TIDMSTB
RNS Number : 1060X
Secure Trust Bank PLC
08 August 2018
PRESS RELEASE
Wednesday 8 August 2018
For immediate release
SECURE TRUST BANK PLC
Interim Results for the six months to 30 June 2018
Strategic repositioning yielding significant benefits
Secure Trust Bank PLC ("STB", the "Bank" or the "Group") is
pleased to announce a 31.3% year-on-year increase in Group profit
before tax to GBP15.1m for the six months to 30 June 2018.
The repositioning of the business model towards lower risk
lending in attractive market segments, and continued growth in both
Business Finance and Consumer Finance, have led to income growth
and reduced impairment losses. Improvement in impairment
performance has offset any impact of the new IFRS 9 accounting
standard on reported profits. The cost of risk is down 20% compared
with the same period in 2017.
Capital and funding positions remain healthy and the flexibility
of the Group's business model allows the Group to continue to
pursue its ambitions in line with its risk appetite.
FINANCIAL HIGHLIGHTS
-- Statutory profit before tax of GBP15.1m (2017: GBP11.5m), up 31.3%
-- Underlying profit before tax of GBP16.5m (2017: GBP12.1m), up 36.4%
-- Cost of risk 2.0% on IAS 39 basis (2017: 2.5%), down 20%
-- Common equity tier 1 ratio of 13.6% (2017: 15.3%) - post payment of 2018 interim dividend
-- Total pro-forma capital ratio, including Tier 2 capital
raised in July 2018 and after 2018 interim dividend, of 15.1%
-- Operating income GBP72.5m (2017: GBP61.1m), up 18.7%
-- Basic earnings per share 68.7p (2017: 50.3p), up 36.6%
-- Underlying earnings per share 74.7p (2017: 53.0p), up 40.9%
-- Interim dividend of 19p per share (2017: 18p per share), to be paid in September 2018
-- Total assets GBP2.19bn (2017: GBP1.63bn), up 34.4%
Note: Underlying profit and underlying earnings per share relate
to the Group's normal recurring business activities. Comparative
figures for 2017 are reported on a continuing operations basis,
which excludes the unsecured personal loans book that was sold in
December 2017.
OPERATIONAL HIGHLIGHTS
-- Overall loan book increased to GBP1,839.1m (2017: GBP1,461.1m
- continuing operations), up 25.9%
-- One millionth customer signed up: total customer numbers increased by 30.7% to 1,096,854
-- Customer deposits increased to GBP1,645.4m (2017: GBP1,325.8m). up 24.1%
-- Capital structure enhanced by issue of GBP25m Tier 2 capital
in July 2018 annual coupon 6.75%
-- Invoice Finance business has funded over GBP2bn of customer invoices since inception in 2014
-- Retail Finance lending balances now exceed GBP500m
-- Real Estate Finance lending growth up 30.2% year-on-year
-- Internet banking offered utilising new deposits platform
-- Continuing high levels of customer satisfaction as measured by FEEFO
Lord Forsyth, Chairman, said:
"I am pleased to report very good progress over the last six
months including signing up our one millionth customer and improved
profitability. This reflects well on the hard work and dedication
of all our staff and their commitment to the business. This
positive momentum sets us up well for the rest of 2018 and beyond
notwithstanding the economic and political uncertainties."
Paul Lynam, Chief Executive, said:
"During 2016 and 2017 we repositioned our business away from
higher risk, higher income consumer credit activities and
reallocated capital to lower risk lending segments across a focused
selection of attractive market segments. The growth of more than
36% in underlying profits before tax reported today clearly shows
the benefits of this decision. Balance sheet and customer numbers
have grown strongly in the first six months of 2018 as we have
invested our capital. We remain well positioned to continue
developing our business model in line with our ambitions, creating
sustainable value for our consumer and SME customers, our people
and our shareholders."
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)
Bobbie Hilliam
Sunil Duggal
Tel: 020 7523 8000
Tulchan Communications
Tom Murray
Sheebani Chothani
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.
Interim business review
Chairman's statement
Secure Trust Bank PLC has made good progress in the first half
of 2018, building on the significant strategic repositioning of the
business and its balance sheet over the last few years. The benefit
of reducing exposure to higher risk, higher margin consumer credit
activities and instead focusing on lower risk lending at this point
in the economic cycle is apparent in the strong results for the
first half of 2018.
We achieved a number of milestones during the last six months
including signing up our one millionth customer, surpassing GBP2
billion of customers' invoices financed via our invoice finance
business and our Retail Finance loan balances now exceed GBP500
million.
Our underlying profit has grown by 36.4% compared to the same
period in 2017 and this provides a solid foundation for the second
half of the year and beyond.
The UK's macroeconomic environment currently remains stable with
signs emerging that GDP growth may be picking up after a slow start
to 2018. Record numbers of people are in employment, inflation has
fallen and real wages are now growing, albeit modestly, after a
sustained period of pressure on household disposable income. That
said there are risks to navigate. These include the potential for a
disruptive trade war, a slowing of house price inflation, the
impact of potential increased taxation on consumers and businesses
to fund further investment in the NHS and the continued uncertainty
created by the UK's negotiations to exit the EU. These factors have
informed our risk appetite.
I would like to take this opportunity, on behalf of my Board, to
thank all of our employees for their commitment and hard work which
has delivered strong growth and consistently high levels of
customer satisfaction.
The new UK Corporate Governance Code takes effect in our case
from 1 January 2019 and we are assessing the implications to be
fully compliant. We regularly review our governance and succession
planning and had initiated a process earlier this year to identify
new independent non-executive directors. I was pleased to note that
our shareholders were supportive of the resolutions proposed at our
AGM in May 2018. We fully recognise the importance of engaging with
our shareholders. We are also assessing ways to enhance engagement
with our workforce.
As a result of the strong first half performance the Board
proposes to pay an interim dividend of 19 pence per share (June
2017 interim: 18 pence), representing a 5.6% increase on the prior
year. This will be paid on 28 September 2018 to shareholders on the
register as at 1 September 2018.
Given the resources at our disposal and the flexibility of our
business model we face the future with optimism.
Lord Forsyth
Chairman
7 August 2018
Chief Executive's statement
I am delighted to confirm that my interim statement this year
clearly shows the benefits we expected from the strategic
repositioning undertaken during 2016 and 2017.
To recap we reduced our risk appetite and evolved the business
model away from higher risk unsecured consumer credit and to focus
the Group towards lower risk secured lending across a focused group
of attractive asset classes. Refocusing in this manner inevitably
created a short term economic impact as the reduced income effect
comes through faster than the impairment benefit thus creating a
short term drag on profit growth. This was reflected in the 2017
results. It is encouraging to note that a substantial element of
the legacy higher risk loan book has now run off and therefore the
drag effect of legacy subprime related impairments on profits has
largely abated.
We entered 2018 with our largest ever pipeline of new business
and have enjoyed considerable success in converting this into new
customer lending balances which are 25.9% higher at GBP1,839.1
million as at 30 June 2018 than the same date in 2017 on a
continuing operations basis (June 2017: GBP1,461.1 million. See
Appendix to the interim report on page 67 for a reconciliation of
continuing operations). This strong growth in customer lending has
enabled us to profitably deploy some of the surplus capital held at
the end of 2017.
Customer satisfaction levels remain high as measured by FEEFO
and the continued growth in the size of the customer base is
encouraging.
The financial results for the first half of 2018 reflect these
positive dynamics with the Group statutory profit before tax for
the first half increasing by 31.3% to GBP15.1 million compared to
the GBP11.5 million of profit before tax generated from continuing
operations during the first half of last year. Underlying profit
before tax on the same basis has increased by 36.4% to GBP16.5
million. Basic underlying earnings per share increased by 40.9%
over the same period. As shown on page 16, the Group's underlying
return metrics have also increased.
Given the very healthy new business pipelines and ongoing
positive momentum we expect further progress in the business in the
second half of 2018.
Strong customer satisfaction
I remain grateful for the ongoing commitment of our team members
who continue to strive to deliver good customer outcomes in a
customer friendly and professional manner, as the Group's lending
and deposit taking activities grow. This in turn is reflected in
customer satisfaction levels which, as measured by the independent
FEEFO customer feedback forum, are consistently in the 90-95%
range.
Customer numbers continue to grow and are over 30% higher than
at 30 June last year at 1,096,854 (30 June 2017: 839,208 on a
continuing operations basis).
Healthy Capital and Liquidity positions
The Bank's capital and funding positions remain healthy.
Our Common Equity Tier one ratio was 13.6% as at 30 June 2018
compared to 15.3% at the same point last year. Our overall leverage
ratio was 10.4% (June 2017: 12.7%), and the total capital ratio was
13.6% (June 2017: 15.7%). The year on year movement is a function
of the investment of capital to support the strong growth in the
loan portfolios.
As detailed in the 2017 results the Board has reviewed the
Group's capital structure during the period and determined that an
issuance of GBP25 million of Tier 2 capital at an annual coupon of
6.75% per annum was advantageous. This is a post-tax cost of 5.4%
and negates the need to otherwise raise GBP25 million of longer
term deposits which would cost circa 3%. This issuance will help to
reduce the Bank's weighted average cost of capital. We will
continue to seek to optimise the composition and cost of the
Group's capital base particularly given our ongoing growth and
ambition.
Secure Trust Bank has continued to fund its lending activities
primarily from customers' deposits. Our loan to deposit ratio was
111.8% at 30 June 2018 which compares to 110.2% at 30 June 2017, on
a continuing basis. Usage of the Term Funding Scheme was increased
prior to the closure of the scheme in order to lock in some of the
unutilised capacity. This remains a modest part of the Bank's
funding. The Bank has continued broadly to match-fund its customer
lending with customer deposits. This strategy seeks to mitigate
maturity transformation and interest basis risks. 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.
Lending activities
Our strategic repositioning and our reduced credit loss appetite
have guided the allocation of capital to support growth
particularly in lower risk lending activities during the period.
Overall net customer lending as at 30 June 2018 of GBP1,839.1
million represents 25.9% growth over the same period in 2017
(GBP1,461.1 million on a continuing operations basis. See the
Appendix to the interim report on page 67). As at 30 June 2018,
53.3% of these lending balances are in secured lending (30 June
2017: 51.1%, 31 December 2017: 51.6% on a continuing operations
basis).
The total volume of new loans written in the period was GBP610.4
million representing a 14.3% increase on a continuing basis on the
GBP534.2 million for the same period last year. Growth in the
targeted segments of the lending market remained strong, while the
overall Group growth rate reflected the cessation of some higher
risk lending activities as previously mentioned.
Motor Finance balances have grown to GBP272.0 million from
GBP258.4 million a year ago and GBP274.6 million as at 31 December
2017 representing 5.3% growth and 0.9% contraction respectively. As
previously disclosed, we stopped writing new subprime motor loans
in January 2017 and have been running this part of the book off.
The run off assets are being replaced by lower risk, albeit lower
margin loans. These dynamics are reflected in the balance sheet
growth and profit metrics. On the latter aspect I am pleased that
the shift in the portfolio mix has driven the expected significant
reduction in impairments.
Motor Finance remains an important and profitable line of
business for us. It is good to see profit margins here improve as
the drag effect of the run off of the subprime part of the book
abates. A clear opportunity exists to deliver prime and near prime
products and services in this market though a new Motor lending
platform. The Motor Finance business is developing initiatives to
enhance system capabilities and to deliver a broader range of
products. This is expected to further improve the credit quality of
the portfolio and drive business growth.
We have continued to prioritise Retail Point of Sale lending
during this period, noting this is the best quality consumer
lending we write and also the shortest in duration. Balances have
grown to GBP508.0 million from GBP394.3 million a year ago and
GBP452.3 million as at 31 December 2017 representing 28.8% and
12.3% growth respectively. The cost of risk for the V12 portfolio
has also fallen. However, the volatility of the IFRS 9 methodology
compared to IAS 39 is having an impact on the V12 reported
results.
The mortgage market is exhibiting significant competitive
pressures, with lenders increasingly competing on price and risk
appetite to drive new business volumes. We are being careful to
avoid being sucked into a race to the bottom and are tempering the
growth of this part of the business at this time. Mortgage lending
balances have increased from GBP16.5 million as at 31 December 2017
to GBP37.3 million as at 30 June 2018 being growth of 126%. I
continue to expect that following the closure of the Term Funding
Scheme in February 2018 we will see pricing pressures 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 below should, in time, have a
positive effect on returns for lower LTV lending undertaken by
smaller banks.
As at 30 June 2018, Real Estate Finance lending balances have
grown to GBP704.8 million from GBP541.4 million a year ago and
GBP580.8 million as at 31 December 2017, representing 30.2% growth
and 21.3% growth respectively. The loan book is performing well and
remains biased in favour of modestly leveraged residential
investment lending. This is reflected in the portfolio composition,
which in round terms is split 70% / 30% in favour of investment
lending.
There is a long-term shortage of housing in the UK and
government policy is seeking to improve supply through the
construction of 300,000 new homes per year by the mid-2020s, a
material increase from the levels seen in recent years. Small and
medium-sized house builders account for 41% of all new builds.
However, access to finance remains a major barrier for the majority
of SME house builders as larger lenders continue to retrench from
the market. We are working with HM Government and bodies such as
the British Business Bank to explore ways to support the
Government's public policy agenda.
Asset Finance lending balances have contracted as forecast and
were GBP87.9 million as at 30 June 2018 compared to GBP111.5
million a year ago. Some lenders are offering loans up to or
exceeding 100% of open market value on asset finance at extremely
low margins, by historical standards. We are not prepared to
compromise on risk or price simply to achieve short term net
balance sheet growth, and as matters stand expect this part of the
lending portfolio to continue to contract. We will revisit our
appetite for recommencing new lending in light of market
developments in this scale part of the UK SME lending market.
As at 30 June 2018 Invoice Finance lending balances have grown
to GBP187.5 million from GBP94.2 million a year ago and GBP126.5
million as at 31 December 2017 representing 99.0% growth and 48.2%
respectively. During this period we have surpassed the milestone of
having funded over GBP2 billion of customers' invoices since we
started invoice finance operations in September 2014.
On 1 January 2018, the IFRS 9 Accounting rules became effective.
IFRS 9 is a more volatile methodology compared to the previous IAS
39. Changes in the performance of underlying loan balances are more
immediately reflected in the required IFRS9 impairment charge as
this operates on a forward looking basis whereas IAS 39 is an event
of default triggered approach. The impairment requirement
differential is most pronounced in rapidly growing or shrinking and
rapidly improving or deteriorating portfolios. Noting it is the
first year of the IFRS 9 methodologies we will adopt a cautious
approach to impairment provisioning whilst we continue to embed
this new approach.
Given the heightened levels of uncertainty we have continued to
refine our credit risk appetite and acceptance criteria during this
period. As a matter of course, we will regularly review our credit
criteria and pricing to take into account our view of the current
and future economic conditions.
Fee based services
The OneBill service remains closed for new business. Customer
numbers continue to reduce in line with management expectations and
ended the period at 18,438 (2017: 19,382).
Profits at our debt collection business, Debt Managers
(Services) Limited, have continued to grow.
Evolving regulatory environment
When announcing our annual results for 2017 in March 2018, I
noted that that the regulatory direction of travel appeared to be
to reduce the capital differentials between the systemic and
non-systemic firms. Consistent with this, in April 2018 the
Prudential Regulation Authority published a policy statement
providing further guidance on capital requirements. During the
first half of 2018 a number of stakeholders have recognised that
post Brexit HM Government will be free to adopt a much more
proportionate approach to the regulation of smaller
non-internationally active banks than is possible today. Certainly
one of the implications of the UK's exit from the European Union is
that it can address the shortcomings of the 'one size fits all'
Capital Requirements Regulation implementing the Capital
Requirements Directive IV, if the appetite exists.
Such an approach would bode well for smaller banks and building
societies. 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.
I was encouraged by the tone of the Financial Conduct
Authority's progress report into UK Retail Banking published in
June 2018. They note that whilst progress has been made by smaller
and challenger banks, the dominant players continue to enjoy huge
incumbency advantages and some regulatory interventions may be
required to help foster competition to achieve better outcomes for
customers.
We will remain engaged with these important stakeholders as
their work in these areas progresses.
Strategic priorities
The Group's three strategic priorities of: (i) organic growth,
(ii) diversification and (iii) M&A activity are unchanged.
The benefits of a diversified business model have been evident
over recent periods when we have been able to reallocate capital
from higher risk higher margin to lower risk lower margin lending
activities whilst continuing to scale the Group's balance sheet and
grow our profitability.
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 delivery of profit growth in the medium term to create shareholder value
We have been active across all five of these areas during the
last six months and will remain so for the rest of 2018 and
beyond.
In support of our strategy, we have engaged in a number of
discussions relating to inorganic business opportunities during the
last six months but none progressed 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, prioritizing the creation of sustainable, long-term
shareholder value. We are continuing to work on a diverse pipeline
of external business opportunities.
Outlook
It is pleasing to report the positive momentum and strong profit
growth during the period. We expect further progress during the
second half of the year but need to be mindful that our forward
looking economic indicators are pointing to a period of low
confidence and tepid, albeit slowly improving economic growth. We
feel the Bank's lending portfolio is well positioned for the
current conditions and the short duration nature of our asset
portfolio means we can react quickly to both opportunities and
threats.
Our approach to the market will reflect evolving economic
conditions and our credit appetite will be kept under review. We
expect the second half to build on the positive trends in the first
half. 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 and allocate
capital for more sustainable returns. Notwithstanding the current
uncertain economic outlook, I believe there is scope to pursue our
strategic priorities by developing the business model organically
and pursuing attractive acquisition opportunities.
Paul Lynam
Chief Executive Officer
7 August 2018
Year ended
Period ended Period ended 31 December
30 June 2018 30 June 2017 2017
-------------------------------------------------- ---------------- ---------------- ----------------
Financial highlights (on a continuing operations
basis)
Loan to deposit ratio 111.8% 110.2% 107.8%
Profit before tax GBP15.1 million GBP11.5 million GBP25.0 million
GBP129.5
Operating income GBP72.5 million GBP61.1 million million
Common Equity Tier 1 ('CET1') capital ratio 13.6% 15.3% 16.5%
Underlying profit before tax GBP16.5 million GBP12.1 million GBP27.0 million
GBP2,187.1 GBP1,625.9 GBP1,891.6
Total assets million million million
-------------------------------------------------- ---------------- ---------------- ----------------
See Appendix to the interim report on page 67 for a
reconciliation of continuing operations.
Loans and
New business advances
volumes in to customers
the previous at 30 June
six months 2018
GBPmillion GBPmillion
------------------------ -------------- --------------
Operational highlights
Business Finance
Real Estate Finance 143.9 704.8
Asset Finance 5.7 87.9
Commercial Finance 62.2 187.5
Consumer Finance
Retail Finance 297.4 508.0
Motor Finance 77.2 272.0
Consumer mortgages 21.3 37.3
Other 2.7 41.6
---------------------------- -------------- --------------
610.4 1,839.1
------------------------ -------------- --------------
Interim financial review
Period Period Period Period Year ended
ended ended ended ended 31 Year ended Year ended
30 June 30 June 30 June 30 June December 31 December 31 December
2018 2017 2017 2017 2017 2017 2017
Continuing
operations Continuing Discontinued Continuing Discontinued
and Total operations operations Total operations operations Total
Summarised income
statement GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------- ------------ ------------ ------------- ----------- ----------- ------------- ------------
Interest, fee and
commission income 89.0 74.3 4.7 79.0 157.3 8.0 165.3
Interest, fee and
commission expense (16.5) (13.2) - (13.2) (27.8) - (27.8)
-------------------- ------------ ------------ ------------- ----------- ----------- ------------- ------------
Operating income 72.5 61.1 4.7 65.8 129.5 8.0 137.5
Impairment losses (16.3) (16.4) (2.1) (18.5) (33.5) (3.4) (36.9)
Operating expenses (41.1) (33.5) (0.2) (33.7) (71.3) (0.3) (71.6)
Profit on sale of
equity investment
available-for-sale - 0.3 - 0.3 0.3 - 0.3
-------------------- ------------ ------------ ------------- ----------- ----------- ------------- ------------
Profit before tax 15.1 11.5 2.4 13.9 25.0 4.3 29.3
Underlying
adjustments
to profit (see
below) 1.4 0.6 (2.4) (1.8) 2.0 (4.3) (2.3)
-------------------- ------------ ------------ ------------- ----------- ----------- ------------- ------------
Underlying profit
before tax 16.5 12.1 - 12.1 27.0 - 27.0
Underlying tax (2.7) (2.3) - (2.3) (5.5) - (5.5)
-------------------- ------------ ------------ ------------- ----------- ----------- ------------- ------------
Underlying profit
after tax 13.8 9.8 - 9.8 21.5 - 21.5
-------------------- ------------ ------------ ------------- ----------- ----------- ------------- ------------
Underlying basic
earnings per share
(pence) (Note 5) 74.7 53.0 - 53.0 116.4 - 116.4
-------------------- ------------ ------------ ------------- ----------- ----------- ------------- ------------
Statutory results
Profit before tax 15.1 11.5 2.4 13.9 25.0 4.3 29.3
Tax (2.4) (2.2) (0.5) (2.7) (5.1) (0.8) (5.9)
-------------------- ------------ ------------ ------------- ----------- ----------- ------------- ------------
Profit after tax 12.7 9.3 1.9 11.2 19.9 3.5 23.4
Gain recognised on
disposal after tax - - - - - 0.4 0.4
-------------------- ------------ ------------ ------------- ----------- ----------- ------------- ------------
Profit for the
period 12.7 9.3 1.9 11.2 19.9 3.9 23.8
-------------------- ------------ ------------ ------------- ----------- ----------- ------------- ------------
Basic earnings per
share (pence)
(Note
5) 68.7 50.3 10.3 60.6 107.7 21.1 128.8
-------------------- ------------ ------------ ------------- ----------- ----------- ------------- ------------
Underlying
adjustments
to profit
Fair value
amortisation 0.1 0.4 - 0.4 0.9 - 0.9
Transformation
costs 0.4 0.5 - 0.5 0.8 - 0.8
Other bonus
payments 0.9 - - - 0.6 - 0.6
Profit on sale of
NSF plc shares - (0.3) - (0.3) (0.3) - (0.3)
Discontinued
operations - - (2.4) (2.4) - (4.3) (4.3)
-------------------- ------------ ------------ ------------- ----------- ----------- ------------- ------------
Underlying
adjustments
to profit 1.4 0.6 (2.4) (1.8) 2.0 (4.3) (2.3)
-------------------- ------------ ------------ ------------- ----------- ----------- ------------- ------------
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.
Transformation costs comprise principally the costs of potential
M&A activity (30 June 2017 and 31 December 2017: comprised the
costs of setting up the Group's Consumer Mortgage operation and of
closing the current account and unsecured personal lending
products).
The other 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.
A summary of the KPIs is set out on page 16 of this Financial
Review. These are all alternative performance measure that are not
defined or specified under IFRS. Therefore, definitions of the
KPIs, their calculation and an explanation of the reasons for their
use can be found in the Appendix to the interim report on page 67.
In the narrative of this financial review, KPIs are identified by
being in bold font.
IFRS 9 'Financial Instruments'
The new standard, effective for period beginning 1 January 2018,
has replaced IAS 39 'Financial Instruments: Recognition and
Measurement'. Adoption of the standard has resulted in new
accounting policies for interest income and expense, the
classification and measurement of financial instruments and the
impairment of financial assets and loan commitments which are set
out in Note 1.3. Changes in accounting policies resulting from the
adoption of IFRS 9 have been applied retrospectively, except that
comparative periods for the periods ended 30 June 2017 and 31
December 2017 are stated on an IAS 39 basis, and therefore have not
been restated.
Discontinued operations
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 for the period
ended 30 June 2017 and the year ended 31 December 2017 throughout
this interim report. The profit before tax relating to the
unsecured personal loan portfolio announced shortly after its sale
for the 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 cost of attributable Statutory Statutory
before funds costs profit profit
tax as added added before after
announced back back tax Tax tax
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
------------------------- ----------- ----------- -------------- ----------- ----------- -----------
Unless otherwise stated, the analyses that follow relate to
continuing operations, which represents all of the Group's
divisions, excluding PLD.
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, Retail Finance, Motor Finance products, and commissions
earned on debt collection activities in DMS.
Interest receivable from continuing operations was GBP79.2
million for the period, increasing by GBP12.7 million (19.1%) on
June 2017, which was driven by the growth of the Group's loan books
over the period.
Fee and commission income from continuing operations was GBP9.8
million for the period, increasing by GBP2.0 million (25.6%) on
June 2017. The fee income relating to OneBill has continued to
decrease, as this product has been closed to new business. 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 expense 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 GBP15.5 million for the period, increasing
by GBP2.8 million (22.0%) on June 2017. The cost of funds reduced
from 1.9%% for June 2017 to 1.8% for June 2018. 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 8.2% in June 2017
to 7.6% in June 2018 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 increased by GBP0.5 million
(100.0%), mainly arising from the increase in activity in DMS.
Operating income
Operating income increased by 18.6% to GBP72.5 million.
The net revenue margin for the period was 8.6% compared with
9.3% for June 2017. The gross revenue margin for 2018 was 10.6%
compared with 11.3% for June 2017. The reductions in these margins
are due to the factors referred to above.
Impairment losses
Impairment losses during the period were GBP16.3 million (June
2017: GBP16.4 million). The impairment losses for the period are
calculated using IFRS 9 methodology, whereas the comparative
calculated impairment losses were calculated under IAS 39. A
breakdown of the charge by product is shown in note 7. The expected
increase in charge brought about by the change in methodology to
IFRS 9 has been offset by improvement in performance, particularly
in respect of Motor Finance lending. The provision charge includes
the impact of applying expert credit judgement, resulting in an
overlay being added to provision levels estimated using the Group's
models.
The cost of risk for the period was 1.9%, compared with 2.5% for
June 2017. Further analysis of the Group's loan book and its credit
risk exposures is provided in Notes 6, 7 and 17.
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 GBP33.5
million in June 2017 to GBP41.1 million in the period. The Group's
cost to income ratio increased to 56.7% from 54.8% for June
2017.
Underlying profit
On a continuing operations basis, underlying profit before tax
was GBP16.5 million (June 2017: GBP12.1 million).
Taxation
The effective underlying tax rate has fallen to 16.4% (June
2017: 19.0%), being underlying tax of GBP2.7 million divided by
underlying profit before tax of GBP16.5 million (June 2017:
underlying tax of GBP2.3 million divided by underlying profit
before tax of GBP12.1 million). The effective rate in the period
was reduced by a deferred tax credit of GBP0.5 million arising from
a reassessment of the rates that the deferred tax asset on the IFRS
9 transition adjustment will reverse at over the next nine and a
half years. The new Bank Corporation tax surcharge of 8%, which is
effective from 1 January 2016, will apply to any taxable profits of
Secure Trust Bank Plc company that exceed GBP25.0 million.
Distributions to shareholders
The directors recommend the payment of an interim dividend of 19
pence per share (June 2017:18 pence).
Earnings per share
Detailed disclosures of earnings per ordinary share are shown in
Note 5. Basic earnings per share increased by 37% to 68.7 pence per
share (June 2017: 50.3 pence), as a result of the increase in
profit after tax. The underlying basic earnings per share increased
by 41% to 74.7 pence per share (June 2017: 53.0 pence per
share).
Summarised balance sheet (on a continuing operations basis)
June June December
2018 2017 2017
GBPmillion GBPmillion GBPmillion
------------------------------------ ----------- ----------- -----------
Assets
Cash and balances at central banks 126.7 114.0 226.1
Debt securities 150.0 - 5.0
Loans and advances to banks 34.2 25.5 34.3
Loans and advances to customers 1,839.1 1,461.1 1,598.3
Other assets 37.1 25.3 27.9
------------------------------------- ----------- ----------- -----------
2,187.1 1,625.9 1,891.6
------------------------------------ ----------- ----------- -----------
Liabilities
Due to banks 263.0 63.0 113.0
Deposits from customers 1,645.4 1,325.8 1,483.2
Other liabilities 53.7 46.3 46.3
------------------------------------- ----------- ----------- -----------
1,962.1 1,435.1 1,642.5
------------------------------------ ----------- ----------- -----------
See Appendix to the interim report on page 67 for a
reconciliation of continuing operations.
The assets of the Group increased during the period by 15.6% to
GBP2,187.1 million, primarily driven by the growth in the Group's
loan portfolios and the raising of debt securities.
The Group measures underlying returns on average assets, average
equity and required equity as set out in the KPIs table on page 16.
These ratios have all improved in comparison to the prior period,
driven by a combination of the improving profitability and the
impact of the IFRS 9 transition adjustment reducing assets and
equity at 1 January 2018.
The liabilities of the Group increased by 19.5% to GBP1,962.1
million, primarily driven by the increase in deposits from
customers, providing funding for the Group's lending activities,
and the use of the Term Funding Scheme as shown in amounts due to
banks.
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 period balance sheet, the composition of the
June 2018 loan book remains broadly consistent with June 2017, with
the Consumer Finance book being approximately 42% of total lending,
and the Business Finance book being approximately 53%. The Consumer
Mortgage business currently accounts for 2% of total lending.
Loan originations in the period, being the total of new loans
and advances to customers entered into during the period, increased
to GBP610.4 million, which is significantly ahead of loan
originations in both the first half of 2017 (GBP534.2 million,
14.3% increase) and the second half (GBP542.9 million, 12.4%
increase). Almost half of the new business volume (GBP297.4
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 an increase during the period in
the Retail Finance book of GBP55.7 million (12.3%).
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 6 and 7.
Debt Securities
Debt Securities consists solely of sterling UK Government
treasury bills. The increase in the period to GBP150 million from
GBP5 million in December 2017 is for the purpose of collateral
against Term Funding Scheme drawings with the Bank of England.
Due to Banks
The amount due to banks consists solely of drawings from the
Bank of England Term Funding Scheme. The Group has taken advantage
of this low cost source of funding which will result in an overall
reduction in cost of funds.
Deposits from customers
Customer deposits include term, notice and sight deposits, as
well as the Group's OneBill product. Customer deposits grew by
10.9% during the period to close at GBP1,645.4 million, to fund the
increased lending balances.
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 in
January 2013, since then it has grown its number of debts under
management to over 429,000.
DMS has had a strong period, building on the profitable growth
established throughout 2017. Income from selective debt purchases
increased, whilst the company maintained similar levels of
contingent and business process outsourcing income, thus
establishing DMS as a true hybrid credit management company. To
support this growth the business has undertaken a number of
transformational projects, including a refurbishment of its
building, all of which will allow it to work with companies across
new target sectors in the industry.
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:
June June December
2018 2017 2017
---------------------------------------------------- ----------- ----------- ------------
Financial KPIs:
---------------------------------------------------- ----------- ----------- ------------
Earnings per shares
Basic earnings per share - Continuing operations
(Note 5) 68.7 pence 50.3 pence 107.7 pence
Underlying basic earnings per share (Note
5) 74.7 pence 53.0 pence 116.4 pence
Margin ratios
Net interest margin 7.6% 8.2% 8.1%
Net revenue margin 8.6% 9.3% 9.1%
Gross revenue margin 10.6% 11.3% 11.1%
Cost ratios
Cost of risk 1.9% 2.5% 2.4%
Cost of funds 1.8% 1.9% 1.9%
Cost to income ratio 56.7% 54.8% 55.1%
Underlying profit
GBP16.5 GBP12.1 GBP27.0
Underlying profit before tax million million million
GBP13.8 GBP9.8 GBP21.5
Underlying profit after tax million million million
Return ratios
Underlying return on average assets 1.4% 1.3% 1.3%
Underlying return on average equity 12.3% 8.2% 8.9%
Underlying return on required equity 14.6% 13.0% 13.5%
Funding ratios
Loan to deposit ratio 111.8% 110.2% 107.8%
Total funding ratio 116.0% 111.4% 115.5%
Non-financial KPIs:
Customer FEEFO ratings (mark out of 5 based
on star rating from 510 reviews (June 2017:
400 reviews, December 2017: 608 reviews)) 4.6 4.6 4.7
Employee survey engagement score (based on
2017 all staff survey) N/A N/A 78%
Environmental intensity indicator (tonnes
carbon dioxide per GBP1 million group income) N/A N/A 4.2
---------------------------------------------------- ----------- ----------- ------------
Definitions of the KPIs, their calculation and the reasons for
their use can be found in the Appendix to the interim report on
page 67.
The employee survey and environmental intensity work are carried
out on an annual basis, and are therefore not available for
reporting for the interim periods.
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.
Prior to the implementation of IFRS 9, the Group's regulatory
capital was 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 did not hold any Tier 2
capital. In July 2018 the Group issued GBP25.0 million of Tier 2
capital. Further information is contained in Note 20.
The Group has elected to adopt the IFRS 9 transitional rules.
For 2018 this allows 95% of the IFRS 9 impact to be added back to
eligible 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 period 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.
30 June 30 June 31 December
2018 2017 2017
GBPmillion GBPmillion GBPmillion
------------------------------------------------ ----------- ----------- ------------
Capital
CET1 capital 235.9 218.5 238.9
Total Tier 2 capital - 5.3 4.4
------------------------------------------------ ----------- ----------- ------------
Total capital 235.9 223.8 243.3
------------------------------------------------ ----------- ----------- ------------
Total Risk Exposure 1,729.2 1,426.4 1,446.1
------------------------------------------------ ----------- ----------- ------------
CRD IV ratios (calculated on the basis defined
by the regulator)
CET1 capital (Group consolidated) 13.6% 15.3% 16.5%
Leverage ratio 10.4% 12.7% 12.3%
------------------------------------------------ ----------- ----------- ------------
The CET1 capital ratio is the ratio of CET1 capital divided by
the Total Risk Exposure. Excluding the interim dividend, the CET1
capital ratio is 13.8% and the leverage ratio is 10.6%.The Group
has maintained a robust CET1 capital ratio and this provides a
capital buffer for continued growth.
Leverage
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 10.4% (30 June 2017: 12.7%, 31 December 2017:
12.3%), 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 30 June 2018 and throughout the period, 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 123% from GBP139.5
million to GBP310.9 million, with the High Quality Liquid Assets
balance being GBP276.7 million.
30 June 30 June 31 December
2018 2017 2017
GBPmillion GBPmillion GBPmillion
--------------------- ----------- ----------- ------------
Liquid assets
Aaa - Aa3 276.7 114.0 231.1
A1 - A3 29.2 20.5 29.3
Unrated 5.0 5.0 5.0
--------------------- ----------- ----------- ------------
Balance sheet total 310.9 139.5 265.4
--------------------- ----------- ----------- ------------
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.
Interim 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.
Revenue and lending performance vs prior periods
Period
ended Period ended Year ended
30 June 30 June 31 December
2018 2017 2017
GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ------------- -------------
Lending revenue 18.3 14.8 32.3
Lending balance 704.8 541.4 580.8
Impairment losses/(gains) 0.5 0.1 (0.2)
--------------------------- ----------- ------------- -------------
2018 performance
The Group has continued to grow its Real Estate Finance
business, with balances up 30.2% since June 2017 and up 21.3% since
December 2017. Growth during the first half of the year has been
more balanced between the development and investment books with the
higher yielding development book increasing to 33% of the total
book, compared to 28% at the end of 2017. This has helped to drive
the increase in lending revenues, which have increased 24% compared
to the first half of 2017 and are up 5% compared to the second half
of 2017. There has been an increase in impairment losses following
the transition to IFRS9, albeit that the increase largely arises
from the impact of watch-list cases, as opposed to a fully
crystallised impairment.
Looking forward
The business continues to remain cautious around credit policy
in the light of more uncertain market conditions, but expects to
continue to grow the business. The impact of higher capital
requirements continues to affect the Group's ability to remain
competitive in all parts of the market, and growth will be managed
carefully to ensure that returns are maximised whilst maintaining
credit quality.
Asset Finance
Asset Finance was formed as a division within the Group in
December 2014. It provides funding to support SME businesses in
acquiring commercial assets, such as building equipment, commercial
vehicles and manufacturing equipment.
Revenue and lending performance vs prior periods
Period
ended Period ended Year ended
30 June 30 June 31 December
2018 2017 2017
GBPmillion GBPmillion GBPmillion
------------------- ----------- ------------- -------------
Lending revenue 3.8 4.3 8.5
Lending balance 87.9 111.5 116.7
Impairment losses 0.9 0.5 1.0
------------------- ----------- ------------- -------------
2018 performance
Following the decision to cease new business, the portfolio is
in run-off and therefore the lending balances and income have
reduced during the first half of 2018, with balances down by 21.2%
against June 2017 and down 24.7% so far in 2018.
Impairment losses have increased during the first half of the
year to GBP0.9 million compared to a charge of GBP0.5 million in
both previous periods.
Looking forward
The asset finance division has operated through a partnership
with Haydock Finance to date. With the sale of Haydock in January,
2018, the Group continues to assess options within the Asset
Finance market, but in the meantime, the Asset Finance portfolio
will be expected to reduce in line with contractual repayments from
customers.
Commercial Finance
Commercial Finance was formed as a division within the Group in
2014. The division specialises in providing a full range of invoice
financing solutions to UK businesses including invoice discounting
and factoring.
Revenue and lending performance vs prior periods
Period
ended Period ended Year ended
30 June 30 June 31 December
2018 2017 2017
GBPmillion GBPmillion GBPmillion
------------------- ----------- ------------- -------------
Lending revenue 6.2 3.0 7.2
Lending balance 187.5 94.2 126.5
Impairment losses 0.2 - 0.1
------------------- ----------- ------------- -------------
2018 performance
The Commercial Finance business has continued to evolve in the
first half of 2018, with lending balances increasing by almost 50%.
Income has also grown accordingly against a stable cost base and
the nominal levels of impairment are underpinned by a strong
culture of risk management.
Alongside this, the business has further improved its
infrastructure with the establishment of a regional footprint,
confirmed by the opening of offices in central Birmingham and
Leeds. Key to this success has been the recruitment and engagement
of high calibre people, combined with the ongoing support of the
Group. Client service remains at the heart of the business.
Looking forward
For the growth of the Commercial Finance business to remain
sustainable, the Group must continue to invest in the regional
model, retain and attract the best talent and ensure that the
capital allocated is invested in the right opportunities and with
the most appropriate returns.
By focussing on our core strengths the Group aims to provide a
first class customer centric proposition which firmly cements its
existing position as a top ten independent provider of asset based
lending facilities in the UK market.
Interim business review - Consumer Finance
Retail Finance
Retail Finance includes lending products for in-store and online
retailers to enable consumer purchases.
Revenue and lending performance vs prior periods
Period
ended Period ended Year ended
30 June 30 June 31 December
2018 2017 2017
GBPmillion GBPmillion GBPmillion
------------------- ----------- ------------- -------------
Lending revenue 29.4 23.4 50.7
Lending balance 508.0 394.3 452.3
Impairment losses 9.0 6.6 13.8
------------------- ----------- ------------- -------------
2018 performance
The four largest sub-markets for the Retail Finance business are
the provision of finance for the purchase of sports and leisure
equipment (including cycles), jewellery, consumer electronics and
furniture.
The business has continued to grow strongly across all of the
core business sectors. Growth has been driven particularly by
increasing market share in jewellery and furniture sectors with new
lending volumes increasing by 17.0%. Lending assets totalled
GBP508.0 million at the half year end (June 2017: GBP394.3 million)
which is an increase of 28.8% on the previous year.
Income from retail lending increased by 25.6% to GBP29.4
million, whilst impairment losses continued to be well controlled.
The requirement to book a day one impairment provision under IFRS
9, which was not applicable last year, combined with the increase
in the loan book during the period, resulted in impairment losses
of GBP9.0 million (an increase of 36.4% on the previous year).
Looking forward
The Group plans continued growth in Retail Finance for the
remainder of 2018 with the focus on acquiring increased market
share across its target markets.
A number of initiatives are underway to further enhance systems
capabilities to ensure that quality of service to retailers and
customers are maintained or improved as the business continues to
expand. The business intends to enhance the customer journey by
implementing improved telephony systems as well as providing
customers with self-serve facilities through an online portal. The
business continues to invest in its workforce through improvements
to the office environment, support services and training
facilities.
Motor Finance
Finance is arranged through motor dealerships and brokers and
involves fixed rate, fixed term hire purchase arrangements,
predominantly on used cars. The Group uses its Moneyway brand for
this business.
Revenue and lending performance v prior periods
Period
ended Period ended Year ended
30 June 30 June 31 December
2018 2017 2017
GBPmillion GBPmillion GBPmillion
------------------- ----------- ------------- -------------
Lending revenue 23.8 22.4 47.1
Lending balance 272.0 258.4 274.6
Impairment losses 6.4 9.2 20.8
------------------- ----------- ------------- -------------
2018 performance
The Motor Finance business saw an increase in new business
volumes from GBP72.2 million in the period ended 30 June 2017 to
GBP77.2 million in for period to 30 June 2018. The business
narrowed its credit parameters during 2017 in order to reduce
potential future impairment losses, hence the increased volume
reflects a higher credit quality.
Impairment losses for the period have improved from GBP9.2
million to GBP6.4 million reflecting the shift away from subprime
motor lending discontinued during 2017. The improvement has been
supported by the Motor Finance leadership increasing levels of
resource and delivering process improvement within the Collections
and Recoveries teams.
Lending revenue improved modestly, by 6%, reflecting the
reduction in margin for higher credit quality business. This shift
in business alongside improved collections performance has driven
an improvement in impairments.
Looking Forward
Over the period the business has made some key appointments to
drive growth in the prime and near-prime motor business with new
Motor Finance MD, FD, Product Director and Head of Dealer Sales all
now on board.
A clear opportunity exists to deliver prime and near-prime
products and services in the Motor lending market through a new
Motor Finance lending platform. 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 near-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.
Personal Lending
Revenue and lending performance vs prior periods
Period
ended Period ended Year ended
30 June 30 June 31 December
2018 2017 2017
GBPmillion GBPmillion GBPmillion
------------------- ------------ ------------- -------------
Lending revenue - 4.7 8.0
Lending balance - 48.5 -
Impairment losses - 2.1 3.4
------------------- ------------ ------------- -------------
On 21 December 2017, the Group sold its remaining personal
lending portfolio to Alpha Credit Solutions and the loans have been
migrated to the third party administrator appointed by the
purchaser. The Group will continue to monitor the market and
consider re-entering it once returns are better aligned with
risk.
Interim business review - Consumer Mortgages
Consumer Mortgages was launched during 2017. The division
supports residential customers who are underserved by the
traditional high street lenders.
Revenue and lending performance v prior periods
Period
ended Period ended Year ended
30 June 30 June 31 December
2018 2017 2017
GBPmillion GBPmillion GBPmillion
------------------- ----------- ------------- -------------
Lending revenue 0.4 - 0.1
Lending balance 37.3 - 16.5
Impairment losses - - -
------------------- ----------- ------------- -------------
2018 performance
The first half of 2018 has seen the business build upon the
foundations established since launch in March 2017. Attention has
been focused on developing the intermediary distribution
relationships, bringing additional key partners on board and
promoting and educating the broker base on the Group's
offering.
The product set and customer focused proposition has continued
to develop with the introduction of Interest Only and Part &
Part mortgages in March 2018, the 90% Loan to Value product
extension in July 2018 and further bespoke opportunities for
partner relationships.
Challenges seen in the first half relate to the general slowdown
in the purchase market, competitor positioning relating to the
specialist market and the ongoing potential of rate rises.
Looking forward
The business is focused on continuing its growth curve by
cementing intermediary relationships and becoming the specialist
lender of choice. There is a roadmap of continuous improvement in
plan, centred on customer service, operational excellence and
proposition development; building a compliant scalable business
with excellent customer service which has put the Group in a good
position to grow.
It is anticipated that the challenges within the wider market
will remain and as a result competition in the specialist space
will increase. The Group is well placed to serve this market, with
the ability to identify, manage and react to market movements and
customer risks accordingly.
Interim business review - Savings
The Group is funded primarily via deposits from individuals and
small to medium sized businesses, attracting and retaining sizeable
balances with competitive rates of interest.
The key terms of accounts that are usually offered from time to
time are summarised below:
-- 60 to 180 day notice periods and fixed term savings over one to seven years.
-- Minimum balance of GBP1,000.
-- Maximum balance of GBP1 million for sole account holders and
GBP2 million for business and joint accounts.
-- Interest paid quarterly (notice) or annually (fixed term) to a nominated account.
Savings balances vs prior periods
30 June 31 December
2018 30 June 2017 2017
GBPmillion GBPmillion GBPmillion
---------------------- ----------- ------------- ------------
Interest expense 15.5 12.7 26.7
---------------------- ----------- ------------- ------------
Savings balances
Notice deposits 449.8 419.0 455.3
Fixed Term Savings 1,180.6 890.8 1,013.4
Sight/Instant Access 15.0 16.0 14.5
---------------------- ----------- ------------- ------------
Total balances 1,645.4 1,325.8 1,483.2
---------------------- ----------- ------------- ------------
2018 performance
During the period, total balances from customers have grown
GBP162 million or 11% with over 8,000 new customers. This level of
growth has been supported by almost 70% of existing customers
choosing to keep their savings balances with the Group at the end
of their fixed rate bond.
The Group has been recognised for the high quality of its
savings products in the last six months; winning Best Notice
Provider in the Savings Champion and being highly commended for its
Notice Accounts and shortlisted for the Best Bank Savings Provider
by Moneyfacts. Customer ratings of the Group remain strong with
Feefo awarding Secure Trust Bank their 'Gold Trusted Service
Award'.
Following the successful introduction of a new Banking platform
in 2017 the Group, having embedded the new system, has commenced
utilising its full capability, starting with the launch of internet
banking facilities. Of new customers in 2018, 99% have signed up to
the service, of which over 70% have already logged in for the first
time. Over 25% of total customers are now registered.
Looking forward
The Group expects more competition for Savings following the
Term Funding Scheme being withdrawn. Average market rates have
risen during the first half of the year, to levels last seen in
2016, as a result of associated funds being refinanced into the
market. The growing competition for customer deposits is expected
to become a continuing trend as systemic and mid-tier banks return
to the market.
Having already invested in a new savings platform ahead of this,
the range of savings products the Group offers to customers is to
be expanded in preparation for increasing competition for deposit
raising:
-- Introducing Fixed Term Cash ISAs; allowing new subscriptions and ISA transfers
-- Appraising the opportunity to introduce a broader range of
notice and instant access products
-- Launching Business Savings; allowing for access to a broader
range of potential customers, and
-- Enhancement of existing product features; the introduction of monthly income fixed bonds.
The Group will continue to seek further cost efficiency in its
operational processes and diversification of product distribution
including the potential for distributing its savings products via
third party platforms. These will allow the Group to continue to
raise deposits to support the Group lending operations at a
competitive cost of funds.
The roll-out of internet banking to the existing customer base
will further bring efficiencies to the savings operations and a
refresh of the web-site will help as part of marketing and
distribution initiatives to drive customer deposits, using other
tools besides a rate led offer.
Principal risks and management
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
----------------- -------------------------------------------
Overview
The Group's risk management statement is set out in the Annual
Report and Accounts for the year ended 31 December 2017 starting on
page 67. There have been no significant changes to this statement
during the period to 30 June 2018.
Changes to the Group's risk profile
Changes to the Group's risk profile since the position set out
in the 2017 Annual Report and Accounts are set out in the following
sections:
Credit risk
Consumer Finance Credit Risk
The Group made the strategic decision to withdraw the Unsecured
Personal Lending product at the start of 2017, largely due to
excessively aggressive competition by lenders that now offer
unsecured loans in the near-prime market driving prices and margins
down below the Group's risk appetite. The Group sold this portfolio
in December 2017.
The Retail business has continued to grow strongly in the first
half of 2018. A new scorecard was introduced in December 2017,
which will refine the balance between acceptance of applications,
maintaining risk appetite and generating the required return on
equity.
Business Finance Credit Risk
Real Estate Finance and Commercial Finance lending have
continued to grow, with continued application of robust risk
governance, credit appetite and lending policies, alongside the
significant experience within the lending teams. The credit
assessment process now utilises credit grading models, developed as
part of the Group's IFRS 9 programme, which model the probability
of default and loss given default for loans within these
portfolios.
Business Finance impairments and arrears have remained minimal
to date. Management continue 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
nature of the Group's lending operations the directors consider the
lending operations of the Group as a whole to be well diversified.
The security on the Real Estate Finance and Consumer Mortgages
businesses is principally located in London and the South East of
the United Kingdom, whilst the remainder of the loan book is spread
around the country broadly in proportion to the population.
Liquidity risk
The Group has continued to use competitive interest rates to
attract new fixed and variable rate deposits over terms ranging
from one to seven years. A moderate amount of borrowing under the
Bank of England's Term Funding Scheme has also been used, with
GBP263.0 million drawn up to 30 June 2018.
The Overall Liquidity Adequacy Requirement has been maintained
significantly above regulatory levels throughout the period. This
is the Board's own view of the Group's liquidity needs as set out
in the Board approved Internal Liquidity Adequacy Assessment
Process ("ILAAP"). The Liquidity Coverage Ratio (LCR), which
assesses net 30 day cash outflows as a proportion of High Quality
Liquid Assets, was also significantly higher than the regulatory
requirement throughout the period.
At 30 June 2018, the total funding ratio was 116.0% (30 June
2017: 111.4%, 31 December 2017: 115.5%). This ratio has increased
in line with the drawdown of TFS funding. Definitions of this
ratio, its calculation and the reasons for its use can be found in
the Appendix to the interim report on page 67.
Operational Risk
The Group's operational risk process and standards are defined
and embedded through a formal Operational Risk Policy and
Framework, which is aligned to the Basel Committee on Banking
Supervision criteria for the sound management of operational risk.
The objective of operational risk management is to:
-- Identify and manage operational risks within acceptable levels and defined risk appetite statements/metrics/thresholds and to limit operational losses
-- Develop a transparent risk culture that seeks to understand
its risk profile, the incidents and losses they are incurring and
to respond with proportionate and expeditious action to thematic
areas of concern
-- Develop consistent and robust policies and controls that are
understood and embedded across all business areas.
Key Risk themes of Operational Risk focus in 2018 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 introduced a more effective control framework and
developed its assurance requirements.
-- Operational Resilience - The Group recognises that any
disruption to the services it provides could cause detriment to its
customers and could affect the Group financial stability. In 2018
the Group is developing and further improving its operational
resilience.
-- Information Security and Cyber Risk - As a financial
institution, the Group is subject to a heightened risk of actual or
attempted IT security breaches by sophisticated cybercrime groups.
Any failure by the Group's intrusion detection and anti-penetration
software to anticipate, prevent or mitigate a breach of the Group's
IT network could significantly disrupt the Group's operations. The
Group continues to invest in its information security controls in
response to emerging cybercrime threats and to seek to ensure that
controls for known threats remain robust.
Capital Risk
At 30 June 2018, the CET1 Ratio was 13.6% (30 June 2017: 15.3%,
31 December 2017: 16.5%) and the Leverage Ratio was 10.4% (30 June
2017: 12.7%, 31 December 2017: 12.3%) on a Group consolidated
basis. Both ratios are significantly higher than regulatory
requirements. The Group has continued to utilise capital arising
from the sale of Everyday Loans to enable balance sheet growth. See
Note 13 for further details.
The Group has developed processes by which it can access
additional forms of capital, culminating in the issue of GBP25
million of Tier 2 Fixed Rate Reset Callable Subordinated Notes in
July 2018 at a rate of 6.75%. Further details are given in Note 20.
The Total Capital Requirement is currently under review and will be
confirmed by the PRA in the second half of the year.
Market risk
The Group has continued to focus on interest rate risk in the
banking book by monitoring the Interest Rate Sensitivity Gap. It
has continued to operate a broadly matched asset and liability
model.
The Group remained within risk appetite in respect of interest
rate risk throughout the year.
Conduct risk
In line with the Operational Risk Framework, the conduct risk
and control assessments have been reviewed by the business units
with self-attestations by first line risk owners.
Monthly review and challenge of Key Risk Indicators takes place
in the product ExCo meetings, with the Customer Focus Committee
providing 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 is provided to first line staff as part
of an annual training and communication programme, with an
eLearning module completed by staff during the period.
Regulatory risk
In the period, the Group has delivered changes to implement the
General Data Protection Regulation (GDPR) and the second Payment
Services Directive (PSD2). The Group continues to work on new and
revised regulations and legislation that will come into force over
the next 18 months and beyond.
Consolidated statement of comprehensive income
Year Year
Period Period Period Period ended Year ended
ended ended ended ended 31 ended 31
30 June 30 June 30 June 30 June December 31 December December
Note 2018 2017 2017 2017 2017 2017 2017
Unaudited Unaudited Unaudited Unaudited Audited Audited Audited
Continuing
and Total Continuing Discontinued Total Continuing Discontinued Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Income statement
Interest receivable
and similar income 79.2 66.5 4.7 71.2 141.3 8.0 149.3
Interest expense
and similar
charges (15.5) (12.7) - (12.7) (26.7) - (26.7)
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Net interest
income 63.7 53.8 4.7 58.5 114.6 8.0 122.6
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Fee and commission
income 9.8 7.8 - 7.8 16.0 - 16.0
Fee and commission
expense (1.0) (0.5) - (0.5) (1.1) - (1.1)
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Net fee and
commission
income 8.8 7.3 - 7.3 14.9 - 14.9
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Operating income 72.5 61.1 4.7 65.8 129.5 8.0 137.5
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Impairment losses
on loans and
advances to
customers 7 (16.3) (16.4) (2.1) (18.5) (33.5) (3.4) (36.9)
Operating expenses (41.1) (33.5) (0.2) (33.7) (71.3) (0.3) (71.6)
Profit on sale
of equity
instruments
available-for-sale 8 - 0.3 - 0.3 0.3 - 0.3
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Profit before
income tax 15.1 11.5 2.4 13.9 25.0 4.3 29.3
Income tax expense 4 (2.4) (2.2) (0.5) (2.7) (5.1) (0.8) (5.9)
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Profit after
income tax 12.7 9.3 1.9 11.2 19.9 3.5 23.4
Gain recognised
on disposal 19 - - - - - 0.4 0.4
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Profit for the
period 12.7 9.3 1.9 11.2 19.9 3.9 23.8
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Other comprehensive
income
Items that will
not be reclassified
to the income
statement
Revaluation reserve - - - - 0.1 - 0.1
- - - - 0.1 - 0.1
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Items that may
subsequently
be reclassified
to the income
statement
Available-for-sale
reserve - 2.8 - 2.8 2.8 - 2.8
- 2.8 - 2.8 2.8 - 2.8
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Other comprehensive
income for the
period, net of
income tax - 2.8 - 2.8 2.9 - 2.9
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Total comprehensive
income for the
period 12.7 12.1 1.9 14.0 22.8 3.9 26.7
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Profit attributable
to:
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Equity holders
of the Company 12.7 9.3 1.9 11.2 19.9 3.9 23.8
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Total comprehensive
income attributable
to:
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Equity holders
of the Company 12.7 12.1 1.9 14.0 22.8 3.9 26.7
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Earnings per
share for profit
attributable
to the equity
holders of the
Company during
the period (pence
per share)
Basic earnings
per share 5 68.7 50.3 10.3 60.6 107.7 21.1 128.8
-----------
Diluted earnings
per share 5 67.6 49.8 10.2 60.0 106.4 20.9 127.3
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Consolidated statement of financial position
30 June 30 June 31 December
2018 2017 2017
Unaudited Unaudited Audited
Note GBPmillion GBPmillion GBPmillion
--------------------------------------------- ----- ----------- ----------- ------------
ASSETS
Cash and balances at central banks 126.7 114.0 226.1
Loans and advances to banks 34.2 25.5 34.3
Loans and advances to customers 6 1,839.1 1,509.6 1,598.3
Debt securities 150.0 - 5.0
Property, plant and equipment 11.6 11.2 11.5
Intangible assets 10.3 9.8 10.4
Deferred tax assets 7.4 0.9 0.6
Other assets 7.8 3.4 5.4
Total assets 2,187.1 1,674.4 1,891.6
--------------------------------------------- ----- ----------- ----------- ------------
LIABILITIES AND EQUITY
Liabilities
Due to banks 9 263.0 63.0 113.0
Deposits from customers 10 1,645.4 1,325.8 1,483.2
Current tax liabilities 2.8 3.5 3.0
Deferred tax liabilities - 0.3 -
Other liabilities 49.3 41.3 41.9
Provisions for liabilities and charges 11 1.6 1.2 1.4
Total liabilities 1,962.1 1,435.1 1,642.5
--------------------------------------------- ----- ----------- ----------- ------------
Equity attributable to owners of the parent
Share capital 7.4 7.4 7.4
Share premium 81.2 81.2 81.2
Revaluation reserve 1.3 1.2 1.3
Retained earnings 135.1 149.5 159.2
--------------------------------------------- ----- ----------- ----------- ------------
Total equity 225.0 239.3 249.1
--------------------------------------------- ----- ----------- ----------- ------------
Total liabilities and equity 2,187.1 1,674.4 1,891.6
--------------------------------------------- ----- ----------- ----------- ------------
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
------------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
(Unaudited) Balance at
1 January 2018 (as previously
stated) 7.4 81.2 1.3 - 159.2 249.1
IFRS 9 transition adjustment - - - - (25.8) (25.8)
------------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
(Unaudited) Balance at
1 January 2018 (as restated) 7.4 81.2 1.3 - 133.4 223.3
Total comprehensive income
for the period
Profit for the six months
ended 30 June 2018 - - - - 12.7 12.7
Transactions with owners,
recorded directly in
equity
Contributions by and
distributions to owners
Dividends - - - - (11.3) (11.3)
Share-based payments - - - - 0.3 0.3
Total contributions by
and distributions to
owners - - - - (11.0) (11.0)
------------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 30 June 2018 7.4 81.2 1.3 - 135.1 225.0
------------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
(Unaudited) Balance at
1 January 2017 7.4 81.2 1.2 (2.8) 149.0 236.0
Total comprehensive income
for the period
Profit for the six months
ended 30 June 2017 - - - 11.2 11.2
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 11.2 14.0
------------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Transactions with owners,
recorded directly in
equity
Contributions by and
distributions to owners
Dividends - - - - (10.7) (10.7)
Total contributions by
and distributions to
owners - - - - (10.7) (10.7)
------------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 30 June 2017 7.4 81.2 1.2 - 149.5 239.3
------------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
(Audited) Balance at
1 January 2017 7.4 81.2 1.2 (2.8) 149.0 236.0
Total comprehensive income
for the period
Profit for the twelve
months ended 31 December
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
------------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Consolidated statement of cash flows
Period Period Period Period Year ended
ended ended ended ended 31 Year ended Year ended
30 June 30 June 30 June 30 June December 31 December 31 December
2018 2017 2017 2017 2017 2017 2017
Total Continuing Discontinued Total Continuing Discontinued Total
Unaudited Unaudited Unaudited Unaudited Audited Audited Audited
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
---------------------- ----------- ----------- ------------- ----------- ----------- ------------- ------------
Cash flows from
operating activities
Profit for the period 12.7 9.3 1.9 11.2 19.9 3.9 23.8
Adjustments for:
Income tax expense 2.4 2.2 0.5 2.7 5.1 0.8 5.9
Depreciation of
property, plant
and equipment 0.4 0.4 - 0.4 0.8 - 0.8
Amortisation of
intangible assets 1.0 0.9 - 0.9 2.0 - 2.0
Impairment losses
on loans and
advances
to customers 16.3 16.4 2.1 18.5 33.5 3.4 36.9
Share-based payments 0.3 - - - - - -
Gain recognised
on disposal - - - - - (0.4) (0.4)
Profit on sale of
equity instruments
available-for-sale - (0.3) - (0.3) (0.3) - (0.3)
---------------------- ----------- ----------- ------------- ----------- ----------- ------------- ------------
Cash flows from
operating profits
before changes in
operating assets
and liabilities 33.1 28.9 4.5 33.4 61.0 7.7 68.7
Changes in operating
assets and
liabilities:
- net
(increase)/decrease
in debt securities (145.0) 20.0 - 20.0 15.0 - 15.0
- net
increase/(decrease)
in loans and
advances
to customers (288.9) (224.1) 17.0 (207.1) (378.3) 28.0 (350.3)
- net
(increase)/decrease
in other assets (2.4) 1.5 - 1.5 (1.0) - (1.0)
- net increase
in deposits from
customers 162.2 174.0 - 174.0 331.4 - 331.4
- net
increase/(decrease)
in other
liabilities 7.3 (7.8) - (7.8) (7.0) - (7.0)
Income tax paid (3.1) (1.7) - (1.7) (5.1) - (5.1)
Net cash
(outflow)/inflow
from operating
activities (236.8) (9.2) 21.5 12.3 16.0 35.7 51.7
---------------------- ----------- ----------- ------------- ----------- ----------- ------------- ------------
Cash flows from
investing activities
Sale of discontinued
operation - - - - 37.1 - 37.1
Proceeds from sale
of equity
instruments
available-for-sale - 16.6 - 16.6 16.6 - 16.6
Purchase of property,
plant and equipment (0.5) (0.2) - (0.2) (0.8) - (0.8)
Purchase of computer
software (0.9) (1.7) - (1.7) (3.4) - (3.4)
Net cash
(outflow)/inflow
from investing
activities (1.4) 14.7 - 14.7 49.5 - 49.5
---------------------- ----------- ----------- ------------- ----------- ----------- ------------- ------------
Cash flows from
financing activities
Net
increase/(decrease)
in amounts due to
banks 150.0 (7.0) - (7.0) 43.0 - 43.0
Dividends paid (11.3) (10.7) - (10.7) (14.0) - (14.0)
---------------------- ----------- ----------- ------------- ----------- ----------- ------------- ------------
Net cash
inflow/(outflow)
from financing
activities 138.7 (17.7) - (17.7) 29.0 - 29.0
---------------------- ----------- ----------- ------------- ----------- ----------- ------------- ------------
Net
(decrease)/increase
in cash and cash
equivalents (99.5) (12.2) 21.5 9.3 94.5 35.7 130.2
Cash and cash
equivalents
at start of period 260.4 130.2 - 130.2 130.2 - 130.2
---------------------- ----------- ----------- ------------- ----------- ----------- ------------- ------------
Cash and cash
equivalents
at end of period 160.9 118.0 21.5 139.5 224.7 35.7 260.4
---------------------- ----------- ----------- ------------- ----------- ----------- ------------- ------------
The consolidated statement of cash flows has been restated in a
columnar format, as this enhances the user's understanding of the
cash flows of the business.
Proceeds from sale of equity instruments available-for-sale and
net (decrease)/increase in amounts due to banks have been moved
from operating activities to investing activities and financing
activities respectively, as this better represents the nature of
the underlying activity.
Notes to the interim report
1. Accounting policies
The principal accounting policies applied in the preparation of
this interim report are set out below. These policies have been
consistently applied to all the periods 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 interim report of the Company as at and
for the period ended 30 June 2018 comprises 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 interim report does not constitute statutory accounts as
defined in section 434 of the Companies Act 2006, and has been
prepared in accordance with International Financial Reporting
Standards, as adopted or early adopted by the Group and endorsed by
the EU, the Companies Act 2006 applicable to companies reporting
under IFRS and IAS 34 Interim Financial Reporting.
A copy of the statutory accounts for that year has been
delivered to the Registrar of Companies. The previous auditor's
report on those accounts was not qualified, did not include a
reference to any matters to which the previous auditors drew
attention by way of emphasis without qualifying the report and did
not contain statements under section 498(2) or (3) of the Companies
Act 2006.
The results for the periods ending 30 June 2018 and 30 June 2017
are unaudited. The results for the year ending 31 December 2017 are
audited.
The interim report has been prepared under the historical cost
convention, as modified by the revaluation of land and buildings.
The interim report is presented in pounds sterling, which is the
functional and presentational currency of the entities within the
Group.
The preparation of the interim report 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 interim report are disclosed
in Notes 1.3 and 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
Group has adequate resources to continue in business for the
foreseeable future. For this reason, they continue to adopt the
'going concern' basis for preparing accounts.
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.
1.3. Accounting policies
The accounting policies applied in preparing the unaudited
condensed interim report are consistent with those used in
preparing the audited statutory financial statements for the year
ended 31 December 2017, except for the following:
1.3.1 IFRS 9 'Financial Instruments'
The new standard, effective for period beginning 1 January 2018,
has replaced IAS 39 'Financial Instruments: Recognition and
Measurement'. Adoption of the standard has resulted in new
accounting policies for interest income and expense, the
classification and measurement of financial instruments and the
impairment of financial assets and loan commitments which are
presented below.
Changes in accounting policies resulting from the adoption of
IFRS 9 have been applied retrospectively, except as noted
below:
-- Comparative periods have not been restated. Information
presented for 2017 will not therefore be comparable. Differences in
the carrying amounts of financial instruments resulting from
adoption of IFRS 9 are recognised in retained earnings at 1 January
2018
-- The determination of the business model within which the
financial asset is held has been assessed based on facts that
existed at the date of initial application and
-- If a debt security had low credit risk at the date of initial
application of IFRS 9, then the Group has assumed that the credit
risk of the asset had not increased significantly since 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.
Implementation of IFRS 9 resulted in a GBP25.8 million reduction
in the Group's opening equity at 1 January 2018, being GBP32.1
million net of GBP6.3 million related to associated deferred tax
impacts. There has been no change in the carrying amount of
financial instruments on the basis of their measurement categories.
All adjustments have arisen solely due to a replacement of the IAS
39 incurred loss impairment approach with an expected credit loss
(ECL) approach. Further details are provided in Note 18.
1.3.2 Interest income and expense
For all financial instruments measured at amortised cost, the
effective interest rate method is used to measure the carrying
value and allocate interest income or expense. The effective
interest rate is the rate that exactly discounts estimated future
cash payments or receipts through the expected life of the
financial instrument to:
-- the gross carrying amount of the financial asset or
-- the amortised cost of the financial liability.
In calculating the effective interest rate for financial
instruments, other than assets that were credit impaired on initial
recognition, the Group estimates cash flows considering all
contractual terms of the financial instrument (for example, early
redemption penalty charges and broker commissions) and anticipated
customer behaviour but does not consider future credit losses. For
financial assets that were impaired on initial recognition (also
referred to as purchased or originated credit impaired assets -
POCI), a credit adjusted effective interest rate is calculated
using estimated future cash flows, including expected credit
losses.
The calculation of the effective interest rate includes all fees
received and paid that are an integral part of the effective
interest rate, transaction costs and all other premiums or
discounts. Transaction costs include incremental costs that are
directly attributable to the acquisition or issue of a financial
instrument.
For financial assets that are not considered to be credit
impaired (stage 1 and stage 2 assets), interest income is
recognised by applying the effective interest rate to the gross
carrying amount of the financial asset. For financial assets that
become credit impaired subsequent to initial recognition (stage 3
assets), interest income is recognised by applying the effective
interest rate to the amortised cost of the financial asset. The
credit risk of financial assets that become credit impaired are not
expected to improve such that they are no longer considered credit
impaired, however, if this were to occur the calculation of
interest income would revert back to the gross basis. The Group's
definition of stage 1, stage 2 and stage 3 assets is set out in
Note 1.3.4.
For financial assets that were credit impaired on initial
recognition (POCI assets), income is calculated by applying the
credit adjusted effective interest rate to the amortised cost of
the asset. For such financial assets the calculation of interest
income will never revert to a gross basis, even if the credit risk
of the asset improves.
Further details regarding when an asset becomes credit impaired
subsequent to initial recognition is provided within Note
1.3.4.
1.3.3 Classification of financial instruments
Financial Assets
The Group classifies its financial assets at inception into
three measurement categories; 'amortised cost', 'fair value through
other comprehensive income (FVOCI)' and 'fair value through profit
and loss' (FVTPL). A financial asset is 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.
The Group's current business model for all financial assets is
to hold to collect contractual cash flows and all assets held give
rise to cash flows on specified dates that represent solely
payments of principal and interest on the outstanding principal
amount. All the Group's assets are therefore currently classified
as amortised cost. Loans are recognised when funds are advanced to
customers and are carried at amortised cost using the effective
interest method.
The amortised cost of an instrument is the amount at which it is
measured at initial recognition, less principal repayments, plus or
minus the cumulative amortisation using the effective interest
method of any difference between the initial amount recognised and
the maturity amount, less any expected credit loss allowance. The
gross carrying amount of a financial asset is the amortised cost of
a financial asset before adjusting for any expected credit loss
allowance.
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.
The Group currently has no financial instruments classified as
FVOCI. All financial assets are measured at amortised cost.
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 would be made on an
investment by investment basis. The Group currently holds no such
investments.
All other assets are classified as FVTPL. The Group currently
has no financial assets classified as FVTPL.
Financial assets are not reclassified subsequent to their
initial recognition, except in the period after the Group changes
its business model for managing financial assets. The Group has not
reclassified any financial assets during the reporting period.
Financial liabilities
The Group classifies its financial liabilities as measured at
amortised cost. Such financial liabilities are recognised when cash
is received from depositors and 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.
The Group has not elected to measure any financial liabilities
at fair value.
1.3.4 Impairment of financial assets and loan commitments
The Group recognises loss allowances for ECLs on all financial
assets carried at amortised cost, including lease receivables and
loan commitments.
Credit loss allowances are measured as an amount equal to
lifetime ECL, except for the following assets, for which they are
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.
Such assets are classified as stage 1 assets.
Assets which have experienced a significant increase in credit
risk since their initial recognition and have not subsequently met
the Group's cure policy or considered to be in default are
classified as stage 2 assets. The Group's definitions of a
significant increase in credit risk and default are set out
below.
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' assets. The Group has assessed all
its debt securities, which represents 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.
Definition of default/credit impaired financial assets (Stage 3
loans)
At each reporting date, the Group assesses whether financial
assets carried at amortised cost are credit impaired (stage 3). A
financial asset is considered to be credit impaired when an event
or events that have 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 is
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.
For Commercial Finance facilities that do not have a fixed term
or repayment structure, evidence that a financial asset is credit
impaired includes:
-- The client ceasing to trade; and
-- Unpaid debtor balances that are dated at least 6 months past their normal recourse period.
Significant increase in credit risk (Stage 2 loans)
For Consumer Finance, the credit risk of a financial asset is
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 is
considered to have experienced a significant increase in credit
risk where certain early warning indicators apply. These indicators
may include notification of county court judgements or,
specifically for the Real Estate Finance portfolio, cost over runs
and timing delays experienced by borrowers.
As a backstop, the Group considers that a significant increase
in credit risk occurs no later than when an asset is more than 30
days past due for all portfolios.
Performing assets which have experienced a significant increase
in credit risk since initial recognition are reclassified from
stage 1, for which loss allowances are measured at an amount equal
to 12 month ECL, to stage 2, for which ECL is measured as lifetime
ECL.
Cure policy
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. The Group's cure
policy for all portfolios, with the exception of Real Estate
Finance, requires 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.
Expected credit loss
ECLs are probability weighted estimates of credit losses which
are 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 is measured as the difference between the
contractual cash flows due if the commitment is drawn and the cash
flows expected to be received.
Lifetime ECL is the ECL that results from all possible default
events over the expected life of a financial asset.
12 month ECL is the portion of lifetime ECL that results from
default events on a financial asset that are possible within 12
months after the reporting date.
Further details regarding key inputs into the calculation of ECL
are provided in Note 2.
Loss allowances for ECL are presented in the statement of
financial position as follows with the loss recognised in the
statement of comprehensive income:
-- Financial assets measured at amortised cost: as a deduction
from the gross carrying amount of the assets.
-- Other loan commitments: generally, as a provision.
For the Real Estate Finance and Commercial Finance portfolios,
where a loan facility is agreed that includes both drawn and
undrawn elements and the Group cannot identify the ECL on the loan
commitment separately, a combined loss allowance for both drawn and
undrawn components of the loan is presented as a deduction from the
gross carrying amount of the drawn component, with any excess of
the loss allowance over the gross drawn amount presented as a
provision.
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. Any change in the carrying
value of the modified asset would be recognised immediately in the
income statement.
When a loan is uncollectible, it is written off against the
related ECL allowance. Such loans are written off after all
necessary procedures have been completed and the amount of the loss
has been determined.
1.3.5 Taxation
Taxes on profits in interim periods are accrued using the tax
rate that will be applicable to expected total annual profits.
1.3.6 Standards in issue but not yet effective
New and amended standards and interpretations need to be adopted
in the first interim report issued after their effective date (or
date of early adoption). IFRS 9, IFRS 15 'Revenue' and IFRS 17
'Insurance contracts' all became effective for the first time for
the six months ended 30 June 2018. The effect of adopting IFRS 9 is
set out in this Note. IFRS 15 and IFRS 17 had no material effect on
the group.
IFRS 16 'Leases' has been issued but is only 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.
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 set out
below that have had a significant effect on the amounts recognised
in the financial statements.
Estimates
Note 1.3 above outlines the main sources of estimation
uncertainty inherent within the application of IFRS 9. Those
estimations which could have a material impact on the Group's
financial results and are therefore considered to be key sources of
estimation uncertainty are outlined below, along with corresponding
sensitivity analysis which demonstrated the impact of a reasonably
possible change in assumption.
Modelling techniques
ECLs are calculated by multiplying three main components; the
probability of default (PD), exposure at default (EAD) and loss
given default (LGD) discounted at the original effective interest
rate of an asset. These variables are derived from internally
developed statistical models and historical data, adjusted to
reflect forward looking information and are discussed in turn
further below. Management adjustments are made to modelled output
to account for situations where known or expected risk factors have
not been considered in the modelling process. Note 7 sets out in
more detail the management adjustments made in this period.
Probability of default (PD) and credit risk grades
Credit risk grades are a primary input into the determination of
the PD for exposures. The Group allocates each exposure to a credit
risk grade at origination and at each reporting period to predict
the risk of default. Credit risk grades are determined using
qualitative and quantitative factors that are indicative of the
risk of default e.g. arrears status and loan applications scores.
These factors vary for each loan portfolio. Exposures are 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 are
considered for Consumer Finance. Additionally, for Business Finance
information obtained during periodic client reviews, for example
audited financial statements, management accounts, budgets and
projections are considered, with particular focus on key ratios,
compliance with covenants and changes in senior management
teams.
Exogenous, Maturity, Vintage (EMV) modelling is used in the
production of forward looking lifetime PDs. This method entails
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 are 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 is 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
(GBPmillion)
-------------------- -------------- ------------------- ---------------------
Real Estate Finance 705.4 CML repossessions The benchmarks below
and default rates relate to all three
portfolios:
S&P Ratings;
BOE UK Possessions
as proxy data for
ERM
-------------------- -------------- ------------------- ---------------------
Asset Finance 90.2 N/A
-------------------- -------------- ------------------- ---------------------
Commercial Finance 188.5 N/A
-------------------- -------------- ------------------- ---------------------
The sensitivity of Consumer Finance provision levels to changes
in PD is set out below:
10% change
in PD
GBPmillion
---------------- -----------
Retail Finance 1.9
Motor Finance 2.2
------------------ -----------
4.1
---------------- -----------
The directors consider that a change in PD of 10% is a
reasonably possible change. The sensitivity of Business Finance
provision levels to any reasonable change in PD is not
material.
Exposure at default (EAD)
EAD represents the expected exposure in the event of a default.
EAD is 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 is made that accounts close 36 months after the
reporting date for the purposes of measuring lifetime ECL. This
assumption is based on industry experience of average client life.
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
the facilities with immediate effect, although 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 is estimated taking into account the
credit risk management actions that the Group expects to take to
mitigate against 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 takes 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. LGDs are calculated on a discounted cash flow
basis using the financial instrument's origination effective
interest rate as the discount factor.
The sensitivity of Consumer Finance provision levels to changes
in LGD is set out below:
10% change
in LGD
GBPmillion
---------------- -----------
Retail Finance 2.0
Motor Finance 3.4
------------------ -----------
5.4
---------------- -----------
The directors consider that a change in LGD of 10% is a
reasonably possible change.
Of the GBP3.4 million sensitivity to LGD in Motor Finance above,
an estimated GBP2.3 million relates to the expected loss on sale of
repossessed vehicles.
The sensitivity of Business Finance provision levels to any
reasonable change in LGD is not material.
Incorporation of forward looking data
The Group incorporates 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 is achieved by developing
a number of potential economic scenarios and modelling expected
credit losses for each scenario. The outputs from each scenario are
combined using the estimated likelihood of each scenario occurring
to derive a probability weighted expected credit loss. The
scenarios adopted and probability weighting applied are approved by
the Assumptions Committee.
The scenarios adopted at 30 June 2018 remain unchanged from
transition to IFRS 9 and are summarised below:
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 changing macroeconomic
Benign case variables. 5%
Management's assessment, based on historic
data, of an adverse scenario that could
Stressed case occur once every 7 to 8 years. 10%
Based on the scenario used by the PRA
for the H1 2017 ICAAP. This can be found
Deeper stress on the Bank 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.
3. Operating segments
The Group is organised into six main 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) Motor Finance: Hire purchase agreements secured against the vehicle being financed.
5) Retail Finance: Point of sale unsecured finance for in-store and online retailers.
Consumer mortgages
6) 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, RentSmart, 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 second half of 2017.
OneBill has been closed to new customers since 2009.
Discontinued operations
Personal Lending: Unsecured consumer loans sold to customers via
broker aggregators and business partners.
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.
Impairment
Interest Revenue losses
receivable Fee and from on loans Loans
and similar commission external and advances and advances
income income customers to customers to customers Loan commitments
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------- ------------- ------------ ----------- -------------- -------------- -----------------
Period ended 30 June
2018
Business Finance
Real Estate
Finance 18.3 - 18.3 0.5 704.8 168.7
Asset Finance 3.8 - 3.8 0.9 87.9 -
Commercial Finance 2.3 3.9 6.2 0.2 187.5 53.2
Consumer Finance
Retail Finance 27.4 2.0 29.4 9.0 508.0 25.8
Motor Finance 23.2 0.6 23.8 6.4 272.0 0.8
Consumer Mortgages 0.4 - 0.4 - 37.3 13.8
Other 3.8 3.3 7.1 (0.7) 41.6 1.0
--------------------- ------------- ------------ ----------- -------------- -------------- -----------------
79.2 9.8 89.0 16.3 1,839.1 263.3
--------------------- ------------- ------------ ----------- -------------- -------------- -----------------
Impairment
Interest Revenue losses
receivable Fee and from on loans Loans
and similar commission external and advances and advances
income income customers to customers to customers Loan commitments
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------- ------------- ------------ ----------- -------------- -------------- -----------------
Period ended 30 June
2017
Business Finance
Real Estate
Finance 14.7 0.1 14.8 0.1 541.4 109.5
Asset Finance 4.3 - 4.3 0.5 111.5 17.9
Commercial Finance 1.0 2.0 3.0 - 94.2 28.4
Consumer Finance
Retail Finance 21.8 1.6 23.4 6.6 394.3 20.5
Motor Finance 22.0 0.4 22.4 9.2 258.4 0.6
Consumer Mortgages - - - - - -
Other 2.7 3.7 6.4 - 61.3 0.5
--------------------- ------------- ------------ ----------- -------------- -------------- -----------------
Continuing
operations 66.5 7.8 74.3 16.4 1,461.1 177.4
Discontinued
operations
Personal Lending 4.7 - 4.7 2.1 48.5 -
--------------------- ------------- ------------ ----------- -------------- -------------- -----------------
71.2 7.8 79.0 18.5 1,509.6 177.4
--------------------- ------------- ------------ ----------- -------------- -------------- -----------------
Impairment
Interest Revenue losses
receivable Fee and from on loans Loans
and similar commission external and advances and advances
income income customers to customers to customers Loan commitments
GBPmillion 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 98.6
Asset Finance 8.5 - 8.5 1.0 116.7 15.5
Commercial Finance 2.5 4.7 7.2 0.1 126.5 35.5
Consumer Finance
Retail Finance 47.5 3.2 50.7 13.8 452.3 0.6
Motor Finance 46.2 0.9 47.1 20.8 274.6 20.1
Consumer Mortgages 0.1 - 0.1 - 16.5 7.7
Other 4.4 7.0 11.4 (2.0) 30.9 0.5
--------------------- ------------- ------------ ----------- -------------- -------------- -----------------
Continuing
operations 141.3 16.0 157.3 33.5 1,598.3 178.5
Discontinued
operations
Personal Lending 8.0 - 8.0 3.4 - -
--------------------- ------------- ------------ ----------- -------------- -------------- -----------------
149.3 16.0 165.3 36.9 1,598.3 178.5
--------------------- ------------- ------------ ----------- -------------- -------------- -----------------
The 'other' segment above includes other 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 interim report.
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. Income tax expense
Period Period Period Period
ended ended ended ended Year ended Year ended Year ended
30 June 30 June 30 June 30 June 31 December 31 December 31 December
2018 2017 2017 2017 2017 2017 2017
Continuing
operations Continuing Discontinued Continuing Discontinued
and Total operations operations Total operations operations Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------- ------------ ------------ ------------- ----------- ------------- ------------- -------------
Current taxation
Corporation tax
charge -
current
period 2.9 2.9 0.5 3.4 5.5 0.8 6.3
Corporation tax
charge -
adjustments
in respect of
prior
periods - (0.7) - (0.7) - - -
2.9 2.2 0.5 2.7 5.5 0.8 6.3
----------------- ------------ ------------ ------------- ----------- ------------- ------------- -------------
Deferred
taxation
Deferred tax
charge
- current
period (0.5) 0.1 - 0.1 (0.5) - (0.5)
Deferred tax
charge
- adjustments
in
respect of
prior
periods - (0.1) - (0.1) 0.1 - 0.1
(0.5) - - - (0.4) - (0.4)
----------------- ------------ ------------ ------------- ----------- ------------- ------------- -------------
Income tax
expense 2.4 2.2 0.5 2.7 5.1 0.8 5.9
----------------- ------------ ------------ ------------- ----------- ------------- ------------- -------------
The tax for the period ended 30 June 2018 has been calculated at
the current effective rate, which is 19% throughout 2018 (30 June
2017 and 31 December 2017: 19.25%).
The main component of the deferred tax asset is deferred tax on
the IFRS 9 transition adjustment, which reverses on a straight line
basis over the next ten years. The Company is likely to suffer the
8% corporation tax surcharge on banking company profits in excess
of GBP25.0 million during this period, but the timing of this is
uncertain. Any changes in the forecast tax rate of the Company over
this period could significantly affect the future tax charge.
5. 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:
Period Period
ended ended Year ended
30 June 30 June 31 December
2018 2017 2017
Profit attributable to equity holders
of the parent (GBP millions)
Continuing operations 12.7 9.3 19.9
Discontinued operations - 1.9 3.9
--------------------------------------------- ----------- ----------- -------------
12.7 11.2 23.8
-------------------------------------------- ----------- ----------- -------------
Weighted average number of ordinary shares
(number) 18,475,229 18,475,229 18,475,229
--------------------------------------------- ----------- ----------- -------------
Earnings per share (pence)
Continuing operations 68.7 50.3 107.7
Discontinued operations - 10.3 21.1
--------------------------------------------- ----------- ----------- -------------
68.7 60.6 128.8
-------------------------------------------- ----------- ----------- -------------
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
period, as noted above, as well as the number of dilutive share
options in issue during the period, as follows:
Period Period
ended ended Year ended
30 June 30 June 31 December
2018 2017 2017
-------------------------------------------- ----------- ----------- -------------
Weighted average number of ordinary shares 18,475,229 18,475,229 18,475,229
Number of dilutive shares in issue at
the period end 319,374 180,210 219,007
--------------------------------------------- ----------- ----------- -------------
Fully diluted weighted average number
of ordinary shares 18,794,603 18,655,439 18,694,236
--------------------------------------------- ----------- ----------- -------------
Dilutive shares being based on:
Number of options outstanding at the
period end 468,157 242,076 368,063
Exercise price (pence) 644 529 799
Average share price during the period
(pence) 1,924 2,082 1,974
--------------------------------------------- ----------- ----------- -------------
Diluted earnings per share (pence)
Continuing operations 67.6 49.8 106.4
Discontinued operations - 10.2 20.9
--------------------------------------------- ----------- ----------- -------------
67.6 60.0 127.3
-------------------------------------------- ----------- ----------- -------------
Underlying
Underlying earnings per ordinary share are calculated by
dividing the underlying profit attributable to equity holders of
the parent by the weighted average number of ordinary shares as
follows:
Period Period
ended ended Year ended
30 June 30 June 31 December
2018 2017 2017
-------------------------------------------- ----------- ----------- -------------
Underlying profit attributable to equity
holders of the parent (GBP millions) 13.8 9.8 21.5
--------------------------------------------- ----------- ----------- -------------
Weighted average number of ordinary shares
(number) 18,475,229 18,475,229 18,475,229
--------------------------------------------- ----------- ----------- -------------
Underlying earnings per share (pence) 74.7 53.0 116.4
--------------------------------------------- ----------- ----------- -------------
6. Loans and advances to customers
30 June 30 June 31 December
2018 2017 2017
(on an (on an (on an
IFRS 9 IAS 39 IAS 39
basis) basis) basis)
GBPmillion GBPmillion GBPmillion
------------------------------------------ --- ----------- ----------- ------------
Gross loans and advances 1,907.1 1,545.2 1,638.2
Less: allowances for impairment on loans
and advances (Note 7) (68.0) (35.6) (39.9)
----------------------------------------------- ----------- ----------- ------------
1,839.1 1,509.6 1,598.3
---------------------------------------------- ----------- ----------- ------------
The 30 June 2018 column has been prepared on an IFRS 9 basis. In
accordance with the transitional provisions of the standard,
comparatives have not been restated. Refer to Notes 1.3 and 18 for
further information.
The fair value of loans and advances to customers is shown in
Note 14.
7. Allowances for impairment of loans and advances
Credit
Not credit impaired impaired
Stage
1: Subject Stage Stage
to 12 2: Subject 3: Subject Gross
month to lifetime to lifetime Total loans Provision
ECL ECL ECL provision and receivables cover
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion %
---------------------------- ------------ ------------- ------------- ----------- ----------------- ----------
Period ended 30 June 2018
Business Finance:
Real Estate Finance 0.1 0.5 - 0.6 705.4 0.1%
Asset Finance 0.3 0.1 1.9 2.3 90.2 2.5%
Commercial Finance 0.2 0.3 0.5 1.0 188.5 0.5%
Consumer Finance:
Retail Finance 8.3 7.7 4.0 20.0 528.0 3.8%
Motor Finance:
---------------------------- ------------ ------------- ------------- ----------- ----------------- ----------
Voluntary termination
provision 5.7 - - 5.7
Other impairment 5.3 15.4 14.4 35.1
---------------------------- ------------ ------------- ------------- ----------- ----------------- ----------
11.0 15.4 14.4 40.8 312.8 13.0%
Consumer mortgages 0.1 - - 0.1 37.4 0.3%
Other - - 3.2 3.2 44.8 7.1%
---------------------------- ------------ ------------- ------------- ----------- ----------------- ----------
20.0 24.0 24.0 68.0 1,907.1 3.6%
---------------------------- ------------ ------------- ------------- ----------- ----------------- ----------
Total provisions above include expert credit judgements over the
Group's IFRS 9 model results of GBP4.4 million, of which GBP1.8
million are specific overlays for the Business Finance
portfolio.
The above table is prepared on an IFRS 9 basis. In accordance
with the transitional provisions of the standard comparatives set
out in the tables below have not been restated. Refer to Notes 1.3
and 18 for further information.
Gross
Individual Collective loans Provision
provision provision Total and receivables cover
GBPmillion GBPmillion GBPmillion GBPmillion %
-------------------------------------- ----------- ----------- ----------- ----------------- ----------
Period ended 30 June 2017 (IAS
39 basis)
Business Finance:
Real Estate Finance - 0.5 0.5 541.9 0.1%
Asset Finance 1.3 0.2 1.5 113.0 1.3%
Commercial Finance 0.4 0.2 0.6 94.8 0.6%
Consumer Finance:
Retail Finance 4.8 1.2 6.0 400.3 1.5%
Motor Finance:
-------------------------------------- ----------- ----------- ----------- ----------------- ----------
Voluntary termination provision 0.9 - 0.9
Other impairment 13.6 2.5 16.1
-------------------------------------- ----------- ----------- ----------- ----------------- ----------
14.5 2.5 17.0 275.4 6.2%
Personal Lending 5.6 0.6 6.2 54.7 11.3%
Other 3.8 - 3.8 65.1 5.8%
-------------------------------------- ----------- ----------- ----------- ----------------- ----------
30.4 5.2 35.6 1,545.2 2.3%
-------------------------------------- ----------- ----------- ----------- ----------------- ----------
Gross
Individual Collective loans Provision
provision provision Total and receivables cover
GBPmillion GBPmillion GBPmillion GBPmillion %
-------------------------------------- ----------- ----------- ----------- ----------------- ----------
Year ended 31 December 2017 (IAS
39 basis)
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:
Retail Finance 6.5 1.1 7.6 459.9 1.7%
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%
Consumer Mortgages - - - 16.5 -
Other 3.3 - 3.3 34.2 9.6%
-------------------------------------- ----------- ----------- ----------- ----------------- ----------
35.5 4.4 39.9 1,638.2 2.4%
-------------------------------------- ----------- ----------- ----------- ----------------- ----------
Provisions included in 'Other' are in respect of various legacy
products. This segment also includes loans of GBP17.8 million (30
June 2017: GBP17.1 million, 31 December 2017: GBP17.2 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 impairment losses disclosed in the income statement, for
continuing operations, can be analysed as follows:
Period Period
ended ended Year ended
30 June 30 June 31 December
2018 2017 2017
(IFRS
9) (IAS 39) (IAS 39)
GBPmillion GBPmillion GBPmillion
-------------------------------------------- --- ----------- ----------- -------------
IFRS9 ECL/ IAS 39 incurred loss individual
provision: charge for impairment losses 13.7 18.4 36.4
IFRS 9 impairment losses in respect of
off balance sheet loan commitments 0.1 - -
IAS 39 incurred loss collective provision:
charge for impairment losses - (0.1) (0.4)
Loans written off, net of amounts utilised 3.2 0.7 1.4
Recoveries of loans written off (0.7) (0.5) (0.5)
------------------------------------------------- ----------- ----------- -------------
16.3 18.5 36.9
Less Personal Lending - (2.1) (3.4)
16.3 16.4 33.5
------------------------------------------------ ----------- ----------- -------------
The 30 June 2018 column has been prepared on an IFRS 9 basis. In
accordance with the transitional provisions of the standard
comparatives have not been restated. Refer to Notes 1.3 and 18 for
further information.
Reconciliations of the opening to closing impairment allowance
for losses on loans and advances are presented below:
Credit
Not credit impaired impaired
Stage
1: Subject Stage Stage
to 12 2: Subject 3: Subject
month to lifetime to lifetime
ECL ECL ECL Total
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------------------- ------------ ------------- ------------- -----------
At 1 January 2018 18.9 24.9 27.9 71.7
------------ ------------- ------------- -----------
Increase/(decrease)due to change in credit
risk
- Transfer to stage 2 (3.0) 15.7 - 12.7
- Transfer to stage 3 (0.1) (12.2) 16.0 3.7
- Transfer to stage 1 0.8 (1.8) - (1.0)
Passage of time (4.4) (1.1) (2.5) (8.0)
New loans originated 8.5 0.1 - 8.6
Derecognised loans (0.9) (1.6) - (2.5)
Other adjustments 0.2 - - 0.2
------------ ------------- ------------- -----------
Charge to income statement 1.1 (0.9) 13.5 13.7
Allowance utilised in respect of write
offs - - (17.4) (17.4)
------------ ------------- ------------- -----------
30 June 2018 20.0 24.0 24.0 68.0
-------------------------------------------- ------------ ------------- ------------- -----------
The above table is prepared on an IFRS 9 basis. In accordance
with the transitional provisions of the standard comparatives have
not been restated. Refer to Notes 1.3 and 18 for further
information. The comparatives below are stated on an IAS 39
basis.
Other adjustments above represents the movement in the Motor
voluntary termination provision.
Period
ended Year ended
30 June 31 December
2017 2017
GBPmillion GBPmillion
-------------------------------------------------- ----------- -------------
Individual allowances for impairment
At 1 January 23.1 23.1
Charge for impairment losses 18.4 36.4
Amounts utilised (7.3) (13.5)
Changes to presentation in respect of debt sales (3.8) (3.6)
Sale of Personal Lending - (6.9)
30.4 35.5
-------------------------------------------------- ----------- -------------
Collective allowances for impairment
At 1 January 5.3 5.3
Charge for impairment losses (0.1) (0.4)
Sale of Personal Lending - (0.5)
5.2 4.4
-------------------------------------------------- ----------- -------------
Total allowances for impairment 35.6 39.9
--------------------------------------------------- ----------- -------------
8. Equity instruments available-for-sale
On 13 April 2016, as part of the sale of Everyday Loans Group
(ELG) to Non-Standard Finance plc ('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. This was settled prior to the
implementation of IFRS 9, and therefore no reassessment of fair
value through other comprehensive income, or fair value through
profit and loss was required.
9. Due to banks
30 June 30 June 31 December
2018 2017 2017
GBPmillion GBPmillion GBPmillion
------------------------------------------ ----------- ----------- ------------
Amounts due to other credit institutions 263.0 63.0 113.0
------------------------------------------- ----------- ----------- ------------
Amounts due to banks at 30 June 2018 and 31 December 2017
represent monies arising from drawings under the Term Funding
Scheme. These are due for repayment between May 2021 and February
2022 (December 2017: between May 2021 and November 2021).
Amounts due to banks at 30 June 2017 represented monies arising
from the sale and repurchase of drawings under the Funding for
Lending Scheme, which were repaid during 2017.
10. Deposits from customers
30 June 30 June 31 December
2018 2017 2017
GBPmillion GBPmillion GBPmillion
------------------------- ----------- ----------- ------------
Current/demand accounts 15.0 16.0 14.5
Term deposits 1,630.4 1,309.8 1,468.7
------------------------- ----------- ----------- ------------
1,645.4 1,325.8 1,483.2
------------------------- ----------- ----------- ------------
The fair value of deposits from customers is shown in Note
14.
11. Provisions for liabilities and charges
ECL allowance
on loan
commitment
Customer (IFRS
redress Fraud 9 basis) Total
Period ended 30 June 2018 GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------------- ----------- ----------- -------------- -----------
Balance at 1 January 1.2 0.2 0.3 1.7
(Credited)/charged to income statement - (0.1) 0.1 -
Utilised (0.1) - - (0.1)
1.1 0.1 0.4 1.6
---------------------------------------- ----------- ----------- -------------- -----------
The above table is prepared on an IFRS 9 basis. In accordance
with the transitional provisions of the standard comparatives have
not been restated. Refer to Notes 1.3 and 18 for further
information. The comparatives below are stated on an IAS 39
basis.
Customer
redress Fraud Total
Period ended 30 June 2017 GBPmillion GBPmillion GBPmillion
------------------------------- ----------- ----------- -----------
Balance at 1 January 1.3 - 1.3
Charged to income statement 0.2 - 0.2
Utilised (0.3) - (0.3)
1.2 - 1.2
------------------------------- ----------- ----------- -----------
Customer
redress Fraud Total
Period ended 31 December 2017 GBPmillion GBPmillion GBPmillion
------------------------------- ----------- ----------- -----------
Balance at 1 January 1.3 - 1.3
Charged to income statement 0.4 0.2 0.6
Utilised (0.5) - (0.5)
1.2 0.2 1.4
------------------------------- ----------- ----------- -----------
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.
ECL allowance on loan commitments
In accordance with the requirements of IFRS 9 the Group holds an
ECL allowance against loans it has committed to lend but have not
yet been drawn. The majority of the GBP0.4 million allowance held
at 30 June 2018 relates to undrawn balances within Retail Finance.
For the Real Estate Finance and Commercial Finance portfolios,
where a loan facility is agreed that includes both drawn and
undrawn elements and the Group cannot identify the ECL on the loan
commitment separately, a combined loss allowance for both drawn and
undrawn components of the loan is presented as a deduction from the
gross carrying amount of the drawn component, with any excess of
the loss allowance over the gross drawn amount presented as a
provision. At 30 June 2018 no provision was held for losses in
excess of drawn amounts.
12. Commitments
The Group's off-balance sheet exposure to undrawn loan
commitments at 30 June 2018 was GBP263.3 million (30 June 2017:
GBP177.4 million, 31 December 2017: GBP178.5 million). Details of
the split by business is given in Note 3.
13. Capital
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.
The following table shows the regulatory capital resources as
managed by the Group:
30 June 30 June 31 December
2018 2017 2017
GBPmillion GBPmillion GBPmillion
------------------------------------------------ ----------- ----------- ------------
Tier 1
Share capital 7.4 7.4 7.4
Share premium 81.2 81.2 81.2
Retained earnings 135.1 138.2 159.2
Revaluation reserve 1.3 1.2 1.3
Goodwill (1.0) (1.0) (1.0)
Intangible assets net of attributable deferred
tax (9.1) (8.5) (9.2)
Transitional IFRS 9 adjustment 24.5 - -
------------------------------------------------ ----------- ----------- ------------
CET 1 capital excluding interim dividend 239.4 218.5 238.9
Interim dividend (3.5) - -
CET1 capital 235.9 218.5 238.9
------------------------------------------------ ----------- ----------- ------------
Tier 2
Collective allowance for impairment of loans
and advances - 5.3 4.4
------------------------------------------------ ----------- ----------- ------------
Total Tier 2 capital - 5.3 4.4
------------------------------------------------ ----------- ----------- ------------
Own Funds 235.9 223.8 243.3
------------------------------------------------ ----------- ----------- ------------
Reconciliation to total equity:
Goodwill and other intangible assets net of
attributable deferred tax 10.1 9.5 10.2
Collective allowance for impairment of loans
and advances - (5.2) (4.4)
Profits yet to be certified - 11.2 -
Transitional IFRS 9 adjustment (24.5) - -
Interim dividend 3.5 - -
Total equity 225.0 239.3 249.1
------------------------------------------------ ----------- ----------- ------------
Under IFRS 9, there is no longer a collective allowance, and
therefore at 30 June 2018 the Group does not hold any Tier 2
capital.
Retained earnings within CET 1 Capital are reported on a
certified basis and therefore did not include uncertified earnings
of GBP11.2 million for the period ended 30 June 2017. The profits
for the period ended 30 June 2018 have been certified by the
auditors, and are therefore included within CET 1 Capital. This
profit will not be included in the Group's Pillar 3 return for June
2018 as it is not yet approved by the regulator.
The transitional adjustment to capital arises from the Group
making an election to phase in the impact of transitioning to IFRS
9 over a five year period, by applying add back factors of 95%,
85%, 70%, 50% and 25% for years one to five respectively. At 30
June 2018, this amounted to 95% of the IFRS 9 transition adjustment
of GBP25.8 million.
14. Fair value of loans and advances to customers and deposits from customers
The fair value of loans and advances to customers and deposits
from customers is set out below:
Total Total Total
carrying carrying carrying
amount Fair value amount Fair value amount Fair value
30 June 30 June 30 June 30 June 31 December 31 December
2018 2018 2017 2017 2017 2017
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------- ----------- ----------- ----------- ----------- ------------ ------------
Loans and advances to
customers 1,839.1 1,910.6 1,509.6 1,607.5 1,598.3 1,641.1
------------------------- ----------- ----------- ----------- ----------- ------------ ------------
Deposits from customers 1,645.4 1,644.2 1,325.8 1,323.2 1,483.2 1,481.6
------------------------- ----------- ----------- ----------- ----------- ------------ ------------
Equity investments held-for-sale and freehold land and buildings
are carried at fair value. All other assets and liabilities are
carried at amortised cost.
15. Share-based payments
At 30 June 2018, the Group had five share-based payment schemes
in operation:
-- Share Option Scheme
-- 2017 long term incentive plan
-- 2017 sharesave plan
-- 2017 deferred bonus plan
-- 'Phantom' share option scheme
A summary of the key details of each scheme is set out
below:
Outstanding Granted Leavers
at the during during Outstanding
start the the at the Vested
of the period period end of and Exercise
period the period exercisable Vesting price
Number Number Number Number Date GBP
-------------------------- ------------ ---------- ---------- ------------ ------------ ------------- ---------
Equity settled
2 November
Share option scheme 177,084 - - 177,084 177,084 2016 7.20
-------------
1 June 2020,
2017 long term incentive 20 April
plan 67,992 94,504 - 162,496 - 2021 0.40
-------------
1 November
2017 sharesave plan 125,947 - (12,060) 113,887 - 2020 13.19
-------------
20 April
2019,
20 April
2020,
2017 deferred bonus 20 April
plan - 14,690 - 14,690 - 2021 0.40
371,023 109,194 (12,060) 468,157 177,084
-------------------------- ------------ ---------- ---------- ------------ ------------ ------------- ---------
Cash settled
'Phantom' share 16 March
option scheme 312,917 - - 312,917 - 2019 25.00
-------------------------- ------------ ---------- ---------- ------------ ------------ ------------- ---------
Share option scheme
The number of unexercised share options as at 30 June 2018
remains unchanged from the position as at 31 December 2017 and 30
June 2016. The intrinsic value of unexercised options is GBP2.0
million (30 June 2017: GBP2.2 million, 31 December 2017: GBP1.8
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.
On 20 April 2018, a further 94,504 share options were granted at
an exercise price of 40 pence per share, which are subject to the
same rules as the awards granted under the plan during 2017.
Details of the awards under the plan are set out below:
Subject Subject
to a holding to no
period holding
of two period Total
years 2017 2017
Number Number Number
-------------------------------------- -------------- --------- --------
At 1 January 2017 - - -
Awarded on 1 June 2017 33,467 34,525 67,992
--------------------------------------- -------------- --------- --------
At 30 June 2017 and 31 December 2017 33,467 34,525 67,992
Awarded on 20 April 2018 30,429 64,075 94,504
--------------------------------------- -------------- --------- --------
At 30 June 2018 63,896 98,600 162,496
--------------------------------------- -------------- --------- --------
The original grant date valuation of the 2017 awards 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 total
shareholder return ('TSR') tranche, and these valuations have been
used in the calculation. Measurement inputs and assumptions used
were as follows:
At date
of 2017
grant
------------------------------------------- ---------
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 Below
compared to comparator group median
Correlation 37%
---------------------------------------------- ---------
At 30 June 2018, the original grant date valuation of the 2018
awards had not yet been assessed, as the impact of this share award
on the period ended 30 June 2018 is not considered to be
significant.
2017 Sharesave plan
At 30 June 2018, 203 employees with 113,887 share options (31
December 2017: 228 employees with 125,947 share options) remained
in the 2017 Sharesave Plan.
2017 deferred bonus plan
On 3 May 2017, the Group established the 2017 deferred bonus
plan, entitling eligible employees who earned a bonus in the prior
financial year to a share option award equal to their deferred
bonus.
As disclosed in the Directors' remuneration report in the annual
report and accounts for the year ended 31 December 2017, 50% of the
bonus earned by two Executive directors, amounting to GBP280,000,
was deferred into shares under the deferred bonus plan.
Accordingly, on 20 April 2018, 14,690 share options were granted at
an exercise price of 40 pence per share, which will vest in three
equal tranches after one, two and three years following
deferral.
The original grant date valuation was determined to be GBP19.64
for those awards vesting after one year, GBP18.87 for those awards
vesting after two years and GBP18.12 for those awards vesting after
three years, using a Black-Scholes model, and these valuations have
been used in the calculation. The share price at date of grant was
GBP20.85 and the expected dividend yield was 3.96%. The other
measurement inputs and assumptions used at the grant date were as
follows:
Awards
Awards Awards vesting
vesting vesting after
after after three
one year two years years
--------------------------------- ----------- ----------- ---------
Expected stock price volatility 25.25% 30.90% 27.68%
Risk free interest rate 0.69% 0.77% 0.82%
Average expected life (years) 1.00 2.00 3.00
---------------------------------- ----------- ----------- ---------
'Phantom' share option scheme
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 30 June 2018, 31 December 2017 and 30 June 2017, 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.
The estimated fair value was last calculated on 31 December
2017, prepared using the Black-Scholes model. There was no material
change in the estimated fair value during the period ended 30 June
2018. Measurement inputs and assumptions used were as follows:
30 June 30 June 31 December
2018 2017 2017
--------------------------------- -------- -------- ------------
Expected stock price volatility 24.49% 24.6% 24.49%
Expected dividend yield 4.45% 3.8% 4.45%
Risk free interest rate 0.59% 0.56% 0.59%
Average expected life (years) 3.53 1.35 4.03
---------------------------------- -------- -------- ------------
This resulted in the following being recognised in the financial
statements:
30 June 30 June 31 December
2018 2017 2017
GBPmillion GBPmillion GBPmillion
---------------------------- ------------ ----------- ------------
Liability at 1 January 0.3 0.6 0.6
Charge for the year - (0.3) (0.4)
----------------------------- ------------ ----------- ------------
Liability at end of period 0.3 0.3 0.2
----------------------------- ------------ ----------- ------------
16. Related party transactions
There were no changes to the nature of the related party
transactions during the period to 30 June 2018 that would
materially affect the position or performance of the Group. Details
of the transactions for the year ended 31 December 2017 can be
found in the 2017 Annual Report.
17. Credit risk
The Group takes 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 expected credit losses 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).
The Board monitors the ratings of the counterparties in relation
to the Group's loans and advances to banks. There are no direct
exposures to the Eurozone and peripheral Eurozone countries.
With the exception of loans and advances to customers, the
carrying amount of financial assets represents the Group's maximum
exposure to credit risk. The Group's maximum exposure to credit
risk for loans and advances to customers by portfolio and IFRS 9
stage without taking account of any collateral held or other credit
enhancements attached was as follows:
Stage Stage 2 Stage 3 Total
1
<= 30 > 30 Excl.
days days purchased Purchased
past past credit credit
due due Total impaired impaired Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Business
Finance
Real Estate
Finance 649.5 55.9 - 55.9 - - - 705.4
Asset Finance 76.2 4.6 0.4 5.0 9.0 - 9.0 90.2
Commercial
Finance 170.7 17.2 - 17.2 0.6 - 0.6 188.5
Consumer
Finance
Retail 472.9 47.2 3.4 50.6 4.5 - 4.5 528.0
Motor 200.5 70.7 22.5 93.2 19.1 - 19.1 312.8
Consumer
Mortgages 37.4 - - - - - - 37.4
Other 13.4 - - - 12.4 19.0 31.4 44.8
---------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total drawn
exposure 1,620.6 195.6 26.3 221.9 45.6 19.0 64.6 1,907.1
---------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Off balance
sheet
Loan
commitments 263.3 - - - - - - 263.3
---------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total gross
exposure 1,883.9 195.6 26.3 221.9 45.6 19.0 64.6 2,170.4
---------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Less:
Impairment
allowance (20.0) (12.7) (11.3) (24.0) (24.0) - (24.0) (68.0)
Provision for
loan
commitments (0.4) - - - - - - (0.4)
----------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total net
exposure 1,863.5 182.9 15.0 197.9 21.6 19.0 40.6 2,102.0
---------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
The above table is prepared on an IFRS 9 basis. In accordance
with the transitional provisions of the standard comparatives have
not been restated. Refer to Notes 1.3 and 18 for further
information. The average IFRS 9 probability of default (PD) is
based on 12 month PDs at the reporting date.
The table below further summarises the June 2017 and December
2017 loans and advances to customers on an IAS 39 basis as
follows:
30 June 30 June 31 December 31 December
2017 2017 2017 2017
GBPmillion % GBPmillion %
------------------------------------- ----------- -------- ------------ ------------
Neither past due nor impaired 1,457.6 94.3% 1,545.6 94.4%
Not past due but impaired 0.6 0.0% 5.4 0.3%
Past due but not impaired 5.3 0.4% 0.3 0.0%
Past due up to 90 days and impaired 43.5 2.8% 37.8 2.3%
Past due after 90 days and impaired 38.2 2.5% 49.1 3.0%
------------------------------------- ----------- -------- ------------ ------------
Gross 1,545.2 100.0% 1,638.2 100.0%
Less: allowance for impairment (35.6) (39.9)
------------------------------------- ----------- -------- ------------ ------------
Net loan and advances to customers 1,509.6 1,598.3
------------------------------------- ----------- -------- ------------ ------------
Concentration risk
Management assesses the potential concentration risk from
geographic, product and individual loan concentration. Due to the
nature of the Group's lending operations the directors consider the
lending operations of the Group as a whole to be well diversified.
Details of the Group's loan and advances to customers and loan
commitments by product is provided in Note 3.
Geographical concentration
The Group's Real Estate Finance and Consumer Mortgages are
secured against UK property only. The geographical concentration of
these business loans and advances to customer at 30 June 2018, by
location of the security, is set out below:
Real Estate Consumer
Finance Mortgages
30 June 30 June
2018 2018
GBPmillion GBPmillion
----------------------------- ------------ -----------
Concentration by region:
Central England 26.5 6.5
Greater London 389.4 6.9
Northern England 80.2 6.7
South East England (excl.
London) 186.8 10.4
South West England 9.2 4.9
Wales and Northern Ireland 13.3 2.0
--------------------------------- ------------ -----------
Gross loans and receivables 705.4 37.4
Allowance for impairment (0.6) (0.1)
--------------------------------- ------------ -----------
Total 704.8 37.3
--------------------------------- ------------ -----------
The geographical concentration of these business loans and
advances to customer at 30 June 2017 and 31 December 2017, by
location of the borrower, is set out below:
Real Estate Consumer Real Estate Consumer
Finance Mortgages Finance Mortgages
30 June 30 June 31 December 31 December
2017 2017 2017 2017
GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------- ------------ ----------- ------------ ------------
Concentration by region:
Central England 2.8 - 6.8 2.1
Greater London 374.9 - 384.2 4.1
Northern England 9.2 - 12.1 2.1
Scotland 7.7 - - -
South East England (excl.
London) 129.3 - 154.9 5.2
South West England 3.3 - 3.3 1.9
Wales and Northern Ireland - - - 1.1
Other 14.7 - 19.8 -
------------------------------- ------------ ----------- ------------ ------------
Gross loans and receivables 541.9 - 581.1 16.5
Allowance for impairment (0.5) - (0.3) -
------------------------------- ------------ ----------- ------------ ------------
Total 541.4 - 580.8 16.5
------------------------------- ------------ ----------- ------------ ------------
The average LTV for the consumer mortgage portfolio was 59% at
30 June 2018 with a maximum LTV of 91% (31 December 2017: average
LTV 59%, maximum LTV 85%).
18. Implementation of IFRS 9
The table below summarises the adjustments arising on adoption
of IFRS 9 on the Group's balance sheet at 1 January 2018. There has
been no change in the carrying amount of financial instruments on
the basis of their measurement categories. All adjustments have
arisen solely due to a replacement of the IAS 39 incurred loss
impairment approach with an expected credit loss approach. The
Group's classification and measurement and loss impairment
accounting policies are provided in Note 1.3.
IAS 39 measurement IFRS 9 measurement IAS 39 ECL adjustment IFRS 9
category category carrying GBPmillion carrying
amount amount
At 1 January GBPmillion GBPmillion
2018
------------------------ ------------------------- -------------------- ------------ --------------- ------------
ASSETS
Cash and balances
at central banks Loans and receivables Amortised cost 226.1 - 226.1
Loans and advances
to banks Loans and receivables Amortised cost 34.3 - 34.3
Loans and advances
to customers Loans and receivables Amortised cost 1,598.3 (31.8) 1,566.5
Debt securities Held to maturity Amortised cost 5.0 - 5.0
Property, plant
and equipment N/A N/A 11.5 - 11.5
Intangible assets N/A N/A 10.4 - 10.4
Deferred tax
asset N/A N/A 0.6 6.3 6.9
Other assets N/A N/A 5.4 - 5.4
------------------------ ------------------------- --------------------
Total assets 1,891.6 (25.5) 1,866.1
------------------------------------------------------------------------- ------------ --------------- ------------
LIABILITIES AND EQUITY
Other financial
Due to banks assets and liabilities Amortised cost 113.0 - 113.0
Deposits from Other financial
customers assets and liabilities Amortised cost 1,483.2 - 1,483.2
Current tax liabilities N/A N/A 3.0 - 3.0
Other liabilities N/A N/A 41.9 - 41.9
Provisions for
liabilities and
charges N/A N/A 1.4 0.3 1.7
------------------------ ------------------------- -------------------- ------------ --------------- ------------
Total liabilities 1,642.5 0.3 1,642.8
------------------------------------------------------------------------- ------------ --------------- ------------
Equity attributable to owners
of the parent
Share capital N/A N/A 7.4 - 7.4
Share premium N/A N/A 81.2 - 81.2
Revaluation Reserve N/A N/A 1.3 - 1.3
Retained earnings N/A N/A 159.2 (25.8) 133.4
------------------------ ------------------------- -------------------- ------------ --------------- ------------
Total equity 249.1 (25.8) 223.3
------------------------------------------------------------------------- ------------ --------------- ------------
Total liabilities and equity 1,891.6 (25.5) 1,866.1
--------------------------------------------------- -------------------- ------------ --------------- ------------
The following table reconciles the Group's closing IAS 39
impairment allowance to the opening IFRS 9 allowance as at 1
January 2018:
Closing ECL adjustment Opening
IAS 39 IFRS 9
balance balance
at 31 GBPmillion at 1 January
December 2018
2017
GBPmillion GBPmillion
-------------------------------------------- ------------ --------------- --------------
Specific allowances for impairment 35.5 36.2 71.7
Collective allowances for impairment 4.4 (4.4) -
-------------------------------------------- ------------ --------------- --------------
Impairment against on balance sheet assets 39.9 31.8 71.7
-------------------------------------------- ------------ --------------- --------------
Provision for loan commitments - 0.3 0.3
-------------------------------------------- ------------ --------------- --------------
Total impairment and provision 39.9 32.1 72.0
-------------------------------------------- ------------ --------------- --------------
Total provisions above include expert credit judgements over the
Group's IFRS 9 model results of GBP2.5 million, of which GBP1.2
million are specific overlays for the Business Finance
portfolio.
An analysis of the Group's opening gross loans and advances to
customers and ECL impairment allowance by IFRS 9 stage is provided
below:
Not credit impaired Credit impaired
Stage Stage Total Provision
1: Subject Stage Stage 3: Purchased cover
to 12 2: Subject 3: credit
month to lifetime Excl. impaired
ECL ECL purchased
credit GBPmillion GBPmillion %
impaired
1 January 2018 GBPmillion GBPmillion GBPmillion
-------------------------------- ------------ ------------- ------------ -------------- ------------ ----------
Gross loans and advances
Business finance
Real Estate Finance 516.5 64.6 - - 581.1
Asset Finance 103.1 11.3 3.5 - 117.9
Commercial Finance 125.4 1.2 0.5 - 127.1
Consumer finance
Retail Finance 398.8 57.5 3.6 - 459.9
Motor Finance 182.0 94.0 25.5 - 301.5
Consumer mortgages 16.5 - - - 16.5
Other 15.4 0.1 3.1 15.6 34.2
-------------------------------- ------------ ------------- ------------ -------------- ------------ ----------
Total on balance sheet 1,357.7 228.7 36.2 15.6 1,638.2
-------------------------------- ------------ ------------- ------------ -------------- ------------ ----------
Loan commitments 178.5 - - - 178.5
-------------------------------- ------------ ------------- ------------ -------------- ------------ ----------
ECL Impairment allowance
Business finance
Real Estate Finance 0.1 - - - 0.1 0.0%
Asset Finance 0.3 0.1 1.0 - 1.4 1.2%
Commercial Finance 0.2 0.2 0.4 - 0.8 0.6%
Consumer finance
Retail Finance 6.8 7.4 3.1 - 17.3 3.8%
Motor Finance:
------------ ------------- ------------ -------------- ------------ ----------
ECL allowance 5.9 16.9 20.1 - 42.9
Voluntary termination
provision 5.6 - - - 5.6
------------ ------------- ------------ -------------- ------------ ----------
11.5 16.9 20.1 - 48.5 16.1%
Consumer mortgages - - - - - 0.0%
Other - 0.3 3.3 - 3.6 10.5%
-------------------------------- ------------ ------------- ------------ -------------- ------------ ----------
Impairment allowance against
on balance sheet assets 18.9 24.9 27.9 - 71.7 4.4%
-------------------------------- ------------ ------------- ------------ -------------- ------------ ----------
Provision for loan commitments 0.3 - - - 0.3 0.2%
-------------------------------- ------------ ------------- ------------ -------------- ------------ ----------
As set out in Note 1.3 for the Real Estate Finance and
Commercial Finance portfolios, where a loan facility is agreed that
includes both a drawn and undrawn element and the Group cannot
identify the ECL on the loan commitment separately, a combined loss
allowance for both the drawn and undrawn component of the loan is
recognised as an impairment allowance and deducted from the gross
carrying amount of the drawn component. At 1 January 2017 loan
commitments held for the Real Estate Finance and Commercial Finance
portfolios were GBP98.6 million and GBP35.5 million
respectively.
19. Discontinued operations
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 was completed
during May 2018.
Details of the net assets disposed of and consequential gain
recognised on disposal are set out below:
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
------------------------------------------------------ --------------
20. Post balance sheet event
On 17 July 2018, Secure Trust Bank PLC issued GBP25 million
6.75% Fixed Rate Reset Callable Subordinated Notes due 2028 (the
"Notes"). The Notes mature in 2028 but the issuer may at its
discretion redeem the Notes in 2023.
The Notes will be treated as Tier 2 regulatory capital which
will be used to support the continuing growth of the business
taking into account increases in regulatory capital buffers. The
issue of the Notes is part of an on-going programme to diversify
and expand the capital base of the Bank.
Appendix to the interim report
Key performance indicators
All revenue, income, impairments, and expenses used in the
calculations below are stated on a continuing operations basis.
(i) Margin ratios
Net interest margin is calculated as interest receivable and
similar income less interest expense and similar charges for the
financial period as a percentage of the average loan book, net
revenue margin is calculated as operating income for the financial
period as a percentage of the average loan book and gross revenue
margin is calculated as interest receivable and similar income plus
fee and commission income for the financial period as a percentage
of the average loan book. The calculation of the average loan book
is the average of the monthly balance of loans and advances to
customers, net of provisions and discontinued operations, over
seven or thirteen months as appropriate for the financial period.
The resulting margins for June 2018 and June 2017 are multiplied by
365/181 to give an annual equivalent comparable to the annual
results:
June June December
2018 2017 2017
GBPmillion GBPmillion GBPmillion
---------------------------------------- ----------- ----------- -----------
Net interest margin
Interest receivable and similar income 79.2 66.5 141.3
Interest expense and similar charges (15.5) (12.7) (26.7)
---------------------------------------- ----------- ----------- -----------
Net interest income 63.7 53.8 114.6
---------------------------------------- ----------- ----------- -----------
Net revenue margin
Net interest income 63.7 53.8 114.6
Net fee and commission income 8.8 7.3 14.9
---------------------------------------- ----------- ----------- -----------
Operating income 72.5 61.1 129.5
---------------------------------------- ----------- ----------- -----------
Gross revenue margin
Interest receivable and similar income 79.2 66.5 141.3
Fee and commission income 9.8 7.8 16.0
---------------------------------------- ----------- ----------- -----------
Gross revenue 89.0 74.3 157.3
---------------------------------------- ----------- ----------- -----------
Opening loan book 1,566.5 1,255.5 1,255.5
Closing loan book 1,839.1 1,461.1 1,598.3
---------------------------------------- ----------- ----------- -----------
Average loan book 1,699.0 1,329.7 1,418.1
---------------------------------------- ----------- ----------- -----------
Net interest margin 7.6% 8.2% 8.1%
---------------------------------------- ----------- ----------- -----------
Net revenue margin 8.6% 9.3% 9.1%
---------------------------------------- ----------- ----------- -----------
Gross revenue margin 10.6% 11.3% 11.1%
---------------------------------------- ----------- ----------- -----------
A reconciliation of the loan book figures used above to the
statement of financial position is as follows:
June 1 January December June December
2018 2018 2017 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------ ----------- ----------- ----------- ----------- -----------
Balance sheet loan book 1,839.1 1,598.3 1,598.3 1,509.6 1,321.0
Discontinued operations - - - (48.5) (65.5)
IFRS 9 transition adjustment - (31.8) - - -
------------------------------ ----------- ----------- ----------- ----------- -----------
1,839.1 1,566.5 1,598.3 1,461.1 1,255.5
------------------------------ ----------- ----------- ----------- ----------- -----------
The margin ratios all measure the yield of the loan book.
(ii) Cost ratios
Cost of risk is calculated as impairment losses on loans and
advances to customers for the financial period as a percentage of
the average loan book, cost of funds is calculated at interest
expense for the financial period as a percentage of average loan
book and cost to income ratio is calculated as operating expenses
for the financial period as a percentage of operating income for
the financial period. The resulting ratios for June 2018 and June
2017 are multiplied by 365/181 to give an annual equivalent
comparable to the annual results:
June June December
2018 2017 2017
GBPmillion GBPmillion GBPmillion
-------------------------------------------- ----------- ----------- -----------
Impairment losses on loans and advances to
customers 16.3 16.4 33.5
Average loan book 1,699.0 1,329.7 1,418.1
-------------------------------------------- ----------- ----------- -----------
Cost of risk 1.9% 2.5% 2.4%
-------------------------------------------- ----------- ----------- -----------
Interest expense 15.5 12.7 26.7
Average loan book 1,699.0 1,329.7 1,418.1
-------------------------------------------- ----------- ----------- -----------
Cost of funds 1.8% 1.9% 1.9%
-------------------------------------------- ----------- ----------- -----------
Operating expenses 41.1 33.5 71.3
Operating income 72.5 61.1 129.5
-------------------------------------------- ----------- ----------- -----------
Cost to income ratio 56.7% 54.8% 55.1%
-------------------------------------------- ----------- ----------- -----------
The cost of risk measures how effective the Group has been in
managing its impairment losses. The cost of funds measures the cost
of money being lent to customers. The cost to income ratio measures
how efficiently the Group is utilising its cost base in producing
income.
(iii) Return ratios
Underlying return on average assets is calculated as the
underlying profit after tax for the financial period as a
percentage of average assets, underlying return on average equity
is calculated as the underlying profit after tax for the financial
period as a percentage of average equity and underlying return on
required equity is calculated as the underlying profit after tax
for the financial period as a percentage of average required
equity.
Underlying profit after tax is profit after tax attributable to
continuing operations, adjusted for items that are non-controllable
items or other items that fall outside of the Group's core business
activities. A reconciliation of underlying profit after tax to
statutory profit after tax is provided on page 11.
Average assets is calculated as the average of the monthly
assets balances, net of discontinued operations, over seven or
thirteen months as appropriate for the financial period, average
equity is calculated as the average of the monthly equity balances
over seven or thirteen months as appropriate for the financial
period and average required equity is calculated as the average of
the monthly balances of total required equity over seven or
thirteen months as appropriate for the financial period. Total
required equity is calculated as the equity required to achieve a
CET1 ratio of 12%, excluding equity required against discontinued
operations. The resulting returns for June 2018 and June 2017 are
multiplied by 365/181 to give an annual equivalent comparable to
the annual results:
June June December
2018 2017 2017
GBPmillion GBPmillion GBPmillion
------------------------------------------------ ----------- ----------- -----------
Underlying profit after tax 13.8 9.8 21.5
------------------------------------------------ ----------- ----------- -----------
Opening assets 1,866.1 1,444.5 1,444.5
Closing assets 2,187.1 1,625.9 1,891.6
------------------------------------------------ ----------- ----------- -----------
Average assets 2,035.1 1,509.8 1,639.9
------------------------------------------------ ----------- ----------- -----------
Opening equity 223.3 236.0 236.0
Closing equity 225.0 239.3 249.1
------------------------------------------------ ----------- ----------- -----------
Average equity 226.2 239.9 242.0
------------------------------------------------ ----------- ----------- -----------
Opening required equity 173.3 146.1 146.1
Closing required equity 204.3 166.8 173.3
------------------------------------------------ ----------- ----------- -----------
Average required equity 190.7 152.3 159.8
------------------------------------------------ ----------- ----------- -----------
Annualised underlying return on average assets 1.4% 1.3% 1.3%
------------------------------------------------ ----------- ----------- -----------
Annualised underlying return on average equity 12.3% 8.2% 8.9%
------------------------------------------------ ----------- ----------- -----------
Annualised underlying return on required
equity 14.6% 13.0% 13.5%
------------------------------------------------ ----------- ----------- -----------
A reconciliation of assets to the balance sheet is as
follows:
June 1 January December June December
2018 2018 2017 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------ ----------- ----------- ----------- ----------- -----------
Balance sheet assets 2,187.1 1,891.6 1,891.6 1,674.4 1,510.0
Discontinued operations - - - (48.5) (65.5)
IFRS 9 transition adjustment - (25.5) - - -
2,187.1 1,866.1 1,891.6 1,625.9 1,444.5
------------------------------ ----------- ----------- ----------- ----------- -----------
A reconciliation of opening equity at 1 January 2017 is as
follows:
GBPmillion
------------------------------ -----------
At 31 December 2017 249.1
IFRS 9 transition adjustment (25.8)
At 1 January 2018 223.3
---------------------------------- -----------
Annualised underlying return on average assets measures how hard
the assets of the Group are working, and annualised underlying
return on average and annualised underlying return on required
equity both measure how much profit the Group generates with the
money shareholders have invested.
(iv) Funding ratios
The loan to deposit ratio is calculated as the loan book, net of
discontinued operations, at the period end, divided by deposits
from customers at the period end, and the total funding ratio is
calculated as the total funding at the period end, being the sum of
deposits from customers, borrowings under the Term Funding Scheme,
or the Funding for Lending Scheme, and equity, divided by the loan
book, net of discontinued operations, at the period end:
June June December
2018 2017 2017
GBPmillion GBPmillion GBPmillion
------------------------------------------- ----------- ----------- -----------
Loan book (on a continuing basis) 1,839.1 1,461.1 1,598.3
------------------------------------------- ----------- ----------- -----------
Deposits from customers 1,645.4 1,325.8 1,483.2
Borrowings under the Term Funding Scheme,
or the Funding for Lending Scheme 263.0 63.0 113.0
Equity 225.0 239.3 249.1
------------------------------------------- ----------- ----------- -----------
Total funding 2,133.4 1,628.1 1,845.3
------------------------------------------- ----------- ----------- -----------
Loan to deposit ratio 111.8% 110.2% 107.8%
------------------------------------------- ----------- ----------- -----------
Total funding ratio 116.0% 111.4% 115.5%
------------------------------------------- ----------- ----------- -----------
The funding ratios measure the Group's liquidity.
(v) Cost of risk: IAS 39 vs IFRS 9
Cost of risk is calculated as impairment losses on loans and
advances to customers for the financial period as a percentage of
the average loan book. The ratio is multiplied by 365/181 to give
an annual equivalent comparable to the annual results.
GBPmillion
--------------------------------- -----------
IAS 39 impairment charge 16.8
Impact of IFRS 9 (0.5)
----------------------------------- -----------
IFRS 9 impairment charge 16.3
----------------------------------- -----------
Average loan book 1,699.0
----------------------------------- -----------
Cost of risk on an IAS 39 basis 2.0%
----------------------------------- -----------
Cost of risk on an IFRS 9 basis 1.9%
----------------------------------- -----------
Directors' responsibility statement
The directors confirm that, to the best of their knowledge:
-- the condensed financial statements have been prepared in
accordance with International Accounting Standard 34 - 'Interim
Financial Reporting', issued by the IASB and as adopted and
endorsed by the European Union;
-- the interim business review includes a fair review of the
information required by Section 4.2.7R of the Disclosure Guidance
and Transparency Rules, issued by the UK Listing Authority (that
being an indication of important events that have occurred during
the first six months of the current financial year and their impact
on the condensed financial statements and a description of the
principal risks and uncertainties for the remaining six months of
the financial year); and
-- the interim business review includes a fair review of the
information required by Section 4.2.8R of the Disclosure Guidance
and Transparency Rules, issued by the UK Listing Authority (that
being disclosure of related party transactions that have taken
place in the first six months of the current financial year and
that have materially affected the financial position or the
performance of the enterprise during that period; and any changes
in the related party transactions described in the last annual
report which could do so).
Approved by the Board of Directors and signed on behalf of the
Board.
Paul Lynam
Chief Executive Officer
Neeraj Kapur
Chief Financial Officer
7 August 2018
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR BUGDISBGBGIR
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