivables liabilities amount value
-----------
Fair
value
hierarchy
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion level
------------------------- ----------------- ------------- ------------- ----------- ----------- -----------
At 31 December 2017
Cash and balances Level
at central banks - 226.1 - 226.1 226.1 1
Loans and advances Level
to banks - 34.3 - 34.3 34.3 2
Loans and advances Level
to customers - 1,598.3 - 1,598.3 1,641.1 3
Debt securities Level
held-to-maturity 5.0 - - 5.0 5.0 1
Other financial Level
assets - - 1.2 1.2 1.2 3
5.0 1,858.7 1.2 1,864.9 1,907.7
------------------------- ----------------- ------------- ------------- ----------- -----------
Level
Due to banks - - 113.0 113.0 113.0 2
Level
Deposits from customers - - 1,483.2 1,483.2 1,481.6 3
Other financial Level
liabilities - - 29.5 29.5 29.5 3
- - 1,625.7 1,625.7 1,624.1
------------------------- ----------------- ------------- ------------- ----------- -----------
Other
financial
Loans assets Total
and and carrying Fair
Available-for-sale Held-to-maturity receivables liabilities amount value
----------
Fair
value
hierarchy
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion level
-------------------- ------------------- ----------------- ------------ ------------ ----------- ----------- ----------
At 31 December
2016
Cash and balances
at central Level
banks - - 112.0 - 112.0 112.0 1
Loans and
advances to Level
banks - - 18.2 - 18.2 18.2 2
Loans and
advances to Level
customers - - 1,321.0 - 1,321.0 1,399.8 3
Debt securities Level
held-to-maturity - 20.0 - - 20.0 20.0 1
Equity instruments Level
available-for-sale 13.5 - - - 13.5 13.5 1
Other financial Level
assets - - - 0.9 0.9 0.9 3
13.5 20.0 1,451.2 0.9 1,485.6 1,564.4
-------------------- ------------------- ----------------- ------------ ------------ ----------- -----------
Level
Due to banks - - - 70.0 70.0 70.0 2
Deposits from Level
customers - - - 1,151.8 1,151.8 1,160.9 3
Other financial Level
liabilities - - - 18.3 18.3 18.3 3
- - - 1,240.1 1,240.1 1,249.2
-------------------- ------------------- ----------------- ------------ ------------ ----------- -----------
Equity investments held-for-sale are carried at fair value. All
other assets and liabilities are carried at amortised cost.
Therefore for these assets and liabilities, the fair value
hierarchy noted above relates to the disclosure in this note
only.
During the period, the underlying methodology used to calculate
the fair values of loans and advances to customers has been
enhanced to calculate fair values on an individual business segment
basis. Accordingly the comparatives as at 31 December 2016 have
been re-presented on this basis.
Company
Other
financial
Loans assets Total
and and carrying Fair
Held-to-maturity receivables liabilities amount value
-----------
Fair
value
hierarchy
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion level
------------------------- ----------------- ------------- ------------- ----------- ----------- -----------
At 31 December 2017
Cash and balances Level
at central banks - 226.1 - 226.1 226.1 1
Loans and advances Level
to banks - 32.3 - 32.3 32.3 2
Loans and advances Level
to customers - 1,565.5 - 1,565.5 1,608.3 3
Debt securities Level
held-to-maturity 5.0 - - 5.0 5.0 1
Other financial Level
assets - - 30.7 30.7 30.7 3
------------------------- ----------------- ------------- ------------- ----------- -----------
5.0 1,823.9 30.7 1,859.6 1,902.4
------------------------- ----------------- ------------- ------------- ----------- -----------
Level
Due to banks - - 113.0 113.0 113.0 2
Level
Deposits from customers - - 1,483.2 1,483.2 1,481.6 3
Other financial Level
liabilities - - 34.2 34.2 34.2 3
------------------------- ----------------- ------------- ------------- ----------- -----------
- - 1,630.4 1,630.4 1,628.8
------------------------- ----------------- ------------- ------------- ----------- -----------
Other
financial
Loans assets Total
and and carrying Fair
Available-for-sale Held-to-maturity receivables liabilities amount value
----------
Fair
value
hierarchy
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion level
-------------------- ------------------- ----------------- ------------ ------------ ----------- ----------- ----------
At 31 December
2016
Cash and balances
at central Level
banks - - 112.0 - 112.0 112.0 1
Loans and
advances to Level
banks - - 16.5 - 16.5 16.5 2
Loans and
advances to Level
customers - - 1,289.2 - 1,289.2 1,591.1 3
Debt securities Level
held-to-maturity - 20.0 - - 20.0 20.0 1
Equity instruments Level
available-for-sale 13.5 - - - 13.5 13.5 1
Other financial Level
assets - - - 33.0 33.0 33.0 3
-------------------- ------------------- ----------------- ------------ ------------ ----------- -----------
13.5 20.0 1,417.7 33.0 1,484.2 1,786.1
-------------------- ------------------- ----------------- ------------ ------------ ----------- -----------
Level
Due to banks - - - 70.0 70.0 70.0 2
Deposits from Level
customers - - - 1,151.8 1,151.8 1,173.2 3
Other financial Level
liabilities - - - 30.7 30.7 30.7 3
-------------------- ------------------- ----------------- ------------ ------------ ----------- -----------
- - - 1,252.5 1,252.5 1,273.9
-------------------- ------------------- ----------------- ------------ ------------ ----------- -----------
Equity investments available-for-sale are carried at fair value.
All other assets and liabilities are carried at amortised cost.
Therefore for these assets, the fair value hierarchy noted above
relates to the disclosure in this note only.
Fair value classification
The tables above include the fair values and fair value
hierarchies of the Group and Company's financial assets and
liabilities. The Group measures fair value using the following fair
value hierarchy that reflects the significance of the inputs used
in making measurements:
-- Level 1: Quoted prices in active markets for identical assets or liabilities.
-- Level 2: Inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either
directly (i.e. as prices) or indirectly (i.e. derived from
prices).
-- Level 3: Inputs for the asset or liability that are not based
on observable market data (unobservable inputs).
Cash and balances at central banks
The fair value of cash and balances at central banks was
calculated based upon the present value of the expected future
principal and interest cash flows. The rate used to discount the
cash flows was the market rate of interest at the balance sheet
date.
At the end of each year, the fair value of cash and balances at
central banks was calculated to be equivalent to their carrying
value.
Loans and advances to banks
The fair value of loans and advances to banks was calculated
based upon the present value of the expected future principal and
interest cash flows. The rate used to discount the cash flows was
the market rate of interest at the balance sheet date.
Loans and advances to customers
The fair value of loans and advances to customers was calculated
based upon the present value of the expected future principal and
interest cash flows. The rate used to discount the cash flows was
the market rate of interest at the balance sheet date, and the same
assumptions regarding the risk of default were applied as those
used to derive the carrying value.
Debt securities held-to-maturity and equity instruments
available-for-sale
The fair value of debt securities held-to-maturity and equity
instruments available-for-sale is based on the quoted mid-market
share price.
At the end of December 2017 the fair value of debt securities
held-to-maturity was calculated to be equivalent to their carrying
value.
Due to banks
The fair value of amounts due to banks was calculated based upon
the present value of the expected future principal and interest
cash flows. The rate used to discount the cash flows was the market
rate of interest at the balance sheet date.
At the end of each year, the fair value of amounts due to banks
was calculated to be equivalent to their carrying value due to the
short maturity term of the amounts due.
Deposits from customers
The fair value of deposits from customers was calculated based
upon the present value of the expected future principal and
interest cash flows. The rate used to discount the cash flows was
the market rate of interest at the balance sheet date for the
notice deposits and deposit bonds. The fair value of instant access
deposits is equal to book value as they are repayable on
demand.
Dividends and other financial liabilities
The fair value of dividends and other financial liabilities was
calculated based upon the present value of the expected future
principal cash flows.
At the end of each year, the fair value of dividends and other
financial liabilities was calculated to be equivalent to their
carrying value due to their short maturity. The other financial
liabilities include all other liabilities other than non-interest
accruals.
35. Related party transactions
Related parties of the Company and Group include subsidiaries,
Key Management Personnel, close family members of Key Management
Personnel and entities which are controlled, jointly controlled or
significantly influenced, or for which significant voting power is
held, by Key Management Personnel or their close family
members.
A number of banking transactions are entered into with related
parties in the normal course of business on normal commercial
terms. These include loans and deposits as set out below. Except
for the directors' disclosures, there were no other Key Management
Personnel disclosures, therefore the tables below relate to
directors and close members of their family only.
Directors
2017 2016
GBPmillion GBPmillion
------------------------------------------ ----------- -----------
Loans
Loans outstanding at 1 January 3.2 0.2
Loans advanced 0.4 3.4
Repayments - (0.5)
Interest applied 0.1 0.1
Loans outstanding at 31 December 3.7 3.2
------------------------------------------ ----------- -----------
Deposits
Deposits outstanding at 1 January 0.3 0.5
Additional deposits made during the year 0.1 -
Withdrawals during the year - (0.1)
Director retired - (0.1)
------------------------------------------ ----------- -----------
Deposits outstanding at 31 December 0.4 0.3
------------------------------------------ ----------- -----------
The loans outstanding above comprise the following:
-- A GBP0.4 million advance (2016: GBP0.4 million) as part of a
GBP2.5 million facility agreed with a company in which a director
holds 50% of the voting shares, which is secured by property and
personal guarantees.
-- A GBP3.3 million advance (2016: GBP2.8 million) as part of a
GBP4.4 million facility agreed with a director, which is secured by
property and certain other undertakings.
Both of these transactions were agreed by the Group's Real
Estate Finance business and arose during the normal course of
business. Both loans were subject to the usual Board governance and
Credit Committee approval procedures and are on substantially the
same terms as for comparable transactions with third parties.
The Company undertook the following transactions with other
companies in the Secure Trust Bank Group:
2017 2016
GBPmillion GBPmillion
----------------------------------------------- ----------- -----------
Debt Managers (Services) Limited - income
from sale of debt portfolio (0.3) (2.9)
Debt Managers (Services) Limited - debt
collection services 0.2 -
Secure Homes Services Limited - building
rental paid 0.4 0.4
V12 Finance Group Limited - dividend received (13.9) -
V12 Retail Finance Limited - financial
intermediary charges - applications proposed 5.1 4.5
V12 Retail Finance Limited - financial
intermediary charges - applications accepted 2.3 2.2
V12 Retail Finance Limited - financial
intermediary charges - loan set-up and
processing 4.5 4.4
V12 Retail Finance Limited - loan book
management and servicing fees 8.9 7.1
----------------------------------------------- ----------- -----------
7.2 15.7
----------------------------------------------- ----------- -----------
No longer related parties
Arbuthnot Banking Group PLC - group recharges - 0.2
Everyday Lending Limited - interest income
on loan receivable - 1.9
- 2.1
----------------------------------------------- ----------- -----------
7.2 17.8
----------------------------------------------- ----------- -----------
The loans and advances with, and amounts receivable and payable
to, related companies are noted below:
Company Company
2017 2016
GBPmillion GBPmillion
---------------------------------------- ----------- -----------
Amounts receivable from subsidiary
undertakings 29.7 31.2
Amounts due to subsidiary undertakings (9.7) (13.2)
20.0 18.0
---------------------------------------- ----------- -----------
Directors' remuneration
The directors' emoluments (including pension contributions and
benefits in kind) for the year are disclosed in the Remuneration
Report beginning on page 84.
At the year end the ordinary shares held by the directors are
disclosed in the Directors' Report beginning on page 100. Details
of the directors' holdings of share options, as well as details of
those share options exercised during the year, are also disclosed
in the Directors' Report.
The interests of any directors who hold shares in the ultimate
parent company, Arbuthnot Banking Group PLC, which was the ultimate
parent company until the sale of its controlling stake, are shown
in the Directors' Report of that company.
36. Immediate and ultimate parent company
Prior to the sale of its controlling interest on 15 June 2016,
the Company regarded Arbuthnot Banking Group PLC, a company
registered in England and Wales, as the immediate and ultimate
parent company. At that time, Sir Henry Angest, the Group Chairman
and Chief Executive of Arbuthnot Banking Group, had a beneficial
interest in 53.7% of the issued share capital of Arbuthnot Banking
Group and was regarded by the Company as the ultimate controlling
party. A copy of the consolidated financial statements of Arbuthnot
Banking Group may be obtained from the Company Secretary, Arbuthnot
Banking Group, Arbuthnot House, 7 Wilson Street, London, EC2M
2SN.
Since 15 June 2016, the Company has had no ultimate controlling
party.
37. Discontinued operations
a) Sale of unsecured personal loan portfolio
On 21 December 2017, the Bank agreed to sell its remaining
portfolio of unsecured personal loans to Alpha Credit Solutions 8
S.à.r.l., a company owned by AnaCap Credit Opportunities III LP. As
previously highlighted, the Group made the decision to withdraw
from the unsecured personal loan market in 2016, and the sale of
this portfolio represents a full exit by the Group from this
market.
The net proceeds of sale, after transaction costs, amounted to
GBP36.6 million, which will be used for general corporate purposes
including other forms of lending. The cash purchase consideration
for the portfolio was calculated based on an agreed price for the
portfolio as at 30 June 2017, adjusted for cash receipts the Group
has already received from the portfolio during the period up to the
date of completion.
The effect of the transaction is to accelerate capital
realisation to reinvest into the Group's core business while
removing any future credit risk associated with the portfolio. The
profit arising on sale of the portfolio was GBP0.5 million before
tax. The Group continued to administer the portfolio until the
completion of a migration of the portfolio to a third party
administrator appointed by the purchaser, which is due to be
completed in the first half of 2018.
Details of the income statement, net assets disposed of and
consequential gain recognised on disposal, and cash flow of the
discontinued operation are set out below:
2017 2016
Income statement GBPmillion GBPmillion
---------------------------------- ----------- -----------
Interest receivable
and similar income 8.0 11.2
Interest expense
and similar charges - -
---------------------------------- ----------- -----------
Net interest income 8.0 11.2
--------------------------------------- ----------- -----------
Fee and commission
income - -
Fee and commission
expense - -
---------------------------------- ----------- -----------
Net fee and commission
income - -
---------------------------------- ----------- -----------
Operating income 8.0 11.2
--------------------------------------- ----------- -----------
Net impairment losses on
loans and advances to customers (3.4) (4.4)
Operating expenses (0.3) (1.2)
--------------------------------------- ----------- -----------
Profit before income
tax 4.3 5.6
Income tax expense (0.8) (1.1)
--------------------------------------- ----------- -----------
Profit after income
tax 3.5 4.5
Gain recognized on disposal
after tax (see below) 0.4 -
------------------------------------ ----------- -----------
Profit for the period 3.9 4.5
------------------------------------ ----------- -----------
As described in Note 3, funding costs and operating expenses are
not aligned to operating segments for day to day management of the
business, so they cannot be allocated on a reliable basis.
Accordingly, funding costs are not included above, and operating
expenses above relates only to those costs that are directly
attributable to the discontinued business.
Assets
sold
on 21
December
2017
Net assets disposed and gain recognised
on disposal GBPmillion
----------------------------------------- -----------
ASSETS
Loans and advances to customers 36.1
Consideration
Cash 37.1
Less selling costs (0.5)
------------------------------------------ -----------
36.6
----------------------------------------- -----------
Gain recognised on disposal before tax 0.5
Tax (0.1)
------------------------------------------ -----------
Gain recognised on disposal after tax 0.4
------------------------------------------ -----------
Year Year
ended ended
31 December 31 December
2017 2016
Cash flow statement GBPmillion GBPmillion
------------------------------------------------ ------------- -------------
Cash flows from discontinued operations
Cash flows from operating activities
Profit for the year 3.5 4.5
Adjustments for:
Income tax expense 0.8 1.1
Impairment losses on loans and advances
to customers 3.4 4.4
------------------------------------------------ ------------- -------------
Cash flows from operating profits before
changes in operating assets and liabilities 7.7 10.0
Changes in operating assets and liabilities:
- net decrease in loans and advances to
customers 28.0 8.8
Net cash inflow from operating activities
and net increase in cash and cash equivalents 35.7 18.8
------------------------------------------------ ------------- -------------
b) Sale of non-standard consumer lending business ELG
On 4 December 2015, the Bank agreed to the conditional sale of
its non-standard consumer lending business, ELG, which comprises
Everyday Loans Holdings Limited and subsidiary companies Everyday
Lending Limited and Everyday Loans Limited, to NSF. Consideration
received on completion comprised GBP106.9 million in cash and
GBP16.3 million in NSF ordinary shares. The disposal completed on
13 April 2016, and on completion NSF paid GBP215.0 million to the
Group, being the GBP106.9 million cash consideration plus repayment
of intercompany debt of GBP108.1 million. Subsequently, NSF took a
GBP30.0 million three year loan from STB, which was repaid in full
during 2017. After selling costs of GBP2.7 million, this resulted
in a gain recognised on disposal in 2016 of GBP116.8 million. In
addition, staff costs of GBP3.5 million were incurred in respect of
the sale, which are included in 2016 operating expenses.
Details of the income statement, net assets disposed of and
consequential gain recognised on disposal, assets and liabilities
held-for-sale at 31 December 2015 and cash flow of discontinued
operations are set out below.
2017 2016
Income statement GBPmillion GBPmillion
---------------------------------- ------------ -----------
Interest receivable
and similar income - 11.1
Interest expense
and similar charges - -
---------------------------------- ------------ -----------
Net interest income - 11.1
--------------------------------------- ------- -----------
Fee and commission
income - 0.1
Fee and commission
expense - (0.1)
--------------------------------------- ------- -----------
Net fee and commission
income - -
---------------------------------- ------------ -----------
Operating income - 11.1
--------------------------------------- ------- -----------
Net impairment losses on
loans and advances to customers - (2.6)
Operating expenses - (6.0)
--------------------------------------- ------- -----------
Profit before income
tax - 2.5
Income tax expense - (0.5)
--------------------------------------- ------- -----------
Profit after income
tax - 2.0
Gain recognised
on disposal (see
below) - 116.8
--------------------------------------- ------- -----------
Profit for the
period - 118.8
--------------------------------------- ------- -----------
Assets
and
liabilities
sold
on 13
April
2016
Net assets disposed and gain recognised
on disposal GBPmillion
------------------------------------------------- --------------
ASSETS
Loans and advances to banks 2.4
Loans and advances to customers 117.9
Property, plant and equipment 0.5
Intangible assets 1.2
Deferred tax assets 0.4
Other assets 0.8
-------------------------------------------------- --------------
Total assets 123.2
-------------------------------------------------- --------------
LIABILITIES
Current tax liabilities 4.0
Other liabilities 7.4
-------------------------------------------------- --------------
Total liabilities 11.4
-------------------------------------------------- --------------
Net assets disposed of 111.8
-------------------------------------------------- --------------
Consideration
Cash (including the settlement of inter-company
debt) 215.0
NSF shares 16.3
-------------------------------------------------- --------------
231.3
Selling costs (2.7)
Net assets disposed of (111.8)
-------------------------------------------------- --------------
Gain recognised on disposal 116.8
-------------------------------------------------- --------------
The cash flow from the sale of subsidiary undertakings can be
analysed as follows:
Group Company
GBPmillion GBPmillion
---------------------------------------------- ----------- -----------
Cash consideration (including the settlement
of inter-company debt) 215.0 215.0
Selling costs (2.7) (2.7)
Cash disposed of as part of sale (2.4) -
---------------------------------------------- ----------- -----------
209.9 212.3
---------------------------------------------- ----------- -----------
Company
Assets held-for-sale comprised investment in subsidiary
undertaking totaling GBP1.
Year Year
ended ended
31 December 31 December
2017 2016
Cash flow statement GBPmillion GBPmillion
---------------------------------------------- -------------- -------------
Cash flows from discontinued operations
Cash flows from operating activities
Profit for the year - 2.0
Adjustments for:
Income tax expense - 0.5
Impairment losses on loans and advances
to customers - 2.6
---------------------------------------------- -------------- -------------
Cash flows from operating profits before
changes in operating assets and liabilities - 5.1
Changes in operating assets and liabilities:
- net increase in loans and advances to
customers - (6.2)
- net increase in other assets - (0.3)
- net increase in other liabilities - 2.1
Net cash inflow from operating activities - 0.7
---------------------------------------------- -------------- -------------
Net increase in cash and cash equivalents - 0.7
Cash and cash equivalents at 1 January - 1.7
---------------------------------------------- -------------- -------------
Cash and cash equivalents disposed of /
at 31 December - 2.4
---------------------------------------------- -------------- -------------
38. Country by Country reporting
The Capital Requirements (Country-by-Country Reporting)
Regulations 2013 introduced reporting obligations for institutions
within the scope of CRD IV. The requirements aim to give increased
transparency regarding the activities of institutions.
The Country-by-Country Information is set out below:
Profit Tax
Number before paid
Turnover of FTE tax on profit
Nature
Name of activity Location GBPmillion employees GBPmillion GBPmillion
------------------ -------------- ---------- ----------- ---------- ----------- -----------
31 December 2017
Secure Trust Banking
Bank plc services UK 165.3 734 29.3 6.0
------------------ -------------- ---------- ----------- ---------- ----------- -----------
Profit Tax
Number before paid
Turnover of FTE tax on profit
Nature
Name of activity Location GBPmillion employees GBPmillion GBPmillion
------------------ -------------- ---------- ----------- ---------- ----------- -----------
31 December 2016
Secure Trust Banking
Bank plc services UK 157.5 697 27.5 6.8
------------------ -------------- ---------- ----------- ---------- ----------- -----------
39. Audited financial statements
The above announcement, from Group strategy and business model
to note 38 above, has been extracted from the audited financial
statements of Secure Trust Bank PLC for the year ended 31 December
2017. The audit opinion on those financial statements was
unmodified. The full audited financial statements, together with
this announcement and the associated investors' presentation are
available on:
www.securetrustbank.com/results-reports/results-reports-presentations.
Five year summary
2017 2016 2015 2014 2013
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------- ----------- ----------- ----------- ----------- -----------
Profit for the year
Interest and similar
income 149.3 141.1 139.7 93.6 73.8
Interest expense and
similar charges (26.7) (26.3) (21.6) (14.2) (12.9)
---------------------------------- ----------- ----------- ----------- ----------- -----------
Net interest income 122.6 114.8 118.1 79.4 60.9
---------------------------------- ----------- ----------- ----------- ----------- -----------
Net fee and commission
income 14.9 14.5 14.4 18.5 18.1
---------------------------------- ----------- ----------- ----------- ----------- -----------
Operating income 137.5 129.3 132.5 97.9 79.0
---------------------------------- ----------- ----------- ----------- ----------- -----------
Impairment losses on
loans and advances (36.9) (30.3) (24.3) (15.3) (15.6)
Gain from a bargain purchase - - - - 0.4
Exceptional costs - - - - (0.9)
Arbuthnot Banking Group
recharges - - (0.8) (0.2) (0.1)
Operating expenses (71.6) (71.5) (70.9) (56.3) (45.7)
Profit on sale of equity
instruments available-for-sale 0.3 - - - -
---------------------------------- ----------- ----------- ----------- ----------- -----------
Profit before income
tax 29.3 27.5 36.5 26.1 17.1
---------------------------------- ----------- ----------- ----------- ----------- -----------
2017 2016 2015 2014 2013
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------- ----------- ----------- ----------- ----------- -----------
Earnings per share for profit attributable
to the equity holders of the Group during
the year
(expressed in pence per
share)
- basic 128.8 754.1 157.8 122.3 78.3
---------------------------------- ----------- ----------- ----------- ----------- -----------
2017 2016 2015 2014 2013
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------- ----------- ----------- ----------- ----------- -----------
Financial position
Cash and balances at
central banks 226.1 112.0 131.8 81.2 -
Loans and advances to
banks 34.3 18.2 11.5 39.8 110.0
Loans and advances to
customers 1,598.3 1,321.0 1,074.9 622.5 391.0
Debt securities held-to-maturity 5.0 20.0 3.8 16.3 -
Other assets 27.9 38.8 25.4 22.5 24.9
---------------------------------- ----------- ----------- ----------- ----------- -----------
Total assets 1,891.6 1,510.0 1,247.4 782.3 525.9
---------------------------------- ----------- ----------- ----------- ----------- -----------
Due to banks 113.0 70.0 35.0 15.9 0.1
Deposits from customers 1,483.2 1,151.8 1,033.1 608.4 436.6
Other liabilities 46.3 52.2 38.1 33.1 27.6
Total shareholders' equity 249.7 236.0 141.2 124.9 61.6
---------------------------------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity 1,892.2 1,510.0 1,247.4 782.3 525.9
---------------------------------- ----------- ----------- ----------- ----------- -----------
This information is provided by RNS
The company news service from the London Stock Exchange
END
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